Market Monitor will be taking off next week to celebrate the Thanksgiving holiday. MM will return on December 1, 2017.

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1 Equities fade By Anne D. Picker, Chief Economist produced by Market Monitor will be taking off next week to celebrate the Thanksgiving holiday. MM will return on December 1, Global Markets Investors contended with a deluge of global economic data and a continuation of mixed earnings reports. But hovering over it all was the attention garnered by the attempt in the U.S. Congress to put together a tax reform bill that could actually become law. Markets were mixed as they waited for news regarding U.S. tax reform. Most equity indexes were down for the week. Traders remained concerned by the lingering uncertainty over the administration s ability to pass U.S. tax reform legislation. Weakening commodity prices thanks to concerns over slowing Chinese growth also weighed on investor sentiment. The pace of economic data releases picked up this week. Among the key releases were third quarter GDPs in Europe and Japan growth in the U.S. and UK had already been reported. In Europe, the Eurozone was up a quarterly 0.6 percent while Germany and Spain both climbed 0.8 percent, and France and Italy both advanced 0.5 percent. This compares with Japan s modest 0.3 percent quarterly increase and the UK s 0.4 percent. The U.S. outperformed both with a quarterly 0.7 percent gain. 1

2 Global Stock Market Recap % Change Index Dec 31 Nov 10 Nov 17 Week 2017 Asia/Pacific Australia All Ordinaries % 5.6% Japan Nikkei % 17.2% Topix % 16.1% Hong Kong Hang Seng % 32.7% S. Korea Kospi % 25.0% Singapore STI % 17.4% China Shanghai Composite % 9.0% India Sensex % 25.2% Indonesia Jakarta Composite % 14.3% Malaysia KLCI % 4.9% Philippines PSEi % 21.5% Taiwan Taiex % 15.6% Thailand SET % 10.8% Europe UK FTSE % 3.3% France CAC % 9.4% Germany XETRA DAX % 13.2% Italy FTSE MIB % 14.9% Spain IBEX % 7.0% Sweden OMX Stockholm % 6.6% Switzerland SMI % 11.7% North America United States Dow % 18.2% NASDAQ % 26.0% S&P % 15.2% Canada S&P/TSX Comp % 4.7% Mexico Bolsa % 4.9% 2

3 United States of technology shares. The Dow and S&P retreated for a second week as investors wondered if and in what form tax reform will be passed. Congressional Republicans took important steps the House of Representatives approved a broad package of tax cuts, and a Senate panel advanced its own version of the legislation. The Dow was down 0.3 percent on the week while the S&P was 0.1 percent lower in choppy trading. The Nasdaq managed to increase 0.5 percent for the week thanks to the strength Investors were inundated in new economic information during the week. Key economic events such as October industrial production and housing starts surprised on the up side while both the Empire and Philadelphia Fed indexes declined in November. Retail sales were positive but core producer prices and import prices were below expectations. 3

4 Europe Most European equity indexes declined for the week. Markets were under pressure as the euro gained ground against the U.S. dollar. The FTSE was down 0.7 percent, the CAC declined 1.1 percent and the DAX was 1.0 percent lower. Only the SMI managed to increase on the week up 0.5 percent. The FTSE, CAC and DAX retreated four of five days while the SMI was down only two days. In the UK, worries over a slowing economy in the UK discouraged some investors from taking exposure to domestic stocks, as households battle rising prices and Brexit talks drag on. Investors have been locking in profits, shrugging off continued strength in economic data as euro zone earnings growth slowed compared to previous quarters and caution rose over whether the stock market rally could continue. European Central Bank President Mario Draghi said Friday that the Eurozone's robust economic recovery is still supported by the massive monetary stimulus that will help inflation return to target. "A key motor of the recovery remains the very favorable financing conditions facing firms and households, which are in turn heavily contingent on our policy measures... An ample degree of monetary stimulus remains necessary for underlying inflation pressures to build up and support headline inflation over the medium term." Equities were little moved despite the upbeat speech. European Central Bank President Mario Draghi said that forward guidance has evolved into a fullfledged monetary policy tool and has been successful. Speaking at the ECB's first conference on central bank communication, Draghi said, "Forward guidance was initially protective and not proactive, and it worked." He was part a four-member panel, which included US Fed Chair Janet Yellen, Bank of England Governor Mark Carney and Bank of Japan Chief Haruhiko Kuroda, discussing central bank communication. 4

