Greece

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.

Financial Markets…Year-to-date global corporate bond sales rose to $3.43 trillion, already surpassing 2011’s full year total of $3.29 trillion, as further stimulus from global central banks pushed yields to record lows. Funding costs for the riskiest to the most creditworthy corporates are plunging as the persistent low-yield environment spurred unprecedented investor demand.

Perceived default risk of US corporate debt climbed for a third consecutive day, with the benchmark Markit CDX North America Investment Grade Index rising 3.6 basis points to 108 bps, amid growing concerns that the so-called US fiscal cliff could push the world largest economy into deep recession.

Ghana’s 3-month borrowing costs, which fell to a five month low last week, are gearing for further decline today after the central bank issued record volume of domestic bonds, lowering its financing needs in near-terms. The 3-month yield on Ghana’s Treasury bills dropped 69 bps to 22.33% last week, but they are still the highest among African countries.

In its November update released earlier today, the US Department of Agriculture reported marginal increases in global grain supplies (compared to the October update) for the 2012/13 crop year ending in May 2013. Yet, stock-to-use ratio for corn—and less so for wheat—remain at historical low levels. The rice market is well-supplied with trade expected to surpass 38 million tons in 2012—a record high.

High-income Economies…France's industrial production posted the biggest monthly drop since December 2009, falling 2.7% (m/m) in September (-2.1% y/y), with both manufacturing production and construction contracting. The Bank of France said the economy may shrink in the fourth quarter.

Italy’s industrial production fell by 1.5% (m/m) in September (-4.8% y/y), the most in five months, suggesting the country remained in recession in the third quarter.

Greece’s industrial production fell 7.3% (y/y) in September, resuming its downward trend after rising temporarily by 2.5% in August.

Sweden’s industrial production fell 5% (y/y) in September, following a 2.7% increase the previous month.

Germany’s annual consumer price inflation on a EU-harmonized basis remained at 2.1% (y/y) in October, the same rate as September (+0.1% m/m). A 5.5% (y/y) increase in domestic gas and diesel prices and increases in some food items prevented inflation from falling.

UK’s goods trade deficit fell to 8.4bn pounds in September from 10bn pounds in August, as exports rose 1.1% (m/m), while imports fell a larger 3.9% (m/m) because of lower imports of fuel and manufactured goods.

US consumer confidence continued to improve for the fourth month in November, with the Thomson Reuters/University of Michigan consumer sentiment index climbing to 84.9 (a five-year high) from 82.6 in October as the labor market showed signs of improvement.

Hungary’s industrial output rose 0.6% (m/m) in September, following 1.8% increase in August. Despite the monthly increases, industrial output in September was 3.8% lower than the same month the previous year.

Developing Economies…China’s retail sales rose 14.5% (y/y) in October slightly faster than 14.2% in September, while consumer price inflation dropped to its weakest level in nearly three years to 1.7% (y/y) in October from 1.9% in September on declining food inflation.

Growth in China's industrial production accelerated to 9.6% (y/y) in October from 9.2% in September China’s producer prices fell at a slower pace of 2.8% (y/y) in October compared to a 3.6% fall in September. China's total fixed asset investments were 20.7% higher during the January-October period compared to the same period last year.

Malaysia's exports grew 2.6% (y/y) in September, recovering from a 4.5% contraction in August on strong demand from ASEAN, the US, India and Taiwan, while exports to the European Union decreased 12.5%. Import growth accelerated to 9.6% (y/y) in September from 2.8% in August.

The central bank of Peru held its benchmark interest steady at 4.25%. Peru's inflation rate fell to 3.25% (y/y) in October from 3.74% in September, but remains above the central bank's targets inflation of 2.0% (+/- 1). An acceleration of inflation in September was related to a weather conditions-related temporary supply side factor.

Russia's central bank held its benchmark refinancing rate steady in October. Inflation declined in October slightly to 6.5% (y/y) from 6.6% in September, but remains above the Bank of Russia's target of 5-6 percent inflation range. The bank noted that inflation is stabilizing due to a moderation in food prices which had experienced a temporary upswing related to a supply shock associated with a bad harvest.

