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2011-06-08 DBS Daily Breakfast Spread

2011-06-08 DBS Daily Breakfast Spread

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Daily Breakfast Spread, 8 June 2011
 
Daily Breakfast Spread
DBS Group Research8 June 2011
Economics
Greater China, Korea
TW
: CPI inflation for May (released yesterday) rose to 1.7% YoY, significantly upfrom 1.3% in April. The sequential growth in consumer prices remained faster thanthe 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 to1.2% 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 pressureswill continue to grow on the back of a widening output gap and capacitytightening. Meanwhile, although the imported inflation is stabilizing for nowthanks to lower commodity prices, producers’ incentives to pass costs ontoconsumers would remain in place, as the cost passthrough was incomplete in thepast several quarters and producers’ profit margin has been squeezed. Moreover,the upcoming pay hike for civil servants in July could trigger a broad based wagehike 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 andaverage 1.8% for the full year of 2011.The level of inflation (1.7%) is now significantly higher than the 1-year deposit rateof 1.28%. A modest 12.5bps rate hike at the upcoming MPC meeting in end-Junecan’t bring real rates back into the positive territory. Bolder rate moves are neededto address the issue of negative real interest rates. That said, the CBC may bereluctant to accelerate the pace of tightening this month, taking into considerationthe increase in global uncertainty (the weaker than expected US recovery, China’sgrowth slowdown, European debt crisis and Japan’s earthquake). Growth indicatorsin 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 onJune 30th.
G3
US
: It’s too early to say. I don’t think it will be needed. My medium-term view hasn’tchanged very much. All responses from Fed officials yesterday regarding the weakdata seen over the past 6-8 weeks and whether another round of quantitativeeasing – which would be called QE3 – might be needed to give the economy yetanother push down the road. On the first comment: yes, it is too early to say. On thesecond: great, but why? On the third: what’s the medium-term? That place wenever actually see?All comments that don’t say very much. And yet they’re just about all that can bereasonably expected at this point in time. The data go up and down even whenpolicy is stable. You can’t go chasing every labor report with fresh views and freshpolicies, even day traders know that. Bernanke summed it up about the only wayone can: the recovery is “frustratingly slow” and “accomodative monetary policiesare still needed”. Hard to argue with that.But does that mean QE3 is on the cards? No. Does it mean it’s off the table? No. Itmeans that all of sudden the data flow has been bad and there’s no clear reason forit. It’s too early to say much and do anything. So the Fed, and everyone else, sitsand waits. It’s frustrating. But there it is. Wish we had some data this week. We don’t– except for payrolls tomorrow. And unless they move a lot in one direction oranother – very unlikely for weekly data – they won’t change what we know aboutthe economy or the mood of investors towards it. Stick of gum?
US Fed expectations
Source: Bloomberg fed fundfuturesNotes: Given a FF target rate of0.25%, an implied FF rate of0.30 is interpreted roughly asthe market pricing in a 20%chance of a Fed hike to 0.50%from 0.25% (30 is 1/5th of thedistance to 50 from 25). DBSexpectations are presented indiscrete blocks of 25bps, i.e., theFed moves or it does not. Seealso “Policy rate forecasts”below.
Implied fed funds rateDec-11 Mar-12 Jun-12
Market
Current 0.17 0.22 0.301wk ago 0.17 0.23 0.33
DBS
0.25 0.50 0.75
 
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Daily Breakfast Spread, 8 June 2011
Currencies
FX:
Asia woke up this morning to read that Fed Chairman Ben Bernanke hurt theUS dollar when he did not signal any plans to further loosen monetary policy(QE3?) to aid the “frustratingly slow” US economic recovery. Then again, onecannot help but wonder if the dollar would have reacted positively if he did. Atleast, the US stock market wouldn’t have reacted as negatively as it did, in spite ofBernanke’s pledge to keep monetary policy accommodative. Against thisbackground, the market appears to be looking past the Greece debt crisis andholding on to their euros. What the dollar bears need now is for ECB PresidentJean-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 hoursyesterday. The main story was an article that saw a Chinese State Administration ofForeign Exchange (SAFE) official warning against excessive holdings of US assetsbecause of the downside risks posed by loose US monetary and fiscal policies to thedollar. These comments were not taken lightly because data showed that China’snet purchases of US treasury bonds and notes were negative in 1Q 2011 despite alarge accumulation of foreign reserves. The first quarter was also when Chinastarted to openly support EU bonds over US government debt. For most of thisyear, markets have struggled between the US budget impasse obstructing thelifting of the US federal debt limit and the EU sovereign debt crisis. What is slowlybecoming 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.
Looking back
US mkts
: US stocks fell overnight after Fed Chairman Bernanke said that recent dataon the labor market show a loss of momentum and accommodative monetarypolicies are still needed. The Dow Jones Industrial Average fell 0.16% to 12070.81and 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.
01002003004005000001020304050607080910114Q3Q2Q1Q
China's increase in foreign reserves
$ billion
-5005010015000 01 02 03 04 05 06 07 08 09 10 114Q3Q2Q1Q
China's net purchases of US T bond & notes
$ billion
 
3
Daily Breakfast Spread, 8 June 2011
Economic calendarCentral bank policy calendar
EventConsensusActualPreviousJun 7 (Tue)
PH: CPI (May)5.0% y/y4.5% y/y4.3% y/yTW: CPI (May)1.64% y/y1.66% y/y1.32% y/yEZ: retail sales (Apr)0.3% m/m sa0.9% m/m sa-0.9% m/m sa
Jun 8 (Wed)
KR: GDP (1Q, F)1.3% q/q sa1.4% q/q sa--4.2% y/y4.2% y/yJP: adj currenct acc (Apr)JPY 266bnJPY 546.3bnJPY 752.7bnTW: trade balance (May)USD 2.53bnUSD 2.96bn-- exports8.1% y/y24.6% y/y-- imports11.6% y/y25.7% y/yEZ: GDP (1Q, P)0.8% q/q sa0.8% q/q sa--2.5% y/y2.5% y/y
Jun 9 (Thur)
sJP: GDP (1Q, F)-3.1% q/q saar-3.7% q/q saarMY: industrial production (Apr)2.5% y/y2.4% y/yUS: initial jobless claims (Jun)419K422KUS: trade balance (Apr)-USD 48.9bn-USD 48.2bn
Jun 10 (Fri)
PH: exports (Apr)8.0% y/y4.0% y/yCN: trade balance (May)USD 19.8bnUSD 11.42bn-- exports20.4% y/y29.9% y/y-- imports22.0% y/y21.8% y/yIN: industrial production (Apr)5.5% y/y7.3% y/y
PolicyDateCountryRateCurrentConsensusDBSActualThis 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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