JP March 18, 2011

Economic Research
March 18, 2011
Global Data Watch Contents

Economic Research note
• Japan to contract in 2Q followed by 3% growth in 2H; limited rever- Offsetting crosscurrents for
developed market consumers 11
berations elsewhere focused in manufacturing and EM Asia
Keep an eye on the global
• We maintain that global growth will hold above trend in 2Q and 2H11 inventory cycle 13
New Fed sequence is mostly the
• Policy easing to support recovery in Japan; no changes elsewhere same as the old one 15
Euro area data point to a drift
• European officials unveil substantial policy package as Portugal moves higher in core inflation 17
closer to accessing the EFSF Euro area delivers a good
comprehensive policy package 19
The sun also rises Japan to recover from the
disaster, but will take time 21
In the face of the unfolding tragedy in Japan, near-term global growth prospects
UK growth: the good, the bad, and
have moderated further this week. On the heels of growth downgrades due to the 25
the ugly
oil-price shock and signs that the US and China turned into the year slower than UK: Budget for 2011 will stay the
expected, the Tohoku earthquake has prompted an 2%-pt reduction in our forecast fiscal course 27
for 1H11 Japanese GDP growth. We now project a 3.4% annualized gain in global RBNZ on hold until 2012— OCR
changes more potent 29
GDP during the first half, down from a projected 4% pace that included upside risk
as the year began.
Global Economic Outlook Summary 4
Global Central Bank Watch 6
Recent events are a sobering reminder of the fragility of human endeavor (and
The J.P. Morgan View: Markets 7
forecasts) in the face of unpredictable natural and political forces. Considerable
uncertainties surround the resolution of events in the MENA region and Japan’s Selected recent research from
10
J.P. Morgan Economics
impaired Fukushima nuclear facility. However, we believe that both Japan and the
global economy will be resilient. For its part, the Japanese economy will likely bounce Data Watches
back in the second half of the year, moving on to an above-trend growth path that raises United States 31
GDP above our previous forecast level by the end of next year (see “Japan to Euro area 39
recover from the disaster, but will take time” in this GDW). Outside Japan, the global Japan 45
economy remains on track to deliver growth well above its trend pace of 2.7% per year. Canada 49
Mexico 51
In part, this perspective is built on what we have learned from past shocks: Brazil 53
Andeans 55
• If history is any guide, disruptions following natural disasters are short-lived in United Kingdom 57
societies where reconstruction takes place. That was the case following the Russia 61
January 1995 earthquake that decimated Kobe—the world’s 6th largest con- Turkey 63
tainer port and a key hub between Japan’s two largest cities of Tokyo and Osaka. South Africa 65
Although many predicted it would take a decade for Kobe return to prominence,
Australia and New Zealand 67
the city was nearly fully recovered in just over one year. Moreover, GDP in
China, Hong Kong, and Taiwan 71
Japan surged in 1995 alongside a slowing global backdrop. The cost of the
Korea 75
current disaster is hard to predict but, assuming the nuclear situation improves,
ASEAN 77
it will likely be similar to that of the Kobe earthquake at 2% of GDP. With
India 81
damage to economic growth to be temporary, we expect limited reverberations
to the rest of the world.
Regional Data Calendars 84
Industrial production
Oil and equity prices Bruce Kasman
%3m, saar; both scales
$/bbl (Brent) Index (dev. mkt.) (1-212) 834-5515
bruce.c.kasman@jpmorgan.com
16 36 120 1000 JPMorgan Chase Bank NA
Global ex Japan Oil
27
110 David Hensley
950
8 18 (1-212) 834-5516
100 david.hensley@jpmorgan.com
9 900 JPMorgan Chase Bank NA
90
0 0 Equities Joseph Lupton
Japan 850
80 (1-212) 834-5735
-9
joseph.p.lupton@jpmorgan.com
-8 -18 70 800 JPMorgan Chase Bank NA
2010 2011 Sep 10 Oct 10 Dec 10 Feb 11 Mar 11
www.morganmarkets.com
JPMorgan Chase Bank NA, New York Economic Research
Bruce Kasman (1-212) 834-5515 Joseph Lupton (1-212) 834-5735 Global Data Watch
bruce.c.kasman@jpmorgan.com joseph.p.lupton@jpmorgan.com March 18, 2011
David Hensley (1-212) 834-5516
david.hensley@jpmorgan.com
Global service-sector activity A limited policy response

DI, sa Global services PMI %oya
The G-7 support for yen intervention is a welcome sign that
65 new orders index 4 policymakers are aware of the vulnerabilities of the global
60 3 recovery and can act cooperatively. Similarly, the willingness
of the BoJ to leave any FX intervention unsterilized, coupled
55 2
with an expansion of the central bank’s QE program, will
50 1 provide important monetary support to the economy under the
45 US services 0 most stress. The government is expected to approve a supple-
consumption mentary reconstruction budget of ¥10 trillion or more, al-
40 -1
though a portion of this may be financed with higher taxes.
35 -2
04 06 08 10
Beyond these measures, however, we do not expect any
additional new policy support. This should not be surprising
given our view that the macroeconomic fallout will be limited.
• The recent jump in oil prices is squeezing purchasing Moreover, the drift of policy is toward normalization, and the
power, and this will be evident in a softening of real hurdle for additional easing remains very high. The Fed is
consumer spending growth through April. However, as- firmly set to end its QEII program in June while US fiscal
suming matters in the MENA stabilize, the damping effect policy now looks to tighten earlier than we had anticipated.
on growth will quickly fade. This will allow continued Fiscal policy is also tightening across Western Europe, while
improvements in financial and labor markets to lift demand ECB President Trichet signaled today that recent events have
growth to a robust pace by midyear (see “Keep an eye on the not changed plans for an April hike. Running against the tide,
global inventory cycle” and “Offsetting crosscurrents for one central bank that may be getting cold feet is the Bank of
developed market consumers” in this GDW). England. GDP might disappoint for a second quarter in a row
and next week’s Budget Report is likely to show no letting up
In addition, our perspective on the outlook also is built on
in fiscal tightening. Even still, however, the best this would
what we believe is happening now. Although official data are
do is delay an MPC hike to later in the year.
adding up to less growth in global GDP this quarter than we
previously anticipated, there is an impressive broadening
underneath the surface of the expansion that points in the Ripple effects most prominent in EM Asia
direction of robust growth. Signs that service sector activity The ripple effects from developments in Japan will be felt
has picked up smartly are consistent with an acceleration in unevenly across the world economy. Sectorally, the biggest
developed world growth and job creation in the United States. impact will be felt by global manufacturing activity. Japan
In addition, there is evidence that credit conditions are easing manufacturing accounts for 10% of global value-added in
in the countries hardest hit by the financial crisis. And despite the sector and is a formidable player in many industries
the fiscal turmoil in the Euro area, the disappointing perfor- including autos and high technology. Although it is hard to
mance to date in much of the region outside Germany, quantify, the near-term disruption to Japanese production
including France, Italy, and Spain, appears to be reversing. will affect the supply of materials, components, and fin-
ished goods across the globe. These disruptions will be felt
To be sure, there are risks that shocks will turn 2011 from the most in EM Asia, on account of its extensive trade and
being a great to a merely good year for growth. The shocks production linkages with Japan and the region’s high
hitting the global economy will take a toll on consumer manufacturing intensity.
confidence and the possibility that oil prices will spike even
higher is the key risk for our outlook. While overshadowed by In reassessing the near-term growth outlook for EM Asia,
the disaster in Japan, there was a clear intensification of some issues specific to EM Asia’s two biggest economies,
turmoil in the MENA region this week, highlighting this China and India, also played a role. In China’s case, some
concern. A sharp rise in oil prices that also undermined risk key data have fallen short of expectations in early 2011,
appetite and sent the equity markets tumbling would pose a including the PMI surveys, auto and other retail sales, and
formidable roadblock for the recovery. At the same time, the industrial production. Although the Lunar New Year holi-
global economy is vulnerable to constraints on fiscal and days may account for some of this shortfall, it also appears
monetary policy that could prompt tightening that magnifies that policy tightening is playing a role. Consequently, the
shocks and generates a negative feedback loop with deterio- 1H11 GDP forecast has been trimmed to 8.8% (from
rating private sector behavior. 9.3%). The forecast for 2H11 was bumped up slightly to
2
Customs trade with Japan port are negotiable and that they are conditional on the
Exports to JPN Imports from JPN behavior of the debtor sovereign (as indicated by the change
% of total % of GDP % of total % of GDP for Greece but not Ireland), policymakers have taken a step
DM 2.9 0.5 3.8 0.7 toward laying out a credible path to debt sustainability.
US 5.1 0.4 6.8 0.9
Borrowing costs still remain too high (they were lowered only
Germany 1.3 0.5 2.2 0.7
100bp for Greece), but given the conditional nature of what
UK 1.6 0.3 2.3 0.5
EM 5.5 1.7 8.6 2.5 was agreed, we think it is reasonable to expect further im-
China 8.2 2.5 13.4 3.3 provements in the terms and conditions over time.
ASEAN 9.8 7.2 11.8 7.8
Brazil 2.9 0.3 4.0 0.4 Despite a general improvement in the region as whole, events
Mexico 0.7 0.2 5.3 1.6 in Portugal this week highlight the challenges still ahead.
CEEMEA 1.7 0.5 2.9 0.8 Faced with increasing market pressure, the Portuguese gov-
ernment announced a new set of fiscal consolidation mea-
9.0%. In India, the more downbeat prospects for near-term sures. Nevertheless, Moody’s still downgraded the sovereign
investment spending and the government’s plans for earlier this week and concerns mounted with the risks of a fall in the
fiscal tightening point to lower near-term growth, with the minority government by April. Political developments are
2Q GDP forecast trimmed to 8.4% from 10%. The forecast increasing the likelihood that the sovereign will access the
changes to Japan, China, and India means slower growth in EFSF despite the government's efforts to avoid this outcome.
the remainder of EM Asia, as well, where the 1H GDP
growth forecast was lowered 0.5%-pts to 6.2%q/q saar. Latins remain focused on inflation
As in EM Asia, it appears that Latin American
The growth backdrop in EM Asia remains solid despite policymakers are still focused squarely on containing infla-
these revisions. Moreover, inflation pressures continue to tion pressures. Recent IP and retail sales data have been on
build, as core inflation and wage growth move higher, and the strong side, pointing to firm growth overall. Although
the surge in commodity prices flows through to consumer year-ago inflation readings did not advance much in Febru-
food and energy prices. With the impact from Japan ex- ary, the recent deterioration of inflation expectations has
pected generally to be transitory, we are not making not subsided and is keeping the pressure on central banks
changes to our policy forecast, which calls for continued, to tighten further. This week, Chile’s central bank surprised
gradual monetary tightening and modest currency apprecia- the market by raising its policy rate 50bp versus a widely
tion. Indeed, signaling their confidence in the global and anticipated 25bp move. That said, we see this more aggres-
domestic growth backdrop, central banks in China and In- sive move as tactical and are not changing our 6.50%
dia tightened policy this week. policy rate call for year-end (consensus 5.75%). In turn,
Colombia followed the script and hiked an expected 25bp
EMU delivers on commitment today.
While uncertainties abound in the MENA region and now in
Asia, considerable resolution was brought to the EMU fiscal Today Mexico’s central bank released meeting minutes that
crisis with the announced details of the region’s comprehen- open the door for earlier hikes if it sees signs of rising in-
sive policy. While not addressing all concerns, the package flation expectations. The minutes included a lengthy dis-
should contain the crisis in the near term as it creates a path cussion among Banxico’s board members of the narrowing
whereby the region can achieve debt sustainability in the output gap and the deterioration in inflation expectations,
medium term without debt restructuring, and it lays out a set which stand near the top of the inflation target range for
of governance reforms to help prevent future crises. Anyone 2011 and 2012. Given the widening gap between the inter-
that expected the package to fully resolve the crisis was bound national and domestic fuel prices and the likelihood that the
for disappointment, as a full resolution will not be achieved government will be forced to accelerate the monthly in-
until Euro area sovereigns reach a combination of primary crease in gasoline prices later this year, we no longer think
positions and debt levels which are deemed to be sustainable. that Banxico will be able to stand pat in 2011 and now an-
Such an outcome can only come with time. ticipate the start of the beginning of a rate cycle with a
50bp move in 4Q11.
The most important element of the package, in our view, was
the decision that the cost of liquidity support can be reduced. Editor
By indicating that the terms and conditions of liquidity sup- Sandy Batten (1-212) 834-9645 sandy.batten@jpmorgan.com
3
JPMorgan Chase Bank, New York Economic Research
David Hensley (1-212) 834-5516 Joseph Lupton (1-212) 834-5735 Global Data Watch
david.hensley@jpmorgan.com joseph.p.lupton@jpmorgan.com March 18, 2011
Carlton Strong (1-212) 834-5612
carlton.m.strong@jpmorgan.com
Global economic outlook summary

Real GDP Real GDP Consumer prices
% over a year ago % over previous period, saar % over a year ago
2010 2011 2012 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 4Q10 2Q11 4Q11 2Q12
The Americas
United States 2.8 2.9 2.9 2.6 2.8 2.5 3.5 3.5 3.0 2.0 1.2 2.8 ↑ 2.5 ↑ 1.6 ↑
Canada 3.1 3.3 3.0 1.8 3.3 4.0 3.6 3.5 3.3 2.7 2.3 2.4 1.9 2.0
Latin America 6.0 4.3 3.8 2.5 3.6 3.7 5.7 ↓ 4.1 ↓ 4.3 3.2 6.7 7.0 7.6 7.6
Argentina 8.5 5.5 5.0 1.6 2.0 6.0 8.0 8.0 6.0 3.0 10.5 11.0 12.0 12.0
Brazil 7.5 4.0 3.8 1.6 3.0 3.9 4.8 4.9 4.6 4.0 5.6 6.0 6.1 6.2
Chile 5.2 ↓ 6.0 4.5 8.7 ↑ 3.8 ↓ 5.0 5.0 5.0 4.5 4.5 2.5 4.2 5.5 5.0
Colombia 4.1 ↑ 4.5 4.0 0.9 6.7 ↑ 6.0 3.8 ↓ 3.7 ↓ 4.2 ↓ 4.5 ↑ 2.7 3.6 4.0 3.4
Ecuador 3.0 3.5 3.0 6.5 3.0 3.0 2.5 2.5 2.0 3.5 3.3 3.5 3.8 3.6
Mexico 5.5 4.5 3.5 3.2 5.1 2.0 8.0 2.5 3.6 1.5 4.2 3.6 3.7 3.6
Peru 8.8 7.3 6.0 7.2 8.6 6.8 7.0 4.5 6.7 6.5 2.1 2.9 2.8 2.8
Venezuela -1.4 1.5 3.0 0.6 -1.8 2.5 1.5 2.0 2.5 3.0 27.3 29.0 33.8 34.6
Asia/Pacific
Japan 4.0 0.9 ↓ 2.8 ↑ 3.3 -1.3 1.2 ↓ -1.0 ↓ 2.0 ↓ 4.0 ↑ 3.5 ↑ 0.1 0.5 0.4 0.3
Australia 2.7 2.6 ↓ 4.5 ↑ 0.5 3.0 -0.3 ↓ 4.8 ↓ 4.1 ↓ 5.2 ↑ 5.1 ↑ 2.7 3.4 3.6 3.2
New Zealand 1.5 1.6 3.9 -0.6 2.1 -0.6 2.3 5.0 5.0 2.7 4.0 5.4 3.8 2.9
Asia ex Japan 9.1 7.5 ↓ 7.6 ↑ 7.4 7.9 7.6 ↓ 7.3 ↓ 8.3 ↑ 7.3 ↑ 7.1 4.9 5.4 4.4 3.9
China 10.3 9.4 ↓ 9.0 9.9 12.7 8.7 ↓ 8.8 ↓ 9.0 ↑ 9.0 ↑ 9.3 4.7 5.1 3.3 3.0
Hong Kong 6.8 4.7 ↓ 4.7 3.6 6.1 4.1 ↓ 4.2 ↓ 4.8 ↑ 5.0 4.8 2.8 3.9 4.2 3.7
India 8.5 8.0 ↓ 8.7 ↑ 13.5 0.9 7.9 ↓ 8.4 ↓ 13.2 ↓ 5.8 ↓ 5.0 9.2 8.5 ↑ 8.5 ↓ 8.0 ↓
Indonesia 6.1 6.0 ↑ 6.7 6.7 7.5 6.0 ↑ 5.0 ↓ 4.5 5.0 7.0 6.3 7.2 6.3 5.5
Korea 6.1 4.2 4.6 ↑ 3.0 2.2 5.0 ↓ 4.0 5.5 ↑ 5.8 ↑ 4.0 3.6 4.5 3.2 2.5
Malaysia 7.2 5.1 ↓ 4.4 -0.6 8.9 5.2 ↓ 5.1 ↓ 5.4 ↑ 5.0 ↑ 5.5 2.0 3.4 3.7 3.0
Philippines 7.3 5.0 ↓ 5.1 ↑ -3.1 12.7 4.9 3.6 ↓ 5.3 ↑ 4.5 ↑ 5.3 2.9 5.6 5.1 3.9
Singapore 14.5 5.0 5.6 -16.7 3.9 8.7 7.8 7.0 6.6 4.9 4.0 6.0 4.8 2.3
Taiwan 10.8 4.8 ↓ 5.3 ↓ 3.2 0.0 8.2 ↓ 5.8 ↓ 5.8 6.0 5.5 1.1 1.8 2.9 2.1
Thailand 7.8 4.3 ↓ 4.8 -1.3 4.8 6.5 ↓ 5.8 ↓ 5.5 5.5 4.5 2.9 4.4 4.3 4.5
Africa/Middle East
Israel 4.6 4.5 4.0 4.6 7.7 4.5 4.5 4.5 4.5 4.5 2.5 4.9 ↑ 3.8 ↑ 3.5 ↑
South Africa 2.7 3.7 3.8 2.7 4.4 3.6 3.7 4.0 4.1 3.0 3.5 4.2 5.9 5.8
Europe
Euro area 1.7 2.2 2.2 1.4 1.1 3.0 2.0 2.0 2.5 2.3 2.0 2.3 ↑ 2.3 ↑ 1.9 ↑
Germany 3.5 3.3 2.2 2.8 1.5 4.5 2.5 2.5 2.5 2.0 1.6 2.3 ↑ 2.3 ↑ 1.8 ↑
France 1.5 2.3 2.4 1.0 1.4 3.5 2.0 2.5 3.0 2.3 1.9 2.0 ↓ 2.1 1.8 ↑
Italy 1.1 1.4 2.1 1.1 0.2 1.5 1.5 2.0 2.5 2.5 2.0 1.9 1.9 ↑ 2.0 ↑
Norway 2.2 2.9 ↓ 2.9 ↓ 4.4 1.3 3.3 ↓ 3.3 ↓ 3.0 ↓ 3.0 3.0 2.2 1.1 0.9 0.9
Sweden 5.3 4.6 ↓ 2.9 ↓ 8.7 5.1 3.5 ↓ 3.3 ↓ 3.0 ↓ 3.0 3.0 1.9 3.1 2.9 2.4
United Kingdom 1.3 1.7 2.7 2.8 -2.3 2.8 2.0 2.5 3.0 2.5 3.4 4.0 3.8 2.4
Emerging Europe 4.3 4.1 4.6 -1.0 9.3 3.2 3.2 3.7 5.0 5.2 6.6 7.7 6.9 6.0
Bulgaria 0.1 3.5 4.0 … … … … … … … … … … …
Czech Republic 2.3 3.0 3.5 3.6 1.4 1.5 3.0 3.5 4.0 3.5 2.1 2.2 2.9 2.7
Hungary 1.2 2.8 3.5 2.2 0.8 2.5 3.0 3.5 3.5 3.5 4.4 4.0 4.2 3.8
Poland 3.8 4.0 4.2 4.9 3.2 3.5 4.0 4.5 4.5 4.2 2.9 4.0 2.9 2.7
Romania -1.3 2.0 4.0 … … … … … … … 7.9 7.3 ↑ 4.8 ↑ 5.0 ↑
Russia 4.0 4.5 5.0 -3.8 14.5 3.5 3.0 3.5 5.5 6.0 8.2 10.9 9.7 7.9
Turkey 8.3 4.5 5.0 … … … … … … … 7.4 6.3 6.5 6.2
Global 3.8 3.3 ↓ 3.6 ↑ 2.9 2.9 3.4 ↓ 3.4 ↓ 3.7 ↓ 3.8 ↑ 3.3 ↑ 2.7 3.4 ↑ 3.2 ↑ 2.6 ↑
Developed markets 2.5 2.3 ↓ 2.7 ↑ 2.3 1.4 2.5 ↓ 2.3 ↓ 2.7 ↓ 3.0 ↑ 2.4 ↑ 1.6 2.4 ↑ 2.3 ↑ 1.6 ↑
Emerging markets 7.2 6.0 ↓ 6.0 4.7 7.0 5.8 ↓ 6.2 ↓ 6.4 ↑ 6.1 ↑ 5.7 5.6 6.2 5.7 5.2
Memo:
Global — PPP weighted 4.8 4.2 ↓ 4.2 ↓ 3.8 4.0 4.2 ↓ 4.2 ↓ 4.7 4.5 ↑ 4.5 ↑ 3.4 4.1 ↑ 3.8 ↑ 3.2 ↑
Note: For some emerging economies, 2010-2012 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan.
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.
4
Carlton Strong (1-212) 834-5612
carlton.m.strong@jpmorgan.com
G-3 economic outlook detail

Percent change over previous period; seasonally adjusted annual rate unless noted
2010 2011 2012

2010 2011 2012 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
United States
Real GDP 2.8 2.9 2.9 2.8 2.5 3.5 3.5 3.0 2.0 3.0 3.5
Private consumption 1.8 3.0 2.7 4.1 1.9 3.5 4.0 3.0 1.5 2.5 3.0
Equipment investment 15.1 10.8 9.6 5.5 8.0 12.0 12.0 10.0 10.0 8.0 8.0
Non-residential construction -13.8 3.5 9.6 4.5 2.0 5.0 9.0 10.0 10.0 10.0 10.0
Residential construction -3.0 2.6 12.5 2.7 2.0 10.0 15.0 10.0 10.0 15.0 15.0
Inventory change ($ bn saar) 60.3 53.0 52.3 7.1 64.0 57.7 45.3 45.1 47.7 52.7 56.2
Government spending 1.0 -0.2 -0.6 -1.5 -0.9 -1.3 -1.3 -0.1 -0.4 -0.6 -0.6
Exports of goods and services 11.8 10.3 8.5 9.6 15.0 10.0 8.0 8.0 8.0 9.0 9.0
Imports of goods and services 12.7 8.9 8.2 -12.4 20.0 7.0 8.0 9.0 9.0 8.0 7.0
Domestic final sales contribution 1.9 3.0 3.1 3.1 1.9 3.4 4.0 3.3 2.3 2.9 3.3
Inventories contribution 1.4 -0.1 0.0 -3.7 1.7 -0.2 -0.4 0.0 0.1 0.1 0.1
Net trade contribution -0.4 0.0 -0.1 3.4 -1.1 0.3 -0.1 -0.3 -0.3 0.0 0.1
Consumer prices (%oya) 1.6 2.6 1.5 1.2 2.1 2.8 2.9 2.5 1.6 1.5 1.4
Excluding food and energy (%oya) 1.0 1.1 1.0 0.6 1.1 1.1 1.1 1.1 0.9 0.9 1.0
Federal budget balance (% of GDP, FY) -8.8 -9.8 -6.9
Personal saving rate (%) 5.8 5.0 4.7 5.4 5.2 5.1 4.9 4.9 4.6 4.7 4.7
Unemployment rate (%) 9.6 8.8 8.4 9.6 8.9 8.8 8.7 8.6 8.5 8.5 8.4
Industrial production, manufacturing 6.0 5.7 3.7 4.0 8.4 5.0 4.5 3.5 3.5 3.0 3.5
Euro area
Real GDP 1.7 2.2 2.2 1.1 3.0 2.0 2.0 2.5 2.3 2.0 2.0
Private consumption 0.7 1.2 1.8 1.7 1.0 1.0 1.5 1.5 2.0 2.0 2.0
Capital investment -0.8 3.3 4.5 -2.4 7.0 4.0 4.0 5.0 4.5 4.5 4.5
Government consumption 0.7 0.1 -0.3 0.4 0.0 -0.5 -0.5 -0.5 -0.3 -0.3 0.0
Exports of goods and services 10.6 8.3 7.0 7.5 8.0 7.0 7.0 7.0 7.0 7.0 7.0
Imports of goods and services 8.7 6.8 6.8 4.4 7.0 6.5 7.0 6.5 7.0 6.5 7.0
Domestic final sales contribution 0.4 1.3 1.8 0.6 1.9 1.3 1.5 1.7 2.0 2.0 2.0
Inventories contribution 0.4 0.1 0.1 -0.9 0.5 0.4 0.3 0.4 0.1 -0.4 -0.2
Net trade contribution 0.9 0.7 0.3 1.4 0.6 0.4 0.2 0.4 0.2 0.4 0.2
Consumer prices (HICP, %oya) 1.6 2.3 1.6 2.0 2.3 2.3 2.4 2.3 1.9 1.6 1.5
ex unprocessed food and energy 1.0 1.3 1.6 1.1 1.1 1.2 1.4 1.5 1.7 1.7 1.5
General govt. budget balance (% of GDP, FY) -6.3 -4.6 -3.9
Industrial production 7.1 6.0 4.6 6.9 7.0 5.0 5.0 4.5 4.5 4.5 4.5
Japan
Real GDP 4.0 0.9 2.8 -1.3 1.2 -1.0 2.0 4.0 3.5 3.2 2.5
Private consumption 1.9 -0.5 1.5 -3.2 0.2 -3.0 0.5 2.5 2.0 1.8 1.7
Business investment 2.4 1.3 5.1 2.0 1.0 -5.0 0.0 5.0 8.0 8.0 6.0
Residential construction -6.5 6.9 3.2 12.3 10.0 5.0 2.0 2.0 4.0 4.0 3.0
Public investment -3.3 -1.1 13.8 -20.5 -5.0 10.0 30.0 25.0 20.0 10.0 -5.0
Government consumption 2.3 2.0 1.3 1.2 1.0 5.0 1.2 1.0 1.0 1.0 1.0
Exports of goods and services 24.2 5.1 6.1 -3.0 8.0 2.0 6.0 8.0 6.0 6.0 6.0
Imports of goods and services 9.8 5.0 4.9 -0.5 4.0 4.0 5.0 5.0 5.0 5.0 5.0
Domestic final sales contribution 1.5 0.4 2.3 -2.8 0.7 -1.4 1.5 3.5 3.1 2.7 1.9
Inventories contribution 0.3 0.2 0.1 0.7 0.1 0.4 0.3 0.1 0.0 0.0 0.1
Net trade contribution 2.2 0.3 0.4 0.9 0.4 0.0 0.2 0.5 0.4 0.5 0.5
Consumer prices (%oya) -0.7 0.4 0.1 0.1 0.0 0.5 0.7 0.4 0.3 0.1 0.1
General govt. net lending (% of GDP, CY) -7.9 -7.8 -7.4
Industrial production 16.0 2.0 8.9 -6.1 7.0 -5.0 18.0 15.0 15.0 1.0 2.0
Memo: Global industrial production 9.3 6.3 6.1 5.5 7.6 5.6 7.8 7.0 6.4 5.0 4.9
%oya 7.2 6.4 5.4 6.6 6.9 6.6 6.5 5.8
Note: More forecast details for the G-3 and other countries can be found on J.P. Morgan’s Morgan Markets client web site.
5
JPMorgan Chase Bank N.A., New York Economic Research
Michael Mulhall (1-212) 834-9123
michael.r.mulhall@jpmorgan.com
Central Bank Watch

Change from Forecast
Official interest rate Current Aug '07 (bp) Last change Next meeting next change Mar 11 Jun 11 Sep 11 Dec 11 Mar 12
Global GDP-weighted average 1.91 -306 1.92 2.08 2.23 2.37 2.48
excluding US GDP-weighted average 2.61 -222 2.62 2.85 3.06 3.25 3.40
Developed GDP-weighted average 0.62 -358 0.62 0.74 0.87 1.00 1.11
Emerging GDP-weighted average 5.48 -162 5.51 5.80 6.01 6.18 6.27
Latin America GDP-weighted average 7.85 -155 7.85 8.35 8.46 8.67 8.67
CEEMEA GDP-weighted average 4.08 -294 4.18 4.38 4.68 5.12 5.47
EM Asia GDP-weighted average 5.18 -107 5.19 5.44 5.64 5.69 5.69
The Americas GDP-weighted average 1.38 -444 1.38 1.47 1.53 1.58 1.59
United States Federal funds rate 0.125 -512.5 16 Dec 08 (-87.5bp) 27 Apr 11 On hold 0.125 0.125 0.125 0.125 0.125
Canada Overnight funding rate 1.00 -325 8 Sep 10 (+25bp) 12 Apr 11 31 May 11 (+25bp) 1.00 1.25 1.75 2.00 2.25
Brazil SELIC overnight rate 11.75 -25 2 Mar 11 (+50bp) 20 Apr 11 20 Apr 11 (+50bp) 11.75 12.50 12.50 12.50 12.50
Mexico Repo rate 4.50 -270 17 Jul 09 (-25bp) 15 Apr 11 4Q 11 4.50 4.50 4.50 5.00 5.00
Chile Discount rate 4.00 -100 17 Mar 11 (+50bp) 12 Apr 11 12 Apr 11 (+25bp) 4.00 5.00 6.00 6.50 6.50
Colombia Repo rate 3.50 -550 18 Mar 11 (+25bp) 29 Apr 11 29 Apr 11 (+25bp) 3.50 4.25 5.00 5.00 5.00
Peru Reference rate 3.75 -75 10 Mar 11 (+25bp) 7 Apr 11 7 Apr 11 (+25bp) 3.75 4.50 4.50 4.50 4.50
Europe/Africa GDP-weighted average 1.49 -323 1.50 1.74 2.01 2.30 2.56
Euro area Refi rate 1.00 -300 7 May 09 (-25bp) 7 Apr 11 7 Apr 11 (+25bp) 1.00 1.25 1.50 1.75 2.00
United Kingdom Bank rate 0.50 -500 5 Mar 09 (-50bp) 7 Apr 11 May 11 (+25bp) 0.50 0.75 1.00 1.25 1.50
Sweden Repo rate 1.50 -200 15 Feb 11 (+25bp) 20 Apr 11 20 Apr 11 (+25bp) 1.50 1.75 2.25 2.75 3.00
Norway Deposit rate 2.00 -250 5 May 10 (+25bp) 12 May 11 12 May 11 (+25bp) 2.00 2.25 2.50 2.75 3.00
Czech Republic 2-week repo rate 0.75 -200 6 May 10 (-25bp) 24 Mar 11 23 Jun 11 (+25bp) 0.75 1.00 1.25 1.75 2.25
Hungary 2-week deposit rate 6.00 -175 24 Jan 11 (+25bp) 28 Mar 11 4Q 11 (+25bp) 6.00 6.00 6.00 6.25 6.50
Israel Base rate 2.50 -150 21 Feb 11 (+25bp) 28 Mar 11 2Q 11 (+25bp) 2.50 3.00 3.50 4.00 4.50
Poland 7-day intervention rate 3.75 -75 19 Jan 11 (+25bp) 5 Apr 11 5 Apr 11 (+25bp) 3.75 4.25 4.25 4.50 4.75
Romania Base rate 6.25 -75 4 May 10 (-25bp) 29 Mar 11 3Q 11 (+25bp) 6.25 6.25 6.50 6.75 7.00
Russia 1-week deposit rate 3.00 0 24 Dec 10 (+25bp) 25 Mar 11 25 Mar 11 (+25bp) 3.25 3.50 3.75 4.00 4.25
South Africa Repo rate 5.50 -400 18 Nov 10 (-50bp) 24 Mar 11 Nov 11 (+50bp) 5.50 5.50 5.50 6.00 6.50
Turkey 1-week repo rate 6.25 -1125 20 Jan 11 (-25bp) 23 Mar 11 Aug 11 (+50bp) 6.25 6.25 7.00 8.00 8.50
Asia/Pacific GDP-weighted average 3.27 -92 3.27 3.41 3.54 3.58 3.59
Australia Cash rate 4.75 -150 2 Nov 10 (+25bp) 5 Apr 11 Aug 11 (+25bp) 4.75 4.75 5.00 5.25 5.25
New Zealand Cash rate 2.50 -550 10 Mar 11 (-50bp) 28 Apr 11 2Q 12 (+25bp) 2.50 2.50 2.50 2.50 2.50
Japan Overnight call rate 0.05 -45 5 Oct 10 (-5bp) 8 Apr 11 On hold 0.05 0.05 0.05 0.05 0.05
Hong Kong Discount window base 0.50 -625 17 Dec 08 (-100bp) 28 Apr 11 On hold 0.50 0.50 0.50 0.50 0.50
China 1-year working capital 6.06 -51 9 Feb 11 (+25bp) - 2Q 11 (+25bp) 6.06 6.31 6.56 6.56 6.56
Korea Base rate 3.00 -150 10 Mar 11 (+25bp) 12 Apr 11 2Q 11 (+25bp) 3.00 3.25 3.50 3.50 3.50
Indonesia BI rate 6.75 -175 4 Feb 11 (+25bp) 12 Apr 11 12 Apr 11 (+25bp) 6.75 7.00 7.00 7.00 7.00
India Repo rate 6.75 -100 17 Mar 11 (+25bp) 3 May 11 3 May 11 (+25bp) 6.75 7.00 7.25 7.50 7.50
Malaysia Overnight policy rate 2.75 -75 8 Jul 10 (+25bp) 5 May 11 5 May 11 (+25bp) 2.75 3.00 3.00 3.00 3.00
Philippines Reverse repo rate 4.00 -350 9 Jul 09 (-25bp) 24 Mar 11 24 Mar 11 (+25bp) 4.25 4.50 4.50 4.50 4.50
Thailand 1-day repo rate 2.50 -75 9 Mar 11 (+25bp) 20 Apr 11 20 Apr 11 (+25bp) 2.50 3.00 3.00 3.00 3.00
Taiwan Official discount rate 1.625 -150 30 Dec 10 (+12.5bp) 31 Mar 11 Mar 11 (+12.5bp) 1.75 1.875 2.00 2.125 2.25
Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting during upcoming week.
6
JPMorgan Chase Bank, London Economic Research
Jan Loeys (1-212) 834-5874 Global Data Watch
jan.loeys@jpmorgan.com March 18, 2011
The J.P. Morgan View: Markets 3.3%. Importantly, 2012 growth is raised by the same
0.1%-pt, so we are flat in terms of growth revisions.
A correction, not a reversal
Besides direct economic contagion, the Japanese disaster
• Economics: the Japanese earthquake moves froth from
could depress growth through its impact on asset prices and
1H to 2H, but still pushes down our 2011 global growth
sentiment. Here we are greatly comforted as many investors
projection.
we have met this week uniformly considered this week’s
• Asset allocation: Equities are in correction mode, but the event as only a temporary setback for risky assets and thus
solidity of the recovery, investor confidence, and only a buying opportunity. We surmise that the same is true for
modest Japanese liquidation risk suggests the sell-off will global corporates. Many await nuclear reactor and Middle
be modest and temporary. We stay long equities to bonds. East news to put money to work. This is a consensus inten-
tion, and not yet a consensus position. The uniformity of
• Fixed income: Money markets have gone too far in
positive views seems dangerous, but we see it more as con-
pricing out rate hikes. Short front end in Australia and
fidence than complacency.
Euro area.
• Equities: Cyclical sectors and Asian countries are more One potential threat to markets from the Japanese earthquake
vulnerable following the Japanese earthquake. is the risk of asset liquidation to finance the rebuilding of
Japan. Our weekly Flows & Liquidity reviews the evidence
• Credit: The damage in Japan has a negative near-term
and concludes that the impact is modest and concentrated on
impact on Insurers, but it will increase pricing power in
higher yielding currencies. We believe insurers will have to
the long run.
cover only about 1% of the estimated $190 billion in physi-
• FX: USD/JPY should range between 80 and 82 for the cal capital losses. The 1995 Kobe earthquake saw Japanese
next few months but still reach our year-end target of 79. banks and households repatriate 7% and 10% respectively of
their foreign assets, which would imply $60-$70 billion to-
• Commodities: The disaster in Japan means a near-term
day. Some of this was offset by BoJ intervention to the tune
increase in demand for fuel oil and LNG but a reduction
of $27 billion at the time. During Kobe, the yen carry trade
in demand for crude oil and base metals.
was in vogue and much of this was unwound then, putting
upward pressure on the yen.
Riskier asset classes lurched down further and bonds spiked
up this week on the escalating toll of the Japanese earthquake
In sum, we believe the downside for global equities from
and the rising fear of a nuclear melt-down in the Fukushima
here is quite modest and temporary. The recent down-
reactor. The move pushed equities just into red territory and
grading of growth projections invites comparisons with the
government bonds back to flat. Credit spreads are still tighter
2Q-3Q correction last year when equities fell 15%. At the
YTD with commodities at the top of the heap.
time, though, the recovery was less than 1-year old and on
feeble footing. Today, we are seven quarters into the recov-
The sell off pushed stock prices to 6% below last month’s
ery and few companies and market participants think about
cycle peak, confirming that we are in correction mode.
a double dip. We stay solidly overweight riskier assets.
This raises the issue of how deep and how long this correc-
tion will be, or whether this kills off the 2-year old rally.
From today’s vantage point, this depends on how much the Fixed income
twin oil and tsunami shocks depress growth and earnings; A turbulent week saw bonds rally strongly in response
on investor positions and confidence; on how much Japan to the tragedy in Japan. That reflects both fears of a wors-
needs to liquidate assets to finance rebuilding; and on the ening of the nuclear accident, and concerns over the impli-
condition of the Fukushima nuclear reactor. On the last, we cations for global growth.
have no insight and watch the news like everyone else.
Japanese government bonds participated in the rally, de-
On growth, the Japanese earthquake, tsunami, and electric- spite a spike higher in Japan’s CDS spreads. We estimate
ity blackouts will depress growth in 2Q, but this should be that the disaster is likely to raise Japanese government issu-
fully offset by rebuilding in 2H. We expect contagion ance by a modest ¥3 trillion (0.6% of GDP), too little to
through the Asian supply chain to be minimal. As a result, challenge our near-term bullish view on JPY duration. The
this pushes down our 2011 global GDP growth forecast by experience of the Kobe earthquake suggests that Japa-
another 0.1%-pt, the third downward revision in a row, to nese banks and households may sell around $50 billion
7
Nikolaos Panigirtzoglou (44-20) 7777-0386 The J.P. Morgan View: Markets
nikolaos.panigirtzoglou@jpmorgan.com March 18, 2011
of foreign bonds over the next few months. That seems a 2011 global GDP growth forecasts: J.P. Morgan versus consensus
modest headwind, particularly as it will be offset at least in %
3.8
part by the investment of FX intervention proceeds. See
today’s Flows and Liquidity for details. 3.6 J.P. Morgan
The downward momentum in growth forecasts is worri- 3.4

some. Even so, we think that money markets have gone 3.2
too far in pricing out rate hikes, especially in the stron- Consensus
ger economies. Thus we recommend front end shorts in 3.0
Korea (see Gochet and Lee, Paying 1yr KRW IRS, Mar 16)
2.8
and also in Australia, where the market has started to price Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11
easing, whereas we expect the RBA to resume tightening in
August. We retain money market shorts in the Euro area,
with the ECB still set to hike next month. And we would liquidity cushions them during modest corrections as inves-
look to reset shorts in 10-year US Treasuries at 3.30% or tors tend to sell their more liquid large caps.
below.
We remain neutral on EM vs. DM equities. Within EM we
European peripherals outperformed as Euro area lead- favour domestic-oriented stocks vs. exporters. We take
ers came to a surprisingly early outline agreement. The profit on our Russia overweight given the downside we see
deal creates a path to debt sustainability without restructur- in oil prices over the coming months.
ing by establishing the principle that the terms of liquidity
support can be eased over time (see David Mackie’s re- Credit
search note in this GDW). That in turn bolsters the me-
Credit spreads widened for another week. The exception
dium-term case for buying peripherals.
to broad weakness was Euro area HG corporates, the credit
spreads of which were unchanged over the week. The Euro
Equities area policy agreement released last weekend was overshad-
Equities fell sharply earlier in the week, on fears of a owed by the Japanese crisis. In our view, the policy pack-
nuclear catastrophe in Japan, but they rebounded later this age is moving the region in the right direction and should
week. The MSCI AC World index is now in negative continue to support Euro area credits including European
territory YTD, down by 1% in local currency terms. banks. Although the details will not be finalized for another
week, it is clear that Euro area policy makers are address-
It is true that technical and position indicators have turned ing the issues at heart, creating a path to debt sustainability
more favorable following the 6% correction in equity mar- without debt restructuring.
kets. But uncertainty regarding the impact from the Japa-
nese earthquake, the ongoing crisis in the MENA region, In contrast, US and EM corporate credit spreads sold off on
and a deterioration in economic surprises, suggest that the the week. Since mid-February, US credit spreads have
balance of risks is skewed to the downside for the near given back 60% of their previous tightening for the year.
term. US HG and HY spreads are now only 7bp and 32bp tighter
YTD. We believe most US sectors will only see limited
The US Economic Activity Surprise Index fell to nega- direct impact from the Japanese crisis. We are more wor-
tive territory for the first time since last September. An ried about the indirect impact through weaker equity mar-
exceptional 6-month run of positive economic surprises has kets or further risk reduction.
been a major driver of the rally that began last summer.
This major driver is now a headwind for equity markets. In the near term, the Insurance sector is likely to be under
most pressure as damages and claims from the Japanese
Cyclical sectors and Asian countries are more vulner- earthquake are evaluated. However, even for Japanese insur-
able following the Japanese earthquake. Our economists ers which are likely to bear most of the losses, the estimated
calculate that Japanese exports make up over 13% of Chi- claims are very manageable compared to their reserves (see
nese imports and nearly 12% of ASEAN imports. This this week’s Flows & Liquidity). Moreover, long-term im-
comprises over 3% of China’s GDP and nearly 8% of pacts of the Japanese earthquake are likely to be positive for
ASEAN GDP. Small caps are less vulnerable. Their lower Insurance companies as insurance premia rise.
8
Jan Loeys (1-212) 834-5874 Global Data Watch
jan.loeys@jpmorgan.com March 18, 2011
Foreign exchange Ten-year Government bond yields

