Global Markets

The news of week was highlighted by Federal Reserve Chair Jerome Powell’s two days of Congressional testimony and the data deluges from China and the UK. Diatribes from U.S. President Trump regarding the Federal Reserve and the value of the U.S. dollar also resulted in spontaneous knee jerk reactions in the markets. Equities were mostly higher on the week but currencies gyrated with the yuan tumbling to its lowest in more than a year on Friday.

On Thursday, Mr Trump expressed dissatisfaction with Federal Reserve policy and expressed concern about the potential impact of rising interest rates and a stronger dollar on the U.S. economy and American corporate competitiveness. Until now, U.S. presidents never commented on Fed policy. He also said that he wouldn’t interfere with the Fed and futures prices suggested no big shift in expectations on interest rates going forward. He renewed his attack Friday. The dollar had been bolstered during the week by Fed Chair Powell’s upbeat Congressional testimony.

Global Stock Market Recap

Europe and the UK

European equities were mixed for the week as renewed trade war worries weighed on the markets after President Donald Trump indicated a willingness to impose tariffs on all Chinese imports to the U.S. He also has been threatening to impose tariffs on European autos. Obviously the news hit shares of European automakers hard. For the week, the FTSE and DAX added 0.2 percent each while the SMI advanced 1.5 percent. The CAC retreated 0.6 percent. Corporate earnings proved mixed and mining stocks were under pressure due to a pullback in metal prices.

UK stocks ended higher Thursday and the pound sterling tumbled after disappointing British retail sales stoked speculation the Bank of England may refrain from increasing interest rates when it meets on August 2. The pound sterling slumped below $1.30 Thursday, the weakest since early September 2017 before stabilizing above that level. A weaker pound can boost the FTSE as many of the index’s multinational companies generate most of their sales in other currencies. The UK released a number of key economic statistics during the week with surprisingly weak June retail sales having investors questioning whether the Bank of England would increase its key interest rate. The retail sales data followed weaker than anticipated June consumer price data. However, the ILO unemployment rate remained at 4.2 percent.

Asia Pacific

Equities were mixed in a week that began with a deluge of Chinese data. Investors were distracted by trade war threats between China and the U.S. along with a summit between presidents Trump and Putin. Along with the summit, investors were waiting for the two days of testimony from Fed Chair Jerome Powell to the U.S. Congress. On the week, advances ranged from 1.9 percent (KLCI) and 1.7 percent (SET) to a low of 0.43 point (PSEi). Declines ranged from 0.1 percent (Shanghai Composite and Sensex) to 1.2 percent (Jakarta Composite).

The week began with a deluge of Chinese economic data, including second quarter gross domestic product. Economic growth slowed in the second quarter, as the government's efforts to rein in debt dampened activity, while production slowed adding fuel to concerns over an escalating trade war with the United States. Gross domestic product expanded 6.7 percent on the year in the three months to June as expected after growing 6.8 percent in the first quarter. The Shanghai Composite was down only 0.1 percent — but that was after a rally that added 2.1 percent on Friday alone after the People’s Bank of China lowered its yuan midpoint (its official fixing rate) for the seventh consecutive trading day. The Hang Seng lost 1.1 percent on the week.

The Nikkei and Topix advanced 0.4 percent and 0.9 percent respectively. Japan’s June merchandise trade surplus was ¥721.408 billion following the ¥578.3 billion deficit in May. Exports advanced an annual 6.7 percent while imports were up just 2.5 percent from a year earlier. Japan signed a trade pack with the EU during the week — it got little notice in the markets.

Currencies

The U.S. dollar, after climbing in response to Fed Chairman Powell’s upbeat Congressional testimony, declined against its peers following U.S. President Donald Trump’s criticism of Federal Reserve policy. Trump on Thursday expressed concern about the potential impact of rising rates and a stronger dollar on the U.S. economy and American corporate competitiveness. The dollar had reached the high after Federal Reserve Chairman Jerome Powell expressed confidence in the U.S. economy and affirmed expectations that the central bank is on track to keep increasing interest rates gradually. On the week, the dollar was down against the yen, Swiss franc, euro and the Canadian and Australian dollars. It was higher against the pound sterling (which had problems of its own). Sterling was pressured by weaker than anticipated consumer price index and retail sales along with Brexit woes.

The major news in the foreign exchange markets was the steady decline in the value of the Chinese currency, the yuan. Ultimately, the People’s Bank of China was forced to step in to halt the currency’s steep decline. China’s yuan rebounded from more than one-year lows against the dollar on Friday afternoon, driven up on suspected dollar sales by major state banks to prop up a currency that has been hit by the Sino-U.S. trade conflict. The frenetic action in the currency market was matched by some sharp gyrations in the country’s stock markets, which recovered from early losses to close solidly higher Friday amid reports of an imminent release of detailed rules governing the wealth management industry. Beijing’s currency management has been a sore point in relations between China and the United States in the past, so any suspicions that Chinese authorities might be deliberately weakening the yuan could further inflame tensions between the two countries.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

June final harmonized index of consumer prices was up 2.0 percent on the year. The core measures were mixed. The yearly rate of the narrowest gauge, which excludes energy, food, alcohol and tobacco, was up 0.9 percent. This was 0.2 percentage points below its final May reading and compares with a 1.0 percent rate at the start of the year and the 1.1 percent posted in June 2017. Omitting just energy and unprocessed food, inflation was unrevised at 1.2 percent, although this was also a tick less than in mid-quarter. Similarly, without only energy and seasonal food, inflation was 1.2 percent, down from 1.3 percent in May.

