Daily Breakfast Spread, 10 Aug 2010

Daily Breakfast Spread

DBS Group Research 10 Aug 2010

Economics
Greater China, Korea
• CN: The worry over China’s economic slowdown will continue. On the trade front,
export and import are respectively projected to grow 40% YoY and 34.5% in Jul.
Slower export growth will be mirrored by the deceleration of industrial production
to 12.1% from 13.7% in Jun. The trend is consistent with the lower reading of the
PMI seen lately. FAI will somewhat grow slower at 25.1% (0.4ppt lower than Jun)
due to ongoing austerity measures imposed on the property market. On the other
hand, retail sales will likely charge up to 19% from 18.3% in Jun on the back of
strong domestic tourism due to the ongoing Shanghai Expo.
On the monetary side, M2 is likely to moderate further to 18% from 18.5% in Jun.
New loans are projected to reach CNY600bn this month. Thus, the remaining quota
for this year will be around CNY2.27trn or CNY454bn per month for the remaining 5
months. That said, the CPI is expected to shoot up to 3.4% from 2.9% despite the
deceleration of most monetary parameters, up from 2.9% in Jun primarily due to
floods and bad weather in some provinces. The bottom line is strength of domestic
demand is still holding up and the CPI will likely to trend higher going forward. Talk
of interest rate hikes will be back on the agenda soon.

Southeast Asia, India

• SG: The second quarter GDP growth figures announced this morning saw the
headline growth figure being revised down slightly from what was reported in the
advance release last month. Overall GDP growth for the quarter came in at 18.8%
(24.0% QoQ saar), very much in line with our expectation (18.7% YoY, 24.1% QoQ
saar).

Singapore GDP growth

US Fed expectations 2Q09 3Q09 4Q09 2009 1Q10 2Q10a
Implied fed funds rate Overall GDP (%QoQ saar) 18.5 11.1 -1.0 - 45.7 24.0
Sep-10 Dec-10 Mar-11 Overall GDP (%YoY) -1.7 1.8 3.8 -1.3 16.9 18.8
Market Manufacturing -0.4 7.6 2.2 -4.1 37.9 44.5
Current 0.17 0.17 0.19
1wk ago 0.18 0.18 0.21
Construction 18.1 11.7 11.5 16.2 9.7 11.5
DBS 0.25 0.25 0.50 Services producing -3.4 -1.1 3.7 -1.4 11.4 11.2
Source: Bloomberg fed fund
futures
A pullback in manufacturing activities, particularly in the pharmaceutical segment is
Notes: Given a FF target rate of the key reason for the downward adjustment. Industrial production fell by 23.4%
0.25%, an implied FF rate of
MoM sa in June owing to a 50% drop in the pharmaceutical segment. Volatility is
0.30 is interpreted roughly as
the market pricing in a 20% the “hallmark” of the pharmaceutical industry due to the nature of its production
chance of a Fed hike to 0.50% process. Having ramped up production since the start of the year, it came as no
from 0.25% (30 is 1/5th of the surprise to see some producers shutting down production in June to do the
distance to 50 from 25). DBS necessary maintenance and sterilization before embarking on the next batch of
expectations are presented in
discrete blocks of 25bps, i.e., the
drugs. We have highlighted this regular affair several times in the past and this is
Fed moves or it does not. See also one of the reasons why the stunning performance by the manufacturing sector
also “Policy rate forecasts” in 1H10 will not last going into the second half (see “A year of two halves” dated 30
below. Jun10).
Moreover, manufacturing PMIs in key markets such as China and US are tapering off
as headwinds on the manufacturing sector pick up. If we juxtaposed a subpar
recovery in the US against a China economy that is due for some soft landing as well
as the potential drag coming from the Eurozone, there is little ground to suggest
that the current strong growth momentum in the manufacturing sector can be
sustained in the coming quarters.

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Daily Breakfast Spread, 10 Aug 2010

Though the downward adjustment in the headline growth figure is unlikely to

raise the alarm of a double dip recession, it does confirm our long held view that
the economy is due for a slower second half of the year. Yet, we see this
moderation in growth as a healthy normalization of economic activities. And even
with the growth momentum set to slow, the Singapore economy is still on track to
meet our target of 15.0% growth for the year, which will most likely place it as the
fasting growing economy in the world in 2010.
• MY: Industrial production for June is the key data to watch this week and hope is
high for another healthy double-digit expansion in output. A rise of 14% YoY has
been penciled into our forecast. Though this is higher than consensus expectation
of 11.3%, the point to note is that with another good showing in industrial
production in June, on top of an average 11.6% rise in Apr-May, we can safely
expect another quarter of strong growth in Malaysia. A still healthy export growth
of 17.2% in the month is the factor driving industrial output. Though the outlook
going forward points to a gradual moderation in production and export sales,
underlying economic fundamentals, particularly in terms of domestic demand
remain strong. The domestic engine should remain supportive of economic growth
even when external demand is expected to cool in the coming quarters. And that
should provide enough room for Bank Negara to persevere with its interest rate
normalization process in the forthcoming policy meeting in September.

