Jp Morgan - Global Report

Economic ResearchMarch 28, 2013

Global Data Watch Cyprus stress adds to case for more ECB ease; it won’t come in April

US corporate strength seen in durables to be reinforced by strong April employment gain

BoJ takes first step on path to reflation next week

Through noisy industry data, PMIs point to solid regional performance

Caught one more time up on Cyprus avenue The seeds of the decisions made in Cyprus this week were sown by last sum-mer’s OMT program. By stepping into the role of a sovereign lender of last resort, the ECB significantly lowered the risk that a Euro area sovereign would lose access to funding. However, as systemic sovereign risk has abated so has the pressure for the region to move forward on institutional reforms and burden sharing. This has empowered Germany to push a position that legacy problems need to be addressed at the sovereign level in advance of broader regional reforms.

The repercussions arising from the OMT program were first seen last Septem-ber when Germany made it clear that area-wide resources for bank recapitali-zation—which had been in the banking union roadmap announced in June—would only be available to resolve subsequent banking crises. As such, ESM support for Spanish banks came in a loan to the sovereign rather than the ac-quisition of an equity investment in the banks. Greece also faced a very diffi-cult set of negotiations last autumn to release money from the second pro-gram. The pattern continued with Cyprus where the lack of sovereign capacity to deal with a banking crisis produced an agreement where the burden of re-capitalizing banks incorporated a broad-based bail-in of bank creditors.

The recognition that regional burden sharing is limited is putting upward pres-sure on bank funding costs, unwinding a portion of the decline seen since the announcement of the OMT. There should be little doubt that recent develop-ments will weigh on area-wide economic performance. Our current forecast has the regional recession continuing through midyear. It will also exacerbate regional divergences between those countries now doing relatively well (Germany, Austria, Belgium) and those still in recession (the periphery).

Contents

Assessing shifts in ex port market

performance 13

US labor force participation still

trending low er 15

Italy 's structural challenge: law

and the judicial sy stem 17

What does China’s recent ex port

strength tell us? 19

Glass-half-full RBA to ease again

in Nov ember, not May 21

Singapore: MAS to fade soft data

and keep inflation focus 23

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 25Euro area 33Japan 37Canada 41Mex ico 43Brazil 45Argentina 47Colombia and Chile 49United Kingdom 51

Central Europe 55

South Africa 59

Australia and New Zealand 61China, Hong Kong, and Taiw an 65Korea 69ASEAN 71

India 75Asia focus 77

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.jpmorganmarkets.com

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1450100

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3502011 2012 2013

Bp

EMU bank CDS and equity pricesIndex

Bank CDS, inverted scale

Equity prices

Source: J.P.Morgan, Bloomberg, Morgan Stanley

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45

-20

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2011 2012 2013

%ch saar over 3 mos, both scales

Core cap goods shipments and orders

Shipments New orders

Source: Census Bureau

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Economic Research Global Data Watch March 28, 2013

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]

We have argued for some time that there need to be macro-economic policies that support regional demand in the midst of these adjustments. For a region that has been in recession for more than a year—facing record-high unemployment and an ongoing large fiscal drag—further monetary easing is es-sential. Looking to next week’s ECB meeting, no action is expected. Arguably the appropriate response to disappoint-ments with the bank lending channel would be an easing of collateral requirements and further LTROs. This would also help to contain any deposit flight from peripheral banking systems. But, while ECB policymakers have spoken for many months about wanting to support bank lending to small and medium-sized companies, there is no indication that anything is imminent. We expect that the main refinancing rate will be cut 25bp to 0.5% by June and hope that a signal is sent next week that opens the door for a move in May.

US corporates drive the bus While the Euro area economy remains mired in recession, the US economy is rebounding. The forecast for current quarter GDP growth was revised up to 2.7%q/q saar this week. As consumption growth moderates in the face of a tax increase and higher gasoline prices, growth should moderate next quar-ter. However, our current 1H13 projection of 2.1% annualized growth would represent an impressive outcome in the face of a large front-loaded 2013 fiscal drag.

US resilience reflects corporate sector health, and we antici-pate firms will perceive this year’s fiscal drag as a temporary shock. In this regard, the building momentum on business spending and hiring is encouraging. Following last summer’s slump, real business fixed investment rebounded to a 13.2% annualized gain last quarter. Positive news on business spend-ing from the February durable goods report points to a solid gain in capital spending in 1Q13. This lift is being reinforced by stronger hiring and a turn in the inventory cycle. Indeed, next week we expect the March labor market report to rein-

force this message as nonfarm payroll employment is antici-pated to rise 210,000.

The underlying source of business strength is the solid profit performance through a period of modest growth. This week’s GDP report showed that corporate profits grew at a 9.7% an-nualized pace during 2H13, calming fears of weakness that depressed spending and hiring around the middle of last year. With margins elevated and hourly labor costs growing mod-estly, the prospects for continued strong employment gains look good, even as the economy absorbs the fiscal drag.

Japan: a historic meeting next week Next week’s BoJ meeting, on April 3 and 4, will be a historic event, marking a regime change in Japanese monetary policy. Indeed, Governor Kuroda stated at the Diet this week that the BoJ would achieve 2% inflation target at any cost and that it would purchase a wide range of assets to achieve this goal.

In this context, next week’s decision should be viewed as the first step on a long path toward Japanese reflation. At the meeting we expect four initiatives:

Pulling forward the start of the open-ended asset purchase to May 2013.

An increase in asset purchase to ¥4 trillion a month (or ¥48 trillion a year) on a net basis.

The purchase of long-dated JGBs by the consolidation of the APP and the Rinban operation, with the extension of JBG maturity up to 30 years.

A change in wording on forward guidance to “the BoJ will continue the virtually zero rate policy until the 2% inflation target is in sight” from the current wording that “the Bank will pursue aggressive monetary easing through a virtually zero rate policy and purchases of financial assets, as long as the Bank judges it appropriate to continue with each policy measure respectively.”

Although these actions are anticipated, the BoJ is expected to guide expectations in the direction of further actions in the months ahead. We expect that raising actual inflation will be difficult and take time and that the BoJ will need to build credibility through actions that expand the scope of the asset purchase to include more equities and corporate bonds. An agreement with the government to share potential BoJ losses, derived from holding risk assets, would provide a signal lay-ing the groundwork for these purchases.

Source: Shoko-Chukin Bank, Reuters

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2010 2011 2012 2013

Index

Japan equity prices and small business sentimentDI, sa; adj for Tohoku disaster

Shoko-ChukinNikkei 225

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



Global PMI likely steady in March Global manufacturing grew at a robust 4.5% annualized clip in the three months through January, riding a wave of stronger final demand growth and a positive turn in the inventory cy-cle. The forecast calls for this growth pace to moderate to near 3% in coming months as US consumption growth fades, along with the inventory impulse. Our global PMI index has given an early signal in this direction. The output index dropped a half-point in February, accompanied by a similar decline in new orders. Likewise, the finished goods inventory index has moved to an elevated level. Looking to next week’s March release, our expectation is that the PMI will hold near the Feb-ruary level. The EM Asian PMIs will be of special interest. Manufacturing output pulled out of its slump in EM Asia a few months earlier than elsewhere, and likewise, the forecast has called for some cooling off in regional IP growth during the current quarter. Tracking this story is made complicated by distortions in January and February data due to the Lunar New Year holidays, seen in the volatility of recent IP and ex-port readings. Experience shows the manufacturing PMIs are less affected by these holiday distortions, so we look to them for signal. Through February, the EM Asian PMI stood well above the 4Q average, despite a pullback on the month, sug-gesting that any slowing in IP growth is modest.

EMEA central banks in motion In the emerging markets, a handful of central banks are still easing, dominated by the EMEA region. This week Hungary cut the base rate 25bp for the eighth consecutive meeting and will probably gradually lower rates from the current 5% level to 4.50% by May. Wary of inflation, Romania’s central bank left the policy rate on hold at 5.25% this week. The Czech National Bank reached the zero bound in 4Q12, so this week the bank turned to communications, signaling that the policy rate will be kept low over a longer horizon. In contrast to pol-icymakers in the rest of the region, Turkey’s central bank is preoccupied with rapid credit expansion and potential infla-tion risk. The CBRT’s attempts to restrain loan growth using

macro-prudential measures appear to have failed and the Bank decided to use liquidity management instead. As the CBRT reduces the repo funding to the banks, we expect ON rates to settle in the upper half of the interest rate corridor.

Argentina flirts with technical default Investor concerns over sovereign default risk have focused on Europe in recent years. Now Argentina faces a challenging legal situation as a US court is requiring it to propose a set-tlement for defaulted debt held by a minority of private credi-tors (8% of total) that did not participate in its 2005 and 2010 restructurings. Argentina can surprise with a generous offer and resolve the uncertainty favorably; it has enough resources today and a combination of high growth and a large haircut on other creditors has resolved its prior debt overhang. But Ar-gentine policymakers are averse to offering holdouts better terms and have suggested they prefer to petition the Court for an unprecedented sovereign “cram down.” This is a risky strategy given that interpretation of sovereign contractual law is not framed in the context of a bankruptcy code common to corporate debt workouts. If it fails, the court orders under re-view could trigger a ban on Argentina’s access to the US banks that it uses to pay restructured bondholders. True, any resulting “technical” default on external debt (22% of total public debt) might have only a limited impact on Argentina’s banking system while its strict capital outflow controls can mitigate the threat of a run on central bank reserves. But a miscalculated decision that further isolates the economy should be expected to undermine long-term growth and in-vestment.

China acts to rein in nonbank lending Following a spike in nonbank lending early this year, Chinese officials are moving to rein in this channel of credit creation, which has grown to be nearly as large as bank lending. A few weeks ago, government regulators (CBRC) announced guide-lines on local government financing vehicles. This week they followed up with new guidelines to control WMPs, requiring that investment in non-standard assets should not exceed 35% of a bank’s total WMP issuance, or 4% of a bank’s total as-sets. Tighter regulatory controls over the credit channel pri-marily restrain investment, especially by local governments. Continued action along these lines would reinforce our fore-cast for trend-like growth in China’s economy this year.

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

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25

0.8

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1.0

1.1

1.2

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2010 2011 2012 2013

Ratio, sa; incl Mar 13 est

EM Asian manufacturing%3m, saar

PMI orders/inventory Mfg output

Source: J.P. Morgan, Markit

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



Global economic outlook summary Real GDP Real GDP Consumer prices

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

2011 2012 2013 2014 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 3Q12 4Q12 2Q13 4Q13

The Americas United States 1.8 2.2 1.9 2.3 3.1 0.4 2.7 1.5 2.0 2.5 2.0 1.7 1.9 1.9 1.7Canada 2.6 1.8

1.4

2.1

0.7 0.6 1.6 1.6 2.0 2.1 1.9 1.2 0.9 1.4 2.0Latin America 4.2 2.6 3.4 3.8 2.0 3.4 3.0 4.0 4.2 3.7 3.9 4.7 4.7 5.0 4.7

Argentina 8.9 1.9

3.0

1.5

3.2 5.2 3.5 3.0 1.6 1.5 1.5 10.0 10.6 10.0 11.0Brazil 2.7 0.9 3.0 4.0 1.5 2.2 2.7 3.7 4.4 3.9 4.2 5.2 5.6 6.4 5.9Chile 5.9

5.6

5.5

4.5

5.0 6.1 6.0 5.1 4.8 4.5 4.5 2.6 2.2 2.2 3.1Colombia 6.6 4.0 4.5 5.0 -2.9 7.4 4.2 5.5 5.5 5.1 4.5 3.1 2.8 2.0 2.4Ecuador 8.0 5.0 4.0 4.5

6.3 5.5 5.0 3.0 3.0 4.0 5.0 5.1 4.6 5.4 4.7

Mexico 3.9 3.9 3.6 3.6 1.5 3.1 3.9 4.5 4.6 4.0 3.5 4.6 4.1 4.0 3.4Peru 6.9 6.3

6.0 6.5

6.9 2.5 5.0 7.0 7.5 6.0 6.5 3.5 2.9 2.3 2.5

Uruguay 5.7 3.5 3.7 4.0 7.8 2.3 4.0 3.0 5.0 5.0 4.0 8.0 8.9 8.4 7.7Venezuela 4.2 5.6

2.0

3.0

5.2 5.7 -4.0 2.0 2.0 2.0 4.0 19.0 18.7 31.0 35.7

Asia/Pacific 4.7 4.8

4.8

4.9 2.9 5.1 5.2 5.6 5.3 5.4 5.4 2.1 2.2 2.6 3.0Japan -0.5 2.0 1.3 1.2 -3.7 0.2 3.0 3.2 2.5 2.9 3.4 -0.4 -0.2 0.0 0.5Australia 2.4 3.6

2.7

3.2

2.6 2.4 2.4 2.7 3.7 2.6 4.3 2.0 2.2 2.8 2.7New Zealand 1.4 2.5 2.5 2.9 0.7 6.1 2.1 3.5 -2.0 4.4 4.3 0.8 0.9 1.1 2.2Asia ex Japan 7.4

6.2

6.7

6.7

5.9 7.7 6.6 7.0 6.9 6.9 7.0 3.2 3.4 3.7 4.2China 9.3 7.8 8.2 8.0 8.0 9.4 8.0 8.2 8.2 8.2 8.0 1.9 2.1 3.0 3.6Hong Kong 4.9 1.4

3.8

3.6

3.2 4.9 3.5 3.5 5.0 5.0 2.0 3.1 3.8 3.5 3.7India 6.2 5.0 5.8 6.5 3.5 4.7 6.4 6.5 5.3 5.6 7.6 9.8 10.1 9.0 8.5Indonesia 6.5 6.2 5.7 5.3 5.3 6.9 5.0 6.0 6.0 5.5 5.5 4.5 4.4 3.9 4.6Korea 3.7 2.0 2.8 3.9 0.2 1.1 3.1 4.0 4.5 4.5 4.0 1.6 1.7 1.8 2.6Malaysia 5.1 5.6

5.4 5.4

5.2 7.9 4.7 4.5 5.4 5.4 6.3 1.4 1.3 2.3 2.6

Philippines 3.9 6.6 5.3 5.3 7.0 6.1 4.5 4.9 5.3 5.3 5.3 3.5 3.0 3.1 3.4Singapore 5.2

1.3

2.4 3.9 -4.6 3.3 1.2 7.0 4.1 4.1 6.1 4.2 4.0 3.0 3.4Taiwan 4.1 1.3 4.2 3.9 3.9 7.3 4.0 4.0 4.2 4.3 3.4 2.9 1.8 1.3 2.3Thailand 0.1 6.4

5.4

4.5

6.1 15.0 4.5 4.5 5.0 5.0 4.5

2.9 3.2 4.2 4.0

Africa/Middle East Israel 4.6 3.1 3.1 3.3 2.7 2.4 3.2 2.8 3.6 3.6 3.2 1.8 1.6 1.9 2.2South Africa 3.5 2.5

2.6

3.6

1.2 2.1 2.7 2.8 3.4 3.6 3.8 5.1 5.6 6.2 5.7

Europe 2.1 0.2 0.1 1.7 0.5 -1.6 -0.3 0.3 1.2 1.5 1.8 3.2 3.0 2.5 2.4Euro area 1.5 -0.5

-0.6

1.2

-0.3 -2.3 -0.5 -0.5 0.5 1.0 1.5 2.5 2.3 1.6 1.5Germany 3.1 0.9 0.6 2.1 0.9 -2.3 1.5 1.0 1.8 2.0 2.5 2.1 2.0 1.6 1.6France 1.7 0.0

-0.7

1.0

0.7 -1.2 -1.3 -1.3 0.0 0.5 1.5 2.3 1.7 1.1 1.2Italy 0.5 -2.4 -1.6 0.7 -0.8 -3.7 -1.5 -1.5 0.0 0.5 1.0 3.4 2.6 1.7 1.8Spain 0.4 -1.4 -1.7

0.5

-1.3 -3.1 -1.8 -1.8 -0.8 -0.8 0.0 1.9 3.2 2.6

2.6United Kingdom 1.0 0.3 0.8 1.9 3.8 -1.2 0.5 1.0 1.5 2.0 2.0 2.4 2.7 2.8 2.9Emerging Europe 4.8 2.4

2.3

3.4

1.3

1.5

0.2

3.1

3.9

3.1

3.0 6.1 5.7

5.5

4.8Bulgaria 1.8 0.8 1.2 1.7 … … … … … … … … … … …Czech Republic 1.9 -1.3

-0.2

1.9

-1.8

-0.7

-0.1

0.5

1.0

1.0

2.0 3.3 2.8

2.2 2.4

Hungary 1.6 -1.7 -0.7 1.4 -1.4 -3.4 -0.3 0.3 1.2 1.5 1.5 6.1 5.4 2.9 2.8Poland 4.3 2.0

1.3

2.6

1.2

0.8

1.1

1.6

2.3

2.8

2.8 3.9 2.9

1.0

1.8Romania 2.2 0.3 1.9 2.3 -1.0 0.3 0.8 3.9 5.9 2.8 1.6 4.1 4.8 6.3 5.1Russia 4.3 3.4

2.5

3.6

2.2 2.5

0.0

4.0

4.8

3.5

3.5 6.0 6.5

6.8

5.5Turkey 8.5 2.6 3.7 4.5 … … … … … … … 9.0 6.8 6.7 6.3

Global

3.1 2.4 2.4

3.1

2.1

1.6

2.6

2.7

3.1 3.3

3.3

2.5

2.5

2.6

2.6Developed markets 1.4 1.2 0.9 1.8 0.9 -0.5 1.5 1.1 1.6 2.0 2.1 1.7 1.7 1.6 1.6Emerging markets 6.1

4.7

5.1

5.4

4.2

5.7

4.7 5.6 5.7

5.5

5.6 4.0 4.1

4.3

4.4

Memo: Global — PPP weighted 3.8 3.0 3.1 3.6 2.7 2.5 3.2 3.3 3.6 3.6 3.6 2.9 3.0 3.0 3.0 Note: For some emerging economies, 2012-2014 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan. Bold denotes changes from last edition of Global Data Watch, with arrows showing the direction of changes. Underline indicates beginning of J.P. Morgan forecasts. Unless noted, concurrent nominal GDP weights calculated with current FX rates are used in computing our global and regional aggregates. Latin America CPI aggregate now includes only those countries where central banks actively target inflation (excluding Argentina, Ecuador and Venezuela).

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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

2012 2013 2014

2011 2012 2013 2014 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q United States Real GDP 1.8 2.2 1.9 2.3 3.1 0.4 2.7 1.5 2.0 2.5 2.0 2.5 Private consumption 2.5 1.9 1.8 1.9

1.6 1.8 2.3 1.0 1.8 2.2 1.5 2.0

Equipment investment 11.0 6.9 5.9 7.1 -2.6 11.8 5.8 5.5 7.0 7.0 8.0 7.0 Non-residential construction 2.8 10.8 2.2 8.3

0.0 16.7 -11.2 4.0 8.0 9.0 9.0 9.0

Residential construction -1.4 12.1 17.4 21.7 13.6 17.5 11.7 23.0 25.0 25.0 20.0 20.0 Inventory change ($ bn saar) 31.0 43.0 51.2 43.5

60.3 13.3 55.8 55.8 49.9 43.5 38.9 39.8

Government spending -3.1 -1.7 -1.7 -1.1 3.9 -7.0 -0.7 -1.4 -1.6 -1.6 -1.0 -0.8 Exports of goods and services 6.7 3.4 2.9 5.1

1.9 -2.8 4.0 5.0 5.0 5.0 5.0 5.0

Imports of goods and services 4.8 2.4 2.9 5.9 -0.6 -4.2 6.5 5.0 6.0 5.0 6.0 6.0 Domestic final sales contribution 1.7 2.0 1.9 2.6

2.0 1.6 1.9 1.6 2.4 2.8 2.4 2.7

Inventories contribution -0.2 0.1 0.0 -0.1 0.7 -1.5 1.3 0.0 -0.2 -0.2 -0.1 0.0 Net trade contribution 0.2 0.1 0.0 -0.2

0.4 0.3 -0.5 -0.1 -0.2 -0.1 -0.2 -0.2

Consumer prices (%oya) 3.1 2.1 1.8 1.7 1.7 1.9 1.7 1.9 1.8 1.7 1.7 1.7 Excluding food and energy (%oya) 1.7 2.1 1.8 1.6

2.0 1.9 1.9 1.7 1.7 1.7 1.6 1.6

Federal budget balance (% of GDP, FY) -8.6 -6.9 -5.4 -4.3 Personal saving rate (%) 4.3 3.9 2.7 3.3

3.6 4.7 2.4 2.7 2.9 3.0 3.1 3.3

Unemployment rate (%) 8.9 8.1 7.7 7.4 8.0 7.8 7.8 7.7 7.6 7.5 7.4 7.4 Industrial production, manufacturing 3.4 3.9 3.5 2.9 -0.5 2.4 7.0 3.0 4.0 4.0 2.0 2.0 Euro area Real GDP 1.5 -0.5 -0.6 1.2 -0.3 -2.3 -0.5 -0.5 0.5 1.0 1.5 1.5 Private consumption 0.1 -1.2 -0.9 0.7

-0.4 -1.6 -1.0 -1.0 -0.5 0.5 1.3 1.3

Capital investment 1.6 -3.9 -3.0 0.9 -3.0 -4.4 -3.0 -3.0 -1.0 1.0 2.0 1.5 Government consumption -0.1 -0.1 -0.5 0.7

-0.4 -0.3 -1.0 -0.5 0.0 0.5 1.0 1.0

Exports of goods and services 6.5 2.9 2.5 4.0 4.1 -3.5 3.5 3.5 4.0 4.0 4.0 4.0 Imports of goods and services 4.3 -0.9 0.9 3.7

0.4 -3.5 1.5 2.0 3.5 3.5 4.0 4.0

Domestic final sales contribution 0.3 -1.4 -1.2 0.7 -0.9 -1.8 -1.3 -1.2 -0.5 0.6 1.3 1.2 Inventories contribution 0.2 -0.7 -0.2 0.1

-1.1 -0.4 -0.1 -0.1 0.6 0.0 0.0 0.1

Net trade contribution 1.0 1.6 0.8 0.3 1.6 -0.2 1.0 0.8 0.4 0.4 0.2 0.2

Consumer prices (HICP, %oya) 2.7 2.5 1.6 1.5

2.5 2.3 1.8 1.6 1.6 1.5 1.5 1.5 ex unprocessed food and energy 1.7 1.8 1.4 1.4 1.7 1.6 1.4 1.3 1.4 1.4 1.5 1.5 General govt. budget balance (% of GDP, FY) -4.1 -3.8 -2.8 -2.2

Unemployment rate (%) 10.2 11.4 12.1 12.3 11.5 11.8 11.9 12.1 12.2 12.3 12.3 12.3 Industrial production 3.2 -2.3 -1.6 2.0

0.4 -8.1 -0.5 -0.5 1.0 2.0 2.5 2.5

Japan

Real GDP -0.5 2.0 1.3 1.2 -3.7 0.2 3.0 3.2 2.5 2.9 3.4 -3.6 Private consumption 0.5 2.4 1.5 0.1 -1.9 2.0 3.5 1.2 0.7 2.7 4.8 -8.0 Business investment 3.3 2.0 0.7 4.9 -12.5 -5.7 4.0 8.0 6.0 5.0 5.0 3.5 Residential construction 5.5 2.9 9.4 3.3 6.8 14.9 8.0 8.0 10.0 8.0 8.0 -5.0 Public investment -6.9 12.5 12.3 0.9 10.7 7.2 5.0 20.0 20.0 10.0 -5.0 -10.0 Government consumption 1.4 2.7 1.8 1.4 1.6 2.7 1.6 1.8 1.5 1.5 1.5 1.2 Exports of goods and services -0.4 -0.2 -1.4 5.1 -19.0 -14.0 9.0 5.2 5.6 5.6 5.2 4.7 Imports of goods and services 5.9 5.3 2.7 4.7 -1.9 -9.0 10.0 5.6 5.0 4.2 10.0 -1.5 Domestic final sales contribution 0.8 2.7 2.1 1.1 -0.5 1.0 3.3 3.1 2.6 2.9 4.1 -4.5 Inventories contribution -0.5 0.0 -0.2 0.0 -0.1 0.1 -0.2 0.1 -0.3 -0.3 -0.1 -0.1 Net trade contribution -0.8 -0.8 -0.6 0.1 -3.0 -1.0 0.0 0.0 0.1 0.3 -0.6 0.9

Consumer prices (%oya) -0.3 0.0 0.1 1.9 -0.4 -0.2 -0.4 0.0 0.4 0.5 0.4 2.4 General govt. net lending (% of GDP, CY) -9.7 -10.0 -10.6 -8.9 Unemployment rate (%) 4.6 4.4 4.1 3.9 4.3 4.2 4.1 4.1 4.1 4.0 4.0 3.9 Industrial production -2.3 -1.0 2.4 5.1 -15.8 -7.2 15.0 10.0 6.0 8.0 5.0 -2.0

Memo: Global industrial production 3.9 1.7 2.8 4.1 -0.3 0.0 5.4 3.9 4.4 4.9 4.0 3.0 %oya 0.9 0.9 0.9 2.1 3.4 4.6 4.3 4.0 Note: More forecast details for the G-3 and other countries can be found on J.P. Morgan’s Morgan Markets client web site

6

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

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



Global Central Bank Watch Official Current Change since (bp)

Last change Next mtg Forecast Forecast (%pa)

rate rate (%pa) 05-07 avg Trough1 Jul 11 next change Mar 13 Jun 13 Sep 13 Dec 13 Mar 14

Global 2.20 -218 36 -52 2.20 2.14 2.17 2.16 2.21

excluding US 2.87 -145 39 -62 2.87 2.80 2.83 2.83 2.89

Developed 0.50 -299 0 -31 0.50 0.42 0.42 0.41 0.42

Emerging 5.39 -169 50 -88 5.39 5.38 5.45 5.46 5.58

Latin America 5.88 -489 0 -315 5.88 6.00 6.59 6.64 6.73

EMEA EM 4.68 -177 74 34 4.66 4.54 4.31 4.31 4.34

EM Asia 5.47 -39 96 -51 5.47 5.45 5.45 5.45 5.60

The Americas 1.40 -392 23 -64 1.40 1.42 1.54 1.55 1.59

United States Fed funds 0.125 -438 0 0 16 Dec 08 (-87.5bp) 1 May 13 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) 17 Apr 13 1Q 14 (+25bp) 1.00 1.00 1.00 1.00 1.25

Brazil SELIC O/N 7.25 -800 0 -525 10 Oct 12 (-25bp) 17 Apr 13 May 13 (+25bp) 7.25 7.50 8.50 8.50 8.50

Mexico Repo rate 4.00 -387 -10 -50 8 Mar 13 (-50bp) 26 Apr 13 2Q 14 (+25bp) 4.00 4.00 4.00 4.00 4.00

Chile Disc rate 5.00 31 450 -25 12 Jan 12 (-25bp) 11 Apr 13 Jul 13 (+25bp) 5.00 5.00 5.50 5.75 6.00

Colombia Repo rate 3.25 -406 25 -125 22 Mar 13 (-50bp) 26 Apr 13 26 Apr 13 (-25bp) 3.25 3.00 3.00 3.50 4.50

Peru Reference 4.25 19 300 0 12 May 11 (+25bp) 11 Apr 13 On hold 4.25 4.25 4.25 4.25 4.25

Uruguay Reference 9.25 200 300 125 28 Dec 12 (+25bp) 2Q 13 2Q 13 (+25bp) 9.25 9.50 9.50 9.50 9.50

Europe/Africa 1.58 -228 3 -38 1.57 1.38 1.33 1.33 1.34

Euro area Refi rate 0.75 -223 0 -75 5 Jul 12 (-25bp) 4 Apr 13 Jun 13 (-25bp) 0.75 0.50 0.50 0.50 0.50

United Kingdom Bank rate 0.50 -444 0 0 5 Mar 09 (-50bp) 4 Apr 13 On hold 0.50 0.50 0.50 0.50 0.50

Czech Republic 2-wk repo 0.05 -235 0 -70 1 Nov 12 (-20bp) 2 May 13 On hold 0.05 0.05 0.05 0.05 0.05

Hungary 2-wk dep 5.00 -213 0 -100 26 Mar 13 (-25bp) 23 Apr 13 23 Apr 13 (-25bp) 5.00 4.50 4.50 4.50 4.50

Israel Base rate 1.75 -250 125 -150 24 Dec 12 (-25bp) 24 Mar 13 On hold 1.75 1.75 1.75 1.75 1.75

Poland 7-day interv 3.25 -127 0 -125 6 Mar 13 (-50bp) 10 Apr 13 On hold 3.25 3.25 3.25 3.25 3.25

Romania Base rate 5.25 -294 0 -100 29 Mar 12 (-25bp) 2 May 13 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) 2 Apr 13 2Q 13 (-25bp) 5.50 5.25 4.75 4.75 4.75

South Africa Repo rate 5.00 -329 0 -50 19 Jul 12 (-50bp) 23 May 13 On hold 5.00 5.00 5.00 5.00 5.00

Turkey Effctve rate 5.53 -1041 0 -72 N/A² 16 Apr 13 N/A² 5.40 5.40 5.35 5.35 5.50

Asia/Pacific 3.66 -3 76 -47 3.66 3.65 3.65 3.63 3.73

Australia Cash rate 3.00 -294 0 -175 4 Dec 12 (-25bp) 2 Apr 13 Nov 13 (-25bp) 3.00 3.00 3.00 2.75 2.75

New Zealand Cash rate 2.50 -488 0 0 10 Mar 11 (-50bp) 24 Apr 13 Sep 13 (+25bp) 2.50 2.50 2.75 2.75 3.00

Japan O/N call rate 0.05 -17 0 0 5 Oct 10 (-5bp) 4 Apr 13 On hold 0.05 0.05 0.05 0.05 0.05

Hong Kong Disc. wndw 0.50 -548 0 0 17 Dec 08 (-100bp) 2 May 13 On hold 0.50 0.50 0.50 0.50 0.50

China 1-yr working 6.00 -14 69 -56 7 Jul 12 (-31bp) - 1Q 14 (+25bp) 6.00 6.00 6.00 6.00 6.25

Korea Base rate 2.75 -140 75 -50 11 Oct 12 (-25bp) 11 Apr 13 11 Apr 13 (-25bp) 2.75 2.50 2.50 2.50 2.50

Indonesia BI rate 5.75 -412 0 -100 9 Feb 12 (-25bp) 11 Apr 13 On hold 5.75 5.75 5.75 5.75 5.75

India Repo rate 7.50 63 275 -50 19 Mar 13 (-25bp) 3 May 13 On hold 7.50 7.50 7.50 7.50 7.50

Malaysia O/N rate 3.00 -24 100 0 5 May 11 (+25bp) 9 May 13 On hold 3.00 3.00 3.00 3.00 3.00

Philippines Rev repo 3.50 -356 0 -100 25 Oct 12 (-25bp) 25 Apr 13 On hold 3.50 3.50 3.50 3.50 3.50

Thailand 1-day repo 2.75 -108 150 -50 17 Oct 12 (-25bp) 3 Apr 13 On hold 2.75 2.75 2.75 2.75 2.75

Taiwan Official disc. 1.875 -71 62.5 0 30 Jun 11 (+12.5bp) 2Q 13 1Q 14 (+12.5bp) 1.875 1.875 1.875 1.875 2.00

1 Refers to trough end-quarter rate from 2009-present ² Effective rate adjusted on daily basis

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

7

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




Nowcast global growth: 1Q13 Model upside holding steady This week saw modest mixed revisions to our national

current quarter GDP forecasts, with the official J.P. Morgan 1Q outlook holding at 2.6% ar. Stronger-than-anticipated business equipment spending and inventory gains prompted us to raise our sights marginally for 1Q US growth. Offsetting this were larger downgrades to our Malaysia and Singapore calls. We maintain our forecast that global GDP growth will accelerate slowly and steadily over the course of the year, moving from just-below trend in 1H to just-above trend growth in the second half.

Like our bottom-up projection, our nowcast of 1Q global GDP growth held at last week’s pace, again printing 3.2% ar. Also like the bottom-up projection, this week brought slight rotation in the nowcast inputs. Incoming data were limited but helped flesh out our global IP, retail sales, and G-3 capital goods orders aggregates for January. In particular, IP is now understood to have grown a touch stronger than previously believed, while capital goods orders did slightly worse.

As it has since the start of the quarter, the nowcaster points to some upside risk to our official projection. The strength of the 1Q nowcast owes to the strong momentum heading into and maintained at the start of the year. The nowcast model estimates global GDP was expanding at a solidly above-trend 3.6% ar in January before cooling in each of the following two months to a 2.7% rate in March.

As we enter 2Q next week we will receive the first official nowcast input data points for the final month of the current quarter. Monday’s European holiday will delay release of the J.P. Morgan global manufacturing PMI until Tuesday. Last week’s flash PMIs from the US, Euro area, and China suggest the output index (the nowcast input) will hold at 51.8, a fact already incorporated into the model. We judgmentally look for a modest decline in Thursday’s services activity PMI.

We briefly turn now to the sister of the global GDP nowcast, the DFM-Cmd model, which tracks imputed global manufacturing growth based on real-time commodity price moves. Apart from a late-year commodity price lift head fake, the DFM-Cmd model has tracked global IP growth relatively well over the past year. At present, this nowcast looks for a stall in global IP growth, posing downside risk to the more reliable but less timely PMI-implied growth rate, which points to a moderate 3% annualized expansion of global industry.

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

4Q12 1Q13

Current Last week 4 weeks ago

J.P. Morgan 1.6 2.6 2.6 2.4 Nowcaster (DFM-Eco) 1.7 3.2 3.2 3.2 Global PMI model 2.6 2.6 2.6 2.3 Source: J.P. Morgan

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

4Q12 1Q13 Jan 13 Feb 13 Mar 13

PMI, mfg 49.7 52.0 52.3 51.8 51.8 PMI, serv 54.0 53.3 53.4 53.3 53.0 IP -0.7 3.9 0.2 0.2 0.2 Retail sales 1.4 1.9 0.3 0.0 0.0 Auto sales 4.8 -0.6 -0.2 -1.1 0.0 Cap. orders 17.2 16.0 2.9 0.3 0.3

Nowcast 1.7 3.2 3.6 3.0 2.7 Note. Shaded values show forecasts computed by the Kalman filter estimates from the dynamic factor model. Underlined values are our estimates based on available data and our judgment. Source: J.P. Morgan, Markit, and national statistical agencies

1.41.82.22.63.03.43.8

Feb

08

Feb

15

Feb

22

Mar

01

Mar

08

Mar

15

Mar

22

Mar

28

Apr 0

5

Apr 1

2

Apr 1

9

Apr 2

6

May

03

May

10

May

17

May

24

May

31

J.P.Morgan

Nowcast

Nowcasting global real GDP by forecast date, 1Q2013

%q/q, saar

Source:J.P.Morgan

-6

0

6

12

18

2010 2011 2012 2013

%3m, saar; Nowcast is 13-week annualized change

Global manufacturing output

Actual (thru Jan)

Implied by Mfg PMI (thru Mar prelim) Implied by

commodity price nowcast (thru Mar 28)

Source:J.P.Morgan

8

Economic ResearchGlobal Data WatchMarch 28, 2013

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 EconomicsGlobalWeaker global pricing power redistributes growth, Mar 15, 2013Global FX reserves resume steady trend upward, Feb 8, 2013Any turn in the EM credit cycle will be limited, Feb 1, 2013Positive demand surprises confirm pickup in global growth, Jan 18, 2013Global consumers: look for solid holiday shopping season, Nov 30, 2012EM bank tightening is gradually abating, Oct 19, 2012FX reserve accumulation nears stall speed, Oct 19, 2012Fed, ECB shock and deliver, Sep 21, 2012Tracking 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, 2012

United States and CanadaThe next BoC governor, Mar 22, 2013US consumers: don’t think twice, it’s all right, Mar 15, 2013Gauging the recovery in US capital spending, Mar 8, 2013US: finally, the last act of the fiscal cliff drama, Mar 1, 2013US: what prices say about the healthcare slowdown, Feb 15, 2013Will US nonresidential construction catch fire, too? Feb 15, 2013US: profit margins should weather the storm, Feb 8, 2013Steady US job growth and more labor supply in 2013, Feb 8, 2103Behind the music: details of the US 4Q GDP report, Feb 1, 2013US: the credit easing effect of rising house prices, Jan 25, 2013A funny thing happened on the way to the US mfg renaissance, Jan 25, 2013US: stress testing the Fed balance sheet, Jan 18, 2013US: is I.T. over? Jan 11, 2013External headwinds dominate 2013 Canada outlook, Jan 11, 2013US: from one cliff to the next, Jan 4, 2013Accounting for the US current account improvement, Dec 14, 2012Will unlimited QE limit US bank lending? Dec 7, 2012US: a numerical thresholds primer, Nov 30, 2012US households know how to read the labor market data, Nov 30, 2012Six more weeks of fiscal cliff, if you don’t jump off one, Nov 9, 2012

Western EuropeUK: are inflation expectations behaving differently? Mar 22, 2013Euro area labor markets: institutions & demand shocks, Mar 15, 2013ECB's tolerance of low inflation has increased, Mar 15, 2013UK: slack is limited, but demand growth will lift supply, Mar 15, 2013Italy: September elections looking more likely, Mar 15, 2013Euro area growth divergences are increasing in the core, Mar 8, 2013Euro area inflation risks now tilting to the downside, Mar 8, 2013Germany: what better wage growth means for consumers, Mar 8, 2013The institutional structure of Euro area labor markets, Mar 1, 2013UK: lower expected real rates unlikely to lift spending, Mar 1, 2013Cyclical lift in the Euro area: let’s have another go, Feb 22, 2013Euro area wages: sticky overall, adjusting underneath, Feb 22, 2103Cyprus: phony war is over, now for the hard part, Feb 22, 2013France’s position at Europe’s epicenter is under challenge, Feb 15, 2013

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

Central Europe, Middle East, and AfricaEgypt: fiscal performance raises refinancing risk, Mar 22, 2013Hungary: thoughts on NBH policy after the changeover, Mar 8, 2013Hungary: a greater tolerance for weaker HUF, but with limits, Feb 8, 2013Russia: capital investment growth to slow in 2013, Jan 18, 2013Morocco: bright side of the Arab Spring, Jan 18, 2013Egypt: FX stability to prove challenging, Jan 11, 2013Ghana: awaiting fiscal discipline, Jan 4, 2013MENA: regional turmoil sends tourists to Southern Europe, Dec 14, 2012

JapanJapan: wages unlikely to rise much in the near future, Mar 1, 2013Japan’s FY2013 budget: expansionary or restrictive? Feb 1, 2013BoJ: more easing likely in April with a new governor, Jan 25, 2013Japan: Abe trying to end deflation with “Abenomics,” Dec 21, 2012Second chance for next PM Abe to change Japan, Dec 21, 2012Japan: what can and cannot be expected from the election, Nov 23, 2012Macroeconomic impacts of Japan/China dispute, Oct 5, 2012

Non-Japan Asia and PacificThailand: autos slowing but domestic demand not stalling, Mar 22, 2013New RBNZ toolkit: release valves, not circuit breakers, Mar 15, 2013The discomforting math behind Indonesia's energy balance, Mar 15, 2013More comfort on Australia's mining investment pipeline, Mar 8, 2013Bank of Korea: time to watch domestic policy mix, Mar 8, 2013China: the concept of total social financing, Feb 22, 2013Potential cease-fire in Aussie fiscal/monetary standoff, Feb 22, 2013Tech product cycles mixing up EM Asia’s cyclical signals, Feb 22, 2013Malaysia: watching for signs of credit disintermediation, Feb 22, 2013RBA easing no panacea for monetary conditions, Feb 15, 2013China: tracking the corporate sector’s recovery, Feb 1, 2013Singapore: tightening the screws on property again, Jan 18, 2013Thailand: brisk credit growth calls for targeted tightening, Jan 18, 2013Reconstruction spillovers to dictate RBNZ policy in 2013, Jan 11, 2013Philippines: higher investment is key to the peso problem, Jan 11, 2013

Latin AmericaArgentina: capital controls are turning into a "catch-22," Mar 22, 2013Mexico CPI: a change in consumption patterns, Mar 1, 2013Argentina: facing a worse growth/inflation trade-off, Jan 25, 2013MXN: what’s taking you so long? Jan 18, 2013Brazil can't blame its growth disappointment on China alone, Dec 21, 2012

Special Reports and Global IssuesItalian election: Analysis of potential outcomes, Feb 15, 2013Beyond “whatever it takes”, ECB policy changes in the year ahead, Feb 5, 2013China’s growth trend to slow below 7%, Feb 1, 2013More growth, less fear: 2013 global economic outlook, Jan 9, 2013

9

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


The J.P. Morgan View: Markets

Local forces are dominating Asset allocation: Local risks and opportunities trump

global forces in driving investment opportunities. Cross-market correlations to remain much lower than in recent years.