Current Jun 11 Sep 11 Dec 11 Mar 12
This week’s all-time lows in USD/JPY and USD/CHF
United States 3.28 3.60 3.65 3.70 3.90
have brought the contrarians out in force, especially in
Euro area 3.19 3.45 3.55 3.65 3.75
light of the pending intervention. The G-7 are committing
United Kingdom 3.51 3.70 3.90 4.05 4.10
to prevent a USD/JPY collapse and contain volatility if re-
Japan 1.21 1.25 1.30 1.35 1.40
patriation flows and carry trade unwinds continue. They are
GBI-EM 7.03 7.30
not attempting to engineer a trend reversal, as with the
1987 Louvre Accord. Doing so would require one of two Credit markets
Current YTD Return
tactics: unlimited intervention to achieve an FX target, and/
US high grade (bp over UST) 141 1.4%
or monetary tightening in the US and Europe to induce pri-
Euro high grade (bp over Euro gov) 168 -0.1%
vate investors to buy USD/JPY and EUR/JPY. For ex-
USD high yield (bp vs. UST) 545 3.5%
ample, the Plaza Accord weakened the dollar because the
Euro high yield (bp over Euro gov) 547 2.7%
Fed began easing in 1985 while the Bundesbank, and the
EMBIG (bp vs. UST) 307 0.5%
BoJ were on hold. Likewise, the Louvre Accord lifted the
EM Corporates (bp vs. UST) 293 1.5%
dollar because the Fed began tightening as the Buba eased
and the BoJ lifted rates only modestly. Foreign exchange
Current Mar 11 Jun 11 Sep 11 Dec 11
The most significant threat to the yen isn’t the BoJ or EUR/USD 1.42 1.40 1.43 1.45 1.48
JGB issuance. It is the possible erosion of Japan’s trade USD/JPY 81.0 81 80 79 78
surplus, since quake damage will increase demand for GBP/USD 1.62 1.61 1.61 1.63 1.68
some imports and limit exports of others. But even if the
Commodities - quarterly average
next few months could deliver some shocking trade figures,
Current 11Q2 11Q3 11Q4 12Q1
it is more likely USD/JPY will range between 80 and 82
Brent ($/bbl) 114 105 102 102 110
for the next few months, and if the Fed remains on hold for
Gold ($/oz) 1417 1450 1475 1500 1500
another year, USD/JPY can reach our long-standing target
Copper($/m ton) 9565 9450 9750 10000 9750
of 79. We are selling 1-month 78 USD/JPY puts on expec-
Corn ($/Bu) 6.88 7.00 6.75 6.10 6.20
tation that a floor is intact.
Source: J.P. Morgan, Bloomberg, Datastream
The fiscal issue too looks overstated as a yen risk. Even if

the BoJ financed $100 billion of reconstruction bonds, this
amount is small relative to Japanese GDP and the Fed’s asset
purchases. This debt monetization also has no impact on the
So what is the impact on commodity markets? The Japa-
US-Japan cash rate spread which is more material to USD/
nese oil refineries that are currently offline account for
JPY than bond spreads. See G-7 coordinated intervention…a
about 1.6% of world crude oil demand though we only ex-
much-needed breather (Sasaki) for a full discussion of the
pect about half of this to remain offline for an extended
yen view post-quake and post-intervention.
period. The result is thus near-term bearish crude but
bullish crude products, especially fuel oil and diesel
Commodities which Japan will now need to import for power generation.
Japan has lost approximately 6% of its total power gen- Having said this, we continue to believe that the MENA
eration capacity due to the shutdown of the nuclear reac- crisis is a far more important driver of crude prices.
tors, resulting in rolling power outages across Tokyo and
the north. Although the Western part of the country is unaf- Base metals will also likely suffer from the power out-
fected, due to limited power transfer capacity, the solu- age. Japan accounts for about 5% of world base metal con-
tion must come from power generation facilities in the sumption, and we expect a reduction in manufacturing use
East and given the damage to nuclear power plants, this while the power grid is repaired and brought up to full ca-
means burning either LNG or fuel oil. Fortunately, there pacity. However, once efforts to rebuild the country’s in-
appears to be capacity to do this and enough global LNG frastructure get underway, we should see demand for met-
supplies to cover the increased demand, although a side als pick up sharply. Our Japanese economist expects this
effect is likely higher gas prices elsewhere. recovery in demand to start in 4Q11.
9
Selected recent research1 from J.P. Morgan Economics

Global Central Europe, Middle East, and Africa
Developed world capex poised to accelerate once again, Mar 4, 2011 Czech rate hikes: lagging ECB at first, but outrunning in 2012, Mar 11, 2011
Oil prices will take some steam out of near-term growth, Feb 25, 2011 Turkey: CBRT’s new policy mix slow to combat loan growth, Feb 25, 2011
Easing G-4 bank lending standards reinforcing recovery, Feb 11, 2011 Taking stock of Russian inflation expectations, Feb 25, 2011
Surveys signal second wind for global recovery, Feb 4, 2011 Romania is ready for a long-awaited cyclical upswing, Feb 18, 2011
Rising service sector will bolster DM economies, Jan 28, 2011 MENA region: 2011 a year of political turmoil, Feb 18, 2011
Return to sender: global recycling of Fed QE, Nov 26, 2010 South Africa: SARB faces delicate balancing act, Feb 4, 2011
Global IP slowdown appears to have reached bottom, Nov 5, 2010 Russia: stronger economy and still elevated inflation in 2011, Jan 28, 2011
Fault lines emerge amid global growth slowdown, Sept 10, 2010 Food inflation to climb higher in CIS countries in 1H11, Jan 28, 2011
G-4 banks begin to open the lending spigot, Aug 20, 2010
Global potential growth slows, but much slack remains, Aug 6, 2010 Japan
Euro FX depreciation widely spread but narrowly felt, Jul 9, 2010 Japan: core CPI deflation set to end in April, but temporarily, Mar 4, 2011
Developed market consumer spending to keep expanding, Jul 2, 2010 Japan: private sector spending to get boost from confidence, Feb 18, 2011
DM policy stances move to extremes, Jun 25, 2010 Japan: service sector capex likely to expand in 2011, Jan 21, 2011
Japan 2011 outlook: toward growth with modest deflation, Jan 7, 2011
United States and Canada Japan: no deficit reduction despite continued rise in debt, Dec 17, 2010
US data brings hints of stronger export growth ahead, Mar 11, 2011 Japan: 4Q GDP contraction likely to be temporary, Nov 19, 2010
Commodities will give only temporary lift to core inflation, Mar 4, 2011
US GDW growth slips on oil in 1Q, Feb 25, 2011 Non-Japan Asia and Pacific
Showdown at the not-OK Corral: battle over the US debt ceiling, Feb 25, 2011 Aussies’ online shopping: under-stating retail sales, not GDP, Mar 11, 2011
US: one cheer for the fall in the unemployment rate, Feb 11, 2011 Singapore: to maintain current tightening path or go further?, Mar 11, 2011
It doesn’t take much to get a 25% rise in US housing starts, Jan 28, 2011 China’s export sector copes with rising wages, Mar 4, 2011
US: one gathers what another man spills, Jan 28, 2011 Figuring the drivers of Thailand’s inflation trajectory, Mar 4, 2011
More austerity ahead for US state and local governments, Jan 21, 2011 Vietnam: navigating the monetary maze, Mar 4, 2011
US: turn on, tune in, drop out of the labor force, Jan 14, 2011 Australia’s virtuous cycle of a rising terms of trade, Feb 25, 2011
US: mind the gap or obey the speed limit?, Jan 7, 2011 Another earthquake in NZ puts rate hikes off agenda, Feb 25, 2011
Stronger US job growth would help clear the housing market, Jan 7, 2011 Australia’s GDP/employment mix inflationary, Feb 18, 2011
Canada: sluggish 2011 despite brighter US outlook, Jan 7, 2011 Rising food prices: putting Australia in the EM Asia basket, Feb 11, 2011
US: blame the textbook, not the TA, for money multiplier confusion, Dec 17, 2010 China: tracking inflation in 2011, Feb 4, 2011
US tax compromise: more growth, higher deficit, less QE, Dec 10, 2010 Australia: household incomes stretched as living costs rise, Feb 4, 2011
Strong and broad US business expansion, with tepid job growth, Dec 3, 2010 Severe floods depress Aussie GDP growth, lift inflation, Jan 7, 2011
A V-shaped recovery for US profits, Nov 26, 2010 Aussie 2011 outlook: making room for the mining boom, Dec 30, 2010
US: the fiscal cost of central bank interventions, Nov 19, 2010 Return to trend growth in NZ slowed by deleveraging, Dec 30, 2010
Looming fiscal issues include more than just Bush tax cuts, Nov 5, 2010
Impact of US QE2 on Canada, Nov 5, 2010 Latin America
Equipment spending stands out in a lackluster US recovery, Oct 29, 2010
Fiscal policy back in the spotlight in Brazil, Mar 4, 2011
Latin America: policymakers in need of tightening will innovate, Jan 28, 2011
Western Europe
Chile: unpleasant CPI math, Jan 21, 2011
The role of the time horizon in Euro area debt sustainabilitly, Mar 11, 2011 Brazil: BRL cyclically strong despite pricey valuation, Oct 1, 2010
ECB about to begin a rate normalization cycle, Mar 4, 2011
The Euro area’s journey to a comprehensive policy package, Feb 25, 2011 Special Reports and Global Issues
The not-so-small role of the output gap at the ECB, Feb 25, 2011
UK: why inflation is so high, and why it will come back down, Feb 11, 2011
UK: quantifying MPC credibility, Feb 25, 2011
Strong global growth ahead: eleven themes for 2011, Jan 7, 2011
Euro area: more growth, more inflation, and higher rates, Feb 11, 2011
US 2011 economic outlook: strength, breadth, jobs, and a rising fiscal
Uncertainty to persist beyond Euro area policy changes, Feb 4, 2011
deficit, Dec 30, 2010
Euro area: closing fiscal books on 2010 and opening for 2011, Feb 4, 2011
A way out of the EMU fiscal crisis, Dec 16, 2010
UK: a hawkish shift at the MPC, Feb 4, 2011
Jobs vs. income smoothing: a comparison of US and German labor
Agricultural commodity prices to push up Euro area inflation, Jan 21, 2011
markets, Nov 15, 2010
Another busy year for Euro area policymakers, Jan 7, 2011
Stuck in a low inflation rut, Oct 27, 2010
The three-speed Euro area recovery to continue in 2011, Dec 30, 2010
1. Research notes listed have been published in GDW; Special Reports and Global Issues are stand-alone features, but may also have appeared in some form in GDW.
10
Joseph Lupton (1-212) 834-5735 Global Data Watch
joseph.p.lupton@jpmorgan.com March 18, 2011
Economic Research Note Oil price and developed market retail sales volume
%3m/3m %3m/3m, saar
Offsetting crosscurrents for -30
Brent oil (inverted)
6.0
developed market consumers -15 4.5

0 3.0
• Spending damped by oil price jump but supported by
past equity gains and improving labor markets 15 1.5
30 0.0
• Major concern is a further jump in oil prices that is
amplified by a decline in equity prices 45 Retail sales -1.5
60 -3.0
• 2Q11 spending growth forecast of 2.4% annualized 00 02 04 06 08 10
with risk distribution ranging from 1.1% to 3.9% Consumer spending fundamentals, developed markets
%3m/3m, saar (fcst Mar 11 to Jun 11) %3m/3m
After slowing in mid-2010 against a backdrop of rising un-
certainties, consumer spending in the developed markets ac- 6 CPI Equity prices 20
celerated into year-end. However, personal outlays are once
again being buffeted by a number of powerful crosscurrents 3 10
that is clouding the outlook. The foremost concern is the
20% year-to-date jump in oil prices (the 2H10 rise is less of 0 0
a concern as it is associated with improved growth percep-
tions).1 As noted in recent research, the direct impact of this -3 -10
move is damping global GDP growth by about 1/2%-point
-6 -20
annualized spread over 1H11. While less visible, the rise in 2007 2008 2009 2010 2011
oil prices is being countered by strong prior gains in equity ior, the response to moves in equity prices tends to be more
markets and improving labor markets. At present, the net gradual. While beyond the scope of our analysis,wealthier
effect is likely damping growth somewhat. As inflation households may be more inclined to smooth through wealth
pressures subside, however, we expect some acceleration in effects if they are viewed as temporary even as more li-
developed market goods spending growth even as the lift quidity-constrained households react to fuel prices. A sec-
from equity gains moderates some. Coupled with a pro- ond caveat is that, for lack of data, we use changes in the
jected pickup in services spending, we expect total devel- unemployment rate as a proxy for labor income. While ad-
oped market personal outlays to accelerate into midyear. equate at lower frequencies, monthly unemployment rate
moves are affected by the supply of as well as the demand
Gauging the impact of the Japan earthquake is difficult at for labor. Thus, a sticky unemployment rate against im-
this point as spending is both damped by the initial shock proving labor markets may understate income growth.
but hoarding behavior could ultimately end up spurring
outlays. Short of a nuclear meltdown, we maintain the im-
Fundamentals support modest gains in 2Q
pact will be temporary in Japan and limited globally. Con-
sequently, the key risk is that oil prices move up materially To gauge the fundamental support to consumer spending,
from their current highs and that the macro impact is ampli- we estimate a model of retail sales volumes. The model ac-
fied by a more damaging deterioration in confidence and counts for CPI inflation (to capture the purchasing power
financial markets. Such a dual adverse shock would more of labor income), changes in the unemployment rate (to
than double the direct impact of the move up in the price of proxy growth in labor income), and equity and house prices
oil alone. By contrast, a significant improvement in MENA (to account for the wealth effect). The model explains retail
conditions would generate a powerful positive feedback spending well, predicting almost two-thirds of the varia-
loop. Our outlook is for developed market goods spending tion. The fit deteriorated significantly in 2H08 (the model
growth of 2.4%(ar) in 2Q11, with a risk distribution of is estimated from 1998m1 through 2008m8 to avoid
+/-1.5%pt. Arguably, a similar distribution applies to GDP. overfitting during the global financial crisis). However,
while some have viewed this error as a break in behavior
There are two caveats to this analysis. While the household that will persist in the recovery, we maintain the error re-
spending response to a purchasing power hit from inflation flects a collapse in consumer confidence and a breakdown
is mechanical and quickly propogated to spending behav- in credit markets, both of which are absent from the model.
1. The even more impressive surge in agriculture prices is more of a concern for the EM Consistent with our view, spending rebounded smartly in
outlook and less so for developed market spending, where passthrough to consumer food the recovery and has tracked the model forecast well.
prices is limited and the share of food in the consumer basket is also smaller.
11
Joseph Lupton (1-212) 834-5735 Offsetting crosscurrents for developed market
joseph.p.lupton@jpmorgan.com consumers
David Hensley (1-212) 834-5516 March 18, 2011
In general, a 1%-pt (annualized) rise in inflation damps Model of developed market consumer goods spending
spending growth by 0.5%-pt annualized, while a 0.5%-pt Regression of retail sales volume (%3m/3m,saar); Sample 1999m1 to 2008m8
Coefficient t-statistic
move down in the unemployment rate generates enough Constant 3.36 7.82
income to lift spending growth by about 2%-pt. A 10% rise CPI (3m/3m,saar) -0.50 -3.76
in equity prices in a given quarter (40% annualized) boosts Unemployment rate (3m chg, 3mav) -3.96 -2.88
Equity prices (3m/3m,saar) 0.03 3.42
annualized goods spending growth by 1.2%-pt. Movements Home prices (3m/3m,saar) 0.11 3.73
in house prices have a considerably larger impact on spend- Spending (3m/3m,saar; 3m lag) -0.18 -2.16
Adj. R-squared 0.62
ing behavior, according to the model estimates. Based on
the model estimates, spending growth is currently being Retail sales volume, developed market
buffeted by offsetting fundamentals. The sharp jump in oil %3m/3m, saar (fcst begins Feb 2011) Actual & J.P.
prices that is pushing up consumer price inflation is slow- 6.0 Morgan fcst
ing spending growth by about 3/4%-pt relative to its his-
4.5
torical mean. A slide in house prices over the past year
Model fit
(primarily in the US) is subtracting a similar amount. How- 3.0
ever, these drags are offset by a strong prior gains in equity 1.5
prices and improvements in labor markets.
0.0
It is unclear whether the improvement in the unemploy- -1.5
ment rate in the US is reflecting increased labor income -3.0
rather than an improving participation rate. This clearly 01 03 05 07 09 11
poses a downside risk to the model outlook, as the change Contributions to retal sales volume growth, developed markets
in the unemployment rate is currently the largest support %-pt contrib. to %3m/3m chg, dev. from mean; fcst begins Feb 2011
for spending growth according to the model estimate. At
1.5
the same time, the model is missing the support to dispos- Unemp rate
able income from the US tax cut. These two errors are thus 1.0 Equities
potentially offsetting. Looking forward, spending growth CPI
should continue to post solid gains through in 2Q11. A sta- 0.5
bilization in oil prices will generate a sharp swing in infla- 0.0
tion from being a large drag to a large support. This will be
offset by more modest gains in equity prices. On net, the -0.5 House prices
fundamentals point to solid spending gains through to mid- -1.0
year. Our official J.P. Morgan forecast generally tracks 2010 2011
this, although with somewhat more initial drag from energy Alternative simulations, developed markets
Mar 11 Apr 11 May 11 Jun 11
prices and a somewhat larger acceleration from improve- Equity prices (%m/m)
ments in labor income not adquately captured in the model. Brent holds at $115/bbl (baseline) -2.4 2.0 2.0 2.0
Brent jumps to $135/bbl … -9.0 -1.0 0.0
Brent falls to $95/bbl … 5.0 4.0 3.0
Gauging the risks CPI (%3m/3m,saar)
Brent holds at $115/bbl (baseline) 3.5 3.0 2.0 1.2
Our baseline assumes that oil prices stabilize near their cur- Brent jumps to $135/bbl … 3.4 2.8 2.3
rent levels of $115/bbl (Brent), equity prices recovery this Brent falls to $95/bbl … 2.6 1.2 0.1
year’s high by June (a 6% rise), and inflation slows sharply Retail sales volume (%3m/3m,saar)
J.P. Morgan forecast 1.8 2.0 2.8 3.3
to 1.2%(3m/3m saar). The risks around this outlook are two Model: Brent holds $115/bbl (baseline) … 2.7 2.4 2.8
sided. On the downside, we consider the impact of a jump Model: Brent jumps $135/bbl … 2.1 1.3 1.1
in oil prices to $135/bbl. However, rather than consider Model: Brent falls to $95/bbl … 3.0 3.2 3.9
only the independent purchasing power hit from this sce- goods spending growth jumps to 3.9% annualized in 2Q11,
nario, we also consider the dual impact of a hit to risk ap- near the boomy gains seen late last year.
petites that result in a 10% decline in equities. In this case,
spending growth is damped to a tepid 1.1% annualized gain Our risk analysis implies developed market goods spending
in 2Q11, on par with the slowest gains seen in the 2001 in 2Q11 could range from 1.1% to 3.9% annualized, with a
recession. Alternatively, we consider the upside scenario baseline of 2.5%. This roughly -/+1.5%-pt band also pro-
whereby oil prices decline to $95/bbl. We complement this vides a reasonable guide for the risk distribution around
with a 12% rise in equity prices by midyear. In this case, developed market GDP growth.
12
David Hensley (1-212) 834-5516 Global Data Watch
david.hensley@jpmorgan.com March 18, 2011
Joseph Lupton (1-212) 834-5735
Economic Research Note Global final goods expenditures (J.P. Morgan proxy) vs. IP
%3m, saar
Keep an eye on the global 16
inventory cycle 12 IP
• Recovery in business inventory growth will boost glo- 8

bal growth for a few more months
4 Final goods sales
• Inventories will not be a problem unless final demand
growth turns weak 0
Jan 10 Apr 10 Jul 10 Oct 10 Jan 11
Despite the unprecedented array of shocks buffeting the
global economy, we are maintaining our forecast for Producers' inventories
above-trend global growth over the remainder of the year. %3m/3m, saar; US is total M&T
This assessment is based on two premises. The first is that Korea
30
Taiwan
the shocks hitting the economy will prove to be both lim-
ited and temporary, and that the foundations of the expan- 20
sion are solid. The second is that the underlying trajectory Japan
of growth was quite strong as these events unfolded. 10
This strong global growth trajectory owes partly to a solid 0

advance in the final demand for goods and services as the US
Japan
purchasing power squeeze from higher commodity prices is -10
2009 2010
being cushioned by a strengthening labor market, prior
large gains in equity prices, and a sizable tax cut in the US Developed economies—inventory contribution to GDP growth
(see “Offsetting crosscurrents for developed market con- %-pt contribution to q/q, saar growth rate
sumers,” in this GDW). At the same time, global growth is 3
getting a powerful additional lift from an increase in global
stockbuilding. Indeed, global factory output has surged at 2
an annualized 10% pace in the 3-months through January,
1
well above the pace of final goods sales. This additional
growth impetus from the inventory cycle is expected to 0
help offset some near-term softening in final demand, prin-
-1
cipally from the oil shock, keeping growth above trend.
-2
The restocking phase is not expected to last beyond the 2007 2008 2009 2010 2011
next few months, however. If final demand growth re- Ratio of inventories to shipments
bounds into midyear as expected, then any slowing in IP Index, Jan 07=100; Asia is mfg, US is total M&T
growth will be limited and GDP growth will remain above
trend, in line with our forecast. On the other hand, if 140
growth in final goods demand weakens significantly, this
will likely prompt a production adjustment that will weigh 120
on global growth in 2H11. These global growth dynamics Japan
appear to apply to a broad range of countries, including the
US
United States. The key exception is Japan, where the natu- 100
ral disaster will impart a sharply different pattern to near- Korea
term output and demand. More on this below. Taiwan
80
2007 2008 2009 2010 2011
Inventory boost will wane by midyear middle of last year, as companies shifted stance from liqui-
The inventory cycle has played a starring role in the eco- dating stocks to accumulating them in line with the growth
nomic recovery, and it is destined to remain an important of sales. Companies then slammed the brake on inventory
player in the months to come. The inventory cycle made a growth in the latter half of 2010, perhaps due to the uncer-
major contribution to economic growth up through the tainty caused by the European debt crisis. Having overre-
13
David Hensley (1-212) 834-5516 Keep an eye on the global inventory cycle
david.hensley@jpmorgan.com March 18, 2011
Joseph Lupton (1-212) 834-5735
acted at that time, companies are now scrambling to realign Global PMI finished goods inventory index (excludes US)
the growth of stocks with sales once again. DI, sa
2004-07 avg
51
It is not possible to observe directly the global inventory
50
cycle in a timely way. Only the United States and a handful
of Asian countries report monthly data on inventories. But 49
we can infer the contour of global inventory growth more 48
broadly from the variations in growth in global IP and our
47
final goods sales proxy, which combines retail sales and
capital goods shipments. 46
45
98 00 02 04 06 08 10
As seen in the first exhibit on the previous page, global IP
growth nearly halted in 3Q10 but since then has returned to a
robust pace. The growth of final goods sales has been more Retail sales volume, developed market
moderate and steadier. Putting these observations together,
%3m/3m, saar (fcst begins Feb 2011) Actual & J.P.
the implication is that inventory growth slowed sharply in Morgan fcst
6.0
the second half of last year and then quickened once again as
firms moved to realign the growth of stocks with sales. This 4.5
impression of the global inventory cycle is borne out in Model fit
3.0
monthly data for the US and Asia, and in the NIPA-based
1.5
measures of inventory contributions to GDP growth in the
developed economies (second and third charts, previous 0.0
page). Based on available data, we are reasonably confident -1.5
that the level of inventories is lean in relation to sales (fourth -3.0
chart, previous page). Nonetheless, the current pace of glo- 01 03 05 07 09 11
bal IP growth cannot be maintained for long or else the rate
of inventory growth will become excessive. Industrial production
%3m, saar; both scales
As noted above, with the restocking cycle boosting both IP
and GDP growth, this can compensate for some near-term 16 36
Global ex Japan
softening in final demand growth in response to the oil 27
shock and the uncertainty generated by the natural disaster 8 18
in Japan. What is critical is that this softening in demand
9
does not become excessive. Our modeling shows that the
fundamental supports for consumption growth are solid, 0 0
Japan
based in the improving labor market and the impressive -9
gain in equity prices over the past seven months. A similar
-8 -18
picture holds for corporate spending on capex. As the pur- 2010 2011
chasing power squeeze from higher inflation dissipates into
midyear (based on an assumption of stable to falling oil
prices), final demand growth—for both goods and ser-
Japan will diverge from the global pattern
vices—should strengthen. The pickup in final goods spend- The natural disaster means that Japan is set to diverge from
ing will cushion IP growth as the restocking phase is com- this global path. Industrial output is set to fall sharply this
pleted. This development, along with faster growth in ser- month, in all likelihood by more than the 3%m/m drop that
vices, will keep GDP growth on an above-trend pace. occurred during the month of the January 1995 Kobe earth-
quake. The level of output should then begin to recover as
On the other hand, should final demand growth weaken manufacturers in unaffected areas boost output and firms in
meaningfully, not only would 2Q growth disappoint, but the affected region gradually restart idled production lines.
the prospects for second-half growth would shift down- The swings are likely to be quite large, which will distort
ward as well. This likely would lead to some overshooting our global IP numbers. Thus, it will be important to track
in the rate of inventory growth, necessitating a production these data separately so as not to lose sight of the underly-
adjustment that would spill over into the third quarter. ing dynamics in the majority of the world economy.
14
Michael Feroli (1-212) 834-5523 Global Data Watch
michael.e.feroli@jpmorgan.com March 18, 2011
Economic Research Note Fed UST holdings as % of outstanding

%, assuming QE2 completed
New Fed sequence is mostly Forecast
25
the same as the old one No run-off
20
• Asset sales still likely to come only after the first hike
in the overnight policy rate 15
• Halting reinvestment of maturing assets could be- 10

come the first step in the long road to the exit Passive run-off
5
• Eventual assets sales still on the agenda 52 57 62 67 72 77 82 87 92 97 02 07 12
The minutes to the April 2010 FOMC meeting laid out a

sequence for the Fed to exit from extraordinary monetary ment of maturing assets. If the US economy gets past current
policy accommodation. That sequence called for the Fed to economic worries and returns to above-trend growth, we
sell securities only after it had begun raising overnight in- think this step could occur as soon as the second half of this
terest rates. Shortly after that meeting, economic growth year. It will likely involve two smaller steps: first, halting
slowed materially and discussion of exit strategies was put reinvestment of prepaying MBS, and second, halting rein-
on the back burner. Subsequently, the Fed changed policy vestment of maturing Treasuries. The first step would be
in two ways: first, in August it began reinvesting the pro- consistent with the long-term objective of returning to an all-
ceeds of prepaying MBS back into Treasury securities, and Treasuries balance sheet, whereas the second step would be
second, in November it put itself on course to buy another consistent with the long-term objective of reducing the Fed’s
$600 billion of Treasury securities, on top of the amount balance sheet over time to a more normal size (i.e., around
bought from reinvesting MBS proceeds. the amount of currency demanded by the public).
We don’t believe these two actions will change the likely
exit sequence whereby asset sales occur only after the first
LSAP-adjusted Taylor rules?
hike in overnight interest rates. The principle concern that Arguably one other effect of the decision to purchase more
had led the majority of the committee to its conclusion last assets last November was to bring forward the timetable by
spring was that asset sales could potentially be disruptive. which the Fed finally raises overnight interest rates. This
While the whole point of tightening policy is, in some certainly seems like a reasonable conclusion: LSAP2 eased
sense, to be “disruptive,” policymakers were wary that the financial conditions and probably hastened the eventual re-
degree of financial tightening caused by asset sales could turn to full employment and of core inflation closer to 2%.
not be well-calibrated, and for that reason, tightening Of course, other things have happened since last spring as
should be done primarily through the more familiar tool of well: business has exhibited ongoing caution regarding hir-
raising the overnight interest rate. ing, and more recently consumers have been hit by higher
gasoline prices. So all else equal, LSAPs do pull forward
The actions taken last summer and fall result in the Fed eventual tightening, but unfortunately all else is not equal.
having a larger balance sheet than was anticipated when the
committee mostly agreed on an exit sequence last spring. For this reason we think Fed asset purchases are not di-
This means the process of reducing the size of the Fed’s vorced from the timing of rate hikes, but this interdepen-
balance sheet will take longer and so, one could argue, dence is complex. We would be quite cautious about ap-
should begin sooner. However, the concern expressed proaches such as adjusting Taylor rules for LSAPs and pre-
about the disruptive effects of asset sales still seems to suming that this would give a prescription for when over-
hold. If anything, the larger portfolio the Fed now holds night rates should be increased. Translating the tightening
implies that any step to sell securities could be even more or easing from asset sales or purchases into an equivalent
disruptive and harder to calibrate than was the case last degree of short rate tightening or easing is an appealing
spring. For this reason, we believe the rate hike-asset sale approach for combining balance sheet policy with conven-
sequence laid out last spring remains the preferred path. tional monetary policy. Indeed, some Fed policymakers
have spoken about asset purchases in a similar manner. For
The August-November policy actions of 2010 do, however, example, Bernanke noted that $600 billion of purchases has
add another step to the exit process: halting the reinvest- eased financial conditions equivalent to about a 75bp fed
15
Michael Feroli (1-212) 834-5523 New Fed sequence is mostly the same as the
michael.e.feroli@jpmorgan.com old one
March 18, 2011
funds rate cut, though by Bernanke’s own admission, that Fed securities holdings and currency outstanding
was a very rough estimate. $ bn
2500
The original Taylor rule was descriptive and meant to Securities
match how Fed policy was set in the 1987-1992 period. 2000
Subsequently, some researchers found that variants of Tay- Currency
1500
lor rules were optimal in certain economic models, and so
could also be prescriptive. However, those classes of mod- 1000
els were usually quite restrictive, such as assuming policy
was not at the zero bound, or that the central bank only 500
tried to influence the short end of the curve. (In fact, very 0
few optimal policy models even incorporate multi-period 90 95 00 05 10
interest rates.) When those restrictive assumptions don’t
hold, Taylor rules no longer necessarily represent optimal overall market held by the Fed will be well below its his-
policy. As such, its not clear what an LSAP-adjusted Tay- torical highs and basically just back to where it was before
lor rule tells us. the crisis began.1 This is so for two reasons: first, the Fed
sold some of its Treasuries during the early phase of the
Asset sales credit crisis in order to make room on its balance sheet for
liquidity support programs, and second and more impor-
It probably remains the case that the Fed will sell assets tantly, the amount of Treasury securities outstanding has
after beginning to raise the overnight interest rate. But we soared in the past few years.
do not see this need to sell assets as being motivated by a
desire to remove excess stimulus from the economy. If the Fed balance sheet has only removed a normal share
Rather, there appears to be a desire to return to a system in of duration from the market, this might suggest that asset
which the price of reserves is set in the market (i.e., re- purchases have not exerted much of a portfolio balance ef-
serves are scarce, and the Fed’s balance sheet is about the fect, and hence have not had much impact on lowering long
size of currency in the hands of the public). rates. However, one should keep in mind Chairman
Bernanke’s qualifier that asset purchases should have low-
To see why the size of the balance sheet may not represent ered long rates relative to where they otherwise would have
excessive long-term stimulus, it is useful to recall that the been. The massive issuance of Treasury securities has re-
way the Fed thinks about the impact of asset purchases on quired the market to absorb significant duration risk, which
long-term interest rates is through the so-called portfolio could have otherwise put upward pressure on long rates.
balance effect. In this view, when the Fed buys longer du- Arguably, the Fed has partially averted that outcome.
ration Treasury securities and removes that supply from the
market, the price of those securities goes up and the yield Even though the portfolio balance effect does not indicate
goes down (even though there is not necessarily any that the Fed balance sheet is providing excessive stimulus,
change in the expected path of short rates). In this frame- there is still a consensus on the FOMC that reducing the bal-
work, the overall size of the market clearly matters. For ance sheet over time is appropriate. It is important to note
example, the $600 billion to be purchased under LSAP2 that this does not reflect a concern—at least for most com-
should not necessarily be seen as a more meaningful mittee members—that large amounts of excess reserves are
amount than the £200 billion purchased by the Bank of En- inherently inflationary. Rather, it appears the committee
gland under their Asset Purchase Facility, as the Fed’s would prefer to move toward a market for reserves that looks
$600 billion of intended purchases amounts to less than 7% more like the corridor system—as in the Euro area—rather
of marketable US Treasury securities outstanding, whereas than a floor system—as in New Zealand. (For more on the
the £200 billion purchased by the BoE amounted to nearly distinction, see “The Fed’s road home,” Mar 2, 2010.) Re-
a quarter of the outstanding stock of gilts. (Related, and not ducing Fed assets and reserve liabilities appears to be the
surprisingly, the per dollar impact of Fed asset purchases is preferred long-term route for moving to a corridor system.
generally estimated to be less than the dollar equivalent per
pound impact of BoE asset purchases.) 1. The Fed has also bought over a trillion dollars of mortgage-backed securities, which
arguably should be added to the tally of how much interest rate risk the Fed has removed
Looking at how much Treasury securities the Fed balance from the market. Unlike government debt, when a mortgage is issued, the mortgage buyer
takes on interest rate risk, while the mortgaged homeowner sheds interest rate risk. For this
sheet has removed from the market, even after the end of reason, measuring the degree to which private credit adds interest rate risk to the private
the current $600 billion purchase plan, the share of the sector is problematic.
16
Raphael Brun-Aguerre (44-20) 7777-0282 Global Data Watch
raphael.x.brun-aguerre@jpmorgan.com March 18, 2011
Economic Research Note Euro area HICP inflation

%oya
Euro area data point to a drift 5 Core (ex. food, alcohol, tobacco, energy, and admin. prices)
higher in core inflation 4

3 Headline
• Direct measures of slack point to gradual rise in
2
core inflation...
1
• ... as do survey measures of pricing intentions
0
• Core inflation to reach 1.4%oya by year-end -1
2005 2006 2007 2008 2009 2010 2011
Euro area core inflation—which excludes food, alcohol, to-
bacco, energy, and administered prices—troughed at
0.7%oya at the start of last year and drifted up to 1.0% last Phillips Curve core inflation forecasts
summer. Since then, it has remained steady around this %oy a, min-max band and av erage forecast Average forecast
level. However, this stability is unlikely to last. Direct mea-
sures of slack have tightened to such an extent that our mod- 2.5
els point to a gradual rise in core inflation in the second half
1.5
of the year. Moreover, survey measures of pricing intentions
point in the same direction. It now looks like core inflation 0.5
will rise modestly to 1.4%oya by year-end, and that this up-
-0.5
ward trend will continue in 2012. Actual
-1.5
The message from slack 05 05 06 06 07 07 08 08 09 09 10 10 11 11
We believe that the most important driver of core inflation

is the amount of slack in the economy. Unfortunately, it is Phillips Curve core inflation predictions for 3Q11
hard to measure how much there is. Broadly speaking,
there are two ways to measure slack. First, output and un- Lab.
Capu Eq. short. GDP gap UR gap
short
employment rate gap measures can be estimated, where the
Change in core infl.
current state of the economy (as measured by production or
(%oya) from 3Q10 -0.48 0.82 0.18 0.07 -0.07
the labor market) is compared to some equilibrium level.
Contributions:
Using a simple Hodrick-Prescott filter, our analysis sug-
Slack, t-2 -0.52 0.64 0.05 -0.01 -0.26
gests the current output gap is limited, while the amount of
NEER, t-3 0.07 0.19 0.11 0.11 0.19
slack coming from the labor market is still significant. Sec-
Core infl. 3Q11 (%oya) 0.53 1.83 1.18 1.07 0.94
ond, direct measures of resource use from the surveys can
The contributions might not add up exactly to the 4-quarter change in core inflation because the
be used to gauge how far the economy is from an equilib- constant is not included.
rium. The European Commission survey provides such
measures for the manufacturing sector, which suggest that
slack is quite limited: capacity utilization is now close to its PMI ouput price
long run pre-recession average; equipment shortages are Diffusion index, sa
close to their previous cyclical peak; and labor shortages 65
are now above their long run pre-recession average. A key Manufacturing
60 Services
point is that the amount slack extracted from these mea-
sures, gap measures and surveys, can differ widely. 55
50
We have a suite of simple Phillips Curve models which use
45
direct and indirect measures of slack to predict core infla-
tion. In these models, the four quarter change in core infla- 40
tion is predicted using one of the slack variables (lagged 35
two quarters) and an exchange rate term (lagged three quar- 00 02 04 06 08 10
17
Raphael Brun-Aguerre (44-20) 7777-0282 Euro area data point to higher core inflation
raphael.x.brun-aguerre@jpmorgan.com March 18, 2011
ters). These models point to a gradual increase in core in- EC survey pricing intentions
flation. However, there is a larger than normal degree of %balance, sa
uncertainty around these forecasts, for two reasons. First, 30 Retail Industry
the wide dispersion of slack across measures gives very
20
different core inflation predictions (see table on the preced-
ing page). And second, core inflation has actually been 10
running ahead of almost all of these models over the past
0
year or so, which suggests a greater degree of pricing
Services
power than the measures of slack would indicate. -10
-20
The message from price surveys 04 05 06 07 08 09 10 11
Given the heightened uncertainty around the forecasts gen-
erated by our slack models, it is worth looking at other evi-
PMI composite output price (lagged 3 quarters) and core inflation
dence to see whether the prediction of the gradual rise in Diffusion index, sa % oya
core inflation is corroborated. Thus, to complement our
Phillips Curve analysis, we have looked at the pricing com- 65 Core inflation ex. admin. prices
2.3
ponents of the PMI and European Commission surveys. 60
These surveys have received considerable attention re- 1.8
55
cently, as the surge in oil and agricultural commodity
prices has been reflected not only in the input price compo- 50
1.3
nents but also in the output price components. Output 45
prices in manufacturing are close to the highest level seen Composite PMI 0.8
40
since 1985, and output prices in services are close to the
35 0.3
previous cyclical peak.
00 02 04 06 08 10
Our analysis finds these surveys to be good predictors of

core inflation three quarters ahead. We use these surveys in
simple univariate models to forecast core inflation over the Retail pricing intentions (lagged 3 quarters) and core inflation
% balance, sa % oya
coming quarters. These models suggest that by the third
quarter of this year core inflation will be in a range be- Core inflation ex. admin. prices
30 2.5
tween 1.4%oya and 1.6%oya, which corroborates the mes-
20
sage from the slack models. However, in contrast to the 2.0
slack models, actual core inflation has recently been run- 10
ning slightly below where the pricing intentions models 1.5
0
predicted it would be.
EC survey 1.0
-10
Core inflation to rise, but only modestly -20 0.5
Both measures of slack and surveys of pricing intentions 00 02 04 06 08 10
are sending a similar message: core inflation is set to rise in
the coming quarters. The average forecast coming from the
slack analysis suggests that core inflation will reach Core inflation models and predictions using surveys
1.1%oya in the third quarter. However, given recent errors,
the outcome is likely to be higher than this. Meanwhile, the PMI PMI PMI EC EC
EC Ind. Average
manuf. serv. comp. serv. retail.
average forecast coming from the price survey analysis
suggests that core inflation will reach 1.5%oya in the third Coefficient 0.04 0.07 0.06 0.03 0.03 0.02 -
quarter. However, given recent errors, the outcome is likely t-stat (10.4) (13.9) (13.0) (10.0) (11.1) (10.9) -
to be lower. We assume the middle of this range by the end R-square 0.55 0.67 0.66 0.51 0.59 0.56 -
of the third quarter. Looking beyond that point, we expect Predictions:
the uptrend to continue, to 1.4%oya at year-end, and then 2Q11 1.51 1.39 1.42 1.52 1.36 1.40 1.43
higher still in 2012. 3Q11 1.57 1.41 1.46 1.59 1.41 1.46 1.48
18
David Mackie (44-20) 7325-5040 Global Data Watch
david.mackie@jpmorgan.com March 18, 2011
Economic Research Note Gross debt under alternative interest rate subsidies
% of GDP
Euro area delivers a good 2015 2020
Scen 1 Scen 2 Scen 3 Scen 1 Scen 2 Scen 3
comprehensive policy package Esp 84 83 79 89 87 78
Grc 161 151 142 184 153 125
• Terms and conditions of liquidity support now made
conditional on behavior of debtor sovereign Ire 135 129 121 155 136 113
Prt 95 95 89 95 95 80
• Creating a path to debt sustainability without debt Note: Scenario 1 assumes borrowing rates are capped at 6% through 2012 but then move to
restructuring market rates thereafter. Scenario 2 assumes market rates are capped at 350bp above the
German borrowing cost from now through 2020. Scenario 3 assumes market rates are capped
• Exit journey still long and uncertain at 100bp above the German borrowing cost from now through 2020. See "A way out of the
EMU fiscal crisis," Global Issues, December 16, 2010.
Although the comprehensive policy package will not be turn to debt sustainability without debt restructuring. Bor-
finalized until March 24-25, enough has now been agreed rowing costs still remain too high, but given the conditional
to understand what policymakers are seeking to achieve. In nature of what was agreed last weekend, we think it is rea-
our view, the package is about as good as could have reasonable to expect further improvements in the terms and
sonably been expected. By making it clear that the terms conditions of liquidity support over time.
and conditions of liquidity support are open to negotiation,
policymakers have created a path down which the region A journey back to debt sustainability without debt restruc-
can travel to exit the current sovereign crisis without dis- turing may ultimately be unsuccessful, either because the
ruptive debt restructurings. debtor sovereigns do not put in a good faith effort in terms
of fiscal consolidation, or because nominal economic
We have argued that the exit plan that was put on the table growth turns out to be too weak for too long, or because
last year—which we would describe as huge amounts of the rest of the region fails to give sufficiently concessional
fiscal consolidation around the periphery and liquidity sup- borrowing costs on the liquidity support. But, the path ex-
port at a borrowing rate of 350bp over that in Germany— ists now in a way that it didn’t exist a week ago.
didn’t really help to exit the crisis. It simply enabled the
peripheral sovereigns to stabilize their debt-to-GDP ratios
at close to the peaks. If this exit plan had remained un- The context for the policy package
changed, then debt restructurings would have been inevi- In order to gauge whether the comprehensive policy package
table at some point. is reasonable, we need a proper understanding of the nature of
the sovereign crisis. Peripheral sovereigns in the Euro area
We have also argued that although the region does want to have both an income problem (large primary deficits) and a
establish debt restructuring as the ultimate fiscal end balance sheet problem (large amounts of outstanding debt).
game—this is clear in the way the ESM is being struc-
tured—policymakers only want to use this as a last resort. A sovereign income problem can only be resolved in one of
Given the political, financial, and macroeconomic disrup- three ways: fiscal consolidation to close the primary deficit,
tions caused by sovereign debt restructuring, the region an ongoing permanent fiscal transfer from a rich neighbor, or
would like to exit the current crisis in some other way. This a permanent increase in money supply growth which eventu-
is only possible if fiscal consolidation around the periphery ally generates an inflation tax. Given that the latter two are
is combined with very low-cost liquidity support, and pos- extremely unlikely, there is really no alternative to signifi-
sibly other measures such as liability management and as- cant fiscal austerity around the periphery. It is important to
set sales. stress that default and debt restructuring do not help to re-
solve an income problem. What can be done to help is that
By indicating that the terms and conditions of liquidity sup- generous liquidity support can be provided so that the fiscal
port are negotiable, and are conditional on the behavior of consolidations take place over a reasonable horizon which
the debtor sovereign (as indicated by the change for Greece limits the macroeconomic consequences.
but not Ireland), policymakers have provided an incentive
to the debtor sovereigns to continue with fiscal consolida- Meanwhile, a sovereign balance sheet problem can be re-
tion and have created a mechanism that makes it possible solved in one of four ways: fiscal consolidation to generate a
that these consolidations can actually help sovereigns re- primary surplus, a debt restructuring, a one-off lump-sum
19
David Mackie (44-20) 7325-5040 Euro area delivers a good comprehensive
david.mackie@jpmorgan.com policy package
March 18, 2011
fiscal transfer from a rich neighbor, or a one-off increase in agreement of Euro area member states. Operational deci-
the money supply and the price level. As far as the Euro area sions can be changed at any point in time. Thus, the terms
is concerned, the latter two are not in the cards, which leaves and conditions of liquidity support can be changed further;
the resolution of the balance sheet problems lying between low-cost loans could be made to enable liability manage-
further fiscal consolidation and debt restructuring. ment exercises to be conducted; and the authority to pur-
chase secondary market debt could be given.
In this context, it was unreasonable to expect the compre-
hensive policy package to fully resolve the sovereign crisis. At the Ecofin meeting on Tuesday, finance ministers
Given the size of the primary deficits and the reluctance to agreed on the package of reforms to the Stability and
engage in debt restructuring, it will take time to exit the Growth Pact and the new macroeconomic surveillance
current crisis. The best that could have been expected from framework, which essentially implements the recommenda-
the policy package was a set of measures which contained tion of the European Council Task Force (for details of the
the crisis in the near term, created a path whereby the re- governance framework see “The Euro area’s journey to a
gion could exit the current crisis in the medium term with- comprehensive policy package,” GDW, Feb 25, 2011).
out debt restructuring, and laid out a set of governance re-
forms to help prevent future crises. In our view, this is what Euro area leaders agreed on the broad contours of the com-
policymakers have delivered. petitiveness pact (it is now called the pact for the euro).
This is essentially about boosting growth potential in the
The content of the policy package region, motivated by the idea that “competitiveness is es-
sential to help the EU grow faster and more sustainably in
The comprehensive policy package was meant to contain
the medium and long term, to produce higher levels of in-
five elements: an increase in the size and a broadening of
come for citizens, and to preserve our social models.” It
the scope of the EFSF (which will provide liquidity support
covers four areas: improving competitiveness (through in-
out to mid-2013); more details on the operation of the ESM
ter alia a better alignment of wages and productivity, and
(which will provide liquidity support beyond mid-2013); a
through higher productivity); boosting employment
reformed Stability and Growth Pact (which will guide fis-
(through increased flexibility and tax reforms); improving
cal policy across the region); a new macroeconomic sur-
the medium-term sustainability of public finances (through
veillance framework (which will guide macro prudential
inter alia aligning retirement ages with demographics); and
and structural policies to limit intraregional imbalances);
reinforcing financial stability (through legislation on bank-
and a competitiveness pact (which will guide all policies
ing resolution and regular bank stress tests).
toward lifting growth potential in the region).
Regarding the EFSF, Euro area leaders agreed that its lend- Conclusions and implications for the ECB
ing capacity will be increased to €440 billion, although There should be no doubt that Euro area leaders are com-
they did not specify how this would be achieved. In terms mitted to ensuring the survival of the monetary union. On
of additional functionality, only one thing was agreed: al- the question of whether sovereign debt restructuring is go-
lowing the EFSF to intervene in the primary debt markets. ing to occur, the comprehensive policy package was never
This is an alternative to providing liquidity loans and a way going to be able to fully resolve that issue. Whether or not
of helping to ease sovereigns back into the capital markets any of the peripheral sovereigns ends up restructuring their
after a spell in the liquidity hospital. The responsibility of debt depends on both the extent of the fiscal effort it is
secondary market purchases remains with the ECB. willing to engage in and the extent to which the rest of the
region is willing to subsidize the liquidity support. Each of
Regarding the ESM, it was confirmed that it will have an these is still unclear, but the region has now sent a power-
effective lending capacity of €500 billion and that this will ful signal that if the debtor sovereign puts in a good faith
be ensured by a mix between paid-in capital, callable capi- effort, then debt restructuring could well be avoided
tal, and guarantees. It will also have the power to purchase
debt in primary markets, but not in secondary markets. In our view, the fiscal authorities are now doing enough to
enable the ECB to set monetary policy on the basis of
An important point to stress is that the functionality of both macro conditions in the region as a whole. On the Securi-
the EFSF and the ESM are not set in stone by this policy ties Markets Program, the ECB will continue with its cur-
announcement. The functionality of these two liquidity pro- rent policy: stepping in when absolutely necessary but not
viding vehicles is determined by an intergovernmental otherwise, and limiting the purchases as much as possible.
20
JPMorgan Securities Japan Co., Ltd. Economic Research
Masaaki Kanno (81-3) 6736-1166 Global Data Watch
masaaki.kanno@jpmorgan.com March 18, 2011
Masamichi Adachi (81-3) 6736-1172
masamichi.x.adachi@jpmorgan.com
Miwako Nakamura (81-3) 6736-1167
miwako.nakamura@jpmorgan.com
Economic Research Note Northeast Japan and Tokyo metropolitan area
Japan to recover from the Iwate
disaster, but will take time

