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Prospects Daily: Euro Area retail sales rise in August…Uganda cuts interest rate by 200 basis points

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Financial Markets…Credit risk for bank debt dropped for a third day on Wednesday as investors speculated that a Spanish bailout is imminent, which would boost the outlook of Europe’s banks. The Markit iTraxx Financial Index of senior debt of 25 banks and insurers fell 10 basis points to 185 bps.

Portuguese debt agency IGIP completed its a debt-swap operation, exchanging €3.76 billion of bonds maturing next year for the same value of securities due in 2015 with a higher yield. This would reduce the country’s repayment burden in 2013 (which was €9.6 billion before the exchange) as it tries to regain access to long-term bond markets.

Developing countries’ stock markets fell for the first time in five days amid slumping oil prices and weak Chinese economic data. The benchmark MSCI Emerging Market Index dropped 0.2%, with energy shares leading the decline.

High-income Economies…Euro Area retail sales increased 0.1% (m/m) in August, the fourth monthly increase, following a 0.1% gain in July, led by a rebound in demand in Germany where sales rose 0.3% (m/m) after falling 1% in July. On an annual basis, the pace of deterioration in Euro Area sales eased slightly to -1.3% in August from -1.4% in July.

UK’s CIPS/Markit services Purchasing Managers’ Index (PMI) fell from 53.7 in August to 52.2 in September indicating a slower pace of expansion in services activity.

Germany’s services PMI rose to 49.7 in September, closer to the 50-mark separating growth from contraction, from 48.3 in August. Italy’s services PMI also rose slightly to 44.5 to from 44, suggesting services activity shrank at a slower pace, but the index remains well below the 50 mark.

By contrast the services PMI for France fell sharply to 45.0, a 11-month low, from 49.2 in August, indicating a steep decline in business activity among service providers. Spain’s services PMI also fell sharply, to 40.2 in September from 44.0.

Poland’s central bank decided to leave its key interest rate at 4.75% even as GDP growth weakened and August’s industrial output rose at the lowest rate since October 2009; however, although consumer price inflation slowed to 3.8% (y/y) in August from 4% in July, it remains above the central bank’s 2.5% target. 

Developing EconomiesChina's official NBS purchasing managers' index (PMI) for the services sector fell to 53.7 in September from 56.3 in August, weighed by weakened construction services and transport as well as lackluster new orders overall.

Russia’s HSBC Services PMI rose further from July’s low of 52.0 to 54.5 in September, indicative of a solid pace of expansion, remaining above the no-change threshold for the twenty fifth month in succession. The Composite Output index improved to 54.3, partly reflecting a stronger increase in manufacturing production (53.9).

Consumer confidence index for Thailand fell for a third straight month to 77.0 in September from 77.9 in August indicating continued pessimism about economic prospects.

Turkey's consumer price inflation increased to 9.2% (y/y) in September from 8.9% in August led by acceleration of food and non-alcoholic beverages prices and housing costs. Turkey's producer price inflation slowed to 4.0% in September from 4.6% in August indicating weak economic activity.

The central bank of Uganda cut its key interest rate by 200 basis points to 13.0% to provide further stimulus to the economy following a sharp drop in inflation. This was the 7th rate cut in 2012 for a total reduction of 1,000 basis points. Uganda's annual headline inflation rate fell to 5.4% in September from 11.9% in August due to base effects and weak demand.