Daily Breakfast Spread, 3 June 2011

Daily Breakfast Spread

DBS Group Research 3 June 2011

Economics
Southeast Asia, India
• MY: Trade data for April in on tap today and a healthy increase of 9.6% YoY is expected
for the headline export figure. Import growth should post a rise of 5.2%, which will
thus deliver an overall trade balance of MYR12bn for the month. We had correctly
predicted a sluggish export performance in March due to the high base effect. But
such effect will be eroded in April, which thus implies some technical lift to the export
number. That said, as oil prices have also moderated in April, the positive price effect
which has boosted Malaysia's export in recent months would likewise have subsided.
But technical issues aside, there have been concerns that the calamity in Japan may
disrupt manufacturing supply chains as well as cool regional demand. Recent exports
and industrial production performance in neighbouring Singapore have been tepid
for that reason and similar outcome can be expected for Malaysia export numbers.
Nonetheless, we think that the drag coming from Japan will be transient in nature and
should not have a lasting impact on the export sector in the longer run. In fact,
stronger demand can be expected from Japan during the reconstruction phase later in
the year. Indeed, growth momentum is poised to improve in the second half of the
year on the back of the buoyant regional demand as well as a steady recovery in the
developed economies.

G3
• EZ: While available flash GDP and PMI data (up to May) show growth was strong in the
first half, we are not hopeful that this strength will carry on to the second half of the
year. Even if we assume the economy did lose considerable momentum in June, first
half growth will average a strong 2.3% easily (which means 2Q GDP growth drops to
1.5% QoQ, saar from 1Q’s 3.3%). For the second half of the year, we prefer to pencil in
modest growth of about 1% (QoQ, saar) which makes for full-year growth of 1.9%,
US Fed expectations just slightly higher than our current estimate of 1.7% (which was also the consensus
Implied fed funds rate
before the strong flash GDP estimate was out).
High oil prices are the biggest
Dec-11 Mar-12 Jun-12 threat to sustaining the
Market EZ: PCE vs real hourly labour cost
strength of the recovery.
Current 0.17 0.24 0.33
1wk ago 0.17 0.24 0.33 Consumer price inflation
%
DBS 0.25 0.50 0.75 has averaged 2.6% (YoY)
in Jan-May and it is unlikely 4 real hourly labour cost
Source: Bloomberg fed fund that wage growth was as
futures
PCE
high in the same period.
3
Notes: Given a FF target rate of Nominal hourly labour cost
0.25%, an implied FF rate of rose by 1.6% (YoY) in 4Q10
0.30 is interpreted roughly as 2
and by a similar extent in
the market pricing in a 20%
chance of a Fed hike to 0.50% 2010. Real hourly labour
from 0.25% (30 is 1/5th of the costs most likely contracted 1
distance to 50 from 25). DBS (YoY) in 1Q. Historically,
expectations are presented in consumption has been
discrete blocks of 25bps, i.e., the
0
Fed moves or it does not. See
sensitive to real wages
also “Policy rate forecasts” (Chart) and this suggests -1
below. the rising cost of living will Latest: 4Q10
weaken consumption
eventually. Investment is -2
supported by a low-base Jun-01 Jun-03 Jun-05 Jun-07 Jun-09
(and hence catch-up) but

1
Daily Breakfast Spread, 3 June 2011

is still a derived demand, dependent on consumption (and exports). All in all, it is