• 2Q GDP to contract from hit to production, but Miyagi
economy to recover in 2H on public works as in the past ● Hypocenter of
×
• More than ¥10tn supplementary budged expected, 94km the main shock
Nuclear Power Plant
financed by tax hike, spending cut, and JGB issuance Fukushim a ◎
• BoJ started QE2 with bank reserves to rise to histori- 227km
cal high; coordinated intervention unsterilized
Tokyo
• Remaining concern is problems at Fukushima nuclear
●
power plant, still facing risk of reactor core meltdown
Japan had four unprecedentedly large disasters in a week: Real GDP produced in earthquake-impacted prefectures
an earthquake, tsunami, partial power outage (in eastern FY 2008 yen trillion for GDP, thousands for population
part of Japan), and the nuclear power plant accident, which Iwate Miyagi Fuku Total Nation
is the most serious problem at the moment. -shima
Overall 4.9 9.0 9.0 22.9 554.1
A massive earthquake struck Japan’s northeast coast on Agriculture, forestry
& fishing 0.2 0.1 0.2 0.6 9.0
Friday, March 11. It was not only the largest in the modern
Mining
history, but the unprecedentedly large tsunami has signifi- & manufacturing 1.0 1.4 2.8 5.2 130.6
cantly exacerbated the damage. The last week’s 9.0 magni- Private services 2.8 6.0 4.9 13.7 339.5
tude earthquake is said to have 300 times more energy than Other 1.1 1.7 1.3 4.1 91.2
the 1995 Kobe earthquake, or more than 100 times more Population 1352 2340 2052 5744 127692
than the 2008 Sichuan quake in China. The casualties from Note: Nation is the aggregate of the prefectures.
last week’s earthquake, which are still increasing day by
GDP forecast
day, are expected to rise to far above ten thousand, mostly
%q/q, saar, oya for CY2011
caused by the tsunami, rather than the earthquake itself.
1Q 2Q 3Q 4Q CY2011
New 1.2 -1.0 2.0 4.0 0.9
While the damage from the earthquake on the capital stock Previous 2.2 2.2 2.5 2.0 1.7
remains to be seen, we estimate that it should be at least
¥15 trillion (approximately 3% of GDP), 50% larger than Composite index and IP
that associated with the Kobe earthquake’s ¥9.9 trillion, as
Index 2005=100 sa, for both scales
the quake struck a much broader area, ranging from
Hokkaido to the Tokyo metropolitan area, although the 90 Composite index 98
main damage was concentrated in three prefectures, Iwate,
88 96
Miyagi, and Fukushima. Manufacturing output in these
three prefectures is approximately 4% of the nation’s while 94
86
output of their agriculture/forestry/fishing industries is 92
84 IP
about 6%. To be sure, the loss in capital and people’s lives 90
will reduce demand and production in the damaged areas in 82 88
the short run. But history shows that the loss of output 80 86
tends to be more than offset by the subsequent additional 1994 1995
spending on public works. In all, we revised down 1Q GDP
modestly and now look for a contraction of GDP in 2Q, but Lessons from Kobe earthquake
the economy is expected to recover in 3Q and jump in 4Q The experience of the Kobe earthquake in January 1995,
due to a large public works spending. As a result, our 2011 which took 6,433 lives and destroyed 104,906 houses, of-
GDP forecast was revised down to 0.9%oya from 1.7%, fers some guide for anticipating the impact of the recent
but 2012 was revised up to 2.8% from 1.8%. earthquake on economic activity in coming months. As ex-
21
Masaaki Kanno (81-3) 6736-1166 Japan to recover from the disaster, but will
masaaki.kanno@jpmorgan.com take time
Masamichi Adachi (81-3) 6736-1172 March 18, 2011
pected, there was a negative impact in the short term, but it Cabinet Office real private consumption index
did not last long: Index 2000=100 sa
98
• The coincident economic indicator, IP, and real exports
fell noticeably in January 1995, but rebounded in Febru- 96
ary and the following months. Real private consumption
also plunged in January, but recovered somewhat in fol- 94
lowing months.
92
• Firms’ sentiment did not deteriorate even with the earth-
quake, according to the January Shoko Chukin survey, 90
but fell in the ensuing months, on the heels of yen 1994 1995
strength. Indeed, USD/JPY fell from 99 in January 1995
to below 80 in April. The yen’s appreciation was likely Nikkei equity prices and yen FX rate
reflected in changes in foreign capital flows: net Japa- Yen Yen/dollar
Nikkei 225
nese foreign security purchases, which started to slow
22000 120
even before the earthquake, slowed further after the
quake, and were negative (which means that the funds 20000 110
came back to Japan) in March, before recovering in
April. However, it is worth noting that yen appreciation 18000 100
largely reflected the growing pressure from the US gov-
ernment over a trade dispute between the two countries. 16000 90
JPY/USD
Indeed, despite the Kobe earthquake, GDP continued to 14000 80
grow above 3%ar for three consecutive quarters until 3Q 1994 1995
1995. Indeed, one of the main drivers of the rapid growth
was an increase in public works, which rose 19.9% on av-
Net Japanese purchases of foreign securities
erage for four quarters to 1Q96. The government passed
Yen bn
three supplementary budgets, totaling ¥3 trillion, or 0.6%
of GDP. In addition, especially after USD/JPY hit bottom 2400
in 2Q, stronger private consumption boosted GDP.
1600
New constraint from power outages 800
However, last week’s earthquake appears to weigh on the 0

economy more significantly and will likely linger for a
-800
more extended period than the Kobe earthquake, due to the
secondary effect of the disaster. The massive damage to the -1600
1994 1995
nuclear power plant in Fukushima, operated by Tokyo
Electric Power Company (TEPCO), resulted in power out-
ages in the Tokyo metropolitan area, which produces 40% transfer of the power from the west to the east would solve, or
of Japan’s GDP. As the shortage of power supply is ex- at least ease, the problem. But, because of a technical issue,
pected to last until this summer, when demand increases electricity cannot be transferred, as the frequency in the east
seasonally, and with the outage also affecting train service, (50 Hz) differs from that in the west (60 Hz).
it will weigh on economic activity not only in northeastern
Japan, but also in the Tokyo metropolitan area. The disruption to domestic production from insufficient
power may generate a supply chain problem especially in
We have usually assumed that the damage of an earthquake Asia. Japanese manufacturers have been increasing over-
would be limited in duration as a shortage of goods caused by seas production to avoid the risk of yen appreciation and
an earthquake could easily filled by an increase in production also to take advantage of the high economic growth rates in
in other regions, which are not affected by the earthquake. the EMs, especially in Asian EMs. But Japanese overseas
Indeed, economic activity, including electricity production, in affiliates depend relatively heavily on the import of the
the western part of Japan has been about normal. In theory, the parts and machines from Japan. So, any decline in the sup-
22
Masaaki Kanno (81-3) 6736-1166 Global Data Watch
masaaki.kanno@jpmorgan.com March 18, 2011
Masamichi Adachi (81-3) 6736-1172
ply of materials and parts from Japan will likely restrain Electricity generation by source in Japan
New power, etc.
operating rates of foreign affiliates (see tables, next page). As of FY2009
1.1%
On the financial front, we have seen repatriation of assets, Hydroelectric

Coal
which drove USD/JPY to below 80, breaking the previous 8.1%
24.7%
post WWII high marked in April 1995. Domestic investors’ Nuclear
waning risk appetite would likely put upward pressure on 29.2%
the yen, delivering an additional blow to exporters. Petroleum
7.6%
LNG
Nuclear power plant problem 29.4%
Nuclear power provides 30% of Japan’s electricity, and that
ratio is thought to be rising. The tsunami following the earth-
quake destroyed TEPCO’s fuel tank for its diesel generators BOJ's current deposit
at the Fukushima nuclear power plant, which power the Yn tn
cooling systems when the main system fails. As a result, the
40
cooling system failed, and the temperature inside the nuclear
reactor rose substantially, as the water level in the reactors
30
fell, exposing fuel rods. Should the fuel rods in the reactor
remain exposed, the temperature inside the reactor would
20
soar, and, the fuel rods could melt down. To cope with this
very dangerous situations, TEPCO flooded the reactor with 10
sea water to cool it down. However, according to the govern-
ment and the TEPCO, despite the desperate effort, the tem- 0
perature has not yet fallen significantly. 00 02 04 06 08 10
On Tuesday, March 15, leakage of radioactive materials However, how the supplementary budget will be financed
was first reported even in Tokyo, located 227 kilometers remains to be seen. There is no consensus at the moment on
away from the troubled nuclear power plant, in the after- how much should be financed by a new “reconstruction
math of a hydrogen explosion, which apparently caused tax” and how much by issuing JGBs. If the consumption
some small cracks in the reactor. The Fukushima situation tax rate is hiked 1%-pt for a year, tax revenue will rise ¥2.5
may be comparable with the Three Mile Island episode in trillion (0.5% of GDP) per year.
the US but is far different from Chernobyl. The govern-
ment urged the local residents living within 20-30 kilome- The BoJ injected ¥15 trillion this week into the banking
ters to stay inside their houses. Actual amounts of radiation system, and is expected to increase current account depos-
in Tokyo were very low—0.0008 milli Sievert (mSv)—far its (about the same as bank reserves) to above ¥40 trillion
below the critical level1 and much lower than the amount of next Monday, which will exceed the BoJ’s liquidity injec-
radiation to which one is exposed flying in an airplane tion under QE1 that it conducted from 2001 to 2006. The
from Tokyo to NY (0.2 mSv). size of the coordinated purchase of USD that the BoJ con-
ducted today with the other G-7 countries to prevent the
Supplementary budget likely to exceed 2% yen from strengthening further is estimated to be close to
of GDP with the BoJ starting QE2 ¥2 trillion and appears to have been unsterilized.
Given the size of the damage from the disaster, the budget
for reviving the damaged area should exceed the one New risks abound
passed in the aftermath of the Kobe earthquake (¥3 tril- We still believe that the economy will start to recover in
lion). While it is premature to estimate the size of the bud- 2H11, assuming that the nuclear power plant problem does
get, it should be at least ¥10 trillion (2% of GDP). With the not worsen further. However, we attach a 10% probability
public works’ multiplier of 1.1, this will push up GDP, first to a scenario in which there is a massive leakage of radia-
offsetting the expected fall in private demand in 2Q 2011, tion, which in turn contaminates a meaningful portion of
and accelerating the GDP growth to close to 4% by 4Q. the food supply.
1. 100 mSv per day is estimated to be the critical level. A normal x-ray is 0.6 mSv.
23
Masaaki Kanno (81-3) 6736-1166 Japan to recover from the disaster, but will
masaaki.kanno@jpmorgan.com take time
Masamichi Adachi (81-3) 6736-1172 March 18, 2011
Obviously, this would have tremendous negative impacts Major partners in Japan's international trade
on the economy. Agriculture in the northeast of Japan Exports from Japan
would be devastated. Distribution channels would be dis- % of total Japanese nominal exports
rupted. On the international trade front, Japan’s food im- 2000 2005 2009 2010
ports would surge. With industrial production and exports 1 China 6.3 13.5 18.9 19.4
falling, the trade balance could easily fall into deficit, and 2 United States 29.7 22.5 16.1 15.4
even the current account could be in deficit, if the trade 3 Korea 6.4 7.8 8.1 8.1
4 Taiwan 7.5 7.3 6.3 6.8
deficit exceeds the income account surplus.
5 Hong Kong 5.7 6.0 5.5 5.5
6 Thailand 2.8 3.8 3.8 4.4
On the fiscal front, the government would increase spend- 7 Singapore 4.3 3.1 3.6 3.3
ing to compensate for the decline in private demand and to 8 Gernamy 4.2 3.1 2.9 2.7
help rebuild destroyed infrastructure. With a fall in tax rev- - Rest 33.0 32.8 34.8 34.4
enue, the fiscal deficit would expand with debt rising to far - Aggregate Asia 41.1 48.4 54.2 56.1
above 200% of GDP, unless consumption tax rate is hiked - ASEAN 14.3 12.7 13.8 14.7
significantly. The net impact of the disaster on Japan’s debt - NIES 23.9 24.3 23.5 23.7
dynamics is that the time for the current account surplus to Imports of Japan
disappear will be sooner. % of total Japanese nominal imports
2000 2005 2009 2010
In addition, if investors’ risk appetite wanes markedly, and 1 China 14.5 21.0 22.3 22.1
if investors exhibit a strong preference to hold cash, even 2 United States 19.0 12.4 10.7 9.7
bonds could sell-off. In an extreme case in which overseas 3 Saudi Arabia 3.7 5.6 5.3 5.2
portfolio investments are liquidated to repatriate funds, the 4 UAE 3.9 4.9 4.1 4.2
sharp change in the direction of capital flows could se- 5 Korea 5.4 4.7 4.0 4.1
6 Indonesia 4.3 4.0 3.9 3.3
verely limit the liquidity in EM asset markets.
7 Taiwan 4.7 3.5 3.3 3.3
8 Malaysia 3.8 2.8 3.0 3.0
Meanwhile, even though we assume that Japan’s current - Rest 40.6 41.0 43.3 44.9
account surplus will persist for some time, the loss of con- - Aggregate Asia 41.7 44.4 44.7 45.3
fidence in government policies and a surge in liquidity - ASEAN 15.7 14.1 14.1 14.5
preference could reduce demand for JGBs, especially long - NIES 12.2 9.8 8.6 8.9
dated JGBs. To avoid a rise in JGB yields, the government
would have to cut expenditures and hike the consumption Major traded goods in Japan's international trade (2010)
tax rate. This painful prescription would restrain economic Exports from Japan
growth, perhaps significantly. % of total Japanese nominal exports
1 Transport machinery 22.6
Under these scenarios, the BoJ’s policy options would be 2 Indusrial machinery 19.8
3 Electric machinery 18.8
limited, as conventional measures of the monetary policy
4 Manufactured goods 13.0
have already been overextended. The BoJ could purchase 5 Chemicals 10.3
equities as well as the bonds, by expanding the size and the 6 Mineral fuels 1.6
scope of the Asset Purchase Program. If this option were 7 Raw materials 1.4
chosen, the BoJ would monetize both the fiscal deficit and 8 Food 0.6
real assets held by the private sector. Indeed, the BoJ’s ag- - Rest 11.9
gressive policies would ease deflation, and may create in-
flation, if they are combined with an increase in public Imports of Japan
spending. This may seem like a favorable outcome. How- % of total Japanese nominal imports
ever, creating inflation through debt monetization policy is 1 Mineral fuels 28.6
2 Electric machinery 13.3
fraught with risks. The important question would be
3 Chemicals 8.9
whether the government could cut the spending or increase 4 Manufactured goods 8.9
taxes to reduce the need for debt monetization as inflation 5 Food 8.6
nears the target. In other words, a workable debt monetiza- 6 Indusrial machinery 7.9
tion plan ultimately would require fiscal discipline. 7 Raw materials 7.8
8 Transport machinery 2.8
- Rest 13.2
24
Malcolm Barr (44-20) 7777-1080 Global Data Watch
malcolm.barr@jpmorgan.com March 18, 2011
Allan Monks (44-20) 7777-1188
allan.j.monks@jpmorgan.com
Economic Research Note Composite output PMI versus real GDP growth
Standard deviations from average since 2000
UK growth: the good, the bad, 2
and the ugly 1

PMI
0
• Good: business survey and labor market data suggest
growth is holding up -1
-2 GDP
• Bad: consumer indicators warn of weak spending
-3
• Ugly: plunge in construction output runs into Janu-
-4
ary 2011, threatening another fall in GDP in 1Q11 00 02 04 06 08 10
Claimant count unemployment versus real GDP growth
As Chancellor George Osborne prepares his March budget, 000s sa, chg over 3 months % q/q sa
and the MPC deliberates a hike in rate motivated by inflation Claimant count
-100 1.5
concerns, the UK data are more difficult to read than usual.
1.0
After a surprise decline in GDP in 4Q, partly reflecting the
0 0.5
impact of December snowstorms, a bounce in 1Q has been
0.0
widely anticipated. The data in hand are creating significant 100 -0.5
doubt as to whether that will occur. Business survey data GDP -1.0
suggest at least a tepid underlying pace of growth and the 200 -1.5
possibility of something close to trend. The labor market as a -2.0
whole is broadly stable despite job cuts in the public sector. 300 -2.5
But indicators of household spending have weakened of late, 04 05 06 07 08 09 10 11
warning that consumption may be contracting anew amid Industrial production versus business investment
ongoing weakness in real incomes. And official data on con- %3m/3m, saar for IP, %q/q, saar for business investment
struction output suggest that, having boosted growth through 20 IP capital goods 40
the middle quarters of 2010, the sector may act as a large
drag on output in 1Q; output has fallen further after 10
20
December’s sharp decline. 0
0
Our forecast has been for growth to gradually pick up as -10
Business
2011 progressed, and that remains the case. But uncertainty investment -20
-20
on the current momentum in growth is unusually high, with
risks still skewed to the downside after 4Q’s surprising -30 -40
2005 2006 2007 2008 2009 2010 2011
weakness. Releases in late March and early April will pro-
fore December’s snowstorms hit, while business surveys
vide further color on how 1Q has fared, but are likely to
point to ongoing growth. Where the official data and the
leave the picture uncertain ahead of the April 27 release of
surveys are not in conflict is in the manufacturing sector,
the preliminary estimate of GDP growth. Although the
where output and exports are growing strongly.
MPC will take all of the available data into account, that
release will be an important input into its appraisal of the
It would be complacent to rely solely on the business sur-
outlook in May. The bar for the a majority to vote to raise
veys as a signal that the official data are underreporting
rates is low (the February inflation report had forecast
output growth, as the linkages (even in the mature data) are
growth averaging near 1.5% q/q saar over 4Q10 to 2Q11)
not always very close. But we are inclined to put weight on
but the data are keeping that debate going.
them for three reasons beyond their tracking record. First,
the composite output PMI has retained its linkage with the
The good: business surveys hold in global measure through recent releases, which makes the
As GDP fell in 4Q, many pointed out that after allowing for apparent strength explicable. Second, the data on employ-
the impact of December’s snow, the underlying weakness ment have held in better than we would expect if the ser-
in output growth was not consistent with business survey vice sector were contracting. Having hoarded labor through
data. More specifically, the official data report that private the downturn, we would expect to see a quick turn to labor
service sector output had begun to contract again even be- shedding if output growth were to falter again. But such
25
Allan Monks (44-20) 7777-1188 UK growth: the good, the bad, and the ugly
allan.j.monks@jpmorgan.com March 18, 2011
Malcolm Barr (44-20) 7777-1080
malcolm.barr@jpmorgan.com
weakness in the labor market data has not been forthcom- Household spending versus tracking indicator using monthly data
ing, and some of the business survey readings on the labor %q/2q, defined as real HH consumption plus investment spending
market have been strengthening of late. Third, production 6
of capital goods is leading the gains in manufacturing pro-
4
duction, which hints that investment spending in the UK is
2
also firming.
0
-2
The bad: households take the hit Actual overall
-4 Tracker using
HH spending
Should UK growth disappoint, it is clear where it would be -6 monthly data
concentrated on the expenditure side: consumer spending -8
faces a litany of headwinds. Weekly nominal pay growth per 2007 2008 2009 2010 2011
employee is running below 3%, while employment is run- Real labor income proxy versus real private consumption
ning near flat. Increases in consumer prices have meant that
%oya, income proxy=avg earnings plus employ. growth minus RPI inflation
pre-tax labor income has been falling in real terms for over a
year. The recent hike in VAT has generated another step 4
down in real incomes in early 2011, while ongoing gains in 2 Consumption
food and energy prices threaten further downward pressure
on real incomes. Public service provision is set to be cut, 0
while the near 25% of the workforce who work in the public
-2
sector face job uncertainty, alongside weaker pay and pen-
sions even if they keep their jobs. Meanwhile, the housing -4
market remains weak, the ability to borrow against housing Income proxy
-6
is constrained, and unsecured credit is relatively expensive. 2005 2006 2007 2008 2009 2010
Consumer confidence began to sag in the wake of last year’s
Construction output
election and that fall has accelerated in early 2011.
£ bn at 2005 prices, nsa, quarterly data prior to 2010
Sustaining even modest gains in real consumption over 9.5
1H11 will likely require households to reduce their saving 9.0
rate. After the sharp retrenchment seen during 2008-9,
8.5
2010 saw the saving rate move down from its peak, sup-
porting sluggish gains in consumption. A bounce in invest- 8.0
ment spending by households, which is comprised mainly 7.5
of additions and repairs to the housing stock, also sug- 7.0
gested some stabilization in household behavior through to
6.5
3Q10. Tracking spending is not easy, but our indicator has 2009 2010 2011
suggested the data are consistent with near flat household
due on April 8. As the data stand, we need to see strong
spending for a while.
(10% m/m) gains over both February and March to bring
the quarterly change in construction output up to the bot-
The ugly: construction fails to bounce tom of the historical range at around an 8% q/q sa decline.
An outsized bounce in construction output added signifi- Such an outcome would reduce the (not annualized) quar-
cantly to GDP growth through mid-2010, and the potential terly growth rate of GDP by 0.5%-pt.
for a correction has been clear. After an almost 17% m/m
nsa decline in construction output in the snow-impacted After the 4Q downside surprise, we had penciled in a 0.7%
December, the January data were expected to rebound. But q/q gain in GDP for 1Q. The release of official data on ser-
the monthly data show a further near 8% m/m nsa fall. The vices output for January (due March 30) will be important
official monthly data on construction output have only 13 as a window on the magnitude of the bounce after
months of history, are volatile, and not seasonally adjusted. December’s sharp decline. But the drag from the construc-
But with January’s level of output down some 18% on the tion sector threatens to dominate the 1Q data, leaving us
4Q average, even strong monthly gains over February and tracking a near flat outcome with the data in hand. A fur-
March will likely leave the sector acting as big drag on ther contraction in output in the quarter cannot be ruled out
GDP growth in 1Q. The next update of the monthly data is if the move up in services output proves underwhelming.
26
Allan Monks (44-20) 7777-1188 Global Data Watch
Malcolm Barr (44-20) 7777-1080
Economic Research Note Changes in the current budget deficit and investment spending
Change from prior year, £ bn
UK: Budget for 2011 will stay 12 Current budget deficit
10 Deterioration
the fiscal course 8
6
• The Chancellor is under pressure to slow the pace of 4 Net investment
fiscal consolidation following better news on tax receipts 2
0
• But next week’s Budget will stick to the austerity pro- -2 Improvement
gram outlined last year -4
-6
• Osborne will instead announce small supply-side 2006/07 2007/08 2008/09 2009/10 2010/11
measures aimed at supporting growth Central government revenue and expenditure
%oya
The government continues to face criticism about the speed
and scale of the austerity program being pushed through,
15
while economic growth has yet to show a sustained recov-
10 Expenditure
ery. Recent positive surprises from tax receipts appear set
to deliver a £10-15 billion undershoot in borrowing for the 5
2010-11 fiscal year. This creates some pressure for the 0
Chancellor to slow the pace of planned consolidation in -5
next week’s 2011 Budget, which is also likely to see the Revenue
-10
OBR downgrade its growth forecasts. But Osborne will
-15
likely stick to his guns. New tax increases are scheduled to 2007 2008 2009 2010
begin from April. And spending cuts will intensify during OBR public finance projections
the 2011-12 fiscal year, resulting in a larger drop in the pri- % of GDP, unless stated
mary structural deficit worth 2.3%-pts of GDP. 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
OBR 2011 projections (expected):
Overall deficit (£bn) 139 113 93 62 37 20
The Chancellor will divert attention from this reality by ar- Overall deficit (% GDP) 9.3 7.4 5.7 3.6 2.0 1.0
guing that the plans are part of a broader strategy aimed at GDP, %oya 1.7 1.8 2.7 2.9 2.7 2.6
kick-starting growth. The Budget will therefore center atten- OBR November 2010 report:
tion on a host of micro level reforms aimed at encouraging Overall deficit (£bn) 149 117 92 62 37 20
businesses to expand and create jobs. These reforms—which Overall deficit (% GDP) 10.0 7.6 5.6 3.6 2.0 1.0
will include identifying enterprise zones most in need of sup- Current deficit (cyc. adj.) 4.7 3.3 1.8 0.5 -0.5 -1.0
Net debt (PSND ex) 62.8 67.2 69.8 70.3 69.4 67.4
port, targeted tax breaks, and simpler planning rules—will
be aimed at facilitating a rebalancing toward private sector- Revenue 6.9 6.7 5.8 6.1 5.9 5.3
Total expenditure 4.2 0.8 1.1 1.1 1.9 2.7
led growth. Consumers appear likely to be offered some re- Investment spending 2.9 2.0 1.7 1.4 1.3 1.3
lief from rising oil prices in the form of a reduction in fuel Paybill (%oya) - -0.7 -0.6 -1.5 -3.2 -1.5
duty—which may involve a mechanism to stabilize petrol GDP, %oya 2.5 2.0 2.7 2.9 2.8 2.7
prices. But these measures will cost little in the aggregate, Potential GDP, %oya 1.7 2.1 2.3 2.2 2.1 2.0
and will not meaningfully alter the near-term growth out- Output gap -3.3 -3.4 -3.0 -2.3 -1.6 -0.9
look. New measures are more than likely to be covered by
£10-15 billion (almost 1% of GDP). The improvement in
the better news on tax receipts, allowing for some modest
the structural deficit may be less than this if the OBR con-
downward revisions to the 2011-12 forecast for borrowing.
cludes that potential growth was weaker than thought—
which appears likely given recent data on activity. More-
Rising receipts give Osborne some leeway over, the OBR will be forced to revise down 2010-11 GDP
A resurgence in tax revenues and headway in cutting public growth following recent weak outturns, and may shave its
investment spending helped to generate better monthly estimate for 2011-12 as well. Allowing for a package worth
budgetary outturns toward the end of last year. With the £2-3 billion (0.2% of GDP) aimed at delivering reforms to
current fiscal year (which ends in March) drawing to a support growth, the reduction in the OBR’s 2011-12 bor-
close, borrowing looks likely to undershoot the £148.5 bil- rowing projection is therefore likely to be small. We antici-
lion projection made by the OBR in November, by around pate a £4 billion revision, leaving the forecast for the com-
27
Allan Monks (44-20) 7777-1188 UK: Budget for 2011 will stay the fiscal course
Malcolm Barr (44-20) 7777-1080
ing fiscal year at £113 billion. The cyclically adjusted cur- Government net investment
rent budget will be shown returning to balance in 2014- £ bn
15—in line with the fiscal objectives.
-8 2009/10
2010/11
Fiscal pain to increase from 2Q -6
The OBR estimated that the primary structural deficit for the
current fiscal year would fall by 1.9% of GDP. For the fiscal -4
year that begins in April 2011, the drag is expected to in-
10/11 target
crease to 2.3%—which is estimated to be the single largest -2
year of adjustment in the five year consolidation process. But
offering a more specific quarterly time line for the planned 0
Apr Jul Oct Jan
measures is not easy, given the information available. A step Public spending projections
up in the intensity of the current consolidation process will
%oya
occur from 2Q and last for the next four quarters, concentrated
mostly in spending cutbacks: 8
6 Nominal
• A host of tax and benefit measures will come into ef-
fect from April—but are relatively small. In the aggre- 4
Real
gate these changes—all planned to take effect from early 2
April to coincide with the new fiscal year—are equiva-
lent to a net fiscal drag of £5.4 billion (0.3% of GDP) 0
according to the Institute of Fiscal Studies. This is rela- -2
tively small and measures the impact over the fiscal year 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
as a whole. The largest takeaway is the 1%-pt rise in na-
tional insurance. But some offset will come in the form Public job cuts happening more quickly
of a higher personal income tax allowance and an in- OBR projections suggested the change in public sector em-
crease in the threshold of employer national insurance ployment in the year to March 2011 would be negligible—
contributions. VAT was also increased at the beginning with most of the expected 330,000 loss of jobs over the
of this year, which is providing an additional fiscal drag current parliament concentrated from 2013-2016. The lat-
compared to last year. est ONS data, however, report a decline in public sector
jobs of 45,000 in 4Q alone, and of 132,000 drop (2.1%)
• Nominal spending growth will slow dramatically in over the past year. This raises questions about whether the
2011-12—accounting for the lion’s share of the con- OBR’s approach, which involves a model of the aggregate
solidation. Departmental spending limits are set for the public sector paybill, is the more reliable guide to the tim-
fiscal year as a whole, which makes it tough to identify a ing of employment decisions within the public sector.
quarterly profile for the spending cuts. But nominal Public versus private sector employment
growth is expected to slow from 4.2%oya to 0.8% in the
Mn sa, survey of Mn sa, LFS household survey adjusted by
fiscal year beginning in April. This works out to be
public institutions estimate of public employment
worth around 1.7% of GDP according to the Budget—
and accounts for around 80% of the planned tightening 6.4
for the year. We will be able to track the pace of slow- 6.3 23.4
down in spending using the monthly public finances
6.2
data. Since current spending slowed less than projected 23.1
Public sector Private sector
in 2010-11, this may imply that a larger drag is to come 6.1
from this source from April. 22.8
6.0
• Public sector pay freeze to broaden from April, with 5.9 22.5
2007 2008 2009 2010
ongoing job cuts. A two-year public sector pay freeze
will take effect in 2011-12, and will save the government mental impact from April. Some civil servants who were
£3.3 billion a year (0.2% of GDP)—a small part of the mea- awaiting legally binding pay deals in 2010-11 will have had
sures described above. But there are signs that this adjust- their two-year pay freeze already. And public employment
ment is already at work, which may suggest a smaller incre- has started falling much earlier than planned (box).
28
J.P. Morgan Australia Limited, Sydney Economic Research
Helen Kevans (61-2) 9220-3250 Global Data Watch
helen.e.kevans@jpmorgan.com March 18, 2011
Economic Research Note Floating rate home loans now more popular
% of loans
RBNZ on hold until 2012— 80
Fixed
OCR changes more potent 70
• The RBNZ cut the official cash rate (OCR) 50bp last 60
week as an “insurance measure” 50
• Preference for floating rate mortgages means the 40
OCR cut will benefit households faster than before 30 Floating
• RBNZ to leave policy settings unchanged until earth- 20

05 07 09 11
quake rebuilding phase begins
Fixed interest rates were lower than floating
The Reserve Bank of New Zealand (RBNZ) slashed the
%
official cash rate (OCR) 50bp last week in a “preemptive”
move to mitigate against broader economic damage from 11
Floating
the recent earthquake. The quake on February 22 was the 5-year fixed
second within six months to rock the city of Christchurch 9
and surrounding areas, which account for 15% of national
GDP. The near-term economic damage is significant. Most
rebuilding will be delayed until 2012 given the severity of 7
2-year fixed
the land damage, which will need to be repaired before re-
building can begin. The RBNZ now will remain on the 5
policy sidelines for an extended period. Our forecast calls 05 06 07 08 09 10 11 12
for the next OCR hike to be delivered in 2Q12.
GDP to fall 0.2%q/q. The earthquake will have a negative
RBNZ Governor Alan Bollard returned the OCR to the impact on near-term activity, but will be positive for growth
record low 2.5% last seen during the most recent recession in the medium-term when rebuilding gets underway.
in a move he labeled an “insurance measure.” While we
had believed that a rate cut was not strictly needed and that Lags in policy transmission now shorter
targeted fiscal policy was a more appropriate response, we
The latest RBNZ stimulus should have more potency than
had acknowledged that the March decision was finely bal-
before given the lags in the monetary policy transmission
anced. The RBNZ delivered a meaningful cut, but made
mechanism now are shorter. The yield curve is sharply up-
clear that the decision required many important assump-
ward sloping and more borrowers favor floating rate mort-
tions “based on quite limited information.”
gages, which are relatively less expensive than those with
fixed rates. The proportion of households with floating rate
Pre-earthquake weakness mortgages has risen significantly, such that changes to the
The economy was weakening before the recent earthquake. OCR are quickly reflected in borrowing rates faced by
A handful of positive indicators in early 2011 had, though, households. In January, 57% of all mortgages issued were
hinted that the recovery was gaining traction. The trade data with floating rates, compared to just one-third when the last
showed that net exports provided a small contribution to OCR cut was delivered in April 2009.
growth in 4Q10 and that the terms of trade soared to a 35-
year high. But, outside the external sector, the economic pic- Shorter-term wholesale interest rates declined sharply fol-
ture was weak. Indeed, Bollard acknowledged that even be- lowing the earthquake, reflecting concerns that the disaster
fore the earthquake, the economy had underperformed, a would have a significant, negative impact on near-term
fact that clearly influenced the March decision. growth. The rates market was quick to price in cuts from
the RBNZ. The three-month overnight indexed swap (OIS)
The earthquake dealt a considerable blow to the economy, rate slumped from 3% pre-quake to 2.5% by March 9, the
resulting in a loss of output from the Canterbury region day prior the OCR announcement. The slump in wholesale
and a delay in the reconstruction effort from the previous rates prompted a number of banks to slash their fixed rates
quake in September 2010. The result will be another con- by up to 0.5% before the cut to the official cash rate. Float-
traction in the economy in 1Q11, with our forecast for ing interest rates fell shortly after the RBNZ decision.
29
Helen Kevans (61-2) 9220-3250 RBNZ on hold until 2012—
helen.e.kevans@jpmorgan.com OCR changes more potent
March 18, 2011
Slow start to reconstruction phase Contraction in GDP in 1Q11
Mortgage rates will remain low for some time. The Gover- % J.P. Morgan
nor underscored that the emergency stimulus will be re- 1.0 forecasts
moved only once the “rebuilding phase materialized.” This
will take time, particularly with aftershocks continuing. 0.5
The latest Christchurch earthquake put existing repairs and
0.0
rebuilding on hold, and the tremor caused substantial dam-
age to houses, commercial property, and infrastructure al-
-0.5
ready damaged by the earlier quake.
-1.0
Rebuilding efforts from the 2010 earthquake had proceeded 2008 2009 2010 2011
at a slower pace than initially anticipated. Earthquake-re-
lated construction approvals from the September quake had
yet to show up to any significant degree in the building Budget to remain in deficit until at least 2016
consents data. Only 30 earthquake-related consents were
OBEGAL, % of GDP
identified in the January figures from a total of 867, a quar- J.P. Morgan forecasts
5
ter of which were in the Canterbury region. Rebuilding
could not get underway as claims had not been processed
by insurers, one reason being the lack of information on 0
land remediation, which aims to prevent lateral spreading
of any future quakes.
-5
The scale of destruction from the second quake means repair
work will be even slower to gather momentum. The rebuild- -10
ing phase, therefore, is unlikely to “materialize” until next 02 04 06 08 10 12 14
year; hence our forecast for the RBNZ to leave the OCR un-
changed for an extended period. The reconstruction phase
will be large, however, such that the string of rate hikes we changes to its inflation projections in the most recent Mon-
anticipate in 2012 will push the OCR to 3.5% by year-end. etary Policy Statement, forecasting medium-term inflation
Our forecast for 100bp of policy tightening in 2012 will de- comfortably within the Bank’s 1%-3% target range. With
pend, though, on how the economy develops in the aftermath NZD falling and global inflation pressures rising, the risks
of the earthquake, particularly regarding inflation. to these forecasts are to the upside.
Price indicators the ones to watch Government to help with heavy lifting
Upward inflation pressure will intensify as rebuilding gets The economy will be supported by more fiscal spending in
under way. Prices for many goods and services already the upcoming Budget in May. Treasury estimates the cost
have risen, such as those for insurance premia, construction of rebuilding at around NZ$15 billion (8% of GDP), mean-
and rent costs. The inflation impulse from the quake should ing the drain on public finances will be substantial. Before
prove only temporary provided inflation expectations re- the earthquake, Treasury expected that the Budget would
main anchored. Should it prove persistent, however, the be in balance by 2015/16, with the operating deficit before
RBNZ would be forced to tighten more assertively than we gains and losses (OBEGAL) to improve markedly from
currently project. The faster transmission of policy changes 5.5% of GDP in the current fiscal year. This forecast was
suggests, though, that future tightening will have a more looking optimistic prior to the earthquake and now looks
immediate impact. highly unlikely. The government has said it will prioritize
spending to pay for the earthquake damage. Finance Minis-
For now, the significant slack in the economy means there ter Bill English has declared that the government will look
is little impetus for the RBNZ to shift the OCR toward neu- at “all options,” including curbing interest free-student
tral. Underlying inflation is benign, price expectations are loans and Working for Family tax credits which it previ-
low, and firms have lacked pricing power such that many ously said wouldn’t be changed. These changes will come
were unable to pass on the October 1 increase in the goods on top of other measures already implemented, including
and service tax (GST). The RBNZ, as such, made few the GST-hike last year.
30
Robert Mellman (1-212) 834-5517 Global Data Watch
robert.e.mellman@jpmorgan.com March 18, 2011
Core PCE price index, with forecast for February

