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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-to-
back 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 longer-
term government bonds. The shift was a symbolic one: maturing proceeds of some
US Fed expectations $130bn over the coming year would, if not reinvested, have shrunk the Fed’s
Implied fed funds rate 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,
Sep-10 Dec-10 Mar-11 would have been unaffected by the move, absent a separate and explicit policy
Market move to change them. Longer-term rates such as 10Y Treasury yields (chart below),
Current 0.17 0.17 0.19 have run the gamut between 4.00% and 2.15% anyway, with little or no change in
1wk ago 0.18 0.18 0.22
DBS 0.25 0.25 0.50
Fed balance sheet size.

Source: Bloomberg fed fund


futures US Fed balance sheet and 10Y UST yields
Notes: Given a FF target rate of USD bn, nsa %
0.25%, an implied FF rate of
0.30 is interpreted roughly as 2,500 Fed balance sheet size 5.00
the market pricing in a 20%
chance of a Fed hike to 0.50% 2,000 4.50
from 0.25% (30 is 1/5th of the
distance to 50 from 25). DBS 4.00
expectations are presented in 1,500
discrete blocks of 25bps, i.e., the 3.50
Fed moves or it does not. See
also “Policy rate forecasts”
1,000 10Y UST yields 3.00
below.
500 2.50

0 2.00
25 Feb 09

26 May 10
20 May 09

11 Nov 09
31 Dec 08
28 Jan 09

25 Mar 09

9 Sep 09

3 Feb 10

31 Mar 10
25 Jun 08

14 Oct 09

28 Apr 10
15 Jul 09

9 Dec 09

3 Mar 10

23 Jun 10
6 Jan 10

21 Jul 10
8 Aug 07

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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 mortgage-
backed 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 Consensus Actual Previous
Aug 9 (Mon)
TW: trade balance (Jul) USD 1.35bn USD 2.16bn USD 1.41bn
-- exports 31.0% y/y 38.5% y/y 34.1% y/y
-- imports 39.7% y/y 42.7% y/y 40.4% y/y

Aug 10 (Tues)
SG: GDP (2Q, F) 25.2% q/q saar 24.0% q/q saar 45.9% q/q saar
-- 19.3% y/y 18.8% y/y 16.9% y/y
PH: exports (Jun) 25.0% y/y 33.4% y/y 37.3% y/y
CN: trade balance (Jul) USD 19.6bn USD 28.73bn USD 20.02bn
-- exports 35.0% y/y 38.1% y/y 43.9% y/y
-- imports 30.0% y/y 22.7% y/y 34.1% y/y
MY: industrial production (Jun) 11.8% y/y 9.4% y/y 12.3% y/y

Aug 11 (Wed)
SK: unemployment rate (Jul) 3.7% sa 3.5% sa
JP: machine orders (Jun) 5.4% m/m sa -9.1% m/m sa
CN: CPI (Jul) 3.3% y/y 2.9% y/y
CN: retail sales (Jul) 18.5% y/y 18.3% y/y
CN: industrial production (Jul) 13.4% y/y 13.7% y/y
US: trade balance (Jun) -USD 42.1bn -USD 42.3bn

Aug 12 (Thur)
JP: industrial production (Jun, F) -1.5% m/m sa
IN: industrial production (Jun) 8.3% y/y 11.5% y/y
EZ: industrial production (Jun) 0.6% m/m sa 1.0% m/m sa
US: initial jobless claims (Aug) 479K

Aug 13 (Fri)
SG: retail sales (Jun) -3.4% y/y -3.4% y/y
HK: GDP (2Q) 6.3% y/y 8.2% y/y
-- 2.0% q/q sa 2.4% q/q sa
EZ: GDP (2Q, A) 0.7% q/q sa 0.2% q/q sa
-- 1.4% y/y 0.6% y/y
US: CPI (Jul) 0.2% m/m sa -0.1% m/m sa
US advance retail sales (Jul) 0.5% m/m sa -0.5% m/m sa

Central bank policy calendar


Policy
Date Country Rate Current Consensus DBS Actual
This week
08-Aug JP BoJ target rate 0.10% 0.10% 0.10% 0.10%
11-Aug US FOMC 0.25% 0.25% 0.25% 0.25%
12-Aug KR 7-day repo rate 2.25% 2.50% 2.25%
12-Aug EZ ECB bulletin (Aug)

