jpm_global_data_watch_se_2012-09-21_946463

Economic ResearchSeptember 21, 2012

Global Data Watch Activity indicators are lackluster now, but forward-looking signals

have turned more positive

Raising Euro area growth for 2013 as fiscal and credit drags to fade

Next week to continue a run of weak August global activity releases

Sentiment lifts as economies bottom Economic news through the third quarter reinforces the messages of lackluster global growth. The data flow has shown stronger July production and retail sales gains giving way to softer readings for August. Regionally, the only clear growth dynamics are a weakening Japan and a lifting Brazil. In all, the news is consistent with our forecast of the global economy in the midst of a bottoming phase. But with global growth averaging less than 2% during the middle quarters of the year—more than a percentage point below trend—a bottoming is not a cause for cheer.

While growth remains lackluster, policymakers have been responsive and the forward-looking signals are starting to improve, consistent with our forecast that a modest lift in activity will take hold next quarter. In particular:

G-4 central banks do more than expected. The constraints on monetary policy for countries facing the zero interest rate bound remain a factor weighing on global growth. Based on past relationships a developed world easing of about 100bp would have been warranted through the current phase of sub-par growth. However, a surprisingly strong G-4 effort to em-ploy unconventional tools is now taking hold. Recent initiatives by the Fed and ECB respond to very different challenges but share a common thread. These central banks have broken from past behavior to support growth and financial stability in the face of the zero bound (see “Fed, ECB shock and deliver” in this GDW). This month’s opening of the BoE’s funding for lend-ing scheme should be viewed in the same light.

September survey shift is better late than never. Manufacturing surveys released this week continue to point to weak output. Indeed, output readings fell in the September flash PMI for the US, China, and Euro area and are at levels consistent with a sharp contraction in global IP. However, all three flash readings showed a modest rise in orders and employment alongside a significant fall in the finished goods inventory to its lowest level this year.

Contents

Fed, ECB shock and deliv er 13

Breaking Good: US consumer gets

unex pected help 15

Euro area grow th: a better 2013 in

prospect 17

The BoJ eased, w hat's nex t? 19

The French Budget: Scy lla,

Chary bdis, and Europa 21

Household delev eraging is not

prev enting a UK recov ery 25

Taiw an trade hinges on G-3 demand

as China stabilizes 29

Global Economic Outlook Summary 4

Global Central Bank Watch 6

Now cast of global grow th 7

Selected recent research from

J.P. Morgan Economics8

The J.P. Morgan View : Markets 9

Data WatchesUnited States 31Euro area 37Japan 41Canada 45Mex ico 47Brazil 49Argentina 51Colombia 53United Kingdom 55Central Europe 59

South Africa 63

Australia and New Zealand 65China, Hong Kong, and Taiw an 69Korea 73ASEAN 75

Asia focus 79

Regional Data Calendars 80

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

www.morganmarkets.com

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Economic Research Global Data Watch September 21, 2012

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

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

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

This dynamic—which we had expected to materialize two months ago—points to final demand growth stabilizing and suggests that current production is finally generating pro-gress in the global inventory adjustment. September pro-gress is consistent with next week’s expected weak August IP reports from Asia.

Sentiment and financial conditions improve. A mix of disappointing growth and heightened concerns over a wide range of political concerns (in Europe, the US, and the MENA region) weighed on sentiment and equity prices into midyear. The potential for sentiment to slip further has been an important downside risk to the forecast, particularly as oil prices moved higher this quarter and we approach the US fis-cal cliff. In the event, sentiment and financial conditions have been breaking in a positive direction recently. Global equity prices are up 8% over the past three months, and credit spreads have narrowed. The US consumer has received a par-ticularly good set of news as the price of gasoline and non-fuel import prices have fallen and increases in equity prices have been accompanied by rising home prices. These chang-es are starting to lift consumer sentiment.

Policy relief boosts EMU growth forecast The boost to confidence and improvement in financial condi-tions is welcome in the Euro area where this week’s Septem-ber flash PMI edged further down and consumer confidence slipped this month. However, these markers are bound to turn up as financial markets improve and the worst of the down-side tail risks have been mitigated by the aggressive actions of the ECB and a growing sense that EMU integration is back on track—even if the path is sure to be long and bumpy. In re-sponse, we look for Euro area GDP to expand 1.1%-pts in 2013 (4q/4q), an upward revision of 0.3%-pt.

Financial conditions have already started to improve, and this should soon begin to bolster economic activity. For the Euro area as a whole, two-year sovereign bond yields have declined

almost 100bp since late July. At the same time, a greater tol-erance for slippage on deficit targets is now expected to limit fiscal tightening next year more than previously anticipated. Indeed, fiscal drag is expected to be more modest than in the US and UK. For the Euro area as a whole, fiscal plans suggest an underlying tightening worth roughly 2% of GDP in 2012 that falls to near 1% in 2013. The fading drag is most pro-nounced in the periphery. Consequently, the improved growth outlook will flow more to the periphery than the core, closing some of the gap that has opened in recent years.

EM Asia is tolerant of slow growth Growth in EM Asia has clearly disappointed this year and yet, to some surprise, this has failed to spark an aggressive policy response. This unusual degree of low-growth tolerance owes primarily to domestic considerations—elevated inflation, ris-ing asset prices, and tight labor markets despite soft growth—even as the external growth backdrop weakened. And now, with the ECB having trimmed downside tail-risks in Europe and the Fed having taken out a bigger insurance policy, EM Asian policymakers are less worried about growth. This is underscored by recent policy inaction. Following last week’s decisions by central banks in Indonesia, Korea, and the Phil-ippines to stay on hold, this week Taiwan did the same. The decision by the CBC of Taiwan was particularly interesting in that it makes explicit reference to inflation risks stemming from the Fed’s QE3. Whether the Fed becomes a target of outright criticism—as was seen in 2010 following QE2—remains to be seen.

China has shared this tolerance for growth disappointments. The flash Markit PMI this week was again soft, staying below 50 for the eleventh consecutive month and featuring another decline in its output component. Though new orders, export orders, and inventories were somewhat encouraging, on net, the outlook for China’s manufacturing sector remains chal-lenging in the near term. Nevertheless, the government’s poli-cy response continues to be cautious. After consecutive rate cuts from the PBoC in June and July, the odds on our call for another policy rate cut and three RRR cuts are declining. In terms of fiscal policy, Beijing is trying to encourage the pri-vate capital investment, but is still aiming to achieve its deficit target of 2%. As is true elsewhere, as long as surveys indicate that labor market resilience continues, Chinese policymakers will tolerate lower GDP growth.

The BoJ eases in a reactive mode Among developed economies, it is arguably the BoJ that should be moving most aggressively. GDP remains most de-pressed relative to its previous cycle peak and domestic de-mand is sharply slowing. With a strong yen and weak global

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demand hurting export performance, GDP will likely contract during 2H12. Inflation is hovering close to zero, placing no constraint on strong action.

After the BoJ’s surprising introduction of a 1% inflation target in February, we had thought that a more fundamental shift to-ward aggressive policy action would, indeed, be forthcoming. But the central bank’s inaction since April along with its subse-quent statements has tempered our enthusiasm. Although reit-erating its objective, the BoJ has consistently expressed the view that inflation is on track to rise to 1% with the current stance in place. Perhaps of greatest concern is its view that in-flation expectations are aligned with its objective and that there is no need for a policy shift to raise expectations.

To be sure, it delivered easing this week—increasing its Asset Purchase Program Y10 trillion—earlier than we had expected. However, this move looks like a reaction to prospective cur-rency pressure in the face of Fed action and a deteriorating economic outlook. We believe that it is likely the BoJ will ease again around the end of the year. But this move will come only after a further shift downward in the bank’s fore-casts of growth and inflation and should not be viewed as a decisive shift in its reaction function.

India’s government stays on the offensive The inevitable pushback from last week’s bold policy pro-posals by the Indian government came quickly. The second largest constituent of the fragile government withdrew its support earlier this week, thereby reducing the government to a minority status. This came in conjunction with a national strike on Thursday in opposition to easing restrictions on FDI in the retail sector and hiking fuel prices. However, rather than cave to pressures, the government negotiated a deal with regional parties to stay in power. More importantly, it also pushed on with even more capital market reforms. Markets have surged in response, with the currency at a four-month high and equity markets at a 14-month high. In an important

speech this week, the Prime Minister publicly rationalized the need for tough choices. And with a Cabinet reshuffle in the works and more policy initiatives on the anvil, there is con-siderable momentum behind the policy initiatives even if questions remain about whether the new political realities are conducive to the government finishing its full term.

QE3 stokes embers of Latin currency war Policymakers in Latin America have once again become con-cerned about the unintended spillovers from the Fed’s ultra-easy monetary policy and are moving to stem the flow of capital into their economies. Shortly after the Fed’s QE3 an-nouncement, Brazil’s central bank proactively began to con-duct FX swap auctions aimed at keeping BRL within the im-plicit range of 2.00-2.10 against USD. At the same time, the Finance Ministry publicly noted it will not hesitate to impose new capital controls to avoid the erosion of recent competi-tiveness gains caused by speculative inflows. The risk of keeping the currency in such a range in the context of global monetary easing is that inflation pressures could mount, limit-ing BCB’s monetary policy flexibility. Authorities may even-tually tolerate a shift to higher BRL levels, but this will re-quire firmer signs that the economic recovery is on track.

Brazil is not alone in the region in its willingness to act against FX appreciation pressures. Colombia’s central bank had already stepped up its daily USD purchases even before QE3 was announced, and Peru’s BCRP has warned that its intervention will become more “unpredictable” in order to introduce larger two-way risks in its FX market and discour-age directional bets. Meanwhile, the strengthening of the Chilean peso has led to an open debate of whether BCCh will respond by announcing a new program to accumulate FX re-serves or actually cut its policy rate—which remains among the highest in real terms among EM countries.

The standout in this rising tide of currency intervention is Mexico. In contrast to other central banks in the region, Banxico will likely tolerate further FX appreciation. Mexico has historically allowed greater exchange rate flexibility com-pared to others. Moreover, the recent surge in both headline and core inflation along with the fact that the Mexican peso remains among the least appreciated currencies when meas-ured against long-term REER averages suggests policymakers have plenty of reason to sit on the sideline. That activity has shown surprising resilience to the global slowdown only adds to the attractiveness of the currency.

Editor: Sandy Batten (1-212) 834-9645 [email protected]

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



Global economic outlook summary

Note: For some emerging economies, 2012-2013 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan. Bold denotes changes from last edition of Global Data Watch, with arrows showing the direction of changes. Underline indicates beginning of J.P. Morgan forecasts. On July 6 we shifted to using concurrent nominal GDP weights in computing our global and regional aggregates from a static 5-year average GDP weight. We maintain the use of current FX rates but still report PPP-based aggregates. For details, see research note "Global economic aggregates get new weights” in July 6, 2012 GDW.

2011 2012 2013 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q11 2Q12 4Q12 2Q13The AmericasUnited States 1.8 2.2 2.0 2.0 1.7 1.5 2.0 1.5 2.3 2.5 3.3 1.9 2.0 1.7 Canada 2.4 2.0 2.1 1.8 1.8 1.9 2.0 2.1 2.1 2.2 2.7 1.6 2.4 2.0Latin America 4.2 2.9 3.7 2.9 2.2 4.5 4.0 3.3 3.6 3.9 7.2 6.0 6.3 7.2

Argentina 8.9 3.3 2.2 3.6 -4.5 8.0 6.0 0.0 1.5 0.5 9.6 10.0 10.0 11.0Brazil 2.7 1.4 4.1 0.5 1.6 4.8 4.6 3.8 4.0 4.3 6.7 5.0 5.4 5.5Chile 6.0 5.0 4.5 5.1 7.1 2.0 4.0 4.6 4.7 4.4 4.0 3.1 2.5 3.1Colombia 5.9 4.3 4.5 0.9 6.7 2.8 3.8 4.2 5.5 5.5 3.9 3.4 3.1 3.2Ecuador 7.8 4.0 4.0 2.8 3.5 4.0 4.0 4.0 4.0 5.0 5.5 5.1 4.2 4.4Mex ico 3.9 3.9 3.6 4.9 3.5 3.5 3.5 4.0 3.2 3.3 3.5 3.9 4.4 4.1Peru 6.9 6.0 7.0 8.3 6.0 5.5 6.0 8.0 8.0 7.0 4.5 4.1 3.1 2.8Uruguay 5.7 3.5 4.0 11.8 2.1 9.0 -9.0 12.0 7.0 9.0 8.3 8.0 7.6 7.2Venezuela 4.2 5.0 0.0 10.1 0.6 3.5 -3.0 -3.0 0.0 3.0 28.5 22.3 23.4 37.3

Asia/PacificJapan -0.7 2.0 0.6 5.3 0.7 -2.0 0.0 1.0 1.2 1.3 -0.3 0.2 0.0 -0.2Australia 2.1 3.5 2.5 5.6 2.6 1.5 1.8 3.8 2.5 1.8 3.1 1.2 1.7 2.7New Zealand 1.3 2.6 2.9 4.1 2.3 1.5 3.5 3.7 3.3 2.0 1.8 1.0 1.7 1.8 Asia ex Japan 7.4 6.1 6.5 7.2 5.7 5.5 6.4 6.6 6.9 7.1 4.9 3.9 3.5 3.9

China 9.3 7.6 8.3 6.5 6.7 7.4 8.5 8.5 8.7 8.7 4.6 2.9 2.5 3.5Hong Kong 5.0 1.2 3.2 2.4 -0.4 2.0 2.5 3.5 3.5 5.0 5.7 4.2 2.5 2.7India 6.5 5.6 6.0 6.1 5.3 5.2 5.0 5.8 6.0 6.8 8.4 10.1 9.8 9.0Indonesia 6.5 5.0 3.7 4.6 6.2 3.0 3.0 3.5 4.5 5.0 4.1 4.5 3.9 2.2Korea 3.6 2.4 3.3 3.5 1.1 2.0 3.5 3.5 3.5 4.0 4.0 2.4 1.9 3.1Malay sia 5.1 4.7 2.9 5.8 5.9 2.5 1.5 2.0 3.0 3.5 3.2 1.7 1.1 1.2Philippines 3.8 5.3 3.5 12.6 0.9 1.2 1.2 4.5 4.5 4.5 4.7 2.9 2.3 2.3Singapore 4.9 2.1 3.4 9.5 -0.7 0.8 4.1 4.1 4.1 4.1 5.5 5.3 3.4 2.4Taiw an 4.0 1.1 3.9 1.5 3.5 1.8 3.8 4.5 4.6 4.8 1.4 1.7 2.1 1.8Thailand 0.1 5.8 2.7 50.8 13.9 2.0 2.0 1.5 2.0 2.0 4.0 2.5 1.3 1.1

Africa/Middle EastIsrael 4.6 3.0 3.1 3.1 3.4 2.0 2.8 4.9 6.1 6.1 2.5 1.6 1.3 1.5South Africa 3.1 2.6 3.2 2.7 3.2 2.3 2.4 3.8 3.2 3.6 6.1 5.7 5.5 5.6

EuropeEuro area 1.5 -0.5 0.3 -0.1 -0.7 -1.0 -0.5 0.8 0.8 1.3 2.9 2.5 2.5 1.9

Germany 3.1 1.0 1.3 2.0 1.1 0.3 0.5 1.5 1.8 2.0 2.6 2.1 2.1 1.8 France 1.7 0.1 0.7 0.1 -0.2 -0.3 0.0 0.8 1.3 1.5 2.6 2.3 2.1 1.5 Italy 0.5 -2.5 -0.7 -3.3 -3.3 -2.5 -1.5 -0.3 0.0 0.5 3.7 3.6 3.1 2.2 Spain 0.4 -1.4 -0.5 -1.3 -1.7 -2.5 -2.0 0.0 1.0 1.0 2.7 1.9 3.3 2.7

United Kingdom 0.8 -0.4 1.5 -1.3 -1.8 2.0 0.5 1.5 2.0 2.5 4.6 2.8 2.7 2.6Emerging Europe 4.8 2.7 3.0 2.4 1.3 1.3 2.2 3.1 3.1 3.6 6.4 5.0 5.9 5.9

Bulgaria 1.7 1.0 2.5 … … … … … … … … … … …Czech Republic 1.7 -1.1 0.9 -3.1 -0.8 -1.2 -1.3 2.1 1.0 4.3 2.4 3.4 2.9 2.4Hungary 1.6 -1.2 0.8 -3.5 -0.9 -0.5 0.5 1.0 1.5 1.8 4.1 5.5 5.5 3.3Poland 4.3 2.4 2.1 2.4 1.6 1.2 1.6 1.8 2.4 3.5 4.6 4.0 3.7 2.6Romania 2.5 0.6 0.9 0.6 2.1 -1.0 0.8 1.2 -0.4 3.2 3.4 1.9 4.7 6.4Russia 4.3 3.6 3.4 3.7 1.5 2.0 3.0 4.0 4.0 3.7 6.8 3.9 6.7 7.4Turkey 8.5 2.8 4.1 … … … … … … … 9.2 9.4 6.5 5.9

Global 3.0 2.4 2.6 3.0 1.9 1.8 2.3 2.7 3.0 3.2 3.8 2.8 2.8 2.8 Dev eloped markets 1.3 1.2 1.2 1.7 0.6 0.2 0.8 1.3 1.6 1.9 2.7 1.8 1.9 1.6 Emerging markets 6.1 4.7 5.2 5.3 4.2 4.6 5.1 5.3 5.5 5.8 5.7 4.6 4.5 5.0

Memo:Global — PPP w eighted 3.8 3.0 3.3 3.6 2.5 2.4 3.0 3.3 3.6 3.9 4.2 3.3 3.3 3.3

% over a year ago

Consumer prices % over previous period, saar

Real GDP% over a year ago

Real GDP

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



G-3 economic outlook detail Percent change over previous period; seasonally adjusted annual rate unless noted

Note: More forecast details for the G-3 and other countries can be found on J.P. Morgan’s Morgan Markets client web site

2011 2012 2013 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

United StatesReal GDP 1.8 2.2 2.0 2.0 1.7 1.5 2.0 1.5 2.3 2.5 3.0 Priv ate consumption 2.5 1.9 1.6 2.4 1.7 1.3 2.3 1.0 1.5 2.0 2.5 Equipment inv estment 11.0 7.0 5.0 5.4 4.7 0.5 6.0 4.0 6.0 7.0 8.0 Non-residential construction 2.7 11.2 6.3 12.9 2.8 3.5 8.0 6.0 6.0 8.0 9.0 Residential construction -1.4 11.0 11.2 20.6 8.9 7.0 12.0 12.0 12.0 12.0 12.0 Inv entory change ($ bn saar) 31.0 58.0 61.7 56.9 49.9 71.3 53.7 59.5 62.9 62.3 62.3 Gov ernment spending -3.1 -1.8 -0.3 -3.0 -0.9 -0.2 -0.4 -0.5 -0.2 0.1 0.1 Ex ports of goods and serv ices 6.7 3.7 4.1 4.4 6.0 1.0 2.0 3.0 6.0 7.0 7.0 Imports of goods and serv ices 4.8 3.3 3.6 3.1 2.9 3.0 2.0 3.0 4.0 6.0 6.0 Domestic final sales contribution 1.8 2.0 1.9 2.3 1.6 1.2 2.5 1.4 2.0 2.5 3.0 Inv entories contribution -0.2 0.2 0.0 -0.4 -0.2 0.6 -0.5 0.2 0.1 0.0 0.0 Net trade contribution 0.1 0.0 0.0 0.1 0.3 -0.3 0.0 -0.1 0.2 0.0 0.0

Consumer prices (%oy a) 3.1 2.1 1.5 2.8 1.9 1.7 2.0 1.5 1.7 1.5 1.4 Ex cluding food and energy (%oy a) 1.7 2.1 1.6 2.2 2.3 2.0 1.9 1.8 1.5 1.5 1.5Federal budget balance (% of GDP, FY) -8.6 -7.6 -6.1Personal sav ing rate (%) 4.3 3.8 4.4 3.6 4.0 4.0 3.8 4.1 4.4 4.5 4.6Unemploy ment rate (%) 9.0 8.2 8.1 8.3 8.2 8.2 8.2 8.2 8.1 8.1 8.0Industrial production, manufacturing 4.3 4.6 2.6 9.8 1.0 1.0 3.0 2.0 3.0 4.0 4.0Euro areaReal GDP 1.5 -0.5 0.3 -0.1 -0.7 -1.0 -0.5 0.8 0.8 1.3 1.5 Priv ate consumption 0.1 -0.9 -0.1 -0.7 -0.8 -0.5 -1.0 -0.3 0.3 0.8 1.3 Capital inv estment 1.6 -3.0 -0.3 -5.2 -3.3 -3.0 -2.0 0.5 1.5 1.5 2.0 Gov ernment consumption -0.1 0.0 -0.2 0.7 0.5 -1.0 -1.0 0.0 0.0 0.5 0.5 Ex ports of goods and serv ices 6.3 2.9 3.8 2.8 5.5 2.0 3.0 4.0 4.0 5.0 5.0 Imports of goods and serv ices 4.1 -0.2 2.8 -0.9 3.6 0.0 2.0 3.0 3.5 4.5 4.5 Domestic final sales contribution 0.3 -1.1 -0.2 -1.3 -1.0 -1.1 -1.2 0.0 0.4 0.8 1.2 Inv entories contribution 0.1 -0.8 -0.1 -0.4 -0.7 -0.8 0.1 0.2 0.0 0.0 -0.1 Net trade contribution 1.0 1.4 0.6 1.6 1.0 0.9 0.5 0.6 0.4 0.4 0.4

Consumer prices (HICP, %oy a) 2.7 2.5 1.8 2.7 2.5 2.5 2.5 2.0 1.9 1.7 1.4 ex unprocessed food and energy 1.7 1.8 1.5 1.9 1.8 1.8 1.7 1.6 1.7 1.5 1.4General gov t. budget balance (% of GDP, FY) -4.1 -3.7 -3.1Unemploy ment rate (%) 10.2 11.2 11.5 10.9 11.2 11.3 11.5 11.5 11.5 11.4 11.4Industrial production 3.5 -2.3 0.8 -2.0 -2.0 -1.5 -1.0 1.5 2.5 2.5 3.0JapanReal GDP -0.7 2.0 0.6 5.3 0.7 -2.0 0.0 1.0 1.2 1.3 2.3 Priv ate consumption 0.1 2.2 0.1 5.0 0.5 -2.0 -1.2 1.0 0.5 0.5 2.5 Business inv estment 1.2 3.7 3.8 -6.3 5.6 -1.0 8.0 3.0 3.0 4.0 5.0 Residential construction 5.7 1.7 3.1 -6.3 3.8 5.0 5.0 3.0 0.0 2.0 5.0 Public inv estment -2.8 7.7 -1.1 15.2 7.2 15.0 5.0 -5.0 -5.0 -10.0 -10.0 Gov ernment consumption 2.0 2.1 1.0 4.4 0.6 2.0 1.0 0.8 0.8 0.8 0.8 Ex ports of goods and serv ices -0.1 2.6 1.8 14.3 5.0 -10.0 2.5 3.5 4.0 4.0 4.0 Imports of goods and serv ices 6.3 6.9 4.2 9.1 6.7 5.0 4.5 4.5 3.0 3.0 4.0 Domestic final sales contribution 0.6 2.6 0.8 4.3 1.0 0.5 0.2 1.2 0.9 1.0 1.9 Inv entories contribution -0.5 0.0 0.1 0.1 -0.2 -0.1 0.1 -0.2 0.1 0.1 0.3 Net trade contribution -0.8 -0.5 -0.3 0.9 -0.1 -2.4 -0.2 -0.1 0.2 0.2 0.1

Consumer prices (%oy a) -0.3 0.1 -0.1 0.3 0.2 0.0 0.0 -0.4 -0.2 -0.1 0.1General gov t. net lending (% of GDP, CY) -9.5 -9.9 -10.1Unemploy ment rate (%) 4.6 4.4 4.1 4.5 4.4 4.3 4.3 4.1 4.1 4.1 4.0Industrial production -2.3 -0.5 0.8 5.1 -7.7 -14.0 -4.0 9.0 5.0 5.0 5.0

Memo: Global industrial production 4.2 2.1 3.4 6.4 -1.0 0.5 2.8 4.7 4.5 4.8 5.2

%oy a 2.8 2.5 1.2 1.9 1.7 3.0 4.2 4.8

2012 2013

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

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



Global Central Bank Watch

Official Current Forecast

rate rate (%pa) 05-07 av g Trough1 Jul 11 nex t change Sep 12 Dec 12 Mar 13 Jun 13 Sep 13

Global 2.29 -209 45 -42 2.26 2.15 2.15 2.15 2.22

ex cluding US 3.00 -132 52 -49 2.96 2.81 2.81 2.81 2.90

Developed 0.52 -297 0 -30 0.52 0.34 0.34 0.35 0.36

Emerging 5.62 -146 72 -65 5.54 5.53 5.53 5.53 5.70

Latin America 6.26 -451 0 -278 6.26 6.26 6.26 6.25 6.67

EMEA EM 5.10 -135 116 75 5.12 5.18 5.05 5.06 5.07

EM Asia 5.58 -29 107 -40 5.43 5.40 5.43 5.43 5.58

The Americas 1.48 -385 31 -56 1.48 1.48 1.50 1.50 1.60

United States Fed funds 0.125 -438 0 0 16 Dec 08 (-87.5bp) 24 Oct 12 On hold 0.125 0.125 0.125 0.125 0.125

Canada O/N rate 1.00 -273 75 0 8 Sep 10 (+25bp) 23 Oct 12 1Q 13 (+25bp) 1.00 1.00 1.25 1.25 1.50

Brazil SELIC O/N 7.50 -775 0 -500 29 Aug 12 (-50bp) 10 Oct 12 On hold 7.50 7.50 7.50 7.50 8.25

Mex ico Repo rate 4.50 -337 0 0 17 Jul 09 (-25bp) 26 Oct 12 On hold 4.50 4.50 4.50 4.50 4.50

Chile Disc rate 5.00 31 450 -25 12 Jan 12 (-25bp) 18 Oct 12 On hold 5.00 5.00 5.00 5.00 5.00

Colombia Repo rate 4.75 -256 175 25 24 Aug 12 (-25bp) 28 Sep 12 On hold 4.75 4.75 4.75 4.75 4.75

Peru Reference 4.25 19 300 0 12 May 11 (+25bp) 11 Oct 12 On hold 4.25 4.25 4.25 4.25 4.25

Uruguay Reference 8.75 150 250 75 29 Dec 11 (+75bp) 28 Sep 12 2Q 13 (-50bp) 8.75 8.75 8.75 8.25 8.25

Europe/Africa 1.67 -219 12 -29 1.67 1.36 1.33 1.33 1.33

Euro area Refi rate 0.75 -223 0 -75 5 Jul 12 (-25bp) 4 Oct 12 Oct 12 (-25bp) 0.75 0.25 0.25 0.25 0.25

United Kingdom Bank rate 0.50 -444 0 0 5 Mar 09 (-50bp) 4 Oct 12 On hold 0.50 0.50 0.50 0.50 0.50

Czech Republic 2-w k repo 0.50 -190 0 -25 28 Jun 12 (-25bp) 27 Sep 12 27 Sep 12 (-25bp) 0.25 0.25 0.25 0.25 0.25

Hungary 2-w k dep 6.75 -38 150 75 28 Aug 12 (-25bp) 25 Sep 12 25 Sep 12 (-25bp) 6.50 6.50 6.00 6.00 6.00

Israel Base rate 2.25 -200 175 -100 25 Jun 12 (-25bp) 24 Sep 12 Oct 12 (-25bp) 2.25 2.00 2.00 2.00 2.25

Poland 7-day interv 4.75 23 125 25 9 May 12 (+25bp) 3 Oct 12 3 Oct 12 (-25bp) 4.75 4.50 4.25 4.00 4.00

Romania Base rate 5.25 -294 0 -100 29 Mar 12 (-25bp) 27 Sep 12 On hold 5.25 5.25 5.25 5.25 5.25

Russia Repo rate 5.50 N/A N/A N/A 13 Sep 12 (+25bp) Oct 12 Nov 12 (+25bp) 5.50 5.75 5.75 5.75 5.75

South Africa Repo rate 5.00 -329 0 -50 19 Jul 12 (-50bp) 22 Nov 12 Jan 13 (-50bp) 5.00 5.00 4.50 4.50 4.50

Turkey Effctv e rate 6.27 -967 52 2 N/A² 18 Oct 12 N/A² 6.50 6.50 6.25 6.50 6.50

Asia/Pacific 3.78 8 87 -36 3.68 3.65 3.65 3.65 3.74

Australia Cash rate 3.50 -244 50 -125 5 Jun 12 (-25bp) 2 Oct 12 Dec 12 (-25bp) 3.50 3.25 3.00 3.00 3.00

New Zealand Cash rate 2.50 -488 0 0 10 Mar 11 (-50bp) 25 Oct 12 1Q 13 (+25bp) 2.50 2.50 2.75 3.00 3.00

Japan O/N call rate 0.05 -17 0 0 5 Oct 10 (-5bp) 5 Oct 12 On hold 0.05 0.05 0.05 0.05 0.05

Hong Kong Disc. w ndw 0.50 -548 0 0 17 Dec 08 (-100bp) 25 Oct 12 On hold 0.50 0.50 0.50 0.50 0.50

China 1-y r w orking 6.00 -14 69 -56 7 Jul 12 (-31bp) - 3Q 12 (-25bp) 5.75 5.75 5.75 5.75 6.00

Korea Base rate 3.00 -115 100 -25 12 Jul 12 (-25bp) 11 Oct 12 11 Oct 12 (-25bp) 3.00 2.75 2.75 2.75 2.75

Indonesia BI rate 5.75 -412 0 -100 9 Feb 12 (-25bp) 11 Oct 12 On hold 5.75 5.75 5.75 5.75 5.75

India Repo rate 8.00 113 325 0 17 Apr 12 (-50bp) 30 Oct 12 1Q 13 (+25bp) 8.00 8.00 8.25 8.25 8.25

Malay sia O/N rate 3.00 -24 100 0 5 May 11 (+25bp) 8 Nov 12 On hold 3.00 3.00 3.00 3.00 3.00

Philippines Rev repo 3.75 -331 0 -75 26 Jul 12 (-25bp) 25 Oct 12 On hold 3.75 3.75 3.75 3.75 3.75

Thailand 1-day repo 3.00 -83 175 -25 25 Jan 12 (-25bp) 17 Oct 12 28 Nov 12 (-25bp) 3.00 2.75 2.75 2.75 2.75

Taiw an Official disc. 1.875 -71 62.5 0 30 Jun 11 (+12.5bp) 4Q 12 On hold 1.875 1.875 1.875 1.875 1.8751 Refers to trough end-quarter rate from 2009-present ² Effectiv e rate adjusted on daily basis

Bold denotes mov e since last GDW and forecast changes. Underline denotes policy meeting during upcoming w eek. Aggregates are GDP-w eighted av erages.

Change since (bp)Last change Nex t mtg

Forecast (%pa)

7

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



Nowcast of global growth: 3Q12 Our official bottom-up J.P. Morgan projection for global

GDP growth this quarter remains at an expansion-low of 1.8% annualized, the same pace set in 2Q12. Upward revi-sions to growth are made this week to our Euro area fore-cast in response to recent policy actions but this affects the 2013 forecast. Since the start of the quarter, the J.P. Morgan forecast has been revised down by 0.5%-pt, reflecting downgrades to Japan and China.

Our new top-down nowcaster of global GDP growth (in-troduced in last week’s GDW) is also unchanged relative to last week, and points to a gain this quarter of 1.8% ar. Un-rounded, growth was revised down 7bp ar.

The news this week comes from the flash PMIs for the US, Euro area, and China. Although the forward-looking indi-cators were encouraging (orders up, inventories down, em-ployment up), the output PMI—an input in the nowcast model—ticked down in all three countries. Our estimate is that the global manufacturing output PMI (out Oct 1) will move down 0.4pt. Our model was looking for a 0.4pt in-crease. We hard-code the global manufacturing PMI esti-mate for September in this week’s nowcast, which accounts for the unrounded downward revision.

Our commodity-price based nowcast of global IP took a step back this week but continues to signal a sharp rebound in factory output growth. Oil, metals, and agricultural pric-es all moved down this week, suggesting a common decel-eration in global demand. This contrasts even more now with the signal from the September flash PMIs, which are pointing to a 5% ar tumble in global IP in the three months through September. As noted last week, we are fading the commodity price demand signal owing to the potential for Fed QE3 and ECB OMT to have boosted prices.

Commodity price decomposition % change over respective period

Total = Common + Idiosyncratic

1wk 4wk 13wk 1wk 4wk 13wk 1wk 4wk 13wk

Oil -4.9 -4.3 21.6 0.7 4.1 13.7 -5.6 -8.4 7.9 Industrial metals -1.9 9.0 13.2 0.7 4.3 14.1 -2.6 4.8 -0.9 Agriculture -5.0 -3.6 17.7 0.5 3.1 10.0 -5.5 -6.6 7.6

Memo: Global IP nowcast (ann. rate) 6.0 8.5 9.3 Note. Oil is Brent while industrial metals and agriculture are the JPMorgan commodity curve indexes. Common movements for each is given by the common factor scaled by each commodi-ties individual loading weight. The idiosyncratic movement is the residual.

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J.P.Morgan

Nowcast

Nowcasting global real GDP, 3Q2012%q/q, saar

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

2Q12 3Q12

Current Last week 4 weeks ago

J.P. Morgan 1.9 1.7 1.7 2.1 Nowcaster (DFM-Eco) 1.4 1.8 1.8 1.4 Global PMI model 1.6 1.5 1.5 1.7

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

2Q12 3Q12 Jul 12 Aug 12 Sep 12

PMI, mfg 51.3 48.4 48.8 48.5 48.1 PMI, serv 51.7 52.4 52.6 52.3 52.3 IP -1.4 0.4 0.4 -0.3 -0.1 Retail sales 2.3 2.8 0.3 0.2 0.2 Auto sales 16.9 1.1 -2.2 3.6 -1.0 Cap. orders -15.6 -12.1 -3.0 0.9 -1.1 Note. Shaded values show forecasts computed by the Kalman filter estimates from the dynamic factor nowcasting model. Sep 12 PMI, mfg is estimate based on flash report from US, EMU, CHN.

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%3m, saar; Nowcast is 13 week annualized changeGlobal manufacturing output

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Implied by Mfg PMI Implied by commodity price

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Global real GDP growth for 2H2012, J.P. Morgan forecast2H2012 growth rate (%4Q/2Q) show n for each forecast week(Early forcasts adjusted for change in weights on July 6)

8

Economic ResearchGlobal Data WatchSeptember 21, 2012

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

David Hensley (1-212) [email protected]

Joseph Lupton (1-212) [email protected]

Selected recent research1 from J.P. Morgan EconomicsGlobalTracking a low-level bottom in global growth, Aug 3, 2012Expecting a wide but shallow global monetary easing cycle, Jul 27, 2012EM inflation slide tempered by jump in agriculture prices, Jul 13, 2012Global economic aggregates get new weights, Jul 6, 2012Global manufacturing will remain weak in 3Q, Jun 29, 2012Global inflation falls below target, risks to the downside, Jun 29, 2012A downgrade to global growth, Jun 8, 2012Gauging the upside to the global outlook, Mar 9, 2012Model linkages between global GDP and oil prices, Feb 17, 2012Upside risk to outlook for sluggish global consumer, Feb 10, 2012Global inflation to fall close to target midpoint in 2Q12, Feb 10, 2012What’s behind the bounce in global manufacturing, Feb 3, 2012

United States and CanadaUS: the Fed’s novus ordo seclorum, Sep 14, 2012US house prices are up; supply overhang has vanished, Aug 31, 2012US: drought means lower GDP now, higher inflation later, Aug 17, 2012US: interest income in an era of ultra-low interest rates, Aug 10, 2012US: the Treasury-Fed discord, Jul 27, 2012US slowdown: it's not just about the uncertainty, Jul 27, 2012US: would a decent economy be too much to ask for? Jul 20, 2012Sorry, the Fed won’t be buying your equities from you, Jul 13, 2012US manufacturing and construction have switched roles, Jul 6, 2012US medical services spending now in slow-growth mode, Jun 22, 2012US: FOMC preview, Jun 15, 2012Revisiting the US seasonal echo effects, Jun 15, 2012Most US families feeling poorer because they are, Jun 15, 2012US spring slowdown: the same only a lot different, Jun 8, 2012US: putting the For Rent signs up on more front doors, May 18, 2012What’s ahead for Canadian monetary policy? May 18, 2012Getting a grip on the surprising strength of US wage growth, May 11, 2012US high-tech spending looks set for a bounce, May 4, 2012Fact and fantasy of the US manufacturing revival, Apr 20, 2012US: will the Fed suffer a loss? would it matter? Apr 13, 2012

Western EuropeAnother good week in the Euro area, Sep 14, 2012ECB takes a big step forward but with qualifications, Sep 7, 2012Euro area inflation differentials: largely a tax story, Sep 7, 2012Europe’s busy political September, Aug 31, 2012What next from the ECB? Previewing SMP’s big brother, Aug 24, 2012UK: Chancellor likely to delay the target for debt reduction, Aug 24, 2012Euro area: a look at the drags facing Euro area consumers, Aug 17, 2012Euro area: awaiting a decline in core inflation, Aug 10, 2012UK: revisiting the hop, skip, and slump in productivity, Aug 10, 2012ECB interest passthrough has weakened since last year, Aug 3, 2012UK: weighing the arguments for a policy rate cut, Aug 3, 2012ECB to cut its deposit facility rate below zero, Jul 27, 2012ECB to focus on monetary transmission in 2H12, Jul 13, 2012How France is trying to solve its budget dilemma, Jul 13, 2012

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

Central Europe, Middle East, and AfricaSouth Africa: CPI re-weighting to lift inflation projections, Aug 31, 2012MENA: higher food prices pose contraints for policymakers, Aug 10, 2012Russia: stronger house prices a sign output gap has closed, Aug 3, 2012Turkey: macro improvement led by strong exports, Jul 20, 2012Poland: lower CPI trajectory raises odds of 1Q13 rate cut, Jul 6, 2012Egypt: transition in disarray, Jun 22, 2012Hungary’s LTRO: fizzle rather than bang, Apr 6, 2012South Africa: CPI to moderate to 5.1%oya by end-2013, Mar 30, 2012

JapanJapan: recession or stagnation, that is the question, Sep 14, 2012Japan: hope and anxiety, consumption by the elderly, Aug 17, 2012Japan’s tax hike: small step toward debt sustainability, Jun 29, 2012Japan: nonmanufacturers are performing well, but…, Jun 15, 2012Japan: how worrisome is the nuclear power plant shutdown? May 11, 2012BoJ’s monetary easing to continue, May 4, 2012Can Japan maintain domestic demand-driven recovery? Apr 27, 2012

Non-Japan Asia and PacificAntipodean imbalances: the devil is in the detail, Sep 14, 2012PBoC’s quantitative measures: RRR and OMO, Sep 7, 2012RBA cuts help, but mostly track the neutral rate lower, Sep 7, 2012India’s falling potential growth, Sep 7, 2012Malaysia: the math behind the energy balance, Sep 7, 2012Australia’s mining investment boom is far from over, Aug 31, 2012Korea: micro policy to ease HH debt servicing burden, Aug 31, 2012Implications of China’s recent capital flow reversal, Aug 24, 2012Australia: margin pressure to be the acid test for labor market. Aug 24, 2012Figuring the drivers of ASEAN’s rebalancing, Aug 24, 2012Philippines: rise of the financial account, Aug 24, 2012Hong Kong: driving factors behind lower inflation, Aug 17, 2012Global ag price hikes yet to threaten Chinese inflation, Aug 10, 2012Singapore: job growth cooling but labor market to stay tight, Aug 10, 2012China: what do electricity data tell us about the economy? Jul 27, 2012

Latin AmericaBrazil: BRL close to, but still stronger than, fair value, Aug 31, 2012Latin America: agriculture price spike adds inflation risk, Aug 3, 2012Brazil: challenges to increasing public investment spending, Jun 15, 2012Brazil: BCB finally supporting BRL, May 25, 2012Mexico: GDP to grow 3.8% in 2012, Apr 20, 2012

Special Reports and Global IssuesThe time is always now: introducing J.P. Morgan’s global nowcasters, Sep 5, 2012Moving towards a much larger ECB balance sheet, Jul 31, 2012Chinese housing market revisited, Jul 5, 2012Global impact of the Euro area crisis, Jun 21, 2012

9

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

J.P. Morgan Securities Ltd. Nikolaos Panigirtzoglou (44-20) 7777-0386 [email protected]


The J.P. Morgan View: Markets

Weak economy vs. strong liquidity: who wins? Asset allocation: Strong liquidity, heavy supply of safe

assets, high risk premia, defensive positioning by end in-vestors, and a QE focus on reducing downside risk are not technicals but are true fundamental drivers of the risk rally that trump weak economic growth, in our view.

