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Macro Commodities Forex Rates Equity Credit Derivatives
Please see important disclaimer and disclosures at the end of the document
31 May 2011
EconomicsDaily
www.sgresearch.com
The Economic NewsHow vulnerable is Italy?
S&Ps negative outlook on Italys sovereign is debatable interms of its timing, as the economy has been stuck on alow-growth, high-debt trajectory for the best part of thelast decade, and growth-enhancing reforms have beenminimal. But while S&P's recent action appears a case ofdelayed realisation, Italy's economy is fragile, and shouldbe monitored closely. Here we discuss some of its keyvulnerabilities.Italys GDP per capita is lower today than it was in 1999; inthe IMFs words one of the worst performances amongadvanced economies. In fact, even excluding Italysespecially deep recession in 2008-2009, GDP growthbarely averaged 1.1% yoy since 2001 - the same rate asPortugals, and half that of the euro areas.Yet Italian bond yield spreads have held up well so far. Oneof Italys main advantages relative to the deeper peripheryis the relatively contained size of its external imbalances.For instance, its current account position, while in deficit,is nowhere near as negative as Portugals or Greeces.Nonetheless, the trend is one of clear deterioration (Fig. 2).The widely held view is that Italian banks are solid, but weare observing a sharp increase in non-performing loansamong Italian corporates (Figure 3). Household loanperformance is likely to follow suit, despite thecomparatively low leverage, as interest rates are set toincrease while real wages will at best stagnate on the backof weak productivity dynamics.S&P judges that the negative outlook issued on Italyreflects risks to its fiscal position that primarily stem fromweaker growth than our current assumption of averageGDP growth of 1.3% over the 2011-2014 period. Thatseems indeed a tall order: on our central forecasts, ItalianGDP growth will average 0.8%yoy over that period; andGDP won't be back to its 2008 level until at least 2015.Until now, Italys too big to fail status has provided aglass ceiling to its spreads even in the face of adversedomestic developments. But another prolonged bout ofstagnation may eventually erode that privilege.
Figure 1: Italys lost decade
Sources: ISTAT, SG Cross Asset Research, European Economics
Figure 2: Italy's trade deficit has continued to deteriorate, despitestrong global growth
Sources: ISTAT, SG Cross Asset Research, European Economics
Worthy of increased vigilanceUntil S&Ps recent outlook downgrade from stable to
negative of Italian sovereign debt and four domestic
banks, Italy had successfully averted the attention of
bond vigilantes. But after a lost decade (Figure 1),
economic stagnation continues to place relentless
pressure on fiscal sustainability, domestic demand and
the banking system.
[email protected] page 2
20,162 (1999) 20,127 (2010)
19500
20000
20500
21000
21500
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Italy - Real GDP per capita
-4
-3
-2
-1
0
1
2
3
4
1
993
1
994
1
995
1
996
1
997
1
998
1
999
2
000
2
001
2
002
2
003
2
004
2
005
2
006
2
007
2
008
2
009
2
010
2
011
Visible trade balance as % of GDP
Current account balance (% of GDP)
Inside: GREEK SCENARIOS:
Good, Bad and Ugly,
THAILAND: Politics will
remain Thaid up in knots
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In the newsGREEK SCENARIOS
Good, Bad and Ugly
THAILANDPolitics Thaid up in knots
UNITED STATES
Personal income and spending disappoint in April
Pending home sales: now that's a black swan!
Preview: Chicago PMI
Preview: Dallas Fed manufacturing
Preview: Brazil industrial production
JAPANManufacturers plan a return to normalcy in June
April unemployment rises to 4.7%
A fresh new start for Japanese politics?
SOUTH KOREA
Industrial production was weak in April
NEW ZEALANDRecord trade surplus in April
Preview: Hong Kong April retail sales
Preview: India Q1 GDP
Preview: Australia Q1 GDP
Preview: China May PMI
Preview: South Korea CPI
ITALY
Berlusconi's coalition suffers a heavy defeat
EURO AREA
European Commission Survey: Cyclical peak is past
SWEDEN
Sweden GDP: Another strong reading in Q1
Preview: Germany Unemployment
Preview: France April consumer spending
Preview: Italy CPI
Preview: Euro area unemployment
Preview: Euro area CPI
Preview: Switzerland GDP
Continued from page 1
The banking sector is more vulnerable than it
seems...Italys banking system is widely perceived as safe and
free from opaque and risky products, while household
leverage is famously low (38% of GDP in 2010). This
broadly suggests lower contingent liabilities in the
economy, all else equal; a valued feature for many
investors.
But in truth, Italian banks are experiencing a steady
deterioration in their asset quality, and their loss
provisions have been rising. The steep increase in non-
performing loans among non-financial corporates -
despite the broadly unchanged nominal interest rates -is a concerning sign of fragility (Fig. 3). In addition, it is
worth noting that the traditional lending channel is
particularly important for Italian corporates, as most
companies are far too small to access capital markets.
Figure 3: Non-performing loans: Ongoing deterioration
Sources: Bank of Italy, SG Cross Asset Research, European Economics
Figure 4: Banks - Tier 1 capital ratios (%) could be higher
Sources: ECB, the data refer to 2009, SG Cross Asset Research, European Economics
0.0
0.2
0.4
0.6
0.8
1.0
1.2 Households
Non Fin. Corps
Banks, lenders & fin. institutions
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Germany Spain France Greece Ireland Italy Portugal
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...and rising interest rates will impact credit quality
As the ECB "normalises" its policy rates against this
vulnerable economic environment, asset quality looksset to deteriorate further, even in the absence of major
shocks. The simple mechanics of increasing interest
payments and static or declining real wages are likely
to solidify this trend. The most obvious risks for Italy,
unlike Ireland and, to a degree, Spain, do not stem
from abrupt adjustments in the housing market and the
construction sectors, or aggressive deleveraging from
households. Italys underlying vulnerability remains its
outright inability to grow real incomes, and the
consequences this entails, for consumers, credit
performance, and the broader health of the economy
and its public finances.
Where Italy's underlying fragility coming from?
The Italian economy was penalised by a comparatively
low productivity level even before the Great Recession.
To make things worse, 2008-2009 the economy
experienced a deep fall in productivity, from which the
economy is still struggling to rebound (Figure 5).
Similarly, our simple statistical analyses suggest that
the fall in Italys potential outputlevelin 2008-2009 has
been largely a permanent phenomenon (Fig. 6). Our
estimates also point towards a further deterioration of
Italys potential growth rate (the filtered slopes in
Figure 6).
Most structural economic indicators point in exactly
the same direction. Key determinants of productivity
such as spending on R&D and tertiary education
attainments all look extremely low, and fall visibly short
of average European standards. These characteristics
are reflected by Italys predominantly low-added-value
export composition, and the very modest share of
high-tech exports, which is close to Portugal's and the
rest of the periphery (Figure 7).
Figure 5: Italys productivity shock
Sources: ECB, SG Cross Asset Research, European Economics
Figure 6: Potential output Both a growth and level problem
Sources: ISTAT , SG Cross Asset Research, European Economics
Figure 7: Proportion of high technology exports as % of total
Source: Eurostat, European Commission, SG Cross Asset research
Avoiding another lost decade
The deep-seated structural flaws behind Italys poor
growth performance, suggest that its growth prospects
are subject to significant downside risks, especially in
the absence of vigorous and extensive structural growth-
enhancing reforms.
Yet there is no concrete strategy on this front. The years
ahead are likely to prove challenging for workers,
corporates, and the banking sector alike.
How increased surveillance could help
Pressures from financial markets and prospective
downgrades from credit rating agencies may induce
policy makers to proceed on structural growth-enhancing
reforms with a renewed sense of urgency. This would be
a major step in the right direction.
Ultimately, Italys biggest challenge will be to avoid
another lost decade. To this end, the key challenge will
be to engineer mutually reinforcing structural growth-
enhancing reforms while proceeding with a rationalisationof public spending.
2800
2850
2900
2950
3000
3050
3100
3150
3200
3250
3300
Q2200
0
Q4200
0
Q2200
1
Q4200
1
Q2200
2
Q4200
2
Q2200
3
Q4200
3
Q2200
4
Q4200
4
Q2200
5
Q4200
5
Q2200
6
Q4200
6
Q2200
7
Q4200
7
Q2200
8
Q4200
8
Q2200
9
Q4200
9
Q2201
0
Q4201
0
Labour productivity: Output per hour worked
12.45
12.5
12.55
12.6
12.65
12.7
1995Q1
1996Q3
1998Q1
1999Q3
2001Q1
2002Q3
2004Q1
2005Q3
2007Q1
2008Q3
2010Q1
2011Q3
Italy GDP (log)
Potential GDP (Christiano-FitzgeraldBandpass)
Potential GDP (HP Filter, Lambda=50K)
Statistical estimates of Italy's potential GDP
(logs)
0
5
10
15
20
25
30
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Should the policy response be limited to deep and
unimaginative austerity measures, similar to those
implemented in Greece and Ireland, there would be a
concrete risk to tip Italy's fragile economy into yet another
recession. We reckon Italy would struggle to cope with
more than 0.5-0.8% of GDP of net fiscal tightening per
annum on a sustained basis.
