Dbs Daily 120508

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Daily Breakfast Spread, 8 May 2012

Daily Breakfast Spread

DBS Group Research 8 May 2012

Economics

Greater China, Korea

TW: The risk of inflation may have been overstated and the downside risk toeconomic growth may have been underestimated. Yesterdays trade data remindedthe fact that the recovery in exports and overall economic growth is slow andfragile. Exports registered a year-on-year contraction of -6.5% in April, down from -3.3% in the preceding month. Sequentially, exports fell -3.1% MoM sa, reversing

the gains of 2.5% in March. Due to the weakness in exports, trade surplus narrowedto USD 0.7bn in April, significantly down from USD 1.9bn on average during theJan-Mar period. We are conservative about the export outlook in the near term,given the ongoing economic contraction in Europe, and on the other hand, thelack of a rapid growth recovery in China.

Meanwhile, yesterdays CPI data alleviated the inflation concerns resulting fromfuel/electricity price hikes. CPI inflation picked up to 1.4% YoY in April, slightlyhigher than 1.2% in March. This almost fully reflected the 10% fuel price hike lastmonth, which boosted the MoM CPI growth to 0.4% from the long term average of0.1% (oils weight in CPI: 3%). Regarding the upcoming hike in electricity prices, thegovernment has decided to postpone it to June from May and spread it over threestages. We have penciled in a MoM CPI growth of 0.3% for June and Decemberrespectively. Accordingly, we expect the YoY inflation to remain low at 1.0-1.5% inMay-June, before entering the range of 1.5-2.0% in 2H. The possibility of inflationexceeding 2% in 2H is low, unless food prices surge strongly due to worse-than-normal weather in the typhoon season.

Fundamentally, the softness in economic growth indicates weak price pressures onthe demand side, and limits the possibility of wage hikes and a wage-price spiral.The inflationary impact of fuel/electricity hikes should be one off. Meanwhile, theimported inflation pressures are now easing, thanks to the declines in crude oil andother commodities prices in the international markets. As growth softness isexpected to continue and inflation will remain benign, the central bank shouldkeep policy neutral.

G3

EZ: Yesterday we discussed at some length the growing risks to the US outlook. Butrisks are on the rise again in Europe too. They are surely bigger than those in the USyet probably easier to write down and to understand. The heart of the issue is thesame at it was back in December when market tension was at a local peak: whether

the euro will survive.

Tension subsided in late-December for two reasons: the key short- and long-termissues surrounding the crisis had, at least seemingly, finally been addressed. Theshort-term worry was that there was no money to ringfence questionable assetswhose value was declining by the day. The short-term risk was that panic wouldspread to other markets. This was addressed when the ECB, after denying formonths that it would do anything of the sort, began flooding the market withwhat would become, by February, a trillion euros worth of 3-year loans. Such loansdidnt fix anything but they changed the time dimension of the problem,especially given that there was nothing preventing the ECB from rolling these loansover three years hence if the situation hadnt improved.

The second, longer-term issue was preventing the debt crisis from reoccurring atsome point in the future and this was addressed, or seemingly so, by Germanysefforts to make deficit rules harder to get around. EU countries agreed in December

to begin enshrining lower deficit rules into national constitutions. With short-termmoney flooding the market and the key long-term issue being addressed, markets

US Fed expectations

Source: Bloomberg fed fundfutures

Notes: Given a FF target rateof 0.25%, an implied FF rateof 0.30 is interpreted roughlyas the market pricing in a 20%chance of a Fed hike to 0.50%from 0.25% (30 is 1/5th of thedistance to 50 from 25). DBSexpectations are presented indiscrete blocks of 25bps, i.e.,the Fed moves or it does not.See also Policy rateforecasts below.

Implied fed funds rate

Dec12 Jun13 Dec-13MarketCurrent 0.16 0.17 0.221wk ag 0.16 0.18 0.24DBS 0.25 0.25 0.25

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enjoyed an innocent and relatively uneventful spring.

One trouble with the lower deficits / austerity budgets is that they are painful.Another is that they dont address the competitiveness differences betweencountries and that makes repaying debt difficult. Recession and highunemployment will eventually lower wages and prices locally but its a long, painful

slog before competitiveness gets rebalanced and debt gets repaid. The innocentpresumption among markets for the past few months has been that countries wouldnevertheless bite the bullet, endure the pain and eventually emerge from the otherside of the tunnel.