5 Asia Pacific Most Asian Pacific equities declined on the week despite rebounding at week s end after U.S. House of Representative Republicans voted to approve a tax reform bill. Of the major indexes, only the Hang Seng (up 0.3 percent) and the Sensex (up 0.1 percent) managed to gain on the week. The Nikkei however, swooned 1.3 percent snapping a nine week stretch of gains, the Shanghai Composite retreated 1.4 percent and the All Ordinaries were 1.1 percent lower. Shares mostly rebounded from their weekly loss after rising firmly Friday thanks to strong U.S. earnings and a step forward on U.S. tax reform brightened the mood, though many hurdles remain to secure passage of a tax cut deal. Mainland Chinese shares fell on worries over slowing growth. They posted their worst week in three months after closing at a 27 month high the week before. Data released Tuesday indicated that China s economy cooled further in October, with industrial output, fixed asset investment and retail sales missing expectations as the government extended a crackdown on debt risks and factory pollution. Chinese equities have been under pressure recently as funding costs in the mainland, as measured by short-term interbank rates and government bond yields, stayed near elevated levels. Japan s gross domestic product was up for a seventh consecutive quarter marking the country s longest growth streak since the turn of the century. However, the underlying numbers weren t all so rosy. Third quarter GDP was up a quarterly 0.3 percent which was less than expected. Exports climbed healthily over the period, but domestic consumption actually declined for the first time since Data for the second quarter were also revised downward. 5

6 Currencies The U.S. dollar tumbled against several of its major counterparts as political developments in Washington muddied the outlook for the delivery of tax reform proposals that already looked to be priced into the currency and equity markets. The U.S. currency was down against the yen, euro, Swiss franc and the pound sterling. It advanced however, against the Canadian and Australian dollars. The pressure follows reports that Robert Mueller, the special counsel looking into interference in the election, is continuing his investigation. That has taken attention away from the passage of tax cut legislation through the House of Representatives, raising the prospect of further distraction among lawmakers from the reforms. Senate Republicans have pledged to debate the measures next week, amid disagreements on the proposals between members of the party in the two branches of Congress. Selected currencies weekly results % Change Dec 30 Nov 10 Nov 17 Week 2017 U.S. $ per currency Australia A$ % 4.9% New Zealand NZ$ % -1.9% Canada C$ % 5.3% Eurozone euro ( ) % 12.0% UK pound sterling ( ) % 7.2% Currency per U.S. $ China yuan % 4.8% Hong Kong HK$* % -0.7% India rupee % 4.5% Japan yen % 4.2% Malaysia ringgit % 7.8% Singapore Singapore $ % 6.7% South Korea won % 9.9% Taiwan Taiwan $ % 7.5% Thailand baht % 9.1% Switzerland Swiss franc % 3.0% *Pegged to U.S. dollar Source: Bloomberg 6

7 Indicator scoreboard Europe Eurozone Third quarter flash Eurozone gross domestic product was up a quarterly 0.6 percent and compared with a year ago, total output was up 2.5 percent. The full flash release offers no information on the key GDP expenditure components but expands the very limited preliminary data to include a regional breakdown. This confirmed a generally good period for the largest four member states. Quarterly growth in France was 0.5 percent, down just a tick from the second quarter rate, while in Germany it climbed from an already respectable 0.6 percent to 0.8 percent. Spain (0.8 percent after 0.9 percent) was once again among the best performers and Italy (0.5 percent after 0.3 percent) also fared well by its recent standards. Elsewhere Latvia (1.5 percent) and Finland (1.1 percent) stood out. There were no contractions in national output. Germany government consumption were relatively stable. Following an unrevised 0.6 percent gain in the second quarter, real GDP provisionally grew at a surprisingly strong 0.8 percent quarterly rate, its second fastest pace since the fourth quarter of Annual workday adjusted growth was 2.8 percent, up 0.5 percentage points from last time. The few details provided by the Federal Statistics Office indicated that the expansion was led by net exports and investment in machinery & equipment. By comparison, household and 7

