Interest Rate Monitor

1. Interest Rate Monitor July 7, 2013

2. Brief Overview International MENA Region Egypt: Treasuries fall while stocks rally after the ousting of President Morsi US: Bond yields spike after a better then expected jobs report, in anticipation of fewer Fed purchases GCC News Highlights Eurozone: ECB introduces forward guidance as the most recent euro crisis seems to be averted GCC interbank rates UK: Carney signals that rates will remain low longer than expected despite upbeat data Comparative MENA Markets China: Data continues to be week, as the credit crunch eases Local Economy Markets overview New and analysis Major Indices: US stocks gain following the jobs report • GDP growth reached 2.6% in Q1 of this year; concerns arise due to disruption in Egyptian gas supply Commodities and Currencies: Egypt crisis sends oil prices high Markets overview Central Bank Meeting Calendar • Amman Stock Exchange Interest Rate Forecast • Local Debt Monitor The Week Ahead • Prime Lending Rates

3. International

4. Yields soar on positive jobs report, QE tapering expected • Robust US employment figures sent bond yields soaring on Friday as the labor market showed it was healthy enough for the Federal Reserve to slow its $85bn a month in asset purchases later this year. • The 10-year US government bond yield was up 23bp at 2.73% – the highest since August 2011 – after the US employment report showed that 195,000 jobs had been created in June, well ahead of forecasts. Over the week, the 10-year US yield was up 24bp.

5. U.S. hiring beats expectations in June with big job gains • The job market made solid improvement last month, sending signals to markets that the Federal Reserve is on track to start winding down its bond-buying program in the coming months. • The economy added 195,000 new jobs in June, beating economists' expectations of 155,000 jobs. • U.S. employers added 195,000 jobs in June, a sign of consistent improvement in the labor market that keeps the Federal Reserve on track to start winding down its bond-buying program in the coming months. • The stronger job growth came alongside sharp revisions showing that employers added a combined 70,000 more jobs than previously estimated in April and May, the Labor Department said Friday. For the past three months, payrolls have increased by about 196,000 jobs a month. • Meanwhile, the unemployment rate, obtained by a separate survey of U.S. households, was unchanged at 7.6% as more people entered the labor force. • Nevertheless, economists say the gains in hiring -- including past months that were revised higher -- mean the rate should head lower in the months ahead. June: +195,000

6. The jobs report signals that Fed is on track to start pulling back its stimulus program • The report was being watched particularly closely by investors, in light of recent comments from Fed Chairman Ben Bernanke that caused wild swings in the markets. • For the last couple of weeks both stocks and bonds had been selling off, as investors fretted the Fed may be ending its stimulus program too early. • The latest snapshot of the job market suggests the economy is withstanding the effects of higher payroll taxes, government spending cuts and slower growth overseas. • The underlying strength of the report and the stretch of gains in the labor market—employers have added more than 200,000 jobs a month on average in the first half of this year—cemented expectations that the Fed will start to slow its $85 billion-a-month bond-buying program at its September meeting. • Fed Chairman Ben Bernanke has said the program may end entirely around the time the unemployment rate hits 7%, a threshold the Fed expects to be reached in mid-2014. • Stocks rose slightly and bonds sold off following the news. It seems that investors are beginning to believe that the economy actually may be strong enough to grow without the extreme monetary support. June: 7.6% 7.0%: Fed target for finishing quantitative easing 6.5%: Fed target for considering rate hikes

7. U.S. manufacturing accelerated in June, another sign that the US is working itself out of a soft patch • America's factories accelerated slightly in June, easing fears of a deeper U.S. slowdown, but weakness among manufacturers elsewhere points to the sector's vulnerability around the globe. • The Institute for Supply Management on Monday said its broad index, in which any reading above 50 indicates expansion, rose to 50.9 last month from 49 in May. • The report showed growth in new orders, production and inventories, pointing to a fairly solid report confirming that the US is working its way through the soft patch and that the bottom for the ISM was likely in May. • It is likely that there will be further increases in the ISM in the coming months. • The slight upturn in the U.S. contrasts with much of the rest of the world. Manufacturing across most of Asia, including China, weakened in June, while euro zone factory activity continued to shrink, albeit at a slower pace.

