JUL 30 UniCredit Friday Notes

30 July 2010 Economics & FI/FX Research
Friday Notes
Contents
Diverging labor market trends Research Notes _____________________________ 2
Data Monitor________________________________ 9
FI Outlook_________________________________ 15
■ US. It is primarily the weak labor market that is causing Americans to FX Outlook ________________________________ 17
worry and fueling the fear of a double-dip recession. 8½ million people CIB View _________________________________ 19
lost their job during the "Great Recession". And a growing population CIB Forecasts _____________________________ 20
Calendar__________________________________ 23
means a further 2½ million entered the labor market (cf. chart below).
■ Vicious circle. The economic recovery created only a few new jobs, and CIB MACRO FORECASTS
above all few permanent jobs. Government and temporary-help agencies in % yoy 2009 2010 2011
are responsible for most of the new jobs. And the further weakening of the GDP EMU -4.1 1.0 1.3
dynamic in the economy as a whole means that the current development CPI EMU 0.3 1.5 1.8
will continue to lag behind earlier labor market cycles for some time to GDP Germany -4.9 1.8 1.5
come. This is slowing growth, which in turn is hurting hiring plans. CPI Germany 0.3 1.1 1.6
■ Increase. On top of that, there is the structural change that is making it GDP Italy -5.1 0.9 1.0
increasingly difficult for those seeking employment. Jobs in the producing CPI Italy 0.8 1.6 1.9
sector are disappearing forever. Job openings will be almost exclusively
GDP US -2.4 3.0 2.4
in the services sector. The prospects for inflexible and poorly-educated
CPI US -0.3 1.8 2.2
applicants are virtually non existent. There is the threat of permanently
higher long-term and core unemployment (pages 2-5). CIB FI/FX FORECASTS
■ Germany. The perception is, in contrast, quite different in Germany. 2010/11 30-Sept 31-Dec 31-Mar 30-Jun
EMU 3M (%) 0.95 1.20 1.28 1.35
Some are even talking about the job miracle. In July, unemployment fell
EMU 10Y (%) 3.00 3.25 3.45 3.50
for the 13th consecutive month to the level prior to the Lehman collapse.
Even during the crisis, unemployment was with 3¼ mn much lower than US 3M (%) 0.60 0.75 1.05 1.55
had been feared (5 mn) since management and labor agreed on shorter US 10Y (%) 3.40 3.80 4.20 4.30
working hours and the government promoted short-time work massively. EUR-USD 1.24 1.22 1.20 1.18
■ Forecast. In the short term, the prospects remain favorable. Nevertheless, USD-JPY 91 95 100 106
too many hopes should not be pinned on the creation of new, permanent Oil Price 78 85 80 80
jobs. In fact, employees will work longer hours again. And companies are
focusing more on temporary staff in any case (page 14).
■ Further topics:
– United Kingdom: Slowdown ahead; Bank of England to remain on
hold for longer (page 6)
– Data outlook: Strong German numbers (page 9). Global Head of Research & Chief Strategist
– Market outlook: Euro well maintained (page 17). Thorsten Weinelt, CFA (UniCredit Bank)
+49 89 378-15110
thorsten.weinelt@unicreditgroup.de
US: TEN MILLION LOOKING FOR A JOB
Head of Economics & FI/FX Research
12 Marco Annunziata, Ph.D. (UniCredit Bank)
Chief Economist
Population increase (mn, 16-64Y) +44 20 7826-1770
10
Job losses (mn) marco.annunziata@unicreditgroup.co.uk
8 Editor
Nikolaus Keis (UniCredit Bank)
+49 89 378-12560
6 nikolaus.keis@unicreditgroup.de
4 Editorial deadline
Friday, 30. Jul., 12:00H
2 Bloomberg
UCGR
0
Internet
12/07 04/08 08/08 12/08 04/09 08/09 12/09 04/10
www. research.unicreditgroup.eu
Source: Datastream, UniCredit Research
UniCredit Research page 1 See last pages for disclaimer.

Friday Notes
10 MILLION ADDITIONAL UNEMPLOYED LOOKING FOR WORK

US: Where are the jobs to come
from? Since December 2007, in millions
■ It is first and foremost the weak US labor market that is 12

Population increase (16-64Y)
standing in the way of a stronger recovery. Fed Chairman 10
Job losses
Bernanke also sees it that way. Most of the newly-created

jobs are not permanent, as businesses are still very 8
reluctant to hire in light of the uncertain economic outlook.
6
■ Apart from the lack of vacancies, the unemployed also 4

have to cope with the structural change of the US
economy. While during the crisis most jobs were lost in 2
the goods-producing sector, the job openings are now
0
almost exclusively in the services sector.
Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10
■ Older and less educated unemployed are least likely to

Source: BLS, Thomson Datastream, UniCredit Research
find a new job in this environment, as they are generally
less flexible. A permanently higher unemployment rate
and more long-term unemployed are, therefore, the "new Few permanent jobs
normality" the US has to adjust to.
At first glance, the situation on the US labor market has
improved perceptibly of late. After all, 880k new jobs were
10 million jobs missing created in the last six months. However, only 400k of them
About one year ago, the US emerged from the most severe are permanent. That is at least the number by which private
recession of the post-war era. Since then, the economy has employment ex temporary-help services has risen (cf. chart).
expanded by roughly 3½% – much too little in light of the The increase in public employment, in contrast, results solely
massive slump in GDP between early 2008 and mid-2009. from the additional hires for the census. Without this special
While we do not expect a double-dip recession, we think that item, government employment would have fallen by 35k in
GDP growth will slow even further from its already only the past six months – instead of increasing by 290k. But by
moderate pace. During his most recent testimony before the end of the summer most of these temporary census
Congress, Fed Chairman Bernanke stated, “the slow recovery workers will be out of work again. The remaining 190k jobs
and the attendant uncertainty about job prospects” is one of the were created at temporary-help agencies. Since September
most important drags on household spending and, therefore, 2009, employment here has even risen by 379k.
GDP growth as a whole. In his view, “a significant amount of
time will be required to restore the nearly 8½ million jobs that MORE THAN HALF OF THE NEW JOBS ARE NOT PERMANENT
were lost over 2008 and 2009.”1 The actual need for jobs is
even much greater than 8½ million, as the population (16- Nonfarm payrolls, change since December 2009, in k
64 years) has increased by 2.5 million since December 2007.
So even as the US economy did create some jobs in the first 450
half of 2010 (in part temporary jobs to conduct the 2010 400
census), the economy still needs 10 million jobs to bring the 350
jobless rolls back down to the pre-crisis level (cf. chart next 300
column). The question being posed not only by Fed 250
Chairman Bernanke is: Where are these jobs to come from? 200
150
100
50
0
Government Temporary-help agencies Private sector ex
temporary-help agencies
Source: BLS, UniCredit Research
1
Ben Bernanke, Semiannual Monetary Policy Report to Congress, 21 July 2010.

Friday Notes
At the end of last year, many economists saw this rapid GOODS-PRODUCING SECTOR: A DYING BREED
increase as a sign that employment would likely also pick up
In k
in other sectors. The reasoning here is that businesses
initially take on temporary staff at the beginning of an 5,000
Job loss during the Great Recession
upswing, before they increase their own headcount. We, in 4,500
Job openings (May 2010)
4,000
contrast, had already warned at the end of last year that this
3,500
causality does not necessarily hold in the current upswing.2
3,000
Now, we are going one step further to say that instead of
2,500
preceding permanent hires, temporary jobs might substitute
2,000
them this time (cf. chart).3 The main reason for this is the 1,500
employers’ uncertainty about the economic outlook. Moreover, a 1,000
good part of the demand for temporary workers came from 500
the manufacturing sector, which experienced a brief 0
inventory-related boom in the last couple of months. Now, Goods-producing Service-providing
(construction + manufacturing)
however, regional business surveys are pointing again to a
significant loss of momentum. It is, therefore, unlikely that
Source: BLS, UniCredit Research
temporary jobs will translate into permanent ones.
TEMPORARY WORKERS INSTEAD OF FULL-TIME EMPLOYEES ...requires more flexible employees

But even as the structural change on the US labor market
Nonfarm payrolls, in millions
already started quite some time ago, it never had to be tackled on
2.8 115
this scale. As mentioned above, only a few of the close to 5
million unemployed who worked in the goods-producing
2.6 113 sector before the crisis have a chance to get their job back.
All others will have to change careers, undergo further
2.4 111
training, and in many cases relocate to other areas. A recent
2.2 109
study conducted by the PEW Research Center reveals that 60%
of re-employed workers changed or seriously considered
2.0 107 changing careers while being out or work.4 Close to 40% said
that when they were unemployed they moved or seriously
1.8 105
Temporary-help services considered moving to an area where jobs were more
1.6
Private sector ex temporary-help services (RS)
103 plentiful. Another 36% tried to improve their opportunities by
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 pursuing job re-training or by getting more education (cf.
table next page). Interestingly, the study highlights the
Source: BLS, Thomson Datastream, UniCredit Research different attitudes between different ages and education
levels: Younger workers are generally more flexible when it
comes to relocating and are more open to get additional job
More severe structural change... training, while older unemployed persons tend to consider a
Apart from the lack of job openings, the structural change on the career change (presumably also to avoid relocating). A
labor market is another major problem for the unemployed. glance at the different education levels clearly shows that
While during the last recession most (close to 5 million) jobs workers with a better education are in every respect more
were lost in manufacturing and in the construction sector, by flexible than the average. They are significantly more likely
far the largest number in job openings is currently in the than other (less educated) workers to have contemplated
services sector (cf. chart next column). That highlights that making major changes in their working lives to get a job
the transformation of the US economy to a service-based when they were out of work.
society goes on unabatedly. Over the last 60 years, the
employment share of the manufacturing sector has already
fallen from over 30% to less than 9%. At the same time, the
employment share of education & health services more than
trebled from less than 5% to 15%.
2
US: Long-term unemployment becoming a structural problem, Friday Notes,
11 December 2009.
3 4
Without a pick-up in permanent jobs, the US recovery has feet of clay, Chart PEW Research Center, How the Great Recession has changed Life in America,
of the Week, 21 July 2010. 30 June 2010.

