Global Rundown

Global trade is showing some welcome and unexpected life in the latest reports out of Europe and, despite all the continuing uncertainty and ever-building drama on Brexit, employment and retail data out of the UK are proving surprisingly upbeat. Yet economic sentiment in German isn't showing improvement and the latest set of flash composites are not pointing to any quarter-end acceleration for the global economy, to say the least. Still the week's economic news is probably more good than bad, evident in a solid GDP performance for New Zealand and a falling unemployment rate in Australia where, however, home prices continue to tumble. And prices everywhere, whether at the consumer level or the producer level or whether in the UK or Japan or Canada, are decidedly flat.

But before turning our attention to the week's run of data out of Europe and Asia, let's first update announcements from the Bank of England and the Swiss National Bank where wait-and-see caution, as also underscored in the week by the U.S. Federal Reserve, is the definitive global theme for monetary policy.

Bank of England

Staring into the black hole of Brexit uncertainty, the Bank of England's monetary policy committee responded as widely anticipated and did nothing. It's Bank Rate held at 0.75 percent and the QE ceiling at £445 billion (gilts £435 billion). The vote was again a unanimous 9-0. More significantly, forward guidance was also left intact. This leaves the MPC believing 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 percent target at a conventional horizon''. In other words, the modest tightening bias was retained, albeit inevitably subject to how Brexit is finally resolved.

Other news out of the meeting was a small upward revision to the bank's first-quarter growth forecast (0.3 percent from 0.2 percent) which provided a little extra justification for keeping the tightening bias. A slightly stronger labor market argued in the same vein. However, the response of the BoE to whatever the final Brexit outcome might be is very unlikely to be rushed as the bank will want to assess just how the economy reacts. For now, monetary policy is in the hands of the politicians.

Swiss National Bank

To nobody's surprise the Swiss National Bank, like the BoE, left policy on hold at its latest meeting. The target corridor for 3-month CHF Libor again held at minus 1.25 percent to minus 0.25 percent with the key deposit rate in the middle at minus 0.75 percent. Also as widely expected, the central bank reinforced its willingness to intervene in the foreign exchange markets as and when necessary to prevent any unwanted appreciation in the Swiss franc. The relative stability of the EUR/CHF cross-rate since the last meeting in December had reduced some of the pressure on the SNB to ease any further. However, at current levels the exchange rate is still regarded as ‘highly valued' and with inflation uncomfortably low (0.6 percent in February), the policy bias must remain tilted in that direction.

Indeed, the central bank's updated economic forecasts show a lower inflation profile than in December due in large part due to a weaker assessment of the international economy. CPI inflation this year has been trimmed from 0.5 percent to just 0.3 percent while 2020 sees a cut from 1.0 percent to 0.6 percent. The 2021 call is 1.2 percent. These projections assume that 3-month CHF Libor remains at minus 0.75 percent over the entire forecast horizon. However, the projection for domestic economic growth this year is unchanged at 1.5 percent, down from the 2.5 percent registered in 2018.

SNB policy has been essentially unchanged for more than four years now and could well stay that way for a lot longer yet. Inevitably, much depends upon how the Swiss franc performs. In the current environment, a seemingly improbable, but not impossible, move back to the old target floor of EUR/CHF1.20 would certainly please policy makers. However, the bank would probably still want to see a sustained pick-up in domestic inflation before even contemplating any step towards policy normalization. Much more of a risk to stability is an increase in geopolitical uncertainty (Brexit?) that prompts fresh capital inflows into the currency and forces interest rates to slide still deeper into negative territory.

Indicator scoreboard

Eurozone

January's seasonally adjusted trade balance returned a €17.0 billion surplus, up from €15.6 billion in December and its highest mark since last April. The improvement reflected a 0.8 percent monthly bounce in exports, their first gain since October, that more than offset a 0.3 percent advance by imports. Unadjusted annual growth of exports returned to positive territory at 2.5 percent but was still short of its import counterpart which clocked a 3.4 percent rate. The January surplus compares favourably with the €16.0 billion average recorded in the fourth quarter when total net exports boosted real GDP growth by a useful 0.2 percentage points. Although early days yet and while changes in the terms of trade could cloud the picture, it looks as if trade may give the current quarter a small lift.

