Interest Rate Monitor

1. Interest Rate Monitor August 18, 2013

2. Brief Overview International MENA Region US: Bond yields rose as markets price for the end of QE, pushed by positive economic data Egypt: Inflation surges to two year high Eurozone: Peripheral bond yields drop as Eurozone emerges from its recession GCC News Highlights GCC interbank rates UK: Likelihood of continued economic recovery strengthens, but BOE not unanimous on guidance Comparative MENA Markets Japan: Economic growth comes in less than expected, fuelling debate on sales tax Local Economy Markets overview New and analysis Major Indices: US stocks struggle amid speculation that Fed ‘tapering’ might start in September • Inflation rises 6.4% during the first 7-months of the year, and Jordan signs Eurobond guarantees Commodities & Currencies:Brent oil hit a 4-month high, as unrest in Egypt fuelled worries about supply disruption Markets overview Central Bank Meeting Calendar • Amman Stock Exchange Interest Rate Forecast • Local Debt Monitor The Week Ahead • Prime Lending Rates

3. International

4. Treasury yields rose to highest level in two years as markets are starting to price for the day when QE ends • Fresh signs of global economic recovery drove yields on highly-rated government bonds to multi-year peaks. • The 10-year US government bond yield, rose 25bp over the week to 2.83% – as encouraging US labor and housing market figures, helped heighten expectations that the Federal Reserve could start scaling back – or “tapering” – its economic stimulus measures as early as next month. • Going back to early 2011 when the Fed was not aggressive in its QE, US 10-year yields were trading at 3.5% – even with an economy that was looking weaker than today.

5. Inflation moves towards Fed target • Consumer prices rose for the third consecutive month in July, and the number of Americans filing new claims for jobless benefits fell to a six-year low, developments that could comfort Federal Reserve officials as they consider dialing back their bond purchases. • The consumer-price index rose 0.2% last month after rising 0.5% in June, the Labor Department said Thursday. "Core" prices, which exclude volatile food and energy costs, rose 0.2% in July after a similar increase in June. • The latest price increases are modest by historical standards, underscoring the weak economy, but they have pushed inflation closer to the Fed's annual target of 2%. Indeed, overall prices were 2% higher in July from a year ago, with core prices up 1.7% year over year. • The reports suggested the economy could be gaining momentum after growing at an anemic rate in the first half of the year. Central-bank officials have said they are looking for inflation to move off its low levels and for further gains in the labor market before reducing their $85 billion a month bond-buying program, begun last year to help spur growth. • Still, the inflation picture remains cloudy and the latest figures are unlikely to settle a debate within the central bank on the matter.

6. US consumers continue to spend, while consumer sentiment dips • U.S. consumers continued spending steadily in July, signaling shoppers are likely to remain the engine of the economy's slow but steady expansion in the months ahead. • Retail sales climbed a seasonally adjusted 0.2%, the fourth consecutive month of increases, the Commerce Department said Tuesday. The previous month's gain was revised up to 0.6% from 0.4%, amid brisk demand for cars and furniture. • Consumers started the year confronted by higher taxes, surging gasoline prices and the impact of federal budget cuts. However, more than halfway through 2013, they are notching the highest confidence levels in years. Economists attributed the optimism to a gradually improving jobs picture, rising home values and the bull market in stocks. • Nevertheless, U.S. consumers, in the face of rising interest rates, began August feeling less positive about the economy, according to data released Friday. • The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 80 from 85.1 in July, which was the highest since July 2007. • Higher mortgage rates are threatening to crimp momentum in the housing market that’s contributed to the economic expansion.

