global macro trends and strategies - bloomberg

Financial Conditions WatchJuly 25, 2012

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Bloomberg

FINANCIAL CONDITIONS WATCHJULY 25, 2012

Bloomberg

GLOBAL MACRO TRENDS AND STRATEGIES

MICHAEL R. ROSENBERG

Volume 5 No. 3

Available on the Bloomberg at FCW <go> and FCON <go>

Negative Real Yields on Safe Assets, Coupled With Heightened Investor Risk Aversion toward Risky Assets, Pose a Dilemma for Policymakers and Asset-Allocators Alike

andWhat’s Left in the Fed’s Arsenal?

“Monetary policy works in the fi rst instance by affecting fi nancial conditions, including the levels of interest rates and asset prices. Changes in fi nancial conditions in turn infl uence a variety of decisions by households and fi rms, including choices about how much to consume, to produce, and to invest.” Federal Reserve Chairman Ben S. Bernanke, March 2, 2007

Inside This Issue:

Financial Conditions Watch July 25, 2012

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Bloomberg

Table of ContentsYield Spread/Volatility Watch ...........................................3

Overview..........................................................................4


Special Focus ................................................................10

What’s Left in the Fed’s Arsenal?

Bloomberg’s U.S. Financial Condition Index .................19U.S. Financial Condition Indicators ...............................20

Bloomberg’s Euro-Area Financial Condition Index ........24Euro-Area Financial Conditions Indicators ....................25

Japan Financial Conditions Indicators ...........................26UK Financial Conditions Indicators................................27

Federal Reserve Policy Watch ......................................28G-10 Economic Outlook ................................................29EMEA Economic Outlook ..............................................45Asia Economic Outlook .................................................52Latin America Economic Outlook...................................63

Yield Pick-Up of Currency Hedged Foreign Bonds .......69

Keeping Up With the Financial Crisis ............................70


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-- Jan. 1994-June 2008 -- Latest Avg. Std. Dev. Z-Score

Financial Conditions Relative to the Pre-Crisis Period

---- 52-Week ---- Latest Avg. Std. Dev. Z-Score

Financial Conditions Relative to the Past 52 Weeks

Notes:Unless noted otherwise, all indicators are basis-point yield spreads.Indicators highlighted in orange are signifi cantly above or below their January 7, 2000-June 29, 2008 aver-age levels.

U.S. Money-Market Spreads TED Spread 35 46.6 31.6 -0.37Libor/OIS Spread 30 19.0 20.6 0.55CP/T-Bill Spread 30 39.2 35.9 -0.25 U.S. Yield Curve Spreads 2-Yr./Fed Funds Spread -3.30 36.1 76.1 -0.5210-Yr./3-Mo. Spread 131 137.7 116.1 -0.0610-Yr./2-Yr. Spread 119 79.9 82.5 0.47 U.S. Agency Bond Spreads 2-Yr. Fannie Mae Spread 3 27.6 16.1 -1.5210-Yr. Agency Spread -14 56.5 20.3 -3.48 U.S. Municipal Bond Spreads AAA Muni/10-Yr. Spread 76 -99.1 49.9 3.50AA Muni/10-Yr. Spread 106 -91.0 49.9 3.93A Muni/10-Yr. Spread 286 -9.8 63.9 4.62Baa Bond/10-Yr. Spread 373 15.7 76.4 4.67 U.S. Investment-Grade Corporate Spreads AAA/10-Yr. Gov’t Spread 183 128.7 45.3 1.19AA/10-Yr. Gov’t Spread 198 154.7 51.3 0.83A/10-Yr. Gov’t Spread 239 175.0 57.1 1.11Baa/10-Yr. Gov’t Spread 333 212.7 60.1 1.99 U.S. Swap Spreads U.S. 2-Yr. Swap Spread 22 41.2 18.5 -1.02U.S. 10-Yr. Swap Spread 14 57.2 23.0 -1.89U.S. 1-Yr. Fwd. Swap Yld.(%) 2 5.9 1.0 -4.41 North American Credit Default Swap Spreads IBOX 5-Yr. Invest. Grade 117 57.2 26.9 2.21 High-Yield Spreads High-Yield Corp. Spread 654 524.0 189.5 0.68EMBI+ Spread 358 583.8 324.0 -0.70 U.S. Infl ation Protected Bond Yields 5-Yr. Tips Yield -1.15 2.41 1.17 -3.0410-Yr. Tips Yield -0.68 2.81 0.90 -3.865-Yr. Breakeven Infl ation Rate 1.68 2.20 0.41 -1.2510-Yr. Breakeven Infl ation Rate 2.00 2.06 0.44 -0.135-Yr. Breakeven in 5 Years 2.63 2.54 0.08 1.15 U.S. Equity Market S&P 500 1342.9 1058.4 312.2 0.91S&P Financials 191.3 395.8 59.2 -3.45MBIA 9.8 42.9 15.7 -2.11VIX Index 19.1 19.3 6.6 -0.03 Fixed Income/FX Market Volatility Move Index 62.9 100.8 22.5 -1.68Swaption Volatility Index 78.7 91.1 12.1 -1.02Euro-Dollar Volatility 11.1 9.8 2.0 0.64Dollar-Yen Volatility Index 8.0 10.6 2.7 -0.98

Notes:Unless noted otherwise, all indicators are basis-point yield spreads.Indicators highlighted in orange are signifi cantly above or below their 52-week average levels.

U.S. Money-Market Spreads TED Spread 35 41.2 7.6 -0.83Libor/OIS Spread 30 34.2 7.7 -0.49CP/T-Bill Spread 30 43.2 7.0 -1.86 U.S. Yield Curve Spreads2-Yr./Fed Funds Spread -3 0.8 4.4 -0.9510-Yr./3-Mo. Spread 131 189.5 26.0 -2.2710-Yr./2-Yr. Spread 119 168.3 23.5 -2.10 U.S. Agency Bond Spreads 2-Yr. Fannie Mae Spread 3 9.1 5.1 -1.1810-Yr. Agency Spread -14 -8.6 10.9 -0.50 U.S. Municipal Bond Spreads AAA Muni/10-Yr. Spread 76 32.4 21.7 1.98AA Muni/10-Yr. Spread 106 60.9 29.4 1.51A Muni/10-Yr. Spread 286 248.5 31.7 1.17Baa Bond/10-Yr. Spread 373 332.2 34.1 1.18 U.S. Investment-Grade Corporate Spreads AAA/10-Yr. Gov’t Spread 183 195.9 14.0 -0.96AA/10-Yr. Gov’t Spread 198 209.3 12.9 -0.91A/10-Yr. Gov’t Spread 239 244.9 11.0 -0.58Baa/10-Yr. Gov’t Spread 333 324.1 14.0 0.60 U.S. Swap Spreads U.S. 2-Yr. Swap Spread 22 33.1 8.2 -1.31U.S. 10-Yr. Swap Spread 14 14.4 4.0 -0.17U.S. 1-Yr. Fwd. Swap Yld.(%) 1.7 2.3 0.3 -2.21 North American Credit Default Swap Spreads IBOX 5-Yr. Invest. Grade 117 115.0 15.1 0.12 High-Yield Spreads High-Yield Corp. Spread 654 691.4 52.4 -0.72EMBI+ Spread 358 356.8 30.1 0.06 U.S. Infl ation Protected Bond Yields 5-Yr. Tips Yield -1.15 -1.04 0.22 -0.4810-Yr. Tips Yield -0.68 -0.19 0.25 -1.965-Yr. Breakeven Infl ation Rate 1.68 1.78 0.18 -0.5110-Yr. Breakeven Infl ation Rate 2.00 2.11 0.14 -0.765-Yr. Breakeven in 5 Years 2.63 2.51 0.15 0.81 U.S. Equity Market S&P 500 1342.9 1289.2 83.4 0.64S&P Financials 191.3 185.9 15.5 0.35MBIA 9.8 9.6 1.8 0.13VIX Index 19.1 24.3 8.0 -0.65 Fixed Income/FX Market Volatility Move Index 62.9 86.5 15.7 -1.51Swaption Volatility Index 78.7 89.8 5.6 -1.97Euro-Dollar Volatility 11.1 12.8 2.1 -0.76Dollar-Yen Volatility Index 8.0 9.7 1.1 -1.47

Yield Spread/Volatility Watch


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Overview


When discussing the impact that risk appetite consider-ations are having on the fi nancial markets and the broader trend in economic activity, it is useful to distinguish between the level of risk appetite and changes in risk appetite. For example, as shown in Figure 1, not only is the level of fi nancial conditions lower than its pre-crisis average, but the volatility of fi nancial conditions has increased signifi -cantly as well.

As the stylized diagram in Figure 2 illustrates, the level of risk appetite in the pre-crisis period was fairly high as evidenced by the run-up in the prices of housing and other risky assets. Around that higher level of risk appetite,

monthly changes in risk appetite tended to be muted as evi-denced by the persistently narrow Baa corporate-Treasury bond spread (see Figure 3) and the persistently low level of the VIX Index (see Figure 4).

The post-crisis period portrays a very different picture for both the level and changes in risk appetite. As illustrated in Figure 2, not only is the level of risk appetite in the post-crisis period considerably lower than the levels that prevailed in the pre-crisis period, but changes in risk ap-petite around the new lower level are now considerably more volatile as well. Evidence of this pattern can be found in Figure 3, where the Baa corporate-Treasury spread in

Figure 3 Figure 4

Baa Corporate/ 10-Year Treasury Yield Spreads(2004-2012)

Source: Bloomberg

Figure 2

Stylized Model of the Post-Crisis Loss of Risk Appetite

Source: Bloomberg

Source: Bloomberg

Figure 1

Volatility of U.S. Financial Conditions in the Pre- and Post-Crisis Era

Pre-Crisis PeriodOf Persistently Low

Baa Spreads

Post-Crisis PeriodOf Higher Baa

Spreads

Crisis Period

Pre-Crisis Periodof Persistently Low

Equity Market Volatility

Post-Crisis PeriodOf Higher Equity Market Volatility

Crisis Period

VIX Index of S&P 500 Volatility(2004-2012)

Pre-Crisis Period --Lower Volatility of

Financial Conditions

Post-Crisis Period --Higher Volatility of

Financial Conditions

Crisis Period

2012

Risk Appetite

Pre-Crisis Periodof High Risk Appetite

2004 2007-08

Post-Crisis Periodof Low Risk Appetite

Source: Bloomberg


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the post-crisis period is not only higher than the pre-crisis average, but the volatility in that spread is now consider-ably greater as well. Figure 4 shows that the VIX Index in the post-crisis period is exhibiting signifi cantly larger and more frequent volatility spikes than was the case in the pre-crisis era.

Distinguishing between the level and change in risk appetite provides insights into the dilemma facing households and fund managers in deciding how much of investor funds should be allocated to safe assets such as Treasuries, and how much to risky assets such as equities. With the overall level of risk appetite now considerably lower than it was pre-crisis, there has been a signifi cant shift in how economic agents are now allocating their portfolios be-tween equities and bonds.

For example, a recent Towers Watson survey of life insur-ance company CFOs found that a whopping 87% believed that “there is a 50% or greater likelihood of a major disrup-tion to the economy in the next 12 to 18 months.” Given such extensive fears of potentially large downside risks, life insurance company CFOs are altering their business strategies in terms of exiting or altering existing product lines, and are at the same time adjusting their asset al-locations accordingly.

In addition, investor surveys reveal that households are now allocating a greater share of their assets to fi xed-income products because of the perceived downside (negative tail) risk associated with equities. A recent Belgian central bank survey of Belgian households found that a relatively large number of respondents—70.7%—indicated that they were unwilling to take any fi nancial risk in today’s environment, while 23.9% were willing to only take average risks with the expectation of earning average returns. Only 5.5% were willing to take above-average or substantial risks with the hope of earning above-average returns.

Similar concerns were expressed in a recent survey of Australian households by the Reserve Bank of Australia. According to the RBA, “Australian households’ appetite for risk appears to have declined in recent years with households having actively shifted their portfolios away from riskier assets.”

Evidence of a declining willingness to take on fi nancial risk is evidenced by the declining volume of equity market transactions (see Figure 5) and by the negative real yield on U.S. Treasuries. As shown in Figure 6, the real yield on fi ve-year TIPS has declined from an average positive read-ing of +2.0%-2.5% to a negative reading of -1.2% today.

Figure 5

Source: Bloomberg

S&P 500 Volume(1995-2012)

Source: Bloomberg

Figure 6U.S. Five-Year Tips Yield

(Treasury Infl ation Protected Sedcurities, 2004-2012)

Pre-Crisis Period

Post-Crisis Period

Crisis Period


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The fact that investors are willing to accept a negative real yield rather than move into potentially higher-returning riskier assets indicates that they are not confi dent that risky assets will generate signifi cantly attractive risk-adjusted returns to make such an asset-allocation shift worthwhile. Indeed, risk aversion is so pervasive at the moment in Europe that not only are real yields in the core markets in negative territory, but nominal yields in several core markets in the two-year area of the yield curve are negative (see Figure 7) or close to zero.