Economics: 3Q global growth remains as soft as 2Q, con-firming the bottoming process, but not yet a rebound. Only rising order/inventory ratios and rallying markets hint at rebound into 4Q, we believe. We nudge up 2013 Euro area growth from 0.2% to 0.3% on improved financial conditions.

Fixed income: Position on wider swap spreads in Treasur-ies, Bunds, and UK.

Equities: Stay long value stocks in Europe, commodity sectors globally, US-housing-sensitive sectors within the US, and US against EM.

Credit: Stay long credit spreads across the US HY and EM sovereigns and corporates and we expect further spread compression.

Currencies: New FX forecasts, with weaker dollar into year-end.

Commodities: We think agriculture prices have peaked and will move lower from here. Open a short in the GSCI agriculture index.

Markets took a breather this week, after last week’s fire-works, with equities and credit largely flat, and bond yields and commodities down. It was a quiet week for data, but what we got was on the softer side. We continue to think global growth is bottoming, but the evidence so far confirms only that growth has come down and that 3Q seems as soft as 2Q. There seems no real evidence yet of a rebound in growth. All we have is a rise in orders relative to inventories in flash PMIs, a rise in confidence, and surging financial asset prices.

The weak economic data of the past two years and rising as-set prices have created a conundrum to investors on what they should really follow—the weak fundamentals or the good “technicals”? We have argued here frequently that liquidity-driven asset reflation in a market with high risk premia and defensive positions trumps weak economic growth, as long as the latter does not deteriorate into recession. Hence, we have chosen to remain long risk assets despite repeated down-grades to economic growth projections. We like to make clear, though, that these so-called technicals are to us very

fundamental and are not as short term in nature as many would suspect. And this for three reasons.

For one, the relative supply of and demand for financial assets is not a mere short-term technical but is based on the first fundamental law of economics, which is that of supply and demand. Government supply of government debt and cash is many times the supply (net issuance) of corporate debt and equities. Hence the latter, scarcer corporate securities should rise in price against the much more abundant supply of government liabilities (high-powered money and govern-ment debt). This force is not a short-term technical impact, but in fact works more slowly and profoundly.

Second, credit and equities are characterized by much higher risk premia versus government debt than we typically see at this point of the cycle. Central banks are now acting not merely to increase the supply of cash, but are also casting their policy in term of providing downside risk protection (insurance). We would classify the ECB’s OMTs as exactly that. They will be implemented only if needed and with an explicit objective to eliminate risk premia on sovereign EMU debt. The Fed’s new QE3 similarly is conditional on the state of the economy and labor market and will be accelerated if the economy weakens. If only US and Euro fiscal authorities could similarly reduce downside risk, risk premia would sure-ly come crashing down. Risk premia are thus fundamental and not merely technical.

Third, it is frequently argued that markets are running ahead of still weak fundamentals (growth) and are thus wrong. We would argue that the transmission process of monetary poli-cy in a world of zero interest rates runs exactly from markets to growth. It is through asset reflation that central banks try to stimulate growth. Hence markets will lead economies. Don’t fight a determined Fed, ECB, BOJ, and BoE, especially not when they work together.

To be clear, we are not telling you to ignore economic growth. Stronger growth would have given us higher equity prices. But at this point in the cycle (we assume we are mid-cycle), volatility of economic data is trumped by relative sup-ply and demand and changing risk perceptions, as long as we do not have another recession. Growth, however, does have an impact on relative country and sector performance. For 2012, growth forecasts have been stable in DM, but have trended down in EM over the past six months, which likely explains why EM equities have underperformed. Moreover, cyclical stocks have not kept up with their high-beta nature over the past two years, underperforming defensives, despite an overall rally in stocks, likely as cyclicals are more vulner-able to downgrades in growth.

10

Economic Research The J.P. Morgan View: Markets September 21, 2012



Fixed income Yields edged lower on weaker data. Spain’s largest bond auc-tion since January provides more evidence of the impact of the ECB’s backstop, although it remains unclear when the backstop will be activated. The Bank of Japan joined its counterparts in announcing further bond purchases, but with the focus remaining on bills and short-dated bonds, the im-pact is likely to be limited, and we are in fact modestly bear-ish on duration in Japan.

G-4 central banks are slated to buy nearly $1 trillion net of bonds over the next year, half of that due to the Fed’s MBS purchases. Together, FX reverse managers and G-4 central banks already own an estimated $11 trillion of bonds, equiva-lent to over one third of global bonds rated AA and above, or more than half of those rated AAA, following a steady up-ward trend in recent years (see Friday’s Flows and Liquidity). By hoovering up most of the net issuance of safer bonds, the official sector appears to be continuing to push investors into riskier or less liquid alternatives.

We are not strongly positioned on duration, even as we expect higher US Treasury yields over the balance of the year. We remain positioned for narrower intra-EMU spreads, consistent with a broader view that credit and liquidity spreads are a more attractive source of carry than extending duration. We do, however, look for the sharp narrowing in swap spreads across markets, driven in part by heavy swapped issuance, to reverse course, and hold spread wideners (long govies vs. swaps) in USTs, Bunds, and UK gilts.

Equities Equity markets paused this week following two weeks of strong gains of almost 5% for MSCI AC World in the first two weeks of September. We find no reason to change our stance. We stay tactically long equities and we favor value stocks in Europe, commodity sectors globally, US-housing-sensitive sectors within the US, and US against EM equities regionally.

Market gyrations have been a permanent feature of the mar-ket environment over the past few years. But despite this year’s crisis or “soft patch,” equities have delivered double-digit returns outperforming other asset classes. In our opin-ion, this justifies a focus on the long term. Our quarterly pub-lication Trade opportunities for long-term investors, Sep 19, does exactly this. It looks beyond short-term gyrations and focuses on long-term trading themes.

Our recommendation for the long term is to focus on mone-tizing extremities in yield gaps and risk premia, e.g., the mul-ti-decade-high yield gap between equities and bonds and risk

premia such as correlation and skew risk premia. Our equity specific trades are shown below:

Buy high dividend yield US equities vs. 10-yr USTs

Buy 2013 FTSE100 dividend futures for defensive growth

Stay short S&P500 long-dated skew

Stay short S&P500 correlation

Stay short Nikkei convexity

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2012 global GDP growth forecasts: J.P. Morgan versus consensus%

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2013 global GDP growth forecasts: J.P. Morgan versus consensus%

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11




Stay OW European SMid vs. US SMid

Buy MSCI EM$ vs. MSCI World$

Long Dax vs. EuroStoxx50

Credit This week was mixed for credit. US HG spreads continued to narrow and are now at their lowest level in over a year and US CMBS also rallied further. However, HG spreads in Eu-rope and US HY spreads both widened a little along with EM sovereign and corporate spreads. Some profit taking is not surprising given the almost straight line rally we have seen across spread products over the last few months but we think a big correction is unlikely. In our view, credit remains the most attractive asset from a carry-to-risk perspective, and QE is pushing fixed income investors out of low-yielding gov-ernment debt, leaving little choice but to move out further and further along the risk spectrum.

This week saw a record weekly inflow into European HY funds (European High Yield Fund Flows: Weekly Update, Daniel Lamy et al., Sep 21) Our European credit strategists believe investor positioning in European HY is still light and supports further spread compression. They also see value in Spanish covered bonds, where there could be significant posi-tive event risk from Spanish bank recapitalization announce-ments in the next few weeks.

Foreign exchange We published our monthly Key Currency Views on Sep 21. We revised forecasts globally to reflect greater inflation risks in the US and less sovereign stress in Europe follow-ing the Fed’s proclamation of open-ended asset purchases on September 13 and the ECB’s commitment to fund the periph-ery (within conditions) on September 6. End-2012 targets with previous forecast in parentheses are now EUR/USD 1.30 (1.24), GBP/USD 1.62 (1.58), USD/JPY 78 (78), AUD/USD 1.04 (1.02), USD/BRL 1.98 (1.98), USD/MXN 12.50 (12.50), USD/CNY 6.32 (6.30), USD/KRW 1125 (1150), USD/TRY 1.8 (1.8), and USD/ZAR 8.50 (8.30).

Although the world’s biggest central banks (Fed, ECB, BoE, BoJ, and SNB) have been engaging in various forms of QE all year, the dollar has been the biggest casualty so far. It is down 3% trade-weighted, outdone only by the declines in IDR, BRL, ARS, and GHS. This momentum surprises some who think of all balance sheet expansions as equal and there-fore offsetting as far as their currency influence. Not true, in our view: As we have argued before, balance sheet expansion entails positive and negative effects on currencies, so the cen-tral bank’s decision on how and when to deploy liquidity is critical. The currency-positive effect is lower default risk if

the central bank targets distressed assets (ECB). The negative effect is lower real yields if asset purchases push nominal rates down and inflation expectations up. If default rates de-cline, this impact is positive where investors are underweight the currency as a credit hedge (EUR), since QE drives short-covering. If real rates fall, QE is more negative if the country is a capital importer (US) or if investors had been long the currency (USD in 2009) or close to neutral (September 2012), since investors will fund carry trades in the lowest yielder.

From this perspective it should be clear why the Fed should have more luck weakening the dollar with its balance sheet than will the ECB or the Bank of Japan. Fed QE is driving up inflation expectations more quickly and from a higher level than are the ECB or BoJ; the US is the current account debtor among the G-3; and investors are roughly neutral between funding in dollars and euros after six weeks of short-covering in the euro crosses. To offset the Fed’s move, the ECB would need to cut rates again, in our view.

Commodities Commodities sold off sharply this week, led lower by oil. Oil is down 6% as Saudi Arabia stated it will be offering extra oil in an attempt to lower prices. Since then, prices have stabilized somewhat and are moving higher again. It seems unlikely we will see materially lower oil prices for the time being given ongoing tensions in the Middle East and a QE induced weaker USD. We remain long energy and long Brent time spreads in our GMOS portfolio as a hedge against the risk of a supply shock in the Middle East.

Agricultural prices have been in a choppy range for the last two months and appear to have peaked. Historically, agricul-tural prices have experienced some element of mean rever-sion. This should make sense from a fundamental perspective as price spikes typically occur because of some supply shock, often because of unfavorable weather. However, higher prices induce higher planting and so greater supply from subsequent harvests, which pushes prices back down. Our Agriculture strategists see prices falling through next year precisely be-cause of this dynamic. We thus take profit on our longs in corn and soybeans and open a short GSCI agriculture position. This trade also has positive slide given the current upward slope of most agriculture curves. In our GMOS long-only commodity portfolio, we balance this trade by removing our UW in base metals so that we are OW energy and gold but UW agriculture.

12

Economic Research The J.P. Morgan View: Markets September 21, 2012



Interest rates Current Dec-12 Mar-13 Jun-13 Sep-13 YTD Return*

United States Fed funds rate 0.125 0.125 0.125 0.125 0.125

10-year yields 1.77 2.00 2.00 2.00 2.25 1.6%

Euro area Refi rate 0.75 0.50 0.50 0.50 0.50

10-year yields 1.60 1.50 1.50 1.60 1.70 2.5%

United Kingdom Repo rate 0.50 0.50 0.50 0.50 0.50

10-year yields 1.83 1.65 1.65 1.80 1.95 2.5%

Japan Overnight call rate 0.05 0.05 0.05 0.05 0.05

10-year yields 0.80 0.90 0.90 0.95 1.00 1.6%

GBI-EM hedged in $ Yield - Global Diversified 5.87 6.00 5.7%

Credit Markets Current Index YTD Return*

US high grade (bp over UST) 170 JPMorgan JULI Porfolio Spread to Treasury 8.0%

Euro high grade (bp over Euro gov) 196 iBoxx Euro Corporate Index 7.9%

USD high yield (bp vs. UST) 555 JPMorgan Global High Yield Index STW 12.8%

Euro high yield (bp over Euro gov) 771 iBoxx Euro HY Index 18.7%

EMBIG (bp vs. UST) 293 EMBI Global 14.1%

EM Corporates (bp vs. UST) 346 JPM EM Corporates (CEMBI) 13.4%

Quarterly Averages

Commodities Current 12Q4 13Q1 13Q2 13Q3 GSCI Index YTD Return*

Brent ($/bbl) 111 105 112 105 120 Energy -1.0%

Gold ($/oz) 1776 1725 1750 1775 Precious Metals 12.2%

Copper ($/metric ton) 8263 8300 8500 8700 Industrial Metals 5.1%

Corn ($/Bu) 7.50 8.75 8.50 8.25 Agriculture 17.3%

YTD Return*

Foreign Exchange Current Dec-12 Mar-13 Jun-13 Sep-13 in USD

EUR/USD 1.30 1.30 1.30 1.32 1.34 EUR 0.9%

USD/JPY 78.2 78 79 79 79 JPY 1.4%

GBP/USD 1.62 1.62 1.62 1.63 1.65 GBP 5.5%

USD/BRL 2.02 1.98 1.95 1.95 1.95 BRL -2.3%

USD/CNY 6.31 6.32 6.32 6.30 6.25 CNY 1.2%

USD/KRW 1119 1125 1125 1110 1100 KRW 4.6%

USD/TRY 1.79 1.80 1.75 1.75 1.70 TRY 11.7%

3m cash index

YTD Return

Equities Current (local ccy)

S&P 1464 18.0%

Nasdaq 3190 22.6%

Topix 756 4.8%

FTSE 100 5853 8.4%

MSCI Eurozone* 147 16.2%

MSCI Europe* 1122 13.3%

MSCI EM $* 998 11.8%

Brazil Bovespa 61971 9.3%

Hang Seng 20735 14.9%

Shanghai SE 2027 -7.9%

*Levels/returns as of Sep 20, 2012

Local currency except MSCI EM $

US Europe Japan EMSector Allocation * YTD YTD YTD YTD ($)

Energy 9.0% 1.6% -4.6% 6.1%

Materials 14.4% 11.8% -6.3% 5.4%

Industrials 12.7% 15.5% 1.1% 10.8%

Discretionary 23.4% 22.3% 9.1% 10.5%

Staples 13.6% 14.0% 12.5% 14.7%

Healthcare 17.5% 15.3% 10.8% 24.4%

Financials 23.9% 20.1% 22.9% 14.5%

Information Tech. 24.6% 14.9% -3.6% 19.9%

Telecommunications 26.6% 1.8% 9.2% 12.5%

Utilities 3.1% 9.7% -20.0% 4.1%

Overall 18.0% 13.3% 4.8% 11.8%

13




Economic Research Note

Fed, ECB shock and deliver Fed and ECB alter their reaction functions

The Fed moves to a more growth-oriented Taylor rule as the ECB becomes a sovereign backstop

Market and sentiment moves show success on balance

Central banks adjust policy regularly as they perceive changes in the economic outlook or the distribution of risks. However, it is rare that they signal a shift in the parameters by which they will respond to economic and financial market variables. In recent weeks, both the Fed and the ECB have signaled that their reaction functions have changed.

The Fed tweaks its Taylor rule. The Fed has operated with unconventional tools for some time, but has described balance sheet operations as an extension of existing mone-tary policy rules, when constrained by the zero interest rate bound. Last week, it signaled it will place greater im-portance on delivering labor market improvement and tol-erate somewhat more inflation risk when setting policy. It stated that accommodation would remain in place “for a considerable time after the economy recovers.” It rein-forced this message through its forecast revisions. At end- 2014, it lowered its sights on the unemployment rate and raised its forecast for inflation. At the same time, the medi-an Fed funds forecast for the end of 2014 was lowered.

The ECB fixes broken credit markets. Despite efforts to ease policy and enhance bank liquidity, the ECB has seen Euro area borrowing rates move higher and credit standards tighten. Faced with recession and market dysfunction, the ECB committed itself to becoming a liquidity backstop for sovereigns subject to fiscal conditionality. In contrast to the Fed, the ECB has not changed its macroeconomic objec-tives or the parameters of its area-wide Taylor rule. But it now believes it is necessary to intervene in sovereign mar-kets to “to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area.”

Identifying transmission channels While these changes are very different, their success will be judged by their impact on economic growth. Gauging their effectiveness through a macroeconomic lens will, of course, take time, but an assessment of policy impacts can be moni-tored through moves in financial conditions, which is a central channel through which monetary policy is transmitted.

For the Fed, the shift in its reaction function contains three related elements that bear on interest rates. First, the commit-ment to keep rates on hold longer than normal as labor mar-kets improve should lower real interest rates over the next three to five years. Second, a greater tolerance for a near-term

Fed forecasts: end 2014

%

Unemp rate Core PCE Fed funds

2011 November 7.25 1.75 na

2012 Jan 7.15 1.80 1.00 April 7.05 1.90 1.00 June 7.35 1.80 0.50 September 7.00 1.90 0.00-0.25

-0.2

0.0

0.2

0.4

0.6

0.8

-2.0

-1.5

-1.0

Jan 2, 12 Mar 7, 12 May 12, 12 Jul 16, 12 Sep 20, 12

%, both scalesUS TIPS yields (real)

20-year

5-year

1.6

2.1

2.6

3.1

3.6

2008 2009 2010 2011 2012 2013

%, saUS inflation swaps

10 year

10 year/10year forward

3

4

5

6

7

06 07 08 09 10 11 12 13

% p.a.Euro area nonfinancial corporate borrowing costs

Periphery

Core

14




inflation overshoot as the economy moves toward its growth objective should be reflected in a rise in inflation expectations over this horizon. Finally, the Fed is maintaining its medium-term inflation objectives and is committed to a return to the standard reaction function once labor market healing is com-plete. Thus, long-term inflation expectations and real interest rates (beyond 10 years) should remain stable. Recent move-ments in TIPS yields suggest the Fed has moved real interest rates consistent with its objectives. There has however been a similar movement in medium-term (0-5 years) and long-term (10-20 years) inflation expectations, suggesting the Fed may be challenged in communicating its intentions on inflation.

In the ECB’s case, the key is to convince market participants that its backstop is credible enough to generate sustained low-er risk premiums in sovereign debt markets. The initial re-sponse has been positive as 2-year yields in the countries like-ly to be supported by the ECB (Ireland, Italy, Portugal, Spain) have moved sharply lower since the signal of the program was given in early August. If these lower yields can be sustained, it will then be important to look for signs that it is transmitted to lower borrowing rates and easier credit standards for households and businesses.

For both central banks, these shifts in policy are designed to generate far-reaching changes beyond interest rates. Policy changes are designed to boost confidence that growth will improve. It is thus encouraging to observe the recent lift in equity markets relative to business surveys of economic activ-ity. In both the US and the Euro area, this divergence is remi-niscent of the experience of 2003 and 2009 when equity mar-kets rose in advance of a turn in growth and business confi-dence. For now, the improvement in household sentiment has been mixed. Consumer sentiment moved up recently in the US but continues to languish in the Euro area. By contrast, the equity response has been more pronounced in the Euro area than in the US, particularly with respect to the current surveys on business activity.

With faltering confidence having weighed on activity through 2Q12 and much of 3Q12, the ability of central banks to gen-erate a sentiment lift should be seen as shifting the risk pro-file of the outlook. This will be amplified by improving financial conditions. This week, we raise our 2013 growth forecast for the Euro area. By contrast, we remain cautious on the US given looming policy uncertainties but recognize that should fiscal cliff matters be resolved more successfully than expected, growth is more levered to the upside because of the Fed’s actions.

0

2

4

6

8

2010 2011 2012 2013

% p.a.; Periphery does not include Greece

Euro area 2-year sovereign bond yields

Periphery

Core

45

50

55

60

-20

-15

-10

-5

0

5

10

15

99 01 03 05 07 09 11 13

DI, sa

US: Composite ISM and equities

%3m chg ISM

Equities

44

47

50

53

56

59

-24

-12

0

12

24

36

99 01 03 05 07 09 11 13

DI, sa

Euro area: Composite PMI and equities

%3m chgPMI

Equities

-30

-25

-20

-15

-10

-5

0

-60

-55

-50

-45

-40

-35

-30


%bal

Consumer sentiment

US

EMU

15

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



Breaking Good: US consumer gets unexpected help A subdued outlook for consumer spending has turned

more positive recently

Most important, inflation is set to recede; higher equity prices, house prices, and sentiment are also supportive

But spending growth will depend mainly on hiring and on whether business sentiment is also turning up

Commentary over the past few months has emphasized down-side risks to the near-term growth forecast. Consumer real income and spending would be squeezed by higher gasoline and food prices, exports would weaken in response to falter-ing global growth, and hiring might be held down by uncer-tainties related to the fiscal cliff and more general tax and regulatory policy. To be sure, the recovery in home building looks convincing and durable. But new home construction only accounts for about 1% of GDP.

Lately things seem to be breaking in a positive way for con-sumer spending. Most important, recent declines in the price of gasoline futures and nonfuel import prices suggest that inflation will trend much lower starting next month, giving a noticeable boost to real income growth. Continued increases in equity prices and house prices over the past few months are lifting household wealth. And these changes are starting to give a noticeable lift to consumer sentiment.

As always, spending will depend most importantly on labor income. Since spring there has been a noticeable slowing in both key influences on labor income—hours worked and hourly earnings. And this slowing has contributed to the tepid outlook for consumer spending. Lower inflation and higher equity prices could lift business sentiment in the same way it is apparently affecting consumers and lead to increased hiring. But a substantial near-term lift still looks unlikely, given still fragile global growth and looming fiscal policy uncertainties. The forecast for consumer spending has not been revised up, but risks to the forecast are becoming a lot more balanced.

Some help for the consumer Energy markers point to much lower inflation ahead: One big change in the landscape facing consumers is the sharp decline in the price of gasoline futures so far this month. The retail price of gasoline had soared since midyear and the latest average weekly retail price is about 45 cents per gallon above its July average. These fuel price increases are largely respon-sible for the 0.6% samr surge in the CPI for August and for

the expected further rise of 0.5% in September. Higher infla-tion and its squeeze on real income seems to account for the fact that real growth of consumer spending in 3Q12 is track-ing only 1.3% saar, below expectations of 2.5% at the begin-ning of the quarter.

A few weeks ago the forecast looked for the CPI to continue at a relatively high 2.5% pace through 4Q12-1Q13 as ex-pected increases in energy and especially food prices kept inflation up. This pace would not be shockingly high, but high enough to continue to dampen consumer spending. However, so far this month the futures prices of crude oil and gasoline have receded. And, with a lag, the retail price of gasoline looks set to decline as well. The usual relationships suggest that the retail price of gasoline will peak in September at $3.85 per gallon and decline to about $3.50 per gallon by Jan-uary, a decline of about 9%. On a seasonally adjusted basis, the CPI is expected to increase considerably less than 1.0% saar for the next several months starting in October (despite expected upward pressure from higher food prices), and lower inflation will support growth of real income and spending.

Weaker goods pricing will push down core inflation, too: Lower energy prices are the main story. But the core CPI also looks set to slow in the months ahead. Short-term fluctuations in the core CPI tend to be dominated by swings in core goods prices rather than in more inertial core services inflation. And

-2

0

2

4

6

3.30

3.40

3.50

3.60

3.70

3.80

3.90

4.00

Jan 12 Apr 12 Jul 12 Oct 12 Jan 13

$/gallon, nsaRetail gasoline price and CPI, with forecast based on forward prices

%ch saar over 3 months

Gasoline price

CPI

30

60

90

120

50

65

80

95

110

2006 2007 2008 2009 2010 2011 2012

Index, UMich survey, both scalesConsumer expectations and expectations for unemployment

Expectations

Expect lower unemployment

16

Economic Research Breaking Good: US consumer get unexpected help September 21, 2012


the leading indicators of core goods prices point to slowing ahead. The core intermediate PPI (materials and components less food and energy), a leading indicator of domestically produced goods prices, has declined 7.2% saar over the past three months. And prices of both nonfuel imports and imports of consumer goods have also slowed sharply.

Equity prices are up: Higher equity prices are another plus for consumer spending. The S&P 500 index is up about 16% so far this year and about 10% since June. It is unclear wheth-er the rise over the past few months reflects the effects of ECB and Fed actions to reduce downside risks to growth, or other influences. But in any case the wealth effects of higher equity prices should tend to boost consumer spending over time. Mainstream rules of thumb indicate that the wealth ef-fects of a 10% increase in equity prices boosts growth of con-sumer spending by about 0.4% in the first year.

House prices are up: House prices have started to climb out of the basement over the past several months. The CoreLogic index of house prices, the index the Fed uses in estimating household wealth, has increased in each of the first seven months of this year for a cumulative gain (seasonally adjust-ed, but not annualized) of 4.1%. Household holdings of real estate are slightly less than those of equities but in the same ballpark. And the wealth effects of higher house prices will also lift spending, but by much less than the boost from equity prices given the more modest house price appreciation so far.

But the popular realization that house prices have hit bottom probably will lift house price expectations and, along with declining mortgage rates, reduce the perceived real interest rate for home mortgages. This seems to be occurring and is helping to support increased home sales and associated spend-ing on new home furnishings and appliances.

Consumer expectations are up: The preliminary Michigan consumer survey for September showed a surprisingly large increase in confidence, a result confirmed by other surveys including the Rasmussen daily survey. And the bounce was concentrated in consumer expectations, the component most highly correlated with spending on durables, taking expecta-tions near its highest level for the expansion to date. The monthly improvements in both the five-year economic out-look and the outlook for changes in unemployment were fa-vorable and large.

Labor demand is the real key to spending Some things are breaking the right way for consumers. But the outlook for consumer spending will depend mainly on growth of labor income, and that will depend mainly on busi-ness hiring decisions. Since spring, business hiring has gener-

ally disappointed. The trend in growth of both employment and hours worked has slowed sharply starting last spring.

The pullback by business seems to be more general and ap-plies to capital spending as well. Manufacturers report that core capital goods orders have been trending lower since March. While the recent sharp declines may largely reflect weakness in foreign markets, there is increasing evidence that domestic spending is faltering as well. Import (and net im-port) volumes of capital goods declined in each of the last two months through July. And so did shipments of capital goods by wholesalers.

Thus, the major issue for spending is whether the same influ-ences that seem to be lifting consumer expectations will also lift business expectations and influence hiring decisions. Giv-en the absence of evidence to date that global growth is im-proving or that progress on policy negotiations is being made in Washington, the forecast continues to look for subdued real GDP growth and real consumer spending growth, averaging less than 2.0% through the middle of next year. But this week we got a tantalizing hint that business expectations may have started to shift. The early September Fed manufacturing sur-veys in hand posted negative readings for the assessment of current conditions but highly positive and rising expectations.

0.5

1.0

1.5

2.0

2.5

3.0

-2

0

2

4

6

2007 2008 2009 2010 2011 2012 2013

%ch nsa ar over 6 monthsPrice of imported consumer goods and core PCE price index

%ch saar over 6 monthsPrice of imported consumer goods including autos

Core PCE price index

0

10

20

30

40

50

60

-20

-10

0

10

20

30

2010 2011 2012 2013

Sa, avg of NY Fed and Philly Fed

Current conditions and expectations, avg of early Fed mfg surveysSa

Current conditions

Expectations

17

JPMorgan Chase Bank N.A, London Branch David Mackie (44-20) 7134-8325 [email protected]

Greg Fuzesi (44-20) 7134-8310 [email protected]



Euro area growth: a better 2013 in prospect Financial conditions key to understanding recession

Financial conditions now turning more supportive

Fiscal policy drag also easing next year

After a moderate recovery that began in the middle of 2009, which delivered an average GDP growth rate of 1.8% ar for nine quarters, the Euro area economy slid back into recession toward the end of last year. Although fiscal policy turned into a bigger headwind, the return to recession was primarily driv-en by a tightening of financial conditions from the middle of last year. Borrowing rates at the short end were pushed up by the 50bp monetary tightening by the ECB. The increase in sovereign stress from the middle of last year put further up-ward pressure on bank funding costs, borrowing rates for households and corporates, and bank lending standards.

As we try to anticipate growth momentum next year, two things are very striking. First, although fiscal policy continues to tighten next year, we expect the magnitude of the headwind for the region as a whole will be significantly less than what has been experienced this year. The moderation of this head-wind will help growth momentum. And second, financial conditions look set to be more supportive next year. The ECB has unwound last year’s monetary tightening and added more easing. We think even more monetary easing will come. In addition, the new approach to bond market interventions an-nounced by the ECB has already led to a significant reduction in financial stress. Actual borrowing rates for households and corporates have started to come down, but spreads relative to overnight rates remain wide. But, these spreads will narrow, and bank lending standards will ease, if lower sovereign yields persist. Given the importance of the swing in financial conditions in explaining the return to recession, an easing of financial conditions should play a significant role in improv-ing growth momentum.

The ECB’s new policy approach has prompted us to revise up our Euro area GDP forecast for next year from an average annualized growth rate of 0.8% to an average annualized growth rate of 1.1%. These revisions push up the annual year-on-year estimate for 2013 from 0.2% to 0.4%. Moreover, with the swing in both fiscal policy and financial conditions great-est in the periphery, the dispersion of growth across the region should narrow.

A framework for understanding growth Forecasting growth in the current environment is very chal-lenging. The monetary transmission mechanism is severely impaired due to high funding costs for banks, capital short-falls, the return of home bias in capital markets, and a desire

Understanding Euro area growth

%q/q saar

2011 2012 2013 Change 2012/2011

Change 2013/2012

Growth potential 1.3 1.3 1.3 0.0 0.0 Monetary policy 1.6 2.0 2.3 0.4 0.3 Financial conditions/sentiment -0.8 -2.3 -1.9 -1.5 0.4 Fiscal policy -1.1 -1.4 -0.8 -0.3 0.6 Exchange rate 0.1 0.2 0.0 0.1 -0.2 Global growth -0.1 -0.2 0.0 -0.1 0.2 Terms of trade -0.4 -0.2 0.2 0.2 0.4 Actual GDP 0.6 -0.6 1.1 -1.2 1.7 GDP is q/q saar. Monetary policy is the gap between a normal nominal interest rate of 3.5% and the actual overnight interest rate multiplied by 0.6. The financial conditions/sentiment component is the residual in the past. Fiscal policy is our judgment of fiscal measures multiplied by a fiscal multiplier of 0.8. The exchange rate effect is the quarter on quarter change in the nominal trade weighted exchange rate multiplied by 4 and then multiplied by 0.05. Global growth effect is global GDP quarterly annualized minus potential (3.1) multiplied by 0.2. The terms of trade effect is headline CPI (ex taxes) %oya minus 2% multiplied by 0.6. Taxes are excluded from inflation to avoid double counting with the fiscal policy impact.

Euro area fiscal projections

Government plans

Growth %oya Deficit % of

GDP Fiscal stance %pts of GDP

2012 2013 2012 2013 2012 2013

Euro area aggregate -0.5 0.8 -3.5 -2.5 1.7 1.1 Germany 0.7 1.6 -1.0 -0.5 0.2 0.5 France 0.3 0.8 -4.5 -3.0 1.4 1.1 Italy -2.4 -0.2 -2.6 -1.8 2.8 0.9 Spain -1.5 -0.5 -6.3 -4.5 4.5 2.2 Netherlands -0.8 1.3 -4.2 -3.0 1.1 1.2 Belgium 0.1 1.3 -2.8 -2.2 1.0 0.9 Ireland 0.7 2.2 -8.3 -7.5 1.1 2.1 Portugal1 -3.0 -1.0 -5.0 -4.5 4.6 1.7 Greece -4.8 0.0 -7.3 -4.6 1.6 2.0

1. GDP growth figures and deficit figures are from the IMF statement on the fifth review Septem-ber 11, 2012. Fiscal stance figures are from previous documentation.

Euro area growth forecast

%q/q saar

3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

Previous -1.0 -0.5 0.5 0.5 1.0 1.3 New -1.0 -0.5 0.8 0.8 1.3 1.5

Country level forecasts

%oya

2012 2013

Previous New Previous New

Euro area -0.5 -0.5 0.2 0.3 Germany 1.0 1.0 1.2 1.3 France 0.1 0.1 0.6 0.7 Italy -2.5 -2.5 -1.0 -0.7 Spain -1.5 -1.4 -0.9 -0.5

18

Economic Research Euro area growth: a better 2013 in prospect September 21, 2012

JPMorgan Chase Bank N.A, London Branch David Mackie (44-20) 7134-8325 [email protected]

Greg Fuzesi (44-20) 7134-8310 [email protected]

to delever in both financial and nonfinancial sectors. Mean-while, household and business sentiment is depressed by con-cern about crisis management and tail risks related to sover-eign solvency and EMU breakup.

In order to forecast growth in this environment, we have used a simple framework that starts from the region’s growth po-tential and gauges the impact of various forces that can be reasonably well identified (the monetary stance, fiscal policy, the exchange rate, global growth, and the terms of trade). This leaves an unexplained residual to make the whole exercise add up—this reflects the combined impact of financial condi-tions and sentiment.

The framework helps to explain the move back into recession at the end of last year. Although fiscal policy became a bigger drag, the additional effect was not large. None of the other categories turned negative enough to explain the large deterio-ration in growth momentum, so we are left to conclude that the primary cause of the recession was the tightening of fi-nancial conditions. Presumably, the decline in household and business sentiment that began in the middle of last year was also driven by the tightening of financial conditions.

Where does the region stand now? At this stage, the latest business surveys suggest that the re-cession is continuing. The composite PMI declined in Sep-tember, although through the relatively small monthly chang-es of late, it has been broadly unchanged over the past four months. In terms of level, it suggests that economic activity is still contracting at an average 0.75% annualized pace during the second half of this year. The dispersion of growth perfor-mance across the region also appears to have widened again according to the PMI report for September. The German economy, which had been slowing sharply, appears to have bottomed out, while the modest improvements seen recently in the PMIs in France and the periphery reversed, suggesting a continuation of sharp contractions in the periphery.

Reduced fiscal and financial headwinds Looking ahead to 2013, the two big headwinds that have been weighing on Euro area growth are set to moderate.

Fiscal policy will remain restrictive, but less so than this year. On the basis of current plans, the fiscal drag next year would be around 0.7% of GDP, around half of this year’s drag. In our forecast, we assume a slightly bigger drag next year as governments make up for some slippage in meeting budgetary objectives this year. But, even so the fiscal headwind is set to moderate.

Meanwhile, financial conditions are also set to be more sup-portive of growth. The ECB’s monetary easing and its new approach to bond market interventions have already led to an easing of financial conditions. For the Euro area as a whole, two-year sovereign bond yields have fallen almost 100bp since midyear. If these lower yields are sustained, they will reduce bank funding costs, reduce actual borrowing rates for households and corporates, and ease bank lending standards.

Given the uncertainties about the evolution of financial condi-tions, the efficacy of the transmission mechanism, and devel-opments in consumer and business confidence, it is hard to be certain about exactly how much growth will improve. But, using the framework outlined earlier, it is easy to envisage that the ECB’s new approach could add around a quarter of a percentage point annualized to our GDP growth outlook for next year.

Less dispersion of growth As the overall economy moved back into recession late last year, the dispersion of growth across the region increased. This was not surprising given that the tightening of financial conditions was most severe in those countries experiencing the greatest fiscal austerity. As we look into next year, it is reasonable to expect growth dispersion to decline. The easing of the fiscal drag is particularly large in Spain and Italy. On the basis of current plans, fiscal austerity in Spain moderates from 4.5% of GDP this year to 2.2% of GDP next year. In Italy, meanwhile, it moderates from 3.1% of GDP this year to 1.1% of GDP next year. In addition, the easing in financial conditions seen since the middle of this year has been greatest in the periphery. In the periphery, excluding Greece, two-year sovereign bond yields have fallen around 230bp. In terms of our new forecast, the annual averages still show large declines of 0.8%oya and 0.6%oya in Italy and Spain, respectively. But, this is entirely due to the base effect created by the declines in economic activity this year. During 2013, we have lifted our growth forecasts for Spain and Italy by 0.5%-pt annualized in each quarter and now expect GDP to be stable already in 1H12.

0

1

2

3

4

5

2006 2007 2008 2009 2010 2011 2012 2013

Weighted averageEuro area 2-year bond yield

19

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



The BoJ eased, what's next? The BoJ downgraded its economic forecast, pushing out

the timing of the recovery by six months

The BoJ believes that its policy is no less aggressive than the Fed’s

The BoJ to ease again in December or January, on the economy, yen, inflation, or political pressure

The BoJ eased policy this week by increasing its Asset Pur-chase Program (APP) ¥10 trillion to ¥80 trillion, increasing JGB and T-bill purchases by ¥5 trillion each. The last time the BoJ eased was in April, when it increased JGB purchases ¥10 trillion, ETFs ¥200 billion, and J-REITs ¥10 billion. This week’s easing was sooner than expected with the consensus looking for the BoJ to ease in October, when it publishes its Outlook Report.

The BoJ revised down economic outlook The BoJ downgraded not only its assessment of current eco-nomic conditions, but also its economic outlook. The state-ment, published after the meeting, indicated that “economic activity is expected to level off more or less.” Indeed, Gover-nor Shirakawa stated in the press conference that the timing of the economic recovery would be pushed back approximately half a year, mainly due to the global economic slowdown.

While the BoJ’s view is basically consistent with ours, Shirakawa indicated that board members spent a good portion of the two-day meeting discussing how the investment-led Chinese economy would adjust to slower growth, with a view to the country’s demographic change. In this context, the re-cent escalation of the dispute with China over small islands in the East China Sea could damage Japanese subsidiaries’ activ-ity in China given the widespread anti-Japan movement across the country. This likely added downside risk to the economic outlook, although Shirakawa refrained from elabo-rating in the press conference.

On the inflation outlook, while the BoJ has held the view that the year-on-year change in the core CPI, which excludes only fresh food, would reach 1% in or shortly after FY2014, Shirakawa said that the BoJ eased policy to prevent the ex-pected path of price changes from deviating from its forecast, which was at risk due to the downshift in the economic outlook.

The BoJ intensified its commitment to end-ing deflation by extending the APP The BoJ’s increased purchase of JGBs under the APP will now be completed by end-2013. Previously, the target for the purchase of individual assets under the APP was end-June 2013. The BoJ extended the period of its APP operation by another six months to increase its commitment to ending de-flation. This is not surprising, as the BoJ had extended the period to June 2013 in April, when the Bank increased JGB purchases ¥10 trillion to ¥29 trillion.

In addition to the increase in the APP, the BoJ removed the minimum bidding yield (currently 0.1%) for the purchase of JGBs and corporate bonds. This will help the BoJ achieve the year-end target for JGB purchases (¥24 trillion), which means that the BoJ needs to purchase JGBs ¥2 trillion plus per month until December on average. If the BoJ had maintained the minimum bidding yield, the BoJ’s JGB purchasing opera-tion could fail, especially if market JGB yields fall below 0.1%. Note that the 2-year JGB yield has fallen to below 1% since late last year. Although Shirakawa said that this should contribute to the decline in bond yields, we think that its im-pact on bond yields will be limited, as long as the BoJ main-tains the IOER at 0.1%. The removal of the minimum bidding yield is applied to Rimban operations (BoJ’s outright pur-chase of JGBs outside the APP) as well. Note that in July 2012 the BoJ removed the minimum bidding yields for Rimban operations, but only for the purchase of JGBs with remaining maturity equal to or less than a year. With this week’s an-nouncement, this was extended to all Rimban operations.

Has the BoJ’s reaction function changed? We once believed, especially after the BoJ’s surprising an-nouncement on February 14 that it was introducing a 1% in-flation goal, that its policy reaction function had changed, such that the Bank would continue to ease until 1% inflation was on the horizon. However, we have learned that this does not mean that the BoJ would increase the APP persistently, even if the economy did not weaken further. Shirakawa reiter-

0

10

20

30

40

2010 2011 2012 2013 2014

¥ tnJGBs in the Asset Purchase Program

JGBs in the APP

Target (ceiling)

J.P.Morgan forecast

20

Economic Research The BoJ eased, what's next? September 21, 2012

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

ated that the BoJ continued to intensify monetary easing, de-spite the BoJ’s inaction in terms of the size of the APP, as the BoJ has increased the amount of JGBs under the current APP. This week’s decision appears to confirm that the BoJ’s policy reaction function does not seem to have changed from the old one, i.e., it increases the APP only when the economic and price outlook deteriorates.

