Economic Research

January 4, 2013

Global Data Watch
 Global PMI survey shows year-end lift led by US and EM Asia  The shift away from caution by corporates to gain momentum  Large front-loaded US tax hike to limit global lift in 1H13  BoJ monetary policy shift leaves new Korean government with difficult choice  Expected December Chinese inflation rise highlights divergence ahead between EM and DM inflation trends

Contents
US: from one cliff to the nex t Australia's 2013 outlook: mind the grow th gap! Ghana: aw aiting fiscal discipline Global Economic Outlook Summary Global Central Bank Watch Now cast of global grow th Selected recent research from J.P. Morgan Economics The J.P. Morgan View : Markets 15 17 4 6 7 8 9 19 25 29 35 37 39 41 43 45 49 53 55 57 61 63 67 68 13

Bumpy, a little better, and a lot less risky
The global economy is turning into 2013 with growth momentum building modestly and financial conditions becoming more supportive. We forecast GDP gains to pick up modestly in the coming quarters. Following a meager 2.1% gain last year—a full percentage point below our estimate of trend— global GDP is projected to expand at a 2.5% annualized pace during 1H13 followed by a 3.3% rise during the second half. The initial impetus for the increase in growth is coming from the corporate sector. A substantial shift toward business caution took hold in the middle of 2012 as profit growth slowed and concerns about the Euro area and China intensified. During the middle two quarters of last year global capital spending stalled, alongside a slowing in hiring and increased efforts to reduce the pace of inventory accumulation. In the event, global final demand growth held up, largely on the back of solid consumer spending. With profits continuing to grow and policy actions successful in stabilizing Chinese growth and containing Euro area stress, business sentiment has turned up and prices of risk assets have moved higher. The recent agreement to avert the US fiscal cliff should amplify these developments. Early indications that global investment spending is rebounding and the inventory cycle is set to turn support the view that momentum is building. Both developments point to better times ahead for a beleaguered global manufacturing sector that just completed its worst non-recession year in more than two decades. It should be recognized, however, that there is a year-end manufacturing bounce underway that overstates this turn. Global manufacturing output

Data Watches United States Euro area Japan Canada Mex ico Brazil Argentina Peru United Kingdom Central Europe South Africa Australia and New Zealand China, Hong Kong, and Taiw an Korea ASEAN Asia focus Regional Data Calendars

Monthly global GDP trackers
%m/m, saar 6 5 4 3 2 1 2010 Nowcaster

Manufacturing PMI new orders
DI, sa 60 55 50 45 US

Bruce Kasman
JPMorgan Chase Bank NA

David Hensley
EM Asia EMU Japan Jul 12
JPMorgan Chase Bank NA JPMorgan Chase Bank NA

PMI 2011 2012 2013

Joseph Lupton

40 Jan 12

www.morganmarkets.com

JPMorgan Chase Bank NA Bruce Kasman David Hensley

Joseph Lupton

Economic Research Global Data Watch January 4, 2013

The projected tension between low underlying inflation and the constraint posed by the zero interest rate bound represents a unique challenge for DM central bankers. Aggressive fiscal tightening in the US and Europe in the face of high unemployment represents another. In response, central bank balance sheets are set to expand further. However, there is a major new initiative underway as central banks experiment with their communication policy—the signals policymakers send about their objectives and how they will react to changing economic circumstances. The active use of communication policy, with balance sheet activities used to reinforce messages, will be the defining feature of the G-4 central bank landscape in 2013. is estimated to have risen 0.4%m/m in November and will likely produce a similar-sized gain in December. Much of this lift represents a temporary bounce as disruptions related to Hurricane Sandy and the Japan-China dispute fade. The volatility in global activity related to recent shocks is buffeting our monthly GDP nowcaster, which fell below 1% in September and October and looks set to move up to 3% in December. Our all-industry global PMI is also lifting. Smoothing the monthly profile, both indicators have moved modestly above our bottom-up forecast for last quarter. Regionally the US and Emerging Asia are leading the move up in our global surveys. In the US, early December labor market reports and consumer indicators reinforce this message. Unfortunately, the economy is about to hit a pothole as the household sector absorbs a large front-loaded drag resulting from the fiscal cliff agreement. The increase in payroll taxes and higher marginal rates on high-income households is set to depress 1H13 income growth by roughly 2%-pts at an annualized pace. Although lower inflation will cushion part of this blow, US growth is expected to slow at the start of the year, limiting the lift in overall global growth. By contrast, EM Asia will be supported by the turn in global manufacturing as well as continued solid gains in Chinese demand. Recent months have already set the ball in motion. The ECB has reluctantly taken on the role of a sovereign liquidity backstop, and the launch of the OMT program institutes a key risksharing mechanism changing the nature of sovereign debt in the region. For its part, the Fed made a significant shift in its reaction function in September in an attempt to augment the perceived diminishing returns of asset purchases. The minutes of the latest meeting also highlight the Fed’s concern about a large open-ended purchase plan with sentiment on the committee pointing to a scaling down of the program later this year. Our forecast that QE3 will end in the first half of 2014 would appear to be challenged by this news. However, the Fed’s policy forecast is predicated on a 2.7% (4Q/4Q) 2013 GDP forecast, which is well above our own 2%. Importantly, the minutes reiterate that the numerical targets on rate guidance are consistent with above-trend growth and unchanged rate policy until mid-2015.

The slack debate divides
If economic slack matters for inflation, then so, too, does the measurement of slack. Any disinflationary impulse from slack rests heavily on the measurement of actual real GDP relative to its unobserved potential. Mismeasurement of the output gap has led policymakers to make large errors in the past, particularly in the 1970s. It thus comes as little surprise that this issue underlies a heated debate taking place in the halls of central banks as this measurement either reinforces or undermines the foundation for the unprecedented levels of monetary policy support now in place. Whereas the ECB and BoE have been much more accepting of the idea of supply destruction in the wake of the global financial crisis, the Fed and the BoJ have viewed the GDP shortfall as mostly demand-driven. Based on our estimates of the output gap consistent with each central bank’s thinking, the Euro area and UK have experienced as much as a 6% to 10% outright reduction in productive capacity as of 4Q12,

Central bank communications are the key
Even as global growth picks up, the legacy of two full years of subpar performance will play a major role influencing macroeconomic performance. Global inflation is expected to retreat modestly this year, settling at a 2.5%oya pace in 4Q13. This would build on the even larger drop recorded in 2012 and would take inflation to the lower end of the range for the past decade, outside of recessions. The decline is expected to be focused in the developed world, where core inflation is expected to fall against a backdrop of weak (though improving) growth and dramatically lower import price inflation.

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JPMorgan Chase Bank NA Bruce Kasman David Hensley

Joseph Lupton

Economic Research Global Data Watch January 4, 2013

Nominal broad trade-weighted exchange rates
Indexed Jan 3, 2011=1.0 1.08 1.04 1.00 0.96 0.92 2011 Japan 2012 2013 EM Asia

would reinforce these trends. Nevertheless, Asian policymakers are leery of sustained, rapid currency gains and regularly intervene in FX markets. Korea may be a test case. Korean policy priorities appear to have shifted in recent months, a shift that may be reinforced after the new government takes office in February. Already, the 2013 budget, which was approved by the National Assembly earlier this week, altered spending plans to improve the welfare system, while raising the tax burden on higherincome households by imposing “comprehensive financial income taxes” for interest and dividend income of more than Won20 million. The National Assembly also terminated temporary tax benefits for housing transactions despite concern about market weakness. Expectations are building that the new government will be more tolerant of KRW appreciation in order to boost household buying power. Yet it is unclear how far it will go with the won already having appreciated quite sharply in recent months and the export outlook still uncertain. EM Asian FX policy also will be affected by what happens in Japan. The new Japanese government has been unusually aggressive in advocating a cheaper yen. On a trade-weighted basis, the yen already is down about 12% from the recent July peak, with about half of the drop occurring over the past month. History shows that the won’s appreciation against the yen tends to occur during global economic recoveries, allowing rising demand to offset any lost competitiveness. If won appreciation is driven largely by Japan’s monetary policy shift, Korean officials likely would intervene more heavily.  

relative to pre-crisis potential growth trends. By contrast, the US and Japan have seen a much more modest 2% hit. With output gaps still depressed across the G-4, the debate is somewhat moot in the near term as inflation pressures will remain subdued again this year. However, a return to more robust growth would lead to a staggered exit from unprecedented monetary policy support, with the ECB and BoE likely to move first.

EM inflation looks set to firm modestly  
Whereas inflation is expected to recede in the developed world this year, it is forecast to increase somewhat in the emerging economies, led by Asia. We estimate that the output gap is positive in Asia and near neutral in Latin America, though negative in CEEMEA. Inflation has been rising recently in China, and we look for a further increase in next week’s December report to 2.3%oya. Chinese inflation is expected to keep firming in 2013, driven by a turnaround in the food price cycle and higher unit labor costs. An expected push by the new government on resource price reform will add to the pressure. Some of the same factors are at work elsewhere in the region. Korea, Malaysia, and Taiwan will lead the pack as headline inflation in these economies is forecast to end the year more than 1%-point higher than the rate at which it started. For the most part, Asian inflation is moving up off of low levels and the forecasted gains are not expected to trigger central bank tightening. Indeed, we expect inflation to remain below the upper limit of most central bank targets this year. If our outlook proves correct, EM Asian policymakers will gradually shift focus to guarding against signs of overheating or a return to rapid growth in credit. 

Egypt’s FX weakness tied to political unrest
Egypt’s political crisis over the constitutional referendum has taken a toll on domestic sentiment and pushed the currency to its weakest level ever. We believe the acceleration in dollarization in December prompted the central bank to conduct a controlled mini-devaluation. Pressure on the currency is likely to remain elevated amid dwindling international FX reserves. We believe the central bank will try to stabilize the currency ahead of parliamentary elections, likely to be held within two months. These elections are pivotal to Egypt’s near-term outlook and international financial support. In our view, IMF talks will likely resume in January but a US$4.8 billion loan is unlikely to be approved before parliamentary elections, while other international support from the African Development Bank, the United States, and the EU will be tied to the IMF deal.

Korean shift to be tested by yen slide
One factor that should help contain EM Asian inflation is currency appreciation. EM Asian currencies gained in value during 2H12 as reduced uncertainty about developments in Europe and China contributed to a fall in risk premia. Our forecast for a continued, gradual acceleration in global GDP

Editor: Sandy Batten
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JPMorgan Chase Bank NA David Hensley Carlton Strong

Joseph Lupton

Economic Research Global Data Watch January 4, 2013

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

2012 2.3  2.0  2.4 2.3 1.0  5.5  3.2 5.0  3.9  6.2  3.5  5.0

2013 1.8  1.7  3.7  3.6  3.4  4.5  4.0 4.0  3.6  6.0  4.0  0.0

2Q12

3Q12

4Q12

1Q13

2Q13 1.5 2.0 4.1 2.5 3.8 5.0 6.1 3.0 4.5 6.0 4.3 0.0 2.0 2.8 4.3 6.6 8.2 3.5 5.7 4.5 4.0 4.5 4.9 1.6 3.5 3.5 2.8 4.0 0.8 2.0 0.5 0.5 -1.5 1.5 2.6  … 0.8  0.5 2.3  3.2 3.0  … 2.8  1.4 5.4 

3Q13 2.5 2.2 4.0 2.0 3.6 5.0 6.1 3.0 4.6 5.0 4.0 3.0 1.7 2.4 1.6 6.8 8.2 5.0 5.8 5.0 4.5 4.5 5.3 4.1 3.8 4.5 3.6 4.1 1.3 2.5 1.0 1.0 0.0 2.0 3.6  … 2.4  1.8 3.0  4.1 4.0  … 3.2  1.9 5.6

4Q13 3.0 2.5 3.9 2.0 3.8 4.6 5.3 4.0 4.0 5.0 4.0 4.0 2.7 2.4 3.1 7.0 8.2 5.0 6.0 5.5 4.5 5.0 5.3 6.1 4.0 4.5

2Q12 1.9 1.6 4.9 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 3.8  9.4 2.7  1.8 4.3

4Q12

2Q13

4Q13

1.3 3.1 1.5 1.0 1.7 0.6 1.5 1.7 2.0 2.2 3.9 3.9 -3.7 2.5 12.0 2.0 1.0 2.4 3.1 3.9 8.3 5.7 2.9 4.0 5.3 -2.6 3.7 4.2 4.8 3.0 5.5 5.0 3.3 1.8 2.3 3.9 6.0 5.5 6.0 6.5 2.2 7.8 2.3 6.0 -0.5 4.2 0.0 -4.0 -0.1 2.3 1.0 5.8 7.1 -0.4 5.3 6.0 1.1 6.3 5.0 0.5 -0.4 11.7 3.4 3.4 -0.7 1.1 -0.2 -2.9 -1.7 -1.5 0.6  … -1.6  -1.4 0.8  0.5 1.0  … 1.6  0.3 4.1

1.9 1.6 1.4 1.6 1.4 2.0 5.2 5.2 5.0 10.0 10.0 11.0 5.6 6.0 5.5 2.7 2.2 3.1 2.8 2.1 2.4 5.1 5.4 4.7 4.2 3.5 3.3 2.8 2.1 2.5 8.9 8.1 7.6 18.6 30.2 35.0 0.1 2.6 1.4 3.2 2.0 3.5 9.8 4.3 1.7 1.2 2.3 3.9 1.6 3.0 1.9 5.6 2.3 2.1 1.8 2.6 3.2  2.7 5.8  … 2.7  5.5 2.9  5.4 6.6  6.8 2.7  1.8 4.1  0.1 3.2 1.5 3.8 3.0 3.5 9.0 3.9 2.4 2.3 2.3 3.8 1.3 3.6 1.9 5.9 1.8 1.9 1.5 1.6 2.5  2.7 5.8  … 2.2  3.4 1.9  6.3 7.0  6.7 2.6  1.6 4.4 0.3 2.7 2.3 4.1 3.5 3.3 8.5 4.6 3.0 2.6 2.9 4.0 2.3 3.0 2.2 5.4 1.7 1.8 1.7 2.3 2.5 2.4 5.1 … 2.4 3.7 2.4 5.1 5.7 6.3 2.5 1.5 4.5

-0.5  2.4  1.4  7.5  9.3  4.9  6.5  6.5 3.6  5.1  3.8 4.9  4.1  0.1

2.0  3.5  2.3 6.1  7.6  1.2  5.2  5.7 2.2  5.3  6.4 1.2 1.2  5.7

0.5 2.5  2.8 6.5  8.0  3.2  5.8  4.5 3.0 5.1  4.8 2.3  3.4  4.5

-3.5 1.9 0.8 5.7 7.7 2.4 4.1 4.9 0.2 3.6 5.2 -5.9 3.9 5.0 2.9 1.2 -0.2 0.9 0.9 -0.8 -1.1 3.8 1.4  … -1.3  -0.7 1.6  -2.0 2.2  … 2.1  0.9 4.2 

-0.5 1.1 2.5 6.5 8.2 2.5 5.1 4.5 3.5 6.5 4.5 1.8 3.8 2.5 2.8 -0.4 -1.5 -1.0 -1.5 -2.0 -2.5 0.0 1.8  … -1.6  -1.0 0.5  -1.2 3.0  … 1.9 0.1 5.1

1.0 3.7 3.8 6.5 8.0 3.5 6.2 4.5 2.5 5.0 4.5 6.1 3.5 3.5 3.2 4.4 0.0 1.0 -0.5 -0.5 -2.5 0.8 2.4  … 0.0  0.0 1.3  -0.4 3.5  … 2.4  0.8 5.3 

4.6  3.5

3.0  2.3

3.1  2.7

3.6 3.8 1.5 2.5 1.0 1.0 0.0 2.0 3.0  … 1.4  2.0 2.3  2.4 3.5  … 3.5  2.4 5.6

1.5  3.1  1.7  0.6  0.4  0.9  4.8 1.7  1.9  1.6  4.3 2.5  4.3 8.5

3.1  1.4 6.2

-0.4  0.9  0.1  -2.1  -1.4  0.0  2.5  0.7  -1.1  -1.4  2.1  0.0  3.6  2.6  2.4  1.2 4.6

0.0  1.1  0.0  -0.5  -1.6  1.2  2.5  1.5  0.0  0.0  1.6  0.8   3.0  3.7

Memo:    Global — PPP weighted 3.8 3.0 3.1 2.3 2.7 2.6 3.0 3.4 3.8 3.8 3.2 3.1 3.0 3.0          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.
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2.5  1.0 5.1 

7 5.5 -5.6 56.6 4.0 3.0 -0.2 1.3 1.4 22.3 Memo: Global industrial production 4.1 2.9 1.8 -3.3 -1.8 -3.2 %oya 2.0 5.9 10.0 3.4 1.7 0.0 2.0 6.7 5.1 2.0 0.1 4.5 1.0 8.0 -0.5 5.3 1.0 13.9 -3.3 4.5 2.7 11.8 -0.4 -1. 2013 G-3 economic outlook detail Percent change over previous period.5 1.7 3Q 3.5 2. 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.9 3.6 11.3 3.9 0.0 -0.8 -1.0 0.9 9.8 1.5 0.7 4.3 1.0 1.9 4.1 1Q 1.0 0.3 0.5 -0.8 1.0 38.9 7.8 2.3 0.5 -1.4 1.2 0.8 -0.0 -0.1 6.1 7.6 2.4 -0.5 0.3 0.3 8.7 0.7 4.5 0.7 1.8 1.0 -0.5 1. %oya) ex unprocessed food and energy General govt.5 3.9 3.0 25.0 2.3 9. Morgan’s Morgan Markets client web site 5 .6 1.1 0.4 0.8 1.5 2.0 Note: More forecast details for the G-3 and other countries can be found on J.4 -0.6 2.5 0.2 -5.7 5.8 1.6 -0.9 7.0 2.5 -3.1 1.4 12.0 2.7 4.5 5.6 3.7 0.1 6.4 0.7 6.0 1.2 7.0 1.4 0.1 -6.1 -0.1 1.5 1.4 1.7 -8.0 -1.2 2.3 -0.0 4.5 1.0 3.6 1.2 3.5 -2.5 1.7 -6.1 0.0 2.6 1.0 0.0 -0. budget balance (% of GDP.2 4.7 0.6 0.6 8.0 -0.2 3.4 3.1 -0.8 2.2 0.4 2.5 3.5 18.0 -1.3 -1.0 -1.0 40.6 1.1 -0.4 0.8 2.5 -0.6 -2.2 1.4 31.3 0.6 0.6 5.2 1.3 2.0 -8.6 3.5 5.0 0.6 6.3 -4.5 1.7 1.5 3.5 0.4 1.0 5.7 0.8 2.6 2.4 -1.5 3.5 4.3 -1.0 -3.7 4.7 1.3 0.1 -10.2 0.4 0.2 5.0 1.6 2.5 0.7 12.4 41.7 1.4 -7.5 -2.9 1.8 -3.0 2.5 -3.8 -0.0 4.3 -2.2 1.0 1.1 2.8 8.6 1.2 -0.5 -20.0 -0.2 0.0 0.0 1.0 -0.7 -0.8 2.1 -0.8 12.0 2.0 6.0 16.JPMorgan Chase Bank NA David Hensley Carlton Strong Joseph Lupton Economic Research Global Data Watch January 4.1 0.1 1.2 2.5 0.7 0.0 -20.9 2.6 12.4 1.4 5.0 5.0 6.1 -3.4 3.9 2.7 1.8 -0.3 19.1 -2.5 0.0 2.3 -9.9 -0.3 3.0 4.2 5.5 1.9 -1.7 -1.7 7.4 5.1 0.1 2.6 8.3 0.0 6.3 7.7 3.9 1.2 2.2 1.5 6.7 5.6 60.5 3.1 -1.3 -0.4 4. 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.5 5.0 4.5 12.5 -7.1 1.7 4.2 45.5 4.1 10.7 1.7 2013 2Q 1.7 0.2 -0.2 4Q 3.0 1.0 4.1 1.2 1.0 -0.6 -3.1 -1.4 4.9 37.3 -0.9 2013 1.7 0.0 1.7 -0.6 12.5 1.1 5.9 6.1 0.0 4.1 1.1 -1.4 0.9 0.9 1.5 1.1 0.8 2.6 2.0 8.8 1.0 9.0 4.8 -0. net lending (% of GDP.1 -0.2 0.5 0.3 4.0 3.0 -1.9 -2.1 1.4 0.9 -0.0 8.0 4.7 13. 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.4 -2. CY) Unemployment rate (%) Industrial production 1.3 -0.7 -0.0 23.1 2.6 8.7 1.5 11.0 3Q 2.1 0.5 4.2 -1.3 3.5 2.7 -9.0 33.7 2.3 -0.8 -0.8 11.3 0.7 7.1 2.0 2.1 2.5 0.8 -1.7 12.5 8.1 11.8 3.5 0.1 2.0 0.2 -0.0 -0.0 0.1 -3.8 8.2 4.1 0.4 0.6 2.7 2.3 3.7 -0.7 2.0 -0.5 -0.6 0.9 2.5 0.0 1.7 1.8 9.0 2.1 -0.7 -0.0 0.7 0.0 2.0 0.3 -0.5 10.0 10.0 0.4 -18.8 11.0 1.0 25.1 0.0 2.0 5.1 -4.5 -9.5 4.8 2.8 0.2 1Q 2.0 36.3 2.3 2.5 -0.1 1.5 6.P.3 5.4 -0.6 4.3 0.5 0.0 -0.6 -2.9 0.0 -3.1 -0.5 7.1 -0.9 -0.0 0.0 1.1 -0.3 34.1 4.0 1.6 -2.8 -1.0 0.3 4.5 1.4 3.7 4.5 -1.3 0.6 -5.4 -1.3 -1.5 4.9 5.8 -0.8 7.2 9.2 3.1 -10.7 -0.1 4.7 0.0 6.1 0.7 -4. FY) Personal saving rate (%) Unemployment rate (%) Industrial production.3 0.8 0.1 4.1 2Q 1.0 1.3 0.3 2.0 8.7 0.1 6.4 1.0 1.8 1.4 0.2 3.5 2.0 -1.4 -0.0 7.2 -15.9 4.0 5.6 4.1 8.3 2.8 20.0 3.3 2012 2.0 0.1 4.3 2.3 23.3 0.0 -4.8 4Q 1.4 6.3 1.2 3.2 1.6 4.7 -11.0 6.

