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Prospects Daily: ECB gives Monday deadline to Cyprus, Flash PMIs signal intensification in Eurozone downturn, US data show economy improving

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Financial Markets…European financial markets fell today after poor economic data from the euro-zone and lingering uncertainty over the Cypriot crisis fueled renewed concerns over the region’s economic outlook. The benchmark Stoxx 600 stock index slid 0.5%, dropping for the 4th time in five days, but the gauge has still gained 5.5% thus far this year. The euro retreated 0.2% against the dollar to $1.2913, after touching a 4-month low of $1.2844 on Tuesday, while the 17-nation currency dropped 0.9% versus the yen to 123.02.

Cyprus is reportedly seeking a loan of about €5 billion from Russia in an effort to stave off financial collapse after the nation’s lawmakers rejected the euro-zone’s proposed bailout plan. Russia previously lent €2.5 billion to Cyprus in December 2011. Meanwhile, the ECB said it would cut off emergency funds to the nation’s banks after March 25 unless there is a bailout agreement with the EU and IMF. Cypriot banks are to remain closed until next Tuesday.

Italian and Spanish government bonds rose for a second day amid speculation that growth concerns over the euro-zone economy might prompt the ECB to introduce further stimulus measures. Italian 10-year yields dropped 7 basis points to 4.57%, while similar-maturity Spanish bond yields fell 13 bps to 4.85%. Notably, the Spanish Treasury successfully sold €4.51 billion ($5.8 billion) of 2-year, 5-year, and 10-year securities at lower yields compared to previous sales.

High-income Economies
…The Eurozone flash PMI estimates suggest the downturn in the Eurozone worsened, with the composite index posting a 4-month low of 46.5 in March, down from 47.9 in February. (A reading below 50 indicates that output is contracting.) Breakdowns revealed that the contraction in both service and manufacturing sectors intensified in March. France saw the steepest downturn in business activity since March 2009, while the German manufacturing PMI fell to 48.9 from 51.7 in February, ending a two-period month of growth.

US labor, housing and manufacturing survey data suggest that the economy continues to firm. The monthly average of first time initial jobless claims dropped by 7,500 to a fresh low of 339,750 (sa) in the month ending March 16th. That’s the lowest since February 2008. Separately, existing home sales rose by 0.8% (m/m) to an annual rate of 4.98 million (sa) in February, the highest level in 3 years, from an upwardly revised 4.94 million in January. Finally, flash manufacturing PMI estimates for March showed a continued strong rise in manufacturing output, with the index rising to 54.9 from 54.3 in February and also signaled faster pace of job creation.

UK retail sales growth including automotive fuel improved to -0.4% (3m/3m saar, volume) in February following a drop of 2.2% in January. Excluding automotive fuel, sales were flat on a 3m/3m basis in February after declining the previous two months.

Ireland GDP data show that the economy grew by 0.9% in 2012, marking two consecutive years of growth following the recession from 2008-2010. Quarterly data show that Q4 GDP was flat after a 1.6% (q/q, saar) decline in Q3.

Developing Economies
East Asia and Pacific: The flash March (HSBC) manufacturing PMI for China rebounded in March, rising 1.3 points to 51.7, offsetting most of the 1.9 point decline in February to 50.4. Breakdowns revealed the output and new orders (including overseas orders) increased at a faster pace in March.

Europe and Central Asia: Mexico’s retail sales in January are up 1.8% (y/y), compared to decline of 1.8% (y/y) in December which is the fastest pace in two years. The pickup was led by improving sales of automobile parts, fuels and lubricants.

South Asia: After declining for two months in a row, FDI in India grew by 8% (m/m) during January to $2.15 billion from the $2 billion in In January 2012. However, during the April-January period of the current fiscal year, FDI fell by 39% compared to the same period in the previous fiscal year from $31.28 to $19.10 billion.

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