You are on page 1of 55

Economic Research

October 12, 2012

Global Data Watch


Fiscal drag will persist in 2013 but shift geographic focus from Europe to the US Capex slump viewed as temporary but needs to be watched EMU summit not expected to deliver much China data reports to confirm slow acceleration back toward trend

Contents
European Summit to remind inv estors of a long road ahead Germany : taking a look at the grow th slow dow n Aussie ex ports performing w ell giv en global headw inds Indonesia: tracking signs of a credit cy cle inflection Global Economic Outlook Summary 21 4 6 7 8 9 23 31 35 39 41 43 45 47 49 53 55 57 61 65 67 71 72 19 17 13

Fiscal drag to persist but rotate regionally in 2013


We forecast a modest acceleration in the global economy toward year-end as the recent combination of faster consumption growth and still-sluggish manufacturing sector sets the stage for a fading inventory drag and firming business sentiment. This weeks poor September car sales were a reminder that at least some of the pickup in consumer spending was due to temporary factors. However, the key challenge to our near-term forecast remains the recent poor performance of the capital goods sector. To the extent that the recent swoon in G3 capital goods orders represents a shift to broadly based business retrenchment, a new powerful drag will weigh on global growth. However, we take comfort that the tone of September readings from global surveys, US labor markets, and financial markets suggest that firms remain in a modestly expansionary mode, and that the drop in 3Q capex will prove temporary. Indeed, an upturn in capital spending into year-end is incorporated in our forecast. Policy also will play a central role in the 2013 outlook. Policy uncertainty or expectations about next years stance may already be influencing activity including the recent softness of business demand. Our forecast incorporates policy that on the whole tempers the lift in global growth that is now taking shape. In large part this judgment is driven by the view that fiscal policy will remain quite restrictive. Even after assuming that an agreement is reached that avoids the worst of the US fiscal cliff outcomes, we anticipate a developed world fiscal drag of more than one percent of GDP next year. The fiscal stance for EM countries is expected to be broadly neutral. The offset to global fiscal dragand what is now approaching two full years of subpar global growthby monetary authorities looks small. Notwithstanding the broadening in the set of countries that have easedwith Brazil, Korea, and Australia delivering the most recent cutsglobal policy rates have fallen only 43bp over the past year.

Global Central Bank Watch Now cast of global grow th Selected recent research from J.P. Morgan Economics The J.P. Morgan View : Markets Data Watches United States Euro area Japan Canada Mex ico Brazil Argentina Chile and Colombia United Kingdom Russia Turkey Australia and New Zealand China, Hong Kong, and Taiw an Korea ASEAN Asia focus Regional Data Calendars

Structural fiscal tightening


% of GDP 0.5 0.0 -0.5 -1.0 -1.5 -2.0 2010 2011 2012 2013 EMU

Global IP and retail sales


%3m/3m, saar 7 6 5 4 3 Retail sales IP 12 10 8 6 4 2 0 2011 2012 -2 2013

Bruce Kasman
JPMorgan Chase Bank NA

David Hensley
JPMorgan Chase Bank NA

Joseph Lupton
JPMorgan Chase Bank NA

US 2014

2 1 2010

www.morganmarkets.com

JPMorgan Chase Bank NA Bruce Kasman David Hensley

Joseph Lupton

Economic Research Global Data Watch October 12, 2012

G-3 capital goods indicators and global capital expenditures


%3m/3m saar; adjusted for Tohoku earthquake 25 20 15 10 5 0 -5 -10 -15 -20 -25 2009 Capex %q/q saar 20 15 10 5 0 -5 -10 -15 -20 2013

data confirm that policy is getting traction, with growth expected to surpass 4% annualized in 2H12. By contrast, we recently scaled back our expectations for policy easing and economic growth in China (more below).

Capex slump seen as temporary


This weeks reports brought additional confirmation of a downshift in global capex last quarter. August data show that G-3 capital goods shipments, which are a close proxy for global business equipment spending, are on track for a decline of around 4% annualized in 3Q12. The growth of global capex already was very soft in 1H12, averaging near 1.5% ar. With G-3 shipments recently falling, the forecast assumes that global capex declined in 3Q12. Already, the deceleration in capex has offset some of the recent pickup in global retail sales, prolonging the soft patch in manufacturing. A continued decline in capex likely would undermine the forecast for a modest pickup in global growth, while raising the odds of a broader pullback in business spending. Temporary dips in capex are not uncommon during economic expansions, and we are viewing the 3Q decline in this way, expecting some bounce back into year-end. As noted above, the first look at September data and the behavior of financial markets supports this call. Even more reassuring, and consistent with our global forecast, would be a return to growth in G-3 capital goods shipments and orders in the next few months.

Shipments Orders 2010 2011 2012

Against the backdrop of global policy stances that restrain growth, the role of policy in relative performance is important to understand. It is in the Euro area where we think policy shifts will do the most to improve the growth picture. The ECBs OMT program is anticipated to help fix peripheral credit markets broken by sovereign stress. To be sure, Euro area fiscal policy will continue to tighten. But the structural fiscal tightening in the region as a whole is set to fall from over 1.5% of GDP in 2012 to near 1% of GDP in 2013. Underpinning this forecast is an ongoing shift in the regions approach to fiscal austerity, in which budget overshoots due to recession are no longer met with demands for additional structural tightening. The Italian government, for example, recently doubled its budget deficit forecast this year, without taking corrective action. And the plans the Troika has agreed with Portugal also allow for at least partial operation of automatic stabilizers. The forecast shows the Euro area as a whole crawling out of recession next year, with GDP rising 1.1% next year on a 4Q/4Q basis. In contrast, the US fiscal drag in 2013 is likely to be somewhat larger than the 1% drag experienced in 2012. Moreover, risks are increasing that not all of the fiscal cliff tightening will be avoided, in which case the drag could be significantly larger. There is some room for Fed policy to cushion this blow. However, the degree of fiscal tightening makes it hard to see any meaningful acceleration in the US economy in coming quarters. Our forecast maintains average US growth around 2%, an outcome that will require solid underlying performance in interest-sensitive components of private demand. In the emerging markets, it is Brazil that is being afforded the broadest policy lift. Policy interest rates reached a new low after this weeks 25bp cut, with the central bank signaling a low-for-long stance that we think will extend through late 2013. This stance is complemented by more expansionary fiscal policy, including measures targeted to boost consumption and investment, as well as more generous funding from the national development bank (BNDES). The latest activity
2

An anticlimactic EMU summit


Although the ECB has yet to purchase a single bond under its new OMT, the announcement of the program continues to stabilize markets, which this week took a two-notch downgrade to Spains credit rating in their stride. The balm of ECB support looks increasingly important given that next weeks summit of European leaders is unlikely to deliver much substantive progress on institution building. One unintended consequence of ECB action is that politicians will feel less urgency to deliver across a spectrum of contentious issues. In particular, we doubt that disparate views on which banking burdens should be shared will be reconciled at this point. The combination of a credible but conditional central bank liquidity backstop, alongside the promised banking union, could limit the degree of fiscal integration needed for the regions viability. To the extent that these innovations both guarantee market access for sovereigns, and make markets more comfortable holding a higher level of sovereign debt, they provide a large part of the benefit that would come from Eurobonds. If the region is prepared to operate with a higher steady-state level of debt, rather than insisting on a path that

JPMorgan Chase Bank NA Bruce Kasman David Hensley

Joseph Lupton

Economic Research Global Data Watch October 12, 2012

Euro area auto sales and auto output


Mn units, saar 11.0 10.5 10.0 9.5 9.0 8.5 8.0 2010 2011 Sales 2012 Output

%3m, saar 60 40 20 0 -20 -40 2013

by a drop in car sales that was partly related to the diplomatic dispute with Japan. Inflation likely moderated to 1.8%oya, though the relief is expected to prove temporary, with inflation forecast to move above 3%oya early next year.

Divergent outlooks from BoK and MAS


Recent data reports from Korea did not deliver reliable confirmation of the turn in the manufacturing cycle, with September exports firming amid softening survey data. Against this backdrop, the Bank of Korea cut the base rate by 25bp to 2.75% and downgraded its growth outlook significantly. However, this weeks decision was not unanimous, and we maintain our call that the BoK will go on hold for the rest of the year, and throughout 2013 barring an unexpected shift in growth. Although there was speculation that the Monetary Authority of Singapore also might ease at this weeks meeting, officials chose to maintain their stance. The MASs decision reflects its concern that tightening labor market conditions might feed through to wage and price inflation; diminished worry about external growth in light of recent G-3 policy actions; and a belief that the global tech demand will recover next year.

will lower debt to 60% of GDP, difficult fiscal journeys will be substantially shortened. Though this weeks Summit will demonstrate that further institution building is hard, we doubt it will show that what is needed is out of reach.

Humps and bumps in Euro area data


The Euro area business surveys have been sending a clear message of ongoing recession in 3Q12. However, the incoming IP data have not been playing to this script, even in the periphery. With back-to-back gains in July and August, Euro area IP is tracking up 4% ar so far in 3Q12, after almost one year of contraction. Seasonal adjustment problems are likely contributing to this, and the surge in auto production is hard to square with sliding car sales in the region. Even so, part of the IP strength will likely be reflected in next months GDP estimates for 3Q, followed by a reversal in 4Q. Hence, we have raised our GDP forecast for 3Q12 by 1%-pt to zero and have reduced our 4Q forecast by the same amount to -1.5% ar. While IP and GDP may show a larger contraction this quarter, we still think the economys underlying momentum is poised to improve in response to easing financial market conditions and reduced uncertainty. This lift will best be tracked via the monthly business surveys.

NBR running against regional easing trend


Rising inflation, currency pressure, and very low GDP growth have created a policy dilemma for Romanias central bank. Until now, the slumping economy has caused the NBR to look past the escalation in inflation, but we think increasing FX pressure will force the bank to change approach and hike rates by early next year. FX weakness also will aggravate the difficulty of meeting the heavy schedule of repayments on external debt (about 12 billion during the next two years). The IMF repeatedly has asked for tighter monetary policy, and probably early next year it will intensify the pressure on the NBR to tighten as otherwise FX reserves will decline quickly. The view on rates in Romania is unique in the region, but it certainly runs against the general easing trend. In Serbia, the central bank is tightening monetary policy to stabilize the currency and to limit second-round effects from rising food prices. The Russian central bank is not worried about the currency, but it is concerned that supply shocks might filter into inflation and inflation expectations.

Reports to show slight growth lift in China


In China, next weeks release of 3Q GDP and September activity data are expected to bolster confidence that economic growth is lifting very gradually toward trend. The GDP report is anticipated to show that growth rose modestly to 7.4%q/q saar (our seasonal adjustment), up from 6.7% in 2Q (although on a year-over-year basis, we still expect growth to bottom in 4Q). In September, IP is projected have advanced 1.0%m/m, with a possible boost from front-loading ahead of Octobers week-long national holiday. Fixed asset investment likely continued at a steady pace near 20%oya. In particular, railway-related investment reportedly has surged as fiscal policy support gains traction. Similarly, retail sales likely posted stable monthly growth, with any upside probably eliminated

Editor: Sandy Batten


3

JPMorgan Chase Bank NA David Hensley Carlton Strong

Joseph Lupton

Economic Research Global Data Watch October 12, 2012

Global economic outlook summary


Real GDP
% over a year ago

Real GDP
% over previous period, saar

Consumer prices
% over a year ago

2011 The Americas United States Canada Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Uruguay Venezuela Asia/Pacific Japan Australia New Zealand Asia ex Japan China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Africa/Middle East Israel South Africa Europe Euro area Germany France Italy Spain United Kingdom Emerging Europe Bulgaria Czech Republic Hungary Poland Romania Russia Turkey Global Developed markets Emerging markets 1.8 2.6 4.2 8.9 2.7 6.0 5.9 8.0 3.9 6.9 5.7 4.2 -0.7 2.1 1.3 7.4 9.3 5.0 6.5 6.5 3.6 5.1 3.8 4.9 4.0 0.1 4.6 3.1 1.5 3.1 1.7 0.5 0.4 0.9 4.8 1.7 1.7 1.6 4.3 2.5 4.3 8.5 3.0 1.3 6.1

2012 2.1 2.2 2.9 3.3 1.4 5.4 4.3 4.0 3.9 6.0 3.5 5.0 2.0 3.5 2.6 6.1 7.6 1.2 5.6 5.7 2.4 4.7 5.3 2.1 1.1 5.8 3.0 2.1 -0.4 1.0 0.1 -2.3 -1.5 -0.3 2.7 1.0 -1.1 -1.2 2.4 0.6 3.6 2.8 2.4 1.2 4.7

2013 1.9 2.1 3.7 2.2 4.1 4.5 4.5 4.0 3.6 7.0 4.0 0.0 0.6 2.5 2.9 6.4 8.0 3.2 6.0 3.5 3.3 2.9 3.5 3.4 3.9 2.7 3.1 3.0 0.2 1.4 0.0 -0.6 -1.3 1.5 2.7 1.5 0.9 0.7 2.1 0.9 3.0 3.7 2.6 1.2 5.1

1Q12 2.0 1.8 2.8 2.4 0.5 5.1 0.9 4.2 4.9 8.3 11.8 10.1 5.3 5.6 4.1 7.2 6.5 2.4 6.1 4.6 3.5 5.8 12.6 10.0 1.5 50.8 3.1 2.7 0.0 2.0 0.1 -3.3 -1.3 -1.2 2.4 -3.1 -3.5 2.4 0.5 3.7 3.0 1.7 5.3

2Q12 1.3 1.9 2.4 -3.2 1.6 7.1 6.7 4.8 3.5 6.0 2.1 0.6 0.7 2.6 2.3 5.7 6.7 -0.4 5.3 6.2 1.1 5.9 0.9 -0.7 3.5 13.9 3.4 3.2 -0.7 1.1 -0.1 -3.3 -1.7 -1.5 1.3 -0.8 -0.9 1.6 1.9 1.5 1.8 0.4 4.2

3Q12 1.4 1.9 4.5 8.0 4.8 3.0 2.8 4.0 3.5 5.5 9.0 3.5 -2.0 1.5 1.5 5.6 7.4 2.0 5.2 4.0 2.0 2.5 1.2 -1.6 1.8 2.0 2.0 0.3 0.0 1.0 0.5 -1.0 -1.5 2.0 1.2 -1.2 -1.0 1.2 -1.0 1.8

4Q12 2.0 2.0 4.0 6.0 4.6 4.0 3.8 4.0 3.5 6.0 -9.0 -3.0 -0.8 1.8 3.5 6.3 8.2 2.5 5.0 3.0 3.5 1.5 1.2 8.2 3.8 2.0 2.8 -1.2 -1.5 0.0 -1.5 -2.5 -4.5 0.5 2.1 -1.3 -0.5 1.6 0.8 3.0

1Q13 1.5 2.1 3.3 0.0 3.8 4.0 4.2 4.0 4.0 8.0 12.0 -3.0 1.4 3.8 3.7 6.4 8.0 3.5 5.8 3.0 3.5 2.0 4.5 6.1 4.5 1.5 4.9 5.9 0.8 1.5 0.0 0.0 -1.0 1.5 2.8 2.1 1.0 1.8 1.2 3.5 2.7 1.4 5.1

2Q13 2.3 2.1 3.6 1.5 4.0 5.0 5.5 4.0 3.2 8.0 7.0 0.0 1.6 2.5 3.3 6.5 8.2 3.5 6.0 4.0 3.5 3.0 4.5 -1.2 4.6 2.0 6.1 3.8 0.8 2.0 0.5 0.3 0.5 2.0 2.5 1.0 1.5 2.4 -0.4 3.0 2.9 1.7 5.2

3Q13 2.5 2.2 3.9 0.5 4.3 5.0 5.5 5.0 3.3 7.0 9.0 3.0 1.3 1.8 2.0 6.8 8.2 5.0 6.8 4.0 4.0 3.5 4.5 4.5 4.8 2.0 6.1 3.6 1.3 2.5 1.0 0.8 0.5 2.5 3.8 4.3 1.8 3.5 3.2 4.0 3.2 1.9 5.6

4Q11 3.3 2.7 7.2 9.6 6.7 4.0 3.9 5.5 3.5 4.5 8.3 28.5 -0.3 3.1 1.8 4.9 4.6 5.7 8.4 4.1 4.0 3.2 4.7 5.5 1.4 4.0 2.5 6.1 2.9 2.6 2.6 3.7 2.7 4.6 6.4 2.4 4.1 4.6 3.4 6.8 9.2 3.8 2.7 5.7

2Q12 1.9 1.6 6.0 9.9 5.0 3.1 3.4 5.1 3.9 4.1 8.0 22.3 0.2 1.2 1.0 3.9 2.9 4.2 10.1 4.5 2.4 1.7 2.9 5.3 1.7 2.5 1.6 5.7 2.5 2.1 2.3 3.6 1.9 2.8 5.0 3.4 5.5 4.0 1.9 3.9 9.4 2.8 1.8 4.6

4Q12 1.9 2.4 6.3 10.0 5.5 2.5 3.1 4.2 4.4 3.4 7.6 23.4 0.0 1.7 1.7 3.3 2.2 2.5 9.8 3.9 1.9 1.1 2.3 4.1 2.1 1.3 1.3 5.3 2.5 2.1 1.9 3.2 3.4 2.7 6.1 2.9 5.9 3.7 4.7 6.7 7.7 2.8 1.9 4.5

2Q13 1.6 2.0 7.3 11.0 5.6 3.1 3.2 4.4 4.1 2.8 7.2 37.3 -0.2 2.7 1.8 3.8 3.3 2.7 9.0 2.2 3.0 1.2 2.3 3.3 1.8 1.1 1.5 5.4 2.0 1.8 1.3 2.3 2.9 2.6 6.2 2.4 5.0 2.6 6.4 7.4 6.9 2.8 1.6 5.0

1.9 0.5 4.6

2.0 0.3 5.0

Memo: 2.7 2.6 3.4 3.2 Global PPP weighted 3.8 3.0 3.2 3.6 2.4 3.2 3.8 4.2 3.3 3.3 Note: For some emerging economies, 2012-2013 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan. Bold denotes changes from last edition of Global Data Watch, with arrows showing the direction of changes. Underline indicates beginning of J.P. Morgan forecasts. On July 6 we shifted to using concurrent nominal GDP weights in computing our global and regional aggregates from a static 5-year average GDP weight. We maintain the use of current FX rates but still report PPP-based aggregates. For details, see research note "Global economic aggregates get new weights in July 6, 2012 GDW.

JPMorgan Chase Bank NA David Hensley Carlton Strong

Joseph Lupton

Economic Research Global Data Watch October 12, 2012

G-3 economic outlook detail


Percent change over previous period; seasonally adjusted annual rate unless noted
2012 2011 United States Real GDP Private consumption Equipment investment Non-residential construction Residential construction Inventory change ($ bn saar) Government spending Exports of goods and services Imports of goods and services Domestic final sales contribution Inventories contribution Net trade contribution Consumer prices (%oya) Excluding food and energy (%oya) Federal budget balance (% of GDP, FY) Personal saving rate (%) Unemployment rate (%) Industrial production, manufacturing Euro area Real GDP Private consumption Capital investment Government consumption Exports of goods and services Imports of goods and services Domestic final sales contribution Inventories contribution Net trade contribution Consumer prices (HICP, %oya) ex unprocessed food and energy General govt. budget balance (% of GDP, FY) Unemployment rate (%) Industrial production Japan Real GDP Private consumption Business investment Residential construction Public investment Government consumption Exports of goods and services Imports of goods and services Domestic final sales contribution Inventories contribution Net trade contribution Consumer prices (%oya) General govt. net lending (% of GDP, CY) Unemployment rate (%) Industrial production Memo: Global industrial production %oya 1.8 2.5 11.0 2.8 -1.4 31.0 -3.1 6.7 4.8 1.8 -0.2 0.1 3.1 1.7 -8.6 4.3 9.0 4.3 1.5 0.1 1.6 -0.1 6.4 4.2 0.3 0.1 1.0 2.7 1.7 -4.1 10.2 3.5 -0.7 0.1 1.2 5.7 -2.8 2.0 -0.1 6.3 0.6 -0.5 -0.8 -0.3 -9.5 4.6 -2.3 4.2 2012 2.1 1.9 6.0 8.8 12.0 58.3 -1.7 2.9 2.9 1.9 0.2 0.0 2.1 2.1 -7.7 3.8 8.1 4.4 -0.4 -1.0 -3.4 -0.1 2.9 -0.4 -1.3 -0.5 1.4 2.6 1.8 -3.8 11.3 -1.9 2.0 2.2 3.7 1.7 7.7 2.1 2.3 6.9 2.6 0.0 -0.6 0.1 -9.9 4.3 -1.0 2.0 2013 1.9 1.7 3.7 4.3 18.7 58.7 -0.7 3.3 3.2 2.0 0.0 0.0 1.5 1.6 -5.5 4.2 7.9 2.2 0.2 -0.2 -0.4 -0.2 3.8 2.8 -0.2 -0.1 0.6 1.8 1.5 -2.8 11.5 0.8 0.6 0.0 3.8 3.1 -0.6 1.0 1.9 4.2 0.7 0.1 -0.3 -0.1 -10.1 4.1 0.4 3.1 1Q 2.0 2.4 5.4 12.8 20.6 56.9 -3.0 4.4 3.1 2.3 -0.4 0.1 2.8 2.2 3.6 8.3 9.8 0.0 -0.8 -4.7 0.6 2.7 -0.6 -1.2 -0.2 1.4 2.7 1.9 10.9 -2.0 5.3 5.0 -6.3 -6.3 15.2 4.4 14.3 9.1 4.3 0.1 0.9 0.3 4.5 5.1 6.4 2.8 2Q 1.3 1.5 4.8 0.6 8.4 41.4 -0.7 5.2 2.8 1.5 -0.5 0.2 1.9 2.3 4.0 8.2 1.0 -0.7 -1.4 -5.7 0.0 5.1 2.4 -1.9 -0.1 1.3 2.5 1.8 11.3 -2.1 0.7 0.5 5.6 3.8 7.2 0.6 5.0 6.7 1.0 -0.2 -0.1 0.2 4.4 -7.7 -1.1 2.4 3Q 1.4 1.7 -4.8 -10.0 14.5 76.1 0.4 -4.2 0.2 1.0 1.0 -0.6 1.7 2.0 3.9 8.1 -0.3 0.0 -1.0 -3.0 -1.0 2.0 0.0 -1.3 0.4 0.9 2.6 1.7 11.3 2.5 -2.0 -2.0 -1.0 5.0 15.0 2.0 -10.0 5.0 0.5 -0.1 -2.4 0.0 4.2 -14.0 0.8 1.3 4Q 2.0 2.5 3.0 8.0 15.0 59.0 -0.3 2.0 2.0 2.5 -0.5 0.0 1.9 1.9 3.6 8.0 2.0 -1.5 -0.5 -2.0 -1.0 3.0 2.0 -0.9 -1.2 0.5 2.5 1.6 11.5 -3.5 -0.8 -1.2 8.0 5.0 5.0 1.0 -1.8 4.5 0.1 0.0 -0.9 0.0 4.2 -12.0 1.1 1.5 1Q 1.5 1.0 4.0 6.0 18.0 63.4 -1.1 3.0 3.0 1.4 0.1 -0.1 1.4 1.8 4.0 8.0 2.0 0.8 -0.3 0.5 0.0 4.0 3.0 0.0 0.2 0.6 2.0 1.6 11.5 1.5 1.4 0.6 3.0 3.0 -3.0 0.8 5.8 4.5 1.3 -0.1 0.3 -0.4 4.1 12.0 4.8 1.3 2013 2Q 2.3 1.5 6.0 6.0 23.0 63.1 -1.2 6.0 4.0 2.1 0.0 0.2 1.6 1.5 4.2 7.9 3.0 0.8 0.3 1.5 0.0 4.0 3.5 0.4 0.0 0.4 2.0 1.6 11.5 2.5 1.6 0.5 3.0 0.0 -5.0 0.8 6.2 3.0 0.9 0.1 0.5 -0.2 4.1 8.0 4.5 2.7 3Q 2.5 2.0 7.0 8.0 25.0 57.2 -1.0 7.0 6.0 2.7 -0.2 0.0 1.5 1.5 4.4 7.9 4.0 1.3 0.8 1.5 0.5 5.0 4.5 0.8 0.0 0.4 1.7 1.5 11.4 2.5 1.3 0.5 4.0 2.0 -10.0 0.8 4.0 3.0 1.0 0.1 0.2 -0.1 4.1 5.0 4.6 3.7 4Q 3.0 2.5 8.0 9.0 25.0 50.9 -1.0 7.0 6.0 3.2 -0.2 0.0 1.4 1.5 4.4 7.8 4.0 1.5 1.3 2.0 0.5 5.0 4.5 1.2 -0.1 0.4 1.5 1.5 11.4 3.0 2.3 2.5 5.0 5.0 -10.0 0.8 4.0 4.0 1.9 0.4 0.1 0.1 4.0 5.0 4.9 4.7

Note: More forecast details for the G-3 and other countries can be found on J.P. Morgans Morgan Markets client web site

JPMorgan Chase Bank NA David Hensley Michael Mulhall

Joseph Lupton

Economic Research Global Data Watch October 12, 2012

Global Central Bank Watch


Official rate Global excluding US Developed Emerging Latin America EMEA EM EM Asia The Americas United States Canada Brazil Mexico Chile Colombia Peru Uruguay Europe/Africa Euro area Refi rate United Kingdom Bank rate Czech Republic 2-wk repo Hungary Israel Poland Romania Russia South Africa Turkey Asia/Pacific Australia New Zealand Japan Hong Kong China Korea Indonesia India Malaysia Philippines Thailand
1

Current

Change since (bp) Jul 11 -45 -53 -31 -72 -291 65 -42 -59 0 0 -525 0 -25 25 0 100 -31 -75 0 -50 50 -100 25 -100 N/A -50 -43 -39 -150 0 0 0 -56 -50 -100 0 0 -75 -25