8 November ZEW was mixed with the current conditions measure at 88.8, up from 87.0 in October and a new post-great Recession high. Expectations advanced a smaller 1.1 points to 18.7, their third increase in as many months and their best reading since May. Expectations are still well short the levels seen over much of 2015 but, at some 11.4 points above their mark a year ago, optimism has clearly strengthened. Italy Third quarter flash gross domestic product was up a quarterly 0.5 percent and up from a slightly softer revised 0.3 percent rate in the second quarter. Annual growth climbed 0.3 percentage points to 1.8 percent. This equaled the best quarterly performance since the Great Recession and marked the highest yearly expansion rate since the first quarter of As usual with the flash report, Istat offered only very limited details of how the major sectors performed. However, goods producing and service sector industries made fresh headway while agriculture contracted. Both domestic demand and net foreign trade also made positive contributions. 8

9 United Kingdom October consumer price index edged up a monthly 0.1 percent and left the annual inflation rate steady at September's multi-year high of 3.0 percent. The main boost to the change in the annual inflation rate came from food & nonalcoholic drink where prices rose a monthly 0.4 percent compared with a 0.5 percent decline over the same period a year ago. Recreation & culture (0.5 percent after 0.2 percent) also had a positive impact, mainly reflecting package holidays (0.4 percent after minus 0.4 percent). However, motor fuels (minus 0.4 percent after 2.3 percent) subtracted as did owner occupiers' housing costs (zero percent after 0.4 percent) and, to a lesser extent, furniture & household goods. As a result, the core CPI was only flat at its September level which, in turn, saw its yearly rate hold steady at 2.7 percent. October claimant count joblessness climbed just 1,100 after a slightly larger revised 2,600 increase in September. The unemployment rate was unchanged at 2.3 percent. By contrast, the more reliable but lagging ILO statistics showed the number of people out of work declining a further 59,000 in the third quarter, although this too left its measure of the unemployment rate steady at 4.3 percent, its lowest mark since the three months ending June However, potentially significantly, third quarter employment was down 14,000, its first drop since the three months ended October Wages growth is still essentially flat. Average annual earnings growth last quarter was just 2.2 percent, a tick firmer than expected but still 0.1 percentage points below its May to August mark and historically very soft. Excluding bonuses, the rate was also 2.2 percent after 2.1 percent last time. The stickiness here means that the squeeze on household budgets continues and real regular wages are now 0.5 percent below their mark a year ago. 9

10 October retail sales rebounded a monthly 0.3 percent following a marginally smaller revised 0.7 decline in September. However, annual growth still slid from 1.3 percent to minus 0.3 percent, the first sub-zero rate since March Excluding auto fuel, purchases rose a smaller 0.1 percent from August and were also 0.3 percent weaker than in October The monthly headline change was mainly due to nonfood stores which rose 0.8 percent and contributed 0.4 percentage points. Petrol stations (0.2 percentage points) also provided a boost but there was a hefty drop in textile & clothing (1.5 percent). Food & non-store retailing also subtracted. Inflation was a little softer with the overall deflator up 0.2 percent on the month which was small enough to reduce its yearly rate from 3.3 percent to 3.1 percent, the first decline since April. However, excluding auto fuel, the annual rate was only flat at 3.0 percent. Asia Pacific Japan The preliminary estimate of third quarter gross domestic product was up a quarterly 0.3 percent in the three months to September, down from a revised 0.6 percent in the three months to June. On the year, GDP was up 1.6 percent or at an annualized 1.4 percent, down from 2.6 percent in the previous quarter. Private consumption contracted 0.5 percent on the quarter, largely reversing an increase of 0.7 percent in the previous quarter. Other major components of domestic demand were also weak, with private non-residential investment up 0.2 percent and total government spending dropping 0.6 percent on the quarter. The weakness in domestic sources of growth was partly offset by a rebound in external demand, with exports up 1.5 percent on the quarter after falling by 0.2 percent in the three months to June. 10

