Global Markets

Events are shifting whether late hour talks between the U.S. and China or the approaching finale for Brexit. Economic assessments are also shifting, from slowing global growth to the risk of slumping global growth.

On Thursday the European Commission, like the International Monetary Fund before it, lowered economic forecasts cutting back its outlook for Eurozone growth to 1.3 percent this year from its November forecast for 1.9 percent. The EU cited global trade tensions, slowing in China, social unrest in France and budget uncertainty in Italy. For the UK, the EU also sees 1.3 percent growth which, however, is based on the assumption that cross border trade will not be hit by Brexit. The Bank of England also cut its outlook for UK growth, down 5 tenths from November to 1.2 percent which would be an expansion low. For the BoE, the outlook for Brexit remains uncertain.

The BoE, nevertheless, did hold its policy rate unchanged unlike the Bank of India which, in an effort to boost inflation, unexpectedly cut rates. India's move sets the scene for what promises to be a major highlight of the coming week: a policy meeting at the Reserve Bank of New Zealand and whether it too will join the rising number of central banks turning dovish.

It was a week of wide market movements, falling German production, Italian recession, and renewed fighting in the U.S.-Sino trade war. There were no dramatic developments in Brexit over the week but, no less importantly, no tangible positives either.

In a split 4-to-2 vote, the Reserve Bank of India unexpectedly cut its benchmark repurchase rate by 25 basis points. Only as recently as August and June, the bank was raising this rate by 25 basis points and adopting a policy stance of "calibrated tightening" which pointed to higher rates ahead and which was criticized by India's government. Since the RBI's last policy meeting in early December, however, incoming data have included weakening growth and a drop in headline inflation, down from 3.4 percent in October to 2.2 percent in December and near the bottom of the RBI's 2.0 to 6.0 percent target range. There also has been a change of leadership since the previous meeting in December, with new RBI Governor Shaktikanta Das indicating a greater focus on supporting growth in his public comments. The bank also cut medium-term forecasts, to 3.2 to 3.4 percent for inflation, down from 3.8 to 4.2 percent, and to 7.2 to 7.4 from 7.5 percent for growth. Reflecting their outlook shift, officials adjusted their policy stance to "neutral".

The Bank of England lived up to expectations and announced no changes at its February policy meeting. With Brexit uncertainty making any shift in the stance difficult to justify, the bank rate was left at 0.75 percent with the ceiling for quantitative easing staying at £445 billion (gilts £435 billion, corporate bonds £10 billion). The vote was once again unanimous, at 9-0. Policy bias for higher rates was also left intact, that "an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon". Still minutes of the meeting, citing global slowing and Brexit uncertainty, did acknowledge some loss of UK economic momentum that could affect the first half of 2019.

Global Stock Market Recap – Weekly Results

Europe

European stocks rose sharply on Tuesday as the U.S. administration cited a constructive atmosphere in Chinese trade talks before shares fell sharply on Thursday when the White House warned that progress had hit an impasse. Early in the week prospects were bright that President Trump would be meeting his counterpart Xi Jingping before month end and the U.S.-imposed deadline of March 1, but by week's end, Trump had ruled out such a meeting.

Performance in the week was widely mixed with the FTSE posting a 0.7 percent weekly gain but the DAX a sizable 2.4 percent decline. It wasn't just hopes early in the week for a Chinese trade deal that lifted the FTSE by 2.0 percent on Tuesday but also strength in the commodity sector after British Petroleum lifted guidance. For the DAX, however, it was fundamental economic news that sank the index as both German merchandise orders and industrial production proved weak and raised chatter that fresh monetary stimulus may be the next move for the European Central Bank.

For Brexit, developments shifted into the backrooms of Brussels as negotiators struggle to solve the question of the Irish backstop. Prime Minister Theresa May and EU Commission President Jean-Claude Juncker reached no breakthroughs but did agree to do their best to reach an agreement before month end and well ahead of the March 29 Brexit deadline. Germany's Angela Merkel opened the week with a note of conciliation, urging negotiators to find a "creative" solution to solve the impasse. But Mark Carney sounded less than optimistic after the BoE's meeting, saying the range of potential outcomes for Brexit "is very wide".

Asia Pacific

Markets in China and Taiwan were closed for the Lunar New Year but Australia's All Ordinaries and Japan's Nikkei both moved sharply. Mining shares in Australia were in particular demand following Brazil's Vale dam disaster and the disruption of the mining company's iron ore production. Rising commodity prices are often a boost to the All Ordinaries which, further benefiting from a sharp drop in the Australian dollar, posted a very strong 3.4 percent gain on the week.

The new urgency over Chinese trade talks sent the Nikkei sharply lower on Friday and made for a 2.2 percent loss on the week. White House advisor Larry Kudlow said Thursday that there remains "a pretty sizable distance" between the two parties and warned that an agreement may not be reached. President Trump said on Tuesday, in his State of the Union Address, that a deal "must include" structural changes to end what he described as China's unfair trade practices. If no deal is reached by March 1, the U.S. has promised to hike tariffs on $200 billion of Chinese imports from 10 percent to 25 percent.