Italy

The seasonally adjusted balance was €4.5 billion in the black in January after €2.0 billion in December. This was the most black ink for Italy since November 2017. The rise in the surplus was largely attributable to a 4.1 percent monthly decline in imports. This was compounded by a 2.5 percent increase in exports, their first rise since last October, as solid gains across major sectors more than offset a 14.4 percent slump in energy. Unadjusted annual growth of the former dropped from 4.6 percent to 1.7 percent, its weakest outturn since March 2018, while the rate for the latter climbed from minus 2.4 percent to 2.9 percent, a 3-month high. The improvement in January net goods exports boosts the chances of total net exports providing another positive contribution to quarterly real GDP growth. However, with imports now at their lowest level since last April, the indications are that domestic demand remains soft.

Switzerland

The merchandise trade balance was in a CHF3.13 billion surplus in February, little changed from CHF3.04 billion posted in January. The lack of volatility masked a sharp improvement in annual import growth from minus 1.2 percent to 7.1 percent, a 7-month high, and a more modest increase in the export rate from 4.2 percent to 5.9 percent. In monthly terms, exports rose 2.3 percent following a 1.4 percent gain previously while imports declined 1.2 percent after a cumulative 8.0 percent jump in December/January. There was also a marked improvement in the real balance as export volumes expanded a further 1.3 percent compared with a 3.0 percent drop in imports. Chemicals and pharmaceuticals, which hit a new record high, together with watches and metals performed especially well. Having seen a marked deterioration in real net exports at the start of the year, the February rebound bodes well for first-quarter GDP growth. Even so, without a particularly good March, merchandise trade will still have a negative impact this quarter.

UK

The labour market again proved resilient in January/February although the recent uptrend in wage growth showed some signs of stalling. According to the claimant count, joblessness rose a further 27,100 in February. This followed a sharper revised 15,700 increase at the start of the year and was large enough to lift the unemployment rate a tick to 2.9 percent, still historically low but also its highest level since the middle of 2014. However, the more trustworthy ILO statistics showed the number of people out of work declining 35,000 in the three months to January. This put this jobless rate at 3.9 percent, slightly below market expectations and its lowest reading since the three months to January 1975. At the same time, employment advanced a hefty 222,000 (full-time 152,000) to put the employment rate at 76.1 percent, up from 75.8 percent in the fourth quarter and a new record high. Less promising was the outlook as job vacancies in the three months ending February declined 9,000 to 854,000. This was only their second fall since February-April last year and one of the steepest in recent times. Wages were stronger than expected but still failed to show any further acceleration. Hence, average weekly earnings in the three months to January recorded a 3.4 percent yearly rate, down a tick from their upwardly revised fourth-quarter mark. Excluding bonuses, the rate was also 3.4 percent, in line with the previous period.

UK

Retailers had a surprisingly respectable February. Volume sales rose 0.4 percent on the month following a 0.9 percent bounce in January. This was the third increase in the last four months and put annual growth at a solid 4.0 percent, just a tick short of the rate at the start of the year. Moreover, the monthly headline advance was wholly attributable to discretionary spending as food purchases nosedived 1.2 percent, their steepest decline since December 2016. Excluding auto fuel, non-food demand was up 0.9 percent after a 0.2 percent gain previously. Within this, other stores and non-store retailing (both 2.4 percent) had a particularly good month and both household goods (0.8 percent) and non-specialised stores (0.3 percent) also made decent headway. The only negative was textiles and clothing which slipped 0.3 percent. Auto fuel was 2.2 percent higher.

The February report puts average volumes over the latest three months 0.7 percent above their level in September-November, matching the rate for the three months ending January. So, the trend in sales remains firm despite all the Brexit uncertainty. It may be that Brexit has provided some kind of a boost in precautionary stockpiling but the drop in food purchases suggests that if this is the case, it is probably only limited.

Germany

According to ZEW, analysts remain downbeat about the German economy situation this month. However, pessimism about the next six months is significantly less marked than in February. The current conditions index declined by a further 3.9 points, its sixth consecutive fall but the smallest over the period. Even so, at 11.1, this was its weakest result since December 2014. By contrast, expectations rose for a fifth straight month. Moreover, a surprisingly sharp 9.8 point spike was the steepest since last August and, at minus 3.6, the measure now stands at its highest mark since March 2018. That said, the latest print was still well short of its 22.2 long-run average. A possible delay in the Brexit process as well as hopes for a US-China trade deal seem to have provided some boost to confidence.

