Global Markets

Equities tumbled at week’s end, dragged down for the week after the dispute between the U.S. and Turkey escalated and sent the Turkish lira plummeting, shaking up markets and sending investors to havens from possible contagion. A meeting between a Turkish delegation and U.S. officials in Washington yielded no apparent solution to a diplomatic rift.

The Reserve Banks of Australia and New Zealand left their respective monetary policies unchanged.

Reserve Bank of Australia

Once again, the Reserve Bank of Australia left its main policy rate unchanged at 1.50 percent where it has been since August 2016. In its statement the RBA noted that the global economy continues to expand but again expressed caution about the direction of international trade policy in the United States. Regarding the domestic outlook, the Board retained their forecast for the Australian economy to grow on average by just over 3.0 percent in 2018 and 2019. Mining exports and non-mining business investment are expected to support headline growth despite concerns about the outlook for household consumption and the impact of drought conditions in some parts of the country.

The RBA's assessment of the inflation outlook is little changed — the consumer price index data released late in July are in line with the Bank’s expectations. Headline inflation picked up to 2.1 percent in the three months to June from 1.9 percent in the previous three months and back within the RBA's target range of 2.0 percent to 3.0 percent after four consecutive quarters below this range. Although one-off moves in some administered prices are expected to make inflation in the current quarter a little lower than previously anticipated, inflation is expected to rise modestly from current levels in 2019 and 2020.

Reserve Bank of New Zealand

The Reserve Bank of New Zealand held its policy overnight cash rate (OCR) unchanged at 1.75 percent as expected and where it has been since November 2016. RBNZ governor Adrian Orr said the Bank is expected to keep the OCR at this level through 2019 and into 2020 — longer than projected in the May statement before reiterating the next move could be up or down. That caught markets off guard and prompted a sharp drop in the New Zealand dollar (kiwi).

The RBNZ noted that gross domestic product growth had slowed over the past year. It added that fiscal and monetary stimulus, as well as higher net exports, “are expected to lift growth over the next two years, but the risks to the growth outlook are to the downside.” The RBNZ added that the labour market has tightened over the past year and that employment is near its maximum sustainable level. Inflation is still below the 2 percent target “but there are early signs of inflationary pressure rising.”

Global Stock Market Recap

Europe and the UK

European markets retreated Friday and for the week. Concerns over global trade and the banking crisis in Turkey weighed on sentiment. Only the FTSE (up 0.1 percent) and OMX (up 0.3 percent) advanced on the week. The CAC declined 1.2 percent, the DAX lost 1.5 percent and the SMI was 1.4 percent lower.

The Turkish lira plunged to an all-time low against the U.S. dollar in European trading Friday following a news report that the European Central Bank raised concerns over the impact of a weak (Turkish) lira on European banks. The ECB is more concerned about the exposure of some banks in France, Italy and Spain to Turkey's problems. The currency has been falling amid a widening rift between the U.S. and Turkey and intensifying worries about the state of the economy. Diplomatic talks between Washington and Ankara in Washington to resolve issues appeared to break.

The currency crisis is actually a banking crisis as Turkey owes so much money to so many different banks, that they risk a potential contagion.

Asia Pacific

Equities ended on a sour note Friday as investors fretted about rising trade tensions between the U.S. and China as well as the new set of U.S. sanctions on Russia. A diplomatic rift between the U.S. and Turkey also kept underlying sentiment cautious. Equities were mixed on the week. Gains ranged from 2.5 percent (Hang Seng) to 0.6 percent (All Ordinaries and STI). Losses ranged from 1.3 percent (Topix) to 0.2 percent (Kospi and Taiex).

Chinese shares posted their best weekly gains in a month, with technology companies leading the surge after China revamped a national leadership group charged with planning and studying its key technological development strategies. The Shanghai Composite was up 2.0 percent while the Hang Seng was 2.5 percent higher.

The Nikkei and Topix retreated 1.0 percent and 1.3 percent respectively thanks to a firmer yen and heavy selling in the technology sector. The yen rose against the US dollar as trade worries persisted and data showed the country's economy grew more than expected in the second quarter, driven by higher consumer spending and business investment. Second quarter gross domestic product surprised and increased a quarterly 0.5 percent (1.0 percent annualized).

Japan and the United States failed to reach an agreement in talks Thursday between U.S. Trade Representative Robert Lighthizer and Japanese Economy Minister Toshimitsu Motegi. Tokyo’s position remains that it prefers multilateral free-trade agreements over bilateral ones.

On Thursday, China announced retaliatory tariffs against the United States, raising concerns over the escalation of the trade war between China and the U.S. A slump in oil prices overnight and the U.S. announcement that it would soon impose new sanctions on Russia also kept investors on edge. China had already announced additional tariffs of 25 percent on $16 billion worth of U.S. imports from fuel to autos. The tariffs will apply to billions of dollars in U.S. gasoline, diesel and other oil products, though not crude. Washington said on Tuesday it would begin collecting 25 percent tariffs on another $16 billion in Chinese goods from August 23. These come after it last month slapped tariffs on $34 billion of goods.

