Daily Breakfast Spread, 11 Aug 2010

Daily Breakfast Spread
DBS Group Research 11 Aug 2010

Economics
Greater China, Korea
• KR: The Bank of Korea will meet tomorrow morning to review monetary policy. It is widely known that the BOK will continue normalizing policy after raising the benchmark repo rate by 25bps in July (the first hike since the global crisis), but the pace of interest rate normalization remains a question. In our view, the BOK is likely to keep rates unchanged at 2.25% on tomorrow’s meeting before moving again in September. The BOK meeting is scheduled on a frequent (monthly) basis. Back-toback rate hikes will quickly push up the repo rate to 4% in the beginning of next year and 5% (the precrisis neutral level) in mid-2011. With uncertainties still lingering in the global economy (such as US growth sustainability and China slowdown), the BOK would be inclined to normalize policy in a gradual manner to avoid the risks of derailing economic recovery. On the data front, the Korean economy continued to grow but the growth rate moderated slightly in 3Q. Exports decelerated to 29.6% YoY in July from 30.1% in June (a modest 0.3% MoM sa). Business sentiment in the manufacturing industry improved marginally to 109 (sa) in August from 108 in July. Consumer confidence stayed unchanged at 112 in July, the same level as in the previous month. Meanwhile, inflation remained stable, both for the headline CPI (2.6% YoY in July) and core CPI (1.7%). Residential property prices have retreated, falling on MoM basis for the first time over 16 months (-0.2% in July). By any measure, policymakers are not under great pressure to hike rates at the current juncture. Our year-end target for the repo rate is maintained at 3.0%, and the 12-month target is 4.0%.

G3
• US: The Fed shifted policy back to a strictly neutral stance yesterday, announcing that it would reinvest proceeds from maturing MBS (housing) securities into longerterm government bonds. The shift was a symbolic one: maturing proceeds of some $130bn over the coming year would, if not reinvested, have shrunk the Fed’s balance sheet by about 5%. That’s too small an amount to have a “fundamental” impact on rates or economic activity. Short-term rates, currently at or near zero, would have been unaffected by the move, absent a separate and explicit policy move to change them. Longer-term rates such as 10Y Treasury yields (chart below), have run the gamut between 4.00% and 2.15% anyway, with little or no change in Fed balance sheet size.

US Fed expectations
Implied fed funds rate Sep-10 Dec-10 Mar-11 Market Current 0.17 0.17 0.19 0.18 0.22 1wk ago 0.18 DBS 0.25 0.25 0.50
Source: Bloomberg fed fund futures Notes: Given a FF target rate of 0.25%, an implied FF rate of 0.30 is interpreted roughly as the market pricing in a 20% chance of a Fed hike to 0.50% from 0.25% (30 is 1/5th of the distance to 50 from 25). DBS expectations are presented in discrete blocks of 25bps, i.e., the Fed moves or it does not. See also “Policy rate forecasts” below.

US Fed balance sheet and 10Y UST yields
USD bn, nsa 2,500 2,000 1,500 1,000 500 0 26 May 10 25 Feb 09 20 May 09 11 Nov 09 31 Dec 08 25 Mar 09 31 Mar 10 9 Sep 09 28 Jan 09 3 Feb 10 28 Apr 10 14 Oct 09 25 Jun 08 3 Mar 10 23 Jun 10 15 Jul 09 9 Dec 09 8 Aug 07 21 Jul 10 6 Jan 10 10Y UST yields Fed balance sheet size % 5.00 4.50 4.00 3.50 3.00 2.50 2.00

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Daily Breakfast Spread, 11 Aug 2010

With the reinvestment policy, the Fed took the middle ground between doing nothing (leaving a very slight / natural tightening in place) and outright easing via increased purchases of longer-term bonds (so-called quantitative easing). The Fed noted that output (supply) and employment gains had slowed in recent months – this and the move back to strict neutrality reassures investors worried about the threat of a double-dip that the Fed does not have its head in the sand. Meanwhile, the FOMC noted that it continues to anticipate a gradual recovery and does not see the need for outright easing at this point in time. Where to from here? As it should, that all depends on the data. We are in the camp that believes the recovery is indeed proceeding and expect GDP growth to run between 2.5% - 2.75% over the next few quarters (and indeed the next few years). That’s below average, but not by a lot. Meanwhile, although the unemployment rate is still a sky-high 9.5%, the improvement in private sector nonfarm payrolls is averaging about 50k per month. That’s as fast as any post-war recovery pace, and three times faster than in the last two recessions. In short, we continue to think that the next move for Fed policy rates is up, not down. And we continue to envision a first Fed move in that direction in June/July of 2011, a month or two earlier than what markets currently have priced in.