The ratification of the European Stability Mechanism (ESM)/Fiscal Pact laws by the German Constitutional Court removes significant hurdles from deeper European integration and was positively received by markets, with borrowing costs declining sharply for Spain and Italy. And today the Federal Reserve announced a third round of quantitative easing to boost growth and reduce unemployment, including open-ended purchases of $40 billion of mortgage debt a month and continuation of other assets purchases till labor market conditions improve. Industrial production (IP) shows signs of stabilization in July but performance in Q3 is expected to remain lackluster as business sentiment indicators remain depressed. Meanwhile, maize and wheat stocks are expected to decline in 2012/13 due to adverse weather conditions, with the maize market likely to be very tight.
While key developments in Euro-area since last week suggest the risk of an acute crisis has subsided, uncertainties remain. On September 12th, Germany's Constitutional Court ratified the €700 billion ESM that is crucial to resolve the region’s ongoing debt crisis and is a key requirement for the European Central Bank’s (ECB) new bond-buying program announced last week. However the court has ruled that increases in potential German liabilities above €190 billion will be subject to parliamentary approval. In September borrowing costs have declined sharply for Italy and Spain, with 10-year sovereign bond yields at 5.02% and 5.62%, respectively. This is particularly important for Spain, which has to repay more than €20 billion in debt by the end of October. The ECB, EC and the IMF decision on the aid program for Greece is expected in early October.
Industrial activity appears to have bottomed out in July, but August business sentiment surveys and inventory dynamics point to a weak performance in Q3. Newly released data suggest that IP growth may have bottomed out in July. Notably Euro Area IP surprised on the upside in July, up 0.6% m/m, with a positive outturn in Germany as both domestic and export orders rose. China’s IP growth also improved, expanding at a 5% annualized pace in the three months to July up from a dismal 2.8% pace in Q2. High global inventory levels and weak final demand suggest that inventory adjustments could be a drag on growth in Q3, especially in the Euro Area and China. Inventory dynamics are more favorable for growth in the G3 and the East Asian tech exporters. In China high inventory levels will weigh on growth in coming months, but front-loading of spending on infrastructure should support growth going forward.
The US Department of Agriculture kept its 2012/13 global grain outlook largely unchanged in its September 12 update; yet, there are upside price risks, especially for maize. The assessment was widely expected with marginal effects on futures. For maize, the 2012/13 stocks are expected to be 12.2% lower than the last season (and 18.6% below the May 12 assessment). This brings the stock-to-use ratio down to 14.4%, the lowest level since 1972/73 and 2.6 percentage points lower than in 2007/08. With stocks that low, even a small supply shock could trigger a large price spike while high oil prices could make maize-based ethanol an attractive alternative. Although wheat stocks are expected to decline by 11% from the last season, the wheat market is better supplied with stock-to-use ratio of 21.9%, 5 percentage points higher than in 2007/08. Despite weather problems earlier in the year and the on-going Thai rice purchase program, the rice market seems to be well-supplied, with prices relatively stable.

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Market confidence has been rattled once again following recent election results in France and Greece. However, credit default swaps rates, while up, remain well below their fall 2011 highs. Through March, retails sales have continued strengthening among both developing and high-income economies, although weakness still persists in the Euro Area. Notwithstanding the post-crisis appreciation in the currencies of several developing countries, in general, their currencies still remain below pre-crisis peaks.
Euro Area sovereign debt concerns have resurfaced once again. Following elections in France and Greece, the political landscape in the Euro Area has changed. The new French President-elect has indicated his intention to add a growth component to the EU fiscal treaty, while the Greek elections were inconclusive, and the influence of anti-austerity parties has increased markedly. These events, plus the announced bail out of one of Spain’s largest banks have rattled investors’ confidence once again. Credit default swap rates (CDS) have risen by 95.3, 37.3, 25.8 and 19.4 basis points in Portugal, Spain, Italy and France, respectively between 4th and 9th May. Among other Euro Area countries, CDS rates are up an average 5.2 basis points, but remain 116.5 basis points below their fall 2011 peaks.
Retail sales continue to strengthen across most regions. Easing inflationary pressures, rising employment strong credit growth, and in some cases lower policy rates have contributed to an up-tick in developing country retail sales volumes during the three months ending February (10.7%, 3m/m saar). The strength of developing-country domestic demand is also reflected in their import demand, which increased at a 19 percent annualized pace over the same period. In the U.S., improving labor market and consumer confidence conditions have boosted retail sales growth. Even in Europe, where consumer confidence remains low, retail sales expanded in March - the first increase in 5 months. Nevertheless, demand remains shackled by high unemployment and ongoing fiscal austerity. Looking forward, recent easing in oil prices could support real-incomes and further boost retail sales.
Despite substantial appreciations since the trough of the crisis, the real-effective exchange rates of many developing countries remain below pre-crisis peaks. Measured from post-crisis troughs the currencies of many developing countries have appreciated strongly (by more than 30 percent in many cases). However, measured on a longer-term perspective, the real-effective exchange rates of currencies of Indonesia, Brazil, Russia, India and Turkey remain below pre-crisis peaks. Among major middle-income countries, China’s Renminbi has appreciated the most. While capital flows have contributed to short-term volatility, the appreciation since 2005 among commodity exporters like Brazil, Indonesia, and Russia appears to mainly reflect higher commodity prices.

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