United States %ch saar
• Forecast still expects stronger real GDP growth in 2.5
2Q11 on increased hiring, much lower inflation
2.0
• CPI is up 5.0% saar in 1Q11; core inflation has also
1.5 Over year ago
accelerated but is still running at low levels
• Passthrough of the weaker dollar into higher prices for 1.0
imported manufactures has been very modest so far
0.5 Over 3 months
The prospects for strong growth in the first half are being 0.0
2009 2010 2011
threatened by a set of shocks to the economy and to confi-
dence. The sharp increase in fuel prices had prompted a
downward revision of the 1H11 real GDP forecast over the Initial jobless claims
'000s, sawr
past few weeks to 3.0% (from 4.0%). The more recent
news has been the extent of damage in Japan related to the 480
earthquake, tsunami, and accident at the nuclear power
4-week
plant. Natural disasters usually result in near-term disloca- 440 average
tion and then rebuilding. And, the forecast for Japan eco-
nomic growth has been revised down in the first half and
400
revised up in the second half accordingly. Weekly
The direct effects on US economic activity in this scenario 360

are likely to be modest. Near-term export growth might be Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11
just a bit lower, and there is some concern about the near-
term effect on manufacturing from interruptions in the sup- Manufacturing output and single-family housing starts
ply chains. The greater risk to growth is that the growing %ch saar, over 3 months, both scales
list of global worries (Japan, oil supplies from the Middle
15 Manufacturing IP Housing starts 80
East and North Africa, Euro area fiscal problems, China
inflation and policy tightening, the US political stalemate) 40
could lead to risk aversion on the part of investors, a fur- 10
ther decline in equity prices, and significant adverse wealth 0
effects on consumer spending. The rebound in equity 5
prices over the last two days provides tentative encourage- -40
ment that a wave of persistent pessimism is not building.
0 -80
We are maintaining the forecast of 2.5% real GDP growth
this quarter rising to 3.5% next quarter. And we see good
reason for real consumer spending to reaccelerate before Any judgments about the effects of recent events on con-
long. Business surveys and the more timely weekly read- sumer and business behavior remain tentative, and it will be
ings on initial jobless claims are pointing to an upturn in important to monitor the most timely incoming data, includ-
employment growth. The latest weekly reading on initial ing the automakers’ guidance on March new car and light
jobless claims was a low 385,000, and the 4-week average truck sales that should be available early next week.
of jobless claims has dropped from 418,500 in the week of
the February labor market survey to 386,250 in the week Incoming February supply-side data show a mixed perfor-
of the March labor market survey. At least as important, mance in the first quarter. Manufacturing output accelerated
the tentative stabilization of energy prices suggests that to a 9.8% saar growth rate over the past three months. And
any acceleration of labor income in 2Q11 will be accompa- the sky-high reading for new orders in the Philadelphia Fed
nied by a sharp decline in inflation from an estimated 5.0% survey for March (the highest since the early 1980s) points
saar pace for the CPI this quarter to only about 2.0% next to further gains ahead. On the other hand, housing starts
quarter. Lower inflation next quarter will boost real in- plunged in February to their lowest level in almost two
come growth and provide important support for spending. years, and single-family starts are down 53.9% saar over
31
Robert Mellman (1-212) 834-5517 United States
robert.e.mellman@jpmorgan.com March 18, 2011
the past three months. Manufacturing accounts for 11.5% Three measures of core inflation
of GDP, while new home construction has plunged to only %ch saar, over 3 months
0.8% of GDP. 2.0 Core PCE, with Core CPI
1.5 Feb forecast
Assessing core inflation gets complicated
1.0
The inflation data for February confirm the recent surge in
inflation and a more modest acceleration in core inflation. 0.5
Market-based
The CPI increased 0.5% in February and has risen 5.6% 0.0 core PCE prices
saar over the past three months. The core CPI rose 0.2% in
-0.5
February and has also accelerated to 1.8% saar over the
past three months.
The Fed prefers the core PCE price index as a measure of Price of imported manufactures and the real broad value of the dollar
core inflation to the core CPI. Based on the CPI and PPI %ch nsa ar, over 6 months, both scales
source data for February, the core PCE price index is fore-
4 Import price for manufactures -50
cast to rise 0.16% in February. If realized, this would bring
the 3-month run rate for this measure of core inflation to
1.3% saar and its annual increase to 0.9%oya. These read- 2 -25
ings are off their lows, but still relatively modest and well
below the Fed’s informal inflation target. 0 0
Value of dollar
-2 25
While the 3-month run rate for core inflation has acceler-
ated recently, it is far from clear just what this acceleration
-4 50
means for the inflation forecast or for Fed policy. 2006 2007 2008 2009 2010 2011
Note: Manufactures in this chart include the price of imported capital goods, autos and
Is higher core inflation a trend or a wiggle? It is not parts, and nonauto consumer goods.
clear how much of the recent increase in core inflation is a
trend that should be extrapolated and how much is one of the core PCE price index lately, and if the recent differen-
those frequent wiggles in short-term inflation measures that tial holds, this measure of inflation would be running only
may soon be reversed. The 3-month run rate for the core 1.0% saar in the three months through February.
CPI had accelerated to 2.0% saar in October 2009 but fell
to -0.2% saar by the following March. And there are rea-
sons to expect at least some moderation ahead this time, Modest import price response to the dollar
too. For example, fully 0.4%-pt of the 1.8% run rate in the Import prices are also accelerating, up 1.4% samr in Febru-
core CPI is accounted for by public transportation (mainly ary and 6.9%oya. A substantial part of the increase in im-
air fares), as the cost of higher fuel prices has been quickly port prices reflects the global surge in commodity prices
passed on to the consumer. If the price of jet fuel were to over the past several months. But the price of imported
stabilize near recent levels, as priced into the futures mar- manufactures (capital goods, autos and parts, and nonauto
ket, flat air fares would bring a 0.4%-pt decline in the run consumer goods) has also accelerated, mainly in response
rate for the core CPI over the next several months. to the weakening of the dollar.
What is the best measure of core inflation? The CPI is The real, broad trade-weighted dollar has been trending
up to a 3-month run rate of 1.8% saar, including the surge lower since its March 2009 peak and declined 12.4% at an
in air fares. The core PCE price index, the Fed’s preferred annual rate in the six months through February. The price
measure, is forecast to be up to more modest 1.3% run rate of imported manufactures has increased over the past six
in the three months through February. Finally, many so- months, but is only up 1.2% nsa ar. Thus, only about 10%
phisticated inflation watchers focus on the market-based of the shift in the exchange rate has passed through into
core PCE price index, a measure that excludes goods and higher prices for imported manufactures, in line with the
services with imputed rather than market prices (for ex- trend over the past couple of years. Foreign producers have
ample, the “price” of the free use of an ATM machine). tended to respond to the lower dollar by accepting lower
The market-based core PCE price index is running below profit margins rather than raise prices and risk losing share.
32
Daniel Silver (1-212) 622-6039
daniel.a.silver@jpmorgan.com
Data releases and forecasts most recent four months with the prior three months
using proprietary data and includes distressed sales—
Week of March 21 - 25 also showed a pickup in prices in January (using our
own seasonal adjustment of the data).
Mon Existing home sales
Mar 21
10:00am Nov Dec Jan Feb Wed New home sales
Mar 23
Total (mn, saar) 4.64 5.22 5.36 5.15 10:00am Nov Dec Jan Feb
%m/m 5.9 12.5 2.7 -3.9
%oya nsa -24.6 -2.2 3.3 2.6 Total (000s,saar) 281 325 284 290
Months’ supply (nsa) 9.6 8.2 7.6 %m/m 0.4 15.7 -12.6 2.1
Single-family 9.4 7.9 7.5 %oya nsa -23.1 -8.3 -20.8 -16.4
Median price (%oya) 0.1 -1.0 -3.7 Months’ supply 8.3 7.0 7.9
Median price (%oya) 1.2 5.6 5.7
We forecast that existing home sales declined 3.9% in
February to an annualized rate of 5.15 million units. We believe that new single-family home sales increased
Existing home sales had been recovering modestly from 2.1% in February to an annualized rate of 290,000 units.
the extremely low level reached after the expiration of New home sales have bounced around at very low lev-
the home buyer tax credit, with sales up almost 40% els since the end of the home buyer tax credit. Most
(not annualized) between July and January. However, it recently, new home sales dropped 12.6% in January
looks like the severe winter weather in December and after jumping 15.7% the prior month in anticipation of
January may have restrained sales. Pending home the end of a state-specific tax credit in California. We
sales—which generally become existing home sales in think that the fallout from the tax credit was concen-
one or two months—fell about 6% between November trated in January and look for a very slight pickup in
and January. new home sales in February as the weather improved
after two months of severe winter storms. The volume
Prices of existing home sales continued to fall in Janu- of mortgage purchase applications declined 2.8% in
ary, with the availability of distressed sales weighing on February, but increased in early March; the month of
the market. Prices fell 3.7%oya in January, reaching the the mortgage application does not exactly match the
lowest level reported since early 2002. month of the new home sale.
The number of new single-family homes for sale contin-
Tue FHFA home price indexes
ued to press lower in January (to 188,000 units), ap-
Mar 22 Purchase only
proaching the all-time lowest level of inventories re-
10:00am Oct Nov Dec Jan
ported dating back to 1963 (181,000 units). The price
%oya -4.0 -4.6 -3.4 -4.4 data on new single-family home sales has been very
%m/m (sa) 0.1 -0.3 -0.3 -0.2 volatile since early 2010; prices were reported up
We forecast that the FHFA house price index—a 5.7%oya in January.
monthly house price measure—decreased 0.2% in Janu-
ary (-4.4%oya). Home prices were boosted in early Thu Jobless claims
2010 when the home buyer tax credit was stimulating Mar 24 000s, sa
buying activity, but since the tax credit’s expiration, 8:30am New claims (wr.) Continuing claims Insured
various home price indexes have looked very weak. We Wkly 4-wk avg Wkly 4-wk avg Jobless,%
expect further weakening in the FHFA data based on
the steep decline in mortgages applications in Decem- Jan 8 447 417 3897 4015 3.1
ber (-22%), which was much larger than normal for the Jan 15¹ 403 413 4009 3980 3.2
month (the data are not seasonally adjusted); we find Jan 22 457 430 3936 3932 3.1
that the mortgage data generally lead the FHFA data by Jan 29 419 432 3910 3938 3.1
about one month, although this relationship is some- Feb 5 385 416 3938 3948 3.1
what loose. Feb 12¹ 413 419 3833 3904 3.1
Feb 19 388 401 3791 3868 3.0
Other house price indexes already available for January
Feb 26 371 389 3786 3837 3.0
have been mixed. The CoreLogic house price index—
Mar 5 401 393 3706 3779 3.0
which is a three-month moving average of house
Mar 12¹ 385 386
prices—showed that distressed sales weighed signifi-
Mar 19 380 384
cantly on prices in January. The CoreLogic index fell
1. Payroll survey week
1.2%m/m sa during the month when including dis-
tressed sales, but jumped a sizable 1.7% during the
month when distressed sales were excluded. The FHFA We forecast that initial jobless claims for the week end-
index includes distressed sales (when its other criteria ing March 19 declined 5,000 to 380,000. Claims should
are met), though over the past two years, it has corre- continue to trend lower as the labor market heals,
lated slightly better with the CoreLogic data that ex- though the level of claims may bounce around through
cludes distressed sales. The Clear Capital house price the weekly reports. We expect some further payback in
index—a semimonthly series comparing prices from the the upcoming data from the 30,000 jump in claims that
33
Michael Feroli (1-212) 834-5523 United States
occurred the week ending March 5—claims fell only Fri Gross domestic product
16,000 in the intervening week. Mar 25 %ch, q/q saar, unless noted
There has been downward momentum building in con- 8:30am Adv Second Third
tinuing claims since the economy started to pick up last 3Q10 4Q10 4Q10 4Q10
fall. The four-week moving average for continuing Real GDP 2.6 3.2 2.8 3.2
claims dropped about 16% between September and the Final sales 0.9 7.1 6.7 6.5
week ending March 5. Domestic final sales 2.6 3.4 3.1 3.2
Consumption 2.4 4.4 4.1 4.1
Initial jobless claims Equip. and software 15.4 5.8 5.5 5.4
Nonres. structures -3.6 0.9 4.5 7.0
000s, sa
Residential investment -27.3 3.4 2.7 3.4
Government 3.9 -0.6 -1.5 -1.5
700 Net exports (pct.pt.contr.) -1.7 3.4 3.4 3.3
Inventories (pct.pt.contr.) 1.6 -3.7 -3.7 -3.3
600 Core PCE price index 0.5 0.4 0.5
(%oya) 1.2 0.8 0.8
500 GDP chain price index 2.1 0.3 0.4
(%oya) 1.2 1.3 1.4
400
Adj. corporate profits 1.6 0.6
(%oya) 26.4 16.3
300
We expect fourth quarter real GDP growth to be revised
200 up from 2.8%saar to 3.2% in the third release of the data,
2007 2008 2009 2010 2011 pushing GDP growth up to what was initially reported by
the BEA for the quarter. The bulk of this revision should
come from revisions to the change in inventories, which
Thu Durable goods we expect to be revised up from $7.1 billion saar to
Mar 24 %m/m sa $20.8 billion (adding 0.4%-pt to GDP growth) based on
8:30am Nov Dec Jan Feb revisions to source data released by the Census Bureau.
New orders -0.1 -0.6 3.2 3.2 We also anticipate slight upward revisions to private resi-
Ex transportation 4.6 2.7 -3.0 2.5 dential and nonresidential investment based on data re-
Nondef cap. gds ex air 3.3 4.0 -6.2 3.9 leased in the monthly reports on construction spending.
Shipments 0.5 2.3 0.3 1.0 These upward revisions should be partly offset by very
Nondef cap. gds ex air 1.5 2.4 -1.9 1.3 small downward revisions to net exports and equipment
Inventories 0.9 0.8 0.7 and software investment.
We forecast that durable goods orders increased 3.2% Corporate profits for 4Q will also be released with the
in February and that shipments increased 1.0%. The GDP data, and we believe weak pricing during the pe-
important core capital goods components was very riod should have weighed on profits. We forecast a
weak in January (orders down 6.2%, shipments down 0.6% rise in corporate profits during the quarter
1.9%) which is often the case in the first month of the (+16.3%oya) which would be the weakest quarter for
year due to inadequate seasonal adjustment of the data. profits since they plunged 26.3% in 4Q08 at the start of
Weak months for CCG orders and shipments are gener- the financial crisis.
ally followed by some bounceback the following
month, and we expect CCG orders to have increased Fri Consumer sentiment
3.9% and shipments to have risen 1.3% in February. Mar 25 Pre Fin
9:55am Jan Feb Mar Mar
Away from CCG, we expect solid gains in the transpor-
tation components of the report. The February IP report Univ. of Mich. Index (nsa) 74.2 77.5 68.2 68.0
showed increased production of motor vehicles and Current conditions 81.8 86.9 83.6
parts during the month, and we forecast that orders and Expectations 69.3 71.6 58.3
shipments of motor vehicles rose 3.4%. Our seasonal Inflation expectations
adjustment of available aircraft data also points to gains Short-term 3.4 3.4 4.6
in civilian aircraft orders and shipments. Long term 2.9 2.9 3.2
Home buying conditions 151.0 154.0 161.0
We also anticipate increases in defense orders and ship-
ments based on the strong month for Department of We forecast that the final University of Michigan con-
Defense spending (using our own seasonal adjustment sumer sentiment index for March will be 68.0, 0.2pt
of the data). Metal prices increased as well during the lower than reported in the preliminary data for the month
month, which could boost the nominal figures for re- and 9.5pts below the February level. The news since the
lated components.
34
preliminary data has been dominated by the earthquake Import prices (Mar 15)
and tsunami in Japan and the resulting crises unfolding in %m/m nsa, unless noted
the country. Geopolitical unrest has also persisted in the Dec Jan Feb
Middle East and North Africa, and oil prices remain el-
Import prices 1.2 1.4 1.5 1.3 0.7 1.4
evated. Equity markets in the US (and around the world)
%oya 5.1 5.3 5.3 5.4 6.1 6.9
have been rattled by this run of bad news and uncer-
Ex-fuel import prices 0.3 0.8 0.7 0.6 0.3
tainty, which could also adversely affect sentiment.
%oya 3.0 3.4 4.0 3.6
Even with all of this recent bad news, we do not expect
too significant a drop in sentiment between the prelimi- The import price index increased 1.4% in February
nary and final March readings. The preliminary data— (+6.9%oya). The headline reading was boosted by a big
which account for about teo-thirds of the monthly jump in petroleum prices (+3.7%), but nonfuel prices rose
sample—already showed a sizable decline from 0.3% during the month as well (+3.6%oya). The prices of
February’s level, and downward revisions have been rare imported fuels, foods, chemicals, and metals have all been
in recent years; in the 26 months reported since the start pushing noticeably higher in recent months, and we have
of 2009, there have only been five downward revisions also seen some firming in consumer goods prices.
between the preliminary and final readings for a month.
The prices of imported fuels and lubricants have been in-
We will also continue to monitor inflation expectations creasing steadily since late in 2010; the related price index
in the University of Michigan data. These measures jumped about 50%ar over the six months through February.
perked up significantly in the preliminary March report, Imported food prices have also been increasing significantly
with one-year-ahead expectations jumping 120bp to 4.6% lately, though there was some modest cooling in prices in
and longer-term expectations increasing 30bp to 3.2%. February; prices were up about 20%ar over the three months
through February, after increasing at an annualized rate of
Review of past week’s data almost 30% in the prior two months. The prices of imported
chemicals and unfinished metals continued to rise signifi-
Empire State survey (Mar 15) cantly in February, though the pace of growth also slowed a
Diffusion indices, sa bit relative to prior months.
Jan Feb Mar
Prices of imported consumer goods increased 1.9%ar over
General bus. conditions 11.9 15.4 15.5 17.5 the three months through February, after trending lower or
New orders 12.4 11.8 5.8 being flat through most of 2H10. The recent increases have
Shipments 25.4 11.3 1.6 been driven by apparel prices (due to increased cotton
Unfilled orders -11.6 -4.8 2.6 prices), which have increased at an annualized rate of 8.8%
Prices paid 35.8 45.8 53.2 over the three months through February; this was by far the
Prices received 15.8 16.9 20.8 largest three-month increase in the history of the series dat-
Composite 54.4 53.6 51.9 ing back to 1994.
The Empire State manufacturing survey increased from 15.4 The recent upward pressure on import prices has occurred in
to 17.5 in March, reaching its highest level since June 2010. imports to the US from all of the reported regions and coun-
However, several of the key measures within the survey tries, reflecting the global increases in commodity prices.
weakened in March, and the ISM-weighted composite de- The export price index for the US has also been increasing,
creased from 53.6 to 51.9. The Empire State survey has not up 9.8% over the year through February.
been a very reliable indicator of the ISM manufacturing sur-
vey in recent months. Homebuilders survey (Mar 15)
sa
Within the Empire State survey’s ISM-weighted composite, Jan Feb Mar
new orders declined from 11.8 to 5.8, and shipments fell
Housing market 16 16 17
from 11.3 to 1.6. Inventories declined from 9.6 to 3.9, and
Present sales 15 17 17
the orders-inventories gap reached its narrowest level (1.9)
Prospective buyer traffic 12 12 12
since November, which indicates slowing momentum for
manufacturing growth. Delivery times slid down from 0.0 to The NAHB survey finally increased to 17 in March after
-1.3. The main bright spot in the Empire State survey was holding at 16 the prior four months. The homebuilders’ sur-
the employment measure, which increased from 3.6 to 9.1 in vey has yet to show any significant improvement since the
March. The measure of the workweek—which is not part of end of the home buyer tax credit, increasing only 4pts from
the composite—also looked encouraging, up from 6.0 to the trough reached in August and September; the data on
15.6 in March, reaching its highest level in about 1½ years. new home sales and housing starts and permits (reported
separately) have also been stuck at very low levels since the
The price measures—also not part of the composite—have
tax credit’s expiration.
pushed significantly higher in recent months. In March,
prices paid increased from 45.8 to 53.3 and prices received All of its NAHB survey’s components remained near de-
increased from 16.9 to 20.8, with both measures reaching pressed levels, though the expectations measure increased
multi-year highs. from 25 to 27 in March. The present sales index held at 17
while prospective buyer traffic was unchanged at 12.
35
Michael Feroli (1-212) 834-5523 United States
All of the regional indexes remained at low levels in March, Housing starts (Mar 16)
although it appears that homebuilding in the South and West Mn units, saar
regions has recovered somewhat better than activity in the Dec Jan Feb
Northeast and Midwest regions so far in 2011. The index for
Starts 0.52 0.60 0.62 0.55 0.48
the South increased from 18 to 20 in March while the index
Single-family starts 0.42 0.41 0.42 0.41 0.38
for the West rose from 13 to 17; the Northeast index edged
Multifamily starts 0.10 0.18 0.19 0.14 0.10
down from 21 to 20 and the Midwest index held at 12.
Permits 0.63 0.56 0.57 0.52
The February report on housing starts and permits was very

Producer price index (Mar 16) disappointing and showed continued weak housing market
%m/m sa, unless noted
following the end of the home buyer tax credit. Most other
Dec Jan Feb
economic indicators have shown some signs of revival (and
Finished goods 0.9 0.8 0.7 1.6 even some strength) over the past six months, but housing
%oya (nsa) 4.0 3.6 4.8 5.6 starts and permits (as well as some other housing indicators)
Core 0.2 0.5 0.3 0.2 continue to look exceptionally weak.
%oya (nsa) 1.3 1.6 1.9 1.8
Energy 2.8 1.8 1.0 3.3 Single-family permits—perhaps the most important indicator
Cars -0.4 -0.1 -0.1 0.6 of the trend in housing growth—fell 9.3% in February to an
Trucks 0.2 0.2 0.1 -0.1 annualized rate of 382,000 permits. February was the weak-
Core intermed. 0.4 1.0 0.9 1.1 est month for permits in almost two years, and permits were
Core crude 3.5 4.0 2.3 only about 10% above the all-time low reported for the data
series. Single-family starts dropped 11.8% in February to an
The producer price index jumped 1.6% in February annualized rate of 375,000 units, which was also the weakest
(+5.6%oya), the largest monthly increase in more than 1½ reading in almost two years and close to the historic low for
years. The headline reading was boosted by sizable increases in the series. All of the reported regions have shown compa-
food prices (+3.9%) and energy prices (+3.3%) in February. rable weakness since the end of the tax credit, though there
The core PPI (ex. food and energy) increased a tamer 0.2% have been fluctuations in some months due to severe
in February (+1.8%oya), which is just a slight firming from weather and changes in building codes in some areas.
the average monthly increases reported over the past year.
Multifamily starts and permits are notoriously volatile, but
The energy PPI has been pushing higher over the past half have also remained very weak through the monthly fluctua-
year reflecting the increases in energy prices reported around tions. Multifamily starts plunged 46.1% in February to an
the world. The energy PPI surged almost 30% over the six annualized rate of 104,000 units, after surging 87.4% the
months through February. Gasoline prices and jet fuel prices prior month. Multifamily permits declined 4.9% in February
have been major factors in the recent run up in energy prices. to an annualized rate of 135,000 permits; this was the second
straight monthly decline after a 45.7% increase in Decem-
The 3.9% increase in the food PPI was the largest monthly ber. The multifamily data for the different regions has been
increase in more than 35 years, and was largely attributable mixed, but remains depressed across the board.
to an increase in vegetable prices (+50%). The food PPI
has leapt more than 20% saar over the three months
through February, reflecting the rise in most measures of CPI (Mar 17)
agricultural prices. %m/m sa, unless noted
Dec Jan Feb
The 0.2% increase in the core PPI was largely attributable to
a 0.6% increase in passenger car prices. The core measure Total 0.4 0.4 0.5
excluding light vehicles was also up 0.2% during the month, %oya nsa 1.5 1.6 2.2 2.1
boosted by apparel prices (related to cotton prices). We be- Core 0.07 0.17 0.16 0.20
lieve that the firming in the core index in January (+0.5%) %oya nsa 0.8 1.0 1.1
was partially the result of some seasonality in the data not Core services 0.1 0.1 0.2
captured by seasonal adjustment, and the February increase Core goods -0.1 0.2 0.2
in the core was more in line with the trend we have been Food 0.1 0.5 0.4 0.6
seeing lately. Energy 4.0 2.1 4.0 3.4
Housing 0.2 0.1 0.3
Data in the PPI release point to a 0.2% increase in the PCE Owners’ eq.rent 0.09 0.10 0.11 0.14
medical deflator for February. Rent 0.20 0.16 0.17 0.14
Lodging away from home 1.0 -1.0 -0.9 0.0
Apparel 0.1 1.0 0.4 -0.9
New vehicles -0.1 -0.1 -0.1 1.0
Used vehicles -0.1 -0.3 0.0 0.1
Airfares 2.7 2.2 0.0 2.1
Communication -0.6 -0.2 -0.3 0.0
Medical care 0.2 0.1 0.2 0.4
36
The consumer price index increased 0.5% in February Away from utilities, manufacturing production increased
(+2.1%oya), largely due to higher food and energy prices. 0.4% and mining production jumped 0.8%. Manufacturing
Food and energy prices have consistently boosted the head- production is increasing at a strong annualized pace of 9.2%
line readings in recent months, and the core CPI (ex. food so far in 1Q11. Solid motor vehicle production has provided
and energy) has looked much softer. The core measure in- a lift to the manufacturing data so far this quarter, but away
creased 0.2% in February (+1.1%oya), which showed some from motor vehicles and parts, manufacturing production is
firming from the recent trend. Data from the CPI (as well as still increasing at an annualized rate of 8.6% during the
the PPI) indicate that the headline PCE price deflator for quarter. The regional manufacturing surveys and the ISM
March should increase 0.4% (+1.6%oya), but the core PCE manufacturing index all looked very strong in the data avail-
deflator should remain tame, up only 0.16% (+0.9%oya). able so far for the quarter.
The trend of higher energy and food prices carried over into Overall capacity utilization edged down in February from
February. Energy prices soared 45%saar over the three 76.4% to 76.3% due to the weakness in utilities production.
months through February, reflecting the upward pressure on Manufacturing capacity utilization increased from 74.1%
energy prices around the world. Gasoline, fuel oil, and gas to 74.3% in February, reaching its highest level since
service prices posted sizable increases in February. As most August 2008.
measures of agricultural and food prices have increased re-
cently, the food CPI jumped 5%saar between November and Philadelphia Fed survey (Mar 17)
February (mainly due to prices for food at home); there was Diffusion indices, sa
a sizable 6.7% jump in vegetable prices (not annualized) in Jan Feb Mar
February, and prices rose for most other categories of food
as well. General bus. conditions 19.3 35.9 32.0 43.4
New orders 23.6 23.7 40.3
Within the core measure, both core goods and services in- Shipments 13.4 35.2 34.9
creased 0.2% in February, which was on the high end of Inventories 6.8 2.1 12.0
their respective recent trends. Owners’ equivalent rent Prices paid 54.3 67.2 63.8
firmed further in February, increasing 0.14% during the Prices received 17.1 21.0 22.6
month after increasing close to 0.10% the prior four months. Composite 56.4 59.5 61.4
The pace of growth in tenants’ rent has slowed slightly in
recent months, with a 0.14% increase reported for February. The Philadelphia Fed manufacturing survey’s impressive run
Airfares continued to push higher in February as jet fuel continued into March. The headline index jumped from 35.9
prices continued to rise; airfares increased 32%saar over the to 43.4 during the month, reaching its highest level since the
three months through February. Vehicle prices also picked 1980s. The index’s ISM-weighted composite pushed higher
up in February, with new vehicle prices increasing 1.0% from 59.5 to 61.4, which was its highest level since 2004.
during the month after four prior monthly declines, and used The March Philadelphia Fed survey was much stronger than
vehicle prices increasing 0.1%. Apparel prices—which have the Empire State survey (reported earlier), so we will look to
been lifted recently as cotton prices shot up—fell 0.9% in additional regional surveys reported in the coming weeks to
February after jumping 1.1% the prior month. get a clearer picture regarding manufacturing activity during
the month.
Industrial production (Mar 17) Most of the gain in the Philadelphia Fed survey’s ISM-
%m/m sa,unless noted weighted composite was due to the a 16.6pt jump in the new
Dec Jan Feb orders index to 40.3, but the other components of the com-
Industrial production 1.2 1.3 -0.1 0.3 0.9 -0.1 posite continued to look favorable in March. The measure of
Manufacturing 0.9 1.1 0.3 0.9 1.1 0.4 shipments edged lower from 35.2 to 34.9, while the delivery
Motor vehicles & parts 0.2 0.3 3.2 4.5 6.4 4.2 times index slid down from 10.0 to 8.5. The employment
High-tech 2.1 3.2 1.2 1.9 1.2 index dropped from 23.6 to 18.2, which is still a solid
Mfg ex motor vehicles 0.9 1.1 0.1 0.7 0.9 0.2 reading. The inventories index increased from 2.1 to 12.0,
Business equipment 1.0 1.5 0.9 1.8 0.5 but with the big jump in orders, the orders-inventories gap
Capacity utilization (%sa) 76.2 76.3 76.1 76.4 76.7 76.3 widened 6.7pts to 28.3, which was the largest gap since
Manufacturing 73.5 73.7 74.1 74.5 74.3 October 2009.
Industrial production declined 0.1% in February, but the The price measures reported in the Philadelphia Fed survey
details were much better than the headline reading implied. remained at high levels in March, but did not rise signifi-
There were also upward revisions released to the data for cantly during the month like the price indexes reported in
December and January. February’s headline print was Empire State survey. The Philadelphia Fed’s measure of
dragged down by a 4.5% plunge in utilities production as prices received edged up from 21.0 to 22.6, while its mea-
warmer temperatures returned throughout the country after sure of prices paid declined from 67.2 to 63.8.
two months of unseasonably cold weather.
37
Daniel Silver (1-212) 622-6039 Global Data Watch
daniel.a.silver@jpmorgan.com March 18, 2011
Consumer price index

Focus: core inflation firms modestly Years are %Dec/Dec, quarters are %q/q, saar
2008 2009 2010 3Q10 4Q10 1Q112
• The recently released data on prices for February showed
CPI 0.1 2.7 1.5 1.4 2.6 4.9
energy and food prices continuing to push higher, re- 1
1.8 1.8 0.8 1.1 0.6 1.7
Core
flecting the inflation pressure indicated by most related Core ex shelter 1.6 2.9 1.1 1.4 0.5 2.0
global price indexes. Higher food and energy prices led Core goods -0.6 3.0 -0.4 0.9 -1.2 1.2
the consumer price index up 0.5% in February Core services 2.7 1.4 1.3 1.2 1.3 1.9
(+2.1%oya), while the producer price index increased Food and beverages 5.8 -0.4 1.5 0.8 2.1 4.3
5.6%oya basis, and the import price index rose 6.9%oya. Housing 2.4 -0.3 0.3 0.3 0.7 1.6
Core inflation pressure (excluding food and energy) re- Rent 3.4 0.7 0.8 0.7 1.5 2.1
mains mild, though there has been some firming recently; Owners' equivalent rent 2.1 0.7 0.3 0.5 0.9 1.3
the core CPI rose 0.2% in February (+1.1%oya). Apparel -1.0 1.9 -1.1 1.7 -2.0 3.3
Transportation -13.3 14.4 5.3 4.7 12.3 19.1
• The energy CPI soared 45%saar over the three months New and used vehicles -3.5 5.5 0.6 2.2 -1.2 0.0
through February. The PPI and the import price index New -3.2 4.9 -0.2 1.2 -0.5 1.0
also showed large increases in energy prices in recent Used -8.1 9.2 3.7 6.3 -2.1 -1.0
Medical care 2.6 3.4 3.3 2.2 3.4 2.5
months. The food CPI increased at an annualized rate of
Recreation 1.8 -0.4 -0.8 -0.9 -1.5 0.8
5% over the most recently reported three months, and the
Education 5.6 4.7 3.9 3.4 2.5 5.9
PPI and import price index showed much larger increases Communication 1.7 0.1 -1.1 -0.2 -1.9 -3.2
in food prices. Tobacco 6.3 30.1 5.6 12.8 0.7 3.2
Personal care 2.6 1.5 0.7 2.1 -0.4 1.5
• The core services CPI increased 0.2% in February which
Core PCE deflator 1.8 1.8 1.4 0.5 0.5 1.1
was on the high side of the range of monthly increases re- 3
2.7 1.2 0.7 0.5 0.6 0.9
Cleveland Fed median CPI
ported over the past year. The core goods CPI increased 1. Core is ex food and energy.
0.2% in both January and February, after falling in each of 2. 1Q11 is January and February data. Core PCE deflator is January data.
the last four months of 2010. The core PPI also firmed in 3. Quarterly values are averages of year-over-year changes
recent months, and was up 1.9%oya in February. Consumer prices
%oy a, nsa %oy a, nsa
• Within the components of the core CPI, the table shows Core CPI
tenants’ rent going up faster than owners’ equivalent rent 6 3.0
in 1Q, though the monthly increases in tenants’ rent have
moderated lately. Airfares have shot up recently, reflect- 4 2.5
ing higher jet fuel prices. Apparel prices came down in 2 2.0
February after jumping significantly in January. Vehicle
0 1.5
prices picked up in February after having been soft for Headline CPI
some time. -2 1.0
-4 0.5
05 07 09 11
Import prices Producer price index for finished goods
%3m, nsa %3m, nsa %oy a, nsa
Import price index PPI
10 4 10
5
2 5
0
-5 0 0
-10 Ex. petroleum
-2 -5 Core PPI
-15
-20 -4 -10
05 07 09 11 05 07 09 11
38
Greg Fuzesi (44-20) 7777-4792 Global Data Watch
greg.x.fuzesi@jpmorgan.com March 18, 2011
Raphael Brun-Aguerre (44-20) 7777-0282
raphael.x.brun-aguerre@jpmorgan.com
Euro area inflation

Euro area %oy a, dotted line show s ECB target, core is ex food, alcohol, tobacco, energy
• We still expect the ECB to raise rates in April, but
unfolding events will have to be watched 5 Headline
4
• Incoming activity data are mostly positive
3
• Modest labor market gain in 4Q10, but with some 2
positives in the detail
1 Core
0
In the past week, Euro area policymakers have made sig-
nificant announcements aimed at tackling the sovereign -1
2005 2006 2007 2008 2009 2010 2011
debt crisis in the region, Japan continues to deal with the
aftermath of the disastrous earthquake, and the Middle
Eastern and North African (MENA) continues to experi-
Euro area exports, IP and construction output
ence significant political turmoil. One question that arises
%q/q saar, latest observation shows January level over 4Q10 average
from all this is whether the ECB is still likely to follow
through on its “strong vigilance” signal and raise its policy 40 4Q10 1Q11
Exports
interest rate in early April.
20
IP
The EU’s comprehensive policy package is supportive of
an April move. The ECB would have liked the package to 0
go further, but given that its announcement has not trig-
gered renewed financial market stress, it will make it easier -20 Construction
for the central bank to raise rates. In fact, we think that Eu-
-40
ropean policymakers are now doing enough to contain the 2008 2009 2010 2011
sovereign stresses, even if Portugal could still be forced to
seek external support.
We still expect the ECB to raise its main policy interest rate
Regarding the crisis in Japan and the political tensions in 25bp to 1.25% in early April. This is not because the ECB
the MENA region, it is still far too early to tell what their will be stubborn about following through on its “strong
impact will be. But, in many ways, what matters is how vigilance” signal; after all the central bank always makes
they affect the ECB’s view about inflation over the medium clear that it never pre-commits. Instead, our sense is that a
term. Clearly, these events could hurt global demand by fundamental change in the economic outlook, and possibly
hitting confidence, via negative wealth effects (due to some renewed financial stress, would be needed for the
lower equity prices), and by triggering another spike in the ECB to delay its rate normalization cycle. If there is still a
price of oil. All of this remains very hard to gauge. But, for sense that the recovery is likely to continue at a steady
now, we expect only a short-term impact on Japanese pace, then one or two quarters of softer growth would not
growth, given the need for significant reconstruction suffice to delay a rate move. In this context, it is important
spending later this year, and are not minded to change our to note that the Euro area business surveys in February
Euro area forecast. In addition to the impact on the Euro were at a level far above that consistent with the ECB
area economy, the ECB will also watch the inflation impli- staff’s growth forecast. This provides a significant buffer.
cations of any increases in energy prices. In the near term, Clearly, an open mind is needed given that the events are
a larger inflation “hump” would further raise the risk of still unfolding, but for now we think that the bar for the
second-round effects. And, in the medium term, the re- ECB to postpone its rate move is set rather high.
newed concerns about the safety of nuclear energy, could
add to the structural increases in global demand for fossil
fuels, about which the ECB is already worried. In this con- A quick macro round-up
text, Germany has already decided to shut almost half of its In this week’s reports, Euro area IP (ex. construction) rose
nuclear reactors for three months until thorough safety 0.3%m/m in January, construction output rose 1.8%m/m,
checks have been completed. Given that 23% of German while exports to outside of the region surged 3.6%m/m. This
electricity is generated using nuclear power, this has led to leaves the January levels of IP, construction output and ex-
a spike in wholesale electricity prices this week. ports up 4%, 1%, and 15% annualized above the 4Q10 aver-
39
Greg Fuzesi (44-20) 7777-4792 Euro area
age. We would expect IP to strengthen further in February, Euro area employment

while the modest gain in construction output has to be seen DI, sa, box shows 4Q10 average to date %q/q saar
in the context of large declines in 2H10 of over 10% annual- PMI employment index
60
ized. And exports look to be picking up after a softer patch 4
in late 2010. Overall, it is still unclear whether Euro area 55
GDP will print in line with our 3%q/q saar forecast for 2
50
1Q11, but together with the relatively solid indicators on 0
consumer spending so far, the data do not appear far off it. 45 -2
40 Employment (private, ex. construction) -4
On inflation, the final report for February confirmed Euro
area HICP at 2.4%oya in February, up one-tenth on Janu- 35 -6
ary. Energy price inflation increased substantially, rising 98 00 02 04 06 08 10
1.1%-pts to 13.1%oya, while the food component also
contributed to the rise. On the other hand, core inflation Level of employment
(ex. food, alcohol, tobacco, and energy prices) declined 1Q06=100
one-tenth to 1.0%. It is not entirely clear why core inflation
fell. For example, in France, the statistics office noted that 106
Germany
an extended period of seasonal sales contributed to decline 104
in core inflation there, although this is hard to reconcile as 102
a sign of weakness given that French consumer spending is
100
still on a firm upward trajectory. Our expectation is that
core inflation will move sideways in the next two months 98 Core, excl. Germany
before drifting higher over the forecast horizon. 96 Periphery
94
Labor market still soft in 4Q10 2006 2007 2008 2009 2010
This week’s employment report for 4Q10 showed that the

improvement in the labor market was still quite modest. Euro area GDP and employment
The level of employment rose 0.6%q/q saar (209,000 jobs), 1H08=100
which was a bit better than we had expected. But, hours
101 Hourly labor productivity
worked per employee fell more than we thought, with only
part of this related to the severe winter weather, especially 100
in Germany. As a result, total hours worked in the Euro 99
98 Employment
area economy were unchanged at the end of last year. This
implies that the modest growth of GDP (1.1%q/q saar) was 97
achieved entirely through another increase in hourly labor 96
GDP
productivity, which had fallen during the recession due to 95
the labor hoarding by firms. 94
2008 2009 2010 2011
Looking ahead, at least, productivity has now recovered to
around its pre-recession level, and the business surveys ongoing housing market adjustments in some countries.
suggest that firms in the region are hiring again, which is Excluding construction, private sector jobs were up 0.7%q/q
encouraging. And, the 4Q10 national accounts showed a saar, all of this in services. This is only slightly below what
1.7%q/q saar gain in consumer spending, despite the weak- the composite PMI employment index is implying. By
ness in labor income. This suggests that important supports country, the labor market adjustments are still ongoing in
came either from higher nonlabor income or from a further the periphery, but there are encouraging signs of a broader-
decline of the household saving rate. These detailed income based improvement in core countries. Job growth was de-
data are not yet available. cent at around a 1%-annualized pace in Germany, France,
Belgium, and Austria, while Italy saw a surprising jump in
By sector, employment rose just 0.2%q/q saar in the private 4Q10 (1.6%q/q saar). In the periphery, employment fell
sector and a more solid 1.2%q/q saar in the public sector. another 1.1%q/q saar in Spain and by 2.3%q/q saar in Por-
Part of the weakness in the private sector still reflects the tugal (data on Ireland and Greece are not yet available).
40
David Mackie (44-20) 7325-5040
david.mackie@jpmorgan.com
Data releases and forecasts Of course, that episode was different in many ways
from the current crisis in Japan, the Middle East and
Week of March 21 - 25 North Africa. For example, the PMI was gradually de-
clining already before the terrorist attacks occurred,
Output and surveys whereas the trend has been impressively up in recent
months. The details of the PMI have also been improv-
Real GDP ing recently, suggesting that growth has been broaden-
1Q10 2Q10 3Q10 4Q10 ing out impressively beyond Germany and beyond
Euro area manufacturing. Even the PMI in the periphery has
%q/q sa 0.4 1.0 0.3 0.3 picked up markedly.
%q/q saar 1.5 4.0 1.4 1.1
%oya 0.8 2.0 1.9 2.0 In addition, to the uncertainties created by the Japanese
Fri France crisis, the survey could also be impacted by the recent
Mar 25 %q/q sa 0.3 0.6 0.3 0.3 increases in energy and commodity prices, and by the
7:00am %q/q saar 1.1 2.4 1.0 1.4 ECB’s signal to raise interest rates. Overall, we have
%oya 1.2 1.6 1.7 1.5 penciled in a decline of the Euro area composite PMI of
GDP components (%q/q saaar) 1.2pts to 57.0, which would still leave it signaling GDP
Private consumption 0.3 1.2 1.9 3.4
Government consumption -0.1 0.9 1.3 1.4
growth at a 3% annualized pace. The uncertainty
Fixed investment -2.9 3.7 1.8 1.6 around this estimate is clearly quite high.
Exports 20.7 11.6 10.9 3.1
Imports 8.0 15.6 16.4 -4.6
Contribution to GDP growth (%q/q saar)
Domestic final sales -0.4 1.6 1.8 2.7
Inventories -1.3 2.1 1.1 -3.7
Net trade 2.9 -1.4 -1.9 2.4 Euro area composite PMI output index
DI, sa, dotted line shows average from 2000 to 2007
We do not expect any revisions in the final report of
French GDP. Sep 2001
65
60
Purchasing managers index flash (manufacturing)
Dec Jan Feb Mar 55
Thu Euro area
50
Mar 24 Overall region 57.1 57.3 59.0 58.0
10:00am
45
9:30am Germany 60.7 60.5 62.7 61.5
9:00am France 57.2 54.9 55.7 55.8 40
Purchasing managers index flash (services)
Dec Jan Feb Mar 35
Thu Euro area 98 00 02 04 06 08 10
Mar 24 Overall region 54.2 55.9 56.8 55.8
10:00am
9:30am Germany 59.2 60.3 58.6 57.6
9:00am France 54.9 57.8 59.7 58.7
Purchasing managers index flash (composite) Euro area composite PMI output index
Dec Jan Feb Mar Standard deviations from average over 2000 to 2007 period
Thu Euro area
Mar 24 Overall region 55.5 57.0 58.2 57.0 Germany
2
10:00am
9:30am Germany 60.3 61.3 60.9 59.7
9:00am France 56.3 57.6 59.0 58.0 0
The survey period for the flash PMI fully covers the
time since the earthquake in Japan. The questionnaire -2
would have reached firms on Friday, March 11, the day
of the earthquake. And responses received through to
next week Wednesday (March 23) will be included in -4 Euro area ex
the flash report. It is certainly possible that the PMI will Germany
be noticeably affected by the uncertainties created by -6
the earthquake, at least in the near term. Following the 2007 2008 2009 2010 2011
terrorist attacks in the US in September 2001, the Euro
area composite PMI fell 2pts in September and another
3pts in October, before then fully reversing those de-
clines over the following three months.
41
Nicola Mai (44-20) 7777-3467 Euro area
nicola.l.mai@jpmorgan.com March 18, 2011
National business surveys Demand and labor markets

Dec Jan Feb Mar
Fri German IFO survey Consumer confidence (prelim)
Mar 25 2000=100, sa Dec Jan Feb Mar
10:00am Business climate 109.8 110.3 111.2 110.3 Wed Euro area (European Commission survey)
Business expectations 106.8 107.8 107.9 106.0 Mar 23 % balance of responses
Current conditions 112.9 112.8 114.7 114.5 4:00pm Consumer confidence -11.0 -11.2 -10.0 -11.0
Thu French (INSEE survey - manufacturing)
Mar 24 Index Euro area consumer confidence rose 1.2pts in February,
8:45am Composite index 102 108 106 returning almost to its recovery high. The March survey
Index of past production 9 20 21 will have been conducted in the first two to three weeks
Expected output–personal 13 19 16
of this month and will therefore not have fully captured
Expected output–general 10.0 11.0 19.0
Wed Belgium (BNB survey)
the impact of the events in Japan. This could be similar
Mar 23 % balance of responses, sa to what occurred after the terrorist attacks in the US on
3:00pm Overall 3.1 4.5 5.8 September 11, 2001, when confidence fell just 0.4pt in
Manufacturing 1.4 2.9 3.1 the September survey before then declining 2pts in the
Commerce 5.6 8.3 13.0 October reading. As a result, we would expect the
Construction -2.0 -3.6 5.0 events in Japan to have only a small impact on the
March survey. An additional negative impact could
We would expect the increased uncertainties globally
come from the ongoing uncertainties in the North Afri-
and the recent increases in energy and commodity
can and Middle Eastern region and the increases in en-
prices to have an effect on the German IFO. In addition, ergy prices, while the improving economic backdrop in
firms will also be responding to the ECB’s interest rate
the Euro area should be a support. Overall, we expect
signal and possibly the slightly more mixed global data.
consumer confidence to reverse February’s increase,
As a result, we expect the headline index to fall from its which would still leave it above its long-run average.
record high in February to 110.3 in March. If this fore-
cast is correct, then the IFO would remain at a very
high level in March, signaling that the German recovery Domestic consumption
would still be expected to proceed at a very solid pace Nov Dec Jan Feb
Fri France
for now.
Mar 25 Consumption of manufactured products, real terms
8:45am %m/m sa 2.6 0.4 -0.5
German IFO—business climate %oya sa 1.4 0.1 2.4
Idx, dotted line shows long-run average French consumption of manufactured goods may have
Sep 2001 increased in February. The large 7.2%q/q saar increase
110 in 4Q10 was related to a significant extent by surging
car sales, given that the car scrappage incentive expired
105 in December. There was then payback in January, with
car registrations falling 14%m/m. But, registrations
100
surprisingly rebounded in February, rising 10%m/m. As
95 a result, consumption of manufactured goods could in-
crease again in 1Q11 (the January level was already
90 2.6%q/q saar above the 4Q10 average).
85
80
90 95 00 05 10
Manufacturing orders
Oct Nov Dec Jan
Wed Euro area
Mar 23 Values
11:00am New orders (%m/m sa) 1.4 2.1 2.4
New orders (%oya sa) 17.9 16.7 18.8
42
David Mackie (44-20) 7325-5040
david.mackie@jpmorgan.com
Financial activity and public finance Review of past week’s data

