Global Data Watch: Developed Markets...sgp twn tha-4.0-3.0-2.0-1.0 0.0 1.0 2.0 3.0-6.0 -4.5 -3.0...

Global Data Watch: Developed Markets

Economic ResearchSeptember 24, 2010

• FOMC moves toward QE and signals firm commitment to reflation

• The ECB is resistant to additional QE while BoJ and BoE are likely to act

• Global growth rotation is proceeding apace; Europe slows as US stabilizes

• High inflation allows India to accept currency appreciation

• Next RBA rate hike moved up to October

Whip-up Inflation NowOn one level, this week’s FOMC meeting merely met expectations, as the com-mittee did not engage in further asset purchases while signaling a heightenedreadiness to ease. We maintain that the Fed will resume large-scale asset pur-chases (LSAP) of Treasuries, most likely at its November meeting. However,the committee went further than signaling that it might take out insuranceagainst downside risks to growth. For the first time, the FOMC statement ex-pressed a view that underlying inflation is running below its mandate, and thatthe Fed is committed to moving it higher.

The statement linked the inflation outlook to two key variables—slack and in-flation expectations—whose movements will now guide its path through QE2.Although there is a divide within the committee on the role high unemploy-ment plays in the inflation process, US experience shows that the level of slackhas been a key determinant of cyclical swings in inflation. This message hasbeen reinforced by recent US and global performance. The strong correlationbetween output gaps and inflation movements across the globe this year is par-ticularly notable. As evidence reinforces this relationship, the policy prescrip-tion is clear: The FOMC needs to deliver sustained growth well above trend ifit is going to avoid the threat that inflation drifts further from its objective.

There is less debate about the importance of aligning inflation expectations withFed objectives. However, expectations are hard to measure. The FOMC statementreiterated the view that expectations remain stable, but the slide in breakevenspreads since early this year and the recent fall in one-year consumer expectationshave likely contributed to the Fed’s willingness to consider action at this point.

Given the considerable skepticism about the effectiveness of monetary policyonce the lower policy rate bound has been reached, it is encouraging to see thatfinancial markets are moving in a manner consistent with the Fed’s policy shift—which began with Chairman Bernanke’s August 27 speech. Over the past

Bruce Kasman

David Hensley

Joseph Lupton

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Global slack and inflation

%-pt, chg in core(oya) ytd

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ContentsEconomic Research noteThe Fed talks and financial markets listen 10US jobless recoveries: what we now know and still don’t know 12Ireland faces huge medium-term fiscal challenges 14

Global Economic Outlook Summary 4Global Central Bank Watch 6The J.P. Morgan View: Markets 7

Data WatchesUnited States 16Euro area 24Japan 30Canada 34United Kingdom 36Sweden/Norway 40Australia and New Zealand 42

Regional Data Calendars 46

Sample

2

Economic ResearchGlobal Data Watch: Developed MarketsSeptember 24, 2010

JPMorgan Chase Bank NA, New YorkBruce Kasman

David Hensley

Joseph Lupton

month, real interest rates and the dollar have moved lowerwhile inflation expectations and risky asset values havemoved higher (see the research note “The Fed talks and fi-nancial markets listen” in this GDW).

More hands on deckThe shift taking place at the Fed was mirrored by moremodest movements at other large central banks. By year-end it is possible that both the Bank of England and Bankof Japan will engage in further QE. The official statementfrom the BoJ on the recent unsterilized currency interven-tion gave an impression that it is easing only reluctantly.However, board member Miyao suggested this week thatthe BoJ appears to be ready for further easing through theoutright purchase of JGBs. While it is premature to assumethat the BoJ has decided to increase JGB purchases fromthe current yearly JPY21.6 trillion, the FOMC statementhas increased the odds of BoJ action.

The release of the August MPC minutes this week showsthat some BoE members are edging toward more QE asgrowth momentum slows. However, concerns about thecontinued high level of inflation make it a close callwhether a consensus will form around our view of a £25billion extension of QE in November.

Notably absent from the group moving toward QE is theECB. In part, this reflects the ECB’s forecast that underlyinginflation will move higher over the next year despite modestgrowth and a depressed utilization rate. However, relative tothe Fed, the ECB also views the benefits of QE as more lim-ited and the risks as higher. Regarding risks, the central bankworries about anchoring inflation expectations in an environ-ment in which budget deficits are very wide and the region isstruggling to impose an appropriate medium-term frame-work for fiscal discipline. In addition, the ECB worries thatfurther stimulus will prevent the very balance sheet adjust-ments that are necessary to return to health. It is thus not sur-prising to observe the divergence in movements of financialmarket measures of inflation expectations in recent weeks.

Growth rotations are on trackA rotation in regional growth continues to be an importantglobal theme. Recent weeks have brought hopeful signs thatgrowth in the United States and China is stabilizing after asharp downshift in 2Q. At the same time, the Euro area wasexpected to slow this quarter after having accelerated intomidyear. This week’s report of a steep drop in the SeptemberEuro area PMI was a confirming sign. It does not appear that3Q growth fell materially below our 2% forecast, as the PMIhad been elevated relative to our expectations. In addition,the continued resilience of national business sentiment—which is a broader gauge of business health—suggests thatdownside risks are limited. To this point, it will be importantto watch the German consumer. The surge in the retail com-ponent of the IFO survey offers hope that household spend-ing growth will be more robust in this expansion.

A challenge to growth in the Euro area comes from stress inthe periphery. This is coinciding with the beginning of thebudgetary round for 2011. All Euro area countries havemulti-year fiscal adjustment plans, and as budgets get re-leased in the coming weeks, most of the region simply willconfirm the objectives that have already been set. The keyinformation in the budgets will be the details about how theobjectives will be met. However, the situations in Portugaland Ireland are different. Portugal is under pressure to ar-rest some slippage in meeting this year’s objective, whileIreland is under pressure to front-load some of the adjust-ment that was planned for future years.

Elsewhere, we are on guard for a growth downshift in Japan.Current-quarter activity received a temporary boost from fis-cal stimulus and unusually warm weather. We look forgrowth to stall as these effects wear off and the tightening indomestic financial conditions (yen, Nikkei) takes hold. Themost important guidance in next week’s reports will comefrom the forward-looking business surveys (SeptemberShoko Chukin and manufacturing PMI, quarterly Tankan)and the August IP report, which will include manufacturers’production plans for September and October.

India leading Asian policy normalizationEM Asian policymakers are still running very loose policydespite an impressive rebound in growth that already haslifted resource utilization back above average and produceda rise in core inflation. This stance is reflected in the rela-tively meager rise in both policy interest rates and trade-weighted exchange rates across the region. Over the pastyear, for example, EM Asian policy interest rates have in-creased 26bp, while the region’s real TWI is up 6%.

1.80

2.10

2.40

2.70

3.00

3.30

3.60

% p.a.; US is Fed breakeven measure, EMU based on swaps5yr/5yr forward inflation expectations

2008 2009 2010

US

EMU

Jackson Hole

Sample


3


David Hensley

Joseph Lupton

EditorSandy Batten

The region’s two biggest economies, China and India,bracket the range of regional policy tightening. Chinese offi-cials have not raised interest rates since late 2007. Mean-while, they have maintained a tight grip on the currency, not-withstanding this month’s 3% rise versus the dollar. US frus-tration with this policy spilled over this week in the form ofdraft legislation that would allow US companies to petitionfor higher duties on imports from China to compensate forthe effect of the weak yuan. The House of Representatives isexpected to vote on this legislation next week.

Reluctant to allow their currencies to appreciate versus theyuan, policymakers elsewhere in the region have beenholding back on raising interest rates, while interveningheavily in the FX markets. The notable exception to thistrend has been India. In the year-to-date the RBI has raisedits policy rate 125bp. Moreover, because of tight bank li-quidity, the overnight call rate has jumped from the bottomof the policy corridor to the top, implying an effectivetightening of 275bp. As it has raised rates, the RBI has re-frained from FX intervention. Thus, India’s real TWI hasincreased about 10% over the past year, versus about a 4%gain in the rest of EM Asia, including China.

India’s more aggressive policy action is motivated by highinflation. Although the inflation rate has eased modestlyover the last two months, it remains in a range of 8% to9%. Barring a more significant decline in inflation, we ex-pect Indian officials to continue tightening, although at aless rapid pace. As such, India will continue to lead theprocess of policy normalization in the region.

Shifting timetables for RBA, RBNZ actionThe RBA sent a strong message this week that a furtherrate hike is imminent. The Governor said that the taskahead “is likely to be on managing a fairly robust up-swing.” Above-trend growth is the likely outcome for theAustralian economy in 2011, which will push the limits onresource usage and thus feed inflation. As the central bank

gains confidence that the global backdrop is stabilizing, it islikely to determine that delaying further policy tightening until2011 would be a mistake. We have therefore brought forwardour forecast for the next RBA hike to October. In contrast, weare pushing out an expected December rate hike in NewZealand to March of next year. The surprise weakness in theGDP numbers this week, falling inflation expectations, andthe damping impact of the recent earthquake in Canterbury oneconomic activity mean there is no urgency for the RBNZ tostep away from its accommodative policy.

CEEMEA central banks to stay on holdAlthough several CEEMEA central banks sent more hawk-ish messages this week, we maintain our call that rate nor-malization will not get under way in the region until 2Q11.MPC minutes in Poland showed that a motion for a 50bprate hike was put forward at the August meeting, while oneMPC member in the Czech Republic voted to raise rates25bp this week. Turkey’s central bank raised reserve re-quirements on TRY and FX deposits to restrain loangrowth. Nonetheless, the combination of uncertainty overthe Euro area growth outlook, low inflation, and continuedupward pressure on FX rates argues against preemptiverate hikes. Indeed, in South Africa, continued currencystrength raises the likelihood of another rate cut in Novem-ber. The Bank of Israel is the odd one out. It is already inthe midst of a tightening cycle, and we expect another 25bprate hike next week.

Latin governments push for fiscal restraintIn Latin America, the current budget season is drawing at-tention to a shift away from stimulative fiscal policies. InMexico, the opposition is seeking to reduce the VAT, but thegovernment intends to keep the current lid on fiscal policy inplace in 2011, lowering the deficit to just over 2% of GDP.In Argentina, opposition proposals to raise pensions andlower export taxes are unlikely to advance. In Brazil, mar-kets are anticipating that a cabinet led by ex-Finance Minis-ter Palocci will deliver a moderate improvement in the pri-mary balance, although reining in lending by BNDES, themain development bank, will be a challenge. Chile’s govern-ment is reviewing the definition of the structural fiscal rule,which will imply a reining in of stimulus even as earthquakereconstruction proceeds, bringing the structural deficit from3% of GDP to 1% by the end of its mandate. Colombia’snew administration is eager to adopt a structural fiscal rulelike Chile’s. The challenge is to have Congress approve thereform without watering it down.

80

85

90

95

100

105

110

35

40

45

50

55

60

65

IndexGerman IFO and composite PMI

Index

00 02 04 06 08 10

IFO

PMI

Sample

4


JPMorgan Chase Bank, New YorkDavid Hensley

Carlton Strong

Joseph Lupton

Global economic outlook summary

Note: For some emerging economies, 2010-2011 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan. New GDP weights used tocalculate the regional and global aggregates shown in the table were introduced in the September 3, 2010 issue. The change in composition adds to the weight given to EM countries andas a result increases global GDP growth by 0.4%-point on average.Bold denotes changes from last edition of Global Data Watch, with arrows showing the direction of changes. Underline indicates beginning of J.P. Morgan forecasts.

2009 2010 2011 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 2Q10 4Q10 2Q11 4Q11The AmericasUnited States -2.6 2.6 2.4 3.7 1.6 1.5 2.0 2.5 2.5 3.0 1.8 0.9 1.2 1.1Canada -2.5 3.1 2.2 5.8 2.0 2.2 2.0 2.3 2.0 2.4 1.4 1.9 ↓ 2.1 2.1Latin America -2.4 5.7 ↑ 4.1 ↑ 4.9 ↓ 8.9 ↓ 1.0 ↓ 2.7 ↓ 4.4 ↑ 6.0 ↑ 3.5 6.6 ↑ 7.1 7.3 7.3

Argentina -2.0 8.5 5.5 ↑ 13.4 ↑ 12.6 ↓ 0.0 ↓ 2.0 ↓ 6.0 ↑ 8.0 ↑ 8.0 10.6 ↑ 10.5 ↑ 11.0 12.0Brazil -0.2 7.5 4.5 11.3 5.1 2.3 3.2 5.7 4.7 5.0 5.1 5.0 5.1 5.1Chile -1.5 5.5 ↑ 6.0 -6.0 18.4 11.0 ↓ 6.0 ↓ 4.0 ↑ 4.0 ↑ 4.0 1.2 3.8 3.6 ↓ 3.4 ↓

Colombia 0.8 4.5 4.1 3.3 ↓ 3.9 ↓ 3.7 4.0 4.0 4.1 5.0 2.1 2.8 3.3 4.0Ecuador 0.4 2.0 3.0 1.3 3.5 4.0 4.5 3.0 2.5 2.5 3.3 3.9 4.1 3.9Mexico -6.5 4.5 3.5 -2.5 13.5 -3.6 3.1 2.9 9.2 -0.1 4.0 5.1 4.5 4.0Peru 0.9 8.2 6.0 8.0 12.7 4.8 3.5 5.8 6.7 7.2 1.2 2.6 2.2 2.7Venezuela -3.3 -2.2 1.0 -2.0 5.2 3.0 -5.0 2.0 1.0 1.5 31.9 31.6 34.7 35.1

Asia/PacificJapan -5.2 3.0 1.1 5.0 1.5 2.5 -0.5 0.5 1.5 1.8 -0.9 -0.7 0.1 -0.1Australia 1.2 3.1 3.2 2.7 4.9 2.4 2.8 3.1 4.0 3.0 3.1 3.3 3.8 3.4New Zealand -1.7 2.0 ↓ 2.8 ↓ 2.2 ↓ 0.7 ↓ 2.5 ↓ 2.5 ↓ 2.6 ↓ 3.1 ↓ 4.2 ↑ 1.8 4.9 5.6 3.2Asia ex Japan 5.6 8.7 7.0 10.5 7.4 5.5 6.4 7.4 7.3 7.5 4.5 4.1 ↓ 3.9 ↓ 3.9

China 9.1 9.8 8.6 10.8 7.2 7.5 8.1 9.1 8.9 9.1 2.9 2.8 2.7 2.6Hong Kong -2.8 6.6 4.1 8.7 5.7 3.0 3.5 4.2 4.3 4.7 2.6 2.5 2.2 2.4India 7.4 8.3 8.5 9.2 8.5 8.0 8.9 8.0 8.5 8.6 13.7 11.0 10.1 10.2Indonesia 4.5 6.0 5.4 3.0 7.5 4.5 5.0 5.3 5.2 5.0 4.4 6.8 6.6 4.8Korea 0.2 6.1 4.0 8.8 5.8 2.5 3.8 4.0 4.0 4.5 2.6 2.9 ↓ 3.4 ↓ 3.4 ↑

Malaysia -1.2 7.2 4.6 4.8 7.2 3.0 3.5 4.9 4.9 4.5 1.6 1.1 1.3 2.4Philippines 1.1 7.0 3.9 11.9 7.7 0.8 1.6 4.9 4.9 4.9 4.2 1.8 1.5 3.5Singapore -1.3 14.8 4.2 45.7 24.0 -11.5 -2.0 8.7 6.6 7.4 3.1 3.0 1.4 1.6Taiwan -1.9 9.9 4.1 10.9 7.2 1.5 2.3 4.2 4.6 5.5 1.1 2.0 1.8 1.7Thailand -2.2 8.5 5.0 13.9 0.6 2.8 2.8 6.0 5.5 4.0 3.2 1.1 1.5 1.8

Africa/Middle EastIsrael 0.8 3.5 4.5 3.8 4.6 3.0 3.0 4.0 5.0 5.5 2.8 2.6 3.0 2.8South Africa -1.8 2.9 3.1 4.6 3.2 3.1 3.2 3.1 3.1 3.4 4.5 4.5 4.7 5.9

EuropeEuro area -4.0 1.7 1.5 1.3 3.9 2.0 1.0 1.0 1.0 1.8 1.5 1.7 1.1 1.0

Germany -4.7 3.3 2.4 1.9 9.0 3.0 2.0 2.0 1.5 2.0 1.0 1.2 0.6 0.7France -2.5 1.6 1.5 ↑ 0.7 2.8 ↑ 2.0 1.5 1.0 1.0 1.5 1.8 1.3 0.7 1.1Italy -5.1 1.2 ↑ 1.3 1.7 ↑ 1.8 ↑ 2.0 1.0 1.0 1.0 1.5 1.6 1.7 1.4 1.5

Norway -1.2 1.5 2.3 0.7 1.9 3.0 2.5 2.0 2.0 2.5 2.6 2.1 1.3 1.3Sweden -5.1 4.5 3.1 6.0 8.0 4.5 3.0 2.3 2.3 2.8 1.0 1.5 1.6 1.8Switzerland -1.9 2.9 2.0 4.2 3.5 2.5 2.0 1.5 1.5 2.3 1.0 0.4 0.1 0.7United Kingdom -4.9 1.7 2.2 1.3 4.9 2.5 1.5 1.0 2.5 3.0 3.5 2.6 1.9 2.1Emerging Europe -5.3 3.9 4.2 2.7 3.8 2.4 3.8 3.9 4.2 4.6 5.7 6.4 6.5 5.6

Bulgaria -5.0 -0.5 4.0 … … … … … … … … … … …Czech Republic -4.1 2.0 3.2 1.5 3.8 2.5 2.3 2.5 3.0 5.0 1.2 2.8 2.7 2.6Hungary -6.3 1.0 2.8 2.4 0.0 2.0 2.0 2.0 3.0 3.5 5.4 4.4 3.4 3.6Poland 1.7 ↓ 3.5 3.8 2.8 4.5 3.5 3.5 3.0 3.5 4.0 2.3 2.6 2.7 2.9Romania -7.1 -2.0 1.5 … … … … … … … 4.4 8.0 7.2 4.0Russia -7.9 4.3 4.7 3.3 4.3 2.5 5.0 5.0 5.0 5.0 5.9 7.6 8.4 7.1Turkey -4.7 6.4 4.7 … … … … … … … 9.2 7.5 7.0 6.2

Global -2.2 3.6 2.9 4.2 3.9 2.5 2.3 2.8 3.1 ↑ 3.3 2.5 2.3 2.3 2.2Developed markets -3.5 2.3 1.9 3.0 2.8 2.0 1.4 1.6 1.9 2.4 1.5 1.2 1.2 1.1Emerging markets 1.3 6.9 5.7 7.7 7.1 3.8 ↓ 5.0 ↓ 6.0 ↑ 6.4 ↑ 5.9 5.2 5.3 5.2 ↓ 5.1

Memo:Global — PPP weighted -0.8 4.5 3.8 5.2 4.6 ↓ 3.1 3.2 3.8 ↑ 4.0 4.2 3.2 3.0 3.0 2.9

% over a year agoConsumer prices

% over previous period, saar Real GDP

% over a year ago Real GDP

Sample


5

JPMorgan Chase Bank, New YorkDavid Hensley

Carlton Strong

Joseph Lupton

G-3 economic outlook detailPercent change over previous period; seasonally adjusted annual rate unless noted

Note: More forecast details for the G-3 and other countries can be found on J.P. Morgan’s Morgan Markets client web site.

2009 2010 2011 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QUnited StatesReal GDP -2.6 2.6 2.4 3.7 1.6 1.5 2.0 2.5 2.5 3.0 4.0 Private consumption -1.2 1.5 2.1 1.9 2.0 1.8 1.8 2.0 2.3 2.5 3.3 Equipment investment -15.3 14.5 8.9 20.5 24.9 10.0 7.0 7.0 8.0 8.0 10.0 Non-residential construction -20.4 -14.4 1.7 -17.8 0.4 -6.0 -3.0 0.0 7.0 9.0 10.0 Residential construction -22.9 -2.1 6.4 -12.3 27.1 -20.0 -5.0 10.0 15.0 20.0 20.0 Inventory change ($ bn saar) -113.1 51.3 59.7 44.1 63.2 48.7 49.0 59.3 59.6 60.2 59.8 Government spending 1.6 0.9 0.0 -1.6 4.3 0.9 0.8 -0.8 -1.0 -1.0 0.4 Exports of goods and services -9.5 11.8 7.2 11.4 9.2 8.0 7.0 6.0 7.0 8.0 8.0 Imports of goods and services -13.8 11.9 6.2 11.2 32.4 3.0 4.0 4.0 6.0 6.0 6.0 Domestic final sales contribution -3.1 1.7 2.3 1.4 4.4 1.4 1.7 2.0 2.5 2.8 3.8 Inventories contribution -0.6 1.3 0.1 2.6 0.6 -0.5 0.0 0.3 0.0 0.0 0.0 Net trade contribution 1.0 -0.3 0.0 -0.3 -3.4 0.6 0.3 0.2 0.0 0.2 0.2Consumer prices (%oya) -0.3 1.6 1.0 2.4 1.8 1.3 0.9 0.8 1.2 1.1 1.1 Excluding food and energy (%oya) 1.7 1.0 0.7 1.3 1.0 0.9 0.7 0.8 0.7 0.6 0.7Federal budget balance (% of GDP, FY) -10.0 -9.6 -8.0Personal saving rate (%) 5.9 5.9 6.1 5.5 6.1 6.0 6.1 6.0 6.0 6.2 6.2Unemployment rate (%) 9.3 9.7 9.8 9.7 9.7 9.6 9.8 9.9 9.8 9.7 9.6Industrial production, manufacturing -11.1 5.7 3.3 6.2 8.5 3.5 2.0 2.0 3.0 4.5 5.0Euro areaReal GDP -4.0 1.7 1.5 1.3 3.9 2.0 1.0 1.0 1.0 1.8 2.0 Private consumption -1.1 0.7 1.0 0.6 1.9 0.3 0.5 1.0 1.0 1.5 2.0 Capital investment -11.3 -0.5 3.4 -1.6 7.5 3.0 3.0 3.0 3.0 3.5 4.0 Government consumption 2.5 1.0 -0.1 0.9 1.9 1.0 0.0 -0.5 -0.5 -0.5 -0.5 Exports of goods and services -12.9 9.9 7.0 9.8 18.6 8.0 7.0 6.0 6.0 5.0 5.0 Imports of goods and services -11.6 10.2 6.3 17.2 18.6 6.0 5.0 6.0 6.0 5.0 5.0 Domestic final sales contribution -2.6 0.5 1.2 0.3 2.9 0.9 0.9 1.1 1.1 1.4 1.8 Inventories contribution -0.7 1.2 -0.1 3.7 0.8 0.2 -0.8 -0.1 -0.1 0.3 0.1 Net trade contribution -0.8 0.0 0.3 -2.6 0.1 0.9 0.9 0.1 0.1 0.1 0.1Consumer prices (HICP, %oya) 0.3 1.5 1.1 1.1 1.5 1.7 1.7 1.4 1.1 0.9 1.0 ex unprocessed food and energy 1.3 0.9 0.8 0.9 0.8 1.0 1.0 0.9 0.9 0.7 0.7General govt. budget balance (% of GDP, FY) -6.3 -6.8 -5.5Unemployment rate (%) 9.4 10.0 9.9 9.9 10.0 10.0 10.0 10.0 9.9 9.8 9.7Industrial production -14.9 6.5 1.9 9.8 10.1 2.0 1.0 1.0 1.0 2.0 3.0JapanReal GDP -5.2 3.0 1.1 5.0 1.5 2.5 -0.5 0.5 1.5 1.8 2.0 Private consumption -1.0 2.1 0.6 2.2 0.0 4.5 -2.5 0.5 1.2 0.8 1.5 Business investment -19.1 1.6 4.0 3.2 6.2 4.0 3.0 3.0 4.0 6.0 5.0 Residential construction -13.9 -9.6 2.1 1.2 -5.1 -5.0 0.0 5.0 5.0 5.0 5.0 Public investment 8.0 -4.3 -10.4 -3.5 -10.3 -10.0 -10.0 -10.0 -10.0 -12.0 -12.0 Government consumption 1.5 1.6 0.9 2.2 1.1 1.0 0.8 0.8 0.8 1.0 1.0 Exports of goods and services -24.1 25.6 6.3 31.0 25.8 10.0 2.5 3.0 5.0 8.0 8.0 Imports of goods and services -16.8 10.8 5.7 12.6 17.4 10.0 3.5 3.5 4.0 6.0 7.0 Domestic final sales contribution -3.4 1.3 0.7 2.0 0.5 2.8 -1.3 0.6 1.1 1.1 1.4 Inventories contribution 0.2 -0.6 -0.1 0.2 -0.8 -0.8 0.8 -0.2 0.0 0.0 0.0 Net trade contribution -2.0 2.2 0.4 2.8 1.9 0.5 0.0 0.1 0.4 0.6 0.5Consumer prices (%oya) -1.4 -1.0 -0.1 -1.2 -0.9 -1.1 -0.7 -0.5 0.1 0.2 -0.1General govt. net lending (% of GDP, CY) -7.2 -7.6 -8.5Unemployment rate (%) 5.1 4.9 4.5 4.9 5.2 4.9 4.7 4.6 4.6 4.5 4.4Industrial production -21.8 17.8 2.8 30.9 6.2 2.5 -1.0 1.0 4.0 7.0 7.0

