PP 7767/09/2010(025354) MARKET DATELINE

Global

Economic Highlights
18 June 2010

1 US Inflation Remained Benign And The Fed Is In No Hurry To Raise Interest Rates 2 US Leading Index Points To A More Moderate Economic Growth In 2H 2010 And Manufacturing Activities In Philadelphia Region Slowed Down In June 3 Euroland’s Construction Output Fell M-o-m In April 4 Singapore’s Non-oil Domestic Exports Slowed Down In May

Tracking The World Economy...
Today’s Highlight US Inflation Remained Benign And The Fed Is In No Hurry To Raise Interest Rates US headline inflation fell by 0.2% mom in May, compared with -0.1% in April and +0.1% in March. This was the second consecutive month of decline, pointing to easing price pressures, on the back of a sharper drop in gasoline prices, which fell by 5.2% mom in May, compared with -2.4% in April and -0.8% in March. A moderation in the costs of healthcare, education and recreation also helped. These were, however, offset partially by a pick-up in the prices of apparel, while prices of food & beverages and the costs of housing remained stable during the month. Excluding food and energy prices, the core inflation rate, on the other hand, inched up by 0.1% mom in May, after remaining unchanged in the previous two months. Yoy, the headline inflation moderated to 2.0% in May, from +2.2% in April and a peak of +2.7% in December. The core inflation rate, on the other hand, held stable at +0.9% yoy in May, the same rate of increase as in April and compared with a peak of +1.8% in December. The readings suggest that price pressures remain benign in the US, in tandem with the US Federal Reserve’s assessment that substantial resource slack would continue to restrain cost pressures and inflation is likely to be subdued for some time. As a result, the Fed will likely keep its key policy rate unchanged at between 0-0.25% in the near term, after it has stopped most of its emergency lending programmes and the quantitative easing in March. Nevertheless, we believe the Fed will likely use other instruments to soak up liquidity from the system in order to prevent the excess liquidity from fuelling inflation as economic growth picks up momentum. As it stands, the Fed announced on 15 June that it had sold US$1.15bn in deposits in the first test of a credit-tightening tool it may use to drain a near-record amount of cash from the banking system. The Fed said that it offered $1bn for 14 days through its Term Deposit Facility and received bids worth US$6.14bn. The successful banks will deposit money with the Fed and receive interest of 0.27%, marginally higher that the 0.25% banks currently received in interest on their excess reserves.

The US Economy US Leading Index Points To A More Moderate Economic Growth In 2H 2010 ◆ The US Conference Board’s index of leading indicators, which provides early signal on the direction of the economy over the next three to six months, bounced back to increase by 0.4% mom in May, after remaining

Peck Boon Soon
Please read important disclosures at the end of this report.

(603) 9280 2163 bspeck@rhb.com.my

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18 June 2010

unchanged in April. This suggests that the US economy will likely continue expanding and be resilient. The pick-up was on account of a pick-up in average workweek, consumer goods orders, consumer expectations and money supply as well as smaller declines in the pace of deliveries and building permits. These were, however, offset partially by declines in orders of non-defence capital goods and stock prices. Meanwhile, the leading index’s six-month annual rate of change softened to 7.9% in May, from +9.4% in April. This was the second consecutive month of easing and off the peak of 11.6% in December, suggesting that the US economy will likely grow at a more moderate pace in the 2H of the year. This is in line with consensus estimate, which expects US real GDP to expand at a more moderate annualised rate of around 2.9% in 2H 2010, compared with +3.15% in the 1H of the year. For the full-year, real GDP is projected to grow by 3.2% in 2010 before easing to +2.92% in 2011 and compared with -2.4% in 2009. Manufacturing Activities In Philadelphia Region Slowed Down In June ◆ The Philadelphia Business Outlook Survey’s diffusion index of current general activity fell to 8.0 in June, after reaching a recent high of 21.4 in May. The Philadelphia Fed region, which comprises eastern Pennsylvania, southern New Jersey and Delaware, is more exposed to the auto sector and less influenced by financial services and trade than the New York region. This was the first easing in six months, suggesting that factory activities expanded at a slower pace during the month, on account of a slowdown in shipments and a decline in average workweek and employment. These were, however, mitigated by a pick-up in new orders, delivery time and inventory as well as a smaller decline in unfilled orders. Input costs moderated and selling prices fell during the month. Over the next six months, the future general activity index, however, bounced back to 40.2 in June, from 37.0 in May but off the peak of 52.0 in March. This suggests that manufacturing activities are likely to continue expanding in the months ahead. The pick-up was reflected in higher unfilled orders and average workweek. These were, however, offset partially by a slowdown in new orders and shipments as well as a sharper decline in delivery time. As a result, firms indicated that they will likely slow down labour recruitment and capital spending in the months ahead. Meanwhile, firms expect input costs to ease but selling prices to pick up in the near term.

The Euroland Economy Construction Output Fell M-o-m In April ◆ Euroland’s construction output fell by 0.3% mom in April, after a rebound to +6.5% in March. This was the third month of decline in four months, suggesting that construction activities remained weak in the region. The decline was due to a drop in building construction activities, which fell by 0.9% mom in April, after rising by 9.2% in March, indicating that private construction activities remained lacklustre during the month. This was, however, mitigated by a pick-up in civil engineering construction activities, which strengthened to 3.4% mom in April, from +0.9% in March, pointing to an improvement in infrastructure spending. Yoy, construction output fell by 6.1% in April, marginally higher than -6.0% in March and compared with -14.3% in February. This suggests that construction activities are improving, albeit gradually, dragged by the sovereign debt crisis in the region.

Asian Economies Singapore’s Non-oil Domestic Exports Slowed Down In May ◆ Singapore’s non-oil domestic exports slowed down to 24.4% yoy in May, from +30.0% in April and compared with +25.4% in March. This was the slowest pace of growth in three months, suggesting that global demand for Singapore’s exports has eased somewhat and as a low base effect gradually wears off. Slower growth was reflected in a slowdown in the exports of non-electronic products, which eased to 16.2% yoy in May, from +35.3% in April. This was attributed to a sharper drop in the exports of pharmaceutical products, which was mitigated by a pick-up in the exports of petrochemical products. A pick-up in the exports of electronic products, which rose by 38.9% yoy in May, compared with +21.2% in April, however, mitigated the slowdown. This was due to stronger growth in the exports of ICs, IC parts, PC parts and disc drives as well as a rebound in the exports of diodes & transistors. In terms of country, the slowdown was due to weaker demand from the US and Europe. These were, however, mitigated by a pick-up in exports to China, Hong Kong, Japan and Taiwan.

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18 June 2010 IMPORTANT DISCLOSURES This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction. “Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports. This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel. The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

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