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Prospects Daily: Global stocks start New Year on relatively weak note, U.S. manufacturing ends 2013 on a high note, Manufacturing sector growth rebounds in Brazil but slows in China, India, and Turkey

Financial Markets… Financial Markets…Global stocks started the year on a relatively weak note amid disappointing Chinese manufacturing data with developing-country stocks leading the decline. Market valuations for global equities surged more than $9 trillion in 2013 as Federal Reserve’s quantitative easing helped the U.S. economy gain momentum and Eurozone economy rebound from its longest recession. European and U.S. stock markets fell slightly after ending 2013 on a very strong note, while emerging-market stocks drop the most in six weeks on Thursday. The benchmark MSCI developing-country stock index fell 1.1%, gearing for the steepest decline since November 21, as China’s weaker-than-expected Purchasing Managers’ Index (PMI) and escalating political turmoil in Thailand and Turkey damped market sentiment. Notably, the Thai baht depreciated versus the dollar to the lowest level since March 2010 with the country’s stocks sliding 5.2%, while the Turkish lira touched a record low against the dollar with the nation’s equity index falling 2.5%.
 
Safe-haven government bonds, both U.S. Treasuries and German bunds, fell on Thursday as investors continued to unload them in favor of riskier assets. The benchmark Treasury 10-year yields rose to as high as 3.05%, the highest level since July 2011, as investors looked ahead to U.S. manufacturing data, which is expected to show robust growth. Ten-year yields surged 127 basis points (bps) in 2013. German 10-year bund yields climbed 4 bps to 1.964% with future prices slumping to their lowest since September 2013. Meanwhile, Italian and Spanish government securities advanced as industry reports showed stronger-than-expected manufacturing growths in both southern Eurozone economies. Spain’s two-year yield touched a record low of 1.169%, while the nation’s benchmark 10-year yield dropped 14 bps to 4.01%. The Italian 10-year rate declined 11 bps to 3.98%, the lowest level since May 23.
 
High Income Economies…Business sentiment within the U.S. manufacturing sector ended 2013 on a high note, according to the final December Markit U.S. Manufacturing Purchasing Managers’ Index (PMI), which rose to 55.0 last month, beating November's 54.7 reading and an initial December estimate of 54.4.  A reading above 50 indicates expansion.  The latest reading, which is an eleven-month high, was driven by strong output growth supported by strong increase in new orders and employment growth quickening to a nine-month high.
 
In contrast, the Institute for Supply Management (ISM) U.S. manufacturing PMI edged down 57.0 in December from 57.3 in November, indicating a modest slowdown in the pace of growth in December.   With the modest decrease, the ISM index gave back some ground after reaching its highest level since April 2011 in November. The modest decrease by the headline index was partly due to a contraction in inventories, and a slowing in the pace of production growth.
 
U.S. first-time jobless claims fell modestly in the week ended December 28th to 339,000, a decrease of 2,000 from the previous week's revised figure of 341,000. The figure from the previous week was upwardly revised from the 338,000 originally reported.  The less volatile four-week moving average climbed to 357,250, an increase of 8,500 from the previous week's revised average of 348,750.  Continuing claims, a reading on the number of people receiving ongoing unemployment assistance, fell to 2.83 million in the week ended December 21st from the preceding week's revised level of 2.93 million.
 
The Markit Eurozone Manufacturing PMI rose for the third month running to 52.7 in December, and unchanged from the earlier flash estimate but up from 51.6 in November.  The latest reading, which is a 31-month high, was supported by rising output and fuller order books that encouraged manufacturers to hold off from further job cuts.  In addition, new export orders continued to rise at solid pace.  Among the member countries, there was solid and accelerated growth in the Netherlands, Germany, Ireland and Italy, while Austria continued to expand at a robust clip despite the rate of increase easing slightly since November. Meanwhile the Spanish PMI moved back into expansion territory.
 
Signaling an improvement in operating conditions for the third successive month, the HSBC South Korea Manufacturing PMI rose to a seven-month high in December, posting a reading of 50.8, up from 50.4 in November.  Moreover, whilst the pace of improvement remained marginal, the PMI has steadily risen for five consecutive months from July’s ten-month low.  Driven by higher volumes of new orders and the promotion of new product lines, production expanded for the third successive month in December, and the pace of output growth accelerated to a seven-month high.
 
Developing Economies…East Asia and Pacific:  China’s final Markit/HSBC Manufacturing Purchasing Managers’ Index reading for December came in as the flash estimate released earlier at 50.5, down from 50.8 in November, indicating slower manufacturing sector growth. Driving the December manufacturing PMI reading, which was a three-month low, manufacturing production growth eased from the eight-month high recorded in November; and growth in new orders slowed, while new export orders fell for the first time in four months. Meanwhile, employment at manufacturing firms fell for the second consecutive month in December and price indicators eased. Input prices faced by manufacturers rose for the fifth consecutive month but at a moderate pace, while output prices fell for the first time in five months.
 
Europe and Central Asia: Turkey’s seasonally adjusted Markit/HSBC Manufacturing Purchasing Managers’ Index fell slightly to 53.5 in December, down from 55 in November indicating  continued expansion in the manufacturing sector but at a moderate pace.  The December PMI reading marked the fifth consecutive month of improved conditions in Turkey’s manufacturing sector. Underpinning the moderation in December PMI reading, growth in manufacturing production eased though remaining high and new orders increased at a weaker but solid rate, while backlogs of work increased.  The average input costs faced by Turkish manufacturers rose in December on account of higher costs of raw materials and unfavorable exchange rates, which they passed on to consumers through higher charges, but the rate of increase in prices was the slowest in four months.    
 
Latin America and the Caribbean: Brazil’s manufacturing sector expanded in December supported by faster production growth. The seasonally adjusted Markit/HSBC Manufacturing Purchasing Managers’ Index increased to 50.5 in December, up from 49.7 in November. The December reading brought the PMI average for Q4 to 50.1, slightly higher than Q3 average of 49.3. The increase in manufacturing output reflected an increase in new business as order books rose for the first time since June 2013 boosted by domestic demand. New export orders stagnated in December reflecting subdue external demand. Despite the uptick in domestic orders manufacturing firms reduced their staff levels for the ninth consecutive month in December. Both input and output prices rose further in December. Input costs moved higher as currency depreciation led to higher costs of raw materials, which were partly passed on to consumers. Output price inflation remained subdue, however. 
 
South Asia: India’s seasonally adjusted Markit/HSBC Manufacturing Purchasing Managers’ index fell to 50.7 in December from 51.3 in November, but remained above the 50-mark, indicating continued but moderate expansion. Underlying the December reading, manufacturing output rose for the second consecutive month but at a slower pace supported by a marginal increase in new orders, with much of the gain concentrated in the consumer goods sectors. Manufacturing employment rose for the third consecutive month but the rate of growth was also marginal. Price indicators also eased in December.  Average input costs faced by manufacturers increased at a moderate pace; and while output prices rose for the seventh consecutive month, the rate of increase was muted.