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Prospects Daily: Developing country stocks drop for the 9th day, Japanese consumer confidence index falls, Indonesia’s central bank raises benchmark interest rate

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Financial Markets…U.S. and German government bond prices declined as signs of improvement in the world’s largest economy added the case for the Federal Reserve to taper its stimulus program sooner than expected. The benchmark 10-year U.S. Treasury yield climbed to as high as 2.79%, the highest level since September 18, while the comparable German bund yield rose to a nearly three-week high of 1.79%.  Notably, longer-term U.S. Treasuries have declined 11% thus far this year, the worst performer among major sovereign bonds worldwide.

Developing-country stocks dropped for 9th day on Tuesday as growing expectations of the Fed’s earlier-than-expected tapering continued to weigh on those countries with a weak external balance and inflation pressures. The benchmark MSCI Emerging Market Index dropped 0.2%, heading the longest losing streak since 2006, led by declines in Indonesia (1.4%), Turkey (1%), and Czech Republic (1%). The gauge has declined 4.9% in the previous nine days. Meanwhile, benchmark stock indexes in Hungary and China rallied 1.1% and 0.8%, respectively.

High Income Economies…Largely due to falling petroleum prices, U.K. consumer price inflation fell more-than-expected to 2.2% (y/y) in October from 2.7% in September.  Nonetheless, inflation hovers above the Bank of England's 2% target.
Driven by a drop in fixed investment and a poor harvest, the Russian economy expanded less-than-expected in Q3 with a growth rate of 1.2% (y/y), unchanged from GDP growth in Q2 and down from Q1’s 1.6%.

The Japanese consumer confidence index fell unexpectedly from 45.4 in September to 41.2 in October, its lowest since Shinzo Abe became prime minister in December.  All component sub-indices were below 50, indicating a pessimistic outlook across the board.  The income growth sub-index was the most pessimistic with a reading of 37.7, while the least pessimistic was the employment prospects sub index at 46.3. 

Developing Economies…East Asia and Pacific:  The Indonesian central bank raised its benchmark interest rate by 25 basis points to 7.5%, bringing the benchmark rate to its highest level since April 2009, in an effort to reduce the current account deficit, which had widened to a record 4.4% of GDP in Q2, and keep inflation under control.  With this increase, the benchmark interest rate has increased by a cumulative 175 basis points since June 2013.  The central bank also raised the deposit facility and lending facility rates by 25 basis points to 5.75% and 7.5% percent respectively. 
 
Europe and Central Asia:  Hungary’s annual headline inflation, measured by the consumer price index, rose to 0.9% (y/y) in October, its lowest rate in nearly 40 years, staying well within the central bank’s medium term target of 3%.  Contributing to this gain, water charges fell 10% (y/y), cost of housing electricity, gas and other fuels decreased by 7.1% following a 6.4% decline in September, and transportation cost and prices of consumer durable goods declined by 1.6% and 1.9%, respectively.  Alcoholic beverages and tobacco recorded the highest annual increase in October at 11.8%, while prices of food and non-alcoholic beverages slowed to 0.8% from 1.4% in September.  Month-on-month, the CPI fell 0.3%.  
 
Middle East and North Africa: Egypt’s consumer price index rose to 10.4% (y/y) in October from 10.1% in September, on account of higher food prices which accelerated to 15.3% (y/y) in October from 12.9% in September.  In addition, cost of restaurants and hotels increased by 22.6%.  Mitigating these increases, the cost of housing slowed to 1.8% from 3.4% in September, cost of medical care eased to 9.7% from 10.5% in September, and transport prices rose slightly at 7.45 from 7.52% in September.  Month-on-month, prices slowed to 1.1% in October from 1.6% in September.  Core CPI, which excludes subsidized goods and volatile items such as food and vegetables, decelerated to 1.2% in October after rising 1.7% in September.  Year-on-year, core CPI was steady at 11.1%.
 
South Asia: India’s industrial production improved in September, rising 2.0% (y/y) after rising 0.4% in August, but was less than the consensus forecast of 3.5%.  Contributing to this improvement, manufacturing output increased 0.6% (y/y), reversing August’s 0.2% fall; mining output rose 3.3% and electricity production accelerated by 12.9%.  In the period April-September, industrial production increased 0.4% compared with the gain of 0.1% in the same period last year.