Demand for the $62 billion of U.S. Treasury securities sold this week soared to the highest level since March 2013 on mixed U.S. economic data and increased risk aversion in the wake of Iraq turmoil. Notably, yesterday’s $13 billion sale of 30-year bonds posted the bid-to-cover ratio of 2.69 (meaning securities received bids from investors equal to 3.08 times the actual debt sold). Meanwhile, the 10-year note auction had a bid-to-cover ratio of 2.88, while the 3-year note auction’s coverage ratio was 3.41. This year’s rally in longer-dated treasury securities underlines lingering anxiety about the long-term growth outlook and absence of inflation.
Developing-country stocks fell for a third day amid a sharp sell-off in Indian stocks and growing worries that Iraq situation will push oil prices higher. The benchmark MSCI Emerging Market Index slid 0.6%, paring this week’s gain to 0.4, as U.S. WTI crude prices are heading for the biggest weekly jump since December. India’s Sensex index slumped 1.4%, the steepest drop since February 3, on concerns higher oil prices could prompt inflation and widen the country’s trade deficit. In contrast, Chinese equities advanced as stronger-than-expected industrial output spurred optimism over the economy, sending the benchmark Shanghai index to a six-week high.
High Income Economies
Ratings agency Fitch affirmed the United Kingdom's AA-plus rating and stable outlook, highlighting favorable macroeconomic trends, including strong GDP growth, falling unemployment and inflation close to the 2% target. The ratings agency stripped Britain of its triple-A rating in April 2013. It last affirmed the AA-plus rating in December.
Despite inflation hitting a five-year high in May, the Central Bank of Chile kept its key rate at 4% for the third straight month at its latest monetary policy meeting, as economic growth hit a four-year low. The Bank cited the current inflationary pressures as “temporary development” in light of the peso’s depreciation.
In line with economists’ expectations, the Bank of Japan kept unchanged its aggressive monetary policy of increasing the monetary base by Y60tn to Y70tn per year, citing that the economy "continued to recover moderately as a trend."
Signaling that manufacturing sector activity continues to expand but at a slower pace, the Business NZ manufacturing index for New Zealand came in with a score of 52.7 in May, the lowest reading since December 2012 and less than the downwardly revised 54.4 in April. A score above 50 means expansion in a sector, while a reading below signals consolidation. All five main components continued to expand, including production, new orders, employment, finished stocks and deliveries.
East Asia and Pacific
China’s industrial production and retail sales increased in May. Industrial production grew 8.8% (y/y) in line with economists’ expectations, following April 8.7% (y/y) increase. Retail sales grew at a faster pace, advancing 12.5% (y/y) compared with April’s 11.9% (y/y) growth, beating expectations. At the same time, urban fixed asset investment rose 17.2% (y/y) in the January to May period, as expected. Meanwhile, real estate investment grew 14.7% (y/y) during January-May, slowing from the 16.4% (y/y) growth recorded in the January to April period.
Fitch Ratings cut South Africa’s credit rating outlook from Stable to Negative, citing deteriorating growth prospects. Fitch affirmed South Africa’s long-term foreign and local currency Issuer Defaults Ratings at ‘BBB’ and ‘BBB+’, respectively. In the first quarter of 2014, South Africa’s GDP contracted 0.6% as continued labor strikes led to a sharp decline in mining production. Against this backdrop, Fitch lowered its 2014 growth forecast for South Africa to 1.7% from 2.8% and that for 2015 to 3.0% from 3.5%.