PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

10 June 2010

1 The US Fed Said The Economy Grew Moderately In May

And Early June

2 The ECB Under Pressure Over Bond Purchases As

Spreads Widen

3 Japan’s Core Machinery Orders Moderated M-o-m In

April

Tracking The World Economy...

Today’s Highlight

The US Fed Said The Economy Grew Moderately In May And Early June

The Federal Reserve’s Beige Book indicated that the US economic activities continued to improve since the last report
but at a moderate pace. Nonetheless, it was the first time since October 2007 the Beige Book showed all 12 Fed regions
reporting an expanding economy. It was a turnaround from the October and December 2008 reports, which showed
contraction in all of the districts. Consumer spending and tourism activity generally increased and it continued to be
concentrated in necessities as opposed to discretionary big-ticket items. Business spending also rose, with employment
and capital spending edging up but inventory investment slowing. Nonfinancial services, manufacturing, and transportation
sectors continued to gradually improve during the period. Residential real estate activity buoyed by the April deadline
for the homebuyer tax credit but commercial real estate remained weak. Financial activity was little changed but there
were signs of improvement. Prices of final goods and services were largely stable as higher input costs were not being
passed along to customers and wage pressures continued to be minimal. The report offers anecdotal evidence that will
help the Fed weighs developments in the economy and the findings will be used as an input for the FOMC meeting on
22-23 June. The findings suggest that the Fed will be in no hurry to raise its key interest rate from the current 0-0.25%
but will likely use other measures including paying higher interest for banks’ reserves, using reverse repos and issuing
term deposits to mop up excess liquidity from the system. Already, the Fed raised its discount rate on emergency loans
by 25 basis points to 0.75% in February.

Meanwhile, the Fed indicated that the US economic recovery, while sustained by private demand, is not as strong as it
prefers and faces risks from Europe’s debt crisis that may require further Fed action.

The Euroland Economy

The ECB Under Pressure Over Bond Purchases As Spreads Widen

◆ The European Central Bank (ECB) is under pressure to communicate to the markets how far it is
prepared to wade into government bond markets, as policymakers already split over its purchases and
borrowing costs in some countries continue to climb. Since the ECB announced its bond purchase programme on
10 May to restore normal functioning in certain markets, the extra yield that investors demand to hold Spanish
and Italian debt has advanced to euro-era highs. Portuguese and Irish yields are also rising. While the spread

Peck Boon Soon

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 10 June 2010

over benchmark German bonds was 556 basis points in Greece on 9 June, down from 965 on 7 May, the Spanish
spread rose to 199 basis points, from 164, and the Italian spread widened to 157 against 149. Ireland’s spread,
on the other hand, eased to 254 compared with 306 and Portugal’s was 271 versus 349. The ECB has so far given
no information about how much it plans to spend on government debt or which countries’ bonds it is buying. Critics
say the purchases amount to bailing out governments and could fuel inflation, breaching two of the ECB’s founding
principles and undermining its credibility. The sovereign debt crisis has also forced the ECB to reverse its
withdrawal of emergency stimulus measures and prompted economists to push back forecasts for higher interest
rates until 2Q 2011.

Asian Economies

Japan’s Core Machinery Orders Moderated M-o-m In April

◆ Japan’s core machinery orders, excluding volatile orders for ships and orders placed by electric power
companies, moderated to 4.0% mom in April, from +5.4% in March and compared with -3.8% in February.
This was the second month of increase in four months, suggesting that businesses continued to spend, albeit
cautiously, as a pick-up in exports prompted them to invest in plant & machinery. Yoy, Japan’s core machinery
orders strengthened to 9.4% in April, after returning to a growth of 1.2% for the first in more than a year in March.
This suggests that capital investment is recovering along with a recovery in global economic activities.

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