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Interest Rate Monitor. March 10, 2013. Brief Overview. International. MENA Region. US: Treasury yields rise amid strong US jobs data pointing to recovery momentum. Egypt receives US aid but with string attached. Eurozone: Fitch downgrades Italy as ECB gives little hope of action.
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Interest Rate Monitor March 10, 2013
Brief Overview International MENA Region US: Treasury yields rise amid strong US jobs data pointing to recovery momentum Egypt receives US aid but with string attached Eurozone: Fitch downgrades Italy as ECB gives little hope of action GCC News Highlights GCC interbank rates UK: BoE decides against further QE as UK service sector grows Comparative MENA Markets China: inflation on the rise amid signs of softer data More aggressive easing in the horizon, as data point to end of recession Local Economy Markets overview New and analysis Major Indices: Wall street wrapped up positive week with record highs • Interest Rate Forecasts • Signals point to less pressure on domestic liquidity Commodities and Currencies: yen reached 3 ½ year low against dollar Central Bank Meeting Calendar Markets overview • Amman Stock Exchange Interest Rate Forecast • Local Debt Monitor The Week Ahead • Prime Lending Rates
US Treasury bond rates • A bigger-than-forecast gain in U.S. employment sparked selling in safe-harbor Treasury bonds for a fifth straight session, sending benchmark yields to the highest levels in 11 months, pushing up the yield to 2.058%. • This reflected brightened sentiment over the U.S. labor market and the broader economy, which has sent U.S. stocks to record highs.
Moody’s Expects Higher Treasury Yields & Thinner Spreads • Treasury yields have extra room to increase, when rates compared to three years GDP average for the last 30 years. (2.40% is the projected rate for Q1 2014) • Treasury yields may rise further as capacity utilization, employment and consumer spending are riding the upward trend. • 10 years Inflation expectations have recently shown higher figures indicating wider room for yields to improve. • US Equity market has reached a record high in terms of market value; reflecting better economic and labor market fundamentals. • US equity market performance is a major Driver for households consumer spending and economic activity, since it is linked to pensions and savings.
Moody’s Expects Higher Treasury Yields & Thinner Spreads • Moody’s does not expect yields on non-investment grade bonds to go higher despite the expected increase in US treasury yields. • The rationale behind this forecast is thinner spreads to come, on Moody’s opinion. • Investors should seek lower compensation for credit default risk; especially since default rates are moving lower and economic fundamentals are improving. • Equity market volatility index VIX suggests that credit spreads for lower grades’ bonds can go thinner by 100 bps to reach 380 bps from treasuries.
Hiring picked up in February and unemployment rate down to its lowest level since December 2008 • U.S. job growth accelerated and the unemployment rate fell to the lowest level in more than four years in February, signs of a steadily improving labor market and stronger economic gains. • The U.S. economy added 236,000 jobs in February, according to a Labor Department report released Friday. That's much stronger growth than in January, when employers hired a revised 119,000 workers. • Meanwhile, the unemployment rate dipped to 7.7%, as 12 million workers were counted as unemployed. The drop was partly because more people said they got jobs, but also because 130,000 people dropped out of the labor force. • For all of last year, the economy added an average of about 183,000 jobs a month. Over the past four months, that pace has picked up a little to an average of 205,000 a month—though the gains have been choppy. • The increase in jobs and decrease in the unemployment rate were better than expected. Stocks rose modestly in early trading Friday, with the Dow hitting yet another record high. February +236,000
But some headwinds remain • Private sector employers added 246,000 jobs in February, where one of the brightest stars in the labor market was the construction sector, which added 48,000 jobs in February, and 151,000 jobs over the past five months. • The latest snapshot of the labor market comes against a backdrop of an improving housing market, big gains for the stock market, rising consumer confidence and other signs of momentum for the economy. • ISM non-manufacturing, which tends to fluctuate with private consumption rose in February from 55.2 to 56.0. • Nevertheless, recent benchmarks reflect a recovery that is moving forward but at risk of losing pace as its main engine—consumer spending—is strained by higher taxes, government cutbacks and gas prices. • The recession in Europe and weakness in other U.S. export markets also pose threats, as do possible shocks from Washington's budget wrangling. • Even with recent gains, the unemployment rate is expected to remain well above the 6.5% threshold the Federal Reserve is targeting before allowing interest rates to rise. The Fed's next policy meeting is March 19-20. February 7.7%