Memo: Global industrial production -8.9 9.3 4.6 11.9 9.9 2.9 3.6 3.1 5.0 5.7 7.1 %oya 10.0 11.3 8.8 7.1 5.0 3.9 4.3 5.2

2010 2011

Sample

6


JPMorgan Chase Bank N.A., New YorkDavid Hensley

Michael Mulhall

Joseph Lupton

Central Bank WatchChange from Forecast

Official interest rate Current Aug '07 (bp) Last change Next meeting next change Sep 10 Dec 10 Mar 11 Jun 11 Sep 11

Global GDP-weighted average 1.76 -319 1.77 1.82 1.87 1.94 1.98 excluding US GDP-weighted average 2.40 -241 2.40 2.47 2.54 2.64 2.70Developed GDP-weighted average 0.61 -358 0.61 0.63 0.65 0.67 0.69Emerging GDP-weighted average 4.99 -211 5.00 5.14 5.29 5.51 5.59 Latin America GDP-weighted average 7.22 -218 7.22 7.31 7.80 8.38 8.42 CEEMEA GDP-weighted average 4.07 -295 4.08 4.10 4.11 4.17 4.36 EM Asia GDP-weighted average 4.54 -171 4.55 4.76 4.84 5.00 5.05

The Americas GDP-weighted average 1.28 -453 1.28 1.31 1.40 1.51 1.54United States Federal funds rate 0.125 -512.5 16 Dec 08 (-87.5bp) 3 Nov 10 On hold 0.125 0.125 0.125 0.125 0.125Canada Overnight funding rate 1.00 -325 8 Sep 10 (+25bp) 19 Oct 10 19 Oct 10 (+25bp) 1.00 1.25 1.50 1.75 2.00Brazil SELIC overnight rate 10.75 -125 21 Jul 10 (+50bp) 20 Oct 10 Jan 11 (+25bp) 10.75 10.75 11.50 12.50 12.50Mexico Repo rate 4.50 -270 17 Jul 09 (-25bp) 15 Oct 10 On hold 4.50 4.50 4.50 4.50 4.50Chile Discount rate 2.50 -250 16 Sep 10 (+50bp) 14 Oct 10 16 Sep 10 (+50bp) 2.50 3.25 4.00 4.50 4.50Colombia Repo rate 3.00 -600 30 Apr 10 (-50bp) 29 Oct 10 1Q 11 (+50bp) 3.00 3.00 4.00 5.00 5.50Peru Reference rate 3.00 -150 9 Sep 10 (+50bp) 7 Oct 10 4Q 10 (+50bp) 3.00 4.00 4.50 4.50 4.50

Europe/Africa GDP-weighted average 1.44 -322 1.44 1.45 1.46 1.47 1.52Euro area Refi rate 1.00 -300 7 May 09 (-25bp) 7 Oct 10 On hold 1.00 1.00 1.00 1.00 1.00United Kingdom Repo rate 0.50 -500 5 Mar 09 (-50bp) 7 Oct 10 On hold 0.50 0.50 0.50 0.50 0.50Sweden Repo rate 0.75 -275 2 Sep 10 (+25bp) 26 Oct 10 26 Oct 10 (+25bp) 0.75 1.25 1.25 1.25 1.50Norway Deposit rate 2.00 -250 5 May 10 (+25bp) 27 Oct 10 3Q 11 (+25bp) 2.00 2.00 2.00 2.00 2.25Czech Republic 2-week repo rate 0.75 -200 6 May 10 (-25bp) 4 Nov 10 2Q 11 (+25bp) 0.75 0.75 0.75 1.00 1.25Hungary 2-week deposit rate 5.25 -250 26 Apr 10 (-25bp) 27 Sep 10 3Q 11 (+25bp) 5.25 5.25 5.25 5.25 5.50Israel Base rate 1.75 -225 26 Jul 10 (+25bp) 27 Sep 10 27 Sep 10 (+25bp) 2.00 2.25 2.50 2.75 3.25Poland 7-day intervention rate 3.50 -100 24 Jun 09 (-25bp) 29 Sep 10 2Q 11 (+25bp) 3.50 3.50 3.50 3.75 4.00Romania Base rate 6.25 -75 4 May 10 (-25bp) 29 Sep 10 3Q 11 (+25bp) 6.25 6.25 6.25 6.25 6.50Russia 1-week deposit rate 2.75 -25 31 May 10 (-50bp) Sep 10 3Q 11 (+25bp) 2.75 2.75 2.75 2.75 3.00South Africa Repo rate 6.00 -350 9 Sep 10 (-50bp) 18 Nov 10 On hold 6.00 6.00 6.00 6.00 6.00Switzerland 3-month Swiss Libor 0.25 -225 12 Mar 09 (-25bp) 4Q 10 Jun 11 (+25bp) 0.25 0.25 0.25 0.50 0.75Turkey 1-week repo rate 7.00 -1050 - 14 Oct 10 4Q 11 (+50bp) 7.00 7.00 7.00 7.00 7.00

Asia/Pacific GDP-weighted average 2.92 -128 2.92 3.06 3.12 3.23 3.27Australia Cash rate 4.50 -175 4 May 10 (+25bp) 5 Oct 10 5 Oct 10 (+25bp) 4.50 4.75 5.00 5.25 5.50New Zealand Cash rate 3.00 -500 29 Jul 10 (+25bp) 27 Oct 10 10 Mar 11 (+25bp) 3.00 3.00 3.25 3.50 3.75Japan Overnight call rate 0.10 -43 19 Dec 08 (-20bp) 5 Oct 10 On hold 0.10 0.10 0.10 0.10 0.10Hong Kong Discount window base 0.50 -625 17 Dec 08 (-100bp) 4 Nov 10 On hold 0.50 0.50 0.50 0.50 0.50China 1-year working capital 5.31 -126 22 Dec 08 (-27bp) 3Q 10 4Q 10 (+27bp) 5.31 5.58 5.58 5.85 5.85Korea Base rate 2.25 -225 9 Jul 10 (+25bp) 14 Oct 10 4Q 10 (+25bp) 2.25 2.50 2.75 2.75 2.75Indonesia BI rate 6.50 -200 5 Aug 09 (-25bp) 5 Oct 10 2Q 11 (+25bp) 6.50 6.50 6.50 6.75 6.75India Repo rate 6.00 -175 16 Sep 10 (+25bp) 2 Nov 10 4Q 10 (+25bp) 6.00 6.25 6.50 6.50 6.75Malaysia Overnight policy rate 2.75 -75 8 Jul 10 (+25bp) 12 Nov 10 On hold 2.75 2.75 2.75 2.75 2.75Philippines Reverse repo rate 4.00 -350 9 Jul 09 (-25bp) 7 Oct 10 1Q 11 (+25bp) 4.00 4.00 4.25 4.75 5.00Thailand 1-day repo rate 1.75 -150 26 Aug 10 (+25bp) 20 Oct 10 20 Oct 10 (+25bp) 1.75 2.00 2.00 2.00 2.00Taiwan Official discount rate 1.375 -175 24 Jun 10 (+12.5bp) 30 Sep 10 30 Sep 10 (+12.5bp) 1.50 1.50 1.50 1.50 1.625Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting during upcoming week.

Sample

Economic ResearchGlobal Data WatchSeptember 24, 2010

7

JPMorgan Chase Bank, LondonJan Loeys

J.P. Morgan View: Markets

Central banks areboosting confidence• Economics –– Activity data are tracking our forecast of

growth close to potential.

• Asset allocation –– QE boosts investor confidence.Add risk.

• Fixed Income –– QE on the horizon supports core bondmarkets, but look for Australia and Canada to decouple.

• Equities –– Negative pre-announcements point to aworse EPS outcome in Q3 relative to Q2, but seemlargely priced in. Short covering has further to go.

• Credit –– Medium-term strategy remains long credit,favoring EM over DM, corporate over state, and USover Europe.

• FX –– Add to USD shorts.

• Commodities –– Much stronger than expected demandfor crude oil leads us to raise price forecasts, from $75 to$81 average for Q4. Go long crude oil.

In a week where economic data were OK, but not great andjust confirming stabilization, the important event was aclear enough statement from the Fed that it would do whatit can with its balance sheet to reflate the economy. To-gether with the Bank of England and Bank of Japan, theyare telling us that low growth is not acceptable, deflationrisks are rising, and they stand ready to move to a sec-ond phase of asset purchases to reflate the globaleconomy and asset markets.

Investors are becoming more hopeful, but remain scep-tical on what central banks can achieve, taking a “showme that it works” attitude before joining the reflation trade.Recent global activity data are telling us that downside riskof a double dip has been curtailed, but that there is as yetno reason to see upside risk (Chart 1). The majority of in-vestors believe that the developed economies have entereda 7-year famine of weak growth, high unemployment, andhigh fiscal deficits. And most believe that emerging econo-mies will escape much of this malaise. We have expressedsimilar views but are more open on how long this malaisewill last and how bad it will be. This is because policymakers and governments are under massive pressure to endthe malaise and reflate the world economy.

Hyperactive policy makers have the tools that can help turnthe world economy around, but the risk is that such ac-

tions will do more bad than good. Negative impacts couldcome from overstimulating the world, and thus quicklyturning deflation into inflation risks. This is one reason theECB remains more conservative. A second danger is thathyperaction turn into beggar-they-neighbour policies,aimed at helping your own country at the cost of others,and likely the overall world economy. You increase yoursize of the pie, but the pie itself will shrink. These measureinclude currency intervention and trade restrictions. Thegood news is that, so far, most counties are staying awayfrom destructive protectionism. Asia, however, continues toprotect itself against currency appreciation, with Japan hav-ing joined in recently. There is a danger this becomes a cur-rency war, but Europe and the US are so far not taking thebait. If anything, Asian currency intervention has had thegrowth-positive impact of importing US easy monetarypolicy. We conclude that trade, monetary, and currencypolicies are in aggregate a boost to growth.

Will these policies succeed in stimulating growth andthus risk assets? Much of the slower growth we are seeingis due not only to delevering, but also to broad macro andmicro uncertainty that are holding companies and house-holds back from responding to easy money. The clear moveby three major central banks to commit their balance sheetsto reflation should make economic agents on the marginless uncertain and thus more willing to invest and spend.This is the reason to raise allocations to riskier assets.

Fixed incomeBond markets are priced for significant further easing, andcentral banks brought that easing closer this week, pushingyields lower across the globe. The BoE’s minutes showed acommittee edging towards more QE. And more impor-tantly, the FOMC adopted a very explicit easing bias,pledging to take action if inflation stays subdued. In-stead of a big bang announcement of a huge target for bondpurchases, QE2 seems set to take a more flexible course,with the Fed setting a modest target for the first fewmonths, and waiting for the data to see if more is needed.Ultra-loose monetary policy remains supportive of bondmarkets, and we stay bullish and in flatteners.

More easing in the US, UK and perhaps Japan raisesthe prospect of a more pronounced decoupling withbond markets in the smaller developed economies,which have recovered more smartly from the global reces-sion. Indeed, hawkish comments by RBA GovernorStevens this week prompted the market to fully price an-other rate hike by year end. We favour flatteners on theAustralian money market curve. Similarly, we expect the

Sample

8

Economic ResearchJ.P. Morgan View: MarketsSeptember 24, 2010

JPMorgan Chase Bank, LondonNikolaos Panigirtzoglou

Bank of Canada gradually to move policy away from itsemergency setting, even in the face of somewhat slowergrowth, and stay short in Canada vs the US.

European peripherals underperformed this week, led onceagain by Ireland and Portugal. Peripheral bonds have threepotential supports. The first and most important is a narrow-ing of fiscal deficits, but this will take time, and Portugal forone appears to be falling behind its targets. The second is theprospect of support from the EU and IMF. Yet even thoughGreece has secured funding for the next three years, its 2-year yields are still at 9%, indicating that the market remainssceptical that EU/IMF support removes default risk. Thethird is the potential for more aggressive ECB buying,though the central bank’s purchases have now been below€400m for ten weeks in a row. Thus we stay neutral overallon peripherals, even at these wide spreads, while looking forshort-dated Greek paper to continue its recent rally, andfor Spanish spreads to drift wider into supply.

EquitiesEquities rose for a fourth straight week on dovish centralbank comments and slightly better economic data. Our USEconomic Activity Surprise Index (EASI), which tends tocorrelate well with equities and tracks data surprises over a6-week rolling window, has risen to zero after spendingalmost three months in negative territory (see chart).

Equity fund flows continued to be positive for a thirdstraight week driven once again by ETFs. In contrast,non-exchange traded equity mutual fund flows remainnegative. As explained last week, this suggests that it wasmostly hedge funds rather than retail investors behind thismonth’s rally. The still low level of their 21-day rollingequity beta suggests that Macro hedge funds are still farfrom fully covering their shorts in equities (see chart).

Equity prices have been above the important technicallevel of 200-day moving averages for two straightweeks, longer than the one week in early August. Thelonger equity prices stay above the 200-day moving aver-age, the more likely it becomes that momentum driven in-vestors will chase the equity rally.

The Q3 reporting season is set to kick off in two weeks.Pre-announcements and guidance has been so far morenegative compared to Q2. Negative pre-announcementsare running at 59% of total, compared with 50% for the Q2reporting season and 55% for Q1. Negative pre-announce-ments and guidance were concentrated in Cyclical sectors,especially the Technology sector. We are thus reluctant to

chase the recent rally in Technology stocks and prefer tofocus our sectoral exposure on Banks.

Overall, negative earnings pre-announcements point to aworse EPS outcome in Q3 relative to Q2, but this islargely priced in. Bottom-up projections for Q3S&P500 EPS show a large 4% drop from Q2, a magnitudeonly seen during past financial crises or recessions.

Across regions, we continue to focus our exposure on EM.Indeed, EM equities resumed their outperformance inSeptember. Our EM vs DM equity allocation modelfavours an EM overweight, as both 2-month return momen-tum and relative IP growth (i.e. the difference between theoya rates in EM IP vs DM IP) are supportive.

CreditCorporates bonds are up on the week in price terms, butspreads have lagged the equity rally due to the rapid fall ingovernment yields. Unlike equities, credit does not benefitfrom a short base, with most managers being overweight.Near term, this benefits equities over credit, despite ourpreference for credit in a low-growth world.

Our medium strategy is to be long credit, but to be selec-tive, favoring sectors and regions least vulnerable to a lowgrowth environment. This means favoring EM over DM,corporate over sovereign, and US over Europe.

Foreign ExchangeIn view of the Fed’s imminent re-launch of large-scaleasset purchases, we published several forecast changes inweek. EUR/USD still looks to be in a range, though wemove the mid-point from 1.25, where we set it during thelast round of forecast revisions in May, to 1.30. As the majorreserve currency alternative to the dollar, the euro wouldbenefit unambiguously from Fed QE were it not for

2.8

3.0

3.2

3.4

3.6

3.8

Jan 10 Mar 10 May 10 Jul 10 Sep 10

2011 global GDP growth forecasts: J.P. Morgan versus consensus%

J.P. Morgan

Consensus

Sample


9

JPMorgan Chase Bank, LondonJan Loeys

Europe’s growth slowdown in Q4, an event which couldrevive sovereign stress. This upgrade to EUR/USD’s fore-cast also lifts the GBP/USD range from a previous low 1.40sto high 1.40s. The outlook for EUR/GBP is unchanged,however. We still expect the cross to reach 0.87 by end-2010and 0.88 by Q1 2011.

Commodity currency forecasts are raised through year-end. We had expected these currencies to slump in Q42010 as the global economy downshifted, but Asia hasstabilised more quickly than expected and Chinese data areshowing some signs of reacceleration. AUD, NZD andCAD should, therefore, range around current levels in Q4before trending higher in 2011 on the back of further raterises. The USD/JPY forecast for a new all-time low at 79by December 2010 is unchanged, even in the face of in-tervention risks.

The signal from the Fed that further QE is required is notjust the message that inflationary pressures remain weakbut that US growth momentum is stalling. Though a furthersuppression in US yields and added monetary stimulus bythe Fed should be broadly negative for USD versus all ma-jor currencies, stalling growth is likely to see some dispar-ity between the performance of high beta currencies suchas NZD which are likely to under-perform and defensivecurrencies such as CHF and JPY which should continue tooutperform. This week we are moving to a more defensivestance are adding further short USD exposure (vs. CHF)whilst extending CHF longs (vs. NZD, GBP and EUR).

With the Fed having now shown its hand, we expect thatthe BoE will be the next central bank to pull the trigger onQEII in the months ahead. A triumvirate of spending cuts,housing market slowdown and further monetary stimulusprovide the perfect storm for sustained GBP downside.Add GBP shorts vs. European currencies where fundamen-tal divergences are starkest (NOK, CHF).

CommoditiesRecent data show a much stronger than expected in-crease in demand for crude oil in Q3 2010, driven almostentirely by emerging markets and in particular China. Thiscoincides with the view from our economists that whiledemand growth is likely to remain at subdued levels, theglobal manufacturing downshift is now over and withChina’s economy projected to expand by 8.6% next year,we expect demand to remain strong. These two develop-ments coupled with probable further weakness in the dollarfollowing on from an expected second round of QE, lead us

to revise up our oil price forecast from an average price of$75 in Q4 to $81. As such, we move from neutral to out-right long crude oil.

We have been underweight base metals for over a monthnow as we expected a dramatic slowdown in global indus-trial growth to translate into a slowdown in demand for rawmaterials like metals. This slower demand growth has notmaterialised and with the manufacturing slowdown nowover and Chinese demand growth stabilising at healthy lev-els, we see a more balanced supply and demand picture. Asa result, we turn neutral base metals.

It is tempting to jump on the current rally in gold as mo-mentum and flows are clearly supportive. However, goldsupply appears healthy and industrial and consumer de-mand has weakened this year while buying by ETFs hasincreased to account for almost 30% of global demand,raising the tail risk that a change in investor attitudes couldcause a significant correction in gold prices. As such, weprefer not to chase this rally, and we remain neutral gold.

Ten-year Government bond yieldsCurrent Dec 10 Mar 11 Jun 11 Sep 11

United States 2.61 2.25 2.25 2.25 2.25Euro area 2.34 2.15 2.20 2.30 2.30United Kingdom 3.04 3.00 3.00 3.10 3.25Japan 1.00 0.80 0.80 0.90 0.95GBI-EM 6.33 7.90

CurrentUS high grade (bp over UST) 165Euro high grade (bp over Euro gov) 170USD high yield (bp vs. UST) 669Euro high yield (bp over Euro gov) 629EMBIG (bp vs. UST) 306EM Corporates (bp vs. UST) 351

Current Dec 10 Mar 11 Jun 11 Sep 11EUR/USD 1.35 1.30 1.30 1.30 1.30USD/JPY 84.4 79 81 83 85GBP/USD 1.58 1.49 1.48 1.48 1.49

Current 10Q4 11Q1 11Q2 11Q3WTI ($/bbl) 76 75 75 77 80Gold ($/oz) 1297 1275 1250 1250 1250Copper($/m ton) 7883 6750 6750 7000 6800Corn ($/Bu) 5.22 5.25 5.30 5.15 5.10

12.7%12.5%

Credit marketsYTD Return

10.3%

10.7%5.2%

Commodities - quarterly average

Foreign exchange

Source: J.P. Morgan, Bloomberg, Datastream

11.7%

Sample

10

Economic ResearchThe Fed talks and financial markets listenSeptember 24, 2010


Robert Mellman

The Fed talks and financialmarkets listen• Bernanke’s Jackson Hole speech communicated Fed

concerns over low inflation and willingness to use LSAP

• These two themes were reinforced in this week’sFOMC statement

• Markets have responded: inflation expectations areup, the dollar is down, and risk assets have rallied

Tuesday’s FOMC meeting reinforced the message that theFed is moving toward additional large-scale asset pur-chases (LSAP). The first hint of a shift in policy came fromthe decision to reinvest the paydown of MBS into Treasur-ies announced at the August 10 meeting. This was followedby Chairman Bernanke’s discussion of the efficacy of alter-native policies to support growth, focusing on asset pur-chases, in his August 27 Jackson Hole speech. This week’sdownbeat growth assessment and statement that the com-mittee is “prepared to provide additional accommodation ifneeded” signals that the Fed is now likely to embark onTreasury purchases before year-end.

The goal of Fed balance sheet policy since the financialcrisis began has been to influence the prices of the assets itpurchases. To this end, a decision to purchase longer-termTreasury securities would be geared toward portfolio bal-ance effects that lower longer-term interest rates (see “US:The Fed exits the exit,” GDW, August 13). However, theFed also operates through words and actions that communi-cate its broader policy objectives and path of future actions.In this regard, it has sent an important complementary sig-nal about its objectives in recent weeks. The Committeehas publicly stated for the first time that inflation has fallento unacceptably low levels.

This message was first relayed in the Jackson Hole speech,in which the Chairman said “inflation has declined to a levelthat is slightly below that which FOMC participants view asmost conducive to a healthy economy in the long run.” Itwas reiterated in this week’s statement with a commitmentby the FOMC “to return inflation, over time, to levels consis-tent with its mandate.” A stated goal of raising the level ofUS inflation implies that the Fed is moving much more ag-gressively than just acting against downside risks to growth.Although FOMC members employ different frameworks inforecasting inflation, the likely Committee consensus wouldsee sustained above-trend growth and a significant fall in theunemployment rate as necessary to achieve this goal.

Economic Research Note

More bang for buck after Jackson HoleThere has been considerable skepticism about the effective-ness of monetary policy tools as the Fed reached the lowerbound on policy rates. Despite this skepticism, it is impres-sive to see the size and breadth of the Fed’s impact on fi-nancial markets as it has talked about LSAP and its infla-tion objectives in recent weeks. To be sure, Fed policy isnot the only influence, and these market shifts have alsoreflected incoming economic data that, while generallylackluster, have reduced the risks of a double-dip back intorecession. However, market movements appear to be di-rectly responding to the signal from the Fed.

82838485868788

Jan Mar May Jul Sep

Index, 2000=100Value of dollar, real broad effective exchange rate

Jackson Hole speech

Key US financial market variables%, except as noted

May 3 August 9 Aug 26 LatestEuro fiscal Pre-FOMC Pre-Jackson Hole

10-year Treasury 3.72 2.86 2.50 2.60

S&P 500 index 1202 1128 1047 1145

Dollar, real broad 83.9 83.8 85.1 83.1

Corp. credit spreads (bp):

High grade 114 136 143 140

High yield 587 673 709 672

5yr-5yr breakeven, Fed 3.13 2.49 2.22 2.70

Real 10-year yield 1.30 1.01 0.93 0.74

2.2

2.5

2.8

3.1

3.4

Jan Mar May Jul Sep0.7

0.9

1.1

1.3

1.5

1.7

%, Fed measureUS interest rates

% 5-year - 5-year forward breakeven

10-year TIPS yield (real)

Jackson Hole

Sample

Economic ResearchSeptember 24, 2010

11


Robert Mellman

For purposes of tracking financial markets, it is useful todistinguish between three separate periods.

