Global Data Watch - J.P. Morgan Home | J.P. Morgan · JPMorgan Chase Bank NA David Hensley (1-212) 834-5516 [email protected] JPMorgan Chase Bank NA 7 Joseph Lupton (1-212)

Economic ResearchJanuary 10, 2014

Global Data Watch Policy challenges are building for the major central banks

Still not extrapolating robust global growth momentum into 2014

Expecting a modest pickup in ASEAN growth

Next week’s releases: robust global IP and retail sales in November followed by a flat US retail sales report for December

For one guvnor, three masters The unconventional path followed by G-4 central banks in recent years has to a large degree been geared toward achieving conventional objectives. Faced with a zero lower interest rate bound and headwinds from tight credit condi-tions and deleveraging, central banks have employed their balance sheets and forward rate guidance to deliver a policy stance appropriate with their dual mandate. However, the post-financial-crisis world has also seen central banks take on a broader set of objectives. For G-4 central banks two new objectives stand out.

Financial stability. There is a longstanding recognition that asset prices and monetary policy can interact in ways that generate financial excess, but the prevailing pre-crisis attitude was that monetary authorities were not well positioned to identify or limit the emergence of financial imbalances. However, the unprecedented stress generated by the financial crisis and the sustained cost in terms of lost output has raised the role of financial stability as an important independent objective for monetary authorities.

Arresting the supply slide. Before the financial crisis, monetary policy fo-cused on inflation objectives while stabilizing temporary shocks buffeting growth. Aggregate supply dynamics were generally viewed as exogenous. But there is growing concern that part of the deterioration in aggregate supply in recent years is linked to the persistent weakness in demand. Sustained slow demand growth shifts the willingness of firms to invest and innovate. At the same time, a persistent demand shock can erode the skills of long-term un-employed and affect the attachment of workers to the labor market. With the level of DM GDP nearly 7%-pts below the level projected had potential growth been maintained at its 2006 pace, the case for central banks to exper-iment with the growth/inflation trade-off to try to elicit a positive supply-side response is strong. The unconventional actions implemented over 2010-13 were generally supportive for achieving all three central bank objectives.

Contents

EM ex ports spurred by stronger DM

domestic demand 13

The great rotation: EM gaining

ground on DM in global GDP 15

Help for US net ex ports from the

supply side 17

Japan in 2014: abov e trend grow th

despite tax rate hike 19

Euro area unemploy ment is stuck at

12% 21

Spain on the right track 23

New Zealand: Grow th, hikes, and

RBNZ judgment calls in '14 25

EM Asia's troubled DM dependency 27

Global Economic Outlook Summary 4

Global Central Bank Watch 6

Now cast of global grow th 7

Selected recent research from

J.P. Morgan Economics8

The J.P. Morgan View : Markets 9

Data WatchesUnited States 31Euro area 39Japan 45Canada 49Mex ico 51Brazil 53Argentina 55Chile 57United Kingdom 59Russia 63Turkey 65Australia and New Zealand 67China, Hong Kong, and Taiw an 71Korea 75ASEAN 77India 81Asia focus 83

Regional Data Calendars 84

Bruce Kasman (1-212) 834-5515 [email protected] JPMorgan Chase Bank NA David Hensley (1-212) 834-5516 [email protected] JPMorgan Chase Bank NA Joseph Lupton (1-212) 834-5735 [email protected] JPMorgan Chase Bank NA

www.jpmorganmarkets.com

90

95

100

105

110

115

04 06 08 10 12 14

Index, 2010 = 100

Real GDP, developed markets

Source: J.P. Morgan

Pre-2006 trend

Actual

5

6

7

8

9

10

08 09 10 11 12 13 14 15

%; Dashed lines show central bank thresholds

Unemployment rate

Source: J.P. Morgan

US

UK

http://jpmorgan.reutersinsider.com/MorganMarketsTV/

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Economic Research Global Data Watch January 10, 2014

JPMorgan Chase Bank NA Bruce Kasman (1-212) 834-5515 [email protected]

David Hensley (1-212) 834-5516 [email protected]

Joseph Lupton (1-212) 834-5735 [email protected]

With banks deleveraging and low levels of interest-sensitive spending, unconventional easing promoted both financial and macroeconomic stability. The DM economic backdrop—of weak growth, low inflation, and high unemployment—meant that unconventional actions taken to support macroeconomic stability also broadly supported supply-side objectives.

These three distinct but related objectives—macroeconomic stability, financial stability, and supply-side lift—are becom-ing more challenging to balance as growth and financial con-ditions improve. We have already seen a Fed balancing act unfold in the tapering saga. The Fed has worked hard to signal its desire to end QE at the same time as rate guidance has pointed to an extended path toward rate normalization. In de-linking tapering from tightening the Fed is balancing its mac-roeconomic objective of supporting sustained above-trend growth with its growing concern of the financial stability risks associated with a large and rapidly rising balance sheet.

A far bigger challenge will arise in the coming months as the Fed and BoE see above-trend growth pushing unemployment rates through their thresholds. We now believe that their re-spective 7% and 6.5% thresholds for the unemployment rates will be breached sometime before midyear. While a standard policy reaction function would argue for policy normalization to begin sometime this year, neither central bank is likely to shift forward guidance in this direction. Instead, both are likely to further deemphasize the role of the unemployment rate in their guidance and communicate that policy adjustment is likely to begin in 2015. In both cases, they will be balanc-ing their dual mandate objectives with an experiment to test the limits of the growth/inflation trade-off to elicit a supply-side response. Neither central bank is likely to lower its threshold. Rather they will engage in discretionary guidance focusing on a broad range of indicators to gauge the evolution of growth and supply-side conditions.

For the MPC, members are likely to want to give above-trend growth time to produce a recovery in productivity. Rather

than lower the unemployment rate threshold, rate guidance is likely to evolve with the presentation of quarterly growth and inflation forecasts in the style of Sweden’s Riksbank, condi-tioned on a path of rates the MPC believes delivers on its mandate. That would allow the MPC to signal the policy path it has in mind without being unconditionally committed to it. We expect a change along these lines in May.

We believe the Fed will downplay the disappointing Decem-ber employment report and announce another $10 billion ta-per at the January FOMC meeting. It should also continue down the road of downplaying the significance of the unem-ployment rate in the setting of interest rate policy. As Chair-woman Yellen now takes the stage, she will likely take her time before laying out a framework that emphasizes the Fed’s supply-side experiment.

For both central banks, falling inflation and subdued wage gains provides important support for maintaining their friendly guidance in the coming months. In the US, average hourly earnings are up only 1.8%oya, and our forecast for 1Q14 inflation (CPI and PCE) is 1% (q/q saar). The UK Fi-nancial Policy Committee’s decision to end use of the FLS to support mortgage loans has demonstrated that it is willing to apply tools to address financial stability risks, and we expect further action in this space.

Still sitting on strong growth news The news on the global economy has continued to impress. Our nowcaster, which predicts global GDP growth based on a filtering of six global activity indicators including the PMI, moved even higher this week. For 4Q as a whole, the nowcaster calls for 3.4% global GDP growth, with monthly gains now standing over 4% annualized in November and December. Our official bottom-up forecast for 4Q13 has been climbing as well, having reached 3.2% this week following an upward revision in the US (to 2.8% from 2.5%). In a similar vein, Japanese data point to solid gains in consumption and capex into year’s end, with additional confirmation expected in next week’s reports on November consumer spending and machinery orders. The latest data reaffirm our forecasts for a 4Q growth pickup in Europe and the UK, as well.

Despite the momentum of activity at year’s end we have re-frained from extrapolating it into the 2014 forecast. Much of this caution stems from the US, where we think temporary factors boosted growth in 2H13 and we look for a return to more moderate 2.5% growth in 1H14. This week’s disap-pointing December payroll jobs figure gave some support for this forecast, as should an expected flat reading in next week’s report on December US retail sales. In addition, there is good

1.0

1.5

2.0

2.5

3.03.5

4.0

4.5

Jan 11 Jul 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13

%q/q, saar; Box shows J.P. Morgan projection for 4Q13Global real GDP

Nowcaster(dashed line shows %m/m, saar)

Actual/JPM(%q/q, saar)

Source: J.P. Morgan

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JPMorgan Chase Bank NA Bruce Kasman (1-212) 834-5515 [email protected]



reason to look for weaker 1H growth in Asia’s two biggest economies, with the consumption tax hike looming in Japan and Chinese officials acting to restrain domestic credit.

The ECB is patient with a still sick patient The ECB provides a stark contrast to the Fed and the BoE in its acceptance of a 12% unemployment rate despite failing to the downside on its inflation mandate. The latest data suggest GDP growth is tracking our forecast for a 1% annualized gain last quarter after a weak start, with welcome signs of im-provement in the periphery along with strength out of Germa-ny offset by underperformance in France. This message was echoed in this week’s EC survey. Economic sentiment has rebounded to its long-run average, with sizable gains in Italy, Spain, and Portugal to levels now above that of France.

The improvement in the growth outlook should not be taken as a sign for comfort, however. Core inflation was reported this week to have reached an all-time low of 0.7%oya last month, with the %3m/3m sequential pace moving down to 0.3%. We expect core inflation has troughed and will remain near 1% over the coming year, an outcome consistent with the latest readings from the EC survey on price expectations. However, whether such a low outcome would be enough to get the ECB to act is unclear. At this week’s press conference, Draghi suggested it would take a worsening in inflation out-look to warrant further action. It is unlikely the ECB will see its inflation forecast getting off track until much later this year. In the meantime, a modest firming of its low-for-long language this week is the best the ECB has to offer.

Expecting a modest lift in ASEAN growth The forecast calls for some acceleration in the ASEAN econ-omies this year, with growth reaching 5.1% (4Q/4Q) compared with an estimated gain of 4.0% in 2H13. On the external side, the push from stronger DM demand has to be weighed against the pull from slower growth in China. As a general rule of thumb, we estimate that growth in ASEAN changes by 0.7%-pt

for every one percentage point change in the US, while the effect from China’s economy is about half as strong. Thus, it appears that external demand will provide a boost to ASEAN growth in 2014. In contrast, domestic activity is expected to cool somewhat, although not in every country. In Indonesia, tighter monetary conditions from market forces and from cen-tral bank policy to contain the current account deficit should lead to lower growth this year, while in Singapore, continued reverberations from tighter immigration policy, and stricter housing and auto purchasing measures will restrain domestic activity. Political uncertainty is likely to damp near-term de-mand in Thailand. By contrast, reconstruction spending should support demand in the Philippines while the Economic Transformation Program will boost investment in Malaysia.

Lowering our sights on Turkey As with much of the EM, Turkey is being buffeted by improv-ing external demand and softening domestic demand. In re-cent weeks, we have flagged numerous policy and political developments that have raised downside risks, and this week we lowered our GDP projection for 2014 by 0.5%-pt to 2.5%. On the plus side, the weaker lira combined with the recovery in Europe will boost exports. However, we expect the slow-down in domestic demand to be even more pronounced as macro-prudential measures introduced by the government to restrain loan growth and a series of tax hikes lead to lower consumption. At the same time, recent policy tightening by the CBRT to support the lira will have knock-on effects on credit conditions. The surge in political tension is also weigh-ing on local sentiment.

Inflation outcomes varied in Latin America While our global outlook looks for inflation to be tame across most countries, inflation will hug the upper end of most cen-tral banks’ target ranges across Latin America. Leaving aside Argentina and Venezuela, Brazil stands out as the economy where persistently high inflation has most visibly undermined inflation expectations. This week, inflation ticked up to 5.9%oya, just shy of the ceiling of the central bank target range—where it is expected to remain for most of 2014. Infla-tion in Mexico and Peru also ended 2013 at or near the ceiling of central banks’ target range, respectively. However, unlike in Brazil, inflation outcomes this year are unlikely to pressure expectations, and thus central banks should remain comforta-bly on hold. Elsewhere in the region, inflation remains near the midpoint of the BCCh’s target in Chile, while it settled just under the floor of the target in Colombia.

Editor: Jimmy Coonan (1-212) 622-0547 [email protected]

0.6

1.1

1.6

2.1

-15

-10

-5

0

5

10

15

20

06 08 10 12 14Source: European Commission survey (wgted avg across sectors), J.P. Morgan, Eurostat

% bal, advanced 12 months

Price expectations and core inflation, Euro area

% oya

Core inflation

Price expectations(EC Survey)

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JPMorgan Chase Bank NA David Hensley (1-212) 834-5516 [email protected] Carlton Strong (1-212) 834-5612 [email protected]



Global economic outlook summary Real GDP Real GDP Consumer prices

% over a year ago % over previous period, saar % over a year ago

2013 2014 2015 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 4Q13 2Q14 4Q14 4Q15 United States 1.9 2.9↑ 2.9 4.1 2.8↑ 2.5 2.5 3.0 3.0 1.2 1.6↓ 1.6↓ 1.9 Canada 1.7

2.1 2.6 2.7 1.5 1.9 2.2 2.5 2.7 1.0 1.4 1.6 1.9

Latin America 2.6 2.6 3.0 0.8 2.9 2.3 2.4 3.0 3.1 4.5 4.6 4.8 4.3 Argentina

4.9

1.5 2.0 -0.7 0.5 1.5 4.0 1.5 1.0

11.0 11.0 18.0 20.0 Brazil 2.3 2.1 2.2 -1.9 3.0 2.0 1.8 3.0 2.6 5.8 5.6 5.9 5.5 Chile

4.1 ↓ 3.7 4.2 5.4 1.9↓ 4.0↑ 3.6 ↑ 3.0↓ 6.0 ↑ 2.6 ↑ 4.0↑ 3.3↑ 3.0 ↓

Colombia 4.2 4.8 4.5 4.5 4.7 4.5 4.7 4.7 4.5 2.5 3.0 2.9 3.0 Ecuador

3.0

4.0 4.0 2.0 3.0 4.0 4.0 4.5 4.5

2.3 2.0 3.3 4.0 Mexico 1.2 ↓ 3.4 3.8 3.4 3.6↓ 4.0 3.2 3.5 3.6 3.5 3.7 4.1 3.1 Peru

5.0

5.5 5.5 3.2 7.0 6.0 5.0 5.0 6.0

2.9 2.8 2.6 2.5 Uruguay 4.0 4.0 4.0 -2.8 -3.0 8.0 9.0 4.0 3.0 8.7 8.1 7.8 7.3 Venezuela 1.5

-1.0 2.5 2.5 0.0 -5.0 -2.5 1.0 2.0 52.7 59.5 40.2 34.0

Asia/Pacific 4.6

4.6 4.7 5.2 5.3 5.1 2.8 4.5 4.8 3.1 4.0 3.6 3.4 Japan 1.7 1.4 1.2 1.1 3.8 4.0 -4.5 1.2 1.7 1.4 ↑ 3.7↑ 3.4↑ 2.9 ↑Australia 2.4

2.7 3.0 2.3 3.2 1.8 3.5 2.8 3.7 2.7 2.9 2.0 2.6

New Zealand 2.6 2.7 2.8 5.6 1.6 3.4 1.4 2.7 3.5 1.3 ↓ 1.8↓ 1.9↓ 2.0 ↓EM Asia

6.1

6.2 6.3 7.3 6.3 6.0 5.9 6.1 6.3

3.9 4.2 3.9 3.7 China 7.6 7.4 7.2 9.1 7.8 7.2 6.8 7.2 7.2 3.0 3.5 3.1 3.1 India 4.6

5.0 6.5 6.0 5.3 3.4 5.0 5.5 6.0 10.2

9.5

9.0

7.0 EM Asia ex China/India 3.7 4.2 4.4 4.0 3.5 4.7 4.5 4.0 4.4 3.1 3.4 3.2 3.5

Hong Kong 2.8

3.2 2.5 2.0 4.0 2.5 3.5 3.5 4.0 4.4 4.0 3.3 3.5 Indonesia 5.5 4.9 5.3 5.0 4.5 5.0 5.0 5.0 4.5 7.9 6.2 4.6 4.6 Korea

2.8

3.8 3.9 4.3 3.8 3.5 3.8 3.8 3.5

1.1

2.2

2.9

2.9 Malaysia 4.5 5.5 5.1 6.8 5.5 5.5 5.3 5.0 5.0 2.6 2.9 3.1 5.2 Philippines

6.9 6.5↑ 6.7 ↑ 4.5 ↓ 2.0 9.5↑ 8.2 ↑ 6.1↑ 7.0 ↑ 3.4

4.1

3.6

3.7 Singapore 3.7 4.1 4.4 1.3 -2.8 9.1 4.5 -1.2 6.6 2.2 3.7 2.8 2.6 Taiwan 1.9

3.1 3.8 1.1 3.5 3.4 3.7 4.0 4.2 0.5 ↓ 1.2↓ 1.6↑ 1.9

Thailand 2.6 3.0 4.2 5.2 3.5 3.8 4.0 4.2 4.0 1.6 2.6 2.9 3.8 Western Europe 0.0

1.3 1.9 0.7 1.2 1.4 1.3 1.7 1.9 1.1 1.1 1.2 1.3

Euro area -0.4 1.0 1.7 0.3 0.8 1.0 1.0 1.5 1.5 0.8 0.9 1.0 1.0 Germany 0.5

1.8 2.2 1.3 1.5 2.0 1.5 2.0 2.0 1.3 ↓ 1.1↓ 1.3↓ 1.6

France 0.1 0.5 1.3 -0.6 0.0 0.5 0.5 1.0 1.0 0.8 ↑ 1.3↑ 1.2↑ 1.1 Italy -1.8

0.8 1.6 -0.1 0.5 1.0 1.5 1.5 1.5 0.7 ↑ 0.7↑ 0.9↑ 0.7

Spain -1.2 ↑ 1.0↑ 1.3 0.5 1.0↑ 1.0↑ 1.5 ↑ 1.5 1.0 ↓ 0.2 0.3↑ 0.2↑ -0.2 Norway

1.8

2.1

2.5

1.9 1.8 2.1 2.3 2.5

2.5

2.3 ↓ 2.1↓ 2.2↑ 1.8 ↓Sweden 0.6 1.4 2.6 -1.6 1.3 2.1 2.3 2.5 2.5 0.0 ↓ 0.3↓ 0.8↓ 1.8 United Kingdom

1.9

3.0 3.1 3.1 3.5 3.0 2.5 2.5 3.5

2.2

2.3

2.3

2.2 EMEA EM 1.9 2.3 3.0 2.2 2.5 1.7 2.0 2.8 3.3 5.1 4.8 4.4 4.2

Czech Republic

-1.4

1.9

2.2

0.9 ↑ 0.9

1.7

2.4

3.6

4.4

1.1 ↓ 0.6 1.7 1.5 Hungary 1.1 2.3 2.5 3.6 2.5 2.0 2.0 1.8 2.5 0.7 1.5 2.5 3.1 Israel

3.5

3.7 3.8 2.2 4.9 3.2 3.3 3.6 4.5

2.0

2.3

2.0

2.2 Poland 1.4 2.8 3.2 2.4 2.5 2.5 2.5 3.0 3.5 0.7 1.5 1.9 2.4 Romania

2.6

2.3 3.0 6.6 1.2 1.8 2.0 1.9 1.2

2.0

1.3

3.5

3.5 Russia 1.5 1.8 2.5 1.6 3.0 1.3 1.5 2.0 2.5 6.4 5.6 4.5 4.6 South Africa 1.9

3.0 3.2 0.7 3.9 3.1 3.0 3.5 3.5 5.4 6.0 5.9 5.7

Turkey 3.8 2.5↓ 4.0 3.5 0.4 1.2↓ 2.0 ↓ 4.3↓ 5.0 7.5 7.4 7.1 5.5

Global 2.4

3.0

3.2

3.2

3.2

3.0 2.3

3.2

3.3 2.3 2.7 2.6 2.6

Developed markets 1.2 2.0 2.3 2.3 2.3 2.2 1.1 2.2 2.4 1.2 1.7 1.7 1.8 Emerging markets 4.5

4.7

5.0

4.9

4.8

4.4

4.4

4.8

5.0 4.3 4.4 4.2 3.9

Global — PPP weighted 2.9 3.4 3.7 3.7 3.6 3.3 2.8 3.6 3.7 2.8 3.1 3.0 2.9 Note: For some emerging economies, 2013-2015 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan. Bold denotes changes from last edition of Global Data Watch, with arrows showing the direction of changes. Underline indicates beginning of J.P. Morgan forecasts. Unless noted, concurrent nominal GDP weights calculated with current FX rates are used in computing our global and regional aggregates. Regional CPI aggregates exclude Argentina, Ecuador and Venezuela. This week we rolled forward our concurrent nominal US$ GDP weights used in calculating regional aggregates to 2012. Therefore, no arrows or bold numbers will be shown in those lines for this week.

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JPMorgan Chase Bank NA David Hensley (1-212) 834-5516 [email protected] Carlton Strong (1-212) 834-5612 [email protected]



G-3 economic outlook detail 2013 2014 2015 2013 2014 2015 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q United States Real GDP 1.9 2.9 2.9 4.1 2.8 2.5 2.5 3.0 3.0 3.0 3.0 Private consumption 2.0 2.6 2.9 2.0 3.8 2.5 2.2 2.7 2.7 3.3 3.3 Equipment investment 2.9 5.8 6.1 0.2 7.4 6.5 6.5 7.0 7.0 6.0 6.0 Non-residential construction 1.6 8.8 7.5

13.4 3.6 8.0 9.0 10.0 8.0 8.0 6.0

Intellectual property products 2.9 3.3 3.4 5.7 1.0 4.0 4.0 4.0 4.0 3.0 3.0 Residential construction 12.4 10.4 15.3

10.3 -4.8 12.0 15.0 18.0 20.0 15.0 13.0

Inventory change ($ bn saar) 81.5 68.8 54.2 115.7 111.7 83.2 70.1 61.6 60.4 59.0 57.6 Government spending -2.2 -0.9 -0.3

0.4 -4.5 0.6 -0.7 -0.6 -0.5 -0.3 -0.1

Exports of goods and services 2.7 7.0 5.5 3.9 10.5 6.5 6.5 6.5 6.0 5.0 5.0 Imports of goods and services 1.6 4.0 5.9 2.4 3.5 3.5 4.0 5.0 6.2 6.5 6.0 Domestic final sales contribution 1.6 2.6 3.1 2.3 2.1 2.9 2.6 3.1 3.1 3.3 3.2 Inventories contribution 0.2 -0.1 -0.1 1.7 -0.1 -0.8 -0.3 -0.2 0.0 -0.1 0.0 Net trade contribution 0.2 0.3 -0.1 0.1 0.8 0.4 0.3 0.2 -0.1 -0.3 -0.2

Consumer prices (%oya) 1.5 1.4 1.9 1.6 1.2 1.1 1.6 1.4 1.6 1.8 1.8 Excluding food and energy (%oya) 1.8 1.6 1.8 1.7 1.7 1.6 1.7 1.6 1.7 1.7 1.8 Federal budget balance (% of GDP, FY) -4.0 -3.7 -3.1 Personal saving rate (%) 4.5 4.3 4.7 4.9 4.3 4.3 4.4 4.3 4.4 4.7 4.7 Unemployment rate (%) 7.3 6.5 6.0 7.2 7.0 6.7 6.5 6.4 6.3 6.2 6.0 Industrial production, manufacturing 2.2 2.7 2.9 1.4 5.2 2.0 2.5 3.0 3.0 3.0 3.0 Euro area

Real GDP -0.4 1.0 1.7 0.3 0.8 1.0 1.0 1.5 1.5 2.0 1.5 Private consumption -0.5 0.6 1.2

0.3 0.5 0.5 0.5 1.0 1.0 1.0 1.5

Capital investment -3.2 1.1 2.0 1.6 0.5 1.0 1.0 1.5 1.5 2.5 2.0 Government consumption 0.3 0.4 0.9 0.8 0.0 0.5 0.5 0.5 0.5 1.0 1.0 Exports of goods and services 1.0 3.1 3.6 0.7 2.5 3.0 3.0 3.5 3.5 4.0 3.5 Imports of goods and services 0.0 3.3 3.8 4.0 2.5 2.5 3.0 4.0 4.0 4.0 4.0 Domestic final sales contribution -0.8 0.6 1.2 0.6 0.4 0.6 0.6 0.9 0.9 1.2 1.4 Inventories contribution -0.1 0.3 0.4 1.0 0.3 0.1 0.3 0.6 0.6 0.6 0.1 Net trade contribution 0.5 0.0 0.1 -1.3 0.1 0.3 0.1 0.0 0.0 0.2 0.0

Consumer prices (HICP, %oya) 1.4 0.8 1.0 1.3 0.8 0.7 0.9 0.7 1.0 1.0 1.0 ex unprocessed food and energy 1.3 0.9 0.9 1.3 1.0 0.9 0.9 0.8 0.9 0.8 0.8 General govt. budget balance (% of GDP, FY) -3.0 -2.5 -2.4 Unemployment rate (%) 12.1 12.1 11.8 12.1 12.1 12.1 12.1 12.0 12.0 11.9 11.9 Industrial production -0.6 1.7 2.3

-0.9 1.0 2.0 2.0 2.5 2.5 2.5 2.0

Japan Real GDP 1.7 1.4 1.2 1.1 3.8 4.0 -4.5 1.2 1.7 1.6 2.4 Private consumption 2.1 1.0 1.3 0.8 4.2 5.5 -8.5 1.0 2.2 2.0 3.5 Business investment -1.4 3.8 4.2 0.0 5.0 5.0 3.0 4.2 4.0 4.0 4.5 Residential construction 8.3 2.6 2.4

11.0 12.0 8.0 -10.0 -8.0 3.0 5.0 10.0

Public investment 10.7 5.3 -3.3 28.9 10.0 -5.0 0.0 0.0 2.0 -10.0 -5.0 Government consumption 2.0 1.4 1.2

1.0 1.5 1.5 1.2 1.0 1.2 1.2 1.2

Exports of goods and services 1.7 4.6 4.8 -2.4 6.0 5.5 4.5 4.5 4.0 5.0 5.0 Imports of goods and services 2.8 6.1 5.2

9.2 8.0 9.0 -0.5 4.3 5.5 5.5 6.5

Domestic final sales contribution 2.1 1.6 1.5 3.1 4.1 4.5 -5.4 1.2 2.0 1.8 2.7 Inventories contribution -0.3 -0.1 -0.3 -0.4 -0.2 -0.1 0.1 -0.1 -0.1 -0.2 -0.2 Net trade contribution -0.1 -0.1 0.0 -1.6 -0.2 -0.4 0.8 0.1 -0.2 0.0 -0.1

Consumer prices (%oya) 0.3 3.0 2.3

0.9 1.4 1.5 3.7 3.3 3.4 3.4 1.4

General govt. net lending (% of GDP, CY) -11.0 -9.9 -9.8 Unemployment rate (%) 4.0 3.9 3.8 4.0 4.0 4.0 3.9 3.9 3.9 3.8 3.8 Industrial production -0.6 4.7 4.0 7.0 8.0 9.0 -7.0 6.5 6.0 7.0 7.0

Memo: Global industrial production 1.7 3.7 3.7 2.9 4.8 4.1 2.6 4.1 4.2 4.4 4.4 %oya 2.0 3.1 3.5 3.5 3.8 3.7 3.8 4.3 Note: More forecast details for the G-3 and other countries can be found on J.P. Morgan’s Morgan Markets client web site

6

JPMorgan Chase Bank NA David Hensley (1-212) 834-5516 [email protected]

Michael Mulhall (1-212) 834-9123 [email protected]



Global Central Bank Watch Official Current Change since (bp)

Last change Next mtg Forecast Forecast (%pa)

rate rate (%pa) 05-07 avg Trough1 Jul 11 next change Mar 14 Jun 14 Sep 14 Dec 14 Mar 15

Global 2.23 -212 42 -48 2.24 2.23 2.23 2.25 2.31

excluding US 2.96 -132 52 -52 2.96 2.95 2.95 2.98 3.05

Developed 0.32 -317 0 -50 0.33 0.33 0.33 0.33 0.35

Emerging 5.69 -135 81 -58 5.79 5.76 5.76 5.82 5.93

Latin America 6.99 -376 118 -204 7.24 7.22 7.29 7.33 7.73

EMEA EM 4.80 -165 88 46 5.00 4.80 4.64 4.72 4.77

EM Asia 5.57 -23 109 -41 5.60 5.62 5.65 5.71 5.74

The Americas 1.51 -357 42 -53 1.49 1.48 1.50 1.50 1.58

United States Fed funds 0.125 -438 0 0 16 Dec 08 (-87.5bp) 29 Jan 14 4Q 15 (+25bp) 0.125 0.125 0.125 0.125 0.125

Canada O/N rate 1.00 -273 75 0 8 Sep 10 (+25bp) 22 Jan 14 2Q 15 (+25bp) 1.00 1.00 1.00 1.00 1.00

Brazil SELIC O/N 10.00 -525 275 -250 27 Nov 13 (+50bp) 15 Jan 14 15 Jan 14 (+25bp) 10.50 10.50 10.50 10.50 11.25

Mexico Repo rate 3.50 -437 0 -100 25 Oct 13 (-25bp) 31 Jan 14 2Q 15 (+25bp) 3.50 3.50 3.50 3.50 3.50

Chile Disc rate 4.50 -19 400 -75 19 Nov 13 (-25bp) 16 Jan 14 18 Feb 14 (-25bp) 4.25 4.00 4.00 4.00 4.00

Colombia Repo rate 3.25 -406 25 -125 22 Mar 13 (-50bp) 20 Jan 14 Jul 14 (+25bp) 3.25 3.25 4.00 4.50 4.50

Peru Reference 4.00 -6 275 -25 7 Nov 13 (-25bp) 13 Feb 14 On hold 4.00 4.00 4.00 4.00 4.00

Europe/Africa 1.34 -248 0 -62 1.37 1.32 1.29 1.31 1.35

Euro area Refi rate 0.25 -273 0 -125 7 Nov 13 (-25bp) 6 Feb 14 4Q 16 (+25bp) 0.25 0.25 0.25 0.25 0.25

United Kingdom Bank rate 0.50 -444 0 0 5 Mar 09 (-50bp) 6 Feb 14 1Q 15 (+25bp) 0.50 0.50 0.50 0.50 0.75

Norway Dep rate 1.50 -169 25 -75 14 Mar 12 (-25bp) 27 Mar 14 2Q 15 (+25bp) 1.50 1.50 1.50 1.50 1.50

Sweden Repo rate 0.75 -181 50 -125 18 Dec 13 (-25bp) 12 Feb 14 3Q 15 (+25bp) 0.75 0.75 0.75 0.75 0.75

Czech Republic 2-wk repo 0.05 -235 0 -70 1 Nov 12 (-20bp) 6 Feb 14 On hold 0.05 0.05 0.05 0.05 0.05

Hungary 2-wk dep 3.00 -413 0 -300 17 Dec 13 (-20bp) 26 Jan 14 26 Jan 14 (-10bp) 2.70 2.70 2.70 3.00 3.30

Israel Base rate 1.00 -325 50 -225 23 Sep 13 (-25bp) 27 Jan 14 1Q 15 (+25bp) 1.00 1.00 1.00 1.00 1.25

Poland 7-day interv 2.50 -202 0 -200 3 Jul 13 (-25bp) 5 Feb 14 4Q 14 (+25bp) 2.50 2.50 2.50 2.75 3.00

Romania Base rate 3.75 -444 0 -250 8 Jan 14 (-25bp) 4 Feb 14 4 Feb 14 (-25bp) 3.50 3.50 3.50 3.50 3.50

Russia Key pol rate 5.50 N/A N/A N/A 13 Sep 12 (+25bp) Jan 14 2Q 14 (-25bp) 5.50 5.25 5.00 5.00 5.00

South Africa Repo rate 5.00 -329 0 -50 19 Jul 12 (-50bp) 29 Jan 14 Sep 14 (+50bp) 5.00 5.00 5.50 5.50 5.50

Turkey Intbnk O/N 7.30 -864 206 105 N/A² 21 Jan 14 N/A² 8.50 8.00 7.50 7.75 7.75

Asia/Pacific 3.78 11 88 -34 3.79 3.80 3.82 3.86 3.90

Australia Cash rate 2.50 -344 0 -225 6 Aug 13 (-25bp) 4 Feb 14 4 Feb 14 (-25bp) 2.25 2.25 2.25 2.25 2.50

New Zealand Cash rate 2.50 -488 0 0 10 Mar 11 (-50bp) 30 Jan 14 2Q 14 (+25bp) 2.50 2.75 3.00 3.25 3.50

Japan O/N call rate³ 0.05 -17 0 0 5 Oct 10 (-5bp) 22 Jan 14 On hold 0.05 0.05 0.05 0.05 0.05

Hong Kong Disc. wndw 0.50 -548 0 0 17 Dec 08 (-100bp) 30 Jan 14 4Q 15 (+25bp) 0.50 0.50 0.50 0.50 0.50

China 1-yr working 6.00 -14 69 -56 7 Jul 12 (-31bp) - On hold 6.00 6.00 6.00 6.00 6.00

Korea Base rate 2.50 -165 50 -75 9 May 13 (-25bp) 13 Feb 14 4Q 14 (+25bp) 2.50 2.50 2.50 2.75 3.00

Indonesia BI rate 7.50 -237 175 75 12 Nov 13 (+25bp) 13 Feb 14 2Q 14 (+25bp) 7.50 7.75 7.75 7.75 7.75

India Repo rate 7.75 88 300 -25 29 Oct 13 (+25bp) 28 Jan 14 1Q 14 (+25bp) 8.00 8.00 8.25 8.50 8.50

Malaysia O/N rate 3.00 -24 100 0 5 May 11 (+25bp) 29 Jan 14 On hold 3.00 3.00 3.00 3.00 3.00

Philippines Rev repo 3.50 -356 0 -100 25 Oct 12 (-25bp) 6 Feb 14 4Q 14 (+25bp) 3.50 3.50 3.50 3.75 4.00

Thailand 1-day repo 2.25 -158 100 -100 27 Nov 13 (-25bp) 22 Jan 14 1Q 15 (+25bp) 2.25 2.25 2.25 2.25 2.50

Taiwan Official disc. 1.875 -71 62.5 0 30 Jun 11 (+12.5bp) 1Q 14 1Q 15 (+12.5bp) 1.875 1.875 1.875 1.875 2.00

1 Refers to trough end-quarter rate from 2009-present ² Effective rate can be adjusted on daily basis 3 BoJ targets ¥60-70tn/year expansion in monetary base

Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting during upcoming week. Aggregates are GDP-weighted averages.

7

JPMorgan Chase Bank NA Joseph Lupton (1-212) 834-5735 [email protected]



Michael Mulhall (1-212) 834-9123 [email protected]

Nowcast global growth: 4Q13 Model tracking year-end pop The official J.P. Morgan estimate of quarterly sequential

global GDP growth in 4Q13 is 3.2%. As noted in this week’s cover essay, this is higher than the 3.1% published last week due to a rolling forward of our GDP weights. Controlling for this, our estimate of 4Q global GDP growth is unchanged. We made only a few small revisions to our country forecasts this week. Most notably, US GDP growth was marked a bit higher to 2.8%. Spain also received an upgrade, moving from 0.3% to 1%. Offsetting these improvements were markdowns to our calls for Chile (-1.1%-pts to 1.9%) and Mexico (-0.6%-pts to 3.6%).

Our top-down nowcast model estimate of 4Q GDP growth picked up a good bit this week, rising to 3.4%q/q saar. This is the strongest estimate since the early stages of the tracking exercise in mid-November, and buttresses the moderate upside risk to our official projections that has been in place over this time.

The data received over the past week have been mixed but on net suggest global activity was even stronger at year-end than the model previously suggested. The global services PMI for December disappointed the nowcaster’s internal momentum model with its small decline to 53.6. However, that the activity PMI held on to the majority of its 2pt November increase was not a bad outcome by any means. Rounding out the week’s downside data reports was a 0.6%-pt downward revision to global auto sales growth in November.

The reasons for the pickup in the nowcaster were twofold. This week we unveil our preliminary tallies of global IP and retail sales volume in November. Both series popped nicely, rising 0.6% and 0.9%, respectively. We will publish the official global figures upon the release of Euro area IP (Tuesday) and Japanese consumption (no specific date). We will also receive G-3 capital goods orders for the month on Thursday. With strong rises already logged in the US and German data, the risks are for the aggregate to at least match the 2.3% monthly gain expected by the nowcaster.

This week’s data reinforce the model projection of a sharp upswing in global activity at year-end. Keeping in mind the dip and rebound in the October and November services PMIs that may have been due to the US government shutdown, the model estimates global GDP stepped up to a 4.1% average annualized pace over the final two months of the year. That the December estimate remains a robust 4.0%ar at least partly eases worries that the November level simply reflects artificial bounceback from the depressed October reading.

Global real GDP %q/q, saar (Current forecast shaded)

3Q13 4Q13

Current Last week 4 weeks ago

J.P. Morgan 3.1 3.2 3.1 3.0 Nowcaster (DFM-Eco) 3.0 3.4 3.3 3.3 Global PMI model 3.0 2.9 2.9 2.9 Source: J.P. Morgan

J.P. Morgan global aggregates Quarters are %3m/3m,saar (PMIs avg level); Months are %m/m (PMIs level)

3Q13 4Q13 Sep 13 Oct 13 Nov 13 Dec 13

PMI, mfg 52.3 54.5 53.1 52.9 55.2 55.3 PMI, serv 54.0 53.1 54.9 51.8 53.8 53.6 IP 2.9 4.8 0.2 0.3 0.6 0.5 Retail sales 4.0 4.6 0.1 0.4 0.9 0.2 Auto sales 0.3 13.0 0.6 2.1 0.7 0.5 Cap. orders 3.1 8.7 3.2 -2.2 2.3 0.4

Nowcast 3.0 3.5 3.4 2.8 4.2 4.0 Note. Shaded values show forecasts computed by the Kalman filter estimates from the dynamic factor model. Underlined values are our estimates based on available data and our judgment. Source: J.P. Morgan, Markit, and national statistical agencies.

2.7

2.9

3.1

3.3

3.5

Nov

08

Nov

15

Nov

22

Nov

29

Dec

06

Dec

13

Dec

20

Jan

03

Jan

10

Jan

17

Jan

24

Jan

31

Feb

07

Feb

14

Feb

21

J.P. Morgan

Nowcast

Nowcasting global real GDP by forecast date, 4Q13

%q/q, saar

Source:J.P.Morgan

1.01.52.02.53.03.54.04.5

Jan 11 Jul 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13

%q/q, saar; Box shows J.P. Morgan projection for 4Q13

Global real GDP

Nowcaster(dashed line shows %m/m, saar)

Actual/JPM(%q/q, saar)

Source:J.P.Morgan

8

Economic ResearchGlobal Data WatchJanuary 10, 2014

JPMorgan Chase Bank NA, New YorkBruce Kasman (1-212) [email protected]

David Hensley (1-212) [email protected]

Joseph Lupton (1-212) [email protected]

Selected recent research1 from J.P. Morgan EconomicsGlobalAnother pause in global FX reserve accumulation, Oct 25, 2013EM have driven recent pop in global IP growth, Oct 18, 2013Global inflation settling in for a long winter's nap, Oct 11, 2013Don’t ignore export boost amid EM gloom, Aug 30, 2013

United States and CanadaUS: the beginning of the end of unconventional Fed policy, Dec 20, 2013US: Unemployment benefits, participation, and the Fed, Nov 29, 2013US core inflation wedge keeps getting wider, Nov 29, 2013Low and stable growth for US labor costs, Nov 22, 2013Revisiting the demographic case for US housing, Nov 8, 2013US: labor market implications of health care reform, Oct 25, 2013US: does Fed policy exacerbate income inequality? Oct 25, 2013Simple explanations of falling US unemployment don’t cut it, Oct 25, 2013US: how will the shutdown affect economic reports? Oct 18, 2013US manufacturing renaissance is still just a concept, Oct 18, 2013FOMC preview, Sep 13, 2013

What the smaller external gap means for US competitiveness, Sep 13, 2013

Western EuropeThe ECB in 2014: stuck at the zero nominal bound, Jan 3, 2014The UK in 2014: the little engine that could, Jan 3, 2014Euro area periphery politics: good, bad, and ugly scenarios, Dec 6, 2013UK: The BoE spreads its macroprudential wings, Dec 6, 2013ECB preview and options, Nov 29, 2013The relentless European Commission, Nov 22, 2013Italian politics: from dysfunction to possibility of change, Nov 22, 2013Banking union: an update from Europe's construction site, Nov 8, 2013UK: a bad start to the BoE's productivity gamble, Nov 1, 2013Euro area periphery: 2014 primary surpluses for many, Oct 25, 2013The ECB’s 2015 inflation forecast will be low, Oct 25, 2013Europe’s political mainstream set to face ongoing pressure, Oct 25, 2013UK: how much slack is “underemployment” hiding? Oct 11, 2013Fiscal consolidation the Italian way: only through tax hikes, Oct 11, 2013French budget: pace of fiscal consolidation to slow in 2014, Oct 4, 2013Change in budget accounting could have broad implications, Sep 27, 2013Greece: is there some light at the end of the tunnel? Sep 27, 2013A rising global tide has lifted the UK boat above sea level, Sep 27, 2013The macro consequences of the AQR and stress test, Sep 20, 2013ECB: the 2014 problem, Sep 20, 2013A busy autumn ahead for Euro area policymakers, Sep 13, 2013UK: softening in labor supply growth is likely to continue, Sep 13, 2013

Central Europe, Middle East, and AfricaCEE: reaping the benefits of external rebalancing, Nov 22, 2013Turkey: pricing rather than funding risk, Sep 20, 2013Historical lessons on market impact from Syrian conflict, Sep 13, 2013

1. Research notes listed have been published in GDW; Special Reports and Global Issues are stand-alone features, but may also have appeared in some form in GDW.

