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Prospects Daily: U.S. Treasury securities advance before today’s Fed meeting, BoE signals possible rate increase, South Africa’s annual consumer price inflation at near 5-year high

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Financial Markets

U.S. Treasuries prices advanced on Wednesday as investors speculated the Fed will lower its economic outlook following today’s policy meeting. Yields on two-year notes, which are more sensitive to changes in expectations for monetary policy than longer-term securities, soared to the highest level since September yesterday with the strong inflation data and more bearish bets towards the Fed’s policy, but they fell 3 basis points (bps) to 0.46% this morning. Further, yields on the benchmark 10-year notes also slid 2 bps to 2.63% after climbing 6 bps yesterday.

The Russian ruble gained against the dollar for the first time in six days and Ukrainian bonds advanced amid signs that geopolitical tension between two countries will ease after three months of clashes. The rubble strengthened 0.8% to 34.54 per dollar, set for the first increase since June 9. Ukraine’s government bonds due in 2017 rallied, pushing yields down by 87 bps to 9.31%. Benchmark stock indexes for Russia and Ukraine climbed 0.7% and 0.6%, respectively.

High Income Economies

While deciding to leave key interest rates unchanged in June, minutes of June's monetary policy meeting showed the Bank of England could raise rates before the end of this year. Although slack estimations remain unchanged, policymakers said they were uncertain and found it somewhat surprising that markets attached only a relatively low probability of a Bank Rate increase this year.

Signaling deteriorating economic expectations, the Centre for European Economic Research / ZEW economic expectations index for Switzerland fell by 2.6 points to 4.8 in June. The index reflects the expectations of surveyed financial market experts regarding the economic development of Switzerland on a six-month time horizon. At the same time, the assessment of the current economic situation was more positive in June, with the corresponding index rose by 8.3 points to 57.1 in June.

In the latest sign of returning investor confidence, Cyprus has issued a new five-year bond just over a year after the country was racked by a banking crisis. The €750m bond, to yield 4.85%, matures in June 2019.

Developing Economies

East Asia and Pacific

At its meeting of June 18th 2014, Thailand’s central bank decided to leave the benchmark interest rate unchanged at 2.0% for the second consecutive meeting as expected, citing the need to lend support to a sustained economic recovery given reduced political uncertainties in the country. At the same time, the economic growth forecast for 2014 was lowered to 1.5% from the 2.7% growth that was forecast in March.

Sub-Saharan Africa

Driven by higher food prices, South Africa’s annual consumer price inflation accelerated to 6.6% in May, the fastest pace in nearly 5 years, up from 6.1% in April, remaining above the central bank’s target range of 3%-6%. Excluding non-alcoholic beverages, food prices rose 9.1% (y/y) in May the highest annual rate of increase since February 2012. Additional upward pressures came from transport costs, which rose 8.9% following a 6.8% increase in April. Month-on-month consumer price inflation rose 0.2% in May, slowing from April’s 0.5% increase.

Meanwhile, South Africa’s retail sales improved in April, rising by a seasonally unadjusted 1.8% (y/y) after inching up a downwardly revised 0.8% in March. Annual retail sales growth has slowed since reaching a peak of 6.4% in January. On a monthly basis, retail sales growth was flat in April, after falling for two consecutive months in March (-1.1%, m/m) and February (-0.4%).

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