US Economic Weekly

NOMURA GLOBAL ECONOMICS

ROUNDUP: TIME TO ACT 2-3 17 September 2010

Marginally stronger economic data have not altered the case for a new round of quantitative
easing and we see no compelling reason to wait.
Nomura US Economics
OUTLOOK: STALLING GROWTH STIRS THE POLICY POT 4 David H. Resler
Slowing economic growth is prodding policymakers to take action. Chief Economist US
+1 (212) 667 2415
david.resler@nomura.com
PREVIEW OF THE WEEK AHEAD 5-6
While the FOMC meeting should gather much attention, this week should also yield valuable Aichi Amemiya
insights on the housing sector. +1 (212) 667 9347
aiamemiy@nomura.com
US ECONOMIC CALENDAR 7
Zach Pandl
WEEK IN REVIEW 8 +1 (212) 667 9668
GLOBAL LETTER: JAPAN’S INTERVENTION: A STERILE DEBATE 9 zach.pandl@nomura.com

The MOF has intervened – the BOJ should now launch its own anti-deflation version of QE2.

GLOBAL ECONOMIC CALENDAR 10

Market watch
Units Latest 1w k ago 1m ago 6m ago 12m ago
Fixed incom e
3m USD LIBOR % 0.29 0.29 0.35 0.27 0.29
Spread to OIS bp 10 10 17 7 11
2yr Treasury yield % 0.48 0.58 0.52 0.95 0.98
10yr Treasury yield % 2.77 2.81 2.64 3.65 3.42
10yr TIPS breakeven % 1.77 1.79 1.63 2.25 1.80
30yr mortgage rate % 4.35 4.35 4.44 4.95 5.07
30yr jumbo rate % 5.34 5.40 5.38 5.82 6.20
CDX.IG bp 104 103 107 83 102
AAA ABX Price 45.6 46.0 46.5 35.2 32.2
AAA CMBX Price 96.1 95.9 95.0 93.4 92.6
Equities
S&P 500 Index 1,125 1,110 1,093 1,166 1,065
Percent change since % -- 1.4 2.9 -3.6 5.6
NASDAQ Index 2,303 2,242 2,209 2,389 2,127
Percent change since % -- 2.7 4.2 -3.6 8.3
VIX index % 21.7 22.0 24.3 16.9 23.7
Foreign exchange
EUR $/€ 1.31 1.27 1.29 1.37 1.47
GBP $/₤ 1.56 1.54 1.56 1.53 1.65
JPY ¥/$ 85.7 84.1 85.5 90.4 91.2
Com m odities
WTI crude oil $/bl 74.6 76.5 75.8 82.9 72.5
Notes: Values are as of Thursday close; conventional mortgage rate is weekly figure from FHLMC;
Overnight indexed swap (OIS) rate is expected average Fed funds rate; ABX is index of subprime
RMBS credit default swaps; CMBX is index of CMBS credit default swaps; Sources: Bloomberg, Markit,
Bankrate.com, FHLMC, Federal Reserve and Haver Analytics.

Please see analyst certifications and important disclosures on the last page of this report.
Economic Diary – Nomura Global Economics

United States ⏐ Roundup David Resler

Time to act
Marginally stronger economic data have not altered the case for a new round of quantitative
easing and we see no compelling reason to wait.

In August, the FOMC When the Federal Open Market Committee met on 10 August, it noted that the most recent
saw signs of stalling economic indicators showed that “the pace of recovery ... has slowed” and that it would likely
economy, and … remain “more modest in the near term than had been anticipated.” In response, the committee
determined that it would be appropriate to prevent an unintended tightening of financial
conditions that might result from redemptions of agency debt or agency-backed mortgage-
backed securities (MBS).

…acted to prevent a The New York Fed’s System Open Market Account (SOMA) staff had projected that holdings of
passive tightening of MBS and agency debt would decline by about $395 billion by the end of 2011. That contraction
policy has already begun as the SOMA holdings of those two asset classes are now about $17bn lower
than their peak levels (Figure 1). The minutes of the FOMC meeting indicate that “most
members” believed that the tightening of financial conditions that would result from the projected
further contraction of the balance sheet – representing more than 19% of the SOMA’s securities
portfolio – would be “inappropriate, given the economic outlook.” Consequently, the FOMC voted
to “keep constant” its securities portfolio at the then-prevailing level ($2.054 billion).

The FOMC now With this decision, the Fed effectively established the size of its balance sheet – specifically its
targets the size of its securities portfolio – as a new policy target. (See US Roundup: “The Fed introduces a new
securities portfolio target,” Global Weekly Economic Monitor, 13 August 2010.) We see this as a significant
innovation that complements traditional interest rate targeting. In what is effectively a zero
interest rate environment, having a balance sheet-related target can prove to be an effective
instrument for communicating policy intentions, one that might mimic the role of a Fed funds
target in normal times. When the Fed inaugurates the next phase of quantitative easing (QE),
specifying the magnitude of any change in its “securities portfolio target” (SPT) would provide a
welcome element of transparency that would likely enhance the effectiveness of its policy.