Friday Notes
THE DEMOGRAPHICS OF CAREER CHANGE The second “problem group” includes persons with a poorer
% of re-employed workers who said that they had done or seriously education. Since they – as the PEW study reveals – are in
considered doing each while unemployed
addition less flexible than the average, they have by far the
Enrolled in worst prospects of getting re-employed. This gels with the
Moved to area Changed retraining,
with jobs careers, field education fact that the unemployment rate for those with no high-school
Total 39 60 36 diploma has skyrocketed from 6% to 15½% (cf. chart; the
By age recent decline is, in our view, attributable to the fact that
18-29 years 47 55 44 many discouraged people have stopped actively looking for a
30-49 years 38 65 33 job and are, therefore, no longer classified as unemployed).
50+ 22 62 26 The unemployment rate among people with a bachelor’s
By education degree and more, in contrast, rose "only" from 2% to 5%.
College degree 43 64 38
Some college 43 62 41
LESS EDUCATION MAKES ITSELF FELT
Less than high- 34 57 33
school diploma
Unemployment rate by education groups, in %
Source: PEW Research Center, UniCredit Research
16
Less than a high school diploma
14 Bachelor's degree and higher
“The new normal” 12
The PEW study reveals how different population groups are 10

more or less willing/able to adjust to new circumstances in 8
order to get re-employed. There are first the older people
6
who no longer want to relocate. An important reason for their
higher immobility is the social contacts built up over the years. 4
Furthermore, most of these families own a home, which they 2

could only sell at a steep discount following the dramatic 0
slump in home prices during the recession. That means that Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
the very crisis, which ultimately requires greater flexibility to
overcome, has in fact reduced mobility. The lower flexibility Source: BLS, Thomson Datastream, UniCredit Research
of the elderly is a growing problem, because since 1990, the
share of those 55 and older in the labor force has risen to
Because of the sluggish GDP growth and the structural problems
19½% from 12% (cf. chart); close to 43% of the labor force is
mentioned above (mismatch & lack of flexibility), the average
now older than 45.
duration of unemployment has continued to increase. In
June, it hit a new all-time high of 35.2 weeks; the record so
AGEING LABOR FORCE far was 21.2 weeks and stems from 1983.
Civilian labor force, percentage split by age groups

LONG-TERM UNEMPLOYMENT RISING…
30
1990 2010
25
Average duration of unemployment, in weeks
40
20
35
15
30
10 25
5 20
0 15
16-19y 20-24y 25-34y 35-44y 45-54y >55y
10
Source: BLS, Thomson Datastream, UniCredit Research 5

Jan-50 Jan-60 Jan-70 Jan-80 Jan-90 Jan-00 Jan-10

Friday Notes
This increase is largely attributable to the ever growing THE FEDERAL RESERVE’S FORECAST OF
THE LONG-TERM UNEMPLOYMENT RATE
number of long-term unemployed. While the number of people
out of work for less than 15 weeks has fallen since May 2009
Number of forecasts (June 22/23 FOMC meeting)
from 7.5 to 5.9 million (3.8% of the labor force), the number
10
of people out of work for more than 15 weeks has continued
9
to rise. In June, it was 9.0 million (5.8% of the labor force);
8
that is by far the highest reading since the record-keeping 7
began 60 years ago. 6
5
4
...AND BECOMING A STRUCTURAL PROBLEM
3
2
Unemployment rates by duration of unemployment, in % 1
8.0 0
less than 15 weeks 15 weeks and over 5.0% - 5.2% - 5.4% - 5.6% - 5.8% - 6.0% - 6.2% -
7.0 5.1% 5.3% 5.5% 5.7% 5.9% 6.1% 6.3%
Range for the long-term unemployment rate
6.0
5.0
Source: Federal Reserve, UniCredit Research
4.0
3.0 To be sure, the mismatch and the structural problems on the

2.0 labor market can be cushioned over time by better education
1.0
or retraining measures. Other factors, such as the ageing of
the population or the decline in home prices, are however,
0.0
Jan-50 Jan-60 Jan-70 Jan-80 Jan-90 Jan-00 Jan-10
difficult for policymakers to influence. Accordingly, we think
that a permanently higher unemployment rate and long-term
unemployment are the "new normality" that the US economy
is facing.
The group of long-term unemployed comprises primarily the Dr. Harm Bandholz, CFA (UniCredit Bank)
aforementioned "problem groups". Most of them have probably +1 212 672-5957
harm.bandholz@us.unicreditgroup.eu
few chances of getting one of the few jobs offered in the
coming months. Because in addition to lower education and
less flexibility, there is the additional problem that long-term
unemployment erodes skills. That, as Chairman Bernanke
pointed out during his recent testimony, might have long-
lasting effects on workers’ employment and earnings
prospects. Against this backdrop, we find it a bit surprising
that most Fed officials still see the long-term unemployment
rate at 5%-5¼%. Only two of the seventeen forecasts
published in the June FOMC minutes (12 presidents of the
regional Federal Reserve Banks plus 5 members of the
Board of Governors) expect the unemployment rate to settle
at above 6% over the long term (cf. chart next column). We,
in contrast, even think that the non-accelerating inflation rate
of unemployment (NAIRU) is as high as 6½%.

Friday Notes
UK: weaker growth ahead, BoE to and the restoration of the VAT early this year). Therefore, the
strong performance in 2Q looks much more like a technical
remain on hold for longer rebound rather than a sustainable upward trend.
■ UK GDP rose strongly by 1.1% qoq in 2Q, but this is likely to As far as the demand-side breakdown is concerned (details
be the peak of the current cycle. We expect a moderation have not been released yet) we think that, after a sluggish
in GDP growth in 2H 2010. first quarter, household consumption probably rebounded, as
suggested by the strong rise in retail sales coupled with the
■ The fiscal consolidation effort which will be implemented improvement in services sector confidence. Exports should
by the government over the next few years will affect GDP have risen as well, consistent with indications from different
growth, though not dramatically so. industrial sector surveys and hard data showing exports up
by around 2% in April/May vs. 1Q. Gross fixed capital formation
■ The inflation outlook remains worrisome. It is still highly should have continued to expand briskly, thanks also to a
uncertain whether, and how fast, a widening output gap rebound in construction activity, while the contribution from
might start exerting decisive downward pressure on core inventories likely moderated, although remaining largely positive.
prices in coming quarters.
What is next? Overall, while we acknowledge that upside
■ The BoE has recently acknowledged that the medium-term risks to our forecast for 2010 GDP have definitely risen after
growth outlook has worsened. Therefore, it is unlikely that the strong outcome recorded in the second quarter, we
the BoE will revise up its inflation profile significantly in the remain convinced that momentum will decelerate in 2H.
August Inflation Report. Against this backdrop, risks of a Indications from different surveys of economic activity have,
rate hike before the end of the year have vanished and we in fact, already started to signal a deceleration in growth
now expect the first rate hike at the earliest in 1Q11. momentum. On top of that, the fiscal tightening outlined in
the June emergency budget will be a drag on economic
A stronger-than-expected 2Q activity, though not dramatically. The composite PMI
declined from 58.1 in February to 55.0 in June (cf. chart). It
Growth momentum in the UK accelerated significantly in the
is, however, interesting to note that the slowdown was mostly
second quarter of this year. On the one hand, this is feeding
driven by the services sector, while industrial activity proved
optimism that the economy will face headwinds from the
to be more resilient – while the services sector has been on
fiscal consolidation effort put in place by the government
a downward trend since March 2010, the manufacturing index
starting from a relatively strong position. On the other hand,
marked in June the first (modest) decline since November 2009.
however, the acceleration in growth momentum added fuel to
the fire, raising concerns that the current, very high, level of
inflation might not decelerate as fast as expected in response to SLOWER GROWTH AHEAD
a widening output gap. In this research note, we first make a
65
brief assessment of what to expect in terms of GDP growth Composite PMI
in 2H and beyond, looking more closely at the impact on 60
growth of the fiscal tightening that will be implemented in the
next few years. Secondly, after having outlined our medium- 55
term inflation outlook, we discuss our recently updated BoE

50
call – we now expect the first rate hike in 1Q11.
45
UK GDP surprised to the upside in the second quarter, expanding critical level
by 1.1% qoq. The breakdown shows that industrial production 40
was up 1% qoq, services by 0.9%, while construction marked

35
the largest quarterly increase since 1963 (+6.6% qoq). Most 01/97 01/99 01/01 01/03 01/05 01/07 01/09
of the upside surprise compared to our slightly-above
consensus forecast (we had actually highlighted upside risks Source: Thomson Datastream, UniCredit Research
to our 0.7% qoq forecast), came from a surprisingly strong
surge in construction activity, and, within the services sector,
from a higher-than-expected surge in retail, hotel and This divergent trend between manufacturing and services
catering activity, while industrial production was broadly in sector was also confirmed by the BCC quarterly survey for
line with our expectations. These details, however, show that 2Q. The good resilience so far of survey-based measures of
the sectors which surprised to the upside were those mostly industrial activity is probably underpinned by a combination
affected in 1Q by unfavorable one-off effects (bad whether of the ongoing process of stock building and solid exports.