Stage One: Increasing prospects of weaker growth andlower inflation. The weeks and months after May 3 werefollowed by a period of troubling news out of Europe, acoincident marked downshift in many US economic indica-tors including employment, and increased concerns aboutthe economy possibly slipping back into recession. FromMay until the August 10 FOMC meeting, the financial mar-kets priced in increasing prospects of economic weaknessand reduced inflation. Treasury yields declined, equityprices declined, credit spreads widened, and inflation ex-pectations as measured by TIPS spreads moved signifi-cantly lower (see table on previous page).

Stage Two: Trends continue past August 10 FOMCmeeting. Although the August 10 Fed decision to reinvestMBS prepayments was a surprise, the Fed’s commentaryabout this move suggested that it should not necessarily beviewed as a shift toward an easing bias. Several Fed offi-cial including the Chairman have explained that the deci-sion was necessary just to keep the Fed on hold, as allow-ing prepayments to reduce the size of the Fed’s balancesheet would be a passive policy tightening. In addition,there was no change in the description of the inflation out-look in the statement. As a result, the August 10 FOMCmeeting did not have any discernible influence on financialmarket performance. Through most of August, Treasuryyields declined further, equity prices dropped, creditspreads widened, and market-measured inflation expecta-tions continued to trend lower.

Stage 3: Jackson Hole is a turning point. Nearly half ofChairman Bernanke’s August 27 speech at the JacksonHole conference was devoted to “Policy options for furthereasing.” While the Chairman did not provide much speci-ficity about the path of policy, he explicitly expressed theCommittee’s concern about inflation and recommendedLSAP as the preferred policy tool. Financial markets re-versed course immediately following this speech. BetweenAugust 26 and the September 21 FOMC meeting, Treasuryyields rose, equity prices rose, the dollar declined in value,credit spreads narrowed, and inflation expectations in-creased significantly. These changes are broadly consistentwith the view that the market was now expecting LSAPfrom the Fed that would, at a minimum, cushion downsiderisks to growth.

To be sure, other influences have contributed to swings infinancial market variables since late August. The tone ofthe incoming economic data has been somewhat better. Andsome investors may be looking for the early November elec-tion to result in a Congress that is friendlier to business andto the financial markets. But the economic data have notbeen strong, and inflation news has been subdued. It doesseem that the Fed’s commitment to reflation and its willing-ness to embark on another round of LSAP has been an im-portant influence on financial markets since late August.

Against this backdrop, the statement following the TuesdayFOMC meeting largely reinforced the shift made at Jack-son Hole with details adding support for those who thinkthat the Fed will start to buy Treasuries in size later thisyear. The immediate financial market response to theFOMC statement was not dramatic. But by the end of theweek the latest readings on market-based inflation expecta-tions, the dollar, and equity prices were continuing to re-spond to a Fed that views inflation as undesirably low andis increasingly likely to resort to another LSAP program.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

%ch saarCore PCE price index, with forecast for August

2008 2009 2010

Over year ago

Over 3 months

-2

0

2

4

685 90 95 00 05 10

-4

-3

-2

-1

0

1

%-pt, dev from avg

US unemployment and core inflation rates

%-pt, 8qtr chg in oya

Core inflation, chgUnemployment rate

Sample

12

Economic ResearchUS jobless recoveries: what we now know andstill don’t knowSeptember 24, 2010

JPMorgan Chase Bank, New YorkMichael Feroli

US jobless recoveries: what wenow know and still don’t know• The labor market recovery from the 2007-2009 reces-

sion bears similarities to the past two recoveries

• One hypothesis for this is structural change that hasmade businesses more cautious

One year ago, as the current recovery was just getting un-der way, we published a note that surveyed theories of job-less recoveries in order to gauge the prospects for the labormarket in the year ahead. At that time, there were twobroad sets of explanations for the jobless recoveries thatfollowed the 1991 and 2001 recessions. One set focused onthe shallowness of those recessions, which created only amodest bounce-back in growth and labor market activity.The other set of explanations looked to structural changesthat may have taken place in the economy in the 1980s orsince that may have changed the shape of business cycles.

Defining jobless recoveriesThe current recovery certainly wasn’t shallow, yet by somemeasures it is shaping up to be a jobless recovery. Probablythe simplest measure of a jobless recovery is net change injobs since the end of the recession. Currently, private non-farm employment, total nonfarm employment, and thehousehold survey measure of civilian employment all standbelow where they were at the end of the recession in June2009. By this straightforward standard, the US is experi-encing its third consecutive jobless recovery.

A recurrent concern is that the term “jobless recovery” maysimply mean a slow-growth recovery, with no labor marketfeature that is particularly unusual. In order to mitigate thisconcern, we look at job growth relative to GDP growth(second chart) in order to control for the strength of the re-covery. When looked at in this way, the behavior of thelabor market in recoveries still exhibits a sharp break in themid-1980s. Prior to then, employment grew at about halfthe rate of GDP in the first year of recovery. Since then,employment has contracted in the first year even as GDPhas grown. Of course, there is a complex web of interac-tions between overall economic growth and job growth, buteven controlling for GDP growth, there seems to be a shiftin labor market behavior in the 1980s that persists in thecurrent recovery.

Economic Research Note

98

100

102

104

106

108

-10 -5 0 5 10 15 20Months from trough

Private nonfarm payrolls around recession troughTrough employ ment = 100

1982

1975

1991

2001

2009

-40-20

020406080

%

First year of recovery employment growth rate as % of GDP growth rate

'49 '58 '70 '82 '01'54 '61 '75 '91 '09

Another way of comparing the current labor market recov-ery to previous jobless recoveries is to look at the grossflows in the labor market. (Gross flow data are availablefor only the last two decades, but a widely used methodintroduced by Rob Shimer at the University of Chicago es-timates implied flow data from the household survey.) Thethird chart plots the probability an employee is separatedfrom his job (a proxy for firing) and the probability an un-employed person finds employment (a proxy for hiring).

Relative to recoveries prior to the mid-1980s, there is noth-ing unusual about the job separation probabilities in the job-less recoveries, or in the current recovery for that matter,indicating that businesses have not stepped up firing in thepast three recoveries. In contrast, the job finding probabilityhas been significantly lower in the past three recoveries rela-

2.02.53.03.54.04.55.0

72 77 82 87 92 97 02 07

102030405060

%, both scales

Probability of finding or losing a jobProbability employ ed

person loses jobProbability unemploy ed

person finds a jobSample


13


0.70.80.91.01.11.21.31.4

1 3 5 7 9 11 13 15 17 19 21 23 25

Index , trough=1Job finding probability

Range of 6 prior post-WWII recoveries

2001

Months after trough

19912009

0.7

0.8

0.9

1.0

1.1

1 3 5 7 9 11 13 15 17 19 21 23 25

Index , trough=1Job separation probability in recoveries

1991

Range of 6 prior post-WWII recoveries

Months after trough

20012009

tive to prior post-war recoveries. For whatever reason, firmsappear much more reluctant to hire in jobless recoveries, andthe current recovery fits right into this pattern.

Explaining jobless recoveriesGiven that the current recovery seems to fit most definitionsand share most characteristics of jobless recoveries, the shal-low recession explanation of jobless recoveries is much lesspersuasive. Why then has every recovery since the mid-1980s produced no job growth in the first year of the expan-sion, even controlling for the vigor of the overall economy?And why has hiring been relatively weak even as layoffshave followed the path of previous recoveries?

Of course there are idiosyncracies in each recession—theS&L issues in the 1990s, the Iraq War uncertainties in the2000s, the deleveraging process today—and so the appar-ent trend toward jobless recoveries could be merely a stringof bad luck. While this is possible, the consistent experi-ence of job-full recoveries before the mid-1980s and job-less ones since then is striking. In last year’s note, we dis-cussed the various explanations put forward by academiceconomists. To recap, the explanations were few, weregenerally not compelling, and become even less compellingwhen forced to also explain the current jobless recovery.

Structural changes in the US economy surely did take placein the mid-1980s. The “Great Moderation” in the volatilityof economic activity—which seems to have survived theGreat Recession—is often dated to the mid-1980s. Associ-ated with that is a shift in inventory behavior such thatfirms’ stockbuilding is less procyclical. More generally,firms are often reported to have become more cost-con-scious in that period, whether it was just-in-time inventorymanagement, EVA, lean manufacturing, etc. The problemeconomists have with this explanation is that it seems toimply that before the 1980s, firms were leaving profits onthe table by not cutting costs to the fullest extent possible.

While economists assume a profit maximization motive forfirms, the starting point in the study of corporate finance isthe observation of a separation between ownership andcontrol: the profit-maximizing objective of shareholdersmay conflict with the empire-building or other objectivesof executives. The mid-1980s ushered in an era of morecontested markets for corporate control. While the hostiletakeover tactics of that decade have subsided, corporatefinance theorists are in general agreement that the legacy ofthat period is fundamentally changed governance struc-tures: private equity, LBOs, MBOs, heightened merger ac-tivity, increased incentive compensation for executives, and

other mechanisms have emerged since the 1980s as meansto align the interests of ownership and management. Thereorienting of executive focus from empire-building toprofits may have created more reluctant hiring early in re-coveries. Of course, this explanation is conjectural.

If jobless recoveries are an enduring feature of economicrecoveries, the implications are not entirely bleak. While it’sobviously nice to experience robust job growth coming outof recession, the two prior jobless recoveries eventually—within two or three years—became job-creating. They alsobecame long expansions. While the last expansion did notend well (to put it mildly), that owed more to household fi-nancial imbalances than to business sector fatigue.

1

2

3

4

5

6

Five-year rolling standard deviation of output growthThe Great Moderation

60 65 70 75 80 85 90 95 00 05 10

Sample

14

Economic ResearchIreland faces huge medium term fiscalchallengesSeptember 24, 2010

JPMorgan Chase Bank, LondonDavid Mackie

Ireland faces huge medium-term fiscal challenges• Deficit reduction plan assumes buoyant growth

• Softer growth would require more fiscal tightening

• Cumulative move in Irish deficit could end up beingalmost as large as that in Greece

The increased market pressure on Ireland in recent weekshas little to do with how the Irish economy and the fiscaladjustment are progressing this year. According to thehigh-frequency data, the Stability Program looks to be ontrack. Real GDP growth has been very volatile in recentquarters, but the growth assumption in the Stability Pro-gram still looks achievable. Meanwhile, the budgetary ob-jective for this year, excluding measures to support thebanks, looks likely to be met. Instead, the market stress re-flects concerns about the fiscal cost of bailing out the banksand the likelihood that more fiscal adjustment will beneeded over time, and that it may need to be more front-loaded. This would add downside risks to growth to aneconomy that has already experienced the deepest reces-sion in the region.

The Irish fiscal adjustmentThe fiscal adjustment outlined in the Irish Stability Program,published last December, is striking in three respects. First,although the cumulative fiscal tightening in the program—amove in the cyclically adjusted primary position of 7.6%-ptsof GDP—is large, it is spread over a long time: five years intotal. Second, the fiscal consolidation is heavily backloaded:only just over a quarter of the total adjustment takes place in2010 and 2011. And third, the growth assumptions seemvery optimistic: even as the fiscal tightening intensifies, realGDP gains averaging 4.3% are anticipated in 2012-14.

The fiscal cost of supporting the banks is increasing the gen-eral government deficit and the level of debt. As banks trans-fer assets to the National Asset Management Agency(NAMA), losses have to be realized, and this requires thebanks to increase their capital positions. The government issupporting this process, injecting capital by way of promis-sory notes. It now looks likely that the fiscal deficit this yearwill be around 25% of GDP, and the level of debt will bejust over 91% of GDP. Each of these is 13.6%-pts above theestimates contained in the Stability Program. The Irish gov-ernment is stressing that the “underlying” deficit this year isstill tracking the original Stability Program target of 11.6%

Economic Research Note The Irish Stability Program% of GDP for fiscal data, %oya for GDP and CPI

2009 2010 2011 2012 2013 2014Fiscal balance -11.7 -11.6 -10.0 -7.2 -4.9 -2.9Interest expense 2.1 2.9 3.4 3.8 3.9 3.9Primary balance -9.6 -8.7 -6.6 -3.4 -1.0 1.0Cyclically adjusted fiscal balance -9.3 -9.4 -8.5 -6.8 -5.2 -3.5Cyclically adjusted primary balance -7.2 -6.5 -5.1 -3.0 -1.3 0.4Government debt 64.5 77.9 82.9 83.9 83.3 80.8Real GDP -7.5 -1.3 3.3 4.5 4.3 4.0Nominal GDP -9.5 -2.2 5.6 6.7 6.5 6.1Output gap -7.0 -6.9 -3.7 -1.1 0.6 1.5Unemployment rate 11.8 13.2 12.6 11.8 10.8 9.5CPI -2.1 -0.8 1.6 1.8 2.0 1.9Source: Irish Ministry of Finance. Published December 2009.

IMF projections for Ireland

2010 2011 2012 2013 2014General government deficit -11.9 -11.1 -8.6 -7.3 -5.9General government debt 86.2 94.7 96.9 97.5 97.7Real GDP -0.6 2.3 2.5 2.9 3.2CPI -1.8 -0.5 0.8 1.7 1.9

% of GDP for general government deficit and debt, %oya for real GDP and CPI

Based on the Article IV Consultation, July 2010. The projections for the deficit this year do not include all the additional support for banks.

Government projections for deficit reduction% of GDP

Debt at end of adjustment

Overall deficit Primary deficitSpain 8.2 9.5 69.2Greece 11.0 14.4 149.1Portugal 7.4 8.5 84.8Ireland 8.9 10.7 94.4

Changes from 2009-2014

The Irish deficit excludes banking support measures. For Spain and Portugal, the table assumes that the deficit in 2014 is the same as in 2013.

Updated Irish government projections

2010 2011 2012 2013 2014General government deficit -25.2 -10.0 -7.2 -4.9 -2.9General government debt 91.5 96.5 97.5 96.9 94.4Real GDP 1.0 3.3 4.5 4.3 4.0CPI -1.0 1.6 1.8 2.0 1.9

% of GDP for general government deficit and debt, %oya for real GDP and CPI

Based on the Stability Program published in December 2009 and information made available since then.

The headline fiscal deficit in 2009 and 2010 % of GDP

2009 2010"Underlying" deficit -11.8 -11.6Bank support 2.5 13.6

Anglo Irish 2.5 11.7Irish Nationwide 0.0 1.7Educ. bldg. society 0.0 0.2

"Headline" deficit -14.3 -25.2The underlying deficit for 2009 has been revised by 0.1%-pt since the Stability Program was published. There is still some uncertainty about whether the support for the Educational building society will be fully reflected in the deficit.

Sample


15


of GDP, and indeed it is. However, the wider-than-expecteddeficit, and higher-than-expected debt, do reflect the fiscalcost of the banking crisis, which will ultimately be borne byIrish taxpayers. So, the cumulative gain in Irish debt is goingto be huge, from a level of around 25% of GDP in 2007 to apeak of around 97% in 2013. We would attribute around athird of this to the direct cost of the banking crisis.

Looking beyond this year, the medium-term issues aroundthe Irish fiscal consolidation remain. Excluding the impact ofthe direct banking support, this year’s primary deficit in Ire-land will be around 8.7% of GDP. This is clearly an unsus-tainable position. Economic theory and empirical analysissuggest that there should be a positive relationship betweenthe primary position and the level of debt: that is, as the levelof debt goes up, the primary surplus has to increase in orderto maintain the confidence of financial markets regardingsolvency. Our analysis suggests that with Irish governmentdebt peaking at around 97% of GDP, the primary surplus hasto be at least 1% of GDP, and may need to be higher due toincreased risk premia as debt moves to an exceptionally highlevel (see “Euro area sovereigns: the long journey back tosolvency,” GDW, July 9, 2010).

The Irish Stability Program does anticipate a primary surplusof 1% of GDP, but not until 2014. Relative to the adjust-ments elsewhere on the periphery of the Euro area, the Irishconsolidation for the period 2010-04 is backloaded. More-over, it is conditioned on a set of very buoyant growth ex-pectations and a projected inflation rate of more than 2%oya(for the GDP deflator). Real GDP growth is expected toaverage 4.3%oya from 2012 to 2014, and nominal GDPgrowth is expected to average 6.4%oya.

It is hard to see how Ireland can achieve such buoyant realgrowth. Taking the magnitude of the fiscal adjustment in theStability Program, and assuming a fiscal multiplier of 1.0,the underlying real growth rate from 2012 to 2014 would bearound 6%. This would be quite an achievement. During the2002-07 upswing, GDP growth averaged 5.4%, which wasclearly an unsustainable pace of growth, boosted by an ex-cessive expansion in the construction and financial sectors.In its Article IV Consultation, published in July, the IMFsuggested that, at the peak of the last cycle, the level of GDPwas 5%-7%-pts above potential. In addition to the headwindfrom the unwinding of imbalances, some of the output lost inthe recession was likely structural and the reversal of immi-gration trends points to lower growth potential in the future.It seems likely that Irish growth will be subdued for years tocome. The IMF projects a more moderate pace of growththan the Irish government: an average real growth rate of2.9% from 2012 to 2014.

Moreover, in the first eight months of the year, the coreCPI has fallen 2.6%oya, and in the first half, the GDP de-flator fell by almost as much. Ireland could easily fall into asustained deflation, which would mean lower nominalgrowth than the Stability Program assumes. To the extentthat real and nominal GDP fall short of the projections inthe Stability Program, additional fiscal tightening will beneeded. If the IMF growth and inflation projections turnout to be correct, then the cumulative fiscal tightening willneed to be almost 30% greater than in the Stability Programin order to achieve the same primary position in 2014. Thiswould make the required cumulative move in the Irish pri-mary position similar in size to what is needed in Greece.

The consequences of market pressureAs we saw with Greece earlier in the year, market pressurecan add significantly to the funding difficulties of sover-eigns and banks. However, in contrast to earlier in the year,the region is now well placed to provide liquidity support.The European Stabilization Mechanism set up in May,which comprises the European Financial StabilizationMechanism (€60 billion) and the European Financial Sta-bility Facility (€440 billion), can provide liquidity supportto sovereigns. In addition, the ECB can provide unlimitedliquidity support to banks.

While liquidity support would be available to the Irish sov-ereign if needed, it would likely involve an accelerated pro-gram of fiscal consolidation as part of the conditionality ofthe program. Alone among the peripheral sovereigns, Ire-land has not added any measures this year to those con-tained in the Stability Program. It is striking that Greece,which is in receipt of multilateral liquidity support, is en-gaging in a fiscal tightening this year that is over threetimes larger than the tightening in Ireland. Severe marketpressure and an accelerated fiscal consolidation would addsignificant downside risks to Irish economic growth. More-over, these would come on top of the severe recession thathas only just ended.

-10

-5

0

5

60

70

80

90

100

110

120

% of nominal GDP, both scalesIrish household debt and financial position

2003 2004 2005 2006 2007 2008 2009

Net lending/borrowing

Debt to GDP ratio

Sample

16

Economic ResearchUnited StatesSeptember 24, 2010

JPMorgan Chase Bank NA, New YorkRobert Mellman

United States• August durables report points to continued solid

growth in capital goods spending this quarter

• Home sales remain severely depressed in August;homebuilders see more of the same this month

• FOMC statement emphasizes that inflation is undesir-ably low, hints that LSAP is increasingly likely

Recent reports on durable goods orders and on home salesand housing starts helped to fill in the picture of economicperformance in August. The details of the durables reportwere stronger than expected and provide some assurancethat capital spending is continuing to expand at a solid clipthis quarter. But the news on housing remains gloomy.New and existing home sales remained severely depressedin August, and respondents to the September homebuilderssurvey report unchanged sales in September. Housing startsdid bounce 10.5% samr from extremely low levels in Au-gust, but with most of the improvement coming from multi-family activity. Industry sources indicate that the decline inhomeownership is starting to lift rental occupancy rates,and developers are beginning to increase supply.

The statement following the FOMC meeting reiterated twothemes from Chairman Bernanke’s Jackson Hole address:that inflation is undesirably low and that the Fed is preparedto embark on another program of large-scale asset purchases.Fed communication in advance of action has been influenc-ing financial markets in a substantial way, helping to raisemarket-based inflation expectations, drive down the value ofthe dollar, and support risk markets including equities evenin advance of Fed action. (See the research note “The Fedtalks and financial markets listen” in this GDW.)

The upcoming calendar includes August reports on incomeand consumption and on construction (both Friday). Earlyreports on September activity (also on Friday) are expectedto be mixed. Based partly on regional manufacturing surveysin hand, the ISM manufacturing survey (Friday) is expectedto decline 2.3 points to 54.0. Early industry guidance pointsto an increase in new car and light truck sales to 11.9 millionsaar this month from 11.4 million in August.

Durable growth for capital goodsIncoming durable goods orders declined 1.3%, but onlybecause of a 40.2% decline in orders for civilian aircraftand a 4.4% decline in orders for motor vehicles and partsthat reversed large increases in July. New orders excludingtransportation rebounded 2.0% in August and reinforced

other upbeat manufacturing indicators for August includingthe 56.3 reading for the ISM manufacturing survey and the0.5% increase in nonauto manufacturing production.

The most encouraging part of the durables report for growthprospects is the 1.6% increase in core capital goods ship-ments, accompanied by an upward revision to the July fig-ure (to 0.1% from -1.0%). More timely data still show thatthe trend in core capital goods shipments is slowing, from17.4% saar in 2Q10 to about 10% in the current quarter.But these shipments, key source data for the estimate ofspending on equipment and software in the GDP accounts,are tracking considerably stronger than seemed likely be-fore this report was released. The much more volatile serieson core capital orders rebounded 4.1% in August, but thisfollowed an even larger decline in July. Core capital goodsshipments have slowed to only about 2% saar growth so farin the quarter, hinting at a further moderation in growth ofshipments and equipment spending next quarter.

Housing slump drags on and on and onA good part of this past week’s economic calendar was de-voted to updates on housing including home sales, houseprices, and housing starts.

-60-45-30-15

0153045

%ch saar over 3 monthsCore capital goods shipments and new orders

2009 2010

New orders

Shipments

0.2

0.4

0.6

0.8

1.0

1.2

3.54.04.55.05.56.06.57.0

Mn units, saar, both scalesNew home sales and existing home sales

2006 2007 2008 2009 2010

New homes Existing homes

Sample


17

JPMorgan Chase Bank NA, New YorkRobert Mellman

Home sales still severely depressed: Declining mortgagerates have not done much to revive home sales, and bothnew and existing home sales for August were at severelydepressed levels.

Existing home sales did manage to rebound 7.6% in August,but this seemingly encouraging report followed a 27.0% de-cline the month before. The August level of existing homesales, 4.13 million at an annual rate, was 17.8% below thedepressed average pace in 2008-2009 and was 22.9% belowthe average pace in the first half of this year that had re-flected some benefit from the homebuyer tax credit. Indeed,August home sales were the second lowest (next to July) ofany month in the history of this series dating back to 1999.And single-family existing home sales were the second low-est (next to July) for any month since 1995.

New home sales, which are based on contracts signedrather than closings, provide more timely information. Andnew home sales for August were also severely depressed.Sales of 288,000 at an annual rate were unchanged fromJuly and not much above May’s 282,000 reading that hadbeen the lowest in a series dating back to 1963.

More timely readings on housing demand were also down-beat. The September homebuilders survey was unchanged at13, the lowest reading since March 2009. And mortgage pur-chase applications fell for the second consecutive week. Theaverage level of purchase applications so far this month is upfrom the low June-July levels, but not by much.

2H sag in house prices: The FHFA measure of nationalhouse prices has recently followed patterns of demand thatwere influenced by the homebuyer tax credit. The FHFAmeasure rose 1.5% in the three months through May whensales were being pulled forward by the tax credit, andprices declined a downwardly revised 1.2% in June and0.5% in July when sales were depressed following the ex-piration of the tax credit. Through the first seven months ofthe year, the FHFA measure of house prices is down 0.9%,consistent with the forecast of a modest decline in houseprices over the whole year. The more closely followedCase-Shiller house price measure (released Tuesday) in-creased 1.4% in the first half of the year. But the forecastlooks for the falloff in demand following the expiration ofthe tax credit to lead to declines in this index starting inJuly and for a 4Q10 reading that is -2.1%oya.