Economic agents are thus left with a diffi cult choice—how much to allocate to bonds that offer negative real yields, and how much to allocate to equities that entail large perceived negative tail risk. Interestingly, the Financial Analyst Journal recently had a guest editorial by Andre F. Perold, who posed a question to investors on this subject. If investors set a targeted portfolio return of 5% per annum in real terms to fi nance current consumption and allocate their funds along traditional 60% equity/40% bonds lines, and given that U.S. real bond yield returns are presently negative at -1.2%, then equities would need to generate an annual expected real return of 9.1% per annum in order to generate a portfolio expected real return of 5% = (60% x 9.1%) + (40% x -1.2%).

That would amount to an expected equity risk premium of 10.3% per annum in real terms (9.1% - (-1.2%)), which would be roughly 2.5 times its long-run historical average of 4.1%. (Note that the equity risk premium is defi ned as the excess return of equities over bonds.)

If investors do not believe that the equity risk premium will be that high in the future, then they are left with two options. Then can either increase their exposure to risky assets—by increasing the share of equities in their port-folios to greater than 60%—in order to meet their 5% real return target, or they would need to set a lower targeted real return for their portfolio that fi ts more closely with their more risk-averse leanings.

The prospect of anticipated lower real portfolio returns could be having a major bearing on the U.S. economic outlook and could infl uence likely policy steps in the fu-ture. If it is assumed that households have a target for net household wealth, and allocate their savings to meet that target, then how far current wealth levels are deviating from their targeted levels could determine how much households are willing to spend and how much they are willing to save out of their current incomes.

Consider the trend in net household wealth since the onset of the crisis shown in Figure 8. Net household wealth has fallen from a high of $67.5 trillion in the third quarter of 2007 to a low of $51.3 trillion in the fi rst quarter of 2009. Since the 2009 trough, net household wealth has recovered some of its lost ground, edging up to $62.9 trillion in the fi rst quarter of 2012. In real terms, net household wealth is probably down some 15% from its pre-crisis peak.

If households wish to restore their net wealth to its pre-crisis path, but portfolio real returns are expected to be modest at best, then households will have to choose one of two paths: either (1) accept that it will take longer to restore net wealth back to its desired path, or (2) if they wish to speed up the process of restoring net wealth to its desired path and given the current low level of risk appetite, then more of household funds will need to be allocated to savings and less to consumption.

This is an important issue for both the baby boom genera-tion, who are currently saving for retirement, and for the next generation who are saving for a future home and the education of their children. Risk aversion, coupled with negative real yields on safe assets, poses a major hurdle for both of these two large segments of the population—either more of household funds will need to be allocated to savings, or signifi cant shortfalls in desired wealth must inevitably result, which could have consequences for spending in the future.

Figure 8

Source: Bloomberg

U.S. Net Household Worth(1995-2012)

Figure 7German Two-Year Bund Yield

(2004-12)

Source: Bloomberg

Pre-Crisis Period

Post-Crisis Period

Crisis Period


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The downside risks associated with low real yields dis-cussed here are at odds with conventional macroeconomic theory, which states that lower real yields are needed to boost economic activity when considerable economic slack exists, as it does today. In theory, lower real yields should encourage consumers and businesses to save less and spend more, and at the same time increase investor demand for risky assets.

But with real interest rates already in negative territory, the questions become: Could a further decline of real interest rates actually be counterproductive? And how do you push real interest rates lower when nominal interest rates at both the front and back ends of the yield curve are already at or approaching the zero bound?

One way for the Fed to engineer an even lower real interest rate—which has the support of leading academic econo-mists such as Paul Krugman, Ken Rogoff and Greg Mankiw as well as key IMF economists—is for the Fed to consider raising its implicit target for U.S. infl ation from 2% today to perhaps 4%-6% for a period of time. Raising the infl ation rate temporarily would in theory: (1) help lower the real debt burden of over-indebted households and governments, (2) encourage households to spend more now rather than delay purchases to the future when prices are likely to be signifi cantly higher in a higher infl ation regime, (3) lower the level of U.S. unemployment by rolling up along a downward sloping Phillips (infl ation/unemployment tradeoff) curve (see Figure 9), and (4) lower the real interest rate further to encourage greater investment spending along a downward sloping IS curve (see Figure 10 on the following page).

Figure 9

Short-Run and Long-Run Tradeoffs Between Infl ation and Unemploymentvia the Phillips Curve

Source: Bloomberg

Unemployment Rate

Inflation Rate

A

C

Elastic Short-Run Philips

Curve

In the short-run, an increase in inflation could lower the unemployment rate from U1to U2.

2

U1

Decrease in Unemployment

B

1

U2

Increase in Inflation

Inelastic Long-Run Philips

Curve

U3


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Figure 11

Source: Bloomberg

U.S. Monetary Base (2004-2012)

$824 Billion

$2.615 Trillion

Raising the Fed’s implicit infl ation target faces a number of hurdles, however. First, and foremost, most macro models today posit that the output gap is a key determinant of U.S. infl ation. Therefore, given that the U.S. presently faces a negative output gap, it may not be easy to push the actual infl ation rate higher at a time when substantial economic slack exists.

Second, simply raising the growth rate of the monetary base may not be enough to raise the U.S. infl ation rate. After all, U.S. infl ation has been fairly tame over the past 4-5 years despite the fact that the U.S. monetary base has tripled in size over that period, having risen from $820 billion in 2008 to $2.6 trillion today (see Figure 11).

Third, attempting to reduce the real debt burden of house-holds and governments via higher infl ation may not be that easy if a sizable share of that debt is fl oating rather than fi xed, or if the maturity of that debt is short rather than long. If a large share of the debt is fl oating or has a relatively short maturity, market participants will eventually adjust to the higher infl ation outlook by pushing up the yield on fl oating-rate securities and short-maturity debt. In such a case, the overall debt burden of over-leveraged households and governments would not be signifi cantly reduced, if at all.

Fourth, targeting a higher infl ation rate for a few years and then returning to a lower infl ation rate down the road can pose problems for U.S. fi nancial institutions. In such a scenario, yields at the front end of the maturity spectrum would likely rise sharply to refl ect the higher infl ation rate in the short run, while yields at the longer end of the maturity

spectrum might not rise as much if infl ation is expected to return to its previous low level in the long run. This implies that the yield curve would likely invert, and an inverted yield curve has typically not been very friendly to the profi tability of U.S. fi nancial institutions.

Fifth, neither the Phillips curve nor the IS curve illustrated in Figures 9 and 10 may be as elastic as shown. If both curves were more inelastic, as some studies have sug-gested, the impact of infl ation on employment and the level of economic activity may prove to be far more modest than infl ation-advocates contend.

Figure 10

The Impact of Real Interest Rates on the Level of Outputvia the Investment-Savings Schedule (IS Curve)

Source: Bloomberg

Output

Real Interest Rate

A

C

Elastic Investment-

Savings Curve

In the short-run, an decrease in the real interest rate should increase the level of output from Y1 to Y2.

r2

Y1

Increase in Output

B

r1

Y2

Decrease in Real Interest

Rate

Inelastic Investment-

Savings Curve

Y3

IS1IS2

(+)0(-)


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Bloomberg

Finally, lowering the real interest rate deeper into negative territory could complicate asset allocation decisions further, particularly if investors’ appetite for risk remains depressed. This could have an adverse impact on consumer confi -dence and spending decisions.

All told, deliberately raising the infl ation rate with the hope of boosting the U.S. economy comes with a long list of risks that must be carefully considered before the monetary authorities undertake such a move. Indeed, they need to be aware that the proposed cure could end up being worse than the disease.

This may explain why Fed Chairman Bernanke has ex-pressly ruled out the infl ation option as a realistic policy consideration at this time. A stronger case for targeting a higher infl ation rate could be made if outright defl ation were to present a serious threat. But for now at least, that scenario does not seem to be a near-term risk.

In the article that follows, we consider what other policy options might be available to the Fed to help jumpstart the U.S. economy.

Michael R. Rosenberg (212) [email protected]


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Bloomberg

Special Focus

What’s Left in the Fed’s Arsenal? The August FOMC meeting will likely be characterized by a continued debate over the objectives of monetary policy and a debate over Fed tactics during a time of slow growth and elevated unemployment. This latter debate centers on the expected returns of another round of large scale asset purchases by the Federal Reserve, which are generally conceded to be diminished relative to previous efforts.

The Fed faces challenges in meeting its dual mandate of achieving maximum sustainable employment within the context of price stability, while playing the role of the de facto global lender of last resort and attempting to provide a modicum of certainty for investors. As such, the Fed’s affi rmation of its zero interest rate policy until 2014 and continuation of Operation Twist, the latest program in an effort to pressure longer-term interest rates even lower, represented a continuation of tactics rather than a shift in policy. Indeed, the outcome of the June FOMC meeting suggested that the Fed might be buying time in hopes the November election will solve the fi scal gridlock in Washington.

The U.S. fi xed income market had already anticipated the Fed’s June announcement and kept three-month Treasury bills and 10-year Treasury notes well within their trading ranges (see Figure 1). And as of this writing, the futures market now expects the fi rst Fed Funds rate hike to occur in mid-2015.

Bond market bears were left waiting at the alter once again. As reported by Bloomberg News, “the 3 percent return on Treasuries in the second quarter exceeded the 2.25 percent return on company debt and the 1.11 percent gain for mort-gages.” Compare that to the second-quarter 3.3% loss in

the U.S. equity market and the 7.9% loss in the commodity market as the U.S. economic recovery appeared to stall.

Clearly, the global demand for safe-haven assets is hav-ing a profound effect on fi xed-income securities, pushing the yields on Treasuries and Bunds and even Gilts lower. Nevertheless, one would have to argue that at least some of the downward pressure on U.S. longer-term yields is attributable to the Fed’s zero interest-rate policy and to its quantitative easing programs. The question for investors is when will the Fed take its foot off the accelerator and allow both short-term and longer-term interest rates to rise once again?

The FOMC now has a policy of clearly letting the market know exactly where it stands in terms of its economic projections and what it thinks will be the most appropriate

Figure 1

Figure 3 U.S. 10-Year Treasury Note Yields

(July 2011-July 2012)

Source: Bloomberg

Figure 2

FOMC Projections of U.S. Real GDP Growth(Projections of % Change in Real GDP as of April and June 2012)

(%)

2.72.9

3.4

2.52.2

2.5

3.3

2.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2012 2013 2014 Longer-Run

April 2012 Projection June 2012 Projection

Source: Bloomberg

Source: Bloomberg

2.01.8 1.9

2.0

1.5

1.8 1.8

2.0

0.0

0.5

1.0

1.5

2.0

2.5

2012 2013 2014 Longer-Run


FOMC Projections of U.S. Infl ation(Projections as of April and June 2012)

(%)

November 2011-February 2012Range Trading

Second Quarter 2012 Bull Market

June 2012Range Trading


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Bloomberg

monetary policy for the next three years. The FOMC also specifi cally defi nes its longer-run targets for real economic growth, infl ation, and unemployment.

In June, the FOMC reaffi rmed that it is looking for a moder-ate recovery from the Global Financial Crisis of 2007-09, with real GDP growth increasing from roughly 2% in 2012 to 3.25% by the end of 2014. The Fed expects infl ation to hover below-target at less than 2% while the unemploy-ment rate remains above-target, falling to 7.4% over the next two years.

As Figures 2-4 illustrate, changes in the FOMC’s June economic projections were fairly predictable, given the Q2 slowdown after a warm winter front-loaded this year’s growth in the early months of the year. The FOMC’s projec-tions for real GDP growth and infl ation were knocked down a peg in 2012 and 2013, with the unemployment rate stuck closer to 8% than previously projected.

Source: Bloomberg

Bloomberg Consumer Comfort Index(2007-12)

Indeed, the Bloomberg Economic Surprise Index {ECSUR-PUS Index} trended lower from the end of February to mid-June 2012 (see Figure 5). As we reported last December, the deviations of analyst forecasts from the actual releases of economic indicators tend to signal shifts in the leading indicators of U.S. economic growth as well as trends in the bond and equity markets.

Consumer confi dence also took a hit in the second quarter of 2012, as illustrated by the trend in the Bloomberg Con-sumer Comfort Index {COMF <go>} (see Figure 6). After being moribund for the four years since the onset of the Financial Market Crisis, U.S. consumer sentiment showed a resurgence earlier in the year as unemployment began to trend lower

Note that since 2011, the BCCI has displayed a fairly direct relationship to the trends in the U.S. equity market (see Figure 7), perhaps indicating an increase in retail demand

Figure 6 Figure 7

Source: Bloomberg

Figure 4 Bloomberg Economic Surprise Index(Analyst Expectations of Economic Data Releases, 2011-12)

Source: Bloomberg

Figure 5

Source: Bloomberg

7.97.5

7.1

5.6

8.17.8

7.4

5.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2012 2013 2014 Longer-Run


FOMC Projections of U.S. Unemployment(Projections as of April and June 2012)

(%)

7-Month UpswingJuly 2011-February 2012

4-Month DownswingMarch-June

2012

4-Month Downswing

March-July 2011

2008-2011Range Trading

Bloomberg Consumer Comfort Index and the S&P 500(January 2011-July 2012)

Consumer Comfort Index S&P 500 Index

1100

1150

1200

1250

1300

1350

1400

1450

1500

-60

-55

-50

-45

-40

-35

-30

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

Bloomberg Consumer Comfort Index S&P 500


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Bloomberg

for higher-yielding equity investments as an alternative to negative real money-market rates and low expected bond-market returns. Indeed, as Figure 8 indicates, the spread between the earnings yield of the U.S. equity market and the yield of 10-year Treasuries is at near-record levels. Despite projections of below-target infl ation and above-target unemployment throughout 2014, the expected tim-ing of the Fed’s fi rst rate hike remains at the end of 2014, according to the poll of FOMC voting members.

