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Prospects Daily: Portuguese and Irish bonds advance, British services PMI improves, Developing country service PMIs soften

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Financial Markets… Perceived credit risk of U.S. corporate bonds has eased significantly since last September, with the benchmark Markit CDX North America Investment Grade index sliding 83 basis points on Tuesday (intraday, lowest level in more than five months) as investor confidence improved amid positive growth outlook.

Italy’s 10-year government bond yields tightened by 10 bps to 4.78% on Tuesday as some investors picked up the country’s cheaper debt following yesterday’s sell-off. Portuguese and Irish bonds advanced as well, with the benchmark long-term yields sliding 23 bps to 6.16% and 7 bps to 3.76%.

Asian stocks advanced on Tuesday after two days of losses, with the MSCI Asia Pacific Index rising 0.5%, as Chinese shares bounced back from yesterday’s plunge, driven by the government’s pledge to increase fiscal spending to sustain economic growth. In China, the CSI 300 Index surged 3% after posting its biggest one-day drop in two years, while the Shanghai Composite Index jumped 2.3% from a two-month low closing.

High-income Economies
UK services, which comprise more than three-quarters of total economic output, expanded at the fastest pace in 5 months in February, with the services PMI rising to 51.8 (sa) from 51.5 in January driven mainly by an expansion in new business. The reading follows weak PMI data in February for manufacturing and construction. Separately, the British Retail Consortium said the total value of retail sales grew by 4.4% (y/y) in February, up from 3.0% in January.

Eurozone February services PMI data remained mixed, with expansion in Germany offset by sharp contractions in France, Spain and Italy.  PMI readings for Germany indicated a solid expansion in private sector business activity, although the index eased slightly to 54.7, from 55.7 in January. In contrast, output declines accelerated in Italy and Spain, with PMIs dropping to 43.6 (from 43.9) and 44.7 (from 47.0) respectively. France’s PMI readings were barely changed at 43.7 in February from the near 4 year-low of 43.6 in January 

Australia’s central bank held its policy rate unchanged at a half-century low at 3% for the third consecutive month. It had previously cut rates by a total of 125 basis points in 2012 as the economy, which is heavily dominated by commodities exports to China, softened.

Developing EconomiesEast Asia and the Pacific: Philippines’ inflation accelerated in February to 3.4 (y/y) following a 3% rise in January, but still within the central bank’s inflation target of 4% +/- 1%. Core inflation, excluding selected food and energy items, came in at 3.9% (y/y), up from 3.6% (y/y) with alcoholic beverages and tobacco prices contributing to the rise in prices.

China’s service sector PMI (HSBC/Markit) slowed to 52.1 in February from 54 in January. The index stayed above the no-change 50 mark - which separates growth from contraction. The composite index, that measures performance of both manufacturing and services, posted 51.4 in February, down from January's 2-year high of 53.5.

Europe and Central Asia: Russia’s inflation accelerated in February to 7.3% (y/y) up from 7.1% in previous month and is at the highest level in 18 months and well above the central bank’s inflation target range of 5-6%. A rise in food expenses, higher excise taxes and transport costs are contributing to the rise in headline inflation.

Latin America and the Caribbean: Brazil’s service sector PMI dropped to 52.1 in February from 54.5 in January. The index stayed above the no-change 50 mark for the sixth successive month. The composite PMI, came in at 52.9 in February, hitting the lowest level in 4 months.

South Asia: India’s service sector PMI dropped to 54.2 in February from 57.5 in January. The index stayed above the 50 mark for the sixteenth successive month. The composite PMI declined to 54.8 in February from 56.3 in January, marking the weakest improvement in business conditions in three months.

Sub-Saharan Africa: Zambia's inflation rate eased to 6.9% (y/y) in February from 7.0% (y/y) in the previous month. Lower food prices for some essential commodities were primarily responsible for the softer inflation during the month.

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