Mixed news on starts: August housing starts surprised byrebounding 10.5% in August, with details of the reportshowing very different recent trends in the single-familyand the multifamily segments of the markets. Single-family

-30

-20

-10

0

10

20

%ch saar over 6 monthsTwo measures of house prices

2005 2006 2007 2008 2009 2010

Case-Shiller 20-city indexFHFA purchase-only

index

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.05

0.10

0.15

0.20

0.25

Mn units, saar, both scalesHousing starts

2009 2010

Multifamily

Single family

starts, accounting for almost 80% of the total, increased4.3% in August, but this gain recaptures only a small partof the cumulative 25.4% decline between April and July.The August gain looks like an outlier in a still-weakeningtrend. Single-family permits fell 1.2%, the fifth consecutivemonthly decline, and are at a level below starts. And, asnoted, the homebuilders survey indicates that industry par-ticipants remain exceedingly gloomy about sales prospects.

Multifamily starts, in contrast, are on an improving trendfrom an extremely low level at the beginning of the year.Multifamily starts increased 36.0% in July and another32.2% in August to a level nearly double the average pacein 4Q09-1Q10. Moreover, industry analysts look for fur-ther gains ahead from levels that are still considered to beextremely low. The REIS survey shows modest declines inapartment vacancy rates and modest increases in rentsthrough the first half of the year, and industry sources indi-cate that these trends are continuing this quarter. (Resultsare different from readings on rents and vacancy rates inofficial data in part because the REIS sample tends, on av-erage, to be at the higher end.) To be sure, gains in multi-family housing from these levels will not do much to boostGDP since new multifamily construction comprises a mi-nuscule share, less than 0.2%, of the overall economy.

Sample

18



Daniel Silver

Data releases and forecastsWeek of September 27 - October 1

Tue S&P/Case-Shiller home price indexSep 28 %oya, unless noted9:00am Apr May Jun Jul

20-city composite 3.8 4.6 4.2 2.9 %m/m, sa 0.6 0.5 0.3 -0.4 10-city composite 4.6 5.4 5.0We expect the Case-Shiller 20-city home price index todecline 0.4% in July (+2.9%oya). House prices werelifted earlier in the year when home buying was stimu-lated by the homebuyer tax credit, but have come downsince its expiration. The Case-Shiller index is calculatedas a three-month moving average and will thereforeincorporate data from May, June, and July in the forth-coming release. Data that have been reported alreadyindicate that house prices have dropped in June andJuly. The LoanPerformance home price index, which isalso a three-month moving average, declined in Julywhen including distressed sales (the Case-Shiller datawill also incorporate distressed sales, assuming thatthey meet the sample’s other requirements). The FHFAhouse price index, which is a monthly index, showedhouse prices declining in both June and July.

Tue Consumer confidenceSep 28 Sa10:00am Jun Jul Aug Sep

Conference Bd index 54.3 51.0 53.5 54.0Present situation 26.8 26.4 24.9 Jobs plentiful 4.3 4.4 3.8 Jobs hard to get 43.5 45.1 45.7 Plentiful less hard-to-get -39.2 -40.7 -41.9Expectations 72.7 67.5 72.5We expect the Conference Board measure of consumerconfidence to edge up 0.5pt to 54.0 in September. Thepreliminary September consumer sentiment measurereported by the University of Michigan dropped 2.3ptsto 66.6 and the two indexes generally move in the samedirection each month. That being said, the ConferenceBoard survey has two questions specifically on the jobmarket while the Michigan survey has none. Since the

recent data on jobless claims have been relatively en-couraging compared to August, we think the Confer-ence Board index should improve despite the declinealready reported in the University of Michigan survey.

Thu Jobless claimsSep 30 000s, sa8:30am New claims (wr.) Continuing claims Insured

Wkly 4-wk avg Wkly 4-wk avg Jobless,%

Jul 17¹ 468 457 4568 4549 3.6Jul 24 460 453 4570 4583 3.6Jul 31 482 459 4491 4528 3.5Aug 7 488 475 4515 4536 3.6Aug 14¹ 504 484 4479 4514 3.5Aug 21 478 488 4479 4491 3.5Aug 28 478 487 4573 4512 3.6Sep 4 457 479 4537 4517 3.6Sep 11 453 467 4489 4520 3.5Sep 18¹ 465 463Sep 25 460 4591. Payroll survey weekWe forecast initial jobless claims to decline 5,000 to460,000 for the week ending September 25. In the priorweek, initial claims increased 12,000 to 465,000, whichis in line with the four-week moving average for thatweek, but above the weekly levels in the previous twoweeks. We think claims should return to the lower lev-els in the forthcoming report.Continuing claims fell 48,000 to 4.489 million for theweek ending September 11. There was a significantupward revision to the prior week’s data from 4.485million to 4.537 million. The weekly data have beenvolatile, but the four-week moving average was basi-cally unchanged at 4.520 million. Continuing claimshave been declining very gradually throughout the year.The insured unemployment rate for the same weekedged down from 3.6% to 3.5%, on the low end of therange seen throughout the year.

-20-15-10

-505

10152025

%oy a

Case-Shiller monthly home price indices

10-city composite

20-city composite

88 93 98 03 08

0

50

100

150

Index , sa

Conference Board consumer confidence

78 83 88 93 98 03 08

Sample


19


Daniel Silver

Thu Gross domestic productSep 30 %ch, q/q, saar, unless noted8:30am Adv Second Third

1Q10 2Q10 2Q10 2Q10

Real GDP 3.7 2.4 1.6 1.7Final sales 1.1 1.3 1.0 0.9Domestic final sales 1.3 4.1 4.3 4.2Consumption 1.9 1.6 2.0 2.0Equip. and software 20.5 21.9 24.9 24.9Nonres. structures -17.8 5.1 0.4 -2.6Residential investment -12.3 27.8 27.1 25.8Government -1.6 4.4 4.3 4.3Net exports (pct.pt.contr.) -0.3 -2.8 -3.4 -3.3Inventories (pct.pt.contr.) 2.6 1.0 0.6 0.8Core PCE price index 1.2 1.1 1.1(%oya) 1.8 1.5 1.5GDP chain price index 1.0 1.8 1.9(%oya) 0.5 0.8 0.8Adj. corporate profits 10.5 4.6(%oya) 37.6 39.2

Annualized real GDP growth for 2Q10 should be re-vised up 0.1%-pt to 1.7% in the third release. The Junegoods trade balance was revised up slightly, whichshould add less than 0.1%-pt to GDP growth, and up-ward revisions to retail and wholesale inventoriesshould also contribute just under 0.2%-pt. We expectdownward revisions to residential investment and non-residential structures based on reported revisions toconstruction spending data, which should partially off-set these increases.

Fri Personal incomeOct 1 %m/m sa, unless noted8:30am May Jun Jul Aug

Personal income 0.3 0.0 0.2 0.3 Wages & salaries 0.4 -0.1 0.3 0.4Consumption 0.1 0.0 0.4 0.3Real consumption 0.2 0.1 0.2 0.2PCE price index -0.1 -0.1 0.2 0.2 Core 0.11 0.04 0.11 0.04 Mkt-Based Core 0.1 0.1 0.1 Core (%oya) 1.5 1.4 1.4 1.3 Mkt-Based Core (%oya) 1.1 1.1 1.1Saving rate 6.1 6.2 5.9 5.9

We expect personal income to increase 0.3% in August,which is a slight acceleration from the 0.2% rise inJuly. This increase should be mostly attributable togrowth in private wages and salaries reflecting an al-ready reported 0.2% increase in average hourly earn-ings and a 0.3% increase in average weekly hoursworked for the private nonfarm sector. We anticipate aslight decline in government wages and salaries in Au-gust, similar to changes in recent months.The core PCE price index should only increase 0.04%(+1.3%oya) in August since we have seen the prices ofmost core goods remain relatively stable in already-reported data. The prices of gasoline and other energyproducts posted solid gains in August, however, so weexpect the headline PCE price index to increase 0.2%.We project real consumer spending to increase 0.2% inline with the modest growth reported over the past threemonths. Control retail sales popped up 0.8% in August,but lower spending on vehicles and utilities should reinin the expansion of consumer spending. We expectnominal spending to increase 0.3% with a slight liftfrom prices.

200

300

400

500

600

700

000s, sa

Initial jobless claims

2007 2008 2009 2010

-10

-5

0

5

10

%q/q, saar

Real GDP and real gross domestic income (GDI)

Real GDI

Real GDP

98 00 02 04 06 08 10

-10

-5

0

5

10

%oy a

Personal income and wage and salary dispursements

00 02 04 06 08 10

Personal income

Wage and salary disbursements

Sample

20



Daniel Silver

Fri Consumer sentimentOct 1 Pre Fin9:55am Jul Aug Sep Sep

Univ. of Mich. Index (nsa) 67.8 68.9 66.6 67.0 Current conditions 76.5 78.3 78.4 Expectations 62.3 62.9 59.1Inflation expectations Short-term 2.7 2.7 2.2 Long term 2.9 2.8 2.8Home buying conditions 152.0 154.0 147.0The University of Michigan’s measure of consumersentiment showed a disappointing drop from 68.9 to66.6 in the preliminary September data. This declineoccurred even though equity markets have performedwell throughout September and the data on joblessclaims have been relatively encouraging lately.We expect some of this decline to be undone in the fi-nal September reading with a final reading of 67.0 forthe month; this would be an increase of 0.4pt from thepreliminary reading and would reduce the decline fromAugust to 1.9pts. Recently, the sentiment index hasshown a tendency to print higher in final readings thanin preliminary ones. Sentiment may also be helped byequity markets, which have continued to improve sincethe preliminary data were released.

Fri ISM manufacturing surveyOct 1 Sa10:00am Jun Jul Aug Sep

Overall index 56.2 55.5 56.3 54.0 Production 61.4 57.0 59.9 New orders 58.5 53.5 53.1 Inventories 45.8 50.2 51.4 Employment 57.8 58.6 60.4 Supplier deliveries 57.3 58.3 56.6 Export orders 56.0 56.5 55.5 Imports 56.5 52.5 56.5 Prices 57.0 57.5 61.5

The August ISM manufacturing index posted a surpris-ing 0.8pt gain to 56.3; most of the regional manufactur-ing surveys reported prior to its release had shownslowing manufacturing activity. The two Septemberregional surveys that are currently available both

showed slight increases in their ISM-weighted compos-ites: the Empire State survey’s composite increasedfrom 50.3 to 50.9 while the Philadelphia Fed survey’scomposite increased from 46.3 to 46.6. Both compos-ites are currently running below the ISM index; this hasbeen the trend for some time for the Philadelphia Fedcomposite but a more recent development in the lasttwo months of data for the Empire State composite.We expect the ISM manufacturing index to fall 2.3pts to54.0 in September; the regional surveys have indicatedweaker manufacturing activity than the recent ISM data,and the orders-inventories gap narrowed but remainedpositive in last month’s ISM data. This forecast wouldstill indicate increasing manufacturing activity, butwould be the lowest reading since November 2009.

Fri Construction spendingOct 1 %m/m sa10:00am May Jun Jul Aug

Nominal -2.8 -0.8 -1.0 -0.6Private -3.6 -1.6 -0.8 -1.8 Residential -4.7 -2.0 -2.6 -3.9 Nonresidential -2.5 -1.2 0.8 0.2Public -1.4 0.6 -1.2 1.3Declines in private residential construction spendinghave driven total construction spending down in each ofthe past three months, and we expect this trend to con-tinue into August. We look for an overall decline of0.6% due to a 3.9% decline in private residential con-struction spending. Data in hand on housing starts andnew home prices suggest that construction spending onnew single-family homes will decline for the fourthstraight month following the April 30 deadline associ-ated with the homebuyer tax credit. We expect to see amuch less significant decline in multifamily construc-tion spending than the recent norm. Construction spend-ing on multifamily homes has declined in each of thepast 22 months but the recent pickup in multifamilyhousing starts suggests that the August data may im-prove marginally.We forecast a 0.2% increase in private nonresidentialconstruction spending and a 1.3% increase in public con-struction spending since employment rose in those indus-tries in August.

40

60

80

100

120

Index

Michigan consumer sentiment

80 85 90 95 00 05 10

30

40

50

60

70

Index , sa

ISM mfg index vs Empire State ISM-weighted composite

00 02 04 06 08 10

ISM manufacturing index

Empire State ISM-weighted composite

Sample


21


Daniel Silver

Review of past week’s data

Homebuilders survey (Sep 20)Sa

Jul Aug Sep

Housing market 14 13 15 13 Present sales 15 14 13 13 Prospective buyer traffic 10 10 9

The National Association of Home Builders Housing MarketIndex was unchanged at 13 in September. This is a bit of adisappointment since there had been slight improvements inboth pending home sales and mortgage purchase applica-tions. The NAHB reported that builder confidence remainedat a low level as consumers remained reluctant to buy housesamid uncertainty over jobs, and the a large amount of fore-closed properties available for sale affected new home build-ing.

The details of the survey were little changed as well. Themeasure of current sales held at 13 and the measure of salesexpectations remained at 18. The index of prospective buyertraffic edged down from 10 to 9.

The HMI fell 2pts in the Northeast (to 16) and fell 3pts inthe Midwest (to 12). The index for the South increased 2ptsto 14 while the index for the West held steady at 8.

Housing starts (Sep 21)Mn units, saar

Jun Jul Aug

Starts 0.54 0.55 0.54 0.53 0.60 Single-family starts 0.45 0.43 0.42 0.41 0.44 Multifamily starts 0.09 0.11 0.12 0.12 0.16 Permits 0.58 0.56 0.56 0.57

Housing starts increased 10.5% in August to an annualizedrate of 598,000, largely due to strong 32.2% growth in mul-tifamily starts. This is the second straight month in which asignificant increase in multifamily starts has boosted theheadline starts number. Single-family starts increased in Au-gust as well, although growth was a more modest 4.3%.Single-family starts remain at a low level of 438,000 saar.Even though single-family starts moved in the right direc-tion, there is still weakness evident in the single-family data.Single-family permits fell 1.2% to an annualized rate of401,000 which is the fifth straight monthly decline. Thelevel of starts relative to permits indicates that this rise inhousing starts may not be sustained.

It is clear that housing construction remains depressed afterbeing stimulated earlier in the year by the home buyer taxcredit. Single-family starts have dropped 48% saar so far in3Q10—they had increased 33% in 1Q and dropped 23% in2Q. Single-family permits have fallen 39% saar in 3Q—permits had increased 30% in 1Q and dropped 47% in 2Q.

Overall permits increased 1.8% in August on a gain in multi-family permits. Multifamily permits are volatile and in-creased 9.8% in August after falling 5.6% in July.

FHFA home price indexes (Sep 22)Purchase-only

May Jun Jul

%oya -1.3 -1.2 -1.6 -2.5 -1.3 -3.2 %m/m (sa) 0.4 0.5 -0.3 -1.2 -0.2 -0.5

House prices fell 0.5% in July, according to the FederalHousing Finance Authority’s House Price Index. The Juneindex was revised downward from a 0.3% decline to asteeper 1.2% drop. While the index has shown a trend ofdownward revisions to the prior month’s data over the pastyear, the 0.9%-pt revision to the June data was larger thannormal. Over the past 12 months, the index has been reviseddown nine times, revised up once, and not revised twice.The HPI has fallen 3.3%oya and is down 13.8% below theindex’s peak in April 2007. The July FHFA was the firstlook at house prices without the effects of the end of thehome buyer tax credit and shows weakness lasting beyondthe initial drop off in house prices (the LoanPerformancehousing price data, already reported for July, is calculated asa three-month moving average).

Most regions in the survey showed lower house prices forthe month, with declines ranging from -0.1% (New England)to -1.6% (South Atlantic). The exceptions were the Pacificregion, which posted a decent 1.1% monthly increase, andsmaller gains in the Middle Atlantic and East South Centralregions.

Fri Motor vehicle salesOct 1 Mn, saar

Jun Jul Aug Sep

Light trucks and autos 11.1 11.5 11.4 11.9Imports 2.6 2.7 2.9 Domestics 8.6 8.8 8.6 Autos 3.8 3.8 3.7 Light trucks 4.8 5.0 4.8

We project light vehicle sales of 11.9 million units saarfor September. This forecasted level of sales would bean increase of 4.0% from August and would be on thehigh end of the range seen since March. Mostcarmakers have indicated that sales volumes were par-ticularly strong around the Labor Day weekend.

-100

-75

-50

-25

0

25

50

%ch saar

Private new residential construction put in place

01 03 05 07 09

Over year ago

Over 3 months

Sample

22



Daniel Silver

Existing home sales (Sep 23)Jun Jul Aug

Total (mn, saar) 5.26 3.83 3.84 4.15 4.13 %m/m -7.1 -27.2 -27.0 8.4 7.6 %oya nsa 6.5 -26.9 -26.5 -18.6 -17.0 Months’ supply (nsa) 8.9 12.5 11.6 Single-family 8.6 11.9 11.3 Median price (%oya) 0.7 0.7 0.4 0.8

Existing home sales increased 7.6% in August to an annual-ized rate of 4.13 million. This increase offers some relieffrom the steep 27.0% decline in July which came as saleswere pulled forward out of July into June leading up to theinitially-scheduled June 30 expiration of the home buyer taxcredit. However, sales remain at a very low level; throughAugust, existing home sales are down 80% saar in 3Q10.The monthly increase in August was balanced betweensingle-family homes (+7.4%) and condos/co-ops (+8.5%)and between the four reported regions.

The months supply decreased from 12.5 to 11.6 in August.Most of this decline was due to condos/co-ops, which fellfrom 17.3 to 13.9, while the decline in single-family homeswas more modest.

It is encouraging to see the prices of existing home saleshold up. The median price increased 0.8%oya and the aver-age price increased 2.9%oya, though prices were mixed re-gionally. On a year-ago basis, the median price increasedin the Northeast (+7.6%oya) and the Midwest (+0.4%oya);the median price fell in the South (-1.5%oya) and the West(-2.5%oya).

Durable goods (Sep 24)%m/m sa

Jun Jul Aug

New orders -0.2 0.4 0.7 -1.6 -1.3 Ex transportation 0.2 -3.7 -2.8 1.4 2.0 Nondef cap. gds ex air 3.6 -7.2 -5.3 3.1 4.1 Shipments 0.2 2.3 2.5 -0.6 -1.5 Nondef cap. gds ex air 0.9 -1.0 0.1 0.9 1.6 Inventories 1.2 0.6 0.4

New orders of durable goods fell 1.3% in August, as thebump up in aircraft and motor vehicle orders in July wasreversed. Excluding transportation equipment, orders rose asolid 2.0%. The core capital goods category (excluding air-craft and defense equipment) saw a nice 4.1% increase inorders last month, and there was a significant upward revi-sion to July core capital good orders, from -8.0% to -5.3%.Core capital good shipments also registered a decent gain of1.6% with upward revisions to July. After the initial releaseof the July data, this report comes as a relieving indicationthat the deceleration in capital spending growth is happeninggradually. To be sure, even with this report, capital spendinggrowth is slowing from the heady pace registered earlier inthe year, but it is not falling off a cliff.

Core capital good shipments, an input in the estimation ofreal capital equipment spending in GDP, is increasing at a10% annual rate so far in 3Q10, following a 17% increase in2Q and 12% in 1Q. Core capital good orders are up at a 2%

pace in 3Q, down from the 31% rate of increase in 2Q and15% pace in 1Q. Durable goods manufacturers increasedinventories $1.3 billion last month, down from the peakmonthly accumulation of $3.8 billion in June. All in, we arestill tracking pretty close to a 1.5% growth rate for real GDPin 3Q, with a little better mix of inventories and final sales.

New home sales (Sep 24)Jun Jul Aug

Total (000s,saar) 315 312 276 288 310 288 %m/m 12.1 10.6 -12.4 -7.7 12.3 0.0 %oya nsa -21.6 -34.2 -28.9 -23.5 -30.6 Months’ supply 8.0 8.1 9.1 8.7 8.6 Median price (%oya) 1.1 1.5 -4.8 -3.9 -1.2

The number of new homes sold remained at a very low levelin August, with reported single-family home sales of only288,000 saar. This is unchanged from level reported for July,which was revised 12,000 units higher than previously re-ported. The level of sales in August is only 2.1% above theall-time low for the series, reported in May, and shows per-sistent weakness following the drop off in sales after theexpiration of the home buyer tax credit.

The monthly changes in new home sales were mixed acrossthe regions, but sales remain depressed in general. Sales inthe South, which is by far the largest region by volume, fell10.8% in August. Sales also fell 26.0% in the Midwest, butincreased 16.7% in the Northeast and 54.4% in the West.

The months’ supply of new homes stayed at a high level, butdecreased slightly from 8.7 to 8.6 in August. Inventoriescontinue to push lower, with 206,000 single-family housesfor sale in August, down from 209,000 in July.

There was some improvement in the price data in Augustrelative to July. In August, the median price was down1.2%oya after being down 3.9%oya in July. The averageprice was down 3.5%oya after being down 9.9%oya in July.

Sample


23

JPMorgan Chase Bank NA, New YorkDaniel Silver

Focus: durable goods arehanging in• Total orders of durable goods have decreased slightly so

far in 3Q10 after five consecutive quarters of growth.The strong pace of growth in shipments of durable goodshas slowed a bit so far in 3Q to 8.0% saar, which is morethan 2%-pts below the average growth over the priorfour quarters.

• There has been a deceleration in the growth of shipmentsof core capital goods (source data for the GDP estimate)through the first two months of 3Q, though the pace ofexpansion is still tracking a solid 10.3% saar. Readingson new orders of core capital goods have been verychoppy, but are up 2.1% saar so far in 3Q.

• The transportation components of the durable goods re-port fell in August following a very strong July. For thethree months through August, new orders are down 3.9%saar and shipments are up 19.9% saar.

• Both orders and shipments of defense capital goods havebeen weak for the past six months, an unusually long pe-riod of weakness for this category.

• Inventories of durable goods continue to grow at a solidclip, although growth has slowed since June. Inventoriesof durable goods increased 9.3% saar in the three monthsthrough August.

-100-50

050

100150200

%ch ov er 3 months, saar

Transportation equipment orders and shipments

2005 2006 2007 2008 2009 2010

New orders

Shipments

-200

0

200

400

600

800


Defense capital goods orders and shipments

2007 2008 2009 2010

New ordersShipments

-30

-20

-10

0

10

20


Durable goods inventories

01 03 05 07 09

Ex. transportation

-60-40-20

0204060


Core capital goods orders and shipments

2005 2006 2007 2008 2009 2010

New orders

Shipments

-60-40-20

0204060


Durable goods orders and shipments

2005 2006 2007 2008 2009 2010

New orders

Shipments

Sample

24

Economic ResearchEuro areaSeptember 24, 2010

JPMorgan Chase Bank, LondonNicola Mai

David Mackie

Euro area• Euro area PMI fell sharply in September...

• ...but is still broadly in line with our growth forecast

We were expecting a gradual descent in the PMI in Sep-tember, so the sharp decline raises the question of whetherthe economy is slowing by more than our forecast currentlyassumes. It is, of course, possible, but the PMI does notnecessarily signal that. We have highlighted that the PMIhas been running somewhat ahead of our growth forecast,and that it would need to drop abruptly at some stage inorder to be in line with where we thought GDP would be atthe end of the year. A composite PMI of 53.8 is consistentwith a GDP gain of around 2% ar, which is our estimate forthe third quarter. The composite PMI should be around51.0 to be consistent with our GDP forecast of 1% ar in thefourth quarter. It may simply be that the decline in the PMIis occurring earlier than anticipated, but that the trough willbe at the same level as we have always assumed.

The declines were particularly sharp in Germany, with themanufacturing PMI down 2.9pts and the service PMI down2.6pts. Within manufacturing, the output component inGermany fell a very sharp 5.5pts. In France, manufacturingactually rose slightly, while services were down 1.6pts.Given developments in Germany and France, it looks likethe PMIs in the rest of the region fell on average by thesame amount as did the Euro area aggregate. This suggeststhat the region is downshifting in a broad-based way, andthe regional divergences are not getting larger.