8. Borrowing costs jump early in the week due to renewed euro crisis concerns , but stabilize later in the week • Earlier in the week, borrowing costs in southern Europe had jumped on concern about the stability of both Greece and Portugal. • The Portuguese government was shaken by the resignation of two key ministers, while Greece struggled to convince the EU and IMF that it's able to meet the terms of its bailout. • However, yields on 10-year government bonds fell back on Friday. The drop was helped along by signs of progress in both countries and the ECB's commitment Thursday to keep rates at current levels or even lower for "an extended period." Portugal's 10-year yield was back below 7% after spiking to 8%. • The German Bund yield rose 8bp on the Friday to 1.73%, leaving it flat over the week. • Meanwhile, yields on Spanish and Italian 10-year bonds fell to 4.66% and 4.42% respectively.

9. ECB surprises marketand introduces forward guidance • Europe's central bank broke with longstanding tradition by pledging that interest rates will remain at record lows far into the future. This is a very new way of ECB communication. Previously, Draghi as well as his predecessors have repeated “we never pre commit”. • The strategy shift by the ECB, which has long prided itself for keeping all its options open, came amid a political crisis in Portugal that threatened to bring down the government of a country largely seen as a model for Europe's troubled periphery. As of late Thursday, Portugal's coalition government appeared to have found a way to stay together. But doubts linger about the country's financial health and political stability. • The renewed euro-crisis concerns, combined with a recent rout in global bonds triggered by the Federal Reserve, raised doubts that the euro bloc would emerge from its recession this year as hoped. • The ECB will keep rates where they are, or even lower, for "an extended period," ECB President Mario Draghi said after the bank's monthly meeting. The ECB held its main policy rate at 0.5%. • There was, however, an "extensive discussion" within the ECB's rate board on whether to reduce rates Thursday, Mr. Draghi said, leaving the door open for a rate cut and negative deposit rate also continues to be a possibility . • The decision to adopt forward guidance was unanimous. It means that even conservative ECB members such as German central-bank chief Jens Weidmann—who has warned of the dangers of keeping rates low for too long—saw the benefits.

10. ECB still expects gradual recovery in the coming months • Though Mr. Draghi didn't specify how long an "extended period" may be, he sought to amplify the importance of the ECB's new communications strategy, calling it "unprecedented." Mr. Draghi's predecessors at the ECB long resisted such pledges. • The ECB said the economy should gradually improve in the coming months. Eurozone gross domestic product has contracted for 18 straight months through the first quarter of 2013. • But a vibrant, job-creating rebound remains elusive. This week data showed that the rate of unemployment across the eurozone rose to a record 12.1% in May. It is above 25% in Spain and Greece and approaching 18% in Portugal, putting additional strain on public debt. • Moreover, small businesses in southern Europe continue to pay considerably higher rates on loans than their German counterparts, ECB data showed Thursday. • Meanwhile, Inflation remains subdued. Eurostat Monday said consumer prices in the eurozone rose 1.6% in the 12 months to June, up from 1.4% in the 12 months to May and 1.2% in the 12 months to April. Although rising, the annual rate of inflation remained well below the European Central Bank's target of just below 2.0%.

11. Eurozone business activity slowdown eases • On Wednesday, a survey showed businesses in the eurozone cut back on activity in June at the least severe rate in over a year. • Data company Markit said Wednesday its composite purchasing managers' index, a gauge of business activity in the eurozone, edged up to 48.7 in June from 47.7 in May. The figure means activity was still falling, but at the slowest rate in 15 months. The 50 level separates growth from contraction. • The improvement was less significant than economists had expected, however, largely due to poor readings by services companies in Germany and Italy. • Combined with readings for April and May, data points to a continued contraction in eurozone gross domestic product in the second quarter, said Markit chief economist Chris Williamson. • That would stretch the region's recession to seven straight quarters, the longest in the postwar history of its constituent nations. • Nevertheless, there is good reason to believe that the region is stabilizing and on course to return to growth during the second half of the year. But any growth is likely to be tepid, due to little signs of expansion in Germany.

