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Interest Rate Monitor. August 25, 2013. Brief Overview. International. MENA Region. US: Treasuries strengthen, putting a brake on yield’ surge to 3% as uncertainty over ‘tapering’ continues. Egypt: Borrowing costs rise from 28-month low.
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Interest Rate Monitor August 25, 2013
Brief Overview International MENA Region US: Treasuries strengthen, putting a brake on yield’ surge to 3% as uncertainty over ‘tapering’ continues Egypt: Borrowing costs rise from 28-month low Eurozone: Business activity points to further expansion GCC News Highlights UK: Economic recovery shows faster growth GCC interbank rates China: Manufacturing activity rebounds sharply Japan: Exports rise at fastest pace in three years Comparative MENA Markets Emerging markets were in focus after significant capital outflows that might threaten global economy Local Economy Markets overview New and analysis Major Indices: US stocks end week on bright note • Fiscal deficit down 26% in first half of the year, while trade deficit increased by 2.5% Commodities and Currencies: Gold jumps to a two-month high, near $1,400 Markets overview Central Bank Meeting Calendar • Amman Stock Exchange Interest Rate Forecast • Local Debt Monitor The Week Ahead • Prime Lending Rates
U.S. Treasury bond market strengthened, putting a brake on yield’s surge toward 3%, last breached in July 2011 • Earlier in the week, treasury yields jumped to two-year highs, amid increasing worries that an improving economy would prompt the Fed to start slowing the flow of liquidity by tapering bond purchases as early as September. On Thursday, the yield reached 2.936% in intraday trading, the highest since July 2011. • However, Treasury yields pulled back after disappointing housing data where US new home sales tumbled 13.4% in July, with the 10-year yield down 7bp on Friday, closing the week down 1bp at 2.82%.
U.S. Fed minutes left markets uncertain, underscoring the importance of economic growth • Federal Reserve officials reaffirmed their plan to try winding down an easy-money program that has charged up global markets but left investors uncertain again about when or how aggressively they would move. • Minutes of the Fed's July 30-31 policy meeting, released Wednesday, suggested officials were on track to start winding down the $85 billion-a-month bond-buying program by the end of the year, possibly as early as September, if the economy strengthens as they expect. • The Fed minutes showed that "few" officials favored reducing its bond-purchase programs soon, while a "few" urged more caution. • The minutes were, however, a bit more uncertain than in June about whether economic growth would pick up as they forecast and about the gains they were seeing in the job market. If anything, the minutes underscored that the Fed's decision on any pullback will depend in large part on how the economy is holding up—putting even more emphasis on coming data, including the monthly jobs report due Sept. 6. • Reflecting the cautiousness shown in the minutes and their own uncertainty about how the economy will perform in the months ahead, some Fed officials have begun talking about making a small move when they do start pulling back on bond buying.
