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Prospects Daily: Yen depreciates further, India’s WPI inflation falls insignificantly, Kenya cuts its policy rate

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Financial Markets…The Japanese yen depreciated as much as 0.6% to 89.67 per dollar in New York morning trade, the weakest level since June 2010, amid growing investors’ speculation that the Bank of Japan will push for further monetary stimulus. The yen also declined to a 20-month low versus the euro, dropping to 120.13 in earlier trading.

Spanish government bonds fell for the first time in three days, with the benchmark 10-year yields climbing 10 basis points to 4.99% (the steepest rise in a month), following a report that showed an unexpected decline in euro-area industrial production in November. Italian bonds fell as well, with the 10-year yield rising 6bps to 4.19%, after falling to a 14-month low of 4.13% last week.

Global corporate bond issuance reached $126 billion last week, the biggest weekly volume on record, as companies worldwide continued to take advantage of extreme low borrowing costs. Company bond sales worldwide enjoyed a banner year in 2012, when issuance activity reached an unprecedented $3.95 trillion, as corporate borrowing rates touched a record low of 3.243% in December (based on the Bank of America Merrill Lynch Global Corporate & High Yield index).

Chinese shares surged on Monday, with the CSI 300 (an index of Shanghai and Shenzhen listed stocks) jumping 3.8% to a six-month high level, after a regulator said the country can raise quotas for cross-border investment in its financial market by 10 times. The China stock index has gained 22% from a nearly 4-year low reached on December 3.

High-income Economies
Euro Area industrial production fell a smaller 0.3% (m/m) in November compared with a 1% drop in October. Industrial output in Germany, Europe’s largest economy, remained broadly stable, rising 0.1% (m/m) after a steep 2% decline in October. French production rose 0.5% (m/m), while Italy and Spain reported declines of 1% and 2.5%, respectively.

German wholesale price index inflation remained flat in December (0.0% m/m) following 0.7% drop in November. Wholesale prices were also stable on a year-on-year basis at 3.2% (y/y).

The OECD’s composite leading indicators suggest that economic growth likely firmed in the US (with the index rising to 101 in November from 100.8 in October) and in the UK (to 100.7 from 100.5). An index level of 100 represents the long-term trend in economic activity. In China (99.7) and India (97.9), signs of a turning point were more marked compared with the previous month. The indices for Italy, Germany, France, and the Euro Area as a whole also point to stabilization in growth prospects, according to the OECD.

South Korea’s trade surplus fell to $28.5 billion in 2012 from $30.8 billion in 2011, as exports fell 1.3% (y/y) as a result of the global economic slowdown and the European debt crisis, while imports fell a smaller 0.9% (y/y).

Developing EconomiesBulgaria's inflation accelerated in December to 4.2% (y/y), after easing in the previous two months. Annual average inflation for 2012 was 3% lower than the 4.2% recorded in 2011. 

India's wholesale price inflation fell slightly to 7.18% (y/y) in December from 7.24% in November. India’s CPI meanwhile rose to 10.6% (y/y) in December from 9.9% in November. Food and beverages prices advanced 13.04% (y/y) and fuel and electricity prices were up 8.23%.

The Central Bank of Kenya cut its key rate by 150 basis points to 9.50%. Kenya's inflation rate eased to 3.2% (y/y) in December, down from 3.25% in November, well below the central bank’s 5% inflation target.

Mozambique's central bank held its benchmark standing facility rate steady at 9.5% and announced its decision to reduce the monetary base to 38.50 billion meticais by the end of January to help meet its 6.5% inflation and 8.4% economic growth targets for 2013. Mozambique's inflation rate eased to an annual rate of 2.0% (y/y) in December from 2.3% in November.

The central bank of Peru held its monetary policy reference rate steady at 4.25%, as inflation has continued to decline and is now within the bank's target range (2% +/- 1 percentage point). Peru's headline inflation rate eased to 2.65% (y/y) in December from 2.7% in November due to a decline in the cost of perishable food