JapanJapan: fiscal drag likely marginal in CY2014, Jan 3, 2014Japan: public pension reform to deepen financial market, Nov 22, 2013Japan: core wages unlikely to rise much on average, but... Nov 22, 2013Japan: can Abenomics achieve fiscal targets? Oct 25, 2013BoJ’s communication policy to raise inflation expectations, Oct 11, 2013Japan: tax hike, economic package, and growth strategy, Sep 27, 2013

Non-Japan Asia and PacificA stealthy deterioration in the Aussie labor market, Dec 20, 2013Australia's economy in 2014: still minding the gap, Dec 13, 2013Korea: solid employment gain with mixed details, Dec 13, 2013China: tightened liquidity amid credit tapering, Nov 29, 2013Wealth effects and the path of Aussie household consumption, Nov 8, 2013China: what do profits tell us about the industrial sector? Nov 8, 2013EM Asia's tech exports dancing to different tunes, Nov 1, 2013Australia: where are we in the RBA's easing cycle? Oct 18, 2013India: making sense of current growth impulses, Oct 18, 2013Taiwan's economy tracks the global recovery, Oct 18, 2013Australia’s productivity gains mask underlying weakness, Oct 11, 2013Hong Kong: growth outlook and associated risks, Oct 11, 2013Gauging underlying demand conditions of Korean exports, Oct 11, 2013Crawling not walking: Australia’s sluggish transition, Sep 27, 2013Aussie first home buyers absent in housing upswing, Sep 20, 2013Adjusting for interplay between the RBNZ’s policy tools, Sep 20, 2013Emerging Asia riding on the coattails of China’s tourists, Sep 20, 2013What lies beneath Thailand’s current account deficit? Sep 20, 2013Singapore: another uneventful MAS meeting expected, Sep 20, 2013Australian voters punish Labor, turn back to the Coalition, Sep 13, 2013Aussie exports have weathered the China slowdown, Sep 13, 2013

Latin AmericaMexico: energy and fiscal reform bills in focus, Jul 12, 2013Shedding light on Latin America’s shadow FX rates, May 24, 2013

Special Reports and Global IssuesThe US economic outlook in 2014, Jan 2, 2014We will grow, but can we heal? 2014 global economic outlook, Dec 19, 2013Ten questions about China, Dec 18, 2013Enjoying the interval in the Euro area drama, Oct 24, 2013US future isn't what it used to be: potential growth falls below 2%, Aug 12, 2013Job gains to lag global growth lift, Jul 24, 2013BoJ to succeed by failing to hit its inflation goal, Jul 24, 2013China’s financial sector: concerns about the mounting risks, Jul 18, 2013The challenge of very low inflation in the Euro area, Jul 9, 2013Germany’s election and beyond, July 3, 2013Beyond “whatever it takes”: ECB policy challenges in the year ahead, Feb 5, 2013More growth, less fear: 2013 global economic outlook, Jan 9, 2013

9

JPMorgan Chase Bank NA Jan Loeys (1-212) 834-5874 [email protected]


The J.P. Morgan View: Markets

Who's got their act together? Asset allocation –– Divergences in how determined

countries are in pursuing demand and supply side stimulus are becoming more important in driving country performance. Be OW Japan and the US equities.

Economics –– We fade the downbeat message from US Payrolls as weather driven and not consistent with other activity signals. US Q4 2013 is upgraded from 2.5% to 2.8% on stronger inventory building.

Fixed Income –– Stay long Euro area periphery vs. core, German Bunds vs. USTs and UK gilts, and short UST duration via steepeners medium term, despite increased potential for near-term noise after payrolls.

Equities –– OW Spanish and Italian equities vs. French equities.

Credit –– Trim credit OW as spreads are back almost to pre-crisis tights.

FX –– We expect further weakness in AUD and CAD vs. the USD.

Commodities –– Open a tactical short in US natural gas..

Equities are starting the new year poorly and bonds are up, suggesting investors are taking profit on the positions they built late last year. Other markets, though, are singing the same tune as last year with credit spreads coming in and EM and commodities underperforming. Position squaring is thus not a catch-all explanation of YTD market moves. We self-servingly choose to interpret the latter repeats from last year as consistent with fundamentals and our views, and the former – bonds up and equities down – as noise that does not mean much for the rest of the year.

The rally in bonds clearly has much to do with today’s disappointing US jobs report. One can explain part of it from the bad weather in December, but this does not explain the 0.3% drop in the unemployment rate, nor the related 0.2% drop in the participation rate. The latter two are clearly bearish for bonds. We are fading the downbeat message from Payrolls as the report can be quite volatile and does not fit cleanly with other more upbeat signals on US activity growth. We respect the positive momentum in US growth forecasts for 2014. We thus retain a positive bias on growth and on growth trades such as long equities and credit, short bonds, overweight Cyclical stocks, OW US in equities and UW US in duration.

Value is similarly a major part of our OW of equities, but is starting to raise warnings on the advanced nature of the rally in credit spreads, where the peak-to-cyclical-trough rally in HG and HY spreads is likely over 90% done. We thus take half profit on spread tightening positions.

Beyond these macro investment themes of Growth, the Cycle, US Leadership, Value and Momentum, we have combined others into the broad theme of Policy Divergence, and have added exposure to it. In a nutshell, this means that we weight our country equity positions by how much each country has its act together in terms of boosting economic growth, both from a short-term demand side point of view and from a more medium- term productivity and supply side point of view.

The country with the highest commitment to policy support and reform is in our mind Japan. There are valid questions on how much of Abenomics will get implemented, but we are optimistic given a unified government and a clear motivation in the form of a newly assertive China. This policy should generate higher growth, inflation and asset reflation simultaneously. We are looking in particular for signs of domestic investors joining the scramble for equities. This keeps us long Japanese equities, and short JPY, as QQE should remain a negative here. JGB yields should see little change this year.

In the US, monetary policy remains super easy. The FOMC cut its QE buying pace by $10bn this month and likely by the same amount each meeting, with the last cut in Oct. The Fed has been careful to signal that this is a change in approach towards Rate Guidance and not a tightening. We see the move as gently bearish for bonds, pushing 10-yr UST yields to 3.65% by year end, or 20bp higher than forwards. But the Bernanke-now-Yellen Put remains in place, with the Fed continuing to communicate a pro-growth bias. We do not know how aggressively Janet Yellen as the new Chair will be able to push an aggregate supply agenda in the face of higher growth and inflation, but she is more likely to do so than any other central bank, bar the BoJ.

There is little reform in the US, but we believe the recent passing of a budget for 2014-15 raises the odds of an immigration or tax reform bill. Market expectations are subdued, but any progress would be a boost for US risk assets and the dollar.

We are much less optimistic about policy support in Europe. The recession is over, but inflation continues to fall to new record lows. Investors are worried the Euro area is making the same mistakes as Japan 20 years ago and is headed for deflation. The ECB denies this, as it is quite pessimistic on potential growth in the region. Together with institutional

10

Economic Research The J.P. Morgan View: Markets January 10, 2014


constraints, it is much less likely to take further non-standard measures to boost growth. Also, the ECB has made it clear for some time that it has no impact on the supply side and that this is the remit of national governments, who in turn are hardly pro-active in pursuing reform. As a result, we are UW Euro area equities, ignoring the superior value that can be claimed for them versus other markets.

Within EM, Chinese reform plans from the 3rd Plenary Session are impressive, but have no deadlines and face a checkered history. We are on the optimistic side, but must take account also of the fact that aggregate demand policy is on the neutral to tight side. Both credit and leverage have been growing faster than GDP in China, particularly for financials, real estate, and local government. Over the next few quarters, credit slowing policies are set to slow growth and will likely offset the positive impact on equities from reform measures. This keeps us UW Chinese equities and long the currency.

Elsewhere, Mexico is pursuing an ambitious reform plan which is keeping us overweight its equities and the currency. India has great potential and need for reform, but we will likely have to wait until after the elections in May to hear more. In the meanwhile, we keep an overweight on its stock market. Among the other majors, we see little happening in Brazil, Russia and South Africa.

Fixed income Bonds rallied strongly after US non-farm payrolls came in weaker than expected. The data appeared to be affected by a large weather-related effect relative to December vs. the average December over the last 10 years, and the negative surprises were concentrated in sectors such as construction that are more weather exposed. The payrolls do increase uncertainty in the data, and it may take some time for the market to adjust.

That said, on its own the jobs data do not outweigh positive macro momentum in other US macro indicators, such as the PMIs, and we maintain our medium-term short duration bias in USTs via a 2s10s steepener and cross-market vs. German bunds. From a shorter-term tactical perspective, our US rates team remains neutral duration this week.

In the Euro area, the Spanish PMI and economic sentiment surveys point to a robust buildup in momentum, and our economists have revised their Spanish GDP forecast for 2014 from 0.7% to 1% (Spain is back, Marco Protopapa, Jan 10). We remain overweight peripheral vs. core government bonds. Given the subdued Euro-area inflation outlook and a low-for-long ECB, we remain long duration in German Bunds at the short end.

In the UK, we retain a bearish bias on duration on the improving macro outlook, expressed as a short position on 5Y UK gilts vs. Bunds. Despite the weak November output data today, the survey data continue to point to strong Q4 growth. We also hold a bullish medium-term view on 5-year UK inflation, as we see potential upside risks to RPI from the stronger than expected house price appreciation (Monthly Inflation Outlook, Diamond et al, Jan 8).

Equities We hold on to our medium-term OW stance in US and Japanese equities and continue to avoid EM. While equity funds continue to see strong inflows, the divergence between DM and EM equity market flows is widening. It is the 11th consecutive week that we have witnessed outflows from EM funds compared to inflows into US and global equity funds. This is the longest period EM equities have seen outflows since October 2011. Latam leads with the strongest outflows during the week ending Jan 8. We saw outflows from all emerging markets except Taiwan, Thailand and India.

Strong global PMI momentum underpins our long in Cyclicals vs. Defensives. The global manufacturing PMI rose to 53.3 in December, up from 53.1 in November. We opened an OW in Spain (IBEX 35) and Italy (FTSE MIB) vs. France

-5-4-3-2-1012345

YTD returns through:%, equities in lighter color

9-Jan

47

Source: Bloomberg, J.P. Morgan

0

100

200

300

400

500

600

73 79 86 93 99 06 13

US HG credit spreadBp. JULI index

Source: J.P. Morgan

11



(CAC 40) in our model portfolio this week based on an improving macro picture in the periphery and the loss of momentum in France as evidenced by the latest PMI releases. Moreover, we expect the rapid tightening of peripheral spreads to boost peripheral equities further. See European Equity Strategy by Mislav Matejka who expects this theme last the full year. We also remain OW banks in Europe based on attractive valuations and earnings momentum. In the 2014 Year Ahead Preview, our analysts note business conditions in the semiconductor sector are improving with the communications, automotive and industrial end markets solid. This keeps us OW semiconductors in the US.

Credit In GMOS on Wednesday, we trimmed our credit overweight as the recent rally has brought spreads down almost to pre-crisis tights. We still expect positive returns from credit but we think the risk-return tradeoff is now less attractive. Our colleagues in European High Yield Strategy today wrote that European HY spreads are now 52bp rich to their fair value model. This is the first time spreads have compressed through fair value since November 2011. The model uses the current 30 day average VSTOXX of 17 and assumes a 2014 default rate of 2% (High Yield Talking Points, Bailey and Lamy, Jan 10).

In the US, supply will likely keep spreads range bound near term but the recent trend of stronger economic data and our expectation of higher UST yields favor tighter spreads over time. Over the last month, EM rallied, but by no more than US names, keeping the EM spread discount to the US stable. Our spread outlook for EM remains less optimistic than for US credit. The heavy election calendar in major EM countries poses substantial uncertainty and is likely to create more volatility during the year for EM corporates. Downside risk on growth for several key EM countries is also a problem. We stay neutral as we are reluctant to pay the negative carry to go short.

Foreign exchange Our Key Currency Views was published today. There are only a few changes to forecasts. New targets include: AUD/USD profile four cents lower in each quarter (bottoming at 0.87 in Q3); more USD/CAD strength (1.10 peak in Q2 vs. previous 1.07 in Q1); USD/CNY ending 2014 at 5.95 (from 6.00); USD/THB ending the year at 33.50 (from 32.50); and USD/PHP at 44.50 in Q4 (from 43.30). All other forecasts are unchanged from our Nov 27, FX 2014 outlook. Although USD/JPY is at our Q1 target of 104, the forecast is unchanged given political and cyclical risks in Japan.

2014 should deliver a less-dramatic version of 2013 given the very atypical process of US rate normalization. The UST curve continues to bear steepen as long rates rise while US funding rates remain at zero, a pattern which occurs only about 15% of the time in rates markets. Since cash rates are more influential on FX than long rates (because cash rates drive carry gains and hedging costs), and if Fed funds won’t rise until late 2015 due to low inflation, the dollar’s gains should be limited in magnitude and scope.

The biggest losers in 2014 should be currencies of G-10 countries where central banks are easing or could do (JPY, AUD, SEK, EUR); and emerging markets where external positions are poor and financing dependent on bond market inflows (IDR, MYR, BRL, CLP, TRY, ZAR). The biggest winners should be G-10 countries with enough cyclical momentum to justify rates hikes this year (NZD) or in early 2015 (GBP), plus emerging markets with stronger external positions (ILS, MXN, CNY, KRW). This range of outcomes nets to only small gains on the dollar index of about 3% on DXY (target 83.5) and flat on a broader trade-weighted index (JPMQUSD target 84.5). Although this pattern would look a lot like 2013, there should be a few important differences: much smaller USD gains in 2014 versus JPY, AUD and the weakest EM currencies; most EM currencies beating the forwards; USD gains eventually versus EUR as short-end US rate expectations edge higher over 2014; and greater GBP outperformance in 2014 than in 2013.

Commodities Commodities are down 4% so far in 2014 with energy, base metals and Agriculture down 3%, 2.5% and 2% offsetting a 3.5% rally in precious metals. In GMOS, we kept our UW commodities vs. equities and credit on a weak China and higher supply. We are outright short agriculture as we think new supply will come in the spring. Oil is down 5% YTD as Libyan production has restarted faster than anticipated. US natural gas prices, in contrast, have rallied strongly since early Nov on the harsh cold across North America. Our meteorologists expect the polar vortex to move towards Europe over coming weeks, with the US warming up. Gas prices have already fallen somewhat but they remain elevated given still very high production rates. We initiate a tactical short via the GSCI natural gas index.

12



Forecasts & Strategy

Interest rates Current Mar-14 Jun-14 Sep-14 Dec-14 United States Fed funds rate 0.125 0.125 0.125 0.125 0.125

10-year yields 2.88 3.10 3.25 3.50 3.65

Euro area Refi rate 0.25 0.25 0.25 0.25 0.25

10-year yields 1.85 1.85 2.00 2.15 2.25

United Kingdom Repo rate 0.50 0.50 0.50 0.50 0.50

10-year yields 2.88 3.15 3.35 3.55 3.70

Japan Overnight call rate 0.05 0.05 0.05 0.05 0.05

10-year yields 0.70 0.60 0.60 0.70 0.80

Emerging markets GBI-EM - Yield 6.88 7.50

Credit Markets US high grade (bp over UST) 133

130

Euro high grade (bp over Euro gov) 98

100

USD high yield (bp vs. UST) 440

425

Euro high yield (bp over Euro gov) 351

400

EMBIG (bp vs. UST) 338

300

EM Corporates (bp vs. UST) 332

325

Foreign Exchange

EUR/USD 1.37 1.33 1.32 1.32 1.30

USD/JPY 104 104 100 102 106

GBP/USD 1.65 1.63 1.61 1.61 1.60

AUD/USD 0.90 0.89 0.88 0.87 0.89

USD/BRL 2.37 2.40 2.45 2.50 2.50

USD/CNY 6.05 6.01 5.98 5.96 5.95

USD/KRW 1059 1070 1040 1030 1020

USD/TRY 2.17 2.20 2.15 2.15 2.15

Commodities Current 14Q1 14Q2 14Q3 14Q4 Brent ($/bbl) 106 110 102 105 105

Gold ($/oz) 1244 1255 1250 1260 1285

Copper ($/metric ton) 7235 7210 7100 6750 6950

YTD Equity Sector Performance* US Europe Japan EM$ Energy 23.0% OW 10.4% UW 15.9% UW -15.3% N

Materials 23.7% OW -1.1% UW 37.6% UW -21.2% UW

Industrials 39.5% OW 26.1% N 44.3% OW -4.7% OW

Discretionary 41.6% OW 28.7% OW 57.2% OW 1.7% N

Staples 24.3% UW 11.8% UW 48.6% OW -7.6% UW

Healthcare 44.2% OW 27.9% OW 45.2% UW 9.4% N

Financials 37.0% OW 30.2% OW 61.8% OW -7.8% N

Information Tech. 26.8% OW 27.1% N 53.8% UW 10.0% OW

Telecommunications 8.4% N 39.4% N 106.5% OW -5.0% UW

Utilities 12.3% UW 12.0% UW 40.3% UW -5.3% N

Overall -0.7% -0.2% -0.4% -3.9% *Levels/returns as of Jan. 9, 2014 Source: J.P. Morgan

Investment themes and impacts Global growth momentum

Upside risk signaled by PMIs. First significant upgrade in US: Long equities, short duration, OW Cyclicals.

US economy leads US has best upside on wealth effects and most supportive policy makers. OW US equities; UW duration vs. rest of the world.

Cycle at mid-age Rising confidence to boost capex and risk assets. Bonds in gentle bear market. Credit spread tightening almost over. UW cash

Central bankers experimenting, again US and Japan are willing to push easy money to boost aggregate supply, much unlike the Euro area. Asset inflation coming faster than growth. OW their equity markets.

Where is the reform? China, Japan and Mexico have a long list and will achieve a decent amount. US Congress may surprise. Europe and much of EM disappoint.

Value Credit spreads are near lows of the cycle. Take half profit, and have lion’s share of risk assets in equities.

Momentum Still best asset allocation signal. Long equities and HY versus bonds and commodities.

Source: J.P. Morgan, GMOS, Jan. 8, 2014.

Tactical overview

Direction Country Sector

Asset allocation

Earn risk and vol premia.

OW Equities, HY credit vs. bonds, cash and Com’s

Equities Long JA, US, Russia

Cyclicals; Banks, Small Caps; Value

Bonds Small short EU vs. US & UK

Euro periphery.

Credit OW, but take half profit

HY, FINs; long end flattening; EMBI vs. CEMBI

FX Bullish USD. Selective UW EM vs. USD

Long CNY; GBP, MXN; NZD vs. JPYAUD. TRY, IDR, CZK, INR.

Comd’s UW given no yield & slower China

Long gasoline vs. Brent. Short Ags

Source: J.P. Morgan

13

JPMorgan Chase Bank NA Michael Mulhall (1-212) 834-9123 [email protected]


Economic Research Note

EM exports spurred by stronger DM domestic demand DM domestic demand has bounced back, spurring a

strong recovery in EM exports

The pass-through to EM economic growth has been muted by stiff headwinds to EM domestic demand

On net, the forecast assumes continued, stable GDP growth in the emerging economies

EM export volume rebounded from a near standstill to a 10% annual rate in the middle two quarters of 2013, fueled by a recovery in DM domestic demand. The export bounceback is promoting stronger EM economic growth; however, this impulse is being offset by significant constraints on EM domestic demand, so the net effect on EM IP and GDP has been muted. Indeed, following a pickup in 2Q13, EM GDP growth appears to have been little changed over the balance of last year. In our forecast, the positives and negatives affecting EM growth remain roughly balanced and thus net to continued, stable EM growth.

Export lift offset by domestic constraints The DM economies have staged a strong recovery over the past year, bolstered by powerful shifts in policy in the Euro area and Japan, in addition to new steps taken by the Fed. This policy action dissipated a cloud of uncertainty, spurring confidence, financial markets, and private-sector spending. Consequently, after having contracted through much of 2012, DM domestic demand began to grow again in 2013, strengthening over the course of the year. The demand pickup was especially pronounced for household durable goods.

Indeed, our high-frequency trackers suggest DM retail sales and capex continued to accelerate into year-end. Household spending recently has been bolstered by low inflation and buoyant equity markets on top of decent gains in labor income. Likewise, capex likely is strengthening in response to expectations for faster sales growth amid reduced uncertainty and a low cost of capital.

The benefits of this demand recovery extend beyond the developed economies to the emerging market economies. In response to improving domestic demand, DM import demand has picked up smartly in recent quarters. Based on the national product accounts, DM real imports rose at an average 5.2% annual rate in 2Q13-3Q13 after having contracted in the previous two quarters. Monthly volume data from the G-3

0

2

4

6

8

10

12

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2011 2012 2013 2014

%oya; both scalesDM domestic demand and EM ex CHN exports

Source: J.P. Morgan, national sources

EM ex CHN exports

DM domestic demand

3.5

4.0

4.5

5.0

5.5

6.0

2012 2013 2014

%q/q, saarEM real GDP

Source: J.P. Morgan

-4

-2

0

2

4

6

-1.2

-0.6

0.0

0.6

1.2

1.8%q/q, saar; both scalesDM real private expenditures

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13Source: J.P. Morgan

Fixed investment

Consumption

-15

-10

-5

0

5

10

15

-2

0

2

4

6

Jan 12 Jul 12 Jan 13 Jul 13

%3m, saar; both scales; w/ Nov 13 est

DM goods expenditure proxies

Source: J.P. Morgan

G-3 capital goods shipments

Real retail sales

14

Economic Research EM exports spurred by stronger DM domestic demand January 10, 2014


indicate that something close to this pace was maintained in 4Q. Roughly half of DM imports come from the EM.

The recovery in EM exports is occurring in textbook fashion, closely in line with what we predicted last August (see “Don’t ignore export boost amid EM gloom,” GDW, Aug 30, 2013). Based on the national product accounts, EM export volume grew at close to 10% annualized in 2Q13-3Q13, compared with a 2.5% pace in the previous two quarters. Although the NIPA data exclude China, they have the major advantage of being free of distortions from pricing and FX effects. In fact, DM growth is tracking even stronger than we had anticipated, with domestic demand now expected to rise 2.1% over the four quarters ending 1Q14, a half-point more than before. EM export growth has exceeded expectations in symmetric fashion (i.e., consistent with our model).

The recovery in EM exports should alleviate any concern that the channel of trade transmission between the DM and the EM has been disrupted since the financial crisis. For example, some have speculated that the import elasticity of DM demand might be significantly lower now that the EM economies, notably China, are more thoroughly absorbed in the global system. In particular, the large gap in cost structures has narrowed somewhat, so that the EM as a whole, or some subset of the EM, might have lost competitive position vis à vis the DM. In previous analysis, we found that our model results were relatively insensitive to the time period used in the estimation. The subsequent confirmation that EM exports are tracking the model provides further reassurance. (Our colleagues in EM Asia come to a similar conclusion; see the research note “EM Asia’s troubled DM dependency” in this week’s GDW.)

The upside surprise in EM exports has contributed to faster growth in IP and GDP than previously anticipated. Indeed, it appears that EM GDP growth will average about 0.5%-pt higher from 2Q13-4Q14 than we forecast in late August (when we published our initial research note on this topic). Our EM economists have not extrapolated the upside GDP surprise to 2014, however. For the most part, this judgment reflects a more downbeat view on EM domestic demand. The tightening in domestic financial conditions as a result of excess credit creation will damp consumer and business spending. At the same time, a squeeze on EM corporate profit margins has caused businesses to curtail capital spending and hiring. In our forecast, the interplay of the cross-currents affecting EM growth, with stronger export gains being offset by domestic headwinds, is roughly balanced and thus nets to little acceleration in EM growth. The forecast anticipates a wide range of outcomes at the country level, however.

-4

-2

0

2

4

6

8

-1.5

0.0

1.5

3.0

2011 2012 2013 2014

%q/q, saarDM real domestic demand and imports

Source: J.P. Morgan

Imports

Domesticdemand

-6

0

6

12

2011 2012 2013 2014

%q/q saar; 4Q DM import projected using monthly G-3 import volumeVolume of EM exports and DM imports


EM ex China exports

DM imports

-5

0

5

10

15

20

25

30

IND

PHL

SGP

MEX

CO

LBR

APE

RC

HL

ZAF

HU

NID

NPO

LR

US

TWN

KOR

MYS EM EM

LEM

AEM

ESource:J.P.Morgan

EM export growth%ch, ar

2Q-3Q13 (q/q saar)

2012 (4Q/4Q)

2

4

6

8

0.5

1.9

3.3

2011 2012 2013 2014

%oya, both scales; ex ChinaEM employment and retail sales


EmploymentRetail sales

15




Bruce Kasman (1-212) 834-5515 [email protected]


The great rotation: EM gaining ground on DM in global GDP EM share of global GDP jumps to one-third

Pace of convergence at risk of slowing in coming years

Rising EM limits decline in global potential growth

Amid the twists and turns of a global economy that has been buffeted over the past seven years by financial crises, fiscal crises, geopolitical flare-ups, and natural disasters, a tectonic shift in the macroeconomic landscape has gone largely unnoticed. Specifically, following a gradual gain in the share of global GDP attributed to the emerging markets (EM) of 5%-pts between 1990 and 2003, the past 10 years has seen a remarkable 17%-pt surge in EM share. We estimate that the EM contributed 36% of global nominal economic activity in 2013. Accordingly, this shift has been accompanied by an equally significant decline in the share of global activity attributed to the developed markets (DM).

It would be a mistake to dismiss the jump in the EM’s share of global nominal activity as merely a reflection of the region’s higher underlying rates of inflation. A considerable portion of the rise does owe to pricing. According to our estimates, EM inflation added 14%-pts to the region’s global GDP share. However, to the extent that this inflation was not offset by declining FX rates, the purchasing power of EM GDP is effectively increased and should not be discounted. Moreover, real GDP growth in the EM also contributed a considerable 12%-pt to the share increase. The resulting 26%-pt gain is damped 5%-pts by DM inflation and by an additional 2%-pts by DM real GDP growth. Note that the inflation impacts implicitly include movements in currencies relative to the USD.

Not surprisingly, the great rotation is due largely to gains made by the major EM economies at the expense of the major DM economies. Specifically, China’s remarkable boom in GDP over the past decade has lifted its share of global GDP from 5% in 2003 to an estimated 14% as of 2013.The other major EM economies made smaller, though still notable, gains of roughly 1%-3%-pts. These gains were made entirely at the expense of the US, Euro area, Japan, and the UK. Again, while inflation differentials played a role, the resilience of EM currencies along with their strong real growth over the past decade give validity to the increasing role of the region.

Global convergence after a long wait Despite having been overshadowed by the higher-frequency moves, the implications of this great rotation are significant.

15

20

25

30

35

40

60

65

70

75

80

85

91 96 01 06 11Source: J.P. Morgan

%, market FX rates in USD; both scales

Share of global nominal GDP

Developed

Emerging

-12-8-4048

121620

DM Real GDP DM inflation/FX EM Real GDP EM inflation/FX

Source: J.P. Morgan

%-pts; market FX rates in USD, black line shows cumulative contribution

Contribution to change in EM global GDP share, 2003-2013

-8-6-4-202468

usa emu jpn gbr dmx ind rus bra emx chn

Change in share of global nominal GDP, 2003 to 2013

%-pt of global GDP; market FX rates in USD

Source: J.P. Morgan; DMx and EMx are regions excluding the countries reported.

1

2

3

4

5

6

7

8

7

14

21

28

35

42

49

56

91 96 01 06 11Source: J.P. Morgan

$1000s; both scales (range set proportionately to factor of 8), market FX rates in USD

GDP per capita

Developed

Emerging

1991 2013DM $26,022 $53,685EM $1,018 $6,167Ratio 25.6 8.7

16

Economic Research The great rotation: EM gaining ground on DM in global GDP January 10, 2014



Bruce Kasman (1-212) 834-5515 [email protected]

Foremost is that a long-awaited convergence in regional GDP is taking place. Economic theory argues that the diminishing of returns to capital in the DM coupled with the diffusion of technology to the EM should ultimately lead to a convergence of GDP per capita across economies.

While this process lagged over most of the post-WWII era, the considerable strides made in institution-building in the EM over the past two decades reached a tipping point in 2003. Moves toward independent, inflation-targeting central banks, liberalizing capital accounts, and the correction of fiscal imbalances all contributed to a more attractive platform for investment. In response, risk-adjusted returns to capital improved considerably, sparking a surge in investment that lifted productive capacity. This was amplified following the crisis when central banks flooded the world with excess liquidity and returns to capital in the DM fell sharply.

GDP per capita in the EM remains far below that of the DM, however. In contrast to its one-third share of global nominal GDP, the population of our EM aggregate makes up over 80% of the global total. A key question for the EM in the coming decade is whether it gets caught in the “middle-income” trap whereby the initial burst of investment and productivity owing to technology diffusion and urbanization fades and is not replaced by domestic innovation and labor efficiencies. The recent slowing in productivity growth along with a hangover from excess credit growth suggests the EM faces challenges in the coming years, a realization not lost on many policymakers—particularly in China.

Adjusting the global yardstick The great rotation also has important implications for the more practical matter of how we track global activity. The increased role of the EM needs to be taken into account when considering underlying economic trends. For example, a major theme of the past year and that we expect to continue into the current year has been the underperformance of EM GDP growth relative to the recovery in DM GDP growth. Specifically, the re-acceleration in DM GDP that got under way in the middle of 2013 was not echoed as usual in the EM, an outcome we attribute to EM domestic factors related to excess credit growth and corporate profit concerns. However, given the EM’s rising share of global production, its contribution to global GDP growth has been remarkably stable over the past three years despite the sharp slowing in growth. Put differently, in terms of global GDP, EM’s rising share of global activity has offset its growth underperformance. Another important implication of EM’s increased footprint is that it opens the global economy to higher levels of potential growth. Indeed, global real potential GDP growth would be 0.7%-pt lower if not for the EM’s increased presence.

2

3

4

5

6

7

8

9

-2

-1

0

1

2

3

4

5

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

%oya

Real GDP

Source: J.P. Morgan

Developed

Emerging

-1

0

1

2

3

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14Source: J.P. Morgan

%pt contribution to global real GDP growth (%oya)

Global real GDP, contributions

Developed

Emerging

1

2

3

4

5

00 02 04 06 08 10 12 14

%oya

Global real GDP

Source: J.P. Morgan

Concurrent weights

Fixed 2000 weights

1.5

2.0

2.5

3.0

3.5

00 02 04 06 08 10 12 14

%oya

Global potential real GDP

Source: J.P. Morgan

Concurrent weights

Fixed 2000 weights

17

JPMorgan Chase Bank NA Robert E Mellman (1-212) 834-5517 [email protected]



Help for US net exports from the supply side Data through November show a surge in exports and

net exports in 4Q13 despite unexciting foreign growth

The trade improvement dominantly reflects large gains in oil production and a recovery in farm exports

Rapid growth in oil output, along with flattish domestic oil demand, should continue to boost net exports in 2014

November economic reports released over the past few months show strong readings for releases gauging private-sector demand including real consumer spending, core capital goods orders and shipments, private construction spending, and new home sales. These results indicate that the economy was gaining strength near the end of 2013 and motivated an upward revision to the forecast of 4Q13 real GDP growth (out January 30). While the extent of the recent strength in domes-tic demand indicators had not been fully anticipated, a turn to stronger growth had been and seems consistent with the do-mestic backdrop of less fiscal tightening, lower energy prices, rising asset values, and reduced policy uncertainty.

It is more surprising that the upturn in domestic spending has been accompanied by much stronger export growth. With data in hand for the first two months of last quarter, real merchan-dise export volumes are tracking growth of 16.3% saar in 4Q13, up from average growth of only 2.5% in the year through 3Q13. And this swing is coming at a time when the usual explanations for stronger export growth, a noticeable pickup in foreign growth and/or a noticeable weakening in the dollar, are just not there. The acceleration in export volumes of late has been accompanied by more modest slowing in im-port volumes, up only 2.4% saar so far in 4Q13, pointing to a large contribution to 4Q13 real GDP growth from net exports.

Exports get help from the supply side Export volumes have accelerated sharply into 4Q13, but the gains have not been broad-based across major product groups. Instead they are heavily concentrated in increased shipments abroad of agricultural and oil products.

Exports of agricultural products posted sharp declines from mid-2012 until the spring of 2013 as severe drought curtailed output and exports. With a return to more normal weather, agricultural production has recovered and the decline in farm output in the second half of 2012 has been followed by large increases in output and exports in 2013. Export volumes for “foods, feeds, and beverages” in October-November of last

year are running 97.3% at an annual rate above their 3Q13 average, although they are less than 10% above their October-November average in 2011, a year of more normal weather prior to the 2012 drought.

The other major source of increase in exports comes from petroleum and petroleum products, where very rapid increases in domestic supply are leading to both reduced oil imports and increased exports of petroleum products. (Exports of crude oil face legal restrictions.) Export volumes of petroleum and pe-troleum products have been increasing steadily the past few years and have soared since the beginning of this year. The October-November average was running 42.6% at an annual rate above the 3Q13 average.

-5

0

5

10

15

20

2011 2012 2013 2014

%ch saar, 4Q13 based on Oct-Nov results

Merchandise export and import volumes

Source: Census, J.P. Morgan

Exports

Imports

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

7.0

7.5

8.0

8.5

9.0

9.5


$2009 bn, samr, both scales

Export volumes: foods and feeds, petroleum and products

Source: Census

Foods, feeds, and beverages Petroleum

-42.0

-39.0

-36.0

-33.0

-16

-14

-12

-10

-8

2011 2012 2013 2014

$2009 bn, samr, 3mma, both scales

Real merchandise trade balance

Source: Census, J.P. Morgan

Foods and feeds and oil and oil products

All other goods

18

Economic Research Help for US net exports from the supply side January 10, 2014


These two categories combined comprise only about 18% of exports, but they account for more than 75% of the 16.2% growth rate of export volumes in the quarter to date. Other major categories of manufactures are posting only moderate gains, consistent with generally unexciting demand growth in major export markets.

With the price of many agricultural commodities now well below year-ago levels, the trend in agricultural production and exports will probably be flat-to-down in 2014. But oil produc-tion in the US is expected to continue to increase rapidly over the next few years, raising the prospect of further substantial gains for exports of petroleum products.

Domestic production displacing oil imports Rapid increases in oil production have helped boost exports, but they have played an even greater role in displacing im-ports. The decline in oil imports was particularly pronounced in November, as the 12.4% samr plunge in oil imports (with a 6.3% monthly decline in volumes) accounted for the large majority of the monthly trade improvement. But oil import volumes have been trending steadily lower at about a 5% pace for the past five years. While October-November merchandise import volumes were up only 2.4% saar above the 3Q13 aver-age, nonoil imports were up 4.3%.

Revisiting comparative advantage Several months ago J.P. Morgan research analyzed the im-provement in the current account deficit and its implications for US competitiveness (see “What the smaller external gap means for US competitiveness,” GDW, Sep 13, 2013). Data at that time showed that the US was gaining share in services and energy and seemed to be gradually losing share across the broad swath of manufactures including capital goods, autos, and nonauto consumer goods. Incoming data over the past few months only reinforce this message. The US continues to show an increasing surplus on services and declining deficit in energy (and, at least temporarily, agricultural products), while the trade balances for other categories of goods (includ-ing capital goods, autos and parts, and nonauto consumer goods), continue to deteriorate. The deterioration has recently been most pronounced for capital goods, with October-November export volumes of capital goods only 0.9% saar above its 2Q13 average and imports up nearly 10%.

Trade improvement will continue in 2014 The trade deficit in 4Q13 has declined substantially in nomi-nal as well as real terms, with the average monthly trade defi-cit on goods and services in October-November nearly 10% (not annualized) narrower than its 3Q13 average. The current account balance was the equivalent of 2.2% of GDP in 3Q13,

its lowest share since the late 1990s, and it is likely to narrow further to 2.0% of GDP in the fourth quarter.

The forecast for this year looks for continued improvement in the trade balance. Export growth is expected to outpace im-port growth and real net exports are expected to add a modest 0.2% to annualized real GDP growth. This view may seem a stretch in an environment in which US growth is expected to accelerate a bit more than growth in US trading partners and in which the trade-weighted dollar has been appreciating. But this forecast reflects a continuation of trends in place for the past couple of years that have incorporated the impact of in-creased energy production.

With domestic oil consumption running fairly flat and domes-tic production increasing rapidly, net import volumes for pe-troleum and products are expected to continue to decline. The recent Energy Information Administration (DOE) 2014 Ener-gy Outlook notes that net imports of oil (in volume terms) declined about 25% between 2011 and 2013 and looks for the gap to narrow another 25% between 2013 and 2015.

In short, the effects of increased oil production on economic growth are mainly reflected in the GDP accounts as a reduc-tion in real net imports, and they account for improvement in the trade balance beyond what might be expected based on relative growth and exchange rate considerations alone.

16

18

20

22

24

3

5

7

9

2010 2011 2012 2013 2014

$2009 bn, samr, both scales

Export and import volumes for oil and oil products

Source: Census

Export volumes

Import volumes

-7

-6

-5

-4

-3

-2

-1

-250

-200

-150

-100

-50

0

95 97 99 01 03 05 07 09 11 13

$bn, saqr

US current account balance, with 4Q13 forecast%, sa

Source: BEA, J.P. Morgan forecast

Current account balance

Current account as share of GDP

19

JPMorgan Securities Japan Co., Ltd. Masaaki Kanno (81-3) 6736-1166 [email protected]



Japan in 2014: above-trend growth despite tax rate hike Real workers’ income likely to fall in 2014, as a rise in

nominal income will be offset by a rise in inflation

Improvement of consumer sentiment and a fall in saving rate is key to support consumption

Manufacturers’ capex to finally start growing, although capex lift will mainly be led by nonmanufacturers

BoJ expected to announce additional easing in April

After achieving above 3% growth in 2013 (4Q/4Q), the Japanese economy will likely take a bumpy road in 2014, with 4% ar growth expected in 1Q, followed by a 4.5% plunge in 2Q due to the April consumption tax rate hike from the current 5% to 8%. While we do not think that the economy will lose momentum even after the tax hike, we expect the BoJ to announce additional easing in April to assure a recovery in 2H14. One big question is whether core CPI inflation will near 2% by mid-2015, as the BoJ expects.

Labor market tightens, but not enough to raise wage rate Good news at year-end was that the job offers to applicants ratio rose to 1.0 in November, indicating that there is no excess labor. This corroborates the result of the BoJ’s December Tankan survey that firms are now facing labor shortages. However, the bad news was that wages were still falling; the year-on-year change in scheduled wages was -0.7%oya in October (although preliminary November contractual wage data was flat, it is likely to be revised down in the final report, as frequently happens). Indeed, wages have been falling since the late 1990s, mainly due to an increase in part-time workers, whose hourly wage rate is less than half that of regular workers. Even with the job offers to applicants ratio at 1.0, the ratio of part-timers is still rising, and the job offers to applicants ratio for regular workers was as low as 0.63 in November (although this is much higher than the 0.52 in November 2012). While we expect a modest increase in scheduled wages in 2014 led by large companies, further tightening in labor markets is required for the part-timers’ ratio to fall, or at least stabilize.

That said, we expect total workers’ income to grow 1.5%oya in 2014 due to an increase in total employment (1.0%), overtime hours worked (4.0%), and bonuses (2.0%). If this is realized, it will be the highest growth rate since 1995. While such an outcome appears impressive, it would not be enough to keep pace with the rise in living costs. Core CPI inflation,

excluding only perishable foods, but including the impact from the consumption tax rate hike, is expected to rise to 2.9% in 2014. In this context, we expect real workers’ income to fall 1.4%, the largest annual decline outside of the recession period since 1980, when the current national income data started.

However, we still expect a modest real consumption rebound after it plunges in 2Q, supported by an improvement in consumer confidence and a fall in the household saving rate. In the latest GDP statistics, the household saving rate fell to 1.3% in 2012 from 2.7% in 2011. The saving rate likely continued to fall in 2013 (2013 data will be published in December 2014), and we expect it will fall further in 2014, reflecting demographics. Additional BoJ easing is necessary for the fall in saving rate to occur (see below).

Inflation rate likely to stabilize in 2Q The year-on-year change in core CPI rose to 1.2%oya in November. In 2013, core CPI inflation lifted much faster than we (and consensus) had forecast. We expect that the upward momentum of core CPI will continue in 1Q14 and that the core inflation will mark 1.4%oya in FY2014 (which starts in April), which is even stronger than the BoJ’s 1.3% forecast for the same period. Although the BoJ’s core CPI inflation forecast is 1.9% in FY2015, we expect that it will stabilize in and after 2Q amid a slowing economy.

