PP 7767/09/2010(025354)

Economic Highlights
Global
•MARKET DATELINE

19 July 2010

1 US Core Inflation Held Stable Yoy And The Fed Will Be

In No Hurry To Raise Interest Rates

2 Investors Turned Cautious In Buying US Financial Assets

3 Euroland’s Exports Bounced Back In May

Tracking The World Economy...

Today’s Highlight

US Core Inflation Held Stable Yoy And The Fed Will Be In No Hurry To Raise Interest Rates

US headline inflation fell by a smaller magnitude of 0.1% mom in June, after a decline of 0.2% in May. This was the third
consecutive month of decline, pointing to easing price pressures, on the back of a smaller drop in gasoline prices, which fell
by 4.5% mom in June, compared with -5.2% in May and -2.4% in April. Excluding energy prices, inflation held stable at 0.1%
mom during the month, the same rate of increase as in the previous month. Excluding food and energy prices, the core
inflation rate, on the other hand, inched up by 0.2% mom in June, marginally higher than +0.1% in May and after remaining
unchanged in the previous two months. This was attributed to a pick-up in the prices of apparel and the costs of healthcare
as well as recreation. These were, however, mitigated by a decline in the costs of housing. Prices of food & beverages and
the costs of education, on the other hand, remained stable during the month. Yoy, the headline inflation eased to 1.1% in
June, from +2.0% in May and the peak of +2.7% in December. The core inflation rate, on the other hand, held stable for the
third consecutive month at +0.9% yoy in June, the same rate of increase as in the previous two months and compared with
the peak of +1.8% in December. The readings suggest that price pressures remain benign in the US, in tandem with the US
Federal Reserve’s assessment that substantial resource slack would continue to restrain cost pressures and inflation is likely
to be subdued for some time.

As a result, the Fed will likely keep its key policy rate unchanged at between 0-0.25% in the near term, after it has stopped
most of its emergency lending programmes and the quantitative easing in March. Nevertheless, we believe the Fed will likely
use other instruments to soak up liquidity from the system in order to prevent the excess liquidity from fuelling inflation as
economic growth picks up momentum. As it stands, the Fed has tested out a credit-tightening tool, i.e. the Term Deposit
Facility, that it may use to drain a near-record amount of cash from the banking system.

The US Economy

Investors Turned Cautious In Buying US Financial Assets

◆ Net purchases of US dollar long-term financial assets such as equities, notes and bonds by foreign investors
slowed down to US$35.4bn in May, from US$81.5bn in April and after reaching a record high of US$141.4bn in
March. This suggests that investors have turned cautious in buying US financial assets after financial conditions
in Europe stabilised somewhat. Earlier, there was a flight to safety when investors were concerned about Europe’s
sovereign debt crisis. Investors were further encouraged by signs of a sustained US economic recovery that have
translated into a rebound in companies’ earnings and stock prices as well as the fact that the US policy normalisation will
likely be ahead of the Euroland. The slowdown in net purchases of US financial assets was reflected in a slower increase

Peck Boon Soon

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

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 19 July 2010

in net purchases by foreign private investors, which eased to US$23.8bn in May, from US$92.8bn in April and the high
of US$126.1bn in March. This was reflected in a slowdown in net purchases of US Treasury notes & bonds, which fell
sharply to US$7.7bn in May, from US$61.8bn in April and US$80.5bn in March. Similarly, investment in equities slowed
down in May, while investment in corporate bonds recorded a net sale during the month. These were, however,
mitigated by a pick-up in demand for US agency debt from companies such as Fannie Mae and Freddie Mac. In the same
vein, central banks around the globe slowed down their net purchases of US financial assets. This was reflected mainly
in a slowdown in net purchases of US Treasury notes and bonds.

The Euroland Economy

Exports Bounced Back In May

◆ Euroland’s exports rebounded to increase by 24.3% yoy in May, from +17.9% in April and compared with
+23.2% in March. This was the strongest growth since exports returned to positive growth in January, indicating that
the region’s exports remained resilient amidst signs of a slowdown in global demand. A weakening euro, which fell
sharply by around 15.0% against the US dollar in 1H 2010, might have helped to sustain the region’s exports as well.
Similarly, the region’s imports grew at a faster pace of 30.2% yoy in May, compared with +20.0% in April and +21.1%
in March, in tandem with a resilient growth in exports. As a whole, a pick-up in exports will help to sustain economic
activities in the region in the 2Q, after growing at a slightly faster pace of +0.2% qoq in the 1Q.

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