unlikely that overall economic growth is half as strong in 2H11 as it was in the first
half.
As for inflation, the latest May reading of 2.7% (YoY) implies prices were flat from
April (MoM, sa). However, factoring in the large 10% (MoM, sa) drop in Brent crude oil
prices in the month, this moderation in inflation is not as much as we would have
expected. As such, it appears inflation will come in much higher than 2011 forecast of
2.0%, at 2.6%. By 2012, inflation is expected to be within the ECB’s target of ‘close to
and under 2%’ assuming policy normalization continues apace. We still nudge our
forecast for 2012 inflation higher to 1.9% from 1.6% currently.
The slightly improved growth prospects and the higher inflation (and the deteriorating
debt crisis) don’t alter our thinking on the ECB policy much. The ECB’s strategy is likely
to continue to be to curb excessive wage hikes that might harden the current high
headline inflation (which is largely imported / supply-driven) and keep inflation
expectations anchored. Thus, we continue to expect the ECB to hike rates slowly and
steadily giving us a 25bps hike each quarter. This should take the policy rate to 1.75%
by end-2011 from 1.25% currently (EONIA futures now price in only a third chance of
a rate hike in 3Q11 and just slightly more than one 25bps hike by end-year).

• US: Nonfarm payrolls are on tap today. Markets expect 165k new jobs were added in
May. That’s down 10k since yesterday, which means that the last guy or two to throw
their estimates into the hat must be betting on a seriously negative outcome. Why
would they do that? Because Wednesday’s ADP report showed a 140k drop in payrolls
from April, taking new jobs in May all the way down to 38k. Market reaction was
dramatic enough following that report (and an ISM that fell by 7 points). If today’s
payrolls mimic the ADP, the shoes may hit the fan.
How likely is it that? It’s hard to say because while most consider jobs and job growth
to be the most fundamental part of the economy, job hiring is different: it is surely the
part of the economy (outside markets themselves) that for better or worse is the most
prone to sentiment. Nobody likes to fire workers. It’s stressful. It’s painful. It’s costly. It’s
almost as traumatic for the guy doing it as it for the guy on the receiving end. So
nobody hires unless they’re pretty darn sure about the outlook.
And all of a sudden, nobody’s too darn sure about the outlook. First quarter GDP
growth dropped to 1.8% (QoQ, saar), the same speed that, in 2Q last year, had
everyone so worried about a double-dip that QE2 was born. Business investment –
almost as risky as hiring new labor – has slowed to a crawl over the past 4-6 months.
The ISMs have backed off a notch. Or ten. Jobless claims took a 2 month detour off
their previous path to recovery and though they’re no longer running in the wrong
direction, they’re not running the right direction either.
What’s common to jobless claims and business investment and the ISMs? They’re all
essentially sentiment-driven indicators. Just like the nonfarm payrolls. So if the ISM
can drop by 7 points in a month and if the ADP can drop by 140k in a month; payrolls
can too.
The problem is, one bad turn begets another. Sentiment snowballs. How long might
lousy sentiment last? And what will bring the reversal? That’s easy. Consumption is
the least sentiment-driven part of the economy. It’s also the least cyclical / most stable
part of the economy. Thankfully in this case, it’s the biggest part of the economy too
(about 70% currently). When economies go into downturns or suffer bouts of anxiety,
consumption drags them out, slowly but surely. ‘Twas always thus.
The good news is, consumption continues to grind ahead, not at breakneck speed,
but fast enough to pull the economy forward and, in so doing, to pull sentiment
back behind the boat as well. GDP growth is expected to register 2.5% (QoQ, saar)
in 2Q and to run between 2.5% and 3% in Q3 and Q4. If markets slip further in the
meantime, as snowballing sentiment suggests, they should be back by summer’s
end too.

Currencies
• FX: All eyes will be on tonight’s US nonfarm payrolls, which consensus expects will slip
to 165K from in May from 244K in the previous month. Privately, we suspect that
markets believe this forecast to be a tad too high for comfort. After all, the ADP
employment change did come in significantly lower at 38K instead of the 175K consensus.
The employment sub-index for the ISM manufacturing PMI survey also retreated to

