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Prospects Daily: Economic activity in Euro Area strengthens led by Germany, British services sector gains strength, Pace of Indonesia’s growth slows, Russia’s inflation up

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Financial Markets…The euro appreciated 1.4% against the yen to 126.56 as Germany’s January service sector PMI posted its largest monthly increase since August 2009. A 17 nation currency also strengthened versus the dollar, gaining 0.2% to $1.354. Meanwhile, the Japanese yen fell 1.1% against the dollar to 93.43.

Chinese stocks advanced for the seventh day, with the benchmark Shanghai Composite Index climbing 0.2% to the highest level since May 8. The property-sector shares led the rally. The benchmark stock gauge has climbed 24% from a three-year low level attained on December 3.

The Ukrainian government raised additional $1 billion by re-tapping its existing $1.25 billion dollar-denominated 10-year Eurobond placed in November. The new tranche was priced to carry a yield of 7.625%.

High-income EconomiesAustralia's central bank left its benchmark cash rate steady at 3.0%, but signaled a possible easing depending on inflation and growth outcomes. Australia's inflation rate inched up to 2.2% (y/y) in the fourth quarter from 2% in the third quarter, but remained consistent with the 1-3% medium-term annual inflation target.

The British Markit and Chartered Institute of Purchasing and Supply (CIPS) PMI for the services sector climbed to 51.5 in January signaling an expansion. Surveys also showed that business confidence in the U.K. service sector in January hit the highest level since May 2012.

The Euro Zone’s Markit composite output PMI rose to a ten-month high 48.6 in January improving from 47.2 reading in December. The services sector PMI for the Euro Zone also rose to 48.6 in January from 47.8 in December. The aggregate indicator masked a considerable divergence in country performance, with the improvements in Germany, deterioration in France, positive signals on service sector performance in Spain and deterioration in service sector activity in Italy. 

Germany’s composite output PMI increased to 54.4 in January from 50.3 in December. The services sector PMI also advanced to 55.7 in January from 52 in December. This positive news were also supported by the data on Germany’s plant and machinery orders, which increased 4% (y/y) in December following a 3% decline in November. Domestic orders climbed 1%, and foreign business orders, which came mainly from the other euro member countries, increased 5%. Total orders in the fourth quarter were up 3% (y/y).

France’s composite output PMI fell to 42.7 in January from 44.6 in December. The services sector PMI also fell to 43.6 from 45.2 in December.

Markit/ADACI services PMI fell to 43.9 in January from 45.6 in December. Spain’s service sector PMI improved to 47 in January from 44.3 in December.

Euro Area’s retail sales meanwhile contracted by 0.8% (m/m) in December showing a steeper decline than a 0.1% contraction in November. Sales of food, beverages and tobacco decreased 0.8% and sales in non-food sector saw a 1% decline. On an annual basis, the retail sales volume declined 3.4% (y/y) in December, compared to a 1.9% fall in November. The average volume of retail trade index slipped 1.7% (y/y) in 2012.

Taiwan, China’s consumer price inflation eased to 1.15% (y/y) in January from 1.61% in December.

Developing Economies…The pace of Indonesia’s GDP growth decelerated to a negative 5.7% annualized rate (-1.45% q/q) in the fourth quarter on weak external demand and reduced public spending on infrastructure. This followed a 13.4% annualized pace (3.2% q/q) GDP expansion in the third quarter. Indonesian economy grew by 6.2% (y/y), for the entire 2012, slowing from 6.5% in 2011, with domestic demand contributing the most to growth.

The Philippines’ inflation accelerated to a three-month high 3.0% (y/y) in January on higher alcohol and tobacco prices, which rose 11.9% largely due to a passage of the sin tax law, which imposed higher excise taxes on tobacco and liquor products. Inflation rate remains within the central bank's 3-5% annual inflation target.

central bank held its policy rate steady at 5.25% along with the current level of reserve requirements on domestic and foreign exchange deposits. Romania's inflation accelerated to 4.95% (y/y) in December from November's 4.56%, above the central bank's 2.5%, +/- 1 percentage point annual inflation target.

Russia’s inflation accelerated sharply to 7.1% (y/y) in January from 6.6% in December, on rapid increase in food and alcoholic beverage prices, with the rate moving further above the central bank’s 5-6% annual inflation targeted range.
Serbia's central bank raised its benchmark interest rate by 25 basis points to 11.75% to contain inflation which accelerated to 12.2% (y/y) in December from November's 11.9%, well above the central bank's 4%, +/- 1.5 percentage points annual inflation target.