00 3.49 5.50 0.50 2.5 1 Last change Next mtg Forecast next change Forecast (%pa) Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 2.25 1.08 4.63 1.83 5.50 5.50 5. 2-wk dep Base rate 7-day interv Base rate Repo rate Repo rate Effctve rate Fed funds O/N rate SELIC O/N Repo rate Disc rate Repo rate Reference Reference Current rate (%pa) 2.75 3.48 1.50 5.72 3.00 5.25 1.21 2.50 8.49 5.75 0.50 5.125 1.05 4.22 2.46 6.66 2.58 0.50 5.05 5.50 5.75 3.46 0.50 5.50 0.50 0.75 7.75 7.50 5.75 3.00 5.00 4.00 4.00 2.JPMorgan Chase Bank NA David Hensley Michael Mulhall Joseph Lupton Economic Research Global Data Watch January 4.875 2.50 0.05 4.5bp) 30 Jan 13 8 Sep 10 (+25bp) 23 Jan 13 10 Oct 12 (-25bp) 16 Jan 13 17 Jul 09 (-25bp) 18 Jan 13 12 Jan 12 (-25bp) 17 Jan 13 12 May 11 (+25bp) 10 Jan 13 28 Dec 12 (+25bp) 27 Mar 13 On hold 4Q 13 (+25bp) 1Q 14 (+25bp) 2Q 14 (+25bp) On hold On hold 1Q 14 (-25bp) 0. 2013 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 Taiwan Cash rate Cash rate O/N call rate Disc.50 5.75 0.75 3.75 5.25 1.25 5.25 4.00 1. Underline denotes policy meeting during upcoming week.05 0.05 0.125 1.52 5.50 6.05 0.25 5.50 2.25 2.91 0.25 9.25 4.66 2.21 2. 6 .00 1.44 0.58 0.44 6.75 4.00 3.00 2.50 5.5bp) 9 Jan 13 1Q 13 1 Refers to trough end-quarter rate from 2009-present ² Effective rate adjusted on daily basis Bold denotes move since last GDW and forecast changes.48 1.25 4.45 6.50 0.75 0.49 5.75 7.00 7.43 0.56 3.89 0.00 Jul 11 -47 -56 -32 -76 -295 49 -44 -60 0 0 -525 0 -25 -25 0 125 -34 -75 0 -70 -25 -150 -25 -100 N/A -50 -69 -42 -175 0 0 0 -56 -50 -100 0 0 -100 -50 0 4 Dec 12 (-25bp) 5 Oct 10 (-5bp) 7 Jul 12 (-31bp) 9 Feb 12 (-25bp) 5 Jul 12 (-25bp) 5 Mar 09 (-50bp) 1 Nov 12 (-20bp) 10 Jan 13 10 Jan 13 6 Feb 13 16 Dec 08 (-87.25 9.68 5.75 2.25 5.125 1.75 4.75 3.05 4.25 4.50 0.75 0.50 0.50 4.875 10 Mar 11 (-50bp) 31 Jan 13 Sep 13 (+25bp) 17 Dec 08 (-100bp) 31 Jan 13 11 Oct 12 (-25bp) 11 Jan 13 11 Apr 13 (-25bp) 17 Apr 12 (-50bp) 29 Jan 13 29 Jan 13 (-25bp) 5 May 11 (+25bp) 31 Jan 13 25 Oct 12 (-25bp) 24 Jan 13 17 Oct 12 (-25bp) 30 Jun 11 (+12.59 23 Nov 12 (-25bp) 18 Jan 13 18 Jan 13 (-25bp) 2Q 14 (+25bp) On hold On hold On hold 9 Jan 13 (-25bp) On hold 1Q 14 (-25bp) On hold N/A² 0.00 1.75 2.50 5.75 1.00 7.00 5. Aggregates are GDP-weighted averages.50 5.75 8.50 6.75 0.54 4.00 2.25 5.75 0.75 3.61 6.50 6.75 3.43 2.875 2.40 3.125 1.29 3.25 4.75 4.58 0.50 5.44 6.00 5.66 2.00 5.50 5.60 5.51 6.58 0.00 3.75 0.25 4.48 1.05 5.25 7.89 0.00 3.75 5.78 3.40 3.75 1.50 6.00 3.05 5.50 5.05 0.75 4.50 1.25 9.25 9.75 2.05 5.00 0.75 4.00 7.69 5.00 3.05 5.25 1.50 5.75 1.24 2.75 0.74 5.50 6.75 7.875 2.75 7.25 1.50 0.10 4. wndw 1-yr working Base rate BI rate Repo rate O/N rate Rev repo 1-day repo Official disc.75 1.00 3.125 1.05 0.25 5.93 0.50 3.50 6.68 5.00 1.25 9.75 5.90 0.75 3.50 5.54 1.25 5.75 2.50 5.75 1.75 2.35 3.00 2.22 2.00 4.51 1.05 5.50 5.875 Change since (bp) 05-07 avg Trough -214 -139 -299 -157 -468 -162 -32 -388 -438 -273 -800 -337 31 -306 19 200 -225 -223 -444 -235 -138 -250 -27 -294 N/A -329 -1037 2 -294 -488 -17 -548 -14 -140 -412 113 -24 -356 -108 -71 40 45 0 61 0 89 103 27 0 75 0 0 450 125 300 300 6 0 0 0 50 125 75 0 N/A 0 0 81 0 0 0 0 69 75 0 325 100 0 150 62.25 5.05 0.50 2.25 9.50 0.00 3.75 3.00 2.00 3.125 1.00 5.50 2.50 5.00 3.56 0.00 3.00 7.00 2.25 5.68 18 Dec 12 (-25bp) 29 Jan 13 29 Jan 13 (-25bp) 24 Dec 12 (-25bp) 28 Jan 13 5 Dec 12 (-25bp) 29 Mar 12 (-25bp) 13 Sep 12 (+25bp) 19 Jul 12 (-50bp) N/A² 9 Jan 13 7 Jan 13 Jan 13 24 Jan 13 Jan 13 4 Feb 13 4 Feb 13 (-25bp) 22 Jan 13 10 Jan 13 On hold On hold 1Q 14 (+25bp) On hold On hold On hold On hold 1Q 14 (+12.75 3.5bp) 2.00 0.50 5.43 0.61 0.00 4.50 2.35 3.75 1.50 2.00 1.

1 0. as modest gains in the US and EM were held back by contractions in Europe and Japan. orders -19.0 3.4 2.1 PMI.4% in November. Shaded values show forecasts computed by the Kalman filter estimates from the dynamic factor model.0 0. serv 52. 2013 Nowcast global growth: 4Q12 momentum builds into year-end  Although the first of the official 4Q GDP reports are still a few weeks off. the manufacturing PMI continues to underscore a constructive turn in the inventory cycle as surprisingly resilient global final demand amplified the stock-building drawdown implied by the sharp contraction in global factory output in the three months through October. Months are %m/m (PMIs level) 3Q12 4Q12 Oct 12 Nov 12 PMI.7 48.0 2.5 50. but this will be temporary. Boxes are J. saar) 0.2 1.2 4 weeks ago 1.4 0. The December all-industry PMI report shows global economic activity accelerating. Global real GDP %chg.4 IP -3.P.0 2.0 1.3 Retail sales 2. As these fade.1 2.2 0. mfg 48.Morgan Nowcast Feb 01 Feb 08 Feb 15 Nov 02 Nov 09 Nov 16 Nov 23 Nov 30 Dec 07 Dec 14 Dec 21 Dec 28 J.0 2. and recovery dynamics take hold in Europe. This leveraging of growth via the inventory cycle certainly amplifies the manufacturing bounce.8 2.0 . geopolitical tension between Japan and China.6 1. 4Q2012 %q/q.2 -0. an estimate based on reported data (including the US.5 Auto sales -21. Morgan global aggregates Quarters are %3m.2 15.3 -1.8% annualized last quarter.5 3.6 Note. Underlined values are our estimates based on available data and our judgment.JPMorgan Chase Bank NA Joseph Lupton David Hensley Economic Research Global Data Watch January 4.7 2. Global real GDP %q/q. global GDP is expected to accelerate to a 2.8 1. saar (current forecast shaded) 3Q12 J.8 1.2 4Q12 Last week 1. More important to watch is the building momentum in final demand.8 1.4 1. China. global GDP expanded at a 2% annualized pace last quarter.  The monthly global GDP tracking implied by our nowcaster underscores how depressed economic activity was at the start of 4Q12 and that the unwinding of one-off factors is leading to a sharp buildup in momentum into year-end.  We attribute part of the weakness to one-off factors related to the hurricane in the US.7 1.4 1.6 Dec 12 50. monthly activity data through November and business surveys through December are now available. and Japan) amounting to 54% of global value-added.0 54.P. According to the filtering of these data.8 2.P. Our bottom-up J.7 Current 1.5 Nowcasting global real GDP by forecast date. a touch stronger than the bottom-up forecast.0 Nowcaster through Dec.0 1. Morgan forecast continues to see global GDP having expanded at a weak 1.8 52.0 0.9 0.9 2.saar (PMIs avg level).3% pace this quarter—a still-soft pace owing to a fiscal drag in the US.0 0. This top-down projection relies importantly on a judgmental assumption that global IP will expand at a solid 0. saar 2.P. while the stumble in global capex in mid-2012 looks set to reverse. Importantly.P.5 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Actual/JPM Feb 22 7 Jan 04 Jan 11 Jan 18 Jan 25 1.2 J.8 7. Monthly GDP (%m/m. Morgan Nowcaster (DFM-Eco) Global PMI model 2.6 Nowcast 1. and abnormal swings in auto production in Europe.8 0.  Our global nowcaster provides a useful lens through which to view the moving parts underlying the business surveys and the production and final demand data now in hand.5 1. Morgan forecast 3Q and 4Q12 4.5 2.4 2.9 53. Retail sales volume growth is expected to get a boost from falling inflation.7 49.3 1.5 54. based on the latest pickup in G-3 capital goods orders.  The shift in momentum is already showing up in the monthly data flow.0 1.2 Cap.

Dec 14. 2012 Tracking a low-level bottom in global growth. Nov 23. 2012 Can Aussie dwelling starts shoulder growth expectations? Nov 30. Nov 2. 2012 EM inflation slide tempered by jump in agriculture prices. Oct 19. Aug 17. 2012 A downgrade to global growth. 2012 Gauging the upside to the global outlook. 2012 A brief history of Indonesia’s fiscal financing. 2012 Catalan challenge asks real questions of Europe. 2012 FX reserve accumulation nears stall speed. 2012 Euro area growth. 2012 South Africa: perfect storm leads to likely GDP contraction. 2013 Selected recent research1 from J. 2012 ECB shuns Portugal to save its blushes on Greece. Oct 19. Aug 3. Oct 5. consumption by the elderly. Special Reports and Global Issues are stand-alone features. Dec 14. 2012 US households know how to read the labor market data. Mar 9. 2012 Korea: house rent prices and consumption doldrums. 2012 The BoJ eased. Nov 30. 2012 Mixed messages in Emerging Asia’s manufacturing data. Morgan Economics Global Global consumers: look for solid holiday shopping season. 2012 US: would a decent economy be too much to ask for? Jul 20. supply overhang has vanished.P. 2012 US house prices are up. Oct 26. 2012 Latin America Brazil can't blame its growth disappointment on China alone. 2012 Aussie exports performing well given global headwinds. 2012 Japan: recession or stagnation. Nov 30. Nov 23. 2012 RBNZ leadership change: new boss same as the old boss? Nov 2. Oct 5. 2012 1. 2012 Brazil: BRL close to. Jul 5. 2012 Six more weeks of fiscal cliff. but may also have appeared in some form in GDW. 2012 US: the Fed’s novus ordo seclorum. ECB shock and deliver. 2012 Japan Japan: Abe trying to end deflation with "Abenomics. Sep 21. Dec 21. 2012 Brazil at a crucial juncture to address potential growth. what's next? Sep 21. Nov 9. Nov 30. Oct 26. 2012 Japan: what can and cannot be expected from the election. temporary political setback. Aug 31. 2012 Global inflation falls below target. 2012 Non-Japan Asia and Pacific Something has to give in Australia's flow of funds. Dec 14. 2012 Chinese housing market revisited. 2012 Taiwan trade hinges on G-3 demand as China stabilizes. 2012 UK: zombie households are not a threat to growth. 2012 Japan: hope and anxiety. Sep 21. Middle East. 2012 US: here comes the story of the hurricane. Nov 9. and bank deleveraging. 2012 United States and Canada Accounting for the US current account improvement. Dec 14. if you don’t jump off one. Sep 14. Dec 14. Aug 17. 2012 Second chance for next PM Abe to change Japan. 2012 UK: Carney plants a seed in fertile ground. higher inflation later. 2012 UK: the case against zombie firms. 2012 US: interest income in an era of ultra-low interest rates. 2012 Spain: import compression is preventing bigger GDP fall. 2012 OSI and Greece: what has been achieved thus far. 2012 EM Asia's unit labor costs: not quite goldilocks. Nov 30. 2012 Hong Kong: tackling strong capital inflows. Dec 21. Oct 19. Nov 23. Oct 19. Nov 9. 2012 Mexico: a structural challenge ahead. Sep 28. Nov 30. 2012 Revival of capex is key to near-term US growth. Dec 14. 2012 The US fiscal cliff: an update and a downgrade. 2012 Macroeconomic impacts of Japan/China dispute. the Fed won’t be buying your equities from you. 2012 Western Europe Treaty constraints on the ECB's behavior. Jul 31. Sep 28. Aug 10. 2012 What if UK growth stays weak? A look at the policy options. credit. Jul 6. Jul 13. Oct 26. 2012 US slowdown: it's not just about the uncertainty. Jul 27.JPMorgan Chase Bank NA. 2012 Will unlimited QE limit US bank lending? Dec 7. 2012 Ukraine election preview and what to expect afterward. 2012 Singapore: MAS to ease or not to ease? A tough question. Oct 19. 2012 Global economic aggregates get new weights. 2012 Global impact of the Euro area crisis. 2012 Egypt: unexpected power play to test outlook. Dec 7. 2012 Just what is recovering in the US housing recovery? Nov 9. Jun 21. 2012 Sorry. Nov 30. 2012 South Africa: CPI re-weighting to lift inflation projections. 2012 US: drought means lower GDP now. Nov 9. Oct 12. Nov 23. 2012 Euro area: a look at the prospect of lift from inventory. Sep 28. 2012 Expecting a wide but shallow global monetary easing cycle. Jun 29. Oct 19. 2012 EM bank tightening is gradually abating. Nov 2. Jul 27. 2012 Indonesia: tracking signs of a credit cycle inflection. New York Bruce Kasman Joseph Lupton David Hensley Economic Research Global Data Watch January 4." Dec 21. 2012 US: a numerical thresholds primer. 2012 China’s local government stimulus: castles in the air. 2012 UK: the recession that wasn’t—a new way to track GDP. 2012 Thailand: fiscal transfers pushing up public debt. 2012 Moving towards a much larger ECB balance sheet. Jul 13. Aug 31. Jun 8. 2012 Economics to trump arithmetic in Aussie tradable inflation. 2012 Global manufacturing will remain weak in 3Q. 2012 Financing Greece leaves unfinished business. Oct 12. 2012 UK: the deflationary dog that didn’t bark. that is the question. Jul 27. Research notes listed have been published in GDW. Sep 21. Oct 26. 8 . Oct 26. risks to the downside. Aug 31. 2012 US: the Treasury-Fed discord. 2012 Breaking Good: US consumer gets unexpected help. and Africa MENA: regional turmoil sends tourists to Southern Europe. Nov 23. Oct 5.P. Poland least. Sep 14. Dec 7. 2012 US inflation will be hibernating through the winter. but still stronger than. Nov 30. Oct 5. Oct 5. Nov 9. 2012 Central Europe. 2012 Chile: a conscientious objector faces "currency war" draft. Morgan’s global nowcasters. fair value. 2012 Romania elections: USL win. 2012 Fed. Sep 28. 2012 Special Reports and Global Issues The time is always now: introducing J. 2012 US: the impact of higher dividend and cap gains taxes. 2012 Turkey: CAD narrows even apart from gold exports. 2012 CE-4: Romania hit most by food price shock. Sep 5. Jun 29. Oct 5.

few of these gains have shown up in overall credit supply or the economy. At issue for investors now are whether the new-found compromise in Congress and hawkishness at the Fed are true game changers. The minutes were quite surprising as they showed members again discussing the timing of an eventual exit from QE large-scale asset purchases in terms of calendar guidance. the December 31 budget deal came in largely as expected and thus does not require any change in economic forecasts. incentives. three times the gain in the S&P500.P. Risk markets started the new year in a strong fashion. but equities have been largely ignoring it. we continue to see the beneficial impact of the ECB’s promised OMT. we believe the policy needs to be implemented and needs to produce results.JPMorgan Chase Bank NA Jan Loeys Economic Research Global Data Watch January 4.  Fixed income: We are fading the early QE exit trade and go flat duration. The bond markets reacted badly to this.  Credit: Stay long but hedge duration risk. The range of likely QE exit timings was shown to be mid-to-late this year and thus well before the early 2014 that we have assumed.4% to 0. with liquidity for sovereigns and bonds continuing to improve. Results will likely be harder to come by. the Japanese reflation trade—or “Abenomics”—has the highest chance of becoming a game changer. That is. and then replacing the top three officials at the BoJ at the end of the quarter.  Economics: Better activity data and PMIs are comforting. Now Congress has to work on deciding what to do with the debt ceiling that will effectively be breached within two months. It would indeed be a game changer if both sides of the aisle recognize that governing is all about the art of compromise and that both the health of the economy and the country’s finances require a combination of still higher revenues and lower spending.  Currencies: Remain short JPY. with the new Washington compromise or Fed hawkishness more in the camp of shorter-term tactical games. even as not a cent has been spent yet. even as we remain UW bonds vs. followed by EMU. or only short-term tactical market games that will soon fade. For Japanese reflation to become a true game changer. instead of the economic objectives that they told us they were moving to. The same can be asked about the Japanese reflation and the EMU yield convergence trades that were put in the later months of last year. Starting in Japan. as our 2% 4q/4q growth projection is well below the FOMC’s forecast of 2. 2013 The J. A last and most tantalizing potential game changer was raised by this week’s FOMC minutes from its Dec 11-12 meeting. new Prime Minister Abe has strong convictions.5% given a weaker yen.7%. the dollar since mid-November and pushed up the Nikkei 23%. the minutes probably 9 . We prefer the bond UW over the short duration trade as we do not see an early Fed QE exit. Expect thus an ugly two months of difficult negotiations. and bonds fell badly. There seems little doubt about implementation.  Commodities: We close our long gold position. and are not enough to upgrade growth prospects. To this analyst. with Abe co-opting the BoJ to raise its inflation target to 2%. The body language and new composition of Congress give us no such confidence.550/oz. We do raise Japan by a notch to 0.  Equities: EM equities continue to outperform their DM counterparts for four straight months helped by strong flows. But this was likely the easy part. in our view. That said. the dollar will only have a small impact on domestic inflation. But it is helping us to raise growth expectations with calendar year growth raised from 0. Expect rapid action on fiscal policy also. the automatic spending cuts in entitlements and the military coming from sequestration that now start on March 1. though. even as we expect an ultimately last-minute deal to prevent default and shutdown of the government. in our view. Expectations of Japanese reflation have driven down the yen 10% vs. credit and equities. But so far. but they still only support the expected grinding up in growth rates toward trend by midyear. And EMU policymakers are not exactly using the relative quiet productively at the moment.5% (see Japan data watch in this GDW). we think the FOMC will see a weaker economy than it currently expects and thus be induced to extend its purchases. as the US Congress clinched a lastminute deal to avoid much of the fiscal cliff tax hikes. In the Euro area. and the expiration of the continuing resolution on March 27. and the FOMC minutes showed the committee discussed an early exit from QE. and we keep the Euro OW. We would look to reopen the position around $1. The 10% drop in the yen vs. Euro equities have been outperforming the US for the past six months. but this is one trade we are eyeing nervously for the right time to take profit. We retain a best guess that the Fed will keep buying until early next year. Morgan View: Markets Game changers or new games in town?  Asset allocation: We stay with significant overweights of equities and credit over cash and bonds. and we believe the ability to push true fiscal stimulus financed by massive QE. In the US.

we cover shorts that we still had on in Europe. The flow trend should remain positive into 2013 helped by stabilization in Chinese growth following two years of downshifting and by a steady improvement in overall bank lending conditions in EM. and more likely new tactical games in town. Our long in risk assets is more a broad value and momentum consideration than outright bullishness on the world economy. Indeed. Technically. Middle East war. We fade the “Feds are coming” short-duration trade by taking profit on our shorts in the Euro area. and short the yen. earnings. we continue to focus on regional and sector allocations: UW US equities.2 Jan 12 Consensus J. We capture the EM theme via a long in MSCI EM Asia vs. Low delivered risk and continued asset reflation from QE were also our major themes for 2012. equities in lighter color 25 20 15 10 5 GSCI TR US cash Gold 0 EMBIG US High Grade US High Yield EM FX US Fixed Income EM Local Bonds MSCI AC World S&P500 Europe Fixed Inc Global Gov Bonds 2013 global GDP growth forecasts: J. At the same time. S&P500. (If they did. the Fed would likely send a quick message it has been misunderstood. and US fiscal crush—were not realized. Be short duration.P. here. OW home builders and banks within the US. We are not changing yield forecasts. We accept that these drivers are becoming spent and are thus not as powerful anymore. Nov 12 lack of upgrades of earnings or growth expectations. 2012 returns %. the chart at the top shows that the performance of EM vs. EM equities have been outperforming their DM counterparts for four straight months. and because most traders only went short over the past 24 hours. as we need to see significant growth upgrades for us to become confident of an early Fed QE exit. And that flow improvement is providing strong support to EM equities.JPMorgan Chase Bank NA Jan Loeys Economic Research The J. correlates well with EM equity flows. In the meantime. But the rally is consistent with the steady fading of tail risk fears that kept some investors on the sidelines. EMU exits. The rally in equities over the past month may seem excessive given the 10 MSCI EM Topix .2 3.6 3. as managers do not yet have a lot of profit to show. as we do not see yields going up to a level that threatens the economy and equities. We thus tactically exit our long gold. i.. given we are only in the first week of the year. investors probably do not have as many fears and have thus likely reduced a decent part of their safe asset allocations. and staying neutral in the US. Fixed income Bonds backed violently this week.8 2. Morgan versus consensus % 3. and OW commodity equity sectors.0 2.) And finally.P. due to both the US fiscal cliff deal and the hawkish FOMC minutes. Morgan Mar 12 May 12 Jul 12 Sep 12 MSCI Europe EM $ Corp. We do not go as far as to say that the market has become complacent. Equities Equity markets rose sharply over the past month with the MSCI AC World index marking a new high for the past year to a level that is only 3% below its May 2011 peak.4 2. yields will likely rise further near term. between MSCI EM and MSCI World. In our GMOS model equity portfolio. The major tail risks a year ago—China hard landing. keep us overweight Japanese and euro equities against the US. Our overall long equities to bonds should also benefit from any further backup in bond yields.6 2. Morgan View: Markets January 4. we estimate that flows into EM equities improved by almost $90 billion in 2012 relative to 2011 (see this week’s Flows & Liquidity). and wait for a lower re-entry point. but it is surely not as driven by fear anymore.P. The improvement in EM equities is reflected in flows.e. How do we position on these new games in town? Our overall strategy remains long equities and credit against cash and bonds on the argument that equity and credit risk premia provide greater compensation for risk than is likely to be realized. Over these four months close to $40 billion was injected into EM equity funds. the early QE exit trade probably has a bit further to go.4 3. The four mini game changers. 2013 also show that the FOMC is a bit more hawkish than we or the market had assumed. we continue to hedge the duration of our longs in credit (except HY) by selling government debt against them. For the year as a whole. DM equities. or event risk. From here.

driven by higher demand as the global economy should improve sequentially towards the end of 2013. Thus. Foreign exchange The dollar is starting 2013 quite mixed—higher vs. Last week. despite the 18bp backup in US Treasury yields this week. We stay long. We do not expect an imminent rotation from credit to equities until investors start upgrading their growth and earnings projections significantly. and we think the FOMC minutes mean gold will fall further as more of these trades are unwound. There is also no denying that USD/JPY continues to rally well beyond what shifts in US versus Japan interest rate spreads would imply. Commodities Gold sold off sharply this week following the release of the FOMC minutes. All of our short-term fair-value models and position indicators were suggesting that the dollar was entering 2013 slightly cheap/oversold versus all currencies but the yen. EUR. which suggested that the Fed’s open-ended asset purchase program could end as early as June. 2012). and GBP but lower versus AUD. but hedge duration risks.. In the interim. 11 . we raised our USD/JPY forecasts from a 2013 range of 75-85 to a range of 80-90. Australia +17bp).JPMorgan Chase Bank NA Jan Loeys Economic Research Global Data Watch January 4. We have always been skeptical that the Bank of Japan would be able to drive up Japanese inflation and drive down real yields versus the US to power USD/JPY higher throughout 2013. such that the yen is about 7% weaker than Fed versus Bank of Japan policy implies. and KRW. Dec 18. on both the US budget deal and the backup in government yields. closely followed by base metals and precious metals with 12% and 9% respectively. we remain short the yen versus a basket of USD. but there is no denying the pair’s momentum. This is a massive disconnect relative to the occasional overshoots of FX relative to rates. USD rallies tend to represent corrections rather than trend shifts. EM. UK +29bp.550/oz. and HY. and so we tactically take profit on our gold position and wait for a better entry point. there has been little trend in the broad dollar. losing another 5% in total return terms by year end (see Commodity Markets Outlook and Strategy. CHF. and would appear to reflect a growing consensus that this time is different. Our oil strategists see Brent at $120/bbl by year-end. JPY. We would look to reopen a long in gold at around $1. but we do not expect this anytime soon. There may be some optimism toward the US economy and the dollar given how little fiscal tightening Congress has delivered and how recent Fed minutes suggest less commitment to unlimited asset purchases. which was one of the top trades from the 2013 Global FX Strategy Outlook. however. Many investors had put on long gold positions based on a view of unlimited QE for the foreseeable future. and most of Latin America and Asia. Energy is forecast to make the largest gain with close to 14%. Colin Fenton et al. Agriculture prices are expected to continue to fall. 2013 Credit Spreads have come in significantly this week. but we do not think the first week of trading is indicative of much. so it is natural that this week’s Treasury sell-off has prompted some short-covering. focused on crossover. Our commodity strategists have published their 2013 outlook and expect a 10% total return for the GSCI index for the coming year. We still like gold as a hedge against future inflation once global growth returns to trend. We suspect the consensus will be disappointed but not until later this spring when BoJ policies likely prove ineffective. CAD. EUR. that the sell-off in US bonds is no more extreme than that of several other government bond markets (Germany +22bp. NOK. Note. When government bond sell-offs reflect a global rather than a solely US phenomenon.