2
Daily Breakfast Spread, 3 June 2011

58.2 from 62.7, though it is tonight’s sub-index for the ISM non-manufacturing PMI
sector that will be more important for payrolls.
If tonight’s payrolls disappoint, it may increase the budget impasse that’s preventing
US lawmakers from raising the federal debt limit. The Republican-held lower house
rejected, on Wednesday, by a majority (318-97) vote a bill to increase this debt ceiling.
It was probably no coincidence that Republican Mitt Romney chose this period of soft
US jobs/housing data to launch his presidential bid for the White House yesterday,
attacking US President Barack Obama’s handling of the US economy. Adding to the
uncertainty yesterday was Moody’s warning that it may join Standard & Poor’s in
placing US’s AAA debt rating under negative watch as early as July if US lawmakers
fail to make progress towards raising the debt limit with a credible fiscal consolidation
plan.
In conclusion, we remain comfortable with our view that the current soft patch confronting
the US economy is negative for the US dollar. Once Greece secures its new bailout
deal, focus will shift more decisively from the EU sovereign debt crisis towards the
uncertainty surrounding US’s AAA credit debt rating. Yesterday’s negative reaction in
US treasuries on the Moody’s warning should be viewed as a serious shot across the
bow for the US dollar.

Fixed Income
• Asia: After poor performance in 1Q11, Asian local-currency government bonds have
done well so far in 2Q11. The downtrend in Treasury yields since early-April has
helped as has the deterioration in the outlook for global growth. Energy prices are
unlikely to rise when markets see slower growth and that means that annual headline
inflation rates will stabilize, taking pressure off central banks in the region to hike
rates more aggressively. Tighter monetary policy is still likely, because policy rates are
still low relative to current and average historical underlying inflation rates, but if
headline inflation rates stabilize, the amount of tightening that we are likely to see in
the coming months is mostly priced into bonds. That’s a key positive for the bond
market outlook, but it is unlikely that the strong performance of the asset class in this
quarter can be repeated in 3Q11. If the slowdown is just that, a slowdown and markets
don’t start to doubt the sustainability of the recovery, bond yields are more likely to
rise than fall, in the US and in Asia.

Looking back
• US mkts: US stocks closed mixed overnight amid soft economic data. The Dow Jones
Industrial Average fell 0.34% to 12248.55 and the Nasdaq closed 0.15% higher at
2773.31. Treasury yields rose 2bps to 0.46% in the 2Y sector and 7bps to 3.03% in the
10Y sector.

3
Daily Breakfast Spread, 3 June 2011

Economic calendar
Event Consensus Actual Previous
May 30 (Mon)
PH: GDP (1Q) 5.1% y/y 4.9% y/y 7.1% y/y

May 31 (Tue)
IN: GDP (1Q) 8.1% y/y 7.8% y/y 8.2% y/y
HK: retail sales value (Apr) 25.2% y/y 27.7% y/y 26.2% y/y
KR: ind. Prod. (Apr) 9.2% y/y 6.9% y/y 9.0% y/y
TH: trade balance -USD477mn USD1892mn
-- exports 24.7% y/y 31% y/y
-- imports 26.3% y/y 27.2% y/y
US: S&P/Case Shiller index -3.4% y/y -3.61% y/y -3.33% y/y

Jun 1 (Wed)
KR: CPI (May) 4.2% y/y 4.1% y/y 4.2% y/y
KR: trade balance (April) USD4528mn USD2746mn USD5139mn
-- exports 27.7% y/y 23.5% y/y 25.1% y/y
-- imports 29% y/y 29.9% y/y 23.9% y/y
CH: PMI (May) 51.6 52.9
IN: trade (Apr)
-- exports 34.4% y/y 43.9% y/y
-- imports 14.1% y/y 17.3% y/y
ID: CPI (May) 5.94% y/y 5.98% y/y 6.16% y/y
ID: trade balance (Apr) USD1397mn USD1630mn USD1880mn
-- exports 29.9% y/y 37.3% y/y 27.5% y/y
TH: CPI (May) 4.3% y/y 4.19% y/y 4.04% y/y
US: ISM (May) 57.1 53.5 60.4
US: ADP employment chg 175K 38K 179K