1 rate (%pa) 05-07 avg Trough

Last change

Next mtg

Forecast next change

Forecast (%pa) Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 2.26 2.96 0.50 5.57 6.12 5.08 5.54 1.45 2.25 2.94 0.49 5.54 6.12 5.03 5.51 1.45 0.125 1.00 7.25 4.50 5.00 4.75 4.25 9.00 1.65 0.75 0.50 0.10 6.00 2.25 4.25 5.75 5.75 4.50 6.00 3.68 2.75 2.75 0.05 0.50 6.00 2.75 5.75 7.75 3.00 3.75 2.75 1.875 2.25 2.94 0.49 5.54 6.11 5.03 5.51 1.45 0.125 1.00 7.25 4.50 5.00 4.75 4.25 8.50 1.65 0.75 0.50 0.10 5.50 2.25 4.00 5.75 5.75 4.50 6.25 3.68 2.75 3.00 0.05 0.50 6.00 2.75 5.75 7.75 3.00 3.75 2.75 1.875 2.25 2.95 0.50 5.54 6.11 5.03 5.51 1.47 0.125 1.25 7.25 4.50 5.00 4.75 4.25 8.50 1.65 0.75 0.50 0.10 5.50 2.25 4.00 5.75 5.75 4.50 6.25 3.68 2.75 3.00 0.05 0.50 6.00 2.75 5.75 7.75 3.00 3.75 2.75 1.875 2.29 3.00 0.51 5.63 6.53 5.03 5.51 1.57 0.125 1.50 8.00 4.50 5.00 4.75 4.25 8.50 1.65 0.75 0.50 0.10 5.50 2.25 4.00 5.75 5.75 4.50 6.25 3.69 2.75 3.25 0.05 0.50 6.00 2.75 5.75 7.75 3.00 3.75 2.75 1.875

2.26 2.96 0.51 5.56 6.12 5.00 5.55 1.45 Fed funds O/N rate SELIC O/N Repo rate Disc rate Repo rate Reference Reference 0.125 1.00 7.25 4.50 5.00 4.75 4.25 9.00 1.65 0.75 0.50 0.25 6.50 2.25 4.75 5.25 5.50 5.00 5.82 3.74 Cash rate Cash rate O/N call rate Disc. wndw 1-yr working Base rate BI rate Repo rate O/N rate Rev repo 1-day repo 3.25 2.50 0.05 0.50 6.00 2.75 5.75 8.00 3.00 3.75 3.00

-211 -136 -298 -152 -465 -145 -31 -388 -438 -273 -800 -337 31 -256 19 175 -221 -223 -444 -215 -63 -200 23 -294 N/A -329 -1011 5 -269 -488 -17 -548 -14 -140 -412 113 -24 -331 -83

43 48 0 66 0 106 104 28 0 75 0 0 450 175 300 275 10 0 0 0 125 175 125 0 N/A 0 7 84 25 0 0 0 69 75 0 325 100 0 175

16 Dec 08 (-87.5bp) 24 Oct 12 8 Sep 10 (+25bp) 10 Oct 12 (-25bp) 17 Jul 09 (-25bp) 12 Jan 12 (-25bp) 24 Aug 12 (-25bp) 12 May 11 (+25bp) 23 Oct 12 28 Nov 12 26 Oct 12 18 Oct 12 26 Oct 12 8 Nov 12

On hold 3Q 13 (+25bp) 4Q 13 (+25bp) On hold On hold On hold On hold 2Q 13 (-50bp)

0.125 1.00 7.25 4.50 5.00 4.75 4.25 9.00 1.67

28 Sep 12 (+25bp) 29 Dec 12

5 Jul 12 (-25bp) 5 Mar 09 (-50bp) 27 Sep 12 (-25bp) 25 Sep 12 (-25bp) 25 Jun 12 (-25bp) 9 May 12 (+25bp) 29 Mar 12 (-25bp) 13 Sep 12 (+25bp) 19 Jul 12 (-50bp) N/A

8 Nov 12 8 Nov 12 1 Nov 12 30 Oct 12 29 Oct 12 7 Nov 12 2 Nov 12 Nov 12 22 Nov 12 18 Oct 12

On hold On hold Feb 13 (-15bp) 1Q 13 (-25bp) On hold 7 Nov 12 (-25bp) Feb 13 (+25bp) Nov 12 (+25bp) Jan 13 (-50bp) N/A

0.75 0.50 0.25 6.50 2.25 4.50 5.25 5.75 5.00 5.85 3.72

2-wk dep Base rate 7-day interv Base rate Repo rate Repo rate Effctve rate

2 Oct 12 (-25bp) 10 Mar 11 (-50bp) 5 Oct 10 (-5bp) 7 Jul 12 (-31bp) 11 Oct 12 (-25bp) 9 Feb 12 (-25bp) 17 Apr 12 (-50bp) 5 May 11 (+25bp) 26 Jul 12 (-25bp) 25 Jan 12 (-25bp)

5 Nov 12 25 Oct 12 30 Oct 12 9 Nov 12 9 Nov 12 30 Oct 12 8 Nov 12 25 Oct 12 17 Oct 12 4Q 12

Dec 12 (-25bp) 1Q 13 (+25bp) On hold On hold On hold On hold On hold 1Q 13 (-25bp) On hold On hold 28 Nov 12 (-25bp) On hold

3.00 2.50 0.05 0.50 6.00 2.75 5.75 8.00 3.00 3.75 2.75 1.875

17 Dec 08 (-100bp) 25 Oct 12

Taiwan Official disc. 1.875 -71 62.5 0 30 Jun 11 (+12.5bp) Refers to trough end-quarter rate from 2009-present Effective rate adjusted on daily basis

Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting during upcoming week. Aggregates are GDP-weighted averages.

JPMorgan Chase Bank NA Joseph Lupton David Hensley

Economic Research Global Data Watch October 12, 2012

Nowcast of global growth: 3Q still tracking 1.7%


While the official J.P. Morgan bottom-up global GDP forecast was nudged higher to 1.9% this week, our nowcast held steady at 1.7%. Both indicate that global growth continued to bump along at roughly the same sub-trend level as in 2Q. We will introduce our first nowcast for 4Q in the October 26 Global Data Watch, after the release of the flash October PMIs for the US, Euro area, and China. We officially rolled out updates to a number of our global indicators included in the DFM-Eco nowcaster model this week: September auto sales, August retail sales, August IP, and August G-3 capital goods orders. We had used preliminary versions of each of these in last weeks nowcast. A mix of upside and downside surprises netted to a tiny decline in the models 3Q estimate (unchanged when rounded). Advances in both global retail sales volume and industrial output were a bit stronger than expected in August. Real retail sales grew 0.4%m/m sa, the third solid monthly increase out of the past four. We had penciled in a 0.2%m/m rise. Global manufacturing also did better, with output unchanged monthon-month, versus last weeks expectation of a 0.2% decline. Though every component of our global manufacturing output PMI moved constructively in September, the nowcast model projects that factory sector momentum remained weak, with an expected drop in output of 0.1%. In contrast, our aggregates of auto sales and capital goods surprised on the downside. Global auto sales slumped 5.5% in September. Though we already had known about the incentives hangovers in Japan and Brazil and the post-VAT hike slump in Spain, the poor results for Germany and China were not available until this week. Likewise, we anticipated a better outcome than the 12.6% tumble in Japanese capital goods orders; our G-3 index fell 2.7%, against expectations of a small gain. Commodity prices were again mixed this week. Brent crude oil advanced nearly 4%, while base metals and agricultural commodities edged down roughly 2%. Taken together the common factor moved a bit higher. The weeks rise is consistent with roughly 2% annualized IP growth. Taking a longer-run smoothed basis, the common factor of commodity prices suggests global IP growth of 4.2% annualized (this is roughly half the gain the model wanted in midSeptember). This is far better than the contraction implied by our September PMI. Actual output has split the difference through August, running basically stagnant since early this year.

Nowcasting global real GDP, 3Q2012


%q/q, saar 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 J.P.Morgan Nowcast

Jul 27

Nov 02

Nov 09

Global real GDP


%q/q, saar (current forecast shaded) 2Q12 J.P. Morgan Nowcaster (DFM-Eco) Global PMI model 1.8 1.5 1.7 Current 1.9 1.7 1.7 3Q12 Last week 1.7 1.7 1.7 4 weeks ago 1.9 1.4 1.6

J.P. Morgan global aggregates


Quarters are %3m,saar (PMIs avg level); Months are %m/m (PMIs level) 2Q12 3Q12 Jul 12 Aug 12 PMI, mfg 51.3 48.1 48.8 47.4 PMI, serv 51.8 52.9 52.6 52.0 0.8 0.4 0.0 IP -1.2 2.6 0.1 0.4 Retail sales 2.2 -22.6 -3.0 2.3 Auto sales 16.8 -22.1 -4.0 -2.7 Cap. Orders -15.6 Sep 12 48.1 54.0 -0.1 0.1 -5.5 0.6

Note. Shaded values show forecasts computed by the Kalman filter estimates from the dynamic factor model. Underlined values are our estimates based on available data.

Global manufacturing output


%3m, saar; Nowcast is 13-week annualized change 18 12 6 0 -6 2010 Implied by Mfg PMI (thru Sep) Actual (thru Aug ) Implied by commodity price nowcast (thru Oct 12)

2011

2012

2013

Commodity price decomposition


% change over respective period Total 1wk 4wk Oil 3.7 -2.2 Industrial metals -2.5 -3.9 Agriculture -1.4 -8.0 Memo: Global IP nowcast (ann. rate) = 13wk 14.5 7.0 -2.9 1wk 0.2 0.2 0.1 1.8 Common + Idiosyncratic 4wk 13wk 1wk 4wk 13wk -1.4 6.3 3.5 -0.8 8.2 -1.4 6.5 -2.7 -2.5 0.5 -1.0 4.7 -1.6 -7.0 -7.6 -2.6 4.2

Note. Oil is Brent while industrial metals and agriculture are the J.P. Morgan commodity curve indexes. Common movements for each are given by the common factor scaled by each commoditys individual loading weight. The idiosyncratic movement is the residual.

Nov 16
7

Aug 03

Aug 10

Aug 17

Aug 24

Aug 31

Sep 07

Sep 14

Sep 21

Sep 28

Oct 05

Oct 12

Oct 19

Oct 26

JPMorgan Chase Bank NA, New York Bruce Kasman Joseph Lupton David Hensley

Economic Research Global Data Watch October 12, 2012

Selected recent research1 from J.P. Morgan Economics


Global
Fed, ECB shock and deliver, Sep 21, 2012 Tracking a low-level bottom in global growth, Aug 3, 2012 Expecting a wide but shallow global monetary easing cycle, Jul 27, 2012 EM inflation slide tempered by jump in agriculture prices, Jul 13, 2012 Global economic aggregates get new weights, Jul 6, 2012 Global manufacturing will remain weak in 3Q, Jun 29, 2012 Global inflation falls below target, risks to the downside, Jun 29, 2012 A downgrade to global growth, Jun 8, 2012 Gauging the upside to the global outlook, Mar 9, 2012 Model linkages between global GDP and oil prices, Feb 17, 2012 Upside risk to outlook for sluggish global consumer, Feb 10, 2012 Global inflation to fall close to target midpoint in 2Q12, Feb 10, 2012

Central Europe, Middle East, and Africa


South Africa: perfect storm leads to likely GDP contraction, Oct 5, 2012 South Africa: CPI re-weighting to lift inflation projections, Aug 31, 2012 MENA: higher food prices pose contraints for policymakers, Aug 10, 2012 Russia: stronger house prices a sign output gap has closed, Aug 3, 2012 Turkey: macro improvement led by strong exports, Jul 20, 2012 Poland: lower CPI trajectory raises odds of 1Q13 rate cut, Jul 6, 2012 Egypt: transition in disarray, Jun 22, 2012 Hungarys LTRO: fizzle rather than bang, Apr 6, 2012

Japan
Macroeconomic impacts of Japan/China dispute, Oct 5, 2012 The BoJ eased, what's next? Sep 21, 2012 Japan: recession or stagnation, that is the question, Sep 14, 2012 Japan: hope and anxiety, consumption by the elderly, Aug 17, 2012 Japans tax hike: small step toward debt sustainability, Jun 29, 2012 Japan: nonmanufacturers are performing well, but, Jun 15, 2012 Japan: how worrisome is the nuclear power plant shutdown? May 11, 2012

United States and Canada


US: the impact of higher dividend and cap gains taxes, Oct 5, 2012 US inflation will be hibernating through the winter, Oct 5, 2012 Breaking Good: US consumer gets unexpected help, Sep 21, 2012 US: the Feds novus ordo seclorum, Sep 14, 2012 US house prices are up; supply overhang has vanished, Aug 31, 2012 US: drought means lower GDP now, higher inflation later, Aug 17, 2012 US: interest income in an era of ultra-low interest rates, Aug 10, 2012 US: the Treasury-Fed discord, Jul 27, 2012 US slowdown: it's not just about the uncertainty, Jul 27, 2012 US: would a decent economy be too much to ask for? Jul 20, 2012 Sorry, the Fed wont be buying your equities from you, Jul 13, 2012 US manufacturing and construction have switched roles, Jul 6, 2012 US medical services spending now in slow-growth mode, Jun 22, 2012 US: FOMC preview, Jun 15, 2012 Revisiting the US seasonal echo effects, Jun 15, 2012 Most US families feeling poorer because they are, Jun 15, 2012 US spring slowdown: the same only a lot different, Jun 8, 2012 US: putting the For Rent signs up on more front doors, May 18, 2012 Whats ahead for Canadian monetary policy? May 18, 2012 Getting a grip on the surprising strength of US wage growth, May 11, 2012

Non-Japan Asia and Pacific


Chinas local government stimulus: castles in the air, Oct 5, 2012 Mixed messages in Emerging Asias manufacturing data, Sep 28, 2012 Singapore: MAS to ease or not to ease? A tough question, Sep 28, 2012 A brief history of Indonesias fiscal financing, Sep 28, 2012 Taiwan trade hinges on G-3 demand as China stabilizes, Sep 21, 2012 Antipodean imbalances: the devil is in the detail, Sep 14, 2012 PBoCs quantitative measures: RRR and OMO, Sep 7, 2012 RBA cuts help, but mostly track the neutral rate lower, Sep 7, 2012 Indias falling potential growth, Sep 7, 2012 Malaysia: the math behind the energy balance, Sep 7, 2012 Australias mining investment boom is far from over, Aug 31, 2012 Korea: micro policy to ease HH debt servicing burden, Aug 31, 2012 Implications of Chinas recent capital flow reversal, Aug 24, 2012 Australia: margin pressure to be the acid test for labor market. Aug 24, 2012 Figuring the drivers of ASEANs rebalancing, Aug 24, 2012

Western Europe
A NEET way to look at Euro area unemployment, Oct 5, 2012 Germany may want to slow down on Europe, Oct 5, 2012 Euro area growth: a better 2013 in prospect, Sep 21, 2012 The French Budget: Scylla, Charybdis, and Europa, Sep 21, 2012 Household deleveraging is not preventing a UK recovery, Sep 21, 2012 Another good week in the Euro area, Sep 14, 2012 ECB takes a big step forward but with qualifications, Sep 7, 2012 Euro area inflation differentials: largely a tax story, Sep 7, 2012 Europes busy political September, Aug 31, 2012 What next from the ECB? Previewing SMPs big brother, Aug 24, 2012 UK: Chancellor likely to delay the target for debt reduction, Aug 24, 2012 Euro area: a look at the drags facing Euro area consumers, Aug 17, 2012 Euro area: awaiting a decline in core inflation, Aug 10, 2012 UK: revisiting the hop, skip, and slump in productivity, Aug 10, 2012

Latin America
Chile: a conscientious objector faces "currency war" draft, Oct 5, 2012 Brazil at a crucial juncture to address potential growth, Sep 28, 2012 Brazil: BRL close to, but still stronger than, fair value, Aug 31, 2012 Latin America: agriculture price spike adds inflation risk, Aug 3, 2012 Brazil: challenges to increasing public investment spending, Jun 15, 2012

Special Reports and Global Issues


The time is always now: introducing J.P. Morgans global nowcasters, Sep 5, 2012 Moving towards a much larger ECB balance sheet, Jul 31, 2012 Chinese housing market revisited, Jul 5, 2012 Global impact of the Euro area crisis, Jun 21, 2012

1. Research notes listed have been published in GDW; Special Reports and Global Issues are stand-alone features, but may also have appeared in some form in GDW.

JPMorgan Chase Bank NA Jan Loeys J.P. Morgan Securities Ltd. Nikolaos Panigirtzoglou

Economic Research Global Data Watch October 12, 2012

The J.P. Morgan View: Markets

Patience during political season


Asset allocation: No changes in our medium-term, valuefocused strategy to be long assets with high risk premia, equities, credit, and carry trades, even as upcoming political events will likely create shorter-term volatility. Economics: No major forecast changes, although increasing uncertainty around US fiscal cliff posturing creates downside risk on US 4Q and 1Q. Fixed income: We prefer German Bunds to US Treasuries. Equities: US earnings season favors domestically-oriented stocks and US Financials. Credit: We expect further spread tightening in US HG as the lack of credit supply brought about by QE3 is not fully priced in. Currencies: We launch a Chinese Economic Surprise Index. Commodities: Stay long Brent time spreads on Middle East uncertainty. Equity markets are trading heavy, and are giving back most of their gains of the past one to two weeks, despite no clear change in fundamentals. Other risk markets, such as credit, commodities, and the euro periphery, are not following equities this time, indicating we are largely seeing profittaking after the hefty rally in stocks over the last four months. There are no meaningful changes in growth forecasts this week, except for moving 1% in growth from 3Q to 4Q in the Euro area, due to better IP data in 3Q that we do not think will last. But as a result, global growth in 4Q at 2% is now barely different from the previous two quarters. In GDP terms, there is not as much sign of a rebound as we had hoped, even as the underlying PMI orders and inventory data do hint at this coming rebound. We are only at the beginning of the 3Q earnings season, but what we have is in line with subdued expectations for small oya drops. Profit margins then hit new highs and world growth has since fallen below potential. But global equities are up 10%. Why? We have argued that equities and other risk markets can rally despite lackluster growth as they offer high risk premia against events that will not all materialize. Hence, if the world turns out less ugly and volatile than what most feared, as is our view, then investors will over time gradually switch some of their defensive holdings into betterreturn, but riskier asset classes.

This risk-premium-focused strategy into equities, credit, and carry assumes volatility will remain subdued and markets will be buffeted by only modest adverse shocks. We dont see huge volatility from data or earnings surprises, with macro volatility having collapsed over the past two years, and aggregate earnings now also showing almost no movement anymore. This leaves us with the political surprise factor. Here we have to tread more carefully as the next few weeks will see another EU Summit, US elections, and Chinese leadership change, each of which with potentially momentous impact. On the last, the top priority of Chinese leaders will likely be stability and continuity. We do not foresee a major change in direction or worsening of the territorial conflict with Japan. The recent rebound in Chinese equities shows the market is hoping for positive news coming out of the Communist Party Congress on Nov 8. The EU Summit on Oct 18-19 has an ambitious agenda on both long- and short-term issues. But the lack of an imminent crisis, thanks to the ECBs OMT promise, means to us that not much progress is likely to be made. Unfortunately, given the need to merge sovereignty, EMU members seem to be unable to make major decisions without being subject to undue pressure (detailed analysis by Alex White in this GDW). That leaves the US election and the nearing fiscal cliff. Irrespective of who wins the election, both parties will soon have to seek compromise on avoiding a recession caused by fiscal tightening, as it appears extremely unlikely one party will have a blocking majority. But into the election, and the yearend decisions on taxes, inevitable political posturing, as neither side wants to show their cards yet, can easily have a depressing effect on economic activity, if not on risk prices. In our view, it supports taking some chips off the table, without going as far as neutral, let alone short risk assets. We stay medium-term positive on risk assets.

Fixed income
Bonds edged higher on the week, but essentially remain in the very narrow range they have held since the summer. That overall stability masks some striking crosscurrents, however. One is the Fed-fueled compression of US MBS spreads, which we expect to hold given an extremely tight supplydemand balance. Another is the marked outperformance of Australian bonds, triggered by a more dovish central bank, but also reflecting a long-standing yield compression toward core markets. We are reluctant to oppose this outperformance, given the uncertainty about the RBAs reaction function engendered by last weeks rate cut. The most important shift has been the better tone in Euro area sovereign debt markets. We share the broad view that the promise of the OMT backstop marks a major step forward in
9

JPMorgan Chase Bank NA Jan Loeys J.P. Morgan Securities Ltd. Nikolaos Panigirtzoglou

Economic Research The J.P. Morgan View: Markets October 12, 2012

the Euro areas crisis management, and are encouraged by some tentative signs of capital returning to the periphery. These include a fall in Spains Target2 balance and bond managers shift to overweight peripheral bonds, for the first time since 2010, as reported in our European Duration Survey. But for the near term, we are wary of a Spanish downgrade from Moodys to below investment-grade, and thus move to a more defensive stance, including by cutting overweights in the EMU core vs. Germany, and adding outright longs in German Bunds.

Equities
Global equities have paused over the past five weeks, following three months of strong gains. MSCI AC World at 330 is practically unchanged since the beginning of September and is at the same level as at the end of April, before the May crash. It is still 8% below its post-Lehman peak seen in May 2011. With short covering largely behind us, the equity market appears to be lacking strong drivers. The US reporting season is generating a small positive surprise, but this is not enough of an impetus. As we argued last week a subpar 2% pace in global GDP growth for 3Q is not enough to change the pattern of stagnation seen in S&P500 EPS since 3Q11. We thus look for a 3Q EPS of around $26, similar to 2Qs $25.8 and little changed from 3Q11. The bottom-up analyst forecast is $25.2, so such an outturn would represent a small positive surprise of around 3%, similar to the previous reporting season. At the time, a 3% surprise in the 2Q reporting season failed to lift equity markets during the first half of July. There is not enough impetus in the macro picture either. This weeks macro news was rather mixed, raising doubts about the anticipated rebound in global manufacturing. The rebound in the September global manufacturing PMI induced us last week to re-enter our Cyclical vs. Defensive equity sector overweight, but the trade has yet to perform. However, the US reporting season provides two interesting sectoral themes. First, domestically-oriented US companies are the ones whose earnings are outperforming, suggesting a focus on US-centric stocks. Second, Financials will likely be one of the bright spots in 3Q driven by improving credit and loan demand and a solid recovery in US housing. Our US Equity Strategist Tom Lee points out that a tailwind is also building for US Financials into 2013, which is the resetting of the credit scores for millions of Americans. The peak year of personal bankruptcies was 2005 and those records are removed from credit reports after 2012. Thus, we should see rapid improvements in the credit quality of millions of Americans in 2013.
10

2012 global GDP growth forecasts: J.P. Morgan versus consensus


% 4.2 3.8 3.4 3.0 2.6 2.2 1.8 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 J.P. Morgan Consensus

Chinese Economic Surprise Index


Bal of pos vs. neg surprises as % of total releases 72 48 24 0 -24 -48 -72 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12

Credit
Spreads gave a mixed picture this week as US high-grade tightened, Treasuries rallied, and lower-quality credit and equity markets sold off. At 160bp, US high-grade is now back to pre-August 2011 levels, and the Feds activity in mortgage markets seems to be bolstering demand for highquality corporates as MBS portfolio holdings are replaced. Yet even as issuers take advantage of low all-in yields to push net supply across all USD spread product toward our forecast of $25 billion/month, $40 billion of Agency MBS purchases and $60 billion of coupon payments per month will drive a $75 billion/month shortfall of spread product going forward. We believe such strong technicals are not fully priced in

JPMorgan Chase Bank NA Jan Loeys J.P. Morgan Securities Ltd. Nikolaos Panigirtzoglou

Economic Research Global Data Watch October 12, 2012

and expect further spread tightening to occur. Eric Beinstein and his team elaborate in this weeks CMOS. Our colleagues in credit derivatives strategy continue to cite liquidity as the overarching theme in European credit markets. Given that OMT can be seen as the ECB taking the role of lender of last resort, just as the Bank of England has done over the last three years, they feel that financial conditions between the UK and Europe will normalize and so examined relative value ideas between the two this week. They argue for a long in Euro vs. UK in investment grade corporates, which comes with an attractive entry point given the UKs recent outperformance. See Saul Doctor and team, CD Player.

vent much weakness in China-linked currencies. Regardless, we have few strong priors on this months releases so combine limited commodity FX longs (long NZD/USD) with a relative value trade (sell downside in an oversold cross like AUD/CAD).

Commodities
Commodities are up around 2% this week, led by oil as tensions between Turkey and Syria escalated further. Syrian crude output is very small and world oil markets are already insulated from a supply disruption caused by the sanctions and logistical constraints affecting Syrian production. Of more concern is the possible threat to the 1mbd of crude exports that pass through Turkey from Azerbaijan and Iraq to the Mediterranean around 50 miles from the Syrian border (see Daily Oil Note, Fenton et al., Oct 10). The threat to these pipelines seems low, while the conflict is limited to sporadic border skirmishes, but this does further raise uncertainty in an already tense situation and is likely at least partially responsible for the rally in oil this week. In our GMOS portfolio, we remain long Brent time spreads, to hedge our long risk exposures against an oil shock. This hedge has worked very well over the past weeks and we maintain it. USDA data out this week showed lower-than-expected corn stocks but soybeans were in line with expectations and wheat stocks were higher, although both were lower than previous USDA estimates. This caused a sharp rally in grains, which recovered all of the weeks earlier decline to finish broadly flat. In GMOS, we remain short agriculture on the argument that the US harvest is essentially over and that planting conditions for the new crops are much improved and high prices mean much higher future supply. Agriculture prices have historically exhibited an element of mean reversion precisely due to this dynamic, and we believe they have peaked over the summer and will gradually move lower over the coming months.

