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Prospects Daily: ECB and UK keeps interest rates on hold…Russia's inflation accelerates

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Financial Markets…Spanish government bonds declined for a second day amid lingering uncertainty over when the county will seek a bailout, although it successfully sold €3.99 billion of 2-, 3-, and 5-year bonds today. Spanish 2-year bond yield rose 6 basis points to 3.28%, while the 10-year yield climbed 2 bps to 5.83%.

The euro strengthened against the major currencies as the European Central Bank kept borrowing cost at a record low of 0.75% on Thursday. The 17-nation currency gained 0.4% to $1.2968, and it rose 0.7% to 102.03 yen. The single currency also gained versus British pound and Swiss Franc.

Turkish bonds slumped on Thursday after the country shelled Syria in retaliation for the second straight day. The benchmark 2-year yields jumped 16 basis points to 7.73%, gearing for the largest widening in almost two months. Credit-default swap on Turkey rose 3 basis points to 153 bps as well, the first increase in six days.

High-income Economies…The ECB kept its benchmark interest rate for the Euro Area unchanged at 0.75% today. The bank’s head said Eurozone inflation rate is expected to remain above its 2% target throughout 2012 owing to high energy prices and increases in indirect taxes in some countries, but warned of weak growth in the near term with ongoing tensions in some eurozone financial markets and high uncertainty (although alleviated by last month’s bond purchase plans) still weighing on confidence and sentiment.

The Bank of England also left its key interest rate unchanged at a record low of 0.5% amid signs of modest, albeit still feeble, economic growth. It however made no change to its plans to buy 50bn pounds of government bonds, which will take its total purchases to 375bn pounds by November.

US factory orders fell 5.2% (m,/m) in August, the most in more than three years, dragged down by a slump in demand for transportation equipment. US initial unemployment claims rose by 4,000 to 367,000 in the week ended Sept. 29 but the 4-week moving average remained unchanged at 375,000, suggesting an uneven improvement in the labor market.

The Netherlands’ consumer price inflation remained steady at 2.3% (y/y) in September from August; the EU-harmonized (HICP) inflation rate also remained steady at 2.5%. 

Hong Kong’s
retail sales growth accelerated to 4.5% (y/y) in August from 3.9% in July helped by tourist spending and favorable labor market conditions. Sales growth however remains well below the double digits rates earlier this year.

The HSBC PMI for United Arab Emirates rose to 53.8 in September, from 53.3 in August, on strengthening non-oil private sector business activity as new orders rose at the sharpest rate in 15 months.

Developing Economies
Mexico’s consumer confidence index dropped to 94.0 in September from 97.6 in August partly on inflation concerns.

Russia's annual consumer price inflation accelerated to 6.6% in September from 5.9% in August surpassing the Central Bank’s 6% inflation target. The price index rose by 0.6% (m/m) in September compared with 0.1% increase in August.

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