Minutes indicate that changes to forward guidance thresholds are possible down the line • The Fed's deliberations have roiled global markets in the past few months, pushing up U.S. interest rates and knocking down emerging markets, which initially benefited from the Fed's easy-money policies. • Interest rates had stabilized in July but shot higher in August as investors weighed the possibility that the Fed might move at the Sept. 17-18 meeting. Officials have just four weeks to make a judgment about moving then, and only a few more pieces of important economic data, such as a jobs report for August. • Meanwhile, the most interesting part of the minutes was the discussion about changes to the forward guidance on both asset purchases and the fed funds rate. Current forward guidance calls for exceptionally low interest rates to remain in place until the unemployment rate falls to 6.5%, and as long as inflation does not rise above 2.5%. Unemployment rate in July was 7.4%. • It is unlikely anything will be changed at the September meeting, but several participants were willing to contemplate lowering the unemployment threshold if additional accommodation were to become necessary. • The impact if agreed would be to delay the first interest rate rise, allowing for greater space between tapering and real tightening in asset purchases. 7.0%: Target for Fed to end its bond buying program 6.5%: Target for Fed start conversation about raising rates
U.S. housing sector facing concerns amid rising mortgage rate • Sales of newly built homes fell sharply in July to the lowest level in nine months, heightening worries that higher mortgage rates will slow the housing recovery. • New-home sales fell 13.4% in July from a month earlier to an annual rate of 394,000, the Commerce Department said Friday. That was the steepest drop in three years and sent sales down to the lowest level since October. The report also showed that June sales were lower than previously estimated. • The drop in new-home sales came at a time of concerns that higher mortgage rates, which effectively raise the cost of buying a home, would scare away potential buyers. The average rate on a 30-year mortgage rose to 4.58% this week, according to Freddie Mac, up from 4.40% a week ago and more than a point higher from the level in May. • Many economists say it is still too early to tell how the higher rates are affecting the industry. But the big drop in new-home sales could add to worries that overall sales, including previously owned properties, will slow in coming months. • Nevertheless, even with the decline, new-home sales are still up on the year. Sales in July were 6.8% higher than a year ago. • Meanwhile, other reports indicate that housing remains strong. Sales of previously owned homes rose 6.5% in July from a month earlier to the highest level in nearly four years, the National Association of Realtors, said earlier this week. Some economists said that might reflect buyers rushing to lock in ahead of higher rates. The median price of homes sold that month continued to climb.
Eurozone bond market remains calm, though yields rose slightly this week • Peripheral bond markets in the euro area continue to perform, and despite a slight sell-off, have not been greatly affected by the general risk aversion in markets related to Fed tapering. Fundamentals are improving in these countries as signs of recovery are materializing. • Preliminary eurozone purchasing managers’ data for August offered further evidence that the region’s economy was picking up pace. • Ten-year-bond yields in Spain and Italy were up 10pb and 14bp respectively, to end the week at 4.46% and 4.33%. • Meanwhile, German sovereign debt also sold off over the course of the week and the Bund yield rose 1bp on Friday to 1.94% for a 4bp gain over the five-day period.
Eurozone business activity points to further expansion • Eurozone business activity increased at its fastest pace in two years, a closely watched survey of purchasing executives showed, adding to recent evidence that the German-led recovery is beginning to spread to southern Europe. • The Purchasing Managers Index on Thursday suggested that the eurozone recovery has extended in the summer months, after the bloc's GDP expanded 1.1%, at an annualized rate, during the second quarter, breaking a string of six-straight contractions. • The eurozone PMI increased 1.2 points in August to 51.7, according to the data firm Markit, exceeding expectations. The index, which includes manufacturing and services firms, was the highest since June 2011. Index readings above 50 signal expansion in activity. • Nevertheless, the pickup appears modest, however, and insufficient to bring down record-high unemployment or reduce large debt loads. • The PMI readings imply GDP growth rates of only around 1%, economists said, about half the pace needed to bring unemployment in the region down from its record-high 12.1%. Despite rising business activity, employment fell in August for a 20th-straight month, according to Markit. • Moreover, the fragility in the area’s growth was underlined by the contraction in France’s activity in France, the eurozone's second-largest economy after Germany.
Flash PMIs add to recent evidence that the German-led recovery is beginning to spread to southern Europe • Euro area flash PMIs once again came out better than expected. Both manufacturing and service PMI for the euro area have increased for four consecutive months and are now above 50. • Manufacturing PMI increased to 51.3 in August from 50.3 in July while service PMI increased to 51.0 from 49.8 . • Germany's PMI rose to 53.4, a seven-month high, in part because of rising exports. In contrast, France's index slipped further below the 50 threshold, to 47.9 from 49.1. • With Germany and France largely canceling each other out, much of August's PMI rise appears to have been driven by Italy and Spain, analysts said. • GDP in these countries contracted last quarter, but at much slower rates than in previous quarters.
