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Prospects daily: Euro-markets roiled by withdrawal of ECB term facility

Global Macroeconomics Team's picture

Important developments today:

1.  Interbank rates for euro funding push to highest levels since October

2.  Chicago PMI survey shows economic activity still strong

3.  Manufacturing growth moderates in Japan



Interbank rates for euro funding push to highest levels since October. The cost of interbank borrowing for three-month euro-denominated loans (or EURIBOR) increased to highest levels in almost nine months, as banks were wary of cash availability amid expiry of the European Central Bank’s (ECB) 1-year long-term refinancing operation (LTRO) tomorrow. European banks need to repay €442 billion in 12-month funds to the ECB as a result, while typical quarter-end cash needs have also placed upward pressure on rates. EURIBOR increased by almost two basis points (bps) to 0.706% this morning, the highest since September 2009. Meanwhile the differential between EURIBOR and the Overnight Indexed Swap—an important gauge of bank’s willingness to lend to one another—narrowed to 21.5 bps today, as a result of interest rate expectations also moving sharply higher post the ECB 1-year facility.

The 12-month LTRO was introduced in June 2009 as part of a series of measures to keep the European credit market flush with cash and ensure lending to the corporate sector wasn’t crimped. Although the ECB program pledged unlimited three-month funding for banks amid the ongoing sovereign debt crisis in the region, there are concerns about stresses in the banking sector following the disappearance of the one-year funds. The ECB will also set up a 6-day fine tuning operation on Thursday to plug any funding gaps. One implication of the expiry of LTRO is that sound Euro Area banks are likely to fund themselves at a cheaper rate than the ECB is currently offering.


Chicago PMI survey shows economic activity still strong. Surveys of Chicago area manufacturers during June showed business to remain growing, but the pace of growth was beginning to wane. The headline index fell to 59.1 in June from 59.7 in May, still indicative (survey responses above 50) of advances in manufacturing production. In other U.S. economic news today, ADP, an employment services company, estimated that firms hired about 13,000 workers during June, a figure well below consensus estimates, and the smallest increase in 4 months. The official employment report from the Commerce Department will be released on July 2, with analysts’ estimates in a range of plus 75,000 jobs in the month, down from forecasts at the start of June of some 115,000.


Manufacturing growth moderates in Japan. Manufacturing activity in June declined slightly in Japan, as the Nomura/JMMA Purchasing Managers Index (PMI) dropped to a reading of 53.9 from 54.7 in May. While this was the first decline in the PMI in five months, the gauge for activity in manufacturing has remained above the 50 threshold that separates contraction from expansion for 12 months now, and at current levels remains close to a four-year peak.

Of note, the index for new export orders declined for a second month running in June, from 57.5 to 56.9, as the Euro Area debt crisis and associated spending cuts, as well as waning Chinese imports, drove down external demand for Japanese goods. This is very much in line with the softening of Japan’s export growth and industrial production witnessed in May. But as the PMI export orders index remains well above 50, market demand will likely continue to grow for some time.


Among emerging markets:

In South Asia, India’s current account deficit widened to $13 billion in the three months ended March 31st, up from a revised $12.2 billion in the previous quarter, according to data from the Reserve Bank of India. Imports climbed 43% year -on-year to $83.9 billion; exports gained 36.2% to $52.4 billion in the period.

In Latin America and the Caribbean, Chile’s unemployment climbed to 8.8% in the three months through May from 8.6% in April, as industrial production grew at a slower-than-expected pace. Industrial output expanded 4.2% in May, after declining 1.3% in April.

In Sub-Saharan Africa, South Africa’s trade deficit narrowed to 302 million rand ($39.4 million) in May, after recording a deficit of 1.9 billion rand the previous month, as exports rose 6.8% (m/m) to 47.2 billion on the back of a 37% surge in exports of precious and semi-precious stones and metals. Imports recorded a 3.1% rise to 47.5 billion rand, according to data from the South African Revenue Service.

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