Economics: US activity data are coming in better than hoped, but we need another one to two months to see how consumers are responding to higher taxes.

Fixed income: Search for carry to trump Euro area jitters over time.

Equities: Japan remains our main country overweight.

Credit: We OW covered bonds in the Euro periphery over senior bank bonds and subordinated vs. senior bank bonds in the core.

Currencies: Cyprus to have minimal further impact on EUR, but an ECB rate cut would push it a few cents lower versus the dollar.

Commodities: Stay long Brent and short gasoline.

US equities continue to gain, with the benchmark S&P500 breaching its all-time high level on Mar 28 in a gentle fash-ion. Bonds are generally up this week on dovish comments from both the Fed and the BoJ. Commodities have gained also, but credit remains the troubled asset class with spreads wider in most markets, especially in EM external debt.

Our overall investment theme remains that there is no overarching global investment theme anymore this year but instead a number of unrelated local forces that have largely local impact. The generalized asset reflation we saw last year, with risk premia coming down consistently across the globe and asset classes, was due to a gradual fading of tail risks that has since been largely completed. “Risk-on, risk- off is so last year.”

In addition, we are seeing no momentum either way in global growth, price, or earnings expectations that could put us into a bullish or bearish growth story. Our 2.4% pro-jection for 2013 world economic growth is unchanged since November. YTD activity data for the world are tracking our 2.6% forecast for 1Q, comfortably up from the dismal 1.6% in 4Q of last year. Amid offsetting up- and downside surpris-es in the US and Japan versus Europe, there has been no rea-son yet to raise the growth profile for the year as a whole. We hope, but need evidence first.

Without a global growth or fading-of-tail-risks force, we are left with a set of local issues and opportunities that are having a local impact, at the regional, asset class, and company level, that should leave the rest of the world largely unmoved. In this environment, correlations across regions and risk markets should remain significantly lower than in past years. Various markets may seem to behave “inconsistently” with others, but we caution against expecting simple mean reversion, given our view of the reduced impact of global factors. Active investors should pay more attention to local fundamentals while long-term investors can expect to achieve greater gains from cross-market and international diversification.

Local issues must be monitored and understood, though, to decide how to allocate capital and risk. Just to review a few, Japanese policymakers continue to present a concerted plan to reflate their economy through monetary, fiscal, and struc-tural measures. The strong control of the government and its high approval rating are steadily raising the chance of suc-cess. We stay overweight Japanese equities and grow wary of the short yen trade, as capital inflows and rising growth ex-pectations are ultimately bullish for the currency. Watch next week’s BoJ meeting, led by newly appointed Governor Kuro-da, for new reflationary measures.

The Euro area economy remains in recession, while policy-makers are making little effort to reverse the contraction. We monitor signs of any large deposit flight post Cyprus over coming weeks and months to judge whether the bailout may actually be worsening conditions in the Euro area. Economic forecast momentum remains negative. These are good rea-sons to underweight the Euro area, if not all of Europe, across asset classes, against the rest of the world.

The US, in contrast, is seeing better spending from both cor-porates and consumers than we could have expected post Fiscal Cliff and sequestration. But given the huge amount of fiscal drag, which is a fact, we want to see another one to two months of data before extrapolating the good news. It did support US equities in recent weeks, which continue to bene-fit from US corporates issuing debt to buy their own shares and others’, through M&A. This corporate rotation from debt to equities is almost exclusively a US flow, which helps ex-plain US equity outperformance.

Across risk assets, we are similarly seeing huge delinking, with equities rallying greatly and commodities and credit seeing no gains, very much unlike last year. Commodities are delinking as there are no growth upgrades in EM, and infla-tion concerns are concentrated on two countries, UK and Ja-pan. Credit is delinking as most investors are massively overweight credit versus equities, as evidenced by the dispari-ty in buying flows in 2011-12. Relevering by US corporates

10

Economic Research The J.P. Morgan View: Markets March 28, 2013


and the Fed debating the end of QE are signaling that the three-decade-long rally in bonds is likely over. Investors are starting to dollar-average away from bonds to equities.

Fixed income Bonds rallied again, except for Euro area peripherals, the source of this week’s market concerns. The imposition of capital controls on Cypriot deposits is sure to be a watershed moment, but for now not one we expect to spark significant deposit withdrawals elsewhere. Meanwhile, the most likely outcome to the Italian impasse appears to be new elections in the autumn. With seemingly little prospect of a material rise in yields on the safest assets, we think the search for carry evident across the full gamut of asset markets will see periph-eral spreads narrow over time.

Ten-year JGB yields have rallied to within a few bp of their all-time low, ahead of next week’s inaugural meeting for the new BoJ leadership. We do indeed expect aggressive easing, with JGB purchases out to 30 years, but think this will be trumped by profit-taking in JGBs after the fiscal year-end.

Our latest Inflation Expectations Survey (F. Diamond, K. Gupta) was out on Mar 27. One interesting result is that al-most 90% of respondents believe the BoJ has less than a 50/50 shot of hitting its 2% inflation target in two years, a reflection of the formidable challenge of sparking inflation expectations after two decades of falling prices.

Equities The global rally in equity markets slowed this week, but did not reverse, on continued concerns about the fallout from a poorly executed Cyprus solution. The Euro area underper-formed again, for a second week in a row. As discussed last week, we view Cyprus as a local problem that we address by underweighting Euro area equities in a global portfolio. A potential negative feedback loop from markets to the econo-my poses a serious downside risk for Euro area growth over coming months prolonging the current run of negative eco-nomic surprises from the region.

Japan is the region we like the most. In our mind the Japa-nese equity trade has further legs not only due to prospective BoJ balance sheet expansion but more importantly due to a reform agenda to be unveiled into the summer.

EM equities are suffering from renewed policy tightening in major EM economies such as Brazil and China. Investors have bitter memories of previous property tightening measures in China. As within DM, we see a lot of divergenc-es within EM and prefer to focus on under-owned markets with good domestic demand stories such as Mexico and

Malaysia. See “Consensus Asset Allocation,” Adrian Mowat and team, Mar 26. Open overweights in Mexican and Malay-sia equities vs. MSCI EM.

For long-term investors we just released our quarterly publi-cation “Trade opportunities for long term investors” Mar 27. We monetize risk premia in Value stocks via a long in S&P500 Value vs. S&P500 ETFs. It appears that a five-year-long underperformance of Value stocks has come to an end. We take profit on trades that monetize skew risk premia in

-10-505

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YTD returns through:%, equities in lighter color

27-Mar

Source: J.P. Morgan, Bloomberg

0.00.20.40.60.81.01.21.41.6

Jan 12 Apr 12 Jul 12 Oct 12 Jan 13

J.P. Morgan

Consensus

2013 Japan GDP forecasts: J.P. Morgan and consensus%

Source: J.P. Morgan, Consensus Economics

-0.8-0.6-0.4-0.20.00.20.40.60.81.01.2

Jan 12 Apr 12 Jul 12 Oct 12 Jan 13

J.P. Morgan

Consensus

Source: J.P. Morgan, Consensus Economics

2013 Euro area GDP forecasts: J.P. Morgan and consensus%

11



S&P500 due to sharp contraction over the past quarter. We continue to monetize equity risk premia via buying high-dividend yield equity ETFs against USTs. Our preference is to buy ETFs that track the S&P US Preferred stock due to its high yield, around 6%, and its high weight on Financials.

Credit The news flow from the Cypriot bailout continued to push spreads wider and vol higher this week, with European Financials underperforming as creditor bail-in risks returned to the forefront. iTraxx senior and subordinated financials indices widened 20bp as investors sought to hedge via CDS rather than sell bonds. European credit continued to underper-form US credit.

The fact that Cypriot banks debt is only 1.3% of total liabili-ties was a key factor in the decision to bail-in depositors. Yet events surrounding the banking sector restructuring also sug-gest that keeping senior unsecured bondholders immune from costly bail-outs is politically untenable. This removes the implicit “cover” that senior bond holders have enjoyed and has increased speculation that implementation of the bail-in proposals under the EU’s Resolution & Recovery Directive (RRD) will be brought forward to 2015 from the current 2018 time frame.

As such, our colleagues in European Credit have examined the implications of changing recovery rate expectations across the bank capital structure. Assuming that covered bonds remain outside the scope of the proposals, we expect senior bank bond spreads to widen relative to covered bonds and prefer being OW covered bonds vs. senior bonds in the periphery, particularly in Spain, where covered bonds have first claim over the entire mortgage book of the bank. From a relative value point of view, we also suggest owning subordinated bank bonds vs. senior bank bonds in the core as, under the new RRD regime, there is a higher proba-bility than before that senior bank bond holders will lose money and this risk is, in our mind, not yet in the price (Re-thinking the capital structure, R. Henriques et al., Mar 27).

Foreign exchange This week’s FX research note, Sacrificing Cyprus, examines several presumptions that have arisen over the past two weeks due to the Cyprus crisis, and scores them on a scale of truths, half-truths, and falsehoods. There are indeed some right con-clusions to draw from this experience, but also some wrong ones. As examples, it is true that capital controls have created a two-tier euro, but very unlikely that Cyprus is exiting EMU. And while it is true that markets deserve a risk premium for policy uncertainty, the size of the premium should be much lower than in previous crises due to backstops like the OMT.

For example, during the first Greek crisis in May 2010 EUR undershot by 10% relative to cyclical conditions at that time, and during Greek elections in May 2012 the currency under-shot by 5%. The combination of Italian and Cypriot events have eliminated the euro’s overvaluation from early 2013, when the currency spiked to the high $1.30s on a presumption that LTRO funds would be repaid rapidly, driving European rates higher. The currency is now close to fair value, so car-ries no risk premium for contagion. The message is similar in vol markets: the 1% premium for 3-month implied versus realized vol is far less than the 5% premium witnessed during previous crises.

While there is no evidence that the EUR/USD cash or options market carries a risk premium, it is also true that the required premium should probably be far less than in previous crises given that a sovereign funding backstop like the OMT is in place. We are thus reluctant to extrapolate this mini-crisis into a systemic event that triggers broad deleveraging, or to forecast trend euro weakness. The currency could trade down a couple of cents around an ECB rate cut, but assuming that fears around Cyprus contagion pass in a month or two, the currency should reverse its recent decline by the summer.

Commodities Commodities rallied this week, up almost 2%, led by ener-gy. We went tactically long Brent in last week’s J.P. Morgan View as we believed that the correction in oil markets had brought prices too far below our price forecast of $112/bbl. Since then Brent is up around 1.5%. We stay long and expect further price appreciation over coming months. We are also short gasoline vs. Brent. Gasoline cracks (the premium for gasoline over crude prices) spiked over the first three months of the year due to a combination of low inventories and refin-ery closures that came during refinery maintenance season. As refinery maintenance comes to a close and demand falls seasonally, gasoline prices should fall relative to Brent.

We went long Soybean time spreads late last year (GMOS, Dec 5) on a view that much higher Brazilian supplies would find it difficult to leave the country due to logistical con-straints. Since then we have seen a record number of ships planning to load soybeans in Brazilian ports and this number is still rising. The average waiting time before loading is also rising, now 38 days compared to 26 days a month ago. This has caused the front Soybean contract to rally while longer maturity contracts have been depressed by the much higher-than-normal supply inside the country. The spread between the May-13 and Jul-13 contracts has doubled since we put the trade on in December. We stay long as we think these logis-tical issues are unlikely to be resolved anytime soon.

12



Interest rates Current Jun 13 Sep 13 Dec 13 Mar 14 YTD Return*

United States Fed funds rate 0.125 0.125 0.125 0.125 0.125

10-year yields 1.85 2.00 2.10 2.25 2.35 -0.5%

Euro area Refi rate 0.75 0.75 0.75 0.75 0.75

10-year yields 1.29 1.55 1.70 1.80 1.90 0.0%

United Kingdom Repo rate 0.50 0.50 0.50 0.50 0.50

10-year yields 1.77 2.40 2.50 2.55 2.60 -0.1%

Japan Overnight call rate 0.05 0.05 0.05 0.05 0.05

10-year yields 0.51 0.65 0.65 0.70 0.80 2.0%

GBI-EM hedged in $ Yield - Global Diversified 5.59 5.70 0.1%

Credit markets Current Index YTD Return*

US high grade (bp over UST) 159 JPMorgan JULI Portfolio Spread to Treasury -0.1% Euro high grade (bp over Euro gov) 165 iBoxx Euro Corporate Index 0.6% USD high yield (bp vs. UST) 496 JPMorgan Global High Yield Index STW 2.9% Euro high yield (bp over Euro gov) 633 iBoxx Euro HY Index 1.6% EMBIG (bp vs. UST) 305 EMBI Global -2.3% EM Corporates (bp vs. UST) 322 JPM EM Corporates (CEMBI) 0.5%

Quarterly averages Commodities Current 2Q13 3Q13 4Q13 1Q14 GSCI Index YTD Return*

Brent ($/bbl) 110 108 120 120 122 Energy -0.1%

Gold ($/oz) 1595 1775 1800 1775 1800 Precious Metals -3.8%

Copper ($/metric ton) 7577 8700 9000 9200 9400 Industrial Metals -6.1%

Corn ($/Bu) 6.95 8.00 6.50 6.00 Agriculture 0.0%

3m YTD Return* Foreign exchange Current Mar 13 Jun 13 Sep 13 Dec 13 Cash CCY vs. USD EUR/USD 1.28 1.32 1.32 1.34 1.34 EUR -1.9% USD/JPY 94.1 94 97 97 96 JPY -9.0% GBP/USD 1.52 1.50 1.47 1.51 1.51 GBP -6.5% AUD/USD 1.05 1.04 1.05 1.06 1.07 AUD 1.3% USD/BRL 2.02 1.92 1.90 1.92 1.95 BRL 3.7% USD/CNY 6.2 6.28 6.25 6.2 6.15 CNY 0.7% USD/KRW 1113 1070 1060 1040 1020 KRW -3.6% USD/TRY 1.8 1.8 1.8 1.75 1.75 TRY -0.5%

YTD Return US Europe Japan EM

Equities Current (local ccy) Sector performance* YTD YTD YTD YTD ($)

S&P 1563 10.2% Energy 10.5% 3.0% 14.8% -5.5%

Nasdaq 3261 8.6% Materials 4.3% -2.1% 17.2% -10.0%

Topix 1037 22.8% Industrials 10.0% 8.3% 17.4% -1.3%

FTSE 100 6388 9.4% Discretionary 11.7% 5.9% 24.6% -2.2%

MSCI Eurozone* 154 1.9% Staples 14.0% 13.8% 26.7% 1.2%

MSCI Europe* 1214 6.6% Healthcare 14.7% 14.7% 32.6% 1.9%

MSCI EM $* 1032 -1.8% Financials 11.2% 3.5% 26.3% 1.5%

Brazil Bovespa 56028 -7.5% Information Tech. 4.3% 7.5% 16.4% 0.8%

Hang Seng 22300 -0.5% Telecommunications 9.1% 7.2% 24.6% -5.1%

Shanghai SE 2236 -2.4% Utilities 11.6% -0.3% 12.3% 1.0%

*Levels/returns as of Mar 27, 2013 Overall 10.2% 6.6% 22.8% -1.8%

Local currency except MSCI EM $

13





Economic Research Note

Assessing shifts in export market performance DM countries on the whole have experienced a trend

loss of market share to the EM

US share has stabilized reflecting a weaker dollar and restrained ULC

Germany’s global share has held up due to a strong competitive position inside the Euro zone

Japan’s two-decade slide is striking

In recent decades, the volume of international trade has expanded much more rapidly than world GDP, reflecting the trend decline in the barriers to trade and in the costs of transporting goods. With trade on the ascent in most countries, more sophisticated metrics are needed to gauge the performance of a country’s manufacturers in the global arena.

One important measure is the OECD’s index of export market performance, which tracks the ratio of an economy’s real exports to a constant market share baseline of the imports of its trading partners. The OECD’s data extend from 1975 through 2012, enabling an examination of how export performance has evolved over time, including any shifts in performance since the Great Recession. Among the influences on export market performance are relative variations in national trade-weighted exchange rates and in unit labor costs. For countries outside of the OECD, we can construct a proxy export market share, dividing that country’s exports by rest of world imports.

OECD data show that developed market export performance has trended lower since 1990, an unsurprising outcome given the rapid development of the emerging economies and their integration into the global manufacturing system over the period. While the OECD performance indexes for their EM members show impressive gains over the past decades, the full magnitude of the DM underperformance owes impor-tantly to China. Over the past two decades, China’s share of global imports has increased by about 10%-pts, with most of the gain occurring since China joined the WTO in 2001.

While DM performance has broadly declined in recent decades, there has been notable cross-country divergence. Germany stands out for its near-20%-pt improvement in export performance since 1999, an outcome that owes in large part to Germany’s strong competitive position inside the Euro area as well as briskly rising EM demand for German capital goods. The mirror image of this was seen in the EMU

Export performance %chg, ratio of export volume to constant market share baseline 90-02 03-12 2009 2010 2011 2012

DM US -8.8 0.6 2.3 -2.5 0.4 0.4 Japan -30.6 -22.0 -17.0 7.5 -6.2 -2.7 UK -9.2 -15.8 2.8 -3.8 -1.0 -2.2 Germany 2.3 11.1 -1.3 1.8 2.4 3.0 France 5.2 -19.8 -1.1 -1.3 0.5 1.2 Italy -13.4 -21.7 -7.5 0.6 1.0 -1.1 Canada -5.8 -24.5 0.0 -5.4 -0.6 -1.1 EM Korea 98.9 18.8 7.2 -0.6 2.0 0.2 Mexico 46.0 22.5 -0.8 8.2 1.6 3.2 Turkey 56.3 6.6 6.1 -5.0 1.3 12.6 Poland 54.3 21.9 6.6 0.6 1.0 0.1

Source: J.P. Morgan

20

35

50

65

80 85 90 95 00 05 10

% of total DM imports

EM exports to DM

EM ex China

Total EM

Source:J.P.Morgan, IMF

0.60.70.80.91.01.11.21.31.4

75 80 85 90 95 00 05 10

Ratio, export volume to constant 2005 market share baselineDM export market performance

Source: OECD

Japan

Germany

US

0.8

0.9

1.0

1.1

1.2

1.3

99 01 03 05 07 09 11 13

Ratio, export volume to constant 2005 market share baseline

EMU export market share

Source: OECD

Spain

Portugal

Germany Italy

14

Economic Research Assessing shifts in export market performance March 28, 2013




periphery, where export market share eroded virtually across the board, with especially severe losses in Italy and Greece. There are some signs of a shift in relative performance of late. Germany’s share has leveled off since the middle of 2011, while export shares in the periphery have generally stabilized.

The US has also done well relative to its DM peers over the past decade, with essentially unchanged export performance over this time. In part, this outperformance is due to the roughly 25% drop in the trade-weighted dollar from 2002 to mid 2008, while US manufacturers also have benefited by unusual labor cost restraint. (The more recent slide in US natural gas prices is a highly visible though minor factor in manufacturing costs.) That these powerful supports for US exporters merely held performance steady underscores the large gains in market share achieved by the EM over this period, notably China. The counterfactual can be seen in the experience of other major DM exporters that did not benefit from currency tailwinds over the past decade, including the UK, France, Canada, Australia, and Japan.

Japan’s loss of market share really stands out. Japan’s export market share rose steadily in the 1970s and 1980s, reaching a peak in 1991. Since then, however, Japanese export perfor-mance has tumbled, falling below its 1975 starting point for the first time last year. This U-turn is partly explained by the steady rise in Japan’s trade-weighted exchange rate in the 1980s and early 1990s. In addition, by the early 1990s, Japan had lost competitive position on a more fundamental level, reflecting the high level of labor costs, rigid labor markets, and slowing population growth. This condition has persisted to the present day, aggravated by the country’s slide into deflation and lack of progress in joining free trade agree-ments. These domestic forces coincided with the rise of the EM Asian economies, beginning with the Asian Tigers (Korea, Taiwan, Hong Kong, and Singapore) and eventually extending to China. To be fair, robust EM Asian import demand for commodities has been a factor in Japan’s loss of market share, and this does not reflect a loss of competitive position.

With the bursting of the asset bubble, these developments prompted the business sector to reassess Japan’s growth prospects. Having boomed during the 1980s, the growth of real business spending subsequently stalled, with the level stagnating since 1991. This stall coincided with an acceleration in Japanese FDI, especially to Asia. The resulting lack of growth in the capital stock helped to undermine the growth of productivity and potential growth, further eroding Japan’s competitive position.

70

80

90

100

110

1200.7

0.8

0.9

1.0

1.1

1.2

1.3

75 80 85 90 95 00 05 10

RatioUS export performance and USD real effective exchange rate

Index, 2000 = 100 (inverted)

USD REERExport performance

Source:J.P.Morgan, OECD

-6.0 -4.5 -3.0 -1.5 0.0 1.5 3.0 4.5 6.0 7.5 9.0

AUS

ITA

CAN

ESP

FRA

DEU

GBR

KOR

JPN

USA

TWN

%ar, 2000-11

Manufacturing unit labor costs

USD termsLocal currency

Source:J.P. Morgan, BLS

100

150

200

250

300

350

0

50

100

150

70 75 80 85 90 95 00 05 10

$ bnJapan outward FDI and domestic capital investment

Index, 1970 = 100

Source: JETRO, BoJ, OECD

Capital investment

Outward FDI

0.5

1.0

1.5

2.0

2.5

3.0

3.5

90 95 00 05 10

Indexed 1990=1.0

Export volume

Source: OECD

Germany

US

Japan

15

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



US labor force participation still trending lower Almost four years into the expansion, the labor force

participation rate is still trending lower

Participation is below year-ago levels, even in states where the jobless rate approaches pre-recession norms

Shorter-term swings are not very reliable, but the par-ticipation rate has stabilized over the past six months

The sharp drop in labor force participation has been an im-portant and unusual feature of this US expansion. Participa-tion rates often drop during recessions and then gradually gain ground in the subsequent recovery. But labor force participa-tion declined especially sharply through the 2007-09 reces-sion, and then continued to decline as the economy gradually recovered.

The decline in labor force participation through this expan-sion, counter to the usual pattern, has allowed a reasonably rapid decline in the unemployment rate despite unexciting economic growth and job growth. Between 4Q09 and 4Q12 real GDP growth averaged only 2.0% per year, a pace widely regarded as close to trend. The old rules of thumb, summa-rized by the Okun’s Law relationship, would have predicted little or no change in the unemployment rate over this period. But the falling participation rate allowed the unemployment rate to decline 2.1%-pts, or 0.7%-pt per year.

The future path of the unemployment rate (and expectations of when the Fed removes policy accommodation) will depend partly on whether labor force participation keeps declining, stabilizes, or even reverses course. If a gradually improving labor market were to encourage substantial re-entry into the labor force, the unemployment rate probably would prove sticky on the downside.

Recent data indicate that the labor force participation rate is still trending lower. The latest February reading, 63.5%, matches the monthly low for the expansion and was down from an average 63.8% in the year-ago quarter. Continued declines are not too surprising, since many measures indicate that labor market conditions are still very weak. The employ-ment/population measure, for example, is barely off its lows and has retraced less than 10% of the peak-to-trough decline associated with the recession. The probability of an unem-ployed person being hired in any month has also retraced only a small part of its recent decline.

While national labor markets are still weak, the jobless rate in several states is back to within a percentage point of its 2003-07 average. And it is natural to ask whether better labor market conditions in these states have started to push participation rates back toward their prior norms. Results from these states, the largest of which is Texas, generally show that labor force participation rates have continued to decline over the past year and about in line with the national average.

Source: BLS

Source: BLS

Source: BLS

81.0

81.5

82.0

82.5

83.0

83.5

63.5

64.0

64.5

65.0

65.5

66.0

66.5

03 04 05 06 07 08 09 10 11 12 13

Sa, 3mma, both scalesLabor force participation rate

Total

25-54 year old

15

20

25

30

58

59

60

61

62

63

64

03 04 05 06 07 08 09 10 11 12 13

Sa, percent, 3mma

Employment /population ratio , share of unemployed finding work

Sa, % per month, 3mma

Employment/ population ratio

Percent of unemployed who become employed

64.5

65.5

66.5

67.5

68.5

63

64

65

66

67

03 04 05 06 07 08 09 10 11 12 13

%, sa, 3mma, both scales

Labor force participation rate

United States

Texas

16

Economic Research US labor force participation still trending lower March 28, 2013


Participation down across most age groups One influence that explains part of the decline in the labor force participation rate is the aging of the baby-boom genera-tion. An increasing share of the population is at or approach-ing retirement. However, this seems to explain only a small part of the decline in the participation rate since 2007, since the participation rate is tracking sharply below forecasts made pre-recession that incorporated effects of an aging population.

Younger workers have had an especially hard time in this expansion, and unemployment rates have shot up for younger workers, both teenagers (24.0%) and 20- to 24-year-olds (13.7%). And this has continued to discourage labor force participation by 16- to 24-year-olds. But the declining labor force participation is not simply a matter of an aging popula-tion or discouraged younger workers. Participation rates have continued to decline for the so-called prime-age 25- to 54-year-olds. Indeed, the annual decline in labor force participa-tion for this group, 0.4%-pt, has matched the overall decline.

Not a simple story of lower skills Unemployment rates as well as income are closely related to education. The unemployment rate for college graduates (for those 25 and older) is 3.8%, the rate for high-school graduates is 7.9%, and the rate for high-school drop-outs is 11.2%. Moreover, the increase in the unemployment rate since its cyclical trough is also inversely related to education. The un-employment rate for college graduates is up 2.0% from its 4Q06 trough. The unemployment rate for high-school gradu-ates is up nearly twice as much. Some popular accounts as-cribe falling participation rates to the rise in unemployment and decline in relative wages for lower-skilled and less-educated workers. With job prospects bleak and compensation falling, people with less education are more likely to drop out of the labor force. There may well be some truth to this story, but participation rates have declined across the population over the past few years, even for college graduates.

Looking at some stronger states Some parts of the country are doing better than others. While the national unemployment rate is 2.4%-pts above its 2002-07 average, there are several states where the gap is within one percentage point, and conditions can be characterized as get-ting back to normal. Most of these states are relatively sparse-ly populated rural states, (e.g., Alaska, Nebraska, and the two Dakotas). But three states with more than five million people each are in this category—Texas, Ohio, and Minnesota. Trends in these three states provide some information about whether national labor force participation rates will respond as the unemployment rate gets back toward normal. As it turns out, participation rates for all three have declined over the past year and by more than the national average. Participation rates

do not seem to respond, or respond quickly at any rate, as jobless rates head back toward prior norms.

Hints of recent stabilization Data for the US and for major demographic groups indicate that labor force participation has continued to decline over the past year. However, the overall labor force participation rate in February was exactly the same as six months earlier, as was the participation rate for those 20 and older. And, the partici-pation rate for college graduates has increased over the past six months. However these results are no more than a hint of stabilization. Six months do not make a trend in data from the household labor market survey, and we have seen other signs of stabilization several times over the past few years that proved to be temporary.

Labor force participation by education

%, sa, 3mma, age 25 and older

2003-07 avg Feb 12 Feb 13

Not high school graduate 45.7 46.5 45.5 High school graduate 63.2 59.8 59.1 Some college 72.4 69.1 68.5 College graduate 77.9 76.0 75.7

Source: BLS

Source: BLS

Source: BLS

-1.2

-0.8

-0.4

0.0

0.4

2011 2012 2013

Pct pt ch over 12 months

Labor force participation rate in select states, change from year ago

Texas Minnesota

Ohio

74.7

75.2

75.7

76.2

76.7

77.2

65.5

65.7

65.9

66.1

66.3

66.5

2011 2012 2013

Sa

Labor force participation rate, select groupsSaAge 20 and older

College graduates

17

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



Italy's structural challenge: law and the judicial system Italy’s underlying growth performance is very poor

Monti’s 2012 reforms are a step in the right direction

But, there is plenty more to do

As well as changing the law, the judicial system also needs to be reformed

According to the IMF, Italy’s underlying growth potential is currently close to zero. This continues the steady and dramatic deterioration seen over the past three decades. Meanwhile, according to the OECD, Italy’s natural rate of unemployment is currently around 7.6%.

It is almost universally acknowledged that this dismal picture is due to rigid structures in labor and product markets, which limit flexibility and competitiveness. Structural reform is thus viewed as the solution to Italy’s economic problems. The key uncertainties relate to what exactly needs to be changed and how much change needs to occur.

Our analysis suggests that a lot more needs to be done, but that this is not just about changing the law. Of critical importance is the way that laws are interpreted, especially by the judiciary. The judicial system needs to be reformed to quicken the decision-making process and make legal judgments more predictable. Only with reform of both the legal and judicial systems will Italy get the flexibility it needs.

Where Italy stood before the 2012 reforms Broadly speaking, there are two ways to directly assess the health of the Italian economy from a structural perspective. The first is to look at quantitative indicators of the structure of the economy, such as those produced by the Fraser Institute, the World Bank, and the OECD. The second is to look at survey-based measures of business people’s perceptions of the structure of the economy, such as the one produced by the World Economic Forum.

The adjacent table provides the most recent data on these measures of structure, which do not reflect the impact of the latest reforms. According to the Fraser Institute overall economic freedom index, Italy ranks poorly, although this is due to business regulation rather than labor market regulation. According to the World Bank, Italy ranks poorly in terms of the overall ease of doing business, essentially because of the difficulty of enforcing contracts, dealing with construction permits, acquiring credit, and getting electricity. In the World

Bank category on starting a business, Italy does poorly but is somewhere close to the Euro area average. The OECD data on employment protection legislation and product market regulation rank Italy in the bottom half, but not a long way from the Euro area average.

Italian GDP growth

%oya

Contributions

GDP Hours worked

Net capital stock

Total factor productivity

1971-1980 3.7 -0.2 1.3 2.6 1981-1990 2.4 0.4 0.9 1.1 1991-2000 1.6 0.1 0.6 0.9 2001-2010 0.4 0.2 0.6 -0.4

Source: IMF

Structural indicators

Ranking

Euro area Germany France Italy Spain

Fraser Institute 2012 report (144 countries) Overall economic freedom 42 31 47 83 34 Labor market regulation 89 112 94 72 123 Business regulation 42 26 34 100 50

World Bank Doing Business 2013 report (185 countries) Overall ease of doing business 36 20 34 73 44 Starting a business 76 106 27 84 136

World Economic Forum Global Competitiveness 2012/13 report (134 countries) Overall competitiveness 29 6 21 42 36 Labor market efficiency 67 53 66 127 108 Goods market efficiency 39 21 46 65 55

OECD 2008 report (20 countries) Employment protection legislation 14 15 19 14 20 Product market regulation 13 14 19 15 6

Source: Fraser Institute, World Bank, World Economic Forum, OECD, and J.P. Morgan

Predicted effect on Italian institutional structure indicators Indicator

2008 actual Latest 2013 predicted R-squared of regression

OECD Average 1.9

1.65

EPL 2.38 2.08 PMR 1.32

1.22

Fraser Institute Overall 6.90 6.73 6.83 0.66 Labor 6.30 6.48 7.08 0.74 Business 5.40 5.59 5.66 0.15

World Economic Forum Overall 4.31 4.50 4.62 0.37 Labor 3.74 3.72 3.94 0.69 Goods 4.22 4.29 4.35 0.31 For the OECD data, a higher reading indicates less flexibility. For the Fraser Institute and WEF data, a higher reading indicates more flexibility.

Source: OECD, Fraser Institute, World Economic Forum, and J.P. Morgan

18

Economic Research Italy's structural challenge: law and the judicial system March 28, 2013

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

The World Economic Forum, which judges structure on the basis of an executive opinion survey, ranks Italy poorly overall and in terms of goods market efficiency, but spectacularly poorly in terms of labor market efficiency. According to business executives, the Italian labor market is one of the worst-performing labor markets in the world.

The impact of the 2012 reforms During 2012, the Monti government introduced broad-based product market reforms covering energy, transport, and professional services. The aim of the reforms was to reduce tariffs and increase flexibility. It also introduced labor market reforms to reduce dismissal costs, promote apprenticeships, decentralize wage settlements, and liberalize employment placement services.

Estimating how these reforms will impact the various measures of structure mentioned earlier is not easy. One way to do this is to use the Italian Treasury’s estimates of how the reforms have impacted the OECD measures of structure. According to the Italian Treasury, the 2012 labor market reforms have reduced the OECD employment protection legislation index by 0.3pt, while the 2012 product market reforms have reduced the OECD product market regulation index by 0.1pt (lower readings on these indicators indicate less restrictive labor and product markets).

We can use these estimates, along with bivariate regressions linking the other measures of structure to the OECD measures, to estimate how the 2012 reforms will have impacted the Fraser Institute indices and the World Economic Forum indices. We are not able to do this for the World Bank Doing Business survey due to a lack of sufficient data. The adjacent table provides predictions for how these indicators will move from the latest readings (before the reforms) to 2013 readings (after the reforms). Not surprisingly, all of these indicators show that the 2012 reforms have improved the structure of the Italian economy.

In terms of gauging the extent of the improvement, we can calculate where Italy would rank in these surveys after the 2012 reforms, assuming that nothing has changed in any other country. This is shown in the adjacent table. Thus, Italy’s ranking in the Fraser Institute overall economic freedom index would improve from 83 to 79. This is clearly an improvement but would leave Italy still looking significantly worse than the Euro area as a whole.

This analysis suggests that there is a lot more work for Italy to do to improve the structure of the economy. But, this change is not just about reforming laws. It is also importantly about changing the judicial system. This is very evident from looking at the relationship between quantitative measures of

structure, such as the OECD measures of employment protection legislation and product market regulations, and the perceptions of businesspeople. According to the OECD, Italy is not too far from the Euro area average. But, the WEF indices show that business perceptions of working in Italian goods and labor markets are much poorer. This suggests that the problem is as much about how the laws are interpreted by the judiciary, as it is about the laws themselves. The Italian judicial system is viewed as difficult to navigate due to lengthy and unpredictable processes.

Impact of 2012 reforms on rankings

Rank

Latest actual Predicted for 2013

Fraser Institute (144 countries) Overall economic freedom 83 79 Labor market regulation 72 56 Business regulation 100 95

World Economic Forum (134 countries) Overall competitiveness 42 36 Labor market efficiency 127 113 Goods market efficiency 65 57

OECD (20 countries) Employment protection legislation 14 11 Product market regulation 15 11 This table uses the estimated impact of the product and labor market reforms on the ranking of Italy in these various surveys, assuming no changes in any other countries.

Source: Fraser Institute, WEF, OECD, and J.P. Morgan

3.5

4.0

4.5

5.0

1.0 1.5 2.0 2.5 3.0 3.5OECD EPI, 2008

WEF labor market efficiency, 2008WEF labor market efficiency and OECD employment protection index

IE

ES

IT

DE

FI

FR

BEAT

NL

GR

PT

Source: OECD and WEF

4.0

4.5

5.0

5.5

0.5 1.0 1.5 2.0 2.5OECD PMR, 2008

WEF labor market efficiency, 2008WEF goods market efficiency and OECD product market regulation

GR

NL

IT

PT

IE DE

FR

FI BE

AT

ES

Source: OECD and WEF

19

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

Grace Ng (852) 2800-7002 [email protected]


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


What does China’s recent export strength tell us? Recent strength in China’s export data partly driven by

tech sector, especially new product launches.

China data show remarkable export growth to Hong Kong, but Hong Kong data do not.

We think global demand will improve especially by mid-year, while REER appreciation may exert near-term drag.

The latest macro data from China suggest the economy is tracking a moderate recovery going into early 2013. Meanwhile, one of the surprises in the recent data flow is the impressive strength in exports, especially over the past three months, as merchandise exports jumped 52.5%3m/3m saar in February. While the global manufacturing sector has rebounded since late last year, China’s export performance appears to have significantly outperformed (first chart). Indeed, while domestic exporters’ outlook has improved modestly lately (the export orders component of the March flash manufacturing PMI rose moderately to 51.1, compared to the monthly average of 47.9 in 2012), the export data in the three months through February still appeared surprisingly strong.

The role of the tech sector It is interesting that even among the heavyweight North Asian exporters, China’s exports have outperformed Korea and Taiwan since mid-2011, with the gap widening notably since late last year (second chart). Recent J.P. Morgan research has noted that the North Asian producers of China, Korea, and Taiwan have been leaders in the production of smart phones and tablets, mobile computing devices (MCDs) (see “Tech product cycles mixing up EM Asia’s cyclical signals,” GDW, February 22, 2013). With China’s role as a regional conduit for final assembly and export, including for the newer MCD products, the recent strength in its exports partly reflects the impact of new product launches in this space. Not surprisingly, China’s tech exports surged at a remarkable 86.3%3m/3m saar pace through February.

