July 16, 2010

Economics Group
Weekly Economic & Financial Commentary

U.S. Review Retail Sales

3-Month Moving Average
Slower Growth, Low Inflation with Big Budget Deficits 20% 20%

• Retail sales and industrial production set the tone for the
10% 10%
economic outlook as momentum has slowed to a three
month pace of 4 percent compared to a 7 percent year-
over-year gain. This slowdown outlook was reinforced by 0% 0%

comments by the Federal Reserve.

• Inflation, meanwhile, measured by the Consumer Price -10% -10%

Index, is now up just 1.1 percent over the past year.

Substantial slack in the economy will likely continue to -20% -20%
put downward pressure on core CPI inflation. Slow Year-over-Year Percent Change: Jun @ 6.8%
growth and low inflation suggests big federal fiscal 3-Month Annual Rate: Jun @ 4.1%
-30% -30%
budgets persist for the outlook horizon. 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Global Review Chinese Real GDP

Year-over-Year Percent Change
Chinese Economy Starts to Slow 14.0% 14.0%

• After a sharp rebound, the year-over-year rate of GDP 12.0% 12.0%

growth in China slowed in the second quarter relative to

10.0% 10.0%
the first quarter. The lending restrictions that the
government directed banks to take a few months ago 8.0% 8.0%
appear to have had their desired effects.
6.0% 6.0%
• Although we look for further slowing in the quarters
ahead, we do not look for a “hard landing” in China. 4.0% 4.0%
Indeed, recent declines in equity and housing prices and
benign inflation may cause the government to ease up on 2.0% 2.0%

the brakes somewhat. Year-over-Year Percent Change: Q2 @ 10.3%

0.0% 0.0%
2000 2002 2004 2006 2008 2010

Inside
Wells Fargo U.S. Economic Forecast
Actual Forecast Actual Forecast U.S. Review 2
1Q 2Q
2009
3Q 4Q 1Q 2Q
2010
3Q 4Q
2006 2007 2008 2009 2010 2011
U.S. Outlook 3
Real Gross Domestic Product
1
-6.4 -0.7 2.2 5.6 2.7 3.2 1.6 2.2 2.7 2.1 0.4 -2.4 2.9 2.3
Global Review 4
Personal Consumption 0.6 -0.9 2.8 1.6 3.0 3.0 1.5 2.2 2.9 2.7 -0.2 -0.6 2.2 2.1 Global Outlook 5
Inflation Indicators
2
Point of View 6
"Core" PCE Deflator 1.7 1.6 1.3 1.5 1.4 1.2 1.2 1.2 2.3 2.4 2.4 1.5 1.2 1.6
Consumer Price Index -0.2 -1.0 -1.6 1.5 2.4 1.8 0.9 0.6 3.2 2.9 3.8 -0.3 1.4 1.2 Topic of the Week 7
Industrial Production
1
-17.6 -10.3 8.3 7.0 6.9 7.5 3.9 2.2 2.2 2.7 -3.3 -9.3 5.3 3.4 Market Data 8
2
Corporate Profits Before Taxes -19.0 -12.6 -6.6 30.6 34.0 25.0 20.0 14.0 10.5 -4.1 -11.8 -3.8 22.6 7.1
3
Trade Weighted Dollar Index 83.2 77.7 74.3 74.8 76.1 77.3 80.0 81.5 81.5 73.3 79.4 74.8 81.5 88.0
Unemployment Rate 8.2 9.3 9.6 10.0 9.7 9.7 9.8 9.8 4.6 4.6 5.8 9.3 9.7 9.6
4
Housing Starts 0.53 0.54 0.59 0.56 0.62 0.60 0.52 0.60 1.81 1.34 0.90 0.55 0.58 0.85