-10-8-6-4-202468

10

05 06 07 08 09 10 11 12 13 14 15

%saar

Real GDP

J.P. Morgan forecast

Sourrce:CaO, J.P. Morgan (forecast)

0.0

0.5

1.0

1.5

90 95 00 05 10 15

TimesJob offers to applicants ratio

Source: MHWL

20

Economic Research Japan in 2014: above-trend growth despite tax rate hike January 10, 2014

JPMorgan Securities Japan Co., Ltd. Masaaki Kanno (81-3) 6736-1166 [email protected]

As a result of the expected 4.5%q/q saar fall in 2Q GDP, the output gap should increase to 1.4% of GDP, after closing to nearly zero in 1Q with a boost from front-loaded demand ahead of the tax rate hike. With the expected drop in consumption, firms will find it hard to raise prices in 2Q. In addition, even with our assumption that the yen will weaken in coming months, although only modestly, the contribution from the expected rise in energy prices will be limited due to the base effects unless oil prices surge in USD terms.

Capex to rise, finally Compared to the resiliency of household consumption and housing investment, capex has remained soft in the current recovery. Despite a weak yen, industrial production and manufacturers’ capex has failed to show solid growth. This is in part due to weakness in Emerging Asia, which receives 50% of Japan’s exports. But more importantly, this probably reflects the ongoing structural shift of production overseas.

However, we expect capex will finally accelerate in 2014. Even with the strong headwind from the tax hike, we believe that the underlying cyclical lift will be dominant in coming quarters, amid gradual acceleration in the global economy and expected further yen weakness. The BoJ’s Tankan survey indicated in December that manufacturers’ excess production capacity DI (excess minus shortage) was as high as 8, although it fell from 10 in September. If the current pace of decline in capacity continues in 2014, the excess of manufacturers’ production capacity will disappear by end of 2014.

Meanwhile, the main driver of capex will likely remain nonmanufacturers, whose share of capex is 68%. Indeed, nonmanufacturers are facing a shortage of business facility capacity. Their facility capacity DI (excess minus shortage) fell to -3 in the December Tankan survey from -1 in September. Although public works orders appear to be peaking, the large amount of backlogs will allow the construction industry’s operating rate to be high enough in 2014 for public works implementation to grow. We expect that public works will grow 5.3% in 2014, which is down from an expected 10.7% in 2013 (see “Japan: Fiscal drag likely marginal in CY2014” GDW, January 3).

Third arrow still needs to be focused Although several bills related to the growth strategy passed the previous Diet session, which ended in late December, the result was rather disappointing, as the reform on three core issues, i.e., agricultural, medical and labor reform, failed to show any significant progress, in part as PM Abe spent much time discussing the “Special Secrets Protection bill,” which secures confidential information related to national security.

The Abe administration’s approval rate fell about 10pts in the latest opinion survey.

However, this is not the end of the story. The good news was that the “National Strategic Districts (NSDs) bill” passed the Diet, and that the government set up a council to discuss the details of the NSDs. While the government reportedly plans to announce the revised growth strategy in June, establishing NSDs will be a major driver of the reform, since companies will benefit from deregulation and low tax rates in these zones.

The major risk is the overseas economy While the growth strategy needs more focus, which is crucial to raising productivity, the BoJ will remain key to the economy and markets in 2014. Bank lending and money stock growth has accelerated of late, reflecting the BoJ’s QQE. However, should the BoJ disappoint by not announcing additional easing in April, the market is expected to respond negatively with a strengthening yen and a fall in stock prices. We expect the BoJ to ease again in April, including the additional purchase of ¥1.0 trillion of ETFs and ¥10 trillion of yen bonds, in part because the bank has strong motivation to keep the economy healthy in 3Q, to help ensure that the consumption tax rate is raised to 10% in October 2015. Abe stated toward end-December that he would decide by end-2014 whether the tax rate should be hiked to 10%. The most important input will be 3Q GDP, to be published in November 2014, which must be good enough for Abe to make an affirmative decision. If the BoJ announces easing in July, it would be too late to lift 3Q GDP. April is more likely.

If the BoJ eases in April in line with our expectation, a major domestic downside risk will fade. The remaining risk will be the overseas economy. If the US economy turns too strong, a rise in US bond yields and USD could destabilize the EM, and the expected loss of investors’ risk appetite would prompt the yen to strengthen. On the other hand, if the US economy disappoints with lower bond yields, the yen would also appreciate. “Not too strong and not too weak” growth of the US and the global economy in line with J.P. Morgan’s forecast appears best for Japan’s economy.

-60

-40

-20

0

20

40-10

0

10

20

30

4005 07 09 11 13

DI, excess - shortage, box is the Tankan survey forecast

Capex and excess manufacturing capacity %oya

Capex (GDP)Excess production capacity

Source: BoJ, CaO

21

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi (44-20) 7134-8310 [email protected]



Euro area unemployment looks stuck at 12% for now GDP growth of 1.6%oya is needed to stabilize Euro area

unemployment, according to a historical Okun’s law

It is not clear whether this hurdle rate is lower now

But, the labor market has stabilized, despite growth being weaker than required by Okun’s law

The Euro area labor market has stabilized in recent months. The level of employment was unchanged in 3Q13, the number of unemployed was unchanged in the three months through to November, and the unemployment rate has been stable at 12.1% since April. These developments are consistent with the business surveys, which are also pointing to stable staff levels in the private sector. But, while our growth forecast antici-pates a modest pickup in growth momentum during 2014, this is unlikely to lead to any material decline in unemployment. In fact, the pre-recession Okun’s law relationship, which has performed well since 2008, suggests that unemployment will remain at these levels in 2015 as well. In contrast, the most recent developments in the data and the business surveys offer a bit more encouragement.

Okun’s law getting stuck at 12% One way to assess the recent stabilization in unemployment is with Okun’s law. This relates changes in unemployment to changes in GDP growth. For the Euro area, this suggests the following rules of thumb, based on the pre-recession experi-ence (1999-2007). First, the Euro area unemployment rate will tend to increase by 0.6%-0.7%-pt over a one-year period if GDP growth is zero. Second, GDP growth must be around 1.6%oya in order to prevent the unemployment rate from in-creasing. And, third, for every 1%-pt of growth above 1.6%oya, the unemployment rate will decline by around 0.4%-pt over a one-year period. This historical relationship implies that the Euro area economy would need to grow 2.5%oya for the next five years just to reduce the unemploy-ment rate from its current level of 12.1% to 10%.

Even if estimated over a pre-recession period (1999-2007), Okun’s law has tracked actual developments in unemploy-ment very well. Run dynamically from 1Q00, it has picked up most of the changes in actual unemployment, using only GDP growth as explanatory variable. And it has continued to per-form well even after 2007. During the 08-09 recession, actual unemployment rose less quickly than Okun’s law had predict-ed, but this divergence was temporary (related mostly to labor hoarding in Germany and a few other countries). During the

sovereign crisis, it correctly predicted the increase of the un-employment rate from 10% to 12%. Looking ahead, our GDP forecast shows an increase in growth momentum to 1% ar in

7

8

9

10

11

12

13

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

%, Okun's law estimated over 1Q99 to 4Q07 period, dynamic forecast from 1Q00

Euro area unemployment rate

Source: Eurostat, J.P. Morgan

Actual

Predicted using Okun's law

100

102

104

106

108

110

112

114

99 01 03 05 07 09 11 13 15

1Q99=100, dotted line shows constant growth of 0.9%oya

Euro area output per worker


3.5% gap

94

100

106

112

118

00 02 04 06 08 10 12 14

2000=100

Euro area GDP, employment, and hours worked

Source: Eurostat, ECB, J.P. Morgan

Real GDP

Employment

Hours worked per worker

-0.5

0.0

0.5

1.0

1.5

2.0

99 01 03 05 07 09 11 13 15

%oya

Growth of active population in the Euro area


22

Economic Research Euro area unemployment looks stuck at 12% for now January 10, 2014

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi (44-20) 7134-8310 [email protected]

1H14, to 1.5% ar in 2H14 and 1.75% ar in 2015. According to the historical Okun’s law relationship this will not suffice to reduce unemployment over the next two years.

Will the growth hurdle be lower? According to Okun’s Law, growth must exceed 1.6%oya for unemployment to fall. This can be thought of as growth hav-ing to exceed the growth of labor productivity and the labor force. In the Euro area, labor productivity grew at an average 0.9%oya pace between 2000 and 2007. And the labor force grew at a 1.1%oya pace over this period. Around half of the labor force growth was due to the growth of the population and around half was due to steady increases in labor force participation. In particular, labor force participation has in-creased from 67% in early 1999 to 71% by the end of the business cycle in 2008. Of course, the sum of actual produc-tivity and labor force growth exceeded the 1.6% hurdle calcu-lated through the Okun relationship, but the unemployment rate actually fell 0.4%-pt per year on average over this period.

Hence, unless the Euro area economy grows significantly faster than we currently expect, unemployment will fall only if the hurdle rate is lower than in the past. It is unclear that this is the case. First, labor productivity growth may be on a slow secular downtrend, but there is also still a significant cyclical overhang with productivity 3.5% below its pre-2008 trend. The workweek also looks cyclically depressed. Hence, for a while, firms may increase output by raising productivity and hours, rather than by hiring new workers, which acts to slow any decline in unemployment. Second, the growth of the active population has slowed sharply since 2008, reflecting slower growth of the total population and outright declines of the number of people of working age. A rising participation rate has provided only a partial offset. Overall, it is possible that cyclical productivity catch-up will offset any structural decline in underlying productivity and labor force growth, at least for a while. As a result, it is unclear that the hurdle rate for reducing unemployment has declined from the 1.6% pace seen during the last business cycle.

More encouragement at higher frequency At present, the Euro area economy is not yet growing at the 1.6%oya pace that Okun’s law has historically suggested is needed to stabilize unemployment. In fact, according to the Euro area composite PMI, the economy is currently expanding at a 0.5%-1.0% ar pace. Nevertheless, high-frequency indica-tors of the labor market suggest that even this may already be acting to stabilize unemployment. Actual unemployment was stable in the three months to November and the unemployment rate has been stable at 12.1% since last April. Based on the re-cent correlation between changes in unemployment and chang-es in employment, this suggests that some jobs are already

being created (likely equal to modest growth in labor supply). Similarly, the PMI employment index rose to 50.0 in December and the employment intentions in the European Commission surveys improved to a comparable level. These two surveys are both pointing to employment that is at least stable.

It is not entirely clear why the labor market is stabilizing, de-spite relatively modest GDP growth. The national accounts through to 3Q13 suggest that the workweek has not shortened recently and labor participation also still seemed to be trend-ing higher, which suggests that corporates are tolerating a lower level of productivity. It will be important to see how this evolves as growth steps up further. Our current expecta-tion is that unemployment will barely fall next year.

66

67

68

69

70

71

72

73

99 01 03 05 07 09 11 13 15

%

Euro area labor participation rate


-4

-2

0

2

4

05 07 09 11 13 15

%q/q saar

Euro area private sector employment (ex. construction)

Source: Markit, Eurostat, J.P. Morgan

Employment PMI-based estimate (box shows Dec 2013 PMI)

-500

0

500

1000

1500-1600

-1200

-800

-400

0

400

800

2008 2009 2010 2011 2012 2013 2014 2015

q/q, 000s

Euro area employment and unemploymentq/q, 000s

Source: Eurostat

Unemployment

Employment

23

JPMorgan Chase Bank N.A, London Branch Marco Protopapa (44-20) 7742 -7644 [email protected]



Spain is back Strong PMI and economic sentiment surveys point to a

robust buildup of momentum

We raise our GDP forecast for 2014 to 1%oya, even in the presence of tight financing conditions

Export performance, substantial cost adjustment, and a lower fiscal drag to support the recovery in 2014

Progress in private balance sheet repair bodes well for a stabilization of domestic demand

The recent data flow in Spain has been encouraging. Despite protracted weakness in bank lending and persistently high bank lending rates, the Spanish economy has recorded significant progress since mid-2013. This consideration prompts us to evaluate the cyclical dynamics in Spain as we enter the new year. In our view, it can be cautiously concluded that the Spanish economy has healed sufficiently well to grow at a decent pace in 2014. Supported by the very positive PMI survey outcome in December, we upgrade our real GDP forecast for 2014 from 0.7%oya to 1%.

GDP on the right track, surveys signal robust momentum building After a poor start to 2013, the Spanish economy managed to exit a nine-quarter-long recession in 3Q13. The full GDP report for the third quarter put domestic demand front and center of the improvement, despite still depressed capex in the construction sector. The quarterly contribution from domestic final sales was 1.1%-pt ar. The overall GDP gain was limited to 0.5%q/q ar due to drags from inventories and net trade. Within domestic demand, consumer spending rose 1.6%q/q ar and corporate spending on machinery and equipment rose 3.2%q/q ar. The gain in machinery was particularly striking given that it followed a 16.3%q/q ar gain in the second quarter.

This recovery in economic activity was signaled by the broad progress of virtually all high-frequency survey-based indicators starting in 2Q13. The European Commission’s economic sentiment indicator—a broad measure of sentiment covering manufacturing, services, construction, retail, and households— soared in December, confirming a pattern over recent months whereby sentiment in Spain has been higher than sentiment in France. Not many people were expecting that, although this has also been a result of the poor French performance. The substantial improvement in economic sentiment in Spain in recent months is all the more impressive given the still very depressed level of sentiment in construction. What this means is that the improvement in

sentiment in industry, services, retail, and households has been more pronounced than the overall average. The PMI surveys further strengthen this message, with the composite PMI output index achieving 53.9 in December—close to the pre-recession average—and strong readings for new orders and the employment components. Particularly encouraging is the swift recovery in the services sector, which closely reflects domestic demand, and which has been trailing the export-led industry cycle until recently.

Exports growth to remain a key driver Through the long Spanish recession, net trade has been the key contributing factor to GDP performance, in the face of the multiple headwinds hampering the domestic economy, the legacy of both the real estate boom-bust and of the broader Euro area crisis. Among the headwinds are large-scale deleveraging in the household, corporate, and banking sectors; fiscal consolidation of the public sector; sharp job losses in the face of a dual labor market; and, obviously, intense financial market stress, which in turn created a perverse loop between government and bank funding costs.

The joint dynamics of exports and imports have led to a rapid turnaround in the current account, from a deficit of 10% of GDP 2007 to a surplus of 1.4% in 2013, as forecast by the Commission. Undoubtedly, part of the adjustment is due to the collapse of imports, but the internal devaluation process—a sizable decline in unit labor costs—has played an important

20

30

40

50

60

-10

-5

0

5

07 08 09 10 11 12 13 14

%q/q saar, shaded area shows J.P. Morgan forecast

Spanish GDP growth and PMIDI, sa

Source: Markit, INE, J.P. Morgan

GDP

Manufacturing PMI

Services PMI

70

100

130

160

00 02 04 06 08 10 12 14

Index: 2000=100

Level of Spanish GDP components

Source: INE, J.P. Morgan

Capex (construction)Exports

Consumer spending

Capex (machinery, transport equipment)

24

Economic Research Spain is back January 10, 2014

JPMorgan Chase Bank N.A, London Branch Marco Protopapa (44-20) 7742 -7644 [email protected]

role in strengthening Spain’s external competitiveness. The export performance of the Spanish economy has indeed been remarkable. Export volumes have risen 19% since 2007, moving from 27% of GDP to 33% in 2013, driven by exports to non-Euro area countries. Importantly, the increase in exports has materialized under a relatively stable euro performance vis-á-vis trading partners, which further supports the role of cost adjustment as a major export driver. We expect this trend to persist over 2014.

However, the decline in unit labor costs has not been painless, as it has been driven by a fall in wages as well as a massive rise in the number of unemployed. Given that employment in the construction sector accounted for only 6% of the active labor force in 2013 compared to 13% in 2007, a large degree of labor shedding, especially of less protected temporary workers, was unavoidable. The labor market reform of 2012 has somewhat reduced the level of duality and made it easier to achieve wage flexibility, which over time may help the economy to reabsorb part of the unutilized labor force.

Balance sheet repair bodes well for a stabilization of domestic demand The possibility of a stronger contribution from domestic demand is supported not only by the encouraging pickup in capex, but also by the relatively successful deleveraging effort achieved by the private sector.

Regarding banks, Spain has been given the green light by the Troika to exit its bank recapitalization program. Challenges remain, however. Deleveraging will continue for some time and non-performing loans (NPLs)—which lag the economic cycle—will continue to rise until domestic demand stabilizes at a decent level. But banks are judged to be well capitalized and liquidity conditions have sharply improved. In our view, the AQR process will make banks more cautious while they continue to provision and clean up their balance sheets during the review period. This should prevent a significant improvement in financing conditions for the corporate sector over most of 2014, so companies will remain reliant on internal sources of finance. Some comfort can be drawn from the large swing observed in the net financing position of Spanish companies and by stronger profit margins.

The debt overhang legacy of the real estate bubble was most intense in the household sector. Deleveraging has been modest in terms of the adjustment in the stock of debt, as a share of gross disposable income; negative income growth has played havoc. But household deleveraging has been substantial in terms of flows and appears sustainable, especially if job creation resumes over 2014. The growth of private consumption in 3Q13 is encouraging. We think that the reinstatement of the Christmas bonus for public

employees this year—in net terms about 0.5% of GDP once accounting for the reduction of personnel in the public sector—is important in supporting purchasing power, together with the stabilization of the unemployment rate and low inflation. Indeed, consumer confidence has improved quickly over recent months and the drawdown of accumulated wealth observed for three running quarters has come to a halt in 2Q13 (the latest available date for the sector flow of funds).

Conditions for growth in place, despite tight financing conditions In conclusion, it seems fair to acknowledge the remarkable adjustment achieved by the Spanish economy. In 2014, the economy will also take advantage of the milder fiscal stance allowed by the delay in achieving fiscal targets granted by the European Commission earlier in May. According to the government, the fiscal drag will be only 0.6% of GDP in 2014 versus 1% in 2013 (the European Commission estimates an even smaller fiscal drag of 0.3%) and the deficit target (5.8% of GDP) looks achievable. However, as mentioned, the drag from weak bank credit and high lending rates to corporates will not fade quickly. But, we believe the available evidence suggests that there is sufficient dynamism in the economy to resume growth even in the absence of a significant improvement in financing conditions.

95

100

105

110

115

120

80

100

120

140

160

180

00 02 04 06 08 10 12 14

Index: 2000=100, sa

Spanish exports and exchange ratesIndex: 2000=100

Source: Eurostat, INE, J.P. Morgan

Exports

Nominal effectiveexchange rate

Real effectiveexchange rate

30

32

34

36

38

40

42

44

-15

-10

-5

0

5

10

00 02 04 06 08 10 12 14

% of GDP, 4-quarter moving sum

Financing position of Spanish private sector and corporate margins% of gross value added

Source: INE, ECB, J.P. Morgan

Households net lending/borrowing

Non financial corporations Net lending/borrowing Gross operating surplus

25

J.P. Morgan Australia Limited Ben K Jarman (61-2) 9003-7982 [email protected]



New Zealand: Growth, hikes, and RBNZ judgment calls in '14 Another year of above-trend growth forecast for 2014

Policy normalization to begin in 1H14; exact timing conditional on whether price pressures remain contained to housing

From there, officials have several unusual forces to balance in calibrating pace of rate hikes; we expect less tightening than is currently priced

The last couple of years have started with J.P. Morgan forecasting above-trend growth in New Zealand (2.5% for 2012 and 2.8% for 2013), and while vulnerabilities arose at various points, these expectations were, in the end, broadly realized (2.6% in 2012, and tracking the same outcome in 2013). However, despite the persistently upbeat growth outlook, underpinned by earthquake reconstruction, the RBNZ has steered clear of a hiking bias until quite recently. The OCR has been left unchanged at a very low 2.50% since the devastating Canterbury earthquakes more than two and a half years ago. This policy inertia in the face of solid growth was justified by the significant spare capacity that had built up over 2008-2010, combined with a persistently strong currency, which together pushed inflation below the bottom of the Bank’s 1%-3% target band for the four quarters up to 3Q13.

If it ain’t broke don't fix it In our view, 2014 will look much like 2013 from the growth perspective (table), with the Canterbury reconstruction impulse providing a bank-able base for growth. This will be supplemented by the organic labor income recovery and continued consumption pickup that comes with a sustained period of above-trend growth (first chart). Overall, the economy is expected to expand 2.7% this year, slightly more than last year’s estimated 2.6%. This is significantly above our estimate of potential growth, which is below 2%.

The drags, too, are likely to be familiar ones. The government is beating a path back to Budget surplus, with the fiscal drag to ramp up this year, reaching peak intensity as the reconstruction impulse also hits its crescendo. Fiscal policy has been a persistent drag in the last few years, but has not been sufficient to derail growth in private demand. Given that the fiscal accounting has repeatedly tracked above expectations over the last year, we see no reason why the return to surplus should be particularly burdensome this year. Imports again should be solid, as frothy investment growth sucks in capital goods, and currency strength continues the import substitution trend in

consumer durables that has been the bane of local manufacturing. Strength in imports also is not a new phenomenon, and recent history shows that the “overvalued” currency is more of an issue for the current account and external balance than it is for aggregate growth performance.

Third year’s the charm A third consecutive year of above-trend growth is likely to motivate the RBNZ to tighten policy. Moving into 2014, activity now has been strong enough for long enough that spare capacity looks to have been eliminated, such that the OCR needs to push back toward a more neutral setting. On our projections, the output gap will push from close to zero to over +1% over the next four quarters, leading non-tradables inflation higher (third chart). Adding in a fading disinflationary impulse from the currency, headline inflation should end the year just under the RBNZ’s 2% target midpoint at 1.9%oya. In the

New Zealand forecast summary 2013 (%y/y) 2014 (%y/y)

Private consumption 3.1 2.5

Government consumption 0.7 -2.0

Gross fixed capital formation 12.7 15.0

Changes in inventories (%-pt cont.) 0.3 -0.6

Exports -0.3 0.8

Imports 6.7 7.0

GDP 2.6 2.7

Source: J.P. Morgan

Source: NZ Stats, J.P. Morgan forecasts

Source: NZ Stats, J.P. Morgan forecasts

-2

0

2

4

6-3

-2

-1

0

1

2

390 95 00 05 10 15

4qtr ch, invertedOkun's law: unemployment and GDP growth

%y/y

Unemployment rate (inverted)

Annual GDP growth

J.P. Morgan forecasts

1

2

3

4

5

6

-4

-2

0

2

4

6

94 99 04 09 14

% of potential output, 2qtrs priorNon-tradable inflation and the output gap

%oya

GST hikeNon-tradable inflation

Output gap

J.P. Morgan forecasts

26

Economic Research New Zealand: Growth, hikes, and RBNZ judgment calls in '14 January 10, 2014

J.P. Morgan Australia Limited Ben K Jarman (61-2) 9003-7982 [email protected]

RBNZ’s projections (taken from the December MPS), the output gap expands by less, and inflation finishes 2014 at a somewhat lower 1.5%. The difference derives mostly from the fact that the RBNZ’s potential growth measure is pro-cyclical, which limits the pressure on capacity as the economy gathers steam, whereas our estimate is more stable.

RBNZ red-lining on rates While RBNZ officials are prepping the household and corporate sectors for the realities of tighter monetary policy, we would not view the RBNZ’s steep bill projections as representing a commitment, nor even guidance in the strict sense, given its exhibited sensitivity in between forecast rounds to changes in inputs like the TWI. In forming our OCR forecasts, then, while the likelihood of policy normalization is high, the magnitudes and timing are much more uncertain.

A Taylor rule constructed using the J.P. Morgan estimate of the output gap and inflation forecasts first “priced” a full 25bp rate hike in mid-2013 (first chart). Governor Wheeler has not yet pulled the trigger, though, and the RBNZ’s bill projections show delayed lift-off, first pricing a full 25bp hike in 2Q14. The difference in start dates given by the Taylor rule and the RBNZ’s projected bill path in part reflects the imposition of LVR restrictions, which the Bank argues take 30bp off the bill track, and is not captured in the Taylor Rule machinery. Also, there is the difference of opinion in terms of the output gap and inflation inputs mentioned above. Our official forecast for the first rate hike is, contrary to our Taylor rule, also 2Q14, since LVR restrictions do have to be taken into account, and the tool seems to be having the desired effects. And, with the governor having argued that LVR restrictions give him “flexibility,” we believe officials will be reluctant to hike rates before these measures have been in place long enough to make an official judgment on their effect. Admittedly though, this is a close call (the March MPS is also a possibility), and the atmospherics around inflation early in the year will dictate how much time Governor Wheeler feels he has on his side.

Lots of unusual forces to consider Even once normalization is underway, there are many questions to be answered before policy can be correctly calibrated. In the MPS projections, everything clicks into gear after midyear, with potential growth and interest rates rising significantly in unison, as the ongoing signal of strengthening growth presumably reinforces the need for further tightening, and further tightening keeps the growth/inflation trade-off benign. Our sense is that, in the end, Governor Wheeler will be chastened by the experience of being the lone DM central banker raising rates in 2014, and will only hike 75bp this year, as opposed to the 110bp in the MPS projections and 118bp embedded in market pricing.

In particular, Governor Wheeler will be trying to discern the correct calibration of policy in a world where LVR restrictions are in play. These restrictions were brought in to give policymakers another degree of freedom, but in reality things now are more complicated than ever. The Bank may have another free variable, but it also has another equation to balance: currently the equation states that LVR restrictions are equal to +30bp on the OCR, but that measurement will need to be re-verified through the year.

Other uncustomary forces will feed into the degree of tightening delivered in 2014. The first is the terms of trade, at a 40-year high, with dairy prices failing so far to moderate as expected even as the sector recovers from the 2013 drought. This lift to national income is softening the trade-off that had held between the TWI and the OCR in 2012 and 2013, since a higher terms of trade helps justify the currently high level of the former. The December MPS included a simulation (third chart) that showed that both the TWI and rate tracks would be higher under sustained strength in dairy prices. Finally, the extent to which Fed tapering is regarded as genuine policy tightening also will feed into New Zealand’s TWI/OCR relativities, and so influence the extent of OCR tightening required to keep inflation in check.

Source: RBNZ, J.P. Morgan forecasts

Source: RBNZ

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2010 2011 2012 2013 2014 2015

%-pt ch from 2.50%Our Taylor rule and OCR path implied by RBNZ's MPS bank bill forecasts

J.P. Morgan Taylor rule

Dec MPS forecastsMPS forecasts without LVR adjustment

45

50

55

60

65

70

75

80

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

IndexRBNZ TWI assumptions (Dec MPS)

Baseline scenario

Scenario with dairy prices staying elevated

27

J.P. Morgan Securities LLC Jahangir Aziz (1-202) 585-1254 [email protected]



EM Asia's troubled DM dependency EM Asian growth has been surprisingly subdued in the

face of a sharp turnaround in DM growth

A post-crisis breakdown of the old EM Asia-DM link and lower DM import sensitivity are seen as the culprits

We find little evidence to support either view—other factors (unwinding excess credit and profit crunch) may underlie the weak EM Asia response

As these factors fade and if DM growth is sustained, EM Asia growth could surprise on the upside

As we step into 2014 the fortunes of EM Asia this year are likely to be determined by the interplay of four broad developments. On the positive side, higher developed market (DM) growth should boost exports, but that will come alongside increased global funding costs as the Fed’s easy money policy is unwound. On the other hand, China is expected to slow as structural factors—an aging population and the end of cheap underemployed agricultural labor—start biting and reforms to rebalance the economy get underway. A key reform focus in China is to make investment less resource-intensive, which will soften global commodity prices and hurt incomes in commodity-exporting EMs that have been important sources of demand for Asia in recent years.

How things eventually turn out will depend, in part, on how strongly the higher DM growth affects Asia. And this is where things turn muddy. In past cycles, higher DM growth increased Asia’s exports, which induced domestic corporates to invest more, raising GDP growth more than one-for-one, widening current account surpluses and appreciating currencies.

Individual country experiences are more nuanced than this caricature, but this common storyline has been seriously challenged in the current recovery. The response of EM Asia exports and growth to the higher DM growth has been uncharacteristically muted. In this note, we investigate whether there has been a fundamental breakdown in this relationship between DM final demand and EM exports. To preview our results, we find that this relationship is alive and well. EM Asian trade is still tied closely to DM final demand, exports are still a critical driver of EM growth, and DM economies have not become less import-intensive. In fact, recent trade data have shown the DM lift starting to feed into EM exports. Rather, EM Asian growth has disappointed because of weak EM demand and domestic constraints stemming from the unwinding of excess credit and tight

corporate profit margins. EM Asian economies should continue to get a boost from DM demand as they struggle through these internal issues.

Sifting through the wreckage What’s going on? Standard econometric analysis over the period 1Q00-3Q13 suggests that the link between DM and EM Asia growth is apparently alive and well. A two-variable vector auto-regression (VAR) model linking DM GDP growth to EM Asia GDP growth shows that a 100bp increase in DM growth in one quarter leads to a cumulative 150bp rise in EM Asia growth spread over two quarters. Adding exports and investment to the VAR model (with the causal ordering DM growth, EM Asia exports, investment, and GDP growth) does not change this estimate and corroborates the links in the Asian growth story.

But like most things the devil is in the details. A closer look suggests that the major contemporaneous decline in growth following the crisis and the sharp simultaneous recovery in 2009 seriously distorts this relationship. If the crisis period—3Q08 to 1Q10—is removed from the estimates things change quite dramatically. Over the period 1Q00-2Q08, a 100bp increase in DM growth raised EM Asia growth by nearly 180bp with the largest effect felt with a lag of one quarter. As

Source: J.P. Morgan

Source: J.P. Morgan

-5

-1

2

5

9

12

-6

-4

-2

0

2

4

05 06 07 08 09 10 11 12 13 14 15

%oya, both scales

Real GDP growth

EM AsiaDM

-1.0

-0.5

0.0

0.5

1.0

1 2 3 4 5 6 7 8 9 10

Quarters

%-pts, response of EM Asia growth to 1%-pt higher DM growth

Estimated DM-EM Asia growth link, 2000-13

28

Economic Research EM Asia's troubled DM dependency January 10, 2014


before the results don’t change much when shifted to the four-variable model.

But in the post-crisis period, i.e., 2Q10-3Q13, the impact of DM growth on EM Asia growth is virtually nonexistent, i.e., statistically indistinguishable from zero. The short length of this period precludes running the four-variable model in any meaningful way. This makes it difficult to extract more robust inferences in the post-crisis period in other estimates, too, as we shall see below.

Is the Asian growth model dead? This of course brings us to the key question: is the traditional export-led Asian growth model dead? The answer to this question lies in identifying the factors that forced the relationship to break down. There are two sets of candidate explanations. The first centers on structural changes within the Asian economies.

Underlying the breakdown is the severing of the traditionally tight relationship between DM growth and EM Asia exports. For decades Asia’s growth was driven by DM demand. It seemed that the DM could absorb, without faltering much, Asia’s ever-increasing export capacity as Japan, Korea, ASEAN, and eventually China and India all put their faith in the model. But the 2008 crisis and the subsequent DM slowdown rudely shocked EM Asia. DM demand could no longer be relied upon as before to absorb the output churned out by EM Asia.

Instead, Asian (and EM) policymakers used the space (and the excuse) provided by the unprecedented policy easing in DMs to boost domestic demand by doing much of the same. So when the initial shock of the global crisis faded and a recovery began in late 2009, the surge in EM Asia growth was driven by domestic demand boosted by internal policy support and external demand from other EM economies backed by similar easy policies.

Asia’s regional trade spiked as did exports to non-Asia EM economies. For a while it seemed that a virtuous EM-centric cycle was underway. But the easy macroeconomic policies soon spawned their own imbalances. Runaway inflation in India, a steep rise in bank credit in China, rising wages across the region, and worsening external balances (especially in the current account deficit economies of India and Indonesia) raised sufficiently alarming signs to persuade authorities to reverse policy. With domestic demand slowing, Asia’s regional trade also declined. So did Asia’s resource hunger, especially China’s, such that global commodity prices began to slow, cutting deep into the incomes of Asia’s commodity-exporting trading partners. And the seemingly self-contained EM cycle began to falter, bringing down growth across the EM world.

Source: CEIC

Source: CEIC

Source: CEIC

Source: CEIC

-1.0

-0.5

0.0

0.5

1.0

1.5

1 2 3 4 5 6 7 8 9 10

Quarters



-1.0

-0.5

0.0

0.5

1.0

1 2 3 4 5 6 7 8 9 10

Quarters



10

20

30

40

50

05 07 09 11 13

% of EM Asia's exports

EM Asia's exports share by destination

DM

Regional

Non-Asia EM

-20

-10

0

10

20

05 07 09 11 13

%-pts

Contribution to EM Asia's export growth

Non-Asia EMDM

Regional

29



Looks can be deceiving This narrative of “rebalancing” Asia’s export growth drivers away from DMs toward regional and non-Asia EM demand has reasonable evidence backing it. Since the crisis the share of DMs in Asia’s export market has fallen from 42% to 36%, while the regional export share has risen from 39% to 44%. The share of non-Asia EMs has remained broadly stable around 19%-20%. A similar tale emerges from the contribution of various markets to overall export growth. While in the pre-crisis period regional markets’ contribution to overall export growth was similar to that of DM markets, after the crisis the former has on the surface become a much bigger contributor. Indeed, the contribution of non-Asia EMs now appears larger than that of DMs.

But closer inspection suggests that all this could be grossly misleading. First, the rise in the share of regional exports especially in 2012 is likely to be exaggerated by the “misinvoicing” of Chinese exports that took place when offshore-onshore renminbi exchange rates diverged and collapsed in 2013 after the authorities cracked down on the practice. As a result once China is taken out of the Asia aggregate, the sharp rise in regional exports growth is almost nonexistent over 2012-13. The spike in regional export growth in 2009-10 is likely a reflection of the short-term domestic demand boost from easy policies that faded quite quickly as the support was reversed.

Instead the remarkably strong correlation between regional and DM exports corroborates the long-held suspicion that much of regional trade is closely tied, through complicated supply chains, to final demand in DM economies. Indeed even in the post-crisis period the correlation has remained just as strong (when excluding China the correlation has actually increased). What has been problematic is the much lower DM exports growth. Thus there is little evidence to suggest that the structure of EM Asia exports in terms of destination changed much after the crisis.

Exports still big growth driver There is, of course, still the possibility that even if the structure of Asian trade has not changed, the impact of exports on overall growth has become more muted. For example, this could be because domestic corporates have been more hesitant to add capacity even when exports growth picked up given the uncertainty surrounding the sustainability of DM growth and external demand. But again empirical evidence suggests that this is not the case. The manner and quantitative impact of exports on overall GDP growth in Asia remains broadly intact.

Instead, corporate investment in Asia has languished because export growth has faltered. And overall GDP growth hasn’t picked up because the level of export growth hasn’t increased despite the higher DM growth.

Has DM growth turned less import-sensitive? So if it isn’t any material change in the Asian growth model, is the breakdown a result of the drivers of the current DM recovery turning less import-intensive? On the DM demand side, consumption growth remains below pre-2008 levels, while investment growth has been volatile. Instead, a vastly improved net export position (current account balance) has

Source: CEIC

Source: CEIC and J.P. Morgan

Source: J.P. Morgan

-20

-10

0

10

20

30

05 07 09 11 13

%-pts

Contribution to EM Asia ex China export growth

Regional

DMNon-Asia EM

0.2

0.4

0.6

0.8

1.0

China ex-CN Asia

Correlation

Correlation between DM and EM Asia regional export growth

Jan05-Jun08

Jan05-Jun08

Jan10-Jun12 Jan10-Sep13

-0.2

-0.1

0.1

0.2

1 2 3 4 5 6 7 8 9 10

Quarters

EM Asia exports and GDP growth

%-pts, response of EM Asia GDP growth to 1%-pt higher export growth

2Q10-2Q131Q00-2Q08

30

Economic Research EM Asia's troubled DM dependency January 10, 2014


been a dominant driver of growth. Obviously this has not been good for EM economies, which have seen their own current account balances (counterparts to the DM current account balance) deteriorate markedly over the last four years. The external balance of DM economies has improved roughly 3%-pts of GDP since the crisis. This is a very large number (roughly US$1 trillion) from EM’s perspective. Even discounting for commodity-exporters who are likely to have been a significant counterpart to this improvement, the impact on EM Asia had to be telling.

But things might be worse for EMs if the import sensitivity of DM domestic demand also declined. On the face of it that does not seem to be the case. DM import demand still appears closely linked to domestic demand.

Many have pointed to the “goods” component of domestic demand, which presumably is more closely tied to manufacturing imports that drive demand for Asian exports, sharply declining in the crisis. For example, in the US, the share of the goods component of investment (equipment investment and non-farm inventories) and the share of goods-to-services consumption both fell markedly in the crisis. However, both of these ratios have reversed direction and are now broadly back to their pre-crisis levels.

More importantly even visual inspection of manufacturing imports and the overall goods component of domestic demand (goods consumption, equipment investment, and non-farm inventories) suggests that there has been little delinking. A bit more formal is to trace the quarterly response of US manufacturing imports to changes in domestic goods demand before and after the crisis, using a VAR model. Here, too, it is hard to pinpoint any material change.

The future may be what it used to be So where does all this leave us? Despite seemingly overt signs of rebalancing, the Asian export-led growth model appears alive and well. The import sensitivity of DM domestic demand for manufacturing goods (at least from the US data) doesn’t show much change either. If that’s the case then why did Asian exports and growth respond so mildly to the DM recovery? The answer seems to be that internal constraints from a turn in the regional credit cycle and a corporate margin crunch have provided an offsetting drag. Corporate investment growth, except in post-earthquake Thailand, has slowed relentlessly. Rising wages and more recently higher funding costs have compressed margins and profitability. Once these drags fade, then given that the plumbing of the Asian growth model and DM import sensitivity hasn’t changed much, there is a fair chance that growth in Asia could surprise on the upside.

Source: CEIC

Source: J.P. Morgan

Source: BEA, Census, J.P. Morgan

Source: J.P. Morgan

-10

-1

8

17

26

35

-5

0

5

10

15

00 02 04 06 08 10 12 14

%3m/3m saar, 4-qtr moving average, both scales

EM Asia investment and export growth

InvestmentExports

-21

-13

-5

4

12

20

-4

-2

0

2

4

6

00 02 04 06 08 10 12 14

%3m/3m saar, 4-qtr moving avg, both scales

DM imports and domestic demand growth

Imports Investment

Consumption

-16

-9

-2

6

13

20

-40

-20

0

20

40

00 02 04 06 08 10 12 14

%3m/3m saar, 4-qtr moving avg, both scalesUS manufacturing imports and domestic demand growth

Manufacturing imports

Domestic goods demand

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1 2 3 4 5 6 7 8 9 10

Quarters

US manufacturing imports and domestic demand growth

%-pts, response of US manuf import to 1%-pt higher domestic goods demand

2Q10-3Q13

1Q00-2Q08

31



United States 4Q13 GDP forecast now up to 2.8%; forecast still looks

for 1Q14 real GDP growth of 2.5%, final sales of 3.3%

Weak December payroll growth looks like an aberra-tion; continued slide in jobless rate is more of an issue

December consumer spending apt to slow; look for soft-er retail sales and 0.1% dip in real consumer spending

November economic reports that serve as source data for es-timating GDP have generally come in on the strong side of expectations, and the latest upside surprise is the substantial narrowing in the November foreign trade deficit. The forecast for 4Q13 real GDP growth has been revised up to 2.8% to reflect the latest data (from a forecast of 2.5% last week and a forecast of only 1.5% in early December), and the forecast for real final sales growth in 4Q13 is being raised to 2.9%. The outlook for 1H14 has not been changed. We still expect a modest strengthening in real final sales this quarter to 3.3% growth but with a negative turn in the inventory cycle holding real GDP growth to 2.5%.

December data in hand, though limited, caution that November strength should not be extrapolated. The December report on payroll employment shows monthly job growth of only 74,000, vs. an average of 205,000 over the three prior months. And unit auto sales were surprisingly weak, declining 6.2% samr to a pace of 15.3 million. While most December business surveys held fairly steady, the ISM non-manufacturing survey declined to its lowest level in six months, and its key new orders com-ponent dropped below 50 to its lowest level since 2009.

We are inclined to think that strong November data and weaker December data to date should be averaged and not viewed as an economy starting to falter at year-end. It is un-clear why there should be a consistent up/down pattern in the data over the two months. But these types of runs sometimes happen. For example, payroll employment rose only 89,000 in July followed by a much stronger 238,000 increase in August. And the July-August weak/strong pattern extended to other data, including real consumer spending and factory output.

The more complicated issue is what to make of the weakening in the supply side of the labor force. Household employment increased a moderate 143,000, but a further decline in labor force participation brought the unemployment rate down to 6.7% from 7.0% in November and 7.9% in December 2012. In light of these results, the forecast for the unemployment rate in 4Q14 has been revised down 0.3%-pt to 6.3%. (The December FOMC central tendency forecast expects the un-employment rate to decline to the 6.3%-6.6% range by 4Q14.) But if the jobless rate declines in 2014 at anywhere near its

pace of the past year—which is not our forecast but also not impossible against the expected background of stronger real GDP growth—the unemployment rate would be well below 6% by the end of the year.