Meanwhile, for the lower value-added, more labor-intensive consumer goods sector, including textiles, garments, toys, and shoes, the picture has been somewhat less clear. Despite general concerns of rising costs of production in China and exporters’ complaints that they are losing competitiveness, exports of lower-end consumer goods, which should have been most adversely affected by the rising costs, have registered solid growth (indeed at a pace roughly similar to

tech exports) in the past three years (third chart). For the three months through February, exports of lower-end consumer goods expanded at an impressive 37.1%3m/3m saar.

Intriguing trade with Hong Kong Looking at demand growth by region, exports to Hong Kong (up 126.4%3m/3m saar in February), which account for 15.8% of China’s total exports, were the most significant contributor to total export growth (in %oya terms) in 2H12 and the first two months of this year, followed by the ASEAN region (first chart, next page). Meanwhile, during the same period, the contribution from exports to the US and Europe was well below previous performance. The remarkable

Source: China Customs, J.P. Morgan

Sources: China Customs, Taiwan MoF, Korea, J.P. Morgan.

Source: China Customs, J.P. Morgan.

-20

0

20

40

60

80

-5

0

5

10

15

20

10 11 12 13

%3m/3m, saar, both scales

Global real industrial output and China exports

Global IP

China exports

70

80

90

100

110

120

130

Index, 1Q11=100, sa, 3mmaNorth Asia merchandise exports

2010 2011 2012 2013

China

Taiwan

Korea

80

90

100

110

120

130

140

Index, 1Q11=100, sa, 3mma

Major export categories: low-end consumer goods vs. tech

2010 2011 2012 2013

Lower-end consumer goods

Tech products

20

Economic Research What does China’s recent export strength tell us? March 28, 2013

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

Grace Ng (852) 2800-7002 [email protected]


strength in exports to Hong Kong is somewhat intriguing, as most of Hong Kong’s imports (more than 70%) are for re-export to rest of the world (including the US and Europe).

Also, comparing China customs exports to Hong Kong with data from the Hong Kong Census and Statistics Department (CSD) on imports from China reveals an anomaly. The two data series, which historically have tracked each other very closely, began to diverge in late 2010, with China’s exports to Hong Kong consistently exceeding Hong Kong’s imports from China (second chart). The divergence has widened notably recently, averaging US$12.1 billion per month for the three months through February (for comparison, China’s trade surplus averaged $25.3 billion during the same period). In contrast, the outperformance of China’s exports to the ASEAN region (as measured by China) is also reflected in the ASEAN import data.

There is not an obvious explanation for the divergence in the China-Hong Kong trade data. One argument is that, given sluggish external demand since the global financial crisis, Chinese exporters have either over-invoiced exports, or engaged in round-tripping of exports between different ports within China, in order to benefit from export tax rebates. Meanwhile, our F/X strategists suspect that export over-invoicing, if true, may reflect Chinese corporates’ desire to build up offshore F/X assets/reduce F/X liabilities in recent quarters, as the appreciation in the CNY/USD exchange rate is no longer seen as a one-way proposition. In any case, if we adjust China’s customs exports to Hong Kong for the gap with Hong Kong imports, China’s overall exports would have risen 14.6%oya 3mma in February rather than the official 19.8% increase.

Moderate export growth in 2013 Looking ahead, we believe the 2013 outlook for China’s trade is moderately better than last year; we look for trade flows to rise 12%oya (compared to 6.2% last year). Meanwhile, our global team has noted some surprising resilience in the US economy amid near-term fiscal drag, and anticipates a move to above-trend global GDP growth after midyear, which should provide a boost to China’s exports. On the other hand, it should be noted that the CNY REER has appreciated about 5% in the past six months, which will likely exert some drag on exports in the coming months. Overall, it appears that the external sector will remain subjected to considerable global uncertainty in 1H13. As such, we think China’s domestic demand, in particular infrastructure investment and recovery in the property sector, as well as steady consumer demand growth, will likely be the major drivers of the 8.2% GDP growth that we forecast for this year.


Source: China Customs, Hong Kong C&SD, J.P. Morgan.

China Customs, Hong Kong C&SD, J.P. Morgan.


-20%

0%

20%

40%

60%

80%

100%

2010 2011 1H12 2H12 Jan - Feb13

Contribution to total %oya export growth

Export growth breakdown by destinations

USEU

HK

Japan

ASEAN

Taiwan&Korea

Others

05

10152025303540

US$ bn, sa

04 06 08 10 12

Trade between China and Hong Kong

China exports to HK

HK imports from China

0

5

10

15

20

25

30

%oya, 3mma

Merchandise exports

2011 2012 2013

China exports

China exports adjusted by Hong Kong import data

-9

-6

-3

0

3

60

10

20

30

40

50

%oya, 3mma

CNY REER and merchandise exports

%oya, leading by 6 months, reverse scale

2010 2011 2012 2013

Merchandiseexports

Real effectiveexchange rate

Appreciation

21

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



Glass-half-full RBA to ease again in November, not May We have pushed out the preferred timing of the RBA’s

final rate cut to November, from May

Firmer tone to domestic data and better offshore news have brought comfort to RBA officials

Implied easing bias remains in place as officials track transition from mining to non-mining investment

Unexpected AUD strength could trigger earlier rate cut

We are changing our RBA call to reflect a later end to the easing cycle, in November rather than May. The forecast still anticipates a terminal rate for this cycle at 2.75%, but we now expect to get there later. We had been forecasting the RBA would deliver a further and final quarter-point cut to the cash rate in May, but this now looks unlikely. Recent public commentary from senior officials, informed by a firmer tone to domestic data and better news from offshore, indicates they are comfortable that the much-anticipated transition from mining investment as the principal driver of growth, to lift outside mining, is playing out broadly as expected. Indeed, the RBA’s earlier rate cuts, starting in late 2011, finally are getting traction. The economy, therefore, needs no further policy support, at least not yet. The RBA, in glass-half-full mode, is in the midst of a tactical pause in the easing cycle.

Still question marks over the outlook There still are, however, key question marks about two issues of substance: the durability of the lift in non-mining investment and the level of AUD. The transition away from mining to non-mining investment is critical, given that spending by the miners is poised to peak this year. The evidence of lift outside mining is tentative and patchy; business managers may need another nudge from the RBA at some point to complete the transition. And, our house view anticipates renewed AUD strength this year. The relationship is non-linear, but the higher AUD goes in trade-weighted terms, the lower the cash rate should be in order for monetary conditions to be held steady (chart). This anticipated AUD strength and the likelihood that a “growth gap” will open later this year once mining investment peaks are why we retain a final rate cut in our forecasts, albeit later than before.

There is a risk, however, that the RBA’s easing cycle may already have ended with the most recent rate cut last December. The rising prospect of further material fiscal slippage as the federal election nears, now that the unpopular Labor government has abandoned its pledge to return the

Budget to surplus this year, alone could be sufficient to keep the RBA sidelined. Unexpected AUD weakness, not the house view, also could see the RBA inactive. Out-of-cycle rate cuts by the domestic banks, given the fall in the cost of wholesale funding, also could be a factor here, but independent cuts to variable home mortgage rates remain somewhat unlikely.

“Growth gap” still likely to open this year For now, by using language implying that a bias to ease policy remains in place, RBA officials are signaling they are prepared to deliver policy support as needed. In particular, the transition to growth outside mining is unlikely to be “seamless,” as Governor Stevens indicated late last year. The swollen pipeline of work still to be done means investment in mining (including the now dominant oil and gas sector) will keep rising as a share of GDP for a few quarters yet. The peak in spending, though, is nearing; the forecast anticipates that mining investment will become a drag on GDP growth from around year-end.

The most recent official investment intentions survey showed little lift in non-mining investment in the near term, but a decent gain in the year to June 2014. The resulting “growth gap” likely to emerge after mining investment peaks, though, means there will be a period of sub-trend growth; the forecast

Source: RBA, J.P. Morgan

Source: ABS, J.P. Morgan

-4

-2

0

2

4

6

8

2

3

4

5

6

7

8

06 07 08 09 10 11 12 13 14

Percent per annum, end of period

RBA cash target rate and monetary conditions

Percent

Cash rate

MCI

4.0

4.5

5.0

5.5

6.0

6.5

0

1

2

3

4

5

6

7

03 05 07 09 11 13

% of GDPBusiness investment: mining and non-mining

% of GDP

Non-mining

Mining

22

Economic Research Glass-half-full RBA to ease again in November, not May March 28, 2013

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

anticipates CY12 growth of just 2.5%. The resulting rise in the unemployment rate—we still expect a rise from the current 5.4%—and AUD appreciation to a record high in trade-weighted terms are the most likely triggers for the RBA’s move in November.

RBA policy no longer “spinning its wheels” It is clear that the RBA’s previous 175bp of rate cuts since late 2011 finally are getting some traction, and broadly as would be expected based on observations from previous easing cycles. Asset prices are lifting—the local equity market has surged and house prices are higher—consumer confidence has risen 10% since the start of the year, and there are hopeful signs that the labor market has firmed. We are fading the message from the February employment report, which showed a spectacular surge in employment. The subsequent release of the sector breakdown, though, showed a near-40,000 gain in construction employment in the six months to February, a key signpost flagged earlier by RBA officials that the rate cuts are working. And, of course, the export phase of the mining lift still lies ahead, albeit after a lag.

One important piece missing from this otherwise constructive picture, though, is business confidence, which remains low and fragile, partly owing to a resumption of uncertainty in Europe, a lack of conviction about the nascent lift in the interest-sensitive parts of the economy, and, perhaps, heightened domestic political instability. Business investment often is the last part of the economy to lift after official rates are lowered, but is unlikely to do so until corporate confidence solidifies. The fact that firms have improved hiring is a positive sign that a pickup in investment also is near. Home construction remains weak, but recent house price gains hint that activity also will lift. The leading indicators of building activity have firmed, albeit modestly.

RBA forecasting sub-trend growth Although the tactical imperative suggests there is no need for the provision of further rate cuts in the near term, the underlying official narrative still supports the case for further easing at some point. Indeed, the Reserve Bank’s latest official forecasts published last month in the Statement of Monetary Policy (SoMP) assume an unchanged cash rate at the current 3%, and show that growth in the economy will be sub-trend, growing between 2% and 3% out to June 2014. The Bank also expects the unemployment rate to rise.

The RBA predicts that inflation will be confined to the 2%-3% target range. In other words, the economy will underperform unless officials provide further policy support, against a backdrop of low inflation. The minutes from the March Board meeting, therefore, indicated that “further

reductions (in the cash rate) may be required.” The Bank does not expect growth to return to trend until later in 2014. It follows that, other things equal, only a lower cash rate will return growth to trend earlier than the Bank forecasts.

Post-Budget fiscal slippage a key risk The worse the government’s standing gets in opinion polls (and it plunged this week in the wake of the bout of in-fighting at senior levels of the government last week that saw a slew of senior ministers resign), the greater the risk that the government tries to buy support in the electorate by loosening the purse strings. Treasurer Swan already has abandoned his pledge to return the budget to surplus, which was an important constraint on government largesse. Now, though, the perception among MPs facing looming political oblivion may be that it matters little whether the deficit is modest or significantly larger. The Treasurer is said to be resisting ministerial requests like lifting unemployment benefits but, given the government’s political troubles, there probably will be some sweeteners offered in the May Budget.

We have penciled in the start of a hiking cycle in 2H14. By then, the upswing in global demand should be entrenched and the transition to domestic non-mining activity more advanced. Inflation likely will have troughed.

Source: WMI, RBA, J.P. Morgan

Source: NAB, ABS, J.P. Morgan

-4

-3

-2

-1

0

1

2

70

80

90

100

110

120

130

00 02 04 06 08 10 12 14

Index, adv 6 mos

Consumer confidence and change in the cash rate% change, 6 mo

Consumer confidence

Cash rate

-40

-30

-20

-10

0

10

20

30-1.0

-0.5

0.0

0.5

1.0

1.5

2.098 00 02 04 06 08 10 12 14

6 mo change in jobless rate, inverse scaleBusiness confidence and the unemployment rate

Net balance, adv. 6 moUnemployment rate

Business confidence

23

JPMorgan Chase Bank, N.A., Singapore Branch Matt L Hildebrandt (65) 6882-2253 [email protected]



Singapore: MAS to fade soft data and keep inflation focus Government-led economic restructuring process has

worsened labor market and inflation dynamics.

But, macroprudential rules on housing and cars should lead to lower CPI inflation, even as core inflation firms.

MAS to stay on hold as core inflation risks trump soft data; risk of a steeper slope is greater than a flatter one.

Global demand has traditionally dictated economic dynamics in Singapore as soft external conditions have led to weaker GDP growth, higher unemployment, and lower inflation. But, the transmission process has broken down in recent years as soft economic growth has not led to deterioration in labor market conditions. Rather, hiring has been solid, which along with stricter immigration policy has led to tight labor market conditions and elevated inflation despite sluggish growth.

Sticky core inflation (ex. accommodation and private transport) has contributed to high CPI inflation, but the latter has also been lifted by rising prices of certificates of entitle-ment (COE) for auto registrations and of housing. The gov-ernment, however, recently implemented measures to curb housing and COE prices, which should lead to a slowdown in CPI inflation. Core inflation will still firm though as labor market conditions are tight and because service sector produc-tivity has been weak. In fact, data suggest that the historical trade-off between unemployment and inflation has shifted (worsened) since the 2008-09 global crisis, and we expect inflation to be higher for any given rate of unemployment or output growth than it has been in the past.

CPI and core prices both surged in February, but their trends should diverge over the rest of this year as CPI inflation eases while core prices firm further. The issue is whether the MAS will focus more on soft growth and the COE and housing-led slowdown in CPI inflation or more on tight labor market con-ditions and core inflation. We expect the MAS to fade the soft growth figures and volatile CPI trends and instead focus on the labor market and core inflation risks. This would keep MAS policy on hold, with the balance of risks tilted toward a steeper rather than flatter slope.

Phillips curve trade-off has worsened Since the 2008-09 global crisis, the strength of Singapore’s labor market and intensification of price pressures has been surprising. Some of the increase in CPI price pressures has reflected higher housing and COE prices, but much of it has also reflected stickier core inflation and low productivity,

Source: Ministry of Manpower.

Source: Department of Statistics.

Source: J.P. Morgan.

Sources: Department of Statistics, Ministry of Manpower, J.P. Morgan

90

100

110

120

130

140

2008 2009 2010 2011 2012 2013

Index, 1Q08=100

Singapore: employment

Total

Services

Manufacturing

Construction

70

85

100

115

130

145

160

2008 2009 2010 2011 2012 2013

Index, 1Q08=100

Singapore: GDP level

Services

Construction

TotalManufacturing

60

80

100

120

140

2008 2009 2010 2011 2012 2013

Index, 1Q08=100

Singapore: productivity by sector

Construction

Services

Total

Manufacturing

0

1

2

3

4

5

Vertical = core inflation (%oya); horizontal = unemployment rate, sa

Singapore: Phillips curve

0.6 1.4 2.2 3.0 3.8 4.6

1990-2000 2002-11

0.6 1.4 2.2 3.0 3.8 4.6

2005-12

2% unemployment rate

24

Economic Research Singapore: MAS to fade soft data and keep inflation focus March 28, 2013

JPMorgan Chase Bank, N.A., Singapore Branch Matt L Hildebrandt (65) 6882-2253 [email protected]

particularly in services. Since 2008, hiring in services has been much stronger than in construction or manufacturing, while growth in that sector has been the weakest. This implies low productivity, which explains why hiring in services has held up even during periods of sluggish growth.

Tight labor market conditions partly explain high inflation. However, core inflation has been higher than in the past even relative to a given unemployment rate. This suggests that high core inflation is not just related to the economy’s cyclical state but that it also reflects a structural shift up in price pres-sures. This structural shift is at least partly a result of weak productivity, which explains the official focus on economic restructuring and boosting productivity. In other words, even if the labor market were to soften a bit, core inflation would likely stay higher than past experience would suggest as the inflation-unemployment trade-off has worsened.

CPI and core inflation trends to diverge COE and housing prices have also pushed CPI inflation higher in recent years. This trend was visible in the February infla-tion release this week as private transport prices rose 17.4%oya from 10.5% in January, resulting in a CPI inflation rate of 4.9%oya from 3.6% (with a modest boost from food, too). But, COE prices have moderated in recent months and will not likely rise again soon because of the stricter financing rules for cars announced in the budget last month. Thus, the contribution to CPI inflation from private transport will fall sharply in coming months. In addition, property prices are expected to be better behaved following the strict housing measures introduced in January (see “Singapore: tightening the screws on property again,” GDW, January 18, 2003). As a result, CPI inflation is expected to ease sharply in coming months to around 3%oya from the most recent 4.9% print.

While CPI inflation is forecast to ease, core inflation should firm if sequential price pressures in coming months remain similar to those in recent months. In such a scenario, core in-flation should climb to around 2.5% by year-end from 1.9% in February (and 1.2% in January). Given tight labor market con-ditions and stricter immigration, risk to this forecast is to the upside. So, core and CPI inflation trends should diverge over the rest of this year as their rates converge toward 3%.

MAS on hold in April In October, the MAS maintained its policy stance because of tight labor market conditions and upside risks to core infla-tion, rather than easing as the market had expected. We expect that the same combination of factors will take precedence now, and that the MAS will maintain its current monetary stance in light of recently weak economic data and lower CPI inflation.


Source: Department of Statistics


Source: Department of Statistics

-2

-1

0

1

2

3

4

-100

-50

0

50

100

150

200

%oya

Singapore: certificate of entitlement prices and CPI private transport

COE prices Private transport

%-pt contribution to %oya inflation, 1-mo lag

05 07 09 11 13

-2

0

2

4

6

8

-2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013 2014

%oya

Singapore: consumer prices

CPI inflationHousing and

private transport

%-point contribution to %oya CPI inflation

-2

-1

0

1

2

3

4

5

05 06 07 08 09 10 11 12 13

%-pt contribution to %oya inflation

Singapore: accommodation and private transport prices

Accommodation

Private transport

-2

0

2

4

6

8

05 06 07 08 09 10 11 12 13

%oya

Singapore: core and CPI prices

25



United States Real GDP for 4Q12 now 0.4%, forecast for 1Q13 raised

to 2.7%; domestic final sales much steadier than GDP

Latest reports on 4Q12 profits and 1Q13 core capital goods shipments highlight corporate resilience

Forecast still looks for 1.5% growth in 2Q13, but slow-ing is unlikely to show in upcoming March reports

The economic news this past week highlights the continuing rebound in business investment following last summer’s slump. The government’s latest estimate shows a modest up-ward revision to real GDP growth in 4Q12 to 0.4% saar (from 0.1%) with the entire net revision accounted for by real busi-ness fixed investment, now reporting a 13.2% saar rebound.

Unexpectedly strong news on business spending also prompted an upward revision to the forecast of real GDP growth in 1Q13 to 2.7% (from 2.3%). February’s strong gain in core capital goods shipments (and the upward revision to January) lift the forecast for real spending on equipment and software for 1Q13 to a trend-like 5.8% saar (from 2.7%). The forecast had previously expected a weak patch for spending while business monitored the economic effects of substantial tax hikes that took effect at the beginning of the year.

The latest report on 4Q12 GDP contains the government’s first estimate of 4Q12 corporate profits, and the results help explain the corporate resilience early this year. Adjusted prof-its rose 9.5% saar and nonfinancial profits from domestic op-erations, the more important influence on domestic capital spending, also rose 9.5% saar despite a quarter of very weak real GDP growth.

Incoming news on the housing market is also generally up-beat. New home sales for February came up a bit short, but the average sales pace for January-February (421,000 saar) is sharply above the average 4Q12 pace (380,000) and supports the outlook for further strong gains in new home construction this year. Rising home sales and lean inventories of unsold homes are encouraging increases in house prices as well.

Real GDP growth over the past year shows fairly large quar-terly swings, including the acceleration from growth of only 0.4% last quarter to an estimated 2.7% this quarter. But these swings are exaggerated by the ups and downs of inventories. Growth of real domestic final sales has maintained a fairly steady and subdued growth pace close to 2.0%, and this trend is expected to continue. The forecast looks for real domestic final sales to accelerate modestly from 1.5% saar in 4Q12 to 2.0% in the current quarter.

The forecast still looks for real GDP growth in 2Q13 to mod-erate to 1.5% saar, but the tone of the upcoming March eco-nomic reports is expected to be similar to February results without any downside break. The forecast looks for nonfarm payroll employment to increase 210,000 (close to the 236,000 in February) and for the unemployment rate to edge up to 7.8%, giving back a part of February’s 0.2% decline. Forecasts for the March final PMI (54.5), the ISM manufacturing survey (54.0), and the ISM nonmanufacturing survey (55.0) are each expected to be close to February results. And March auto sales are fore-cast to be unchanged at a pace of 15.3 million.

There will also be interest in February reports on construction spending and foreign trade. These releases will provide source data used to refine the forecast of 1Q13 real GDP growth. And reports on March auto sales and chain store sales will provide some sense of the tone of March consumer spending.

Capex rebound continues Monthly readings for durable goods orders have been choppy lately, as is often the case. However, the trend in growth has turned stronger over the past few months, reflecting in part the turn in the inventory cycle from sharply negative in 4Q12 to sharply positive in 1Q13. Total new orders for durable

Source: BEA, J.P. Morgan


0

1

2

3

4

5

2011 2012 2013

%ch saar

Real domestic final sales and real GDP

Real domestic final salesReal GDP

Forecast

-30

-15

0

15

30

45

-20

-10

0

10

20

30

2011 2012 2013

%ch saar over 3 months, both scales

Core capital goods shipments and new orders

Shipments New orders

26

Economic Research United States March 28, 2013


goods rebounded 5.7% samr in February and are up 22.7% saar over the past three months. Total orders ex. transporta-tion, a better measure of the trend, edged down 0.5% in Feb-ruary but are at a 13.3% pace over the past three months.

Detail of the February durables report shows that the trend in core capital goods orders and shipments continued to increase following the snap back in 4Q12. Core capital goods orders for February gave back some of January’s surge. But the Jan-uary-February level is running 31.4% saar above the 4Q12 average. Core capital goods shipments, key source data for estimating GDP, are up 5.3% so far this quarter and, as noted, the forecast for real spending on business equipment and software for 1Q13 has been raised to a trend-like 5.8% pace.

Within capital goods, new orders for machinery gave back part of their January surge and new orders for computers and electronic parts made up part of their January decline. Growth in new orders for machinery over the past three months (45.6% saar) continues to run hugely stronger than for com-puters and electronics (-2.9%).

Real GDP and profits Revisions to 4Q12 real GDP were minor and largely antici-pated. The two main surprises relative to expectations are the downward revision to real consumer spending to 1.8% (from 2.1%) that could have modest negative implications for cur-rent-quarter growth and the smaller-than-expected upward revision to inventories that has modest positive implications for current-quarter growth.

That the first report on 4Q12 corporate profits increased 9.5% at an annual rate is a bigger surprise (see “Focus” page.) Do-mestic nonfinancial profits increased 9.5% saar, increasing more rapidly than the trend over the previous year in a quarter when both real GDP growth and labor productivity were very weak. And profits earned abroad advanced at a double-digit pace last quarter, counter to the prior trend of gradual de-clines, in a quarter when foreign growth was also weak.

Profits are volatile from quarter to quarter. But the broad mes-sage from 2012 results is that corporate business managed to maintain elevated profit margins despite a year of subpar real GDP growth in the US and in the rest of the world. The fore-cast of somewhat stronger real GDP growth this year, if real-ized, should bring stronger profit growth this year as well.

Home sales and prices continue to rise News on the new home market has been conflicting lately. The monthly Homebuilders survey peaked in December and has been drifting lower early this year. But the large public companies have been reporting that sales growth is

accelerating. The latest Census report indicates that sales are turning much stronger in 1Q13. New home sales did slip a bit in February, but this follows a double-digit monthly increase in January. New home sales for the first two months of the year have averaged 421,000 at an annual rate and are running 63.5% at an annual rate above their 4Q12 average. The months’ supply of inventory (including homes permitted but not yet started) has averaged a lean 4.3 months (sa) so far this year, down from 4.7 months in 4Q12. Lean inventories for new and existing homes are an important positive influence on both new construction ac-tivity and house prices.

Not unexpectedly, the latest report on house prices was strong as well. The Case-Shiller 20-city house price index rose 1.0% samr and 8.1%oya in January. Prices rose in all 20 of the cities, both for the month and on an over-year-ago basis. Several of the areas that seemed hopeless a couple of years ago are now reporting double-digit house price increases, including Phoenix (23.2%oya), Las Vegas (15.3%oya), and Miami (10.8%oya). This reinforces the message from the other quality-adjusted house price measures. The supply/demand balance in the mar-ket is unlikely to change anytime soon, so prices are expected to continue to rise through the rest of the year.


Source: Census Bureau, Case-Shiller

4.2

4.8

5.4

6.0

6.6

7.2

7.8

0.28

0.33

0.38

0.43

2011 2012 2013

Mn, saar, 3mma

Single-family new home sales and months' supply of unsold inventory

Sa, 3mma

New home sales

Inventory

-5

0

5

10

2010 2011 2012 2013

%oya

Two measures of quality-adjusted house prices

Census index for new homes

Case-Shiller 20-city index for existing homes

27

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


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

Data releases and forecasts Fri Personal income Mar 29 %m/m sa, unless noted 8:30am Nov Dec Jan Feb

Personal income 1.0 2.6 -3.6 1.1 Wages & salaries 1.1 0.7 -0.6 0.8

Consumption 0.4 0.1 0.2 0.6 Real consumption 0.5 0.1 0.1 0.2 PCE price index -0.2 0.0 0.0 0.4

Core 0.07 0.03 0.15 0.11 Mkt-based Core 0.0 0.0 0.2 Core (%oya) 1.5 1.4 1.3 1.3 Mkt-based Core (%oya) 1.6 1.4 1.4

Saving rate 4.0 6.4 2.4 2.9

Data not released at time of publication. Fri Consumer sentiment Mar 29 9:55am Pre Fin

Jan Feb Mar Mar Univ. of Mich. Index (nsa) 73.8 77.6 71.8 73.0

Current conditions 85.0 89.0 87.5 Expectations 66.6 70.2 61.7

Inflation expectations Short term 3.3 3.3 3.3 Long term 2.9 3.0 2.9

Home buying conditions 164 154 160

Data not released at time of publication. Mon Markit manufacturing PMI Apr 1 Index, sa 8:58am Flash Final

Jan Feb Mar Mar Composite1 55.8 54.3 54.9 54.5

New orders (30%) 57.4 55.4 55.9 Output (25%) 56.8 57.3 56.8 Employment (20%) 55.6 53.5 54.6 Sup. del., (15%, inv.) 45.7 48.5 46.6 Stks of purch (10%) 51.5 49.5 50.2

New export orders 51.5 48.5 51.2 Backlogs of work 50.3 49.9 50.1 Output prices 53.3 53.5 52.9 Input prices 59.0 58.2 55.2 Stocks of finished goods 50.4 50.7 49.4 Quantity of purchases 53.7 53.6 53.0 ISM-weighted composite2 55.1 53.4 54.2 1. Weights in parentheses 2. Attributes ISM-composite weights (equal weights) to corresponding PMI series

We forecast that the Markit manufacturing PMI will be re-vised down from 54.9 to 54.5 between the flash and final reports for March, which would still be a slight improve-ment over the final figure reported for February (54.3). Most manufacturing indicators have been decent lately, but the PMI has been stronger than many other related surveys suggesting that it might be due to cool off a bit. Downward revisions in the PMI have also been fairly common since late in 2011.

Mon ISM manufacturing survey Apr 1 Sa 10:00am Dec Jan Feb Mar

Overall index 50.2 53.1 54.2 54.0 Production 52.6 53.6 57.6 New orders 49.7 53.3 57.8 Inventories 43.0 51.0 51.5 Employment 51.9 54.0 52.6 Supplier deliveries 53.7 53.6 51.4 Export orders 51.5 50.5 53.5 Imports 51.5 50.0 54.0 Prices 55.5 56.5 61.5

We believe the ISM manufacturing survey’s headline edged down 0.2pt to 54.0 in March. The headline increased 1.1pts to 54.2 in the February report with favorable under-lying details. The ISM weighted composite indexes calcu-lated from the various regional survey data that we already have in hand for March suggest that the ISM survey should weaken in March. However, the national PMI index re-ported for March (the flash report) was stronger than the ISM survey reported for February, so we do not expect much weakening in the ISM survey.

Mon Construction spending Apr 1 %m/m sa 10:00am Nov Dec Jan Feb

Nominal 1.9 1.1 -2.1 1.0 Private 2.7 2.1 -2.6 1.5

Residential -0.1 1.7 0.0 2.5 Nonresidential 5.5 2.4 -5.1 0.5

Public 0.0 -1.0 -1.0 -0.3

We estimate that nominal construction spending put in place increased 1.0% in February. Private spending on res-idential construction has been increasing lately while the housing market has been recovering, and we believe these figures will continue to improve. We forecast that private residential construction spending—including improve-ments, which are not used to estimate GDP—increased 2.5% in February while spending on new residential con-struction rose 3.4%. Private nonresidential construction spending has also been trending higher throughout the past few years, though spending dropped 5.1% in January after strong growth at the end of 2012. We look for a resumption of the upward trend in the data and forecast a 0.5% increase for February. Public construction spending has been weak in recent months, declining 3.7% saar over the six months through January. With look for some moderation in the downward trend related to public spending in February and forecast a decline of 0.3% samr.

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

28




Tue Factory goods report Apr 2 %m/m sa, unless noted 10:00am Nov Dec Jan Feb

New orders -0.3 1.3 -2.0 3.4 Shipments 0.3 0.0 -0.2 1.2 Inventories 0.0 0.0 0.5 0.6

Inventory/sales ratio 1.27 1.27 1.28 1.27

We believe factory orders increased 3.4% in February while related shipments increased 1.2% and inventories rose 0.6%. The advance durable goods report already showed that durable goods orders increased 5.7% during the month while durable shipments increased 1.0% and in-ventories rose 0.4%. The trends related to the important core capital goods data continued to look solid despite the 2.7% decline in the related orders figure; over the three months through February, core capital goods orders in-creased 12.7% saar while core capital goods shipments in-creased 5.6% saar. We estimate that new orders and shipments of nondurable goods popped up 1.5% in February while nondurable in-ventories increased 0.9%. Price increases for most of the related products (especially petroleum products) should boost the nominal figures reported for February.

Tue Motor vehicle sales Apr 2 Mn, saar

Dec Jan Feb Mar

Light trucks and autos 15.3 15.2 15.3 15.3 Imports 3.3 3.2 3.3

Domestics 12.0 12.0 12.0 Autos 5.6 5.7 5.5 Light trucks 6.4 6.4 6.4

We forecast light vehicle sales of 15.3 million saar for March based on available industry guidance, which would be unchanged from the pace of sales reported for February. After trending higher throughout most of the recovery, the pace of sales has flattened out since late in 2012. But sales have held up reasonably well considering the fiscal tight-ening implemented at the start of the year.

Wed ADP employment Apr 3 Change from month ago, sa 8:15am Dec Jan Feb Mar

ADP 209 215 198 BLS private payroll 224 140 246

The deviation between the first prints of the ADP em-ployment report and the BLS data on private payrolls has averaged only 6,000 over the five months since the former began using a new methodology. However, the directions of these deviations have varied and the magnitude of the misses has averaged 35,000 over these five months. We will be able to better evaluate the reliability of the ADP re-port’s new methodology in predicting the BLS data as we get additional reports each month.

Wed ISM nonmanufacturing survey Apr 3 Sa 10:00am Dec Jan Feb Mar

Nonmfg. index (NMI) 55.7 55.2 56.0 55.0

Business activity 60.8 56.4 56.9 New orders 58.3 54.4 58.2 Employment 55.3 57.5 57.2 Prices 56.1 58.0 61.7

We believe the ISM nonmanufacturing index’s headline declined 1.0pt to 55.0 in March. The improvement in the housing market appears to have provided a nice boost to service sector activity recently, and the ISM nonmanufac-turing survey looked very solid in February (with regard to both its headline and underlying details). We look for some softening in the March survey, largely due to seasonal is-sues. The survey’s index related to supplier deliveries (25% of the headline composite) is not seasonally adjusted and is typically weak in March. February has also been the peak for the overall ISM index each of the past two years, so there could be some seasonality in the data that is not being correctly accounted for by the survey’s seasonal fac-tors (away from the supplier deliveries index).

Thu Jobless claims Apr 4 000s, sa

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

Jan 19 343 360 3207 3201 2.5 Jan 26 374 360 3219 3210 2.5 Feb 2 361 357 3140 3183 2.4 Feb 9 348 357 3163 3182 2.5 Feb 16¹ 366 362 3102 3156 2.4 Feb 23 348 356 3105 3128 2.4 Mar 2 340 351 3058 3107 2.4 Mar 9 334 347 3077 3086 2.4 Mar 16¹ 341 341 3050 3073 2.4 Mar 23 357 343 Mar 30 350 346 1. Payroll survey week

We forecast that initial jobless claims declined 7,000 to 350,000 during the week ending March 30. The claims da-ta are often volatile around this time of year because of seasonal adjustment issues related to the varied timing of Good Friday, Easter, Passover, and school spring breaks. Claims had been trending lower early in 2013 before in-creasing in the most recent two weeks (7,000 the week ending March 16 and 16,000 the week ending March 23). If some of this recent deterioration in the data was due to issues with the seasonal adjustment process, we will likely see a decline in the upcoming report. The last year to show increases in the two weeks leading up to the week of Good Friday (the pattern evident this year) was 2008, and claims declined that year during the week of Good Friday.


29




However, there are differences between the seasonal fac-tors for that year and this year so a similar outcome in the seasonally adjusted data is far from assured.

Fri Labor market report Apr 5 Sa 8:30am Dec Jan Feb Mar

Payroll employment (ch, m/m, 000s) 219 119 236 210

Private payrolls 224 140 246 215 Goods-producing 58 41 67 55

Construction 38 25 48 40 Manufacturing 13 12 14 10

Service-providing 161 78 169 155 Private service-providing 166 99 179 160

Wholesale trade 6 16 6 Retail trade 6 29 24 Professional services 35 16 73 Temporary help 12 -3 16 Education/health 36 9 24 Leisure and hospitality 40 30 24

Government -5 -21 -10 -5 Average weekly hours 34.5 34.4 34.5 34.5 Index, hrs worked (%m/m) 0.5 -0.2 0.5 0.2 Hourly earnings (%m/m) 0.3 0.1 0.2 0.3

(%oya) 2.1 2.1 2.1 2.1 Unemployment rate (%) 7.8 7.9 7.7 7.8

We forecast that nonfarm payrolls increased 210,000 in March while the unemployment rate ticked up to 7.8% dur-ing the month. The labor market indicators we track have been generally upbeat so far in 2013 despite the fiscal tightening implemented at the start of the year. Nonfarm payrolls increased by an average of almost 180,000 jobs per month in January and February, which was a modest step down relative to the 4Q12 average (almost 210,000 jobs per month) but very close to the average growth re-ported over the second half of 2012 as well as the full year. And since the reference week for the February employ-ment report, the jobless claims data have been trending lower, which signals additional improvement in the labor market (the tone of the economic data in general has also been fairly upbeat). We believe the private sector added 215,000 jobs to the payroll count in March. Private goods-producing industries have added an average of 55,000 jobs per month over the three months through February with most of this growth coming from construction workers due in part to the hous-ing recovery. We believe these trends carried over into March. We also forecast that private service-producing in-dustries added 160,000 jobs in March; this would be a modest pickup relative to the trend reported for the prior few months reflecting some general improvement in the labor market. Government payrolls declined by an average of 12,000 jobs per month between December and January, continuing the downward trend in the public-sector jobs data from the past few years. About 80% of the most recent weakness was related to state-level education workers, which may have been some payback from strength in this sector around the start of the school year in the fall of 2012. We look for the downward trend in the government payroll

data to moderate in March, and forecast a decline in pay-rolls of 5,000. Most other details of the establishment survey should also have been relatively upbeat in March. We believe the aver-age workweek held at 34.5 hours in March after ticking up the prior month. In February, the average workweek for production workers popped up 0.2 hour to 33.8 (matching the peak for the expansion to date), suggesting that the in-crease in the overall workweek from February will be sus-tained because the production worker series is generally a more reliable measure. A steady workweek and our fore-cast for payroll growth should generate a 0.2% increase in the index of hours worked. Although the broad trend in earnings remained soft through February (+2.1% oya), we have seen some signs of firming lately. Between Novem-ber and February, earnings have increased by an average of 0.3% each month (for the series for all workers as well as production workers), and we believe earnings increased by a similar amount in March. For the household survey, we believe the unemployment rate ticked up 0.1%-pt to 7.8% in March. The unemploy-ment rate dropped 0.2%-pt in February (partly due to de-creased participation). Given the general volatility in the household survey data, we expect some of this decline to be undone in the upcoming report.

Fri International trade Apr 5 $ bn, samr 8:30am Nov Dec Jan Feb

Balance (BOP basis) -48.2 -38.1 -44.4 -45.1 Services 17.3 17.9 17.3 17.4 Merchandise -65.5 -56.1 -61.8 -62.5

Exports (%m/m) 1.2 2.2 -1.2 1.2 Imports (%m/m) 3.8 -2.6 1.8 1.3

We believe the nominal trade balance widened from -$44.4 billion in January to -$45.1 billon in February with imports increasing 1.3% and exports rising 1.2%. In vol-ume terms, the trade data have been choppy lately with soft underlying trends—real goods imports edged down 0.6% saar over the six months through January while real goods exports declined 2.8% saar. US port data on container traf-fic as well as trade figures already reported by other coun-tries signal a pickup in activity in February, and we fore-cast that real goods imports rose 0.8% while real goods ex-ports increased 1.1%. For the figures on nominal trade in services, we forecast that both imports and exports in-creased 0.6% in February in line with the recent trends in the data.


