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Prospects daily: Spreads on Greek bonds surge to record peak

Global Macroeconomics Team's picture

Important developments today:

1. Greek risk premia surge

2. U.S. unemployment claims soar on seasonal fluctuations

3. German industrial production unchanged in February


Greek bond spread hits record high. As investor concerns over a potential Greek sovereign default intensifies, Greek government bonds continued to sell off in today’s trading, pushing borrowing costs to record levels. The yield premium on the 10-year government bond over German bunds (the benchmark for borrowing in Europe) soared to over 450 basis points (bps), the most since the euro’s inception. That spread averaged about 65bps in the five years through November, before worries over the country’s external financing deepened. Increasing risk premiums to hold Greek debt suggests (among other factors) that investors are increasingly concerned about the effectiveness of the EU/IMF financial package hammered out last month.

Greek stocks also took a beating Thursday, with the country’s benchmark stock index losing more-than 5%, on concerns that the country’s deficit situation will continue to deteriorate. Market sentiment had already been affected by Wednesday’s request for more government aid by Greece’s four largest commercial banks, which are facing difficulty in accessing short-term funding in the country’s interbank money market.

U.S. initial unemployment claims soar on seasonal fluctuations New claims for unemployment insurance increased by an unexpectedly large 18,000 persons in the week ending April 2 to 460,000, according to the Labor Department’s report today. The 4-week moving average, which provides a less volatile measure of the trend in layoffs, increased by 2,000 to 450,250, still continuing on an overall declining trend in claims. Labor Department analysts have indicated that seasonal factors surrounding the floating Easter holiday make it particularly difficult to tabulate an accurate picture of labor markets, making April a traditionally unstable month for employment data.

European retail turnover falls for a second month. Retail volumes in the 16-nation Euro Zone tumbled at the fastest monthly pace seen in a year, as consumers continued to rein in spending. The volume of sales reported by Eurostat dropped 0.6% February (m/m) following a 0.2% fall a month earlier. Euro Zone unemployment increased to 10% of the labor force in February, despite expectations that the worst of the downturn was past. Households are getting increasingly concerned about- not just job security, but also the income implications of fiscal tightening, particularly in the southern Euro Zone countries.

And amid weak consumer spending and rising apprehensions about a Greek sovereign debt default, the European Central Bank signaled today that it does not expect to move forward with tightening monetary policy anytime soon.


Source: Economy Ministry


German production unchanged in February on inclement weather. Industrial output was unchanged in February following a small 0.1% increase in January (m/m), as severe winter weather temporarily halted manufacturing activity, and dampened construction work. Though production gained 5.3% in February from a year ago, that positive reading is a result of favorable year-on-year comparisons to the peak crisis period; indeed industrial activity remains almost 17% below the pre-crisis production figures from January 2008 according to the Economy Ministry’s index of industrial production.

Industrial output, which recovered at a consistent pace in the second and third quarters of 2009, appears to have been stagnating in the past few months, with almost no increases in monthly output. Indeed, the momentum in industrial output (3 month moving average, saar) shifted into negative territory with the latest data to a decline of 3.7%. Today’s data increases the likelihood of weak first quarter growth figures in Germany. However, manufacturing orders have remained steady from both external and domestic sources, reducing the likelihood of a double dip in factory output.

Japan machinery orders off in February, but momentum still strong. Following a sharp falloff in January (3.7%, m/m), orders received by Japanese manufacturers dipped 0.4% during February, as a combination of seasonal factors (affecting exports to China for example) and underlying trends in domestic demand (investment still on the weaker side) played a role. It’s clear that business capital outlays have lagged well behind the surge in export performance [February trade figures reported today show export volumes moving up to a 66% annualized growth path, with imports “trailing” at more-than 50%].

Factory orders themselves are up a vibrant 62% on the same basis. These trends will provide important underlying support for GDP growth in the early part of 2010. And indeed, the Bank of Japan announced following yesterday’s policy meeting that “… exports are driving the expansion.” This is a much more upbeat assessment of economic conditions that provided just a month ago.


Among emerging markets:

In East Asia and the Pacific, Thailand’s consumer confidence retreated for a second consecutive month in March to a level of 69.8 from 70.9 in February, reaching the lowest point in four months. This is on concern that political unrest in the country will harm the recovery, according to data released by the University of the Thai Chamber of Commerce.
In South Asia, Sri Lanka’s exports fell 3.9% in January (y/y) as foreign demand for textiles and garments remains soft; exports of these items dropped 16.9% in January (y/y). Exports could fall further in coming months after the EU announced on February 15th that it will suspend preferential trade benefits to Sri Lanka due to human rights shortcomings.

In Latin America and the Caribbean, Chile’s trade surplus registered $1.36 billion in March, as exports surged 32% (y/y) to $5.46 billion, highest levels since January on a strong increase in copper exports. Meanwhile imports rose 39% to $4.09 billion. Brazil’s consumer price inflation accelerated to 5.17% in March (y/y), above the central bank’s 4.5% target, and marking a 10-month high. This has served to raise expectations for a rate hike later this month.
In Central and Eastern Europe, Serbia’s central bank cut its key interest rate to a record-low 8.5%, as it expects weak demand to keep inflation in check.

In Sub-Saharan Africa, South Africa’s manufacturing expanded 2.7% in February (y/y), slower than the revised 3.5% gains recorded for the previous month-- and slower than widely anticipated. On the month output fell a seasonally adjusted 1.5%. Meanwhile business confidence remained little changed in March, at 82.3 according to the South African Chamber of Commerce.

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