Next week
No policy meeting this week

Last week
04-Aug ID o/n reference rate 6.50% 6.50% 6.50% 6.50%
05-Aug EZ refi rate 1.00% 1.00% 1.00% 1.00%

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Daily Breakfast Spread, 11 Aug 2010

GDP & inflation forecasts


GDP growth, % YoY CPI inflation, % YoY
2007 2008 2009 2010f 2011f 2007 2008 2009 2010f 2011f
US 2.1 0.4 -2.4 3.2 2.9 2.9 3.8 -0.3 2.0 2.1
Japan 2.4 -1.2 -5.1 2.8 1.8 0.1 1.4 -1.4 -0.4 0.5
Eurozone 2.7 0.5 -4.0 0.6 1.0 2.1 3.3 0.3 0.8 1.0
Indonesia 6.3 6.0 4.5 6.0 5.8 6.4 9.8 4.9 5.1 6.5
Malaysia 6.2 4.6 -1.7 8.0 5.5 2.0 5.4 0.6 1.8 2.4
Philippines 7.1 3.8 0.9 6.2 4.9 2.8 9.3 3.3 4.0 4.4
Singapore 8.2 1.4 -1.3 15.0 4.5 2.1 6.5 0.6 3.0 2.7
Thailand 4.9 2.5 -2.2 8.0 4.0 2.2 5.5 -0.8 3.0 2.5
Vietnam 8.4 6.2 5.3 6.5 6.9 8.3 23.1 7.0 9.0 8.0
China 13.0 9.6 8.7 11.0 10.0 4.8 5.9 -0.7 4.0 3.0
Hong Kong 6.4 2.1 -2.7 5.5 4.5 2.0 4.3 0.5 3.0 3.0
Taiwan 6.0 0.7 -1.9 7.5 3.8 1.8 3.5 -0.9 0.9 1.4
Korea 5.1 2.3 0.2 6.2 3.9 2.5 4.7 2.8 2.9 3.1
India* 9.2 6.7 7.4 8.8 8.5 4.7 8.4 3.7 8.0 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 Exchange rates, eop
current 3Q10 4Q10 1Q11 2Q11 current 3Q10 4Q10 1Q11 2Q11
US 0.25 0.25 0.25 0.25 0.50 … … … … …
Japan 0.10 0.10 0.10 0.10 0.20 85.3 94 95 96 94
Eurozone 1.00 1.00 1.00 1.00 1.25 1.316 1.26 1.28 1.30 1.32
Indonesia 6.50 6.50 7.00 7.50 8.00 8,953 9,200 9,100 9,000 8,900
Malaysia 2.75 2.75 3.00 3.25 3.25 3.15 3.22 3.20 3.18 3.16
Philippines 4.00 4.25 4.50 4.75 5.00 44.9 45.7 45.5 45.3 45.1
Singapore n.a. n.a. n.a. n.a. n.a. 1.35 1.38 1.37 1.36 1.35
Thailand 1.50 1.75 2.25 2.75 3.00 32.0 32.4 32.2 31.9 31.7
Vietnam^ 8.00 8.00 8.00 8.00 8.00 19,090 19,310 19,420 19,450 19,450
China* 5.31 5.58 5.85 6.12 6.39 6.77 6.74 6.69 6.64 6.60
Hong Kong n.a. n.a. n.a. n.a. n.a. 7.76 7.75 7.75 7.75 7.75
Taiwan 1.38 1.50 1.75 2.00 2.25 31.8 31.9 31.7 31.5 31.3
Korea 2.25 2.50 3.00 3.50 3.75 1169 1160 1150 1140 1130
India 5.75 5.75 6.25 6.50 6.50 46.4 45.8 45.6 45.4 45.2
^ prime rate; * 1-yr lending rate

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

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Daily Breakfast Spread, 11 Aug 2010

Contributors:
Economics
David Carbon Singapore (65) 6878 9548
Ramya Singapore (65) 6878 5282
Ma Tieying Singapore (65) 6878 2408
Irvin Seah Singapore (65) 6878 6727
Chris Leung Hong Kong (852) 3668 5694
Currencies
Philip Wee Singapore (65) 6878 4033
Fixed income strategy
Jens Lauschke Singapore (65) 6224 2574

