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Prospects Daily: Hungary, Turkey, and Sweden cut policy rates, US current account deficit narrows

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Financial Markets…Global stocks advanced on Tuesday, with the benchmark MSCI world equity index gaining 0.6%, as growing optimism on U.S. budget talks boosted investor confidence. The MSCI Asia Pacific Index rose 0.5%, heading for the highest closing in nine months, and the Stoxx Europe 600 Index climbed 0.3%, extending its year-to-date gains to 13%. U.S. equities also opened higher in early morning trade with the S&P 500 Index rising 0.2%.

Credit-default swaps on U.S. corporate debt slid for a second day, with the benchmark Markit CDX North American Investment Index sliding 0.9 basis points to 91 bps, amid signs that progress was being made on negotiations over the so-called fiscal cliff. The credit-swap index generally declines as investor sentiment improves and climbs as it deteriorates.

Spanish government bonds rose on Tuesday, with 2-year note yields sliding as much as 6 basis points to a two-week low of 2.84%, as borrowing costs declined at a new auction of €3.52 billion ($4.6 billion) Treasury bills. The Spanish Treasury sold 84-day bills at an average yield of 1.195%, down from 1.254% at last month’s auction, and 183-day bills at 1.609%, compared with 1.669% at a previous auction in November.

High-income EconomiesUK consumer price inflation remained unchanged at 2.7% (y/y) in November, the same rate as October. However, prices rose 0.2% (m/m) as increases in food and gas prices and electricity costs were partially offset by cheaper fuel costs. Annual inflation remains above the Bank of England’s 2% target. The core inflation rate remained steady at 2.6%. 

The US current account deficit narrowed to a two-year low of $107.5 billion (2.7% of GDP) in the third quarter of 2012 from $118.1 billion (3% of GDP) in the second quarter. The decrease was mainly accounted by a fall in the goods trade deficit, as goods imports fell by a larger margin (to $567.3 billion from $579.9 billion) than the decline in goods exports (to $393.4 billion from $394.1 billion). 

Ireland’s GDP grew at about a 0.8% (q/q) annualized pace in the third quarter, compared to an upwardly revised 1.6% annualized pace in the second quarter. On a year-on-year basis, however, GDP rose 0.8% (y/y) in the third quarter following a 1.1% (y/y) decline in the second quarter.

Sweden’s central bank cut its benchmark interest rate to 1% from 1.25% in an effort to counter the impact of the Euro Area debt crisis on the Swedish economy.

central bank cut its interest rate further to 5.75% from 6%, its fifth rate cut this year in a bid to support stalled growth. Inflation fell to 5.2% in November, down from 6% the previous month, but is higher than the central bank’s 3% target. The central bank has cut interest rates by a cumulative 125 basis points this year.

Developing Economies… Foreign direct investment in China fell 5.4% (y/y) in November to $8.29 billion and FDI inflows in the first 11 months of 2012 fell 3.6% (y/y) to $100 billion. Meanwhile, non-financial investment abroad rose 25% in the first 11 months of 2012 to $62.5 billion.

In November, China’s new home prices increased in 53 out of the 70 cities tracked by the government, compared with 35 in October.

central bank held its policy repo rate unchanged at 8.0%, along with its Cash Reserve Ratio (CRR). India's wholesale price inflation rate eased to 7.24% in November from October's 7.45%, but remains above the bank’s 5-6% comfort level in the absence of a formal inflation target.

Turkey's central bank cut its benchmark one-week repurchase rate by 25 basis points to 5.5%, but kept its short term rates steady. The overnight borrowing rate, which forms the bottom of Turkey’s interest rate corridor, was kept at 5% and the overnight lending the rate, the ceiling, was kept at 9.0 percent. This decision to cut key policy rate was made in the context of moderating inflation to support weakening growth. Inflation rate fell to 6.4% (y/y) in November. It is projected to remain above the bank’s 5% target due to higher administered prices.

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