A balance sheet A balance sheet target, such as the SPT, could also be a valuable tool when the time comes to
target can be an begin unwinding QE. As we noted in the 13 August Roundup, a balance sheet target can aid in
important policy tool controlling the exit strategy. For instance, the Fed could calibrate the SPT either to slow or to
accelerate the pace of exit.

As always, the policy Consideration of any further changes in its QE policy is likely to depend on the evolution of the
course is data economy’s performance, and at the 10 August meeting the FOMC also asserted that it would
dependent “employ its policy tools as necessary to promote economic recovery and price stability.” Since
then, the economic indicators have yielded no convincing evidence of improvement. Indeed, in
its 8 September release, the Federal Reserve’s Beige Book noted “widespread signs of a
deceleration compared with previous periods” in the reports from the 12 Federal Reserve

Figure 1. SOMA holdings of agencies and MBS Figure 2. Consensus forecasts of real GDP growth

$bn
2,080 % , annual rate

2,070 4.0
2,060 3.7
3.5
2,050
2,040 3.0 August
2,030
2.5
2,020
2.0 September
2,010
2,000 1.5
4/21/2010

5/19/2010

6/16/2010

6/30/2010

7/14/2010

7/28/2010

8/11/2010

8/25/2010
4/7/2010

5/5/2010

6/2/2010

9/8/2010

1.0
Q1 Q2 Q3 Q4 Q1 Q2
2010 2011
Source: Federal Reserve; Nomura Global Economics. Source. Blue Chip Economic Indicators; Nomura.

Nomura Global Economics 2 September 17, 2010

Economic Diary – Nomura Global Economics

districts. This “deceleration” mirrors a further deterioration in private sector forecasts. The
September Blue Chip Economic Indicators (BCEI) showed a consensus real GDP growth for the
next four quarters of just 2.4%, down about 0.3 percentage points from August (Figure 2). It is
also about 0.5pp lower than the July consensus, which, at 2.9%, matched the lowest estimate of
2010 growth among participants on the FOMC and was about 0.4pp below the midpoint of the
range of all FOMC forecasts. Since both private sector and Federal Reserve forecasts tend to
adjust in similar ways to recent data, it seems reasonable to believe that policymakers have also
lowered their sights for the economy’s growth over the remainder of 2010 and 2011.

Signs of The “better-than-expected” tone of many recent indicators says more about the gloom that has
improvement are not overtaken the markets than it does the improvement in economic fundamentals. For instance,
convincing the seemingly robust 0.6% increase in non-automotive retail sales in August masked details that
mainly reinforced our conviction that consumers are bent on reducing debt. Sales of big-ticket,
discretionary items marketed by auto-dealers and appliance stores fell 0.7% and 0.8%
respectively. These data may allay the misguided worries about some sort of economic free-fall
but they provide little justification for hopes of a quick revival from a mid-year stall. Although we
do not believe the economy will slide back into recession, the risks tilt decidedly in that direction.

It is a close call, but Policymakers must now determine whether this erosion in the economic outlook warrants a
we expect the Fed to policy response. Last month in Jackson Hole, Wyoming, Fed Chairman Ben Bernanke linked
launch further QE any further QE to a significant deterioration in the economic outlook. We believe that that the
outlook has changed enough since mid-year to warrant inaugurating the next phase of QE and
that acting sooner rather than later is more likely to contain the downside risks. For that reason,
we believe the FOMC should and will authorize an increase in its securities portfolio target at the
forthcoming 21 September FOMC meeting. Reaching such a decision, however, will not be easy
and will require attention to several important details.

The transmission For instance, there seems to be no consensus about how changes in the Fed’s balance sheet
mechanism of QE is will affect the broader economy. At Jackson Hole, Mr Bernanke stressed that QE operates
uncertain “primarily through the portfolio balance sheet channel.” By changing its holdings of particular
assets, the Fed can influence asset prices to encourage or discourage private investment
allocations. Others stress that balance sheet operations also can trigger changes in long-term
interest rates. We suspect, however, that another, related channel of influence – the effect of QE
on growth and inflation expectations – may prove equally important. Indeed, as a policy most
commonly deployed in a low interest rate environment, an effective QE would be one that
anchors inflation expectations comfortably above the deflationary zone. This suggests that if QE
deters the emergence of a deflationary mindset and thereby raises inflation expectations, long-
term interest rates might rise rather than fall. Agreement about the transmission mechanism is
probably not a necessary condition for the FOMC to launch the next phase of QE but a thorough
airing of alternative interpretations may not be possible in a short four- or five-hour meeting.

