Global Data Watch 110311 JPM

Economic Research
March 11, 2011
Global Data Watch

1H11 GDP growth trimmed to 3% ar in US and 3.7% worldwide as shocks and near-term uncertainty mount A massive earthquake in Japan adds to uncertainties even as economic data continue to point to robust 1Q11 growth EMU policymakers begin a two-week stretch of crucial meetings that will unveil the latest attempt to resolve the peripheral fiscal crisis COPOM turns dovish while Banxico notes upside inflation risks
Contents Economic Research note US data bring hints of stronger export growth ahead The role of the time horizon in Euro area debt sustainability Aussies online shopping: under-stating retail sales, not GDP Singapore: to maintain current tightening path or go further? Czech rate hikes: lagging ECB at first, but outrunning in 2012 Global Economic Outlook Summary Global Central Bank Watch The J.P. Morgan View: Markets Selected recent research from J.P. Morgan Economics Data Watches United States Euro area Japan Canada Mexico Brazil Andeans United Kingdom Central Europe Australia and New Zealand China, Hong Kong, and Taiwan Korea ASEAN Regional Data Calendars 11 13 15 17 19 4 6 7 10
Shaking foundations
Fridays massive earthquake in Japan added to the unusual array of shocks that are buffeting the global economy in early 2011. The lengthy list includes the oil price shock, surging food prices, severe winter weather in the US and Europe, Lunar New Year holiday disruptions in China, and simmering tensions surrounding the EMU fiscal crisis. As some drags have persisted longer than expected and new ones have come on the scene, this has both raised the level of uncertainty about the outlook and tempered our baseline for near-term growth. We lowered the US forecast for 1H GDP Friday for the second time in two weeks, with growth now expected to average 3% ar in the two quarters, versus the original forecast of 4%. We made a smaller downward adjustment to the Euro area growth forecast last Friday. These changes are likely to be followed by modest cuts elsewhere around the globe in coming days. One candidate may be the UK, where weak construction data have shifted the risks for 1Q growth to the downside. As we assess the likely impact of these supply and geopolitical shocks on nearterm growth, it is important to recognize that most, if not all of them, will prove to be temporary, and that they are occurring against a backdrop of very strong fundamental supports for growth. Industrial production is booming and the purchasing-power hit to consumption from higher oil prices is being cushioned by improving labor markets, a 17% advance in global stock prices since September, and the reduction in social security taxes in the US. Moreover, the soft spots in the global economy, including the service sector, the Euro area outside of Germany, and Japan, are all showing signs of improvement. Even with the cuts we have made to the forecast so far, our call for 1H global growth still stands at 3.7%, which is 1%-pt above trend. Put differently, the shocks to date would have to magnify considerably to push global growth below this trendline. Our biggest immediate concern remains the oil shock and political turmoil in the Middle East and North Africa. Oil shocks can affect the economy through two channels: the hit to household purchasing power and a loss of confidence and risk
Oil price and retail sales volume, dev. mkts.
%3m/3m chg -30 -15 0 15 30 45 60 00 Retail sales 02 04 06 08 10 Brent oil %3m/3m chg, saar 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0
21 29 35 39 41 43 45 47 51 55 59 63 65 72
Equities and consumer expectations, US

%3m chg 20 10 0 -10 -20 -30 05 06 07 08 09 10 11 12 Cons. Expect. S&P500 Index; (Michigan survey) 90 80 70 60 50
Bruce Kasman
(1-212) 834-5515 bruce.c.kasman@jpmorgan.com JPMorgan Chase Bank NA
David Hensley
(1-212) 834-5516 david.hensley@jpmorgan.com JPMorgan Chase Bank NA
Joseph Lupton
(1-212) 834-5735 joseph.p.lupton@jpmorgan.com JPMorgan Chase Bank NA
www.morganmarkets.com
JPMorgan Chase Bank NA, New York Bruce Kasman (1-212) 834-5515 Joseph Lupton (1-212) 834-5735 bruce.c.kasman@jpmorgan.com joseph.p.lupton@jpmorgan.com David Hensley (1-212) 834-5516 david.hensley@jpmorgan.com
Economic Research Global Data Watch March 11, 2011
China all-industry PMI and real GDP

DI, sa 62 58 54 50 46 GDP 2006 2007 2008 2009 2010 2011 PMI %q/q, saar 18 14 10 6 2
a heavy security presence. Although more protests this month will continue to test authorities, policy actions aimed at appeasing at least some of the protestors demands will likely damp tensions. These measures could entail the inclusion of younger figures in the government, the introduction of a set of mortgage laws, and education reforms. In addition, GCC countries have announced a US$20 billion support fund to help Bahrain and Oman, both of which have been affected by the spread of popular protests. This impressive plan represents more than 26% of Bahrain and Omans GDP.
Earthquake rattles strengthening Japan

A magnitude 8.9 earthquake, the fifth largest in the world since WWII, struck the east coast of Japan Friday morning, 373 kilometers northeast of Tokyo. While the seriousness of this tragic disaster should not be underestimated in terms of its broader impacts, it is premature to gauge the economic fallout. Undoubtedly, economic activity will be disrupted in the very near term, at least in the most affected areas. This will be followed by an increase in public works spending. On net, it is worth noting that GDP grew more than 3% annualized in the first three quarters of 1995 following the devastating 7.2magnitude Kobe earthquake. The BoJ announced it would provide for any needed additional liquidity in the aftermath of the earthquake. Also, next weeks two-day board meeting has been shortened to just one day, Monday, to allow for prompt action if necessary. Should the yen strengthen significantly and the Nikkei sell off, as occurred following the 1995 Kobe earthquake, the BoJ may step in to ease policy further by expanding its QE operations via accelerating the purchase of JGBs. The earthquake comes at a time when the macroeconomy appears to be accelerating sharply from a temporary contraction last quarter. The string of strong data was continued this week. Total machinery orders in January jumped close to 20%m/m sa, the biggest gain since 1988, led by orders from overseas. Also, the Economy Watchers survey headline index rose 4pts in February to the second highest level of the cycle. In addition, the Cabinet Offices real private consumption index advanced in January. In whole, our current forecast looks for 2.2% real GDP growth in both this and next quarter, but the recent data flow points to upside risks while the impact of the earthquake raises more uncertainty.
appetite that undermines asset prices. To date, this shock has proved manageable because the hit to purchasing power, while significant, has not been big enough to stifle growth in real income, and because it has not spilled over to confidence and asset prices. However, the developments of the past two weeks have begun to chip away at this more benign scenario, as seen in the modest retreat in global stock prices and Fridays report of a sharp drop in US consumer confidence in early March. Our energy strategy team anticipates that although there will be an unusual amount of volatility in global oil prices in coming weeks, the level of prices will be lower by midyear. However, we cannot rule out the possibility that the unrest in the region will intensify and spread to additional suppliers, critically Saudi Arabia, delivering a fresh jolt to oil prices and geopolitical uncertainty.
Raising the bar for March data in China

In addition to the issues discussed above, uncertainty about the trajectory of Chinas economy continues to cloud the outlook. The latest reports show that the growth of retail sales has slowed, led by car sales, as has the growth of exports and IP. Chinas all-industry PMI has fallen to the lowest level since March 2009. With the Lunar New Year holidays disrupting activity in January and February, it is hazardous to draw firm conclusions from these early-year data. Our forecast calls for growth to moderate to a still-solid 9%-9.5% annual rate in 1H11 compared with the robust 12.7% gain recorded in 4Q10. To validate this call, we need to see a rebound in these key indicators in March. Chinas inflation rate held steady at 4.9%oya in February as higher food inflation offset a decline in nonfood inflation. We look for inflation to rise to an expansion-high 5.3%oya this month. If our growth call is correct, the continued rise in inflation will keep policymakers on a gradual tightening path.
EMU policy needs to deliver Protests reach Saudi Arabia

Following an escalation of tensions Thursday in which Saudi police discharged their weapons to disperse a protest, Fridays more widely anticipated protest was less well-attended amid
2
Financial market stress has returned to the Euro area periphery as policymakers enter the final stretch before next weeks Eurogroup/EcoFin meeting on March 14-15 and the announcement of the comprehensive policy package on March
Medium-term inflation expectations and gasoline prices, Mexico

%oya, both axes 4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3 Jan 08 Inflation expectations Gasoline 14 12 10 8 6 4 2 0 Aug 08 Feb 09 Sep 09 Mar 10 Oct 10
UK output data create room for doubt

The UK MPC left rates unchanged this week, awaiting confirmation that at least a tepid pace of growth has been sustained through early 2011 before inflation concerns trigger an increase in rates. Unfortunately, indicators of UK growth are unusually dispersed. Readings on consumer spending and confidence remain weak. But business survey indicators suggest near trend output growth, with exports and the manufacturing sector growing strongly. Official data this week showed a large fall in construction output in January after a snow-impacted December, shifting risks to our forecast for 1Q GDP to the downside. Although labor market data are soft, we expect next weeks data will not demonstrate the magnitude of weakness we would associate with an economy that was stagnating. Still, although the bar for the MPC to raise rates is not high, the data are creating enough doubt to keep debate alive.
24-25. There is no single reason behind the renewed decline in bond prices around the periphery. Rather, a confluence of events has led to a deterioration in sentiment: a shift toward policy tightening by the ECB; a downgrade of Greece and Spain by Moodys; a lack of clarity on the policy package to be announced soon; and unhappiness with fiscal austerity in the periphery. Regardless of the source of the market stress, policymakers are under huge pressure to deliver. One critical issue to be decided is whether the transition from the current liquidity hospital (the EFSF) to the new liquidity hospital (the ESM) in the middle of 2013 will trigger debt restructuring. Uncertainty about this process was one of the factors mentioned by Moodys in its downgrading of Greece. Even if restructuring is imbedded as an option for the fiscal end game, a reduced borrowing rate on liquidity support is the single most important thing that policymakers could decide, as it has the potential to dramatically change the likelihood of default. By contrast, the markets focus on the size of the EFSF is misplaced. No matter how large the vehicle is it will not help sovereigns to exit the current crisis without a debt restructuring at the current borrowing rate. With regard to implementation risk surrounding fiscal austerity, there is little that can be done. Sovereigns around the periphery have an income problemlarge primary deficits as well as a balance sheet problemlarge amounts of outstanding debt. There is no alternative to fiscal consolidation aimed at closing the primary deficits. This was recognized by the new Irish government in its decision to stick to the previous administrations fiscal plans for the next two years. And it is evident in the Portuguese governments decision to make additional commitments this week to ensure that its ambitious deficit objective of 4.6% of GDP this year is met. The only possible alternative for these economies is to perhaps slow the pace of fiscal consolidation, but this would come at the cost of riling already skeptical creditors.
COPOM and Banxico role reversal

The impact of the spike in commodity prices on Latin American policymakers is playing out differently among the regional heavyweights. Finding itself increasingly behind the curve, Brazils central bank has hiked rates 100bp over the last two meetings. However, the COPOM suddenly shifted to a more dovish tone in its minutes published this week. The committee explicitly highlighted signs of deceleration in economic activity as well as a resulting lower inflation projection. The risk is now of a shorter rate-hiking cycle than what we have penciled inwhich calls for an additional 50bp hike in April and a final increase of 25bp in June, lifting the Selic rate to 12.5% particularly if new macroprudential measures are announced. In contrast to the COPOM, the central bank of Mexico has been one of the more dovish Latin American central banks given its closer ties to the US and the Fed. However, Banxico highlighted last week that the global and domestic food price shocks, as well as the potential consequences of higher oil prices, have shifted the balance of risks for inflation, apparently opening the door for potential rate hikes later this year. Indeed, higher oil prices are increasing the possibility that Mexicos Ministry of Finance decides to step up the monthly gasoline price increase, which would have a direct impact on inflation and potentially medium-term inflation expectations. Although we are keeping our call that Banxico will leave rates unchanged until 2Q12, we acknowledge the possibility that higher oil prices could prompt more front-loaded action. Next Fridays publication of the minutes from Banxicos latest meeting should shed more light on the boards reassessment of the balance of risks, which we may use to fine-tune our rate call.
Editor Sandy Batten (1-212) 834-9645 sandy.batten@jpmorgan.com
JPMorgan Chase Bank, New York David Hensley (1-212) 834-5516 Joseph Lupton (1-212) 834-5735 david.hensley@jpmorgan.com joseph.p.lupton@jpmorgan.com Carlton Strong (1-212) 834-5612 carlton.m.strong@jpmorgan.com
Global economic outlook summary

Real GDP
% over a year ago
Real GDP
% over previous period, saar
Consumer prices
% over a year ago
2010 The Americas United States Canada Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela Asia/Pacific Japan Australia New Zealand Asia ex Japan China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Africa/Middle East Israel South Africa Europe Euro area Germany France Italy Norway Sweden United Kingdom Emerging Europe Bulgaria Czech Republic Hungary Poland Romania Russia Turkey Global Developed markets Emerging markets Memo: Global PPP weighted 2.8 3.1 6.0 8.5 7.5 5.3 4.0 3.0 5.5 8.8 -1.4 4.0 2.7 1.5 9.1 10.3 6.8 8.5 6.1 6.1 7.2 7.3 14.5 10.8 7.8 4.6 2.7 1.7 3.5 1.5 1.1 2.2 5.3 1.3 4.3 0.1 2.3 1.2 3.8 -1.3 4.0 8.3 3.8 2.5 7.2 4.8
2011 2.9 3.3 4.3 5.5 4.0 6.0 4.5 3.5 4.5 7.3 1.5 1.7 2.8 1.6 7.7 9.6 4.8 8.8 5.4 4.2 5.2 5.3 5.0 5.0 5.0 4.5 3.7 2.2 3.3 2.3 1.4 3.0 4.8 1.7 4.1 3.5 3.0 2.8 4.0 2.0 4.5 4.5 3.4 2.4 6.1 4.3
2012 2.9 3.0 3.8 5.0 3.8 4.5 4.0 3.0 3.5 6.0 3.0 1.8 4.2 3.9 7.5 9.0 4.7 8.4 6.7 4.5 4.4 5.0 5.6 5.4 4.8 4.0 3.8 2.2 2.2 2.4 2.1 3.0 3.0 2.7 4.6 4.0 3.5 3.5 4.2 4.0 5.0 5.0 3.5 2.6 6.0 4.3
3Q10 2.6 1.8 2.5 1.6 1.6 8.1 0.9 6.5 3.2 7.2 0.6 3.3 0.5 -0.6 7.4 9.9 3.6 13.5 6.7 3.0 -0.6 -3.1 -16.7 3.2 -1.3 4.6 2.7 1.4 2.8 1.0 1.1 4.4 8.7 2.8 -1.0 3.6 2.2 4.9 -3.8 2.9 2.3 4.7 3.8
4Q10 2.8 3.3 3.6 2.0 3.0 4.0 5.0 3.0 5.1 8.6 -1.8 -1.3 3.0 2.1 7.9 12.7 6.1 0.9 7.5 2.2 8.9 12.7 3.9 0.0 4.8 7.7 4.4 1.1 1.5 1.4 0.2 1.3 5.1 -2.3 9.3 1.4 0.8 3.2 14.5 2.9 1.4 7.0 4.0
1Q11 2.5 4.0 3.7 6.0 3.9 5.0 6.0 3.0 2.0 6.8 2.5 2.2 0.0 -0.6 8.1 9.5 4.2 8.0 5.3 5.5 5.5 4.9 8.7 9.0 7.5 4.5 3.6 3.0 4.5 3.5 1.5 3.5 4.0 2.8 3.2 1.5 2.5 3.5 3.5 3.6 2.7 6.1 4.4
2Q11 3.5 3.6 5.8 8.0 4.8 5.0 5.0 2.5 8.0 7.0 1.5 2.2 5.8 2.3 7.8 9.0 4.3 10.0 5.2 4.0 5.3 6.1 7.8 6.5 6.0 4.5 3.7 2.0 2.5 2.0 1.5 3.5 3.5 2.0 3.2 3.0 3.0 4.0 3.0 3.8 2.8 6.4 4.6
3Q11 3.5 3.5 4.2 8.0 4.9 5.0 4.5 2.5 2.5 4.5 2.0 2.5 4.2 5.0 8.1 8.7 4.7 14.0 4.5 4.5 5.0 4.1 7.0 5.8 5.5 4.5 4.0 2.0 2.5 2.5 2.0 3.3 3.5 2.5 3.7 3.5 3.5 4.5 3.5 3.8 2.8 6.3 4.7
4Q11 3.0 3.3 4.3 6.0 4.6 4.5 4.7 2.0 3.6 6.7 2.5 2.0 4.4 5.0 7.1 8.7 5.0 6.0 5.0 5.5 4.5 4.1 6.6 6.0 5.5 4.5 4.1 2.5 2.5 3.0 2.5 3.0 3.0 3.0 5.0 4.0 3.5 4.5 5.5 3.6 2.8 6.0 4.3
1Q12 2.0 2.7 3.2 3.0 4.0 4.5 4.0 3.5 1.5 6.5 3.0 1.8 4.7 2.7 7.1 9.3 4.8 5.0 7.0 4.0 5.5 5.3 4.9 5.5 4.5 4.5 3.0 2.3 2.0 2.3 2.5 3.0 3.0 2.5 5.2 3.5 3.5 4.2 6.0 3.1 2.2 5.7 4.3
4Q10 1.2 2.3 6.7 10.5 5.6 2.5 2.7 3.3 4.2 2.1 27.3 0.1 2.7 4.0 4.9 4.7 2.8 9.2 6.3 3.6 2.0 2.9 4.0 1.1 2.9 2.5 3.5 2.0 1.6 1.9 2.0 2.2 1.9 3.4 6.6 2.1 4.4 2.9 7.9 8.2 7.4 2.7 1.6 5.6 3.4
2Q11 2.5 2.4 7.0 11.0 6.0 4.2 3.6 3.5 3.6 2.9 29.0 0.5 3.4 5.4 5.4 5.1 3.9 8.1 7.2 4.5 3.4 5.6 6.0 1.8 4.4 3.5 4.2 2.0 2.0 2.1 1.9 1.1 3.1 4.0 7.7 2.2 4.0 4.0 7.2 10.9 6.3 3.3 2.2 6.2 4.0
4Q11 2.1 1.9 7.6 12.0 6.1 5.5 4.0 3.8 3.7 2.8 33.8 0.4 3.6 3.8 4.4 3.3 4.2 8.7 6.3 3.2 3.7 5.1 4.8 2.9 4.3 3.5 5.9 1.9 2.0 2.1 1.7 0.9 2.9 3.8 6.9 2.9 4.2 2.9 4.5 9.7 6.5 3.0 2.0 5.7 3.6
2Q12 1.4 2.0 7.6 12.0 6.2 5.0 3.4 3.6 3.6 2.8 34.6 0.3 3.2 2.9 3.9 3.0 3.7 8.3 5.5 2.5 3.0 3.9 2.3 2.1 4.5 3.2 5.8 1.6 1.6 1.6 1.8 0.9 2.4 2.4 6.0 2.7 3.8 2.7 4.8 7.9 6.2 2.5 1.5 5.2 3.1
Note: For some emerging economies, 2010-2012 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan. Bold denotes changes from last edition of Global Data Watch, with arrows showing the direction of changes. Underline indicates beginning of J.P. Morgan forecasts.
JPMorgan Chase Bank, New York David Hensley (1-212) 834-5516 Joseph Lupton (1-212) 834-5735 david.hensley@jpmorgan.com joseph.p.lupton@jpmorgan.com Carlton Strong (1-212) 834-5612 carlton.m.strong@jpmorgan.com
G-3 economic outlook detail

2010 United States Real GDP Private consumption Equipment investment Non-residential construction Residential construction Inventory change ($ bn saar) Government spending Exports of goods and services Imports of goods and services Domestic final sales contribution Inventories contribution Net trade contribution Consumer prices (%oya) Excluding food and energy (%oya) Federal budget balance (% of GDP, FY) Personal saving rate (%) Unemployment rate (%) Industrial production, manufacturing Euro area Real GDP Private consumption Capital investment Government consumption Exports of goods and services Imports of goods and services Domestic final sales contribution Inventories contribution Net trade contribution Consumer prices (HICP, %oya) ex unprocessed food and energy General govt. budget balance (% of GDP, FY) Unemployment rate (%) Industrial production Japan Real GDP Private consumption Business investment Residential construction Public investment Government consumption Exports of goods and services Imports of goods and services Domestic final sales contribution Inventories contribution Net trade contribution Consumer prices (%oya) General govt. net lending (% of GDP, CY) Unemployment rate (%) Industrial production Memo: Global industrial production %oya 2.8 1.8 15.1 -13.8 -3.0 60.3 1.0 11.8 12.7 1.9 1.4 -0.4 1.6 1.0 -8.8 5.8 9.6 6.0 1.7 0.7 -0.8 0.7 10.6 8.7 0.4 0.4 0.9 1.6 1.0 -6.3 10.0 7.1 4.0 1.9 2.4 -6.5 -3.3 2.3 24.2 9.8 1.5 0.3 2.2 -0.7 -7.9 5.1 16.0 9.3 2011 2.9 3.1 10.8 3.5 5.5 56.7 -0.2 9.9 9.5 3.1 -0.1 -0.1 2.2 1.0 -9.8 5.0 8.8 4.7 2.2 1.2 3.3 0.1 8.3 6.8 1.3 0.1 0.7 2.0 1.3 -4.6 9.9 6.0 1.7 0.3 4.6 7.0 -10.6 1.2 7.8 5.6 0.8 0.3 0.6 0.4 -7.7 4.7 5.6 6.3
Percent change over previous period; seasonally adjusted annual rate unless noted
2010 2012 2.9 2.7 9.6 9.6 12.8 67.1 -0.6 8.4 8.6 3.1 0.1 -0.2 1.3 0.9 -6.9 4.6 8.4 3.7 2.2 1.8 4.5 -0.3 7.0 6.8 1.8 0.1 0.3 1.4 1.4 -3.9 9.3 4.6 1.8 1.2 5.1 4.3 -8.2 1.0 5.9 6.3 1.4 0.1 0.3 0.1 -7.4 4.3 5.7 5.9 4Q 2.8 4.1 5.5 4.5 2.7 7.1 -1.5 9.6 -12.4 3.1 -3.7 3.4 1.2 0.6 5.4 9.6 4.0 1.1 1.7 -2.4 0.4 7.5 4.4 0.6 -0.9 1.4 2.0 1.1 10.0 6.9 -1.3 -3.2 2.0 12.3 -20.5 1.2 -3.0 -0.5 -2.8 0.7 0.9 0.1 5.0 -6.1 5.5 7.2 1Q 2.5 2.1 8.0 2.0 10.0 57.8 -0.9 15.0 21.0 2.2 1.5 -1.2 1.9 1.0 5.1 8.9 4.5 3.0 1.0 7.0 0.0 8.0 7.0 1.9 0.5 0.6 2.3 1.2 10.0 7.0 2.2 0.8 3.0 6.0 -10.0 0.8 12.0 4.5 1.5 0.2 0.5 0.0 4.9 28.0 8.2 6.5
2011 2Q 3.5 3.5 12.0 5.0 15.0 55.8 -1.3 8.0 7.0 3.6 -0.1 0.0 2.5 1.0 5.0 8.8 5.0 2.0 1.0 4.0 -0.5 7.0 6.5 1.3 0.4 0.4 2.0 1.2 9.9 5.0 2.2 0.5 5.0 8.0 -5.0 0.8 10.0 5.0 1.3 0.5 0.4 0.5 4.8 3.0 6.3 5.7 3Q 3.5 4.0 12.0 9.0 15.0 53.9 -1.3 8.0 10.0 4.0 -0.1 -0.5 2.5 0.9 4.8 8.7 4.5 2.0 1.5 4.0 -0.5 7.0 7.0 1.5 0.3 0.2 2.0 1.3 9.8 5.0 2.5 1.2 6.0 5.0 -5.0 1.0 8.5 6.0 1.5 0.3 0.7 0.7 4.6 1.0 6.2 6.5 4Q 3.0 3.0 10.0 10.0 10.0 59.2 -0.1 8.0 10.0 3.3 0.1 -0.5 2.1 0.9 4.9 8.6 3.5 2.5 1.5 5.0 -0.5 7.0 6.5 1.7 0.4 0.4 1.9 1.4 9.7 4.5 2.0 1.2 6.0 5.0 -8.0 1.0 6.0 6.5 1.1 0.1 0.8 0.4 4.5 6.0 6.3 6.7 1Q 2.0 1.5 10.0 10.0 10.0 62.2 -0.4 8.0 9.0 2.3 0.1 -0.4 1.4 0.8 4.5 8.5 3.5 2.3 2.0 4.5 -0.3 7.0 7.0 2.0 0.1 0.2 1.6 1.6 9.6 4.5 1.8 1.5 5.0 4.0 -8.0 1.0 5.0 7.0 1.1 0.1 0.5 0.3 4.4 15.0 6.8 6.4
2012 2Q 3.0 2.5 8.0 10.0 15.0 67.4 -0.6 9.0 8.0 2.9 0.1 0.0 1.3 0.9 4.6 8.5 3.0 2.0 2.0 4.5 -0.3 7.0 6.5 2.0 -0.4 0.4 1.4 1.4 9.4 4.5 1.5 1.0 5.0 4.0 -10.0 1.0 5.0 6.0 1.0 0.2 0.3 0.1 4.3 1.0 4.9 6.0 3Q 3.5 3.0 8.0 10.0 15.0 71.0 -0.6 9.0 7.0 3.3 0.1 0.1 1.2 1.0 4.6 8.4 3.5 2.0 2.0 4.5 0.0 7.0 7.0 2.0 -0.2 0.2 1.4 1.4 9.2 4.5 1.5 1.3 4.0 3.0 -10.0 1.0 5.0 6.0 1.2 0.1 0.2 0.1 4.3 2.0 4.9 5.7
Note: More forecast details for the G-3 and other countries can be found on J.P. Morgans Morgan Markets client web site.
JPMorgan Chase Bank N.A., New York David Hensley (1-212) 834-5516 Joseph Lupton (1-212) 834-5735 joseph.p.lupton@jpmorgan.com david.hensley@jpmorgan.com Michael Mulhall (1-212) 834-9123 michael.r.mulhall@jpmorgan.com
Central Bank Watch

Change from Official interest rate Global excluding US Developed Emerging CEEMEA EM Asia The Americas United States Canada Brazil Mexico Chile Colombia Peru Europe/Africa Euro area Sweden Norway Czech Republic Hungary Israel Poland Romania Russia South Africa Turkey Asia/Pacific Australia New Zealand Japan Hong Kong China Korea Indonesia India Malaysia Philippines Thailand Taiwan GDP-weighted average GDP-weighted average GDP-weighted average GDP-weighted average GDP-weighted average GDP-weighted average GDP-weighted average Federal funds rate Overnight funding rate SELIC overnight rate Repo rate Discount rate Repo rate Reference rate GDP-weighted average Refi rate Repo rate Deposit rate 2-week repo rate 2-week deposit rate Base rate 7-day intervention rate Base rate 1-week deposit rate Repo rate 1-week repo rate GDP-weighted average Cash rate Cash rate Overnight call rate Discount window base 1-year working capital Base rate BI rate Repo rate Overnight policy rate Reverse repo rate 1-day repo rate Official discount rate Current Aug '07 (bp) 1.91 2.60 0.62 5.45 7.81 4.08 5.14 1.37 0.125 1.00 11.75 4.50 3.50 3.25 3.75 1.49 1.00 0.50 1.50 2.00 0.75 6.00 2.50 3.75 6.25 3.00 5.50 6.25 3.25 4.75 2.50 0.05 0.50 6.06 3.00 6.75 6.50 2.75 4.00 2.50 1.625 -307 -223 -358 -165 -160 -294 -111 -444 -512.5 -325 -25 -270 -150 -575 -75 -323 -300 -500 -200 -250 -200 -175 -150 -75 -75 0 -400 -1125 -94 -150 -550 -45 -625 -51 -150 -175 -125 -75 -350 -75 -150 2 Nov 10 (+25bp) 10 Mar 11 (-50bp) 5 Oct 10 (-5bp) 17 Dec 08 (-100bp) 9 Feb 11 (+25bp) 10 Mar 11 (+25bp) 4 Feb 11 (+25bp) 25 Jan 11 (+25bp) 8 Jul 10 (+25bp) 9 Jul 09 (-25bp) 9 Mar 11 (+25bp) 30 Dec 10 (+12.5bp) 5 Apr 11 28 Apr 11 14 Mar 11 16 Mar 11 12 Apr 11 12 Apr 11 17 Mar 11 5 May 11 24 Mar 11 20 Apr 11 31 Mar 11 May 11 (+25bp) 2Q 12 (+25bp) On hold On hold 2Q 11 (+25bp) 2Q 11 (+25bp) 12 Apr 11 (+25bp) 17 Mar 11 (+25bp) 5 May 11 (+25bp) 24 Mar 11 (+25bp) 20 Apr 11 (+25bp) Mar 11 (+12.5bp) 7 May 09 (-25bp) 5 Mar 09 (-50bp) 15 Feb 11 (+25bp) 5 May 10 (+25bp) 6 May 10 (-25bp) 24 Jan 11 (+25bp) 21 Feb 11 (+25bp) 19 Jan 11 (+25bp) 4 May 10 (-25bp) 24 Dec 10 (+25bp) 18 Nov 10 (-50bp) 20 Jan 11 (-25bp) 7 Apr 11 7 Apr 11 20 Apr 11 16 Mar 11 24 Mar 11 28 Mar 11 28 Mar 11 5 Apr 11 29 Mar 11 Mar 11 24 Mar 11 23 Mar 11 7 Apr 11 (+25bp) May 11 (+25bp) 20 Apr 11 (+25bp) 12 May 11 (+25bp) 23 Jun 11 (+25bp) 4Q 11 (+25bp) 2Q 11 (+25bp) 5 Apr 11 (+25bp) 3Q 11 (+25bp) Mar 11 (+25bp) Nov 11 (+50bp) Aug 11 (+50bp) 16 Dec 08 (-87.5bp) 8 Sep 10 (+25bp) 2 Mar 11 (+50bp) 17 Jul 09 (-25bp) 17 Feb 11 (+25bp) 25 Feb 11 (+25bp) 10 Mar 11 (+25bp) 15 Mar 11 12 Apr 11 20 Apr 11 15 Apr 11 17 Mar 11 18 Mar 11 7 Apr 11 On hold 31 May 11 (+25bp) 20 Apr 11 (+50bp) 2Q 12 (+25bp) 17 Mar 11 (+25bp) 18 Mar 11 (+25bp) 7 Apr 11 (+25bp) Last change Next meeting Forecast next change Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 1.92 2.62 0.62 5.51 7.84 4.18 5.19 1.37 0.125 1.00 11.75 4.50 3.75 3.50 3.75 1.50 1.00 0.50 1.50 2.00 0.75 6.00 2.50 3.75 6.25 3.25 5.50 6.25 3.27 4.75 2.50 0.05 0.50 6.06 3.00 6.75 6.75 2.75 4.25 2.50 1.75 2.09 2.85 0.74 5.79 8.33 4.38 5.44 1.47 0.125 1.25 12.50 4.50 4.50 4.25 4.50 1.74 1.25 0.75 1.75 2.25 1.00 6.00 3.00 4.25 6.25 3.50 5.50 6.25 3.43 5.00 2.50 0.05 0.50 6.31 3.25 7.00 7.00 3.00 4.50 3.00 1.875 2.24 3.07 0.88 6.01 8.46 4.68 5.64 1.53 0.125 1.75 12.50 4.50 6.00 5.00 4.50 2.01 1.50 1.00 2.25 2.50 1.25 6.00 3.50 4.25 6.50 3.75 5.50 7.00 3.56 5.25 2.50 0.05 0.50 6.56 3.50 7.00 7.25 3.00 4.50 3.00 2.00 2.37 3.24 1.00 6.14 8.49 5.12 5.69 1.55 0.125 2.00 12.50 4.50 6.50 5.00 4.50 2.30 1.75 1.25 2.75 2.75 1.75 6.25 4.00 4.50 6.75 4.00 6.00 8.00 3.60 5.50 2.50 0.05 0.50 6.56 3.50 7.00 7.50 3.00 4.50 3.00 2.125 2.47 3.39 1.12 6.23 8.49 5.47 5.69 1.57 0.125 2.25 12.50 4.50 6.50 5.00 4.50 2.56 2.00 1.50 3.00 3.00 2.25 6.50 4.50 4.75 7.00 4.25 6.50 8.50 3.60 5.50 2.50 0.05 0.50 6.56 3.50 7.00 7.50 3.00 4.50 3.00 2.25
Latin America GDP-weighted average
United Kingdom Bank rate
Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting during upcoming week.
JPMorgan Chase Bank, London Jan Loeys (1-212) 834-5874 jan.loeys@jpmorgan.com
The J.P. Morgan View: Markets
A slippery slope
Economics: 2011 global growth cut again by 0.1%-pt to 3.4% due to downward revisions in the US for 1Q and 2Q. Asset allocation: March seems set to become a correction month, on growth downgrades and political risk. We stay positive risky assets on a 3-month horizon. Fixed income: Hold swap spread wideners in dollars, sterling, and euros, as they are more carry efficient than flatteners or being outright short duration. Equities: Fading US economic surprises raise downside risks for near term. Weaker economic data in DM could make EM outperform further. Credit: Senior debt of Portuguese banks has been upgraded to overweight. FX: USD is rallying on position squaring. We stay bearish. Commodities: Positions leave commodities vulnerable to a correction near term but we remain positive over the next six to 12 months. Another week of turmoil in the MENA region was joined by a set of weaker economic data and an earthquake in Japan to push riskier asset classes down, and major government bonds up. Equities are now down over 3% over the past three weeks, and are thus in standard correction mode. The question is now how long and how deep this correction will turn out to be and whether it presages the end of the bull market in stocks, just as it was celebrating its second anniversary. The answers will depend on any overvaluation, excessively long positions, news flow, and the sensitivity of the assets to this news. Ranking the three major riskier asset classes on value and positions, we would rank equities as least vulnerable, credit in the middle, and commodities most. Our measures still signal that both equity holdings and multiples are near historical means. Credit surveys show that most managers remain significantly long corporate credit, while more anecdotal evidence suggests that end investors have focused on credit first as the best way to position for economic recovery and have only recently started to move more into equities. Position data show very elevated long positions in commodities while the rally has brought many to record highs.
The news flow will likely remain quite noisy, and should keep risk takers on the sidelines. The civil war in Libya continues to rage, but contagion to the Middle East seems contained. The Japanese earthquake is a human disaster, and will disrupt economic activity, but should not make one bearish on future growth (on the contrary). The debate on EMU fiscal reform will escalate as we approach the EMU Council Summit in two weeks. Our view is that the EU has the ability and resources to redress its fiscal crises, but internal disagreements will likely keep it short of the promised comprehensive solution this month. It is hard to say how the market will react to the Council, as most investors do not have a strong view of what to expect and are positioned neutrally. The political news flow this month does not seem as much a threat as the economic one. Going into the current correction, economic data were running ahead of forecasts, creating clear upside risk on our forecasts. That has changed with the spike in oil prices and this weeks setbacks in data. We cut 2011 growth forecasts for the US, EU, and Japan over the past few weeks. And today, we cut the US again to 2.5% in 1Q and 3.5 in 2Q on weaker consumption and more fiscal tightening than we had thought. None of these changes is recovery threatening, but they have a dangerous track record of accumulating over time. Over the past two years, single-digit equity corrections were minor because they did not coincide with growth downgrades and were thus over after a few weeks of mere profit taking. The one correction whereby equities fell by double-digits (15%) was fueled by a four-month period of growth forecast downgrades. Over the past few weeks, we pushed our global growth forecast down twice by 0.1%-pt (chart). Hence, we must accept the risk of continued slides in risk assets in coming weeks. On a three-to-six-month horizon, though, we remain positive on equities, credit, and commodities on renewed growth and value.
Fixed income
Bonds rallied, as Euro area sovereign downgrades and the earthquake in Japan fueled a flight to quality. The downturn in activity data also challenges our somewhat bearish outlook on duration. We hold shorts only in EM and remain sidelined on duration in DM. We stick with cyclical trades in Europe, however, including flatteners and swap spread wideners in the UK and Euro area (see GFIMS). Swap spreads tend to widen during hiking cycles, reflecting tighter liquidity conditions. And importantly, spread wideners do not have the onerous nega7
JPMorgan Chase Bank, London Nikolaos Panigirtzoglou (44-20) 7777-0386 nikolaos.panigirtzoglou@jpmorgan.com
Economic Research The J.P. Morgan View: Markets March 11, 2011
tive carry of being short duration or flatteners. We also look for 30-year spreads to widen in the US, partly because we expect the long end of the curve to flatten. Euro area peripherals underperformed in the face of supply and ratings downgrades. In downgrading Greece, Moodys cited the risk of a restructuring or distressed exchange. Though market pricing has moved sharply in this direction, with Greek 1-year yields 4%-pt higher this month, we still think a near-term restructuring is improbable. However, the most recent political rhetoric suggests that EU leaders are still some way from agreeing on sufficiently decisive steps to stabilize peripheral spreads this month.
2011 global GDP growth forecasts: J.P. Morgan versus consensus %