That presumption is now being tested. Governments that backed austerity are beingthrown out of office. Promises that were made to lenders are being questioned. AU-turn on austerity is underfoot and whether its right or wrong from an economic /moral point of view, markets will re-price the likelihood that countries will keeptheir promises and that lenders will be repaid. The risk, as it was back in December, isthat some in the markets will want out and that others, perhaps many others, willfollow. That exit becomes exodus.

It hasnt happened yet. And markets may well conclude that growth policies make itmore likely that all will get repaid at the end of the day. But markets are differentfrom ten guys sitting in a room promising each other they wont be the first to walk

out. Markets are individual and selfish and unpredictable. With economies sinkinglower and policies becoming less predictable, markets can only become lesspredictable too.

Currencies

FX: The market is still nervous despite yesterdays late recovery. The initial sell-off inrisk assets from the disappointing elections in France, Greece and Germany was stillconsidered the right reaction. The emergence of Francois Hollande as the nextpresident of France will create anxiety over fiscal compact and growth compact.First, the ability of Germany and France to stay united in providing the leadership tosteer Eurozone out of its sovereign debt crisis. Eurogroup and Germany do notsupport the push by Hollande to renegotiate fiscal compact. This divide will become

more evident after Hollande meets German Chancellor Angela Merkel after hisinauguration on May 15. Second, the European Central Bank (ECB) will be urged tocounterbalance fiscal austerity with a pro-growth monetary policy. The IMF hasurged Eurozone to balance spending cuts with revenue increases, but urged morelabor market reforms and deleveraging in the banking sector.

Overall, Eurozone still needs to ease monetary conditions, which essentially meanslower real interest rates and a weaker real exchange rate. EUR/USD is still set to tradebelow 1.30 again. As witnessed in past crises, EUR/USD does not find a bottom untilpoliticians and policymakers achieve consensus on how to steer policies towardsresolving the crisis.

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65

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

EUR/USD is vulnerable to more downside without policy consensus

Lehman

crisis

Greek

crisis

Political

backlash

crisis

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Economic calendar

Central bank policy calendar

Event Consensus Actual Previous

May 7 (Mon)TW: CPI (Apr) 1.41% y/y 1.44% y/y 1.21% y/yTW: trade balance (Apr) USD 2.58bn USD 0.69bn USD 2.36bn

-- exports -3.1% y/y -6.4% y/y -3.2% y/y-- imports -2.0% y/y 2.1% y/y -5.8% y/y

ID: GDP (1Q) 6.31% y/y 6.30% y/y 6.49% y/y

May 9 (Wed)MY: trade balance (Mar) MYR 10bn MYR 10.587bn

-- exports 2.9% y/y 14.5% y/y-- imports 7.0% y/y 18.0% y/y

May 10 (Thur)JP: currennt acc (Mar) JPY 1449bn JPY 1177.8bn

-- adjust current acc JPY 650bn JPY 854.1bnPH: total exports (Mar) 14.6% y/yMY: industrial production (Mar) 7.5% y/yUS: trade balance (Mar) -USD 49.7bn -USD 46.0bnUS: initial jobless claims (May)CN: trade balance (Apr) USD 9.9bn USD 5.35bn

-- exports 8.4% y/y 8.9% y/y-- imports 10.9% y/y 5.3% y/y

May 11 (Fri)CN: CPI (Apr) 3.4% y/y 3.6% y/yCN: industrial production (Apr) 12.0% y/y 11.9% y/yCN: retail sales (Apr) 15.1% y/y 15.2% y/yIN: industrial production (Mar) 4.1% y/yHK: GDP (1Q) 0.3% q/q sa

-- 3.0% y/y

PolicyDate Country Rate Current Consensus DBS ActualThis week10-May ID o/n reference rate 5.75% 5.75% 5.75%10-May KR 7 day repo rate 3.25% 3.25% 3.25%

11-May MY OPR 3.00% 3.00% 3.00%

Next weekNo policy meeting

Last week

02-May TH 1 day repo rate 3.00% 3.00% 3.00% 3.00%

03-May EZ 7-day refi rate 1.00% 1.00% 1.00% 1.00%

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GDP & inflation forecasts

Policy & exchange rate forecasts

Market prices

Policy rate 10Y bond yield FX EquitiesCurrent Current 1wk chg Current 1wk chg Index Current 1wk chg

(%) (%) (bps) (%) (%)

US 0.25 1.88 -4 79.6 1.0 S&P 500 1,369 -2.4Japan 0.10 0.86 -3 79.9 -0.1 Topix 773 -4.5Eurozone 1.00 1.61 -9 1.305 -1.4 Eurostoxx 2,370 -2.2

