Daily Breakfast Spread, 8 June 2011
Daily Breakfast Spread
DBS Group Research8 June 2011
Greater China, Korea
: 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.
: 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
Current 0.17 0.22 0.301wk ago 0.17 0.23 0.33
0.25 0.50 0.75