Eurozone

February's modest rebound in France's private sector business activity proved short-lived as the first quarter unexpectedly ended with renewed contraction. At 48.7, the flash composite output index was 1.7 points below its final February reading and, once again, on the wrong side of the 50-expansion threshold. The latest deterioration reflected fresh weakness in both the manufacturing and service sectors. The flash PMI for the former was 49.8, down from a final 51.5 in February and a 3-month low. Its services counterpart was 48.7, a decline of 1.5 points. For Germany, the lopsided and sluggish economic upswing extended into March. A flash reading of 51.5 was down 1.3 points versus the final February mark, well short of market expectations and the weakest outturn in some sixty-nine months. Services were again relatively buoyant with the flash sector PMI weighing in at a healthy enough 54.9, down just 0.4 points from February. However, the downturn in manufacturing steepened with a provisional reading of just 44.7, a 79-month low.  Manufacturing output, at 45.0, recorded its worst performance in more than six years and a slump in new orders here was more than enough to offset an accelerated rise in services. Exports saw their sharpest drop since August 2012. For the Eurozone itself, business activity was disappointingly soft. The flash composite output index, at 51.3, was 0.6 points short of its final February mark, well below market expectations and worryingly close to the 50-growth threshold. It was also the third worst score since November 2014.

Asia Pacific

Australia

Australia's residential property price index fell 2.4 percent on the quarter in the three months to December after falling 1.5 percent in the three months to September. This is the fourth consecutive drop in house prices and the biggest on record. Year-on-year growth in the index also weakened from a fall of 1.9 percent to a sharp drop of 5.1 percent. The headline index is a weighted average of house prices for the capital cities of Australia's eight states and territories, with prices falling on the last quarter in all but two of these cities.

Weakness in the headline index was mainly driven by significant price falls in the two largest Australian cities, Sydney and Melbourne. Sydney house prices fell for the sixth consecutive quarter and at the sharpest pace on record, down 3.7 percent on the quarter after falling 1.9 percent previously, with prices there now down 7.8 percent on the year. Melbourne house prices fell 2.4 percent on the quarter after dropping 2.6 percent previously with prices there 6.4 percent lower on the year. Prices also fell on the quarter in Brisbane, Perth, Darwin, and Canberra, offset by a modest increase in Adelaide and a more substantial increase in Hobart. The data are consistent with other indicators that have shown that Australia's residential property market slowed considerably in 2018, with more up-to-date indicators suggesting that this weakness has extended into 2019.

Australia

Australia's labour market recorded an increase of 4,600 in the number of employed persons in February (seasonally adjusted) after a revised increase of 38,300 in January. The unemployment rate fell from 5.0 percent to 4.9 percent, its lowest rate since June 2011, while the participation rate fell from 65.7 percent to 65.6 percent. The increase in headline employment in February was entirely driven by part-time employment, up 11,900 persons after falling by 27,300 persons in January. Full-time employment fell by 7,300 persons after increasing by 65,600 persons previously. The total number of hours worked increased 0.2 percent on the month. Over the last twelve months, full-time employment has increased by 210,000 persons, while part-time employment has increased by 74,000 persons. February's results are in line with the assessment by officials at the Reserve Bank of Australia that conditions in the labour market remain strong, offsetting recent weakness in the housing market. Officials expect the unemployment rate to decline further over the medium-term, resulting in a gradual pick-up in both wage growth and consumer inflation.

New Zealand

New Zealand's economy expanded 0.6 percent on the quarter in the three months to December, up from growth of 0.3 percent in the three months to September. Yet year-on-year, growth slowed from 2.6 percent to 2.3 percent, its lowest level since late 2013. The latest quarterly increase reflects stronger growth in the services sector and a smaller contraction in manufacturing. Services sector output rose 0.9 percent on the quarter, up from 0.5 percent previously, while manufacturing output fell 0.4 percent after dropping 0.8 percent previously. Output in primary industries, however, fell 0.8 percent on the quarter after a strong 2.3 percent increase previously.

