61181 Daily Brief Economics and Financial Market Commentary July 30, 2008 12:26 pm Mick Riordan (x31289), Cristina Savescu (x80812), 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: www.worldbank.org/gem The “DECPG Daily” will be taking its traditional break for the month of August—and wish readers the best for the summer vacation season. World stocks close higher on earnings. Shares in Europe and Asia advanced the most in a week on Wednesday, following a sharp rebound in U.S. equities overnight, as several major companies reported better-than-expected earnings and oil prices retreated to 12-week low. Asian stocks closed higher on Wednesday as drug-makers and financial companies, including Taisho Pharmaceutical Co. and Matsushita Electric Industrial Co. posted strong gains that bested market estimates. The region’s benchmark index, the MSCI Asia- Pacific Index climbed 1.6%, the biggest one-day advance since July 21. All 10 of the index’s industry sectors gained, with health care and financial shares posting the biggest gains. Major markets across the region advanced, with Japan up 1.6%, Hong Kong 1.9%, Korea 0.7%, and India 3.6%. All other benchmarks in the region increased except for China and Thailand. Meanwhile, European stocks climbed, taking their cue from U.S. and Asian markets, boosted by a flurry of better-than-estimated earnings from some of the region’s biggest companies. Europe’s Dow Jones Stoxx-600 Index advanced 1.4% in mid-day trading, led by Siemens, Europe’s biggest engineering company, and Arcelor-Mittal, the world’s largest steelmaker. By country, the U.K.’s FTSE 100 index added 1.2%; France’s CAC-40 index advanced 1.4% and Germany’s DAX index climbed 0.7% by midday. WTO negotiations conclude without an agreement. For the third time in as many years, attempts to restart and revive the Doha Round of trade negotiations under the WTO appear to have fallen short. A nine-day trade summit in Geneva ended yesterday without an agreement on a plan to cut agricultural subsidies and further open trade in manufactures. The sticking point was apparently a clash between the U.S. and Indian delegations regarding how poor nations could raise tariffs when farm imports surge. The United States accused China and India of refusing to open their markets to foreign competition and snubbing a compromise on agriculture and industrial goods. The failure “will have a major impact on the fragile multilateral trading system,” Chinese Commerce Minister Chen Deming said yesterday. It added to a “world economic downturn, serious inflation and imminent financial risks,” he noted. Euro Area confidence at 5-year low in July. European households and businesses are more pessimistic about the economic outlook than at any time since the September 11, 2001 bombings of the New York World Trade Center, according to surveys for July released by the European Commission. An index measuring overall economic sentiment fell 5.3 points to 89.5 this month, while Euro Area consumer confidence dropped to a reading of (minus) 19.7 from (minus) 16.7 in June, contrasted with recent highs of (minus) 12 at the start of 2008 [see http://GEM]. Rising commodity prices have lifted Euro Zone inflation to 4% (y/y), a 16-year high, sapping household purchasing power and pushing up firms’ costs. This is adding to pressures on the economy as credit remains tight, and the strength of the euro is increasingly impeding export performance. “The business and consumer confidence surveys have ‘stagflation’ written all over them,” notes Martin van Vliet of ING Group in Amsterdam. There is a “frightening mix of sharply falling confidence and elevated inflation expectations.” Japan’s IP falters in June. As Japanese exports declined for the first time in 4 years during June, so in turn did manufacturing output in the month, by a sharp 2% (m/m) carrying production to a decline of 3.2% for the second quarter (saar) contrasted with a 2.8% fall in the first three months of 2008. Back-to-back quarterly production declines have not occurred in the world’s second largest economy since 2001. Japan has seen its shipments to its biggest export market- the United States- decline for three months running, while signs of slowing demand growth in East Asia are alerting Japanese business to the probability of an overall downturn for the economy in the second quarter, with potential weakness extending into the second half of the year. Among emerging markets...in East Asia, Malaysia’s Domestic Trade and Consumer Affairs Minister Shahir Samad said that the government may subsidize gasoline for another decade, after the prime minister backed off from a plan that would complete pass-through of international oil prices to local fuel prices after a 41% hike during June. The government spent 8.8 billion ringgit subsidizing gasoline, diesel and liquefied petroleum in 2007, and subsidies may rise to 29 billion in 2008, as oil prices average $140 per barrel with no further increase in local fuel price. Vietnam’s central bank pledged to keep its key interest rate at 14%, the refinancing rate at 15% and the discount rate at 13% during August, as higher interest rates helped curb inflationary pressures, brining monthly inflation down to the slowest pace since October. China’s retail sales picked-up to 23% growth in June (y/y), highest in a decade; adjusted for inflation, retail sales gained 14.8%. During the first half of the year, sales expanded 21.4% to 5.1 trillion yuan, and adjusted for inflation sales advanced by 12.9%. In Central and Eastern Europe, Poland’s central bank kept its seven-day reference interest rate unchanged at 6%, following four hikes this year, as slower economic growth is expected to help ease inflationary pressures. Slovenia’s retail sales in June increased 6.7% (y/y), faster than in the previous month, on account of higher sales of food, drinks and tobacco. Bulgaria’s producer price inflation accelerated to 14.5% year-on-year in June, on account of higher prices for food and timber. This compares to an inflation rate of 13.6% in May, with monthly inflation at 2%. Hungary’s annual industrial producer prices rose 4.6% in June, down from 4.8% the previous month, according to the Central Statistics Office. Export prices declined 0.8% in June, while domestic sales prices rose 12.1% in the twelve months to June. In Latin America, Brazil’s IGP_M price index increased 1.46% in July, down from 1.98% in June, on the back of higher wholesales costs for manufacturers. Manufacturers absorbed most of the increase, with prices to consumers increasing less rapidly. Wholesale prices, which account for 60% of the index increased 2.2% in the month, while consumer prices rose 0.65%. Annual inflation reached 15.12% in July (y/y), the fastest since October 2003, when CPI registered gains of 17.3%. In Sub-Saharan Africa, South Africa’s consumer price inflation accelerated to 11.6% year-on-year in June, from 10.9% in May, the fastest pace in at least a decade, signaling that inflationary pressures are building in the economy. The appreciation of the rand against the U.S. dollar and lower oil prices this month may help ease a degree of inflationary pressure. Headline inflation which includes mortgage costs picked-up to 12.2% in July, while core inflation accelerated to 12% from 11%. ***************************************************** 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. The views expressed here are those of the various authors and do not necessarily reflect those of the World Bank Group's Executive Directors or the countries they represent. The content is subject to copyright and is not for quotation outside of the World Bank. The Prospects Group of the World Bank is pleased to share this content with GEM subscribers, under the terms and conditions of use agreed upon login (at www.worldbank.org/gem) to the extranet GEM site. Feedback and requests to be added to or dropped from the distribution list, may be sent to eriordan@worldbank.org.