80 US 3Q13 120 1800 9000 7.85 0.6% 1.63 1.4% 24.0% 25.9% 11.80 0. 2012/returns as of Jan 3.6% 7.05 0.0% 7.0% EM 2012 ($) 6.9% 10.75 1.75 2.4% 18.9% 18.9% 14.5% 2012 Return* in USD 2.00 1.2% -2.00 0.1% 1.6% 33.Global Diversified Current 0.8% 30.50 Mar 13 1.58 1.50 2.0% 15.34 87 1.JPMorgan Chase Bank NA Jan Loeys Economic Research The J.2% 14.125 1.7% 6.9% Commodities Brent ($/bbl) Gold ($/oz) Copper ($/metric ton) Corn ($/Bu) 2012 Return* -1.50 2.03 6 1063.35 0.32 88 1.5% 20.4% 10.00 0.1% 15.05 2.10 6 1070.0% 20.80 0.8% 18.5% 25.4% GSCI Index Energy Precious Metals Industrial Metals Agriculture 3m Cash EUR JPY GBP AUD BRL CNY KRW TRY Japan 2012 0.6% 15.25 Jun 13 1.3% 16.7% 11.84 5. Morgan View: Markets January 4.6% 16.5% 27.8% 17.8% 17.8% 10.75 0.5% 2.54 0.60 1.05 0.8% 18.07 2. 2013 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 .40 0.8% 21.9% 29. UST) EM Corporates (bp vs.80 2Q13 105 1775 8700 8.6% 30.07 6 1040.4% 10.6% 20. 2012 Local currency except MSCI EM $ 12 .6% Foreign Exchange EUR/USD USD/JPY GBP/USD AUD/USD USD/BRL USD/CNY USD/KRW USD/TRY Equities S&P Nasdaq Topix FTSE 100 MSCI Eurozone* MSCI Europe* MSCI EM $* Brazil Bovespa Hang Seng Shanghai SE Current 1459 3105 889 6047 155 1176 1083 62632 23331 2277 (local ccy) 16.2% 4.90 5.75 1.68 1.0% *Levels as of Dec 31.0% 14.3% 23.04 2.85 Current 1.8% 14.9% 28.50 2. Telecommunications Utilities Overall 2012 4.00 0.75 Europe 2012 -3.93 0.55 0.75 1.50 2.0% 16.05 6 1020.2 1.9% 2012 Return* 9.78 2012 Return Mar 13 0.7% Credit Markets US high grade (bp over UST) Euro high grade (bp over Euro gov) USD high yield (bp vs.4% 6.2% 16.05 0.30 90 1.125 1.5% 6.50 2.5% 25.50 Dec 13 1.05 0.1% 2.0% 15.00 1.8% 8.2% 15.0% 6.08 6 1060.4% 17.45 Current 160 161 548 649 244 319 Current 111 1645 8137 6.4% 32.85 Dec13 0.28 88 1. UST) Index JPMorgan JULI Portfolio 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 1Q13 112 1750 8500 8.5% 16.75 Sep 13 0.60 1.8% 5.0% 17.61 1.75 4Q13 120 1775 9200 6.4% -5.05 0.00 Sep 13 1.4% 6.06 2.125 1.80 0.3% 1.25 0.9% 10. UST) Euro high yield (bp over Euro gov) EMBIG (bp vs.6% 16.125 2.75 1.00 1.9% 58.90 2012 Return* 2.P.12 0.75 Jun 13 0.2% Sector Allocation * Energy Materials Industrials Discretionary Staples Healthcare Financials Information Tech.125 1.00 1.05 2.6% 5.3% 14.1% 16.0% -4.30 88.

the deal also raises revenue from upper-income individuals through a number of avenues.650 $70.650 $70.701 to $217.000 Over $400. These measures include: 13 . generally for another two years.351 to $450.351 Over $388.700 $85. More taxes The core of the resolution of the tax side of the fiscal cliff was a permanent extension of the Bush-era tax rate structure as it applies to lower. What has not been dealt with is the sequestration.400 $8.450 $178.451 to $388.000 Marginal tax rate 10% 15% 25% 28% 33% 35% 39.351 to $400. while upper-income taxes were increased.401 to $70. On the spending side of the ledger.351 Marginal tax rate 10% 15% 25% 28% 33% 35% US: from one cliff to the next  Tax deal left lower.6% Other tax changes Old law Estate tax Rate Exemption 35% $5 mn New law 40% $5 mn Capital gains and dividends <25% bracket 0% >25% bracket 15% Low/mid income taxed same as old law. or automatic across-the-board spending cuts.and middle-income taxes intact.451 to $388. Finally. Low/mid income defined as income below $400.and middle-income taxpayers.350 Over $388.700 $35. little will be done to establish long-run fiscal sustainability The tortured US fiscal debate has made it past one obstacle— the expiration of the Bush tax cuts—but another obstacle remains—the sequestration and the debt ceiling.and middle-income households.651 to $178. we think it could present a meaningful headwind to growth in the first half of this year. This means that in coming years and decades we may face numerous fiscal-cliff-like crises.000 (individual filers) and $450.700 $85. Finally. Also left unresolved is the fate of the debt ceiling.000 $388.000 (married filing jointly).350 $17. The resolution of the tax debate played out fairly close to our expectations: the Bush tax cuts were permanently extended for lower.000 Over $450. The deal also extended for five years many of the new lower-income tax credits contained in the 2009 Recovery Act. filing jointly Up to $8.350 $217. all of which together raise $624 billion of revenue over 10 years (or about $40-$50 billion per annum in the first few years).350 $17. the only item that has been resolved so far is the relatively small amount associated with extending Emregency Unemployment Compensation.350 $388.651 to $388. Enduring this debate would be more bearable if one actually sensed that the end result would be a more sustainable course for federal finances.701 to $142. such as the expanded earned income tax credit. Instead. At the Administration’s insistence.701 to $217.JPMorgan Chase Bank NA Michael Feroli Economic Research Global Data Watch January 4.700 Up to $17. and promises to linger on into late February  In all these budget battles.700 $35. upper income taxed at 20%1 1.401 to $70. While this so-called “payroll tax holiday” received little media attention.701 to $142. a temporary measure first put in place in 2008.350 $217.701 to $35. the theatrics around the fiscal cliff appear headed to produce little in the way of long-run reforms to entitlement spending.650 $142. Income tax rates for 2013 Taxable income Single Married.700 Up to $17. Upper income is income in excess of these thresholds.701 to $35. This also included permanently adjusting the parameters of the Alternative Minimum Tax (AMT) so it would not impact as many middle-income taxpayers.450 $178.650 $142. which has been pushed back to March. 2013 Economic Research Note Income tax rates for 2012 Taxable income Single Married. filing jointly Up to $8. which will become a binding constraint on government funding in late February or early March.400 $8.651 to $388. and their resolution will likely only come after a long and bruising political showdown. Federal spending in this area—particularly for health care—is essentially automatically programmed to grow at a pace faster than nominal GDP.651 to $178. most so-called “business tax extenders” such as the R&D tax credit were extended.351 to $85. raised upper-income tax revenue  The expiration of the payroll tax holiday—affecting almost all taxpayers—will weigh on spending  The sequestration and debt ceiling remain unresolved. the 2%-pt temporary reduction in payroll taxes expired as scheduled at the beginning of the year. These two issues—the sequestration and the debt ceiling—are bound to be debated together.351 to $85.

JPMorgan Chase Bank NA Michael Feroli Economic Research US: from one cliff to the next January 4. 2013  Increasing the top marginal income tax rate from 35% to 39.000 if married filing jointly). the government will no longer be able to meet its obligations.  The estate tax rate is increased from 35% to 40% while the exemption amount was left unchanged at $5 million. but the risk of a Treasury default remains the doomsday scenario in the debt ceiling debate. Looked at another way. The other alternative is to increase taxes much more massively than was done this past week. but not before an acrimonious debate that pushes the issue into late February. March 1.000 if married filing jointly). little progress on sustainability The budget battles have produced a lot of ill will.  The capital gains and dividend tax rate will increase from 15% to 20% for individuals earning over $400.6% for individuals earning over $400.6%-pt subtraction from GDP growth in 2013. and we anticipate that the end of the payroll tax holiday implies about a 0. Publicly held debt to GDP % 250 200 150 100 50 0 00 10 20 30 40 50 60 70 80 90 00 10 20 30 40 CBO estimate with policy before New Year's deal CBO estimate with policy after New Year's deal measures will likely be exhausted by early March. the automatic spending cuts associated with the Budget Control Act have been pushed back to March. The deadline for the sequestration. After these extraordinary measures run their course. (In contrast. is also likely to be quite close to when the debt ceiling becomes a binding constraint.000 (or $300. This year.000 (or $450. In late December the US Treasury exhausted its statutory authority to issue more debt. There is some uncertainty as to whether the Treasury Secretary can legally prioritize certain payments over others.8% tax on investment income associated with Obamacare. this should be felt in consumer paychecks as early as mid-January. probably on the order of 0. however. But so far.) Failure to address the growth in federal health spending will cause the nation’s debt to spiral out of control.000 (or $450. In the longer run.000 if married filing jointly). but beyond that did little to address the spending side of the fiscal cliff. right around the time that the sequester would take effect. Social Security is projected to grow by “only” about 1%-pt over that same period.  Phasing out the personal exemption for upper-income taxpayers as well as reinstating a measure that existed prior to 2001 that reduced deductions available to upper-income taxpayers. For example. the increase in tax revenue from the New Year’s Day agreement—$624 billion over 10 years—is about 6% of the almost $10 trillion in deficits that the CBO projects in the coming decade. This was extended for another year in late 2011. These extraordinary 14 . The drag on spending from upper-income tax increases is smaller. or perhaps late February. This expiration implies that the houshold tax burden will increase for the year by about $125 billion. More battles The tax deal did extend more generous unemployment benefits for another year. In particular. 2%-pt reduction in Social Security taxes. federal spending is projected to increase by several percentage points’ worth of GDP. and unless savings are found elsewhere in the budget— through either higher revenue or reduced spending later on along the 10year budget horizon—then those spending cuts are mandated to take effect. which will likely grow by 5%-pts as a share of GDP over the next 25 years. In late 2010. which is to say.1%-0. Since payroll taxes are levied entirely through wage and salary withholding. Since then the Treasury has resorted to certain “extraordinary measures” to fund the budget shortfall—mostly this involves effectively borrowing from the civil service retirement funds. though. the temporary relief expired as scheduled.3% of GDP.2%-pt. An even bigger tax increase took place through the expiration of the payroll tax holiday. We believe this scenario will be averted and cooler heads will prevail. While these spending cuts have been delayed they have not been taken off the table. Congress and the President agreed to a one-year. Note that on top of the 20% will be added the new 3. beginning around 2025. Both these measures apply to individuals earning over $250. the tax bill increases the federal government’s annual revenue by about 0. Much of this increase is due to the expected growth in federal spending on health care programs. We anticipate the hit to household spending could be significant. but very little in the way of solving the nation’s long-run deficit problems.

Prices for iron ore and coal showed significant volatility in 2H12. the evidence of lift outside mining is unconvincing. An untidy transition. RBA officials. This allowed real household spending to rise strongly despite a fall in nominal spending relative to income. . A recession in the near term.” where growth dips beneath trend only briefly. however. whose current term ends around the time mining investment will peak. Governor Stevens. particularly in manufacturing and non-mining construction. where activity remains weak. Morgan Australia Limited Stephen Walters Economic Research Global Data Watch January 4. The sharp reversal in the terms of trade. as the main driver of activity shifts away from the fading mining investment boom and toward lift in the non-mining economy. looks unlikely given the reduced but still-impressive mining investment pipeline and the significant policy flexibility still available to government and central bank officials. owing to lower commodity prices. however.P. a full percentage point below the likely outcome for CY12. Indeed. as households increased their saving rate. Growth in real income now has been below growth in real output for the last three quarters. would trigger a more prolonged adjustment. which they could deploy to support the non-mining economy. manufacturing. though. though. has seen these positions reverse. followed by gradual decline. Sustainable growth in the economy will be maintained only if there is material lift in nonmining activity and a rise in export volumes. recently gave a rare interview in which he raised the limitations of monetary policy and the RBA’s ability to fine-tune the economy. had been growing faster than output. and tepid demand. Australia’s major trading partner. already have trimmed the cash rate six times. The anticipated “gap” means the forecast for GDP growth for CY13 is just 2. rising costs. Another risk is that the adjustment caused by high AUD and weak growth in national income. so the idea that the economy is “overdue” an extended downturn is often bandied about. where the sources of growth also are rebalancing. and leading indicators of dwelling starts have perked up a little.5%. aware that the transition away from mining may not be seamless. although fiscal policy now a smaller drag The outlook for Australia hangs largely on how tidy the rebalancing of growth will be. 2013 Economic Research Note Annual growth in real GDP % oya 6 4 2 0 -2 85 90 95 00 05 10 J. if sentiment stays fragile. Then. Real domestic income has fallen outright 15 Mind the growth “gap” in 2013 The unprecedented boom in mining investment in recent years was stoked by record-high commodity prices. could be more abrupt than the forecast anticipates. owing to midyear plunges in bulk commodity prices as global demand softened. including for China. Industry expectations show an extended plateau in spending on mining projects. A$ billion 25 20 15 10 5 0 93 95 97 99 01 03 05 07 09 11 13 Non-mining Mining Patchy lift in non-mining output so far Thus far. firms in retailing. AUD also has scope to fall if the outlook weakens significantly. Investment spending Constant prices. The gap could be wider. until recently. which. Our estimate is that the peak will be passed in 2H13.P. Morgan forecasts Australia's 2013 outlook: mind the growth gap!  Growth is rebalancing away from mining investment to firmer non-mining activity  The transition will not be seamless. however. and tourism continue to suffer from high AUD. compounded by productivity and participation effects  Benign inflation will allow RBA to ease policy. but policy has gained little traction outside housing. which called into question the economics of some major projects. Another dynamic in the outlook is uncertainty over the impact of the recent plunge in growth of real domestic income. Australia has not suffered recession since the early 1990s.J. The forecast anticipates a short “gap. Mining investment spending rose to a record-high 7% of GDP. with a “gap” opening up alongside weak income growth  Jobless rate will rise to 6% owing to sub-trend growth. The rate cuts by the RBA have helped house prices. The soaring terms of trade has boosted the economy’s real purchasing power relative to real output. but the peak in spending is coming ever-closer. there are challenges to the global outlook.

This improvement is more about fading investment spending (i. officials may use fiscal policy as an 16 . Industry surveys indicate that the mining investment boom has some way to run. allowing room for the RBA to further ease policy. Mining investment projects by status as at September 2012 A$ billion 250 200 Mining boom fading. is that. but not yet over The latest official report on investment shows that firms in mining have lifted their spending for 12 straight quarters. The downside of improved productivity. Opinion polling shows that Labor will lose government. officials may overstoke a fire that could merely be smoldering. One risk. so leaders may unleash new stimulus to try and win over undecided voters. If activity outside mining is even slower to budge. The fact that commercial banks routinely do not pass all of the RBA’s cuts on to market rates. One dividend of higher export volumes and lower mining investment is that productivity should continue to improve. but less so than before. Growth in output per hour worked averaged just 1% over the last decade. This will take the cash rate to a record low of 2. with the government now free of the surplus pledge constraint. which could see the banks make “out of cycle” cuts to mortgage rates.J. means today’s 2. the weakest period since the global crisis.e.75% effectively is the “old” 4. possibly fueling a credit-funded splurge.P. high AUD. and rising costs. Some key projects. however. Firms in mining still plan to spend twice as much as they did just two years ago. for example. implying Board members believe the end of the easing cycle is near. A final constraint would be lower wholesale funding costs. The jobless rate is likely to peak later in CY13 at 6%. 150 100 50 0 Under construction Committed Under consideration Possible Exports and productivity to improve The forecast anticipates firmer growth in export volumes. however. seem becalmed in the early stages of development. The 25bp rate cut in December. Treasurer Swan was forced to announce in late December what most already had thought was obvious. 2013 in two of the last four quarters. and has declined over the year to 3Q. This would ease financial conditions without the RBA having to adjust policy. but some firms have scaled back spending plans in response to softer prices and demand. The intentions component of the 3Q survey showed that planned spending for the year ended June 2013 slipped in each of the last two quarters. is that labor market outcomes will be even softer than implied by the subtrend growth rates we forecast. but new stimulus on top of the cyclical slippage already in evidence could reduce the need for the RBA to provide policy support. with officials wanting to calibrate policy ahead of the summer break (there is no Board meeting in January). the forecast anticipates core inflation to stay within target this year and next. Morgan Australia Limited Stephen Walters Economic Research Australia's 2013 outlook: mind the growth gap! January 4. The slow accumulation of slack and higher productivity mean underlying inflation likely will stay benign. We anticipate one further and final rate cut in February. lower inputs relative to output) than a product of major reforms or faster uptake of innovative work practices and technology.75%.25%. a move most likely to be triggered by AUD strength and the accumulation of evidence of non-mining sluggishness. instrument to win support in the federal election due by October 2013. Recent decisions by the Board have been close calls.. a product of the expected improvement in global growth and the capacity added by the miners. assuming participation normalizes as the economy decelerates. The government abandoning this pledge means the fiscal drag in 1H13 will be smaller. but the level of spending has flattened out. The value of work in the mining investment pipeline still sums to more than A$420 billion (28% of GDP). of course. This loss of income firepower is key to our forecast that the consumer will lose steam in 2013. however. Budget policy still will be tighter. One constraint on monetary policy is that pushing the cash rate to record lows could encourage households to re-lever. the government will fail on its “solemn pledge” to deliver a Budget surplus this fiscal year. was partly tactical. Our forecasts already incorporated a deficit in 2013. projects considered by sponsors to be possible or under consideration have been slow to move into the committed and under construction phases of the pipeline. but has improved to more than 3% in 2012. RBA nearing end of easing cycle On policy.