11 Asia Pacific ex Japan Australia October employment increased 3,700 after adding 26,600 jobs in September. This was the weakest monthly result since payrolls fell for two consecutive months in August and September of The unemployment rate edged down from 5.5 percent in September to 5.4 percent in October while the participation rate fell from 65.2 percent to 65.1 percent. The increase in employment was driven full-time jobs, which increased by 24,300 after growing by 9,300 in September. Part-time employment declined 20,700, more than reversing an increase of 17,300 recorded in September. The total number of hours worked in October increased 0.3 percent, down from an increase of 0.7 percent in September. Over the last 12 months, seasonally-adjusted full-time employment has increased by 297,900, while part-time employment has increased by 57,800. China October industrial production was up 6.2 percent on the year after increasing 6.6 percent in September. On the month, output was up 0.51 percent after increasing 0.55 percent in September. Weaker headline industrial production growth was driven by the manufacturing sector, where annual growth slowed to 6.7 percent from 8.1 percent in September. Growth weakened in several major industries in the sector, including automobiles, communication equipment, electric machinery, general equipment and textiles. Elsewhere, growth improved, with utilities output advancing by 9.2 percent on the year, up from 7.8 percent in September, while mining output fell 1.3 percent on the year after a drop of 3.8 percent in the previous month. 11

12 October retail sales were up 10.0 percent on the year after increasing 10.4 percent in September. Retail sales rose 0.74 percent on the month after an increase of 0.89 percent in September. The decline in retail sales growth was driven by big-ticket items and spending associated with the housing sector. Autos were up 6.9 percent after increasing 7.9 percent the month before. Communication equipment was up 2.1 percent after increasing 3.8 percent. Purchases of furniture eased from 15.5 percent to 10.0 percent and from 6.8 percent to 5.4 percent for home appliances. However, sales of clothing were up from 6.2 percent to 8.0 percent and grain & food oil, up from 8.0 percent to 10.1 percent. Americas and Canada Canada September manufacturing sales surprised and increased a monthly 0.5 percent in contrast to expectations of a 0.5 percent decline. The increase reflected higher sales in the petroleum and coal product industry. Overall, sales were up in 7 of 21 industries, representing 28.9 percent of the Canadian manufacturing sector. Sales of non-durable goods rose 1.7 percent while sales of durable goods decreased 0.5 percent. In constant dollars, sales increased 0.7 percent, indicating that higher volumes of manufactured goods were sold in September. On the year, sales were up 4.6 percent. Petroleum & coal products jumped 10.3 percent for the third consecutive monthly gain. The increase reflected gains in prices and volumes for petroleum and coal products. After removing the effect of price changes, sales in volume terms increased 6.7 percent in September. Partially offsetting these increases in current dollars were declines in the food and transportation equipment industries. Unfilled orders declined 1.1 percent while new orders decreased 1.7 percent. 12

