PP 7767/09/2010(025354) MARKET DATELINE

Global

Economic Highlights
4 August 2010

1 US Consumer Spending Losing Momentum, But The Fed Is In No Hurry To Act 2 US Factory New Orders Fell In June 3 Indonesia’s Inflation Picked Up And Exports Moderated 4 Thailand’s Inflation Inched Up Slightly In July

Tracking The World Economy...
Today’s Highlight

US Consumer Spending Losing Momentum, But The Fed Is In No Hurry To Act US personal consumption expenditure (PCE) stagnated in June, after rising by +0.1% mom in May and compared with -0.1% in April. This suggests that consumers have turned cautious in spending, as job market remains weak and austerity drive in Europe coupled with policy normalisation and tightening in emerging economies will likely slow down the global economy. In real terms, PCE grew at a slower pace of 0.1% mom in June, compared with +0.2% in May. On an annualised basis, the PCE slowed down to 1.6% in June, from +2.3% in May and the peak of +2.5% in April, suggesting that consumer spending is losing momentum. The US uses this figure to compute its consumer spending in real GDP. As a result, the US economy slowed down to an annualised rate of 2.4% in the 2Q, from +3.7% in the 1Q. Despite the softening, we believe PCE will unlikely fall off the cliff and will continue providing a support to the US economy, given that employment in the private sector is improving, albeit gradually. Similarly, income remained unchanged in June, after easing to +0.3% mom in May and from +0.4% in March-April. This suggests that income has turned weaker, on the back of a decline in wages. With the economic outlook becoming more uncertain, Americans have been saving more recently. Consequently, the personal savings rate rose to 6.4% of disposable income in June, from 6.3% in May and a low of 5.4% in March. Separately, the headline PCE price index fell by 0.1% mom in June, the same rate of decline as in May and after remaining unchanged in April. Yoy, the headline PCE price index moderated to 1.4% in June, from +2.1% in May and a high of +2.5% in March. Similarly, the core PCE price index remained unchanged in June, after rising by 0.1% mom in the last two months. Yoy, the core PCE price index moderated to 1.4% in June, from +1.5% in May and a high of +1.8% in March. As a whole, the readings suggest that price pressures remained tame and it would provide more room for the US Fed to hold its key policy rate unchanged at between 0-0.25% in the near term. Indeed, the US Federal Reserve policymakers signaled that they will probably not providing additional stimulus at their 10 August meeting and wait to see if signs of weaker economic growth persist. The Fed believes that consumer spending will likely sustain its recovery even though it is likely to pick up moderately. Nevertheless, policymakers indicated that they may ease more should the economy falter after reports of a flagging housing industry and persistently high jobless rate. Options include strengthening the pledge to keep interest rates around zero or cutting the rate the Fed pays on excess bank reserves. In fact, the Fed could also use cash it receives when its mortgage-bonds holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead. The Fed’s holdings currently stood at US$2.3 trn and a projected US$200bn of bonds will mature in 2011.

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

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

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4 August 2010

Fears of further monetary easing in the US combined with indications that Japan might not want to intervene pushed the US dollar down Tuesday. The US dollar sank below 86 yen for the first time since November last year and it weakened to US$1.3224 in early afternoon, compared with US$1.3171 late Monday in New York.

The US Economy Factory New Orders Fell In June ◆ Factory new orders fell by a smaller magnitude of 1.2% mom in June, compared with -1.8% in May and +1.0% in April. This was the second straight month of decline so far this year, indicating that manufacturing activities have turned softer. The smaller decline was due to a pick-up in new orders for fabricated metals and electrical equipment as well as a smaller drop in non-defence aircraft (which is often volatile). These were, however, offset partially by declines in new orders for machinery, computers & electronic products and furniture as well as a slowdown in new orders for vehicle parts. Excluding transportation, factory new orders fell by a smaller magnitude of 1.1% mom in June, compared with -1.2% in May and -0.7% in April. Non-defence capital goods new orders excluding aircraft slowed down to 0.2% mom in June, from +4.7% in May. This suggests that businesses are still keen to increase spending, albeit cautiously, in the months ahead. Yoy, factory new orders slowed down to 11.2% in June, from +14.3% in May and a high of +19.3% in April, indicating that factory new orders are losing momentum. Similarly, non-defence capital goods new orders excluding aircraft moderated to 15.1% yoy in June, from +21.7% in May and +22.4% in April.

Asian Economies Indonesia’s Inflation Picked Up And Exports Moderated ◆ Indonesia’s inflation rate strengthened to 6.2% yoy in July, from +5.1% in June and a low of +3.4% in March. This was the highest in 15 months and was slightly above Bank Indonesia’s target of 4-6%, indicating that the central bank may be under pressure to raise its key policy rate, after keeping it at 6.5% since August 2009. However, there is likelihood that Bank Indonesia may tolerate slightly higher inflation and keep its benchmark interest rate unchanged for another few months. The pick-up in inflation rate was driven by higher prices of food, processed food and clothing as well as the costs of transport, housing and healthcare. These were, however, mitigated by a slower increase in the costs of education. Indonesia’s exports slowed down to 31.0% yoy in June, from +37.4% in May and a high of +59.3% recorded in January. This was the fifth consecutive month of slowing down, due to a slowdown in the exports of oil & gas, which weakened to 30.9% yoy in June, from +108.4% in May and a high of +147.6% in January. This was mainly on account of a slowdown in the exports of crude oil, oil products and gas. A pick-up in the exports of non-oil & gas products, which grew at a faster pace of 31.1% yoy in June, compared with +27.4% in May, however, mitigated the slowdown. Imports, on the other hand, picked up to 47.6% yoy in June, from +30.6% in May, pointing to a resilient domestic demand. A slowdown in exports suggests that Indonesia’s economy will likely sustain its growth in the 2Q, albeit at a more moderate pace compared with +5.7% yoy in the 1Q.

Thailand’s Inflation Inched Up Slightly In July ◆ Thailand’s inflation rate inched up slightly to 3.4% yoy in July, from +3.3% in June but off a high of +4.1% recorded in January. This suggests that inflation remained manageable and is unlikely pose a major threat to the economy. The pick-up in inflation rate was due to a faster increase in food prices, which accelerated to 6.9% yoy in July, from +6.1% in June and a low of +3.7% in April. This was, however, mitigated by a slowdown in prices of non-food items, which eased to 1.4% yoy in July, from +1.5% in June and a high of +4.7% in January. This was mainly on account of slower increases in the prices of clothing and tobacco & alcoholic beverages as well as the costs of transportation and recreation & education. These were, however, offset partially by a slight pick-up in the cost of medical care. Although inflation will likely be manageable, the Bank of Thailand has started to normalise its monetary conditions by raising its key policy rate by 25 basis points to 1.5% on 14 July, after keeping it unchanged in the past nine meetings and since it held its key policy rate stable for more than a year at 1.25% in April 2009. This suggests that the central bank will likely raise its key policy rate further, as interest rates in Thailand have been at too low a level for comfort even though economic growth will likely soften in the months ahead.

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4 August 2010

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