Uncertainty argues The FOMC must also determine a specific strategy for implementing QE. Some favor bold action,
for a cautious championing a commitment to a large-scale expansion of the Fed’s balance sheet. However, an
approach alternative, incremental approach seems more commendable to us. Uncertainty about the
effectiveness of QE instruments argues for carefully calibrated measures. Of course, uncertainty
pervades other dimensions of the policy decision, such as uncertainty about the true state of
affairs to which the policymakers respond. Donald Kohn, the recently retired Federal Reserve
Board Vice Chairman, made precisely that point in a December 2006 speech, and underscored
that careful academic analysis concludes that “central banks should be cautious about boldly
acting.” History leaves little room for doubt that policymakers prefer a cautious and gradualist
approach. Bold measures have been undertaken rarely and only then because the facts at hand
provide a compelling rationale. A large-scale asset purchase plan could be seen by many as a
sign of an even worse economic outlook. It would also invite attacks on the Fed’s independence.
With a new majority of populist conservatives likely to be evident on Capitol Hill after the election,
such concerns should not be lightly dismissed.

The FOMC should act One final consideration persuades us that the Fed should act sooner rather than later. Pre-
pre-emptively emptive action seems more likely to affect growth and inflation expectations than does a more
hesitant approach. Incremental balance sheet adjustments calibrated to changing economic
conditions seem most likely to be perceived as a credible means of implementing the next phase
of quantitative easing. With the aid of a specific balance sheet target, an incremental
implementation of QE might effectively mimic conventional interest rate policy.

Nomura Global Economics 3 September 17, 2010

Economic Diary – Nomura Global Economics

United States ⏐ Economic Outlook David Resler ⏐ Zach Pandl ⏐ Aichi Amemiya

Stalling growth stirs the policy pot

Slowing economic growth is prodding policymakers to take action.

Forecast change: Reflecting recent data, we now peg Q3 GDP growth at 1.7% up from 0.9%,
previously. The arithmetic of these revisions adds about 0.1% to 2010 and 2011 annual growth.

Activity: Although some recent indicators show some improvement, the pace of recovery
remains markedly slower than expected. The expansion is likely to continue, but several factors
point to lacklustre growth. First, households and small businesses are likely to continue paring
debt. Second, the housing recovery is likely to be much slower than in the past. Third, fiscal
stimulus is set to turn into fiscal drag. Meanwhile, state and local governments face budget
challenges that are likely to lead to deep cuts in spending and employment. Lastly,
comprehensive reforms of health care and financial services have added uncertainties to the
outlook that will likely discourage business investment and hiring.

Inflation: The excess productive capacity evident in the stubbornly high jobless rate is likely to
exert persistent downward pressure on wages and prices. Under these conditions, we forecast
core inflation to continue its cyclical slide to a new record low of just 0.7% in Q4 of this year.
Accelerating rent inflation should help prevent a decline in price levels over the near-term, but
we do see a non-trivial probability of deflation (see Deflation: causes, consequences and cures).

Policy: We expect the FOMC to inaugurate a new phase of quantitative easing (QE) by
targeting incremental increases in its holdings of US Treasuries as conditions warrant. This
additional easing of monetary policy late in 2010 makes it unlikely that the FOMC will begin
raising its interest rate targets before 2013. However, we do expect some modest tightening in
the form of calibrated asset sales to begin in 2012. We also now expect Congress to fully
extend the Bush-era tax cuts as a response to weak growth. Election-year politics make the
fiscal policy outlook unusually murky, but a variety of options including infrastructure spending,
and business and payroll tax cuts will likely be considered for early action after the elections.

Risks: Weak employment growth remains the greatest threat to a sustainable recovery. If the
economy were to slip back into recession, deflation would be likely to develop. Alternatively,
strong policy action could revive animal spirits and drive above-trend growth.

