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Prospects Daily: Chinese Yuan at 20-year high, German investor confidence climbs to 42-month high, India’s annual headline inflation rises to a 7-month high

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Financial Markets… Global equities advanced on Tuesday as signs of a U.S. debt deal boosted investor sentiment.  Europe’s Stoxx 600 index gained 0.8% to a three-week high and the MSCI Asia Pacific Index rose 0.4% to its highest level since May. Developing-country shares climbed to a four-month high, with the MSCI Emerging Market Index rising 0.7%, led by sharp gains in Emerging Europe stocks.

U.S. Treasuries slumped for a fifth day amid growing optimism on looming U.S. debt deal, with the benchmark 10-year yield rising to as high as 2.74%, the highest level since September 23.  Rising risk-appetite among investors damped the demand for safe-haven U.S. government debt before the Treasury is scheduled to sell $65 billion of three-and six-month bills later today.  Rates on one-month Treasury bill also declined, down 5.5 basis points to 0.20%, but they are much higher than 0.025% on September 30 just before the start of a U.S. government shutdown.

Chinese currency rose to the strongest level against the dollar in 20 years after the government report showed record currency reserves. The yuan appreciated to as high as 6.1007 per dollar, the strongest level since 1993 after China reported its foreign-exchange reserves climbed to $3.66 trillion at the end of third quarter.  Meanwhile, the country’s Shanghai Composite stock index slid 0.2%, posting its first loss in three days.

High Income Economies…European Union finance ministers approved the creation of a centralized banking supervisor, which will be operated by the European Central Bank and directly oversee the bloc's 130 biggest banks.  However, the ministers were unable to reach an agreement on some issues, mainly how to design and fund a bank rescue authority, and relatedly how to stabilize the bloc’s financial system.

OECD employment rose to 65.1% of the working-age population in Q2, 0.1 percentage point higher than in Q1.  In the euro area, the employment rate fell by 0.1 percentage point to 63.4% compared with Q1.  In terms of individual countries, the employment rate fell in Italy (by 0.5 percentage point to 55.5%); it rose in Germany (up 0.2 percentage point to 73.3%); and was stable in France (at 64.0%).  Outside of the euro area, the rate increased in Japan (up 0.3 percentage point to 71.5%), the United Kingdom (up 0.1 percentage points to 70.5%) and Canada (up 0.1 percentage points to 72.6%).  It was stable in the United States at 67.3%.

Japan's industrial production (IP) declined more than initially estimated in August with final data exhibiting a 0.9% (m/m sa) fall, compared to July’s 3.4% increase.  Shipments slipped 0.1% and inventory declined to 0.2%.  The capacity utilization ratio declined 2.1 % (m/m sa), reversing July's 3.7% increase.  On a three-monthly annualized basis, IP increased 1.4% (3m/3m saar) in August, compared to July’s increase of 6.4 %.

The German Center for European Economic Research (ZEW) indicator of economic sentiment increased from 49.6 in September to 52.8 in October, the third consecutive increase and the highest since April 2010.  The sub-index for opinions on the current German economic situation fell to 29.7 from 30.6 in September.  The Eurozone expectations index increased to 59.1 from 58.6, but the Eurozone current economic situation decreased to -60.9 from -59.7.

Developing Economies…East Asia and Pacific: China’s consumer price inflation rose to 3.1% (y/y) in September from 2.6% in August, its highest since February 2013 when it stood at 3.2% (y/y).  Driving the rise in CPI inflation, food prices increased to 6.1% (y/y) from 4.7% in August while non-food prices rose 1.6% from 1.5% in August.  At the same time industrial producer prices eased further in September, although at a slower pace, decreasing 1.3% (y/y) in September following a decline 1.6% in August.     

Latin America and the Caribbean: Brazil’s retail sales increased at a weak pace in August, rising by 0.9% (m/m, sa) compared with the revised 2.1% gain recorded in July.  The main drivers of this slowdown were sales of fuel and lubricants which decreased 0.7% (m/m/) and clothing and footwear which fell 1%. Year-on-year retail sales grew by 6.2% in August from 6.0% in July.
 
South Asia: India’s annual headline inflation, measured by the wholesale price index, increased to 6.46% (y/y) in September, a seven-month high, from 6.10% in August, pushed up by higher food prices.  Driven by higher prices of vegetables, rice and fruits, the food price index rose 18%; while energy costs climbed 10% and manufactured goods prices moved up 2%.  Month-on-month, the wholesale price index increased by 0.36 percentage point in September over its level in August.

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