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Prospects Daily: European deal boosts market sentiment

Global Macroeconomics Team's picture

Important developments today:

1. European deal boosts market sentiment

2. U.S. GDP grows 2.5% in Q3

European deal boosts market sentiment. Euro-zone leaders agreed to strengthen their bailout fund’s capacity and reached a last-minute deal with private banks and insurers to write down their Greek debt holdings. The deal also foresees a recapitalization of hard-hit European banks and a potentially increased role for the International Monetary Fund. Under the deal, EU will boost the European Financial Stability Facility (EFSF) fund to €1 trillion ($1.4 trillion) and private lenders agreed to voluntarily accept nominal 50% write-down in their bond investments to cut Greece’s debt to 120% of GDP by 2020 from an estimate of about 170% next year. The euro and stocks advanced while Greek, Spanish, Italian, and French bonds all climbed. The single currency climbed to a 7-week high versus the dollar, appreciating above $1.40 for the first time since September. The Stoxx Europe 600 Index gained 2.5%, led by bank shares, and Asian and U.S. stocks advanced as well. The yield on Greek 10-year government bonds slid 117 basis points (bps) to 24.15%, Spanish 10-year yields fell 16 bps to 5.32% and Italy’s 10-year yields tightened 13 bps to 5.81%.

U.S. GDP grows 2.5% in the third quarter. Real GDP in the U.S. grew at a 2.5% annual pace in the third quarter of 2011, up from a 1.3% gain recorded in the previous quarter and 0.4% in the first quarter, according to the Commerce Department's release today [see Chart]. Household consumption (which increased at a 2.4% pace) and increased business investment helped support positive growth in Q3. Business expenditure on equipment climbed at a 17.4% annual pace, contributing 1.2 percentage points to growth. While economic performance was in line with the more positive forecasts, the economy will need to post stronger, sustained growth in order to create jobs. Seasonally adjusted layoffs increased in the latest week by 1750 to 405,500 (4-week average), underscoring the continuing stagnation in labor markets.

Among Emerging Markets

In East Asia and the Pacific, Vietnam's industrial production index rose 5.3% y/y in October according to the statistics office. Output has grown at a 7% annual pace in the first ten months of 2011, down from 7.8% in the January-September period, signaling slower manufacturing growth in the fourth quarter.