61461 DECPG Daily Economics and Financial Market Commentary October 22, 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. Emerging-market assets slump. Emerging market bourses dropped the most in three weeks on Thursday. Falling oil prices dampened earnings prospects for energy companies; and investors speculated that China might raise interest rates and withdraw stimulus measures against the background of rising inflationary pressures. The benchmark MSCI Emerging Markets Index declined 1.1%, led by a 1.5% drop in Russia’s Micex Index. Emerging-market equities have gained 69% thus far this year, as government stimulus packages and interest-rate cuts have helped to revive the global economy. Meanwhile, emerging-market bond spreads over comparable U.S. Treasuries widened by 3 basis points (bps) to 307bps today, according to the JPMorgan EMBI+ Index. Notably, the spread on Russian bonds increased 11 bps; borrowing costs in Turkey increased 4 bps. U.S. initial claims rise. New claims for unemployment insurance increased by 11,000 to 531,000 in the week ending October 16, much higher than median market expectations of 515,000, serving as a reminder of slow recovery in labor markets. However, the 4-week moving average continued to point downward, albeit at a slower pace, falling to the lowest level in over nine months. In other U.S. economic news… leading indicators surprise to the upside. The Conference Board’s index of leading U.S. economic indicators (LEI) extended gains for a sixth month in September, reading 103.5 after coming in at 102.5 for August. The LEI which measures expectations of economic activity for the next three to six months, points to a recovery that will continue into 2010, moving away from fears of a “double dip”, or a relapse into recession. Indeed, the 2.9% (y/y) increase in the index was the fastest since early 2006, bringing the LEI very close to levels seen in the first half of 2007. Japan’s exports faltering. Goods exports from Japan dropped for a second month running during September, a fall of 0.8% (m/m); at the same time imports showed additional signs of life, up 1.9% in the month. When translated into volume terms, and examined in a “momentum” perspective, the news for the country appears rather sobering [see Daily Chart at http://gem or http://www.worldbank.org/gem]. Export volumes increased by a sharp 22% during the second quarter (saar), on the back of strong demand from China (stimulus measures) and the remainder of the East Asia region; but volumes for the third quarter have now relapsed to gains of just 3.6%, as China’s demand eases and imports among key OECD markets have yet to ramp-up, 1 given sluggish domestic demand. Japan’s imports, by contrast declined 20% (saar) during the second quarter, only to increase by a moderate 5% during the third. Among emerging markets...in East Asia and the Pacific, China’s economy expanded 8.9% in the third quarter from a year earlier, the fastest pace in a year, showing that the immense fiscal stimulus and record lending have boosted output growth substantially. In the first three quarters of the year GDP expanded 7.7%, with domestic demand accounting for most of the gain. Consumption contributed 4 percentage points to growth; investment contributed 7.3 percentage points, while a decline in net exports and services subtracted 3.6 percentage points from growth. Strong increases in auto sales helped boost industrial output growth to 13.9% in September year-on-year, while urban fixed investment surged 33.3% in the first nine months of the year (y/y). Retail sales gained 15.5% on the year in September. In South Asia, India’s wholesale prices rose 1.21% in the week of October 10 from a year earlier compared to 0.92% the previous week. In Latin America and the Caribbean, Brazil’s central bank kept its benchmark rate at a record low 8.75%, saying that this level is consistent with a non-inflationary recovery. Meanwhile the unemployment rate retreated to 7.7% in September, adding to sings that a recovery is well underway and that it is solid. Mexico’s consumer price inflation accelerated to an annual 4.65% as prices rose 0.35% on the month in the first half of October due to higher prices for electricity, local telephone services, and sugar. In Sub-Saharan Africa, South Africa’s central bank kept its interest rate unchanged at 7% for a second consecutive meeting, as inflationary pressures are being fueled by rising energy costs, and the country’s first recession in 17 years is easing. Meanwhile Finance Minister Pravin Gordhan expects the economy to contract by 2% in 2009 as the global financial crisis carried a large negative impact on the South African economy. ***************************************************** 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. 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