Friday Notes
These two factors, however, are likely to become less supportive GROWTH IMPACT OF THE FISCAL CONSOLIDATION
going forward, as the inventory cycle might be close to its Additional consolidation, as % of GDP
peak and export growth should benefit progressively less 2010/11 2011/12 2012/13 2013/14 2014/15
from the past sterling depreciation. Historical relationship Total 0.5 1.0 1.5 1.9 2.2
suggests that a 10% depreciation of TW sterling boosts UK Spending 0.4 0.6 1.1 1.4 1.8
exports by 1.5pp after four quarters. Taking into account the Taxes 0.2 0.4 0.4 0.5 0.4
sterling depreciation throughout last year and a moderate Impact on GDP, in % of GDP
slowdown in global GDP growth starting from 2H10, we Total 0.3 0.5 0.8 1.0 1.2
expect export growth to remain sustained over the next Spending 0.2 0.4 0.7 0.9 1.1
couple of quarters, but to start easing thereafter throughout Taxes 0.1 0.1 0.1 0.2 0.1
next year. Source: UniCredit Research
Against the backdrop of a lower contribution from exports

and inventories, however, we see investment, although not Taking also into account that exports will not offset the
booming, taking up the baton going forward. According to the negative impact of the fiscal tightening next year (see the
BCC survey, investment intentions both in the manufacturing previous paragraph), we have revised slightly down our GDP
and services sector turned positive in 2Q, although remaining projection from 2.0% to 1.8% in 2011. A highly debated issue
well below the long-term average in the services sector. is whether the existing estimate of fiscal multipliers might
Clearly, it is unlikely to see firms expanding their investment apply also in the current juncture or some caveats need to be
plans briskly as long as they remain as credit constrained as taken into account when evaluating the growth impact of a
they are now, but we remain confident that capex growth will fiscal shock. On the one hand, our view is that fiscal multipliers
remain on a decent expansionary path. Taking all these might effectively be higher than standard estimates and,
factors together, we expect GDP growth to slow down in 2H, accordingly, that the negative impact on growth of the fiscal
but we deem the scenario of a double-deep recession as consolidation effort might be larger for the following two
unlikely. We expect growth to average 1.2% in 2010. reasons: first, the fact that there is no room for further
monetary policy accommodation and, second, the fact that
both firms and households are credit constrained. On the
Medium-term growth outlook other hand, the policy mix implemented by the government is
While the consolidation effort implied in the budget projections in line with the suggestions outlined by both the European
appeared as a decisive step in the direction of bringing UK Commission and the IMF in order to minimize the loss in
public finances back on a sustainable path – which is term of GDP and maximize long-term gains. First of all, the
reassuring for financial markets – concerns have inevitably tightening will be mostly achieved through spending cuts
emerged that the severity of the austerity measures might be (80% of the adjustment); secondly, the measures on the
detrimental for growth. The attention, therefore, has shifted expenditure side should mostly involve a reduction of
to measuring the impact of the fiscal tightening on GDP over unproductive spending (the bulk of the adjustment will be
the coming years. made in departmental spending) and, last but not least,
changes on the revenue side involve increases in the least
For this purpose, the easiest approach is to apply existing distortionary taxes (on consumption and housing) and some
estimates of fiscal multipliers to key budget measures. In reduction of the most distortionary (on labor and capital).
particular, following the indication from the OBR (The Office However, this positive growth effect is likely to be felt more
for Budget Responsibility), we assume a multiplier of 0.6 and on a longer-term horizon, rather than in the short term.
0.3, respectively, for spending and tax measures. We recall
that a multiplier of 0.6 means that a measure which has a
direct effect of cutting expenditures by 1% of GDP is
estimated to have an immediate negative effect on GDP
growth of 0.6pp. In the table on the previous page, we show
the fiscal adjustment announced in the budget – split between
spending cuts and tax increases – throughout 2014-2015,
and the year-by-year impact on GDP growth of both spending
and tax measures. The result in the table below shows that
the fiscal consolidation will be a relatively modest drag on
growth this year and next, but the negative impact will be felt
over the next five years, as fiscal measures will be gradually
implemented, and the drag on GDP growth should add up to
1.2% of GDP by 2014-2015.

Friday Notes
A still worrisome inflation outlook upside, coming from the behavior of private sector’s medium-
term inflation expectations which have remained subdued so
While expectations of a deceleration in GDP growth in 2H might far but risk picking up in response to a persistently high (and
pour some water on the fire, the inflation outlook still remains above-target) inflation rate. Interestingly enough, the Minutes
worrisome. It remains highly uncertain, in fact, whether, and showed that the MPC discussed in July both arguments in
how fast, a widening output gap might start exerting favor of a further easing in the stance of monetary policy in
decisively downward pressure on core prices in coming response to the weakening growth outlook and arguments in
quarters. Based on our survey-based gauge of the economic favor of a modest tightening to prevent an increase in
slack, which peaked in 2Q 2009, we would have expected medium-term inflation expectations.
the core to ease much faster and to bottom out in 2Q10. On
the contrary, core inflation drifted higher from 1Q09 to 1Q010 At the August meeting next week, the BoE will have a
– and this was only in part due to the reintroduction of a 17.5% revised set of growth and inflation projections, which will be
standard VAT rate, after a temporary reduction to 15%. This published a week later in the August Inflation Report. On the
evidence casts doubts on: 1) whether the output gap might one hand, we expect the BoE to revise down its (optimistic,
have effectively widened as much as implied by our gauge of in our view) growth profile for next year to take into account
the economic slack; 2) whether the link between slack and also the impact of the additional fiscal tightening. On the
core prices might have been weaker this time. Overall, taking other hand, while it will certainly acknowledge the temporary
also into account our growth projections for next year, we upward effect on inflation of the increase in the VAT, we
see limited chances for a sizeable deceleration in core doubt that it will significantly revise up the inflation profile to
inflation in coming quarters. Taking into account that the take into account a weaker response of core prices to the
increase in the VAT from 17.5% to 20% announced in the output gap than previously penciled in. We expect the BoE to
June budget should add further upward pressure to inflation only acknowledge that upside risks from this side are larger
starting from January 2011, we have revised up our CPI than previously expected.
projections and we now expect headline inflation to decelerate
from 3.2% in 2010 to 2.6% next year (vs. our previous 2.3% Overall, our impression is that against the backdrop of a
in 2011), while the core should ease from 2.8% this year to weakening growth outlook the BoE is inclined to at least
2% in 2011 (vs. our previous forecast of 2.7% and 1.5%, keep the extra-loose monetary policy stance to offset the
respectively in 2010 and 2011). headwinds the economy is going to face in the medium term.
But for how long it will be allowed to do so depends on the
A tough job for the BoE behavior of inflation: if the MPC’s medium-term outlook proves
correct and signs of a decisive downward trend in headline
The BoE’s task is getting more complicated. In the minutes
inflation emerge in coming months with no signs of a pick-up
of the July meeting, the MPC pointed out that that both
in inflation expectations, the extra-loose monetary policy will
medium-term growth prospects and the short-term inflation
be maintained well into 2011. If, in contrast, inflation continues
outlook have deteriorated vs. the previous month. Growth is
to be sticky and medium-term inflation expectations start to
expected to be dampened by several factors which include
rise, the BoE will be forced to hike. We now expect the first
the weakening global economic recovery, stressed financial
rate hike in 1Q 2011.
markets, less easy credit conditions for the private sector, as
well as the impact of the fiscal consolidation announced by Chiara Corsa (UniCredit Bank Milan)
the government. On the latter in particular, the MPC said the +39 02 8862-2209,
impact on growth is hard to judge at this stage and that it will chiara.corsa@unicreditgroup.de
depend mostly on the private sector’s response. However,

the preliminary assessment is that the fiscal tightening will
bear down a little on growth.
The inflation outlook remains the most critical issue for the
BoE. The MPC is well aware that short-term inflation
prospects have worsened, also because of the increase in
the VAT starting from January 2011. On the medium-term
outlook, the BoE’s central view remains that the output gap
should eventually exert some downward pressures on prices
once the impact of temporary factors has worn off. Still, there
is a high degree of uncertainty surrounding this central
scenario. The MPC does still see risks to the downside,
coming from a larger-than-expected output gap, and to the

Friday Notes
Data Monitor – Preview Europe
Monday, 2 August
UK, PMIS SLOWER GROWTH AHEAD
July MIB Cons. June May

Manufacturing 57.0 57.0 57.5 58.0 65
Services (Wednesday, July 4) 54.4 -- 54.4 55.4 60
We expect both the services and the manufacturing 55
PMIs to keep signaling a slowdown in economic activity 50

from the very strong performance recorded in 2Q. We
expect the manufacturing index to ease to 57 and the 45
Critical level
services counterpart stabilizing at the current level (54.4) 40
in July, for the time being
35 PMI Manufacturing
PMI Services
30
01/99 01/01 01/03 01/05 01/07 01/09
Source: Markit, UniCredit Research
Thursday, 5 August
UK, BANK OF ENGLAND ON HOLD
August MIB Cons. July June

Asset purchase (GBP bn) 200 -- 200 200 7
CIB forecast
Repo rate (%) 0.5 0.5 0.5 0.5 6
We expect the BoE to remain on hold both on the repo 5
rate and the asset purchase program. The Bank is facing 4

a difficult task in trying to balance two offsetting forces, a
3
worsening medium-term growth outlook and a Repo rate (%)
persistently high level of inflation. The MPC main view is 2 3M Libor (%)
that inflation will come down in response to a widening 3M Libor futures (%)
1 MIB forecast 3M Libor (%)
output gap, but a high degree of uncertainty remains on the MIB forecast repo rate (%)
speed and size of this downward adjustment. While the 0
BoE discussed the possibility of further easing in July, 01/99 07/00 01/02 07/03 01/05 07/06 01/08 07/09
we think that the BoE will remain on hold, at least until 1Q11. Source:BOE, UniCredit Research
GERMANY, NEW ORDERS NEW ORDERS, IN % YOY
June CIB Cons. May Apr 40

in % mom 2.0 1.4 -0.5 3.2 30
in % yoy 22.0 -- 24.4 30.2
20
Companies were exceptionally bullish on the order situation 10
up to mid-year. Accordingly, we expect another tangible 0

increase in the new order volume after the breather in -10
the previous month. The largest individual order in the
-20
history of Airbus at the beginning of June even harbors
upside risks for a substantially stronger mom increase. -30
-40
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: Bundesbank, UniCredit Research

Friday Notes
Friday, 6 August
GERMANY, INDUSTRIAL PRODUCTION INDUSTRIAL PRODUCTION, IN % YOY
June CIB Cons. May Apr

