60740 Daily Brief Economics and Financial Market Commentary September 11, 2007 11:25 am Mick Riordan (x31289), Cristina Savescu (x80812), 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: www.worldbank.org/gem Emerging market debt-spreads continue to widen. The average spread for emerging market bonds over similar-maturity U.S. Treasuries increased by 10 basis points to 257 points on Monday, widening for a second consecutive session, according to the JP-Morgan EMBIG index. The risk premium has increased 16 points since Friday, after a disappointing U.S. job report heightened concerns that the world’s biggest economy may be slowing. Meanwhile, emerging market debt-prices remain firm, with a positive daily return of 0.09%. Most investors appear to be holding-on to high-yielding bonds in a slow market. China’s equity markets hit by inflation scare. China’s consumer price inflation picked-up to 6.5% in August (y/y), the quickest pace in ten years, after rising 5.6% in July. Concerns that higher inflationary expectations will prompt the central bank to raise interest rates and curb bank lending led to a 4.7% decline in the stock market, the largest fall in more-than two months. Meanwhile the trade surplus surged 33% in August (y/y) to $24.97 billion, the second highest monthly total, as exports jumped 22.7% (y/y) while import growth trailed behind at 20.1%. U.S. trade balance improves modestly in July. On the back of strong goods exports, and despite a ramp-up in the landed price of crude oil, the U.S. balance on goods and services trade narrowed slightly to $59.2 billion in July from $59.4 billion in the month preceding. Goods exports continued to turn in a solid performance in the month, jumping 3.7% in July (m/m), on the heels of a 1.6% gain in June. Indeed, exports over 2007 to date stand 11.4% over the like period of 2006, having breached records in each of the last five months. At the same time, goods imports increased 2% in July, following a weak 0.9% gain in the prior month, reflecting reduced U.S. demand growth, in large part tied to the slump in housing and in several manufacturing sectors. Contrasted with the positive export story, imports have registered a 4.4% increase 2007 to date, contrasted with an 11% gain in 2006. The U.S. deficit on crude oil and refined products widened by $500 million in the month on an escalation in global oil prices; yet over the year to date, this shortfall has been reduced by some $6.5 billion. The non-oil goods balance continued to improve, from a recent trough of $48.4 billion in March to $44.1 billion in July, a welcome improvement of over $4 billion [see Daily chart at http://GEM]. This development points as well toward the (very) gradual process of shifting “global imbalances” that should accompany a rotation of growth and trade away from the United States, toward Europe and the developing world. European Commission lowers growth projections for 2007. Citing increased uncertainty in financial markets and the strengthening of the euro, the European Commission (EC) lowered its 2007 GDP growth forecast for the thirteen euro- area member countries to 2.5% from previous forecasts of 2.6%. Forecasts for Germany and France were cut to 2.4% and 1.9%, from earlier views of 2.5% and 2.4% growth, respectively. The EC joins organizations including the IMF, the OECD and the European Central Bank (ECB) in becoming more pessimistic on the outlook for growth in the euro zone. “The turmoil has clearly titled the balance of risks to the downside, the Commission said. “This points to reduced growth momentum into 2008 as well.” Japan machinery orders jump in July. Though notoriously volatile, Japan’s core machinery orders for July surged 17% over June (m/m) well exceeding expectations. The increase, the largest in nearly four years, was led by demand for electronic machinery, and is welcome news after yesterday’s report that GDP contracted 1.2% in the second quarter. The strong increase in orders suggests that capital spending should support growth in the third quarter; but many uncertainties remain, including weakness in household spending, and the sharp appreciation of the yen—coming to affect exports—the rising yen in part a response to unwinding of so-called “carry trades” sourced in the currency. Among emerging markets...in South Asia, Pakistan’s consumer price inflation inched up to 6.45% in August (y/y) from 6.37% the previous month, as higher wheat prices pushed up the food component of the price index. Meanwhile the trade deficit widened to $1.27 billion in August contrasted with $1.02 billion in August 2006, as exports retreated 1.4% to $1.48 billion and imports rose 8.9% to $2.75 billion. In Central and Eastern Europe, Hungary’s inflation rate eased to 8.3% in August (y/y) from 8.4% the previous month, but remains the second highest in the EU following Latvia. CPI is expected to decelerate further in coming months, as the effects of higher taxes and increases in regulated energy prices are beginning to fade. Poland’s government approved a 2008 budget draft calling for a reduction in the budget deficit to 28.2 billion zloty ($10.3 billion), down from a projected 30.5 billion zloty this year. Slovakia’s trade deficit declined to 1.8 billion koruna ($74 million) in July, from 2.8 billion koruna the previous month, as exports increased 13.5% in July (y/y) while imports gained 12.2%. In the Middle East and North Africa, Egypt’s industrial output growth eased to 12.5% in July (y/y) from 13.1% the previous month, as growth in manufacturing output almost halved to 7.3% from 13% previously. Growth picked-up in construction and transportation, however, to 19.9%-and 8.3%, from 15.1% and 3.5% respectively. ***************************************************** 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 subscribers, under the terms and conditions of use agreed upon login (at www.worldbank.org/gem) to the extranet GEM site. 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