0% saar real GDP growth this quarter. The latest economic reports for December are consistent with that forecast and suggest that the economy may have been strengthening a bit into year-end. It will take some time to know the exact timing and extent of the drag on growth from further fiscal tightening. new car and light truck sales reached 15.4% last month. This week’s agreement on fiscal policy (including the $125 billion increase in payroll taxes and higher marginal tax rates at the upper end of the income distribution) was about as expected in terms of fiscal tightening.000 in construction. Importantly.000. with real final sales accelerating to a 2. But details of the report are generally on the strong side. Payroll growth stays on trend in December The pace of job growth was little changed in December. The nonmanufacturing ISM survey for December reached its highest level since 1Q12. But manufacturing detail of the payroll survey and independent information on auto output suggest that factory output increased a solid 0. while the J.6% pace and an inventory correction holding back overall growth.000.000 in December. Nonfarm payroll employment increased 155. including an increase in the average workweek both for all workers and for production workers. Total nonfarm payroll employment and private hours-worked %ch saar over 3 months 6 4 Hours worked 2 0 -2 Jan 11 Sa 62 59 56 53 50 Jan 12 New orders Employment Jul 11 Jan 12 Jul 12 Nsa 68 66 64 62 60 Inventory sentiment 58 56 ISM nonmanufacturing survey: new orders and inventory sentiment Jul 12 Most FOMC members expect to end QE3 this year: The major news in the latest Fed minutes is that most of the Committee expects the open-ended asset purchase program to end sometime this year. 19 . Auto sales appear to have improved toward year-end even apart from hurricane effects. for both the index and the key new orders component. The risk to our forecast that QE3 ends in 1H14 is now biased toward an earlier end date. while the unemployment rate holds at 7.4% samr in both November and December.JPMorgan Chase Bank NA Robert E Mellman Economic Research Global Data Watch January 4.000.000 more than the average over the prior three months. Finally.5 million in November and 15.4 million in December. which is 3.7% real GDP growth this year. Morgan forecast looks for only 2. up from an average 14.0% growth.5% real GDP growth in 4Q12. And private sector employment increased 168.000 more than the average of the prior three months. 2013 United States  Job growth on trend: December payroll employment up 155. and overall real GDP growth through the first half of this year. the forecast continues to look for a slowing to 1. only slightly more than the average of the prior two months. however.000. The Fed’s policy outlook is based on a central tendency forecast of 2. Construction jobs may have been temporarily boosted by post-hurricane clean-up and rebuilding activities. the most since January. Labor demand as measured by hours worked increased a relatively strong 0.P. Higher taxes are expected to dampen real income. with job gains of 59. Recent data a little stronger: Most early reports on activity in December suggest the economy was gaining a little strength into year-end.8%  The tone of incoming economic data strengthened a bit toward the end of last year  But payroll and other tax hikes included in the fiscal policy agreement will likely dampen growth in 1Q13 The forecast still looks for 1.000 in manufacturing and 30. Total nonfarm payrolls increased 155.5 million in 3Q12. Fed guidance had previously been vague and only indicated that an end to QE3 would depend on “substantial” improvement in the labor market.0% this quarter. including 25. Reports on January auto sales and retail sales to be released in the first half of February will provide the first hard information on 1Q13 consumer spending. about 12. December manufacturing surveys are mixed. But the increase in payroll and other taxes that start to bite this month are expected to hold real GDP growth to only 1. But tax hikes likely to hold down 1Q13 growth: Despite the slightly stronger tone of most recent data. consumer spending. Manufacturing and construction hiring strong: Employment in the more cyclically sensitive goods-producing industries was especially strong. much of the difference in views on the timing of exit from QE3 reflects differences in economic forecasts.

especially.3% gains in average hourly earnings for all employees in December and an upwardly revised 0.3pts to 52. The two major national manufacturing surveys for December send mixed messages.1%.7) and for output (54.6% in December and remains low. The Markit PMI also increase 1.3% in November as well.6) were each below their OctoberNovember averages.5.5% to previously reported figures for the prior two months.3) and new orders (59.000 in manufacturing and hours worked by production workers increased 0. Construction recovery a housing story The November report on construction spending came in on the weak side of expectations.3% samr and with a net downward revision of 0. The employment/population ratio edged down 0.2pts in December. The tentative forecast looks for a solid 0. Private new residential construction rose 1.4% samr increase in manufacturing IP for the month. Manufacturing detail of the payroll report suggests that the PMI is giving the right message. its first reading above 50 since 20 May. 2013 but the rise could equally well reflect the strong upturn in homebuilding activity.9%.3). As noted.3) reached their highest levels since February. but even for so-called prime age workers (25-54 years). And readings for the headline index for new orders (54.4% saar through the first two months of the quarter. sa. and production (52.0% saar so far in the quarter. Unemployment rate stabilizes: The unemployment rate held at 7. Similarly.1% to 58. but to a lackluster 50.JPMorgan Chase Bank NA Robert E Mellman Economic Research United States January 4. and the latest November reading on factory IP is slightly below the 1Q12 average.4% samr. but this survey is much more volatile than the payroll survey and average job growth for the two surveys over the past six months is similar.7% in October and November. employment increased 25. Hourly earnings not looking quite as weak: Previous reports had highlighted a very sharp slowing in average hourly earnings. and public spending is up 2.000 in December. The ISM measure of export orders rose 4.2pts in December. The December report shows 0.3. And December results for the headline reading.5) were each at their highest level since at least May. Part of the decline relative to pre-recession levels reflects an aging population. the PMI measure of export orders rose 2. Meanwhile the measure of inventory sentiment (nsa) declined to its lowest level of the year. taking hourly earnings to 2. its highest level since March. but to a higher 54. both scales 64 63 62 61 60 59 58 2006 2007 2008 2009 2010 2011 2012 25-54 year olds Total 81 80 79 78 77 76 75 74 Nominal construction spending %ch saar over 3 months 60 45 30 15 0 -15 -30 -45 Jan 11 Jul 11 Public Private nonresidential Private new residential Jan 12 Jul 12 It looks like a mfg upturn into year-end Manufacturing output stalled through most of 2012.849% to three digits.8%). new orders (50. Employment to population ratio %.9% is much closer to its cyclical low (74.5pts to 51. . with overall spending down 0. the December employment/population ratio of 75. not annualized) hint that output may be strengthening into year-end. Both the headline index (56.8% in December but just barely. November figures were at least a little below the recent trend for all three major categories of spending. The nonmanufacturing ISM survey also shows activity strengthening into the end of the year.1%oya from a recent low of only1. The ISM manufacturing survey rose 1. for core capital goods (up a cumulative 5. the surveys are in accord on one detail. But the main message of the report is that the upturn in homebuilding continued in 4Q12. While the surveys send conflicting messages as to whether manufacturing is starting to break out of its doldrums. But impressive recent gains in new orders for durable goods and.6% oya in October. Employment as measured by the household survey increased only 28. just shy of 7.8%) than its prerecession level (79. But private nonresidential construction activity is running -2.7 reading. while growth in both private nonresidential activity and public activity held close to flat.2% samr in November and has accelerated to exceptionally strong growth of 43. The rate came in at 7.0 level. a negative for consumer spending and a source of potential concerns regarding eventual deflationary risks.

-fuel import prices %oya 1.1 Nov -41. We anticipate that the import price index ticked up 0. which was the lowest reported figure since March and one of the weakest from the past few years.0 -57. Our forecasted decline would reverse most of the increase reported for the previous week.4 0.0 4. Real trade flows were very weak in October.6 2. but it would still remain at a pretty favorable level for the recovery. The claims data can be volatile during the holiday season because of large swings in the seasonal factors.JPMorgan Chase Bank NA Michael Feroli Robert E Mellman Daniel Silver Jimmy Coonan Economic Research Global Data Watch January 4.1 1. the port strike on the West Coast that started in late November should weigh on the activity data for that month.5%oya) on a slight increase in fuel prices and flat nonfuel prices.2%.6 0.6 2. with these gains undoing only a small portion of the declines reported for October. Payroll survey week We forecast that initial jobless claims declined 7.3 17. The four-week moving average would increase if our forecast is correct.7 The NFIB survey’s headline plunged 5.5 2.0 Oct 93.3 billion in November with imports falling 0.0 0. 21 .6pts to 87. samr Aug Balance (BoP basis) Services Merchandise Exports (%m/m) Imports (%m/m) -42.8 21.2 0. For real goods trade.3% in November while exports edged up 0.2 billion in October to -$41.5 2. We also expect rising prices for metals and building materials based on movements in relevant spot prices.5 We estimate that the nominal trade balance narrowed from -$42. Data already released by the organization showed that a net 1% of firms planned to increase employment. container traffic data for the two ports that were affected by the strike (Port of Los Angeles and Port of Long Beach) look pretty weak in November.5 2.6 2.4 -0. autos were unchanged in December.9 -1. The nominal trade-weighted dollar was relatively stable between early November and early December (when most prices for the import price index are collected). We forecast that nonfuel prices were unchanged in December (+0.0 -0.2 16.1% in December (-1. which should help prevent broad-based swings in prices for imported goods.6 -0.2 -0. 1986=100. We forecast that prices for capital goods and consumer goods ex.5 0.2 Dec 0.5 Oct 0. and some of the weakness in the October data was likely related to disruptions caused by Hurricane Sandy.) Wkly 4-wk avg Oct 27 Nov 3 Nov 10 Nov 17¹ Nov 24 Dec 1 Dec 8 Dec 15¹ Dec 22 Dec 29 Jan 5 363 361 451 416 395 371 344 362 362 372 365 367 372 387 398 406 408 382 368 360 360 365 Continuing claims Wkly 4-wk avg 3174 3367 3359 3305 3219 3213 3238 3201 3245 3240 3266 3291 3301 3313 3274 3244 3218 3224 Insured Jobless.4 Sep -40. 2013 Data releases and forecasts Tue Jan 8 7:30am NFIB Small-Business Optimism survey Index. Sixteen percent of firms reported job openings in December. We do not see a bias for this potential revision.000 to 365.0 16.0 0. Fri Jan 11 8:30am Import prices %m/m nsa.0 16. which likely reflected a response to the election as well as concerns related to the fiscal cliff. We anticipate an increase in food prices based on recent gains in the GSCI livestock index.3 17.5 in November. We also expect a gain in imported natural gas prices based on movements in relevant spot prices.2 Nov -0.1 -1. when seasonally adjusted).3 3. sa Sep Optimism Index Capex plans Hiring plans Planned price increases 92.5 2.4 -0.3 0.7% and exports declining 0.5 19.0 19. The four-week moving average—which smooths through some of the weekly volatility in the data—was basically unchanged at 360. but there is actually a sharp contrast between the data for the individual ports (trade flows for the Port of Los Angeles tumbled while trade flows through the Port of Long Beach looked strong. These increases should be offset by falling prices for paper and materials associated with nondurable supplies.% 2. we look for imports to increase 0. so it is unclear how the NFIB survey should behave during the month.1 -58.6 -2.6 16.000 during the week ending January 5.5 Oct -42. sa New claims (wr. Combined. There could also be a larger-than-normal revision to the data associated with the week ending December 29 as the Department of Labor had to estimate data for nine states because of the short workweek.3 -58.0 4. unless noted Sep Import prices %oya Ex.000 during the week ending December 29.0 Nov 87.0 5.2 -3. Recent gains in spot crude prices signal a small rise in the price of imported crude. which is around the lowest figure of the expansion to date. which was very close to the figures reported for the prior few months.0 Dec Fri Jan 11 8:30am International trade $ bn. which have been trending down in the past few months of data.4%.5 2.1 22. And while there could be some related bounce back in the November report.9 -1.0 -0.9 -59.1 1. Thu Jan 10 8:30am Jobless claims 000s. The uncertainty surrounding the fiscal cliff persisted into December.1%oya).

5 55.8 52.000 saar in November and revisions to recent months were mixed.3 Sep 3.7 52. including an encouraging rebound in export orders.1 62.5 53.7 8. goods Quantity of purchases ISM-weighted comp.6pt decline during the month rather than a 0.0 62.0 Nov 73.8 Nov 105.9 The ISM manufacturing index’s headline increased from 49.3 49.3% in November.5 Dec 50.6 50.4 2.3 53.5 4.3 0.1 49.6 Final Dec 54.7% in November on top of a 5. Construction spending (Jan 2) %m/m sa Nominal Private Residential Nonresidential Public Sep 0. 22 Construction spending declined 0. Looking at the broad set of manufacturing indicators.9 1.6 46.3 45.4 80.) Stks of purch (10%) New export orders Backlogs of work Output prices Input prices Stocks of fin.9 Dec 70.7 51.5 to 50.9 25.4 4.1 0.8 5.6 0.4 3. .9 5.2 18.3 47.0 48. the separate Markit manufacturing PMI has shown signs of improvement in the sector.2 54. keeping the headline in the range reported in recent months.7 50.3 50.0 48.7 0. 2013 Review of past two weeks’ data S&P/Case-Shiller home price index (Dec 26) %oya.6 Nov 380 3. Attributes ISM-composite weights (equal weights) to corresponding PMI series ISM manufacturing survey (Jan 2) Oct Overall index Production New orders Inventories Employment Supplier deliveries Export orders Imports Prices 51.2pts relative to November and the strongest since May.0 Nov 49.0 52.4% saar over the past six months).1 54. even with the latest disappointing data.7 14.JPMorgan Chase Bank NA Michael Feroli Robert E Mellman Daniel Silver Jimmy Coonan Economic Research United States January 4.3 -0.5 57. unless noted Total (mn.6pt increase. The headline for Markit PMI was revised down from 54. which so far have not translated into weaker activity data.4 54. sa Nov Composite1 New orders (30%) Output (25%) Employment (20%) Sup.4 50.1 Oct 4.5 50.2 0.5 The Conference Board consumer confidence index dropped 6.3 53.7 56.0 0. Public construction spending has been basically flat lately though with some monthly volatility.7 2.6 53. This recent drop-off in confidence has been concentrated in the survey’s expectations measure.6 5. del.6 50.7 52.3 47.8 4.6 85.4 -26. and there were net downward revisions to the data reported for September and October. which fell a cumulative 17.7 1.4 17. Consumer confidence (Dec 27) Sa Conference Bd index Present situation Jobs plentiful Jobs hard to get Labor mkt diff Expectations Oct 73.7 54.5 8.7 49.0 Nov 0. The Case-Shiller index increased 6. inv.0 104.4 38.0 17. private nonresidential construction spending has been drifting lower lately.0 16.5 52.3% oya).4 -0.4 8. (15%.7 -0.0 47.3 66.saar) %m/m %oya nsa Months’ supply Median price (%oya) 369 0. While the ISM survey has been fluctuating lately.4 1.0 0.2 Oct 1.9 48. other details in the new home sales report and most separate indicators look consistent with continued improvement in the housing market.5 0.6 3.4 45. These recent increases in pending home sales point to upcoming gains in existing home sales because pending home sales— counted when contracts are signed—typically become existing home sales—counted when transactions are completed—in one or two months.2 377 4.2 54.5 53.0 52.3 0. but down 1.3 16.3 16.1 54.2 Oct 368 -0.5 54.0 37.1 71.6 -25.6 11.9 0.0 4.1 56.3 -0.6 48.7 10.2 1. Although the trend in new home sales has flattened out lately (+4.0 54.5 46. declining 3..6 1.3 374 1.1% saar over the three months through October and other house price measures that are reported separately also have shown similar increases in prices lately. Growth related to residential construction spending still looks solid as the housing market recovers.7 361 -3.0% gain reported for October (revised from 5.1 1.7 14.4 63.8 1.9 -1.8 53.2 to 54.8 55.4pts to 65.4 1.7% samr in October (+4.7 1.4% to 377.8 20.8 -28.7 54.2 50.7 52. unless noted 20-city composite %m/m sa 10-city composite Aug 2. and details of the latest report were mixed.7 Markit manufacturing PMI (Jan 2) Index. but the revised figure was still up 1.2 38.4 The pending home sales index increased 1. Weights in parentheses 2.4 The Case-Shiller 20-city composite index increased 0.5 over the past two months.8 0.000 on net.5pts to 66. ar) %ch m/m %oya (nsa) Sep 99.4 -0.9 61.4 11.7 50.0 48.2 52.0 52. there are signals that activity picked up heading into the end of 2012 after a weak stretch during the summer.4 84.5 51. with fairly balanced growth related to single-family and multifamily units.9 Sa 63.8 50.1 52.5 -0.8 47.7 Oct 104.0 0.3% saar over the same six months.1 in December and the November data were revised to now show a 1. Meanwhile.3 35.3 0.0 52.3 43.5 New single-family home sales increased 4. This significant weakening in expectations was also evident in the separate University of Michigan consumer sentiment survey and signals concerns about the fiscal cliff.8 10. Pending home sales Sa.2%). New home sales (Dec 27) Sep Total (000s.3 0.2 Flash Dec 54.5 55.7 54. New residential construction spending increased 38% saar over the six months through November.0 65.4 1.0 between the flash and final reports for December.8 5. This report continued to show evidence of firming house prices while the housing market recovers.8 -27.7 106.1 0. And spending on home improvements increased 14% saar over the six months through November.8 53.7 in December.

re-entrants into the labor market increased 262.6% and is back to around where it was in the first half of the year.4pts to 56. The series for production and nonsupervisory workers also ticked up.8 54.000 jobs last month. This was the strongest reading for the headline index since February.3 0.2 2.6 1.1 11.0 0. likely due in part to the drop in petroleum prices during the month. and 12 months.000 jobs and manufacturing up 25.9 Nov 15. 000s) Private payrolls Goods-producing Construction Manufacturing Service-providing Private service-providing Wholesale trade Retail trade Professional services Temporary help Education/health Leisure and hospitality Government Average weekly hours Index.1 50.8 Dec 195 200 0 10 -10 195 200 155 168 59 30 25 96 109 0 -11 19 -1 65 31 -13 34.7 161 171 -1 -10 5 162 172 10 63 32 8 24 29 -10 0. While the headline numbers were unexciting.5 0. as employment increased 155. which was mostly due to the tick up in the average workweek to 34. index (NMI) Business activity New orders Employment Prices Oct 54. as the tick down in the employment-to-population ratio reminds us.2 0.2 5. The participation rate was unchanged at 63. Nondurable orders and shipments declined 0.2 58.1 7.3%.6 Nov 54. and increased only 28.6 61.5 3. The hours and earnings data might have looked a little better than average. The household measure of employment has softened some recently.3 59.8 The household survey details weren’t quite as upbeat as the hours and earnings data. with construction adding 30.4% and related inventories were also flat.8%.3 Nov 146 147 -22 -20 -7 168 169 13 53 43 18 18 23 -1 34.4 0. 2013 Motor vehicle sales (Jan 3) Mn.3 2. saar Oct 14. In level terms. hrs worked (%m/m) Hourly earnings (%m/m) (%oya) Unemployment rate (%) Oct 137 203 26 25 7 111 177 4 44 58 14 32 26 -66 34.6 6.4 Light trucks and autos Imports Domestics Autos Light trucks Labor market report (Jan 4) Sa Payroll employment (ch. the report indicates that on the eve of the fiscal cliff.5 56.3 1.0 Dec 54. 23 . The government sector lost 13.4 0. increasing 0. Private service payrolls expanded a relatively modest 109.9 7.6 The ISM nonmanufacturing survey surprised to the upside in December. however. The factory goods report also showed declines in the nominal figures related to nondurable goods.4%.000 last month. the economy was expanding placidly. increasing 1.1. On a trend basis earnings growth is still quite soft.2 0.0 1. The data on private hours worked were solid. Factory goods report (Jan 4) %m/m sa. and most of the underlying details were favorable as well. The ISM survey and some other related indicators show activity picking up some steam heading into the end of 2012. The recent data on average hourly earnings also looked a little better.7 0. as the construction workweek moved up to almost an all-time high of 39.4 0. but on an unrounded basis nearly ticked up from 7. increasing 55.000 last month.000.3 56.1 5. about in line with the recent trend.3% in each of the past two months.9 -5 34.4 0. ISM non manufacturing survey (Jan 4) Sa Nonmfg.8 0.1 60.28 Nov 0.6 hours. Unemployment rose 164.28 Oct 0. Most of the other details were equally ho-hum.2 0.27 0. unless noted New orders Shipments Inventories Inventory/sales ratio Sep 4.6 7. Both major goods-producing sectors had a good month. temp help was soft and retail employment suffered some payback after three very strong months. All in all. The employment-to-population ratio slipped a tenth to 58. but overall.9 65.6% in November and nondurable inventories slipped 0. The broad U-6 measure of unemployment held steady at 14.0 1. Until these measures of the labor market improve we can expect the Fed to remain hesitant and cautious in removing monetary accommodation. 6. while the household survey was modestly disappointing. though the overall pickup in the housing market is an equally plausible explanation.000.4 -0.5 hours.0 5.6 0.3 56.1 1. pointing to a labor market and an economy that are slowly but steadily advancing at around a trend growth rate. the recent service sector data look mixed. and there are other signals that manufacturing activity started to improve at the end of 2012: core capital goods orders jumped 23% saar over the three months through November while related shipments increased 8% saar.3 57. though.6% and over the past few months appears to be stabilizing. though in what may be an encouraging sign of confidence.2 3.5 12.4 0.1% over the past year. The important details related to core capital goods orders and shipments still show a recent pickup in activity after the revisions released in Friday’s report (orders revised down slightly.4 Dec 15.5 0.4 18 15 10 8 51 55 14 24 20 -51 34.0 1.3 -0. increasing only 2.000 last month. about the same as the average over the last 3.753% to 7. the labor market continues to disappoint.0 7. shipments unrevised on net). The rise in construction jobs could reflect Sandy rebuilding.000 last month.7 The December jobs report was light on drama.2 55.1 0. The health care and social assistance category had its biggest gain ever.000. m/m.27 0. there were some notable details.7 7. The unemployment rate held steady at 7. New orders for factory goods were unchanged in November while shipments increased 0.849%.2 1.JPMorgan Chase Bank NA Michael Feroli Robert E Mellman Daniel Silver Jimmy Coonan Economic Research Global Data Watch January 4.4 54.

sa 80 70 60 50 40 30 2013 Manufacturing employment indicators 2011 2012 Core capital goods orders and shipments Growth in manufacturing inventories 2011 2012 2013 24 .JPMorgan Chase Bank NA Daniel Silver Economic Research Global Data Watch January 4. Softer inventories could be providing a lift to manufacturing activity and could help production in the near term. Orders jumped 23% saar over the three months through November while related shipments increased 8% saar. Manufacturing surveys Index. sa 60 40 20 0 -20 -40 2010 %ch over 3 months. and it looks like activity was picking up heading into the end of 2012 despite the uncertainty related to the fiscal cliff that persisted through December.  The BLS’s employment data point to an increase in manufacturing activity in December. both production schedules show a modest decline in auto production over these four months.  Data on core capital goods orders and shipments have also improved lately. data on real inventories also signal slowing growth in the figures reported through October. sa 60 58 56 54 52 50 48 2010 Monthly change. Manufacturing production payrolls increased 22. there appears to be some slowing in the pace of growth in the data available so far for 4Q (we believe the change in inventories will be a sizable drag on 4Q GDP growth). 2013 Focus: positive signs for manufacturing  Most manufacturing indicators have been upbeat recently.7% annualized pace over the three months through September. The latest PMI report also showed increases in orders and production (not shown). the strongest monthly gain since March. The PMI’s headline increased 1. the workweek for production workers ticked up for the second straight month (not shown). and most of the survey’s underlying details were also at multi-month highs in December.0 in December.  After a strong buildup of manufacturing inventories in 3Q.7 in December. The ISM survey’s headline increased 1. Despite these differences. on net (not shown). the trend in the PMI has been more favorable than that of the ISM lately. the strongest reading since May.1% saar over the three months through November after increasing at a 7. though both improved between November and December.  For the main manufacturing surveys. Encouragingly. and the diffusion index for the manufacturing sector also increased.2pts to 50.  The monthly production schedules provided by Wards and IHS show conflicting figures for December through March (using our own seasonal adjustment). and the underlying details were mixed and mostly softer than the corresponding figures in the PMI. other related indicators have been more consistent with the recent PMI data than the recent ISM data. 000s. saar 20 15 10 5 Real 0 -5 2010 Nominal Shipments 2011 2012 2013 Orders 3m diffusion index Production worker payrolls ISM Markit PMI 2011 2012 2013 %.2pts to 54.000. saar 60 40 20 0 -20 -40 2010 %ch over 3 months. Nominal manufacturing inventories increased 2. which kept the headline in the range that has been reported over the past few months.