13 October consumer price index edged up 0.1 percent on the month and was up 1.4 percent from a year ago as anticipated. On the year, prices were up in seven of the eight major CPI components with the transportation and shelter indexes contributing the most to the increase. The clothing & footwear index declined on the year. The annual gain was a slowdown from September's 1.6 percent increase, but should not surprise the Bank of Canada, which expects fourth quarter CPI to average 1.4 percent and not reach the 2 percent target before mid On a seasonally adjusted monthly basis, the CPI increased 0.2 percent in October, matching the gain in September. Six major components increased while two declined. The household operations, furnishings & equipment index (0.5 percent) and the health & personal care index (0.5 percent) recorded the largest increases. The recreation, education & reading index (down 0.3 percent) and the food index (down 0.2 percent) both declined. United States October retail sales were up a monthly 0.2 percent following September's revised 1.9 percent hurricane-related surge. Excluding autos, sales managed only a 0.1 percent gain though two core readings both show respectable growth, at 0.3 percent each for exautos ex-gas and control group sales. On the year, total sales were up 4.6 percent and excluding autos, 4.3 percent. The control group was up 3.4 percent from a year ago. Hurricane effects were evident in autos, slowing sharply to a still very strong 0.7 percent gain from September's 4.6 percent replacement surge. Building materials reversed sharply, down 1.2 percent following a 3.0 percent gain, with gasoline down 1.2 percent from September's plus 6.4 percent. On the plus side, furniture along with electronics & appliance stores both rose 0.7 percent in October with health & personal care stores up 0.8 percent. 13

14 October import prices were up 0.2 percent and were up 2.5 percent from the same month a year ago. Excluding petroleum which swung sharply higher on the month, import prices edged up 0.1 percent. Excluding petroleum, import prices were 1.4 percent higher on the year. Export prices were unchanged in October despite a 1.9 percent monthly climb in agricultural prices. On the year, agricultural prices were up 3.5 percent. Prices for finished goods, whether on the import or export side, remain stubbornly flat with about half of these annual readings tilted in the negative column including export prices of consumer goods which were down 0.7 percent. decline for mining. October industrial production jumped a monthly 0.9 percent and advanced 2.8 percent on the year. Manufacturing added 1.3 percent on the month and 2.7 percent on the year. Motor vehicles increased 1.0 percent on the month. Selected hitech was a center of strength, also gaining 1.1 percent in the latest month. The report's mining component has been uneven in recent months, down 1.3 percent in October but was up 6.4 percent on the year. Utilities were 2.0 percent higher and helped to offset the 14

15 October housing starts were up 13.7 percent to a million annualized rate while permits were up 5.9 percent to million. All readings show strength including single-family home starts, up 5.3 percent to an 877,000 rate and permits up 1.9 percent to 839,000. Multi-family starts jumped 36.8 percent to 413,000 with permits up 13.9 percent to 458,000. Completions were up 12.6 percent overall to million and adding immediate supply to a very thin new home market. This is the highest level of completions since February Homes under construction were also up, 0.9 percent higher to million. Bottom line While most economic data were favorable, earnings were mixed and weighed on equities. The struggle to pass tax legislation also hurt especially the U.S. dollar. There were no central bank meetings but plenty of central bank speak especially in Europe where Fed Chair Janet Yellen, BoE and BoJ governors Mark Carney and Haruhiko Kuroda and ECB President Mario Draghi opined on communication policies. The upcoming week is shortened in the U.S. by the Thanksgiving Day holiday. Key data are the flash November PMIs in Europe, Japan and the U.S. Germany posts updated third quarter gross domestic product. 15

16 Looking Ahead: November 20 through November 24, 2017 The following indicators will be released this week... Europe Nov 20 Germany Producer Price Index (October) Nov 22 Eurozone EC Consumer Confidence (November flash) Nov 23 Eurozone PMI Composite, Manufacturing & Services (November flash) Germany PMI Composite, Manufacturing & Services (November flash) Gross Domestic Product (Q3.2017) France PMI Composite, Manufacturing & Services (November flash) Nov 24 Germany Ifo Business Survey (November) Asia Pacific Nov 20 Japan Merchandise Trade Balance (October) Nov 22 New Zealand Retail Sales (Q2.2017) Nov 23 New Zealand Merchandise Trade Balance (October) Nov 24 Japan PMI Manufacturing (November flash) Americas Nov 21 United States Existing Home Sales (October) Nov 22 United States Initial Unemployment Claims (week ending prior Saturday) Durable Goods Orders (October) Consumer Sentiment (November final) Nov 23 Canada Retail Sales (September) Nov 24 United States PMI Composite, Manufacturing & Services (November flash) Anne D Picker is Econoday s chief economist and the author of International Economic Indicators and Central Banks. 16

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