30




Review of past week’s data Durable goods (Mar 26) %m/m sa

Dec Jan Feb

New orders 3.6 -4.9 -3.8 1.2 5.7Ex transportation 0.8 2.3 2.9 -2.2 -0.5Nondef cap. gds ex air -0.8 7.2 6.7 -3.0 -2.7

Shipments 0.6 -1.2 -0.7 1.1 1.0Nondef cap. gds ex air 0.1 -1.1 -0.7 2.5 1.9

Inventories -0.1 0.2 0.3 0.4

Business investment spending is continuing to recover nicely from last fall’s stumble, as core (nondefense, ex-aircraft) capital good shipments climbed 1.9% in February. Core capital good orders slipped 2.7%, but that was after a 6.7% gain the prior month. The latest data take our estimate of real business spend-ing on equipment and software to a trend-like 5.8% annual pace. The headline gain in new orders for durable goods was 5.7%, supported by a 75.2% jump in orders in the volatile aircraft cat-egory. Outside of transportation equipment, orders slipped 0.5%, following five months of solid increases. Machinery or-ders fell 2.2%, but held on to most of the previous month’s 15.9% increase. The gain in core capital goods shipments was mostly due to an increase in the machinery category, as tech or-ders and shipments continue to look soft. Inventories at manu-facturers of durable goods rose $1.6 billion last month, and real stockbuilding looks to be on track for about a $65 billion annual rate of increase in 1Q.

S&P/Case-Shiller home price index (Mar 26) %oya, unless noted

Nov Dec Jan 20-city composite 5.4 6.8 8.2 8.1

%m/m, sa 0.7 0.6 0.9 1.1 1.010-city composite 4.4 5.9 7.3

Most measures of house prices have been firming already while the housing market has been recovering. The Case-Shiller house price index increased 1.0% samr in January and was up 8.1% oya. There have been widespread increases in house prices across the reported metropolitan areas in the Case-Shiller data.

New home sales (Mar 26)

Dec Jan Feb

Total (000s,saar) 378 381 437 431 415 411%m/m -3.8 -3.3 15.6 13.1 -5.0 -4.6%oya nsa 12.5 34.8 30.4 13.4 10.0

Months’ supply 4.8 4.1 4.2 4.4Median price (%oya) 14.3 19.0 2.1 8.1 2.9

New single-family home sales declined 4.6% to 411,000 saar in February and there were net downward revisions to the earlier data of 2,000. This most recent decline in home sales only gave up a portion of the 13.1% jump reported for the prior month, and the trend in the sales data still appears to be headed higher and other related measures continue to signal improvement in the housing market. New home sales increased 25% saar over the six months through February, though levels of activity re-main weak by historical standards. Performance has been mixed across regions lately, with sales in the West generally outpacing sales in the other reported regions. In other details of the new home sales report, inventories of new homes available for sale remained very lean in February despite

drifting higher over the past few months. Limited inventories should generate new home construction and keep upward pres-sure on prices.

Consumer confidence (Mar 26) Sa

Jan Feb Mar

Conference Bd index 58.4 69.6 68.0 68.0 59.7Present situation 56.2 63.3 61.4 57.9

Jobs plentiful 8.5 10.5 10.1 9.4Jobs hard to get 36.6 37.0 36.9 36.2Labor mkt diff -28.1 -26.5 -26.8 -26.8

Expectations 59.9 73.8 72.4 60.9

The Conference Board consumer confidence index dropped 8.3pts to 59.7 in March, undoing most of the 9.6pt increase re-ported for the prior month. The recent volatility in the Confer-ence Board measure as well as mixed results from other related indicators over the past few months make it difficult to decipher the underlying trend for consumer attitudes. The survey period for the Conference Board report occurred around when the sequestration was implemented, though other factors may have affected confidence as well (including the tax hikes and increase in gasoline prices earlier in the year as poten-tial negatives, and the recent performance of equity markets and the housing market as potential positives). Most details of the Conference Board report weakened in the March survey and expectations measures generally performed worse than measures of current conditions. The labor market differential in the Conference Board survey held at -26.8 in February, which is disappointing considering the relatively upbeat news in most other recent labor market indicators.

Pending home sales (Mar 27) Sa, unless noted

Dec Jan Feb

Total (mn, ar) 101.3 105.9 105.2 104.3 104.8%ch m/m -2.0 4.5 3.8 -1.5 -0.4%oya (nsa) 4.7 10.4 9.6 7.9 5.0

The pending home sales index slipped 0.4% samr in February which gave back a small portion of the 3.8% increase reported for January (revised from 4.5%). Through some monthly ups and downs, the pending home sales data continue to be trending higher as the housing market recovers; the national index in-creased 6.0% saar over the six months through February with growth in the Northeast (5.3%), Midwest (11.5%), and South (11.1%), but a decline reported in the West (-6.9%). And the gains in pending home sales over the past few months point to upcoming increases in existing home sales because pending home sales—counted when contracts are signed—typically lead existing home sales—counted when transactions are complet-ed—by one or two months.


31




Gross domestic product (Mar 28) %ch, q/q, saar, unless noted

Adv Sec Thi4Q12 4Q12 4Q12

Real GDP -0.1 0.1 0.7 0.4Final sales 1.1 1.7 2.1 1.9Domestic final sales 1.3 1.4 1.8 1.5Consumption 2.2 2.1 2.0 1.8Equip. and software 12.5 11.3 11.6 11.8Nonres. structures -1.1 5.7 17.2 16.7Residential investment 15.3 17.4 18.0 17.5Government -6.6 -6.9 -6.8 -7.0Net exports–%-pt cont. -0.2 0.2 0.3Inventories–%-pt cont. -1.3 -1.6 -1.4 -1.5Core PCE price index 0.9 0.9 1.0

(%oya) 1.5 1.5 1.5GDP chain price index 0.6 0.9 1.0

(%oya) 1.7 1.8 1.8Adj. corporate profits 2.3

(%oya) 3.1

The BEA revised up 4Q12 real GDP growth to 0.4% saar in its third estimate for the quarter. This was modestly below expecta-tions, but stronger than the BEA’s earlier estimates of 4Q GDP (-0.1% in its first report, +0.1% in its second). And 4Q growth was restrained by a large decline in government spending and a sharp slowing in inventory accumulation, which will likely be one-time factors, and the underlying growth momentum was much better than implied by the headline GDP figure. In the details underlying GDP, real consumption growth in 4Q was revised down from 2.1% to 1.8% (due to services) and the change in inventories was revised up slightly from $12.0 billion to $13.3 billion, both of which were softer than expected. Most of the other details were close to our forecast, including a siza-ble upward revision to nonresidential structures investment (from 5.7% to 16.7%) as well as small upward revisions to equipment and software spending, residential investment, and net exports. Government spending was revised down slightly from -6.9% to -7.0%. The BEA’s report of corporate profits was stronger than ex-pected; pretax profits increased 2.3% saqr in 4Q (+3.1% oya) with domestic nonfinancial profits up 2.3% saqr (+4.3% oya). There were also slight upward revisions to the PCE price index in 4Q (headline from 1.5% to 1.6% saar; core from 0.9% to 1.0% saar), but these measures of inflation still look very tame.


32

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


Focus: corporate profits in 4Q Adjusted corporate pretax profits increased 9.6% saar in 4Q

during a quarter when real GDP growth was very soft (+0.4% saar). The increase in profits in 4Q was a pickup relative to the average growth reported during the first three quarters of 2012 (+1.4% saar), but on an over-year-ago ba-sis, growth in profits continued to decelerate through the fourth quarter. Profits increased only 3.1%oya in 4Q, the softest oya growth in the expansion to date. Real GDP growth and nonfarm productivity growth were also soft in 2012, coming in at 1.7%oya and 0.5%oya, respectively, in the fourth quarter. Our forecast assumes that real GDP growth accelerates to 2.2%oya in 4Q13 and that growth in corporate profits picks up to 4.7%oya.

The remainder of this Focus looks at various subcategories of the broad profits measure. The term corporate profits (or profits) will continue to refer to adjusted pretax profits, which calculate depreciation and inventory expense on a consistent cost basis and measure earnings from current production and omit capital gains. These are also not af-fected by changes in taxes.

Domestic nonfinancial profits are an important factor be-hind domestic capital spending. These profits bounced back 9.5% saar in 4Q after declining 5.0% the prior quarter. Through some quarterly volatility, domestic nonfinancial profits increased only 4.3% on a year-ago basis in 4Q. Growth in these profits has moderated over the past few years after much stronger increases in the early stages of the recovery.

Corporate profits from the rest of the world popped up 24.5% saar in 4Q but were basically flat on a year-ago basis (+0.3%). This recent soft trend in foreign profits is not very surprising given the struggles with growth abroad, and the relative strength reported in 4Q might have reflected nor-mal volatility in the series.

Domestic financial profits slipped a little in 4Q (-3.0% saar), but the longer term trend continued to move modestly higher. Financial profits can be very choppy and are not very related to capital spending.

-100

-50

0

50

100

150

00 02 04 06 08 10 12

%ch, saar

Adjusted corporate pretax profits

Source: BEA

%q/q

%oya

-40

-20

0

20

40

60

00 02 04 06 08 10 12

%oya

Domestic nonfinancial profits

Source: BEA

-40

-20

0

20

40

60

00 02 04 06 08 10 12

%oya

Rest of world profits

Source: BEA

-100

0

100

200

300

400

500

00 02 04 06 08 10 12

$bn, saar

Domestic financial profits

Source: BEA

33

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


Euro area Cyprus agreement reflects the way Germany wants to

deal with legacy problems

Extent of any deposit flight is still unclear, but bank funding costs are likely to rise and weigh on growth

Strong case for the ECB to ease policy as early as next week; we expect a rate cut by June

Euro area loan growth remained weak in February, while deposits continued to slowly improve

Throughout this crisis, Germany has wanted legacy problems to be dealt with at the national level through fiscal consolida-tion, bank recapitalization, and structural reform. For a long time, this strategy led to financial stress. However, since the ECB announced the OMT in July last year, financial stress has been greatly reduced, and this has allowed Germany to become more assertive again about how it wants legacy assets to be dealt with. Hence, Germany has made clear that direct bank recapitalizations via the ESM will only be available to tackle the next banking crisis, rather than deal with the present one. And Greece faced a very difficult set of negotiations last summer to release money from the second program.

This pattern continued with the Cyprus agreement last week. This makes clear that bank creditors will be bailed in if the government cannot shoulder the burden of recapitalizing the banks. This is the way the region was moving forward in terms with the Resolution and Recovery Directive, but it has now just happened a couple of years earlier.

It remains to be seen how much deposit flight there will be from peripheral countries and how markets will behave. It is likely that bank funding costs will go up again and unwind some of the OMT-related improvement of the last few months, which will weigh on the Euro area economy and likely exacerbate the regional divergences. The GDP revisions we made last week—a later exit from recession and a more mod-erate recovery—reflected not only the disappointing PMI data but also the recognition that however Cyprus was to be re-solved, bank funding costs would rise. It is also likely that regional divergences will be exacerbated between the few countries doing well and the rest.

ECB to ease, but perhaps not yet This week’s economic data reinforced the sense that the econ-omy has suffered a setback and that the move out of recession will be slow and bumpy. Following the decline in last week’s flash PMI, the European Commission’s economic sentiment index, which also largely preceded the problems in Cyprus, also fell in March (-1.1pts to 90.0). In terms of levels, both the

PMI and the EC sentiment index are pointing to further mod-est contraction in the economy. And, strikingly, sentiment is above the long-run average (of 100) only in Germany and Estonia, with most other countries below 90. While sentiment actually improved slightly in the periphery in March and Greek sentiment continued to close in on the Euro area aver-age, any uncertainty created by the bailout of Cyprus could have a larger effect there in April.

Against this backdrop of weaker growth and higher bank funding costs, our expectation is that the ECB will ease policy. Arguably the appropriate response to disappointments with the bank lending channel would be an easing of collateral requirements and further LTROs. This would also help to contain any deposit flight from peripheral banking systems. But, while ECB policymakers have spoken for many months about wanting to support bank lending to small and medium-sized companies, there is no indication that anything is immi-nent (likely because such policy measures imply a larger and riskier ECB balance sheet they are seen as controversial). As a result, our expectation is that the main refinancing rate will be cut instead by 25bp to 0.5% (with a narrower corridor). Such a move is possibly as early as next week, but there has been no signal for that and it is possible that recent political events are complicating a very quick response.

For now, it looks as if any ECB policy response will be quite modest. As we noted recently, the ECB’s tolerance of low

-4

-2

0

2

99 01 03 05 07 09 11 13

Standard deviation from 2000-07 average

Euro area business surveys

Composite PMI

EC economic sentiment

Source: European Commission, J.P.Morgan

70

80

90

100

110

120

07 09 11 13

Idx, sa

Euro area economic sentiment

Periphery

Germany

Other core

Source: European Commission, J.P.Morgan

34

Economic Research Euro area March 28, 2013


inflation and disappointments on growth has increased signif-icantly since the middle of last year. This is likely because the central bank wants to keep pressure on politicians, because it wants to preserve its remaining bullets, and because it ques-tions the effectiveness of some policy options. Some of these reasons are questionable, and it is striking just how much macroeconomic underperformance the ECB is tolerating. Having emphasized the positive developments in financial markets in recent months, it will be important to see how Draghi’s rhetoric shifts at next week’s policy meeting, given the disappointing business surveys in March.

Pre-Cyprus, another mixed M3 report Even though the latest M3 report preceded the problems in Cyprus, it was mixed. In general, bank deposits continued to slowly improve. In the region overall, M3 rose 0.2%m/m in February and the annual rate declined modestly to 3.1%oya. To some extent this just reflects shifts from longer-term de-posits into the shorter-term deposits included in M3. But, even at the country level there continues to be a modest improvement. In particular, deposits are still rising in the core countries and they are continuing to edge higher again in the periphery overall. There are some nuances within the periph-ery—deposits are trending higher in Italy, the improvement has stalled a bit in Spain, there is a larger improvement in Greece, there is a modest downward trend in Portugal, and there is broad stability in Greece. We also think that the de-posit data are hard to interpret—deposit flight or its reversal, income pressures that force households to dip into their sav-ings, and net repayments of loans. In any case, despite these caveats, the pre-Cyprus trends were still encouraging.

In contrast, the news on bank lending to the real economy continued to be weak. Loans to the nonbank private sector edged up in February, but the annual change remained at -0.4%oya. Within this, corporate loans rose for the first time in six months, albeit only slightly, and the annual rate re-mained very negative at -1.4%oya. And loans to households are now stagnating, after having increased over the past four years; the annual rate stayed at +0.4%oya in February but that was well below the 1.8%oya seen in February last year. There also continues to be a very large split between the core and the periphery. Corporate loans extended by German banks are stagnating, perhaps due to the internal funds available to German corporates. Corporate loans of other core banks are still rising modestly, while those of peripheral banks continue to contract sharply. Corporate loans are down 8.4%oya in Spain, 3.0%oya in Italy, 4.3%oya in Portugal, 4.8%oya in Greece, and 4.1%oya in Ireland. The pace of decline has re-cently increased only in Spain, however. The broad trends are quite similar for household loans. The weakness in the periphery will likely reflect increased pressures to delever and tighter bank lending conditions.

0

500

1000

1500

2008 2009 2010 2011 2012 2013 2014

Cumulative flows since Jan 2008

Bank deposits of nonbank private sector

Source: ECB, J.P.Morgan

Core

Periphery

-2

0

2

4

6

8

10

12

99 01 03 05 07 09 11 13

%oya, adjusted for loan sales and securitizations

Euro area bank loans to nonbank private sector

Source: ECB, J.P. Morgan

96

98

100

102

104

106

108

2009 2010 2011 2012 2013 2014

Jan 09 = 100, index of notional stocks, adjusted for loan sales, securitizations

Euro area bank loans

Nonfinancial corporates

Households


-6

-4

-2

0

2

4

2010 2011 2012 2013 2014

%oya, adjusted for securitization

Euro area bank loans to nonfinancial corporates


Core

Periphery

35



Data releases and forecasts Week of April 1 - 5 Output and surveys

Purchasing managers index final (manufacturing) Dec Jan Feb Mar Tue Euro area Apr 2 Overall region 46.1 47.9 47.9 46.6 10:00am 9:55am Germany 46.0 49.8 50.3 48.9 9:50am France 44.6 42.9 43.9 43.9 9:45am Italy 46.7 47.8 45.8 9:15am Spain 44.6 46.1 46.8

Purchasing managers index final (services) Dec Jan Feb Mar Thu Euro area Apr 4 Overall region 47.8 48.6 47.9 46.5 10:00am 9:55am Germany 52.0 55.7 54.7 51.6 9:50am France 45.2 43.6 43.7 41.9 9:45am Italy 45.6 43.9 43.6 9:15am Spain 44.3 47.0 44.7

Purchasing managers index final (composite) Dec Jan Feb Mar Thu Euro area Apr 4 Overall region 47.2 48.6 47.9 46.5 10:00am 9:55am Germany 50.3 54.4 53.3 51.0 9:50am France 44.6 42.7 43.1 42.1 9:45am Italy 45.7 45.4 44.2 9:15am Spain 43.9 46.5 45.3

The Euro area composite PMI fell sharply in March, ac-cording to the flash report. If confirmed, the PMI would have almost entirely reversed the improvement since last October. This has already prompted us to revise down our GDP forecast for this year. By country, the flash PMI fell sharply in Germany, but the level was consistent with trend-like growth. In France, the flash PMI fell to a new cycle low, with survey respondents mentioning domestic uncertainties that are restraining spending. Finally, the flash results implied a smaller decline in the periphery, but even that would be disappointing given the low level.

Manufacturing orders Nov Dec Jan Feb Fri Germany Apr 5 Volumes, sa 11:00am Total (%m/m) -2.6 1.1 -1.9 2.0 %oya -1.1 -1.8 -2.1 Domestic (%m/m) 0.3 0.3 -0.6 %oya -5.0 -4.0 -4.6 Foreign (%m/m) -4.7 1.6 -3.0 %oya 2.2 -0.2 -0.3

German orders made a very weak start to the first quarter, with the January level down 8% are on the 4Q12 average.

The disappointment was broad-based across many catego-ries, with export orders particularly weak. Weak bulk or-ders weighed on the outcome. We expect a 2%m/m gain in February, but that would leave 1Q13 still looking weak.

Demand and labor markets

Retail sales Nov Dec Jan Feb Fri Euro area Apr 5 Total sales, volumes 11:00am %m/m sa 0.2 -0.8 1.2 -0.1 %oya, working-day adj. -2.0 -3.0 -1.3

Euro area retail sales may broadly hold the January level, leaving 1Q13 tracking a solid 2.5%q/q saar increase on 4Q12. A big part of this will be related to surging retail sales in Germany, but it will act to offset the weakness in car registrations. The outlook for consumer spending re-mains weak due to the labor market, but 1Q13 may not see much of a decline.

Unemployment Nov Dec Jan Feb Tue Euro area Apr 2 Harmonized measure (Eurostat) 11:00am Unemployment rate (%, sa) 11.8 11.8 11.9 12.0

The Euro area unemployment rate is set to rise further in the coming months due to the weakness in the economy, and it could reach 12% as early as February.

Inflation

Consumer prices Dec Jan Feb Mar Wed Euro area (flash) Apr 3 HICP (%oya nsa) 2.2 2.0 1.8 1.6 11:00am Tue Germany (prelim) Apr 2 %m/m nsa 0.3 -0.5 0.6 8:00am %oya 2.0 1.7 1.5 HICP (%oya) 2.0 1.9 1.8 Baden Wuerttemberg (%oya) 1.7 1.3 1.3 Bavaria (%oya) 2.1 1.8 1.4 Brandenburg (%oya) 1.8 1.4 1.3 Hesse (%oya) 2.0 1.7 1.5 North-Rhine West (%oya) 2.0 1.7 1.6 Saxony (%oya) 2.0 1.8 1.5

Euro area headline inflation began to decline late last year, as energy price inflation dropped sharply. This year, the decline in energy prices was reinforced by a move down in core inflation, which we expect to continue in the coming months. In our view, headline inflation will likely decline by another two tenths in March to 1.6%oya. This move down would be spread across the main countries of the region, including Italy and Spain.

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

36

Economic Research Euro area March 29, 2013


Review of past week’s data Output and surveys

European Commission survey Jan Feb Mar Euro area

% balance of responses, sa

Industrial conf. -14 -11 -13

Economic conf. 89.5 91.1 90.0

Recent prod. trend -17 -12 -14

Production exp. -5 -1 -1

Exp. order books -29 -25 -26

Stocks of fin. prod. 5 5 6

Selling-price exp. 2 1 -2

Construction conf. -29 -30 -30

Retail confidence -16 -16 -18

Service conf. -7.7 -5.4 -6.7

Consumer conf. -23.9 -23.6 -23.5

Economic sentiment fell in March, consistent with last week’s PMI. In terms of levels, both surveys are pointing to further modest contraction in the economy. Neither survey will likely have been much affected by the problems in Cyprus, which emerged toward the end of the sampling period. Hence, a fur-ther decline cannot be ruled out in April. In the details, there were declines in all business sectors of around 1pt. Only con-sumer confidence edged up by a mere tenth, but the level re-mained very depressed. Both business and consumer sentiment are still higher than in October last year, but the momentum has changed.

By country, only Germany (-1.6pts to 100.4) and Estonia (-0.7pt to 102.4) are above their long-run averages of 100; most other countries are much weaker, at below 90. But, while senti-ment improved a bit further (+0.6pt to 86.5) in the periphery, it fell 1.5pts to 89.1 in the non-German core. French sentiment declined 1.7pts to 88.2, Italian sentiment rose 1.4pts to just 85.3, and Spanish sentiment fell 0.9pt to 88.8. Remarkably, Greek sentiment continued to close in on the Euro area average (+1.2pts to 88.1), but any spillover from Cyprus would only be visible next month (in this context, sentiment still increased in Cyprus in this week’s data).

Demand and labor markets

Retail sales

Dec Jan Feb

Germany

Sales ex autos and petroleum, volumes

%m/m sa -2.1 -1.9 3.1 3.0 0.4

%oya sa -2.9 -2.7 1.9 2.0 2.1

German retail sales look very strong so far the first quarter. Following a 3%m/m jump in January, retail sales rose a bit further in February, leaving the Jan/Feb level 9.4% ar above the 4Q12 average. Our consumption tracker is pointing to a 3% consumption gain in the first quarter, which would be a big improvement on the stagnant spending of last year. Revisions are always a risk with the retail data, but tax changes may be driving the gains and may therefore prove lasting.

Unemployment

Jan Feb Mar

Germany Registered

(ch m/m, 000s) -14 -13 -3 0 -8 13

000s, nsa 3138.2 3156.2 3097.8

Unempl. rate (%) 6.9 6.9 6.9

Employment

Dec Jan Feb

Germany Ch m/m, 000s, sa 24 26 25 30 15 44

The German labor market held up well in March. Unemploy-ment rose, but that was likely due to the long winter (accord-ing to the Labor Agency). Other indicators were in line with their recent trends. The unemployment rate held at 6.9%. Vacancies edged a bit lower but the level remained very high. And employment growth actually picked up, in line with the business survey indicators.

Inflation

Consumer prices

Jan Feb Mar

Spain (flash) HICP (%oya nsa) 2.8 2.9 2.6

Financial activity and public finance

Money and credit data

Dec Jan Feb Euro area

M3 (%m/m sa) -0.4 -0.1 0.3 0.4 0.2

M3 (%oya) 3.4 3.5 3.5 3.1

M3 (%oya 3mma) 3.7 3.6 3.3

Loans (%oya)1. -0.2 -0.4 -0.5 -0.4

Loans (m/m, €bn)1. 3.6 2.4 -10.9 -9.9 5.6 1. Loans to nonbank private sector, adjusted for securitization

See Euro area essay for details. Source: Eurostat, European Commission, FSO, Bundesbank, INSEE, ISAE, Istat, INE, BNB, CBS, Markit, and J.P. Morgan

37

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


Japan Small firms’ sentiment improved markedly in March,

adding evidence that positive momentum continued

Retail sales rose in February, but largely in fuel and with large downward revisions to past data

The new BoJ probably will act next week, but this will likely not be the end of attempts to reflate the economy

Small firms business sentiment improved markedly in March in both manufacturing and nonmanufacturing, providing more evidence that recent upbeat momentum has been maintained. To be sure, the jump in the sentiment index probably reflected seasonality as March is the end of the Japanese fiscal year. Also, hard data on exports and business investment have been weak so far. Retail sales are tracking a steady gain this quarter, but largely on fuel sales. Still, we believe that a strong recovery is occurring throughout this year as there are at least four separate tailwinds boosting the Japanese economy: fiscal stimulus, a weak yen, a gradual recovery in the global economy, and front-loaded demand ahead of the consumption tax rate hike scheduled for April next year. The February IP report, including manufacturers’ output projections for March and April, and the March PMI manufacturing report will offer more color on the latest state of the recovery.

Next week is critical for Japanese financial markets. The BoJ will hold its first policy meeting (April 3-4) led by the new governor (Kuroda) and one of two new deputy governors (Iwata), who committed to achieve a 2% inflation target within two years—which looks extremely challenging in our and many market participants’ view. Worth highlighting is that yields on 10-year and 30-year bonds have fallen sharply lately with the market expectation that the new BoJ will purchase long-dated JGBs aggressively in the coming months and even years. Interestingly, moves in the currency and equity markets have been rather mild, probably reflecting that participants in these markets, especially foreigners, had already priced in the BoJ’s expected bold actions at the next policy meeting.

Our call looks for a purchase of 30-year bonds for the purpose of monetary easing as the key signal of the new BoJ’s boldness—and an early start of open-ended purchases of assets at ¥4 trillion per month including reinvestment of matured bonds, and setting policy rate guidance like the Fed. We think the market is expecting about what we are, so a lack of any aggressive action would be a significant disappointment. However, it should be noted that next week is not the only chance for the new BoJ to demonstrate its boldness. The next policy meeting will come within three weeks (April 26), and Kuroda likely will reiterate his strong

commitment in the coming weeks and months, especially if the market reaction is unfavorable. More importantly, Prime Minister Abe most likely will demand that the central bank do more. The latest poll by the Nihon Keizai Shimbun showed that the approval rate of Abe’s administration remained high at 69% (70% a month ago). Even if the market is disappointed next Thursday, it’s not the end of the game, in our view.

Small firms are upbeat, partly due to seasonality The Shoko Chukin small firm sentiment jumped 3.7pts to 49.7 in March, the highest level since March 2007. The strength was broad-based as sentiment in both the manu-facturing and the nonmanufacturing sectors soared. The manufacturing DI rose 3.5pts to a year-high of 48.3 in March, with only the electric machinery sector showing a m/m drop, albeit from a very high level. The nonmanufacturing DI rose 3.8pts to 50.7, the highest level since November 2006. The March rise in the nonmanufacturing DI reflected improvement in the assessment of business conditions by all eight subsectors, especially restaurants/hotels (amid probable acceleration in consumer spending) and construction (likely due to a boost from the supplementary budget).

Source: Shoko Chukin Bank

Source: Bloomberg

35

40

45

50

55

2010 2011 2012 2013

DI, boxes show outlook for April

Small firms business sentiment

Manufacturing

Nonmanufacturing

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Jan 12 Apr 12 Jul 12 Oct 12 Dec 12 Apr 13

% for both scales

JGB yields

10-yr 30-yr

38

Economic Research Japan March 28, 2013

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

It should also be noted that the strength of the March DI needs to be discounted somewhat as the DI has risen in every March during 2002-12, by an average of 2.7pts. Looking forward, the outlook DI predicts the first drop in five months in April. However, the predicted 0.9pt decline in April likely also reflected the seasonality of this survey as the index fell on average 0.6pt between March and April in the previous expansion during 2002-07. Also worth noting is that the predicted index level in April is still well above the 1Q average (48.8 vs. 46.7).

Retail sales rose in February, but… Retail sales rose 1.6%m/m sa in February. While the solid gain in the month is encouraging, it should be noted that the annual revision in seasonal factors and re-basing of the index from 2005 to 2010 led to a significant downward revision in the January print from +2.3% to -0.2%. While the average of January and February is tracking a 3.7% annualized gain from the 4Q average, showing a steady recovery of sales, this is largely driven by sales of fuel (+22.5% ar). After the revision, the retail sales index moved closer to the Cabinet Office’s private consumption index, which is the most reliable indicator for tracking consumption in GDP. Accordingly, we maintain our forecast for 1Q GDP-based consumption at 3.5%q/q saar after a 2.0% gain in 4Q, but we need confirmation from the Cabinet Office’s index for February (due around April 5) to be more confident in this forecast.

Households’ financial assets increased According to the BoJ’s flow of funds statistics, households’ financial assets outstanding increased 3.1%oya in 2012 after being little changed in 2011. The level (¥1,547 trillion, 325% of GDP) is still below that at the end of 2005 (¥1,572 trillion) and 2006 (¥1,586 trillion), but the ratio to GDP is the highest on record, starting in 1997. The increase in assets was broad-based in terms of asset class: cash and deposits (+2.0%), equities (+12.3%), insurance and pension reserves (+2.5%), and investment trust (+13.3%). The only major class that fell was bonds. The gain in equity, reserves, and investment trust mainly reflected a rise in value from higher equity prices and a weaker yen—57% of assets in investment trust are foreign securities—rather than new purchases. The gain in financial assets’ value should have boosted consumption, at least to some extent.

Government debt continues to rise The government financial deficit (fiscal deficit) in 2012 (¥38.1 trillion, 8% of GDP) was less than that in 2011 (¥41.2 trillion, 9%). Note, though, that the deficit in these data is not exactly same as in the national accounts, which is regarded as official data. There is a relatively large

discrepancy between these two. Indeed, the official national accounts deficit was ¥42.0 trillion in 2011.

Meanwhile, general government gross debt increased 4.2%oya, reaching ¥1,095.6 trillion (230% of GDP) at the end of 2012. Net debt—gross debt minus assets held by the government (mainly social security funds)—rose more at 7.2% to ¥612.5 trillion (129% of GDP). JGBs outstanding (including TBs) were ¥960 trillion, of which 12.0% was held by the BoJ, 10.6% by the general government and public firms, and 8.7% by foreigners.

Source: METI, Cabinet Office

Source: BoJ

Source: BoJ

-10

-5

0

5

10

15

20

2010 2011 2012 2013

%3m/3m, saar

Retail sales and real private consumption

Retail sales

Retail sales(before revision)

Real consumption

240

260

280

300

320

340

1250

1320

1390

1460

1530

1600

97 99 01 03 05 07 09 11 13

Yen tn, eop

Household financial assets% of GDP

Outstanding

% of GDP

0

50

100

150

200

250

98 00 02 04 06 08 10 12

% of GDP

General government debt

Gross

Net

39

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


Data releases and forecasts Fri Purchasing managers survey (manufacturing) Mar 29 Diffusion index 8:15am Dec Jan Feb Mar

Overall index 45.0 47.7 48.5 49.0

Data not released at time of publication.

Fri Consumer prices Mar 29 %oya 8:30am Dec Jan Feb Mar

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

Nationwide Overall -0.1 -0.3 -0.5 Core (ex fresh food) -0.2 -0.2 -0.3 Ex food and energy -0.6 -0.7 -0.9


Fri Labor force survey Mar 29 %m/m sa 8:30am Nov Dec Jan Feb

Unemployment rate (% sa) 4.2 4.3 4.2 4.1 Labor force (%m/m sa) -0.1 -0.3 0.6 Total employment (%m/m sa) -0.1 -0.4 0.5 Unemployed (%m/m sa) -0.4 1.8 0.4 Job offers ratio (sa) 0.82 0.83 0.85 0.86


Fri Household survey of expenditures Mar 29 %m/m sa, incl. agricultural worker households 8:30am Nov Dec Jan Feb

All households Real spending 0.1 -0.1 1.9 0.3 %oya 0.2 -0.7 2.4 -0.5

Core -0.2 0.6 1.8 %oya 0.5 0.1 2.2

Worker households Real disposable income -0.5 -0.4 -0.4 Propensity to spend (%) 74.7 75.0 76.7


Fri Industrial production-preliminary Mar 29 %m/m sa 8:50am Nov Dec Jan Feb

Production -1.4 2.4 0.3 2.0 Shipments -0.8 4.0 -0.3 Inventories -1.2 -1.2 -0.4 Inventory/shipments ratio -0.3 -0.6 -3.2


Fri Housing starts Mar 29 2:00pm Nov Dec Jan Feb

Housing units %oya 10.3 10.0 5.0 -1.8 %m/m sa -6.4 -2.9 -1.9 4.2 Mn units saar 0.91 0.88 0.86 0.90


During Cabinet Office private consumption index the %m/m sa week Nov Dec Jan Feb

Overall 0.3 0.0 0.5 0.3

This index, our preferred monthly consumption indicator, should show a second consecutive gain in February. Sentiment indicators for both consumer-oriented businesses and consumers, as well as some activity indices have been indicating a strong response from Japanese consumers to the marked policy shift and the rise in asset prices triggered by that shift.

Mon BoJ Tankan Apr 1 DI, “good” minus “bad” 8:50am Sep Dec Mar Jun

Large firms Manufacturers -3 -12 -7 1 Nonmanufacturers 8 4 10 18

Small firms Manufacturers -14 -18 -15 -12 Nonmanufacturers -9 -11 -7 -5

FY2012 FY2013 Capex projections, %oya Sep Dec Mar Mar

Large firms 6.4 6.8 6.0 1.5 Small firms 0.0 6.2 8.0 -15.0

Current profit projections, %oya Large firms 0.0 -2.2 -1.5 12.0 Small firms 4.9 2.6 1.2 25.0

The large manufacturers’ business conditions DI will probably continue its improvement since December 2012 in March 2013, amid the rebound in manufacturing output and the further weakening of the yen. Still, the DI is not expected to recover to an above-neutral level, though the large manufacturers’ outlook DI will likely show respondents’ expectations for a revival of “good” conditions in the coming few months (positive readings represent respondents’ overall assessment on business conditions as “good”).

Sentiment of large nonmanufacturers is likely much more upbeat, as consumer spending is being boosted by higher equity prices and the weaker yen while the supplementary budget is supporting public works.

We expect firms’ plans for sales/profits/capex in FY2013 will not be noteworthy, as firms are thought to remain quite cautious about prospects in the medium to long term.

Sources: Markit, Statistics Office, METI, MLIT, BoJ, CAO, and J.P. Morgan

40

Economic Research Japan March 28, 2013

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

Mon Auto registrations Apr 1 2:00pm Dec Jan Feb Mar

Total %oya -3.4 -12.9 -12.2 -20.0 Mn units saar 3.10 3.21 3.27 3.14

J.P. Morgan adjusted (incl. light vehicles) Mn units saar 3.84 4.04 4.1

Auto producers’ predictions for a decline in their March output, which was included in the latest January IP report, as well as the recent softening in sentiment DIs for the auto sector, suggest that new auto registrations will slip some in March after the solid recovery since late last year.

Tue Employers' survey Apr 2 %oya 10:30am Nov Dec Jan Feb

Total earnings per employee -0.8 -1.7 0.1 Contract wages -0.3 -0.6 -0.7 -0.5

Scheduled payments -0.1 -0.6 -0.7 Overtime payments -1.3 -0.2 -1.5

Special payments -9.2 -2.8 22.1

Total hours worked 1.6 -1.4 -1.7

Regular employment 0.6 0.8 0.6 Full-time workers -0.1 -0.3 -0.5 Part-time workers 2.3 3.2 3.1

It will probably take a while to see a clear improvement in total wages, given that the number of full-time employees with higher wages is now declining slightly while the number of part-time employees with lower wages is increasing at a steady pace. Note that there has been a tendency in this survey for initial readings to be revised down significantly in final reports.

Wed Services/composite PMIs Apr 3 Diffusion index 8:15am Dec Jan Feb Mar

Services (business activity) 51.5 51.5 51.1 Composite (output) 49.3 50.4 50.2

Review of past week’s data

Corporate service prices (Mar 26) %oya

Dec Jan Feb

Overall -0.4 -0.2 0.0 0.1

Ex international transport -0.4 -0.4 -0.2

In February the CSPI ex. international transportation extended its string of oya declines since June last year. The three-month moving average of the index edged down from the lowest level in its history, which began in 2005, that had been marked in the previous month. Although the overall index has recently been boosted by an FX-led rise in international transportation prices, the report continued to point to the softness in corporate service prices.

In February, advertising service fees, which are thought to be a timely reflection of business sentiment, firmed to +0.9%oya from -1.0% in January and -2.3% in 4Q, helped by high-priced large deals during the month. Meanwhile, office rental fees continued to mark a meaningful oya decline at -2.6%, and the pace of decline for software development fees accelerated to -2.7%oya from -2.0% in January and -1.7% in 4Q. Construction machinery rental and temporary material rental fees, which were likely boosted by reconstruction demand, appear to be stabilizing (the February readings were +3.8%oya and +8.5%oya, respectively).

Shoko Chukin small firm survey (Mar 26) Diffusion index

Jan Feb Mar

Sentiment index 44.3 46.0 48.0 48.8

Manufacturing 41.1 44.8 47.1

Nonmanufacturing 46.9 46.9 50.2

The headline index for March rose a sharp 3.7pts to 49.7 (the highest level since March 2007); the rise was broad-based. The manufacturing DI rose 3.5pts to a one-year high of 48.3 in March, with only the electric machinery sector showing a m/m drop, albeit from a very high level (the recent softness in exports appears to have weighed on sentiment in this sector). At the same time, the nonmanufacturing DI rose 3.8pts to 50.7, the highest level since November 2006. The March rise in the nonmanufacturing DI reflected improvement in the assessment of business conditions by all eight subsectors, especially restaurants/hotels (amid the apparent pickup in consumer spending) and construction (likely due to a boost from the supplementary budget). Note, though, that the strength of the March DI should be discounted somewhat, as the DI has risen in every March during 2002-12, by an average of 2.7pts.

Apart from general business sentiment, it is encouraging that the output price DI marked a positive reading for the first time in the current recovery (marked 0.4), and the input price DI continued to rise rapidly amid yen depreciation. Indeed, the profit margin DI improved, though it remained within negative territory, for the second consecutive month. The employment DI remained upbeat (rising further to 1.4 from 0.2 in February), indicating a growing sense of labor shortage among small firms.

Commercial sales (Mar 28) %oya

Dec Jan Feb

Wholesale sales -2.5 0.1 -1.3

Total retail sales 0.2 -1.1 -2.5 -2.3

%m/m sa 0.0 -0.2 1.2 1.6

See main essay.

Sources: Japan Auto Dealers Association, MHLW, BoJ, Shoko Chukin Bank, METI, and J.P. Morgan

41

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


Canada GDP rebounds in January

Led by a jump in manufacturing output

But growth likely still sub-trend in 1Q

Inflation jumps up in February on a surge in gasoline prices

Economic activity showed more strength in January after a dismal December. Monthly GDP rebounded, rising 0.2%m/m in January after having fallen 0.2% in December, led by a jump in manufacturing output. The CPI surprised on the up-side in February after months of downside surprises. Led by a jump in gasoline prices, headline inflation jumped back into the BoC’s 1%-3% comfort zone. With global commodity prices on the rebound, headline inflation should continue to edge up going forward. Core inflation also rebounded in Feb-ruary but given the widening of the output gap in the second half of 2012, it will probably remain sticky in the near term.