Currencies
• FX: The Fed made good its pledge to sustain the US recovery. Owing to the moderation in the pace of the recovery, the FOMC meeting yesterday made the decision to maintain the holdings of securities at the Fed. This is achieved by reinvesting the principal payments from agency debt and agency mortgagebacked securities in longer term Treasuries, as well as rolling over the holdings of Treasuries as they mature. To markets, this was touted as Quantitative Easing II and thus, considered as negative for the US dollar. The market still needs to sort itself out before it can resume selling dollars again. First, QE II is considered a measure against deflationary fears but gold was bought up in anticipation of future inflation. Second, there were mixed reactions to the surge in China’s trade surplus. While markets worry that China’s import slowdown may be pointing to a slowdown in growth ahead, it was difficult to ignore the negative reaction of US lawmakers seeking to tie China’s trade surplus to the lack of CNY appreciation. A widening in US’s trade deficit data tonight will surely revive the politicization of the CNY issue ahead of the US mid-term elections scheduled for November 2. Then again, markets are only comfortable selling US dollars if they are assured that equities can continue to head north as bond yields head south. Until there is more clarity, currencies will probably take their cue from equities in the near-term. Judging from this morning’s reaction, investors seem to be leaning more towards caution than assuming more risk.

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Daily Breakfast Spread, 11 Aug 2010

Economic calendar
Event Aug 9 (Mon) TW: trade balance (Jul) -- exports -- imports Aug 10 (Tues) SG: GDP (2Q, F) -PH: exports (Jun) CN: trade balance (Jul) -- exports -- imports MY: industrial production (Jun) Aug 11 (Wed) SK: unemployment rate (Jul) JP: machine orders (Jun) CN: CPI (Jul) CN: retail sales (Jul) CN: industrial production (Jul) US: trade balance (Jun) Aug 12 (Thur) JP: industrial production (Jun, F) IN: industrial production (Jun) EZ: industrial production (Jun) US: initial jobless claims (Aug) Aug 13 (Fri) SG: retail sales (Jun) HK: GDP (2Q) -EZ: GDP (2Q, A) -US: CPI (Jul) US advance retail sales (Jul) Consensus USD 1.35bn 31.0% y/y 39.7% y/y Actual USD 2.16bn 38.5% y/y 42.7% y/y Previous USD 1.41bn 34.1% y/y 40.4% y/y

25.2% q/q saar 24.0% q/q saar 45.9% q/q saar 18.8% y/y 16.9% y/y 19.3% y/y 25.0% y/y 33.4% y/y 37.3% y/y USD 19.6bn USD 28.73bn USD 20.02bn 35.0% y/y 38.1% y/y 43.9% y/y 30.0% y/y 22.7% y/y 34.1% y/y 11.8% y/y 9.4% y/y 12.3% y/y

3.7% sa 5.4% m/m sa 3.3% y/y 18.5% y/y 13.4% y/y -USD 42.1bn

3.5% sa -9.1% m/m sa 2.9% y/y 18.3% y/y 13.7% y/y -USD 42.3bn

8.3% y/y 0.6% m/m sa

-1.5% m/m sa 11.5% y/y 1.0% m/m sa 479K

-3.4% y/y 6.3% y/y 2.0% q/q sa 0.7% q/q sa 1.4% y/y 0.2% m/m sa 0.5% m/m sa

-3.4% y/y 8.2% y/y 2.4% q/q sa 0.2% q/q sa 0.6% y/y -0.1% m/m sa -0.5% m/m sa

Central bank policy calendar
Policy Date Country Rate Current This week JP 08-Aug BoJ target rate 0.10% US 11-Aug FOMC 0.25% KR 7-day repo rate 2.25% 12-Aug EZ 12-Aug ECB bulletin (Aug) Next week No policy meeting this week Last week 04-Aug 05-Aug Consensus 0.10% 0.25% 2.50% DBS 0.10% 0.25% 2.25% Actual 0.10% 0.25%

ID
EZ

o/n reference rate refi rate

6.50% 1.00%

6.50% 1.00%

6.50% 1.00%

6.50% 1.00%

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Daily Breakfast Spread, 11 Aug 2010

GDP & inflation forecasts
GDP growth, % YoY 2007
US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam China Hong Kong Taiwan Korea India* 2.1 2.4 2.7 6.3 6.2 7.1 8.2 4.9 8.4 13.0 6.4 6.0 5.1 9.2

CPI inflation, % YoY 2011f
2.9 1.8 1.0 5.8 5.5 4.9 4.5 4.0 6.9 10.0 4.5 3.8 3.9 8.5