3.8 3.6 3.4 3.2 3.0 2.8 Jan 10 Consensus J.P. Morgan
Mar 10
May 10
Jul 10
Sep 10
Nov 10
Jan 11
Mar 11
Equities
Equities fell this week bringing the cumulative decline since the Feb18 high to 3.5%. This is below the typical 5%10% correction seen during equity bull markets. Risks are skewed to the downside near term as it is becoming harder for economic data to beat elevated consensus expectations especially as news flow from the MENA region and the Euro periphery remains volatile. As we have highlighted in the past, an exceptional 6-month run of positive economic surprises has been a major driver of the rally that began last summer. Todays rather soft US retail sales suggest that we are getting closer to the US Economic Activity Surprise Index falling into negative territory. Cyclical sectors are more vulnerable to a further correction near term. Small caps are instead less vulnerable. Their lower liquidity cushions them during modest corrections as investors tend to sell their more liquid large caps. Worse news on DM economic data is good news for EM equities. One of the drivers of EM underperformance from October to February was a narrowing growth differential vs DM. Our EM-DM IP oya growth differential signal, which is a useful indicator for trading the MSCI EM vs. MSCI World, has spent most of the past six months in negative territory. With growth indicators softening in DM this signal will likely turn supportive of EM equities, adding fuel to the gradual EM vs. DM equity outperformance currently under way. With the ECB set to hike next month, monetary tightening is becoming a worry among equity investors. Is prospective monetary tightening a threat to the bull equity market trend for the medium term? Not in our view. Monetary tightening tends to happen when growth is strong, and in such an environment equities tend to rise. The
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uptrend in the S&P500 was intact around the beginning of monetary tightening by the Fed over the past 10 tightening cycles. But we do acknowledge that monetary tightening poses a threat to interest-sensitive sectors in Europe, such as Property and Utilities. In fact, our European Equity strategist Mislav Matejka has initiated a tactical UW in Eurozone vs. US equities given the earlier start of ECB vs. Fed tightening (see European Equity Strategy: March Chartbook, Mar 7).
Credit
Credit spreads widened this week as a severe earthquake hit Japan, the Middle East crisis escalated, and concerns on peripheral European sovereigns were reignited. With these headwinds likely to linger in the near term, credit spreads will likely widen further as risky markets correct. However, we view this correction as temporary within a multi-year bull market. Thus, instead of turning underweight credit, we focus on higher-yielding assets, and we recommend investors to take the opportunity to add risk in a few weeks time. One of the most vulnerable credit sectors is high yield given its high beta with the market. A typical bull market correction results in a 5%-8% fall in the S&P500. This would translate into 55-88bp of widening in US HY spreads based on the historical relationship between equities and HY credit. With spreads already 28bp wider than the recent cycle low in early February, US HY spreads could widen another 20-60bp. However, this does not alter our medium-term positive view on HY credit as the fundamentals of HY companies are strong and the 2011 default outlook remains benign. Although the recent rating downgrades of peripheral European sovereigns are hurting investor confidence, we are upgrading Portuguese bank senior debt to overweight given its attractive valuation versus other peripheral bank debt, especially that of Spanish banks. We recommend to sell senior CDS protection on Portuguese banks and buy subordinated CDS protection on Spanish banks. Despite
JPMorgan Chase Bank, London Jan Loeys (1-212) 834-5874 jan.loeys@jpmorgan.com
the difference in subordination, the two are currently trading at similar spread levels. Fundamentally, we believe senior debt is unlikely to be impaired for systemically important institutions. Moreover, Spanish banks have been very active in accessing the covered bond market in recent months. This further reduces the recovery value of subordinated Spanish bank debt in the event of a default (see Portuguese Banks: Stemming the tide, R. Henriques, Mar 9).
Ten-year Government bond yields

Current United States Euro area United Kingdom Japan GBI-EM 3.40 3.21 3.55 1.27 7.06 Current 135 160 526 514 294 283 Mar 11 1.40 81 1.61 11Q2 105 1450 9450 7.00 Jun 11 1.43 80 1.61 11Q3 102 1475 9750 6.75 Jun 11 3.60 3.45 3.70 1.25 Sep 11 3.65 3.55 3.90 1.30 Dec 11 3.70 3.65 4.05 1.35 7.30 YTD Return 0.9% -0.7% 3.8% 3.5% 0.6% 1.3% Mar 12 3.90 3.75 4.10 1.40
Credit markets
US high grade (bp over UST) Euro high grade (bp over Euro gov) USD high yield (bp vs. UST) Euro high yield (bp over Euro gov) EMBIG (bp vs. UST) EM Corporates (bp vs. UST)
Foreign exchange
March is providing more than its usual madness. The MENA crisis is intensifying to the point where the oil price drives rather than reflects growth expectations; Europe has initiated the first of four sovereign summits with the potential to resolve everything or nothing by March 25; and the US budget showdown threatens a government shutdown on March 18. Our view has beenand remainsthat none of these events would be a trend-changer for the dollar in 2011. The world needs a recession or an activist Fed to accomplish that. But the deleveraging bid for dollars this week cant be dismissed. More interesting is how much currencies and currency vols have lagged the weakness in core asset markets this month. Even though equities are down 3% month-to-date, equity vol is up 3.5pts and spread markets are 10-40bp wider, the dollar is flat month-to-date, and FX vols have sold off. This pattern is obviously atypical. Admittedly the technical backdrop is poor if we are wrong on how these issues play out this month. On valuation, a simple cyclical model relating the trade-weighted dollar to trade-weighted rate spreads and equity vol puts the dollar about 1.5% too cheap, a misalignment that makes it vulnerable to a bounce rather than a rally. Positions are wellknown to be record short by some measures like the IMM, but very large shorts have precedent when the dollar is the global low yielder. Vol curves are near record steep, a term structure that would mean revert through higher front-end vols if event risks are realized. Technicals are also favoring slightly more USD strength given supports that held this week in DXY. We hold limited USD exposureonly short USD/CHF ahead of Thursdays SNB meetingand see no reason to adjust in this environment. Cross-rates are more insulated from these global hotspots. Also stay long EUR/ GBP, short EUR/CHF, and short AUD/CAD.
Foreign exchange
Current EUR/USD USD/JPY GBP/USD 1.39 81.9 1.61 Current Brent ($/bbl) Gold ($/oz) Copper($/m ton) Corn ($/Bu) 114 1420 9173 6.68 Sep 11 1.45 79 1.63 11Q4 102 1500 10000 6.10 Dec 11 1.48 78 1.68 12Q1 110 1500 9750 6.20
Commodities - quarterly average
Source: J.P. Morgan, Bloomberg, Datastream
tion squaring. It is too early to gauge the economic impact of the earthquake but we view both the uncertainty in the Middle East and the weaker Chinese data as temporary risks that will eventually subside. OPEC has already increased production enough to mitigate lost Libyan supplies, and we assign a very low 5% probability to any further disruptions in major oil-producing nations. The Chinese data were likely affected by the Lunar New Year holiday, and we remain convinced that policymakers there will succeed in managing inflation without adversely affecting growth. We thus stay bullish commodities on a medium-term view but we do expect the correction to continue until the uncertainty around the above risks begins to subside. Our preferred commodities are Gold, Corn, Wheat, and Copper. Gold should benefit from the increased uncertainty around growth, and Copper, Wheat, and Corn are supported by very tight supply conditions. We remain bullish on a six-month basis but expect the current correction to continue in the short run.
Commodities
Commodities sold off sharply this week, down 4%. Spec positions across most commodities had moved to historically very high levels and this week, continued uncertainty in MENA, weaker-than-expected Chinese trade data, and now, the earthquake in Japan have resulted in some posi-
Selected recent research1 from J.P. Morgan Economics

Global
Developed world capex poised to accelerate once again, Mar 4, 2011 Oil prices will take some steam out of near-term growth, Feb 25, 2011 Easing G-4 bank lending standards reinforcing recovery, Feb 11, 2011 Surveys signal second wind for global recovery, Feb 4, 2011 Rising service sector will bolster DM economies, Jan 28, 2011 Return to sender: global recycling of Fed QE, Nov 26, 2010 Global IP slowdown appears to have reached bottom, Nov 5, 2010 Fault lines emerge amid global growth slowdown, Sept 10, 2010 G-4 banks begin to open the lending spigot, Aug 20, 2010 Global potential growth slows, but much slack remains, Aug 6, 2010 Euro FX depreciation widely spread but narrowly felt, Jul 9, 2010 Developed market consumer spending to keep expanding, Jul 2, 2010 DM policy stances move to extremes, Jun 25, 2010
Central Europe, Middle East, and Africa

Turkey: CBRTs new policy mix slow to combat loan growth, Feb 25, 2011 Taking stock of Russian inflation expectations, Feb 25, 2011 Romania is ready for a long-awaited cyclical upswing, Feb 18, 2011 MENA region: 2011 a year of political turmoil, Feb 18, 2011 South Africa: SARB faces delicate balancing act, Feb 4, 2011 Russia: stronger economy and still elevated inflation in 2011, Jan 28, 2011 Food inflation to climb higher in CIS countries in 1H11, Jan 28, 2011 Tunisia: after the revolution, growth to take a hit in 2011, Jan 21, 2011
Japan
Japan: core CPI deflation set to end in April, but temporarily, Mar 4, 2011 Japan: private sector spending to get boost from confidence, Feb 18, 2011 Japan: service sector capex likely to expand in 2011, Jan 21, 2011 Japan 2011 outlook: toward growth with modest deflation, Jan 7, 2011 Japan: no deficit reduction despite continued rise in debt, Dec 17, 2010 Japan: 4Q GDP contraction likely to be temporary, Nov 19, 2010
United States and Canada

Commodities will give only temporary lift to core inflation, Mar 4, 2011 US GDW growth slips on oil in 1Q, Feb 25, 2011 Showdown at the not-OK Corral: battle over the US debt ceiling, Feb 25, 2011 US: one cheer for the fall in the unemploymen t rate, Feb 11, 2011 It doesnt take much to get a 25% rise in US housing starts, Jan 28, 2011 US: one gathers what another man spills, Jan 28, 2011 More austerity ahead for US state and local governments, Jan 21, 2011 US: turn on, tune in, drop out of the labor force, Jan 14, 2011 US: mind the gap or obey the speed limit?, Jan 7, 2011 Stronger US job growth would help clear the housing market, Jan 7, 2011 Canada: sluggish 2011 despite brighter US outlook, Jan 7, 2011 US: blame the textbook, not the TA, for money multiplier confusion, Dec 17, 2010 US tax compromise: more growth, higher deficit, less QE, Dec 10, 2010 Strong and broad US business expansion, with tepid job growth, Dec 3, 2010 A V-shaped recovery for US profits, Nov 26, 2010 US: the fiscal cost of central bank interventions, Nov 19, 2010 Looming fiscal issues include more than just Bush tax cuts, Nov 5, 2010 Impact of US QE2 on Canada, Nov 5, 2010 Equipment spending stands out in a lackluster US recovery, Oct 29, 2010 Monetary and fiscal routes to reducing US real interest rates, Oct 22, 2010
Non-Japan Asia and Pacific

Chinas export sector copes with rising wages, Mar 4, 2011 Figuring the drivers of Thailands inflation trajectory, Mar 4, 2011 Vietnam: navigating the monetary maze, Mar 4, 2011 Australias virtuous cycle of a rising terms of trade, Feb 25, 2011 Another earthquake in NZ puts rate hikes off agenda, Feb 25, 2011 Australias GDP/employment mix inflationary, Feb 18, 2011 Rising food prices: putting Australia in the EM Asia basket, Feb 11, 2011 China: tracking inflation in 2011, Feb 4, 2011 Australia: household incomes stretched as living costs rise, Feb 4, 2011 Severe floods depress Aussie GDP growth, lift inflation, Jan 7, 2011 Aussie 2011 outlook: making room for the mining boom, Dec 30, 2010 Return to trend growth in NZ slowed by deleveraging, Dec 30, 2010 Even Stevens: a balancing act in Aussie inflation pressures, Dec 10, 2010 RBA forging on gradually with unconventional hiking cycle, Dec 3, 2010
Latin America
Fiscal policy back in the spotlight in Brazil, Mar 4, 2011 Latin America: policymakers in need of tightening will innovate, Jan 28, 2011 Chile: unpleasant CPI math, Jan 21, 2011 Brazil: BRL cyclically strong despite pricey valuation, Oct 1, 2010
Western Europe
ECB about to begin a rate normalization cycle, Mar 4, 2011 The Euro areas journey to a comprehensive policy package, Feb 25, 2011 The not-so-small role of the output gap at the ECB, Feb 25, 2011 UK: quantifying MPC credibility, Feb 25, 2011 Euro area: more growth, more inflation, and higher rates, Feb 11, 2011 Uncertainty to persist beyond Euro area policy changes, Feb 4, 2011 Euro area: closing fiscal books on 2010 and opening for 2011, Feb 4, 2011 UK: a hawkish shift at the MPC, Feb 4, 2011 Agricultural commodity prices to push up Euro area inflation, Jan 21, 2011 Another busy year for Euro area policymakers, Jan 7, 2011 The three-speed Euro area recovery to continue in 2011, Dec 30, 2010 The UK in 2011: where recovery isnt much fun, Dec 30, 2010
Special Reports and Global Issues

UK: why inflation is so high, and why it will come back down, Feb 11, 2011 Strong global growth ahead: eleven themes for 2011, Jan 7, 2011 US 2011 economic outlook: strength, breadth, jobs, and a rising fiscal deficit, Dec 30, 2010 A way out of the EMU fiscal crisis, Dec 16, 2010 Jobs vs. income smoothing: a comparison of US and German labor markets, Nov 15, 2010 Stuck in a low inflation rut, Oct 27, 2010
1. Research notes listed have been published in GDW; Special Reports and Global Issues are stand-alone features, but may also have appeared in some form in GDW.
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JPMorgan Chase Bank NA, New York Robert Mellman (1-212) 834-5517 robert.e.mellman@jpmorgan.com
Economic Research Note
US merchandise exports
%ch saar, over 6 months 32 24 16 8 0 Jan 10 Values
US data bring hints of stronger export growth ahead

Forecast looks for exports in 1H11 to continue at their 2H10 growth pace, but risks are now tilted up Export orders are soaring, foreign growth has turned stronger, and the weaker dollar should also help Upside risks to growth from exports should help offset downside risks from higher fuel prices, fiscal policy The current economic forecast looks for export volumes over the next couple of quarters to grow at about the 8% pace that prevailed in 2H10. But risks look increasingly tilted toward the upside. Real export volumes surged in December and January. And the ISM measure of export orders points to an accelerating trend ahead. Moreover, the combination of a forecasted upturn in growth in foreign markets and weaker dollar provides a ready explanation of why export orders have strengthened. To be sure, import volumes have also surged in the last two months, presumably reflecting the upward turn in the inventory cycle this quarter. But the ISM survey measures for imports, in both manufacturing and nonmanufacturing, are running appreciably below the readings for export orders. And the surge in imports is more likely to settle down before long. Upside risks to the overall growth forecast from a potential surge in exports would help to offset increasingly visible downside risks to the forecast associated with the squeeze on household purchasing power from higher fuel and food prices and with the possibility of deeper federal spending cuts than are now incorporated in the forecast.
Volumes
Apr 10
Jul 10
Oct 10
Jan 11
New export orders, ISM manufacturing survey

Sa, quarterly avg and Jan and Feb 2011 monthly readings 70 65 60 55 50 45 40 35 88 93 98 03 08 Latest = 62.5
US nominal exports to developed and emerging markets

$ bn, nsa mr, 3mma 70 60 50 40 30 20 04 05 06 07 08 09 10 11 Developed markets Emerging markets
Export growth has been strong

The government reported that the US trade balance widened to -$46.3 billion in January from a 4Q10 average of -$38.9 billion. Part of the widening reflects the higher price of imported oil. But the real goods balance also deteriorated substantially, and very early in the quarter the trade data are pointing to a drag on annualized real GDP growth in 1Q11 from net exports of about 1.0%-pt. Looked at another way, however, January trade results can be viewed as a symptom of strong global and US demand growth around the turn of the year. Merchandise export volumes and import volumes surged in December and then
again in January, and January levels of both export and import volumes are running more than 30% saar above their 4Q10 average. Export volumes rose 2.1% in December and another 2.5% in January. While these back-to-back gains are unusually large, the export trend through the expansion has been strong, and export volume growth is up 12.8% over the past year, a multiple of 2.7%oya growth of overall real GDP or 5.5%oya growth of manufacturing output. The strength in export volumes has been accompanied by strong pricing as well. Much higher prices for imported oil
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Economic Research US data bring hints of stronger export growth ahead March 11, 2011
have boosted import prices substantially, but, the terms of trade has actually moved in favor of the US over the past year. January figures show export prices running 6.8%oya and import prices 5.3%oya. With rapid price increases reinforcing gains in volumes, nominal exports have increased nearly 20% in both the year ending January 2011 and in the year ended January 2010. Data on trade flows by trading partner are only available in nominal terms, but these data indicate that the strong export growth so far in this recovery largely reflects rapid demand growth from emerging markets. As recently as 2006, a majority of exports went to the developed economies of Canada, Western Europe, Japan, and Australia. Emerging markets now account for a sizable majority of exports and more than two-thirds of the export growth since the end of the recession.
Merchandise export volumes and ISM export orders

%ch saar over 2 quarters 30 20 10 0 -10 -20 -30 -40 00 02 04 06 08 10 Exports ISM export orders Sa 65 60 55 50 45 40 35
Value of the dollar on foreign exchange markets

Real broad index, 2000=1.00, monthly plots and latest daily 110 102
Export orders are way up

Monthly figures on trade flows tend to be volatile, and large gains for two consecutive months would usually be followed by a month or two of retrenchment. But there is very good reason to expect that export growth will remain very strong over the next few months. In particular, the ISM manufacturing measure of new export orders increased to readings of 62.0 in January and 62.5 in February of this year, up substantially from an average 56.4 reading in the second half of last year and the highest levels since the late 1980s. The ISM measure is a diffusion index and, strictly speaking, measures the breadth of export orders across industries rather than export growth. But this index has historically had a reasonably close relationship with the trend in export volumes and a somewhat closer relationship with nominal exports. Based on historical relationships, the February reading of 62.5 is consistent with 18% growth in merchandise export volumes and 21% growth in nominal exports. It is probably unrealistic to expect export volume growth this strong. But the clear message is that, barring an unanticipated hit to foreign demand from higher energy prices or some other shock, export growth can be expected to accelerate noticeably from the already good growth over the past six months.
94 86 78 70 95 97 99 01 03 05 07 09 11 Latest daily value reading
this year; the current J.P. Morgan forecast looks for real GDP growth outside the US to accelerate noticeably, from 3.0% growth in 2H10 to 4.0% growth in 1H11. Stronger global growth should be giving a meaningful lift to US export growth. In addition, the dollar has continued to trend lower on foreign exchange markets. The weaker real value of the dollar, reflecting increasing price competitiveness of US producers, should be helping US producers gain share in world markets. The econometric evidence indicates that changes in the dollar boost exports more than activity in importcompeting industries. Both recent declines in the value of the dollar and the relatively low level of the dollar on foreign exchange markets should contribute to US export performance. The real trade-weighted value of the dollar so far in 1Q11 has averaged nearly 6% below year-ago levels, and the dollar is 13.7% below its longer-term average from the years 2000-2010. The obvious potential negative for exports would be a reduction in global growth expectations as effects of higher oil prices start to bite. So far, the global growth forecast seems to be tracking. But the next ISM manufacturing survey, April 1, will provide a timely update of this view.
Orders are up for a reason

It is not hard to see why export orders might be accelerating in the first half of this year. Export growth is mainly determined by economic growth in US trading partners and by US price competitiveness as measured, for example, by the real broad trade-weighted dollar. Economic growth outside the US appears to be accelerating in the first half of
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JPMorgan Chase Bank, London David Mackie (44-20) 7325-5040 david.mackie@jpmorgan.com
IMF debt sustainability: Greece

Real GDP (%oya) Avg borrowing cost (%) Inflation (%oya) Primary position (%GDP) Government debt (%GDP)
Source: IMF December 2010
The role of the time horizon in Euro area debt sustainability

Debt sustainability assessments to be conducted from mid-2013 Huge uncertainty about how these will be done The time horizon is as critical as the judgements about growth, borrowing costs, and fiscal performance The picture painted by Euro area leaders at the end of last year about liquidity provision beyond 2013 seems pretty clear. Any sovereign that is a patient in the current liquidity hospital (the EFSF) when it closes in the middle of 2013 will be put on a trolley and wheeled across the road to the new liquidity hospital (the ESM), which will open at the same time. The ESM will provide liquidity support in the same way that the EFSF does. However, before that liquidity support can be accessed, a debt sustainability assessment will be conducted by the European Commission, the IMF, and the ECB. If this assessment concludes that a sovereign is insolvent, it will have to restructure its debt as part of the process of returning to debt sustainability. There is a huge amount of uncertainty about how these debt sustainability assessments will be conducted, and this is already being reflected in the way that the credit rating agencies are viewing peripheral government debt. At first blush it is hard to see how countries like Greece and Ireland can avoid being deemed insolvent in the middle of 2013. According to the IMF, in 2013 Greece will have a debt-to-GDP ratio of 158% of GDP and an overall fiscal deficit of 4.8% of GDP. Meanwhile, Ireland will have a debt-to-GDP ratio of 125% of GDP and an overall fiscal deficit of 7.5% of GDP. And the situation could be worse, either if growth falls short of the IMFs assumptions or if there is slippage in the implementation of the fiscal consolidations. It would be easy to conclude that debt restructuring for Greece is almost certain, and that there is a reasonable likelihood that there will be a debt restructuring in Ireland. However, we are not persuaded that the likelihood is as high as most assume. Our view is that provided debtor sovereigns put in a good faith effort, the rest of the region will help the sovereign return to debt sustainability without a disruptive debt restructuring. This could be achieved by low borrowing costs on liquidity support and loans made for liability management exercises. The critical point to note is that there are a lot of judgements that need to be
2011 -3.0 4.6 1.5 -0.8 152
2012 1.1 5.0 0.4 1.1 158
2013 2.1 5.4 0.8 3.5 158
2014 2.1 5.7 1.2 6.0 154
2015 2.6 5.7 1.3 6.0 150
2020 2.7 5.7 1.8 6.0 131
IMF debt sustainability: Ireland

Real GDP (%oya) Avg borrowing cost (%) Inflation (%oya) Primary position (%GDP) Government debt (%GDP)
Source: IMF December 2010
2011 0.9 3.9 0.4 -6.7 112.8
2012 1.9 4.0 0.8 -4.1 120.0
2013 2.4 5.3 1.4 -1.4 124.5
2014 3.0 5.3 1.6 1.2 124.1
2015 3.4 5.4 1.6 1.5 123.0
made in any debt sustainability assessment. Different judgements about nominal growth, borrowing costs, and fiscal positions can make a huge difference to medium-term debt dynamics. Also of critical importance is the time horizon that is assumed in the assessment. It is noteworthy that in the European Commissions assessments of both Greece and Ireland, it evaluates debt sustainability over a very long horizon: 15 years for Greece and 20 years for Ireland. A lot can be achieved over such a period of time.
Debt sustainability calculations

Debt sustainability assessments depend on forecasts made for real growth, inflation, borrowing costs, and the primary fiscal position. The stronger the real growth rate, the higher the inflation rate, the lower the borrowing cost, and the larger the primary surplus, the greater the likelihood that a sovereign will be deemed to be solvent. But, also of critical importance is the time horizon over which solvency is assessed. Solvency is essentially a forward-looking concept for a sovereign so the key question is whether a sovereign can improve its debt dynamics over a certain horizon. The IMF provides the most extensive debt sustainability analysis. In its second review of the Greek Stand-By Arrangementpublished last Decemberit provided a baseline projection of Greek government debt through 2020. After peaking at 158% of GDP in 2013, the IMF projected debt at 131% of GDP in 2020. The sensitivity analysis around this baseline showed the importance of growth, inflation, the borrowing cost, and the primary fiscal position. Meanwhile, in its staff report on Irelands request for an Extended Arrangementalso published last Decemberthe
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JPMorgan Chase Bank, London David Mackie (44-20) 7325-5040 david.mackie@jpmorgan.com
Economic Research The role of the time horizon in Euro area debt sustainability March 11, 2011
IMF provided a baseline projection for Irish government debt through 2015. After peaking at 124.5% of GDP in 2013, the IMF projected debt at 123% of GDP in 2015. The European Commission provides less information on debt sustainability than the IMF, but there is one critical difference: the horizon over which the analysis is conducted. In the third review of the Greek adjustment programpublished in February this yearthe European Commission provides projections for Greek government debt through 2025, and in the review of the adjustment program for Irelandalso published in February this year the European Commission provides projections for Irish government debt through 2030. The longer horizon in the European Commissions debt sustainability assessments is of critical importance in trying to gauge whether Greece and Ireland will be deemed insolvent in mid-2013. In its analysis of Greece, the European Commission presents three scenarios. The first scenario assumes anemic nominal growth of less than 2% and a primary surplus that fails to move above 3.25% of GDP. In this scenario the Commission argues that debt developments are not sustainable: even with low borrowing costs, the debt-to-GDP ratio is merely stabilized at close to the peak, otherwise it continues to climb. The second scenario assumes that nominal growth improves to 3.5% and the primary surplus moves up to 5.5% of GDP. In this scenario, the debt-to-GDP ratio in 2025 is estimated to be between 105% and 130% depending on the borrowing cost, and this is described as sustainable. The third scenario is the same as the second but it includes 50 billion of asset sales between 2011 and 2015. In this scenario the debt-toGDP ratio in 2025 is estimated to be between 80% and 105%, depending on the borrowing cost. More striking is the European Commissions debt sustainability analysis for Ireland. Here, the central scenario has the debt-to-GDP ratio peaking at 120.5% of GDP in 2013 and then declining steadily to reach close to 70% of GDP in 2030. This is close to the Maastricht debt objective of 60%. The Commission assumes that beyond 2015 nominal GDP growth averages 4.8%, the average borrowing cost is 5%, and the primary surplus is 3.2% of GDP. If the longer time horizon in the European Commissions analysis is applied to the IMFs projections, then both Greece and Ireland could be described as solvent. In the IMFs projections for Greece, nominal GDP growth in 2020 is assumed to be 4.5%, the average borrowing cost is assumed to be 5.7%, and the primary surplus is assumed to be 6% of GDP. If growth, borrowing costs, and the primary
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Government debt
% of GDP 160 140 120 100 80 Ireland (1) Greece
Ireland (2) 10 15 20 25 30
Note: This chart shows debt trajectories through 2030, extending the IMF assumptions. The second trajectory for Ireland assumes a primary surplus beyond 2015 in line with the European Commissions forecast.
surplus were to remain at these levels, then by 2030 the Greek debt-to-GDP ratio would be around 85% of GDP. Meanwhile, in the IMFs projections for Ireland, growth, borrowing costs, and the primary surplus are put at 5%, 5.4%, and 1.5% of GDP, respectively, in 2015. If these variables were to remain steady, then in 2030 the Irish debt-toGDP ratio would be around 107% of GDP. However, it is noteworthy that the European Commission assumes a larger primary surplus in 2015, of 3.2% of GDP. A primary surplus of this magnitude would push the debt-to-GDP ratio down to 81% in 2030. Surely if these projections were viewed as credible, Greece and Ireland would be described as solvent.
Clarification from the policy package

What happens in the middle of 2013 is of huge importance in valuing peripheral sovereign debt. Indeed, as one of the reasons behind its downgrade of Greece this week, Moodys referred to the issue of whether Greece will satisfy the solvency criteria introduced in mid-2013. And in its discussion of Portugal last week, Standard & Poors also referred to the issue of the ESM possibly requiring a sovereign to restructure its debt. According to the announcement in January, the comprehensive policy package to be unveiled this month should provide more details on how the ESM will work. The Council document of last November stated that rules will be adopted to provide for case-by-case participation of private sector creditors. The comprehensive policy package could reveal these rules. But, given that nothing will be decided automatically, much will depend on the fiscal effort of the debtor sovereign and the judgements made about the macroeconomic outlook. Moreover, the rules of the ESM can be changed in the future, given that it is an inter-governmental agreement of Euro area countries. Thus, the question of debt restructuring for sovereigns like Greece and Ireland will remain unclear for a while.
JPMorgan Australia Ltd., Sydney Ben Jarman (61-2) 9220-1669 ben.k.jarman@jpmorgan.com
Aussies online shopping: understating retail sales, not GDP

Evolving consumer preferences, new technology, and strong AUD are boosting Aussies online purchases This shift toward foreign purchases is not being recognized in the official retail sales data But these sales are also not captured in imports, so GDP should not be affected One question being posed of the high-frequency data of late is why consumer spending has been so soft. Anecdotal evidence suggests that households are redirecting their spending toward online shopping through overseas vendors, particularly with AUD elevated. Since the Australian Bureau of Statistics (ABS) retail sales numbers capture only domestic online vendors, the argument is that incomplete data coverage in this growing sector is understating the true consumption trend. We agree there are coverage shortfalls in the retail data, which will detract from the level of measured consumer expenditure over time given that online shopping is on a secular uptrend. Technological developments are reducing search costs and improving access to alternative markets. Moreover, to the extent that we can expect AUD to remain above long-run norms, overseas goods will remain relatively cheap. But, for the purposes of calculating GDP, the omission of these sales subtracts not only from consumption but from imports as well, meaning estimates of total economic activity should not be affected. Even incorporating multipliers, the economy-wide impact on GDP from this leakage appears modest. Further, in terms of the path of consumption and GDP growth from here, the relevant issue is impulses to existing trends, rather than the trends themselves. On these grounds, the continued rise in online shopping is less important than the fact that the steady ascent of the saving rate seems to be ending.
tion, as well as vehicle and related sales. So, even without going further, it is clear that online shopping with overseas retailers, equivalent to a small fraction of total retail expenditure, which itself is only a third of total consumption, should not matter too much at present levels. The analysis needs to be taken further, however, because strong growth in web-based spending could see online sales achieve a meaningful share of households total spending before too long. Unfortunately, as the dearth of information on this phenomenon shows, the statistical framework currently is ill-equipped to capture such flows. Online shopping is a highly decentralized activityindeed, this is its main virtuethat allows individual consumers to bypass domestic retailers and importers. This makes specific data on online sales scarce, but also hints that distortions to the GDP data should not be too severe, since the omission of consumption flows should be counterbalanced by an omission in imports.
It all evens out through imports

Consider the expenditure side of GDP: GDP = Consumption (C) + Private Investment (I) + Government Spending (G) + Exports (X) Imports (M) Holding the other components of GDP constant, excluding foreign online sales from consumption reduces measured GDP. But, individual purchases of less than A$1,000 are similarly not included in the imports data. Whatever sales are absent from consumption will also be missing from imports, leaving GDP unchanged in level terms.
How will GDP be affected over time?

The above point addresses the measurement of GDP ex post, and so looks at the data in a static, mechanical way (i.e., holding other components constant). Thinking about what substitution to overseas merchants means for the economy, it is clear that a dollar spent overseas, rather than domestically, is a dollar that will not contribute to further domestic income, consumption, and so on. To estimate the economic impact on GDP as consumers switch to overseas online vendorsas opposed to measuring ex post how this will distort particular components of GDPmultipliers need to be employed. We now pursue an admittedly simple, but instructive, exercise to this end. First, we separate both consumption and imports into the part dependent on income and the remainder, yielding the following: GDP = (C0+I+G+X-M0)/(1+MPM-MPC)
Online sales: rising, but small at present

The ABS retail sales series is a valuable high-frequency indicator but, as a measure of how the economy is tracking, it largely is a means to an end in estimating the consumption component of GDP. The ABS measure of consumption, as it appears in GDP, is put together using a range of sources. Around 35% of the source input comes from the retail sales data, with the remainder made up of spending on services like rent, financial and transport services, health, and educa-
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JPMorgan Australia Ltd., Sydney Ben Jarman (61-2) 9220-1669 ben.k.jarman@jpmorgan.com
Economic Research Aussies online shopping: understating retail sales, not GDP March 11, 2011
C0 and M0 are the components of consumption and imports that are independent of income. The initial shift in consumer preferences toward online sales is captured through reductions in these variables. MPM is the share of imports in GDP, and MPC is the share of consumption in GDP.1 The equation shows how shocks to C0 and M0 transmit through the economy. The multiplier determines the strength of the transmission: a positive shock boosts income, which flows through to more imports and consumption, into more income, etc. A higher MPM means more leakage through imports and a lower multiplier. A higher MPC means less leakage through saving and a higher multiplier. Currently, MPC is about 0.54 and MPM about 0.24. So, imports are quite significant relative to consumption, meaning any reduction in consumption as a result of higher overseas online purchases should be tempered by a fairly substantial fall in conventional imports.
Real consumption and imports relative to GDP

% of GDP 55.5 Consumption 54.5 53.5 52.5 51.5 02 04 Imports 18 22 % of GDP 26
06
08
10
14
Household saving rate

% 15 10 5 0 -5 90 95 00 05 10
Drag is modest, even with multipliers

Consider the following hypothetical. Online purchases increase from their estimated 2009 value2 of around A$21 billion (equivalent to 3.1% of consumption, or 9% of retail sales, the midpoint of estimates collected by AE), by a substantial 10%y/y. Also, assume that the share of overseas purchases within online sales rises from an estimated 30% (again, AEs midpoint) to 50%. This is equivalent to a rise of A$6.5 billion in overseas online sales between 2009 and 2011. Estimating the impact on GDP requires two steps, each of which is heavily influenced by the relative sizes of MPM and MPC. First, we assume that this rise in online sales is paid for with an initial reduction in both consumption and imports, reflecting the relativities of MPM and MPC. In this case, the consumption drag is A$6.5 billion times MPC/ (MPM+MPC) = A$4.5 billion, while the imports drag is A$2 billion. This means a net shock to C0-M0 of about -A$2.5 billion. We then apply the multiplier, equal to approximately 1.4, and smooth the result over two years. The conclusion is that output is reduced by around 0.15%-pt over 2011 (and similarly for 2010) as a result of the shift to greater overseas online sales. Thus, even under generous assumptions on the growth in overseas online sales, the estimated effect on GDP is not large, since the leakage from imports will bear some of the burden. A share of online sales will be paid for with lower imports of conventional items, and this shock transmits with a modest multiplier,
1. We use the consumption and imports shares as proxies for the marginal propensity to consume and import. This assumption will likely lead us to overstate the true MPC and MPM, though this should not distort the multiplier if the true imports and consumption functions have similar shapes. 2. Access Economics (AE): Household E-Commerce Activity and Trends in Australia, 2010.
again because of the already substantial share of imports relative to consumption. Of course, individual sectors retail, obviouslywill bear a disproportionate share of this reduction in output relative to the baseline. As noted by RBA Deputy Governor Lowe this week, the adjustment in relative performance across sectors is a natural consequence of persistently elevated terms of trade and AUD.
Saving rate is worthy of greater attention

The shocks to the levels of consumption and GDP occur relative to some counterfactual. But online sales have been rising as a proportion of consumption for several years. So, while the above exercise assumes a sharp rise relative to 2009 online sales, which pulls down 2010 and 2011 consumption and output, this drag largely cancels out in the forecasts for growth rates this year and beyond. In other words, a continuing trend imposes little impulse on the growth outlook. The saving rate, on the other hand, looms as a more important swing factor. Judging by last weeks national accounts release, the saving rate now seems to be stabilizing, having risen for more than five years. From this point, nominal income growth should transmit with much greater intensity into consumption growth. This fact, combined with the realization that national income is growing near 10% following the terms of trade boost of the last year, leaves the consumer poised for a rebound by yearend. We will address the issue of saving and consumption behavior in greater detail in a forthcoming note.
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JPMorgan Chase Bank, Singapore Matt Hildebrandt (65) 6882-2253 matt.l.hildebrandt@jpmorgan.com
Singapore: consumer price inflation

%3m/3m saar 12 8 4 0 -4 -8 04 06 08 10 Core CPI
Singapore: to maintain current tightening path or go further?