Tension rises in Italy while nervousness elsewhere abates • On Friday, Fitch Ratings downgraded Italy's credit ratings by a notch to triple B-plus. Though the move added some tension, the Italian ten-year bond yields increased slightly, at their high for the day at 4.59%. • Aside from the Fitch downgrade there seems to be an easing of eurozone sovereign debt tensionswith broader market sentiment • Nervousness in European bond markets continued to abate with Spain garnering robust demand at a sovereign debt sale and Portuguese bond yields falling to a one-month low after Standard & Poor's upgraded its outlook on the country's debt to stable. • A solid auction of Spanish debt this week is contributing to a 14bp fall for Madrid’s yields to 4.75%, the lowest since November 2010. Spain Italy
Fitch downgrades Italy • Fitch downgraded Italy's credit rating Friday, saying the lack of a stable government in Rome puts the nation's already fragile economy at risk. • The No. 3 ratings agency cut Italy's credit rating to BBB+, which is still investment grade. The outlook for Italy is negative, suggesting that further downgrades are possible. • Italy has been without clear leadership for weeks as politicians struggle to form a coalition following last month's inconclusive election. • Fitch said it is unlikely that a stable government will be formed in the next few weeks. • The latest economic data underscored that the recession in Italy is "one of the deepest in Europe," according to Fitch. • Fitch expects the Italian economy to shrink 1.8% this year, following a 2.4% decline in 2012. • The ongoing recession could put additional pressure on the government's finances. Fitch expects government debt in Italy to reach 130% of gross domestic product this year.
ECB Gives Little Hope of More Action • The European Central Bank cut its forecasts for the eurozone economy this year and next, but President Mario Draghi played down the possibility of taking further steps to revive it, saying the central bank has already done what it could. • The overall message from Mario Draghi seems to be that as long as the medium-term outlook is okay the ECB will not cut rates further but the ECB will keep rates unchanged at low levels for a long time. • In his monthly news conference, Mr. Draghi appeared to rule out most forms of further stimulus, despite data this week that showed the economy contracted for a fifth straight month, that unemployment was at a record high of nearly 19 million and that inflation had now fallen within the ECB's targeted range. • But he stressed that the central bank's policy would remain "accommodative" for as long as needed, giving eurozone politicians and banks the breathing space to implement structural reforms and reduce their debts. • Mr. Draghi repeated that the economy is expected to start recovering in the second half of the year, and said that the process of recovery would be helped by a continued healing in financial markets. • Mr. Draghi also dodged invitations to comment on the political stalemate in Italy. He repeated that there would be no special favors for Italy from the ECB's new and still-untested program of bond purchases—known as Outright Monetary Transactions—insisting that the new government would have to ask for a euro-zone program first.
ECB:Europe's recession deepens • Mr. Draghi said the ECB now expects the eurozone economy to shrink by around 0.5% this year. That is below its central estimate of a 0.3% contraction in December, and below the European Commission's and IMF's forecasts for this year. For next year, the central projection was cut to growth of 1.0% from 1.2% previously. • Draghi emphasized that the downward revision in 2013 was due mainly to weak carry over. Economic activity is expected to start stabilizing in the first part of the year and then a gradual recovery should commence in the second part of the year. • The bank's governing council made only a fractional adjustment to its projections for inflation, leaving this year's central estimate unchanged at 1.6% and cutting next year's to 1.3% from 1.4%. • Meanwhile, the head of the IMF, said in a Speech in Dublin on Friday that the ECB should consider a further cut in its key interest rate. • Christine Lagarde said European policymakers had to ensure the recent improvement in market sentiment toward the eurozone also translated into more jobs and higher incomes.
