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Prospects Daily: Japan's credit rating downgraded by S&P to AA

Global Macroeconomics Team's picture

Important developments today:

1. Treasuries rebound after the latest debt auction

2. S&P knocks Japan’s credit rating down a notch to AA- on deflation and debt

3. Trade is showing evidence of a turnaround in the last months of 2010

4. Generally upbeat indicators for U.S. economy

5. consumer and business sentiment indicators hold prime space in the headlines


Treasuries rebound after the latest debt auction. U.S. Treasury prices improved, led by shorter-dated instruments, after the government wrapped up its final debt auction scheduled for this week. Treasuries earlier pared losses after government data showed U.S. jobless claims increased sharply last week. The latest debt sale, a $29 billion offering in seven-year notes, was met with solid demand, suggesting investors still have some appetite for safe-haven U.S. government debt, especially in shorter-dated maturities. The government also sold $99 billion in new two-, five-, and seven-year bills this week. Meanwhile, the spread between 2-and 30-year Treasury yields widened to almost record highs, signifying investors are being more sensitive to the inflation outlook.

S&P knocks Japan’s credit rating down a notch to AA- on deflation and debt. Japan’s credit rating was cut for the first time in 9 years as persistent deflation, and apparent political gridlock undermine efforts to reduce a ¥943 trillion ($11 trillion) debt burden. Japan’s is now rated AA-, the fourth highest rating, putting the country on par with China, which likely passed Japan in 2010 to become the second largest global economy. The outlook for the rating is stable, S&P said. The yen and bond futures dropped on the news, amid concern that the downgrade with increased the cost of sovereign borrowing for Japan.

In better news on the economic front in Japan… trade is showing evidence of a turnaround in the last months of 2010, following a slump that removed some of the dynamism from growth over the course of the year. Export growth accelerated for a second month in December, up a hefty 5.7% (m/m), on the heels of a 2.3% gain in November. This has been sufficient for exports to close the year at an annualized 16% pace (saar), up from a decline of 14.5% in the third quarter . [see Chart at http://gem or Imports have recouped as well, moving quickly to close the year up 20% annualized, vis-à-vis a 30% falloff in the preceding quarter. Signs of stronger growth in the United States and China, together the destination for more-than 20% of Japanese exports, bodes well for recovery into 2011.

Generally upbeat indicators for U.S. economy. Among the less optimistic of today’s reports, was that from the Department of Labor, highlighting that—after some improvement in the last weeks—initial claims for unemployment insurance increased by 51,000 persons to 454,000 in the week ended January 22—typical of the ups and downs that have characterized labor markets for the last year. Indeed, winter effects in Southern states during the preceding week yielded a ‘backlog’ of claims which were filed in the week of record, boosting claims. According to Julia Coronado of BNP Paribas in New York, “We’re creating enough jobs to keep the unemployment rate steady, but it’s not a picture of rapid improvement.”

Of better tenor, durable goods excluding transport orders registered growth of 0.5% in December (m/m), enough, within the context of a recent strong spell, to boost the fourth quarter’s growth performance to a 10.8% advance (saar), up from a meager 1% gain during the third quarter. And capital goods also remain in demand, up 9% (saar) for the final quarter of 2010. And, pending home re-sales (contracts awaiting approval) gained 2% in December (m/m), more than anticipated by the majority of analysts.

In European developments…consumer and business sentiment indicators hold prime space in the headlines, with the European Commission’s Consumer sentiment measure improving modestly in January (from a dispersion reading of -12.2 in December to -11.7); and the Commission’s industrial confidence reading improving more-so, from a 4.9 reading in December to 6 in January. In contrast, France’s INSEE survey of households dropped for a second month running as unemployment jumped to a 7-year high amid concerns about the strength of the economy


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