0 -1. but it should be a lot calmer than 2012. Taxes are excluded from inflation to avoid double counting with the fiscal policy impact.e.3 2. London Branch Greg Fuzesi David Mackie Economic Research Global Data Watch January 4. and some still has to be built. We have been interpreting this as heralding a shift in the region’s position on the trade-off between national sovereignty and risk/burden sharing. we expect a constructive outcome from the German election in September (a Merkel-led government.2 -2.1 0. But.4 -0.3 2.2. A framework for understanding Euro area growth %q/q saar Growth potential Conventional monetary policy Fiscal policy Exchange rate Global growth Terms of trade Residual Actual GDP 2011 1. The exchange rate effect is the quarter on quarter change in the nominal trade weighted exchange rate multiplied by 4 and then multiplied by -0.6 -1. In particular. which was not much larger than in 2011. and by an uncertaintyrelated fall in economic sentiment (i. The financial conditions/sentiment component is the residual in the past. Despite the fact that significant progress still needs to be made. In terms of the growth outlook for this year. ideas about a common Euro area budget are still embryonic. and to the global backdrop and to the ECB’s monetary policy stance.2 -0.0 0.5% and the actual overnight interest rate multiplied by 0. due to the Euro area’s unique structure and the perceived treaty constraints on the ECB’s behavior.A.5 GDP is q/q saar. Instead it works by changing the risk characteristics of sovereign debt. which is likely to be slow. but further steps toward common resolution and bank guarantee mechanisms still need to be negotiated.4 0.JPMorgan Chase Bank N. many of the growth drivers did not change much last year and hence cannot explain the slide into recession.0 0. by increased pressure to delever.2 Ch. financial markets have sensed that policy is changing in a way that significantly reduces the risks related to sovereign and bank solvency and to EMU’s survival.2 0.4 -0. There will also need to be further progress in the periphery and some core countries in terms of fiscal positions and competitiveness.1 -0.6 2013 1. Looking ahead. The first step toward a banking union—an agreement on a single supervisory mechanism under the authority of the ECB—has been agreed. the sovereign and bank leverage was so great that financial market concerns about solvency could not be assuaged without a shift to increased risk and burden sharing. by the residual category in the table). we tend to think of this in the context of last year’s slide into recession.5 0. but it was ultimately up to governments and banks to eventually regain market access by deleveraging sufficiently (including via private sector involvement).1 0.1 0.3 -1.6. This political commitment enabled the ECB to adopt a new approach (Outright Monetary Transactions). designed to eliminate inappropriate risk premia in government bond markets. we think that the OMTrelated improvement in financial markets will lead to less restrictive financial conditions this year and that this will also help to improve sentiment. This judgment is correct in our view. Meanwhile. the OMT is already acting to strengthen bank balance sheets. the Italian election in the first quarter could lead to some uncertainty.3 1.4 -0. the ESM/OMT.6. 2013 Euro area  2013 will not be easy. Fiscal policy is the European Commission’s assessment of the change in the cyclically adjusted primary position adjusted for one-offs.2 -0.05. although we expect a pro-European government to emerge. Crisis management finally shifted direction in the middle of 2012. with a political commitment to move to a greater degree of banking and fiscal integration. We view the OMT as a key risk-sharing mechanism that transforms the growth outlook by changing the nature of sovereign debt in the region. Overall. On the political side. 12/13 0. This applies to the fiscal drag.2 0.5 -1. possibly in the form of a Grand Coalition.1) multiplied by 0.1 -1. This in turn is improving banks’ access to wholesale funding and encouraging a return of deposit funding in the periphery. given banks’ significant holdings of sovereign debt. Hence. policymakers tried to address the crisis within the original Maastricht vision of full national sovereignty and limited risk and burden sharing. In the coming months. TARGET2).0 0. but it should be calmer than 2012  ECB’s OMT announced change of course of the crisis and will help the region exit the recession in early 2013  No policy changes expected at next week’s ECB meeting In the first two and a half years of the sovereign debt crisis.6 2012 1.1 -0.. Global growth effect is global GDP quarterly annualized minus potential (3. we expect governments to do enough to not undermine the consensus on the ECB’s Governing Council for the OMT.3 0. Some of the required institutional structure is now in place. Apart from this.8 0.1 -0.2 -1. By supporting government bonds. Monetary policy is the gap between a normal nominal interest rate of 3. Cheap funding was being provided to sovereigns via official bailout packages and to banks via the ECB (LTROs. This is not to say that 2013 will be an easy year. However.0 0. The terms of trade effect is headline CPI (ex taxes) %oya minus 2% multiplied by 0.5 1. it will be important that these improvements lead to a stabilization in bank lending standards and to 25 . In many countries such a lender-of-last-resort function to sovereigns is implicit. which would be more accommodative to fiscal transfers). thereby making existing investors more willing to continue holding peripheral government bonds (and indeed buy more). Similarly. it had to be made more specific. It does not work by buying up huge amounts of government debt. progress will need to be made on banking and fiscal union.3 -0.8 0. 11/12 0.9 Ch. we think that last year’s slide into recession was mainly caused by a deterioration in financial conditions.0 0.

as less self insurance against shocks is needed by each country in the form of low government debt. this debate has barely begun. ECB to start in wait-and-see mode In July 2012. Hence. This is particularly important given that Spain is the country likely to experience the greatest fiscal slippage in 2012 relative to its objective. then the Euro area economy should be able to exit the recession early this year. although the backloading of the 2012 measures will ensure that the macro impact spills into 2013. the ECB is unlikely to cut its deposit facility rate to below zero.2% of GDP in 2012 to 1. and that it expects the OMT-related improvement in financial markets to feed through slowly to the real economy. a limited appetite for taking inflation and balance sheet risks.5% while leaving the deposit facility rate at zero. This was not surprising given that the tightening of financial conditions was most severe in those countries experiencing the greatest fiscal austerity. the ECB could change its collateral framework so that it encourages banks to lend more to households and corporates.9% of GDP in 2012 to 1. In particular.JPMorgan Chase Bank N. This would have much less impact. but nevertheless somewhat surprising. if financial conditions do improve. The easing of the fiscal drag is sizable in Spain and Italy. “within our mandate. In the periphery. according to government plans. an aversion to fine-tuning. it is reasonable to expect growth dispersion to decline. governments are being given more time to meet their near-term fiscal objectives. unless the growth outlook deteriorates significantly. It is not out of character.A.) also has an important impact on the required fiscal journeys. Hence. refers to an equilibrium level of leverage for a standalone sovereign issuing debt with credit risk. fiscal austerity in Spain moderates from 3. In addition. A more likely option is that the ECB narrows its interest rate corridor by 26 . In 2013. Our sense is that the ECB feels that it has already done a lot. This compares with a decline of 110bp in the region as a whole. that the ECB has not followed this up with additional measures. And in the M3 report for November. but the change in direction reflects a broader shift in sentiment toward the periphery. fiscal austerity moderates from 2. London Branch Greg Fuzesi David Mackie Economic Research Euro area January 4. Crucially. From a longer-term perspective. ECB President Draghi said. including in Spain where an intensified fiscal drag is currently impacting the economy. Bank deposits of nonbank private sector Cumulative sum of flows since January 2008 300 250 200 150 100 50 0 -50 2008 2009 2010 2011 2012 Spain Italy cutting the main refinancing rate to 0. the composite PMIs have improved recently in the perhiphery. banking union. 2013 a fall in the interest rates that banks charge on new loans to households and corporates. two-year sovereign bond yields have fallen by almost 300bp since late June. and recent ECB communication is not clearly pointing to this. Greater risk sharing should also change medium-term fiscal objectives. the medium-term fiscal journeys will be changed accordingly. there was a further increase in deposit funding in peripheral banking systems. As we look into 2013.g. On the basis of current plans. Less growth dispersion As the overall economy moved back into recession in late 2011. the dispersion of growth across the region increased. the ECB is ready to do whatever it takes to preserve the euro. excluding Greece. But. In terms of next week’s policy meeting. Draghi was hinting at this early last year. the equilibrium level of leverage should be higher. of a negative deposit rate). Instead.” The OMT announcement that followed has changed the course of the Euro area crisis. reinforced in the fiscal compact. the increased risk sharing (via the OMT. we are not expecting any policy changes and our expectations are also low for subsequent meetings.0% of GDP in 2013. the fiscal drag will already be a bit less than in 2012. despite the ongoing underperformance of the macroeconomy and only a very gradual improvement in the transmission mechanism. This does not yet reverse much of the sharp declines seen particularly in Spain earlier last year. however. which mainly affect the ECB’s ability to support sovereigns. But. where the European Commission has stated that Spain will not be asked to do any more structural tightening before 2014. worries about doing too much and creating moral hazard. The 60% debtto-GDP objective in the original Maastricht vision.9% of GDP in 2013. Once this is recognized. etc. This has been made particularly explicit for Spain. In Italy. reversing a third of last year’s deterioration. Given that risk-sharing changes the nature of sovereign debt in the Euro area. This does not reflect any treaty constraints. meanwhile. Of greater significance would be further liquidity and collateral easing to improve the monetary transmission channel. that it views its policy stance as very accommodative. In this week’s data. we think it reflects concern about the supply side of the economy and hence the inflation outlook. it appears that the central bank now thinks that it has done enough via the OMT. worries about unintended consequences (e. and questions about the efffectiveness of further policy easing. the easing in financial conditions seen since the middle of 2012 has been greatest in the periphery.

7 -1.1 -1.3 -24 -11 -31 9 1 -33 -17 -12.8 -6.9 Oct Nov Dec German orders surged in October due to a big jump in the bulky other transport equipment category.0 -2.74 1.8%m/m gain in October) due to drags from domestic and Euro area orders. -25.6 -0.2 77. values. Inflation Consumer prices Sep Thu Jan 10 7:30am France %m/m nsa Index ex tobacco nsa %oya nsa HICP (%oya) -0.4 Sep -1. Excluding these bulk orders.6 -1.9 -1. which requires the surveys to rise further in the coming months. Retail sales Aug Tue Jan 8 11:00am Euro area Total sales. German industry is turning. 2013 Data releases and forecasts Week of January 7 .4 -2. 1 Construction conf. with the leve1 13.5 German IP slumped in October.6 11.4 -1.4 -3.5 3. leaving 4Q12 tracking a big decline of 5%-6% ar.7 1.7 1.8 -1. trend -20 Prod.3 124. 7 Selling-price exp.6 We expect a new record high in November.7 -18 -7 -29 6 1 -36 -15 -11. sa Industrial conf.5 27 .4 1. Demand and labor markets -18 84. This reflects a weak underlying trend. although some firms have become less pessimistic recently.2 -0.9 86.5 in December.2 -3.4 6.6 -1.5 Sep Oct Nov 11.6% ar below 3Q12.9 -2.1 92.6 -0.4 -2. with only a small improvement in November. while the underlying trend should remain soft. -16 Economic conf. sa Total (%m/m) %oya Domestic (%m/m) %oya Foreign (%m/m) %oya Sep Oct Nov German exports got off to a weaker start in 4Q12.5 -0.4 75.9 -4.4 -6. In November.7 -7.2 Recent prod.5 Tue Jan 8 11:00am Unemployment Aug Euro area Harmonized measure (Eurostat) Unemployment rate (%) 11.0 -0.4 16.6 0.7 -2.3 -0.9 2.1 12.4 -4.9 -26. External trade and payments Foreign trade Aug Tue Jan 8 8:00am Germany € bn.9 -2.8 15.4 -0.3 76.81 1. we still expect the Euro area recession to end in 1Q13. Manufacturing orders Aug Tue Jan 8 11:00am Germany Volumes.5 -2. expectations -10 Export order books -27 Stocks of finished prod.2 124. 85. Looking ahead.3 0.6 Oct -2.6 Dec -0.7 -2.year earlier Exports %m/m Imports %m/m Sep Oct Nov Thu Jan 10 8:45am 18.7 -0.11 Output and surveys European Commission survey Tue Jan 8 11:00am Sep Euro area % balance of responses.A. but only very slowly. volumes %m/m sa %oya. Sep Oct Nov Economic sentiment may have increased to 86.8 -2. and auto-related payback after a strong summer.7 -1.2 Oct 0.4 -3.6 92. consistent with weak business surveys and the recent dynamics of the unmployment data. the trend was soft (despite a 0.1 13. we expect payback at the headline level. -32 Retail confidence -19 Service confidence -11.9 Consumer conf. consistent with the slow improvement in the manufacturing surveys.1 -0.9 -2.0 Nov 1.9 -1.8 0.6 -3. working-day adj.5 -3.3 -1.7 11. Business surveys still point to weak export orders.7 -3.3%m/m. We expect IP to remain weak in the very near term. London Branch Greg Fuzesi Raphael Brun-Aguerre Economic Research Global Data Watch January 4.2 -1.6 94.6 -2.1 -25.3 We expect Euro area retail sales to rise just 0. Industrial production Aug Wed Jan 9 12:00pm Germany Production sector (%m/m sa) %oya sa Prod sec ex constr (%m/m sa) %oya sa Industry (%m/m sa) %oya sa France Ind production (%m/m sa) %oya sa Manuf prod (%m/m sa) %oya sa -0.6 -1. as firms are not hoarding labor as they did in 2008-09.8 -4. Unemployment is rising a bit faster than suggested by an Okun’s Law relationship. sa Trade balance .61 1.1 2.2 124.6 -2.9 2.4 -0.9 2.JPMorgan Chase Bank N.4 15.6 2.8 -26.8 0.0 0. consistent with the recent improvements of the PMI.7 -15 85.1 Nov -0.

0 Nov -5. with an increase in household loans not quite offsetting another decline in corporate loans. Bank lending remained soft in November.0 2839.1 45. which is encouraging (considering the intensified fiscal drag in Spain at year-end).5 43. however. adjusted for securitization -0.0 41.1 2.9 Dec 10.0 -10. French consumption is faring a bit better.5%oya.1 1. The gain in December was led by services.0 47.8 3.9 2.6 3.6 Domestic consumption Sep France Consumption of goods.5 -11.5 45.4 -0.4 46. London Branch Greg Fuzesi Raphael Brun-Aguerre Economic Research Euro area January 4.8 Employment Sep Germany Change m/m.6 46.6 41.2 -0.8 44.9 The Euro area composite PMI was confirmed to have increased significantly in December.JPMorgan Chase Bank N.9 3. the PMI needs to increase another 2pts over the next two months.7 47.2 2.2 45.3 -2.2 -1. while manufacturing was unchanged (and with weaker details).6 42.0 0.4 2.2 46. firms are retaining workers. 52. This implies a disappointing 2H12 for German retailers.4 7.2 2. Energy inflation eased a bit further while core inflation ticked up one tenth to 1.7 45.3 Inflation Consumer prices Oct Euro area (flash) HICP (%oya nsa) Germany (prelim) %m/m nsa %oya HICP (%oya) Italy (prelim) %m/m nsa %oya nsa HICP (%oya nsa) Spain (flash) HICP (%oya nsa) 2. deposit funding is rising again in the periphery.4 43.0 2.3 -0. but 4Q12 is still set to post a big decline (of around 3% ar).3 0.3 44.1 -0. 000s.8 3. This may partly relate to the timing of the Christmas sales (especially in Germany).5 Nov 2. Even though 4Q12 GDP will be very weak.sa) 000s.5 49.0 2751.4 44.1 0.3 44.2 -0.0 Dec 2.3 44.8 44.9 1.0 2753.5 -0. Euro area inflation was unchanged at 2.6 2. The periphery improved as well in December. Loans to nonbank private sector. but it also looks softer in 4Q12.8 52. volumes %m/m sa 0. which is ambitious but possible.5 0.2 50.3 2. Business surveys even suggest some jobs growth.5 5.3 50.0 6.7 1. 2013 Review of past week’s data Output and surveys Purchasing managers index final (manufacturing) Oct Euro area Overall region Germany France Italy Spain 45.0 Euro area M3 (%m/m sa) M3 (%oya) M3 (%oya 3mma) Loans (%oya)1 Loans (m/m.5 Nov 46.0 48.2 German retail sales recovered in November.5 Nov -0.0 -20.A.6 44.8 Oct 1.2 Nov 46.7 43.6 Unemployment Oct Germany Registered (ch m/m.1 3.9 3.6 Purchasing managers index final (composite) Oct Euro area Overall region Germany France Italy Spain 45.9 Nov 5.0 The German labor market softened only slightly in December.9 Oct Nov Financial activity and public finance Money and credit data Sep 1.2 -0.2 Oct Nov -0.7 44. And. real terms %m/m sa 0. nsa Unempl.7 43.0 46.9 1.1 %oya sa -0.4 Dec 47.2 -1.4 3.7 45.3 Dec 46.0 -1.3 46.2 0.5 45.2 44. encouragingly. The declines are not dramatic.6 45.7 49. Demand and labor markets Retail sales Sep Germany Sales ex autos and petroleum.5 45.5 2. € bn)1 -0. rate (%.1 0.1 46.0 2.0 2.1 3.2%oya in December.1 2.6 46.4 2. To become consistent with stable GDP in 1Q13.1 -0.4 6.9 -0.1 %oya sa -0.5 6. sa) 19. 28 . 000s -8.1 46.5 Nov 46.0 0.0 -0.6 3.0 45.0 43.4 -11.9 0.8 1.4 Dec 47.0 Oct 2.0 Purchasing managers index final (services) Oct Euro area Overall region Germany France Italy Spain 46.

3%  IP report and PMI send contradicting messages on near-term manufacturing activity  Small firms’ business sentiment remains depressed  “Abenomics” (ultra easy monetary policy plus easy fiscal policy) is set to start soon In our view. the Japanese economy entered recession in spring of last year. the new government is expected to hold the first meeting of the Council on Economic and Fiscal Policy (CEFP) that will determine the basic guidelines of economic and fiscal policies.and income-related data for November did not deteriorate much. Next week. and consumer behavior ahead and after the tax hike is difficult to forecast. followed by a solid gain in January.. According to the Cabinet Office’s econometric model.0 1.1 IP and manufacturers' output projection 2005=100. IP fell more than expected in November at -1. 2013 Japan  With expectations of a weaker yen in 2013. Masamichi Adachi Economic Research Global Data Watch January 4. we have raised our GDP growth forecast from 2Q this year. but the manufacturers’ output projection survey showed an impressive expected jump in December. our view on Japanese economy has improved somewhat as our FX research team revised up their USD/JPY forecast for this year from an average of 80.5 2. mainly due to a pickup in business investment and less drag from net trade.JPMorgan Securities Japan Co.5 1. On fiscal policy. However. sa 60 55 50 45 40 35 2010 2011 2012 2013 Exports Total 2011 Projection 2012 2013 IP PMI manufacturing new orders growth forecast around year-end 2013 and 2014 is extremely high now. as the new government may delay the timing of the tax hike. Prime Minister Abe and his key cabinet members have all suggested that a supplementary budget for this fiscal year will be large (at least ¥10 trillion). but manufacturers’ output projection showed a 6. last week’s monthly data were a mixed bag of encouragements and disappointments.25—which means that the yen is forecast to be 10% weaker than before. In all. leaving the FY2013 (starting from April) forecast up to 1.4% gain in January.3 -0.5 1. we think that our near-term view does not need to be revised. While the exact timing of when the positive effect will emerge is uncertain from the model. a 10% depreciation of the yen against USD raises real GDP growth by 0.0 0.0 1.to long-term agenda will be discussed at this time. However. While a contraction of real GDP likely continued in 4Q after a large 3.0 2. consumption-related data were generally firm in the first two months of 4Q last year. The more than 2% growth in 2H this year may look quite strong—Japan’s potential growth rate is a mere 0.7 2. While the magnitude of the pickup shown in the projection survey seems exaggerated.1% to 1. Since the BoJ Governor is a member of this council. the direction of manufacturers’ activity is in line with our positive view of this quarter. small firms’ business sentiment remains depressed as the outlook for January deteriorated. IP report versus PMI The November IP report and the December PMI manufacturing were a mixed bag of good and bad news. IP would fall 29 .0 1.4 1.7 2. While incoming data were rather mixed for the near-term forecast. Also. In this regard.7%m/m sa.0 1. but already had hit the bottom by November.8 1.5% in the previous report) and a further 2.5 2.7% jump in December (revised down from +7. If the projection is realized. but it should be noted that this partly reflects the expected frontloading of consumption ahead of the consumption tax (VAT) rate hike in April 2014.5 1. Still.24%-pt in the first year. Labor market. Ltd. although our conviction has lessened with the weak business surveys. but remained soft. FY2013 growth forecast revised up from 1.25 to 88. November IP fell as expected.5%q/q saar fall in 3Q. but we are not sure whether the medium. sa 100 95 90 85 80 75 2010 Index.0 0. we expect growth to resume this quarter. the December PMI was very weak. showing a plunge in new orders. Governor Shirakawa will likely effectively accept a 2% inflation target at this meeting. uncertainty toward the Japan economic forecast %ch saar Real GDP Prior forecast 4Q12 1Q13 2Q13 3Q13 4Q13 CY12 CY13 FY12 FY13 -0.3% from the previous 1.5%.1%.

and both inventory and the inventory to shipment ratio continued to rise. one month after the Tohoku earthquake.0% gain.4% decline in November (from +0. the unemployment rate edged down to 4. The recovery of this sector is in line with the positive news on the high-tech sector in Japan’s Asian neighbors. the outlook was decisively weaker than we had expected.2%).1% in November.1%oya in November after a revised 0. These readings are not decisive in either direction. Factory shipments 2005=100.6. However. Export orders continued to fall. While some improvement in December was in line with firms’ outlook reported last month and our forecast (both at 44. Still. while the inventory to shipments ratio index fell 14.8. followed by 1. mainly benefiting from the introduction of new smart phones and tablets. we do not have a good explanation for the contradicting messages from the output projection survey and the PMI report at this moment. while the job offers-toapplicants ratio was unchanged at 0. the expected decline in winter bonuses is likely to weigh on consumption. While these are not very accurate indicators for tracking GDP-based consumption (the Cabinet Office’s consumption index. Unfortunately.5 in November. the December PMI was decisively weak: the headline index fell to 45. While core capital goods edged up 0.5% contraction in real GDP in 4Q. Moreover. with the key leading indicator component (new orders) showing the sharpest fall since April 2011.0% gain in 1Q this year). and jump 27. this outcome is a challenge to our view that the economy started to improve at the beginning of this year. Small firms sense no improvement of business conditions The Shoko Chukin small firms’ sentiment index edged up to 43. To be sure. but the firms’ outlook for January looks for a decline to 42. but they suggest that overall labor market conditions (and income) stayed soft.0). which clearly challenges our view that foreign demand began to pick up at the end of year. lower than the 4Q average of 43. In the PMI report. it was after an accumulated 15. Still. sa for both scales 135 130 125 120 115 110 105 2010 Electronic parts and devices 2011 Core capital goods 90 85 80 75 70 2013 2012 Shoko-Chukin small firms' business sentiment DI.JPMorgan Securities Japan Co.4. expected to be released on January 11. But.3%. On the other hand.8%q/q saar in 4Q after a 15. there is a comment that intermediate goods recorded a net gain in foreign orders. but basically stayed soft. is more reliable). 2013 only 2.6% after an impressive 2.8% plunge in 3Q. To be sure.6% in 1Q13.0 from 46.5% ar in 4Q after -1. from the recent bottom (August for output and September for shipments). retail sales were flat in November after a 0. dotted lines show January outlook 55 Nonmanufacturing 50 45 40 35 2010 Manufacturing 2011 2012 2013 Labor market and income stayed soft but consumption looks relatively firm in 4Q November labor market indicators were mixed. Indeed.5% (not annualized) and 15. we think that the recovery of the economy is being led by large manufacturers.1% from 4. we think that the reading of the output survey is more reliable for predicting the direction of output in the near term. assuming no change in February or March.7% in 3Q. The expected gain in IP is consistent with our view that the Japanese economy will resume growth from 1Q this year (our forecast looks for a 0. though. we are comfortable leaving our forecast of GDP-based consumption at +0. respectively. On the other hand.2% in October but total employment (including self-employed) fell in the month. Ltd. Masamichi Adachi Economic Research Japan January 4. while the size of the gain is likely exaggerated as usual. total wages per regular worker fell 1. payroll employment rose in the month and the smoothed six-month moving average showed a continued increase to a level close to the one seen before the Tohoku earthquake. equipment investment-related goods remain depressed.3 in November.6% from the peak in July.4% decline in five consecutive months.8 in December from 43. Looking ahead. while core real private consumption fell only 0. 30 . the anecdotes in the PMI report highlight particular weakness in the investment goods category. While total manufacturing activity remains subdued. the electronics parts and devices sector is an exception: output and shipments rose 17.8%m/m sa gain a month ago.. so the weak small firms’ sentiment is not necessarily unusual at this time.