So after 4+ years of zero interest-rate policy, massive purchases of mortgage-backed securities to prop up the housing market, two massive rounds of purchases of longer-maturity bonds (Quantitative Easing), and two pro-grams to extend the duration of its portfolio holdings (via Operation Twist), is the Fed confi dent that the economy is on a sustainable recovery path that will allow it to begin rais-ing rates? Or has the Fed simply exhausted all of it options and fi nds itself in a holding pattern, hoping for the best?

Interestingly, there doesn’t seem to be much common ground. There are those who vehemently argue that the Fed has already done too much and there are those who adamantly claim that the Fed has not done nearly enough.

At the one extreme are those that contend that the Fed’s quantitative easing has never been necessary and that the presence of the Fed distorts market activity, leading to booms and busts. One could certainly point to recent history, with the Fed being blamed for being too lax for too long after the 2000 recession.

The Fed’s inordinately low policy rates from 2001-05 are commonly cited as prompting housing market excesses, leading to the Global Financial Crisis of 2008, the U.S. recession, and ultimately to the European Sovereign Debt Crisis. Before that, it was the so-called “Greenspan Put”, in which the Fed indirectly encouraged speculators to believe that the Fed would put a fl oor on any market’s collapse.

Source: Stefan Kanfer, “Booms and Busts”, Wall Street Journal,

Figure 8

Source: Bloomberg

Figure 9S&P 500 Earnings Yield vs. 10-Year Treasury Yield

(1970-2012)

U.S. Booms and Busts A Condensed History of U.S. Booms, Bust, and Financial Panics

from 1792-2012

1792 Alexander Hamilton has the U.S. Treasury purchase securities to stabilize panicked markets.

1830s Gold and silver shortages cause bank runs and the withdrawal of European funds from U.S. banks.

1857-59 Gold shortage and trust fraud spark panic selling of securities.

1869 Fisk and Gould corner gold market, which then collapses under government pressure.

1870s Silver prices plunge and faltering railway investments cause closing of NYSE for 10 days. Unemployed mobs riot as businesses fail.

1893-95 Railway failures cause bank runs and panic selling, depleting the gold in Fort Knox. Real-estate values drop precipitously.

1907 Global shortages of capital, cornering of the copper market, and the failure of New York's third largest trust cause the NYSE to lose half its value in the "Banker's Panic" of 1907. JP Morgan organizes emergency fi nancing.

1929-45 Stocks, that had quadrupled in value during the Roaring Twenties, crash on Black Monday and Black Tuesday, losing 89% of their value. Retaliatory global trade protectionism brings on the Great Depression.

1961 The Kennedy recession is countered by stimulus spending, leading to the largest peace-time expansion.

1970s Stagfl ation — Energy shortages lead to low growth, high unemployment, and high infl ation.

1987 A global stock market crash, attributed to program trading, results in the largest one-day loss in the Dow-Jones Industrials Index.

2008-12 A housing bubble leads to the Lehman collapse, the Global Financial Crisis of 2007-09, the Great Reces- sion, and the European Sovereign Debt Crisis.

But those who contend that the Fed has done more harm than good are ignoring a long history before the Fed was put in charge of managing both the business cycle and the integrity of the fi nancial markets. As Figure 9 shows, U.S. history is replete with bank runs and panics, near disasters, and riots and recessions.

The most interesting example, perhaps, was the Bankers’ Panic of 1907, when J.P. Morgan locked his fellow bank-ers in his mansion until they agreed to bankroll a fi nancial market bailout. Morgan also cajoled the major industrialists of the day to help fund the troubled trusts and arranged for foreign bankers to replenish the gold supply, thereby averting a collapse of the banking system and the New York Stock Exchange. In essence, J.P. Morgan behaved as an ad hoc modern-day Fed at a time when there was no Fed.


13

Bloomberg

Then there are those who contend that the Fed has done all that it can in the aftermath of the Financial Crisis and subsequent economic downturn. A forceful argument can be made that the fi nancial shock to the economy resulted in a structural break in the labor market that the Fed is not well suited to address. The onset of “hysteresis”—a one-time shock that permanently affects the path of the economy, in this case through the labor market—cannot be completely discounted, given the long duration of unemployment and job-mismatch facing many who are without work. Hysteresis may be part of the economic ecosystem that the central bank can likely do little to change, similar to what occurred in Western Europe in the 1970s and 1980s, a time that economists refer to as Euro-sclerosis.

Consider a workforce that has become ill-suited to the rapid shift in demand for scientifi c, technological, and technical skill sets. Under such conditions the duration of unemployment increases, causing the skill sets of the job-less to deteriorate, which makes re-entry to the workforce all the more diffi cult. Should the duration of unemployment persist for a long enough period of time, individuals become detached from the workforce as do their expectations and attitudes regarding employment shift.

While the loss of skills that underscore the development of human capital is paramount, shifting expectations regard-ing wages, living standards, and the loss of the stigma of unemployment can lead to longer-term problems in the labor market. In this respect, actual unemployment under conditions roughly approximating hysteresis can cause long-term unemployment to increase, reducing the overall pool of labor, which leads to slower growth and lower tax revenues, thus exacerbating the current fi scal problems of the federal government.

So is hysteresis a problem that now affects the U.S. labor market? The evidence points to a potential problem, but is not yet conclusive. It is diffi cult to precisely identify the

emergence of a structural shift in the labor market in real-time, yet readily available employment data is instructive. In particular the shift outward of the Beveridge curve—which shows the relationship between the unemployment rate and job vacancy rate—suggests a growing problem with job mismatch (see Figure 10). In 2001, a job vacancy rate of 2.7% was associated with an unemployment rate of 5.5%. But in 2012, a 2.7% job vacancy rate is now associated with 8.1% unemployment.

At the same time, both the Federal Reserve and the OECD now estimate that the U.S. natural unemployment rate (NAIRU) has shifted upward from 5% to roughly 5.5%. While economists recognize that NAIRU can shift up or down over time, this could nevertheless suggest a deep-seated labor-market problem.

One additional issue that might be indicative of a structural form of unemployment is “Spatial Lock”, or the inability of workers to relocate due to an inability to sell their homes. The 2.4 million homes on the market (see Figure 11), in addition to a conservative estimate of 4.16 million in shadow inventory—defi ned as foreclosures plus those 90 days late on their mortgages—tend to indicate that the U.S. economy is not profi ting from the type of labor mobility that it has in past recoveries.

The structural problems in the U.S. housing and labor market are inextricably linked. Roughly 23% of mortgage holders sit on negative equity positions in their homes, and another 5% hold near negative equity positions.

The 2.3 million construction jobs that have been lost since the peak in 2007 and the historically subpar 708,000 annu-alized pace of housing starts—which should be 1.3 million to meet basic demographic changes—point not only to the probability of hysteresis in the domestic labor market, but to the apparent loss of effi cacy of monetary policy in stimulat-ing the housing market or bringing down unemployment.

Figure 10

Source: Bloomberg

U.S. Beveridge Curve — 2001-2011 Relationship of U.S. Job Vacancies and the Unemployment Rate

Job Vacancy Rate (%)

Figure 11

Source: Bloomberg

U.S. Housing Inventory Existing and Shadow (Foreclosures and 90-Days Late) Inventory

(Millions)

2

3

4

5

6

7

8

9

2005 2006 2007 2008 2009 2010 2011 2012Existing Inventory Shadow Inventory

1.5

2.0

2.5

3.0

3.5

4.0

3.5 4.5 5.5 6.5 7.5 8.5 9.5 10.5Unemployment Rate

2001: Q1

2009: Q4 Recession Ends

2012: Q2 Esimtated


14

Bloomberg

As we will discuss below, clogged credit channels through which monetary policy traditionally stimulates the housing market are blocked due to tight credit conditions and the massive inventory of unsellable homes, which the offi cial data likely understates.

Although one would need to see 1) a persistent shift in the unemployment rate and 2) an increase in fi rms’ diffi culty in fi lling of open positions before coming to the conclusion that a structural shift in employment is largely to blame for current high levels of unemployment, the direction of the data is not encouraging.

That leads us to the other side of the argument, which is that in the absence of fi scal alternatives, the Fed could do more to spark a recovery and rectify the unemployment problem. Here, the argument is that the unemployment problem is less a structural issue than as a result of the most severe downturn since the Great Depression. As shown in Figure

Figure 13

Source: Bloomberg

Figure 14

Source: Bloomberg

Source: Bloomberg

12, the unemployment rate during and after the current recession has behaved much the way it has throughout the post-war period, rising sharply and peaking near the end of the past 10 recessions.

Moreover, the Great Recession has been an equal op-portunity disaster for all segments of the labor force. As shown in Figure 13, education is a major factor in determin-ing whether or not you are unemployed, and the fi nancial crisis and the recession have clearly affected all education levels of society at the same time. Unemployment rose rapidly at the height of the fi nancial crisis and then tapered off once the economic stimulus provided by Congress in 2009 kicked in.

Gender has also been a determinant of unemployment level in the post-war period (see Figure 14). From 1950 to 1975, females were more apt to be unemployed than males. But as the 1972 equal employment-opportunity legislation took effect and then as females became more highly educated than males, males were the more likely to be unemployed. For example, male unemployment reached 11.2% in Octo-ber 2009 while female unemployment peaked a year later at 9% in November 2010.

The non-structural argument says that this is a balance-sheet recession and in the absence of fi scal alternatives, the Fed needs to take extraordinary actions.

As such, there are calls for the Fed to raise infl ation ex-pectations in order to get corporations and households to begin investing, with economists asking the Fed to drop its infl ation-fi ghting mantle until the economy reaches a sustainable level of growth. These voices contend that although the Fed has stated that it will keep the Fed Funds rate at the zero bound for an extended period, the Fed’s projection of below-target infl ation (less than 2%) now and in the distant future suggests that, at the slightest hint of infl ation, the Fed will slam on the brakes.

Figure 12 U.S. Unemployment Rate and Postwar Recessions

(1950-2012)(%)

U.S. Unemployment Rate by Education since 2000(2000-12)

(%)

U.S. Employment Ratio by Gender since 1950(1950-2012)

(%)

2

3

4

5

6

7

8

9

10

11

12

1950195519601965197019751980198519901995200020052010

0

2

4

6

8

10

12

14

16

18

2000 2002 2004 2006 2008 2010 2012

Total Less than HS Diploma HS Grad

Some College Colege Grad

2

3

4

5

6

7

8

9

10

11

12

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Total Male Female


15

Bloomberg

The growth of U.S. monetary aggregates has slipped of late, which has also dampened infl ation expectations. As shown in Figures 15, growth in the U.S. Monetary Base has declined back to pre-crisis levels, and M1 and M2 money-supply growth has slipped since the start of the year (see Figures 16-17).

If the economy is in a liquidity trap—and with short-term interest rates at the zero bound and long-term yields being pushed steadily lower by the Fed and by the global demand for safe-haven assets—then is the Fed’s inaction a sign that the monetary options have run out?

Certainly, Japan’s experience with quantitative easing dur-ing its lost decades was unremarkable and the economy barely righted itself only after Japan fi nally dealt with its underperforming banks. But even then, an aging popula-tion of net savers and the rise of cheaper labor markets in the rest of Asia consigned Japan to low-growth status for roughly two decades.

As Figure 18 suggests, the Fed’s recent experience with quantitative easing could be suffering from diminishing returns. By the end of the fi rst round of asset purchases by the Fed in 2010, the S&P 500 had shown an 80% increase. But subsequent purchase programs appear to have had a lesser impact, with the S&P 500 gaining 30% by the end of QE2, and then 17% during Operation Twist.

Figure 15

Source: Bloomberg

Figure 16

Source: Bloomberg

U.S. Monetary Base(Year-over-Year Percent Change since 2004)

U.S. M1 Money Supply(Year-over-Year Percent Change since 2004)

Figure 17

Source: Bloomberg

U.S. M2 Money Supply(Year-over-Year Percent Change since 2004)

Figure 18

Source: Bloomberg

Diminshing Wealth Effects from Fed Purchases(Response of the the S&P500 to Fed QE Programs)

S&P 500 Index

650

750

850

950

1050

1150

1250

1350

1450

2009 2010 2011 2012

End of QE1

S&P 500 Gains 80%

End of QE2

S&P 500 Gains 30% S&P 500 Gains 17%During OperationTwist


16

Bloomberg

If today’s overleveraged U.S. households and underem-ployed population are the corollary to Japan’s aging net savers, then is increasing the money supply or bringing down long-term rates likely to have any effect on U.S. consumption and investment, much less the labor market?

No matter what the cause of the stubbornly high unem-ployment rate—if it is structural or if it is a result of the Financial Crisis and the economic downturn—solutions to solving the pressing labor market problems are likely to be controversial and expensive, and not within the realm of the Federal Reserve. Worker retraining programs such as those in the Scandinavian countries in response to the era of Euro-sclerosis required a sustained bi-partisan commit-ment that appears be absent in the U.S. polity currently.