Foreign exchange
Apart from a few trend reversals this week, currency markets still look listless. The trade-weighted dollar and aggregate FX volatility are unchanged this week, FX volumes are below average, and manager returns are flat-lining for some composites. We have argued that easy money from the worlds central banks wouldnt deliver easy returns immediately since the global economy looked flaccid, commodity currencies were rich, and central bank intervention likely. This remains the outlook andunfortunatelyan exercise in patience, particularly ahead of two massive weeks for US earnings and Chinese data. Earnings look well on track to be unimpressive but in line with expectations. Trades are mostly unchanged this week and geared around three themes: carry (long NZD/USD), less sovereign stress in Europe (long EUR/GBP and short EUR/Scandi puts), and commodity FX relative value (AUD/CAD). China releases its usual array of activity data next week, the last before the November leadership transition. Any data improvement should lift currencies in Chinas orbit (AUD, NZD, EM Asia), but how much? The China Economic Surprise Index described in this weeks FXMW provides some guidance. Identical to the US Economic Activity Surprise Index (US EASI) we developed over 10 years ago, this one tracks the balance of positive versus negative surprises on monthly Chinese data releases since 2009. Months when the balance of surprises is positive are associated with 2% rises that month in commodity currencies, whereas months with negative surprises are associated with small declines (about 0.3%). Should China disappoint again as the index shows it has been doing for the past two months (third chart previous page), it isnt clear that the commodity currencies would decline that much or for that long, given the proximity of the leadership transition. If China observes its usual political-business cycle by engineering stronger growth in the year after the transition, expectation for imminent stimulus would probably pre-

11

JPMorgan Chase Bank NA Jan Loeys J.P. Morgan Securities Ltd. Nikolaos Panigirtzoglou

Economic Research The J.P. Morgan View: Markets October 12, 2012

Interest rates
United States Euro area United Kingdom Japan GBI-EM hedged in $ Fed funds rate 10-year yields Refi rate 10-year yields Repo rate 10-year yields Overnight call rate 10-year yields Yield - Global Diversified

Current 0.125 1.65 0.75 1.45 0.50 1.72 0.05 0.77 5.79 Current 159 190 573 753 292 340

Dec-12 0.125 2.00 0.50 1.50 0.50 1.65 0.05 0.90 6.00 Index

Mar-13 0.125 2.00 0.50 1.50 0.50 1.65 0.05 0.90

Jun-13 0.125 2.00 0.50 1.60 0.50 1.80 0.05 0.95

Sep-13 0.125 2.25 0.50 1.70 0.50 1.95 0.05 1.00

YTD Return* 2.1% 2.9% 2.4% 1.9% 6.3% YTD Return* 9.6% 8.6% 12.8% 19.0% 15.7% 14.7%

Credit Markets
US high grade (bp over UST) Euro high grade (bp over Euro gov) USD high yield (bp vs. UST) Euro high yield (bp over Euro gov) EMBIG (bp vs. UST) EM Corporates (bp vs. UST)

JPMorgan JULI Porfolio Spread to Treasury iBoxx Euro Corporate Index JPMorgan Global High Yield Index STW iBoxx Euro HY Index EMBI Global JPM EM Corporates (CEMBI) Quarterly Averages

Commodities
Brent ($/bbl) Gold ($/oz) Copper ($/metric ton) Corn ($/Bu)

Current 114 1754 8242 7.52

12Q4 105 1725 8300 8.75

13Q1 112 1750 8500 8.50

13Q2 105 1775 8700 8.25

13Q3 120

GSCI Index Energy Precious Metals Industrial Metals Agriculture

YTD Return* -1.0% 12.2% 5.1% 17.3%

Foreign Exchange
EUR/USD USD/JPY GBP/USD USD/BRL USD/CNY USD/KRW USD/TRY

Current 1.30 78.4 1.61 2.04 6.27 1111 1.81

Dec-12 1.30 78 1.62 2.02 6.32 1125 1.80

Mar-13 1.30 79 1.62 2.02 6.32 1125 1.75

Jun-13 1.32 79 1.63 2.00 6.30 1110 1.75

Sep-13 1.34 79 1.65 1.98 6.25 1100 1.70

3m cash YTD Return* index in USD EUR JPY GBP BRL CNY KRW TRY 0.8% 1.8% 4.5% -3.0% 2.0% 5.5% 11.2%

YTD Return

US

Europe YTD 0.5% 8.9% 13.9% 21.8% 13.7% 16.5% 19.8% 10.1% -0.2% 7.5% 12.3%

Japan
YTD -4.0% -13.1% -3.6% 0.0% 11.3% 8.6% 18.2% -10.4% 5.5% -18.2% 0.2%

EM
YTD ($) 5.5% 3.0% 9.9% 10.9% 18.5% 28.3% 14.9% 17.8% 13.0% 4.9% 11.6%

Equities
S&P Nasdaq Topix FTSE 100 MSCI Eurozone* MSCI Europe* MSCI EM $* Brazil Bovespa Hang Seng Shanghai SE

Current 1427 3044 718 5793 144 1111 996 59162 21136 2105

(local ccy) 15.9% 17.3% 0.2% 7.4% 14.2% 12.3% 11.6% 5.5% 19.0% -3.0%

Sector Allocation *
Energy Materials Industrials Discretionary Staples Healthcare Financials Information Tech. Telecommunications Utilities Overall

YTD 6.8% 11.1% 10.9% 19.9% 12.6% 18.5% 25.0% 17.9% 24.2% 5.1% 15.9%

*Levels/returns as of Oct 11, 2012 Local currency except MSCI EM $

12

JPMorgan Chase Bank N.A, London Branch Alex White

Economic Research Global Data Watch October 12, 2012

Economic Research Note

Proposal Burden sharing

Likely outcome Reinforcement of German views on legacy assets. No resolution on whether burden sharing will ultimately be prospective or retroactive. Possible small assurances to Ireland. Likely little progress, disagreements becoming more obvious. Possible indication that timeframe on introduction will be pushed back. Some discussion but likely not substantive. Some member states may indicate shift to greater domestic focus. Likely more discussion of transactions tax. Progress likely in principle, but unlikely to see precise details. Proposal will continue to be more about symbolism than substance in the near term. Review of progress on the Growth Compact wont be substantive. More pressure on Germany to support pro-growth policies following IMF revisions. Debate over Commission plan to move toward fiscal integration, but all substantive discussion pushed to December. Possible discussion of Treaty change. Unlikely to see substantive progress, particularly if Greek Troika discussions not complete. Small chance of Spain surprising on support request, but unlikely. Background tussle on speed with which the region needs to act, and on balance between structural and EU wide institutional reform.

European Summit to remind investors of a long road ahead


Europe has set itself an excessively ambitious agenda for the next Leaders Summit on October 18-19 Germany will push for the periphery to make domestic structural change; the periphery will push Germany for pro-growth policies and transfers Expect a broad vision on regional objectives, but little detail on banking union, integration, or Greece and Spain; expect some progress on an EMU budget The Summit will highlight how much remains to be done in order to deliver institutional change and thereby underscore the crucial importance of the OMT in relieving pressure on the Euro area The ECBs commitment to stand behind the region has transformed the response to the European crisis in important ways, with key tail risks clearly contained. However, in our view a long-term resolution of the problems faced by the Euro area will require institutional and structural reform in addition to a central bank willing to stand behind the integrity of the currency. The structural aspects of reform will need to be reflected in domestic policy within Euro area member states, centered on changes to welfare systems and labor markets. On an institutional level, the region needs to deliver further progress in the direction of burden sharing, including movement on banking union and genuine steps toward fiscal integration (precisely how far the region may need to move in order to reach a stable equilibrium is open to debate). Our concern is that the removal of acute financial market stimulus may reduce the political incentive to deliver these institutional and structural changes. The regions commitment will be put to the test at the European Leaders Summit at the end of next week (October 18-19). We expect to see an overly ambitious agenda, and disagreement about burden sharing and growth, which will prevent the region from taking a significant step forward. We think this Summit may come to be seen as an important missed opportunity in the long term, but in the short term we see concerns around European event risk being significantly less acute than in the pre-OMT world.

Banking union

Banking sector

EMU budget

Growth

Fiscal integration

Spain & Greece

Other issues

media attention. The fatal flaw for next weeks Summit is likely to be an agenda that tries to do much. We expect discussion of seven or eight key line items designed to shape the regions response to the crisis, in a package that seems sufficiently dense that leaders will be unable to navigate their way to a substantive agreement. The content of the debate will also be difficult to address. We expect significant divisions to remain over the long-term move toward banking union and shared supervision, as well as strategies to deal with European banking sector stress. We also expect the fundamental disagreement about official sector burden-sharingas to whether it is backward-looking or forward-lookingto remain unresolved. We are more optimistic about progress on new budgetary mechanisms although we think that these will amount to less in practice than many appear to believe. We do not expect significant outcomes on Greece or Spain, although we dont discount the possibility that the Summit could surprise. On a more positive note, while the Summit is unlikely to resolve any issues permanently, it may make incremental progress overall (insofar as it will at least force the region to address some areas of disagreement that have been conveniently ignored in the past). However, in doing so, it will highlight the length of the political journey that has yet to be traveled in order to deliver permanent structural and institutional reform. We think the outcomes will probably leave the region leaning
13

What to expect
Investors who have been following European politics over the past two years will have become used to Summits that overpromise or under-deliver. There are usually a range of reasons for this, not least the fact that compromise agreements require concessions, which are difficult to make in the full glare of

JPMorgan Chase Bank N.A, London Branch Alex White

Economic Research European Summit to remind investors of a long road ahead October 12, 2012

more heavily on the prospect of monetary policy intervention with the Summit providing a reminder to the market that political authorities are not yet able to deliver on structural or institutional changes in the near term. In many ways this will be dj vu all over again. Investors with longer memories will recall a crucial European Summit in mid-October 2011 (almost exactly the same day a year ago), which saw the final touches being put on Europes bailout mechanism (then the EFSF, rather than the ESM) after a painful period of ratification beset by legal difficulties. There was intensive discussion of the need to restructure Greeces debt burden, which was felt to be unsustainable. Chancellor Merkel went into the meeting seeking further commitments on economic governance (a Fiscal Pact) from her European partners, who instead wanted to see burden sharing before they signed away significant parts of their sovereignty. In substance, all of these debates remain current a year later, with disagreement over banking union replacing discussion of the Fiscal Compact for example. In Europe, beyond the ECB, change will continue to happen slowly.

impact of this concession by making further gains on burdensharing and growth, and as a result goes into the Summit with big expectations and relatively little room for maneuver. France will push for specific time-bound commitments on banking union, burden sharing, and fiscal integration. Germany will most likely demur. In preparing for this discussion, French Government figures have been making a significant play of the need for more urgent regional action in the near term. Finance Minister Moscovici has publicly urged Germany to focus on the dynamics of the European crisis, which in his view remain acute and mean that the region must continue to act quickly. The German view is much more skeptical on the need for speed (see Germany may want to slow down on Europe, GDW, Oct 5). We think these different perspectives on growth, institution building, and the speed of change will frame most of the discussions that take place at this Summit and further reduce the likelihood of substantive agreement. As a result, investors can expect the region to offer up a range of inconclusive debate about the areas we lay out below.

France and Germany to clash


The Summit will discuss a wide range of specific proposals, but we expect the substance of the debate to be framed by two primary areas of disagreement, where France and Germany in particular stand some way apart. The first of these is about growth. President Hollande has poured substantial political capital into securing progress on his Growth Compact, which will be reviewed at the Summit, and we expect him to push for further steps to be taken. We also expect further pressure on Germany and the European core following the IMFs revision of its fiscal multiplier assumptions, leading to renewed demands for amendments to the Euro areas austerity focus. This discussion will be closely related to the second fundamental issue we expect to be in play at the Summitthe sequencing of structural and institutional reform. The periphery, and France, will continue to push for major institutional changes (centered on burden sharing) to occur quickly on a European levelto which Germany will object. Germany, and the European core, will push for more commitments on structural reform (to welfare/labor markets, etc.) to take place at a domestic level within the periphery. As we have suggested, all of these developments need to take place, but the two main parts of the region will talk past each other on the sequencing. We expect all of these differences of view to be crystallized at the Summit. As a result, we see a high risk of public disagreement between France and Germany in particular. The French Government has just been through a difficult political period, passing the Fiscal Compact that President Hollande had previously promised to renegotiate or reject. It needs to counter the political
14

A tough debate on burden-sharing


One of the most prominent of the main line items for discussion at the Summit will be the different perspectives on burden sharing, which we have highlighted previously. The main difference of view is whether burden sharing (both for banks and sovereigns) is to be applied retroactively or prospectivelyi.e., as a way out of the current crisis or as part of the new steady state equilibrium the region is working toward. This may seem an arcane point, but it has direct impacts for the fiscal positions of several member states, particularly Ireland. The draft set of Summit conclusions that have been leaked by the European Commission call on leaders to address this issue once and for all by agreeing on the exact operational criteria that will guide bank recapitalization by the ESM in full respect of the 29 June Euro Area Statement. We dont think leaders will be successful in securing consensus; it is hard to see Germany, the Netherlands, and Finland rowing back from their recent stated position that they will not take on the burden of the regions legacy banking assets. In itself, this may not prove crucial in the long term. Only in Ireland is the total sum of the governments exposure to a legacy banking sector asset problem genuinely material in terms of a member states overall fiscal path. We expect Irish Prime Minister Enda Kenny to be vocal at the Summit, but Irelands problems may be more likely to be addressed in the future through other forms of debt relief. In the long term we do expect Ireland to receive additional support, through ECB intervention and a change to the terms of the package it received through the EFSF (recognizing the political difficulties this may cause in Germany and elsewhere). We think it is

JPMorgan Chase Bank N.A, London Branch Alex White

Economic Research Global Data Watch October 12, 2012

unlikely that other commitments to Ireland will be made clear at this Summit, but Kenny could receive private assurances that encourage him to temper the amount of pressure he places on Germany et al at this stage. A possible compromise on the whole issue would see a reiteration of the German, Dutch, and Finnish position alongside recognition that the structure of Irelands obligations to the EU and ECB would be subject to renegotiation in the future.

role. All of these issues remain highly contentious, and we do not expect any resolution at this stage. It is possible that we could see a reframing of the commitments on when banking union is supposed to be introduced, perhaps giving a more realistic time frame than January 2013.

Different approaches on banking and tax


Although it is unlikely to appear as a major line item in the Summit conclusions, we expect Leaders to discuss some of the implications of the recent Liikanen report on bank structure. There is a possibility of further disagreement here, with a number of member states concerned about the way in which the recommendations may be implemented (particularly if they are connected to the proposals around banking union). France wants to see a ban on certain types of banking activities by the end of 2012; we think it is unlikely to make serious progress and will seek to pursue some form of domestic Volcker rule on a separate track. There is some possibility of others, such as the Netherlands, moving more in the direction of national level implementation if European level agreement is hard to reach. The most likely outcome from the Summit itself is an agreement to disagree in the near term with the debate about bank structure and supervision likely to be reconsidered at a later date. Most of the region sees the SSM (changing the referee) as being fundamentally more important than Liikanen (changing some of the rules of the game) in the near term. In addition to Liikanen, however, we also expect discussion of a financial transactions tax (FTT) to be taken up in the margins of the Summit, with enough EU states now signed up to introduce enhanced cooperation (essentially a shared mechanism that would be introduced across part but not all of the EU). There will clearly be impacts for the banking sector, and a further sense of alienation from those, notably the UK, who will want nothing to do with this project.

Disagreement over banking union


The debate on burden sharing will be linked in some ways to discussion of the Commissions banking union proposals, which reflect many of the regions existing disagreements over the sequencing of liability and control mechanisms. The German view of banking union sees progress over a five- or six-year time horizon, with shared supervision potentially introduced in 2014, and reviewed for around two years. Potential next steps on burden sharing would only be substantively discussed at that point (and would then take time to build). The French and Italian conception of what banking union means sees a Single Supervisory Mechanism (SSM) up and running in January of 2013 with burden sharing on the regions banks to follow shortly thereafter. There is a substantive gulf of understanding with one perspective seeing banking union complete after around five to six years, and another seeing it largely complete in around five to six months. We continue to believe that the French perspective (shared by the Commission) is wholly unrealistic; we think that President Hollande is unlikely to make much progress at this Summit. We think that the fundamental issue of who pays and how will continue to be too sensitive to discuss at this stage. In the context of a German election year, the idea of proposing substantive moves toward a system of shared deposit guarantee schemes and resolution arrangements is almost certainly a non-starter. It was notable that early drafts of the European Commissions proposals on banking union included details of a payment mechanism that were removed from the final proposals; even the Commission recognized that they would get nowhere on these issues in the near term. Without any details of who pays, the whole integrationist aspect of banking union remains somewhat still-born in the near term, however. We see several other potential areas of disagreement, notable among which is the issue of how precisely the SSM is to work in practice, and what its scope will be. From the German perspective, any proposal that hands control of all Euro area banks to the ECB is likely a non-starter. There is also likely to be disagreement about the control and oversight of any supervisory mechanism (Germany would like to see controls based on economic weight rather than one member, one vote). There are also major questions around the precise powers and resources that the ECB will be able to access in pursuit of its

A Euro area budget and more integration


One area where we do expect some, though limited, progress is on the idea of a shared budgetary mechanism for the Euro area, although we dont expect this Summit to produce anything substantive by way of details. The European Commission is in favor of moving toward a central budget, while recognizing that its role and functions would need to be defined, and hopes that the region will make progress at this Summit. We expect German support in principle for this idea, but think that the proposed budget would add very little to the institutional soundness of the region apart from that already provided by the ESM (indeed it is not impossible that the ESM itself could ultimately be rebranded as some form of EMU treasury at some later date). It is notable that the latest proposals for a Euro area budget do at least appear to anticipate that the mechanisms for fiscal solidarity would be specific to the Euro area and not be covered by the Multiannual
15

JPMorgan Chase Bank N.A, London Branch Alex White

Economic Research European Summit to remind investors of a long road ahead October 12, 2012

Financial Framework (MFF). This reflects the need to appease the UK and other non-Euro area member states that fear having to pay for Euro area integration. Beyond this, the Commission sees the centerpiece of this Summit as a discussion of the other steps toward integration laid out in its interim report Toward a genuine economic and monetary union. This report has already been published, but provides little in the way of concrete detail on which leaders will be able to agree. It reflects the Commissions four-point plan to move through banking union to fiscal and economic integration and the building of more political structures at the European level. We think it is wholly unrealistic to expect that leaders will agree on anything of substance at this stage, when the debate over banking union has itself only just begun. We do however expect some general statements about the desirability of a long-term move in the direction of further fiscal integration. A more substantive discussion may happen when the Commissions final report is published in December. However, the regions internal debate over integration is likely to keep skating around the central issue, which is the question of how to introduce binding control mechanisms on individual members to which they are prepared to sign up. We dont expect any progress on this core issue at this stage, and think that progress on the integration agenda will be largely confined to positive words. One other question which will hang over this Summit to some extent, however, is the possibility of Treaty change. There is widespread recognition that a change to the European Treaty (TFEU) will likely be required at some point if the region is to move in the direction of further integration, even if only as far as a completed banking union. We think that much of this debate will remain on hold until after next years German election, however.

After the Summit.


Oct 21 Oct 24 Nov 7 Early Nov Nov 22 Nov 22-23 Late Nov Nov 25 Dec 3 Dec 3-5 Early Dec Early Dec Mid Dec Dec 13-14 Spain: regional elections ECB: Draghi in front of Bundestag EC: Autumn forecasts Possible deal on Greece ECB: Governing Council Meeting EU Summit (to discuss the 2014-2020 European budget) Likely deal on support for Cyprus Spain: Catalan elections Eurogroup meeting Germany: CDU party congress Possible Spanish request Ireland: Troika review Most European Parliaments not in session European Council Summit (will debate final fiscal integration plan)

sible point of leverage. We dont see this as being particularly credible, but it is not completely impossible that Prime Minister Rajoy could deliver a piece of political theatre and pronounce himself willing to make a formal request if the Summit reaches some arbitrary criteria of his choosing. In addition to all this, there may be some broader discussion in the margins of the Summit about the role of the ECB in containing peripheral stress. Leaders may seek private assurances from Chancellor Merkel that she will remain supportive of the idea of ECB intervention (reflecting ongoing political nervousness in the background). None of this is likely to become public, or to impact the ECBs stance.

Check for institutional progress


Despite the potential for major disagreement, we expect the tone coming out of this Summit to be reasonably constructiveif for no other reason than that the amount of pressure being applied is so much less than in June. However, the Summit communiqu will probably be largely insubstantial or backward looking, focused on the progress made since June (the delivery of the OMT and the ESM). There are risks that Franco-German disagreements spill over in a damaging way, but we expect leaders to make a sustained effort to keep them under control. Investors should look out for progress on the areas that are key to long-term institution building: burden sharing and banking union. Unfortunately at this stage we dont expect substantive progress on any of these issues. Leaders will likely continue to debate them at the next major Summit in December. This highlights the central dilemma of the path ahead for the region; with the OMT removing acute pressure we expect decreasing political incentives for action, which could leave the long-term institutional reform agenda withering on the vine.

Spain and Greece


We expect discussion of both Spain and Greece to dominate the sidelines of the debate in Brussels but we dont expect progress at this stage. There is a great deal of pressure on the Greek government to deliver a credible package to the Troika before the Summit begins that would enable leaders to reflect on progress made. We think there is a roughly even chance of Greece being able to deliver in advance of the Summit. Regardless of whether it does so or not, the detailed discussion of whether and how to release the next tranche of support will likely take place later in October and into November. We think there is a chance that the next tranche, which is unusually large at 31.5 billion, may ultimately be split into separate segments, although that will not likely be signaled at this point. As far as Spain is concerned, we dont expect a program request at this stage, although it is possible. Over the past few days the Spanish government has been attempting to link a support request to movement on banking union, which implies that it believes that the timing of any request is a pos16

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi

Economic Research Global Data Watch October 12, 2012

Economic Research Note

Euro area composite PMI output index


DI, sa 62 58 54 50 46 42 2010 Euro area, ex Germany 2011 2012 2013 Germany

Germany: taking a look at the growth slowdown


Domestic demand accounted for strong growth in 2011 External uncertainty turned corporates more cautions this year, causing domestic demand to stagnate Outlook is favorable for next year, but domestic demand is still an export-dependent engine Many view Germany as having a large role to play in the rebalancing of the Euro area economy, especially via a sustained pickup in wage and domestic demand growth. Last year, the German economy grew at an above-trend pace, with all of that accounted for by domestic demand. But as the Euro area debt crisis intensified and the global economy slowed, Germanys export-oriented corporate sector responded in typical fashion by turning more cautious. Capital spending was cut and job creation has now slowed sharply, which is in turn impacting the outlook for consumer spending. Only residential construction is lifting more clearly in an environment of very low interest rates and easy credit conditions. Overall, the German economy has expanded at a trend-like pace in 1H12, but that was entirely due to exports as domestic demand stagnated. Exports may improve in the coming months, but without this stimulus the German economy still seems to find it difficult to generate significant growth domestically.

Tracking German GDP


%q/q saar, models estimated over 1998 to 2007 period, boxes shows Sept 10 8 6 4 2 0 -2 2010 2011 2012 2013 GDP Tracking using PMI Tracking using IFO expectations

German IP
%q/q saar 20 10 0 -10 -20 96 98 PMI-based estimate 00 02 04 06 08 10 Sep PMI 12 14 IP (Manufacturing) Jul/Aug IP

What are the business surveys saying?


What are the business surveys currently saying about growth? The surveys have declined sharply since the start of the year. For 3Q12, both the German composite PMI and the IFO are signaling zero growth. Their message is mixed, though, about the last month. In particular, the September level of the PMI points to a return to marginal growth of almost 0.5%q/q saar at the end of the quarter, but the September level of the IFO points to a contraction of a similar amount. While we tend to prefer the more output-focused methodology of the PMI, the IFO cannot be ignored on statisical grounds, and therefore the overall message is that the economy is still struggling to turn around convincingly. At the sector level, the surveys suggest services activity may still be expanding modestly, which is broadly offsetting the contraction in manufacturing. In particular, the services PMI has held close to the 50 level, suggesting close to 1% ar growth in this part of the economy. But, the manufacturing PMI points to a 5%q/q saar IP decline in 3Q12 and still a 2% ar pace of contraction at the end of the quarter in September. The details of the manufacturing PMI were mixed, however,

so there is still a question about the near-term outlook for the industrial sector (despite the puzzlingly strong IP data in 3Q).