7. Recent data points to downside risk to US economic growth • Builders started construction on single-family homes at the slowest pace in eight months, underscoring worries that higher mortgage rates could restrain the housing sector's upturn. • Starts of single-family homes fell 2.2% in July from a month earlier to an annual rate of 591,000, the Commerce Department said Friday. That ended two months of gains and marked the lowest level of single-family starts since November. • The latest pullback, while modest, came against expectations for an increase given strong sales and industry surveys showing a surge in home builders' confidence. • Slipping activity could be a sign that the jump in mortgage rates since the spring is starting to spook potential buyers, or making builders reluctant to break ground on homes that might not sell. The average rate on a 30-year mortgage has risen nearly a point since April to 4.4%, though it still remains low by historical standards. • Separately, industrial production in the U.S. was unchanged in July as a slowdown at factories overshadowed an increase in mining. • The reading for output at factories, mines and utilities followed a 0.2% gain the prior month that was smaller than previously reported, a report from the Federal Reserve showed today in Washington. Manufacturing, which makes up 75 percent of total production, declined for the first time in three months.

8. Peripheral yields move downwards as investors shift towards riskier debt, amid signs that the euro area has emerged from its recession • Subdued summer trading coupled with a relatively calm political backdrop and signs that some of Europe's fiscally frail countries are emerging from recession are luring investors into riskier eurozone debt, narrowing the gap in yields between Spanish and Italian bonds over German bunds to its slimmest in more than two years. • Data showed that the eurozone's recession ended in the second quarter after six successive quarters of contraction, and industrial output in the eurozone rose at its fastest pace in more than 2½ years in the three months to June. • Ten-year-bond yields in Spain and Italy ended the week at 4.36% and 4.19%, respectively, having slowly edged lower in recent weeks as risk appetite increased. • The German Bund yield at 1.88%, meanwhile, rose 21bp over the week – touching a 17-month high in the process – due to strong second-quarter GDP, as well as the general view that a mild ‘tapering’ of Fed’s asset purchases will be announced at the next meeting..

9. Eurozone returns to growth, but problems lingers • The eurozone's 18-month recession has ended, spurred on by new economic data in both Germany and France. But the modest recovery won't go very far in fixing the bloc's deeper problems and threatens to stoke a sense of complacency in European capitals • The increased pace was primarily driven by renewed business and consumer spending in the 17-country bloc's two largest economies, Germany and France. The eurozone economy was fragile overall, however, with some countries, notably Spain and Italy, still struggling. • The European Union's official statistics agency Wednesday said the combined gross domestic product of the currency area's 17 members was 0.3% higher than in the first three months of the year, but 0.7% lower than in the second quarter of 2012. It was the fastest quarterly expansion since the first three months of 2011, , ending a sequence of six quarters of contraction. • The improvement was led by quarterly growth of 0.7% in Germany and a better-than-expected 0.5% in France. • Germany bounced back strongly from a winter when lots of snow froze construction and an uncertain global outlook held back industry. France's consumers and government spent more freely in the three months to June. Analysts expect more growth ahead, but at a slower pace.

10. Eurozone’s modest growth unlikely to fix the area’s deeper problems • Among the good news: The economic meltdown in Southern Europe is slowing considerably. The depressed economies of Spain, Italy and Greece contracted again, but more slowly than previously. • Portugal—one of five euro members with a bailout program—even grew by a surprising 1.1% last quarter, although its statistics office cautioned that the relatively early Easter holiday this year was partly responsible, and further austerity measures required under the country's international bailout program may make the recovery short-lived. • Meanwhile, the bloc's return to slow growth, is likely to encourage European politicians to claim that the region's debt crisis is receding, and that a combination of austerity and structural reform is bearing fruit. • Brussels warned against complacency on Wednesday, as once-desperate efforts to fix the common currency's flaws are already showing signs of petering out, and a resolution to its banking and fiscal crises remains a distant prospect . • Most economists say the recovery is too sluggish to overcome the eurozone's multiple ailments, including still-rising debts, mass unemployment, lack of credit for business, hobbled banks and political instability. • Annualized growth of 1.1% is considered too slow to bring down an unemployment rate that has reached a euro-era record of 12.1%. If unemployment stays high, it will keep hurting consumer spending, company sales, government budgets and bank loan quality.