Quarter-End Interest Rates

Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 5.25 4.25 0.25 0.25 0.25 1.00
Conventional Mortgage Rate 5.00 5.42 5.06 4.93 4.97 4.58 4.50 4.70 6.14 6.10 5.33 4.93 4.70 5.60
10 Year Note 2.71 3.53 3.31 3.85 3.84 2.97 3.00 3.20 4.71 4.04 2.25 3.85 3.20 4.00
Forecast as of: July 7, 2010
1
C ompound Annual Growth Rate Quarter-over-Quarter
2
Year-over-Year Percentage C hange
Economics Group U.S. Review Wells Fargo Securities, LLC
U.S. Review
Moderate Paced Recovery with Low Inflation Industrial Production - Computer & Electronic Products
Output Growth by Volume, Not Revenue
A Dose of Reality from the Fed: Participants generally 50% 50%
anticipated that, in light of the severity of the economic
downturn, it would take some time for the economy to converge 40% 40%

fully to its longer-run path as characterized by sustainable rates

30% 30%
of output growth, unemployment, and inflation consistent with
participants’ interpretation of the Federal Reserve’s dual 20% 20%

objectives; most expected the convergence process to take no

10% 10%
more than five to six years.
Recent data suggest economic momentum has slowed. Retail 0% 0%

sales slowed to a three-month pace of 4 percent compared to a 7 -10% -10%

percent year-over-year gain. This slowdown was reinforced by
comments made by the Federal Reserve at the June meeting. The -20%
Both Series are 3-Month Moving Averages
-20%

Fed suggested that the economic recovery was proceeding at a 3-Month Annual Rate: Jun @ 18.6%
-30% -30%
moderate pace in the second quarter but that the unemployment Yr/Yr % Change: Jun @ 15.6%
rate remained elevated. Yet, aggregate hours worked by -40% -40%
employees on private nonfarm payrolls rose substantially through 87 89 91 93 95 97 99 01 03 05 07 09

May suggesting continued forward momentum.

Reinforcing the Fed’s view, industrial production figures this
U.S. Consumer Price Index
Year-over-Year Percent Change
week indicated moderation over the past three months especially 6.0% 6.0%

for consumer goods including autos. In contrast, business

5.0% 5.0%
equipment production, including computer and electronic
products, remains solid. Exports, business inventory rebuilding 4.0% 4.0%
and the longer-run imperative of global competition have
3.0% 3.0%
provided forward momentum to industrial production. Our July
outlook is for 1-2 percent growth in GDP in the second half of 2.0% 2.0%
2012, with positive contributions from consumer spending,
1.0% 1.0%
business equipment investment and government purchases.
Inflation: CPI Moderation at a Low Level 0.0% 0.0%

On the inflation front, falling energy prices held down headline -1.0% -1.0%
consumer prices in June, with overall CPI now at 1.1 percent year
-2.0% -2.0%
over year, while core consumer prices are at just 0.9 percent.
CPI: Jun @ 1.1%
Fed: Nonetheless, the possibility that inflation expectations -3.0% -3.0%
92 94 96 98 00 02 04 06 08 10
might start to decline in response to persistently low levels of
actual inflation and the potential effects of continued weakness
of the economy on price trends were seen by a few participants Federal Budget Surplus or Deficit
12-Month Moving Sum in Billions of Dollars
as posing some downside risks to the inflation outlook. $400 $400

Clearly there is little pricing power for suppliers as it appears that $200 $200
keeping market share is the driving force. Our July outlook is for
$0 $0
overall CPI to stay in the 1 percent range for the rest of this year.
The Federal Budget Outlook and Our Foreign Friends -$200 -$200

The fiscal year-to-date deficit reached more than $1.0 trillion in -$400 -$400
June, and we estimate the deficit-to-GDP ratio will finish this
-$600 -$600
year above 9 percent. The slight reduction of the deficits in recent
months has been due to better economic growth so the recent -$800 -$800

slowdown in growth expectations is a negative signal for the -$1,000 -$1,000

deficit moving into the next fiscal year. Our outlook is for fiscal
deficits to come in at $1.3 trillion on average for fiscal 2010 and -$1,200 -$1,200

2011. Ominously, net foreign purchases of Treasury bonds and -$1,400 -$1,400
Surplus or Deficit: Jun @ -$1,333 Billion
notes fell in May. Foreign official purchases of short-term
-$1,600 -$1,600
securities also declined. 00 01 02 03 04 05 06 07 08 09 10

