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Prospects daily: Greek financing concerns persist despite European-IMF aid agreement

Global Macroeconomics Team's picture

Important developments today:

1. Renewed worries arise over Greek financing situation

2. U.S. manufacturing sector expands for eighth straight month

3. Manufacturing sectors in China, India and Brazil continue to expand in Q1


Renewed worries over Greek financing situation.  As investor concerns over Greece’s ability to meet its financing needs flared up again, the yield spreads on Greek government bonds over benchmark German government bonds continued to widen Wednesday. Last week’s agreement by Euro Zone leaders to back a joint European-International Monetary Fund standby aid plan was expected to bring down borrowing costs for the Greek government. Instead, yields on Greek government debt have remained persistently high at above 6%—roughly more than twice the borrowing cost of Germany. The yield on 10-year bonds issued on Mar.4 reached a one-month high of 6.529% for a spread of 351 basis points (bps) yesterday, while the yield on 7-year bonds sold on Mar.29 shot up to 6.325%, or 371.4 bps over German Bunds.

With Greece needing to raise about €53 billion through the bond markets this year, soaring borrowing cost does not bode well for future offerings, or attempts to lower coupon rates to 2%. More importantly, rising borrowing cost could threaten to disrupt the government’s efforts to cut its budget deficit to 8.7% of gross domestic product this year and less than 3% (the EU limit) by 2012 from 12.7% last year. Moreover, deteriorating investor sentiments toward Greek bonds underlined concerns about the substance of the Euro Zone’s aid agreements, which was supposed to be a confidence-enhancing measure.


Source: Institute for Supply Management


U.S. manufacturing sector grows for eight months The manufacturing sector expanded in March for an eighth straight month according to the latest reading of the Institute of Supply Management’s index of activity in the manufacturing. The gauge of activity rose to 59.6 from 56.5 a month earlier, beating median market estimates of a rise to 57 for the month, as American factories continued to lead the way in the economic recovery. Indeed, the index value for March (in which any reading above 50 indicates expansion) signaled the fastest pace of expansion in the manufacturing sector since July 2004.

U.S. initial claims decrease in latest week…New claims for unemployment insurance benefits declined by 6000 to 439,000 in the week ending March 26, in line with median market forecasts. Despite temporary spikes in the number of layoffs over the winter months, the number of layoffs has been steadily declining since peaking at 651,000 in April 2009, signaling that employers are slowing job cuts as the economy emerges from the worst post-war recession. The 4-week moving average of claims also declines to 447, 250, the lowest level since September 2008. 

European PMI revised up for March…Manufacturing activity in the Euro Zone grew even faster than previously estimated in Markit Economics’ latest reading of the Purchasing Managers’ Index for the Area, as the PMI leapt from 54.2 in February to 56.6 in March, beating an earlier flash estimate of 56.3. The manufacturing activity expansion was the fastest recorded in almost 10 years in Germany, but activity firmed in almost all Euro Zone economies, including France, Italy and even Spain, where the sector grew for the first time since late 2007.

German retail sales weak in February…Retail sales in Germany fell for a second consecutive month in February, with a decline of 0.4% (m/m) in seasonally adjusted volume of sales, following a decrease of 0.5% in January.  Consumer confidence in Germany has remained low on concerns regarding unemployment, while higher energy prices put further pressure on households’ real disposable income over February. At the same time, harsh winter weather deterred consumers from traveling to retail outlets and further weighed in on the weakness in retail activity.


Among emerging markets:

In East Asia and Pacific, China’s manufacturing sector continued to expand at a faster pace in March, according to the Purchasing Managers’ Index (PMI) released by Li & Fung, which rose to a seasonally adjusted 55.1 from 52 a month earlier.

In South Asia, India’s manufacturing  sector grew for a 12th straight month, as the PMI for factories logged in at 57.8, slightly lower than 58.5 for February, but still indicating a fast pace of expansion.

In Latin America and Caribbean, Brazil’s industrial output rose 1.5% (m/m) in February, the fourth month of gains in manufacturing output, following an upwardly revised increase of 1.2% (m/m) in January.

In Sub-Saharan Africa, Kenya’s headline inflation fell to 4% (y/y) in March, slowing from 5.2% inflation measured in February, indicating the inflationary pressures are not an immediate concern for the Kenyan economy. The central bank cut the benchmark interest rate by 25 basis points to a record low of 6.25% last week in a bid to boost lending on the basis that inflation did not pose a risk.