Business activity data again point to recession • Data on Thursday confirmed that the eurozone appears to be heading for a fourth consecutive quarter of economic contraction, as surveys of purchasing managers indicate business activity shrank at a faster pace in February. • Data provider Markit said the composite Purchasing Managers' Index for the eurozone fell to 47.9 in February from 48.6 in January. The sub-50 reading means activity across the currency bloc's manufacturing and services sectors declined month-to-month. • The figures mean eurozone gross domestic product will probably fall in the first though at a slower pace —and may not show growth until the end of the year. • Official data have shown the eurozone economy shrank throughout the last nine months of 2012. Output between October and December fell by a particularly sharp 0.6% from the previous three-month period, according to the latest figures released by Eurostat. • Meanwhile, figures released by the Eurostat offered a tentative sign of a pickup in consumer spending, with retail sales rising at the fastest pace in almost two years in January. • The volume of retail sales rose by 1.2% from December, a stronger outcome than the 0.3% increase forecast by economists, and the largest pickup since April 2011.
Bank of England decided against further QE • The Bank of England left its monetary policy unchanged Thursday, but its inaction masks a lively debate among policy makers over whether new tools are needed to rekindle growth in the U.K.'s stalled economy. • Some market participants were expecting the Monetary Policy Committee to extend the asset-purchase program. • The BoE said in a statement that its MPC voted to leave the central bank's benchmark interest rate at 0.5% and the size of its bond-buying stimulus program at £375 billion. • Nevertheless, many economists believe further bond buying is imminent, even though annual inflation, measured at 2.7% in January, is expected to rise further above the BoE's target this year. • This view was reinforced when minutes of February's policy meeting revealed Governor Mervyn King and markets chief Paul Fisher joined longtime stimulus advocate David Miles in voting for more bond buying. They were defeated by the remaining six officials on the nine-person panel. • While the BoE considers ways to revive the flat-lining economy, U.K. Prime Minister David Cameron on Thursday made it clear that his government will stick to its austerity drive and wider economic plan, despite calls for a change of course from within his coalition government.
UK service sector receives boost • Meanwhile, a gauge of activity in the U.K.'s services sector, which accounts to more than three-quarters of GDP, rose to its highest level since September. • The purchasing managers' index for the services sector published by data firm Markit and the Chartered Institute for Purchasing and Supply rose to 51.8 in February from 51.5 a month earlier, Markit said on Tuesday. A reading above 50 indicates activity in the sector is expanding. • The improvement in the services sector in February should offset weaker performances by the manufacturing and construction industries in the same period. The data suggest the U.K. economy may return to growth in the first quarter after shrinking 0.3% in the final three months of 2012, economists said .
China’s inflation on the rise • China's policy makers are grappling with an uptick in data released Saturday show. China's consumer inflation jumped to 3.2% year-on-year in February, up from 2% in January, for the highest increase since April last year. Prices were likely boosted by the Lunar New Year holiday, which often brings a spike in prices for food and other goods. • Also compounding the challenges for the government was data showing that property sales have been soaring, rising 77.6% from last year's levels in value terms over the first two months of the 2013, highlighting the difficulties in keeping the economy growing at a steady pace while avoiding steep rises in prices. • While the rise in consumer inflation was somewhat steeper than expected in February, some analysts said that the index could drop back in March. • After months of relatively subdued inflation, rising prices may once again have policy makers worried. Premier Wen Jiabao, in his report to the annual session of parliament on Tuesday, set an inflation target of 3.5% or below for this year, and the central bank has dropped hints of monetary tightening later in the year.
China’s Economic Data Show Weakest Start Since 2009 • China’s retail sales and industrial output had their weakest combined start to a year since the global recession in 2009, adding to signs of a moderating rebound in the world’s second-biggest economy. • Industrial production grew slightly more slowly, with a 9.9% year-on-year rise in January and February, after a 10.3% gain in December. The government releases combined figures for the first two months of the year to avoid distortions related to the timing of the Lunar New Year holiday. • Retail sales were up 12.3% on-year in January and February, compared with a 15.2% rise in December. • Fixed-asset investment rose 21.2% on-year in January and February, compared with a 20.6% rise in the whole of 2012.