United Kingdom

June claimant count of joblessness increased 7,800 after a smaller revised 3,000 decline in May. This left the unemployment rate unchanged at a still historically very low 2.5 percent. The ILO data revealed a 12,000 decline in the number of people out of work in the three months to May. The jobless rate remained at 4.2 percent on this measure. The figure for June alone was just 4.0 percent. Moreover, employment was up another sizeable 137,000 which, following a 146,000 gain last time, lifted the employment rate to a record high of 75.7 percent. In addition, at 21.0 percent, the inactivity rate equaled its record low while, at 824,000, vacancies saw their all-time high. Annual average earnings growth for the three months to May was 2.5 percent and 0.1 percentage point below its reading for February-April. Excluding bonuses, the picture was little different with the rate 2.7 percent similarly a tick less than last time.

June consumer prices were unchanged on the month and up 2.4 percent for the third month. The steady yearly rate masked upward contributions from transport, where prices rose a monthly 0.8 percent after a 0.1 percent increase a year ago, and housing, water, electricity, gas and other fuels (0.2 percent after zero percent). The boost here was essentially offset by the negative effects of clothing and footwear (down 2.1 percent after a decline of 1.0 percent) and recreation and culture (down 0.4 percent after falling 0.1 percent). As a result, the core index, which dipped 0.1 percent on the month, saw its annual change drop from 2.1 percent to 1.9 percent, its first sub-2 percent reading since March 2017. Meantime, the measure preferred by the ONS, the CPIH, was flat on the month and also unchanged on the year (2.3 percent).

June retail sales declined a monthly 0.5 percent after spiking an upwardly revised 1.4 percent in May despite the potential boost to sales from the World Cup and very warm weather. Annual growth of purchases fell from 4.1 percent to 2.9 percent. Excluding auto fuel, the picture was much the same — sales declined 0.6 percent to stand 3.0 percent higher on the year after a 4.5 percent annual increase last time. World Cup and weather effects may have helped to lift food purchases by a minimal 0.1 percent. Excluding auto fuel, non-food sales were off 1.1 percent within which other stores (down 3.2 percent), non-store retailing (down 1.4 percent) and textiles and clothing (down 0.8 percent) were especially weak. Only non-specialized stores (0.8 percent) and auto fuel (0.3 percent) recorded positive monthly growth.

Asia/Pacific

Japan

June merchandise trade balance shifted from a deficit of ¥578 billion in May to a surplus of ¥721 billion in June. Exports grew 6.7 percent on the year, slowing from 8.1 percent in May. Imports slowed from 14.0 percent to 2.5 percent. The moderation in annual headline growth in exports was mainly driven by weaker demand from China and the United States. Exports to China increased 11.1 percent on the year, down from 13.9 percent in May, while exports to the United States fell 0.9 percent on the year after increasing 5.8 percent previously. Exports to Korea and Taiwan also weakened in June. These moves were offset by substantially stronger growth in exports to the European Union, up 9.3 percent on the year in June after an increase of 0.7 percent previously. The deceleration in headline imports in June was broad-based.

Australia

June employment increased 50,900 after a revised increase of 13,500 in May. The unemployment rate was unchanged at 5.4 percent while the participation rate rose from 65.5 percent to 65.7 percent. The increase in employment was mainly driven by full-time employment, up 41,200 on the month after falling by 19,900 previously. Part-time employment also increased by 9,700 after increasing by 32,600 in May. The total numbers of hours worked rose 0.6 percent on the month in June after falling 1.4 percent in May. Over the last 12 months, full-time employment has increased 158,200 persons while part-time employment has increased by 180,800 persons.

China

Second quarter gross domestic product increased 6.7 percent from a year ago and down slightly from the 6.8 percent pace in the previous quarter. GDP grew 1.8 percent on the quarter, up from the 1.4 percent increase recorded in the three months to March. The data continue the recent pattern of remarkable stability in Chinese economic growth, with the annual change in GDP reported at between 6.7 percent and 7.0 percent in every quarter since the start of 2015. Monthly data for June, also published today, showed stronger growth in retail sales and steady growth in fixed asset investment but weaker growth in industrial production.

Americas

Canada

May manufacturing sales rebounded 1.4 percent after sinking a revised 1.1 percent the month before. Sales rose in 14 of 21 industries, representing 64 percent of total manufacturing sales. The chemical, machinery, and wood product industries accounted for most of the gains while the transportation equipment industry posted the largest decline. In constant dollars, manufacturing sales were up 0.9 percent. Manufacturing sales were up in seven provinces in May, led by Alberta and British Columbia. On the year, sales were up 3.7 percent, unchanged from April. Unfilled orders were up 3.5 percent for the fourth consecutive monthly gain. Higher levels of unfilled orders in the aerospace product and parts industry were mainly responsible for the overall rise in unfilled orders in May. New orders were also up in May, increasing 4.9 percent. The gain was largely due to the aerospace product and parts industry. The overall increase was partially offset by a 13.3 percent decline in new orders for fabricated metal products.

Bottom line

Equities were mixed in a volatile week of trading. Economic data in the UK disappointed as did China’s. Tariff talk continued to rattle investors. Fed Chair Jerome Powell, in his Congressional testimony, was upbeat about the U.S. economy and avoided answering specific questions regarding the impact of tariffs.

First data for the third quarter will be released in the form of flash composite PMIs. France posts flash second quarter gross domestic product. Worries about a full-blown global trade war are likely to persist as officials from the EU Trade Commission are due to arrive in Washington in the coming week for trade talks and are said to be preparing a list of retaliatory measures in response to proposed U.S. tariffs on European Union cars. The European Central Bank holds a General Council monetary policy meeting.

Looking Ahead: July 23 through July 27, 2018

Anne D Picker is the author of International Economic Indicators and Central Banks.