Daily Breakfast Spread, 8 June 2011

Daily Breakfast Spread

DBS Group Research 8 June 2011

Economics
Greater China, Korea
• TW: CPI inflation for May (released yesterday) rose to 1.7% YoY, significantly up
from 1.3% in April. The sequential growth in consumer prices remained faster than
the YoY growth, at 2.3% 3M/3M saar. In spite of the slowdown in oil and transport &
communication prices, other key CPI items such as clothing, housing and medicine &
medical cares continued to see price gains. Core inflation therefore accelerated to
1.2% YoY in May from 1.0% in April, the fastest pace seen ever since Feb09.
The rise in core inflation corroborates our view that the demand pull price pressures
will continue to grow on the back of a widening output gap and capacity
tightening. Meanwhile, although the imported inflation is stabilizing for now
thanks to lower commodity prices, producers’ incentives to pass costs onto
consumers would remain in place, as the cost passthrough was incomplete in the
past several quarters and producers’ profit margin has been squeezed. Moreover,
the upcoming pay hike for civil servants in July could trigger a broad based wage
hike in the private sector, which points to the risks of second round inflation effects.
As such, we maintain our forecast that inflation will rise further to 2% in 2H and
average 1.8% for the full year of 2011.
The level of inflation (1.7%) is now significantly higher than the 1-year deposit rate
of 1.28%. A modest 12.5bps rate hike at the upcoming MPC meeting in end-June
can’t bring real rates back into the positive territory. Bolder rate moves are needed
to address the issue of negative real interest rates. That said, the CBC may be
reluctant to accelerate the pace of tightening this month, taking into consideration
the increase in global uncertainty (the weaker than expected US recovery, China’s
growth slowdown, European debt crisis and Japan’s earthquake). Growth indicators
in Taiwan including export orders and industrial production have softened in 2Q.
The CBC is likely to balance risks and hike rates by a modest amount of 12.5bps on
June 30th.

G3
US Fed expectations
• US: It’s too early to say. I don’t think it will be needed. My medium-term view hasn’t
Implied fed funds rate changed very much. All responses from Fed officials yesterday regarding the weak
data seen over the past 6-8 weeks and whether another round of quantitative
Dec-11 Mar-12 Jun-12
Market easing – which would be called QE3 – might be needed to give the economy yet
Current 0.17 0.22 0.30 another push down the road. On the first comment: yes, it is too early to say. On the
1wk ago 0.17 0.23 0.33 second: great, but why? On the third: what’s the medium-term? That place we
DBS 0.25 0.50 0.75 never actually see?
Source: Bloomberg fed fund All comments that don’t say very much. And yet they’re just about all that can be
futures reasonably expected at this point in time. The data go up and down even when
Notes: Given a FF target rate of policy is stable. You can’t go chasing every labor report with fresh views and fresh
0.25%, an implied FF rate of policies, even day traders know that. Bernanke summed it up about the only way
0.30 is interpreted roughly as one can: the recovery is “frustratingly slow” and “accomodative monetary policies
the market pricing in a 20%
are still needed”. Hard to argue with that.
chance of a Fed hike to 0.50%
from 0.25% (30 is 1/5th of the But does that mean QE3 is on the cards? No. Does it mean it’s off the table? No. It
distance to 50 from 25). DBS means that all of sudden the data flow has been bad and there’s no clear reason for
expectations are presented in
it. It’s too early to say much and do anything. So the Fed, and everyone else, sits
discrete blocks of 25bps, i.e., the
Fed moves or it does not. See and waits. It’s frustrating. But there it is. Wish we had some data this week. We don’t
also “Policy rate forecasts” – except for payrolls tomorrow. And unless they move a lot in one direction or
below. another – very unlikely for weekly data – they won’t change what we know about
the economy or the mood of investors towards it. Stick of gum?

1
Daily Breakfast Spread, 8 June 2011

Currencies
• FX: Asia woke up this morning to read that Fed Chairman Ben Bernanke hurt the
US dollar when he did not signal any plans to further loosen monetary policy
(QE3?) to aid the “frustratingly slow” US economic recovery. Then again, one
cannot help but wonder if the dollar would have reacted positively if he did. At
least, the US stock market wouldn’t have reacted as negatively as it did, in spite of
Bernanke’s pledge to keep monetary policy accommodative. Against this
background, the market appears to be looking past the Greece debt crisis and
holding on to their euros. What the dollar bears need now is for ECB President
Jean-Claude Trichet to signal a July hike at tomorrow’s ECB meeting.
To some extent, the weak dollar tone was already set during Asian trading hours
yesterday. The main story was an article that saw a Chinese State Administration of
Foreign Exchange (SAFE) official warning against excessive holdings of US assets
because of the downside risks posed by loose US monetary and fiscal policies to the
dollar. These comments were not taken lightly because data showed that China’s
net purchases of US treasury bonds and notes were negative in 1Q 2011 despite a
large accumulation of foreign reserves. The first quarter was also when China
started to openly support EU bonds over US government debt. For most of this
year, markets have struggled between the US budget impasse obstructing the
lifting of the US federal debt limit and the EU sovereign debt crisis. What is slowly
becoming clear is that creditor nations will be more willing to support the country/
region that sets a responsible path towards a credible fiscal consolidation path.