2008
0.4 -1.2 0.5 6.0 4.6 3.8 1.4 2.5 6.2 9.6 2.1 0.7 2.3 6.7

2009
-2.4 -5.1 -4.0 4.5 -1.7 0.9 -1.3 -2.2 5.3 8.7 -2.7 -1.9 0.2 7.4

2010f
3.2 2.8 0.6 6.0 8.0 6.2 15.0 8.0 6.5 11.0 5.5 7.5 6.2 8.8

2007
2.9 0.1 2.1 6.4 2.0 2.8 2.1 2.2 8.3 4.8 2.0 1.8 2.5 4.7

2008
3.8 1.4 3.3 9.8 5.4 9.3 6.5 5.5 23.1 5.9 4.3 3.5 4.7 8.4

2009
-0.3 -1.4 0.3 4.9 0.6 3.3 0.6 -0.8 7.0 -0.7 0.5 -0.9 2.8 3.7

2010f
2.0 -0.4 0.8 5.1 1.8 4.0 3.0 3.0 9.0 4.0 3.0 0.9 2.9 8.0

2011f
2.1 0.5 1.0 6.5 2.4 4.4 2.7 2.5 8.0 3.0 3.0 1.4 3.1 5.3

* India data & forecasts refer to fiscal years beginning April; inflation is WPI Source: CEIC and DBS Research

Policy & exchange rate forecasts
Policy interest rates, eop
current US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam^ China* Hong Kong Taiwan Korea India 0.25 0.10 1.00 6.50 2.75 4.00 n.a. 1.50 8.00 5.31 n.a. 1.38 2.25 5.75 3Q10 0.25 0.10 1.00 6.50 2.75 4.25 n.a. 1.75 8.00 5.58 n.a. 1.50 2.50 5.75 4Q10 0.25 0.10 1.00 7.00 3.00 4.50 n.a. 2.25 8.00 5.85 n.a. 1.75 3.00 6.25 1Q11 0.25 0.10 1.00 7.50 3.25 4.75 n.a. 2.75 8.00 6.12 n.a. 2.00 3.50 6.50 2Q11 0.50 0.20 1.25 8.00 3.25 5.00 n.a. 3.00 8.00 6.39 n.a. 2.25 3.75 6.50 current … 85.3 1.316 8,953 3.15 44.9 1.35 32.0 19,090 6.77 7.76 31.8 1169 46.4

Exchange rates, eop
3Q10 … 94 1.26 9,200 3.22 45.7 1.38 32.4 19,310 6.74 7.75 31.9 1160 45.8 4Q10 … 95 1.28 9,100 3.20 45.5 1.37 32.2 19,420 6.69 7.75 31.7 1150 45.6 1Q11 … 96 1.30 9,000 3.18 45.3 1.36 31.9 19,450 6.64 7.75 31.5 1140 45.4 2Q11 … 94 1.32 8,900 3.16 45.1 1.35 31.7 19,450 6.60 7.75 31.3 1130 45.2

^ prime rate; * 1-yr lending rate

Market prices
Policy rate Current (%) US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand China Hong Kong Taiwan Korea 0.25 0.10 1.00 6.50 2.75 4.00 Ccy policy 1.50 5.31 Ccy policy 1.38 2.25 5.75 10Y bond yield Current 1wk chg (%) (bps) 2.75 1.04 2.54 7.90 3.86 7.43 1.99 3.42 … 2.19 1.32 4.84 7.83 -20 0 -7 -15 -5 -16 -5 0 … -4 -5 -1 -6 FX Current 80.9 85.3 1.316 8953 3.15 44.9 1.353 32.0 6.77 7.76 31.8 1169 46.4 1wk chg (%) 0.4 1.1 0.0 -0.1 0.3 0.5 -0.1 0.5 0.0 0.0 0.0 0.2 -0.5 Index S&P 500 Topix Eurostoxx JCI KLCI PCI FSSTI SET S'hai Comp HSI TWSE Kospi Sensex Equities Current 1,121 855 2,533 3,083 1,360 3,526 2,984 862 2,595 21,474 7,977 1,781 18,220 1wk chg (%) 0.1 -0.5 -0.4 0.8 -0.3 1.2 -1.3 -0.3 -1.2 0.1 0.2 -0.5 0.6

India Source: Bloomberg

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Daily Breakfast Spread, 11 Aug 2010

Contributors:
Economics
David Carbon Ramya Ma Tieying Irvin Seah Chris Leung Singapore Singapore Singapore Singapore Hong Kong Singapore Singapore (65) (65) (65) (65) (852) 6878 6878 6878 6878 3668 9548 5282 2408 6727 5694

Currencies
Philip Wee Jens Lauschke (65) 6878 4033 (65) 6224 2574

Fixed income strategy

Administrative / technical support
Violet Lee Singapore (65) 6878 5281

Please direct distribution queries to Violet Lee on 65-6878-5281

Client Contacts
Singapore
DBS Bank DBS Asset Management DBS Vickers Securities The Islamic Bank of Asia (65) (65) (65) (65) 6878 6878 6533 6878 8888 7801 9688 5522