Details of the forecast

% 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 2010 2011 2012
Real GDP 3.7 1.6 1.7 1.4 2.4 2.7 2.4 2.4 2.6 2.1 2.5
Personal consumption 1.9 2.0 2.2 1.8 2.3 2.3 2.4 2.3 1.5 2.2 2.4
Non residential fixed invest 7.8 17.6 -1.2 0.1 0.8 4.3 5.3 8.0 3.9 3.0 6.3
Residential fixed invest -12.3 27.1 -21.3 -6.2 0.5 5.9 5.3 6.7 -2.4 -0.5 8.2
Government expenditure -1.6 4.3 -2.4 -2.9 -0.2 -0.6 -0.6 -1.8 0.2 -1.0 -1.0
Exports 11.4 9.2 8.7 11.3 8.3 5.6 4.9 7.4 12.2 7.9 7.1
Imports 11.2 32.4 4.1 2.7 -0.1 0.7 2.6 4.7 12.0 3.5 4.1
Contributions to GDP:
Domestic final sales 1.4 4.4 0.3 0.5 1.6 2.1 2.2 2.2 1.5 1.6 2.5
Inventories 2.6 0.6 1.0 -0.1 -0.3 0.0 0.0 0.0 1.5 0.1 0.0
Net trade -0.3 -3.4 0.4 0.9 1.1 0.6 0.2 0.2 -0.4 0.4 0.1
Unemployment rate 9.7 9.7 9.6 9.8 9.8 9.6 9.5 9.4 9.7 9.6 9.0
Non-farm payrolls, 000 87 207 -85 25 50 75 115 115 59 89 238
Housing starts, 000 saar 617 602 571 583 593 614 632 652 593 623 745
Consumer prices 2.4 1.8 1.2 0.5 0.5 1.1 1.1 1.6 1.5 1.1 1.5
Core CPI 1.3 1.0 1.0 0.7 0.8 0.8 0.7 0.9 1.0 0.8 1.1
Federal budget (% GDP) -9.0 -7.8 -5.9
Current account balance (% GDP) -3.6 -3.8 -3.6
Fed securities portfolio ($trn) 2.01 2.06 2.15 2.25 2.30 2.40 2.40 2.40 2.25 2.40 2.10
Fed funds 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25
3-month LIBOR 0.29 0.53 0.40 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.75
TSY 2-year note 1.02 0.60 0.50 0.40 0.40 0.50 0.50 0.75 0.40 0.75 1.00
TSY 5-year note 2.54 1.77 1.35 1.50 1.70 1.75 1.90 2.00 1.50 2.00 2.50
TSY 10-year note 3.83 2.93 2.75 2.75 3.00 3.00 3.25 3.25 2.75 3.25 3.50
30-year mortgage 4.99 4.69 4.40 4.50 4.75 4.75 5.00 5.00 4.50 5.00 5.25
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates (saar). The unemployment rate is a quarterly
average as a percentage of the labor force. Nonfarm payrolls are average monthly change during the period. Inflation measures and
calendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Housing starts are period averages.
Numbers in bold are actual values. Based on data as of 16 September. Source: Nomura Global Economics.

Nomura Global Economics 4 September 17, 2010

Economic Diary – Nomura Global Economics

United States ⏐ Data Preview David Resler ⏐ Zach Pandl ⏐Aichi Amemiya

The week ahead

While the FOMC meeting should gather much attention, this week should also yield valuable
insights on the housing sector.

We expect the NAHB NAHB housing market index (Monday): The Home builder sentiment index has been in a mild
index to improve downward trend since May and is close to its historical low. However, we expect the index to
slightly in September inch up to 14 in September from 13 previously, as the payback effect of the expiry of the home
buyer tax credit is likely to be diminishing.

Chain-store sales (Tuesday): The two major US chain-store sale surveys reported mixed
results for the second week of September. The ICSC index registered a 0.8% gain from the
previous week and is the strongest advance since the week of 17 July. By contrast the Redbook
index was down 0.1% month to date. Although neither of these indices has appeared to be a
good predictor of official monthly retail sales so far this year, we believe they will offer some
perspective on the recent sub-par growth in consumer spending.

In a close call, we FOMC (Tuesday): As detailed in the US Roundup, we expect the FOMC to surprise the markets
think the FOMC will with a decision to inaugurate the next phase of quantitative easing. However, Chairman
launch QE2 Bernanke might not be able to persuade the most skeptical FOMC members, most could be
persuaded by arguments to act pre-emptively and incrementally. .

Housing starts likely Housing starts (Tuesday): We forecast that housing starts declined by 4.8% m-o-m in August
dropped in August to an annualized rate of 520,000. Judging by the recent volatility in building permits, which tend
to lead housing starts, we look for a decrease in starts. By contrast, we expect building permits
to stabilize as the distortions from the home buyer tax credits recede. We forecast that building
permits rose 2.0% m-o-m to an annualized rate of 576,000 (Figure 1).

Strong refinance Mortgage applications (Wednesday): Mortgage purchase applications showed little change
activity may lose from the previous week in the week of 10 September after three straight increases. This
some steam suggests that home sales remain at distressingly low levels. Meanwhile, the index of refinancing
applications seemed to be losing some momentum recently as the index registered its first back-
to-back declines since April.

Initial jobless claims (Thursday): Initial claims marked a small decline to 450k in the week of
10 September from 453k previously and 478k two weeks before. This suggests that the pace of
lay-offs may be slowing.

We forecast a bounce Existing home sales (Thursday): We forecast a large, above-consensus increase in the
back in existing August existing home sales of 20.1% m-o-m or an annualized of 4,600k units. Since a payback
home sales effect of the completion of the tax credit program for home buyers was likely diminishing during
the month, we expect the August number to reverse some of the large decline in July when
existing home sales fell 27.2% from June. That being said, the pending home sales index, which

Figure 1. Housing starts and building permits Figure 2. Existing home sales

thousand saar thousand saar

1800 7000

1600 Housing
Starts
6000
1400 Building
permits
1200
5000
1000

800 4000
600

400 3000
Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10

Source: Census Bureau Source: National Association of Realtors

Nomura Global Economics 5 September 17, 2010

Economic Diary – Nomura Global Economics

is thought to be a good predictor of existing home sales, showed only moderate growth in July,
suggesting a downside risk to our forecast (Figure 2).