Fed Chairman Ben Bernanke has clearly called for a fi scal partner in reviving the U.S. economy. But that is probably unrealistic to expect. Nevertheless, should events dictate, one would have to assume that the Fed is unlikely to just sit there. Following are four clusters of possible policy options.

1) Buying Time — The Fed has chosen to lengthen its extended maturity program by $267 billion, with the pace of purchases at $44 billion per month. Since the Fed started its Operation Twist program, the Fed has lengthened the maturity of its portfolio from 6.09 years to 8.87 years.

The Fed could also extend its conditional commitment to keep rates low past 2014 until mid-2015. By extending that conditional commitment, the Fed would nonetheless be making an explicit hedge against further weakness in the domestic economy this year and a potential downdraft associated with the coming fi scal cliff next year.

2) Explicitly Commit — Doves on the FOMC such as Chicago Fed President Charles Evans would prefer a shift in policy from a conditional commitment to explicit pledges linked to specifi c economic variables. For instance, Evans supports linking forward-looking guidance on policy to a decline in the unemployment rate to 7% or an increase in the infl ation rate to above 3%. 3) Aggressive Action — While not a probable outcome yet, FOMC members Bernanke, Dudley and Yellen are more than willing to turn to further asset purchases to calm markets. While, the marginal benefi t of further Large Scale Asset Purchases (LSAP) is open to debate, they would be stabilizing during an external fi nancial shock and therefore cannot be ruled out in coming months. The asset purchases would likely come in two forms: sterilized and unsterilized.

3a) Sterilized LSAP — The objective here is to keep rates low at the long end of the curve without the unintended con-sequences that accompanied the second round of LSAPs (i.e., speculative-driven increases in oil and commodity prices). A sterilized asset purchase program would consist of the Fed purchasing long-term bonds and then draining reserves created via purchases through either reverse

repurchase operations or term deposits, effectively quar-antining the new money created through the purchases.

3b) Unsterilized LSAP — Another full blown asset pur-chase program that would likely lean away from Treasury purchases toward buying of mortgage-backed securities to target the still depressed housing market. In a white paper released by the Fed earlier this year, the central bank clearly indicated it thinks that the effectiveness of monetary policy has been reduced through a blockage of the monetary transmission mechanism due to the problems in mortgage industry and housing market (which we’ll discuss below).

4) Reducing Interest on ReservesThe central bank can reduce interest rate paid on re-serves—currently 0.25 basis points—to zero, in an attempt to spur increased lending by banks, much in the same way the European Central Bank recently has done. The logic of this approach is straightforward: reduced incentives on the parts of banks to hold excess reserves could plausibly lead to an increase in lending to consumers and fi rms, supporting a rise in overall consumption and investment.

While this will most likely be on the agenda at the upcom-ing August 1 FOMC meeting, scholarly work conducted at the New York Federal Reserve (http://tinyurl.com/lh74eo) suggests that a decline in the rate paid on excess reserves would result in a general shifting of reserves around the banking system, rather than reducing the overall level of reserves, and thus only a modest increase in lending.

The quantity of money in the banking system is determined by the central bank. A reduction in that quantity would require reducing a substantial portion of their security hold-ings on the balance sheet, resulting in a net tightening of policy. Although reducing rates paid on excess reserves would result in marginal lower short-term rates, it will likely not do much to alter the quantity of reserves that banks hold on account at the Fed.

Figure 19

Source: OECD, Bloomberg

U.S. Output Gap(1965-2012)


17

Bloomberg

Monetary Transmission Mechanism: A Granular Look

Source: Adapted from Kenneth N. Kuttner and Patricia C. Mosser, “The Monetary Transmission Mechanism: Some Answers and Further Questions”, New York Federal Reserve, FRBNY Economic Policy Review, May 2002, http://www.newyorkfed.org/research/epr/02v08n1/0205kutt.pdf.

Figure 20

4) Regime Change — This would involve a temporary lifting of the Fed’s infl ation target from 2% to 5%, and/or targeting growth in nominal GDP, with the central bank taking steps via asset purchases to meet the new policy objective.

Although Fed Chairman Bernanke counseled the Japanese to take extraordinary measures during the most intense portion of their defl ationary trap during the late 1990s, it seems likely that the Fed would only turn to a regime switch in the direst of circumstances.

Targeting nominal GDP might work, but it does carry risks of asset-price distortions. Nevertheless, with the policy rate constrained by the zero boundary and with the U.S. output gap currently estimated in the 3.5%-6% range (see Figure 19), another Lehman moment could tip the central bank in that direction. The Fed would probably only turn to regime change if it felt it needed to stabilize aggregate demand in the event of an outbreak of defl ation triggered by the U.S. slipping back into recession and/or an external fi nancial shock.

The recent lapse in economic activity and the tepid hir-ing do not appear to have convinced policymakers of the necessity of regime change at this time. That implies more quantitative easing for now. That in turn implies the possibility of short-term profi ts for fi xed-income investors and the continued availability of profi ts for banks taking yield-curve carry-trade positions, earning the spread of

borrowing at nearly zero cost and investing in the long end of the Treasury curve.

There are immense potential downsides to the current situ-ation of monetary and fi scal policy inaction, starting with the deleterious impact of long-term unemployment on the economy and on the labor force. While an economy can make up for lost ground after a downturn by increasing investment, each hour of labor lost during a recession can never be recovered. Even more troubling is that long-term unemployment can leave personal scars that lead to dis-tancing from the labor force and therefore an increased burden on the social safety net and a self-perpetuating poverty of ambition.

Now what exactly can the Fed do to bolster employment conditions. Not much. After fi ve years of progressively unorthodox action, it is unclear what marginal economic benefi ts can be derived from further asset purchases. Although purchasing mortgage-backed securities would likely bring down mortgage rates from already historically low levels near 3.6%, that will not unclog the problems in the credit markets, or reduce the backlog of homes offi cially on the market, nor the nearly 30% of mortgage holders sitting on negative or near-negative home equity positions, all of which are blocking the monetary transmission mechanism shown in Figure 20.

Real Interest Rates

Open Market Operations

Reserves

Federal Funds Rate Monetary Base

Market Interest Rates

Asset Prices Levels Exchange Rate

Collateral

Aggregate Demand

Loan Supply

Relative Asset Prices

Narrow Credit Channel Broad Credit Channel Interest Rate Channel Monetarist ChannelExchange Rate Channel

Wealth Channel

Blockage Blockage

Blockage


18

Bloomberg

If we are in a liquidity trap, and if the expected return on long-term investments is so low, then the amount of in-vestment necessary to get the economy moving again is unlikely to come from the private sector. In fact, it could be argued that in this situation, expectations of low long-term interest rates actually inhibit investments, with investors unwilling to move out along the yield curve for low-returning/higher-risk assets.

While the Fed may ultimately choose to restart its asset purchase program—most likely at the September 13 FOMC meeting—the decline in long-term yields and the boost to asset prices and overall growth is likely to be less than previous efforts.

Monetary policy is a sub-optimal response to the current conditions of high unemployment and insuffi cient invest-ment. Further security purchases under these conditions will likely not achieve much.

Joseph Brusuelas (212) [email protected]

Robert Lawrie (212) [email protected]

with contributions fromPeter Savvin (212) [email protected]


19

Bloomberg

Bloomberg’s two composite U.S. Financial Conditions indices track the overall stress in the U.S. money, bond, and equity markets {BFCIUS Index} and trends in selected asset-price movements and real long-term interest rates {BFCIUS+ Index}. These indices are available on the Bloomberg terminal at {FCON <go>}, and provide a use-ful gauge to assess the level of stress in the U.S. fi nancial markets.

The table below lists the components and weights used to calculate the Financial Conditions indices. The spreads and indices are normalized and combined, and then presented as Z-scores (defi ned as the number of standard deviations that fi nancial conditions are above or below the average level of fi nancial conditions observed during the January 1994-June 2008 pre-crisis period).

According to the BFCIUS index, U.S. fi nancial conditions are roughly 0.2 standard deviations below their neutral level. The BFCIUS+ index remains positive, but slipping to 0.9 standard deviations above its neutral level on the relative strength of tech share prices, the steady improve-ment in home-building share prices, and the extremely low levels of medium-term real and nominal bond yields relative to their norms.

---- Weights ---- BFCIUS BFCIUS+Money Market Ted Spread 11.1% 6.7%Commerical Paper/T-Bill Spread 11.1% 6.7%Libor-OIS Spread 11.1% 6.7% 33.3% 20.0%Bond Market Baa Corporate/Treasury Spread 6.7% 4.0%Muni/Treasury Spread 6.7% 4.0%Swaps/Treasury Spread 6.7% 4.0%High Yield/Treasury Spread 6.7% 4.0%Agency/Treasury Spread 6.7% 4.0% 33.3% 20.0%Equity Market S&P 500 Share Prices 16.7% 10.0%VIX Index 16.7% 10.0% 33.3% 20.0%Asset Bubbles Nasdaq/S&P 500 Ratio 10.0%S&P Homebuilders/S&P 500 Ratio 10.0% 20.0%Equilibrium Yield Gap 5-Yr. Treasury Yield less Nom. GDP Growth 10.0%Real Baa Corporate Yield less Average 10.0% 20.0% Total 100% 100%

Bloomberg’s U.S. Financial Conditions IndexComponents and Weights

Source: Bloomberg

Bloomberg’s U.S. Financial Conditions Indices(BFCIUS and BFCIUS+ Index, Daily Z-Score Values, 2007-2012)

Source: Bloomberg

Bloomberg U.S. Financial Conditions Index

U.S. Financial Conditions Index Components(Normalized Values, January 2007-April 11, 2012)

(Z-Scores)

Money-market conditions are once again barely positive for the fi rst time since last September. Both Ted spreads and commercial paper spreads have improved to the extent that they are now 10 basis points below their pre-crisis norms. The Libor-OIS spread remains about 12 basis points above its norm.

Conditions in the bond market have deteriorated slightly as the various components have not kept up with the safe-haven demand for Treasuries. The recent focus on the fi nancial health of local municipalities and the states appears to be having an effect on the muni spread.

Equity prices have been on a two-month uptrend since the beginning of June, with the VIX index trending lower more or less over that same time period. Nevertheless, the health of the economy is still in question and equity-market conditions are choppy and still below normal levels.

Contributions of the Money, Bond, and Equity Markets to Financial Conditions

-7

-6

-5

-4

-3

-2

-1

0

1

2

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Financial Conditions Index Money Mkt Bond Mkt Equity Mkt


20

Bloomberg

U.S. Financial Conditions — Money-Market

TED Spread(Three-Month US$ Libor less Three-Month T-Bill Rate)

U.S. Libor-OIS Spread(Three-Month US$ Libor less Three-Month Swap Rate)

Commercial Paper/Three-Month T-Bill Spread(90-Day Commercial Paper less 3-Mo. T-Bill Rate)

Market Expectations of the Three-Month Euro-$ Rate(CME 90-Day Euro-$ Futures)

Market Expectations of the Fed Funds Rate(Actual Fed Funds Rate and the Futures Implied Rate)

(%)

.TED Index GP <go>

.USLIBOIS Index GP <go>

FFA Comdty CT <go>

EDA Comdty GP<go>

.CP3MOSPD Index GP <go>

U.S. 2-Year/Fed Funds Rate Spread(Two-Year Treasury Yield less Fed Funds Rate)

.US02YFED Index GP <go>

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2007 2008 2009 2010 2011 2012 2013 2014 2015Fed Funds Rate Futures Market Implied Rate


21

Bloomberg

U.S. Corporate and Agency Bond Market Spreads

U.S. 10-Year Agency Spread(10-Year Agency less 10-Year Treasury Yield))

U.S. 10-Year Swap Spread(10-Year U.S. Swap less 10-Year Treasury Yield)

FNMGVN10 Index GP <go> USSP10 Index <go>

U.S. Baa Corporate/Treasury Yield Spread(Baa Corporate less 10-year Treasury Bond Yield)

.BAA10Y Index GP<go>

U.S. High-Yield Corporate Spread(JP Morgan Domestic High-Yield Corporate Yield Spread)

EMBI+ Spread(JP Morgan Emerging-Market Yield Spread)

JPDFHYI Index GP <go>

JPEMSOSD Index GP <go>

U.S. AA Muni Bond Spread(AA Muni less 10-Year Treasury Yield)

.MAA10Y Index <go>


22

Bloomberg

U.S. Government Bond Market

U.S. 10-Year TIPS Yield(10-Year Treasury Infl ation-Protected Securities)

U.S. 10-Year Implied Breakeven Infl ation Rate(10-Year Treasury less TIPS Yield)

USGGT10Y Index GP <go>

USGGBE10 Index GP<go>

U.S. 10-Year/3-Month Spread(10-Year Treasury Yield less Three-Month T-Bill Rate)

.US10Y03M Index GP <go>

Move Index(Merrill Lynch One-Month Treasury Options Volatility Index)

MOVE Index GP <go>

U.S. 10-Year Treasury Yield

USGG10YR Index GP <go>

U.S. 10-Year/2-Year Spread(10-Year less Two-Year Treasury Yields)

.US10Y02Y Index GP <go>


23

Bloomberg

U.S. Financial Asset Prices

S&P 500 Index S&P Financials Index

SPX Index GP <go> SPF Index GP <go>

SPX Index GP <go>

S&P 500 Price/Earnings RatioU.S. Equity Market Volatility(VIX Index of S&P 500 Volatility)

VIX Index GP <go>

Euro-Dollar Volatility(Three-Month Implied EUR Volatility)

Dollar-Yen Volatility(Three-Month Implied JPY Volatility)

EURUSDV3M Index GP <go> USDJPYV3M Index GP<go>


24

Bloomberg

Bloomberg’s Euro-area composite Financial Conditions index is now available on the terminal as {BFCIEU Index}and at {FCON <go>}. A counterpart to Bloomberg’s U.S. Financial Condition Index, the BFCIEU index tracks the overall stress in the Euro-area money, bond, and equity markets and provides a useful gauge to assess the level of stress in the Euro-area fi nancial markets.

