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                      DECPG Daily
        Economics and Financial Market Commentary
                    October 19, 2009
 Mick Riordan (x31289), Cristina Savescu (x80812), Nadia Islam Spivak (x80504)
   Eung Ju Kim (x85804), Shane Streifel (x33867), Annette De Kleine (x34710)
  You’ll find recent issues of this Daily and lots of other current analysis and high-frequency data at our
              intranet website: http://gem or for external users http://www.worldbank.org/gem.


Foreign demand for U.S. government debt remains strong. Foreign investors’
appetite for U.S. Treasuries remained firm in August, even though China pared its
holdings. Foreigners were net purchasors of U.S. Treasuries for a fourth month in
succession during August as the U.S. government sold a record amount of debt to
cover an estimated budget deficit of $1.4 trillion in the fiscal year to end-September.
Against this background, the downward pressure on the dollar continues. Foreign
investors owned $3.45 trillion of Treasuries in August (all-time highs), up from $3.08
trillion in December, according to Treasury Department data. China, the largest foreign
owner of U.S. government debt, trimmed its holdings by $3.4 trillion to $797.1 billion in
August, while Japan, the second largest foreign holder, increased its holdings to $731
billion, from $724.5 billion in July. Treasury data also showed Russia boosted its
investment in U.S. government debt in August to $121.6 billion from $118 billion.

BOJ and indicators suggest more upbeat Japan outlook. The Bank of Japan today
raised its assessment of the economy’s health for a second month, pointing to “…signs
of picking-up appearing throughout the economy”. The Bank noted that companies
appear to have cut capital spending at a slower pace during the third quarter, and
access to private funding sources has improved. A concern is the strength of the yen,
which has appreciated against the dollar by about 9.5% in the past six months, and may
be coming to have an impact on trade prospects; exports indeed have slowed
considerably in the last months.
In other Japanese economic news, an index of activity for the services sector increased
for a third month in August, beating expectations by gaining 0.3% to a level of 97.1, the
highest since January. Purchases of services appear to be gaining at a faster pace than
that of goods. But analysts fret that recent advances may not be sustained due to high
unemployment and falling wages.
Among emerging markets...in Latin America and the Caribbean, Peru’s economy
expanded in August for the first time in three months, as construction grew 5.2% (y/y),
while oil and gas output rose 22% and agriculture was up 1.7%. Meanwhile
manufacturing contracted 9.8% and metals output fell 1.4% (y/y)
In Central and Eastern Europe, Hungary’s central bank cut its key interest rate 50 basis
points to 7%, bringing it to lowest levels since July 2006, and marking the fourth
consecutive reduction in as many months. The country is facing its worst recession in
18 years and the central bank expects GDP to contract 6.7% during 2009. Poland’s
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industrial output declined 1.3% in September (y/y), less than expected, after a 0.1%
increase in August. Poland is the only EU member to avoid recession in the aftermath of
the financial crisis.




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