12. Eurozone retail sales rise more than expected • A surprisingly strong rise in retail sales across the 17 countries that share the euro during May adds to recent indications that the currency area's economic contraction may be coming to an end. • The pickup in retail sales suggests consumer spending could yet support a fragile economic recovery that the ECB expects to take hold later this year. • Eurostat, the EU's official statistics agency, said retail sales rose 1% in May from April, rebounding from falls of 0.2% in each of the two prior months and beating expectations. The growth was the strongest since January this year. • Sales were down just 0.1% from the comparable month a year earlier. That compares with a 1% year-to-year fall in April and is the least severe decline since March 2012.

13. Carney starts early forward guidance • The Bank od England kept its main interest rate unchanged at 0.5% on Thursday and the size of its bond-buying stimulus program unchanged at £375 billion. • However, Mark Carney ended his first policy meeting as governor with an admonishment to financial markets that rising interest rates were unwarranted and could derail a fledgling recovery in the U.K. economy. • Against usual practice, the MPC published a statement alongside the decision, in which Mark Carney signaled that the BoE will keep interest rates at a record low for longer than investors had expected. • Borrowing costs have been creeping up. Early last week, at the height of the Fed-inspired selloff, money market contracts were pricing in a rise in the BOE's benchmark rate as early as mid-2014. • As recently as May, markets weren't expecting any rise in the benchmark rate until well into 2016, according to BoE forecasts published that month.

14. Carney starts early forward guidance • The BoE said that while there were signs that a recovery is underway, it stressed that it will be "weak by historical standards," and the economy is likely to continue along below potential for some time, despite some promising data the past few weeks. • The BoE's move foreshadows a looming shift in communications under Mark Carney; guidance is a policy his predecessor, Mervyn King, resisted. • Mr. Carney is expected to explain in greater detail how the BoE will use guidance when he gives his first news conference as governor on Aug. 7, following the publication of new forecasts for economic growth and inflation by the MPC.

15. UK service sector growth fastest for two years • Thursday’s rate decision came after a slew of upbeat data for the UK in recent weeks showed signs of an economic recovery after a period of stuttering growth. • The UK's dominant services sector, which account for three-quarters of the economy, expanded at its fastest rate since March 2011 during June. • The purchasing managers' index soared to 56.9 in June, up from 54.9, its highest level for 27 months. A figure above 50 means growth, according to Markit, which compiles the survey. • Surging growth in the service sector accompanied a resurgent manufacturing sector and modest growth in construction in June resulted in an increasingly broad-based economic upturn. • The buoyant picture for June means the economy is on course to expand by at least 0.5% in the second quarter, with more growth to come, according to Chris Williamson, Markit's chief economist.

16. China credit crunch fears ease as bank rates normalize • Tension in China's money markets have eased with short term rates sliding as the central bank steadied the market with a pledge to backstop ailing lenders and provide liquidity injections to support the financial system. • The financial turmoil earlier this month came as the central bank tried to force banks to manage their liquidity better. With the People's Bank of China no longer playing the role of lender of last resort, the rates that banks charge to lend to each other for overnight funds shot up, briefly topping 30%. • The cash crunch came at the end of the second quarter as banks rushed to raise funds to meet capital requirements. • The People's Bank of China has taken an unusually indifferent approach in handling the liquidity crisis so far, refraining from using its routine market operations to add cash into the system and only admitting at the last minute that it had injected funds into some banks to help alleviate the crisis. • However, rates have now normalized to 3.98% level after the PBC moved to alleviate fears last week. It said: 'If banks have temporary shortages in their planned funding, the central bank will give them liquidity support. • 'If institutions have problems in managing their liquidity, the central bank will apply appropriate measures under the circumstances to maintain the overall stability of money markets.‘

