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Prospects Daily: European bonds and stocks rally, ECB cuts rates to new low, South African manufacturing production falls

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Financial Markets…European bonds and stocks rallied, while the euro weakened the most in two years against the dollar after the European Central Bank unexpectedly cut its main interest rate. Italy’s 10-year bond yield dropped 13 basis points (bps) to 4.08%, the steepest decline since June 26, while Spain’s 10-year yield fell 13 bps to 4.05%, the biggest drop since July. Furthermore, the benchmark German 10-year yield slid 4 bps to 1.69%, while the two-year note yield fell to as low as 0.05%, the lowest level since May 31. Europe’s benchmark Stoxx 600 equity index surged 1.4% to extend its five-year high level, helped by the ECB’s decision, better-than-expected corporate earnings, and improved industrial data from Germany to the U.K.. National benchmark stock indexes advanced in 16 out of the 18 western European markets.

Global Food Prices edged higher in October after declining for the past five months, fueled by rising sugar prices. A gauge of 55 food items rose 1.3% to 205.8 in October from September and reached the highest level since July, according to the United Nation’s Rom-based Food & Agriculture Organization report. An FAO index of sugar price surged 7.4% to 264.8 in October, a third-consecutive month of gain. Raw-sugar futures reached a one-year high on October 18 in New York trading after rain delayed harvest in Brazil, the world’s biggest producer and exporter, and a warehouse fire in the nation’s port destroyed 180,000 metric tons of sweetener supplies.

High Income Economies…U.S. first-time jobless claims fell for the fourth consecutive week to 336,000 in the week ended November 2nd, from the previous week's revised figure of 345,000. The less volatile four-week moving average dipped to 348,250, from the previous week's revised average of 357,500. Continuing claims, a reading on the number of people receiving ongoing unemployment assistance, rose to 2.868 million in the week ended October 26th from the preceding week's revised level of 2.864 million.

According to advanced estimates, U.S. GDP rose by 2.8% (q/q saar) in Q3, up from Q2’s 2.5%. The acceleration primarily reflected a deceleration in imports and accelerations in private inventory investment and in state and local government spending that were partly offset by decelerations in exports, in nonresidential fixed investment, and in personal consumption expenditures (PCE).

Responding to fears that the Eurozone's still fragile economic recovery could stall, the European Central Bank cut interest rates to a new record low, after a shock slump in euro zone inflation to 0.7% in October, far below the ECB target of just under 2%. The ECB cut its main refinancing rate to 0.25%, held the deposit rate it pays on bank deposits at 0.0% and cut its marginal lending facility - or emergency borrowing rate - to 0.75% from 1.00%. Consequently, the euro tumbled 1.4% versus the dollar to $1.3326, the sharpest depreciation since December 2011 and touched a seven-week low of $1.3296 earlier.

The Bank of England kept its key rate at the current record low level of 0.50% and the size of the monetary stimulus and asset purchase program at GBP 375 billion as the bank had pledged not to raise rates until the jobless rate falls to 7%.

The merchandise trade surplus for Taiwan, China increased at a faster-than-expected 8.3% (y/y) to US$3.5 billion in October as imports decreased at a faster rate than exports. Good exports dropped 1.5% to US$26.1 billion, while imports fell 2.8% to US$22.6 billion. Exports to Europe and ASEAN-6 increased, while dispatches to Mainland China and Hong Kong, U.S.A. and Japan declined

Australia added about 1,100 jobs in October compared to 3,300 in September. Full-time employment slipped down by 27,900 and part time employment rose 28,900. The unemployment rate remained steady, moving up only slightly to 5.8%.

Developing Economies… East Asia and Pacific: Malaysia’s central bank kept its benchmark interest rate, the overnight policy rate, unchanged at 3% to support economic growth and contain inflationary pressures. The overnight policy rate has been at this level since May 2011. Malaysia’s annual headlined inflation jumped to 2.6% in September from 1.9% in August mainly due to rising petrol prices, but remained within the central bank’s target of 3% plus/minus 1 percentage points for 2013.

Latin America and the Caribbean: Brazil’s annual consumer price inflation steadied in October, at 5.84% (y/y), almost similar to the 5.86% (y/y) recorded in September, but remained above the central bank target of 4.5% for 2013. On a monthly basis, prices rose 0.57% in October from 0.35% in September, the fastest increase in eight months, driven by higher food cost. Contributing to the rising food cost, prices of wheat flour rose 32.6% (y/y), prices of powder milk increased 20.2%, and cost of fruits went up by 15%. Notable prices decreases were recorded on onions (19%), tomatoes (17%), and soybean oil (15%).

Sub-Saharan Africa: South Africa’s manufacturing production fell 3.3% (y/y) in September, following a 0.2% increase in August. This downturn was mainly due to the decline in the production of motor vehicles, parts and accessories and other transport equipment, which fell by 49.7%, following the strikes that hit vehicle makers in August and September. Month-on-month, manufacturing production fell 4.7%, following a 3.6% decline in August. Manufacturing production fell 2.1% (q/q sa) in Q3 compared with Q2.

Meanwhile, South Africa’s gross reserves fell to US$49.7bn in October from US$50bn in September. The central bank wants gross reserves to be above US$50bn. Contributing to the decline, foreign exchange reserves fell by US$304 million and gold reserves dropped US$28 million, which reflected a fall in the price of gold to US$1,325/oz in October from US$1,332/oz on average in September. Net reserves amounted to US$45.7bn in October, slightly down from US$45.8bn in September.

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