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Prospects Daily: US trade deficit widens in November, Inflation in China accelerates, India’s industrial production slows

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Financial Markets…Italian government bonds advanced for a fourth day, pushing the yield difference over comparable German bunds down to less than 250 basis points (at 248 bps) for the first time since July 2011, amid growing optimism that the region’s debt crisis is easing. The country’s 10-year bond yields fell as much as 7 bps to 4.09%, the lowest level since November 2010.

Developing-country equity funds received the biggest weekly inflows on record in the week ended January 9, posting net inflows of $7.4 billion, as the U.S. budget deal and growing signs of China’ economic rebound boosted demand for riskier assets. Meanwhile, emerging-market bond funds attracted their second-largest inflows of $2 billion for the like period.
 
Chinese shares fell the most in the Asian region, with the benchmark Shanghai Composite Index slumping 1.8%, after the country’s consumer prices rose more than expected in December. Chinese equities have gained 17% from a nearly 4-year low on December through yesterday, hinting at a bull market.

High-income Economies…The US trade deficit widened sharply to $48.7 billion in November from $42.1 billion the previous month, mainly due to a 3.8% (m/m) surge in imports, the largest percent gain in 8 months. This was driven by demand for consumer goods imports (including automobiles), which rose $4.6 billion. Imports of petroleum products however fell $870 million. Import prices fell 1.5% in the 12 months through December, with prices for fuel down 6.4% over that period and non-fuel prices up just 0.1%.

Industrial production in the UK rose 0.3% (m/m) in November following a 0.9% (m/m) fall in October, mainly due to a strong rebound in oil and gas extraction after maintenance of the Buzzard North Sea field was completed. Manufacturing output, however, fell 0.3% from October, when it dropped 1.3%, indicating continued weakness in the economy toward the end of 2012. 

France’s current account deficit was broadly unchanged at 2.9bn euro in November from the previous month. The goods trade account showed a deficit of 5bn euros, lower than the 5.1bn euros deficit in October.
The pace of contraction in Spanish industrial production worsened in November, with output dropping 7.2% (y/y), following a 3.1% drop recorded in October.

South Korea’s central bank held its key policy rate at 2.75%, citing easing demand side pressures that are expected to keep inflation low in the near term. Inflation fell to 1.4% (y/y) in December from 1.6% in November.
 
Developing Economies…Inflation in China accelerated to 2.5% (y/y) in December from 2% in November, to the highest level in seven months, as recent cold weather pushed food prices up. Food prices jumped 4.2% in December (y/y) with vegetable prices leading the increase. Inflation rate for 2012 was 2.6%, well below the government's 4% target. Meanwhile, producer prices in China continue to decline, but the pace of decline in slowing. The industrial producer price index fell 1.9% (y/y) in December following a 2.2% decline in November.

India's industrial production contracted 0.1% (y/y) in November compared with a 8.3% expansion in October. India's exports continue to decline slowing 1.9% (y/y) in December. The pace of decline is however slowing compared to 4.2% recorded in November. Imports increased by 6.3% to US$42.54 billion contributing to a monthly trade deficit of US$17.67 billion in December, which was nevertheless lower than US$19.3 recorded in November.  

Mexico's industrial production rose 2.8% (y/y) in November, somewhat slower than the 3.6% annual increase in October. Expansion was led by manufacturing and mining and utility sectors, while growth in construction declined 1.1%. On a monthly basis, industrial activity was up 0.92% in November from October and showed reversal for a m/m 0.9 contraction recorded in October.

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