Fiscal implications
On our current assumptions Italys debt-to-GDP ratio
has been broadly stabilised at around 120% in thecoming years. However, the large erosion of Italys
productivity level and growth potential jointly suggest
that Italys debt sustainability remains vulnerable to
adverse setbacks.
GREEK SCENARIOSGood, Bad and UglyForget 2012, the deadline for Greece is June 29, when thenext tranche of 12bn from the EU/IMF is due. Without it,Greece is set to default, and in a very ugly way sendingshock waves through the global financial system. Morelikely, however, is that politicians with their backs to thewall will find a last minute solution. A good solution wouldclarify Greek funding out to at least 2013 and preferably2015. A bad one would carry Greece past the June 29, butleave big question marks open over what happens beyondthat date. True to European form, we expect a goodsolution to ultimately come through but in the usualpatchwork pattern, leaving markets open to significantvolatility near-term.Troikas verdict expected this week
The IMF, ECB and EU Commission are expected to
deliver the outcome of the Fourth Quarterly Review of the
Greek economic program this week (or possibly early
next week). The Third Review concluded; Greece has
made further progress towards its objectives, and the
underlying fiscal and broader reforms necessary to deliver
the programs medium-term objectives are gradually
being put in place. However, major reforms still need to be designed and implemented to build a critical mass
necessary to secure fiscal sustainability and economic
recovery. All performance criteria were met, but the
indicative target on domestic arrears accumulation was
again missed. The measures supported by structural
benchmarks have been either implemented or partially
implemented (with slight shortfalls in substance for
collective bargaining reforms and the study of public pay
and employment).We expect the Fourth Review to conclude favorably on
Greek debt sustainability allowing the next 12bn trancheof 110bn package to be paid out on June 29, but only if
Greece signs up to a new program of tougher
conditionality.
German Diet with Coach
Last week, PM Papandreou promised an additional 6bn
(or 2.8% of GDP) of austerity measures to reach the
deficit target of 7.5% of GDP in 2011. He also announced
the creation of a Sovereign Wealth Fund to accelerate the
50bn of privatisation set out in the Medium Term Fiscal
Strategy (MTFS, 2011-15). New promises to lose fiscal
weight, however, are unlikely to prove enough this time.
The EU and IMF both want assurance that the diet will
be implemented with (1) broad political support and (2)
discipline.PM Papandreou has already failed on step 1 as the
opposition New Democracy leader, Antonio Samaras, last
Friday rejected the governments austerity plans.
Papandreou has a sufficient majority in Parliament to
push ahead on reforms, but with the MTFS stretching into
2015 and the next election due in 2013, the EU and IMF
are keen to see broad political support.
On step 2, press reports suggest that part of a new
agreement for Greece could include technical
assistance (i.e. foreign involvement) in tax collection and
privatisation.
This would be unprecedented, but would no doubt help
deliver much needed confidence, both to EU taxpayers
and investors.
More help needed
Even the most optimistic of scenarios on new austerity
measures and accelerated privatisation will still leave
Greece in need of accessing bond markets in 2012; an
option that simply appears unrealistic today.
Consequently, a new package is urgently needed for
Greece. As we have detailed on previous occasions, wesee the most likely outcome to be an additional 50-60bn
of EU/IMF loans, likely with collateral and accompanied
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by a Vienna agreement approach, under which the main
private creditors (i.e. banks), agree to maintain current
exposure levels to Greece and thus secure refinancing for
a substantial share of maturing debt. If appropriately
structured, we do not expect the ECB to oppose this.
While the June 29 deadline is very tangible, it is still
unclear exactly what timeline reaching an agreement for
Greece will follow. Press reports suggest the Eurogroup
may hold an emergency meeting on Monday June 6,
although EU officials denied this Monday. The next official
meeting of the group is due on June 20, ahead of the
June 24 EU Summit. While a single comprehensive
package for Greece, clarifying both the short-term and
medium-term funding, is clearly the most desirable
outcome, the risk is to see a solution in patches. The first
patch would fix short-term funding, the second-patch
medium-term funding.
Thinking the unthinkable
With their backs to the wall, we expect policymakers will
always opt for the least risky and painful solution, i.e.
more support for Greece. Any political process, however,
is open to risk and there is a risk (albeit small in our
opinion) that Greece finds itself without funding on June
29. This scenario would most likely force Greece to
default on its debt, and by default here we mean haircuts.
Greek banks on the frontline: The most immediate
impact would fall on the Greek banking sector, which
holds 12.2% of its assets in Greek government bonds.
Greek banks would not only have an asset problem, but
also a liquidity one as Greek governments under a default
scenario would no longer be eligible at ECB refinancing
operations. A program for recapitalisation and emergency
lending assistance would be required immediately.
Greece is small : For the euro area banking sector as
a whole, Greece is relatively small. According to the latest
BIS data (end Q3-10), foreign claims and other exposures
of euro area banks amount to a modest 65bn on the
Greek public sector and just over 200bn including all
sectors in the Greek economy. At the euro area level,
these amounts are small.
the real issue is contagion
The real issue is contagion. Over the weekend, the Irish
Transport Minster noted that Ireland too could find it
difficult to return to market funding in 2012, hinting that
Ireland would also need a new package. Total foreign
claims and other exposures of euro area on Ireland
amount to almost 400bn, including all sectors. Portugal
amounts to just over 230bn and Spain almost 690bn.
These are clearly the sums the ECB is concerned about.
Liquidity crisis followed by funding crisis: In a Greek
default scenario with contagion; the most likely initial
outcome would be a drying up in inter-bank markets. The
ECB has the tools to tackle a liquidity crisis and would
take action accordingly. Government funding would be
the next issue. The ECB again has tools to act, stepping
up the SMP program (note that the ECB can only
intervene in secondary markets). An additional option
would be to use the EFSF to intervene in primary markets.
With the new EFSF powers still under construction, this
would require some accelerated footwork by the
Eurogroup. The Eurogroup would also have to act quickly
to reassure investors that the euro area is not on the
verge of serial defaults under such a scenario. This wouldleave policymakers scrambling for stability against a very
difficult backdrop. Moreover, such a risk scenario would
not just threaten the euro area, but global financial
stability.
To our minds, euro area policy makers are only too well
aware of the risks of not bringing an orderly resolution to
the current climate. An ugly scenario is thus to our minds
a low probability event, but as euro area leaders struggle
to put a good plan in place, things are likely to continue to
look bad over the coming days and weeks contributing to
more market volatility and euro weakness.
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THAILANDThailand elections: Politics Thaid up in knotsElections in Thailand rarely provide the resolution topolitical tensions that they should and the upcoming pollson 3 July are unlikely to change this pattern, in our view.Unless the Democrat Party wins an unlikely majority of thepopular vote, the best outcome that we may hope for is apostponement of political instability for a year or two. Yetmarkets have become accustomed to political instability inThailand; it is only when uncertainty reigns that sentimentbecomes markedly fragile and investors get nervous. Butthe upcoming polls contain ingredients that suggest thatthis may be thecase after July.Normally elections
will either deliver a
decisive victory for
one side or an
inconclusive result
for two or more
parties, requiring a
period of
negotiation before
the new coalition
government
emerges.
However, the odds
seem against a
neat and tidy
solution for
Thailand.
The current political
backdrop for these
elections is whatmatters and the
next elections are
unlikely to be the
platform to deliver
any decisive
resolution to the
wider political
game.
Yet the expectations will be that the market and economy
will largely ignore the political uncertainty. On the
economic front, this has seemed largely the case;Thailands GDP growth has averaged 4.5% per annum in
the past 20 years (when the country largely returned to
democratic rule), compared to the Asian average of 5.1%.
More recently, GDP growth is running at a respectable
3% yoy, though inflation is tracking higher and there is a
lack of policy leadership at present. And while political
volatility does lend itself to fragile market sentiment, the
importance of elections seems to have mixed long-term
significance.
Looking at the Bangkok SET equity index as a market
indicator, we note that sentiment is generally optimistic
ahead of elections with the SET rising by an average
2.2% in the month run-up to polling day.
However, whether
anything changes
at a political level,
the market
response is broadly
indifferent then
negative,
suggesting the
limited effect from
politics. SET is
virtually flat onemonth after an
election then falls
by an average 7%
in the three months
following. Elections
do not create any
sustained macro
impact typically,
instead the
direction of
markets usually
returns to the
prevailing
economic trends.
As long as the
politics doesnt
interfere too much
with the running of
the economy, then the political factor is usually short-
lived.
