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Prospects Daily: U.S. non-manufacturing sector activity expands after three months

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Important developments today:

Corporate bond risks in Europe to fall.

U.S. services sector expands after 3 months.

Poland's budget deficit to reach 7.5 percent of GDP in 2010.


Corporate bond risks in Europe to fall. The cost of insuring European corporate bonds against default tightened Wednesday as the market reacted positively to the European Commission’s endorsement of Greece’s budget-reducing plan. Credit-default swaps on the Markit iTraxx Crossover index, which lets investors hedge against losses and speculate on credit quality of a basket of 50 mostly sub-investment grade European corporate borrowers, dropped 14 basis points (bps) to 434 bps after climbing for the past three weeks, according to JPMorgan Chase & Co. Credit-default swaps on Greek government bonds also fell today, signaling that investors are more confident of an eventual turnaround in Greece’s deficit crisis, which has pushed credit spreads to the widest in a month. Greece’s sovereign CDS spreads dropped 13.5 bps to 373.5 bps after surging to a record 422 bps on Jan. 28. Meanwhile, the cost of insuring Portuguese sovereign debt against default reached a record high of 183 bps Wednesday as easing of Greek concerns prompted investors to turn their focus to other festering budget issues in the Euro Zone economies.


Source: Institute of Supply Management


U.S. services sector expands after 3 months. The Institute of Supply Management’s index of activity in the non-manufacturing sectors of the economy rose for the first time in three months in January, increasing to 50.5 from 49.8 a month ago (an index value above 50 signals expansion in activity). While a return to growth in the dominant sector of the economy is encouraging, expansion was reported in only four of the eighteen service-based industries surveyed, with major sectors such as retail and transportation still reporting a downward trend in activity over January. Activity in the service sector has hit a bumpy road since October, although the recovery is expected to firm over the coming months as consumer spending continues to step up from depressed levels, and the rate of job losses moderates. 

Euro Zone manufacturing and service sector expansion slows…The composite index of a Purchasing Managers Index (PMI) for the Euro Zone fell to 53.7 today from a reading of 54.2 in December, indicating a moderation in the pace of the region’s economic recovery. The gauge of manufacturing activity increased from 51.6 to 52.4, but that of the services sector dropped from 53.6 to 52.5 in January. Whether the recovery, particularly that of the manufacturing sector, is seat to weaken in the first quarter will become more evident with the release of new data on German manufacturing orders (Wednesday) and industrial production (Thursday).

Among emerging markets:

In Central and Eastern Europe and the CIS, Romania’s central bank cut its key interest rate by 50 basis points to 7 percent for the second time this year. The central bank left its reserve requirements on foreign exchange deposits at 25 percent and requirement sin lei at 15 percent.
Poland’s budget deficit amounted to 23.8 billion zloty in 2009, the equivalent of 7.2 percent of GDP, and 88 percent of the government’s target. This compares with a deficit of 24.6 billion zloty in 2008. The budget deficit is projected to reach 7.5 percent of GDP in 2010.


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