15
in % mom 1.0 1.0 2.6 1.2
in % yoy 12.2 11.4 12.4 14.0 10
5
The very positive order situation has driven order backlogs
0
higher again recently. Consequently, the pipeline for
industrial production is well filled for the foreseeable -5
future. The upward trend for industrial production should -10

continue in the coming months. After the already strong -15
gain in the previous month, we also expect June to bring
-20
a further perceptible improvement.
-25
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: Bundesbank, UniCredit Research
ITALY, INDUSTRIAL PRODUCTION STRONG APRIL-MAY IP NUMBERS
June CIB Cons. May Apr

in % mom 0.0 0.1 1.0 0.9 6
3
After strong increases in April-May, industrial activity should
have moderated its pace in June, in line with the 0
message stemming from business surveys that keep
signaling that momentum is off the cyclical high. Still, -3
even with a flat IP figure in June (assuming no revisions
-6
to previous data), industrial output should be up 1.9% in
2Q10, from the 1.7% qoq marked in 1Q. -9
Industrial production (in % mom)
Industrial production (3M rate of change, in %)
-12
01/99 01/01 01/03 01/05 01/07 01/09
Source: Thomson Datastream, UniCredit Research
ITALY, REAL GDP SLOWDOWN AHEAD
2Q10 CIB Cons. 1Q 4Q

in % qoq 0.2 0.4 0.4 -0.1 2.0 5.50
CIB forecast
1.5 4.25
Economic growth is expected to have eased to 0.2% qoq 1.0 3.00

in 2Q after the strong pace recorded in 1Q. Even though 0.5 1.75
industrial production increased at a firm pace in 2Q (thus 0.0 0.50
signaling that investment activity can be a supporting -0.5 -0.75
factor), the end of the car-scrapping scheme should -1.0 -2.00
have weighed on the GDP outcome. We see still moderate -1.5 -3.25
GDP (in % qoq)
growth in the coming quarters. -2.0 -4.50
GDP (in % yoy, RS)
-2.5 -5.75
-3.0 -7.00
I/99 I/01 I/03 I/05 I/07 I/09 I/11

Friday Notes
UK, INDUSTRIAL PRODUCTION STILL ON A STRONG FOOTING
June MIB Cons. May April

in % mom 0.8 0.2 0.8 -0.7 2
1
Although different surveys for the manufacturing sector 0
started to signal in June a slowdown in the pace of -1
economic activity, strong quarterly growth of industrial
-2
production in the first GDP estimate suggests that
-3
factory output might have posted another solid increase
-4
in June (we expect 0.8% mom).
-5 Industrial production (3M rate of
change, in %, smoothed)
-6 Industrial production (in % mom)
-7
01/04 01/05 01/06 01/07 01/08 01/09 01/10
Source: ONS, UniCredit Research
Tullia Bucco (UniCredit Bank Milan) Chiara Corsa (UniCredit Bank Milan)
+39 02 8862-2079 +39 02 8862-2209
tullia.bucco@unicreditgroup.de chiara.corsa@unicreditgroup.de
Alexander Koch, CFA (UniCredit Bank) Chiara Silvestre (UniCredit Bank Milan)
+49 89 378-13013 chiara.silvestre@unicreditgroup.de
alexander.koch1@unicreditgroup.de
Marco Valli (UniCredit Bank Milan)

+39 02 8862-8688,
marco.valli@unicreditgroup.de

Friday Notes
Data Monitor US – Preview of the coming week
Monday, 2 August
ISM MANUFACTURING ONGOING MODERATION IN MANUFACTURING
July CIB Cons. June May

65
54.0 54.5 56.2 59.7
60
Despite its decline in June to the lowest level in six months,
55
the manufacturing ISM still stayed at an elevated level
that signals solid growth. But as the support from the 50
inventory cycle is fading and signs for a (moderate)
45
slowdown in global economic growth are emerging, we
expect another decline in the ISM index for July. Regional 40
manufacturing surveys, however, fell quite sharply 35

ISM manufacturing
across the board in July, highlighting some downside Critical value
risks to our forecast. 30

01/99 01/01 01/03 01/05 01/07 01/09
Wednesday, 4 August
ISM NON-MANUFACTURING WEAKER ECONOMY TO DAMPEN MOOD

65
53.5 53.3 53.8 55.4
60
After staying at a 4-year high for three consecutive months,
the non-manufacturing ISM moderated in June to 55
53.7 points. The decline was broad based, as all major
components eased. For July, we expect another 50
moderate decline, as there are mounting signs that the

45
recovery continues to lose some momentum. Initial
ISM non-manufacturing
jobless claims remain stubbornly high, while consumer 40
sentiment fell to a five-month low. Both developments Critical value
should have weighed on the important retail sector. 35

01/99 01/01 01/03 01/05 01/07 01/09

Friday Notes
Friday, 6 August
MONTHLY EMPLOYMENT REPORT ANOTHER DECLINE IN PAYROLLS –
AND IN THE UNEMPLOYMENT RATE?

600 2
Nonfarm payrolls in k -75 -70 -125 433 Unemployment rate (in %, inverted, RS)
Unemployment rate in % 9.5 9.6 9.5 9.7 450 3
300 4
In June, nonfarm payrolls declined for the first time in six 150 5
months, as the government laid off 225k temporary Census 0 6
workers. And according to the Census Bureau, it reduced
-150 7
its staff by another 150k between mid-June and mid-
-300 8
July. Private-sector employment, in contrast, expanded
-450 9
for the last six consecutive months, and should have Non-farm payrolls
-600 (monthly changes in thousands) 10
risen again in July. We expect an increase of about 75k,
which is slightly below the 1H average. While the decline -750 11
01/97 01/99 01/01 01/03 01/05 01/07 01/09 01/11
in June nonfarm payrolls was widely expected, the
decrease in the unemployment rate to 9.5% from 9.7% Source: Thomson Datastream, UniCredit Research
came as a surprise. This decline, however, was solely
caused by a massive decline in the labor force, as hundreds
of thousands of people stopped looking for a job. The same
development could have brought down the unemployment
rate even further in July. As Congress has only recently
extended the emergency unemployment benefits,
another million people lost access to these payments
since mid-June – and therefore were not legally forced
anymore to look for a job. As the extension was signed
in mid-July, however, we expect a renewed increase in
the unemployment rate in August.
Dr. Harm Bandholz, CFA (UniCredit Bank)

+1 212 672 5957
harm.bandholz@us.unicreditgroup.eu

Friday Notes
Review Europe The short-term outlook for the labor market remains positive.
Business confidence recently stayed at very solid levels and
employment plans point north across the board - above all in
German labor market: No summer lull the temporary work sector. Hence, we expect a continuation
German unemployment was up 39,000 mom on a non- of the downward trend in unemployment in the second half of
seasonally adjusted basis to 3.192 million in July. In contrast, this year. Despite the brisk economic rebound, the pace of
adjusted unemployment was down again by 20,000 in line job creation is, however, not likely to accelerate in the
with expectations. The start of the summer holidays in 14 of coming months. Besides the considerable rise in the number
the 16 German states triggered the first rise in unadjusted of temporary workers, higher capacity utilization will involve
unemployment since February. The absolute increase in lay-offs an upward readjustment of working hours of the existing
was, however, muted compared to the historical average. workforce – dampening the potential for additional permanent
Accordingly, the adjusted figure continued its downward jobs. In any case, the related marked decline in unemployment
trend as expected. The thirteenth consecutive monthly decline expectations and higher incomes due to the increase in
brought unemployment down close to the trough observed overall working time will definitely support the observable
before the Lehman default started to affect the real economy stabilization in private consumption. This is also reflected in
in autumn 2008. The intensive use of the government the latest improvement in consumer confidence, despite the
subsidized short-time work scheme together with the increased government's austerity plans for next year.
flexibility in terms of working hours agreed on in collective
Alexander Koch, CFA (UniCredit Bank)
wage contracts strongly helped to keep the impact on +49 89 378-13013
employment during the downswing rather limited. And the alexander.koch1@unicreditgroup.de
current vibrant industrial recovery has been reducing the
temporarily very high number of short-term workers dramatically
of late without a corresponding marked increase in lay-offs.
After a peak of 1.5 million in May of last year, the figure
declined to 481,000 by May 2010 (see chart).
SHORT-TIME WORKERS, IN MN
1.6
Short-time workers
1.4
Announcements for short-time work
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
Source: BfA, UniCredit Research

Friday Notes
EUR-USD EXCHANGE RATE THEN AND NOW

Fixed Income Outlook
Percentage change in the 20 trading days before and after the stress
■ The ECB press conference next week should attract test release
additional interest, especially after the publication of the 10
stress test results. US stress test release EU stress test release
8
■ Bunds, EUR and the USD could follow our script for 6
another one to two weeks.

4
2
Psychology outperformed
interpretation 0
-2
The only thing booming these days is prophecies of doom.
Anyone trying to catch a headline has to predict at least a -4
sovereign default, a double-dip recession or deflation. In this -20 -15 -10 -5 0 5 10 15 20
regard, financial market commentators responded to the stress

test as is their wont: missed opportunity, stress scenario too 10Y BUND YIELD THEN AND NOW
lax, markdowns on government bonds should have related
not only to the exposure in the prop book, and the list goes Change (in bp) in the 20 trading days before and after the stress test
on and on … release
60
US stress test release EU stress test release
The amusing aspect is that investors were deaf to these 50
arguments. In a world dominated by numbers, psychology is
40
apparently to some extent more important. Despite several
30
hundred pages of critical research material immediately
before and after the publication of the European stress test 20
results, the simulation we discussed over the last two Fridays 10

was spot on in terms of the development of currencies and
0
fixed income markets. The EUR-USD exchange rate, the
-10
trade-weighted USD, and even yield movements in the euro
zone reacted as suggested by the experience of the US -20
-20 -15 -10 -5 0 5 10 15 20
stress test - almost to the decimal place.
Source: Bloomberg, UniCredit Research

USD-INDEX THEN AND NOW
Percentage change in the 20 trading days before and after It was basically irrelevant what was published; investors wanted
the stress test release "no matter what" to interpret the stress test as confidence
4 building. The message until then was: The combination of
US stress test release EU stress test release falling Bund yields and reduced spread volatility since 9 May
2
highlights nothing else but the pre-eminent importance of the
0 government bond purchases by the ECB, while the EUR 750bn
-2 package still cannot be considered confidence-building in
any way. This has changed since the publication of the stress
-4
test results. The confidence-suggesting correlation kicked in
-6 more or less exactly two days prior to the publication of the
European banks' stress test. All told, since the end of 2Q10,
-8
Finland, Germany and the Netherlands have lost part of their
-10 "safe-haven" status, while the spreads of periphery countries
-20 -15 -10 -5 0 5 10 15 20
have narrowed substantially.