Jun 2 (Thur)
US: initial jobless claims (28 May) 417K 422K 424K

Jun 3 (Fri)
MY: trade balance (Apr) MYR 10.15bn MYR13.52bn
-- exports 11.3% y/y 7.8% y/y
-- imports 10.8% y/y 12.1% y/y
US: services ISM (May) 54.3 52.8
US: nonfarm payrolls chg (May) 165K 244K
US: unempl. rate (May) 8.9% 9.0%

Central bank policy calendar

Policy
Date Country Rate Current Consensus DBS Actual
This week
01-Jun TH 1 day repo 2.75% 3.00% 3.00% 3.00%

Next week
09-Jun Ezone 7-day refi rate 1.25% 1.25% 1.25%
09-Jun ID o/n reference rate 6.75% 6.75% 6.75%
10-Jun KR 7 day repo rate 3.00% 3.25%

Last week
No meetings

4
 Daily Breakfast Spread, 3 June 2011

GDP & inflation forecasts

GDP growth, % YoY CPI inflation, % YoY
2008 2009 2010 2011f 2012f 2008 2009 2010 2011f 2012f
US 0.0 -2.6 2.9 2.5 3.0 3.8 -0.3 1.6 2.6 2.2
Japan -1.2 -6.3 4.0 1.0 2.4 1.4 -1.4 -0.4 0.5 0.7
Eurozone 0.3 -4.0 1.7 1.9 1.7 3.3 0.3 1.6 2.6 1.9
Indonesia 6.0 4.6 6.1 6.4 6.1 9.8 4.8 5.1 7.0 6.3
Malaysia 4.6 -1.7 7.2 5.5 5.6 5.4 0.6 1.7 2.9 2.4
Philippines 3.6 1.0 7.3 5.5 5.2 9.3 3.2 3.8 5.6 5.2
Singapore 1.4 -1.3 14.5 7.0 6.5 6.5 0.6 2.8 4.2 3.0
Thailand 2.5 -2.2 7.8 5.0 5.0 5.5 -0.8 3.3 4.0 4.0
Vietnam 6.2 5.3 6.8 7.0 7.5 23.1 7.0 9.2 13.0 7.8
China 9.6 9.2 10.3 9.5 9.0 5.9 -0.7 3.3 4.5 4.0
Hong Kong 2.1 -2.7 6.8 5.0 4.5 4.3 0.5 2.4 5.0 4.5
Taiwan 0.7 -1.9 10.8 4.1 4.3 3.5 -0.9 1.0 1.8 1.6
Korea 2.3 0.2 6.1 4.5 4.1 4.7 2.8 3.0 4.4 3.2
India* 6.8 8.0 8.6 8.0 8.0 8.4 3.6 9.4 7.0 6.0
* India data & forecasts refer to fiscal years beginning April; inflation is WPI
Source: CEIC and DBS Research

Policy & exchange rate forecasts

Policy interest rates, eop Exchange rates, eop
current 2Q11 3Q11 4Q11 1Q12 current 2Q11 3Q11 4Q11 1Q12
US 0.25 0.25 0.25 0.25 0.50 … … … … …
Japan 0.10 0.10 0.10 0.10 0.10 80.8 81 80 79 78
Eurozone 1.25 1.25 1.50 1.75 2.00 1.451 1.42 1.46 1.50 1.52
Indonesia 6.75 7.00 7.25 7.50 8.00 8,544 8,800 8,750 8,700 8,675
Malaysia 3.00 3.00 3.25 3.25 3.25 3.01 2.92 2.87 2.82 2.79
Philippines 4.50 4.50 4.75 5.00 5.00 43.2 42.0 41.0 40.0 39.8
Singapore n.a. n.a. n.a. n.a. n.a. 1.23 1.23 1.21 1.19 1.18
Thailand 3.00 3.00 3.50 4.00 4.00 30.3 29.1 28.8 28.5 28.1
Vietnam^ 9.00 10.00 10.00 10.00 10.00 20,490 21,240 21,480 21,720 21,770
China* 6.31 6.56 6.81 7.06 7.31 6.48 6.46 6.38 6.30 6.25
Hong Kong n.a. n.a. n.a. n.a. n.a. 7.78 7.75 7.75 7.75 7.75
Taiwan 1.75 2.00 2.25 2.50 2.75 28.6 28.0 27.5 27.0 26.8
Korea 3.00 3.25 3.75 4.00 4.00 1075 1020 1000 980 970
India 7.25 7.25 7.75 8.00 8.00 44.8 43.5 43.0 42.5 41.8
^ prime rate; * 1-yr lending rate

