Global FX May The decline of the euro accelerated in the past two weeks. It hit a four-year low of. on May 9 as the sovereign debt crisis spread from Greece to other eurozone countries, undermining confidence in the single currency. The euro did rally sharply after the European Union and the International Monetary Fund put together a EUR7 billion package to bailout troubled eurozone nations which have difficulty in refinancing their public debts. However, the rebound quickly faded and selling accelerated as investors became concerned that belt-tightening measures among European economies would affect not only growth in the region, but around the world. In addition, some began to have doubt about the long term survival of the euro itself after reports emerged that France threatened to leave the euro during talks that led to last week s EUR7 billion rescue package for debtladen euro zone countries. German Chancellor Angela Merkel also said in a speech late last week that the crisis over the euro s future was not just any crisis, it is the strongest test Europe has faced since 99. For the year to date, the euro fell about % against the dollar. The Australian and New Zealand dollars also lost significant ground against the US unit in the past two weeks on growing concern that austerity programmes in Europe and tightening measures in mainland China would halt global growth and erode demand for commodities. Europe s debt crisis will not be resolved in a short period of time and this is likely to weigh on the euro and other currencies still further in the months ahead, particularly as latest reports showed that the US economic recovery was gathering momentum, raising expectations that the Fed might raise interest rates ahead of its counterparts in Europe. 9Q Q QF QF QF EUR/USD....8. USD/JPY 9. 9.7 9. 9 98. GBP/USD.7.8..8. AUD/USD.8977.97.8.88.9 NZD/USD.78.7.8.7.7 USD/CAD..... USD/CNY.88.8.8.7. Notes: End of period figures; F denotes forecast Sources: Bloomberg L.P, Hang Seng Bank
Interest Rates May With Greece s sovereign debt spreading, all eyes were on Europe in the past month. The European Central Bank also became the centre of attention. As part of the EU/IMF rescue plan for debt-laden eurozone countries, the ECB started purchasing government bonds. The bank revealed that it bought EUR. billion in the week ended May. Its action succeeded in bringing down government bond yields in Greece, Portugal and Spain. For instance, the yield on -year Greek government bond fell from 9% on May 7 to around 7% currently and that on its -year also dropped from.% to 8%. In a bid to allay market fear about rising inflation risk, the ECB said that it would sterilise its operation by taking one-week deposits from banks. Despite its success in stabilizing European government bond markets, many see that such an action would blur between the line between fiscal and monetary policies, and undermine the credibility of the ECB in the longer term. In the near term, it would be difficult, if not impossible, for the ECB to raise interest rates anytime soon as growth in the European economies is bound to slow with many countries implementing austerity measures in a bid to reduce their fiscal deficits. Across the Atlantic, the situation seems to be much better. The US Federal Reserve is more optimistic about the US economic outlook. In the minutes of its latest meeting held on April 7-8, US policy makers raised US GDP forecast to a growth of.% to.7% in, from their original estimate of.8% to.%. Nevertheless, as the Fed does not see inflation as a near term risk, it is unlikely to begin tightening monetary policy any time soon. We maintain our forecast that the Fed would leave its target rate unchanged at a range of zero to.% for the rest of the year. (%) 9Q Q QF QF QF US Fed Funds Target Rate -. -. -. -. -. Japanese Target Rate..... Euro Refinancing Rate..... British Repo Rate..... Australian Cash Rate.7.... New Zealand Cash Rate Canadian Bank Rate..... Notes: End of period figures; F denotes forecast Sources: Central Bank Data, Bloomberg L.P., Reuters, Hang Seng Bank
US Economy May 9 8 7 US Retail Sales and Consumer Sentiment 7 8 9 - - - - Real growth in retail sales Reuters/University of Michigan consumer sentiment index US Industrial Production and Capacity Utilisation 8 8 8 8 7 7 7 7 7 8 9 Industrial Production (yoy change) Capacity Utilization US GDP and Leading Indicators - - - - - - The US economic recovery gained momentum at the start of the second quarter as manufacturing powered ahead and retail sales rebounded. However, a drop in building permits suggests that more government help may be needed if the economic recovery is to be sustained. The manufacturing sector has been leading the recovery as factories benefit from the upswing in the inventory cycle, improving global trade and leading to a gradual rebound in consumer spending. Industrial production jumped.8% in April after a.% increase in March. Meanwhile, capacity utilization, a closely watched measure of how fully the economy is using its productive potential, rose to 7.7% in April, the highest since November 8. Retail sales also rose.% in April, the seventh consecutive month of increase. A key reason for the spending gains may be that labour market recovery is accelerating, which also helps lift consumer sentiment. The housing market, the collapse of which triggered the financial crisis, has been recovering strongly but there are signs that the rebound is losing steam. US housing starts rose.8% to an annual rate of 7, units in April, the highest in -/ years. The gain mainly reflected a rush by prospective homeowners to take advantage of a federal tax credit for home buyers before the April deadline to sign contracts. They have to close the purchases by the end of June to qualify for the credit. However, a drop in building permits to a sixmonth low during the same month implied that the recovery may struggle to gain momentum without more government aid. - - - - - - 9 9 9 9 98 8 US Index of Leading Indicators US GDP Growth Despite a rebound in growth, inflation pressure remained subdued. Consumer prices fell.% in April, the first decrease in a year. Prices excluding food and energy rose were flat during the same month. On a year on year basis, overall and core inflation increased by.% and.9%. Such an inflation scenario and coupled with uncertainty in Europe, should give the Fed an opportunity to maintain its accommodative policy stance for a while longer and we therefore expect the Fed to leave interest rates unchanged for the rest of.
