74748 DECPG Daily Economics and Financial Market Commentary January 2, 2013 Allen Dennis (84812), Eung Ju Kim (85804), Sanket Mohapatra (37721), Ekaterine T. Vashakmadze (36773) You’ll find recent issues of this Daily and lots of other current analysis and hi gh-frequency data at our website: http://www.worldbank.org/gem Financial Markets…Global stock markets rallied on U.S. budget deal with European benchmark index rising 1.9% to a 19-month high level and Asian shares jumping 2.1% to a 17-month high level. Notably, stock markets in China and Japan are closed today and tomorrow for public holidays. U.S. equities also opened higher with the S&P 500 index rising 1.5% in early morning trade. U.S. Treasury 10-year yields rose 7 basis points to 1.83% and comparable German bund yields advanced 11 bps to 1.43% as passing of U.S. budget bill damped demand for safe-haven government bonds. The yield on U.K. gilt also climbed as high as 14 bps to 1.96%, In contrast, the 10-year yields on Italian and Spanish bonds dropped 19 bps to 4.31% and 15 bps to 5.11%, respectively. The dollar and yen fell against the euro in the wake of U.S. fiscal deal, depreciating 0.5% to $1.3273 per euro and 0.8% to 115.40 per euro. Furthermore, the Dollar Index, which tracks the greenback versus the currencies of six major U.S. trading partners, dropped 0.3%, and the yen weakened against the all 16 of its major counterparts as well. High-income Economies…The US Senate and House of Representatives passed a bill to avoid the “fiscal cliff� of automatic tax rises and spending cuts that was due to take effect on January 1. Under the bipartisan deal, earlier income tax cuts will expire only for individuals making over $400,000 a year (and for couples making $450,000 a year) taking their rate to 39.6% from the current 35%, while automatic spending cuts will be delayed by two months. However, an earlier payroll tax cut of 2 percentage points on workers’ first $113,700 of income was not extended, raising the rate back to 6.2%. The Institute for Supply Management’s factory index for the US rose to 50.4 in December from November’s 49.5, which was the lowest since July 2009, indicating that manufacturing likely expanded last month (A reading above 50 indicates expansion). Markit’s manufacturing Purchasing Managers’ Index (PMI) for the Euro Area edged down to 46.1 in December from 46.2 in November, suggested that manufacturing continued to contract at a similar pace. The index has been below the 50-mark for 17 months. Germany’s PMI fell to 46.0 in December from 46.8 in November, partially offset by increases in France (to 44.6 from 44.5) and Italy (to 46.7 from 45.1). Singapore’s GDP expanded an annualized 1.8% (q/q) in the fourth quarter, following a steep 6.3% contraction in the third quarter. However, manufacturing shrank by an annualized 10.8% (q/q) in Q4, faster than the 9.9% contraction in Q3, which was offset 1 by a rebound in services sectors. Singapore’s GDP grew by 1.1% (y/y) in Q4, bringing growth for 2012 to 1.2%, down from 4.9% in 2011. South Korea’s exports fell 5.5% (y/y) in December after two straight months of year-on- year expansion. Developing Economies…Angola's central bank kept its base rate (BNA) steady at 10.25% in the context of stable inflation and exchange rates. The National Bank of Angola said credit to the economy returned to growth in November, continuing the trend from previous months. Angola's inflation rate was largely steady in November, with the inflation rate at 9.83% (y/y) compared with October's 9.76%. China's official purchasing managers' index at 50.6 – unchanged from November – also pointed to steady growth in manufacturing activity in December, despite a marginal slowdown in production. China’s HSBC manufacturing purchasing manag ers' index meanwhile rose to 51.5 in December from 50.5 in November and to 19-months high, suggesting that economic recovery is firming up and that manufacturing sector is expanding. Total new orders increased at the quickest pace since January 2011, despite a fall in new export orders. Output at manufacturing plants grew for a second consecutive month and at the fastest rate in 21 months. Indonesia's inflation eased to 4.3% (y/y) in December from 5.32% in November and well within the central bank’s targeted 3.5%-5.5% band, providing room for the central bank to retain its record low 5.75% rate. Indonesia's Markit’s manufacturing PMI, which fell to 50.7 in December from 51.5 in November suggests a continued expansion in manufacturing sector in December, but indicates that the pace of growth may be slowing down. Pakistan's inflation increased in December to 7.9% (y/y) from 6.9% in November after slowing for six straight months. Alcoholic beverages and tobacco prices showed the biggest annual growth of 18.2% in December. Cost of clothing and footwear climbed 15.8% and food and non-alcoholic beverages by 7.2%. Uruguay's central bank raised its policy rate by another 25 basis points to 9.25% in an attempt to rein in inflation and keep inflationary expectations in check. The inflation rate in October rose to 9.1% compared with September's 8.6%, well above the central bank's 4-6 percent target range. Vietnam's Markit PMI, which dropped from to 49.3 in December from 50.5 in November, marking the eighth decline in activity in the past nine months, suggests that manufacturing sector contracted in December, hurt by disinvestment of inventory holdings and stagnating production volumes. Recent issues and other current analysis is also available on the Prospects blog 2 ***************************************************** DECPG Daily is an informal briefing for Bank staff whose responsibilities require that they stay abreast of changes in global markets. The views expressed here are those of the various authors and do not necessarily reflect those of the World Bank Group's Executive Directors or the countries they represent. The content is subject to copyright and is not for quotation outside of the World Bank. The Prospects Group of the World Bank is pleased to share this content under the agreed terms and conditions of use. Feedback and requests to be added to or dropped from the distribution list may be sent to adennis@worldbank.org. 3