Friday Notes
10Y GOVERNMENT BOND YIELDS EU-11 SINCE BEGINNING OF NEED TO DIP INTO THE EUR 750BN AID PACKAGE ABATES
THE GREEK RATING DRIFT ON 22 OCTOBER 2009
22 Oct. 09 31 Mar 7 May 30 June Today Swap + 300 + fee 3Y Portugal

18
EUR swap rate 3.5515 3.2788 3.0705 2.8965 2.9658 3Y Ireland 3Y Greece
16
Austria 3.7573 3.4335 3.2635 3.1911 3.0787 14
Belgium 3.7532 3.5283 3.4973 3.4566 3.3450 12
Finland 3.5858 3.3402 3.0564 2.8641 2.9213 10
France 3.5921 3.4460 3.2197 3.1504 3.1183 8
Germany 3.3788 3.1437 2.8013 2.5608 2.7466 6
Greece 4.6643 6.3870 12.3616 10.587 10.1516 4

2
Ireland 4.8355 4.4819 5.8560 5.5962 5.1209
0
Italy 3.9734 3.8375 4.2696 4.1417 4.0082
7/1/2009
8/1/2009
9/1/2009
10/1/2009
11/1/2009
12/1/2009
1/1/2010
2/1/2010
3/1/2010
4/1/2010
5/1/2010
6/1/2010
7/1/2010
8/1/2010
Netherlands 3.6645 3.3002 3.0055 2.8181 2.9616
Portugal 3.8913 4.2288 6.2688 5.6816 5.1124
Spain 3.8518 3.8211 4.4230 4.5750 4.2406

RARITY PREMIUM FOR SELECTED GOVERNMENT BONDS
Rarity premium %age share of market cap. (Greece, Ireland and Portugal 1-10Y sector)
30
One aspect of pre-eminent importance also cooled down after Weekly bond purchases ECB in EUR bn.
the release of the stress test results: Recourse to the EUR 750bn 25
aid package by countries that cannot "handle" the recapitalization

20
of their banks is – at least for the foreseeable future – off the 16.5
table, given a minor recapitalization requirement of EUR 3.5bn. 15
As a result, the ECB continues to run the show; so far, it has 10
had this important emergency under control via the purchase 10 8.5
6.5
of government bonds. You remember the chain of reasoning: 5.5
4 4 4
5
Recourse to the EUR 750bn petty cash must be avoided at 1 0.3 0.176
all cost. This was achieved by: a) removing Greece from the 0
primary market via the EUR 110bn package, and b) the ECB 5/14/2010 5/28/2010 6/11/2010 6/25/2010 7/9/2010 7/23/2010
massively thinning out the secondary market by buying

government bonds of all countries whose funding costs were Source: Bloomberg, UniCredit Research
in danger of exceeding the costs of the Greek aid package
(and could, therefore, have legitimately triggered demand for
credit aid). With its purchase volume thus far of EUR 60.5bn,
ECB rhetoric as a risk for further rising
the ECB has removed from the market roughly 22% of the yields of core countries
market capitalization (also almost identical to the outstanding In the coming week, it will be interesting to see to what extent
issue volume) of Greece, Ireland and Portugal in the 1-10Y the ECB will, against this backdrop, perhaps let slip the odd
sector. If one assumes that most government bonds are "dovish" comment. Above all from the German standpoint,
anyway on the books of domestic banks or are held by investors this would not be completely utopian in light of a booming
with "firm" hands and are, therefore, quite simply not for sale, business climate. For that reason, we would not unwind or
a) the success of a reduction of the spread volatility because cancel the recommendation we made two weeks ago to
of a drying up of the secondary market is compelling, and b) neutralize a long duration exposure.
the future purchase volume will become increasingly smaller.
At some point, it would not be surprising if the ECB were to Michael Rottmann (UniCredit Bank)
even let the paper flow back into the market again because +49 89 378 15121
michael.rottmann1@unicreditgroup.de
of the rarity value of various government bonds. The objective is
therefore achieved with minimal effort.

Friday Notes
Forex Outlook by central bank officials in the UK and New Zealand. Hence,
we do not expect the current bright risk picture to further
improve, but investors should scale back their risk exposures
■ View: We expect EUR/USD volatility to be less
to a certain extent, which should provide USD, JPY and CHF
pronounced over the next few weeks, with also the global
some relief and set AUD, NZD and EUR under pressure.
risk picture to be less favorable.
Particularly the USD may regain some ground as early as
next week in the wake of a better-than-expected US
■ EUR: At current levels, the EUR seems to have reached its
unemployment report.
full recovery potential. At best, it should remain around current
levels but this does not mean a complete trend reversal.
EUR-USD: Running out of steam
■ JPY: We expect EUR-JPY to decline over the next couple of
weeks, while USD-JPY should remain at around current levels. As some very strong figures from Germany and other EMU
core countries contrasted with the very disappointing US
■ GBP: With EUR-USD staying relatively firm, a EUR-GBP data, moreover accompanied by relief about the long-
break below 0.83 and towards 0.80 might require more time. awaited stress test results, EUR-USD developed remarkable
strength and has been able to hover around 1.30. Given the
■ CHF: We consider any move in EUR-CHF broadly above different economic performances of the US and the euro
1.38 a nice selling opportunity. zone, an almost forgotten driving factor, interest rates and
money market futures spreads, came to the fore again. It
was not the closing of the gap to implied rates of beyond
FX View: Euro to face obstacles
1.40, but simply the spread widening in favor of the EUR. As,
Basically, it is almost never foreseeable, whether poor US on the other hand, spreads are already almost exhausted,
economic data are going to harm the dollar or even the the upward momentum in EUR-USD should fade
opposite will be the case, as investors might fear a quick considerably. In addition, we judge the next strong resistance
clouding of the global risk picture and global risk perspectives. level at around 1.3125 too important to be easily wiped out.
Over the last couple of weeks, investors faced an easy task.
The dollar bore the full brunt of all the bad news coming from
EUR-USD FOLLOWING INTEREST RATE SPREADS…
the US, which also included Bernanke's testimony, poor
consumer sentiment, weak durable goods orders and the
1.64 250
Fed's Beige Book. The USD TWI declined steadily. This was EUR-US D
1.59 Fu tu re Spre ad Jun1 1, RS 202
because, in contrast, other economies, particular in the euro 2Y Spr ead, RS
1.54 154
zone, delivered some very strong economic indicators, which
1.49 106
in turn contributed to a clearly improved global risk picture,
1.44 58
reflected by stable stock markets, declining volas and a
1.39 10
narrowing of credit spreads. While the USD, the JPY and the
1.34 -38
rapidly appreciating CHF booked partly heavy losses across
1.29 -86
the board, AUD, NZD and of course the EUR showed a
1.24 -13 4
brilliant performance.
1.19 -18 2
1.14 -23 0
The euro proved to be a very strong currency and has been
Ja n-06 Ja n-07 Ja n-08 Ja n-09 Ja n-10
recovering remarkably from the EMU sovereign crisis over
the last couple of weeks. On the other hand, we don’t think
that EMU growth potential will be strong, sustained and
broad-based enough to replace the still not entirely resolved
budget crisis. While especially Germany delivered some very
strong figures and can currently be considered the European
growth engine, most of the periphery countries are still
lacking decisive growth impulses. This fact could also be
acknowledged by Mr. Trichet at next week's ECB press
conference. We also believe the initial driving force, triggered
by the highly appreciated stress test results, will fade over
the coming weeks. In turn, investors could review their whole
growth assessment, which may lean more towards global
growth risks again, stemming from fears about the economies in
the US and China. Similar assessments were recently made

Friday Notes
…BUT THE NEXT BARRIERS WILL BE HARD TO BREAK

EUR-CHF: On top above 1.38
1.55
EUR-USD 1.514 7 (intrad ay) 10 0%
As expected, EUR-CHF upside potential proved fairly capped
1.50 above 1.38, although EUR-USD took advantage of the latest
76 .4 % 1.43 75 economic data hinting that the euro zone is apparently in
1.45
6 1.8% 1.38 98
better shape than the US. Indeed, the EUR-CHF retreat back
1.40
50.0% 1.351 2 to 1.36 has been also fostered by excessive speculation
1.35
38 .2 % 1.312 6
about a SNB rate hike as early as in September, but this
1.30 reaction was likely caused by incorrect liquidity signals in the
23 .6 % 1.26 48
1.25
Swiss money market rather than inflation danger. Any SNB
1 .1 877 (in tra day) 0.00%
move is unlikely to take place before 1Q11, but risks are that
1.20
the CHF may return further on bid in autumn, when a broad
1.15 debate of the 2011-2012 budgets across the eurozone may
Ju n-09 Se p-09 De c-0 9 Ma r-10 Jun-1 0
reignite EMU woes and new demand for safe-haven assets.
As a result, with USD-CHF also being exposed to a new
Source: UniCredit Research slide towards parity in case of a full break below 1.04, we
strongly believe that any EUR-CHF recovery attempt above
JPY: Different faces 1.3890 that may emerge in August should be viewed as a
new selling opportunity.
Based on the recently improved market sentiment, the JPY
should trade significantly weaker, particularly vs. the EUR. Armin Mekelburg (UniCredit Bank)
+49 89 378-14307
However, as long as we see weak US data, the latent armin.mekelburg@unicredigroup.de
downward pressure in USD-JPY will strictly limit EUR-JPY's
upside potential. Adding in the almost exhausted correction Roberto Mialich (UniCredit Bank Milan)
+39 02 8862-0658
potential of the EUR in general, EUR-JPY would even have roberto.mialich@unicreditgroup.de
difficulty to reach levels beyond 115. Regarding USD-JPY,
we expect levels of 86-88 to be maintained.
Cable in line with EUR-USD. EUR-GBP

decline will require more time
After UK GDP for 2Q10 showed a stunning 1.0% qoq growth
rate, sterling was even more poised for a further sustained
rally. Thus, cable has continued to outperform the other
major exchange rates, taking also a clear advantage from
the weaker USD that made the break through 1.55 easier
and paved then the way for the following target at 1.57. MPC
testimony before the HM Treasury was fairly ignored,
although most BoE members sounded cautious about UK
growth, inflation and monetary policy prospects: while next
week’s BoE meeting should be a non-event, the bank will
likely be prudent in its new Inflation Report on August 11 too.
Yet, with new UK data releases likely to be good, the
ongoing pound’s strength should continue also next month:
some profit-taking can be expected after the current rally and
this is why we closed our long cable position, but this would
offer just a new buying opportunity amid risks that our
medium-term target for cable above 1.60 may be hit sooner
than we initially predicted. On the other hand, EUR-GBP
should show a more constrained dynamic: with EUR-USD
staying firm, a EUR-GBP break below 0.83 and towards 0.80
might require more time, but this medium-term target remain
intact.