One striking divergence is between the national business sur-veys in September and the PMI, with the former holdingsteady. In Germany, the sharp fall in the manufacturing PMIstands in contrast to the sideways move in the manufacturingbusiness climate index in the IFO survey (albeit with a moveup in current conditions offset by a decline in expectations).In the past, we have interpreted differences between the PMIand the IFO survey by highlighting that the former is moreinfluenced by current activity and the latter is more influ-enced by broader business health. To the extent that this istrue, recent developments may be encouraging, but it isprobably too early to draw a strong conclusion. Also strikingin the IFO survey is the ongoing strength of the retail com-ponent, which moved up again in September adding to theimpression of an improving household sector.

Our story for Euro area growth is that it moves broadly inline with global growth, albeit with a short lag: a first yearof recovery with growth slightly above potential, to be fol-lowed by a soft patch lasting six to nine months, and then

an eventual reacceleration to above-potential growth start-ing next spring or early summer. There is nothing in therecent data to make us doubt this story.

Budgetary slippage continues in PortugalIn the first eight months of the year, the central governmentdeficit in Portugal was €9.2 billion, compared with a deficitof €8.7 billion in the same period a year earlier. Relative tothe government’s budgetary plans, there was slippage onboth revenues and primary expenditures. In the first eightmonths of the year, revenue growth was 1.8%, comparedwith the budgetary objective of 3.3%, while primary ex-penditure growth was 4.1%, compared with the budgetaryobjective of 1.9%.

The government’s objective for the general governmentdeficit is an improvement from 9.4% of GDP last year to7.3% of GDP this year. Given the developments in the cen-tral government’s finances through August, this objectivemay not be met. There is some speculation that the Portu-guese government will announce additional measures, al-though there is little time left for them to have much impactthis year. More likely, to the extent that this year’s deficitfalls short of the government’s objective, further tighteningis likely to be announced for next year. The Portuguese 2011budget is due to be announced in October, and the budget-ary objective for next year is a deficit of 4.6% of GDP.

60

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80

90

100

110

120

20

40

60

IndexGerman manufacturing indicators

Index

2006 2007 2008 2009 2010

Expectations

CurrentPMI output

3035404550556065

DI, sa, box shows PMI consistent with 1%q/q saar GDP in 4Q10Euro area composite PMI output

00 02 04 06 08 10

Year-end marker for PMI

Sample


25


Greg Fuzesi

Irish GDP contracts in 2Q10Irish GDP fell 4.8%q/q saar in 2Q10. Given the extremenoise in the data, it is difficult to say what the underlyingtrend is: Irish GDP fell 9.7% ar in 4Q09, rose 9.3% ar in1Q10, and fell 4.8% ar in 2Q10. Most likely, the economy isexpanding again, but this impression is coming more fromthe monthly data than from the quarterly GDP readings.Indeed, the monthly data in the third quarter look particu-larly buoyant. The level of IP and exports in July were both40% ar above the 2Q average, and both indicators are al-ready well above the pre-recession peak. So, even thoughthe Irish PMI has been moderating since June, and stood at52.2 in August, it was still consistent with some expansion.Our tracking model did not quite catch the second-quartercontraction, but is looking for a more robust third quarter.

Consumption fell 0.9% ar in the second quarter, continuing avery weak run: in the past 10 quarters, consumption has con-tracted in eight of them and the level in the second quarterwas 10.4% below the previous cyclical peak. Meanwhile,investment spending rebounded by 54.8% ar in the secondquarter. This is a very impressive bounce, although it is alsoa very noisy series. The level of investment spending is still54.1% below the previous cyclical peak.

German retail sales better than thoughtUntil mid-August, it looked as if German retail sales weretrending sideways. But, in mid-August, the German statis-tics office made some improvements to the representative-ness and size of the sample, with the revised data showinga steady upward trend from mid-2009 onward. This ap-peared more consistent with other indicators, such as theretail IFO, which has risen to the highest level since theGerman reunification boom in the early 1990s.

The preliminary retail sales report for July left this upwardtrend in place, but showed 3Q getting off to a relatively softstart. This is no longer the case. Instead, the regular mid-month revision, which incorporated late responses from re-tailers (up to 25% of the sample), now shows the July levelof retail spending 2.1% ar above the 2Q average. With carregistrations having reached a floor after the expiry of thecar scrappage incentive and consumer confidence muchstronger, total consumer spending is tracking a very solidincrease of 2.5% ar so far in 3Q. Given that spending alreadyrose 2.3% ar in 2Q, this would be the largest half-year gainsince mid-2001 (ignoring the VAT-induced bounce in late2006). These data support our view that German domesticdemand can improve, even if growth in industry slows asexpected after the record gains in 2Q10.

94

96

98

100

102

Index, volumeGerman retail sales revisions

2008 2009 2010

Latest

Pre-revision data

Two weeks ago

40

60

80

100

120

1Q06=100Irish GDP

2006 2007 2008 2009 2010

Capex

GDP

Consumer spending

Exports

-20

-10

0

10

20

%q/q saar, shaded band shows range of estimates using individual indicatorsTracking Irish GDP

00 02 04 06 08 10

Actual

Main tracking estimate

-10

-5

0

5

10

%q/q saar, model uses retail sales, car registrations, and cons. confidenceTracking German consumer spending with monthly data

94 96 98 00 02 04 06 08 10

Consumption

Tracking model

3Q10 tracking

Sample

26

Economic ResearchEuro areaSeptember 24 2010


Nicola Mai

Data releases and forecastsWeek of September 27 - October 1Output and surveys

Purchasing managers index final (manufacturing)Index, sa

Jun Jul Aug SepFri Euro areaOct 1 Overall region 55.6 56.7 55.1 53.610:00am9:55am Germany 58.4 61.2 58.2 55.39:50am France 54.8 53.9 55.1 55.49:45am Italy 54.3 54.4 52.8 51.39:15am Spain 51.2 51.6 51.2 49.7

Judging by the areawide, German, and French moves,the decline in the manufacturing PMI in the region out-side Germany and France was broadly in line with the1.5pt drop seen in the Euro area itself.

European Commission surveyPercent balance of responses, sa

Jun Jul Aug SepWed Euro areaSep 29 Industrial confidence -6 -4 -4 -411:00am Economic confidence 98.9 101.1 101.8 101.8

Recent production trend 7 10 10 __Production expectations 9 9 8 __Export order books -25 -21 -18 __Stocks of finished products 1 0 1 __Selling-price expectations 6 5 6 __Construction confidence -30 -29 -29 __Retail confidence -6 -4 -4 __Service confidence 4 7 7 __

Developments in the national business surveys suggestthat the EC survey will move sideways in September.This would be a sharp contrast to the decline in the PMIsurvey. To some extent, this may simply reflect a lag inthe response of the national business surveys to themoderation in growth. But, it may also reflect the factthat the PMI is influenced more by current output whilethe national surveys are influenced more by broaderbusiness health.

National business surveysJun Jul Aug Sep

Wed Italy (ISAE survey)Sep 29 2000=100, sa9:30am Producer confidence 96.2 98.3 100.5 __

Demand and labor marketsRetail salesTotal sales, volumes

May Jun Jul AugFri GermanyOct 1 Sales ex autos and petroleum, volumes8:00am %m/m sa 1.6 0.1 -0.1 0.3

%oya sa 2.0 3.1 1.1 3.2

Most indicators suggest that the German household sec-tor is spending relatively robustly. For example, theIFO retail component moved up further in September tothe highest reading seen since the end of 1991. If ourforecast of a small increase in August is correct, retailsales in July and August will have been up 2.7% ar overthe second-quarter average.

UnemploymentSa

May Jun Jul AugFri Euro areaOct 1 Harmonized measure (Eurostat)11:00am Unemployment rate (%) 10.0 10.0 10.0 10.0

Jun Jul Aug SepThu GermanySep 30 Registered (ch m/m, 000s, sa) -22 -21 -17 -159:55am 000s, nsa 3153 3192 3188 __

Unempl. rate (%, sa) 7.7 7.6 7.6 7.5

EmploymentMay Jun Jul Aug

Thu GermanySep 30 Change m/m, 000s, sa 32 26 13 109:55am

In recent months, the level of German unemploymenthas continued to fall and the level of employment andvacancies has continued to rise. We expect further im-provements in the September report. Important to watchwill be the pace of improvement. This appears to haveslowed somewhat since the spring, although we wouldnote that there has been an important rotation beneaththe headline figures. For example, the gains in employ-ment are no longer just in part time, but increasingly infull time as well, and the reliance on public sector jobcreation to produce overall improvements in the labormarket has also fallen recently. In addition, hoursworked per employee has recovered strongly, allowingusage of the government’s short-time work scheme tofall to less than a third of its peak, without there havingbeen a rotation into unemployment. Monthly data onhours worked per employee are not available, however.

We expect the Euro area unemployment rate to haveremained unchanged at 10.0%, for the sixth consecutive

Sample


27

JPMorgan Chase Bank, LondonGreg Fuzesi

month. In last month’s report, the number of unem-ployed actually nudged lower, by 8,000, for the firsttime in this recovery (although Greek and Dutch datahad not yet been incorporated for July). At the countrylevel, German data stand out, but unemployment tickeddown for the first time in July in other core countries aswell. Despite weaker growth in the periphery, the paceat which unemployment there is rising has not intensi-fied recently. Instead, there appears to have been an-other slight improvement in Spain and Portugal.

Consumer confidenceJun Jul Aug Sep

Wed Euro area (European Commission survey)Sep 29 Percent balance of responses, sa11:00am Consumer confidence (final) -17 -14 -11 -11

Domestic consumptionMay Jun Jul Aug

Tue FranceSep 28 Consumption of manufactured products, real terms8:45am %m/m sa 0.6 -1.4 __ __

%oya sa 1.9 -1.9 __ __

InflationConsumer prices

Thu Jun Jul Aug SepSep 30 Euro area (flash)11:00am HICP (%oya nsa) 1.4 1.7 1.6 1.7Tue Germany (prelim)Sep 28 %m/m nsa 0.1 0.3 0.0 -0.28:00am %oya 0.9 1.2 1.0 1.2

HICP (%oya) 0.8 1.2 1.0 1.2Baden Wuerttemberg (%oya) 1.0 1.3 0.9 1.1Bavaria (%oya) 0.9 1.2 1.1 1.5Brandenburg (%oya) 0.8 1.1 1.0 1.1Hesse (%oya) 0.5 0.9 0.7 1.0North-Rhine West (%oya) 0.7 1.1 1.0 1.1Saxony (%oya) 1.0 1.2 1.1 1.2

Thu Italy (prelim)Sep 30 %m/m nsa 0.0 0.4 0.2 -0.211:00am %oya nsa 1.3 1.7 1.6 1.6

HICP (%oya nsa) 1.5 1.8 1.8 1.6Wed Spain (flash)Sep 29 HICP (%oya nsa) 1.5 1.9 1.8 __9:00amTue Belgium CPISep 28 %m/m nsa 0.0 0.0 0.1 __11:15am %oya nsa 2.5 2.6 2.3 __

We expect the German preliminary CPI release to showthat inflation rose two-tenths, to 1.2%oya in Septemberfrom 1%oya in August. No details will be publishedwith the preliminary CPI, although some informationwill be available from releases from the six states. Inour forecast, core inflation (measured by CPI ex. foodand energy) rose slightly in September, to 0.7%oyafrom 0.6%, but we do not expect this to be the start of

an upward trend. Meanwhile, food price inflation likelyincreased, to 3%oya from 2.8%, as did energy inflation,to 4.3%oya from 2.5% in September.The Euro area flash HICP release will likely show thatinflation edged up one-tenth, to 1.7%oya, in September.No details will be published with the release, and wewill need to wait for the final print to get a more com-plete picture. In our view, the rise in inflation in Sep-tember was driven largely by a base effect in energyprices, while core inflation was likely stable at 1%oya.

Producer pricesMay Jun Jul Aug

Thu FranceSep 30 %m/m nsa -0.1 0.0 __ __8:45am %oya nsa 4.2 3.5 __ __Wed ItalySep 29 %m/m nsa 0.6 0.3 -0.1 __10:00am %oya nsa 3.7 3.5 3.9 __

Financial activity and public financeMoney and credit data

May Jun Jul AugMon Euro areaSep 27 M3 (%m/m sa) -0.2 0.3 0.1 0.210:00am M3 (%oya) 0.0 0.2 0.2 0.4

M3 (%oya 3mma) -0.1 0.0 0.1 0.2Private loans (%oya) 0.2 0.5 0.9 ___

The money and bank credit data were slightly mixed inJuly. The aggregate banking system balance sheet fellfor the second consecutive month, with external assetsand interbank loans accounting for most of this. In con-trast, bank loans to the nonbank private sector expandedfurther. In fact, bank loans have increased for each ofthe past six months, with a total increase of €150 billionsince January (2.5% of the outstanding stock). This is asolid turnaround from last year, when bank loans werestagnant. At the sector level, household mortgages rosefurther, albeit at a slightly reduced pace of around 3% ar(compared to over 4% ar a few months ago). In con-trast, loans to nonfinancial corporates stabilized further,after falling for most of last year. Therefore, an optimis-tic interpretation is that banks were protecting their do-mestic loan supply by cutting other activities, althoughit was equally evident in the data last month that therewere still some pressures. For August, we expect M3 torise slightly, but will look closely at the other details ofthe release.

Sample

28

Economic ResearchEuro areaSeptember 24 2010


Nicola Mai


Output and surveys

Real GDP4Q09 1Q10 2Q10

Euro area%q/q sa 0.2 0.3 1.0%q/q saar 0.7 1.3 3.9%oya -2.0 0.8 1.9France (final)%q/q sa 0.6 0.2 0.6 0.7%q/q saar 2.3 2.4 0.7 2.5 2.8%oya -0.5 1.2 1.7GDP components (%q/q saar)Private consumption 3.9 3.8 0.2 -0.1 1.5 1.2Government consumption 2.4 0.3 0.2 1.4 1.6Fixed investment -4.2 -4.1 -3.7 3.3Exports 2.9 4.0 17.8 19.1 11.4 11.8Imports 11.4 11.7 7.6 8.0 17.8 16.7Contributions to GDP growth (%q/q saar)Domestic final sales 2.1 2.0 -0.6 -0.7 1.9 1.7Inventories 2.7 -1.0 2.7Net trade -2.4 -2.2 2.3 2.5 -2.0 -1.6

Purchasing managers index flash (manufacturing)Index, sa

Jul Aug SepEuro areaOverall region 56.7 55.1 54.3 53.6Germany 61.2 58.2 57.0 55.3France 53.9 55.1 55.0 55.4

Purchasing managers index flash (services)Index, sa


Purchasing managers index flash (composite)Index, sa


The Euro area flash composite PMI fell sharply in Septem-ber. The weakness was broad-based across manufacturingand services, raising the question of whether the economy isslowing by more than expected. It is, of course, possible, butthe PMI does not necessarily signal that. We have high-lighted that the PMI has been running somewhat ahead ofour GDP growth forecast, and that it would need to dropabruptly at some stage in order to be in line with where wethought GDP would be at the end of the year. A compositePMI of 53.8 is consistent with a GDP gain of around 2% ar,which is our estimate for the third quarter. The compositePMI should be around 51.0 to be consistent with our GDPforecast of 1% ar in the fourth quarter. It may simply be thatthe decline in the PMI is occurring earlier than anticipated,but that the trough will be at the same level as we have al-ways assumed.

The declines were particularly sharp in Germany, with themanufacturing PMI down 2.9pts and the service PMI down2.6pts. Within manufacturing, the output component in Ger-many fell a very sharp 5.5pts. In France, manufacturing ac-tually rose slightly, while services were down 1.6pts. Givendevelopments in Germany and France, it looks like the PMIsin the rest of the region fell on average by the same amountas the Euro area aggregate. This suggests that the region isdownshifting in a broad-based way, and the regional diver-gences are not getting larger.

Manufacturing ordersIndex, sa

May Jun JulEuro areaValuesNew orders (%m/m sa) 4.0 4.2 2.5 2.4 __ -2.4New orders (%oya sa) 23.8 23.2 22.6 22.7 __ 14.2

30

35

40

45

50

55

60

65

IndexPMI manufacturing

2007 2008 2009 2010

Euro area

GermanyFrance

35

40

45

50

55

60

65

IndexPMI services

2007 2008 2009 2010

Euro area

Germany

France

Sample


29

JPMorgan Chase Bank, LondonGreg Fuzesi

National business surveysJul Aug Sep

Germany (IFO survey)2000=100, saBusiness climate 106.2 106.7 106.5 106.8Business expectations 105.6 105.2 104.8 103.9Current conditions 106.8 106.9 108.2 108.2 109.7France (INSEE survey—manufacturing)IndexComposite index 98 97 __ 98 __ 98Index of past production 22 19 __ 15 __ 12Expected output—personal -9 -11 __ -5 __ 0Expected output—general -2 -1 __ 1 __ 3Belgium (BNB survey)Percent balance of responses, saOverall -6.5 -5.1 __ -3.4Manufacturing -9.5 -8.1 __ -7.4Commerce 0.8 1.1 __ 2.7Construction -5.6 -3.2 __ -3.6

The surprise gain in the German IFO survey was driven by arise in the current assessment indicator. However, this wasmostly offset by a drop in the expectations component—abetter guide to current GDP growth. Despite a second con-secutive monthly decline, the expectations reading remainsat a very elevated level, close to the highest seen in thesurvey’s post-1991 history. The expectations reading is con-sistent with growth in 3Q that is slightly higher than our cur-rent 3% GDP forecast.The IFO sends a clear message about the German economy.Growth remains solid and continues to outperform the rest ofthe region, but the pace of expansion is now slowing. Thisreflects the inevitable slowdown in Germany’s industrialsector from the downturn in the global economy. But, be-neath the surface there are further signs that domestic de-mand is finally shifting into a higher gear. The sector break-down of the IFO showed an impressive gain in the retailcomponent from 9.2 to 11.4—easily the highest sinceGerman’s post-reunification boom. Service sector sentimentalso moved up modestly in September. These developmentsare consistent with other signs of improvement in Germanconsumer spending recently.

The Belgian BNB survey moved up in September, broadlybased across manufacturing, retail, and business services.Only construction registered a small deterioration. Withinmanufacturing, there was an improvement in recent outputtrends and domestic orders and a sharp deterioration in ex-port orders. Selling prices slid a little. Within retail, therewas a sharp improvement in sales and selling prices. In busi-ness services there was a sharp improvement in businessactivity and a modest improvement in employment.

At first blush, aside from the overall improvement, the BNBsurvey is encouraging about sectoral trends. To the extentthat manufacturing is bound to slow, an improvement inbusiness and retail services would limit the overall modera-tion in GDP. But, in fact, this may be overinterpreting thesurvey. Both manufacturing and business services in Sep-tember were still below the level reached in the spring ofthis year. The improvement in the past couple of months hasonly partially unwound the earlier decline. Only the retailsector has moved above the level seen in the spring. Never-theless, these sectoral trends are important to watch in thecoming months as the manufacturing slowdown becomesmore evident.

Demand and labor markets

Consumer confidence (prelim)Jul Aug Sep

Euro area (European Commission survey)Percent balance of responses, saConsumer confidence -14 -11 -10 -11

Inflation

Import pricesJun Jul Aug

Germany%m/m nsa 0.9 -0.2 __ 0.2%oya nsa 9.1 9.9 __ 8.6

Sample

30

Economic ResearchJapanSeptember 24, 2010

JPMorgan Securities Japan Co., Ltd.Masamichi Adachi

Japan• Financial markets were relatively calm this short

week; BoJ Governor Shirakawa’s tone was dovish

• Next week’s real exports, IP report, and ShokoChukin survey bear close attention

• BoJ quarterly Tankan preview; forecast looks for animprovement in the headline DI, to 7 from 1 in June

This week was shortened by two public holidays, on Mondayand Thursday. Financial markets were somewhat volatile lastweek with the FX market intervention, but were relativelycalm this week. We still think that in the near term, the direc-tion of USD/JPY will be lower (the yen will appreciate),rather than higher, especially given the Fed’s willingness toease further, as indicated in this week’s FOMC statement.

The BoJ probably needs to move in step with the Fed innear future to calm the pressure from markets, the media,and politicians. Indeed, in an interview with Yomiuri news-paper on Tuesday, Governor Shirakawa emphasized theheightened uncertainty about the global growth outlookand downside risks to exports and corporate profits associ-ated with yen appreciation. Moreover, he mentioned con-cern about the negative impact on domestic demand fromthe withdrawal of fiscal stimulus, including the Septemberexpiration of auto incentives. Speaking about unsterilizedFX market intervention, Shirakawa said “what is the mostimportant message to the people? It is the BoJ’s stance tosupply abundant liquidity. As in the past, there is com-pletely no change going forward in that the BoJ will con-tinue to supply abundant liquidity.” This response deli-cately sidestepped explaining whether the interventionprompted the BoJ to ease its policy stance further, but sug-gests that the Bank is willing to ease further, if necessary.

There was effectively no data released this week due to theholidays. Next week, however, is a busy one for Japanesedata watchers as important figures are released each day.Key indicators are August real exports, the August IP re-port (with manufacturers’ projections of their output inSeptember and October), and the September Shoko Chukinsmall firms sentiment survey. The BoJ’s quarterly Tankansurvey also will be released next week. As such, we notethat even though our relatively positive forecast for Augustand 3Q will likely be met, that is not a sign that theeconomy will avoid the expected stagnation. Manufactur-ers’ projections and the Shoko Chukin survey’s outlookindex for October will be the earliest guideposts for the 4Qgrowth outlook.

Next week’s focusOur real GDP forecast looks for stagnation over the next twoquarters, but not before it accelerates to 2.5% annualized in3Q after decent 1.5% growth in 2Q. Looking at the compo-nents, real exports continue to rise at a solid pace, despiteslowing, while domestic demand—particularly private con-sumption—is rising strongly in 3Q. Next week’s monthlydata will indicate how well this forecast is tracking.

• Customs trade and real trade indices (Monday): Cus-toms trade data in nominal terms will be released by theMoF in the morning, and real trade indices, adjusted forprice changes by the BoJ, will be published in the after-noon. Nominal exports declined for the third consecutivemonth in July, averaging 1.5%m/m sa, partly due to a 1%-2% nsa fall in export prices. Real exports have been solid.While we expect that both nominal and real exports willease more noticeably in 4Q, our forecast looks for somerise in August in each measure, given that manufacturers’projections anticipated a 1.6% increase in output in theJuly IP report, and as imports by China—Japan’s largestexport destination—also rose in the month. Nominal im-ports are expected to fall again, but real imports likely willrise, reflecting strong private consumption.

-5

0

5

10

%m/m sa, box show s our forecast for August

Real exports and IP

2009 2010

Real exports

IP

83

84

85

86

87

Aug 2, 10 Aug 15, 10 Aug 28, 10 Sep 10, 10 Sep 24, 10

880090009200940096009800

Yen

FX and equity marketIndex

USD/JPY Nikkei 225

Sample


31


• Shoko Chukin small firms survey (Tuesday): The im-provement of nonmanufacturers’ business sentiment inAugust was in line with our view that domestic economicactivity held firm in the summer, reflecting the temporaryboost in consumer spending. In September, we forecastthat nonmanufacturers’ sentiment is broadly unchanged,but an expected, noticeable fall in manufacturers’ senti-ment will likely weigh on the overall index, moving from48.4 in August to 47.5 in September. The outlook DI forOctober should also be worth watching: with our expec-tation of a 1% decline in 4Q IP, the nonmanufacturers’outlook for the October DI should be around 41.5 (48 inAugust) to be consistent with our 4Q forecast of 0.5%real GDP contraction in our GDP tracking model.

• IP report and PMI manufacturing (Thursday):Japan’s IP report, which includes not only informationabout actual output, shipments, and inventory, but alsomanufacturers’ output projections for the next twomonths (September and October), is the most coincidentindicator for monitoring the economy. We note, how-ever, that distortion caused by seasonal adjustment mighthave shown a larger swing in output (up in 1Q, and downin 2Q and 3Q) this year. Indeed, August IP is expected torise 1.6%m/m sa in the projection survey, but the surveytends to overstate. As such, we expect a 1.2% gain in Au-gust, and a large fall in October’s projection. Meanwhile,the August PMI fell to 50.1 from July’s 52.8, which wasan unusually sharp dip, given that output was expected torise in the month. Thus, our forecast looks for a flat read-ing in September, partly offsetting the softness in August.

