PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

13 August 2010

1 The US Fed Is Heading Towards Not So Successful

Japan’s Style Of Quantitative Easing?

2 Euroland’s Industrial Production Fell M-o-m And

Moderated Y-o-y In June

3 Japan’s Consumer Confidence Fell In July

4 India’s Industrial Production Slowed Down In June

Tracking The World Economy...

Today’s Highlight

The US Fed Is Heading Towards Not So Successful Japan’s Style Of Quantitative Easing?

The US Federal Reserve’s decision on 10 August to keep its holdings of US Treasury and mortgage-related securities
stable at US$2.054 trn, by rolling over Treasuries and reinvesting proceeds from mortgage-related securities as they
mature, has prompted some economists to question whether it is heading towards the Japanese style of quantitative
easing last decade which yielded little impact. The Fed’s latest move is aimed at stopping the shrinkage of its balance
sheet from prompting an increase in long-term borrowing costs, potentially allowing rates to fall further. While the move
shows a change in policy direction away from exiting monetary stimulus, the Fed didn’t indicate it was ready to pursue
larger-scale purchases of securities.

Recall that the Bank of Japan (BOJ) kept its benchmark rate near zero as it used quantitative easing in early 2000s and
became the first central bank in modern history to embark on the policy. The BOJ targeted the level of reserves and
pumped trillions of yen in excess cash into the economy, trying to encourage bank lending to companies and beat
deflation. The policy did not work out as planned because commercial lenders kept the funds at their accounts with the
BOJ, even though the target was increased by almost nine times to 35 trn yen (US$411bn) by early 2004. The money
failed to boost confidence and spark business investment as well as consumption, and deflation plagued the economy
through 2005.

The Fed Chairman has called the Fed’s credit easing policy to be different from Japan’s so-called quantitative easing from
2001 until 2006. The Fed, by comparison, is trying to lower borrowing costs by targeting the level and composition of
assets it holds that correspond with bank reserves instead of the actual level of excess reserves, which totaled US$1.01
trn on 28 July. Furthermore, unlike the BOJ, the Fed was aggressive and it is still early in the process, and the US
economy is still in a position of having reasonable growth.

Meanwhile, initial jobless claims rose by 2,000 to 484,000 in the week ended 7 August, the highest level since mid
February. Similarly, the four-week moving average of claims, a more stable indicator, climbed to 473,500, the highest
level since late February. As a whole, the readings suggest that the job market has turned weaker, as companies may
be losing confidence in the recovery and are hesitant to hire, raising the risk of further erosion in consumer spending.

Peck Boon Soon

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

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 13 August 2010

The Euroland Economy

Industrial Production Fell M-o-m And Moderated Y-o-y In June

◆ Euroland’s industrial production fell by 0.1% mom in June, the first decline in four months and compared
with +1.1% in May. This was due to declines in the production of durable- and non-durable consumer goods
as well as intermediate inputs. These were made worse by a slowdown in the production of energy and capital
goods during the month. Yoy, industrial production moderated to 8.2% in June, from +9.9% in May. This was
the first easing after four straight months of picking up, suggesting that industrial activities are beginning to lose
momentum. A slowdown in the production of intermediate inputs, capital goods, non-durable consumer goods
and energy contributed to the slowdown. This suggests that exports and business spending are likely to soften
in the months ahead. In terms of country, the slowdown was reflected in a slower increase in industrial
production in Germany, France and Spain.

Asian Economies

Japan’s Consumer Confidence Fell In July

◆ Japan’s consumer sentiment fell to 43.3 in July, from 43.5 in June. This was the first decline in seven
months, suggesting that consumers have turned cautious, given that the unemployment rate is rising and export
growth is heading south. Indeed, Japanese policymakers are increasingly voicing concern over the threat after
the yen advanced to a 15-year high. As a result, consumers expect income to soften and they have become
less willing in buying durable goods during the month. This could affect consumer spending in the country.

India’s Industrial Production Slowed Down In June

◆ India’s industrial production slowed down to 7.1% yoy in June, from +11.3% in May and the peak of
+16.5% in April. This was the slowest growth in 13 months, indicating that economic activities will likely expand
at a more moderate pace in the 2Q. The slowdown was due mainly to a weaker manufacturing production, which
eased to 7.3% yoy in June, from +12.3% in May and a high of +17.9% in April. This was reflected in slower
increases in the production of basic, capital and intermediate goods. The slower growth in industrial production
will likely complicate India’s move in raising its key policy rate. As it stands, India raised its key policy rate
for the fourth time on 27 July and by 25 basis points to 5.75% in a move to control inflation. The country’s
inflation, as measured by the wholesale-price index, accelerated to +10.6% yoy in June, after inching up to
+10.2% in May and it remained high compared to the peak of 11.0% recorded in March.

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