Slowing CPI inflation trajectory, tame core prices, and already tight policy path to keep MAS on hold in April Decision a close call but the current policy stance is appropriate with respect to the economic outlook High oil prices and a tight labor market pose risks to our call; band could be narrowed and recentered Consumer prices have risen rapidly in recent months. Price pressures primarily have stemmed from housing and private transportation costs, the latter of which reflects rising fuel and certificate of entitlement (COE) costs. Core inflation in Singapore excludes private transportation and accommodation. As a result, core inflation has been much tamer than CPI inflation, leading to a large divergence between the two. The MAS has been at the forefront of the regional tightening cycle, surprising the market on the upside at each of its last two meetings. The market expects another tightening move in April, but we think the MAS will surprise again by leaving its stance unchanged this time. This would still leave the policy stance on a historically aggressive tightening path, which we think is sufficient given subdued core inflation, a likely slowdown in CPI inflation, and strong regulatory measures in January to cool the housing market. We acknowledge that the decision will be a close call. The recent rise in global oil prices, especially considering tight domestic labor market conditions, poses upside risk to inflation and our policy call. Moreover, the MAS will likely take back at some point its band widening from the last meeting. Potentially, the MAS could narrow its band, which would also require an upward shift in the SGD NEER midpoint to avoid an effective easing of its policy stance.
Singapore: CPI inflation and forecast

%oya 8 6 4 2 0 -2 2005 2006 2007 2008 2009 2010 2011 Core CPI Forecasts
Singapore: contributions to inflation

%-pt contribution to %oya inflation 6 Private transport, accommodation, and energy 4 2 0 -2 2009 2010
Food
CPI
Other 2011
Singapore: contributions to inflation

%-pt contribution to %oya inflation 6 Transport 4 2 0 Housing -2 Feb 10 Apr 10 Jun 10 Other Aug 10 Oct 10 Dec 10
Inflation less scary than at first glance

Inflation has risen quickly. In January, inflation hit 5.5%oya from 3.5% in October while the annualized rate was up 6.7% from 3.0%. The increase partly reflects higher property costs, which have been a concern for a few years now as government efforts to cool the sector have had only limited success. However, in January, strong measures were implemented that reportedly have cooled the property market. Private transport costs have also risen from higher oil prices and the governments deliberate intent to reduce the supply of COEs. This alone accounted for 50% of the 5.5% January
inflation print while accommodation accounted for an additional 25%. Singapores core inflation (ex. private transport and accommodation) has been much more muted. Core prices rose
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JJPMorgan Chase Bank, Singapore Matt Hildebrandt (65) 6882-2253 matt.l.hildebrandt@jpmorgan.com
Economic Research Singapore: to maintain current tightening path or go further? March 11, 2011
2.0%oya in January, lower than the 2.2% print a few months earlier, while core prices fell 0.3%3m/3m saar for a second straight month. The extreme divergence between core and CPI inflation trends of late (both %oya and %3m/3m saar) is highly unusual, and it attests to the major roles that housing, COE, and oil prices have played in driving inflation recently.
Singapore: certificate of entitlement (COE) prices

%oya 2000 1500 1000 500 0 -500 2005 2006 2007 2008 2009 2010 2011 Change in price Price SG$ 50000 40000 30000 20000 10000 0
No change still means tightening

Core inflation is expected to stay well-behaved and could even slow in coming months while headline inflation should moderate gradually after peaking at the end of 1Q. This view primarily reflects base effects from COE prices that will kick in as well as softer housing price pressures following the January measures. Even if housing price pressures do not ease as much as expected, additional sector-specific property measures will likely be used to address this concern rather than the SGD NEER. Oil prices pose a risk to inflation, but the effect is not clear-cut, as they also pose risks to growth. Given tight domestic labor market conditions and the strength of the global economy, we think an SGD NEER tightening stance is appropriate. However, the MAS has adjusted the policy band slope upward at each of its last two meetings (as well as recentered upward and widened the band, effectively another recentering), and we estimate that the policy band is now appreciating at a historically strong 2.75% pace. Over the last year, the SGD NEER has appreciated more than 5% (SGD has strengthened almost 10% versus USD), and Singapore stands out in the region as having tight monetary conditions. Even if the policy stance is not changed, monetary conditions will continue to tighten as the SGD NEER should appreciate roughly 2% more by year-end while SGD should gain another 5% against USD.
Singapore: nominal monetary conditions index vs. EM Asia

% deviation from 5-year average 4 2 0 -2 -4 EM Asia Singapore 2 1 0 -1 -2
00
02
04
06
08
10
Singapore: policy band for SGD's effective exchange rate

Index, MAS measure of trade-weighted NEER 115 110 105 100
A few risks to our call

While much higher oil prices could pose risk to inflation expectations, tight labor market conditions are a more notable risk to inflation right now. In 4Q10, nominal wages rose 7.5%oya, the fastest since 1Q08. We think however that the best way to address this concern is via immigration policy, which we do not expect to be as restrictive this year as many fear. Moreover, even during past periods of low unemployment, wage increases have not risen above 7%-8% for any sustainable period, suggesting that wage growth will not likely get out of hand. Rather than outright tightening, the biggest risk to our call is potential for the MAS to narrow its band if it thinks that volatility in financial markets has declined. In this case, the midpoint of the policy band would need to be recentered upward to prevent a de facto easing of monetary policy.
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2006
2007
2008
2009
2010
2011
Singapore: unemployment rate and wage growth

%, sa, p.a., inverted 5 Unemployment rate 4 3 2 1 98 99 00 01 02 03 04 05 06 07 08 09 10 Wage growth (inverted) %oya -10 -5 0 5 10 15
JPMorgan Chase Bank, London Miroslav Plojhar (44-20) 7325-0745 miroslav.x.plojhar@jpmorgan.com
CNB and ECB base rates

%, p.a. 6 5 4 3 2 1 0 00 02 04 06 08 10 12 CNB ECB J.P. Morgan forecast
Czech rate hikes: lagging ECB at first, but outrunning in 2012

The CNB should start a tightening cycle in June and hike the base rate to 3.25% by end-2012 Faster rate increases than ECB in 2012 will be driven by stronger growth, a surge in CPI due to VAT hike ECBs hikes to reflect state of entire EMU, not just Germany; not enough tightening from koruna gains The beginning of a Czech interest rate hiking cycle is approaching. The base rate is at an emergency low level of 0.75%, the economy continues to recover, inflation is heading above the 2% target, and the ECB will likely initiate a tightening cycle in April. We expect the CNB to lag the ECB in rate hikes in the near term but to outrun it in 2012. Despite votes for a rate hike at the last four CNB policy meetings, we maintain our call that the first hike will be in June. The majority of policymakers would like to see 1Q11 data first to evaluate the impact of fiscal austerity measures on growth. In contrast, a faster hiking cycle in the medium term will be driven by expected Czech growth outperformance vs. the Euro area, an increasingly likely hike in VAT rates and related risk of second-round effects, and the likelihood that ECB tightening will be driven by the state of the entire Euro area, not just Germany, Czechs main trading partner. Finally, we do not expect the koruna to deliver sufficient tightening.
year, and we look for growth of 3% this year and more thereafter, driven not only by export-oriented manufacturing but also by a revival in private domestic demand. The improving industrial sector has provided support for employment, which bottomed in 2Q10. Rising demand for labor in the recovering economy is likely to result in a gradual increase in wage growth. We acknowledge that wage growth remains sluggish, slowing to just 0.9%oya in 4Q10 from 4% in 2009. But this reflects a statistical distortion. Wage growth accelerated counterintuitively during the recession year of 2009. This was driven partly by the fact that layoffs were disproportionately skewed toward low-wage workers during the recession. We think that wage growth in 2010 was influenced by a reversal effect. Besides a strong export-oriented manufacturing sector and improving labor market, a further acceleration of GDP growth requires more domestic credit growth. The excesses of the previous credit boom were minor in comparison with most of EMEA. But household confidence was still shaken and the investment thesis of rising house prices is now in question. In sum, animal spirits have taken a hit, but we doubt they will remain down for too long. The recession is becoming a distant memory, and the perceived risk of another crisis is declining. Credit growth has already revived in the corporate sector, and banks are reporting the first signs of reacceleration in household credit.
It's time to return to normal rates

The Czech base rate is at 0.75%, 1.25%-pts below the inflation target and average inflation over the past six months. While a negative real rate was a proper response to the deep recession that began in late 2008, the current level is not sustainable in the medium or longer term. We consider a neutral level of the Czech base rate to be 3%-4%, based on long-term real GDP growth of 4%, an inflation target of 2%, and longterm real FX gains of 3%. A need for interest rate normalization is well recognized by CNB policymakers in interviews, by CNB staff in its forecast, and in the market pricing. Our forecasts of GDP growth, inflation pressures, and the interest rate outlook in other countries, mainly in the Euro area, lead us expect that interest rates will have to move higher in the coming two years, higher than the CNBs relatively modest forecast and even elevated market expectations.
Output gap to close gradually

The abrupt turn from strong GDP growth of close to 6% in 2005-08 to a recession in 2009 in which GDP fell 4.0% opened a wide negative output gap. Various methods of calculating the gap yield estimates ranging from -5% to -2%. Looking at other measures of slack, such as capacity utilization in industry, and noting the revival of core inflation, we think that estimations of a narrower output gap are closer to reality. We expect that the negative output gap will close gradually but will not be completely closed before end-2012.
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GDP growth to accelerate

The Czech economy is recovering from a deep recession, riding a recovery in foreign demand. GDP rose 2.2% last
JPMorgan Chase Bank, London Miroslav Plojhar (44-20) 7325-0745 miroslav.x.plojhar@jpmorgan.com
Economic Research Czech rate hikes: lagging ECB at first, but outrunning in 2012 March 11, 2011
Not a true follower of the ECB

The ECB signaled last week it would start an interest rate hiking cycle in April. J.P. Morgan expects the ECB to deliver a 25bp increase per quarter with the policy rate rising to 2.75% by end-2012. Among European central banks, the CNB policy rate path has most closely followed that of the ECB, in part reflecting the high degree of openness of the Czech economy (goods exports are two thirds of GDP) and close trade links with the Euro area (more than 70% of exports). Though the Czech Republic is not a member of the Euro area, the tight relationship of their business cycles points to a similar path for policy interest rates, though the levels may differ. The slight difference in policy rates mostly reflects prevailing structural differences, especially lower leverage in the financial system, resulting in lower sensitivity of the Czech economy to changes in interest rates. Also, Czech foreign trade is linked mainly to core Euro area countries, especially to Germany, but ECB policy is made for the whole Euro area. Looking ahead, the fiscal problems in peripheral Europe mean that the ECB is likely to follow an easier monetary policy than German economic conditions would call for.
The koruna vs. its fundamental trend

CZK/EUR 36 34 32 30 28 26 24 01 03 05 07 09 11 CZK/EUR Fitted CZK/EUR
significantly reduced the previously reported trade surplus, thereby compromising this argument (see CE pages in this weeks GDW for details). We do not anticipate a large fall in the koruna from here, but we doubt the currency will provide a sufficient tightening of the monetary conditions again to allow interest rates to remain low. That said, there are limits to how much the CNB can diverge from the ECB; we do not expect the CNB rate spread to the ECB to exceed 100bp over the next two years.
FX unlikely to deliver sufficient tightening

The koruna is a highly important variable in the inflation outlook and in the CNBs consideration of how much it can diverge from the ECB. The CNB philosophy is to allow the currency to float as freely as possible; it would be one of the last central banks to intervene. The koruna has delivered sizable tightening of monetary conditions in recent quarters, partially offsetting low interest rates. Yet, we doubt currency strength will deliver sufficient tightening in the coming quarters. Rising interest rates in Europe will be marginally negative for the koruna. Also, the koruna has run a bit ahead of itself on valuation metrics. Currency movements against the euro have followed EMU convergence over the past 10 years, moving generally in line with real GDP growth and inflation differentials against the Euro area. There were two periods of deviations. In 2001-02, the koruna rallied on expectations of large privatization-related FDI inflows and as the CNB mistakenly tightened while the ECB eased. The excessive rally was fully retraced in 2003 after the CNB eased and privatization revenues were converted into CNB reserves. In 2007-08, the koruna rallied on the belief that Central Europe would decouple from the US recession. The rally was fully retraced in early 2009 as CE succumbed to recession. The koruna is now stronger than fundamentals indicate, though the deviation is smaller than in previous overshoots. We thought the stronger FX was justified by the large trade surplus. But revisions to trade statistics have
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A VAT hike to add 1%-2%-pts to inflation

Our rate hiking expectations in 2012 are driven also by a potential hike in VAT rates in early 2012. The government is preparing pension reform that will likely be funded by a VAT hike. Politicians have presented several alternatives of VAT change over recent weeks, a unification of the rate at levels ranging from 17.5% to 20%, from the current basic rate of 19% and lower rate of 10%. Such a tax change would increase headline inflation by 1%-2%-pts. In theory, the central bank should ignore the spike in inflation due to tax changes. In practice, this depends on the context. In an environment of a closing output gap, the risk of secondary inflation effects could push the central bank into more hikes.
The first rate hike in March, May, or June?

Our main call is that the macroeconomic environment will drive the CNB to raise its policy rate to the neutral level of 3%-4% over the next two years, even before the negative output gap closes, and that the rate will rise above the ECBs policy rate. Exactly when the CNB will initiate the hiking cycle is less important. Since last summer, we have maintained that it would start at the end of 2Q11. While not wanting to appear too stubborn, we still think this seems to be the most likely scenario. We think that the majority of MPC members, led by Governor Singer, prefer to wait a bit longer to see 1Q11 data before hiking rates. Votes will likely be cast for a hike at the March 24 and the May 5 meetings, but until Governor Singer changes his mind, a majority favoring a hike is unlikely to be formed.
United States
Forecast for 1H11 real GDP growth is revised down as higher inflation dampens real consumer spending News is not all negative; incoming data still point to strong manufacturing and declining jobless claims Forecast looks for the February CPI to rise 0.5% or 2.2%oya, core CPI to rise 0.16% or 1.1%oya Incoming reports indicate that growth this quarter is tracking below expectations, and the forecast for current quarter growth has been lowered to 2.5% (from 3.5%). This revision reflects the hit to real income and consumer spending from much higher fuel prices, but also the generally weak round of January reports for other key source data including yesterdays report on net exports. Since the economy appears to be carrying somewhat less momentum into the spring than had been expected, and federal government spending may be cut a little more than had been incorporated in the forecast, the forecast for 2Q11 real GDP growth has also been lowered to 3.5% (from 4.0%). Nominal retail sales have held up very well so far. Total retail sales rose an upward-revised 0.7% in December and 1.0% in January. Core retail sales rose a healthy 0.6% in each month. But the gains in nominal spending are more a reflection of higher goods prices than of higher sales volumes. Real consumer spending, including spending on services, appears to have been flat in January and up only 0.2% in February. Consequently, the forecast for 1Q11 real consumer spending has been lowered to 2.1% saar. Moreover, the Michigan preliminary consumer confidence survey for March posted a downside break, finally responding to substantial increases in the price of gasoline (see Focus page). The dominant weakness was in the expectations component, the part of the survey that correlates most closely with spending on consumer durables. In the past, higher fuel prices have had a depressing effect on auto sales, and the obvious concern is that this pattern might play out once again over the next few months. To be sure, not all the incoming data have been disappointing. Manufacturing appears to be accelerating, consistent with the ISM survey readings. The forecast for next weeks reports on manufacturing IP is a 1.1% increase and a 0.9% gain even excluding autos. This increase, if realized, would take the 3-month run rate for manufacturing output to 9.0% annualized growth from a 3-month run rate of only 3.4% saar as recently as November. Next weeks regional manufacturing surveys from the New York Fed
US forecast: real GDP and real consumer spending

%ch saar 4Q10 Real GDP Previous forecast Consumer spending Previous forecast 2.8 2.8 4.1 4.1 1Q11 2.5 3.5 2.1 3.0 2Q11 3.5 4.0 3.5 4.0 3Q11 3.5 3.5 4.0 4.0 4Q11 3.0 3.0 3.0 3.0 2011 4q/4q 3.1 3.5 3.1 3.5]
Nominal consumer spending and PCE price index

%ch saar over 3 months, with Feb forecast 8 6 4 2 0 -2 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Consumer prices Consumer spending
Initial jobless claims and manufacturing output

'000s, sawr, monthly average 500 460 420 380 Jan 10 Mfg output %ch saar over 3 months, with Feb forecast Jobless claims 14 11 8 5 2 Apr 10 Jul 10 Oct 10 Jan 11
(Tuesday) and Philadelphia Fed (Thursday) will provide initial hints as to how manufacturing is doing this month. There are also signs of stronger job growth ahead. The employment measure for both ISM surveys hit new highs for the expansion in February. And although the latest reading for initial jobless claims increased to 391,000, claims have declined from 413,000 in the week of the February labor market survey (and a four-week average of 418,500) to an average 385,000 in the three weeks since the February survey. The recent rise in commodity prices is lifting headline inflation and is also having some effect on core inflation, if for no other reason than the impact of higher fuel prices on air fares (up 2.2% samr in January) and the impact of much
21
Economic Research United States March 11, 2011
higher cotton prices on apparel prices (up 1.0% in January). The forecast for the February CPI (Thursday) looks for a 0.5% increase in the headline reading (to 2.2%oya) and a 0.16% increase in the core CPI (to 1.1%oya).
Retail sales
%ch saar, over 3 months 15 10 Total retail sales
Good gains in retail sales and in prices

Nominal retail sales continues to post solid gains, according to data now available through February. Total sales increased 1.0% in February and the previously reported figure for January was revised up to show a 0.7% increase. Total retail sales have increased 9.7% saar over the past three months. Much of the increase was associated with the upturn in unit auto sales and the increased price of gasoline. But even core retail sales, which excludes these items, is up 4.5% saar over the past three months. Core retail sales increased 0.6% in both January and February and has been up either 0.5% or 0.6% in each of the last six months, save for the weak month of December when core retail sales edged down 0.1%. But an increasing share of that spending simply reflects higher prices. Total retail sales rose a combined 1.3% in December and January, and the CPI for goods rose an even larger 1.7% over these two months. Similarly, the stronger 1.0% increase in total retail sales in February was probably barely enough to match price increases for goods. The forecast looks for real consumer spending growth to accelerate from an estimated 2.1% pace this quarter to 3.5% next quarter. But this forecast is predicated on a stabilization in the price of oil and a near-term slowdown in the rate of inflation from an estimated 4.0% saar increase in the CPI this quarter to only 1.8% next quarter.
5 0 -5 Jan 10
Core retail sales
Apr 10
Jul 10
Oct 10
Jan 11
Note: Core retail sales excludes autos, gasoline, and building materials.
Real merchandise exports and imports

$2005 bn, both scales 106 100 94 88 Jan 10 Real exports Real imports 152 143 134 125 Apr 10 Jul 10 Oct 10 Jan 11
Foreign trade
The trade deficit widened substantially in January to a balance of -$46.2 billion from -$40.3 billion in December and a 4Q10 average of -$38.9 billion. Part of the increase in the deficit reflects the effect of higher import prices, but the real ex.-petroleum deficit also widened. And early in the quarter, the tracking estimate indicates that real net exports are a drag on overall real GDP growth of 1.0%-pt or more. The other message from the latest monthly trade reports, however, is that both US and global demand were very strong at the turn of the year as both export and import volumes surged. Merchandise export volumes rose 2.1% in December and another 2.5% in January. The increase in import volumes (following several months of a declining trend between August and November) was even greater, up 2.1% in December and another 4.1% in January. Monthly trade figures are notoriously choppy, but there is good reason to think that strong export growth continues for the next several months as the ISM manufacturing measure of export orders, a reasonably good correlate of export performance, is running at its highest levels since the early 1980s (see the research note US data bring hints of stronger export growth ahead in this GDW).
Gasoline prices soar, consumers gloomy

National figures show that the retail price of gasoline increased a modest 14 cents per gallon between the end of 2010 and the week of February 23, but then rose 33 cents per gallon in the following two weeks (nsa). The recent spike was enough to finally drive a sharp drop in consumer confidence in March. The household appraisal of buying conditions for houses, cars, and household durables did not decline much (the appraisal of buying conditions for houses actually rose substantially). But there was a sharp decline in the expectations component of confidence to its lowest level since September. And the expected change in family income collapsed, plummeting to its lowest level in the history of a series going back to the 1970s. The very low reading partly reflects much lower inflation than in the 1970s or 1980s. But it probably also reflects the knowledge that prior oil price spikes often drove the economy into recession.
22
JPMorgan Chase Bank, New York Michael Feroli (1-212) 834-5523 michael.e.feroli@jpmorgan.com Daniel Silver (1-212) 622-6039 daniel.a.silver@jpmorgan.com
Data releases and forecasts

Week of March 14 - 18
Tue Mar 15 8:30am Import prices %m/m nsa, unless noted Nov Import prices %oya Ex-fuel import prices %oya 1.6 4.0 0.8 3.0 Dec 1.2 5.1 0.3 3.0 Jan 1.5 5.3 0.8 3.4 Feb 0.7 6.1 0.6 4.0
future manufacturing activity, we look for little change in the Empire State and Philadelphia Fed surveys in March. We expect the Empire State survey to be basically unchanged at 15.5 in March. Even though the details of the survey softened a bit in Februarywith a slight decline in its ISM-weighted composite and the important new orders component, as well as a narrowing of the orders-inventories gapwe do not anticipate a decline in the survey since it already looks soft relative to the other regional indicators. The headline reading and the ISM-weighed composite of the Philadelphia Feds survey both were elevated in February. The details of the survey looked healthy in February, but we expect some cooling in March from 35.9 to 32.0. We will also continue to monitor the price measures reported in the regional surveys, which have pushed higher lately with the rising price of oil.
Empire State survey and derived-composite
Index , sa 60 40 20 0 -20 -40 01 03 General business conditions 05 07 09 11 Derivedcomposite Index , sa 65 60 55 50 45 40 35
We anticipate that the import price index increased 0.7% in February (+6.1%oya). We expect that the gains in prices were widespreada continuation of the recent trendand the nonfuel price index should be up 0.6% for the month (+4.0%oya). We forecast that the prices of imported fuels and lubricants rose 0.8% in February, largely due to increases in fuel oil prices. These increases have been evident in various spot price measures already available for the month. Away from fuels, imported food prices and metal prices have also been pushing higher in recent months. Food prices shot up 30% ar over the three months through January, and agricultural price indexes available for February point to further price increases. The prices of unfinished metals increased 42% ar over the three months through January, and there have been more modest increases reported for the prices of finished metals. We expect that imported unfinished metal prices increased 3.6% in February based on reported increases in tin, nickel, platinum, and palladium prices, and we look for more modest growth in finished metal prices based on the reported increase in copper prices.
Tue Mar 15 8:30am Empire State survey Diffusion indices, sa Dec General bus. conditions New orders Shipments Unfilled orders Prices paid Prices received Composite Thu Mar 17 10:00am Philadelphia Fed survey Diffusion indices, sa Dec General bus. conditions New orders Shipments Inventories Prices paid Prices received Composite 20.8 10.6 5.2 -5.9 47.9 9.4 52.1 Jan 19.3 23.6 13.4 6.8 54.3 17.1 56.4 Feb 35.9 23.7 35.2 2.1 67.2 21.0 59.5 Mar 32.0 9.9 2.0 7.2 -18.2 28.4 3.4 48.3 Jan 11.9 12.4 25.4 -11.6 35.8 15.8 54.4 Feb 15.4 11.8 11.3 -4.8 45.8 16.9 53.6 Mar 15.5
Philadelphia Fed survey and derived-composite

Index , sa 40 20 0 -20 -40 Derived-com posite General business conditions Index , sa 70 60 50 40 30
01
03
05
07
09
11
The various regional manufacturing surveys and the ISM manufacturing index have all exhibited boomy levels of activity in recent months. With the details of the February regional surveys generally favorable for
Tue Mar 15 10:00am
Homebuilders survey Sa Dec Housing market Present sales Prospective buyer traffic 16 16 11 Jan 16 15 12 Feb 16 17 12 Mar 17
23
We expect the March NAHB survey to finally tick up to 17 after holding at 16 the prior four months. The homebuilders survey has been stuck at a very low level since dropping after the end of the homebuyer tax credit; the new home sales data have similarly remained depressed since the tax credits expiration. We look for just some improvement in the NAHB survey in March as the volume of mortgage purchase applications during the first week of the month was the highest since the end of December (though still extremely low by historical standards).
NAHB index and new home sales
Index , sa 80 60 40 20 0
Wed Mar 16 8:30am
Away from energy and food, we look for the pace of increase in the core PPI to slow from 0.5% in January to 0.3% in February. Even though the data are seasonally adjusted, the core measure tends to firm noticeably in January each year, and we anticipate some subsequent softening to occur. That said, a 0.3% increase would still be the strongest monthly increase in slightly more than a year (excluding the months of January).
Producer price index for finished goods
%oy a, nsa 10 5 0 PPI
Mn, saar New home sales 1.5
1.0 -5 0.5 NAHB index 00 02 04 06 08 10 0.0

Wed Mar 16 8:30am
Core PPI
-10
05
07
09
11
Housing starts Mn units, saar Nov Starts Single-family starts Multifamily starts Permits 0.55 0.46 0.09 0.54 Dec 0.52 0.42 0.10 0.63 Jan 0.60 0.41 0.18 0.56 Feb 0.55 0.41 0.14 0.57
Producer price index %m/m sa, unless noted Nov Finished goods %oya nsa Core %oya nsa Energy Cars Trucks Core intermed. Core crude 0.7 3.5 0.1 1.2 1.8 1.3 -0.3 0.6 3.2 Dec 0.9 4.0 0.2 1.3 2.8 -0.4 0.2 0.4 3.5 Jan 0.8 3.6 0.5 1.6 1.8 -0.1 0.2 1.0 4.0 Feb 0.7 4.8 0.3 1.9 1.0 -0.1 0.1 0.9
Housing starts have been very volatile in recent months as severe winter weather and changes to building codes in some states have led to large swings in some regions. Through this volatility, housing starts and permits have remained at very low levels by historical standards; we expect that this continued in February, with starts down 8.5% to an annualized rate of 545,000 units and permits up 2.1% to an annualized rate of 575,000 units. Single-family permitsperhaps the most important indicator of the trend in housing growthhave been basically flat since May, averaging 417,000 saar between May and January. We look for just a slight uptick of 1.0% in February data to follow the 4.8% decline reported for the prior month. In January, single-family permits were running below starts in permit-issuing areaswhich generally indicates a subsequent decline in starts. We therefore expect a tick down (-1.0%) in single-family starts for February, extending the gradual decline in the data reported since the middle of 2009. Multifamily starts and permits are notoriously volatile month to month. We believe that these starts fell 26.2% in February after surging 77.7% the prior month. We look for a bit of a rebound in permits (+5.3%) following the steep 23.2% decline reported for January.
We forecast that the producer price index increased 0.7% in February (+4.8%oya), largely due to higher energy and food prices. We also expect that the core measure (excluding food and energy) increased 0.3% during the month (+1.9%oya). Energy prices have been pushing higher over the past half year, with the energy PPI up almost 30% saar over the six months through January. We expect this measure to increase another 1.0%m/m in February based on our analysis of available energy spot prices. We expect a decent increase in the PPI for refined petroleum prices, but it is important to note that most of the PPI data are collected in the middle of the month, so the surge in oil prices that occurred late in February should not be reflected in this report. Food prices have also been rising recently, and various food price indexes point to further increases in February. We forecast an increase of 1.5% for the February food PPI (+4.9%oya).
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Thu Mar 17 8:30am
Jobless claims 000s, sa New claims (wr.) Wkly 4-wk avg Jan 1 Jan 8 Jan 15 Jan 22 Jan 29 Feb 5 Feb 12 Feb 19 Feb 26 Mar 5 Mar 12 411 447 403 457 419 385 413 388 371 397 390 411 417 413 430 432 416 419 401 389 392 387
Continuing claims Wkly 4-wk avg 3887 3897 4009 3936 3910 3938 3833 3791 3771 4059 4015 3980 3932 3938 3948 3904 3868 3833
Insured Jobless,% 3.1 3.1 3.2 3.1 3.1 3.1 3.1 3.0 3.0
Thu Mar 17 8:30am
CPI %m/m sa, unless noted Nov Total %oya nsa Core %oya nsa Core services Core goods Food Energy Housing Owners eq. rent Rent Lodging away from home Apparel New vehicles Used vehicles Airfares Communication Medical care 0.1 1.1 0.12 0.8 0.2 0.0 0.2 0.1 0.0 0.11 0.21 -1.0 0.1 -0.2 0.1 2.4 -0.1 0.2 Dec 0.4 1.5 0.07 0.8 0.1 -0.1 0.1 4.0 0.2 0.09 0.20 1.0 0.1 -0.1 -0.1 2.7 -0.6 0.2 Jan 0.4 1.6 0.17 1.0 0.1 0.2 0.5 2.1 0.1 0.10 0.16 -1.0 1.0 -0.1 -0.3 2.2 -0.2 0.1 Feb 0.5 2.2 0.16 1.1
0.4 4.0 0.11 0.17 -0.9 0.4 -0.1 0.0 0.0 -0.3 0.2
1. Payroll survey week
We forecast that initial jobless claims for the week ending March 12 declined 7,000 to 390,000. Initial claims for the week ending March 5 increased 26,000 after falling 42,000 over the prior two weeks. We believe that claims should continue to trend lower as the labor market heals, though there may be some hiccups along the way since claims tend to bounce around a bit. There was a severe winter storm in Vermont that closed state government offices on March 7 that may have delayed the processing of claims there for the week ending March 12, but this should not have a major effect on the national claims total due to the relative size of Vermont. Continuing claims are generally less volatile than the initial claims data, and have shown a more consistent downward trend lately. For the week ending February 26, continuing claims fell 20,000 to 3.771 million. The four-week moving average for continuing claims has dropped about 15% since September and 20% over the past year. The insured unemployment rate for the week ending February 26 held at 3.0%, the low for the recovery so far.
We forecast that the consumer price index rose 0.5% in February (+2.2%oya) on higher food and energy prices. We expect the core CPI measure (excluding food and energy) to have increased 0.16% during the month (+1.1%oya), continuing the recent run of minimal core inflation in the economy. Energy prices picked up in the second of half of 2010 and oil prices pushed significantly higher in February. We anticipate that the energy CPI increased 4.0% in February (+11.9%oya), driven by higher motor fuel and fuel oil prices. Food prices jumped 0.5% in January and have been trending higher in recent months, reflecting the rise in prices of foodstuffs around the world. We forecast a 0.4% increase in the food CPI for February, bringing prices up 2.1% on a year-ago basis. Core prices have remained constrained of late, even with the acceleration in food and energy prices, though there appears to be some passthrough of commodity prices into the core measure. We expect the core CPI to increase 0.2% for the second consecutive month in February. The important rent measures (about 40% of the weight of the core) have firmed in recent months; we expect this trend continued into February, with owners equivalent rent increasing 0.11% and tenants rent up 0.17%. Airfares have been surging latelyup 33% saar over the three months through Januaryreflecting rising jet fuel prices. Fuel prices continued to increase in February, and we anticipate the CPI for airfares to rise further (+2.7).
Initial jobless claims

000s, sa 700 600 500 400 300 200 2007 2008 2009 2010 2011
We look for apparel prices to increase 0.4% in the February CPI on top of the 1.1% jump reported for January. Cotton prices have shot up in recent months, probably contributing to the recent run up in apparel prices. We look for some moderation in the price increase in February, since it is rare for the apparel CPI to have two very strong prints in consecutive months.
25
Vehicle prices have declined in recent months, and we look for this weakness to continue into February. New car prices fell each month between October and January, and we expect to see a 0.1% decline in February. The Manheim Used Vehicle Value Indexwhich generally leads the CPI for used vehiclesindicates that we should see an upcoming rise in used vehicle prices. However, the market for used vehicles could be flooded as people trade in their old cars for new ones; the data on new unit car sales have been coming in strong in recent months. We expect the CPI for used vehicles to be flat in February. Our analysis of available data on hotel prices points to further weakness in the prices of lodging away from home in February (-0.9%). These prices have been falling recently, down 5.6% saar over the six months through January.
Consumer prices
%oy a, nsa 6 4 2 0 -2 -4 05 07 09 11 Headline CPI %oy a, nsa Core CPI 3.0 2.5 2.0 1.5 1.0 0.5
cast that manufacturing IP increased 1.1% in February, with a 6.4% gain in motor vehicles and parts and 0.9% growth in the other manufacturing categories. Away from manufacturing, we expect that mining production increased 0.3% in February while production of utilities edged down 0.1%. February was a big month for crude oil field production, but our expectations for mining output are modest since the workweek for related workers fell more than 1% during the month. Utilities production should have edged lower in February as the extreme cold weather from January moderated somewhat. Our anticipated gains in IP should drive overall capacity utilization and manufacturing capacity utilization to their highest levels since late 2008.
Manufacturing production and ISM mfg composite

3mma, %ch over 3 months, saar 20 10 0 -10 -20 -30 00 ISM manufacturing Manufacturing IP Index, sa 65 60 55 50 45 40 35 02 04 06 08 10 30
Thu Mar 17 9:15am
Industrial production %m/m sa, unless noted Nov Industrial production Manufacturing Motor vehicles and parts High-tech Mfg ex motor vehicles Business equipment Capacity utilization (%,sa) Manufacturing 0.3 0.3 -4.9 1.5 0.6 0.3 75.4 72.9 Dec 1.2 0.9 0.2 2.1 0.9 1.0 76.2 73.5 Jan -0.1 0.3 3.2 1.2 0.1 0.9 76.1 73.7 Feb 0.9 1.1 6.4 0.9 76.7 74.5
Review of past weeks data

NFIB Small-Business Optimism survey (Mar 8)
Index, 1986=100, sa Dec Optimism Index Capex plans Hiring plans Planned price increase 92.6 21.0 6.0 15.0 Jan 94.1 22.0 3.0 19.0 Feb 94.5 22.0 5.0 21.0
We anticipate a solid industrial production report for February, with a 0.9% gain in headline IP for the month and a 1.1% increase in manufacturing production. The ISM manufacturing survey looked very strong in January and February, and other available data also point to a good month for IP in general. The workweek for manufacturing production workers popped up in February (+0.2%) after dropping in January (-0.5%), indicating that manufacturing production should also pick up in February after a lackluster January. Our seasonal adjustment of auto production schedules shows a strong month for motor vehicles and parts production within the manufacturing sector. We fore-
International trade (Mar 10)