Market prices
Policy rate 10Y bond yield FX Equities
Current Current 1wk chg Current 1wk chg Index Current 1wk chg
(%) (%) (bps) (%) (%)
US 0.25 3.01 -6 74.3 -0.9 S&P 500 1,313 -0.6
Japan 0.10 1.15 2 80.8 0.0 Topix 828 0.3
Eurozone 1.25 2.99 -1 1.451 1.7 Eurostoxx 2,563 -1.5
Indonesia 6.75 7.36 -7 8544 0.3 JCI 3,838 1.5
Malaysia 3.00 4.00 -1 3.01 0.8 KLCI 1,558 1.1
Philippines 4.50 6.69 15 43.2 0.3 PCI 4,325 2.2
Singapore Ccy policy 2.30 3 1.231 0.4 FSSTI 3,161 1.2
Thailand 3.00 3.74 #N/A 30.3 0.2 SET 1,060 -0.5
China 6.31 … … 6.48 0.1 S'hai Comp 2,705 -1.1
Hong Kong Ccy policy 2.26 -11 7.78 0.1 HSI 23,254 1.5
Taiwan 1.75 1.42 -3 28.6 0.7 TWSE 8,991 2.3
Korea 3.00 4.21 -3 1075 0.7 Kospi 2,129 1.4
India 7.25 8.30 -10 44.8 1.1 Sensex 18,494 2.5
Source: Bloomberg

5
 Daily Breakfast Spread, 3 June 2011

Contributors:
Economics
David Carbon Singapore (65) 6878 9548
Ramya Singapore (65) 6878 5282
Ma Tieying Singapore (65) 6878 2408
Irvin Seah Singapore (65) 6878 6727
Chris Leung Hong Kong (852) 3668 5694

Currencies / Fixed Income

Philip Wee Singapore (65) 6878 4033
Jens Lauschke Singapore (65) 6224 2574
Nathan Chow Hong Kong (852) 3668 5693

Administrative / technical support

Violet Lee Singapore (65) 6878 5281

Please direct distribution queries to Violet Lee on 65-6878-5281

Client Contacts
Singapore Japan
DBS Bank (65) 6878 8888 DBS Tokyo (81 3) 3213 4411
DBS Asset Management (65) 6878 7801
DBS Vickers Securities (65) 6533 9688
Korea
The Islamic Bank of Asia (65) 6878 5522 DBS Seoul (82 2) 339 2660