In expenditure terms, GDP rose 0.5 percent in the three months to December, up from 0.4 percent in the three months to September. Growth in household consumption picked up from 1.0 percent to 1.3 percent, while investment in fixed assets rebounded strongly, up 1.4 percent after falling 1.1 percent previously. Net exports and government spending also made strong positive contributions to headline growth. Officials at the Reserve Bank of New Zealand forecast growth to pick up in 2019, supported by accommodative monetary and fiscal policy.

Japan

Inflation data showed headline and underlying measures of inflation remained steady and subdued in February. The headline consumer price index rose 0.2 percent on the year in February, unchanged from the increase recorded in January, and still well below the Bank of Japan's 2.0 percent inflation target. Seasonally adjusted headline CPI was unchanged on the month in February after advancing 0.3 percent in January.

Steady headline inflation in February reflects offsetting moves in some of the major categories of the index. Food prices, which account for just over a quarter of the total index, fell 1.4 percent on the year after falling 1.5 percent previously, while transport and communication costs, around 15 percent of the index, fell 0.6 percent after falling 0.2 percent previously. Price changes were relatively steady in other major categories of spending, including housing, fuel and utility charges and services.

Core CPI, which excludes fresh food prices, rose 0.7 percent on the year in February, down from 0.8 percent in January and just below the consensus forecast. The index advanced 0.1 percent on the month after increasing 0.2 percent previously. The Bank of Japan's preferred measure of underlying inflation, CPI excluding fresh food and energy prices, increased 0.4 percent on the year in February, as it did in January, and rose 0.1 percent on the month after increasing 0.2 previously. The BoJ forecasts core inflation of 0.8 percent for the current fiscal year ending March. Excluding the impact of an upcoming increase in the sales tax rate, core inflation is forecast to increase to 0.9 percent for fiscal year 2019 and to 1.4 percent for fiscal year 2020.

Americas

Canada

Inflation in Canada accelerated very modestly in February. A largely seasonal and slightly larger than expected 0.7 percent monthly gain in prices put the annual rate at 1.5 percent, just a tick higher than its January rate and below its medium-term target for a second consecutive month. The relative stability of the yearly headline rate reflected faster price rises in food (3.2 percent after 2.8 percent) and clothing and footwear (1.6 percent after 0.5 percent), offset by smaller gains in recreation, education and reading (1.0 percent after 1.3 percent) and alcohol, tobacco and recreational cannabis (4.1 percent after 4.5 percent).

As a result, the underlying picture was also essentially unchanged from the start of the year. Among the BoC's core measures, the CPI-common edged a tick lower to 1.8 percent but both the CPI-trim (1.9 percent) and the CPI-median (1.8 percent) were unchanged. Excluding food and energy, inflation stood at 2.0 percent, a larger 0.3 percentage points down on last time.

Seasonal factors are quite strongly positive in January and adjusted for these, overall prices were up 0.3 percent on the month after a 0.1 percent dip last time. Excluding food and energy, the CPI rose 0.2 percent following a 0.1 percent decline. In sum, the results suggest that inflation is going nowhere in a hurry and as such should bolster the likelihood of the Bank of Canada retaining its current policy stance for some while yet.

The bottom line

If not improving on net, the week's economic data do at least show that conditions are generally stable and not deteriorating significantly. And though the flash PMIs are a concern, these reports are based on small samples and employ a less-than-rigorous methodology. As opposed to definitive evidence of economic change, the PMIs may instead be echoing the message of Germany's ZEW data, that confidence is very soft. And given the perplexity of the Brexit outlook, this should be no surprise. Still the improvement in trade data is a solid plus and perhaps suggests that cross-border trade, putting Brexit risks aside, is holding its own, at least for now.

The week ahead is busy and will include sentiment surveys out of Germany (Ifo and GfK) as well as confidence numbers out of Italy which right now of course is battling recession. Trade data out of Hong Kong and New Zealand may offer clues whether negative trade effects in Asia are deepening. Canada will also post trade data as well as its monthly GDP report.

**Jeremy Hawkins and Brian Jackson contributed to this article

Looking Ahead: March 25 through March 29, 2019