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Prospects Daily: Sovereign default risk on European countries decreases

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Important developments today:

1. Sovereign default risk on European countries decreases

2. U.S. household spending increases in January

3. The unemployment rate in the Euro Area remained steady at 9.9% in January

 

Sovereign default risk on European countries decreases. The cost of insuring sovereign debt against default in Europe declined, led by Greece, as concerns over the cash-strapped country eased amid reports of a rescue package. Greece’s five-year credit default swap spreads (a key gauge of credit risk) tumbled 28.5 basis points (bps) to 335.5 bps this morning, the lowest level since January 27, according to CMA Data-Vision. Spreads on Portugal also declined 11 bps to 152.5 bps, Spain tightened 5.5 bps to 124 bps, and Italy fell 6 bps to 122 bps. Reported bailout plans for Greece should provide some support to market sentiment over coming weeks, and could raise confidence in euro zone economies that are struggling to cope with serious budget/debt problems.

Improved market sentiment on sovereign debt also helped cut the cost of default protection on corporate debt, with the swaps on the Markit iTraxx Europe index of 125 investment-grade companies declining 1.5 bps to 83.5 bps, the lowest level since February 3, according to JPMorgan Chase & Co. Credit-default swaps on the Markit iTraxx Crossover Index of 50 companies of mostly sub-investment grade tightened 11 bps to 455 bps.

 

U.S. household spending increases in January. The pace at which U.S. households spent on goods and services picked up in January to 0.5% (m/m) from December’s revised 0.3% showing. This is a fourth consecutive monthly gain and a sign that personal consumption—which accounts for the bulk (70-75%) of U.S. GDP—may contribute more to growth in coming months than earlier thought. On an annualized basis, spending is rising at a 4.2% clip (saar), strong, given the uncertain background for job growth and the economic outlook facing households at the moment.

“It’s a good start for the year,” notes Brian Bethune of IHS Global Insight. “But consumption is not going to be the main driver for economic growth.” (I’m assuming Brian is referring to business investment as the element giving strongest impetus to growth in coming quarters.) With a disappointing 0.1% gain in personal incomes during January (tied to declines in dividend and interest income), the savings rate fell back to 3.3%, the lowest since October 2008, from 4.2% in December. PCE prices were stable in January, increasing 2.1% (y/y).

 

Source: Institute of Supply Management

 

U.S. manufacturing expands for a seventh month. Activity in U.S. factories advanced for a seventh month in February, as noted by the Institute of Supply Management’s index of manufacturing activity. The February index reading was 56.5 (all values over 50 indicate positive growth). However, the production gauge fell from 58.4 in January to the current value, signaling a moderation in the pace of the expansion in manufacturing [see ]. Production at factories has been ramping up since the second half of 2009 to meet demand from businesses looking to replenish depleted inventory levels. In coming months, further growth in manufacturing is likely to get impetus from reviving consumer demand.

 

In Europeexpansion in manufacturing accelerated to the fastest pace in 2 years, according to the latest reading of the Purchasing Managers’ Index conducted by Markit Economics. The index value for the 16-nation region increased in February to 54.2 from 52.4 a month ago, the highest since August 2007. Euro Zone manufacturing has relied largely on demand from emerging economies in recent months, as unemployment and rising energy costs have weighed heavily on domestic consumption. A weaker euro, which has declined over 5% this year, along with healthy global demand, is likely to keep the Euro Zone manufacturing sector on the road to export-led recovery this year.

The unemployment rate in the Euro Area remained steady at 9.9% in January, having risen just 0.1% since October 2009. Eurostat’s latest report revealed that 38,000 more people were laid off last month, bringing the total number of unemployed persons in the region to 15.7 million. Some 4.2 million people have lost their jobs in the Euro Zone over the last 24 months, leading to a 2.6% increase in the overall unemployment rate. Employment opportunities continue to be the most difficult to come by in Spain, where unemployment persists at a staggeringly high 18.8% of the labor force. In the wider European Union, unemployment was also stable from the previous month at 9.5%, with Latvia recording the highest number of unemployed persons, about 22.9%.

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