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Prospects Daily: Global stocks bounce back as Ukraine tensions ease, OECD inflation rises slightly in January, China’s PMI at 7-month low

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Financial Markets…Global equities bounced back on Tuesday as Ukraine tensions eased. The rebound was led by European stocks with the benchmark Stoxx Europe 600 Index advancing 2.1%, the biggest rally in eight months. The European gauge tumbled 2.3% yesterday after Russia’s parliament granted President Putin the authority to use military force in Ukraine. Asian and developing-country shares also recovered amid improving investor sentiment. U.S. equities gained as well, with the S&P 500 index surging 1.4% to a fresh record high in mid-day trading.

U.S. Treasuries and German bunds retreated as easing concern over Ukraine’s crisis reduced demand for safe-haven government bonds. The benchmark U.S. 10-year yield widened 7 basis points (bps) to 2.67%, the biggest rise in more than three months, and German 10-year yield increased 5 bps to 1.60%. Meanwhile, high-yielding European government bonds advanced with Spanish and Italian yields sliding 6 bps to 3.44% and 4 bps to 3.42%, respectively.

High Income Economies…Inflation in the OECD, as measured by the consumer price index, picked up slightly to 1.7% (y/y) in January, following 1.6% increase in December. The acceleration was largely led by energy prices, which rose 2.1% annually versus 1.7% in December. Food price inflation, meanwhile, slowed to 1.4 percent from 1.5 percent. Excluding food and energy, core inflation in the OECD area held steady at 1.6% in January. Month-on-month, OECD area prices edged up 0.1% (m/m) in January.

In line with expectations, the Reserve Bank of Australia (RBA) kept its main cash rate unchanged at 2.5%. The RBA has reduced the cash rate by a cumulative 225 basis points since November 2011 to help the economy sustain demand in areas outside the resources sector in view of fading support from the mining boom.

The SABB HSBC PMI for Saudi Arabia non-oil sector decreased to a three-month low of 58.6 in February from 59.7 in January indicating that despite slightly softer growth rates the sector is expanding, with output, new orders, and employment all continuing to rise. Economic conditions remained supportive for conducting and securing new business, both at home and abroad, as export orders strengthened with the rate of growth accelerating to the sharpest for four months.

Developing Economies…East Asia and Pacific: China’s Markit/HSBC manufacturing PMI for February remained below the no-change 50 mark, indicating a continued contraction. The PMI came in at 48.5, its lowest level in 7 months, down from 49.5 in January but slightly higher than the flash estimate of 48.3. Reflecting weak demand, both factory production and new orders contracted for the first time since July 2013; and faced with declining order flows, firms lowered their staffing levels for the fourth consecutive month. Also, input prices paid by producers fell for the second consecutive month, while factory gate prices charged by producers fell for the third consecutive month.

South Asia: India’s HSBC manufacturing purchasing managers’ index rose to its highest level in a year in February, climbing to 52.5 from 51.4 in January, remaining above the no-change 50 mark, which indicates expansion. Suggesting notable improvements in business conditions across the manufacturing sector, the February PMI reading was driven by an increase in new orders for factory goods, which surged to a one-year high of 54.9, and export orders, which climbed to their highest level in eight months. With higher domestic and external demand boosting new order flows, factory production expanded rapidly. Input costs and prices charged by producers also rose.

Sub-Saharan Africa: South Africa’s Kasigo manufacturing purchasing managers’ index rose above the no-change 50 mark in February, after two consecutive months of decline, coming in at 51.7, up from 49.9 in January, signaling expansion. Driving the rebound, new orders in the sector posted their sharpest increase since August 2013. However, production remained subdued for the third consecutive month, leading firms to reduce their workforce. Inflation accelerated in the manufacturing sector as the weakened rand exchange rate pushed up the costs of imported inputs.