The Canadian economy rebounded in January with GDP ris-ing 0.2%m/m after having fallen 0.2% in December. Goods production, up 0.4%m/m, led the rebound with services out-put up 0.2%m/m. Compared to a year ago, GDP was up 1.0% in January versus 0.7% in December. Over the past six months, GDP rose an anemic 0.6% ar in January, but this is up from 0.5% ar in December.

After a very weak 4Q12, the January reading gets 1Q13 off to an OK start. But given the decline in December, the level of GDP in January is only 1.3% ar above the 4Q average. It will take monthly gains in February and March on par with the one in January to reach our 1.6%q/q expected growth for the entire quarter. There is little hope of reaching the Bank of Canada’s expectation from the January MPR for a 2.3%q/q ar increase in 1Q.

The rise in goods production was led by an outsize increase in manufacturing output, up 1.2%m/m, led by a 1.7%m/m surge in output of durable goods. But even this jump did not offset the 1.9%m/m decline in manufacturing in December. Construction slipped 0.1%m/m (concentrated in residential), its first monthly decline in six months. Mining and oil and gas extraction was up 0.2%m/m, its fourth consecutive monthly increase.

Services production posted a more modest 0.2%m/m in Janu-ary after having been unchanged in December. Wholesale trade (+0.7%m/m) and real estate (+0.3%) led the rise in ser-vices output, though the end of the hockey labor dispute led to a 4.1%m/m jump in arts, entertainment, and recreation.

The headline CPI inflation rate jumped up to 1.2%oya in Feb-ruary from 0.5%oya in January, which was the lowest oya rate since October 2009. On a monthly basis, the headline CPI also jumped up 1.2%m/m nsa after a 0.1%m/m nsa rise in January. There is typically a seasonal boost in February, but this year it was much larger than usual. The seasonally adjusted headline index rose 0.7%m/m in February after having been unchanged in January. In a reversal of the January slowdown, a rebound in gasoline prices (among an outsize jump in over-all transportation prices) accounted for most of the accelera-tion in the oya rate in February. Gasoline prices were up

Source: Statistics Canada



-1.5-1.2-0.9-0.6-0.30.00.30.60.9

%m/m

Monthly real GDP

05 07 09 11 13

-1

0

1

2

3

4

5

%oya

Consumer prices

Total

Core

98 00 02 04 06 08 10 12

-5.0

-2.5

0.0

2.5

5.0

2008 2009 2010 2011 2012 2013 2014

%oya

Employment and GDP

GDP

Employment from labor force survey

42

Economic Research Canada March 28, 2013

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

3.9%oya in February versus a 1.8%oya decline in January. This accounted for nearly half of the acceleration in the head-line oya rate. While the jump in the headline index in Febru-ary was more than expected, it was likely at least in part a correction for the unusual weakness in prices since November and is not likely to be repeated. With the February reading, headline inflation appears to be right on track to realize the 0.9%oya rate the BoC anticipates for all of 1Q13.

The core index also exhibited an outsize jump in February, rising 0.8%m/m nsa after having edged up 0.1%m/m nsa in January. Compared to a year ago, the core index rose 1.4%, up from only 1.0%oya in January. After seasonal adjustment, the core index was up 0.4%m/m versus 0.1%m/m in January. So far in 1Q, core inflation is averaging 1.2%oya, still below the BoC’s 1.4% expectation and indicative of the economy also underperforming the Bank’s forecasts.

After underperforming both the market’s and the Bank’s ex-pectations recently, inflation roared back in February. In that context, some of the surprising strength in February appears to be payback for some of the previous surprising weakness, and not the beginning of a new trend. We doubt that this report will have any impact on the Bank’s current view of policy. The trend inflation environment is consistent with the current per-formance of the economy. One month’s reading will not likely alter that. The Canadian economy continues to be hit by ex-ternal headwinds, and so we look for the Bank to remain on the policy sidelines for quite a while—at least into 1Q14. The US economy is proving to be more resilient in 2013 than we had forecast. This should provide a boost to Canadian activity during this year and allow the Bank to resume its normaliza-tion of policy by early 2014.

Next week sees the release of the March labor force survey. Apart from a decline in employment in January, job gains have markedly outperformed the overall economy over the past seven months. Over that period, the economy has barely grown yet employment is up 213,000, or 30,400 per month. The current performance of the overall economy is consistent with monthly job gains of only around 10,000. So, we continue to look for some significant retreat in job gains and expect no change in March.

Data releases and forecasts Week of April 1 – 5

Fri Labor force survey Apr 5 Sa 8:30am Dec Jan Feb Mar

Employment (mn) 17.67 17.65 17.70 17.70(ch, m/m, 000s) 31.2 -21.9 50.7 0.0

Dec Jan Feb Mar (%m/m) 0.2 -0.1 0.3 0.0(%oya) 1.8 1.6 1.9 1.5

Labor force (mn) 19.03 18.97 19.03 19.05(%m/m) 0.1 -0.3 0.3 0.1(%oya) 1.4 1.0 1.5 1.3

Unemployment rate (%) 7.1 7.0 7.0 7.0Avg hrly earnings (%oya) 2.5 2.0 2.2 2.0Hours worked (%m/m) 0.1 0.2 0.4 0.2

Fri International trade Apr 5 Sa 8:30am Nov Dec Jan Feb

Balance (C$ bn) -2.00 -0.33 -0.24 0.1Exports (%m/m) -0.5 0.3 2.1 3.1Imports (%m/m) 3.9 -3.9 1.9 2.2Real balance -2.18 -0.49 -0.49

Fri Ivey PMI Apr 5 10:00am Dec Jan Feb Mar

Composite index¹ (sa) 49.2 52.8 49.6 50.2Purchasing index (sa) 52.8 58.9 51.1 52.4Purchasing index (nsa) 43.1 54.8 51.6 54.6

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


Consumer price index (Mar 27) %m/m nsa, unless noted

Dec Jan Feb

Total CPI -0.6 0.1 0.8 1.2

%oya 0.8 0.5 0.9 1.2

BoC core CPI -0.6 0.1 0.5 0.8

%oya 1.1 1.0 1.1 1.4

Ex food & energy -0.6 -0.1 0.5 0.9

%oya 0.9 0.6 0.8 1.1

CPI-XFET (%oya) 0.7 0.5 1.0

Monthly GDP (Mar 28) Sa

Nov Dec Jan

Total, %m/m 0.3 -0.2 0.2

%oya 1.5 1.4 0.8 0.7 1.0

Industrial PPI (Mar 28) %m/m nsa, unless noted

Dec Jan Feb

Total 0.0 0.0 0.1 0.5 1.4

%oya 0.3 -0.2 -0.1 0.1 1.0

Ex energy 0.1 -0.1 0.1 0.3 0.6

%oya 0.3 0.0 0.2 0.2 0.7

Source: Statistics Canada, Richard Ivey School of Business

43

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 Growth is starting to show signs of improvement after a

soft start of the year

The services sector should be a key driver as credit and employment continue to expand

The external sector, however, remains a source of concern and poses a downside risk for growth

After a worrisome start of the year, with most economic releases surprising to the downside, we are now seeing some relatively upbeat numbers that point to a gradual take-off during this year. This has been particularly the case for the services sector, while manufacturing activity remains soft. The economic activity index was stronger than expected in January, rising to 3.2%oya from 1.4% a month earlier. The stronger print was mainly explained by the resilience of services output, which advanced at a robust 3.5%oya pace, up from 1.9% in December. Sequential figures showed output in the services sector has been persistently accelerating since bottoming last October, reaching an annualized 5.1% pace in the three months through January.

Though moderate, the expansion in formal employment, coupled with credit growth, rising consumer confidence, and falling inflation, is likely to have boosted the services sector in the four months through January, sustaining its healthy expansion. We expect resilience in services output to help offset softness in manufacturing. However, the slow start in manufacturing is expected to have a negative carryover effect on growth in the first quarter. Despite managing to lift from December’s -1.8%oya, factory output remained fairly weak at 1.7%, the second lowest reading in the expansion to date. Furthermore, factory output has contracted for three months in a row, contrasting with dynamics in the US, where manu-facturing has lifted significantly from last quarter’s weakness (first chart).

We continue to look for manufacturing activity to rebound over the coming months, particularly since uncoupling between the US and Mexico’s manufacturing cycles has historically proved to be short-lived. Nevertheless, as mentioned, the negative carryover from weak prints early in the year is likely to hurt industrial production’s performance in the first quarter of 2013.

Diverse growth across sectors The diverse performance of the domestic and external sectors was further echoed by the trade balance for February, which despite showing softer-than-expected imports signaled healthy domestic demand and failure of manufacturing to lift

fully from 4Q12 weakness. February’s trade balance posted a surprising US$46 million surplus, contrasting with market expectations for a large US$1.2 billion deficit. The deviation in February came mainly on a weak performance of imports, which were virtually flat on a monthly basis and down 1.5%oya.

Within imports, consumer-related imports were the most surprising, dropping 1.4%m/m and leading to an annual decline of 4.4% in February. It is worth noting, however, that the fall was explained by the volatile oil-related component (-30%oya), as in fact non-oil consumer imports rose 12.8%,

Source: INEGI

Source: INEGI

Source: INEGI and IMEF

-10

-5

0

5

10

15

20

09 10 11 12

Industrial production and services output

%3m/3m saar

IP

Services

-10

-5

0

5

10

-40

-20

0

20

40

04 05 06 07 08 09 10 11 12 13

Services outputImports%oya, 3mma

Non-oil consumer imports and services output

40

45

50

55

60

-20

-10

0

10

20

%oya

GDP and IMEF manufacturing PMI

Index

05 07 09 11 13

GDPPMI

44

Economic Research Mexico March 28, 2013

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]

Steven Palacio (52 55) 5283-1651 [email protected]

topping our forecast for a 12% increase and suggesting domestic consumption remains healthy (second chart previous page). Nevertheless, the all-important intermediate goods component—highly correlated with manufacturing exports—fell 0.6%m/m and -1.5%oya.

Although remaining weak, exports were a touch better, at least in sequential terms. The year-over-year rate was in line with our expectations at -2.9%, weighed down in part by leap-year effects. On a monthly basis, however, exports popped up 4.9%m/m, reversing the 4.7% drop posted in January. The rise in exports was supported by a large 5.3%m/m rebound in manufacturing exports, which nevertheless was not sufficient to offset the 7.7% decline posted a month earlier, leaving the year-over-year rate at a subdued -1.5%. As mentioned above, we are still expecting the manufacturing sector to lift, catching up with the rebound in US manufacturing early this quarter. Nevertheless, the lift is likely to be limited and growth should continue being diverse in the coming months, with the services sector remaining the main driver ahead.

Next week’s releases We expect next week’s releases to show a modest lift in activity late in the first quarter. In this context, we are looking for March manufacturing PMI to support this view, ticking up marginally to 51.7 from 51.5, pointing to a mild pickup in the sector’s momentum and validating our view of a gradual improvement in overall economic activity (third chart previous page). Regarding nonmanufacturing activity, it is likely that calendar effects related to Holy Week provided a mild boost to the services sector. As a result, we expect the index to rise to 51.8 in March, from 51.1 in February.

We look for consumer confidence—to be released on Thursday—to inch down to 95.4 in March from 95.5 a month earlier. The seasonally adjusted figure should mimic this move, falling to 96.9 from 97.5. The rapid reversal in agricultural prices has pushed inflation to 4.1%oya, up from the 3.2% trough reached early in the year. We expect this increase to dampen consumer confidence through its negative impact on the purchasing power component. However, the fact that the peso strengthened in March could offset some of this negative impact—an appreciated peso is historically correlated with higher consumer confidence. Although confidence has moved down lately, it remains high by post-crisis standards. We continue to see the gradual improvement in formal employment dynamics, as well as the healthy expansion of consumer credit, supporting sentiment over the next months.


Mon Family remittances Apr 1 11:00am Nov Dec Jan Feb

Total (US$ bn) 1.7 1.7 1.5 1.7 %oya -5.1 -4.4 -2.3 -4.3

Mon IMEF PMI survey Apr 1 Index, nsa 2:00pm Dec Jan Feb Mar

Manufacturing 51.4 51.7 51.5 51.7 Nonmanufacturing 54.3 51.9 51.1 51.8

Tue Central bank foreign reserves Apr 2 %m/m sa, unless noted 11:00am Mar 8 Mar 15 Mar 22 Mar 29

Gross reserves 165.4 165.7 165.8 ___

Thu Consumer confidence, INEGI Apr 4 Jan 2003=100 10:00am Dec Jan Feb Mar

Composite 99.0 100.0 95.5 95.4


Indicator of overall economic activity (IGAE) (Mar 25) %oya, unless noted

Nov Dec Jan

%oya 3.9 1.4 2.5 3.2

%m/m sa 1.3 -1.0 0.5 0.2

Central bank foreign reserves (Mar 26) US$ bn

Mar 7 Mar 15 Mar 22

Gross reserves 165.4 165.7 ___ 165.8

Trade balance (Mar 27)

Dec Jan Feb

Balance (US$ mn) 962 -2,866 -1,424 46

Exports (US$ bn) 30.2 27.3 29.2 29.1

%oya 3.5 0.0 -2.5 -2.9

Imports (US$ bn) 29.2 30.2 30.6 29.1

%oya 0.2 9.5 3.8 -1.5

Source: INEGI, Banxico, and IMEF

45

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


Brazil Meaningful increases in inflation projections justify

recent shift in BCB’s communication

Maintaining the call for a 25bp Selic hike in May, after remaining on hold in April

Some moderation in labor markets, and a marginal tightening in bank credit conditions in February

Amid myriad communications concerning inflation and monetary policy, authorities continue to move gradually and cautiously toward a rate tightening. This week, the 1Q13 Inflation Report contained significant increases in official inflation projections for both the short and long term, when assuming the current Selic rate remains at 7.25%. At the same time, it reaffirmed that monetary policy needs to be cautious on the back of ongoing external and domestic uncertainty. The domestic uncertainty around the pace of the economic recovery should be heightened with next week’s February IP report, which is expected to post a 2%m/m sa contraction, following a 2.5% increase in January. There are no hard data for March yet, but sentiment surveys are mixed, with the FGV manufacturing index declining further while services surveys are improving.

1Q13 Inflation Report endorses a monetary tightening, with caution In sync with the recent BCB communication signaling in-creased inflation concerns, this week’s 1Q13 Inflation Report showed a meaningful deterioration in BCB’s numerical infla-tion projections, which now anticipates IPCA around 100bp above the 4.5% target midpoint over the next two years, in-cluding breaching the 6.5% target ceiling in the first two quar-ters of this year. In addition, the report expressed a lot of concern with the broad-based deterioration in inflation expec-tations that have been affected by both the rate of inflation and the dispersion of price increases. It is worth mentioning that despite the hawkish projections in this report, it reaf-firmed that remaining domestic and external uncertainty rec-ommend a cautious monetary policy, thereby reducing the chances of an immediate Selic rate hike. In this context, we keep our call that after remaining on hold in April, the COPOM will start to increase the Selic rate at the May 29 meeting, with a 25bp hike, followed by two more hikes of 50bp each in July and August.

According to the BCB projections, with the Selic rate at 7.25% and FX at 1.95, IPCA does not converge to target even when including tax reductions in food and health care prices. The baseline projection that assumes the FX rate is flat at 1.95 and the Selic rate at 7.25% for the whole period now

anticipates IPCA in 2Q13 at 6.7% (above the target ceiling), up from 5.5% in the previous report. The end-2013 projection jumped to 5.7% (from 4.8%), and the end-2014 IPCA was increased to 5.3%, from 4.9% (table). Even the newly released

Forecasts in Inflation Report Mar 12 Jun 12 Sep 12 Dec 12 Mar 13

IPCA %Dec/Dec forecast baseline scenario: 12m ahead 4.9 5.0 4.6 4.8 5.4 End-2013 (target: 4.5%) 5.2 5.0 4.9 4.8 5.7 End-2014 (target: 4.5%)

4.9 5.3

8 quarters ahead 5.1 5.1 5.1 4.9 5.4

Macro assumptions in the baseline scenario:

Selic rate (% p.a.) 9.75 8.50 7.50 7.25 7.25 R$/US$ 1.75 2.00 2.05 2.05 1.95 IPCA %Dec/Dec forecast market scenario: Focus 2011

End-2013 (target: 4.5%) 5.3 4.9 4.8 4.9 5.8 End-2014 (target: 4.5%)

4.8 5.1

8 quarters ahead 5.2 5.1 5.0 4.8 5.2

Macro assumptions in the market scenario: Selic rate (% p.a. by Dec 13) 10.00 8.92 8.07 7.25 7.79 Selic rate (% p.a. by Dec 14) 8.29 8.33 Selic rate (% p.a. by Dec 15) 8.29 R$/US$ (by Dec 13) 1.75 1.89 2.00 2.08 2.00 R$/US$ (by Dec 14) 2.02 2.05 R$/US$ (by Dec 15) 2.07 Source: BCB

Source: IBGE

Source: BCB

-2

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014

%oyaReal labor income decelerating

Employment

Real labor income

5.00

5.22

5.44

5.66

5.88

6.10

1.8

1.9

2.0

2.1

2.2

2.3

2.4

2.5

Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13

% of arrears (over 90days), both scalesDelinquency rates from corporates and households

Corporates

Households

46

Economic Research Brazil March 28, 2013

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

1Q15 IPCA projection is at 5.4%, reinforcing that the current monetary policy stance is not consistent with convergence to the target midpoint. Besides unchanged FX and interest rates, this baseline projection is already factoring in the recent tax reductions on food and health care prices. Furthermore, the BCB projections assuming market scenarios for FX and rates (as of March 8) are slightly lower but still do not converge to targeted rates. In this context, it seems that BCB models indi-cate that the market consensus for rates prevailing in the be-ginning of this month for a modest tightening cycle (around 100bp) starting in the last quarter will not be sufficient to promote inflation convergence within the forecast horizon.

Good credit flow and lower delinquencies in February The February bank credit report was good news in terms of loan growth and credit quality, but also showed that the recent widening in the local yield curve has started to limit the decline in the interest rates charged by banks to final borrowers. Public banks continue to lead the credit growth, expanding even more their share of outstanding bank credit to 48.4% (from 48.2%), while private sector local banks stabilized their participation at 35.6%, and foreign banks shrank further to 16.0%.

Corporate and household loans rose in February. Although it is difficult to gauge what’s going on with the new loans se-quentially due to the recent methodological change in this report that broadened the types of credit covered but short-ened the time series (see “Brazil: A broader (but shorter) picture of bank credit”), it appears that the flow of new loans increased in February for both corporates and households. The daily average of loans for households increased 18.2%oya (deflated by IPCA) in February, with both ear-marked and non-earmarked loans rebounding from January’s slowdown, while the loans for corporates improved in Febru-ary on the back of private sector-driven non-earmarked credit.

Easing in conditions was halted, but improved quality was positive. The long-standing improvement in credit conditions was interrupted in February, with a marginal increase in the rates charged on households (24.9%, from 24.7% in January), and a decline in the average maturity of new corporate loans (57 months, from 69.5). We believe this marginal tightening in credit conditions reflects the recent widening of the local yield curve triggered by market expectations of a monetary tightening cycle. Despite this tightening in conditions, credit quality continues to improve on a very gradual basis, with the delinquency rate of non-earmarked loans declining to 7.7%, the lowest level since December of 2011.

Despite lower unemployment rate, moderate wage pressures in February The February unemployment rate printed at 5.6%, below our estimate (5.8%) and slightly below the market consensus of 5.7%. Seasonally adjusted, the unemployment rate slipped to 5.4% from 5.5% in January, mostly on the back of a 0.9%m/m sa decline in the labor force. On the other hand, those employed decreased 0.5%m/m sa (from 0% in January), in line with the signs of moderation in net hiring from the CAGED report for formal labor markets. The decline in em-ployment is probably a lagged response to slower growth observed recently, and should ease some of the labor market pressures this year. Looking at labor income data, February real wage growth slowed to 0.9%3m/3m saar from 3.2% in January and 6.1% in December. Real wages are slowing on the back of recent upward inflation pressures, but also due to nominal wages decelerating. This could be a result of the smaller increase in minimum wage this year (9% versus 14% in 2012). In that context, we look for this gradual moderation in labor income growth to persist, although we do not expect a disruptive hit to consumption, as we still think credit condi-tions will remain supportive of household spending.

Data releases and forecasts Week of April 1 – 5 Tue Industrial production Apr 2 8:00am Nov Dec Jan Feb

%m/m sa -1.3 0.2 2.5 -2.0 %oya nsa -0.8 -3.5 5.6 -2.3


General prices (IGP-M) Jan Feb Mar

%m/m 0.3 0.2 0.17 0.21 %oya 8.2 8.4 8.02 8.06

National unemployment Dec Jan Fev

Open rate, nsa (30 days) 4.6 5.4 5.8 5.6

Public sector borrowing requirement Minus denotes surplus Dec Jan Jan

R$ bn Primary -22.3 -30.3 -9.0 3.0 12-month sum, as % of GDP Primary -2.4 -2.5 -2.4 -2.2 Nominal 2.5 2.4 2.3 2.7 Net debt, % of GDP 35.0 35.2 35.4 35.7

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

47

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


Argentina Export proceeds sold to BCRA showing a recovery

The spot parallel FX spread remains high, close to 66%

US courts to be in spotlight again next week, as Argen-tina files an alternative “pro rata” formula

After the severe underperformance of agro exports in the first two months of the year, the latest available data of export pro-ceeds sold to BCRA show a recovery. Indeed, our estimated weekly average of tons exported (USD export sales of farmers divided by the price of crops) shows a converging path with the weekly average of the past five years (first chart). However, in cumulative terms, exporters have sold 16.9% less in dollars ytd than in 2012. We expect exporter dollar sales to gain mo-mentum as the soy crop harvest approaches, although we can-not rule out further tensions between the government and farmers, which could affect exports.

In spite of the increased pace of exporters’ dollar sales to BCRA, gross international reserves have declined to US$40.6 billion (-US$2.2 billion ytd, -US$0.4 million in the last five days). It should be noted that BCRA reserves (ex-cluding both commercial banks’ deposits and Treasury depos-its at the central bank) have declined by US$0.3 billion ytd to US$33.2 billion. Therefore, the bulk of the gross reserves decline is explained by Treasury repaying transitory peso loans (ARS credit from BCRA) with dollars for US$1.0 bil-lion, as well as commercial banks’ reserves contracting US$0.74 billion ytd. Finally, the decline of gross international reserves on Wednesday (US$223 million) is explained by the service of Par bonds (coupon payments for US$ 185 million).

Taking advantage of the increasing dollar sales of farmers, the authorities managed to assuage the pressures on the parallel FX market. Indeed, the FX spread is currently running at 66%, still high but down from 70% last week. We believe the government is likely to keep accelerating the official crawling peg, to around 30% (the current depreciation pace is 20.1% 20d/20d ar, compared to 16.1% by the end of February). Last week we emphasized that, as a necessary condition for an acceleration of the official crawling peg, “price agreements” with supermarkets should remain in place. Therefore, this week’s announcement of the agreement extension for another 60 days did not come as a surprise. Moreover, we expect food price controls to remain in place up to the elections (to be held in October), with relatively minor price adjustments in May.

Next week the market focus will likely be directed to the NY courts, as Argentina will be filing an alternative “pro rata” formula on Friday, March 29 (see “Argentina: Preparing for the March 29 filing: The PDI ‘swing factor’ and relevant

Sources for all charts: BCRA, CIARA, and J.P. Morgan

0

1

2

3

1 5 9 13 17 21 25 29 33 37 41 45 49

% of total agricultural export proceeds sold to BCRA, weekly basis

Agro export FX proceeds

2013

2008Avg 2012-07 (exc. 2008)

2008 agro strike

Weeks of the year

30

35

40

45

50

55

Jun-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

US$ bn

Gross international reserves

Reserves of the central bank

Gross international reserves

3.8

4.8

5.8

6.8

7.8

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Official

Parallel (implied in bond prices)

USD/ARS, inverse scalePeso exchange rates

Capital controls tightened

2.8

3.3

3.8

4.3

4.8

800

900

1000

1100

1200

1300

1400

1500

Sep 12 Nov 12 Jan 13 Mar 13

Bp spread

Spread

Benchmark sovereign bond: Discount 33

Adverseruling

Under/outperformance vs. market

Ratio of spreadsArg/EMBIGExtension

of staysAppeals

Courthearing

48

Economic Research Argentina March 28, 2013

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

NPVs (...and thoughts on the ‘Ambito deal’),” March 27). On March 26, the NY Appeals Court denied Argentina its petition for an “en banc” rehearing (notwithstanding support for that petition from the US government). The development is a neg-ative for Argentine sovereign credit as it suggests little sym-pathy from the Court to the arguments Argentina is using in its defense against holdout creditors in the pari passu litiga-tion. Moreover, the timing of the decision to deny a rehearing could be interpreted as a warning from the Court, raising the stakes for Argentina ahead of its filing. We interpret the tim-ing of the Court’s denial of a rehearing as a message to Argentina that it should not expect much flexibility from the Court if it is not willing to embrace flexibility when it designs and files its pro rata payment proposal. (See “Argentina: The denial of ‘en banc’ rehearing raises the stakes of Argentina’s March 29 filing,” March 26.)

Data releases and forecasts Week of April 1 – 5 Mon Revenues Apr 1 %oya

Dec Jan Feb Mar Tax revenues

External trade-related -7.8 -19.1 -14.1 5.0 Domestic activity-related 31.3 28.9 35.1 31.5 Labor market-related 32.2 31.2 31.9 29.0

Thu Auto production Apr 4 Dec Jan Feb Mar

%oya 16.4 4.9 -2.3 __ %oya, 3mma 8.6 7.7 6.3 __

Thu Auto sales Apr 4 %oya

Dec Jan Feb Mar

Exports 11.6 -8.2 -15.3 __ Domestic sales 6.6 -7.7 6.0 __

Thu Cement sales Apr 4 Dec Jan Feb Mar

%oya -13.1 1.0 7.1 __


Economic activity (official)Nov Dec Jan

%oya 1.8 1.1 1.5 3.2

%oya, 3mma 1.4 1.9 1.5 2.1

%oya, 3m/3m saar 3.1 5.0 __ 4.5

January’s monthly economic indicator (EMAE) surprised on the upside, printing 3.2%oya (J.P. Morgan: 1.5%oya; Bloomberg consensus: 2.1%), or 2.1%oya 3mma. The sequential growth pace of activity (as officially reported) is now running at 4.5%3m/3m saar, slightly below the (revised) pace through De-cember (5.0%3m/3m saar). The gap between official and genuine activity continues to widen. Our model estimates of genuine activity suggest that activity contracted slightly in January (-0.6%oya). Therefore, the “over-reporting” gap (difference between official releases and genuine model estimates) reached 3.8%-pt in January 2013. Indeed, the over-reporting gap has widened since October 2012, averaging 3.3%-pts, compared to a 1.1%-pt average in the first nine months of 2012. Genuine activity likely improved in February, but we expect the over-reporting gap to narrow. Our preliminary model estimates of genuine activity point to a slight recovery on an over-year-ago basis in February. Indeed, activity growth ran at 0.5%oya in February, compared to -0.6%oya in January. The improvement in genuine growth is likely to be accompanied by a narrower over-reporting gap, which should start to converge to its long-term trend (1.8%-pts). Thus, and in spite of the upward surprise in the monthly indicator, we maintain our full-year 2013 real (official) GDP forecast at 3.0%.

Industrial production (official)

Dec Jan Feb

%oya -3.4 0.2 0.9 -4.4

Construction (official)

Dec Jan Feb

%oya -8.0 -1.9 3.0 1.0

Sources for all tables: INDEC, Mecon, UTDT, and J.P. Morgan

49

J.P. Morgan Securities LLC Ben Ramsey (1-212) 834-4308 [email protected] Diego W. Pereira (1-212) 834-4321 [email protected]


Colombia and Chile Colombia January retail sales remained strong despite

poor auto sales in the period

Supply and demand gap continue to widen

In Chile, unemployment surprised to the upside

But February economic activity is likely to print above potential again

Colombia: supply and demand gap still widening January activity prints continued to show a widening gap between supply and demand conditions, with January IP posting a 1.7%oya contraction compared to a 1.3%oya increase in retail sales. The contrasting trends are much more pronounced on a sequential comparison, with industrial production falling 9.5%3m/3m saar in January (versus -9.7% in December and +4.5% in September, first chart), while retail sales grew at a double-digit pace (13.3%3m/3m saar from 8.2% in December and -1.3% in September)—despite a poor January for car sales (-14%m/m in January, sa by J.P. Morgan). While the manufacturing sector should be a bigger drag in 1Q13, consumption remains solid in our view, particularly consumption ex. autos. This, in addition to better prospects for investment brought to light by the 4Q GDP report, indicates the demand side of the economy remains solid, which in turn means latent inflation concerns cannot be dismissed entirely, even with headline CPI hovering below the lower bound of the target for now. BanRep at its last meeting proved more reactive than we thought it would be, and—given the mixed 1Q data and low inflation—we now look for a final 25bp rate cut to 3% at the April meeting. However, given our perception following full-year 2012 GDP that there is less slack in the economy than we initially thought, we think supply-demand imbalances should close Colombia’s negative output gap sooner rather than later. As such, our own monetary policy forecast does not see BanRep staying “low for long,” and we continue to see a tightening cycle commencing by 4Q13, continuing into 2014 to take the policy rate to 4.5%.

Chile: expect February IMACEC to print 5.3%oya In February, manufacturing production in Chile increased 0.9%oya, mining production rose 2.6%oya, and utilities rose 0.9%oya. Meanwhile, retail sales continued to show solid consumption growth, 7.4%oya. In addition, employment momentum remained positive, rising 1.3%oya, although the unemployment rate surprised to the upside by increasing to

Source for Colombia charts: DANE and J.P. Morgan

Sources for Chile charts: INE and J.P. Morgan

-20

-10

0

10

20

30

%q/q, saar

Colombia: IP and retail sales

Retail sales

IP

2008 2009 2010 2011 2012 2013

95

100

105

110

115

2011 2012 2013 2014

Jan 2011 = 100, sa by J.P. Morgan

Retail

IP

Retail ex-auto

Colombia: retail ex-auto reaccelerating

-15

-10

-5

0

5

10

15

20

Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13

Chile: retail sales and manufacturing production

%oya, 3mma

Retail sales

Manufacturing production

-2

0

2

4

6

8

10

Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13

% oya, 3mma

Chile: economic activity (IMACEC)

IMACEC ex-mining

IMACEC

50

Economic Research Colombia and Chile March 28, 2013

J.P. Morgan Securities LLC Ben Ramsey (1-212) 834-4308 [email protected] Diego W. Pereira (1-212) 834-4321 [email protected]

6.2% (3mma) from 6.0% in January, thereby relaxing some of the pressure on the tight labor market, at least temporarily.

The partial data suggest that economic activity (IMACEC) could print in the neighborhood of 5.3%oya in February. If so, growth would continue its above-potential trend (February: 5.7%oya 3mma and IMACEC ex. mining 6.2%oya 3mma). The current pace of consumption—retail sales’ sequential growth pace is running at 15.9%oya 3m/3m saar (sa by J.P. Morgan)—should reinforce BCCh’s concerns, by its continued pressure on the current account balance. Indeed, the current account balance posted a 3.5% of GDP deficit in 2012 (but which, on a structural basis, is equivalent to about 7.3% of GDP), and we expect the deficit to further deteriorate in 2013 (to 5.5% of GDP).

Next week, both the minutes of the March policy meeting (due Monday) and the Monetary Policy Report (due Tuesday) should provide more details on how BCCh is viewing the latest acceleration of economic activity. Particularly relevant will be the discussions on “economic overheating” (driven by the current account deficit and not by above-target inflation), as well as the current account deterioration and the real FX appreciation. Indeed, on the back of sustained above-potential economic growth and the pace of the current account deficit deterioration, we have penciled in a three-pronged approach to tightening policy: (1) we expect BCCh may engage in FX intervention sometime in 2Q; (2) we expect macroprudential measures to follow FX intervention, and (3) we anticipate that BCCh may begin hiking in July by 25bp with subsequent hikes every other month. If so, the policy rate would end the year at 5.75% and would reach 6.0% by January 2014.

Chile:

Data releases and forecasts Week of April 1 – 5 Fri Economic activity (IMACEC) Apr 5 Nov Dec Jan Feb

%oya 5.5 4.7 6.7 5.3


Labor report Dec Jan Feb

Unemployment (%, 3mma) 6.2 6.0 5.9 6.2

Retail sales

Dec Jan Feb

%oya 11.0 9.5 7.5 7.4

Industrial production %oya

Dec Jan Feb Mining 2.9 8.4 2.2 2.6

Manufacturing production -2.5 4.3 0.8 0.9 Sources for Chile tables: BCCh and INE

Colombia:

Data releases and forecasts Week of April 1 – 5 Fri Consumer prices Apr 5

Dec Jan Feb Mar

%m/m nsa 0.09 0.30 0.44 0.21 %oya 2.43 1.99 1.83 1.91


No data released. Sources for Colombia tables: DANE

Peru:

Data releases and forecasts Week of April 1 – 5 Mon Consumer prices Apr 1

Dec Jan Feb Mar

%m/m nsa 0.26 0.12 -0.09 0.62 %oya 2.66 2.88 2.44 2.29


No data released.

Sources for Colombia tables: INEI

51

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 Services output rebounded in January, but GDP still

looks likely to print 0.0%-0.1%q/q in 1Q

Gfk consumer confidence steady in March

No change expected at next week’s MPC meeting, but QE likely to follow in May

FPC highlights £25 billion capital shortfall for lenders

A rebound in services output in January left GDP on track to show a very small gain at best in 1Q. Although the impact of the weather on the March data poses downside risks, we con-tinue to think that growth in an underlying sense is doing a little better than the official data suggest. Next week’s BCC business survey—a key ingredient in our nowcasting exer-cise—will be an important cross-check on this view. Mean-while, the Gfk consumer confidence survey overall was steady in March. But the reading on the climate for major purchases, along with several other consumer-related indica-tors lately, continues to flag modest signs of improvement. That said, we still think a weaker growth outlook due to ex-ternal headwinds from the Euro area will prompt further gilt purchases from the MPC in May. But we do not think the growth picture has changed dramatically enough to prompt more easing from the MPC as soon as next week’s meeting.

Services output rebounds, Gfk stable Following a 0.4%m/m drop in December, services output re-bounded with a 0.3%m/m gain in January. The details of the report show fairly broad-based gains, with a particularly large 1.3%m/m gain in the transport, storage, and communications category. If adverse weather conditions do not prevent ser-vices output from recording small gains in February and March—which the business surveys suggest is a reasonable view—output is likely to rise by around 0.2%q/q in 1Q. Con-struction and IP look set to provide an offsetting drag. But the hard data to date suggest that 1Q GDP will narrowly avoid a second consecutive contraction, with an outturn of zero or 0.1%q/q looking likely.

The Gfk’s headline confidence reading held steady at -26 in March—slightly higher than the 4Q average in the survey. The climate for major purchases reading, which conceptually is the part of the survey closest to household durables spend-ing, reversed the prior month’s decline to stand at -23, relative to a 4Q average of -29. Although the CBI retail survey weak-ened in March, the national accounts report for 4Q this week showed moderate growth in consumer spending last year (see below). Retail sales in February also showed a strong 2%m/m gain, while there were signs of improvement in the housing market and higher private car registrations.

Source: ONS

Source: Gfk

Monthly services output

% m/m sa

Oct 12 Nov 12 Dec 12 Jan 13 Services 0.2 0.0 -0.4 0.3 Details:

Distribution, hotels, restaurants -1.2 0.7 -0.7 0.0 Transport, communication 1.5 -0.4 0.0 1.3 Business services and finance 0.9 -0.1 -0.7 0.2 Government and other -0.4 0.0 -0.2 0.3

Source: ONS

Gfk consumer confidence % balance, sa

Dec 12 Jan 13 Feb 13 Mar 13 Headline -29 -26 -26 -26 Personal finances

Last 12 months -22 -24 -20 -20 Next 12 months -7 -7 -5 -6

Economic situation Last 12 months -55 -51 -52 -54 Next 12 months -31 -25 -25 -27

Climate for major purchases -27 -22 -26 -23 Future saving intentions -20 -16 -20 -23

Source: Gfk

101.0

101.5

102.0

102.5

103.0

103.5

104.0

104.5

105.0

Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14

Index of services output

2009=100, sa

-50

-40

-30

-20

-10

0

10

20

2007 2008 2009 2010 2011 2012 2013 2014

% balance, saGfk consumer confidence: climate for major purchases

52

Economic Research United Kingdom March 29, 2013


Consumption growth looking healthier The publication of the full set of national accounts for 4Q left GDP showing a 0.3%q/q contraction, with modest revisions to output by sector. The demand side revealed another upward revision to private consumption, which is now estimated to have expanded 1.6% last year (4q/4q). In particular, consump-tion in 4Q was revised up from 0.2%q/q to 0.4%. Given the backdrop of weak pay growth and high inflation, any growth in household spending at present appears impressive. But de-spite household real incomes falling 0.1% last quarter, a strong gain in social benefits net of taxes in 2Q together with a more moderate consumption deflator helped to leave real incomes showing a gain of 2.3% (4q/4q) for the year as a whole (see chart and table, next page). Either households have decided to spend this typically more volatile component of their income (which has not usually been the case in the UK), or the stability in the measured saving rate last year has masked a desire by households to spend more than the in-crease in their regular income from employment. This comes despite the ongoing contention that households would not be able to increase spending due to balance sheet constraints, something we have never believed.

As noted above, various monthly consumer-related indicators have shown some signs of improvement lately. This may in-dicate that consumption has continued to grow in 1Q, despite still weak labor income. The demand-side details suggest that trade was a key factor behind last year’s disappointing growth outturn. Indeed, the drag from net trade on growth in 2012 (4q/4q) was revised up from 0.9%-pt to 1.2%-pts, while the current account remains very wide by historical standards at 3.6% of GDP. The latter reflects not only a poor trade perfor-mance, but also weaker investment income. It is difficult to say whether the weakness in investment income will persist, as this component in the current account can be very unpre-dictable. But we expect last year’s net trade drag to moderate this year—as the decline in energy production fades, and the Euro area eventually pulls out of recession.

