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Prospects Daily: The German engine powers on

Global Macroeconomics Team's picture

Important developments today:

1.  Fitch downgrades Ireland’s credit rating another notch

2.  The German engine powers on

 

Fitch downgrades Ireland’s credit rating another notch. Fitch Rating Agency lowered Ireland’s debt ratings to ‘A+’ from ‘AA-‘on Wednesday, citing the “exceptional and greater-than-expected cost” of bailing out the country’s banking sector. Rating agency also said the outlook on the nation’s rating is negative, implying that a further downgrade is more than likely in the next 12 to 24 months if the economy fails to recover. The move comes a day after Moody’s Investor Service warned that it was reviewing the country’s rating for a possible downgrade.

The market reaction to the downgrade was somewhat muted with the euro, European government bonds, and European equities largely unflustered. As for Irish government bonds, however, the 10-year Irish and German bond yield spreads widened by 6 basis points (bps) to 416 bps after Fitch downgraded the nation’s credit rating. Similarly, sovereign credit default swap on Ireland’s debt rose 13 bps to 450 bps, reversing 13 bps tightening in morning trade.

The German engine powers on. Inspite of the slowdown in global economic activity, orders for German made manufactured goods increased by 3.4% in August, thanks to strong foreign demand. Orders from abroad were up by 6.6% in contrast to the 0.5% fall in domestic orders [see Chart at http://gem or http://www.worldbank.org/gem].  Demand from other eurozone countries was the biggest driver of the orders abroad, up by 13.8% compared to only 1.5% increase from non-eurozone countries. The increase in August manufacturing orders should lend support to Q3 GDP growth. However, it is important to also recognize that most of the increase in manufacturing orders came from big-ticket items such as trains, planes and ships, hence may not be sustained in the coming months. Indeed, the new orders component of the September manufacturing purchasing managers index (PMI), which gives an indication of manufacturing activity fell. This suggests a slowdown in manufacturing activity in September/October is most likely. 

Among emerging markets

 Emerging stock markets are rising on the speculation that more monetary policies such as the one from the Bank of Japan will be implemented thus boosting the flow of funds to emerging countries. The MSCI Emerging Markets Index reached 1,111.17 today and benchmark stock measures in South Korea, Taiwan, Czech Republic and Turkey also gained at least 1%. Both the U.S. and Japan have carried out easing measures, the U.K. Australia, New Zealand, and Canada are also considering their options as many other central banks worldwide would follow.