One weak payroll report Slower job growth: December payroll employment slowed substantially from the pace of prior months. December weak-ness seems to reflect technical factors or underlying volatility in the data rather than a more fundamental pullback in hiring, given the backdrop of accelerating final sales through the se-cond half of last year. Construction employment declined 16,000 in December vs. an average increase of 15,000 over the prior three months, suggesting that cold weather during the survey week had a bigger effect on employment than

50

100

150

200

250

300

350


'000s, samr

Payroll employment growth

Source: BLS

Monthly3-month average

80.5

80.7

80.9

81.1

81.3

81.5

81.7

81.9

6.5

7.5

8.5

9.5

2011 2012 2013 2014

%, sa

Total unemployment rate and labor force participation rate, age 25-54%, sa

Source: BLS

Total unemployment rate

Labor force participation rate, age 25-54

1.0

1.5

2.0

2.5

3.0


%ch saar over 6 months

Average hourly earnings, private-sector workers

Source: BLS

All workers

Production and nonsupervisory

workers

32

Economic Research United States January 10, 2014


expected. But weakness extended well past weather-sensitive industries. Although retail employment was up a strong 55,000 as the late Thanksgiving pulled holiday hiring from November into December, private services employment ex. retail slowed to only 45,000 in December from an average 134,000 in the prior three months.

Details also soft: Details of the payroll report were also on the soft side. The workweek edged lower for both production and nonsupervisory workers and all workers. Total hours-worked declined 0.3% samr for production and nonsuperviso-ry workers and declined 0.2% for all workers.

Manufacturing holding in: Hours-worked by manufacturing production workers and auto production schedules point to moderate manufacturing growth in December. The forecast looks for manufacturing IP to rise 0.4% and 0.3% ex. autos.

Wage gains not accelerating: In late 2012 and early 2013 it looked as if wage gains might be accelerating while labor markets still seemed to have considerable slack. But through most of this year hourly earnings growth has moderated, and the series for both all workers and for production and non-supervisory workers have slowed through 2H13.

Even more drop-outs: The unemployment rate continues to decline much faster than would be expected on the basis of job growth alone, as labor force participation continues to decline. Participation rates can be choppy from month to month, but in 2013 the decline in the participation rate inten-sified to 0.7%-pt, from 63.6% in 4Q12 to 62.9% in 4Q13 after a decline of 0.5%-pt in 2012. This is at odds with the prior view that declines would moderate as unemployment declined and job growth picked up. The decline in the participation rate for so-called prime age 25- to 54-year-old workers also inten-sified to a decline of 0.6%-pt in 2013 (4Q/4Q) following a decline of only 0.1%-pt in 2012.

Consumer spending ready for a breather Real consumer spending posted unusually strong gains in Oc-tober and November and real spending for the quarter is track-ing growth of nearly 4.0%. The key forecasting issue is whether wealth effects might be kicking in and whether the forecast for average real consumer spending growth for 1H14 should be closer to 4.0% than the current 2.4% forecast.

Income implications of the December labor market report are a negative for spending. More important, other recent data suggest that the October and November gains in real consum-er spending are not the beginning of a string of stronger num-bers. The tentative forecast looks for a 0.1% samr decline in real consumer spending in December. Unit auto sales have already been reported and were down 6.2%. Reports from

retailers are difficult to interpret but suggest that the monthly increase in core retail sales is only about half the 0.6% samr increase in each of the two prior months. And while nominal spending seems to be slowing, the rise in the price of gasoline points to a stronger 0.3% increase for the CPI.

Better capex news is not what you thought Spending on business equipment has been unexpectedly weak through most of 2013 and key source data, core capital goods shipments, were essentially flat through the first 10 months of the year. Thus, the 2.7% samr surge in core capital goods shipments in November was taken as a sign that with the gov-ernment shutdown (and related uncertainties) behind us, busi-ness might be ready to boost spending. But fully 80% of the increase in core capital goods shipments in November is ac-counted for by shipments of farm equipment, and the gain appears to be motivated by the year-end expiration of tax in-centives rather than a sustained upturn in business spending. (The factory report does not provide detail on what share of the 4.1% rebound in core capital goods orders was accounted for by farm machinery.)

The more reliable sign of an upturn in capital spending is coming from the more broadly based acceleration of real capi-tal goods imports, showing a three-month run rate of nearly 15% saar since September.

-10

-5

0

5

10

15

0

1

2

3

4

5


%ch saar over 3 months, both scales

Real consumer spending and nominal retail sales, with Dec. forecast

Source: BEA, Census, J.P. Morgan forecast

Real consumer spending

Nominal retail sales

-10

-5

0

5

10

15

20


%ch saar, 3m/3m, nonauto capital goods

Import and export volumes, capital goods

Source: Census

Imports

Exports

33

JPMorgan Chase Bank NA Robert E Mellman (1-212) 834-5517 [email protected] Michael Feroli (1-212) 834-5523 [email protected]


Daniel Silver (1-212) 622-6039 [email protected] Jimmy Coonan (1-212) 622-0547 [email protected]

Data releases and forecasts Tue NFIB Small-Business Optimism survey Jan 14 Index, 1986=100, sa 7:30am Sep Oct Nov Dec

Optimism Index 93.9 91.6 92.5 Capex plans 25.0 23.0 24.0 Hiring plans 9.0 5.0 9.0 Planned price increases 19.0 18.0 19.0

The headline for the NFIB survey edged up 0.9pt to 92.5 in November, but remained lower than all of the figures reported between May and September of last year. Commentary already released by the NFIB about the la-bor market in December was mostly upbeat. The NFIB indicated that the average increase in employment for small businesses in December was the strongest since February 2006. It also reported that the share of owners reporting job openings was unchanged at 23% in Decem-ber, but in more downbeat news, the net percent of firms planning to increase employment slipped 1%-pt to 8%.

Tue Retail sales Jan 14 %m/m, sa 8:30am Sep Oct Nov Dec

Total 0.1 0.6 0.7 0.0 Ex autos 0.4 0.5 0.4 0.4

Ex autos and gas 0.4 0.6 0.6 0.2 Building materials 0.0 -1.5 1.8 -0.2 Control group¹ 0.4 0.7 0.5 0.3 Ex. autos and building mat. 0.4 0.7 0.3 0.4 1. Total ex. gasoline, automotive dealers, building materials, and food serv.

We forecast that nominal retail sales were unchanged in December, with offsetting changes across the main com-ponents. We look for a sizable increase in sales at gasoline stations (+2.0%) largely as a result of the increase in prices during the month. We also expect a drop-off in sales at motor vehicles and parts dealers in December (-2.3%) based on the decline in unit auto sales already reported for the month. Building material sales jumped 1.8% in No-vember but have been little changed on net over the past six months, and we look for a modest move down in De-cember (-0.2%) to follow the November increase. We also forecast that sales of the control group—the to-tal excluding autos, gasoline, building materials, and food services—increased 0.3% in December. The control group has done pretty well lately, increasing 0.4% in September, 0.7% in October, and then 0.5% in Novem-ber. Many other economic indicators have also perked up in recent months. But we think the release of a new smartphone helped boost the data from the past few months, and we do not think this boost carried over into December; so we look for a little bit of cooling in the December retail sales data relative to the trend from the preceding few months.

Sources: ADP/Moody’s Analytics, BEA, BLS, Census Bureau, Conference Board, Federal Re-serve Board, ISM, J.P. Morgan forecasts, NAHB, NAR, NFIB, NY Fed, Markit, Philadelphia Fed, Standard & Poor’s, University of Michigan, US Treasury

Tue Import prices Jan 14 %m/m, nsa, unless noted 8:30am Sep Oct Nov Dec

Import prices 0.3 -0.6 -0.6 0.4 %oya -0.7 -1.6 -1.5 -0.5

Ex. fuel import prices 0.1 0.1 0.0 0.0 %oya -1.2 -1.3 -1.2 -1.1

We forecast that the import price index gained 0.4% in December (-0.5%oya) on rising fuel prices and un-changed nonfuel prices. Rising spot prices for crude oil, fuel oil, and natural gas point to a 1.7% increase in im-ported fuel prices in December. Excluding fuels, we an-ticipate that import prices were flat (-1.1%oya). The nominal trade-weighted dollar increased 0.9% between early November and early December (when import pric-es are collected), likely putting some downward pressure on the index. Within nonfuel prices, we expect falling metals prices based on declines in spot prices for alumi-num and other metals. This should be offset by rising prices for building materials and food, based on our analysis of relevant spot prices. We forecast a 0.1% rise in capital goods prices, which is a step down from No-vember’s 0.2% gain that was boosted by a jump in semi-conductor prices. We anticipate that consumer goods prices were unchanged.

Tue Business inventories Jan 14 %m/m, sa, unless noted 10:00am Aug Sep Oct Nov

Inventories 0.4 0.6 0.7 0.5 Manufacturing 0.2 0.3 0.0 0.0 Wholesale 0.8 0.5 1.3 0.5

Retail inventories 0.4 1.0 0.8 1.0 Ex. autos 0.3 0.4 0.2 Autos 0.5 2.3 2.1

Inventory/sales ratio 1.29 1.29 1.29 1.29

We estimate that nominal business inventories increased 0.5% in November. We already have reports in hand showing that manufacturing inventories were unchanged during the month while wholesale inventories increased 0.5% and we forecast that retail inventories increased 1.0%. We believe retail inventories of motor vehicles and parts increased 2.5% based on a solid increase al-ready reported in some industry data, and we look for a 0.3% increase in other retail inventories to continue its recent upward trend in the data.

Wed Producer price index Jan 15 %m/m, sa, unless noted 8:30am Sep Oct Nov Dec

Finished goods -0.1 -0.2 -0.1 0.2 %oya (nsa) 0.3 0.3 0.7 1.0

Core 0.1 0.2 0.1 0.1 %oya (nsa) 1.2 1.4 1.3 1.2

Energy 0.5 -1.5 -0.4 1.2 Cars 0.3 1.7 -0.8 0.3 Trucks 0.9 -0.1 0.6 0.2 Core intermed. 0.1 -0.1 -0.1 0.0 Core crude -1.0 -0.5 1.4

34




We forecast that the producer price index for finished goods increased 0.2% in December (+1.0%oya), with rising energy prices, an uptick in core prices (which ex-clude food and energy), and falling food prices. We an-ticipate rising gasoline prices based on our analysis of relevant spot prices. This should be accompanied by in-creases in liquefied petroleum gas and natural gas prices, contributing to a 1.2% rise in the energy PPI. Movements in prices received by farmers, including falling meat pric-es, signal a 0.5% drop in the food PPI. We anticipate that core prices ticked up 0.1% in Decem-ber (+1.2%oya), in line with the November increase. Light vehicle prices were on the rise in September through November, and we expect that this continued in December with a 0.2% gain. Excluding light vehicles, we predict that core prices increased 0.1%, which is a bit higher than in November but consistent with the general-ly soft pace of increase throughout 2013.

Wed Empire State survey Jan 15 Diffusion indices, sa 8:30am Oct Nov Dec Jan

General bus. conditions 1.5 -2.2 1.0 3.5 New orders 7.8 -5.5 -3.5 Shipments 13.1 -0.5 7.7 Unfilled orders -6.0 -17.1 -24.1 Prices paid 21.7 17.1 15.7 Prices received 2.4 -4.0 3.6 Composite 51.4 48.9 47.3

We believe the Empire State manufacturing survey’s headline increased 2.5pts to 3.5 in January. The survey has been weak lately, which has contrasted with the more upbeat message from most other recent manufacturing surveys. We therefore look for some improvement in the Empire State survey as it “catches up” with some of the other indicators, but we still expect a fairly soft January report considering the weak forward-looking details re-ported in the December survey.

Thu Jobless claims Jan 16 Thousands, sa

8:30am New claims (wr.) Continuing claims Insured Wkly 4-wk avg Wkly 4-wk avg Jobless,%

Nov 2 341 350 2810 2850 2.2 Nov 9 344 345 2867 2855 2.2 Nov 16¹ 326 339 2765 2829 2.1 Nov 23 321 333 2757 2800 2.1 Nov 30 305 324 2790 2795 2.1 Dec 7 369 330 2877 2797 2.2 Dec 14¹ 380 344 2932 2839 2.2 Dec 21 341 349 2815 2854 2.2 Dec 28 345 359 2865 2872 2.2 Jan 4 330 349 Jan 11 310 332 1. Payroll survey week


We forecast that initial jobless claims declined 20,000 to 310,000 during the week ending January 11. Claims have been volatile over the past few months, which is normal for the period around the holiday season. The weekly changes in claims during this holiday season have close-ly mirrored the weekly changes from the 2002/2003 hol-iday season, which we think is related to seasonal factors not fully capturing the effects of the unusually late Thanksgiving and New Year’s falling on a Wednesday. If these similarities continue, we should see a drop-off in initial claims during the week ending January 11.

Thu CPI Jan 16 %m/m, sa, unless noted 8:30am Sep Oct Nov Dec

Total 0.2 -0.1 0.0 0.3 %oya (nsa) 1.2 1.0 1.2 1.5

Core 0.12 0.12 0.15 0.14 %oya (nsa) 1.7 1.7 1.7 1.7

Core services 0.2 0.2 0.3 Core goods -0.1 -0.1 -0.1 Food 0.0 0.1 0.1 0.0 Energy 0.8 -1.7 -1.0 2.1 Housing 0.3 0.1 0.2 Owners' eq. rent 0.22 0.22 0.27 0.24 Rent 0.20 0.18 0.18 0.18 Lodging away from home -0.4 -3.1 2.9 0.5 Apparel -0.5 -0.5 -0.4 -0.4 New vehicles 0.2 -0.1 -0.1 0.0 Used vehicles 0.0 0.3 0.1 0.0 Airfares 0.5 3.6 2.6 1.0 Communication 0.2 0.0 -0.1 0.0 Medical care 0.3 0.0 0.0 0.2

We expect that the consumer price index gained 0.3% in December (1.5%oya) with a jump in energy prices and modest increases in food and core prices (core prices ex-clude food and energy). We forecast a 0.14% rise in core prices, a small step down from November’s 0.15% in-crease. Such an outcome would translate into steady year-ago growth of 1.7%. Within core prices, core services should continue to run stronger than core goods, with core services buoyed by relatively firm rental inflation. We anticipate that motor fuel prices rose 3.5% in De-cember based on our seasonal adjustment of relevant spot prices. Similarly, spot prices signal rising prices for fuel oil and natural gas, leading us to expect a 2.1% gain in the overall energy CPI. Recent declines in prices re-ceived by farmers signal that the food CPI was un-changed in December, at the low end of the tight 0.0%-0.2% range that food prices have kept to for much of the past year. Moving to core price components, rental inflation tends to be sticky. Tenants’ rent increased 0.18% in October and November, and we expect an identical increase in December. We forecast that owners’ equivalent rent, which constitutes over 32% of core prices, gained 0.24% in December. This would be a step down from Novem-ber’s 0.27% rise but above October’s 0.22% increase. Used vehicles prices tend to lag the Manheim Used Ve-hicle Value Index by a few months. After rising over the

35




summer, this index started to fall in October. Based on this swing, we anticipate that used vehicle prices have peaked and expect that they were unchanged in Decem-ber. We predict that new auto prices were also un-changed in December based on our analysis of recent movements in auto sales data. Medical care prices have been running unusually soft re-cently, with prices unchanged in October and November. We expect a 0.2% rise, reflecting some acceleration but still below the historical trend for the series.

Thu Philadelphia Fed survey Jan 16 Diffusion indices, sa 10:00pm Oct Nov Dec Jan

General bus. conditions 15.6 9.2 6.4 5.0 New orders 23.8 14.0 12.9 Shipments 17.3 7.8 11.9 Inventories 6.0 13.9 16.0 Prices paid 21.0 25.4 16.4 Prices received 12.8 9.0 10.8 Composite 56.7 53.9 53.7

We look for the Philadelphia Fed survey’s headline to decline 1.4pts to 5.0 in January. Many manufacturing in-dicators were improving at the end of 2013, but the Phil-adelphia Fed survey’s headline cooled each month since reaching 20.0 in September. The decline in orders and increase in inventories reported in the December survey also point to some additional softening ahead for the Philadelphia Fed survey.

Thu Homebuilders survey Jan 16 Sa 10:00am Oct Nov Dec Jan

Housing market 54 54 58 57 Present sales 58 58 64 Prospective buyer traffic 43 41 44

We believe the NAHB survey’s headline declined 1pt to 57 in January. The index popped up 4pts to 58 in De-cember, matching the high for the expansion to date pre-viously reported for last August. But we think home-builder sentiment declined over the past few weeks be-cause mortgage application volumes weakened through early January and mortgage rates have pushed higher in recent weeks. The severe winter weather might also be weighing on the housing market.

Fri Housing starts Jan 17 Million units, saar 8:30am Sep Oct Nov Dec

Starts 0.87 0.89 1.09 0.99 Single-family starts 0.58 0.60 0.73 0.66 Multifamily starts 0.29 0.29 0.36 0.33

Permits 0.97 1.04 1.02 1.04

We forecast that housing starts dropped 9.7% to 985,000 saar in December while housing permits increased 1.8% to 1.035mn saar. Broadly speaking, it looks like a lot of housing indicators started improving again late in 2013 after a weak period following the increase in mortgage rates around the middle of the year. But we think starts

are poised to drop off in December after the substantial 23% increase reported for November. The large increase in single-family starts in November broke with the earli-er trend of more subdued improvement in the data and the gap between starts and permits in November points to a decline in starts to come. The multifamily starts se-ries is generally very volatile each month and we also expect a decline in December to undo a portion of the large increase reported for November. Single-family permits—which typically lead the related starts data—have been trending fairly steadily higher lately, and we look for a continuation of this modest up-ward trend in December. The monthly figures on multi-family permits data can also be very volatile and we ex-pect a modest increase in December to undo a portion of decline reported for November.

Fri Industrial productionJan 17 %m/m, sa, unless noted9:15am Sep Oct Nov Dec

Industrial production 0.5 0.1 1.1 0.3 Manufacturing 0.1 0.5 0.6 0.4

Motor vehicles and parts 1.8 -1.3 3.4 1.2 High-tech -1.3 1.5 1.9 Mfg ex motor vehicles 0.0 0.6 0.5 0.3 Business equipment 1.1 0.2 -0.5 Capacity utilization (%, sa) 78.3 78.2 79.0 79.1

Manufacturing 76.2 76.4 76.8 77.0

We estimate that industrial production increased 0.3% in December. Data on manufacturing from the December employment report as well as separate auto production schedules point to a decent gain in manufacturing output in December, though a moderation relative to the growth reported for October and November. We forecast that manufacturing IP increased 0.4% in December, with mo-tor vehicles and parts rising 1.2% during the month and other manufacturing IP increasing 0.3%. Away from manufacturing, we look for mining production to be up 0.7% in December and utilities production to be down 0.5%. Many available figures on mining point to another increase in production in December to follow a solid 1.7% gain reported for November. Utilities production has been affected by the weather, and we expect a modest pullback in utilities IP in December to reflect to the less extreme cold during the month relative to November.


36




Fri Consumer sentiment Jan 17 Michigan preliminary 9:55am Oct Nov Dec Jan

Univ. of Mich. Index (nsa) 73.2 75.1 82.5 85.0 Current conditions 89.9 88.0 98.6 Expectations 62.5 66.8 72.1

Inflation expectations Short term 3.0 2.9 3.0 Long term 2.8 2.9 2.7

Home buying conditions 156 150 167

We believe the University of Michigan consumer senti-ment index increased 2.5pts to 85.0 in the preliminary January report. Early January readings from the daily Rasmussen Consumer Index as well as the weekly Bloomberg Consumer Comfort Index have been above their respective December averages, and the Michigan index is not seasonally adjusted and tends to increase in January.

Review of past week’s data Markit services PMI Index, sa

Flash Final Nov Dec Dec

Business activity 55.9 56.0 56.0 55.7 Incoming new business 56.9 58.1 57.9 Employment 52.4 55.7 55.2 Business expectations 72.4 79.5 78.7 Input prices 56.3 55.8 56.0 Prices charged 55.0 54.3 54.5 Backlogs of work 53.8 52.5 51.5

ISM nonmanufacturing survey (Jan 6) Sa

Oct Nov Dec

Nonmfg. index (NMI) 55.4 53.8 55.0 53.0 Business activity 59.7 55.5 55.2 New orders 56.8 56.4 49.4 Employment 56.2 52.5 55.8 Prices 56.1 52.2 55.1

The national service sector survey data reported for December came in softer than expected. The ISM nonmanufacturing survey’s headline declined from 53.9 in November to 53.0 in December and the Markit services PMI’s activity index was revised down slightly from 56.0 to 55.7 between the flash and final December reports (down from 55.9 in November). The details of the ISM survey were a mixed bag while the PMI da-ta were still generally upbeat, despite modest downward revi-sions to several components in the final December report. Within the ISM nonmanufacturing survey, the new orders index dropped a substantial 7.0pts to 49.4 in December, reaching its lowest level since June 2009. This could be an ominous sign for the economy, but other related data (including the PMI’s index on new business) have been much more upbeat lately. The ISM’s business activity index edged down 0.3pts to 55.2 in


December, which is still a decent level for this measure. In more upbeat news, the employment index increased 3.3pts to 55.8, continuing its recent choppy run. And the supplier de-liveries index edged up 0.5pt to 51.5 in December (not sea-sonally adjusted). The survey’s inventory change index dropped 6.0pts to 48.0 in December (not seasonally adjusted), suggesting that firms may have started to cut back on invento-ries in December after a pretty substantial buildup in 3Q and earlier in 4Q, though other related indicators have been mixed regarding recent changes in inventories.

Factory goods report (Jan 6) %m/m, sa, unless noted

Sep Oct Nov

New orders 1.8 -0.9 -0.5 1.6 1.8 Shipments 0.1 0.1 0.8 1.0 Inventories 0.3 0.1 0.0 0.1 0.0 Inventory/sales ratio 1.29 1.29 1.28

Nominal factory goods orders increased 1.8% in November while related shipments increased 1.0% and inventories were unchanged during the month. The report contained modest downward revisions to the core capital goods data for No-vember as well as small upward revisions to the October data, and the newly reported figures related to nondurable goods (orders and shipments +0.3%, inventories +0.0%) were a touch stronger than expected. On net, the factory goods report had little impact on our 4Q GDP. Within the details of the report, core capital goods orders and shipments both jumped up in November following lackluster results in earlier months. Core capital goods orders increased 4.1% in November and are now up 9.6% saar over the three months through November. Core capital goods shipments—source data used to estimate equipment spending in the GDP accounts— increased 2.7% in November and are also up 9.6% saar over the latest three months. It is possible that the recent strength in the core capital goods data was made in anticipation of the expiration of the bonus depreciation tax credit at the end of 2013. Shipments of farm machinery looked especially strong in November, surging 80% during the month; despite farm machinery typically accounting for about 3% of total core capital goods shipments, the November increase in farm machinery shipments accounted for about 80% of the total in-crease in core capital goods shipments during the month.

International trade (Jan 7)$ bn, samr

Sep Oct Nov

Balance (BoP basis) -43.0 -40.6 -39.3 -39.5 -34.3 Services 19.4 19.6 19.5 19.7 Merchandise -62.4 -60.2 -58.8 -59.2 -53.9 Exports (%m/m) -0.1 1.8 2.0 -0.2 0.9 Imports (%m/m) 1.6 0.4 0.1 -0.6 -1.4

The trade deficit was much narrower than anticipated in No-vember and the October deficit was revised to be narrower than previously reported. The nominal trade balance narrowed to -$34.3 billion in November from -$39.3 billion in October (revised from -$40.6 billion) while the real goods balance nar-rowed to -$44.6 billion in November from -$47.0 billion the previous month (revised from -$48.3 billion). Large increases in exports have helped contribute to the recent narrowing in

37




the trade deficit, while imports have been soft over the past few months. Real goods exports jumped 3.6% in October and then increased another 0.5% in November, and it looks like 4Q will be one of the strongest quarters for export growth since the very early stages of the recovery. Real import vol-umes, meanwhile, declined in October (-0.2%) and November (-1.0%) after jumping 2.0% in September. Overall, the recent trade data suggest that net exports will boost 4Q GDP growth by almost 1%-pt. Much of the narrowing in the trade deficit in both November and over the past year has been related to petroleum products. The real petroleum trade balance narrowed by $1.4 billion in November and $3.7 billion over the latest 12 months. The real nonpetroleum trade balance narrowed by only $0.3 billion in November. The nonpetroleum balance narrowed by $2.5 bil-lion over the past 12 months, but the series can be choppy and the deficit in November 2012 was much wider than surround-ing months. Overall, it looks like the nonpetroleum trade defi-cit has been expanding lately.

Labor market report (Jan 10) Sa

Oct Nov Dec Payroll employment (ch, m/m, 000s) 203 241 215 74 Private payrolls 217 196 226 215 87 Goods-producing 31 30 44 51 30 -3 Construction 12 8 17 19 15 -16 Manufacturing 16 17 27 31 10 9 Service-providing 170 159 190 185 77 Private service-providing 187 152 175 185 90 Wholesale trade -8 -6 7 10 15 Retail trade 46 55 22 22 55 Professional services 48 52 35 41 19 Temporary help 9 13 16 13 40 Education/health 30 26 40 41 Leisure and hospitality 49 45 17 20 9 Government -14 -17 7 15 0 -13 Average weekly hours 34.4 34.5 34.5 34.4 Index, hrs worked (%m/m) 0.1 0.5 0.2 -0.2 Hourly earnings (%m/m) 0.1 0.2 0.2 0.1 (%oya) 2.2 2.0 1.9 1.8 Unemployment rate (%) 7.3 7.2 7.0 7.0 6.7 Participation rate (%) 62.8 63.0 62.8

The December jobs report was an ugly mix of slowing em-ployment growth and disappointing labor supply. The step down in nonfarm job growth from an upward-revised 241,000 in November to just 74,000 last month can partly be blamed on weather and, perhaps just as important, on the month-to-month noise in the series. Just as the hype over upside risks after strong November data was probably overdone, so, too, should the string of disappointing December data be taken in stride. Given the economic fundamentals we’d guess the un-derlying trend in job growth hasn’t materially shifted. More troubling, though, is not what we are learning about business-es’ labor demand, but what is happening in households’ labor supply: the unemployment rate plunged 0.3%-pt to 6.7% as the labor force participation rate fell another 0.2%-pt to 62.8%. So far, the fall in unemployment is not being accompanied by even the slightest hint of wage acceleration—average hourly earnings were up just 0.1% last month—but it does raise the

risk that the economy may bump up against capacity con-straints sooner than hoped. Bernanke’s last meeting as Chair-man will be a tricky one. We believe the Fed can convince it-self there were enough special factors distorting this number that another $10 billion taper will be appropriate at the Janu-ary FOMC meeting, though there may be some advocating a pause. The forward guidance decision could be even more dif-ficult than the tapering call. Rather than lower the unemploy-ment threshold further—which would be doubling down on predicating policy on an arguably flawed statistic—we think the Committee will continue along the path of downplaying the significance of the unemployment rate in the setting of in-terest rate policy. The weakness in the establishment survey was not just in the headline jobs number, but also in the ticking down in the av-erage workweek to 34.4 hours, and the sluggish 0.1% gain in average hourly earnings, the lowest increase since the sum-mer. The big question is how much of the disappointment was weather distortion. The 16,000 decline in construction pay-rolls is an obvious candidate as a casualty of cold weather in the survey week. Another clue comes from the 273,000 who reported themselves as employed but not at work due to bad weather, about 100,000 more than an average December. Caution should be taken in simply adding this 100,000 to the nonfarm payroll number, as the nonfarm number counts peo-ple as employed as long as they were paid, whether or not they were at work. Our educated guess is weather may have taken 50,000 off payrolls. It’s hard to see how the weather—or anything else—was to blame for the 25,000 decrease in employment of accountants. Another outlier was health care employment, down 6,000 and the first monthly decline in over a decade, undoubtedly a data point that will enter the civ-ic discussion on health care reform. Going in the opposite di-rection, retail employment had a strong month, up 55,000, which tends to occur in Decembers following a late Thanks-giving (even after seasonal adjustment). Temp help was also strong, up 40,000. The weakness in average hourly earnings took year-ago wage gains down to 1.8%, partly a base effect as earnings late last year got a boost, perhaps ahead of sched-uled tax increases. Job gains as measured in the household survey came in a somewhat more respectable 174,000 and unemployment plunged 490,000, the most in three years. The decline in the participation rate undid the November rebound that occurred in the wake of the government shutdown. Most demographic groups saw participation decline, though it was more concen-trated in persons with lower levels of educational attainment. Similarly the decline in unemployment was fairly broad-based. This decline occurred even before extended unem-ployment benefits began expiring at the end of December, and in fact was heavily concentrated in those unemployed less than five weeks, i.e., those who will not be affected by ex-tended benefits. The unemployment rate of those unemployed six months or less, which some researchers have flagged as a more reliable measure of how labor market slack affects infla-tion, fell to 4.2%, a fair bit below the 4.9% long-run average.


38

JPMorgan Chase Bank NA Daniel Silver (1-212) 622-6039 [email protected]


Focus: indicators on ice Many areas in the United States have experienced very cold

temperatures lately as a polar vortex has moved through the country. The severe cold has drawn some attention to the potential ways that unusual temperatures can impact the economy. Unseasonably cold weather can affect some parts of the economy—discussed in more detail below—but we should point out that just a few days of severely cold tem-peratures might not have a meaningful impact on some economic reports since many are reported with monthly or quarterly frequencies. We also need to draw the distinction between the extreme cold and other severe winter weather events (like blizzards), the latter of which can significantly impact the economy, but not specifically because of cold temperatures.

We use data on heating degree day deviations reported by the National Oceanic and Atmospheric Administration (NOAA) to test how unusually cold weather impacts a vari-ety of economy reports. Heating degree day deviations rep-resent how heating energy requirements differ from season-al norms; deviations increase when temperatures are much colder than normal during cold-weather months. Generally speaking, unusually cold winter temperatures negatively impact many, though not all, of the economic indicators re-lated to retail sales, the manufacturing sector, the housing market, and construction, as well as the labor market. Se-verely cold temperatures also typically boost the production and consumption of utilities.

The table at the right shows regression results for a number of models incorporating NOAA’s heating degree deviations and a constant as right-hand-side variables and a variety of economic indicators as dependent variables. The table shows the impact of the weather on these variables during a month in which the total heating degree deviation was 50. We use this value—shown as the dashed line in the upper-right chart—to represent a month that is much colder than normal but is not as unusually cold as some of the most ex-treme cases in recent history. This is not a forecast of the precise severity of the cold during the past week or the en-tire month of January; data on heating degree days for the week ending January 11 will be reported on January 13.

In a few highlights from our findings, we believe a heating degree day deviation totaling 50 during a month typically reduces nonfarm payroll growth by nearly 40,000, almost entirely in the private sector and with about a third specifi-cally coming out of the construction sector. We also esti-mate that this kind of abnormally cold weather reduces total retail sales growth by about 0.2%-pt and growth in sales of the control group by 0.1%-pt and reduces manufacturing industrial production growth by about 0.2%-pt.

Regression results involving heating degree day deviations

Effect of heating degree deviation of 50

Unit of monthly measure

Statistically significant results Retail sales -0.2 %-pts Control retail sales -0.1 %-pts Real utilities consumption 2.0 %-pts Utilities IP 1.0 %-pts Manufacturing IP -0.2 %-pts Manufacturing IP ex. MVP -0.1 %-pts ISM manufacturing -0.3 Index points Single-family starts -1.4 %-pts Single-family permits -0.9 %-pts Construction spending -0.3 %-pts Nonfarm payrolls -39 000s Private payrolls -37 000s Construction payrolls -13 000s

Not statistically significant results

Real consumption 0.0 %-pts PMI manufacturing -0.2 Index points New home sales -0.4 %-pts Unemployment rate 0.0 %-pts

ISM nonmanufacturing index -0.1 Index points

PMI services activity index 0.2 Index points

Note: Regression samples are limited to months between September and March. Regressions start in 1997 or later depending on data availability. Statistical significance is determined by t-stats greater than 1.64 for heating degree day deviation variable. Source: J.P. Morgan

While the results mentioned in the previous paragraph are

all statistically significant, we should also point out that a number of economic indicators do not appear to be affected by unseasonably cold temperatures with any reliable ro-bustness (shown in the lower portion of the above table). We also tested a few variations of the models that are shown in the table that incorporated lagged trends of the dependent variables as right-hand-side variables as well as the incremental change in the heating degree day deviation instead of the actual heating degree deviation; the results of these models were often, though not always, similar to the results shown in the above table.

-300

-200

-100

0

100

200

99 01 03 05 07 09 11 13

Days, monthly total, through December 2013

Heating degree day deviation

50

Source: NOAA

39

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi (44-20) 7134-8310 [email protected] Marco Protopapa (44-20) 7742 -7644 [email protected]


Euro area ECB on hold, with slightly reinforced guidance

Growth indicators improve

But, core inflation slides to a new record low

The ECB made no policy changes this week, except for tweaking the opening policy statement. The aim of the tweak, according to Draghi, was to strengthen the forward guidance. Specifically, the Governing Council now “strongly emphasis-es” that it will maintain an accommodative policy stance for as long as needed and the Governing Council now “firmly” expects rates to be at their current or lower levels for an ex-tended period of time. Apart from this, Draghi set out two scenarios that could prompt the ECB to act. First, a worsening in the inflation outlook, and, second, a tightening of money market conditions. But, with both of these, it remains very unclear where the ECB’s trigger points lie. Core inflation slid to a record low in December, without it triggering any real calls for action at this week’s meeting. And the increases in money market rates since the last meeting were described as “okay” by Draghi.

Overall, we continue to think that the ECB is on hold, despite the uncomfortably low level of inflation. We also think that a large shock would be needed to trigger a significant response, rather than an incremental one. At the meeting, Draghi was repeatedly asked about the toolbox. He said only that all tools that are eligible under the Treaty are eligible for use. Beyond this truism, he refused to discuss any specifics.

Growth: official activity data improve While the business surveys have been signaling a continuation of the recovery, some of the official activity data had got off to a very weak start in 4Q13. The October levels of IP and retail sales were 3.6% ar and 2.1% ar below the 3Q13 levels, creating the risk that Euro area GDP may even contract in 4Q13. Our expectation for this week’s data was that the busi-ness surveys would continue to signal a slow improvement in underlying growth momentum and that the official activity data would rebound, aligning themselves with the surveys, which is what the data delivered.

Surveys signal better growth in aggregate. In December, the Euro area PMI effectively reversed the small declines seen in October and November. And economic sentiment in the European Commission survey rose 1.6pts to 100. The sector and component details were encouraging in both sur-veys. The composite PMI employment index moved back to 50 for the first time in two years and employment inten-tions in the EC survey are sending the same message of

stabilizing employment levels. In manufacturing, the bal-ance between new orders and inventory improved in the PMI, which sends a positive signal about the early part of 2014. Finally, in the EC survey, consumer confidence in-creased as well, matching the increase in business senti-ment. Overall, our impression is that the general tone of the surveys points to further improvement, despite the PMI’s temporary stumble.

Surveys improve (outside of France). The country details in the surveys are also encouraging, as much of the recent weakness has been narrowly based in France. In Germany, both the IFO and PMI are pointing to GDP growth at above a 2% ar pace at the end of last year. The recent increases have been equally striking in Spain, where the composite

43

48

53

58

63

-2

-1

0

1

2

3

4

2010 2011 2012 2013 2014 2015

%q/q saar, boxes show J.P. Morgan GDP forecasts from 4Q13

Euro area GDP growth and composite PMIDI, sa

GDP growth

Source: Markit, Eurostat, J.P. Morgan

Composite PMI

-6

-4

-2

0

2

07 08 09 10 11 12 13 14

Standard deviations from 2000-07 average

Euro area business surveys

Source: European Commission, Markit, J.P.Morgan

Composite PMI

EC economic sentiment

40

45

50

55

Jan 13 Apr 13 Jul 13 Oct 13 Jan 14

DI, sa

Euro area composite PMI

Source: Markit, J.P. Morgan

Germany

Spain

Italy

France

40

Economic Research Euro area January 10, 2014

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi (44-20) 7134-8310 [email protected] Marco Protopapa (44-20) 7742 -7644 [email protected]

PMI jumped 3pts in December to an elevated 53.9, driven by both services and manufacturing. In the EC survey, eco-nomic sentiment also rose strongly in Spain by 4pts to 100. In Italy, the composite PMI had declined in recent months, but a 1.2pt gain in December took it back to 50, while eco-nomic sentiment rose solidly in December to a new recov-ery high. Notable also is the sharp improvement in Portu-guese economic sentiment, which is now close to the Euro area average. These improvements in the periphery create the possibility of a virtuous cycle whereby better growth and financial conditions reinforce each other (this week, we have decided to revise up our Spanish GDP forecast for this year). And if France also steps up again, which it could, then the picture for the whole region would start to look much better.

Retail sales point to further consumption gains. Euro area retail sales were weak in October, but a strong rebound in November (+1.4%m/m) suggests that retail spending may have increased slightly in 4Q13. With a solid increase in car registrations and further increases in consumer confidence, our tracking tool points to a rise in consumer spending of 1%q/q saar (taking into account the recent bias of our track-ing estimate). This would be a bit firmer than expected.

IP also rebounded in November. Following a very weak October, IP also looks set to rebound. In Germany, manu-facturing output surged 3.1%m/m in November and in France it rose 0.2%m/m. This leaves the level of production in October and November 2% ar and 1.5% ar above the 3Q13 level in Germany and France, respectively. And, at least in Germany, the indications point to a further im-provement in December, given the sharp increases in the business surveys and the solid upward trend in industrial orders (through to November). Next week, we expect Euro area IP to have increased 1.3%m/m in November, which would also reverse the October weakness.

Bank lending rates fail to decline again. The main disap-pointment in this week’s data was the failure of actual bank lending rates to decline. This could be because banks are cautious about passing on low funding costs due to fears about AQR-related provisioning requirements. But, we note that this disappointment is not preventing economic growth from stepping up significantly in the periphery.

Core inflation at a record low Despite the improvement in growth momentum, the strength of the recovery is not yet sufficient to bring about declines in unemployment. The unemployment rate has stabilized at 12.1% and the number of unemployed is no longer increasing, which is consistent with the message sent by the employment indices in the business surveys. But, there are no signs yet that unemployment is starting to decline.

With unemployment very elevated, it is little surprise that inflation is very low. In fact, core inflation fell to an all-time low of 0.7%oya in December and the recent trajectory sug-gests that it may decline a bit further. Our forecast assumes that core inflation moves sideways from here, but it is very possible that lagged effects of past economic weakness and currency appreciation are still to feed through. And the ECB even expects core inflation (at least in services) to increase somewhat at the start of 2014. In this context, it is interesting to note that the survey indicators of pricing intention (in the PMI and EC surveys) have stabilized and in some cases in-creased. This suggests that core inflation could stabilize.

-3.0

-1.5

0.0

1.5

3.0

4.5

99 01 03 05 07 09 11 13

%q/q saar, model uses retail and car sales, and confidence

Tracking Euro area consumer spending with monthly data

Actual

Tracking estimate

4Q13

Source: Eurostat, European Commission, J.P.Morgan

-500

0

500

1000

1500

7

8

9

10

11

12

99 01 03 05 07 09 11 13

%

Euro area unemployment000s, change over three months

Unemployment rate

Unemployed (000s)

Source: Eurostat, J.P.Morgan

-1.0

0.0

1.0

2.0

3.0

99 01 03 05 07 09 11 13

%oya, dotted line shows ECB target, core excludes energy, food, alcohol, tobacco

Euro area HICP inflation

Source: Eurostat

Core goods

Services

41

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi (44-20) 7134-8310 [email protected] Raphael Brun-Aguerre (44-20) 7134-8308 [email protected]


Marco Protopapa (44-20) 7742 [email protected]

Data releases and forecasts Week of January 13 - 17 Output and surveys

Industrial production Aug Sep Oct Nov Tue Euro area Jan 14 %m/m sa 0.9 -0.2 -1.1 1.3 11:00am %oya -1.6 0.1 -0.1 Mon Italy Jan 13 Ind prod (%m/m sa) -0.1 0.2 0.5 0.4 10:00am Ind prod (%oya sa) -4.7 -3.1 -1.1

We expect Euro area IP to have increased 1.3%m/m in November, reversing the declines seen in September and October. That would leave the October and November average effectively in line with the 3Q13 level, and re-move a lot of downside risk to our 4Q13 Euro area GDP estimate. Energy production was likely still a drag last quarter, mainly due to the weather. But, we expect a larg-er increase in manufacturing output in November, which would leave manufacturing already tracking an increase in 4Q13. This would be more consistent with the business surveys, which have recently shown a significant pickup in the sector.

In Italy, we expect IP to have increased 0.4%m/m, putting Italian industry on a steady recovery path. We note that in the Italian PMI, the manufacturing sector appears to be stepping up strongly, while services are lagging behind.