That said, the consensus in the market appears to be that the BoJ’s policy is not aggressive enough. This probably reflects the inflation outlook. While the BoJ believes that, given its economic outlook, the 1% inflation target will be achieved shortly, the market does not. Indeed, if the BoJ is correct, the additional easing measures are not needed. The BoJ would need to ease further only if the economy weakened further due to unexpected events.

The BoJ’s easing is no less aggressive than the Fed’s Responding to a question at the press conference, Shirakawa raised three factors to explain why the BoJ’s policy is not less aggressive than that of other major central banks, especially the Fed. First is the composition of the assets that the central banks are buying. The BoJ purchased risk assets under the APP, such as corporate bonds, commercial paper, ETFs, and J-REITs, in contrast to both the Fed and the ECB, to have a direct impact on the risk premium in asset prices. Second, while the Fed announced the MBS purchases for an unlimited period, the BoJ remains flexible in terms of the size and the end of the period of the APP. The third is the communication strategy. The FOMC statement says that the exceptionally low level for the fed funds rate is likely to be warranted at least through mid-2015. According to Shirakawa, this is a condi-tional commitment, or just a matter of possibility, given the Fed’s current economic and inflation outlook, and is not a clear commitment to maintain the low policy rate until mid-2015. It is very rare for Shirakawa to make such comments in public on the monetary policy of other central banks. The BoJ’s commitment is to continue an extremely easing policy with de facto zero rate policy and APP until 1% inflation is on the horizon.

In addition, Shirakawa believes that monetary conditions in Japan are the easiest among the DM. Although he did not elaborate on this at this week’s press conference, Shirakawa has referred, in a recent speech, to significantly narrower credit spreads in the corporate bond market, a persistently declining trend of the bank lending rate to below 1%, and even favorable real interest rates. In contrast to the consensus view that the expected rate of inflation should be below zero, the BoJ believes that it remains positive, as shown in many surveys, such as the BoJ’s and the Consensus Forecast’s. If the BoJ is right, people and firms are not borrowing money

even with a negative or extremely low (in real terms) bank lending rate.

What’s next? As the BoJ’s revised economic and price forecasts will be published on October 30 in the Outlook Report, we need to wait until then to see what the BoJ’s latest forecasts are; it will also extend the forecast to FY2014 next month. That said, there remains a good chance that the BoJ will ease again in December 2012 or in January 2013, under different scenarios:

For one, the economy could downshift further for one reason or another, and, if so, the BoJ would likely downgrade its forecast again in three months or so. Even if the economy moves in line with our forecast, in which we expect consump-tion to contract 2% ar in 3Q, the BoJ could downgrade its assessment on weaker consumption, and ease policy in De-cember 2012 or January 2013, as the BoJ still believes that the consumption is growing solidly.

For another, the BoJ’s inflation rate outlook may not material-ize, despite a modest economic recovery. We expect headline and core deflation to continue through the turn of the year, and that the price outlook will not improve much unless ener-gy prices rise substantially. In this scenario, the BoJ would likely ease in January 2013, when the Bank makes its mid-term review of the economy and prices.

Third, the yen could strengthen unexpectedly. This may hap-pen if the Fed eases in December ahead of the fiscal cliff, and the market urges the BoJ to ease through yen appreciation. Indeed, the BoJ eased in February and September 2012, short-ly after the Fed’s easing. In this scenario, the BoJ would like-ly ease in December.

And finally, an increase in political pressure could prompt the BoJ to ease. If the Lower House is dissolved and a general election is held in November (or early December), the LDP is likely to win (although the LDP may not achieve a majority) according to the opinion polls. Although it is hard to foresee the result of the election accurately, a new government (prob-ably a coalition government led by the LDP) could intensify political pressure on the BoJ, possibly threatening to change the BoJ Law to reduce the BoJ’s independence. This is similar to what happened in February this year when, prompted by political pressure, the BoJ surprised markets by announcing the introduction of a 1% inflation goal and the market re-sponded positively to it. In this scenario, the BoJ could sur-prise again with another radical change in monetary policy, such as an increase in the inflation goal to 2%, with a stronger commitment to ending deflation.

21

JPMorgan Chase Bank N.A, London Branch Alex White (44-20) 7134-5298 [email protected]

Raphael Brun-Aguerre (44-20) 7134-8308 [email protected]



The French Budget: Scylla, Charybdis, and Europa Fiscal slippage likely this year and next in France, by

respectively 0.2%-pt and 0.3%-pt of GDP

2013 budget plan next week to reveal extra measures worth €30 billion, primarily tax increases

The government faces serious political constraints which limit its ability to surprise to the upside

France faces difficulties in trying to reduce its fiscal deficit to remain in line with European targets. Weak economic activity forced the government to raise taxes in July in an attempt to meet its 2012 deficit objective of 4.5% of GDP, but the latest monthly data suggest that some slippage should be expected. Next week, the government will present its 2013 Budget with an objective to reduce the general government deficit to 3.0% of GDP next year. We see this as ambitious; the low-growth environment will likely weigh on fiscal revenues, making the target hard to achieve.

The French government needs to walk a fine line between its fiscal constraints and the domestic and European political pressures it faces. The details of the Budget should give an indication of how it intends to manage this balancing act. Domestically, we see President Hollande’s political commit-ments to the Socialist Party base weighing on the likelihood of major structural reforms, and think there is a chance that the budget proposal will fail to deliver a credible path for fis-cal consolidation as a result. There are European constraints as well, notably around the implementation of the Fiscal Compact. We see risks that the government fails to navigate all these pressures successfully. However, with expectations set as low as they are currently, we believe the government still has some (slight) opportunity to surprise to the upside. We believe that key officials understand fiscal constraints better than the consensus view appears to suggest.

A challenging fiscal environment in 2012 The discussion of the 2013 Budget will be framed by the shortfall we expect for 2012. In order to track the 2012 budg-et, we use the central government monthly budget figures published by the Ministry of Finance. This represents by far the largest share of the general government fiscal balance. In 2011, the central government deficit reached 4.5% of GDP and accounted for 87% of the 5.2% general government defi-cit. The remaining 13% was entirely related to social security costs, while local government finances were balanced.

This year, the government committed itself to reduce the gen-eral government deficit to 4.5% of GDP. This objective is intended to be achieved by a reduction in the central govern-ment deficit to 3.8% of GDP, with deficits of 0.3% and 0.5% penciled in for social security and local governments, respec-tively.

But the monthly budget tracking so far looks worrisome. The latest available data show that the central government deficit reached €85.5 billion at the end of July 2012, against €86.6 billion over the same period last year. This represents only a modest improvement. Using the official central government forecast of 3.8% of GDP for 2012, we calculated the monthly path consistent with achieving that annual target. We assumed a constant seasonally adjusted monthly deficit and translated that into a not seasonally adjusted measure to reflect historical patterns of spending and revenues. According to our calcula-tion, the central government deficit through July should have been €67 billion, €18.6 billion below the actual figure re-leased by the Ministry of Finance.

The likelihood of a shortfall is not new and was indeed point-ed out by an independent audit of the French Cour des Comptes back in early July. This audit concluded that the government’s original 0.7%oya 2012 GDP growth assump-tion was too large and instead argued that GDP growth would only reach 0.4%oya this year. Using their own assumptions,

French fiscal plan

%GDP for fiscal indicators and %oya for GDP

2011 2012 2013 2014 2015 2016 2017

Budget balance -5.2 -4.5 -3.0 -2.3 -1.5 -0.8 0.0 Of which: Central government -4.5 -3.8 -2.5 -2.0 -1.5 -1.0 -0.5 Local governments 0.0 -0.3 -0.3 -0.3 0.0 0.0 0.0 Social security -0.6 -0.5 -0.3 0.0 0.0 0.3 0.5

Government debt 86.0 89.7 90.6 89.9 88.1 85.5 82.4

Assumed real GDP 1.7 0.3 0.8 2.0 2.0 2.0 2.0

-120

-100

-80

-60

-40

-20

0

Jan Apr Jul Oct

€ bn, nsaFrench cumulative monthly budget balance

2011

Path consistent with govt forecast if monthly sa deficit is constant

2012

22

Economic Research The French Budget: Scylla, Charybdis, and Europa September 21, 2012



the fiscal auditors calculated that the general government budget would fall €7.1 billion short of the 4.5% of GDP tar-get. This conclusion prompted the newly elected government to raise additional tax measures estimated to generate €7.2 billion in 2012, and the official GDP growth rate was later revised to 0.3%oya.

The new measures taken by the government in July are not yet visible in the latest available monthly numbers, so we should expect some improvement in the deficit trajectory in 2H12. But even if we assume that this €7.2 billion can be raised, the central government deficit will likely fall short of the 3.8% of GDP official forecast by about €6 billion accord-ing to our calculation. The good news is that the 2012 Budget includes a precautionary reserve of €6 billion that can com-pensate for this shortfall. Our own GDP forecast however assumes that GDP growth will only reach 0.1%oya in 2012, against an official prediction of 0.3%oya, which means that a small slippage should be expected. Including the possibility of implementation risks as well, our forecast assumes a general government deficit of 4.7% of GDP in 2012. This compares with an official estimate of 4.5%.

Fiscal outlook for 2013 looks difficult The official government forecast assumes that a 1.5%-pt gen-eral government deficit reduction will be achieved to reach 3.0% of GDP in 2013. This is a large adjustment considering that economic activity should improve only marginally next year (our current forecast assumes GDP growth will reach 0.7%oya in 2013, against a prediction of 0.1%oya in 2012). As in 2012, a large part of the adjustment should come from the central government, whose deficit is assumed to decline from 3.8% of GDP to 2.5%. Meanwhile, a marginal 0.2%-pt deficit improvement to 0.3% is officially assumed for social security and the local government imbalance is predicted to remain at -0.3%.

But the government’s target was once again challenged by the French Cour des Comptes in July, which believes that the offi-cial growth forecast of 1.2%oya in 2012 was overly optimistic and instead preferred a more cautious 1.0%oya assumption. This discrepancy was large and the audit concluded that an additional €33 billion was needed in 2013 for France to achieve its general government deficit objective of 3.0% of GDP.

Since the publication of this audit, official GDP growth was revised down to 0.8%oya, and a number of additional measures are expected to fill the estimated shortfall. First, the additional tax increases decided in July will impact the 2013 budget by generating €6.1 billion in extra revenue next year. Second, we expect further measures worth an additional €30 billion to be announced in the 2013 Budget next week.

Our own forecast assumes that GDP growth will be marginal-ly weaker than the official forecast in 2013. This means that there should only be a small slippage with respect to the offi-cial deficit target. But we also think implementation risks are likely. Taking these two factors into account, our general gov-ernment deficit forecast is 3.3% of GDP in 2013 versus the official target of 3.0% next year.

Political pressures pull both ways The size of France’s fiscal challenge needs to be seen in the context of the significant political constraints to government action, which are framed by an increasingly tough domestic environment. President Hollande campaigned for election this year by criticizing both France’s and the Euro area’s focus on austerity at the expense of growth (as he saw it). He subse-quently defined his early positioning on the European stage by differentiating himself from Chancellor Merkel and pro-moting the idea of a “Growth Compact.” In doing so, he ex-pended political capital mapping out a direction that is differ-ent from the one that France will now likely need to take. It is not clear that he has popular support for fiscal consolidation, and the government may lack a strong political mandate to deliver tough fiscal medicine as a result. Even without these issues of positioning, the government faces a real challenge in delivering credible fiscal consolidation in a country where popular attachment to the public sector (56% of GDP and growing) remains strong, and where the need for fiscal re-straint has yet to be fully internalized.

The government, and the President in particular, has been further weakened by a significant drop in popular support. Hollande’s own popularity rating has declined by around 15%-pts since June. This is partly for reasons of style rather than substance (and also reflects concerns over exogenous political issues including a controversy over France’s Roma population). More fundamentally, however, it appears to re-flect a lack of trust; only 48% of people think that the Presi-dent is capable of implementing his campaign pledges. Hollande is facing the political consequences of having run against austerity, but asking France to take tough fiscal medi-cine. He is also perceived to have failed to deliver on a com-mitment to water down the European Fiscal Compact. In this context he needs to be careful not to push his base too far, and

France: J.P. Morgan forecast % of GDP unless specified

2009 2010 2011 2012 2013 2014 2015

Budget balance -7.5 -7.0 -5.2 -4.7 -3.3 -2.9 -1.9 Primary balance -5.1 -4.7 -2.7 -2.0 -0.6 -0.2 0.9 Government debt 79.2 82.3 85.9 90.0 91.4 91.8 91.0 Real GDP (% oya) -3.1 1.6 1.7 0.1 0.7 1.5 1.5 GDP deflator (%oya) 0.5 0.8 1.6 1.5 1.8 1.7 1.7

23




risks an uncomfortable period of pressure from the left wing of his party if he does. We see significant risks of a rise in labor unrest, among other things, if the government fails to get this delicate balance right.

The European pressures on France are equally important, and pull in a different direction. The government wants to meet (or at least aim to meet) the commitments under the Fiscal Compact, notably the 3% deficit ceiling. It is important for the President to ensure that France remains bracketed with Ger-many, rather than Italy and Spain, in its degree of European influence as well as its bond yields. France’s political future is tied to Europe, and it needs to retain as strong a voice as pos-sible. The policymaking elite have learned the German lesson, that economic strength is key to European clout. We would be surprised if the budget failed to reflect this to some extent.

If it is to retain a strong European voice, the government also needs to “own” the changes it is making, despite the fact that they are partly inspired by European targets. It will be politi-cally tempting to blame the rest of the region for some aspects of France’s difficulties, but this Budget package needs to be delivered in a way that doesn’t heighten popular doubts about the direction of the European project. We expect the Fiscal Compact itself to be voted on in early October, with some chance of the government being forced to rely on opposition support. Blaming Europe for the need for austerity would make matters worse; we expect the President to maintain his relative silence on the issue.

We view all of these political pressures as critical to determin-ing the route France takes, in next week’s Budget and beyond. There is a good chance of the government failing to navigate all of its constraints successfully—particularly with the need to respond to pressures from the populist left. However, on balance we tend to think that the key figures in government, including at the Ministry of Finance, are genuinely committed to demonstrating fiscal credibility. Budget 2013 will be the first test of just how constrained they are.

What to expect from Budget 2013 Expectations for the 2013 Budget are not high. As elsewhere in the region, it may prove more politically attractive for France to introduce a limited package on the back of optimis-tic growth projections than to expand the pain of fiscal con-solidation more broadly. We already know the main fiscal parameters, which will see only one third of the required con-solidation delivered through spending cuts, with the remain-der to be delivered through tax increases on corporates and households. On the spending side, the government will aim to reduce expenditures by €10 billion next year, although it is not clear where the axe will fall (we suspect mainly on social security). On the revenue side, corporate taxes are estimated

to rise by €10 billion, and the contribution of households will increase by the same amount. In total, the government will take new measures worth approximately €30 billion.

President Hollande has made it clear that he wants to front-load France’s fiscal adjustment so that most of the pain is felt within two years. This makes sense from a political perspec-tive (with a view to avoiding headwinds ahead of the next election), but if true it heightens the importance of delivering a credible package for 2013.We think that the Budget is likely to showcase policies that will be perceived as “anti-business” but that it will make efforts to balance these with more con-structive actions on structural issues. There appears to be a will-ingness to engage with supply-side reforms on a political level, and we expect the government to make some attempt to match “solidarity” (taxing the wealthy) with “flexibility” (presenting structural reforms). The government will also have one eye to the fact that Moody’s is expected to review France’s AAA rat-ing shortly after the Budget announcement. On balance, we expect more “solidarity” than “flexibility”, but there may be more nuance than consensus expectations suggest.

Politically, it will be essential for Hollande to demonstrate that he has asked for sacrifices from the top of the income spectrum and, likely, from the financial services sector. De-spite its limited fiscal impacts, the headline 75% marginal tax rate Hollande has proposed has become totemic, particularly for his political base. An Ifop poll last weekend showed 60% sup-

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May 12 Jun 12 Jul 12 Aug 12 Sep 12

% , CSA survey (non expressed views are not shown)French confidence in President Hollande to solve domestic issues

Confident

Not confident

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30

35

40

45

50

55

May 12 Jun 12 Jul 12 Aug 12 Sep 12

%, Ipsos survey (non expressed views are not shown)Judgement on Hollande as President

Positive

Negative

24

Economic Research The French Budget: Scylla, Charybdis, and Europa September 21, 2012



port for the imposition of the new top rate, and the government has made clear that it will be introduced next week, although we may see exemptions for certain groups earning above the threshold (entertainers for example). Potentially more signifi-cant, we expect to see details of another new marginal tax rate of 45% on incomes over €150,000, as well as further work on tweaking the wealth tax.

Given the political gains to be made from appearing to put pressure on financial services, we think there is some chance of a tweak to the Financial Transactions Tax (FTT). This could involve increasing the level (perhaps to 40bp or 50bp from 20bp currently), or changing the scope of some of the exemptions (although recent changes may mean the FTT is left alone for now). There is also a possibility of some addi-tional tweaks to the tax on dividend payments (currently set at 3%), which would be presented as an attempt to encourage reinvestment. We think other “solidarity” focused efforts are likely, and we may see further measures that place additional pressures on the French banking sector, among others.

On the “flexibility” side of the equation we expect some revi-sion to labor laws, with the government likely to be focused on addressing unemployment. Hollande has previously indi-cated that he wants to address France’s unemployment issues substantively within his first year in office, although his Prime Minister has appeared to backtrack recently. We are unlikely to see more significant changes, for example to pensions and the retirement age. The burden of spending cuts may fall on social security in particular, again tied to the objective of making employment more attractive.

Fiscal and political implications If we do see fiscal slippage in 2013, as we expect, our view is that the government is more likely to accept that it will miss fiscal targets in the near term than attempt to tighten further. We think further spending cuts are unlikely; any fiscal gap would likely be addressed through further tax increases. The government remains committed to seeking a balanced budget by 2017, although it needs to do more to demonstrate the credibility of the long-term fiscal path.

We expect the 2013 Budget to fire the starting gun on a new round of political debate, with the populist left likely to use any popular dissatisfaction with the proposals as an oppor-tunity to increase its political leverage. There is popular un-derstanding that the Budget may be painful, but no real sense of what this is likely to mean in practice, and we can expect a boost for radical political voices once the proposals are un-veiled. We can expect to see what is sometimes presented as the “third round” of France’s election year (following the Presidential and Parliamentary polls). The Budget settlement may also be contested on the streets.

France’s powerful CGT union has already served notice that it will react to any structural adjustment proposals, flagging the possibility of labor unrest through the fall. We see the likeli-hood of labor unrest being particularly significant in the con-text of a round of lay-offs employers are expected to make. We have already seen a significant political reaction to job cuts at a major automaker in the past weeks. Ultimately, the success or otherwise of the likely political response to the Budget will provide a good indicator of how much political capital the government will have to maintain its adherence to whatever fiscal path it lays out, and to its 2017 target.

Optimistic commentators have suggested that only a Socialist President will have the political background required to tackle the issues facing France’s state sector; the analogy often made is that it required a leader with General de Gaulle’s nationalist credentials to give up French control of Algeria. We think this is an attractive notion, and could ultimately contain some el-ements of truth; Gerhard Schroeder’s Social Democrats were responsible for significant structural reforms in Germany. However, we have seen little evidence of this to date, and it is much too early to draw conclusions. Schroeder was guest of honor at the employer’s federation earlier this month; he is seen as a beacon for the political right rather than the left.

Implications for the region We see a number of potential implications for the Euro area from France’s budget debate, both positive and negative. First and foremost, there is a demonstration effect. If France deliv-ers a package that demonstrates fiscal credibility, this will provide less political space for other countries in the region that may seek to avoid similar hard choices (the converse is of course true). There are also important implications from the extent to which concern about austerity plays into the politics of European integration. A survey this week showed that 64% of French voters would reject Maastricht if it were put to them today, while 67% think the EU is moving “mostly in a bad direction.” We see a risk of popular discontent with austerity spilling over into generalized discontent with the euro and with Europe. Our expectation is that, over the long term, the new institutional structures Europe is building may need to be put to popular votes around the region. French opinion—which sometimes links fiscal consolidation with European demands—is trending in a way that does not make us bullish about securing popular support for real institutional change in the region. Post Budget, France faces serious challenges, and will need to demonstrate that it can avoid the twin pitfalls of fiscal and political threats if it is to demonstrate that it is on a sustainable path.

25

JPMorgan Chase Bank N.A, London Branch Allan Monks (44-20) 7134-8309 [email protected]



Household deleveraging is not preventing a UK recovery Forbearance by mortgage lenders is offering “debt re-

lief” to households and limiting financial strain

Household deleveraging is not forced, instead nominal income growth is delivering passive deleveraging

Falling real incomes have instead been depressing con-sumption over the past 18 months

Though the real income situation is improving, a spike in energy prices will act to restrain growth in 4Q12

Consumer spending has declined 2% over the past 18 months, preventing the UK from showing the recovery that many had expected. There are two competing explanations for the main source of disappointment: renewed shocks to real incomes, and the burden of high household debt. Deleveraging within the financial sector is exerting a drag on growth more broadly, via tighter loan standards and wider loan spreads. But there is little agreement about whether the high level of household debt is restraining consumption growth. Declines in the household debt to income ratio have so far arisen from gains in nominal income rather than reductions in the outstanding debt stock. The combination of a low policy rate, labor reten-tion by firms, and forbearance by mortgage lenders has helped to shield the household sector from greater financial pain in this crisis. It is not clear that the shift up in the aggregate sav-ing rate since 2008 reflects anything more than lower asset prices and tighter credit conditions.

In our view the real reason for the weakness in consumption is the ongoing compression of households’ real incomes. Though the trend here is improving, another spike in energy prices will likely restrain growth in 2H12. We do not find persuasive the argument that spending cannot grow without an explicit household debt restructuring program. Such poli-cies would either transfer household debt to an already overleveraged government, or force deeper losses on a fragile banking sector that could push the UK economy deeper into recession. Policies more directly aimed at reducing the nega-tive consequences of banking sector deleveraging for house-holds are likely to be more effective.

Households only passively deleveraging Gross household debt stood at 175% of disposable income just before the crisis, among the highest in the developed world. But there is no consensus on the negative effect this is having on spending growth. Paul Krugman is often cited as saying that a buildup of domestic debt in the aggregate is es-

sentially “money we owe to ourselves.” Indeed, net external debt is relatively small in both the UK and the US (especially

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87 92 97 02 07 12

% of disposable incomeHousehold debt

210

215

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2007 2008 2009 2010 2011 2012 2013

£bn, sa, quarterly figuresHousehold real consumption

-2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013

%, sa

CPI inflation: headline with J.P.Morgan forecast

Over a year ago

3m/3m, saarForecast begins

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87 92 97 02 07 12

% of disposable incomeHousehold net wealth

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26

Economic Research Household deleveraging is not preventing a UK recovery September 21, 2012


when UK FDI is adjusted to include valuation changes). And although the level of gross household debt is particularly high in the UK, this is more than outweighed by the assets that are held by the household sector. Household net financial wealth relative to GDP is currently above its average since 1987. Moreover, most academic models of demand are driven by this balance sheet metric as opposed to gross debt.

The counterargument is that concepts of net wealth ignore the potentially important distributional consequences of high debt. Those that own the assets are not necessarily the ones with the debt, which could leave key sectors exposed to income or interest rate shocks. This implies that high gross debt could lead to slower consumption growth, either due to an increase in financial stress following a shock, or a simple desire to reduce debt levels and hence households’ vulnerability to shocks. Indeed, the IMF finds that instances of high gross household debt in the run-up to a bust tend to lead to weak growth in the years that follow, based on a sample of 25 economies and 99 episodes (“Dealing with household debt,” IMF, April 2012). However, there is very little sign of the kind of financial stress for UK households currently that would highlight a channel to weaker spending:

Debt servicing costs are low and employment has held in. According to the CML, mortgage interest payments for the median borrower stand close to 11% of income, among the lowest levels seen since the data began in 1979. Meanwhile, employment in the UK has risen back close to pre-crisis levels. This has helped to limit the rise in the number of mortgages in arrears over the past 12 months to 0.4% of overall loans. There may be significant distributional issues that are masked by looking at the aggregate picture. But in-terest payments for first-time buyers are also at very low levels. And the employment data show a significant pickup in below-average productivity jobs. Both these points indi-cate that lower earners are receiving support from easy monetary policy and a strong labor market.

Forbearance by lenders has helped borrowers to man-age high debt. Though mortgage arrears are low due to the factors described above, the relative rate of repossessions is even lower when compared to the early 1990s recession. This reflects greater flexibility in loan repayment schedules being offered by the lenders, which has limited financial distress for the household sector. The FSA estimated earlier this year that 5%-8% of UK mortgages are subject to for-bearance.

Households have only been passively deleveraging. From the peak in 2008, household gross debt has fallen to just over 150% of income. But all of this deleveraging has been passive, in the sense that the decline reflects growth in nominal income. Outstanding debt in absolute terms has

been remarkably stable at £1.5 trillion since 2008 and has yet to show a sustained decline. This is a reflection of the

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% of income, CML data, median borrowerMortgage interest payments as a share of income

All borrowers

First time buyers

0.0

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0.2

0.3

0.4

0.5

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0.0

0.5

1.0

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% of total loans more than 12 months in arrearsMortgage arrears and repossessions

ArrearsRepossessions

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1500

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87 92 97 02 07 12

£bn, saHousehold debt

-6

-4

-2

0

2

4

6

% of GDP, positive balance indicates net lending by the sector

Household sector financial balance

89 94 99 04 09

Net saving

Net borrowing

27



factors described above, and indicates there is little “forced” deleveraging taking place in the aggregate.

Deleveraging hasn’t driven the saving rate Although signs of active deleveraging by households since the crisis are absent, there has been a clear shift in household spending behavior. The aggregate financial balance of the household sector—the difference between disposable income and total spending—moved from a 5% deficit in early 2008 to a significant surplus over the 18 months that followed. Is this related to household deleveraging? One way of explaining the shift is to look at a simple model of the aggregate saving rate—which is equal to the financial balance but without in-vestment spending. We have updated our saving rate model to include new data and revisions. It is based on three forms of household wealth, the level of gross debt, a composite house-hold credit conditions term, and consumer confidence. These factors have explained broad movements in the saving rate well since 1987 (chart).

The model is estimated in-sample, but indicates that almost all of the rise in the saving rate to its current 6.4% rate since the crisis can be explained by the drop in house prices and tighter mortgage credit conditions (a symptom of bank deleveraging). The intuition is that households raise precautionary saving as it becomes harder to tap into accumulated housing wealth (see “Housing, Credit and Consumer Expenditure,” Muellbauer, April 2008). We estimate that the saving rate would be 2.2% in the absence of tighter credit and lower house prices alone. In-deed, as house prices and credit availability partially recovered in early 2010, the saving rate moved down slightly. Though the gross debt ratio appears in the saving rate model, this has been declining since the crisis; if anything, this may therefore have actually been working to pull the saving rate downward. Given how closely the saving rate is tracking its estimated equilibrium rate currently, there is little evidence from this analysis that the deleveraging of household debt has triggered a meaningful re-sponse in aggregate spending behavior.

A NIESR paper published earlier this year (see “UK house-hold rebalancing,” Angus Armstrong, April 2012) highlighted that the aggregate position of the household sector masks im-balances that have built up at the sector level. In particular, Armstrong argues that increased saving by higher earners has funded unsustainable consumption growth by lower earners—with no observable impact on the aggregate saving rate. Un-less higher earners increase consumption, aggregate spending will be adversely affected as lower income households are forced to unwind their unsustainable spending. But our analy-sis implies that, some five years into the crisis, these distribu-tional issues have not led to any shift in aggregate consump-tion that cannot be explained by movements in asset prices and bank deleveraging.

Weak income has constrained spending A more compelling explanation for the weaker path of con-sumption is household real income. Real household consump-tion has fallen by a cumulative 1.7% since its peak in 4Q10. During this period, household real incomes fell by almost exactly the same magnitude. The saving rate, in contrast, hardly changed at all. If the saving rate remains broadly steady, then real incomes will continue to be a good guide to consumption in the coming months. It does look as though the

Model of UK saving rate

OLS estimate from 1Q87 to 1Q12

Coefficient T-stat

Constant 0.75 30.04 Wealth to income ratios:

Housing 0.05 9.59 Equities 0.01 1.10 Liquid financial 0.16 2.64

Debt to income ratio -0.16 -4.89 Gfk consumer confidence 0.001 5.43 Credit conditions 0.24 4.13

Household income and consumption % change over period shown

4Q10-1Q12 Consumption -1.7 Disposable income -1.8 Saving rate 0.2

-202468

101214

87 92 96 01 06 11

%, "alternative " scenario assumes flat house prices and credit conditions from 2007Household saving rate

Actual path of adjustment

Estimated equilibrium

Alternative

-2

-1

0

1

2

3

2007 2008 2009 2010 2011 2012 2013

%q.q, sa, nominalConsumption and employee compensation

Employeecompensation

Consumption

28

Economic Research Household deleveraging is not preventing a UK recovery September 21, 2012


saving rate will jump higher in 2Q, as employee compensa-tion was particularly solid in that quarter while consumption fell. But we would attribute a large part of this to the extra bank holiday in 2Q, and expect consumption to rebound this quarter. Nominal incomes look set to stay solid in the near term, reflecting the ongoing strength in employment. But se-quential inflation is likely to begin accelerating in 3Q, reflect-ing higher energy prices. This will exert a new drag on house-hold real incomes, which we think will run close to flat over the second half of this year. Bank holiday and Olympics ef-fects aside, this suggests that the scope for meaningful growth in real household consumption during the remainder of this year will be constrained by higher energy prices. But as the shock from energy prices fades, the path will clear for con-sumer spending to get going. The UK’s puzzlingly high level of employment relative to output creates some concern that the labor market could reverse the strong gains recorded over the past year or so. But we think it is more likely that GDP will begin to surprise on the upside, as the benefits from past employment gains feed into spending.

Would mortgage debt restructuring work? The reasoning above implies that consumption can grow de-spite high debt levels and deleveraging. But some have argued that a form of debt restructuring is necessary before house-holds begin to spend, transferring funds to households with a high propensity to consume. For example, the US government in the 1930s deployed the Home Owners Loan Corporation (HOLC), which purchased distressed mortgages from banks and then restructured them to make the debt more affordable for households. In the current crisis, similar policies were used in Iceland. But given the UK government is already struggling to meet its fiscal rules, these policies for the UK may simply be unaffordable.

An alternative approach is to effectively transfer obligations to the financial sector. For example, Colombia in the late 1990s provided debt relief for households by instead forcing losses onto the banking sector, ruling that mortgages were no longer full-recourse loans. But in this case, the lenders bore losses on loans that might otherwise have been repaid over time, triggering further credit tightening. Given that UK lend-ers are currently engaging in (voluntary) forbearance, some households are already receiving an implicit restructuring of debt. This comes at a cost to the lenders and credit conditions may be slightly tighter for all borrowers as a result. But for many mortgage loans where the borrower is solvent—note our banking team expects minimal losses on banks’ mortgage loan portfolios in the coming one to two years—forbearance helps to limit potentially much larger losses for banks in the long run. It reduces the need for mortgage market intervention by UK policymakers.

Armstrong argues that the uneven distribution of debt among households means that lower-income borrowers will not be able to cope when interest rates increase, with these losses coming to fruition only when rates begin to rise. But when the BoE does start to normalize rates, it is likely that this will be in an environment where financial conditions are becoming easier and spreads are narrowing.

Banking sector policies more effective A larger drag on spending has been prompted by deleveraging in the financial sector. Our saving rate model implies that that the deterioration in credit conditions since the financial crisis has lowered the level of consumption by 2.2%. The improve-ment in banks’ wholesale funding conditions and potentially the BoE’s FLS are likely to limit additional tightening in credit supply from here. However, if conditions deteriorate further, policies outside of the mortgage space are likely to be more effective. Our banking team believes that potential losses are more likely to arise from banks’ holdings of foreign assets, and to a lesser extent commercial property. There is less UK poli-cymakers can do about foreign exposures, with the global out-look the key factor. But if the BoE purchased these assets or bought bank debt, it would accelerate deleveraging within the banking sector and benefit the household sector indirectly. However, this would involve the official sector taking on large risks, which may be politically too difficult.

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-10

0

10

20

30

40

2011 2012 2013 2014

%3m/3m, saarCPI energy inflation

Forecast

-2

-1

0

1

2

05 06 07 08 09 10 11 12 13 14

%q/q, sa, excludes NPISHHousehold consumption

Consumption

Model

29

JPMorgan Chase Bank, N.A., Hong Kong Grace Ng (852) 2800-7002 [email protected]

Lu Jiang (852) 2800-7053 [email protected]



Taiwan trade hinges on G-3 demand as China stabilizes Taiwan’s trade flow with China, after weakening for a

year, has gradually stabilized in the past three months

Non-tech exports broadly consistent with China’s FAI cycle; destocking of Chinese industries still a concern

Outlook for G-3 final goods demand remains a key risk, especially for Euro area and corporate spending

Tech sector likely to benefit moderately from new prod-uct launches; tech inventory correction in progress

The latest J.P. Morgan global manufacturing PMI survey con-tinues to point to a contraction in global output this quarter, with no upturn in immediate sight and still elevated inventory growth. China and Taiwan have been participating in the slowdown, with a steady decline in the new orders to invento-ry ratio. Looking ahead, our global team expects the manufac-turing sector to resume growth in 4Q on the back of growing final goods demand. For Taiwan’s industrial sector, manufac-turing inventory, which had been rising steadily earlier this year, appears to have peaked recently, registering three con-secutive monthly declines through July (in m/m sa terms), with the swings most notable in the tech sector (second chart). As the manufacturing sector goes through an inventory ad-justment process, some decent growth in global final goods demand, if realized, would help to revive Taiwan’s IP and exports. Also, given its high degree of sensitivity to the global manufacturing sector, the latest trend in Taiwan’s trade sector helps to shed some light on the global cycle.

Trade flow with China gradually stabilizes One key component of the global outlook is that Chinese eco-nomic growth will pick up over the remainder of this year, supported by macro policy actions. In this regard, Taiwan’s exports to China/Hong Kong (accounting for about 40% of total exports), which had been on a consistently weakening trend from mid-2011 through May this year, seemed to have stabilized in the past three months (with the sequential growth pace turning up to 2.1% 3m/3m saar in August from a 31.4% 3m/3m saar decline in July). This could be an important sig-nal of an inflection in China’s industrial cycle. Recall that in the bleakest period of the last global recession, Taiwan was among the first major Asian exporters to benefit from improv-ing demand from China in early 2009 (driven by the mainland government’s enormous fiscal stimulus package).

Looking further into cross-strait trade flows, about half of Taiwan’s exports to China are tech-related, which in turn

closely tracks China’s tech exports (third chart), reflecting the tightly-knit regional supply chain. It is worth noting that, dur-ing the 2008-09 global recession, Taiwan’s tech exports to China (down 51% from peak to trough) significantly under-performed China’s tech exports (down 25%), suggesting that

0.7

0.8

1.0

1.1

1.3

1.4

-75

-50

-25

0

25

50

75

%3m/3m, saar

IP and manufacturing PMI new orders to inventory ratioRatio

2008 2009 2010 2011 2012

IP Manufacturing PMI new orders to inventory ratio

-60

-40

-20

0

20

40

60

%3m/3m, saar

Producer inventory breakdown

2008 2009 2010 2011 2012

Tech inventory

Nontech inventory

70

80

90

100

110

120

Index, Jan 2011=100, sa

Taiwan tech exports to China/HK and China tech exports

2011 2012

Taiwan tech exports to China/HK

China tech exports

20

40

60

80

100

120


2008 2009

China tech exports

Taiwan tech exports to China/HK

Taiwan tech exports to China/HK and China tech exports (2008-09)

30

Economic Research Taiwan trade hinges on G-3 demand as China stabilizes September 21, 2012

JPMorgan Chase Bank, N.A., Hong Kong Grace Ng (852) 2800-7002 [email protected]


Taiwan tech exporters generally suffered more when the global cycle trended down (fourth chart, previous page). At this point, it is encouraging that Taiwan’s tech exports to Chi-na appeared to be stabilizing. (On a related note, our tech in-dustry specialists have lately highlighted some on-the-ground signals of near-term improvement in tech orders from China on the back of business-related tech expenditures, which could support Taiwan tech exports to China.)

Regarding Taiwan’s non-tech exports to China, machinery exports have shown a modest, steady gain since early this year (first chart), which is consistent with stable fixed invest-ment growth in China. Going ahead, given the outlook for moderate recovery in the Chinese economy, led by public sector infrastructure investment, related non-tech exports to China would likely be supported. On the other hand, with overcapacity concerns in some of China’s industries, such as the steel sector, Taiwan’s base metal exports to China have continued to weaken. In addition, the Chinese manufacturing sector’s general destocking pressure, if continued, could be a drag on Taiwan’s exports to China. Not surprisingly, Tai-wan’s total exports to China have been closely tied to the Chinese manufacturing sector’s inventory cycle in recent years (second chart).

G-3 final goods demand still a key risk While there have been tentative signs of stabilizing trade flows with China, the outlook for Taiwan’s exports to the advanced economies remains cloudy. In particular, Taiwan’s exports to Europe have continued to lose momentum in recent months, falling 45.6% 3m/3m saar in August. Looking ahead, our global team expects moderate recovery in final global goods demand in the coming quarters. However, for the ad-vanced economies, the squeeze of household real purchasing power from higher energy prices could restrain near-term consumer spending. On the corporate spending front, the lat-est data on G-3 core capital goods orders, as well as Taiwan export orders originating from the G-3 economies, continued to track on the soft side (third chart).

From an industry-specific perspective, for the tech sector in particular, new product launches, including the latest mobile phone models, would likely provide moderate support to Tai-wan’s tech sector production activity and exports in the near term, particularly electronic parts and components as well as information and communication products. In this regard, the latest signs of progress in tech sector inventory adjustment as mentioned earlier could be setting the stage for increased tech sector output in the coming months.

60

70

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100

110

120


2011 2012

Tech products

Basic metals

Machinery

Taiwan exports to China/HK

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10

20

30

40

50-80-60-40-20

020406080

100

%q/q, saar

Taiwan exports to China/HK and China manufacturing inventory%q/q, saar, reverse scale

2007 2008 2009 2010 2011 2012

Taiwan exports to China/HK

China real manufacturing

inventory (ex petro)

-80-60-40-20020406080

-50

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0

25

50

%3m/3m, saar, both scales

G-3 capital goods orders and Taiwan export orders from G-3

2008 2009 2010 2011 2012

G-3 core capital goods orders

Taiwan export orders from G-3

-40

-20

0

20

40

-100-75-50-25

0255075

100125

%3m/3m, saar, both scales

2007 2008 2009 2010 2011 2012

Taiwan tech exports and total US new tech orders

Taiwan tech exports

US new orders for computers and

electronic products

31



United States Housing reports on the Homebuilders survey and

existing homes sales remain strong

Early factory surveys for September all point to yet another soft month for manufacturing

Decline in the prices of oil and gasoline will hold down inflation and could support spending in coming months

The latest round of economic data came in about as expected and highlights the contrast between continued recovery in housing and continued sluggish growth of manufacturing. The September Homebuilders survey and August existing home sales and housing starts all posted further gains. And contin-ued declines in mortgage rates reinforce the view that the re-covery in housing is still in its early stages. At the same time the early manufacturing surveys for September point to yet another month of sluggish growth at best.

The notable change in the economic landscape is the slide in the price of crude oil, and the associated outlook for lower gasoline prices and lower inflation readings starting in Octo-ber. The forecast increase in the CPI for 4Q12 has been low-ered to 2.1% saar (from 2.7%), and the CPI forecast for 1Q13 has been lowered more substantially to only 0.6% (from 2.3%). Lower inflation would give a lift to growth of real in-come and, possibly, to consumer spending as well. But the outlook for spending depends most importantly on earnings and, in turn, on business decisions regarding business hiring. Over the past several months, business has turned more cau-tious regarding both labor demand and capital spending. And it remains to be seen whether the combination of lower oil prices and higher equity values will reverse that shift toward caution and prompt increased hiring any time soon.

Housing market news remains positive The latest new on the housing market confirms the ongoing upturn. The most timely news came from the September Homebuilders survey that posted a 3pt increase to 40, up from a reading of only 14 in the year-ago month, that took the sur-vey to its highest level since June 2006. While the overall survey is regarded as a measure of homebuilder optimism, the component for current home sales provides a timely read on actual sales. And, importantly, the measure of current sales increased 4pts to 42 in September, also the highest reading since mid-2006.