• Labor market indicators (Friday): Although the unem-ployment rate rose in 1H of this year, we think that thelabor market is improving, albeit at a gradual pace. Thejob offers ratio showed consecutive rises during the April-July period, with rising new job offers indicating that theimprovement in the job offers ratio will be maintained incoming months. Indeed, business surveys that ask whetherbusinesses consider their employment excessive or insuffi-cient indicate that the net “excessive” balance is declining.So, we expect further improvement in both indicators.

• Consumption-related data (Thursday and Friday):Unfortunately, neither retail sales nor household spend-ing is an accurate reflection of the true state of consumerspending, due to sample problems. Indeed, they oftenmove in opposite directions. Nevertheless, if both postsolid results for August, they will support our view thatconsumption was strong in the summer. The CabinetOffice’s real private consumption index is the bestmonthly indicator for tracking GDP-based consumption,and the index probably will be released on October 7.

BoJ Tankan previewThe BoJ’s quarterly Tankan survey of businesses, conductedin September and to be released next Wednesday, will likelybe closely watched by the BoJ. The Bank will publish its nextsemiannual outlook report—its most important policy commu-nication tool—on October 28, and this survey is a crucialcomponent of the Bank’s assessment. Although the Tankan’sheadline diffusion index (DI)—showing the percentage bal-ance among large manufacturers’ responses to current busi-ness conditions—receives more attention as a key barometerof the current state of the economy, it is the details of theTankan survey that are more important to the Bank.

We expect that the headline DI index will rise to 7, thehighest level so far in this recovery, as the monthly ReutersTankan has suggested. However, the outlook DI for the endof this year is set to deteriorate sharply, underscoring theabrupt shift in momentum. Meanwhile, other details—in-cluding the assessment of excess labor and production ca-pacity—will probably improve further from June, as thefundamentals supporting a self-sustained recovery continueto strengthen. But, the deterioration of expectations (out-look DIs) should provide good reason for the BoJ to recon-sider the downside risks to growth and deflation. The newprojection of USD/JPY for this fiscal year should bewatched closely (it was 90.18 in the June survey).

-80

-60

-40

-20

0

20

DI, boxes show J.P. Morgan forecastsTankan headline large manufacturers business conditions

2008 2009 2010

Reuters(monthly)

BoJ(quarterly)

Outlook for December

-40

-20

0

20

40

30

35

40

45

50

%q/q saar, boxes are J.P. Morgan forecastsIP and Shoko Chukin small firms business survey

Index

2008 2009 2010

IP

Nonmanufacturers business sentiment

Sample

32

Economic ResearchJapanSeptember 24, 2010


Data releases and forecastsWeek of September 27 - October 1

Mon Customs-cleared international tradeSep 27 ¥ bn sa, unless noted8:50am May Jun Jul Aug

Balance 346 515 610 816 Exports (%m/m) -1.6 -1.6 -1.4 1.5 Imports (%m/m) 3.2 -4.9 -3.5 -2.5Balance (nsa) 316 687 804 589

BoJ real export index (%m/m) 1.0 -0.3 2.4 ___BoJ real import index (%m/m) 7.3 1.0 -0.6 ___

Exports probably increased in August as evidenced bymanufacturers’ output projections and China’s importdata. Given that nominal imports likely remained weak,with import prices down 2.0%m/m nsa, we expect theseasonally adjusted August trade surplus to widen to itslargest level since January 2008.

Mon Corporate services pricesSep 27 %oya8:50am May Jun Jul Aug

Overall -0.8 -1.0 -1.2 -1.3 Ex international transport -1.2 -1.3 -1.2 ___

The message from corporate services prices is expectedto remain unchanged, with the CSPI deflation trendmoderating only gradually.

Tue Shoko Chukin small firm surveySep 28 Diffusion index2:00pm Jun Jul Aug Sep

Sentiment index 47.4 48.1 48.4 47.5 Manufacturers 49.3 50.0 48.8 ___Nonmanufacturers 45.8 46.5 48.0 ___

Sales (%oya) 9.4 8.2 8.3 ___Profit margins -7.2 -6.5 -5.7 ___Financing conditions -4.1 -2.7 -2.2 ___Inventory -11.5 -10.3 -9.7 ___Capacity -15.0 -13.6 -12.6 ___Employment -8.2 -7.1 -5.4 ___

Input prices 8.9 8.9 6.3 ___Output prices -5.9 -6.1 -7.2 ___

See main essay.

Wed BoJ Tankan surveySep 29 DI, %8:50am Mar Jun Sep Dec

Large firms Manufacturing -14 1 7 -1 Nonmanufacturing -14 -5 -2 -5

Small firms Manufacturing -30 -18 -14 -25 Nonmanufacturing -31 -26 -24 -31

FY2009 FY2010Jun Mar Jun Sep

Capex projections,1 %oya Large firms -15.5 -1.9 2.7 2.5 Small firms -21.5 -27.8 -23.3 -18.0

Current profit projections, %oya Large firms -6.3 21.1 21.6 20.5 Small firms -0.4 22.7 17.2 18.0

See main essay.

1. Note that the September figures reflected a methodological change in thesurvey. The new survey is compiled using new accounting standards for leasetransactions which began in April 2008. Under the new standards, the ac-counting treatment for lease transactions that do not transfer ownership hasbeen changed from rental transactions to sale and purchase transactions.Accordingly, the capex recorded by lease firms (nonmanufacturers) is nowrecorded by the firms that installed the equipment (users). In theory, thereshould be no net effect on the total amount of capex for all firms. However, adifference between the fiscal year plans of lease firms (which tend to be moreaggressive) and users (who tend to be more conservative) may have someeffect on the oya change in the projections. Indeed, the previous FY2010projection for large firms in June was 4.4%oya, instead of 2.7% in the newseries.

Thu Purchasing Managers survey (manufacturing)Sep 30 DI8:15am Jun Jul Aug Sep

Overall index 53.9 52.8 50.1 50.0

See main essay.

Thu Industrial production—preliminarySep 30 %m/m sa8:50am May Jun Jul Aug

Production 0.1 -1.1 -0.2 1.2Shipments -1.7 0.2 -0.1 ___Inventories 2.0 0.7 -0.5 ___Inventory/shipment ratio 4.8 -1.7 1.4 ___

See main essay.

Thu Commercial salesSep 30 %oya, unless noted8:50am May Jun Jul Aug

Commercial sales 1.3 1.3 0.9 ___Wholesale sales 0.7 0.6 -0.1 ___Total retail sales 2.9 3.3 3.8 5.0

%m/m sa -2.0 0.4 0.7 2.0

Front-loaded demand for autos and the extreme heatshould have boosted consumer spending in August. Thesentiment DIs of food producers and automakers rosematerially in the Reuters Tankan survey, and our mea-sure of the rate of real consumption of new autosjumped to its highest level since December 1997.

Thu Housing startsSep 30 %oya, unless noted2:00pm May Jun Jul Aug

Housing units %oya -4.6 0.6 4.3 14.5%m/m sa -7.0 1.7 2.9 2.0Mn units saar 0.74 0.75 0.77 0.79

Sample


33


Housing starts have weakened since the spring, but thelatest July report shows tentative signs of a pickup witha second consecutive m/m rise. Going forward, we willbe monitoring this closely to see whether an uptrend isbeing reestablished.

Thu Construction ordersSep 30 %oya2:00pm May Jun Jul Aug

Total 9.2 -10.2 -0.7 ___ Domestic, private sector 10.2 -0.4 2.9 ___ Domestic, public sector -13.5 -10.6 -33.5 ___

Fri Household survey of expendituresOct 1 %m/m sa, incl. agricultural worker households8:30am May Jun Jul Aug

All households Real spending 0.7 2.9 -0.4 1.5

%oya -0.7 0.5 1.1 2.0 Core 0.9 2.1 -0.1 ___ %oya -0.8 0.1 0.8 ___

Worker households Real disposable income -2.1 6.2 -5.4 ___ Propensity to spend ratio (%) 72.8 71.0 76.1 ___

See comment above on commercial sales.

Fri Labor force surveyOct 18:30am May Jun Jul Aug

Unemployment rate (% sa) 5.2 5.3 5.2 5.1 Labor force (%m/m sa) -0.4 0.1 0.2 ___ Total employment (%m/m sa) -0.4 0.1 0.3 ___Unemployed (%m/m sa) 0.3 2.1 -1.7 ___Job offers ratio (sa) 0.50 0.52 0.53 0.54

See main essay.

Fri Consumer pricesOct 1 %oya8:30am Jun Jul Aug Sep

Tokyo Overall -1.0 -1.2 -1.0 -0.9 Core (ex fresh food) -1.3 -1.3 -1.1 -1.1

Ex food and energy -1.4 -1.4 -1.4 -1.4

Nationwide Overall -0.7 -0.9 -0.9 Core (ex fresh food) -1.0 -1.1 -1.0 Ex food and energy -1.5 -1.5 -1.5

The reports are likely to show that CPI deflation contin-ued to moderate, but only gradually. Fresh food pricesclimbed in September due to the extremely hot summer,and so, we expect overall deflation in Tokyo to weakena little. Meanwhile, there is unlikely to be any meaning-ful impact from energy prices on either the August orthe September reading. The next major influence willbe the effect of the tobacco tax hike in October.

Fri Auto registrationsOct 1 %oya, unless noted2:00pm Jun Jul Aug Sep

Total 20.6 15.0 46.7 12.0Mn units saar 3.40 3.58 4.60 3.58

J.P. Morgan-adjusted (incl. light vehicles)Mn units saar 4.18 4.30 5.56 ___

Reports suggest that purchases of environmentallyfriendly cars rocketed in late August, as new auto regis-trations showed an outsized jump during the month.However, with the expiration of government subsidieson September 7, three weeks earlier than scheduled, welook for a large fall in September and a more significantslump in 4Q.


Week of September 20 - 24

Index of all-sector activity (Sep 22)%m/m sa

May Jun JulAll sector 0.1 0.1 1.0 Tertiary sector -0.8 -0.1 1.6 Industrial production 0.1 -1.1 -0.2 Construction 9.2 -1.8 __ 0.0 Public sector -0.1 0.7 __ -0.2

3.5

4.0

4.5

5.0

5.5

6.0

0.4

0.5

0.6

0.7

0.8

0.9

1.0

% of labor force

Labor market indicatorsRatio

2008 2009 2010

Unemployment rate Existing job offers toapplicants ratio

Sample

34

Economic ResearchCanadaSeptember 24, 2010

JPMorgan Chase Bank NA, New YorkSilvana Dimino

Silvana Dimino

Canada• Source data trifecta points to very modest increase in

July monthly GDP

• Retail sales unexpectedly decline in July on a collapsein furniture sales

• Leading indicators point to slower, but still solid,GDP growth

• CPI inflation benign; annual comparison remains dis-torted by provincial sales tax increases

The trio of key monthly data used to forecast monthly GDPpoint to an extremely tepid beginning to 3Q. Both wholesaleand retail sales, reported this week, fell unexpectedly in July.Combined with previously released manufacturing ship-ments information, they point to a modest 0.1%m/m increasein July monthly GDP—reported on Thursday, September 30.

Nominal wholesale sales slipped 0.1%m/m in July with realsales falling 0.3%. The monthly decline was more than ac-counted for by a 3.2% drop in sales of motor vehicles andparts. Excluding that subsector, nominal sales rose 0.6%.Wholesale inventories rose in July for the fifth time in thepast six months. The inventory-to-sales ratio edged up to1.21 from 1.20 and remains in healthy territory.

Retail sales unexpectedly declined 0.1%m/m in July andfell 0.2% when adjusted for price changes. The decline wasrelatively narrow, however, and largely reflected the har-monized sales tax changes in certain provinces in themonth and the ongoing softening of the housing market.The only provincial declines in retail sales in July were inthose provinces that had increased their sales tax—Ontario,British Columbia, and Nova Scotia. Excluding those threeprovinces, sales were up 0.5%. Also, housing-related sec-tors displayed weakness with sales falling sharply at furni-ture stores (-8.4%), electronics/appliance stores (-4.9%),and building materials stores (-2.3%). Excluding thesethree sales groups, sales were up 0.6% in July. So, whilethe July decline was a surprise, some of the factors behindit were temporary, and thus the July report is not likely in-dicative of a new, softer trend.

The leading index rose 0.5%m/m in August, matching itsaverage increase over the previous two months. Thesources of growth were little changed, as manufacturingposted the largest gains while housing continued to re-trench. The leading index has exhibited a close relationshipwith monthly GDP. The index continues to point to slower,but still solid, GDP growth in coming months.

-4

-2

0

2

4

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

6-mo % ch, both scalesMonthly GDP and leading indicators

GDP

Leading indicators

99 01 03 05 07 09

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

%oyaCPI

2009 2010

Headline

Ex. indirect taxes

-50

-25

0

25

50

-5.0

-2.5

0.0

2.5

5.0

6-mo % chg, saTotal CPI ex. indirect taxes and commodity prices

6-mo % chg, saar

03 04 05 06 07 08 09 10

CPI

BOC commodity prices in CAD

-50-40-30-20-10

010203040

%ch over 3 months saarReal manufacturing, wholesale, and retail sales

Manufacturing

Retail

Wholesale

2006 2007 2008 2009 2010

Sample


35

JPMorgan Chase Bank NA, New YorkSandy Batten

Silvana Dimino

Data releases and forecastsWed Industrial PPISep 29 %m/m nsa, unless noted8:30am May Jun Jul Aug

Total 0.4 -0.9 0.1 0.3 %oya 1.5 0.2 1.0 0.7Ex energy 0.7 -0.7 0.3 0.5 %oya -0.1 -0.2 0.3 0.9

The industrial product price index (IPPI) is expected toincrease 0.3% in August. Energy prices were down, butother commodity prices rebounded strongly in July andAugust and CAD has only slightly recovered from thelarge 3.5% drop in May.

Thu Monthly GDPSep 30 Sa8:30am Apr May Jun Jul

Total, %m/m 0.0 0.1 0.2 0.1 %oya 3.3 3.8 3.9 3.7

A moderate increase of 0.1% is expected in monthlyGDP in July, continuing the softer pace of growth thatemerged in 2Q10. Output-based GDP rose 2.6%q/q arin 2Q, down sharply from 6.3% ar in 1Q.

Review of past week’s dataWholesale sales (Sep 20)Sa

May Jun Jul

Total, %m/m 0.0 -0.1 -0.3 0.2 -0.1 %oya 9.5 7.7 5.2 4.9

Consumer price index (Sep 21)%m/m nsa, unless noted

Jun Jul Aug

Total CPI -0.1 0.5 0.2 -0.1 %oya 1.0 1.8 2.0 1.7 BOC core CPI -0.1 -0.1 0.1 %oya 1.7 1.6 1.6 Ex food & energy -0.1 0.3 0.1 0.0 %oya 0.9 1.3 1.4 1.3 CPI-XFET (%oya) 1.0 0.7 0.7

Retail sales (Sep 22)%m/m sa, unless noted

May Jun Jul

Total -0.4 0.1 0.0 0.6 -0.1 %oya 4.9 3.8 3.7 4.1 3.3 Ex autos -0.3 -0.4 -0.5 -0.6 0.5 -0.4 %oya 4.8 4.7 3.2 2.9 3.7 2.6 Ex autos & gasoline 0.1 0.0 -0.1 -0.3 0.2 -0.5 %oya 3.6 3.4 2.7 2.3 3.0 1.9 Real retail sales 0.3 0.9 0.8 0.2 -0.2 %oya 4.3 4.2 4.5 4.3 4.0 3.5

Leading indicators (Sep 22)%m/m

Jun Jul Aug

Smoothed (5-mo mov avg) 0.7 0.6 0.4 0.5 Unsmoothed -0.8 -1.1 0.2 0.5 1.0

The August CPI report was a little milder than expected.The total CPI slipped 0.1%m/m nsa in August, but rose0.1%m/m when seasonally adjusted. The over-year-agoinflation rate edged down to 1.7% from 1.8% in July. Thecore index inched up 0.1%m/m nsa and was unchangedwhen seasonally adjusted. The over-year-ago core rate wasunchanged at 1.6%. Both oya rates remain below the Bankof Canada’s 2% target.

The seasonally adjusted headline index had jumped0.6%m/m in July, boosted by consumption tax changes inOntario and British Columbia. So, without this effect inAugust, prices were generally better behaved though thetax change continued to elevate the oya calculation. Thecourse for global commodity prices has been a key factorbehind the movements in total CPI inflation. The recentslowdown in the 6-month pace of increase in commodityprices is now being reflected in the headline CPI.

The tepid beginning to 3Q has reinforced the increasinglywidely held view that the Bank of Canada will pause in itsinterest rate normalization in October. It has raised its over-night rate 25bp at each of the past three rate announce-ments. We, however, continue to look for another 25bpincrease on October 19 though we are quick to acknowl-edge that the drag from the US has put Canada in its ownsoft patch and thereby possibly slowed the Bank’s pace ofnormalization. However, policy remains very accommoda-tive (something the BoC continues to note); the real over-night rate is decidedly negative; CAD has appreciated littlesince the Bank embarked on a course of higher rates; andmarket rates have fallen since the hikes began (the yield onthe 5-year Treasury note is down 67bp since the first hike).So, it’s quite possible that the Bank will stay its normaliza-tion course in October. The OIS market is currently pricingin a 45% chance of a 25bp hike in October.

Sample

36

Economic ResearchUnited KingdomSeptember 24, 2010

JPMorgan Chase Bank, LondonAllan Monks

Malcolm Barr

United Kingdom• Dale reminds of two-sided risks to the inflation outlook

• MPC edges closer to delivering QE2

• Public finances still showing underlying improvement

The minutes of the September MPC meeting delivered onour expectation for an 8-1 vote, with a tone implying a ris-ing probability of more QE. What the MPC appeared toagree on in September was that, even with the knowledgeof the August headline CPI print in hand, upside inflationrisks relative to its central view remained but were notchanging. The MPC’s discussion of recent movements ininflation expectations crystallizes in the assessment thatthey were broadly unchanged.

There was less agreement on how to interpret weaker signsin the activity data versus the move down in market interestrates. For some members, the combination of weaker activ-ity data, but a move down in market interest rates, andsigns that UK banks were making progress meeting theirlonger-term funding needs, left the outlook for activitybroadly unchanged. For another group (again referred to as“some members”), recent data “indicated that theheadwinds to a recovery in private sector demand weresomewhat stronger than previously thought, and that thedownside risks to activity had increased.” As a result “theprobability that further action would be needed to stimulatethe economy and keep inflation on track to hit the target inthe medium term had increased.”

A key question after these minutes is the relative size andcomposition of these two groups. In this regard, commentaryfrom MPC members will be worth watching in the comingweeks to see if they are prepared to identify their own viewsmore clearly. Following the minutes, a speech by SpencerDale shed more light on the issue. We would have placedDale in the more hawkish camp on the MPC, after AndrewSentance. But his comments on the risks around the inflationoutlook sounded more balanced, with concerns that growthwould not turn out strong enough to prevent inflation fromundershooting the 2% target in the medium term.

While the minutes are mildly friendly to our call for a £25billion extension of QE in November, this remains a closecall, and there is plenty still to watch between now and thenif it is to pan out. If QE is to be extended in November, it islikely that votes to do so will only crystallize alongside theInflation Report—we would be surprised if there were votesfor such action in October, as even those who are inclined to

act will want to do so alongside an Inflation Report. Remem-ber also that the Fed’s November decision is on the Wednes-day evening before the MPC vote on Thursday, so the fram-ing effect of the Fed’s decision may be more powerful thannormal for any members whose vote is in the balance.

Public borrowing still on improving trendAfter hitting a record deficit of 11% of GDP last fiscal year,the monthly outturns in public borrowing have been on animproving trend. The data for August provided a mild inter-ruption to this trend, as PSNB came in £3 billion higher thanexpectations. But this was exactly offset by downward revi-sions to borrowing in prior months. In the fiscal year to Au-gust, public borrowing stands at £55.3 billion. Excludingfinancial sector interventions, this is already around £4 bil-lion lower than at the same point last year. The improvementreflects lower current borrowing (i.e., excluding investment).This is partly due to the rebound in tax revenues seen overthe past six months or so, reflecting the rise in VAT fromJanuary this year, and the April tax hike for high earners.This improvement would have been greater were it not for arise in expenditures over the past year. But the good news isthat the modest trend lower in borrowing seen so far is likelyto continue in the coming months.

-15

-10

-5

0

5

10

15

%oyaCentral government revenue and expenditure

2007 2008 2009 2010

Revenue

Expenditure

-6-4-202468

101214

Change in PSNB from prior year, £ bnPace of deterioration in overall public borrowing

2006/07 2007/08 2008/09 2009/10 2010/11

Sample


37


Malcolm Barr

In addition to already higher tax revenues, the cuts inspending that have been scheduled for this year should re-strain growth in government outlays—meaning that themonthly borrowing figures, on average, continue to comein slightly lower than year-ago levels. Assuming this is thecase, we look for overall public borrowing to come in closeto £134 billion for the 2010/11 fiscal year. This wouldcompare favorably to the £149 billion forecast made by theOBR in June. This would still leave borrowing running ex-traordinarily high, with pressure on the government to takeradical steps to bring the deficit down. The scale of the im-provement seen this year will therefore not change the sizeof spending cuts set to come in the October 20 SpendingReview. But it does increase confidence that the consolida-tion measures taken so far have been sufficient to deliver abetter outturn in borrowing than had been expected.

The secular shift in UK inflationFollowing the publication of our recent research piece,“Why is UK inflation different,” we have had a number ofquestions regarding our conclusion that a long-termsectoral rotation in UK pricing behavior is under way.Since sterling’s marked appreciation in 1997, core con-sumer goods prices in the UK have been in a persistentphase of deflation. We argued that this reflected switchingby retailers away from more expensive domestically pro-duced goods, toward cheaper, foreign-produced items.There are a few other candidates for explaining the defla-tionary period in core consumer goods prices from 1997-2008, including weak unit wage costs, falling distributors’profit margins, and changing input costs. But these seemunlikely to provide a complete explanation: unit wage costsaccelerated as declines in core goods intensified in the late1990s; profit margins would have to have fallen signifi-cantly, and persistently; and no simple weighted average ofPPI and imported prices can explain the size of the declinesseen in core goods prices in the CPI.

The only way we have managed to explain this phenom-enon (in a modeling framework) is to assume substitutionby retailers between domestic- and foreign-sourced inputs.This argument is supported by the observation that theshare of real imports in GDP increased significantly duringthe 1990s after a long period of stability, and that a largepart of this uptrend occurred after sterling’s marked appre-ciation in 1997.

The case for faded substitution effectsIn research earlier this year (see “Cracking the toughest nutin the inflation basket,” GDW, Mar 26, 2010), we sug-

-4

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0

2

4

6

%oya

Core CPI inflation

2004 2005 2006 2007 2008 2009 2010

Services

Goods ex. food and energy

gested that substitution effects had faded significantly.Calling an end to such a persistent period of falling pricesis, of course, a matter of fine judgment. But a number ofobservations support this call.

First, in the absence of substitution between domestic- andforeign-produced goods, one would expect consumerprices to behave more in line with price gains in the PPIand import prices. This is what our model assumes, and thismodel has continued to track recent developments in coregoods prices reasonably well. Second, the import share inGDP has recently stabilized, and started to fall. Third, thisdecline in the import share has coincided with the recentlarge drop in the currency—which will have altered therelative price of domestic versus foreign goods—and hencethe gains to be had from substitution.

Implications for UK inflation and growthLooking forward, we expect CPI inflation to slide back to2% next year—faster than the MPC expects. We also lookfor core goods prices to show a phase of monthly declines.But this is related to the level of spare capacity in theeconomy, and hence is likely to be transitory. From a

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1012

-5

-3

-1

1

3

5

7

%oyaCore goods prices versus unit wage costs

Core goods

82 87 92 97 03 07

Unit wage costs

%oya, CPI excludes estimated VAT impact

Sample

38

Economic ResearchUnited KingdomSeptember 24, 2010


Malcolm Barr

saving rate is likely to come down again in 2Q from the6.9% reported in 1Q. This would compare to a peak of8.5% in 3Q09.