The table below lists the components and weights used to calculate the Euro Area Financial Conditions Index. The

spreads and indices are normalized and combined, and then presented as Z-scores (defi ned as the number of standard deviations that fi nancial conditions are above or below the average level of fi nancial conditions observed during the January 1999-June 2008 pre-crisis period).

According to the BFCIEU index, Euro-area fi nancial condi-tions are now roughly 1.8 standard deviations below their neutral (pre-crisis) level during this latest phase of the European sovereign debt crisis.

Source: Bloomberg

Bloomberg’s Euro-Area Financial Conditions Index(BFCIEU Index, Daily Z-Score Values, 2003-2012)

Source: Bloomberg

Bloomberg Euro-Area Financial Conditions Index

Euro Area Financial Conditions and Components(2007-2012)

(Z-Score)

After deteriorating in the second quarter, Euro area fi nancial conditions appear to be recovering once again. Market anxiety appears to have been ameliorated by Spain’s re-quest for aid in June and by an ECB rate cut early in July.

As the chart indicates, much of this year’s improvement in fi nancial conditions owes to the rebound of money-market spreads. The ECB has pumped liquidity into the market and both the Euro Ted spread and the Euribor/OIS spread are a third of what they were at the depth of the Sovereign Debt Crisis.

Bond-market conditions have lost some ground in recent weeks as the high-yield and swap markets have not been able to keep up with the safe-haven demand for bunds. And the equity market, which appeared to be trending upward, has slipped once again.

Euro Area Financial Conditions and Euro Area Credit Conditions

---- Weights ---- BFCIEU Money Market Euro TED Spread 16.7%Euribor/OIS Spread 16.7% 33.3% Bond Market JP Morgan High-Yield Europe Index 16.7%EU 10-Year Swap Spread 16.7% 33.3% Equity Market Ratio of EuroStoxx to Its 5-Yr. Avg. 16.7%VDAX Index 16.7% 33.3% Total 100%

Bloomberg’s Euro-Area Financial Conditions IndexComponents and Weights

Source: Bloomberg

-14

-12

-10

-8

-6

-4

-2

0

2

2007 2008 2009 2010 2011 2012EU Financial Conditions Index Money Market (norm.)Bond Market (norm.) Equity Market (norm.)


25

Bloomberg

Euro 10-Year Swap Spreads Europe Credit Default Swap Spreads(iTraxx Europe Credit Default Swap Spread)

Euro-Area Financial Conditions

ECB Policy Rate(ECB Refi nancing Rate)

EUIBOR-OIS Spread(Three-Month Euribor Rate less Three-Month Swap Rate)

Euro-Area Equity Prices(Dow-Jones Euro Stoxx Index)

Euro-Area Yield-Curve Spread(10-Year less Three-Month Rate Euro Gov’t Bond Yield)

EURR002W Index GP <go>

SX5E Index GP <go>

.EULIBOIS Index GP <go>

.EU10Y3M Index GP<go>

EUSS10 Index GP <go> ITRXEBE Index GP<go>


26

Bloomberg

Japan’s Financial Conditions

Bank of Japan Policy Rate(BoJ Overnight Call Target Rate)

TIBOR-OIS Spread(Three-Month Tibor Rate less Three-Month Swap Rate)

Japanese Equity Prices(Tokyo Stock Price/TOPIX Index)

Japan’s Yield-Curve Spread(10-Year less Three-Month Japanese Government Bond Yield)

Japan 10-Year Swap Spreads Japan Credit Default Swap Spreads(iTraxx Theoretical Five-Year Credit Default Swap Spread)

BOJDTR Index GP <go> .JPLIBOISIndex GP<go>

TPX Index GP <go> .JP10Y3M Index GP<go>

JYSS10 Index GP <go> ITRXAJE Index GP<go>


27

Bloomberg

U.K. 10-Year Swap Spreads

U.K. Financial Conditions

Bank of England Policy Rate(BoE Base Rate)

UK Libor-OIS Spread(Three-Month Libor Rate less Three-Month Swap Rate)

UK Equity Prices(FTSE 100 Share Price Index)

U.K. Yield-Curve Spread(10-Year less Three-Month Gilt Yield)

UKX Index GP <go> .UK10Y3M Index GP<go>

UKBRBASE Index GP <go> .UKLIBOIS Index GP<go>

BPSS10 Index GP <go>


28

Bloomberg

Federal Reserve Policy Watch

Baseline Taylor Rule Estimates of the Fed Funds Rate(1987-2012)

Fed Funds Rate Outlook MatrixAggressive Taylor Rule Estimates of the Fed Funds Rate

at Selected Levels of Infl ation and Unemployment

Source: Bloomberg; {TAYL <go>}

Source: Bloomberg; ; {G ECO 99 <go>}

Baseline Taylor Rule Projections of the Fed Funds Rate(Based on FOMC Hawk/Dove/Central Tendency Economic Projections)

Aggressive Model Estimates of the Fed Funds Rate(1987-2012)



7.25 7.50 7.75 8.00 8.20 8.25 8.50 8.75 9.00

1.00 -0.80 -1.30 -1.80 -2.30 -2.70 -2.80 -3.30 -3.80 -4.30

1.25 -0.43 -0.93 -1.43 -1.93 -2.33 -2.43 -2.93 -3.43 -3.93

1.50 -0.05 -0.55 -1.05 -1.55 -1.95 -2.05 -2.55 -3.05 -3.55

1.75 0.32 -0.18 -0.68 -1.18 -1.58 -1.68 -2.18 -2.68 -3.18

1.80 0.40 -0.10 -0.60 -1.10 -1.50 -1.60 -2.10 -2.60 -3.10

2.00 0.70 0.20 -0.30 -0.80 -1.20 -1.30 -1.80 -2.30 -2.80

2.25 1.08 0.57 0.07 -0.43 -0.82 -0.93 -1.43 -1.93 -2.43

2.50 1.45 0.95 0.45 -0.05 -0.45 -0.55 -1.05 -1.55 -2.05

2.75 1.83 1.33 0.82 0.32 -0.07 -0.18 -0.68 -1.18 -1.68

Core PCEInflation Rate

Unemployment Rate

2013 FOMC Central Tendency Projections


29

Bloomberg

U.S. Economic OutlookU.S. Economic Indicator Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Real GDP (qoq % saar) -- -- 1.8 -- -- 3.0 -- -- 1.9 -- -- Consumer Price Index (yoy %) 3.6 3.8 3.9 3.5 3.4 3.0 2.9 2.9 2.7 2.3 1.7 1.7Core CPI (yoy %) 1.8 2.0 2.0 2.1 2.2 2.2 2.3 2.2 2.3 2.3 2.3 2.2Producer Price Index (yoy %) 7.1 6.6 7.0 5.8 5.6 4.7 4.1 3.4 2.8 1.9 0.7 0.7Unemployment Rate (%) 9.1 9.1 9.0 8.9 8.7 8.5 8.3 8.3 8.2 8.1 8.2 8.2Industrial Production (yoy %) 0.9 0.3 0.2 0.6 0.2 0.9 0.7 0.4 -0.6 0.8 -0.2 0.4Leading Indicator (yoy %) 5.9 5.0 3.9 4.5 4.0 3.3 3.2 2.9 2.0 1.9 1.8 1.5Purchasing Managers Index 51.4 52.5 52.5 51.8 52.2 53.1 54.1 52.4 53.4 54.8 53.5 49.7Housing Starts (000) 614.0 581.0 647.0 630.0 708.0 697.0 720.0 718.0 706.0 747.0 711.0 760.0Retail Sales (yoy %) 0.0 0.2 1.2 0.9 0.5 0.0 0.6 1.0 0.4 -0.5 -0.2 -0.5Consumer Confi dence -47.6 -49.1 -53.0 -53.2 -50.2 -47.5 -44.8 -38.8 -34.7 -37.6 -39.3 -36.1Personal Income (yoy %) 5.0 4.6 4.9 4.4 4.2 4.0 3.1 2.9 2.9 2.9 2.9 Trade Balance (US$ bn) -45.6 -44.8 -44.5 -45.7 -48.8 -51.7 -52.9 -45.4 -52.6 -50.6 -48.7 Gov’t Surplus/Defi cit (% of GDP) -8.2 -8.5 -8.7 -8.4 -8.3 -8.3 -8.1 -8.1 -8.2 -7.5 -7.9 -8.0M2 Money Supply (yoy %) 8.0 9.9 9.7 9.6 9.7 9.7 10.4 10.2 10.0 10.0 9.7 9.3

U.S. Unemployment Rate(%)

U.S. Current-Account Balance(% of GDP)

U.S. Real GDP Growth(Quarter-over-Quarter Seasonally Adjusted Annualized Rate)

U.S. Consumer Price Infl ation Rate(Year-over-Year % Change)

GDP CQOQ Index GP <go> CPI YOY Index GP<go>

USURTOT Index GP <go> EHCAUS Index GP<go>


30

Bloomberg

Euro-Dollar Implied Volatility(One-Month Implied Volatility)

U.S. Credit Default Swap Spread(Five-Year CDS)

U.S. Dollar Index(DXY Index)

U.S. Short-Term Interest Rate(Three-Month Deposit Rate)

U.S. Dollar PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging Methodology)

U.S. Cumulative Carry Return(Long-Dollar/Short-Euro Carry Return)

DXY Index GP <go>

.PPPUSD G Index GP <go>

USDRC BDSR Curncy GP <go>

USDEURCR Index GP<go>

EURUSDV1M BGN Index GP <go> ZCTO CDS EUR SR 5Y MSG1 Curncy GP<go>

U.S. Dollar at a Glance


31

Bloomberg

Euro Area Economic OutlookEconomic Indicators Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Real GDP (yoy %) -- -- 1.3 -- -- 0.7 -- -- 0.0 -- -- -- --Consumer Price Index (yoy %) 2.5 2.5 3.0 3.0 3.0 2.7 2.7 2.7 2.7 2.6 2.4 2.4 Core CPI (yoy %) 1.2 1.2 1.6 1.6 1.6 1.6 1.5 1.5 1.6 1.6 1.6 1.6 Producer Price Index (yoy %) 6.1 5.8 5.8 5.5 5.4 4.3 3.9 3.7 3.5 2.6 2.3 Unemployment Rate (%) 10.1 10.2 10.3 10.5 10.6 10.7 10.8 10.8 11.0 11.0 11.1 Industrial Production (yoy %) 4.2 5.8 2.2 0.9 0.0 -1.7 -1.7 -1.6 -1.5 -2.4 -2.8 Leading Indicator (yoy %) 0.0 -0.4 -0.8 -1.1 -1.4 -1.6 -1.7 -1.7 -1.7 Business Confi dence Index 0.4 0.1 -0.1 -0.2 -0.4 -0.3 -0.2 -0.2 -0.3 -0.5 -0.8 -0.9 Retail Sales (yoy %) -0.4 0.0 -1.1 -0.7 -1.4 -1.7 -1.1 -2.0 0.0 -3.5 -1.7 Consumer Confi dence Index -11.5 -16.8 -19.3 -20.1 -20.5 -21.3 -20.7 -20.3 -19.1 -19.9 -19.3 -19.8 -21.6Consumer Credit (EUR bn) 629.4 630.6 629.6 629.0 627.0 628.1 624.0 619.1 617.9 618.3 619.2 Trade Balance (EUR bn, sa) -4129 -2415 788 276 3911 7414 4706 2046 4438 4527 6290 M2 Money Supply (yoy %) 2.2 2.3 2.4 1.9 1.9 2.0 2.2 2.6 3.1 2.5 2.8

Euro-Area Unemployment Rate(%)

Euro-Area Current-Account Balance(% of GDP)

Euro-Area Real GDP Growth(Year-over-Year % Change)

Euro-Area Consumer Price Infl ation Rate(Year-over-Year % Change)

EUGNEMUY Index GP <go> ECCPEMUY Index GP<go>

UMRTEMU Index GP <go> EHCAEU Index GP<go>


32

Bloomberg

Euro Implied Volatility(One-Month Implied Volatility)

Germany Credit Default Swap Spread(Five-Year CDS)

U.S. Dollar/Euro Exchange Rate(Spot Rate)

Euro Short-Term Interest Rate(Three-Month Deposit Rate)

Euro PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging Methodology)

Euro Cumulative Carry Return(Long-Euro/Short-U.S.Dollar Carry Return)