Money and credit data
Nov Dec Jan Feb Output and surveys
Fri Euro area Industrial production
Mar 25 M3 (%m/m sa) 0.6 -0.2 -0.5 0.5
Nov Dec Jan
10:00am M3 (%oya) 2.1 1.7 1.5 2.0
Euro area
M3 (%oya 3mma) 1.4 1.6 1.8 1.7
%m/m sa 1.4 1.5 -0.1 0.3 0.1 0.3
Private loans (%oya) 1.5 1.8 2.1
%oya 7.7 8.2 8.8 6.4 6.7
M3 growth remained modest in January, but was af-
fected by some of its volatile components, which all Eurostat’s measure of Euro area industrial production ex
fell. In February, we expect those to bounce back, construction rose 0.3%m/m in January and is tracking a gain
thereby pushing headline M3 growth to 2.0%oya. of 4% annualized so far in 1Q, a pace of increase that has
Based on adjustments for portfolio shifts and other dis- normally been consistent with GDP growth of 3% ar.
tortions, the ECB has calculated that M3 growth has Across sectors, the rise in IP in January looks to have been
been running in the range of 2%-4%oya recently. This driven almost entirely by intermediate goods production,
is a bit firmer than the headline number, but still led it which rose 2.5%m/m, and is up 9.3% ar so far in the quarter.
to conclude that underlying monetary expansion was Output fell across capital, consumer, and energy goods al-
signaling contained inflationary pressures over the me- though, within the consumer goods category, durable con-
dium-term. sumer goods output rose 2.5%m/m and is up 9.4% ar so far
As the main driver of money growth, bank loans to the in 1Q.
private sector have continued to improve gradually in Across the region, German production (ex construction) was
recent months. Loans to nonfinancial corporates turned broadly flat in January and is up only 2.4% ar so far in 1Q.
positive in January (0.4%oya), although firms do of While this would be the weakest quarterly development in
course have ample internal funds to use instead of new German industrial output over the past eight quarters, strong
bank loans. More impressively, household mortgages in orders developments and high survey readings point to
particular have jumped at over a 7% annualized pace stronger output growth over the next few months. Elsewhere
over the past two months. The ECB has said that this is in the region, French output rose 1.1%m/m in January and is
not due to any statistical distortions, but is a reflection up a robust 8.1% ar in the quarter, which would be a signifi-
of the improved housing markets in some Euro area cant reacceleration after three quarters in which growth aver-
countries. Overall, loans to the private sector have aged less than 4% ar. In Italy, on the other hand, production
picked up to 2.7%oya in January. was disappointing, with the index falling 1.5%m/m in Janu-
ary and tracking a decline for the second consecutive quarter
so far in 1Q. The weakness of Italian IP is surprising in the
light of strong survey readings in January and February; we
expect a rebound in Italian IP ahead.
Euro area loan growth In the Euro area periphery, IP rose strongly in Spain
%oya, loans to nonbank private sector, adjusted for securitizations (1.4%m/m), with the index tracking a solid 5.3% ar gain so
far in 1Q. This would be the firmest quarterly development
12 in Spanish IP for seven quarters. Meanwhile, Irish IP fell
1%m/m, but after a 3.1% gain in December; so far in 1Q, it
is tracking a 3% ar increase. Less good news came from Por-
9
tugal, where a 4.2%m/m IP decline in January more than
offset a 4% gain in December. So far in 1Q, Portuguese IP is
6 tracking a 5.3% ar contraction, after a 6.3% ar fall in 4Q.
Finally, Greek IP fell 0.9%m/m; it is tracking a modest de-
cline of 1.3% ar so far in the quarter.
3
Manufacturing orders
0
99 01 03 05 07 09 11 Nov Dec Jan
Italy
Values
New orders (%m/m sa) -4.3 5.4 -0.3
New orders (%oya sa) 10.1 13.5 14.2
43
Nicola Mai (44-20) 7777-3467 Euro area
nicola.l.mai@jpmorgan.com March 18, 2011
Demand and labor markets Inflation

Employment Consumer prices
2Q10 3Q10 4Q10 Dec Jan Feb
Euro area Euro area (final)
Sa HICP (%m/m nsa) 0.6 -0.7 0.4
000s, diff. q/q 97 159 -48 -29 50 209 HICP (%oya nsa) 2.2 2.3 2.4
%q/q 0.1 0.0 0.0 0.1 HICP (%oya core-X)1 1.1 1.2 1.2 1.1
%oya -1.3 -0.6 -1.8 -0.1 0.1 0.2 HICP (%oya core-XX)2 1.0 1.1 1.1 1.0
HICP (%m/m ex-tobacco) 0.6 -0.7 0.4
Please see this week’s Euro area essay for commentary France
about the 4Q10 employment report. %m/m nsa 0.5 -0.2 0.6 0.5
Index ex tobacco nsa 120.03120.61 120.09120.32 121.00120.90
%oya nsa 1.8 1.8 1.8 1.7
External trade and payments HICP (%oya) 2.0 1.9 2.0 1.9 1.8
Italy (final)
Foreign trade %m/m nsa 0.4 0.4 0.4 0.3
Nov Dec Jan %oya nsa 1.9 2.1 2.4
Euro area HICP (%oya nsa) 2.1 1.9 2.1
€ bn, sa The Euro area final inflation release confirmed that headline
Trade balance -3.2 -2.0 -2.3 -1.1 -3.3 HICP inflation rose one-tenth in February. The rise was
Trade balance–year earlier 2.8 1.7 2.4 2.0 1.1 0.9 mainly driven by energy price inflation, which rose 1.1%-pts
Exports 133.2 134.8 132.6 134.5 139.4
to 13.1%oya. In particular, transport fuel price inflation in-
%m/m sa 0.0 0.4 -0.4 -0.2 3.6
Imports 136.4 136.8 134.9 135.6 142.7 creased 1.1%-pts to 16.1%oya and household liquid fuel
%m/m sa 4.9 4.8 -1.1 -0.9 5.3 price inflation increased 5.8%-pts to 30.5%oya. Food price
inflation (including alcohol and tobacco) also increased sub-
Euro area exports rose strongly in January, after a run of stantially to 2.3%oya, on the back of higher agricultural
weaker reports. The 3.6%m/m surge put the level in January commodity prices. Core inflation, on the other side, declined
15% annualized above the 4Q10 average. If this is main- one-tenth to 1.0%oya. This move down was driven by lower
tained in the coming months, it would mark a noticeable core goods price inflation, down 0.4%-pt to 0.1%oya. In-
reacceleration after a soft patch in late 2010. Trade flows deed, core goods inflation suffered from the extended sales
between Euro area countries were slightly softer, but total period in some countries, which have seen higher-than-ex-
(intra and extra) Euro area exports are still tracking a 8% pected price cuts.
gain so far in 4Q10.
In France, headline HICP inflation moved down two-tenths.
This outcome results from the sharp drop in core goods price
Euro area nominal trade flows inflation to 0.5%oya (due to the extended sale period), while
service price inflation rose 0.3%-pt. Meanwhile, energy
Jan07=100, to outside the Euro area
price and food price inflation rose a few tenths. In contrast,
120 Imports Italian headline HICP inflation rose two-tenths, pushed up
by higher service price inflation, up two-tenths on the
month, and higher food price and energy price inflation,
110 reaching 9.9%oya and 1.9%oya, respectively.
100 Producer prices

Exports
Dec Jan Feb
90 Germany
%m/m nsa 0.7 1.2 0.7
%m/m sa 1.0 1.1 0.7
80 %oya nsa 5.3 5.7 6.4
2007 2008 2009 2010
44
Masamichi Adachi (81-3) 6736-1172 Global Data Watch
masamichi.x.adachi@jpmorgan.com March 18, 2011
Real GDP
Japan %q/q saar Previous forecast
• Earthquake, tsunami, and nuclear plant crisis generate ( a week ago)
unprecedented uncertainty for economy and markets 6
• BoJ injects abundant liquidity into banking system, 4 Current

while increasing the size of asset purchase program
2
• Ongoing developments at the Fukushima nuclear
plants are the near-term focus 0
A catastrophe on a scale never faced by Japan since the end -2

2010 2011 2012
of WWII is still unfolding at the time of this writing. Al-
though the situation has calmed somewhat from the middle
Nikkei Dow 225 equity price index
of week, the concern that things may worsen lingers. We
are relatively optimistic that the current crisis situation will Index
stabilize in coming days, but uncertainty remains extremely
11000
high. In such a situation, significant market volatility is to
10500
be expected. The yen appreciated to a record high of 76
level against the USD on Thursday, and the Nikkei plunged 10000
on Monday and Tuesday, while the JGB market has been 9500
relatively calm. 9000
8500
Against this backdrop, the BoJ has been injecting liquidity
Jan 3, 11 Jan 24, 11 Feb 15, 11 Mar 9, 11 Mar 31, 11
aggressively into the banking system, and the Bank eased
policy by expanding the size of its asset purchase program
to ¥10 trillion from ¥5 trillion . More impressively, the G-7
the total dead or missing was 16,893 at 2 pm on March 18,
agreed to conduct coordinated USD purchases against JPY
but it looks certain that the number will increase in coming
on Friday. At 9 am Tokyo time, the MoF/BoJ intervened in
days and even months. In addition, there are 382,612
the USD/JPY market. The US, UK, Canada, and the ECB
people at the evacuation shelters.
joined in when their markets opened.
The tragedy has not ended here. The Fukushima Daiichi
In terms of the economic outlook, the large shock likely will
(Daiichi means first) nuclear plant (consists of 6 operating
pull down the economy in 2Q, but we expect a rebound in
nuclear reactors), located 227 kilometers (km) northeast of
2H. Our updated forecast looks for 1.2% annualized growth
Tokyo, was damaged by the tsunami, and there has been
in 1Q (revised down from 2.2%), a 1.0% contraction in 2Q
leakage of radiation due to the subsequent accidents
(from +2.2%), a 3.0% growth on average in 2H (up from
throughout this week. The radiation leaked so far has not
2.3%), and higher growth in 2012, though our conviction on
been considered to be dangerous, especially outside of the
these numbers is not high at the moment (see more details on
evacuation area, which has been expanded to a 20km ra-
our views in the research note, “Japan to recover from the
dius (in addition, people within a 30km radius outside the
disaster, but will take time,” in this GDW).
evacuation area are recommended to stay indoors). But,
some people, especially foreigners, have started to evacu-
What has happened over last seven days? ate from Tokyo or Japan. The government has focused on
The immediate shock from the mega earthquake (9.0, ini- cooling down the sites to prevent further damage to the
tially reported 8.8 but subsequently revised up) that hit reactors and spent nuclear fuel that would lead to a signifi-
Japan’s northeast coast on March 11 was catastrophic, even cant leakage of radiation. So far, we have not heard signifi-
shaking our office in central Tokyo. It can only be de- cant news on these efforts that began on Thursday. Mean-
scribed as “scary.” The damage from the earthquake itself while, the dose rate of radiation rose sharply at midday on
should be significant in the region close to the seismic area, Wednesday in many places, including Tokyo—although
but more damage was caused by the tsunami after the the level observed was far below the danger zone. It has
quake. The height of the wave is said to exceed 10 meters fallen to a very low level from Wednesday afternoon, sug-
in many places. According to the National Police Agency, gesting that the leakage has been stabilizing.
45
Masamichi Adachi (81-3) 6736-1172 Japan
masamichi.x.adachi@jpmorgan.com March 18, 2011
While the events at the Fukushima plants have dominated BOJ current account balances
the concern, the power shortage due to the accidents at Yen tn, outstanding, daily
these plants and some thermal power stations has been
caused considerable inconvenience even in the Tokyo re- 35
gion. Rail transit has been reduced by more than 20%, 30
while so called “scheduled power outage,” rotating power 25
shutdowns, has affected millions of households and firms
20
around the Tokyo area. Even though the outages were
“scheduled,” residents were initially generally unprepared, 15
thereby intensifying the disruption. In addition, there has 10
been many large aftershocks of the quake. Given the im- 5
mense uncertainty, people rushed to purchase food, causing 2008 2009 2010 2011
some shortages, such as for bread and milk. Also, some
have evacuated to western parts of Japan or abroad. How- Reuters Tankan business confidence
ever, it is important to note that there is no sense of panic. Index
50 Manufacturing
BoJ injected record liquidity into
banking system 25
0
The BoJ on Monday increase the size of the Asset Purchase
Program (APP) to ¥40 trillion from ¥35 trillion. Regarding -25
the purchase of an additional five trillion yen in assets, -50 Nonmanufacturing
Governor Shirakawa stated at the press conference that the -75
BoJ increased the portion of risk assets relative to risk-free -100
assets. The amount of the BoJ’s purchase of risk assets 2007 2008 2009 2010 2011
(commercial paper, corporate bonds, ETFs ,and J-REITs)
under the new facility of the APP will be ¥3.5 trillion, as well as the equity market have not been damaged or trading
opposed to ¥1.5 trillion for the risk-free assets (JGBs and suspended by the catastrophe, while one of the large bank’s
short-term government bills). According to Shirakawa, the ATM system suffered difficulties from Thursday.
rational for the change in the weighting in favor of risk as-
sets is the increased risk that the spread between JGBs and
corporate bonds, as well as between short-term government
Business sentiment was good before
bills and commercial paper, would widen. the disaster
Indicators released this week reiterated that economic
Prior to the monetary policy meeting on Monday, the BoJ activity had been picking up solidly until the earthquake.
offered to inject ¥15 trillion into the overnight call market, In the Reuters Tankan large firm survey for this month,
its largest single operation ever, to meet the significant in- which was conducted between late February and early
crease in banks’ precautionary demand for liquidity, al- March, the headline manufacturers’ business conditions
though the actual amount taken by banks was ¥8.9 trillion. DI edged up to 15, 8 pts above the recent bottom marked
The reason that the actual amount of money injected was in December last year. The nonmanufacturing DI stayed
short of the BoJ’s offered amount was that banks did not at 3 reached in February, when it posted its first positive
rush to secure the liquidity, as they were convinced that reading (which indicates that the conditions, on net, are
the BoJ would provide as much liquidity as they want “good”) since April 2008.
going forward.
Obviously, firms’ sentiment should have changed dramati-
Large injections, mainly through overnight lending, contin- cally after the catastrophe. We will receive the first look at
ued throughout this week, leaving the size of the Bank’s how sentiment has been affected by the disaster from the
current account balances at ¥31 trillion, the highest level Manufacturing PMI (due on March 31) and the BoJ Tankan
since March 2006 when the BoJ conducted outright quanti- (April 1), for which most of the responses were probably
tative easing policy. It seems likely that the large liquidity collected after March 11. However, these surveys may be
injection will continue until the situation stabilizes. Mean- misleading as some respondents may not have answered the
while, the banking system (settlement and transactions) as survey, being overwhelmed by dealing with the disaster.
46
Miwako Nakamura (81-3) 6736-1167 Global Data Watch
miwako.nakamura@jpmorgan.com March 18, 2011
Data releases and forecasts Thu Customs-cleared international trade

Mar 24 ¥ bn sa, unless noted
Week of March 21 - 25 8:50am Nov Dec Jan Feb
Balance 468 580 192 720

During Nationwide department store sales Exports (%m/m) 2.1 5.4 1.0 6.0
the week %oya, unless noted Imports (%m/m) 5.5 3.7 8.5 -3.0
Nov Dec Jan Feb Balance (nsa) 159 726 -475 802
Overall -1.4 -2.3 -2.8 -2.0 BoJ real export index (%m/m) -1.8 7.0 -5.8 ___
%m/m sa, by J.P. Morgan -1.3 3.1 -2.3 1.1.01.0 BoJ real import index (%m/m) 1.1 -2.1 3.4 ___
Same store -0.5 -1.5 -1.1 ___
The weakness in January exports was puzzling, as sur-
Based on the upbeat tone of major stores, we think de- vey reports showed that manufacturers had become in-
partment store sales, a proxy for luxury goods consump- creasingly upbeat about rebounding foreign demand
tion, are picking up from extremely low levels. (prior to the massive earthquake last week). Hence, we
think the January weakness was mainly due to the dis-
Tue Index of all-sector activity tortion from the Lunar New Year holidays in Asian
Mar 22 %m/m sa trade partners and look for a meaningful rebound in
1:30pm Oct Nov Dec Jan February.
All sector -0.3 -0.2 -0.2 2.6
Tertiary sector 0.3 0.6 -0.9 2.1 Fri Consumer prices
Industrial production -2.0 1.0 3.3 1.3 Mar 25 %oya
Construction 0.5 -3.1 -0.1 ___ 8:30am Dec Jan Feb Mar
Public sector 0.0 -0.7 0.0 ___
Tokyo
Overall -0.1 -0.1 -0.1 -0.1
Core (ex fresh food) -0.4 -0.2 -0.4 -0.3
METI all-sector activity indices Ex food and energy -0.5 -0.3 -0.3 -0.3
%3m/3m, saar Mining and
manufacturing Nationwide
16 64 Overall 0.0 0.0 0.0
Core (ex fresh food) -0.4 -0.2 -0.3
Ex food and energy -0.7 -0.6 -0.6
8 32
We expect the rate of oya decline in the nationwide
core CPI to increase again in February, after falling
0 0 0.2%-pt in January. Available data suggest a smaller
boost from energy, and the preliminary Tokyo February
report, where the rate of decline in the core core mea-
-8 -32 sure remained the same as in the previous month, im-
Tertiary sector plies that the underlying pace of the CPI’s exit from
deflation is very gradual.
-16 -64
2007 2008 2009 2010 2011
Fri Corporate services prices
Mar 25 %oya
8:50am Nov Dec Jan Feb
Overall -1.1 -1.3 -1.1 -1.2

Ex international transport -1.2 -1.3 -1.0 ___
The corporate service price index for February probably

extended its steady decline since mid-2010, on the back
of still large economic slack.
47
Miwako Nakamura (81-3) 6736-1167 Japan
Review of past week’s data The report, from a survey conducted on February 15 prior to
the March 11 earthquake, was broadly consistent with our
Industrial production—final (Mar 14) previous view that the economy was rebounding solidly after
contracting at the end of 2010. Now, the prospects for the
%m/m sa
Nov Dec Jan
economy are highly uncertain, and we need to wait for indi-
cators compiled after the quake to assess its impact.
Production 1.0 3.3 2.4 1.3
Shipments 2.6 1.2 1.1 0.6
Inventories -1.8 1.6 4.7 4.0
Reuters Tankan survey (Mar 17)
Inventory/shipments ratio -8.3 0.4 0.7 -0.2 DI, % saying “good” minus “bad”
Operating ratio 1.6 3.0 ___ 3.6 Jan Feb Mar
Production capacity (%oya) 1.9 1.6 ___ 1.8 Manufacturing 11 14 ___ 15
Nonmanufacturing -2 3 ___ 3
Consumer sentiment (Mar 14)
The report, which was conducted between late February and
Diffusion index, nsa
early March, reiterated that economic activity had been pick-
Dec Jan Feb
ing up solidly. The massive earthquake now calls that view
Consumer sentiment 40.1 41.1 42.0 40.6 into question.
Standard of living 42.2 42.7 ___ 41.5
Income growth 40.8 41.0 ___ 40.6 The headline manufacturers’ business conditions DI edged
Labor market conditions 36.4 38.6 ___ 38.8 up to 15, 8pts higher than the recent bottom marked in De-
Durable goods purchases1 40.8 41.9 ___ 41.5 cember last year. The nonmanufacturing DI stayed at 3
1. The DI asks whether a respondent thinks that now is a good time to reached in February, when it posted a positive reading
purchase durable goods. (which indicates that the conditions, on net, are “good”) for
The headline index for February gave back part of the solid the first time since April 2008.
January gain, but stayed slightly above its 4Q average Respondents’ comments suggest that further improvement in
(40.5). That said, the massive earthquake that struck the east manufacturers’ sentiment reflected increasing volume of
coast of Japan on March 11 is now weighing on consumer shipments/orders that were more than offsetting the drag
sentiment across the country. So it is hard to take much from the rapid rise in input costs, and that consumers were
meaning from this release. The first monthly indicator which increasingly willing to spend, though not very willing to
should show how the disaster has impacted sentiment will purchase a home.
probably be the March Economy Watchers survey to be re-
leased on April 8. Index of tertiary sector activity (Mar 17)
% change
MoF business outlook survey (Mar 16) Nov Dec Jan
DI, “upward” minus “downward”
4Q10 1Q11 2Q11 %m/m sa 0.5 0.6 -0.8 -0.9 0.8 2.1
%oya 2.4 2.5 1.8 0.0 1.4
Large firms
All industries -5.0 ___ -1.1 ___ 1.5 The January index sent an upbeat message about the
Manufacturers -8.0 ___ -3.2 ___ 4.0 economy before the earthquake, as did other available indi-
Nonmanufacturers -3.4 ___ 0.0 ___ 0.2 cators. It rose much more than it had fallen the previous
month, to the highest level since November 2008. The
Small firms
All industries -18.4 ___-23.3 ___-14.1 strength was broad-based across sectors, with ten of thirteen
Manufacturers -10.0 ___-26.7 ___ -5.5 subindices, including wholesale trading, retail trading, infor-
Nonmanufacturers -20.1 ___-22.5 ___-15.9 mation/insurance, showing m/m increases.
FY2010 FY2011 Construction spending (Mar 17)

4Q10 actual 1Q11 % change
FY2010 capex plans, %oya Nov Dec Jan
All industries 9.5 ___ 6.9 ___ -0.5
Manufacturers 12.7 ___ 11.0 ___ 1.6 Public -13.9 -15.1 ___-13.9
Nonmanufacturers 7.8 ___ 4.8 ___ -1.7 Private 7.0 11.3 ___ 12.8
Residential 1.9 1.1 ___ 2.7
The large manufacturers’ sentiment DI improved in 1Q, after Nonresidential 13.3 23.9 ___ 25.6
dropping to a negative reading in 4Q (it had posted positive Building and structures 13.2 14.8 ___ 19.4
readings in each of the five quarters through 3Q). The details Civil engineering 13.4 35.2 ___ 33.8
suggest that this reflected a reacceleration of foreign demand,
as well as meaningful improvement in domestic demand. In
addition, the Capex and the Employment DIs, overall, pointed
to higher resource utilization, albeit modestly.
48
Sandy Batten (1-212) 834-9645 Global Data Watch
sandy.batten@jpmorgan.com March 18, 2011
Silvana Dimino (1-212) 834-5684
silvana.dimino@jpmorgan.com
Consumer prices
Canada %oya
• Output growth in 1Q off to a stellar start 5 Total
• Incoming source data already posing risk to our 4
above-consensus 1Q GDP forecast 3
• Oya core inflation rate falls to all-time low, but this is 2
likely cycle trough 1
Core
0
After the sharp widening in the real trade deficit in January
pointed to trade exerting a major drag on overall growth in -1
98 00 02 04 06 08 10
1Q, January data released this week showed that the Cana-
dian economy started 1Q with a bang as both manufacturing Contributions to Canada total CPI inflation
and wholesale sales rose more than expected. Existing home %-pt cont to oya %ch
sales slipped a bit in February, continuing the string of tepid Total Food Energy HST Other
reports on housing. And consumer prices remained benign in Jan 10 1.9 0.2 0.7 0.0 0.9
February with the core rate falling to an all-time low. Feb 10 1.6 0.2 0.4 0.0 1.0
Mar 10 1.4 0.2 0.5 0.0 0.6
Apr 10 1.8 0.2 0.9 0.0 0.8
Manufacturing sales increased a much larger-than-expected
May 10 1.4 0.1 0.5 0.0 0.8
4.5%m/m in January to their highest level since October Jun 10 1.0 0.1 0.1 0.0 0.8
2008. The monthly increase in total sales was the largest Jul 10 1.8 0.1 0.7 0.7 0.3
since a 5.3% jump in July 2009. Real manufacturing sales Aug 10 1.7 0.2 0.4 0.7 0.4
rose even more—up 5.5%m/m. While the January gains Sep 10 1.9 0.3 0.5 0.7 0.4
were widespread (shipments rose in 17 of 21 industries), Oct 10 2.4 0.3 0.8 0.7 0.6
the increase was mostly concentrated in the transportation Nov 10 2.0 0.2 0.6 0.7 0.5
equipment sector. Dec 10 2.4 0.2 1.0 0.7 0.4
Jan 11 2.3 0.3 0.8 0.8 0.4
Sales of motor vehicles soared 26.0% in January. The gain Feb 11 2.2 0.3 1.0 0.8 0.1
reflects large increases at a number of assembly plants fol-
lowing slowdowns and production difficulties in December With 2/3 of the key source data in for January GDP, the
caused by severe weather conditions in southern Ontario. month is shaping up to be quite strong. And with our ex-
Related to the rise in motor vehicle assembly, sales in the pected rise in retail sales (released March 22), monthly
motor vehicle parts industry rose 23.2%. Even excluding GDP should accelerate in January from the 0.5% rise in
the jump in motor vehicle sales, other shipments rose December. Consequently, 1Q would be off to a very strong
2.9%m/m in January. start with upside risk even to our expectation for a 4.0%q/q
saar increase and clearly for the BoC’s 2.5% expectation.
Other parts of the report were also quite strong. Inventories We continue to look for the Bank to remain on hold in the
rose 1.2% in January. Unfilled orders rose 1.6% in January, midst of the elevated global turmoil and uncertainty (now
mostly reflecting an increase in the aerospace product and exacerbated by the Japanese earthquake) and benign do-
parts industry. The overall gain was the first increase since mestic inflation (see below). However, with the economy
August 2010. And new orders increased 8.6%in January. picking up steam and policy still quite accommodative, it is
only a matter of time before the Bank will restart its nor-
Wholesale sales jumped 1.5% in January, mainly as a result malization of policy. We look for a 25bp hike in the over-
of higher sales in the motor vehicle and parts and the mis- night rate at the May 31 announcement.
cellaneous subsectors. In volume terms, wholesale sales
were up 1.6% in January. Wholesale sales increased for the The Canadian total CPI rose 0.3%m/m nsa in February, the
sixth consecutive month in January, with five of the seven same monthly increase as in January. When seasonally ad-
subsectors advancing. The motor vehicle and parts justed, the total CPI was unchanged in February after a
subsector (+4.9%) posted the largest increase. Sales in that 0.3%m/m increase in January. The over-year-ago total CPI
subsector rose to the highest level since June 2007. Invento- inflation rate slowed slightly in February to 2.2% from
ries rose 1.8% in January, the largest monthly increase 2.3% in January and 2.4% in December. The core index
since January 2007. rose 0.2%m/m nsa in February after having been un-
49
Sandy Batten (1-212) 834-9645 Canada
sandy.batten@jpmorgan.com March 18, 2011
silvana.dimino@jpmorgan.com
Silvana.Dimino@jpmorgan.com
changed m/m in January. When seasonally adjusted, the Tue Retail sales
core index edged down 0.1%m/m after a 0.1% rise in Janu- Mar 22 %m/m sa, unless noted
ary. The over-year-ago core rate fell to 0.9% from 1.4% in
January. This was the lowest oya core rate in the history of Total 0.8 1.5 -0.2 1.2
the series dating back to 1984. Looking through the %oya 3.7 5.4 4.9 5.2
monthly volatility, the 3-month rate of core inflation fell to Ex autos 0.8 0.9 0.6 1.0
0.7% saar from 1.0% in January, and the 6-month rate fell %oya 3.5 4.4 4.6 3.4
Ex autos & gasoline -0.1 0.9 -0.6 0.8
to 1.2% saar from 1.6%. Note that the oya rate of headline %oya 1.8 2.9 2.1 0.7
inflation continues to be elevated by increases in provincial Real retail sales -0.1 1.5 -0.4 0.7
sales taxes (in July 2010 and in January 2011), which are %oya 2.8 5.3 4.4 4.7
adding about 0.8%-pt to headline inflation (indirect taxes
A strong rebound is expected in January retail sales
are excluded in calculating the core measure). Adjusting with increases expected in most categories. Large retail-
for this (which the BoC has stated it will ignore in evaluat- ers reported strong over-year-ago increases in many
ing inflation), both inflation measures are safely below the categories, and consumer sentiment in January was up-
BoC’s 2% target. beat. Auto sales will no doubt be one of the largest con-
tributors to the increase as auto sales surged in January
with many Canadian auto makers reporting record Janu-
A significant part of the drop in the oya core rate in Febru- ary sales. A big lift will also come from gasoline station
ary was due to a very favorable base effect, not a sharp soft- sales due to higher gasoline prices as occurred in De-
ening of the inflation environment. Travel accommodation cember. Outside of higher prices at the pump, mild in-
prices last February soared, boosted by the Vancouver Win- flation pressures will boost the level of real retail sales.
ter Olympics, and thereby pushed up the core rate. This
jump in accommodation prices obviously did not occur this Review of past week’s data
February, and so this depressed the core rate. Given the one- New motor vehicle sales (Mar 15)
off factor behind the sharp drop in the core rate, the Febru- Sa
ary reading is probably the cycle low for the oya rate. Nov Dec Jan
Total (mn units, ar) 1.617 1.622 1.539 1.528 1.665 1.577
Energy (notably gasoline) prices continued to make a ma- %m/m 0.1 0.2 -4.8 -5.8 3.0 3.2
jor contribution to total oya inflation. They were up %oya 6.9 7.2 1.4 0.8 9.8 4.4
10.6%oya in February versus a 9.0%oya increase in Janu-
Manufacturing report (Mar 16)
ary. However, seasonally adjusted transportation prices %m/m sa, unless noted
(which include gasoline were up only 0.2%m/m in Febru- Nov Dec Jan
ary after a 1.0% monthly jump in January). Also, food
prices remain benign—up 2.1%oya in February, the same Sales -0.6 -0.9 0.4 0.6 4.0 4.5
New orders 0.6 -0.3 -1.9 -1.0 6.0 8.6
increase as in January. Seasonally adjusted food prices
Unfilled orders 0.2 -0.4 -1.6 -1.8 0.0 1.6
were up just 0.2%m/m in February versus a 0.4% monthly Inventories 1.1 0.9 0.0 -0.2 2.0 1.2
rise in January. Inventory-shipments ratio 1.35 1.34 1.34 1.33 1.32 1.29
Wholesale sales (Mar 17)
Sa
Nov Dec Jan
Total,%m/m 1.0 1.1 0.8 0.9 2.2 1.5

%oya 6.2 6.5 5.8 6.2 5.6 5.2
Consumer price index (Mar 18)
Data releases and forecasts %m/m nsa, unless noted
Dec Jan Feb
Week of March 21 - 25
Total CPI 0.0 0.3 0.5 0.3
Tue Leading indicators %oya 2.4 2.3 2.4 2.2
Mar 22 %m/m BoC Core CPI -0.3 0.0 0.4 0.2
8:30am Nov Dec Jan Feb %oya 1.5 1.4 1.1 0.9
Ex food & energy -0.4 -0.1 0.4 0.3
Smoothed (5 mth movavg) 0.4 0.4 0.3 %oya 1.6 1.6 1.3 1.2
Unsmoothed -1.2 1.3 0.4 CPI-XFET (%oya) 1.0 0.9 0.4
50
Banco J.P.Morgan, S.A., Institución de Banca Múltiple, Economic Research
J.P.Morgan Grupo Financiero Global Data Watch
Gabriel Casillas (52-55) 5540-9558 March 18, 2011
gabriel.casillas@jpmorgan.com
Iker Cabiedes (52-55) 5540-9339
iker.x.cabiedes@jpmorgan.com
Manufacturing and construction output

Mexico %oya
Manufacturing
• We now expect front-loaded action from Banxico 20 Construction
in 4Q11
10
• Very limited direct impact from Japan’s earthquake
and tsunami 0
• Strong IP in January supports our 4.5% GDP growth -10
forecast for 2011
-20
Banco de México today published the minutes of its mon- 2004 2005 2006 2007 2008 2009 2011
etary policy meeting that took place on March 4. In our Source: INEGI
view, the message conveyed was very similar to the one
from the latest post-meeting communiqué. In particular, sume rate hikes in 2H12 as part of a normalization process
with the balance of risks for inflation having deteriorated, to raise rates to 6% by year-end 2012, and to 6.5% by the
the board opened the door for rate hikes later this year by end of 1Q13.
adding the word “timely” to its assessment on when it
could opt to adjust monetary policy. However, the minutes
contained more details about the debate that took place
Very limited direct impact from Japan’s
among board members, and we believe that the bias is defi- earthquake and tsunami
nitely a more hawkish one. We believe there will be very limited direct impact from
Japan’s catastrophe on the Mexican economy. Even though
We highlight the board’s concerns about the potential con- Mexico is one of the very few countries that has signed a
tamination of inflation expectations from rising commodity free trade agreement with Japan, Mexican exports to Japan
prices, particularly because of two issues: (1) The expecta- represent only 0.6% of the total exports. According to
tions channel, in our view, is the most important channel of Japan’s MoF, Mexican exports to Japan consist mainly of
transmission of monetary policy, being in an economy with nonferrous metals, auto parts, electric and electronic ma-
a relatively low credit ratio to GDP (less than 15%); and chinery, optical and scientific instruments, fish, pork meat,
(2) It is our belief that it is just a matter of time before the and certain fresh fruits and vegetables, but as we had men-
Minister of Finance decides to increase the gasoline price tioned, these goods only account for 0.6% of total exports.
monthly adjustment, and this could be the trigger a deterio- On the other hand, however, Mexico imports around 5% of
ration of short- and medium-term inflation expectations. In its total imports from Japan. The Japanese MoF states that
this context, the gap between the international reference 90% of the goods purchased by Mexico are capital and in-
and the domestic sales price is now around 20%. termediate goods, particularly, specialized iron ore, semi-
conductors, auto parts, and panels for plasma TVs that are
As a result, we are changing our rate call and now expect a assembled in Mexico. As a result, there could be significant
rate hike in Q411, instead of Q212. In fact, we now believe negative effects (from disrupted supply chains) on the im-
Banxico will act sooner not to combat inflation, but to ports side of the equation.
battle any sort of contamination of inflation expectations,
that could be boosted by higher or persistently high com- We estimate that a three month disruption of supplies could
modity prices, particularly energy prices. affect Mexico’s manufacturing production by 0.06%-pt (in
real %oya terms), and this could translate into a subtraction
We believe it is difficult to pinpoint the timing of a rate of 0.01%-pt from GDP. However, this could be slightly
hike as Banxico has not expressed a willingness to hike offset by the possibility that, for example, more cars are
rates but rather a commitment to fight inflation. Neverthe- produced in Mexico. As a result, we could see further pro-
less, taking into account the current lack of demand-side duction switches from Japan to Mexico in the medium
inflation pressures, our optimistic appraisal of inflation for term. Of course, much will depend on whether disruptions
this year, and the low probability of higher energy prices in to the supply of the auto parts Mexico imports from Japan
1H11, we believe that Banxico will not lift its reference will still allow increased production in Mexico. Finally its
rate until 4Q11. In this context, Banxico should raise the is also worth noting Japan has been responsible for just 1%
reference rate to 5% this year (currently at 4.5%) to anchor of total FDI inflows in the past few years, of which 80%
inflation expectations and should pause there, and then re- has been directed towards manufacturing. Overall, there is
51
Banco J.P.Morgan, S.A., Institución de Banca Múltiple, Economic Research
J.P.Morgan Grupo Financiero Mexico
Gabriel Casillas (52-55) 5540-9558 March 18, 2011
gabriel.casillas@jpmorgan.com
Iker Cabiedes (52-55) 5540-9339
iker.x.cabiedes@jpmorgan.com
no doubt that the earthquake will have global consequences Wed Central bank foreign reserves
that will end up impacting the Mexican economy, but it is Mar 23 US$ bn
9:00am Feb 25 Mar 4 Mar 11 Mar 18
our take that the direct effects will be quite limited.
Gross international reserves 121.8 121.9 122.0 ___
Strong IP in January supports our 4.5% Wed Retail sales
GDP growth forecast for 2011 Mar 23
Retail sales
IP came in on the strong side, jumping 6.6%oya in Janu- %oya 4.4 2.4 2.6 4.1
%m/m sa 0.5 -0.2 0.7 0.8
ary, mainly due to strong manufacturing output
(+8.8%oya, first chart). However, the surprise was con- Thu Consumer prices
struction output which grew 8.3% in January, after being Mar 24
essentially unchanged in all of 2010. In seasonally adjusted 9:00am Jan 2H Feb 1H Feb 2H Mar 1H
terms, all components except for mining increased in Janu- %2w/2w 0.11 0.21 0.23 0.16
ary. In our view, this confirms that the manufacturing sector Core 0.23 0.22 0.12 0.16
continues to expand at a healthy pace following a long pe- %oya 3.61 3.63 3.51 3.21
Core 3.23 3.28 3.24 3.23
riod of above-trend growth, ending the moderation recorded
in 4Q10. In addition, construction output, which lagged the Thu Labor market report
industrial recovery last year, has consistently improved, and Mar 24 % of labor force
January’s figure suggests that it is now positioned to join the
broader upward trend in manufacturing. We continue to ex- Open unemployment rate 5.3 4.9 5.4 5.2
Sa 5.5 5.5 5.2 ___
pect that IP will expand around 5.3% this year as part of a
more balanced recovery, with manufacturing expanding Fri Trade balance (Feb 24)
5.2% and nonmanufac-turing activity up 5.4%. Against this Mar 25
backdrop, we remain confident in our GDP growth forecast 8:00am Nov Dec Jan Feb
of 4.5% for this year. Balance (US$ mn) -105 -219 63 132
Exports (US$ bn) 28.2 26.9 24.6 25.8
%oya 25.9 16.4 28.2 21.3
Data releases and forecasts %m/m sa 3.2 2.5 3.7 0.2
Imports (US$ bn) 28.3 27.1 24.5 25.7
%oya 25.6 17.0 24.9 23.1
%m/m sa 0.6 2.8 3.3 2.9
Tue Real GDP by type of expenditure
Mar 22 %oya, real terms Review of past week’s data
2:30pm 1Q10 2Q10 3Q10 4Q10
Supply and demand 8.0 12.9 9.3 8.3 Industrial production (Mar 14)
Private consumption 3.9 7.8 5.0 6.1
Nov Dec Jan
Government consumption 1.1 5.3 2.5 3.6
Fixed investment -2.6 1.9 3.8 7.5 %oya nsa 5.8 4.9 4.6 6.6
Exports 23.2 33.5 18.8 9.2 Manufacturing 7.4 6.0 6.3 8.8
Imports 20.2 31.8 22.5 20.0 %m/m sa 0.6 0.7 0.7 0.9 0.1 1.4
Manufacturing 1.0 1.2 1.3 1.7 0.9 1.5
Tue Banamex CPI inflation expectations survey
ANTAD same-store sales (Mar 15)
Mar 22 %oya, except policy rate: %p.a., median value
2:30pm Feb 3 Feb 22 Mar 7 Mar 22 Dec Jan Feb
End-2011 3.88 3.88 3.90 ___ %oya 5.0 4.8 2.8 3.3
End-2012 3.80 3.74 3.76 ___ %oya, real terms 0.6 1.0 ___ -0.1
One year forward 3.81 -- 3.70 ___
Banxico policy rate
End-2011 4.50 4.50 4.50 ___
End-2012 5.50 5.50 5.63 ___
52
JPMorgan Chase Bank, Sao Paulo Economic Research
Fabio Akira Hashizume (55-11) 3048-3634 Global Data Watch
fabio.akira@jpmorgan.com March 18, 2011
Julio Callegari (55-11) 3048-3369
julio.c.callegari@jpmorgan.com
Retail sales volume: breakdown by sectors

Brazil %m/m, sa %oya, nsa
Dec 10 Jan 11 Dec 10 Jan 11
• Retail sales printed above expectations in January,
Narrow retail 0.2 1.2 10.2 8.3
and should grow further in February
1. Fuel 1.3 0.3 6.4 6.3
• CAGED survey showed that the economy continues 2. Food, beverages, and supermkts -0.4 1.2 6.2 4.2
to add jobs at a strong pace 3. Apparel 3.1 0.5 9.8 9.8
4. Furniture and home appliances 1.8 2.7 18.3 19.1
• January IBC-Br reinforces the view that GDP growth 5. Pharmaceuticals 1.6 0.5 14.1 12.7
should accelerate in 1Q11 from 4Q10 6. Computers, office supplies 2.8 -5.1 27.1 7.4
7. Stationers, books 2.2 -2.3 26.7 12.5
The narrow retail sales volume index (which excludes ve- 8. Others -0.3 -2.5 10.2 4.9
hicles and building materials) increased 1.2%m/m sa and Broad retail (1 to 10) 0.3 -0.2 15.0 11.2
8.3%oya in January exceeding consensus and J.P. Morgan 9. Vehicles, parts 5.0 -7.1 26.0 16.4
forecasts (both at 0.8%). Most of the acceleration was 10. Construction material 3.2 1.1 16.3 16.5
driven by a rebound in food and beverage sales (table),
Real retail sales growth (narrow and broad indexes)
which increased 1.2%m/m sa in January. Note that food
inflation has affected the performance of this component in %oy a
recent months, in contrast to the supportive figures regis- Broad (includes auto
25 and construction)
tered in most other components. Although food inflation
remained high in January (+1.16%m/m sa), it nevertheless
continued to decelerate from the +2% peak registered in 15
November. In addition to robust food and beverage sales,
most other sectors continue to record reasonably strong 5
sales, even in components more sensitive to credit condi-
Narrow
tions, such as furniture and home appliances, where sales
-5
increased 2.7% m/m sa and 19.1%oya. The broad retail 2006 2007 2008 2009 2010 2011
sales measure (which includes vehicles and building mate-
rials) performed much worse than the narrow measure Net job creation in February (CAGED establishment survey)
(-0.2%m/m sa, 11.2%oya), on the back of a 7.1%m/m sa 000s of net job creation per working day, nsa
decrease in vehicle sales. This outcome suggests that the
recent macroprudential measures adopted by the BCB (in-
14
cluding a higher capital requirement on auto loans) took a
12
toll on car sales in January. However, the impact of the
10
measures is apparently abating, and reports from car deal- 8
ers showed that auto sales rebounded in February (2.4%m/ 6
m sa versus -2.5% in January), suggesting that the outlook 4
for February broad retail sales is favorable. Overall, the 2
January narrow retail sales print reinforces the view that 0
private consumption is on a strong footing, despite some 2000 2002 2004 2006 2008 2010
moderation caused by higher food inflation and
macroprudential measures. BCB proxy for monthly GDP signaling 1Q11 acceleration
IBC-Br, % change
February retail sales should show an another increase in the
3m/3m, saar
narrow measure and a rebound in the broad indicator. Tak-
ing into account coincident indicators for February retail 10
sales, we expect another sequential expansion in the narrow
index (around 0.5%), which this time around will be assisted 0
by a further slowdown in February food inflation. This trend
points to an acceleration in narrow retail sales in 1Q11 com- -10
pared to 4Q10. The broad measure will pick up in February
on the back of higher auto sales, but some growth modera- -20
tion in 1Q11 (versus 4Q10) still seems likely. 2006 2007 2008 2009 2010 2011
53
Fabio Akira Hashizume (55-11) 3048-3634 Brazil
fabio.akira@jpmorgan.com March 18, 2011
Julio Callegari (55-11) 3048-3369
julio.c.callegari@jpmorgan.com
Labor market conditions should continue Data releases and forecasts

to support retail sales growth Weeks of March 21 - 25
While food inflation is moderating on a sequential basis in
1Q11 (even if remaining high), bringing some relief to nar- Wed Consumer prices (IPCA-15)
row retail sales, labor market conditions continue to favor Mar 23 %m/m nsa
strong domestic demand in the medium term. The CAGED 8:00am Dec Jan Feb Mar
establishment survey of payrolls (released March 16) Total 0.7 0.8 1.0 0.52
printed another strong reading in February, with 280,000 %oya 5.8 6.1 6.1 6.04
%ytd 5.8 0.8 1.8 2.26
jobs created in the month. This figure is higher than the
209,000 jobs recorded in February 2010 and above the his- Ex volatile 0.5 0.8 1.1 0.56
torical February average of 117,000. Even after adjusting Trimmed mean 0.5 0.6 0.5 0.47
for more working days this February, the number is el-
evated (second chart). Fri National unemployment
Mar 25 % of labor force, new methodology
8:00am
The CAGED print is especially strong, considering that un- Nov Dec Jan Feb
employment is already at historically low levels. In fact, our
Open rate, nsa (30 days) 5.7 5.2 6.1 6.4
seasonal adjustment points to more than 250,000 formal jobs
created in February, which is the third highest reading in his-
tory. Next week, the entire labor report for February will be Fri Current account balance
released, but the February CAGED print suggests that the Mar 25 US$ bn, net inflows
unemployment rate will decline further, while the strong 8:30am Nov Dec Jan Feb
pace of employment expansion should underpin growth in Current account (CA) -4.7 -3.5 -5.4 -3.7
labor income (both through job and wage growth). Large Trade balance 0.3 5.4 0.4 1.2
Services -5.3 -9.2 -6.0 -5.0
labor income gains and still high consumer confidence rein-
force our belief that private consumption will remain robust, Net transfers 0.2 0.3 0.2 0.2
despite the ongoing tightening in credit conditions. CA, 12-month sum -49.5 -47.0 -48.6 -49.1
CA, 12-month sum, %GDP -2.4 -2.3 -2.3 -2.3
Foreign direct investment 3.7 15.4 3.0 7.0
IBC-Br points to 1Q11 GDP acceleration
The IBC-Br (a proxy for monthly GDP calculated by the
BCB) increased 5.1%oya and 0.7%m/m in January versus Review of past week’s data
3.7% and 0.1%, respectively, in December. This improve-
ment was in line with the strong retail sales print released Retail sales
this week (+1.2%m/m sa) and the small advance in the Nov Dec Jan
%m/m sa 0.7 -0.1 0.8 1.2
manufacturing sector in January. The trajectory of the IBC- %oya nsa 9.9 10.1 7.3 8.2
Br is signaling 4.0%q/q saar carryover for 1Q11, which
lends a positive bias to 1Q11 GDP growth. Note, however,
General prices (IGP-10)
that the IBC-Br overestimated both full-2010 real GDP %m/m nsa
growth (estimating it at 7.8% compared to the actual 7.5% Jan Feb Mar
print) and 4Q10 growth (4.3%q/q saar versus 3.0%). That Overall 0.5 1.0 0.9 0.8
%oya 11.2 11.0 11.0 10.9
said, most recent activity indicators have suggested that Wholesale prices 1.2 1.2 1.1 1.0
despite the continued poor performance of IP, the growth Consumer prices 0.9 0.9 0.6
momentum of domestic demand remains in place. In addi- Construction costs 0.5 0.4 0.3
tion to positive January readings, preliminary indicators for
February (such as the CAGED job creation report and ve- Formal job creation (Caged)
Dec Jan Feb
hicle sales) reinforce the view that domestic demand re-
mains strong and that 1Q11 GDP growth may be faster Monthly creation (000) -407.5 167.9 280.8
Ytd, nsa 2136.9 2123.4 2194.9
than initially thought. At this point, however, we are leav-
ing our 1Q11 GDP growth projection at 3.9%q/q saar and
our full-2011 GDP growth forecast at 4.0%.
54
Julio Callegari (55-11) 3048-3369 Global Data Watch
julio.c.callegari@jpmorgan.com March 18, 2011
JPMorgan Chase Bank, New York
Ben Ramsey (1-212) 834-4308
benjamin.h.ramsey@jpmorgan.com
Peru: real GDP by sector