Caution prevails in the domestic economy


While we often take the services PMI as a gauge of domestic demand, other data are raising more questions about how well domestic demand is performing. Last year, the above-trend growth in the German economy was entirely driven by domestic demand. But, in 1H12, the still trend-like growth of the economy (at a 1.5% ar pace) relied entirely on net trade, with domestic demand stagnating. The available monthly indicators of demand suggest that this is not yet changing. The stagnation of domestic demand in 1H12 owed much to corporates responding to external uncertainty by curtailing their capital investmentsmachinery capex contracted at a 6% ar pace in 1H12 and subtracted 0.5%-pt from annualized
17

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi

Economic Research Germany: taking a look at the growth slowdown October 12, 2012

GDP growth. Unfortunately, no clear improvement is taking place. The positive signs in July, with domestic capital goods shipments (+4%m/m), capital goods imports (+4.6%m/m), and capital goods orders (+1.5%m/m) increasing, proved short-lived. Detailed import data are not yet available for August, but domestic shipments fell again in August (-2.5%m/m) and domestic capital goods orders plunged (-6.8%m/m). Overall, shipments and imports may still post a gain in 3Q12, but the weakness of orders does not yet point to a sustained stabilization. The decline in reported capacity utilization in manufacturing to below its long-run average also suggests a reduced need for exanding the capital stock in the near term. The greater caution of the corporate sector is also impacting consumers. The business surveys in September pointed to very little new job creation, and the monthly employment data are aligning themselves with that message. We would be surprised if the employment indices in the surveys weakened a lot further, as firms appear to be displaying a willingness to retain staff (as they did during the 2008-09 recession). But, the sharp slowdown in hiring implies that hourly wage growth will be the main driver of disposable income growth in the near term. An underlying improvement has certainly taken place, as negotiated pay growth has accelerated from 1.7%oya last year to a 2.7%oya average so far this year. Unfortunately, the way this feeds through to effective wages and real disposable income is noisy, incomplete, and is currently being impacted by a price drag. Hence, real disposable incomes have only grown at a 1%q/q saar pace in recent quarters and may slow in 2H12. In terms of actual spending, the indicators have also been more mixed. Households remain upbeat about their income positions and are reporting a high propensity to make large purchases. But, unless revised, retail sales and car registrations point to a consumption decline in 3Q12, and household credit is yet to pick up meaningfully. The part of the domestic economy that is still looking buoyant is residential construction. Housing permits are up 7% so far this year, the monthly house price indices are continuing last years upward trend, and financing conditions are very loose (with mortgage rates falling to a new record low in August). Hence, there seems to be more to come from the residential segment, although it is too small as a share of the economy to drive growth in a meaningful way. Outside of the residential segment, the construction data have turned more mixed, and there are questions about the recent momentum in the nonresidential construction segment and about public construction (which plunged in 1Q12, possibly reflecting temporary cutbacks by local and regional government). Overall, the latest developments suggest that German domestic demand is ultimately still very dependent on the export performance of the corporate sector. Via a resilient labor mar18

German real GDP and domestic spending


1H08 = 100 105 95 85 75 2008 2009 2010 Capex (machinery, equipment) 2011 2012 2013 Residential construction Consumer spending

German employment growth


%q/q saar 4 3 2 1 0 -1 -2 98 00 02 04 06 08 10 12 Employment PMI-based estimate Sep PMI

German wages and disposable income


%q/q saar, 2qma, wages and income are for whole economy totals 8 6 4 2 0 -2 -4 03 05 07 09 11 13 Real disposable income Nominal wages

German residential housing permits


bn, nominal 8 7 6 5 4 3 2 1 90 95 000s 000s 30 25 20 15 bn 10 5 00 05 10

ket, corporates continue to protect consumers from downside risks, but that leaves questions over the ability of consumer spending and domestic investment to lift more independently (e.g., in response to the very easy credit conditions). We expect growth to pick up again soon, as exports improve, but it may take longer for a deeper behavioral shift to take place.

J.P. Morgan Australia Limited Tom Kennedy

Economic Research Global Data Watch October 12, 2012

Economic Research Note

Australia's two major export markets


% of total ex ports 35 30 25 20 15 10 2008
% of total 30 25 20 15 10 5 0 China Japan Korea EU 27 India US NZ UK Taiwan

Aussie exports performing well given global headwinds


Australias trade flows have become increasingly narrow over the past few years, by destination and good Net exports contribution to GDP set to turn positive following peak in investment activity Improving external accounts to soften the blow of waning capex Since 2008, Australias trade mix has become increasingly concentrated, with exports to China now accounting for 30% of Australias total exports, up from 16% five years ago. The largest offsetting declines have been experienced in Japan, the European Union, and the United Statesadmittedly all regions that have had their own political and economic difficulties since 2008. In fact, among the top 10 major export destinations, China is the only country to have seen an increase in the proportion of exports received from Australia over the past five years. Although that economys continued demand for commodities helped Australia skirt recession during the financial crisis, the increased reliance on trade with China increases the risks to Australias outlook, especially considering the question marks that exist over the sustainability of Chinese growth.

Japan

China

2009

2010

2011

2012

2013

Major export destinations

Iron ore fines price


US$ per mt 200 150 100 50 0 93 98 03 08

J.P. Morgan forecasts

Destination not the only risk


The acceleration in exports to China has been driven largely by a surge in demand for iron ore and coal. In January 2008, iron ore accounted for 13% of total goods exports, but this has rapidly increased over the past four years to 23% of shipments (the vast majority of which have been sent to China). At the same time, coal exports have also increased, albeit at a more modest pace, rising from 13% in 2008 to 17% in the most recent data. The risk associated with such narrowly-focused trade flows has become evident over the past few months, as both iron ore and coal prices declined to multi-year lows. Unsurprisingly, these sharp price declines have seen various resource companies postpone or cancel investment projects that have become uneconomical at these lower prices. However, as we have previously pointed out (see Australias mining investment boom is far from over, GDW, Aug 31), despite these recent cancellations, there remains a large volume of work still in the investment pipeline, with the peak in mining investment activity, based on current projections, most likely to occur during 2014.

13

further questions about the durability of Australias export mix. However, despite softer-than-expected global growth so far in 2012, demand for Australias key exports has remained healthy, and volumes are forecast to remain elevated for at least the next 18 months (our forecast horizon). Using a regression (first chart next page) based on our projections for iron ore prices, Chinese IP, and global GDP growth, export volumes are expected to increase at an average pace of 7.1%oya until at least 4Q13, an estimate that suggests upside risk to our official forecast of 5.3%oya, and remains well above the longer-term average of 3.7%oya. Further upside exists to the extent that Australias export output has been constrained by supply-side factors, which of course is what necessitated the vast capex pipeline in
19

Will demand hold?


In addition to falling commodity prices, the lowering of real GDP growth forecasts for both China and Japan has raised

J.P. Morgan Australia Limited Tom Kennedy

Economic Research Aussie exports performing well given global headwinds October 12, 2012

the first place. This suggests that export volumes could well be stronger for a given level of Chinese growth than the recent historical sensitivities indicate. This export growth is expected to be driven largely by continual demand for both iron ore and coal from China over the coming years, although the reliance on these commodities will dissipate as LNG exports begin to comprise a larger portion of the total export basket. Currently, nine of the 10 largest projects in Australias investment pipeline are LNGrelated, which, assuming that the Productivity Commissions forecast of a two-year lag between project commencement and output reaching normal capacity holds, should see LNG output increase rapidly in the coming quarters, increasing upside risk for our current export projections. In terms of export values, considering that commodity prices are expected to remain significantly lower than their 2011 record highs, it is likely that value growth will track below that of volumes.

Export volumes
%oy a 25 20 15 10 5 0 -5 -10 96 A$ bn 900 800 700 600 500 400 300 00
% -pts 2 1 0 -1 -2 00 01 02 03 04 05 06 07 08 09 10 11 12

Actual Model

Average growth since 2000 98 00 02 04 06 08 10 12 14 A$ bn -18 Capex -15 -12 -9 -6 02 04 06 08 10 12

Capital imports and capital expenditure

External accounts to receive welcome boost


The current phase of the resources boom involves large-scale investment in the construction and development of infrastructure required to extract commodities. With export output itself not yet online, the benefit of this expenditure is only evident in the national accounts through the capex channel. The impact on the trade balance has been less favorable, as the rapid increase in private capex has been accompanied by a surge in capital imports, with much of the mining-related machinery and equipment having to be imported from offshore. This demand for capital goods imports has weighed heavily on the external accounts, with the economy continually recording annual trade deficits over the past decadeexcluding the consecutive surpluses in 2010 and 2011, which were largely attributable to record prices for both iron ore and coal. Following the anticipated peak in mining capex in 2014, it is likely the resource boom will shift to the production and export phase as output from previous investment ramps up. These lower levels of investment should see demand for capital imports dissipate, which will prove to be beneficial for the trade balance as export volumes remain elevated.

Capital imports

Net exports: contribution to annual GDP growth

What about GDP?


As mentioned, with over A$900 billion in capital expenditure currently in the mining investment pipeline, the impact of the resources boom to date has been captured in the national accounts through very strong business investment growth. However, despite the increased demand for commodity exports over the past decade, net exports of GDP has been a consistent drag on economic growth as import volumes have continually outpaced exports. Following the peak in capital expenditure in 2014, the role that trade has had in growth is set to improve as the diminishing need for mining-related capital
20

imports, coupled with healthy demand for key commodity groups, results in more favorable net export volumes. Although the exact contribution that net trade will make to growth is unclear, it is apparent that the beneficial impact of the net exports of GDP component will provide a somewhat offsetting impact to lower levels of capital investment anticipated in coming years.

JPMorgan Chase Bank NA Robert E Mellman

Economic Research Global Data Watch October 12, 2012

United States
Net exports are a substantial drag on growth in 3Q12; exports are declining as are imports of capital goods September price data confirm a rise in energy prices and continued slowing of core inflation Consumer confidence up in October; first Oct business surveys apt to show sluggish mfg, further rise in housing The economy continues to expand but at a lackluster pace. With additional data on August foreign trade and wholesale inventories out this past week, real GDP growth last quarter is tracking just a bit lighter than expected and the quarterly real GDP forecast is revised slightly lower to 1.4% saar (from 1.5%). The forecast continues to call for a modest acceleration to 2.0% growth this quarter. There is very little currentquarter data in hand to test this forecast. But improvement in new orders as reported in both September ISM surveys is broadly consistent with the forecast of slightly better growth this quarter. The first October business surveys, regional manufacturing surveys from the New York Fed (Monday) and Philly Fed (Thursday) and the Homebuilders survey (Tuesday), will condition views on activity early in the quarter. So will the upcoming weekly reading on initial jobless claims. Initial jobless claims plummeted 30,000 in the first week of October, but the Labor Department indicates that the drop mainly reflects results from one large state, reflecting firstweek-of-the-quarter technical issues rather than labor market improvement. Claims had receded below their recent trend in late September in the two weeks following the week of the last labor market survey, and the upcoming report for the week of October 13 (with possible revisions to the prior week) should give a better sense whether claims are trending lower into the fourth quarter. Markets will be watching consumer indicators ahead of the holiday selling season. The upcoming September retail sales report is expected to post an impressive 1.0% samr increase in monthly sales, boosted by stronger auto sales and higher gasoline prices, along with a healthy 0.5% increase in core retail sales. However, consumer price inflation was also high in September and that increase would imply a lackluster 0.15% rise in real consumer spending for the month, in line with the pace for the quarter as a whole. Continued modest income growth and the prospect of possible payroll tax increases in January are likely to limit gains in holiday spending this year. But recent increases in consumer confidence suggest that spending could be a bit stronger than might be expected on the basis of job and income growth alone. The preliminary Michigan consumer confidence survey

Merchandise export and import volumes


%ch saar over 3 months 24

12

Imports Exports

0 Japan tsunami, supply disruptions Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12

-12 Jan 11

Measures of core inflation, with September forecasts


%ch saar over 3 months 3.0 2.5 2.0 1.5 1.0 0.5 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Core PCE price index Core CPI

for October increased 4.8pts to 83.1. This is a new high for the expansion (although still low by standards prior to the last recession). And increases in confidence from the recent July lows have been concentrated in expectations, the component most highly correlated with spending on durables.

Exports have broken lower


Despite the slowdown in foreign markets during the first half, merchandise export volumes increased 7.0% saar in 2Q12 including a hefty 3.0% samr bounce in June. The foreign trade report for August confirms that the period of strong growth is now over. Merchandise export volumes declined 2.6% in August on the heels of a 2.3% drop in July. And exports so far in the quarter are running 4.9% at an annual rate below their 2Q12 average. Import volumes are also down slightly, but with data in hand it appears that real net exports will subtract 0.6% from annualized growth last quarter, slightly more than in the prior forecast. The ISM manufacturing measure of export orders correctly signaled the abrupt change in trend when it broke below 50 in June. The reading for export orders was slightly better in September (48.5) than the June-August average (47.0) but still points to further weakness ahead. Exports by destination are not seasonally adjusted, but annual growth has been weakest to those areas with slumping demand of late. For example, while overall exports of goods
23

JPMorgan Chase Bank NA Robert E Mellman

Economic Research United States October 12, 2012

have slowed to 1.5%oya, exports to Europe are down 5.8%oya and are down 14.4% saar over the past six months (as sa by J.P. Morgan). The trend in import volumes has also been down over the past few months, although the decline has not been as sharp as for exports. Import volumes have declined 3.6% saar over the past three months despite an increase in oil imports. Nonoil import volumes are down at a 6.1% rate. Trade report a negative for capital spending: Core capital goods orders have been trending lower since last spring, and core capital goods shipments started declining over the summer. For a while it seemed that the weakness in the capital goods business might be concentrated in foreign demand, reflecting the recession in Europe and severe slowdown across most of Asia. However, the latest monthly foreign trade data highlight the weakness in domestic demand. Volumes of imported capital goods declined 1.0% samr in August, the third consecutive substantial decline for a cumulative drop of 17.2% at an annual rate over this period. Meanwhile, exports of capital goods increased 1.0% samr in August and are up at a 6.1% pace over the past three months. Thus, the August trade report only reinforces the message from core capital goods activity of a sharp falloff in domestic demand for capital goods. The forecast for real business spending on equipment and software for 3Q12 is being revised lower again, to -4.8% saar (from -2.7% last week and a forecast of 7.0% growth when the quarter began).

Import and export volumes: capital goods ex autos


%ch saar over 3 months 40 30 20 10 0 -10 -20 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Imports Exports

Michigan consumer survey: 5-year-ahead expectations


Index, nsa 105 95 85 75 65 55 45 2010 2011 2012 Inflation Economic outlook %, nsa 3.3 3.1 2.9 2.7 2.5 2013

Confidence up, inflation expectations down


The preliminary October consumer sentiment survey from the University of Michigan increased 4.8pts to 83.1, the third consecutive monthly increase, taking the confidence measure to a new high for the expansion. The expectations component is a closer correlate of spending on durables than current conditions, and the former increased 6.0pts and accounted for most of the rise in the overall index in October and over the past few months. Consumers may well be responding to the recent increases in equity prices, house prices, and the decline in the unemployment rate. But it is interesting to note how much consumer attitudes have changed recently regarding the longer-term economic outlook. The 5-year-ahead expectations for the economic outlook spiked 10pts in October and 27pts in the last two months. The other notable detail in the preliminary October report is the moderation of inflation expectations. One-year-ahead inflation expectations receded to 3.1%, near the bottom of the recent range. And 5-year-ahead inflation expectations dropped 0.2%-pt to 2.6%, a new low for the expansion.

Core inflation continues to slow


Inflation commentary over the past several weeks has highlighted the sharp increase in the price of gasoline in August and September along with the slowing trend in core consumer price inflation. The early September price reports reinforce these themes. The September PPI increased 1.1% samr on much higher gasoline prices. But the core PPI was unchanged, its lowest reading since October 2011. Detail on the price of medical services in the PPI is used as source data for the price of medical services in the PCE price index. Based on the September PPI, the tentative forecast looks for the PCE price for medical services to decline 0.4% samr in September, reversing most of the unusually large 0.6% increase in August. The PPI results, along with the forecast for the September core CPI (out Tuesday) point to an unchanged reading for the core PCE price index in September. If realized, this would bring this measure of inflation to 1.3%oya (from 1.5% in August) and bring the 6-month run rate to only 0.8% saar.

24

JPMorgan Chase Bank NA Robert E Mellman Michael Feroli

Daniel Silver Jimmy Coonan

Economic Research Global Data Watch October 12, 2012

Data releases and forecasts


Mon Oct 15 8:30am

Retail sales
%m/m sa Jun Total Ex autos Ex autos and gas Building materials Control group Plus gasoline -0.7 -0.8 -0.4 -2.1 -0.3 -0.7 Jul 0.6 0.8 0.8 1.2 0.8 0.7 Aug 0.9 0.8 0.1 1.0 -0.1 0.7 Sep 1.0 0.9 0.6 1.0 0.5 0.9

the survey data reported for September; more specifically, the headline measures and new orders indexes increased in the regional and national surveys last month, on average. However, this improvement was observed in the Empire State survey, so we think it has some catching up to do in October.
Empire State survey and ISM-weighted composite
Index, sa 40 20 0 -20 -40 Derived-composite General business conditions Index, sa 65 60 55 50 45 40 09 11 35

1. Retail sales ex. gasoline, auto. dealers, and building materials

We forecast that retail sales increased 1.0% in September. An increase in unit auto sales has already been reported for the month, and we think gasoline prices will provide a lift to the nominal data on sales at gasoline stations. We believe sales at motor vehicles and parts dealers increased 1.5% in September while sales at gasoline stations increased 3.4%. Excluding these categories, we forecast that retail sales increased 0.6%. Sales of building materials should continue to climb back after plunging between March and June, and we forecast a 1.0% increase for September to follow similarly-sized gains the prior two months. Away from all of these categories, we believe sales of the so-called control group increased 0.5% in September; these sales have been choppy lately, and our forecast would represent a bounce back from a 0.1% decline reported for August.
Retail sales control measures
%ch over 3 months, saar 20 10 0 -10 -20 -30 Control plus gasoline stations 05 07 09 11 Control: total excluding gasoline, automotive dealers, and building materials

01

03

05

07

Mon Oct 15 10:00am

Business inventories
%m/m sa, unless noted May Inventories Manufacturing Wholesale Retail inventories Ex autos Autos Inventory/sales ratio 0.3 -0.1 0.0 1.1 0.6 2.1 1.27 Jun 0.1 -0.1 -0.2 0.8 0.1 2.2 1.29 Jul 0.8 0.6 0.6 1.1 0.5 2.7 1.28 Aug 0.6 0.6 0.5 0.8

1.29

We estimate that nominal business inventories increased 0.6% in August. Reports already available show that manufacturing inventories increased 0.6% during the month, while wholesale inventories increased 0.5%. We forecast that retail inventories increased 0.8% in August; industry data point to an increase in inventories of motor vehicles and parts during the month, and we think other retail inventories increased 0.4%, which would be in line with the recent trend.

Mon Oct 15 8:30am

Empire State survey


Diffusion indices, sa Jul General bus. conditions New orders Shipments Unfilled orders Prices paid Prices received Composite 7.4 -2.7 10.3 -13.6 7.4 3.7 52.5 Aug -5.8 -5.5 4.1 -10.6 16.5 2.4 50.0 Sep -10.4 -14.0 2.8 -14.9 19.2 5.3 49.5 Oct -6.0

We believe the Empire State manufacturing surveys headline increased 4.4pts to -6.0 in October. In general, the manufacturing data have deteriorated significantly over the past few months, though there was some improvement in
25

JPMorgan Chase Bank NA Robert E Mellman Michael Feroli

Daniel Silver Jimmy Coonan

Economic Research United States October 12, 2012

Tue Oct 16 8:30am

CPI
%m/m sa, unless noted Jun Total %oya (nsa) Core %oya (nsa) Core services Core goods Food Energy Housing Owners eq. rent Rent Lodging away from home Apparel New vehicles Used vehicles Airfares Communication Medical care 0.0 1.7 0.20 2.2 0.2 0.2 0.2 -1.4 0.1 0.10 0.12 0.9 0.5 0.2 0.0 -2.5 0.0 0.6 Jul 0.0 1.4 0.09 2.1 0.1 0.0 0.1 -0.3 0.0 0.18 0.31 -2.3 0.2 -0.1 -0.5 -2.7 -0.5 0.4 Aug 0.6 1.7 0.05 1.9 0.1 -0.2 0.2 5.6 0.3 0.26 0.19 -0.6 -0.5 0.2 -0.9 -1.3 -0.6 0.2 Sep 0.5 1.9 0.13 2.0

After accelerating in May and June, medical care prices have settled back to more moderate increases. We forecast that such prices increased 0.3%, which is in line with the average monthly increase for the series.
Consumer prices
%oya, nsa 6 4 2 0 -2 -4 Headline CPI Core CPI %oya, nsa 3.0 2.5 2.0 1.5 1.0 0.5

0.3 4.0 0.20 0.22 -0.2 -0.4 0.2 -0.4 0.5 -0.4 0.3

05

07

09

11

We forecast that the consumer price index increased 0.5% in September (+1.9%oya). In August we saw gains in energy, food, and core prices (which exclude food and energy), with energy prices providing the bulk of the lift to the headline index. We expect that a similar dynamic played out in September with another surge in energy prices and moderate increases in food and core prices. Core prices increased an especially soft 0.05% in August. We anticipate that such a low growth rate was not sustained and that core prices moved up 0.13% (+2.0%oya), which is still fairly mild for the series. We anticipate rising prices for gasoline, fuel oil, and natural gas based on our seasonal adjustment of relevant spot price movements, which should send energy prices up 4.0% in September. Rising fruit prices, along with other components of prices received by farmers, signal a 0.3% increase in the food CPI. Food price increases have remained in a narrow 0.0% to 0.2% range since last September. We expect the food CPI to break a bit above this range as effects from the run up in spot grain prices begin to transmit through the food production chain. Owners equivalent rent moved up 0.26% in August, the largest gain for the series since 2008. We anticipate that OER increased a more moderate 0.20% in September. We forecast that tenants rent firmed 0.22% in September, which is comparable to the August increase for the series. Prices for lodging away from home tumbled in July and August. We expect that this trend continued in September with a 0.2% drop. Used vehicle prices tend to lag the Manheim Used Vehicle Index, which fell each month from April through August. These declines signal a 0.4% drop in used vehicle prices in September. New vehicles prices moved up 0.2% in August and we expect a similar increase in September. Although airfares have eased for the three months through August, we anticipate that they firmed 0.5% in September based on rising jet fuel prices.

Tue Oct 16 9:15am

Industrial production
%m/m sa, unless noted Jun Industrial production Manufacturing Motor vehicles and parts High-tech Mfg ex motor vehicles Business equipment Capacity utilization (%,sa) Manufacturing 0.1 0.4 2.0 1.0 0.3 1.9 78.9 77.5 Jul 0.5 0.4 2.7 0.8 0.2 0.1 79.2 77.7 Aug -1.2 -0.7 -4.0 -1.1 -0.4 -0.2 78.2 77.0 Sep 0.2 -0.1 -4.2 0.3 78.2 76.9

We believe industrial production increased 0.2% in September. Industry figures point to a drop in motor vehicle production during the month but data on hours worked for other segments of the manufacturing sector signal modest growth outside the auto industry. We forecast a 0.1% decline in manufacturing production in September with production of motor vehicles and parts dropping 4.2% and other manufacturing production increasing 0.3%. Away from the important manufacturing sector, we forecast that mining production increased 1.0% in September while utilities production increased 0.7%. Industry data point to increased mining activity during the month, and the weather in September likely led to a boost in utilities production.

26

JPMorgan Chase Bank NA Robert E Mellman Michael Feroli

Daniel Silver Jimmy Coonan

Economic Research Global Data Watch October 12, 2012

Manufacturing production including and excluding autos


%ch over 3 months, saar 20 Manufacturing 10 0 -10 -20 -30 Ex autos

an increase in permits of 1.8% during the month. Starts have been pushing higher since late 2011 but the negative gap between starts in permit-issuing areas and permits reported for August points to a pullback in starts in September, and we forecast a decline of 3.8%. Multifamily starts and permits have been trending higher since late in 2009 though the monthly readings for these series are often very volatile. We believe both starts and permits bounced back in September after declining in August, and we forecast an increase in starts of 9.5% and an increase in permits of 3.5%.
Single-family starts and permits
Mn, saar

06

08

10

12

2.0 Starts 1.5

Tue Oct 16 10:00am

Homebuilders survey
Sa Jul Housing market Present sales Prospective buyer traffic 35 36 28 Aug 37 38 30 Sep 40 42 31 Oct 42

1.0 0.5 0.0 95 97 99 01 03 05 07 09 11 Permits

We forecast that the NAHB surveys headline increased 2pts to 42 in October. This survey has been improving lately, increasing 26pts over the year through September. Other data related to the housing market have picked up recently as well, and we think the housing market will continue to improve.
NAHB survey and single-family housing starts
Index, sa 80 Mn, saar 2.0

Thu Oct 18 8:30am

Jobless claims
000s, sa New claims (wr.) Wkly 4-wk avg Aug 4 Aug 11 Aug 18 Aug 25 Sep 1 Sep 8 Sep 15 Sep 22 Sep 29 Oct 6 Oct 13 364 369 374 377 367 385 385 363 369 339 365 369 365 369 371 372 376 379 375 376 364 359 Continuing claims Wkly 4-wk avg 3313 3320 3331 3332 3304 3275 3281 3288 3273 3305 3312 3325 3324 3322 3311 3298 3287 3279 Insured Jobless,% 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6

60

1.5

40 20

Housing starts

1.0 0.5

NAHB survey

0 05 06 07 08 09 10 11 12 13

0.0

1. Payroll survey week

Wed Oct 17 8:30am

Housing starts
Mn units, saar Jun Starts Single-family starts Multifamily starts Permits 0.75 0.53 0.22 0.76 Jul 0.73 0.51 0.23 0.81 Aug 0.75 0.54 0.22 0.80 Sep 0.75 0.52 0.24 0.82

We estimate that housing starts were unchanged at 750,000 saar in September while housing permits increased 2.4% to 820,000 saar. For the important single-family data, permits have been trending steadily higher since early in 2011, and we expect this to have continued through September with

We forecast that initial jobless claims increased 26,000 to 365,000 during the week ending October 13 (which is the survey period for the October employment report). The Department of Labor indicated that the 30,000 decline in claims reported for the prior week was mostly due to one state which may have reflected an issue with seasonal adjustment. The seasonal factors can often create volatility in the claims data around the change of the quarter and Columbus Day, so we think the upcoming report will show an increase in claims that undoes most of the decline reported for the previous week. The state-level initial claims data for the week ending October 6 will be reported along with the national claims data for the week ending October 13. These figures should reveal which state led to the large drop in claims during the

27

JPMorgan Chase Bank NA Robert E Mellman Michael Feroli

Daniel Silver Jimmy Coonan

Economic Research United States October 12, 2012

week ending October 6; we suspect it was a heavily populated state (most likely California).
Initial jobless claims
000s, sa 700 600 500 400 300 200 2007 2008 2009 2010 2011 2012

Philadelphia Fed survey and ISM-weighted composite


Index, sa 60 40 20 0 -20 -40 -60 01 03 05 07 09 11 Derived-composite General business conditions Index, sa 70 60 50 40 30

Continuing jobless claims (first 26 weeks of UI)


000s, sa 7000 6000 5000 4000 3000 2000

Fri Oct 19 10:00am

Existing home sales


Jun Total (mn, saar) %m/m %oya nsa Months supply (nsa) Single-family Median price (%oya) 4.37 -5.4 5.2 6.5 6.5 7.5 Jul 4.47 2.3 11.7 6.4 6.3 9.7 Aug 4.82 7.8 11.2 6.1 6.2 9.5 Sep 4.65 -3.5 8.6

2007

2008

2009

2010

2011

2012

Thu Oct 18 10:00pm

Philadelphia Fed survey


Diffusion indices, sa Jul General bus. conditions New orders Shipments Inventories Prices paid Prices received Composite -12.9 -6.9 -8.6 -7.5 3.7 1.6 45.3 Aug -7.1 -5.5 -11.3 -6.9 11.2 2.8 45.6 Sep -1.9 1.0 -21.2 -21.7 8.0 -0.2 44.2 Oct 1.0

We believe existing home sales declined 3.5% to 4.65 million saar in September. The housing market appears to be generally improving, but the relevant indicators signal that existing home sales declined in September. Existing home sales increased in both July and August, but pending home saleswhich typically lead existing home sales by one or two monthsedged lower over these two months, on net. The limited data available for local markets look consistent with some pullback in existing home sales in September.