Schäuble provokes a storm in admission that Greece will needs more aid • In a sign of the currency area's problems, German Finance Minister Wolfgang Schäuble said Tuesday that Greece will need a third bailout, the bluntest admission by a top German official that the €246 billion of international aid loans pledged so far won't be enough to save the country from bankruptcy. • "There will have to be another program in Greece," Mr. Schäuble told an election rally of his Christian Democratic Union party near Hamburg, news agencies reported. The statement implies that Greece will need a third bailout, raising prospect of a step that could be deeply unpopular domestically, just five weeks before national elections on Sept. 22. • Mr. Schäuble has previously warned Germany's parliament and media that European taxpayers might have to lend Greece more money. But his language on the campaign trail was less hedged than before. • Other German officials, including Chancellor Angela Merkel, have been taken pains to avoid making an explicit commitment to more money for Greece, saying there was no need to discuss the matter now, and that Greece's situation would be reviewed later. 2013 forecast: 176%
Greece continues to face a deep problem of a ballooning debt load • The eurozone's loan disbursements to Greece under its current program are set to end in mid 2014, while the International Monetary Fund will carry on lending to Greece until 2016. The IMF estimates that Greece faces a financing shortfall of €11.1 billion in the next two years. • The IMF has grown increasingly impatient with European governments' unwillingness to face Greece's uncovered financing needs. The fund has warned Europe that it won't release more money for Greece unless Europe sorts out where Greece's funding will come from after mid-2014. The issue is expected to come to a head this fall, after the German elections, • The thornier problem is that Greece's debt load has ballooned to a level far beyond what most economists and investors think it can repay. Another loan package—although it would be smaller than the previous one—would merely add to Greek debt. • Greece's public debt is expected to reach 176% of its total economic output this year, far above the 120% level the IMF considers sustainable. • The IMF—which insists on its loans being repaid in full—has warned that Europe will have to come up with ways to cut Greece's debt. • Germany has led Europe's resistance to outright debt forgiveness, saying writing down past loans while extending new loans would break German law. Schäuble reiterated last Tuesday that there would be no further debt haircut for Athens.
U.K. economy shows faster growth • The U.K. economy grew faster than previously though in the second quarter, benefiting from a broad-based pick-up in activity that looked to have put the country's recovery on a firmer footing. • Gross domestic product expanded 0.7% from the previous quarter, months—0.1 percentage point higher than the initial reading July 25, data from the Office for National Statistics showed on Friday, beating its initial estimate and economists' forecasts. • On an annualized basis the economy grew 2.9%, placing it alongside Germany as the fastest-growing of the world's largest industrialized economies in the second quarter. In comparison, the U.S. economy expanded by 1.7% in the second quarter, while the euro zone expanded at 1.1% and Japan at 2.6%. • The ONS said small upward revisions across all sectors of the economy led to the overall increase. Economists said the revisions indicate a more durable recovery taking place, British exports rose at the fastest pace since late 2011 and business investment grew faster than household spending, suggesting a shift towards more balanced growth in an economy that has been driven mainly by domestic consumption and imports.
Markets await Carney comments next week • But despite the U.K.'s stronger-than-expected expansion in the second quarter, which followed growth of 0.3% in the first three months of the year, the country's economic output remains 3.2% below its pre-crisis peak in the first quarter of 2008. • Economists said the economy still faces serious constraints, such as the government's austerity measures and weak bank lending, while the continuing problems in the euro zone also present a risk to the recovery. • In an effort to encourage spending and investment, the Bank of England said earlier this month it would not raise borrowing costs while unemployment remained above 7%, a level it did not expect to be breached for at least three years. • But the threshold may be crossed sooner if Britain's recovery maintains momentum, and since the bank gave its forward guidance, the news on the economy has been predominantly upbeat. • Factories' order books looked in their best shape for two years in August, consumer confidence and retail sales soared in July, and surveys found robust growth across manufacturing, construction and services at the start of the third quarter. • In a speech next week, BoE governor Mark Carney is tipped to try to talk down expectations of an earlier rise in the base rate, which have caused conditions to tighten on money markets.
