Global Markets

The explosive, nearly uninterrupted rebound from Christmas lows halted for most global stock markets this week, in part on profit-taking of the double-digit gains registered since the start of the year but also on official expectations for a persisting economic slowdown in Asia and Europe. US growth is still partly obscure due to shutdown-delayed data though Federal Reserve officials have repeatedly mentioned global slowdown risks since the start of the year, and the shining bright spot of the US economy became slightly tarnished Friday with the release of the February employment report for February showing an unexpectedly small rise in nonfarm payrolls of only 20,000.

For the Eurozone, economic weakness convinced the European Central Bank to slash its current year GDP growth estimate while the Chinese government’s forecast for the current year of between 6.0 percent and 6.5 percent is below the official 2018 GDP growth of 6.6 percent, the lowest since 1990. In light of its prognosis, the ECB revised its forward guidance by extending the period that it will keep rates at their present levels at least through the end of 2019. China chose to address its slowdown with fiscal stimulus measures instead, cutting VAT taxes for selected industries, increasing spending on infrastructure projects, and allowing for a budget deficit target increase from 2.6 percent to 2.9 percent.

European Central Bank

The ECB kept its key interest rate at zero but, more significantly, updated its forward guidance which now sees rates ‘‘at their present levels at least through the end of 2019.'' Prior guidance was to the end of summer this year. The change no doubt reflects the unexpected weakness of the Eurozone economy. The bank also restated guidance on quantitative easing saying reinvestment will extend past the date when it starts raising rates. However, since the first rate increase has now been pushed out, reinvestment policy will similarly be pushed out which implies some additional monetary accommodation compared with the January meeting.

The ECB also announced it will be launching a new quarterly targeted longer-term refinancing operation (TLTRO III) from September. This will run through March 2021 and have a relatively short 2-year maturity. Aimed at boosting the supply of loans, TLTRO III is separate from QE and will provide cheap long-term funding for banks linked to their provision of lending to non-financial corporations and households.

The updated economic forecasts show why the central bank thought it necessary to modify its policy stance. GDP has been slashed from the 1.7 percent expected in December to just 1.1 percent. Moreover, the output lost in 2019 is not made back as next year's forecast is trimmed a tick to 1.6 percent while 2021 is unchanged at 1.5 percent. The inflation profile has also been lowered significantly, to 1.2 percent from 1.6 percent this year, 1.5 percent from 1.7 percent next, and 1.6 percent from 1.8 percent in 2021. Of note too, the central bank left its economic risk assessment titled to the downside, despite the policy changes.

Bank of Canada

The Bank of Canada held its benchmark overnight rate at 1.75 percent but, significantly, did remove wording that the rate would need to rise over time. This seems to reflect a notably more pronounced and broader slowdown in the domestic economy than forecast in January's monetary policy report. Exports and business investment in particular were singled out as having undershot official expectations. Meantime, core inflation was noted as being close to the 2 percent medium-term target and seen holding slightly below that level through most of 2019 in respect of temporary factors, including the drag from lower energy prices and a wider output gap. The announcement pulls the rug from under a possible near-term tightening and significantly increases the chances that the rate could still be at 1.75 percent by year-end.

Global Stock Market Indexes – Weekly Results

Europe

Equities posted gains at the start of the week partly on the back of incoming economic data for the region showing welcome strength in February PMI surveys, but the gains mostly turned into the biggest weekly losses since December following the surprisingly downbeat ECB assessment of economic prospects for the Eurozone as well as weak data from China and Germany and topped off by the surprisingly weak headline US job number. Eurozone banks, auto stocks, and basic resources companies were major decliners in the ensuing sell-off, with Germany’s DAX falling 1.2 percent on the week while France’s CAC lost 0.6 percent, Italy’s MIB 1.0 percent, and Spain’s IBEX 1.5 percent. The UK’s FTSE 100 retained its footing, however, ending virtually unchanged at 7,104 despite mixed data that included unexpected weakness in the PMI construction survey, showing a contraction in the sector during February.

Negotiations continued between the United Kingdom and the European Union on revising the terms of their Brexit agreement, but officials reported little progress in resolving outstanding issues just three weeks before the scheduled withdrawal date, March 29. UK Prime Minister Theresa May has promised to present a revised deal to parliament by March 12 and, should this be rejected, to hold a vote on March 13 on whether the UK should withdraw with no deal in place. If this vote also fails, parliament will vote on March 14 on whether to seek to delay withdrawal. If this vote is rejected, Brexit will proceed as scheduled with no deal in place, while if passed the UK government will then seek the EU's approval to delay withdrawal.

Asia Pacific

Asian shares ended mostly lower for the week, as sharply reduced Eurozone growth projections from the ECB and disappointing Chinese trade data reignited concerns about a global economic slowdown, wiping out mostly solid gains made early in the week on the back of US-China trade talk optimism and Chinese announcements of measures to stimulate the economy. Japan’s Nikkei declined 2.7 percent from the prior week, Hong Kong’s Hang Seng was down 2.0 percent, and South Korea’s Kospi fell 2.6 percent. The Shanghai Composite posted an 0.8 percent loss for the week after strong gains in the days leading up to Friday were erased with a 4.4 percent plunge, the biggest daily decline in five months. Chinese car manufacturers, insurers, and brokerages were among the biggest losers.