5 08 09 10 11 12 13 14 Balance of payments Aug Current account (¥ bn sa) Trade balance Services Income Current transfers Current account (¥ bn nsa) 722 -236 -246 1278 -74 455 Sep -142 -977 -311 1226 -79 504 Oct 414 -557 -237 1278 -70 377 Nov 373 -600 -250 1298 -75 -107 We expect the index rose further in December. not to reflect an increase in spending. Morgan adjusted (incl.JPMorgan Securities Japan Co.6 Sep -0.0 2.4 Service account balance Yen bn. sa.0 50.66 Nov -3.2 40. Note. boxes denotes survey predictions 140 120 100 80 60 40 07 Fri Jan 11 8:50am Fri Jan 11 2:00pm The underlying trend in bank lending has been soft. The report should reiterate the declining underlying trend. Miwako Nakamura Economic Research Global Data Watch January 4.89 3.3 2.4 38. Production in transport machinery sector 2005=100. Cabinet Office private consumption index %m/m sa Aug Overall 1.72 Dec -1.3 Nov 40.5 Oct 0.6 44. compared to the drop after the end of the first program in September 2010.87 J.3 Oct 1.3 0.10 Fri Jan 11 8:50am -350 2009 2010 2011 2012 2013 Bank lending Sep %oya %m/m sa by J.3 44.11 During the week The adverse effect from the China/Japan dispute on the travel account has not yet been visible in the BoP report.0 39. based on the overall upbeat tone from other surveys at the end of 2012.. 31 .0 38.P. which mainly reflects weakness in the trade balance. Mon Jan 7 2:00pm Auto registrations Sep Total %oya -8. we think that the November index gave back most of its strong gain in October. the increase in tourists from Taiwan and the recovery in those from Korea have been anecdotally reported.3 0. It appears that consumer spending has been tracking a modest recovery in 4Q after having declined in 3Q. sa 0 -70 -140 -210 Overall -280 Travel Based on the softness in last week’s spending data in the Household survey and nominal retail sales in the Commercial sales report.60 Oct -9.5 Dec 40. another important small firm survey.5 Nov -0. light vehicles) Mn units saar 3.0 The more modest decline after the end of the second subsidy program for eco-friendly cars up to November. Morgan 1. but only to replace declining profits.1 0. however. though the recent weakness in corporate profits may boost loan demand.2 40.0 Nov 1. 2013 Data releases and forecasts Week of January 7 .97 3. Economy Watchers survey DI Sep Current conditions Households Business Employment 41. and by the unexpectedly weak December manufacturing PMI.1 Mn units saar 2. is encouraging and broadly in line with optimistic prospects for the transport machinery sector in the IP report. Ltd.P. which showed respondents looking for deterioration in business conditions in the first month of 2013.8 Oct 39.8 3. that concern has been raised by the Shoko Chukin survey.2 40.0 Dec 1. The softness is expected to continue for a while.2 0.

with the three-month moving average of the CSPI ex. It is also worrisome that small firms assessed their employment as “excess” for the first time since July.1 -0.1 -0.0 The November CSPI report continued to show underlying softness.5% in 3Q and +13. the sequential change in unit starts marked +26.4% in 3Q.3 -0. Consumer prices (Dec 28) %oya Oct Tokyo Overall Core (ex fresh food) Ex food and energy Nationwide Overall Core (ex fresh food) Ex food and energy -0.6 -0.0%q/q saar in this quarter after +3.8% in September).0 0.3 45.5 -0. the contribution from energy to the oya change in the core CPI fell 0. compared to +20. Indeed.7 -1.7% in 3Q and +6.3 46.9% in October and -0.6% and -2.6 -1.5 -0.5 -0.9 Nov 46.1% in October and +4.2 Oct 1.2 -0.6 Nov 43.4% in October and +7. after -0.7%m/m nsa.2%oya in the 3Q average). the six-month moving average of starts by floor space. to 0.0 -0. we maintain our view that the Japanese economy started to pick up at year-end.3% in 2Q).2%oya after +6.5 Nov -0..9 4. but at the same time.1%oya in September and -0.4 0.2%3m/3m saar.91 10. As a result.2% in the previous month.1 -0. and +13.1%oya in November.4 -1.7 -0.1 -2.8%m/m nsa after -0.3 Oct -0. The nationwide core CPI fell 0.7%. while business sentiment has been depressed. The nonperishable food CPI did not show a boost from the previous surge in global agricultural prices.3 -7.8% in 3Q.0 45.2 Dec -0. the lowest since the current series started in 2005.98 Nov 10. low interest rates.8% in 2Q.6 Nov -0. As for residential investment in GDP (which is measured in putin-place terms).5 -2. is now tracking +8. food and energy) fell 0.7 41.0% in October and -1.5 Dec 47.5 -0. looked for some deterioration in January (the manufacturers’ outlook DI marked 38.4 -0.8%q/q saar for the current quarter.2 See main essay.8 -0.0 -0. construction machinery rental and temporary material fees were still solid but appear to be stabilizing (+7.9 -0. mainly on a further drop in gasoline (marking -1. and front-loading ahead of the expected hike in the consumption tax in April 2014 (the last factor has been noted by a number of respondents in the latest Economy Watchers survey).307%-pt.8 and the nonmanufacturing outlook DI 45.0 -1.8 -0. respectively).5 -0. Ltd. but as partial payback for the strong gain in the previous month.9% and +17.0 -7.4% after -2.4 0.1 -4.3 45. international transportation remaining at the October level. being unchanged m/m and leaving 32 . Housing construction is likely being boosted by reconstruction in earthquake-affected areas. and -2.4 -0.7 46. The risk to our real GDP residential investment forecast appears to be balanced (we currently expect residential investment to rise 5.6% in 3Q. The core core CPI (all items ex.4 Housing starts Mn units. the same as in October though better than the -0.1%oya after -3.0 Unit starts fell in November.8 0.5%oya.0 43. Shoko Chukin small firm survey (Dec 26) Diffusion index Oct Sentiment index Manufacturing Nonmanufacturing 43.8 40.4).3 0. Meanwhile.6 -0. Housing starts (Dec 27) Sep Housing units %oya %m/m sa Mn units saar 15.0 Industrial production-preliminary (Dec 28) Both manufacturing and nonmanufacturing firms reported improvement in business conditions in December. The result reiterates that the underlying moderation of consumer price deflation is very gradual although electric power companies are now asking the government to approve hikes in their household rates on April 1.8% in September. In the details. a better indicator.3 40.9% after +16.7 Dec 44.87 Oct 25.5 0. saar 1.1 -1.5 -0.JPMorgan Securities Japan Co.6 2008 2009 2010 2011 2012 2013 Purchasing managers survey (manufacturing) (Dec 28) Diffusion index Oct Overall index %m/m sa Sep Production Shipments Inventories Inventory/shipments ratio -4.2 13.3 -0. Miwako Nakamura Economic Research Japan January 4.09%-pt.2 -0. advertising service and office rental fees remained extremely weak (-2. In the details. 2013 Review of past two weeks’ data Corporate service prices (Dec 25) %oya Sep Overall Ex international transport -0.1 Nov -1. after +6.7%).2 3mma 1. after having improved to unchanged oya in October (it was -0. Nonetheless. the energy CPI fell 0.

as well as from foreign package tours. but somewhat at odds with anecdotal reports on good sales of smart phones.5% in November and -0.3 0.6 0.1% in the month. after staying at 4.7 0. sa 1. sa 5. Survey reports. In the preliminary December report for the Tokyo metropolitan area.5 0.0 Ratio.0%oya in December and -0.0 1.80 0.5 4.5 2.5 2007 2008 2009 2010 2011 2012 0.5 Jan 11 Jul 11 Jan 12 Jul 12 Commercial sales (Dec 28) %oya Sep Oct -1.0% in October).2 -0. Unemployment rate and job offers ratio % of workforce.1 1. though the number employed at firms posted a second consecutive rise (marking +0. 2010-based 0.8%m/m. has now receded. rather than a weakening trend (1. Ltd.2 -0. but the latest decline mainly reflected a decline in the labor force (-0.2%m/m sa after +0. and the department store sales report all pointed to solid m/m rises helped by cooler weather (which accelerated sales of winter apparel) and only a limited negative impact from the end of the government subsidy for eco-friendly cars.0 0.5 Core Household survey of expenditures (Dec 28) %m/m sa. More discouraging. the rising trend of new job offers appears to have ended.8 Nov 1.5 1. The previous upside risk to our 4Q real GDP consumption forecast. providing some confirmation of our view that labor market conditions have been soft.0 0.0 Wholesale sales Total retail sales %m/m sa -4.9 0. agricultural worker households Sep All households Real spending %oya Core %oya Worker households Real disposable income Propensity to spend (%) -1.5 0.1 -0.4% in October.9% in November. Looking at nominal retail sales in detail.3%.2 0. and -1.9 -2.0 Nationwide CPI %oya. The job offers to applicants ratio remained unchanged from October. incl. when it fell for the second straight month after consecutive increases since September 2009. it had been on a declining trend since early this year).3 74.JPMorgan Securities Japan Co.5 1. the same as in the previous month.5 74. Within the core core measure.4 -3.6% from -0. Miwako Nakamura Economic Research Global Data Watch January 4. This seems consistent with the sharp decline in shipments at the information/communication equipment sector in the latest November IP report.0 -1.2%m/m sa after a total 0. which includes self-employed and family workers.7 0.79 Quantitative labor market indicators sent mixed signals in November.5 Unemployment rate 5.4 2013 4.4 -1. on top of the 8. Both real spending in the Household survey and nominal retail sales in the Commercial Sales report were much weaker than expected in November.0 -1. This occurred as the pace of the oya rise in energy prices slowed while the pace of decline in nonperishable food and the core core prices picked up.5 Core core -1. which mainly reflected a favorable base effect.1 2.5 -1.7 Oct 0.0 Nov 1.6 75. the pace of oya decline in the core CPI further accelerated to -0. the impact of aggressive discounting in cellular phones was offset by a bigger contribution from flat panel TVs.3 4.2 0. 33 .80 Nov 4.9 -0.6% in October).6 -0.1 0.1 -0.0 -1.1 0. which looks for +0. as its 3m/3m sequential change marked a decline for the third consecutive month.0 0.7% in 3Q. however. Total employment. new auto registration data.6 Job offers ratio 3.2% in the previous three months (prior to that.2 0.81 Oct 4. Note.5 Labor force survey (Dec 28) %m/m sa Sep Unemployment rate (% sa) Labor force (%m/m sa) Total employment (%m/m sa) Unemployed (%m/m sa) Job offers ratio (sa) 4. 2013 its oya change at -0. that the core core CPI has been exhibiting seesaw changes since mid-2012.5 0.0 0.0 -0.8 0.7 -2. sales at home appliance retailers were extremely weak (-0.6% increase in the previous two months)..4 0. edged down by 0. The unemployment rate in November fell to 4.1 0.1% sa.0% drop in the previous month).0 -0.5%q/q saar after -1.9 0.

For example.3%. continued to show a large oya drop.3. from +0. the outstanding business DI stayed at the November level.0 in October.1 0.7 0.4 Japan PMIs DI. 50. which is thought to represent firms’ medium-term prospects.5 49.9 Nov 51.4 -0. sa 60 50 40 30 20 Jan 07 Manufacturing (output) In the November preliminary report. The result was consistent with the message from other surveys that sentiment among service providers had been holding up well until the end of last year. And the employment DI. a measure of core wages. Ltd. Meanwhile. initial readings on wages in this survey have tended to be revised down significantly in final reports. in contrast to worsening in the manufacturing PMI.3 0. and a 3Q average of 48. Note.4 in November. which was modestly lower than in October but almost the same as the 3Q average.6 -0. rose 0. though.1 2. 34 .8 2.4 49.6pt to 49. contract wages. The composite PMI output index for the month fell 0.4 -0.4 0. Still.JPMorgan Securities Japan Co.9 1. and that the outlook DI for the overall nonmanufacturing sector in the Shoko Chukin small firm survey looks for some moderation in the business conditions at the start of this year.3%oya.9 Nov 0.3 Services (business activity) Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 The services PMI business activity index edged up to 51. at odds with very optimistic predictions for December output in the latest November IP report.0 -1.5 in December. It was also worth noting that overtime payments. the current level of the composite PMI was higher than in any month in the five months through October.1 1. Miwako Nakamura Economic Research Japan January 4..6 Oct -0.5 0. showed only a marginal payback for the previous month’s robust gain. the “services” PMI does not include the retail/wholesale trading and construction sectors. and that the new business index posted its fifth consecutive rise. Services/composite PMIs (Jan 4) Diffusion index Oct Services (business activity) Composite (output) 50.0 0. That said.1 0.1 -2.2%oya to the current -0. 2013 Employers' survey (Dec 28) %oya Sep Total earnings per employee Contract wages Scheduled payments Overtime payments Special payments Total hours worked Regular employment Full-time workers Part-time workers -0.6 0.5%-pt. which are likely a timelier reflection of economic conditions.8 -0. Worth noting in this report is that the business expectations index (which asks about prospects 12 months ahead) rose solidly to the highest level since November 2007.0 48. as the manufacturing PMI output index fell meaningfully between December and November. compared to 51. the October reading of contract wages was revised down 0.6 -1.5 -1.5 -0.3 -26.9 Dec 51.6.1 0. after oya declines in the previous five months.3 2.3 -0.

global headwinds have dominated the economic landscape in Canada in 2012 and should as well in 2013. By our forecast. They were up 41. employment has increased 33. And more important. But external headwinds began to blow hard again by the middle of 2012 and so the economy slowed sharply in the second half of the year. While inflation should remain benign. with jobs rising 39. An anemic US economy. Public sector jobs rose only 3.500 drop in October and November. a Euro area recession.1%-pt to 7.1% in December as the number unemployed declined 12. 35 .200 jump in November. 2013 Canada  Another stronger-than-expected labor market report for December  But recent employment gains are unlikely to be sustained  Near-term outlook heavily dependent on events south of the border After a quiet holiday season.100 rise in November.800 after a 8.400 on top of a 48. as household leverage continues to pose a threat to the overall economy and financial system and the output gap is extremely narrow.400 drop in November. The unemployment rate fell 0. the only data release of consequence this week was the December labor force survey. However. we look for the US economy to strengthen and the Euro area to emerge from recession in 2H13. with the economy likely to post subpar growth in the first half of 2013. having grown at nearly a 4% annual rate in the second half of 2011. For all of 4Q. This is the lowest unemployment rate since December 2008. thereby significantly reducing the force of these headwinds by the second half of the year. rising 17. Jobs in the goods-producing sectors rose for the first time in three months.JPMorgan Chase Bank NA Sandy Batten Silvana Dimino Economic Research Global Data Watch January 4.000 jobs were created versus 190. Canadian real GDP should rise at only slightly more than a 1% ar in the second half of 2012 and continue to perform significantly below trend in the first half of 2013.800 following a 59. Over the past three months. The Bank considers current financial conditions to be accommodative.100 per month. The Canadian economy began 2012 on strong footing. Looking into 2013. we estimate US fiscal drag in 2013 to be nearly twice as large as in 2012). Manufacturing jobs rose 9.200 while the number self employed slumped 22.6%q/q ar in 3Q. sa 100 50 0 -50 -100 -150 05 07 09 6-mo avg 11 m/m Implied labor income (hours x wages) %oya 10 8 6 4 2 0 -2 00 02 04 06 08 10 12 Another employment surprise in December The Canadian labor market continued to show surprising strength in December. we look for the Bank to remain on the policy sidelines for much of 2013 with no policy action until the fourth quarter.800.200 in December after a cumulative 16. it is already concerned over the extent of household leverage and would likely require a marked deterioration in the domestic economy for it to provide more accommodation. 312. the Bank of Canada will likely retain its hawkish rate bias. Construction employment staged a more robust rebound.600 decline in November. The labor market continues to outperform the overall economy—but this is unsustainable and so some payback is to be expected ahead. increasing 15. The details of the report were extremely solid. Private sector employment soared 59. employment is up 26. and is on track to bounce back only slightly in 4Q.000 in 2011. The Canadian labor market surprised once again on the upside. employment rose 100. The economy is not currently weak enough to motivate a move to further accommodation. the fourth outsized monthly gain in the past five months.800 jobs in December.400 after a tepid 4. For all of 2012. adding 39. while over the past six months. Full-time jobs more than accounted for the monthly increase.300 after a 19. along with a peppy CAD are the primary headwinds facing the Canadian economy as it enters 2013. edging up only 0. Change in employment 000s.600 jobs per month on average.300 jump in November. Jobs in forestry.200 on top of a 55.500 with the participation rate unchanged.800. a modest fall off the fiscal cliff in early 2013 (even with the recent agreement. fishing. But.200 jump in November. while part-time jobs slipped 1.

6 5.2 0. this is well above the current rate of inflation and should continue to provide support for consumer spending (real household consumption rose 3.0 -1. hours worked were up only 0.8 Oct 203.4 Nov 0. The current state of the economy is consistent with monthly job gains south of 20.7 Nov 196. Still.2 12.1 -3. hours had plunged in October. scientific.2 2.6 1. Total hours worked in the economy edged up 0.1 1.8 0.7 16.2 58.1 Industrial PPI (Jan 4) %m/m nsa. So.2 Fri Jan 11 8:30am International trade Sa Aug Balance (C$ bn) Exports (%m/m) Imports (%m/m) Real balance -1.200.1 6.2 Thu Jan 10 8:30am Building permits %m/m sa.1 0. Morgan 36 . This report likely does little to alter the Bank of Canada’s view on the economy.2 -0.000. service jobs rose a torrid 111.3 0.3 58.01 1.4 7. held down by an outsized 41. However.4% from 2.1 Review of past week’s data Labor force survey (Jan 4) Sa Oct Employment (mn) (ch.500 drop in professional.3%q/q ar.4 68.53 Nov 0.1%m/m in December following a 0.1 -0. So for all of 4Q. in line with other indications of only tepid 4Q GDP growth.0 0.2 1.98 0. 2013 mining.4%m/m in December.1 Nov -0.3 1.3 Thu Jan 10 8:30am New house prices Nsa Aug Total.3 -0.4 Dec 55.5 -9. 000s) (%m/m) (%oya) Labor force (mn) (%m/m) (%oya) Unemployment rate (%) Avg hrly earnings (%oya) Hours worked (%m/m) 17.8 Sep -12. unless as noted Aug Total %oya 9.4 7.6 -1.JPMorgan Chase Bank NA Sandy Batten Silvana Dimino Economic Research Canada January 4.5 23.2 0.2 -3.4 43. a rate depressed by a very unfavorable base effect.0 -2. unless noted Sep Total %oya Ex energy %oya 0.1 -0.3 Nov 52.2 Dec 17.30 Oct -0.P. Wages of permanent workers rose 0.5 0. oil and gas and in utilities fell in December with forestry/mining/oil jobs plunging 13. Calculated and seasonally adjusted by J.1 -0.5 -0. expect significantly more modest employment reports going forward.4 60. offsetting a 0. For all of 4Q.2 2.1 1.8 0.700 surge in November.8 2.6 47.0 39.4 3.2 0.0 -0. This pushed up the oya rate to 2.63 17.5%oya in November.2 -0.3 18.63 59.57 1.0%oya in December from 3.0 1.9 -0. Wed Jan 9 8:15am Housing starts Saar Sep Total (000) (%m/m) (%oya) 224. and technical jobs. It should reinforce the Bank’s view that its current stance is sufficiently accommodative and that the next move in the overnight rate will be up. The December gains were widespread.02 0.03 19. However.2 Oct -0. the timing of this action has become even more uncertain with increased US fiscal drag in 2013 (even though a complete fall off the fiscal cliff was averted) and the Euro area remaining in recession.11 Mon Jan 7 10:00am Composite index¹ (sa) Purchasing index (sa) Purchasing index (nsa) Ivey PMI Sep 55.00 0. This December labor market report continued a string of reports that have clearly been stronger than the rest of the economy would indicate.67 Sep -1.2 2.0 51.4 -0.5 -0.0 0.7 Nov -7.7 -0.0 2.4 Sep 0.5 1.1 2.2 0. We continue to expect the next monetary policy action to be a 25bp rate hike but do not expect it to occur until 4Q13 after external headwinds have likely diminished significantly.5 0.500 on top of the 65.3 7.1 1.4 7.6 -0.5 Oct 54.2 Data releases and forecasts Weeks of January 7 . the pace of growth of labor income also recovered some from the November slowdown—rising 4. Accordingly.1 -0.4%m/m decline in November.17 1.900.2 2.3 Nov 17.2% in November.7 19. gaining 24.4 Oct 0.17 -0.3 -4.2 -0.2%m/m gain in November. the largest monthly decline since November 2005. %m/m %oya 0.5 46. m/m.1 3.67 5.2 Oct 15.1 2.0 19.8%q/q ar in 3Q and contributed 2%-pts to overall GDP growth).8 19.4 1.1 -2.3 0. Service-producing jobs continued to motor along in December.5 Dec 196.

Meanwhile.1 2.3 259.0 2. that damaged banks are misallocating capital between sectors. the UK is not well placed to dodge the bullet.8 2. sa 1.8 3.5 2.9 2. as investment in sectors that are competitive at a low level of sterling is required.7 2.1 2.2 2.P.9 248.4 2.8 253. Morgan inflation forecast %oya.7 2. With limited ability to use domestic policy tools to generate growth.JPMorgan Chase Bank N. the failure to sustain a recovery since 2010 is a big concern.2 2. Two related puzzles as 2012 progressed that matter for the 2013 outlook are the resilience of employment and the stickiness of GDP growth %q/q. but still not good enough  PMI surveys in December send mixed signals on growth  BoE credit conditions survey indicates significant easing  Previewing CPAC RPI announcement next week The year 2012 was deeply disappointing for the UK economy. 45 .4 2.8 2.3 3.8 2.4 2.5 3.5 2.1 core inflation.9 1.0 1. and the UK forecast sees growth at a near-trend pace by year-end.1 3.3 252.2 2.8 2.9 2. the UK outlook remains dependent on the global and Euro area context.0 2. However.6 2.8 2.3 2. we anticipate a period of more muted job growth while output growth accelerates. should confidence in a global upswing grow.7 2.0 2. 2013 United Kingdom  2013 outlook: better than last year.6 2.9 2.9 3. The Chancellor remains committed to underlying fiscal tightening running at a pace of 1%-1.8 249.0 2. they do not address the problem of weak expectations for overall demand.0 2.9 2.8 246.3 2.8 2.8 2. forecast shown from dotted line onwards CPI Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 2. Morgan’s forecast is for a gradual strengthening in global growth as the year progresses. Our suspicion is that a recovery in demand growth would see productivity trends improve markedly.0 1.8 2.4 3.1 3.0 2.5% of GDP on an annual basis.9 2.9 256.4 2.2 2.0 0.0 -0.8 257.1 3.1 2.8 2.3 Core CPI 2. can carry much weight.0 2010 2011 2012 2013 J.4 2.8 2. The uncertainty over expectations for demand growth has also limited the UK’s ability to exploit a weaker exchange rate.8 255.5 0.8 RPI Level 245. and hence demand for credit.9 2.9 2. J.3 2.8 2.1 256. The absence of bank holiday and other distortions should also make the trend in UK growth a little more linear and easier to discern.9 2.9 254. London Branch Allan Monks Malcolm Barr Economic Research Global Data Watch January 4.1 2.3 3. We are skeptical that the currently trendy explanation.6 2. Although innovations like the Funding for Lending Scheme may improve credit availability at the margin (particularly in the housing market).0 2.3 2.7 2.0 247.A. Although we doubt that the currently reported decline in GDP will survive the revision process.2 2.1 2.5 259. the UK is probably better placed to take advantage of that than others in Western Europe.1 3.9 RPIX 2.5 258.6 2.9 2.P.8 2.7 2.0 253.2 2.2 2.4 249.3 2.9 2. The poor performance of productivity as overall hours worked has risen relative to output is not well understood.8 2. the limits of the effectiveness of reserve funded gilt purchases (the MPC’s preferred means of implementing QE) appear to have been reached.2 2.7 253.5 257.0 2. independent of conditions in the financial system.9 2.6 246.9 2. But that has been tempered by acknowledgement that the UK’s ability to take policy steps to improve growth meaningfully is constrained.4 252. To the extent that global conditions disappoint.2 RPI 3.5 250.8 2.0 2. there has been an increasing acceptance that overall economic conditions are not fairly characterized as recessionary.0 2.3 2.0 247. As 2012 has progressed.5 -1. even if he is prepared to allow realized deficit and debt outturns to vary with the cycle.8 261.6 2.7 2. Given a very depressed level of activity and significant monetary policy support.9 3.0 3.6 2.5 2.9 3.8 2.2 251.8 2.7 2.2 2.8 2.7 249.0 3. With the data suggesting the recent strength in the official employment data is beginning to abate. the fact that output probably did not register an underlying contraction is nothing to cheer about.0 2.0 2.4 2.