China's net purchases of US T bond & notes China's increase in foreign reserves
150 $ billion 500 $ billion

4Q
400
100 3Q
4Q
2Q
3Q
1Q 300
2Q
50 1Q
200

0
100

-50 0
00 01 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11

Looking back
• US mkts: US stocks fell overnight after Fed Chairman Bernanke said that recent data
on the labor market show a loss of momentum and accommodative monetary
policies are still needed. The Dow Jones Industrial Average fell 0.16% to 12070.81
and the Nasdaq closed 0.04% higher at 2701.56. Treasury yields fell 2bps to 0.41%
in the 2Y sector and 1bp to 3% in the 10Y sector.

2
Daily Breakfast Spread, 8 June 2011

Economic calendar

Event Consensus Actual Previous

Jun 7 (Tue)
PH: CPI (May) 5.0% y/y 4.5% y/y 4.3% y/y
TW: CPI (May) 1.64% y/y 1.66% y/y 1.32% y/y
EZ: retail sales (Apr) 0.3% m/m sa 0.9% m/m sa -0.9% m/m sa

Jun 8 (Wed)
KR: GDP (1Q, F) 1.3% q/q sa 1.4% q/q sa
-- 4.2% y/y 4.2% y/y
JP: adj currenct acc (Apr) JPY 266bn JPY 546.3bn JPY 752.7bn
TW: trade balance (May) USD 2.53bn USD 2.96bn
-- exports 8.1% y/y 24.6% y/y
-- imports 11.6% y/y 25.7% y/y
EZ: GDP (1Q, P) 0.8% q/q sa 0.8% q/q sa
-- 2.5% y/y 2.5% y/y

Jun 9 (Thur) s
JP: GDP (1Q, F) -3.1% q/q saar -3.7% q/q saar
MY: industrial production (Apr) 2.5% y/y 2.4% y/y
US: initial jobless claims (Jun) 419K 422K
US: trade balance (Apr) -USD 48.9bn -USD 48.2bn

Jun 10 (Fri)
PH: exports (Apr) 8.0% y/y 4.0% y/y
CN: trade balance (May) USD 19.8bn USD 11.42bn
-- exports 20.4% y/y 29.9% y/y
-- imports 22.0% y/y 21.8% y/y
IN: industrial production (Apr) 5.5% y/y 7.3% y/y

Central bank policy calendar

Policy
Date Country Rate Current Consensus DBS Actual
This week
09-Jun Ezone 7-day refi rate 1.25% 1.25% 1.25%
09-Jun ID o/n reference rate 6.75% 6.75% 6.75%
10-Jun KR 7 day repo rate 3.00% 3.13% 3.25%

Next week
14-Jun JP o/n call rate 0.10% 0.10%
16-Jun IN o/n repo 7.25%
16-Jun PH rev repo 4.50%
17-Jun EZ ECB monthly report (Jun)

Last week
01-Jun TH 1 day repo 2.75% 3.00% 3.00% 3.00%

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 Daily Breakfast Spread, 8 June 2011

GDP & inflation forecasts

GDP growth, % YoY CPI inflation, % YoY
2008 2009 2010 2011f 2012f 2008 2009 2010 2011f 2012f
US 0.0 -2.6 2.9 2.4 3.0 3.8 -0.3 1.6 2.6 2.2
Japan -1.2 -6.3 4.0 1.0 2.4 1.4 -1.4 -0.4 0.5 0.7
Eurozone 0.3 -4.0 1.7 1.9 1.7 3.3 0.3 1.6 2.6 1.9
Indonesia 6.0 4.6 6.1 6.4 6.1 9.8 4.8 5.1 6.7 6.3
Malaysia 4.6 -1.7 7.2 5.5 5.6 5.4 0.6 1.7 3.1 2.4
Philippines 3.6 1.0 7.3 5.5 5.2 9.3 3.2 3.8 5.6 5.2
Singapore 1.4 -1.3 14.5 7.0 6.5 6.5 0.6 2.8 4.2 3.0
Thailand 2.5 -2.2 7.8 5.0 5.0 5.5 -0.8 3.3 4.0 4.0
Vietnam 6.2 5.3 6.8 6.5 7.0 23.1 7.0 9.2 18.5 8.0
China 9.6 9.2 10.3 9.5 9.0 5.9 -0.7 3.3 4.5 4.0
Hong Kong 2.1 -2.7 6.8 5.0 4.5 4.3 0.5 2.4 5.0 4.5
Taiwan 0.7 -1.9 10.9 5.0 4.3 3.5 -0.9 1.0 1.8 1.6
Korea 2.3 0.2 6.2 4.1 4.1 4.7 2.8 3.0 4.4 3.2
India* 6.8 8.0 8.5 7.5 7.5 8.4 3.6 9.5 8.0 7.0
* India data & forecasts refer to fiscal years beginning April; inflation is WPI
Source: CEIC and DBS Research