G3
• US: The debate between equity and fixed income markets over the state / outlook
of the economy continues. Private sector nonfarm payrolls (released Friday) rose by
a less-than-expected 71k in July and the June figures were revised downward (to
31k from 83k initially). Bond markets said “told you so” and 10Y Treasury yields
dropped by 10bps to 2.82%. Equity markets said “Hold on, payrolls improved by
40k in July (to 71k form 31k), not much less than the 50k per month increment
seen, on average, since Feb09. That pace is three times faster than in the past two
recessions (and no slower than any post-war recovery).” Equity markets are up by
between 0.65% (SPX and Dow) and 0.95% (Nasdaq) compared to pre-payrolls
levels.

US – priv sector job creation, current and 2000-01 recession

chg in priv sector nonfarm payrolls, x1000, sa, c3mma
300
200 Jul10
100
0
-100
2000-01 recession:
-200 Oct01
15k per month
-300
-400
current path:
-500 50k per month
-600 improvement
Feb09
-700
-800
Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05
May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12

Where does this leave the Fed when it meets on Wednesday? So far, officials have
largely downplayed the purported slowdown in the data (taking the equity market
view), saying only they are prepared to loosen policy further if it becomes
necessary. And that remains pretty much what we expect the Fed to say this week.
What else could / might they do?
The first thing would be to re-invest the proceeds of MBS securities the Fed holds as
they mature. Recall in its efforts to support the economy, the Fed built up its
holdings of these (housing) securities over the course of 2009 to a total of $1.12 trn
and some are now starting to be retired (holdings have fallen by $11trn (1%) over
the past 6 weeks). As the MBSs mature, the Fed’s balance sheet shrinks and liquidity
tightens. Thus, the default / automatic position of the Fed is no longer “neutral”

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Daily Breakfast Spread, 10 Aug 2010

but very (very) slight tightening. The Fed could reverse this slight tightening by re-
investing the proceeds from the maturing MBSs, and either buy new MBS securities
or, more likely, US Treasuries. By investing these proceeds, then, the Fed would
keep policy more strictly / precisely “neutral”.

US Fed – balance sheet (asset side)

USD bn, nsa, wk avg
2,500 Fed total assets / liabilities

Other assets
2,000

1,500
MBS + agency
1,000

500
US Treasuries
0

20 May 09

17 Feb 10

12 May 10
25 Nov 09

31 Mar 10
11 Mar 09
28 Jan 09

12 Aug 09

14 Oct 09

23 Jun 10
6 Jan 10
8 Aug 07

1 Oct 08

4 Aug 10
Will it announce such a plan on Wednesday? It’s a close call but we think not. From
a “fundamental” perspective, the shift would have almost “mechanical” impact on
rates and economic activity. From a sentiment perspective, it’s by no means clear
that announcing a “loosening” of policy, however slight, would reassure (fixed
income) investors or scare (equity market) investors who are already quite content
to continue pushing the market higher anyway. Between a bond and a stock place,
the Fed sits. And sits pat, we think.

Currencies
• G3: The US dollar is still considered weak compared to the EUR and the JPY. Since
mid-July, the greenback has come under selling pressure from growing
expectations for the Fed to take further steps to counter the dampened US
recovery outlook. Ergo, the importance of tonight’s FOMC meeting. Yet, no one
expects the Fed to announce new purchases of treasuries or mortgage backed
securities. The language of the FOMC statement should, nonetheless, be friendly.
Apart from the pledge to keep rates at ultra-low levels for longer, the Fed should
reinforce Bernanke’s earlier commitment to provide further support for the

US equities buck falling US bond yields

4.25 12000

4.00 Dow Jones (rhs) 11000

3.75
10000
3.50
9000
3.25

US 10Y treasury yield 8000

3.00
(% pa, lhs)

2.75 7000
Jan-10 Mar-10 May-10 Jul-10

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Daily Breakfast Spread, 10 Aug 2010

recovery if necessary. In any case, the pressure on the US dollar from the softened
US rate outlook has slowed the ascent of EU money market rates, as well as put
pressure on the Bank of Japan to consider more quantitative easing measures.
• Asia: Growth-led currencies in Asia ex Japan will be monitoring how US equities
react to the FOMC statement. So far, these currencies have performed well because
US equities did not head south with US interest rates. To continue to contain
double-dip fears, equities have to continue believing that the Fed’s guarantee, and
not its action, is all that is needed for now to safeguard the US recovery. If so, this
should continue to keep AXJ currencies on their appreciation paths, especially
when many central banks in the region have and are continuing to hike interest
rates.