FPC highlights £25 billion capital shortfall The FPC this week published a statement from its March 19 meeting. The FPC has recommended that banks aim for an intermediate target for their tier one capital ratios by end-2013 (en route to broader Basel III and ICB requirements) of 7% of risk weighted assets. For those banks that had not already reached this intermediate target by the end of last year, the FPC concluded that there was an aggregate capital shortfall of £25 billion. This is smaller than the £24-60 billion mentioned following last year’s Financial Stability Review. This estimate was revised to £52 billion in this week’s statement and re-flects the BoE’s measure of the extent to which banks have overstated their capital positions—which in turn is driven by the BoE’s assessment that banks need greater provisions against likely future losses (related to European and UK

Demand-side breakdown of GDP %

1Q12 2Q12 3Q12 4Q12 GDP (%q/q/) -0.1 -0.4 0.9 -0.3

Quarterly growth: Final domestic demand 0.9 0.3 0.1 0.3

Household consumption 0.4 0.5 0.3 0.4 Public consumption 2.9 -1.7 0.3 0.6 Fixed investment 0.5 1.7 -0.4 -0.2

Business investment -0.2 1.6 0.2 -0.8 Domestic demand 0.7 0.5 0.5 -0.1 Exports -1.5 -1.1 1.8 -1.6 Imports 0.6 1.3 0.3 -1.0

Quarterly contributions:

Final domestic demand 0.9 0.3 0.1 0.3 Household consumption 0.2 0.3 0.2 0.2 Public consumption 0.7 -0.4 0.1 0.1 Fixed investment 0.1 0.2 -0.1 0.0

Business investment 0.0 0.1 0.0 -0.1 Inventories -0.3 0.2 0.4 -0.4

Alignment adj. -0.3 0.1 0.5 -0.4 Domestic demand 0.7 0.5 0.6 -0.1 Net trade -0.7 -0.8 0.4 -0.2

Exports -0.5 -0.4 0.6 -0.5 Imports 0.2 0.4 0.1 -0.3

Source: ONS

Source: ONS

Source: ONS

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

2007 2008 2009 2010 2011 2012 2013

%q/q, sa

Household spending

-5

0

5

10

87 92 97 02 07 12

%oya

Household disposable income

53



commercial property assets), to cover costs (payments related to Libor and PPI mis-selling), and to reflect the need to use more conservative risk weightings.

Taking into account actions already put in place by lenders to rebuild capital positions, the £25 billion quoted this week by the FPC represents the additional work that needs to be done to achieve this year’s targets. The good news is that the stated shortfall of £25 billion was smaller than most had expected. And around half of this is thought to have already been built into banks’ plans for this year.

Critically, the FPC is asking banks to make up the capital shortfall without restraining lending to the real economy. Whether this is the case in reality is unclear. But our equity analysts are feeling a little less worried about the challenge for banks this year with regard to their capital requirements. They believe that the intermediate objective for this year set by the FPC is attainable without fresh equity issuance, via a combination of non-core asset disposals, retained earnings, reductions in risk-weighted assets, and convertible capital issuance. As of April 1, the FPC will take on statutory powers that will enable it to direct the PRA (Prudential Regulation Authority, also under the BoE’s wing) to carry out the rec-ommendations described above.

Data releases and forecasts Week of April 1 - 5

During Halifax house price index the Sa week Dec Jan Feb Mar %m/m 0.9 -0.3 0.5 %oya 2.3 1.0 2.1 %3m/3m saar 3.2 7.7 7.8

Tue BCC quarterly economic survey Apr 2 Index 12:01am 2Q12 3Q12 4Q12 1Q13 Manufacturing- Deliveries 9 3 8 Manufacturing- Prices 9 15 36 Services- Deliveries 10 1 11 Services- Prices 18 16 21

Tue Money supply Apr 2 Sa 9:30am Nov Dec Jan Feb M4 ex IOFCs (%m/m) 0.4 0.0 0.9 M4 ex IOFCs (%3m/3m, ar) 5.1 3.9 5.6 M4 (%m/m) -0.2 0.7 0.9 M4 (%oya) -2.9 -1.0 -0.8 M4 lending (%m/m)1 0.0 1.6 -0.4

M4 lending (%oya)1 -4.5 -2.7 -2.3 1. Excludes the effect of securitization.

Source: ONS

Source: ONS

Household income breakdown

%q/q

1Q12 2Q12 3Q12 4Q12

Nominal income -0.3 3.8 0.7 0.7

Deflator 0.5 0.6 0.5 0.9

Real income -0.9 3.1 0.2 -0.1

% changes Gross operating surplus 0.9 2.0 2.0 1.1 Wages and salaries 0.0 2.0 0.5 0.1 Employer social contribution 5.5 -8.3 3.2 -0.6 Net property income -13.4 11.6 1.2 0.9 Net social benefits 3.6 15.0 -6.0 9.0 Net current transfers -2.6 11.3 3.7 -16.0

Contributions Gross operating surplus 0.2 0.4 0.4 0.2 Wages and salaries 0.0 1.5 0.4 0.1 Employer social contribution 0.9 -1.4 0.5 -0.1 Net property income -1.8 1.3 0.1 0.1 Net social benefits 0.5 2.0 -0.7 1.1 Net current transfers -0.1 0.4 0.1 -0.6

Source: ONS

-2-10123456

07 08 09 10 11 12 13 14

%oyaHousehold disposable income

NominalDeflator

Real

-5

0

5

10

2007 2008 2009 2010 2011 2012 2013

Cumulative contribution to % change since 2007

Contributors to household nominal income

Wages and salaries

Gross operating surplusNet social benefits

54

Economic Research United Kingdom March 29, 2013


Tue Net lending to individuals (BoE release) Apr 2 £ bn, average 9:30am Nov Dec Jan Feb Consumer credit (ch, m/m) 0.1 0.9 0.4 Secured lending (ch, m/m) 0.3 0.9 0.1 Mortgage approvals (000s sa) 53.9 55.6 54.7

Tue PMI survey, manufacturing Apr 2 % balance, sa 9:30am Dec Jan Feb Mar Overall index 50.7 50.5 47.9 48.5

The February release was a surprise and we think manufac-turing declines are likely to fade from here. The gain in the output expectations reading of the CBI industry survey for March reinforces this view, although the disappointment in the Euro area PMI survey poses a potential challenge.

Wed BoE quarterly Credit Conditions survey Apr 3 Net % balances 11:00am 2Q12 3Q12 4Q12 1Q13 Availability of secured credit to Households: Past three months -4.1 21.9 26.2 Next three months 0.1 36.1 24.7 Availability of unsecured credit to Households: Past three months 8.1 -4.2 6.6 Next three months 5.6 6.8 14.6 Availability of overall Corporate credit: Past three months -3.2 -5.5 29.4 Next three months 0.7 2.6 14.9

Thu PMI survey, construction Apr 4 % balance, sa 9:30am Dec Jan Feb Mar Overall index 48.7 48.7 46.8

Thu PMI survey, services Apr 4 % balance, sa 9:30am Dec Jan Feb Mar Business activity 48.9 51.5 51.8 51.5

Although the services PMI has shown some improvement in 1Q, it remains low in absolute terms and is pointing to a pace of growth that is less than 1% ar. We look for the March business activity reading to show a small decline following the disappointing Euro area flash PMI. But our growth forecast implies this survey should improve in 2Q.

Thu MPC rate announcement & asset purchase target Apr 4 12:00pm No change expected.

Fri New car registrations Apr 5 %3m/12m nsa 9:30am Dec Jan Feb Mar Total 1.8 1.7 1.2 Private (ex business and fleet) 3.3 2.8 2.2


BBA lending

Sa

Dec Jan Feb Secured lending (ch £ bn, sa) 0.4 -0.4 -0.1 Loan approvals (000s sa)1 33.4 33.2 32.3 32.0 30.5

1. For house purchase.

CBI survey of distributive trades

% balance

Jan Feb Mar Vol. of retail sales 17 8 0

Real GDP (national accounts) Sa

3Q12 4Q12¹ 4Q12 Total GDP %q/q sa 1.0 0.9 -0.3 -0.3

%oya sa 0.2 0.4 0.3 0.2 0.3 0.2

%q/q saar 3.9 3.8 -1.0 -1.2 -1.0 -1.2

Breakdown (%q/q sa): Private cons. 0.3 0.1 0.4

Public consumption 0.5 0.3 1.6 0.6

Fixed investment -0.6 -0.4 -0.3 -0.2

Exports 1.7 1.8 0.1 -1.6

Imports 0.3 0.4 -1.0

1. Preliminary outcome 0.3 0.1 0.4

Balance of payments (quarterly report)

£ bn, sa

2Q12 3Q12 4Q12 Goods and services -10.6 -10.5 -8.3 -8.1 -9.6

Income -1.0 -0.5 1.2 -1.4 2.1

Current transfers -5.4 -5.6 -5.7 -5.6 -6.5

Current balance -17.4 -16.7 -12.8 -15.1 -14.0

GFK consumer confidence

Sa

Jan Feb Mar % balance -26 -26 -26

Nationwide house price index Sa

Jan Feb Mar %m/m 0.5 0.2 0.0

%oya 0.0 -0.1 0.8

%3m/3m saar 1.7 1.5 2.3 2.2 2.4

Index of services

Sa

Nov Dec Jan %m/m 0.1 0.0 -0.4 0.3

%oya 1.2 0.7 0.9

%3m/3m saar 2.3 2.6 -0.3 -0.1 -0.8 -1.0 Source: Halifax, BCC, ONS, Bank of England, Markit, SMMT, Nationwide, BBA, CBI, Gfk, and J.P. Morgan

55

JPMorgan Chase Bank N.A, London Branch Nora Szentivanyi (44-20) 7134-7544 [email protected] Nicolaie Alexandru-Chidesciuc (44 20) 7742-2466 [email protected]


Central Europe CE-3: modest downward revisions to GDP forecasts

Czech Republic: turning slightly more dovish

Hungary: cautious monetary easing continues

Romania: on hold for the eight month

Large downward revisions to J.P. Morgan’s Euro area GDP forecast have prompted us to lower our forecasts for Central Europe. The main impact is through direct trade links to the Euro area. More than half of CE-3 exports are destined for the Euro area, with 27% of CE-3 exports going to Germany alone. The forecast revisions we have made (see table) take the 2013 forecasts down to 1.3% for Poland, -0.7% for Hun-gary, and -0.2% for Czech. Our forecasts still assume that the worst of the downturn is behind us, but the recovery is likely to be more gradual than previously expected. There are coun-try-specific factors that should help growth to varying degrees within the region this year, including expanding auto produc-tion capacity (Hungary), rate cuts (Poland and Hungary), reg-ulatory measures to ease credit conditions (Poland), and a base effect from a poor agricultural year in 2012. A slower recov-ery is likely to keep the region’s central banks dovish, with risk tilted toward more rate cuts than we currently forecast.

CNB: still no CZK sales, but more dovish The CNB board again decided unanimously to leave the two-week repo rate unchanged at 0.05%. While Governor Singer surprised the markets in February with less dovish rhetoric at the press conference, this time he was again dovish. Currency weakening due to verbal intervention has already eased mone-tary conditions and thus the bank refrained once again from direct CZK sales. To compensate for that, the Bank has started to use the communication channel more actively, indicating that the policy rate will be kept low over a longer horizon; the aim is to anchor interest rate expectations at a low level. Im-portantly, risks for the inflation forecast are now seen as tilted toward slightly easier monetary conditions, while previously they were seen as balanced. We remain of the view that CZK has weakened enough to already ease monetary conditions and thus FX intervention is unlikely.

NBH: gradual cuts remain likely As widely expected, the Monetary Council (MC) cut the poli-cy rate 25bp; this is the eighth consecutive rate cut with the policy rate reaching 5%, a new record-low level (the key rate was previously cut to 5.25% in 2010). As evidenced in the statement after the meeting, the bias in the MC is clearly for key rate cuts, but with an eye on the exchange rate. We be-lieve the MC of the NBH will continue with gradual cuts, and we expect the base rate to reach 4.50% by mid-2013; key rate

cuts to 3.50% later in 2013 should not be ruled out provided FX loan stock is reduced substantially in the period ahead. The MC is linking further key rate cuts to moderation in CPI and lower uncertainty on external markets. In the new infla-tion report, the NBH is forecasting headline CPI at 2.6% in 2013 and 2.8% at end-2014, below the 3% inflation target over the entire forecast horizon. The MC statement clearly states that “the outlook for both inflation and the real econo-my points to a further easing in monetary conditions,” while another key phrase is that “ensuring stability of financial mar-kets required a cautious approach to policy.” The latter basi-cally suggests that the NBH is not happy with excessive forint weakening. Excessive currency weakening could prevent the NBH from cutting too much (the bank remains sensitive to FX movements as the stock of households’ foreign currency loans is above 50%).

NBR: on hold again, but with easing bias The NBR left the policy rate unchanged at 5.25% as widely expected. The tone of the press release seemed balanced to us, which indicates the bank will likely remain on hold at least during next few months. Despite earlier comments that key rate cuts would only fuel inflation expectations, the NBR governor reiterated at the briefing that the policy rate may be cut after the CPI slows down. The CPI is already slowing down so we think the governor may want to see headline CPI closer to the target band and/or a forecast showing headline CPI well inside the target band (currently the NBR forecast is 3.5% for end-2013, exactly the upward limit of the variation band around the 2.5% inflation target). We think the earliest the forecast could show headline CPI well inside the target band is August (the next inflation report is in May and after that is in August). Considering our inflation forecast for above 4% at the end of 2013 and the upper limit of the target band at 3.5%, we believe that the key rate will most likely be un-changed this year. However, a bumper harvest could push headline CPI toward 3% and would allow key rate cuts.

The Central Europe data watch is published biweekly, next on April 12.

CE-3 GDP forecast revisions %q/q saar %oya

1Q13 2Q13 3Q13 4Q13 2013 2014

Czech new -0.1 0.5 1.0 1.0 -0.2 1.9 old 0.0 1.1 1.6 1.0 0.0 2.1

Hungary new -0.3 0.3 1.2 1.5 -0.7 1.4 old 0.0 0.5 2.0 2.0 -0.5 1.5

Poland new 1.1 1.8 2.3 2.8 1.3 2.6 old 1.3 2.0 2.8 3.0 1.5 2.6

Source: J.P. Morgan

56

Economic Research Central Europe March 28, 2013


Czech Republic:

Data releases and forecasts Weeks of April 1 - 12

Mon External trade Apr 8 CZK bn 9:00am Nov Dec Jan Feb Trade balance 33.3 5.9 31.5 29.6 Ytd 303.5 309.5 31.5 61.1 Ytd a year ago 184.0 191.1 30.4 58.2 Exports %oya 3.3 -7.1 -3.2 -4.0 Imports %oya -2.5 -6.8 -4.1 2.3

On seasonally adjusted data we expect only a mild ad-vance in exports (+0.2%m/m versus -0.2% in January) and a stronger advance in imports on improved consumer confidence and as a correction to the large fall seen in January (we forecast 0.7%m/m versus -3.6% in January). The trade surplus is likely to remain strong in February and the next few months despite what appears to be weakness in external demand.

Tue Consumer prices Apr 9 %oya 9:00am Dec Jan Feb Mar %oya 2.4 1.9 1.7 1.6 %m/m nsa 0.1 1.3 0.1 0.0 Food 5.2 5.7 5.0 3.1 Housing 3.6 2.6 2.6 2.7 Transport 0.2 -1.1 -0.6 -0.9

We expect inflation to trend lower to 1.6%oya in March on the back of limited food and fuel price increases and positive base effects. We think inflation will not go be-low 1.5%oya in 1H13, but 1.4%oya is possible in 4Q13 with year-end inflation at 1.9%. Monetary-policy-relevant inflation is likely to remain around the lower band of the inflation target at 1%.

Review of past two weeks’ data

Monetary policy announcement

No changes in policy rates, but a more dovish tone. See main text for details.

Hungary:


Thu Retail trade Apr 4 % change 9:00am Nov Dec Jan Feb %oya wda -4.1 -2.1 -4.1 -2.0 %m/m swda -0.4 0.2 0.2 -0.1

Fri Industrial output Apr 5 %oya 9:00am Nov Dec Jan Feb Production, wda -7.1 -3.4 -1.4 -2.5 Production, nsa -7.1 -7.6 -1.4 -4.5 %m/m swda -0.6 -1.6 2.9 -0.8

IP likely posted some payback after the large January gain. The manufacturing PMI remained in expansion ter-ritory in February but declined from the previous month, as did new industrial orders. The auto sector remains the main driver of growth (a new auto model in late January). Yet new car sales in the Euro area continue to look soft, limiting demand for car imports from the CEE region.

Mon External trade Apr 8 EUR mn 9:00am Nov Dec Jan Feb Trade balance 676 143 318 650 Ytd 6680 6823 318 968 Ytd a year ago 6760 7061 357 1100 Exports, %oya -1.9 -8.5 4.3 __ Imports, %oya -1.8 -6.2 5.2 __

Thu Consumer prices Apr 11 %oya 9:00am Dec Jan Feb Mar All items (KSH) 5.0 3.7 2.8 2.5 %m/m nsa 0.0 0.8 -0.1 0.5 Food 7.0 5.8 4.1 __ Consumer durables -1.8 -2.1 -2.3 __ Fuel 1.7 1.1 -1.2 __ Services 4.5 3.1 3.5 __ Core inflation 4.9 3.7 3.6 __ %m/m sa 0.3 0.3 0.4 __ Regulated g&s (NBH) 4.0 2.4 -2.8 __ Market g&s (NBH) 5.2 4.5 4.1 __

Inflation likely declined further in March on the back of base effects in fuel (fuel prices rose 3%m/m in March 2012) and in the alcohol and tobacco component.


Average gross wages %oya Nov Dec Jan

Gross wages, nominal 5.4 4.9 __ 2.5

Private sector 6.3 8.3 __ 3.0

ex bonuses 7.2 7.3 __ 3.3

Public sector 3.7 -3.2 __ 0.9


The NBH cut the base rate 25bp as widely expected. See main text for details.

Source: National Statistics, J. P. Morgan

57



Balance of payments

EUR mn 2Q12 3Q12 4Q12

Current account balance 478 532 780 843 215 242

Trade balance 1308 1303 1187 1163 815 711

Exports %oya 3.4 3.0 3.1 __ 0.7

Imports %oya 1.1 1.2 0.3 0.6 __ 0.4

Service balance 857 903 1094 1163 750 665

Income balance -1720 -1572 -1567 -1550 -1675

Current transfers 33 47 70 84 200 541

Fin + cap balance -964 -984 -1992 -1927 __ -514

FDI, net -530 -523 847 934 __ 1386

Portfolio investment -676 1962 1963 __ 134

Other investment -123 -170 -5516 -5576 __ -3642

The C/A surplus came in close to our forecast and market con-sensus, and posted a significant narrowing versus 3Q12. None-theless, the surplus was wider than in 4Q11 when it stood at just EUR1m.

Poland:


Wed Monetary policy announcement Apr 10

We expect the NBP to remain firmly in wait-and-see mode next week and to return to rate cuts only if the ac-tivity data fail to validate the MPC’s expectation of a gradual recovery by May-June, or if inflation falls mate-rially below 1%.


Gross wages and employment %oya Dec Jan Feb

Gross wages, nominal 2.4 0.4 3.5 4.0

Real (CPI adj.) 0.0 -1.3 2.0 2.7

Employment, 000s, nsa 5474 5507 5489 5497

Employment, %oya -0.5 -0.8 -1.0 -0.8

The corporate sector shed 10,000 jobs m/m in February, with payrolls down 46,000 from a year earlier. While the worst for the job market is likely over, we do not expect a material change in the negative trend until the second half of the year. Meanwhile, wage growth accelerated in February on the back of a base effect linked to shifts in the timing of wage payments.

Industrial output %oya Dec Jan Feb

Industry -9.6 0.4 -2.5 -2.1

%oya swda by GUS -4.5 -2.1 -2.5 -2.4

%m/m swda by GUS -1.4 1.5 -0.5 -1.0

Manufacturing -11.8 -0.4 __ -1.9

Construction -24.9 -16.1 __ -11.4

Industrial production declined more than expected in February, giving back much of January’s gain. Despite the contraction, a very gradual improvement is visible on a sequential basis: the level of IP is down 1% annualized in the first two months of the year versus its 4Q average, which is a bit better than the 2%q/q saar decline in 4Q12. Key export-oriented sectors of manufac-turing continued to contract, although output in some branches fell at a slower pace. The biggest drag came from machinery and equipment (-13.2%oya), computers, electronics, and optical products (-12.8%), basic metals (-8.2%), and motor vehicles (-5.9%). Increases were recorded, among other sectors, in food (1.7%oya). The sectors that drove growth the January increase (energy and mining) predictably pulled back in February. The activity figures are broadly consistent with our forecast for oya GDP growth to slow marginally further to 0.8%-1% in 1Q13 from 1.1% in 4Q12, but in sequential terms the economy should have bottomed in 4Q12. We expect a gradual recovery to unfold by April/May.

Producer prices %oya Dec Jan Feb

Producer prices -1.1 -1.2 -0.3 -0.4

%m/m nsa -0.6 0.1 __ 0.3

Retail sales %oya, unless otherwise stated Dec Jan Feb

Retail sales (nominal) -2.5 3.1 0.5 -0.8

Real, CPI-adjusted -3.6 2.4 -0.8 -1.3

%m/m sa -4.1 -4.3 5.2 5.5 2.2 -0.4

Romania:


Tue Retail sales Apr 2 %oya 10:00am Nov Dec Jan Feb Retail sales, sa 2.4 -2.3 2.4 2.7 %m/m nsa 1.3 -3.2 4.3 -0.7

After a strong start in January, we look for a mild correc-tion in February. However, this should not reverse the general trend of improvement in retail sales and should support acceleration in GDP growth as well. We forecast a strong positive contribution to GDP growth in 1Q13 from retail sales (we also expect industry to positively contribute to GDP growth).


58

Economic Research Central Europe March 28, 2013


Wed Real GDP, final Apr 3 %oya, unless otherwise stated

10:00am 1Q12 2Q12 3Q12 4Q12 Real GDP 0.1 1.3 -0.3 0.3 %q/q saar -0.6 1.6 -1.0 0.4 Domestic demand 2.7 2.7 1.4 __ Private consumption 0.9 2.0 -1.3 __

Gross fixed capital formation 11.3 5.4 8.0 __

Contribution to %oya GDP Domestic final sales 3.5 3.6 1.8 __ Inventories -0.7 -1.1 -0.9 __ Net trade -2.7 -1.1 -1.2 __

The third GDP release is expected to confirm previously released data without any big surprises.

Tue Industrial output Apr 9 %oya 10:00am Nov Dec Jan Feb Industrial output, nsa -0.5 -2.2 5.7 3.8 Industrial output, sa -1.1 -0.7 3.4 4.1 %m/m sa 0.4 0.5 0.3 0.2

IP is expected to continue to grow on a seasonally ad-justed basis as the weakening external demand from Euro zone countries is offset by exports to other countries in-side the EU and countries outside the EU. Also, there is a recovery in domestic consumption in 1Q13 that is ex-pected to be quite large.

Wed Consumer prices Apr 10 %oya 10:00am Dec Jan Feb Mar %oya 5.0 6.0 5.7 5.5 %m/m nsa 0.6 1.3 0.3 0.2

Disinflation is expected to continue in March on the back of base effects, lower price increases in the case of vola-tile items, and a flat exchange rate. The only significant price increase in March is the hike in water and sewerage prices (about 14%). We also believe that CORE3 infla-tion (the one most closely followed by the NBR) will trend marginally lower. We look for inflation to start in-creasing again toward 6% during 2Q13, but to trend again lower below 5% in 2H13.



The key rate was kept on hold at 5.25% with no other changes. See main text for details.


59

J.P. Morgan Securities plc José Cerveira (44-20) 7742-3556 [email protected]


South Africa February trade deficit narrows more than expected to

R9.5 billion, from a record R24.5 billion in January

At the Durban summit, BRICS agree on new develop-ment bank; Transnet secures US$5 billion in financing

Recovery in mining will likely support higher 1Q13 GDP growth

After posting a record R24.5 billion deficit in January, the trade balance improved in February, narrowing to R9.5 bil-lion, somewhat better than market expectations of R12.5 bil-lion. Looking at the details, the recovery was driven mainly by a 17% increase in exports, but also by a 7.7% drop in im-ports. The strong rise in exports was mostly accounted for by higher precious metals (25.6%m/m) and vehicles sales to for-eigners (80.1%), but most other subcategories also showed improvement. On the import side, seasonal effects were exac-erbated by the lumpiness of oil and machinery imports, which tend to revert in months following large increases/decreases. Imports of machinery, which had increased 34%m/m in Janu-ary, fell 15% in February, and oil purchases increased only 6%, lower than seasonally implied. On a 12-month trailing basis (see chart), the trade deficit has reached a new record of R128.6 billion, from R126.6 billion previously, but we expect it to stabilize in the next few months. Looking ahead, we think imports will remain resilient (partly supported by the public infrastructure programs), but the normalization in the mining sector and the currency weakness are expected to improve the export sector, supporting some narrowing of the trade deficit.

NERSA prohibits electricity buybacks, raising risks of tight electricity supply South Africa’s energy regulator (NERSA) has prohibited ESKOM from passing on to customers the cost of its electricity buyback program, through which ESKOM compensates large industrial users for not using electricity during peak usage peri-ods. NERSA argues that these buybacks are too costly and in-troduce production inefficiencies. In our view, however, by removing the incentive to temporarily shut down intensive us-ers, the prohibition increases the risks of electricity supply shortages, in which case the costs to the economy as a whole could be far larger.

CDB agrees to US$5 billion loan to Transnet; BRICS to launch development bank The fifth BRICS summit, held this week in South Africa, re-sulted in a number of important agreements, both at the group level and country deals. The most significant, in our view, is the agreement between China Development Bank (CDB) and Transnet for a US$5 billion loan to support infrastructure pro-jects over a period of five years. The parastatal is—on behalf

of the government—engaged in a seven-year R300 billion (around US$32 billion) development plan to improve the country’s rail and ports network, two thirds of which it ex-pects to finance through internal resources, and the rest from capital markets. The agreement secures an important part of Transnet’s external financing needs ahead and, while the de-tails of the deal were not made public yet, likely at favorable conditions. This important inflow will also be an important contributor to the financing of the current account, which is expected to remain high in 2013, at around 6% of GDP.

The discussions between the five countries also resulted in an agreement to establish a BRICS development bank, which is reportedly targeted to start with a capitalization of around US$50 billion. However, the leaders of the BRICS failed to agree on how the bank would be funded (whether equally or in proportion to each economy’s size) or where it should be headquartered, suggesting the forum’s first official institution may take some time to materialize.

GDP growth expected to improve in 1Q13 to 3%, due to technical rebound in mining The next two weeks will provide a wide set of activity data re-leases that will allow us to better gauge GDP growth during 1Q13. Both mining and manufacturing output surprised on the upside in January, accelerating above market expectations to 7.3%oya (consensus: 4.2%) and 3.9% (consensus: 2.7%), respectively. The manufacturing PMI for February jumped to 53.6 from 49.1, suggesting manufacturing production continued to perform well that month but should moderate in March, in line with that of main trading partners for manufactured goods. The weakness in mining production in 3Q12 and 4Q12 provides a low base for rebound in 1Q13, but given that the mining com-ponent of 4Q12 GDP growth declined much less than suggested by the fall in the mining index, the rebound is also expected to be proportionally smaller. Overall, we expect 1Q13 GDP growth to improve modestly to 2.7%q/q saar from 2.1% in 4Q12.

The South Africa data watch is biweekly, next on April 12, 2013.

Source: SARS, J.P. Morgan

-140

-105

-70

-35

0

35

70

-20

-15

-10

-5

0

5

10

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

R bn

South Africa trade balance

Monthly

12-month trailing

60

Economic Research South Africa March 28, 2013

J.P. Morgan Securities plc José Cerveira (44-20) 7742-3556 [email protected]


Tue New vehicle sales Apr 2 %oya, except as noted 11:00am Dec Jan Feb Mar Passenger car sales 7.0 11.8 4.2 __ %m/m nsa -12.9 18.2 -5.4 __ Light commercial vehicles -13.3 18.6 5.2 __ Heavy/medium commercial 11.8 17.1 -7.7 __ Total vehicle sales 1.8 14.1 1.6 __ %m/m nsa -13.4 19.5 -3.2 __

Tue Kagiso BER PMI Apr 2 11:00am Dec Jan Feb Mar PMI (% weights) 47.4 49.1 53.6 51.0 Business activity (25) 47.3 49.6 52.2 __ New sales orders (30) 44.9 50.9 60.2 __ Suppliers’ performance (15) 56.4 48.8 51.8 __ Inventories (10) 47.3 56.8 55.6 __ Employment (20) 44.7 42.3 45.7 __ Memo: prices paid 79.7 82.0 86.0 __ Business expectations 55.1 58.2 56.8 __ PMI nsa 49.9 44.3 52.9 __

Wed RMB/BER business confidence Apr 3 Index 12:00am 2Q12 3Q12 4Q12 1Q13

Composite total 41.0 47.0 46.0 __

Manufacturing 29.0 33.0 38.0 __

Retail 39.0 46.0 54.0 __

Wholesale 50.0 53.0 57.0 __

Mon SARB official reserves Apr 8 US$ bn, except noted 8:00am Dec Jan Feb Mar Gross reserves (R bn) 430.9 458.7 450.7 __ Gross reserves 50.7 51.2 50.4 __ International liquidity 47.9 48.1 47.2 __

Tue BER consumer confidence

Apr 9 Index 12:00pm 2Q12 3Q12 4Q12 1Q13

Composite total -3.0 -1.0 -3.0 __

Thu Manufacturing production Apr 11 Volume output 1:00pm Nov Dec Jan Feb Manufacturing (%oya) 3.7 2.0 3.9 __ %m/m sa 2.6 -2.3 2.0 __


Quarterly employment statistics Nsa 2Q12 3Q12 4Q12

No. of employees (000) 8430 8440 8439 __ 8461

Gross earnings (R bn) 352.4 369.9 371.9 __ 393.8

Consumer prices %oya, except as noted Dec Jan Feb

CPI 5.7 5.4 5.6 5.9

%m/m sa 0.2 0.3 0.7 1.0

Core 4.7 4.5 5.1

Monetary and credit aggregates %oya, except as noted Dec Jan Feb

M3 5.2 6.7 __ 7.7

M0 11.5 9.6 __ 8.4

Private sector credit 10.1 8.6 __ 7.9

%m/m nsa 1.2 -0.6 __ 0.8

Credit to households 9.9 9.9 __ 9.8

Total domestic credit 10.6 10.0 __ 9.5

Trade balance R bn, except as noted Dec Jan Feb

Trade balance -2.7 -24.5 __ -9.5

Exports 59.8 53.3 __ 62.3

%m/m -9.8 -10.9 __ 17.0

Imports 62.5 77.8 __ 71.8

%m/m -15.8 24.5 __ -7.7

1

Source: Stats SA, SARB, SARS, DTI, BER, J.P. Morgan

61

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 Governor eluded policy discussion, following a

slew of official commentary last week

Credit growth in Australia still driven by investor housing, as many households de-lever

RBNZ moves to increase banks’ capital buffers, while business confidence deteriorates

The last couple of weeks have been all but devoid of major data releases in Australia, but in their place there has been a steady flow of commentary from senior RBA officials. All of this has left us comfortable that next week’s Reserve Bank Board meeting will deliver more of the same, an unchanged cash rate. The lift in consumer confidence and asset prices witnessed so far this year has been succor for a Board that wants to see further signs of traction from low rates by now, nearly 18 months since the easing cycle began. We expect the Board to leave the cash rate on hold and, in a change of call, now forecast this pause to extend until 4Q, when the Board will deliver a final 25bp cut as the transition away from mining-investment-led activity falters and AUD climbs. The highlight this coming week will be the February retail report, which should register a modest payback from a January result that was artificially supported by government transfer payments.

In New Zealand this week, the news flow was light but never-theless touched on the most relevant issues facing the econo-my at present. The February trade data exceeded expectations, recording a large rise in dairy exports, though the slide in business confidence, particularly among farmers reported for March, highlights drought conditions as a risk to the outlook. Also, the RBNZ pushed further along the path of developing a suite of macroprudential measures, with a consultation paper proposing an increase in regulatory capital requirements for banks engaged in high LVR lending.

RBA decision likely a snoozer The RBA Governor’s speech this week at a regulatory forum focused on big-picture issues around financial markets and bank regulation, and did not stray into the macro-policy arena. Nevertheless, we have a pretty good sense of how officials are seeing things, given the multitude of communications released over the past couple of weeks. Last week alone saw speeches from the Deputy Governor and two Assistant Governors, as well as the minutes to the March Board meeting.

Since the first rate decision of the year in February, we have characterized the Board’s position as reflecting two assess-ments: the idea that easier policy is getting preliminary trac-tion, set against the idea that the increased flexibility that is

afforded by better productivity outcomes and a soft labor market will allow the Board to provide more support if need-ed. The latter guidance has left the market content that an eas-ing bias remains in play, even as better news has rolled in on consumer sentiment and housing. It will be important for the Governor’s commentary next week to reaffirm the easing bias, which we believe it will, given lingering downside risks. The alternative, hinting even at an end to accommodative policy, however tentative the move, could push AUD higher, exacer-bating the awkward divergence in the monetary mix officials currently are dealing with.

We remain of the view that more work will need to be done in this cycle, although the risks have now evolved toward a later move. Better cyclical momentum is giving officials scope to save their ammunition for now, but it still seems likely that acceleration in non-mining investment will prove insufficient to offset the significant fade in the contribution from mining investment. We now expect the last rate cut of the cycle to come in November, rather than May.

Retail sales to lose some steam Retail sales surged 0.9%m/m in January, after a downwardly revised 0.4%m/m fall at the end of 2012. We had flagged the possibility of a strong number in January, given the

Source: RBA

Source: RBA

2

3

4

5

6

7

8

06 07 08 09 10 11 12 13 14

%Australia: official cash rate

J.P. Morgan forecasts

50

55

60

65

70

75

80

05 07 09 11 13

IndexAustralia: AUD trade-weighted index

62

Economic Research Australia and New Zealand March 28, 2013



rearrangement of fiscal transfer payments to households as part of last year’s carbon tax compensation package. With that one-off lift to disposable income having disappeared, the path of retail spending from here will rest on underlying labor in-come dynamics. Although the retail figures are likely to take a step back from last month’s stellar stimulus-supported result, we still expect the numbers to hold on to some of the im-provement relative to the disappointing run rate seen during the final quarter of 2012, where retail sales contracted for three consecutive months. We expect retail sales to have in-creased 0.2%m/m throughout February.

In the other data to be released next week, we expect building approvals to have recorded a modest improvement in Febru-ary, increasing 1%m/m after having contracted outright over the previous two months. The swing factor, as always, will be the number of high-density housing approvals, with this cate-gory expected to recover some ground after plunging 10%m/m in the prior month’s release. Any upside surprise in high-density housing should largely be offset by further weakness in detached housing, with the growth rate in this category set to remain uninspiring for some time yet.

The February trade data also are released in the week ahead. Australia has not posted a single monthly trade surplus in over a year, as lower prices for key commodity groups and a firm-ing stream of capital imports have taken their toll on the ex-ternal accounts. The preliminary import data that we currently have at hand suggest Australian demand for foreign goods slipped 1%m/m in February, which coupled with the antici-pated uptick in export values (resulting from accumulated improvements in commodity prices) should see the monthly deficit narrow to around A$700 million, the smallest trade gap since February 2012.

Credit growth in a slumber Another month, another soft credit report in Australia, as overall growth in the pool of private sector credit expanded a modest 0.2%m/m in February. The 6-month annualized run rate now sits at 1.8%, having only previously plumbed those depths in the GFC fallout of 2009 and in the recession of the early 1990s.

There are more interesting developments occurring beneath the surface, particularly in housing, the largest component of the credit pool and the (relative) outperformer in growth terms, which maintained its recent pace of 0.4%m/m. Within that category, a composition shift is under way with existing owner-occupiers using low rates to amortize more quickly, while new loans to investors are starting to perk up. The gap between annual credit growth in the investor and owner-occupier segments now is 1.7%-pts, the widest it has been post crisis. But this move still only brings it in line with its

post-2000 average, and it is doing so at very low levels of owner-occupier activity. So while the shift in the composition of housing activity is a symptom that low rates are getting some traction in the usual pockets, so far this trend looks far too subtle to have broader macro significance, and clearly is not sufficient to lift overall credit growth.

Given the current composition of activity, if the RBA main-tains its easing bias, but with its tactical interest rate pause extending for most of this year, as we now expect, the credit aggregates could perversely get some lift over the next few months, as we cycle out of a run of months where persistentlty lower rates were allowing a steadily increasing flow of principal repayments. But this would not represent any net stimulus to demand. In the other details of this week’s report, business (-0.2%m/m) and personal (+0.1%m/m) credit are still bobbing around, and generally only treading water.

RBNZ moves to boost capital buffers The NZ banking system uses the “internal models” approach in implementing the Basel capital requirements. This means that, rather than set their risk weights for various types of loan (e.g., business, housing, etc.) at fixed values decreed under Basel, the banks set their own risk weights according to their own internal risk models (after the RBNZ signs off on them).

Source: ABS, J.P. Morgan

Source: RBA

-1.0

-0.5

0.0

0.5

1.0

1.5

2011 2012 2013

%m/mAustralia: retail sales

J.P. Morgan forecast

-5

0

5

10

15

20

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

%3mo ar

Australia: private sector credit aggregates

63




Unlike the Basel requirements then, the internal models ap-proach produces risk weights that are sensitive to LVRs. That is probably a good idea, and so the RBNZ’s proposal, an-nounced this week, to alter the capital adequacy framework, is not about changing the internal models approach, but in fact pushes them further down the existing path, and away from the fixed weights of Basel. The RBNZ’s proposal, flagged in a consultation paper, is to make the domestic banks adjust their models so that risk weightings are more sensitive to LVRs, meaning they would have to hold more capital against high-LVR loans than previously.

The argument for higher risk weights on high-LVR housing loans follows the RBNZ’s long-held conviction that the “cor-relation factor” that sits behind the models, as recommended in Basel II, is inappropriately low. The correlation factor es-sentially represents concentration risk, and in the eyes of the RBNZ does not sufficiently incorporate systemic risk (i.e., that which cannot be diversified away in looking at the na-tion’s housing portfolio overall, where outcomes still are highly correlated). In the past, the RBNZ has made the banks tinker with other parts of their models (probability of default and loss given default) to compensate for this shortcoming, but now wants to address the issue head-on.

The consultation paper uses the RBNZ’s own modeling on various stress scenarios for house price declines and interest rate rises. The range of scenarios presented suggests the ap-propriate correlation factor for loans with an LVR above 80% should be between 21% and 25%, rather than the current 15% (though 15% is still deemed appropriate for LVRs under 80%, so no change there). The fact that NZ is currently in a low rate environment has fed into the analysis here, in that from a low starting point, there are more significant upside possibilities for interest rates and debt servicing ratios in the stress scenar-ios. Mapping these higher-correlation factors into capital re-quirements, analysis suggests an increase in regulatory capital on high LVR housing loans of between 14% and 23%.