Currencies

The U.S. dollar was up against its major counterparts including the euro, pound sterling, Swiss franc and the Canadian and Australian dollars. However, the yen advanced on the week. Earlier in the week, the pound sterling was hammered thanks to Brexit woes. Pessimism was rife fueled by investor fears that Britain will leave the European Union without an agreement on its future relationship with the bloc. The recent slide began after the UK trade minister, Liam Fox, warned that he saw a 60 percent chance of a no-deal Brexit.

Although most analysts believe Britain and the EU will strike a deal, but doubts are growing. The UK is staring at a few crucial months of negotiations in which it must make progress if it is to agree a deal before its scheduled exit date in March 2019. Traders say investors have rushed to hedge themselves against the possibility that Britain would be locked out of trading freely with its largest export partner, the EU.

On Wednesday, the pound suffered a decline, knocking it to the lowest level in almost a year against the dollar amid persistent worries about UK Prime Minister Theresa May’s ability to cut a deal with the Europe over Brexit. Britain’s currency also struck its lowest level of the year against the euro.

Selected currencies — weekly results

Indicator scoreboard

Germany

June manufacturing orders tumbled a monthly 4.0 percent — their worst performance since January 2017. The decline easily more than reversed an unrevised 2.6 percent jump in May and reduced annual growth from 4.7 percent to minus 0.9 percent, the first negative print since July 2016. June's monthly decline reflected broad-based weakness. Capital goods were down 4.7 percent, consumer goods 4.5 percent and basics 2.3 percent. Domestic orders shrank 2.8 percent while the foreign market contracted 4.7 percent (Eurozone minus 2.7 percent). Overall orders have now fallen in five of the last six months and June's level equaled the lowest since May last year.

June industrial production dropped a monthly 0.9 percent following a slightly shallower revised 2.4 percent increase in May and constituted the fifth decline in the last seven months. Annual growth dropped from 2.9 percent to 2.5 percent. June's headline decline would have been larger but for a 2.9 percent monthly jump in energy output. Basics were down 0.8 percent, capital goods 0.6 percent and consumer goods 1.6 percent. Construction also had a sizeable negative impact, contracting 3.2 percent.

June seasonally adjusted merchandise trade surplus was €19.3 billion after a minimally larger revised €20.4 billion in May. Unadjusted, the black ink stood at €21.8 billion, up from €19.6 billion in mid-quarter and slightly below its €22.1 billion print a year ago. Within the adjusted data, exports were only flat on the month while imports climbed 1.2 percent, their third straight gain. Unadjusted annual growth of exports was 7.8 percent, up from minus 1.3 percent last time, while the yearly change in imports rose from 0.9 percent to 10.2 percent. Both sides of the balance sheet were biased up by favorable calendar effects.

United Kingdom

Second quarter GDP advanced at a quarterly rate of 0.4 percent — double the pace posted at the start of the year. Compared with a year ago, GDP was up 1.3 percent, just a tick higher than last time. The first look at the GDP expenditure components showed that the quarterly rise in total output was driven by gross capital formation which contributed 0.9 percentage points. However, within this business investment grew a relatively modest 0.5 percent albeit after a fall last time. Household spending was up 0.3 percent, contributing just 0.2 percentage points in line with its first quarter performance. Government current consumption rose 0.4 percent. Quarterly growth would have been a lot stronger but for a major hit from foreign trade. With sharply weaker car sales prompting a 3.6 percent slump in exports compared with a 0.8 percent decline in imports, net exports subtracted a hefty 0.8 percentage points.

June industrial production climbed a monthly 0.4 percent and was up 1.1 percent from a year ago. Manufacturing output also posted a 0.4 percent monthly gain, only its second increase of the year so far. Within this, pharmaceuticals (4.5 percent) alone contributed 0.2 percentage points although rubber and plastic (3.0 percent) were not far behind. On the downside, electrical equipment (minus 8.3 percent), chemicals (minus 1.0 percent) and machinery and equipment (minus 2.8 percent) all had a poor month. Elsewhere total goods production was boosted by water supply (1.6 percent) and electricity and gas (0.3 percent) but undermined by mining and quarrying (minus 0.5 percent).

Asia/Pacific

Japan

June private sector machinery orders (excluding volatile items) tumbled 8.8 percent on the month (seasonally adjusted) after dropping 3.7 percent the month before. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. On the year, orders were up a seasonally adjusted 2.9 percent. Manufacturing orders fell a monthly 15.9 percent after increasing 1.3 percent in May, while non-manufacturing orders (excluding volatile items) fell 7.0 percent after increasing 0.2 percent previously.