Friday Notes
CIB View – Our Global Picture ■ Taking into account the recent escalation of the sovereign
debt crisis together with the weak foundation of the
Global economy current recovery, the ECB should leave its key interest
rate unchanged at currently 1% well into next year. We
■ The Great Recession ran its course last autumn. Real
expect the first hike in 4Q11 (25 bp). But the central bank will
worldwide GDP growth even accelerated up until spring. It
continue to remove excess liquidity again at a measured pace.
was, however, no more than a technical rebound after the
preceding economic collapse that is already facing another
setback. But we do not expect a double-dip recession. Government bond markets
Global economic growth should not re-accelerate before ■ The expected US monetary tightening in 1H 2011 in
late next year. conjunction with growing risk appetite will send government
US bond yields higher (again) later this year, albeit
■ For 2010, we expect real GDP to rise 4.4% on a PPP basis moderately. Combined with the growing supply of
(2011: +4.1%; 2009: -1%). Economic activity in industrialized Treasuries, long-term US yields (10Y) should reach the
countries should post only a modest 2.4% increase (2011: 3.80% level at the end of this year and 4.30% by end-
+2%), after having contracted by 3.1% in 2009. China and June 2011. 10Y Bund yields should barely rise over the
Emerging Asia, which were the first to achieve a trend next couple of months, reaching 3¼% at the end of this
reversal last year, will clearly remain at the top of the year and 3.50% six months later.
growth league.
Exchange rates
US ■ The debt crisis should continue to weigh on the euro
■ After exiting the Great Recession last autumn, real GDP beyond short-term fluctuations. We expect EUR-USD to
growth accelerated to a strong 5.6% in 4Q09 and a weaken again, testing the 1.20 mark in 1Q11. Headwind
satisfactory 2.7% in 1Q10, respectively. But this pace of is also coming from the widening of the transAtlantic
expansion was not sustainable. Growth was primarily interest rate & yield spread since the Fed will start its
fuelled by the re-stocking process as well as the advance tightening cycle well before the ECB. We also expect the
effects due to federal fiscal programs such as the "cash JPY to weaken over the next year or so. USD-JPY should
for clunkers" program. It was therefore borrowed growth rise to the 100 mark at the end of March next year.
from the future. Hence, we expect growth to decelerate
further toward 2% in 1H11 before gaining momentum
OUR MACRO FORECASTS
again late next year. For 2010 as a whole, we expect real
GDP to grow by 2.8% (2011: 2.1%; 2009: -2.4%). in % yoy 2009 2010 2011
GDP EMU -4.1 1.0 1.3
■ The current US growth moderation argues against a rise CPI EMU 0.3 1.5 1.8
in the Fed funds rate any time soon. We expect the Fed to GDP Germany -4.9 1.8 1.5
stick to its Zero Interest Rate Policy (target rate currently CPI Germany 0.3 1.1 1.6
at 0%-0.25%) this year, followed by a first rate hike during
GDP Italy -5.1 0.9 1.0
1H11. This will be preceded by a further gradual removal
CPI Italy 0.8 1.6 1.9
of its Quantitative Easing measures.
GDP US -2.4 3.0 2.4
CPI US -0.3 1.8 2.2
Eurozone
■ The eurozone exited its deepest recession since WWII
OUR FI/FX & OIL PRICE FORECASTS
also in autumn last year. But it was primarily the
turnaround in the inventory cycle, the growth effects of 2010/11 30-Sept 31-Dec 31-Mar 30-Jun
economic stimuli programs and improving net exports that EMU 3M (%) 0.95 1.20 1.28 1.35
lent a helping hand. After a weather-related rebound last EMU 10Y (%) 3.00 3.25 3.45 3.50
quarter, the exceptionally slow pace of the recovery should US 3M (%) 0.60 0.75 1.05 1.55
continue. But we do not expect the EMU-wide economy to US 10Y (%) 3.40 3.80 4.20 4.30
fall back into recession again. Eurozone GDP should grow
EUR-USD 1.24 1.22 1.20 1.18
by only 1% this year, after having contracted by 4.1% last
USD-JPY 91 95 100 106
year. For 2011, we expect EMU-wide GDP growth of 1¼%.
Oil Price 78 85 80 80

Friday Notes
Macro Forecasts
GDP, real (%, yoy) 2004 2005 2006 2007 2008 2009 2010f 2011f
World economy * 4.7 4.3 4.9 5.0 3.0 -0.6 4.4 4.1
Industrialized countries * 2.9 2.5 2.8 2.5 0.5 -3.1 2.4 2.0
US 3.6 3.1 2.7 2.1 0.4 -2.4 2.8 2.1
Euro area 1.9 1.8 3.1 2.8 0.4 -4.1 1.0 1.3
Germany ** 0.7 0.9 3.4 2.6 1.0 -4.9 1.8 1.5
France 2.3 2.0 2.4 2.3 0.1 -2.5 1.4 1.3
Italy 1.4 0.8 2.1 1.4 -1.3 -5.1 0.9 1.0
Spain 3.3 3.6 4.0 3.6 0.9 -3.6 -0.4 0.6
Austria 2.5 2.5 3.5 3.5 2.0 -3.5 1.3 1.4
UK 3.0 2.2 2.9 2.6 0.5 -4.9 1.2 1.8
Switzerland 2.5 2.6 3.6 3.6 1.8 -1.4 2.0 1.5
Sweden 3.5 3.3 4.6 3.4 -0.6 -5.1 2.7 2.1
Japan 2.7 1.9 2.0 2.4 -0.7 -5.3 2.7 1.8
Developing countries * 7.4 7.0 7.9 8.3 6.0 2.4 6.7 6.4
Asia 8.6 9.0 9.8 10.6 7.7 6.9 9.2 8.3
China 10.1 10.4 11.6 13.0 9.6 9.1 10.5 9.0
India 7.9 9.1 9.7 9.3 6.4 5.7 9.4 8.4
Latin America 6.0 4.7 5.7 5.7 4.2 -1.8 4.8 4.0
Brazil 5.7 3.2 3.8 5.7 5.1 -0.2 7.1 4.2
Central and Eastern Europe 7.5 6.1 7.2 6.9 4.0 -5.9 3.0 4.1
Russia 7.2 6.4 7.7 8.1 5.6 -7.9 3.4 5.0
Consumer prices, CPI (%, yoy) 2004 2005 2006 2007 2008 2009 2010f 2011f
US 2.7 3.4 3.2 2.9 3.8 -0.3 1.5 1.7
core rate (ex food & energy) 1.8 2.1 2.5 2.3 2.3 1.7 1.0 1.2
Euro area, HICP 2.1 2.2 2.2 2.1 3.3 0.3 1.5 1.7
Germany 1.7 1.6 1.6 2.3 2.6 0.3 1.2 1.5
France 2.1 1.7 1.7 1.5 2.8 0.1 1.5 1.5
Italy 2.2 2.0 2.1 1.8 3.3 0.8 1.6 1.9
Spain 3.0 3.4 3.6 2.8 2.8 4.1 1.5 1.6
Austria 2.1 2.3 1.5 2.2 3.2 0.5 1.8 2.0
UK 1.3 2.0 2.3 2.3 3.6 2.1 3.2 2.6
Switzerland 0.8 1.2 1.1 0.7 2.4 -0.5 1.1 1.1
Sweden 0.4 0.5 1.4 2.2 3.5 -0.3 1.5 1.5
Japan 0.0 -0.3 0.2 0.0 1.4 -1.3 -1.0 -0.3
GDP, real (%, qoq) I/09 II/09 III/09 IV/09 I/10f II/10f III/10f IV/10f
US (annualized) -6.4 -0.7 2.2 5.6 2.7 2.3 2.3 2.2
Euro area -2.5 -0.1 0.4 0.1 0.2 0.6 0.3 0.2
Germany -3.5 0.4 0.7 0.2 0.2 0.9 0.5 0.4
France -1.4 0.2 0.3 0.5 0.1 0.5 0.3 0.2
Italy -2.9 -0.3 0.4 -0.1 0.4 0.2 0.2 0.2
Spain -1.7 -1.0 -0.3 -0.1 0.1 0.0 0.0 0.1
Austria -2.1 -0.5 0.7 0.3 -0.1 0.7 0.5 0.5
UK -2.6 -0.7 -0.3 0.4 0.3 0.5 0.4 0.4
Switzerland -1.1 -0.1 0.5 0.9 0.4 0.6 0.4 0.3
Sweden -3.0 0.7 -0.3 0.4 1.4 0.3 0.4 0.5
Japan -2.8 0.7 0.3 0.4 0.2 0.2 0.3 0.4
Consumer prices, CPI (%, yoy) I/09 II/09 III/09 IV/09 I/10f II/10f III/10f IV/10f
US -0.2 -1.0 -1.6 1.5 2.4 1.8 1.0 0.9
Euro area, HICP 1.0 0.2 -0.4 0.4 1.1 1.5 1.6 1.7
Germany 0.8 0.2 -0.2 0.4 0.8 1.1 1.3 1.6
France 0.6 -0.2 -0.4 0.4 1.3 1.6 1.5 1.5
Italy 1.5 0.9 0.1 0.7 1.3 1.4 1.6 1.9
Spain 0.5 -0.7 -1.0 0.2 1.2 1.5 1.4 1.8
Austria 1.1 0.3 0.0 0.6 1.4 2.0 1.9 1.9
UK 3.0 2.1 1.5 2.1 3.3 3.5 3.1 2.9
Switzerland 0.0 -0.7 -1.0 -0.2 1.1 1.2 1.0 1.1
Sweden 0.8 -0.5 -1.2 -0.4 1.0 1.3 1.6 1.9
Japan -0.1 -1.0 -2.2 -1.8 -1.1 -1.3 -1.0 -0.8
Comments: *The GDP shares used for aggregation are based on the purchasing-power-parity (PPP) valuation of country GDPs
** Real GDP 2010 unadjusted: +1.9% GDP = Gross Domestic Product, HICP = Harmonized Index of Consumer Prices, CPI = Consumer Price Index, f = forecast