17. China PMI Data Hint at Slowing Economic Growth • China's manufacturing sector showed fresh signs of weakness in June, against a background of strains in the country's financial markets and an effort to rebalance the economy. • Two indices of manufacturing activity published Monday came in below May levels, pointing to lackluster growth in the second quarter. But policymakers have repeatedly emphasized that they see little room for economic stimulus, amid concerns that past efforts to pump up the economy may have left a legacy of bad debts and wasteful investment. • The official purchasing managers' index fell to 50.1 in June from 50.8 a month earlier, holding just above the cutoff level of 50 that divides expansion from contraction. • The HSBC manufacturing PMI, a competing gauge that gives more weight to smaller firms and exporters, fell deeper into negative territory, dropping to 48.2 in June from 49.2 in May. • China's new administration has signaled its intention to rebalance the economy away from a reliance on exports and investments and toward a greater emphasis on domestic consumption. • The country's growth now looks likely to be sluggish when first-half GDP figures are released this month.

18. US stocks gain following the jobs report, but concerns remain that the Fed will scale back stimulus

19. Egypt crisis sends oil prices sharply higher

20. Major Interest Rate Forecasts

21. The Week Ahead,,,

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

23. Regional

24. Egypt’s Treasury yields surprisingly fall after a week of turmoil • Egypt’s 6M and 12M Treasury yields surprisingly fell when an auction was held last Thursday, while no auctions were held for 3M and 9M Treasuries, after a week of political unrest that ended with the removal of PreisdentMorsi by the Egyptian military forces. • Moreover, Egypt’s stocks rallied indicating that Egyptian investors view the ousting of President Morsi as a positive improvement in the economy. • Egypt needs to find stability soon, as the Egyptian Pound continued to depreciate reaching approximately 7.03 against the dollar. • Additionally, if Egypt wants to secure the $4.8 billion IMF loan, it will need to act fast and take unpopular decisions as it’s foreign reserves are already low at $16 billion (just above the 3 month of imports set by the IMF). • The unrest will hurt its tourism and foreign direct investment, while the depreciation of the pound will increase its import bill as it struggles to find stability. Source: Bloomberg Source: Bloomberg

25. Fitch cuts Egypt’s credit ratings from B to B- • Fitch Ratings, the global rating agency, downgraded Egypt’s issuer default ratings and country ceiling from ‘B’ to ‘B-’, following the unrest that took place after the military deposed President Mohamed Morsi amid mass demonstrations. • The global firm cited “heightened uncertainty” and “inflamed political tensions” as reasons behind the economic turbulence in the country, both likely to jeopardize its economy and creditworthiness. • The global rating firm could further downgrade Egypt’s credit rating, as outlook is already negative. • Both ratings are non-investment grade or “junk” ratings, six notches below investment grade. • Fitch’s release also stated that the current political scene may impede Egypt from implementing its fiscal and structural reforms, necessary to secure the proposed $4.8bn International Monetary Fund loan package.

26. GCC Economic Highlights:UAE PMI slows in June on weaker foreign market conditions - HSBC • Growth in non-oil business activity in the United Arab Emirates slowed slightly in June as companies contended with worsening economic conditions in foreign markets, while the rate of wage inflation spiked, HSBC said Tuesday. • The bank's purchasing managers' index came in at 54.1 in June, down from a reading of 55.3 in May. Any reading above 50 indicates growth in the U.A.E.'s private-sector non-oil economy. • Activity, new orders, employment and stocks of purchases all improved, but only workforce numbers rose at an accelerated rate from the previous survey period. • However, June's slowdown was driven by weaker increases in output and new orders, HSBC said, while wage inflation increased at the fastest rate in the survey's 47-month history. • Key points: • Outputs and new orders increase at weaker rates • New exports business rises, albeit only slightly • Average staff costs increase at fastest pace in series history

27. GCC Economic Highlights:Bahrain economic growth accelerates strongly in Q1 of 2013 • Bahrain's economic growth accelerated strongly in the first quarter of this year, helped by a revival of oil output. • Gross domestic product, adjusted for inflation, expanded by 2.5% in the first quarter of this year, compared to a downwardly revised 0.2% in the fourth quarter last year. • On an annual basis, growth quickened to 4.2% in the first three months this year, the highest rate in a year, from a downwardly revised 2.5% in the previous quarter. • Output in the hydrocarbons sector, which accounts for a quarter of Bahrain's $30 billion economy, grew 1.3% in the first quarter from the previous quarter. • Hydrocarbon output jumped 8.0% on an annual basis in the first quarter after falling by the same amount in the fourth quarter of last year.