Andeans: Colombia, Ecuador, %oya Jan-Dec 10 Nov 10 Dec 10 Jan 11
Peru, Venezuela Real GDP 8.7 10.2 8.9 10.0
Agriculture 4.3 6.8 7.9 4.7
• January real GDP growth printed 10.0% in Peru Fishing -17.2 -34.0 -21.6 26.5
• We see real GDP expanding 7.3% in full-2011 Mining and hydrocarbons -0.7 -4.0 1.3 -0.6
Manufacturing 13.7 14.7 9.5 14.4
• S&P has raised Colombia to investment grade Eletricity and water 7.7 7.5 6.2 7.5
Construction 17.6 23.8 12.5 16.2
Real GDP growth in Peru accelerated to 10.0%oya in Janu-
Retail and commerce 9.6 10.8 10.9 10.2
ary from 8.9% in December (J.P. Morgan: 10.4%; consen-
Other services 7.4 8.9 9.3 9.8
sus: 9.0%). The increase was driven by manufacturing,
which contributed 2.1%-pts to the overall print, while retail
and construction activity contributed 1.7%-pts and 1.0%-pt,
respectively. The improvement in real GDP growth was Peru: GDP expected to grow 7.3% in 2011 (from 8.8% in 2010)
anticipated by the strong tone posted by construction lead- %ch oya
ing indicators—construction production and imports.
15
The outlook remains positive for Peru, with growth momen-

10
tum suggesting above-trend expansion again in 2011. While
the estimated carryover for 2011 is close to 4.0%, we see the 5
full-2011 GDP posting 7.3% growth (from a 8.8% growth in
2010). Therefore, although we do expect that the ongoing 0
monetary tightening, fiscal restraint, and higher food and
energy prices should moderate GDP growth in coming quar- -5
ters (particularly in 2H11 when we expect GDP to expand 2006 2007 2008 2009 2010 2011
5.5% q/q saar), the strong performance in the initial months
should assure above-trend growth for the entire year. More-
over, the most recent confidence survey has shown that busi- Peru: corporate demand expectations (next 3 months) at high levels
ness confidence remains high, despite the small sequential Diffusion index, 50=neutral
decrease (66 in January, down from 68 in December).
80
Colombia regains investment grade 70

S&P raised Colombia’s foreign currency rating to BBB-,
i.e., investment grade, with a stable outlook. The move was 60
generally expected, as the three major rating agencies have
all had Colombia’s rating one notch below IG with a posi- 50
tive outlook, and Colombia CDS has been trading in line
with Latin America IG peers since the end of last year. 40
2008 2009 2010
S&P noted in its press release that now that Colombia is
investment grade, the bond “issue” rating (which at the
bond level, rather than the issuer level, had already attained tive surprises in terms of GDP growth and/or the fiscal re-
BBB- status in 2007 due to S&P’s EM recovery rating form effort could actually lead to further upgrades. We re-
scale) and the foreign currency sovereign credit rating are main of the view that Moody’s and Fitch are likely to fol-
in line. It is noteworthy that S&P does not seem to be bas- low suit and raise their respective ratings to IG some time
ing its rating on any ex ante positive assessment of the this year. The other agencies have expressed some modest
Santos administration’s fiscal reform effort, noting that the concern over the results of the ongoing fiscal reform effort,
move owes to Colombia’s proven macroeconomic resil- but we do not believe any possible watering down of the
ience, its market-based policy framework, and an outlook reforms currently in congress would keep the other agen-
for stable debt dynamics. Indeed, S&P notes that any posi- cies from also moving Colombia to IG.
55
Tejal Ray (1-212) 834-8580 Southern Cone / Andeans
tejal.t.ray@jpmorgan.com March 18, 2011
Argentina: Colombia:
Data releases and forecasts Data releases and forecasts
Week of March 21 - 25 Week of March 21 - 25
Fri Budget balance Thu Real GDP
Mar 18 Nov Dec Jan Feb Mar 24 1Q10 2Q10 3Q10 4Q10
ARS bn 3.31 -2.20 2.11 ___ %q/q saar 5.53 3.46 0.85 0.90
%oya sa 4.45 4.40 3.55 7.10
Fri Current account balance
Mar 18 1Q10 2Q10 3Q10 4Q10 Review of past week’s data
US$ bn -0.40 3.19 0.90 ___
BanRep monetary policy meeting
Fri Real GDP Jan Feb Mar
Mar 18 1Q10 2Q10 3Q10 4Q10 Reference rate 3.00 3.25 3.50
%oya 6.8 11.8 8.6 ___
Industrial production
Wed Trade balance Nov Dec Jan
Mar 23 Nov Dec Jan Feb %oya 4.2 4.0 5.0 6.2
US$ bn 0.39 0.24 0.51 ___
Retail sales
Wed Industrial production Nov Dec Jan
Mar 23 Nov Dec Jan Feb %oya 21.4 12.4 9.7 12.3
%oya 12.8 10.6 10.3 ___
Wed Consumer confidence Peru:

Mar 23 Dec Jan Feb Mar
Index 53.21 55.69 53.96 ___ Data releases and forecasts
Review of past week’s data Week of March 21 - 25
Consumer prices No data releases expected.
Dec Jan Feb Review of past week’s data
Consumer prices (%m/m) 0.80 0.70 ___ 0.7
%oya 10.9 10.6 ___ 10.0 Real GDP
Wholesale prices (%m/m) 0.94 0.90 ___ 0.9 Nov Dec Jan
%oya 14.56 14.10 ___ 13.6
%oya nsa 10.19 8.93 10.4010.02
%m/m sa 2.12 0.07 0.30 0.43
Chile: BCRP monetary policy meeting
Jan Feb Mar
Data releases and forecasts Reference rate 3.25 3.50 3.75
Week of March 21 - 25 Trade balance
Nov Dec Jan
No data releases expected. US$ bn 0.60 1.08 ___ 0.23
Review of past week’s data

Venezuela:
BCCh monetary policy meeting
Jan Feb Mar Data releases and forecasts
Nominal ON rate target 3.25 3.50 3.75 4.00
Real GDP
2Q10 3Q10 4Q10 No data releases expected.
%oya 6.59 7.02 6.90 ___ 5.80
Current account balance Review of past week’s data
2Q10 3Q10 4Q10
No data released.
US$ bn 0.18 -0.42-0.05 ___ 1.22
56
Allan Monks (44-20) 7777-1188
Change in unemployment
United Kingdom 000s sa, change over 3 months in 3-mo moving average
• Rising household inflation expectations and a surge in 300
gas prices exacerbate inflation fears
200
• But the growth outlook has also turned more uncer- Household survey
tain, worsening the MPC’s policy dilemma
100
The policy dilemma facing the MPC is becoming increas-

0
ingly acute. Gains in energy prices, particularly the price of
natural gas, are making a round of increases in domestic Claimant count
-100
energy tariffs look increasingly likely at some point later 2005 2006 2007 2008 2009 2010 2011
this year. This creates the potential for a further bump up in
headline inflation well beyond the 4.3%oya peak we had
forecast for February. And as inflation itself rises, the sur- Private sector regular pay growth
vey measures of both short- and medium-term inflation ex- % oya, 3mma
pectations continue to move upward. Our composite mea-
6
sure of medium-term expectations has now moved up to
match the mid-2008 high. 5
4
The news on the growth side of the story is not uniformly
3
bleak, but there were plenty of areas for concern even be-
fore the tragic events in Japan and sharp declines in equity 2
prices (see “UK growth: the good, the bad, and the ugly” in 1
this GDW). Nationwide consumer confidence tumbled to a 0
new cycle low in February. Although next week’s Budget 2005 2006 2007 2008 2009 2010 2011
will be presented as one designed to kick-start growth, the
Chancellor will likely stick to the significant tightening for
2011/12 laid out back in November (see “UK Budget 2011: Real private consumption vs Nationwide consumer confidence
staying the fiscal course” in this GDW). Amid all these Index, sa % q/q saar
moving parts, market pricing suggests the probability of a 110 8
May hike from the MPC has been reduced to around 50%, Nationwide
100 6
and we would agree that the call now looks close. 90 4
80 2
Labor market is holding in 70 0
60 -2
The labor market data remain a distinctly mixed bag. The Consumption
50 -4
pickup in overall employment growth seen through to mid-
40 -6
2010 has faded. But the data are not weak enough to vindi-
30 -8
cate the notion of underlying stagnation in overall output 04 05 06 07 08 09 10 11
suggested by the GDP data for 4Q (and threatened for 1Q
after last week’s construction output data). And on the pay
side of the data, concern that high inflation would generate modest gain in overall employment has come despite more
higher settlements and a step up in actual pay growth finds rapid shedding of jobs in the public sector than expected.
no vindication in data running up to January. The number of claimants of the jobseekers allowance fell in
February, although unemployment as measured by the
The data based on a survey of households report a small household survey rose, pushing the unemployment rate up to
gain in overall employment in the three months to January. 8.0%. The gap between these two measures is within the
The composition of that change hints at underlying improve- normal bounds, and the coexistence of both rising and falling
ment: the number of full time employees saw a strong gain, unemployment in the data should serve to underscore that
while self and part-time employment fell. Moreover, the the changes in both time series are relatively small.
57
Allan Monks (44-20) 7777-1188 United Kingdom
Malcolm Barr (44-20) 7777-1080
Inflation expectations creep higher BoE inflation expectations survey
Household inflation expectations edged closer to 2008 lev- %

els in the Bank of England’s 1Q survey. Year-ahead expec-
5
tations rose one-tenth to 4.0%. Although this is lower than
the peak three years back, the inflation news in the UK is 1yr
4
deteriorating quickly, and a further increase in these expec- 5yrs
tations appears likely. The more concerning move was in 2- 3
year-ahead expectations, which rose from 3.2% to 3.4%, 2yrs
and 5-year expectations, which increased from 3.3% to 2
3.5%. These readings have a short history, but have in-
creased 1.5%-pts and 0.8%-pt, respectively, since the first 1
2007 2008 2009 2010 2011
available readings in 1Q09 (we would focus on changes
rather than levels as it is not clear as to which measure of Composite measures of inflation expectations
inflation households respond). Previously we stated that a %, expectations normalized to be comparable with CPI inflation
move in 5-year inflation expectations to 3.5% would take 3.5 Over the next year
our composite measure of medium-term expectations level
with its 2008 peak, and so it has done. Any move up from 3.0
here would take our composite out of the range established Greater than 1yr
2.5 ahead
following MPC independence in 1997.
2.0
The BoE initially downplayed the move in its own survey,
1.5
on the grounds that inflation itself is high, and that the ex-
pectations of households do not pose a clear and immediate 1.0
threat to inflation. But the problem with this view is that in- 2007 2008 2009 2010 2011
flation is forecast to stay high for some time, which is likely Composite measure of medium-term inflation expectations
to keep expectations running high for a while yet. Our analy-
%
sis has previously indicated that wages show little sensitivity
to short-run expectations. And a new question in the BoE’s 2.5
survey actually asks households what they plan to do in light 2.4
2.3
of their expectations over the next 12 months—a net balance 2.2
of only 9% say they would push for higher wages. However, 2.1
wage pressures could still build gradually over time, particu- 2.0
1.9
larly if the rise in 2- to 5-year household expectations is al- 1.8
lowed to persist for long. A concern is that these medium 1.7
term expectations may also be reflecting a similar shift in 1.6
1.5
sentiment among firms. The Bank of England raised its in- 04 05 06 07 08 09 10 11
flation forecast in its February inflation report, in part to re-
flect greater resistance to the compression in real wages. But
the concern is that the rise in expectations is more persistent Medium-term inflation expectations
than the BoE has allowed for. %, normalized to be comparable with CPI inflation (RPI prior to 2004)
6
Budget could introduce fuel stabilizer 5
One specific issue that Chancellor Osborne has hinted the
4
Budget will address is rising fuel prices, which have al-
ready risen 16% over the past year. These gains are likely 3
to be compounded by the 50% rise in wholesale gas prices
seen since December—which could prompt increases in 2
domestic utility tariffs of as much as 15%, and as soon as 1
3Q. This places significant pressure on the government to 85 90 95 00 05 10
58
Allan Monks (44-20) 7777-1188
respond in some way. An idea previously mentioned was a Possible fiscal cost of "fuel stabilizer policy"
“fair fuel stabilizer.” In this plan, the Chancellor would ad- £ bn, ar, assumes a £10 rise in sterling oil prices costs the Exchequer £3.7 bn and
just fuel duty, to offset changes in petrol prices arising that deviations in oil from £45 are fully offset by changes in fuel duty
from volatility in oil prices. The idea was that this could be 10
costless for the government, as the Treasury derives addi-
tional revenues when oil prices increase—via taxes on 5
North Sea oil production. But when the government asked
the OBR to review the effect the mechanism would have on 0
the public finances, it concluded that borrowing would ac-
-5
tually be made more volatile as a result—because gains
from additional oil revenues on the public finances would -10
probably be more than offset by the adverse effect of 2007 2008 2009 2010 2011
higher oil prices on growth. The OBR’s analysis gave the
impression that a fuel stabilizer was unlikely to be imple-
mented. But in the runup to the Budget the issue has been Possible effect of a "fuel stabilizer" on unleaded petrol prices
mentioned in the media on several occasions, raising the
Pence per liter
possibility that something along these lines will be an-
nounced by the Government next week—despite not hav- 140 No stabilization
ing the OBR’s blessing. 130
120
Effect on the public finances and inflation
110 Full stabilization
To assess what impact this might have on the public fi-
100
nances, we have taken the extreme case that the govern-
ment chooses to offset 100% of changes in petrol prices 90
that are related to spot oil prices. According to the OBR, a 80
2007 2008 2009 2010 2011
20% rise in oil pushes up petrol prices by 7.4 pence a liter.
This would cost £3.7 billion in lost revenue to offset by
changing fuel duty. If we assume a stabilizer had been
implemented at the beginning of 2007 at 100p (and allowed Possible effect of a "fuel stabilizer" on CPI inflation
to increase in line with duty and inflation) it would have %oya
increased borrowing by up to £10 billion in a single year.
This is an extreme estimate, and the government could 5.5
5.0
limit its exposure by implementing a 50% stabilizer, for 4.5
example. What would be the effect on inflation? Again as- No stabilization
4.0
suming 100% stabilization, fluctuations in the CPI would 3.5
3.0
have been damped by up to +/- 1%-pt. 2.5 Full stabilization
2.0
1.5
Other options still on the table 1.0
There are many logistical issues about a fuel stabilization 0.5
2007 2008 2009 2010 2011
policy. For example, around which level should petrol
prices be stabilized? And how often should this level be
reset? If prices were stabilized at current levels, then a drop cut in fuel duty—in addition to canceling the increase that
in oil prices would immediately make the policy very un- was planned to come in from April anyway. As a rule of
popular—suggesting prices would have to be stabilized thumb, a 2.5p increase in fuel duty (3p including VAT)
around a lower level than seen currently. This would essen- would raise CPI inflation by 0.1%-pt. Depending on the
tially be a one-off cut in fuel duty to begin with, followed size of the cut announced, this would provide at least a par-
by a stabilization thereafter. Given some of these imple- tial offset to the effect on inflation of a rise in utility bills
mentation difficulties, we think the Government is more later this year. We will review our inflation forecast after
likely to take the simpler approach of announcing a one-off the Budget and February CPI release next week.
59
Allan Monks (44-20) 7777-1188 United Kingdom
Malcolm Barr (44-20) 7777-1080
Data releases and forecasts Wed BBA lending

Mar 23 Sa
Week of March 21 - 25 9:30am Nov Dec Jan Feb
Mon Rightmove house price index Secured lending (ch £bn, sa) 1.2 0.9 1.6
Loan approvals (000s sa)1 29.8 28.9 28.9
Mar 21 Nsa
12:01am Dec Jan Feb Mar 1. For house purchase.
%m/m -3.0 0.3 3.1 Wed Budget 2011
Mar 23
12:30pm
Tue Retail prices
Mar 22 %oya See research note in this week’s datawatch.
Thu Retail sales
CPI 3.3 3.7 4.0 4.3 Mar 24 Volumes, sa
Core CPI1 2.8 2.9 3.0 3.1 9:30am Nov Dec Jan Feb
RPI (1987=100) 226.8 228.4 229.0 230.7
RPI (1987=100) 4.7 4.8 5.1 5.2 Including auto fuel (%m/m) 0.3 -1.4 2.0 -0.6
RPIX 4.7 4.7 5.1 5.2 Ex auto fuel (%m/m) 0.2 -1.0 1.5 -0.5
Ex auto fuel (%oya) 1.6 0.3 5.3 2.5
1. CPI ex food, energy, alcohol, and tobacco. Ex auto fuel (%3m/3m saar) 0.7 0.0 1.0 0.5
Delayed passthrough from the January VAT hike in the
Early indications have pointed to a significant softening
service sector is likely to push core inflation higher in
in spending in February, following weather related dis-
the February release, from 3.0% to 3.1%. In addition,
ruptions over the prior two months.
rising petrol and domestic utility tariffs will add to
these pressures, pushing headline CPI inflation up from Review of past week’s data
4.0% to 4.3%. Risks to both headline and core are to
the downside, as the level of airfares is now looking Nationwide consumer confidence index
very high—even given the rise in oil prices—and there
Sa
appears some scope for a downward adjustment there.
Dec Jan Feb
Tue CBI industrial trends Index 54 47 48 38
Mar 22 % balance DCLG monthly house price data
11:00am Dec Jan Feb Mar
Nsa
Total order book -3 -16 -8 -10 Nov Dec Jan
Output expectations 13 17 23 20
Output prices 16 31 32 34 All dwellings (%oya) 4.1 3.7 0.5
Tue Public sector finances Labor market statistics

Mar 22 £ bn, nsa Sa
9:30am Nov Dec Jan Feb Dec Jan Feb
PSNCR 17.1 25.4 -14.4 Claimant count (000s ch m/m) -3.4 2.4 1.5 -10.0 -10.2
PSNB 19.4 14.5 5.3 5.0 Claimant count rate (%) 4.5 4.5 -4.5 4.5
PSNB (ex. fin. int.) 20.9 16.0 -3.7 6.5 Nov Dec Jan
Balance on current budget -15.8 -11.3 10.4 -0.1
Average weekly earnings (3mma %oya sa)
Net debt to GDP (%) 149.5 150.6 149.2
Headline 2.1 1.8 1.6 2.3
Barring any large surprises in either February or the Ex bonuses 2.3 2.3 2.1 2.2
March release, borrowing for the 2010/11 fiscal year Private sector ex bonuses 2.2 2.1 2.0 2.1
overall would come in at close to £136 billion—which Three months to: Jul Oct Jan
would be a meaningful undershoot relative to the
Labor force survey (all percentage rates, sa)
OBR’s projection of a £148.5 billion deficit.
Activity rate 63.5 63.3 63.1 63.3
Wed BoE’s minutes of March MPC meeting Employment rate 58.5 58.3 58.2 58.3
Mar 23 Unemployment rate 7.8 7.9 7.9 8.0
9:30am
A 3-5-1 vote is expected with Sentance, Weale, and Dale BoE/NOP Inflation attitudes survey
dissenting for higher rates, and Posen for more QE. %oya, median expectations
3Q10 4Q10 1Q11
Inflation next 12 months 3.4 3.9 4.0
60
JPMorgan Chase Bank International Limited, Moscow Economic Research
Anatoliy Shal (7-495) 937-7321 Global Data Watch
anatoliy.a.shal@jpmorgan.com March 18, 2011
Russia: industrial production

Russia Index, Dec05=100, sa
• IP surprises on the downside... 120
• ... while producer inflation surprises on the upside 115
• Consumer inflation moderates, but likely temporarily 110
Industrial production slowed to 5.8%oya in February from 105

6.7%oya. This was well below expectations (consensus: 100
7.5%, J.P. Morgan: 7.9%), though with the usual caveat
that Russian IP is notoriously volatile. Weak IP numbers 95
2006 2007 2008 2009 2010 2011
were also in contrast with strong manufacturing PMI (up
from 53.5 to 55.2) and other business surveys. We there-
fore view the reported slowdown as a temporary breather, Manufacturing and mining output
not as a break in the uptrend. Index , Dec05=100 (sa by J.P. Morgan)
130
Manufacturing
Seasonally adjusted IP was down 0.1%m/m, after a 0.7%m/m
gain in January. Mining was flat, utilities up, but manufac- 120
turing was down from January. In manufacturing, car pro-
duction—the prime driver of exceptionally strong manufac- 110
turing growth recently—was still up a remarkable 110%oya
Mining
in February (+1.6%m/m sa); however, it is likely to weaken 100
from 2Q11, when the cash-for-clunkers program is likely to
have expired. At the same time, manufacturing output was 90
2006 2007 2008 2009 2010 2011
apparently dragged down by (volatile) investment engineer-
ing and selected export-oriented industries. Positively, con-
struction materials continued to grow strongly. Output of new cars and imports: output buoyed by cash-for-clunkers
Units, 000s (sa by J.P. Morgan)
180
Cost-side pressures continue to build 160
In contrast to slowing industrial output growth, there have 140 Output
been no signs of easing in producer price inflation. PPI 120
once again printed above expectations at 3.3%m/m (con- 100
sensus: 1%, J.P. Morgan: 1.4%), bringing the over-year- 80
60
ago number to 21.4% from 19.4% a month ago. The eleva- Imports
40
tion is not only about commodity prices. As expected, out- 20
put prices in mining and quarrying jumped 5.2%m/m fol- 0
lowing the rise in global commodity prices. However, the 2006 2007 2008 2009 2010 2011
recent price trends in core sectors also look worrisome
(charts). In February, inflation in the textile industry was PPI: automobiles vs. machinery and equipment
running at 22.4%oya, in food processing 17.5%, in machin- %oya
ery and equipment 5.7%, automotive industry 15.8%. 25 Vehicles and transport
equipment Machinery
20
CPI on track to print at 0.6-0.7% in March
15
CPI returned to a 0.2%w/w pace in March. The latest
weekly CPI data shows the pace of price increases picked 10
up from 0.1%w/w in the first week to 0.2% in the second 5
week of the month. This small pickup in price growth owes
0
primarily to the fact that gasoline prices, which were under
administrative pressure in previous weeks, have stopped -5
03 05 07 09 11
declining. Notwithstanding this small acceleration, we must
note that inflation is currently running below our recent The next Russia data watch will be published on April 4.
61
JPMorgan Chase Bank International Limited, Moscow Economic Research
Anatoliy Shal (7-495) 937-7321 Russia
anatoliy.a.shal@jpmorgan.com March 18, 2011
expectations and seems to be on track to stay around PPI: food processing vs. light industry
9.5%oya in March. Following a series of relatively low %oya
weekly CPI readings, CBR Deputy Chairman Alexei 30 Food processing
Ulyukaev already expressed the hope that CPI will not
25
breach 10% this year (we expect this to happen in 2Q11). Textile industry
20
Moderate consumer inflation numbers in early March fol- 15
low the lower-than-expected inflation print in February
10
(9.5% vs. 9.7% expected). The slowdown was helped by
the administered decline in energy inflation, as well as by 5
moderation in food inflation. The latter was mainly a con- 0
sequence of lower inflation in fruit and vegetables (down 03 05 07 09 11
from 51.1% to 46.9%oya)—the price shock from the sum-
mer drought has appeared to be fully reflected in end-con-
Headline CPI and core inflation
sumer prices, which is very good news. Decreased import
duties on selected grains and sugar might also have helped %oy a
Headline CPI
to tame the recent food price growth. Nevertheless, food 16
inflation is likely to stay elevated in the coming months,
being “supported” by meat price inflation (meat forms a 12
quarter of food basket). Both global meat prices and the
usual lags between domestic grain shocks and meat prices 8
suggest meat inflation is likely to continue rising. CPI ex food, energy,
4 and regulated tariffs
CPI excluding food, energy, and regulated prices has con-
tinued to climb higher, rising from 5.4% to 5.6%oya in 0
February. Seasonally adjusted dynamics though show that 05 07 09 11
monthly increases eased somewhat—from a 7.2% annual-
ized rate in January to 6.3% in February—perhaps starting
to reflect the recent strengthening of the currency and, Review of past two weeks’ data
hopefully, some moderation of inflation expectations.
Industrial producer prices
The benign CPI reading and soft IP report are alleviating Dec Jan Feb
%m/m nsa 1.0 2.1 1.4 3.3
immediate pressures on the CBR to tighten aggressively, %oya 16.7 19.4 19.6 21.4
especially as inflation remains below 10% (CBR’s intoler-
ance level). Nevertheless, since the CBR tended to look Real economy indicators
past the initial food price shock (until it started to affect Real terms, %oya
Dec Jan Feb
inflation expectations), it is also likely to choose to ignore Construction 11.6 -1.1 1.5 0.4
the recent moderation in food and energy inflation and to Agriculture 0.6 0.7 1.0 0.8
continue gradually normalizing its monetary policy. Transportation -0.3 4.9 5.8 5.5
Fixed investment 10.1 -4.7 11.5 -0.4
Retail sales 3.4 0.5 1.0 3.3
Average monthly wage due 6.3 1.3 6.0 2.4
Data releases and forecasts Unemployment 7.2 7.6 7.8 7.4
Industrial production 6.3 6.7 7.9 5.8
Weeks of March 21 - April 4
Federal budget
PMI surveys Ruble bn, cash flows
Dec Jan Feb Mar Dec Jan Feb
Manufacturing PMI 53.5 53.5 55.2 54.0 Balance -904 148 0 -95
Services PMI 56.4 54.2 53.4 54.0 % of GDP -19.5 4.4 0.0 -2.5
Revenue 867 805 750 700
Consumer prices Tax revenue 881 703 700 700
Dec Jan Feb Mar Expenditure 1771 657 750 795
%m/m nsa 1.1 2.4 0.8 0.7 Noninterest 1763 632 730 771
%oya 8.8 9.6 9.5 9.6 % of GDP 38.0 18.8 19.5 20.6
62
J.P. Morgan Chase Bank, Istanbul Economic Research
Yarkin Cebeci (90-212) 319-8599 Global Data Watch
yarkin.cebeci@jpmorgan.com March 18, 2011
Current account deficit

Turkey % of GDP, 12-mo trailing
• CAD continues to widen on the back of higher oil 4 Excluding energy
prices and stronger domestic demand imports
2
• However, strong unexplained inflows lead to a decline 0
in total financing needs
-2
• Tourism revenues increase as Turkey benefits from Overall
-4
the unrest in the MENA region
-6
January balance of payments data showed that while -8

2008 2009 2010 2011
Turkey’s current account deficit continued to widen due to
higher oil prices and strong domestic demand, there was a
Financing gap (current account balance + net errors and omissions)
sharp decline in total financing needs on the back of a sud-
den jump in unexplained inflows. The widening of the cur- US$ bn
rent account deficit once again underscored the need for 5
tighter monetary and fiscal policies while the decline in
borrowing needs could at least partly explain the resilience
TRY has exhibited despite questions over the credibility of 0
the CBRT’s new policy mix and investor nervousness
about Turkey’s burgeoning CAD. -5
BOP data also show a sharp slowdown in short-term bor-

rowing by the banking system which should be seen by the -10
2008 2009 2010 2011
CBRT as a sign of the effectiveness of its policy mix. All in
all, we expect the January data to be well-received by the enues. Unofficial exports to Middle Eastern countries are
CBRT, and this should encourage it to remain on hold likely increasing as Turkey abolished visa requirements with
while it assesses data on domestic demand and loan growth Syria, Lebanon, and Jordan. Note that the number of tourists
over the next few more weeks. from Lebanon increased 270% while the corresponding in-
creases were 109% for Iraq and 29% for Syria. A larger part
Turkey posted a US$5.9 billion current account deficit in of these unexplained inflows should be in the form of capital
January. This was slightly lower than our forecast of US$6.0 inflows, and we hope to see an explanation from the CBRT
billion and the market consensus of US$6.1 billion. The wid- on these. Whatever the reason, these inflows led to a sharp
ening of the trade deficit was responsible for the large CAD, fall in total financing needs to US$2.2 billion in January
but there was an encouraging 19% increase in tourism rev- from US$7.8 billion in December (second chart).
enues. We expect this strong performance to continue as
tourists switch from places of unrest like Egypt to Turkey. Thanks to the drop in the financing need and strong capital
As the deficit was US$3.1 billion in January 2010, the 12- inflows, Turkey’s official FX reserves rose US$0.9 billion in
month trailing CAD rose to US$51.4 billion (6.7% of GDP) January. While FDI inflows remained weak, the bulk of the
in January from US$48.6 billion (6.4% of GDP) in Decem- capital inflows was in the form of portfolio inflows. There
ber. Excluding energy imports, the 12-month trailing CAD was a total outflow of US$0.6 billion from the equity market
was US$12.1 billion (1.6% of GDP) in January. As eco- but this was more than offset by a US$2.8 billion inflow to
nomic activity slows, we expect the widening in the CAD to the bond market. Both the bank and nonbank private sectors
moderate in the coming months. Assuming 4.5% GDP were net long-term borrowers, and the rollover ratio was
growth and an average oil price of US$104/bbl, we see the 112% for nonbanks and 324% for banks. This shows that the
CAD reaching US$7.5 billion at year-end. private sector is facing no difficulty in borrowing from
abroad. Encouragingly, short-term borrowing by the banking
Importantly, there was a net inflow of US$3.7 billion in net system declined sharply to US$0.7 billion in January from
errors and omissions. As a result, total financing needs US$4.2 billion in December. This decline should at least
dropped sharply to US$2.2 billion (the lowest in the past partly be due to the new CBRT policy.
five months) in January. These unexplained inflows could
be partly explained by the underrecording of export rev- The next Turkey data watch will be published on April 1.
63
J.P. Morgan Chase Bank, Istanbul Economic Research
Yarkin Cebeci (90-212) 319-8599 Turkey
yarkin.cebeci@jpmorgan.com March 18, 2011
Data releases and forecasts The rise in the unemployment rate was due solely to sea-
sonal factors in December. The seasonally adjusted unem-
Weeks of March 21 - April 1 ployment rate fell to 11.0%, the lowest level since August
2008, but is still about 200bp above the pre-crisis level.
Wed CBRT rate decision
Mar 23 Industrial production
7:00pm Dec Jan Feb Mar %oya
Nov Dec Jan
CBRT 1-week repo rate (%) 6.50 6.25 6.25 6.25
Total 9.4 16.7 13.8 18.9
CBRT remains hopeful on the efficacy of its policy Manufacturing 10.1 18.5 14.4 20.5
mix in restraining loan growth and expects to see some Mining 7.6 1.7 15.2 14.9
results in the near term. CBRT seems determined to Utilities 4.6 8.4 10.0 12.0
remain on hold until it sees evidence of this. January industrial output data showed clearly that economic
growth is significantly above the market consensus and that
Fri Capacity utilization Turkey’s output gap could be closed faster and earlier than
Mar 25 % what the CBRT has been expecting. The risks to our 2011
10:00am Dec Jan Feb Mar GDP growth forecast of 4.5% are skewed to the upside.
Total manufacturing 75.6 74.6 73.0 72.8
Durables 73.4 73.3 72.6 71.5 Consumer confidence
Nondurables 74.7 72.3 70.1 70.0 Index
Dec Jan Feb
The capacity usage level is about 4%-5%-pts below the
pre-crisis level, pointing to considerable slack in the Consumer confidence 91.0 91.3 90.8 93.6
economy. Purchasing power—current 83.6 84.0 83.5 85.8
Purchasing power—future 88.8 89.2 88.8 91.1
Economic setting 91.7 90.9 91.5 93.2
Thu Foreign trade Employment 89.7 92.1 93.3 92.9
Mar 31 US$ bn, except as noted
Consumer confidence remains strong despite a weaker lira
and increased uncertainty surrounding the CBRT’s monetary
Trade balance -7.7 -8.7 -7.3 -6.9 policy. The improvement in labor market conditions may be
Exports (FOB) 9.4 11.9 9.6 10.1 a factor behind this improvement. Also likely supportive is
%oya 6.0 18.1 22.1 22.2 the recovery in export demand.
Imports (CIF) 17.1 20.6 16.9 17.0
%oya 35.7 36.9 44.3 44.3
Balance of payments
Exports are gaining momentum as global economic US$ bn
activity recovers. Higher oil prices and robust domestic Nov Dec Jan
demand leads to rapid import growth. Current account -6.1 -7.5 -6.0 -5.9
Trade balance -6.5 -7.2 -6.0 -5.9
Thu Gross domestic product Exports, fob 9.9 12.4 10.0 10.1
Mar 31 %oya, real terms Imports, fob 16.4 19.4 16.0
10:00am 1Q10 2Q10 3Q10 4Q10 Net invisibles and transfers 0.4 -0.3 0.0
Capital account 6.0 9.6 5.5 3.1
GDP 11.8 10.2 5.5 6.5 Overall balance 2.3 1.8 1.5 0.9
Agriculture 0.1 0.7 -0.8 2.0
Manufacturing 21.2 15.2 8.7 12.5 See main text
Construction 8.3 21.9 24.6 15.0
Commerce 20.7 14.0 7.5 7.3 Central government budget
Transport and comms. 11.7 10.1 6.7 3.8 TRY bn, current prices
Financial services 4.4 7.3 6.4 5.0 Dec Jan Feb
Stronger external demand along with robust domestic Expenditures 37.9 22.5 23.1 23.6
demand likely resulted in an 6.5%oya growth in 4Q. Interest 1.9 3.8 3.6 6.2
This should lead to full-year GDP growth of 8.3%. Non-interest 36.0 18.7 19.5 17.4
Revenues 21.8 23.5 23.5 24.6
Taxes 18.0 19.8 20.0 21.1
Review of past two weeks’ data Primary balance -14.3 4.8 4.0 7.2
Budget balance -16.1 1.0 0.4 1.0
Labor data There has been a cyclical rise in revenues, and encourag-
% ingly a significant portion of this has been saved. The lack
Oct Nov Dec of a pre-election boost in spending should be well-received
Unemployment 11.2 11.0 11.5 11.4 by both the markets and the CBRT.
Nonfarm payrolls (%y/y) 3.8 4.7 4.9 4.6
Labor participation rate 49.0 48.6 48.2 48.4
64
J.P.Morgan Chase Bank, London Economic Research
Sonja Keller (27-11) 507-0376 Global Data Watch
sonja.c.keller@jpmorgan.com March 18, 2011
Current account balance and its components

South Africa % of GDP
• Rates to remain unchanged next week, yet SARB to
acknowledge risk of inflation breaching 6% this year 5
Trade balance
• Current account deficit could show an unexpected
narrowing to 2.6% of GDP 0
• We project February CPI inflation to have remained

-5 Invisibles balance
at 3.7%oya, yet see a sharp uptick from June
Current account
The MPC meeting will be the focus of next week’s busy -10
data calendar, but close attention will also be paid to the 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
February CPI report and the SARB’s Quarterly Bulletin Commodity exports
that could reveal a non-consensus further narrowing in the R bn, 3mma
current account deficit. While the MPC is expected to keep
16 Precious metals
the repo rate unchanged at 5.5%, inflation risks since the
14
January meeting have clearly moved to the upside. Indeed, Mineral products
12
we expect the SARB either to revise up inflation projec- and coal
10
tions further, currently at 4.6%y/y for 2011 (J.P. Morgan: 8
4.7%) and 5.3% in 2012 (J.P. Morgan: 5.6%), or make up- 6
side risks more explicit. The January MPC statement em- 4
phasized that the inflation trajectory was expected to re- 2 Base metals
main within the target range over the entire forecast period, 0
yet the upcoming statement may acknowledge a substantial 99 01 03 05 07 09 11
risk that the 6% mark could be breached this year. While Consumer inflation and the target
J.P. Morgan
next week’s CPI report for February will probably show %oya CPI inflation forecast
inflation contained at 3.7%oya, we expect a sharp uptick in 15 (CPIX before 2009)
inflationary pressures from June and see inflation at
Inflation target range
6.1%oya at year-end.
10
Strong trade surplus helps to narrow

current account deficit further 5
We know from the output data that GDP expanded just

4.4%q/q saar in 4Q10. The SARB Quarterly Bulletin re- 0
leased on March 22 will provide details on the expenditure 01 02 03 04 05 06 07 08 09 10 11
side of the economy for the quarter, as well as outline the
The income, services, and transfer balance likely deterio-
balance of payments. We believe that the current account
rated to a deficit of 5.2% of GDP in 4Q10 from 4.2% in the
deficit could surprise with a further narrowing to 2.6% of
prior quarter as dividend outflows probably rose strongly.
GDP from 3.0% in the previous quarter and 4.6% in 1Q10.
However, as a result of the strong trade balance, the current
High-frequency data suggest that the trade balance, which
account deficit likely narrowed further to 2.6% of GDP.
showed a surplus of 1.2% of GDP in 3Q10, likely im-
proved further to a surplus of 2.6% of GDP for three rea-
While we expect real household consumption expenditure
sons. Net exports of precious metals and base metals
(HCE) growth to have remained solid due to real wage
jumped more than 20%q/q in 4Q10, helped by strong com-
gains, the pace of the recovery likely slowed to 4.5%q/q
modity prices and output gains (second chart). At the same
saar in 4Q10 from 5.5% in the first nine months of the year.
time, vehicle exports picked up strongly in 4Q10 after sev-
Also, the recovery in fixed investment probably remained
eral strike actions hampered domestic vehicle production
slow with growth led by a pickup in private sector invest-
and exports in 3Q10, while vehicle imports also eased
ment. We expect full-year GDP growth to reach 3.7%y/y in
somewhat. Moreover, an 18% rise in coal prices pushed
2011 and 3.8% in 2012.
exports of mineral products (including coal) higher, which
more than offset higher crude oil import prices. The South Africa data watch will be published next on March 25, 2011
65
J.P.Morgan Chase Bank, London Economic Research
Sonja Keller (27-11)507-0376 South Africa
sonja.c.keller@jpmorgan.com March 18, 2011
Data releases and forecasts Review of past two weeks’ data

Week of March 21 - 25 Monetary and credit aggregates
%oya, except as noted
Tue Real GDP by expenditure type Nov Dec Jan
Mar 22 %q/q saar, 2005 prices M3 7.2 6.9 __ 8.2
10:00am 1Q10 2Q10 3Q10 4Q10 M0 7.7 7.2 __ 6.5
Real GDP (market prices) 4.6 2.8 2.6 4.4 Private sector credit 4.6 5.6 __ 5.0
Household consumption 5.8 4.9 5.9 4.5 %m/m nsa -0.2 0.9 __ -0.5
Gross fixed capital formation -2.4 1.3 0.9 1.0 Credit to households 7.2 6.9 7.1 7.5
Domestic final demand 12.0 1.6 5.8 4.3 Total domestic credit 3.8 4.3 __ 3.4
See main text.
Trade balance
R bn, except as noted
Tue Balance of payments Nov Dec Jan
Mar 22 R bn saar, except as noted Trade balance 8.4 10.3 __ -4.9
10:00am 1Q10 2Q10 3Q10 4Q10 Exports 60.2 53.9 __ 44.8
%m/m 20.8 -10.4 __ -17.0
Trade balance -12.9 13.2 32.4 __ Imports 51.8 43.6 __ 49.7
% of GDP -0.5 0.5 1.2 2.6 %m/m -2.4 -15.9 __ 14.0
Invisibles balance -103.3 -80.1 -111.6 __
Current account balance -116.1 -66.9 -79.2 __
% of GDP -4.6 -2.5 -3.0 -2.6 Kagiso BER PMI
Dec Jan Feb
See main text. PMI (% weights) 51.7 54.6 53.8 54.8
Business activity (25) 54.5 51.0 __ 51.6
Wed Consumer prices New sales orders (30) 53.2 59.6 __ 59.0
Mar 23 %oya, except as noted Suppliers’ performance (15) 49.8 56.5 __ 56.1
Inventories (10) 56.2 58.9 __ 54.7
Employment (20) 45.0 47.8 __ 51.6
CPI 3.6 3.5 3.7 3.7
Memo: prices paid 63.1 71.3 __ 81.7
%m/m, sa 0.2 0.2 0.4 0.6
Business expectations 62.5 67.1 __ 61.3
Core 3.4 3.3 3.0 3.0
PMI nsa 55.1 47.8 __ 52.0
New vehicle sales

Thu Monetary policy announcement
%oya, except as noted
Mar 24 Dec Jan Feb
3:00pm Passenger car sales 38.9 22.1 __ 31.1
We expect the SARB to leave rates unchanged. See %m/m nsa -9.9 23.9 __ 3.3
main essay. Light commercial vehicles 14.7 7.7 7.6 __ 11.3
Heavy/medium commercial 8.8 26.7 26.2 __ 28.2
Total vehicle sales 29.6 18.4 18.5 __ 25.2
%m/m nsa -10.9 12.5 14.2 __ 9.0
SARB official reserves

US$ bn, except noted
Dec Jan Feb
Gross reserves (R bn) 290.6 326.4 __ 329.4
Gross reserves 43.8 45.5 __ 47.3
International liquidity 43.4 44.5 __ 44.8
Manufacturing production
Volume output
Nov Dec Jan
Manufacturing (%oya) 4.6 0.2 __ 1.3
%m/m sa 2.7 2.6 -0.2 -0.3 __ 0.4
Retail sales
%oya
Nov Dec Jan
Real 8.0 8.3 __ 6.4
Nominal 9.0 9.3 9.2 __ 7.7
66
Stephen Walters (61-2) 9220-1599 Helen Kevans (61-2) 9220-3250 Global Data Watch
stephen.b.walters@jpmorgan.com helen.e.kevans@jpmorgan.com March 18, 2011
Ben Jarman (61-2) 9220-1669
ben.k.jarman@jpmorgan.com
Australia: overnight indexed swap (OIS) rates