Leading economic indicators (Thursday): We expect leading economic indicators to rise by

0.2% in August following a 0.1% increase in July. Although longer-term treasury yields dropped
a bit during the month, the largest contribution should come from the spread between long- and
short-term interest rates.

Rising orders should Durable goods (Friday): We forecast that August durable goods orders rose by 1.5% from July
allay some worries with respectable gains across a broad swath of industries. Although Boeing reported much lower
about manufacturing orders in August, the Commerce Department’s tabulation for the aircraft industry does not
appear to have fully captured that strength. We expect the August data to reflect some of July’s
surge in bookings.

New home sales (Friday): Because the distortions from the expiration of the federal tax credit
should have disappeared to a large extent, we look for a bounce-back in new home sales in
August. We forecast a 17.8% increase m-o-m or an annualized rate of 325k units.

Nomura Global Economics 6 September 17, 2010

 Economic Diary – Nomura Global Economics

U.S. FINANCIAL MARKET CALENDAR

Nomura forecasts in italics
All figures in % except as noted All Times: EDT

MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

20-Sep 21-Sep 22-Sep 23-Sep 24-Sep
NAHB Housing Mkt. Index Chain Store Sales MBA - Mortgage Index Unemp. Insurance Claims Durable Goods Orders
(1:00 pm) Week ICSC/GS Redbook (7:00am) (000s, 8:30 am) (8:30 am)
Jul Aug Sep 9/4 -0.4 -0.1 Total Purch. Refi. 9/4 453 Jun Jul Aug
9/11 0.8 -0.1 9/3 880 185 4927 9/11 450 Total -0.2% 0.4% 1.5%
Index 14 13 14 9/18 N.F. N.F. 9/10 802 184 4396 9/18 N.F. Ex. Trans 0.2% -3.7% 1.1%
9/17 N.F. N.F. N.F. Ex. Def 0.2% 0.4% 1.5%
Housing Starts Index of Leading Indicators
(8:30 am)
(10:00am) New Home Sales
Jun Jul Aug Jun Jul Aug (10:00 am)
Starts 537 546 520 -0.3% 0.1% 0.2% Jun Jul Aug
%Ch. -8.7% 1.7% -4.8% (000's) 315 276 325
Permits 583 565 576 Existing Home Sales %Ch. 12.1% -12.4% 17.8%
%Ch. 1.6% -3.1% 2.0% (10:00 am)
Jun Jul Aug
FOMC MEETING (000's) 5260 3830 4600
Policy Statement @ 2:15pm %Ch. -7.1% -27.2% 20.1%
___________________ ___________________ ___________________ ___________________ ___________________
Announce 4-Wk Bills Auction 4-Wk & 1-Yr Bills Announce 2-, 5- & 7-Yr Notes
Auction 3, 6mo Bills Announce 3, 6mo Bills
Settle: 4-Wk, 3,6mo & 1-Yr Bills
27-Sep 28-Sep 29-Sep 30-Sep 1-Oct
Chain Store Sales MBA - Mortgage Index Unemp. Insurance Claims Pers. Income & Spending
(7:00am) (8:30 am) (8:30 am)
Case-Shiller HPI Jun Jul Aug
(9:00am) GDP PI 0.0% 0.2% 0.2%
(8:30 am) PCE 0.0% 0.4% 0.3%
May Jun Jul Inflation -0.1% 0.2% 0.2%
HPI 147.4 147.8 N.F. Q1 Q2 2nd Q2-Final "Core" PCE 0.0% 0.1% 0.0%
Yr/Yr % 4.7 4.2 N.F. GDP 3.7% 1.6% 1.6%
Price Index 1.0% 1.9% 1.8%
Consumer Confidence Final Sales 1.1% 1.0% 0.9% ISM Manufacturing Index
(10:00 am) (10:00 am)
Jul Aug Sep Chicago Business Index Jul Aug Sep
Index 51.0 53.5 N.F. (9:45am) PMI 55.5 56.3 53.5
Pres. Cond. 26.4 24.9 N.F. Jul Aug Sep Prices 57.5 61.5 60.0
Expect. 67.5 72.5 N.F. Bus. Cond. 62.3 56.7 56.0
Prices Paid 58.1 57.2 55.5 Construction Spending
(10:00 am)
Jun Jul Aug
-0.8% -1.0% N.F.