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Daily Breakfast Spread, 10 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 37.3% y/y
CN: trade balance (Jul) USD 19.6bn USD 20.02bn
-- exports 35.0% y/y 43.9% y/y
-- imports 30.0% y/y 34.1% y/y
MY: industrial production (Jun) 11.5% y/y 12.6% y/y

Aug 11 (Wed)
SK: unemployment rate (Jul) 3.5% sa
JP: machine orders (Jun) 5.5% 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 42.2bn -USD 42.3bn

Aug 12 (Thur)
JP: industrial production (Jun, F) -1.5% m/m sa
IN: industrial production (Jun) 11.5% y/y
EZ: industrial production (Jun) 0.7% m/m sa 0.9% 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) 6.7% y/y 8.2% y/y
-- 1.8% 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) 0.4% 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%
11-Aug US FOMC 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, 10 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 86.0 94 95 96 94
Eurozone 1.00 1.00 1.00 1.00 1.25 1.321 1.26 1.28 1.30 1.32
Indonesia 6.50 6.50 7.00 7.50 8.00 8,937 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 19,100 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 31.7 31.9 31.7 31.5 31.3
Korea 2.25 2.50 3.00 3.50 3.75 1163 1160 1150 1140 1130
India 5.75 5.75 6.25 6.50 6.50 46.1 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 2.83 -8 80.8 0.2 S&P 500 1,128 0.2
Japan 0.10 1.02 -2 86.0 -0.2 Topix 858 0.8
Eurozone 1.00 2.53 -17 1.321 -0.1 Eurostoxx 2,551 0.3
Indonesia 6.50 7.89 -18 8937 0.1 JCI 3,083 0.8
Malaysia 2.75 3.86 -6 3.15 0.3 KLCI 1,361 -0.2
Philippines 4.00 7.39 -22 44.9 0.9 PCI 3,525 2.0
Singapore Ccy policy 2.03 8 1.349 0.1 FSSTI 2,995 0.2
Thailand 1.50 3.42 -1 32.0 0.5 SET 875 1.4
China 5.31 … … 6.77 0.1 S'hai Comp 2,673 0.0
Hong Kong Ccy policy 2.20 -3 7.76 0.0 HSI 21,802 1.8
Taiwan 1.38 1.32 -3 31.7 0.4 TWSE 8,034 1.6
Korea 2.25 4.85 -1 1163 0.7 Kospi 1,790 0.4
India 5.75 7.82 -1 46.1 0.3 Sensex 18,288 1.1
Source: Bloomberg

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 Daily Breakfast Spread, 10 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
DBS Taichung (886 4) 2230 9188
Hong Kong DBS Tainan (886 6) 213 3939
DBS Hong Kong (852) 3668 0808 DBS Taipei (886 2) 8101 0598
DBS Macau (853) 2832 9338 DBS Taoyuan (886 3) 339 6060
DBS Asia Capital (852) 3668 1148
DBS Asia Capital Shanghai (86-21) 6888 6820 Thailand
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

7
 Daily Breakfast Spread, 10 Aug 2010

Recent research
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 CN: Two growth myths with one stone 14 Apr 10
(Part II)
TH: Higher rates despite politics 9 Apr 10
ID: Upgrade expectations 29 Jul 10
SG: A strong start to 2010 8 Apr 10
Asia: Votes of confidence 9 Jul 10
Asia: Interest Rate Outlook & Strategy 8 Apr 10
FX: The ascension of the CNY 9 Jul 10
US: A top-down look at profits and payrolls 25 Mar 10
CN: Rising wage concern 7 Jul 10
CN: Currency appreciation not a case 23 Mar 10
SG: A year of two halves 30 Jun 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
Levy hike
Asia: Negara vanguarda 20 May 10
KR: Current account outlook 1 Mar 10
TH: Instability and growth 19 May 10
India budget: A mixed bag 1 Mar 10
ID & KR: External positions 14 May 10
ID: Notes from Jakarta 25 Feb 10
Asia: Who’s vulnerable to EU trouble? 13 May 10
IN budget: Room for spending 24 Feb 10
SG: Can Sing rates go to zero? 7 May 10
US Fed: Wake up call 19 Feb 10
EZ: It was never meant to be easy 30 Apr 10
SG: A strategic budget 17 Feb 10
MY: Surprise awaits 30 Apr 10
TW: Managing capital inflows 18 Jan 10
IN policy: Inter-meeting hikes the new norm? 21 Apr 10
ID: Interest Rate Outlook & Strategy 12 Jan 10
ID: Interest Rate Outlook & Strategy 20 Apr 10
IN: RBI’s stance on capital controls 30 Nov 09
IN: Risk of more / earlier hikes 19 Apr 10
CN: What policy options does it really have? 23 Nov 09
KR: Interest Rate Outlook & Strategy 16 Apr 10
TW: When will policy turn? 16 Nov 09
SG: More strength to SGD 15 Apr 10

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