Hence any bullish hopes in the run-up to the elections
have to be taken with caution. Moreover; Thai politics are
rarely decided by elections, but instead by other political
events, such as a military coup (which is usually seen as
positive for stability), a key constitutional event (such as
Politics may cause short-term palpitations, but the longer-run implications of electionresults seem to have modest impact on markets and investor confidence
Notes on dates of significance: Blue lines: General elections; Black lines: Military coups; Pink line: Popular unrest.
Source: SG Cross Asset Research
70
80
90
100
110
120
130
140
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
THB NEER ( Index)
0
500
1000
1500
2000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
SET equity index
0
1
2
3
4
5
6
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
6m Bibor f ixings (%)
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the dissolution of the PPP in 2008), or perhaps, if the
revered king comes out to endorse a particular political
position.
Right now, public opinion polls and local expert analysis
suggest that the main opposition Puea Thai Party will
either win a dominant role in the new parliament, possibly
even an outright majority. We also note that Thailands
notoriously unreliable polling is usually biased to the
Democrats urban support base, and has historically
understated Puea Thais support levels.
Recent polls suggest Puea Thai is leadingOpinion Poll (%) Democrat Puea Thai
DusitPoll 37.0 41.0
Research Institute of Bangkok University 17.0 27.0Khon Kaen University 20.7 63.9
Abac 34.1 36.4
Source: SG Cross Asset Research
Puea Thai is latest incarnation of Thaksin Shinawatras
Thai Rak Thai Party, which was the ruling party between
2001-06 and technically won the 2007 elections (as the
Peoples Power Party).
The partys leader is Yingluck Shinawatra, a political
novice, but also the younger sister of Thaksin. Thaksin is
currently in exile to avoid a jail term for alleged corruption
during his term in office, but a win for Puea Thai is seen
as paving the way for his physical and political return to
Thailand. This seems to be sufficient to guarantee
Yingluck her brothers former popular support, making
her the front-runner for prime minister. It also helps that
Yingluck seems to be continuing her brothers penchant
for populist policies as well.
Against her, incumbent Prime Minister Abhisit Vejjajiva is
attempting to win his first mandate, after gaining power
due to the Constitutional Courts dissolution of the PPP in
2008. That dissolution, after the PPP had won the 2007
election, left Abhisits Democrat Party as the only major
party in parliament left to form a government. The media
has reported Julys election as a head-to-head race
between the Puea Thai and the Democrat Party, but
Abhisit has the weight of history and probably electoral
statistics against his hopes for a victory.
The Democrat Party has not won a general election since
1992. Its voting support also largely averages about 30%,
in comparison to Puea Thai (and its earlier incarnations)
and its average 50% support. Yet it is as Thailands main
conservative party, it naturally occupies the royalist nichethat the conservative tendency of the army leans towards.
And it is the presence of the army in the background,
which creates the enveloping political risk for the
elections. It is the uncertainty of future army intervention
in politics, which dilutes the significance of elections in
Thailand.
If the winning party (such as the Democrats) has the army
backing, then this intervention risk abates. However, a
Puea Thai win will always have the shadow of a potential
interference hanging over it, especially if it then works to
bring Thaksin back into power.
The army has engineered 18 coups or attempted coups
since 1933 (when the army staged its first successful
overthrow of the constitutional government), but there has
been only one in the past 20 years.
This was in 2006 when the army was seen as finally
intervening in the long-running stand-off between the
incumbent Thai Rak Thai government and the array of
anti-Thaksin forces. Officially this coup was executed as
the government was mired in gridlock and threatened
social and economic stability. However, Thaksin was also
seen as working to undermine the traditional and political
influence of the army. Note that the 2006 coup was
widely seen as being endorsed by the king, which
somewhat legitimised what was still an undemocratic
ouster of Thaksin.
It will be this historical shadow that hangs over any
victory by a party other than the Democrats. Hence, an
unsettled political situation remains likely long after July,
though the social and economic consequences may not
be immediately disruptive.
Current House of Representatives: ruling coalition parties on theright (major parties and seats held)
Source: SG Cross Asset Research
DemocratParty 173
Bhumjaithai32
Chartthaipattana 25Rum Chart
Pattana 9SocialAction 5Matubhum 3
Puea Thai189
PueaPandin 32
Pracharaj 8
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Preview: Dallas Fed manufacturingDallas Fed factory activity index expected to retreatto an eight-month lowSG: 2.5, Consensus: 8.3Echoing canvasses conducted by the Federal Reserve
Banks of New York, Philadelphia and Richmond, the
net percentage of manufacturers in the Dallas district
experiencing a pickup in general business activity
likely narrowed in May to 2.5% the lowest reading
since last September (see accompanying chart).
Heading into Fridays jobs report, the local
employment diffusion index may receive more than a
casual glance. Indeed, while the headline activity
gauges retreated in the aforementioned regional
reports, the employment soundings were stronger in
the Empire State and Philadelphia surveys.
Regional Fed manufacturing gauges weakened in May
Source: Global Insight, SG Cross Asset Research
Preview: Brazil industrial productionBrazil industrial production tests growth pacebeyond seasonality%YoY: SG: 1.3, Consensus: 0.9 After a full year of underperformance, industrialproduction picked up in February and March, taking
the baton from retail sales and pushing the 3- month
moving average (a better proxy for trend) to 0.9% from
0.5%. The development is encouraging but given the
drop in retail sales (particularly autos); markets will
wait for further pickup to confirm resumed momentum.
Indeed, despite the recent acceleration output remains
at relatively weak levels: production is only 0.5%
above March 2010 in seasonally adjusted terms.
Seasonality is again another factor bringing noise to
headline numbers as April recorded additional
holidays due to a late Easter in 2011.rebounding from
the -0.6% contraction the prior month, with a bounce in
manufacturing offering support.
Brazil Industrial production
Source: SG Cross Asset Research/Economics
JAPANManufacturers plan a return to normalcy in JuneApril industrial production came in a bit weaker thanexpected (actual +1.0% mom, expected +2.0% mom), butthe bigger news in the report should be manufacturersproduction plan for May and June.Manufacturers are planning to expand their production by
8.0% in May, followed by another surge of 7.7% in June.If these plans are realized, the level of production in June
will be only 0.8% below that of February before the
earthquake. After the devastating 15.5% production
decline in March, manufacturers are now planning a
return to normalcy by June.
Can they pull it off?
There are reasons to be cautious. In the March report,
manufacturers were planning 3.9% expansion in
production in April. In reality, they only managed to
increase the production by 1.0% in April, after the
-80
-60
-40
-20
0
20
40
60
2005 2006 2007 2008 2009 2010 2011
Percent
Dallas
Empire State
Philadelphia
Richmond
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devastating 15.5% decline in March. Perhaps we should
take manufacturers production plans with a grain of salt.
Having said that, while we think it is more likely that
manufacturers are likely to miss their production
expansion plans for May and June, it is likely that there
will be a large sized production expansion in May and
June, if not 8%, then along the level of 4-5%. With
perhaps one month delay, Japanese manufacturers seem
able to achieve their return to normalcy by summer.
Financial market implications: Positive
While the markets seem to remain somewhat sceptical,
we expect the V-shape recovery view to become
consensus as data confirms the slump in March
consumption and production being reversed. The impactof the supply chain shock was greater than our initial
assessments, but the once popular doomsday scenario
that Japanese consumption, as well as production,
remaining depressed until autumn no longer is credible.
While uncertainty still remains on how Japanese
manufacturers will handle power saving requirements
over the summer, we expect manufacturers to weather
their power issues without significant hindrance to output.
As incoming data confirms the V-shape recovery, we
expect the uncertainty discount priced into Japanese
assets to gradually diminish.
Industrial Production
Source: INDB, SG Cross Asset Research/Economics
JAPANApril unemployment rises to 4.7%A moderate deterioration in AprilThe labour market in Japan deteriorated in April with
unemployment rate rising to 4.7% from 4.6% and the job
offers to applicant ratio falling from 0.63 to 0.61. In our
view, job offers and applicants are more important in
determining the direction of the labour market.
Details suggest the beginning of recovery
Details show that job offers expanded by 5.8% month on
month in April. The deterioration in the offers to applicant
ratio stems from the increase in job applicants. Job
applicants expanded by April should make policy makers
remain cautious, yet the news that businesses expanded
their job offers in April gives hope that businesses are
regaining confidence.
JAPANA fresh new start for Japanese politics?Kan may resign in 1-2 weeks, opening the door to a grandcoalitionThere is an increasing possibility that Prime Minister Kan
may resign as soon as this weekend, opening the door to
a grand coalition between the three largest parties: DPJ
(the current ruling party), LDP (the former ruling party) and
Komei (a religion-based party). Yomiuri newspaper
reported that a motion of no confidence may be
submitted as early as Thursday this week.