Vehicle Sales (M, saar)

Jun Jul Aug
Cars 3.8 3.8 3.8
Trucks 4.7 5.0 4.8
Foreign 2.6 2.7 2.9
Total 11.1 11.5 11.5

Michigan Survey (Final)

___________________
Auction 2-Yr Notes
Announce 4-Wk Bills
Auction 3, 6mo Bills
4-Oct
Pending Home Sales (NAR)
Manufacturing Orders
___________________
Announce 4-Wk Bills
Auction 3, 6mo Bills
11-Oct
___________________
___________________
Auction 5-Yr Notes
Auction 4-Wk Bills
5-Oct
Chain Store Sales
ISM Non-Mfg. Index
___________________
Auction 4-Wk Bills
12-Oct
Chain Store Sales
FOMC Minutes
___________________
Announce 4-Wk Bills
Auction 3-Yr Notes
Auction 3, 6mo Bills
___________________
Auction 7-Yr Notes
6-Oct
MBA - Mortgage Index
ADP- Nat'l Emp. Rpt.
___________________
13-Oct
MBA - Mortgage Index
Import/Export Prices
U.S. Budget Statement
___________________
Auction 10-Yr Notes
Auction 4-Wk Bills
(10:00am)
Aug Sep-Pre Sep
Sentiment 68.9 66.6 N.F.
Curr. Cond. 78.3 78.4 N.F.
Expect. 62.9 59.1 N.F.
___________________ ___________________
Announce 3, 6mo Bills
Settle: 4-Wk & 3,6mo Bills
Settle: 2-. 5- & 7-Yr Notes
7-Oct 8-Oct
Unemp. Insurance Claims Employment
Consumer Credit Wholesale Trade
___________________ ___________________
Announce 3, 6mo Bills
Announce 3-, 10- & 30-Yr Issues
Settle: 4-Wk & 3,6mo Bills
14-Oct 15-Oct
Unemp. Insurance Claims Retail Sales
Producer Price Index Michigan Survey-Prel.
Foreign Trade Balance Business Sales & Invent.
Empire State Index
Consumer Price Index
___________________ ___________________
Auction 30-Yr Bonds Settle: 3-, 10- & 30-Yr Issues
Announce 3, 6mo & 1-Yr Bills
Settle: 4-Wk & 3,6mo Bills

Nomura Global Economics 7 September 17, 2010

 Economic Diary – Nomura Global Economics

United States ⏐ Week in Review

New data and revisions in BOLD
In %, except as noted All Times: EST
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
13-Sep 14-Sep 15-Sep 16-Sep 17-Sep
U.S. Budget Statement Chain Store Sales MBA - Mortgage Index Unemp. Insurance Claims Consumer Price Index
($Blns)(2:00pm) Week ICSC/GS Redbook (7:00am) (000s, 8:30 am) (8:30am)
Aug '09 Jul Aug 8/28 0.1 1.0 Total Purch. Refi. 8/28 478 Jun Jul Aug
-103.6 -165.0 -90.5 9/4 -0.4 -0.1 8/27 894 174 5085 9/4 453 Total -0.1% 0.3% 0.3%
9/11 0.8 -0.1 9/3 880 185 4927 9/11 450 Ex. F&E 0.2% 0.1% 0.0%
9/10 802 184 4396
Retail Sales Producer Price Index Michigan Survey-Prel.
(8:30 am)
Import/Export Prices (8:30 am) (10:00am)
Jun Jul Aug (8:30 am)
Total -0.3% 0.3% 0.4% Jun Jul Aug Jul Aug Sep
Jun Jul Aug Total -0.5% 0.2% 0.4% Sentiment 67.8 68.9 66.6
Ex. Auto 0.0% 0.1% 0.6%
Exports -0.7% -0.2% 0.8% Ex. F&E 0.1% 0.3% 0.1% Curr. Cond. 76.5 78.3 78.4
Imports -1.3% 0.1% 0.6% Expect. 62.3 62.9 59.1
Business Sales & Invent. Imports* -0.4% -0.2% 0.2%
(10:00am) Net For. Purch. - US Sec.
*ex petroleum (9:00 am)
May Jun Jul
Sales -1.2% -0.5% 0.7% May Jun Jul
Empire State Index Total 35.3 44.4 61.2
Inventories 0.2% 0.5% 1.0% (8:30 am) Treasuries 14.9 33.3 30.0
Jul Aug Sep
5.1 7.1 4.1 Philadelphia Fed Survey
(10:00am)
Industrial Production Jul Aug Sep
(9:15 am) Activity 5.1 -7.7 -0.7
Jun Jul Aug Prices Pd. 13.1 11.8 9.8
I.P. 0.1% 0.6% 0.2%
Cap.Util.-% 74.1 74.6 74.7

September 13: Federal budget deficit narrowed to -$90.5 billion in August from -$103.6 billion in the same month last year
(Consensus -$95.0 billion). The improvement came from the increase in total receipts which rose by 12.7% y-o-y during the
month.