2
Economics Group U.S. Outlook Wells Fargo Securities, LLC
Housing Starts • Tuesday
Housing starts are expected to remain within the range that has
Housing Starts
been maintained since the beginning of 2009. The market still has Seasonally Adjusted Annual Rate, In Millions
an oversupply of homes, and builders do not yet have a reason to 2.4 2.4

add to it—demand is still soft, particularly in the wake of the first- 2.2 2.2

time homebuyers’ tax credit. The pullback seen in May could 2.0 2.0
continue in June as sales have been extremely weak without 1.8 1.8
government support, making builders exceptionally cautious. 1.6 1.6
The dismal labor market has also weighed on demand. Our 1.4 1.4
expectation that the housing industry will be in the doldrums for 1.2 1.2
some time was confirmed in May’s reading of building permits,
1.0 1.0
down 9.9 percent, and we anticipate weakness continued in June.
0.8 0.8
Residential construction will likely detract from third quarter GDP
0.6 0.6
growth.
0.4 0.4

0.2 0.2
Housing Starts: May @ 593K
Previous: 593K Wells Fargo: 580K
0.0 0.0
Consensus: 581K 01 02 03 04 05 06 07 08 09 10

Existing Home Sales • Thursday

Existing home sales turned in a 2.2 percent decline in May, and we
Existing Single-Family Home Resales
Seasonally Adjusted Annual Rate - In Millions expect another weak result in June. The expiration of the first-time
7.0 7.0 homebuyers’ tax credit means that demand will be determined in
the market without government influence for the first time in
months. However, the effect of the tax credit was to pull demand
6.0 6.0
forward for eligible buyers, so underlying demand is likely even
lower than it otherwise would have been without the tax credit. The
5.0 5.0
market will likely spend the summer finding its new sales pace, and
our expectations are quite low.
Low mortgage rates are a bright spot for the housing market, which
4.0 4.0
may entice certain buyers into the market; however, stricter lending
standards limit the pool of qualified buyers.
3.0 3.0

Existing Home Sales: May @ 5.0 Million

Previous: 5.66M Wells Fargo: 4.85M
2.0 2.0
86 88 90 92 94 96 98 00 02 04 06 08 10 Consensus: 5.20M
Leading Economic Index • Thursday
Despite a steady string of positive readings since March 2009, it
Leading Indicators
appears that the run has ended for the Leading Economic Index. Composite of 10 Indicators
We expect a slight drop to -0.1 percent, though the swing variable 15% 15%

could very well be the building permits number, which prints on

July 20 and is an important component of the index.
10% 10%
Slowing supplier deliveries, as seen in many recent surveys of the
factory sector, as well as weakness in stocks in the month of June
will detract from the index. The disappointing labor market, which 5% 5%

has become a motif of late, will also weigh on the headline. While
the leading index is paring its recent gains, we do not anticipate a
0% 0%
double-dip recession; instead, a slower pace of growth in the
second half is the most likely outcome.
-5% -5%

3-Month Annual Rate: May @ 8.0%

Leading Indicator Year/Year Change: May @ 10.4%
Previous: 0.4% Wells Fargo: -0.1%
-10% -10%
Consensus: -0.3% 88 90 92 94 96 98 00 02 04 06 08 10

3
Economics Group Global Review Wells Fargo Securities, LLC
Global Review
Chinese Economy Starts to Slow
Chinese Loan Growth
Year-over-Year Percent Change
Recent data show that real GDP growth in China slowed to 35% 35%
10.3 percent in the second quarter from 11.1 percent in the first
quarter of 2010 (see graph on front page). Some of the slowdown 30% 30%
in the year-over-year rate of economic growth reflects base
effects. The first quarter of 2009 marked the nadir of the global 25% 25%
downturn, making a strong year-over-year growth rate in the first
quarter of this year easy to achieve. That said, it appears that 20% 20%
economic growth slowed on a sequential basis as well in the
second quarter due, at least in part, to a deliberate attempt by 15% 15%
authorities to take some steam out of the economy.
In the midst of the global downturn, Chinese officials encouraged 10% 10%

banks to ramp up lending in order to support the domestic

economy. When it became apparent earlier this year that the 5% 5%
global economy was on the mend, China no longer needed Chinese Loan Growth: Jun @ 18.2%
economic stimulation. Indeed, sharp rises in house prices in some 0% 0%
cities indicated that tighter economic policies were appropriate. 99 01 03 05 07 09

