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Prospects Daily: European government bonds rally…US part-time employment climbs…China liberalizes interest rates

Global Macroeconomics Team's picture
Financial MarketsAll European government bonds are gearing for weekly gains on Friday amid growing speculation that global central banks will maintain their stimulus program for some time. German 10-year yield fell to 1.5% earlier, the lowest since June 7, while comparable Italian yield touched 4.36%, the lowest level since July11. Notably, Portuguese bonds headed for the first weekly gain in more than 2 months despite ongoing country political unrest.

U.S. junk bond markets rallied in July, after posting the worst loss in nearly two years in June, after Federal Reserve Chairman Ben Bernanke eased concern that a scaling back of U.S. stimulus was imminent. Dollar-denominated speculative-grade bonds have posted a gain of 2.4% thus far this month (the largest gain in 18 months), compared with a 2.6% loss in June and extending this year’s gain to 3.9%. Junk-bond yields jumped to as high as 7.15% on June 25 from 6.04% on May 22 before sliding back to 6.51% yesterday.

High Income Economies...Moody's upgraded the outlook on its triple-A rating on the US to 'stable' from 'negative', citing improvement in the federal government's debt trajectory with the narrowing of the fiscal deficit. The 'negative' outlook had been in place since August 2011. US general government debt ratios climbed from around 66% of GDP in 2006 to just over 100% in 2011 and 2012. The US Congressional Budget Office projects the budget deficit at about 4% of GDP this year down, from 7% last year.

In the US, the number of involuntary part-time workers rose by 360,000 in June to 8.2 million, the highest since October although down from a peak of 9.23 million in September 2010. The number of full-time workers fell by 240,000, erasing much of the gains from April and May. In his July 17 semi-annual testimony to Congress, the Federal Reserve Chairman pointed to statistics on underemployment (or part-time work) as one of the gauges of the strength of the labor market.

Residential property prices in Spain continued their downward trend in the second quarter, signaling a further deterioration of the housing market that collapsed five years ago. House prices fell by 2.4% (q/q) and were down by 7.6%(y/y) compared to a year ago. Average prices per square meter of housing have fallen a cumulative 29.5% from their peak in Q1 2008.

Developing Economies…East Asia and Pacific: China's central bank announced removal of all controls on lending rates of banks, with effect from Saturday. A floor on lending rates set at 70 percent of the benchmark rate will be scrapped. The cap on lending rates offered by rural credit cooperatives has also been removed. However, changes will not apply to deposit rates and lending on mortgages.

South Asia: India will pay its euro-dominated oil debts to Iran pending since February 2013 in Indian rupees. Iran will now be able to recover the accumulated $1.5bn of Indian oil debts, after payments via banks in Turkey came to a halt in February as a consequence of tighter US financial sanctions against Iran. This follows an agreement between Iran and India in mid-2011 in which both sides decided to settle 45% of India’s oil import bill in rupees and the remainder in euros.

Sub-Saharan Africa: Zimbabwe's inflation rate dropped below 2% to average 1.9% (y/y) in June 2013, down from 2.2% (y/y) in May. Inflation averaged 2.5% for the first half of 2013, down from 4.5% for the same period a year ago. Inflation in Zimbabwe now ranks among the lowest in the sub-Saharan Africa region, supported by the "unofficial" dollarization of the economy, limited demand pricing pressures.

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