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Prospects daily: Markets appear calmer in wake of EU/IMF package

Global Macroeconomics Team's picture

Important developments today:

1.  German bonds advance amid lingering bailout worries

2.  U.S. initial claims decline in latest week

3.  Japan’s current account surplus widens

 

German bonds advance amid lingering bailout worries. German two-year government bond prices rose on Thursday, as investorsappeared worried that the euro-zone’s indebted countries will struggle to implement austerity plans aimed at cutting their deficits. This also suggests that investors remained worried about southern European countries, even after the announcement of a massive $1 trillion financial rescue package earlier this week. Along with the persistent sovereigndefault fears, there are also concerns regarding the European Central Bank’s new role, under special circumstances, ofpurchasing government and private bonds in open markets to maintain liquidity and keep yields low. In the longer termunder such scenario, however, the ECB’s new role could leave the bank’s balance sheet exposed to quasi-fiscal risks whichwould result in a capital loss, and potentially stoke inflationary pressure on core Euro-zone economies.

The yield on 2-year German bonds declined 4 basis points (bps) to 0.62% today, while the 10-year bond yield was littlechanged at 2.94%. Meanwhile, the difference between 10-year and 2-year yields widened to 234 bps, the most since 1997. Some analysts argued that the steepening yield curve suggests that the Greek debt crisis isn’t over yet.

 

Source: Department of Labor

 

U.S. initial claims decline in latest week. New claims for unemployment insurance declined in the week ending May 7 by 4,000 to 444,000 persons, logging in a fourth straight week of easing layoffs. Over the same period, the 4-week moving average of claims decreased by 9,000 to 450,500 [see ]. The Labor Department’s data reveals that the number of people continuing to receive unemployment benefits after the initial filing climbed by 12,000 in the latest week; however, the number receiving extended federal benefits fell by 200,000 to 5.36 million. The initial claims data has not yet reflected the sharp upswing in payrolls during March and April, when 162,000 and 290,000 new jobs were created respectively. Even as evidence of net job growth emerges, the unemployment rate for April ticked up to 9.9%, in a sign of the long journey labor markets have to recover to pre-crisis employment levels.

Japan’s current account surplus widens. The Japanese current account surplus increased to a seasonally adjusted ¥1.77 trillion in April, according to the Ministry of Finance, representing a jump of 58% from 12 months ago. Exports increased 45% (y/y), while imports climbed 22% in response to somewhat weaker domestic demand. The current account surplus is now at a 2-year high, as the export-led recovery in Japan maintains speed.

Among emerging markets:

In East Asia and the Pacific, Malaysia’s central bank raised its key interest rate by 25 basis points to 2.5%, the second hike this year, as GDP increased by a sharp 10.1% year-on-year in the first quarter of 2010, the most in a decade. Thailand’s consumer confidence dropped to 67.2 in April from 69.8 in March, a third consecutive month of declines, as the worst political violence in 18 years is undermining sentiment.

In Latin America and the Caribbean, Mexico’s industrial output climbed 7.6% year-on-year in March, on account of an 85% surge in auto production, according to the national statistics institute.

In Sub-Saharan Africa, South Africa’s central bank kept its key interest rate unchanged at 6.5%, on concerns about the impact of the Greek sovereign debt crisis. Zambia’s copper output declined 3% (q/q) in the first quarter of 2010 to 174,725 metric tonnes, according to the central bank. Exports however climbed 19% to $1.27 billion during the same period, as volume shipments increased 7.8% to 191,229 tonnes. 

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