11. UK retails fuelled by summer spending rise at their sharpest pace in over two years • U.K. retail sales offered a fresh sign of a strengthening economic recovery Thursday, rising at their sharpest annual rate in more than two years in July as the hot weather buoyed demand for summer products, official figures showed. • The Office for National Statistics said retail sales rose 1.1% on the month in July and were up 3% on the year. The ONS said the annual rise in sales was the steepest since January 2011. • Economists said lower inflation, an improving labor market, rising house prices and a pickup in consumer confidence should help support retail sales in coming months, adding to the likelihood that the economic recovery will have continued at a firm pace in the third quarter. • They also cautioned that falling real wages—pay adjusted for inflation—could drag on the sector. • Thursday's data come a week after Bank of England Gov. Mark Carney outlined a major shift in the central bank's policy framework, vowing to keep interest rates at record lows at least until the U.K. jobless rate falls to 7%. The unemployment rate averaged 7.8% in the three months to May. The BOE doesn’t expect unemployment to hit the 7% target until 2016. • But the guidance framework gives the BOE an opt-out if annual inflation looked set to be above 2.5% in 18 to 24 months' time or if expectations of future inflation grew dramatically.

12. BOE not unanimous on guidance • Meanwhile, dissent within the Bank of England's interest-rate setting panel fueled investor doubts Wednesday over whether the central bank can stick to its new governor, Mark Carney's, pledge not to raise interest rates until joblessness in the U.K. falls sharply. • Minutes of this month's policy meeting published Wednesday showed Martin Weale, an external member of the central bank's monetary policy committee, voted against the introduction of the BOE's "forward guidance" strategy. • Mr. Weale, a British economist who has long fretted about inflationary pressures in the U.K. economy, couldn't agree to such a lengthy period (18 to 24 months) for the inflation "knockout" to come into effect. • The Bank of England expects annual inflation to slow close to its 2% target by early 2015. • The annual rate of inflation fell in July - to 2.8% from 2.9% the previous month - but continues to outpace wage growth, squeezing consumers’ spending power, official figures showed Tuesday. • A continued cooling of inflation will reinforce expectations the central bank will stick to its pledge to keep its benchmark interest rate at a record low until joblessness declines at least to 7%.

13. Uncertainty over forward guidance pushes gilt yields up • Economists warned that anything less than unanimous support among the central bank's policy makers could lead financial markets to doubt that the monetary policy committee will stick with its rate pledge. • Those doubts were in evidence in market interest rates Wednesday. Market predictions of short-term rates that track the BOE's benchmark suggest investors believe the committee will raise rates in 2015, roughly a year before Mr. Carney said the central bank's forecasts indicated. • Longer-term interest rates also rose. And persistent signs of expansion in the UK economy drove the 10-year gilt yield to 2.70%- up 25bp over the week – as investors appeared to question the Bank of England’s “forward guidance” on interest rates.

14. Japan economic growth comes in less than forecast, stirring debate over planned sales-tax increase • Japan's economy grew an annualized 2.6% in the three months through June, a weaker-than-expected expansion that clouds prospects for a planned sales-tax increase that would help the country rein in its massive public debt. • While below the average 3.6% growth rate economists expected, the figure nevertheless represented continued solid growth in the world's third-largest economy and follows a revised 3.8% annualized growth rate for the first quarter. • The performance over six months is the economy's strongest in three years and a sharp turnaround from last year's recession—Japan's fifth in 15 years, largely due to Prime Minister ShinzoAbe’s push of aggressive monetary easing and government spending. • Mr. Abe is due to announce this fall whether the government will go ahead with a planned doubling of the sales tax to 10% in two stages. • Economists worry that the sales tax increase could choke off the modest recovery. Some advisers to Mr. Abe, said they fear such increases over a short period will nip the recovery in the bud and have argued to delay or push back full implementation of the tax increase. • On the other hand, concerns are rising about burgeoning Japanese government debt, which surpassed $10.4 trillion at the end of June, more than twice the size of the economy, according to data released Friday. It also easily puts Japan as the most indebted nation of any of its industrialized peers. • Not going ahead with the tax increase could risk losing investor confidence in the yen bond market, which could push long-term borrowing costs higher, the fund warned.

