PP 7767/09/2010(025354)

Economic Highlights
Global

MARKET DATELINE

18 June 2010

1 US Inflation Remained Benign And The Fed Is In No

Hurry To Raise Interest Rates

2 US Leading Index Points To A More Moderate Economic

Growth In 2H 2010 And Manufacturing Activities In
Philadelphia Region Slowed Down In June

3 Eurolands Construction Output Fell M-o-m In April

4 Singapores Non-oil Domestic Exports Slowed Down In

May

Tracking The World Economy...

Todays Highlight

US Inflation Remained Benign And The Fed Is In No Hurry To Raise Interest Rates

US headline inflation fell by 0.2% mom in May, compared with -0.1% in April and +0.1% in March. This was the second
consecutive month of decline, pointing to easing price pressures, on the back of a sharper drop in gasoline prices, which
fell by 5.2% mom in May, compared with -2.4% in April and -0.8% in March. A moderation in the costs of healthcare,
education and recreation also helped. These were, however, offset partially by a pick-up in the prices of apparel, while
prices of food & beverages and the costs of housing remained stable during the month. Excluding food and energy prices,
the core inflation rate, on the other hand, inched up by 0.1% mom in May, after remaining unchanged in the previous
two months. Yoy, the headline inflation moderated to 2.0% in May, from +2.2% in April and a peak of +2.7% in
December. The core inflation rate, on the other hand, held stable at +0.9% yoy in May, the same rate of increase as
in April and compared with a peak of +1.8% in December. The readings suggest that price pressures remain benign
in the US, in tandem with the US Federal Reserves assessment that substantial resource slack would continue to restrain
cost pressures and inflation is likely to be subdued for some time.

As a result, the Fed will likely keep its key policy rate unchanged at between 0-0.25% in the near term, after it has
stopped most of its emergency lending programmes and the quantitative easing in March. Nevertheless, we believe the
Fed will likely use other instruments to soak up liquidity from the system in order to prevent the excess liquidity from
fuelling inflation as economic growth picks up momentum. As it stands, the Fed announced on 15 June that it had sold
US$1.15bn in deposits in the first test of a credit-tightening tool it may use to drain a near-record amount of cash from
the banking system. The Fed said that it offered $1bn for 14 days through its Term Deposit Facility and received bids
worth US$6.14bn. The successful banks will deposit money with the Fed and receive interest of 0.27%, marginally higher
that the 0.25% banks currently received in interest on their excess reserves.

The US Economy

US Leading Index Points To A More Moderate Economic Growth In 2H 2010

The US Conference Boards index of leading indicators, which provides early signal on the direction of the
economy over the next three to six months, bounced back to increase by 0.4% mom in May, after remaining

Peck Boon Soon

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bspeck@rhb.com.my

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 18 June 2010

unchanged in April. This suggests that the US economy will likely continue expanding and be resilient.
The pick-up was on account of a pick-up in average workweek, consumer goods orders, consumer expectations
and money supply as well as smaller declines in the pace of deliveries and building permits. These were, however,
offset partially by declines in orders of non-defence capital goods and stock prices. Meanwhile, the leading indexs
six-month annual rate of change softened to 7.9% in May, from +9.4% in April. This was the second consecutive
month of easing and off the peak of 11.6% in December, suggesting that the US economy will likely grow at
a more moderate pace in the 2H of the year. This is in line with consensus estimate, which expects US real
GDP to expand at a more moderate annualised rate of around 2.9% in 2H 2010, compared with +3.15% in the
1H of the year. For the full-year, real GDP is projected to grow by 3.2% in 2010 before easing to +2.92% in
2011 and compared with -2.4% in 2009.

Manufacturing Activities In Philadelphia Region Slowed Down In June

The Philadelphia Business Outlook Surveys diffusion index of current general activity fell to 8.0 in
June, after reaching a recent high of 21.4 in May. The Philadelphia Fed region, which comprises eastern
Pennsylvania, southern New Jersey and Delaware, is more exposed to the auto sector and less influenced by
financial services and trade than the New York region. This was the first easing in six months, suggesting that
factory activities expanded at a slower pace during the month, on account of a slowdown in shipments and a
decline in average workweek and employment. These were, however, mitigated by a pick-up in new orders,
delivery time and inventory as well as a smaller decline in unfilled orders. Input costs moderated and selling
prices fell during the month. Over the next six months, the future general activity index, however, bounced
back to 40.2 in June, from 37.0 in May but off the peak of 52.0 in March. This suggests that manufacturing
activities are likely to continue expanding in the months ahead. The pick-up was reflected in higher unfilled orders
and average workweek. These were, however, offset partially by a slowdown in new orders and shipments as
well as a sharper decline in delivery time. As a result, firms indicated that they will likely slow down labour
recruitment and capital spending in the months ahead. Meanwhile, firms expect input costs to ease but selling
prices to pick up in the near term.

The Euroland Economy

Construction Output Fell M-o-m In April

Eurolands construction output fell by 0.3% mom in April, after a rebound to +6.5% in March. This was
the third month of decline in four months, suggesting that construction activities remained weak in the region. The
decline was due to a drop in building construction activities, which fell by 0.9% mom in April, after rising by 9.2%
in March, indicating that private construction activities remained lacklustre during the month. This was, however,
mitigated by a pick-up in civil engineering construction activities, which strengthened to 3.4% mom in April, from
+0.9% in March, pointing to an improvement in infrastructure spending. Yoy, construction output fell by 6.1% in
April, marginally higher than -6.0% in March and compared with -14.3% in February. This suggests that construction
activities are improving, albeit gradually, dragged by the sovereign debt crisis in the region.

Asian Economies

Singapores Non-oil Domestic Exports Slowed Down In May

Singapores non-oil domestic exports slowed down to 24.4% yoy in May, from +30.0% in April and
compared with +25.4% in March. This was the slowest pace of growth in three months, suggesting that global
demand for Singapores exports has eased somewhat and as a low base effect gradually wears off. Slower
growth was reflected in a slowdown in the exports of non-electronic products, which eased to 16.2% yoy in May,
from +35.3% in April. This was attributed to a sharper drop in the exports of pharmaceutical products, which
was mitigated by a pick-up in the exports of petrochemical products. A pick-up in the exports of electronic
products, which rose by 38.9% yoy in May, compared with +21.2% in April, however, mitigated the slowdown. This
was due to stronger growth in the exports of ICs, IC parts, PC parts and disc drives as well as a rebound in the
exports of diodes & transistors. In terms of country, the slowdown was due to weaker demand from the US and
Europe. These were, however, mitigated by a pick-up in exports to China, Hong Kong, Japan and Taiwan.

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