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Prospects Daily: Italian borrowing costs drop lower, US and German inflation eases…Libya announces new oil financing deal for Egypt

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Financial Markets…Global shares extended their gains today, with the benchmark MSCI world equity index rising 0.2% after gaining 2.3% last week, as investors speculated that continued monetary stimulus from the US and Euro zone central banks will bolster global economic recovery. News of Italy’s new government and higher-than-expected US consumer spending in March also weighed positively on world stock markets.

The dollar fell for a second day on Monday against the euro, sliding 0.4% to $1.3085 in morning trade, as the market expects the Federal Reserve will keep the current easing monetary policies after its two-day meeting starting tomorrow. Investors speculated that the recent string of weak U.S .economic data will dampen any discussion of cutting back on the ongoing bond-buyback program.

Italy’s 10-year funding costs fell to 2 ½ year low at a new debt auction today after the swearing-on of the country’s new prime minster yesterday ended a two-month long political deadlock following February election. The Italian Treasury auctioned €3 billion of 10-year government securities at a yield of 3.94%, the lowest since October 2010, and it is down from 4.66% at the last month’s auction.

High-income EconomiesEurozone economic confidence declined further in April reflecting broad-based weakness in business sentiment, with particularly sharp declines in assessments of past demand and current order books. The European Commission’s economic sentiment index slid to 88.6 from a 90.1 a month ago. Consumer confidence picked up slightly on an easing of unemployment expectations and slightly better expectations concerning households' future financial situation

US consumer spending, which drives about two-thirds of economic activity, continued to inch ahead in March, signaling steady but slow economic growth, with personal consumption expenditures (PCE) up 0.2% (m/m sa) in March, following a 0.7% gain in February. Personal incomes however also rose 0.2% after a 1.1% gain the previous month, possibly reflecting softness in labor markets. The PCE price index, the Federal Reserve’s preferred measure for inflation, was up only 1.0% (y/y) in March, compared with the Fed target of around 2% and less than the 1.3% increase the previous month.

Advance inflation estimates show consumer prices in Germany grew by 1.2% in April compared to 1.4% in March. This is its slowest pace in two and a half years. Germany’s EU harmonized inflation rate fell sharply to 1.1% (y/y) in April from 1.8 % in March.

Developing Economies…Europe and Central Asia: Bosnia and Herzegovina’s inflation continued to ease in March to 0.6% (y/y), down from 1.0% February. As a result the average inflation rate in the first quarter of 2013 rose by just 0.9% (y/y), down from 2.0% (y/y) in 2012Q4. The deceleration in inflation largely reflected a weak domestic demand amid high unemployment rate, low wage growth, and considerable spare capacity in the economy.

Middle East and North Africa: Libya announced $1.2bn-worth of crude oil shipments to Egypt at world prices but on interest free credit for a year starting in May. The crude deal amounts to more than half of Egypt's imports which amounted to $2bn in 2012. Egypt had struggled to purchase crude on the open market since January.

Sub-Saharan Africa: Zambia's inflation edged down in April to 6.5% (y/y) from 6.6% in the previous month led by a decrease in non-food inflation. Food inflation edged up to 6.1% as price of Zambia's primary staple commodity sold–mielie meal–increased by 4.1% (m/m) during April.

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