China Malaysia
DBS Beijing (86 010) 5839 7527 DBS Kuala Lumpur (6 03) 2148 8338
DBS Dongguan (86 769) 2211 7868 DBS Labuan (6 08) 7595 500
DBS Fuzhou (86 591) 8754 4080 Hwang-DBS Penang (6 04) 263 6996
DBS Guangzhou (86 20) 3884 8010 Philippines
DBS Hangzhou (86 571) 8788 1288 DBS Manila (63 2) 845 5112
DBS Shanghai (86 21) 3896 8888
DBS Shenzhen (86 755) 8269 1043 Taiwan
DBS Suzhou (86 512) 6288 8090 DBS Chungching (886 4) 2296 0088
DBS Tianjin (86 22) 2339 3073 DBS Kaohsiung (886 7) 323 2362
DBS Taichung (886 4) 2230 9188
Hong Kong DBS Tainan (886 6) 213 3939
DBS Hong Kong (852) 3668 0808 DBS Taipei (886 2) 8101 0598
DBS Macau (853) 2832 9338 DBS Taoyuan (886 3) 339 6060
DBS Asia Capital (852) 3668 1148
DBS Asia Capital Shanghai (86-21) 6888 6820 Thailand
DBS Bangkok (66 2) 636 6364
India
DBS Delhi (91 11) 3041 8888 United Kingdom
DBS Mumbai (91 22) 6638 8888 DBS London (44 20) 7489 6550

Indonesia UAE
DBS Jakarta (62 021) 390 3366 DBS Dubai (97 1) 4364 1800
DBS Medan (62 061) 3000 8999
USA
DBS Surabaya (62 021) 531 9661
DBS Los Angeles (1 213) 627 0222

6
 Daily Breakfast Spread, 3 June 2011

Recent research
SG 2011: Above expectations 29 Nov 10
CN: A case study of price control on 20 May 11
electricity KR: Interest Rate Outlook & Strategy 11 Nov 10

CN: Good value in CNY forwards 18 May 11 EUR: One for the bulls 11 Nov 10

US: Interest Rate Outlook & Strategy 11 May 11 KRW: Stronger than consensus 3 Nov 10

CN: Latent risks facing China 9 May 11 ID: 2011 budget preview 1 Nov 10

SG: Election effect on policy 9 May 11 Asia: Interest Rate Outlook & Strategy 28 Oct 10

HK: Mild tightening at work 15 Apr 11 IN: Higher rates or higher inflation 26 Oct 10

KR: Interest Rate Outlook & Strategy 11 Apr 11 Asia: The six ways to absorb capital inflow 26 Oct 10

ID: The balance of payments outlook 8 Apr 11 MY: A step towards Vision 2020 18 Oct 10

FX: The CNH & its role in yuan reforms 7 Apr 11 IN: Rising growth potential 13 Oct 10

CN: The formation of Chinese wealth 1 Apr 11 ID: Inflows & monetary policy 13 Oct 10

CN: Interest Rate Outlook & Strategy 31 Mar 11 SG: It’s payback time 11 Oct 10

CN: The roller coaster ride continues 28 Mar 11 ID: Inflows drown fundamentals 8 Oct 10

CN: Offshore CNY progress check 24 Mar 11 Asia: Another day, another $2bn of inflow 7 Oct 10

SG: A well-calibrated budget 21 Feb 11 SG: Higher with or without tightening 7 Oct 10

CN: Inflation and labor productivity 21 Feb 11 HK’s inflection point as offshore CNY center 28 Sep 10

CN: CNY capital account liberalisation -recent 8 Feb 11 CN: Medium-term inflation outlook 27 Aug 10
developments and implications
IN: Interest Rate Outlook & Strategy 27 Aug 10
ID: Interest Rate Outlook & Strategy 2 Feb 11
SG: GDP contribution of the IRs 26 Aug 10
TW: Appreciation impact 28 Jan 11
FX: JPY intervention risk rising 18 Aug 10
IN: Interest Rate Outlook & Strategy 27 Jan 11
HK: How far can HKgo as China's 10 Aug 10
IN: Food inflation demand-driven 24 Jan 11 major Renminbi offshore center?

SG: Budget to tackle the gap 17 Jan 11 US Fed: Between a stock and bond place 10 Aug 10

US: Interest Rate Outlook & Strategy 11 Jan 11 China and US: Demand trumps supply 6 Aug 10

SG: Singapore attempts the impossible 6 Dec 10 CN: Implications of rising wages 4 Aug 10
(Part II)

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