15. U.S. stocks struggle amid speculation that ‘tapering’ might start in September

16. Brent oil hit a 4-month high above $111 this week, as unrest in Egypt fuelled worries about supply disruption

17. Major Interest Rate Forecasts

18. The Week Ahead,,,

19. Central Bank Meetings Calendar Calendar for upcoming meetings of main central banks :

20. Regional

21. Egypt's inflation surges to two-year high • Egypt’s Treasury yields have fallen by as much as 1.25% as no new auctions have been held since the latest political developments in the country and banks have been shut down by the CBE. • According to Egypt’s statistics agency CAPMAS, consumer inflation quickened to its fastest pace in two years in July, driven by higher food and prices and a devaluating currency. • Inflation rose to an annual 10.28% in July, up from 9.75% in June and its highest rate since July 2011. • Despite the recent $12 billion in aid from Gulf countries, the recent political developments have continued to devaluate the currency and place upward inflationary pressures and halted economic activity. • However, the aid helped bolster Egypt’s FX reserves, as the central bank announced last week that FX reserves reached $18.8 billion, their highest level in almost 2 years, up from $14.9 billion in June. • Although this is a big jump in FX reserves, they are still approximately half of what they were before the January 2011 uprising. The political uncertainty will minimize foreign investment and tourism, in turn effecting Egypt’s balance of payment. Source: Bloomberg Source: Trading Economics

22. GCC Economic Highlights:Saudi Arabia’s July consumer price rise 3.7% from year earlier • Saudi Arabia’s consumer inflation increased to 3.7% in July, compared to July 2012, up from 3.5% in June. • Higher food and rental prices pushed inflation up, while core inflation maintained a downward trend. • As expected, food inflation increased further in July to a 4-year high owing to the holy month of Ramadan, while strong housing demand kept the upside trend of rental inflation. • Food inflation accelerated to 6.9% year-on-year in July compared with 6.1% in June, putting food inflation at its highest level since December. On a monthly basis, food prices rose by 1% compared to June. • The rent and housing-related services inflation accelerated to 4.2% year-on-year in July compared with 3.6% in June. This was mainly driven by rising rental inflation reflecting a seasonal trend of increased demand in the summer. • On a monthly basis, prices increased by 0.4% compared to 0.2% in June. Source: Trading Economics

23. GCC Economic Highlights:HSBC: UAE PMI rises in July as export market demand jumps • HSBC’s purchasing manager index, inched up to 54.5 in July, from 54.1 in June. A reading above 50 indicates the economy is expanding. The indicator is designed to give a snapshot of the performance of the non-oil private sector in the UAE. • According to the report, non-oil business activity in the UAE increase in July, driven by new orders from abroad. • HSBC said the July data signaled further rises in output levels and new order intakes at non-oil producing private sector companies in the U.A.E. The increase in foreign demand was the highest in six months. • Meanwhile, new business from abroad rose at the sharpest rate since January and employment levels increased further, albeit at the slowest pace in eight months. • Key points: • Outputs expansion broadly unchanged from June, but new order growth accelerates • Demand from exports markets increases at fastest pace in six months • Rate of job creation eases

24. GCC interbank rates Source: Bloomberg

25. Comparative MENA Markets For the period 11/08 – 16/08

26. Locally

27. Inflation reaches 6.4% during first seven months of the year • According to figures released by the Department of Statistics, the inflation rate stood at 6.40% during the first seven months of 2013 compared to the same period last year. • Inflation seemed to have eased over the past few months, but at 6.40% inflation remains high and subject to new inflationary pressures in the remaining months of the year. • Among the main commodities groups which contributed to the increase were transportation (15.00%), fuel and electricity (24.00%), and fruits and vegetables (14.00%). • The report also showed that inflation reached 5.50% during the month of June compared to the same month last year, down from 5.80% the previous month. Inflation was driven by the same groups as mentioned above, but prices of tobacco and cigarettes, medical care and cereals were down. • Meanwhile, on a monthly basis inflation rose by 0.45% in July compared to the previous month; compared to an increase of 0.80% between May and June 2013. • Forecast: • The average of forecasts by international agencies on Bloomberg expects crude oil prices to rise throughout the remaining 2 quarters of the year. • Additionally, hikes in electricity tariffs for industrial and commercial have only recently gone into effect. • According to studies by the IMF and statements by the Minister of Finance UmayyaToukan, raising electricity tariffs is expected to cause inflation to increase by 1% to 1.5%. • Electricity production cost hikes are back on the agenda, after the recent disruption in Egyptian gas supply, which is expected to increase the financial losses of the NEPCO by 1.2 to 1.4 million JD per day. • The number of Syrian refugees that are entering the country are placing pressure on industries, services and infrastructure in Jordan.