Currencies

Brexit concerns and the Bank of England's statement that cited loss of economic momentum were negatives for sterling which fell 1.1 percent to $1.2936 in the week. The euro, holding support at $1.1300, lost 1.2 percent against the dollar on the week to end at $1.1324. Negatives for both currencies have been strength in the U.S. dollar following the 304,000 surge in January nonfarm payrolls reported on February 1.

But the big moves in the foreign exchange markets were sharp losses in the Australian and New Zealand dollars, falling 2.4 and 2.2 percent respectively in the week. The declines are in the wake of India's rate cut and followed comments by Philip Lowe, governor of the Reserve Bank of Australia, who raised the possibility of a rate cut for Australia. In echoes of the Federal Reserve's move to neutral in the U.S. in the prior week, Lowe said the outlook for the bank's next rate move, whether up or down, are evenly balanced. Earlier in the week, the Reserve Bank of Australia like the BoE kept rates steady but did cite rising domestic risks.

Selected Currencies - Weekly Results

Indicator scoreboard

Europe

Eurozone

Retailers had a dismal December as sales (ex-autos) slumped a monthly 1.6 percent for their worst performance since May 2011. The drop easily reversed November's 0.8 percent increase and left workday adjusted volumes just 0.8 percent above their year-ago level. December was weak across the board with just auto fuel (0.5 percent) registering any monthly rise. Mail order and internet (minus 6.1 percent) declined particularly sharply and there were hefty falls too in textiles, clothing and footwear (2.8 percent), electrical goods and furniture (2.1 percent) and computer equipment and books (1.5 percent). In fact, with purchases of food, drink and tobacco down 0.3 percent, ex-auto fuel, non-food demand nosedived 2.7 percent in the month. The overall slide was dominated by Germany which suffered a massive 4.3 percent monthly collapse. Both France (minus 0.1 percent) and Spain (minus 1.2 percent) also posted losses as did the majority of Eurozone states.

Producer prices (ex-construction) fell again in December, down 0.8 percent and following a 0.3 percent monthly drop in November for the first back-to-back decrease since May/June 2017. Annual PPI inflation eased from 4.0 percent to 3.0 percent, equalling an 8-month low. Once again dominating the monthly headline change were energy price, slumping 2.6 percent and compounding November's 1.0 percent drop. But even excluding this category, the PPI dipped 0.1 for the first decline since March 2016. As a result, the annual core rate slipped from 1.5 percent to 1.3 percent, matching its lowest reading since December 2016. Underlying Eurozone PPI inflation had been effectively trending sideways but the weakness of the December report warns that a downward tilt, in response to sluggish economic growth, might be in store.

Germany

Hopes that German manufacturing might be turning the corner found little support in the latest orders data. Although November's monthly decline was revised upward to only 0.2 percent, the year ended with a hefty 1.6 percent December drop, the worst performance since June and the fifth fall in the last seven months. Annual growth slumped from minus 3.4 percent to minus 7.0 percent, its seventh consecutive negative print and the weakest outturn since June 2012. Consumer goods actually recorded a solid 4.2 percent monthly rise but capital goods were off 2.5 percent and intermediates down 1.2 percent. A 2.3 percent slide in foreign demand did most of the damage but the domestic market also contracted, down 0.6 percent. December's report puts total fourth quarter orders just 0.3 percent above their level in the third quarter when they fell 1.0 percent from the second quarter. Based on orders, first quarter industrial production looks unlikely to impress.

Goods production failed to rebound as expected in December. Following a smaller revised but still sizeable 1.3 percent monthly fall in November, output declined a further 0.4 percent. This was the fourth drop in as many months, the sixth since May and left production some 4.0 percent below its level a year ago. Output actually rose a monthly 0.9 percent for capital goods but that was the only good news. Intermediates were down 0.4 percent, consumer goods 0.5 percent and construction slumped 4.1 percent. Energy was flat. The December results put overall fourth quarter industrial production 1.5 percent below its level in the third quarter when it contracted an even steeper 1.7 percent. This confirms that the sector ended 2018 in technical recession. With orders still trending south, prospects for the current quarter are less than bullish and goods production could well make another negative contribution to real GDP growth.

The seasonally adjusted trade surplus was €19.4 billion surplus December, up from a marginally smaller revised €18.8 billion in November and a 6-month high. The headline improvement was attributable to a 1.5 percent monthly rise in exports to €112.3 billion, a new record high, that more than offset a 1.2 percent increase in imports. The December report puts the calendar year 2018 surplus at €227.8 billion, an 8.1 percent reduction from 2017 but still easily large enough for other Eurozone members to look towards Germany for fiscal stimulus should economic growth remain sluggish. 

France

The seasonally adjusted trade balance returned a €4.65 billion deficit in December following a €4.81 billion shortfall in November. The modest headline improvement reflected a 2.2 percent monthly rise in exports led by autos and refined petroleum products. This more than offset a 1.7 percent increase in imports reflecting demand for aeronautical and space products as well as pharmaceuticals. Despite December's rise in exports and moderation in imports, annual export growth now stands at 2.6 percent, just half of the comparable import rate. December's report puts the calendar year 2018 deficit at €59.9 billion, a €2.1 billion increase versus 2017 and the most red ink since 2013. French industry continues to struggle to be competitive at or around current levels of the euro.

