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Prospects Daily: Italian and Spanish bonds advance amid growing optimism over the fate of Greek debt swap

Global Macroeconomics Team's picture

Important developments today:

1. Italian and Spanish bonds advance amid growing optimism over the fate of Greek debt swap

2. German factory orders slump in January

Italian and Spanish bonds advance amid growing optimism over the fate of Greek debt swap. Italian government bonds advanced for the first time in three days and Spanish bonds also rallied as worries about the result of Greek bond swap with private-sector creditors somewhat eased. European Union Economic and Monetary Commissioner Olli Rehn has expressed confidence that the Greek bond exchange will succeed. Italian 10-year bond yields slid 10 basis points (bps) to 4.97%, after surging as much as 8 bps, while 2-year yields eased 7 bps to 1.83%. The Spanish 10-year debt yields dropped 4 bps to 5.1%, and its 2-year yields declined 10 bps to 2.34%. Italian and Spanish yields remain well off the crisis level seen late last year. They have declined sharply in a rally sparked by two rounds of the European Central Bank’s three-year long term refinancing.

German factory orders slump in January. German factory orders unexpectedly fell by 2.7% (m/m) in January, having increased by 1.6% in December. The main drag to the fall in factory orders was a sharp decline in capital goods orders (-5.4%), though consumer goods also fell (-2.9%). However, while weak demand from the Euro Area (Germany’s largest export market) fell by only 0.4%, much of the fall in orders was due to the 8.6% (m/m) decline from outside the Euro Area, leading many analyst to attribute this to the drop in orders from China due to the Chinese New Year holiday in January. Indeed, Japan, another export power house, saw a similar sharp drop in its exports to China in January (-20%, y/y), contributing to a record high monthly trade deficit in Japan. Notwithstanding the slump in German factory orders in January, recent business surveys suggest rising business confidence and expanding factory activity going forward.

Among Emerging Markets

In East Asia and the Pacific, Malaysia's export growth slowed to a two-year low of 0.4% year-on-year (y/y) in January, as exports of electronic products (comprising one-third of total exports) fell 5.5% because of softer demand in the major export markets. Overall, exports to the Euro Area and China fell 15% and 12%, respectively.

In Latin America and the Caribbean, Brazil’s industrial production fell 2.1% in January on a monthly basis and by 3.4% (y/y) driven partly by a strong real that reduced the competitiveness of Brazilian manufacturers in spite of stimulus measures such as interest rate cuts, tax reductions and looser bank lending requirements. Production of durable goods and capital goods fell 7.6% (y/y) and 13%, respectively.

In Sub-Saharan Africa, Mauritius’ consumer price inflation eased to 4.1% (y/y) in February from 4.8% in January, helped by slowing of food inflation from 3.5% to 1.9% and a relatively stable Mauritian rupee against the US dollar and Euro.