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• TW: July CPI inflation (due today) is likely to stay elevated above 1% YoY (DBSf
1.2%). Although the festive effects subsided in July (the Dragon Boat Festival fell in
June), food prices should have risen due to rainy weather. Nevertheless, the festive
and weather factors are temporary. The demand-side price pressures are expected to
remain moderate amid a relatively high unemployment rate, and the pass-through
on core inflation should be constrained. We believe inflation is not a threat in
Taiwan. However, interest rates are far below neutral (O/N interbank rate: 0.2%) and
the central bank should continue to normalize monetary policy. After the CBC
started the rate normalization cycle in June (a 12.5bps hike), we expect another
12.5bps hike in the benchmark discount rate in September and 25bps hikes in 4Q.
1
Daily Breakfast Spread, 5 Aug 2010
G3
• US: Contrary to expectations of the double-dippers, service sector growth accelerated in
July, according to yesterday’s (serv sector) ISM survey. The headline figure rose by half a
point to 54.3 against expectations for a 0.8 point drop. More importantly, the orders
component rose by 2.3 points and is once again nudging up against the 57 mark. Key
for labor markets and those eagerly awaiting tomorrow’s nonfarm payroll report, the
employment component of the SSISM rose by more than a point to 50.9, an all time
high for post-crisis readings. The latter reading (given the series close correlation with
nonfarm payrolls, chart below) and yesterday’s better-than-expected ADP report (42k
jobs gained in July vs 30k expected) suggest that expectations for Friday’s nonfarm
payroll readings are safe/ conservative. The market looks for private sector job growth
of 90k, with total growth of -65k, the difference owing to the phasing out of
government census-related work.
65 600
Private sector
60 NFP 400
55 200
50 0
45 -200
40 -400
ISM Services
35 (Labor) -600
30 -800
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Alas, (priv sector) job growth of 90k may be a safe assumption but it’s not an especially
sound figure. Given a labor force of some 135m that tends to grow at a 1% pace, it
takes 115k-120k per month just to ‘break even’. Not for nothing do markets expect the
unemployment rate to rise to 9.6% in July from 9.5% in June. The best that can be said
is that, in spite of worries about a double-dip, the economy continues to grow, and
much more strongly than the 2.4% Q2 GDP growth reported last Friday suggests. The
payrolls recovery (chart above) over the past year is no weaker than in other recessions
and if it continues, as we expect, payrolls will be running in the 200k-300k region in
another 2-3 months. That is strong / fast enough to shrink the unemployment rate
noticeably / steadily and to finally bring relief to those most affected by the downturn.
Currencies
• USD: The depreciation in the DXY (USD) index appeared to have stalled around current
levels, generally between 80.50 and 81.00. This pause in USD selling should not come as
a surprise after having fallen some 9% over two months from its peak in early June.
Now trading around April lows, the DXY has effectively returned all gains seen during
the capitulation of the Eurozone sovereign debt crisis. The latest bout of sell-off was
predicated on speculation that Fed may resort to another bout of quantitative easing
to address the drag on the US economy’s recovery pace from renewed weakness in the
housing sector and sluggish job creation. For now, the market is reassessing its position
on jobs after the ISM employment sub-indices showed modest gains for both the
manufacturing and non-manufacturing sectors in July. Coupled with similar
improvements in the ADP report, there is a risk that tomorrow’s headline July nonfarm
payrolls may turn out be flat to positive instead of consensus for a negative number.
The market will also want to wait for the FOMC meeting on August 10 for more clarity
2
Daily Breakfast Spread, 5 Aug 2010
on the Fed’s position on QE. In the end, the Fed is likely to maintain its ultra-
accommodative stance to nurture the recovery. This would probably explain why DXY
has been reluctant to trade above its 400-day moving average in the past three sessions.
• EUR: As for the anti-USD, the euro should pay attention to the ECB meeting this
evening. ECB President Jean-Claude Trichet has started to push for develop economies
to pull back government spending and to reduce public debt. First, this reflects Trichet’s
optimism that the global economy has proven resilient to the EU crisis. Second, Trichet
is also probably encouraged by China’s move towards a more flexible exchange rate, a
move that G7 nations believe is necessary to provide the breathing space for developed
economies to repair their crisis-hit balance sheets. Implicitly, this suggests that G7
nations will tolerate USD weakness as long as emerging markets are willing to play their
role in supporting global growth with policies that encourage domestic demand.
Despite yesterday’s setback, EUR/USD is still comfortably trending higher in an
appreciation price channel currently seen between 1.2960 and 1.3310.