Japan
DBS Tokyo (81 3) 3213 4411 (82 2) 339 2660 (6 03) 2148 8338 (6 08) 7595 500 (6 04) 263 6996 (63 2) 845 5112 (886 4) 2296 (886 7) 323 (886 4) 2230 (886 6) 213 (886 2) 8101 (886 3) 339 0088 2362 9188 3939 0598 6060

Korea
DBS Seoul

China
DBS Beijing DBS Dongguan DBS Fuzhou DBS Guangzhou DBS Hangzhou DBS Shanghai DBS Shenzhen DBS Suzhou DBS Tianjin (86 010) 5839 7527 (86 769) 2211 7868 (86 591) 8754 4080 (86 20) 3884 8010 (86 571) 8788 1288 (86 21) 3896 8888 (86 755) 8269 1043 (86 512) 6288 8090 (86 22) 2339 3073 (852) 3668 (853) 2832 (852) 3668 (86-21) 6888 0808 9338 1148 6820

Malaysia
DBS Kuala Lumpur DBS Labuan Hwang-DBS Penang

Philippines
DBS Manila

Taiwan
DBS Chungching DBS Kaohsiung DBS Taichung DBS Tainan DBS Taipei DBS Taoyuan

Hong Kong
DBS Hong Kong DBS Macau DBS Asia Capital DBS Asia Capital Shanghai

Thailand
DBS Bangkok (66 2) 636 6364 (44 20) 7489 6550 (97 1) 4364 1800 (1 213) 627 0222

India
DBS Delhi DBS Mumbai (91 11) 3041 8888 (91 22) 6638 8888 (62 021) 390 3366 (62 061) 3000 8999 (62 021) 531 9661

United Kingdom
DBS London

Indonesia
DBS Jakarta DBS Medan DBS Surabaya

UAE
DBS Dubai

USA
DBS Los Angeles

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Daily Breakfast Spread, 11 Aug 2010

Recent research
HK: How far can Hong Kong go as China's major Renminbi offshore center? US Fed: Between a stock and bond place China and US: Demand trumps supply CN: Implications of rising wages (Part II) ID: Upgrade expectations Asia: Votes of confidence FX: The ascension of the CNY CN: Rising wage concern SG: A year of two halves Taiwan-China: A quick look at the ECFA TW & KR: Rates up IN: Interest Rate Outlook & Strategy MY: Addressing the supply side challenges TH: Upgraded, against all odds Asia: Negara vanguarda TH: Instability and growth ID & KR: External positions Asia: Who’s vulnerable to EU trouble? SG: Can Sing rates go to zero? EZ: It was never meant to be easy MY: Surprise awaits 10 Aug 10 IN: Risk of more / earlier hikes KR: Interest Rate Outlook & Strategy 10 Aug 10 SG: More strength to SGD 6 Aug 10 SG: Call a rose a rose 4 Aug 10 CN: Two growth myths with one stone 29 Jul 10 9 Jul 10 9 Jul 10 7 Jul 10 30 Jun 10 29 Jun 10 IN: RBI bites the bullet 28 Jun 10 TW: A closer look at housing 17 Jun 10 Asia: Are central banks behind the curve? 17 Jun 10 MY: Interest Rate Outlook & Strategy 25 May 10 20 May 10 19 May 10 14 May 10 13 May 10 7 May 10 30 Apr 10 30 Apr 10 SG: The economics of the Foreign Worker Levy hike KR: Current account outlook India budget: A mixed bag ID: Notes from Jakarta IN budget: Room for spending US Fed: Wake up call SG: A strategic budget TW: Managing capital inflows ID: Interest Rate Outlook & Strategy 17 Mar 10 22 Mar 10 18 Mar 10 18 Mar 10 22 Mar 10 TH: Higher rates despite politics SG: A strong start to 2010 Asia: Interest Rate Outlook & Strategy US: A top-down look at profits and payrolls CN: Currency appreciation not a case of now or never 14 Apr 10 9 Apr 10 8 Apr 10 8 Apr 10 25 Mar 10 23 Mar 10 14 Apr 10 15 Apr 10 19 Apr 10 16 Apr 10

1 Mar 10 1 Mar 10 25 Feb 10 24 Feb 10 19 Feb 10 17 Feb 10 18 Jan 10 12 Jan 10

IN policy: Inter-meeting hikes the new norm? 21 Apr 10 ID: Interest Rate Outlook & Strategy 20 Apr 10

Disclaimer:
The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

Licence No.: MICA (P) 073/11/2009

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