The August reading on existing home sales, a less timely in-dicator, also shows strong sales gains over the summer. Exist-ing home sales rose 7.8% samr in August on top of a 2.2% increase in July. Of course, monthly changes in existing home

sales are choppy, and the extent of the sales gains the last couple of months doubtless overstates the trend. But existing home sales certainly seem to be maintaining their 10% growth rate over the past year and may be accelerating. The upcom-ing report on August pending home sales, a leading indicator of existing home sales based on contracts signed, is forecast to show a strong 2.5% samr increase based on generally strong reports in hand from local markets.

Monthly figures on housing starts and permits are also chop-py. The August report shows continued gains in single-family starts (2.3% samr) and permits (0.2%). Figures to date show single-family starts slowing this quarter to only 4.7% saar growth that, if maintained, would be the slowest since 3Q11. However, higher results from the homebuilders survey over the past few months suggest that both sales and builder senti-ment have improved considerably and support the forecast that single-family activity will reaccelerate soon.

The next major report on housing demand is Wednesday’s release on August new home sales. The forecast looks for a 2.2% samr increase to a pace of 380,000. If realized, this would leave new home sales for the quarter up 18.4% saar and, against the background of low inventories, would be an encouraging sign for new construction.

House prices have been increasing so far this year as well. And these increases seem to have extended into the summer.

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0.45

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15

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2010 2011 2012 2013

SaHomebuilder survey and new home sales

Mn units , saar

Homebuilder survey

New home sales

Home buyer tax

45

50

55

60

65

70

2010 2011 2012 2013

Sa

Two survey measures of factory orders

ISM manufacturing

Markit PMI

32

Economic Research United States September 21, 2012


The CoreLogic measure of July house prices has already been released and increased 0.6% samr (as sa by J.P. Morgan), the seventh consecutive monthly increase. The CoreLogic meas-ure is up 4.1% (not annualized) so far this year. Increases in house prices for July are also expected in upcoming reports by Case-Shiller (1.1% samr) and the FHFA (0.5%).

Manufacturing still stuck in the doldrums Manufacturing activity has essentially stalled since the first quarter, with the August level of production slightly below the 1Q12 average. And the early September manufacturing sur-veys released this past week show no sign of an upturn as the third quarter ended.

The September Markit PMI survey was unchanged at 51.5 and the measure of output declined to a new low for the year of 51.2. Both are at or near their lowest levels since the early months of the expansion. The slightly encouraging news comes from the key leading indicator, new orders, which drifted higher for the second consecutive month, to 52.4 from a recent low of 51.0 in July. The ISM manufacturing measure of new orders (through August) has been running below 50.

Both regional Fed surveys in hand also send a generally downbeat message about business conditions in September. Although the headline readings moved in opposite directions, September results were negative for both the New York Fed (-10.4) and Philadelphia Fed (-1.9) surveys. And the derived composites (calculated from components using ISM weights) edged down and to readings below 50 for both the New York Fed (49.5) and Philadelphia Fed (44.2) surveys. New orders from these regional surveys were mixed, with the New York Fed survey drooping sharply to -14.0 and the Philadelphia Fed survey rising into slightly positive territory at 1.0.

Tentative hints of a turn toward optimism The manufacturing surveys do provide some hint of optimism about a possible near-term improvement, however. The 6-month outlook improved substantially for both surveys. And while expectations have not been a reliable indicator of near-term growth over the whole history of the surveys, they have been a pretty good guide over the past five years. At this point it is hard to know whether the optimism simply reflects a knee-jerk reaction to rising equity prices or whether the re-spondents sense improvement in their business that is not showing up in stronger incoming orders yet.

The preliminary Michigan measure of consumer sentiment showed a surprisingly large improvement. And this reading has been confirmed by other confidence readings since. For example, the daily Rasmussen survey for September to date is the highest of any month since May. And the latest daily read-

ing is the highest since June 1. However, the upcoming Con-ference Board survey has a tendency to be seasonally weak in September (despite being reported on a sa basis), and the forecast looks for a modest increase of 0.9pt to 61.5.

Other August data ahead The upcoming calendar also includes other August releases. The August durable goods report (Thursday) is expected to show a large 6.3% samr decline in orders on a large monthly decline in the volatile series for civilian aircraft. Core capital goods orders are forecast to rise 1.8%, but only as payback for very sharp declines in prior months. The important news in the report is the expected 1.0% decline in capital goods ship-ment, as recent weakness in incoming orders begins to de-press shipments.

The estimate of real consumer spending for August will be important in refining the estimate of 3Q12 real GDP growth (currently 1.5%). The forecast now looks for a 0.2% decline. Note that the forecast for the core PCE price index, at a rela-tively high 0.20%, incorporates what looks like a one-month spike in the PPI for medical services and overstates the trend.

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-5

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%ch saar over 6 months

Three measures of house prices

CoreLogic index

Case-shiller 20 city index

FHFA purchase only index

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%ch saar over 3 months, both scales

Core capital goods orders and shipments, with Aug forecast

New orders

Shipments

33

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


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

Data releases and forecasts Tue S&P/Case-Shiller home price index Sep 25 %oya, unless noted 9:00am Apr May Jun Jul

20-city composite -1.8 -0.7 0.5 1.2 %m/m sa 0.8 1.0 0.9 1.1 10-city composite -2.2 -1.1 0.1

We believe the Case-Shiller 20-city composite index in-creased 1.1% samr in July (+1.2%oya). As the housing market has picked up earlier this year, the Case-Shiller index increased 6.9% saar over the six months through June. And there are a lot of indications that the housing market has continued to improve since June, so we look for additional increases in the Case-Shiller data.

Tue Consumer confidence Sep 25 Sa 10:00am Jun Jul Aug Sep

Conference Bd index 62.7 65.4 60.6 61.5 Present situation 46.6 45.9 45.8 Jobs plentiful 8.3 7.8 7.0 Jobs hard to get 41.2 41.0 40.7 Labor mkt diff -32.9 -33.2 -33.7 Expectations 73.4 78.4 70.5

We forecast that the Conference Board consumer confi-dence index increased 0.9pt to 61.5 in September. The University of Michigan consumer sentiment index in-creased 4.9pts in the preliminary report issued for Sep-tember and the Rasmussen Consumer Index and Bloom-berg Consumer Comfort Index have improved recently as well. We think the Conference Board index will also improve in September, however, we think its increase will be very modest because of a seasonal pattern in the data with September tending to be a soft month for the confidence index. The index has declined in two thirds of the Septembers since 1977, and the monthly changes in the index reported for Septembers have been weaker than the corresponding changes in the University of Michigan index about 60% of the time.

Tue FHFA home price indexes Sep 25 Purchase only 10:00am Apr May Jun Jul

%oya 3.0 3.6 3.7 4.1

%m/m (sa) 0.7 0.6 0.7 0.5

We believe the FHFA house price index increased 0.5% samr in July (+4.1%oya). Most house price measures have been increasing lately as the housing market has improved, and the FHFA index was up 7.0% saar over the six months through June. The CoreLogic house price index has already been reported for July and shows the upward trend in prices continuing during the month (+0.6% samr in July). The broad trends in the FHFA in-dex usually track the CoreLogic data, though the FHFA index is typically more volatile each month because it is a monthly measure and the CoreLogic index is a three-month average of house prices.

Wed New home sales Sep 26 10:00am May Jun Jul Aug

Total (000s,saar) 372 359 372 380 %m/m 3.9 -3.5 3.6 2.2 %oya nsa 25.0 21.4 25.9 30.1 Months’ supply 4.6 4.8 4.6 Median price (%oya) 6.8 -4.6 -2.5

We forecast that new single-family home sales increased 2.2% to 380,000 saar in August. Mortgage rates have continued to push lower lately, and most housing data have shown improvement in the housing market in recent months. We think that new home sales continued to drift higher in August. Our expected pace of sales for August would be the highest since the homebuyer tax credit in 2010, but it would still be quite low by historical stand-ards.

Thu Jobless claims Sep 27 000s, sa

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

Jul 14¹ 388 376 3291 3310 2.6 Jul 21 357 368 3280 3301 2.6 Jul 28 368 366 3336 3306 2.6 Aug 4 364 369 3313 3305 2.6 Aug 11 369 365 3320 3312 2.6 Aug 18¹ 374 369 3331 3325 2.6 Aug 25 377 371 3332 3324 2.6 Sep 1 367 372 3304 3322 2.6 Sep 8 385 376 3272 3310 2.6 Sep 15¹ 382 378 Sep 22 380 379 1. Payroll survey week

We believe initial jobless claims declined 2,000 to 380,000 during the week ending September 22. The trend in claims—as measured by the four-week moving average—has risen somewhat recently, drifting up to 378,000 during the week ending September 15 (this fig-ure is boosted by about 2,000 by the 9,000 claims filed because of Hurricane Isaac during the week ending Sep-tember 8). Our forecast for the week ending September 22 would keep the trend in claims increasing gradually through that week.

Thu Durable goods Sep 27 %m/m sa 8:30am May Jun Jul Aug

New orders 1.5 1.6 4.1 -6.3 Ex transportation 0.7 -2.2 -0.6 0.2 Nondef cap. gds ex air 2.3 -2.7 -4.0 1.8 Shipments 1.1 0.0 2.5 -1.1 Nondef cap. gds ex air 1.0 1.4 -0.5 -1.0 Inventories 0.4 0.3 0.7

We forecast that durable goods orders tumbled 6.3% in August while shipments declined 1.1%. We believe ci-vilian aircraft orders plummeted in August based on in-dustry data, which should depress the headline figure. But away from this one category (which is often vola-

34

Economic Research United States September 21, 2012



tile), we think the results of this upcoming report will al-so be weak. Most manufacturing data—including the re-cent IP report, industry surveys, and international measures—have weakened lately, and the softness in the sector should show up in the durable goods data. For the important core capital goods categories (which exclude aircraft and defense), we believe orders in-creased 1.8% in August while shipments—source data used by the BEA to estimate equipment spending—declined 1.0%. Orders have come off substantially lately, and while we look for some bounce back in August after a very weak July, the trend should still look worrisome. Shipments have held up better than orders lately, but this should not last much longer. We expect to see shipments weaken in August.

Thu Gross domestic product Sep 27 %ch, q/q saar, unless noted 8:30am Adv Sec Thi

1Q12 2Q12 2Q12 2Q12

Real GDP 2.0 1.5 1.7 1.6 Final sales 2.4 1.2 2.0 1.9 Domestic final sales 2.2 1.5 1.6 1.6 Consumption 2.4 1.5 1.7 1.7 Equip. and software 5.4 7.2 4.7 4.4 Nonres. structures 12.8 0.9 2.9 0.5 Residential investment 20.6 9.8 8.9 8.4 Government -3.0 -1.4 -0.9 -0.7 Net exports (pct.pt.contr.) 0.1 -0.3 0.3 0.3 Inventories (pct.pt.contr.) -0.4 0.3 -0.2 -0.3 Core PCE price index 2.2 1.8 1.8 (%oya) 1.9 1.8 1.8 GDP chain price index 2.0 1.6 1.6 (%oya) 2.0 1.7 1.7 Adj. corporate profits -2.7 0.5 (%oya) 10.3 6.1

We believe that real GDP growth for 2Q will be revised down a touch from 1.7% to 1.6% between the BEA’s se-cond and third reports on growth for the quarter. The economic data reported since the BEA’s second report on GDP (released on August 29) have been pretty close to the figures used to prepare that second estimate, so we expect fairly minor revisions in the upcoming report. We look for small downward revisions to the estimates of equipment and software spending, nonresidential struc-tures, residential investment, the change in inventories, and net exports, and a small upward revision to the data on government spending.

Thu Pending home sales Sep 27 Sa, unless noted 10:00am May Jun Jul Aug

Total (mn, ar) 100.7 99.3 101.7 104.2 %ch m/m 5.4 -1.4 2.4 2.5 %oya (nsa) 14.7 8.4 15.0 16.3

We believe the pending home sales index increased 2.5% to 104.2 in August. The index increased 2.4% samr in July and 15.0% over the prior year, and other indicators related to the housing market have been improving lately as well.

Fri Personal income Sep 28 %m/m, sa, unless noted 8:30am May Jun Jul Aug

Personal income 0.3 0.3 0.3 0.2 Wages & salaries 0.1 0.4 0.2 0.2 Consumption -0.2 0.0 0.4 0.4 Real consumption 0.0 -0.1 0.4 -0.2 PCE price index -0.2 0.1 0.0 0.5 Core 0.11 0.20 0.03 0.20 Mkt-Based Core 0.2 0.2 0.1 Core (%oya) 1.8 1.8 1.6 1.7 Mkt-Based Core (%oya) 1.9 1.9 1.7 Saving rate 4.0 4.3 4.2 4.1

We forecast that personal income increased 0.2% in Au-gust. Data from the employment report for the month in-dicate that wages and salaries should be up 0.2% in Au-gust, which should account for about half of the overall increase in income. We think other nonwage sources of income will account for the rest of income growth in August. Data from the CPI and PPI for August point to a solid in-crease in prices during the month, largely due to energy prices. We forecast that the headline PCE price index in-creased 0.5% in August while the core index (which ex-cludes food and energy) rose a more modest 0.20%. Healthcare prices in the PCE price index likely popped up in August—based on the relevant inputs from the CPI and PPI—but these spikes are usually temporary and should not drive the broader trend in core inflation high-er. Data on auto sales, sales at gasoline stations, and other retail sales—the source data by the BEA also excludes building materials from the retail sales report—point to increased consumer spending in August. However, we think that prices outpaced nominal spending (+0.4%) during the month and forecast that real consumption de-clined 0.2% in August. This should keep real consump-tion on pace to increase about 1.3% saar during 3Q, which would be a pretty soft quarter for consumption. The August report will also contain revisions to the monthly figures for months of the second quarter which will be revised to be consistent with the quarterly figures that the BEA will report on September 27.

Fri Consumer sentiment Sep 28 9:55am Pre Fin

Jul Aug Sep Sep Univ. of Mich. Index (nsa) 72.3 74.3 79.2 80.0 Current conditions 82.7 88.7 88.3 Expectations 65.6 65.1 73.4 Inflation expectations Short term 3.0 3.6 3.5 Long term 2.7 3.0 2.8 Home buying conditions 157 157 161

We believe that the University of Michigan consumer sentiment index will be revised up from 79.2 to 80.0 be-tween the preliminary and final reports for September (vs. 74.3 in the final August report). There has been a tendency for the index to print higher in final reports rel-

35




ative to preliminary reports over the past few years, and these adjustments tend to be larger when the increases reported in the preliminary data were large (as was the case in the preliminary September report). The sampling for the preliminary September survey concluded the day before the most recent FOMC announcement; so the up-coming report will be the first Michigan survey to reflect responses to the FOMC’s recent actions. About 70% of the survey’s sample is typically collected for the prelimi-nary report and the remaining 30% is added in the final report.

Review of past week's data

Empire State survey (Sep 17) Diffusion indices, sa

Jul Aug Sep

General bus. conditions 7.4 -5.8 -3.5 -10.4 New orders -2.7 -5.5 -14.0 Shipments 10.3 4.1 2.8 Unfilled orders -13.6 -10.6 -14.9 Prices paid 7.4 16.5 19.2 Prices received 3.7 2.4 5.3 Composite 52.5 50.0 49.5

The Empire State manufacturing survey disappointed again in September, falling from -5.6 to -10.4. The forward-looking de-tails were generally rather soft as well: new orders sank further from -5.5 to -14.0 even as the inventory index rose from -8.2 to 0.0. The ISM-weighted composite of the details eased down from 50.0 to 49.5. The Empire State survey should serve as a caution that the inventory correction in the industrial sector still has quite a bit further to run despite not being the most reliable manufacturing indicator.

Homebuilders survey (Sep 18) Sa

Jul Aug Sep

Housing market 35 37 38 40 Present sales 36 39 38 42 Prospective buyer traffic 28 31 30 31

The NAHB homebuilders survey rose 3pts to 40 in September. Over the past year the homebuilders’ survey has increased 26pts. This report is yet another indicator that housing is with-standing well the other shocks buffeting the economy and con-tinuing to recover at a nice pace.

Housing starts (Sep 19) Mn units, saar

Jun Jul Aug

Starts 0.75 0.75 0.73 0.76 0.75 Single-family starts 0.54 0.53 0.50 0.51 0.51 0.54 Multifamily starts 0.22 0.24 0.23 0.25 0.22 Permits 0.76 0.81 0.82 0.80

Housing starts increased 2.3% to 750,000 saar in August (July starts were revised down) while housing permits declined 1.0% to 803,000 saar during the month. These results were somewhat softer than our expectations, but the trends in the data still look positive and the broad set of housing indicators continues to show improvement in the housing market lately. For the im-portant single-family data, permits edged up 0.2% samr in Au-gust while starts popped up 5.5% samr and both permits and starts increased about 20% saar over the past three months. The main weak spot in the August report is that single-family per-mits were below starts in permit-issuing areas in August, which suggests that we could see a pullback in starts in the near term.

Existing home sales (Sep 19)

Jun Jul Aug

Total (mn, saar) 4.37 4.47 4.55 4.82 %m/m -5.4 2.3 1.8 7.8 %oya nsa 5.2 11.4 11.7 3.2 11.2 Months’ supply (nsa) 6.5 6.4 6.1 Single-family 6.5 6.3 6.2 Median price (%oya) 7.5 9.4 9.7 9.5

Existing home sales jumped 7.8% to 4.82 million saar in Au-gust. This was the highest pace of sales reported since the homebuyer tax credit and other parts of the report also look consistent with improvement in the housing market. The medi-an sale price—which is not adjusted for changes in the sale mix—increased 9.5%oya in August, a similar figure to what was reported for July. And inventories remain lean despite in-creasing modestly in August; at the current pace of sales, the 2.47 million units available for sale in August (not seasonally adjusted) is consistent with 6.1 months of supply.

Markit manufacturing PMI (flash)(Sep 20) Index, sa

Jul Aug Sep

Composite1 51.4 51.5 51.0 51.5 New orders (30%) 51.0 51.9 52.4 Output (25%) 51.7 51.9 51.2 Employment (20%) 52.7 52.4 52.7 Sup. del., (15%, inv.) 49.2 49.9 49.3 Stks of purch (10%) 50.2 49.7 48.5 New export orders 48.6 48.8 47.9 Backlogs of work 48.7 51.4 48.9 Output prices 48.7 48.9 51.8 Input prices 47.6 50.2 53.6 Stocks of fin. goods 50.7 49.3 49.0 Quantity of purchases 51.8 50.8 50.5 ISM-weighted comp.2 51.3 51.2 51.1 1. Weights in parentheses

2. Attributes ISM-composite weights (equal weights) to corresponding PMI series

The Markit manufacturing PMI was unchanged at 51.5 in the flash report for September. Most of the main details within the report were little changed in September, though there was a modest favorable shift with new orders increasing from 51.9 to 52.4 and both inventories measures (stocks of purchases and stocks of finished goods) declining somewhat. The PMI read-ings from recent months have been softer than what were re-ported earlier in the year, though the PMI has held up better than some other measures of manufacturing activity lately.

Philadelphia Fed survey (Sep 20) Diffusion indices, sa

Jul Aug Sep

General bus. conditions -12.9 -7.1 -4.0 -1.9 New orders -6.9 -5.5 1.0 Shipments -8.6 -11.3 -21.2 Inventories -7.5 -6.9 -21.7 Prices paid 3.7 11.2 8.0 Prices received 1.6 2.8 -0.2 Composite 45.3 45.6 44.2

The Philadelphia Fed survey’s headline rose from -7.1 to -1.9 in September but the details of the survey still looked pretty soft. The new orders index crossed into positive territory for the first time since April, increasing from -5.5 to 1.0 in September. But the persistent softness in orders and the large decline in invento-ries is not really a favorable combination for future activity. The shipments index was also worrisome in Philadelphia Fed sur-vey, dropping from -11.3 to -21.2.

36

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


Focus: household net worth Household net worth declined $322 billion (-0.5%) to

$62.7 trillion in 2Q according to the Fed’s Flow of Funds report. This decline occurred as household assets declined $305 billion and liabilities increased $17 billion. As a share of disposable personal income, net worth declined from 535% in 1Q to 527% in 2Q. But things are looking better for net worth so far in the third quarter, specifically with regard to equity prices and house prices.

To date, equity prices (measured by the Wilshire 5000 in-dex) are up a little more than 3% in the third quarter rela-tive to 2Q. If the market value of equity shares increases by the same amount, this should lift assets (and net worth) by about $590 billion in 3Q.

Similarly, house prices look poised to increase in the third quarter. The level of the July CoreLogic house price in-dex—which is used as source data by the Fed to estimate real estate assets—was about 3.4% above the average re-ported for 2Q (not seasonally adjusted and not annualized). Over the past few years, the CoreLogic index (not seasonal-ly adjusted) has peaked around July so we might see some cooling in the index in the remainder of 3Q; however, other data show some firming in the housing market. So prices might be stronger than the seasonal pattern suggests. Simp-ly assuming that overall real estate assets increase by the 3.4% increase in house prices reported through July indi-cates that real estate assets (and net worth) should increase about $575 billion in 3Q.

Assuming there are no additional changes to net worth in 3Q, net worth would increase $1.2 trillion in 3Q based on the earlier discussions of equity assets and real estate assets. If disposable personal income increases about $85 billion in 3Q (based on the figure already reported for July and our forecast for the August data released on September 28), net worth over DPI would increase to 533% during the quarter.

Away from household net worth, the Flow of Funds data show that outstanding household debt increased by $39 bil-lion to $12.9 trillion in 2Q (not shown). This was the first significant increase in outstanding household debt since 1Q08 (it edged up $2 billion in 4Q11). Underlying this overall increase in debt, the data show that consumer credit continued to push higher in 2Q (+$40 billion) which has been the case for about the past two years. Meanwhile, mortgage debt has been trending lower since early in 2008, and there was a decline of $51 billion reported for 2Q. (All of these figures related to household debt are reported sea-sonally adjusted.) Details on the other components of household debt are not published in the Flow of Funds.

450

500

550

600

650

700

20000

30000

40000

50000

60000

70000

90 95 00 05 10

$bn, eop, nsa

Net worth of households and nonprofits%, nsa

Net worth

Net worth/DPI

8000

10000

12000

14000

16000

5000

10000

15000

20000

25000

00 02 04 06 08 10 12

$bn, nsa

Equity shares at market value and stock pricesIndex

Market value

Wilshire 5000

-20

-10

0

10

20

05 06 07 08 09 10 11 12 13

%oya

Growth in real estate assets and CoreLogic house price index

Real estate assets (quarterly)

House prices (monthly)

-50

0

50

100

-200

-100

0

100

200

300

400

00 02 04 06 08 10 12

$bn, q/q, sa, both s cales

Changes in outstanding household debt

Consumer credit

Home mortgages

37

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


Euro area Euro area PMI fails to improve in September and con-

sumer confidence slides further

This creates uncertainty over the near-term path of the economy, but some improvement still likely in 2013

Euro area exports and car registrations weaken in 3Q12, while Ireland’s GDP stagnated in 2Q12

This week’s business and confidence surveys raised further questions over the near-term path of the economy. The Euro area flash PMI declined 0.5pt to 49.6 in September, which is the second consecutive fall, fully reverses the small gains in June/July and, by a tenth, leaves the PMI at the lowest level since the start of the current recession. In addition, the flash Euro area consumer confidence index fell 1.3pts to -25.9, which comes after an even sharper 3.1pt decline in August and leaves the level significantly below the range in which confidence had been over the past year.

In light of the improvement in financial market conditions since the ECB announced the OMT almost two months ago, the fail-ure of key activity and confidence indicators to improve is dis-appointing. It could reflect lags, it could reflect uncertainties caused by imminent announcements of fiscal austerity plans for 2013 (especially in France and Spain), and it could reflect drags from austerity measures that are currently being implemented (e.g., the Spanish VAT hike at the start of this month). It is also possible that the big plunge in France’s PMI in September could be partly reversed in October. In any case, apart from important questions around the near-term path of the economy, we still think that there are reasons to expect an improvement in economic activity next year, reflecting the more aggressive ECB action and a reduced fiscal drag in most peripheral coun-tries (see “Euro area growth: a better 2013 in prospect” in this GDW). Hence, we see the recession ending and growth resum-ing at the start of next year.

Euro area PMI fails to improve At the Euro area level, the composite PMI output index fell 0.5pt to 45.9 in September, new orders fell 0.8pt to 43.6, and employment fell 1.2pts to 46.3. By sector, services performed worse, with declines across key indicators (-1.2pts on output, -1.1pts on new business, and -2.4pts on outstanding business). In manufacturing, output rose by 1.1pts, which followed a similar gain in August. But, the other details on new orders and inventories still point to a very subdued near-term out-look. Overall, the Euro area composite PMI is consistent with a 1%q/q saar GDP contraction in 3Q12 and needs to improve by two points or so to become more consistent with our ex-pectation of a 0.5%q/q saar GDP decline in 4Q12.

Across countries, the German composite PMI rose strongly (+2.6pts to 49.7), which is the first increase following seven consecutive declines and points to a resumption of very mod-est growth. The improvement was most pronounced in manu-facturing, with both the output and employment indices hav-ing rebounded around 6pts over the past two months. The activity index also rose in services, although some details

35

40

45

50

55

60

65

98 00 02 04 06 08 10 12 14

DI, sa, dotted line shows average from 2000 to 2007

Euro area composite PMI output index

700

800

900

1000

1100

-40

-32

-24

-16

-8

0

2006 2007 2008 2009 2010 2011 2012 2013

% balance

Euro area consumer confidence and car registrations000s

Car registrations

Confidence

40

45

50

55

60

65

2010 2011 2012 2013

DI, sa

Composite PMI output index

Germany

France

Periphery

-6

-4

-2

0

2

2007 2008 2009 2010 2011 2012 2013

Standard deviations from 2000 to 2007 average

Euro area composite PMI

Employment

New orders

38

Economic Research Euro area September 21, 2012

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

were weaker, and the employment index plunged sharply in this sector. Nevertheless, for the economy as a whole, the employment index is pointing to further hiring by corporates.

But, outside of Germany, the PMI declined and hence the growth dispersion across the region increased again in an un-helpful way. In particular, the French PMI was very weak across the board, with composite output (-3.8pts to 44.1), new orders (-3.7pts to 43.0), and employment (-1.5pts to 45.2) all disappointing, and both manufacturing and services saw very big declines. There are reasons to think that the French PMI could recover some of these huge declines next month, but it does look as if conditions may nevertheless have weakened overall. In the periphery, the manufacturing output index looks to have increased in September and is now equal to the Euro area aggregate, while there was a large drop in services. Overall, we think that the composite PMI declined around 1.5pts in the periphery to 42.5. There is also a question about how permanent this move down is, given that the Spanish VAT hike in early September may have had an effect. The full country details in the final report will be important.

Exports and car registrations weaken Euro area exports declined 2%m/m in July, almost fully reversing June’s increase. Trade flows among Euro area countries, which have been much weaker since the start of the sovereign crisis due to weakness of demand within the Euro area, also declined in July. Overall, after having been supportive of growth, the trade data got off to a weaker start in 3Q12, with both extra- and intra-Euro area exports track-ing small declines so far.

Car registrations data are now available for both July and August, with the former delayed due to the summer holi-days. The seasonally and calendar adjusted data published by the ECB show a 10%m/m drop in July and a 6%m/m recovery in August, which still leaves 3Q12 down 25% an-nualized on the 2Q12 average so far. In terms of overall consumer spending, this more than offsets the decent start that retail sales made to 3Q12. Hence, it looks as if consum-er spending could contract further at up to a 1% annualized pace, which is consistent with our judgement of real income developments. Important to watch will also be the payback in Spain, given that some of this month’s VAT increase has lifted car registrations in August.

Ireland goes from recovery to stagnation Irish GDP is extremely volatile and revision prone. Hence, the data need to be interpreted carefully. As currently reported, they show the level of GDP having increased 1.4% in 2011. But, this recovery appears to have run out of steam and, over the past four quarters, the level of economic activity has not

increased any further. On the domestic side, there is clearly still a drag from modestly falling consumer spending and slid-ing capital investment (the spike in 1Q12 appears related to imports of planes). But, exports also declined 2%q/q saar in 2Q12, which was the first decline in over one year. In terms of the business surveys, we note that the Irish composite PMI has remained above 50 in recent months.

70

80

90

100

110

120

2008 2009 2010 2011 2012 2013

1Q08=100

Euro area nominal exports of goods

Exports to outside of Euro area

Shipments among Euro area countries

-3.0

-1.5

0.0

1.5

3.0

4.5

99 01 03 05 07 09 11 13

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

Tracking Euro area consumer spending with monthly data

Actual

Tracking estimate

3Q12

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012 2013

1999=100

Spanish car registrations

VAT hikes

70

105

140

175

210

97 99 01 03 05 07 09 11 13

1997=100Level of Irish GDP

Fixed investment (incl. construction)

GDP

Consumer consumption

39

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


Data releases and forecasts Week of September 24 - 28

Output and surveys

European Commission survey Jun Jul Aug Sep Thu Euro area Sep 27 % balance of responses, sa 11:00am Industrial confidence -13 -15 -15 Economic confidence 89.9 87.9 86.1 85.2 Recent production trend -14 -19 -17 Production expectations -6 -8 -9 Export order books -23 -27 -26 Stocks of finished products 7 9 8 Selling-price expectations -1 -2 0 Construction confidence -28 -29 -33 Retail confidence -14 -15 -17 Service confidence -7.4 -8.5 -10.8

National business surveys Jun Jul Aug Sep Mon German IFO survey Sep 24 2000=100, sa 10:00am Business climate 105.2 103.2 102.3 102.8 Business expectations 97.2 95.5 94.2 94.8 Current conditions 113.8 111.5 111.2 111.6 Tue French (INSEE survey - manufacturing) Sep 25 Index 8:45am Composite index 91 89 90 Index of past production -7 -10 -9 Expected output - personal -5 -10 -8 Expected output - general -31.0 -44.0 -44.0 Thu Italy (ISAE survey) Sep 27 2000=100, sa 9:30am Producer confidence 88.7 87.1 87.2

Both the German IFO and PMI had declined sharply through to August, falling to levels that were pointing to modest GDP contraction. In September, the German flash PMI rose strongly, however (+2.6pts to 49.7), signaling a return to modest growth (at around a 0.5% ar pace). The improvement in the PMI was most pronounced in manu-facturing, which has a large weight in the IFO. Hence, we expect the IFO also to have improved in September. Fi-nally, the French INSEE survey will be of interest in light of the dramatic plunge in France’s composite PMI in Sep-tember. We expect Euro area economic sentiment to decline ma-terially in September. The Flash EC survey already showed that consumer confidence dropped 1.3%-pt to -25.9, and the outcome of the composite PMI survey was negative after a five-tenths decline to 45.9 in September. Although the ECB announced the start of the OMT pro-gram, which will likely have positive effects on confi-dence in the coming months, large fiscal drags are also weighing on the region.

Demand and labor markets

Consumer confidence (final) Jun Jul Aug Sep Thu Euro area (European Commission survey) Sep 27 % balance of responses 11:00am Consumer confidence -19.8 -21.5 -24.6 -25.9

Domestic consumption May Jun Jul Aug Fri France Sep 28 Consumption of manufactured products, real terms 8:45am %m/m sa 0.5 0.1 na %oya sa 0.5 0.2 na

French consumption of goods was broadly flat in both 4Q11 and 1Q12 but then declined around 1%q/q saar in 2Q12. Data for both July and August will be published next week, with the former having been delayed due to the summer break. The level of car registrations so far in 3Q12 is 8% ar below the 2Q12 average. This will weigh on total goods consumption as well, which we would ex-pect to be quite soft.

Euro area consumer confidence unexpectedly declined in September. This outcome was somewhat puzzling as it happened after the announcement of the ECB’s OMT program. But fiscal drags are still weighing on economic activity, and the labor market continued to deteriorate re-cently. We expect the final consumer confidence number to be confirmed by the final release.

Unemployment Jun Jul Aug Sep Thu Germany Sep 27 Registered (ch m/m, 000s, sa) 7 9 9 12 9:55am 000s, nsa 2809.1 2876.0 2905.1 Unempl. rate (%, sa) 6.8 6.8 6.8 6.8 Employment May Jun Jul Aug Thu Germany Sep 27 Change m/m, 000s, sa 34 25 16 15 9:55am

In recent months, German unemployment has edged up and the number of vacancies has edged down, while cor-porates have continued to hire. The pace of this job crea-tion has not kept pace with the growth of the labor force, hence explaining the increase in unemployment. But, the latest business surveys suggest that corporates are still hiring at almost a 1% ar pace.

Inflation

Consumer prices Jun Jul Aug Sep Fri Euro area (flash) Sep 28 HICP (%oya nsa) 2.4 2.4 2.6 2.6 11:00am

40

Economic Research Euro area September 21, 2012

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

Wed Germany (prelim) Sep 26 %m/m nsa -0.1 0.4 0.4 0.0 8:00am %oya 1.7 1.7 2.1 2.0 HICP (%oya) 2.0 1.9 2.2 2.1 Baden Wuerttemberg (%oya) 1.6 1.4 1.8 Bavaria (%oya) 2.2 2.2 2.5 Brandenburg (%oya) 1.8 1.7 2.0 Hesse (%oya) 1.8 1.7 2.3 North-Rhine West (%oya) 1.3 1.3 1.9 Saxony (%oya) 1.7 1.8 2.1 Fri Italy (prelim) Sep 28 %m/m nsa 0.2 0.1 0.4 0.0 11:00am %oya nsa 3.3 3.1 3.2 3.2 HICP (%oya nsa) 3.6 3.6 3.3 3.3 Fri Spain (flash) Sep 28 HICP (%oya nsa) 1.8 2.2 2.7 3.3 9:00am Thu Belgium CPI Sep 27 %m/m nsa -0.2 0.2 0.4 11:15am %oya nsa 2.3 2.3 2.9

Euro area inflation should remain stable in September. But divergences are appearing at the country level. Spanish in-flation is expected to rise sharply as the effect of the 3%-pt VAT hike will feed into the numbers (the pass-through al-ready started in August). Meanwhile, German inflation should inch down a tenth, and Italian inflation will likely remain stable.

Financial activity and public finance

Money and credit data May Jun Jul Aug Thu Euro area Sep 27 M3 (%m/m sa) 0.8 0.2 0.7 10:00am M3 (%oya) 3.1 3.2 3.8 M3 (%oya 3mma) 3.0 3.0 3.4 Loans (%oya)1. 0.5 0.3 0.5 Loans (m/m, € bn)1. -8.0 -5.1 43.6 1. Loans to nonbank private sector, adjusted for securitization

Euro area M3 growth has strengthened significantly, but mostly due to an increase in liquidity preference (i.e., portfolio shifts toward liquid bank deposits). In contrast, the part of M3 growth that is being driven by bank loan creation has remained weak, with household and corpo-rate loan growth broadly flat.

Review of past week’s data

Output and surveys

Purchasing managers index flash (manufacturing)

Jul Aug Sep Euro area

Overall region 44.0 45.1 45.5 46.0

Germany 43.0 44.7 45.0 47.3

France 43.4 46.0 45.5 42.6

Purchasing managers index flash (services)

Jul Aug Sep

Euro area

Overall region 47.9 47.2 47.5 46.0

Germany 50.3 48.3 49.0 50.6

France 50.0 49.2 49.5 46.1

Purchasing managers index flash (composite)

Jul Aug Sep

Euro area

Overall region 46.5 46.3 46.7 45.9

Germany 47.5 47.0 47.5 49.7

France 47.9 48.0 48.0 44.1

See Euro area essay for details.

National business surveys Jul Aug Sep

Belgium (BNB survey)

% balance of responses, sa

Overall -11.3 -11.8 -11.6

Manufacturing -14.9 -13.2 -13.7

Commerce -8.9 -15.2 -13.9

Construction -9.4 -13.9 -8.8

Demand and labor markets

Consumer confidence (prelim) Jul Aug Sep

Euro area (European Commission survey) % balance of responses

Consumer confidence -21.5 -24.6 -25.9

After the downside surprise from the composite PMI, which fell five tenths to 45.9, Euro area consumer confidence de-clined counter to expectations of a mild improvement in Sep-tember. The level of the European Commission survey fell 1.3pt to reach a cyclical low of -25.9, while the decline since May now totals 6.6pts. The September decline is puzzling in a sense, as the announcement of the ECB program had already improved financial market conditions significantly. This sup-port should however be balanced with the large fiscal drags af-fecting activity in the region and the continuing deterioration of the labor market of late.

External trade and payments

Foreign trade

May Jun Jul Euro area

€ bn, sa

Trade balance 6.8 6.7 10.5 9.3 7.9

Trade bal-yr earlier 0.4 0.3 -4.2 -4.0 -3.9

Exports 154.2 157.9 154.7

%m/m sa 0.4 0.3 2.4 -2.0

Imports 147.4 147.5 147.5 148.6 146.8

%m/m sa -0.9 0.0 0.7 -1.2

See Euro area essay for details.

41

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


Japan BoJ surprised markets by enhancing its policy easing

this week, rather than October as widely anticipated

Both exports and imports were weak in August, while large firms felt only mild deterioration in September

Sovereignty disputes with China over the East China Sea islands raise downside risks to growth outlook

The BoJ enhanced its monetary policy at this week’s policy meeting by expanding the size of the Asset Purchase Program from the current ¥70 trillion (by the end of June 2013) to ¥80 trillion (by the end of 2013). While the substance of the eas-ing was in line with our expectations, the timing was earlier than we and many other economists had expected—who had looked for a move in October when the BoJ publishes its sem-iannual Outlook Report. The reason for the additional easing this week was straightforward. The BoJ downgraded its eco-nomic assessment, stating, “the pickup in Japan’s economic activity has come to a pause.” Looking ahead, further easing looks likely in a couple of months (see “The BoJ eased, what’s next?” in this GDW).

August trade activity was weak in both exports and imports. Real exports have declined for four months in a row with broad-based weakness in terms of destination and goods. While weak external demand is likely the main driver, a per-sistently strong yen and the associated shift of production overseas are additional headwinds to exports. Real imports were also weak, falling nearly 4% in the month. This is con-sistent with our view that domestic private demand has weak-ened recently, in contrast to the BoJ’s assessment that domes-tic demand remains firm. Still, the run rate of the drag from net trade on 3Q real GDP growth is around 3.0%-pts annual-ized, larger than our current forecast of 2.4%-pts. We are al-ready forecasting a large 2.0% real GDP contraction in 3Q, but the risk is still skewed to the downside.

However, the September Reuters Tankan survey of large firms’ business sentiment showed a mild deterioration in both manufacturing and nonmanufacturing. This suggests that firms’ assessment of the current situation is not as bad as hard data indicate, at least so far. Next week’s IP report for August, which includes manufacturers’ output projections through October, the September PMI, and the Shoko Chukin small firm survey will provide a clearer picture of the current mo-mentum of manufacturing and the overall economy.

New concern—dispute with China The latest additional concern is the sovereignty disputes with China over the (Senkaku in Japanese and Diaoyu in Chinese)

islands. While it appears that Chinese authorities are now calming down recent demonstrations, some violent, against Japanese firms, rhetoric from Chinese leaders on Japan re-mains antagonistic. Since the nature of the problem is politi-cally deeply rooted, it is difficult at this stage to predict how this situation will be resolved. Note that both countries are close to a leadership change. While we believe that diplomatic efforts will eventually stabilize the situation and the damage will be limited, the uncertainty likely raises downside risks to both near-term and medium- to long-term prospects for the economy. Indeed, China is now Japan’s largest trade partner, and according to a survey by the Ministry of Foreign Affairs of Japan, more than 33,000 Japanese firms operate in China.

-40

-20

0

20

40

2011 2012 2013

%3m/3m saar

Real exports and imports

Exports

Imports

-40

-30

-20

-10

0

10

20

30

2010 2011 2012 2013

DI

Reuters Tankan large firm business sentiment

Nonmanufacturing

Manufacturing

23.1

17.2

10.3

0

5

10

15

20

25

30

35

95 97 99 01 03 05 07 09 11 13

% of total, 2012 shows year to date through July

Japan's export destination

China(incl HK)

US

EU

42

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


Data releases and forecasts Week of September 24 - 28 Tue Corporate service prices Sep 25 %oya 8:50am May Jun Jul Aug

Overall 0.1 -0.4 -0.2 -0.3 Ex international transport 0.2 -0.1 0.0

The report will likely continue to point to underlying soft-ness in corporate service prices amid weakening economic activity.