September 14: Retail sales rose 0.4% m-o-m in August after a revised 0.3% (0.4% previously estimated) gain in July. A
0.7% decline in autodealer sales partly offset a solid 0.6% increase in sales at other retailers. Core" retail sales -- the
subset that excludes gasoline, automotive and building material retailers advanced by 0.8%, the biggest increase since
February (1.2%).The ICSC-Goldman Sachs index registered a 0.8% gain from the previous week, the strongest
performance since the week of 17 July. That report credited the return of cooler weather for boosting fall apparel sales.
Meanwhile, the Johnson-Redbook index down 0.1% month-to-date, matching its performance of a week ago and
slightly better than the "targeted" drop of 0.2%. Business inventories were up by 1.0% m-o-m in July, stronger than
generally expected (Consensus 0.7%). Given that the growth pace in consumer spending had been relatively slow over
the past several months the recent increase in private inventories was likely a reflection of unintentionally stock building.

September 15: The New York Fed's Empire State index of manufacturing activity for September fell to 4.1 , a 3-point
drop from its August reading and the lowest for this index since July 2009 when it last stood in negative territory. US
industrial production rose by 0.2% m-o-m or 6.2% y-o-y in August. The July increase was restated to show a 0.6%
gain from the previous month rather than the 1% initial estimate. Just as much of the surge in July related to auto
production so did most of the slowing in August. US import prices rose 0.6% m-o-m in August following a revised 0.1%
increase (0.2% originally estimated). More than half of the advance came from higher fuel prices which rose 1.7% during
the month.

September 16: Despite a 7-point jump, the Philadelphia Fed's index of manufacturing activity remained in negative
territory in September at -0.7. This marks the first back to back sub-zero reads since July 2009, when the recovery
presumably began. Initial claims for unemployment compensation fell to 450k in the second week of September from a
revised 453k (previously 451k). That is the fewest filings since the week of July 10 and the fewest back-to-back claims
since May 8. The US producer price index (PPI) increased 0.4% m-o-m (3.1% y-o-y) in August following a 0.2% gain in
the previous month (consensus 0.3%). Most of the advance was attributable to higher energy prices, which rose 2.2%
during the month. PPI excluding food and energy (Core PPI) edged up 0.1% (1.3% y-o-y) during the month.

September 17: The US Consumer Price Index (CPI) rose by 0.3% m-o-m or 1.1% y-o-y in August as expected
(Consensus: 0.3% m-o-m; Nomura: 0.3%). On an unrounded basis, the core gained 0.046% m-o-m, down from 0.130%
in July. Most surprisingly owners' equivalent rent (OER) decelerated slightly on an unrounded basis, to 0.02% m-o-m
from 0.06%. In addition, rent of primary residence fell 0.07% m-o-m marking the first monthly decline since February
2010. University of Michigan’s index of consumer sentiment unexpectedly dropped to 66.6 in September from 68.9
previously. Although it was a preliminary figure for September, the drag suggested that consumers became more
cautious about the future of the economy as a decline in the index for economic outlook accounted for all of the decrease
in the headline number.

Nomura Global Economics 8 September 17, 2010

Economic Diary – Nomura Global Economics

Global Letter Paul Sheard

Japan’s intervention: a sterile debate

The MOF has intervened – the BOJ should now launch its own anti-deflation version of QE2.

The Japanese Ministry of Finance (MOF) intervened in the foreign exchange (FX) market this
week, selling yen to buy US dollars, for the first time since March 2004. Market interest quickly
focused on whether the Bank of Japan (BOJ) would “sterilize” the intervention or not.

When a monetary authority intervenes in the FX market to sell its own currency, bank reserves
(deposits) at the central bank rise by that amount: the central bank “sterilizes” the intervention by
draining that increase in reserves, thus offsetting the impact of the FX intervention on the level of
reserves (a component of base money) and thus on its monetary policy.

A lot of misunderstanding surrounds the sterilization issue. Economic textbooks make a lot of it
(too much in fact), the conventional analysis suggesting that, for FX intervention to be effective,
it needs to be left unsterilized. That is, FX intervention is more likely to have a non-trivial, lasting
effect if it is accompanied by monetary easing.

That basic insight is on the mark but in a normal positive (overnight) interest-rate-targeting
setting, the issue of whether FX intervention is sterilized or not is moot: it virtually always is (both
operationally and in terms of the overall net effect on the level of reserves). This is because, to
control the policy interest rate, the central bank needs to maintain the level of reserves around a
certain – in the short term – essentially fixed level, usually the minimum reserve level.
Operationally, the monetary authority raises the intervention funds by issuing bills, having a
draining effect on reserves which is reversed when intervention takes place.

The situation changes when the central bank is operating at or close to the zero interest rate
bound (or is paying interest on excess reserves at the target policy rate). Then, leaving a given
amount of FX intervention unsterilized and letting the level of reserves increase
correspondingly – essentially a form of quantitative easing (QE) – becomes a live policy option.

