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Prospects Daily: US initial claims decline, trade deficit narrows sharply in July

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Important developments today:

1.  Emerging market equities rebound as European debt concern ease

2.  U.S. initial claims decline



Emerging market equities rebound as European debt concern ease. Developing-country shares rose for the first time in three days as the latest bout of worries over Europe’s debt woe eased, though the overall sentiment across stock markets remains cautious. Renewed concerns about the European banking sector and the potential impact on government debt levels have dented demand for risky assets this week. The MSCI Emerging Market Index advanced 0.3% today, but the gauge is still down 3.8% from this year’s high on April 15. Notably, the Philippine benchmark climbed for an eight day and closed at a record high and Russia’s Micex Index gained 0.9% on robust economic growth and rising oil prices. In contrast, China’s Shanghai Composite Index declined 1.4%, the most in two weeks, amid speculation that the government will step up measures to cool the property sector. Meanwhile, emerging-market bond spreads over comparable U.S. Treasuries tightened 6 basis points (bps) to 285bps today, according to JPMorgan’s EMBI+ Index. Stable spreads are prompting emerging market issuers to come to the market. Indeed, Russia’s state bank Sberbank and the Philippine government are expected to issue global bonds next week.


U.S. initial claims decline. The Labor Department reported today that the number of U.S. workers filing new claims for unemployment insurance fell by 27,000 to a total 451,000 for the week ending September 4th.The four-week moving average- which gives a better idea of trends by smoothing out short-term volatility- decreased by 9,250 to 477,750, the lowest level since July, but still some 10,000 higher than existed at the beginning of 2010 [see chart]. Some 4.48 million people were receiving state unemployment checks in the week ending August 28th. This figure does not include Americans receiving extended benefits under federal programs.

Having dropped sharply from the peak levels of 650,000 per week in April 2009, the pace of slowdown in initial unemployment claims has reduced significantly since the beginning of 2010, pointing to persisting weaknesses in the U.S jobs market. Last week the Labor Department reported that 67,000 workers were added to companies payroll. The manufacturing sector has been the engine for job creation from the private sector. However, overall businesses continue to be hesitant in hiring new workers in an environment of subdued sales and uncertainty about the growth prospects for the second half of the year. The continued lack of jobs growth is restraining consumer spending, which accounts for some 70% of the US economy, and serving as a drag on economic activity including recovery in the housing market.



In other U.S. economic news, the U.S. trade deficit contracted sharply in July, posting its biggest drop in 17 months, as exports of airplanes surged and imports fell across the board. The U.S. deficit in international trade of goods and services narrowed by 14% to $42.78 billion from a revised $49.76 billion the month before, the Commerce Department said. In Q2 net exports served as a significant drag to US economic growth, subtracting 3.2% from growth, when GDP expanded by 1.6%. The narrowing of the trade deficit should provide support to GDP growth in Q3.


In Germany, final August consumer price data from the Federal Statistical Office show readings of 0.0% (m/m) and 1.0% (y/y). The annual rate of inflation has thus retreated from 1.2% (y/y) in July. With a robust recovery underway and low downside risks to inflationary pressures, the low inflation levels should provide support to German private consumption.

In related news, Eurostat’s flash inflation estimate rose by 1.7% in July (y/y), up from the 1.4% gain in June. No
breakdown for core inflation was provided, however it has remained flat over the past few months, implying that most of the gains were due to the volatile elements of food and energy prices. With wage growth limited by high unemployment levels, labor market developments will put downward pressure on underlying core inflation levels in the near term.


Among emerging markets:

In East Asia and the Pacific, South Korea’s benchmark interest rate remains constant at 2.25% as stated by South Korea’s Central Bank.

In Latin America and Caribbean, Brazil’s CPI reached 0.04% in August (m/m) with annual inflation through August slowing down to 4.49% for the year. Brazil’s Central Bank targets a 4.5% for the year.

In Central and Eastern Europe and the CIS, Hungary has abandoned its plan for increasing its government budget, accommodating demands from IMF and EU officials to keep it under 3% of GDP in 2011. Latvia benchmark interest rate is kept at 3%, stated the Central Bank today, as the country continues to recover from its recession.

In Sub-Saharan Africa, South Africa’s drops its benchmark rate by 50 bps, as announced by the South Africa Central Bank today in a move to move to attain its inflation target. The new repurchase rate is now 6% per annum, a decision bolstered by lower-than-expected inflation and a continuing negative output gap in Q2 with an outlook for slow growth.


Emerging markets have a number of positives going for them that don't exist in the advanced industrial economies. Along with improved macroeconomic fundamentals, the diversity of opportunities tied to emerging markets has grown substantially over the past decade.

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