Therefore, the government directed banks to rein in lending and a

sharp slowdown in loan growth ensued (top chart). The directives Chinese Fixed Investment Spending
Year-over-Year Percent Change
were largely targeted at excessive real estate investment, and the 60.0% 60.0%
recent slowdown in fixed-investment spending suggests that the
measures are having their desired effects (middle chart). In that
50.0% 50.0%
regard, growth in the value of construction spending edged down
in the second quarter and further deceleration seems likely.
40.0% 40.0%
Is the Chinese economy destined for a “hard landing”? Probably
not. Outside of the construction sector there are few apparent
signs of significant slowing, at least not yet. The year-over-year 30.0% 30.0%

growth rate in retail spending continues to clip along around

18 percent, and export growth picked up to 40 percent in the 20.0% 20.0%
second quarter from 30 percent in the first quarter. Although we
expect export growth to slow in coming quarters, another
10.0% 10.0%
downturn in exports seems unlikely unless the global economy
falls back into a recession, which we do not expect. Fixed Investment Spending: Jun @ 25.5%
0.0% 0.0%
Moreover, the recent behavior of prices, both in terms of assets
2000 2002 2004 2006 2008 2010
and goods and services, means that the government may be able
to somewhat ease up on the brakes. The stock market (as
Chinese CPI Inflation
measured by the Shanghai Composite index) is off about Year-over-Year Percent Change
25 percent since mid-April, and the widely followed 70-city index 10% 10%
Overall CPI: Jun @ 2.9%
of house prices edged down in June for the first time in more than Non-food CPI: Jun @ 1.5%
a year. In addition, the year-over-year rate of CPI inflation 8% 8%

declined to 2.9 percent in June from 3.2 percent in May (bottom

chart). Although deceleration in food prices contributed to the 6% 6%

decline in the overall rate of CPI inflation, non-food price

inflation also edged lower in June. In other words, there is less 4% 4%

evidence today to support the view that the Chinese economy is

overheating than there was a few months ago. 2% 2%

Although the government may ease up on the brakes somewhat in

0% 0%
terms of monetary policy, we expect its renewed willingness to
allow some flexibility in the exchange rate to continue. The
-2% -2%
currency strategy group projects that the dollar will weaken about
5 percent versus the renminbi over the next 12 months or so.
-4% -4%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

4
Economics Group Global Outlook Wells Fargo Securities, LLC
Bank of Canada Policy Meeting • Tuesday
At its policy meeting on June 1, the Bank of Canada (BoC) raised its
Bank of Canada Overnight Lending Rate
target for the overnight lending rate to 0.50 percent from 0.25
percent, the first rate hike in nearly three years. In its statement 6.00% 6.00%

announcing the rate hike, the BoC noted that “considerable

monetary stimulus” is still in place. Given the recent strength in the 5.00% 5.00%
labor market, we concur with the consensus forecast that the BoC
will hike rates by another 25 bps. 4.00% 4.00%
Data on retail sales in May and CPI inflation in June will also be
released next week, but the BoC probably won’t have the luxury of 3.00% 3.00%
seeing the data before its rate decision. Retail sales are expected to
have bounced back in May from their unexpected decline in April,
2.00% 2.00%
and CPI inflation should remain benign. That said, inflation could
rise over the medium term if abnormally low interest rates
excessively stimulate the economy. 1.00% 1.00%

BOC Overnight Rate: Jul @ 0.50%

Current Rate: 0.50 percent Wells Fargo: 0.75 percent
0.00% 0.00%
Consensus: 0.75 percent 2000 2002 2004 2006 2008 2010

German Ifo Index • Friday

It appears that industrial production (IP) in Germany strengthened
German Production Indicators
Index, Year-over-Year Percent Change considerably in the second quarter. Indeed, IP in the April/May
115 15.0% period shot up nearly 5 percent relative to the first quarter, and the
110 10.0%
high level of the Ifo index in June suggests that IP remained solid
during the final month of the second quarter. The Ifo index for July
105 5.0% will offer investors some insights into the state of the German
100 0.0%
economy thus far in the third quarter.
Elsewhere in the Euro-zone, data on French consumer confidence
95 -5.0%
and consumer spending are slated for release next week as well.
90 -10.0% Italy prints data on industrial orders and sales, consumer
confidence, and retail sales. The “flash” estimates of the Euro-zone
85 -15.0%
manufacturing and service sector PMIs are also on the docket next
80 -20.0% week.