Over the past week, LDP and Komei were mulling over
submitting a motion of no confidence on the PM in the
lower house. If the motion passes, PM Kan will need to
either resign or dissolve the lower house. However, the
motion was considered unlikely to pass, as it needs a
large-scale defection of DPJ members (80 out of 305 DPJ
members in the lower house).
However, last night, Ichiro Ozawa explicitly told his
supporters that Kan should resign and implied that he
60
70
80
90
100
110
120
2008/01 2008/07 2009/01 2009/07 2010/01 2010/07 2011/01
Industrial Production sa (2005=100)
Manufacturers' plan for May - June
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may vote for no confidence. With him leaning on PM Kan
to resign by threatening to join the motion of no
confidence, there is now a significant possibility that Kan
may decide to submit rather than face the embarrassment
of being voted out. The outcome is still not clear, but the
resignation of PM Kan and a formation of a grand
coalition in the next few weeks period is now a real
possibility.
Financial market implication: Positive for equity,
positive/neutral for JGBs
The formation of a grand coalition will be a big win for
Japanese politics after the poor performance of
government following the earthquake. A grand coalition
would be able to make otherwise difficult politicaldecisions, such as raising consumption tax rate. In our
view, such an event would be positive for equity, as it
would mean that Japanese government can form a large-
sized supplementary budget. The implication for JGBs is
not so straightforward. The news of a likely consumption
tax rate hike as soon as April 2012 should be positive for
JGBs, but the prospect of faster economic growth
boosted by a large sized supplementary budget may
dampen the attraction for the asset class.
How likely is a formation of a grand coalition?
The political picture is still too muddy. Ichiro Ozawa
cannot just break up the party. What remains of his
political career also seems limited too and his followers
wont be able to support his decision to leave DPJ . A
successor for PM Kan needs to be found within DPJ so
that DPJ wont lose the leadership in the grand coalition.
If no appropriate successor is found before LDP/Komei
submits the motion, the large majority of the DPJ may
decide to stick with PM Kan for now. In that case, PM
Kan may be able to hang on to this power for another fewmonths. Japanese politics will be something to pay
attention to in the next 1-2 weeks.
SOUTH KOREAIndustrial production was weak in AprilIndustrial production was weak in April, up only 6.9% yearon year, weaker than prior market consensus (9.2%). In ourview, this is a delayed supply shock reaction following theJapan's earthquake in March.While April production growth disappointed the market,
the size of decline was not particularly large. In month on
month terms, April production was down by a mere 1.5%,
meanwhile production in Japan turned into expansion
during April. We expect South Korean industrial
production to return to expansion in May.
BoK unlikely to take the news badly
BoK is likely to view the April decline in IP as a vindication
of its decision not to hike in May. However, supply chain
problems are being resolved in Japan and the actual size
of decline in South Korean IP was within reasonable
ranges. The robust production recovery outlook in Japan
for May and June should provide comfort to the BoK
policy makers that the decline in April is likely to prove
temporary. Mays CPI is due for release tomorrow (1
June) and will be more critical in any BoK decision-
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Preview: India Q1 GDPQ1-GDP to post a cycle highQtrly GDP (% YoY) SG: 10.0, Con: 8.1We are well ahead of the consensus with our 10% yoy
forecast for Indian growth in the first quarter of 2011.
The key difference between ourselves and the
consensus is that we do not expect the national
accounts estimate of industrial production to be as
weak as the monthly industrial production figures.
That is, as India accumulates its national accounts on
a production basis, the manufacturing sector is not
likely to be as weak as the market expects.
We have maintained for some time that as India has
rapidly moved into capital goods production, the
weights in the IP figures have not adequately captured
this, hence the increased volatility of the IP figures.
These distortions are not likely to be included in the
national accounts.
On the expenditure side, we look for a strong 11% yoy increase
in consumption as strong incomes growth continues to support
spending by the rapidly forming middle class.
In the fast lane, Indias growth overtakes Chinas
Source: SG Cross Asset Research
Preview: Australia Q1 GDPA rare moment of weaknessGDP (% QoQ) SG: -0.2, Con: -0.3GDP (% YoY) SG: 3.0, Con: 1.8The backward-looking national accounts will offer a
rare glimpse of weakness in the Australian economy.
That weakness is largely driven by one-off factors with
disruption to exports and consumer spending caused
by the severe flooding, cyclones and adverse weather
conditions in the north-eastern state of Queensland
(which accounts for around 20% of Australias GDP)
over the first quarter.
On the expenditure side of the accounts, private
consumption, housing investment, non-residentialinvestment and exports are all likely to have been
adversely affected or disrupted by the flooding.
Offsetting this, inventories are likely to have
accumulated over the quarter.
Still, on balance, we believe the Australian economy
will post a slight decline in the first quarter. The RBA
will look through this aberrant fall and concentrate on growth
relative to potential. The Australian economy still faces significant
inflationary pressures arising from a complete lack of spare
capacity.
An impressive decade of growth to continue
Source: SG Cross Asset Research
4
6
8
10
12
14
16
2004 2005 2006 2007 2008 2009 2010
IN GDP % YoY
CH GDP % YoY
-2
-1
0
1
2
3
4
5
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
AU GDP % QoQ AU GDP % YoY
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Preview: China May PMIChina PMI to show further decelerationPMI SG: 51.6, Con: 51.6We expect the PMI to decline to 51.6 in May from 52.9
in March. Part of the decline would be due to seasonal
slowdown, as the pattern in previous years suggested.
However, the more important reason would be a real
deceleration in the manufacturing sector.
We think there are three factors behind the expected
slowdown: previous policy tightening, margin
squeezes and supply-chain disruptions caused by
Japans earthquake. The most affected companies areprobably the small-to-medium enterprises, low-value-
end exporters, automobile, and electronic
manufacturers.
The level of PMI would be consistent with GDP growth
of between 9.4~9.1% in Q2. However, we do not
expect the PBoC to change its tightening bias just now, as
inflation is not likely to stop rising until Q3.
China PMI and industrial production
Source: SG Cross Asset Research
Preview: South Korea CPIInflation pick up speed againSG Forecast (MoM): 0.2%, Consensus:0.2%SG Forecast (YoY): 4.2%, Consensus: 4.2%In April, the CPI inflation report surprised the market by
staying flat mom. The comforting news may have
contributed to the BoKs surprise decision to keep its
policy rate unchanged. In our view, the disinflation is
likely to be temporary. While the marginal strengthening
of the Korean won and a recent stability in commodity
price provides some anchor for South Korean inflation,
the general upward trend in the South Korean inflation is
unlikely to stop in the near future.
South Korea May CPI
Sources: SG Cross Asset Research
ITALYBerlusconi's coalition suffers a heavy defeatLocal elections held across Italian cities have resulted in a
heavy defeat for Berlusconi's center-right coalition
throughout Italy. The centre-left prevailed with strong
gains, which extended to historical strongholds of the
center-right such as Milan, Naples, and Trieste in the
North East. The extent of the defeat increases the chance
of some defections among center-right coalitionmembers, which could weaken Berlusconi's coalition.
Although it is early to say, Monday's electoral results
could eventually pave the way for either new General
Elections, or an outright change of government, in the
coming months. That said, before jumping to a new
national election, the current electoral law would most
probably need to be improved, to reduce the likelihood of
an inconclusive electoral outcome.
-40
-20
0
20
40
60
80
100
4
6
8
10
12
14
16
18
20
2005 2006 2007 2008 2009 2010 2011
IP, 3mma PMI, %yoy
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
CPI
Core CPI
(YOY%)
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EURO AREAEuropean Commission Survey: Cyclical peak is pastThe third successive decline in the Economic SentimentIndicator (ESI) for the euro area suggests that the cyclepeak has been reached in Q1, when year-on-year GDPgrowth hit 2.5%.This comes as little surprise, and is in line with our
forecasts a slowdown in year-on-year rate of growth in
Q2 was always on the cards, given that the exceptional
surge of 1.0% in Q2 2010 was most unlikely to be
matched or beaten. While some loss of momentum in
GDP over coming quarters is likely, we do not expect a
deep decline, suggesting a slowdown from the 0.8% qoqpace of Q1, but no slide into stagnation or recession. We
believe that weakness in economic sentiment in recent
months was caused by two factors that are likely to prove
transitory: one, the steep rise in energy prices, which has
been partly reversed already, and two the effect of
Japans earthquake and Tsunami which is also likely to
fade and give way to stronger activity growth. Indeed,
regarding the effect of energy prices, there appears to
have already been a positive effect on consumer
sentiment in May, with an improvement of 1.8pt to -9.8,
helped by a decline in inflation expectations.
SWEDENSweden GDP: Another strong reading in Q1The Swedish economy continued to grow robustly in Q1with real GDP up by 0.8% qoq and 6.4% yoy. This waslower than our projected 1.4% qoq and slightly below
consensus.
