Trade

Financial Markets…Global stock markets rallied on Friday, with the benchmark MSCI world equity index hitting a 20-month high level of 552.16, as positive economic data from the two world’s largest economies boosted market sentiment. Along with robust U.S. labor and housing market reports, China’s better-than-expected fourth-quarter GDP growth (y/y), buoyant industrial production and retail sales figures added to signs that the global economic recovery is gaining traction.

Japanese yen fell further against the dollar, sliding to a 2 1/2 –year low of 90.21 per dollar in early-morning New York trade, amid speculation the Bank of Japan may start open-ending asset buying program later this month. The yen has depreciated 13% versus the dollar in the past 3 months as the Japanese government signaled greater stimulus measures to boost slumping economy, which may lower the currency and stoke inflation.

U.S. Treasuries rose slightly on Friday, with the benchmark 10-year yields sliding 2 basis points from the highest level in a week to 1.87%, as growing concerns over the country’s debt ceiling debate revived demand for the safe-haven government securities. U.S. lawmakers need to raise the nation’s $16.4 trillion debt ceiling next month, and they will also have to deal with the $110 billion in automatic spending cuts and an expiring short-term measure that funds government agencies in March.

High-income Economies…US consumer confidence fell for the second month in a row in December, with the Thomson Reuters/University of Michigan consumer confidence index declining to 71.3 from 72.9 the previous month. More than a third of consumers referred to concerns related to fiscal cliff negotiations. The consumer expectations sub-index slipped to its lowest since November 2011.

UK retail sales fell 0.1% (m/m) in December, with sales only 0.3% (y/y) higher than a year earlier, underscoring the weakness of consumer spending as the economy continues to struggle after emerging from a double-dip recession in the third quarter of 2012.

Poland's industrial production plunged 14.2% (m/m) in December, the steepest fall in almost four years, with annual industrial output falling 10.6% (y/y). A part of the decline was due to fewer working days in December, but also reflects weak domestic demand and difficult economic conditions in key Euro Area export markets.

New industrial orders in Spain fell 1.5% (y/y) in November, reversing the 5.5% gain seen in October. While consumer goods orders fell 1.4% (y/y), orders of capital goods and energy products increased 4.7% and 7.5%.

Developing Economies…China's GDP growth was reported at 7.9% (y/y) in the fourth quarter of 2012 showing a strong rebound from 7.4% growth in the third quarter.

Quarterly GDP growth rates have been revised for the last three quarters of 2011 and the third quarter of 2012. The revised quarterly growth rates were reported at: 11Q1 - 2.2%, 11Q2 - 2.4%, 11Q3 - 2.3%, 11Q4 - 1.9%, 12Q1 - 1.5%, 12Q2 - 2.0%, 12Q3 - 2.1% and 12Q4 - 2.0% respectively compared with the earlier 11Q1 - 2.2%, 11Q2 - 2.5%, 11Q3 - 2.4%, 11Q4 - 1.7%, 12Q1 - 1.5%, 12Q2 - 2.0% and 12Q3 - 2.2%. The revised quarterly numbers suggest a deceleration in GDP growth to 8.2% in the fourth quarter of 2012 from 8.7% reported in the third quarter.

Annual GDP growth was reported at 7.8% in 2012, the weakest growth rate since 1999 and lower than 9.3% achieved in 2011.

Industrial production in China grew 10.3% (y/y) in December, accelerating from 10.1% rise in November. Retail sales expanded 15.2% (y/y) in December, faster than the 14.9% growth in November. China's urban fixed asset investment in the 12 months through December increased 20.6% (y/y). Monthly price increase for the newly built homes was registered in 54 of the 70 cities surveyed. On an annual basis, 40 cities reported increase in prices in December compared to 25 cities in November.

Chile's central bank kept its monetary policy rate steady at 5.0%. Inflation in Chile eased to 1.5% in December 2.1% in November remaining below the central bank’s 3.0% annual target.

Mexico's central bank left its benchmark interest rate unchanged at 4.50%, but indicated that it is considering monetary easing in light of weak growth and moderating inflation.

World Bank’s Global Economic Prospects, January 2013 featured in The Economist.

Financial Markets…The Standard & Poor’s 500 Index added 0.1% in Friday morning trade and the dollar weakened 0.2% versus the euro after a U.S. Labor Department report showed a slightly slower than expected employment growth in December. The S&P500 has advanced 4.1% this week, gearing for its largest weekly gain in 13 months.

10-year U.S. Treasury yields rose 4 basis points to 1.95%, paring some losses after climbing to a nine-month high of 1.97% before a government report on U.S. employment. Treasuries extended losses yesterday as investors feared the possibility of U.S. Federal Reserve ending its $85 billion monthly bond purchase program sometime this year.

Developing-stock markets fell for the first time in 10 days, with the benchmark MSCI index sliding 0.6% from a 17-month high closing yesterday, after Fed policy makers said they may end their stimulus monetary policy. Emerging-market stocks jumped 108% during the first round of so-called quantitative easing, and they have advanced 9.5% since the U.S. Federal Reserve announced a third round on September 13.

High-income Economies…U.S. nonfarm payroll employment rose 155,000 in December, below the 161,000 increase in November, with a slower pace of increase in private sector employment and a drop in public sector employment. The unemployment rate held steady at 7.8% in December.

U.S. factory orders were flat in November, following a 0.8% (m/m) rise the previous month. However, nondefense capital goods order excluding aircrafts – a proxy for future business investment – rose a robust 2.6% (m/m) following a 3% rise the previous month. The ISM non-manufacturing index for the U.S. index rose to 56.1 in December (the highest reading since February) from 54.7 in November.