June household spending sank 1.2 percent on the year after tumbling 3.9 percent in May — the fifth consecutive annual decline in spending. Spending however, increased 2.9 percent on the month after dropping 0.2 percent previously. Annual changes have been adjusted to account for a discontinuity in the collection of sample data. Using unadjusted data, spending also fell 1.2 percent on the year in June in real terms. Spending on food increased 0.2 percent on the year after dropping 5.3 percent previously, while spending on transport and communication, clothing and footwear, and furniture and household utensils also rebounded strongly after annual declines in May. Spending on fuel and utilities, however, weakened further in June, down 6.0 percent on the year after dropping 4.9 percent in May, while spending on housing fell 3.6 percent after increasing 5.8 percent previously.

First estimate of second quarter GDP advanced 0.5 percent on the quarter rebounding from a weather-related decline of 0.2 percent in the first quarter. On an annualized basis, GDP was up 1.9 percent and up from a revised decline of 0.9 percent in the previous quarter. On the year, GDP was up 1.0 percent. The recovery in the second quarter was largely driven by household consumption and private non-residential investment, the former increasing 0.3 percent on the quarter after contracting 0.1 percent previously, and the latter increasing 2.0 percent on the quarter after increasing 0.7 percent previously. Growth in public demand also picked up to 0.3 percent on the quarter from 0.1 percent previously. This was offset by ongoing weakness in private residential investment and net exports, both of which made negative contributions to headline GDP growth.

China

July merchandise trade surplus narrowed to $28.05 from $41.61 billion in June. In year-to-date terms, China's trade surplus was $166.1 billion in July, down more than 25 percent from the same time last year. Although China's overall trade surplus was lower year-to-date than a year ago, its bilateral surplus with the United States remains above levels seen last year. China's trade surplus with the United States was $28.09 billion in July and $162.1 billion year-to-date, up 13.0 percent from the same period last year. China also retains a sizeable trade surplus with the European Union, at $73.1 billion year-to-date, offset by trade deficits with most other major trading partners.

Exports rose 12.2 percent on the year, up moderately from 11.3 percent in June. Seasonally adjusted exports fell 1.9 percent on the month after an increase of 5.7 percent in June. In bilateral terms, China's exports to the United States rose 11.2 percent on the year in July, down from 12.6 percent in June, with year-on-year growth in exports to Japan increasing from 6.9 percent to 12.3 percent. Exports to the European Union rose 9.4 percent on the year after advancing 10.4 percent previously.

Imports posted significantly stronger growth, up 27.3 percent on the year after advancing 16.2 percent in June. Imports from the United States increased 27.3 percent on the year in July, accelerating from growth of 14.1 percent in June and the strongest year-on-year growth since January. Seasonally adjusted imports fell 1.1 percent on the month after increasing by 1.0 percent previously.

In domestic currency terms, China's trade surplus narrowed from CNY251.51 billion in June to CNY176.96 billion in July. Exports increased 6.0 percent on the year in July after advancing 3.9 percent in June, while on the year growth in imports in yuan terms picked up from 11.5 percent to 20.9 percent.

July consumer price index increased 2.1 percent on the year, up from 1.9 percent in June. The index advanced 0.3 percent on the month after falling 0.1 percent the month before. The increase in headline inflation was broad-based, with stronger annual price increases in all spending categories other than health care. Food prices increased 0.5 percent on the year, up from 0.3 percent in June. Non-food items increased from 2.2 percent to 2.4 percent. Inflation picked up in both rural and urban areas.

Americas

Canada

July employment jumped 54,000. The increase was driven by gains in part-time work. The unemployment rate declined 0.2 percentage points to 5.8 percent. In the 12 months to July, employment grew by 246,000 (1.3 percent). These gains were largely the result of growth in full-time work (211,000 or 1.4 percent). Most of July's gain stemmed from a 49,600 increase in the public sector, while private sector jobs, more reflective of the strength of the economy, were up 5,200 on the month. Over this period, the total number of hours worked rose by 1.3 percent. The labour force participation rate (adjusted to US concepts) was 65.3 percent in July compared with 62.9 percent in the United States. Ontario, British Columbia and Newfoundland and Labrador recorded employment increases in July. At the same time, the number of workers declined in Saskatchewan and Manitoba, while it was little changed in the other provinces.

Bottom line

Both the Reserve Bank of Australia and the Reserve Bank of New Zealand left their policy interest rates at 1.5 percent and 1.75 percent respectively. Most equity indexes retreated thanks to geopolitical concerns surrounding tariffs. Most economic data released during the week were positive. Japan and the UK released second quarter gross domestic product data that were better than anticipated.

There are no central bank meetings in the upcoming week. Growth data for the Eurozone and Germany will be released. The pace of new data in the U.S. picks up next week with industrial production and housing starts highlighting the week. The UK posts key data including employment, retail sales and consumer and producer price indexes. As earnings season winds down, investors will have to shift their attention to closely watched economic data and the tariff situation.

Looking Ahead: August 13 through August 17, 2018

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