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Prospects Daily: Egypt reaches a preliminary agreement with the IMF for a US$4.8 billion loan, Turkey narrows its interest rate corridor further

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Financial Markets…Moody’s Investors Service lowered France’s sovereign credit rating by one notch to ‘Aa1’ from the top credit rating of ‘Aaa’, citing an uncertain fiscal outlook and worsening economic outlook. The downgrade follow the one by S&P in January, when the rating agency cut the nation’s rating to ‘AA+’ from ‘AAA.’

U.S. Treasuries declined on Tuesday on a better-than-expected U.S. housing report, with the benchmark 10-year yield climbing 1 basis point to 1.63%. The 30-year bond yield also increased to 2.77%, rising for a fifth day. Treasuries have gained 2.7% in the year to yesterday, while global equities have posted an 11% gain for the like period.

Oil prices fell from the highest level in a month on Tuesday, with crude for January settlement sliding as much as 75 cents to $88.53 a barrel in New York trading, amid speculation U.S. oil stockpiles continued to rise last week. Brent for January delivery dropped as much as 0.9% to $110.75 a barrel in London trading.

Egypt sold a more-than-targeted €640.2 million ($817 million) of one-year government notes yesterday, paying an average yield of 2.548%. The yield is lower than 2.8% on similar-maturity securities from Spain, whose debt carries the lowest investment grade rating of ‘Baa3’ from Moody’s, compared to Egypt’s speculative grade ‘B2’ rating.

High-income Economies
Germany’s producer price inflation slowed to 1.5% (y/y) from 1.7% in September, as energy prices fell 0.1% (m/m). On a month-on-month basis, the producer price index remained unchanged in October, after rising by 0.3% (m/m) in September.

New privately owned housing started in the US rose 3.6% (m/m) in October to reach a seasonally adjusted annual rate of 894,000 units, the highest in four years—reflecting an ongoing turnaround in the housing market after an unprecedented collapse in 2007-09 (from 1.5-2.0 million annualized monthly rates during 2006 to about 500,000 by 2009). Homebuilding is expected to provide a lift to US GDP and employment growth going forward. 

GDP grew 0.7% (q/q) in the third quarter of 2012, similar to the 0.8% (q/q) increase in the second quarter. This was led by a strong 6.8% (q/q) increase in housing investments, but exports fell 3.1 (q/q) amid weakening demand from trade partner countries. 

Poland’s industrial output rose by 0.6% (y/y) in working day adjusted terms in October, following a 1.6% (y/y) drop in September. Poland's economy is slowing sharply on the back of falling investments, consumption and demand for its exports from countries in the euro zone.

Developing Economies
Egypt has reached a preliminary agreement with the Fund for a US$4.8 billion loan. The deal would also lead to an already approved 5 billion euro ($6.4 billion) financial aid package from EU institutions that was conditional on reaching an agreement with the Fund. 

In Russia, retail sales growth slowed to 3.8% (y/y) in October from 4.4% in September. In contrast to the sluggish growth in retail sales, capital investment posted a recovery in October, rising by 4.9%, from a 1.3% decline in September. Unemployment rose to 5.3% of the workforce in October – the first increase this year, up from 5.2% in September, although the jobless rate remains low by historical standards.

The central bank of Turkey kept its benchmark one-week repurchase rate unchanged at 5.75% but cut its overnight lending rate by 50 basis points to 9.0% to further narrow its interest rate corridor. Turkey's inflation rate eased to 7.8% (y/y) in October, the lowest rate this year but above the targeted 5% rate.

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