Euro Area consumer price inflation remained steady at 2.2% (y/y) in December according to preliminary estimates, the same rate as November, as a weakening pace of year-on-year increases in energy prices was offset by a slight pickup in food and services inflation. The overall inflation rate remains above the European Central Bank’s 2% target.

Markit’s services Purchasing Managers’ Index (PMI) for the Euro Area rose to 47.8 in December from 46.7 in November, suggesting a slower pace of contraction in services sectors (An index level below 50 indicates contraction). Despite an earlier reported modest decline in the manufacturing PMI (to 46.1 from 46.2), a composite index that includes both manufacturing and services rose to 47.2 from 46.5 in November.

Services PMI for Germany rose above the 50-mark to 52.0 in December from 49.7 in November. PMIs rose in Italy (to 45.6 from 44.6) and Spain (to 44.3 from 42.4), but fell in France (to 45.2 from 45.8). Services PMI for Ireland fell to 55.8 from 56.1, but indicating a still robust pace of expansion.

German retail sales rose 1.2% (m/m) in November, almost reversing a 1.3% drop the previous month. Retail sales were 0.9% lower than a year earlier in November.

Developing Economies…China’s HSBC business activity index for service sector declined to 51.7 in December from 52.1 in November suggesting a continued, but somewhat weaker expansion of service sector activity in December compared to November. An earlier survey by China Federation of Logistics and Purchasing (CFLP) and the National Bureau of Statistics suggested that that China's service sector growth accelerated to a four-month high in December.

Residential property prices in China increased for the first time in nine months in December, though at a marginal rate, indicating that the property market is on a recovery path. The house price index, which measures the average cost of a new home in 100 major cities, moved up 0.03% on an annual basis in December, ending eight months of declines.

Inflation in the Philippines edged up to 2.9% in December from 2.8% in November, mainly on the account of higher inflation for food, beverages and tobacco. The annual average inflation rate in 2012 at 3.1% was the lowest registered over the past five years. Inflation in 2012 was also significantly lower than 4.7% attained in 2011.

Brazil's industrial production decreased 1% (y/y) in November following a 2.5% growth in October, pulled down by decrease in production of capital goods. On a monthly basis, industrial production also fell by 0.6% in November.

Meanwhile, Brazil’s Markit Economics activity index for services sector, which increased to 53.5 in December from 52.5 in November, suggests that service sector expanded at the fastest rate in nine months in December.

Financial Markets… The euro rose to a six-week high against the dollar, appreciating to $1.3077, and Europe’s benchmark stock index (Stoxx Europe 600) gained for a second day, as growing optimism over a successful Greek buyback program boosted investor sentiment. Greece started the €10 billion ($13 billion) repurchase of government bonds maturing between 2023 and 2042 on Monday.

Italian and Spanish bonds advanced on Tuesday, with their 10-year yield dropping 4 basis points to 4.41% and 2 bps to 5.22%, respectively, as Greek optimism boosted demand for high-yielding region’s government debt into year-end. Meanwhile, Greek bonds turned slightly lower after Monday’s surge with results of the debt buyback due on December 7.

Gold for February settlement fell 0.9% to $1,705 an ounce on Tuesday, after falling a four-week low of $1,698.50 earlier, as concern over U.S. economy amid stalled budget talks weighed negatively on commodity prices. Copper for delivery in three months also dropped as much as 0.5% to $7,963.50 a metric ton, after reaching a six-week high of $8,045 yesterday.

High-income Economies…The Reserve Bank of Australia cut its benchmark interest rate by a quarter percentage point to 3%, the lowest in three years. The sixth rate cut in the past 14 months reflects Australia’s contained wage pressure, lower projected mining spending, and an unemployment rate at a 2½-year high—as well as concerns that the Australian dollar remains “higher than might have been expected” given lower export prices and a weaker global outlook, according to the central bank.

Producer prices in the Euro Area rose 0.1% (m/m) in October from the previous month, but producer price inflation edged down to 2.6% (y/y) in October from 2.7% in September due to base effects. A deceleration in energy-cost growth to 5.9% (y/y) in October from 6.9% in September was offset by acceleration in price increases for intermediate and non-durable consumer goods, partly reflecting strengthening demand.

Canada’s central bank kept its benchmark overnight rate at 1%. In explaining its decision, the central bank said that although economic activity in the third quarter was weak, global economic conditions remain stimulative (though vulnerable to major shocks from the U.S. or Europe) and the pace of Canada’s economic growth is expected to pick up through 2013, while inflation is expected to increase and reach the targeted 2 percent rate over the course of the next 12 months.

The number of people registering for unemployment benefits in Spain rose for the fourth month in November, rising by 74,296 from October to reach 4.91 million, as some firms used newly introduced labor rules to reduce the size of their workforce.

Developing Economies…Brazil’s industrial production increased by 2.3% (y/y) in October compared to a one percent decline in September. On a monthly basis, industrial production rose by 0.9% in October reversing a one percent decline in September.

China and South Korea agreed to use proceeds of existing currency swap deals to settle bilateral trade between two countries.

Malawi continues to be an outlier from the global policy easing cycle, as it continues to tighten monetary policy to achieve macroeconomic stability, raising the policy rate by 400 basis points to 25.0%. Foreign exchange reserves have been falling since July, to an alarming level equivalent to 0.8 months of import cover as of end-October. Inflation rate rose to 30.6% (y/y) in October, up from 28.3% in September, with food price increases accounting for the bulk of the increase in inflation.

Uganda's central bank cut its Central Bank Rate (CBR) by 50 basis points to 12.0% as subdued inflationary pressure allows the bank to stimulate economic growth. November headline inflation rose to 4.9% from 4.5% in October, but remains within the central bank’s 5% medium-term inflation target.