60639 Daily Brief Economics and Financial Market Commentary March 29, 2007 Mick Riordan (x31289), Cristina Savescu (x80812), Eung Ju Kim (x85804), Shane Streifel (x33867) Annette DeKleine (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: www.worldbank.org/gem Market jitters appear to subside on Thursday. A recovery in equity markets and testimony from Federal Reserve Chairman Bernanke helped ease investor nervousness Thursday, while the unfolding situation in the Gulf (Britain/Iran dispute regarding captives) pressured oil prices to a six-month high. The yen fell across the board and high-yielding securities in currencies such as the Australian-and New Zealand dollars rallied as investor re-entered the carry trade, reversing Wednesday’s Forex movements. Yen dropped 0.5% vis-à-vis the dollar to ¥117.38 per USD and dropped 0.7% to ¥156.69 per euro. European and Asian stock markets rallied on Thursday and early signs for U.S. stocks are positive in early trading. U.S. GDP revised up to 2.5% for fourth quarter. In a last revision to GDP for the final quarter of 2006, the Department of Commerce raised its earlier growth estimate of 2.2% to 2.5% (saar), on the back of offsetting changes in housing and business investment on one hand (negative) and inventories and net exports on the other (positive for growth). The figures place GDP for 2006 at a 3.3% clip, up from 3.2% in 2005. Growth during the third quarter was unchanged at 2%. The largest shift in growth came in investment (-9.1% vs. -8.5% earlier), with residential investment (homebuilding) falling at a 19.8% annual pace, the most since 1991, and subtracting a full 1.2 points from growth; business fixed investment dropped to a 3.1% pace compared with a 10.3% increase during the third quarter, mirroring in part a reluctance to expand capital when manufacturing remains swamped with “unwanted” inventories. Indeed stocks were reduced at a slower pace during the quarter, the shift adding 0.2 points to growth (to a contribution of -1.2 versus -1.4 earlier) the main factor in today’s revision. Export performance was marginally ahead of earlier releases, gaining 10.6% in the quarter, while imports contracted at a 2.2% rate, such that the growth contribution from trade picked-up 0.1 to +1.7 points—an unusual development in the U.S. economic landscape—suggestive of the weakening in domestic demand. This combination of “initial conditions” plus more recent downbeat indicators on housing, retail spending and factory orders does not bode well for growth in near future. “First quarter growth will be weaker,” notes Robert Mellman of JPMorgan-Chase in New York, “February numbers looked pretty terrible across the board.” U.S. initial unemployment claims fall. Despite softening economic activity, labor markets continue firm, notably in the services sector, with the number of first-time applicants for unemployment insurance dropping a sizeable 10,000 in the week of March 23, falling to 308,000. The decline of 3.1% in the week brought claims to lowest levels since January, and additions to the dole queue on the margin have fallen by some 8.6% from the like period of 2006, suggesting that job declines in housing and related sectors and in manufacturing have been more-than offset by increases in service positions [see Daily Chart at http://GEM or www.worldbank.org/gem]. “Anecdotal reports suggest that businesses are having difficulties recruiting well-qualified workers in a range of occupations,” Fed Chair Bernanke told the Joint Economic Committee of Congress in testimony yesterday. Among emerging markets...in East Asia, the central bank of Taiwan (PC) brought its policy interest rate closer to a “neutral” stance, worried that inflationary pressures are building. The discount rate on 10-day loans to banks was raised by an eighth of a percentage point, while, anticipating success in this venture, the bank cut its 2007 forecast for inflation to 1.5% from 1.8% previously. Manufacturing production gained 0.5% in February (m/m) in Korea, as output of cars and mobile phones increased. In Central and Eastern Europe, the Czech central bank left its key interest rate unchanged at 2.5% for a sixth consecutive month, as the koruna’s appreciation led to an easing in inflation. Central Bank deputy Governor Ludek Niedermayer said that there remains a possibility “of a rate movement in either direction”. In Sub-Saharan Africa, the unemployment rate remained relatively unchanged in South Africa at 25.5% in September, according to the bi-annual labor force report, as the number of jobless increased to 4.39 million from 4.28 million, despite strong economic expansion last year. Meanwhile producer price inflation eased to 9.5% in February (y/y) down from 9.8% the previous month, helped by lower gasoline prices. Higher oil prices are likely to boost PPI inflation in coming months, while drought in key crop-growing areas could cause food prices to jump. ***************************************************** The Daily Brief is a summary of economic news items 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 with GEM development partners, under the terms and conditions of use agreed upon login (at www.worldbank.org/gem) to the extranet GEM site. Feedback and requests to be added to or dropped from the distribution list, may be sent to eriordan@worldbank.org.