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Prospects Daily: Emerging market sell-off easing, Euro Area economic outlook continues to brighten: Conference Board, India’s central bank raises key interest rates by 25 basis points

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Financial Markets…Developing-country market sell-off eased on Tuesday after three days of intense selling as investors speculated the central bank of Turkey would hike interest rates significantly at emergency policy meeting later today to defend its battled lira. India’s unexpected move to raise policy rates also weighed positively on market sentiment.  Emerging markets have been shaken in the past two weeks amid worries over the reduction of U.S. monetary stimulus and signs of slowing Chinese growth have intensified country-specific political and financial turmoil from Argentina and Ukraine.

Spanish and Italian government bonds advanced for a second day as emerging-market turmoil eased, and boosting demand for other high-yielding assets.  Italy sold €2.5 billion of two-year securities at a record-low yield, and the country also sold €1.25 billion of inflation-linked bonds maturing in 2018.  Italy’s 10-year bond yield fell 5 basis points (bps) to 3.85%, while the comparable Spanish bond yield declined 4 bps to 3.72%.

High Income Economies…New orders for U.S. manufactured durable goods unexpectedly dropped 4.3% (m/m sa) in December, following a revised 2.6% increase in November.  Orders for transportation equipment led the decrease, plunging 9.5% in December after jumping 7.9% in November.  However, even after excluding transportation equipment, durable goods orders still fell 1.6% in December after edging up 0.1% in November.  On a three-monthly annualized basis, total durable goods orders increased 10.3% (3m/3m saar) in December following a 8.1% increase in November, while new orders excluding transportation equipment increased 1.7% in December following 2.4% increase in November.

At the same time, the Conference Board U.S. consumer confidence index increased from 77.5 in December 2013 to 80.7 in January 2014, a five-month high.

Signaling continued improvement in the region's economic outlook, the Conference Board leading indicator for the Eurozone advanced 0.6% (m/m) to 109.9 in December, after recording a similar gain in November. The index has now increased for the seventh month in a row.  Meanwhile, the coincident economic index, a measure of the current situation, dropped 0.1% (m/m) to 101.1 in December, following a 0.3% rise in November.

Developing Economies…Europe and Central Asia: Turkey’s consumer confidence weakened for the second consecutive month in January, with the confidence index falling to 72.4 from 75.0 in December, its lowest level since September 2013 when it was recorded at 72.1.  The sub-index reflecting households’ view of the general economic situation fell markedly, declining to 94.0 in January from 101.9 in December. Consumers also expected the employment situation to deteriorate, with the corresponding index dropping to 78.0 from 81.8 in December.

Latin America and the Caribbean: Mexico’s trade balance recorded a surplus for the second consecutive month in December 2013, with the surplus rising to US$1.7 bn up from US$339.1 mn in November.  Accounting for this gain, exports rose 1.3% (m/m) in December, while imports fell 2.9% (m/m).  For the year 2013 as a whole, exports rose 2.6% and imports increased 2.8%, resulting in a trade deficit amounting to US$1 bn.

South Asia: India’s central bank increased its key interest rates by 25 basis points to contain currency pressures and combat sticky inflation.  The repo rate, the rate at which the central bank lends to banks, was raised to 8% from 7.75%; the reverse repo rate, the rate at which the central bank accepts deposits from banks was adjusted to 7% from 6.75%; and the marginal standing facility rate and bank rate were each raised to 9%. The cash reserve ratio was left unchanged at 4%.