China Posts Surprise Trade Surplus • China posted a surprise trade surplus in February thanks to stronger-than-expected exports as the global economy recovered, and a drop in imports. • Exports were up 21.8% from a year earlier—slower than January's 25% pace but well above economists' expectations of 5%, and a positive sign for the world's second-largest economy. • Imports were down 15.2%, data from the General Administration of Customs showed • The strong export performance, shown in customs data released Friday, contributed to a February trade surplus of $15.25 billion, when most analysts had expected a deficit. • Economists cautioned that the data are difficult to interpret because of the week-long Lunar New Year holiday, which fell in mid-February this year and in January last year. Factories shut down for the festival and many migrant workers go home, though they often work overtime before the holiday, making data less reliable at this time of the year. • Meanwhile, China set a growth target of around 7.5% for this year as it kicked off a meeting to finalize its leadership transition, reflecting how Beijing is turning away from breakneck growth based on exports in favor of a broader economy driven by spending at home.
Japan's economy begins to show signs of growth • Japan's economy performed better in the fourth quarter than previously thought, according to revised data released Friday that could embolden the government in its drive to stimulate growth and end deflation. • The data showed that Japan's economy grew at an annual rate of 0.2% in the final three months of 2012 -- much better than the negative 0.4% rate initially reported by Japan's Cabinet Office. On a quarterly basis, Japan's gross domestic product was unchanged compared with previous data showing a fall of 0.1%. • The upward revision was not exactly a surprise, as other economic indicators have pointed to stronger activity in recent weeks. • The report also provides some political cover for Prime Minister Shinzo Abe, who is pursuing an aggressive set of policy changes in a bid to boost growth.
Japan: more aggressive easing expected • The BoJ kept policy settings on hold at the final board meeting of governor Masaaki Shirakawa’s five-year term, rejecting proposals for more aggressive easing from two of his board members. • Board member SayuriShirai proposed that rather than wait until next year, the central bank should immediately resort to "open-ended" purchases of more bonds. The proposal it was voted down 8-1. • Haruhiko Kuroda, the government's pick for next BOJ governor, told his confirmation hearing this week that the option should be discussed. • Another board member, RyuzoMiyao, also proposed for the third straight month that the central bank keep its policy rate at the current level of around zero until its 2% inflation target is in sight. Mr. Miyao's proposal was also rejected by 8-1. • The central bank voted unanimously to leave unchanged its policy rate, or the unsecured overnight call loan rate, in a 0.0%-0.1% range. • Attention is already turning to the BOJ's next meeting in April, set to be chaired by Mr. Kuroda, if, as expected, his nomination as the central bank's new governor is approved by parliament. • Analysts see the BOJ taking additional stimulus measures under Mr. Kuroda, who has criticized the central bank's past policies. Some believe there is a possibility of two consecutive rounds of easing at the policy board's April 3-4 and April 26 meetings.
Central Bank Meetings Calendar Calendar for upcoming meetings of main central banks :
U.S aid to Egypt with strings attached • Last week, US secretary of state John Terry visited Egypt and offered more aid to help revive its economy. Kerry pledged $250 million as the first part of a larger package of aid to Egypt, acknowledging the country's "extreme needs." The total aid expected by the U.S to Egypt this year is expected to be $1 billion. • Egypt’s official foreign currency reserves went down to $13.5 billion in February, which cover less than three months of imports. However, U.S. officials say that accessible, liquid reserves total only $6 billion to $7 billion. • Egypt will get the aid after Morsi's assurance that he plans to complete the IMF process, referring to a $4.8 billion loan Egypt is currently negotiating with the IMF. Negotiations are expected to continue this month, after Egypt submitted it’s final draft to the IMF last week. • Egypt's urban consumer inflation jumped by 8.2% in the 12 months to February as a sliding Egyptian pound pushed up food prices. The rate jumped from an annual 6.3% in January, putting inflation at the highest since May last year.
