AUG 11 DBS Daily Breakfast Spread

8/9/2019 AUG 11 DBS Daily Breakfast Spread

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Daily Breakfast Spread, 11 Aug 2010

Daily Breakfast SpreadDBS 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 thebenchmark repo rate by 25bps in July (the first hike since the global crisis), but thepace of interest rate normalization remains a question. In our view, the BOK is likelyto keep rates unchanged at 2.25% on tomorrows meeting before moving again inSeptember. 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 nextyear and 5% (the precrisis neutral level) in mid-2011. With uncertainties stilllingering in the global economy (such as US growth sustainability and Chinaslowdown), the BOK would be inclined to normalize policy in a gradual manner toavoid the risks of derailing economic recovery.On the data front, the Korean economy continued to grow but the growth ratemoderated slightly in 3Q. Exports decelerated to 29.6% YoY in July from 30.1% inJune (a modest 0.3% MoM sa). Business sentiment in the manufacturing industryimproved marginally to 109 (sa) in August from 108 in July. Consumer confidencestayed 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 basisfor the first time over 16 months (-0.2% in July). By any measure, policymakers arenot 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$130bn over the coming year would, if not reinvested, have shrunk the Fedsbalance sheet by about 5%. Thats too small an amount to have a fundamentalimpact 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 policymove 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 inFed balance sheet size.

US Fed expectations

Source: Bloomberg fed fundfutures

Notes: Given a FF target rate of0.25%, an implied FF rate of0.30 is interpreted roughly asthe market pricing in a 20%chance of a Fed hike to 0.50%from 0.25% (30 is 1/5th of thedistance to 50 from 25). DBSexpectations are presented indiscrete blocks of 25bps, i.e., theFed moves or it does not. Seealso Policy rate forecastsbelow.

Implied fed funds rate

Sep-10 Dec-10 Mar-11MarketCurrent 0.17 0.17 0.191wk ago 0.18 0.18 0.22

DBS 0.25 0.25 0.50

0

500

1,000

1,500

2,000

2,500

8 A u g

0 7

2 5 J u n

0 8

3 1 D e c

0 8

2 8 J a n

0 9

2 5 F e b 0 9

2 5 M a r

0 9

2 0 M a y

0 9

1 5 J u l 0 9

9 S e p

0 9

1 4 O c t

0 9

1 1 N o v

0 9

9 D e c

0 9

6 J a n

1 0

3 F e b 1 0

3 M a r

1 0

3 1 M a r

1 0

2 8 A p r

1 0

2 6 M a y

1 0

2 3 J u n

1 0

2 1 J u l 1 0

2.00

2.50

3.00

3.50

4.00

4.50

5.00

US Fed balance sheet and 10Y UST yieldsUSD bn, nsa

Fed balance sheet size

%

10Y UST yields


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With the reinvestment policy, the Fed took the middle ground between doingnothing (leaving a very slight / natural tightening in place) and outright easing viaincreased purchases of longer-term bonds (so-called quantitative easing). The Fednoted that output (supply) and employment gains had slowed in recent months this and the move back to strict neutrality reassures investors worried about thethreat 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 seethe 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 campthat believes the recovery is indeed proceeding and expect GDP growth to runbetween 2.5% - 2.75% over the next few quarters (and indeed the next few years).Thats below average, but not by a lot. Meanwhile, although the unemploymentrate is still a sky-high 9.5%, the improvement in private sector nonfarm payrolls isaveraging about 50k per month. Thats as fast as any post-war recovery pace, andthree times faster than in the last two recessions. In short, we continue to think thatthe next move for Fed policy rates is up, not down. And we continue to envision afirst Fed move in that direction in June/July of 2011, a month or two earlier thanwhat 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 thedecision to maintain the holdings of securities at the Fed. This is achieved byreinvesting the principal payments from agency debt and agency mortgage-backed securities in longer term Treasuries, as well as rolling over the holdings ofTreasuries as they mature. To markets, this was touted as Quantitative Easing II andthus, 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 boughtup in anticipation of future inflation. Second, there were mixed reactions to thesurge in Chinas trade surplus. While markets worry that Chinas import slowdownmay be pointing to a slowdown in growth ahead, it was difficult to ignore thenegative reaction of US lawmakers seeking to tie Chinas trade surplus to the lack ofCNY appreciation. A widening in USs trade deficit data tonight will surely revivethe politicization of the CNY issue ahead of the US mid-term elections scheduledfor November 2. Then again, markets are only comfortable selling US dollars if theyare 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 inthe near-term. Judging from this mornings reaction, investors seem to be leaningmore towards caution than assuming more risk.