Tue Balance of payments (quarterly report)Sep 28 £ bn, sa9:30am 3Q09 4Q09 1Q10 2Q10

Trade in goods and services -7.8 -8.0 -9.1 -11.9Income 8.5 11.9 3.8 4.0Current transfers -3.6 -3.4 -4.3 -4.0Current balance -2.9 0.5 -9.6 -11.9

Tue Business investment finalSep 28 2000=100, sa9:30pm 3Q09 4Q09 1Q10 2Q10

%q/q -0.4 -3.6 7.8 -1.6%oya -21.2 -23.0 -7.7 1.9

Tue CBI survey of distributive tradesSep 28 % balance11:00am Jun Jul Aug Sep

Volume of retailer sales -5 33 35 __

longer-term perspective, if we are right that substitutioneffects have faded notably, then this would have two keyimplications for the UK.

• First, prices in the core goods sector will be stabler overthe coming years. This would have implications for theBank of England. In order to meet a 2% inflation targetfor the CPI, the MPC would have to engineer a softerlong-run trend in service inflation. There is the possibil-ity that the transition to slower price gains in the servicesector may take time to come through. This would meanthat inflation in the medium term may run above theBoE’s 2% target, until this adjustment is complete.

• Second, a reduced pace of increase in the demand forforeign-produced products would be good news for UKmanufacturers. This would help to lift a sector that hasseen barely any growth in output for the past decade.This would come in addition to support from greater for-eign demand for UK manufactured products, as a resultof the weaker currency—though clear signs of a cur-rency-related boost to export volumes have been absentso far.

70

80

90

100

110

2000=100Trade-weighted sterling

95 97 99 01 03 05 07 09

Data releases and forecasts

Week of September 27 - October 1

Tue Real GDP (national accounts)Sep 28 Sa9:30am 4Q09 1Q10 2Q101 2Q10

Total GDP (%q/q) 0.4 0.3 1.2 1.2%oya -2.9 -0.2 1.7 1.7%q/q ar 1.7 1.3 4.9 4.9

Breakdown (%q/q sa)Private consumption 0.6 -0.1 0.7 0.7Public consumption 0.1 1.5 0.3 0.3Fixed investment -1.7 4.5 -2.4 -2.4Exports 4.0 -1.7 1.1 1.1Imports 4.4 1.6 0.9 0.9

1. Preliminary outcome

We’re not looking for any revision to growth in 2Q. Buton our calculations, the output side components of GDPas reported in the prior releases average higher than1.2%. This may reflect a rounding error, but may sug-gest some risk of an upward revision to 2Q GDP. Thenew information in this release will be the income sidedetails. Employee compensation rose 0.7% in 2Q, whilenominal consumption gained 2.3%. This suggests the

14

18

22

26

30

34

38

% of GDPReal UK non-energy imports to GDP

80 85 90 95 00 05 10

Sample


39


Malcolm Barr

Wed Money supply 1

Sep 29 Sa9:30am May Jun Jul Aug

M4 ex IOFCs (%m/m) 1.0 0.3 0.0 __M4 ex IOFCs (%3m/3m ar) 9.1 6.8 5.6 __

M4 (%m/m) -0.1 0.0 0.4 -0.2M4 (%oya) 2.7 3.1 2.3 1.8M4 lending (%m/m)2 -0.6 -0.1 -0.5 -0.7M4 lending (%oya)2 1.3 1.3 0.5 -0.5

1. Forecast taken from provisional release.2. Excludes the effect of securitization.

Wed Net lending to individuals (BoE release)Sep 29 £ bn, average9:30am May Jun Jul Aug

Consumer credit (ch, m/m) 0.7 0.5 0.1 0.1Secured lending (ch, m/m) 0.7 0.5 0.4 0.3Mortgage approvals (000s sa) 49.7 48.6 48.7 45.7

Wed Index of servicesSep 29 Sa9:30am Apr May Jun Jul

%m/m -0.7 1.1 -0.5 x%oya 1.0 2.3 1.4 x%3m/3m saar 2.8 4.3 3.1 x

Thu Gfk consumer confidenceSep 30 Sa12:01am Jun Jul Aug Sep

% balance -19 -22 -18 -18

Thu Nationwide house price indexSep 30 Sa7:00am Jun Jul Aug Sep

%m/m 0.0 -0.5 -0.9 0.1%oya 8.7 6.5 3.9 2.9%3m/3m saar 6.5 5.0 -0.1 -3.7

We expect house prices to show small monthly declinesover the second half of this year on average. That said,the drop in the Halifax in August was particularly large,and so we look for some payback for that in Septemberwith a small gain. This would still leave the 3m/3m saarrunning in significantly negative territory.

Thu BoE quarterly Credit Conditions surveySep 30 Net % balances9:30am 4Q09 1Q10 2Q10 3Q10

Availability of secured credit to Households Past three months 15.8 1.3 6.3 __ Next three months 9.9 3.2 -11.4 __Availability of unsecured credit to Households Past three months -16.2 -1.5 -0.6 __ Next three months -1.7 16.1 7.8 __Availability of overall corporate credit Past three months 16.3 21.9 7.1 __ Next three months 20.5 22.7 6.5 __

Fri BoE housing equity withdrawalOct 1 Sa9:30am 3Q09 4Q09 1Q10 2Q10

£ bn -5.0 -3.4 -3.2 __

Fri PMI survey, manufacturingOct 1 % balance, sa9:30am Jun Jul Aug Sep

Overall index 57.5 56.9 54.3 53.3

The survey showed a notable drop in output in August,but with an even sharper decline in new orders. If thelatter is anything to go by, another decline in output andhence the overall manufacturing PMI appears in thecards. A drop of around a point would indicate the out-put growth in the sector is slowing a little more quicklythan implied in our 3Q GDP forecast.


Rightmove house price indexJul Aug Sep

%m/m nsa -0.6 -1.7 __ -1.1

Provisional estimates of M4 money and creditJun Jul Aug

M4 (%m/m sa) 0.1 0.0 0.4 __ -0.2M4 (%oya sa) 3.1 2.3 __ 1.8M4 lending (%m/m sa)1 -0.1 -0.4 -0.5 __ -0.7M4 lending (%oya sa)1 1.3 0.5 __ -0.51. Excludes the effect of securitization.

Public sector finances£ bn, nsa

Jun Jul AugPSNCR 20.7 20.8 -4.1 -3.7 __ 5.8PSNB 13.9 13.2 3.2 2.0 12.6 15.3Balance on current budget -11.8-10.9 0.1 1.2 -9.5-12.7Net debt to GDP (%) 63.9 63.7 63.8 __ 64.0

BoE’s minutes of Sep MPC meeting

See main text.

BBA lendingJun Jul Aug

Secured lending (ch £bn, sa) 2.1 2.0 2.0 1.9 2.0 2.5Loan approvals (000s sa)1 34.6 34.4 33.7 34.2 32.5 31.81. For house purchase.

The BBA reported that its August count of mortgage approv-als for home purchase slipped to the lowest since early 2009,and a decline of over 2,000 from July. Earlier data from theBoE lending panel had hinted at a decline. Having beenbroadly stable at a low level through the last handful ofmonths, a weak new buyer enquiries reading in the RICSsurvey has warned of a turn down in mortgage approvals,and the data are starting to move in that direction. With thelevel of turnover still very low we doubt any decline will besharp.

Sample

40

Economic ResearchSweden and NorwaySeptember 24, 2010


Sweden and Norway• Norges Bank keeps policy rate steady

• We expect rates to remain unchanged for some time

The Norges Bank this week left the policy rate unchanged,at 2%, as expected. The Bank did not publish new fore-casts, but the statement attached to the monetary policy de-cision largely endorsed the monetary policy strategy pre-sented in June, which involved a gradual rise in the policyrate starting in December this year or early next year. Thisstrategy would slowly return the policy rate to a more nor-mal level. Moreover, the statement assessed that growthhas been largely in line with the Bank’s expectations, thatglobal developments are somewhat uncertain, and that coreinflation has been a little lower than expected, albeit notenough to materially change the Bank’s views. These com-ments suggest that there was no reason for the Bank tohave substantially altered its policy rate view at this stage.

Back in June, the Bank forecast that growth in the mainland(non-oil and gas) economy would accelerate to a pace of al-most 3.5% annualized in the second half of this year, beforeslowing to 3% ar early next year. We agree with the Bankthat growth likely picked up at midyear. Retail sales and theindex of consumption through July suggest that consumerspending has reaccelerated recently in response to the re-bound in asset prices and the decline in electricity pricessince the spring. Manufacturing output growth also appearsto have picked up some momentum recently, after a fewquarters of relatively subdued growth. However, relative tothe Norges Bank’s projections, we think that the growth re-vival will be fairly muted and short-lived. In particular, wethink that slowing global growth will weaken Norwegianexports and lead to more corporate caution, and that recentdeclines in oil activity will weigh on demand for goods pro-duced in the mainland economy. In our view, Norwegiangrowth likely reaccelerated to a pace of 3% ar in the currentquarter, but will slow to 2% ar or so early next year.

On the nominal side, core inflation (measured by CPI-ATE,which excludes taxes and energy prices from the CPI) was1.4%oya in August, a couple of tenths below the forecast pro-duced by the Norges Bank in June. Back then, the Bank sawcore inflation bottoming out around this level toward the endof this year and rising gradually through next year. Unlike theBank, we think that low resource usage rates and falling costpressures will push core inflation down to 1%oya in the nearterm, and keep it there for around three quarters.

The next Sweden and Norway data watch will be published on October 8.

0.5

1.0

1.5

2.0

2.5

3.0

3.5

%q/q, saarNorway: mainland GDP growth projections

2010 2011

Norges Bank

J.P. Morgan

0.5

1.0

1.5

2.0

2.5

%oya (core inflation excludes taxes and energy prices from the CPI)Norway: core inflation projections

2010 2011

Norges Bank

J.P. Morgan

1.50

1.75

2.00

2.25

2.50

2.75

3.00

%p.a. (projections are quarterly averages)Norway: policy rate projections

2010 2011

Norges Bank

J.P. Morgan

The difference between our and the Norges Bank’s growthand inflation views explains why we expect the Bank toresume tightening in 3Q next year rather than in a fewmonths’ time. It will be important to monitor activity andinflation developments over the next few months, as thesewill determine whether we or the Norges Bank are right.

The Norges Bank’s quarterly projections are available through 1Q11. Forecasts for theperiod 2Q11-4Q11 are backed out of the forecast for the year 2011 as a whole.

The Norges Bank’s figures are monthly forecasts through September 2010, and quarterlyforecasts for the period 4Q11-1Q11. The Bank’s projections for the period 2Q11-4Q11 arebacked out of the forecast for the year 2011 as a whole.

Projections are quarterly averages of the policy rate in any given quarter (not the level of therate at the end of the quarter).

Sample


41


Sweden:Data releases and forecastsWeeks of September 27 - October 8

Mon Trade balanceSep 27 Skr bn, nsa9:30am May Jun Jul Aug

Exports 91.7 106.2 89.3 __Imports 89.7 96.5 79.0 __Trade balance 2.0 9.7 10.3 __

Tue Retail salesSep 28 Volumes9:30am May Jun Jul Aug

%m/m sa 1.3 -0.2 0.5 __ %oya wda 2.6 2.8 2.0 __

Wed NIER business and consumer surveysSep 299:15am Jun Jul Aug Sep

Mfg tendency index, sa 10 3 6 __Consumer index, nsa 22.0 23.3 25.5 __

Thu NMO wage inflationSep 30 Total earnings, %oya9:00am Apr May Jun Jul

Whole economy 2.0 1.7 1.6 __Business sector 2.3 2.0 1.9 __

Fri Purchasing managers survey, manufacturingOct 1 % balance, sa8:30am Jun Jul Aug Sep

Overall index 62.4 64.2 60.6 __

Fri Industrial productionOct 89:30am May Jun Jul Aug

Production (%m/m sa) 2.0 1.3 2.9 __Production (%oya nsa) 12.0 12.4 14.4 __

Review of past two weeks’ data

Unemployment: monthly labor market boardJun Jul Aug

% of labor force, nsa 4.8 4.8 __ 4.8

Unemployment: Labor Force Survey (Statistics Sweden)Jun Jul Aug

% of labor force, nsa 9.5 8.0 __ 7.4

Producer pricesJun Jul Aug

PPI (%oya) 1.6 1.0 __ 1.3For domestic supply (%oya) 2.1 1.1 __ 0.9

Norway:Data releases and forecastsWeeks of September 27 - October 8

Thu Retail salesSep 30 Volumes10:00am May Jun Jul Aug

%m/m sa 0.1 0.1 1.3 __%oya sa -0.7 2.2 1.5 __

Thu Credit indicatorSep 30 %oya10:00am May Jun Jul Aug

4.2 4.7 4.7 __

Fri Purchasing managers survey, manufacturingOct 1 % balance, sa9:00am Jun Jul Aug Sep

Overall index 51.4 55.2 49.2 __

Fri NEF/EEF house pricesOct 1 All dwellings, NOK11:00am Jun Jul Aug Sep

%m/m -0.2 -1.5 2.3 __%oya 8.3 6.6 5.9 __

Fri Labor DirectorateOct 1 Nsa10:00am Jun Jul Aug Sep

Unemployment rate (%) 2.8 3.0 2.9 __

Thu Industrial productionOct 7 Manufacturing10:00am May Jun Jul Aug

%m/m sa -1.7 3.9 0.1 __%oya wda 2.1 7.3 6.6 __

Review of past two weeks’ data

Trade balanceNkr bn, excluding erratics, nsa

Jun Jul AugExports 67.2 61.7 __ 56.5Imports 41.7 33.3 33.4 __ 35.8Trade balance 25.5 28.4 28.3 __ 20.7Balance ex oil and gas -12.0-11.9 -7.1 -7.2 __ -9.5

Labor force survey3mma sa

May Jun JulUnemployment rate (%) 3.6 3.5 __ 3.3

Sample

42

Economic ResearchAustralia and New ZealandSeptember 24, 2010

J.P. Morgan Australia Limited, SydneyStephen Walters

Ben Jarman

Helen Kevans

Australia and New Zealand• RBA hike now expected before year-end

• Aussie credit growth probably soft in August

• 2Q GDP growth in NZ fell well below expectations

The economic data flow was light in Australia this week,but there was plenty of hype around the timing of theRBA’s next rate move. An upbeat speech by RBA Gover-nor Glenn Stevens, followed by the minutes from theBoard’s most recent meeting two weeks ago, bolstered fu-tures market betting on an imminent rate rise—a full quar-ter-point hike now is priced in by December. Economistsare unanimous in their forecast that the next rate move willbe up, but the RBA rhetoric raised the likelihood of a ratehike before year-end.

In recent weeks, we have flagged the risks of a further RBArate hike in 4Q, while maintaining our forecast for the RBAto remain sidelined until February amid heightened uncer-tainty around the global outlook. Now, though, we believethat the next rate hike will be delivered in October, with therhetoric from the RBA Governor sending a strong messagethat a further hike to the cash rate is not far off.

In New Zealand, the GDP data showed the economy ex-panded a mere 0.2%q/q in the June quarter. The surpriseweakness in the GDP numbers, combined with the dampingimpact on economic activity of the recent earthquake in Can-terbury, means there is no urgency to step away from currentaccommodative policy settings. The recent decline in infla-tion expectations also added to the case for a pause. In con-trast to the RBA, therefore, we now expect that RBNZ Gov-ernor Alan Bollard will leave the cash rate unchanged untilat least March next year, with the risks skewed toward a latermove should economic conditions deteriorate further.

Managing a “fairly robust upswing”The RBA Governor spent much of his speech this week,entitled “Monetary Policy and the Regions,” discussing thesolid performance of the Aussie economy. While othereconomies are only in the early stages of recovery, growthin Australia has been “quite solid,” the unemployment rateis low and has been falling for about a year, and inflation isunlikely to decline much further. Should the Australianeconomy continue to perform strongly, in the absence ofany adverse events (e.g., a sharper-than-expected slow-down in China), the RBA would have to manage a “fairlyrobust upswing.”

With the economy approaching capacity, it is not surprisingthat RBA officials have become increasingly concernedthat the resources boom will put further upward pressure oninflation; this would pose “significant challenges” for eco-nomic policy. These challenges already seem to be on theirway, with the Australia Bureau of Agricultural and Re-source Economics (ABARE) now forecasting total com-modity exports to rise 26% in the 2010-11 year, with ex-port earnings to reach a record high A$215 billion. Thissurge will owe predominantly to higher prices for iron oreand coal, Australia’s two largest commodity exports, asAustralia rides out, in the words of the Governor, “the larg-est minerals boom since the late 19th century.”

Two-speed economy creates challengesAustralia’s “two-speed” economy has reemerged with avengeance, with the commodities boom bolstering the min-ing states, such as Western Australia, and the manufactur-ing- and consumer-oriented states falling behind. This hasbeen evidenced by industry data showing considerable di-vergences across different sectors. Confidence in the min-ing sector now is testing pre-crisis levels, and is trackingwell above that in manufacturing and construction.

But as Stevens highlighted this week, changes to monetarypolicy settings will be based, as always, on “average” con-

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140Index, 2004/05=100, sa

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Australia: terms of tradeJ.P. Morgan forecast

0

2

4

6

8

10

Real annual % changeAustralia: 2Q GDP growth by state

NSW Vic Qld WA SA Tas

National average

Sample


43


Ben Jarman

Helen Kevans

ditions across Australia. The Governor acknowledged thatmonetary policy is often dubbed a “blunt instrument” inthat it cannot be set at different levels across the variousregions and industries. The mining boom impacts regionsand industries to markedly different extents, owing mainlyto the simple fact that mineral resources are not found inevery state and territory. Western Australia, for example,where mining accounts for a quarter of production, will geta much bigger boost from the current “shock” than, say,Victoria, where mining accounts for only 2% of produc-tion. The boom already is having a positive impact on WA,with growth in 2Q rising markedly relative to that in theother states (second chart, previous page).

New era of austerity?Should higher resource utilization, the boom in investment,and the elevated terms of trade coincide with continuedstrength in consumption, the RBA would have to tightenpolicy more than we currently forecast (+100bp) in 2011.RBA officials have assumed, though, that we are living in anew era of consumer austerity, where the challenges posedby the soaring terms of trade and booming investment out-look would be lessened by greater conservatism amonghouseholds.

There are mixed signals emerging on this front, however.On the one hand, household consumption underpinned 2QGDP growth, pushing the savings rate sharply lower (firstchart), and retail sales recently have firmed on the back ofan increase in discretionary spending. On the other hand,more timely data, such as last week’s Westpac MelbourneInstitute (WMI) consumer sentiment index, suggest thathouseholds have started to tread more cautiously. TheWMI found that more people were opting to pay down debt(21% in 3Q compared to 16% in 2Q), which may provide amore accurate signal that households are, in fact, becomingmore conservative. Households’ appetite for debt also hassoftened, with housing credit growth recently easing andcredit card repayments picking up.

Credit demand still subduedThe credit data are a key focus of RBA officials, and hap-pen to be the only leading data point scheduled for releaseahead of the early-October Board meeting. Next week’snumbers should show that credit growth remained subduedin August, rising just 0.2%m/m. This would mean that on athree-month annualized basis, credit growth will have de-clined sharply, to 2.0% from 3.3% in July and 3.8% in June(second chart). This series has slowed markedly this yearafter venturing as high as 5.1% in February, providing evi-dence that the cumulative impact of the RBA’s policy tight-

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15

20

00 01 02 03 04 05 06 07 08 09 10 11

% 3mo arAustralia: private sector credit aggregates

ening has indeed damped demand.

Growth in housing credit, by far the largest pool, likely willhave softened further owing to higher interest rates and theabsence of the expanded first-home buyers’ grant. Personalcredit probably was flat in August, while business creditlikely declined for the third straight month, with small- andmedium-sized firms still struggling to obtain finance fromthe domestic banks.

More signs of weakness in NZAcross the Tasman, economic growth in New Zealandslowed to a crawl in the second quarter. The GDP numbersshowed the economy expanded just 0.2%q/q, compared to0.5% in 1Q (which was downwardly revised from 0.6%).The GDP print also fell short of the RBNZ’s 0.9%q/q fore-cast and adds to the case for Governor Bollard to sit on thesidelines for the time being.

It was just over a week ago that the Governor left the offi-cial cash rate (OCR) unchanged and signaled that futurerate rises would likely be slower than previously expected.With that guidance in mind, combined with this week’sexceptionally weak GDP print and other monthly datashowing that the economy has continued to shed momen-tum in the current quarter, we now expect that Bollard willleave the cash rate unchanged for the remainder of the year.

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0

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4

6

8

% of income savedAustralia: household savings rate

95 97 99 01 03 05 07 09

Sample

44

Economic ResearchAustralia and New ZealandSeptember 24, 2010


Ben Jarman

Helen Kevans

The biggest downside surprise in the GDP numbers, amongthe expenditure components, was the mere 0.1%q/q rise inhousehold consumption. Indeed, household consumption,which accounts for nearly 60% of the economy, did notcontribute to the headline. With retail sales volumes havingbounced 1.3%q/q in 2Q, we had expected a decent rise inthis component. But higher spending on durable goods wasoffset by lower spending on services, with the 0.6%q/q de-cline in that category marking the largest drop in 10 years.

Economic growth in the third quarter also will be subpar.The devastating earthquake in Canterbury, which accountsfor roughly 15% of GDP, will have a negative near-termimpact on economic activity. We estimate that it will knock0.2%-pt off 3Q GDP growth as consumer and business sen-timent take a hit, employees are left unable to work, andconsumer spending is reined in further. In the mediumterm, though, the disaster should boost GDP growth viahigher construction, greater government spending, and in-creased employment, which will have a positive impact onsentiment, household incomes, and spending.

Kiwis need to show more austerityEarlier in the year, we had believed that household con-sumption would remain strong leading into 3Q, ahead ofthe GST hike on October 1, but as a result of the earth-quake, households probably will consolidate spending ear-lier than we previously expected. This is particularly likelygiven the persistent weakness in the labor market, with theunemployment rate actually rising again in 2Q, and withwage growth remaining slow.

The consolidation is a much-needed development, how-ever, with the 2Q current account data bringing to the forethe need for the nation to cut its high debt and bolster sav-ings to turn around the imbalances in the economy. TheCAD rose to 3.0% of GDP from 2.4% in 1Q and will likelytrack higher over the foreseeable future, particularly in2011 as imports rise in order to feed the reconstruction ofthe Canterbury region.

Forthcoming policy changes should assist in promotingsaving. When the government announced in the Budget inMay that it would raise the GST, it also announced cuts toincome taxes, the combination of which should encouragehouseholds to save. The tax bill of someone with an annualincome of NZ$120,000, for example, would fall aroundNZ$4,600 as a result of the cuts to personal income tax rates,but with the GST hike to discourage spending, much of thetax reduction would most likely be saved. This should, to asmall extent, help reduce the vulnerabilities to swelling for-

eign debt. New Zealand is significantly in debt to foreigners,with the country’s net debtor position totaling 86.5% ofGDP, owing mainly to foreign holdings of private sectordebt reflecting households’ perennially low levels of saving.

Australia:Data releases and forecastsWeek of September 27 - October 1

Thu Private sector creditSep 30 Sa11:30am May Jun Jul Aug

%m/m 0.5 0.2 0.1 0.2%oya 2.8 2.9 2.8 2.8

Thu Building approvalsSep 30 Sa11:30am May Jun Jul Aug

%m/m -7.0 -3.3 2.3 2.5%oya 31.1 14.2 11.0 13.4

Building approvals probably got a mild lift in August,rising 2.5%m/m following a third successive rate-hikereprieve from the RBA and a resulting surge in con-sumer confidence, although the soft underlying trendwill remain in place. There is little evidence to suggest

-10

-8

-6

-4

-2

0

Four quarter average, % of GDPNew Zealand: current account balance

90 95 00 05 10

-1.5

-0.5

0.5

1.5

2.5

%oyaNew Zealand: real GDP

04 05 06 07 08 09 10 11

Sample


45


Ben Jarman

Helen Kevans

that approvals for private sector houses in particular,which are down nearly 8%3m/3m, are due for any sortof meaningful bounceback. Total approvals will likelyremain depressed this year owing to structurally lowerfirst-home buyer representation in the housing market.We expect permits for private sector houses to havebeen flat over the month, while the always volatilehigher-density category will continue to be the swingfactor that determines whether the headline over- orundershoots consensus. This category posted a solidgain 7%m/m print in July, but even that still left thethree-month moving average in the red.

