PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

17 March 2010

1 US Fed Pledged To Keep Rate Low For Extended Period

2 US Housing Starts And Permits Fell, And Industrial

Production Slowed Down In February

3 Greece’s Credit Rating Downgrade Threat Eased

Tracking The World Economy...

Today’s Highlight

US Fed Pledged To Keep Rate Low For Extended Period

The US Federal Reserve reiterated that they will keep the key policy rate at 0-0.25% for an “extended period” after
leaving it unchanged on 16 March. This was on account of low rate of resource utilisation, subdued inflation trend, and
stable inflation expectations. Also, the Fed confirmed that the quantitative easing will end as planned by end-March. At
the same time, in light of improved functioning of financial markets, the Fed has been closing the emergency liquidity
facilities that it created to support markets during the crisis. The only remaining such programme, the Term Asset-Backed
Securities Loan Facility, is scheduled to close on 30 June for loans backed by new-issue commercial mortgage-backed
securities and on 31 March for loans backed by all other types of collateral.

Meanwhile, the Fed indicated that economic activities have continued to strengthen but the pace of economic recovery
is likely to be moderate for some time. The labour market is stabilising but employers remain reluctant to employ. Also,
investment in non-residential structures is declining, while housing starts have been flat at a depressed level. Consumer
spending is expanding, albeit at a moderate pace, constrained by high unemployment, modest income growth, lower
housing wealth, and tight credit. Business spending on equipment and software, however, has risen significantly. Inflation
is likely to be subdued for some time given substantial resource slack which continues to restrain cost pressures and
longer-term inflation expectations remain stable.

With the conclusion of the quantitative easing by end-March, the Fed’s next move will likely focus on exiting its extremely
loose monetary policy, including raising interest rate on banks’ reserves and the use of term deposits as well as reverse
repo to soak up liquidity in the system.

The US Economy

Housing Starts And Permits Fell In February

◆ US housing starts fell by 5.9% mom in February, after rising by 6.6% in January, due partly to bad weather
condition. This was reflected in a decline in construction of single-family homes, which fell by 0.6% mom in
February, compared with +4.4% in January. A decline in construction of multi-family homes, which contracted by
30.3% mom in February, compared with +18.5% in January, worsened the situation. Building permits, an
indicator of future construction activity, however, declined by a smaller magnitude of 1.6% mom in February,

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 17 March 2010

compared with -4.7% in January, indicating that construction activities are likely to improve in the months ahead.
Yoy, both housing starts and permits slowed down to 11.3% and 0.2% respectively in February, from the
corresponding rates of +17.1% and +25.2% in January. This suggests that the housing sector has weakened
somewhat and its recovery will likely be slow and uneven.

Industrial Production Slowed Down In February

◆ US industrial production slowed down to 0.1% mom in February, from +0.9% in January, affected partly
by the snow storms. This was reflected in a decline in manufacturing production and a slowdown in utilities output.
These were, however, mitigated by a pick-up in mining output during the month. Manufacturing production slipped
into a contraction of 0.2% mom in February, from +0.9% in January, mainly on account of a decline in the
production of motor vehicle & parts and a slowdown in the production of computers & electronic products and
machinery during the month. Meanwhile, industrial capacity utilisation rate inched up to 72.7% in February, from
72.5% in January. The capacity utilisation rate in the manufacturing sector, however, fell to 69.0% in February, from
69.1% in January but higher than 67.1% a year ago. As a whole, industrial activities held up relatively well in the
1Q, indicating that the US economy will likely continue expanding during the quarter.

The Euroland Economy

Greece’s Credit Rating Downgrade Threat Eased

◆ Greece’s sovereign credit rating downgrade threat by Standard & Poor’s eased after the S&P affirmed
the country’s investment-grade BBB+ rating and dropped the country from “negative credit watch”. The move
followed Greece’s €4.8bn (US$6.6bn) of budget cuts passed on 5 March, which S&P deemed were appropriate to
achieve the goal of cutting the deficit to 8.7% of GDP in 2010, from -12.7% of GDP in 2009. Furthermore, European
finance ministers have worked out a strategy for emergency loans to Greece in an unprecedented bet that they
can avert a euro crisis by sidestepping the no-bailout rules intended to sustain the 11-year old currency, in case
Greece fails to stave off fiscal disaster. As a result, the yield on Greece’s benchmark 10-year bonds fell 17 basis
points to 6.16%, the lowest since the budget cuts were adopted on 5 March. The gain narrowed the premium
investors demand to buy Greek 10-year debt over comparable German bonds to 300 basis points, the lowest since
5 March.

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