Indonesia 5.75 6.08 15 9228 -0.4 JCI 4,217 1.3Malaysia 3.00 3.58 1 3.05 -0.8 KLCI 1,591 0.7Philippines 4.00 5.84 1 42.4 -0.1 PCI 5,298 1.5Singapore Ccy policy 1.50 -5 1.246 -0.7 FSSTI 2,991 0.3Thailand 3.00 3.78 2 31.0 -0.8 SET 1,227 1.5

China 6.56 6.31 0.0 S'hai Comp 2,452 1.9Hong Kong Ccy policy 1.11 -3 7.76 -0.1 HSI 21,086 1.3Taiwan 1.88 1.23 -4 29.3 -0.1 TWSE 7,701 2.4

Korea 3.25 3.75 -12 1136 -0.5 Kospi 1,955 -1.0India 8.00 8.67 -1 52.9 -0.7 Sensex 16,831 -1.8

Source: Bloomberg

Policy interest rates, eop Exchange rates, eop

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

US 0.25 0.25 0.25 0.25 0.25 Japan 0.10 0.10 0.10 0.10 0.10 79.9 85 84 83 82

Eurozone 1.00 0.75 0.50 0.50 0.50 1.305 1.22 1.24 1.26 1.28

Indonesia 5.75 5.75 5.75 5.75 5.75 9,228 9,300 9,200 9,100 9,000

Malaysia 3.00 3.00 3.00 3.00 3.00 3.05 3.15 3.10 3.05 3.00Philippines 4.00 4.00 4.00 4.00 4.50 42.4 43.8 43.1 42.3 41.6

Singapore n.a. n.a. n.a. n.a. n.a. 1.25 1.30 1.28 1.26 1.24Thailand 3.00 3.00 3.00 3.00 3.00 31.0 31.3 30.7 30.0 29.4Vietnam^ 13.00 12.00 10.00 9.00 8.00 20,870 21,000 21,200 21,400 21,600

China* 6.56 6.56 6.56 6.81 7.06 6.31 6.30 6.24 6.18 6.11Hong Kong n.a. n.a. n.a. n.a. n.a. 7.76 7.78 7.80 7.80 7.78

Taiwan 1.88 1.88 1.88 1.88 2.00 29.3 30.8 30.4 30.0 29.6Korea 3.25 3.25 3.25 3.25 3.50 1135 1170 1140 1100 1070

India 8.00 8.00 8.00 7.50 7.50 52.9 52.5 51.5 50.5 49.5

^ prime rate; * 1-yr lending rate

GDP growth, % YoY CPI inflation, % YoY

2009 2010 2011 2012f 2013f 2009 2010 2011 2012f 2013f

US -3.5 3.0 1.7 2.1 2.6 -0.3 1.6 3.1 2.1 2.8

Japan -5.5 4.4 -0.7 2.1 1.5 -1.3 -0.7 -0.3 -0.1 0.1Eurozone -4.0 1.7 1.6 -0.4 0.5 0.3 1.6 2.7 2.1 1.8

Indonesia 4.6 6.1 6.5 6.1 6.5 4.8 5.1 5.4 4.7 5.2Malaysia -1.6 7.2 5.1 4.5 5.0 0.6 1.7 3.2 2.6 2.5

Philippines 1.0 7.3 3.7 4.2 5.2 4.2 3.8 4.8 4.0 4.8Singapore -1.0 14.8 4.9 3.5 5.0 0.6 2.8 5.2 4.1 2.6Thailand -2.2 7.8 0.1 5.5 5.5 -0.8 3.3 3.8 3.8 3.8

Vietnam 5.3 6.8 5.9 6.0 6.2 7.0 9.2 18.6 10.2 6.0

China 9.2 10.3 9.3 8.5 8.8 -0.7 3.3 5.4 4.0 4.0

Hong Kong -2.7 7.0 5.0 2.0 4.5 0.5 2.4 5.3 4.0 3.5

Taiwan -1.8 10.7 4.0 2.9 4.2 -0.9 1.0 1.4 1.4 1.3Korea 0.3 6.2 3.6 3.4 4.1 2.8 2.9 4.0 3.0 3.3

India* 8.0 8.5 6.7 6.5 7.0 3.6 9.6 8.7 7.0 6.5

* India data & forecasts refer to fiscal years beginning April; inflation is WPISource: CEIC and DBS Research

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Recent research

Disclaimer:

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Dbs Daily 120508