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Prospects Daily: Ukraine’s dollar bonds extend record gains, U.S. housing starts at a 5-year high, India’s central bank leaves key interest rates unchanged

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Financial Markets… Global stocks inched higher on Wednesday along with the dollar and U.S. Treasury yields as investors awaited the Federal Reserve decision on the future of its stimulus program.  The benchmark MSCI world stock index gained 0.4% as Japan’s Nikkei 225 index and German’s DAX index climbed 2% and 1.5%, respectively, helped by weakening yen and robust German business sentiment.  U.S. equities crept higher with the S&P 500 and the Dow rising 0.1% and 0.3% amid an upbeat housing data.  Meanwhile, the greenback appreciated versus the yen and the euro for a second day, and the benchmark U.S. 10-year note yield widened 4 basis points to 2.87%, after posting the steepest drop in a month yesterday.  The 10-year yield has risen sharply from 1.63% at the beginning of May, but it is still lower than the average of 3.49% during the past decade.

Ukraine’s dollar bonds extended their record gains after a $15 billion Russian bailout pledge eased months of uncertainty over the government solvency.  Under the terms of the deal, Russian government will purchase Ukraine’s government debt this year (as early as the end of the week) and next, and will lower natural gas price it charges for the country.  The yield on Ukrainian dollar debt maturing in June 2014 declined 18 basis points 9bps) to a six-month low of 8.58% after plunging more than 600 bps yesterday. Notably, credit default swaps on Ukraine’s sovereign debt fell 263 bps to 778 yesterday in the wake of the bailout news, their biggest drop in more than 5 years.

High Income Economies…U.S. surged up 22.7% (m/m sa) from a seasonally adjusted rate of 889,000 in October to an annual rate of 1.091 million in November, their highest level since reaching an annual rate of 1.103 million in February 2008.  October housing starts were up 1.8% from the September rate of 873,000, which reflected a 1.1% decrease from the revised August rate of 883,000.

At the same time, U.S. homebuilder confidence, as measured by the NAHB/Wells Fargo Housing Market Index climbed more than expected from 54 in November to 58 in December, its highest level since a matching reading in August, which represented a nearly eight-year high.

The Markit Flash U.S. Services PMI Business Activity Index increased to 56.0 in December, up from 55.9 in November.  Due to the fastest increase in new business since April 2012, services output continue to rise strongly.  In addition, employment in the service sector accelerated to a record high and business expectations are at a near three year high.

The number of people claiming U.K. Jobseeker's Allowance fell by a more-than-expected 36,700 to 1.27 million in November, the lowest figure since January 2009.  During August to October, the jobless rate dipped unexpectedly to 7.4%, down 0.3 percentage point from May to July and reached the lowest since April 2009.

At the same time, the Bank of England decided to leave unchanged the 0.50% record low benchmark interest rate and quantitative easing at GBP 375 billion.
Sentiment among German business as measured by the Ifo Institute business climate index for the industrial and trade sectors, rose from 109.3 in November to 109.5 in December, its highest level in twenty months, signaling that the economy could carry the growth momentum through next year.

Developing Economies…East Asia and Pacific: Malaysia’s annual headline inflation, measured by the consumer price index, rose for the third consecutive month to 2.9% in November.  Contributing to this increase, prices of alcoholic beverages and tobacco rose 14.2% (y/y); transport prices remained unchanged at 4.9%, while cost of non-durable goods increased 3.9%.   Food prices rose moderately, by 3.9% from 3.7% in October; but cost of housing, electricity and other fuels accelerated to 2.3% from 1.8% in October.  Mitigating these increases, prices of durable goods fell 2.3%, prices of communication contracted 0.6% and cost of clothing and footwear decreased 0.3% (y/y). Month-on-month, the CPI rose 0.3% in November.
 
China’s Conference Board leading economic index rose for the third consecutive month in November, advancing 1.4 percentage points (m/m) to 278, following a 0.7 percentage point increase in October and a 1 percentage point increase in September.  The increase in November was mainly driven by the real estate sector and new lending.  At the same time the coincident indicator, a gauge of current economic activity, advanced 0.8 percentage points to 252.7 in November, after increasing by 0.8 percentage point in October and 0.2 percentage point in September.
 
Meanwhile, foreign direct investment flows into China rose 2.3% (y/y) in November, up from a 1.2% growth in October, and higher than the consensus forecast of 1.1% growth. For the year to November, FDI flows to China rose 5.5% (y/y) to US$105bn.  
 
South Asia: At its December 18th meeting, India’s central bank decided to keep its key interest rates unchanged despite the recent sharp increase in retail and wholesale price inflation, citing the need for more economic data given the uncertainty surrounding the short-term path of inflation and the weak state of the economy.  The repo rate, the rate at which the central bank lends to banks, was left unchanged at 7.75%, and the reverse repo rate, the rate at which banks accept deposits from other banks was also left unchanged at 6.75%.   The cash reserve ratio was kept unchanged as well, at 4%, and the marginal standing facility, which was introduced to help stabilize the exchange rate, was also left unchanged at 8.75%
 
Sub-Saharan Africa: South Africa’s composite leading economic index, a gauge of overall economic activity, rose 0.2 percentage point (m/m) to 100.9 in October after falling to 100.6 in September.  Five of the 10 sub-components of the index increased, with the largest contribution to the October rebound coming from an increase in the number of residential building plans passed and the rise in the average hours worked per factory worker in the manufacturing sector.  However, the coincident economic index, a gauge of current economic situation, decreased to 114.1 in September from 114.7 in August; and the lagging index, which measures the past performance of the economy, edged up to 102.5 in September from 102.0 in August.

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