$ bn, samr Nov Balance (BOP basis) Services Merchandise Exports (%m/m) Imports (%m/m) -38.3 -38.2 13.0 13.2 -51.3 -51.4 1.0 0.8 Dec -40.6 -40.3 13.0 13.4 -53.6 1.8 1.9 2.6 Jan -42.0 -46.3 13.2 13.4 -55.2 -59.8 1.6 2.7 2.0 5.2
26
The nominal trade balance widened from -$40.3 billion to -$46.3 billion in January. The sizable jumps in real goods imports (+4.1%) and exports (+2.5%) during the month are signs of solid demand growth in the US and abroad. However, the significant widening of the January trade deficit implies that first-quarter real GDP growth in the US is tracking about 0.5%-pt lower than we had previously forecast. Not surprisingly, nominal imports were boosted by energy prices in January. Imports of industrial supplies rose 8.0% in January and have soared 141.5% saar over the prior three months once energy prices started to pick up. There was growth in imports away from energy products, however, and imports excluding petroleum products jumped 5.1% in January. Food imports rose 50.9% saar over the three months through January, which is also a reflection of higher prices. January was also a big month for auto imports (+14.0%), possibly reflecting increased production in Canada during the month. Exports were strong in January (+2.7%) reflecting increased demand abroad. This rise in exports was driven by industrial supplies (+10.2%) and motor vehicles (+13.4%). Exports of consumer goods have turned softer in recent months. Federal budget (Mar 10)
$ bn, nsa Dec Unified balance Prior year -78.1 -91.4 Jan -49.8 -42.6 Feb -226.0 -222.5 -220.9
nual pace, slower than the 4.1% pace registered last quarter and slower than the 3% rate we had penciled in to our forecast. Looking across categories, strength was particularly evident in sporting goods stores (up 1.3%) and restaurants (up 1.2%). The only declines were at furniture stores, health and personal care stores, and non-store retailers. Core retail sales were revised up in January from 0.4% to 0.6%, leaving less of an apparent weather imprint in the data. Consumer sentiment (Mar 11)
Michigan preliminary Jan Univ. of Mich. Index (nsa) Current conditions Expectations Inflation expectations Short term Long term Home buying conditions 74.2 81.8 69.3 3.4 2.9 151.0 Feb 77.5 86.9 71.6 3.4 2.9 150.0 154.0 Mar 76.5 68.2 83.6 58.3 4.6 3.2 161.0
Retail sales (Mar 11)

%m/m sa Dec Jan Feb Total 0.5 0.6 0.3 0.7 1.5 1.0 Ex autos 0.3 0.5 0.3 0.9 1.1 1.0 Ex autos and gasoline 0.1 0.4 0.2 0.8 0.8 0.9 Building materials 1.8 2.0 -2.9 -1.3 0.4 0.6 Control group 0.2 0.1 0.6 0.7 1.1 0.7 Ex gasoline -0.1 0.4 0.6 0.8 0.6 1. Control group is total less automotive dealers and building materials.
The University of Michigan consumer sentiment index dropped 9.3pts in March to 68.2. This setback brings the index to its lowest level since October (67.7), after a run of significantly stronger readings over the intervening months. There are several likely causes of the decline in sentiment, including the geopolitical turmoil in the Middle East and North Africa, rising gasoline prices, and an uneven start to the month for equity prices. The decline in sentiment in March was concentrated in the expectations measure (down 13.3pts to 58.3), and the current conditions index also declined (down 3.3pts to 83.6). The inflation measures reported in the survey increased in March; a move up in these measures was not surprising given the run up in oil and gasoline prices, but the magnitude of the changes in inflation expectations was somewhat striking. One-year-ahead inflation expectations jumped 1.2%-pts to 4.6% and longer-term inflation expectations increased 0.3%-pt to 3.2%. Both of these measures were at their highest levels since August 2008. Business inventories (Mar 11)
Nominal retail sales were solid in both February and, thanks to an upward revision, January. Because of higher headline inflation, however, that nominal spending strength is unlikely to translate into much real spending strength. Total retail sales increased 1.0% last month, helped by a 2.3% increase in auto sales and a 1.3% rise in the dollar value of gasoline station sales. The core category (which strips out those two categories as well as sales at building material stores) increased a respectable 0.6%, the same as in January. Nominal retail sales may be getting support early in the year from the 2%-pt reduction in Social Security taxes that should have kicked in during January. However, the rise in headline inflation in both months means that we are tracking increases of real consumption in January and February of 0.0% and 0.2%, respectively. For the quarter as a whole, real consumer spending looks to be increasing at about a 2% an-
%m/m sa, unless noted Nov Inventories Manufacturing Wholesale Retail inventories Ex autos Autos Inventory/sales ratio 0.4 0.9 0.0 0.0 0.4 -0.8 1.25 Dec 0.8 1.4 1.0 0.4 0.7 -0.4 1.25 1.1 1.3 0.6 1.0 Jan 0.8 1.3 1.1 0.2 0.9
0.4 0.4 0.1 1.25 1.23
27
JPMorgan Chase Bank NA, New York Daniel Silver (1-212) 622-6039 daniel.a.silver@jpmorgan.com
Focus: sentiment falls

The University of Michigan sentiment index dropped 9.3pts in the preliminary March data to 68.3. Prior to this decline, the index had risen in recent months, though remaining at low levels by historical standards. The geopolitical unrest in the Middle East and North Africa, the surge in gasoline prices, the possibility of a government shutdown in the US, and a bumpy period for equity prices may all be weighing on sentiment. Sentiment fell in both income groups in March, but the decline was much steeper for families with lower incomes compared to those with higher incomes (-10.4pts vs. -4.8pts). Higher gasoline prices have a greater impact on families with lower incomes than higher incomes. The expectations measure plunged 13.3pts in March to 58.3. This was one of the steepest monthly declines on record going back to 1978. All three expectations subcomponents posted sizable declines in March, with expectations regarding personal finances and business conditions over the next five years both reaching their lowest levels in two years. The current conditions measure declined 3.3pts in March to 83.6 (not shown). However, the measure of current conditions for buying houses pushed higher in March, reaching its highest level (161) since May 2009. While on the surface this is a good sign for home sales, the Michigan data and the data on new and existing home sales have not correlated very well in recent years. Short-term inflation expectations reported in the University of Michigan survey have risen in recent months, reflecting the run-up in gasoline prices. The median one-year-ahead inflation expectation reached 4.6% in March, 1.2%-pts higher than reported the prior month, and 2.4%-pts higher than reported in September. Longer-term inflation expectations (not shown) have also risen in recent months, increasing 0.3%-pt in March to 3.2%.
One-year-ahead inflation expectations and retail gasoline prices
%ch, ar 6 5 4 3 2 1 0 00 02 04 Gasoline prices 06 08 10 Inflation expectations $/gallon 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0
Michigan consumer sentiment

Index 120 100 80 60 40 80 85 90 95 00 05 10
Consumer sentiment by income

Index 120 110 100 90 80 70 60 50 Family income more than 75k/yr
Fam ily income less than 75k/yr 2005 2006 2007 2008 2009 2010 2011
Expectations subcomponents
Relativ e score 140 130 120 110 100 90 Personal finances Business conditions Relativ e score 120 100 80 60 40 2008 2009 2010 2011 20
(next 12 m onths) Business conditions (next 5 years)
2005
2006
2007
Current conditions for buying houses

Relativ e score 180 170 160 150 140 130 120 110
00
02
04
06
08
10
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JPMorgan Chase Bank, London Greg Fuzesi (44-20) 7777-4792 greg.x.fuzesi@jpmorgan.com
Euro area
Industry reports mostly positive, but with some disappointments Sovereign stress has increased again ahead of crucial EU policy meetings An April ECB rate move would be earlier than we had thought, but we do not regard it as a policy mistake This weeks industry reports were mostly positive, although there was also some disappointment. In Germany, construction rebounded much more strongly in January than expected, following the weather-related collapse in December. In fact, the January level is around 55% annualized above the 4Q10 average and is thereby more than offsetting the 23%q/q saar fall at the end of last year. In contrast, manufacturing output got off to a softer start, with the January level so far up only 2.2% annualized over the 4Q10 average. And even more disappointingly, the level of real exports in January is 8% annualized below the 4Q10 average following four consecutive monthly declines. We still expect German industry to expand robustly. The very upbeat business surveys are pointing in this direction. This weeks industrial orders report was also upbeat. Following the 11%q/q saar surge in 4Q10, orders are already tracking a 9%q/q saar gain in January, with both domestic and foreign orders rising strongly. This should lead to further increases in output and exports in the coming months. Elsewhere, IP expanded robustly in both France and Spain in January and looks to be picking up relative to recent quarters. But there was significant disappointment in Italy, where output fell 1.5%m/m in January. It is possible that this is only a short-term blip, given that the Italian manufacturing PMI rose dramatically in both January and February to a decade high. But, this will have to be watched closely.
Industrial production
Jan08=100 105 100 95 90 85 80 75 2008 2009 Spain 2010 2011 France Italy Germany
German IP, orders, and exports

%q/q saar, latest observation shows January compared to 4Q10 average 50 25 0 -25 -50 IP Exports Orders
2008
2009
2010
2011
German manufacturing orders

Jan06=100 120 110 100 90 80 70 2006 2007 2008 2009 Foreign 2010 2011 Domestic
Renewed stress in the periphery

There is no single reason behind the renewed decline in bond prices in the periphery, but a number of things have contributed to the weaker sentiment: the ECB signaling some imminent policy tightening, Moodys downgrading both Greece and Spain, the lack of clarity on the comprehensive policy package due to be announced at the end of this month, and signs of austerity fatigue in Greece. This shift in sentiment has considerably increased the pressure on policymakers to come up with an agreement that will calm market participants. In our view, reduced borrowing costs on liquidity support would be much more effective at dealing with the underlying problem (solvency) than other
German IPconstruction
1991=100 140 120 100 80 60
90
95
00
05
10
29
Economic Research Euro area March 11, 2011
measures, such as significantly increasing the size of the current and future liquidity facilities. This is because reduced borrowing costs, if linked to progress on cutting the fiscal deficits, can lower the probability of debt restructuring. While we remain hopeful that policymakers will reach an agreement that contains the peripheral crisis, we recognize that the comprehensive policy package will not be able to fully resolve the crisis. A full resolution requires the peripheral sovereigns to achieve an equilibrium configuration of their primary budgetary positions and their outstanding debt levels. Given where we are now, it is not possible to get there quickly. Exactly how these sovereigns will reach that point, and whether it will require some debt restructuring, remains to be seen.
the drag from the output gap is moderating. All of this makes the ECBs policy stance look more and more accommodative. A smaller output gap and higher inflation pressure. The ECB can reasonably assume a smaller output gap and a smaller inflation undershoot than we allowed for, which in turn yields a higher appropriate policy rate in a standard Taylor rule. First, regarding the output gap, the IMF and European Commission estimates for 4Q10 are around -2.5% of GDP, but direct measures of slack (e.g., capacity utilization), which have normalized more quickly, suggest a much smaller gap of less than -1% of GDP. Second, core inflation, which is still low at 1.1%oya, may exaggerate the relevant inflation undershoot if imported food and energy prices are assumed to trend higher in the medium term (due to strong demand in emerging markets). And the Taylor rule calculation will change quite quickly this year as we expect growth to run more than 1%-pt above trend. Greater concern about second-round effects. Given the persistence of some slack, we did not think that the risk of second-round effects would materialize, and Trichet admitted last week that the ECB hadnt thought so either. But, we underestimated its concern about this risk, especially against the backdrop of accelerating growth and the possibility that further commodity price rises could prolong the inflation hump. Stronger growth has significantly increased the ECBs discomfort with above-target headline inflation, even if there is some slack in the economy. Responding differently to the sovereign stress. Last year the ECB took some extraordinary steps to help hold the Euro area together, essentially the decisions about eligible collateral in repo operations and purchases of peripheral sovereign debt. In some sense, the impression given was that the ECBs top priority was to ensure the survival of the Euro area. Given the ECBs behavior last year, we thought that the central banks monetary stance would still be influenced by the situation in the periphery: the central bank would not want to make life harder for peripheral governments. In the event, by deciding to move ahead of the announcement of the comprehensive policy packagewhich could still disappoint financial marketsthe central bank is sending a message that it will not allow monetary policy to compensate for the risk that the fiscal authorities do not live up to their responsibilities. It is worth noting that the ECBs decision last May to purchase government bonds was taken only after the Euro area governments had given commitments to achieving fiscal sustainability.
Understanding the ECBs hawkish shift

When we revised up our Euro area growth forecast three weeks ago, we also brought forward our forecast for the first ECB rate hike, from the middle of 2012 to December this year. This was based on the view that the ECB could afford to wait: to see the upbeat business surveys reflected in the official activity data, to see how well the region would absorb the fiscal tightening and terms of trade shock, and to see the outcome of the comprehensive policy package. But, by signaling that it is minded to move in April, the ECB has essentially decided not to wait and see how things unfold. Although the ECB looks set to move much earlier than we had been expecting, we would not characterize this as a huge policy mistake, given that we expect growth to remain well above trend despite the various headwinds and given that we expect governments to contain the sovereign crisis. Therefore, a normalization cycle starting in the late summer or autumn would have been perfectly reasonable. Nevertheless, it is important to try to understand why the ECB is turning out to be less patient than we expected. Monetary policy is gaining traction. Economic growth in the region is picking up and is broadening impressively beyond Germany and beyond manufacturing. The region is still benefiting from cyclical lift following the very deep recession. Monetary policy is gaining traction, with households responding to very low interest rates by taking on more debt. And the spillover from the sovereign crisis to the real economy has been modest: economic sentiment has continued to improve, fiscal consolidation has not led to collapsing growth in the periphery, and bank funding stress has not led to severe tightening of bank lending standards. On inflation, the core rate has nudged up since early last year, suggesting that
30
JPMorgan Chase Bank, London Greg Fuzesi (44-20) 7777-4792 greg.x.fuzesi@jpmorgan.com David Mackie (44-20) 7325-5040 david.mackie@jpmorgan.com

Demand and labor markets

Employment
1Q10 2Q10 97 0.1 -1.3 3Q10 -48 0.0 -1.8 4Q10 50 0.0 0.1 Tue Mar 15 11:00am Euro area Sa 000s, diff. q/q %q/q %oya
Output and surveys

Oct Mon Mar 14 11:00am Euro area %m/m sa %oya 0.8 7.3 Nov 1.5 7.7 Dec 0.2 8.8 Jan 0.1 6.4
22 0.0 -1.0
Euro area industrial production excluding construction is likely to have risen marginally in January, after a modest increase in December. The national releases published so far show that IP (ex. construction) was broadly flat in Germany, that it rose 1%m/m or so in France, and that it fell 1.5% or so in Italy. Elsewhere in the region, IP looks to have risen 1.5% or so in Spain after falling in December, and to have fallen more than 4%m/m in Portugal after rising by a similar amount in the prior month. If our forecast is realized, Euro area IP will be tracking a solid gain of around 3% ar at the start of 1Q.
Even though the employment index from the Euro area composite PMI has been signaling some job growth, we do not expect this to show up materially in the official data yet. We expect decent employment gains in Germany, France, and a few other core countries (e.g., Austria) to have been mostly offset by further labor shedding in the periphery. We also expect some further jobs to have been lost in Italy, where there has still not been a clear sense of improvement in the labor market. Even if hours worked in the Euro area increased a bit in 4Q10, this outcome would be disappointing, given that the economy has been recovering for some time now. Interestingly, it would contrast with the relatively robust growth of consumer spending currently reported in the Euro area national accounts for 4Q10 (1.7%q/q saar).
Industrial production (ex. construction)

Index, sa 105 100 95 90 85 80 75 70 2008 2009 2010 Spain 2011 France Italy Germany
External trade and payments

Foreign trade
Oct Fri Mar 18 11:00am Euro area bn, sa Trade balance Trade balanceyear earlier Exports %m/m sa Imports %m/m sa 3.1 1.1 133.1 0.8 130.1 -0.5 Nov -3.2 2.8 133.2 0.0 136.4 4.9 Dec -2.3 2.4 132.6 -0.4 134.9 -1.1 Jan
1.1
Manufacturing orders
Oct Thu Mar 17 11:00am Italy Values New orders (%m/m sa) New orders (%oya sa) -0.1 15.6 Nov -4.3 10.1 Dec 5.4 13.5 Jan
In nominal terms, Euro area exports have been expanding at a 5% annualized pace recently. This is much weaker than earlier in 2010 and also below the long-run average. Judging from the business surveys, a solid pickup in trade flows can be expected, which would be important for the recovery. National data are quite mixed so far, with German exports in particular disappointing in January.
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JPMorgan Chase Bank, London Nicola Mai (44-20) 7777-3467 nicola.l.mai@jpmorgan.com Raphael Brun-Aguerre (44-20) 7777-0282 raphael.x.brun-aguerre@jpmorgan.com
Inflation
Consumer prices
Nov Wed Mar 16 11:00am Euro area (final) HICP (%m/m nsa) HICP (%oya nsa) HICP (%oya, core-X)1 HICP (%oya, core-XX)2 HICP (%m/m, ex tobacco) France %m/m nsa Index ex tobacco nsa %oya nsa HICP (%oya) Italy (final) %m/m nsa %oya nsa HICP (%oya nsa) 0.1 1.9 1.2 1.1 0.1 0.1 120.09 1.6 1.8 0.0 1.7 1.9 Dec 0.6 2.2 1.1 1.0 0.6 0.5 120.03 1.8 2.0 0.4 1.9 2.1 Jan -0.7 2.3 1.2 1.1 -0.7 -0.2 120.09 1.8 1.9 0.4 2.1 1.9 Feb 0.4 2.4 1.2 1.1 0.4 0.6 121.00 1.8 1.9 0.4 2.4 2.1

Output and surveys
Real GDP
2Q10 3Q10 4Q10 Euro area %q/q sa 1.0 0.3 0.3 %q/q saar 4.0 1.4 1.1 %oya 2.0 1.9 2.0 Italy %q/q sa 0.5 0.3 0.1 %q/q saar 1.9 2.1 1.1 1.3 0.2 0.5 %oya 1.3 1.5 1.2 1.4 1.3 1.5 GDP components (%q/q saar) Private consumption 0.0 0.3 1.2 1.7 1.0 Government consumption 1.4 2.0 -0.9 -1.3 -2.3 3.7 3.2 -2.9 Fixed investment 8.1 5.8 Exports 9.9 10.6 11.5 10.7 1.9 14.5 Imports -0.2 1.5 20.1 21.1 Contribution to GDP growth (%q/q saar) Domestic final sales 1.8 1.7 1.2 1.4 -0.4 Inventories -2.3 -1.7 2.1 2.6 4.4 -2.2 -2.6 -3.4 Net trade 2.4 2.2
Tue Mar 15 7:30am Wed Mar 16 10:00am
1. Excluding unprocessed food and energy. 2. Excluding food, alcohol, tobacco, and energy.
We expect the Euro area final inflation release to confirm the February flash estimate. Our forecast sees core inflation excluding unprocessed food and energy, as well as core inflation excluding food, alcohol, energy, and tobacco, remaining stable. In our view, the rise in headline inflation since January is thus mostly driven by higher food and energy prices. In France, we expect both headline CPI and HICP to remain stable in February. Our forecast assumes slightly lower core inflation (excluding all food, alcohol, tobacco, and energy) as a result of a base effect. Meanwhile, the recent increase in agricultural commodity prices and oil prices likely pushed up food and energy price inflation. In Italy, the final inflation release should confirm the rise in headline HICP inflation and CPI inflation. The details should show that the increase was mostly driven by food price and energy price inflation, resulting from large gains in agricultural commodity prices and oil prices. Producer prices
Nov Fri Mar 18 8:00am Germany %m/m nsa %m/m sa %oya nsa 0.2 0.5 4.4 Dec 0.7 1.0 5.3 Jan 1.2 1.1 5.7 Feb
Italian GDP growth in 4Q10 was revised up marginally to 0.5%q/q saar in the final report. Apart from consumer spending, which expanded again in 4Q10, all other details were weak. Imports rose strongly, but export growth slowed sharply, creating a very large net trade drag. It appears that all of this went into a higher inventory contribution. In terms of domestic final sales, the small decline reflected contractions in both government consumption and fixed investment. In the latter, transport investment fell for the second consecutive month (after having been very strong earlier in the year) and machinery investment also ground to a halt. Looking ahead, the Italian PMI rose very strongly at the start of 2011, but IP got off to a very weak start. As a result, there is still some uncertainty about which way the Italian economy is going. For now, we still expect a significant strengthening.
Level of Italian GDP

1Q06=100 110 105 100 95 90 85 80 2006 2007 Exports 2008 2009 2010 Capex Consumption GDP
32
JPMorgan Chase Bank, London Greg Fuzesi (44-20) 7777-4792 greg.x.fuzesi@jpmorgan.com David Mackie (44-20) 7325-5040 david.mackie@jpmorgan.com
Manufacturing orders
Germany Volumes, sa Total (%m/m) %oya Domestic (%m/m) %oya Foreign (%m/m) %oya Nov 5.2 5.3 20.6 20.7 1.8 14.6 8.0 8.2 25.7 Dec -3.4 -3.6 19.5 19.2 -2.4 -3.2 14.0 13.2 -4.2 -3.8 24.0 24.5 Jan 2.5 2.9 16.3 4.5 11.4 1.6 20.6
Germany Production sector (%m/m sa) %oya sa Prod sec ex constr (%m/m sa) %oya sa Industry (%m/m sa) %oya sa France Ind production (%m/m sa) %oya sa Manuf prod (%m/m sa) %oya sa Italy Ind prod (%m/m sa) Ind prod (%oya sa) Nov -0.6 11.3 -0.6 11.6 -0.5 12.4 2.3 6.0 2.2 5.1 1.3 4.2 5.9 5.0 1.1 4.1 Dec -1.5 -0.6 9.9 11.0 0.0 1.0 11.8 12.9 -0.1 1.0 13.0 14.3 0.3 7.0 -0.1 6.6 0.3 5.7 0.2 -0.2 6.4 0.2 5.6 Jan 2.0 1.8 12.4 1.0 0.1 11.4 1.0 0.2 13.1 1.0 5.4 1.8 6.8 -1.5 0.9
German industrial orders were strong in January. Following the 11.4%q/q saar surge in 4Q10, orders are off to another strong start in the current quarter, with the January level already 8.9%q/q saar above the 4Q10 average. These gains are again being driven by both domestic and foreign orders, reinforcing the message from the German business surveys that industry is seeing not only strong but also broad-based demand. Domestic orders jumped 4.5%m/m, while export orders rose 1.6%m/m. In terms of the %3m/3m saar rates of growth, both domestic and export orders have picked up strongly from close to no growth three to four months ago to a 10% and 20% annualized pace now, respectively. The share of large-scale orders was below average in January; no payback is likely in February for this reason.
German industrial orders and IP

Idx, 2005=100, both scales 120 115 110 105 100 95 90 85 2005 2006 2007 2008 2009 2010 2011 IP 108 96 83 70 Orders 134 121
The German IP report was solid. Construction bounced back much more than expected, rising 36%m/m after heavy snowfall had caused a 24%m/m collapse in December. Meanwhile, manufacturing output rose less than expected in January, but a large upward revision to December provided a meaningful offset. Overall, the January level of IP (incl. construction) is already 5%q/q saar above the 4Q10 average. With manufacturing orders solid and business surveys very upbeat, further monthly increases are likely. In the detail, output of intermediate and consumer goods rose strongly in January, while there was payback in capital goods after a very large 5.6%m/m gain in December. This is reversing the pattern in 4Q10, when capital goods output surged 31%q/q saar, while all other categories stagnated. In terms of construction, the larger-than-expected surge in January may lead to some payback in February. But, it could also reflect an improvement of the underlying trend. Outside of Germany, IP was strong in France, with the January level almost 8% annualized above the 4Q10 average. It is possible that car manufacturers are still working off orders, which surged at the end of last year due to the final expiry of the car scrappage incentive. In contrast, Italy surprised significantly on the downside, leaving IP tracking another quarterly decline so far in 1Q11. There had been an encouraging upward trend during the fourth quarter, which should have set up a decent gain in 1Q11. This does not appear to be materializing so far.
33
JPMorgan Chase Bank, London Nicola Mai (44-20) 7777-3467 nicola.l.mai@jpmorgan.com Raphael Brun-Aguerre (44-20) 7777-0282 raphael.x.brun-aguerre@jpmorgan.com
External trade and payments

Foreign trade
Germany bn, values, sa Trade balance Trade balanceyear earlier Exports %m/m Imports %m/m Nov 11.9 15.1 82.8 0.5 70.9 4.1 Dec 14.2 15.0 83.2 83.3 0.5 69.1 -2.6 Jan 11.8
Inflation
Consumer prices
Euro area HICP (%oya nsa) Germany (final) %m/m nsa %m/m sa %oya nsa HICP (%oya) Spain (final) %m/m nsa %oya nsa HICP (%oya nsa) Netherlands %m/m nsa %oya nsa HICP (%oya) Dec 2.2 1.0 0.5 1.7 1.9 0.6 3.0 2.9 -0.2 1.9 1.8 Jan 2.3 -0.4 0.3 2.0 2.0 -0.7 3.3 3.0 0.0 2.0 2.0 Feb 2.4 0.5 2.0 2.2 0.1 2.1 0.1 3.6 3.4 0.7 1.9 2.0
82.4 -2.0 -1.0 70.6 2.3
9.8
German exports were puzzlingly weak. In real terms, they fell for the fourth consecutive month. The largest of these declines was in the latest report for January, where exports fell 1.6%m/m in real terms, leaving the January level 8% annualized below the 4Q10 average. The picture is no better for imports, where the January level is also around 8% annualized below the 4Q10 average in real terms. These data suggest that net trade is not making any contribution to GDP in the first quarter, following the solid contributions in 2H10. The weakness in the data is surprising. New export orders are still rising at a decent pace, and manufacturers have very upbeat expectations for exports. In fact, export expectations surged to a record high in February. We also thought that there could be some lift from the improved weather conditions, given that some modes of transport were severely disrupted in December by the heavy snowfall. Finally, it is worth noting that goods exports were much stronger in the 4Q10 national accounts (11%q/q saar) than in the monthly data (0.7%q/q saar). Such divergences can occur, partly for methodological reasons: it is unclear whether it will continue in 1Q11. Looking ahead, we would still expect to see solid export growth, but the data will need to be watched closely.
1. Excluding unprocessed food and energy. 2. Excluding food, alcohol, tobacco, and energy.
German real exports and imports

Jan07=100 110 105 100 95 90 85 80 2007 2008 2009 Exports 2010 2011 Imports
The February rise in German inflation was dominated by the strong increase in energy price inflation, up 1.6%-pts to 10.2%oya. Household energy price inflation reached 9.4%oya, driven by higher heating oil price inflation at 32.0%, and to a lesser extent, gas and electricity price inflation. Motor fuel price inflation increased sharply to 11.7%oya. Food price inflation (up 0.7%-pt) also contributed to the rise in headline inflation. The rise in food price inflation was mostly driven by fruit price inflation and nonalcoholic beverage inflation. Core inflation, as measured by headline inflation excluding food and energy prices, remained stable at 0.9%oya according to our calculations. After hitting a trough in April last year, core inflation rose gradually through the end of the third quarter of 2010, and has remained broadly stable since then. The continuous increase in oil prices should also affect the March headline inflation print; although a base effect will dampen the energy price inflation contribution slightly (the monthly gain in energy price inflation in March last year was especially high).
German CPI inflation

%oy a 4 Headline 3 2 1 0 -1 Core 2005 2006 2007 2008 2009 2010 2011
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JPMorgan Securities Japan Co., Ltd. Masamichi Adachi (81-3) 6736-1172 masamichi.x.adachi@jpmorgan.com
Japan
Machinery orders were strong in January Economy Watchers were upbeat in February Deterioration in terms of trade with higher commodity prices is causing concern Last week, we highlighted that Japans economic recovery was strengthening even though monthly data were mixed. This weeks major data releases, especially January machinery orders and the February Economy Watchers survey (of small firm business sentiment), provided further support for our view. Indeed, total machinery orders jumped close to 20%m/m sa in January, the largest gain since December 1988, mainly due to orders from overseas (surged 72%). The headline index of the Economy Watchers survey leapt 4pts in February to just below the cyclical high. In addition, while we need to wait for confirmation in next months revisions, the Cabinet Offices real private consumption index rose impressively in January. It now seems certain that a solid recovery resumed after the 1.3% (revised down from original 1.1%) annualized fall in 4Q last year. Our current forecast looks for 2.2% real GDP growth in both this and the next quarters, and now the market consensus is getting closer to our relatively upbeat outlook. While almost all indicators point to a brighter outlook, one concern is the recent deterioration in the terms of trade. Import prices rose 7.6%oya in February while export prices continued to fall, -1.6%. To be sure, the negative impact from prices is often more than offset by a rise in quantity. If the volume of exports and domestic demand increase as we expect, the drag from the rise in import prices will not likely jeopardize the economic rebound. Still, it is too early to conclude that the impact will be marginal. We think that the cause and effect of the deterioration in the terms of trade will be a key topic of discussion at the BoJs policy meeting next week, although the view that the Bank will stay on hold is almost universally held.
Real GDP
%q/q saar 6 4 2 0 -2 -4 2010 Consensus (Feb) 2011 J.P. Morgan Consensus (Mar) Forecast
Machinery orders
Yen bn 3mma for both scales 1200 1100 1000 900 800 700 600 2008 2009 2010 2011 Core domestic Foreign 1400 1200 1000 800 600 400 200
few months, but this weeks reading eased concerns that business capital investment is losing steam. Another encouraging finding was the surge in foreign orders. The 71.4%m/m sa jumpthe largest rise since 1962included some big-ticket orders for chemical machinery. However, even excluding chemical machinery orders, which have been very volatile, foreign machinery orders rose 55.6%oya, after a 22.4% gain in the 4Q average. This was in line with our view that exports, along with IP, has been gathering momentum toward the end of 1Q.
Upbeat Economy Watchers in February

The headline current conditions DI in the Economy Watchers survey rose a robust 4.1pts in February, and now stands at 48.4, the second highest level in the current recovery (the cyclical high is 49.8, marked in July and April of last year). The result, which was consistent with the increasingly upbeat mood shown by the Shoko Chukin small firm survey for the month, suggests that Japans economy is rebounding solidly after contracting in 4Q last year. Indeed, the three component DIs rose solidly last month. The sentiment DI of consumer-oriented businesses rose
Strong January machinery orders

Core machinery orders (excluding ships and orders from electric power companies) increased 4.2%m/m sa in January, after the modest 1.7% gain in December. Core orders excluding mobile phoneswhich are not considered to be business investmentrose a larger 6.6%m/m sa to a level 6.3% higher than the 4Q average. Core orders unexpectedly fell 6.9%q/q sa in 4Q10, and core capital goods shipments in the IP reports have been running weak in the last
35
JPMorgan Securities Japan Co., Ltd. Masamichi Adachi (81-3) 6736-1172 masamichi.x.adachi@jpmorgan.com
Economic Research Japan March 11, 2011
much more than the previous months drop, marking 47.3 after 42.4 in January and 44.5 in December, with respondents citing that adverse effects from the bad weather and expiring government incentive supports are now fading. The sentiment DI of corporate-oriented businesses rose further at a faster pace than in the previous two months (marked 46.9 after 44.3 and 44.1). Firms comments suggest that solid overseas demand is the main factor. Along with comments that the purpose of firms hiring is now shifting to increasing the number of employees from just replacement, the Employment DIwhich represents sentiment among employment agencies/staff dispatching service providerscontinued to rise, even after the jump in the previous month (marked 58.9 after 56.7 and 51.1). This is a particularly important sign that jobs and labor income will continue to rise. Meanwhile, the outlook DI, which represents respondents prospects for the economic conditions a few months ahead, was flat after having risen since last November. This was mainly because price increases for energy and other commodities are weighing on corporate-oriented businesses. In contrast, both consumer-oriented business and employment agencies/staff dispatching service providers remained upbeat.
Economy Watchers survey: overall index

DI, nsa 60 50 40 30 20 10 2007 2008 2009 2010 2011 Current Outlook
Cabinet Office real private consumption index

%3m/3m 10 5 0 -5 -10
2009
2010
2011
Real consumption up in January

The contraction of real GDP in 4Q was mainly due to the fall in private consumption and exports. In this regard, the pace of pickup in consumption is critical for the near-term outlook. In Japan, the only reliable consumption-related data to track GDP-based consumption is the Cabinet Offices real private consumption index, which was released this week. The outcome was impressive with the index rising 0.6%m/m sa after a 0.7% fall in December, leaving the level 4.3% annualized higher than the 4Q average. This is markedly higher than our forecast, which looks for a modest 0.8%q/q saar gain. We are more comfortable with our view that consumption has resumed its rise this quarter, but, given that revisions to this index have been large recently, we will maintain the current forecast until seeing the revision next month.
Export and import prices

%oya 40 20 0 -20 -40 Exports Imports
2005
2006
2007
2008
2009
2010
2011
Terms of trade deteriorated further

Import prices have risen considerably on a monthly basis since last November, pushing up the oya change to 7.6% in February. Export prices also began to rise last November, but in February were still down 1.6%oya. The rise in import prices reflected the rise in commodity prices, including energy, metals, and food. Based on the latest behavior of commodity prices, the rising trend of import prices likely will continue for a while. On the other hand, the rise in export prices has been limited, although prices of some items
36
such as autos are rising, especially on a contract currency basis. This combination of price moves had led to a deterioration in the terms of trade, meaning that Japans income is being shifted to commodity-exporting countries through price changes. To be sure, the current situation is better than in 2008 when import prices rose much faster than currently. Still, it is uncertain whether the turmoil in the MENA region will stabilize and energy prices will stop rising. We are relatively optimistic on this with our commodity strategist looking for a fall in oil prices in the middle of year, but developments in commodity prices are a key concern for the prospects for the domestic economy.
JPMorgan Securities Japan Co., Ltd. Miwako Nakamura (81-3) 6736-1167 miwako.nakamura@jpmorgan.com

During the week
Thu Mar 17 8:30am
Reuters Tankan survey

DI, % saying good minus bad Dec Manufacturing Nonmanufacturing 7 -12 Jan 11 -2 Feb 14 3 Mar ___ ___
Nationwide department store sales

%oya, unless noted Nov Overall %m/m sa, by J.P. Morgan Same store -1.4 -1.3 -0.5 Dec -2.3 3.1 -1.5 Jan Feb -2.0 -2.8 -2.3 1.1.01.0 -1.1 ___
Based on the upbeat tone of major stores, we think department store sales, a proxy for luxury goods consumption, are picking up from extremely low levels.
Mon Mar 14 1:30pm
The combined message from recent business surveys (the previous February report of this survey and the latest February reports for the Shoko Chukin small firm and the Economy Watchers surveys) has been that the economy is rebounding solidly after contracting in 4Q last year, though firms are increasingly concerned about the negative impact from rising global commodity prices.
Thu Mar 17 8:50am
Industrial productionfinal
%m/m sa Oct Production Shipments Inventories Inventory/shipments ratio Operating ratio Production capacity (%oya) -2.0 -3.0 -1.0 8.4 -2.3 2.4 Nov 1.0 2.6 -1.8 -8.3 1.6 1.9 Dec 3.3 1.2 1.6 0.4 3.0 1.6 Jan 2.4 1.1 4.7 0.7 ___ ___
Index of tertiary sector activity