Review of past weeks data


NFIB Small-Business Optimism survey (Oct 9)
Index, 1986=100, sa Optimism Index Capex plans Hiring plans Planned price increase Jul 91.2 21.0 5.0 17.0 Aug 92.9 24.0 10.0 17.0 Sep 92.8 21.0 4.0 19.0

We think the Philadelphia Fed surveys headline increased 2.9pts to 1.0 in October, crossing back into positive territory for the first time since April. The survey was still weak in September, but the increase in new orders (from -5.5 to 1.0) and the large drop in inventories (from -6.9 to -21.7) created a favorable dynamic for upcoming activity, so we think we will see some improvement in the survey reported for October.

International trade (Oct 11)


$ bn, samr Jun -41.9 15.5 -57.4 1.2 -1.5 Jul -42.0 15.3 -57.3 -1.0 -0.8 -42.5 15.4 -57.8 -1.1 -0.6 Aug -44.0 14.9 -58.9 -0.4 0.6 -44.2 15.1 -59.3 -1.0 -0.1

Balance (BOP basis) Services Merchandise Exports (%m/m) Imports (%m/m)

The trade deficit in August widened to $44.2 billion from $42.5 billion the prior month, as imports edged down 0.1%, but exports fell quite a bit more, dropping 1.0%. The slowing in global growth is now making itself more evident in the export data; over the past two months exports are down 3.4% and on a year-ago basis exports are up only 1.5%, the slowest pace of the expansion. Net exports appear likely to subtract

28

JPMorgan Chase Bank NA Robert E Mellman Michael Feroli

Daniel Silver Jimmy Coonan

Economic Research Global Data Watch October 12, 2012

around 0.6%-pt from GDP growth in 3Q, a little more than our previous estimate. The decline in exports occurred across a number of categories. One of the larger declines was an 8.3% drop in food and beverage exports, which may appear to reflect a drought effect, though the drop merely seems to be reversing a 16.7% increase that took place the prior month. The geography of exports is reported on a not seasonally adjusted basis, but in year-ago terms one of the bigger declines has taken placenot surprisingly in exports to Europe, which are down 5.8% versus last August. The slight decline in imports took occurred despite a price-led increase in nominal crude petroleum imports, as ex. petroleum imports fell 1.5%. Auto imports cooled off, down 3.0%, after running quite strong the prior three months. One of the more disappointing aspects of the report was the continued decline in capital goods imports, down another 1.1% in August, which alongside the weak capital goods shipments figures signal reduced domestic appetite by US business for expanding capital outlays. Import prices (Oct 11)
%m/m nsa, unless noted Import prices %oya Ex. fuel import prices %oya Jul -0.7 -3.2 -0.4 0.0 -3.3 Aug 0.7 -2.2 -0.2 -0.5 1.1 -1.9 -0.4 Sep 0.5 -1.6 -0.1 -0.8 1.1 -0.6 0.2 -0.5

The producer price index for finished goods jumped 1.1% in September on rising energy and food prices, leaving the PPI up 2.1%oya. Despite the increase in headline prices, core prices (which exclude food and energy) were unchanged in September, their lowest print since October 2011. Rising gasoline, fuel oil, and natural gas prices sent the energy PPI up 4.7% in September, the second consecutive monthly rise in energy prices. Food prices firmed 0.2%, which is fairly soft considering we expect that they started to come under pressure from the summer spike in feed grain prices. Taking a closer look within core prices, auto prices slipped 0.2% for a second month. Light truck prices gained 0.3%, but increases have been moderating since July. Core ex light vehicles were also unchanged in September, the lowest reading for the series since February 2010. Much of the weakness in core prices was due to a 0.1% drop in capital equipment prices (a category that includes light trucks). This decline reflects the current weakness in US capital spending. Based on information in the PPI report, we anticipate that the PCE medical care services deflator dropped 0.4% in September, which is likely making up for an unusually large 0.6% increase in August. The intermediate goods PPI popped 1.5% and the core intermediate increased by the same amount in September. PPI crude goods firmed 2.8% and the crude core rose 1.6%. Taken together, these increases suggest that some firming may be in the pipeline for PPI finished goods. Consumer sentiment (Oct 12)
Michigan preliminary Aug 74.3 88.7 65.1 3.6 3.0 157 Sep 78.3 85.7 73.5 3.3 2.8 165 Oct 78.0 83.1 88.6 79.5 3.1 2.6 152

The import price index increased 1.1% in September on rising fuel and nonfuel prices. Despite the September increase and an August gain that was revised up to 1.1%, import prices have declined 0.6% over the prior year. In September, rising crude oil and fuel oil prices sent fuel prices up 4.4%. Nonfuel prices moved up 0.2%, the first monthly increase for the series since April. The nominal trade-weighted dollar depreciated 0.9% between early August and early September (when import prices are collected), which likely accounts for some of the firmness in nonfuel prices. Turning to the details of nonfuel prices, food prices popped 1.7% in September, the largest increase since March. This rise was likely not substantially influenced by the summer surge in spot feed grain prices since the US is not a major importer of the products most affected by the Midwest drought. In fact, the September increase in food prices was largely driven by a spike in vegetable prices. Capital goods prices increased 0.2%, the largest gain since January, and vehicle prices increased 0.3%. However, the story for September was not entirely one of firming prices. Consumer goods prices were unchanged and nonfuel industrial supplies dipped 0.2%, the fourth consecutive drop for the series. Producer price index (Oct 12)
%m/m sa, unless noted Finished goods %oya (nsa) Core %oya (nsa) Energy Cars Trucks Core intermed. Core crude Jul 0.3 0.5 0.4 2.5 -0.4 1.1 1.6 -0.9 -1.1 Aug 1.7 2.0 0.2 2.5 6.4 -0.2 0.6 -0.2 2.2 Sep 1.0 2.0 0.2 2.5 3.7 0.3 0.2 0.2 1.1 2.1 0.0 2.3 4.7 -0.2 0.3 0.6 1.6

Univ. of Mich. Index (nsa) Current conditions Expectations Inflation expectations Short term Long term Home buying conditions

The University of Michigan consumer sentiment index increased 4.8pts to 83.1 in the preliminary October report, which was a new peak for the expansion. The level of sentiment still looks low by historical standards, and other data related to consumer spending have been soft, but it is still positive to see sentiment improving. Details of the report show that the current conditions index (+2.9pts to 88.6) and expectations measure (+6.0pts to 79.5) both improved in the October report. The two expectation measures specifically regarding the economy also reached new highs for the recovery in October. Sentiment related to personal finances and income expectations improved in October but remain weak by historical standards. The indexes related to the labor market were mixed in October even with the favorable headlines associated with the September employment report (most of the sampling for the Michigan survey was done before the employment data were released). The median one-year-ahead and five-year-ahead inflation expectations both declined by 0.2%-pt to 3.1% and 2.6%, respectively, in the preliminary October data. This reading for the longer-term measure was a new low for the cycle and was last reported this low during the recession in March 2009 and December 2008.

29

JPMorgan Chase Bank NA Daniel Silver

Economic Research Global Data Watch October 12, 2012

Focus: mixed measures of inflation expectations


Measures of inflation expectations have been mixed recently and some of the closely-tracked ones are sending very different signals. Overall, we think that inflation expectations are anchored and that persistent slack in the labor market will keep wage inflation, and subsequently general inflation, tame for the next few years. The preliminary University of Michigan consumer sentiment survey for October reported that the median five-yearahead inflation expectation declined 0.2pt to 2.6% during the month. This was the lowest figure reported in the recovery to date; there has not been a reading this low since the early stages of the financial crisis (this measure previously printed 2.6% in December 2008 and March 2009). In contrast to the Michigan survey data, the 5-year/5-year forward breakeven inflation rate has been trending higher for about a year now, though it has cooled a touch since the middle of September. The latest readings for this measure have been around 2.7% or 2.8%, which are on the high end of the range reported over the past few years. Comparable values have been observed in the past without unhinging inflation expectations. Measures of core inflationwhich exclude food and energy and reflect underlying inflation pressureshave been easing lately, and we believe this will continue to be the case in the upcoming reports for September. We forecast that the core CPI will be up only 1.1% saar over the three months through September (reported on October 16) and that growth in the core PCE price indexthe Feds preferred measure of underlying inflationwill be even softer at +0.8% saar (reported October 29). Both of these figures would represent the softest respective three-month growth rates since December 2010 and the growth rate for the core PCE price index would be one of the softest of the recovery to date. Looking out over a longer time span, we believe that inflation measured by the PCE price index (as well as the related core measure) should remain below the Feds 2.0% target through the end of 2013 (on a year-ago basis). We expect slightly firmer, but similar, results from the comparable consumer price indexes (not shown).

Michigan survey: median five-year-ahead inflation expectations


% 3.4 3.2 3.0 2.8 2.6 2.4 00 02 04 06 08 10 12

5yr-5yr forward breakeven inflation rate


% 3.0

2.5

2.0

1.5 2010

2011

2012

2013

Core inflation measures


%ch over 3 months, saar, September data are forecasts 4 3 2 1 0 -1 2008
%oya 5 4 3 2 1 0 -1 06 07 08 09 10 11 12 13 Core PCE price index PCE price index

Core CPI

Core PCE price index

2009

2010

2011

2012

2013

PCE price indexes


Forecast

30

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi Raphael Brun-Aguerre

Economic Research Global Data Watch October 12, 2012

Euro area
Next weeks Euro area summit to be a reminder of difficult path toward greater political integration But, ECBs OMT announcement continues to limit financial market stress Euro area IP surprises on upside in August, with statistical question marks We nevertheless allow for better IP in our 3Q12 GDP estimate, offset by payback in 4Q12 Next weeks EU summit will be a reminder of the long road ahead that the region faces in moving toward a more politically and fiscally integrated monetary union. Nevertheless, the ECBs willingness to engage in OMT continues to limit the level of stress in financial markets and reduces the pressure on politicians of having to move too quickly toward more integration.

Euro area GDP


%q/q saar 4Q11 Euro area Old New Germany France Italy Spain -1.3 -1.3 -0.6 0.1 -2.9 -2.0 1Q12 0.0 0.0 2.0 0.1 -3.3 -1.3 2Q12 -0.7 -0.7 1.1 -0.1 -3.3 -1.7 3Q12 f -1.0 0.0 1.0 0.5 -1.0 -1.5 4Q12 f -0.5 -1.5 0.0 -1.5 -2.5 -4.5

Tracking Euro area GDP


%q/q saar, box shows 3Q11 tracking estimate 5 0 -5 -10 GDP (actual)

Tracking model

Rotating our 3Q and 4Q GDP forecasts


The August IP reports were surprisingly strong in the core countries and across the periphery. Overall, Euro area IP increased 0.6%m/m in August, which left the July/August average up 4% annualized on the 2Q12 level. The manufacturing part is up even more at 4.8% annualized so far in 3Q12. Unfortunately, the details clearly point to large payback, most likely in September. In particular, while a broad range of production categories have improved, half of the large increase reported so far for 3Q12 owes to surging auto production. The data for autos show back-to-back gains of around 6%m/m in July and August, which is at odds with the anecdotal evidence of weakening demand and pressure for production cutbacks. It may be that in France, auto manufacturers have been trying to increase inventory to guard against possible industrial action (due to plant closures). But, huge gains have also been reported in Germany, which are harder to explain. There was also an 11.4%m/m jump in Italy in August. There are clear questions about likely problems with the seasonal adjustment of the data, and it is also not entirely clear how the national account statisticians will use them when they prepare the 3Q12 GDP reports next month. We are however willing to make some allowance for the strong IP data in our GDP forecast. Crucially, we assume that the payback will come in the form of a sharp drop in September, rather than revisions to July and August. This means that even if we assume a 2%m/m IP plunge in September, the third quarter will still show almost a 2% annualized increase and set up a much weaker 4Q. If we put this into a tracking tool for Euro area GDP, together with other activity indicators, we think that even a 1%q/q saar GDP increase is possible in 3Q12. We are

99

01

03

05

07

09

11

13

Euro area IP, excl. construction


1Q08 = 100 105 100 95 90 85 80 75 2008 2009 2010 2011 2012 2013 Euro area, excl. Germany Germany

Euro area IP - motor vehicles


1H08=100 110 100 90 80 70 60 50 2008 2009 2010 2011 2012 2013

unwilling to go quite so far, mainly because the business surveys are much weaker. But, we are going halfway by raising our 3Q12 GDP forecast by 1%-pt to zero, and are reducing our 4Q12 estimate by the same amount to -1.5%q/q saar. Hence, the 2H12 average is unaffected. Revisions at the country level follow a similar pattern, with 3Q better and 4Q worse than previously. In Spain, this is exaggerated by a
31

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi Raphael Brun-Aguerre

Economic Research Euro area October 12, 2012

VAT effect, which likely supported spending in 3Q12 and will weigh even more on spending in 4Q12. Given the statistical factors that may be impacting the data and given that the IP gains are hard to square with anecdotal evidence and the much weaker business surveys, we would downplay the significance of the forecast change. Instead, we continue to watch the business surveys for signs of underlying lift, which we continue to expect to materialize as we move into next year.

Euro area IP
1Q08 = 100 105 100 95 90 85 80 75 70 2008 2009 2010 2011 Germany France Italy Spain 2012 2013

Tracking the 2012 French budget


The French central governments August budget balance number was released this week. It showed a modest 5.1 billion improvement with respect to the same period last year. Thus, with respect to the official deficit objective of 3.7% of GDP this year, it still looks like some slippage is likely. But additional measures estimated at 7.2 billion were adopted at the end of July, a large part of which has yet to be reflected in the budget figures, and the 2012 budget also includes a precautionary reserve worth 6 billion. Taking these amounts into account, the slippage this year should be limited. Our own forecast is that French GDP growth will only reach 0.1%oya this year against an official projection of 0.3%oya, so the government may not raise the full amount of additional taxes estimated in July. Implementation risks are also likely in our view. We thus think that the general government deficit this year will reach 4.7% of GDP, against an official projection of 4.5%.
120 110 100 90 80 70

Euro area IP
1Q08 = 100 Ireland Germany Portugal Greece 2008 2009 2010 2011 2012 2013

French cumulative monthly budget balance


bn, nsa 0 -20 -40 -60 -80 -100 -120 Jan Apr Jul Oct 2011 Path consistent with govt forecast if monthly sa deficit is constant 2012

Insights about the 2013 French budget


France released the details of its 2013 budget last week. The government plans to reduce the deficit level by 1.5%-pt to 3.0% of GDP next year, which would be a large achievement considering the low level of domestic activity: French output has been little changed for the last three quarters, and the official forecast assumes a mere 0.8%oya GDP improvement next year. Thus, a large part of the fiscal consolidation in 2013 relies on additional measures estimated at 30 billion. Of that amount, one third will be met by spending cuts, while the remaining part will be evenly divided between household and corporate tax increases. In the details, spending cuts will be met by a lower budget allocated to ministries (down 2.8 billion), partly achieved by a lower number of public sector workers (by around 1,300). Defense spending will also be reduced by 2.2 billion; public investment is set to decline by 1.2 billion; transfers to regional and local governments will decrease by 1.8 billion; and extraordinary spending will decline by 2.0 billion. On the revenue side, the government will create an additional
32

French fiscal plan


%GDP for fiscal indicators and %oya for GDP 2011 Budget balance Of which: Central government Other central admin. Local governments Social security Government debt Assumed real GDP -5.2 -4.5 -0.1 0.0 -0.6 86.0 1.7 2012 -4.5 -3.7 -0.2 -0.1 -0.5 89.9 0.3 2013 -3.0 -2.5 -0.2 -0.1 -0.2 91.3 0.8 2014 -2.2 -2.0 -0.1 -0.1 0.0 90.5 2.0 2015 -1.3 -1.5 0.0 0.0 0.3 88.5 2.0 2016 -0.6 -1.2 0.0 0.1 0.6 85.8 2.0 2017 -0.3 -1.0 -0.1 0.1 0.8 82.9 2.0

marginal income tax tranche of 45% for incomes higher than 150,000; capital gain taxes will increase in the housing sector; credit tax exemptions benefiting companies will be partly removed; and taxes on polluting activities will increase.

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi Raphael Brun-Aguerre

Economic Research Global Data Watch October 12, 2012

Data releases and forecasts


Week of October 15 - 19

Review of past weeks data


Output and surveys
Industrial production
Jun Jun Jul Aug Euro area %m/m sa %oya Germany Prod. sector (%m/m sa) %oya sa Prod sec ex constr(%m/m sa) %oya sa Industry (%m/m sa) %oya sa France IP (%m/m sa) %oya sa Manuf prod (%m/m sa) %oya sa Italy IP (%m/m sa) IP (%oya sa) -0.6 -1.9 -0.4 0.3 -0.4 0.0 -0.8 -0.4 0.0 -2.5 0.0 -2.9 -1.3 -7.7 -0.5 -1.7 Jul 0.5 -2.7 1.3 -1.4 1.3 -1.7 1.7 -1.7 0.2 -3.1 0.9 -2.8 -0.2 -7.0 0.6 -2.4 1.2 -1.2 -1.4 1.5 -1.6 0.6 -2.8 1.0 -2.6 -0.1 -6.6 0.0 -0.5 Aug -0.2 0.6 -2.3 -0.5 -1.4 -0.4 -1.5 -0.5 -1.8 1.5 -0.9 1.8 -0.4 1.7 -6.4

External trade and payments


Foreign trade
May Tue Oct 16 11:00am Euro area bn, sa Trade balance Trade balanceyear earlier Exports %m/m sa Imports %m/m sa

6.7 0.3 154.2 0.3 147.5 -0.9

9.3 -4.0 157.9 2.4 148.6 0.7

7.9 -3.9 154.7 -2.0 146.8 -1.2

0.5

0.5 -0.3 0.3 -0.1 0.1 -2.3 0.3 -2.6 -1.1 -7.4

Inflation
Consumer prices
Jun Tue Oct 16 11:00am Euro area (final) HICP (%m/m, nsa) HICP (%oya, nsa) HICP (%oya, core-X)1 HICP (%oya, core-XX)2 HICP (%m/m, ex-tobacco) -0.1 2.4 1.8 1.6 -0.1 Jul -0.5 2.4 1.9 1.7 -0.6 Aug 0.4 2.6 1.7 1.5 0.4 Sep 0.7 2.6 2.5 1.5 0.8

1. Excluding unprocessed food and energy. 2. Excluding food, alcohol, tobacco, and energy.

Producer prices
Jun Fri Oct 19 8:00am Germany %m/m nsa %m/m sa %oya nsa -0.4 -0.4 1.6 Jul 0.0 0.0 0.9 Aug 0.5 0.5 1.6 Sep

We expect Euro area headline inflation to be revised down one tenth to 2.6%oya. Since the publication of the Euro area flash estimate in the final days of September, a number of countries have released their final inflation figures. Spanish inflation increased seven tenths to 3.5%oya as a result of the September VAT hike from 18% to 21%. Italian inflation also increased a tenth to 3.4%oya as fuel prices continued to surge. But inflation declined in Germany and France, by one tenth to 2.1%oya and two tenths to 2.2%oya, respectively, largely offsetting inflation increases in Spain and Italy. The country releases so far suggest Euro area inflation will be revised down one tenth.

The August IP reports were much stronger than expected, both in the core and in the periphery. In the region overall, IP rose 0.6%m/m in August, with the July/August average up 4% annualized on the 2Q12 level. The manufacturing part did even better, rising 0.7%m/m and tracking up almost 5% ar so far in 3Q12. In the detail, intermediate goods production was flat in August and is up only marginally so far in 3Q. Consumer goods production rose strongly however (1.8%m/m in August) and is up just over 2% ar so far in 3Q. The capital goods category rose 0.7%m/m in August and is up over 8% ar so far in 3Q12. Within the capital goods category, both machinery and electrical/optical goods production declined in August but are still up modestly so far in 3Q12. The category that accounted for most of the strong gains is auto production, which surged 5.6%m/m in July and 6%m/m in August. This reflects particularly strong increases in Germany, France, and Italy. The increases in auto production are hard to reconcile with anecdotal evidence, which points to weak orders and manufacturers trying to manage down their production levels (one exception is France, where reports suggest that producers ramped up production in August to build inventory levels ahead of possible strike action). It is possible that the data are being impacted also by problems with the seasonal adjustment. Nevertheless, we are incorporating some of the strength into our GDP forecast, offset by payback in 4Q12. For more details, see this weeks Euro area essay. By country, the improvement in the summer has been broadbased across the region, and much less of this owed to auto production in Germany, France, and Italy. In fact, almost all Euro area countries are tracking decent increases so far in 3Q12, including the peripheral countries.

33

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi Raphael Brun-Aguerre

Economic Research Euro area October 12, 2012

External trade and payments


Foreign trade
Jun Germany bn, values,sa Trade balance Trade balance - year earlier Exports %m/m Imports %m/m Jul Aug

16.3 11.9 92.4 -1.4 76.1 -2.9

16.2

16.1 10.7 92.8 0.4 76.7 0.7

16.3 10.8

18.3 13.7 95.0 2.4 76.7 0.3

German and Spanish HICP inflation was unrevised with respect to their flash releases. German inflation declined a tenth to 2.1%oya and Spanish inflation rose seven tenths to 3.5%oya as the 3%-pt VAT hike to 21% lifted prices. In the remaining countries, French inflation printed two tenths lower at 2.2%oya, and Italian inflation rose 0.1%-pt to 3.4%oya. Taking these data into account, as well as final figures for countries such as Belgium and the Netherlands, it looks like Euro area inflation will be revised down a tenth to 2.6%oya. The details of the country releases were also informative in a number of ways. French inflation declined partly as a result of the lower tax rate applied to fuel products in September. Fuel prices in France declined 0.9%m/m, which subtracted 0.3%-pt from lower energy prices. But prices also declined substantially in the service sector, especially for services related to tourism. In Spain, the introduction of the new VAT rate of 21% (up from 18%) contributed to lift prices by 1.9%m/m in September, and headline inflation rose seven tenths to 3.5%oya. During the summer, we observed a frontloading of the VAT pass-through as headline inflation already increased 0.9%-pt in the two months prior to September. The cumulative impact has now reached 1.6%-pts since June and only a marginal effect remains to be seen. In our view, this effect will not be strong enough to lift inflation further, and we think Spanish inflation has now peaked.

76.2 -2.1

76.5 0.3

German exports remained on a firm upward trajectory in August. Exports of goods rose 2.4%m/m in nominal terms and 2.0%m/m in real terms, and the %3m/3m annualized rate is still running at a solid 7% on both measures. Imports were softer. They edged up in nominal terms, and fell for the third consecutive month in real terms (by 0.8%m/m in August). The %3m/3m saar rate is still running at a decent 5.9% pace on real imports, but this reflects gains a few months back. Due to the relative strength of exports, the trade surplus jumped close to its all-time high. The export data are firm relative to the business surveys, which point to stagnant or slightly declining real exports. In particular, the new export orders index in the manufacturing PMI had slumped to 39.4 in August before it recovered somewhat to 42.4 in September. The export expectations index in the IFO had declined to -1.4 in August and deteriorated a bit further in September to -3.2.

Inflation
Consumer prices
Jul Germany (final) %m/m nsa %m/m sa %oya nsa HICP (%oya) France %m/m nsa Index ex tob nsa %oya nsa HICP (%oya) Italy (final) %m/m nsa %oya nsa HICP(%oya nsa) Spain (final) %m/m nsa %oya nsa HICP(%oya nsa) 0.4 0.1 1.7 1.9 -0.4 124.22 1.9 2.2 0.1 3.1 3.6 -0.2 2.2 2.2 Aug 0.4 0.4 2.1 2.2 0.7 125.06 2.1 2.4 0.4 3.2 3.3 0.6 2.7 2.7 0.0 3.2 3.4 1.0 3.4 3.5 Sep 0.0 0.3 2.0 2.1 -0.3 124.74 1.9 2.2

34

JPMorgan Securities Japan Co., Ltd. Masamichi Adachi

Economic Research Global Data Watch October 12, 2012

Japan
Small firms sentiment worsened with concerns over the impact of the China-Japan dispute Total machinery orders plunged in August, further evidence of weak global equipment investment Private consumption picked up in August, but trend appears to be downward The IMF/World Bank annual meeting is being held in Tokyo this week, and the IMF published its latest World Economic Outlook, which revised down its global GDP growth forecast for 2012 and 2013 from the July update (a detailed report was released in April). The downward revision of the global outlook is not surprising; we also have revised down our global outlook over the past three to six months. Still, the IMFs outlook for Japan (2.2% real growth in 2012 and 1.2% in 2013) seems too optimistic in our viewour forecast looks for 2.0% and 0.6%. Indeed, the Japanese Cabinet Offices real consumption index released this week showed a notable contraction of a key component of domestic private demand in 3Q. With the sharp fall in auto sales in September due to the end of government subsidies, a further fall in consumption looks likely at least in the near future. Also, the machinery orders report provided further evidence of the softness in domestic capex and the sharp fall in external demand for Japanese equipment. With the recent emergence of additional downside risk from the dispute with China, it looks likely that the trend of the Japanese economy is weakening more and faster than the views of officials (including the BoJ and Japanese government). To be sure, we do not think that Japan has slid into a recession, even though we do expect two consecutive quarters of contraction in the GDP (technical recession). In line with the official view, our base case scenario looks for some (but less) recovery in global growth next year after near-term uncertainties (such as the US fiscal cliff) fade away. Even in Japan, relatively firm business and consumer sentiment so far may prevent a second-round effect from the decline in manufacturing activity to the overall economy. However, the downside risks to this view remain high, and are probably strengthening, especially in Japan. The current development warrants nearterm policy support. In this regard, the hung Diet is decisively negative. We expect another monetary easing at the end of October, but that will not likely be sufficient to boost growth materially. In our view, close cooperation between a strong government and the BoJ is necessary to address the challenges facing Japan. Political deadlock is generally a strong headwind for the global economy; Japan is no exception.