Real GDP 1Q13 2Q13 3Q13 4Q13 Wed Germany Jan 15 %q/q sa 0.0 0.7 0.3 0.4 8:00am %q/q saar 0.0 2.9 1.3 1.5 %oya -0.3 0.5 0.6

Next week, the German statistics office will publish its early estimate of GDP in 2013, which will include an as-sumption about growth in 4Q13. This latter estimate will be based on a lot of judgment and short-term forecasting, given that official activity data for December are not yet available. Nevertheless, this early GDP estimate tends to be quite reliable, even though it is produced one month earlier than normal.

Our expectation is that the German economy expanded 1.5%q/q saar in 4Q13. The surveys are sending a firmer message of growth at just above 2%q/q saar. But, some activity data are still a bit soft in 4Q13, although momen-tum appears to be building even in the official activity data. Hence, the risk is slightly to the upside for 4Q13 and cer-tainly the data are pointing to a significant acceleration into 1Q14. This pickup appears broadly based with manu-facturing and services both stepping up, driven by better external and domestic demand.

External trade and payments

Foreign trade Aug Sep Oct Nov Wed Euro area Jan 15 € bn, sa 11:00am Trade balance 12.6 12.4 14.5 - year earlier 9.6 10.2 9.1 Exports 157.0 158.6 159.0 %m/m sa 0.5 1.0 0.2 Imports 144.4 146.2 144.5 %m/m sa -0.7 1.3 -1.2

Inflation

Consumer prices Sep Oct Nov Dec Thu Euro area (final) Jan 16 HICP (%m/m nsa) 0.5 -0.1 -0.1 0.3 11:00am HICP (%oya nsa) 1.1 0.7 0.9 0.8 HICP (%oya, core-X)1 1.2 1.0 1.1 0.9 HICP (%oya, core-XX)2 1.0 0.8 0.9 0.7 HICP (%m/m, ex. tob.) 0.5 -0.1 -0.1 0.3 Thu Germany (final) Jan 16 %m/m nsa 0.0 -0.2 0.2 0.4 8:00am %m/m sa 0.1 -0.1 0.1 %oya nsa 1.4 1.2 1.3 1.4 HICP (%oya) 1.6 1.2 1.6 1.2 Tue France Jan 14 %m/m nsa -0.2 -0.1 0.0 0.4 7:30am Index ex. tobacco nsa 125.60 125.44 125.38 125.91 %oya nsa 0.9 0.6 0.7 0.8 HICP (%oya) 1.0 0.7 0.8 1.0 Tue Italy (final) Jan 14 %m/m nsa -0.3 -0.2 -0.3 0.2 10:00am %oya nsa 0.9 0.8 0.7 0.7 HICP (%oya nsa) 0.9 0.8 0.7 0.6 Wed Spain (final) Jan 15 %m/m nsa -0.2 0.4 0.2 0.0 9:00am %oya nsa 0.3 -0.1 0.2 0.2 HICP (%oya nsa) 0.5 0.0 0.3 0.3 1. Excluding unprocessed food and energy. 2. Excluding food, alcohol, tobacco and energy.

We expect the final release to confirm the preliminary numbers for December. In 1H14, Euro area headline in-flation should average 0.8%oya, although with a consid-erable amount of volatility caused by Germany. Indeed, the timing of Easter in 2013 created a significant amount of distortion in 2013 that will impact the 2014 year-on-year numbers through a base effect (we expect Euro area inflation to be as low as 0.6%oya in March before re-bounding to 1.0%oya in April).

Source: Eurostat, European Commission, ECB, FSO, IFO, Bundesbank, INSEE, ISAE, Istat, INE, Markit, and J.P. Morgan forecasts

42




Review of past week’s data

Output and surveys

Purchasing managers index final (services) Oct Nov Dec

Euro area Overall region 51.6 51.2 51.0 Germany 52.9 55.7 54.0 53.5 France 50.9 48.0 47.4 47.8 Italy 50.5 47.2 47.9 Spain 49.7 51.5 54.2

Purchasing managers index final (composite) Oct Nov Dec

Euro area Overall region 51.9 51.7 52.1 Germany 53.2 55.4 55.2 55.0 France 50.5 48.0 47.0 47.3 Italy 51.3 48.8 50.0 Spain 50.1 50.8 53.9

The final December Euro area composite PMI was confirmed at 52.1. This erased the concerns raised by two consecutive declines in October and November and signaled that GDP growth momentum has settled at just above a 0.5%-ar pace. The data confirm the diverging momentum in the two largest economies of the region, with above-trend growth in Germany and stagnation or very modest growth in France. The periphery was very positive. The composite PMI output index rose 1.2pts to 50 in Italy and 3pts to 53.9 in Spain. Both countries are seeing a broad-based pickup in the manufacturing sector. The picture in the services sector is less uniform. In Spain, the services PMI has been rising fast in recent months, with the December reading jumping 2.7pts to 54.2. Despite an increase of 0.7, the services PMI remains at a modest 47.9 in Italy, 4.8pts below the September reading. The impression, con-firmed by other indicators, is that the healing of domestic de-mand has advanced much faster in Spain than in Italy.

Industrial production Sep Oct Nov

Germany Prod. sector (%m/m sa) -0.7 -0.6 -1.2 2.0 1.9

%oya sa 0.7 0.8 1.1 3.5 Ex. constr (%m/m sa) -0.7 -0.6 -1.2 2.0 2.4

%oya sa 0.7 0.8 1.1 1.2 3.9 Industry (%m/m sa) -1.0 -1.1 2.0 3.1 %oya sa 0.8 0.9 1.4 1.5 4.8 France Ind prod (%m/m sa) -0.3 -0.4 -0.3 -0.5 0.7 1.3 %oya sa -0.7 -0.9 0.0 -0.3 1.5 Manuf prod (%m/m sa) -0.5 0.4 0.3 0.2 %oya sa -1.2 0.7 0.5 1.6

German IP recovered from its very weak start to 4Q13. After having declined in both September and October, IP rebounded 1.9%m/m in November. The October weakness was partly

related to holiday effects, which have now unwound. In terms of 4Q13, the Oct/Nov average is still 0.7% annualized below the 3Q13 level, but even a flat outturn in December would suf-fice to generate a small increase in 4Q. This could come from energy production and construction, which posted large de-clines in November (of 3.3%m/m and 1.7%m/m, respectively). But, it could also come from manufacturing, where production rose more strongly in November (+3.1%m/m) and where the Oct/Nov average is already 1.9% ar up on the 3Q13 level. While this is already decent, the business surveys are more up-beat about manufacturing output, with the December PMI and IFO signaling a strong 6%-8%-ar pace of growth. The orders data have also been on a decent upward trend since the start of last year.

Manufacturing orders Sep Oct Nov

Germany Volumes, sa Total (%m/m) 3.1 -2.2 -2.1 2.5 2.1 %oya 8.1 1.8 1.9 6.8 Domestic (%m/m) -0.9 -2.0 -1.9 1.9 %oya 4.4 1.8 1.9 3.9 Foreign (%m/m) 6.3 -2.3 -2.2 2.2 %oya 10.9 1.8 1.9 9.0

German industrial orders rose 2.1%m/m in November, with the October and November average now 3.6% annualized above the 3Q13 level. On a %3m/3m saar basis, orders are running at a 6.5% rate and the business surveys have stepped up even further in December to levels consistent with a 10%-ar pace. Excluding the bulky other transport equipment category, orders rose even more in November (3%m/m), but are still a bit softer in 4Q13, at least for the moment. Both export and domestic orders rose in November, although the recent trend has been firmer on the export side.


43




Demand and labor markets

European Commission survey Oct Nov Dec Euro area

% balance of responses, sa Industrial confidence -5 -4 -3 Economic confidence 97.7 98.5 98.4 99.0 100.0 Recent production trend -4 3 2 Production expectations 9 10 8 Export order books -18 -14 -14 Stocks of fin. products 3 4 2 Selling-price exp. 1 1 2 2 Construction confidence -30 -31 -27 Retail confidence -8 -8 -5 Service confidence -3.7 -0.8 -0.9 0.2

Consumer confidence -14.5 -15.4 -13.6

Following the good performance of the Euro area composite PMI, the European Commission’s economic sentiment indica-tor rose markedly by 1.6pts to 100 in December. The indicator has risen for eight consecutive months (for a total gain of 11.4pts) and remains at its highest level since August 2011. The positive trajectory of the economic sentiment indicator, together with the PMI safely holding in expansion territory, further supports our view that the Euro area recovery will gather pace going into 2014.

The improvement of the economic sentiment indicator was spurred by services, consumer confidence, and retail, while manufacturing increased more moderately. In a welcome turn, construction also rose, albeit from depressed levels. The periphery notably outperformed. In Germany and France, economic sentiment was little changed, so that the divergence between Germany and France remained at historical highs. The relative French underperformance owed mostly to ser-vices, suggesting rising weakness in domestic demand.

Bright news came from the periphery. Lifted by large gains in all its components, Spain soared 4pts to 100, a level last seen in pre-crisis times; this bodes extremely well for the level of economic activity in Spain during 2014. Similar considerations apply to Portugal, where the index gained 12.2pts since Au-gust. Albeit on a smaller order of magnitude, the Italian per-formance was positive as well.

The European Commission also released the details of the consumer confidence indicator. Supported by a more favora-ble assessment of the future general economic situation and future employment conditions, consumer confidence (+1.8pts to -13.6) resumed its upward trend after the temporary No-vember setback.

Retail sales Sep Oct Nov

Euro area Total sales, volumes %m/m sa -0.6 -0.3 -0.4 -0.5 1.4 %oya, working-day adj. 0.3 0.0 -0.1 -0.3 1.6

After declining in September and October, Euro area retail sales delivered the required rebound in November, rising 1.4%m/m. That leaves the October and November average in line with the 3Q13 level. And together with a decent gain in car registrations and ongoing improvements in consumer con-fidence, our tracking estimate is pointing to a decent increase in overall consumer spending. A gain of up to 1%q/q saar ap-pears possible based on the current data.

By country, the increases in November were very broadly based, in Germany (+1.5%m/m), France (+2.1%m/m), Spain (+1.9%m/m), Belgium (+1.7%m/m), Austria (+1.7%m/m), and Portugal (+3.1%m/m). The trends have improved in most countries over the past year, with peripheral countries also trending higher (or at least stabilizing).

Unemployment Sep Oct Nov

Euro area Harmonized measure, %, sa (Eurostat) Unemployment rate 12.2 12.1 12.1 12.2 12.1

Oct Nov Dec Germany Reg. (ch m/m, 000s, sa) 3.0 1.0 10.0 9.0 -3.0 -15.0 000s, nsa 2801.2 2806.1 2872.8 Unempl. rate (%, sa) 6.9 6.9 6.9

Employment Sep Oct Nov Germany Change m/m, 000s, sa 9.0 17.0 24.0 35.0 15.0 23.0

The number of unemployed in the Euro area marginally in-creased in November, by 4,000 sa, mostly on account of poor performance in Italy. The unemployment rate in the region has remained stable at 12.1%, the level prevailing since April 2013. Against the backdrop of a gradual recovery of economic activity in 2014, the unemployment rate should have stabi-lized, albeit at historical highs.


44




The most unfavorable outcome was realized in Italy, where the unemployment rate reached an historical high of 12.7%, two- tenths higher than in October; the lack of an incisive labor market reform and increasing taxation of business income re-main key obstacles to a recovery in occupational levels. The number of jobless also increased in France, in line with the poor readings of the PMI unemployment index.

Positive news stemmed from Spain, Ireland, and Portugal. De-spite a stable, record-high unemployment rate of 26.7%, in November the number of unemployed declined in Spain, for what could be the beginning of a slow turnaround in the labor market. The number of unemployed decreased in Ireland for the sixth running month. Portugal continued to record another decrease, in line with a trend started in February 2013 that yielded a cumulative decline in the unemployment rate of 2.1%, to 15.5%.

In Germany, the national labor market report showed some firming in December. Jobs growth held steady at a 0.6% annu-alized pace, with a gain of 23,000 in November. Job vacancies are edging higher again and the 7,000 increase in December hints at an accelerating pace. A pickup in labor demand is con-sistent with the German business surveys, with the composite PMI employment index having increased to 52.4 in December, which is the highest level in almost two years. Finally, unem-ployment fell for the first time in five months in December with a decline of 15,000, while the unemployment rate held steady at 6.9%.

External trade and payments

Foreign trade Sep Oct Nov

Germany € bn, values, sa Trade balance 18.7 16.7 17.8 Trade bal - year earlier 16.5 14.9 15.5 Exports 92.7 92.9 93.2 %m/m 1.6 0.3 0.3 Imports 74.0 76.2 75.4 %m/m -1.9 3.0 -1.1

German exports rose 0.3%m/m in November, the fourth con-secutive increase. Exports are now tracking a 7.5%-ar increase in 4Q13, after having been sluggish in prior quarters. German imports fell 1.1%m/m in November, but are also up solidly in 4Q13, by around 6% ar. Hence, these data suggest an improv-ing export trend, consistent with the improvements seen in the recent business surveys, and could hint at some domestic de-mand improvement as well.

Inflation

Consumer prices Oct Nov Dec Euro area (flash) HICP (%oya nsa) 0.7 0.9 0.8 Germany (prelim) %m/m nsa -0.2 0.2 -0.2 0.4 %oya 1.2 1.3 1.3 1.4 HICP (%oya) 1.2 1.6 1.3 1.2 Baden Wuertberg (%oya) 1.2 1.3 1.0 Bavaria (%oya) 1.0 1.0 1.2 Brandenburg (%oya) 1.2 1.3 1.2 1.3 Hesse (%oya) 0.9 1.1 1.1 1.2 North-Rhine West (%oya) 1.4 1.6 1.5 1.8

Saxony (%oya) 1.1 1.4 1.3 1.4

According to the details published in the Euro area release, core inflation moved down two-tenths to 0.7%oya. This de-cline largely reflects the significant fall in German inflation that occurred last month—down four-tenths to 1.2%oya—which in our view was driven by a fall in services price infla-tion (the details for Germany are still unknown but we think the upward distortion affecting package holiday prices and rental holiday price inflation disappeared from the year-on-year numbers in December). At the current level, Euro area core inflation is at its lowest level since EMU began. Back in July last year, the level of core inflation hit a cyclical peak of 1.7%oya, and the fall since then occurred at a significant and steady pace.

Producer prices Sep Oct Nov Germany %m/m nsa 0.3 -0.2 -0.1 %m/m sa 0.2 -0.1 0.0 %oya nsa -0.5 -0.7 -0.8


45

JPMorgan Securities Japan Co., Ltd. Masamichi Adachi (81-3) 6736-1172 [email protected]


Japan Fundamental strength of the Japanese economy will be

tested in 2014 when the VAT is hiked in April

Auto registrations have jumped ahead of the consumption tax rate hike

Household inflation expectations rose somewhat but are still far less than 2%

The year 2014 is a critical year for the Japanese economy. The economy’s fundamental strength will be tested by the scheduled hike in the consumption tax (VAT) rate from the current 5% to 8% in April. Also, while core CPI inflation reached 1.2%oya in November last year, the BoJ’s 2% inflation target in 2015 probably cannot be achieved if corporate pricing behavior has not changed materially.

On the economy, it is difficult to assess the underlying strength in the first half of the year as front-loaded consumption demand most likely will boost consumer spending before the tax hike, followed by a plunge in 2Q. In fact, auto registrations jumped in December and 4Q last year. The expected increase in winter bonuses paid in December and a rise in equity prices should also have supported consumption at the end of year, so it is hard to distinguish the front-loaded demand from fundamental strength. We need to see how spending recovers from the post-hike drop before making conclusions about underlying strength. Still, we think the key factor that will drive underlying growth this year is corporate spending, both capex and labor costs (wages). In this regard, labor market indicators and capital goods orders and shipments (hard data) are worth watching. Next week’s machinery orders will likely show an increase in equipment investment intentions. The business survey, which is less affected by the front-loaded demand, is also important to track. So far, small firms’ business sentiment has been stronger than in the lead-up to the 1997 tax hike, suggesting that underlying strength is stronger this time.

On the price side, there is currently no hard indicator of corporate pricing behavior (except qualitative assessment in DIs). But, the BoJ announced new quantitative questions to corporates on the outlook (one, three, and five years ahead) for their own output prices and overall inflation in the BoJ Tankan survey starting this April (due on April 2). We think that this survey will be one of the most important data releases determining inflation expectations for the BoJ (i.e., monetary policy-making). At the moment, we believe corporates as a whole see a chance to raise their output prices to some extent (especially with the tax hike), but not as much as policymakers wish (2%p.a.) in the near future.

Auto registrations jumped in December The J.P. Morgan adjusted measure of new auto registrations (the sum of all passenger cars and a half of total mini cars), a better indicator for auto consumer spending in real terms, rose 9.7%m/m sa, following the cumulative 14.1% gain over the previous three months. The measure finished 4Q at +55.2%q/q saar, which pushed the level to its highest since 2Q12.

Since the recession in 2007-2009, auto sales have been very volatile, because the government introduced two incentive schemes to boost sales, and also as a result of the Tohoku earthquake in March 2011. It is difficult to see the trend now as indicated above.

-6

-4

-2

0

2

4

6

2012 2013 2014 2015

%q/q saar, dashed line shows J.P. Morgan forecast

Real GDP

Source: Cabinet Office, J.P. Morgan forecast

2

3

4

5

6

7

8

80 85 90 95 00 05 10

Million units, saar by J.P. Morgan

New auto registration (J.P. Morgan measure)

Source: JADA and J.P. Morgan

Apr97when the consumption tax rate

hiked from 3% to 5%

40

42

44

46

48

50

52


DI

Shoko Chukin small firm business sentiment

Source: Shoko Chukin Bank

Consumption tax hike

Jan12 to Dec 13

46

Economic Research Japan January 10, 2014

JPMorgan Securities Japan Co., Ltd. Masamichi Adachi (81-3) 6736-1172 [email protected]

General Public Views and Behavior: inflation expectations up a bit According to the Opinion Survey on the General Public’s Views and Behavior, conducted by the BoJ between November 8 and December 4 last year with 2,241 respondents, the average households’ inflation expectations over the next five years edged down to 3.9%p.a. from 4.1% in the September survey.

However, given the 1.2%oya inflation in November core CPI, the expectation around 4% looks unreliable. We thus estimated the adjusted series by the Carlson-Parkin method that derives an inflation expectation series using actual inflation and qualitative assessment of prices of households. The BoJ prefers to use this adjusted series when discussing the inflation expectations of households. As shown in the first chart on this page, the adjusted series was around 1% and fell to close to 0% between 2009 and 2010, then rose to around 0.5% through 2012. In 2013, when the BoJ introduced the aggressive easing called Quantitative and Qualitative Monetary Easing (QQE) in April, the adjusted expectation rose somewhat to around 0.9% and the latest print showed 1.2%. The rising trend should be welcome for the BoJ, but the 2% target is still far away—note that the BoJ wants to achieve 2% inflation in sustainable way (not just temporarily) so a rise in expectations is critical.

Worth noting is that only around 30% of the respondents in this survey knew that the BoJ is targeting 2% inflation and conducting QQE, while the rest replied either “have read or heard of it, but do not know much about it” or “never heard of it.” This outcome is consistent with our view that inflation (and growth) expectations would rise not because of the policymakers’ vocal communication, but through higher asset prices, which are determined by financial market investors.

Separately, the impression of economic conditions in both the present and one year ahead stayed relatively high compared to the last couple of years, but they worsened for a second consecutive release. While spending in the next year also stayed relatively high mainly due to higher prices, income prospects worsened again. These dynamics suggest that households are not so upbeat about the economy this year.

Still, respondents expect that land prices will rise on net, which has become clear from the beginning of last year (after Prime Minister Abe took power). A similar pattern is seen in the impression of growth potential, although the negative level of the DI means that respondents sense less potential to grow on net.

-0.5

0.0

0.5

1.0

1.5

3

4

5

6

7

06 08 10 12 14

%p.a. for both scales

Outlook for price levels over the next five years

Source: BoJ and J.P. Morgan

Original prints

Adjusted series (estimated using the modified Carlson-

Parkin method)

-100

-80

-60

-40

-20

0

20

06 08 10 12 14

DI "improve" minus "worsen"

Impression of economic conditions

Source: BoJ

One year from now

Present compared with one year ago

-70

-60

-50

-40

-30

-20

06 08 10 12 14

DI "will increase" minus "will decrease"

Income and spending outlook at one year ahead

Source: BoJ

Income

Spending

-100

-75

-50

-25

0

25

50

06 08 10 12 14

DI

Future land prices and growth potential of Japanese economy

Source: BoJ

Land prices"will go up" minus "will go down"

Growth potential"greater potential to grow" minus "less potential to grow"

47

JPMorgan Securities Japan Co., Ltd. Miwako Nakamura (81-3) 6736-1167 [email protected]


Data releases and forecasts Week of January 13 – 17 During Cabinet Office private consumption index the %m/m sa week Aug Sep Oct Nov

Overall 0.1 0.8 -0.2 1.0

We expect this index, our preferred monthly consumption indicator, to rise in November, more than offsetting the weather-related drop in October. In already available commercial sales reports for the month, nominal retail sales showed a much stronger-than-expected rebound, though it in part reflected the recent firming in consumer prices.

Tue Bank lending Jan 14 8:50am Sep Oct Nov Dec

%oya 2.2 2.3 2.4 2.5 %m/m sa by J.P. Morgan 0.2 0.0 0.1

Encouragingly, with the release of the previous, November report BoJ officials noted a broadening in demand for loans, which is consistent with our view on the solidly growing economy.

Tue Balance of payments Jan 14 8:50am Aug Sep Oct Nov

Current account (¥ bn sa) 352 -125 -59 122 Trade balance -564 -1349 -1098 -983 Services -174 -146 -177 -125 Income 1160 1468 1315 1320 Current transfers -70 -98 -100 -90

Current account (¥ bn nsa) 162 587 -128 -380

The trade balance in November 2013 posted a historical low in the already available customs trade data. But, in the BoP report, where the seasonal factors for the month look for a combination of softer exports and stronger imports than in the customs trade report, the trade balance will probably improve further from the historically large deficit marked in September. With the income account surplus likely to remain elevated, the seasonally adjusted current account balance is expected to revert to a surplus in November.

Tue Economy Watchers survey Jan 14 DI 2:00pm Sep Oct Nov Dec

Current conditions 52.8 51.8 53.5 54.0 Households 50.6 49.2 51.3 Business 55.9 54.8 56.3 Employment 60.3 61.6 61.3

The overall message from the recent surveys (the December reports for the Shoko Chukin small firm and the PMI surveys) is that the Japanese economy is strengthening mainly due to solid domestic demand, and we expect this survey to give much the same message.

Wed Money stock Jan 15 %oya 8:50am Sep Oct Nov Dec

M2 3.9 4.1 4.3 4.1 L 3.7 4.0 4.2 4.2

Thu Index of tertiary sector activity Jan 16 8:50am Aug Sep Oct Nov

%m/m sa 0.6 0.0 -0.7 0.5 %oya 0.7 1.3 0.3 0.4

The tertiary activity index is expected to recover solidly in November, after the weak October report, which was partly due to an adverse impact from destructive typhoons. Available data point to a rebound in commerce, as well as in securities businesses, amid resurgent stock prices.

Source: CAO, BoJ, MoF, METI, and J.P. Morgan forecasts

-1500

-1000

-500

0

500

1000

1500

2000

07 09 11 13

Bn yen, sa, thick lines show 3-month moving averages

Merchandise trade and income account balance

Income account balance

Merchandise trade balance

Source: BoJ and MoF

48

Economic Research Japan January 10, 2014

JPMorgan Securities Japan Co., Ltd. Miwako Nakamura (81-3) 6736-1167 [email protected]

Thu Corporate goods prices index Jan 16 %m/m nsa, 2010-based 8:50am Sep Oct Nov Dec

Domestic CGPI 0.2 -0.1 0.1 0.4 (%oya) 2.2 2.5 2.7 2.7

Export prices 1.0 -0.6 1.2 Import prices 2.1 -1.0 1.5

The report will probably continue to suggest that corporate goods prices have been firming amid the weak yen and improving domestic demand.

Thu Machinery orders Jan 16 %m/m sa 8:50am Aug Sep Oct Nov

Core domestic orders1 5.4 -2.1 0.6 3.0 Manufacturing 0.8 4.1 -0.2 Core nonmanufacturing 6.2 -7.0 11.5

Foreign 22.4 12.1 -16.0 1. Domestic private sector, ex. for ships and from utilities

The latest October IP report showed a marginal negative payback for the previous surge in core capital goods shipments, supporting our view that capital investment is picking up. Thus, we expect core domestic machinery orders to further increase in the upcoming November report.

Fri Consumer sentiment Jan 17 DI, sa 2:00pm Sep Oct Nov Dec

Consumer sentiment 45.4 41.2 42.5 43.5 Standard of living 42.4 37.7 39.3 Income growth 40.6 37.7 39.6 Labor market conditions 51.7 46.3 48.1 Durable goods purchases1 47.0 43.2 43.1

1. The DI asks whether a respondent thinks that now is a good time to purchase durable goods.

The headline DI is expected to continue recovering and increase our confidence in the view that consumer spending is accelerating, at least in part reflecting front-loaded demand ahead of the consumption tax hike.

Fri Construction spending Jan 17 %oya 2:00pm Aug Sep Oct Nov

Public 24.3 26.7 25.6 %m/m sa by J.P. Morgan 1.0 1.9 1.3

Private 11.4 9.6 12.9


Services/composite PMIs (Jan 6) Diffusion index

Oct Nov Dec

Services (business activity) 55.3 51.8 52.1 Composite (output) 56.0 54.0 54.0

The services PMI business activity index edged up in December after having plunged in November. As a result, 4Q13 ended with the average at 53.1, 1.5pts higher than its 3Q average and 0.6pt above its 1H average. The result was consistent with our view that the economy is regaining momentum, mainly due to solid domestic demand.

Looking at the details, while the outstanding business DI lost part of the gain of the previous three months, the new business DI rebounded and the business expectations index (which represents firms’ prospects 12 months ahead) showed a large 3pt m/m rise. Although the employment DI fell for the second consecutive month, it has tended to be quite volatile.

Last month, the manufacturing PMI output index fell, but remained high relative to norms in recent years. The composite PMI output index for the month stayed at the same high level as in November, bringing its 4Q average at 54.7, by far the highest quarterly average in its history since 4Q07 (it was 51.9 in the 3Q average and 52.9 in the 1H average).

Auto registrations (Jan 6) Oct Nov Dec

Total %oya 17.3 13.3 10.0 18.7 Mn units saar 3.32 3.37 3.41 3.68

J.P. Morgan adjusted (incl. light vehicles) Mn units saar 4.19 4.31 4.73

The recent strength in auto registrations is consistent with our view that consumer spending is gaining momentum, partly due to front-loaded demand ahead of the consumption tax hike on April 1, and to the probable oya rise in 2013 winter bonuses, which were paid mostly in early December (See also main essay).

Source: BoJ, CAO, MLIT, Markit, JADA, and J.P. Morgan forecasts

20

30

40

50

60

07 09 11 13

Services(business activity)

Japan PMIsDI, sa

Manufacturing(output)

Source:Markit

49

JPMorgan Chase Bank NA Silvana Dimino (1-212) 834-5684 [email protected]


Canada LFS employment down 45,900 in December

Unemployment rate jumps up to 7.2%, ending the year higher than at the start

Trade deficit little changed in November

Headline Ivey PMI falls below 50 in December

Data released this week for November and December have been far less upbeat than October reports, which showed a small trade surplus (revised away in this week’s International trade report), strength in manufacturing, and a solid 0.3%m/m sa increase in October real monthly GDP. The Labor Force Survey for December was downbeat, with employment down 45,900 and a jump in the unemployment rate to 7.2% from 6.9% in November. The international trade report for November was also disappointing with a trade deficit little changed from an October balance that was revised from a small surplus to a large deficit. With trade data now reported for October and November, net exports are now likely to be a headwind to real GDP growth in 4Q13 after subtracting 0.2%-pt in 3Q13. And in more bad news, the headline Ivey PMI index was off sharply in December, down 7.4pts to 46.3, dropping below the 50 expansion threshold for the first time since July.

December Labor Force Survey downbeat The December Labor Force Survey report was a disappointment, with employment down 45,900 and the unemployment rate 0.3%-pt higher than November at 7.2%. The six-month average jobs gain fell to 3,400 in December, the lowest six-month average of the year. The unemployment rate never broke above 7.2% or below 6.9% throughout 2013 and now stands higher than it was at the start of 2013.

The sector details of employment were generally negative, with both goods-producing (-23,800) and service producing (-22,100) lower in December. The largest drop-off was in full-time employment, but that category tends to be volatile month to month. Still, the outsized loss pulled the six-month average in full-time employment down to -3,300. The 64,200 decline in private sector and self-employment overwhelmed the 18,200 increase in public sector jobs. However, looking at the year as a whole, it’s the private sector that drove job growth in 2013, averaging +9,400 in 2013 compared with a slightly negative average (-2,300) in public sector growth. In a positive sign, manufacturing was up for the second month in a row (+7,500) and averaged +8,700 in the last three months of 2013. Construction jobs were down 14,100 in December (the fourth monthly decrease in a row), but construction was one of the better performers of 2013 after some pickup in residential and non-residential construction last year.

Employment slowed from a 310,000 (+1.8%oya) increase in 2012 to a 102,000 (+0.6%oya) rise in 2013, the slowest growth since 2010. And unfortunately most of the job gains in 2013 were in part-time employment (82,800), with full-time employment only rising 19,200. The private sector saw all the annual gains in 2013 (+113,200) offset by the 28,100 loss of public sector jobs. Construction, although showing some weakness in recent months, was one of the better performers in terms of annual gains, up 24,800 in 2013 compared with +8,800 in 2012, but manufacturing was down 41,600, taking back almost all of the 47,300 gain in 2012.

Average hourly earnings were up 2.0%oya, closer to trend after base effects had held growth to a below-trend average of 1.6%oya between July and October. Hours worked softened into year-end, decreasing 0.2%m/m sa for the second month in a row in December and ending the year up 0.6%q/q ar in 4Q13 compared with +1.5%q/q ar in 3Q13.

Trade deficit little changed in November The trade balance was little changed in November (-C$0.94 billion) from an October balance that was revised from a small surplus to a large deficit. Nominal exports were flat after decreasing a revised 2.3%m/m sa in October (a significant downward revision, as October was originally reported as -0.3%m/m sa). Imports edged up 0.1%m/m sa. The trade balance in volume terms (chain-weighted: -C$1.49 billion) also remained about the same in November, as real exports and real imports were both slightly weaker in the month. With October and November now reported, real exports are down 2.8%q/q saar in 4Q13 and real imports are up 0.7%q/q saar, pointing to another quarterly drag from net exports on real GDP growth in 4Q13—currently tracking about -0.5%-pt. Net exports subtracted 0.2%-pt from real GDP growth in 3Q13.

Lower real exports of energy products was among the categories holding down overall exports, decreasing 1.4%m/m sa in November after a 5.8%m/m sa decrease October. Crude oil and crude bitumen was down for the third month in a row

15000

20000

25000

30000

35000

00 02 04 06 08 10 12 14

6 month moving average, sa

Trade with the US

Source:Statistics Canada

Exports

Imports

50

Economic Research Canada January 10, 2014

JPMorgan Chase Bank NA Silvana Dimino (1-212) 834-5684 [email protected]

after reaching a record high in August. In volume terms, energy exports are down 14.9%q/q saar in the first two months of 4Q and energy imports are down 39.1%q/q saar. More constructively, real exports of motor vehicles and parts provided a large offset to the weakness in most other categories in November, recovering 8.5%m/m sa after a 5.8%m/m sa decline in October.

Imports edged up 0.1%m/m sa on a 0.1% increase in prices; volumes of imports were flat in November. Real imports of machinery and equipment, an indicator of real business investment, posted a sharp recovery in November—up 7.6%m/m sa after a 4.6%m/m sa decrease in October—but the volume of such imports is still tracking a 6.2%q/q saar decrease in 4Q13 (through November), suggesting that growth in nonresidential investment in machinery and equipment may be weaker in 4Q13 than in 3Q13.

Canada’s trade surplus with the US narrowed in November, as exports to the US were up 0.6%m/m sa, but imports grew 2.0%m/m sa. The trade balance with the US has stagnated since the downturn, as the growth in imports has kept pace with the growth in exports. It’s likely that a stronger Canadian dollar has been helping the demand for imports. Exports to countries other than the US declined 2%m/m sa, with the EU recording the largest decline at -6.4%m/m. Exports to the EU tend to be quite volatile month to month, but on a year-over-year basis have been trending up in recent months; however they are still negative over-year-ago.

Next week sees the release of the Bank of Canada’s Business Outlook Survey and Senior Loan Officer Survey. It’s likely that the Bank of Canada will be watching to see if firms’ inflation expectations remain within the target range of 1%-3%.


Industrial PPI (Jan 6) %m/m nsa, unless noted

Sep Oct Nov

Total -0.2 -0.3 -0.5 0.0 0.1%oya 1.0 0.1 0.8 -0.1 1.0 0.3

Ex energy -0.3 -0.2 0.1 -0.2 -0.1 0.2%oya 0.7 0.1 0.7 -0.2 0.6 -0.2

International trade (Jan 7) Sa

Sep Oct Nov

Balance (C$ bn) -0.30 -0.29 0.07 -0.91 0.2 -0.94 Exports (%m/m) 0.6 1.5 -0.3 -2.3 1.2 0.0 Imports (%m/m) -0.5 -0.3 -1.2 -0.8 1.0 0.1 Real balance -0.70 -0.41 -0.88 -1.45 -1.49

Ivey PMI (Jan 7) Oct Nov Dec

Composite index¹ (sa) 53.9 51.6 50.4 50.3Purchasing index (sa) 62.8 53.7 52.9 46.3Purchasing index (nsa) 64.2 48.2 43.2 40.2

1. Calculated and seasonally adjusted by J.P. Morgan

Housing starts (Jan 9) Sa

Oct Nov Dec

Total (000) 198.2 203.6 192.2 197.8 196.5 189.7(%m/m) 1.2 3.3 -3.0 -2.8 2.2 -4.1(%oya) -5.0 -1.5 -4.6 -1.6 -0.3 -5.4

Building permits (Jan 9) %m/m sa, unless as noted

Sep Oct Nov

Total 4.1 7.4 8.0 -12.5 -6.7%oya 2.6 -6.2 -5.7 -1.8 5.4

New house prices (Jan 9) Nsa

Sep Oct Nov

Total, %m/m 0.0 0.1 0.0%oya 1.6 1.5 1.4

Labor force survey (Jan 10) Sa

Oct Nov Dec

Employment (mn) 17.79 17.82 17.83 17.77(ch, m/m, 000s) 13.2 21.6 10.0 -45.9(%m/m) 0.1 0.1 0.1 -0.3(%oya) 1.2 1.0 0.9 0.6

Labor force (mn) 19.12 19.13 19.15(%m/m) 0.1 0.1 0.1(%oya) 0.7 0.7 0.7

Unemployment rate (%) 6.9 6.9 6.9 7.2Avg hrly earnings (%oya) 1.7 2.3 2.2 2.0Hours worked (%m/m) 0.4 -0.2 0.0 -0.2

Source: Statistics Canada, CMHC, Richard Ivey School of Business, J.P. Morgan forecasts

51

Banco J.P.Morgan, S.A., Institución de Banca Múltiple, J.P.Morgan Grupo Financiero Gabriel Lozano (52-55) 5540-9558 [email protected] Steven Palacio (52 55) 5283-1651 [email protected]


Mexico Manufacturing output will benefit from increased

demand from developed markets

Main challenge remains for domestic demand to catch up with the lift in externally driven sectors

Inflation is set to accelerate over the coming months and remain elevated in 2014

However, we see no underlying inflation pressure building and expect inflation to converge to 3% in 2015

Activity was off to a slow start in 4Q13, with October’s 0.3%m/m gain merely offsetting a similar-sized drop in the prior month. Details by sector were mixed, reinforcing the asymmetric nature of the ongoing recovery. Manufacturing continued to do most of the heavy lifting, even as November IP figures signal that the sector might have lost some steam toward year-end. We are fading for the moment the downbeat manufacturing data for November, as we believe that acceleration in developed market demand over the last few quarters should continue to provide lift to the sector in the coming months. Nevertheless, the weak November IP data do lead us to trim our 2013 full-year growth forecast to 1.2%oya from 1.4% previously.

Away from manufacturing, two domestic factors continue to weigh on the economy: the underperformance of the construction sector and the lack of full traction in the services sector. The November IP report showed construction is still down 5%oya, evidencing the large hit to the sector from the homebuilders’ crisis early last year; however, while still down on over-year-ago terms, construction output registered its first monthly increase since April, jumping 1.8%m/m in November. November’s jump tentatively suggests that the sector could have bottomed in 3Q13 and is starting to benefit from the increase in government spending in the second half of last year. A larger public deficit in 2014 (up 1.1%-pt of GDP with respect to 2013) is expected to further boost construction spending throughout the year.

Evidence that gains in the manufacturing sector are spreading to the broader economy remains at best mixed. Services related to the manufacturing sector—transportation, storage, and commerce—have benefited from the rebound but those closely tied to domestic demand continue to lag. Domestic demand indicators out this week were mostly on the soft side, with consumer confidence further declining in December to a more than two-year low. Some of this reflects the impact of higher consumer taxes this year, but it also seems to signal that employment is not recovering yet; household current conditions—positively correlated to employment growth—

slid again in December. On a more positive note, the deterioration in firms’ growth expectations and investment plans seemed to have bottomed last month, showing the first monthly increase in five months. The latter indicator—investment intentions—usually does a fair job describing corporate capex, and thus its increase is certainly welcome.

Inflation expected to temporarily rise The December CPI report showed inflation accelerating 0.6%m/m to end the year at 3.97%oya—just below the 4%

Source: INEGI

Source: INEGI

Source: INEGI and J.P. Morgan forecasts

-20

-15

-10

-5

0

5

10

15

20

07 08 09 10 11 12 13

%3m/3m saar

Industrial production: Construction output

-15

-10

-5

0

5

10

15

0

10

20

30

40

50

60

05 07 09 11 13

DI

Investment intentions and gross fixed investment %oya, 3mma

GFI

Intentions

2.5

3.0

3.5

4.0

4.5

5.0

5.5

10 11 12 13 14 15

%oya, biweeklyCPI: headline inflation

Banxico target

52

Economic Research Mexico January 10, 2014

Banco J.P.Morgan, S.A., Institución de Banca Múltiple, J.P.Morgan Grupo Financiero Gabriel Lozano (52-55) 5540-9558 [email protected] Steven Palacio (52 55) 5283-1651 [email protected]

upper bound of the central bank’s target range. The increase was largely led by rising non-core prices, as core inflation continued to hover at historically low levels despite registering a mild uptick. Low core prices have been the legacy of a year of subpar growth and lackluster domestic demand. While we see growth bouncing back and domestic demand regaining its footing this year, the degree of improvement will not suffice to close a wide negative output gap. With slack conditions prevailing, we do not see room for tax increases to trigger second-round inflation effects. Thus, the impact of higher taxes on prices should prove transitory. We expect inflation to rise as high as 4.5%oya in the first quarter of the year as tax increases play out. However, inflation should converge back to 4% as we move into 2Q14 and fluctuate close to this level throughout the year. Moreover, we look for inflation to converge toward the central bank’s 3% target next year, as a still slightly negative output gap, coupled with supportive base effects from this year’s high inflation prints, favors inflation dynamics.

