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PP 7767/09/2010(025354)

Economic Highlights
Global

MARKET DATELINE

11 March 2010

1 US Fed Will Likely Keep Its Federal Funds Rate Unchanged


But Continue To Exit Its Emergency Programmes

2 China’s Exports Surged And Property Prices Picked Up

3 Japan’s Core Machinery Orders Fell M-o-m In January

4 Thailand Kept Its Key Policy Rate Unchanged

Tracking The World Economy...

Today’s Highlight

US Fed Will Likely Keep Its Federal Funds Rate Unchanged But Continue To Exit Its Emergency Programmes

Long before the US Federal Reserve raises its Fed funds rate amid an improving economy, it will need to signal to the
public that a change is in the works. For the past year, the Fed has signalled plans to keep interest rates near zero
for “an extended period”, which implies that rates will stay near zero for at least several more months. For the next
FOMC meeting on 16 March, the Fed is unlikely to change the wording, as many officials believe a recovery is not
entrenched and inflation is still low. Also, the latest Beige Book findings suggest that the economy only improved
modestly in January-February, while housing market has softened recently. Similarly, the unemployment was still high
at 9.7% of total labour force in February, though it was off a peak of 10.0% recorded in November-December. Indeed,
future markets anticipate the Fed will raise its key policy rate to 0.5% only by November or December. The termination
of the Fed’s quantitative easing, which is scheduled to end by end-March, however, looks more certain and the normalisation
of discount rate would likely continue. Although some investors worried mortgage rates could rise without the Fed’s
support, the market’s reaction thus far has been a pleasant surprise.

Meanwhile, investors chasing for better returns poured US$7.8bn into high-yield municipal bond funds in 2009, creating
a mini-bubble and pushing assets to a two-year high. High-yield municipal funds had US$49.3bn in assets as of January,
the most since November 2007, according to Morningstar. Some of these below-investment grade municipal bonds are
typically issued by companies raising debt through a municipality for a project with a public interest such as hospitals,
nursing homes, housing developments and sports stadiums. Investors, however, may start experiencing losses as early
as this year as default risks grow. US state and local government tax revenue fell 6.7% as of September from a year
earlier, marking the fourth consecutive quarter of decline. That may drive defaults higher this year and next, according
to Moody’s.

Asian Economies

China’s Exports Surged And Property Prices Picked Up

◆ China’s exports surged by 45.7% yoy in February, compared with +21.0% in January. This was the third
straight month of increase due partly to a lower base effect and partly to an improvement in global demand for
the country’s exports. The surge in exports adds to pressure on China to allow its currency to appreciate and

Peck Boon Soon


(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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11 March 2010

to roll back stimulus measures adopted during the global recession. China indicated last week that it is seeking
more evidence of a sustained export recovery before it will let the renminbi appreciate. China has prevented any
rise in the currency against the US dollar since July 2008 to aid exporters amid the collapse of trade on the back
of a severe global recession. China’s imports, however, slowed down to 44.7% yoy in February, from +85.5%
in January, due partly to festive season.

◆ Chinese home prices in 70 major cities accelerated to 10.7% yoy in February, from +9.5% in January.
This was the fastest increase in almost two years and the eighth consecutive month of picking up, pointing to an
upward property price pressure. The rapid rise in property prices is fanning concerns over an asset bubble in
China. As a result, China has been fine-tuning its stimulus measures to control a rise in property
prices. These include property sales by individuals would only be exempted from tax after 5 years of ownership
instead of 2 years. Also, the authorities have imposed requirements of 30% down payments for mortgages for
first homes, and 40% down payments plus higher rates of interest for second homes. Lately, the central bank
has ordered banks to hold more cash in reserves and advising lenders to rein in credit expansion. Indeed, the
central bank said on 8 March that measures undertaken by government to cool the property market have had an
effect, causing transactions to fall and some prices to halt gains. Already, sales of residential properties eased
to 37% yoy in January-February, from growth rates of more than 50% late last year.

Japan’s Core Machinery Orders Fell M-o-m In January

◆ Japan’s core machinery orders, excluding volatile orders for ships and orders placed by electric power
companies, fell by 3.7% mom in January, compared with +20.1% in December. Despite the decline in the
headline figure, core machinery orders from manufacturers rose for the second straight month, in tandem with a
rebound in exports. This suggests that businesses are likely to continue spending, albeit cautiously, in the
months ahead. Yoy, the decline in Japan’s core machinery orders narrowed to 1.1% in January, from -1.5% in
December and from -20.5% in November, pointing to a gradual improvement in business spending.

Thailand Kept Its Key Policy Rate Unchanged

◆ The Bank of Thailand kept its benchmark interest rate unchanged at a 5-year low of 1.25% for a
seventh meeting, as the lingering political uncertainties could affect economic activities in the country. The
government plans to invoke the Internal Security Act to control anti-government protests this weekend. Furthermore,
inflation eased to 3.7% yoy in February, after picking up for the last three consecutive months and to a high of
+4.1% in January. The central bank, however, indicated that it will likely raise interest rate to a more normal level
in the coming months, if the recovery is sustained, and the need for accommodative monetary policy eases.

IMPORTANT DISCLOSURES

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