GCC Economic News Highlights • UAE maintains its position as second largest Arab economy: The UAE maintained its position as the second largest Arab economy in 2012 after its gross domestic product (GDP) swelled by $23 billion in current prices to reach $375 billion, an increase of 6.5%. The UAE has remained the second largest Arab economy after Saudi Arabia for more than 10 years because of a steady and rapid growth in its GDP as a result of high public spending, a surge in oil prices and a steady increase in private sector investment. • Moody's placed subordinated debt ratings of 12 GCC banks on review for possible downgrade; all other ratings and outlooks unaffected: Moody's has placed on review for possible downgrade the subordinated debt ratings of 12 banks in the (GCC) countries. • The affected banks are Arab National Bank, Banque Saudi Fransi, Abu Dhabi Commercial Bank, Emirates NBD PJSC, First Gulf Bank, Mashreqbank PSC, Commercial Bank of Qatar, Doha Bank, Qatar National Bank, Burgan Bank, Bank Muscat and BBK B.S.C. • While Moody's continues to view government support for banks across GCC countries as high, the rating agency's decision to initiate a review for possible downgrade of the 12 banks' subordinated debt ratings is driven by the growing risk of 'bail-ins' for subordinated debt instruments. This is as a result of Basel III guidelines on bank capital and regulatory efforts aimed at enhancing market discipline.
GCC Economic News Highlights • Qatar’s Central Bank to issue 7 billion riyals debt: Qatar's central bank said on Sunday that it would issue 4 billion riyals ($1.1 billion) of local currency sukuk and 3 billion riyals of local currency conventional bonds, as part of an adjustment of monetary policy and in order to help commercial banks meet Basel III liquidity requirements. • The central bank did not give the time period for these issues; it said the timing would be announced later. Local currency debt will be issued every quarter, half with three-year maturities and half with five-year. • Sukuk Issuance totals $22 billion by end of February: Sukuk issuance momentum continues in 2013 with a total issuance of $22.0bln to date. The Malaysian market makes up 70% of the total market share. • Governments remained the majority issuers during February, with sovereigns and government-related entities accounting for over 90% of issuances during the month.
Comparative MENA Markets For the period 03/03 – 08/03
Local interest rates forecasts and major developments • The excess liquidity in the banking system has increased following the $500 million USD denominated bond issuance and less demand by the government on domestic debt. • The increase in excess liquidity is anticipated to place downward pressure on JOD interest rates, especially if foreign reserves continues it upward trend.
Less Pressure on Domestic Liquidity & Interest Rates • Since the beginning of the year, government bonds worth 822 million JOD have matured, while new issuances amount to 745 million JOD. • This means that domestic debt has decreased by JD 77 million. • This fall in government borrowing in JD is due to the 500 million USD denominated internal bond issued by the Jordanian government last month, providing the sufficient funds the government needs to meet its expenses. Up to March 10th 2013 Sum of bonds redeemed : 822 million JOD Sum of new issuances: 745 million JOD Jordanian Government Net: -77 million JOD
Government Bonds Coverage Ratio Up since start of 2013 • Coverage ratio for 3 year government bonds have gone up since the beginning of 2013. This shows a sign of increased appetite for the local government bonds that provide a return of 8.6% for 3 years. • This increased appetite is also supported by the increase in excess liquidity for the same period. • Higher coverage ratios have encouraged CBJ to reduce the amounts of weekly and monthly repos with commercial banks.
Negotiations with IMF • The Jordanian government met with the IMF staff last week in order to negotiate the next step in the economic reform program. The IMF is directing the Jordanian government to go ahead with raising tariffs on electricity and water, while government officials are trying to delay the inevitable decision as long as possible. • Jordan must tackle a soaring energy import bill by reducing power subsidies to get its economy back on track, the International Monetary Fund said on Wednesday. • It is expected that the government will eventually raise electricity tariffs in June. • The IMF board is expected to meet in mid April to decide on granting the Jordanian government the second tranche of $385 million of the agreed loan. • Reappointed Prime Minister Dr. Abdullah Ensour has refused concerns by members of parliament to retract the decision taken to lift subsidies on oil in November 2012. • The PM’s stern decision is a well received sign by the IMF that the Jordanian government is committed to the economic reform program.
Amman Stock ExchangeFor the period 03/03 – 07/03 ASE free float shares’ price index ended the week at (2059.9)points, compared to (2042.4)points for the last week, posting a decrease of 0.85%. The total trading volume during the week reached JD(78.9) million compared to JD(63.8) million during the last week. Trading a total of (110.7)million shares through (36,841)transactions The shares of (181) companies were traded, the shares prices of (84) companies rose, and the shares prices of (52) declined.
Local Debt MonitorLatest T-Bills As March 10, the volume of excess reserves, including the overnight window deposits held at the CBJ JD(2,094) million.
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