Global Markets

Equities were mixed as investors responded to key events that occurred during the week. However, markets in Asia and Europe were usually closed prior to important U.S. announcements.

Two events dominated — the U.S. mid-term elections and the Federal Reserve announcement. The Reserve Banks of Australia and New Zealand also announced their respective policy decisions and would have drawn more attention had it not been for the U.S. events.

Regarding the mid-term elections, the majority in the House of Representatives is now held by the Democratic Party and the Senate, by the Republican Party. The markets seem satisfied with the result.

The Federal Reserve announced its decision on Thursday — namely no change in its policy. A market analyst counted only nine changed words in its official statement from the one it issued after its meeting in late September when it raised interest rates.

Reserve Bank of Australia

The Reserve Bank of Australia as no surprise left its policy interest rate unchanged at 1.5 percent where it has been since August 2016.

The decision again highlights that the global economic expansion is continuing but the Bak noted that growth has slowed a little in China and that "the direction of international trade policy in the United States" represents an uncertainty for the global outlook.

The RBA revised their average economic growth forecasts in 2018 and 2019 slightly higher from around 3.0 percent to around 3.5 percent but expect growth to moderate in 2020. Mining exports and non-mining business investment are still expected to support headline growth in the near-term, though the Board remains uncertain about the outlook for household consumption.

The RBA remains confident about the outlook for the labour market. It expects the unemployment rate to fall to over the next few years from around 5.0 percent to around 4.75 percent. They argue that wage growth has "picked up a little" and expect this trend to continue, albeit gradually. Inflation is expected to rise modestly from current levels around 2.0 percent to be around 2.25 percent in 2019 and "a bit higher" in 2020.

Low interest rates are still considered to be providing support to the domestic economy and consistent with sustainable growth as well as achieving the inflation target over time. Although officials have noted consistently in recent months that they expect the next move in policy rates will be higher, there remains little indication that they see a case for such a move anytime soon.

Reserve Bank of New Zealand

The Reserve Bank of New Zealand left its policy rate — the overnight cash rate (OCR) — unchanged at 1.75 percent as anticipated. The OCR rate has been unchanged since a 25 basis point cut in November 2016. In the statement accompanying the decision, the RBNZ again said that they expect the rate will remain at this level through 2019 and into 2020 and again noted that the next move will be data dependent.

It said that economic growth may slow in the near-term after temporary facts boosted activity in the three months to June. They continued to forecast growth to pick up in 2019, supported by accommodative monetary and fiscal policy and a relatively competitive currency, though global trade tensions were again cited as a potential downside risk.

Data released last month showed headline inflation increased from 1.5 percent in the three months to June to 1.9 percent in the three months to September, just below the mid-point of the RBNZ's 1.0 percent to 3.0 percent target range. They noted that higher fuel prices were boosting near-term inflation but advised that they will "look through this volatility as appropriate". They remained confident that inflation expectations will be achieved at their target and expect core inflation to rise to around the mid-point of their target range.

Global Stock Market Recap

Europe and the UK

The majority of European markets ended the week in negative territory after investors had their first opportunity to react to Thursday’s Federal Reserve statement. The Fed left its interest rate target level unchanged as widely expected at 2.00 percent to 2.25 percent. It remains on track to gradually raise rates despite signs of a slowdown in the pace of growth in business investment. The FTSE was up 0.2 percent on the week, while both the CAC and DAX edged up 0.1 percent and the SMI was 0.9 percent higher. China growth concerns also contributed to the negative mood among investors after data indicated China's producer price inflation slowed for the fourth month in a row in October.

The European markets ended Wednesday's session solidly in positive territory. Investors were relieved that the results of Tuesday's U.S. midterm elections were in line with expectations. The Democrats reclaimed control of the House of Representatives and the Republicans retained control of the Senate. Traders moved onto waiting for the FOMC announcement — it was widely expected to leave interest rates unchanged which it did on Thursday. Investors tried to glean what they could regarding the Fed’s next meeting in December and what actions might be taken at that time.

Meanwhile, chatter indicated that there would be some sort of Brexit agreement this week and the pound sterling rose accordingly. It turned out to be simply chatter. Italy stuck to its budgetary decision and remains at odds with EU rules.

Asia Pacific

Asian equities ended the week on a down note after the Federal Reserve reiterated its hawkish stance and the populist government in Rome flatly dismissed the EU's more pessimistic outlook for the Italian economy, deepening a rift with the European Union. On the week, only four of 13 indexes advanced. The All Ordinaries were up 1.3 percent, the Topix added 0.9 percent, the Nikkei inched up 6.59 points and the Sensex was 0.4 percent higher. The All Ordinaries advanced for a second consecutive week. China’s Shanghai Composite and Hang Seng were down 2.9 percent and 3.3 percent respectively. Even though stocks received a mild lift from China’s stronger than anticipated exports data, shares retreated on the week.

Asian stocks ended broadly higher Thursday after U.S. midterm elections delivered no big surprises. While a split Congress is expected to halt any major advances in President Donald Trump's economic agenda, Republicans expanded their majority in the Senate, overcoming historical political headwinds.