Friday Notes
Interest & Exchange Rate Forecasts (I)

INTEREST RATE FORECASTS (%, END QUARTER)
2010/11 current end-Q3 end-Q4 end-Q1 end-Q2

Eurozone bond market (Bunds)
Refi rate 1.00 1.00 1.00 1.00 1.00
3M Euribor 0.90 0.95 1.20 1.28 1.35
2Y 0.81 0.85 1.05 1.15 1.30
5Y 1.68 1.83 2.10 2.30 2.40
10Y 2.68 3.00 3.25 3.45 3.50
30Y 3.40 3.60 3.80 3.95 4.00
10Y swap spread (in bp) 27 25 25 25 20
US Treasury Market
Fed funds target rate 0.13 0.25 0.25 0.75 1.25
3M USD Libor 0.47 0.60 0.75 1.05 1.55
2Y 0.55 0.85 1.30 2.00 2.40
5Y 1.63 2.11 2.55 3.15 3.45
10Y 2.96 3.40 3.80 4.20 4.30
30Y 4.06 4.25 4.60 4.70 4.75
10Y swap spread (in bp) -3 10 15 20 20
Japan
Target rate 0.10 0.10 0.10 0.10 0.10
3M JPY Libor 0.24 0.30 0.35 0.40 0.40
10Y JGB 1.07 1.40 1.50 1.60 1.65
United Kingdom
Repo rate 0.50 0.50 1.00 1.50 2.00
3M GBP Libor 0.74 0.80 1.10 1.80 2.30
10Y Gilt 3.36 3.80 4.30 4.50 4.70
Switzerland
3M CHF Libor mid target rate 0.25 0.25 0.25 0.50 0.75
3M CHF Libor 0.17 0.10 0.30 0.60 0.85
10Y Swissie 1.48 2.00 2.25 2.45 2.35
EXCHANGE RATE FORECASTS (END QUARTER)

EUR-USD 1.3037 1.24 1.22 1.20 1.18
EUR-JPY 112.50 113 116 120 125

EUR-GBP 0.8345 0.82 0.78 0.75 0.72
EUR-CHF 1.3551 1.29 1.27 1.30 1.33
USD-JPY 86.30 91 95 100 106

GBP-USD 1.5623 1.52 1.57 1.60 1.63
USD-CHF 1.0395 1.04 1.04 1.08 1.13
COMMODITY PRICE FORECASTS

Oil price (Brent, USD/b) 76.87 78 85 80 80
DJ commodity price index 264.69 290 310 310 310

Friday Notes
Interest & Exchange Rate Forecasts (II)

INTEREST RATE FORECASTS (%, END QUARTER)

Sweden
Key rate 0.50 0.50 0.75 1.00 1.50
3M rate 0.93 0.95 1.10 1.55 2.00
10Y government bond yield 2.76 3.20 3.65 3.90 4.15
10Y spread to Bunds (in bp) 8 20 40 45 65
Norway
Key rate 2.00 2.25 2.50 2.75 3.00
3M rate 2.63 2.80 3.00 3.20 3.40
Canada
Key rate 0.75 0.75 0.75 1.00 1.25
3M rate 0.98 1.00 1.10 1.30 1.50
Australia
Key rate 3.50 4.75 5.00 5.25 5.25
3M rate 4.89 5.05 5.30 5.50 5.50
New Zealand
Key rate 3.00 3.00 3.25 3.50 3.50
3M rate 3.44 3.40 3.70 3.85 4.00
EXCHANGE RATE FORECASTS (END QUARTER)

EUR-SEK 9.4417 9.50 9.45 9.40 9.35
EUR-NOK 7.9669 7.70 7.65 7.60 7.55
EUR-CAD 1.3471 1.20 1.22 1.28 1.30
EUR-AUD 1.4497 1.33 1.30 1.29 1.30
EUR-NZD 1.8064 1.68 1.63 1.60 1.62
USD-SEK 7.2423 7.66 7.75 7.83 7.92

USD-NOK 6.1109 6.21 6.27 6.33 6.40
USD-CAD 1.0333 0.97 1.00 1.07 1.10
AUD-USD 0.8993 0.93 0.94 0.93 0.91
NZD-USD 0.7216 0.74 0.75 0.75 0.73
EUR-USD 1.3037 1.24 1.22 1.20 1.18

Friday Notes
Economic Event & Data Release Calendar

Time Consensus
Date (ECB) Country Indicator Period CIB est. (Bloomberg) Prev. period
30 July to 06 August 2010
Fri, 30 Jul '10 14:30 US Employment cost index (in % qoq) Q2 0.5 0.6
14:30 US PCE deflator (in % qoq annualized) Q2 1.0 0.7
14:30 US Real GDP (in % qoq annualized) Q2 2.6 2.7
15:45 US Chicago Purchasing Managers Index Jul 56.0 59.1
15:55 US University of Michigan consumer confidence Aug 67.0 66.5
Mon, 02 Aug '10 9:30 SZ Manufacturing PMI (index) Jul 64.7 65.7
9:45 IT Manufacturing PMI (index) Jul 54.8 54.3
9:50 FR Manufacturing PMI (index) Aug 53.7
9:55 GE Manufacturing PMI (index) Aug 61.2 61.2
10:00 EMU Manufacturing PMI (index) Aug 56.5 56.5
10:30 UK Manufacturing PMI (index) Jul 57.0 57.0 57.5
16:00 US Construction spending (in % mom) Jun -0.5 -0.2
16:00 US ISM manufacturing (index) Jul 54.0 54.5 56.2
18:00 IT New car registration (in % yoy) Jul -19.12
20:00 IT Budget balance (EUR bn) Jul 4.3
22:00 US Geithner Delivers Remarks on Financial Reform
Tue, 03 Aug '10 0:00 UK House price (HBOS, in % 3M yoy) Jul 4.6 6.3
9:15 SZ Consumer price index (in % yoy) Jul 0.6 0.5
11:00 EMU Producer price index, PPI (in % yoy) Jun 3.2 3.1
14:30 US PCE core inflation (in % mom) Jun 0.2 0.2
14:30 US Personal expenditures (in % m-om) Jun 0.1 0.2
14:30 US Personal income (in % mom) Jun 0.2 0.4
16:00 US Pending home sales (in % mom) Jun 1.1 -30.0
16:00 US New orders (in % mom) Jun 0.0 -1.4
23:00 US Auto sales (in mn) Jul 11.7 11.08
Wed, 04 Aug '10 9:45 IT Services PMI (index) Jul 51.5 51.5
9:50 FR Services PMI (index) Aug 61.3
9:55 GE Services PMI (index) Aug 57.3 57.3
10:00 EMU Composite PMI (index) Aug 56.7
10:00 EMU Services PMI (index) Aug 56 56
10:30 UK Services PMI (index) Jul 54.7 54.4
11:00 EMU Retail sales (volume, in % mom) Jun -0.1 0.1
13:00 US MBA mortgage applications Jul 30 -4.4
14:15 US ADP employment index (change in thousands mom) Jul 35 13
16:00 US ISM Non-manufacturing (index) Jul 53.5 53.3 53.8
Thu, 05 Aug '10 12:00 GE Industrial orders (in % mom) Jun 2.0 1.4 -0.5
13:00 UK Bank of England repo rate (in %) Jul 30 0.5 0.5 0.5
13:45 EMU ECB refi rate (in %) Jul 30 1.0 1.0
14:30 EC Trichet Speaks at ECB Monthly News Conference
14:30 US Initial jobless claims (in thousands) Jul 30 457 457
Fri, 06 Aug '10 7:45 SZ Unemployment rate (in %) Jul 3.9 3.9
8:45 FR Budget balance (EUR bn) Jun -67.9
8:45 FR Trade balance (EUR bn) Jun -5.5
10:00 IT Industrial production (in % mom) Jun 0.0 0.1 1.0
10:30 UK Producer price index, manuf. products (in % mom) Jul 0.1 -0.3
10:30 UK Industrial production (in % mom) Jun 0.8 0.2 0.7
11:00 IT Real GDP (in % yoy) Q2 1.2 0.5
11:00 IT Real GDP (in % qoq) Q2 0.2 0.4 0.4
12:00 GE Industrial production (in % mom) Jun 1.0 1.0 2.6
12:00 GE Industrial production (in % yoy) Jun 12.2 11.4 12.4
14:30 US Unemployment rate (in %) Jul 9.5 9.6 9.5
14:30 US Non-farm payrolls (change in thousands mom) Jul -75 -70 -125
21:00 US Consumer credit (USD bn) Jun -6 -9.1
*Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted

Friday Notes
Economic Event & Data Release Calendar – The week after

Time Consensus
Date (ECB) Country Indicator Period CIB est. (Bloomberg) Prev. period
09 August to 13 August 2010
Mon, 09 Aug '10 8:00 GE Exports (in % mom) Jun 9.2

8:00 GE Imports (in % mom) Jun 14.8
10:30 GE Sentix growth expectations Aug -1.2766
18:00 IT Ex Bank of Italy Governor Ciampi Speaks at Cortina Event
Tue, 10 Aug '10 JN BOJ Target Rate

