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Prospects Daily: US treasury yields at 2-year high on Q2 GDP outturns, China’s current account strengthens, capital account in deficit, Albania cuts interest rates

Financial Markets…U.S. Treasuries extended losses on Wednesday, pushing 30-year yields to nearly a two-year high, after reports showed the U.S. economy grew stronger-than-expected in the second quarter and private sector added jobs more-than-expected in July. Robust U.S. economic data fueled speculation the Federal Reserve may start to scale back its stimulus program sooner than expected. The benchmark 10-year yield widened 6 basis points to 2.67%, while 30-year bond yields touched 3.74%, the highest level since August 2011.

Developing-country shares slid for a sixth day, trimming the first monthly gains since April, led by losses in Malaysian shares. Most emerging-market currencies also weakened as investors remained cautious before the Federal Reserve meeting today. The benchmark MSCI Emerging Market Index fell 0.8%, gearing for the longest losing streak since early April. The index has gained 0.8% thus far this month, bouncing back from a sharp sell-off between late May and June. Notably, Malaysia’s benchmark stock index dropped 1.3% today, the steepest decline since June 13, after Fitch Ratings cut the country’s credit outlook, citing climbing debt stocks and a lack of fiscal reform.

India’s capital outflows continued in July as overseas investors pulled $2 billion from domestic debt this month through July 30, widening the record $5.4 billion outflows in June, and $1 billion from local stocks, pushing the two-month withdrawal to $2.8 billion. Exacerbating capital outflows have put further pressure on India’s currency as the rupee weakened 1.6% against the dollar in July, posting a third monthly decline and falling to a record low on July 8.

High Income Economies...The US economy grew at an annualized pace of 1.7% (q/q saar) in the second quarter of the year. This compares to growth of 1.1% in Q1, which had been revised down from 1.8%. The acceleration in the pace of GDP growth primarily reflected upturns in non-residential fixed investment and in exports, a smaller decrease in federal government spending, and an upturn in state and local government spending. Separately payroll data showed private sector employment rising by 200,000 jobs in July following an upwardly revised increase of 198,000 jobs in June, led by gains in the service sector.

Retail spending in Germany contracted sharply in June, by 1.5% (m/m sa) reversing gains in the previous two months. As a result, overall momentum in spending sank to -0.13% (3m/3m saar) from 4.0% in May.
Spain's current account turned to a surplus of EUR2.4 billion in May, compared to the EUR625 million deficit recorded a year earlier, due mainly to a marked improvement in foreign trade and better performance by the service sector.

Developing EconomiesEast Asia and Pacific: China’s current account surplus rose to $48.2bn in 2013Q2, up from a surplus of $47.6bn in Q1. The current account surplus narrowed significantly amid weak external demand, averaging around 2.5% of GDP, after reaching a record high of 10% of GDP in 2007. At the same time, capital/financial account reported a deficit of $1.6bn, a drop from a surplus of $90.1bn in 2013Q1.
Europe and Central Asia: Albania's central bank cut its key policy rate by 25 basis points to 3.5% - a record low. The previous cut was in January, when the rate was lowered by a similar size. Inflation was 2.3% (y/y) in June, below the central bank’s target of 3 percent.

Serbia’s economy expanded at a slower pace in 2013Q1 as it grew by 0.7% (y/y), down from the revised previous quarter growth of 1.9% (y/y). GDP recorded negative growth in each of the four quarters of 2012, which resulted in a contraction of 1.7% for the whole year.

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