Tue Shoko Chukin small firm survey Sep 25 Diffusion index 2:00pm Jun Jul Aug Sep

Sentiment index 46.2 46.6 44.8 44.5 Manufacturing 44.0 45.4 41.8 Nonmanufacturing 47.9 47.5 47.2

Sales (%oya) 3.6 3.4 -0.6 Profit margins -7.4 -5.8 -9.5 Financing conditions -3.3 -2.5 -4.0 Inventory -9.7 -9.5 -9.1 Capacity -6.4 -6.2 -8.0 Employment -2.6 -0.4 0.2

Input prices 0.6 -0.2 0.9 Output prices -7.0 -6.9 -6.7

The headline DI will probably fall further in September from the August level, which was the lowest since June 2011 and 2.2pts below the 2Q average.

Evidence of manufacturing-led weakening in the economy has been cumulating, and there have emerged tentative signs that nonmanufacturing activity has started to moder-ate. The tertiary sector activity index for July fell to a level 0.3% below the average for the past three quarters, when it was generally stable.

Although this week’s September Reuters Tankan large firm survey indicated that the nonmanufacturing sector has been holding up well, this was largely due to strength in wholesale trade and information technology, but the senti-ment DIs and the outlook DIs for these two sectors had been below neutral levels in the August report.

Fri Purchasing managers survey (manufacturing) Sep 28 Diffusion index 8:15am Jun Jul Aug Sep

Overall index 49.9 47.9 47.7 47.0

Given the worsening in manufacturing sentiment, includ-ing extremely weak manufacturers’ predictions for Sep-tember output in the latest July IP report, which looks for a 3.3%m/m sa drop, we expect the September index to de-cline from an already low level (it averaged 50.6 in 1H12 and 50.5 in 2H11).

Fri Labor force survey Sep 28 %m/m sa 8:30am May Jun Jul Aug

Unemployment rate (% sa) 4.4 4.3 4.3 4.2 Labor force (%m/m sa) -0.3 0.3 0.0 Total employment (%m/m sa) -0.2 0.4 0.0 Unemployed (%m/m sa) -3.3 -2.8 0.4 Job offers ratio (sa) 0.81 0.82 0.83 0.84

We think that the labor market is improving at a very grad-ual pace. The August rebound in the employment DI in the Economy Watchers survey supports this view (that DI de-clined for three straight months through July, with re-spondents noting a mismatch between jobs available and skills of job searchers).

Fri Consumer prices Sep 28 %oya 8:30am Jun Jul Aug Sep

Tokyo Overall -0.6 -0.8 -0.7 -0.4 Core (ex fresh food) -0.6 -0.6 -0.5 -0.2 Ex food and energy -1.0 -1.0 -0.8 -0.9

Nationwide Overall -0.2 -0.4 -0.4 Core (ex fresh food) -0.2 -0.3 -0.3 Ex food and energy -0.6 -0.6 -0.5

The nationwide core CPI for August is expected to have fallen oya at a similar rate to July’s. The underlying trend of consumer price deflation appears to be moderating at a very gradual pace, the rebound in gasoline prices during the month was only modest, and pass-through from the recent surge in global agricultural prices likely has yet to take hold.

Fri Household survey of expenditures Sep 28 %m/m sa, incl. agricultural worker households 8:30am May Jun Jul Aug

All households Real spending 1.5 -1.3 -1.3 -0.5 %oya 4.0 1.6 1.7 0.5 Core -0.3 -2.1 -0.7 %oya 2.7 -0.4 -0.6

Worker households Real disposable income -4.2 5.3 -5.5 Propensity to spend (%) 74.6 72.0 75.4

We think that consumer spending has slowed materially amid weakness in labor income. Indeed, this week’s Sep-tember Reuters Tankan showed that the retail trade sector assessed its business conditions as “bad” for the second consecutive month, with a lackluster outlook for three months ahead. In addition, department store sales during August marked the second lowest in the post-earthquake period, even though the indicator is not a good indicator for overall consumer spending.

43



Fri Industrial production-preliminary Sep 28 %m/m sa 8:50am May Jun Jul Aug

Production -3.4 0.4 -1.0 -0.8 Shipments -1.3 -0.9 -3.1 Inventories -0.7 -1.2 2.9 Inventory/shipments ratio -3.7 4.2 3.7

August industrial production is expected to post a second consecutive decline, despite manufacturers’ predictions of a slight 0.1%m/m sa rebound in the July report. Manufac-turing sentiment indicators, as well as trade data, indicate that the strong yen and slowing overseas economies con-tinue to depress domestic manufacturing activity.

Fri Commercial sales Sep 28 %oya 8:50am May Jun Jul Aug

Commercial sales 2.5 -2.8 -3.1 Wholesale sales 2.1 -3.8 -4.0 Total retail sales 3.6 0.2 -0.7 -0.3 %m/m sa 0.7 -1.2 -1.5 -0.5

See above comment on Household survey.

Fri Housing starts Sep 28 2:00pm May Jun Jul Aug

Housing units %oya 9.3 -0.2 -9.6 -5.0 %m/m sa 0.8 -7.3 4.0 2.5 Mn units saar 0.90 0.84 0.87 0.89

Housing construction has been, and will likely continue to be, boosted by reconstruction in the earthquake-affected areas and a decline in mortgage rates, albeit at a depressed level.


Construction spending (Sep 18) %oya

May Jun Jul

Public 10.5 10.4 12.3

Private 2.1 2.4 0.7

Residential 5.2 5.3 1.4

Nonresidential -1.4 -0.9 -0.2

Building and structures 7.5 7.0 Civil engineering -29.5 -33.6

Public works contracts

Jun Jul Aug

%oya nsa 14.1 26.6 19.2

%m/m sa by J.P. Morgan -9.8 0.2 6.1

%m/m sa, 6mma 2.5 1.3 0.0

Public construction spending accelerated further in July (it was +9.0% in the 2Q average, and +3.1% in the 1Q average). In ad-dition, the 6-month average of public works contracts slipped 0.02%m/m sa in August after seven consecutive rises through

July, but this still left the 3Q trajectory at +21.0%q/q saar after +24.8% in 2Q and +23.5% in 1Q.

The reports suggest that public investment, which posted a se-cond consecutive robust gain in the 2Q GDP report (rising 7.2%q/q saar after +15.2% in 1Q), is maintaining its momentum in this quarter. We are currently expecting public investment in real GDP to rise a robust 15.0% ar in 3Q, and then to slow to +5.0% in 4Q.

Reuters Tankan survey (Sep 20) Diffusion index

Jul Aug Sep

Manufacturing -2 -4 -5

Nonmanufacturing 8 8 7

The large manufacturing DI edged down in September, marking -5 after -4 in August and -2 in July. The manufacturers’ outlook DI, which represents respondents’ outlook for business condi-tions three months ahead, posted -4. The result was added evi-dence of the weakening in manufacturing activity amid the slowing global economy and the strong yen.

Looking at the details, chemicals fell sharply, and five out of nine subsectors assessed the business situation as “bad.” The sentiment DI of the auto sector improved to a positive reading in the month, but this was at odds with anecdotal reports that auto sales lost momentum materially before the end of the gov-ernment’s subsidiary program for eco-friendly cars. Worth not-ing is that concern was raised on the negative impact from in-tensifying anti-Japan sentiment in China.

Meanwhile, nonmanufacturing sentiment, by this survey meas-ure, has been holding up, with the current conditions DI mark-ing 7 (compared to 8 in August and July and 11 in June and May) and the outlook DI looking for a meaningful rise to 10. That said, the important retail trading sector reported “bad” business conditions for the second consecutive month, with a lackluster outlook (the retail trading DI marked -5 for the se-cond month in a row and is predicted to rise to the neutral 0 in December).

Overall, the report supports the downward revision we made to our 2H GDP forecast last week—we now expect a 1.0% ar con-traction.

Index of all sector activity (Sep 20) %m/m sa

May Jun Jul

All sector -0.2 0.2 0.3 -0.4 -0.6

Tertiary sector 0.9 0.2 -0.8 Industrial production -3.4 0.4 -1.0 Construction 9.5 -0.1 1.0 -2.0

Public sector -0.2 -0.1 -0.2 -0.4 0.7

44

Economic Research Japan September 21, 2012


Customs-cleared international trade (Sep 20) Jun Jul Aug

Balance (¥ bn sa) -318 -348 -326 -372 -560 -473

Exports (%m/m sa) -1.6 -1.7 -1.1 -1.2 -0.5 -2.1

Imports (%m/m sa) -6.3 -0.9 -0.7 3.6 -0.2

Balance (¥ bn nsa) 60 59 -517 -519 -1045 -754

Exports (%oya) -2.3 -8.1 -5.0 -5.8

Imports (%oya) -2.2 2.1 0.0 -5.4

BoJ real export index (%m/m ) -0.9 -0.8 -3.1 -3.0 -0.6

BoJ real import index (%m/m ) -3.0 -2.9 2.3 2.4 -3.9

The real export index fell 0.6%m/m sa in August, on top of a to-tal 6.4% drop over the previous three months. This put the cur-rent trajectory for 3Q at a very large 20.7%q/q saar decline, which would more than offset the 17.4% rise in 2Q. Meanwhile, the real import index fell a larger 3.9%m/m sa in the month, tracking -2.9%q/q saar for this quarter after the 13.9% rise in 2Q. On net, the risk to our forecast for the 3Q real GDP net trade contribution, which is for a 2.4%-pt subtraction from q/q annualized growth, is now skewed to the downside (our current forecast is that real exports fell 10.0%q/q saar while real exports continued rising at 5.0% ar in this quarter).

Looking at customs trade data, which are in yen value terms, the weakness in exports was broadly based across both destinations and exported goods. After our seasonal adjustment, nominal ex-ports to EU countries fell for the sixth consecutive month at 4.3%m/m sa, putting the 3m/3m sequential change at a large -41.1%. At the same time, exports to Asia fell 2.4%m/m sa or 25.8%3m/3m saar, and exports to the US recovered only a mar-ginal part of their decline of the previous three months (rising 0.7% after the cumulative 11.1% drop), showing a -31.1% ar drop in 3m/3m terms.

The recent moderation in imports was also broadly based. Even imports of liquefied natural gas fell for the third month in a row, albeit to a still-elevated level, and imports of telecommunication equipment lost most of the previous month’s solid rise.

The deficit of the nominal trade balance widened in August, to -¥473 billion sa from -¥372 billion in July and -¥348 billion in June, and was close to the average in 1H (-¥477 billion). This

occurred as the decline in nominal exports significantly exceed-ed that of nominal imports (-2.1%m/m sa vs. -0.2%m/m sa).

Nationwide department store sales (Sep 20) Jun Jul Aug

Overall, %oya -2.0 -4.1 -2.4 -1.5

%m/m sa by J.P. Morgan 0.9 -2.2 -0.6 0.3

Same store, %oya -1.2 -3.3 -1.0

Department store sales, after our seasonal adjustment, rose only 0.3%m/m sa in August after the large 2.2%m/m drop in the pre-vious month. August sales stood at the second lowest level since March 2011, the earthquake month. The July-August av-erage of department store sales was 10.2% annualized below the average in 2Q, indicating much faster decline in this quarter versus -1.2%q/q saar in 2Q and -3.8%q/q saar in 1Q. The result was consistent with our view that consumer spending has lost momentum materially amid weakness in labor income.

Note, though, that this is not a very accurate indicator for track-ing overall consumer spending. The retail component in the commercial sales report (due to be released on Oct 28) and the CAO real consumption index (expected to be out on Oct 10) will provide a clearer picture of consumer spending at the mid-dle of this quarter.

80

85

90

95

100

105

2010 2011 2012 2013

Index, 2011 Feb = 100

METI all sector activity indices

Tertiary sector

Construction

Manufacturing and mining

45

JPMorgan Chase Bank NA Sandy Batten (1-212) 834-9645 [email protected] Silvana Dimino (1-212) 834-5684 [email protected]


Canada Tepid 3Q data continued this week

Existing home sales plunged in August

And wholesales fell in July

July GDP looks to have only edged up 0.1%

Third-quarter data releases continued to portray a slowing of economic activity. Existing home sales plunged nearly 6%m/m in August for their fourth consecutive monthly de-cline. And wholesale sales fell in July for the second consecu-tive month. Consumer prices were benign in August, reflect-ing weaker natural gas prices but higher auto and gasoline prices. Retail sales appear to have been on the weak side in July. Combining our expectation for July retail sales with the already reported sluggishness in manufacturing shipments and wholesale sales leads us to look for a very tepid 0.1%m/m increase in July GDP released next week.

Wholesale sales fell 0.6%m/m in July, following a 0.3% de-cline in June. Among the seven subsectors, five subsectors reported declines. In volume terms, wholesale sales were down 0.3%m/m in July. The largest sales decrease in dollar terms was in the food, beverage, and tobacco subsector, where sales fell 1.5% in July.

The headline CPI edged up 0.2%m/m nsa in August after hav-ing fallen in each of the three preceding months. Compared with a year ago, the headline CPI inflation rate slipped to 1.2% from 1.3% in July. August is usually a seasonally de-pressed month—so the seasonals look for weakness. Conse-quently, after seasonal adjustment, the total CPI increased 0.4%m/m, its first monthly increase in four months. The nsa core index rose 0.3%m/m in August after having declined in the two preceding months. Compared to a year ago, the core index was up 1.6% versus 1.7%oya in July.

Higher prices for the purchase of passenger vehicles and gaso-line were a major factor behind the year-over-year increase for August. Energy prices rose 0.8%oya in August, following three consecutive months of year-over-year declines. Gasoline prices rebounded, while natural gas prices continued to fall oya. The oya rise in food prices inched up to 2.2% from 2.1% in July, indicating that the global rise in agricultural prices has yet to impact Canadian food prices.

Will US Fed new QE impact the course of Canadian monetary policy? With the US Fed having recently embarked on another round of QE—this time until “the outlook for the labor market” im-proves “substantially,” the Fed could remain on hold for quite

some time. Indeed, it also noted after the last FOMC meeting that “the Committee expects that a highly accommodative stance for monetary policy will remain appropriate for a con-siderable time after the economic recovery strengthens.” This meant in particular that the Committee “currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”

BoC Governor Carney has noted frequently that there are lim-its to the disconnect that can exist between US monetary poli-cy and Canadian monetary policy even though Canadian poli-cy is set to achieve domestic objectives. So, with the Fed hav-ing extended and indeed intensified its monetary accommoda-tion, how might the BoC be impacted? BoC officials have been resolute in their assertion that “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.” (Governor Carney and Deputy Gover-nor Lane make public appearances next week.) Part of the Bank’s resolution has reflected an apparent strategy to set the bar very high for the provision of more monetary accommo-dation—which until recently the market had expected. The Canadian recovery is being driven by domestic demand and consequently would not seem to call for further monetary stimulus—so the Bank wanted to convey this to the market. But external headwinds have recently begun to blow harder, and the consumer and housing parts of domestic demand ap-pear to be slowing a bit. Indeed, the Canadian economy has grown at a pace only around its longer-term potential over the past three quarters, and early data for 3Q point to even slower overall growth. So it seems that without a revival in the exter-nal sector, the Canadian economy could underperform the BoC’s expectations over the rest of this year. Moreover, infla-tion does not appear to be giving the Bank any reason to ad-just policy—inflation remains benign and inflation expecta-tions appear to be anchored.

With the Fed anticipating being on hold for another three years and external headwinds currently slowing the Canadian economy, the Bank will not likely be in any hurry to resume its rate hiking and indeed, it may want to keep its powder dry

-3

-2

-1

0

1

2

3

%-pt

Deviations of BoC overnight rate from US fed funds rate

+1 stdev

-1 stdev

Mean

95 97 99 01 03 05 07 09 11

46

Economic Research Canada September 21, 2012

JPMorgan Chase Bank NA Sandy Batten (1-212) 834-9645 [email protected] Silvana Dimino (1-212) 834-5684 [email protected]

for longer than we had previously envisaged. We currently are looking for the Bank’s next move to be a 25bp rate hike in March 2013 with another in the third quarter of 2013. How-ever, the likely slowdown of activity in 2H12 and the Fed’s new round of QE could push out the Bank’s next move to past the middle of 2013. We will reassess our rate call based on the incoming data for 3Q—both domestic and external—but the risk clearly lies toward a later rate hike than we had previ-ously expected.

One key to the course for Canadian monetary policy is the fate of the US economy. If QE (or whatever) leads to a faster recovery, this should spill over into the Canadian economy. The Canadian economy, despite its recent subpar perfor-mance, has performed much better than its industrial peers in the current recovery—it has already recovered all the jobs and almost all the potential output lost in the previous recession; so with the output gap almost nonexistent, only a slight pickup in overall growth is required to engender inflation concerns at the central bank.

History indicates that the Bank can probably raise its over-night rate another 100bp or so even with the Fed on hold. Over the period that the BoC has been inflation targeting, its overnight rate has on average roughly equaled the US fed funds rate (the average of the difference between the two rates over this more than 17-year period is 8bp). And two thirds of the time, the Canadian overnight rate has been within 100bp of the fed funds rate—it currently exceeds the fed funds rate by 88bp. At the extremes, the difference has been just a little more than 200bp—so this might be an upper limit.

The Bank has explained in great detail why it does not need to have returned the overnight interest rate to its neutral level by time the output gap is closed. However, the overnight rate is now 200bp below even conservative estimates of the neutral rate. So, only a modest pickup in activity is required to close what remains of an already narrow gap. Over the inflation-targeting period, the Bank has begun to raise its overnight rate whenever the output gap has closed. Indeed, in the past it would have its overnight rate well above its current level with the output gap as small as it is currently. It would seem that persistent external headwinds have prevented the Bank from following its historical course for normalizing policy.

All in all, we continue to look for the Bank’s next policy ac-tion to be a 25bp rate hike—though, given the Fed’s recent moves and the slowdown in the Canadian economy, when that might be has become considerably more uncertain.

Data releases and forecasts Week of September 24 - 28 Tue Retail sales Sep 25 %m/m sa, unless noted 8:30am Apr May Jun Jul

Total -0.6 0.2 -0.4 0.2 %oya 3.1 3.0 1.7 2.4Ex autos -0.4 0.4 -0.4 0.3 %oya 2.3 2.0 1.5 1.6Ex autos & gasoline -0.7 0.8 -0.2 0.3 %oya 2.1 2.3 1.7 1.8Real retail sales -0.8 0.6 -0.1 0.4 %oya 2.1 2.5 0.7 1.9

Retail sales are expected to be up 0.2%m/m in July after a weak June. Rebounds are likely in most of the large cate-gories that experienced sharp declines in June like building materials and general merchandise stores. Warmer-than-usual weather in much of Canada during March appears to have pulled forward springtime sales, as March saw the strongest sales increase month to month so far this year. Re-tail sales were down in the second quarter as a whole; real retail sales were also lower in 2Q. Weakness in auto sales is expected to continue in July as unit sales sa were down in July and prices were also down month to month. Gasoline station sales should be flat. Although prices at the pump ticked up toward the end of July, it was probably too late in the month to dramatically effect sales in that category.

Fri Monthly GDP Sep 28 Sa 8:30am Apr May Jun Jul

Total %m/m 0.4 0.1 0.2 0.1 %oya 2.1 2.4 2.4 2.0


Consumer price index (Sep 21) %m/m nsa, unless noted

Jun Jul Aug

Total CPI -0.4 -0.1 0.3 0.2

%oya 1.5 1.2 1.3 1.2

BoC core CPI -0.4 -0.1 0.3

%oya 2.0 1.7 1.6

Ex food & energy -0.4 -0.3 0.3 0.2

%oya 1.7 1.3 1.3 1.1

CPI-XFET (%oya) 1.6 1.2 1.0

Wholesale sales (Sep 21) Sa

May Jun Jul

Total %m/m 0.9 -0.1 -0.3 -0.1 -0.6

%oya 6.6 6.5 6.3 6.1 5.3 4.6

47

Banco J.P.Morgan, S.A., Institución de Banca Múltiple, J.P.Morgan Grupo Financiero Gabriel Lozano (52-55) 5540-9558 [email protected] Iker Cabiedes (52-55) 5540-9339 [email protected]


Mexico Banxico minutes: No hikes on the horizon

Private consumption: walking, not running

Inflation is likely to peak at 4.8% in September

Banco de México (Banxico) released the minutes from the September 7 monetary policy meeting this week. As we ex-pected, Banxico highlighted its concerns regarding the recent inflation spike stemming from supply shocks to non-core items and acknowledged that the short-term balance of risks for inflation has continued to deteriorate.

However, several factors suggest that in spite of the vigilant tone adopted by Banxico, it is not likely to alter its monetary policy anytime soon. For starters, the increase in non-core prices has been meaningfully passed through to the core com-ponent, revealing no signs of second-round effects; consist-ently, medium-term inflation expectations have remained well anchored. Board members highlighted that risks to medium-term inflation are still on the downside, as global growth is likely to remain subdued and there exists a risk of observing deflationary pressures in advanced economies.

While all of the above should prevent Banxico from adopting an outright tightening bias, the most important “neutralizer” came from the central bank’s remarks on the importance of Mexico’s relative monetary conditions and the dynamics of the local currency. In this context, most board members high-lighted that “the central bank will have to pay close attention to the behavior of the exchange rate and … to the potential measures introduced by the Federal Reserve and the European Central Bank.”

The fact that the monetary meeting took place before the in-troduction of further stimulus measures by the ECB and the Fed, and the recent rally of the peso, suggests that the above-mentioned relative monetary conditions have indeed tight-ened, making it even less likely for Banxico to tighten its ref-erence rate in the future. Something worth noting is that for the first time, some board members expressed their concern on the trend observed in core prices, pointing out that they have been persistently increasing over the past year, even considering a core measure excluding food and energy.

However, most of the increase can be explained by the ad-justments in tradable good prices following the peso deprecia-tion of 2H11. In our view this adjustment is nearly completed and tradable goods should begin to halt their increase in the next few months. Furthermore, the fact that exchange rate forecasts have remained relatively anchored since the end of last year has limited the passthrough to tradable goods, as

companies tend to use exchange rate expectations as an input in their price-setting decisions.

Finally, on growth expectations, the board’s view remained the same. Domestic growth is still on track, with both exter-nally and internally driven sectors performing reasonably well, and consequently the output gap has already closed. Yet, the global growth outlook, particularly in the US, continues to weigh on the medium-term balance of risks for growth, which the central bank deemed as deteriorating.

What to expect ahead: We believe Banxico will remain on hold for the foreseeable future on the back of two opposing forces. On the one hand, potential demand-side pressures, risks for higher medium- and long-term inflation expectations, and the persistently higher core prices imply a significant risk for tighter monetary policy. On the other hand, a stronger pe-so on the back of ample global liquidity has already tightened monetary conditions, offsetting at the same time further pass-through from the peso depreciation.

Source: INEGI and J.P. Morgan

Source: INEGI

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16

INEGI's and J.P. Morgan's core CPI%oya

INEGI's core CPI

J.P.Morgan's core CPI

-15

-10

-5

0

5

10

15

%oya, 3mma

Retail sales and industrial production: demand and supply

04 06 08 10 12

Retail salesIP

48

Economic Research Mexico September 21, 2012

Banco J.P.Morgan, S.A., Institución de Banca Múltiple, J.P.Morgan Grupo Financiero Gabriel Lozano (52-55) 5540-9558 [email protected] Iker Cabiedes (52-55) 5540-9339 [email protected]

Private consumption is walking, not running Aggregate demand data for the second quarter of 2013 showed an expansion of 4.1%oya reflecting a strong perfor-mance by exports, which expanded at a 6.3% pace. However, consumption posted a mild deceleration in the past quarter, with private consumption moderating to 3.3%oya, from 4.3% in 1Q12, dragging down overall consumer spending to 3.1%, from 4% in the previous quarter. As such, Mexico continues to experience an expansion with exports in the driver’s seat. Indeed the gap between domestic and external factors’ contri-bution to growth narrowed over the second quarter (first chart previous page).

By the same token, the start of the third quarter is showing some moderation in private consumption, as retail sales de-celerated in July to 2.6%oya from 5.6% a month earlier. Su-permarket and departmental stores posted the sharpest decel-eration, moderating to 0.7%oya after averaging a 6.8% in-crease in the first half of the year. We expect retail sales to continue to grow at a moderate pace, as slower consumer credit expansion, coupled with the increase in inflation, pinches household purchasing power.

Nevertheless, in spite of soft July retail activity, other con-sumer-related indicators continue to show a positive trend, and industrial production has shown some signs of regaining its footing early in 3Q (second chart previous page). In fact, retail sales in July were kept afloat by items related to the manufacturing sector. Auto-related and appliances sales post-ed hefty increases of 6.3%oya and 7.9%, respectively.

Demand for durable goods should continue to provide support for economic activity in Mexico, and consumer credit and employment expansion will be key in the next few months. According to data published this week, the unemployment rate remains quite sticky, as it increased from 5.0% to 5.4% in August.

High agricultural prices linger Inflation is likely to have continued upward in the first half of September, as increases in non-core prices failed to recede. We are expecting inflation to post a 0.29%2w/2w increase, pushing up the yearly figure to 4.77%, its highest level over the past three years. Apart from tradable goods, which have been affected by passthrough effects from the peso deprecia-tion, most core prices have posted moderate increases so far this year. In fact, inflation in services prices has remained below 2.6%oya throughout the year, indicating that local price dynamics have not been subject to any form of inflation pres-sures. However, the supply shocks affecting non-core prices, particularly on agricultural goods, have been more significant than previously expected. Agricultural prices have risen a

total of 5.5% in the four months through August, adding around 75bp to yearly inflation. Although inflation is likely to peak in September as agricultural prices recede over the com-ing months, they are expected to do so at a relatively slow pace, allowing inflation to ease toward 4.2% only at year-end.


Mon Consumer prices Sep 24 %oya 9:00am Jul 1H Aug 1H Aug 2H Sep 1H

%2w/2w 0.09 0.14 0.24 0.29 Core 0.09 0.16 0.05 0.29 %oya 4.39 4.45 4.69 4.77 Core 3.63 3.70 3.70 3.78

Tue Indicator of overall economic activity (IGAE) Sep 25 %oya, unless noted 9:00am Apr May Jun Jul

%oya 4.7 4.2 3.8 4.3 %m/m sa 0.4 -0.2 0.9 0.7

Tue Central bank foreign reserves Sep 25 US$ bn 10:00am Aug 31 Sep 7 Sep 14 Sep 21

Gross reserves 161.3 161.3 161.1 ___

Wed Trade balance Sep 26 9:00am May Jun Jul Aug

Balance (US$ mn) 360.7 601.7 -426.8 -74 Exports (US$ bn) 33.2 30.3 30.3 34.2 %oya 6.7 -0.4 8.7 8.8 Imports (US$ bn) 32.8 29.7 30.7 34.3 %oya 7.4 -2.1 5.8 6.3


Central bank foreign reserves (Sep 18) US$ bn

Aug 31 Sep 7 Sep 14

Gross reserves 161.3 161.3 ___ 161.1

Retail sales (Sep 20)

May Jun Jul

Retail sales %oya 5.2 5.6 4.1 2.6

%m/m sa -0.1 1.8 -0.7 -1.4

Labor market report (Sep 21) % of labor force

Jun Jul Aug

Unemployment rate 4.8 5.0 5.1 5.4 Sa 4.9 4.8 4.8 4.9

49

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


Brazil Brazil’s prominent FX activism back to fore

Hiring is slowing, but the unemployment rate remains under downward pressure

September inflation on the rise

Brazil’s prominent activism on the FX intervention front was resparked by the most recent round of quantitative easing in developed markets. In the aftermath of the Fed’s QE3 an-nouncement, BCB proactively began to conduct FX swaps auctions with BRL still within the implicit range of 2.00-2.10 against USD. Almost simultaneously, Finance Ministry repre-sentatives resumed verbal interventions, stating the govern-ment will not hesitate in imposing capital controls to keep the recent competitiveness gain from being eroded by speculative inflows. The flip side of keeping the currency at the current range in the context of global monetary easing is that inflation risks could arise, limiting the degree of freedom of BCB’s monetary policy. We believe the BRL range could eventually shift to stronger levels, but this would require firmer signals in terms of economic recovery.

Government is putting up a fight to hold USD/BRL above the 2.00 level The Brazilian government is putting up a fight to hold USD/BRL above the 2.00 level. Right after the Federal Re-serve announced a new round of quantitative easing last week, the government—in a seemingly coordinated action between the Ministry of Finance and the Central Bank—stepped up its intervention with Minister Mantega resuming verbal interven-tion and with the CB surveying dealers on demand for FX swaps. In the last few days, Finance Ministry representatives reinforced that message and highlighted the government’s intention to keep USD/BRL in a 2.0-2.1 range. We should expect swap auctions every time USD/BRL threatens the 2.00 level, and spot intervention should resume if inflows into the currently tame spot market accelerate. At this point, we do not expect any change to IOF regulations regarding external issu-ances (as has been speculated by the local press), as this flow has not been a source of appreciation pressure, and given its growth-related nature.

Since last Wednesday the BCB bought US$5.7 billion through reverse-swaps, moving its USD swap book from a US$1.8 billion short position into a US$3.9 billion long expo-sure. Also, recently Minister Mantega and his executive secre-tary, Nelson Barbosa, stated that the government will not hesitate to take measures to keep BRL depreciated. We inter-pret this as a sign that the government is still willing to sup-port USD/BRL at current levels at least until there is clearer

evidence of a firm recovery in the economy, and that, if need-ed, more measures will be taken to curb undesired pressures

2.5

3.5

4.5

5.5

6.5

7.5

2007 2008 2009 2010 2011 2012 2013

%oyaIPCA-15: headline and core measures

Headline

Core

-5

0

5

10

15

2008 2009 2010 2011 2012

%oyaIPCA-15: core goods breakdown by type of use

Nondurables Semidurables

Durables

5

7

9

11

13% of labor force, sa

Brazil: unemployment rate

04 06 08 10 12

-200000

-100000

0

100000

200000

300000

04 05 06 07 08 09 10 11 12 13

Total Total 3m avg

Net jobs created in the month, saCAGED net job creation

50

Economic Research Brazil September 21, 2012

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

from excessive inflows. However, comparing the current environment with 1Q12, it seems clear that while back then the aggressive intervention was intended not only to curb appreciation forces but also to change the level of the ex-change rate (motivated to stimulate the stagnant manufactur-ing sector), today, it would probably be aimed at keeping USD/BRL at around the 2.00-2.10 range.

FX intervention more effective Intervention may have become more effective since factors formerly boosting the currency have been waning with inter-est rates lower and GDP growth lackluster, and regulatory risks increased. In addition, FX flows have been muted since May, and Japanese investors continue to unwind their long BRL positions, signaling that foreign investors are not heavily positioned. Indeed, short USD positions through derivatives have increased in the last few days, though they are still lower than in 1Q12, but the 1% IOF charge on net incremental short USD positions remains in place, limiting increases in specula-tive positions in this market. Also, real interest rates have come off and should stay low for a while. Altogether, these factors should give the government an upper hand in the FX market, at least in the near term.

Mixed signals from labor market in August After two months of incomplete labor reports due to strikes at IBGE, the August release revealed a new record low for the unemployment rate at 5.2% on a seasonally adjusted base, from 5.3% in July, 5.7% in June, and 5.5% in May, which had been the most recent release until this week’s catch-up. While the low unemployment rate reflects a tight labor market, the data suggest that most of the recent decrease in the unem-ployment rate was due to a slowdown in labor force growth as the pace of employment growth has been relatively stable in recent months. The information from a separate survey (the Minister of Labor’s formal employment report—CAGED) revealed a much sharper deceleration in net job creation in August. This is in line with the slowdown in activity in the first half of the year, as labor indicators usually lag activity indicators, and the recent improvement in growth should not impact the pace of job creation until year-end. However, this time could be different, as the remarkably low unemployment rate could in fact point to a supply constraint in the labor market, thus jeopardizing the sustainability of the recovery.

September IPCA-15 was in line, but short-term inflation risks mounting The September IPCA-15 (a preview for the targeted IPCA) printed at 0.48%m/m, slightly above market consensus of 0.46%, and a bit below J.P. Morgan’s estimate of 0.49%. The 12-month cumulative inflation decreased to 5.31% from 5.37% in August. Despite the small downside surprise against

our projection, we are revising up our end-September IPCA forecast to 0.58% from 0.54%, on the back of higher food prices in our high frequency price surveys. This should push the 12-month reading to 5.29% from 5.24% in August. Look-ing forward, uncertainty over the near-term outlook for infla-tion remains high, with upside risks from higher commodity prices and the cyclical recovery and downside risks from tax changes. We keep our 5.4% forecast for 2012.

Data releases and forecasts

Week of September 24 - 28

Tue Current account balance Sep 25 9:30am May Jun Jul Aug

Current account (CA) -3.5 -4.4 -3.7 -2.8 CA, 12-month sum -50.7 -51.8 -52.0 -50.1 CA, 12-month sum, %GDP -2.2 -2.2 -2.2 -2,3 Foreign direct investment 2.8 4.7 7.0 4.0

Thu General prices (IGP-M) Sep 27 7:00am Jun Jul Aug Sep

%m/m 0.7 1.3 1.4 0.84 %oya 5.1 6.7 7.7 7.93

Fri Public sector borrowing requirement Sep 28 Minus denotes surplus 9:30am May Jun Jul Aug

R$ bn Primary -2.7 -2.8 -5.6 -3.3 12-month sum, as % of GDP Primary -3.0 -2.7 -2.5 -2.5 Nominal 2.4 2.6 2.8 2.8 Net debt, % of GDP 35.0 35.1 35.0 35.0


General prices (IGP-10)

Jul Aug Sep

%m/m 1.0 1.6 1.06 1.05 %oya 6.0 7.5 7.96 7.95

Consumer prices (IPCA-15)

Jul Aug Sep

%m/m 0.3 0.4 0.49 0.48

%oya 5.2 5.4 5.32 5.31

National unemployment

Jun Jul Aug

Open rate, nsa (30 days) 5.9 5.4 5.3

51

J.P. Morgan Securities LLC Vladimir Werning (1-212) 834-4144 [email protected] Diego W. Pereira (1-212) 834-4321 [email protected]


Argentina IMF criticizes Argentina’s “damned statistics” again

Fund lacks conventional “carrots and sticks”

Other IFIs are providing US$2.0 bn gross funding p.a.

This past week the IMF board issued a statement regretting Argentina’s lack of progress in addressing the quality of offi-cial CPI and GDP data reported by INDEC (Argentina’s sta-tistics agency) to the Fund. The board—which in February of this year had urged Argentina to remedy the situation within 180 days—set a new 90-day time frame after which the Board will again review Argentina’s response.

Although distortions of inflation and GDP statistics have var-ied over time, it is widely understood that Argentina is un-derreporting genuine inflation by some 15%-pts and overreporting genuine real GDP by 2%-pts. Inflation report-ing is evidently the main thorn in the relationship with the IMF (in part, GDP reporting distortions are a by-product of CPI distortions). Paradoxically, the IMF’s warning was deliv-ered at a moment when reporting of official economic activity (a proxy for real GDP) appears to be converging to the pace at which our model suggests genuine activity is growing. In-deed, while INDEC grossly underreports inflation the official overreporting of activity has narrowed in 2012 (first chart).

What the IMF’s repeated “slap on the wrist” may eventually lead to in terms of Argentina’s relationship with the Fund is far from clear because the IMF cannot wield its conventional “carrot-and-stick” approach at Argentina today. Indeed: (a) Argentina does not rely on new funding from an IMF pro-gram, (b) it has no outstanding loans to repay to the IMF, (c) it does not face imminent balance of payments challenges (having effectively resorted capital controls to contain resi-dent capital outflows), and (d) the Treasury is understood to be politically averse to considering a request for financial support from the IMF (or for that matter from the capital mar-kets) were the need to arise.

Since the Kirchner administrations began toying with statisti-cal reporting in 2007, Mark Twain’s sarcastic division of lies into three categories—lies, damned lies, and statistics—could well have been expanded to include a fourth: “damned statis-tics.” The IMF’s current dispute over Argentina’s damned statistics has led the Fund board to point out that Argentina is not complying with the Articles of Agreement. This raises the specter in many observers’ imaginations that the Fund might expel Argentina from the multinational club. Whether this extreme scenario is being considered was not explicitly ad-dressed in the board’s statement.

Argentina’s damned statistics are evidently an insult to its citizens, a tax on its inflation-indexed bond investors (para-doxically, mostly Argentine government agencies), and a ben-efit to its GDP-warrant investors. The IMF’s slap on the wrist is probably most welcomed by local economic consultants and think tanks that are engaged in court battles with the gov-ernment over the latter’s attempt to fine them for reporting macroeconomic estimates that are different from official fig-ures. Yet the aggravation that statistical misreporting gener-ates within professional economic circles pales in comparison to the material economic damage that other challenges requir-ing the IMF’s attention can potentially inflict on the global economy. Indeed, at a time when the IMF faces so many is-sues of great importance—regarding matters of financial ur-gency—its current focus on Argentina—regarding matters of principle—seems odd.

Thus, disregarding an extreme environment, a more realistic question is whether the dispute with the IMF may impair Ar-gentina’s financial relationship with other multilateral organi-zations with similar shareholders. It is well known that this already affects Argentina’s relationship with the Paris Club: Argentina seeks to renegotiate its arrears (all told, some US$9 billion) over a five-year payment schedule (rather than a standard protracted plan) if the IMF were to be excluded from the process. Yet the Paris Club requires an even more accelerated payment schedule (to which Argentina will not concede) to accept side-stepping the IMF. In terms of out-standing credit, Argentina is not enjoying meaningful net funding from IFIs. In 2011, for instance, the World Bank,

Treasury debt service to IFIs (World Bank, IADB, CAF, etc.)

US$ bn

2009 2010 2011 2012 2013 Debt service due to IFIs 2.3 2.2 2.1 2.2 2.0 Principal 1.7 1.7 1.6 1.7 1.6 Interest 0.6 0.5 0.5 0.5 0.4 Gross disbursements from IFIs 3.1 2.4 2.1 Net disbursements from IFIs 0.8 0.2 0.0 Debt rollover, % of principal due 185 145 135

0

5

10

15

20

-3

0

3

6

9

Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12

Official statistics biases

Inflation under-reporting

%-pts, both axes Activity over-reporting(official minus

JPM activity model est.)

52

Economic Research Argentina September 21, 2012

J.P. Morgan Securities LLC Vladimir Werning (1-212) 834-4144 [email protected] Diego W. Pereira (1-212) 834-4321 [email protected]

IADB, CAF, and others rolled over principal for US$1.6 bil-lion and granted additional funding of US$0.5 billion equal to Argentina’s interest obligations—thus, not providing any net inflows. Looking ahead, the upper bound of additional finan-cial burden faced by Argentina if the IFIs were to decide to reduce their refinancing commitments with Argentina in re-sponse to an unresolved dispute over statistics with the IMF would amount to US$2.0 billion on an annual basis.

Likely financial pressure should represent a smaller amount, however, as politics will play a part in determining whether pressure is exerted in this fashion or not. Evidently, decision-making within the World Bank (where global representation dominates)—to whom Argentina owes US$0.75 billion p.a.—might be more permeable to such pressures than that within the IADB (where regional representation prevails).

Data releases and forecasts Week of September 24 - 28 Fri Public sector balance Sep 21 ARS bn

May Jun Jul Aug

Primary 2.4 -0.7 0.5 0.7 12-mo, % of GDP 0.0 -0.1 -0.1 -0.1 Headline 0.1 -3.8 -2.9 -0.8 12-mo, % of GDP -1.9 -2.0 -2.1 -2.1

The report was not available at time of publication. On the revenue side, our forecast assumes transfers from ANSeS and BCRA of ARS1.0 billion, higher than the ARS0.7 billion in August 2011. On the spending side, the interest bill is expected to print around ARS1.4 billion, similar to the interest spending the same month last year. All in all, the 12-month primary fiscal balance (which in-cludes BCRA profits and ANSeS interest earnings) is ex-pected to remain at -0.1% of GDP, on the back of ANSeS and BCRA transfers. Using international standards (e.g., accounting for ANSeS’ interest earnings at the headline level alongside interest expense), the primary balance would stand at -0.9% of GDP.

Mon Trade balance (FOB-CIF) Sep 24 US$ bn

May Jun Jul Jul

Headline balance 1.5 1.0 1.0 1.7 Headline , 12-mo sum 11.9 11.9 12.2 13.3 Energy -3.6 -3.6 -3.7 -3.8 Non-energy 15.5 15.5 15.9 17.1

President Kirchner provided an advance reading on the trade balance for August: exports are to print at US$7.9 billion (-4.1%oya) and imports at $6.2 billion (-19%oya). The monthly surplus would jump to $1.7 billion from $0.6 billion in August 2011. The jump in the monthly balance would be explained by higher agriculture prices.

