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Prospects Daily: China cuts holdings of U.S. Treasuries by record amount

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Important developments today:

China cuts holdings of U.S. Treasuries by record amount

U.S. Leading Economic Indicators point to strengthening recovery

Poland posts strong increase in industrial output


China cuts holdings of U.S. Treasuries by record amount. China’s declared holdings of U.S. Treasury securities dropped by $35 billion to $755.4 billion in December 2009, according to a U.S. Treasury Department report this week. Meanwhile, Japan increased its net purchases by $11 billion to carry sticks of Treasuries to $768 billion—becoming once more the world’s largest holder of U.S debt (China overtook Japan as the biggest holder in September 2008).China’s holdings peaked at $801.5 billion in May 2009, but the country began reducing its exposure to U.S. government assets since November, in an effort to diversify its $2.4 trillion in reserves beyond safe- but low-yielding U.S. debt. Indeed, China launched a $200 billion sovereign wealth fund in 2007, which is investing in riskier but more profitable foreign assets.

The move triggered concerns that the U.S. government may have to pay higher yields to attract foreign finance for a mounting budget deficit, expected to hit $1.5 trillion this year. But analysts say China’ record reduction of Treasury holdings does not necessarily mean China is shifting out of Treasuries for good. For example, the true size of Beijing’s holdings of U.S government securities is larger than reported, but is obscured as the Chinese government also purchases these assets anonymously through banks in the United Kingdom, Switzerland, and offshore centers.

U.S. claims for unemployment insurance increase. New claims for jobless insurance picked-up by 31,000 in the week ending February 12—an unexpectedly large number of layoffs. With this report, the number of redundancies rose to a seasonally adjusted 473,000 in the week. People continuing to file for insurance claims remained stable at 4.56 million, while those collecting extended benefits increased marginally to 6 million. Though the unemployment rate dipped to 9.7% last month from 10% in December, more seasonal layoffs (leading to one-off gains in initial claims) may be in line for the automobile industry and others.

U.S. producer prices up on energy costs. Headline PPI inflation jumped 1.2% in January (m/m) on the back of higher energy costs. At the same time core prices (which exclude energy) increased 0.3% (m/m) after remaining flat in December, providing little incentive for the Federal Reserve to increase interest rates from their current record lows. For the twelve months to January, wholesale inflation registered 4.6%, reflecting the recent uptick in energy prices. Details on January CPI will be released tomorrow by the Labor Department.


Source: The Conference Board


U.S. LEI point to strengthening recovery. The Conference Board’s index of Leading Economic Indicators (LEI) increased for a tenth consecutive month in January, signaling building momentum in economic activity over the coming months. The index currently stands at 107.4, a substantial improvement from lows of 98.1 seen in March 2009, and higher still than pre-crisis average levels [see ]. The LEI has been increasing steadily since the second half of 2009, led by improvements in financial markets and in manufacturing. On a momentum basis (rolling-quarter, saar), the index increased 11% in January, pointing to a firming of recovery in 2010.

Among emerging markets:

In Latin America and the Caribbean, Brazil created 181,420 jobs in January, a record number, compared with a loss of 101,750 jobs a year earlier, according to the Labor Ministry. Mexico’s Finance Ministry revised up its economic growth forecast for 2010 to 3.9% from previous projections of 3%, on the back of expected stronger domestic and external demand.  

In Central and Eastern Europe, Poland’s industrial output surprised to the upside in January increasing 8.5% (y/y), following a 7.4% gain in December. The pickup occurred despite weak demand in Germany, one of its main trading partners. But in the month, output declined 5.4% from December 2009.


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