EUR Curncy GP <go>

.PPPEUR G Index GP <go>

EUDRC BDSR Curncy GP <go>

EURUSDCR Index GP<go>

EURUSDV1M BGN Index GP <go> ZCTO CDS EUR SR 5Y MSG1 Curncy GP<go>

Euro at a Glance


33

Bloomberg

Japan Economic OutlookJapan Economic Indicators Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Real GDP (yoy %) -- -- -0.5 -- -- -0.6 -- -- 2.8 -- -- --Consumer Price Index (yoy %) 0.1 -0.2 -0.3 -0.5 -0.9 -0.4 -0.2 -0.2 -0.1 -0.3 -0.5 -0.6 Core CPI (yoy %) -0.1 -0.2 -0.1 -0.4 -0.5 -0.3 -0.4 -0.3 -0.3 -0.5 -0.8 -0.6 Producer Price Index (yoy %) -0.6 -0.5 -0.2 -0.2 -0.4 -0.1 -0.4 -0.7 -0.2 0.2 0.1 Unemployment Rate (%) 4.7 4.4 4.2 4.4 4.5 4.5 4.6 4.5 4.5 4.6 4.4 Industrial Production (yoy %) -1.7 1.6 -2.4 0.9 -2.9 -3.0 -1.6 1.5 14.2 12.9 6.0 Leading Indicator (yoy %) 0.4 0.4 0.3 0.3 0.2 0.2 0.2 0.2 0.2 Business Confi dence Index 47.1 46.4 47.2 46.4 45.8 45.6 45.7 45.3 48.7 47.6 47.2 46.2 46.6Retail Sales (yoy %) 0.6 -2.6 -1.1 1.9 -2.2 2.5 1.8 3.4 10.3 5.7 3.6 Consumer Confi dence Index 37.7 37.5 38.5 38.5 37.7 38.1 39.4 39.1 40.1 40.3 40.7 40.8 Household Spending (yoy %) -2.1 -4.1 -1.9 -0.4 -3.2 0.5 -2.3 2.3 3.4 2.6 4.0 Trade Balance (JPY bn, sa) -142.5 -266.0 -57.4 -433.8 -548.8 -486.4 -491.8 -322.9 -621.4 -485.8 -618.3 -300.8 M2+CD Money Supply (yoy %) 3.0 2.7 2.7 2.8 3.0 3.2 3.1 2.9 3.0 2.6 2.2 2.2

Japan Unemployment Rate(%)

Japan Current-Account Balance(% of GDP)

Japan Real GDP Growth(Year-over-Year % Change)

Japan Consumer Price Infl ation Rate(Year-over-Year % Change)

JGDPNSAQ Index GP <go> JNCPT Index GP<go>

JNUE Index GP <go> EHCAJP Index GP<go>


34

Bloomberg

Yen Implied Volatility(One-Month Implied Volatility)

Japan Credit Default Swap Spread(Five-Year CDS)

Japanese Yen/U.S. Dollar Exchange Rate(Spot Rate)

Japan Short-Term Interest Rate(Three-Month Deposit Rate)

Japanese Yen PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging Methodology)

Japanese Yen Cumulative Carry Return(Long-Yen/Short-U.S. Dollar Carry Return)

JPY Curncy GP <go>

.PPPJPY G Index GP <go>

JYDRC BDSR Curncy GP <go>

JPYUSDCR Index GP<go>

USDJPYV1M BGN Index GP <go> JGB CDS USD SR 5Y Corp GP<go>

Japanese Yen at a Glance


35

Bloomberg

U.K. Economic OutlookU.K. Economic Indicators Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Real GDP (qoq % saar) -- -- 0.5 -- -- 0.6 -- -- -0.2 -- -- -0.8 --Retail Price Index (yoy %) 5.0 5.2 5.6 5.4 5.2 4.8 3.9 3.7 3.6 3.5 3.1 2.8 Core RPI (yoy %) 5.0 5.3 5.8 5.6 5.3 5.0 4.0 3.8 3.7 3.5 3.1 2.8 Producer Price Index (yoy %) 18.5 16.3 18.1 14.5 13.8 8.9 6.5 7.7 5.4 1.0 0.0 -2.3 Unemployment Rate (%) 7.9 8.1 8.3 8.3 8.4 8.4 8.4 8.3 8.2 8.2 8.1 Industrial Production (yoy %) -0.9 -1.2 -1.5 -2.3 -3.1 -2.7 -3.9 -2.5 -2.8 -2.0 -1.6 Leading Indicator (yoy %) -1.3 -1.6 -1.9 -2.1 -2.3 -2.3 -2.3 -2.1 -2.0 Economic Sentiment Index 98.8 93.2 89.8 89.8 89.2 88.6 93.6 93.9 91.5 95.7 91.0 92.9 Mortgage Approvals (000) 49.6 52.6 51.1 52.8 52.9 53.2 58.6 49.7 50.9 51.6 51.1 Retail Sales (yoy %) -1.2 -1.6 0.0 0.4 -0.4 1.2 0.6 0.9 2.7 -0.8 2.7 2.2 Consumer Confi dence -30.0 -31.0 -30.0 -32.0 -31.0 -33.0 -29.0 -29.0 -31.0 -31.0 -29.0 -29.0 Consumer Credit (GBP bn) 0.3 0.5 0.6 0.1 0.4 0.0 0.2 0.3 0.7 0.4 0.7 Trade Balance (GBP mn) -8711 -8746 -10249 -7991 -9273 -7471 -7880 -8585 -8582 -9709 -8363 Gov’t Surplus/Defi cit (% of GDP) -- -- -8.8 -- -- -8.3 -- -- -8.3 -- -- --M4 Money Supply (yoy %) -1.1 -0.7 -1.7 -2.8 -2.6 -2.5 -2.5 -3.9 -4.8 -4.0 -4.1

U.K. Unemployment Rate(%)

U.K. Current-Account Balance(% of GDP)

U.K. Real GDP Growth(Year-over-Year % Change)

U.K. Retail Price Infl ation Rate(Year-over-Year % Change)

UKGRABIY Index GP <go> UKRPYOY Index GP<go>

UKUEILOR Index GP <go> EHCAGB Index GP<go>


36

Bloomberg

British Pound Implied Volatility(One-Month Implied Volatility)

U.K. Credit Default Swap Spread(Five-Year CDS)

U.S. Dollar/British Pound Exchange Rate(Spot Rate)

U.K. Short-Term Interest Rate(Three-Month Deposit Rate)

British Pound PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging Methodology)

British Pound Cumulative Carry Return(Long-Sterling/Short-U.S. Dollar Carry Return)

GBP Curncy GP <go>

.PPPGBP G Index GP <go>

BPDRC BDSR Curncy GP <go>

GBPUSDCR Index GP<go>

GBPUSDV1M BGN Index GP <go> UKT CDS USD SR 5Y MSG1 Curncy GP<go>

British Pound at a Glance


37

Bloomberg

Canada Economic OutlookCanada Economic Indicators Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Real GDP (qoq % saar) -- -- 4.5 -- -- 1.9 -- -- 1.9 -- -- Consumer Price Index (yoy %) 2.7 3.1 3.2 2.9 2.9 2.3 2.5 2.6 1.9 2.0 1.2 1.5Core RPI (yoy %) 1.2 1.5 1.9 1.5 1.6 1.3 1.6 1.7 1.5 1.9 1.5 1.7Producer Price Index (yoy %) 5.3 5.4 5.6 4.8 4.3 2.6 2.4 1.8 1.1 0.5 0.7 Unemployment Rate (%) 7.3 7.3 7.2 7.4 7.5 7.5 7.6 7.4 7.2 7.3 7.3 7.2Industrial Production (yoy %) 2.2 2.7 4.3 3.3 3.4 2.7 1.6 0.8 -0.1 1.1 Leading Indicator (yoy %) 0.6 0.6 0.5 0.4 0.3 0.3 0.2 0.2 0.3 Purchasing Managers Index 45.4 57.6 63.4 55.6 57.1 53.6 55.7 66.0 65.0 52.2 66.3 55.3Housing Starts (saar, 000s) 213.1 191.4 209.2 211.3 186.2 200.4 200.6 204.2 214.2 252.0 217.4 222.7Retail Sales (yoy %) 4.6 4.4 4.9 5.0 3.6 3.9 4.8 4.0 4.0 3.2 3.1 Consumer Confi dence 83.6 76.9 77.2 73.9 78.6 72.0 76.0 77.4 81.8 77.2 83.1 77.5Trade Balance (C$ bn) 0.0 -0.5 1.3 -0.5 1.0 3.2 2.0 0.1 0.1 -0.6 -0.8 Trade Balance with U.S. (US$ bn) 3.6 2.7 4.3 3.6 4.7 6.0 6.1 4.6 4.4 3.6 3.2 M2 Money Supply (yoy %) 4.2 4.4 5.2 5.8 6.4 6.4 6.9 6.7 6.6 6.8 7.3

Canada Unemployment Rate(%)

Canada Current-Account Balance(% of GDP)

Canada Real GDP Growth(Quarter-over-Quarter % Change, Seasonally Annualized Rate)

Canada Consumer Price Infl ation Rate(Year-over-Year % Change)

CGE9ANN Index GP <go> CACPIYOY Index GP<go>

CANLXEMR Index GP <go> EHCACNY Index GP<go>


38

Bloomberg

Canadian Dollar Implied Volatility(One-Month Implied Volatility)

Canadian Dollar/U.S. Dollar Exchange Rate(Spot Rate)

Canadian Short-Term Interest Rate(Three-Month Deposit Rate)

Canadian Dollar PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging Methodology)

Canadian Dollar Cumulative Carry Return(Long-C$/Short-US$ Carry Return)

CAD Curncy GP <go>

.PPPCAD G Index GP <go>

CDDRC BDSR Curncy GP <go>

CADUSDCR Index GP<go>

USDCADV1M BGN Index GP <go>

Canadian Dollar at a Glance


39

Bloomberg

Australian Dollar Implied Volatility(One-Month Implied Volatility)

Australia Credit Default Swap Spread(Five-Year CDS)

U.S. Dollar/Australian Dollar Exchange Rate(Spot Rate)

Australia Short-Term Interest Rate(Three-Month Deposit Rate)

Australian Dollar PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging Methodology)

Australian Dollar Cumulative Carry Return(Long-A$/Short-US$ Carry Return)

AUD Curncy GP <go>

.PPPAUD G Index GP <go>

ADDRC BDSR Curncy GP <go>

AUDUSDCR Index GP<go>

AUDUSDV1M BGN Index GP <go> AUSTLA CDS USD SR 5Y MSG1 Curncy GP<go>

Australian Dollar at a Glance


40

Bloomberg

New Zealand Dollar Implied Volatility(One-Month Implied Volatility)

New Zealand Credit Default Swap Spread(Five-Year CDS)

U.S. Dollar/New Zealand Dollar Exchange Rate(Spot Rate)

New Zealand Short-Term Interest Rate(Three-Month Deposit Rate)

New Zealand Dollar PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging Methodology)

New Zealand Dollar Cumulative Carry Return(Long-NZ$/Short-US$ Carry Return)

NZD Curncy GP <go>

.PPPNZD G Index GP <go>

NDDRC BDSR Curncy GP <go>

NZDUSDCR Index GP<go>

NZDUSDV1M BGN Index GP <go> NZ CDS USD SR 5Y MSG1 Curncy GP<go>

New Zealand Dollar at a Glance


41

Bloomberg

Swiss Franc Implied Volatility(One-Month Implied Volatility)

Switzerland Credit Default Swap Spread(Five-Year CDS)

Swiss Franc/U.S. Dollar Exchange Rate(Spot Rate)

Switzerland Short-Term Interest Rate(Three-Month Deposit Rate)

Swiss Franc PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging Methodology)

Swiss Franc Cumulative Carry Return(Long-Swiss Franc/Short-US$ Carry Return)

Swiss Franc at a Glance

CHF Curncy GP <go>

.PPPCHF G Index GP <go>

SFDRC BDSR Curncy GP <go>

CHFUSDCR Index GP<go>

USDCHFV1M BGN Index GP <go> SWISS CDS USD SR 5Y MSG1 Curncy GP<go>


42

Bloomberg

Danish Krone Implied Volatility(One-Month Implied Volatility)

Denmark Credit Default Swap Spread(Five-Year CDS)

Danish Krone/U.S. Dollar Exchange Rate(Spot Rate)

Denmark Short-Term Interest Rate(Three-Month Deposit Rate)

Danish Krone PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging PPP Methodology)

Danish Krone Cumulative Carry Return(Long-Krone/Short-US$ Carry Return)

DKK Curncy GP <go>

.PPPDKK G Index GP <go>

DKDRC BDSR Curncy GP <go>

DKKUSDCR Index GP<go>

USDDKKV1M BGN Index GP <go> DENK CDS USD SR 5Y MSG1 Curncy GP<go>

Danish Krone at a Glance


43

Bloomberg

Norwegian Krone Implied Volatility(One-Month Implied Volatility)

Norway Credit Default Swap Spread(Five-Year CDS)

Norwegian Krone/U.S. Dollar Exchange Rate(Spot Rate)

Norway Short-Term Interest Rate(Three-Month Deposit Rate)

Norwegian Krone PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging PPP Methodology)

Norwegian Krone Cumulative Carry Return(Long-Krone/Short-US$ Carry Return)