28. JD deposits at licensed banks continues to grow • In the year 2012, JD deposits at licensed banks fell by 1.40 billion JD while foreign currency deposits increased by $2.82 billion as a result of increased fear of the devaluation of the JD, causing a huge dollarization wave. • However, since the beginning of this year, JD deposits have increased by 1.98 billion JD to reach an all time high of 19.69 billion JD at licensed banks. • Additionally, foreign currency deposits fell by approximately $595 million for the same period to reach $9.65 billion (6.84 billion JD). • In detail, the major increase in JD deposits came in the month of April, as JD deposits increased by 601 million JD from March. • Recently, the CBJ decreased major interest rates on JD instruments by 0.25%, indicating that the JD devaluation and dollar crisis has calmed down, and it can now concentrate on helping GDP growth.

29. US agrees to be Jordan’s guarantor on Eurobond • Last week, Jordan and the U.S signed an agreement which allows Jordan to issue Eurobonds in the global financial markets with the U.S as its guarantor. • The amount of the bond is expected to be around $1.25 billion for a period of up to 7 years. • Jordan will be able to obtain external financing with competitive interest rates at par with U.S government borrowing. • Choosing the U.S as the guarantor will allow Jordan to borrow from international markets at competitive rates, which will minimize the cost of borrowing on the government, provide the necessary funding to meet expenses, and boost foreign currency reserve levels. • Additionally, it will reduce the government’s need to borrow from the domestic market, providing funds for the private sector to expand. • Currently, the U.S government’s borrowing rate for a duration of 7 years is 2.25%. If the U.S did not agree to be Jordan’s guarantor, the Jordanian government would borrow at significantly higher rates.

30. Electricity hike into effect last Thursday • As part of the National Economic Reform Program with accordance from the IMF, the government raised electricity tariffs on certain sectors last Thursday. • President of the Electricity Regulatory Commission (ERC), Mohammad Hamad said the tariffs will be raise over the course of five years to bring the state-owned National Electric Power Company (NEPCO) to cost recovery. • He added that tariffs will not be put into effect for Jordanian households until next year. • Hamad said that government buildings, such as ministries, public and private hospitals, schools and universities will witness an increase of 5 to 10%. The new scenario excludes small industrial establishments that consume less than 10,000kW a month. • On the other hand, as of 2014, households that consume over 600 kilowatts (kW) of electricity a month and whose bill exceeds JD50 will see an annual increase in their bills of up to 15%. • The disruption in Egyptian gas flows has created bigger loses for NEPCO, whose estimated losses at the end of 2012 are 1.158 billion JD, forcing it to resort to more expensive methods to generate electricity. IMF’s cost recovery plan Source: IMF

31. Amman Stock ExchangeFor the period 12/08 – 15/08 ASE free float shares’ price index ended the week at (1921.9)points, compared to (1946.5)points for the last week, posting an decrease of 1.26%. The total trading volume during the week reached JD(21.2) million compared to JD(20.5) million during the last week, trading a total of (22.9) million shares through (10,852)transactions The shares of (161) companies were traded, the shares prices of (54) companies rose, and the shares prices of (72) declined.

32. Local Debt MonitorLatest T-Bills As of August 18, the volume of excess reserves, including the overnight window deposits held at the CBJ JD(2,691) million.

33. Local Debt MonitorLatest T-Bonds Issues

34. Prime Lending Rates

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