75 Ifo Index: Jun @ 101.8 (Left Axis) -25.0%

IP Year-over-Year % Chg 3-M MA: May @ 11.8% (Right Axis)
Previous: 101.8
70 -30.0%
1996 1998 2000 2002 2004 2006 2008 2010 Consensus: 101.5
British GDP • Friday
Positive growth has returned to the U.K. economy, but the rate of
U.K. Real GDP
recovery has been slow, at least through the first quarter. However, Bars = Compound Annual Rate Line = Yr/Yr % Change
monthly indicators suggest that growth strengthened somewhat in 6.0% 6.0%

the second quarter. For example, industrial production in the 4.0% 4.0%
April/May period was up 1.1 percent relative to the first quarter.
Therefore, most analysts, including us, look for an increase in the 2.0% 2.0%

rate of GDP growth when the figures for the second quarter print 0.0% 0.0%
on Friday.
-2.0% -2.0%
Other data released earlier in the week will give investors further
insights into the state of the British economy at present. A widely- -4.0% -4.0%
followed business survey will shed some light on business
-6.0% -6.0%
sentiment, and retail sales data will show how consumer spending
fared in June. -8.0% -8.0%

-10.0% Compound Annual Growth: Q1 @ 1.3% -10.0%

Year-over-Year Percent Change: Q1 @ -0.2%
Previous: 0.3% (not annualized) Wells Fargo: 0.5%
-12.0% -12.0%
Consensus: 0.5% 2000 2002 2004 2006 2008 2010

5
Economics Group Point of View Wells Fargo Securities, LLC
Interest Rate Watch Consumer Credit Insights
FOMC Provides Guidance Central Bank Policy Rates An Increasingly Bifurcated Economy
7.5% 7.5%
Like a good corporate investor relations US Federal Reserve: Jul - 16 @ 0.25%
ECB: Jul - 16 @ 1.00%
This week, FICO reported that as of April,
head, the FOMC has given us guidance on 6.0%
Bank of Japan: Jul - 16 @ 0.10%
Bank of England: Jul - 16 @ 0.50%
6.0%
25.5 percent of consumers now have a
interest rates and, like a good equity credit score of 599 or below, a significant
analyst, we pay attention. 4.5% 4.5%
jump from the pre-recession average of
The FOMC modestly lowered its projection 15.0 percent. On the other hand, the share
for growth and inflation for the next two 3.0% 3.0%
with a score of 800 or higher has risen to
years. Growth in 2010 is now at 3.0-3.5 17.9 percent versus a pre-recession average
percent, which is slightly above our 1.5% 1.5%
of 13.0 percent. The ranks of those with
number. The FOMC cited tighter financial moderate credit scores between 650 and
conditions resulting from spillover effects 0.0% 0.0%
699 have dropped to 11.9 percent from a
from Europe, while we would add that
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
pre-recession average of 15.0 percent. The
housing is not bouncing back as some Yield Curve reasons for the increase in the lower credit
expected after the first-time homebuyers’ 4.50%
U.S. Treasuries, Active Issues
4.50% score range are numerous, including over-
tax credit was discontinued. 4.00% 4.00%
indebtedness, missed payments, job losses
Unemployment also has been higher than 3.50% 3.50%
and foreclosures. But what accounts for the
the FOMC expected. We expect increase in the top score range? Those
3.00% 3.00%

unemployment rates to stay in the 9.5 individuals who are lucky enough to have a
2.50% 2.50%

percent plus range this year. The FOMC job are likely putting more of their income
2.00% 2.00%

also lowered its inflation outlook for core toward paying down debt. Similarly, those
PCE prices for 2010 and 2011 as well.
1.50% 1.50%
who are lucky enough to still have equity in
1.00% 1.00%
their homes are refinancing at record-low
Downside risk to the outlook for inflation 0.50%
July 16, 2010
July 9, 2010 0.50% mortgage rates. Both of these actions can
was also discussed and the risk of deflation 0.00%
June 16, 2010
0.00% help to improve credit scores by either
was cited by a few (more than one) 3M 2Y 5Y 10
Y
30
Y
reducing debt or debt service burdens. This
participants. Forward Rates speaks to a bifurcated economy, one where
90-Day EuroDollar Futures
Given such guidance, our expectation is 2.00%
July 16, 2010
2.00% those who are doing well are getting really
that the FOMC is unlikely to move the July 9, 2010
June 16, 2010
good deals and shoring up their balance
1.75% 1.75%
funds rate this year or through the first sheets, while those who are already going
quarter of next year. Only some upside 1.50% 1.50% through difficult times are finding things
growth/inflation surprise is likely to get getting even worse. With credit conditions
any movement. 1.25% 1.25%
tight across the economy, even those with
Long Rates: Growth, Inflation, the good credit are still finding it challenging to
1.00% 1.00%