Mon Consumer confidence Sep 24 Jun Jul Aug Sep

%oya 44.4 43.6 42.7 43.0

We expect consumer confidence to remain well below the 50 threshold for the fifth month in a row. Pessimism should dominate as: the collapse of economic growth in 2Q12 hurt consumption; dollar purchase restrictions re-main binding; and political tensions among the national and provincial governors remain high.

Fri Construction (INDEC) Sep 28 May Jun Jul Aug

%oya -5.4 -1.6 -1 -6.0

We expect construction to decrease in August mainly on weather factors and base effects. Cement sales contracted 16.7%, as heavy rains took a toll on construction activity.

Fri Economic activity (official) Sep 28 Apr May Jun Jul

%oya 0.6 -0.5 0.0 0.8

Genuine activity as measured by J.P. Morgan’s model in-creased 0.4%oya in July. Given that recently the over-reporting gap has remained well below the historical aver-age (0.4%-pt in 2Q12 compared to 1.9%-pt historical aver-age), official activity should print around 0.8%oya.


Industrial production (INDEC) Jun Jul Aug

%oya -4.7 -1.8 -1.5 -0.9

GDP (official) 4Q11 1Q12 2Q12

%oya 7.3 5.2 0.0

Current account 4Q11 1Q12 2Q12

US$ bn -0.4 -0.6 1.2 1.7

53

J.P. Morgan Securities LLC Ben Ramsey (1-212) 834-4308 [email protected] Banco J.P. Morgan S.A. Laura A Karpuska (55-11) 4950-3322 [email protected]


Colombia 2Q GDP rebounded to 6.7%q/q saar, well above our

forecast, on the back of v-shaped domestic demand

3Q initial indicators point to a decent, but uneven, start to the second half; we revise 2012 growth up to 4.3%

We now think BanRep’s easing cycle is over

In a year when Colombian economic indicators have been on the whole surprising to the downside, 2Q GDP delivered a rather large upside surprise this week. The 4.9%oya rise rep-resented an increase from the 4.7% of 1Q, and was well above both our own more pessimistic call of 3.6% and market ex-pectations of 4.2%. Looking at the figure on a sequential basis reveals an even starker v-shaped recovery. GDP grew an impressive 6.7%q/q saar, up from only 0.9% in 1Q. The sharp rebound (and our underestimation) owed largely to a strong recovery in domestic demand, especially public investment. Indeed, public infrastructure works ballooned 28.5%q/q sa, which in turn led to a stronger-than-expected result for in-vestment on the demand side (to 12.7%oya and 29.1%q/q saar) and for construction on the supply side (18.4%oya). But household consumption also showed a surprisingly strong rebound, growing at a 7.6%q/q saar pace versus a 2.9% se-quential contraction in 1Q—a turnaround that belies the de-celeration in the oya measure for consumption (to 4% in 2Q from 5.7% in 1Q12) as well as the apparent drop-off in monthly retail sales data, especially in April and May.

Initial activity reports for 3Q were also released this week, and while the July oya figures looked rather anemic at first glance (1.5% for IP and 1.3% for retail sales), they are still confronting a challenging base effect from a strong 2011. On a 3m/3m comparison both IP and retail sales are now back in positive territory (first chart) with the worst of the slowdown now apparently past—a view we can state with considerably more conviction with the 2Q rebound on the books. Overall, we think activity readings over the past two months are con-sistent with a gradual, more even, uptrend in the second half of the year after the surprisingly jagged 1H12 result. Indeed, we would not expect to extrapolate last quarter’s GDP pop in a linear way. Much of the 2Q surprise can be attributed to highly volatile public investment, which history suggests may deliver some downside payback in the coming quarters. Moreover, July’s retail and manufacturing reports showed that the improvement was not broad-based, and job growth in both sectors is retreating: employment in industry fell 0.4%3m/3m sa after a 0.3% decline in June, and there was no employment growth in the retail sector compared to the 1.0%3m/3m sa registered in June. Meanwhile, both business and consumer confidence have retreated from the highs in recent surveys. All that said, we consider the overall resilience of domestic

demand in Colombia to be impressive, and we now revise 2012 full-year GDP up to 4.3% from 3.5%.

We now see BanRep on hold BanRep has cut 25bp at each of its past two meetings, lower-ing the policy rate to 4.75%. While we had forecast a final 25bp cut at next week’s meeting, we now expect the rate to be left on hold. Considering the minutes of the August meeting, the bank was clearly expecting 2Q12 GDP to slow down compared to 1Q, while its concerns at the time were growing about a worst-case scenario on the external front. With 2Q GDP revealing less slack in Colombia than originally estimat-ed, and the ECB and the Fed putting a floor under external risks and commodity prices, BanRep is likely to be much less concerned about downside risks to growth. At the same time, high frequency price surveys suggest some pass-through is finally materializing from higher international food prices, which may add to fresh food pressures—dynamics that are already weighing on analyst inflation expectations and market break-even inflation. While we see little risk to the inflation target (3%+/-100bp), BanRep is unlikely to feel compelled to deliver further insurance to growth at a time when it appears surprisingly unneeded, and when inflation risks are moving higher. Rather, a more compelling argument for another cut may be to assist in combating FX appreciation in the context of the historically easy monetary policy emanating from the ECB and the Fed. Nonetheless, we see a relatively orthodox BanRep as unlikely to use the policy rate as an FX tool, and more likely to extend and potentially modestly step up its daily intervention policy, which currently has it buying “at least” US$20 million per day until November 2.

Colombia: real GDP demand-side breakdown %oya Weights 2010 2011 2012

Real GDP 100.0 4.0 5.9 4.3 Household consumption 62.8 5.0 6.5 4.6 Government consumption 16.2 5.5 2.6 4.2 Fixed capital formation 23.2 7.3 17.2 10.3 Exports 15.8 1.3 11.4 2.5 Imports 17.9 10.5 21.5 10.2

-20

-10

0

10

20

30

%q/q, saar

Colombia: IP and retail sales recovering in July

Retail sales

IP

2008 2009 2010 2011 2012

54

Economic Research Colombia September 21, 2012

J.P. Morgan Securities LLC Ben Ramsey (1-212) 834-4308 [email protected] Banco J.P. Morgan S.A. Laura A Karpuska (55-11) 4950-3322 [email protected]

Chile


Fri Industrial production Sep 28 %oya May Jun Jul Aug

Mining 3.6 3.8 9.1 1.6

Manufacturing production 2.8 1.1 0.6 0.9

Electricity, gas, water 3.7 5.0 4.8 4.5

Fri Retail sales Sep 28 May Jun Jul Aug

%oya 7.1 5.6 7.9 7.4

Fri Unemployment Sep 28 May Jun Jul Aug

%oya 6.7 6.6 6.5 6.4


No data released.

Colombia

Data releases and forecasts Week of September 24 - 28 Fri Unemployment rate Sep 28

May Jun Jul Aug

% unemployed population 11.85 11.33 11.50 ___ Fri BanRep meeting Sep 28

Jun Jul Aug Sep

Repo rate (%) 5.25 5.00 4.75 4.75


Industrial production

May Jun Jul

%m/m sa -0.09 4.42 -0.50 -0.74

%oya -0.32 2.77 2.30 1.48

Retail sales

May Jun Jul

%m/m sa 0.61 0.35 -0.30 0.94 %oya 0.80 4.04 -0.70 1.29

GDP

11Q4 12Q1 12Q2

%oya 6.18 4.68 3.60 4.87

%q/q saar 5.71 0.93 2.20 6.67

Peru


No data releases expected.


GDP growth May Jun Jul

%oya nsa 6.86 7.07 7.80 7.21

%oya sa 2.06 0.53 1.00 0.62

55

JPMorgan Chase Bank N.A, London Branch Allan Monks (44-20) 7134-8309 [email protected] Malcolm Barr (44-20) 7134-8326 [email protected]


United Kingdom Retail sales show a modest drop in August

MPC minutes indicate an easing bias despite strong em-ployment growth and more QE on the table for Nov

CPAC moves closer to recommending changes that will lower RPI inflation

Public borrowing in August came in below expectations but a £9-10 bn 2012/13 forecast overshoot still likely

The minutes of the September MPC meeting this week indi-cate that several members on the committee still have a bias to ease and are inclined to downplay the recent strength in em-ployment on the grounds that it is likely to be temporary. We continue to expect more QE as likely in November. Retail sales were soft in August but look set for a strong gain in 3Q owing to strength in prior months. In next week’s data we look for an upward revision to 2Q GDP to -0.4%q/q. The July index of services will be key for gauging the likely GDP out-turn for 3Q. Any upside surprise would indicate that our cur-rent 0.5%q/q forecast will need to be revised higher. But with average GDP growth over the middle two quarters of the year likely to be close to flat, this would still leave growth tracking no stronger than the BoE’s forecast from the August inflation report—which contained a bias to easing policy further.

Retail sales show a modest drop in August The volume of retail sales fell 0.2%m/m in August, following modest growth in July and a couple of strong gains late in 2Q (likely partly driven by a weaker deflator). The overall Olym-pics effect is unclear, but appears to have been a small drag in August. The ONS points out (according to feedback from online retailers) that store sales rose by a modest 0.2%m/m in August, partly due to a large increase in expenditure on sport-ing goods and some boost from the Olympics. The strength in the category that included these sales added 0.1%-pt. In con-trast, sales at (mostly) internet-based retailers showed a large 6.7%m/m drop, in part due to more people at home watching the Olympics rather than shopping online. Though the latter category is just 5% of sales, it generated a 0.3%-0.4%-pt drag in August.

Despite the weaker August number and the softer sequential trend in the first two months of the quarter, the momentum from 2Q indicates that retail sales will show something like a 4%q/q saar gain in 3Q. Though the linkage with consumption is not tight, a gain also looks likely this quarter—reflecting a bank-holiday-related rebound in spending in some sectors following a drop last quarter, and some recent improvement in household real incomes.

Retail sales

%

May 12 Jun 12 Jul 12 Aug 12

Total m/m 1.4 0.6 0.2 -0.2 3m/3m, saar 1.2 -1.8 2.9 2.8

Total, excluding auto-fuels

m/m 1.0 1.0 -0.1 -0.3

3m/3m, saar 2.7 1.6 4.8 4.2

Deflator m/m -0.4 -0.7 0.5 0.4 3m/3m, saar -0.1 -2.8 -3.7 -2.5

Deflator, excluding auto-fuels m/m -0.1 -0.4 0.4 0.1 3m/3m, saar 0.1 -1.4 -1.8 -1.3

Components (m/m):

Mostly food stores 0.4 0.5 0.3 0.2 Mostly non-food stores 1.4 1.6 -0.8 0.2

Non-specialized stores 0.9 0.1 0.3 -0.8 Textile, clothing stores 3.7 2.5 -1.3 1.6 Household goods stores 0.0 1.2 -2.4 -2.6 Other stores 0.5 2.1 0.2 1.5

Non-store retailing 1.6 -0.5 3.6 -6.7 Mostly automotive fuel 6.1 -3.1 2.9 0.4

-1.5-1.0-0.50.00.51.01.52.02.5

-2.0-1.5-1.0-0.50.00.51.01.52.0

2007 2008 2009 2010 2011 2012 2013

%q/q for consumption, %6m/6m, sa for retail salesConsumption versus retail sales (ex. auto fuel)

Retail sales

Consumption

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13

%m/m, sa, excludes auto fuelRetail sales deflator

56

Economic Research United Kingdom September 21, 2012


MPC minutes leave November QE on track The minutes of the MPC’s September meeting contain no real surprises. As expected, the vote to maintain existing policy was unanimous (and “relatively straightforward” for most). For one member (almost certainly David Miles), the decision was more finely balanced as a “good case” could be made for announcing more asset purchases at this meeting. Furthermore “some members” felt that “additional stimulus was more like-ly than not to be needed in due course.”

Since this meeting, risky assets have rallied following an-nouncements from the ECB and the Fed, and the latest UK labor market data were strong. However, the final drafting of the minutes will only have been agreed on Monday of this week, and we suspect the relatively dovish tone could have been dampened further if the MPC’s thinking was really mov-ing on. We had been anticipating that David Miles would vote for more QE in October; that looks more doubtful now. Even so, we continue to anticipate a further £50 billion extension of QE in November, when the current program of purchases is due to end. Our forecast does not show QE extending beyond £375 billion at this point, though we think risks are clearly slanted toward more QE in the early part of next year.

The MPC’s discussion of the data flow does little to raise eyebrows compared to its recent commentary. On the big puzzle of the moment—the strength of employment relative to output—the MPC is struggling for explanations like everyone else. Its statement that “It was unlikely that any one factor alone could satisfactorily explain all of the conjunction of weak output growth and relatively strong employment growth” is not new, and it should be added that it is not clear how the set of potential explanations on the table should be arranged to tell a convincing story.

On the inflation front, the MPC acknowledged that recent food and energy price increases will slow the rate at which inflation declines, but little weight appears to have been put on that as a window on more medium-term trends. Indeed, more weight appears to be being put on the fact that the im-plied drag on household real incomes may slow a recovery in consumption, keeping output growth weak. As much as more positive signs in some of the data flow are acknowledged (the July bounce in IP, strong employment growth, hints of stronger consumption), the MPC’s commentary suggests little confidence that these will deliver a recovery strong enough to keep inflation from undershooting the target over time.

Looking ahead to next week’s GDP data The upward revision to construction output in June indicates that 2Q GDP will be revised up from -0.5%q/q to -0.4%q/q in next week’s third release. We have no specific reason to ex-pect an upward revision to the 0.4%q/q drop reported in con-sumption. But the initial estimate was surprisingly weak and

looked odd compared to the strength in retail sales and em-ployee compensation—there may be some chance of an up-ward revision.

The index of services for July next week will frame the 3Q GDP outturn. We look for a rebound in July following a bank holiday depressed June reading. The average of May-July will give a sense of the underlying pace of services output, which in theory removes the impact of the changes to the number of usual working days that occurred during these months. But given the large swings associated with bank holiday effects, any surprise in the July reading is likely to have a larger-than-usual bearing on what output in the sector does for the quarter. We have said that risks to our current 3Q GDP forecast of 0.5%q/q are to the upside—the IP data alone point to a 0.6% rise. But the weaker construction figures for July shifted risks back in the other direction. Given how unpredictable the con-struction data have been lately, a services July reading that is in line with our forecast next week would still warrant making a small upward revision to 3Q GDP. But any upside surprise to services—which appears to be where the risks lie—could prompt a larger revision

CPAC moves closer to RPI changes There were two types of barriers to radical changes being made to lower RPI inflation in the UK: theoretical and politi-cal ones. The minutes of this week’s CPAC meeting indicate that while there is no consensus on which is theoretically the best approach, UK statisticians have strengthened their bias

345

350

355

360

365

370

375

28.6

28.8

29.0

29.2

29.4

29.6

2007 2008 2009 2010 2011 2012 2013

Mn, sa, LFS household survey

UK employment versus GDPReal £ bn, sa, 2009 prices

GDP

Employment

0.4

0.6

0.8

1.0

1.2

05 06 07 08 09 10 11 12 13

%

The formula effect that drives part of the RPI/CPI gap

57



for recommending that large changes are pushed through. One of four options will be formally selected for recommendation later this year, following a public consultation. The first in-volves no changes; the second, changes just to clothing prices; the third and fourth, radical changes that are really the key source of concern. Given the bias of the statisticians, the chances that one of the latter two is eventually selected have increased.

That said, it still leaves other barriers that are more political in nature: namely that a decision that lowers RPI inflation by almost a percentage point would anger those who have pen-sions linked to the RPI. The public consultation will be launched from October 8 until late November. Depending on how those affected voice their objections in the media, this may deter CPAC from recommending more radical action when it meets again later this year to discuss responses from the consultation. This increases the importance of listening to the public reaction over the coming weeks.

After CPAC listens to responses and makes a recommenda-tion, the BoE must then decide whether proposed changes would lead to a “detrimental” impact on holders of “relevant” index-linked gilts. The definition of what is “relevant” means the outcome of the BoE’s decision is not clear. But if the de-cision is ultimately put forward to the Chancellor, it would create a further political hurdle. Rubber-stamping a change would significantly reduce the UK’s interest payments on a large portion of government debt (indexed-linked gilts ac-count for roughly 32% of the total, including accrued infla-tion). Authorizing a large redefinition of the RPI in the midst of a European sovereign debt crisis would be risky to say the least—particularly given that we think Osborne will already be forced to sacrifice some political credibility by shifting the fiscal goalposts at this year’s autumn statement (by delaying the targeted date for debt reduction). On the basis of this polit-ical barrier and objections from those affected by a shift, we think there is a good chance that changes to the RPI will be more subtle (i.e., the second option described above) but this week’s minutes lower our conviction in taking this view. One way or the other, a final decision will be made in January of next year, leading to possible implementation in February 2013.

Assuming the most extreme fourth option does go ahead, there is a case for expecting the residual gap between RPI and CPI inflation to still average a positive 0.3%-0.4%-pt. Exclud-ing the formula effect, the RPI ran 0.4%-pt above the CPI over the period 1989 to 2007. There are, however, always future changes that can be made that break patterns of the past, as we have seen with the discussions about the formula effect. The ONS wants to remove unjustified causes of differences between RPI and CPI inflation, of which the formula effect was the main candidate. Our sense is that future changes will

be relatively small—for example, the decision to include owner-occupied housing in the CPI is likely to have only a modest impact, doing little to close the gap with the RPI. If this is the case, a positive gap is likely to remain. But the risks are that the ONS pushes more strongly to remove other differ-ences between the two measures in the future.

Public borrowing still set for an overshoot The August borrowing requirement (excluding. financial sec-tor interventions) actually came in slightly lower than ex-pected at £14.4 billion. But the bigger picture has not changed. Cumulative borrowing in the first four months of the current fiscal year was £10 billion higher than year earlier levels. And the August figures still failed to show any decline from last year, which is what is needed to begin offsetting the overshoot seen to date. The deficit appears on track for an overshoot of the OBR’s £120 billion projection for FY12/13 of at least £9 billion—and possibly more if revenues (the main source of the forecast miss to date) fail to improve later this year.

A few weeks back we highlighted that Osborne would be faced with a difficult choice at the December 5 Autumn Statement: tighten fiscal policy by an additional 1% of GDP before the 2015 election in order to meet the government’s fiscal rules, or change the rules to avoid an additional squeeze on growth. This release does little to reduce the pressure on the Chancellor, and we continue to think Osborne will opt to delay the targeted date for debt reduction by one year to 2016/17. King’s comments in a TV interview cross the line of what is acceptable for the governor of a central bank to say about fiscal policy (see email by Malcolm Barr this Friday for more). But they at least make is easier for Osborne to wriggle out of one of his stated fiscal commitments later this year, which is a positive for growth.

-4

-2

0

2

4

89 94 99 04 09

%oya

The gap between RPI and CPI inflation, excluding formula effect

Average since 1989: 0.4%

58

Economic Research United Kingdom September 21, 2012



Tue BBA lending Sep 25 Sa 9:30am May Jun Jul Aug Secured lending (ch £ bn, sa) -0.1 0.3 0.3 Loan approvals (000s sa)1 30.0 25.9 28.4 1. For house purchase.

Wed BoE quarterly credit conditions survey Sep 26 Net % balances 11:00am 4Q11 1Q12 2Q12 3Q12 Availability of secured credit to Households: Past three months 1.9 3.8 -4.1 Next three months 7.6 -8.7 0.1 Availability of unsecured credit to Households: Past three months 12.5 4.7 8.1 Next three months 7.0 -10.4 5.6 Availability of overall Corporate credit: Past three months 11.0 -2.6 -3.2 Next three months 8.1 -6.4 0.7

Wed CBI survey of distributive trades Sep 26 % balance 11:00am Jun Jul Aug Sep Volume of retailer sales 42 11 -3

Thu Balance of payments (quarterly report) Sep 27 £ bn, sa 9:30am 3Q11 4Q11 1Q12 2Q12 Trade in goods and services -7.9 -5.5 -8.2 Income 2.3 4.4 2.2 Current transfers -5.7 -6.1 -5.5

Current balance -11.3 -7.2 -11.2

Thu Business investment (final)

Sep 27 2000=100, sa 9:30am 3Q11 4Q11 1Q12 2Q12 %q/q 2.1 -0.8 1.9 %oya 4.8 4.5 14.8

Thu Real GDP (national accounts) Sep 27 Sa 9:30am 4Q11 1Q12 2Q12¹ 2Q12 Total GDP (%q/q sa) -0.4 -0.3 -0.5 -0.4 %oya sa 0.6 -0.2 -0.5 -0.4 %q/q saar -1.4 -1.3 -1.8 -1.4 Breakdown (%q/q sa): Private consumption 0.5 -0.1 -0.4 -0.4 Public consumption 0.8 1.9 0.0 0.0 Fixed investment -0.6 1.9 -3.2 -3.2 Exports 3.1 -1.7 -1.7 -1.7 Imports 1.6 -0.3 1.4 1.4 1. Preliminary outcome

See main text.

Fri GFK consumer confidence Sep 28 Sa 12:01am Jun Jul Aug Sep % balance -29 -29 -29

Fri Index of services Sep 28 Sa 9:30am Apr May Jun Jul %m/m -0.3 0.9 -1.7 1.3 %oya 1.7 1.2 -0.7 0.7 %3m/3m saar -0.4 1.6 -0.3 -0.6

See main text.


Rightmove house price index

Nsa

Jul Aug Sep %m/m -1.7 -2.4 -0.6

Retail prices

%oya

Jun Jul Aug CPI 2.4 2.6 2.6 2.5

Core CPI1 2.1 2.3 2.2 2.1

RPI (1987=100) 241.8 242.1 243.5 243.0

RPI 2.8 3.2 3.1 2.9

RPIX 2.8 3.2 3.1 2.9

1. CPI ex food, energy, alcohol, and tobacco.

CPAC meeting statement and papers released

See main text.

BoE's minutes of MPC meeting

Unanimous vote for unchanged policy.

Retail sales

Volumes, sa

Jun Jul Aug Including auto fuel (%m/m) 0.8 0.6 0.3 0.2 -0.2

Ex auto fuel (%m/m) 1.2 1.0 0.0 -0.1 -0.2

Ex auto fuel (%oya) 3.4 3.1 3.4 2.7 3.1 Ex auto fuel (%3m/3m saar) 2.1 1.6 5.9 4.8 4.2

CBI industrial trends

% balance

Jul Aug Sep Total order book -6 -21 -8

Output expectations 11 0 7

Output prices -3 1 3

Public sector finances

£ bn, nsa

Jun Jul Aug PSNCR 0.9 -0.8 -22.9 -25.0 -9.6

PSNB 12.2 12.5 -1.8 -1.9 12.4

PSNB (ex. fin. int.) 14.6 14.5 0.6 0.1 15.5 14.4 Current budget (ex. fin. int.) -13.1 1.6 -14.0 -11.7 Net debt to GDP (%) 136.8 136.6 136.0 Net debt to GDP (%) ex fin it. 66.2 65.9 65.7 65.6 66.1

59

JPMorgan Chase Bank N.A, London Branch Nora Szentivanyi (44-20) 7134-7544 [email protected]


Central Europe CNB board likely to cut 25bp next week

NBH could cut again next week in another tight vote

Romania: odds for hikes are increasing

Poland: NBP likely to pull the trigger in October

The Czech National Bank has very few options other than to ease monetary policy given deepening recession in the coun-try and a slowdown in exports, the single growth engine; in-flation also came in below the level expected by the CNB by 0.1%-pt in August. Therefore, we think the board will decide to cut by another 25bp to 0.25%. However, room for policy rate cuts is limited since the key rate level is already very close to zero and a majority of the CNB board members clear-ly oppose unconventional easing (five out of seven). State-ments this week from Governor Singer and Vice-Governor Hampl reflected the split in the board. The Governor repre-sents the camp that believes the base rate should likely be cut to zero and if that is not enough then non-standard easing would be justified. On the other side, Vice-Governor Hampl is part of the neutral/hawkish camp that is divided in terms of rate cuts, but seems to be clearly against unconventional measures that are seen as too risky for financial stability and pro-inflationary. Regarding the vote on September 27, we be-lieve Hampl will support the Governor’s camp and vote for a 25bp cut (board member Lizal is likely to vote for a cut as well). We expect a tight decision with a 4-3 vote in favor of the cut.

NBH remains in easing mode Our base case now is for the NBH to cut another 25bp in an-other tight vote (4-3). On balance, we believe the external members will argue that continued improvement in Hungary’s risk metrics (CDS spreads and bond yields are both 50bp tighter m/m, although HUF is 1.5% weaker versus EUR) gives the NBH room for maneuver to ease rates further. Rela-tions with the IMF/EU remain volatile but the Hungarian au-thorities continue to engage with the Troika. The new Infla-tion Report is unlikely to support the case for further mone-tary easing but the external members are likely to argue that much of the inflation overshoot stems from factors beyond the control of monetary policy (i.e., tax hikes, regulated prices, and supply-side shocks). We expect the 2012-13 CPI forecast to be revised up further, with the return to the inflation target likely to be delayed until early 2014 from late 2013. The NBH staff might sound more hawkish on the surprisingly strong pace of private sector wage growth and the recent acceleration in core inflation (chart). In our view, given the cyclical posi-tion of the economy, underlying measures of inflation should be lower. Although the recent rise reflects cost shocks rather than demand-driven inflationary pressure, a quick succession

of rate cuts could eventually undermine the NBH’s inflation-fighting credibility. As such we pencil in just one more rate cut between now and year-end (to 6.50%).

Romania: inflation calls for stable rates In spite of growth weakness, a large negative output gap, and the general tendency to ease in the region, we look for the NBR to remain on hold at 5.25% on September 27 and in 2013 mainly because inflation is currently substantially above the central bank forecast (3.9% versus less than 3.5% forecasted) and the outlook is worrying, taking into account food price risks. Monetary easing would not be possible also because the local currency remains at risk of sharp weakening due to the political situation. The latter is likely to offer surprises at least up until elections and/or a new EU/IMF deal is reached. We believe inflation will accelerate to almost 5% at the end of this year and to almost 6% in 1H13. This would normally severely limit the NBR’s ability and willingness to cut rates. But, even though headline and core inflation increases are chiefly food-driven, we would not rule out monetary policy tightening by restricting liquidity in a first instance and by hiking the policy rate afterward. This scenario is quite important, given that the market is focused on monetary policy easing next year. Although we see a clear bias for a tighter monetary policy stance, for the moment we prefer to keep a flat key rate profile during 2013.

Poland: 25bp rate cut likely We expect a 25bp rate cut, but this is not a done deal (60%-65% probability in our view). We believe the weak August activity data (IP, construction) and inflation data satisfy the condition for a cut set out in the September MPC statement. Recent comments from MPC members cast some doubt on an October rate cut. Yet, we believe there is little upside for the NBH in postponing the rate cut until the November meeting when the new Inflation Report is published, as this would give the impression that the NBP is behind the curve. We ex-pect Bratkowsi, Chojna-Duch, Belka, Zielinska-Glebocka, and Hausner to support a rate cut at the October meeting.

The Central Europe data watch is published biweekly, next on Oct 5.

0

2

4

6

8

10

2008 2009 2010 2011 2012 2013

%oyaHungary: inflation on the rise

Private sector wage growth (ex. bonuses)

CPI

Core CPI

60

Economic Research Central Europe September 21, 2012


Czech Republic:

Data releases and forecasts Weeks of September 24 - October 5

Thu Monetary policy announcement Sep 27

See main text. We look for a 25bp cut to 0.25%.

Review of past two weeks’ data

Consumer prices %oya Jun Jul Aug %oya 3.5 3.1 3.4 3.3

%m/m nsa 0.2 -0.1 0.0 -0.1

Food 8.4 7.0 7.6 7.3

Housing 4.9 4.8 4.9 4.7

Transport 2.4 1.9 2.3 2.9

The decrease in consumer prices was mainly driven by vegeta-bles (-9%m/m out of which potato prices fell by 28.4%). This indicates that the vegetable and fruit harvest was not awful in the Czech Republic, similar to developments seen in some re-gional countries like Romania or Ukraine (though prices are fal-ling less than indicated by the seasonal pattern). However, signs of upside pressure coming from the recent increases in soft commodity prices on global markets have emerged—flour prices rose by 7.3%m/m. Food inflation remains an upside risk for the inflation profile, and we expect to see a more pro-nounced impact later in the year and in 1H13. We look for infla-tion to remain around 3.3%oya in September. We also maintain our year-end forecast at 3%oya for 2012 (same as the CNB forecast published in August). For end-2013 we forecast 2%oya, while the CNB expects 2.3%.

Balance of payments CZK bn May Jun Jul Current account -8.2 -7.0 -9.1 -6.8 -8.8 -11.5

YTD 32.7 23.2 23.5 16.3 16.7 4.8

YTD-a year ago -21.3 -34 1

-54.1

Trade balance 10.5 13.5 14.4 18.7 10.1 11.9

Service balance 4.7 3.6 5.2 4.2 5.2 5.0

Income balance -23.4 -24.3 -2 3

-28.4 -22.3 -25.1

Current transfers 0.0 0.2 -1.5 -1.3 -1.8 -3.4

Financial account 31.6 26.4 -13 1

-3.8 -4.6

FDI, net 10.5 5.1 -8.2 -4.2 16.7

Portfolio investments 6.3 4.9 15.1

Other investments -25.9 -27.3 -12

-9.2 -40.7

July dividend payments were larger than we expected and this led to a wider C/A deficit; payments to the EU budget also ex-ceeded inflows somewhat more than we had anticipated. The data for 1H12 were revised to show a smaller C/A surplus, but this remains much better than 2011, when a deficit was recorded for 1H.

Hungary:


Mon Retail trade Sep 24 % change 9:00am Apr May Jun Jul %oya wda -2.8 -2.5 -1.7 -1.5 %m/m swda -1.2 0.0 0.0 -0.3

Tue Monetary policy announcement Sep 25

See main text.

Fri Balance of payments

Sep 28 EUR mn 8:30am 3Q11 4Q11 1Q12 2Q12 Current account balance 438.3 134.3 186.1 685 Trade balance 838.0 795.3 1156.2 Exports %oya 8.9 3.0 0.3 Imports %oya 7.5 3.6 1.4 Service balance 988.9 689.5 605.8 Income balance -1591.1 -1578.9 -1422.1 Current transfers 202.4 228.4 -153.7 Fin + cap balance 1658.6 -1052.0 -2178.9 FDI, net -521.5 1236.8 345.4 Portfolio investment 2056.4 -1181.5 406.2 Other investment -212.4 -1420.6 -3184.5

The current account surplus is forecast to have risen in 2Q12, both q/q on seasonal factors and compared to year-earlier levels. Our forecast would put the 4-quarter trailing C/A surplus at 1.5% of GDP. Further improvement in the trade balance is the main driver of the improvement with the 4-quarter trailing trade surplus rising to 4.2% of GDP from 3.9% in the previous quarter.

Fri Industrial output Oct 5 %oya 9:00am May Jun Jul Aug Production, wda 2.4 0.6 -2.2 -2.0 Production, nsa 0.1 0.6 0.0 -4.0 %m/m swda 3.5 -2.2 -1.2 -0.4


Consumer prices %oya Jun Jul Aug All items (KSH) 5.6 5.8 6.1 6.0

%m/m nsa 0.1 -0.1 0.2 0.1

Food 5.0 6.1 __ 6.3

Consumer durables -1.0 -0.9 __ -0.8

Fuel 14.4 13.9 __ 12.2

Services 4.0 4.1 __ 4.1 Core inflation 5.0 5.2 5.1 __ 5.2 %m/m sa 0.4 0.3 0.4 __ 0.3 Regulated g&s (NBH) 4.8 4.7 __ 5.0 Market g&s (NBH) 5.8 6.0 __ 6.3

61



Headline inflation continued to accelerate in August. The sharp increases in fuel prices (+3.6%m/m) and further pass-through from the excise tax hike on tobacco were the main drivers be-hind price increases in August. Food prices decreased by 0.9%m/m in August in line with what would have been justified by the seasonal pattern, but less than decreases in 2011 and as a result food inflation accelerated to 6.3%oya from 6.1% in July. CPI excluding tax effects also increased to 3.7%oya from 3.5%, driven by accelerating food, clothing, and fuel prices. This was the third consecutive increase in the ex.-tax CPI measure. The official measure of core CPI rose 0.3%m/m sa and the annual rate was stable at 5.1%. Inflation will likely accelerate further in September toward 6.5% as food inflation adds to the pressure and a number of tax hikes have yet to show up fully in the data. Agricultural producer price inflation picked up sharply to 6.6%oya in July from 1.5% in June, and most of the pass-through to food inflation is likely to materialize over the next three months. We look for inflation to peak at above 6%oya in September and then correct lower toward 5.5% at the end of 2012. Next year, we expect disinflation to continue and reach 3.5% at year-end, but to remain above the NBH target.

Industrial output %oya May Jun Jul Industry, wda 2.3 0.7 0.6 __ -2.1

Nsa 0.1 0.6 __ 0.0

%m/m 3.5 -2.2 __ -1.2

Average gross wages %oya May Jun Jul Gross wages, nominal 6.4 4.1 __ 7.1

Private sector 9.4 7.2 __ 9.2

ex bonuses 9.6 7.3 __ 8.0

Public sector -0.6 -3.1 __ 0.9

Private sector wage growth excluding bonuses continued to ac-celerate sharply in July and is likely to be a cause for concern among the more hawkish camp on the MPC. Both wage growth and core inflation are running at a stronger pace than would be justified by economic fundamentals. We believe the rise largely reflects the large hike in minimum wages at the start of the year and knock-on effects for labor costs at the lower end of the wage scale.

Poland:


Tue Retail sales Sep 25 %oya, unless otherwise stated 10:00am May Jun Jul Aug Retail sales (nominal) 7.7 6.4 6.9 4.8 Constant prices 4.3 2.6 3.4 0.9

Tue Monetary policy announcement Oct 3

See main text.


Balance of payments EUR mn May Jun Jul CA balance -749 -1240 --1115 -1027

YTD (bn) -5.8 -7.0 -8.1 -8.0

YTD-a year ago (bn) -4.5 -21.0 - 6 . 5 -23.0 -8.4 -24.8

Trade balance -933 -412 __ -314

Exports %oya 0 1 __ 13

Imports %oya 0 -6 __ 4

Service balance 357 546 __ 407

Income balance -1365 -1441 __ -1555

Current transfers 1192 67 __ 435

Fin + cap balance -1110 4173 __ 2780

FDI, net 769 279 __ 413

The July current account deficit narrowed more than forecast due to a sharply lower trade deficit. The July trade deficit de-clined 74%oya, taking the 12-month deficit down to just 2.2% of GDP from 2.5% in the previous month—the lowest since late 2010. Export growth shot up to 12.7%oya in July from just 0.5% in June, likely on temporary factors, while import growth picked up less, to 4.2%oya from 5.7%oya in June. The im-provement in the trade balance more than offset continued wid-ening of the income deficit. The 12-month current account defi-cit narrowed to 4.3% of GDP, and we look for further im-provement to 3.5% of GDP by year-end. Consumer prices %oya, unless otherwise stated Jun Jul Aug %oya 4.3 4.0 3.9 3.8

%m/m nsa 0.2 -0.5 -0.2 -0.3

Food 5.4 5.0 __ 5.3

Fuel 13.1 10.6 __ 10.2

The August CPI data confirmed a slowdown in both headline and core inflation. Food prices dropped 1.1%m/m, less than in August 2011, but broadly in line with the seasonal pattern. Fuel prices rose a bit less than we had penciled in (0.9%m/m versus our 1.5% forecast). Price growth in household energy also de-celerated on base effects. Core inflation eased to 2.0% from 2.3% previously. We expect inflation to reaccelerate temporari-ly above 4% in September on the back of rising commodity prices and base effects. The CPI rate is then likely to fall back to the 1.5%-3.5% target range in November, ending the year at around 3.2%. We expect inflation to ease to the midpoint of the target range by April 2013 although we see some reacceleration toward 2.8% in 2H13.

Gross wages and employment %oya Jun Jul Aug Gross wages, nominal 4.3 2.4 2.5 2.7

Real (CPI adj.) 0.0 -1.5 --1.4 -1.1 Employment, 000s, 5531 5529 5522

Employment, %oya 0.1 0.0 0.0

62

Economic Research Central Europe September 21, 2012


Industrial output %oya Jun Jul Aug Industry 1.2 5.2 0.9 0.5

%oya swda by GUS 2.7 4.7 1.5 1.9

%m/m swda by GUS -1.9 2.4 -0.5 -0.4

Manufacturing 1.8 5.8 __ 0.7

Construction -5.1 -8.7 __ -5.0

August headline industrial production slowed more than fore-cast, although the m/m contraction was close to our forecast. The details of the report show that the weakness stemmed pri-marily from export-oriented manufacturing sectors such as mo-tor vehicles (-8.3%oya), furniture (-7.1%), pharmaceutical prod-ucts (-9.1%), and coke and refined petroleum products (-12%). Production of food products is still expanding (5%). Construction, reported separately, stabilized with output up 0.2%m/m sa after average monthly declines of 2.5%m/m in the previous three months. The slide in buildings construction deep-ened to -13%oya, while civil engineering projects (i.e., roads and other infrastructure projects) recovered to +5%oya.The Au-gust data are tracking our forecast for 3Q GDP growth to slow to around 2%oya. In September two fewer working days will weigh significantly on the over-year-ago activity numbers, likely leading to an oya decline. At the same time we expect the large inventory drag to reverse somewhat in 3Q, providing an offset to weakening final domestic sales. We look for GDP growth to de-celerate further to around 1.5%oya in 4Q12.

Producer prices %oya Jun Jul Aug Producer prices 4.4 3.7 __ 3.1

%m/m nsa -0.5 -0.2 __ 0.1

Core inflation %oya Jun Jul Aug CPI-ex food and energy 2.3 2.4 2.1

CPI-ex administered prices 3.8 3.5 __ 3.4

CPI-15% trimmed mean 4.0 3.9 __ 3.8

Avg. of four NBP measures 3.3 3.3 __ 3.1

Romania:


Tue Monetary policy announcement Sep 27

See main text. We look for an unchanged policy rate at 5.25%.

Tue Retail sales Oct 2 %oya 10:00am May Jun Jul Aug Retail sales, sa 5.6 4.0 4.4 4.9 %m/m nsa 1.1 -1.1 0.6 0.4

Retail sales are expected to continue to increase on a sea-sonally adjusted basis as the poor harvest should offer some help to supermarket sales and wage increases in the

public sector should offer additional support. We look for acceleration in annual rate as well, but we also expect a sharp decline until year-end because of uncertainty associ-ated with elections and negative base effects.

Fri Real GDP, final

Oct 5 %oya, unless otherwise stated 10:00am 3Q11 4Q11 1Q12 2Q12 Real GDP 4.4 1.9 0.3 1.2 %q/q saar 4.4 -0.3 0.6 2.1 Domestic demand 5.2 3.7 2.1 3.8 Private consumption 3.6 2.8 0.6 1.6 GFCF 11.4 10.3 12.2 15.2


Consumer prices %oya Jun Jul Aug %oya 2.0 3.0 3.7 3.9

%m/m nsa 0.0 0.6 0.3 0.5

We revised our end-2012 CPI forecast to 4.7%oya from 4% previously and expect headline inflation to peak at 5.9% in 2013; we also updated our end-2013 forecast to 5.1%oya from 4.5% previously. Higher-than-expected food and fuel prices pushed inflation to 3.9%oya in August from 3%, thus sharply decreasing the likelihood of reaching the 2012 inflation target (3%±1%-pt); the 2013 inflation target of just 2.5%±1%-pt looks like an impossible mission. The sharp increase in food prices in a month when food prices should normally have fallen high-lights how big the risks are to the inflation outlook. As we have noted several times, the NBR inflation forecast is very optimis-tic (3.5% for September 2012, 3.2%oya for end-2012, and 3% for end-2013); we expect sharp upside revisions in November. We believe the NBR will probably tighten liquidity in a first in-stance. Key rate cuts next year are highly unlikely, as hikes are becoming more likely.

Industrial output %oya May Jun Jul Industrial output, nsa 3.1 -1.3 2.0 2.9

Industrial output, sa -0.2 1.4 1.8 1.0 1.9

%m/m sa -0.7 -0.5 -0.1 0.6 1.1

IP recovery was even stronger than we expected in July on the back of the automotive industry. Given that new models were launched into production, growth in IP should continue for a few months.