At the same time, growth in Q4 2010 was revised up to
1.6% (from 1.2%) which implies that the outlook for 2011
as a whole largely remains in place, with GDP heading for
an increase of around 4.5%. For 2010, growth was
revised up to 5.7% (from 5.5%).As expected, household
consumption was relatively weak in Q1 growing by 0.4%
qoq, while imports grew strongly by 3.1% qoq. Stocks
made another strong contribution to growth as activity in
the manufacturing sector remained very high. In fact,
confidence indicators suggest continued optimism in the
manufacturing sector, which could lead to higher than
expected GDP growth in Q2. The continued strength in
the economy reinforces the view that the Riksbank may
need to increase its rate path in their next forecast. We
expect rates to rise by 25 bp at each of the coming four
Executive Board meetings this year.
Main contributions to Swedish real GDP growth (p.pts)
Source: SG Cross Asset Research
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4
Domestic demand (w/o stocks)
Change in stocks
Net exports (p.pt. contr.)
GDP (% yoy )
Economic sentiment and GDP growth in the euro area
Source: SG Cross Asset Research
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
50
60
70
80
90
100
110
120
1996 1998 2000 2002 2004 2006 2008 2010
Economic Sentiment indicator
long run average
Euro area GDP % y/y
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Preview: Germany UnemploymentGerman unemployment falling at a slower rateUnemployment Change, k SG: -28, Con: -30Unemployment Rate s.a SG: 7, Con: 7We doubt that the pace of decline in unemployment in
Germany over the past three months will have been
maintained in May. The average decline of 48k
reported for these months was about twice the size
recorded since the beginning of the downtrend in July
2009. This was probably related to the temporary
slowdown in the labour market during Q4, when
weather played a role. We expect a solid 28k decline
to have been recorded in May, reflecting a
continuation of the solid pace of growth in activity andin employment. Short-term impacts from the Japan
disasters are not expected to have affected labour
market trends, even if they are likely to have hit
manufacturing production. Employment is expected to
have continued to grow at a steady pace of about 1% at an
annualised rate, with a 35k increase in April.
Employment and unemployment in Germany (sa)
Source: SG Cross Asset Research
Preview: Italy CPITemporary lull in inflation volatility in ItalyCPI - EU Harmonized (% MoM) SG: 0, Con: 0.2CPI - EU Harmonized (% YoY) SG: 2.8, Con: 3.0The new method of measuring seasonal prices has
had a very large impact on Italian harmonised inflation
data, leading to a sharp drop in recorded inflation in
January and February and a surge in March and April.
Given that prices of clothing normally tend to move
very little in May, the effect should have been far more
muted this month, suggesting little change in headline
inflation rates. As elsewhere, Italian consumer prices
are expected to have benefited from the recent pull-
back in energy prices, allowing for slightly lower rates.
That said, energy price effects tend to have a far
smaller impact on Italian consumer prices than
elsewhere, implying some upward risks to our
forecast. Nevertheless, we note that there has in the
past few months been a sharp divergence of core and headline
inflation (in the harmonised measure), which supports our
forecast of a 0.1ppt decline in inflation
Measures of consumer prices in Italy (% yoy)
Source: SG Cross Asset Research
2,500
3,000
3,500
4,000
4,500
5,00038,500
39,000
39,500
40,000
40,500
41,000
2000-01 2002-01 2004-01 2006-01 2008-01 2010-01
Employment (in 1,000s)
Unemployed (in 1,000s) (rhs, inverted)
0.0
1.0
2.0
3.0
4.0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
HICP
NIC
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Preview: Switzerland GDPSwitzerland Q1 GDPGDP (% QoQ) SG: 0.8, Con: 0.7GDP (% YoY) SG: 3.2, Con: 3The boom in manufacturing continues unabated in
Switzerland. Judging by leading indicators, the PMI
and capacity utilisation, industrial production should
have remained buoyant in Q1 and with that
investments should also have performed well. While
consumers have yet to join in the party, and export
growth may have decelerated slightly, real GDP is
expected to have grown by 0.8% qoq, down
marginally from 0.9% in Q4 2010. On an annual
comparison, real GDP is expected to have grown by
3.2%. Even with a marked slowdown in growth for the
rest of the year, annual growth should be well above
potential at around 2.5%. Wage and inflationary
pressures remain low however and are only expected
to pick up gradually into next year. The Swiss National
Bank consequently faces a difficult choice of when to
start raising interest rates, and the hope of seeing a
weaker Swiss franc in the near term appears increasingly
unlikely. Given the current trends, we expect a first rate increase
after the summer at the earliest.
Main contributions to Swiss growth (pp)
Source: SG Cross Asset Research
Preview: France April consumer spendingFrench consumption of manufactured goods wasdepressed by the car sector in March.Consumer spending (% MoM) SG: -0.3, Con: -0.3We expect this trend to continue in April and
perhaps for a few months thereafter. Many car
purchases were in fact signed before end-2010 but
were delivered in January and February, thus
boosting total consumption in these two months.
April car sales should drop more significantly than
in March, given that new car registrations tumbled
by 34% mom in April. Moreover, consumerconfidence remains depressed and the weakness
in underlying consumption growth (ex-cars)
observed in Q1 11 is likely to persist into Q2,
particularly given the negative impact of fiscal
retrenchment. As a result, consumer spending
looks set to fall in April and we forecast almost flat
consumption in Q2 11 (-0.1% qoq). Looking ahead
into H2 11, the savings rate would have to fall significantly from its
current elevated 16.1% to bring consumption growth back to the
historical average rate (2% p.a. over the last 10 years).
Consumption of manufactured goods and car purchases
Source: DataStream, SG Cross Asset Research
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4
Domestic demand Net exports Inv entories GDP (% y oy )
2.5
2.7
2.9
3.1
3.3
3.5
3.7
19
19.5
20
20.5
21
21.5
22
22.5
23
23.5
Jan-05 Jan-07 Jan-09 Jan-11
Cons. Spending on manuf. Goods Car sales
EURbn 2000
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Calendar of economic releasesFriday 27-May-2011
GMT Period Previous SG Forecasts Consensus/
Actual
South Korea Current Account, USD mln 3:00(-1D) APR 1434.5 . 1876.8A
Goods Balance, USD mln 3:00(-1D) APR 2859 . 3927A
Japan Natl CPI (% YoY) 3:30(-1D) APR 0 0.5 0.3A
Natl CPI Ex-Fresh Food (% YoY) 3:30(-1D) APR -0.1 0.4 0.6A
Natl CPI Ex Food, Energy (% YoY) 3:30(-1D) APR -0.7 -0.2 -0.1A
Tokyo CPI (% YoY) 3:30(-1D) MAY -0.1 0 -0.1A
Tokyo CPI Ex-Fresh Food (% YoY) 3:30(-1D) MAY 0.2 0.3 0.1A
Tokyo CPI Ex Food, Energy (% YoY) 3:30(-1D) MAY 0 0.1 0.1A
Large Retailers' Sales (% YoY) 3:30(-1D) APR -7.5R -1 -1.9A
Retail Trade s.a. (% MoM) 3:30(-1D) APR -7.6R 5 4.1A
Retail Trade (% YoY) 3:30(-1D) APR -8.3R -2 -4.8A
China MNI Business Condition Survey 1:35 MAY 69.28 . 61.22A
Industrial Profits y.t.d. (% YoY) 2:00 APR 32 . 29.7A.
Spain Adjusted Real Retail Sales (% YoY) 7:00 APR -8.6 . -2A
Retail Sales (Real) (% YoY) 7:00 APR -8.0R . -2A.
Sweden GDP s.a. (% QoQ) 7:30 1Q 1.6R 1.4 0.8A
GDP w.d.a. (% YoY) 7:30 1Q 7.7R . 6.4A
Euro area M3 s.a. (% YoY) 8:00 APR 2.3 2.1 2.0A
M3 s.a. 3 mth ave. 8:00 APR 2 2.2 2.1A
Italy Hourly Wages (% MoM) 8:00 APR 0.2 0.2 0.1A
Hourly Wages (% YoY) 8:00 APR 2 2 1.8A
Norway Manufacturing Wage Index (% QoQ) 8:00 1Q 1.0R . 0.2A
Taiwan Coincident Index (% MoM) 8:00 APR 0.7R . 0.6A.
Leading Index (% MoM) 8:00 APR 0.3R . 0.3A.
Euro area Business Climate Indicator 9:00 MAY 1.28 1.2 0.99A
Consumer Confidence 9:00 MAY F -11.6 -12 -9.8A.
Economic Confidence 9:00 MAY 106.1R 105.5 105.5A
Indust. Confidence 9:00 MAY 5.6R 5 3.9AServices Confidence 9:00 MAY 10.4 10 9.2A
Portugal Consumer Confidence 9:00 MAY -49.5 . -50.3A.
