PP 7767/09/2010(025354)

Economic Highlights
Global
•MARKET DATELINE

26 May 2010

1 European Changed The Emergency Rescue Fund Slightly

And Euro May Become A Currency For “Carry Trade”

2 US Consumer Confidence Improved In May And House

Prices In Major Cities Picked Up Yoy In March

3 Euroland’s Industrial Orders Picked Up M-o-M In March

4 Thailand’s Real GDP Strengthened To 12.0% Yoy In The

1Q

5 Singapore’s Inflation Rate Accelerated In April

6 Japan’s All Industry Index Fell M-o-m In March

Tracking The World Economy...

Today’s Highlight

European Changed The Emergency Rescue Fund Slightly And Euro May Become A Currency For “Carry
Trade”

The European Commission said that it would change the plan of the emergency rescue fund slightly to lend it directly
to Euroland countries that are in need of aid rather than buy their bonds as originally planned. The Special Purpose
Vehicle would sell debt backed by the nations’ guarantees and use the money it raises to make loans to nations that
request help. An initial option for the fund to purchase the bonds of countries asking for support was scrapped after
talks with governments in the Euroland. The emergency fund of €440bn, being created for three years, is the main part
of a €750bn aid package that Euroland’s finance ministers have agreed on to halt a sovereign debt crisis on 9-10 May.
Another €60bn will come from the European Commission and €250bn from the International Monetary Fund.

Separately, Italy has approved a €24bn (US$30bn) cut in budget or equivalent to 1.6% of GDP, as part of a European
effort to convince investors that the Euroland nations can trim deficits and defend the single currency. Italy aims to bring
its budget deficit to within the European Union’s limit of 3% of GDP in 2012 and it incurred a deficit of 5.3% of GDP in
2009. The measures include a three-year wage freeze for civil servants and a crackdown on tax evasion. Italy follows
Spain and Portugal’s lead in adopting additional budget cuts, as a fallout from Greece’s near default has led to a surge
in borrowing costs in southern Europe and fueled investor concern about the survival of the euro, which has fallen 14%
thus far this year.

Meanwhile, after the yen and US dollar, there are signs suggesting that the euro may become a third favourite funding
currency of the so-called “carry trade” by hedge funds and speculators. This is because Euroland’s economic growth will
likely remain sluggish and lag behind the US, as the sovereign debt crisis will force countries to undertake austerity
measures. This, in turn, suggests that the European Central Bank may keep interest rates lower for longer than expected
to nurture the region’s economic recovery. Furthermore, inflation remains low in Euroland. Also, the ECB’s decision to
start buying government bonds to prop up their funding efforts has increased doubts about the future of the Euroland
itself. As a result, many analysts are bearish about the euro, making it a perfect currency to borrow and to be converted
into other currencies with better prospects of appreciation such as the US dollar and yen.
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 26 May 2010

The US Economy

Consumer Confidence Improved In May

◆ The Conference Board’s consumer confidence index rose to 63.3 in May, from 57.7 in April and a low of 46.4
in February. This was the highest reading in two years, as a recovering US economy raised expectations the hiring
will pick up in the coming months. As it stands, non-farm payrolls rose in five of the past six months, on the back
of a sustained expansion in the US economic growth after it turned around to record a positive growth in the 3Q
of last year. Over the next six months, consumers expect business conditions and job market to improve, which
will translate into higher income. As a result, consumers’ future expectation index rose to 85.3 in May, from
77.4 in April, suggesting that consumers are feeling more upbeat looking ahead. As a result, more consumers
indicated that they plan to buy automobiles within the next six months. However, they are not very keen yet to buy
houses and major appliances in the next six months. As a whole, the improvement in consumer confidence will help
to support the US consumer spending, which is likely to improve gradually.

House Prices In Major Cities Picked Up Yoy In March

◆ House prices in 20 US metropolitan areas strengthened to 2.4% yoy in March, after returning to a positive
growth of +0.7% for the first time in more than three years in February, according to S&P/Case-Shiller. This
suggests that the housing market is on the path to recovery, albeit gradually. The improvement in house
prices was aided by the government tax credit for first-time home buyers, which has been extended to June after
expiring in November last year and broadened to include more affluent buyers. An improvement in job market also
helped. Seasonally adjusted house prices fell by 0.1% mom in March, the same rate of decline as in February and
compared with +0.3% in January.