% change Oct %m/m sa %oya 0.3 0.6 Nov 0.5 2.4 Dec -0.8 1.8 Jan 0.8 0.0
Mon Mar 14 2:00pm
Consumer sentiment
Diffusion index, nsa Nov Consumer sentiment Standard of living Income growth Labor market conditions Durable goods purchases1 40.4 41.8 40.7 36.9 42.0 Dec 40.1 42.2 40.8 36.4 40.8 Jan 41.1 42.7 41.0 38.6 41.9 Feb 42.0 ___ ___ ___ ___
Available data point to solid recovery in the January index after the decline in December. In the commercial sales report for the month, nominal sales rebounded robustly in both the wholesale trading and the retail trading sectors. With industrial output recovering and temperatures unusually low, electric power usage continued to increase at a faster pace. Also, transaction volume in the securities market likely continued to rise in seasonally adjusted terms.
Thu Mar 17
Construction spending
% change Oct Public %m/m sa, by J.P. Morgan Private Residential Nonresidential Building and structures Civil engineering -13.3 -3.4 6.4 2.3 11.1 10.3 12.3 Nov -13.9 -2.6 7.0 1.9 13.3 13.2 13.4 Dec -15.1 -2.7 11.3 1.1 23.9 14.8 35.2 Jan ___ ___ ___ ___ ___ ___ ___
1. The DI asks whether a respondent thinks that now is a good time to purchase durable goods.
Consumer sentiment likely improved further in February. The Economy Watchers survey for the month reported that adverse effects from the expiring government supports on purchases of environmentally friendly cars and energy-efficient home appliances are now fading, and also that the purpose of hiring is now shifting to increasing the number of employees from replacement.
Wed Mar 16 8:50am
MoF business outlook survey

DI, upward minus downward 3Q10 Large firms All industries Manufacturers Nonmanufacturers Small firms All industries Manufacturers Nonmanufacturers FY2010 capex plans, %oya All industries Manufacturers Nonmanufacturers 7.1 13.3 3.8 -21.4 -13.5 -23.0 2Q10 9.2 12.5 7.5 4Q10 -5.0 -8.0 -3.4 -18.4 -10.0 -20.1 3Q10 8.7 9.4 8.3 1Q11 -0.9 -0.2 -1.2 -18.9 -23.4 -18.0 4Q10 9.5 12.7 7.8 2Q11 ___ ___ ___ ___ ___ ___ 1Q11 ___ ___ ___

Indices of business conditions (Mar 7)
Nov Composite index (sa) Leading Coincident Diffusion index Leading Coincident Dec Jan
100.6100.2 101.4101.0 102.5101.9 102.4 103.5103.7 105.9106.2 45.5 30.0 63.6 70.0 90.0 85.0 88.9
The coincident CI for January reached its highest level since the current series began in 1980 (the previous historical high was 105.2 marked in August 2007 and in October 1990). The leading CI also continued rising, and exceeded the previous cycle high of 101.8 in April last year. These results provided further evidence that Japans economy is rebounding solidly after a dip in 4Q last year.
37
JPMorgan Securities Japan Co., Ltd. Miwako Nakamura (81-3) 6736-1167 miwako.nakamura@jpmorgan.com
Economic Research Japan March 11, 2011
Cabinet Office private consumption index (Mar 8)

Nov 1.8 Dec -0.8 -0.7 Jan ___ 0.6
See main essay. Balance of payments (Mar 8)

bn sa, unless noted Nov Current account Trade balance Services Income Current transfers Current account (nsa) 11451233 397 480 -191 -176 10141007 -75 -79 926 Dec 1556 1519 700 701 -64 -86 1004 988 -83 -85 1195 Jan 12191089 455 302 -107 -46 957 937 -87 -104 385 462
Looking at the details, it is especially encouraging that producers of machinery are now more willing to purchase equipment, implying they are sensing increased demand for capital goods. Orders from the industrial machinery and the information/communication equipment sectors have been on solid rising trends, and those from the electric machinery and the auto/auto parts sectors have picked up robustly in the recent few months. GDPsecond preliminary estimates (Mar 10)
%q/q saar 8:50am 3Q10 Real GDP Private consumption Residential investment Business investment Public consumption Public investment Exports Imports 3.3 3.6 7.6 7.5 6.0 5.6 1.2 -8.0 -7.9 6.3 12.0 1st 4Q10 -1.1 -2.9 12.6 3.7 0.8 -21.1 -2.8 -0.5 -0.4 0.9 -1.1 2nd 4Q10 -1.3 -2.9 -3.2 12.6 12.3 3.3 2.0 0.8 1.2 -21.1-20.5 -2.8 -3.0 -0.5 -0.4 0.8 1.1 -1.1 -1.5
In January, the seasonally adjusted overall surplus fell to its lowest level in eight months, mainly reflecting a large decline in the trade surplus. Looking ahead, we think such weakness in the trade surplus will prove to be temporary (global demand appears to be solid, though the latest data from China have raised some concern). However, the income balance will probably remain sluggish on the back of extremely low interest rates in global markets. Money stock and bank lending (Mar 8)
%oya Dec M2 L Bank lending Adjusted for special items 2.3 0.0 -0.1 -2.1 -1.8 Jan 2.3 -0.1 -1.9 -1.6 Feb 2.2 2.4 0.0 -1.9 -2.0 -1.6 -1.7
%-pt contribution to q/q saar GDP growth Net exports -0.2 -0.3 Inventories 0.6 GDP deflator (%oya) -2.0
Despite a declining trend in lending rates, loan demand likely remained weak given abundant liquidity in the corporate sector. Indeed, last weeks 4Q MoF corporate survey showed that the robust rise in profits raised firms free cash flow to a historical high. Economy Watchers survey (Mar 8)
DI Dec Current conditions Households Business Employment 45.1 44.5 44.1 51.1 Jan 44.3 42.4 44.3 56.7 Feb 45.5 48.4 ___ 47.3 ___ 46.9 ___ 58.9 %oya
The magnitude of the downward revision to the 4Q10 GDP was in line with our expectations, though its source was somewhat different. Growth in business capital investment was revised down slightly more than we had expected, and the q/q contraction in private consumption unexpectedly widened a bit. In regard to growth in coming quarters, we are not concerned about these revisions. That said, the fact that the contribution from inventories was increased, contrary to our call, implies that the inventory cycle is not as favorable as we had thought. Corporate goods prices index (Mar 10)
Dec Domestic CGPI Export prices Import prices 1.2 -2.0 4.2 Jan 1.6 -3.4 4.7 5.2 Feb 1.8 1.7 ___ -3.4 ___ 7.6
See main essay. Machinery orders (Mar 9)

%m/m sa Nov Domestic private sector, ex for ships and from utilities Manufacturing Core nonmanufacturing Foreign -3.0 10.6 -10.5 -17.8 Dec 1.7 -1.9 3.9 -7.7 Jan 3.0 4.2 ___ 7.2 ___ -2.7 ___ 71.4
The intermediate CGPI rose a solid 2.5%oya, but the final goods CGPI rose only a modest 0.1%oya despite a boost from a 7.1%oya rise in gasoline prices. Indeed, even prices of processed food fell oya albeit at a slight -0.1%, despite rising global agricultural prices. It seems that firms are having difficulty passing pipeline price pressures downstream because of intense price competition amid the still-large output gap and the strong yen. Note, though, that increasing pressures (the government will raise its selling prices for imported wheat next month, and oil prices remain on an uptrend amid rising tensions across MENA) are expected to be passed through at least partially in coming months.
The accelerated rise in core orders in January eases the concern that business capital investment is recovering only modestly, which had been raised by the unexpected drop in core orders in 4Q and the recent softness in core capital goods shipments in the IP report.
38
JPMorgan Chase Bank NA, New York Sandy Batten (1-212) 834-9645 sandy.batten@jpmorgan.com Silvana Dimino (1-212) 834-5684 silvana.dimino@jpmorgan.com
Canada
Employment settles down in February, details disappoint December trade surplus evaporates in January Net exports on track to be a drag to GDP in 1Q Employment gains moderated in February after an outsize jump in January. Moreover, the details were a little disappointing though the labor market clearly remains healthy. The surprise trade surplus reported for December evaporated in January, implying that net exports could once again be a drag on overall growth in 1Q. Housing data were mixed with starts rising a bit in February while permits slumped in January. After a 69,200 jump in January, Canadian employment settled down in February with a less-than-expected 15,100 increase. The unemployment rate was unchanged at 7.8% as was the labor force participation rate at 67.0%. Employment is up 1.9%oya, in line with employment growth during the 2003-08 expansion. The details of the modest February increase were underwhelming. Full-time jobs fell 23,800 while part-time jobs increased 38,900. Private sector jobs fell 20,000, public sector jobs rose 9,600, and self employment increased 25,500. Goods-producing jobs increased 13,900 while service-sector jobs edged up 1,100. Manufacturing jobs rose further, adding 9,000 to the increases in December and January. Construction jobs rose 6,100. Service sector jobs were restrained by a 34,500 drop in employment in business, building, and other support services. Apart from that decline, other service sectors generally reported increases. Total hours worked slipped in February for the third consecutive month, falling 0.3%m/m. For January and February, hours worked are 0.8% ar below the 4Q10 average. This likely points to some rebound in productivity growth in 1Q. Notwithstanding the fall in hours, however, labor income continues to grow at a pace consistent with continued solid consumption growth. Amid the volatility, the labor market remains healthy. Going forward, we look for job growth to fluctuate between 10,000 and 30,000 per montha range consistent with slightly above-trend economic growth. This report did not likely alter the BoCs view of the economy. We continue to expect the Bank to keep its policy rate on hold until May as it assesses the impact of the uncertain global environment and the revival of the US economy on the overall Canadian economy.
Employment
000s, 3m avg chg 60 30 0 -30 -60 -90 2006 2007 2008 2009 2010 2011
Monthly GDP and hours worked

3m%ch, ar 10 5 0 -5 -10 -15 2006 2007 2008 2009 2010 2011 Hours GDP
Monthly real merchandise trade balance

Chained 2002 C$ bn, monthly rate 2 0 -2 -4 -6 -8 -10 2006 2007 2008 2Q avg 3Q avg 2009 2010 1Q avg 4Q avg 2011
The trade surplus shrank to C$116 million in January from a downwardly revised C$1.7 billion (originally C$3.0 billion) in December. Nominal exports edged up 0.8%m/m after a downwardly revised 7.9% jump in December (originally 9.7%m/m), while imports increased 5.3% after a 1.5%m/m rise in December (originally 0.7%m/m). Export performance was mixed in January. Exports of automotive products led the growth with contributions from energy products and industrial goods and materials. In contrast, exports of agricultural products, forestry products, and machinery fell in January. Real exports (chain weighted) were essentially unchanged in January, edging up 0.1%m/m following a 5.5% jump in December (originally 8.1%m/m).
39
JPMorgan Chase Bank NA, New York Sandy Batten (1-212) 834-9645 sandy.batten@jpmorgan.com Silvana Dimino (1-212) 834-5684 silvana.dimino@jpmorgan.com Silvana Dimino (1-212) 834-5684 Silvana.Dimino@jpmorgan.com
Economic Research Canada March 11, 2011
The surge in nominal imports was led by a 16.6% jump in real automotive imports. Energy imports also posted an sharp increase mostly due to higher prices. Most of the rise in nominal imports was in volumes with real (chain weighted) imports increasing 5.2%m/m against a 2.5%m/m rise in December (originally +1.6%). With the big jump in real imports and only modest rise in real exports, the real trade deficit widened markedly in January from December after having narrowed throughout 4Q. In January the real deficit stood at C$8.7 billion versus C$6.7 billion in December and a C$7.3 billion monthly average in 4Q. This implies that after contributing 4.5%-pts to overall GDP growth in 4Q, net exports are on track to once again subtract in 1Q. However, some of the subtraction by net exports from overall GDP will be offset by stronger business spending on machinery and equipment (about 70% of which is imported). Real imports of machinery and equipment rebounded in January after a soft December and 4Q. Real imports of machinery and equipment rose 3.2%m/m in January and currently point to near double-digit growth in business spending on machinery and equipment in 1Q after less than 1%q/q ar growth in 4Q. Moreover, the trade drag will likely be offset somewhat by inventory rebuilding in 1Q. Much of the surge in exports in 4Q came from inventories with some rebuilding likely in 1Q in response. Data releases and forecasts
Tue Mar 15 8:30am
Fri Mar 18 7:00am
Consumer price index

%m/m nsa, unless noted Nov Total CPI %oya BoC core CPI %oya Ex food & energy %oya CPI-XFET (%oya) 0.1 2.0 0.0 1.4 0.0 1.5 0.9 Dec 0.0 2.4 -0.3 1.5 -0.4 1.6 1.0 Jan 0.3 2.3 0.0 1.4 -0.1 1.6 0.9 Feb 0.5 2.4 0.4 1.1 0.4 1.3
Higher gasoline prices should continue to boost headline inflation in February. The core index is usually boosted by seasonal factors in February. However, the seasonal boost last February was magnified by the Winter Olympics in Vancouver, which led to an outsize 18.6%m/m nsa jump in travel accommodation prices. The lack of a repeat this February should significantly lower the oya core inflation rate.

Building permits (Mar 7)
Sa Nov Total, %m/m %oya -10.5 -11.2 -9.7 -10.1 Dec 2.4 -5.0 2.6 -4.7 Jan 0.0 -0.3 -5.1 -4.0
Housing starts (Mar 8)

Sa Dec Total (000) (%m/m) (%oya) 169.0 169.3 -13.3 -13.0 -4.2 -4.0 Jan 170.4 170.6 0.8 -11.5 -11.4 Feb 175.0 181.9 2.7 6.6 -13.2 -9.8
New house prices (Mar 9)

Nsa Nov Total,%m/m %oya 0.3 2.3 Dec 0.1 2.1 Jan 0.2 1.9
New motor vehicle sales

Sa Oct Total (mn units, ar) %m/m %oya 1.614 0.0 0.3 Nov 1.617 0.1 6.9 Dec 1.539 -4.8 1.4 Jan 1.665 3.0 9.8 Sa
International trade (Mar 10)

Nov Balance (C$ bn) Exports (%m/m) Imports (%m/m) Real balance -0.12 -0.49 0.8 0.7 -2.3 -1.3 -6.79 -7.40 Dec 3.00 1.71 9.7 7.9 0.7 1.5 -4.82 -6.65 Jan 3.00 0.12 1.9 0.8 1.8 5.3 -8.71
Wed Mar 16 8:30am
Manufacturing report
%m/m sa, unless noted Oct Sales New orders Unfilled orders Inventories Inventory-shipments ratio 2.0 4.4 -0.8 0.4 1.33 Nov -0.6 0.6 0.2 1.1 1.35 Dec 0.4 -1.9 -1.6 0.0 1.34 Jan 4.0 6.0 0.0 2.0 1.32 Sa
Labor force survey (Mar 11)

Dec Employment (mn) (ch, m/m, 000s) (%m/m) (%oya) Labor force (mn) (%m/m) (%oya) Unemployment rate (%) Avg hrly earnings (%oya) Hours worked (%m/m) 17.15 30.4 0.2 1.8 18.56 0.2 0.8 7.6 2.2 -0.5 Jan 17.21 69.2 0.4 1.9 18.66 0.6 1.4 7.8 2.3 0.0 Feb 17.23 20.0 15.1 0.1 1.9 18.70 18.68 0.2 0.1 1.5 1.4 7.8 2.2 2.5 0.1 -0.3
Thu Mar 17 8:30am
Wholesale sales
Sa Oct Total, %m/m %oya 0.2 8.4 Nov 1.0 6.2 Dec 0.8 5.8 Jan 2.2 5.6
40
Banco J.P.Morgan, S.A., Institucin de Banca Mltiple, J.P.Morgan Grupo Financiero Gabriel Casillas (52-55) 5540-9558 gabriel.casillas@jpmorgan.com Iker Cabiedes (52-55) 5540-9339 iker.x.cabiedes@jpmorgan.com
Mexico
Oil price shock could restrain growth Gasoline prices important influence on inflation expectations Banxicos meeting minutes High oil prices could pose downside risks to growth and upside inflation pressures. This scenario contrasts with the old idea that Mexico should benefit from higher oil prices since it is a net oil exporter. However, oil price shocks now have a somewhat neutral effect on overall public finances and on external accounts. While crude oil exports are larger than gasoline importsboth in volume and in value terms higher crude oil prices are somewhat neutralized by higher gasoline prices and the widening of the crude-gasoline crack spread. Hence, there is a neutral effect on external accounts, while the neutral effect on the fiscal accounts arises via the fact that higher government oil-related revenues are offset by a larger gasoline price subsidy. However, higher energy prices could restrain growth. The effects are twofold. While higher gasoline prices could affect US consumptiontherefore harming Mexicos growth via weaker exportspotentially higher domestic gasoline prices could trim Mexicos consumption as well. The effect on domestic consumption rests on the Mexican government, which will have to decide if there is a need to adjust up the monthly gasoline price adjustment, currently at MXN8 cents (first chart).
Low-grade gasoline prices

Mexican pesos per liter 11.5 10.5 9.5 8.5 7.5 6.5 5.5 Jan 09 May 09 Sep 09 Jan 10 May 10 Oct 10 Feb 11 Mexico 8.92 US 10.94 Jan 10
Source: J.P. Morgan with data from Pemex and Bloomberg 1. Mexico: Low-Grade Gasoline (Magna Sin in Mexico City Metro Area); US: PADD 3 all-grade average price net of taxes
Medium-term inflation expectations and low-octane gasoline prices

%oya, both axes 4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3 Jan 08 Aug 08
Source: Banxico
Inflation
Gasoline
14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
Feb 09
Sep 09
Mar 10
Oct 10
A more comprehensive assessment of a slightly more hawkish stance

In our view, the possibility that the Mexican authorities accelerate the pace of monthly gasoline price increases engendered a more hawkish central bank statement on March 4. In fact, we believe that the central banks board decided to open the door for earlier hikes, compared to what the market consensus and we were expecting (J.P. Morgan: 2Q12; consensus: January 2012). Next Friday (March 18), Banco de Mxico will release the minutes from the March 4 meeting. In our view, looking at the details behind the discussion at this meeting will be key to provide a clearer assessment of Banxicos balance of risks. It will be very interesting to see how the monetary authority balances externally driven inflation pressures from higher oil prices with the benign domestic inflation environment and the still negative output gap. In this context, one of the most important changes we perceived in the last statement was that Banxico tweaked its tone from stressing the absence of demand-side inflation pressures
The importance of gasoline prices for inflation expectations

Inflation expectations could also be influenced by domestic gasoline price dynamics. Before the crude oil price shock, several pieces of positive news led us to believe that inflation would not be a concern this year: the beneficial base effects generated by the elimination of the upward substitution bias (due to the new CPI-calculation methodology); the fact that taxes were not raised this year as they had been in 2010; the higher degree of competition in the airline and retail sectors; and the still negative output gap. Nevertheless, the possibility that the Mexican government transfers some of the global price shock to consumers could unanchor inflation expectations, potentially leading Banxico to hike rates earlier than market consensus and we expect (J.P. Morgan: 2Q12; consensus: January 2012).
41
Banco J.P.Morgan, S.A., Institucin de Banca Mltiple, J.P.Morgan Grupo Financiero Gabriel Casillas (52-55) 5540-9558 gabriel.casillas@jpmorgan.com Iker Cabiedes (52-55) 5540-9339 iker.x.cabiedes@jpmorgan.com
Economic Research Mexico March 11, 2011
while downplaying supply-side risk, to emphasizing that the uncertainty over higher oil and commodity prices has shifted the balance of risks on inflation. Hence, we believe the minutes could provide a more extensive assessment of the risk of potential contamination to inflation expectations, and the possible passthrough from higher commodity and oil prices to agricultural and administrated prices, particularly gasoline. In this context, we believe that board members will provide more information about one of the most important sentences in the post-meeting statement: ...if the unexpected higher grain and commodity prices boost generalized inflationary pressures (or affect) inflation expectationsthe board will have to adjust Banxicos monetary stance in a timely basis. Furthermore, the focus will be on how the board introduces the word timely.
Wed Mar 16
Consar report
Mex$ bn Nov Assets under management Government securities Equity investment 1,376 828 235 Dec 1,385 815 244 Jan 1,384 823 236 Feb ___ ___ ___

Central bank foreign reserves (Mar 8)
US$ bn Feb18 Gross international reserves %oya Dec Production Export Domestic sales 11.5 6.6 14.1 Jan 20.8 44.5 7.3 Feb 19.6 15.7 12.3 1.7 9.2 12.6 118.5 Feb 25 121.8 Mar 4 ___ 121.9
Automobile production and sales (Mar 8)
Consumer prices (Mar 9)

Jan 2H Feb 1H 0.21 0.22 3.63 3.28 Jan 0.49 4.78 0.46 3.27 Feb 2H 0.42 0.18 3.75 3.30 Feb 0.49 3.69 0.43 3.29 0.38 3.57 0.40 3.26 0.23 0.12 3.51 3.24 %2w/2w Core %oya Core All items (%m/m nsa) %oya Core (%m/m nsa) %oya % oya, one year ahead Dec Nov %oya %oya, real terms Tue Mar 15 9:00am US$ bn Feb 18 Gross international reserves 118.5 Feb 25 121.8 Mar 4 121.9 Mar 11 ___ -0.1 -4.2 Dec 5.0 0.6 Jan 4.8 1.0 Feb 2.3 ___ Nominal increase Real terms1 4.3 -0.1 Jan 4.4 0.6 Feb 4.5 ___ 4.7 1.1 0.11 0.23 3.61 3.23 Dec Oct %oya nsa Manufacturing %m/m sa Manufacturing Mon Mar 14 9:00am 3.6 4.6 -0.3 0.1 Nov 5.8 7.4 0.6 1.0 Dec 4.9 6.0 0.7 1.3 Jan 4.6 6.3 0.1 0.1 0.50 4.40 0.47 3.57

Mon Mar 14
Nominal wage settlements (Mar 10)
ANTAD same-store sales
1. Using 12-month average CPI inflation.
Fixed investment (Mar 11)

%oya nsa Oct Total Machinery and equipment Construction 5.3 7.7 3.9 Nov 7.8 10.8 5.8 Dec 4.1 3.4 4.6 5.4 6.5 4.5
Central bank foreign reserves
42
JPMorgan Chase Bank, Sao Paulo Fabio Akira Hashizume (55-11) 3048-3634 fabio.akira@jpmorgan.com Julio Callegari (55-11) 3048-3369 julio.c.callegari@jpmorgan.com
Brazil
COPOM minutes were surprisingly dovish, reassessing monetary policy strategy being considered Slowing in activity and more use of macroprudential measures could mean a more modest rate hike cycle Booming capital inflows and more FX measures in the pipeline The minutes released this week from the latest COPOM meeting (at which it hiked the Selic rate 50bp to 11.75%) were surprisingly dovish, given the backdrop of inflation flirting dangerously with the upper bound of the targeted band, inflation expectations above the target, and the unemployment rate at historical lows. The committee explicitly mentioned in paragraph 31 that in light of alternative simulations showing inflation below the target in 2012 and signs of deceleration in economic activityalong with a complex external environmentthe eventual introduction of (new) macroprudential actions could provide an opportunity to reassess the monetary policy strategy. In our view, this statement not only precludes the possibility of a reacceleration in the pace of tightening, but also raises the risk of a cycle shorter than what we have penciled inan additional 50bp hike in April and a final increase of 25bp in June, lifting the Selic rate to 12.50%particularly if new macroprudential measures are announced in coming months.
Equity and fixed income investment by foreigners in local market

US$ mn 10000 8000 6000 4000 2000 0 -2000 -4000 -6000 Equities IOF 2% IOF 6% on FI
Local fixed income
2008
2009
2010
2011
Rollover of private sector external debt at high levels

New issuance as % of amortizations coming due in the month 400 300 200 100 0
99
01
03
05
07
09
11
COPOM is calm about accelerating inflation and confident about convergence

Despite the recent acceleration of inflation, signs that the 12-month cumulative IPCA could break above the top of the target range of 6.5% during 3Q11, and the 30bp increase in market inflation expectations for 2012, the COPOM minutes did not mention that the inflation environment has deteriorated, preferring to say that the situation has not evolved favorably. The COPOM also added a specific paragraph (#25) anticipating that inflation will continue to accelerate until the third quarter (given the base effects) and then decelerate in the last quarter of the year to a trajectory more in line with the target. This could be signaling some tolerance for an acceleration in inflation over the next few quarters. Looking ahead into 2012, the official projections are very optimistic about the convergence to the targeted level of 4.5%. The COPOM usually releases two inflation simulations in its reports: a baseline projection considering the current FX level and the prevailing Selic rate fixed for the entire forecast period, and a market scenario in which the
BCB Focus survey projections for FX and the Selic rate are assumed. In this weeks report, the 2012 IPCA projection moderated from the January estimates but remained above the target in the baseline scenario (with FX at 1.65 and the Selic rate at 11.25%), and increased (also from January forecasts) but remained around the target in the market scenario (assuming FX at 1.79 by Dec 2012, and Selic rate at 12.50% by end-2011 and at 11.25% by end-2012). In addition, in this weeks minutes the COPOM included an alternative simulation using FX fixed at 1.65 and the Selic rate being raised to 12.50% (and reduced to 11.25% in 2012) as in the market scenario. This alternative simulation yielded projections below the target for end-2012 IPCA, hinting that the COPOM could deliver even fewer hikes than analysts expect in the Focus survey. As mentioned above, this alternative simulation and the introduction of new macroprudential measures could lead to a reassessment of the monetary policy strategy.
Fiscal consolidation, uncertain external scenario, and cooling activity

The fiscal assumption employed by the COPOM is usually in line with the primary surplus target implicit in the budget law (3.0% of GDP), but in the recent minutes the committee highlighted that important announcements and actions
43
JPMorgan Chase Bank, Sao Paulo Fabio Akira Hashizume (55-11) 3048-3634 fabio.akira@jpmorgan.com Julio Callegari (55-11) 3048-3369 julio.c.callegari@jpmorgan.com
Economic Research Brazil March 11, 2011
have been implemented, triggering a fiscal consolidation process (for details about fiscal announcements see the research note Fiscal policy back in the spotlight in Brazil, GDW, March 4, 2011). In our view, this indicates that the monetary authority remains confident that fiscal policy will help to restrain aggregate demand, although the minutes also stressed that future developments on quasi-fiscal policy (mainly public banks) will also be important factors determining future monetary policy actions. The external scenario remains ambiguous, despite the spike in commodities prices. In this weeks minutes, this was reinforced by noting adverse developments on the geopolitical front. To be sure, the document mentioned commodities and external inflation acceleration as factors causing some concern, but it continued to define the external side as ambiguous in the final appraisal of risks. The COPOMs appraisal of economic activity highlighted signs of moderation, but recognized that the pace of deceleration is uncertain, and that the risks derived from the imbalance between demand and supply remain. The committee is especially concerned with the lack of idle capacity in the labor market, and the possibility of nominal wages rising faster than productivity. On this front, we recognize that recent manufacturing activity figures have been disappointing, but we believe that final demand conditions remain robust, and a reacceleration should occur by midyear, adding pressure for more monetary policy actions in the near term. The minutes, though, increased the likelihood of more macroprudential actions rather than the more traditional use of changes in the Selic rate.
inflows is related to FDI and external issuance, which are still welcomed by the government. FDI surprised on the upside in January, reaching US$3.0 billion; the central bank is expecting US$7.0 billion in FDI in February, which would increase the 12-month FDI total to US$55 billion, a historical high. In addition, the rollover of private sector external debt has been quite high, with issuance likely more than 250% of the total amount maturing. This means that on average, the private sector has brought more than US$3.0 billion per month into the country since November 2010 through issuance in offshore markets. Total net FX inflows in the local spot market have reached US$24.4 billion YTD (as of March 4). At the same time, the BCB has bought US$29.2 billion YTD, most of it through USD purchases in the FX spot market (US$18.7 billion), with further intervention through FX swaps (US$9.5 billion) and FX forwards (US$1.0 billion). Note that in 2010, the BCB intervened in the FX spot market only and bought US$41.1 billion over the entire year, meaning that in less than two months, the BCB has already bought 71% of total 2010 intervention. This reinforces the view that by using the derivatives market, the BCB will likely be more aggressive on the FX intervention front. Moreover, we cannot ignore the possibility that even more aggressive measures could be adopted if BRL/USD breaks the 1.65 mark consistently.

Tue Mar 15 8:00am
Booming inflows, lots of intervention

This week, the local press (O Estado de S. Paulo, for instance) reported that new FX intervention measures will be announced. In our view the governments focus remains on preventing BRL appreciation, but we believe the inflation threat reduces the likelihood of more aggressive action, such as last years introduction of a 6% IOF tax on fixed income inflows. Indeed, it does not make much sense to think about even higher IOF on fixed income investment in the local market, because there has been no inflow in these instruments since November 2010. Equity investment in the local market (which is charged a 2% IOF) has been modest, so we believe this is quite unlikely as well. In fact, we have been highlighting that a large part of recent FX
Retail sales
Out %m/m sa %oya nsa 0.1 8.7 Nov 0.7 9.9 Dec -0.1 10.1 Jan 0.8 7.3
Wed Mar 16 7:00am
General prices (IGP-10)

%m/m nsa Dec Overall %oya Wholesale prices Consumer prices Construction prices 1.3 11.3 1.5 1.1 0.5 Jan 0.5 11.2 1.2 0.9 0.5 Fev 1.0 11.0 1.2 0.9 0.4 Mar 0.9 11.0 1.1 0.6 0.3
44
JPMorgan Chase Bank, Sao Paulo Julio Callegari (55-11) 3048-3369 julio.c.callegari@jpmorgan.com JPMorgan Chase Bank, Sao Paulo Laura Karpuska (55-11) 3048-3322 laura.a.karpuska@jpmorgan.com
Andeans: Colombia, Ecuador, Peru, Venezuela

Colombian inflation was below consensus in Feb; this should anchor inflation expectations in the short term Short-term risks are still in place, which led us to revise up our 2011 CPI forecast to 3.6% from 3.2% Our new scenario factors in a higher CPI, and some downside risks to our 4.5% GDP growth The February CPI showed a 0.60%m/m nsa increase, well below consensus (1.03%) and also below our 0.82% forecast. The over-year-ago (oya) inflation rate decreased to 3.17% from 3.40%oya in January, flat relative to full 2010 inflation. The breakdown continues to be relatively benign, with the ex.-food and regulated component remaining stable in oya terms at relatively low levels (1.70% from 1.67% in Jan). The tradables component is still the key force containing headline inflation, with the oya reading posting a 0.3% decline. The nontradables component is higher but has been moderating (flat at 3.4%oya) compared to historical trends. After increasing more than 1.6%m/m in December and January, food prices decelerated to 0.7%m/ma sharp slowdown compared to the high-frequency wholesale price surveys. Even taking into account softer-than-expected food inflation in February, our assessment is that the uncertainty on food prices remains quite high. Separately, government officials have mentioned in recent days that further increases in gasoline prices should not be ruled out (after the spike earlier this month), since the recent increase in international oil prices has been increasing the deficit in the fuel stabilization fund and eventually this will prompt higher local prices. Considering that oil prices have been drifting higher in international markets, further increases in gasoline prices could take place in 2Q11. Therefore, even considering that the February inflation reading was below market expectations, we are revising our 2011 forecast to 3.6% (from 3.2%), due to increasing risks of higher controlled prices and remaining uncertainties on food items (that may be impacted by past increases in external prices).
Colombia: headline and food inflation

%oya 15 10 5 0 -5 Food inflation
Headline
04
05
06
07
08
09
10
11
Colombia CPI: tradables and nontradables components

%oya 8 6 4 2 0 -2 04 05 06 07 08 09 10 11 Tradables Nontradables
Colombia: international and local commodity prices

%oya, both scales 20 15 10 5 0 -5 2006 Cmdty in COP 2007 2008 2009 2010 2011 Cmdty food in the CPI Assumption: flat prices until year-end 60 40 20 0 -20 -40
Higher inflation, and some downside risks to 2011 growth

The softer-than-expected Feb CPI should tame pressures on inflation expectations in the short term. The last Banrep inflation expectations survey was already showing the consensus for the 2011 CPI at 3.6%oya, and while the Febru-
ary reading should bring some relief to expectations, medium-term risks related to oil and food prices should prevent a full improvement. Separately, relatively high inflation and the preemptive monetary tightening announced last week are posing downside risks to growth. The latest figures on retail sales and declining consumer confidence suggest that growth momentum is not yet robust, and higher inflation and monetary policy normalization are extra drags. Therefore, while we are not revising our growth forecast at this point, we do recognize downside risks to the 4.5% GDP growth forecast for this year.
45
JPMorgan Chase Bank, Sao Paulo Laura Karpuska (55-11) 3048-3322 laura.a.karpuska@jpmorgan.com JPMorgan Chase Bank, New York Tejal Ray (1-212) 834-8580 tejal.t.ray@jpmorgan.com
Economic Research Southern Cone / Andeans March 11, 2011
Argentina: Data releases and forecasts

Tue Mar 15
Ecuador: Data releases and forecasts

Week of March 14 - 18 No data releases expected.
Nov 0.70 11.0 0.94 14.91 Dec 0.80 10.9 0.94 14.56 Jan 0.70 10.6 0.90 14.10 Feb ___ ___ ___ ___
Consumer prices
Consumer prices (%m/m) %oya Wholesale prices (%m/m) %oya

No data released.