India’s Sensex managed to rise 1.7 percent despite the regional weakness and news that US President Trump plans to drop preferential duty-free trade treatment for some imports from India, with markets focused instead on the rising possibility of a second term for Prime Minister Narendra Modi in the upcoming election. Australia’s All Ordinaries also eked out a gain on the week, advancing 0.2 percent partly on increased expectations of a rate cut by the RBA later this year following the release of data showing quarterly GDP slowing to 0.2 percent, the weakest growth since mid-2016, and partly on Australian trade data showing an increase in the trade surplus from a revised A$3.769 billion in December to A$4.549 billion in January, the biggest surplus since December 2016.

The week’s initial positive tone for Asia was given by unconfirmed reports over the weekend that a US-China trade deal was close at hand and expectations that the annual meeting of China’s National People’s Congress will pass new legislation easing restrictions on foreign investment. Premier Li Keqiang’s annual report to the National People's Congress Tuesday began on a slightly sour note, announcing a target range for GDP growth of between 6.0 percent and 6.5 percent for 2019, compared with the target of "around 6.5 percent" in 2018. Market-friendly however, at least for Chinese shares, was the stimulus package announced to address this slowdown. Premier Li advised that monetary policy would remain "prudent" but fiscal policy would be "proactive, stronger and more effective," and announced cuts to value-added tax rates for manufacturing by 3 percentage points to 14 percent and by 1 percentage point to 9 percent for transport and construction firms. Reflecting these and other fiscal measures that included increasing road and waterway investments to 1.4 trillion yuan and railway investments to 800 billion yuan, the target for the budget deficit has been increased from 2.6 percent of GDP in 2018 to 2.9 percent in 2019.

Currencies

Under pressure all week and posting its biggest losses Thursday, the euro plunged to the lowest level since June 2017 before partially recovering to end the week down 1.2 percent. Thursday’s decline was precipitated by the ECB’s announcement that it would put off the first interest rate hike until at least through the end 2019, extending its previous soft end-date by 6 months and suggesting that policy will remain loose for that much longer. The pound also fell sharply on the week after strong gains in the prior two weeks, losing 1.5 percent. The Canadian and Australian dollar fell 0.8 percent and 0.4 percent respectively. Asian currencies were also mostly lower against the dollar, except the Indian rupee which rose 1.1 percent and the Japanese yen, up 0.7 percent on the week.

Selected Currencies – Weekly Results

Indicator scoreboard

Europe

Eurozone

Eurozone retailers enjoyed much-needed improvement in January. Following a very sharp 1.4 percent monthly slump in December, sales volumes climbed 1.3 percent for their best performance since November 2017 and lifted annual workday adjusted growth from 0.3 percent to 2.2 percent. The monthly recovery was broad-based and led by discretionary spending. That said, excluding auto fuel, a 1.7 percent jump in non-food purchases failed to fully reverse December's 2.4 percent nosedive. Gains in electrical goods (2.0 percent after minus 2.0 percent) and mail order and internet (2.8 percent after minus 4.2 percent) were notable but the headline data were also helped by a 1.6 percent increase in sales of auto fuel. Food was up 0.6 percent. Regionally, the rebound was dominated by a 3.3 percent monthly surge in Germany with France up 0.9 percent while Italy and Spain did not provide any data.

Germany

Germany's composite output index was revised 0.1 point stronger from the mid-month flash to 52.8 for final February. This is a 4-month high but masks a sharp divergence between the goods producing and services industries. On the positive side, the final services PMI weighed in at 55.3, a useful 2.3 points above its final February mark and a 5-month peak. Growth of new orders accelerated for the first time in five months, albeit to a still modest pace, and backlogs were up for the first time in three months. Nonetheless, with the final manufacturing PMI clocking in at a 6-year low of just 47.6, the results underline an increasingly lopsided German economy where growth is wholly dependent upon the service sector.

France

The final February PMI data confirmed a better month for French economic activity than in January. In fact, now at 50.4 and 2.2 points stronger than its final January reading, composite output moved back above the 50-expansion threshold for the first time since November. Even so, it still indicates at best, only very subdued business activity. The headline revision mainly reflected a firmer services sector where the flash PMI was nudged up 0.4 points to 50.2, now 2.4 points higher than January. A smaller fall for both new orders combined with broadly stable backlogs as well as a larger increase in sector headcount produced the gain. Business confidence in the year ahead moved up to a 3-month peak. But still leading services in the French PMI is manufacturing, up 3 tenths in February to 51.5. Output seems to have broadly stabilized but weak orders do not bode well for the next few months. The ‘gilets jaunes' protests continue to have some negative impact and underlying trends in business activity remain quite sluggish.