JP Bank of Japan key rate (in %) Jan 1 0.1
1:01 UK House price (RICS, balance) Jul 9
8:00 GE Harmonized CPI (in % yoy) Aug 1.2
8:00 GE Consumer price index, CPI (national, in % yoy) Aug 1.1
8:45 FR Industrial production (in % mom) Jun 1.7
10:30 UK Trade balance (EUR bn) Jun -3817
14:30 US Unit labor costs (in % qoq annualized) Q2 -1.3
14:30 US Non-farm productivity (in % qoq annualized) Q2 2.8
20:15 US Federal funds target rate (in %) Jul 30 0.25 0.25
Wed, 11 Aug '10 8:45 FR Current account balance (EUR bn) Jun -4.5
10:30 UK Jobless claims (change in thousands) Jul -20.8
10:30 UK Unemployment rate (in %) Jul -20.8
11:30 UK Bank of England Releases Quarterly Inflation Report
14:30 US Trade balance (USD bn) Jun -42.871 -42.266
20:00 US Federal budget (USD bn) Jul -68.422
Thu, 12 Aug '10 7:00 JP Consumer confidence (Nationwide, index) Jul 43.6
10:00 EC ECB Publishes Aug. Monthly Report
11:00 IT Trade balance (EUR bn) Jun -1957.04
11:00 EMU Industrial production (in % yoy) Jun 9.6
14:30 US Import prices (in % mom) Jul -1.3
Fri, 13 Aug '10 8:00 GE Real GDP (in % yoy) Q2 1.6

8:00 GE Real GDP (in % qoq) Q2 0.2
8:45 FR Non-farm payrolls (in % qoq) Q2 0.2
8:45 FR Real GDP (in % yoy) Q2 1.2
8:45 FR Real GDP (in % qoq) Q2 0.1
8:45 FR Consumer price index (in % yoy) Jul 1.5
11:00 EMU Trade balance (EUR bn) Jun -2967.7
11:00 EMU Real GDP (in % yoy) Q2 0.6
11:00 EMU Real GDP (in %qoq) Q2 0.2
14:30 US CPI ex food & energy (core, in % yoy) Jul 0.9
14:30 US Consumer price index (in % yoy) Jul 1.1
14:30 US CPI ex food & energy (core, in % mom) Jul 0.2 0.2
14:30 US Consumer price index (in % mom) Jul 0.2 -0.1
14:30 US Retail sales ex autos (in % mom) Jul 0.4 -0.1
14:30 US Retail sales (in % mom) Jul 0.4 -0.5
16:00 US Business inventories (in % mom) Jun 0.1
*Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted

Friday Notes
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Friday Notes
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Friday Notes
UniCredit Research*
Thorsten Weinelt, CFA Dr. Ingo Heimig
Global Head of Research & Chief Strategist Head of Research Operations
+49 89 378-15110 +49 89 378-13952
thorsten.weinelt@unicreditgroup.de ingo.heimig@unicreditgroup.de
Economics & FI/FX Research
Marco Annunziata, Ph.D., Chief Economist

+44 20 7826-1770
marco.annunziata@unicreditgroup.eu
Economics & Commodity Research EEMEA Economics & FI/FX Strategy

Global Economics Gyula Toth, Head of EEMEA FI/FX Strategy
Dr. Davide Stroppa, Global Economist +43 50505 823-62, gyula.toth@caib.unicreditgroup.eu
+39 02 8862-2890
davide.stroppa@unicreditgroup.de Cevdet Akcay, Ph.D., Chief Economist, Turkey
+90 212 319-8430, cevdet.akcay@yapikredi.com.tr
European Economics
Matteo Ferrazzi, Economist, EEMEA
Andreas Rees, Chief German Economist +39 02 8862-8600, matteo.ferrazzi@unicreditgroup.eu
+49 89 378-12576
andreas.rees@unicreditgroup.de Dmitry Gourov, Economist, EEMEA
+43 50505 823-64, dmitry.gourov@caib.unicreditgroup.eu
Marco Valli, Chief Italian Economist
+39 02 8862-8688 Hans Holzhacker, Chief Economist, Kazakhstan
marco.valli@unicreditgroup.de +7 727 244-1463, h.holzhacker@atfbank.kz
Stefan Bruckbauer, Chief Austrian Economist Marcin Mrowiec, Chief Economist, Poland
+43 50505 41951 +48 22 656-0678, marcin.mrowiec@pekao.com.pl
stefan.bruckbauer@unicreditgroup.at Vladimir Osakovsky, Ph.D., Head of Strategy and Research, Russia
Tullia Bucco +7 495 258-7258 ext.7558, vladimir.osakovskiy@unicreditgroup.ru
+39 02 8862-2079 Rozália Pál, Ph.D., Chief Economist, Romania
tullia.bucco@unicreditgroup.de +40 21 203-2376, rozalia.pal@unicredit.ro
Chiara Corsa Kristofor Pavlov, Chief Economist, Bulgaria
+39 02 8862-2209 +359 2 9269-390, kristofor.pavlov@unicreditgroup.bg
chiara.corsa@unicreditgroup.de
Goran Šaravanja, Chief Economist, Croatia
Dr. Loredana Federico +385 1 6006-678, goran.saravanja@unicreditgroup.zaba.hr
+39 02 8862-3180
loredana.federico@unicreditgroup.eu Pavel Sobisek, Chief Economist, Czech Republic
+420 2 211-12504, pavel.sobisek@unicreditgroup.cz
Alexander Koch, CFA
+49 89 378-13013 Jan Toth, Chief Economist, Slovakia
alexander.koch1@unicreditgroup.de +421 2 4950-2267, jan.toth@unicreditgroup.sk
Chiara Silvestre
chiara.silvestre@unicreditgroup.de
Global FI/FX Strategy
US Economics Michael Rottmann, Head
+49 89 378-15121, michael.rottmann1@unicreditgroup.de
Dr. Harm Bandholz, CFA
+1 212 672 5957 Dr. Luca Cazzulani, Deputy Head, FI Strategy
harm.bandholz@us.unicreditgroup.eu +39 02 8862-0640, luca.cazzulani@unicreditgroup.de
Chiara Cremonesi, FI Strategy
Commodity Research +44 20 7826-1771, chiara.cremonesi@unicreditgroup.eu
Jochen Hitzfeld Dr. Stephan Maier, FX Strategy
+49 89 378-18709 +39 02 8862-8604, stephan.maier@unicreditgroup.eu
jochen.hitzfeld@unicreditgroup.de
Armin Mekelburg, FX Strategy
Nikolaus Keis +49 89 378-14307, armin.mekelburg@unicreditgroup.de
+49 89 378-12560
nikolaus.keis@unicreditgroup.de Roberto Mialich, FX Strategy
+39 02 8862-0658, roberto.mialich@unicreditgroup.de
Kornelius Purps, FI Strategy
+49 89 378-12753, kornelius.purps@unicreditgroup.de
Herbert Stocker, Technical Analysis
+49 89 378-14305, herbert.stocker@unicreditgroup.de
Publication Address
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Arabellastrasse 12
D-81925 Munich Internet
Tel. +49 89 378-18927 - Fax +49 89 378-18352 www.research.unicreditgroup.eu
*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit CAIB Group (UniCredit CAIB), UniCredit Securities (UniCredit Securities),
UniCredit Menkul Değerler A.Ş. (UniCredit Menkul), UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank and ATFBank.

JUL 30 UniCredit Friday Notes

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30 July 2010 Economics & FI/FX Research

Source: Datastream, UniCredit Research

UniCredit Research page 1 See last pages for disclaimer.

10 MILLION ADDITIONAL UNEMPLOYED LOOKING FOR WORK

■ It is first and foremost the weak US labor market that is 12

Bernanke also sees it that way. Most of the newly-created

■ Apart from the lack of vacancies, the unemployed also 4

■ Older and less educated unemployed are least likely to

Source: BLS, UniCredit Research

UniCredit Research page 2 See last pages for disclaimer.

TEMPORARY WORKERS INSTEAD OF FULL-TIME EMPLOYEES ...requires more flexible employees

UniCredit Research page 3 See last pages for disclaimer.

The PEW study reveals how different population groups are 10

Furthermore, most of these families own a home, which they 2

Civilian labor force, percentage split by age groups

Source: BLS, Thomson Datastream, UniCredit Research 5

Source: BLS, Thomson Datastream, UniCredit Research

UniCredit Research page 4 See last pages for disclaimer.

3.0 To be sure, the mismatch and the structural problems on the

UniCredit Research page 5 See last pages for disclaimer.

term inflation outlook, we discuss our recently updated BoE

was up 1% qoq, services by 0.9%, while construction marked

UniCredit Research page 6 See last pages for disclaimer.

Against the backdrop of a lower contribution from exports

UniCredit Research page 7 See last pages for disclaimer.

depend mostly on the private sector’s response. However,

UniCredit Research page 8 See last pages for disclaimer.

Data Monitor – Preview Europe

July MIB Cons. June May

Services (Wednesday, July 4) 54.4 -- 54.4 55.4 60

We expect both the services and the manufacturing 55

PMIs to keep signaling a slowdown in economic activity 50

Source: Markit, UniCredit Research

August MIB Cons. July June

We expect the BoE to remain on hold both on the repo 5

rate and the asset purchase program. The Bank is facing 4

GERMANY, NEW ORDERS NEW ORDERS, IN % YOY

June CIB Cons. May Apr 40

Companies were exceptionally bullish on the order situation 10

up to mid-year. Accordingly, we expect another tangible 0

Source: Bundesbank, UniCredit Research

UniCredit Research page 9 See last pages for disclaimer.

June CIB Cons. May Apr

future. The upward trend for industrial production should -10

Source: Bundesbank, UniCredit Research

ITALY, INDUSTRIAL PRODUCTION STRONG APRIL-MAY IP NUMBERS

June CIB Cons. May Apr

Source: Thomson Datastream, UniCredit Research

ITALY, REAL GDP SLOWDOWN AHEAD

2Q10 CIB Cons. 1Q 4Q

Economic growth is expected to have eased to 0.2% qoq 1.0 3.00

Source: Thomson Datastream, UniCredit Research

UniCredit Research page 10 See last pages for disclaimer.

UK, INDUSTRIAL PRODUCTION STILL ON A STRONG FOOTING

June MIB Cons. May April

Source: ONS, UniCredit Research

Marco Valli (UniCredit Bank Milan)

UniCredit Research page 11 See last pages for disclaimer.

Data Monitor US – Preview of the coming week

July CIB Cons. June May

manufacturing surveys, however, fell quite sharply 35

across the board in July, highlighting some downside Critical value

risks to our forecast. 30

Source: Thomson Datastream, UniCredit Research