Economic Climate Indicator 9:00 MAY -1.8 . -2.0A.
Switzerland KOF Swiss Leading Indicator 9:30 MAY .2.30R . 2.30A
Chile Central Bank Meeting Minutes 12:30 . .
US PCE Core (% MoM) 12:30 APR 0.1 0.2 0.2A
PCE Core (% YoY) 12:30 APR 0.9 1 1.0A
PCE Deflator (% YoY) 12:30 APR 1.8 2.2 2.2A
Personal Income (% MoM) 12:30 APR 0.4R 0.5 0.4A
Personal Spending (% MoM) 12:30 APR 0.5R 0.5 0.4A
U. of Michigan Confidence 13:55 MAY F 72.4 73 74.3A
Pending Home Sales (% MoM) 14:00 APR 5.1 2.1 -11.6A
Pending Home Sales (% YoY) 14:00 APR -11.5 -13.8 -26.8A
Mexico Overnight Rate 14:00 4.5 4.5 4.5A
Brazil Central Govt Budget, BRL bln APR 9.1B . 8
Germany Consumer Price Index (% MoM) MAY P 0.2 0 0.0A
Consumer Price Index (% YoY) MAY P 2.4 2.3 2.3A
CPI - EU Harmonised (% MoM) MAY P 0.3 0 -0.2A
CPI - EU Harmonised (% YoY) MAY P 2.7 2.6 2.4A
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WEEK 30-May to 3-June
GMT Period Previous SG Forecasts Consensus/
Actual
China Leading Index APR 101.71 . .
Ireland Consumer Confidence MAY 57.9 . .
Live Register Level s.a., k MAY 439.2 . .
Live Register Monthly Change, k MAY -1.6 . .
Unemployment Rate MAY 14.6 . .
Japan BOJ to Hold International Conference on Monetary Policy . .
Official Reserve Assets, USD bln MAY 1135.5 . .
South Korea Foreign Exchange Reserve, USD bln MAY 307.2 . .
Spain Consumer Confidence MAY 73.2 . .
UK Halifax House Prices 3Mths/Year MAY -3.7 . .
Halifax House Prices s.a (% MoM) MAY -1.4 . .
Monday 30-May-2011
GMT Period Previous SG Forecasts Consensus/
Actual
UK Bank HolidayUS Public Holiday
New ZealandExports, NZD bln 2:45(-1D) APR 4.61R 5 4.65A
Imports, NZD bln 2:45(-1D) APR 4.04R 4 3.54A
Trade Balance, NZD mln 2:45(-1D) APR 578R 1000 1113A
Trade Balance 12 Mth y.t.d. 2:45(-1D) APR 734R . 1187A
Japan Small Business Confidence 1:00 MAY 36.1 . 37.8A
Australia Company Operating Profit (% QoQ) 1:30 1Q -2.8 6 -2.0A
Inventories (% QoQ) 1:30 1Q 0.7 . 0.4A
New ZealandMoney Supply M3 (% YoY) 3:00 APR 5.6 . .
Spain Consumer Price Index (% YoY) 7:00 MAY P 3.8 3.7 3.5A
CPI (EU Harmonised) (% YoY) 7:00 MAY P 3.5 3.4 3.4A
Sweden Retail Sales n.s.a. (% YoY) 7:30 APR 0.4R . 5.2A
Retail Sales s.a. (% MoM) 7:30 APR -0.8 . 1.6A
Wages - Non-Manual Workers (% YoY) 7:30 MAR 1.9R . 1.7A
Taiwan Bounced Check Ratio 8:20 APR 0.16 . 0.18ABrazil FGV Inflation IGP-M (% MoM) 11:00 MAY 0.45 . 0.43A
FGV Inflation IGP-M (% YoY) 11:00 MAY 10.6 . 9.77A
Central Bank Weekly Economists Survey 11:30 . .
Chile Industrial Sales (% YoY) 12:00 APR 19.7 . 9.6A
Canada Current Account (BOP), USD bln 12:30 1Q -10.3R . -8.9A
Gross Domestic Product (% MoM) 12:30 MAR -0.1R 0.3 0.3A
Gross Domestic Product (% YoY) 12:30 MAR 3.0R . 2.8A
Quarterly GDP Annualized 12:30 1Q 3.1R 4.3 3.9A
Chile Copper Production Total 13:00 APR 450507 . 438340A
Industrial Production (% YoY) 13:00 APR 30.9 . 9.5A
Retail Sales (% YoY) 13:00 APR 16.4 . 8.7A
Brazil Outstanding Loans (% MoM) 13:30 APR 1.1R . 1.3A
Private Banks Lending, BRL bln 13:30 APR 1016R . 1029A
Total Outstanding Loans, BRL bln 13:30 APR 1754R . 1776A
Euro area ECB Announces Bond Purchases 13:30 . .
ECB Calls for Bids in 7-Day Main Refinancing Tender 13:30 . .
Mexico Budget Balance (y.t.d.), MXN bln 19:30 APR 1.26 . -6.637A
Colombia Overnight Lending Rate 3.75 4 4.0A
Portugal Retail Sales (% MoM) APR -5.5R . 3.0A
Retail Sales (% YoY) APR -7.7R . -4.3A
Tuesday 31-May-2011
GMT Period Previous SG Forecasts Consensus/
Actual
South Korea Business Survey- Manufacturing 1:00(-1D) JUN 100 102 97A
Business Survey- Non-Manufacturing 1:00(-1D) JUN 89 90 86A
Industrial Production (% MoM) 3:00(-1D) APR 1.7R 0 -1.5A
Industrial Production (% YoY) 3:00(-1D) APR 9.0R 7 6.9A
Industrial Production Mfg (% YoY) 3:00(-1D) APR 9.2R . 7.1A
Leading Index (% YoY) 3:00(-1D) APR 1.6 . 1.1A
Service Industry Output (% YoY) 3:00(-1D) APR 3.0R . 3.1A
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Japan Markit/JMMA Manufacturing PMI 3:15(-1D) MAY 45.7 . 51.3A
Jobless Rate 3:30(-1D) APR 4.6 4.6 4.7A
Job-To-Applicant Ratio 3:30(-1D) APR 0.63 0.61 0.61A
Overall Hhold Spending (% YoY) 3:30(-1D) APR -8.5 -3 -3.0A
Industrial Production (% MoM) 3:50(-1D) APR P -15.5 5 1.0A
Industrial Production (% YoY) 3:50(-1D) APR P -13.1 -8 -14.0A
Australia RP Data-Rismark House Px n.s.a. (% MoM) 0:30 APR -0.5R . -0.1A
RP Data-Rismark House Px s.a. (% MoM) 0:30 APR -0.6R . -0.3A
New Zealand NBNZ Activity Outlook 1:00 MAY 29.5 . 39.7A
NBNZ Business Confidence 1:00 MAY 14.2 . 38.3A
Australia Net Exports as % of GDP 1:30 1Q 0 -1 .
Building Approvals (% MoM) 1:30 APR 8.6R 4.2 -1.3A
Building Approvals (% YoY) 1:30 APR -19.3R . -11.5A
Current Account Balance, AUD mln 1:30 1Q -8091R -5600 -10447A
Private Sector Credit (% MoM) 1:30 APR 0.6 . 0.0A
Private Sector Credit (% YoY) 1:30 APR 3.5R . 3.3A
Japan Labor Cash Earnings YoY 1:30 APR -0.1R -0.4 -1.4A
Vehicle Production (% YoY) 4:00 APR -57.3 . .
Annualized Housing Starts, mln 5:00 APR 0.807 0.8 0.776Construction Orders (% YoY) 5:00 APR -11 . .
Housing Starts (% YoY) 5:00 APR -2.4 . -3.1
Switzerland GDP (% QoQ) 5:45 1Q 0.9 0.8 0.6
GDP (% YoY) 5:45 1Q 3.1 3.2 2.9
UBS Consumption Indicator 6:00 APR 1.66 . .
Germany Retail Sales (% MoM) 6:00 APR -2.7 3 1.8
Retail Sales (% YoY) 6:00 APR -3.5 2.9 1.5
France Consumer Spending (% MoM) 6:45 APR -0.7 -0.3 0
Consumer Spending (% YoY) 6:45 APR 2.6 3.6 4.4
Producer Prices (% MoM) 6:45 APR 0.9 . 0.8
Producer Prices (% YoY) 6:45 APR 6.6 . 6.4
Sweden Current Account, SEK bln 7:30 1Q 53.3 . .
Germany Unemployment Change, k 7:55 MAY -37 -28 -30
Unemployment Rate s.a 7:55 MAY 7.1 7 7
Italy Unemployment Rate s.a. 8:00 APR P 8.3 8.3 8.3Norway Credit Indicator Growth (% YoY) 8:00 APR 6.3 . 6.4
Retail sales - vol s.a. (% MoM) 8:00 APR -0.5 . 0.7
Retail Sales - vol. n.s.a. (% YoY) 8:00 APR -5.4 . 3.4
Poland GDP (% YoY) 8:00 1Q 4.4 4.5 4.4
GDP s.a. (% QoQ) 8:00 1Q 0.8 . .