The Euroland Economy

Industrial Orders Picked Up M-o-M In March

◆ Euroland’s industrial orders strengthened to 5.2% mom in March, from +1.9% in February. This was the
fourth increase in five months and the strongest in almost three years, indicating that industrial activities are likely
to be sustained in the months ahead. The pick-up was underpinned by stronger growth in orders for capital and
intermediate goods, suggesting that business spending and exports will likely improve in the months head. This was
aided by a rebound in orders for non-durable consumer goods orders, while orders for durable consumer goods
remained stable, pointing to a gradual improvement in consumer spending. Yoy, industrial orders grew at a stronger
pace of 19.8% in March, compared with +12.5% in February and +7.5% in January. This was the fourth straight
month of increase, suggesting that industrial activities in Euroland are improving. Stronger growth was
underpinned by a surge in industrial orders in the three largest economies in the Euroland, i.e. Germany, France and
Italy, indicating that a weakening euro might have helped these countries in securing more exports.

Asian Economies

Thailand’s Real GDP Strengthened To 12.0% Yoy In The 1Q

◆ Thailand’s real GDP growth strengthened to 12.0% yoy in the 1Q, after returning to a growth of +5.9% for
the first time in a year in the 4Q of last year. This was the fastest pace of expansion since 4Q 1995, underpinned
by a surge in exports, which grew by 16.2% yoy in the 1Q, compared with +4.1% in the 4Q and -14.8% in the 3Q.
A pick-up in exports helped created jobs and lifted consumer spending and private investment in the country. As
a result, consumer spending grew at a faster pace of 4.0% yoy in the 1Q, compared with +1.4% in the 4Q and -
1.3% in the 3Q. Similarly, investment recovered to a positive growth of 12.6% yoy in the 1Q, the first in six
consecutive quarters and from -3.4% in the 4Q, helped partly by the government’s stimulus spending. Thailand’s
economic growth in the 2Q, however, could be affected by the nation’s worst political violence in 18
years. Rioting erupted across Bangkok on 19 May after Thai security forces backed by armoured vehicles cleared
an anti-government protest camp and forced its leaders to surrender. More than 30 buildings were set alight,

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 26 May 2010

including the Stock Exchange of Thailand’s building, the nation’s biggest shopping complex and at least eight branches
of Bangkok Bank Pcl, the country’s biggest lender.

Singapore’s Inflation Rate Accelerated In April

◆ Singapore’s consumer prices grew at a faster pace of 3.2% yoy in April, compared with +1.6% in March.
This was the fastest in 14 months and the fourth consecutive month consumer price index recorded positive growth,
due partly to an upward price pressure and partly to a low base effect where inflation began to contract in April last
year. The pick up in inflation was on account of higher food prices, which rebounded to 1.2% yoy in April, from
+0.9% in March. This was made worse by a faster increase in the costs of transport, which accelerated to 13.4%
yoy in April (+10.1% in March) and a rebound in the costs of housing to +2.9% yoy during the month (-0.7% in
March). A faster increase in the costs of healthcare and a pick-up in prices of clothing & footwear worsened the
situation. These were, however, mitigated by a sharper decline in the costs of communications. Mom, inflation rate
picked up to 0.9% in April, after easing to 0.1% in March. A pick-up in inflation coupled with a rise in property prices
on the back of stronger economic growth has prompted the Monetary Authority of Singapore to allow a one-
off appreciation of Singapore dollar and shifted its monetary policy stance from zero appreciation to a
gradual and modest appreciation of the country’s currency in April.

Japan’s All Industry Index Fell M-o-m In March

◆ Japan’s all industry index fell by a smaller magnitude of 0.8% mom in March, compared with -2.3% in
February and after rising by 3.4% in January. This was on account of a pick-up in manufacturing and government
activities, which bounced back to increase by 1.2% and 0.6% mom respectively in march, from the corresponding
rates of -0.6% and -0.9% in February, underpinned by an improvement in exports. These were, however, offset
partially by a sharper decline in services activities (-3.0% mom in March versus -0.3% in February), while construction
activities slipped into a contraction during the month. Yoy, all industry index strengthened to 4.7% in March, from
+4.1% in February and +1.9% in January. This was the third consecutive month of growth, suggesting that the
improvement in Japan’s economic activities has gained strength.

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