At the same time. Though last quarter’s survey had already indicated a clear improvement in mortgage credit availability. the end of a long period of rising penetration of cheap imports has shifted the average run rate for core goods pricing. The January surveys will be important in gauging the momentum of the slide in the services PMI. London Branch Allan Monks Malcolm Barr Economic Research United Kingdom January 4. the BoE’s money and credit data continue to show an advance in mortgage approvals to 46 Bank loan spreads % balance. But at this stage. All told. sa 62 60 58 56 54 52 50 48 46 44 42 2010 2011 Services Manufacturing 2012 2013 Bank loan availability % balance. a third consecutive decline and consistent with a modest contraction in services output. The good news. past 3 months 30 20 10 0 -10 -20 -30 -40 -50 -60 2007 Improving Supply Demand Deteriorating 2008 2009 2010 2011 2012 2013 54. and its influence is likely at work in the BoE survey.2 to 48. an impressive move up from their low this year of 44. triangles denote expectations 60 40 20 0 -20 -40 -60 -80 07 08 09 10 11 12 13 Tightening Firms Easing Household secured Demand versus supply of bank loans for firms % balance. we expect inflation to spend most of the year above the 2% target. thanks to a strong gain in the manufacturing component for the same month. The latter was evident this week from a marked improvement in the BoE’s 4Q credit conditions survey.JPMorgan Chase Bank N. The OMT announcement has played a key role in improving wholesale funding conditions across Europe. the poor performance of productivity has meant that unit labor costs have not seen a prolonged period of sub-2% growth at any stage since 2008. The effective rate on new borrowing to PNFCs also dropped to its lowest since March of this year. triangles denote expectations 40 30 20 10 0 -10 -20 -30 -40 -50 -60 07 08 Firms Easing Household secured Tightening 09 10 11 12 13 Near-term data look mixed The December services PMI dealt a blow to growing expectations of an imminent recovery in output. But that downtrend in core inflation will be slow moving.9. And third.A. And we remain comfortable with our forecast for flat GDP growth in 4Q. the BoE will feel comforted that its Funding for Lending Scheme is likely to be driving at least part of the improvement in credit conditions. On the heels of the BoE’s credit survey this week. Second. and tuition fees. and show little sign of doing so in the data in hand. Our best guess is that the pressures on the unit labor costs side may abate slowly as output growth builds.000. past 3 months. is that measures of inflation expectations have remained well-behaved throughout the period of above-target inflation. we continue to expect better growth in 1Q due to three fundamental factors that will be helping the economy: lower sequential inflation. BoE survey. energy bills. measures of capacity use within firms have not been weak enough to suggest firms are prepared to take an ongoing hit to margins in order to boost output levels. even if usage to date has been very modest. past 3 months. and the headline data will be dominated by other influences. .500. a slightly more supportive global backdrop (including lower funding costs in international capital markets) and signs of an easing in credit conditions. however. VAT. PMI output readings % balance. BoE survey. These have included increases in import prices. the survey is certainly a challenge to our view that we will see a return to growth this quarter. 2013 A succession of plausibly “one-off” shocks has helped to keep inflation high. The business activity reading dropped unexpectedly from 50. First. But measures of inflation that clean up for those influences have not moved below 2% on a sustained basis. given upside risks that had appeared around that forecast previously. it was corporate loan conditions that saw the biggest improvement this time round. That said. BoE survey. The composite PMI is at 50. We would attribute that to three forces. however.

assuming no further methodological changes.1 2.2 1. This would lower the RPI by 0.6 3.4 0.3 1.3 2.5 1.2 2.1 -0. Even if true.JPMorgan Chase Bank N.6%-pt.4 2.8 0.9 -0. Our central view is the second of these scenarios.6 2.4 -0.1 2.9 0. Though this scenario would push RPI below CPI.5 2. Ultimately. This decision will be made at a CPAC meeting held two days earlier.5 2. at which the ONS will report the responses of the recently conducted public consultation.9 0.2 -0.4 0.9 0.2 2.4 1.6 -0.6 2.6 2. leaving the current contribution of the formula effect to the gap between RPI and CPI inflation at current levels for the foreseeable future. These are the options users were asked to comment on in the ONS’s public consultation:  Option 1. the National Statistician must decide which option to put forward (following CPAC’s advice).6 2.0 0. while avoiding some Scenarios for RPI inflation %oya No change (Option 1) RPI RPI-CPI 3.3 0.6 2. but may lean in favor of the first option.1 0.3 3.3 3.8 -0.9 -0.0 2.2 2.2 1.0 2.1 -0.5 2. The results of the public consultation are not yet known.9 -0.9 0.7 2.5 -0.4 0.4 2. the decision would then be deferred to the Chancellor.9 0. Change the whole RPI to an alternative averaging method (Dutot). this is likely to be a temporary occurrence.3 0.1 -0.2 2.4 1. Even if option one is selected. At the end of the process.2 2.  Option 3.4 0.1 2.0 0.8 0.1 2.5 2. And the third scenario in the table captures both options three and four as laid out by CPAC. The first scenario in the table is consistent with no further changes at all.3 0.9 -0.5 2. Though Mervyn King has publicly backed the more extreme options.A. No methodological changes to the RPI.3 2. our view has been that an outcome resembling option two was most likely.2 2. A very similar outcome to option three as described above.6 2. the other differences between RPI and CPI inflation are unusually low.0 -0.0 -0.  Option 4. it is very difficult to gauge how much weight CPAC will put on this consultation.3 0. it is not known when the responses by the BoE and Chancellor will be made public (should the decision be deferred to these entities).0 2.4 2.8 0.0 0.2 2.6 -0.3 2.3 0. three.4 -0.3 2.1 -0. As a brief recap. Applying logic to the decision-making process only gets us so far—with the outcome being driven by the subjective judgment of a number of senior statisticians and policymakers.3 2. creating an outcome that would look similar to the pre-2010 environment before any related changes were made.1 2.0 -0.3 0.2 -0.1 -0.2 -0. which deliver an observed outcome close to the second scenario shown in the table above over time. the BoE would then have to decide whether the change would be detrimental to the interests of some index-linked bond holders.8 0.4 0. At present.3 0.1 -0. London Branch Allan Monks Malcolm Barr Economic Research Global Data Watch January 4. a short list of four possible outcomes has been drawn up for recommendation.5 -0.1 2. given they themselves have a bias for more radical change. These options all relate to which averaging method should be used to aggregate items in the RPI where no detailed weights are available.1 -0.5%-0.7 -0.4 -0.2 2.5 2.5 2.2 2.1 2.1 2.3 3.1 2.2 2.0 -0. Changes just to clothing.1 -0. 2013 CPAC meeting on RPI changes Next Thursday the National Statistician will announce her recommendation regarding changes to RPI inflation. Early indications suggest the responses have been mixed. This would allow the ONS to correct the adverse consequences of the changes it made back in 2012. and we would expect this to reverse in the long run.6 2. however. or four is recommended.1 Full harmonization (Option 4) RPI RPI-CPI 2.0 0.1 -0.9 0.8 0.8 0.2 2. Even if option one from the bullet points above is selected.7 2.9 0. Though we have stood by this call through the twists and turns in the story. Change the averaging method to mirror the CPI.3 0.1 2.4 3.8 0.1 -0.1 2. This would significantly lower RPI inflation by almost 1%-pt.6 2.6 2.1 -0. Should the BoE conclude that a change would not be detrimental to bondholders.3 0.2 1.5 2.4 0. this is really a separate issue from how it affects bondholders.1 2.5 -0. there is significant uncertainty around the decision. we would expect the ONS to make further changes to the descriptions used for clothing price collection.2 2.1 0.9 0.6 3.4 0.6 Just clothing (Option 2) RPI RPI-CPI 2. If option two.2 2. the ONS could still tweak the methodology used in the collection of clothing prices.5 0.  Option 2.2 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 of the barriers associated with pushing forward the more extreme alternatives.5 -0.8 0.1 2.3 3. Though the decision by the National Statistician will be announced on January 10.9 -0. we have set out three possible scenarios for RPI inflation (and its implied gap over the CPI). Reflecting the uncertainty around the decision.9 -0. which over time would deliver an outcome observationally equivalent to option two.6 2.1 2. 47 .6 2.2 2.7 0.4 2.6 0.0 -0.9 0.

4 -8.5 3.9 -3.3 -6.6 -2.2 Dec 50.7 Oct -0.8 Dec 0.2 -1.6 Nov 50.Deliveries Manufacturing. sa Aug -0.2 15. constant prices % m/m Aug -0. PMI survey. sa Permanent placements Permanent salaries Availability of permanent staff Sep 49.4 Oct -0.3 Dec 48.8 22.4 23.7 0.0 51.8 0. construction % balance.Prices 1Q12 12 26 10 24 2Q12 9 9 10 18 3Q12 3 15 1 16 4Q12 1.2 4.3 Dec Review of past two weeks’ data Nationwide house price index Sa %m/m %oya %3m/3m saar Oct 0.3 0.5 48.5 BoE housing equity withdrawal Sa £ bn.0 4. 48 .2 -3.5 -1. For house purchase.8 -3.2 2.6 Tue Jan 8 12:01am BRC retail sales monitor %oya Like for like sales Total Sep 1.0 33. sa) Loan approvals (000s sa)1 1.7 51.6 33. Excludes the effect of securitization.7 Thu Jan 10 12:00pm Fri Jan 11 9:30am MPC rate announcement & asset purchase target No change expected.1 -3.3 31.6 -0.1 Dec Money supply Sa Sep M4 ex IOFCs (%m/m) (%3m/3m.8 10.2 Oct 0.2 33.0 66. 2013 Data releases and forecasts Week of January 7 .3 Wed Jan 9 9:30am Trade balance £ bn.JPMorgan Chase Bank N.1 -1.3 -2.0 Nov 0. ar) M4 (%m/m) M4 (%oya) M4 lending (%m/m)1 (%oya)1 0.1 Nov 0.9 BBA lending Sa Sep Secured lending (ch £ bn.3 47.6 Nov 0.6 Sep -2.5 Oct -9.4 Nov 3.0 Oct 55.4 5.2 -5. London Branch Allan Monks Malcolm Barr Economic Research United Kingdom January 4.1 0.3 Nov 56.8 3Q12 -9. sa Overall index Oct 47.Deliveries Services.6 Nov -3.11 Mon Jan 7 9:30am Fri Jan 11 9:30am Construction output Nsa. Some recovery in oil and gas extraction after the recent plant shutdowns is also likely to lift overall IP.2 -4.0 5. sa Total balance (goods) Trade balance (services) Total trade balance Aug -10.4 1.9 Industrial production Sa IP (%m/m) %oya Manufacturing (%m/m) %oya We assume a partial rebound following the large drop in manufacturing in October.1 1.6 Dec PMI survey. Oct 0.6 -8.7 Sep -2.9 Nov 49.1 1.9 1.9 50.4 1. services % balance.9 -2.0 -1.0 Tue Jan 8 12:01am RICS housing market survey %bal.0 -1.1 6.2 -1. PMI survey.Prices Services.1 Nov 0.4 Wed Jan 9 12:01am Markit report on jobs % balance.4 0. manufacturing % balance.1 2Q12 -9.4 7.1 Sep -8. sa Prices in last 3 months Stocks of homes on books Sales in last 3 months Sales to stocks ratio (%) New buyer enquiries Sep -14.3 -0.A.2 15.9 Nov 49.1 49.9 5. sa 1Q12 -9.4 5.5 0.1 Dec -0.7 Tue Jan 8 12:01am BCC quarterly economic survey Index Manufacturing.9 Oct 8.0 51.1 31.3 Nov New car registrations %3m/12m nsa Total Private (ex business and fleet) Sep 2.0 -4.2 -0.0 -1.3 65.3 17.0 2.5 Oct 2.2 -1. sa Overall index Oct 50.6 Overall index Oct 50.0 52.2 Dec 50.5 5.0 51.1 Nov 0.2 14.3 4.5 Nov -8.3 Oct -7.2 -2.7 69.4 51.2 -3.9 22.

AUD and NZD appreciate as US fiscal cliff risks are (partially) avoided  Aussie retail and building approvals data next week to deliver further judgment on the power of rate cuts  NZ and Aussie trade reports to be supported by improving commodity price dynamics Over the New Year period there has been little new domestic information to guide the outlook for the Antipodean economies. The news will be somewhat better on the trade front. AUD and MSCI world equity index (local currency terms) /USD 1.4%m/m. while prices and activity are being sparked by loosening credit conditions. as it is close to the average run rate for 2012. the removal. as will the hit to purchasing power as prior disinflation from AUD fades away. 2013 Australia and New Zealand  In the absence of domestic data. Is Aussie housing credit growth turning? While the total pool of private sector credit outstanding in Australia was unchanged in November. In 2013. In that echo chamber. increasing 0. This represents a change in the distribution of debt that could have financial stability implications later. having generally fallen during the RBA’s easing cycle. as rents and building activity pick up after a long malaise. While the growth rates we are projecting in the two economies are similar. with new borrowers entering the housing market and paying down the debt of existing mortgage holders.P. with the turning tide in the Asian economies and better news on global commodity prices to have stabilized exports in both Australia and New Zealand. Already there are broader signs of life in the housing market data. For more details on our forecasts for growth and policy. Next week marks the resumption of the data flow. given that the accumulated effects of prior easing tend to mechanically shrink the pool of credit. though. Only a falling participation rate has kept the unemployment rate low.9 0. we expect the labor market to slow further. but the economy nevertheless will benefit substantially from the reconstruction boost to GDP. such that both AUD and NZD appreciated significantly alongside the global equity rise and bond sell-off.1 1.6 2008 2009 2010 2011 2012 2013 MSCI World AUD Index 450 400 350 300 250 200 Australia: private sector credit %3m ar 20 15 10 5 0 -5 2006 2007 2008 2009 2010 2011 2012 2013 Housing credit Total credit %3m ar 18 14 10 6 2 2013 to show opposing growth dynamics Trade factors aside. Australia is moving into a world where the terms of trade are shifting from a tailwind to a headwind for national purchasing power.0 0. and be whittled away in New Zealand.8 0. see our 2013 outlook pieces on Australia (in this GDW) and New Zealand (in next week’s GDW). we view the Antipodean economies as being subject to distinctly different dynamics in 2013. the corporate sector has turned very cautious on hiring. The threemonth run-rate on housing credit has edged up to its strongest pace since April. the difference in potential growth rates means that we expect slack to accumulate in Australia. As a result. which started in November 2011. In the same sense that the two economies’ performances have diverged in recent years due to external shocks that benefited Australia over New Zealand. there could be more interesting composition effects unfolding as well. the household and government sectors remain in retrenchment mode. which will weigh on real household spending. such that job ads now are in a state of persistent decline. And with new housing finance commitments growing somewhat stronger than the pool of credit. However. our forecasts show a rolereversal occurring this year.J. albeit partial. as existing mortgage holders use lower rates to pay down more principal. and posted a further modest acceleration. most of it for Australia. Morgan Australia Limited Stephen Walters Ben K Jarman Tom Kennedy Economic Research Global Data Watch January 4. housing credit was once again the strongest performer.7 0. the fact that the housing numbers have been pushing higher over the last few months is notable. The plateau in mining capex will lay bare the weakness in non-mining activity. 55 . of the US fiscal cliff concerns this week made the “risk on” bells ring louder. In New Zealand. where we expect the numbers to show the household sector’s limp response to aggressive monetary easing having persisted into the end of 2012. This is certainly nothing to get too excited about.

1 Nov -2.6 Review of past two weeks’ data Private sector credit Sep %m/m 0.P. there are few signs of life in credit demand.0 Nov 0. Morgan Australia Limited Stephen Walters Ben K Jarman Tom Kennedy Economic Research Australia and New Zealand January 4.3 Oct 0. Business credit growth was unusually strong during 1H12. and coal shipments improve. the overall sense that households are keeping the purse strings taut will remain.4 Sep 9. November’s result. goods revenues were down 12% in Australia. Even the modest returns shown in recent months on retail sales have been flattered by the strength in food price inflation. and Global Dairy Trade’s tradeweighted index shows prices up 3% in November.2%m/m from flat in October).4 Oct -2.6 Wed Jan 9 11:30am Retail sales Aug %m/m 0. with the trend measure of house approvals to keep pushing lower.6%m/m rise). 0 04 06 08 10 12 14 500 Australia Data releases and forecasts Week of January 7 . imports strength will also be a drag. which preliminary reports show posted broad-based gains.5 Oct -7. However. provides further confirmation that this shift has run its course and that business credit growth will remain soft heading into 2013. As of October.6 Nov 2. strength in imports. treading water in November. for example.3 Sep 0. will push the deficit wider still. However.6 billion. We expect a slight improvement in total sales in November (+0.9 Sep -1. though. The auction payout results show this price strength continuing through December and January. building approvals should recover somewhat after a shocking October (we expect a 2.11 Thu Jan 10 8:45am Trade balance Aug NZ$ mn -811 Sep -775 Oct -718 Nov -670 Review of past two weeks’ data No data released.2 0. these price effects come through with a lag. we expect export revenues to stabilize. This should see the trade deficit narrow slightly to NZ$670 million. but a larger rebound is expected in export volumes.2 Price drags to fade in trade reports The effect of commodity price drags on export revenues has been clear in both Australia and New Zealand.11 Tue Jan 8 11:30am Trade balance Aug A$ bn -1. As the earlier price drags fade. but the normalization will stem from a temporary bounce in higher-density approvals. which has been attributed to firms switching credit lines away from offshore lenders (namely European) toward domestic banks. to A$2. while discretionary spending has been consistently disappointing. In New Zealand. Thu Jan 10 11:30am Building approvals Aug %m/m 8. which saw business credit contract 0.0 New Zealand Data releases and forecasts Week of January 7 . and iron ore in particular has been on a tear recently. Similarly. due to the slide in iron ore and coal prices.1 Nov 0. 56 .J. and a shift in the composition toward better outcomes in household goods and department store sales.5 Oct 0. 2013 Outside of housing. RBA non-rural commodity price index and Global Dairy Trade NZTWI Index 200 150 100 50 1000 GDT trade-weighted index of NZ dairy prices RBA index of non-rural commodities Index 2000 1500 Retail and building approvals to limp higher Next week’s reports on retail sales and building approvals for November should see only slight improvements on recent run rates. However. which has lifted nominal outlays.6%m/m.

New York Daniel Silver Economic Research Global Data Watch January 4. Jr. Louis Fed President Bullard speaks on monetary policy in Wisconsin (2:00pm) Minneapolis Fed President Kocherlakota speaks in Minneapolis (8:00pm) International trade (8:30am) Nov -$41.000 Wholesale trade (10:00am) Nov JOLTS (10:00am) Nov Auction 30-year bond (r) $13 bn Kansas City Fed President George speaks on economy in Kansas City (1:10pm) St.3bn Import prices (8:30am) Dec 0..1% Federal budget (2:00pm) Dec Philadelphia Fed President Plosser speaks on economy in New Jersey (9:30am) 14 Jan San Francisco Fed President Williams speaks on economy in California (11:55am) Atlanta Fed President Lockhart speaks on economy in Atlanta (12:40pm) Chairman Bernanke speaks at University of Michigan (4:00pm) 15 Jan Retail sales (8:30am) Dec PPI (8:30am) Dec Empire State survey (8:30am) Jan Business inventories (10:00am) Nov Philadelphia Fed President Plosser speaks on economy in New York (12:30pm) 16 Jan CPI (8:30am) Dec TIC data (9:00am) Nov Industrial production (9:15am) Dec NAHB survey (10:00am) Jan Beige book (2:00pm) 17 Jan Initial claims (8:30am) w/e prior Sat Housing starts (8:30am) Dec Philadelphia Fed survey (10:00am) Jan Announce 10-year TIPS $15 bn 18 Jan Consumer sentiment (9:55am) Jan preliminary 21 Jan Martin Luther King.JPMorgan Chase Bank N. Day Markets closed 22 Jan Existing home sales (10:00am) Dec Richmond Fed survey (10:00am) Jan 23 Jan FHFA HPI (9:00am) Nov 24 Jan Initial claims (8:30am) w/e prior Sat Manufacturing PMI (8:58am) Jan flash Leading indicators (10:00am) Dec KC Fed survey (11:00am) Jan Auction 10-year TIPS $15 bn Announce 2-year note $35 bn Announce 5-year note $35 bn Announce 7-year note $29 bn 25 Jan New home sales (10:00am) Dec 28 Jan Durable goods (8:30am) Dec Pending home sales (10:00am) Dec Dallas Fed survey (10:30am) Jan Auction 2-year note $35 bn 29 Jan S&P/Case-Shiller HPI (9:00am) Nov Consumer confidence (10:00am) Jan Housing vacancies (10:00am) 4Q FOMC meeting Auction 5-year note $35 bn 30 Jan ADP employment (8:15am) Jan Real GDP (8:30am) 4Q advance FOMC statement (2:15pm) Auction 7-year note $29 bn 31 Jan Initial claims (8:30am) w/e prior Sat Personal income (8:30am) Dec Employment cost index (8:30am) 4Q Chicago PMI (9:45am) Jan 1 Feb Employment (8:30am) Jan Manufacturing PMI (8:58am) Jan final Consumer sentiment (9:55am) Jan final ISM manufacturing (10:00am) Jan Construction spending (10:00am) Dec Light vehicle sales Jan 68 . 2013 US economic calendar Monday 7 Jan 8 Jan NFIB survey (7:30am) Dec Consumer credit (3:00pm) Nov Auction 3-year note $32 bn Richmond Fed President Lacker speaks on economy in South Carolina (3:00pm) Tuesday 9 Jan Wednesday 10 Jan Thursday 11 Jan Friday Auction 10-year note (r) $21 bn Initial claims (8:30am) w/e prior Sat 365.A.