Administrative / technical support


Violet Lee Singapore (65) 6878 5281

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

Client Contacts
Singapore Japan
DBS Bank (65) 6878 8888 DBS Tokyo (81 3) 3213 4411
DBS Asset Management (65) 6878 7801
DBS Vickers Securities (65) 6533 9688
Korea
The Islamic Bank of Asia (65) 6878 5522 DBS Seoul (82 2) 339 2660

China Malaysia
DBS Beijing (86 010) 5839 7527 DBS Kuala Lumpur (6 03) 2148 8338
DBS Dongguan (86 769) 2211 7868 DBS Labuan (6 08) 7595 500
DBS Fuzhou (86 591) 8754 4080 Hwang-DBS Penang (6 04) 263 6996
DBS Guangzhou (86 20) 3884 8010 Philippines
DBS Hangzhou (86 571) 8788 1288 DBS Manila (63 2) 845 5112
DBS Shanghai (86 21) 3896 8888
DBS Shenzhen (86 755) 8269 1043 Taiwan
DBS Suzhou (86 512) 6288 8090 DBS Chungching (886 4) 2296 0088
DBS Tianjin (86 22) 2339 3073 DBS Kaohsiung (886 7) 323 2362
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DBS Bangkok (66 2) 636 6364
India
DBS Delhi (91 11) 3041 8888 United Kingdom
DBS Mumbai (91 22) 6638 8888 DBS London (44 20) 7489 6550

Indonesia UAE
DBS Jakarta (62 021) 390 3366 DBS Dubai (97 1) 4364 1800
DBS Medan (62 061) 3000 8999
USA
DBS Surabaya (62 021) 531 9661
DBS Los Angeles (1 213) 627 0222

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Daily Breakfast Spread, 11 Aug 2010

Recent research
HK: How far can Hong Kong go as China's 10 Aug 10 IN: Risk of more / earlier hikes 19 Apr 10
major Renminbi offshore center?
KR: Interest Rate Outlook & Strategy 16 Apr 10
US Fed: Between a stock and bond place 10 Aug 10
SG: More strength to SGD 15 Apr 10
China and US: Demand trumps supply 6 Aug 10
SG: Call a rose a rose 14 Apr 10
CN: Implications of rising wages 4 Aug 10
(Part II) CN: Two growth myths with one stone 14 Apr 10

ID: Upgrade expectations 29 Jul 10 TH: Higher rates despite politics 9 Apr 10

Asia: Votes of confidence 9 Jul 10 SG: A strong start to 2010 8 Apr 10

FX: The ascension of the CNY 9 Jul 10 Asia: Interest Rate Outlook & Strategy 8 Apr 10

CN: Rising wage concern 7 Jul 10 US: A top-down look at profits and payrolls 25 Mar 10

SG: A year of two halves 30 Jun 10 CN: Currency appreciation not a case 23 Mar 10
of now or never
Taiwan-China: A quick look at the ECFA 29 Jun 10
IN: RBI bites the bullet 22 Mar 10
TW & KR: Rates up 28 Jun 10
TW: A closer look at housing 18 Mar 10
IN: Interest Rate Outlook & Strategy 17 Jun 10
Asia: Are central banks behind the curve? 18 Mar 10
MY: Addressing the supply side challenges 17 Jun 10
MY: Interest Rate Outlook & Strategy 22 Mar 10
TH: Upgraded, against all odds 25 May 10
SG: The economics of the Foreign Worker 17 Mar 10
Asia: Negara vanguarda 20 May 10 Levy hike

TH: Instability and growth 19 May 10 KR: Current account outlook 1 Mar 10

ID & KR: External positions 14 May 10 India budget: A mixed bag 1 Mar 10

Asia: Who’s vulnerable to EU trouble? 13 May 10 ID: Notes from Jakarta 25 Feb 10

SG: Can Sing rates go to zero? 7 May 10 IN budget: Room for spending 24 Feb 10

EZ: It was never meant to be easy 30 Apr 10 US Fed: Wake up call 19 Feb 10

MY: Surprise awaits 30 Apr 10 SG: A strategic budget 17 Feb 10

IN policy: Inter-meeting hikes the new norm? 21 Apr 10 TW: Managing capital inflows 18 Jan 10

ID: Interest Rate Outlook & Strategy 20 Apr 10 ID: Interest Rate Outlook & Strategy 12 Jan 10

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