Data releases and forecasts Week of December 13 – 17

Tue Central bank foreign reserves Jan 14 US$ bn 10:00am Dec 20 Dec 27 Jan 3 Jan 10

Gross reserves 176.6 176.6 176.6 ___

Fri Labor market report Jan 17 % of labor force 9:00am Sep Oct Nov Dec

Unemp. rate 5.3 5.0 4.5 4.4 Sa 5.0 4.9 4.6 4.8


Central bank foreign reserves US$ bn Dec 20 Dec 27 Jan 3

Gross reserves 176.6 176.6 ___ 176.6

Consumer confidence, INEGI Jan 2003=100

Oct Nov Dec

Composite 91.2 88.7 91.2 89.7

Indicator of overall economic activity (IGAE) %oya, unless noted

Aug Sep Oct

%oya 1.1 0.8 0.9 1.8 1.3 %m/m sa 0.1 -0.4 -0.3 0.4 0.3

Consumer prices

Nov 2H Dec 1H Dec 2H

%2w/2w 0.02 0.40 0.34 0.32 Core -0.03 0.30 0.14 0.08

%oya 3.73 3.86 4.11 4.09 Core 2.70 2.75 2.86 2.80

Oct Nov Dec

All items (%m/m) 0.48 0.93 0.58 0.57 %oya 3.36 3.63 3.98 3.97

Core (%m/m) 0.19 0.14 0.36 0.33 %oya 2.48 2.56 2.81 2.78

Fixed investment %oya

Aug Sep Oct

Total -5.9 -5.5 -4.8 -5.6 M&Eq -4.9 0.0 0.4 -2.6 Construction -6.4 -8.4 -7.9 -7.4

Industrial production %oya, unless noted Sep Oct Nov

%oya nsa -1.4 0.1 -0.9 -1.4 Manufacturing 1.3 3.5 2.1 0.6

%m/m sa -0.7 0.5 0.6 0.1 Manufacturing -1.0 1.0 0.3 -1.0

Nominal wage settlements %oya, one year ahead

Oct Nov Dec

Nominal increase 4.0 4.2 4.2 Real terms 0.6 0.5 0.3

Source: Banxico, IMEF, INEGI, Ministry of Labor and J.P. Morgan forecasts

53

Banco J.P. Morgan S.A. Fabio Akira (55-11) 4950-3634 [email protected] Cassiana Fernandez (55-11) 4950-3369 [email protected]


Brazil Fiscal accounts remain at the top of press headlines

2013 IPCA at 5.91% (from 5.84% in 2012), missing the central bank’s informal goal

November IP surprised to the upside, but activity momentum remains weak

This week, local press focused on the rating agency debate over Brazil’s rating outlook. All rating agencies reaffirmed their current outlooks, with Moody’s and Fitch saying Brazil’s rating should remain stable and S&P anticipating that a rating revision could happen early this year. In fact, according to a local broadcast agency, an S&P director suggested that a downgrade might come before the October elections given the fiscal deterioration. S&P has had Brazil’s sovereign rating on negative outlook since June 2013, a change that sparked the still-ongoing fiscal debate. Market participants and the press have focused on the strong December primary fiscal result anticipated by Minister Mantega last Friday. The perception was that the result was accomplished by postponing expenditures rather than through any permanent adjustment, which raises concerns not only about the sustainability of the current fiscal result but also about the long-term risk presented by any potential off-balance-sheet transactions. On the inflation side, this week December IPCA came out 10bp above market consensus, leaving year-end IPCA at 5.91%oya. This result was particularly important because government officials (BCB and Finance Ministry) have stated that 2013 IPCA would be below 2012’s 5.84%oya. On the eve of the first COPOM meeting of the year this result increases the chances that the central bank maintains the pace of tightening at 50bp. Even so, given recent signals, we keep our call for a 25bp hike next week, followed by another one at the February meeting, leading the final Selic rate to 10.5% by year-end.

2013 IPCA ends at 5.91% with repressed inflation mounting December IPCA printed 0.92%m/m, surprising market expectations to the upside (consensus: 0.82%; J.P. Morgan: 0.89%) and leaving year-end IPCA at 5.91%oya (from 5.77% in November), the fourth consecutive year-end IPCA above the central bank’s 4.5% target. In addition, core inflation remains elevated—the average of core measures accelerated to 6.06%oya, from 6.01% in November, staying above 6% level for the eighth month in a row.

IPCA’s breakdown showed market-driven prices accelerating sharply to 7.3%oya (from 6.5% in 2012) due to a reversal in durable goods prices, while controlled prices continued to

-50-40-30-20-10

0102030

04 06 08 10 12 14

%3m/3m saar

Brazil: industrial production

Source: IBGE

-5

0

5

10

15

20

25

2008 2009 2010 2011 2012 2013 2014

% of excessive inventories responses minus insufficient inventories

Brazil: survey on manufacturing sector inventories

Source: FGV

4

5

6

7

8

2008 2009 2010 2011 2012 2013 2014

%oya

Brazil: IPCA headline and core

Source: IBGE and J.P. Morgan forecasts

Headline

Core

Target ceiling

0

2

4

6

8

10

2011 2012 2013 2014

%oya

Brazil: IPCA controlled and market driven prices

Source: IBGE and J. P. Morgan forecasts

Controlled Prices

Market Driven

IPCA

54

Economic Research Brazil January 10, 2014

Banco J.P. Morgan S.A. Fabio Akira (55-11) 4950-3634 [email protected] Cassiana Fernandez (55-11) 4950-3369 [email protected]

rise slowly by 1.5%oya, mostly due to the energy price decrease and the revocation of the bus fare increases. Services inflation remained at 8.73%, very close to the 2012 year-end growth of 8.74%. The still-tight labor market and record-low unemployment rate explain high services inflation, especially since 2009. Food inflation decelerated to 8.5%oya (from 9.9% in 2012), with commodity prices slowing to 6.9% (from 8.7%) and fresh food inflation at 16.3%, versus 17.3% in 2012.

For 2014, we see a better composition for IPCA with overall market-driven prices decelerating due to non-durables goods prices disinflation (mostly food) offsetting higher durable goods prices (due to higher VAT in vehicles and some F/X depreciation). However, controlled prices should increase with adjustments that have been delayed so far (mostly electricity and bus fares), leaving headline inflation under pressure and near to the upper bound of the central bank’s target. Based on rising food prices in our high frequency price surveys at the beginning of this year, we are raising our 2014 IPCA forecast to 5.9% (from 5.8% previously expected). In all, while we expect some normalization in prices that have been repressed so far (mostly controlled prices), some adjustments will likely still be delayed to 2015, mostly gasoline, bus fares, and other components of controlled prices.

November IP is less of a drag, offsetting downside risks from Dec auto production After plunging in 3Q, industrial production seems to have recovered in 4Q, printing at -0.2%m/m sa in November (above J.P. Morgan’s forecast of -1.2%) after a 0.6%m/m increase in October. This result led the 3m/3m saar reading to 1.2%, from -0.1% in October and -4.5% in September. December indicators so far are weak—mainly, the still-low level of confidence and the sharp auto production drop suggest another decrease in the sequential IP reading last month. But even assuming a 0.5%m/m sa decrease in December, the three-month measure would print at +2.6%q/q saar in 4Q, rebounding from the 4.7% drop (revised from -4.5%) in 3Q. This is in line with our 4Q GDP forecast of +3%q/q saar, reversing part of the 1.9% contraction registered in 3Q.

In all, it seems the industrial sector recovered marginally from a very weak level, but we continue to see poor momentum ahead. The high level of inventories among still-historically -low confidence levels raises uncertainties over 1Q14, mostly for the auto industry, which will also need to adjust its production for the new safety regulations and higher VAT.

While capital goods production plunged 2.6%m/m sa in November, leading the 3m/3m saar reading to 12.1%, from 15.8% in October, intermediate goods production increased

1.2%m/m sa. On the investment side, construction materials production decreased 1.4%m/m sa, reversing the 1.1% increase in October. In all, our proxy of capital goods absorption (capital goods production plus imports less exports) decreased 3.6%m/m sa (from -11.3% in October) as capital goods exports were boosted in 4Q by the accounting of the “export” of oil platforms by Petrobras under the Repetro system (of US$1.9 billion in October, US$1.8 billion in November, and US$1.1 billion in December).

Data releases and forecasts Week of January 13 – 17

Wed General prices (IGP-10) Jan 15 5:00am Oct Nov Dec Jan

%m/m 0.6 0.3 0.4 0.59 %oya 5.5 5.5 5.4 5.56

Wed COPOM meeting Jan 15

Jul Aug Nov Jan

Selic rate 9.00 9.50 10.00 10.25

Thu Retail sales Jan 16 6:00am Aug Sep Oct Nov

Narrow %m/m sa 0.9 0.5 0.2 0.8 Narrow %oya nsa 6.2 4.3 5.3 7.0 Broad %m/m sa 0.3 -0.7 1.8 -0.3 Broad %oya nsa -0.9 7.7 2.2 3.2

Fri Economic Activity Index: IBC-Br Jan 17 5:30am Aug Sep Oct Nov

%m/m sa 0.0 0.0 0.8 -0.2 %oya nsa 1.3 3.3 2.7 1.5


Industrial production Sep Oct Nov

%m/m sa 0.5 0.6 -1.2 -0.2 %oya nsa 1.8 0.9 -1.2 0.4

General prices (IGP-DI) Oct Nov Dec

%m/m 0.6 0.3 0.65 0.69 %oya 5.5 5.5 5.48 5.52

Consumer prices (IPCA) Oct Nov Dec

%m/m 0.4 0.6 0.89 0.91 %oya 5.9 5.8 5.88 5.91

Source: IBGE, FGV, and J.P. Morgan forecasts.

55

J.P. Morgan Securities LLC Vladimir Werning (1-212) 834-4144 [email protected] Iker Cabiedes (1-212) 834-2349 [email protected]


Argentina Genuine activity is estimated at 3.6%oya for December

Sequentially, this confirms the economy remains stalled

Genuine activity was up 2.9% in 2013 only thanks to 2Q

All the early monthly reports for December confirmed that in seasonally adjusted terms the economy remained stalled in 4Q (first chart). Nominal tax revenues increased 23.8%oya, which translates into -2.0%oya in real terms (compared to +0.8%oya in Oct-Nov). Auto production remained depressed, plunging 26.4%oya (compared to -12.5% in Oct-Nov). Growth in cement sales was 14.9%oya in December—below October’s peak and vulnerable to moderation now that elections have passed (second chart).

All considered, J.P. Morgan’s economic activity model suggests genuine output advanced 3.6%oya in December. This performance implies a genuine 3.8%oya expansion in 4Q13, which, in turn, suggests that real GDP averaged 2.9% during 2013, in line with our forecast.

December’s growth of 3.6%oya may suggest decent performance of genuine activity but only because base effects are supportive. Indeed, most of the 2013 growth spurt was experienced in 2Q when activity delivered a remarkable 15.5% (3m/3m saar)—due to the favorable agricultural harvest. Since then the economy cooled visibly. In seasonally adjusted terms economic activity was -0.5% (ar) in 3Q and 0.1% (ar) in 4Q. The best way to characterize economic performance in 2H13 is “stalled.”

INDEC’s over-reporting of activity (averaging 2.7%-pts so far this year) has varied widely over the course of 2013: in 1H13 it was 4%-pts (peak) but thereafter narrowed and in October (last available INDEC reading) became negative (-1.0%-pt). For full-year 2013 we are expecting the official over-reporting gap (the difference between INDEC reporting and reliable economic estimates) to have been around 2%-pts. Thus, our forecast for officially reported real GDP stands at 4.9% for 2013—but only temporarily.

We believe that INDEC will progressively lower its measured economic performance for 2013. This likely would be done through a combination of: downward revisions to past monthly activity data, discrepancies between the latter and subsequent (likely lower) quarterly real GDP reports, pending methodological changes to quarterly national accounting (as demanded by the IMF), and subsequent downward revisions to the first print of quarterly real GDP.

Source: J.P. Morgan

Source: ADEFA and AFCP

Source: J.P. Morgan

Source: INDEC and J.P. Morgan

-15

-10

-5

0

5

10

15

20

2008 2009 2010 2011 2012 2013

%J.P. Morgan Argentina economic activity model

Oya, 3mma

3m/3m, saar

-15

-10

-5

0

5

10

15

20

25

-40

-20

0

20

40

60

80

2009 2010 2011 2012 2013

Auto production and cement sales

%oya 3mma, both axes

Auto production

Cement sales

-10

-5

0

5

10

15

2006 2007 2008 2009 2010 2011 2012 2013

Official activity

% oyaOfficial and J.P. Morgan Argentina economic activity model estimate

JPM activity model estimate

Reported distortions

begin

-2

-1

0

1

2

3

4

5

2011 2011 2012 2012 2013 2013

%-pts

Official activity minusJPM activity model est.

Avg 2008-12: 1.8%-pts

1H13: 4.0%-pts

Gap between INDEC (official) and J.P. Morgan activity model estimate

3Q13: 1.4%-pts

56

Economic Research Argentina January 10, 2014


We believe there is ample room for downward revisions to the 4.9% estimate for official real GDP. A possible motivation for statistical revisions comes from the structure of GDP warrants. A payment on the GDP warrants is triggered if 2013 growth exceeds 3.2%, implying that GDP revisions below that threshold offer a tempting savings of $3 billion to the government’s 2014 debt service. J.P. Morgan’s model estimate of 2.9% for genuine economic activity in 2013 suggests that a potential revision to real GDP performance below the GDP warrant threshold can be justified by hard data.

Data releases and forecasts Week of January 6 - 10

Wed Construction Jan 15 Official

Sep Oct Nov Dec

%oya 7.4 6.2 2.9 ___

Wed Consumer prices Jan 15

Sep Oct Nov Nov

Private1 %oya 24.6 24.8 25.5 26.4 %m/m 1.7 2.1 2.45 3.0

Official %oya 10.5 10.5 10.5 10.5 %m/m 0.8 0.9 0.9 1.0

1. J. P. Morgan, average of private consultants.

Wed Official economic activity (EMAE) Jan 17 %oya

Aug Sep Oct Nov

EMAE 5.0 5.9 3.2 __


Cement sales Official

Oct Nov Dec

%oya 16.2 8.1 ___ 14.8

Auto report Official, %oya

Oct Nov Dec

Production -4.8 -20.3 ___ -26.4 Exports -8.7 -16.4 ___ -24.5 Domestic sales 29.9 20.3 ___ 0.7

Source: ADEFA ASCP, J.P. Morgan forecasts

57



Chile Base effects and CLP weakness are pushing inflation up

Trade activity suggests further economic slowdown

BCCh to hold next week as risks are balanced

This week the December headline CPI increased 0.6%m/m, pushing the 12-month print to 3.0%oya (from 2.4% in November) and squarely hitting BCCh’s target. BCCh’s (current) preferred core CPI metric (headline CPI ex. food and energy) was reported at 0.6%m/m, translating into a 2.1%oya reading—implying that the latter finally climbed back within BCCh’s inflation target tolerance band (3% +/-1%) from depressed readings.

While most of the increase in headline prices was explained by gasoline prices (5.0%m/m) and transportation tariffs (1.7%m/m), together producing a 43bp monthly contribution to headline CPI, details also suggest FX pass-through has started to feed into prices. Tradable goods inflation accelerated to 2.4%oya (from 1.3%oya in November), while that of non-tradable goods inched up to 3.8%oya (from 3.7%). This ongoing trend is reflecting a successful relative price adjustment driven by pass-through from a weaker CLP. The contribution from tradable goods prices to year-ago inflation climbed to 1.3%-pts in December (vs. 0%-pts in October), while that of non-tradable goods has been virtually flat at 1.7%-pts (first chart).

We anticipate that FX pass-through amid adverse base effects (from very low inflation early in 2013) will lead to rising inflation in the first half of the year. We expect headline CPI to peak around 4.2% in May, but to gradually fall to close to 3% as base effects dissipate and the peso stabilizes (second chart).

On the other hand, December’s trade report confirmed that the external sector contributed to Chile’s economic slowdown in late 2013. Chile’s 2013 trade surplus narrowed to US$2.4 billion, from US$3.4 billion in 2012, with most of the deterioration occurring in 4Q13, due to mining export slippage. Broad trade trends depict a relatively stable trade surplus throughout 2013—in contrast with sharp deterioration in 2011 and 2012 (third chart).

Exports fell 8.5%oya in 4Q13 (down from +7.6% in 3Q14), exceeding the decline in imports (-7%oya and -0.4%oya, respectively). The drop in exports mainly reflected a downswing in mining exports, which collapsed 15.2%oya in 4Q13, from +7.4% in 3Q14.

Source: BCCh

Source: BCCh and J.P. Morgan

Source: BCCh

Source: BCCh

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2011 2012 2013

Contribution to %oya

Tradable and non-tradable CPI inflation

Tradable

Non-tradable

0

1

2

3

4

5

2011 2012 2013 2014

Headline and core CPI

Headline

Core (ex. food and energy)

BCCh's target

Forecast

0

5

10

15

20

2010 2011 2012 2013

US$ bn, 12-month sum

Chile: trade balance

-50

0

50

100

150

2007 2008 2009 2010 2011 2012 2013

%oya, 3mma

Copper exports and capital goods imports

Capital goods imports

Copper exports

58

Economic Research Chile January 10, 2014


Weaker capital goods imports—reflecting the downturn in the investment cycle—are also mostly associated with the copper industry (fourth chart). Capital goods imports were -32.1%oya in 4Q13 (compared to -5.0% in 3Q14), posting a 4.4% drop in 2013. In contrast, consumer imports remain strong (consistent with other private consumption indicators), expanding 7.8% in 4Q13 (compared to 8.9% in 3Q13) and posting a 9.1% gain last year.

The evidence of weakening external performance is consistent with J.P. Morgan’s below-consensus 2014 real GDP growth forecast of 3.7% (compared to BCCh: 4.25%, and consensus: 4%). Slowing domestic demand alongside a weaker CLP should contribute to an improving trade surplus in 2014: after a considerable deterioration in Chile’s trade balance over the last few years, we forecast the trade surplus will increase this year amid a weaker peso, stable mining production, a gradual moderation in private consumption, and a sustained deceleration in the investment cycle. The risk to our view stems from volatile copper prices (J.P. Morgan’s commodities team anticipates a decline of 4.3% in 2014).

Overall, with the policy rate now at a slightly expansionary level of 4.5%, BCCh has adopted a neutral policy bias. Higher-than-expected CPI supports the forecast that BCCh will leave the policy rate unchanged next week. Rising prices on their own might be perceived as raising the risk the board holds rates longer than expected—in contrast to our forecast for a 25bp rate cut in February and a 25bp rate cut in April. Yet further expected deceleration in growth makes it likely that BCCh will resume its easing bias down the road.

Chile


Thu BCCh monetary policy meeting Jan 16

Oct Nov Dec Jan

Reference rate 4.75 4.50 4.50 4.50


Economic activity (IMACEC)

Sep Oct Nov

%m/m -0.7 -0.1 __ 0.5 %oya 4.3 2.8 __ 2.8

CPI Oct Nov Dec

%m/m nsa 0.1 0.4 __ 0.6 %oya nsa 1.5 2.4 __ 3.0

Trade balance

Oct Nov Dec

US$ bn 0.2 0.2 __ 0.1 US$ bn, 12-month sum 3.4 3.3 __ 2.4

Source: BCCh and INE

Colombia


Fri IP Jan 17

Aug Sep Oct Nov

%m/m nsa -1.7 1.1 0.1 1.6 %oya nsa -3.7 -1.6 -0.1 2.0

Fri Retail sales Jan 17

Aug Sep Oct Nov

%m/m nsa -0.6 -0.6 2.3 -0.9 %oya nsa 6.8 2.4 6.6 2.7


CPI

Oct Nov Dec

%m/m nsa -0.26 -0.22 0.25 0.26 %oya nsa 1.84 1.76 1.92 1.94

Source: DANE and J.P. Morgan

Peru


Sat GDP Jan 16 Aug Sep Oct Nov

%oya nsa 4.4 4.4 5.4 5.0


No data released.

Source: INEI

59

JPMorgan Chase Bank N.A, London Branch Malcolm Barr (44-20) 7134-8326 [email protected]


United Kingdom Official output data suggests preliminary 4Q GDP will

run short of the strength suggested by the surveys

Credit availability shows broad-based improvement in BoE lenders survey

Expecting Riksbank-style guidance after the 7% unemployment rate threshold is breached

Next week: stable inflation and a strong RICS survey

The UK’s business survey data are pointing to strong 4Q growth across the board, even though the monthly PMI data suggest output growth has begun to edge down from the highs. A composite of the manufacturing and services deliveries readings in the quarterly BCC surveys, for example, has hit the highest level since the series began in 1989. Both the manufacturing and services PMI output readings fell in December, but high new orders readings and rising employment do not suggest a sharp decline is in store for the coming months. Moreover, there are increasing signs that rising business confidence is translating into higher capital spending, with the investment intentions balance in the BCC survey at its highest since 1997.

Despite these positive signs, the official releases on November IP and construction output were a disappointment. Manufacturing output stalled in November, while construction output is reported to have fallen 4%. The trajectory of the official services output data through to October, reported just before Christmas, was also not particularly strong. Taken as a whole, the official output data in hand are pointing toward a 4Q preliminary GDP estimate that substantially undershoots the strength that is evident in the survey data. We have nudged our forecast for the preliminary 4Q GDP estimate down to 0.8%q/q sa from 0.9%q/q sa, and that estimate requires output across all three sectors to do relatively well in December. The survey data would suggest a high likelihood of upward revision to an estimate of that sort through time.

BCC goes from tight to tightest We tend to place significant weight on business survey measures of resource use as gauges of slack. The business surveys as a whole have not tended to show the margin of slack one would have expected, given the extent of the weakness in the level of output, and that message has been particularly clear in the BCC survey. Both in terms of the number of firms reporting recruitment difficulties, and the level of capacity utilization, the BCC balances have shown much less slack than during the recession of the early 1990s. The 4Q survey delivered another message of tightening

resource use from levels that were already high. The composite capacity use reading is back near the highs seen over the survey’s history, while the percentage of manufacturing firms reporting recruitment difficulties is at a record high.

The MPC has downplayed the message on slack coming from surveys such as the BCC. And within the BCC surveys, there is no sign of upward wage pressure that would crystallize inflation concerns. But with output now growing, rising and elevated readings on recruitment difficulties may also begin to be interpreted as evidence of speed-limit or bottleneck effects. The position of the surveys will hence act to raise the MPC’s sensitivity to any signs of a shift in wage trends.

BoE survey shows credit availability improving The Bank of England’s 4Q survey of lenders reports that credit availability improved in late 2013, and is expected to continue to do so, more or less across the board. With a net balance of 17% of lenders reporting rising expectations for house prices as a key driver of improving credit availability, the survey will serve to keep the Financial Policy Committee (FPC) focused on the potential vulnerabilities arising from house price gains. We expect that the FPC will recommend that the £600,000 limit on purchases supported by the Help to

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05 07 09 11 13 15Source: BCC, ONS and J.P. Morgan

%q/q, saar, excludes energy, utilities and construction output, 1995 to 2011

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Economic Research United Kingdom January 10, 2014


Buy scheme is lowered at some point later this year, and that the Chancellor will agree.

We also highlight the ongoing improvement in corporate credit availability. The balances on reported and expected credit availability for corporates moved up to levels seen over 2009-10 and briefly at the end of late 2012. We have argued that rising capex will be a feature of the data in the coming months, and lenders appear to agree: a net balance of 38% of respondents to the survey see rising capex plans as a key factor driving increased credit demand from corporates in the next three months.

What happens after 7%? How will the MPC’s forward guidance framework evolve, given that the 7% threshold for the unemployment rate looks set to be crossed much earlier than the MPC had expected? Our forecast is for a 6.9% unemployment rate to be reported in the data for the three months to March, which will be published in mid-May. The possibility of the MPC lowering the unemployment rate threshold to 6.5% is getting a lot of discussion. We doubt this is the path the MPC will take.

Rather than lowering the 7% threshold, we expect the MPC will move back toward using the broader narrative in the Inflation Report as the guide. More specifically, we expect the MPC will add a Riksbank-like projection for its own policy rate in the May Inflation Report. This would allow the MPC to set out a view of not just when the first hike may come, but also what sort of increases may follow. And it would make the forecast policy path conditional on the MPC’s broad understanding of the data and not just the level of the unemployment rate. Our best guess, at long distance, is that the MPC will show a first hike occurring in mid-2015, with modest increases thereafter.

Life after thresholds... Before the 7% threshold was adopted, we argued that the attempt to summarize UK economic conditions in a single variable was likely to be fraught with difficulty. Our preference was for the MPC to shift toward a calendar date form of guidance while reserving the right to reassess that date as conditions evolved. The counterfactual is difficult to establish, but we suspect that the front end of the UK yield curve would be flatter than it is now had the MPC heeded our advice. Among our concerns was that the mappings between UK labor market and growth data were difficult to establish, while a coherent understanding of productivity dynamics could take a long time to come. Hence, focusing on the unemployment rate could telescope the need to make an assessment of medium-term productivity trends into a very short window, and create a lot of communication issues for

the MPC. Even we had not expected these issues to be demonstrated so rapidly.

Lowering the threshold on the unemployment rate from 7% to 6.5% would certainly give the MPC more time to assess the situation. But it is by no means clear that the unemployment rate will act as a better summary of policy intentions as it moves toward 6.5% than it was at 7%. Furthermore, one can question how much value a movable threshold has as a communication device. And if the behavior of other variables (wage growth or the exchange rate, for example) may mean the threshold can be moved, surely these variables should be recognized at the outset.

Given these issues, we anticipate that the MPC will allow the use of a specific numerical threshold to die gracefully rather than be reinvigorated by lowering the threshold. Even so, it is fair to argue that markets, firms, and households need more information from the central bank about its reaction function than previously, given the many changes to policymaking the crisis has generated. Hence, we expect the MPC’s guidance on policy to evolve even as numerical thresholds are discreetly dropped.

As it stands, the MPC produces forecasts in the form of fan charts for GDP growth, inflation, and the unemployment rate conditioned on two sets of assumptions about the policy rate: a path for the Bank rate extracted from market pricing, and on

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61



an unchanged Bank rate. We expect it will add a new variant; a set of forecasts based on a policy path that the MPC believes delivers inflation and growth outturns appropriate to its mandate. As it does so, it will likely drop the publication of the forecasts based on unchanged rates to keep the amount of material provided manageable. The path of rates the MPC provides will likely be shown as a fan in order to emphasize that the future path of policy is uncertain, and that the MPC is making no unconditional commitment on policy. Coming in the shadow of the threshold-driven guidance, the provision of such a forecast may be misinterpreted by some as a form of commitment to a given policy path. But we would expect that perception to change gradually through time.


Tue Retail prices Jan 14 %oya 9:30am Sep Oct Nov Dec CPI 2.7 2.2 2.1 2.1 Core CPI1 2.2 1.7 1.8 1.7 RPI (1987=100) 251.9 251.9 252.1 253.5 RPI 3.2 2.6 2.6 2.7 1. CPI ex food, energy, alcohol, and tobacco.

The pattern of goods pricing around Christmas has been changing in recent years, with price gains in December being muted as some of January’s discounting gets pulled into the prior month. The CPI data are based on a mid-month survey, and it is always difficult to tell exactly how much of such early discounting will be picked up in the data. Given the weakness in the BRC data, and widespread reports of pre-holiday discounting, there may be some downside risk to the forecast.

Tue ONS monthly house price data Jan 14 Nsa 9:30am Aug Sep Oct Nov All dwellings (%oya) 3.7 3.8 5.4

Tue Producer prices Jan 14 Nsa 9:30am Sep Oct Nov Dec Input prices (%m/m nsa) -0.9 -0.4 -0.7 %oya nsa 1.0 0.0 -1.0 Output prices (%m/m nsa) 0.0 -0.3 -0.2 %oya nsa 1.2 0.8 0.8

Core output prices1 (%m/m nsa) 0.0 0.0 -0.1 %oya nsa 0.8 0.8 0.7

1. PPI output ex food, beverages, tobacco, and petroleum products.

Thu RICS housing market survey Jan 16 %bal, sa 12:01am Sep Oct Nov Dec Prices in last 3 months 52.9 56.7 58.4 Stocks of homes on books 64.2 61.5 59.7 Sales in last 3 months 19.0 20.5 20.6 Sales to stocks ratio (%) 29.6 33.3 34.5

New buyer inquiries 50.4 57.8 62.4

The RICS survey has tended to overstate the degree of lift in the volume of transactions. But the last couple of readings have shown an accelerating rise in the sales-to-stocks ratio, which is typically a sign of more rapid gains in home prices.

Fri Retail sales Jan 17 Volumes, sa 9:30am Sep Oct Nov Dec Including auto fuel (%m/m) 0.7 -0.9 0.3 Ex auto fuel (%m/m) 1.0 -0.8 0.4 Ex auto fuel (%oya) 2.7 2.3 2.3 Ex auto fuel (%3m/3m saar) 6.0 0.5 1.0

The rapid rise in internet retailing has contributed to big differences in performance among high street retailers. That drama should not be mistaken as a source of information about underlying trends in the pace of consumer spending. The information content of the retail sales data as a window on such trends is low most of the time, and even more so around the December/January releases.

Source: BCC, BRC, SMMT, Markit, RICS, ONS, BoE, and J.P. Morgan forecasts


PMI survey, services % balance, sa Oct Nov Dec

Overall index 62.5 60.0 59.0 58.8

BCC quarterly economic survey Index 2Q13 3Q13 4Q13

Manufacturing Deliveries 16 38 36 Prices 12 27 31 Services Deliveries 20 32 38 Prices 12 23 27

New car registrations %3m/12m nsa Oct Nov Dec

Total 9.8 9.1 10.8 Private (ex bus&fleet) 14.2 13.6 11.2

Although seasonal adjustment of these data is tricky, our version suggests that the level of private registrations has made a renewed move higher over the last couple of months.

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Economic Research United Kingdom January 10, 2014


BoE quarterly Credit Conditions survey Net % balances 2Q13 3Q13 4Q13

Availability of secured credit to Households: Past 3 mnths 17.4 21.7 13.8 Next 3 mnths 17.2 -4.5 20.7 Availability of unsecured credit to Households: Past 3 mnths 18.1 17.2 2.6 Next 3 mnths 26.6 19.2 17.9 Availability of overall Corporate credit: Past 3 mnths 14.2 8.5 22.2 Next 3 mnths 3.5 9.7 16.1

Markit report on jobs % balance, sa Oct Nov Dec

Perm. placements 61.9 59.3 64.6 Perm. salaries 57.6 59.7 60.6 Avail. of perm. staff 42.9 40.7 39.6

Trade balance £ bn, seasonally adjusted Sep Oct Nov

Trade balance Goods -10.1 -9.7 -9.4 Services 7.5 6.4 7.1 6.2 6.2

Total trade balance -2.6 -3.7 -2.6 -3.5 -3.2

MPC rate announcement and asset purchase target

No change in policy and no statement, as expected.

BRC retail sales monitor %oya Oct Nov Dec

Like-for-like sales 0.8 0.6 0.4 Total 2.6 2.3 1.8

Construction output Sa, constant prices Sep Oct Nov

% m/m -0.5 2.2 2.0 0.5 -4.0

Industrial production Sa

Sep Oct Nov IP (%m/m) 0.9 0.3 0.2 0.5 0.0 %oya 2.2 3.2 3.1 2.5 Manufacturing (%m/m) 1.2 0.3 0.2 1.1 0.0 %oya 0.7 2.6 2.5 2.7

Source: BCC, BRC, SMMT, Markit, RICS, ONS, BoE, and J.P. Morgan forecasts

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000s samr, seasonally adjusted by J.P. Morgan

Private car registrations

Source: SMMT and J.P. Morgan

63

J.P. Morgan Bank International LLC

Anatoliy A Shal (7-495) [email protected]

Economic Research

Global Data WatchJanuary 10, 2014

Russia Divergence in PMI surveys widened in December

Headline CPI was confirmed at 6.5%oya in December

Food inflation finally started slowing, but services surprised negatively

Our measure of core CPI was stable at 5.2%oya, but elevated in sequential terms

The manufacturing PMI weakened further to 48.8 in December from 49.4 in November. New orders fell to 49.8,while the backlog of work fell to 43.6, their lowest levelssince mid-2011. The output index was more stable at 50.6, little changed from the 50.9 seen in November. The forward-looking orders-to-inventory ratio slid further to 1.02 from 1.04, suggesting that output growth will likely remain depressed in the months to come.

On the brighter side, activity in the service sector posted another gain in December, as the services PMI rose to 53.6 from 52.9. This was despite a downward correction in new orders and future business expectations. Businesses in both manufacturing and services have continued to shed labor (second chart), evidently staying in a retrenchment mode. Their pricing power has also remained limited, as output price indices stayed at historically depressed levels despite the recent rise in input costs.

Inflation unchanged at 6.5% in December

The Rosstat confirmed its preliminary estimate of December inflation at 6.5%oya (0.5%m/m), unchanged from November. The print thus came in a tick higher than we and consensus expected (6.4%) and above CBR’s target range of 5%-6% for 2013. In contrast to previous months, this small upward surprise is difficult to explain by only supply-side factors as neither food nor energy inflation changed much last month. What in our view is becoming more of a concern is accelerating inflation in market services.

Food inflation slowed marginally to 7.3%oya from 7.5%. Grain-related components and meat led the slowdown. Milk and dairy, as well as fruit and vegetable inflation continued to advance higher, albeit not as fast as in prior months—price shocks in these product groups seem to have passed and largely transmitted into final prices. We expect the impact of lower cereal prices to finally come to the forefront in the coming quarters, hence we continue to expect substantial food disinflation during 2014.

Our measure of core inflation—CPI ex. food, energy, and regulated prices—remained unchanged at 5.2%oya in

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Source: Rosstat, J.P. Morgan

64

Economic Research

RussiaJanuary 10, 2014

J.P. Morgan Bank International LLC

Anatoliy A Shal (7-495) [email protected]

December. However, it was elevated in sequential terms, posting 5.5%m/m saar in December (after 5.6% saar in November and 4.4%-4.7% saar in September-October). Inflation in non-food goods ex. gasoline remained contained, revealing little pass-through from the weaker exchange rate. But market services inflation continued to climb—in sequential terms, we estimate it reached 9.9%m/m saar, its highest level since the crisis (second chart). We tend to attribute this rise in services inflation mainly to elevated wage inflation in the last two years. Note that the latest data show that the labor market has not been softening as fast as had been feared, which may suggest that it will take some time for service price inflation to slow from current elevated levels.

Russia data watch is published biweekly, next on January 24.

Data releases and forecastsWeeks of January 13 - 24

State budgetRUB billion, cash flows

Sep Oct Nov Dec

Balance 213 6 -59 -650

% of GDP 3.4 0.1 -1.0 -10.3

Revenue 1186 1136 1018 1400

Expenditure 974 1130 1077 2050

Real economy indicatorsReal terms, %oya

Sep Oct Nov Dec

Construction -2.9 -3.6 -0.3 1.0

Agriculture -1.4 26.3 18.3 5.0

Fixed investment -1.6 -1.9 0.2 1.0

Transportation 1.9 6.3 0.8 0.0

Retail sales 3.3 3.6 4.5 4.2

Unemployment 5.3 5.5 5.4 5.4

Average monthly wage 6.3 5.4 4.8 4.3

Industrial output 0.3 -0.1 -1.0 0.8

Industrial producer prices

Sep Oct Nov Dec

%m/m, nsa 1.4 -1.2 -1.5 0.5

%oya 1.9 2 1.6 3.2

Auto salesSep Oct Nov Dec

Units, 000s 247 234 232 245

%oya -5.0 -7.7 -3.6 -3.2

Source: Rosstat, MinFin, AEB Russia, J.P. Morgan forecasts

Review of past four weeks’ data

Real economy indicatorsReal terms, %oya

Sep Oct Nov

Construction -2.9 -3.6 -1.5 -0.3

Agriculture -1.4 26.3 15.0 18.3

Transportation 1.9 6.3 0.5 0.8

Fixed investment -1.6 -1.9 -1.0 0.2

Retail sales 3.3 3.6 3.3 4.5

Average monthly wage 6.3 5.4 4.0 4.8

Unemployment 5.3 5.5 5.4 5.4

Industrial production 0.3 -0.1 -0.3 -1.0

Consumer prices

Oct Nov Dec

%m/m nsa 0.6 0.6 0.5 0.5

%oya 6.3 6.5 6.4 6.5

PMI surveysOct Nov Dec

Manufacturing PMI 51.8 49.4 50.0 48.8

Services PMI 52.5 52.9 52.5 53.6

Broad money supplySep Oct Nov

Broad money, M2 28629 28546 29071 29167

%m/m nsa -0.5 -0.3 1.8 2.2

%oya 16.1 15.4 15.9 16.3

Source: Rosstat, Markit, CBR, and J.P. Morgan forecasts

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https://jpmm.com/research/content/GPS-1283043-0

65

JPMorgan Chase Bank N.A, Istanbul Branch Yarkin Cebeci (90-212) 319-8599 [email protected]


Turkey Due to the macroprudential measures and tax increases

implemented, we cut the 2014 GDP forecast to 2.5%

We expect Turkey to reach its potential growth rate of 4.0% in 2015

We now expect the current account deficit to narrow to US$46.4 billion (5.5% of GDP) in 2014

Despite improved technicals (foreign participation has come down in both bond and equity markets in recent months) and the government’s renewed attempts to improve the country’s external balances, we believe that it is too early to become constructive on Turkish financial assets because we see potential for an escalation in political noise in the near term. That factor leads us to expect further net local bond outflows from non-resident investors. That being said, our base case is for the current domestic political confrontation to dissipate in a market-friendly manner before Turkey’s municipal elections in late March. Local and international appetite for Turkish assets has dried up following the mid-December corruption investigation against dozens of high-level people including sons of ministers and the CEO of a large state bank. Prime Minister Erdogan has responded by accepting the resignations of four of his ministers, but also has vowed to fight against what he believes is a plot to displace him. The impact of the rise in political tension on financial markets was paramount. TRY lost 8% of its value against the US dollar, the yield on 2-year benchmark bonds rose 115bp, and stock prices on average plunged 10% in the last two weeks.

The policy response was also significant. The CBRT tightened its policy further and intervened in the FX market by selling US dollars. Importantly, the government implemented a series of macroprudential measures aimed at restraining loan growth and thus curbing domestic demand. First, there will be no installments in credit card transactions for telecommunications, jewelry, food, and oil purchases. This is quite a significant step as 80%-90% of sales in electronics and telecoms are made through credit card usage and the installments likely extend more than six months. Second, for the remaining categories, the maximum installment period in credit cards will be capped at nine months. Third, auto loans for cars priced at TRY50,000 and below will be capped at 70% of the price and higher-priced cars will be subject to a further 50% limit on the portion above TRY50,000. BRSA has limited the maturity of passenger car loans to 48 months. Fourth, the number of monthly installments for general-purpose loans will be capped at 36 months. The current cap is 60 months. The government also increased the special consumption tax on passenger cars, tobacco, and alcoholic beverages.

We think that these measures will be effective in keeping growth at a lower and more sustainable level, thus helping to narrow the current account deficit. In fact, we have revised down our 2014 GDP growth forecast to 2.5% from 3.0%. We expect the economy to reach its potential growth rate of 4.0% in 2015. Due to the introduction of macroprudential measures and tax increases all targeted to discourage imports, we have also revised our CAD forecast. We now expect the CAD to narrow to US$46.4 billion (5.5% of GDP) in 2014 from US$59.0 billion (7.1% of GDP) in 2013.

The Turkey data watch is published biweekly, next on January 24.

Source: Turkstat, J.P. Morgan

Source: CBRT

Source: J.P. Morgan

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66

Economic Research Turkey January 10, 2014

JPMorgan Chase Bank N.A, Istanbul Branch Yarkin Cebeci (90-212) 319-8599 [email protected]

Data releases and forecasts Tue Balance of payments Jan 14 US$ bn 10:00am Aug Sep Oct Nov Current account -2.4 -3.3 -2.9 -4.1 Trade balance -5.7 -6.0 -5.6 -5.3 Exports 12.0 14.0 13.3 15.4 Imports 17.7 20.0 18.9 20.7 Net invisibles/transfers 3.3 2.7 2.7 1.2 Capital account 3.3 2.2 6.6 4.0 Overall balance 4.0 0.7 2.2 1.5

The m/m widening in CAD mainly reflects seasonal factors while the underlying rebalancing likely continued in November. We think that the pace of improvement will strengthen as 1) higher interest rates and poor sentiment lead to weaker domestic demand and hence lower imports; 2) the currency depreciation enhances the competitive power of Turkish exporters; 3) Turkey continues benefiting from the recovery in EU demand.

Wed Labor market data Jan 15 10:00am Jul Aug Sep Oct Unemployment (%) 9.3 9.8 9.9 10.0 Nonfarm payrolls (%oya) 3.6 3.4 3.4 3.3 Labor participation (%) 50.8 50.8 50.8 51.0

The rise in the unemployment rate mainly is following a seasonal pattern. Despite the rise seen in recent months, the labor participation rate is still too low, in our view.

Tue CBRT rate decision Jan 21 % 2:00pm Oct Nov Dec Jan CBRT 1-week repo rate 4.50 4.50 4.50 4.50 CBRT ON borrowing rate 3.50 3.50 3.50 3.50 CBRT ON lending rate 7.75 7.75 7.75 7.75

The interbank market ON rate has become the relevant policy rate in recent weeks. The CBRT has vowed to keep this rate equal to its ON lending rate of 7.75%. The Bank will need to hike the ON lending rate to tighten monetary conditions. We would expect a hike if the currency remains under pressure.

Review of past two weeks’ data

Industrial production %oya Sep Oct Nov

Total 6.4 -0.5 4.1 4.6 Manufacturing 8.0 -0.5 5.0 5.6 Mining -4.4 -7.9 -8.0 -8.9 Energy and utilities 1.3 4.0 5.5 4.8

The increase in yearly IP growth mainly reflects a weak base while in sequential terms, IP growth remained stable in November. We expect production to lose momentum as increased political noise and higher bank lending rates translate into lower domestic demand. The recently introduced macroprudential measures should also curb domestic demand. This is why we have revised down our 2014 GDP growth forecast to 2.5%.

Inflation % change Oct Nov Dec

Consumer prices %oya 7.7 7.3 7.3 7.4 %m/m 1.8 0.0 0.3 0.5

Producer prices %oya 6.8 5.7 6.8 7.0 %m/m 0.7 0.6 0.9 1.1

Core CPI (I) %oya 7.5 7.2 7.2 7.1 %m/m 1.8 0.6 0.0 -0.1

Despite the relatively benign core inflation data, we see reason to be more cautious on the inflation front. The increase in energy prices and especially sharply higher LPG prices constitute cost pressures. Furthermore, continued lira weakness and the recently introduced tax hikes will exert inflationary pressures, especially within the next six months. Hence, we have revised our end-2014 CPI forecast to 7.0% from 6.3%. We see inflation falling below the 7% mark due to a strong base in January. Yearly inflation will likely stay in the 6.5%-7.5% band for the remainder of the year, in our view.