Fixed income
• Asia: Risk appetite is returning and Asian markets are benefitting from overseas
demand. The combination of Asia’s growth prospects and low returns in the major
economies is giving rise to renewed capital flows into the region. Sentiment is
improving, as it has become clear that the impact of the sovereign debt crisis in Europe
on the USD banking system, global trade and global growth is limited and the Chinese
yuan is appreciating again. Indonesian bonds have been key beneficiaries, with foreign
holdings reaching new record highs, but no bond market in Asia will see a sustained
rally in the coming months. Despite inflows into local markets, bond yields will be
under upward pressure because of central bank rate hikes and inflation concerns. Rate
hike stories not capital flows will be the dominant driver in bond markets. That means,
in total return terms, besides high yielding markets, markets with steeper curves, which
discount sharp rate increases, will do better than markets with flatter curves. Investors
should keep duration exposure low until yield curves steepen considerably further.
Looking back
• US mkts: US stocks rose overnight on better-than-expected ADP employment survey
results ahed of tomorrow’s official employment report. the Dow Jones Industrial
Average rose 0.41% to 10680.43 and the Nasdaq closed 0.88% higher at 2303.57.
Treasury yields rose 3bps to 0.57% in the 2Y sector and 4bps to 2.96% in the 10Y sector.
3
Daily Breakfast Spread, 5 Aug 2010
Economic calendar
Event Consensus Actual Previous
Aug 2 (Mon)
KR: inflation (Jul) 2.6% y/y 2.6% y/y 2.6% y/y
ID: inflation (Jul) 5.7% y/y 6.22% y/y 5.1% y/y
ID: trade bal (Jun) USD 1.9bn USD 0.6bn USD 2.7bn
--exports 34.9% y/y 31.0% y/y 37.4% y/y
--imports 33% y/y 47.6% y/y 30.6% y/y
TH: inflation (Jul) 3.6% y/y 3.4% y/y 3.3% y/y
--core inflation 1.2% y/y 1.2% y/y 1.1% y/y
IN: exports (Jun) 30.4% y/y 35.1% y/y
IN: imports (Jun) 23.0% y/y 38.5% y/y
US: ISM mfg (Jul) 54.5 55.5 56.2
Aug 3 (Tues)
CN: non-mfg PMI (Jul) 60.1 57.4
MY: trd bal (Jun) MYR 8.0bn MYR 6.04bn MYR 8.1bn
--exports 17.3% y/y 17.2% y/y 21.9% y/y
--imports 24.8% y/y 30.1% y/y 34.2% y/y
US: personal income (Jun) 0.2% m/m sa 0.0% m/m sa 0.3% m/m sa
US: personal spending (Jun) 0.1% m/m sa 0.0% m/m sa 0.2% m/m sa
US: PCE core (Jun) 0.1% m/m sa 0.0% m/m sa 0.1% m/m sa
1.3% y/y 1.4% y/y 1.5% y/y
US: factory orders (Jun) -0.5% m/m sa -1.2% m/m sa -1.8% m/m sa
US: pending home sales (Jun) 4.0% m/m sa -2.6% m/m sa -29.9% m/m sa
Aug 4 (Wed)
US: dom vehicle sales (Jul) 8.9mn sa 9.1mn sa 8.6mn sa
--total vehicle sales 11.6mn sa 11.85mn sa 11.08mn sa
CN: HSBC services PMI (Jul) 56.3 55.6
EZ: retail sales (Jun) 0.1% y/y 0.4% y/y 0.6% y/y
0.0% m/m sa 0.0% m/m sa 0.4% m/m sa
US: ISM non-mfg 53.0 54.3 53.8
Aug 5 (Thur)
PH: inflation (Jul) 4.1% y/y 3.9% y/y
TW: inflation (Jul) 1.3% y/y 1.2% y/y
ID: GDP (2Q) 6.0% y/y 5.69% y/y
Aug 6 (Fri)
US: NFP chg (Jul) -65 K -125 K
US: unemploy. rate (Jul) 9.6% sa 9.5% sa
Policy
Date Country Rate Current Consensus DBS Actual
This week
04-Aug ID o/n reference rate 6.50% 6.50% 6.50%
05-Aug EZ refi rate 1.00% 1.00% 1.00%
Next week
08-Aug JP BoJ target rate 0.10% 0.10% 0.10%
11-Aug US FOMC 0.25% 0.25% 0.25%