Italy Governor Draghi Speaks at Annual Meeting of the Bank of Italy 8:30 . .
Hong Kong Retail Sales - Value (% YoY) 8:30 APR 26 26.7 25
Retail Sales - Volume (% YoY) 8:30 APR 20 21.4 19.8
Italy CPI - EU Harmonized (% MoM) 9:00 MAY P 1 0 0.2
CPI - EU Harmonized (% YoY) 9:00 MAY P 2.9 2.8 3
CPI (NIC incl. tobacco) (% MoM) 9:00 MAY P 0.5 0 0.2
CPI (NIC incl. tobacco) (% YoY) 9:00 MAY P 2.6 2.5 2.7
Euro area CPI Estimate (% YoY) 9:00 MAY 2.8 2.8 2.8
Unemployment Rate 9:00 APR 9.9 . 9.9
Hong Kong Govt Mthly Budget Surp/Def, HKD bln 9:00 APR -9.1 . .
Money Supply M1 - in HKD (% YoY) 9:00 APR 4.6 . .
Money Supply M2 - in HKD (% YoY) 9:00 APR 7.4 . .
Money Supply M3 - in HKD (% YoY) 9:00 APR 7.2 . .
Euro area ECB Announces Allotment in 7-Day Main Refinancing Tender 9:15 . .
Italy PPI (% MoM) 10:00 APR 0.7 . 0.9
PPI (% YoY) 10:00 APR 6.1 . 5.5
Euro area ECB Announces Allotment in 7-Day Term Deposits 11:00 . .
Brazil Industrial Production s.a. (% MoM) 12:00 APR 0.5 . 0.4
Industrial Production (% YoY) 12:00 APR -2.1 1.3 0.8
Chile Unemployment Rate 12:00 APR 7.3 7.5 7.4
Canada Industrial Product Price (% MoM) 12:30 APR 0.9 . 0.7
Raw Materials Price Index (% MoM) 12:30 APR 5.7 . 4.2
Bank of Canada Rate 13:00 1 1 1
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US S&P/CaseShiller Home Price Ind 13:00 MAR 139.27 138.9 .
S&P/Case-Shiller US HPI 13:00 1Q 130.38 . .
S&P/Case-Shiller US HPI (% YoY) 13:00 1Q -4.13 . .
S&P/CS 20 City s.a. (% MoM) 13:00 MAR -0.18 -0.1 -0.2
S&P/CS Composite-20 (% YoY) 13:00 MAR -3.33 -3.1 -3.5
Brazil Net Debt % GDP 13:30 APR 39.9 . .
Nominal Budget Balance, BRL bln 13:30 APR -6.9 . .
Primary Budget Balance, BRL bln 13:30 APR 13.6 . .
US Chicago Purchasing Manager 13:45 MAY 67.6 63.6 63
Consumer Confidence 14:00 MAY 65.4 64 66.4
NAPM-Milwaukee 14:00 MAY 68 62 .
Dallas Fed Manf. Activity 14:30 MAY 10.5 2.5 8.5
Euro area ECB's Ewald Nowotny Speaks in Vienna 16:00 . .
Colombia Urban Unemployment Rate 16:00 APR 12.2 . 11.8
Greece Retail Sales (% YoY) MAR -7 . .
India Qtrly GDP (% YoY) 1Q 8.2 10 8.1
Peru GDP (% YoY) 1Q 9.2 8.8 8.8
Portugal Industrial Production (% MoM) APR 0.4 . .
Industrial Production (% YoY) APR -2.4 . .Spain Current Account, EUR bln MAR -5.4 . .
Total Housing Permits (% MoM) MAR 21.9 . .
Total Housing Permits (% YoY) MAR 3.6 . .
Wednesday 1-Jun-2011
GMT Period Previous SG Forecasts Consensus/
Actual
New Zealand Terms of Trade Index (% QoQ) 2:45(-1D) 1Q 0.6 . .
South Korea Consumer Price Index (% MoM) 3:30(-1D) MAY 0 0.2 0.2
Consumer Price Index (% YoY) 3:30(-1D) MAY 4.2 4.2 4.3
Core Consumer Price Index (% YoY) 3:30(-1D) MAY 3.2 3.2 .
Australia AiG Performance of Mfg Index 3:30(-1D) MAY 48.4 . .
Japan Loans & Discounts Corp (% YoY) 3:50(-1D) APR -2.2 . .
South Korea Balance, USD mln 1:00 MAY 5823 . 4528
Export, USD mln 1:00 MAY 49773 . .Import, USD mln 1:00 MAY 43951 . .
Export (% YoY) 1:00 MAY 26.6 . 27.7
Imports (% YoY) 1:00 MAY 23.7 . 29
Australia HIA New Home Sales (% MoM) 1:00 APR 4.3 . .
China PMI Manufacturing 1:00 MAY 52.9 51.6 51.6
New Zealand ANZ Commodity Price 1:00 MAY 1.6 . .
Australia Gross Domestic Product (% QoQ) 1:30 1Q 0.7 -0.2 -0.3
Gross Domestic Product (% YoY) 1:30 1Q 2.7 3 1.8
Taiwan HSBC Manufacturing PMI 2:00 MAY 58.2 . .
China HSBC Manufacturing PMI 2:30 MAY 51.8 . .
India Markit Manufacturing PMI (Table) 5:00 MAY 58 . .
Japan Vehicle Sales (% YoY) 5:00 MAY -51 . .
India Exports (% YoY) 5:30 APR 43.9 45 .
Imports (% YoY) 5:30 APR 17.3 20 .
France ILO Mainland Unemployment Rate 5:30 1Q 9.2 9 .
ILO Unemployment Rate 5:30 1Q 9.6 . 9.4
Mainland Unemp. Change, k 5:30 1Q -49 -44 .
Ireland NCB Manufacturing PMI 6:00 . .
Australia RBA Commodity Index SDR (% YoY) 6:30 MAY 32.3 . .
RBA Commodity Price Index Au 6:30 MAY 106.1 . .
Sweden Swedbank PMI Survey 6:30 MAY 59.8 60.1 59.2
Poland Manufacturing PMI 7:00 MAY 54.4 54 .
Euro area ECB Calls for Bids in 7-Day Dollar Tender 7:15 . .
Spain Manufacturing PMI 7:15 MAY 50.6 49.5 .
Switzerland Retail Sales (Real) (% YoY) 7:15 APR -0.2 . .
SVME-Purchasing Managers Index 7:30 MAY 58.4 . 57.5
Italy Manufacturing PMI 7:45 MAY 55.5 54.5 53
France Manufacturing PMI 7:50 MAY F 55 55.3 55
Germany Manufacturing PMI 7:55 MAY F 62 58.2 58.2Euro area Manufacturing PMI 8:00 MAY F 54.8 54.8 54.8
Norway PMI s.a. 8:00 MAY 55.6 . 55.4
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UK M4 Money Supply (% MoM) 8:30 APR 0.1 . .
M4 Money Supply (% YoY) 8:30 APR -1.1 . .
M4 Ex OFCs 3M Annualised 8:30 APR 1 . .
Mortgage Approvals, k 8:30 APR 47.6 47 47.9
Net Consumer Credit, GBP bln 8:30 APR 0.1 0.3 0.3
Net Lending Sec. on Dwellings, GBP bln 8:30 APR 0.4 . 0.6
Trends in Lending data
Manufacturing PMI 8:30 MAY 54.6 53.5 54
Euro area ECB Announces Allotment in 7-Day Dollar Tender 9:00 . .
Brazil FGV CPI IPC-S 11:00 27-May 0.47 . .
India 364 Day T-Bill Cutoff Yield 11:00 1-Jun 8.2947 . .
91 Day T-Bill Cutoff Yield 11:00 1-Jun 8.1439 . .
US MBA Mortgage Applications 11:00 27-May 1.1 . .
Challenger Job Cuts (% YoY) 11:30 MAY -4.8 . .
ADP Employment Change, k 12:15 MAY 179 125 178
Brazil Manufacturing PMI 13:00 MAY 50.7 . .
Euro area ECB's Trichet Speaks in Aachen, Germany 13:00 . .
Brazil Exports, USD mln 14:00 MAY 20173 . 21100
Imports, USD mln 14:00 MAY 18310 . 18600Trade Balance (FOB) - Monthly, USD mln 14:00 MAY 1863 3500 2500
US Construction Spending (% MoM) 14:00 APR 1.4 0.7 0.4
Manufacturing ISM 14:00 MAY 60.4 58.7 58
Prices Paid ISM 14:00 MAY 85.5 87 81.8
Mexico Central Bank Economists Survey 14:00 . .