Capacity utilization % Oct Nov Dec

Total manufacturing 76.4 75.6 76.1 76.0 Durables 73.7 73.0 73.5 72.9 Nondurables 75.1 74.0 74.3 74.0

Despite the recent rise, capacity usage rates are still around 5%-pts below where they were five years ago, showing that the slack in the economy persists.

Consumer confidence Index Oct Nov Dec

Consumer confidence 75.5 77.5 74.8 75.0 Financial situation - current 83.1 84.7 82.8 84.0 Financial situation - future 92.2 92.9 90.0 92.4 Economic setting 100.1 104.7 99.0 99.5 Employment 84.0 85.9 83.5 81.8

The fall in consumer confidence mainly reflects the sharp increase in political tension in December. We expect the worsening to get more pronounced in the first months of 2014.

Foreign trade US$ bn, except as noted Sep Oct Nov

Trade balance -7.5 -7.4 -7.3 -7.1 Exports 13.1 12.1 14.2 14.3

%oya 1.3 -8.5 3.2 3.6 Imports 20.6 19.5 21.5 21.4

%oya 3.5 3.7 2.4 2.2

The narrowing trade deficit reflects resilient exports and somewhat weaker imports.

Source: Turkstat, CBRT, Ministry of Finance, J.P. Morgan forecasts

67

J.P. Morgan Australia Limited Stephen Walters (61-2) 9003-7980 [email protected] Ben K Jarman (61-2) 9003-7982 [email protected]


Tom Kennedy (61-2) 9003-7981 [email protected]

Australia and New Zealand Data flow resumed in Australia, but not in New Zealand

Consumers are finding their feet, and the fall in home building approvals is modest

December employment report the highlight in Australia in the week ahead

Retail card spending kicks off the annual data flow across the Tasman

Following a lazy couple of weeks over the summer holiday period, the data flow for Australia resumed this week. The trade deficit for November was unexpectedly small and we expect the trade accounts to swing into modest surplus in the months ahead as mining exports ramp up. Approvals for home construction dropped but stayed close to recent highs, and the November retail sales report indicated that consumers are regaining their propensity to spend.

The December monthly employment report is the clear highlight in Australia next week: the forecast anticipates another month of only modest growth in employment (a net gain of 10,000 jobs), but an unchanged jobless rate. The jobless rate edged higher in November largely owing to rounding, so another rise in next week’s data looks unlikely, absent an unexpected rise in the participation rate.

In New Zealand, there were no data of note released during the past week, but next week’s calendar includes the December retail card spending report. We anticipate a similar pace of advance to November (+0.5%m/m), which will extend the run of generally upbeat data releases in the Shaky Isles since the RBNZ’s last review of the cash rate back in December.

Aussie consumers finding their feet Nominal retail sales in Australia were unexpectedly healthy in November, rising 0.7%m/m. After a sustained weak period in which nominal sales did not grow at all between February and July 2013, Australian retail sales have picked up noticeably, averaging 0.7%m/m between August and October, and maintaining that run-rate into November. While the details for November were somewhat mixed, it does appear the combination of low interest rates and rising consumer confidence and asset prices is catalyzing a burst of consumer activity moving into the holiday spending period.

Most retail groups were up in November, but there still is a sense of the specific drivers not being clear. Food retailing was flat; household goods retailing grew in line with the average, a modest outcome after three months of decline; and

department stores surprisingly were down 2%m/m. The strength came from “other retailing,” which is an awkward aggregate of things like cosmetics, books, and recreational goods, among other things, up 2.1%m/m, as well as the perennially outperforming cafes and restaurants group (+2.2%m/m), and clothing and footwear (+1.8%m/m), which has been running hot.

Similar trends are evident in annual growth rates, with sales at cafes and restaurants up over 8%oya, and clothing and footwear up over 10%oya, while household goods retailing, food retailing, and “other” retailing have been growing at around half that rate. Department stores remain the clear laggard, with sales down 1.2%oya. To the extent that we can rank these groups by the price point of the product, higher-end retail (specialty clothing and footwear, hospitality) is doing better than bread-and-butter consumer products (e.g., household goods and department stores).

As to whether the trend can continue, anecdotes from industry suggest Christmas and Boxing Day sales were solid, which bodes well for the next couple of reports, as does the possibility of a repeat of last year’s episode in which retail spending growth posted its best performances of the year in January and February due to re-profiling of fiscal transfer payments. However, our optimism is tempered for 2014

Source: ABS

Source: ABS

-2

-1

0

1

2

3

4

5

04 06 08 10 12 14

%3m/3mAustralia: total retail sales

-5

0

5

10

15

%oya

Australia: discretionary and non-discretionary retail spending

Non-discretionary

Discretionary

07 09 11 13

68

Economic Research Australia and New Zealand January 10, 2014



overall due to the weakness of the labor market and absence of any signs of life in hiring appetite in the business and job advertisement surveys.

On-line retail sales tiny, but growing For the first time, the ABS included estimates of online spending with domestic vendors (this series is in original terms, running from March to September, and will always come with a lag). Such spending already was included in the aggregates in cases where the vendor had a bricks and mortar presence, but the specific amount owing to this channel was lost in the reporting of aggregate sales. This type of spending has now been split out to examine its individual growth performance, and also to calculate its share of the overall retail pie, while information on “pure-play” domestic online vendors has also been added to the mix.

The ABS estimates that online retail accounts for 2% of total online retail trade. This is a much lower estimate than has been cited elsewhere, since it does not account for sales with offshore vendors (the retail survey is intended to count revenue of Australian businesses). The ABS does now use data on low-value consumer imports from customs and shipping data to supplement the household consumption and imports numbers in the national accounts, which boosts the estimate of online spending substantially.

Home building approvals down but not out November building approvals data printed slightly firmer than we had expected, with the total number of approvals slipping only 1.5%m/m, following a similar-sized decline in October. Despite these back–to-back monthly falls, in level terms the number of building approvals remains elevated following the 17% surge in September, supporting the view that activity in the construction sector has turned a corner.

The composition of the November release also was favorable for the construction outlook, with the 10%m/m decline in high-density approvals counterbalanced, to an extent, by a stellar 6%m/m upswing in detached dwelling commitments. The flow of approvals in the latter category historically has been a more reliable indicator of underlying construction activity, with the November gain the largest since May 2012, providing further evidence that the benefit of record-low interest rates is filtering through.

Although the Australian Bureau of Statistics does not provide a comprehensive breakdown of dwelling type by state, it appears that up to one-half of the growth in detached dwellings stems from an uptick in demand from South Australia. The downside, however, is that these gains may prove fleeting, with this surge likely underpinned by

individuals dragging forward building plans to capitalize on the looming expiration of the first home buyer Housing Construction Grant.

Despite the double-digit fall in high-density commitments in November, we don’t view the decline as being particularly alarming. High-density approvals were the dominant driver of the September surge, increasing almost 40%m/m, which, even after incorporating recent declines, leaves the volume of approvals tracking considerably above the post-2008 average.

Trade deficit now wafer-thin Australia’s November trade report showed all the expected features, but with the magnitudes slightly more favorable to the overall balance than expected. Iron ore exports managed to offset the slide in coal shipments (we expected the latter effect to win out), while imports fell a touch more than forecast. The result was that the nominal trade balance narrowed for a fourth consecutive month to A$118 million, having blown out to over A$1 billion in July.

The currency backdrop has been a clear tailwind to export revenues in 2H13 relative to 1H, with AUD/USD having fallen close to 15% between April and November. The benefits to exports have been more through earnings translation than through competitiveness effects, given that

Source: ABS

Source: ABS

0

6

12

18

000s

Australia: building approvals

Total

High density

Houses

04 06 08 10 1204 06 08 10 12

59

60

61

62

63

04 06 08 10 12 14

%Australia: employment to population ratio

69




the bulk commodities are priced in USD. Still, there has been a pickup in export volumes, too, as mining capex projects wind up, forcing a supply-side expansion. On the evidence of 2013—export revenues are up 10.7%oya as of November—demand growth in Asia has been more than strong enough to absorb this extra capacity, though we expect prices and the terms of trade to be biased lower in order for the market to clear this extra supply in 2014 and 2015.

At the same time, nominal imports have been effectively stagnant, down 1.3%oya, and have not blown out due to currency weakness, since the pull-back in capital import volumes that has been underway as mining capex crests has offset higher prices on the remainder of the import basket. Over the last year, capital goods imports are down 13% in nominal terms, while consumption goods are 5% higher. The double-barreled nature of the improvement in the trade balance should play out in real terms in the GDP data. On our forecasts, almost 2%-pts of the 2.75% of growth expected this year will come from net trade, due to stronger real exports and a significant pull-back in real imports.

In the details of the November report, goods exports were up 0.2%m/m, with non-rural goods up 0.5%m/m. This outcome reflected a balancing act in the two largest categories: ores and minerals exports jumped 4%m/m, while those on coal, coke, and briquettes were down 6%m/m. Both results were broadly consistent with data on shipments from selected ports. The weakness in coal export shipments, particularly thermal (-12%m/m in volume terms), is a theme we expect to continue into year-end given the significant declines recorded previously in onshore coal prices in China, which are acting to lock out imports. Imports were down 0.5%m/m, with the decline driven by consumption goods (-1.9%m/m, with autos down 8%m/m), while capital goods imports bucked the trend with a 1.3% rise.

Card spending the highlight in NZ The card spending data for November kick-starts New Zealand’s economic calendar for 2014, with the last data point having been the 3Q GDP report, delivered before Christmas. Given that domestic output has been recovering from the agricultural supply shock of the drought in 1Q, the frothy GDP result (+1.4%q/q) likely overstated the strength of the economy coming into year-end. Still, averaging through the drought distortions, the New Zealand economy clearly is in an upswing, in line with our long-held forecasts for above-trend growth. The retail card spending data represented compelling evidence of this uplift around midyear, but momentum has cooled a little—the 3-month change in retail card spending has halved from 2.3% in September to 1.2% in November—with residential investment picking up more of the growth burden relative to consumer spending. For the December

retail card spending result, we expect a continuation of the recent rate of advance (0.5%m/m) in December, with the pace of sales running into 2014 giving RBNZ officials comfort that the strength of housing is not adding any extra impulse to consumer spending, credit, or inflation. In the detail, the one area that should be getting some lift from the housing market is durables spending, which had an off month in November, and is due a bounce.

Australia


Mon Housing finance Jan 13 11:30am Aug Sep Oct Nov

%m/m -3.1 -3.5 1.0 2.0

Thu Labor force survey Jan 16 11:30am Sep Oct Nov Dec

Unemployment rate (%) 5.7 5.7 5.8 5.8 Employment (ch. 000s) 5.0 -1.0 21.0 10.0

Participation rate (%) 64.8 64.8 64.8 64.8

Source: ABS, Stats NZ, J.P. Morgan forecasts

Source: ABS

Source: Stats NZ

-4

-2

0

2

4

A$ bn

Australia: trade balance

00 02 04 06 08 10 12

-1

0

1

2

3

4

5

04 06 08 10 12 14

%3m/3mNew Zealand: retail card transactions

70

Economic Research Australia and New Zealand January 10, 2014



Review of prior week’s data Trade balance

Sep Oct Nov

A$ bn -0.3 -0.5 -0.4 -0.5 -0.1

Building approvals

Sep Oct Nov

%m/m 16.9 3.6 -1.8 -1.6 -2.0 -1.5

Retail sales

Sep Oct Nov

%m/m 0.9 0.5 0.5 0.7

New Zealand


Tue Retail card spending Jan 14 8:45am Sep Oct Nov Dec

%m/m -1.2 1.8 0.6 0.7

Review of prior week’s data No data releases of note.

Source: ABS, Stats NZ, J.P. Morgan forecasts

71

JPMorgan Chase Bank, N.A., Hong Kong Haibin Zhu (852) 2800-7039 [email protected] Grace Ng (852) 2800-7002 [email protected]


Lu Jiang (852) 2800-7053 [email protected]

Greater China China: December CPI inflation eased to 2.5%oya on

food prices; PPI stuck in deflation territory

December exports continued with steady sequential growth; trade balance narrowed

Taiwan: December exports firming, consistent with steady global demand recovery

December CPI inflation eased again; expect policy rates to be on hold through 2014

China’s December CPI inflation rate eased further to 2.5%oya, compared to 3.0%oya in November. Seasonally adjusted, we calculated that CPI stayed flat (in %m/m sa terms) in December (vs. +0.1%m/m sa in November). In more details, food prices rose 4.1%oya in December (vs. +5.9%oya in November). Seasonally adjusted, food prices fell 0.5%m/m sa in December, after rising 0.4%m/m sa in November. Among food price items, vegetable prices have eased notably lately, rising 2.6%oya in December (vs. 22.3%oya in November). Seasonally adjusted, vegetable prices fell 4.0%m/m sa in December (vs. +0.9%m/m sa in November). In addition, pork prices fell 0.5%m/m sa in December (vs. +1.9%m/m sa in November). Meanwhile, nonfood price inflation rose 1.7%oya in December, compared to 1.6%oya in November. The gain in December nonfood prices was broad-based, led by prices of residences (+0.4%m/m sa), clothing, traffic and communication appliances, and recreation, education, and cultural services.

The PPI deflation rate was unchanged at -1.4%oya in December. In sequential terms, we calculated that PPI fell 0.1%m/m sa in December (vs. +0.1%m/m sa in November). PPI has been in negative territory since March 2012, although the deflation pressure has eased gradually from the recent bottom of -2.9%oya in May.

Inflation and monetary policy outlook The easing in December headline CPI inflation was mainly driven by easing food price inflation, especially regarding volatile vegetable prices (which had been a major driver of food price inflation in recent months). Overall, 2013 CPI inflation averaged at 2.6%oya, undershooting the government’s 3.5%oya target by a notable margin. Going into 2014, we expect CPI inflation to move up gradually, averaging 3.3%oya, which is still a manageable level (the government will likely set the inflation target at 3.5%oya again).

On monetary policy, we expect no change in policy rates or RRR through the course of 2014, while “credit tapering” (whereby credit growth slows but remains higher than

Source: NBS, J.P. Morgan

Source: NBS

Source: NBS

Source: NBS, J.P. Morgan

-5

0

5

10

06 07 08 09 10 11 12 13 14

%oya J.P. Morganforecast

China: CPI inflation

-10

-5

0

5

10

15

20

25

-4

-2

0

2

4

6

8

10

06 07 08 09 10 11 12 13 14

China: headline CPI, food prices, and non-food CPI

%oya, both scales

Nonfood CPI CPI: food pricesHeadline CPI

-40

-20

0

20

40

60

2009 2010 2011 2012 2013 2014

%oya

China: major CPI food items

Fresh vegetablesGrain Pork

-30

-20

-10

0

10

20

-6

-3

0

3

6

9

12

07 08 09 10 11 12 13 14

PPI (NBS)

Headline CPI

China: CPI and PPI

%3m/3m, saar, both scales

72

Economic Research Greater China January 10, 2014



nominal GDP growth) will continue. In addition, we expect regulators will continue to strengthen regulation and supervision on speculative financial activities in shadow banks and interbank markets.

Amid ongoing credit tapering, which started in 2Q13, growth in outstanding total social financing (TSF) had slowed from a recent peak of 21.9% in April to 18.6% in November. Looking into 2014, we expect TSF growth to ease further to 16.2%oya in 2014 as credit tapering continues. This would suggest that interbank rates may continue to drift upwards. In turn, this will likely force financial institutions to improve their risk management practices. However, the uncertain part for the real economy is whether, when, and how much of the higher rates in the interbank market may be passed through to the funding cost of ultimate borrowers.

Steady sequential growth in exports China’s exports rose 4.3%oya in December, compared to the rise of 12.7%oya in November. Seasonally adjusted, exports rose by a decent pace of 2.2%m/m in December, after easing marginally by 0.1%m/m sa in November. On a sequential trend basis, exports rose 28.2%3m/3m saar in December (compared to 21.7%3m/3m saar by November). For full-year 2013, China’s exports rose 7.9%oya. By destination, exports to the EU (+5.0%m/m sa) outperformed in December, while exports to the US fell 3.4%m/m sa. Within the region, exports to ASEAN rose 2.4%m/m sa in December, and exports to Hong Kong rose 1.2%m/m sa.

Meanwhile, imports rose 8.3%oya in December, compared to the rise of 5.3%oya in November. This translates to a notable 4.3%m/m sa rise in December, compared to the 2.2%m/m sa fall in November. The trade surplus narrowed to US$25.6 billion in December, compared to US$33.8 billion in November. The trade surplus for full-year 2013 came in at US$259.8 billion.

Overall, the sequential trend in China’s export growth has been accelerating at a decent pace in recent months, suggesting that China’s export sector is benefiting from the current upturn in the global economy. Meanwhile, on the import front, the impressive gain in December imports appears to be led by mechanical and electrical products (up 3.0%m/m sa, which is likely related to the favorable near-term export growth outlook) and faster imports of crude oil (+10.7%m/m sa). Meanwhile, imports of some industrial metals, such as iron ore (-6.4%m/m sa) and copper (-1.4%m/m sa), eased again in December, which likely hints at moderating domestic fixed investment growth going ahead.

Our global team expects moderately above-trend growth in the global economy in the coming quarters, led by the

developed economies, which should support China’s export sector. Meanwhile, the CNY REER appreciation since the beginning of 2013, and the less robust growth outlook in the EM world, may still exert some drag on exports. Overall, we expect China’s export sector to improve moderately, rising at 11%oya in 2014.

Taiwan: December exports firming Taiwan’s December exports fell 1.9%oya, after staying flat in November. The over-year-ago decline in December exports (which markets interpreted as a sign of weakness) mainly reflects a base effect: exports jumped 8.9%oya in December

Source: China Customs, J.P. Morgan



0

10

20

30

40

50

0

2

4

6

8

10

12

2010 2011 2012 2013 2014

%oya, both scales

Global IP

China's exports

J.P. Morgan forecast

China's merchandise exports and global IP

-30-20-10

01020304050

06 07 08 09 10 11 12 13 14

US$ bn

China: merchandise trade balance

SaNsa

60708090

100110120130140150

Index, 2010=100, sa, 3mma

2010 2011 2012 2013

Iron oreCrude and refined oil

Copper

China: commodity import volume

73




2012, following the modest gain at 0.8%oya in November 2012. Indeed, our seasonal adjustment process shows that exports rose a decent 2.1%m/m sa in December, after rising 1.2%m/m sa in November. The underlying sequential trend rose 3.1%3m/3m saar by December (vs. -1.9%3m/3m saar by November).

Further details in the December trade report showed tech exports rose modestly by 0.2%m/m sa (vs. +1.9%m/m sa in November). Non-tech exports rose notably by 3.2%m/m sa in December (vs. +0.6%m/m sa in November). Details by destination show steady expansion in exports to the US in December (+2.1%m/m sa), with shipments to China/Hong Kong up 1.2%m/m sa (following the sharp gain of 8.1%m/m sa in November). Overall, the latest export figures appear to be consistent with the steady recovery in the global economy.

In addition, December imports rose sharply by 10.1%oya, following the decline of 0.5%oya in November. Seasonally adjusted, imports rose significantly by 9.6%m/m sa in December, following a modest gain of 0.4%m/m sa in November. Behind the surge in December imports, it is worth noting that significant seasonal volatility in merchandise imports around the Lunar New Year holiday period had been quite common in previous years.

CPI inflation eased again Taiwan’s December CPI inflation rate eased again to 0.33%oya, compared to 0.67%oya in November. Our seasonal adjustment process shows that headline CPI edged up 0.05%m/m sa in December (vs. -0.25%m/m sa in November). Core CPI (overall CPI excluding fruits, vegetables, fish, and energy) came in at 0.21%oya (+0.1%m/m sa) in December. For full-year 2013, Taiwan’s headline CPI inflation rate averaged 0.79%oya.

Expect policy rate to be on hold in 2014 For 2014, on the global front, J.P. Morgan believes global inflation will remain at a low level, with EM inflation expected to ease further. Taiwan’s domestic inflation pressure will also likely be well-contained amid the moderate growth trend in domestic demand and considering that the output gap should stay negative. Overall, we expect Taiwan’s 2014 inflation rate to average a modest 1.2%oya.

The global economy is expected to register above-trend growth through the course of 2014, led by the DM world. As such, the constructive global demand outlook should support some steady recovery in Taiwan’s export and industrial sectors in the coming quarters. Our forecast for Taiwan’s full-year 2013 GDP growth stands at 1.9%oya, with the forecast for 2014 GDP growth at 3.1%.

Overall, given the stable growth- inflation dynamics in the coming quarters, we believe there is a high probability that the central bank will keep major policy rates on hold through 2014.

Source: Markit, Taiwan MoF, DGBAS, J.P. Morgan

Source: MoF, J.P. Morgan

Source: DGBAS, J.P. Morgan

-40

-20

0

20

40

60

45

50

55

60

Index, sa

Global manufacturing PMI and Taiwan real export growth%3m/3m, saar

2010 2011 2012 2013

Global manufacturing PMI - output

Taiwan export volume (adjusted by export prices)

-50

-25

0

25

50

75

%3m3/m, saar

Taiwan: export growth breakdown

2010 2011 2012 2013

Tech exports

Nontech exports

-4

-2

0

2

4

6

%oya

Taiwan: headline CPI

2008 2009 2010 2011 2012 2013 2014

J.P. Morganforecasts

74

Economic Research Greater China January 10, 2014



China:


Fri-Wed Monetary aggregates Jan %oya, bn yuan

10-15 Sep Oct Nov Dec M2 14.2 14.3 14.2 13.5 New loan creation 787.0 506.1 624.6 660.0


Merchandise trade (Jan 10) US$ bn

Oct Nov Dec Balance 31.1 31.1 33.8 33.8 29.7 25.6 Exports 185.4 185.4 202.2 202.2 205.0 207.7 %oya 5.6 5.6 12.7 12.7 2.9 4.3 Imports 154.3 154.3 168.4 168.4 175.2 182.1 %oya 7.6 7.6 5.3 5.3 4.2 8.3

Consumer prices (Jan 9) % change

Oct Nov Dec %oya 3.2 3.2 3.0 3.0 2.6 22.5_ %m/m sa 0.2 0.3 0.1 0.2 0.1 0.0_

Producer prices (Jan 9) % oya

Oct Nov Dec Producer (NBS) -1.5 -1.5 -1.4 -1.4 -1.2 _-1.4 Producer (PBoC) 0.1 0.1 0.1 0.1 0.1 _-0.1

Source: NBS, Markit, J.P. Morgan forecasts

Hong Kong:


No data releases.


No data released.

Taiwan:


No data releases.


Consumer prices (Jan 6) % change

Oct Nov Dec %oya 0.6 0.6 0.7 0.7 0.5 0.3 %m/m sa -0.5 -0.5 -0.3 -0.2 0.2 0.0

Merchandise trade (Jan 6) US$ bn

Oct Nov Dec Balance 3.5 3.5 3.5 3.5 3.6 1.4 Exports 26.1 26.1 24.9 24.9 25.3 25.6 %oya -1.5 -1.5 0.0 0.0 -3.0 -1.9 Imports 22.6 22.6 21.4 21.4 21.4 24.2 %oya -2.8 -2.8 -0.5 -0.5 -1.0 10.1

Source: Taiwan Ministry of Economic Affairs, DGBAS, J.P. Morgan forecasts

75

JPMorgan Chase Bank, N.A., Seoul Branch Jiwon Lim (82-2) 758-5509 [email protected]


Korea Bank of Korea on hold with few surprising comments

Next week: December labor market report

As widely expected, the Bank of Korea kept the policy rate at 2.5% in a unanimous decision. There were few surprising comments in either the MPC statement or the governor’s press conference, just as we had anticipated in last week’s Data Watch. In the quarterly outlook report, the BoK trimmed its 2014 inflation forecast from 2.5%y/y to 2.3% (J.P. Morgan: 2.3%; consensus: 2.2%), but attributed the revision to technical factors, such as CPI basket changes, while keeping the forecast for 2014 GDP growth at 3.8% (J.P. Morgan: 3.8%; consensus: 3.6%). We maintain the view that the Bank of Korea’s monetary policy should stay supportive of growth, but mostly via micro-level credit tools, while the base rate will be unchanged at 2.5% until 3Q14.

There were few changes to the BoK’s assessment of underlying growth or the path of inflation. The BoK appears to have been comforted by recent developments that global financial markets’ nervousness around US QE tapering has subsided while local agricultural prices remained stable throughout 4Q13. In the press conference, the governor did not hint at any near-term action, sounding less dovish than before by toning down previous concerns over potential impact of DM countries’ policy changes on the Korean economy. For example, the governor commented that the US QE tapering is not necessarily negative news for the Korea economy, with the action unlikely to come without confidence in the improvement of US growth. Also, he noted that he expected the impact of KRW’s appreciation against JPY to be limited to somewhat micro-level issues, commenting that not all industries would be negatively affected by such a currency move, especially as Korea’s trade with Japan remains in deficit (and thus importers will benefit).

2014: monetary policy and political noise The Bank of Korea expects real GDP to rise 3.8%y/y in 2014 and 4.0% in 2015. It also forecasts that consumer prices will rise eventually, with core prices expected to touch 3% in 2H14 and the output gap to turn positive in 2015. This suggests that the BoK is poised to gradually hike rates in the medium term, if growth conditions track its forecast, which in turn supports our view that the BoK would start rate hike action before year-end, possibly 25bp in 4Q.

That said, we need to consider a political caveat that might complicate the monetary policy decision. Primarily, the ruling party has advocated further monetary expansion ahead of the local government election on June 4, with a couple of senior

policymakers openly urging a rate cut this week. Also, the composition of the MPC is supposed to change in 2Q, with the official terms of the current governor and one MPC member scheduled to end, on March 31 and April 14. So far, few names have been circulating for those positions, but history suggests that new MPC members often start the term with a relatively dovish bias, potentially making the new MPC more dovish than the old one. Against this background, we do not exclude the possibility that the BoK flips its policy stance, ready to cut rates if growth conditions weaken.

Next week’s focus The unemployment rate is expected to have rebounded in December, but mainly for seasonal and technical reasons. Seasonally adjusted, the jobless rate likely edged up, but mainly led by the rise in labor force. Given that the government’s policy priority is to increase the employment ratio, we expect total employment to stay on the rise, albeit with monthly volatility and at the cost of job quality (see “Korea: solid employment gain with mixed details,” Global Data Watch, Dec 13, 2013). In December, though, key public companies announced an accelerated pace of expansion of “flexible work hour jobs,” and began to receive job applications one month ahead of when the positions actually start. This could boost the labor force but not yet employment itself, and thus would push headline jobless rate up temporarily.

Forecast of key macro indicators %y/y, unless otherwise noted

BoK Consensus J.P. Morgan

New Old

Real GDP 2013 2.8 2.8 2.8 2.8

2014 3.8 3.8 3.6 3.8

2015 4.0 n/a n/a 3.9

Consumer prices 2014 2.3 2.5 2.2 2.3

2015 2.8 n/a n/a 2.8

Source: BoK and J.P. Morgan forecast

Source: BoK

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013 2014

% per annum, eop

Korea: BoK base rate

76

Economic Research Korea January 10, 2014

JPMorgan Chase Bank, N.A., Seoul Branch Min Joo Kang (822) 758-5512 [email protected]

Data releases and forecasts Week of January 13 – 17 Tue Import and export prices Jan 14 %oya, in local currency terms

6:00am Sep Oct Nov Dec Export prices -4.7 -4.6 -2.5 -0.7 Import prices -8.1 -7.3 -4.9 -3.0

Import prices in local currency terms likely rose in December as global oil prices moved up, and KRW appreciation moderated.

Wed Unemployment rate Jan 15 % of labor force

8:00am Sep Oct Nov Dec Seasonally adjusted 3.0 3.0 2.9 3.0 Not seasonally adjusted 2.7 2.8 2.7 2.9

The jobless rate is forecast to have risen. Seasonal labor slack in agricultural and construction sectors likely reduced job openings, while the recruiting schedule for “flexible work hour jobs” likely increased the labor force. Also see main story.


Monetary aggregates (Jan 8) %oya, monthly average

Sep Oct Nov M2 4.6 4.6 4.7 4.7 4.9 5.1 Lf 6.7 6.7 6.7 6.7 6.9 6.8

On a seasonally adjusted basis, M2 grew 0.4%m/m sa in November, about the same pace as in October. Exporters’ short-term deposits increased most. Lf growth also stayed flat at 0.4% in November.

BoK Watch The local bond market fluctuated during the week of the MPC meeting. Although the market had widely expected the MPC to hold, recent political caveats triggered some noise as parliamentary members urged a rate cut action. Thus, the financial market had priced in dovish comments with at least one vote against the rate decision. In turn, the benchmark 3Y KTB yields were down 6.6bp through Wednesday from the previous week’s closing, but unwound most of their rallies by rising 5.3bp after the BoK’s unanimous decision.

Meanwhile, the BoK released its foreign reserves for December, which increased by US$1.5 billion to US$346.5 billion, marking another record high. The BoK attributed much of the gain to the FX gain due to the strong euro and returns on assets.

Source: KOFIA

Interest rates % p.a.

Dec 20 Dec 27 Jan 3 Jan 9 Overnight call 2.51 2.50 2.50 2.49 3-month CD fixing 2.65 2.65 2.66 2.65 1-year MSB 2.685 2.675 2.710 2.655 3-year Treasury bond 2.878 2.834 2.924 2.895 3-year corporate bond (AA-) 3.307 3.261 3.346 3.322

Deposit changes at deposit money banks KRW tn

Oct Nov Dec Jan 1-7 Total deposits 5.9 2.7 -1.1 -3.2

Demand -2.6 2.6 6.8 -5.5 Time and savings 8.6 0.1 -7.9 2.3

Source: BoK, NSO, and J.P. Morgan forecasts

2.80

2.85

2.90

2.95

3.00

3.05

3.10

2 Dec 11 Dec 21 Dec 31 Dec 10 Jan

% p.a.

Three-year Korea Treasury bond yield

MPC decision

77

JPMorgan Chase Bank, N.A., Singapore Branch Benjamin Shatil (65) 6882-2311 [email protected]


ASEAN Continued weakness in Thai domestic activity: looking

for another rate cut in 1Q

Political storm intensifying with potential election delay

Inflation outlook remains contained, possibility of diesel price hike is a risk

Amid continued political rumblings and lingering softness in domestic activity, the bias in Thailand is shifting toward further monetary easing. On balance, recent data reports suggest that momentum weakened in 4Q13, with declines across private consumption and investment indicators, even as external demand is holding up better. The positive surprise in the data came from the tourism sector: November visitor arrivals appeared to shrug off the impact of political protests that month, approaching all-time highs for the peak season. But anecdotal evidence suggests that strength in arrivals has not persisted through December and into the new year. A fall in tourism-related spending now looks likely to translate into a material drag on the economy in 1Q14.

In all, the data continue to paint a picture of sluggish domestic activity amid a more constructive external environment. But with fiscal spending hamstrung by political uncertainty—and public infrastructure investment likely put on the back-burner—the growth outlook remains fragile. We see increased likelihood of another rate cut in 1Q, amid a contained inflation outlook and further slowing in private sector credit.

On the political front, the National Anti-Corruption Commission moved this past week to press charges against over 300 former MPs, citing their involvement in a draft law that was subsequently found to be unconstitutional. A guilty ruling could ultimately see these MPs impeached from parliament, leaving an insufficient number of MPs to form the next government, even if elections are held as planned.

Political storm brewing: likely hit to tourism Aside from ongoing political tensions, a striking feature of the economy in recent quarters has been the contrast between strong tourist spending and very weak consumption by Thai residents (first chart). Alongside falling consumer confidence, private spending is being restrained by pullback of fiscal stimulus, slowing credit, and higher household debt servicing—all factors that have been in play for some time. But on the flip side, robust consumption by tourists and other non-residents has boosted headline GDP by more than 2.5%-pts over the past four quarters. (By contrast, sluggish spending by residents shaved 0.1%-pt from growth over the same period).

Source: Bank of Thailand and J.P. Morgan




-4

-2

0

2

4

%-pt. contribution to headline GDP growth

Thailand: private consumption composition

06 07 08 09 10 11 12 13

Tourists and non-residents

Residents

0.0

0.4

0.8

1.2

1.6

06 07 08 09 10 11 12 13

Millions per month, sa

Thailand: visitor arrivals by nationality

Asia

EU and US

Other

2006 protests 2010 protests 2011 flooding

-10

-5

0

5

10

15

20

-50

0

50

100

%3m/3m, saarThailand: private domestic demand indicators

Private investment

Private consumption

2010 2011 2012 2013

40

45

50

55

60

-25

0

25

%oya

Thailand: private fixed capital formation and BoT sentiment indexIndex

06 07 08 09 10 11 12 13

Private fixed investment

Business sentiment (1-qtr lead)

78

Economic Research ASEAN January 10, 2014


The implication here is that a fall in tourist arrivals—particularly a decline in visitors from Asia, who make up about 60% of all arrivals—could see the positive growth impulse on GDP decline materially (second chart previous page). The increasingly likely tourism fallout risks exacerbating already sluggish momentum in domestic activity. The trend in November indicators continued to tread water: private consumption slumped 1.2%m/m sa on a fall in car sales, VAT receipts, and consumer goods imports, while the investment index fell 0.6%m/m sa. Private investment in particular looks poised for more softness—the Bank of Thailand’s business sentiment expectations survey continued to slide into year-end (third and fourth charts, previous page).

THB weakness on fragile CA outlook In spite of the soft domestic outlook, the external demand picture looks more constructive. November exports firmed further on solid tech exports, mirroring the trend in the manufacturing production report, and leaving the trade balance in surplus of US$1.5 billion. This provided for the widest current account surplus since December 2011. At this juncture, we expect the current account surplus to continue to recover through 1H14, but this will depend on sustained improvement in exports alongside subdued imports. There are a couple of risks to this outlook: a potential rise in gold import demand (which was partly responsible for the deterioration in the trade balance last year), and an increasingly likely fall in tourism receipts. Without the support of tourist-related inflows, last year’s current account deficit would have been significantly wider (first chart).

More broadly, the narrowing current account buffer will likely leave the baht hostage to potential further capital outflows. As the historically large current account surplus has narrowed, Thailand’s overall balance of payments has increasingly relied on capital account inflows. The baht tends to move closely in line with the BoP trajectory and in this context is likely to remain sensitive to capital movement (second chart).

Limited inflation pass-through so far Amid sluggish domestic demand, the inflation outlook remains contained. One risk is that diesel subsidies are not extended past January because of the political impasse, which could lead to a 30% increase in the price of fuel. This will depend on a decision by the Election Commission; our base-case scenario is that subsidies are extended as planned. Separately, hikes to LPG for cooking and transport (which began in 4Q13) are so far feeding through more moderately into the CPI. In previous rounds of cooking-gas price hikes, prepared food inflation has risen in step. With falling global food prices, the overall impact is expected to be modest—but will bear watching through 1H14 (third and fourth charts).



Source: Bank of Thailand, Bloomberg and J.P. Morgan


-15

-10

-5

0

5

10

USD bn, 2qma

Thailand: current account balance composition

06 07 08 09 10 11 12 13

ex. goldCA balance

ex. tourist receipts

29

30

31

32

33

340

10

20

30

40

50

Cumulative BoP, since Jan 2010

Thailand: balance of payments and spot FXTHB/USD, eop, inverted

2010 2011 2012 2013

Spot FX

BoP

0

4

8

12

16

-40

-20

0

20

40

60

80

06 07 08 09 10 11 12 13 14

%oya, both scales

UN world food price index and Thai food prices

Thai food CPI

Global food prices, 6-month lead

0.0

0.2

0.4

0.6

0.8

1.0

1.2

06 07 08 09 10 11 12 13 14

Prepared at home

Prepared away from home

%-pt. contribution to oya headline inflation

Thailand: prepared food inflation

79



ASEAN Indonesia:


No data releases.


BI monetary policy meeting (Jan 9) % p.a. Nov Dec Jan BI rate 7.50 7.50 7.50

Since the August 15 monetary policy meeting last year, the reaction function of the central bank had shifted squarely to containing the current account deficit. Thus, the trajectory of the external balance has been a key focus for monetary policy and the shift in the reaction function informed the J.P. Morgan forecast for the BI rate. In this context, the forecast for 2014 had assumed that the turn in the current account deficit would be relatively slow, reaching US$28.4 billion (3.4% of GDP) from an estimated US$31.2 billion (3.7% GDP) deficit in 2013. However, the recent improvement in the trade balance has been faster than expected and we have now revised the current account deficit forecast to US$25.6 billion (3.0% GDP). The implication here is that the need for rate hikes has diminished following the recent inflection in the external balances. We have revised the BI rate to 7.75% by 1H14 from 8.00% previously, with a hike penciled in for 2Q14.

Malaysia:


No data releases.


Merchandise trade (Jan 8) US$ bn nsa Sep Oct Nov Trade balance 2.7 2.6 2.5 3.0

Exports 19.5 21.1 19.5 %oya -0.4 5.5 2.6 2.1

Imports 16.8 18.5 17.0 16.4 %oya -3.7 9.7 5.2 1.8

The November surplus was the largest of the year, and it was about twice the size of the average monthly surplus in the first 10 months of the year. In seasonally adjusted terms, the surplus widened US$200 million to US$2.5 billion in November. The larger surplus reflected stronger export growth relative to imports. Exports rose 1.1%m/m sa and 28.7%3m/3m saar in USD terms while imports were up only 0.4%m/m sa and 14.0%3m/3m saar. As a result, exports rose 2.1%oya while imports rose 1.8%. Exports were driven by electronics in November, with electronics up 4.4%m/m sa, and up 41.8%3m/3m saar from 15.7% in October. In contrast, nonelectronics exports fell 0.6%m/m sa, though they still managed to edge up to 22.7%3m/3m saar from 20.1% the previous month. Import

details were pretty soft. Consumer and capital goods imports fell 0.7%m/m sa and 6.3%, while intermediate goods rose 0.8%. The trends were more mixed, with consumer goods imports rising 6.9%3m/3m saar from -17.8% the previous month and intermediate goods showing a more modest turnaround to 4.2% from -10.1%. Capital goods imports, however, contracted at a more intense pace of -18.8% from -14.7% in October.

Industrial production (Jan 9) % change Sep Oct Nov %oya 1.0 1.7 0.8 4.3

%m/m sa 1.5 0.4 0.6 3.1

Output was up across all sub-sectors, and was especially strong in mining, which was up 8.4%m/m sa, compensating for the softness seen in 3Q13. The more impressive development was the strength in the electronics sector, which rose 4.5%m/m sa and expanded 33.6%3m/3m saar. This marks the strongest expansion in tech output since 1H10. Anecdotally, the lift in electronics output has been driven by a recovery of traditional tech products—PCs, notebooks and servers—and appears to be mirroring a pickup in corporate demand. More broadly, manufacturing activity looks to have firmed in the final months of last year, and growth in 4Q13 looks to be tracking our expectation of a 5.5%q/q saar expansion.

Philippines: Data releases and forecasts Week of January 13 – 17

Wed OFW remittances Jan 15 % change

Aug Sep Oct Nov

%oya 6.8 5.3 7.0 5.9 %m/m sa 1.9 -0.9 2.4 3.5


Consumer prices (Jan 7) % change Oct Nov Dec %oya 2.9 3.3 4.0 4.1

%m/m sa 0.3 0.5 0.8 0.9

The main reasons for the spike in December were food and energy prices, primarily related to Typhoon Haiyan. Food and housing, water, electricity, gas, and other fuels (housing and utilities for short) rose 0.9%m/m sa and 1.5%, respectively. Moreover, since October, when inflation was 2.9%oya, these two categories each contributed 0.6%-pt to the 1.2%-pt rise in the CPI to 4.1%oya in December. In other words, supply-side pressures have been the driver behind the jump in CPI inflation due to typhoon effects (not only Haiyan but also typhoons in prior months), as well as to seasonal holiday price effects on food in December and the scheduled power tariff increase in November. The contribution to over-year-ago inflation from the “other” prices in the CPI has been constant at 1.4%-pts since May. CPI prices may rise at a slightly faster pace in January but core inflation has likely peaked, and CPI inflation is expected to do so soon too. CPI inflation rates, which BSP targets at 4%+/-1%, will likely remain near the middle of the target

Source: Central Bureau of Statistics, Indonesia; Department of Statistics, Malaysia; National Statistical Coordination Board; National Statistics Office, Philippines; J.P. Morgan forecasts

80

Economic Research ASEAN January 10, 2014


range in coming quarters before moderating slightly toward the end of the year. At the same time, changes to investment trust investment rules in BSP’s Special Deposit Accounts (SDAs) have led to a spike in reserve money and M4. But, this spike is expected be temporary and is not expected to lead to a material pickup in loan growth. As a result, we do not foresee any near-term policy rate hikes in response to the supply-side driven inflation or policy-driven M4 spikes, a view that was reinforced by Governor Tetangco’s comments this week that the monetary policy stance is appropriate.