Policy & exchange rate forecasts

Policy interest rates, eop Exchange rates, eop
current 2Q11 3Q11 4Q11 1Q12 current 2Q11 3Q11 4Q11 1Q12
US 0.25 0.25 0.25 0.25 0.50 … … … … …
Japan 0.10 0.10 0.10 0.10 0.10 80.2 81 80 79 78
Eurozone 1.25 1.25 1.50 1.75 2.00 1.468 1.42 1.46 1.50 1.52
Indonesia 6.75 6.75 7.00 7.50 8.00 8,513 8,800 8,750 8,700 8,675
Malaysia 3.00 3.00 3.25 3.25 3.25 3.01 2.92 2.87 2.82 2.79
Philippines 4.50 4.50 4.75 5.00 5.00 43.2 42.0 41.0 40.0 39.8
Singapore n.a. n.a. n.a. n.a. n.a. 1.23 1.23 1.21 1.19 1.18
Thailand 3.00 3.00 3.50 4.00 4.00 30.3 29.1 28.8 28.5 28.1
Vietnam^ 14.00 14.00 14.00 14.00 12.00 20,565 21,240 21,480 21,720 21,770
China* 6.31 6.56 6.81 7.06 7.06 6.48 6.46 6.38 6.30 6.25
Hong Kong n.a. n.a. n.a. n.a. n.a. 7.78 7.75 7.75 7.75 7.75
Taiwan 1.75 1.88 2.13 2.38 2.63 28.7 28.0 27.5 27.0 26.8
Korea 3.00 3.25 3.50 3.75 4.00 1082 1020 1000 980 970
India 7.25 7.25 7.75 8.00 8.00 44.7 43.5 43.0 42.5 41.8
^ prime rate; * 1-yr lending rate

Market prices
Policy rate 10Y bond yield FX Equities
Current Current 1wk chg Current 1wk chg Index Current 1wk chg
(%) (%) (bps) (%) (%)
US 0.25 2.99 -7 73.6 -1.4 S&P 500 1,285 -4.5
Japan 0.10 1.17 0 80.2 0.9 Topix 814 -2.9
Eurozone 1.25 3.09 7 1.468 2.5 Eurostoxx 2,538 -3.6
Indonesia 6.75 7.35 -4 8513 0.3 JCI 3,843 0.4
Malaysia 3.00 3.98 -2 3.01 0.2 KLCI 1,552 -0.4
Philippines 4.50 6.67 9 43.2 0.2 PCI 4,236 -0.2
Singapore Ccy policy 2.31 -8 1.227 1.0 FSSTI 3,116 -1.4
Thailand 3.00 3.74 #N/A 30.3 0.0 SET 1,035 -3.6
China 6.31 … … 6.48 0.0 S'hai Comp 2,744 1.4
Hong Kong Ccy policy 2.28 -11 7.78 0.0 HSI 22,869 -1.4
Taiwan 1.75 1.48 3 28.7 -0.1 TWSE 9,057 2.6
Korea 3.00 4.20 -1 1082 -0.3 Kospi 2,100 0.3
India 7.25 8.28 -1 44.7 0.9 Sensex 18,496 0.0
Source: Bloomberg

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 Daily Breakfast Spread, 8 June 2011

Contributors:
Economics
David Carbon Singapore (65) 6878 9548
Ramya Singapore (65) 6878 5282
Ma Tieying Singapore (65) 6878 2408
Irvin Seah Singapore (65) 6878 6727
Chris Leung Hong Kong (852) 3668 5694

Currencies / Fixed Income

Philip Wee Singapore (65) 6878 4033
Jens Lauschke Singapore (65) 6224 2574
Nathan Chow Hong Kong (852) 3668 5693

Administrative / technical support

Violet Lee Singapore (65) 6878 5281

Please direct distribution queries to Violet Lee on 65-6878-5281

Client Contacts
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Indonesia UAE
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DBS Medan (62 061) 3000 8999
USA
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5
 Daily Breakfast Spread, 8 June 2011

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