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Prospects Daily: U.S. treasuries continue to decline, while Euro Area output increases in January

Global Macroeconomics Team's picture

Important developments today:

1. U.S. treasuries continue to decline after Fed’s upbeat economic outlook

2. Euro Area output increases in January yet concerns remain


U.S. treasuries continue to decline after Fed’s upbeat economic outlook. U.S. Treasuries extended their losses on Wednesday, pushing 10-year note yields to more than four-month high, after the Federal Reserve acknowledged signs of strength in the U.S. economy. An upbeat Fed statement eroded demand for the safe-haven government debt, as equities surged. The Fed said in a statement yesterday it expects “moderate economic growth” over coming quarters and predicted a gradual decline in the unemployment rate. Yields on the benchmark 10-year securities widened 6 basis points (bps) to 2.19%, after reaching 2.20% earlier, the highest level since October 31st. Yields on 30-year bonds increased as much as 9 bps to 3.36%, also the highest level in more than four months. The U.S. Treasury will auction $13 billion of 30-year bonds later in the day, following a sale of $21 billion 10-year notes on Tuesday and Monday’s sale of $32 billion 3-year notes.

Euro Area output increases in January yet concerns remain. After falling consecutively in the two previous months, Euro Area industrial production rose by 0.2% in January on a month-on-month basis [see at http://prospects or]. Performance however differed by member country. The blocs economic powerhouse, Germany, roared ahead with a healthy 1.5% (m/m) output increase in January, while austerity hit Italy saw its output fall by 2.5%. Though the 0.2% increase in output is better than in recent months, much of this was from an increase in output from the energy sector (1.4%) – buoyed on by the cold winter spell. However, reflecting weak domestic demand, non-durable consumer goods fell 0.7% (m/m), thus bringing into question the sustainability of January’s uptick. With high gas prices and Euro Area inflation remaining sticky (inflation was 2.7% in February, well above the ECB target) household spending will continue to face headwinds. The Euro Area is most likely in a mild recession. It contracted by 0.3% (q/q) in Q4 2011 and the European Commission projects Euro Area GDP growth to contract by 0.3% in Q1 2012.

Among Emerging Markets

In Europe and Central Asia, Russia kept its benchmark refinancing rate steady at 8.0% citing high real wage growth in the public sector amid moderate output growth and weak confidence indicators. Russia’s inflation rate dipped to a decade-low of 3.7% (y/y) in February.  

In South Asia, India’s benchmark wholesale price inflation accelerated to 6.95% (y/y) in February from 6.55% in January driven mostly by a rebound in food price inflation and a 12.8% increase in fuel prices. Sri Lanka held its benchmark repurchase rate at 7.5% because of recent policy measures that are expected to lead to moderation of aggregate demand which would offset to some extent recent increases in administered prices. 

In Sub-Saharan Africa, Mozambique’s central bank cut its key lending interest rate by 125 basis points to 13.75% from 15%, noting favorable inflation trends and to set the conditions to create additional space for bank financing of the private sector.

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