28. GCC Economic Highlights:Kuwait May inflation climbs to 3pc y/y • The annual inflation in Kuwait climbed to 3% in May from 2.8% the previous month mainly due to a jump in food prices, said a report. • The food prices, which account for over 18% of the basket, rose 6.3% on an annual basis in May and 0.2% from the previous month. • In other news, Kuwait's first quarterly balance-of-payments data for 2013 indicate a continuing strong current-account performance, with a surplus of KD4.7bn (US$16.7bn, equivalent to 9.5% of estimated 2012 GDP) generated in the first three months of this year. • Nonetheless, the surplus was lower than in the corresponding period of the previous year when it reached KD5.9bn (11.8% of GDP). • The deterioration largely reflected the impact of a 12.5% year‑on‑year decline in oil receipts, which make up the bulk of Kuwait's merchandise exports (95% in the first quarter of 2013).

29. GCC interbank rates Source: Bloomberg

30. Comparative MENA Markets For the period 16/06 – 21/06 Egypt stocks rally as army ousts president

31. Locally

32. GDP grew by 2.6% in Q1 of 2013 • GDP grew by 2.6% in the first quarter of 2013, compared to the first quarter of 2012,with expectations for 3.3% annual growth in 2013 according to IMF forecasts. • Sectors that had the biggest impact on growth during the first quarter of 2013 compared with the first quarter of 2012: • Construction industry and social service sector grew the most by 7.80% and 7.7% respectively. • On the other hand, Agriculture sector and quarrying industry contracted the most by 8.30% and 18.30% respectively. • GDP growth remained below estimates due to a drop in exports and a drop in the purchasing power of the consumer, as the government continue to take harsh austerity measures to minimize it’s fiscal deficit. • Additionally, capital spending by the government has not kicked in, which is expected to help increase the GDP growth rate later this year.

33. JD deposits at licensed banks at all time high • 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 1.62 billion JD to reach an all time high of 19.33 billion JD at licensed banks. • Additionally, foreign currency deposits fell by approximately $520 million for the same period to reach $9.72 billion (6.89 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. • On the other hand, the major drop in foreign currency deposits also came in the month of April, as foreign currency deposits fell by $357 million from March.

34. Explosion hits Egypt-to-Jordan gas pipeline • There were explosions early on Sunday at an Egyptian pipeline supplying natural gas to Jordan. • Jordan depends on the gas to generate electricity, and if gas supplies are low, Jordan resorts to importing oil at higher prices to meet electricity needs. • Since the beginning of the year, the amount of gas imported has been higher than previous years, as reflected in Jordan’s oil bill that has fallen by 643 million JD in the first four months of the year, compared to last year. • The disruption in gas flows will once again raise Jordan’s oil bill, widen the fiscal deficit and create bigger loses for Jordan’s national electricity company, NEPCO. • As part of the National Economic Reform Program, the IMF has set target losses for NEPCO in the upcoming years, and the disruption in gas will cause a setback in the performance of NEPCO.

35. Amman Stock ExchangeFor the period 30/06 – 04/07 ASE free float shares’ price index ended the week at (1966.8)points, compared to (1986.1)points for the last week, posting a decrease of 0.97%. The total trading volume during the week reached JD(41.1) million compared to JD(82.9) million during the last week. Trading a total of (39.2)million shares through (16,826)transactions The shares of (166) companies were traded, the shares prices of (43) companies rose, and the shares prices of (93) declined.

36. Local Debt MonitorLatest T-Bills As of June 16, the volume of excess reserves, including the overnight window deposits held at the CBJ JD(2,365) million.

37. Local Debt MonitorLatest T-Bonds Issues

38. Prime Lending Rates

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