No data released.
Peru: Data releases and forecasts

Tue Mar 15
Chile: Data releases and forecasts

Real GDP
%oya nsa %m/m sa Oct 8.51 -0.30 Nov 10.16 2.03 Dec 8.93 0.40 Jan 10.40 0.30

Trade balance
Balance (US$ bn) Dec 2.39 Jan 2.18 Feb ___ 1.1

BCRP monetary policy meeting
Reference rate Jan 3.25 Feb 3.50 Mar 3.75
Economic activity
%oya
Trade balance
Nov 6.22 Dec 5.70 Jan 6.50 6.8 US$ bn
Nov 0.56
Dec 1.08
Jan ___
Inflation
Consumer prices (%m/m) %oya
Venezuela:
Dec 0.10 3.00 Jan 0.30 2.70 Feb 0.30 0.2 2.70

Colombia: Data releases and forecasts

Wed Mar 16

Caracas CPI
Dec 1.70 27.40 Jan 3.60 28.90 Feb ___ 2.20 ___29.80
Trade balance
Consumer prices (%m/m) Oct 0.2 Nov -0.2 Dec 0.1 Jan ___
Consumer prices (%m/m) %oya
Thu Mar 17
%oya Oct 2.8 Nov 4.2 Dec 4.0 Jan 5.0
Thu Mar 17
Retail sales
%oya Oct 15.0 Nov 21.4 Dec 12.4 Jan 9.7

Consumer prices
%oya 3.00 3.18 3.40 3.17
46
JPMorgan Chase Bank, London Malcolm Barr (44-20) 7777-1080 malcolm.barr@jpmorgan.com Allan Monks (44-20) 7777-1188 allan.j.monks@jpmorgan.com
United Kingdom
Construction output fell off a second cliff in January Other output data not looking so bad Labor market also suggests firms are not retrenching After a 16.6%m/m nsa decline in a snow-impacted December, we had anticipated a bounce in January construction output. Astonishingly, the data published this week show a further 7.7%m/m nsa decline in output. The failure to bounce leaves the level of construction output for January running 18.5% nsa below the average for 4Q as a whole. Although seasonal adjustment will moderate this decline to some degreewe estimate by perhaps a couple of percentage pointsthis is still a very weak outturn. The sectoral breakdown of output shows weakness that is widespread across sectors: of the 11 subsectors reported, five are labeled as private sector, and they all show sizable declines over the last couple of months. We have spoken to the statisticians who compile this report, and like us they had anticipated a bounce from weather-related weakness, as seen in February of 2010 following heavy snowfall in the prior month. They had no strong anecdotal evidence from survey respondents of weather impacts spilling into January. They also point out, however, that monthly data for this series only exist back to January 2010 and it is possible that seasonality accounts for some of Januarys decline. Because January 2010 itself was affected by snow, it is not very instructive to use it as a guide to seasonal patterns. The worry is that, as we and others have pointed out, the strength of construction output through mid2010 looked outsized, and it is possible we are seeing a sharp correction independent of the weather. The available national accounts data show quarterly swings of construction output of the order of 8%q/q sa at the extremes. This means we are going to need to see m/m nsa gains in construction output of near 10% over February and March to deliver even a -8%q/q sa (unless the January decline is revised). With construction accounting for 6.3% of output, an 8% decline would drag quarterly GDP growth down by 0.5%-pt. The next release of this data on April 8 will hence be an important input to the tracking exercise for 1Q GDP.
Construction output
bn at 2005 prices, nsa, quarterly data prior to 2010 9.5 9.0 8.5 8.0 7.5 7.0 6.5 2009 2010 2011
Manufacturing output
%3m/3m, saar 15 10 5 0 -5 -10 -15 -20 -25
2007
2008
2009
2010
2011
the historical range, we now have a 0.5%-pt drag on growth from the sector, which would take the GDP outturn to near flat. Given the volatile and rather unproven status of the construction data, our inclination is not to make any changes to the forecast until we have seen the February release on April 8and the January index of services that will become available in the meantime).
Other output data are looking better

Although it appears likely that there will be a significant drag from construction in 1Q, the other output sectors of the economy are showing better signs. Retail output looks likely to be strong in 1Q. Retail sales data for January showed a rebound following a heavily weather-affected December. Retail sales through January alone were already close to a percentage point higher than their 4Q average. The index of services for January, will also take on added importance given the role that the weather played around the turn of the year. We look for a rebound in overall service sector output in January (released on March 30), reflecting a rebound from the snow-related disruptions evident in the December data. This behavior of the retail and service sector data for January would increase our confidence that a large part of the estimated 0.5%-pt drag on 4Q GDP from the weather will be reversed this quarter. The only caveat is that, weather effects aside, the BRC pointed to a slowing in retail spending in February.
47
Arithmetic for 1Q GDP just turned nasty

Before the January construction release, we had thought 1Q GDP was tracking a near 0.7%q/q gain, with one or two tenths of that gain coming from the construction sector. If we assume enough of a recovery in construction output over February and March to bring the quarterly change into
JPMorgan Chase Bank, London Allan Monks (44-20) 7777-1188 allan.j.monks@jpmorgan.com Malcolm Barr (44-20) 7777-1080 malcolm.barr@jpmorgan.com
Economic Research United Kingdom March 11, 2011
Moreover, the official data show that the manufacturing sector is enjoying a mini-boom at present. The 1%m/m gain in manufacturing output in January left growth within the sector running at a 5.4%3m/3m saar pace. Payback from the large rise in energy output in December tempered the gain in overall industrial production, which was up 0.5%m/m in January. But IP is also now running 1.1% above its 4Q average. Barring declines in IP in the coming two months, the industrial sector overall is likely to show annualized growth of close to 5% this quarterwith manufacturing possibly reaching 7% ar. This is about as strong as the UK manufacturing sector gets in its present-day incarnation. Though the linkage between IP and business investment is a bit patchy, the particularly strong upswing in capital goods production suggests that capex may also rebound in 1Q, after a disappointing drop in 4Q (chart). Meanwhile, core goods export volumes showed a sharp 6.1%m/m increase in January, suggesting these components of demand are doing okay.
Industrial output by type of good

%3m/3m, saar 20 10 0 -10 -20 -30 -40 2007 2008 2009 2010 Intermediate goods 2011 Consumer nondurables Capital goods
Industrial production versus business investment

%3m/3m, saar for IP, %q/q, saar for business investment 20 10 0 0 -10 -20 -30 2005 Business investment 2006 2007 2008 2009 2010 2011 -20 -40 IP capital goods 40 20
How will the MPC respond to the data?

This raises the question of whether the MPC will be willing to overlook output weakness that is confined to just the construction sectorparticularly if broader indications of growth from the business surveys and global data flow are looking more upbeat. The problem is that although the weakness in growth may be isolated on the output side of the national accounts, the same may not be true on the demand side. It is possible that the softness in construction is echoed to some degree across all components of final demand. But this would still leave open the question of why any softening in demand is falling disproportionately within the construction sector. Even so, a near flat GDP print for this quarter which even assumes some weather-related liftwould surely not be consistent with a majority for higher rates forming in May. The MPC appears to have assumed a 0.8%q/q GDP gain in 1Q. Moreover, with added uncertainty about growth also coming from higher oil prices, a May rate hike with the data in hand is looking less likely.
Retail sales volume

Volumes, %m/m, sa, excludes auto fuels 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5
2009
2010
2011
LFS household survey of employment and the Markit jobs survey
Growth through a labor market lens

The linkage between labor market data and swings in output growth is not close on a quarter-to-quarter basis, which diminishes the usefulness of labor market data as a cross check on signals on growth. But we are more inclined than usual to look to the labor market data for guidance for a number of reasons. First is that the linkage between business survey measures of services output and the official data has been stress tested in recent releases, raising the value of other indicators. Second, firms appear to have
%3m/3m, saar 4 2 0 -2 -4 ONS
Index, sa 70 66 62 58 54 50 46 42 38 34 30 26
Markit permanent placements 07 08 09 10 11
48
JPMorgan Chase Bank, London Malcolm Barr (44-20) 7777-1080 malcolm.barr@jpmorgan.com Allan Monks (44-20) 7777-1188 allan.j.monks@jpmorgan.com
hoarded labor to some degree during the downturn, which suggests that employers could begin to shed labor more rapidly than usual if they expected weakness in output to persist. This week brought some conflicting news on labor market developments, but we are inclined to put more weight on the positive signs. The latest survey of employment intentions by Manpower saw the overall balance hold at +2, with increased hiring intentions in the private sector offsetting weakness in the public sector. Although the balance is positive, it remains well below its long-run average. The February survey of recruitment consultants by NTC/REC, however, saw the permanent placements reading hit a 10-month high, reaching a level that is close to its cyclical high. The NTC data have had a reasonable linkage with aspects of the official data over recent years (charts). It is also the case that within the official data, rising outflows relative to inflows to the claimant count suggests the potential for the number of recipients to begin to register meaningful declines. Next weeks labor market data are likely to show continuing weakness in the data based on a survey of households, with employment near flat while the population of working age and unemployment rises. But we look for the more timely claimant count data to register a meaningful decline, hinting at better to come.
Manpower employment intentions

% balance, sa 30 20 10 0 -10
92
94
96
98
00
02
04
06
08
10
NTC permanent placements vs chg in claimant count unemployment

Index, sa 70 60 50 40 30 20 2005 2006 2007 2008 2009 2010 2011 Claimant count NTC 000s sa, change over 3 months -150 -100 -50 0 50 100 150 200 250 300 350

During the week 12:01am
Nationwide consumer confidence index

Sa Nov Index 46 Dec 54 Jan 47 Feb
Employment rate Unemployment rate
58.3 7.8
58.5 7.7
58.2 7.9
58.2 7.9
Tue Mar 15 9:30am
DCLG monthly house price data

Nsa Oct All dwellings (%oya) 5.0 Nov 4.1 Dec 3.7 Jan
Wed Mar 16 9:30am
Labor market statistics

Sa Nov Claimant count (000s ch m/m) Claimant count rate (%) -3.2 4.5 Oct Dec -3.4 4.5 Nov Jan 2.4 4.5 Dec Feb -10 4.5 Jan Thu Mar 17 11:00am
The data on inflows and outflows through the claimant count suggest that we should start to see meaningful declines in the claimant count, and business survey data are pointing in the same direction. We would not expect that to be echoed in the LFS data at this stage, although there is an outside chance that rising inactivity could help the unemployment rate to fall. A fall in private sector regular pay growth to its lowest since August should act to ease inflationary concerns. BoE/NOP inflation attitudes survey
%oya, median expectations 2Q10 Inflation next 12 months 3.3 3Q10 3.4 4Q10 3.9 1Q11
Average weekly earnings (3mma %oya sa) Headline Ex bonuses Private sector ex bonuses2.2 Three months to: 2.1 2.3 2.2 Jun 2.1 2.3 2.1 Sep 1.8 2.3 2.0 Dec 1.6 2.1 Jan

BRC retail sales monitor
%oya Dec Like for like sales Total -0.3 1.5 Jan 2.3 4.2 Feb 1.3 3.2 -0.4 1.1
Labor force survey (all percentage rates, sa) Activity rate 63.2 63.4 63.2 63.1
49
JPMorgan Chase Bank, London Allan Monks (44-20) 7777-1188 allan.j.monks@jpmorgan.com Malcolm Barr (44-20) 7777-1080 malcolm.barr@jpmorgan.com
Economic Research United Kingdom March 11, 2011
RICS housing market survey

%bal, sa Dec Prices in last 3 months Stocks of homes on books Sales in last 3 months Sales to stocks ratio (%) New buyer inquiries -39.1 70.8 15.2 21.5 -12.2 Jan -31.4 68.2 14.6 21.3 -7.3 Feb -26.0 67.8 14.8 21.9 -0.6
Bank of England interest rate announcement and asset purchase target No change in the policy rate or the asset purchase program. Producer prices
Nsa Dec Input prices (%m/m nsa) %oya nsa Output prices (%m/m nsa) %oya nsa Core output prices1(%m/m nsa) %oya nsa 3.9 12.9 13.0 0.4 0.5 4.1 4.2 -0.1 0.0 2.6 2.7 Jan 1.7 2.3 13.4 14.1 1.0 1.1 4.8 5.0 0.7 3.2 Feb 1.5 1.1 14.3 14.6 0.5 5.1 5.3 0.4 0.1 3.4 3.1
Markit report on jobs

% balance, sa Dec Permanent placements Permanent salaries Availability of permanent staff 54.9 54.5 50.8 55.4 Jan 57.4 58.2 54.1 49.9 Feb 62.7 53.7 51.5
1. PPI output ex food, beverages, tobacco, and petroleum products.
The permanent placements reading leapt from 58.2 to 62.7 in February, the highest reading since April of last year, and well above the long-run average of 56. Indicators of employment had been signaling a broad stabilization in 2H10 following a temporary pop in hiring in the first half of last year. Though the official data remain weak with little sign of an improving trend, the Markit report suggests a robust reacceleration in employment is taking place. The employment readings from the PMIs currently lie somewhere in between these two extremes, but there is a general sense from the most timely survey data that private sector employment is starting to pick up again after the recent slowdown. Meanwhile, the Markit surveys reading on pay fell to 53.7 in the month, and remains below its long-run average. Trade balance
bn, sa Total balance (goods) Trade balance (services) Total trade balance Nov -8.5 4.5 -3.9 -8.6 4.3 -4.3 Dec -9.2 4.4 -4.8 -9.7 4.2 -5.5 Jan -7.1 4.1 -3.0
Headline producer prices rose broadly as expected in February. The surprise was the weaker rise in core output prices. A larger increase in energy prices resulted in the bigger wedge between headline and core. As the recent gains in oil prices had occurred toward the end of the month, pressure from energy prices was expected to show up more in the March PPI release. Core output price inflation has shown some modest slowing from the 3.8%oya reached in the middle of last year, and the softer reading for February has prompted a further one-tenth decline to 3.1%. But this trend looks less likely to continue, given the possibility of passthrough from rising input costs. Input prices rose a further 1.1%m/m in February, to reach 15.9%oya. And an important point is that this reflects gains across a broad range of commodities outside of fuel and energy. This suggests core output inflation is likely to remain high at around 3% this year, or even accelerate further (third chart). Taken with rising energy prices, this is likely to keep headline PPI inflation running close to its current 5.3%oya pace this year. Though we have downplayed the importance of the PPI in the past (as fewer consumer products are sourced domestically than before) high producer price inflation reflects broader pressures in commodity and manufactured goods prices across the globe. These pressures are currently evident in imported goods prices as well, which are clearly important for consumer prices. With core imported goods inflation currently running up at 6%oya, this suggests that core consumer goods prices are unlikely to show meaningful declines this year (we have not forecast that they will). These commodity price pressures are one factor preventing both headline and core CPI inflation from returning to 2% this year. Our call that the CPI will hit the target next year rests on the assumption that imported goods inflation softens next year. Construction output
Nsa, constant prices Nov Dec 0.1 -15.8 -16.6 Jan -7.7
Sharp declines in imports of oil and other erratic items helped to generate a large narrowing in the trade deficit in January (with total import volumes down 3.7%m/m, and exports up 4.8%). But even excluding these noisy components, the underlying trade deficit also improved, reflecting a strong 6.1%m/m gain in core export volumes and a smaller 1.9% rise in core imports. This news on its own is not cause for celebration, as the monthly data are extremely volatile: net trade has averaged a 0.2%-pt drag on quarterly GDP growth for the past six quarters, and it remains to be seen whether trade for this quarter as a whole will make a positive contribution to growth. But the prospects of this happening in 1Q look better after the January trade report, with exports now running above their precrisis peak. Industrial production
Sa Nov IP (%m/m) %oya Manufacturing (%m/m) %oya 0.7 3.2 0.7 5.1 Dec 0.6 3.7 -0.1 4.4 Jan 0.3 4.1 0.5 6.2 0.6 4.5 1.1 6.8
% balance
-0.7
See main text.
50
JPMorgan Chase Bank, London Nora Szentivanyi (44-20) 7777-3981 nora.szentivanyi@jpmorgan.com Miroslav Plojhar (44-20) 7325-0745 miroslav.x.plojhar@jpmorgan.com
Central Europe: Czech Republic, Hungary, Poland, Romania

Czech: revisions wipe out trade surplus; will result in weaker FX and higher rates Hungary: structural reform program still lacking in detail but focus on spending side is encouraging Romania: the NBR will cut reserve requirements and hike interest rates
Czech: C/A gap after revision of 2009 and 2010

% of GDP 0 -1 -2 New -3 -4 Old
2006
2007
2008
2009
2010
Czech trade surplus evaporated

The trade surplus of 3.3% of GDP in 2010 was revised to a deficit of 0.6% of GDP by the statistics office (CSO) this week. The revisions resulted from a change in the definition of foreign tradefrom goods crossing the border to goods changing ownership from a resident to a nonresidentformerly a negligible distinction but now a point of marked contrast. Using the first definition led to divergences in GDP calculations, i.e., production method vs. spending method, and in the balance of payments statistics, where a large reported trade surplus has not been matched by underlying money flows. This has led to a puzzling deterioration in the service balance and deepening deficit of so-called errors and omissions in the overall balance of payments. The mismatch in the old statistics was due to activity of nonresidents in the country, not due to foreignowned companies in Czech (foreign-owned producers are treated as residents in the trade statistics). Previously, the value added by nonresidents, intermediaries in cross-border transactions, was included in Czech exports but not in Czech imports. As a result, exports were over-reported by 2.9% of GDP and imports under-reported by 1.1% of GDP. The CSO will from September revise the GDP data to harmonize them with change in ownership principles. While the level and pace of GDP growth should not change much, the composition will change, showing faster domestic demand growth. Separately, the Czech National Bank (CNB) has already published revised balance of payments in 2009 and 2010. The reduction of the trade surplus was offset in part by the improvement in the service balance. Yet, the current account deficit was larger by 1.7% of GDP in 2009 and by 1.2% GDP in 2010 to reach 3.8% of GDP (chart). Consequently, errors and omissions declined by the same amount. This change of important macroeconomic variables, while fully incorporated into statistics, is likely to have a negative impact on the koruna over the medium term. We do not think it will completely change the long-term convergence story of a strengthening koruna. But it will show that cur-
Hungary: planned fiscal savings

HUF bn, cumulative adjustment Employment, labor market Pension system reform Public transport Higher education Drug subsidies State and local government financing 1 Payment into public debt reduction fund Total adjustment % of GDP Headline fiscal deficit , % of GDP Public debt, % of GDP 2012 195 93 45 12 83 32 90 550 1.9 -2.5 72 2013 213 129 60 38 120 122 220 902 3.1 -2.2 69 2014 213 129 60 38 120 122 220 902 3.1 -1.9 66
1. Includes revenue from higher bank tax in 2012; postponing the CIT cut for larger companies and higher road tolls in 2013.
rent koruna strength may be a bit overdone. A potentially weaker koruna and stronger domestic demand may change the CNBs view on the appropriate level of interest rates. This would support our expectation of higher-than-pricedin interest rates over the medium term.
Hungary: reform plan ticks the right boxes

The government last week announced a structural reform program with a fiscal adjustment of HUF902 billion (approx. 3.1% of GDP) by 2013. Sixty percent of that adjustment will take place next year. The program targets a reduction in the budget deficit to 1.9% of GDP by 2014 from 2.9% of GDP this year, while public debt is expected to fall to 66% of GDP from 80% over the same period. The bulk of the adjustment will come from the expenditure side, with measures to include a reduction in the period over which unemployment benefits are paid out, restricted eligibility for disability pension schemes, and a cut in drug subsidies. Additional savings are expected to come from less generous public transport subsidies. One quarter of the deficit reduction by 2013 will come from keeping taxes higher for longer. The bank tax will be unchanged at HUF180 billion next year, or double the previous
The Central Europe Data Watch is published biweekly, next on March 25.
51
JPMorgan Chase Bank, London Miroslav Plojhar (44-20) 7325-0745 miroslav.x.plojhar@jpmorgan.com Nora Szentivanyi (44-20) 7777-3981 nora.szentivanyi@jpmorgan.com
Economic Research Central Europe March 11, 2011
assumption, while a previously planned cut in the CIT rate to 10% for larger companies will be postponed. The government will also raise motorway tolls. Details on the concrete measures should be released piecemeal between now and year-end. We believe the announced program is sufficient to keep the fiscal gap below 3% of GDP and will also boost potential growth. While the package is light on details and implementation remains a risk, the fiscal targets set out in the plan appear realistic and should help ease concerns over the deterioration that would have occurred in Hungarys post2012 fiscal outlook. However, for the governments strategy of boosting potential growth to be successful, additional net investment in sectors like manufacturing, agriculture, and tourism will need to be sufficiently large to more than offset disinvestment by banks and larger retail, energy, and telecommunications companies that is likely to occur due to the large, temporary taxes being imposed on those sectors. Stronger growth will also be important for achieving the planned reduction in Hungarys debt trajectory. Separately, two former NBH economists, Ferenc Gerhart and Andrea Bartfai-Mager, were appointed to the MPC. Originally, four new MPC members were expected to be appointed, but it seems that Fidesz, the ruling party, is cautious about the market reaction to the recently released fiscal package and changes in the MPC. As a result, the government decided for now to name only two new members, whose appointment is unlikely to spark a negative market reaction or further negative comments from the ECB.
bank in Europe is hiking or preparing to hike rates due to inflation concerns. This could be seen as a policy mistake with a negative impact on the currency and could increase inflation expectations. This would help neither the effort to tame inflation nor the effort to strengthen the financial system and revive credit growth. We think that easing reserve requirements on local currency loans (currently 15%) would be more effective to support a revival in private credit growth than small interest rate cuts with questionable consequences. We expect the NBR will keep its base rate on hold until hiking 50bp in late 2011. Instead, we think the NBR is likely to reduce reserve requirements in the coming months, in our view the reverse of the recent Turkish monetary policy mix.
Czech Republic: Data releases and forecasts

Weeks of March 14 - 25
Mon Mar 14 10:00am
Balance of payments
CZK bn Oct Current account Ytd Ytd a year ago Trade balance Services Income Current transfers Financial account FDI Portfolio investment Other investments -8.7 -127.0 -85.1 6.3 4.5 -17.0 -2.4 8.5 8.3 2.0 -1.8 Nov -7.5 -134.5 -932 5.8 4.5 -12.7 -5.2 22.6 -0.5 -2.8 25.9 Dec -4.7 -139.2 -114.8 -6.0 5.5 -10.3 6.2 -2.9 -31.1 9.3 18.9 Jan 10.0 10.0 15.3 __ __ __ __ __ __ __ __
Romania: Turkish policy mix in reverse

We do not share the consensus view that the NBR will cut interest rates as early as this summer. On the contrary, we continue to expect the next move in rates will be up and will come by the end of the year. We acknowledge that a slowdown in inflation in 2H11 and our bullish view on the leu, targeting EUR/RON to reach 4.00 by the end of the year, make a strong case for rate cuts. However, the inflation outlook is not that benign-looking beyond the favorable base effect (VAT hike in July 2010). We expect inflation to trend to 6% during next year, on the back of reviving domestic demand, with the risks on the upside due to food and fuel prices. We are less optimistic on inflation than the NBR. The central bank saw inflation in the range of 3%-4% in 2012 in its Inflation Report from February. Moreover, we think that it would be hard for the NBR to cut the base rate without clear signs of significant disinflation ahead at a time when nearly every other central
52
Thu Mar 24
Monetary policy announcement We expect no change in rates at the upcoming meeting. See the research note Czech rate hikes: lagging ECB at first, but outrunning in 2012 in this GDW for details.
Review of past two weeks data

Consumer prices
%oya Dec %oya %m/m nsa Food Housing Transport 2.3 0.5 5.6 2.3 2.6 Jan 1.7 0.7 4.3 2.7 2.1 Feb 1.9 0.2 4.2 2.6 2.9 1.8 0.1 4.3 2.4 2.8
Inflation accelerated a tenth to 1.8%oya in February. Food price growth slowed marginally to 4.2%oya, while core inflation accelerated to 0.8%oya. We expect headline inflation to rise to 2.5%-3%oya in the coming 12 months, driven mainly by accelerating core inflation and by energy prices.
JPMorgan Chase Bank, London Nora Szentivanyi (44-20) 7777-3981 nora.szentivanyi@jpmorgan.com Miroslav Plojhar (44-20) 7325-0745 miroslav.x.plojhar@jpmorgan.com
Average wage
%oya 2Q10 Nominal wage of which: private sector Real wage 2.4 2.7 1.2 3Q10 2.1 3.0 0.2 4Q10 1.5 0.9 2.5 2.1 -0.6 -1.2
Wed Mar 23 9:00am
Retail trade
% change Oct %oya wda %m/m swda -0.7 -0.6 Nov -0.3 0.0 Dec -1.7 -0.6 Jan -1.0 1.0
Wage growth was sluggish in 4Q10 but we have to be cautious in interpretation. Wage growth accelerated counterintuitively to 4% during the recession year of 2009, partly reflecting the disproportionate layoff of low-wage workers. We think that this will be reversed in 2010. External trade
CZK bn Trade balance Ytd Ytd a year ago Exports, %oya Imports, %oya Nov 12.4 123.6 146.9 22.7 25.7 Dec 1.0 124.5 149.6 27.0 28.5 Jan 10.0 15.7 10.0 15.7 15.3 24.4 28.4 30.1 30.9

Industrial output
%oya Nov Production, wda Production, nsa %m/m swda 14.6 14.7 4.3 Dec 6.1 8.5 -11.8 Jan 5.0 10.5 7.5 10.9 7.0 15.5
External trade
EUR mn Nov Trade balance Ytd Ytd a year ago Exports, %oya Imports, %oya 652 5093 3437 20.2 18.3 Dec 457 5550 3738 21.4 19.4 Jan 400 401 400 401 395 __ 26.1 __ 30.2
The trade balance improved in so-called border statistics. See main essay for details on large statistical revision. Industrial output
%oya Nov Production 15.9 Dec 12.7 Jan 10.0 16.9
Consumer prices
%oya Dec Jan 4.0 0.7 6.4 -1.6 16.5 2.5 1.7 0.1 4.5 3.2 Feb 4.2 4.1 0.5 0.4 __ 7.4 __ -1.8 __ 16.5 __ 1.9 2.0 1.9 __ 0.1 __ __ All items (KSH) %m/m nsa Food Consumer durables Fuel Services Core inflation %m/m sa Regulated g&s (NBH) Market g&s (NBH) 4.7 0.4 6.7 -1.4 20.1 2.8 2.0 0.2 5.7 3.3
Real GDP, final

%oya, unless otherwise stated 2Q10 Real GDP %q/q saar Domestic demand Private consumption Gross fixed capital formation %-pt contribution to oya GDP Domestic final sales Inventories Net trade 2.9 3.1 3.6 0.9 -3.7 2.3 2.8 0.8 0.7 -6.4 3Q10 2.5 3.9 4.8 0.9 1.7 2.7 3.6 4.3 0.7 -0.2 4Q10 2.9 2.0 __ 1.2 2.0 2.6 1.4 2.3 -0.4 -2.3
0.1 -1.1 3.4 1.9 -0.5 1.2
1.6 0.3 3.2 3.9 -2.2 -2.5
__ -1.1 __ 3.3 __ 0.2
The CSO cut 2010 growth to 2.2% from 2.3% and eased the 2009 recession to -4% from -4.1%. We do not make strong conclusions from the structure of GDP growth when statisticians revised the 2010 trade balance by 4%-pts of GDP and GDP revisions will be released in September.
Inflation accelerated a tenth to 4.1%oya in February due to a rise in food and energy price inflation. Core inflation accelerated to 1.9%oya from 1.7%oya. We expect headline inflation to be around 4% during the coming months. Real GDP, final
%oya, unless otherwise stated 2Q10 Real GDP %q/q saar Domestic demand Private consumption Gross fixed capital formation %-pt contribution to oya GDP Domestic final sales Inventories Net trade 1.0 0.8 -2.8 -5.0 -4.5 -4.4 1.9 3.4 3Q10 1.7 2.4 -0.8 0.8 -2.6 0.3 -0.9 2.4 4Q10 2.0 0.8 __ __ __ 1.9 0.3 -0.4 -9.1
Hungary: Data releases and forecasts

Fri Mar 18 9:00am
Average gross wages

%oya Oct Gross wages, nominal Private sector ex bonuses Public sector 1.2 3.0 2.7 -3.0 Nov -1.2 1.6 3.0 -7.8 Dec -4.6 -2.2 3.0 -10.3 Jan 2.0 __ __ __
0.5 0.1 -1.0 -0.8 2.5 2.6
The composition of 4Q GDP data showed that net trade remained the main driver of the expansion. Growth for 2010 was confirmed at 1.2%; 4Q10 was revised down a tenth to 1.9%. Hungarian economic growth is likely to accelerate to just below 3% this year, in our view.
53
JPMorgan Chase Bank, London Miroslav Plojhar (44-20) 7325-0745 miroslav.x.plojhar@jpmorgan.com Nora Szentivanyi (44-20) 7777-3981 nora.szentivanyi@jpmorgan.com
Economic Research Central Europe March 11, 2011
Poland: Data releases and forecasts

Tue Mar 15 2:00pm
Consumer prices
%oya Nov All items %oya %m/m Food, %oya Fuel, %oya 2.7 0.1 4.3 7.2 Dec 3.1 0.4 3.9 14.4 Jan 3.8 1.2 4.8 __ Feb 4.0 0.4 __ __
At the same time the statement hinted at further tightening, highlighting the risk that heightened inflation expectations would persist. Governor Belka confirmed that the January rate hike was not a one-off, but added that fiscal tightening may weigh on growth in the coming years. The decision and comments were entirely consistent with our view of a continued gradual hiking cycle. We see a further 75bp in hikes this year and 100bp in 2012, to 5.50%. Real GDP
%oya, 2000 prices 2Q10 Real GDP 3.5 %q/q saar 4.1 4.5 Domestic demand 4.0 Private consumption 3.0 Fixed investment -1.7 %-pt contribution to oya real GDP growth Domestic final sales 1.9 Inventories 2.1 Net trade -0.7 3Q10 4.2 5.3 4.9 4.2 3.5 0.4 2.8 1.3 -0.1 4Q10 4.4 4.0 3.2 5.5 5.6 4.0 4.1 0.9 3.5 1.9 2.1 -1.0 -1.2
We expect inflation to accelerate further largely on the back of rising food price inflation and further passthrough from the January VAT hike. That said, we see a good chance that the January figure will be revised down 0.1%-0.3%-pt following the annual reweighting of the CPI basket. We expect core inflation to have risen to around 2% from 1.6% at end-2010.
Wed Mar 16 2:00pm
Gross wages and employment

%oya Nov Gross wages, nominal Real (CPI-adj.) Employment, 000s, nsa Employment, %oya 3.6 0.9 5381 2.2 Dec 5.4 2.1 5379 2.4 Jan 5.0 1.1 5501 3.8 Feb 4.8 0.8 5555 4.0
Growth momentum slowed. The expansion in 4Q10 was led by domestic demand. Net trade became a drag after making no contribution in the previous quarter. Disappointingly, gross fixed investment remained near stagnation. We look for growth to hold in the 3%-3.5%q/q saar range in the current quarter with oya growth likely to ease slightly toward 4%. Advance purchases ahead of the January VAT hike likely boosted consumer spending in 4Q and some payback was evident in January retail sales data.
Romania: Data releases and forecasts

Thu Mar 17 2:00pm
Industrial output
%oya Nov Industry %oya swda by GUS %m/m swda by GUS Manufacturing Construction 10.0 7.0 -0.3 11.9 14.2 Dec 11.4 11.0 0.8 14.1 12.3 Jan 10.2 8.4 0.7 11.4 11.2 Feb 8.2 8.2 0.2 __ __
Mon Mar 14 10:00am
Current account balance

EUR bn Oct Current account Ytd Ytd a year ago -0.7 -4.9 -4.0 Nov -0.2 -5.2 -4.2 Dec 0.0 -5.2 -4.9 Jan -0.4 -0.4 -0.5
Thu Mar 17 2:00pm
Core inflation
%oya Nov CPIex food and energy Avg. of four NBP measures 1.2 1.9 Dec 1.6 2.2 Jan 1.9 __ Feb 2.0 __
We look for a C/A gap of 5% of GDP this year. Domestic demand should recover gradually, and there should be an increase in labor remittances.

Consumer prices
%oya Dec %oya %m/m nsa 8.0 0.5 Jan 7.0 0.8 Feb 7.1 7.6 0.4 0.8

Monetary policy announcement The NBP left its policy rate unchanged at 3.75%, though the market was split nearly 50-50. The MPC statement cited the January rate hike, uncertainty over the sustainability of the acceleration in consumer demand, weak investment demand, and moderate wage pressure amid a continued rise in unemployment as the main reasons for keeping rates unchanged.
54
February inflation accelerated on the back of food prices (up 8.8%oya). The outlook is still for a slowdown in headline CPI into the 4%-5%oya range in the second half of the year due to a favorable base effect (5% VAT hike in July 2010).
J.P. Morgan Australia Limited, Sydney Stephen Walters (61-2) 9220-1599 Helen Kevans (61-2) 9220-3250 helen.e.kevans@jpmorgan.com stephen.b.walters@jpmorgan.com Ben Jarman (61-2) 9220-1669 ben.k.jarman@jpmorgan.com
Australia and New Zealand

RBA officials bang the drum on terms of trade, mining boomsagain Aussie job growth slowed in February, but jobless rate steady at 5% RBNZ delivered a 50bp rate cutpolicy rate now stable until 2012 A busy week for data in Australia delivered mixed signals on the economy. Employment unexpectedly fell in February (albeit after record gains in 2010, and the fall was concentrated in the flood-affected state of Queensland), and consumer confidence and demand for home loans also dropped. The number of jobs advertised, however, rose for the tenth straight month. Also, business confidence unexpectedly rebounded, although the survey was collected before the government announced its contentious plan to introduce a carbon tax from mid-2012 (reportedly the main trigger for the drop in consumer confidence). Crucially, senior RBA officials, including Governor Stevens, again spoke publicly this week about the very expansionary impact of the terms of trade (ToT) and mining booms. These speeches remind us that officials remain focused on the huge wave of associated income coming down the pipe, not the near-term offsetting caution of households, which is unlikely to persist. Next week in Australia is much quieter: the RBA release of minutes from the early March Board meeting will be the highlight. There also is the release of the second-tier motor vehicle sales and housing starts data. The Board minutes are unlikely to ring too many bellsrecent RBA commentary has been clear. Car sales and dwelling starts each likely fell slightly. In New Zealand, the RBNZ delivered a preemptive 50bp rate cut Thursday to mitigate the already material damage to sentiment likely to be reported in the wake of the devastating earthquake that hit Christchurch last month. We had expected no change to the OCR, but acknowledged there was a material risk of a large cut. With the quake rebuilding effort, which will give a substantial boost to growth in the economy, likely to be delayed until later this year at the earliest, it seems the policy rate now will be left steady at 2.5% for an extended period. RBNZ officials probably will start removing policy accommodation in the first half of 2012. Governor Bollard said this week that the economy was weakening even before the natural disaster, so the case for further policy accommodation had been building.
Australia: terms of trade since 1900

Index 140 120 100 80 60 40 20 00 10 20 30 40 50 60 70 80 90 00 10 J.P. Morgan forecast to 2012
Australia: employment
Mn 8.2 8.0 7.8 7.6 7.4 7.2 2007 2008 2009 2010 2011 Part time Full time Mn 3.5 3.4 3.3 3.2 3.1 3.0 2.9 2.8
RBA speeches: is there an echo in here?