Euro and Federal Deficits get a loan, while those with bad credit are
0.75% 0.75% finding credit nearly impossible to obtain.
Meanwhile our expectations are for five- This imbalance between supply and
and 10-year Treasury rates to remain 0.50% 0.50%
demand does not bode well for lenders.
Dec 10 Mar 11 Jun 11 Sep 11 Dec 11
around the 2 and 3 percent levels for the
rest of this year. Two big positives for Mortgage Data
Treasury rates this year have been less than
consensus expectations for both growth
Week 4 Weeks Year
and inflation. Throw in a little flight-to-
Current Ago Ago Ago
safety from the Euro and you get lower
Treasury yields. Mortgage Rates
30-Yr Fixed 4.57% 4.57% 4.75% 5.14%
Risk remains in the large fiscal deficits and
15-Yr Fixed 4.06% 4.07% 4.20% 4.63%
the dependence of the United States on
5/1 ARM 3.85% 3.75% 3.89% 4.83%
foreign investors. As reported earlier this
1-Yr ARM 3.74% 3.75% 3.82% 4.76%
week, foreign demand for long-term U.S.
assets fell in May as net purchases of
MBA Applications
Treasury bonds and notes fell significantly. Composite 700.3 721.5 659.9 514.4
Growth and inflation dominate but the Purchase 163.3 168.6 180.0 258.8
delicate financing balance remains a Refinance 3,831.2 3,944.6 3,461.5 2,009.4
concern.
Source: Freddie Mac, Mortgage Bankers Association and Wells Fargo Securities, LLC

6
Economics Group Topic of the Week Wells Fargo Securities, LLC
Topic of the Week
States struggle to balance budgets
State & Local Government Tax Revenue
July 1 marked the beginning of fiscal-year 2011 for most Year-over-Year Percentage Change
20% 20%
states, and state officials are faced with tough decisions
concerning their budgets. Slow economic growth 16% 16%
coupled with the legal obligation to balance budgets
forces states to continue to raise taxes and/or cut 12% 12%
spending.
8% 8%
Record high unemployment levels have increased
demand for state spending as more people qualify for 4% 4%
assistance programs. States have projected total budget
0% 0%
deficits of $127 billion in 2011. While less than the
shortfalls of the past two years, this deficit will prove -4% -4%
more difficult to close. Under the stimulus program
-8% -8%
enacted in 2009, the federal government was able to
plug 30-40 percent of state budget shortfalls in 2009 -12% -12%
and 2010. However, the funding will run out in
December and Congress has yet to show any signs of -16% -16%
Total Tax Revenue: Q1 @ 2.5%
extending assistance.
-20% -20%
Two states facing significant financial woes, Arizona and 95 97 99 01 03 05 07 09
California, show that states are looking to make
considerable spending cuts. Arizona projects a California Unemployment Rate
structured shortfall of $1.69 billion. The budget solution Seasonally Adjusted
consists of a 26 percent reduction in spending, cutting 14% 14%
Unemployment Rate: May @ 12.4%
back on temporary cash assistance eligibility, as well as
12-Month Moving Average: May @ 12.2%
Medicaid services for more than 1 million Arizonans.
The state imposed a 1.1 percent rise in the sales tax rate, 12% 12%
creating the expectation of a 4.3 percent rise in base
revenues. However, the boycotts some cities are calling
against Arizona over its immigration laws may impact 10% 10%
tourism and lead to lower-than-expected fiscal revenues.
Last year, California was able to close its budget gap of
$60 billion, draining most of its rainy day fund, yet the 8% 8%
state faces a $19.1 billion gap again this year. To help
close the gap, California will reduce expenditures by
$12.4 billion. Still facing unprecedented unemployment 6% 6%
levels of 12.4 percent, California is looking at a rough
road ahead. The cuts in state spending will continue to
counterweight the federal stimulus and place a drag on
4% 4%
the slow growing economy.
90 92 94 96 98 00 02 04 06 08 10