Economy Watchers survey overall current index


DI 60 50 40 30 20 10 02 03 04 05 06 07 08 09 10 11 12

Machinery orders
Yen bn, sa, 3mma for both scales 3000 Total 2500 2000 800 1500 1000 02 03 04 05 06 07 08 09 10 11 12 Core domestic 700 600 1000 900 1100

Small firms sentiment worsened with the dispute with China


The headline current conditions DI in the Economy Watchers survey fell 2.4pts in September to 41.2, the lowest level since May last year (two months after the Tohoku earthquake). The deterioration of sentiment was not a surprise, but the pace was faster than we had expected, based on a milder decline in the Shoko Chukin small firm survey. The Economy Watchers survey is conducted later (at the end of month) than the Shoko Chukin survey (in the middle of the month), so the recent dispute with China likely had a larger impact on the Economy Watchers survey. Looking at the components, the DIs of business-related firms worsened 4.0pts, more than those of households (-1.9pts) and employment-related firms (-1.7pts). Respondents comments highlighted the China/Japan dispute, especially among manufacturers and tourist-related firms, in addition to the common negative factors of weakening external demand and a strong yen. We expect that sentiment will continue to worsen for a while.

Machinery orders plunged in August


Total machinery orders plunged 12.6%m/m sa in August, further evidence of the weakness in global equipment investment. Core domestic private machinery orders (which exclude orders from electric utility companies and those for ships) fell more moderately at 3.3% in August after two months of de35

JPMorgan Securities Japan Co., Ltd. Masamichi Adachi

Economic Research Japan October 12, 2012

cent gains in July (+4.6%) and June (+5.6%). The average of July and August is up 4.3% annualized relative to the 2Q average, showing some recovery from the 15.3% plunge in 2Q, and it is stronger than the official outlook (-4.8%) presented in August. This suggests that firms spending (investment) behavior is not yet on a downtrend. However, it should be noted that the total domestic private orders, including volatile orders from the noncore sectors, plunged 13.7%m/m sa in August and is tracking a 22.3%q/q saar decline in 3Q, which is certainly negative for the GDP-based capex in near future. More worrisome was the 14.7%m/m sa plunge in foreign orders in August, which leaves the Jul/Aug average down 42.6% annualized from 2Q when the orders fell off a cliff at -52.7% ar. The August orders level is 40.9% lower than the recent peak in January this year, indicating that external demand for Japanese equipment manufacturers has fallen sharply. The decline in August may be exaggerated as the fall of orders in big ticket items (railroad vehicles) was cited in the report, but the weak trend seems to be clear. With recent news of a softer Asian economy and the dispute between Japan and China, it is difficult to expect that external demand will pick up materially in the near future. In domestic orders, it appears that manufacturers demand has been softening lately, but nonmanufacturers are holding up relatively well, except noncore electric utility companies. Meanwhile, public orders fell again in August, -7.1%m/m sa after a 13.5% plunge in July. It seems that reconstructionrelated orders are now weakening, although the main reason for the decline in August was a fall in defense-related orders.

Real consumption and auto registrations


2005=100 sa 108 106 104 102 100 98 96 94 02 03 04 05 06 07 08 09 10 11 12 Auto registration 5 4 3 2 Consumption Units, mn, sa by J.P. Morgan 6

Bank lending
%oya 6 4 2 0 -2 -4 2008 2009 2010 2011 2012 2013

sumption in 4Q after a 2.0% decline in 3Q, but the risk is still skewed to the downside.

Bank lending increased from special factor


The pace of bank lending edged up in September to 1.2%oya from 1.1% in August, leaving 3Q up 1.1%oya, a notable acceleration from 0.5% in 2Q. However, it should be noted that at least a part of this acceleration reflects a special factor related to the central governments initiative to delay the distribution of local allocation tax to local governments. Since the DPJ-led government is still struggling to pass the legislation that allows the government to issue deficit bonds (new JGBs), the MoF decided to delay expenditures as much as possible, including the local tax grants. As a result, local governments are now borrowing from banks to compensate for the temporary shortage of funds. There are also other reasons that bank lending continues to grow. First, in year-on-year terms, loan demand related to reconstruction activity remains high. Second, electric power companies still contributed to the overall lending growth with the need to finance higher input (mainly liquid natural gas) costs and bond redemptions. Finally, M&A transactions and mortgage loan demand have recently been on rising trends. However, overall loan demand remains weak, especially with low business investment.

Private consumption weakening


The Cabinet Offices private consumption index unexpectedly jumped 1.5%m/m sa in August, but the downward revision to July to -1.0% from -0.5% left the 3m/3m sequential change at -2.0% annualized, which is equal to our forecast for 3Q GDPbased consumption. The jump in August was not surprising as bad weather had likely been a drag on consumption in June and July, but the uptrend of consumption has probably weakened since the end of 2Q with the softening in labor income (a decline in summer bonuses) and the fading of pent-up consumption demand from last year when consumer spending was restrained by the disaster. With auto registrations (sales) plunging in September, overall consumption is expected to decline in the month. And given the more downbeat information on the overall economy, particularly the dispute between China and Japan, it is difficult to expect that consumption will strengthen in the near future, except possibly for new smart phones. Our current forecast already looks for a further 1.2%q/q saar contraction in con-

36

JPMorgan Securities Japan Co., Ltd. Miwako Nakamura Masamichi Adachi

Economic Research Global Data Watch October 12, 2012

Data releases and forecasts


Week of October 15 - 19
Mon Oct 15 1:30pm

Industrial productionfinal
%m/m sa May Production Shipments Inventories Inventory/shipments ratio Operating ratio Production capacity (%oya) -3.4 -1.3 -0.7 -3.7 -2.2 -1.3 Jun 0.4 -0.9 -1.2 4.2 -2.3 -1.3 Jul -1.0 -3.1 2.9 3.7 0.5 -1.7 Aug -1.3 0.4 -1.6 -2.9 DI

nomic impacts of Japan/China dispute, GDW, Oct 5, 2012), at least in the near future. However, given that the income surplus is expected to rise gradually or at least to be stable at a high level, the current account surplus will not likely turn into deficit in coming months. Economy Watchers survey (Oct 10)
Jul Current conditions Households Business Employment 44.2 42.8 44.8 52.1 Aug 43.6 42.1 44.0 52.5 Aug 43.2 41.2 40.2 40.0 50.8

Wed Oct 17 2:00pm

Construction spending
%oya May Public Private Residential Nonresidential 10.5 2.1 5.2 -1.4 Jun 10.4 2.4 5.3 -0.9 Jul 12.3 0.7 1.4 -0.2 Aug

See main essay. Cabinet Office private consumption index (Oct 10)
Jun %m/m sa -1.0 -0.9 Jul -0.5 -1.0 Aug 0.5 1.5

See main essay. Bank lending (Oct 11)


%oya Jul Bank lending Adjusted for special items 0.9 1.0 Aug 1.1 1.2 1.1 Sept 1.1 1.2 1.2 1.3

Construction spending data are a second-tier indicator that rarely receives much attention. Still, public spending in this survey is the key input for public investment in GDP. Since reconstruction activity has been delayed, we expect that the uptrend of this demand will continue for while, but confirmation from this indicator is important.

See main essay.

Review of past weeks data


Balance of payments (Oct 9)
Jun Current account ( bn sa) Trade balance Services Income Current transfers Current account ( bn nsa) 774 -167 -195 1214 -78 433 Jul 335 -477 -279 1181 -90 625 Aug 635 -211 -225 1170 -99 351 722 -236 -246 1278 -74 455

Machinery orders (Oct 11)


%m/m sa Jun Domestic private sector, ex for ships and from utilities Manufacturing Core nonmanufacturing Foreign 5.6 -2.9 2.6 -9.8 Jul 4.6 12.0 -2.1 3.0 Aug -2.5 -3.3 -15.1 3.6 -14.7

See main essay. Consumer sentiment (Oct 11)


DI, sa Jul Consumer sentiment Standard of living Income growth Labor market conditions Durable goods purchases1 39.7 40.6 39.4 36.8 42.0 Aug 40.5 40.7 39.6 38.7 42.8 Sept 40.2 40.1 40.6 39.7 37.7 42.2

The current account surplus was somewhat larger than expected in August, recording 722.3 billion, sa (J.P. Morgan: 635 billion; consensus: 520 billion), up from 335.4 billion in July. The relatively large gain in the surplus reflected a smaller trade deficit in the month, which was not a surprise given the already reported custom trade balance. The trend of the trade deficit has been relatively stable since the beginning of this year with declines in both nominal exports and imports. The surprise in August was a larger-than-expected income surplus, which jumped from 118 billion to 128 billion. This component is volatile, so it is difficult to identify a trend from monthly changes. From the three-month average, it looks like the income surplus is on a gradual rising trend, mainly from direct investment income. The services deficit was smaller in August than in July but the trend is for a wider deficit. Overall, the current account surplus has been broadly flat through this year, and August report did not break that trend. Looking ahead, the merchandise trade and services deficits likely will be larger given the dispute with China (see Macroeco-

1. The DI asks whether a respondent thinks that now is a good time to purchase durable goods.

The CAOs consumer sentiment index fell 0.4pt to 40.1 in September, but remained above the recent low in July (39.7). The level has been broadly flat since March this year. This sentiment survey has yet to point to any downturn in the trend of consumption. However, the track record of this sentiment index in predicting actual consumer spending has been poor, especially for real changes. So, stable sentiment does not assure firm actual consumption.
37

JPMorgan Securities Japan Co., Ltd. Miwako Nakamura Masamichi Adachi

Economic Research Japan October 12, 2012

In the details, all four component DIs have been broadly stable, showing no particular change (improvement or worsening) recently. While the perception of the labor market condition is relatively soft, income growth actually edged up in September. We think that sentiment will worsen further in coming months.

Consumer sentiment and real consumption


Index, sa 50 45 40 35 30 25 Sentiment Consumption %3m/3m saar 16 8 0 -8 -16 -24

of oya rise was exactly that same as in August and 2Q. However, it should be noted that the rise reflects the liquidity preference of money holders (households and nonfinancial corporates), not a rise in credit, as the broad liquidity measure, L, rose at a much more moderate pace in September (0.7%oya) and 3Q (+0.4%). In L, investment trusts, the key financial product for households that want to take risk, fell more rapidly in September (-3.4%oya) and 3Q (-2.7%) from 2Q (-2.0%) and 1Q (-0.7%). On the other hand, the rise in foreign bonds accelerated in September (+5.3%) and 3Q (+3.8%) from 2Q (+0.3%) and 1Q (-0.8%). It seems that individuals who are taking risks are now shifting their portfolio to foreign bonds from investment trusts that are backed by equities. Note that the recent acceleration of the gain in L partly reflects a technical estimate in the preliminary print, so it is difficult to judge if there is a change in trend.

Index of tertiary sector activity (Oct 12)


Jun %m/m sa %oya 0.2 0.9 0.1 0.8 Jul -0.8 0.8 -0.7 Aug 0.3 0.5 0.4 0.6

05

06

07

08

09

10

11

12

Corporate goods prices index (Oct 12)


%m/m nsa, 2010-based Jul Domestic CGPI (%oya) Export prices Import prices -0.7 -2.2 -0.9 -2.7 Aug 0.2 -1.8 0.0 0.0 Sept 0.3 -1.4 0.1 0.0 1.5

The tertiary sector activity index, which covers almost all sectors except manufacturing, picked up in August as expected after a revised 0.7% (from 0.8%) fall in July. The average of July and August is only 0.8% annualized lower than the 2Q average, showing broad stability. The result was consistent with business surveys that show firm nonmanufacturing activity. Indeed, manufacturing activity (industrial production) is tracking a sharp decline of close to 15% annualized in 3Q even after a 7.7% decline in 2Q.

The domestic corporate goods price index (CGPI) rose modestly again in September at 0.3%m/m nsa after a 0.2% rise in August, mainly due to the rise in prices of petroleum products. Still, the fall before August left 3Q down 3.0%q/q ar. In oya terms, the index was down 1.4% in September and 1.8% in 3Q. Excluding petroleum products, corporate goods prices were basically flat between July and September after having declined from falling commodity prices. By stage of demand, prices at all stages, raw materials (+2.2%), intermediate materials (+0.3%), and final goods (+0.4%), rose in September, although capital goods in the final goods category fell a bit (-0.1%). Consumer goods rose 0.5%, mainly due to a 1.2% rise in imported nondurable goods (propane gas). Accordingly, the oya decline eased notably, suggesting that the deflation in the core CPI will soon ease (note that Japans core CPI excludes only fresh food and includes energy). Export prices were flat, while import prices jumped 1.5%, mainly due to the hike in energy prices. International terms of trade derived from this survey deteriorated a bit in September, but remain somewhat higher than the trend from 2002. Money stock (Oct 12)
%oya Jul M2 L 2.2 0.0 2.3 Aug 2.4 0.3 Sept 2.4 0.3 0.7

Tertiary sector index and IP


2005=100, sa 104 102 100 98 96 IP 94 92 2007 2008 2009 2010 2011 2012 90 80 70 2013 Tertiary sector index all sectors 120 110 100

The M2 (high liquidity) maintained a relatively solid rise, up 2.6%m/m saar in September and 2.9%q/q saar in 3Q, leaving the oya rise at 2.4% in both the month and the quarter. The pace
38

JPMorgan Chase Bank NA Sandy Batten Silvana Dimino

Economic Research Global Data Watch October 12, 2012

Canada
Trade balances narrow slightly in August But trade still likely a drag on overall growth in 3Q Weak capex implications from August trade figures Next week sees release of key BoC survey The August trade figures released this week continued to show the trade sector being a net drag on overall activitya reflection of the external headwinds that are buffeting the economy. Both the nominal and real trade deficits narrowed slightly but this reflected weakness in imports, not revival of exports. Housing starts retreated 2.3%m/m in August following a 7.7%m/m jump in July, but were down 5.3%q/q for 3Q versus an 11.7%q/q surge in 2Q. This points to a weak reading, on the margin, for residential investment in the 3Q national accounts, though construction will obviously be ongoing on the surge in structures started in 2Q. Consumer sentiment treaded water in September, holding to the strong gains made in August. The nominal trade deficit narrowed in August to C$1.32 billion from a wider-than-previously-released C$2.53 billion shortfall in July (previously -C$2.34 billion). Nominal imports collapsed 3.1%m/m, reflecting declines in every sector except energy, while exports were little changed (-0.1%m/m). This was the sixth month of the previous seven in which the trade balance posted a deficit. Nominal exports were down 1.6% from a year ago, while imports edged up 0.6% from a year earlier. By sector, exports were generally up with a sharp decline in exports of industrial goods and materials (-6.1%m/m) offsetting increases in other major sectors. Real (chain weighted) exports were essentially unchanged in August following a 1.7%m/m decline in July. So far in 3Q, real exports are down 1% from the 2Q average. Though the August decline in imports was widespread, it was led by a 7.4%m/m drop in imports of industrial goods and materials, after four consecutive monthly increases. Energy imports rose for the first time in three months, while imports of machinery and equipment fell for the second consecutive month. Real (chain weighted) imports slumped 2.0%m/m on top of a 1.2%m/m decline in July. Thus far in 3Q, real imports are down 0.5% from the 2Q average. The real trade deficit narrowed in August from July. But, the July/August average is still slightly wider than the 2Q average, indicating that net exports could be a slight drag on 3Q overall GDP. It should be noted, however, that Statistics Can-

Monthly real merchandise trade balance


Chained 2002 C$ bn, monthly rate 2 0 -2 -4 -6 -8 -10 -12

3Q avg

1Q avg 2Q avg

4Q avg 06 08 10 12

Real exports and imports


2002 C$ bn 45 40 35 30 25 01 03 05 Exports 07 09 11 Imports

Real capital equipment purchases


q/q %chg saar, 3Q12 is estimate from Jul/Aug data Est from imports 40 20 0 -20 -40 -60 00 Actual 02 04 06 08 10 12

ada recently conducted a major revision to its national accounts data, and as a result, the monthly real trade figures do not line up as well with quarterly net exports as they had previously. For example, the monthly real trade figures show that the real deficit widened slightly in 2Q while the revised national account figures show a slight narrowing. Meanwhile, the 3Q capex picture is getting gloomier. Canadian businesses import about 70% of their purchases of machinery and equipmentso these imports are a very useful leading indicator of business investment spending. Machinery and equipment imports fell 1.9%m/m in August on top of a 2.6%m/m drop in July. Thus far in 3Q, they are 0.5% below the 2Q average, pointing to weak business investment spending in 3Q.
39

JPMorgan Chase Bank NA Sandy Batten Silvana Dimino

Economic Research Canada October 12, 2012

Since Canada is a small, open economy, the terms of trade play an outsize role in the determination of domestic income. Changes in global commodity prices are a key factor behind changes in Canadas terms of trade. The recent pickup in global commodity prices is being reflected in an associated rise, albeit slight thus far, in the terms of trade. External headwinds are clearly blowing hardas reflected in the recent deterioration in export performance. The external sector will likely be a drag on overall growth in 3Q. This report continues to underscore the outsize role global events are playing in determining the near-term course for both the Canadian economy and Canadian policy. We continue to expect that external events will be the primary guide to the course of monetary policy over the near term. We still look for the next BoC rate action to be a hikebut not until July 2013. Next week sees the release of the Bank of Canadas quarterly Business Outlook Survey. This contains key gauges of business expectationsfor investment spending and employmentas well for inflation and measures of capacity utilization. The most recent couple of surveys have portrayed very strong capex and hiring intentions with capacity utilization above its long-term average. However, inflation expectations have remained anchored. With external headwinds now blowing harder than at the previous survey, it will be interesting to see how the business outlook has been affected.

Thu Oct 18 8:30am

Wholesale sales
Sa May Total, %m/m %oya 0.9 6.5 Jun -0.3 6.1 Jul -0.6 4.6 Aug 0.8 4.8

Fri Oct 19 8:30am

Consumer price index


%m/m nsa, unless noted Jun Total CPI %oya BoC core CPI %oya Ex food & energy %oya CPI-XFET (%oya) -0.4 1.5 -0.4 2.0 -0.4 1.7 1.6 Jul -0.1 1.2 -0.1 1.7 -0.3 1.3 1.2 Aug 0.2 1.2 0.3 1.6 0.2 1.1 1.0 Sep 0.3 1.3 0.4 1.5 0.5 1.0

The headline CPI is expected to increase 0.3%m/m. Gasoline prices should push the index up again in September, as they did in August. In August, the CPI for gasoline was up 2.7%, turning up for the first time in four months. At a 1.3%oya expected pace in September, the headline rate will be below the BOC target midpoint (2%) for the fifth month in a row. Core inflation should remain tame at 1.5%oya, although a seasonal boost is expected from clothing and the education category.

Review of past weeks data


Housing starts (Oct 9)
Sa Jul Total (000) (%m/m) (%oya) Aug Sep 208.0 209.4 223.8 225.3 205.0 220.2 -6.3 -6.1 7.6 -8.4 -2.3 -2.4 -1.6 16.9 -2.0 5.0

Data releases and forecasts


Week of October 15 - 19
Tue Oct 16 8:30am

Manufacturing report
%m/m sa, unless noted May Sales New orders Unfilled orders Inventories Inventory-shipments ratio 0.4 1.6 0.7 1.5 1.34 Jun -0.8 1.0 2.1 -1.8 1.32 Jul -1.5 -5.6 -1.2 1.0 1.36 Aug 1.2 1.2 -1.2 0.0 1.34

International trade (Oct 11)


Sa Jun Balance (C$ bn) Exports (%m/m) Imports (%m/m) Real balance Jul Aug -1.93 -2.34 -2.53 -1.93 -1.32 -0.2 0.2 -3.4 -3.6 1.5 -0.1 1.8 1.6 -2.2 -2.0 0.4 -3.1 -9.56 -9.55 -9.40 -9.63 -8.73

Manufacturing shipments are expected to recover robustly in August after two months of negative readings. Energy shipments should provide a large boost to the total. Sharp monthly decreases in energy shipments have held down total shipments since April, so a turnaround in that sector is overdue. Exports of energy products, already reported for August, were up 5.5% after six consecutive monthly declines. Crude petroleum exports were the standout increasing 9.1%, mostly due to higher prices. The auto sector is also expected to contribute to the August gain as production numbers were strong in the month. Offsetting some of the strength will be metal products. Prices in that sector were down in August and have been weak since March.

New house prices (Oct 11)


Nsa Jun Total, %m/m %oya 0.2 2.3 Jul 0.1 2.3 Aug 0.0 2.2 0.2 2.4

40

JPMorgan Chase Bank N.A, London Branch Allan Monks Malcolm Barr

Economic Research Global Data Watch October 12, 2012

United Kingdom
3Q GDP still tracking near 0.5%q/q sa, energy tariff increase will damp 4Q King allows for aiming off the inflation target, but doesnt show how Weale joins those likely not to vote for more QE in November The IP and manufacturing output numbers for August were significantly weaker than expected, leaving manufacturing output running at -2.8%3m/3m saar. After Julys post-bank holiday bounce, the ONS data had edged toward a flat sequential trend, while the business surveys had been flagging falling output. On that basis, the August data are not much of a surprise. For the purposes of the 3Q GDP preliminary estimate (due Oct 25), we assume that the ONS will pencil in flat manufacturing output in August and a small decline in overall IP. Oil and gas output has risen a cumulative 9% in the last three months, and we suspect September will see some payback. Given the step up in output in July, however, the main effect of the August IP data is not on the 3Q GDP estimate, but to create a more negative trajectory for the data looking into 4Q. It looks increasingly likely that the weakness in the underlying trend in output will demonstrate itself with the 4Q GDP data. A key question, however, is how the Olympics may affect the data on services output for 3Q. While the ONS has stated that it will treat ticket sales as household expenditure in 3Q, it has not been clear how this would be captured on the output side of the data, which drives the early estimates of GDP. The ONS has informed us that, within the Index of Services output, an adjustment to the data under the Arts, Entertainment, and Recreation heading will be made to reflect the Games. The size of this adjustment is near 600 million, or 0.16% on the quarterly change in GDP, and should lift output in the affected sector by just under 11% in the quarter. Near 10% of that adjustment was applied to the July data, and the rest will come over August and September. While the Olympics will act to push the estimate of 3Q GDP growth upward, it looks like construction output will offset that effect. After a small decline in August, construction output looks set to rise by close to 1.6%q/q nsa in 3Q. The seasonal adjustment the ONS makes to the data is somewhat variable, but our best guess is that will translate into a near 2% sa decline for 3Q. That would take nearly 0.14%-pt off the quarterly growth rate of GDP, a similar magnitude to the Olympics boost. If we put all of the data together, 3Q looks to be tracking a near 0.5%q/q sa gain, a gain that would be almost

Tracking manufacturing output via the PMI survey


%3m/3m, saar, based on a bivariate model estimated from 1992-2011 8 PMI model 4 0 -4 -8 12 2007 Actual

2008

2009

2010

2011

2012

2013

Monthly construction output


bn, nsa 10 9 8 7 6 2010 2011 2012 2013

Domestic energy bills in the CPI


% ar, both scales, forecasts from September 2012 onward 25 20 15 10 5 0 -5 -10 -15 -20 2010 70 60 50 40 30 20 10 0 -10 -20 2014

oya

3m/3m

2011

2012

2013

entirely attributable to the normalization in working days after a bank holiday affected 2Q.

Energy tariffs on the rise


British Gas, the largest of the UK suppliers, became the second supplier to announce a winter increase in tariffs this week. An average 6% increase in its domestic gas and electricity prices will take effect from November 16. The magnitude of the increase is broadly in line with what we had assumed in building our inflation forecasts for late 2012, but the mid-November implementation is coming a bit later than we had penciled in. We will fine-tune our inflation forecast after

49

JPMorgan Chase Bank N.A, London Branch Allan Monks Malcolm Barr

Economic Research United Kingdom October 12, 2012

next weeks September CPI release and as other energy suppliers respond to the move by British Gas. Our CPI projection had assumed the bulk of the energy price impact would come in October, lifting the headline CPI inflation rate from what is likely to be a local low point in September at 2.2%oya (the September data are due on Tuesday). The British Gas move suggests that, relative to our prior forecast of a bounce to 2.6% in October, the move back up will be a bit more muted in the month. But the view that the CPI will move up to run close to or slightly above 2.5%oya as we move through year-end still looks about right. The increase in energy tariffs will lift the sequential rate of inflation above that in underlying nominal incomes, and mean that the putative recovery in real income growth receives another short-term knock. Our utilities team has been flagging to us the likelihood of these increases in tariffs for some time, and it has been one of the reasons why we have forecast that 4Q GDP growth will not show much acceleration from the pace underlying the noisy 2Q and 3Q prints.

weaker growth) it is prepared to tolerate in the near term to deliver greater financial stability? These questions will be made more complicated in the future by the interaction of monetary policy with macroprudential tools. Kings speech added very little on these key issues other than calling for more research. Some have interpreted Kings speech as a suggestion that the MPC is currently (and has recently been) aiming off by seeking higher-than-target inflation in the medium term. We would agree that the MPC has become more tolerant of realized inflation overshoots, and of upside risk in its mediumterm inflation forecast, through the crisis. But it is more difficult to demonstrate conclusively that the mean of the MPCs medium-term inflation objective has shifted, and that the MPCs shift in responses does not simply reflect the greater volatility of the economic environment. We very much doubt that MPC members would agree that they are aiming off the target currently.