Currencies

The dollar rose towards a 16-month high Friday after the U.S. Federal Reserve kept interest rates steady and reaffirmed its monetary tightening stance, preparing investors for a rate increase in December. On the week, the U.S. dollar was up against the euro, pound, yen, Swiss franc and the Australian dollar. It retreated against the Canadian dollar.

The U.S. currency declined following the midterm elections Tuesday on expectations that the outcome of the vote would make further fiscal stimulus measures unlikely. But the dollar bounced back and on Friday returned to outperforming most major currencies, underpinned by the robust U.S. economy and rising interest rates. The Fed is widely expected to raise interest rates in December, which would be its fourth hike this year.

Selected currencies — weekly results

Indicator scoreboard

Germany

September manufacturing orders rose again to yield the first back-to-back gain since November/December 2017. Moreover, a 0.3 percent monthly advance followed a stronger revised 2.5 percent bounce in August to lift orders to their highest level since May. However, annual growth slowed from minus 1.7 percent to minus 2.2 percent, its fourth straight negative print and its worst performance since June 2016. September's monthly increase was wholly attributable to domestic demand which climbed a solid 2.8 percent. By contrast, a 3.7 percent decline in non-Eurozone orders was more than enough to offset a 2.4 percent rise in the Eurozone to produce a 1.4 percent decline in the overall foreign component. Headline strength was led by the consumer sector, which increased a monthly 2.1 percent, and capital goods, which were up 1.4 percent. However, basics were off a further 1.7 percent.

September industrial output closed out the third quarter on a slightly stronger than expected note. A 0.2 percent monthly rise followed an upwardly revised 0.1 percent gain in August and made for the first back-to-back increase since July/August 2017. Annual growth was a modest 0.8 percent but even this was a marked improvement on the zero percent reading last time. September was a mixed affair with a healthy 0.9 percent monthly advance in capital goods production contrasting with a 1.0 percent decline in basics and a 0.3 percent slide in consumer goods. Energy (minus 3.3 percent) had a negative effect but headline growth was boosted by a 2.2 percent bounce in construction. As a result, manufacturing output was only flat after a 0.3 percent advance in August.

United Kingdom

Following an unrevised 0.4 percent rise in the second quarter, total output expanded a solid 0.6 percent in the third quarter — the best quarterly performance since the fourth quarter of 2016. Annual growth was 1.5 percent, a 0.3 percentage point improvement on last time. The quarterly acceleration in part reflected a stronger consumer sector where spending rose 0.5 percent, a tick faster than in the previous period. More important though was gross fixed capital formation which returned to positive growth (0.8 percent) having contracted in both the first and second quarters. However, within this, business investment was disappointingly weak, declining 1.2 percent. This was its third consecutive decline and its steepest fall since the first quarter of 2106. Elsewhere, government consumption (0.6 percent) also moved higher having fallen in the second quarter for the first time since the third of 2017. Within the real foreign trade balance, exports rebounded from a 2.2 percent decrease in the second quarter with an increase of 2.7 percent, their best gain in a year. At the same time, imports were only flat which, after a 0.2 percent slide previously, means that they have still not grown since third quarter of 2017. As a result, net exports contributed a hefty 0.8 percentage points to the quarterly change in total output, the largest boost since the fourth quarter of 2016. Exports of goods (4.4 percent) were particularly robust but services (0.8 percent) also made headway.

September merchandise trade deficit was £9.73 billion, nearly £2 billion below its revised £11.72 billion August mark and the smallest since February. The improvement reflected in part a 1.7 percent monthly increase in exports but, more importantly, a 3.5 percent drop in imports. The decline in the red ink was wholly attributable to trade with non-EU members where the shortfall narrowed from £4.56 billion to £2.34 billion. By contrast, the gap with the rest of the EU widened slightly from £7.16 billion to £7.39 billion, a 3-month high. However, the surprisingly good headline figure was heavily influenced by oil and other erratic items where a deficit of £0.88 billion in August was replaced by a surplus of £0.31 billion. Excluding this category, the goods shortfall shrank from £10.50 billion to £9.40 billion.

Asia/Pacific

China

The merchandise trade surplus in U.S. dollar terms widened from $31.7 billion in September to $34.01 billion in October. Exports rose 15.5 percent on the year in October, up from 14.5 percent in September. Imports grew 21.4 percent on the year after advancing 14.3 percent in August. In domestic currency terms, China's trade surplus widened from CNY213.3 billion in September to CNY254.2 billion in October. Exports increased by 22.9 percent on the year in October after advancing 17.0 percent in September.

Bottom line

Most equity indexes retreated last week as investors evaluated the respective monetary policy announcements from the Reserve Banks of Australia and New Zealand and the Federal Reserve. The three central banks left their respective policy interest rates unchanged. Data were light during the week. Most of China’s data disappointed with only exports and imports providing the good news. UK data were mixed — third quarter GDP advanced while the trade deficit narrowed.

There are no central bank announcements this coming week. There are several third quarter GDP announcements including the Eurozone, Germany and Japan. The UK releases its labour market report, consumer and producer price indexes and retail sales. China continues releasing its October data including industrial production and retail sales.  

Looking Ahead: November 12 through November 16, 2018

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