Australia and New Zealand %, implied cash rate at each RBA meeting in 2011
17-Mar
• Small downgrade to near-term Aussie GDP growth 5.0
forecasts; next RBA hike now in August, not May 4.9
2-Mar
• Skittish financial markets pricing in significant risk 4.8
of rate cuts this year
4.7
• NZ GDP to rise in 4Q10, so economy will avoid an-
other recession 4.6
4.5
As was the case elsewhere this week, the unfolding situa- Apr May Jun Jul Aug Sep Oct Nov Dec
tion in Japan dominated headlines in Australia and New
Zealand. In the background, there was no top-tier economic Australia: RBA cash target rate
data to mull over, and the release of the minutes from the
%
most recent RBA Board meeting two weeks ago offered
little new information. Indeed, as always, the problem with 8
the minutes is that, in theory at least, they depict discus- 7
sions from the recent past. The March minutes, therefore,
6
did not reflect officials’ assessment of the disaster in Japan,
escalating tensions in the Middle East, and the extreme 5
volatility in financial markets. The sell-off in risky asset 4
markets this week, for example, led AUD and NZD sharply 3
lower, both falling more than 5% against USD.
2
2007 2008 2009 2010 2011 2012
The downgrades to our GDP growth forecasts in Japan,
alongside smaller downgrades for the US and China,
prompted us to revise lower our near-term growth forecasts RBA to err on side of caution
for Australia. We upgraded expected growth in 2012, Until this week, our base case was that RBA officials
though, owing to a brighter outlook for energy exports, in would lift the cash rate in May, but recent events mean this
particular. We also have changed the RBA call; we now now is unlikely. We believe a rate hike in May is still a
expect the next hike in August, rather than May, but still risk, but is no longer our base case. Indeed, the uncertainty
anticipate the RBA delivering roughly one hike per quarter over the impact of Japan’s earthquake and the crisis in its
from there (second chart). The economic fundamentals un- nuclear facilities, and the resulting dislocation in financial
derpinning the strength of the Australian economy remain markets, mean the probabilities have shifted in favor of a
intact, and the medium-term outlook is even stronger. later hike. August now is our preferred month. Although
market pricing suggests a significant chance of a rate cut
The changes to our New Zealand growth forecasts are not from the RBA in coming months (first chart), we believe
material, and will be finalized following the release of the the risks of an ease are small. The upbeat medium-term
4Q10 GDP numbers next week. We think the economy will story for the Aussie economy is intact, and our view that
have avoided another technical recession; our forecast is the next rate move will be up remains unchallenged. The
for GDP growth of 0.4%q/q in 4Q10, following the unex- RBA will tighten policy to stay ahead of the “hugely expan-
pected contraction (-0.2%) in 3Q10. In the medium term, sionary” impacts of the mining boom.
the disaster in Japan likely will be positive for the New
Zealand economy. Japan is New Zealand’s fourth largest In the meantime, a delayed hike allows officials to gather
trading partner, accounting for 7.5% of exports. About one- more information on the impact of the disasters in Japan
quarter of those exports are of aluminum, followed by and to see the 2Q CPI report in late July. The RBA staff
wood, dairy products, meat, and fruit and vegetables. De- then also has the opportunity to explain the decision in de-
mand for aluminum and, to some extent, wood will rise tail in the quarterly statement that follows the August Board
when rebuilding does get underway in Japan. meeting. Waiting, though, carries risks—the RBA may be
67
Stephen Walters (61-2) 9220-1599 Helen Kevans (61-2) 9220-3250 Australia and New Zealand
Ben Jarman (61-2) 9220-1669
forced to be more assertive later in pushing the cash rate Australia: exports
further into restrictive territory, given the even larger terms % of total, 6mma
of trade and mining investment booms. In fact, if demand 30
for Aussie commodities does rise as Japan rebuilds, and
25 Japan
commodity prices increase in anticipation of this, boosting
the terms of trade, the resources boom would be even more 20
supportive than before over the medium term. 15
10
China
Minor downgrades to near-term growth 5
We have pushed through modest adjustments to our Aussie 0
GDP forecasts in the wake of the recent downgrades to the 00 02 04 06 08 10
near-term US and China growth forecasts, and the adjust-
ments to the Japan forecasts in the wake of last week’s Australia: household saving
earthquake. We have made the following adjustments to the
% of disposable income
Australian forecasts, based on what we know now, though
the ultimate impact of Japan’s earthquake, ensuing tsunami, 15
Seasonally adjusted
and nuclear crisis remains unclear.
10
We now anticipate slightly weaker GDP growth of 2.6% in
2011 (down from 2.8%). The downgrade to our 2011 fore- 5
cast owes mainly to near-term weakness in commodity ex-
0
port volumes to Japan. Most of this weakness will be con-
Trend
centrated in the June quarter. We expect higher export vol-
-5
umes from 3Q11, though, as Japan’s rebuilding effort kicks 00 02 04 06 08 10
in. Japan receives 18% of Australia’s exports, down from
nearly 30% in late 2008, but remains Australia’s second derlying theme of Australia is one of an “unprecedented”
most significant export partner (behind China, top chart). boom in mining investment and commodity prices. Refer-
Two-way trade of more than A$54 billion was recorded ences to the “expansionary and inflationary” nature of re-
between Australia and Japan in the last financial year. Ja- sources booms have been prominent and consistent in RBA
pan now receives 39% of Australia’s exported coal (coking commentary for more than a year. This particular “story”
and thermal), 17% of its iron ore, and 65% of its liquefied now is even more supportive, given that rebuilding in Japan
natural gas (LNG). should boost demand for energy and bulk commodities.
The upward revision to our 2012 forecasts (from 4.2% to The commentary on business investment is broadly the
4.5%) puts our GDP growth forecast even further above same as before (mining investment is poised to rise to a
trend, owing partly to further anticipated gains in energy record-high share of GDP), and employment growth will
and bulk commodity export volumes. The upside is limited, be “solid.” Consumers, however, are being cautious, as
though, by capacity constraints in the coal and LNG indus- best evidenced by the significant rise in the household sav-
tries, in particular. The LNG sector probably will benefit ing rate over the past year. The saving rate has risen from
the most from the disaster as Japan may increase utilization just 2% at end-2007 to stabilize at a two-decade high just
of gas-fired power stations following the explosions at the short of 10% in recent quarters (second chart). Discretion-
nuclear plant in Fukushima. LNG would likely be the alter- ary spending has weakened considerably, most recently
native fuel replacement, and coal also probably would be a falling to a two-year low, home sales are down, and de-
substitute. mand for credit remains subdued. The “cautious” consumer
is providing an important, and necessary, offsetting influ-
ence to the booms elsewhere in the economy.
“No material change” says RBA
The strong fundamentals underpinning the Australian The Board minutes also provided more color on the impact
economy in the medium term remain unchanged. Indeed, of the Queensland floods. RBA officials expect that the
the key message from the Board minutes this week—albeit flooding shaved 0.5%-pt off 4Q10 and 1Q11 growth. On
the meeting preceded the events in Japan—was that the un- domestic inflation, the RBA’s staff forecasts now show
68
Stephen Walters (61-2) 9220-1599 Helen Kevans (61-2) 9220-3250 Global Data Watch
Ben Jarman (61-2) 9220-1669
higher near-term headline inflation, mainly reflecting the New Zealand: real GDP
sharp rise in banana prices after Cyclone Yasi, which %q/q
wiped out three quarters of the national crop. The headline J.P. Morgan forecasts
2.5
inflation forecasts for 2012 now, though, are slightly lower
owing to an expected unwind of the “banana-effect.” 1.5
No double dip for New Zealand 0.5
In New Zealand, we have not pushed through changes to

-0.5
the near-term GDP growth forecasts, as we await the re-
lease next week of the fourth quarter GDP numbers. The -1.5
threat of a double-dip recession became real following the 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
unexpected contraction in GDP in 3Q10. Our forecast is for
the economy to have expanded 0.4%q/q in the December
quarter, a subpar result, but one which means that another New Zealand: retail sales and house prices
technical recession has been avoided. The most recent re- %oya %oya
Retail sales
cession was experienced throughout 2008 and into early 25 10
2009 when the economy contracted for five straight quar-
20
ters. We do, however, expect that the economy will again
15
contract in 1Q11, owing mainly to the impact of the most 5
10
recent earthquake in Christchurch (February 22).
5
REINZ house prices 0
In the December quarter, stronger investment will have un- 0
derpinned growth. Residential investment slumped over the -5
quarter, but this was more than offset by a spike in nonresi- -10 -5
02 04 06 08 10
dential investment. Government spending and net exports
also should add to growth, albeit more modestly. The drags
will stem from the change in inventories and household On the other hand, the outlook for the housing market is
spending. Among the expenditure components of GDP, more subdued, despite the pickup in activity last month.
the latter will subtract from growth the most over the quar- House prices surprisingly rose in February, as did sales
ter, with continued caution among consumers partly to volumes, but it took nearly two months for transactions to
blame. The biggest dent to consumption in the December be completed. The jump in the number of days it took to
quarter was likely due to the hike to the goods and services sell a house was the clearest indication of continued cau-
tax on October 1. tion among buyers. The median time to sell a house was 58
days in February, the highest in over two years, compared
Labor market recovery key to an already elevated 51 days in January. And despite the
rise in home sales, sales volumes still are well below the
The recent decline in market interest rates may lessen the
5,206 sales recorded in May last year. Slow sales have kept
current caution among New Zealanders, but a sustained
inventory levels elevated, such that the backlog of unsold
recovery in the housing and labor markets is what is really
property sitting on the market will depress house prices
needed. The recent decline in house prices has coincided
further in coming quarters.
with a drop in retail spending (second chart), while the
lackluster recovery in the labor market, with the unemploy-
ment rate just 0.2%-pt below its recession peak of 7.0%, More downbeat for the time being
has discouraged discretionary spending. Not surprisingly, New Zealanders are more downbeat. The
Westpac consumer confidence index showed that confi-
The labor market should recover throughout the year, with dence deteriorated markedly in the March quarter, with
our forecast for the unemployment rate to fall from 6.8% to confidence toward current and future conditions both fall-
6.2% by year-end. The solid rise in imports of capital ing below the neutral 100 threshold. The headline index
goods (up 17%oya in January) signals increased business fell 9.6%m/m in 1Q11, marking the largest decline since
investment in coming quarters, which should foster a rise in 2Q08, and the first drop in the index below 100 since
firms’ hiring intentions and employment growth. 1Q09. The index now has fallen for three straight quarters.
69
Stephen Walters (61-2) 9220-1599 Helen Kevans (61-2) 9220-3250 Australia and New Zealand
Ben Jarman (61-2) 9220-1669
The survey captured the impact on sentiment of the earth- New Zealand:
quake in Christchurch, which had already been weakened
by the quake that hit the same area in September last year. Data releases and forecasts
A sharper fall would have been prevented, though, by the Week of March 21 - 25
expectation that, having now delivered a rate cut, the
RBNZ will be on the policy sidelines for the remainder of Wed Current account balance
the year. We believe that Governor Bollard will leave the Mar 23 Sa
official cash rate at a record low 2.5% for the remainder of 8:45am 1Q10 2Q10 3Q10 4Q10
the year. The added stimulus will not be removed until the NZ$bn 0.2 -1.0 -1.8 -2.1
rebuilding phase materializes, which is likely to be a 2012 % of GDP -2.4 -3.2 -3.1 -2.4
story; hence, our forecast is for the next OCR hike to be
The CAD probably widened despite an improvement in
delivered in 2Q12. the trade balance. The unadjusted trade balance should,
thanks to stronger exports, return to a modest surplus.
Australia: The income balance will remain in deficit owing to a
drop in foreign investors’ earnings on their investments.
Data releases and forecasts We suspect that the CAD will deteriorate further from
here, although do not forecast the deficit to return to the
Week of March 21 - 25 8%-9% of GDP-levels recorded in recent years.
No major data releases. Thu Real GDP

Mar 24 Sa
Review of past week’s data 8:45am 1Q10 2Q10 3Q10 4Q10
%qoq 0.6 0.1 -0.2 0.4

New motor vehicle sales %oya 1.8 1.8 1.5 0.9
Sa
Dec Jan Feb
%m/m 1.0 0.9 -1.9 -2.4 -1.0 0.2
%oya -3.2 -2.8 -1.9 -1.5 REINZ house price index
sa
Dec Jan Feb
Dwelling starts
Sa %m/m -0.6 -2.6 -0.6 2.3
2Q10 3Q10 4Q10 %oya -1.6 -2.6 -3.6 -0.6
%q/q 2.1 1.1 -13.2 -13.0 -1.3 -5.3
%oya 46.4 48.1 12.4 15.1 -5.3 -7.3 The REINZ house price index was up 2.3%m/m, reversing
much of the 2.6% decline in January, but prices remain 5.6%
The fall in dwelling commencements in 4Q was much larger below the November 2007 peak. The stratified median house
than anticipated (J.P. Morgan: -1.3%; consensus: -1.4%), price rose NZ$10,000 to NZ$360,000, with prices up across
although not nearly as sharp as the 13% tumble in the pre- most of the nation. Christchurch was among the exceptions
ceding quarter. The number of commencements also fell in however, having been hit by an earthquake on February 22.
year-on-year terms, slipping 7.3%oya, marking the first de- The median house price declined in Christchurch, the
cline in five quarters. We are pessimistic on the outlook for nation’s second largest city, by NZ$5,000 to NZ$325,000, as
building activity, not least because first home buyers have sales numbers dropped to 244 from 271.
all but withdrawn from the market. This group is very im-
portant in driving new dwelling creation, but now represents
a lower share of new housing finance commitments, due to Westpac NZ consumer confidence
the steady rise of borrowing rates and the withdrawal of sub- Index
3Q10 4Q10 1Q11
sidy support. The recent drop-off in immigration rates not-
withstanding, Australia’s supply imbalance will be exacer-
Index 114.1 108.3 99.1 97.9
bated by a return to sluggish dwelling creation. With house %m/m -4.4 -5.1 -8.5 -9.6
prices having appreciated fairly substantially throughout
2009, there is scope for rental yields to normalize, meaning
the pressure valve for undersupply of new housing is likely
to be higher rents.
70
JPMorgan Chase Bank, Hong Kong Economic Research
Grace Ng (852) 2800-7002 Global Data Watch
grace.h.ng@jpmorgan.com March 18, 2011
China real GDP forecast

Greater China 4Q10 1Q11 2Q11 3Q11 4Q11
%q/q saar 12.7 8.7 8.8 9.0 9.0
• China: fine-tuning near-term GDP forecast; expect
Previous 12.7 9.5 9.0 8.7 8.7
trend growth in 2H11
%oya 9.8 9.4 10.0 9.8 8.9
• PBoC hiked RRR 50bp again; February M2 growth Previous 9.8 9.6 10.3 10.0 9.0
eased again; new loans at 535.6 billion yuan
• Hong Kong: unemployment rate continued to decline,
fell to 3.6% in December-February period
US retail sales and Chinese exports to US
On the back of the hit to real income and consumer spend-
%3m/3m, saar, both scales
ing from higher fuel costs, our US team has revised down US retail sales ex motor vehicle, China exports to US
the forecast for 1H11 GDP for the second time in two 15 parts, and gasoline 75
weeks, with US growth now expected to average 3% ar in 10 50
the first two quarters, versus the original forecast of 4%. 5
Also, a smaller downward adjustment has been made to the 25
0
Euro area growth forecast. Meanwhile, after the Tohoku 0
earthquake in Japan, our Japan team has revised down 1Q -5
and 2Q11 GDP growth from 2.2% to 1.7% and from 2.2% -10 -25
to 0.5%, respectively, but revised up 3Q and 4Q GDP from
-15 -50
2.5% to 4.0% and from 2.0% to 2.5%, respectively. The 2005 2006 2007 2008 2009 2010 2011
latest changes in the external environment, coupled with
recent indicators from China suggesting that the economy
has moved onto a more moderate growth path in early
2011, easing from the sharp acceleration in 4Q10, have
China: trade with Japan by major products (2010)
prompted us to fine-tune our outlook for the near-term
US$ bn % of Total
GDP growth trajectory for China, revising down the 1H11
Imports from Japan 176.8 12.7
forecast modestly, while expecting trend growth through Machiney, electrical equipment 84.9 6.1
2H11. Our full-year 2011 real GDP forecast now stands at Base metals and articles 19.6 1.4
9.4%oya (previously 9.6%). Vehicles, aircraft, vessels & transport equip 16.7 1.2
Products of chemcial or allied industries 14.8 1.1
Hit to near-term G-3 growth outlook Optical, photographic, muscial instruments 14.7 1.1
Exports to Japan 121.2 7.7
Historically, a 1%-pt change in US GDP growth (with its
Machiney, electrical equipment 47.4 3.0
associated impact on the global economy) leads to about a
Textiles and textile articles 21.8 1.4
5%-pt change in China’s export growth. This would in turn Foodstuffs 9.0 0.6
impact China’s GDP growth by about 0.8-1.1%-pt. (By Products of chemcial or allied industries 6.8 0.4
comparison, exports to Japan constitute about 7.7% of
China’s total exports, and imports from Japan are about
12.7% of China’s total imports.) As such, the recent down-
ward revision to the US and other advanced economies’
near-term growth forecasts would likely have a moderate China: manufacturing PMI and GDP
impact on China. A closer look at China’s latest trade data Index, sa
suggests that, average seasonally adjusted exports in Jan- Manufactuirng PMI Real GDP
60 20
Feb were was 6.5% (not annualized) above the average (Markit)
monthly level in 4Q10. This suggests that the underlying
55 15
trend in China’s exports was still rising at a gradual pace
through February, though the growth pace in the near term
50 10
may remain moderate given the downward revision to GDP
forecasts across the major advanced economies. Indeed, the 45 5
disappointment in China’s February exports was led by Jan-Feb average
slowing exports to Europe, while the export momentum to 40 0
the US also eased somewhat. 2005 2006 2007 2008 2009 2010 2011
71
Lu Jiang (852) 2800-7053 Greater China
lu.l.jiang@jpmorgan.com March 18, 2011
Impact of tightening begins to appear China: real GDP and M2 growth

%q/q, saar %3m/3m, saar
The Chinese economy appears to have moved onto a more
Real GDP M2
moderate growth path in early 2011, easing from the sharp 20 25
acceleration in 4Q10. The government’s assortment of policy
measures to cool the housing market, manage inflation, and 15 20
prevent overheating risks appear to be impacting the real
economy. In particular, while fixed investment continued to 10 15
register solid growth in Jan-Feb (though new investment
5 10
projects have eased), retail sales disappointed, dragged down
Feb figure
by a notable slowing in auto sales partly on the back of the
0 5
expiration of preferential tax treatment. Housing-related 04 05 06 07 08 09 10 11
spending, such as furniture sales, also contributed to the re-
cent slowing in overall retails sales, reflecting softer property China: auto production and sales
transactions on the back of housing policy tightening. %oya, 3mma
60
The central bank has been normalizing monetary policy Production Sales
since early last year, and this has lead to some moderation 40
in M2 and loan growth. From August last year, this process
was put on hold with the sequential trend growth in M2 and 20
loans rebounding as policymakers became concerned about
slowdown in global activity, the impact of the Europe sov- 0
ereign crisis, etc. More recently, however, with the easing
of these external concerns, but with growing concerns over -20
domestic inflation, the renewed, rather notable moderation 05 06 07 08 09 10 11 12
in the growth pace of monetary indicators during the past China: real estate investment and floor space started
two months suggests that monetary policy normalization
has resumed. This resumption is consistent with the recent %oya, 3mma, both scales
modest easing in the real economic indicators and should 50 Real estate FAI 120
eventually temper some of the overheating concerns. 100
40 Floor space started
80
30 60
Look for trend growth in 2H11
20 40
Looking further ahead, on the external environment, the 20
generally supportive global demand outlook for 2H11 10
0
should support steady growth for Chinese exports. On the 0 -20
domestic front, public investment projects, especially at the 2006 2007 2008 2009 2010 2011
local government level, are expected to increase solidly go-
ing forward. In addition, while private real estate invest- China: real estate investment and domestic spot steel prices
ment will likely slow ahead from policy tightening, public %oya, both scales
economic housing investment should gather more momen- Spot steel price
50 Real estate 60
tum, with strong support from the central government, investment
given the policy target to start constructing 10 million af- 40 40
fording housing units this year. On domestic consumption,
30 20
while the impact of the expiration of preferential tax treat-
ment and restrictions on auto purchases in certain cities 20 0
may drag down near-term auto sales growth, solid overall
10 -20
employment growth and broad-based wage gains should
support overall household income and hence consumer de- 0 -40
mand this year. 2005 2006 2007 2008 2009 2010 2011
72
Grace Ng (852) 2800-7002 Global Data Watch
Another 50bp RRR hike China: reserve requirement ratios for financial institutions
The People’s Bank of China announced on Friday that the %

reserve requirement ratio (RRR) for financial institutions’ RRR for large banks
20
yuan deposits would be raised again by 50bp, effective
March 25. The latest move would drain about 360 billion
yuan from the banking system. After this hike, the reserve 15
requirement ratios stand at 20.0% for large banks and
18.0% for medium and small financial institutions. This is 10
the third hike in the RRR in 2011. The hike, following six RRR for medium
and small banks
RRR hikes in 2010 and two earlier this year, each by 50bp,
is a further move by the central bank to manage the overall 5
03 05 07 09 11
liquidity situation and the pace of new loan creation.
China: money supply and loan growth
While the latest macro data flow suggests that policy %oya
changes intended to cool the housing market, manage infla- Loans
tion, and prevent overheating risks appear to be impacting 40 M1
the real economy, the latest RRR hike suggests
policymakers see the need for further normalization of 30
monetary conditions, and are still cautious to manage the
pace of new loan creation going forward. 20
10 M2
Technically, a RRR hike remains a cheaper and more high-
profile move than open market operations for liquidity man-
0
agement, with the 1-year PBoC bill yield at 3.1992% vs.
06 07 08 09 10 11 12
1.62% interest on required reserves. Importantly, our rate
strategists suggest that a significant amount of PBoC bills China: financial institutions' new loan creation
will mature in the near term, totaling 230 billion yuan for the Bn yuan, nsa
rest of March, and 855 billion yuan for the months of April
2000 2011
and May combined. As such, though M2 money supply
growth has slowed rather notably, and with the merchandise 1500
2010
trade balance likely to remain in deficit in March and possi- 2009
bly April, near-term liquidity management through RRR 1000
changes is still an important policy instrument.
500
On the macro policy front, CPI inflation rate is expected to
0
pick up again, breaching the 5% handle in March (our fore-
Jan Apr Jul Oct Jan
cast is 5.3%oya), and remain elevated through midyear. We
thus expect the monetary policy normalization process to
continue, including at least one more RRR hike, and two M2 growth eased again in February
more interest rate hikes, as well as further CNY apprecia- China’s M2 money supply growth eased further, with M2
tion (with year-end USD/CNY forecast at 6.3), with these rising 15.7%oya in February (J.P. Morgan: 17.1% consen-
policy actions largely front-loaded in 1H. Going into 2H11, sus: 17.0%), compared to 17.2%oya growth in January,
as headline CPI inflation begins to moderate gradually, registering the slowest growth in %oya terms since July last
helped by a more favorable base effect and as the various year. Seasonally adjusted M2 rose a moderate 0.8% m/m in
macro policies begin to impact the real economy, uncer- February, following no growth in January, with the sequen-
tainty and market concerns over policy tightening may be- tial trend growth pace easing to 13.5%3m/3m saar in Feb-
gin to ease. The behavior of global commodity prices re- ruary. M1 money supply growth came in at 14.5%oya in
mains the key risk to China’s inflation outlook in 2H11. February, stabilizing from 13.6%oya in January, but mod-
73
Grace Ng (852) 2800-7002 Greater China
Lu Jiang (852) 2800-7053
lu.l.jiang@jpmorgan.com
erating from the average 21.8%oya in 4Q10. Bank loans rose February headline inflation is likely to pick up further
17.7%oya in February, compared to 18.5%oya in January. on a monthly basis, reflecting further increases in com-
modity prices, particularly food imports, as well as
New loan creation was 535.6 billion yuan in February (con- larger increases in prices during the holiday season.
sensus: 600 billion yuan), compared to 1,040 billion yuan in
January, and 700.1 billion yuan last February. Thu Merchandise trade
Mar 24 HK$ bn
4:30pm Nov Dec Jan Feb
Hong Kong: unemployment fell further
Balance -23.5 -43.5 -16.0 -31.3
Hong Kong’s labor market continues to improve. The sea- Exports 273.0 253.0 283.7 203.9
sonally adjusted unemployment rate declined further, post- %oya 16.6 12.5 27.6 11.7
Imports 296.6 296.5 299.6 235.2
ing a better-than-expected result at 3.6% in December-Feb- %oya 16.4 14.8 19.0 16.4
ruary period, compared to an average of 3.8% during the
Hong Kong’s exports likely eased after the surge in
November-January period. Seasonal factors contributed to
January generated by the front loading activity before
the February decline as employment actually declined mod- the Lunar New Year holiday, and also corresponding to
estly to 3,576 in February from 3,582 in January, reflecting the weaker trade figures in Mainland China.
some moderation in business activity and labor demand
after the Lunar New Year holiday.
Going forward, we expect the latest changes in the external Labor market survey (Mar 17)
environment, particularly the downward revisions to the US Sa, 3mma
Dec Jan Feb
and Mainland China growth outlook, will offer some re- Unemployment rate
straint to Hong Kong’s exports. On the other hand, domestic % avg 4.0 3.8 3.8 3.6
demand is likely to remain solid on the back of steadily im- Employed
Ch, m/m, 000 persons 13.4 15.1 __ 41.1
proving labor market conditions as well as a still buoyant
real estate sector and the implementation of various multi-
Taiwan:
year public infrastructure projects. Strong tourism inflows
will likely continue to support hiring in retail and related ser- Data releases and forecasts
vices. Our forecast for Hong Kong’s real GDP in 2011 now
stands at 4.7%oya (previous forecast 4.8%oya).
Mon Export orders
China: Mar 21 % change
Data releases and forecasts
%oya 14.3 15.3 13.5 10.7
Week of March 21 - 25 %m/m sa 3.3 3.8 1.9 2.0
No data releases. Wed Industrial production

Mar 23 % change
Review of past week’s data 4:00pm Nov Dec Jan Feb
Monetary aggregates (Mar 14) %oya 19.6 18.9 17.2 16.2
%oya %m/m sa 6.1 2.7 2.2 0.8
Dec Jan Feb
Thu Labor market survey
M2 19.7 17.2 17.1 15.7 Mar 24 %
Bank lending 19.9 18.5 __ 17.7
Hong Kong: Unemployment rate, sa 4.8 4.7 4.7 4.7

Unemployment rate, nsa 4.7 4.7 4.6 4.7
No data released.
Tue Consumer prices
Mar 22 % change
%oya 2.9 3.1 3.6 2.3
%m/m sa 1.0 1.0 0.5 1.0
74
JPMorgan Chase Bank, Seoul Economic Research
Jiwon Lim (822) 758-5509 Global Data Watch
jiwon.c.lim@jpmorgan.com March 18, 2011
James Lee (822) 758-5512
james.dh.lee@jpmorgan.com
Korea's trade partners

Korea % of total during 2010
• Quarterly profile of 2011 GDP forecast fine-tuned Exports to Imports from
China 25.1 Middle East 19.0
• Large number of government job applications pushed
EU 11.5 China 16.8
up February jobless rate
US 10.7 Japan 15.1
The data calendar was relatively light, but the crisis in Ja- Japan 6.0 US 9.5
pan dampened financial markets further this week with the Hong Kong 5.4 EU 9.1
developments at the Fukushima nuclear reaction becoming Total (US$ bn) 466.4 Total (US$ bn) 425.2
a major concern. While it is too early to estimate with any
precision the impact on the Korean economy, we note that Unemployment rate
the earthquake in Japan came on top of a series of unex- % of total labor force Distortion caused by government
pected events since early this year, such as weather-driven hiring program
5.5
food price increases and geopolitical risks in the MENA
region, that have weighed on consumer and investor confi- 5.0
dence in Korea as well as its key trading partners. As for 4.5
the direct trade link, only 6% of Korea’s exports go to Ja-
4.0
pan. However, more than 15% of Korea’s imports come
from Japan, and thus any reduction raises concern over 3.5
possible disruption in supply channels, notably in the tech 3.0
sector, although major manufacturing companies are re-
2.5
ported to have 1-2 months of inventory. Reflecting this, we 2005 2006 2007 2008 2009 2010 2011
trimmed our 1H growth forecast modestly, but boosted the
2H outlook, keeping our forecast of full 2011 GDP growth Labor force participation rate
at 4.2%. This forecast still assumes that both food and % of total population above age 15, sa
crude oil prices recede in 2H, and the developments at the
62.5
Fukushima nuclear power plants does not worsen further
3mma
and will be followed by broad-based rebuilding in Japan. 62.0
Jobless rate up, but details remain firm 61.5

The seasonally adjusted unemployment rate rose to 4.0% in
February from 3.6% in January, but mainly because the 61.0
labor force rose more than employment, together with some
60.5
lunar holiday impact. The labor force surged 317,000 (or 05 07 09 11
1.4%m/m sa) in February, more than reversing the 131,000
(or 0.5%m/m sa) decline in January. As a result, the labor Changes in employment
force participation rate jumped to 61.4 from 60.6, recording 000s, sa Total
the largest gain in the seasonally adjusted series’ twelve- 200 Public services only
year history. The sharp rise in the labor force was attributed 150
in part to government job applications; the government job 100
creation program intends to add 30,000 jobs from March to 50
June. Though on a smaller scale than last year, this still at- 0
tracted 130,000 applications, raising both the labor force -50
and the number unemployed as the actual hiring will start -100
from March. Meanwhile, employment rose 223,000 (or -150
1.0%m/m sa) in February, after a soft patch in January due -200
2007 2008 2009 2010 2011
to unusually harsh winter weather. The average workweek
was also extended to 45.8 hours in February, after staying
at 45.4 hours in the prior three months. In the details, pri- secutive month. In terms of industries, both construction
vate sector hiring continued to lead the creation of new po- and agriculture displayed strong gains, although this in part
sitions, while the public sector shed jobs for the third con- reflected a rebound from weather-driven weakness in Janu-
75
JPMorgan Chase Bank, Seoul Economic Research
James Lee (822) 758-5512 Korea
james.dh.lee@jpmorgan.com March 18, 2011
ary. Hiring in manufacturing and private service sectors Housing prices (Mar 18)
was firm, up 24,000 (or 0.6%m/m sa) and 98,000 (or % change from previous week, apartment prices only
0.6%), respectively. Week of Feb 28 Mar 7 Mar 14
0.3 0.4 __ 0.3
Fri Consumer survey

Mar 25 100=neutral reading, nsa BoK Watch
6:00am Dec Jan Feb Mar
• Financial markets volatile
Index 109 108 105 103
Consumer sentiment likely pulled back in March, as With the news of the Japan earthquake and the trouble at
prices of necessary goods remained elevated. the Fukushima nuclear power plant taking center stage,
Korea’s financial market has been extremely volatile. For
example, the 3-yr benchmark KTB yield fell as much as
Review of past week’s data 13bp to 3.59%, but eventually closed the week with yields
just 7bp lower at 3.65%. Meanwhile, USD/KRW turned up
Export and import prices (Mar 15)
early this week as global risk aversion kicked in, but the
%oya, in local currency terms
Dec Jan Feb move was eventually capped by perceptions that a bout of
Export prices 4.3 4.9 5.8 5.6
KRW weakness would not be welcomed by the govern-
Import prices 12.7 14.1 19.2 16.9 ment whose policy priority has temporarily shifted to price
stability. USD/KRW saw further pressure on Friday on the
Imported good prices in local currency rose 3.1%m/m nsa in
February, after staying flat in January for seasonal reasons. news of coordinated G-7intervention to support JPY. As a
By J.P. Morgan’s calculation, imported good prices rose result, JPY/KRW fell about 3.8% on Friday, almost recov-
2.7%m/m sa in February, about the same pace as in the pre- ering to the pre-earthquake level.
vious three months. The price gain was concentrated in raw
materials that surged 5.5%m/m sa in February. Imported
goods in contractual currency terms moved up 3.3%m/m sa
in February. Meanwhile, export prices rose 1.2%m/m sa and
1.7% each in local currency and contractual currency terms.
Interest rates
Stage of processing price index (Mar 15) %p.a.
%oya Feb 18 Mar 3 Mar 10 Mar 17
Nov Dec Jan
Overnight call 2.75 2.75 2.99 3.00
Index 8.6 9.8 11.4 11.1
Three-month CD fixing 3.15 3.23 3.39 3.39
The headline SPPI rose 1.7%m/m nsa to be up 11%oya in One-year MSB 3.57 3.66 3.59 3.57
February. The seasonally adjusted SPPI increased 1.4%m/m
Three-year Treasury bond 3.96 3.93 3.71 3.66
sa in February, decelerated modestly for two straight
months. Domestically produced goods prices rose 1.0%m/m Three-year corporate bond 4.74 4.71 4.52 4.48
sa in February, moderating from the 1.8% gain in January,
but imported goods prices rose 2.6% in February, about the
same pace as in January.
Deposit changes at deposit money banks
Unemployment rate (Mar 16) KRW tn
% of total labor force
Nov Dec Jan Dec Jan Feb Mar 1-14
Seasonally adjusted 3.5 3.6 3.5 4.0 Total deposits -2.8 4.6 15.1 0.2
Not adjusted 3.5 3.8 3.8 4.5 Demand -7 2.1 2.1 -0.4
See main story. Time and savings 4.2 2.5 12.9 0.6
76
JPMorgan Chase Bank, Singapore Economic Research
Matt Hildebrandt (65) 6882-2253 Global Data Watch
matt.l.hildebrandt@jpmorgan.com March 18, 2011
Vietnam: official exchange rate

ASEAN: Indonesia, Malaysia, VND per USD
Philippines, Singapore, Thailand, Vietnam 21000
20000
• Policy tightening in Vietnam has become more ag-
19000
gressive and consistent over the last month
18000
• But, inflation still likely to spike this month from hike
in domestic energy and electricity prices 17000
16000
• Policy direction more constructive but near- and me-
dium-term problems still need to be addressed 15000
2005 2006 2007 2008 2009 2010 2011
We are becoming more positive on the outlook for Viet-

nam, primarily due to the more assertive and consistent Vietnam: monetary policy rates
policy direction of late. Since early February, we have seen %
much more aggressive, consistent, and prudent policies pri- Repo rate (OMO)
16
oritizing economic stability over growth. Tighter monetary
policy, slower credit growth, more prudent fiscal policy, 14 Refinance
and a more flexible exchange rate should lead to a more rate
12
stable currency and balance of payments position. 10
Inflation stabilized in February despite the devaluation, as 8

most business in the country was already being priced at the 6
Discount rate
unofficial exchange rate. Thus, by bringing the official VND 4
rate in line with unofficial black market rate, the devaluation 2007 2008 2009 2010 2011
did not have much effect on the real economy. However, the
government raised domestic energy and electricity prices,
both of which are partly subsidized. These price hikes will Vietnam: compulsory reserve requirement and inflation
% %oya
cause a jump in inflation this month. As a result we see infla-
30 CRR Inflation 30
tion still rising over the next few months before stabilizing
and eventually slowing gradually later in the year. 25 25
20 20
Despite these improvements, some policy concerns remain.
FX reserves are still unknown, bank deposit rate caps are 15 15
still in place and inconsistent with recent policy tightening, 10 10
monetary policy effectiveness is unclear, and transparency 5 5
within the economy and communication by the government
0 0
is poor. Over the medium term, freeing up deposit rates, 2005 2006 2007 2008 2009 2010 2011
clarifying and developing the monetary policy framework,
and improving transparency and communication should be
achieved to reduce future economic volatility. Vietnam: trade balance
US$ bn, both scales 12-month rolling sum
Monthly
More prudent policy direction being taken 1 6
Immediately following Tet New Year, the government de- 0 0

valuated the official VND rate by 8.5%, much larger than
-1 -6
the usual 2%-5% moves of the past. This brought the offi-
cial rate in line with the unofficial black market rate, and to -2 -12
provide more credibility going forward, the government -3 -18
announced that it would it would set the daily official rate
with more flexibility than in the past to keep it more in line -4 -24
with market prices. The government introduced several Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11
77
Matt Hildebrandt (65) 6882-2253 ASEAN
other measures as well to stabilize the economy, including: Vietnam: important monetary policy rates
hiking the repo, refinance, and discount rates by 100bp, Base rate: former main policy rate and center of interest rate corridor; seems to
200bp, and 500bp, respectively, bringing them all to 12%, have lost effectiveness except for use in civil law
lowering the fiscal deficit target 0.3%-pt to 5.0% of GDP, Refinance theoretically marks the upper bound of the interest rate corridor;
rate: meant as a punitive lending rate for liquidity-short banks; access
cutting spending on specific SOE projects 10%, and lower-
requires higher administrative hurdles and can invite greater
ing credit (25% to 19%) and M2 (20% to 16%) growth tar- operational scrutiny; banks reportedly use as a source of capital for
gets. The government also has ordered state-owned enter- government approved projects
prises to remit foreign exchange earnings to the SBV, and Discount theoretically marks the lower bound of the interest rate corridor;
it is rationing USD loans to essential importers. This will rate: subject to quotas; mostly major state-owned banks access this
reduce the trade deficit and lead to a rise in FX reserves. window
Repo rate: rate at which the SBV performs open market operations; appears to
be the de facto policy rate
Inflation still to rise temporarily Compulsory this rate determines the amount of reserves a bank must hold against
In addition to the positive moves mentioned above, the reserves: deposits to maintain fluid operations
government also raised domestic fuel and electricity costs
to rationalize subsidy expenses. These moves will likely Vietnam: inflation
raise inflation around 1.5%-pts, and we now expect infla- %oya
tion to peak between 14%-15% from its February print of 30
12.3%oya. However, even with this jump in prices, our
forecast shows inflation starting to slow from March on-
wards, which leads us to think that the worst of the recent 20
inflation scare has past. Thus, we expect the over-year-ago CPI
inflation rate to stabilize in coming months before gradu-
10
ally slowing later in the year.
Core
Policy improvements still needed 0
03 05 07 09 11
While the government is finally sending more clear and
consistent signals about prioritizing economic stability over Vietnam: contribution to CPI by major components
growth, some policy concerns remain. In particular, the %-pt contribution to %oya CPI inflation
monetary framework remains weak and transmission from
policy to market rates is poor due to operational opaque- 14
12
ness, policy inconsistency, and regulatory distortion. As a
10
result, market rates have not moved much in response to
8
policy rate tightening (most market rate tightening occurred 6
before December), and the bank deposit rate cap of 14% 4
keeps lending rates lower than would be otherwise despite 2
some circumvention by banks of this restriction . 0
Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11
Policy communication is also poor. The market is not in- Other Housing Transport Total food products
formed of policy meetings before they take place, and the
monetary framework is confusing. Our understanding is that Vietnam: consumer prices
the refinance rate is meant to be the upper bound of the %
Annualized
policy rate corridor while the discount rate the lower bound. 40
Currently, all rates, including the repo rate, are at 12% and
the base rate, which had previously been the policy rate but 30
Over-year-ago
seems to have been abandoned, is still at 9%. In addition to
20
improving communication, transparency must improve. The
government has not released FX reserve data since 3Q10, 10
leaving the market uninformed of the actual level. This en-
0
courages market uncertainty and speculation about the actual
level currently, which at times, can be more harmful than -10
just confirming lower than ideal FX reserve levels. 2006 2007 2008 2009 2010 2011
78
Indonesia: The Philippine fiscal balance posted a surplus of PHP13.4

billion in January following December’s sizeable PHP44.6
Data releases and forecasts billion deficit. This is a very positive start for 2011 consider-
ing that the government averaged a monthly deficit of
Week of March 21 - 25 PHP26 billion in 2010, and this marks the first time since
No data releases. 1998 that the budget is starting the year in the black. More-
over, the improvement was due to a combination of expendi-
Review of past week’s data ture restraint and rise in revenues. Boosting revenues has
been particularly troublesome for the government in the past
No data released. but perhaps its efforts are starting to pay off.
Malaysia: The government recently released its full-year budget figures
that showed the deficit narrowing to 3.7% of GDP in 2010
Data releases and forecasts from 3.9% of GDP in 2009. The PHP314 billion deficit com-
pared favorably to the official target of PHP325 billion (re-
Week of March 21 - 25 vised up around midyear last year from below PHP300 billion
initially), and it shows that since coming to the power the
Wed Consumer prices Aquino administration has made some important strides in
Mar 23 % change improving the fiscal position. The government is targeting a
5:00pm Nov Dec Jan Feb deficit of PHP300 billion this year, about 3.3% of GDP, but
we think the outcome could surprise on the upside slightly.
%oya 2.0 2.2 2.4 2.2 To be sure, the January figure was flattered with PHP24 bil-
%m/m sa 0.6 0.7 0.4 0.5
lion in dividend payments from state agencies. However,
Review of past week’s data even without the dividends the deficit would have been only
around PHP11 billion, less than half the size of the 2010
No data released. monthly average. Importantly, revenues rose sharply, up
57.6%m/m sa (including dividends) while spending was
Philippines: down almost 9%. This trend will likely be reversed in com-
ing months but the fiscal position does appear to be on a
Data releases and forecasts gradually improving trajectory.
OFW remittances (Mar 15)
Thu BSP monetary policy meeting % change
Mar 24 % p.a. Nov Dec Jan
%oya 10.5 8.1 7.8 7.6
%m/m sa 0.1 -2.0 0.6
Dec Jan Feb Mar
Reverse repo rate 4.00 4.00 4.00 4.25
Overseas foreign worker (OFW) remittances rose 0.6%m/m
sa in January, leaving inflows up 7.6%oya, slightly higher
Inflation has risen quickly in recent months. Though than the 8.1% growth in December 2010. In level terms, re-
only at 4.3%oya, it appears set to breach the upper mittances fell hard due to seasonal factors and were only
bound of BSP’s 3%-5% inflation target range. We thus US$1.47 billion for the month compared to the $1.69 billion
expect BSP to hike the policy rate 25bp next week, the record set in December. However in seasonally adjusted
first rate hike of a tightening cycle, as an attempt to terms, the level compared more favorably at $1.60 billion
keep inflation expectations anchored. versus $1.62 billion in December.
Fri Merchandise trade The soft start to the year combined with the weak December
Mar 25 US$ bn, nsa print leaves our annual remittance forecast lower than in
9:00am Oct Nov Dec Jan 2010. While 2010 remittances rebounded nicely from the
global recession, up 8.2% in 2010 after slowing to 5.6% in
Imports 4.9 4.9 4.9 4.9 2009, remittance growth this year is forecast to soften to
%oya 28.4 35.3 25.3 15.6 around 7%. Given the large size of remittances, estimated at
almost US$19 billion in 2010 (10% of GDP), the slower
Review of past week’s data growth forecast is not a big concern, especially since remit-
Government budget tances are nearly three times as large as the trade deficit.
Pesos bn
Nov Dec Jan
Balance 0.5 -44.6 __ 13.4
Revenue 111.5 103.2 __135.9
Expenditure 111.1 147.8 __122.5
79
Matt Hildebrandt (65) 6882-2253 ASEAN
Singapore: This dichotomy between electronics and non-electronics is

also observed across the region, with electronics softening
Data releases and forecast more than expected despite what has ostensibly been fairly
strong forward looking indicators—notably the new orders
Week of March 21 - 25 component of the global PMI and also in the new orders
component of the Singapore electronics PMI. While some of
Wed Consumer prices
this softness in electronics could reflect the Lunar New Year
Mar 23 % change
effect, this impact should also be been seen in the other ex-
port sectors but this has not been the case. Nonetheless,
%oya 3.8 4.6 5.5 5.9 there is little evidence to suggest that the recent data should
%m/m sa 0.4 0.8 1.3 0.9 mark a turn in what has otherwise been a positive uptrend in
Passthrough from high oil prices will likely persist, external demand following some softness in 3Q10.
which should push inflation higher. Looking ahead, exports to Japan are expected to have soft-
ened in March owing to the recent catastrophe though this is
Fri Industrial production
Mar 25 % change
expected to be a temporary dip rather than suggesting a
broader downshift in demand. The key metric for external
demand remains the PMIs, and this will need to be closely
%oya 40.4 9.0 10.5 3.9 watched given recent developments in commodity markets
%m/m sa 1.3 -12.1 15.4 -2.9 and the impact from natural disasters.
We expect IP to have softened last month as January
saw a big boost from electronics and nonelectronics
production. We expect some payback, and February is Thailand:
unlikely to repeat.
Retail sales (Mar 15)
No data releases.
% change
Nov Dec Jan Review of past week’s data
%oya -4.6 -1.1 -6.0 -0.4
No data released.
%m/m sa 0.8 2.7 0.3 -3.1
Retail sales fell a sharp 3.1%m/m sa and 4.7%3m/3m saar. Vietnam:

However, the decline reflected volatile auto sales that are
subject to government sales quotas. Exlcuding auto sales, Data releases and forecasts
retail sales were up 1.4%m/m sa and 7.7%3m/3m saar.
Merchandise trade (Mar 17)
During Consumer prices
US$ bn, nsa
Dec Jan Feb the week %oya
Dec Jan Feb Mar
Trade balance 4.6 4.7 4.3 3.8
Exports 32.4 33.0 30.0 28.4 All items 11.8 12.2 12.3 13.8
Non-oil domestic (NODX) 11.3 11.3 10.8 10.1 %m/m sa 1.8 1.5 1.1 2.0
%m/m sa, US$ terms 12.7 6.9 -1.8 -4.6 Higher domestic electricity and energy prices should
%oya, US$ terms 20.0 32.2 27.6 21.7
lift CPI inflation despite monetary tightening by SBV.
February non-oil domestic exports (NODX) fell 4.6%m/m sa in
US$ terms. Sequential trend growth was up a strong 26.5%3m/ Review of past week’s data
3m saar after some softness in January which owed in part to No data released.
the volatility in the pharmaceuticals sub-sector. While some of
the weakness might owe to the Lunar New Year effect, this
softness was not apparent across all the various product sub-
groups. In this context, electronics exports softened further,
echoing a trend that has been in place since 4Q10 even as non-
electronics and non-pharmaceuticals exports rose solidly, bol-
stered by exports of ships and machinery.
80
J.P. Morgan Chase Bank, Mumbai Economic Research
Jahangir Aziz (9122) 6157-3385 Global Data Watch
jahangir.x.aziz@jpmorgan.com March 18, 2011
Sajjid Z Chinoy (9122) 6157-3386
sajjid.z.chinoy@jpmorgan.com
India: February inflations stays stubbornly high

India % oya
Food
• RBI, as expected, raised policy rates 25bp and sig- 20
Headline
naled continuation of anti-inflationary stance 15
• February inflation surprises on the upside as nonfood 10

manufacturing inflation surges 5
• Tepid year-on-year January IP growth masks strong 0 Nonfood
sequential momentum
-5
Aug 07 Feb 08 Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11
As was widely expected, the RBI raised policy rates 25bp
at its mid-quarter review. The repo rate was raised to
6.75% from 6.5% and the reverse repo rate was raised to
5.75% from 5.5%. With February inflation accelerating to India: mfg ex-food momentum running close to double digits
8.3% driven by a sharp increase in nonfood manufacturing
% 3m3/m, saar
inflation (see below), a rate hike at the mid-policy review 20
was a foregone conclusion. Furthermore, with the RBI re- 15 Headline
peatedly emphasizing a “calibrated” approach to monetary 10
tightening, market participants had correctly anticipated 5
that the hike would be 25bp in magnitude. 0
-5
Nonfood manufacturing
RBI increases March inflation forecast -10
-15
to 8%oya
Aug 07 Feb 08 Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11
The RBI has again revised up its March inflation forecast
to 8%oya (J.P. Morgan: 8%). Recall, March inflation had
been forecast to print at 5.5% by the RBI until as recently
as December. It was revised up to 7% in the January review expectations of a moderation (consensus: 7.8%). Further-
and has now been revised up again, more realistically, to more, December inflation was revised upwards by a whop-
8%oya. The fact that March inflation has been revised up ping 100bp to 9.4%oya from the initial estimate of 8.4%.
by a whopping 250bp over the last two meetings, and
policy rates have been hiked hiked 50bp suggests a discon- It was widely anticipated that primary food inflation would
nect between the central bank’s concerns and its actions. moderate in February after surging more than 9% sequen-
tially over the last three months. As expected, primary food
RBI signals continuation of anti-inflation- inflation moderated to 10.6%oya (- 3.9%m/m sa) from
ary stance 15.6% in January, driven primarily by a reduction in fruits
and vegetables inflation. These prices had surged due to idio-
While broadly reiterating its FY11 GDP growth forecast of syncratic supply shocks over the last few months, and prices
8.5%oya, the RBI cited concerns that the investment cli- have mean-reverted once these shocks were reversed.
mate is being adversely impacted by continuing uncertainty
about global energy and commodity prices and could hurt
growth in the next fiscal year. Despite this, however, the
... and nonfood manufacturing inflation
central bank explicitly stated that it will persist with its momentum surges
anti-inflationary stance. With inflation still stubbornly high The moderation in food inflation, however, was more than
and significantly above the central bank’s comfort zone offset by a sharp surge in the prices of nonfood manufac-
more rate hikes are expected in 2011 including a likely tured prices in February, which rose 1.6%m/m sa—the
25bp hike at the next review on May 3. highest month-in-month increase since 2004. The sequen-
tial momentum of nonfood manufacturing inflation has
February inflation exceeds market risen secularly over the last five months and is currently
expectations... tracking 9.1%q/q saar.
February WPI inflation printed at 8.3%oya, accelerating

The India data watch is published biweekly, next on April 1.
further over January’s print of 8.2%oya and belying market
81
J.P. Morgan Chase Bank, Mumbai Economic Research
Jahangir Aziz (9122) 6157-3385 India
jahangir.x.aziz@jpmorgan.com March 18, 2011
Sajjid Z Chinoy (9122) 6157-3386
sajjid.z.chinoy@jpmorgan.com
This is not surprising in light of the sustained increase in India: industrial production
manufacturing input prices over the last six months as well Index sa, Sep08=100 Capital Consumer durables
as the fact that capacity is increasingly constrained in the 180
manufacturing sector in the absence of any meaningful ca-
pacity addition over the last two years. For these reasons, 160
we expect nonfood manufacturing inflation, and therefore 140
headline inflation, to remain sticky for much of 2011.
120
January IP growth tepid, but sequential 100

Consumer nondurables
momentum strong 80
January IP growth printed at 3.7%oya, higher than market Sep 08 Mar 09 Sep 09 Mar 10 Sep 10
expectations (consensus: 2.9 %; J.P. Morgan: 3.1 %) even
as December IP was revised up to 2.5%oya from the initial
estimate of 1.6%oya. While the year-on-year growth rates
appear to be tepid (December 2010 primarily on account of Data releases and forecasts
the high base from December 2009), they are masking the
strong sequential momentum of IP growth in the last two Weeks of March 21 - April 1
months which, when annualized, has been running at
double digits. Specifically, December IP grew at 2.8%m/m Fri Merchandise trade
sa and, on top of that, January IP rose 1.6%m/m sa. Apr 1 US$ bn, nsa
Dec Jan Feb Mar
For a change, the sequential growth was also broad-based. Trade balance -8.9 -2.6 -7.9 __
Exports 18.9 22.5 20.6 __
While basic and intermediate goods posted stable year-on- %oya 26.5 36.4 32.4 __
year growth in January, their sequential monetum contin- Imports 27.7 25.1 28.5 __
ued to be strong (2.2%m/m sa and 2.3% m/m sa).The de- %oya 12.1 -11.0 13.1 __
Oil 7.7 6.9 7.8 __
cline in capital goods on a year-on-year basis (-18.1%oya) Non-oil 20.0 18.2 20.7 __
was deceptive because sequential growth was buoyant
(6.1%m/m sa). Fri Manufacturing PMI survey
Apr 1 2005=100, sa
Finally, consumer goods also posted healthy sequential Jan Feb Mar
gains. While consumer durables growth moderated to 1.3 % Index 56.8 57.9 __
on a monthly sequential basis, this is only because the De-
cember numbers were revised upwards such that durables Review of past two weeks’ data
surged in December (17 % m/m, sa). Encouragingly, non-
durables posted healthy sequential growth for a second
Industrial production (Mar 11)
month, after spectacular non-performance for most of 2010.
%oya nsa
Nov Dec Jan
Exports surge likely driving IP momentum
Overall 3.6 1.6 2.5 __ 3.7
The strong sequential momentum in IP is not entirely sur- %m/m, sa -2.7 1.2 2.0 __ 1.2
prising because there is an increasingly strong correlation Mining 7.4 3.8 5.7 __ 1.6
Manufacturing 3.2 1.0 2.0 __ 3.3
between merchandise export growth and IP growth. With Electricity 4.6 6.0 __ 10.5
exports surging over the last few months (and the provi-
sional information on February exports pointing to a whop-
Wholesale prices (Mar 14)
ping 50.2%oya increase), it was broadly expected that IP %oya
would grow strongly in sequential terms. Furthermore, with Dec Jan Feb
new export orders bouncing back sharply in the February
PMI, strong global demand and export growth should pro- Overall 8.4 9.4 8.2 __ 8.3
Primary 16.5 18.4 17.3 __ 14.8
vide support for IP growth even as the domestic economy Energy group 11.2 11.3 11.4 __ 11.5
seems to be slowing down gradually. Manufactured products 4.5 5.3 3.8 __ 4.9
82
Sin Beng Ong (65) 6882-1623 Global Data Watch
sinbeng.ong@jpmorgan.com March 18, 2011
be hard to substitute in the short term. How this potential

Asia focus: regional trade sand in the wheels of the regional production network might
trends with Japan affect trade flows remains to be seen.
EM Asia: exports
The direct regional economic impact from the catastrophe in
%oya
Japan remains unclear at this point as events unfold. While
Emerging Asia’s trade exposure to Japan has been declining 30 Overall Ex. Japan 3
over the past decade, falling to 10.2% of total trade in 2010 20 2
from 15% in 2000, it is not insubstantial given the openness
of the region to trade (table and first chart). 10 1
0 0
Part of the decline in regional trade with Japan owes to the
changing trade patterns following China’s accession to the -10 -1
%-pt contribution to oya growth from Japan
WTO in 2001, which effectively led to shifts in regional sup- -20 -2
ply chains, reflected for instance in the offshoring of Japa- 00 02 04 06 08 10
nese production to China, possibly at the expense of other
regional manufacturing hubs (chart below). This boosted Emerging Asia: trade with Japan
China’s exports, reflected to some degree in the higher share % of total
of machinery and transport equipment back to Japan which 2000 2002 2004 2006 2008 2010 Change1
2
is either further processed for re-export or consumed as final EM Asia total trade 15.4 14.1 13.5 11.5 10.4 10.2 -3.3
demand. At another level, although relative import shares Exports to Japan 12.2 11.1 10.1 8.9 8.0 7.5 -2.6
from Japan have also declined, the data do not fully capture Imports from Japan 18.8 17.3 17.1 14.4 13.1 13.1 -4.0
the intricacies of the production networks around the region. China total trade 17.5 16.4 14.5 11.8 10.4 10.0 -4.5
Of China’s imports from Japan, around 18% of the total con- Exports to Japan 16.7 14.9 12.4 9.5 8.1 7.7 -4.7
sists of machinery and transport equipment, and this figure Imports from Japan 18.4 18.1 16.8 14.6 13.3 12.7 -4.1
has been relatively stable since 2005. These imports may Hong Kong total trade 8.9 8.4 8.8 7.7 7.2 6.8 -2.0
reflect key intermediate inputs into final products which may Exports to Japan 5.5 5.4 5.3 4.9 4.3 4.2 -1.1
Imports from Japan 12.0 11.3 12.1 10.3 9.8 9.2 -3.0
China and Malaysia: machinery and tranport equipment exports
Indonesia total trade 20.7 18.6 18.7 16.8 16.1 14.6 -4.1
% of exports to Japan
Exports to Japan 23.2 21.1 22.3 21.6 20.3 16.3 -6.0
60 Imports from Japan 16.1 14.1 13.1 9.0 11.7 12.5 -0.6
From China
Korea total trade 15.7 14.3 14.2 12.4 10.4 10.4 -3.8
50
Exports to Japan 11.9 9.3 8.5 8.2 6.7 6.0 -2.5
Malaysia total trade 16.4 14.2 12.7 10.9 11.5 11.4 -1.4
30
Exports to Japan 13.1 11.1 10.1 8.9 10.7 10.4 0.3
20 From Malaysia Imports from Japan 20.5 17.8 15.9 13.3 12.5 12.6 -3.4
Philippines total trade 16.7 17.3 18.7 15.3 13.5 13.7 -5.0
10
93 95 97 99 01 03 05 07 09 Exports to Japan 14.7 15.0 20.1 16.7 15.7 15.2 -4.9
China: imports of machinery and transport equipment
Singapore total trade 12.3 9.7 8.2 6.8 6.5 6.2 -2.1
% of total imports Exports to Japan 7.5 7.1 5.8 5.5 4.9 4.7 -1.2
To Korea and Taiwan Taiwan total trade 19.0 16.0 16.4 14.7 12.9 13.3 -3.1
25 Exports to Japan 11.1 9.1 7.6 7.3 6.9 6.6 -1.0
20
Thailand total trade 19.5 19.2 19.0 16.7 15.2 15.7 -3.3
Exports to Japan 15.0 15.0 14.2 12.9 11.3 10.5 -3.6
15 To Japan
1. 2010 less 2004
10
93 95 97 99 01 03 05 07 09 2. Total trade (exports+imports) with Japan
83
Daniel Silver (1-212) 622-6039 Global Data Watch
daniel.a.silver@jpmorgan.com March 18, 2011
US economic calendar
Monday Tuesday Wednesday Thursday Friday
21 Mar 22 Mar 23 Mar 24 Mar 25 Mar
Existing home sales (10:00am) FHFA HPI (10:00am) New home sales (10:00am) Initial claims (8:30am) Real GDP (8:30am)
Feb 5.15mn Jan -0.2% (-4.4%oya) Feb 290,000 w/e prior Sat 380,000 4Q final 3.2%
Richmond Fed survey (10:00am) Durable goods (8:30am) Consumer sentiment (9:55am)
Mar Fed Chairman Bernanke speaks to Feb 3.2% Mar final 68.0
bankers in San Diego (12:00pm) Ex transportation 2.5%
Dallas Fed President Fisher speaks at Minneapolis Fed President Kocherlakota
Frankfurt Finance Summit (7:30am) Auction 10-year TIPS (r) $11 bn speaks in France (5:00am)
Cleveland Fed President Pianalto Announce 2-year note $35 bn Dallas Fed President Fisher speaks in
speaks on economy in Akron (8:00am) Announce 5-year note $35 bn Brussels (7:30am)
Announce 7-year note $29 bn Chicago Fed President Evans speaks to
reporters in Chicago (8:30am)
Fed Governor Duke speaks to Atlanta Fed President Lockhart speaks
economists in Virginia (7:30pm) on economy in Florida (9:15am)
Philadelphia Fed President Plosser
speaks on monetary policy in New York
(12:15pm)
28 Mar 29 Mar 30 Mar 31 Mar 1 Apr
Personal income (8:30am) S&P/Case-Shiller HPI (9:00am) ADP employment (8:15am) Initial claims (8:30am) Employment (8:30am)
Feb Jan Mar w/e prior Sat Mar
Pending home sales (10:00am) Consumer confidence (10:00am) Chicago PMI (9:45am) ISM manufacturing (10:00am)
Feb Mar Auction 7-year note $29 bn Mar Mar
Dallas Fed survey (10:30am) Factory orders (10:00am) Construction spending (10:00am)
Mar Auction 5-year note $35 bn St. Louis Fed President Bullard speaks Feb Feb
in London (1:00pm) KC Fed survey (11:00am) Light vehicle sales
Auction 2-year note $35 bn St. Louis Fed President Bullard speaks Mar Mar
on monetary policy in Prague
Atlanta Fed President Lockhart speaks Richmond Fed President Lacker speaks Philadelphia Fed President Plosser
on US economy in Atlanta (12:40pm) at credit symposium in Charlotte speaks on economy in Harrisburg, PA
Chicago Fed President Evans speaks (10:30am) (8:15am)
on economy in South Carolina (4:00pm) Fed Governor Tarullo speaks at credit New York Fed President Dudley speaks
symposium in Charlotte (12:30pm) in Puerto Rico (9:00am)
4 Apr 5 Apr 6 Apr 7 Apr 8 Apr
Atlanta Fed President Lockhart speaks ISM nonmanufacturing (10:00am) Atlanta Fed President Lockhart gives Initial claims (8:30am) Wholesale trade (10:00am)
on economy in Florida (9:05am) Mar remarks in Georgia (8:20am) w/e prior Sat Feb
Fed Chairman Bernanke speaks at
Consumer credit (3:00pm)
conference in Atlanta (7:15pm)
FOMC minutes Feb Atlanta Fed President Lockhart speaks
Chain store sales on economy in Knoxville (8:00am)
Atlanta Fed President Lockhart gives Mar
remarks in Georgia (8:25am)
Philadelphia Fed President Plosser Announce 3-year note $32 bn
moderates panel in Georgia (11:15am) Announce 10-year note (r) $21 bn
Minneapolis Fed President Kocherlakota Announce 30-year bond (r) $13 bn
gives remarks in Minneapolis (12:45pm)
Richmond Fed President Lacker speaks
on financial regulation in Virginia
(8:20am)
Fed Vice Chairman Yellen speaks to NFIB survey (7:30am) Retail sales (8:30am) Initial claims (8:30am) CPI (8:30am)
Economic Club in New York (12:00pm) Mar Mar w/e prior Sat Mar
International trade (8:30am) Business inventories (10:00am) PPI (8:30am) Empire State survey (8:30am)
Feb Feb Mar Apr
Import prices (8:30am) JOLTS (10:00am) TIC data (9:00am)
Mar Feb Auction 30-year bond (r) $13 bn Feb
Federal budget (2:00pm) Beige book (2:00pm) Announce 5-year TIPS $12 bn Industrial production (9:15am)
Mar Mar
Minneapolis Fed President Kocherlakota
Auction 10-year note (r) $21 bn Consumer sentiment (9:55am)
speaks on economic development in
Auction 3-year note $32 bn Montana (9:20am) Apr preliminary
Richmond Fed President Lacker speaks

on economy in Baltimore (6:45pm)
84
Euro area economic calendar


Spain: Euro area: Euro area: Euro area:
ECB member Gertrude Tumpel- Trade balance EC cons. conf. prelim (4:00pm) PMI flash (10:00am) Mar M3 (10:00am)
Gugerell speaks in Salzburg, Jan Mar -11.0%bal, sa Mfg 58.0 Index, sa Mar 0.5%m/m, sa
Austria (5:00pm) Netherlands: Industrial new orders (11:00am) Jan Services 55.8 Index, sa Germany:
ECB president Jean-Claude CBS cons. conf. (9:30am) Belgium: Composite 57.0 Index, sa Gfk cons. conf. (8:00am) Mar
Trichet speaks in Brussels, Mar BNB bus. conf. (3:00am) Germany: IFO business survey (10:00am)
Belgium (3:00pm) Mar PMI flash (9:30am) Mar Mar 110.3 Index, sa
Mfg 61.5 Index, sa France:
Services 57.6 Index, sa INSEE cons. conf. (8:45am)
Composite 59.7 Index, sa Mar
France: Cons. of mfg goods (8:45am)
PMI flash(9:00am) Mar Feb
Mfg 55.8 Index, sa GDP final (7:00am)
Services 58.7 Index, sa 4Q 1.4%q/q, saar
Composite 58.0 Index, sa Spain:
INSEE bus. conf. (8:45am) Mar PPI (9:00am) Feb
Italy: Netherlands:
ISAE cons. conf. (10:00am) Mar CBS bus. conf. (9:30am) Mar
Netherlands:
ECB member José Manuel
GDP final (9:30am) 4Q
González-Páramo speaks in
Washington, D.C., U.S.A
(9:15pm)

Germany: Germany: Euro area: Germany: Euro area:
Import prices (8:00am) Feb CPI 6 states and prelim EC bus. conf. (11:00am) Mar Employment (9:55am) Feb PMI Mfg final (10:00am) Mar
Retail sales (8:00am) Feb (8:00am) Mar EC cons. conf. (11:00am) Mar Unemployment (9:55am) Mar Unemployment (11:00am)
France: Italy: France: Feb
Consumption of mfg goods Contractual wages (10:00am) Feb PPI (8:45am) Feb Germany:
(8:45am) Feb Spain: Italy: PMI Mfg final (9:55am) Mar
Italy: HICP flash (9:00am) PPI (10:00am) Feb France:
ISAE bus. conf. (9:30am) Mar Mar CPI prelim (11:00am) Mar PMI Mfg final (9:50am) Mar
Belgium: Italy:
CPI (11:15am) PMI Mfg (9:45am) Mar
Mar Spain:
PMI Mfg (9:15am) Mar

Euro area: Euro area: Euro area: Euro area: Germany:
PPI (11:00am) Feb PMI services & composite final GDP final (11:00am) 4Q ECB rate announcement Foreign trade (8:00am)
(10:00am) Mar Germany: (1:45pm) 25bp hike expected Feb
Retail sales (11:00 am) Feb Industrial new orders (12:00pm) Feb Governing council meeting of the Netherlands:
Germany: ECB, Frankfurt Industrial production (9:30am)
PMI services & composite final Germany: Feb
(9:55am) Mar Industrial production (12:00pm)
France: Feb
PMI services & composite final Netherlands:
(9:50am) Mar CPI (9:30am) Mar
Italy:
PMI services & composite
(9:45am) Mar
Spain:
PMI services & composite
(9:15am) Mar

France: Germany: Euro area: Euro area: Euro area:
Industrial production (8:45am) CPI final (8:00am) Industrial production (11:00am) ECB monthly bulletin (10:00am) HICP final (11:00am)
Feb Mar Feb Mar
Italy: Zew bus. survey (11:00am) Apr France: Foreign trade (11:00am)
Industrial production (10:00am) Spain: CPI (8:45am) Feb
Feb CPI final (9:00am) Mar Mar Italy:
Foreign trade (10:00am) Feb
CPI final (10:00am)
Mar
Highlighted data are scheduled for release on or after the date shown. Times shown are local.
85
JP Morgan Securities Japan Co., Ltd Economic Research
Miwako Nakamura (81-3) 6736-1167 Global Data Watch
Japan economic calendar

Holiday: Japan All sector activity index Flow of funds Trade balance Nationwide core CPI
(1:30 pm) Jan 2.6%m/m, sa (8:50am) 4Q (8:50 am) Feb 802 billion yen, nsa (8:30 am) Feb -0.3%oya
BoJ Board member Miyao’s Corporate service prices
Auction 2-month bill address in Oita prefecture Auction 2-year note (8:50 am) Feb -1.2%oya
(11:10am)
Auction 3-month bill
During the week: Nationwide department store sales Feb -2.0%oya
28 Mar 29 Mar 30 Mar 31 Mar 1Apr
All household spending IP preliminary PMI manufacturing BoJ Tankan

(8:30 am) Feb’ (8:50 am) Feb (8:15 am) Mar (8:50 am) 1Q
Unemployment rate Nominal wages Auto registrations
(8:30 am) Feb (10:30 am) Feb (2:00 pm) Mar
Job offers to applicants ratio Housing starts
(8:30 am) Feb (2:00 pm) Feb Auction 3-month bill
Total retail sales Construction orders
(8:50 am) Feb (2:00 pm) Feb
Shoko Chukin small business
sentiment Mar
Monetary base PMI services/composite Coincident CI BoJ Monetary Policy Meeting and Current account
(8:50 am) Feb (8:15 am) Mar (2:00 pm) Feb statement (8:50 am) Feb
BoJ Monetary Policy Meeting BoJ Governor Shirakawa’s press Economy Watchers survey
Auction 3-month bill conference (3:30 pm) (2:00 pm) Mar
Auction 10-year bond Auction 6-month bill BoJ monthly economic report
(2:00 pm)
During the week: Cabinet Office private consumption index Feb
Private machinery orders M2 Corporate goods prices Reuters Tankan IP final

(8:50 pm) Feb (8:50 am) Mar (8:50 am) Mar (8:30 am) Apr (1:30 pm) Feb
BoJ Governor Shirakawa’s Minutes of Mar 14 BoJ Monetary
address at branch managers’ Policy Meeting (8:50 am) Auction 3-month bill Auction 5-year note Auction 1-year bill
meeting
Auction 2-month bill
Auction 30-year bond
86
Silvana Dimino (1-212) 834-5684 Global Data Watch
silvana.dimino@jpmorgan.com March 18, 2011
Canada economic calendar

Retail sales (8:30am) Saturday, 26 March

Jan 1.2% BoC Governor Mark Carney
Ex autos 1.0% speaks at an Inter-American
Leading indicators (8:30am) Development Bank seminar on
Feb Global imbalances and Latin
FY2011 Federal Budget America in Calgary, Alberta
presented to Parliament (10:30am)
(11:30am)
BoC Deputy Governor Jean IPPI (8:30am) Monthly GDP (8:30am)

Boivin speaks on “The Great Feb Jan
Recession in Canada: Payroll employment (8:30am)
Perceptions and Reality” at a Jan
Montreal CFA Society event in
Montreal, Quebec (12:45pm)
BoC Business Outlook Survey CFIB Business Barometer Building permits (8:30am) Employment (7:00am)
(10:30am) 1Q Index (7:00am) Feb Mar
BoC Senior Loan Officer Mar Housing starts (8:15am)
Survey (10:30am) 1Q Ivey PMI (10:00am) Mar
Mar
International trade (8:30am) Monetary Policy Report Manufacturing sales (8:30am) Nonresidential construction
Feb (10:30am) Feb (8:30am) 1Q
New house price index New vehicle sales (8:30am) Existing home sales (9:00am)
(8:30am) Feb Mar
Feb TNS Canada Consumer
BoC rate announcement Confidence Index (9:00am)
(9:00am) Mar
87
Tejal Ray (212) 834-8580 Global Data Watch
Laura Karpuska (55 11) 3048-3322 March 18, 2011
Latin America economic calendar

Holiday: Colombia and Mexico Mexico: Argentina: Brazil: Brazil:
Central bank reserves IP Unemployment rate Fipe CPI
Aggregate S/D Feb Feb 6.4% m/m nsa Mar 17 0.39% m/m nsa
4Q 8.3%oya Trade balance Colombia: Current account
Feb GDP Feb -US$3.7bn
Brazil: 4Q 4.1% oya sa FDI
FGV CPI IPC-S Mexico: Feb US$7.0bn
Mar 15 0.65% m/m nsa Unemployment rate Mexico:
IPCA-15 Feb 5.2% Trade balance
Feb 0.52% m/m nsa CPI Feb US$132 mn
Mexico: Mar 1H
Retail sales Core CPI Holiday: Argentina
Jan 4.1%oya Mar 1H
Holiday: Argentina
During the week: Venezuela: Unemployment rate Feb

Argentina: Brazil: Brazil: Argentina: Brazil:
Economic activity Banking Credit Report FGV IGP-M Construction activity FGV CPI IPC-S Mar 31
Jan Feb Mar Feb IP Feb
Mexico: Mexico: Central government budget Brazil: PMI Manufacturing Mar
Economic activity Central bank reserves Feb Primary budget Trade balance Mar
Jan Chile: Feb Chile:
IP Net debt as % of GDP BCCh minutes
Feb Feb Colombia:
Retail sales Colombia: BanRep minutes
Feb Unemployment Mexico:
Mexico: Feb Banxico expectations survey
PS budget balance Remittances Feb
Feb Peru:
CPI Mar
WPI Mar
During the week: Argentina: Government tax revenue Mar

Brazil: Chile: Brazil: Brazil: Brazil:
FIPE CPI Economic activity Vehicle sales IGP-DI Mar FGV CPI IPC-S
Mar Feb Mar IPCA Mar Apr 7
Mexico: Colombia: Colombia: Chile: Chile:
PMI manufacturing PPI CPI Trade balance Mar CPI
Mar Mar Mar Mexico: Mar
PMI nonmanufacturing Mexico: Ecuador: CPI Mar Mexico:
Mar Central bank reserves CPI Core Mar Fixed investment
Consumer confidence Mar Peru: Jan
Mar BCRP meeting
During the week: Venezuela: CPI Mar Colombia: Vehicle sales Mar Brazil: CAGED Formal Job Creation

Brazil: Brazil: Argentina:
IGP-M 1st release Retail sales CPI Mar
Apr Apr WPI Mar
Mexico: Chile: Brazil:
IP BCCh meeting FGV IGP-10 Apr
Feb Mexico: Colombia:
Central bank reserves Trade balance Feb
Auto report Mexico:
Mar Banxico meeting
Peru: Peru:
Trade balance GDP Feb
Feb Unemployment Mar
88
Allan Monks (44-20) 7777-1188 March 18, 2011
Nicola Mai (44-20) 7777-3467
UK/Scandinavia economic calendar


United Kingdom: United Kingdom: United Kingdom: United Kingdom:
Rightmove HPI (12:01am) Mar CPI (9:30am) MPC minutes (9:30am) Retail sales (9:30am)
Feb 4.3 %oya A 3-5-1 vote is expected with Feb -0.6 %m/m, sa
Public sector finances (9:30am) Sentance, Weale, and Dale Sweden:
Feb dissenting for higher rates, and PPI (9:30am)
PSNB 5.0 £bn, nsa Posen for more QE. Feb
CBI industrial trends (11:00am) BBA mortgage lending (9:30am)
Mar -10 %bal (Total order books) Feb
The Chancellor of the Exchequer
presents his Budget Statement
(12:30pm)
Sweden:
Business tendency (9:15am) Mar
Consumer conf. (9:15am) Mar
Norway:
AKU unemployment (10:00am) Jan

Sweden: United Kingdom: United Kingdom: United Kingdom: United Kingdom:
Retail sales (9:30am) Business investment final (9:30am) Index of services (9:30am) GfK cons. conf. (12:01am) PMI mfg (9:30am)
Feb 4Q Jan Feb Mar
Trade balance (9:30am) Feb GDP final (9:30am) 4Q CBI survey of distributive trades BoE credit conditions survey 1Q Sweden:
M4 & M4 lending final (9:30am) (11:00am) Mar Norway: PMI (08:30am) Mar
Feb Sweden: Credit indicator (10:00am) Norway:
BoP (9:30am) 4Q Wage Stats (9:30am) Jan Retail sales (10:00am) Feb Labor directorate unemployment
Net lending to individuals (10:00am) Mar
(9:30am) Feb PMI mfg (9:00am) Mar
NEF HPI (11:00am) Mar
During the week : United Kingdom: N’wide HPI (8:00am) Mar

United Kingdom: United Kingdom: United Kingdom: United Kingdom: United Kingdom:
PMI construction (9:30am) PMI services (9:30am) BRC retail sales monitor (12:01am) MPC rate announcement & Asset PPI (9:30am)
Mar Mar Mar purchase target (12:00pm) Mar
BoE housing equity withdrawal Industrial production (9:30am)Feb No change expected Construction output (9:30am)
(9:30am) 4Q New car regs. (9:00am) Mar Norway: Feb
Markit jobs report (12:01am) Mar IP Mfg (10:00am) Feb Sweden:
Industrial production (9:30am) Feb
Industrial orders (9:30am) Feb
During the week : United Kingdom: Halifax HPI (8:00am) Mar

Norway: United Kingdom: United Kingdom: Norway:
CPI (10:00am) Mar RICS HPI (12:01am) Mar Labor market statistics (9:30am) Trade balance (10:00am)
PPI (10:00am) Mar DCLG HPI (9:30am) Feb Mar Mar
Trade balance (9:30am) Feb
CPI (9:30am) Mar
Sweden:
CPI (9:30am) Mar
During the week : United Kingdom: N’wide cons. conf. (8:00am) Mar
89
Anthony Wong (44-20) 7777-3750 Global Data Watch
anthony.x.wong@jpmorgan.com March 18, 2011
Emerging Europe/Middle East/Africa economic calendar


Poland: Poland: Hungary: Czech Rep: Turkey:
Current account (2:00pm) Jan Core inflation (2:00pm) Jan & Feb Retail sales (9:00am) Jan -1%oya Monetary policy announcement Capacity utilization (4:30pm) Mar
EUR-1475mn 1.6%oya & 1.8%oya Poland: (1:00pm) No change 72.8%
South Africa: Retail sales value (10:00am) Feb South Africa: Russia:
Current account (10:00am) 4Q - 8.5%oya Monetary policy announcement Monetary policy announcement
2.6% of GDP Turkey: (3:00pm) No change 25bp hike in deposit rate
Quarterly Bulletin (10:00am) 4Q Monetary policy announcement
(2:00pm) No change
South Africa:
CPI (9:00am) Feb 3.7%oya
Holiday: South Africa
During the week:

Hungary: Romania: Hungary: Hungary: Czech Rep:
Monetary policy announcement Monetary policy announcement PPI (9:00am) Feb Current account (8:30am) 4Q PMI (9:30am) Mar
(2:00pm) No change (5:30pm) No change South Africa: Poland: Hungary:
Israel: South Africa: Credit & money (8:00am) Feb Current account (2:00pm) 4Q PMI (9:00am) Mar
Monetary policy announcement Trade balance (2:00pm) Feb Budget (2:00pm) Feb Turkey: Poland:
(5:30pm) No change GDP (10:00am) 4Q 6.5%oya PMI (9:00am) Mar
Foreign trade (10:00am) Feb Russia:
-$6.9bn Manufacturing PMI (8:00am) Mar
South Africa: Turkey:
PPI (11:30am) Feb PMI (10:00am) Mar
Russia: South Africa:
GDP 4Q10 Kagiso PMI (10:00am) Mar
Vehicle sales (10:00am) Mar
During the week:

Czech Rep: Poland: Czech Rep: South Africa: Hungary:
Retail sales (9:00am) Feb Monetary policy announcement Industrial output (10:00am) Feb Gross reserves (8:00am) Mar Trade balance (10:00am) Feb
Romania: +25bp Trade balance (10:00am) Feb Romania:
Retail sales (10:00am) Feb Russia: Hungary: Industrial output (10:00am) Feb
Turkey: Services PMI (8:00am) Mar Central bank minutes (2:00pm) Turkey:
CPI (10:00am) Mar Industrial output (9:00am) Feb Industrial production (10:00am)
PPI (10:00am) Mar Feb
During the week:

Czech Rep: Hungary: Czech Rep: Czech Rep:
CPI (10:00am) Mar CPI (9:00am) Mar Current account (10:00am) Feb PPI (9:00am) Mar
Poland: Poland: Turkey:
Current account (2:00pm) Feb CPI (2:00pm) Mar Unemployment (10:00am) Jan
Romania: Romania: Israel:
CPI (10:00am) Mar Current account (2:00pm) Feb CPI (6:30pm) Mar
Trade balance (10:00am) Feb Israel:
Trade balance Mar
During the week: South Africa: Retail sales Feb, Manufacturing production
90
Prachi Priya (65) 6882-2311 March 18, 2011
Non-Japan Asia economic calendar

New Zealand: Taiwan: New Zealand: Hong Kong: Korea:
Credit card spending Unemployment rate Current account balance Trade balance (4:15 pm) Consumer survey (6:00 am)
Feb (4:00 pm) 4Q Feb HK$-31.3bn Mar 103, Index
Taiwan: Feb 4.7%, sa Singapore: New Zealand: Malaysia:
Export orders (4:00 pm) Hong Kong: CPI (1:00 pm) GDP 4Q CPI (5:00 pm)
Feb 10.7%oya CPI (4:15 pm) Feb 5.9%oya Philippines: Feb 2.2%oya
Feb 2.3%oya Taiwan: BSP monetary policy Philippines:
IP (4:00 pm) meeting 25 bp hike Imports (9:00 am)
Feb 16.2%oya Jan 15.6%oya
Singapore:
IP (1:00 pm) Feb 3.9%oya
During the week: Philippines: Budget balance Feb Vietnam: CPI Mar 13.8%oya

Taiwan: New Zealand: Korea: Australia: China:
Leading index (4:00 pm) Trade balance Feb GDP 4Q Building approvals PMI Mar
Feb Korea: New Zealand: Feb Korea:
Current account (8:00 am) Building consents Feb Private sector credit CPI (8:00 am) Mar
Feb Feb Trade balance (9:00 am)
Hong Kong: Mar
Retail sales Feb India:
Korea: Trade balance Feb
IP (8:00 am) Feb Indonesia:
Leading index (8:00 am) Feb Inflation (12:00 pm)
Service sector activity Mar
(8:00 am) Feb Trade balance (12:00 pm)
India: CAB 4Q Feb
Taiwan: Thailand:
CBC monetary policy meeting CPI (12:30 pm)
Thailand: Mar
Trade balance (2:30 pm) Feb
PCI (2:30 pm) Feb
PII (2:30 pm) Feb
IP (2:30 pm) Feb
During the week: Vietnam: Trade balance Mar GDP 1Q

Malaysia: Australia: Australia: Australia: Korea:
Trade balance (6:00 pm) Feb Trade balance Feb Home loans Feb Unemployment rate Mar Money supply Feb
RBA board meeting Taiwan: Malaysia:
Philippines: CPI (4:00 pm ) IP (12:00 pm) Feb
CPI (9:00 am) Mar Mar
Singapore:
PMI (9:30 pm) Mar
Holiday: China, Hong Kong,
Holiday: Taiwan Taiwan Holiday: Thailand
During the week:

Malaysia: Australia: Australia: Australia: China:CPI (10:00 am) Mar
IP (12:00 pm) NAB business confidence Westpac consumer confidence New motor vehicle sales PPI (10:00 am) Mar
Feb Mar Apr Mar FAI (10:00am) Mar
Taiwan: India: IP Feb Korea: India: WPI Mar Retail sales (10:00 am) Mar
Trade balance Indonesia: Unemployment rate New Zealand: IP (10:00 am) Mar
Mar Bank Indonesia monetary policy Mar Retail sales Feb Philippines:
meet Singapore: OFW remmittances Feb
Korea: Real GDP adv. (8:00 am) Korea:
BoK monetary policy meet 1Q Export price index Mar
Philippines: Import price index Mar
Exports Feb Singapore:
Retail sales (1:00 pm) Feb
Holiday: Philippines Holiday: Thailand Holiday: Thailand Trade balance (1:00 pm) Mar
During the week:

91
Michael Mulhall (1-212) 834-9123 Global Data Watch
michael.r.mulhall@jpmorgan.com March 18, 2011
Global Data Diary

Week / Weekend Monday Tuesday Wednesday Thursday Friday
19 - 25 March 21 March 22 March 23 March 24 March 25 March
Euro area United Kingdom Euro area Czech Republic Germany
• Trichet speech • CPI (Feb) • EC cons conf prelim (Mar) • CNB mtg: no chg • GfK cons conf (Mar)
• Indstrl new orders (Jan) • IFO bus survey (Mar)
Taiwan Euro area: PMI flash (Mar)
• Export orders (Feb) Taiwan Japan
France
• IP (Feb) • CPI (Feb)
United States • INSEE bus conf (Mar)
• Exstng home sales (Feb) Turkey Singapore
Hong Kong
• CBRT mtg: no chg • IP (Feb)
• Trade report (Feb)
United Kingdom Russia
• MPC minutes (Mar) Japan: Trade report (Feb) • CBR mtg: +25bp
Philippines
United States United States
• BSP mtg: +25bp
• New home sales (Feb) • GDP final (4Q)
• Bernanke speech South Africa • UMich cons sent fnl (Mar)
• SARB mtg: no chg
UK: Retail sales (Feb)
United States
• Durable goods (Feb)
26 Mar - 1 Apr 28 March 29 March 30 March 31 March 1 April
Germany Hungary Japan Euro area Germany Euro area
• Retail sales (Feb) • NBH mtg: no chg • All hhold spending (Feb) • EC cons conf final (Mar) • Labor mkt rprt (Feb/Mar) • Unemployment (Feb)
• CPI prelim (Mar) • Labor market report (Feb) • EC bus conf (Mar)
Israel Japan Japan
• Retail sales (Feb)
• BoI mtg: no chg Japan • PMI mfg (Mar) • BoJ Tankan (1Q)
• Shoko Chukin (Mar)
• IP prelim (Feb) • Auto regs (Mar)
United States Korea
Romania
• Personal income (Feb) Korea • IP (Feb) Korea
• BNR mtg: no chg
• Pending home sales (Feb) • GDP (4Q) • CPI (Mar)
Taiwan
United States • Trade report (Mar)
United States • CBC mtg: +12.5bp
• Case-Shiller HPI (Jan)
• ADP employment (Mar) United States
• CB cons conf (Mar) United Kingdom
• Employment (Mar)
• GfK cons conf (Feb)
• ISM mfg (Mar)
United States • Auto sales (Mar)
• Factory orders (Feb)
Global
• PMI mfg (Mar)
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Economic Research

March 18, 2011

Global Data Watch Contents

Global service-sector activity A limited policy response

Global economic outlook summary

G-3 economic outlook detail

2010 2011 2012

Central Bank Watch

The downward momentum in growth forecasts is worri- 3.4

Foreign exchange Ten-year Government bond yields

The fiscal issue too looks overstated as a yen risk. Even if

Selected recent research1 from J.P. Morgan Economics

developed market consumers -15 4.5

• Recovery in business inventory growth will boost glo- 8

This strong global growth trajectory owes partly to a solid 0

Economic Research Note Fed UST holdings as % of outstanding

• Halting reinvestment of maturing assets could be- 10

The minutes to the April 2010 FOMC meeting laid out a

Economic Research Note Euro area HICP inflation

higher in core inflation 4

We believe that the most important driver of core inflation

Our analysis finds these surveys to be good predictors of

Economic Research Note Northeast Japan and Tokyo metropolitan area

Japan to recover from the Iwate

disaster, but will take time

New constraint from power outages 800

However, last week’s earthquake appears to weigh on the 0

On the financial front, we have seen repatriation of assets, Hydroelectric

and the ugly 1

• RBNZ to leave policy settings unchanged until earth- 20

Slow start to reconstruction phase Contraction in GDP in 1Q11

Core PCE price index, with forecast for February

The direct effects on US economic activity in this scenario 360

The February report on housing starts and permits was very

Consumer price index

Euro area inflation

age. We would expect IP to strengthen further in February, Euro area employment

This week’s employment report for 4Q10 showed that the

National business surveys Demand and labor markets

Financial activity and public finance Review of past week’s data

Demand and labor markets Inflation

100 Producer prices

• BoJ injects abundant liquidity into banking system, 4 Current

A catastrophe on a scale never faced by Japan since the end -2

Data releases and forecasts Thu Customs-cleared international trade

Balance 468 580 192 720

Overall -1.1 -1.3 -1.1 -1.2

The corporate service price index for February probably

FY2010 FY2011 Construction spending (Mar 17)

Total,%m/m 1.0 1.1 0.8 0.9 2.2 1.5

Manufacturing and construction output

Retail sales volume: breakdown by sectors

Labor market conditions should continue Data releases and forecasts

Peru: real GDP by sector

The outlook remains positive for Peru, with growth momen-

Colombia regains investment grade 70

Wed Consumer confidence Peru:

Review of past week’s data

The policy dilemma facing the MPC is becoming increas-

Inflation expectations creep higher BoE inflation expectations survey

Household inflation expectations edged closer to 2008 lev- %

Data releases and forecasts Wed BBA lending

Tue Public sector finances Labor market statistics