To put this proposal in context, the overall regulatory capital requirements are still far less burdensome at present than they were even pre-crisis. The internal models approach may gen-erate risk weights for high LVR loans that are already much higher than Basel’s flat rate, but those on the remaining loans (which comprise the majority of the book) are generally low-er. The RBNZ previously has cited international evidence that increased capital requirements are overwhelmingly met by raising equity, rather than pulling back on lending and shrink-ing the balance sheet. As such we continue to view capital-type measures as having limited implications for the economic and policy outlooks. In our view LVR caps are the only measure that could genuinely masquerade as monetary policy, and change the outlook for the OCR.

NZ businesses tempering expectations After recording a very strong start to the year, the New Zea-land ANZ business confidence survey ticked lower in March, falling from an index level of 39.4 to 34.6. Although a down-shift in confidence is never the optimal outcome for an econ-omy, this week’s result is significantly better than we had expected, which suggests the impact of the drought is not yet as far-reaching as many in the market had assumed. Businesses also reined in their activity expectations in March, although, with the outlook index currently tracking at 32.4, it appears firms are still more optimistic on the outlook than they were in 2012.

While mild, the effects of the drought are starting to take hold, with the livestock index plunging from 16 in February to 2 in the March release. Although it is a little opaque what this actually measures, the impact of the drought is most like-ly to appear first and be most pronounced in the livestock index, which makes this one of the key components to watch over the coming months to gauge how the drought is weigh-ing on New Zealand’s farming sector. Pricing intentions picked up over the month, which could signal an anticipated increase in agricultural prices as supply starts to wane.

Source: ANZ

Source: Stats NZ

-100

-50

0

50

100

2008 2009 2010 2011 2012 2013 2014

Percent balanceNew Zealand: ANZ business confidence survey

-8

-6

-4

-2

0

2

00 02 04 06 08 10 12

NZ$ bn, year to date

New Zealand: trade balalnce

64

Economic Research Australia and New Zealand March 28, 2013



The remaining categories held up fairly well over the month, with employment and profitability ticking slightly lower and hanging on to the majority of the prior month’s gains. Resi-dential and commercial construction continues to be the standout performer, with the ongoing Canterbury rebuild promising a steady flow of construction activity over the com-ing quarters. The strength in both of these construction sectors is unsurprising and synchs with the fourth-quarter GDP re-port, which revealed strong growth in both residential (2%q/q) and other construction (+9.6%q/q) over the quarter, dispelling suggestions that construction activity has been nar-rowly confined to only residential activity.

Traded sector firing pre-drought After a disappointing start to the year, New Zealand’s trade sector bounced back in February with the monthly trade data recording a surplus of NZ$414 million (J.P. Morgan: -NZ$20 million; consensus: -NZ$12 million). The most significant contributor to the February surplus was a 15%m/m sa surge in export values, a move that completely unwinds the prior month’s plunge and easily offsets the more benign 3.9%m/m pickup in imports over the month.

The improvement on the export side was a fairly broad-based phenomenon, although the principal driver was clearly the 21%m/m increase in the milk powder, butter, and cheese cat-egory—a sector that comprises almost a third of New Zea-land’s total export basket. The strength (or weakness) in dairy exports must be taken with a grain of salt during the first few months of the year, with distortions generated over the Chi-nese New Year period making the underlying trend difficult to decipher. Therefore, we are treating the 49%oya surge in exports to China in February with a fair amount of skepticism.

Most of the other major export categories also moved higher throughout February, with logs, wood, and wooden articles (+4.7%m/m), crude oil (+52%m/m), and fruit (+24%m/m) all increasing over the month. The only decline of note was in the meat and edible offal category, where export values fell 3%m/m. Although this is a sector that is particularly vulnera-ble to the impacts of NZ’s recently declared drought, it ap-pears most of this weakness at this stage is due to softer price outcomes, with export volumes for this category actually tick-ing higher over the month.

Australia


Tue RBA cash rate announcement Apr 2 2:30pm

No change expected; see main text.

Wed Trade balance Apr 3 11:30am Nov Dec Jan Feb

A$ bn -2.4 -0.7 -1.1 -0.7 Thu Building approvals Apr 4 11:30am Nov Dec Jan Feb

%m/m 3.4 -1.7 -2.4 1.0 Thu Retail sales Apr 4 11:30am Nov Dec Jan Feb

%m/m -0.2 -0.4 0.9 0.2


Private sector credit

Dec Jan Feb

%m/m 0.4 0.2 0.2

%oya 3.6 3.6 3.6 3.6

New Zealand


No data releases of note.


International merchandise trade

Dec Jan Feb

NZ$ mn 534 -305 -287 -20 414

ANZ consumer confidence index

Dec Feb Mar

Index 22.7 2.9 39.4 3.0 35

Source: ABS, Stats NZ, RBA, RBNZ

65

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



Greater China China: Jan-Feb industrial profits increased by

17.2%oya.

Hong Kong: trade sector posted sluggish readings in February.

Taiwan: IP fell 11.45%oya on seasonal effect; demand outlook to turn more constructive by mid-year we be-lieve.

Taiwan central bank kept policy rates unchanged

The National Bureau of Statistics in China announced that industrial profits (including all industrial companies with an-nual sales exceeding 200 million yuan) increased 17.2%oya in the first two months of the year, maintaining the solid recov-ery in profits since 4Q12. Industrial profits fell in the first three quarters in 2012, but rebounded strongly in 4Q12 (in-creasing by 20.4%oya). In the whole year of 2012, industrial profits increased by 5.3% over the previous year.

In the meantime, total industrial sales revenue increased by 13.1%oya in Jan-Feb, compared to 12.8%oya in December (and 11.0% growth in 2012). Industrial enterprises’ profit margin (profits as a percentage of sales revenue) eased to 5.2% in Jan-Feb, compared to 7.9% in 4Q12.

Among major industries, the top five contributors to profit growth are: electricity, petroleum processing, steel, electronic products, and the auto sector. The five industries contributed 26.5%, 15.2%, 13.3%, 10.7% and 9.7%, respectively, to net increases in profits in the first two months of this year. Specif-ically, profits in electricity increased by 150%oya to 46 bil-lion yuan in Jan-Feb; the petroleum processing industry post-ed a profit of 5.7 billion in Jan-Feb, compared to a loss of 10.1 billion one year ago; profits in the steel industry in-creased by 17 times over a year ago (at 14.6 billion); profits in electronic products rose 89%oya to 23.5 billion; and profits in the auto sector rose 19.8%oya to 61.2 billion yuan in Jan-Feb.

Divergence in industrial profits and manu-facturing investment in China The solid growth in industrial profits in Jan-Feb is partly at-tributable to a low base (industrial profits declined 5.2%oya in Jan-Feb 2012). But overall, the recoveries in industrial profits, together with the turnaround in inventory cycle since 4Q12 are positive news for the economic recovery.

However, manufacturing investment has remained on the weak side. In the first two months of this year, manufacturing investment (which accounted for 34% of total fixed asset in-vestment) increased by 17.0%oya, continuing the softening

trend observed throughout 2012. The divergence between manufacturing investment and industrial profit margins in recent months is somewhat surprising, given their close rela-tionship in the past. This may be driven by overcapacity in certain key industries. For instance, in the steel industry, dur-ing the destocking phase many steel producers chose to cut output. The tentative output cut led to a strong rebound in steel prices and corporate profits. But with the recovery in profits, producers resumed outputs and now inventory is climbing back to historically high levels. The adjustment pro-cess is shorter than usual and does not involve new invest-ment given overcapacity and low utilization in the sector. In the near term, whether and when manufacturing investment can stabilize remains the biggest uncertainty on the domestic front.

Overall, the economic data in the first two months appear to support our view that economic recovery continues, but the momentum of the recovery is somewhat softer in 1Q vs. 4Q12. We expect the economy to expand by 8.0%q/q saar in 1Q (vs. 9.4%q/q saar in 4Q12), or equivalently to grow 8.1%oya (vs. 7.9%oya in 4Q12). We maintain our full-year growth forecast at 8.2%.

Source: NBS.

Source: NBS.

-50

0

50

100

150

07 08 09 10 11 12 13 14

%oya, ytd

Industrial profitsIndustrial sales

revenue

China: industrial enterprises' profits and sales revenue

2

4

6

8

10

12

10

20

30

40

50

%oya, 3mma

Manufacturing FAI and industry profit margin

Profit margin

2008 2009 2010 2011 2012 2013

Manufacturing FAI

% of sales, 3mma

66

Economic Research Greater China March 28, 2013



Hong Kong: soft trade activity in February Hong Kong’s trade figures came in much softer than expected in February. The total value of exports declined 16.9%oya in the month, after increasing 17.6%oya in January. Our seasonal adjustment suggests that total exports contracted by 11.9%m/m sa versus -2.2%m/m sa in January. Meanwhile, the total value of imports dropped 18.3%oya in February, after gaining 23.9%oya in January. This translated into a decline of 24.8%m/m on seasonally adjusted terms (vs. -7.4%m/m sa in January). The trade deficit as such widened to HK$34.0 bil-lion in February (vs. -HK$27.5 billion in January).

Details by destination show that exports to Mainland China fell 17.2%m/m sa after rising consecutively in the previous three months. This was generally consistent with China’s rela-tively soft February import reading. Meanwhile, exports to the US picked up slightly, rising 0.4%m/m sa (vs. -10.8%m/m sa in January). Although we do not have details on total exports to the EU at this point, exports to Germany, which account for about 24% of the total exports to EU, fell 15.0%m/m sa in February (vs. -7.2%m/m sa in January). Exports to Japan con-tinued to fall, by 15.2%m/m sa, after dropping 8.2%m/m sa in January. Aside from Japan and China, exports to other Asian countries declined moderately by 3.2%m/m sa (vs. 0.8%m/m sa in January).

The difference in timing of the Lunar New Year holiday this year has contributed in part to the recent volatility in trade data. However, if we combine January and February trade figures, total exports and imports delivered only modest growth of 0.3%oya and 1.4%oya, respectively, slower than the growth rates of 7.0%oya and 8.1%oya in 4Q12. Hence, external demand conditions appeared to be soft for Hong Kong’s trade sector entering into early 2013. Looking ahead, our global team continues to expect above-trend growth for the global economy from mid-2013, in particular with more resilient outlooks for the US and Japan. This, together with steady recovery of the Chinese economy and improving do-mestic demand conditions, should provide support for Hong Kong’s trade sector during the second half. In the near term, the external sector could still face challenges posed by DM countries, for instance, drags on the US economy from ex-pected softer consumer spending growth due to the payroll tax hike, rising gasoline prices in February, and a further reduc-tion in government spending. Recent weaker data from the Euro area and increased uncertainty surrounding the sovereign debt crisis are also expected to weigh on the Euro area econ-omy and thus its demand from the rest of the world.

Taiwan: IP fell on seasonal effect Taiwan’s February IP was modestly lower than expected, falling 11.45%oya, compared to the downwardly revised 19.05%oya growth in January (from 19.17%oya previously). While the decline in the %oya growth rate in February was

caused by a seasonal effect (the Lunar New Year holidays fell in February this year, compared to January last year), our sea-sonal adjustment process shows that IP fell 3.0%m/m sa in February, after a 3.8%m/m sa rise in January. Combining the first two months, Jan-Feb IP rose a modest 3.24%oya. In sea-sonally adjusted sequential terms, average Jan-Feb IP was 0.5% below the 4Q12 monthly average level.

Overall, aside from the seasonal volatility around the Lunar New Year holidays, it appears that Taiwan’s export and in-dustrial sectors’ growth momentum may be easing somewhat early in the year, following the notable gain during 4Q12.

In the breakdown, tech production led the easing in headline IP in February. IP for information and electronics fell 5.1%m/m sa in February (vs. +3.0%m/m sa in January). Meanwhile, non-tech IP also eased in February, falling 2.5%m/m sa (vs. +4.8%m/m sa in January). IP for metal and machinery fell 3.5%m/m sa in February (vs. +6.2%m/m sa in January). IP for chemical industry fell 2.5%m/m sa in Febru-ary (vs. +1.9%m/m sa in January). Meanwhile, IP for the gen-erally volatile construction sector rose 6.7%m/m sa in Febru-ary (vs. +23.1%m/m sa in January).

Source: Hong Kong C&SD, J.P.Morgan

Source: Taiwan MOEA, J.P. Morgan

-60

-40

-20

0

20

40

60

80

04 05 06 07 08 09 10 11 12 13

%3m/3m, saar

Hong Kong: merchandise trade

Imports

Exports

-40

-20

0

20

40

60

%3m/3m, saar

2010 2011 2012 2013

IP

Export volume (adjusted by export

prices)

Taiwan: IP and exports

67




Inventory flat in January The latest data showed that the Taiwanese manufacturing sec-tor’s total inventory level was essentially unchanged in Janu-ary, after rising 1.2%m/m sa in December. Looking at the major categories, tech sector inventories rose 1.5%m/m sa in January, following a 2.5%m/m sa fall in December. On the other hand, non-tech inventories edged down 0.2%m/m sa in January, after a 2.0%m/m sa rise in December. With a notable gain in shipments (up 7.0%m/m sa), the overall manufac-turing inventory to shipments ratio fell moderately in January.

Better demand outlook by midyear Looking ahead, on the external environment our global team sees some slight upside risk to the call for a modest decelera-tion in the US in 2Q13, while on the other hand the Euro area growth picture has continued to disappoint, leading to the recent downgrade of J.P. Morgan forecasts for the Euro area economy for the rest of the year. China appears to be on track for a continued recovery this year. Overall, we continue to anticipate a move to above-trend global GDP growth after midyear, providing support for Taiwan’s export and industrial sectors down the road.

Against this global backdrop, we expect the Taiwanese econ-omy, including the export and manufacturing sectors, to show a steady recovery in the coming quarters. Our real GDP growth forecast for full-year 2013 stands at 4.2%oya.

Central bank kept policy rate on hold The Taiwan central bank left its policy rate unchanged at the March quarterly monetary policy meeting. Recall that the Taiwan central bank had implemented five consecutive 12.5bp hikes in the key policy rate from June 2010 through June 2011; after that the key rates were held unchanged dur-ing the last seven quarterly policy meetings. With this week’s policy decision, the discount rate, the key policy rate in Tai-wan, remains at 1.875%.

More details from the central bank statement include:

On the external environment, the central bank recognized that monetary stances remained accommodative in major economies entering into this year, and the global economy has been slowly recovering. Recent events in the Euro area together with US fiscal drag still pose uncertainties for global economic growth.

For the domestic economy, the central bank expects exports and private investment to recover and drive growth. For full-year 2013, the economy is expected to grow 3.59%oya, compared to 1.26% in 2012.

On the inflation front, the central bank stated that the mod-est recovery of the global economy, together with the stabi-lization of international raw material prices has helped alle-viate global inflation pressure. Last year’s domestic oil and electricity price hikes, as well as the weather-related spike in food prices provided a favorable base effect for headline inflation in 2013. For full-year 2013, CPI inflation is ex-pected to average at 1.37%oya, compared to 1.93%oya for 2012.

Overall, the statement highlighted that given the overall growth-inflation dynamic (the external environment still carries uncertainties, the domestic economy has been on track for a modest recovery, and inflation pressure is eas-ing), the central bank decided to keep the policy rate un-changed in this week’s quarterly meeting. We expect the central bank will keep its policy rates on hold for most of this year.

The central bank statement also highlighted that bank lend-ing for property purchases in certain areas where prices have risen significantly have been warned to exercise cau-tion and enhance their risk management. Recall the central bank imposed selective controls on the luxury housing segment in June 2012, in response to rising concerns on el-evated property prices in certain areas. The last round of prudential measures has brought down the average LTV ra-tio in the targeted areas to 57% and led the average mort-gage rate upward to above 2%.

Meanwhile, the central bank reiterated that when irregular factors (such as massive inflows or outflows of short-term capital) or seasonal factors lead to excess volatility and dis-orderly movements in the NT dollar exchange rate with ad-verse implications for economic and financial stability, it will step in to maintain an orderly market.

Source: CBC.

0

1

2

3

4

05 06 07 08 09 10 11 12 13 14

% per annum

Taiwan: benchmark policy rate and market interest

Central bank rediscount rate

10Y government bond yield

Bank lending rate for new loans

Overnight interbank call loan rate

68

Economic Research Greater China March 28, 2013



China:

Data releases and forecasts Week of April 1 – 5 Mon Purchasing managers index Apr 1 Index

9:00am Dec Jan Feb Mar

Overall (Markit) 51.5 52.3 50.4 51.8 Output 51.9 53.1 50.8 __ Overall (NBS) 50.6 50.4 50.1 51.5 Output 52.0 51.3 51.2 __


No data released. Sources: China National Bureau of Statistics, Markit, J.P. Morgan.

Hong Kong:

Data releases and forecasts Week of April 1 – 5 Tue Retail sales volume Apr 2 % change

4:30pm Nov Dec Jan Feb

%oya 8.1 8.5 10.4 14.7 %m/m sa 4.6 1.7 0.5 3.5


Merchandise trade (Mar 26) HK$ bn

Dec Jan Feb

Balance -48.0 -48.0 -27.5 -27.5 -29.4 -34.0

Exports 311.0 311.0 304.8 304.8 252.1 215.7

%oya 14.4 14.4 17.6 17.6 -2.9 -16.9

Imports 358.9 358.9 332.3 332.3 281.5 249.7

%oya 11.9 11.9 23.9 23.9 -7.9 -18.3

Sources: Hong Kong Census and Statistics Department, J.P. Morgan.

Taiwan:

Data releases and forecasts Week of April 1 – 5 Mon Markit manufacturing PMI Apr 1 Index, sa


Overall 50.6 51.5 50.2 50.6 Output 50.4 53.3 50.2 __


Industrial production (Mar 25) % change

Dec Jan Feb

%oya 2.0 2.0 19.0 19.0 -10.8 -11.4

%m/m sa -3.6 -3.6 3.8 3.8 -3.0 -3.0 Composite leading indicator (Mar 27) % change

Dec Jan Feb

%m/m sa 1.1 1.2 1.1 1.3 __ 1.1 Central bank MPC meeting (Mar 28) %p.a.

3Q12 4Q12 1Q13

Rediscount rate 1.9 1.9 1.9 1.9 1.9 1.9

Sources: Taiwan Ministry of Economic Affairs, CBC, J.P. Morgan.

69

JPMorgan Chase Bank, N.A., Seoul Branch Min Joo Kang (822) 758-5512 [email protected] Jiwon Lim (82-2) 758-5509 [email protected]


Korea Second estimate of 4Q real GDP growth trimmed

Forward-looking survey indicators firmed modestly

Next week: March trade and CPI

The Ministry of Strategy and Finance (MoSF) lowered its official forecast of 2013 GDP to 2.3%y/y from 3.0% previously (first table). The government commented that the new forecast assumes a “status quo” for overall economic policies, implicitly pressuring other government entities and the Bank of Korea to join its effort to boost the economy. J.P. Morgan has long expected that economic policies would turn supportive, with the current growth forecast assuming a Won7 trillion supplementary budget, a modest pace of deregulation for housing transactions, and in a close call, one more policy rate cut and/or an adjustment of the aggregate loan ceiling by the BoK (see Global Data Watch, March 22). Based on the comments by various policymakers, the extra budget would be larger than our expectations, but the extent of housing deregulation could be more modest.

Meanwhile, the BoK trimmed 4Q GDP slightly in its second estimate, while upgrading 1H GDP. In the new estimate, the BoK left full-year 2012 real GDP growth unchanged at 2.0%y/y but kept the quarterly profile that showed the pace of growth reaccelerating modestly in 4Q, after having slowed for two quarters. By industry, manufacturing output was revised up to rise 0.8%q/q saar in 4Q12, instead of the 0.1% decline in the advance report, while services and construction were revised down. Revisions to expenditure details were generally constructive: both investment and exports were estimated to decline less than in the advance release, while the consumption and inventory gains were trimmed. We will review our GDP forecast after the February IP and March trade reports and more clarification of government policies next week.

Forward-looking indicators improved Consumer sentiment improved in March with firm details and the headline index marking its highest level since last May. Consumers appeared to have regained confidence with improved global conditions, in addition to optimism from the new government’s pledge to support economic growth and boost the real estate market. Consumer spending plans rose on better expectations for household income and real estate prices. Meanwhile, business sentiment also improved modestly further if controlling for seasonal effect. The sentiment gains were more concentrated in the outlook components, but the current conditions assessment also edged upward. Positive news on the global economy and renewed KRW weakness boosted the outlook for exports and profits notably.

Next week: March customs trade and consumer prices Next week’s releases of March trade and consumer prices will be important for anticipating the Bank of Korea’s policy rate decision in April. Given the usual volatility of 1Q data due to lunar holiday noise, we expect some rebound in March, but based on the first-20-day outcome, it should only partially reverse the decline in February. As the February outcome was deflated by unfavorable calendar effects, the over-year-ago growth comparison should have improved sharply in March. Meanwhile, consumer price inflation is expected to rise slightly. Key industrial products and oil prices are expected to increase due to KRW depreciation and higher global oil prices, but these should be partially offset by price declines due to government subsidies on childcare facilities and school lunch programs.

Forecast of key macro indicators

%y/y, unless otherwise noted

MoSF BoK JPM Consensus

new old

Real GDP 2.3 3.0

2.8

2.8

3.0

Consumer prices 2.3 2.7 2.5 2.1 2.5

Current account (US$ bn) 29.0 30.0 32.0 36.6 32.8

Source: MoSF, BoK, J.P. Morgan

Real GDP

% change at annual rate

2011 2012 2012

1Q 2Q 3Q 4Q

%q/q, saar

Real GDP 3.3 1.2 0.2 1.1

Private consumption 3.2 1.5 3.0 3.1

Fixed investment 12.8 -14.2 -5.9 -6.1

Construction -5.9 -5.3 2.7 -4.6

Facilities, equipment 48.4 -27.8 -19.1 -6.9

Intangible assets 17.4 -4.5 -2.6 -14.4

Export of goods and services 16.7 -1.4 7.9 -4.2

Import of goods and services 18.4 -6.9 7.5 -3.0 %oya

Real GDP 3.7 2.0 2.8 2.4 1.6 1.5

Private consumption 2.4 1.7 1.3 1.0 1.7 2.7

Fixed investment -1.0 -1.7 3.7 -2.6 -2.5 -4.2

Construction -4.7 -2.2 -0.4 -3.1 -0.3 -4.2

Facilities, equipment 3.6 -1.9 8.8 -3.5 -6.9 -5.2

Intangible assets 7.4 4.1 9.4 6.8 4.2 -1.2

Export of goods and services 9.1 4.2 5.7 3.5 3.2 4.4

Import of goods and services 6.1 2.5 4.7 0.5 1.4 3.5

Source: BoK; Data series are based on the final revision

70

Economic Research Korea March 28, 2013

JPMorgan Chase Bank, N.A., Seoul Branch Min Joo Kang (822) 758-5512 [email protected] Jiwon Lim (82-2) 758-5509 [email protected]

Data releases and forecasts March 29: Data had not been released at time of publication Fri Industrial production Mar 29 % change

8:00am Nov Dec Jan Feb

%oya 2.1 -0.5 7.3 -6.5 %m/m sa 2.1 1.6 -1.5 0.5

IP is forecast to have rebounded in February, but only modestly, with producers’ inventory to shipments ratio having risen to a four-year high in January. However, due to unfavorable base and calendar effects, the over-year-ago comparison likely dipped into a negative territory.

Fri Producer shipments and inventories Mar 29 %oya


Shipments 1.2 -1.5 4.4 -4.0 Inventories 2.1 3.4 7.1 7.0

On a month-on-month basis, producers’ shipments likely rebounded, accompanied by a reduction in inventory.

Fri Composite leading indicator Mar 29 2005=100, sa


Index 109.1 109.9 110.1 110.0

Fri Service activity Mar 29 % change


%oya 1.4 0.7 1.7 -0.3

Service activity likely rose modestly in February, but the over-year-ago comparison probably slowed due to an unfavorable calendar effect.

Fri Consumption goods sales Mar 29 % change


%oya 4.0 2.0 -2.8 4.4

Consumption good sales are likely to have rebounded in February, after the previous month’s decline. This monthly volatility has been caused mostly by the different timing of the Lunar New Year holidays in 2012 and 2013.

Week of April 1 - 5 Mon Consumer prices Apr 1 % change


%oya 1.4 1.5 1.4 1.6 %m/m sa 0.1 0.0 0.0 0.1

See main story.

Mon Purchasing Managers Index Apr 1 Index, sa


PMI - Manufacturing 50.1 49.9 50.9 51.1

Mon Customs trade Apr 1 US$ bn nsa


Trade balance 1.2 0.5 2.0 2.6 Exports 46.3 45.7 42.3 49.5 Imports 45.1 45.2 40.3 46.9

See main story.


Real GDP—2nd estimate (Mar 26) % change

3Q12 4Q12 2nd-4Q

%q/q 0.1 0.0 0.4 0.4 0.4 0.3

%oya 1.5 1.6 1.5 1.5 1.5 1.5

According to the updated series, real GDP grew 3.7%y/y (revised up from 3.6%) in 2011 and 2.0% in 2012. On a quarterly basis, real GDP growth in 4Q12 was revised down modestly to 1.1% q/q saar from 1.5%.

Consumer survey (Mar 27) 100=neutral reading, nsa

Jan Feb Mar

Index 102.0 102.0 102.0 102.0 102.5 104.0

Current account (Mar 28) US$ bn nsa

Dec Jan Feb Balance 2.1 2.1 2.3 2.3 1.8 2.7

Reflecting outsize seasonal effects, the seasonally adjusted current account surplus narrowed sharply from US$6.7 billion in January to US$4.4 billion in February.

FKI business survey (Mar 28) Index, sa

Jan Feb Mar 1-month outlook 93.7 94.0 96.1 96.6 99.0 100.9

Current conditions 89.2 89.3 88.8 90.2 91.0 92.7

Business sentiment improved modestly further in February after controlling for seasonal effects. The gain in sentiment was concentrated in the outlook components while the current conditions assessment improved but from a low level.

Source: BoK, NSO, FKI, Markit, and J.P. Morgan

71

JPMorgan Chase Bank, N.A., Singapore Branch Sin Beng Ong (65) 6882-1623 [email protected]


ASEAN Malaysia’s January trade balance narrows further on

imports

Current account surplus expected to print 4.5% of GDP in 2013 down from 6.6% in 2012

Domestic indicators remain firm, some modest slowing expected in 1Q13 before recovering solidly in 2H13

The recent data flow from Malaysia suggests that growth con-tinues to be underpinned by domestic demand even as exports have been somewhat lackluster. Although the GDP forecast assumes some deceleration in 1Q13 on the heels of election-related uncertainty, the 2H13 forecast assumes a solid recov-ery to 5.0%-5.5%q/q saar and reflects the uninterrupted im-plementation of investment projects once the general elections are over in 2Q13. This forecast is also reflected in the further narrowing of the current account surplus to 4.5% of GDP this year, while the central bank in its recent annual report expects a surplus of 4.4%. In the interim, the high frequency data are expected to become choppy ahead of elections though the underlying momentum remains firm despite the headline un-certainty. This momentum is underpinned by several factors. First, domestic labor markets have been surprisingly strong driven by hiring in the services sector that has led to a sus-tained period of low unemployment. If the forecast is correct and the investment momentum continues after the elections, employment gains should be sustained in 2H13. In addition, domestic bank credit conditions remain supportive with aver-age bank lending rates drifting lower due in part to firm com-petition even in spite of the normalization in policy rates the past couple years. Despite firm credit and labor markets, infla-tion has been benign, though the expected liberalization of subsidized prices during 2013 should lift inflation to 2%-3%oya.

The forecast of strong domestic demand conditions in 2H13 twinned with a further rise in domestic incomes and credit could lead to reassessment of monetary conditions in 3Q13.

Trade surplus narrows further One of the recent features in the macro data in Malaysia has been the narrowing in the trade surplus, reflecting strong im-ports for domestic demand. The trade balance in January printed a small surplus of US$1.1 billion sa—the narrowest since the Asian crisis of the late 1990s (first chart). The dete-rioration owed to weaker exports and stronger imports, espe-cially of intermediate goods, which rose a firm 6.8%m/m sa. In the past, strength in intermediate imports would generally be a positive signal for electronics exports, especially given the high import content in Malaysia’s electronics exports. However, the recent lift in intermediates owed to stronger

Source for all charts this page: DoS, BNM, and J.P. Morgan

0

1

2

3

4

5

8

10

12

14

16

18

20

22

05 07 09 11 13

US$ bn, 2mma, sa, both scales

Malaysia: trade

Exports Imports

Balance

0

2

4

6

05 07 09 11 13

US$ bn, sa

Malaysia: intermediate goods imports

Parts

Fuel and lubricants

Others

-20

-10

0

10

20

30

40

05 07 09 11 13

%oya, LC terms

Malaysia: fixed investment and capital goods imports

Real fixed investment Capital goods imports, nominal terms

0

5

10

15

20

25

2

4

6

8

10

12

14

05 06 07 08 09 10 11 12 13

% GDP, nsa

Malaysia: current accountUS$ bn, nsa

% GDP

Level

72

Economic Research ASEAN March 28, 2013

JPMorgan Chase Bank, N.A., Singapore Branch Sin Beng Ong (65) 6882-1623 [email protected]

imports of fuel and lubricants and industrial inputs rather than parts for the electronics sector (second chart previous page). Indeed, imports of parts continued to soften, suggesting that the outlook for electronics exports remains unclear in the near term. The other component of imports that is expected to ease in the near term is investment goods, reflecting some of the likely lull in domestic demand in 1Q13 ahead of elections. This component also provides a useful bellwether of the do-mestic investment cycle, and the expectation is that there should be a strong sequential recovery in late 2Q13 and into 2H13 following the elections (third chart previous page).

The combination of strong domestic demand and modest ex-ports is expected to narrow the current account surplus further in 2013, with J.P. Morgan expecting a 4.5% of GDP surplus while the central bank’s forecast is marginally narrower at 4.4% (fourth chart previous page).

Labor market conditions have been firm Aside from the external balances, the recent strength of domestic demand has also been reflected in the labor markets, with the unemployment rate declining amid very strong em-ployment gains (first chart). In particular, the gains in em-ployment have been strongest in the service-producing sec-tors, which contrasts with the recent softness in manufactur-ing employment (second chart). This also implies that the traditional linkages between domestic and external demand have loosened in the face of the strong domestic investment upturn. Although unemployment has been drifting lower, the link between the tightening in labor markets has not yet showed up in inflation, which has been trending lower in the past year due in large part to easing food and energy prices and strong domestic competition that has helped mitigate the impact of higher input costs (third chart). In addition, follow-ing the increase in minimum wages this year, there could be some upward pressure on wages, though firms are expected to respond by cutting costs and compressing margins rather than raising prices.

Bank credit remains on uptrend as lending rates drift lower Although inflation has been easing, bank credit has continued to rise, reaching 117.7% of GDP in 4Q12 and suggesting that the credit cycle remains firm. Part of this demand also likely owes to the decline in average bank lending rates, which reached 4.7% in January, lower even than the trough of 4.83% at the peak of the easing cycle. This suggests that the trans-mission from the policy rate to lending rates has loosened and argues for less accommodation (fourth chart).

Source for all charts this page: DoS, BNM, and J.P. Morgan

0

200

400

600

800

3.0

3.3

3.6

3.9

05 06 07 08 09 10 11 12 13

% labor force, 3qma, nsa

Malaysia: labor market conditions'000s, chg over year ago, 2qma

Unemployment rate

Employment

-200

0

200

400

600

05 06 07 08 09 10 11 12 13

'000s, change from over year ago

Malaysia: employment by sector

Non-manufacturing

Manufacturing

80

90

100

110

120

130

-5

0

5

10

05 07 09 11 13

%oya

Malaysia: CPI and bank credit% GDP, sa

Headline CPI

Bank credit

1.5

2.5

3.5

1.0

2.0

3.0

4.0

5.0

6.0

7.0

05 07 09 11 13

%p.a., eop, both scales

Malaysia: interest rates

Average lending ratePolicy rate

Average lending rateless policy rate

73

JPMorgan Chase Bank, N.A., Singapore Branch Benjamin Shatil (65) 6882-2311 [email protected]


ASEAN Indonesia:


Mon Consumer prices Apr 1 % change 11:00am Dec Jan Feb Mar %oya 4.3 4.6 5.3 5.2 %m/m sa 0.3 0.6 1.0 0.6

Food, %oya 5.7 7.3 10.3 ___ Nonfood, %oya 3.9 3.7 3.8 ___

Mon Merchandise trade Apr 1 US$ bn, nsa 11:00am Nov Dec Jan Feb Trade balance -0.6 -0.2 -0.2 ___ Exports, %oya -5.3 -9.9 -1.2 ___

Imports, %oya 10.0 -5.4 6.8 ___


No data released.

Malaysia:


Fri Merchandise trade Apr 5 US$ bn, nsa 12:00pm Nov Dec Jan Feb

Trade balance 2.9 2.7 1.1 1.2 Exports 19.0 18.7 18.7 16.5 %oya 5.4 -2.4 6.0 -12.2 Imports 16.1 16.0 17.7 15.4 %oya 7.5 -3.2 18.8 0.4


No data releases.

Philippines:


Fri Consumer prices Apr 5 % change 9:00am Nov Dec Jan Feb All items, %oya 2.9 3.0 3.4 3.4 %m/m sa 0.1 0.3 0.2 0.2


Merchandise trade (Mar 26) US$ bn nsa Nov Dec Jan Imports 5.1 5.2 5.3 5.6 4.7

%oya 2.2 13.2 14.4 8.7 -8.0

Import weakness was broad-based with both electronics and nonelectronics falling at double-digit paces. Exports, which were reported on Mar 12, fell more modestly, leaving the trade deficit at US$0.7 billion versus $1.3 billion (nsa) in December. In the details, electronics imports fell 12.6%m/m sa and were down 35.8%3m/3m saar while nonelectronics fell 13.7%m/m sa but were still up 4.2%3m/3m saar. In both cases, the sharp pull-back is likely only temporary, especially given the seasonality common around this time of year.

Government budget PHP bn Nov Dec Jan Balance -11.6 -115.7 -22.7 -19.5

Revenue 155.3 126.4 158.6 138.4

Expenditure 166.9 242.1 174.1 158.0

In the details, revenues rose 1.5%m/m sa and 9.5%oya while expenditures crashed, down 26.5%m/m sa and up only 11.0%oya. The sharp decline in expenditure is not surprising as the government ramped up spending as usual in November and December. Indeed, expenditures were still up 92.6%3m/3m saar in January despite the large monthly decline.

Singapore:


Mon Purchasing managers index Apr 3 Index 9:30pm Dec Jan Feb Mar PMI 48.6 50.2 49.4 50.5 PMI—electronics 46.6 49.9 52.1 52.5


Consumer prices (Mar 25) % change Dec Jan Feb All items, %oya 4.3 3.6 4.6 4.9

%m/m sa 0.8 0.1 0.8 1.1

The jump in CPI inflation was in large part due to COE prices, which hit a record high in January (the CPI computes COE prices with a one-month lag). However, partly due to tighter auto-related financing rules by the government and partly be-cause of base effects, the contribution to CPI inflation from COE prices will now start to decline. This effect, along with slower rises in housing prices, should lead to a sharp slowdown in CPI inflation over the next three months. But the jump in CPI inflation was also partly a result of higher core inflation, a trend that is expected to persist. Core inflation and the labor market have a strong link and the unemployment rate is currently at a cycle low of 1.9% sa. Tight labor market conditions combined with strict immigration and a worsening in the inflation-unemployment trade-off suggest that core inflation will continue to firm further, particularly in the second half of the year. As a result, we expect CPI and core inflation trends to diverge this year. While CPI inflation should slow to around 3%oya, core inflation should gradually firm to 2.5%oya, with much of the firming occurring in 2H (there could even be some

Sources: Central Bureau of Statistics, Indonesia; Department of Statistics, Malaysia; National Statistical Coordination Board, Philippines; National Statistics Office, Philippines; Singapore Department of Statistics; J.P. Morgan

74

Economic Research ASEAN March 28, 2013


softness in coming months). Since the MAS NEER has no im-pact on COE and housing prices, and since the MAS looks 6-18 months in the future when setting policy, we expect the central bank to fade the COE and housing price-led slowdown in CPI inflation and instead focus on the risks to core inflation. Thus, we look for the MAS to stay on hold in April, with risks of a move tilted to the upside rather than to the downside.

Industrial production (Mar 26) % change Dec Jan Feb %oya 1.3 -0.4 -6.5

%m/m sa 6.6 -9.2 1.9 -0.7

In the details, electronics fell 2.2%m/m sa but were still up 2.4%3m/3m saar versus -7.8% in January. Though modest, the 2.4% rise was the first gain in sequential trend electronics out-put since last April, and we expect it to firm further in coming months. Biomedical and transport engineering output were also soft, with the former falling 0.5%m/m sa and the latter declining 11.8%. Both of these declines come on the back of weak monthly prints in January. Thus the sequential trend rates moderated no-tably. Otherwise, chemicals, precision engineering, and general manufacturing all rose 5.5%m/m sa, 9.0%, and 6.3%, respec-tively. Biomedical and transport engineering output tend to be volatile. After two months of consecutive decline in each indus-try, we expect some strong payback in coming months.

Thailand:


Mon Consumer prices Apr 1 % change 11:00am Dec Jan Feb Mar %oya 3.6 3.4 3.2 3.1 %m/m sa 0.7 0.0 0.1 0.2

Wed BoT monetary policy meeting Apr 3 % p.a. 2:30pm Nov Jan Feb Mar One-day repo rate 2.75 2.75 2.75 2.75

Review of past week's data

Manufacturing production (Mar 28) % p.a. Dec Jan Feb %oya 23.0 10.1 10.2 5.4 -1.2

%m/m sa -4.5 -0.6 -0.8 2.0 -1.4

Soft electronics led the slowing in output. Overall, electronics were down 2.9%m/m sa, reflecting a 1.5% contraction in hard disk output and a 14.8% plunge in semiconductor production. Auto production was also soft in February, contracting 5.8%m/m.

Merchandise trade (Mar 29) US$ bn, nsa Dec Jan Feb

Trade balance 0.3 -2.8 1.8 Exports, %oya 13.6 15.5 4.2 Imports, %oya 1.3 38.3 6.3

Private consumption index (Mar 29) % change Dec Jan Feb

%oya 3.5 6.8 5.0 %m/m sa -1.7 2.0 1.0

Private investment index (Mar 29) % change Dec Jan Feb

%oya 29.0 22.0 13.2 %m/m sa -0.5 0.6 0.5

Data not released by time of publication.