NOK Curncy GP <go>

.PPPNOK G Index GP <go>

NKDRC BDSR Curncy GP <go>

NOKUSDCR Index GP<go>

USDNOKV1M BGN Index GP <go> NORWAY CDS USD SR 5Y Corp GP<go>

Norwegian Krone at a Glance


44

Bloomberg

Swedish Krona Implied Volatility(One-Month Implied Volatility)

Sweden Credit Default Swap Spread(Five-Year CDS)

Swedish Krona/U.S. Dollar Exchange Rate(Spot Rate)

Sweden Short-Term Interest Rate(Three-Month Deposit Rate)

Swedish Krona PPP % Over/Undervaluation(Based on Bloomberg’s Long-Term Averaging PPP Methodology)

Swedish Krona Cumulative Carry Return(Long-Krona/Short-US$ Carry Return)

SEK Curncy GP <go>

.PPPSEK G Index GP <go>

SKDRC BDSR Curncy GP <go>

SEKUSDCR Index GP<go>

USDSEKV1M BGN Index GP <go> SWED CDS USD SR 5Y MSG1 Curncy GP<go>

Swedish Krona at a Glance


45

Bloomberg

Czech Koruna Implied Volatility(One-Month Implied Volatility)

Czech Republic Credit Default Swap Spread(Five-Year CDS)

Czech Koruna/U.S. Dollar Exchange Rate(Spot Rate)

Czech Koruna Short-Term Interest Rate(Three-Month Deposit Rate)

Czech Republic Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)

Czech Krona Cumulative Carry Return(Long-Czech Koruna/Short-US$ Carry Return)

Czech Koruna at a Glance

CZK Curncy GP <go>

WIRACZEC Index GP <go>

CKDRC BDSR Curncy GP <go>

CXKUSDCR Index GP<go>

USDCZKV1M BGN Index GP <go> CZECH CDS USD SR 5Y MSG1 Curncy GP<go>


46

Bloomberg

Hungarian Forint Implied Volatility(One-Month Implied Volatility)

Hungary Credit Default Swap Spread(Five-Year CDS)

Hungarian Forint/U.S. Dollar Exchange Rate(Spot Rate)

Hungarian Foring Short-Term Interest Rate(Three-Month Deposit Rate)

Hungarian Forint Cumulative Carry Return(Long-Forint/Short-US$ Carry Return)

HUF Curncy GP <go> HFDRC BDSR Curncy GP <go>

HUFUSDCR Index GP<go>

USDHUFV1M BGN Index GP <go> REPHUN CDS USD SR 5Y MSG1 Curncy GP<go>

Hungarian Forint at a Glance

Hungary Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)

HUCRESRV Index GP <go>


47

Bloomberg

Iceland Credit Default Swap Spread(Five-Year CDS)

Icelandic Krona/U.S. Dollar Exchange Rate(Spot Rate)

Iceland Short-Term Interest Rate(Three-Month Deposit Rate)

Icelandic Krona Cumulative Carry Return(Long-Krona/Short-US$ Carry Return)

ISK Curncy GP <go>

ICIRRA Index GP <go>

IKDRC BDSR Curncy GP <go>

ISKUSDCR Index GP<go>

ICELND CDS USD SR 5Y MSG1 Curncy GP<go>

Icelandic Krona at a Glance

Iceland Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)


48

Bloomberg

Polish Zloty Implied Volatility(One-Month Implied Volatility)

Poland Credit Default Swap Spread(Five-Year CDS)

Polish Zloty/U.S. Dollar Exchange Rate(Spot Rate)

Poland Short-Term Interest Rate(Three-Month Deposit Rate)

Polish Zloty Cumulative Carry Return(Long-Zloty/Short-US$ Carry Return)

PLN Curncy GP <go> PZDRC BDSR Curncy GP <go>

PLNUSDCR Index GP<go>

USDPLNV1M BGN Index GP <go> POLAND CDS USD SR 5Y MSG1 Curncy GP<go>

Poland Zloty at a Glance

Poland Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)

PORAFORX Index GP <go>


49

Bloomberg

Russian Ruble Implied Volatility(One-Month Implied Volatility)

Russia Credit Default Swap Spread(Five-Year CDS)

Russian Ruble/U.S. Dollar Exchange Rate(Spot Rate)

Russia Short-Term Interest Rate(Three-Month Deposit Rate)

RUB Curncy GP <go> RRDRC BDSR Curncy GP <go>

USDRUBV1M BGN Index GP <go> RUSSIA CDS USD SR 5Y MSG1 Curncy GP<go>

Russian Ruble at a Glance

Russia Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)

WIRARUSS Index GP <go>


50

Bloomberg

Turkish Lira Implied Volatility(One-Month Implied Volatility)

Turkey Credit Default Swap Spread(Five-Year CDS)

Turkish Lira/U.S. Dollar Exchange Rate(Spot Rate)

Turkey Short-Term Interest Rate(Three-Month Deposit Rate)

Turkish Lira Cumulative Carry Return(Long-Lira/Short-US$ Carry Return)

TRY Curncy GP <go> TYDRC BDSR Curncy GP <go>

TRYUSDCR Index GP<go>

USDTRYV1M BGN Index GP <go> TURKEY CDS USD SR 5Y MSG1 Curncy GP<go>

Turkish Lira at a Glance

Turkey Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)

WIRATURK Index GP <go>


51

Bloomberg

South African Rand Implied Volatility(One-Month Implied Volatility)

South Africa Credit Default Swap Spread(Five-Year CDS)

South African Rand/U.S. Dollar Exchange Rate(Spot Rate)

South Africa Short-Term Interest Rate(Three-Month Deposit Rate)

South African Rand Cumulative Carry Return(Long-Zloty/Short-US$ Carry Return)

ZAR Curncy GP <go> SADRC BDSR Curncy GP <go>

ZARUSDCR Index GP<go>

USDZARV1M BGN Index GP <go> SOAF CDS USD SR 5Y MSG1 Curncy GP<go>

South African Rand at a Glance

South Africa Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)

SANOFER$ Index GP <go>


52

Bloomberg

China Economic OutlookChina Economic Indicators Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Real GDP (yoy %) -- -- 9.1 -- -- 8.9 -- -- 8.1 -- -- 7.6Consumer Price Index (yoy %) 6.5 6.2 6.1 5.5 4.2 4.1 4.5 3.2 3.6 3.4 3.0 2.2Industrial Product Price Index (yoy %) 7.5 7.3 6.5 5.0 2.7 1.7 0.7 0.0 -0.3 -0.7 -1.4 -2.1Unemployment Rate (%) -- -- 4.1 -- -- 4.1 -- -- 4.1 -- -- Industrial Production (yoy %) 14.0 13.5 13.8 13.2 12.4 12.8 11.9 9.3 9.6 9.5 Leading Indicator (yoy %) 13.7 13.6 13.3 12.8 12.4 12.1 12.0 12.1 12.1 12.2 Manufacturing PMI 50.7 50.9 51.2 50.4 49.0 50.3 50.5 51.0 53.1 53.3 50.4 50.2Retail Sales (yoy %) 17.2 17.0 17.7 17.2 17.3 18.1 15.2 14.1 13.8 13.7 Consumer Confi dence Index 105.6 105.0 103.4 100.5 97.0 100.5 103.9 105.0 100.0 103.0 104.2 99.3Trade Balance (US$ bn, sa) 31.5 17.8 14.5 17.0 14.5 16.5 27.3 -31.5 5.4 18.4 18.7 31.7M2 Money Supply (yoy %) 14.7 13.6 13.0 12.9 12.7 13.6 12.4 13.0 13.4 12.8 13.2 13.6Offi cial Reserve Assets (US$ bn.) 3245 3263 3202 3274 3221 3181 3254 3310 3305 3299 3206 3240

China Unemployment Rate(%)

China Current-Account Balance(% of GDP)

China Real GDP Growth(Year-over-Year % Change)

China Consumer Price Infl ation Rate(Year-over-Year % Change)

CNGDPYOY Index GP <go> CNCPIYOY Index GP<go>

CNUERATE Index GP <go> EHCACNY Index GP<go>


53

Bloomberg

Chinese Renminbi Implied Volatility(One-Month Implied Volatility)

Chinese Renminbi/U.S. Dollar Exchange Rate(Chinese Renminbi/U.S. Dollar Spot Rate)

China Short-Term Interest Rate(Three-Month Implied NDF Rate)

China Foreign Exchange Reserves(Offi cial Reserve Assets, US$ bn.)

CNY Curncy GP <go> CCNI3M Curncy GP <go>

WIRACHIN Index GP<go>

USDCNYV1M BGN Index GP <go>

Chinese Renminbi at a Glance

China Credit Default Swap Spread(Five-Year CDS)

CHINAGOV CDS USD SR 5Y Corp GP <go>


54

Bloomberg

Hong Kong Dollar Implied Volatility(One-Month Implied Volatility)

Hong Kong Dollar /U.S. Dollar Exchange Rate(Hong Kong Dollar/U.S. Dollar Spot Rate)

Hong Kong Short-Term Interest Rate(Three-Month Deposit NDF Rate)

Hong Kong Foreign Exchange Reserves(Offi cial Reserve Assets, US$ bn.)

HKD Curncy GP <go>

WIRAHK Index GP<go>

USDHKDV1M BGN Index GP <go>

Hong Kong Dollar at a Glance

Hong Kong Credit Default Swap Spread(Five-Year CDS)

HONG CDS USD SR 5Y Corp GP <go>

Hong Kong Dollar Cumulative Carry Return(Long HKD/Short US$ Carry Return)

HDDRC BDSR Curncy GP <go>

HKDUSDCR Index GP<go>


55

Bloomberg

Indian Rupee Implied Volatility(One-Month Implied Volatility)

Indian Rupee/U.S. Dollar Exchange Rate(Chinese Renminbi/U.S. Dollar Spot Rate)

India Short-Term Interest Rate(Three-Month Deposit Rate)

India Foreign Exchange Reserves(Offi cial Reserve Assets, US$ bn.)

INR Curncy GP <go> IRDRC BDSR Curncy GP <go>

INMOFCA$ Index GP<go>

USDINRV1M BGN Index GP <go>

Indian Rupee at a Glance

INRUSDCR Index GP<go>

Indian Rupee Cumulative Carry Return(Long INR/Short US$ Carry Return)


56

Bloomberg

Indonesian Rupiah Implied Volatility(One-Month Implied Volatility)

Indonesian Rupiah /U.S. Dollar Exchange Rate(Indonesian Rupiah/U.S. Dollar Spot Rate)

Indonesia Short-Term Interest Rate(Three-Month NDF Rate)

Indonesia Foreign Exchange Reserves(Offi cial Reserve Assets, US$ bn.)

IDR Curncy GP <go>

WIRAINDO Index GP<go>

USDIDRV1M BGN Index GP <go>

Indonesian Dollar at a Glance

Indonesia Credit Default Swap Spread(Five-Year CDS)

INDON CDS USD SR 5Y Corp GP <go>

Indonesia Rupiah Cumulative Carry Return(Long IDR/Short US$ Carry Return)

IHDRC BDSR Curncy GP <go>

IDRUSDCR Index GP<go>


57

Bloomberg

Malaysian Ringgit Implied Volatility(One-Month Implied Volatility)

Malaysian Ringgit /U.S. Dollar Exchange Rate(Malaysian Ringgit/U.S. Dollar Spot Rate)

Malaysia Short-Term Interest Rate(Three-Month Deposit Rate)

Malaysia Foreign Exchange Reserves(Offi cial Reserve Assets, US$ bn.)

MYR Curncy GP <go>

548.055 Index GP<go>

USDMYRV1M BGN Index GP <go>

Malaysian Ringgit at a Glance

Indonesia Credit Default Swap Spread(Five-Year CDS)

MALAY CDS USD SR 5Y Corp GP <go>

MRDRC BDSR Curncy GP <go>


58

Bloomberg

Philippines Peso Implied Volatility(One-Month Implied Volatility)

Philippines Peso/U.S. Dollar Exchange Rate(Spot Rate)

Philippines Short-Term Interest Rate(Three-Month Implied NDF Rate)

Philipppines Foreign Exchange Reserves(Offi cial Reserve Assets, US$ bn.)

PHP Curncy GP <go> PPDRC BDSR Curncy GP <go>

PHIRTTL Index GP<go>

USDPHPV1M BGN Index GP <go>

Philippines Peso at a Glance

Philippines Credit Default Swap Spread(Five-Year CDS)

PHILIP CDS USD SR 5Y Corp GP <go>

PHPUSDCR Index GP<go>

Philippine Peso Cumulative Carry Return(Long PHP/Short US$ Carry Return)


59

Bloomberg

Singapore Dollar Implied Volatility(One-Month Implied Volatility)

Singapore Dollar /U.S. Dollar Exchange Rate(Spot Rate)

Singapore Short-Term Interest Rate(Three-Month Deposit Rate)

Singapore Foreign Exchange Reserves(Offi cial Reserve Assets, US$ bn.)

SGD Curncy GP <go>

SIOFRUS Index GP<go>

USDSGDV1M BGN Index GP <go>

Singapore Dollar at a Glance

Singapore Dollar Cumulative Carry Return(Long SGD/Short US$ Carry Return)

SDDRC BDSR Curncy GP <go>

SGDUSDCR Index GP<go>


60

Bloomberg

South Korean Won Implied Volatility(One-Month Implied Volatility)

South Korean Won/U.S. Dollar Exchange Rate(Spot Rate)

South Korea Short-Term Interest Rate(Three-Month Deposit Rate)

South Korea Foreign Exchange Reserves(Offi cial Reserve Assets, US$ bn.)

