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Prospects Daily: China’s money market rates moderate, EU ministers agree on bank bailout rules, India’s current account deficit narrows

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Financial Markets… Developed-market government bonds remained steady on Thursday as an unexpectedly sharp downward adjustment to first-quarter U.S. gross domestic product calmed fears that Federal Reserve would soon scale back its stimulus program. An agreement among European Union ministers on how to manage failing banks also weighted positively on European bonds. The 10-year yield on U.S. Treasuries fell 2 basis points to 2.52% after sliding 7 bps yesterday, while the yields on similar-maturity German and U.K. debt slide 4 bps to 1.73% and 6 bps to 2.40%, respectively. Italian and Spanish bonds also advanced with their yields falling 16 bps to 4.54% and 8 bps to 4.76%.

Japanese shares advanced, with the country’s benchmark indexes snapping a three-day losing streak, as fears of a U.S. stimulus scaling back and a Chinese cash crunch eased. The Topix index rallied 2.8% at the Thursday closing and the Nikkei 225 index surged 3% after sliding 3% over the past three days. The Topix has dropped 14% since reaching a near five-year high on May 22, while the Nikkei has declined 17% from a 51/2 high on May 23.

China’s benchmark money market rates moderated for a fifth day today after last week’s spike amid signs that the country’s central bank is injecting liquidity selectively to ease a credit crunch in banking sector. The 7-day repurchase rate dropped 53 basis points to 6.74%, after reaching a record high of 12.45% last Thursday and rising 193 bps this month. The overnight repo rate also fell 10 bps to 5.44%.

High-income EconomiesEuropean Union ministers reached agreement early Thursday on rules to deal with bank failures. From 2018, a “bail-in” regime would allow governments to force shareholders, bondholders, and large depositors (with uninsured deposits worth more than 100,000 euros) to take losses in the event of a bank failure. These bail-in losses must reach 8% of a bank's total liabilities before resolution funds or state resources (capped at 5% of liabilities and subject to European Commission approval) can be used. Under the agreement, all unsecured bondholders must take 100% losses before a bank is eligible to receive capital directly from the European Stability Mechanism (ESM), the Eurozone’s bailout fund. The agreement marks an important step towards a banking union.

US unemployment claims declined by 9,000 to 346,000 in the week ended June 22. The four-week moving average, a less-volatile measure, dropped to 345,750 from 348,500, providing further signs of an improving labor market.

German unemployment rate dipped to 6.6% in June from 6.8% in May, amid signs of a recovery in Europe’s largest economy. The number of unemployed persons in the country fell by 12,000 to 2.94 million.

Ireland’s GDP contracted by an annualized 2.4% (q/q) in the first quarter of 2013, following a 0.8% annualized drop in Q4 2012. GDP growth for the whole year 2012 was revised down to +0.2% (y/y).   

Developing EconomiesMiddle East and North Africa: Lebanon's fiscal deficit widened to an annualized rate of 6.8% of GDP in the first quarter of 2013, compared to 6.3% of GDP annualized in January–March 2012. Nominally, the deficit grew by 17% (y/y) to $783mn, due to a 5% drop in revenue, led by VAT declines. At the same time, level of expenditure was unchanged. However, structure of expenditure is shifting increasingly towards debt service and electricity subsidies which now account for 2/3 of revenues.

South Asia: India’s current account deficit moderated sharply to 3.6% of GDP in 2013Q1, from a historic high level of 6.7% of GDP in 2012Q4 as trade deficit narrowed. The moderation in CAD was due falling non-oil and non-gold imports as economic activity is slowing. However, the current account gap for the full fiscal year that ended in March 2013 was a record high at $87.8bn (4.8% of GDP), up from $78.2bn (4.2% of GDP) a year earlier, fuelled by rising imports of oil and gold.

Sub-Saharan Africa: South Africa’s producer price index for the manufacturing sector rose 4.9% (y/y) in May, slower than the 5.4% (y/y) growth recorded in April. The rate of growth eased for the second straight month.