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7
Economics Group Market Data Wells Fargo Securities, LLC
Market Data ♦ Mid-Day Friday
U.S. Interest Rates Foreign Interest Rates
Friday 1 Week 1 Year Friday 1 Week 1 Year
7/16/2010 Ago Ago 7/16/2010 Ago Ago
3-Month T-Bill 0.15 0.15 0.17 3-Month Euro LIBOR 0.79 0.76 0.96
3-Month LIBOR 0.52 0.53 0.51 3-Month Sterling LIBOR 0.73 0.73 0.97
1-Year Treasury 0.35 0.03 0.46 3-Month Canadian LIBOR 0.88 0.85 0.60
2-Year Treasury 0.58 0.63 0.98 3-Month Yen LIBOR 0.24 0.25 0.43
5-Year Treasury 1.69 1.84 2.45 2-Year German 0.78 0.77 1.22
10-Year Treasury 2.94 3.05 3.57 2-Year U.K. 0.76 0.74 1.13
30-Year Treasury 3.95 4.04 4.45 2-Year Canadian 1.61 1.72 1.21
Bond Buyer Index 4.37 4.36 4.68 2-Year Japanese 0.15 0.15 0.27
10-Year German 2.61 2.63 3.34
Foreign Exchange Rates 10-Year U.K. 3.35 3.33 3.77
Friday 1 Week 1 Year 10-Year Canadian 3.19 3.23 3.43
7/16/2010 Ago Ago 10-Year Japanese 1.10 1.16 1.34
Euro ($/€) 1.293 1.264 1.415
British Pound ($/₤) 1.533 1.506 1.644 Commodity Prices
British Pound (₤/€) 0.844 0.839 0.861 Friday 1 Week 1 Year
Japanese Yen (¥/$) 86.370 88.620 93.930 7/16/2010 Ago Ago
Canadian Dollar (C$/$) 1.055 1.034 1.117 WTI Crude ($/Barrel) 75.71 76.09 62.02
Sw iss Franc (CHF/$) 1.046 1.058 1.073 Gold ($/Ounce) 1192.80 1211.60 937.34
Australian Dollar (US$/A$) 0.872 0.878 0.806 Hot-Rolled Steel ($/S.Ton) 625.00 625.00 405.00
Mexican Peso (MXN/$) 12.876 12.769 13.551 Copper (¢/Pound) 293.50 304.45 238.00
Chinese Yuan (CNY/$) 6.775 6.773 6.831 Soybeans ($/Bushel) 10.27 10.01 10.56
Indian Rupee (INR/$) 46.773 46.664 48.703 Natural Gas ($/MMBTU) 4.57 4.40 3.67
Brazilian Real (BRL/$) 1.778 1.755 1.932 Nickel ($/Metric Ton) 19,336 19,343 15,861
U.S. Dollar Index 82.439 83.947 79.216 CRB Spot Inds. 471.29 472.21 406.40

Next Week’s Economic Calendar

Monday Tuesday Wednesday Thursday Friday
19 20 21 22 23
Hou si n g St a r t s Lea di n g In di ca t or s
Ma y 5 9 3 K Ma y 0 .4 %
Ju n e 5 8 0 K (W ) Ju n e -0 .1 % (W )
U.S. Data

Exist in g Hom e sa l es
Ma y 5 .6 6 M
Ju n e 4 .8 5 M (W )

Ca n a da U.K. U.K.
Global Data

Ba n k of Ca n a da Ra t e Ret a i l Ex A u t o Fu el GDP (QoQ)

Pr ev iou s 0 .5 0 % Pr ev iou s (Ma y ) 0 .5 % Pr ev iou s (1 Q) 0 .3 %
It a l y Fr a n ce Ger m a n y
In du s. Or der s (MoM) Bu si n ess Con fi den ce IFO-Bu sin ess Cl i m a t e
Pr ev iou s (A pr ) 4 .7 % Pr ev iou s (Ju n ) 9 5 Pr ev iou s (Ju n ) 1 0 1 .8

Not e: (W ) = W ells Fa r g o Est im a t e (c) = Con sen su s Est im a t e

8
Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg Global Head of Research (704) 715-8437 diane.schumaker@wellsfargo.com

& Economics (212) 214-5070

John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wellsfargo.com

Mark Vitner Senior Economist (704) 383-5635 mark.vitner@wellsfargo.com
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