RBA Assistant Governor (Economic) Phil Lowe this week spoke about relative price changes in Australias economy, of which the terms of trade is most prominent, and the structural changes these are helping to bring about. Later the same day, Governor Glenn Stevens spoke in London, mainly about developments offshore. Stevens repeated his message from two weeks ago, however, that Australias terms of trade boom is the largest in more than a century, and that the mining investment boom is likely to persist for some time yet. Governor Stevens delivered a similarly upbeat speech on the terms of trade late in 2010, and the ToT has been consistently prominent in RBA commentary for more than a year. Why do senior RBA officials continue to beat this very familiar drum? The answer probably lies in the fact that the futures market still prices virtually no chance of a rate hike before midyear, despite the cash rate being below average and that policymakers now face enormous mining investment and commodity price booms. As Governor Stevens pointed out this week, the consumer is providing an important counterpoint to the mining boom, acting cautiously, boosting saving, and taking on less debt. This austerity is unlikely to persist, though, given that national income al-
55
Economic Research Australia and New Zealand March 11, 2011
ready is growing at a double-digit pace. Our assessment continues to be that the RBA will lift the cash rate 25bp in May as officials try to curb the inflation risks stemming from the coming lift to income and activity.
Australia: consumer and business confidence

Index 130 120 110 100 90 80 70 00 WMI consumer confidence NAB business survey % balance 25 15 5 -5 -15 -25 08 10 -35
Aussie jobless rate steady at 5%

Australias February employment report delivered contradictory headlines, but the underlying message is that the labor market remains in decent shape. Total employment unexpectedly dropped 10,000, but full-time jobs bounced nearly 50,000; all of the weakness, therefore, was in parttime employment, which dived nearly 60,000 places. Total hours worked, however (that is, the hours of all people working, not just those entering or leaving employment in February), lifted a robust 1.1%. A note of caution, though: there may be unusually loud statistical noise in the February outcome, given that survey collection was disrupted by the severe floods in January. On balance, we consider this weeks jobs report to be better than the headline fall in employment suggested. This is mainly owing to the stability of the jobless rate close to 5.0% in recent months, and the unexpected bounce in fulltime employment. Moreover, with the rate of employee earnings increasing, the implied income dynamics for households are improving. Looking forward, the number of job advertisements rose in February for the tenth month in a row. The annual rate of growth has, however, slowed significantly, which points to still decent employment growth in 11H1, albeit at a rate slower than the record pace of gains reported for CY2012.
02
04
06
Australia: gasoline price and retail sales

%oya 10 8 6 4 2 0 Retail sales 02 04 06 08 10 Gasoline price %oya, inverted scale -30 -20 -10 0 10 20 30 40
survey, however, unexpectedly soared 10pts to +14. The timing issues over the climate policy changes mean we are treating this outcome carefully.
Carbon tax debate sinks Labor: polls

The federal Labor governments unexpected decision to announce the carbon tax proposal a couple of weeks back, without also releasing specific details of the tax or the associated compensation arrangements, has had an immediate and negative impact on the governments standing in opinion polls. Labors vote sank to a record low of just 30% in poll results released this week. This is 5%-pts below the governments standing in the same poll when the Labor caucus discarded then-Prime Minister Kevin Rudd in June last year. Similarly, current Prime Minister Julia Gillards personal standing slumped 12pts; the PM had promised just before last years election not to introduce a carbon tax. If an election were held today, and voting replicated these polls, the opposition Coalition parties would be elected with a comfortable margin. Senior government officials are committed to delivering on the carbon tax proposal, while the Opposition mounts what, thus far, has been effective resistance. The sometimes shrill debate over the tax probably will be a drag on sentiment measures in coming months.
Confidence moved in opposite directions

Aussie consumer confidence dropped this week, but business executives became more upbeat. What on earth is going on? The answer is that the consumer confidence survey is more timelythe results were collected up until last Sunday and, therefore, capture the angst caused by the federal governments announcement of a plan to install a carbon tax from July 1, 2012. The NAB business confidence results, though, were collected before the Prime Ministers announcement of the new tax. Business respondents may not be so chipper in the next survey. The Westpac Melbourne Institute consumer confidence index dropped 2.7% to a two-year low. Westpac cited concerns over budget and tax issues as the main driver of the decline, although high gasoline prices almost certainly also played a role. Gasoline prices this week touched a two-year high. The headline index in the NAB Business Confidence
56
RBNZ delivered on market expectations

RBNZ Governor Alan Bollard cut the official cash rate (OCR) 50bp Thursday in a preemptive move to mitigate the economic impact of the recent earthquake in Christchurch. The Governor acknowledged that there was much uncertainty as to how large or how long lasting the negative effect of the quake would be, but that this weeks move should be regarded as an insurance measure to help support economic growth. We believe lowering the OCR is the wrong tool to be used in response to a natural disaster, but had acknowledged the decision was finely balanced. Also, we believed that if a rate cut was delivered, it would be a 50bp move, in order for the change to gain sufficient traction. The RBNZ made clear that the decision required many important assumptions based on quite limited information. The RBNZ acknowledged, though, that even before the February earthquake, the economy had underperformed, mainly owing to efforts by households to reduce debt. While there had been some signs that the economy was beginning to recover early in 2011, these were more than offset by the Christchurch earthquake. Our view is that the RBNZ will stay on the sidelines for an extended period while officials assess the impact of the earthquake on the economy. The statement made clear today that future policy adjustments would be guided by emerging economic data but that the policy accommodation in place would not be removed until the rebuilding phase materialized. This will take some time. The earthquake caused substantial damage to property and buildings, and immense disruption to business activity. The RBNZ estimates the cost of the earthquake at around NZ$15 billion (or 8% of GDP), but signaled that the reconstruction phase, which it says will be very large, will not begin until 2012. Thus, we believe that accommodative policy settings will be left in place until 2Q12.
New Zealand: GDP

%q/q 2 1 0 -1 -2 Pre-earthquake
Post-earthquake
2006
2007
2008
2009
2010
2011
2012
RBNZ official cash rate

% 10 8 6 4 2 2005 J.P. Morgan forecasts
2006
2007
2008
2009
2010
2011
2012
Wed Mar 16 11:30am
Dwelling starts
Sa 1Q10 %q/q %oya 8.2 41.3 2Q10 2.1 46.4 3Q10 -13.2 12.4 4Q10 -1.3 -5.3
Building approvals gained a little ground over the fourth quarter, but the accumulated decline in approvals over the last few quarters implies a further decline in starts. With mortgage rates having risen substantially in 2H10, we probably will not see starts rebound meaningfully until flood-related rebuilding comes on line in the second half of 2011.

NAB business confidence
Index Dec -3 Jan 4 Feb 6 14
Australia: Data releases and forecasts

Tue Mar 15 11:30am
New motor vehicle sales

Sa Nov %m/m %oya 0.2 -1.2 Dec 1.0 -3.2 Jan -1.9 -2.8 Feb -1.0 -1.9
Business confidence surged in February, posting a relief rally following the Queensland floods. The index of current conditions, at -2, remains a little underwhelming, but is improving steadily: trading conditions, profitability, and capacity utilization all were up over the month. Westpac-MI consumer confidence
%m/m Jan -5.8 Feb 1.9 Mar 0.0 -2.4
57
Economic Research Australia and New Zealand March 11, 2011
The Governments announcement of a new carbon tax evidently weighed on consumers in March. Confidence slipped 2.4%m/m, with over 40% of respondents naming the tax as an issue. The familiar consumer caution theme was evident to an extent, with the proportion of households viewing paying down debt as the wisest allocation of savings. But respondents also showed an increased preference for equity investment, with intentions for housing market investment suffering as a consequence. Housing finance
%m/m %oya Nov 2.5 2.2 -11.3 -12.1 Dec 2.1 -2.8 -3.4 Jan 0.0 3.8 -4.5 -2.2
New Zealand: Data releases and forecasts

Tue Mar 15 9:00am REINZ house price index Sa Nov %m/m %oya Wed Mar 16 8:00am 1.9 -1.9 Dec -0.6 -1.6 Jan -2.6 -2.6 Feb -0.6 -3.6
The home loan data were very weak in January, though the composition by state suggests that flood disruptions played a role. Commitments in Queensland plummeted 16%m/m, with more subdued falls (or small rises) posted in the remaining states. We expect soft but not disastrous loan demand this year, with an upside to eventuate if the RBAs interest rate pause ends up being protracted. Labor force
Employment change (000s) Unemployment rate (%) Participation rate (%) Dec 2 5.0 65.8 0 4.9 Jan 24 8 5.0 65.9 65.8 Feb 10 5.0 65.9 -10 65.7
Westpac NZ consumer confidence Sa 2Q10 Index %m/m 119.3 4.0
3Q10 114.1 -4.4
4Q10 108.3 -5.1
1Q11 99.1 -8.5
The survey was conducted in the first two weeks of March, and would have captured the impact on sentiment of the Christchurch earthquake on February 22. Should confidence fall 8.5%m/m as we expect, the index will drop below the key 100 threshold for the first time since 1Q09. A sharper fall will, though, be prevented by the expectation that, having now delivered a rate cut, the RBNZ will be on the policy sidelines for the remainder of the year. Also, the medium-term economic outlook is improving.
The fall in headline jobs masks a striking shift toward fulltime work in February. A net 48,000 full-time jobs were added, while part-time employment fell 58,000. Total hours worked rose over 1%m/m, as the shift in composition overcame weaker total employment. Employment growth has softened in line with the leading indicators, but with the unemployment rate at 5%, and hours worked still rising, utilization clearly remains high.

Building consents
Sa Nov %m/m %oya 7.9 -9.2 Dec -18.6 -26.4 Jan 8.5 9.6 -16.1 -16.8
RBNZ OCR announcement See main text.
58
JPMorgan Chase Bank, Hong Kong Grace Ng (852) 2800-7002 grace.h.ng@jpmorgan.com
Greater China
China: Feb CPI inflation stayed at 4.9%oya; steady monetary policy normalization process to continue January-February indicators showed solid FAI growth, retail sales eased on slowing auto sales February exports weakened amid seasonal volatility; trade balance moved into US$7.3 billion deficit Taiwan: strong February trade report; headline CPI inflation ticked up in February As we expected, Chinas February CPI inflation rate stayed at 4.9%oya. Food prices continued to tick up, while nonfood prices moderated. Chinas production activity is usually rather volatile over the Lunar New Year holiday season. Looking through seasonal volatility, Jan-Feb IP growth appears to have moderated somewhat from the elevated pace in 4Q10. On domestic demand, fixed investment continued to register solid growth in Jan-Feb (though new investment projects have eased), while retail sales disappointed, dragged down by slowing auto sales. The economy appears to have moved onto a slower growth path in early 2011, moderating from the sharp acceleration in 4Q10, with the governments basket of policy measures to cool the housing market, manage inflation, and prevent over-heating risks beginning to have some impact on the economy. Industrial production rose 14.1%oya in Jan-Feb. Seasonally adjusted, the average monthly IP in the Jan-Feb period rose 0.8% (not annualized) from the December level, with the sequential trend rising 14.9%3m/3m saar. On external demand, while February exports were weaker than expected, led by particularly weak exports of lower-end, labor-intensive consumer goods, including textiles and garments, the sector most affected by rising costs of production (see Chinas export sector copes with rising wages, GDW, Mar 4). With regard to domestic demand conditions, fixed investment rose at a steady 24.9%oya in Jan-Feb, compared to 21.8%oya growth in December. Further details show real estate investment rose 35.2%oya for Jan-Feb, compared to 33.2%oya growth for full-year 2010. Meanwhile, retail sales were rather disappointing, rising 15.8%oya in JanFeb, compared to 19.1%oya growth in December. Seasonally adjusted, average monthly retail sales in the Jan-Feb period rose 0.5% (not annualized) from the average monthly level in 4Q10, and were down 1.0% from the December level. Slowing auto sales were an important reason for the disappointment in retail sales, while housing-related
China: real industrial production

%oya, 3mma 24 18 12 6 0 2003 %3m/3m, saar %oya, 3mma %3m/3m, saar 45 30 15 0 -15 2012
2004
2005
2006
2007
2008
2009
2010
2011
China: fixed asset investment

%oya 60 50 40 30 20 10 0 03 04 05 06 07 08 09 10 11 %3m/3m, saar %oya, 3mma %3m/3m, saar 30 25 20 15 10 5 04 05 06 07 08 09 10 11 0 12 Nominal Real (adjusted by PPI)
China: retail sales growth

%oya, 3mma 24 22 20 18 16 14 12 10
China: PPI for consumer goods vs CPI

%oya 10 8 6 4 2 0 -2 -4 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PPI (NBS) consumer goods CPI
spending, such as furniture sales, slowed rather notably as well, reflecting slowing property transactions in recent months on the back of policy tightening.
59
JPMorgan Chase Bank, Hong Kong Lu Jiang (852) 2800-7053 lu.l.jiang@jpmorgan.com
Economic Research Greater China March 11, 2011
On inflation, the 4.9%oya rise in the CPI translated to a 1.0%m/m sa rise. For the major categories, food prices rose 11.0%oya in February, compared to a 10.3%oya rise in January, translating to a rise of 1.3%m/m sa. Meanwhile, nonfood prices rose at a slower pace of 2.3%oya in January, compared to the rise at 2.6%oya in January, translating to a modest fall of 0.1%m/m sa. The slower gain in the housing CPI component was an important factor behind the easing of nonfood CPI inflation. The PPI rose at 7.2%oya in February, compared to a 6.6%oya rise in January, translating to a rise of 1.1%m/m sa, hinting at further upward pressure on production costs.
China: merchandise trade balance

US$ bn 50 40 30 20 10 0 -10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Nsa Sa
Growth and policy outlook

Looking ahead, we expect the Chinese economy to settle onto a steady, trend-like growth path in the coming quarters, moderating from the sharp acceleration in 4Q10. On the external environment, our global team continues to look for solid growth in the global economy and aggregate demand this year. In the near term, however, we have lowered some of the growth forecasts, including that for US consumer spending for 1Q11, reflecting the drag from higher commodity prices. The largely benign external demand outlook should support steady growth in Chinas export sector, while a further drag from rising commodity prices on global growth remains an uncertain factor. Besides, Chinas exports of low-end consumer goods would likely continue to be affected by rising production costs. On the domestic front, regarding the investment cycle, public investment projects, especially at the local government level, are expected to rise significantly. In addition, while private real estate investment would likely slow under policy tightening, public economic housing investment should gather more momentum in the coming months, with strong support from the central government, given the policy target to start constructing 10 million affordable housing units this year. Meanwhile, the value of new investment projects fell 23.6%oya in Jan-Feb, suggesting that fixed investment growth may moderate later this year. On domestic consumption, while the expiration of preferential tax treatment and restrictions on auto purchases in cities like Beijing may continue to restrain auto sales growth, solid overall employment growth and broad-based wage gains should be supportive of overall consumer demand this year. Overall, we maintain our forecast of full-year 2011 real GDP growth at 9.6%oya. On inflation, the CPI inflation rate will likely pick up again, breaching the 5% handle in March, as hinted by the further
60
China: merchandise trade

%oya 100 75 50 25 0 -25 -50 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Exports Imports
uptick in the February PPI, suggesting that the monetary policy normalization process will continue at a steady pace. Our forecast for the 2011 average CPI inflation rate remains 4.6%oya, taking into account the rise in food prices, gradual feed-through of wage growth, and impact of rising global commodity prices. On macro policy, we expect policymakers to continue with their incremental and multi-front approach to manage inflation pressure and inflation expectations. We expect the central bank to continue with monetary policy normalization, including two more RRR hikes, at least two more interest rate hikes in 2011, and further CNY appreciation (with year-end USD/CNY forecast at 6.3), in an attempt to curb inflation pressure and manage overall economic growth. These policy actions would likely be front-loaded in 1H, as headline inflation remains elevated. On the credit front, the authorities are closely monitoring new loan creation figures, especially given the commercial banks desire to expand their loan book early in the year.
Exports weakened in February

Following a significant jump in January, Chinas exports eased notably in February, rising a modest 2.4%oya, compared to 37.7%oya growth in January. Seasonally adjusted exports fell 21.5%m/m in February, following a 17.2%m/m
JPMorgan Chase Bank, Hong Kong Grace Ng (852) 2800-7002 grace.h.ng@jpmorgan.com
jump in January, with the underlying trend rising 37.7%3m/3m saar by February. It appears that the January export figure was boosted by the front-loading of trade activity ahead of the Lunar New Year holidays (February 2-8), resulting in payback in February. Combining the export figures for the first two months, the seasonally adjusted Jan-Feb average was 6.5% (not annualized) above the average monthly level in 4Q10. This suggests that, amid seasonal volatility, the underlying trend in Chinas exports was still rising at a gradual pace through February. However, the growth pace of the underlying export trend appears slower than our global teams bullish outlook on the global economy may have suggested. Import growth also slowed, with total imports rising 19.4%oya in February, translating to a 19.2%m/m sa fall, following a 20.3%m/m sa jump in January. Again combining the first two months, the seasonally adjusted Jan-Feb monthly average was 15.1% (not annualized) above the average monthly level in 4Q10. As such, the February trade balance fell into a US$7.3 billion deficit (the largest monthly trade deficit since February 2004), compared to a US$6.5 billion surplus in January.
Taiwan: export breakdown

%3m/3m, saar 150 100 50 0 -50 -100 06 07 08 09 10 11 12 Nontech exports Tech exports
Taiwan: headline CPI and WPI

%3m/3m, saar, both scales 15 10 5 0 -5 -10 2006 Headline CPI WPI 30 20 10 0 -10 -20 -30 2008 2009 2010 2011 -40
Taiwan: strong February trade report

Taiwans merchandise exports rose more than expected in February, increasing 27.3%oya, compared to 25.3%oya gain in January. Seasonally adjusted exports rose 6.8%m/m sa, with the sequential trend rising significantly at 59.4%3m/3m saar. Meanwhile, imports rose 28.7%oya in February, bringing the trade surplus for the month to US$0.9 billion, compared to US$1.9 billion in January. Taiwans tech exports continued to rise at 5.3%m/m sa in February (up 90.5%3m/3m saar). Nontech exports rose at 10.9%m/m sa in February (up 54.7%3m/3m saar). Details by export destination showed that shipments to China/ Hong Kong rose 13.0%m/m sa in February, after a 3.0% gain in January, with the sequential trend rising at 111.7%3m/3m saar. For the DM economies, exports to the US rose 6.9%m/m sa in February (25.6%3m/3m saar). Exports to Europe rose 1.1%m/m sa in February, after two consecutive monthly declines, with the sequential trend rising 29.0%3m/3m saar.
2007
fruits, vegetables, fish, and energy) rose at a steady 0.8%oya in the month. Overall, we expect full-year 2011 headline CPI to rise 2.1%oya. With regard to input cost pressures, the wholesale price index rose at a faster pace at 3.5%oya in February, compared to 1.6%oya in January (translating to a 1.5%m/m sa rise vs. 0.9%m/m sa in January). The import price index, in local currency terms, rose 6.5%oya in February (translating to a 3.8%m/m sa rise, a notable pickup up from the 0.8%m/m sa gain in January). The Directorate General of Budget, Accounting, and Statistics (DGBAS) noted that the pickup in import prices was mainly due to rising international commodity prices. The average 0.7% depreciation in the TWD/USD exchange rate in February also contributed to the pickup in imported inflation pressure. Overall, the pickup in CPI inflation in February reflects the recent rise in international commodity prices as well as the Lunar New Year effect on consumer prices. Meanwhile, asset inflation and associated risks to general financial market stability continue to be among the key concerns of the Taiwan central bank. The headline CPI inflation rate is expected to trend up gradually this year, and the central bank will likely raise policy rates at a steady 12.5bp pace at each of the four quarterly meetings this year.
CPI inflation ticked up moderately

Taiwans February headline CPI rose at a higher-than-expected 1.3%oya, compared to a 1.1%oya rise in January. The seasonally adjusted headline CPI rose 0.4%m/m sa in February. Meanwhile, the core CPI (overall CPI excluding
61
JPMorgan Chase Bank, Hong Kong Grace Ng (852) 2800-7002 grace.h.ng@jpmorgan.com Lu Jiang (852) 2800-7053 lu.l.jiang@jpmorgan.com
Economic Research Greater China March 11, 2011
China: Data releases and forecasts

Week of March 14 - 18 No data released.
Monetary aggregates
%oya Dec M2 Bank lending 19.7 19.9 Jan 17.2 18.5 Feb 17.1 __

Merchandise trade (Mar 10)
US$ bn Dec Balance Exports %oya Imports %oya 13.1 154.2 17.9 141.1 25.6 Jan 6.5 150.7 37.7 144.3 51.0 Feb 2.2 -7.3 115.2 96.7 22.0 2.4 113.0104.0 28.3 19.4
Hong Kong: Data releases and forecasts

Thu Mar 17 4:30pm
Labor market survey

Sa, 3mma Nov Unemployment rate % avg Employed Ch, m/m, 000 persons 4.1 9.2 Dec 4.0 13.6 Jan 3.8 15.3 Feb 3.8 __

% change Dec %oya %m/m sa 4.6 0.2 Jan 4.9 0.3 Feb 4.9 0.9 1.0
Hong Kongs unemployment rate is likely to remain steady in February; in particular the retail business sector will likely benefit from strong tourism inflows during the Lunar New Year holiday.
Producer prices (Mar 11)

%oya Dec Producer (NBS) Producer (PBoC) 5.9 7.9 Jan 6.6 8.0 Feb 6.9 7.2 __

No data released.
Taiwan: Data releases and forecasts

Fixed investment (Mar 11)

% change Nov Fixed investment %oya %oya, ytd Real estate %oya, ytd Manufacturing %oya, ytd 29.1 24.9 36.5 26.1 Dec 21.8 24.5 33.2 26.7 Jan-Feb 24.2 24.9 24.2 24.9 __ 35.2 __
No data releases.

% change Dec %oya %m/m sa 1.3 0.4 Jan 1.1 0.2 Feb 1.1 1.3 1.4 0.4
Retail sales (Mar 11)

% change Nov %oya %m/m sa 18.7 1.0 Dec 19.1 1.8 Jan-Feb 18.8 15.8 1.6 -1.7
Merchandise trade (Mar 7)

US$ bn Dec Balance Exports %oya Imports %oya 1.6 23.8 19.1 22.1 21.4 Jan 1.9 25.3 16.6 23.4 21.9 Feb 0.7 0.9 19.4 21.2 16.5 27.3 18.8 20.3 18.8 28.7
Industrial production (Mar 11)

% change Nov %oya %m/m sa 13.3 1.9 Dec 13.5 1.3 Jan-Feb 15.5 14.1 0.0 0.4
62
JPMorgan Chase Bank, Seoul Jiwon Lim (822) 758-5509 jiwon.c.lim@jpmorgan.com James Lee (822) 758-5512 james.dh.lee@jpmorgan.com
Korea
Bank of Korea hiked 25bp, maintained hawkish bias Producer prices up 6.6%oya in February As expected, the Bank of Korea raised the base rate 25bp to 3.00%, marking the fourth 25bp rate hike since the BoK started its monetary policy normalization cycle last July. The Governors comments continued to be hawkish, but did not deliver any meaningful hint of another near-term rate action. Also, this decision was not unanimous. In the policy statement, the BoK voiced slightly more inflation concern, emphasizing its objective to maintain price stability amid rising inflation expectations. In the press conference, however, the Governor sounded less hawkish than the MPC statement, supporting the view that the BoK would not hike at two consecutive meetings thereby defusing expectations for another hike next month. Also attracting market attention, the Governor toned down the possibility of an upgrade to the 2011 growth forecast in the upcoming periodic outlook report (scheduled to be released in April). Indeed, the Governor commented that while hard activity data from DM economies remained upbeat, its implications for economic growth could be somewhat offset by downside risks from turmoil in the MENA region. In all, we maintain the view that the BoKs policy rate normalization will continue, with the base rate likely to rise to 3.50% by year-end. We expect the next rate hike action to come in either May or June, but this is conditioned on the political turmoil in MENA not spreading to key oil producers in the region.
Bank of Korea base rate

% per annum 5.5 4.5 3.5 2.5 1.5
2008
2009
2010
2011
Headline producer price index

%m/m sa 2 1 0 -1 -2
3mma 05 07 09 11
Producer prices: goods and services

%m/m sa, 3mma 3 2 1 0 Services Goods
Producer prices post small monthly gain

Producer prices rose 0.7%m/m nsa in February, with the oya rate accelerating to 6.6% from 6.2%oya in January. Seasonally adjusted by J.P. Morgan, the headline PPI jumped 0.8%m/m in February, but this was a smaller increase than the 1.5%m/m rise in January and 1.2% average increase in the previous three months. Fresh food prices edged down in February after adjusting for seasonality, with agricultural products down 3.3% while livestock price gains decelerated after surging 17.3% in January to reflect foot-and-mouth disease-led supply reduction. However, manufactured food prices still rose 1.1%m/m sa in February, about the same pace as in January. Energy product prices rose at a decelerated pace, not fully reflecting the geopolitically led global oil price move. Meanwhile, excluding food and energy, producer prices rose 0.9%m/m
-1 -2 05 07 09 11
Producer prices: agricultural and livestock

2005=100, nsa 150 140 130 120 110 100 90 2009 2010 2011 Livestock prices Agricultural prices
63
JPMorgan Chase Bank, Seoul James Lee (822) 758-5512 james.dh.lee@jpmorgan.com
Economic Research Korea March 11, 2011
nsa (0.8% sa) in February, pushing up the over-year-ago rate to 5.4% from 4.8%oya in January. Price pressures were concentrated in commodity-related industrial products, such as metals and chemical products, while service prices rose only 0.2%m/m sa in February, decelerating for three consecutive months.
Producer prices (Mar 10)

% change Dec %oya 5.3 Jan 6.2 Feb 7.1 6.6
See main story. Housing prices (Mar 11)

% change from previous week, apartment prices only

Tue Mar 15 6:00am
Week of Feb 21 0.3
Feb 28 0.3
Mar 7 __ 0.4
Import and export prices

%oya Nov Export prices Import prices 1.9 8.2 Dec 4.3 12.7 Jan 4.9 14.1 Feb 5.8 19.2
BoK Watch
Bond market yields plunge despite BoK rate hike Although the BoK hiked the base rate 25bp to 3.00%, the local bond market rallied significantly on that day, as the policy rate action had already been priced in, the Governors comments gave no sign of further very nearterm moves, and the rate decision was not unanimous. Moreover, the move was amplified by some market participants concerns that the spike in global crude oil prices would have a negative impact on growth. As a result, Korea Treasury bond (KTB) yields fell 6-16bp (and the curve flattened) with the benchmark 3-year KTB yield down 12bp to 3.71%, the lowest level in two months.
3-year Korea Treasury bond (KTB) yield
% per annum 4.1 4.0 3.9 3.8 3.7 3.6 BoK MPC meeting
Import prices in local currency terms are likely to rise markedly in February, with Dubai crude oil prices up 8.5% and the trade-weighted KRW depreciating 0.4%.
Tue Mar 15 6:00am
Stage of processing price index

% change Nov %oya 6.5 Dec 8.6 Jan 9.8 Feb 11.4
Wed Mar 16 8:00am
Unemployment rate
% of total labor force Nov Seasonally adjusted Not adjusted 3.2 3.0 Dec 3.5 3.5 Jan 3.6 3.8 Feb 3.5 3.8
The jobless rate likely edged down in February on a seasonally adjusted basis, after ticking up in January when unusually harsh winter weather intensified seasonal weakness in agriculture and construction jobs, while the pre-Lunar New Year holiday effect worked against new hires in the manufacturing sector.

Monetary aggregates (Mar 9)
%oya, monthly average Nov M2 Lf 7.4 7.3 Dec 7.2 6.7 Jan 7.5 7.0 6.5 6.6
3.5 Jan 3, 11
Jan 25, 11
Feb 16, 11
Mar 10, 11
Interest rates
%p.a. Feb 10 Overnight call Three-month CD fixing One-year MSB Three-year Treasury bond Three-year corporate bond 2.95 3.11 3.61 3.96 4.74 Feb 18 2.75 3.15 3.57 3.96 4.74 Mar 3 2.75 3.23 3.66 3.93 4.71 Mar 10 2.99 3.30 3.64 3.83 4.63
Both M2 and Lf growth decelerated on an over-year-ago basis in January. Seasonally adjusted M2 fell 0.5%m/m in January, following a 0.3% decline in December. Lf (liquidity at financial institutions) rose only 0.1%m/m sa in January, slowing for two straight months.
64
JPMorgan Chase Bank, Singapore Sin Beng Ong (65) 6882-1623 sinbeng.ong@jpmorgan.com
ASEAN: Indonesia, Malaysia,

Philippines, Singapore, Thailand, Vietnam
Indonesian fuel subsidy rationalization to be postponed indefinitely Full-year inflation revised lower; policy rate hikes to depend on when fuel prices are raised Bank Indonesia to adopt a more eclectic approach to managing inflation The February inflation print from Indonesia came in lower than expected. More significantly, food prices were flat on the month and an expected good harvest should help keep them well behaved at least through early 2Q11. The State Logistics Agency (BULOG) has also been active in managing food prices. Aside from the positive high-frequency inflation data, the expected plan to limit the use of subsidized energy in April looks to be on hold indefinitely. While its postponement will ostensibly raise the fiscal cost, this should be manageable given the availability of carryover funds from 2010 and also given the boost to revenues from rising commodity export volumes, especially in Liquefied Natural Gas (LNG), which has been stronger than expected and should offset the budget impact of belowforecast production of crude oil. The upshot is that the delay in the liberalization of the subsidies has led us to revise down average inflation for 2011 and also to postpone our expected rate hike. We expect BI to adopt an eclectic approach to tightening, reflecting a strong balance of payments position that contrasts with its response to the 2005 and 2008 upturns in inflation.
Indonesia: sources of inflation

%-pt contribution to m/m nsa 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 Jan 10 Nonfood
Food
Apr 10
Jul 10
Oct 10
Jan 11
Indonesia: consumer prices

%3m/3m, saar 40 30 20 10 0 -10 2006 2007 2008 2009 2010 Nonfood 2011 Food
Indonesia: core and headline inflation

%3m/3m, saar 40 30 20 10 0 2006 2007 2008 2009 2010 2011 Headline Core
Food inflation slows, core remains benign

The CPI in Indonesia rose 0.2%m/m sa in February, leaving it up a lower-than-expected 6.8%oya (J.P. Morgan: 7.3%oya; consensus: 7.1%oya). The core index (ex. food and energy) was up 0.4%m/m sa and printed 4.4%oya from 4.2% in January. The main observation in the February inflation data is that the food contribution to inflation was negligible, with almost all the sequential increase owing to nonfood prices, which continue to rise at a sequential pace very similar to the previous year (first chart). One of the themes underlying Indonesian inflation over the course of 2010 was that it had predominantly been a function of rising food prices (Indonesia: tracking recent inflation trends, GDW, Aug 26, 2010, and second chart). The February print alleviates some of the concerns over food prices, but the main data points to watch will be the March/
April CPI prints, which will include the impact of the harvest, which tends to lead turns in food prices. Importantly, core inflation has been benign, reflected by the relative stability of core prices even in the face of the significant oscillations in headline inflation (third chart). Indeed, supply shocks tend to impact final demand, especially in lowerincome countries.
Delay in subsidy liberalization to slow inflation climb

One of the key upside risks (and the extant J.P. Morgan assumption) has been that restrictions on private vehicle use of subsidized energy would be implemented in April around Jakarta and West Java. This would also affect
65
Economic Research ASEAN March 11, 2011
Tanjung Priok, a major port. Given its location as the transshipment hub for Indonesia, this would also have had an impact on goods prices more broadly. Its implementation was expected to have lifted inflation by around 0.5%-1.0%-pt in April, which assumed some broadening in its transmission. The postponement in its implementation brings some nearterm relief to inflation and also removes the likelihood of further interest rate hikes by Bank Indonesia. Thus, given the delay in the fuel price hike, J.P. Morgan is now forecasting that BI will leave its policy rate at the current 6.75% until the prices of subsidized energy are raised. A useful precursor to this move would be the preparation for the impending increases through public mediathis would be a signal of its imminent implementation. The delay in the subsidy implementation also lowers the CPI forecast with inflation now expected to peak at 7.2%-7.6%oya in 2Q11 from a previous forecast of an 8.4%oya peak. In addition, full-year inflation is now expected to average 6.7%oya against a previous average of 7.5%oya (first chart).
Indonesia: CPI inflation and forecasts %oya 10 8 6 4 2

2009 2010 2011 Without subsidy removal
Indonesia: deficit elasticity and oil price impact for 2011 budget1
80 Fiscal deficit, IDR tn 124.7 US$ terms 13.1 % of GDP 2.0 Oil price assumption used in budget (US$/bbl) Official deficit forecast, IDR tn Oil price (US$/bbl, ICP2) 90 100 110 127.7 130.7 133.7 13.4 13.8 14.1 2.0 2.1 2.1 120 136.7 14.4 2.2 80.0 124.7 0.30
Elasticity based on MoF stress test (IDR tn/US$/bbl)3
Fiscal cost of subsidy manageable

In the event that fuel prices are not liberalized, this will raise the fiscal cost of the subsidies though the fiscal impact is not expected to be as severe as previous episodes. This reflects use of carryover funds from previous years and also the increase in tax revenues from the non-oil commodity sector, which in recent years has seen a remarkable increase in volumes. The current deficit elasticity to oil prices runs around IDR0.3 trillion per US$1/bbl increase (table). At current prices this implies a deficit increase of IDR6-7 trillion, which is more than manageable given the IDR47 trillion in carryover and unused funds from the 2010 budget and should be reflected in a large contribution to the SAL (Sisa Anggaran Lebih, or balance of excess budget) fund.
1. Using MoF elasticity. 2. Indonesian Crude Price, approximated using Dubai Fateh. 3. Sourced from Nota Keuangan APBN 2011, VI-68
Indonesia: CPI and FX reserves

%oya, both scales 20 15 10 5 0 CPI FX reserves 50 40 30 20 10 0 -10 02 04 06 08 10 -20
An eclectic tightening still in the cards

One the key observations about the recent rise in Indonesian inflation is that it is occurring in the face of a strong balance of payments (BoP) position, in contrast to 2005 and 2008, when the BoP was under stressreflected in a fall in FX reserves (third chart). What this implies is that the BoP will provide Bank Indonesia some flexibility in managing inflation, through the combination of higher interest rates (which were raised on February 4) and stronger FX, which J.P. Morgan forecasts to reach US$/IDR8,700 by end-2Q11.
Moreover, given the nature of inflation, which is predominantly supply-side driven, the best way to deal with this would be via fiscal policy through increased food supply via BULOG (the State Logistics Agency) and through stronger FX to manage the passthrough into nonfood prices. Historically, the coefficient of passthrough from FX runs around 5%-10% depending on the historical period, i.e., a 10% stronger FX leads to a reduction in CPI inflation of 0.5%1%-pt. Also important to note is that the monetary policy transmission in Indonesia from the policy rate to market rates and thus lending rates is neither linear nor clear.
66
Indonesia: Data releases and forecasts

Week of March 14 - 18 No data releases.
issued two separate statements for each decision, explicitly stating in the SRR release that the SRR hike is a preemptive move to manage liquidity, not a signal on the monetary stance. Nevertheless, the monetary policy statement sounded more hawkish, leaving the door open for additional policy and SRR rate hikes in coming months. There were two key changes in policy wording compared to the last statement. First, BNM noted that incipient signs of domestic demand factors placing upward pressure on prices in the latter part of the year are emerging. This contrasts with the previous statement, which referred to inflation being led by supply factors with limited evidence of excess demand exerting pressures on prices. The second change relates to the last paragraph. The last paragraph of the MPC statement usually states that the MPC considers the current monetary policy stance as appropriate and consistent with the current assessment of the economic growth and inflation prospects, as it did in January. This statement however highlighted that the degree of monetary accommodation may be reviewed given the sustained growth in the economy and risks to inflation. Both of these changes suggest that additional policy rate hikes may be in the cards as early as the next meeting in May. While the monetary policy statement does suggest a more hawkish BNM stance, the SRR hike should not be viewed in the same context. Prior to the global recession the SRR had been at 4%. It was slashed to 1% during the recession and until today it had remained at that record low level. This weeks move thus should be seen in the context of regulatory normalization and liquidity management. The statement explicitly highlighted that the decision to raise the SRR is now undertaken as a pre-emptive measure to manage the risk of this build-up of liquidity from resulting in macroeconomic and financial imbalances. Moreover, the statement clearly reads that this move should not be seen as a signal on the policy stance. We expect further hikes in the SRR as BNM continues to normalize its level.

