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Prospects Daily: Early February indicators for U.S. upbeat

Global Macroeconomics Team's picture

Important developments today:

1. Robust demand for U.S. Treasury inflation-indexed bond

2. Upbeat indicators for U.S. activity in February

3. ECB Executive Board member Lorenzo Bini Smaghi indicated that the central bank may need to raise interest rates

 

Robust demand for U.S. Treasury inflation-indexed bond. The U.S. government successfully sold $9 billion of 30-year Treasury Inflation-Protected Securities (TIPS) on Thursday, as investors rushed to hedge against long-term inflation threats. The new bonds were priced to yield 2.910% and attracted strong demand from both domestic and foreign investors—TIPS pays interest on a principal amount that increases in line with consumer prices. It was the third 30-year TIPS auction since the Treasury sold an issue in February 2010 for the first time since the government stopped issuing so-called ‘long-term securities’ in October 2001. The “break-even” rate, or spread, between 30-year un-indexed Treasuries and 30-year TIPS (a gauge of investor long-term inflation expectations) moved up to 2.51% from 2.48% at Wednesday’s close.

Upbeat indicators for U.S. activity in February. The monthly survey of the Federal Reserve Bank of Philadelphia, covering the manufacturing sector in the Bank’s service area, found conditions buoyant in the first part of February. Factory output expanded at the fastest pace in seven years. The Philly Fed’s general economic index (dispersion measure) surged to a reading of 35.9 in February from 19.3 in the month preceding, with total new orders, new export orders, a pick-up in the workweek and improved hiring intentions all contributing to the increase  [see Chart at http://gem or http://www.worldbank.org/gem. A similar report from the Federal Reserve of New York earlier this week also showed a ramp-up in manufacturing in February—good news for the continued momentum of U.S. recovery.

In Europe…according to Bloomberg, ECB Executive Board member Lorenzo Bini Smaghi indicated that the central bank may need to raise interest rates as global inflation pressures mount. Mr. Smaghi’s comments suggest that the ECB is becoming much more concerned about the potential consequences for inflation in the Euro Area due to rising commodity prices, which have carried headline inflation rates about the bank’s 2% target, running at the fastest pace in 2 years at 2.4% in January (y/y).

Among Emerging Markets

In East Asia and the Pacific, China raised the reserve requirement on deposits at the central bank for a fifth time since October 2010 to a record 19.5%, in an aggressive effort to tighten credit growth and fight inflation. Domestic inflation was 4.9% in the 12 months to January 2011, up from the 1.6% recorded in January 2010, raising concerns that pressures were spreading beyond food prices to other consumer goods.

Malaysia's real GDP growth registered 4.8% in the fourth quarter of 2010 (y/y), down from 5.3% in the third, as export performance dipped. Growth for full-year 2010 came in at a better-than-expected 7.2% (the Bank Negara, the central bank had projected 7% growth for the year) following a 1.7% contraction during the global recession of 2009.

In Sub-Saharan Africa, Zambia's economy recorded growth of 7.1% for full-year 2010, up from 6.4% witnessed in 2009.

 

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