China manufacturing activity rebounds sharply • China's crucial manufacturing sector picked up steam in August, a further sign of stabilization in the world's second-largest economy. • A preliminary survey for HSBC’s Purchasing Managers' Index (PMI), a key gauge of the sector's health, rose to 50.1 from 47.7 in July, as orders picked up and piled stocks fell in August. • A reading above 50 shows expansion. For the first time in four months, the HSBC reading has passed that point. • That follows better-than-expected data on industrial production and exports in July. It indicates that the Chinese economy, which slowed to 7.5% year-over-year growth in the second quarter from 7.7% in the first quarter, may now be regaining some of its lost momentum. • The uptick in growth likely reflects a combination of targeted government support such as tax cuts and investment in railways and slum renovation, as well as the delayed effects of a surge in lending during the first months of the year.
Japan exports rise at fastest pace in nearly three years • Japanese exports rose 12.2% in the year to July after a 7.4% rise in June, at the fastest annual pace in nearly three years as the benefits of a weak yen finally started to take hold, with a recovery in overseas demand. • Japan still ran its third-biggest trade deficit on record at 1.02 trillion yen ($10.5 billion) in July, as the weak yen and rising oil prices made energy imports ever more expensive, which may drag on corporate profits ahead. Imports rose 19.6% in July, the biggest gain in three years . • The stronger exports show Japan’s economy is benefiting from a recovery in demand in Europe and the U.S., and the yen’s 11% decline against the dollar this year. The health of the economy will be the key to Abe’s decision in the next month on whether to raise a sales tax to 8% in April from 5% now, a step that would drag on consumption while supporting the nation’s finances. • Japan's economy expanded for three straight quarters in April-June as Prime Minister Shinzo Abe's reflationary policies brightened sentiment and bolstered personal consumption. • But growth slowed in the second quarter on an unexpected fall in capital expenditure, casting doubt on whether the economy can withstand the pain from a planned sales tax hike next April. • Analysts expect the economy to head for a steady recovery, although some warn of risks such as the continued slowdown in China, Japan's biggest trading partner.
Emerging markets have been in focus over the past week • The potential tapering of Fed asset purchases from $85bn a month has pushed up US interest rates and led to falling currencies in emerging markets as capital flows back to the developed world. • Emerging economies like India, Brazil, Indonesia and countries in Eastern Europe all benefited from large influxes in U.S. dollar-based loans over last couple of years years. • But now, as the Fed prepares to slow and then eventually end its simulative policies, the U.S. dollar is already rising versus foreign currencies. Investors are pulling their money out of these countries, triggering fears of a panic. • The Indian rupee, the Brazilian real, the Turkish lira, the South African rand and Indonesia’s rupiah have all weakened substantially since May, some losing 15% against the U.S. dollar, and others reaching record lows Thursday, after Fed minutes signaled that tapering is likely to go ahead. • This prompted a variety of responses from governments and central banks, with the biggest move coming from Brazil unveiling a $60bn currency intervention programme on Thursday
Fed warned of global risks to tapering • In a sign of growing concern among international policy makers, emerging market wobbles was one of the main themes of the Fed’s annual central bankers’ meeting in Jackson Hole on Friday. • Top officials discussed that lack of defenses in emerging markets to prevent potentially huge capital outflows, leaving global financial stability at risk, as one country after another was forced to liquidate holdings of foreign reserves to shore up its currency. • Two papers presented in Jackson Hole urged central bankers to think of the international repercussions of their own domestic policies. Christine Lagarde, managing director of the International Monetary Fund, also delivered a speech calling for more international cooperation. • The world needs to build “further lines of defense” against a possible emerging markets crisis but the International Monetary Fund stands ready to provide financial support if needed, its managing director Christine Lagarde said on Friday.