Vietnam:


No data releases.


Consumer prices % change Jan Feb Mar All items, %oya 7.1 7.0 6.7 6.6

%m/m sa 0.5 0.5 0.0

The sequential trend rate eased for a fourth straight month to 5.5%3m/3m saar from 7.2% in February and from a recent peak of 15.3% in November. Core prices (ex. food and transport) were also flat on the month, and the annualized rate eased for a second straight month to 9.3%3m/3m saar from 11.6% in Janu-ary and from 23.2% in November. Core prices were up 11.3%oya. We had expected a soft inflation print given the usu-al post-Tet New Year trends, and the March report did not sur-prise in any major way. Monthly price pressures were soft across the board with healthcare and education up the most at 0.6%m/m sa and 0.7%, respectively. Pressures in all other parts of the CPI were benign.

Merchandise trade US$ bn nsa Jan Feb Mar Trade balance 0.8 0.9 -0.1 0.4 -0.3

Exports, %oya 43.2 -9.6 -13.9 17.9 16.0

Imports, %oya 24.8 -23.1 -15.6 18.8 24.8

The small March trade deficit left the year-to-date trade balance in surplus of $481 million, which is the strongest start to any year in recent history except for 2009, when the 1Q trade bal-ance was temporarily buoyed by gold re-exports.

Real GDP % change 3Q12 4Q12 1Q13 %oya 5.2 5.8 6.0 4.9

%q/q saar 9.6 8.3 7.2 -3.9 -4.6

Industry and construction accounted for most of the slowdown in growth. We look for another year of subpar growth in Vi-etnam of 5.2% in 2013.

Sources: Singapore Department of Statistics; Singapore Economic Development Board; Bank of Thailand; Office of Industrial Economics, Thailand; General Statistics Office, Vietnam; J.P. Morgan

75

J.P. Morgan India Private Limited Sajjid Z Chinoy (91-22) 6157-3386 [email protected] J.P. Morgan Securities LLC Jahangir Aziz (1-202) 585-1254 [email protected]


India 4Q CAD prints at an unprecedented 6.7% of GDP on

weak exports and surging gold imports

Government rationalizes FII limits in rupee-denominated bonds to boost capital inflows

Political uncertainty remains elevated as another regional party voices discomfort with ruling coalition

As we had expected, India’s 4Q12 CAD surged to 6.7% of GDP (J.P. Morgan forecast: 6.8%) on weak exports and a sharp rise in gold imports. Recognizing that the current ac-count deficit is likely to remain elevated over the foreseeable future, the government moved to rationalize foreign institu-tional investor (FII) limits in rupee-denominated government and corporate bonds this week. Specifically, all sub-limits were eliminated and authorities indicated that limits would be reviewed and increased periodically.

But perhaps the most important news of the week is that polit-ical uncertainty ratcheted up another notch in India. After a key ally had withdrawn support to the government last week, another ally (supporting the coalition from the outside) indi-cated its discomfort with the government this week. While this is unlikely to result in an election immediately, it distinct-ly increases the possibility of an election at the end of 2013, and makes it harder for the government to push ahead with politically sensitive economic reform in the coming months.

4Q12 CAD surges to a record 6.7% of GDP

India’s 4Q12 CAD surged to 6.7% of GDP, rising sharply from the 5.3% of GDP printed in the previous quarter as we had suspected. This was largely due to a sharp decline in the trade deficit from US$48.3 billion (11.5% of GDP) in 3Q to $59.6 billion (12.3% of GDP) in 4Q. While exports just about held up thanks to refined oil exports, imports rose over $13 billion, half of which was due to gold demand. Gold imports increased to a record quarterly high of $17.8 billion. Services surplus remained broadly unchanged at around $27 billion.

Unspecified capital saves the day Despite the record high CAD, the balance of payments (BoP) managed to deliver a small surplus of US$0.8 billion. The en-tire improvement was on account of an $11.6 billion turnaround in “other capital” and errors and omissions. These flows had been consistently negative in the previous three quarters, but turned sharply positive ($6.1 billion), perhaps lured by the ru-pee appreciation after the reform blitz in September.

Net FDI declined to US$2.5 billion from nearly $9 billion in 3Q as inward investments slowed and outward flows increased.

Portfolio inflows rose modestly to $8.8 billion and as has been the case for some time, India continued to depend strongly on external borrowing to finance its current account deficit. Loans (both short- and long-term) rose around $5 bil-lion from the previous quarter to $10.6 billion. Indeed, so far this fiscal year (year beginning April), of the $71 billion of net capital inflows, FDI and equity has accounted for only $30 billion.

As the data release came after closing, market impact of this outsized CAD print has not yet hit the rupee. While an in-crease in the deficit was widely anticipated, the extent was underestimated by the market. Surprisingly, the rupee has held firm despite the general EM asset weakness in recent weeks arising from the Cyprus crisis. Much of this under-scores a significant improvement in the trade balance this quarter. And so it is possible that the market sees past the 4Q12 print, giving the rupee some respite.

FII limits rationalized Recognizing that the current account deficit is likely to stay at elevated levels over the foreseeable future, the government has tried to find ways to boost capital inflows over the last several months. First came reforms to attract FDI into the multi-brand retail and aviation sectors, and authorities are

Source: RBI

Source: Ministry of Trade and Commerce

-8

-6

-4

-2

0

% of GDP

India: current account balance prints at a record deficit in 4Q12

2009 2010 2011 2012

-25

-20

-15

-10

-5

0

US$ bn

India: though the February trade deficit narrowed

2011 2012

76

Economic Research India March 28, 2013

J.P. Morgan India Private Limited Sajjid Z Chinoy (91-22) 6157-3386 [email protected] J.P. Morgan Securities LLC Jahangir Aziz (1-202) 585-1254 [email protected]

toying with increasing FDI limits in several other sectors. In addition, external commercial borrowing (ECB) for Indian corporates has been eased over the last few years, but this still forces Indian borrowers to bear the FX risk.

In light of this, the government moved this week to rationalize foreign institutional investor (FII) limits in rupee-denominated government and corporate bonds. Heretofore, there had been myriad sub-limits with restrictions on tenor, sector, and type of investor that had increased transaction costs for investors and discouraged foreign investment. But this week the government eliminated all the sub-limits such that there are only two buckets of bonds—US$25 billion for government bonds and US$51 billion for corporate bonds. Interest in corporate bonds should increase, because until now about half the limit was reserved for the infrastructure sector, which had seen little interest. Authorities also indicated that the corporate bond limit would be reviewed/increased when utilization hits 80%.

There was less to cheer about for government bonds. Authori-ties indicated that these limits would periodically be in-creased, but would not surpass 5% of the government’s gross borrowing limit. However, more aggressive increases in gov-ernment bond limits cannot be ruled out if the BoP comes under pressure in the coming months and quarters.

All eyes on March PMI The volatile year-on-year IP growth in recent months has masked the fact that industrial growth likely bottomed in the third quarter of 2012 and has been modestly accelerating since. This was presaged by solid manufacturing PMIs in 4Q12. However, the PMI unexpectedly collapsed in January with a sharp moderation in both output and new orders. Feb-ruary saw a symmetrically opposite outcome, with the head-line bouncing back sharply underpinned by a large pickup in output. New orders were more mixed with domestic orders rising but new export orders falling off.

Given this history, all eyes are on the March PMI to ascertain whether January was the aberration or whether it was Febru-ary, and whether the industrial acceleration is on track or has stumbled in 1Q13. The details, too, will also be the focus of much interest. New export orders have been choppy in recent months, and markets will be keen to see whether there is any pickup on that front, especially given the sobering 4Q12 CAD was driven by tepid export growth. Equally, there will be in-terest on the evolution of the price indices. Core WPI momen-tum has collapsed in recent months and with manufacturing output prices being a good leading indicator of core inflation, all eyes will be on whether the momentum remains muted or has begun to rise.

Political uncertainty remains elevated As we had reported last week, political uncertainty returned to India with one of the leading allies in the ruling coalition—the DMK—pulling out. The DMK was unhappy that the govern-ment had not been more receptive of its demand to support a United Nations Human Rights Commission (UNHRC) that condemned alleged human rights violations against one of India’s neighbors. As a consequence, it withdrew from the ruling UPA coalition and would not even offer “outside sup-port.” This left the UPA even more in a minority with the coalition having 232 MPs—well short of the halfway mark of 272—and made it more dependent on outside support to sur-vive. Remember that since September the UPA has been technically in a minority, but received outside support from various regional parties, taking its effective governing majori-ty close to 300.

This week one of those regional parties supporting the gov-ernment (SP) indicated that it might consider withdrawing support in the coming months. As such, the government was forced to scramble and offer olive branches to other regional parties for their external support in exchange. These develop-ments have heightened political uncertainty in India.

How serious are these developments? Concerns that the gov-ernment is likely to fall still appear overstated since several other parties are not in favor of an immediate election. How-ever, recent developments will undoubtedly have implications for the government’s ability to push through politically sensi-tive reforms in the coming months. This is because it is more dependent on regional parties, some of which are opposed to some potential upcoming FDI reforms as well as sustained increases in fuel prices. Furthermore, a general election to-ward the end of 2013 now appears a distinct possibility.

Data releases and forecasts Weeks of April 1 – 5

Mon Manufacturing PMI survey Apr 1 Index, sa 10:30am Dec Jan Feb Mar

Index 54.7 53.2 54.2 ___


Balance of payments (Mar 28) US$ bn, nsa 2Q12 3Q12 4Q12 Current account -16.6 -22.4 -32.6

Merchandise exports 76.7 69.8 71.8 Merchandise imports 119.0 118.2 131.4 Capital account 16.1 23.9 31.8 Overall 0.5 -0.2 0.8

Source: RBI

77



Asia focus: terms of trade Moves in commodity prices have a varied impact on the re-gion’s terms of trade. While the ASEAN commodity export-ers—Indonesia and Malaysia in particular—have benefited from rising commodity prices, North Asian importers of fuel and other raw materials have seen a prolonged deterioration in their terms of trade (first two charts and table).

In addition to this commodity price impact, there has also been increasing variation in the prices of North and Southeast Asian manufactured goods exports. While export prices of Korean goods have softened, prices of Malaysian and Thai products have increased (third chart). With North Asian pro-ducers paying more for imported fuel and other commodities, and earning less for exports of finished manufactured goods, the implication is that profits could increasingly be squeezed at the margin. This may be one factor behind low private in-vestment growth in North Asia relative to the rest of the re-gion, a point we have discussed on this page over the last couple of weeks (fourth chart and see “Asia focus: shifting drivers of growth,” GDW, March 15, 2013).

Asia: terms of trade

2000=100. Shaded area shows ratio of export prices to import prices

2005 2006 2007 2008 2009 2010 2011 Chg.1 China 87 84 81 75 81 77 73 -5.6

Exports 102 104 107 113 111 112 119 6.4 Imports 117 124 131 152 137 146 164 12.7

India 105 111 114 117 132 138 136 -1.9 Exports 130 137 158 175 159 200 239 19.0 Imports 124 124 138 150 121 145 176 21.3

Indonesia 107 113 116 124 120 127 134 5.5 Exports 139 160 178 224 193 222 271 22.3 Imports 130 142 153 181 161 174 202 15.9

Japan 83 75 72 62 74 68 60 -11.3 Exports 96 94 95 101 100 104 112 7.3 Imports 115 125 132 164 135 154 186 21.0

Korea 79 74 72 62 68 68 63 -7.1 Exports 93 93 96 101 84 94 101 7.3 Imports 117 126 134 162 123 138 160 15.5

Malaysia 102 102 102 104 99 100 101 0.6 Exports 107 111 117 135 121 129 144 12.1 Imports 105 109 115 130 122 129 143 11.4

Philippines 86 77 75 67 72 69 65 -5.7 Exports 83 87 88 91 88 89 97 8.5 Imports 96 112 117 135 122 130 149 15.0

Singapore 87 86 84 83 83 83 81 -2.3 Exports 96 103 104 113 100 108 120 11.0 Imports 111 119 123 135 121 130 148 13.6

Taiwan 110 105 102 96 103 98 95 -3.1 Exports 132 150 167 165 138 178 186 4.4 Imports 134 150 164 172 131 181 189 4.2

Thailand 97 96 96 94 97 98 94 -4.2 Exports 113 118 125 138 138 151 160 5.6 Imports 116 124 130 147 142 154 170 10.2

1. % change, 2011 since 2010. Source for table and all charts on this page: CEIC, World Bank, J.P. Morgan

-12

-9

-6

-3

0

3

6

ID MY IN SG TW TH CN PH KR JP

% change, 2011 since 2010

Asia: terms of trade

40

60

80

100

120

2000=100EM Asia: terms of trade

00 02 04 06 08 10 12

Korea

Malaysia

Thailand

0

50

100

150

200

2000=100EM Asia: export price index for manufactured goods

00 02 04 06 08 10 12

Korea

Thailand

Malaysia

50

100

150

200

250

300

350

60

80

100

120

140

160

180

200

Index, 2000=100, both scales

J.P.Morgan commodity price index and North Asian import prices

90 95 00 05 10

Global commodity prices

Korea and Taiwanimport prices

78


JPMorgan Chase Bank NA, New York

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79

JPMorgan Chase Bank NA, New York

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80

JPMorgan Chase Bank NA

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

Economic Research

Global Data Watch March 28, 2013

US economic calendar Monday Tuesday Wednesday Thursday Friday

1 Apr Manufacturing PMI (8:58am) Mar final 54.5 ISM manufacturing (10:00am) Mar 54.0 Construction spending (10:00am) Feb 1.0%

2 Apr Factory orders (10:00am) Feb 3.4% Light vehicle sales Mar 15.3mn Minneapolis Fed President Kocherlakota speaks in North Dakota (1:00pm) Atlanta Fed President Lockhart speaks in Alabama (1:30pm) Chicago Fed President Evans and Richmond Fed President Lacker speak in Richmond (7:30pm)

3 Apr ADP employment (8:15am) Mar ISM nonmanufacturing (10:00am) Mar 55.0 San Francisco Fed President Williams speaks on monetary policy in Los Angeles, CA (3:30pm)

4 Apr Initial claims (8:30am) w/e Mar 30 350,000 Chain store sales Mar Announce 3-year note $32 bn Announce 10-year note (r) $21 bn Announce 30-year bond (r) $13 bn Chicago Fed President Evans and Atlanta Fed President Lockhart speak in Ohio (8:45am) Fed Chairman Bernanke speaks via taped video in Ohio (10:30am) Kansas City Fed President George speaks on economy in Oklahoma (12:30pm) Fed Vice Chair Yellen speaks in Washington DC (5:00pm)

5 Apr Employment (8:30am) Mar 210,000 Unemployment rate 7.8% Average weekly hours 34.5 International trade (8:30am) Feb -$45.1bn Consumer credit (3:00pm) Feb

8 Apr Cleveland Fed President Pianalto speaks in Florida (8:30am) Fed Chairman Bernanke speaks at conference in Georgia (7:15pm)

9 Apr NFIB survey (7:30am) Mar Wholesale trade (10:00am) Feb JOLTS (10:00am) Feb Auction 3-year note $32 bn Richmond Fed President Lacker speaks in Richmond (9:30am) Atlanta Fed President Lockhart speaks in Georgia (1:00pm)

10 Apr Federal budget (2:00pm) Mar Auction 10-year note (r) $21 bn Atlanta Fed President Lockhart speaks in Georgia (8:20am) Minneapolis Fed President Kocherlakota moderates panel in Georgia (8:30am) Dallas Fed President Fisher speaks in Texas (5:00pm) FOMC minutes

11 Apr Initial claims (8:30am) w/e Apr 6 Import prices (8:30am) Mar Auction 30-year bond (r) $13 bn Announce 5 year TIPS $17 bn Philadelphia Fed President Plosser speaks in Hong Kong (6:00am)

12 Apr Retail sales (8:30am) Mar PPI (8:30am) Mar Consumer sentiment (9:55am) Apr preliminary Business inventories (10:00am) Feb Boston Fed President Rosengren speaks in Boston (8:45am)

15 Apr Empire State survey (8:30am) Apr TIC data (9:00am) Feb NAHB survey (10:00am) Apr

16 Apr CPI (8:30am) Mar Housing starts (8:30am) Mar Industrial production (9:15am) Mar Minneapolis Fed President Kocherlakota speaks in Minneapolis (3:30pm)

17 Apr Beige book (2:00pm) St Louis Fed President Bullard speaks in New York (9:30am) Boston Fed President Rosengren speaks in New York (12:00pm)

18 Apr Initial claims (8:30am) w/e Apr 13 Philadelphia Fed survey (10:00am) Apr Leading indicators (10:00am) Mar Auction 5 year TIPS $17 bn Announce 2 year note $35 bn Announce 5 year note $35 bn Announce 7 year note $29 bn Minneapolis Fed President Kocherlakota speaks in New York (9:00am) Fed Governor Raskin speaks in New York (12:00pm)

19 Apr

22 Apr Existing home sales (10:00am) Mar

23 Apr Manufacturing PMI (8:58am) Apr flash FHFA HPI (9:00am) Feb New home sales (10:00am) Mar Richmond Fed survey (10:00am) Apr Auction 2 year note $35 bn

24 Apr Durable goods (8:30am) Mar Auction 5 year note $35 bn

25 Apr Initial claims (8:30am) w/e Apr 20 KC Fed survey (11:00am) Apr Auction 7 year note $29 bn

26 Apr Real GDP (8:30am) 1Q advance Consumer sentiment (9:55am) Apr final

Times shown are local.

81

JPMorgan Chase Bank N.A, London Branch

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

Economic Research


Euro area economic calendar Monday Tuesday Wednesday Thursday Friday

1 Apr Holiday: Easter Monday

2 Apr Euro area: PMI Mfg (10:00am) Mar 46.6 Index, sa Unemployment rate (11:00am) Feb 12.0%, sa Germany: CPI 6 states and prelim (8:00am) Mar PMI Mfg (9:55am) Mar 48.9 Index, sa France: PMI Mfg (9:50am) Mar 43.9 Index, sa Italy: PMI Mfg (9:45am) Mar Spain: PMI Mfg (9:15am) Mar

3 Apr Euro area: HICP flash (11:00am) Mar 1.6%oya

4 Apr Euro area: MFI interest rates (9:30am) Mar PMI services and composite (10:00am) Mar Services: 46.5 Index, sa Composite: 46.5 Index, sa PPI (11:00am) Feb ECB rate announcement (1:45pm) no change expected Germany: PMI services and composite (9:55am) Mar Services: 51.6 Index, sa Composite: 51.0 Index, sa France: PMI services and composite (9:50am) Mar Services: 41.9 Index, sa Composite: 42.1 Index, sa Italy: PMI services and composite (9:45am) Mar Spain: PMI services and composite (9:15am) Mar

5 Apr Euro area: Retail sales (11:00am) Feb -0.1%m/m, sa Germany: Mfg orders (12:00pm) Feb 2.0%m/m, sa

8 Apr Germany: Industrial production (12:00pm) Feb

9 Apr Germany: Foreign trade (8:00am) Feb France: Foreign trade (8:45am) Feb Monthly budget situation (8:45am) Feb Netherlands: CPI (9:30am) Mar

10 Apr France: Industrial production (8:45am) Feb Italy: Industrial production (10:00am) Feb

11 Apr Euro area: ECB monthly bulletin (10:00am) Apr Germany: CPI final (8:00am) Mar France: CPI final (8:45am) Mar

12 Apr Euro area: Industrial production (11:00am) Feb Italy: CPI final (10:00am) Mar Spain: CPI final (9:00am) Mar

15 Apr Euro area: Foreign trade (11:00am) Feb

16 Apr Euro area: HICP final (11:00am) Mar Germany: ZEW bus. survey (11:00am) Apr Italy: Foreign trade (10:00am) Feb

17 Apr Euro area: New car regs (8:00am) Apr

18 Apr

19 Apr Euro area: Balance of payments (10:00am) Feb Germany: PPI (8:00am) Mar Belgium: BNB cons. conf. (3:00pm) Apr Netherlands: CBS cons. conf. (9:30am) Apr

22 Apr Euro area: EC cons. conf. prelim (4:00pm) Apr

23 Apr Euro area: PMI flash - Mfg, services, composite (10:00am) Apr Germany: PMI flash - Mfg, services, composite (9:30am) Apr France: INSEE bus. conf. (8:45am) Apr PMI flash - Mfg, services, composite (9:00am) Apr Italy: ISAE cons. conf. (10:00am) Apr

24 Apr Euro area: ECB Bank Lending Survey (10:00am) 1Q Germany: Import prices (9:30am) Mar IFO bus. survey (10:00am) Apr Belgium: BNB bus. conf. (3:00pm) Apr Netherlands: CBS bus. conf. (9:30am) Apr

25 Apr Germany: GfK cons. conf. (9:30am) May

26 Apr France: INSEE cons. conf. (8:45am) Apr

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] March 28 2013

Japan economic calendar Monday Tuesday Wednesday Thursday Friday

1 Apr BoJ Tankan (8:50 am) 1Q large mfg DI, -7 Auto registrations (2:00 pm) Mar -20.0%oya

2 Apr Nominal wages (10:30 am) Feb -0.5%oya Auction 10-year bond

3 Apr PMI services/composite (8:15 am) Mar BoJ Monetary Policy Meeting Auction 3-year note

4 Apr BoJ Monetary Policy Meeting and statement BoJ Governor Kuroda’s press conference (3:00 pm)

5 Apr BoJ monthly economic report (2:00 pm)

During the week: CAO private consumption index Feb 0.3%m/m, sa

8 Apr Current account (8:50 am) Feb Economy Watchers survey (2:00 pm) Mar Auction 6-month bill

9 Apr Minutes of Mar 6-7 BoJ Monetary Policy Meeting (8:50 am)

10 Apr Bank lending (8:50 am) Mar Auction 2-month bill

11 Apr Money stock (8:50 am) Mar Corporate goods prices (8:50 am) Mar Private machinery orders (8:50 am) Feb Auction 3-month bill Auction 30-year bond

12 Apr Tertiary sector activity index (8:50 am) Feb

15 Apr IP final (8:50 am) Feb BoJ Governor Kuroda’s address at branch managers’ meeting

16 Apr Auction 5-year note

17 Apr Consumer sentiment (2:00 pm) Mar Construction spending (2:00 pm) Feb Auction 1-year note

18 Apr Reuters Tankan (8:30 am) Apr Trade balance (8:50 am) Mar Auction 3-month bill Auction 20-year bond

19 Apr

During the week: Department store sales Mar, BoJ bank loan officers survey 1Q

22 Apr

23 Apr

24 Apr Corporate service prices (8:50 am) Mar

25 Apr Auction 3-month bill Auction 2-year note

26 Apr Nationwide core CPI (8:30 am) Mar BoJ Monetary Policy Meeting and statement BoJ outlook report (3:00 pm) BoJ Governor Kuroda’s press conference (3:30 pm)

During the week: Shoko Chukin small firm sentiment Apr

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


Canada economic calendar Monday Tuesday Wednesday Thursday Friday

1 Apr RBC manufacturing PMI (9:30am) Mar

2 Apr BoC Deputy Governor John Murray speaks at the Peterson Institute for International Economics, Washington, D.C. (12:20pm)

3 Apr

4 Apr

5 Apr Labor force survey (8:30am) Mar unch (0.0%) Unemployment rate 7.0% International trade (8:30am) Feb C$0.1bn Ivey PMI (10:00am) Mar 52.4 (54.6 nsa) J.P. Morgan composite index 50.2 (sa)

8 Apr BoC Business Outlook Survey (10:30am) 1Q BoC Senior Loan Officer Survey (10:30am) 1Q

9 Apr Housing starts (8:15am) Mar Building permits (8:30am) Feb

10 Apr

11 Apr New housing price index (8:30am) Feb

12 Apr

15 Apr New vehicle sales (8:30am) Feb Existing home sales (9:00am) Mar

16 Apr Manufacturing sales (8:30am) Feb

17 Apr Teranet/National Bank HP Index (9:00am) Feb Bank of Canada rate announcement/Monetary Policy Report (10:00am)

18 Apr Nonresidential construction (8:30am) 1Q

19 Apr CPI (8:30am) Mar Wholesale sales (8:30am) Feb

22 Apr

23 Apr Retail sales (8:30am) Feb

24 Apr

25 Apr CFIB Business Barometer Index (6:00am) Apr Payroll employment (8:30am) Feb

26 Apr

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] March 28, 2013

Latin America economic calendar Monday Tuesday Wednesday Thursday Friday

1 Apr Brazil: PMI Manufacturing Mar Trade balance Mar Chile: Central bank meeting minutes Peru: CPI Mar 0.62%m/m nsa WPI Mar Mexico: Banxico survey Family remittances Feb US$1.7bn Manufacturing PMI Mar 51.7 Non manufacturing PMI Mar 51.8 Uruguay: Trade balance Budget balance Feb Holiday: Argentina

2 Apr Brazil: IP Feb -2.3%oya Mexico: Central bank reserves (Prior week) Holiday: Argentina

3 Apr Brazil: Fipe CPI Mar PMI Services Mar Uruguay: CPI Mar

4 Apr Colombia: PPI Mar Mexico: Consumer confidence Mar 95.4 Uruguay: Current account 4Q12

5 Apr Chile: Economic activity index Feb 5.3%oya Colombia: CPI Mar 0.21%m/m nsa BanRep minutes Mexico: Banamex survey of economic expectations

During the week: Argentina: Govt tax revenue Mar Brazil: Commodity price index Mar Vehicle production (ANFAVEA) Mar Colombia: Vehicle sales Mar

8 Apr Chile: CPI Mar Trade balance Mar Mexico: Gross fixed investment Jan

9 Apr Brazil: IGP-DI Apr Colombia: Trade balance Feb Mexico: Central bank reserves (Prior week) CPI Mar

10 Apr Brazil: IPCA Mar Peru: Trade balance Feb Uruguay: Unemployment rate Feb

11 Apr Brazil: IGP-M 1st release Apr Retail sales Feb Chile: BCCh meeting Peru: BCRP meeting Mexico: Industrial production Feb Uruguay: IP Feb

12 Apr Argentina CPI Mar WPI Mar

During the week: Argentina: Budget balance Feb Brazil: Economic activity index Feb

15 Apr Peru: Monthly GDP Feb Unemployment rate Mar

16 Apr Brazil: IGP-10 Apr Mexico: Central bank reserves (Prior week)

17 Apr Brazil: COPOM meeting

18 Apr Brazil: IGP-M 2nd release Apr Colombia: Trade balance Feb

19 Apr Argentina: Economic activity index Feb Brazil: IPCA-15 Apr Colombia: IP Feb Retail sales Feb Mexico: Unemployment Mar

During the week: Argentina: Budget balance Mar Brazil: Caged formal job creation Mar Tax collections Mar Mexico: Pension funds report Mar

22 Apr Argentina: Consumer confidence Apr Mexico: Retail sales Feb Banamex survey of economic expectations Holiday: Uruguay

23 Apr Chile: PPI Mar Mexico: Central bank reserves (Prior week)

24 Apr Brazil: Consumer confidence Apr Current account balance Mar FDI Mar Mexico: CPI Apr 1H

25 Apr Argentina: IP Mar Brazil: COPOM meeting minutes Unemployment rate Mar Mexico: IGAE (GDP proxy) Feb

26 Apr Brazil: BCB credit report Mar Chile: BCCh minutes Mexico: Banxico meeting Trade balance Mar

During the week:

85


Malcolm Barr (44-20) 7134-8326 Allan Monks (44-20) 7134-8309

Economic Research


UK economic calendar Monday Tuesday Wednesday Thursday Friday

1 Apr Holiday: Easter Monday

2 Apr BCC economic survey (9:30am) 1Q M4 & M4 lending final (9:30am) Feb Net lending to individuals (9:30am) Feb PMI Mfg (9:30am) Mar 48.5 % balance, sa

3 Apr BoE credit conditions survey (9:30am) 1Q BoE housing equity withdrawal (9:30am) 4Q PMI Construction (9:30am) Mar

4 Apr PMI Services (9:30am) Mar 51.5 % balance, sa MPC rate announcement and asset purchase target (12:00pm) no change expected

5 Apr New car regs (8:00am) Mar

During the week: Halifax HPI (2-5 Apr)

8 Apr

9 Apr BRC retail sales monitor (12:01am) Mar Markit jobs report (12:01am) Mar RICS HPI (12:01am) Mar Industrial production (9:30am) Feb Trade balance (9:30am) Feb

10 Apr Quoted mortgage interest rates (9:30am) Mar

11 Apr

12 Apr Construction output (9:30am) Feb

15 Apr Rightmove HPI (12:01am) Apr

16 Apr CPI (9:30am) Mar ONS HPI (9:30am) Feb PPI (9:30am) Mar

17 Apr MPC minutes (12:09am) Apr Labor market report (9:30am) Apr

18 Apr Retail sales (9:30am) Mar

19 Apr

During the week: CBI industrial trends 2Q and Apr (20-25 Apr)

22 Apr

23 Apr Public sector finances (9:30am) Mar

24 Apr BBA mortgage lending (9:30am) Mar

25 Apr Index of services (9:30am) Feb Real GDP 1st est. (9:30am) 1Q

26 Apr

During the week: CBI distributive trades Apr (25-30 Apr)


86


Anthony Wong (44-20) 7134-7549 [email protected]

Economic Research


Emerging Europe/Middle East/Africa economic calendar Monday Tuesday Wednesday Thursday Friday

1 Apr Russia: Manufacturing PMI (11:00am) Mar Turkey: GDP (10:00am) 4Q 2.4%y/y PMI (10:00am) Mar Holiday: Czech Republic, Poland, Hungary, Israel, South Africa

2 Apr Czech Republic: PMI (9:30am) Mar Hungary: PMI (9:00am) Mar Poland: PMI (9:00am) Mar Romania: Retail sales (10:00am) Feb 2.7%oya, sa Russia: CBR rate decision Turkey: PMI (10:00am) Mar South Africa: Kagiso PMI (11:00am) Mar Vehicle sales (11:00am) Mar

3 Apr Romania: GDP (10:00am) 4Q Turkey: CPI (10:00am) Mar 0.4%m/m PPI (10:00am) Mar 1.1%m/m

4 Apr Czech Republic: Retail sales (9:00am) Feb Hungary: Retail sales (9:00am) Feb -0.1%m/m, sa

5 Apr Hungary: Industrial output prelim (9:00am) Feb -0.8%m/m, swda

During the week: Russia: Current account 1Q (1-5 Apr); GDP 4Q (2-3 Apr); CPI Mar (4-5 Apr)

8 Apr Czech Republic: Industrial output (9:00am) Feb Trade balance (9:00am) Feb Hungary: Trade balance (9:00am) Feb Turkey: Industrial output (10:00am) Feb South Africa: Gross reserves (8:00am) Mar

9 Apr Czech Republic: CPI (9:00am) Mar Romania: Industrial output (10:00am) Feb

10 Apr Hungary: NBH minutes (2:00pm) Poland: NBP rate decision Romania: CPI (10:00am) Mar

11 Apr Hungary: CPI (9:00am) Mar Turkey: Current account (10:00am) Feb Russia: Foreign trade Feb South Africa: Manufacturing production (1:00pm) Feb

12 Apr

During the week:

15 Apr Czech Republic: PPI (9:00am) Mar Current account (10:00am) Feb Poland: CPI (2:00pm) Mar Current account (2:00pm) Feb Budget balance (3:00pm) Mar Romania: Current account Feb Turkey: Unemployment (10:00am) Jan Israel: CPI (6:30pm) Mar

16 Apr Poland: Core inflation (2:00pm) Mar Turkey: CBRT rate decision (2:00pm) Holiday: Israel

17 Apr Poland: Average gross wages and Employment (2:00pm) Mar South Africa: CPI (10:00am) Mar Retail sales (1:00pm) Feb Israel: GDP final 4Q

18 Apr Hungary: Average gross wages (9:00am) Feb Poland: Industrial output (2:00pm) Mar PPI (2:00pm) Mar

19 Apr

During the week: Russia: Industrial output Mar (15-16 Apr); PPI Mar (17-18 Apr); Retail sales, unemployment, and investment Mar (17-18 Apr)

22 Apr

23 Apr Hungary: NBH rate decision (2:00pm) Holiday: Turkey

24 Apr Turkey: Capacity utilization (2:30pm) Apr

25 Apr Poland: NBP minutes South Africa: PPI (11:30am) Mar

26 Apr Hungary: Unemployment (9:00am) Feb

During the week: Poland: Retail sales Mar (23-27 Apr), Unemployment Mar (23-27 Apr)


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

1 Apr China: PMI mfg. (NBS) (9:00am) Mar 51.5 Index PMI mfg. (Markit) (9:45am) Mar 51.8 Index India: PMI Mfg. (10:30am) Mar Indonesia: CPI (11:00am) Mar 5.2%oya Trade balance (11:00am) Feb Korea: CPI (8:00am) Mar Trade balance (9:00am) Mar PMI mfg. (9:00am) Mar Taiwan: PMI mfg. (10:00am) Mar 50.6 Index, sa Thailand: CPI Mar 3.1%oya Holiday: Australia, New Zealand, Hong Kong

2 Apr Australia: RBA official rate announcement (2:30pm) No change New Zealand: ANZ commodity price (1:00pm) Mar Hong Kong: Retail sales (4:30pm) Feb 14.7%oya

3 Apr Australia: Trade balance (11:30am) Feb –A$0.7bn Singapore: PMI (9:30pm) Mar 50.5 Index Thailand: BoT monetary policy meeting (2:30pm) No change

4 Apr Australia: Building approvals (11:30am) Feb 1.0%m/m Retail sales (11:30am) Feb 0.2%m/m Holiday: China, Hong Kong

5 Apr Malaysia: Trade balance (12:00pm) Feb US$1.2bn Philippines: CPI (9:00am) Mar 3.4%oya Holiday: China

During the week: Singapore: GDP flash 1Q (5-13 Apr) -0.1%oya

8 Apr Australia: ANZ job advertisements (11:30am) Mar Taiwan: CPI (8:30am) Mar Trade balance (4:00pm) Mar Holiday: Thailand

9 Apr Australia: NAB business confidence (11:30am) Mar China: CPI (9:30am) Mar PPI (9:30am) Mar

10 Apr China: Trade balance Mar Korea: Export price index (6:00am) Mar Import price index (6:00am) Mar Unemployment rate (8:00am) Mar Money supply (12:00pm) Feb Philippines: Exports (9:00am) Feb

11 Apr Australia: Unemployment rate (11:30am) Mar New Zealand: Business NZ PMI (10:30am) Mar Indonesia: BI monetary policy meeting Apr Korea: BoK monetary policy meeting (9:00am) Malaysia IP (12:00pm) Feb

12 Apr India: CPI Mar IP (11:00am) Feb

During the week: India: Trade balance Feb (10-15 Apr) China: Money supply Mar (10-15 Apr) Singapore: NODX Mar (11-17 Apr), Retail sales Feb (13-17 Apr)

15 Apr Australia: Housing finance (11:30am) Feb China: FAI (10:00am) Mar GDP (10:00am) 1Q IP (10:00am) Mar Retail sales (10:00am) Mar India: WPI (12:00pm) Mar Philippines: OFW remittances Feb Holiday: Thailand

16 Apr Australia: New motor vehicle sales (11:30am) Mar Holiday: Thailand

17 Apr Korea: PPI (6:00am) Mar Malaysia: CPI (5:00pm) Mar

18 Apr Hong Kong: Unemployment rate (4:30pm) Mar

19 Apr Holiday: India

22 Apr Hong Kong: CPI (4:30pm) Mar Taiwan: Unemployment rate (8:30am) Mar Export orders (4:00pm) Mar

23 Apr China: Flash PMI (9:45am) Apr Taiwan: IP (4:00pm) Mar

24 Apr Australia: CPI (11:30am) 1Q New Zealand: RBNZ rate announcement(9:00am) Vietnam: CPI Apr

25 Apr Hong Kong: Trade balance (4:30pm) Mar Korea: GDP prelim (8:00am) 1Q Philippines: Imports (9:00am) Feb BSP monetary policy meeting

26 Apr New Zealand: Trade balance (10:45am) Mar Korea: Consumer survey (6:00am) Apr Taiwan: Leading index (4:00pm) Mar

During the week: Singapore: IP Mar (23-26 Apr), CPI Mar (23-25 Apr) Philippines: Budget balance Mar (23-27 Apr) Thailand: Mfg. production Mar (26-28 Apr)


1

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


Global Data Diary Week / Weekend Monday Tuesday Wednesday Thursday Friday

30 Mar - 5 Apr 1 April 2 April 3 April 4 April 5 April Brazil China Australia Euro area Euro area Canada Auto sales (Mar) PMI mfg final (Mar) RBA mtg: no chg HICP flash (Mar) MFI interest rates (Mar) Labor force survey (Mar) Japan Japan Brazil Thailand ECB mtg: no chg Euro area CAO prv cons index (Feb) BoJ Tankan (1Q) IP (Feb) BoT mtg: no chg Japan Retail sales (Feb) Russia Auto registrations (Mar) Euro area United Kingdom BoJ MPM: Extend APP Germany GDP (4Q) Korea Unemployment rate (Feb) BoE cred conds surv (1Q) holding maturity, pull Mfg orders (Feb)

Trade report (Mar) PMI mfg final (Mar) United States forward unlimited QE, United Kingdom United States Germany ADP employment (Mar) strengthen language Auto regs (Mar) ISM mfg (Mar) CPI prelim (Mar) Kuroda press conference United States Markit PMI mfg final (Mar) Russia United Kingdom Employment (Mar)

CBR mtg: no chg BoE MPC mtg: no chg Trade report (Feb) United States United States Factory orders (Feb) Bernanke speech Auto sales (Mar) Global

Global PMI srv & all-ind (Mar) PMI mfg (Mar)

6 -12 April 8 April 9 April 10 April 11 April 12 April Brazil Germany Australia Brazil Brazil Euro area BCB IBC-Br (Feb) IP (Feb) NAB bus conf (Mar) IPCA (Mar) Retail sales (Feb) IP (Feb) Singapore Japan China China Chile India NODX (Mar) Econ Watchers surv (Mar) CPI (Mar) Trade report (Mar) BCCh mtg: no chg CPI (Mar)

Taiwan Japan France Indonesia IP (Feb) Trade report (Mar) BoJ MPM mins (Mar) IP (Feb) BI mtg: no chg United States United States United Kingdom Italy Japan Retail sales (Mar) Bernanke speech IP (Feb) IP (Feb) Prv machinery ords (Feb) UMich cons sent plm (Apr)

Poland Korea Bus inventories (Feb) NBP mtg: no chg BoK mtg: -25bp

Mexico IP (Feb) Peru BCRP mtg: no chg

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