Italy

Industrial production (ex-construction) finally achieved some positive results in January. A solid 1.7 percent monthly bounce followed a slightly smaller revised 0.7 percent decline in December and constituted the first increase of any size since last August. Workday adjusted year-on-year contraction eased from 5.5 percent to 0.8 percent, a 3-month low. January's advance reflected broad-based gains among the major subsectors. Consumer goods (2.4 percent) and energy (6.4 percent) led the way but there were also rises in intermediates (1.0 percent) and capital goods (0.3 percent).

UK

UK house prices were remarkably strong in February according to the latest survey from the Halifax. A 5.9 percent monthly spike was one of the sharpest on record and more than reversed December's 3.0 percent slump. Over the three months to February, the HPI was up at an annual 2.8 percent rate, a 2 percentage point spurt versus the November-January outturn and the strongest performance since the three months ending August 2018. The improvement may reflect stronger demand – mortgage approvals picked up quite well in January – along with surprisingly resilient consumer confidence as well as tight supply.

Switzerland

Consumer prices rose at a strong 0.4 percent monthly rate in February though annual inflation held at 0.6 percent. Domestic prices were up 0.2 percent on the month to leave their yearly rate flat and also at 0.6 percent while import prices climbed a much steeper 1.1 percent though base effects limited the rise in this 12-month rate from 0.5 percent to another 0.6 percent. Within the CPI basket, the main boost to the monthly change came from clothing and footwear where a largely seasonal 2.6 percent spurt added almost 0.1 percentage point. Petroleum products also jumped 1.3 percent and recreation and culture 1.2 percent. Other gains were modest and there were falls in restaurants and hotels (0.3 percent) and household goods and services (0.1 percent). Consequently, the core CPI matched the 0.4 percent monthly headline advance and made for a lowly 0.4 percent annual rate, a tick down on from January.

Asia/Pacific

Australia

Australia's GDP increased 0.2 percent on the quarter in the three months to December, down from growth of 0.3 percent in the three months to September. This is the weakest quarterly growth since mid-2016. Year-on-year growth also slowed, from 2.8 percent in the third quarter to 2.3 percent. The decline in quarterly headline GDP growth was mainly due to weaker business investment with gross fixed capital formation falling 1.3 percent after a 0.7 percent decline previously. Residential investment dropped sharply, down 3.4 percent on the quarter after increasing 0.5 percent. Household spending was slightly higher, up 0.3 percent after increasing 0.2 percent previously, while government consumption spending increased 1.8 percent, up from growth of 1.2 percent. The fall in residential investment will likely reinforce concerns about the impact of the housing market on the economy but the slightly stronger increase in household consumption suggests that solid employment growth is underpinning consumers for now.

Japan

Household spending in Japan increased 2.1 percent on the year in January in real terms vs 1.9 percent in December. Spending, in seasonally adjusted real terms, rose 0.7 percent on the month. The increase in growth was largely driven by a rebound in spending on food, up 0.1 percent after falling 3.2 percent previously, and a small drop in spending on utilities, down 8.3 percent after falling 13.3 percent previously. Spending on transport and communication also grew more strongly, offset by weaker growth in spending on housing and clothing and footwear. A measure of core household spending, which excludes housing, motor vehicles and other volatile items and tends to track more closely the consumption component of gross domestic product, increased 1.8 percent on the year in January after falling 1.2 percent in December. Average monthly income per household was around Y471,000 in January, up 3.6 percent in real terms on the year using discontinuity-adjusted figures (and up 6.4 percent using unadjusted figures).

Hong Kong

The Nikkei Hong Kong PMI index increased from 48.2 in January to 48.4 in February, indicating conditions improved modesty but showing that activity in Hong Kong contracted for an 11th consecutive month. Trade tensions between China and the United States were again cited as a major factor weighing on activity and sentiment. Respondents reported another month of falling output and new orders, including from mainland China, as well as job cuts, and weak business confidence. Input costs and selling prices both rose at a modest pace.

Americas

Canada

At an unusually deep C$4.59 billion, December's shortfall was up from C$1.98 billion in November and reflected a 3.8 percent monthly fall in exports, their fifth in a row, compounded by a 1.6 percent rise in imports, their first increase since last May. Within exports, sales to the U.S. were down 3.6 percent which, with purchases from across the border only 2.4 percent lower, put the bilateral surplus at C$1.78 billion after C$2.25 billion previously. The monthly slide in exports was dominated by energy products (off 21.7 percent) as weaker prices saw crude oil nosedive nearly 29 percent. Excluding this category, sales were broadly stable. On the upside, exports of aircraft and other transportation equipment and parts jumped 16.0 percent, mainly due to increased exports of aircraft engines to the US.

The bottom line

Dovish moves by the ECB and BoC during the week extend a series of central bank efforts to head off the risk of slowing growth. But not all the signs are pointing to slowing and much of the economic data for February and January do show some improvement from the late year slump that hit the global economy. US-Chinese trade tensions remain unresolved as does Brexit, but positive outcomes for both could quickly reinvigorate the economic outlook and investor confidence as well.

The calendar is light in the coming week with industrial production reports the major theme where bounce backs whether for Germany or the Eurozone could take the edge off slowdown concerns. Central bank meetings will be limited to Japan on Thursday.

Looking Ahead: March 11 through March 15, 2019