PP 7767/09/2010(025354)

Economic Highlights
Global
•MARKET DATELINE

11 August 2010

1 The US Fed Made A Slight Policy Shift On Its Asset

Holdings As The Economy Slows

2 China’s Exports Moderated In July

3 Japan Kept Its Key Policy Rate On Hold

4 Singapore Economy Expanded At A More Moderate Pace

Than Estimated Earlier In The 2Q

Tracking The World Economy...

Today’s Highlight

The US Fed Made A Slight Policy Shift On Its Asset Holdings As The Economy Slows

The US Federal Reserve kept its key policy rate unchanged at 0-0.25% but said that it would roll over Treasury securities
and reinvest proceeds from mortgage-related securities it bought during the quantitative easing as they mature in order
to maintain the same amount of assets on its balance sheet. With the move, the Fed aims at keeping its holdings at
about US$2.054 trn, the amount it held on 4 August. The Fed holds US$1.4 trn in mortgage-related securities on its
balance sheet. Under its previous policy, when those securities are paid off, such as when people refinance their homes,
the Fed intended not to undertake any new purchases to replace them. As a result, the size of the Fed’s balance sheet
was expected to shrink by $150-190bn over the coming year, due to the maturing of those securities.

The move is aimed at stopping money from draining out of the financial system when the securities matured in an attempt
to bolster the economy as the recovery is losing momentum. With economic growth slowing down in the 2Q and job
creation in July falling short of estimates, the Fed’s move signals that risks of a downturn have increased enough for
it to delay its exit from the unprecedented stimulus. Indeed, the Fed acknowledged that the pace of recovery in output
and employment has slowed in recent months and the pace of the economic expansion is likely to be more modest in
the near term than had been anticipated. Earlier, the Fed had stopped buying assets by the end of March, raised the
rate on direct loans to banks and shut emergency-lending programmes for corporations, bond dealers and money-market
mutual funds. It also developed and tested out tools to absorb excess liquidity from the system.

While the direct effect of the Fed’s move is not significant, the more significant meaning of the decision is in what it signals
about the Fed’s view of the economy and its willingness and ability to go further if economic conditions worsen. As a
result, investors do not expect the Fed to raise the Federal funds rate until late 2011, based on futures contracts on the
Chicago Board of Trade.

Meanwhile, the Fed said that measures of underlying inflation have trended lower in recent quarters and with substantial
resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be
subdued for some time. Indeed, the core personal consumption expenditure price index, the Fed’s preferred index,
moderated to 1.4% yoy in June. This was the third straight month of slowing down and the slowest pace in eight months.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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Asian Economies

China’s Exports Moderated In July

◆ China’s exports grew at a more moderate pace of 38.1% yoy in July, compared with +43.9% in June and
a high of +48.5% in May. This was the slowest pace of increase in three months, suggesting that China’s exports
are slowing down in line with a slowdown in global demand. The moderation was reflected in slower increases in
exports to European Union and the US, the two largest export markets for China, which eased to 38.3% and 35.0%
yoy respectively in July, from the corresponding rates of +43.2% and +43.8% in June. Similarly, exports to Hong
Kong, Japan, Taiwan, India, Asean, South Africa and Brazil slackened during the month. These were, however,
mitigated by a pick-up in exports to South Korea and Russia. In the same vein, China’s imports slowed down
to 22.7% yoy in July, from +34.1% in June and a high of +66.0% in March. This was the fourth straight month
of easing and the slowest pace of growth in nine months, indicating domestic demand is softening. As a result,
China recorded a larger trade surplus of US$28.7bn in July, compared with a surplus of US$20.0bn in June and
US$1.7bn in April. As a whole, a moderation in export suggests that the Chinese economy will likely grow at a
more moderate pace in the 2H of the year.

Japan Kept Its Key Policy Rate On Hold

◆ The Bank of Japan kept the key policy rate unchanged at 0.1% and maintained its credit programmes for
lenders as it gauges the risk posed by the appreciation of the yen on the country’s export-led recovery. Companies
executives and politicians in the past week have voiced concern about the yen, which is approaching a 15-year
high, saying that it threatens an already weakening economic recovery. The yen’s gains have also come at a time
when data indicate the country’s recovery is waning. As it stands, industrial production fell the most in 16 months
in June, and the unemployment rate climbed to a seven-month high. Meanwhile, the Japanese government kept
its assessment of the economy unchanged in August and cut its evaluation of factory output after production fell
the most in more than a year.

Singapore Economy Expanded At A More Moderate Pace Than Estimated Earlier In The 2Q

◆ Singapore’s economy expanded by an annualised rate of 24%, less than +26% initially estimated and
compared with +45.7% in the 1Q. This was because the manufacturing production cooled in June. Similarly,
Singapore’s real GDP grew at 18.8% yoy in the 2Q, slower than the earlier estimate of +19.3% but still stronger
than +16.9% recorded in the 1Q. Stronger growth in the 2Q was due to a pick-up in consumer spending, which
grew by 6.7% yoy in the 2Q, compared with +5.9% in the 1Q. A pick-up in exports also helped. These were,
however, offset partially by a decline in investment (-1.2% yoy in the 2Q versus +10.6% in the 1Q) and a slowdown
in government expenditure (+5.0% yoy in the 2Q versus +15.3% in the 1Q). Gong forward, Singapore’s economic
growth is forecast to slow in the 2H of the year, after a record pace in the 1H. For the full-year, real GDP is forecast
to expand by 13-15% in 2010, a rebound from -1.3% in 2009. Meanwhile, the Monetary Authority of Singapore
said that its currency policy stance remains appropriate and the exchange rate is too blunt a tool to be used to
manage rising property prices.

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