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Economic calendar

Central bank policy calendar

Event Consensus Actual PreviousAug 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/yPH: exports (Jun) 25.0% y/y 33.4% y/y 37.3% y/yCN: 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% saJP: machine orders (Jun) 5.4% m/m sa -9.1% m/m saCN: CPI (Jul) 3.3% y/y 2.9% y/yCN: retail sales (Jul) 18.5% y/y 18.3% y/yCN: industrial production (Jul) 13.4% y/y 13.7% y/yUS: trade balance (Jun) -USD 42.1bn -USD 42.3bn

Aug 12 (Thur)JP: industrial production (Jun, F) -1.5% m/m saIN: industrial production (Jun) 8.3% y/y 11.5% y/yEZ: industrial production (Jun) 0.6% m/m sa 1.0% m/m saUS: 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 saEZ: GDP (2Q, A) 0.7% q/q sa 0.2% q/q sa

-- 1.4% y/y 0.6% y/yUS: CPI (Jul) 0.2% m/m sa -0.1% m/m saUS advance retail sales (Jul) 0.5% m/m sa -0.5% m/m sa

PolicyDate Country Rate Current Consensus DBS ActualThis week08-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 weekNo policy meeting this week

Last week04-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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GDP & inflation forecasts

Policy & exchange rate forecasts

Market prices

Policy interest rates, eop Exchange rates, eopcurrent 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 94Eurozone 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 8,900Malaysia 2.75 2.75 3.00 3.25 3.25 3.15 3.22 3.20 3.18 3.16Philippines 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 1.35Thailand 1.50 1.75 2.25 2.75 3.00 32.0 32.4 32.2 31.9 31.7Vietnam^ 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 6.60Hong Kong n.a. n.a. n.a. n.a. n.a. 7.76 7.75 7.75 7.75 7.75Taiwan 1.38 1.50 1.75 2.00 2.25 31.8 31.9 31.7 31.5 31.3Korea 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

GDP growth, % YoY CPI inflation, % YoY

2007 2008 2009 2010f 2011f 2007 2008 2009 2010f 2011fUS 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 0.5Eurozone 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 6.5Malaysia 6.2 4.6 -1.7 8.0 5.5 2.0 5.4 0.6 1.8 2.4Philippines 7.1 3.8 0.9 6.2 4.9 2.8 9.3 3.3 4.0 4.4Singapore 8.2 1.4 -1.3 15.0 4.5 2.1 6.5 0.6 3.0 2.7Thailand 4.9 2.5 -2.2 8.0 4.0 2.2 5.5 -0.8 3.0 2.5Vietnam 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 3.0Hong Kong 6.4 2.1 -2.7 5.5 4.5 2.0 4.3 0.5 3.0 3.0Taiwan 6.0 0.7 -1.9 7.5 3.8 1.8 3.5 -0.9 0.9 1.4Korea 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 WPISource: CEIC and DBS Research

Policy rate 10Y bond yield FX EquitiesCurrent 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 0.1Japan 0.10 1.04 0 85.3 1.1 Topix 855 -0.5Eurozone 1.00 2.54 -7 1.316 0.0 Eurostoxx 2,533 -0.4Indonesia 6.50 7.90 -15 8953 -0.1 JCI 3,083 0.8Malaysia 2.75 3.86 -5 3.15 0.3 KLCI 1,360 -0.3Philippines 4.00 7.43 -16 44.9 0.5 PCI 3,526 1.2Singapore Ccy policy 1.99 -5 1.353 -0.1 FSSTI 2,984 -1.3Thailand 1.50 3.42 0 32.0 0.5 SET 862 -0.3China 5.31 6.77 0.0 S'hai Comp 2,595 -1.2Hong Kong Ccy policy 2.19 -4 7.76 0.0 HSI 21,474 0.1Taiwan 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 -0.5India 5.75 7.83 -6 46.4 -0.5 Sensex 18,220 0.6Source: Bloomberg


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Contributors:

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

CurrenciesPhilip Wee Singapore (65) 6878 4033

Fixed income strategyJens Lauschke Singapore (65) 6224 2574

Administrative / technical supportViolet Lee Singapore (65) 6878 5281

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

Client Contacts

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

ChinaDBS Beijing (86 010) 5839 7527DBS Dongguan (86 769) 2211 7868DBS Fuzhou (86 591) 8754 4080DBS Guangzhou (86 20) 3884 8010DBS Hangzhou (86 571) 8788 1288DBS Shanghai (86 21) 3896 8888DBS Shenzhen (86 755) 8269 1043DBS Suzhou (86 512) 6288 8090DBS Tianjin (86 22) 2339 3073

Hong KongDBS Hong Kong (852) 3668 0808DBS Macau (853) 2832 9338DBS Asia Capital (852) 3668 1148DBS Asia Capital Shanghai (86-21) 6888 6820

IndiaDBS Delhi (91 11) 3041 8888DBS Mumbai (91 22) 6638 8888

IndonesiaDBS Jakarta (62 021) 390 3366DBS Medan (62 061) 3000 8999DBS Surabaya (62 021) 531 9661

JapanDBS Tokyo (81 3) 3213 4411

KoreaDBS Seoul (82 2) 339 2660

MalaysiaDBS Kuala Lumpur (6 03) 2148 8338DBS Labuan (6 08) 7595 500Hwang-DBS Penang (6 04) 263 6996

PhilippinesDBS Manila (63 2) 845 5112

TaiwanDBS Chungching (886 4) 2296 0088DBS Kaohsiung (886 7) 323 2362DBS Taichung (886 4) 2230 9188DBS Tainan (886 6) 213 3939DBS Taipei (886 2) 8101 0598DBS Taoyuan (886 3) 339 6060

ThailandDBS Bangkok (66 2) 636 6364

United KingdomDBS London (44 20) 7489 6550

UAEDBS Dubai (97 1) 4364 1800

USADBS Los Angeles (1 213) 627 0222


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Recent research

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

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

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AUG 11 DBS Daily Breakfast Spread