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The World Economy... - 18/6/2010

The World Economy... - 18/6/2010

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Published by Rhb Invest
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 Reserve’s assessment that substantial resource slack would continue to restrain cost pressures and inflation is likely to be subdued for some time.
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 Reserve’s assessment that substantial resource slack would continue to restrain cost pressures and inflation is likely to be subdued for some time.

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Published by: Rhb Invest on Jun 18, 2010
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06/17/2010

 
Economic Highlights
18 June 2010
Page 1 of 3
1US Inflation Remained Benign And The Fed Is In NoHurry To Raise Interest Rates2US Leading Index Points To A More Moderate EconomicGrowth In 2H 2010 And Manufacturing Activities InPhiladelphia Region Slowed Down In June3Euroland’s Construction Output Fell M-o-m In April4Singapore’s Non-oil Domestic Exports Slowed Down InMay
Peck Boon Soon(603) 9280 2163bspeck@rhb.com.my
Please read important disclosures at the end of this report.
Tracking The World Economy...
Today’s Highlight
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PP 7767/09/2010(025354)
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 secondconsecutive month of decline, pointing to easing price pressures, on the back of a sharper drop in gasoline prices, whichfell 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, whileprices 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 previoustwo months. Yoy, the headline inflation moderated to 2.0% in May, from +2.2% in April and a peak of +2.7% inDecember. The core inflation rate, on the other hand, held stable at +0.9% yoy in May, the same rate of increase asin April and compared with a peak of +1.8% in December. The readings suggest that price pressures remain benignin the US, in tandem with the US Federal Reserve’s assessment that substantial resource slack would continue to restraincost 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 hasstopped most of its emergency lending programmes and the quantitative easing in March. Nevertheless, we believe theFed will likely use other instruments to soak up liquidity from the system in order to prevent the excess liquidity fromfuelling inflation as economic growth picks up momentum. As it stands, the Fed announced on 15 June that it had soldUS$1.15bn in deposits in the first test of a credit-tightening tool it may use to drain a near-record amount of cash fromthe banking system. The Fed said that it offered $1bn for 14 days through its Term Deposit Facility and received bidsworth US$6.14bn. The successful banks will deposit money with the Fed and receive interest of 0.27%, marginally higherthat 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 201
The
US Conference Board’s index of leading indicators
, which provides early signal on the direction of theeconomy over the next three to six months, bounced back to increase by 0.4% mom in May, after remaining
A comprehensive range of market research reports by award-winning economists and analysts areexclusively available for download from
www.rhbinvest.com 
 
18 June 2010
A comprehensive range of market research reports by award-winning economists and analysts areexclusively available for download from
www.rhbinvest.com 
Page 2 of 3
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 expectationsand 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 index’ssix-month annual rate of change softened to 7.9% in May, from +9.4% in April. This was the second consecutivemonth of easing and off the peak of 11.6% in December, suggesting that the
US economy will likely grow ata more moderate pace in the 2H of the year
. This is in line with consensus estimate, which expects US realGDP to expand at a more moderate annualised rate of around 2.9% in 2H 2010, compared with +3.15% in the1H of the year. For the full-year, real GDP is projected to grow by 3.2% in 2010 before easing to +2.92% in2011 and compared with -2.4% in 2009.
Manufacturing Activities In Philadelphia Region Slowed Down In June 
The
Philadelphia Business Outlook Survey’s diffusion index of current general activity fell to 8.0 inJune
, after reaching a recent high of 21.4 in May. The Philadelphia Fed region, which comprises easternPennsylvania, southern New Jersey and Delaware, is more exposed to the auto sector and less influenced byfinancial services and trade than the New York region. This was the first easing in six months, suggesting thatfactory activities expanded at a slower pace during the month, on account of a slowdown in shipments and adecline 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 sellingprices fell during the month. Over the next six months, the
future general activity index, however, bouncedback to 40.2 in June
, from 37.0 in May but off the peak of 52.0 in March. This suggests that manufacturingactivities are likely to continue expanding in the months ahead. The pick-up was reflected in higher unfilled ordersand average workweek. These were, however, offset partially by a slowdown in new orders and shipments aswell as a sharper decline in delivery time. As a result, firms indicated that they will likely slow down labourrecruitment and capital spending in the months ahead. Meanwhile, firms expect input costs to ease but sellingprices to pick up in the near term.
The Euroland Economy
Construction Output Fell M-o-m In April 
Euroland’s construction output fell by 0.3% mom in April
, after a rebound to +6.5% in March. This wasthe third month of decline in four months, suggesting that construction activities remained weak in the region. Thedecline 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% inApril, marginally higher than -6.0% in March and compared with -14.3% in February. This suggests that constructionactivities are improving, albeit gradually, dragged by the sovereign debt crisis in the region.
Asian Economies
Singapore’s Non-oil Domestic Exports Slowed Down In May 
Singapore’s non-oil domestic exports slowed down to 24.4% yoy in May
, from +30.0% in April andcompared with +25.4% in March. This was the slowest pace of growth in three months, suggesting that globaldemand for
Singapore’s exports has eased somewhat
and as a low base effect gradually wears off. Slowergrowth 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, whichwas mitigated by a pick-up in the exports of petrochemical products. A pick-up in the exports of electronicproducts, which rose by 38.9% yoy in May, compared with +21.2% in April, however, mitigated the slowdown. Thiswas due to stronger growth in the exports of ICs, IC parts, PC parts and disc drives as well as a rebound in theexports of diodes & transistors. In terms of country, the slowdown was due to weaker demand from the US andEurope. These were, however, mitigated by a pick-up in exports to China, Hong Kong, Japan and Taiwan.

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