(9:30am) Jan 22 Jan Germany: ZEW bus. (3:00pm) Jan 25 Jan Germany: IFO bus. conf. sa Retail sales (11:00am) Nov 0. (10:00am) Jan Spain: GDP prelim (9:00am) 4Q Belgium: GDP prelim (3:00pm) 4Q 31 Jan Euro area: HICP flash (11:00am) Jan Germany: Employment (9:55am) Dec Unemployment (9:55am) Jan CPI prelim (9:00am) Jan France: Cons. 69 .8%. conf. sa France: Foreign trade (8:45am) Nov Wednesday 9 Jan Germany: Industrial production (12:00pm) Nov 1. (9:30am) Jan 28 Jan Euro area: M3 (10:00am) Dec Germany: Retail sales (9:30am) Dec Italy: Contractual wages (11:00am) Dec ISAE cons. conf. conf.JPMorgan Chase Bank. prelim (4:00pm) Jan France: INSEE bus. conf. (11:00am) Dec 86. conf. (8:45am) Jan 24 Jan Euro area: Balance of payments (10:00am) Nov PMI flash (10:00am) Jan Manufacturing. Times shown are local.3%m/m. (11:00am) Jan EC cons. (8:45am) Jan 30 Jan Euro area: EC capacity utilization (11:00am) 1Q EC business conf. survey (10:00am) Jan Netherlands: CBS bus.6%bal. (8:00am) Feb France: INSEE cons. Services and Composite Spain: Unemployment rate (9:00am) 4Q Belgium: BNB bus. Services and Composite Import prices (9:30am) Dec France: PMI flash (9:00am) Jan Manufacturing. 2013 Euro area economic calendar Monday 7 Jan Euro area: PPI (11:00am) Nov Tuesday 8 Jan Euro area: EC business conf. (11:00am) Dec -26. of mfg goods (8:45am) Dec PPI (8:45am) Dec Italy: PPI (10:00am) Dec Spain: CPI prelim (9:00am) 1 Feb Euro area: PMI Mfg final (10:00am) Jan Unemployment (11:00am) Dec MFI interest rates (10:00am) Dec Germany: PMI Mfg final (9:55am) Jan France: PMI Mfg final (9:50am) Jan Italy: PMI Mfg (9:45am) Jan Spain: PMI Mfg (9:15am) Jan Highlighted data are scheduled for release on or after the date shown. sa MFI interest rates (10:00am) Nov Unemployment (11:00am) Nov 11.5%bal. London Greg Fuzesi Economic Research Global Data Watch January 4. (11:00am) Jan Italy: ISAE bus. sa Germany: Foreign trade (8:00am) Nov Mfg orders (12:00pm) Nov -2. conf. conf.5%m/m.0%m/m. sa Thursday 10 Jan Euro area: ECB rate announcement (1:45pm) No change expected France: CPI (8:45am) Dec Industrial production (8:45am) Nov Netherlands: CPI (9:30am) Dec Friday 11 Jan France: Monthly budget situation (8:45am) Nov 14 Jan Euro area: Industrial production (11:00am) Nov Italy: Industrial production (10:00am) Nov 15 Jan Euro area: Foreign trade (8:00am) Nov Germany: Annual GDP 2012 (8:00am) CPI (8:00am) Dec Italy: CPI (10:00am) Dec Spain: CPI (9:00am) Dec 16 Jan Euro area: HICP final (11:00am) Dec New car regs (8:00am) Dec Italy: Foreign trade (10:00am) Nov 17 Jan Euro area: ECB Monthly Bulletin (9:00am) Jan 18 Jan 21 Jan Germany: PPI (8:00am) Dec Netherlands: CBS cons. conf. conf. conf. survey (11:00am) Jan 23 Jan Euro area: EC cons. (10:00am) Jan 29 Jan Euro area: Sector accounts (10:00am) 3Q Germany: GfK cons. sa EC cons. Services and Composite Germany: PMI flash (9:30am) Jan Manufacturing.

2013 Japan economic calendar Monday 7 Jan Auto registrations (2:00 pm) Dec Tuesday 8 Jan 9 Jan Wednesday 10 Jan Thursday 11 Jan Friday Bank lending (8:50 am) Dec Current account (8:50 am) Nov Economy Watchers survey (2:00 pm) Dec Auction 3-month bill Auction 10-year bond During the week: CAO private consumption index Nov Auction 3-month bill Auction 30-year bond Auction 6-month bill 14 Jan Holiday: Japan 15 Jan Money stock (8:50 am) Dec BoJ Governor Shirakawa’s addres at branch managers’ meeting 16 Jan Corporate goods prices (8:50 am) Dec Private machinery orders (8:50 am) Nov Consumer sentiment (2:00 pm) Dec 17 Jan Tertiary sector activity index (8:50 am) Nov Construction spending (2:00 pm) Nov 18 Jan IP final (8:50 am) Nov Auction 1-year note Auction 5-year note During the week: Department store sales Dec Auction 3-month bill 21 Jan BoJ Monetary Policy Meeting 22 Jan BoJ Monetary Policy Meeting and statement BoJ Governor Shirakawa’s press conference (3:30 pm) 23 Jan BoJ monthly economic report (2:00 pm) 24 Jan Reuters Tankan (8:30 am) Jan Trade balance (8:50 am) Dec 25 Jan Nationwide core CPI (8:30 am) Dec Minutes of Dec 19-20 BoJ Monetary Policy Meeting (8:50 am) Auction 2-month bill Auction 3-month bill Auction 20-year bond 28 Jan Corporate service prices (8:50 am) Dec 29 Jan 30 Jan Total retail sales (8:50 am) Dec 31 Jan IP preliminary (8:50 am) Dec Nominal wages (10:30 am) Dec Housing starts (2:00 pm) Dec 1 Feb All household spending (8:30 am) Dec Unemployment rate (8:30 am) Dec Job offers to applicants ratio (8:30 am) Dec During the week: Shoko Chukin small firm sentiment Jan Highlighted data are scheduled for release on or after the date shown. Times shown are local.JP Morgan Securities Japan Co. Ltd Miwako Nakamura Economic Research Global Data Watch January 4.. 70 .

000 (-0. Morgan composite index 55.4 nsa) J. Ontario (4:00pm) International trade (8:30am) Nov C$0.P. 2013 Canada economic calendar Monday 7 Jan Ivey PMI (10:00am) Dec 51.JPMorgan Chase Bank NA Silvana Dimino Economic Research Global Data Watch January 4.0 (sa) Tuesday 8 Jan 9 Jan Wednesday 10 Jan Thursday 11 Jan Friday Housing starts (8:15am) Dec 196. 71 .1bn 14 Jan BoC Business Outlook Survey (10:30am) 4Q BoC Senior Loan Officer Survey (10:30am) 4Q 15 Jan Existing home sales (9:00am) Dec 16 Jan 17 Jan New vehicle sales (8:30am) Nov Nonresidential construction (8:30am) 4Q 18 Jan Manufacturing sales (8:30am) Nov 21 Jan Wholesale sales (8:30am) Nov 22 Jan Retail sales (8:30am) Nov 23 Jan Teranet/National Bank HP Index (9:00am) Nov Bank of Canada rate announcement /Monetary Policy Report (10:00am) 24 Jan TNS Canada Consumer Confidence Index (9:00am) Jan 25 Jan CPI (8:30am) Dec 28 Jan 29 Jan 30 Jan Payroll employment (8:30am) Nov 31 Jan CFIB Business Barometer Index (6:00am) Jan IPPI (8:30am) Dec Monthly GDP (8:30am) Nov 1 Feb All existing home sales are tentative.2% New housing price index (8:30am) Nov 0.4 (43.1%) Building permits (8:30am) Nov -7. Times shown are local.1% BOC Senior Deputy Governor Tiff Macklem speaks at Queen’s University in Kingston.

2013 Latin America economic calendar 7 Jan Brazil: IGP-DI Dec 0.22%m/m Headline 3.63%oya Core 3.7% Uruguay: IP Nov During the week: Brazil: Commodity price index Dec Vehicle production (ANFAVEA) Dec Chile: Vehicle sales Dec Mexico: Auto report Dec Colombia: Auto sales Dec CPI Dec 14 Jan 15 Jan Argentina: WPI Dec CPI Dec Brazil: Retail sales Nov Mexico: Central bank reserves (Prior week) Peru: Economic activity index Nov Unemployment rate Dec Uruguay: Unemployment rate Nov 16 Jan Brazil: COPOM meeting 17 Jan Argentina: Consumer confidence Jan Brazil: IGP-10 Jan Fipe CPI Jan 15 Chile: BCCh meeting 18 Jan Argentina: Economic activity index Nov Mexico: Banxico interest rate decision During the week: Brazil: Economic activity index Nov Caged formal job creation Dec Tax collections Dec Colombia: Trade balance Nov 21 Jan Brazil: IGP-M 2nd release Mexico: Employment report Dec 22 Jan Mexico: Central bank reserves (Prior week) Banamex survey of economic expectations 23 Jan Argentina: Trade balance Dec Brazil: IPCA-15 Jan Current account Dec Mexico: Retail sales Nov 24 Jan Argentina: IP Dec Brazil: COPOM minutes Mexico: CPI Jan-1H IGAE (GDP proxy) Nov 25 Jan Brazil: Outstanding loans Dec Mexico: Trade balance Dec During the week: Colombia: Retail sales Banrep meeting 28 Jan 29 Jan Mexico: Central bank reserves (Prior week) 30 Jan Brazil: IGP-M Jan Chile: Retail sales Dec Mexico: PS budget balance Dec 31 Jan Brazil: Unemployment rate Dec Chile: Unemployment rate Dec Mexico: Commercial bank credit Dec 1 Feb Brazil: Industrial production Dec Manufacturing PMI Jan Trade balance Jan Chile: Central bank meeting minutes Mexico: Banxico survey Monetary policy meeting minutes Family remittances Dec Uruguay: Trade balance Peru: WPI Jan During the week: Argentina: Govt tax revenue Brazil: Central govt budget 72 .1%m/m Mexico: Central bank reserves (Prior week) 9 Jan Brazil: IGP-M 1st release Mexico: CPI Dec Headline 0.3%oya 11 Jan Mexico: Industrial production Nov 3. New York Carmen Collyns Economic Research Global Data Watch January 4.77% Fipe CPI Jan 7 Peru: BCRP meeting on hold Mexico: Gross fixed investment 9.JPMorgan Chase Bank.00%oya Peru: Trade balance Nov 10 Jan Brazil: IPCA Dec 0.72% Chile: Trade balance Dec Economic activity index Nov 5.2%oya Wage negotiations Dec 4.29%m/m Core 0.1%oya 8 Jan Chile: CPI Dec 0.

(12:01am) Jan 1 Feb PMI Mfg (9:30am) Jan During the week: Nationwide HPI Jan (28 Jan -1 Feb) Times shown are local. London Branch Malcolm Barr Allan Monks Economic Research Global Data Watch January 4. sa Quoted mortgage interest rates (9:30am) Dec 14 Jan 15 Jan RICS HPI (12:01am) Dec CPI (9:30am) Dec ONS HPI (9:30am) Dec PPI (9:30am) Dec 16 Jan 17 Jan 18 Jan Retail sales (9:30am) Dec 21 Jan Rightmove HPI (12:01am) Jan 22 Jan Public sector finances (9:30am) Dec CBI industrial trends (11:00am) 4Q and Jan 23 Jan Labor market report (9:30am) Dec MPC minutes (9:30am) Jan 24 Jan BBA mortgage lending (9:30am) Dec CBI distributive trades (11:00am) Jan 25 Jan Index of services (9:30am) Nov Real GDP 1st est. conf.A. 2013 UK economic calendar Monday 7 Jan New car regs (9:30am) Dec Tuesday 8 Jan BCC economic survey (12:01am) 4Q BRC retail sales monitor (12:01am) Dec RICS HPI (12:01am) Dec Wednesday 9 Jan Markit jobs report (12:01am) Dec Trade balance (9:30am) Nov Thursday 10 Jan MPC rate announcement and Asset purchase target (12:00pm) No change expected Friday 11 Jan Construction output (9:30am) Nov Industrial production (9:30am) Nov 0. 73 .JPMorgan Chase Bank N.6%m/m. (9:30am) 4Q 28 Jan 29 Jan 30 Jan M4 & M4 lending final (9:30am) Dec Net lending to individuals (9:30am) Dec 31 Jan Gfk cons.

2%oya Poland: CPI (2:00pm) Dec Budget balance (3:00pm) Dec Israel: CPI (6:30pm) Dec South Africa: Mining production (11:30am) Nov 16 Jan Hungary: NBH minutes (2:00pm) Poland: Core inflation (2:00pm) Dec Russia: Foreign trade Nov South Africa: Kagiso PMI (11:00am) Dec Retail sales (1:00pm) Dec Israel: GDP 3Q final 17 Jan 18 Jan Czech Republic: Current account (10:00am) Nov CZK1. sa Turkey: Industrial output (10:00am) Nov South Africa: Gross reserves (8:00am) Dec Wednesday 9 Jan Czech Republic: CPI (9:00am) Dec 2. wda Romania: Retail sales (10:00am) Nov 0. sa South Africa: Manufacturing output (1:00pm) Nov -0. unemployment. -1.4%oya Hungary: Trade balance (9:00am) Nov €775mn Poland: NBP rate decision -25bp Romania: Trade balance (10:00am) Nov GDP (10:00am) 3Q final Russia: CPI Dec Current account 4Q Thursday 10 Jan Romania: Industrial output (10:00am) Nov -0. sa.5%m/m sa Friday 11 Jan Czech Republic: Retail sales (9:00am) Nov Romania: CPI (10:00am) Dec 4.4bn Hungary: PPI (9:00am) Nov Romania: NBR rate decision no change Holiday: Russia During the week: Russia: CBR rate decision (9-15 Jan) Tuesday 8 Jan Hungary: Industrial output (9:00am) Nov -4.3%m/m.A.1bn Hungary: Average gross wages (9:00am) Nov Poland: Average gross wages and Employment (2:00pm) Dec Current account (2:00pm) Nov Industrial output (2:00pm) Dec PPI (2:00pm) Dec Romania: Current account Nov -€4. London Branch Anthony Wong Economic Research Global Data Watch January 4.0%oya. and investment Dec South Africa: SARB rate decision 25 Jan Hungary: Retail sales (9:00am) Nov 28 Jan Israel: BoI rate decision (5:30pm) Turkey: Trade balance Dec 29 Jan Hungary: Unemployment (9:00am) Nov NBH rate decision (2:00pm) Poland: Retail sales (10:00am) Dec Unemployment (10:00am) Dec 30 Jan Russia: GDP 4Q South Africa: Private sector credit (8:00am) Dec Budget (2:00pm) Dec 31 Jan Hungary: PPI (9:00am) Dec Poland: NBP inflation expectations (2:00pm) Jan South Africa: PPI (11:30am) Dec Trade balance (2:00pm) Dec 1 Feb Czech Republic: PMI (9:30am) Jan Hungary: PMI (9:00am) Jan Poland: PMI (9:00am) Jan Russia: Manufacturing PMI (9:00am) Jan Turkey: PMI (10:00am) Jan Times shown are local.9%oya. nsa Trade balance (9:00am) Nov CZK22. 2013 Emerging Europe/Middle East/Africa economic calendar Monday 7 Jan Czech Republic: Industrial output (9:00am) Nov 0%m/m.6%oya Turkey: Current account (10:00am) Nov 14 Jan Turkey: Unemployment rate (10:00am) Oct 15 Jan Czech Republic: PPI (9:00am) Dec Hungary: CPI (9:00am) Dec 5.JPMorgan Chase Bank N. 74 .5%m/m.6bn ytd 21 Jan 22 Jan Russia: Industrial production Dec PPI Dec Turkey: CBRT rate decision (2:00pm) 23 Jan South Africa: CPI (10:00am) Dec Turkey: Capacity utilization Jan 24 Jan Russia: Retail sales.

sa Malaysia: Trade balance (12:00pm) Nov US$2. (9:01am) Jan Taiwan: PMI mfg.. sector credit (11:30am) Dec New Zealand: RBNZ official rate (9:00am) Hong Kong: Retail sales (4:30pm) Nov Malaysia: BNM monetary policy meeting Philippines: GDP (10:00am) 4Q Taiwan: GDP prelim (8:30am) 4Q Thailand: PCI.7bn 14 Jan Australia: ANZ job advertisements (11:30am) Dec Housing finance (11:30am) Nov India: CPI Dec WPI (12:00pm) Dec During the week: 15 Jan Philippines: OFW remittances Nov Singapore: Retail sales (1:00pm) Nov 16 Jan Australia: New motor vehicle sales (11:30am) Dec 17 Jan Australia: Unemployment rate (11:30am) Dec Hong Kong: Unemployment rate (4:30pm) Dec Korea: PPI (6:00am) Dec Singapore: NODX (8:30am) Dec 18 Jan China: FAI (10:00am) Dec GDP (10:00am) 4Q IP (10:00am) Dec Retail sales (10:00am) Dec 21 Jan Australia: PPI (11:30am) 3Q Hong Kong: CPI (4:30pm) Dec Taiwan: Export orders (4:00pm) Dec Holiday: New Zealand During the week: 22 Jan Taiwan: Unemployment rate (8:30am) Dec 23 Jan Australia: CPI (11:30am) 4Q Malaysia: CPI (5:00pm) Dec Singapore: CPI (1:00pm) Dec Taiwan: IP (4:00pm) Dec Vietnam: Trade balance Jan (25-31 Jan) 24 Jan China: Flash PMI (9:45am) Jan Hong Kong: Trade balance (4:30pm) Dec Korea: GDP prelim (8:00am) 4Q Philippines: BSP monetary policy meeting Holiday: Malaysia 25 Jan Singapore: IP (1:00pm) Dec Holiday: India Thailand: Mfg. (10:00am) Jan Thailand: CPI Jan Holiday: Australia.5bn Thailand: BoT monetary policy meeting (2:30pm) No change Thursday 10 Jan Australia: Building approvals (11:30am) Nov 2.2%oya Philippines: Exports (9:00am) Nov 23. PII (1:30pm) Dec Trade balance (1:30pm) Dec 1 Feb China: PMI mfg. 75 . (NBS) (9:00am) Jan PMI mfg.6bn Wednesday 9 Jan Australia: Retail sales (11:30am) Nov 0.2%m/m New Zealand: Building permits (10:45am) Dec Korea: Unemployment rate (8:00am) Dec 3.0bn Tuesday 8 Jan Australia: Trade balance (11:30am) Nov -A$2. N.3%oya Import price index (6:00am) Dec -7.3%oya PPI (9:30am) Dec -1. 2013 Non-Japan Asia economic calendar Monday 7 Jan Taiwan: CPI (8:30am) Dec 1.A. production Dec (25-28 Jan) 28 Jan Korea: Consumer survey (6:00am) Jan Taiwan: Leading index (4:00pm) Dec 29 Jan Australia: NAB business confidence (11:30am) Dec New Zealand: Trade balance (10:45am) Dec India: RBI monetary policy meeting (11:00am) Jan 30 Jan New Zealand: Building permits (10:45am) Dec Korea: Current account balance (8:00am) Dec IP (8:00am) Dec 31 Jan Australia: Pvt.2%oya.JPMorgan Chase Bank. Singapore Branch Benjamin Shatil Economic Research Global Data Watch January 4.4%oya Money supply (12:00pm) Nov 4.9%oya Friday 11 Jan China: CPI (9:30am) Dec 2.1%oya Trade balance (4:00pm) Dec US$3. Trade balance Dec (10-13 Jan) US$21. (Markit) (9:45am) Jan Indonesia: CPI (11:00am) Jan Trade balance (11:00am) Dec Korea: CPI (8:00am) Jan Trade balance (9:00am) Jan PMI mfg.2%oya Malaysia: IP (12:00pm) Nov 5. New Zealand Malaysia During the week: Times shown are local.0%.6%m/m New Zealand: Trade balance (10:45am) Nov -NZ$670mn Indonesia: BI monetary policy meeting No change Korea: Export price index (6:00am) Dec -5.7%oya India: IP (11:00am) Nov Korea: BoK monetary policy meeting (9:00am) No change During the week: India: Trade balance Nov (10-15 Jan) China: Money supply Dec (10-15 Jan) 13.

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Additional information available upon request.18 January Brazil  BCB IBC-Br index (Nov) 14 January Euro area  IP (Nov) India  CPI (Dec)  WPI (Dec) United States  Bernanke speech 15 January Brazil  Retail sales (Nov) Japan  Shirakawa speech United Kingdom  CPI (Dec) United States  Retail sales (Dec)  NY Fed survey (Jan)  Busnss inventories (Nov) 16 January Brazil  COPOM mtg: no chg Euro area  HICP final (Dec) Japan  Private mach orders (Nov)  Consumer sentiment (Dec) United States  CPI (Dec)  IP (Dec)  NAHB survey (Jan)  Beige book 17 January Chile  BCCh mtg: no chg Singapore  NODX (Dec) United States  Housing starts (Dec)  Philly Fed survey (Jan) 18 January China  GDP (4Q)  FAI (Dec)  IP (Dec)  Retail sales (Dec) Colombia  BanRep mtg: -25bp Mexico  Banxico mtg: no chg United Kingdom  Retail sales (Dec) United States  UMich cons sent prl (Jan) Analysts’ Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors. Morgan Securities Ltd. Opinions and estimates constitute our judgment at the date of this material and are subject to change without notice. alternatively. 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. N.Morgan Securities Inc. Morgan Cazenove is a brand name for equity research produced by J. Canada: The information contained herein is not. is a member of the NFA. and European Economic Area (EEA): Investment research issued by JPMS plc has been prepared in accordance with JPMS plc’s Policies for Managing Conflicts of Interest in Connection with Investment Research.A.11 January Brazil  Auto sales (Dec) China  Trade report (Dec)* Japan  CAO prv cons index (Nov) Russia  CBR mtg: no chg** Monday 7 January Japan  Auto registrations (Dec) Romania  BNR mtg: no chg Taiwan  CPI (Dec)  Trade report (Dec) United Kingdom  Auto registrations (Dec) Tuesday 8 January Euro area  EC bus conf (Dec)  EC cons conf (Dec)  Retail sales (Nov)  MFI interest rates (Nov)  Unemp rate (Nov) Germany  Mfg orders (Nov) Wednesday 9 January Germany  IP (Nov) Mexico  CPI (Dec) Poland  NBP mtg: -25bp Thailand  BoT mtg: no chg Thursday 10 January Brazil  IPCA (Dec) Euro area  ECB mtg: no chg France  IP (Nov) Indonesia  BI mtg: no chg Peru  BCRP mtg: no chg United Kingdom  BoE MPC mtg: no chg Friday 11 January China  CPI (Dec) India  IP (Nov) Japan  Econ Watchers surv (Dec) Korea  BoK mtg: no chg Mexico  IP (Nov) United Kingdom  IP (Nov) United States  Trade report (Nov) * To be released Jan 10-13 ** January 9-15 12 . Copyright 2013 JPMorgan Chase Co. Revised January 1. Morgan Australia Limited (ABN 52 002 888 011/AFS License No: 238188) is regulated by ASIC and J.P. J. Dubai Branch. client feedback. habitually invest money..P.P. in the course of and for the purposes of their business. The investments and strategies discussed may not be suitable for all investors. J. JPMSAL does not issue or distribute this material to “retail clients. 2013. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.P. 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 analyst’s involvement with the issuer. 38. Singapore branch is regulated by the Monetary Authority of Singapore. Korea: This report may have been edited or contributed to from time to time by affiliates of J.

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