Economics and Financial Market Commentary
May 29, 2012
Allen Dennis, Eung Ju Kim, Sanket Mohapatra, Mick Riordan
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U.S. treasury advances on worries over Spanish banking sector. Treasury prices
moved higher on Monday, pushing the intra-day yield on 10-year note close to a record
low, after Spain said it plans to recapitalize recently nationalized lender BFA-Bankia by
issuing new government debt. Although the Spanish government backtracked on a plan
to use more public debt to bail out its ailing banks, the yield on Spanish 10-year debt
jumped to 6.53% on Monday, the highest level since November 2011. Moreover, the
risk premium investors demand to buy Spanish 10-year government bond over
comparable German debt jumped to the highest since the creation of the euro. Spanish
bank worries stoked demand for U.S. treasuries and other low-risk investments. The
benchmark 10-year yield fell as low as 1.71% in intra-day trading, approaching the
record low of 1.6714% reached on September 23rd.
U.S. housing market could be turning a corner. According to the closely watched
Standard & Poor’s/Case – Shiller home price index (a 3-month non-seasonally adjusted
moving average of home prices), home prices in 20-major US cities remained
unchanged in – the first non-decline in seven months [see Chart at http://prospects or
http://www.worldbank.org/prospects]. In part this reflects the increase in demand
from the spring buying season, but also adds to the growing signals that the US housing
market could be turning a corner. Recent data releases show a pick-up in new and
existing home sales, a rise in builder confidence, and an increase in construction
permits. The strengthening housing market, which has till date remained the weakest
link in the US recovery, has been supported by an improving jobs market, historically
low mortgage rates and less tighter credit conditions.
Among Emerging Markets…In East Asia and Pacific, Vietnam’s central bank cut its
benchmark refinancing rate by 100 basis points to 12 percent, the third such reduction
since March as the central bank attempts to boost the struggling economy, even as
consumer price inflation slowed to a 21-month low of 8.3% year-on-year (y/y) in May
from 10.5% in April. GDP expanded by 4% in the first quarter of 2012, the slowest rate
In Middle East and North Africa, Egypt’s central bank lowered the reserve requirement
for banks to 10% from 12%, following a similar 2% reduction in March, to provide
additional liquidity to the banking system. Banks’ funding has come under pressure after
the uprising last year, and Treasury bill yields have soared as the government sought to
raise money to help finance its budget deficit.
In Sub-Saharan Africa, South Africa’s GDP growth slowed to 2.7% (y/y) in the first
quarter of 2012 from 3.2% in the previous quarter. Although manufacturing expanded at
a faster annualized pace of 7.7% from 4.2%, mining production contracted 16.8% after
gaining 0.7% in previous quarter. Mining output was hit by safety stoppages,
maintenance halts, and labor action, while slower growth in Europe and Euro Area
uncertainty curbed demand for South Africa’s exports.
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