Industrial production (ex-construction) managed only a partial rebound in December. Following a 1.5 percent monthly fall in November, output rose a larger than expected 0.8 percent. This put annual output growth at minus 1.4 percent, up from minus 2.2 percent. Manufacturing performed better with a 1.0 percent monthly gain although that too failed to reverse November's 1.5 percent decline. In fact, without a 5.7 percent monthly jump in coke and refined petroleum products, the picture would have looked a good deal softer. In particular, machinery and equipment fell a further 2.3 percent on top of a 2.2 percent drop in November. However, there was better news from transport equipment (up 2.6 percent), food and drink (up 0.9 percent) and the other manufactured goods category (up 1.3 percent). Elsewhere, construction advanced 1.9 percent on the month. Nonetheless, the fourth quarter was weak with overall industrial production falling 0.5 percent versus the third quarter and manufacturing down 0.4 percent.

Italy

Goods production (ex-construction) failed to pick up as expected in December. Rather, following a 1.7 percent monthly fall in November output, declined a further 0.8 percent. This was its fourth decrease in as any months and cut annual workday adjusted growth from minus 2.6 percent to minus 5.5 percent, its weakest mark since December 2012. The latest monthly contraction was dominated by consumer goods where output decreased 2.9 percent. Capital goods (0.0 percent) and intermediates (0.1 percent) were little changed but energy (minus 1.5 percent) also subtracted. December's setback put production at its lowest level since February 2017. It also left the fourth quarter 1.1 percent below the third quarter which, having already shrunk 0.4 percent, confirmed that the sector is now in recession.

Consumer prices provisionally edged 0.1 percent firmer on the month in January. This put the annual inflation rate at 0.9 percent, down from December's final 1.1 percent and its lowest reading since April 2018. The flash HICP declined a largely seasonal 1.7 percent on the month which reduced its yearly rate by 0.3 percentage points to also 0.9 percent. The slide in annual CPI inflation was largely due to weakness in the energy sector where the rates of both regulated (6.9 percent after 10.7 percent) and non-regulated (0.3 percent after 2.6 percent) products fell sharply. Against this, unprocessed food (1.8 percent after 1.3 percent) provided a boost as did transport services (2.3 percent after 0.6 percent). Overall goods inflation halved to 0.6 percent while the services rate was flat at 1.1 percent. The core rate, which excludes energy and unprocessed food, slipped a tick to just 0.5 percent. With the Italian economy now in recession, the outlook for underlying inflation is weaker than ever.

Asia/Pacific

Australia

Retail sales in Australia fell 0.4 percent on the month in December, down from an increase of 0.5 percent in November. Sales advanced 2.8 percent on the year in December, unchanged from November. Household goods retailing recorded a decline of 2.8 percent in sales after increasing 1.5 percent previously while sales of clothing, footwear, and accessories fell 2.4 percent on the month, down from growth of 1.4 percent in November. Sales for the largest category, food, rose 0.5 percent on the month after increasing 0.3 percent previously. Sales fell on the month in December in all but one of the eight Australian states and territories, including the most populous state, New South Wales, down 0.6 percent, and the second and third most populous states, Victoria and Queensland, down 0.5 percent and 0.1 percent respectively. Recent falls in residential property prices may be having an impact on consumer spending, with house prices falling most sharply in New South Wales and Victoria.

Americas and Canada

Canada

January was mixed in part but still a strong month for the labour market. Following December's 7,800 increase, employment jumped 66,800. But with the participation rate climbing 0.2 percentage points to 65.6 percent, the jobless rate rose a couple of ticks to a higher than consensus 5.8 percent. Employment growth was dominated by a very buoyant private sector which added a net 111,500 positions. Public sector headcount advanced 15,900 but the number of self-employed slumped some 60,700. The headline rise came courtesy of a 99,200 leap in services. Within this, wholesale and retail trade rose 33,900, transportation and warehousing 14,700 and professional, scientific and technical services 28,500. By contrast, goods producing industries had a poor month, recording a broad-based fall of 32,300. Manufacturing shed 5,500 and construction was off 8,500 but the sharpest decline was in agriculture at 8,900. The January results maintain what has been a particularly volatile performance by the employment figures in recent months yet at 51,000, the 3-monthly rise in jobs is nonetheless impressive.

Bottom line

With manufacturing weak in both Germany and Italy, Eurozone industrial production coming out on Wednesday, February 13 will be watched for any recessionary clues ahead of Thursday's GDP Flash for the Eurozone. Early in the week, on February 12, New Zealand’s central bank will hold its first meeting of the year. Whether this bank too joins those tilting toward the dovish side could prove, for all the financial markets including currencies, to be very big news. In its last meeting in 2018, the Reserve Bank of New Zealand took no action and expected to leave rates unchanged through this year and into next. For Brexit and U.S.-China trade, headlines may be taking a comparative breather ahead of a likely news rush at month-end.

Looking Ahead: February 11 through February 15, 2019