Weale backs away from further QE


Comments in a newspaper interview from Martin Weale this week suggest he may not support an extension of QE at the November meeting. Weale stated that he was concerned at the stickiness of inflation at above-target rates, and while acknowledging the near stagnation in GDP, he said that the need for further monetary stimulus was not self-evident. These remarks do not come as much of a surprise. Under Weales directorship, NIESR would often call for tighter monetary policy on the basis of the behavior of headline inflation rate. After joining the MPC, Weale voted for higher rates as inflation rose during early 2011, before supporting an extension of asset purchases in October. Three members of the MPC (Dale, Broadbent, and Weale) look set to vote against further QE in November. But we continue to think the remaining six members will back an extension of QE, while producing an inflation forecast that suggests that they are not predisposed toward easing further. While a 50 billion extension of gilt purchases looks most likely, a 25 billion move is possible, and strikes us as more likely than no extension at all. The minutes of the October meeting, due next week, will be the next key input into our view.

Aiming off aint nothing new


Mervyn Kings speech on 20 years of inflation targeting offered a defense of the UKs evolving policy framework, where a flexible inflation-targeting regime is being supplemented by macroprudential tools. The headlines were grabbed by his acknowledgement that, even with macroprudential tools in place, the MPC may need to set interest rates that aim off the inflation target in order to limit financial imbalances. The idea that the MPC could limit the buildup of financial imbalances by setting monetary policy tighter than its medium-term inflation forecast would justify, is far from new. Charlie Bean gave a speech back in 2003 arguing that such action required no change in the existing MPC remit. But while a number of MPC members flirted with this argument for tighter policy before the crisis, instances of members allowing it to drive their vote on policy were relatively rare. Sir Andrew Large voted persistently for tighter policy over late 2003 to mid-2005, citing concerns about the rapidity of the buildup of household debt. Even in this case, however, it is not clear that he viewed such action as likely to drive inflation below the target at the two- to three-year horizon. His concerns on the buildup of debt encouraged him to err toward the more hawkish view on what was needed to meet the inflation target over in two to three years, rather than explicitly suggesting the MPC should aim off the inflation target. The key difficulty with aiming off is not theoretical but practicalhow should such a policy be calibrated? How does the central bank establish how much additional tightening is needed to limit the relevant financial imbalance, and how does it establish how much undershoot of inflation (and
50

JPMorgan Chase Bank N.A, London Branch Allan Monks Malcolm Barr

Economic Research Global Data Watch October 12, 2012

Data releases and forecasts


Week of October 15 - 19
Mon Oct 15 12:01am

Wed Oct 17 9:30am

Labor market statistics


Sa Claimant count (000s ch m/m) Claimant count rate (%) Jun 1.0 4.9 Jul -13.6 4.8 Jun 1.8 1.8 2.1 Jun 63.4 58.4 8.0 Jun 202.0 Aug -15.0 4.8 Jul 1.5 1.9 2.1 Jul 63.6 58.5 8.1 Jul 236.0 Aug Aug Sep -12

Rightmove house price index


Nsa %m/m Jul -1.7 Aug -2.4 Sep -0.6 Oct

Tue Oct 16 9:30am

Retail prices
%oya CPI Core CPI1 RPI (1987=100) RPI RPIX Jun 2.4 2.1 241.8 2.8 2.8 Jul 2.6 2.3 242.1 3.2 3.2 Aug 2.5 2.1 243.0 2.9 2.9 Sep 2.2 2.1 244.4 2.7 2.7

May Average weekly earnings (3mma %oya sa) Headline 1.7 Ex bonuses 1.8 Private sector ex bonuses 2.1 Three months to: May Labor force survey (all percentage rates, sa) Activity rate 63.3 Employment rate 58.2 Unemployment rate 8.1 May Change over three months Employment (000s) 168.0

Aug

1. CPI ex food, energy, alcohol, and tobacco.

Headline inflation is likely to fall sharply as increases in utility bills a year ago drop out of the calculation. Utility bill increases will, however, push inflation back upward over the coming months. On the core inflation number, the forecast allows for a bounce back in core goods prices in sequential terms after some unusually deep discounting through the summer.
Tue Oct 16 9:30am

ONS monthly house price data


Nsa All dwellings (%oya) May 2.3 Jun 2.4 Jul 2.0 Aug Thu Oct 18 9:30am

Business survey data suggest the recent strength in employment growth will not be sustained, but nothing within the labor market data itself has sent a clear signal that a slowdown is in prospect. The forecast hence shows a further decline in the claimant count measure of unemployment, but a more modest one than over July-August. Retail sales
Volumes, sa Including auto fuel (%m/m) Ex auto fuel (%m/m) Ex auto fuel (%oya) Ex auto fuel (%3m/3m saar) Jun 0.6 1.0 3.1 1.6 Jul 0.2 -0.1 2.7 4.8 Aug -0.2 -0.2 3.1 4.2 Sep -0.2

Tue Oct 16 9:30am

Producer prices
Nsa Input prices (%m/m nsa) %oya nsa Output prices (%m/m nsa) %oya nsa Core output1(%m/m nsa) %oya nsa Jun -2.2 -2.2 -0.6 2.0 -0.2 1.7 Jul 0.4 -2.4 0.1 1.8 -0.1 1.2 Aug 2.0 1.4 0.5 2.2 0.1 1.2 Sep

1. PPI output ex food, beverages, tobacco, and petroleum products.

Wed Oct 17 9:30am

BoEs minutes of MPC meeting


The vote to hold both rates and the amount of asset purchases was likely unanimous. Key will be whether the minutes continue to flag that a number of members believe further stimulus is likely to be necessary. Our best guess is that the minutes will suggest that is the case, but will be ambiguous as to whether that constitutes a majority on the committee. Fri Oct 19 9:30am

Increases in retail sales over May and June took the level of sales volumes up significantly, and that level has been largely sustained through the last couple of releases. Although the trend in retail sales is toward modest gains, we suspect there is still scope for some payback of the recent gains. Public sector finances
bn, nsa PSNCR PSNB PSNB (ex. fin. int.) Current budget (ex. fin. int.) Net debt to GDP (%) Net debt to GDP (%) ex fin it. Jun -0.8 12.5 14.5 -13.1 135.8 65.9 Jul -25.0 -1.9 0.1 1.5 136.0 65.6 Aug -9.6 12.4 14.4 -11.7 136.0 66.1 Sep

13.9

The forecast would leave the deficit on track to record a full year outturn near 130 billion, around 10 billion higher than projected by the OBR.

51

JPMorgan Chase Bank N.A, London Branch Allan Monks Malcolm Barr

Economic Research United Kingdom October 12, 2012

Review of past weeks data


Markit report on jobs
% balance, sa Jul Permanent placements Permanent salaries Availability of permanent staff 47.3 51.4 54.6 Aug 48.4 50.5 52.5 Sep 49.7 51.0 52.0

Industrial production
Sa IP (%m/m) %oya Manufacturing(%m/m) %oya Jun -2.4 -3.8 -2.9 -3.9 Jul 2.9 -0.8 3.2 -0.6 Aug -0.3 -0.9 -0.3 -0.3 -0.5 -1.1 -1.1 -1.2

3.1 -0.7

Trade balance
bn, sa Jun Trade balance Goods Services Total trade balance -10.1 5.7 -4.3 Jul -7.1 5.6 -1.5 -7.3 -1.7 Aug -9.8 5.7 -4.2

Markit jobs report


%, balance, sa 80 70 60 50 40 30 20 97 99 01 03 05 07 09 11 13 Permanent placements Temporary placements

6.2 -3.9

Construction output
Nsa, constant prices % m/m Jun -3.5 -3.3 Jul 2.2 Aug 2.1 -0.9

BRC retail sales monitor


%oya Like for like sales Total Jul 0.1 2.0 Aug -0.4 1.6 Sep 1.5 3.4

RICS housing market survey


%bal, sa Jul Prices in last 3 months Stocks of homes on books Sales in last 3 months Sales to stocks ratio (%) New buyer enquiries -23.2 67.8 15.1 22.2 -4.2 15.0 -3.6 -22.7 Aug -18.9 66.1 14.8 22.5 -9.1 -17.9 65.8 14.9 22.6 -7.2 Sep -15.2 64.6 14.8 22.9 3.9

RICS sales and stocks


30 25 20 15 10 5 2007
52

Average per surveyor, both scales, sa 100 Sales 90 80 70 Stocks 60 50 2008 2009 2010 2011 2012 2013

J.P. Morgan Australia Limited Stephen Walters Ben K Jarman

Tom Kennedy

Economic Research Global Data Watch October 12, 2012

Australia and New Zealand


Australian unemployment rate jumps to 5.4% due to an increase in labor force participation Rise in jobless rate occurs just as RBA officials are turning their attention elsewhere NZ firms more upbeat; retail card spending still on a solid trend The data highlight this week was the Australian Labor Force Survey (LFS), which saw the unemployment rate climb from 5.1% to 5.4% in September, despite the creation of 14,500 jobs. The rising jobless rate was explained by a lift in participation, which prior to this weeks data, had been tracking at multi-year lows, offsetting much of the weakness in labor demand. The consumer and business confidence surveys also were released this week, and showed household sentiment posting only a modest gain despite a cut to the cash rate, while all the sub-indices on business conditions lost ground. The data flow slows down in the week ahead, with the focus shifting to the RBA Board minutes, where we expect to get more clarity on last weeks surprise easing of policy. In New Zealand, the NZIER business opinion survey showed a reasonable improvement in sentiment, with firms becoming increasingly upbeat on the economic outlook, suggesting that the solid pace of real GDP growth in the second quarter may not be as unsustainable as first thought. In the other data released this week, retail card sales posted a decline of 0.6%m/m; however, this was in line with our forecast, and comes after a stellar 3%m/m rise in the month prior. The underlying trend in card spending remains solid, particularly in light of the surprisingly downbeat labor survey results for 1H12. Next week, we anticipate the 3Q CPI result to again print slightly below the lower bound of the RBNZs target band in annual terms, owing to accumulated slack and persistent currency strength.

Australia: employment and labor force


%oya 5 4 3 2 1 0 -1 04 06 08 10 12 Employment Labor force %oya 4 3 2 1 0

Australia: employment
000s 8500 Full time 000s 3500 3300 3100 7500 Part time 7000 05 06 07 08 09 10 11 12 13 2900 2700

8000

rates. We were of a similar view, but to hear the Deputy Governor say it, after a long period of emphasizing the stability of the unemployment rate in the low 5s, helps explain the Boards about-face. For that reason, the October minutes will add less value than they would have before Deputy Governor Lowes speech, though it will still be interesting to see whether there are broader echoes of a more dovish approach to policy, as hinted in last weeks decision, and in Lowes speech. Recent commentary has left us with the impression that the Board now is more inclined to focus on stimulating non-mining investment, which will require further policy easing given the still-limited transmission of low rates to credit growth so far. Also, on the global front, mention of the shift in the reaction functions of the Fed and the ECB was conspicuous in its absence in the official rate decision: the minutes may shed light on whether the Board felt the case for policy easing was strengthened on the grounds of treading water relative to the major central banks. Of course, such a motivation would be further strengthened given the perceived spillovers from excess liquidity provision by the G-4 to AUD.

Minutes to fill in the gaps


In the immediate aftermath of the RBAs decision to cut rates last week, we were somewhat confused as to precisely which piece of information had proven the final straw for the Board. The tone of most news items, whether of a domestic or global nature, had firmed since the September meeting, so, while it was clear that the Banks top brass had changed their collective mind, we were lacking an obvious catalyst. A speech delivered this week by the Deputy Governor (discussed in greater detail below) hints that further analysis by the Bank on the state of the labor market had revealed that the numbers may have been flattered by structural adjustments, which are distorting the participation and unemployment

Lowe concedes labor market weaker


This week, RBA Deputy Governor Phil Lowe spoke on The Labor Market, Structural Change and Recent Economic Developments. Lowe conceded though that while there is al57

J.P. Morgan Australia Limited Stephen Walters Ben K Jarman

Tom Kennedy

Economic Research Australia and New Zealand October 12, 2012

ways a degree of structural change occurring, there is some evidence that the changes taking place have led to a higher rate of job turnover than has been the case. Whether measured by time in ones current job, the persistently high level of vacancies (which hints at a persistent level of latent demand for labor that is unsatisfied for frictional reasons), or by looking at the dispersion of employment growth across industries, the structural changes the economy has undergone in recent years appear significant. That heightened state of adjustment has led to a general sense of uncertainty, such that consumers have become quite concerned about rising unemployment. This is all despite the fact that the labor market clearing mechanism appears more efficient now than ever: both the average level and variation of unemployment by region are lower now than 10 years ago. Lowe puts some of this down to increased geographic mobilitythe willingness of workers to pursue fly in/fly out opportunities in the resources sector, for example. But the most important points made were those that clarify the RBA Boards about-face last week. The persistently low unemployment rate has been an anchor for policy through the last couple of years and has made the Bank reluctant to cut rates without a clear signal from the inflation data. That changed last week, and the Recent Outcomes section of Lowes speech makes clear why. The fact that aggregate labor demand has slowed is not controversial. Indeed, the Deputy Governor makes this clear in reference to the decline in average hours worked and the employment to population ratio. The unemployment rate has only stayed low because of a fall in participation. In our investigations on this, we concluded that falling participation could not be explained by any clear, sustainable driver that related to a genuine fall in the pool of potential labor, a view that is supported by Lowe.

Australia: consumer expectations over the next twelve months


Index 140 120 100 80 60 40 00 02 04 06 08 10 12 Economy Family finances

heads added to the labor force. The unemployment rate pushed higher from 5.1% to 5.4%. Consolidating the argument that the rise in the jobless rate reflects a realignment with fundamentals rather than being news about the state of the labor market, employment growth actually beat expectations in September (J.P. Morgan and consensus: +5,000), and the other measures of labor utilization firmed a little, too. Total hours worked jumped 0.5%m/m, and average hours per worker rose 0.3%m/m. The employment to population ratio held steady at its cycle low of 61.68%. The implications of the September data are colored by the clear shift in perspective from the Reserve Bank over the last couple of weeks. Both last weeks Board decision to cut rates 25bp, and Deputy Governor Lowes speech earlier this week showed officials no longer clinging as tightly to the jobless rate as the best single measure of inflation pressure. Both pieces of commentary made it clear that the Board had seen enough weakness on the demand side to conclude that the labor market had lost momentum, and, in that sense, it may not have mattered whether we got the final catharsis of a rise in the jobless rate.

Jobless rate catches up to fundamentals


The headline release in Australia this week was the September labor force survey, which at first glance appeared to be a bit of a mess. However, given that the composition of the report in recent months has seen some odd divergences, this weeks reshuffling actually sees all of the moving parts snap into place relative to where the demand-side narrative was tracking already. Over the last six months, job advertisements and the business surveys have shown a clear deterioration in employment prospects, which also had been reflected in weaker trends in hours worked, and the multi-year low in the employment to population ratio that was hit last month. This had been disguised, though, by a puzzling decline in participation, which was at least partially unwound in the September data. The participation rate rose two tenths, such that net employment growth of 14,500 was overwhelmed by the 53,000 new

58

J.P. Morgan Australia Limited Stephen Walters Ben K Jarman

Tom Kennedy

Economic Research Global Data Watch October 12, 2012

Business confidence improves, but conditions remain challenging


The unpredictable path of the NAB business survey continued this week, with business confidence improving from -3 to 0 in September. In contrast to this improvement, firms perceptions of the operating environment deteriorated, with conditions slipping to -3 from 0. This is the third consecutive month in which the confidence and conditions indexes have drifted in opposite directions, with the deviation in the September report a likely consequence of the timing of the release (September 18October 1), which would have captured the constructive steps taken by the ECB and Federal Reserve, as well as speculation of further easing by the RBA in early October. As a result, confidence has received a welcome boost, while the improvement in the operating environment remains to be seen. Weakness in the conditions indices was broad-based, with all the major subcomponents declining over the month. The trading and profitability indexes were among the larger drags on the headline release, declining to -3 from 3 and -5 and -2, respectively. Specifically, profitability in the retail sector fell sharply (down 21 to -29), highlighting the difficulties experienced by those sectors facing structural drags from import competition and subdued demand for consumer goods. Worryingly, the forward orders component of the release also recorded a sharp decline, falling to -7 from -2, which when coupled with stagnant capacity utilization indicates that demand will remain tepid over the coming months. Elsewhere, the NAB employment index, which has been tracking in negative territory since April, remained in the red, indicating that firms remain cautious on the hiring front.

New Zealand: electronic card transactions


%oya 10 8 Core retail 6 4 2 0 2008 %oya 10 GDP QSBO business situation 5 50 0 0 -50 -100 90 95 00 05 10 2009 2010 2011 2012 2013 Total Retail

New Zealand: GDP and QSBO business situation


net % balance, 4qma, 2qtrs ago 100

-5

NZ business outlook improves


The NZIER business survey for 3Q followed the firming path in the monthly business surveys, with the outlook for firms general business situation improving from a -4 to +8 net balance. The headline data are reported nsa, though, as with the monthly business surveys, historically there is a clear tailwind to sentiment as we move from winter through to spring. This weeks data failed to outperform those historical benchmarks, such that both the sentiment and trading activity indices softened in seasonally adjusted terms. We would emphasize though, that the point is to track the growth outlook, and on that front, the forward-looking nsa numbers correlate particularly well with official (sa) GDP performance. So seasonal issues aside, the improvement in the raw activity expected index from +8 to +18 therefore suggests the 2Q growth pace of 2-2.5%q/q ar could be sustained. By sector, there were no great surprises. The building industry is still pretty chipper, with the six-month-ahead business situation index ticking up from +22 to +24. The forwardlooking employment index in this industry also jumped from +9 to +18 in 3Q, and the associated cost measures are running hot in sympathy. Merchants, and those in the services industry, are also becoming more optimistic, though profitability remains a drag, presumably reflecting the absence of pricing power. And the outlook for exporting manufacturers improved, with both new orders and expected selling prices
59

Consumers more upbeat, but only just


The Westpac-Melbourne Institute consumer confidence index increased as expected in October, rising 1%m/m. The drivers of the gain were largely as expected. Domestically, the surprise rate cut by the RBA last week would no doubt have buoyed confidence, although the limited pass-through by the major banks (the big four only lowered the SVR by 18bp20bp) would certainly have capped the extent of these gains. The details of the survey were quite similar to those of the September release, with consumers expectations for their own finances over the next 12 months edging higher (up 2.8%m/m), while the general outlook for the economy over the same period is expected to soften (-2.4%m/m). Over the longer term, consumers remain pessimistic on the economic outlook with the economy over the next five years index falling 4.6%m/m. Despite the gains seen in the confidence survey, this is the eighth consecutive month that the index has printed below the pivotal 100 level, indicating that pessimists continue to outweigh optimists.

J.P. Morgan Australia Limited Stephen Walters Ben K Jarman

Tom Kennedy

Economic Research Australia and New Zealand October 12, 2012

picking up. This in part reflects the better outcomes for global dairy prices of late, which is significant for exporters of milk powder.

Australia Data releases and forecasts


Week of October 15 - 19
Mon Oct 15 11:30am

Inflation to have remained benign in 3Q


Tradeables inflation has been a significant drag on overall consumer price outcomes in New Zealand, which will have continued into 3Q12. The nominal effective exchange rate appreciated 1.9%q/q, while oil prices gave up around 3.5%q/q. On the domestic front, the outlook is a little more nuanced, but nevertheless argues that prices will remain wellcontained. The Phillips curves show that momentum in inflation is more tightly correlated with GDP growth than with the levels of output. This means that the surprising strength of growth in 1H will help arrest the slide in quarterly inflation, but the yawning output gap (of around -1.5%) means that pricing power nevertheless remains weak. About the only factor arguing for stronger inflation in 3Q is the persistent strength in the housing group, reflecting supplyside shortfall in housing construction (rents) and electricity generation capacity (energy prices). After a 0.3%q/q print in 2Q, we expect a 0.4%q/q rise in headline CPI in the third quarter, which will keep annual inflation skimming along the bottom of the RBNZs 1%-3% target band. The new Policy Targets Agreement signed by incoming RBNZ Governor Wheeler has hardened that target by specifically nominating a focus on the midpoint of the band, presumably increasing the Banks intolerance of significant deviations. Until the new Governor demonstrates otherwise, though, we do not think that means much for policy in practice, and our forecasts show the recovery in growth as returning inflation to the midpoint of the band within a year anyway.

Housing finance
Sa May %m/m -0.6 Jun 1.0 Jul -1.0 Aug 2.5

Review of past week's data


NAB business confidence
Jul Index 3.0 ___ Aug -2.0 ___ Sep -2.0 3.0

Labor force survey


Jul Unemployment rate (%) Employment (ch. 000s) Participation rate (%) 5.2 -12.0 65.2 4.6 6.6 Aug 5.1 -9.0 65.0 4.7 5.7 6.7 Sep 5.2 5.0 65.0 5.4 14.5 65.2

Westpac-MI consumer confidence


Aug %m/m -2.5 2.1 Sep 1.6 2.2 Oct 1.0

New Zealand Data Releases and forecasts


Week of October 15 - 19
Tue Oct 16 8:45am

Consumer prices
4Q11 %q/q %oya -0.3 1.8 1Q12 0.5 1.6 2Q12 0.3 1.0 3Q12 0.4 0.9

Underlying trend in retail encouraging


In the other data released this week, retail card spending contracted 0.6%m/m in September, suffering the expected payback after a record 2.7%m/m surge in August. The contraction was just as broad-based as the surge in the previous month, though the payback was reasonably slight in magnitude, and keeps in check the solid underlying trend in sales, which has been gaining momentum since 1Q12. All four core retail categories lost some ground, with the largest decline occurring in apparel sales (-0.9%m/m). The surprise came in fuel sales, which had skyrocketed 12%m/m, and merely stalled in September, rather than wearing a large hangover. Further unwinding of the previous rise (likely driven by price effects) in this category will be a drag on spending near term, though we are comforted by the resilience of spending overall in the face of deleveraging constraints.

Review of past weeks data


Retail card transactions
Sa Jul %m/m -1.1 ___ Aug 3.0 ___ Sep 0.6

60

JPMorgan Chase Bank N.A., New York Daniel Silver

Economic Research Global Data Watch October 12, 2012

US economic calendar
Monday 15 Oct
Retail sales (8:30am) Sep 1.0% Ex auto 0.9% Empire State survey (8:30am) Oct -6.0 Business inventories (10:00am) Aug 0.6%
New York Fed President Dudley speaks in New York (8:00am) Richmond Fed President Lacker speaks on economy in Virginia (12:45pm) St. Louis Fed President Bullard speaks on economy in St. Louis (1:10pm) San Francisco Fed President Williams speaks on economy in San Francisco (8:30pm)

Tuesday 16 Oct
CPI (8:30am) Sep 0.5% Core 0.13% TIC data (9:00am) Aug Industrial production (9:15am) Sep 0.2% Manufacturing -0.1% Capacity utilization 78.2% NAHB survey (10:00am) Oct 42
Fed Governor Raskin speaks on regulation in Boston (12:00pm) Atlanta Fed President Lockhart speaks in Atlanta (12:00pm)

Wednesday 17 Oct
Housing starts (8:30am) Sep 750,000 Permits 820,000

Thursday 18 Oct
Initial claims (8:30am) w/e prior Sat 365,000 Philadelphia Fed survey (10:00am) Oct 1.0 Leading indicators (10:00am) Sep
Auction 30-year TIPS (r) $7 bn Announce 2-year note $35 bn Announce 5-year note $35 bn Announce 7-year note $29 bn

Friday 19 Oct
Existing home sales (10:00am) Sep 4.65 mn

22 Oct

23 Oct
Richmond Fed survey (10:00am) Oct FOMC meeting
Auction 2-year note $35 bn

24 Oct
Manufacturing PMI (8:58am) Oct flash New home sales (10:00am) Sep FHFA HPI (10:00am) Aug FOMC statement (12:30pm), projections (2:00pm), and press conference (2:30pm)
Auction 5-year note $35 bn

25 Oct
Initial claims (8:30am) w/e prior Sat Durable goods (8:30am) Sep Pending home sales (10:00am) Sep KC Fed survey (11:00am) Oct
Auction 7-year note $29 bn

26 Oct
Real GDP (8:30am) 3Q advance Consumer sentiment (9:55am) Oct final

29 Oct
Personal income (8:30am) Sep Dallas Fed survey (10:30am) Oct Senior loan officer survey (2:00pm) 4Q

30 Oct
S&P/Case-Shiller HPI (9:00am) Aug Consumer confidence (10:00am) Oct Housing vacancies (10:00am) 3Q
Minneapolis Fed President Kocherlakota speaks in Minnesota (8:00pm)

31 Oct
ADP employment (8:15am) Oct Employment cost index (8:30am) 3Q Chicago PMI (9:45am) Oct
Announce 3-year note $32 bn Announce 10-year note $24 bn Announce 30-year bond $16 bn San Francisco Fed President Williams speaks on monetary policy in New York (12:45pm)

1 Nov
Initial claims (8:30am) w/e prior Sat Productivity and costs (8:30am) 3Q preliminary Manufacturing PMI (8:58am) Oct final ISM manufacturing (10:00am) Oct Construction spending (10:00am) Sep Light vehicle sales Oct

2 Nov
Employment (8:30am) Oct Factory orders (10:00am) Sep

5 Nov
ISM nonmanufacturing (10:00am) Oct

6 Nov
JOLTS (10:00am) Sep
Auction 3-year note $32 bn

7 Nov
Consumer credit (3:00pm) Sep
Auction 10-year note $24 bn

8 Nov
Initial claims (8:30am) w/e prior Sat International trade (8:30am) Sep Chain store sales Oct
Auction 30-year bond $16 bn

9 Nov
Import prices (8:30am) Oct Consumer sentiment (9:55am) Nov preliminary Wholesale trade (10:00am) Sep

72

JPMorgan Chase Bank, London Greg Fuzesi

Economic Research Global Data Watch October 12, 2012

Euro area economic calendar


Monday 15 Oct 16 Oct
Euro area: HICP final (11:00am) Sep 2.6%oya, nsa Trade balance (10:00am) Aug Germany: ZEW bus. survey (11:00am) Oct Italy: Foreign trade (10:00am) Aug

Tuesday 17 Oct

Wednesday 18 Oct

Thursday 19 Oct

Friday

Belgium: BNB cons. conf. (3:00pm) Oct Netherlands: CBS cons. conf. (9:30am) Oct

Euro area: BoP (10:00am) Aug Germany: PPI (8:00am) Sep

22 Oct

23 Oct
Euro area: EC cons conf prelim (4:00pm) Oct France: INSEE bus. conf. (8:45am) Oct Belgium: BNB bus. conf. (3:00pm) Oct

24 Oct
Euro area: PMI flash (10:00am) Oct Mfg, services, composite Germany: PMI flash (9:30am) Oct Mfg, services, composite Import prices (8:00am) Sep France: PMI flash (8:45am) Oct Mfg, services, composite Italy: ISAE cons. conf. (10:00am) Oct

25 Oct
Euro area: M3 (10:00am) Sep Italy: Contractual wages (10:00am) Sep Netherlands: CBS bus. conf. (9:30am) Oct

26 Oct
Germany: GFK cons. conf. (8:00am) Nov France: INSEE cons. conf. (8:45am) Oct Italy: ISAE bus. conf. (10:00am) Oct

29 Oct
Germany: CPI 6 states and prelim (8:00am) Oct

30 Oct
Euro area: EC capacity utilization (11:00am) 4Q EC bus. conf. (11:00am) Oct EC cons. conf. (11:00am) Oct Sector accounts (10:00am) 2Q Germany: Retail sales (8:00am) Sep Spain: HICP flash (8:00am) Oct GDP flash (9:00am) 3Q Belgium: CPI (11:15am) Oct

31 Oct
Euro area: HICP flash (11:00am) Oct Unemployment rate (11:00am) Sep ECB bank lending survey (10:00am) Oct Germany: Employment (9:55am) Sep Unemployment (9:55am) Oct France: PPI (8:45am) Sep Cons. of mfg goods (8:45am) Sep Italy: CPI prelim (11:00am) Oct PPI (12:00pm) Sep

1 Nov

2 Nov
Euro area: PMI Mfg final (10:00am) Oct Germany: PMI Mfg final (9:55am) Oct France: PMI Mfg final (9:50am) Oct Italy: PMI Mfg final (9:45am) Oct Spain: PMI Mfg final (9:15am) Oct

5 Nov

6 Nov
Euro area: PMI services & composite final (10:00am) Oct PPI (11:00am) Sep Germany: PMI services & composite final (9:55am) Oct Mfg orders (12:00pm) Sep France: PMI services & composite final (9:50am) Oct Italy: PMI services & composite final (9:45am) Oct Spain: PMI services & composite final (9:15) Oct

7 Nov
Euro area: Retail sales (11:00am) Sep Germany: Industrial production (12:00pm) Sep

8 Nov
Euro area: ECB rate announcement (1:45pm) No change expected Germany: Foreign trade (8:00am) Sep France: Trade balance (8:45am) Sep Netherlands: CPI (9:30am) Sep

9 Nov
Germany: CPI final (8:00am) Oct France: Industrial production (8:45am) Sep Monthly budget situation (8:45am) Oct Italy: Industrial production (10:00am) Sep

Highlighted data are scheduled for release on or after the date shown. Times shown are local.