Current account balance EUR bn May Jun Jul Current account -0.7 -0.5 -0.4 0.1

Ytd -2.0 -2.4 -2.8 -2.4

Ytd a year ago -2.5 -3.4 -3.8

C/A posted a small surplus in July on the back of a large surplus in transportation services and lower trade balance deficit. These were mainly temporary factors, and we expect deficits until year-end. We look for the C/A deficit to remain contained this year at about 3.8% of GDP versus 4.4% registered in 2011.

63

JPMorgan Chase Bank, N.A., Johannesburg Branch Sonja Keller (27-11) 507-0376 [email protected]


South Africa SARB left its policy rate on hold, as expected; further

action “highly dependent” on developments

CPI ticks up to 5.0%oya in August (from 4.9% in July); upswing in food fails to show up in the data

Strike at Marikana ends as a wage agreement is reached, but ripple effects will continue to be felt

The SARB kept its policy rate on hold at 5%, in line with ex-pectations, after what the MPC described as a “pre-emptive” 50bp reduction at the July meeting. The tone of the statement remained dovish as the global outlook has weakened further with domestic growth marked down. The MPC revised its GDP growth forecasts for 2012 and 2013 to 2.6% and 3.4%, respectively, from 2.7% and 3.8% previously. On inflation, the MPC now projects a slightly higher profile, particularly near term, yet inflation is anticipated to remain within the target band. After a likely trough of 4.9% in July, inflation is expected to climb to 5.3% in 4Q12 and average 5.2% in 2013 (up from 5.1) and 5% in 2014 (down from 5.1%). These revi-sions incorporate pass-through from higher oil and food prices, and risks around the forecasts are viewed as broadly balanced. Core inflation is seen as well contained with an expected peak of 4.9% in 4Q12 (vs. 5.4% previously).

Governor Gill Marcus added that further actions will be “highly dependent” on global and domestic developments. This stronger wording expresses, in our view, greater willing-ness to act near term, if need be. We think the economy could lose further momentum in the near term: Apart from down-ward pressures on exports due to strikes, growth in consumer spending has slowed to 3.0%q/q saar in 1H12 (from 4.2% in 2H11) and private sector fixed investment growth slowed to 2.1% in 1H12 (from 5.8% in 2H11), with forward-looking indicators suggesting a potential contraction ahead. Therefore, we continue to see a 50%-60% chance of a rate cut in coming months, most likely at the January meeting. The main risk to this view is that the currency may weaken, particularly after the upcoming inclusion in a benchmark bond index, which would prevent further easing and trigger a more hawkish tone.

CPI inflation rises modestly; upward pres-sure from grain prices remains absent CPI inflation edged higher to 5%oya in August from 4.9% previously, in line with market expectations, with the index advancing 0.2%m/m. The upward drivers were core inflation, which increased to 4.6%oya (from 4.5% in July) and petrol prices, which accelerated to 9.3%oya (from 8.9% previously) due to a 22c/l rise in fuel prices. Food inflation continued to ease to 5.1%oya in August from 5.4% previously. While the

steep rise in global grain commodity prices has started to be reflected in higher PPI readings, evidence of pass-through to CPI is currently largely absent. The July CPI print likely marked the bottom of the inflation cycle at 4.9%oya with a steady climb now likely as petrol prices rose in subsequent months and are set to tick up further in October. In addition, we expect food inflation to push headline inflation higher from 4Q12. However, a wide output gap should help to con-tain upward pressure on core inflation. We expect headline inflation to reach 5.4%oya in December before peaking around 6% in mid-2013, partly due to base effects, before easing back to 5.2% by end-2013.

Wage agreement at Marikana ends strike but the standoff is set to continue Workers at the Marikana mine accepted an offer of up to 22% wage increases plus a one-off payment of R2,000. The agree-ment brought a six-week strike to an end, with 80% of work-ers reportedly returning to work the following day. While the deal is likely to help contain the crisis in mining, the ripple effects will continue to be felt across the industry. In fact, the employer’s generous offer will set a new benchmark for wage increases in the sector, with wage costs set to rise substantial-ly, further squeezing the profit margins of an industry strug-gling with falling metal prices. Labor relations in the area remain tense with strike actions at some of the other mines.

The South Africa data watch is published biweekly, next on October 5, 2012.

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JPMorgan Chase Bank, N.A., Johannesburg Branch Sonja Keller (27-11) 507-0376 [email protected]


Thu Producer prices Sep 27 %oya, except as noted 11:30am May Jun Jul Aug Total (%oya) 6.6 6.6 5.4 __ %m/m nsa 0.5 4.4 1.6 __

Fri Monetary and credit aggregates Sep 28 %oya, except as noted 8:00am May Jun Jul Aug M3 6.4 7.0 8.3 __ M0 13.4 9.3 11.0 __ Private sector credit 8.3 8.7 8.3 __ %m/m nsa 0.5 0.9 1.1 __ Credit to households 7.4 7.7 8.1 __ Total domestic credit 7.6 8.2 8.8 __

Fri Trade balance Sep 28 R bn, except as noted 2:00pm May Jun Jul Aug Trade balance -8.9 -5.7 -6.7 __ Exports 62.8 61.7 63.5 __ %m/m 20.4 -1.7 2.9 __ Imports 71.7 67.4 70.2 __ %m/m 15.6 -6.0 4.1 __

Mon Kagiso BER PMI Oct 1 11:00am Jun Jul Aug Sep PMI (% weights) 48.2 51.0 50.2 50 Business activity (25) 47.0 50.8 50.6 __ New sales orders (30) 46.5 52.2 46.9 __ Suppliers' performance (15) 50.8 50.8 53.5 __ Inventories (10) 54.5 56.5 52.2 __ Employment (20) 46.8 47.0 51.0 __ Memo: prices paid 65.1 62.7 70.9 __ Business expectations 57.4 54.0 52.9 __ PMI nsa 45.1 46.7 49.2 __

Tue New vehicle sales Oct 2 %oya, except as noted 11:00am Jun Jul Aug Sep Total vehicle sales 15.6 18.4 9.4 __ %m/m nsa 3.3 4.2 4.0 __

Fri SARB official reserves Oct 5 US$ bn, except noted 8:00am Jun Jul Aug Sep Gross reserves (R bn) 404.2 404.1 420.5 __ Gross reserves 49.2 49.4 50.0 __ International liquidity 47.9 48.0 48.3 __


Real GDP by expenditure type %q/q saar, 2005 prices 4Q11 1Q12 2Q12 %q/q saar 3.2 2.7 3.2 3.2

HH consumption 4.6 3.1 3.5 2.9

GFCF 7.2 5.3 2.3 5.7

Domestic demand 5.1 4.3 3.3 4.7

Balance of payments

R bn, saar, except where noted 4Q11 1Q12 2Q12 Trade balance -17.1 -42.2 -42.1 -59.5 -75.7

% of GDP -0.6 -1.4 -1.8 -2.4

Current account balance -110 -153 -153 -161 -200

% of GDP -3.6 -4.9 -5.1 -6.4

Manufacturing production Volume output May Jun Jul Manufacturing (%oya) 4.4 0.8 0.9 __ 5.8

%m/m sa 3.1 3.2 -2.4 __ -1.1

BER consumer confidence Index 1Q12 2Q12 3Q12 Composite total 4.7 -2.7 2.0 -0.6

Consumer prices %oya, except as noted Jun Jul Aug CPI 5.5 4.9 5.1 5.0

%m/m sa 0.2 0.3 0.3 0.2

Core 4.6 4.5 4.6 4.6

Retail sales %oya May Jun Jul Real 7.1 5.8 8.3 8.6 __ 4.2

Nominal 11.3 10.0 12.7 13.1 __ 8.2

Monetary policy decision See main text.

65

J.P. Morgan Australia Limited Stephen Walters (61-2) 9003-7980 [email protected] Ben K Jarman (61-2) 9003-7982 [email protected]


Tom Kennedy (61-2) 9003-7981 [email protected]

Australia and New Zealand RBA minutes show officials calm in a storm

Credit growth should be relatively steady, reflecting contrasting drags and supports

NZ economy expands 0.6%q/q in 2Q, a solid result and reason to downplay weakness in labor data

This week was a rare one in the Antipodes in that there were more data to chew on in New Zealand than in Australia. GDP expanded a solid 0.6%q/q in New Zealand in 2Q, and while the pace of growth in the first half of 2012 may have been overstated somewhat (the expenditure side has been running somewhat softer than headline growth measured by produc-tion), the broader message from the data is the right one. The economy is withstanding the deleveraging drag, and is gradu-ally gaining momentum. At the same time, most of the upside to domestic growth outcomes is being captured through the currency, which reduces the need for the RBNZ to do much on the policy side. The incoming Governor and Finance Min-ister signed a new Policy Targets Agreement, which we see as differing little from existing arrangements in practice.

In Australia, the minutes to the RBA’s September Board meeting, at which officials left the cash rate on hold at 3.50%, were released. The minutes show the RBA’s top brass sound-ing fairly comfortable, despite the fact that spot market dy-namics for Australia’s key commodity exports were looking quite worrisome at the time of the meeting. In the last two weeks, iron ore prices have recovered substantial ground, and we have no way of knowing whether that fact colored the tone of the minutes, which can of course be “massaged” up until their release date. Nevertheless, the message seems to be that the cash rate will remain on hold until conditions weaken fur-ther and, importantly, “significantly.” On our forecasts, this will occur, but not until around year-end.

RBA minutes characteristically sober The minutes from the RBA’s latest Board meeting are inter-esting enough, in that they summarize the thinking of board members from two weeks earlier. That is useful, as always. The minutes refer, however, to a meeting that occurred before some significant global and market developments, including the bold policy actions by the ECB and the Fed, which have altered the offshore policy and risk landscape in a material fashion.

In addition, the minutes refer to the plunge in bulk commodity prices, but iron ore prices have bounced more than 20% since the Board meeting (which occurred the day iron ore prices bottomed), although AUD also is higher (having bottomed at

102 US cents the same day), which mitigates some of the im-pact of the recovery in commodity prices.

That said, there were some interesting takeaways. In leaving rates on hold, the RBA used the now very familiar phrases that growth would be “close to trend,” and that inflation will be “consistent with target,” such that the level of the policy rate, therefore, is “appropriate.” There is a reference toward the end highlighting that there is scope to lower the cash rate (not too enlightening), but it would take a “significant” dete-rioration in the outlook to trigger a move. It seems that isolat-ed sources of anxiety here and there would not be sufficient; we have enough of those already.

Steady as she goes on domestic outlook The commentary on the domestic economy sounded a little more constructive than earlier verbiage. Anecdotes from re-tailers hinted that August was a better month for sales, and there has been further evidence that housing dynamics have improved. While there was debate at the meeting about the contractionary impact of high AUD, which officials indicated may have been overvalued, the key measure of the jobless rate, which should capture all of these influences, remained low.

The comments about the mining investment boom sounded very sanguine. Even with iron ore prices at their most recent lows, which the minutes highlight had contributed to some longer-dated mining projects being deferred, the official esti-

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Economic Research Australia and New Zealand September 21, 2012



mate was that the impact on near-term investment activity would be small. And, as we now know, bulk prices have re-covered strongly, so officials were right to have been largely unworried about the near-term outlook. They still expect the peak in resource investment spending to be sometime in 2013-14 at “around 9% of GDP.”

Financial themes in focus next week The RBA releases its semiannual Financial Stability Review (FSR) next week, which comes at an opportune time given the chatter in some corners of global financial markets about the health of the Australian banking system. The usual slew of charts showing bank profitability (solid), delinquent loans (low), and funding schedules (running ahead of schedule) will paint a pretty sanguine picture. In the context of a persistently elevated currency, that is creating a significant disinflation force, any commentary on the outlook for capital inflows, particularly given G-4 central bank policy decisions of late, will be interesting.

Later that day, the Assistant Governor (Financial Markets) Guy Debelle delivers another speech, following this week’s remarks on the regulatory outlook and the implications for bank funding and the transmission of policy. Debelle speaks at Deakin University’s Richard Searby Oration, on “Credo et Fido: Credit and Trust.” No doubt the issues of counterparty risk will be discussed in detail, and in the Australian context, the operational supports the RBA has at its disposal to plug such market dislocations.

NZ GDP as good as could be expected Across the ditch, the data flow in New Zealand delivered fair-ly positive news. The economy expanded 0.6%q/q in 2Q, a solid result given the hurdle imposed by the output surge in 1Q. The first-quarter result was revised down a touch, from 1.1%q/q to 1.0%q/q, but this still leaves the economy growing at 2.6%oya, which is about a percentage point above poten-tial, and the strongest pace of output growth since just before the spate of earthquake activity began in 3Q10.

All the elements of demand made positive contributions to growth in 2Q. Modest contributions were recorded in private consumption (+0.1%-pt), government spending (+0.2%-pt), and inventories (+0.1%-pt), while private investment (+0.7%-pt) and net exports (+0.8%-pt) both were a boon for expendi-ture. The latter came from a payback in imports, which had surged in 1Q. On the production side, primary industries had a solid quarter, with agriculture, forestry, and fishing output up 4.5%q/q, mining up 1.5%q/q, and manufacturing up 0.8%q/q. Construction output (3.3%q/q) continues to benefit from the recovery in the housing market, and of course post-earthquake work in Canterbury. The services sector is also expanding,

albeit at a more modest pace (+0.7%q/q), with a distinct skew toward transport and postal services.

The broad contours of the 2Q report are consistent with the view that the economy is on a positive path, albeit one that does not require much of a policy offset from the RBNZ. The strength of GDP on the production side in the first half of the year, combined with the information we have on consumer demand (monthly retail card spending has been picking up, real household consumption is still advancing, and retail in-dustry output expanded 1.1%q/q) tells us that deleveraging is not too great of an impediment at present.

At the same time, the fact that GDP growth is above potential, and households are spending, gives us another reason to fade the downbeat signal from the labor force surveys. Further, the strength in the data is being registered in the expected pock-ets. Dwelling investment is hitting its straps (residential con-struction activity was up 6.2%q/q in 2Q), and farm output remains strong in volume terms (agriculture up 4.7%q/q).

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Bias to inaction from the RBNZ… GDP is tracking our forecast for 2.5% growth this year, and the necessary conditions are being met for that pace to push up toward 3% next year. At the same time though, external factors (global risk sentiment, G-4 central bank policy dynam-ics, portfolio inflows, among others) are conspiring to front-run any work the RBNZ might be forced to do in the future. Currency effects—NZD/USD rallied nearly half a cent on the GDP data—and the fact that the economy is starting with a large negative output gap therefore should leave the RBNZ comfortable that above-trend growth is not a threat to infla-tion, removing the need for near-term policy accommodation.

…even under a new PTA Incoming RBNZ Governor Graeme Wheeler together with Finance Minister Bill English signed a new Policy Targets Agreement (PTA) this week, formalizing the policy objectives for Governor Wheeler’s first five-year term. The new agree-ment is pretty well summarized by English’s statement that he “did not feel that any major changes were required.” The PTA is always given a little spring cleaning coming into a new term, and the changes that have been made in this one are not surprising, and should prove cosmetic in most circumstances given how we believe the Bank already exercises policy in practice.

Price stability, specifically, the requirement of keeping CPI inflation “between 1 percent and 3 percent on average over the medium term” remains front and center. But this has now been supplemented by the requirement of “keeping future average inflation near 2 percent.” This is clearly an attempt to galvanize inflation expectations at the midpoint of the target band, but in practice is basically redundant. The horizon for “future infla-tion” is similarly vague to “medium term,” and any reasonable monetary policy reaction function that was targeting the 1%-3% band should be aiming “near” 2% anyway.

There is also a reference to diminishing unnecessary volatility in “output, interest rates and the exchange rate.” It is far from automatic that a point target for inflation achieves that, partic-ularly for a small open economy that is prone to being buffet-ed by external shocks. If anything, a harder policy target could, in the presence of external shocks, prove counterpro-ductive to stability, and while the incoming Governor is somewhat of an unknown commodity, we doubt that the in-cumbent top brass at the RBNZ would fall into the trap of over-engineering the cycle, which should render that tweak to the PTA also somewhat toothless.

Current account smaller after revisions New Zealand’s current account deficit grew to NZ$1.797 bil-lion in the second quarter, with the expected deterioration in

services exports being compounded by a widening in the in-come deficit. At the same time, there was better news on the annual current account balance, which was recalibrated due to favorable revisions to the trade balance to 4.9% of GDP. By comparison, the consensus estimate for the CAD in NZD terms on Thursday (i.e., before revisions) translated to an an-nual deficit of 5.2% of GDP.

The revisions to the current account mostly reflect better out-comes on the trade side and, outside of services, for which the March quarter always is the high-water mark due to sea-sonal tourism patterns, exports have performed admirably in 2Q given the currency and commodity markets backdrop. Export revenues fell in NZD terms in 2Q, which is not sur-prising given the earnings squeeze from weaker dairy prices, but volumes have been well supported, and the impact to the trade balance was more than offset by weaker crude imports (again, mostly a price effect), yielding an increase in the trade goods surplus of NZ$897 million. Looking through the year, the services trade balance also has improved despite the currency handicap, thanks to solid earnings from personal, cultural, and recreation services, which Stats NZ pins down to the Rugby World Cup and the production of The Hobbit, among other films.

The surprise downside for the 2Q numbers came through the income deficit, which increased by NZ$511 million, mostly

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Economic Research Australia and New Zealand September 21, 2012



due to the banks sending home greater profit disbursements to their foreign parents. The widening in the current account deficit was overfunded in terms of financial account inflows in 2Q, with bond inflows accounting for most of the NZ$2.9 billion increase in portfolio investment, and with a rise in the foreign deposit liabilities of the banks of just over NZ$2.1 billion being recorded. That facilitated a NZ$2.1 billion in-crease in the official sector’s reserve assets, and accumulation of foreign deposits by banks and fund managers to the tune of NZ$1.4 billion.

While the CAD has come in slightly lower than previously thought in annual terms, New Zealand’s external position remains unhealthy, with net foreign liabilities increasing from 71.9% to 72.6% of GDP. This net position includes claims on foreign reinsurers, which spiked in the aftermath of the Can-terbury earthquakes. This asset is captured in the capital ac-count, and was being gradually siphoned off through current transfers as they settled.

However, NZ Stats decided last year to begin treating the set-tlements as capital transfers, too, such that they now leave the current account relatively untouched. Of the total allocation of just under NZ$18 billion in total claims, nearly NZ$13 billion remains outstanding. The treatment of settlements means that as the outstanding amount is drawn down, it will offer little support for the current account. But it is flattering the external position, which will start becoming clear over the next year or so as this asset is drawn down to fund domestic investment. As the accounts stand today, excluding such claims, the net liability position as at June 2012 would be 78.9% of GDP.

Australia


Fri Private sector credit Sep 28 Sa 11:30am May Jun Jul Aug

%m/m 0.5 0.3 0.2 0.3


No data releases of note.

New Zealand

Data releases and forecasts Week of September 24 - 28 Wed International merchandise trade Sep 26

8:45am May Jun Jul Aug

Trade balance (NZ$ mn) 254 287 15 -550

Thu NBNZ business confidence Sep 27 %

11:00am Jun Jul Aug Sep

Index 12.6 15.1 19.5 21.0


Current account balance (Sep 19) 4Q11 1Q12 2Q12

NZ$ bn -2.6 ___ -1.1 ___ -1.58 -1.80

Real GDP (Sep 20) 4Q11 1Q12 2Q12

%q/q 0.5 3.5 1.0 3.6 0.6

%oya 2.0 4.5 2.4 4.6 2.6

69

JPMorgan Chase Bank, N.A., Hong Kong Haibin Zhu (852) 2800-7039 [email protected] Grace Ng (852) 2800-7002 [email protected]



Greater China China’s September flash PMI edged up to 47.8

Chinese regulators lay out the reform framework for the financial industry

Hong Kong: CPI rose 3.7%oya in August, monthly vola-tility expected due to public rental waivers

Taiwan: August export orders report shows signs of stabilization; notable gain in orders from China

Central bank kept policy rate on hold as expected, high-lighted inflation concerns from QE3

China’s flash reading for the September Markit manufactur-ing PMI rose modestly to 47.8, compared to the final reading of 47.6 in August. This was the eleventh consecutive month that the Markit manufacturing PMI has been below the 50 expansion threshold, and the flash September reading was the second lowest since November last year. (The final reading for the September Markit manufacturing PMI is scheduled to be released on September 28, and the September NBS manu-facturing PMI will be released on October 1.)

For the major PMI components, the output component con-tinued to fall to 47.0 in September (from 48.2 in August). On a more positive note, the new orders component rose to 47.6 in September (from 46.1 in August), and the export orders component increased moderately to 46.3 (from 45.5 in Au-gust). But the stock of finished goods fell rather notably to 51.1 in September, compared to 54.0 in August. Overall, the September flash PMI reading suggests that industrial activity stayed sluggish, while external demand conditions appear to be stabilizing somewhat.

In more details,

The output component fell for a second consecutive month by 1.2pts to 47.0 in September. The new orders and export orders components rose moderately by 1.5pts and 0.8pt, re-spectively. Overall, it seems the sluggish external demand conditions have stabilized somewhat, while the impact of policy easing is gradually showing up in domestic demand.

The stock of finished goods component declined 2.9pts to 51.1 in September (from 54.0 in August). With the modest rise in the new orders component and the marked decline in the inventory component, the orders to inventory ratio rose notably to 0.93 in September (from 0.85 in August).

On the inflation front, the input price sub-index increased to 42.2 in September, from 40.5 in August. Meanwhile, the output price sub-index also rose, to 44.3 in September, from

41.1 in August. Overall, we expect CPI inflation to stay modest at about 2%oya in the next two months.

Lingering near-term challenges Overall, the easing in the September flash PMI output com-ponent suggests industrial activity is likely to stay sluggish in the near term, while the modest rise in the new orders and export orders components, as well as the decline in the final goods component, shed some early positive light on the man-ufacturing sector.

Looking ahead, the sluggish external environment will likely continue to put stress on China’s export sector, while the im-pact of policy easing on domestic demand appears to be mod-erate and is offset by continued weakness in manufacturing and the export sector in the near term. In particular, domestic data continued to show soft demand conditions due to declin-ing corporate profits and high destocking pressure. In this regard, the decline in the flash September Markit PMI stock of finished goods component is encouraging in suggesting some stabilization in the near-term destocking pressure in the manufacturing sector.

12th Five-Year Plan for financial industry This week China’s major financial regulators, including the People’s Bank of China, China Banking Regulatory Commis-sion, China Securities Regulatory Commission, China Insur-

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Economic Research Greater China September 21, 2012



ance Regulatory Commission, and State Administration of Foreign Exchange, joined issued the 12th five-year plan’s (2011-15) framework for China’s financial industry reform. Details of the reform framework are essentially a restatement of the various plans that have been laid out by various de-partments. Some of the key points are:

The overall financial industry reform process will proceed with a gradual approach, with no hard timetable or se-quence for various reforms.

Deposit insurance may be the one reform to be introduced in the near term. Reading between the lines would hint that interest rate liberalization may be completed first, with cap-ital account and currency convertibility to follow later.

Two hard number targets have been identified: (1) value-added of the financial sector to reach 5% of GDP during the 12th five-year plan; (2) direct financing should account for 15% of total social financing by the end of the 12th five-year plan (compared to an average 11.1% during the 11th five-year plan).

Amid the progress on interest rate liberalization, gradually develop SHIBOR as the benchmark interest rates.

Hong Kong: inflation 3.7% in August Hong Kong’s headline CPI inflation rose 3.7%oya in August, compared to 1.6%oya in July. On seasonally adjusted terms, the headline CPI increased up 1.4%m/m in August, offsetting July’s 1.4%m/m sa fall. The sequential growth rate moderated to -1.0%3m/3m saar in August. The recent monthly volatility was mostly due to the government’s provision of public rental waivers in July and August. Netting out the effect of these one-off relief measures, the underlying CPI still increased 3.7%oya in August, but this was down sharply from 4.2%oya in July, reflecting easing pressure from food prices and pri-vate rentals.

Looking ahead, although global commodity prices have been picking up, and are expected to impact inflation broadly, do-mestic factors in Hong Kong will likely also play a major role in the inflation picture in coming months. The lagged effect from the slowdown in property and rental prices (in %oya terms) since mid-2011 should keep headline inflation con-tained at around 3% in the coming months. Overall, we expect inflation to reach an average of 2.8%oya in 2H12, compared to 4.7%oya in 1H12. Our full-year inflation forecast remains at 3.8%oya for 2012.

Taiwan: export orders stabilized Taiwan’s export orders for August were in line with expecta-tions, falling 1.5%oya (-4.4%oya in July). Our seasonal ad-justment process shows that export orders rose 1.0%m/m in

August (vs. -0.7%m/m sa in July). Meanwhile, the recent de-cline in the underlying sequential trend in export orders also eased somewhat, with a fall of 7.3%3m/3m saar by August, compared to a 24.0%3m/3m saar decline in July.

Further details showed a notable gain in orders from Chi-na/Hong Kong, which rose 5.6%m/m sa in August (vs.

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China/ HKUS

EuropeJapan

71




-0.5%m/m sa in July). The underlying sequential trend in or-ders from China/HK also improved notably, turning to a rise of 2.7%3m/3m saar in August (vs. -31.2%3m/3m saar in July). However, there was continued sluggish demand from other major markets, in particular the G-3 countries. Demand from the US fell 4.8%m/m sa in August (vs. +3.5%m/m sa in July), orders from Europe fell a notable 6.7%m/m sa in August, add-ing to the fall of 3.0%m/m sa in July, and orders from Japan fell 1.2%m/m sa in August, following the rise of 1.3%m/m sa in July.

Details of export orders by product group showed that orders for tech products eased again, down 1.8%m/m sa in August (vs. -0.6%m/m sa in July). On the other hand, non-tech orders rose 3.4%m/m sa in August (vs. -1.0%m/m sa in July). Put-ting together the notable gain in orders from China/HK and non-tech orders in August suggests some early signs of im-provement in demand from China, especially related to the fixed investment cycle.

Overall, external demand conditions remain challenging for Taiwan in the near term. Meanwhile, in the coming months it will be interesting to see if China’s macro policy support feeds through to some gradual uplift in its trade activity with Taiwan. Our full-year 2012 forecast for Taiwan GDP growth stays at a modest 1.1%oya.

Central bank kept policy rate on hold The Taiwan central bank left its major policy rates unchanged at this week’s quarterly monetary policy meeting. Recall that the Taiwan central bank had implemented five consecutive 12.5bp hikes in the key policy rates from June 2010 through June 2011, after that the key rates were left unchanged for the last five quarterly policy meetings. With this policy decision, the discount rate, which is the key policy rate in Taiwan, stays at 1.875%.

Overall, the central bank recognized lingering external risks on the global economy that could restrain domestic economic activity. On the other hand, the central bank highlighted con-cern about rising global commodity prices, especially oil and agricultural prices. They are also concerned that the Fed’s QE3 exercise could lift inflation expectations and cause re-newed capital inflow into Emerging Asia economies, affect-ing inflation and financial stability in the region.

In the policy statement, the central bank continued to show a cautious view on the global economy going forward. The statement recognized the slowdown in Chinese economy, ongoing recession in the Euro area, and sluggish growth in the US, with lingering risks on external demand conditions for Taiwan.

For the domestic side of the Taiwanese economy, the im-pact of the sluggish global demand environment has contin-ued to feed through, dragging down private investment and household consumption. However, the central bank expects the domestic demand environment to improve modestly in the coming months.

On the inflation front, the statement suggested that spikes in headline CPI inflation rates in July and August were largely due to the seasonal impact of typhoons and severe rainfall on food prices, especially vegetable prices. Nonetheless, the central bank remains worried about the inflation outlook, especially given higher global oil and grain prices. The Di-rectorate General of Budget, Accounting and Statistics (DGBAS) expects full-year 2012 CPI inflation to average 1.93%oya.

Overall, the central bank seems to believe that amid the lingering uncertainty on the near-term global economic out-look, higher global oil and agricultural prices could pose import cost inflation pressure on Taiwan. In addition, poli-cymakers are worried that the Fed’s QE3 could lead to re-newed capital inflow into EM Asia and raise inflation ex-pectations. Given such policy considerations, we now ex-pect the Taiwan central bank to keep major policy rates on hold at their 4Q monetary policy meeting, as well as going into 2013, unless the global economy turns significantly to the downside.

0

1

2

3

4

5

6

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

% per annum

US fed funds target rate

Taiwan central bank rediscount rate

Taiwan central bank policy rate and US fed funds target rate

0

1

2

3

4

05 06 07 08 09 10 11 12 13

% per annum

Taiwan: benchmark policy rate and market interest rates

Central bank rediscount rate

10-yr government bond yield

Bank lending rate for new loans

Overnight interbank call loan rate

72

Economic Research Greater China September 21, 2012



China:


Sat Purchasing managers index Sep 29 Index

10:30am Jun Jul Aug Sep Overall (Markit) 48.2 49.3 47.6 47.8 Output 49.3 50.9 48.2 __


Markit manufacturing PMI (flash) (Sep 20) Index, sa

Jul Aug Sep

Overall 49.3 49.3 47.6 47.6 48.5 47.8

Hong Kong:


Tue Merchandise trade Sep 25 HK$ bn

4:30pm May Jun Jul Aug

Balance -35.6 -44.7 -40.1 -33.0 Exports 294.5 278.2 276.2 302.5 %oya 5.2 -4.8 -3.5 -2.4 Imports 330.1 322.9 316.3 335.6 %oya 4.6 -2.9 -1.8 -2.6


Labor market survey (Sep 18) Sa, 3mma

Jun Jul Aug

Unemployment 3.2 3.2 3.2 3.2 3.2 3.2

Consumer prices (Sep 20) % change

Jun Jul Aug

%oya 3.7 3.7 1.6 1.6 3.6 3.7

%m/m sa 0.0 -0.1 -1.4 -1.1 0.4 1.4

Taiwan:

Data releases and forecasts Week of September 24 - 28 Mon Labor market survey Sep 24 %

8:30am May Jun Jul Aug Unemployment rate, sa 4.3 4.2 4.3 4.3 Unemployment rate, nsa 4.1 4.2 4.3 4.4

Mon Industrial production Sep 24 % change


%oya -0.2 -2.2 0.0 -0.6 %m/m sa 1.5 -3.5 1.4 0.4

Thu Composite leading indicator Sep 27 % change


%m/m sa 0.2 0.2 0.2 __


Export orders (Sep 20) % change

Jun Jul Aug

%oya -2.6 -2.6 -4.4 -4.4 -1.8 -1.5

%q/q saar -1.5 -1.6 -0.7 -0.7 0.3 1.0

Central bank MPC meeting (Sep 20) %p.a.

1Q12 2Q12 3Q12

Rediscount rate 1.9 1.9 1.9 1.9 1.9 1.9

73

JPMorgan Chase Bank, N.A., Seoul Branch Jiwon Lim (82-2) 758-5509 [email protected]


Korea Public sector’s debt growth up firmly in 2Q, while

households’ debt gain decelerated further

Next week: August IP and September surveys

In the absence of any key data reports to help shape the eco-nomic forecast, the Bank of Korea’s quarterly report of the flow of funds showed that the nonfinancial sector’s borrowing picked up in 2Q, mainly led by the public sector. Using J.P. Morgan’s seasonal adjustment, the government sector’s debt grew a strong 3.5%q/q sa in 2Q, compared to the 1.1% gain in 1Q (first chart). Public companies’ borrowing also moved up a relatively firm 2.9% in 2Q, accelerating from a 1.5% rise in 1Q, supporting our long-standing view that Ko-rea’s reliance on off-balance-sheet activity via state compa-nies’ spending has continued. Thus, combining government and state company debt, the public sector’s ratio of debt to nominal GDP rose further to 69.4% in 2Q, compared to 56.9% at end-2008 (second chart).

Meanwhile, private sector borrowing rose relatively modestly. The rise in private companies’ debt accelerated modestly but was still below the pace of 2H11. The pace of household bor-rowing decelerated further, rising only 1.0%. With household financial assets rising at about the same pace as debt, the sec-tor’s ratio of debt to financial assets was almost flat at 47% in 2Q although its ratio to nominal GDP edged higher (second and third chart).

Next week’s focus The data release calendar turns busy next week, with key activity reports for August and survey indicators for Septem-ber. Overall, hard activity data are forecast to have remained on the soft side in August. Industrial production likely fell further, albeit at a more moderate pace than in July. Contin-ued external headwinds, labor strikes at key automakers, and two typhoons in the final week of the month likely restrained output. Meanwhile, demand-side indicators likely weakened, but only partially reversed the previous month’s strength. The payback will be most notable in consumption good sales, which saw an impressive gain in July when unusually hot summer weather boosted seasonal spending on durable goods. However, non-durable goods expenditures likely stayed firm, possibly keeping the sequential gain of consumption good sales in positive territory.

Meanwhile, forward-looking indicators are expected to fare better. The NSO composite leading indicator is forecast to rise further in August, led by financial market indicators. Con-sumer and business surveys are also expected to improve in September, tentatively supporting our view that the pace of

-2

0

2

4

6

8

2010 2011 2012

%q/q saNonfinancial sector debt

Public sector

Private companies

Households

0

20

40

60

80

100

Government Public companies Households

Ratio of debt to nominal GDP

%, sa

4Q08

2Q12

90

95

100

105

110

115

120

125

45

46

47

48

49

50

51

05 06 07 08 09 10 11 12 13

%, sa, for both scales

Ratio of debt to financial assets

HouseholdsPrivate companies

-4

-2

0

2

4

2011 2012 2013

%m/m sa, boxes are J.P. Morgan forecast for Aug Industrial production and NSO composite leading indicator

IP

Leading indicator

74

Economic Research Korea September 21, 2012

JPMorgan Chase Bank, N.A., Seoul Branch Jiwon Lim (82-2) 758-5509 [email protected] Min Joo Kang (822) 758-5512 [email protected]

growth will reaccelerate modestly in 2H, after having slowed to a mere 1.0%q/q saar gain in 2Q.

Data releases and forecast Week of September 24 - 28

Tue Consumer survey Sep 25 100=neutral reading, nsa

6:00am Jun Jul Aug Sep

Index 101.0 100.0 99.0 100.0

We forecast that the Bank of Korea consumer sentiment index edged up in August, with consumers’ assessment of the general economic outlook improving modestly. Equity price moves and price stability likely worked in favor of consumer sentiment.

Thu FKI business survey Sep 27 Index, sa

12:00pm Jun Jul Aug Sep

1-month outlook 90.2 87.5 92.5 97.0 Current conditions 87.5 81.6 89.8 90.0

We expect that the FKI business sentiment index rose in September, with major central banks extending their mone-tary easing in an attempt to boost economic growth. How-ever, the current conditions index likely rose only slightly, after controlling for seasonal effects.

Fri Current account Sep 28 US$ bn nsa


Balance 3.5 5.9 6.1 3.9

The current account surplus likely narrowed, with the mer-chandise trade gain down for seasonal reasons.

Fri Industrial production Sep 28 % change


%oya 2.9 1.4 0.3 0.0 %m/m sa 1.3 -0.6 -1.6 -1.0

Industrial production is estimated to have been soft in Au-gust, with inventories down slightly further. Also see main story.

Fri Producer shipments and inventories Sep 28 %oya


Shipments 3.5 1.9 1.4 1.6 Inventories 15.3 9.8 7.5 5.0

Seasonally adjusted, producers’ shipments were likely down, but less than output. Thus, inventories should have declined.

Fri Composite leading indicator Sep 28 2005=100, sa


Index 141.3 142.7 143.6 144.2

We forecast that the composite leading indicators rose fur-ther in August, led by financial market indicators, surveys, and employment conditions.

Fri Service activity Sep 28 % change


%oya 2.4 1.4 1.5 1.4

We estimate service activity rose modestly further on a seasonally adjusted basis. Financial services and leisure industries were likely the main drivers.

Fri Consumption goods sales Sep 28 % change


%oya 2.2 0.6 2.7 1.5

Consumption good sales likely stepped back, partially re-versing the previous month’s gain. This decline was likely concentrated in durable goods, while non-durable good spending moved up further in August. Also see main story.


Bankruptcy filing (Sep 19) Nsa

Jun Jul Aug

Bankruptcy filings 103 103 95 95 ___ 117

Dishonored bill ratio 0.02 0.02 0.02 0.02 ___ 0.02

BoK Watch According to the August MPC minutes released this week, the Bank of Korea was open to further rate action in August alt-hough it unanimously decided to stand pat. Most MPC mem-bers acknowledged downside risks to the BoK’s growth fore-cast, while remaining comfortable with the inflation outlook, commenting that demand-side pressures would likely remain dormant for the foreseeable future. However, MPC members were cautious in giving any impression that the BoK’s mone-tary easing would be aggressive, while indicating it wanted to monitor the impact of July’s rate cut and other central banks’ actions before taking additional action itself. The September MPC minutes are scheduled to be released in the first week of October, tentatively on October 2.

75


JPMorgan Chase Bank, N.A., Singapore Branch Sin Beng Ong (65) 6882-1623 [email protected]

ASEAN Malaysian output eased in July due to fall in gas output,

with continuing bifurcation in manufacturing output

Overall credit remains firm, bolstered by expansion in non-bank credit

Bank Negara expected to remain vigilant against short-term inflows, watching FX reserves in September

The data from Malaysia suggest that the recent bifurcation between domestic and external demand has continued into 3Q12. In particular, production for construction-related mate-rials has remained solid even as output in the electronics sec-tor softened into 3Q12. This softening was also seen in the non-electronics export sector, owing partially to price effects from the decline in crude palm oil (CPO) prices and a drop in natural gas (NG) output. The latter in particular warrants some attention, with the assumption that output should resume later in 3Q12. This strength in domestic demand is also mirrored in the credit data, with bank loans growing in the low teens dur-ing 2Q12 though total credit expansion would be closer to the high teens. Moreover, the thrust of the 2013 budget, to be announced on September 28, is expected to remain supportive of domestic demand through further transfers to the lower income household sector, possibly including expanding the social safety net and policies to redistribute incomes.

Given this dichotomy between external demand and domestic demand, especially in the construction sector, the central bank is expected to remain on hold until there is clear evidence that domestic demand, too, is slowing. However, the central bank is expected to be more interventionist in managing capital inflows, especially following the recent Fed action. In the past, when such flows surged into shorter-dated BNM bills, this was met with intervention in contrast to BNM’s muted response to flows into longer-dated bonds.

Again, a mixed picture of demand The July data from Malaysia continue to suggest a somewhat bifurcated picture of demand, with both industrial output and exports down in sequential terms. The output data were worth noting for the contraction in mining output, especially of NG, which fell 23%m/m nsa, bringing it to a level not seen since 2004, raising some concerns over current capacity constraints (first chart and see “Malaysia: the math behind the energy balance,” GDW, September 7). Within the broader manufac-turing sub-clusters, there continues to be a clear bifurcation between output for domestic and external demand, with pro-duction of construction-related materials still marking an up-trend even as electronics output has barely moved above pre-2008 levels (second chart). However, the granular output data

convey a slightly more nuanced view: within electronics, semiconductor devices have outperformed the broader elec-tronics sub-cluster up a strong 44.7%3m/3m saar in July though this expansion has yet to be fully reflected in the trade data (third chart). At this juncture, it is not clear whether the

70

80

90

100

110

120

2006 2007 2008 2009 2010 2011 2012 2013

Index, 2006=100, sa

Malaysia: industrial production

Natural gas

Manufacturing

50

100

150

200

2006 2007 2008 2009 2010 2011 2012 2013

Index, 2006=100, 3mma, nsa

Malaysia: manufacturing production

Construction materials

Electronics

50

100

150

200

250

2006 2007 2008 2009 2010 2011 2012 2013

Index 2006=100, sa, US$ terms

Malaysia: exports

Non-electronics

Semiconductors

Electronics ex. semiconductors

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 2013

%oya, LC terms

Malaysia: bank credit

Loans

Loans and other securities

76

Economic Research ASEAN September 21, 2012

JPMorgan Chase Bank, N.A., Singapore Branch Sin Beng Ong (65) 6882-1623 [email protected]

output data reflect firmer external demand or the addition of new capacity.