Review of past week’s dataWMI leading index

May Jun Jul%m/m sa 0.3 0.5 0.0 -0.1 __ 0.4

New Zealand:Data releases and forecastsWeek of September 27 - October 1

Wed Trade balanceSep 29 Nsa10:45am May Jun Jul Aug

Trade balance (NZ$ mn) 765 214 -186 -100

The trade deficit should improve marginally owing to alarger drop in imports. Exports also will be lower thanin the previous month owing to softer external demand.

Thu Building consentsSep 30 Sa10:45am May Jun Jul Aug

%m/m -9.2 3.3 3.2 2.0%oya 11.1 27.9 26.5 25.6

We forecast another rise in building permits in August,but total permits will remain well down from their peakin June 2007. We expect only 4,496 permits were is-sued in August, down from 1,473 permits in July, andjust half the number issued at the most recent peak.

Thu NBNZ business confidenceSep 30 Nsa2:00pm Jun Jul Aug Sep

Index 40.2 27.9 16.4 9.0

The NBNZ business confidence index probably fellfurther in September. Marking the fifth straight monthlyfall, the index probably slipped around seven points tosuggest that only a net 9% of respondents expect busi-ness conditions to improve over the next 12 months.The decline will owe mainly to concerns about the

strength of the recovery in New Zealand and the drop insentiment following the recent earthquake in Canter-bury. The firms’ own activity outlook index also will besignificantly lower, suggesting that economic growthwill moderate in the final stages of the year.


Visitor arrivalsJun Jul Aug

Total (%m/m nsa) 0.7 1.4 1.4 0.8 __ 0.6

Net permanent immigrationJun Jul Aug

Monthly (000s, nsa) -0.7 1.4 __ 0.912-month sum (000s, nsa) 16.5 15.2 __ 14.5

Credit card spendingJun Jul Aug

%oya 4.4 4.5 2.7 2.6 __ 2.0

Balance of paymentsNZ$ mn nsa

4Q09 1Q10 2Q10Current account -3414 -3332 176 159 -600 -880

As a percentage of GDP, the annual current account deficit(CAD) printed at 3.0%, compared to 2.4% in the previousquarter. The marked worsening of the annual CAD was ex-pected given the absence of one-off company tax transac-tions that led to the significant improvement in the CAD inthe year to March 2010. In the absence of these transactions,the CAD would have been much wider in 1Q, at NZ$6.1billion, or 3.3% of GDP. We suspect that the current accountdeficit will rise toward 4% of GDP by year-end, beforeworsening significantly in 2011 as the recovery picks up.

Real GDPSa, production-based

4Q09 1Q10 2Q10%oya 0.5 1.9 2.8 1.9%q/q 0.9 1.0 0.6 0.5 1.0 0.2

GDP growth of 0.2%q/q fell well below expectations(J.P. Morgan: 1.0%; consensus: 0.7%). The biggest down-side surprise was in household consumption, which madezero contribution to the headline rate. Government spendingrose 0.5%q/q, investment spiked 6.2%, and net exportsadded 0.2%-pt to GDP growth. Export volumes increased1.3%q/q, contributing to the rundown in inventories. Importvolumes were up 0.6%q/q, bolstered by a surge in imports ofpassenger vehicles (+23.1%). Across the industries, manu-facturing recorded the largest decline, falling 4.0%q/q anddeducting 0.5%-pt from GDP growth. Manufacturing inven-tories were down NZ$437 million, accounting for most ofthe decline in total inventories (down NZ$530 million).

Sample

46

JPMorgan Chase Bank N.A., New York Economic Research Daniel Silver Global Data Watch: Developed Markets

September 24, 2010

US economic calendar Monday Tuesday Wednesday Thursday Friday

27 Sep Dallas Fed survey (10:30am) Sep Auction 2-year note $36 bn

28 Sep S&P/Case-Shiller HPI (9:00am) Jul 2.9% Consumer confidence (10:00am) Sep 54.0 Richmond Fed survey (10:00am) Sep Auction 5-year note $35 bn Atlanta Fed President Lockhart speaks on the economy in Tennessee (5:30pm)

29 Sep Auction 7-year note $29 bn Minneapolis Fed President Kocherlakota speaks in London (10:15am) Philadelphia Fed President Plosser speaks on the economy in New Jersey (12:30pm) Boston Fed President Rosengren speaks in New York (1:15pm)

30 Sep Initial claims (8:30am) w/e prior Sat 460,000 Real GDP (8:30am) 2Q third 1.7% Chicago PMI (9:45am) Sep KC Fed survey (11:00am) Sep

1 Oct Personal income (8:30am) Aug 0.3% Real consumption 0.2% Core PCE deflator 0.04%(1.3%oya) Consumer sentiment (9:55am) Sep final 67.0 ISM manufacturing (10:00am) Sep 54.0 Construction spending (10:00am) Aug -0.6% Light vehicle sales Sep 11.9mn New York Fed President Dudley speaks at SABEW conference in New York (8:30am) Dallas Fed President Fisher speaks on US economy in Vancouver (3:15pm)

4 Oct Pending home sales (10:00am) Aug Factory orders (10:00am) Aug

5 Oct ISM nonmanufacturing (10:00am) Sep

6 Oct ADP employment (8:15am) Sep

7 Oct Initial claims (8:30am) w/e prior Sat JOLTS (10:00am) Aug Consumer credit (3:00pm) Aug Chain store sales Sep Announce 3-year note $32 bn Announce 10-year note (r) $21 bn Announce 30-year bond (r) $13 bn

8 Oct Employment (8:30am) Sep Wholesale trade (10:00am) Aug

11 Oct Columbus Day Bond market closed

12 Oct NFIB survey (7:30am) Sep FOMC minutes Auction 3-year note $32 bn Kansas City Fed President Hoenig speaks on economy at NABE in Denver (11:45am)

13 Oct Import prices (8:30am) Sep Federal budget (2:00pm) FY10 Auction 10-year note (r) $21 bn

14 Oct Initial claims (8:30am) w/e prior Sat PPI (8:30am) Sep International trade (8:30am) Aug Auction 30-year bond (r) $13 bn

15 Oct Retail sales (8:30am) Sep CPI (8:30am) Sep Empire State survey (8:30am) Oct Consumer sentiment (9:55am) Oct preliminary Business inventories (10:00am) Aug Fed Chairman Bernanke speaks at Boston Fed conference (8:15am)

18 Oct TIC data (9:00am) Aug Industrial production (9:15am) Sep NAHB survey (10:00am) Oct

19 Oct Housing starts (8:30am) Sep

20 Oct Beige book (2:00pm)

21 Oct Initial claims (8:30am) w/e prior Sat Philadelphia Fed survey (10:00am) Oct Leading indicators (10:00am) Sep Announce 5-year TIPS (r) $10 bn Announce 2-year note $35 bn Announce 5-year note $34 bn Announce 7-year note $29 bn

22 Oct

Sample

47

JPMorgan Chase Bank, London Economic Research David Mackie Global Data Watch: Developed Markets

September 24, 2010

Euro area economic calendar Monday Tuesday Wednesday Thursday Friday

27 Sep

Euro area: M3 (10:00am) Aug 0.4%oya

Netherlands: CBS bus. Conf. (9:30am) Sep

ECB President Jean-Claude Trichet speaks in Frankfurt, Germany (9:00am) & Brussels, Belgium (3:00pm)

ECB member Gertrude Tumpel-Gugerell speaks in Frankfurt, Germany (9:15am) & Brussels, Belgium (5:00pm)

28 Sep

Germany: CPI 6 states and prelim (8:00am) Sep 1.2 %oya GfK cons. conf. (8:00am) Oct France: Cons. of mfg goods (8:45am) Aug Italy: ISAE cons. conf. (9:30) Sep Contractual wages (10:00am) Aug Belgium: CPI (11:15am) Sep

ECB member Gertrude Tumpel-Gugerell speaks in Brussels, Belgium (8:45am)

ECB member Jürgen Stark speaks in Istanbul, Turkey (9:30am CET)

29 Sep

Euro area: EC business conf. (11:00am) Sep -4 %bal, sa EC cons. conf. final (11:00am) Sep -11 %bal, sa France: INSEE cons. conf. (8:45am) Sep Italy: ISAE bus. conf. (9:30) Sep PPI (10:00am) Aug Spain: HICP flash (9:00am) Sep ECB member José Manuel González-Páramo speaks in La Paz, Bolivia (4:00pm CET)

30 Sep

Euro area: HICP flash (11:00am) Sep 1.7 %oya, nsa Germany: Employment (9:55am) Aug 10 ch m/m, 000s, sa Unemployment (9:55am) Sep -15 ch m/m, 000s, sa France: PPI (8:45am) Aug Italy: CPI Prelim (11:00am) Sep 1.6 %oya, nsa

1 Oct

Euro area: PMI Mfg final (10:00am) Sep 53.6 Index, sa Unemployment rate (11:00am) Aug 10 %, sa Germany: Retail sales (8:00am) Aug PMI Mfg final (9:55am) Sep 55.3%bal, sa France: PMI Mfg final (9:50am) Sep 55.4%bal, sa Italy: PMI Mfg (9:45am) Sep 51.3%bal, sa Spain: PMI Mfg (9:15am) Sep 49.7%bal, sa

4 Oct

Euro area: PPI (11:00am) Aug

5 Oct

Euro area: PMI services & composite final (10:00am) Sep Retail sales (11:00am) Aug Germany: PMI services & composite final (9:55am) Sep France: PMI services & composite final (9:50am) Sep Italy: PMI services & composite (9:45am) Sep Spain: PMI services & composite (9:15am) Sep

6 Oct

Euro area: GDP final (11:00am) 2Q Germany: Mfg orders (12:00pm) Aug

7 Oct

Euro area: ECB rate announcement (1:45pm) No change expected ECB press conf. (2:30pm) Germany: Industrial production (12:00pm) Aug

France: Foreign trade (8:45am) Aug Netherlands: CPI (9:30am) Sep

8 Oct

Germany: Foreign trade (8:00am) Aug France: Monthly budget situation (8:45am) Aug Netherlands: Industrial production (9:30am) Aug

11 Oct

France: Industrial production (8:45am) Aug Italy: Industrial production (10:00am) Aug

12 Oct

Germany: CPI final (8:00am) Sep

13 Oct

Euro area: Industrial production (11:00am) Aug France: CPI (8:45am) Sep

14 Oct

Euro area: ECB monthly bulletin (10:00am) Oct

Spain: CPI final (9:00am) Sep

15 Oct

Euro area: HICP final (11:00am) Sep Foreign trade (11:00am) Aug Italy: Foreign trade (10:00am) Aug CPI final (10:00am) Sep

18 Oct

19 Oct

Euro area: BoP (10:00am) Aug Germany: ZEW business survey (11:00am) Oct Belgium: BNB cons conf. (3:00pm) Oct

20 Oct

Germany: PPI (8:00am) Sep Italy: Industrial orders (10:00am) Aug ISAE cons. conf. (9:30am) Oct Netherlands: CBS cons. conf. (9:30am) Oct

21 Oct

Euro area: EC cons. conf. prelim (4:00pm) Oct France: INSEE bus. conf. (8:45am) Oct

22 Oct

Euro area: Gen. govt. deficit & debt (10:00am) 2009 (2nd notification)

BoP (10:00am) 2Q (2nd release) Germany: IFO bus. survey (10:00am) Oct Belgium: BNB bus conf. (3:00pm) Oct

Highlighted data are scheduled for release on or after the date shown. Times shown are local.

Sample

48

JP Morgan Securities Japan Co., Ltd Economic Research Miwako Nakamura Global Data Watch: Developed Markets

September 24, 2010

Japan economic calendar Monday Tuesday Wednesday Thursday Friday

27 Sep Trade balance (8:50 am) Aug 589 bn yen, nsa Corporate service prices (8:50 am) Aug -1.3%oya BOJ Governor Shirakawa’s address in Osaka prefecture (4:00 pm)

28 Sep Shoko Chukin small business sentiment (2:00 pm) Sep 47.5, DI Auction 2-year bond

29 Sep BoJ Tankan (8:50 am) 3Q 7, large mfg DI Auction 3-month bill

30 Sep PMI manufacturing (8:15 am) Sep 50.0, DI Total retail sales (8:50 am) Aug 5.0%, oya IP Preliminary (8:50 am) Aug 1.2%m/m, sa Housing starts (2:00 pm) Aug 14.5%oya Construction orders (2:00 pm) Aug

1 Oct Unemployment rate (8:30 am) Aug 5.1%,sa Job offers to applicants ratio (8:30 am) Aug 0.54, sa All household spending (8:30 am) Aug 1.5%m/m, sa Nationwide core CPI (8:30 am) Aug -1.0%, oya Auto registrations (2:00 pm) Sep 12.0%, oya

26 Sep: BoJ Governor Shirakawa’s speech to the Japan Society of Monetary Economics

4 Oct Nominal wages (10:30 am) Aug Monetary base (8:50 am) Sep BoJ Monetary Policy Meeting Auction 6-month bill

5 Oct PMI services/composite (8:15 am) Sep BoJ Monetary Policy Meeting and statement BoJ Governor Shirakawa’s press conference (3:30pm)

6 Oct BoJ monthly economic report (2:00 pm) Auction 3-month bill

7 Oct Coincident CI (2:00 pm) Aug Auction 10-year bond

8 Oct Current account (8:50 am) Aug Economy Watchers survey (2:00 pm) Sep Minutes of Aug 30& Sep 6-7 BoJ Monetary Policy Meeting(8:50am)

During the week: Cabinet Office private consumption index Aug

11 Oct Holiday: Japan

12 Oct Consumer sentiment (2:00 pm) Sep Auction 2-month bill

13 Oct Private machinery orders (8:50 am) Aug M2 (8:50 am) Sep Auction 3-month bill

14 Oct Corporate goods prices (8:50 am) Sep Auction 30-year bond

15 Oct IP final (1:30 pm) Aug BoJ Governor Shirakawa’s address at BOJ branch managers’ meeting Auction 1-year bill

18 Oct Reuter Tankan (8:30 am) Oct Tertiary sector activity index (8:50 am) Aug Construction spending (2:00 pm) Aug

19 Oct Auction 5-year bond

20 Oct Auction 3-month bill

21 Oct All sector activity index (1:30 pm) Aug Auction 20-year bond

22 Oct

During the week: Nationwide department store sales Sep

Highlighted data are scheduled for release on or after the date shown. Times shown are local.

Sample

49

JPMorgan Chase Bank N.A., New York Economic Research Silvana Dimino Global Data Watch: Developed Markets

September 24, 2010

Canada economic calendar Monday Tuesday Wednesday Thursday Friday

27 Sep 28 Sep

29 Sep IPPI (8:30am) Aug 0.3% Ex energy 0.5%

30 Sep Monthly GDP (8:30am) Jul 0.1% BoC Governor Mark Carney speaks to Windsor-Essex Regional Chamber of Commerce in Windsor, Ontario (12:50pm). Press Conference to follow (1:50pm)

1 Oct

4 Oct

5 Oct BoC Senior Deputy Governor Tiff Macklem speaks on monetary policy after Great Recession at The International Finance Club of Montreal (1:15pm)

6 Oct Ivey PMI (10:00am) Sep

7 Oct Building permits (8:30am) Aug

8 Oct Employment (7:00am) Sep Housing starts (8:15am) Sep BoC Business Outlook Survey (10:30am) 3Q BoC Senior Loan Officer Survey (10:30am) 3Q

11 Oct Thanksgiving Day Markets closed

12 Oct

13 Oct New housing price index (8:30am) Aug

14 Oct International trade (8:30am) Aug

15 Oct Manufacturing sales (8:30am) Aug New vehicle sales (8:30am) Aug Existing home sales Sep

18 Oct Nonresidential construction (8:30am) 3Q

19 Oct BoC rate announcement (9:00am)

20 Oct Wholesale sales (8:30am) Aug Monetary Policy Report (10:30am)

21 Oct Leading indicators (8:30am) Sep

22 Oct CPI (7:00am) Sep Retail sales (8:30am) Aug

Highlighted data are scheduled for release on or after the date shown.

Sample

50

JPMorgan Chase Bank, London Economic Research Malcolm Barr Global Data Watch: Developed Markets Allan Monks September 24, 2010 Nicola Mai

UK/Scandinavia/Switzerland economic calendar

Monday Tuesday Wednesday Thursday Friday

27 Sep

Sweden: Trade balance (9:30am) Aug

28 Sep

United Kingdom: GDP final (9:30am) 2Q 1.2 %q/q BoP (9:30am) 2Q -11.9 £ bn, sa (Trade in goods and services) Business investment final (9:30am) 2Q -1.6 %q/q CBI distributive trades (11:0am) Sep BoE policy maker Adam Posen speaks (2:00pm) Sweden: Retail sales (9:30am) Aug Switzerland: UBS cons. indicator (8:00am) Aug

29 Sep

United Kingdom: M4 & M4 lending final (9:30am) Aug 1.8%oya,sa Net lending to individuals (9:30am) Aug 0.3 ch,m/m £ bn Mortgage approvals Aug 45.7k sa Index of services (9:30am) Jul -0.5 %m/m, sa Sweden: Business tendency (9:15am) Sep Consumer conf. (9:15am) Sep Riksbank Governor Stefan Ingves will participate in the Eurofi Financial Forum 2010, Brussels Switzerland: KOF leading indicator (11:30am) Sep 2.12 Index, sa

30 Sep

United Kingdom: GfK cons. conf. (12:01am) Sep -18 %bal,sa Nationwide HPI (7:00am) Sep 0.1%m/m, sa BoE Deputy Governor Paul Tucker speaks in Brussels (8:00am) Credit conditions survey (9:30am) 3Q BoE’s Paul Fisher speaks in London (10:05am) Sweden: Wage stats (9:30am) Jul Norway: Retail sales (10:00am) Aug Credit indicator (10:00am) Aug Switzerland: BoP (9:00am) 2Q

1 Oct

United Kingdom: BoE housing equity withdrawal (9:30am) 2Q PMI mfg (9:30am) Sep 53.3 %bal,sa Sweden: PMI (8:30am) Sep Norway: PMI mfg (9:00am) Sep Labor directorate unemployment (9:00am) Sep NEF HPI (11:00am) Sep Switzerland: PMI (9:30am) Sep 61.0 Index, sa

4 Oct

United Kingdom: PMI construction (9:30am) Sep

5 Oct

United Kingdom: PMI services (9:30am) Sep Switzerland: CPI (9:15am) Sep 0.5%oya

6 Oct

United Kingdom: Markit jobs report (12:0am) Sep New cars regs (9:00am) Sep

7 Oct

United Kingdom: Industrial production (9:30am) Aug MPC rate announcement & Asset purchase target (12:00pm) No change expected Norway: IP mfg (10:00am) Aug

8 Oct

United Kingdom: PPI (9:30am) Sep Sweden: Industrial production & orders (9:30am) Aug Switzerland: Unemployment (7:45am) Sep 3.7%, sa

During the week : United Kingdom: Halifax HPI Sep

11 Oct

United Kingdom: Quoted mortgage interest rates (9:30am) Sep

Norway: CPI (10:00am) Sep PPI (10:00am) Sep

12 Oct

United Kingdom: BRC retail sales monitor (12:01am) Sep RICS HPI (12:01am) Sep BCC economic survey (12:01am) 3Q DCLG HPI (9:30am) Aug CPI (9:30am) Sep Trade balance (9:30am) Aug Sweden: CPI (9:30am)Sep

13 Oct

United Kingdom: Labor market report (9:30am) Sep Sweden: AMV unemployment (10:00am) Sep Norway: Norges Bank’s regional network report 3Q Switzerland: Producer and import prices (9:15am) Sep

14 Oct

15 Oct

Sweden: House prices (9:30am) Sep Norway: Trade balance (10:00am) Sep

During the week : United Kingdom: Nationwide cons conf. Sep

18 Oct

19 Oct

United Kingdom: CBI industrial trends (11:00am) Oct

20 Oct

United Kingdom: MPC minutes (9:30am) M4 and M4 lending prelim (9:30am) Sep Public sector finances (9:30am) Sep

21 Oct

United Kingdom: Retail sales (9:30am) Sep Sweden: Labor force survey (9:30am) Sep Norway: Bank lending survey 3Q Switzerland: Monthly statistical bulletin (9:00am) Trade balance (9:15am) Sep

22 Oct

During the week : United Kingdom: Nationwide cons conf. Sep Highlighted data are scheduled for release on or after the date shown. Times shown are local.

Sample

JPMorgan Chase Bank NA, New YorkMichael Mulhall


Global Data Diary Week / Weekend Monday Tuesday Wednesday Thursday Friday

27 SeptemberEuro area• Trichet speech

Hungary• HNB mtg: no chg

Israel• BoI mtg: +25bps

Japan• Trade bal (Aug)• Shirakawa speech

United States• Dallas Fed surv (Sep)

27 Sep - 1 OctRussia• CBR mtg: no chg• CPI (Sep)

28 SeptemberGermany• CPI prelim (Sep)• GfK cons conf (Oct)

Italy• ISAE cons conf (Sep)

Japan• Shoko Chukin surv (Sep)

United Kingdom• GDP final (2Q)

United States• C-S HPI (Jul)• CB cons conf (Sep)• Richmond Fed surv (Sep)

30 SeptemberEuro area• HICP flash (Sep)

Germany• Labor mkt reprt (Aug/Sep)

Japan• PMI mfg (Sep)• Retail sales (Aug)• IP prelim (Aug)

Korea: IP (Aug)

Taiwan• CBC mtg: +12.5bps

United Kingdom• GfK cons conf (Sep)

United States• GDP 3rd print (2Q)• KC Fed surv (Sep)

29 SeptemberEuro area• EC bus conf (Sep)• EC cons conf final (Sep)

France• INSEE cons conf (Sep)

Italy• ISAE bus conf (Sep)

Japan• BoJ Tankan (3Q)

Poland• NBP mtg: no chg

Romania• BNR mtg: no chg

United Kingdom• Mortgage approvals (Aug)

1 OctoberBrazil: IP (Aug)

Euro area• Unemployment rate (Aug)

Germany• Retail sales (Aug)

India: Trade balance (Aug)

Japan• Unemployment rate (Aug)• Core CPI (Aug)• Auto regs (Sep)

United States• Personal income (Aug)• UMich cons conf fin (Sep)• Auto sales (Sep)

Global• Mfg PMIs (Sep)

4 OctoberTurkey• CPI (Sep)

United States• Pending homes sales

(Aug)• Factory orders (Aug)

4 - 8 OctoberJapan• Cabinet Office private

consumption index(Aug)

5 OctoberAustralia• NAB bus conf (Sep)• RBA mtg: +25bps

Euro area• Retail sales (Aug)

Indonesia• BI mtg: no chg

Japan• BoJ MPM: no chg

Global• Services PMIs (Sep)

7 OctoberAustralia• Unemployment rate (Sep)

Brazil: CPI (Sep)

Euro area• ECB mtg: no chg

Germany: IP (Aug)

Peru: BCRP mtg: no chg

Philippines• BSP mtg: no chg

Taiwan: Exports (Sep)

United Kingdom• MPC mtg: no chg• IP (Aug)

United States: JOLTS (Aug)

6 OctoberBrazil• Auto sales (Sep)

Euro area• GDP final (2Q)

Germany• Mfg orders (Aug)

United Kingdom• Auto regs (Sep)

United States• ADP employment (Sep)

8 OctoberCanada• Employment (Sep)

Germany• Foreign trade (Aug)

Japan• Econ Watchers surv (Sep)• MPM minutes (Aug/Sep)

Netherlands• IP (Aug)

Sweden• IP (Aug)

Turkey• IP (Aug)

United States• Employment (Sep)

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