73

JP Morgan Securities Japan Co., Ltd Miwako Nakamura

Economic Research Global Data Watch October 12, 2012

Japan economic calendar


Monday 15 Oct
IP final (1:30 pm) Aug BoJ Deputy Governor Yamaguchis address at Securities Analysts Association of Japans 50th Anniversary meeting(10:35 am) Auction 5-year note

Tuesday 16 Oct 17 Oct

Wednesday 18 Oct

Thursday 19 Oct

Friday

Construction spending (2:00 pm) Aug

All sector activity index (1:30 pm) Aug BoJ Governor Shirakawas address at meeting of credit unions (3:45 pm) Auction 3-month bill Auction 20-year bond

Auction 1-year note

22 Oct
Reuters Tankan (8:30 am) Oct Trade balance (8:50 am) Sep BoJ bank loan officers survey (8:50 am)3Q Nationwide department store sales (2:30 pm) Sep BoJ Governor Shirakawas address at branch managers meeting

23 Oct

24 Oct

25 Oct
Corporate service prices (8:50 am) Sep

26 Oct
Nationwide core CPI (8:30 am) Sep

Auction 3-month bill Auction 2-year note

During the week: Shoko Chukin small firm survey Oct

29 Oct
Total retail sales (8:50 am) Sep

30 Oct
All household spending (8:30 am) Sep Unemployment rate (8:30 am) Sep Job offers to applicants ratio (8:30 am) Sep IP preliminary (8:50 am) Sep BoJ Monetary Policy Meeting and statement BoJ outlook report (3:00pm) BoJ Governor Shirakawas press conference (3:30 pm)

31 Oct
PMI manufacturing (8:15 am) Oct Nominal wages (10:30 am) Sep Housing starts (2:00 pm) Sep

1 Nov
Auto registrations (2:00 pm) Oct

2 Nov
Minutes of Oct 4-5 BoJ Monetary Policy Meeting (8:50 am)

Auction 3-month bill Auction 10-year bond

5 Nov
PMI services/composite (8:15 am) Oct

6 Nov

7 Nov

8 Nov
Current account (8:50 am) Sep Bank lending (8:50 am) Oct Machinery orders (8:50 am) Sep Economy Watchers survey (2:00 pm) Oct

9 Nov
M2 (8:50 am) Oct Consumer sentiment (2:00 pm) Oct

Auction 6-month bill During the week: CAO private consumption index Sep

Auction 3-month bill Auction 40-year bond

Highlighted data are scheduled for release on or after the date shown. Times shown are local.

74

JPMorgan Chase Bank NA Silvana Dimino

Economic Research Global Data Watch October 12, 2012

Canada economic calendar


Monday 15 Oct
New vehicle sales (8:30am) Aug National Balance Sheet Accounts (8:30am) 2Q Existing home sales (9:00am) Sep BoC Business Outlook Survey (10:30am)3Q BoC Senior Loan Officer Survey (10:30am)3Q BoC Governor Mark Carney speaks at the Vancouver Island Economic Alliance Summit in Nanaimo, British Columbia (3:20pm)

Tuesday 16 Oct
Manufacturing sales (8:30am) Aug 1.2%

Wednesday 17 Oct
Nonresidential construction (8:30am) 3Q

Thursday 18 Oct
Wholesale sales (8:30am) Aug 0.8%

Friday 19 Oct
CPI (8:30am) Sep 0.3% (1.3%oya) Core 0.4% (1.5%oya)

22 Oct

23 Oct
Retail sales (8:30am) Aug Bank of Canada rate announcement (9:00am)

24 Oct
Monetary Policy Report (10:30am) Teranet/National Bank HP Index (9:00am) Sep

25 Oct
Payroll employment (8:30am) Aug

26 Oct

29 Oct

30 Oct
IPPI (8:30am) Sep

31 Oct
Monthly GDP (8:30am) Aug

1 Nov
RBC manufacturing PMI (9:30am) Oct

2 Nov
Labor force survey (8:30am) Oct

5 Nov
Building permits (8:30am) Sep

6 Nov
Ivey PMI (10:00am) Oct

7 Nov
CFIB Business Barometer Index (6:00am) Oct

8 Nov
Housing starts (8:15am) Oct International trade (8:30am) Sep New housing price index (8:30am) Sep

9 Nov

All existing home sales are tentative. Times shown are local.

75

JPMorgan Chase Bank, New York Carmen Collyns

Economic Research Global Data Watch October 5, 2012

Latin America economic calendar


Monday 15 Oct
Peru: Economic activity index Aug 6.5%oya Unemployment rate Sep

Tuesday 16 Oct
Brazil: FGV: IPC-S Oct 15 Mexico: Central bank reserves (Prior week)

Wednesday 17 Oct
Brazil: IGP-10 Oct 0.63%m/m nsa Fipe CPI Oct 15 Colombia: Trade balance Aug

Thursday 18 Oct
Brazil: COPOM meeting minutes Chile: BCCh meeting Colombia: Retail sales Aug -0.1%oya IP Aug -3.5%oya

Friday 19 Oct
Argentina: Economic activity Aug Brazil: IPCA-15 Oct 0.61%m/m nsa IGP-M 2st release Oct Mexico: Unemployment rate Sep 5.2%

During the week: Argentina: Budget balance Sep

Brazil: Tax collections Sep CAGED formal job creation Aug Colombia: Tax revenues Aug Mexico: Pension funds report Sep

22 Oct
Mexico: Retail sales Aug Banamex survey of economic expectations

23 Oct
Argentina: Trade balance Sep Brazil: FGV: IPC-S Oct 22 Current account balance Sep FDI Sep Mexico: Central bank reserves (Prior week)

24 Oct
Mexico: IGAE (GDP proxy) Aug CPI Oct 1H

25 Oct
Argentina: IP Sep Brazil: Consumer confidence Oct Unemployment rate Sep Mexico: Trade balance Sep

26 Oct
Brazil: BCB credit report Sep Colombia: Banrep meeting Mexico: Banxico meeting

During the week:

29 Oct
Brazil: Central government budget Sep

30 Oct
Brazil: IGP-M Oct Primary budget balance Sep Net debt as % of GDP Sep Chile: Retail sales Sep Manufacturing index Sep Mexico: Central bank reserves (Prior week) PS budget balance Sep

31 Oct
Chile: Unemployment rate Sep Colombia: Unemployment rate Sep Mexico: Commercial bank credit Sep

1 Nov
Brazil: FGV: IPC-S Oct 31 IP Sep PMI Manufacturing Oct Trade balance Oct Mexico: Banxico survey of economic expectations Remittances Sep Manufacturing PMI (IMEF) Oct Non-manufacturing PMI (IMEF) Oct Peru: CPI Oct WPI Oct Uruguay: CPI Oct Trade balance

2 Nov
Colombia: PPI Oct

During the week: Argentina: Government tax revenue Oct

Colombia: CPI Oct

5 Nov
Brazil: Fipe CPI Oct Mexico: Consumer confidence Oct

6 Nov
Brazil: PMI Services Oct Mexico: Central bank reserves (Prior week) Uruguay: Unemployment rate Sep

7 Nov
Brazil: IGP-DI Oct IPCA Oct Mexico: Gross fixed investment Aug Inflation report 3Q

8 Nov
Brazil: FGV: IPC-S Nov 7 Peru: BCRP meeting Mexico: CPI Oct

9 Nov
Brazil: IGP-M 1st release Nov Colombia: Banrep meeting minutes Mexico: Banxico meeting minutes Employment report 3Q

During the week: Argentina: Tax revenues Oct Brazil: Commodity price index Oct Vehicle production (ANFAVEA) Oct Colombia: Tax revenues Sep Auto sales Oct Mexico: Auto report Oct

76

JPMorgan Chase Bank N.A, London Branch Malcolm Barr Allan Monks

Economic Research Global Data Watch October 12, 2012

UK economic calendar
Monday 15 Oct
Rightmove HPI (12:01am) Oct

Tuesday 16 Oct
CPI (9:30am) Sep 2.2%oya ONS HPI (9:30am) Aug PPI (9:30am) Sep

Wednesday 17 Oct
MPC minutes (9:30am) Labor market report (9:30am) Sep Claimant count 12.0k,ch,m/m,sa

Thursday 18 Oct
Retail sales (9:30am) Sep -0.2%m/m (ex. auto fuel)

Friday 19 Oct
Public sector finances (9:30am) Sep 13.9bn, nsa (PSNB ex. fin. int.)

BoEs Bailey and Tucker speak in London

22 Oct

23 Oct
BBA mortgage lending (9:30am) Sep

24 Oct
CBI industrial trends (11:00am) Oct and 4Q

25 Oct
Real GDP (9:30am) 3Q Index of services (9:30am) Aug

26 Oct

29 Oct
M4 & M4 lending final (8:30am) Sep Net lending to individuals (9:30am) Sep

30 Oct
CBI distributive trades (11:00am) Oct

31 Oct
Gfk cons. conf. (12:01am) Oct

1 Nov
PMI Mfg (9:30am) Oct

2 Nov
PMI Construction (8:30am) Oct

During the week:

Nationwide HPI Oct (29-31 Oct)

5 Nov
PMI Services (9:30am) Oct

6 Nov
New car regs (9:30am) Oct BRC retail sales monitor (12:01am) Oct Industrial production (9:30am) Sep

7 Nov

8 Nov
Markit jobs report (12:01am) Oct Trade balance (9:30am) Sep MPC rate announcement & Asset purchase target (12:00pm) No change expected

9 Nov
Construction output (9:30am) Sep and 3Q Quoted mortgage interest rates (9:30am) Oct

During the week:

Halifax HPI Oct (5-9 Nov)

Times shown are local.

77

JPMorgan Chase Bank N.A, London Branch Anthony Wong

Economic Research Global Data Watch October 12, 2012

Emerging Europe/Middle East/Africa economic calendar


Monday 15 Oct
Czech Republic: Current account (10:00am) Aug CZK-12.1bn PPI (9:00am) Sep Poland: CPI (2:00pm) Sep 4.1%oya Current account (2:00pm) Aug -989mn Romania: Current account Aug -3.0bn ytd Russia: PPI Sep 1%m/m Industrial output Sep 1.5%oya Turkey: Unemployment (10:00am) Jul 8.1% Israel: CPI (6:30pm) Sep 2.6%y/y During the week:

Tuesday 16 Oct
Poland: Average gross wages 2:00pm) Sep 2.5%oya Employment (2:00pm) Sep 0.0%oya Russia: Retail sales Sep 4.1%oya, Unemployment Sep 5.4% Investment Sep 2%oya Turkey: Consumer confidence (10:00am) Sep Israel: GDP final 2Q

Wednesday 17 Oct
Poland: PPI (2:00pm) Sep 1.7%oya Industrial output (2:00pm) Sep -4.5%oya South Africa: Retail sales (1:00pm) Aug

Thursday 18 Oct
Hungary: Average gross wages (9:00am) Aug Turkey: CBRT rate decision (2:00pm) 100bp cut in the upper band

Friday 19 Oct

22 Oct
Poland: Core inflation (2:00pm) Sep

23 Oct
Poland: Unemployment (10:00am) Sep Retail sales (10:00am) Sep Turkey: Capacity use (2:30pm) Oct 74.6% Holiday: Hungary

24 Oct
South Africa: CPI (10:00am) Sep

25 Oct
Hungary: Retail sales (9:00am) Aug South Africa: PPI (11:30am) Sep Holiday: Turkey

26 Oct

Holiday: Hungary During the week:

Holiday: Turkey

29 Oct
South Africa: Private sector credit (8:00am) Sep Israel: BoI rate decision (5:30pm) no change

30 Oct
Hungary: Unemployment (9:00am) Sep NBH rate decision (2:00pm) South Africa: Budget (2:00pm) Sep

31 Oct
Hungary: PPI (9:00am) Sep Poland: NBP inflation expectations (2:00pm) Oct Turkey: Foreign trade (10:00am) Sep South Africa: Trade balance (2:00pm) Sep

1 Nov
Czech Republic: PMI (9:30am) Oct CNB rate decision (1:00pm) Russia: Manufacturing PMI (8:00am) Oct South Africa: Kagiso PMI (11:00am) Oct Turkey: PMI (10:00am) Oct Holiday: Hungary, Poland

2 Nov
Hungary: PMI (9:00am) Oct Poland: PMI (9:00am) Oct Romania: PPI (10:00am) Sep NBR rate decision

Holiday: Turkey

Holiday: Hungary

During the week: Russia: CBR rate decision (1-9 Nov) South Africa: Quarterly labor force survey 3Q (1-4 Nov)

5 Nov
Czech Republic: Retail sales (9:00am) Sep Romania: Retail sales (10:00am) Sep Turkey: CPI (10:00am) Oct PPI (10:00am) Oct Holiday: Russia

6 Nov
Czech Republic: Industrial output (9:00am) Sep Trade balance (9:00am) Sep Russia: CPI Oct

7 Nov
Hungary: Budget balance (4:00pm) Oct Poland: NBP rate decision 25bp cut South Africa: Gross reserves (8:00am) Oct

8 Nov
Czech Republic: Unemployment (9:00am) Oct Hungary: Trade balance (9:00am) Sep Turkey: Industrial output (10:00am) Sep

9 Nov
Czech Republic: CPI (9:00am) Oct Hungary: Industrial output (9:00am) Sep Romania: Industrial output (10:00am) Sep Trade balance (10:00am) Sep Russia: Foreign trade Sep

During the week: South Africa: Manufacturing output (5-9 Nov) Times shown are local. 78

JPMorgan Chase Bank, N.A., Singapore Branch Benjamin Shatil

Economic Research Global Data Watch October 12, 2012

Non-Japan Asia economic calendar


Monday 15 Oct
Australia: Housing finance (11:30am) Aug 2.5%m/m China: CPI (9:30am) Sep 1.8%oya PPI (9:30am) Sep -3.3%oya India: WPI (12:00pm) Sep Korea: Export price index (6:00am) Sep -1.8%oya Import price index (6:00am) Sep -3.1%oya Philippines: OFW remittances Aug 4.9%oya Singapore: Retail sales (1:00pm)Aug 2.1%oya During the week:

Tuesday 16 Oct
New Zealand: CPI (8:45am) 3Q 0.9%oya

Wednesday 17 Oct
Malaysia: CPI (5:00pm) Sep 1.4%oya Singapore: NODX (8:30am) Sep US$12.2bn Thailand: BoT monetary policy meeting (2:30pm) No change

Thursday 18 Oct
China: GDP (10:00am) 3Q 7.4%oya FAI (10:00am) Sep 20.0%oya, ytd IP (10:00am) Sep 9.0%oya Retail sales (10:00am) Sep 12.5%oya Hong Kong: Unemployment rate (4:30pm) Sep 3.3%, sa

Friday 19 Oct
Taiwan: Export orders (4:00pm) Sep 1.7%oya

22 Oct
Hong Kong: CPI (4:30pm) Sep Taiwan: Unemployment rate (8:30am) Sep

23 Oct
Singapore: CPI (1:00pm) Sep Taiwan: IP (4:00pm) Sep

24 Oct
Australia: CPI (11:30am) 3Q China: Flash PMI (10:30am) Oct Vietnam: CPI Oct Holiday: India

25 Oct
New Zealand: RBNZ rate announcement(9:00am) Hong Kong: Trade balance (4:30pm) Sep Philippines: BSP monetary policy mtg.(4:00pm) Imports (9:00am) Aug Singapore: IP (1:00pm) Sep

26 Oct
New Zealand: Trade balance (10:45am) Sep Korea: GDP prelim (8:00am) 3Q Consumer survey (6:00am) Oct Taiwan: Leading index (4:00pm) Sep Holiday: Indonesia, Malaysia, Philippines, Singapore

Holiday: New Zealand During the week:

Holiday: Hong Kong, Thailand Philippines: Budget balance Sep (22-26 Oct)

Thailand: Mfg. production Sep (26-29 Oct)

Vietnam: Trade balance Oct (24-31 Oct)

29 Oct

30 Oct
India: RBI monetary policy meeting (11:00am) Korea: Current account balance (8:00am) Sep

31 Oct
Australia: Pvt. sector credit (11:30am) Sep Building approvals (11:30am) Aug New Zealand: NBNZ business confidence (1:00pm) Oct Building permits (10:45am) Sep Korea: IP (8:00am) Sep Taiwan: GDP prelim (8:30am) 3Q Thailand: PPC, PII (2:30pm) Sep Trade balance (2:30pm) Sep

1 Nov
China: PMI mfg. (NBS) (9:00am) Oct PMI mfg. (Markit) (9:45am) Oct Hong Kong: Retail sales (4:30pm) Sep India: Trade balance (11:00am) Sep PMI mfg. (10:30am) Oct Indonesia: CPI (11:00am) Oct Trade balance (11:00am) Sep Korea: Trade balance (9:00am) Oct CPI, PMI mfg (8:00am) Oct Taiwan: PMI mfg. (10:00am) Oct Thailand: CPI (11:00am) Oct Holiday: Philippines

2 Nov
Australia: PPI (11:30am) 3Q New Zealand: ANZ commodity price (1:00pm) Oct

Holiday: Philippines

During the week:

5 Nov
Australia: Trade balance (11:30am) Sep Retail sales (11:30am) Sep Singapore: PMI (9:30pm) Oct Taiwan: CPI (8:30am) Oct During the week:

6 Nov
Australia: RBA rate announcement (2:30pm) Philippines: CPI (9:00am) Oct

7 Nov

8 Nov
Indonesia: BI monetary policy meeting Malaysia: IP (12:00pm) Sep BNM monetary policy mtg. Taiwan: Trade balance (4:00pm) Oct

9 Nov
China: CPI, PPI (9:30am) Oct FAI, IP, Retail sales (1:30pm) Oct Korea: BoK monetary policy mtg.(9:00am) Malaysia: Trade balance (12:00pm) Sep

China: Money supply Oct (10-15 Nov)

Times shown are local. 79

JPMorgan Chase Bank NA Michael Mulhall

Economic Research Global Data Watch October 12, 2012

Global Data Diary


Week / Weekend 13 19 October
China Trade report (Sep)*

Monday 15 October
China CPI (Sep) India WPI (Sep) Russia IP (Sep) United States Retail sales (Sep) NY Fed survey (Oct) Busnss inventories (Aug)

Tuesday 16 October
Euro area HICP final (Sep) Russia Retail sales (Sep) United Kingdom CPI (Sep) United States CPI (Sep) IP (Sep) NAHB survey (Oct)

Wednesday 17 October
Poland IP (Sep) Singapore NODX (Sep) Thailand BoT mtg: no chg United Kingdom Labor market report (Sep) MPC minutes (Oct) United States Housing starts (Sep)

Thursday 18 October
Brazil COPOM mtg mins (Oct) China FAI (Sep) IP (Sep) Retail sales (Sep) GDP (3Q) Chile BCCh mtg: no chg Turkey CBRT mtg United Kingdom Retail sales (Sep) United States Philly Fed survey (Oct)

Friday 19 October
Canada CPI (Sep) Japan Shirakawa speech Taiwan Export orders (Sep) United States Existing home sales (Sep)

* published October 13

20 26 October

22 October

23 October
Canada BoC mtg: no chg Euro area EC cons conf plm (Oct) France INSEE bus conf (Oct) Taiwan IP (Sep)

24 October
Australia CPI (3Q) China Markit mfg PMI flash (Oct) Euro area Flash PMI (Oct) Italy ISAE cons conf (Oct) United States Flash mfg PMI (Oct) New home sales (Sep) FOMC mtg: no chg Bernanke press conf

25 October
Euro area M3 (Sep) Hong Kong Trade report (Sep) New Zealand RBNZ mtg: no chg Philippines BSP mtg: no chg Singapore IP (Sep) United Kingdom GDP (3Q) United States Durable goods (Sep) Pending home sales (Sep)

26 October
Brazil BCB credit report (Sep) Colombia BanRep mtg: no chg France INSEE bus conf (Oct) Germany GFK cons conf (Nov) Italy ISAE bus conf (Oct) Japan CPI (Sep) Korea GDP (3Q) Mexico Banxico mtg: no chg United States GDP (3Q) UMich cons sent fnl (Oct)

Japan Japan Shoko Chukin survey (Oct) Reuters Tankan (Oct) Trade report (Sep) BoJ loan officer surv (3Q) Shirakawa speech

Analysts Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors and overall firm revenues. The firms overall revenues include revenues from its investment banking and fixed income business units. Principal Trading: JPMorgan and/or its affiliates normally make a market and trade as principal in fixed income securities discussed in this report. Legal Entities: J.P. Morgan is the global brand name for J.P. Morgan Securities LLC (JPMS) and its non-US affiliates worldwide. J.P. Morgan Cazenove is a brand name for equity research produced by J.P. Morgan Securities Ltd.; J.P. Morgan Equities Limited; JPMorgan Chase Bank, N.A., Dubai Branch; and J.P. Morgan Bank International LLC. J.P.Morgan Securities Inc. is a member of NYSE and SIPC. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. J.P. Morgan Futures Inc., is a member of the NFA. J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority. JPMorgan Chase Bank, Singapore branch is regulated by the Monetary Authority of Singapore. J.P. Morgan Securities Asia Private Limited is regulated by the MAS and the Financial Services Agency in Japan. J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS License No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (JPMSAL) (ABN 61 003 245 234/AFS License No: 238066) is a Market Participant with the ASX and regulated by ASIC.. J.P.Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA), licence number 35-07079. General: Information has been obtained from sources believed to be reliable but JPMorgan does not warrant its completeness or accuracy except with respect to disclosures relative to JPMS and/or its affiliates and the analysts involvement with the issuer. Opinions and estimates constitute our judgment at the date of this material and are subject to change without notice. Past performance is not indicative of future results. The investments and strategies discussed may not be suitable for all investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. JPMorgan and/or its affiliates and employees may act as placement agent, advisor or lender with respect to securities or issuers referenced in this report.. Clients should contact analysts at and execute transactions through a JPMorgan entity in their home jurisdiction unless governing law permits otherwise. This report should not be distributed to others or replicated in any form without prior consent of JPMorgan. U.K. and European Economic Area (EEA): Investment research issued by JPMS plc has been prepared in accordance with JPMS plcs Policies for Managing Conflicts of Interest in Connection with Investment Research. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (all such persons being referred to as relevant persons). This document must not be acted on or relied on by persons who are not relevant. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with these persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to wholesale clients only. JPMSAL does not issue or distribute this material to retail clients. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms wholesale client and retail client have the meanings given to them in section 761G of the Corporations Act 2001. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of the public as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offense. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul branch. Revised September 29, 2012. Copyright 2012 JPMorgan Chase Co. All rights reserved. Additional information available upon request.