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Prospects Daily: European shares fell for a second day and the euro weakened...Turkey cut the ceiling on its interest rate corridor by 150 basis points

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Financial Markets…European shares fell for a second day and the euro weakened on Tuesday, leading a broader decline in risky assets as growing concerns over Spain’s apparent reluctance for a international bailout,  and growing conflicts between China and Japan unnerved investors.

Taking their cue from slipping Asian markets, European benchmark stock index continued to decline from 14-month highs reached last week following the announcement of the Federal Reserve’s third round of quantitative easing. The euro fell 0.5% to $1.3054 and 0.6% to 102.60 yen on Tuesday, after rallying to four-month highs versus the dollar and the yen earlier.

Oil prices extended their decline as well, falling as low as $1.23 to $95.39 in New York morning trade, posting their largest drop in two months. Meanwhile, U.S. Treasuries and German bunds gained for a second day as lingering concerns over global growth and European debt crisis spurred demand for safe-haven government debt.

High-income EconomiesUK consumer price inflation edged down to 2.5% (y/y) in August from 2.6% in July, moving closer to the Bank of England's 2% target. Consumer prices rose 0.5% from the previous month mainly due to higher gasoline prices and transport costs. Core CPI inflation which excludes alcohol, food, tobacco and energy prices, eased to 2.1% from 2.3% in July. 
Germany's ZEW economic sentiment indicator, an index of investor and analyst expectations, rose for the first time in five months by 7.3 points to -18.2 points in September after the ECB announced its bond purchase program earlier this month. The sub-index for the current situation however fell to 12.6, the lowest since June 2010, from 18.2 in August.
The US current account deficit narrowed by 12.1% to $117.4 billion in the second quarter of 2012 from $133.6 billion in the first quarter, helped by a pickup in exports and a larger income surplus in Q2. The US trade deficit shrank to $139.3 billion from $148.4 billion the previous quarter.  

Hong Kong's unemployment rate remained unchanged at 3.2% in the three month period ending in August from the May-July period. The underemployment rate however rose to 1.7% from 1.5%.

Poland’s employment in the private sector remained stable on a year-on-year basis in August, but edged down 0.1% from July; gross wages declined 0.3% (m/m) in August.

Developing Economies…In China, prices for newly constructed homes rose 0.1% in August from July, showing a modest increase for a second consecutive month. Thirty-five of seventy cities covered by the statistics bureau’s monthly report had price gains, less than 49 in July.

India's annual consumer price inflation picked up in August to 10.03% (y/y), up from 9.86% in July, driven by a rise in food prices due to weak monsoon. Food price inflation accelerated to 12.03% (y/y) in August from 11.53% in July.  Inflation as measured by India's benchmark wholesale price index rose by 7.55% in August (y/y). The bank kept interest rates unchanged yesterday stating that fighting inflation was the primary objective.

Turkey's central bank held benchmark one-week repurchase rate at 5.75% but cut the ceiling on its interest rate corridor by 150 basis points to 10 % from 11.5%. The bank introduced the interest rate corridor last year as a safeguard measure against speculative attacks and to control inflation. The bank stated it was taking a cautious stance as inflation rate, although eased to 8.9% (y/y) in August from July's 9.1%, still remains above the bank's 5.0% inflation target.

The Central Bank of Sri Lanka kept its benchmark repurchase rate unchanged at 7.75%. Average monthly credit expansion slowed down to 27 bn rupees in the second quarter, down from an average expansion of about 52 bn. Inflation rose to 9.5% (y/y) in August, down from a 3-1/2 year high of 9.8 %in July. The bank has raised interest rates twice this year, by a total of 75 basis points.

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