Developed economies with floating exchange rates do not usually intervene in the FX market;
but Japan suffers from chronic deflation (Figure 1) and so has ample justification to do so as one
element of a concerted anti-deflation effort. A strong yen both results from deflation (by offsetting
the real exchange depreciation associated with a falling domestic price level) and exacerbates it
(by hitting exports and by imparting downward price pressure via cheaper imports).

The BOJ so far has sat the post-crisis QE parade out, apparently because, based on its own
pioneering experiment with QE, it does not believe that it works (Figure 2). That is a defeatist
attitude and puts the BOJ at odds with other central banks, notably the Fed and the Bank of
England (BoE), that believe QE, via portfolio rebalance and expectations effects, can work. The
BOJ should now embark on its own version of “QE2”, massively expanding its balance sheet,
including a commitment to leave any and all MOF FX intervention unsterilized.

Figure 1. Domestic demand deflators: US/UK vs Japan Figure 2. Balance sheet expansion: Fed/BoE vs BOJ

2007 Jan = 100 2007 Jan = 100

September 2008
150 400

UK 350
140
US 300 BoE
130
Japan 250 Fed
120 200 BOJ

150
110 end 
start  of QE 100
100
of QE
50
90 0
Mar-95 Oct-97 May-00 Nov-02 Jun-05 Jan-08 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10

Source: Haver Analytics and Nomura Global Economics. Source: BoE, BOJ, Fed and Nomura Global Economics.

Nomura Global Economics 9 September 17, 2010

Economic Diary – Nomura Global Economics

Global Calendar

The Week at a Glance

Previous, Nomura, Consensus

Mon 20 Sep Tue 21 Sep Wed 22 Sep Thu 23 Sep Fri 24 Sep
NAHB Housing Market Housing starts (Aug) Existing home sales Durable goods orders
Index (Sep) % m-o-m 1.7, -4.8, 0.7 (Aug) (Aug)
Index 13, 14, 14 % m-o-m -27.2, 20.1, 7.1 % m-o-m 0.3, 1.5, -0.9
United States

Building permits (Aug) Leading economic New home sales (Aug)

% m-o-m -3.1, 2.0, 0.2 indicator (Aug) % m-o-m -12.4, 17.8, 6.9
% m-o-m 0.1, 0.2, 0.1

FOMC meeting

EA Consumer EA PMI manufacturing Germany Ifo (Sep)

confidence (Sep-pre) (Sep-flash) Index 106.7, 105.8, 106.3
Index -11.0, n.a., -10.0 Index 55.1, 54.0, 54.6
Euro Area

EA PMI services
(Sep-flash)
Index 55.9, 55.3, 55.5

M4 (Aug-pre) Public sector net BoE MPC minutes (Sep) BBA loan approvals for
% y-o-y 2.3, n.a., n.a. borrowing (Aug) house purchase (Aug)
£bn 3.2, 12.5, 12.6 k 33.7, n.a., 34.0
UK

Public sector net cash

requirements (Aug)
£bn -4.1, 6.5, 8.8

Holiday All-industry activity (Jul) Holiday

% m-o-m 0.1, 1.2, 1.0
Japan

Thailand Custom Australia Reserve Bank HK CPI (Aug) NZ Real GDP (Q2) Singapore IP (Aug)
exports (Aug) Board minutes (Sep) % y-o-y 1.3, 3.4, 3.2 % y-o-y 1.9, 2.6, n.a. % y-o-y 9.9, 7.7, 11.5
% y-o-y 20.6, 15.4, 23.7
Asia

Taiwan Export orders Malaysia CPI (Aug) Singapore CPI (Aug) Taiwan M2 (Aug)
(Aug) % y-o-y 1.9, 2.0, 2.0 % y-o-y 3.1, 3.9, 3.3 % y-o-y 4.1, 4.5, n.a.
% y-o-y 18.2, 22.1, 20.7

ANC National General Poland Core inflation Hungary Retail sales CZ CNB MPC meeting Poland Retail sales
Council (20-24 Sep) (Aug) (Jul) (Sep) (Aug)
% y-o-y 1.2, 1.3, 1.2 % y-o-y -4.6, -2.6, -3.0 % 0.75, 0.75, 0.75 % y-o-y 3.9, 5.0, 5.3
EM

SA Retail sales constant Poland Unemployment

(Jul) (Aug)
% y-o-y 7.4, 7.9, 7.1 % 11.4, 11.3, 11.3

Note: CZ=Czech Republic, EA=Euro area, EM=Emerging markets, HK=Hong Kong, NZ=New Zealand, SA=South Africa.
Source for consensus forecasts: Bloomberg.

Nomura Global Economics 10 September 17, 2010

Economic Diary – Nomura Global Economics

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Nomura Global Economics 11 September 17, 2010