No data released.
Malaysia: Data releases and forecasts


Industrial production (Mar 10)
%oya Nov Total %m/m sa 5.4 -0.6 Dec 4.2 0.6 Jan -0.3 1.0 0.4 0.9
January IP rose 0.4%m/m sa, leaving it up 1.0%oya (consensus: 1.2%). In sequential trend terms, IP rose 9.9%3m/3m saar, slightly slower than the 10.1% gain in December. The tone of the production data is consistent with the recently released trade data, and it further supports our view that the global economy has moved out of its soft patch. In turn, we expect production from Malaysia to strengthen in early 2011. This also bodes well for the GDP forecast, which assumes a return to trend-like sequential growth in 1H11, even as the over-year-ago readings will be biased lower due to the high base of comparison in 1H10. In the details, manufacturing led IP higher and was up a strong 18.5%3m/3m saar. Mining on the other hand was a drag, with output falling 6.1% and electricity more in line with the overall print, expanding 6.9%. Bank Negara Policy Statement (Mar 11)
%p.a. Jan Overnight policy rate 2.75 Feb 2.75 Mar 2.75
Philippines: Data releases and forecasts

During the week
Government budget check

Pesos bn Oct Balance Revenue Expenditure -31.7 91.9 123.6 Nov -10.5 98.5 109.0 Dec 0.5 111.5 111.1 Jan __ __ __
As expected, Bank Negara Malaysia (BNM) kept its policy rate unchanged at 2.75%. Also, as had been strongly signaled in its last statement, BNM hiked its statutory reserve requirement (SRR) ratio to 2% from 1%. Interestingly, BNM
67
Economic Research ASEAN March 11, 2011
Tue Mar 15 10:45am
OFW remittances
% change Oct %oya %m/m sa 9.3 0.0 Nov 10.5 0.1 Dec 8.1 -2.0 Jan 7.8 0.6

No data releases.
Thailand: Data releases and forecasts


Government budget
Pesos bn Oct Balance Revenue Expenditure -10.5 98.5 109.0 Nov 0.5 111.5 111.1 Dec __-44.6 __103.2 __147.8

BoT monetary policy meeting (Mar 9)
% p.a. Jan One-day repo rate 2.25 Feb 2.25 Mar 2.50
The December budget deficit was PHP44.6 billion, higher than expectations of around PHP35 billion. This is the second largest monthly deficit of the year but it is important to note that the government had been running well ahead of target for the year and thus had some flexibility to spend a bit more. For 2010 as a whole, the deficit came in around PHP314 billion versus the target of PHP325 billion. The deficit narrowed to 3.7% of GDP from 3.9% in 2009. Merchandise trade (Mar 10)
US$ bn, nsa Nov Exports %oya 4.1 11.2 11.5 Dec 4.2 25.3 26.5 Jan 4.3 4.0 20.8 11.8
In line with consensus expectations, the BoT hiked its policy rate 25bp to 2.50%. The move marked the fifth 25bp rate hike since the BoT began raising rates last July from the record low level of 1.25%. The BoT appears prepared to continue on its rate normalization path as it sees inflation pressures continuing to increase from the recent surge in oil and commodity prices. Moreover, the statement specifically stated that the BoT does not foresee the current level of oil prices significantly affecting the global recovery or Thai growth prospects adversely. Thus, the MPC assessed that gradual normalization of the policy rate remains appropriate for anchoring inflation expectations and reducing the risk of financial imbalances in the economy. This statement had a modestly more hawkish tone than in January, mainly because the BoT sounds more confident in the global recovery than before. The decision to hike the policy rate today was unanimous, as it was in January, and the BoT sounds prepared to continue to tighten. We thus continue to expect 25bp rate hikes at each of the next meetings in April and June before the BoT pauses at 3.00%.
Exports were softer than expected with weakness broadbased across electronic and nonelectronic products.
Singapore: Data releases and forecast

Tue Mar 15 1:00pm
Retail sales
% change Oct %oya %m/m sa -5.1 0.7 Nov -4.6 0.8 Dec -1.1 2.7 Jan -6.0 0.3
Vietnam: Data releases and forecasts

Thu Mar 17 1:00pm
Merchandise trade
US$ bn, nsa Nov Trade balance Exports Non-oil domestic (NODX) %m/m sa, US$ terms %oya, US$ terms 3.1 30.1 10.9 -16.9 15.7 Dec 4.6 32.4 11.3 12.7 20.0 Jan 4.7 33.0 11.3 6.9 32.2 Feb 4.3 30.0 10.8 -1.8 27.6

No data released.
68
JPMorgan Chase Bank, Singapore Matt Hildebrandt (65) 6882-2253 matt.l.hildebrandt@jpmorgan.com
Asia focus: real monetary conditions still volatile

Last week we noted that nominal monetary conditions in EM Asia have tightened from loose levels due to currency appreciation and higher policy rates. We also noted the shortcomings of using nominal indices since they ignore inflation. This week we look at real monetary conditions to help judge the stance of monetary policies in the region. From a regional perspective, two trends stand out. First, inflation has been volatile. Real interest rates have declined since mid-2009 despite policy rate tightening because of higher inflation. Second, similar to nominal conditions, real monetary conditions have recently begun to tighten from loose levels, due mostly to real currency appreciation (charts below). It is important to note that inflation volatility can be a shortcoming to using real indicators to judge policy stances as policymakers may look beyond large and temporary swings in real monetary conditions. Within the region, real conditions have only tightened in a few countries recently. In all cases except India, REER appreciation has been the main reason. For the countries that have experienced the most easing in real conditions, higher inflation and slow policy rate tightening have generally been the main culprits, pushing real interest rates lower.
EM Asia: nominal policy rate and inflation
%, %oya 8 6 4 2 0 -2 Inflation Policy rate
EM Asia: monetary conditions index

% deviation from 5-year average 4 2 0 -2 Nominal -4 00 02 04 06 08 10 Real
Note: Monetary conditions are calculated with nominal effective exchange rates and policy/ short-term borrowing costs. Changes in RRRs and macroprudential regulations are not captured.
EM Asia: real monetary conditions

%-pt change since June 2010 3 2 1 0 -1 -2 -3 IN SG TH TW KR JP MY CN PH ID HK
EM Asia: real policy or short-term rates

%-pt change since June 2010 4 2 0 -2 -4 TH TW JP HK ID
2006
2007
2008
2009
2010
2011
IN
PH
MY
KR
CN
SG
EM Asia: real effective exchange rate (REER) and real interest rate
Index, 2000=100 112 110 108 2 106 104 102 2008 2009 2010 2011 0 -2 REER Rate 6 4
EM Asia: real effective exchange rate (REER)

% change since June 2010 6 3 0 -3 -6 -9 SG KR JP TW TH CN ID MY IN PH HK
69
JPMorgan Chase Bank NA, New York
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JPMorgan Chase Bank NA, New York
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71
JPMorgan Chase Bank N.A., New York Daniel Silver (1-212) 622-6039 daniel.a.silver@jpmorgan.com
US economic calendar
Monday 14 Mar 15 Mar
Import prices (8:30am) Feb 0.7% Empire State survey (8:30am) Mar 15.5 TIC data (9:00am) Jan NAHB survey (10:00am) Mar 17 FOMC meeting
Tuesday
Wednesday 16 Mar
PPI (8:30am) Feb 0.7% Core 0.3% Housing starts (8:30am) Feb 545,000 Permits 575,000 Current account (8:30am) 4Q
Thursday 17 Mar
Initial claims (8:30am) w/e prior Sat 390,000 CPI (8:30am) Feb 0.5% Core 0.16% Industrial production (9:15am) Feb 0.9% Manufacturing 1.1% Capacity utilization 76.7% Philadelphia Fed survey (10:00am) Mar 32.0 Leading indicators (10:00am) Feb
Announce 10-year TIPS (r) $11 bn
Friday 18 Mar
21 Mar
Existing home sales (10:00am) Feb
22 Mar
FHFA HPI (10:00am) Jan Richmond Fed survey (10:00am) Mar
Cleveland Fed President Pianalto speaks on economy in Akron (8:00am)
23 Mar
New home sales (10:00am) Feb
24 Mar
Initial claims (8:30am) w/e prior Sat Durable goods (8:30am) Feb
Auction 10-year TIPS (r) $11 bn Announce 2-year note $35 bn Announce 5-year note $35 bn Announce 7-year note $29 bn
25 Mar
Real GDP (8:30am) 4Q final Consumer sentiment (9:55am) Mar final
Chicago Fed President Evans speaks to reporters in Chicago (8:30am) Atlanta Fed President Lockhart speaks on economy in Florida (9:15am) Philadelphia Fed President Plosser speaks on monetary policy in New York (12:15pm)
28 Mar
Personal income (8:30am) Feb Pending home sales (10:00am) Feb Dallas Fed survey (10:30am) Mar
Auction 2-year note $35 bn Atlanta Fed President Lockhart speaks on US economy in Atlanta (12:40pm)
29 Mar
S&P/Case-Shiller HPI (9:00am) Jan Consumer confidence (10:00am) Mar
Auction 5-year note $35 bn St. Louis Fed President Bullard speaks on monetary policy in Prague
30 Mar
ADP employment (8:15am) Mar
Auction 7-year note $29 bn St. Louis Fed President Bullard speaks in London (1:00pm)
31 Mar
Initial claims (8:30am) w/e prior Sat Chicago PMI (9:45am) Mar Factory orders (10:00am) Feb KC Fed survey (11:00am) Mar
Richmond Fed President Lacker speaks at credit symposium in Charlotte (10:30am) Fed Governor Tarullo speaks at credit symposium in Charlotte (12:30pm)
1 Apr
Employment (8:30am) Mar ISM manufacturing (10:00am) Mar Construction spending (10:00am) Feb Light vehicle sales Mar
Philadelphia Fed President Plosser speaks on economy in Harrisburg, PA (8:15am)
4 Apr
Atlanta Fed President Lockhart speaks on economy in Florida (9:05am) Fed Chairman Bernanke speaks at markets conference in Atlanta (7:15pm)
5 Apr
ISM nonmanufacturing (10:00am) Mar FOMC minutes
Philadelphia Fed President Plosser gives remarks in Georgia (8:25am) Philadelphia Fed President Plosser moderates panel in Georgia (11:15am)
6 Apr
Atlanta Fed President Lockhart gives remarks in Georgia (8:20am)
7 Apr
Initial claims (8:30am) w/e prior Sat Consumer credit (3:00pm) Feb Chain store sales Mar
Richmond Fed President Lacker speaks on financial regulation in Virginia (8:20am) Announce 3-year note $32 bn Announce 10-year note (r) $21 bn Announce 30-year bond (r) $13 bn
8 Apr
Wholesale trade (10:00am) Feb
Atlanta Fed President Lockhart speaks on economy in Knoxville (8:00am)
72
Euro area economic calendar

Monday 14 Mar
Euro area: Industrial production (11:00am) Jan 0.1%m/m, sa
Tuesday 15 Mar
Euro area: Employment (11:00am) 4Q 0.0%q/q, sa Germany: ZEW bus. survey (11:00am) Mar France: CPI (7:30am) Feb 1.8%oya, nsa Netherlands: Industrial production (9:30am) Jan ECB member Gertrude TumpelGugerell speaks in Stuttgart, Germany (6:00pm)
Wednesday 16 Mar
Euro area: HICP final (11:00am) Feb 2.4 %oya, nsa Italy: CPI final (10:00am) Feb 2.4%oya, nsa
Thursday 17 Mar
Italy: Industrial new orders (11:00am) Jan Governing Council meeting of the ECB, Frankfurt
Friday 18 Mar
Euro area: BoP (10:00am) Jan Foreign trade (11:00am) Jan Germany: PPI (8:00am) Feb Italy: Foreign trade (10:00am) Jan Belgium: BNB cons. conf. (3:00pm) Mar ECB member Gertrude Tumpel-Gugerell speaks in Belgrade, Serbia (11:30am)
ECB member Lorenzo Bini Smaghi speaks in Florence, Italy (7:30pm)
21 Mar
22 Mar
Spain: Trade balance Jan Netherlands: CBS cons. conf. (9:30am) Mar
23 Mar
Euro area: EC cons. conf. prelim (4:00pm) Mar Industrial new orders (11:00am) Jan Belgium: BNB bus. conf. (3:00am) Mar
24 Mar
Euro area: PMI flash (10:00am) Mar Mfg, services, composite Germany: PMI flash (9:30am) Mar Mfg, services, composite France: PMI flash(9:00am) Mar Mfg, services, composite INSEE bus. conf. (8:45am) Mar Italy: ISAE cons. conf. (10:00am) Mar Netherlands: GDP final (9:30am) 4Q
25 Mar
Euro area: M3 (10:00am) Mar Germany: Gfk cons. conf. (8:00am) Mar IFO business survey (10:00am) Mar France: INSEE cons. conf. (8:45am) Mar Cons. of mfg goods (8:45am) Feb GDP final (7:00am) 4Q Spain: PPI (9:00am) Feb Netherlands: CBS bus. conf. (9:30am) Mar
28 Mar
Germany: Import prices (8:00am) Feb Retail sales (8:00am) Feb
29 Mar
Germany: CPI 6 states and prelim (8:00am) Mar France: Consumption of mfg goods (8:45am) Feb Italy: ISAE bus. conf. (9:30am) Mar
30 Mar
Euro area: EC bus. conf. (11:00am) Mar EC cons. conf. (11:00am) Mar Italy: Contractual wages (10:00am) Feb Spain: HICP flash (9:00am) Mar Belgium: CPI (11:15am) Mar
31 Mar
Germany: Employment (9:55am) Feb Unemployment (9:55am) Mar France: PPI (8:45am) Feb Italy: PPI (10:00am) Feb CPI prelim (11:00am) Mar
1 Apr
Euro area: PMI Mfg final (10:00am) Mar Unemployment (11:00am) Feb Germany: PMI Mfg final (9:55am) Mar France: PMI Mfg final (9:50am) Mar Italy: PMI Mfg (9:45am) Mar Spain: PMI Mfg (9:15am) Mar
4 Apr
Euro area: PPI (11:00am) Feb
5 Apr
Euro area: Retail sales (11:00 am) Feb
6 Apr
Euro area: GDP final (11:00am) 4Q Germany: Industrial new orders (12:00pm) Feb
7 Apr
Euro area: ECB rate announcement (1:45pm) 25bp hike expected Germany: Industrial production (12:00pm) Feb Netherlands: CPI (9:30am) Mar
8 Apr
Germany: Foreign trade (8:00am) Feb Netherlands: Industrial production (9:30am) Feb
Highlighted data are scheduled for release on or after the date shown. Times shown are local.
73
JP Morgan Securities Japan Co., Ltd Miwako Nakamura (81-3) 6736-1167 miwako.nakamura@jpmorgan.com
Japan economic calendar

Monday 14 Mar
Consumer sentiment (2:00 pm) Feb 42.0, DI BoJ Monetary Policy Meeting and statement BoJ Governor Shirakawas press conference (3:30 pm) Auction 1-year bill During the week: Nationwide department store sales Feb -2.0%oya
Tuesday 15 Mar
IP final (1:30 pm) Jan
Wednesday 16 Mar
MoF business outlook survey (8:50 am) 1Q BoJ monthly economic report (2:00 pm) Auction 3-month bill Auction 20-year bond
Thursday 17 Mar
Reuters Tankan (8:30 am) Mar Tertiary sector activity index (8:50 am) Jan 0.8%m/m, sa Construction spending (8:30 am) Jan
Friday 18 Mar
Minutes of Feb 14-15 BoJ Monetary Policy Meeting (8:50 am)
21 Mar
Holiday: Japan
22 Mar
All sector activity index (1:30 pm) Jan Auction 2-month bill
23 Mar
Flow of funds (8:50am) 4Q BoJ Board member Miyaos address in Oita prefecture (11:10am) Auction 3-month bill
24 Mar
Trade balance (8:50 am) Feb Auction 2-year note
25 Mar
Nationwide core CPI (8:30 am) Feb Corporate service prices (8:50 am) Feb
28 Mar
29 Mar
All household spending (8:30 am) Feb Unemployment rate (8:30 am) Feb Job offers to applicants ratio (8:30 am) Feb Total retail sales (8:50 am) Feb Shoko Chukin small business sentiment Mar
30 Mar
IP preliminary (8:50 am) Feb
31 Mar
PMI manufacturing (8:15 am) Mar Nominal wages (10:30 am) Feb Housing starts (2:00 pm) Feb Construction orders (2:00 pm) Feb
1Apr
BoJ Tankan (8:50 am) 1Q Auto registrations (2:00 pm) Mar Auction 3-month bill
4 Apr
Monetary base (8:50 am) Feb
5 Apr
PMI services/composite (8:15 am) Mar Auction 3-month bill Auction 10-year bond
6 Apr
Coincident CI (2:00 pm) Feb BoJ Monetary Policy Meeting Auction 6-month bill
7 Apr
BoJ Monetary Policy Meeting and statement BoJ Governor Shirakawas press conference (3:30 pm)
8 Apr
Current account (8:50 am) Feb Economy Watchers survey (2:00 pm) Mar BoJ monthly economic report (2:00 pm)
During the week: Cabinet Office private consumption index Feb Highlighted data are scheduled for release on or after the date shown. Times shown are local.
74
JPMorgan Chase Bank N.A., New York Silvana Dimino (1-212) 834-5684 silvana.dimino@jpmorgan.com
Canada economic calendar

Monday 14 Mar
Capacity utilization (8:30am) 4Q
Tuesday 15 Mar
New vehicle sales (8:30am) Jan 3.0% Productivity & costs (8:30am) 4Q Existing home sales (9:00am) Feb
Wednesday 16 Mar
Manufacturing sales (8:30am) Jan 4.0%
Thursday 17 Mar
Wholesale sales (8:30am) Dec 2.2% TNS Canada Consumer Confidence Index (9:00am) Mar
Friday 18 Mar
CPI (7:00am) Feb 0.5% (2.4%oya) Core 0.4% (1.1%oya) Conference Board of Canada Index of Consumer Confidence (9:00am) Mar
21 Mar
22 Mar
Retail sales (8:30am) Jan Leading indicators (8:30am) Feb
23 Mar
24 Mar
25 Mar
Saturday, 26 March BoC Governor Mark Carney speaks at an Inter-American Development Bank seminar on Global imbalances and Latin America in Calgary, Alberta (10:30am)
28 Mar
BoC Deputy Governor Jean Boivin speaks on The Great Recession in Canada: Perceptions and Reality at a Montreal CFA Society event in Montreal, Quebec (12:45pm)
29 Mar
30 Mar
IPPI (8:30am) Feb
31 Mar
Monthly GDP (8:30am) Jan Payroll employment (8:30am) Jan
1 Apr
4 Apr
BoC Business Outlook Survey (10:30am) 1Q BoC Senior Loan Officer Survey (10:30am) 1Q
5 Apr
6 Apr
CFIB Business Barometer Index (7:00am) Mar Ivey PMI (10:00am) Mar
7 Apr
Building permits (8:30am) Feb
8 Apr
Employment (7:00am) Mar Housing starts (8:15am) Mar
Highlighted data are scheduled for release on or after the date shown.
75
JPMorgan Chase Bank, New York Tejal Ray (212) 834-8580 Laura Karpuska (55 11) 3048-3322
Latin America economic calendar

Monday 14 Mar
Brazil: CNI Capacity utilization Jan Mexico: IP Jan
Tuesday 15 Mar
Argentina: CPI Feb WPI Feb Brazil: Retail sales Jan 0.8 %m/m sa Mexico: Central bank reserves Peru: GDP Jan 10.4%oya, nsa Unemployment Feb
Wednesday 16 Mar
Brazil: FGV CPI IPC-S Mar 15 0.61%m/m nsa FGV IGP-10 Mar 0.92%m/m nsa Colombia: Trade balance Jan
Thursday 17 Mar
Argentina: Consumer confidence Mar Brazil: Fipe CPI Mar 17 0.35%m/m nsa Chile: BCCh meeting +25bp Colombia: IP Jan 5.0%oya, nsa Retail sales Jan 9.7%oya, nsa
Friday 18 Mar
Argentina: GDP 4Q 2.0%q/q, saar Current account balance 4Q Brazil: FGV IGP-M 2nd release Mar 17 Chile: GDP 4Q 4.0%q/q, saar Current account balance 4Q Colombia: BanRep meeting +25bp Mexico: Banxico minutes
During the week: Argentina: Budget balance Feb Brazil: Tax collections Feb CAGED Formal Job Creation Economic Activity Index (IBC Br) Jan
21 Mar
Holiday: Colombia and Mexico
22 Mar
Mexico: Central bank reserves Aggregate S/D 4Q
23 Mar
Argentina: IP Feb Trade balance Feb Brazil: FGV CPI IPC-S Mar 15 IPCA-15 Feb Mexico: Retail sales Jan
24 Mar
Brazil: Unemployment rate Feb Colombia: GDP 4Q Mexico: Unemployment rate Feb CPI Mar 1H Core CPI Mar 1H Holiday: Argentina
25 Mar
Brazil: Fipe CPI Mar 17 Current account Feb FDI Feb Mexico: Trade balance Feb Holiday: Argentina
During the week: Venezuela: Unemployment rate Feb
28 Mar
Argentina: Economic activity Jan Brazil: Banking Credit Report Feb Mexico: Economic activity Jan
29 Mar
Mexico: Central bank reserves
30 Mar
Brazil: FGV IGP-M Mar Central government budget Feb Chile: IP Feb Mexico: PS budget balance Feb
31 Mar
Argentina: Construction activity Feb Colombia: Unemployment Feb
1 Apr
Brazil: FGV CPI IPC-S Mar 31 IP Feb PMI Manufacturing Mar Trade balance Mar Chile: BCCh minutes Colombia: BanRep minutes Mexico: Banxico expectations survey Remittances Feb Peru: CPI Mar WPI Mar
During the week: Argentina: Government tax revenue Mar Colombia: Vehicle sales Mar
4 Apr
Brazil: FIPE CPI Mar Mexico: PMI manufacturing Mar PMI nonmanufacturing Mar
5 Apr
Chile: Economic activity Feb Colombia: PPI Mar Mexico: Central bank reserves Consumer confidence Mar
6 Apr
Brazil: Vehicle sales Mar Colombia: CPI Mar Ecuador: CPI Mar
7 Apr
Brazil: IGP-DI Mar IPCA Mar Chile: Trade balance Mar Mexico: CPI Mar Core Mar Peru: BCRP meeting
8 Apr
Brazil: FGV CPI IPC-S Apr 7 Chile: CPI Mar Mexico: Fixed investment Jan
During the week: Venezuela: CPI Mar Highlighted data are scheduled for release on or after the date shown. Times shown are local.
76
JPMorgan Chase Bank, London Malcolm Barr (44-20) 7777-1080 Allan Monks (44-20) 7777-1188 Nicola Mai (44-20) 7777-3467
UK/Scandinavia economic calendar

Monday 14 Mar
United Kingdom: BoE Governor Mervyn King speaks in Tokyo (1:35am)
Tuesday 15 Mar
United Kingdom: DCLG HPI (9:30am) Jan Norway: Trade balance (10:00am) Feb
Wednesday 16 Mar
United Kingdom: Labor market statistics (9:30am) Feb Claimant count -10 k,ch,m/m,sa Average earnings Jan 1.6 %oya, 3mma, sa ILO unemployment rate Jan 7.9 % sa BoE Governor Mervyn King speaks in Beijing (7:00am) Norway: Norges Bank rate decision (2:00pm) No change expected
Thursday 17 Mar
United Kingdom: BoE/ NOP Inflation attitudes survey (10:30am) 1Q Sweden: Labor force survey (9:30am) Feb
Friday 18 Mar
Sweden: Riksbanks Svante berg speaks in Stockholm (12:00pm)
During the week : United Kingdom: Nationwide cons. conf. (12.01am) Feb
21 Mar
United Kingdom: Rightmove HPI (12:01am) Mar
22 Mar
United Kingdom: CPI (9:30am) Feb CBI industrial trends (11:00am) Mar Public sector finances (9:30am) Feb
23 Mar
United Kingdom: MPC minutes (9:30am) BBA mortgage lending (9:30am) Feb Sweden: Business tendency (9:15am) Mar Consumer conf. (9:15am) Mar Norway: AKU unemployment (10:00am) Jan
24 Mar
United Kingdom: Retail sales (9:30am) Feb Sweden: PPI (9:30am) Feb
25 Mar
28 Mar
Sweden: Retail sales (9:30am) Feb Trade balance (9:30am) Feb
29 Mar
United Kingdom: Business investment final (9:30am) 4Q GDP final (9:30am) 4Q M4 & M4 lending final (9:30am) Feb BoP (9:30am) 4Q Net lending to individuals (9:30am) Feb
30 Mar
United Kingdom: Index of services (9:30am) Jan CBI survey of distributive trades (11:00am) Mar Sweden: Wage stats (9:30am) Jan
31 Mar
United Kingdom: GfK cons. conf. (12:01am) Feb BoE credit conditions survey 1Q Norway: Credit indicator (10:00am) Retail sales (10:00am) Feb
1 Apr
United Kingdom: PMI mfg (9:30am) Mar Sweden: PMI (8:30am) Mar Norway: Labor directorate unemployment (10:00am) Mar PMI mfg (9:00am) Mar NEF HPI (11:00am) Mar
During the week :
United Kingdom: Nationwide HPI (8:00am) Mar
4 Apr
United Kingdom: PMI construction (9:30am) Mar BoE housing equity withdrawal (9:30am) 4Q
5 Apr
United Kingdom: PMI services (9:30am) Mar
6 Apr
United Kingdom: BRC retail sales monitor (12:01am) Mar Industrial production (9:30am)Feb New car regs. (9:00am) Mar
7 Apr
United Kingdom: MPC rate announcement & Asset purchase target (12:00pm) No change expected Norway: IP Mfg (10:00am) Feb
8 Apr
United Kingdom: PPI (9:30am) Mar Construction output (9:30am) Feb Sweden: Industrial production (9:30am) Feb Industrial orders (9:30am) Feb
During the week :
United Kingdom: Halifax HPI (8:00am) Mar
77
JPMorgan Chase Bank, London Anthony Wong (44-20) 7777-3750 anthony.x.wong@jpmorgan.com
Emerging Europe/Middle East/Africa economic calendar

Monday 14 Mar
Czech Rep: Current account (10:00am) Jan CZK 10bn Poland: Current account (2:00pm) Jan Budget Feb Romania: Trade balance (10:00am) Jan Current account (2:00pm) Jan EUR -0.4bn
Tuesday 15 Mar
Czech Rep: PPI (9:00am) Feb Poland: CPI (2:00pm) Feb 4.0%oya Turkey: Unemployment (10:00am) Dec 11.5% Israel: CPI (6:30pm) Feb 4.0%oya Holiday: Hungary
Wednesday 16 Mar
Czech Rep: Retail sales (9:00am) Jan 3%oya Poland: Average gross wages (2:00pm) Feb 4.8%oya Employment (2:00pm) Feb 4.0%oya Turkey: Consumer confidence (10:00am) Feb 90.8 South Africa: Retail sales (1:00pm) Jan
Thursday 17 Mar
Poland: PPI (2:00pm) Feb Industrial output (2:00pm) Feb 8.2%oya Central bank minutes (2:00pm)
Friday 18 Mar
Hungary: Average gross wages (9:00am) Jan 2%oya Central bank minutes (2:00pm)
Holiday: Hungary During the week: Holiday: Israel (20 Mar)
21 Mar
22 Mar
Poland: Core inflation (2:00pm) Jan & Feb 1.9%oya & 2.0%oya South Africa: Current account (10:00am) 4Q Quarterly Bulletin (10:00am) 4Q
23 Mar
Hungary: Retail sales (9:00am) Jan -1%oya Turkey: Monetary policy announcement (2:00pm) No change South Africa: CPI (9:00am) Feb
24 Mar
Czech Rep: Monetary policy announcement (1:00pm) No change South Africa: Monetary policy announcement (3:00pm) No change
25 Mar
Turkey: Capacity utilization (4:30pm) Mar
Holiday: South Africa During the week:
28 Mar
Hungary: Monetary policy announcement (2:00pm) No change Israel: Monetary policy announcement (5:30pm) No change
29 Mar
Romania: Monetary policy announcement (5:30pm) No change South Africa: Trade balance (2:00pm) Feb
30 Mar
Hungary: PPI (9:00am) Feb Poland: Retail sales (10:00am) Feb South Africa: Credit & money (8:00am) Feb Budget (2:00pm) Feb
31 Mar
Hungary: Current account (8:30am) 4Q Poland: Current account (2:00pm) 4Q Turkey: GDP (10:00am) 4Q Foreign trade (10:00am) Feb South Africa: PPI (11:30am) Feb
1 Apr
Czech Rep: PMI (9:30am) Mar Hungary: PMI (9:00am) Mar Poland: PMI (9:00am) Mar Russia: Manufacturing PMI (8:00am) Mar Turkey: PMI (10:00am) Mar South Africa: Kagiso PMI (10:00am) Mar Vehicle sales (10:00am) Mar
During the week:
4 Apr
Czech Rep: Retail sales (9:00am) Feb Romania: Retail sales (10:00am) Feb Turkey: CPI (10:00am) Mar PPI (10:00am) Mar During the week:
5 Apr
Poland: Monetary policy announcement +25bp Russia: Services PMI (8:00am) Mar
6 Apr
Czech Rep: Industrial output (10:00am) Feb Trade balance (10:00am) Feb Hungary: Central bank minutes (2:00pm) Industrial output (9:00am) Feb
7 Apr
South Africa: Gross reserves (8:00am) Mar
8 Apr
Hungary: Trade balance (10:00am) Feb Romania: Industrial output (10:00am) Feb Turkey: Industrial production (10:00am) Feb
78
JPMorgan Chase Bank, Singapore Matt Hildebrandt (65) 6882-2253 Prachi Priya (65) 6882-2311
Non-Japan Asia economic calendar

Monday 14 Mar
India: WPI Feb
Tuesday 15 Mar
Australia: New motor vehicle sales Feb -1.0%m/m, sa Korea: Export price index Feb 5.8%oya Import price index Feb 19.2%oya New Zealand: REINZ houseprice index (9:00 am) Feb -0.6%m/m, sa Philippines: OFW remmittances Jan 7.8%oya Singapore: Retail sales (1:00pm) Jan -6.0%oya
Wednesday 16 Mar
Australia: Dwelling starts (11:30 am) 4Q10 -1.3%q/q, sa Korea: Unemployment rate (8:00 am) Feb 3.5%, sa New Zealand: Westpac NZ consumer confidence (8:00 am) 1Q11 99.1 Index, sa
Thursday 17 Mar
Singapore: NODX (1:00 pm) Feb US$10.8bn Hong Kong: Unemployment rate (1:00 pm) Feb 3.8%, sa India: RBI monetary policy meeting 25 bp hike
Friday 18 Mar
Philippines: BoP Feb
Holiday: Australia During the week:
China: FDI Feb
Philippines: Budget balance Jan
21 Mar
New Zealand: Credit card spending Feb Taiwan: Export orders (4:00 pm) Feb
22 Mar
Taiwan: Unemployment rate (4:00 pm) Feb Hong Kong: CPI (4:15 pm) Feb
23 Mar
New Zealand: Current account balance 4Q Malaysia: CPI (5:00 pm) Feb Singapore: CPI (1:00 pm) Feb Taiwan: IP (4:00 pm) Feb
24 Mar
Hong Kong: Trade balance (4:15 pm) Feb New Zealand: GDP 4Q Philippines: BSP monetary policy meeting
25 Mar
Philippines: Imports (9:00 am) Jan Singapore: IP (1:00 pm) Feb
During the week:
Vietnam: CPI Mar
28 Mar
Taiwan: Leading index (4:00 pm) Feb
29 Mar
New Zealand: Trade balance Feb Korea: Current account (8:00 am) Feb
30 Mar
Korea: GDP 4Q New Zealand: Building consents Feb
31 Mar
Australia: Building approvals Feb Private sector credit Feb Hong Kong: Retail sales Korea: IP (8:00 am) Feb Leading index (8:00 am) Feb Service sector activity (8:00 am) Feb India: CAB 4Q Taiwan: CBC monetary policy meeting Thailand: Trade balance (2:30 pm) Feb PCI (2:30 pm) Feb PII (2:30 pm) Feb IP (2:30 pm) Feb
1 Apr
China: PMI Mar Korea: CPI (8:00 am) Mar Trade balance (9:00 am) Mar India: Trade balance Feb Indonesia: Inflation (12:00 pm) Mar Trade balance (12:00 pm) Feb Thailand: CPI (12:30 pm) Mar
During the week:
Vietnam: Trade balance Mar GDP 1Q
4 Apr
Malaysia: Trade balance (6:00 pm) Feb
5 Apr
Australia: Trade balance Feb RBA board meeting Philippines: CPI (9:00 am) Mar Holiday: China, Hong Kong, Taiwan
6 Apr
Australia: Home loans Feb Taiwan: CPI (4:00 pm ) Mar Holiday: Thailand
7 Apr
Australia: Unemployment rate Mar Malaysia: IP (12:00 pm) Feb
8 Apr
Korea: Money supply Feb
Holiday: Taiwan During the week:
79
JPMorgan Chase Bank NA, New York Michael Mulhall (1-212) 834-9123 michael.r.mulhall@jpmorgan.com
Global Data Diary

Week / Weekend 12 - 18 March Monday 14 March
Euro area IP (Jan) India WPI (Feb) Japan Consumer sent (Feb) BoJ MPM: no chg Mexico IP (Jan)
Tuesday 15 March
Brazil Retail sales (Jan) Euro area Employment (4Q) United States NY Fed surv (Mar) NAHB surv (Mar) FOMC mtg: no chg
Wednesday 16 March
Euro area HICP final (Feb)
Thursday 17 March
Chile BCCh mtg: +25bp
Friday 18 March
Canada CPI (Feb) Colombia BanRep mtg: +25bp Euro area Trade report (Jan) Japan MPM minutes (Feb)
Norway India Norges Bank mtg: no chg RBI mtg: +25bp United Kingdom Japan Labor market report (Feb) Reuters Tankan (Mar) United States Housing starts (Feb) Singapore NODX (Feb) United States CPI (Feb) IP (Feb) Philly Fed surv (Mar)
19 - 25 March
21 March
Taiwan Export orders (Feb) United States Exstng home sales (Feb)
22 March
United Kingdom CPI (Feb)
23 March
24 March
25 March
Germany GfK cons conf (Mar) IFO bus survey (Mar) Japan CPI (Feb) Singapore IP (Feb) United States GDP final (4Q) UMich cons sent fnl (Mar)
Euro area Czech Republic EC cons conf prelim (Mar) CNB mtg: no chg Indstrl new orders (Jan) Euro area: PMI flash (Mar) Taiwan France IP (Feb) INSEE bus conf (Mar) Turkey Hong Kong CBRT mtg: no chg Trade report (Feb) United Kingdom Japan: Trade report (Feb) MPC minutes (Mar) Philippines United States BSP mtg: +25bp New home sales (Feb) South Africa SARB mtg: no chg UK: Retail sales (Feb) United States Durable goods (Feb)
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Economic Research

March 11, 2011

Global Data Watch

Equities and consumer expectations, US

Economic Research Global Data Watch March 11, 2011

China all-industry PMI and real GDP

Earthquake rattles strengthening Japan

Raising the bar for March data in China

EMU policy needs to deliver Protests reach Saudi Arabia

Economic Research Global Data Watch March 11, 2011

Medium-term inflation expectations and gasoline prices, Mexico

UK output data create room for doubt

COPOM and Banxico role reversal

Economic Research Global Data Watch March 11, 2011

Global economic outlook summary

Economic Research Global Data Watch March 11, 2011

G-3 economic outlook detail

Economic Research Global Data Watch March 11, 2011

Central Bank Watch

Latin America GDP-weighted average

United Kingdom Bank rate

JPMorgan Chase Bank, London Jan Loeys (1-212) 834-5874 jan.loeys@jpmorgan.com

Economic Research Global Data Watch March 11, 2011

The J.P. Morgan View: Markets

JPMorgan Chase Bank, London Nikolaos Panigirtzoglou (44-20) 7777-0386 nikolaos.panigirtzoglou@jpmorgan.com

2011 global GDP growth forecasts: J.P. Morgan versus consensus %

JPMorgan Chase Bank, London Jan Loeys (1-212) 834-5874 jan.loeys@jpmorgan.com

Economic Research Global Data Watch March 11, 2011

Ten-year Government bond yields

Commodities - quarterly average

Source: J.P. Morgan, Bloomberg, Datastream

Economic Research Global Data Watch March 11, 2011

Selected recent research1 from J.P. Morgan Economics

Central Europe, Middle East, and Africa

United States and Canada

Non-Japan Asia and Pacific

Special Reports and Global Issues

Economic Research Global Data Watch March 11, 2011

Economic Research Note

US data bring hints of stronger export growth ahead

New export orders, ISM manufacturing survey

US nominal exports to developed and emerging markets

Export growth has been strong

Merchandise export volumes and ISM export orders

Value of the dollar on foreign exchange markets

Export orders are way up

94 86 78 70 95 97 99 01 03 05 07 09 11 Latest daily value reading

Orders are up for a reason

JPMorgan Chase Bank, London David Mackie (44-20) 7325-5040 david.mackie@jpmorgan.com

Economic Research Global Data Watch March 11, 2011

Economic Research Note

IMF debt sustainability: Greece

The role of the time horizon in Euro area debt sustainability

2011 -3.0 4.6 1.5 -0.8 152

2012 1.1 5.0 0.4 1.1 158

2013 2.1 5.4 0.8 3.5 158

2014 2.1 5.7 1.2 6.0 154

2015 2.6 5.7 1.3 6.0 150

2020 2.7 5.7 1.8 6.0 131

IMF debt sustainability: Ireland

2011 0.9 3.9 0.4 -6.7 112.8

2012 1.9 4.0 0.8 -4.1 120.0

2013 2.4 5.3 1.4 -1.4 124.5