12-Aug KR 7-day repo rate 2.25%
12-Aug EZ ECB bulletin (Aug)
Last week
27-Jul IN O/N repo 5.50% 5.75% 5.75% 5.75%
27-Jul IN O/N reverse repo 4.00% 4.25% 4.25% 4.50%
27-Jul IN cash reserve ratio 6.00% 6.00% 6.00% 6.00%
4
Daily Breakfast Spread, 5 Aug 2010
Market prices
Policy rate 10Y bond yield FX Equities
Current Current 1wk chg Current 1wk chg Index Current 1wk chg
(%) (%) (bps) (%) (%)
US 0.25 2.95 -3 81.0 -0.8 S&P 500 1,127 1.9
Japan 0.10 1.02 -6 86.4 0.4 Topix 846 -2.3
Eurozone 1.00 2.60 -14 1.316 0.6 Eurostoxx 2,545 1.9
Indonesia 6.50 7.98 -18 8943 0.3 JCI 2,983 -2.4
Malaysia 2.75 3.90 0 3.17 0.5 KLCI 1,363 0.6
Philippines 4.00 7.55 -6 45.2 1.5 PCI 3,503 1.5
Singapore Ccy policy 1.94 -29 1.353 0.8 FSSTI 3,002 0.6
Thailand 1.50 3.41 #N/A 32.2 0.2 SET 867 1.6
China 5.31 … … 6.77 0.1 S'hai Comp 2,639 0.2
Hong Kong Ccy policy 2.22 -2 7.76 0.0 HSI 21,550 2.2
Taiwan 1.38 1.35 -4 31.8 0.5 TWSE 7,973 2.4
Korea 2.25 4.82 -5 1166 1.8 Kospi 1,789 0.9
India 5.75 7.82 3 46.1 1.6 Sensex 18,217 1.4
Source: Bloomberg
5
Daily Breakfast Spread, 5 Aug 2010
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
Philip Wee Singapore (65) 6878 4033
Fixed income strategy
Jens Lauschke Singapore (65) 6224 2574
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, 5 Aug 2010
Recent research
CN: Implications of rising wages 4 Aug 10 CN: Two growth myths with one stone 14 Apr 10
(Part II)
TH: Higher rates despite politics 9 Apr 10
ID: Upgrade expectations 29 Jul 10
SG: A strong start to 2010 8 Apr 10
Asia: Votes of confidence 9 Jul 10
Asia: Interest Rate Outlook & Strategy 8 Apr 10
FX: The ascension of the CNY 9 Jul 10
US: A top-down look at profits and payrolls 25 Mar 10
CN: Rising wage concern 7 Jul 10
CN: Currency appreciation not a case 23 Mar 10
SG: A year of two halves 30 Jun 10 of now or never
Taiwan-China: A quick look at the ECFA 29 Jun 10 IN: RBI bites the bullet 22 Mar 10
IN: Interest Rate Outlook & Strategy 17 Jun 10 Asia: Are central banks behind the curve? 18 Mar 10
MY: Addressing the supply side challenges 17 Jun 10 MY: Interest Rate Outlook & Strategy 22 Mar 10
TH: Upgraded, against all odds 25 May 10 SG: The economics of the Foreign Worker 17 Mar 10
Levy hike
Asia: Negara vanguarda 20 May 10
KR: Current account outlook 1 Mar 10
TH: Instability and growth 19 May 10
India budget: A mixed bag 1 Mar 10
ID & KR: External positions 14 May 10
ID: Notes from Jakarta 25 Feb 10
Asia: Who’s vulnerable to EU trouble? 13 May 10
IN budget: Room for spending 24 Feb 10
SG: Can Sing rates go to zero? 7 May 10
US Fed: Wake up call 19 Feb 10
EZ: It was never meant to be easy 30 Apr 10
SG: A strategic budget 17 Feb 10
MY: Surprise awaits 30 Apr 10
TW: Managing capital inflows 18 Jan 10
IN policy: Inter-meeting hikes the new norm? 21 Apr 10
ID: Interest Rate Outlook & Strategy 12 Jan 10
ID: Interest Rate Outlook & Strategy 20 Apr 10
IN: RBI’s stance on capital controls 30 Nov 09
IN: Risk of more / earlier hikes 19 Apr 10
CN: What policy options does it really have? 23 Nov 09
KR: Interest Rate Outlook & Strategy 16 Apr 10
TW: When will policy turn? 16 Nov 09
SG: More strength to SGD 15 Apr 10
CN: No simple exit strategy 9 Nov 09
SG: Call a rose a rose 14 Apr 10
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