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Prospects Daily: Spanish and Italian bonds rally

Global Macroeconomics Team's picture

Important developments today:

1. Spanish and Italian bonds rally, leading advances in euro-zone debt

2. U.S. inflation remains stable


Spanish and Italian bonds rally, leading advances in euro-zone debt. Spanish and Italian government debt surged on Friday after stronger-than-expected demand for Spanish debt auction helped market sentiment for troubled euro-zone debt. Spain sold nearly twice as many notes as initially targeted at Thursday’s bond auction as traders speculated the note is eligible to use as collateral when the European Central Bank starts 3-year financing operation next week. Spain’s two-year yields dropped 52 basis points (bps) to 3.13% in afternoon session, after falling to a four-month low of 3.10% earlier. Two-year Italian yields also fell 48 bps to 5.06%, extending week-to-date decline to 90 bps. The rise in Italian and Spanish bonds came despite the persisting jitters on euro-zone sovereign debt with a threat of sovereign rating downgrade from major rating agencies hang over.

U.S. inflation remains stable. The cost of living in the U.S. remained unchanged in November from the preceding month according to the Labor Department, as the cost of gasoline as well as foods cooled. Annual inflation in November was 3.4%, declining from the 3-year high inflation rate of 3.9% reported in September, signaling that the Federal Reserve may soon gain space to implement measures to stimulate the economy. However excluding food and fuel, the core index rose 0.2% over the previous month, for 2.15% core inflation over the past 12-month period. Core inflation has been increasing at a weak pace, but annualized 3-month moving average growth in core inflation has eased, from 3% in August to 1.7% in November, suggesting that price pressures will continue to fall through the end of the year.

Among Emerging Markets

In Central and Eastern Europe, the WTO approved the petition for Russia’s membership to the organization, following an 18-year process, providing the Russian parliament until June 2012 to ratify the accord.

In South Asia, India’s central bank left the key lending rate unchanged at 8.5% at the latest monetary policy meeting, but advised that it may soon begin an easing stance in light of increased downside risks to growth that have recently materialized. Inflation remains stubbornly above 9%, but industrial output shrank for the first time in two years in the latest month.

In Sub-Saharan Africa, annual inflation in Tanzania rose to 19.2% in November from 17.9% in the previous month with a 1.4% monthly increase in the CPI index. In Rwanda, inflation eased to 7.4% from 7.9% in November from the previous month.