Remittances, USD mln 14:00 APR 2049 . 1950
Italy New Car Registrations (% YoY) 16:00 MAY -2.2 . .
US Fed's Pianalto Speaks on Labor Markets in Columbus, OH 16:25 . .
Italy Budget Balance, EUR bln 17:00 MAY -8.8 . .
Budget Balance (y.t.d), EUR bln 17:00 MAY -40.1 . .
US Domestic Vehicle Sales, mln 21:00 MAY 10.2 . 9.8
Total Vehicle Sales, mln 21:00 MAY 13.14 12.2 12.8
Peru Consumer Price Index (% MoM) MAY 0.68 0.31 0.28
Consumer Price Index (% YoY) MAY 3.34 3.41 3.35
Wholesale Prices (% MoM) MAY 1.11 . .South Korea HSBC Manufacturing PMI MAY 51.7 . .
Thursday 2-Jun-2011
GMT Period Previous SG Forecasts Consensus/
Actual
Japan Capital Spending 3:50(-1D) 1Q 3.8 4 3
Capital Spending excl Sftwre 3:50(-1D) 1Q 4.8 5 -1
Monetary Base (% YoY) 3:50(-1D) MAY 23.9 . .
Australia Retail Sales s.a. (% MoM) 1:30 APR -0.5 1 0.4
Trade Balance, AUD mln 1:30 APR 1740 1500 2100
Japan BOJ Board Member Nakamura to Speak in Nara City 1:30 . .
India Food Articles WPI (% YoY) 6:30 21-May . .
Fuel Power Light WPI (% YoY) 6:30 21-May . .
Primary Articles WPI (% YoY) 6:30 21-May . .
Spain Unemployment MoM Net, k 7:00 MAY -64.3 . .
Brazil FIPE CPI - Monthly 8:00 MAY 0.7 . 0.45
UK Construction PMI 8:30 MAY 53.3 52 53.5
Euro area ECB's Trichet Speaks in Aachen, Germany 9:15 . .
US RBC Consumer Outlook Index 12:00 JUN 42.9 . .
Continuing Claims 12:30 21-May 3690 3610 .
Initial Jobless Claims 12:30 28-May 424 417 .
Nonfarm Productivity 12:30 1Q F 1.6 1.8 1.8
Unit Labor Costs 12:30 1Q F 1 0.8 0.8
Factory Orders 14:00 APR 3 -0.6 -0.8
Canada Bank of Canada Senior Deputy Governor Macklem in Toronto 16:00 . .
US ICSC Chain Store Sales (% YoY) MAY 8.5 3.5 .
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Friday 3-Jun-2011
GMT Period Previous SG Forecasts Consensus/
Actual
New ZealandBuilding Permits (% MoM) 2:45(-1D) APR 2.2 . 0.5
Australia AiG Performance of Service Index 1:30(-1D) MAY 51.5 . .
China Non-manufacturing PMI 1:00 MAY 62.5 . .
HSBC Services PMI 2:30 MAY 51.6 . .
Hong Kong Purchasing Managers Index 2:30 MAY 52.9 . .
India Markit Services PMI (Table) 5:00 MAY 59.2 . .
Ireland NCB Services PMI 6:00 MAY 56 . .
Spain Services PMI 7:15 MAY 50.4 50 .
Italy Services PMI 7:45 MAY 52.2 51.6 51.6
France Services PMI 7:50 MAY F 62.8 62.5 62.8
Germany Services PMI 7:55 MAY F 56.8 55 54.9
Euro area Composite PMI 8:00 MAY F 55.4 55.4 55.4
Services PMI 8:00 MAY F 55.4 55.4 55.4
Taiwan Foreign Exchange Reserves, USD bln 8:20 MAY 399.54 . .
UK Official Reserves (Changes), USD mln 8:30 MAY 1663 . .
Services PMI 8:30 MAY 54.3 53.9 54.2Brazil GDP (IBGE) 4Qtrs Accumulated 12:00 1Q 7.5 . .
GDP (IBGE) (% QoQ) 12:00 1Q 0.7 1.1 1.2
GDP (IBGE) (% YoY) 12:00 1Q 5 4 4.2
US Avg Hourly Earning All Emp (% MoM) 12:30 MAY 0.1 0.1 0.2
Avg Hourly Earning All Emp (% YoY) 12:30 MAY 1.9 1.8 1.9
Avg Weekly Hours All Employees 12:30 MAY 34.3 34.3 34.3
Change in Manufact. Payrolls, k 12:30 MAY 29 . 15
Change in Nonfarm Payrolls, k 12:30 MAY 244 160 195
Change in Private Payrolls, k 12:30 MAY 268 180 220
Chg in Household Survey Emply 12:30 MAY -190 . .
Unemployment Rate 12:30 MAY 9 8.7 8.9
Mexico Consumer Confidence 13:00 MAY 89.7 . 90.1
US Non-Manf. Composite ISM 14:00 MAY 52.8 53.4 54.3
Euro area ECB's Gonzalez-Paramo Speaks in Barcelona 14:15 . .
Colombia Exports FOB, USD mln 21:00 APR 4899.4 . .
Producer Price Index (% MoM) 21:00 MAY 0.2 . .
Producer Price Index (% YoY) 21:00 MAY 4.66 . .
Portugal Industrial Sales (% MoM) APR 12.2 . .
Industrial sales (% YoY) APR 8.5 . .
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European Themes Ireland: Deleveraging, the HousingMarket and the Risks of a Severe Credit Crunch
Inflation Themes: UK inflation target should be raised but not until the existing one has been met!
Ireland is an insightful, if extreme, casestudy on the euro areas twin banking and
sovereign crises and the prospects for
deleveraging. In the aftermath of the
elections, we explore the extraordinary
economic challenges that lie ahead.
The Bank of England has repeatedlymissed the 2% inflation target in recent
years and claims this is because of factors
beyond its control. We disagree. The
fundamental problem is that the core rate
of inflation looks likely to settle well above
the target.
Asia Themes - China landing watchEuropean Themes - Under Construction: Hard-hat
Mandatory!
We have adopted a bumpy landing asour core scenario for the Chinese
economy but we still believe a hard
landing is a risk scenario. We identify 9
possible events under three risk themes
as triggers for potential hard landingareas that we will be monitoring closely.
One year on from the Greek bail-out andthe dramatic May weekend that brought
the EFSF and SMP, Europes new house
is still a messy construction site, with
unruly plumbing and squabbling
architects. Construction will proceed andthe new house will be built, but it will be
arduous work and come in fits and starts,
leaving markets vulnerable.
For further details on the Global Economic Outlook see our latest Country Notes
Recent EditorialsGSEs receive the invite to the Fed repo party (27/05/2011)
Greece: Solvency unsolved (26/05/2011)
Japans decliningpension reserves (25/05/2011)
China: Declining or Derailing? (24/05/2011)
When will euro area inflation peak? (23/05/2011)
publicationsAsia Themes- Japan will rebound. How about Asia?
American Themes Fed Exit-Losing the weight before
raising the rate
On 11 March 2011, Japan was hit by atriple disaster; a combination of a M9.0earthquake, tsunami and a serious nuclear
incident. We have looked at Japans
economy and the doubts raised about its
immediate economic future, as well as the
potential repercussions for the rest of
Asia.
The easing cycle is set to end in June.The Fed is likely to take a brief pausebefore moving on to outright tightening.
We look for exit steps to be staggered,
starting around September. Rate hikes
themselves should come late in the exit
process. Relative to market expectations
for a Q12012 rate increase, we see the
risks skewed toward a later tightening.
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The Economic News
ECONOMICSGlobal Head of EconomicsMichala Marcussen(44) 20 7676 [email protected]
Euro areaKlaus Baader James Nixon Vladimir Pillonca Michel Martinez(44) 20 7676 7609 (44) 20 7676 7385 (44) 20 7676 7863 (33) 1 42 13 34 [email protected] [email protected] [email protected] [email protected]
United Kingdom Scandinavia / Switzerland PolandBrian Hilliard Anatoli Annenkov Jaroslaw Janecki(44) 20 7676 7165 (44) 20 7762 4676 (48) 22 528 41 [email protected] [email protected] [email protected]
AmericasAneta Markowska Alejandro Cuadrado Rudy Narvas Brian Jones(1) 212 278 66 53 (1) 212 278 73 13 (1) 212 278 76 62 (1) 212 278 69 [email protected] [email protected] [email protected] [email protected]
Asia PacificGlenn Maguire Takuji Okubo Wei Yao Joseph Lau(852) 2166 5438 (81) 355 49 5560 (852) 2166 5437 (852) 2166 [email protected] [email protected] [email protected] [email protected]
Research AssociatesLydia Boussour Martin Rose Mehreen Khan Ramzi BerrimaDavid Tam Samuel Slama Alexandre Donna
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