Prospects Daily: Italian and Spanish bonds retreat amid Greek worries, while German industrial output falls sharply in December

Important developments today:

1. Italian and Spanish government bonds fall amid Greek debt worries

2. German industrial output dropped sharply in December, but output is expected to stabilize

 

Italian and Spanish government bonds fall amid Greek debt worries. Italian and Spanish bonds declined on Tuesday as Greek leaders are due to discuss additional austerity demand needed to secure a second European Union-led international bailout and avoid a chaotic debt default. Greek Prime Minister Lucas Papademos prepared to meet leaders of the three parties in his coalition government late on Tuesday to persuade them to accept the EU/IMF conditions for the €130 billion rescue. Greek political leaders are trying to resolve differences over austerity measures demanded by public creditors to secure the second bailout package and seeking to reach a debt deal with private creditors as the country faces about €14.5 billion of bond redemptions in March. The yield on the benchmark 10-year Italian bond rose 7 basis points (bps) to 5.69%, while the Italian 2-year note yields climbed 6 bps to 3.03%, after falling to near eighth month low of 2.90% on February 3rd. Spain’s 10-year bond yields rose 6 bps to 5.08%, while the country’s two-year yield increased 5 bps to 2.62%.

German industrial output dropped sharply in December, but output is expected to stabilize. Reinforcing the slowdown witnessed in the German economy towards the end of last year, as the Eurozone wrestled with its debt crisis, data released by the German Statistics Office today shows industrial production declined 2.9% (m/m) in December, with the drop in output cutting across all sectors [see Chart at http://prospects or http://www.worldbank.org/prospects]. Indeed, Q4 GDP growth in Germany is estimated to have contracted by about 0.25%. However, the rebound in recent Purchasing Managers’ Indices, industrial orders, and business confidence indicators in Germany suggest at least a halt to the declining output trend witnessed in Q4. Nonetheless the current very cold weather spell in Germany, and elsewhere in Europe, could slow the rebound in output.   

Among Emerging Markets

In East Asia and the Pacific, Philippines’ consumer price index (CPI) inflation eased to 3.9% year-on-year (y/y) in January from 4.2% (y/y) in December led by lower food inflation, according to the central bank.

In Europe and Central Asia, Russia’s CPI inflation rate decelerated to 4.2% (y/y) in January, the lowest rate in more than a decade, from 6.1% (y/y) in December, according to the Federal Statistics Service. Estonia’s inflation rate accelerated to 4.5% (y/y) from 3.7% in December mostly because of increases in electricity and fuel tariffs.

In the Middle East and North Africa, Jordan’s central bank raised all of its three policy rates by 50 basis points: the overnight window deposit rate increased to 2.75%, the overnight repo rate to 4.75% and the re-discount rate to 5%, citing expected inflationary pressures and the aim of promoting investment in Jordanian Dinar-denominated assets.

In South Asia, India’s GDP is likely to have grown by 6.9% in the 2011-12 fiscal year, a sharp deceleration from the 8.4% growth in the previous fiscal year led by a slowdown in agriculture (2.5% in FY2011-12 vs. 7.0% in FY2010-11), manufacturing (3.9% vs. 7.6%) and mining (-2.2% vs. 5%), according to advance estimates by the Central Statistics Office.