KRW Curncy GP <go> KWDRC BDSR Curncy GP <go>

WIRASK Index GP<go>

USDKRWV1M BGN Index GP <go>

South Korean Won at a Glance

KRWUSDCR Index GP<go>

South Korean Won Cumulative Carry Return(Long KRW/Short US$ Carry Return)

South Korea Credit Default Swap Spread(Five-Year CDS)

KOREA CDS USD SR 5Y Corp GP <go>


61

Bloomberg

Taiwan Dollar Implied Volatility(One-Month Implied Volatility)

Taiwan Dollar /U.S. Dollar Exchange Rate(Spot Rate)

Taiwan Short-Term Interest Rate(Three-Month Deposit NDF Rate)

Taiwan Foreign Exchange Reserves(Offi cial Reserve Assets, US$ bn.)

TWD Curncy GP <go>

WIRATAIW Index GP<go>

USDTWDV1M BGN Index GP <go>

Taiwan Dollar at a Glance

TRDRC BDSR Curncy GP <go>

TWDUSDCR Index GP<go>

Taiwan Dollar Cumulative Carry Return(Long IDR/Short US$ Carry Return)


62

Bloomberg

Thai Baht Implied Volatility(One-Month Implied Volatility)

Thai Baht /U.S. Dollar Exchange Rate(Spot Rate)

Thailand Short-Term Interest Rate(Three-Month Deposit NDF Rate)

Thailand Foreign Exchange Reserves(Offi cial Reserve Assets, US$ bn.)

THB Curncy GP <go>

WIRATHAI Index GP<go>

USDTHBV1M BGN Index GP <go>

Thai Baht at a Glance

Thailand Credit Default Swap Spread(Five-Year CDS)

THAI CDS USD SR 5Y Corp GP <go>

Thai Baht Cumulative Carry Return(Long THB/Short US$ Carry Return)

TBDRC BDSR Curncy GP <go>

THBUSDCR Index GP<go>


63

Bloomberg

Argentine Peso Implied Volatility(One-Month Implied Volatility)

Argentina Credit Default Swap Spread(Five-Year CDS)

Argentine Peso/U.S. Dollar Exchange Rate(Spot Rate)

Argentina Short-Term Interest Rate(Three-Month Deposit Rate)

Argentina Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)

Argentine Peso Cumulative Carry Return(Long-Peso/Short-US$ Carry Return)

Argentine Peso at a Glance

ARS Curncy GP <go>

ARVARVUS Index GP <go>

APDRC BDSR Curncy GP <go>

ARSUSDCR Index GP<go>

USDARSV1M BGN Index GP <go> ARGENT CDS USD SR 5Y MSG1 Curncy GP<go>


64

Bloomberg

Brazil Real Implied Volatility(One-Month Implied Volatility)

Brazil Credit Default Swap Spread(Five-Year CDS)

Brazil Real/U.S. Dollar Exchange Rate(Spot Rate)

Brazil Short-Term Interest Rate(Three-Month Deposit Rate)

Brazil Real Cumulative Carry Return(Long-Real/Short-US$ Carry Return)

BRL Curncy GP <go>

WIRABRAZ Index GP <go>

BCDRC BDSR Curncy GP <go>

BRLUSDCR Index GP<go>

USDBRLV1M BGN Index GP <go> BRAZIL CDS USD SR 5Y MSG1 Curncy GP<go>

Brazil Real at a Glance

Brazil Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)


65

Bloomberg

Chilean Peso Implied Volatility(One-Month Implied Volatility)

Chile Credit Default Swap Spread(Five-Year CDS)

Chilean Peso/U.S. Dollar Exchange Rate(Spot Rate)

Chile Short-Term Interest Rate(Three-Month NDF Rate)

Chilean Peso Cumulative Carry Return(Long-Peso/Short-US$ Carry Return)

CLP Curncy GP <go>

CHMRRSRV Index GP <go>

CHDRC BDSR Curncy GP <go>

CLPUSDCR Index GP<go>

USDCLPV1M BGN Index GP <go> CHILE CDS USD SR 5Y MSG1 Curncy GP<go>

Chilean Peso at a Glance

Chile Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)


66

Bloomberg

Colombian Peso Implied Volatility(One-Month Implied Volatility)

Colombia Credit Default Swap Spread(Five-Year CDS)

Colombian Peso/U.S. Dollar Exchange Rate(Spot Rate)

Colombia Short-Term Interest Rate(Three-Month Deposit Rate)

Colombian Peso Cumulative Carry Return(Long-Peso/Short-US$ Carry Return)

COP Curncy GP <go>

COIRNET Index GP <go>

CLDRC BDSR Curncy GP <go>

COPUSDCR Index GP<go>

USDCOPV1M BGN Index GP <go> COLOM CDS USD SR 5Y MSG1 Curncy GP<go>

Colombian Peso at a Glance

Colombia Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)


67

Bloomberg

Mexican Peso Implied Volatility(One-Month Implied Volatility)

Mexico Credit Default Swap Spread(Five-Year CDS)

Mexican Peso/U.S. Dollar Exchange Rate(Spot Rate)

Mexico Short-Term Interest Rate(Three-Month Deposit Rate)

Mexican Peso Cumulative Carry Return(Long-Peso/Short-US$ Carry Return)

MXN Curncy GP <go>

WIRAMEX Index GP <go>

MPDRC BDSR Curncy GP <go>

MXNUSDCR Index GP<go>

USDMXNV1M BGN Index GP <go> MEX CDS USD SR 5Y MSG1 Curncy GP<go>

Mexican Peso at a Glance

Mexico Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)


68

Bloomberg

Peruvian Sol Implied Volatility(One-Month Implied Volatility)

Peru Credit Default Swap Spread(Five-Year CDS)

Peruvian Sol/U.S. Dollar Exchange Rate(Spot Rate)

Peru Short-Term Interest Rate(Three-Month Deposit Rate)

Peruvian Sol Cumulative Carry Return(Long-Sol/Short-US$ Carry Return)

PEN Curncy GP <go>

PRRSCB Index GP <go>

PSDRC BDSR Curncy GP <go>

PENUSDCR Index GP<go>

USDPENV1M BGN Index GP <go> PERU CDS USD SR 5Y MSG1 Curncy GP<go>

Peruvian Sol at a Glance

Peru Foreign Currency Reserves(Offi cial Reserve Assets, US$ bn.)


69

Bloomberg

Source: Bloomberg

Foreign Government Bonds U.S. Euro Japan U.K. Canada Australia N.Z. Switz. Norway Sweden 10-Yr. 10-Yr. 10-Yr 10-Yr 10-Yr. 10-Yr. 10-Yr. 1I0-Yr. 10-Yr 10-YrInvestor PerspectiveU.S. InvestorYield Pickup (bps) Latest - 1 -36 -21 -57 -183 -46 -54 -141 -184 of Foreign Bonds High - 1 -33 -5 -57 -162 -10 -51 -58 -144 Hedged into US$ Low - -163 -178 -56 -102 -295 -64 -171 -257 -254 over 10-Yr. Treasuries Avg - -77 -75 -36 -73 -217 -40 -114 -172 -199 Z-Score - 1.87 1.41 1.23 1.71 1.27 -0.42 1.75 0.63 0.59 Euro Investor Yield Pickup (bps) Latest -1 - -36 -21 -58 -183 -47 -54 -141 -185 of Foreign Bonds High 163 - 58 123 70 -84 123 61 26 -57 Hedged into Euros Low -1 - -40 -25 -59 -190 -52 -104 -153 -185 over 10-Yr. Euro Bonds Avg 77 - 2 41 4 -140 36 -37 -95 -122 Z-Score -1.87 - -1.34 -1.33 -1.62 -1.60 -1.77 -0.40 -1.59 -1.94 Japanese Investor Yield Pickup (bps) Latest 36 36 - 15 -22 -147 -11 -18 -105 -149 of Foreign Bonds High 178 40 - 134 77 -87 126 31 -8 -61 Hedged into ¥ Low 33 -58 - -11 -29 -204 -14 -108 -158 -159 over 10-Yr. JGBs Avg 75 -2 - 39 2 -141 35 -38 -97 -124 Z-Score -1.41 1.34 - -0.82 -1.07 -0.28 -1.46 0.57 -0.20 -1.25 U.K. Investor Yield Pickup (bps) Latest 21 21 -15 - -37 -162 -26 -33 -120 -164 of Foreign Bonds High 56 25 11 - -7 -109 28 -8 -16 -104 Hedged into £ Low 5 -123 -134 - -58 -255 -29 -145 -222 -221 over 10-Yr. Gilts Avg 36 -41 -39 - -37 -181 -5 -78 -136 -163 Z-Score -1.23 1.33 0.82 - 0.03 0.62 -1.61 1.39 0.30 -0.03 Canadian Investor Yield Pickup (bps) Latest 57 58 22 37 - -125 11 3 -83 -127 of Foreign Bonds High 102 59 29 58 - -102 62 11 13 -67 Hedged into C$ Low 57 -70 -77 7 - -215 3 -96 -183 -168 over 10-Yr. Canada Bonds Avg 73 -4 -2 37 - -144 32 -41 -99 -126 Z-Score -1.71 1.62 1.07 -0.03 - 0.80 -1.57 1.52 0.34 -0.05 Australian Investor Yield Pickup (bps) Latest 183 183 147 162 125 - 136 129 42 -2 of Foreign Bonds High 295 190 204 255 215 - 269 200 162 74 Hedged into A$ Low 162 84 87 109 102 - 114 45 -18 -21 over 10-Yr. Aussie Bonds Avg 217 140 141 181 144 - 176 103 44 18 Z-Score -1.27 1.60 0.28 -0.62 -0.80 - -1.32 0.73 -0.07 -0.92 N.Z. Investor Yield Pickup (bps) Latest 46 47 11 26 -11 -136 - -8 -94 -138 of Foreign Bonds High 64 52 14 29 -3 -114 - 1 -8 -94 Hedged into NZ$ Low 10 -123 -126 -28 -62 -269 - -128 -216 -221 over 10-Yr. Kiwi Bonds Avg 40 -36 -35 5 -32 -176 - -73 -132 -158 Z-Score 0.42 1.77 1.46 1.61 1.57 1.32 - 1.92 0.70 0.64 Swiss Investor Yield Pickup (bps) Latest 54 54 18 33 -3 -129 8 - -87 -131 of Foreign Bonds High 171 104 108 145 96 -45 128 - 100 16 Hedged into Sfr Low 51 -61 -31 8 -11 -200 -1 - -157 -155 over 10-Yr. Swiss Bonds Avg 114 37 38 78 41 -103 73 - -59 -85 Z-Score -1.75 0.40 -0.57 -1.39 -1.52 -0.73 -1.92 - -0.59 -1.02 Norwegian Investor Yield Pickup (bps) Latest 141 141 105 120 83 -42 94 87 - -44 of Foreign Bonds High 257 153 158 222 183 18 216 157 - 61 Hedged into Nkr Low 58 -26 8 16 -13 -162 8 -100 - -108 over 10-Yr. Norway Bonds Avg 172 95 97 136 99 -44 132 59 - -27 Z-Score -0.63 1.59 0.20 -0.30 -0.34 0.07 -0.70 0.59 - -0.41 Swedish Investor Yield Pickup (bps) Latest 184 185 149 164 127 2 138 131 44 -of Foreign Bonds High 254 185 159 221 168 21 221 155 108 -Hedged into Skr Low 144 57 61 104 67 -74 94 -16 -61 -over 10-Yr. Swedish Bonds Avg 199 122 124 163 126 -18 158 85 27 - Z-Score -0.59 1.94 1.25 0.03 0.05 0.92 -0.64 1.02 0.41 -

Notes: Three-month rolling hedges. Averages, highs, and lows are based on weekly data for the past year. A Z-score is the number of standard deviations that the latest observation lies away from its average. Yield spreads with Z-scores greater/less than +/-1.96 are considered to be signifi cantly different from their 52-week averages.

Yield Pick-Up of Hedged 10-Year Foreign Gov’t Bonds over Domestic Gov’t Bonds


70

Bloomberg

Keeping Up with the Financial Crisis

Real Time Fixed Income Spreads, Market Volatility, and AnalysisFCON Financial Conditions Monitor

Real-Time IndicesBFCIUS Index U.S. Financial Conditions IndexBFCIUS+ Index U.S. Financial Conditions Plus IndexBFCIEU Index Euro-Area Financial Conditions IndexECSURPUS Index U.S. Economic Surprise Index NewsNI CRUNCH Credit Crunch/Crisis NewsSBPR Subprime News

Credit MarketsBANK Monitor bank prices and CDS ratesGCDS CDS sector graphWDCI Writedowns and credit loss vs. capital raisedCCRU Credit crunch overviewWWCC Worldwide credit crunch menu

Mortgages / Housing / DelinquencyHSST U.S. housing and construction statistics DELQ Credit card delinquency ratesBBMD Mortgage delinquency monitorREDQ Commercial real estate delinquenciesDQLO Delinquency rates by loan originator

Infl ation AnalysisIFMO Infl ation monitorILBE World infl ation breakeven rates

Economic Indicators and Financial MarketsCRIS Europe/Middle East/U.S. crises monitors

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