Central Bank Meetings Calendar Calendar for upcoming meetings of main central banks :
Egypt's borrowing costs jump from 28-month low • Egypt’s Treasury yields rose from the lowest in more than two years by as much as 0.30% as violence and unrest persisted in the country. • The average yield on one-year notes increased 24 basis points to 12.92% and the six-month yield climbed 30 basis points to 12.47%, according to central bank data on Bloomberg. • Due to the events, demand for government debt is slumping, forcing up borrowing costs. One-year bills sold Aug. 19 attained a coverage ratio of 1.7, the lowest in seven weeks. The debt sales are part of a government effort to raise 200 billion EGP this quarter to fund the country’s growing budget deficit. • According to Planning Minister Ashraf el-Arabi, the deficit swelled to about 14% of GDP at the end of the fiscal year in June, up from 10.8% a year earlier, while end of calendar year deficit is estimated at 11.3% by the IMF (estimated before Mursi’s ousting). • According to data compiled by Bloomberg, Egypt, which spends more than a quarter of its budget on interest payments, is facing 565 billion Egyptian pounds ($81 billion) of maturing debt by the end of 2014, most of which is in the form of local treasury bills. Source: Bloomberg Source: Bloomberg
GCC Economic Highlights:Qatar government spending growth slows sharply in 2012/13 • Qatar’s government spending rose 2.2% to a record 178.2 billion riyals ($48.9 billion) in its last fiscal year, only slightly missing the target of 178.6 billion riyals for its fiscal year that ended in March. Average annual growth rate for government spending from 2002-2012 is 24%. • This is the first time the government’s annual spending undershot its budget plan since 1990; a sign of the difficulties Qatar is facing in pushing forward huge and complex infrastructure projects. • Expenditure on development was 49.3 billion riyals, well below the 62.1 billion riyals which the government had originally earmarked for the year. Public sector wages increased by 15% during the fiscal year to reach a record 34.1 billion riyals. • However, revenue jumped 24.7% to a record 277.4 billion riyals. Revenues from oil and gas sales accounted for roughly 62% of income in 2012/13, down from 70% in the previous year because of a rise in investment returns and other revenue. • Therefore, the government's budget surplus more than doubled to a record 99.2 billion riyals last fiscal year, or 14.2% of GDP • The government plans to raise spending to 210.6 billion riyals in the current fiscal year as it steps up the infrastructure building program. Source: Trading Economics
GCC Economic Highlights:UAE bank deposits at all-time high • Deposits with UAE banks climbed to an all-time high at the end of the first half of 2013 to peak at Dh1,255.6 billion at the end of June, registering a growth rate of 7.5% in the first half of 2013, and 0.7% in June. • It is believed that UAE banks are flooded with depositor’s cash due to the country’s political stability and sustainable economic growth, as regional and global investors are looking for safe havens at a time when the geopolitical tensions in the region are rising. • One analyst pointed out that interest rates offered by the banks is not the driver, rather the stability of the UAE banking sector, as well as the UAE dirham’s peg to the US dollar, which partly eliminates exchange rate fluctuations and risks. • Not long ago, the UAE banks landed in a liquidity squeeze, due to the global financial crisis that forced international banks to withdraw surplus funds, deposits and investments from international markets, to bolster liquidity at home. • On the other hand, loans surged by nearly Dh16 billion in June to one of their highest levels of about Dh1,147.4 billion, their highest monthly growth in nearly a year.
GCC interbank rates Source: Bloomberg
Comparative MENA Markets For the period 18/08 – 23/08
Fiscal deficit down 26% in first half of the year • The government budget deficit reached JD 309.2 million down by 26% in the first half of the year, compared to the same period the previous year. • The drop in the deficit was mainly due to increased foreign grants, indicating that the budget balance remains under pressure. • Total revenues and grants increased by JD 474 million in the first half of the year, as a result of an increase of foreign grants by JD 408 million for the same period, compared to an overall drought of grants last year. • Domestic revenue increased by JD 65.8 million to reach JD 2,545 million, mainly due to an increase in tax on goods and services, while other revenues such as mining continue to be lower than last year’s levels. • On the other hand, both current and capital expenditures increased, resulting in a total increase in expenditure of around JD366 million for the same period, with the increase mainly stemming from an increase in military spending and interest payments. • Looking at the fiscal deficit before grants, we find that the deterioration in budget balances is significant, as the deficit reached JD742 million during the first half of the year, an increase of JD300 million from the same period last year.
