Economic Research. Economic Watch. FOMC preview. Weekly Highlights. Latest Data (Page 5) June 18, 2012

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1 Economic Research June 18, 212 Economic Watch FOMC preview While markets seem to have priced in additional easing from the upcoming FOMC meeting, we think the Fed will disappoint. In our view, the most the Fed will do in this meeting will be to extend Operation Twist and move itself to high alert mode, showing its intention to act promptly if the situation warrants. The potential weakness of the policy statement s rhetoric and downward adjustment of the economic forecast will pave the way for additional easing. We expect QE3 to come in Q312 before the election-led shaking of confidence and the fiscal cliff. Weekly Highlights FOMC meeting expecting dovish statement, with high alert mode for policy action (Wednesday). Philly Fed likely to rebound to in June (vs pts previously) (Thursday). Existing home sales likely to soften by 1.1% MoM in May after a 3.4% MoM gain (Thursday). Latest Data (Page 5) Benyalak Kriddakarnkul Economist benyalakk@ktzmico.com 66 () Economic page 1 of 6

2 FOMC preview While markets seem to have priced in additional easing from the upcoming FOMC meeting, we think the Fed will disappoint. In our view, the most the Fed will do in this meeting will be to extend Operation Twist and move itself to high alert mode, showing its intention to act promptly if the situation warrants. We think the Fed will need to see further developments from both the external front regarding Euro debt crisis and the domestic economy, especially the job market, before injecting new stimulus. A clearer picture will help the Fed decide on the form and amount of the stimulus. The statement is sure to sound dovish, with the committee acknowledging the disappointment in recent economic data and intensifying risks in the Eurozone. We might see the Fed revise its 212 GDP forecast downward to reflect increasing downside risks to growth. Note that the Fed's current forecast is higher than the consensus (2.6% vs. 2.2%). Such potential weakness of the policy statement s rhetoric and the downward adjustment of the economic forecast will pave the way for additional easing. We expect QE3 to come in Q312 before the election-led shaking of confidence and the fiscal cliff. This upcoming QE might not have a significant impact in terms of lowering interest rates given that they are already substantially low. However, it would support confidence and act as a cushion against external risks if the Eurozone ends up dragging the rest of the world down with it just like Lehman Brothers did back in 28. Economic page 2 of 6

3 Data telescope: June United States Monday, June 18 NAHB Housing Market (US) 8 7 Units, Million NAHB Housing Existing home sales (RHS) The NAHB housing market index is likely to soften to 28 in June after a jump to 29 in May. The index was at 24 in April. Risks are tilting to the downside as heightening uncertainty at the global level could weigh on sentiment. Jan-2 Jan-3 Jan-4 Jan-5 Jan-8 Jan-9 Jan-1 Tuesday, June 19 Housing Starts and Permits (US) Jan-2 Jan-3 Future home sales index (lead 3 months) Building permits (RHS) Housing starts (RHS) Jan-4 Jan-5 Jan-8 Jan-9 Jan-1 Units (') Housing starts are expected to edge up.4% MoM in May after a strong 2.6% MoM increase previously. Meanwhile, building permits should rebound in May after a 7% MoM dip in April. The consensus forecast for building permits is a 1% MoM gain. The recent rises in the future home sales index point toward further improvement in both housing starts and permits. Thursday, June 21 Philly Fed. (US) Philadephia Fed. US ISM (RHS) Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-8 Jan-9 Jan The Philly Fed index will likely rebound in June after slipping into negative territory in May. Markets expect the index to pick up from -5.8 to, just the benchmark between expansion and contraction. Risks are on the downside given the collapse in the Empire manufacturing index (down 15 points to 2.3 in June). Economic page 3 of 6

4 Existing Home Sales (US) Units, million Existing home sales Pending home sales (RHS - lead 1 months) Existing home sales are expected to soften in May, dropping 1.1% MoM to 4.57 million units after a 3.4% MoM gain in April. The potential decline would be in line with the latest moderation of the pending home sales index. Normally, the pending home sales index is an indicator for existing home sales, with a lead time of around one to two months. Jul-6 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jul-11 Economic page 4 of 6

5 Economic Indicators Name Dec-11 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Manufacturing PMI n/a Exports (%YoY) n/a Manufacturing PMI n/a Real GDP (%QoQ) -.3 n/a n/a. n/a n/a n/a Industrial Production (%YoY) n/a n/a Merchadise Export (%YoY) n/a n/a Tankan Business Conditions Large Enterprises Manufacturing -4. n/a n/a -4. n/a n/a n/a Real GDP (%QoQ). n/a n/a 1.2 n/a n/a n/a Headline CPI (%YoY) n/a Core CPI (%YoY) n/a Manufacturing Production (%YoY) n/a n/a Exports (%YoY) n/a n/a Imports (%YoY) n/a n/a Private Consumption (%YoY) n/a Private Investment (%YoY) n/a n/a Real GDP (%YoY) -8.9 n/a n/a.3 n/a n/a n/a ISM Manufacturing n/a Advanced Retail Sales (%MoM) n/a Existing Homes Sales (%MoM) n/a n/a Months' supply of existing homes n/a n/a Initial Jobless Claims (4-week MMA, ' persons) Nonfarm Payrolls (' persons) n/a Unemployment Rate (%) n/a Real GDP (%QoQ) 3. n/a n/a 1.9 n/a n/a n/a Economic page 5 of 6

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