Construction activity remained firm, and this is also mirrored in the domestic credit data through 2Q12. In particular, growth in banks loans and “other” securities, which include bank purchases of debt securities issued by domestic compa-nies, rose 18.3%oya against a more modest rise of 13%oya for bank loans (fourth chart previous page). Specifically, bank purchases of other securities were up a particularly firm 58%oya during 2Q12. In this context, a large part of the funds raised from the rise in “other” securities has likely been uti-lized for infrastructure, which would also be reflected in con-struction-sector activity (see “Figuring the drivers of ASEAN’s rebalancing,” GDW, September 14). The upshot is that with domestic demand remaining firm, monetary policy settings are expected to remain on hold until domestic activity softens materially.

In this context, the September 28, 2013, budget announcement will need to be watched for transfers to households, which may add further to domestic demand next year.

Capital inflows and Bank Negara reaction Another recent focus aside from the cyclical data is the impact of the recent action of G-3 central banks on capital flows. For Malaysia, two observations are worth making. First, inflows into Malaysia’s capital account have been focused on portfo-lio flows with fixed income flows dominating the aggregate. The second is that there is also clear bifurcation between the various fixed income instruments, with foreign participation in Malaysian Government Securities (MGS) remaining broad-ly stable even as inflows into the shorter-dated BNM bills have been more volatile. The presumption here is that foreign participation in the shorter-dated BNM bills adopts a more FX-related view than the MGS. Indeed, foreign flows into BNM bills surged together with the expansion of the Fed bal-ance sheet in 3Q10 even as flows into MGS remained surpris-ingly stable over the same period (first two charts).

In this context, the policy response of Bank Negara also ap-pears to be asymmetric and tends to be sensitive to the nature of the inflows. This is reflected in the nature of BNM’s inter-vention during 2H10 and 1H11, which ebbed and flowed with the inflows into BNM paper rather than MGS (third chart). Although the currency appreciated against USD, it was stable against the nominal effective exchange rate over that same period and interestingly, BNM did not appear to stand in the way of the strong 1Q12 appreciation (fourth chart).

The implication here is that the monetary authorities appear to respond to the nature of the inflow rather than to the outright level of the currency, for as long as it remains consistent with

the broader macro cycle. In this context, it remains to be seen whether this observed reaction held in September following the announcement of another round of G-3 central bank bal-ance sheet expansion.

-40

-20

0

20

40

60

80

-500

-250

0

250

500

750

1000

2008 2009 2010 2011 2012 2013

US monetary base and foreign BNM bill ownership

US high-powered money

LC terms, bn, change over 6-months, both scales

BNM bills

-20

-10

0

10

20

30

40

-500

-250

0

250

500

750

1000

2008 2009 2010 2011 2012 2013

US monetary base and foreign MGS ownership

US high-powered money


MGS

-50

-25

0

25

50

-40

-20

0

20

40

2008 2009 2010 2011 2012 2013


Malaysia: FX reserves and foreign BNM bills ownership

FX reserves

BNM bills

94

96

98

100

102

104

106

-40

-20

0

20

40

2008 2009 2010 2011 2012 2013

US$ bn, change over 6-months

Malaysia: FX reserves and NEERIndex, 2000=100

FX reserves

NEER

77

JPMorgan Chase Bank, N.A., Singapore Branch Benjamin Shatil (65) 6882-2311 [email protected]


ASEAN Indonesia:


No data releases.


No data released.

Malaysia:


No data releases.


Consumer prices (Sep 19) % change Jun Jul Aug %oya 1.6 1.4 1.5 1.4

%m/m sa 0.0 -0.1 0.1

August CPI was flat on the month leaving prices up 1.4%oya. In sequential trend terms, prices were up 0.3%3m/3m saar. Ex-cluding the volatiles, core prices (ex. food and energy) were up a modest 0.1%m/m sa and rose 0.2%3m/3m saar. In terms of the details, most subcategories were benign with the exception of housing and transport costs, which rose on the month, with the former due to an increase in rental costs and the latter to a rise in shipping rates. Somewhat surprising also was the benign behavior of food prices, which tend to rise around the Hari Raya holiday. This has thus kept overall inflation un-expectedly benign. Indeed, core prices have been flat for the past three months and suggest that underlying inflation has been soft. In terms of the policy outlook, current policy settings are con-sidered by the monetary authorities to be appropriate though any material softening in external conditions may prompt a shift to a more accommodative stance.

Philippines:


Tue Merchandise trade Sep 25 US$ bn, nsa 9:00am Apr May Jun Jul Imports 4.8 5.4 5.1 5.6 %oya -13.6 10.1 13.3 11.6

During Government budget the week PHP bn

May Jun Jul Aug Balance -19.9 -11.7 -39.2 -18.3 Revenue 131.4 115.3 123.3 131.9

Expenditure 151.3 127.0 162.6 150.3


OFW remittances (Sep 17) % change May Jun Jul %oya 5.1 4.2 3.9 5.5

%m/m sa 0.1 1.7 1.8 1.5 0.7

Overseas foreign worker (OFW) remittances rose 0.7%m/m sa in July, leaving them up 5.5%. In level terms, remittances rose to US$1.76 billion sa from $1.75 billion in June and a peak of $1.77 billion in November. Remittances started the year soft but began to firm in 2Q and have continued to rise through July. This income flow has been a key support for domestic demand. Separately, the current account remains the main driver of the BoP surplus, but there has been some divergence lately as port-folio inflows have become an increasingly important factor for the BoP. Nevertheless, we expect steady remittance inflows to remain the backstop of large current account surpluses, even if the trade deficit widens.

Singapore:


Mon Consumer prices Sep 24 % change 1:00pm May Jun Jul Aug All items, %oya 5.0 5.3 4.0 3.8 %m/m sa 0.1 0.2 -0.2 0.3

Wed Industrial production Sep 26 % change 1:00pm May Jun Jul Aug %oya 6.9 8.1 1.9 4.4 %m/m sa 3.2 4.1 -9.1 3.5


Merchandise trade (Sep 17) US$ bn, nsa Jun Jul Aug Trade balance 1.6 2.8 2.7 4.7 2.8

Exports 33.8 33.5 35.9 33.5 Non-oil domestic 12.3 12.0 13.0 11.7

%m/m sa, US$ terms 4.4 -4.5 -5.1 1.0 -4.7

%oya, US$ terms 2.9 1.1 1.0 -4.8 -13.7

August non-oil domestic exports (NODX) fell 4.7%m/m sa in US$ terms, leaving them down 26.2%3m/3m saar. Overall non-oil domestic exports contracted 13.7%oya. The details were generally soft. Electronics exports fell 10.7%m/m sa and were down 26.2%3m/3m saar. In particular, the bounce in electronics exports during 1Q12 looks to have been more a function of normalization following the Thai floods, and the export trend has been softening since then, with the August print surprising to the downside. Pharmaceuticals rose 0.5%m/m sa while other exports were down 2.0%. In level terms, there appears to have been notable divergence through the past year, with electronics the clear laggard even as pharmaceuticals have been on an upward trend, albeit volatile, and other exports have effectively held within a broad range since 2011.

78

Economic Research ASEAN September 21, 2012


By destination, NODX to the EU and Hong Kong were particu-larly weak, down 13.7%m/m sa and 21.6%m/m sa, respectively, while those to Japan and China were up 3.8%. Outside of the EU and US, exports eased, falling 3.2%m/m sa, and in level terms have been softening since the February peak. Despite the softness in the headline electronics NODX print, the August electronics PMI provides some room to be cautiously optimistic, given the recent stabilization in August new orders following three consecutive months of sequential declines.

Thailand:


Fri Manufacturing production Sep 28 % change 2:00pm May Jun Jul Aug %oya 6.1 -9.6 -5.8 -11.8 %m/m sa 6.7 -8.9 -0.2 0.0

With external demand remaining sluggish, output likely remained soft in August, bringing the over-year-ago com-parison further into negative territory.

Fri Merchandise trade Sep 28 US$ bn, nsa 2:30pm May Jun Jul Aug Trade balance 0.6 1.6 0.5 -0.4 Exports, %oya 9.2 -2.3 -3.9 -6.0

Imports, %oya 16.8 5.0 13.4 -2.3

We expect both imports and exports to have posted month-ly contractions in August in seasonally adjusted terms. The trade balance may have printed a deficit, with exports slip-ping more than imports.

Fri Private consumption index Sep 28 % change 2:30pm May Jun Jul Aug %oya 6.6 4.4 7.0 3.9 %m/m sa 4.0 -2.5 0.4 0.5

Fri Private investment index Sep 28 % change 2:30pm May Jun Jul Aug %oya 14.5 18.2 19.0 17.0 %m/m sa 2.3 0.0 0.7 0.3


No data released.

Vietnam:


During Merchandise trade the week US$ bn nsa

Jun Jul Aug Sep Trade balance 0.4 0.6 -0.2 -0.2 Exports, %oya 16.9 9.3 6.0 19.6

Imports, %oya 10.5 16.9 3.2 2.9

During Real GDP the week % change

4Q12 1Q11 2Q12 3Q12

%oya 6.1 4.1 4.7 5.3 %q/q saar 7.2 -6.2 9.7 11.7

Mon Consumer prices Sep 24 % change

Jun Jul Aug Sep All items, %oya 6.9 5.4 5.0 5.8 %m/m sa 0.2 0.2 0.9 1.7


No data released.

79



Asia focus: capital flows We noted last week that EM Asia’s external balances had narrowed through 1H12, owing in part to a narrowing in the capital account surplus. This week, we look in more detail at the composition of capital account flows into the region.

In aggregate, net capital flows into EM Asia (including balance of payments errors and omissions, but excluding changes in official reserve assets) dipped into a deficit of US$0.7 billion in 1H12, the lowest level since the 2008-09 crisis (table).The nar-rowing owes to a large net outflow in the “other” flows catego-ry, which captures flows of trade credits, loans, and foreign currency deposits (first chart). This, in turn, is largely a reflec-tion of the recent trend in Greater China’s capital account com-position, where other capital flows recorded a large net outflow, even as net foreign direct investment (FDI) and portfolio flows remained firmly in surplus (second chart).

In EM Asia ex. China, net FDI and portfolio flows have been less supportive of the overall capital account position. Both North and Southeast Asia ex. Singapore have seen net out-flows of FDI over 1H12 (third chart), while the recent trend in net portfolio flows has been a little more mixed across the region. One observation here is the large swings in net ASEAN portfolio flows relative to those in North Asia, which are notable given that ASEAN’s economy is almost equal in size to Korea’s and Taiwan’s combined (fourth chart).

Asia: capital account balance US$ bn, net basis

2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 Japan -45 -58 -62 -91 -70 -47 104 -65 FDI -74 -29 -34 -20 -38 -35 -82 -62 Portfolio -202 -173 -43 -57 -96 106 55 -23 Others 231 143 15 -14 65 -117 131 19 EM Asia -37 59 254 149 261 228 134 -1 FDI 47 39 32 105 79 108 87 95 Portfolio -58 -14 73 52 93 58 -37 54 Others -26 33 149 -8 89 62 84 -149 CN & HK1 64 78 195 110 230 196 188 -2 FDI 59 33 47 86 88 89 74 89 Portfolio 29 14 26 1 37 17 17 21 Others -25 31 122 23 104 89 97 -112 KR & TW -50 14 33 11 -13 -12 -36 -21 FDI -7 -6 -12 -9 -22 -16 -14 -14 Portfolio -11 16 23 9 13 -20 -6 -5 Others -32 4 22 11 -3 24 -17 -2 ASEAN -42 -21 -5 -4 25 32 -23 -1 FDI -16 1 -18 11 -9 7 -5 -1 Portfolio -94 -23 26 37 38 71 -32 30 Others 68 2 -13 -53 -4 -46 14 -31 India1 2 5 33 31 34 31 26 36 FDI 9 9 10 6 5 10 11 3 Portfolio -7 6 12 12 25 2 0 28 Others 0 -10 10 13 5 19 14 6 1. HK and IN based on 1Q12 data, ASEAN excludes Singapore. ‘Others’ include balance of payments errors and omissions.

-200

-100

0

100

200

300

US$ bnEmerging Asia: capital account composition

99 01 03 05 07 09 11

Balance

Others

Net FDI andportfolio flows

-150-100

-500

50100150200250

US$ bnChina and Hong Kong: capital account composition

99 01 03 05 07 09 11

Balance

Others

Net FDI andportfolio flows

-30

-20

-10

0

10

20

US$ bn

EM Asia ex CN and IN: net FDI flows

99 01 03 05 07 09 11

Korea and Taiwan

ASEAN

-100

-50

0

50

100

US$ bn

EM Asia ex CN and IN: net portfolio investment flows

99 01 03 05 07 09 11

Korea and Taiwan

ASEAN

80

JPMorgan Chase Bank N.A., New York Economic Research Daniel Silver (1-212) 622-6039 Global Data Watch [email protected] September 21, 2012

US economic calendar Monday Tuesday Wednesday Thursday Friday

24 Sep Dallas Fed survey (10:30am) Sep San Francisco Fed President Williams speaks in San Francisco (3:30pm)

25 Sep S&P/Case-Shiller HPI (9:00am) Jul 1.1% (1.2%oya) Consumer confidence (10:00am) Sep 61.5 FHFA HPI (10:00am) Jul 0.5% (4.1%oya) Richmond Fed survey (10:00am) Sep Auction 2-year note $35 bn Philadelphia Fed President Plosser speaks in Philadelphia (12:00pm)

26 Sep New home sales (10:00am) Aug 380,000 Auction 5-year note $35 bn

Chicago Fed President Evans speaks in Indiana (1:15pm)

27 Sep Initial claims (8:30am) w/e prior Sat 380,000 Durable goods (8:30am) Aug -6.3% Ex transportation 0.2% Real GDP (8:30am) 2Q final 1.6% Establishment survey preliminary benchmark revision (8:30am) Pending home sales (10:00am) Aug 2.5% KC Fed survey (11:00am) Sep Auction 7-year note $29 bn

28 Sep Personal income (8:30am) Aug 0.2% Real consumption -0.2% Core CPE deflator 0.20% (1.7%oya) Chicago PMI (9:45am) Sep Consumer sentiment (9:55am) Sep final 80.0

1 Oct Manufacturing PMI (8:58am) Sep final ISM manufacturing (10:00am) Sep Construction spending (10:00am) Aug

2 Oct Light vehicle sales Sep

3 Oct ADP employment (8:15am) Sep ISM nonmanufacturing (10:00am) Sep

4 Oct Initial claims (8:30am) w/e prior Sat Factory orders (10:00am) Aug Chain store sales Sep FOMC minutes Economic projections Announce 3-year note $32 bn Announce 10-year note (r) $21 bn Announce 30-year bond (r) $13 bn

5 Oct Employment (8:30am) Sep Consumer credit (3:00pm) Aug

8 Oct Columbus Day Bond market closed

9 Oct NFIB survey (7:30am) Sep Auction 3-year note $32 bn

10 Oct Wholesale trade (10:00am) Aug JOLTS (10:00am) Aug Beige book (2:00pm) Auction 10-year note (r) $21 bn Minneapolis Fed President Kocherlakota speaks in Montana (2:45pm) Dallas Fed President Fisher speaks on Euro area in Washington, D.C. (4:45pm) Minneapolis Fed President Kocherlakota speaks in Minnesota (8:00pm)

11 Oct Initial claims (8:30am) w/e prior Sat International trade (8:30am) Aug Import prices (8:30am) Sep Federal budget (2:00pm) FY12 Auction 30-year bond (r) $13 bn Announce 30-year TIPS (r) $7 bn Philadelphia Fed President Plosser speaks on economy in Pennsylvania (12:30pm)

12 Oct PPI (8:30am) Sep Consumer sentiment (9:55am) Oct preliminary

15 Oct Retail sales (8:30am) Sep Empire State survey (8:30am) Oct Business inventories (10:00am) Aug

16 Oct CPI (8:30am) Sep TIC data (9:00am) Aug Industrial production (9:15am) Sep NAHB survey (10:00am) Oct

17 Oct Housing starts (8:30am) Sep

18 Oct Initial claims (8:30am) w/e prior Sat Philadelphia Fed survey (10:00am) Oct Leading indicators (10:00am) Sep Auction 30-year TIPS (r) $7 bn Announce 2-year note $35 bn Announce 5-year note $35 bn Announce 7-year note $29 bn

19 Oct Existing home sales (10:00am) Sep

81

JPMorgan Chase Bank, London Economic Research Greg Fuzesi (44-20) 7134-7310 Global Data Watch [email protected] September 21, 2012

Euro area economic calendar Monday Tuesday Wednesday Thursday Friday

24 Sep

Germany: Import prices (8:00am) Aug IFO bus. survey (10:00am) Sep 102.8 Index, sa Netherlands: CBS bus. conf. (9:30am) Sep

25 Sep

Germany: GfK cons. conf. (8:00am) Sep

France: INSEE bus. conf. (8:45am) Sep

26 Sep

Germany: CPI 6 states and prelim (8:00am) Sep 2.0%oya, nsa France: INSEE cons. conf. (8:45am) Sep

27 Sep

Euro area: M3 (10:00am) Aug EC business conf. (11:00am) Sep 85.2%bal, sa EC cons. conf. final (11:00am) Sep Germany: Employment (9:55am) Aug 15 ch m/m, 000s, sa Unemployment (9:55am) Sep 12 ch m/m, 000s, sa Italy: ISAE bus. conf. (10:00am) Sep Belgium: CPI (11:15am) Sep

28 Sep

Euro area: HICP flash (11:00am) Sep 2.6%oya, nsa France: GDP final (7:30am) 2Q Consumption of mfg goods (8:45am) Aug PPI (8:45am) Aug Italy: PPI (10:00am) Aug CPI prelim (11:00am) Sep 3.2%oya, nsa Spain: HICP flash (9:00am) Sep 3.3%oya, nsa

1 Oct

Euro area: PMI Mfg final (10:00am) Sep Unemployment rate (11:00am) Aug Germany: PMI Mfg final (9:55am) Sep Retail sales (8:00am) Aug France: PMI Mfg final (9:50am) Sep Italy: PMI Mfg (9:45am) Sep Spain: PMI Mfg (9:15am) Sep

2 Oct

Euro area: PPI (11:00am) Aug

3 Oct

Euro area: PMI services & composite final (10:00am) Sep Retail sales (11:00am) Aug Germany: PMI services & composite final (9:55am) Sep France: PMI services & composite final (9:50am) Sep Italy: PMI services & composite (9:45am) Sep Spain: PMI services & composite (9:15am) Sep

4 Oct

Euro area: ECB rate announcement (1:45pm) 25bp cut expected Netherlands: CPI (9:30am) Sep

5 Oct

Germany: Mfg orders (12:00pm) Aug

8 Oct

Germany: Foreign trade (8:00am) Aug Industrial production (12:00pm) Aug

9 Oct

France: Foreign trade (8:45am) Aug Monthly budget situation (8:45am) Aug

10 Oct

France: Industrial production (8:45am) Aug Italy: Industrial production (10:00am) Aug

11 Oct

Euro area: ECB Monthly Bulletin (9:00am) Oct Germany: CPI (8:00am) Sep France: CPI (8:45am) Sep Spain: CPI (9:00am) Sep

12 Oct

Euro area: Industrial production (11:00am) Aug Italy: CPI (10:00am) Sep

15 Oct

16 Oct

Euro area: HICP final (11:00am) Sep Germany: ZEW bus. survey (11:00am) Oct Italy: Foreign trade (10:00am) Aug

17 Oct

Belgium: BNB cons. conf. (3:00pm) Sep Netherlands: CBS cons. conf. (9:30am) Sep

18 Oct

19 Oct

Euro area: BoP (10:00am) Aug Germany: PPI (8:00am) Sep

Highlighted data are scheduled for release on or after the date shown. Times shown are local.

82

JP Morgan Securities Japan Co., Ltd Economic Research Miwako Nakamura (81-3) 6736-1167 Global Data Watch [email protected] September 21, 2012

Japan economic calendar Monday Tuesday Wednesday Thursday Friday

24 Sep Minutes of Aug 8-9 BoJ Monetary Policy Meeting (8:50 am) BoJ Deputy Governor Yamaguchi’s speech at Aian Affairs Research Council (2:00 pm)

25 Sep Corporate service prices (8:50 am) Aug -0.3%oya Shoko Chukin small firm sentiment (2:00 pm) Sep 44.5, DI

26 Sep

27 Sep Auction 3-month bill Auction 2-year note

28 Sep PMI manufacturing (8:15 am) Sep 47.0, DI Nationwide core CPI (8:30 am) Aug -0.3%oya All household spending (8:30 am) Aug -0.5%m/m, sa Unemployment rate (8:30 am) Aug 4.2%, sa Job offers to applicants ratio (8:30 am) Aug 0.84, sa IP preliminary (8:50 am) Aug -0.8%m/m, sa Total retail sales (8:50 am) Aug -0.3%oya Housing starts (2:00 pm) Aug -5.0%oya

1 Oct BoJ Tankan (8:50 am) 3Q Auto registrations (2:00 pm) Sep

2 Oct Nominal wages (10:30 am) Aug

3 Oct PMI services/composite (8:15 am) Sep Auction 3-month bill

4 Oct BoJ Monetary Policy Meeting Auction 6-month bill Auction 10-year bond

5 Oct BoJ Monetary Policy Meeting and statement BoJ Governor Shirakawa’s press conference (3:30 pm)

8 Oct Holiday: Japan

9 Oct Current account balance (8:50 am) Aug Economy Watchers survey (2:00 pm) Sep BoJ monthly economic report (2:00 pm)

10 Oct Auction 2-month bill

11 Oct Machinery orders (8:50 am) Aug Bank lending (8:50 am) Sep Consumer sentiment (2:00 pm) Sep Minutes of Sep 18-19 BoJ Monetary Policy Meeting (8:50 am) Auction 3-month bill Auction 30-year bond

12 Oct M2 (8:50 am) Sep Tertiary activity index (8:50 am) Aug Corporate goods prices (8:50 am) Sep

During the week: CAO private consumption index Aug

15 Oct IP final (1:30 pm) Aug

16 Oct Auction 5-year note

17Oct Construction spending (2:00 pm) Aug Auction 1-year note

18 Oct Auction 3-month bill Auction 20-year bond

19 Oct All sector activity index (1:30 pm) Aug

During the week: Nationwide department store sales Sep

Highlighted data are scheduled for release on or after the date shown. Times shown are local.

83

JPMorgan Chase Bank NA

Silvana Dimino (1-212) 834-5684 [email protected]

Economic Research

Global Data Watch September 21, 2012

Canada economic calendar Monday Tuesday Wednesday Thursday Friday

24 Sep BoC Governor Mark Carney speaks at a panel discussion of the Canadian Council of Chief Executives in Ottawa, Ontario (3:00pm)

25 Sep Retail sales (8:30am) Jul 0.2% Ex autos 0.3% BoC Deputy Governor Tim Lane speaks at the Calgary CFA Society in Calgary, Alberta (2:15pm)

26 Sep

27 Sep Payroll employment (8:30am) Jul

28 Sep Monthly GDP (8:30am) Jul 0.1%

1 Oct IPPI (8:30am) Aug RBC manufacturing PMI (9:00am) Sep Historical revision Balance of payments 1Q81-2Q12 Expenditure-based GDP 1Q81- 2Q12

2 Oct

3 Oct CFIB Business Barometer Index (6:00am) Sep

4 Oct Ivey PMI (10:00am) Sep BoC Senior Deputy Governor Tiff Macklem speaks at the Manitoba Chambers of Commerce in Winnipeg (1:30pm)

5 Oct Labor force survey (8:30am) Sep Building permits (8:30am) Aug

8 Oct Thanksgiving Day Markets closed

9 Oct Housing starts (8:15am) Sep

10 Oct

11 Oct International trade (8:30am) Aug New home prices (8:30am) Aug TNS Canada Consumer Confidence Index (9:00am) Oct

12 Oct

15 Oct New vehicle sales (8:30am) Aug National balance sheet accounts (8:30am) 2Q Existing home sales (9:00am) Sep BoC Business Outlook Survey (10:30am) 3Q BoC Senior Loan Officer Survey (10:30am) 3Q

16 Oct Manufacturing sales (8:30am) Aug

17 Oct Nonresidential construction (8:30am) 3Q

18 Oct Wholesale sales (8:30am) Aug

19 Oct CPI (8:30am) Sep

All existing home sales are tentative. Times shown are local.

84

JPMorgan Chase Bank, New York Economic Research Carmen Collyns (1-212) 834-3921 Global Data Watch [email protected] September 21, 2012

Latin America economic calendar Monday Tuesday Wednesday Thursday Friday

24 Sep Argentina: Trade balance Aug Consumer confidence Sep Brazil: Consumer confidence Sep FGV: IPC-S Sep 23 Mexico: CPI Sep 1H Headline 0.29%2w/2w Core 0.29%2w/2w Headline 4.77%oya Core 3.78%oya

25 Sep Brazil: Current account balance Aug BRL -2.8bn FDI Aug BRL 4.0bn Mexico: IGAE GDP proxy Jul 4.3%oya Central bank reserves (Prior week)

26 Sep Brazil: Fipe CPI Sep 22 IGP-M Sep 0.84% m/m nsa Mexico: Trade balance Aug -US$ 74 mn

27 Sep Brazil: BCB credit report Aug Central government budget Aug BRL 0.8bn

28 Sep Argentina: Economic activity index Jul 0.8%oya Brazil: Primary budget balance Aug BRL 3.3bn Net debt as % of GDP Aug 35.0% Chile: Unemployment rate Aug 6.4%oya Manufacturing index Aug 0.9%oya Retail sales Aug 7.4%oya Colombia: Unemployment rate Aug Banrep meeting unchanged Mexico: Commercial bank credit Aug PS budget balance Aug

During the week: Argentina: Budget balance Aug Consumer confidence Sep Colombia: Tax revenues Jul

1 Oct Brazil: FGV: IPC-S Sep PMI Manufacturing Sep Trade balance Sep Peru: CPI Sep WPI Sep Mexico: Banxico survey of economic expectations Family remittances Aug IMEF manufacturing PMI Sep IMEF non-manufacturing PMI Sep

2 Oct Brazil: IP Aug Mexico: Central bank reserves (Prior week)

3 Oct Brazil: Fipe CPI Sep PMI Services Sep Chile: BCCh minutes

4 Oct Colombia: PPI Sep Mexico: Consumer confidence Sep

5 Oct Brazil: IPCA Sep Chile: Economic activity index Aug Colombia: CPI Sep Mexico: Banamex survey of economic expectations

During the week: Argentina: Tax revenues Sep Brazil: Commodity Price Index Sep Vehicle production (ANFAVEA) Sep Chile: CPI Sep Colombia: Auto sales Sep

8 Oct Brazil: IGP-DI Sep FGV: IPC-S Oct 7 Chile: Trade balance Sep

9 Oct Mexico: Central bank reserves (Prior week) CPI Sep

10 Oct Brazil: IGP-M 1st release Oct COPOM meeting Mexico: Gross fixed investment Jul Wage negotiations Sep

11 Oct Brazil: Retail sales Aug Peru: BCRP meeting

12 Oct Argentina: CPI Sep WPI Sep Colombia: Banrep meeting minutes Peru: Trade balance Aug Mexico: IP Aug

During the week: Brazil: Economic activity index Aug Caged formal job creation Sep Mexico: Auto report Sep

15 Oct Peru: Economic activity index Aug Unemployment rate Sep

16 Oct Brazil: FGV: IPC-S Oct 15 Mexico: Central bank reserves (Prior week)

17 Oct Brazil: COPOM meeting minutes IGP-10 Oct Colombia: Trade balance Aug

18 Oct Chile: BCCh meeting Colombia: Retail sales Aug

19 Oct Argentina: Economic activity Aug Brazil: IPCA-15 Oct IGP-M 2st release Oct Colombia: IP Aug Mexico: Unemployment rate Sep

During the week: Argentina: Budget balance Sep Brazil: Tax collections Sep Colombia: Tax revenues Aug Mexico: Pension funds report Sep

85

JPMorgan Chase Bank N.A, London Branch

Malcolm Barr (44-20) 7134-8326 Allan Monks (44-20) 7134-8309

Economic Research


UK economic calendar Monday Tuesday Wednesday Thursday Friday

24 Sep

25 Sep BBA Mortgage lending (9:30am) Aug BoE’s Paul Fisher speaks at Richmond Univeristy

26 Sep BoE credit conditions survey 3Q CBI distributive trades (11:00am) Sep

27 Sep BoP (9:30am) 2Q Business investment final (9:30am) 2Q Real GDP final (9:30am) 2Q -1.4 %q/q, saar

28 Sep Gfk cons. conf. (12:01am) Sep Index of services (9:30am) Jul 1.3%m/m, sa

1 Oct M4 & M4 lending final (9:30am) Aug Net lending to individuals (9:30am) Aug PMI Mfg (9:30am) Sep

2 Oct BCC economic survey (12:01am) 3Q PMI Construction (9:30am) Sep

3 Oct PMI Services (9:30am) Sep

4 Oct New car regs (7:00am) Sep BoE housing equity withdrawal (9:30am) 2Q MPC rate announcement and Asset purchase target (12:00pm) No change expected

5 Oct

During the week: Halifax HPI Sep (1-5 Oct)

8 Oct Markit jobs report (12:01am) Sep

9 Oct BRC retail sales monitor (12:01am) Sep RICS HPI (12:01am) Sep Industrial production (9:30am) Aug Trade balance (9:30am) Aug

10 Oct

11 Oct

12 Oct Construction output (9:30am) Aug

15 Oct Rightmove HPI (12:01am) Oct

16 Oct CPI (9:30am) Sep ONS HPI (9:30am) Aug PPI (9:30am) Sep

17 Oct Labor market report (9:30am) Sep

18 Oct Retail sales (9:30am) Sep

19 Oct Public sector finances (9:30am) Sep

During the week: CBI industrial trends (17-25 Oct)

Times shown are local.

86

JPMorgan Chase Bank N.A, London Branch

Anthony Wong (44-20) 7134-7549 [email protected]

Economic Research


Emerging Europe/Middle East/Africa economic calendar Monday Tuesday Wednesday Thursday Friday

24 Sep

Hungary: Retail sales (9:00am) Jul -1.5%oya, wda Turkey: Capacity utilization (2:30pm) Sep Israel: BoI rate decision (5:30pm)

Holiday: South Africa

25 Sep

Hungary: NBH rate decision (2:00pm) -25bp Poland: Unemployment (10:00am) Aug Retail sales (10:00am) Aug 4.8%oya

Holiday: Israel

26 Sep

Holiday: Israel

27 Sep

Czech Republic: CNB rate decision (1:00pm) 25bp cut to 0.25% Romania: NBR rate decision Sep unchanged South Africa: PPI (11:30am) Aug

28 Sep

Hungary: Current account (8:30am) 2Q EUR685m Unemployment (9:00am) Aug PPI (9:00am) Aug Poland: NBP inflation expectations (2:00pm) Sep Current account (2:00pm) 2Q Turkey: Foreign trade (10:00am) Aug South Africa: Private sector credit (8:00am) Aug Budget (2:00pm) Aug Trade balance (2:00pm) Aug

Holiday: Czech Republic

During the week: Russia: Current account final 2Q (29 Sep)

1 Oct

Czech Republic: PMI (9:30 am) Sep Hungary: PMI Sep Poland: PMI (9:00am) Sep Russia: PMI (9:00am) Sep Turkey: PMI Sep South Africa: Kagiso PMI (11:00am) Sep

Holiday: Israel

2 Oct

Romania: PPI (10:00am) Aug Retail sales (10:00am) Aug Russia: Current account 3Q

3 Oct

Poland: NBP rate decision Turkey: PPI (10:00am) Sep CPI (10:00am) Sep

4 Oct

5 Oct

Czech Republic: Retail sales (9:00am) Aug Hungary: Industrial output (9:00am) Aug Romania: GDP final (10:00am) 2Q South Africa: Gross reserves (8:00am) Sep

During the week: Russia: CBR rate decision Oct (1-10 Oct); CPI Sep (3-8 Oct); Foreign trade Aug (5-9 Oct)

8 Oct

Czech Republic: Trade balance (9:00am) Aug Industrial output (9:00am) Aug Unemployment rate (9:00am) Sep Hungary: Budget balance (4:00pm) Sep

Holiday: Israel

9 Oct

Czech Republic: CPI (9:00am) Sep Hungary: Trade balance (9:00am) Aug Turkey: Industrial output (9:00am) Aug

10 Oct

Romania: CPI (10:00am) Sep Industrial output (10:00am) Aug Trade balance (10:00am) Aug Hungary: NBH minutes (2:00pm)

11 Oct

Hungary: CPI (9:00am) Sep Turkey: Current account (10:00am) Aug

12 Oct

During the week: South Africa: Manufacturing output Aug (8-12 Oct); Retail sales Aug (10-15 Oct)

15 Oct

Czech Republic: PPI (9:00am) Sep Current account (10:00am) Aug Poland: Current account (2:00pm) Aug CPI (2:00pm) Sep Budget balance (3:00pm) Sep Romania: Current account Aug Turkey: Unemployment (10:00am) Jul Israel: CPI (6:30pm) Sep

16 Oct

Poland: Average gross wages and Employment (2:00pm) Sep Turkey: Consumer confidence (10:00am) Sep Israel: GDP final 2Q

17 Oct

Poland: Industrial output (2:00pm) Sep PPI (2:00pm) Sep

18 Oct

Hungary: Average gross wages (9:00am) Aug Turkey: CBRT rate decision (2:00pm)

19 Oct

During the week: Russia: PPI Sep (15-16 Oct); Industrial output Sep (15-17 Oct); Retail sales, unemployment, & investment Sep (16-18 Oct)


87

JPMorgan Chase Bank, N.A., Singapore Branch

Benjamin Shatil (65) 6882-2311 [email protected]

Economic Research


Non-Japan Asia economic calendar Monday Tuesday Wednesday Thursday Friday

24 Sep Singapore: CPI (1:00pm) Aug 3.8%oya Taiwan: Unemployment rate (8:30am) Aug 4.3%, sa IP (4:00pm) Aug -0.6%oya Vietnam: CPI Sep 5.8%oya

25 Sep Hong Kong: Trade balance (4:30pm) Aug -HK$33.0bn Korea: Consumer survey (6:00am) Sep 100, Index Philippines: Imports (9:00am) Jul 11.6%oya

26 Sep New Zealand: Trade balance (10:45am) Aug -NZ$550mn, sa Singapore: IP (1:00pm) Aug 4.4%oya

27 Sep Korea: FKI business survey (12:00pm) Sep 97.0, Index, sa New Zealand: NBNZ business confidence (1:00pm) Sep 21.0, Index Taiwan: Leading index (4:00pm) Aug

28 Sep Australia: Pvt. sector credit (11:30am) Aug 0.3%m/m, sa New Zealand: Building permits (10:45am) Aug Korea: IP (8:00am) Aug 0.0%oya Current acct. balance (8:00am) Aug US$3.9bn Leading index (8:00am) Aug 144.2 Index, sa Service sector activity (8:00am) Aug 1.4%oya Malaysia Budget released Thailand: Mfg. production Aug -11.8%oya Trade bal.(2:30pm) Aug -US$0.4bn PCI (2:30pm) Aug 3.9%oya PII (2:30pm) Aug 17.0%oya

During the week: China: PMI mfg. (Markit) Aug (29 Sep) 47.8, Index, sa Philippines: Budget balance Aug -PHP18.3bn Vietnam: Trade balance Sep -US$0.2bn, GDP 3Q 5.3%oya

1 Oct China: PMI mfg. (NBS) (9:00am) Sep India: PMI mfg. (10:30am) Sep Trade balance (11:00am) Aug Indonesia: CPI (11:00am) Sep Trade balance (11:00am) Aug Korea: Trade balance (9:00am) Sep Taiwan: PMI mfg. (10:00am) Sep Thailand: CPI (11:00am) Sep Holiday: Aus., China, HK, Korea

2 Oct Australia: RBA official rate announcement (2:30pm) New Zealand: ANZ commodity price (2:00pm) Sep Korea: CPI (8:00am) Sep PMI mfg. (9:00am) Sep Singapore: PMI (9:30pm) Sep Holiday: China, Hong Kong, India

3 Oct Australia: Trade balance (11:30am) Aug Holiday: China, Korea

4 Oct Australia: Building approvals (11:30am) Aug Retail sales (11:30am) Aug Hong Kong: Retail sales (4:30pm) Aug Holiday: China

5 Oct Malaysia: Trade balance (12:01pm) Aug Philippines: CPI (9:00am) Sep Taiwan: CPI (8:30am) Sep Holiday: China

During the week:

8 Oct Australia: ANZ job advertisements (11:30am) Sep Taiwan: Trade balance (4:00pm) Sep

9 Oct Australia: NAB business confidence (11:30am) Sep New Zealand: NZIER business survey (10:00am) 3Q

10 Oct Korea: Money supply (12:00pm) Aug Unemployment rate (8:00am) Sep Philippines: Exports (9:00am) Aug Holiday: Taiwan

11 Oct Australia: Unemployment rate (12:30pm) Sep Indonesia: BI monetary policy mtg. Korea: BOK monetary policy mtg.(9:00am) PPI (6:00am) Sep Malaysia: IP (12:00pm) Aug

12 Oct India: IP (11:00am) Aug Singapore: Retail sales (1:00pm) Aug

During the week: China: Money supply Sep (11-15 Oct), Trade balance Sep (13 Oct) Singapore: GDP flash 3Q (11-18 Oct)

15 Oct Australia: Housing finance (11:30am) Aug China: CPI, PPI (9:30am) Sep India: WPI (12:00pm) Sep Philippines: OFW remittances Aug

16 Oct

17 Oct Malaysia: CPI (5:00pm) Sep Singapore: NODX (8:30am) Sep Thailand: BOT monetary policy meeting (2:30pm)

18 Oct China: GDP (10:00am) 3Q FAI, IP (10:00am) Sep Retail sales (10:00am) Sep Hong Kong: Unemployment rate (4:30pm) Sep India: CPI Sep

19 Oct Taiwan: Export orders (4:00pm) Sep

During the week:


1

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


Global Data Diary Week / Weekend Monday Tuesday Wednesday Thursday Friday 22-28 September 24 September 25 September 26 September 27 September 28 September

Germany France Germany Brazil China IFO bus survey (Sep) INSEE bus conf (Sep) CPI prelim (Sep) BCB credit report (Aug) Markit PMI mfg (Sep)

Israel Germany Singapore Czech Republic Colombia BoI mtg: no chg GfK cons conf (Sep) IP (Aug) CNB mtg: -25bp BanRep mtg: no chg Japan Hungary United States Euro area Euro area BoJ MPM mins (Aug 8/9) NBH mtg: -25bp New homes sales (Aug) M3 (Aug) HICP flash (Sep) Taiwan Japan EC bus conf (Sep) Japan IP (Aug) Shoko Chukin surv (Sep) EC cons conf final (Sep) PMI mfg (Sep)

United States Germany CPI (Aug) Case-Shiller HPI (Jul) Labor mkt rpt (Aug/Sep) All hhold spending (Aug) CB cons conf (Sep) Italy Labor mkt report (Aug)

ISAE bus conf (Sep) IP prelim (Aug) Romania Total retail sales (Aug) BNR mtg: no chg Korea

United Kingdom IP (Aug) GDP revision (2Q) United Kingdom United States GfK cons conf (Sep) Durable goods (Aug) United States GDP revision (2Q) Personal income (Aug)

Pending home sales (Aug) UMich cons snt fnl (Sep)

Uruguay BCU mtg: no chg

29 Sep – 5 Oct 1 October 2 October 3 October 4 October 5 October Brazil China Australia Euro area Euro area Brazil Vehicle production (Sep) NBS PMI mfg (Sep) RBA mtg: no chg Retail sales (Aug) ECB mtg: -25bp IPCA (Sep) China Euro area Brazil Poland United Kingdom Germany Markit PMI mfg (Sep)* Unemp rate (Aug) IP (Aug) NBP mtg: -25bp Auto registrations (Sep) Mfg orders (Aug)

Germany Korea Turkey MPC mtg: no chg Japan Retail sales (Aug) CPI (Sep) CPI (Sep) United States BoJ MPM: no chg Japan United States United States Factory orders (Aug) Taiwan BoJ Tankan (3Q) Auto sales (Sep) ADP employment FOMC minutes (Sep) CPI (Sep) Auto registrations (Sep) ISM nonmfg (Sep) United States Korea Global Employment (Sep) Trade report (Sep) PMI serv & all-ind (Sep) United States ISM mfg (Sep) Global

PMI mfg (Sep)

* To be released Sep 29

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For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of “the public” as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offense. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul branch. Revised August 25, 2012. Copyright 2012 JPMorgan Chase Co. All rights reserved. Additional information available upon request.

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