Merchandise trade (Jan 10) US$ bn nsa Sep Oct Nov Exports 5.0 5.0 4.0 4.3

%oya 4.9 14.0 10.9 18.9

Exports rose 3.3%m/m, sa in November, leaving headline export growth better than expected at 18.9%oya. The underlying sequential trend rate surged to 39.9%3m/3m saar from 13.5% in October. In the details, electronics took a breather after several months of strong gains. Thus, even though electronics exports fell 2.2%m/m, sa, the trend still surged 57.8%3m/3m, saar. Non electronics performed well also, up 7.1%m/m, sa and 28.7%3m/3m, saar. Some agro products, petroleum products, and woodcrafts and furniture products led the bounce. In line with many other economies in the region, exports to DM were strong in November, up 4.4%m/m, sa to the US and up 6.6% to Japan. In contrast, exports to China and Hong Kong were down 0.3%. In recent months, exports to the US have been particularly strong, with the trend rate up 119.7%3m/3m, saar in November from an already robust 71.0% in October. Trend exports to China and Hong Kong were also impressive, up 58.2% but were down to Japan by 8.8% after running very hot for about half a year.

Singapore:


Wed Retail sales volumes Jan 15 % change 1:00pm Aug Sep Oct Nov %oya -6.5 -3.3 -7.5 -6.6 %m/m sa 4.0 1.6 -3.5 0.2

Fri Merchandise trade Jan 17 US$ bn, nsa 8:30am Sep Oct Nov Dec Trade balance 3.6 5.4 2.9 3.9

Exports 36.0 39.4 33.8 34.0 Non-oil domestic (NODX) 11.3 12.5 10.4 10.6

%m/m sa, US$ terms 4.4 2.3 -4.4 3.2 %oya, US$ terms -3.7 1.2 -10.6 -2.0


Purchasing managers index (Dec 3) Index Oct Nov Dec PMI 51.2 50.8 51.0 49.7

PMI—electronics 51.0 51.2 51.5 50.1

The internals of the report looked soft, though at least the forward-looking orders and export orders components remained slightly in expansionary territory. The details of the electronics index were not as soft as the overall index and the forward-looking indicators fell more modestly than the headline electronics print and remain at higher levels. Moreover, the inventory component fell 2.1pts, which, if orders pick up in coming months, would be constructive for the export outlook. The Advance GDP Estimate for 4Q already showed that Singapore’s manufacturing sector and economy contracted in 4Q. Thus, to the extent that the PMI matters for the current quarter of reporting this report is not surprising. But the PMI should provide some information about coming months, and to this extent, the December PMI is a disappointment and does not bode well for Singapore IP and export growth in 1Q. Nevertheless, Singapore’s PMI has not always been a very good indicator of future IP or growth trends and Korea’s and Taiwan’s latest PMI readings were more upbeat. Thus, for the time being, we are fading the more cautious tone from Singapore’s December PMI and we still expect the manufacturing sector and Singapore’s economy to bounce back this quarter.

Thailand: Data releases and forecasts Week of January 13 – 17

No data releases.


No data released.

Vietnam:


No data releases.


No data released.

Source: National Statistics Office, Philippines; Singapore Economic Development Board; Bank of Thailand; Office of Industrial Economics, Thailand; General Statistics Office, Vietnam; J.P. Morgan forecasts

81

J.P. Morgan India Private Limited Sajjid Z Chinoy (91-22) 6157-3386 [email protected] Toshi Jain [email protected]


India December trade deficit remains contained but the

quality of the compression is worrisome

Nov IP surprised sharply to the downside as consumption plunges

Core CPI to determine rate action in Jan review

India’s December trade deficit (US$10.1 billion) surprised positively, while November IP (-2.1%oya, +0.1%m/m sa) surprised sharply to the downside. But the overarching message from both prints was the same: that growth impulses in India remain very weak—as manifested in exports sequentially contracting for a second successive month, non-oil, non-gold imports continuing to stagnate, and bad consumption-goods numbers in the November IP that caused the headline print to seriously underperform expectations. Markets have been hanging onto the hope that the turnaround in growth is imminent and this is just the latest disappointment. We have long been projecting a deceleration in growth momentum in 4Q13 (to 5.3%q/q saar from 6% in 3Q). But even our forecast for GDP moderation was predicated on a modest revival in IP at the end of the year, as suggested by a pickup in the manufacturing PMIs. This latest IP disappointment now creates a meaningful downside risk to our 4Q13 GDP forecast.

Continued disappointment in the growth data is also likely to influence upcoming monetary policy decisions. The downside surprises in activity data suggest that core inflation pressures could moderate in December. Already, a plunge in vegetable prices is likely to cause a substantial slowdown in headline CPI and WPI inflation (J.P. Morgan forecast: 9.7% oya and 6.7% oya, respectively). If weak growth momentum causes core inflation to abate, there is a growing chance that the RBI could stay on hold in January—especially in light of disappointing activity data. But the decision is likely to be data dependent and much will depend on how core CPI evolves.

Trade deficit remains contained but the quality of the compression is troubling That India’s current account deficit is under control was reaffirmed by the fact that the December trade deficit remained contained at US$10.1 billion. While this was a modest widening from the November print of US$9.2 billion, some normalization was expected and, in fact, the deficit printed slightly below our expectations (J.P. Morgan: US$11 billion).

But, as in November, the quality of the compression leaves much to be desired. Seasonally adjusted exports declined sequentially for a second successive month, underscoring our

concerns (from the choppiness of PMI new export orders) that the surging export momentum from last fall was unlikely to be sustained. Media reports indicated that one of India’s large oil refineries was shut for parts of December and that may have interrupted oil exports. So we will have to wait for another month’s data before drawing more definitive conclusions. But, more fundamentally, any weakness in exports could be attributed to slowing Chinese and Asian growth in 4Q—to which an increasing fraction of India’s exports are directed.

Like in November, the weakness in exports was offset by continued weakness in non-oil, non-gold imports, which were

Source: Ministry of Commerce.

Source: CSO.

Source: CSO.

-40

-20

0

20

40

60

80

Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13

%3m/3m

India: exports

-15

-10

-5

0

5

10

15

20

Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13

%q/q, saarIndia: industrial production

IP ex capital goodsIP

-20

-10

0

10

20

30

40

-35

-25

-15

-5

5

15

25

35

Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13

%q/q, saar

India: durables and non-durables consumption

Non-durablesDurables

82

Economic Research India January 10, 2014

J.P. Morgan India Private Limited Sajjid Z Chinoy (91-22) 6157-3386 [email protected] Toshi Jain [email protected]

essentially flat (-0.1%m/m sa). On a three-month-moving average, non-oil, non-gold imports are contracting 7%, indicating domestic growth weakness.

Expected IP bang turns into a whimper There is an alternative explanation to weak imports. The 10% real depreciation of the currency may be inducing substitution as “more expensive” imports are replaced by their domestic substitutes. But for that to happen one must expect that falling imports should, with a lag, be accompanied by rising domestic production.

And there is no evidence of the latter. November IP is a case in point. A strong November PMI had suggested that, after three months of sequential declines, IP would rebound sharply in November (J.P. Morgan: +1.5%m/m sa; consensus: 2.3%m/m sa)—though our estimates were meaningfully below consensus. Yet, November IP disappointed, growing just 0.1%m/m sa (-2.1%oya).

Consumption has a devastating November Normally, large surprises in IP can be attributed to gyrations of the volatile capital goods sector. But, capital goods were not to blame. In fact, capital goods actually rose by 0.7%m/m sa as did basic goods (1%m/m sa) while intermediate goods were essentially flat (-0.1%m/m sa).

Instead, the weakness was concentrated in the consumption sector. Durables production plunged 13.3% (m/m sa) on a sequential basis and 20% on a 3m/3m saar basis. The dismal performance of consumer durables—given its interest rate sensitivity—is likely to have a bearing on monetary policy.

But, perhaps the bigger surprise was consumer non-durables. The hope was that surging rural demand following the strong monsoon/harvest would translate into buoyant consumer non-durables growth. Instead, production contracted for a second successive month (-1.4%m/m sa preceded by -3.7%m/m sa), and this disappointment is likely to be reflected in corporate performance of firms exposed to the rural economy. This growth likely didn’t materialize due to stubbornly high urban and rural inflation that squeezed purchasing power and impinged on household budgets. In the rural economy, this is reflected in the normalization of real wages. Furthermore, fiscal consolidation over the last two years has likely meant that the fiscal stimulus into the rural economy has waned. From that perspective, there’s more sobering news because the government is likely to engage in sharp expenditure compression this quarter as it races against time to meet its fiscal deficit target. Given the resulting drag on growth, there may not be too much light at the end of the dismal IP tunnel.

Data releases and forecasts

Week of January 13 –17

Mon Consumer prices Jan 13 % oya 5:30pm Sep Oct Nov Dec

Overall 9.8 8.2 11.2 ___ Core 8.5 10.2 7.9 ___

Wed Wholesale prices Jan 15 % oya 12:00pm Sep Oct Nov Dec

Overall 7.0 7.0 7.5 ___ Primary 14.0 14.7 15.9 ___ Energy group 11.7 10.3 11.1 ___ Manu. products 2.4 2.5 2.6 ___


Merchandise trade (Jan 10) US$ bn, nsa Oct Nov Dec

Trade balance -10.6 -9.2 ___ -10.1 Exports 27.3 24.6 ___ 26.4

%oya 13.5 5.9 ___ 3.2 Imports 37.8 33.8 ___ 36.5

%oya -15.3 -18.1 ___ -15.9 Oil 15.0 13.0 ___ 13.9 Non-oil 22.8 20.9 ___ 20.8

Industrial production (Jan 10) % oya Sep Oct Nov

Overall 2.0 -1.8 -1.6 ___ 2.1 %m/m sa -0.4 -0.1 -0.9 -1.4 ___ 0.1

Manufacturing 0.6 -2.0 -1.8 ___ -3.5 Mining 3.3 -3.5 -3.2 ___ 1.0 Electricity 12.9 1.3 ___ 6.3

Source: Central Statistical Organization, Government of India; Ministry of Commerce, Government of India; Markit; Reserve Bank of India, J.P. Morgan forecasts.

83

JPMorgan Chase Bank, N.A., Singapore Branch Matt L Hildebrandt (65) 6882-2253 [email protected]


Asia focus: electronics leading regional production upturn EM Asian IP growth firmed into year-end. In November, momentum was strongest in China (up 12.6%3m/3m saar) and ASEAN (up 12.8%3m/3m saar), while production was softer in Korea and Taiwan. Electronics production has driven the overall trend in the region and was up 25.4% in November, with activity in ASEAN posting the strongest gains (tables).

Korea and Taiwan tend to lead the Asian IP cycle, especially in electronics, so their underperformance relative to ASEAN is surprising. A few factors may explain this unusual pattern. First, Korea and Taiwan are focused on tablets and consumer electronics while ASEAN is more concentrated on PCs and parts. Perhaps corporate spending has driven the recent electronics upturn, which would favor ASEAN over Korea and Taiwan. Second, on-and-off strikes in Korea’s auto sector in 2H13 depressed November IP and have added volatility to manufacturing sector output in recent months. Last, in Taiwan, the inventory-to-shipments ratio has fallen since mid-2013, which has likely damped IP. But, export orders, a leading indicator for regional IP growth, have been strong, so December IP growth may improve.

EM Asia: industrial production

%3m/3m, saar, eop 4Q12 1Q13 2Q13 3Q13 Oct Nov EM Asia 11.8 5.2 7.1 10.9 11.7 11.4 Ex China 9.3 -2.2 0.2 3.4 5.2 6.2

China 12.4 6.9 8.7 12.5 13.2 12.6 Korea + Taiwan 7.0 -2.5 -5.2 4.7 4.1 3.2

Korea 11.9 -3.8 -5.4 1.9 3.1 -0.1 Taiwan 1.8 -1.2 -5.0 7.9 5.3 6.9

ASEAN 9.6 -1.0 8.6 3.1 7.1 12.8 Malaysia 11.8 -7.8 13.2 -1.0 -3.8 5.0 Philippines 8.3 21.5 6.1 32.7 48.1 na Singapore 8.5 -9.2 32.2 -6.2 -0.3 8.1 Thailand 9.0 -3.6 -12.6 -6.9 -6.6 -7.6

Source: National statistical agencies; J.P. Morgan. Note: November regional figures include Philippine forecast

EM Asia: electronics production

%3m/3m, saar, eop 4Q12 1Q13 2Q13 3Q13 Oct Nov Ex China 25.0 -7.1 -6.7 8.4 18.3 25.4 Korea + Taiwan 30.1 -10.0 -10.1 16.4 15.9 14.8

Korea 60.3 -17.7 -12.9 20.5 20.2 16.9 Taiwan 6.7 -1.6 -7.3 12.6 12.0 12.8

ASEAN -4.0 7.8 3.4 -9.2 19.6 48.3 Malaysia 1.8 4.7 2.7 7.9 13.7 33.6 Philippines -32.5 29.1 13.5 -32.5 20.8 na Singapore -19.8 16.4 51.1 -4.6 10.1 27.4 Thailand 64.2 -15.9 -35.1 8.6 34.9 42.1

Source: National statistical agencies; J.P. Morgan Note: November regional figure includes Philippine forecast

Source: J.P. Morgan.


-20

-10

0

10

20

30

2010 2011 2012 2013 2014

%3m/3m, saar

EM Asia: industrial production

EM Asia

Ex China

-50

-25

0

25

50

2010 2011 2012 2013 2014

%3m/3m, saar

EM Asia ex China: electronics production

Korea + Taiwan

ASEANEM Asia



-20

0

20

40

-100

-50

0

50

100

01 03 05 07 09 11 13

%3m/3m, saar, both scales

EM Asia and Taiwan: IP and export orders

EM Asia IPTaiwan export orders

100

110

120

130

2011 2012 2013 2014

Index, Jan11=100

Korea and Taiwan: inventory to shipments

Taiwan

Korea

84

JPMorgan Chase Bank NA

Daniel Silver (1-212) 622-6039 [email protected]

Economic Research

Global Data Watch January 10, 2014

US economic calendar Monday Tuesday Wednesday Thursday Friday

13 Jan Federal budget (2:00pm) Dec Atlanta Fed President Lockhart speaks in Atlanta (12:40pm)

14 Jan NFIB survey (7:30am) Dec Retail sales (8:30am) Dec 0.0% Ex auto 0.4% Import prices (8:30am) Dec 0.4% Business inventories (10:00am) Nov 0.5% Philadelphia Fed President Plosser speaks in Philadelphia (12:45pm) Dallas Fed President Fisher speaks in Dallas (1:20pm)

15 Jan PPI (8:30am) Dec 0.2% Core 0.1% Empire State survey (8:30am) Jan 3.5 Beige book (2:00pm) Chicago Fed President Evans speaks in Iowa (12:50pm) Atlanta Fed President Lockhart speaks in Atlanta (5:45pm)

16 Jan Initial claims (8:30am) w/e Jan 11 310,000 CPI (8:30am) Dec 0.3% Core 0.14% TIC data (9:00am) Nov Philadelphia Fed survey (10:00am) Jan 5.0 NAHB survey (10:00am) Jan 57 Announce 10 year TIPS $15 bn

SF Fed President Williams presents paper on central banking (9:15am) Fed Chairman Bernanke speaks on central banking (11:10am)

17 Jan Housing starts (8:30am) Dec 985,000 Permits 1,035,000 Industrial production (9:15am) Dec 0.3% Manufacturing 0.4% Consumer sentiment (9:55am) Jan prelim 85.0 JOLTS (10:00am) Nov Richmond Fed President Lacker speaks in Richmond (12:30pm)

20 Jan Martin Luther King, Jr., Day, markets closed

21 Jan

22 Jan

23 Jan Initial claims (8:30am) w/e Jan 18 Manufacturing PMI (8:58am) Jan flash FHFA HPI (9:00am) Nov Existing home sales (10:00am) Dec Leading indicators (10:00am) Dec KC Fed survey (11:00am) Jan

Auction 10 year TIPS $15 bn Announce 2 year note $32 bn Announce 2 year FRN $10 bn Announce 5 year note $35 bn Announce 7 year note $29 bn

24 Jan

27 Jan Services PMI (8:58am) Jan flash New home sales (10:00am) Dec Dallas Fed survey (10:30am) Jan

28 Jan Durable goods (8:30am) Dec S&P/Case-Shiller HPI (9:00am) Nov Consumer confidence (10:00am) Jan Richmond Fed survey (10:00am) Jan

Auction 2 year note $32 bn

FOMC meeting

29 Jan Auction 2 year FRN $10 bn FOMC statement (2:00pm)

30 Jan Initial claims (8:30am) w/e Jan 25 Real GDP (8:30am) 4Q advance Pending home sales (10:00am) Dec Auction 5 year note $35 bn Auction 7 year note $29 bn

31 Jan Personal income (8:30am) Dec Employment cost index (8:30am) 4Q Chicago PMI (9:45am) Jan Consumer sentiment (9:55am) Jan final Housing vacancies (10:00am) 4Q

3 Feb Manufacturing PMI (8:58am) Jan final ISM manufacturing (10:00am) Jan Construction spending (10:00am) Dec Senior loan officer survey (10:00am) 1Q Light vehicle sales Jan

4 Feb Factory orders (10:00am) Dec

5 Feb ADP employment (8:15am) Jan Services PMI (8:58am) Jan final ISM nonmanufacturing (10:00am) Jan Announce 3 year note $30 bn Announce 10 year note $24 bn Announce 30 year bond $16 bn

Philadelphia Fed President Plosser speaks in New York (12:30pm)

6 Feb Initial claims (8:30am) w/e Feb 1 International trade (8:30am) Dec Productivity and costs (8:30am) 4Q prelim Chain store sales Jan Boston Fed President Rosengren speaks in Florida (5:30pm)

7 Feb Employment (8:30am) Jan Consumer credit (3:00pm) Dec

Times shown are local.

85

JPMorgan Chase Bank N.A, London Branch

Greg Fuzesi (44-20) 7134-8310 [email protected]

Economic Research


Euro area economic calendar Monday Tuesday Wednesday Thursday Friday

13 Jan Italy: Industrial production (10:00am) Nov 0.4%m/m sa

14 Jan Euro area: Industrial production (11:00am) Nov 1.3%m/m sa France: CPI final (8:45am) Dec 0.8%oya

15 Jan Euro area: Foreign trade (11:00am) Nov Germany: Annual GDP (8:00am) 0.4%q/q Italy: CPI final (10:00am) Dec 0.7%oya Spain: HICP final (9:00am) Dec 0.3%oya ECB’s Mersch speaks in Saarbrücken

16 Jan Euro area: New car regs (8:00am) Dec HICP final (11:00am) Dec 0.8%oya ECB Monthly Bulletin (10:00am) Germany: CPI final (8:00am) Dec 1.4%oya Italy: Foreign trade (10:00am) Nov

17 Jan France: Monthly budget situation (8:45am) Nov

20 Jan Germany: PPI (8:00am) Dec Belgium: BNB cons. conf. (3:00pm) Jan

21 Jan Germany: ZEW bus. survey (11:00am) Jan Netherlands: CBS cons. conf. (9:30am) Jan

22 Jan

23 Jan Euro area: Balance of payments (10:00am) Nov PMI Mfg, services, composite flash (10:00am) Jan Germany: PMI Mfg, services, composite flash (9:30am) Jan France: INSEE bus. conf. (8:45am) Jan PMI Mfg, services, composite prelim (9:00am) Jan Belgium: BNB bus. conf. (3:00pm) Jan

24 Jan

27 Jan Germany: Import prices (8:00am) Dec IFO bus. survey (10:00am) Jan Netherlands: CBS bus. conf. (9:30am) Jan

28 Jan Euro area: Sector accounts (10:00am) 3Q France: INSEE cons. conf. (8:45am) Jan Italy: ISAE cons. conf. (10:00am) Jan

29 Jan Euro area: M3 (10:00am) Dec Italy: ISAE bus. conf. (10:00am) Jan Belgium: GDP prelim (3:00pm) 4Q

30 Jan Euro area: ECB bank lending survey (10:00am) 4Q EC bus. conf. (11:00am) Jan EC cons. conf. (11:00am) Jan Germany: Employment (9:55am) Dec Unemployment (9:55am) Jan CPI 6 states and prelim (2:00pm) Jan Spain: GDP prelim (9:00am) 4Q Belgium: CPI (8:00am) Jan

31 Jan Euro area: HICP flash (11:00am) Jan Unemployment rate (11:00am) Dec France: Cons. of mfg goods (8:45am) Dec PPI (8:45am) Dec Italy: PPI (11:00am) Dec Spain: CPI final (9:00am) Jan

3 Feb Euro area: PMI Mfg (10:00am) Jan Germany: PMI Mfg (9:55am) Jan France: PMI Mfg (9:50am) Jan Italy: PMI Mfg (9:45am) Jan

4 Feb Euro area: PPI (11:00am) Dec Italy: CPI prelim (11:00am) Jan

5 Feb Euro area: PMI services & composite (10:00am) Jan Retail sales (11:00am) Dec Germany: PMI services & composite (9:55am) Jan France: PMI services & composite (9:50am) Jan Italy: PMI services & composite (9:45am) Jan

6 Feb Euro area: ECB rate announcement (1:45pm) Feb No change expected Germany: Mfg orders (12:00pm) Dec

7 Feb Germany: Foreign trade (8:00am) Dec Industrial production (12:00pm) Dec France: Foreign trade (8:45am) Dec Monthly budget situation (8:45am) Dec

Highlighted data are scheduled for release on or after the date shown. Times shown are local.

86

JP Morgan Securities Japan Co., Ltd Economic Research Miwako Nakamura (81-3) 6736-1167 Global Data Watch [email protected] January 10, 2013

Japan economic calendar Monday Tuesday Wednesday Thursday Friday

13 Jan Holiday: Japan

14 Jan Bank lending (8:50am) Dec 2.5%oya Current account (8:50am) Nov -380 billion yen, nsa Economy Watchers survey (2:00pm) Dec 54.0, DI

15 Jan M2 (8:50am) Dec 4.1%oya Auction 1-month bill Auction 30-year bond

16 Jan Corporate goods prices (8:50am) Dec 2.7%oya Private machinery orders (8:50am) Nov 3.0%m/m sa Tertiary sector activity index (8:50am) Nov 0.5%m/m sa BoJ governor Kuroda’s address at branch managers’ meeting (9:00pm) Auction 3-month bill

17 Jan Construction spending (2:00pm) Nov Consumer sentiment (2:00pm) Dec 43.5, DI

During the week: CAO private consumption index Nov 1.0%m/m sa

20 Jan IP final (1:30pm) Nov

21 Jan BoJ Monetary Policy Meeting Auction 2-year note Auction 5-year note

22 Jan BoJ Monetary Policy Meeting and statement BoJ governor Kuroda’s press conference (3:30pm)

23 Jan Reuters Tankan (8:30am) Jan BoJ bank loan officers survey (8:50am) 4Q BoJ monthly economic report (2:00pm) Auction 3-month bill Auction 20-year bond

24 Jan

During the week: Department store sales Dec

27 Jan Trade balance (8:50am) Dec Minutes of Dec 19-20 BoJ Monetary Policy Meeting (8:50am)

28 Jan Corporate service prices (8:50am) Dec Shoko Chukin small firm seniment (2:00pm) Dec

29 Jan

30 Jan Total retail sales (8:50am) Dec Auction 3-month bill Auction 2-year note

31 Jan PMI manufacturing (8:15am) Jan All household spending (8:30am) Dec Unemployment rate (8:30am) Dec Job offers to applicants ratio (8:30am) Dec Nationwide CPI (8:30am) Dec IP preliminary (8:50am) Dec Housing starts (2:00pm) Dec

3 Feb

4 Feb Auction 10-year bond

5 Feb PMI services/composite (8:15am) Jan Nominal wages (10:30am) Dec Auction 6-month bill

6 Feb BoJ deputy-governor Iwata’s address in Miyazaki (11:10am) Auction 3-month bill Auction 30-year bond

7 Feb


87

JPMorgan Chase Bank NA

Silvana Dimino (1-212) 834-5684 [email protected]

Economic Research


Canada economic calendar Monday Tuesday Wednesday Thursday Friday

13 Jan BoC Business Outlook Survey (10:30am) 4Q BoC Senior Loan Officer Survey (10:30am) 4Q

14 Jan Teranet/National Bank HP Index (9:00am) Dec

15 Jan Existing home sales (9:00am) Dec

16 Jan New vehicle sales (8:30am) Nov

17 Jan Nonresidential construction (8:30am) 4Q

20 Jan

21 Jan Manufacturing sales (8:30am) Nov Wholesale sales (8:30am) Nov

22 Jan Bank of Canada rate announcement/Monetary Policy Report (10:00am)

23 Jan Retail sales (8:30am) Nov

24 Jan CPI (8:30am) Dec

27 Jan

28 Jan

29 Jan

30 Jan CFIB Business Barometer Index (6:00am) Jan Payroll employment (8:30am) Nov

31 Jan Monthly GDP (8:30am) Nov

3 Feb IPPI (8:30am) Dec RBC manufacturing PMI (9:30am) Jan

4 Feb

5 Feb Building permits (8:30am) Dec

6 Feb International trade (8:30am) Dec Ivey PMI (10:00am) Jan

7 Feb Labor Force Survey (8:30am) Jan

All existing home sales are tentative. Times shown are local.

88


Latin America economic calendar Monday Tuesday Wednesday Thursday Friday

13 Jan Colombia: BanRep minutes

14 Jan Mexico: Central bank reserves (prior week)

15 Jan Argentina: Construction activity Dec CPI Dec Brazil: IGP-10 Jan 0.59% m/m COPOM meeting +25 bp Job creation Dec Colombia: Trade balance Nov Peru: Economic Activity Index Nov 5.0%oya nsa Unemployment rate Dec

16 Jan Brazil: Retail sales Nov 7.0%oya nsa Chile: BCCh meeting 4.5% Colombia: Trace balance Nov 0.7 bn

17 Jan Argentina: Economic activity Nov Brazil: IGP-M 2nd release Jan Economic activity index Nov 1.5% oya nsa Colombia: Retail sales Nov Industrial production Nov Mexico: Unemployment rate Dec 4.4%

During the week: Colombia: Consumer confidence Dec

20 Jan Brazil: Fipe CPI Nov 22


22 Jan

23 Jan Brazil: COPOM meeting minutes IPCA-15 Jan Mexico: CPI Jan 1H

24 Jan Argentina: Industrial production Dec Brazil: Consumer confidence Jan Current account balance Dec FDI Dec Mexico: Retail sales Nov

During the week: Brazil: Tax collection Dec Colombia: Outstanding loans Nov BanRep meeting Vehicle sales Dec

27 Jan Mexico: Economic activity IGAE Nov Trade balance Dec


29 Jan Brazil: Outstanding loans Dec BCB credit report Dec

30 Jan Brazil: Unemployment rate Dec IGP-M Jan PPI Dec PMI manufacturing Dec Central government budget balance Dec Chile: Manufacturing index Dec Retail sales Dec Mexico: PS budget balance Dec

31 Jan Brazil: Primary budget balance Dec Net debt as % of GDP Dec Chile: Unemployment rate Dec BCCh minutes Colombia: Unemployment rate Dec Mexico: Banxico meeting Banking credit Dec

During the week: Colombia: Industrial confidence Dec Retail confidence Dec Peru: CPI Jan WPI Jan

3 Feb Brazil: PMI manufacturing Jan Trade balance Jan Mexico: IMEF Manufacturing PMI Jan IMEF Non-manufacturing PMI Jan

4 Feb Brazil: FIPE CPI Jan Industrial production Dec Colombia: PPI Jan Mexico: Remittances Dec

5 Feb Argentina: Auto report Jan Brazil: PMI services Jan Chile: Economic activity Dec Colombia: CPI Jan Mexico: Central bank reserves (prior week) Consumer confidence Jan Uruguay: CPI Jan

6 Feb Mexico: Banxico economic survey

7 Feb Brazil: IPCA Jan IGP-DI Jan Chile: CPI Jan Trade balance Jan Mexico: CPI Jan

During the week: Argentina: Tax collection Jan Brazil: Vehicle sales Jan Chile: Auto report Jan Colombia: Industrial confidence Dec Retail confidence Dec Budget balance Dec Peru: CPI Jan WPI Jan

Banco J.P.Morgan, S.A., Institución de Banca Múltiple, J.P.Morgan Grupo Financiero

Steven Palacio (52 55) 5283-1651 [email protected]

89

JPMorgan Chase Bank N.A, London Branch

Malcolm Barr (44-20) 7134-8326 Allan Monks (44-20) 7134-8309

Economic Research


UK and Scandinavia economic calendar Monday Tuesday Wednesday Thursday Friday

13 Jan Sweden: House prices (9:30am) Dec

14 Jan United Kingdom: CPI (9:30am) Dec ONS HPI (9:30am) Nov PPI (9:30am) Dec Sweden: CPI (9:30am) Dec PES unemployment rate (8:00am) Dec

15 Jan Norway: Trade balance (10:00am) Dec

16 Jan United Kingdom: RICS HPI (12:01am) Dec

17 Jan United Kingdom: Retail sales (9:30am) Dec BoE’s Broadbent speaks in London

20 Jan United Kingdom: Rightmove HPI (12:01am) Jan Norway: House prices (10:00) 4Q13

21 Jan United Kingdom: CBI industrial trends (11:00am) Jan

22 Jan United Kingdom: Labor market report (9:30am) Dec Public sector finances (9:30am) Dec MPC minutes (9:30am) Jan

23 Jan United Kingdom: CBI distributive trades (11:00am) Jan Sweden: Labor force survey (9:30am) Dec Household lending (8:00am) Dec

24 Jan United Kingdom: BBA mortgage lending (9:30am) Dec

27 Jan

28 Jan United Kingdom: Index of services (9:30am) Nov Real GDP 1st estimate (9:30am) 4Q Sweden: PPI (9:30am) Dec Trade balance (9:30am) Dec Retail sales (9:30am) Dec Norway: Business tendency survey (10:00am) 4Q13

29 Jan Norway: AKU unemployment (10:00) Nov

30 Jan United Kingdom: M4 & M4 lending final (9:30am) Dec Net lending to individuals (9:30am) Dec Sweden: Consumer confidence (9:00am) Jan Economic tendency survey (9:00am) Jan Wage stats (9:30) Nov

31 Jan United Kingdom: Gfk cons. conf. (12:05am) Jan Norway: Credit indicator growth (10:00am) Dec Retail sales (10:00am) Dec Labor directorate unemployment (11:00) Jan

During the week: Nationwide HPI Jan (27-31 Jan)

3 Feb United Kingdom: PMI Mfg (9:30am) Jan Sweden: PMI Mfg (8:30am) Jan House prices (8:30am) Jan Norway: PMI Mfg (9:00am) Jan

4 Feb United Kingdom: PMI Construction (9:30am) Jan Sweden: Services production (8:00am) Dec

5 Feb United Kingdom: PMI Services (9:30am) Jan Sweden: PMI Services (8:30am) Jan

6 Feb United Kingdom: New car regs (9:00am) Jan MPC rate announcement and asset purchase target (12:00pm) Feb No change expected

7 Feb United Kingdom: Industrial production (9:30am) Dec Trade balance (9:30am) Dec Markit jobs report (12:01am) Jan Sweden: Industrial production & orders Dec Budget balance (9:30am) Jan Norway: IP Mfg (10:00am) Dec

During the week: Untied Kingdom: Halifax HPI Feb (3-7 Feb)


90

J.P. Morgan Securities plc

José Cerveira (44-20) 7742-3556 [email protected]

Economic Research


Emerging Europe/Middle East/Africa economic calendar Monday Tuesday Wednesday Thursday Friday

13 Jan Romania: CPI (10:00am) Dec 1.4%oya; 0.2%m/m Industrial output (10:00am) Nov 0.7%m/m sa; 9.5%oya nsa

14 Jan Turkey: Current account (10:00am) Nov -US$4.1bn

15 Jan Czech Republic: PPI (9:00am) Dec Hungary: CPI (9:00am) Dec 0.3%oya Poland: CPI (2:00pm) Dec 0.7%oya Budget balance (3:00pm) Dec Turkey: Unemployment (10:00am) Oct South Africa: Kagiso PMI (11:00am) Dec Retail sales (1:00pm) Nov Israel: CPI (6:30pm) Dec

16 Jan Poland: Core inflation (2:00pm) Dec Israel: GDP final (1:00pm) 3Q 2.0% saar

17 Jan Czech Republic: Current account (10:00am) Nov CZK6.4bn Poland: Current account (2:00pm) Nov -€1055mn Romania: Current account Nov -EUR1.0bn ytd Russia: Foreign trade Nov

20 Jan Poland: Average gross wages and Employment (2:00pm) Dec

21 Jan Hungary: NBH rate decision (2:00pm) Poland: Industrial output (2:00pm) Dec PPI (2:00pm) Dec Turkey: CBRT rate decision (2:00pm)

22 Jan South Africa: CPI (10:00am) Dec

23 Jan

24 Jan

During the week: Russia: Retail sales, Unemployment & Investment Dec (21-24 Jan), Industrial output Dec (23-24 Jan) Poland: Retail sales Dec (24-27 Jan), Unemployment Dec (24-27 Jan)

27 Jan Turkey: Capacity utilization (2:30pm) Jan Israel: BoI rate decision (5:30pm)

28 Jan

29 Jan Hungary: Unemployment (9:00am) Nov South Africa: SARB rate decision

30 Jan South Africa: Private sector credit (8:00am) Dec Budget (2:00pm) Dec

31 Jan Hungary: PPI (9:00am) Nov Poland: NBP inflation expectations (2:00pm) Jan Turkey: Foreign trade (10:00am) Dec South Africa: Trade balance (2:00pm) Dec

During the week: Russia: PPI Dec (27-28 Jan)

3 Feb Czech Republic: PMI (9:30am) Jan Hungary: PMI (9:00am) Jan Poland: PMI (9:00am) Jan Russia: Manufacturing PMI (11:00am) Jan Turkey: CPI (10:00am) Jan PMI (10:00am) Jan PPI (10:00am) Jan South Africa: Vehicle sales Jan Kagiso PMI (11:00am) Jan

4 Feb Romania: NBR rate decision

5 Feb Czech Republic: Retail sales (9:00am) Dec Hungary: Retail sales (9:00am) Dec NBH minutes (2:00pm) Poland: NBP rate decision

6 Feb Czech Republic: Industrial output (9:00am) Dec Trade balance (9:00am) Dec CNB rate decision (1:00pm) Hungary: Industrial output (9:00am) Dec

7 Feb Hungary: Trade balance (9:00am) Dec South Africa: Gross reserves (8:00am) Jan

During the week: Russia: CPI Jan (4-5 Feb) Romania: Retail sales Dec (4-5 Feb)


91

JPMorgan Chase Bank, N.A., Singapore Branch

Benjamin Shatil (65) 6882-2311 [email protected]

Economic Research


Non-Japan Asia economic calendar Monday Tuesday Wednesday Thursday Friday

13 Jan Australia: Housing finance (11:30am) Nov 2.0%m/m India: CPI (5:30pm) Dec

14 Jan New Zealand: NZIER business survey (10:00am) 4Q Korea: Export price index (6:00am) Dec -0.7%oya Import price index (6:00am) Dec -3.0%oya Holiday: Indonesia, Malaysia

15 Jan Australia: New motor vehicle sales (11:30am) Dec India: WPI (12:00pm) Dec Korea: Unemployment rate (8:00am) Dec 3.0%, sa Philippines: OFW remittances Nov 5.9%oya Singapore: Retail sales (1:00pm) Nov -6.6%oya

16 Jan Australia: Unemployment rate (11:30am) Dec 5.8%

17 Jan Singapore: NODX (8:30am) Dec -2.0%oya Holiday: Malaysia

20 Jan China: FAI (10:00am) Dec GDP (10:00am) 4Q IP (10:00am) Dec Retail sales (10:00am) Dec Hong Kong: Unemployment rate (4:30pm) Dec Korea: PPI (6:00am) Dec Taiwan: Export orders (4:00pm) Dec Holiday: New Zealand

21 Jan Hong Kong: CPI (4:30pm) Dec

22 Jan Australia: CPI (11:30am) 4Q Malaysia: CPI (5:00pm) Dec Taiwan: Unemployment rate (8:30am) Dec Thailand: BoT monetary policy meeting (2:30pm)

23 Jan New Zealand: Business NZ PMI (10:30am) Dec China: Flash PMI (9:45am) Jan Korea: GDP prelim (8:00am) 4Q Singapore: CPI (1:00pm) Dec Taiwan: IP (4:00pm) Dec

24 Jan Philippines: Imports (9:00am) Nov Singapore: IP (1:00pm) Dec Vietnam: CPI Jan

During the week: Vietnam: Trade balance Jan (25-29 Jan)

27 Jan Hong Kong: Trade balance (4:30pm) Dec Korea: Consumer survey (6:00am) Jan Taiwan: Leading index (4:00pm) Dec Holiday: Australia, New Zealand

28 Jan India: RBI monetary policy meeting (11:00am) Thailand: Mfg. production Dec

29 Jan Korea: Current account balance (8:00am) Dec IP (8:00am) Dec Malaysia: BNM monetary policy meeting (6:00pm) Taiwan: GDP prelim (8:30am) 4Q

30 Jan New Zealand: RBNZ official rate (9:00am) Building permits (10:45am) Dec Philippines: GDP (10:00am) 4Q Holiday: Korea, Taiwan

31 Jan Australia: Pvt. sector credit (11:30am) Dec New Zealand: Trade balance (10:45am) Dec China: PMI mfg. (Markit) (9:45am) Dec Thailand: PCI (2:30pm) Dec PII (2:30pm) Dec Trade balance (2:30pm) Dec Holiday: China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan

During the week: China: PMI mfg. (NBS) Jan (1 Feb) Korea: Trade balance Jan (1 Feb)

3 Feb Australia: Building approvals (11:30am) Dec India: PMI (10:30am) Feb Indonesia: Trade balance Dec CPI (11:00am) Jan Taiwan: PMI mfg. (10:00am) Jan Thailand: CPI Jan Holiday: China, Hong Kong, Malaysia, Taiwan

4 Feb Australia: RBA official rate announcement (2:30pm) Feb New Zealand: ANZ commodity price (1:00pm) Jan Hong Kong: Retail sales (4:30pm) Dec Korea: CPI (8:00am) Jan PMI mfg. (9:00am) Jan Holiday: China, Taiwan

5 Feb Philippines: CPI (9:00am) Jan Singapore: PMI (9:30pm) Jan Holiday: China

6 Feb Australia: Retail sales (11:30am) Dec Trade balance (11:30am) Dec Philippines: BSP monetary policy meeting (4:00pm) Taiwan: CPI (8:30am) Jan Holiday: China

7 Feb Malaysia: Trade balance (12:01pm) Dec

During the week: Australia: PPI 4Q (3-5 Feb) China: Trade balance Jan (8-10 Feb) Indonesia: GDP 4Q (5-7 Feb)


1



Global Data Diary Week / Weekend Monday Tuesday Wednesday Thursday Friday 11 – 17 January 13 January 14 January 15 January 16 January 17 January

Japan India Euro area Brazil Brazil Brazil CAO cons index (Nov) IP (Nov) IP (Nov) COPOM mtg: +25bp Retail sales (Nov) Econ act index (Nov)

CPI (Dec) Japan Germany Chile Singapore Italy Econ Watchers (Dec) GDP (2013) BCCh mtg: no chg NODX (Dec) IP (Nov) United Kingdom India Euro area United Kingdom

CPI (Dec) WPI (Dec) HICP final (Dec) Retail sales (Dec) United States United States Japan United States Retail sales (Dec) Empire State surv (Jan) Prv mach ords (Nov) Housing starts (Dec) Bus inventories (Nov) Kuroda speech IP (Dec)

United States JOLTS (Nov) CPI (Dec) Philly Fed surv (Jan) NAHB surv (Jan) Bernanke speech

18 – 24 January 20 January 21 January 22 January 23 January 24 January Russia Colombia Hungary Australia Brazil Canada Retail sales (Dec)* BanRep mtg: no chg NBH mtg: -10bp CPI (4Q) COPOM mtg mins (Jan) CPI (Dec) IP (Dec)** China Poland Canada China Singapore

GDP (4Q) IP (Dec) BoC mtg: no chg Markit mfg PMI flash (Jan) IP (Dec) FAI (Dec) Turkey Japan Euro area IP (Dec) CBRT mtg BoJ MPM: no chg Markit PMI flash (Jan) Retail sales (Dec) Thailand Japan Taiwan BoT mtg: no chg Reuters Tankan (Jan) Export orders (Dec) United Kingdom BoJ loan off surv (4Q) United States Labor market report (Dec) Korea Martin Luther King, Jr. MPC minutes (Jan) GDP (4Q) Day; markets closed Taiwan

IP (Dec) United States Markit mfg PMI flash (Jan)

Exstng hm sales (Dec) * January 21 – 24 ** January 23 – 24

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Global Data Watch - J.P. Morgan Home | J.P. Morgan · JPMorgan Chase Bank NA David Hensley (1-212) 834-5516 [email protected] JPMorgan Chase Bank NA 7 Joseph Lupton (1-212)