Public debt at 72.2% of GDP • Public debt reached around JD17.3 billion by the end of June 2013, estimated at around 72.2% of 2013 GDP according to the Ministry of Finance’s calculations. This posts an increase of JD742 million during the first half of the year. • Breaking down the increase, we find that domestic debt increased by around JD304 million during the first 6 months of the year, compared to the end of 2012. On the other hand, external debt increased by around JD438 million during the same period. • The government is expected to rely on external borrowing this year to meet financing needs, and it recently signed an agreement with the U.S. which allows Jordan to issue Eurobonds in the global financial markets with the U.S as its guarantor, further increasing its dependency on external borrowing. • The amount of the bond is expected to be around $1.25 billion for a period of up to 7 years. This will allow Jordan to borrow from international markets at competitive rates, minimizing the cost of borrowing and reduce the government’s need to borrow from the domestic market, providing funds for the private sector to expand.
Trade deficit increased by 2.5% during first half of 2013 • Last week, the Department of Statistics released figures showing that Jordan’s trade deficit increased by 2.60% during the first half of the year, compared to the same period last year. • The trade deficit stood at 4,795.6 million JD for the first 6 months of this year, compared to 4,680.9 million JD for the same period in 2012. • Breaking down the deficit, we find that exports fell by 1.6% and imports jumped by 0.9%. Exports fell to 2,758.0 million JD from 2,2802.3 million JD for the time period, while imports jumped to 7,553.6 million JD from 7,483.2 million JD for the same time period. • Looking at the change in imports, we find that the oil bill fell by 30.5%, to reach 1,727.8 million JD, compared to 2,485.6 million JD for the first 6 months of this year compared to last year. • On the other hand, looking at the drop in exports, we find that phosphate exports fell by 25.0%, fertilizers by 30.2%, and vegetables by 37.4%. • It is important to note that despite a 757 million JD drop in Jordan’s oil bill, Jordan’s overall import bill increased during this time period, suggesting an increase in non-oil imports, probably due to the influx of Syrian refugees. This will place excessive pressure on balance of payments.
Trade deficit increased by 2.5% during first half of 2013 • The table on the right shows a breakdown of Jordan’s monthly oil bill. • Overall, the drop in the numbers indicate that Egyptian gas levels are averaging higher than the past year, which will reflect positively on the government’s budget deficit and NEPCO losses. • However, comparing Brent oil prices in June 2012 to June 2013, we find that the average barrel price increased by $7.41, which minimized the potential drop in June’s bill . • In addition, given the recent disruption in Egypt’s gas supply, Jordan’s oil bill is expected to increase in the coming months, unless significant developments on the pipeline occurs. • Moreover, comparing Brent oil prices in July 2012 to July 2013, we find that the average barrel price increased by $4.71, which will add more pressure on July’s bill. This will also add pressure on Jordan’s FX reserves and its widening budget deficit.
Amman Stock ExchangeFor the period 18/08 – 22/08 ASE free float shares’ price index ended the week at (1929.9)points, compared to (1921.9)points for the last week, posting an increase of 0.41%. The total trading volume during the week reached JD(38.7) million compared to JD(21.2) million during the last week, trading a total of (40.0) million shares through (19,592)transactions The shares of (171) companies were traded, the shares prices of (64) companies rose, and the shares prices of (65) declined.
Local Debt MonitorLatest T-Bills As of August 25, the volume of excess reserves, including the overnight window deposits held at the CBJ JD(2,817) million.
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