Euro Zone Economy May... -. -. -. -. - Euro Zone GDP Growth (quarter-on-quarter change) 7 8 9... -. -. -. -. - Source: Reuters EcoWin, Hang Seng Bank Contributions to euro area GDP growth (%) 7 8 9 Euro area GDP growth.7..8. -. Contributions by: "PIIGS".7..9 -. -. - Portugal - - Ireland... - -. - Italy... -. -.8 - Greece.. - - Spain.7..7 9 -.8 Source: Eurostat, Hang Seng Bank Euro area gross domestic product expanded by a quarterly rate of.% in the first three months of the year after being flat in the previous quarter. The rate of growth, measured year on year, was.%. The data suggested a continuation of recovery since the second half of last year. But risks to the outlook for growth, highlighted by the recent sovereign debt problems, appear to remain on the downside. Peripheral eurozone countries have taken aggressive measures to cut deficit. The adverse impact of fiscal consolidation on overall euro area growth could be considerable, given that these states were largely fast-growing economies prior to the intensification of the global financial crisis and have in total a large share in the euro area GDP. In 7, the growth of the -country region was.8%, with Greece, Spain, Portugal, Italy, and Ireland altogether making a.9% contribution. In the year and next, therefore, fiscal tightening will hold back growth in the region. As the outlook for the euro area economy is weak, inflation pressures will be limited. In particular, inflation is likely to decrease in the peripheral eurozone nations as price adjustments are required in a monetary union to restore the competitiveness of these economies. Ireland has fallen into deflation, with annual consumer prices down % in April. Spain s statistics office also reported that the country s core price index declined year-onyear in the month. Falling prices in these states will keep euro area inflation low for some time........ -. -. Eurozone Consumer Price Inflation -. -. 7 8 9 Consumer price index, YoY % Consumer price index excluding energy, food, alcohol and tobacco, YoY % Source: Reuters EcoWin, Hang Seng Bank....... Since the beginning of the year, the euro has dropped over % against the dollar and about % against the sterling. To some extent, the depreciation of the euro will reduce the magnitude of downward price adjustments necessary for those peripheral eurozone countries. The euro s decline will also increase euro area import prices and hence general price levels, if exporters to the eurozone raise prices to maintain their profit margins. But at the present state of the economy, the outlook for inflation is likely to be subject more to growth prospects than to exchange rate movements.
UK Economy May UK Industrial and Manufacturing Production (month-on-month change) Until now the direct impact of the eurozone debt crisis on the UK economy has been modest, if any. Total production output, which makes up 7% of UK gross domestic product, increased by a monthly rate of.% in March after rising.9% in February. Output increased in most of industries including manufacturing, mining and quarrying, except energy supply. - - - 8. 7..... 7 9 7 7 8 9 Industrial production in volume terms Manufacturing production in volume terms - - - UK Unemployment and Claimant Count 7 8 9. 7 9 7 Unemployment rate (all aged and over, ILO, s.a.) Overall claimant count (seasonally-adjusted) UK Consumer Price Inflation 8. 7.... The labor market also showed some signs of improvement. The claims for unemploymentrelated benefits fell by 7, in April, exceeding the expected decline of,. The number has decreased for five of the past six months, although the jobless rate has remained at a peak of 8.% and % of the unemployed have been without a job for more than a year. However, the eurozone s debt problems have indirectly affected the UK economy through the fiscal channel. The new UK government has decided to take more actions to reduce deficit. Chancellor of the Exchequer George Osborne is going to announce measures to cut GBP billion spending this year and will deliver on June an emergency Budget with new forecasts for growth and public finances. In the near term, the fiscal restraints are likely to slow the pace of economic expansion. In April, annual consumer price inflation rose to.7%, well above the Bank of England s % target. Excluding energy, food and beverages, and tobacco prices, it remained at.%. The figure raised fears of higher inflation down the road, but the Bank viewed that the rise was largely due to higher oil prices, the return of the value-added tax to %, and the continuing effect of past declines on sterling. - - 7 8 9 Consumer price index excluding energy, food, alcoholic beverages and tobacco (YoY) Consumer price index (YoY) The Bank of England therefore expects the elevated rate of inflation to be temporary. In its latest inflation report, it forecasts that inflation will fall back to below target within a year due to downward pressure from the substantial economic slack. Assuming the policy rate to be in line with market expectations, rising by the end of the year from.%, and the size of the asset purchase program held constant, the Bank projects that inflation will be more likely to stay below % for much of the -year forecast period.
Japan Economy May The Japanese economy advanced at a slowerthan-expected pace of.9% annualized in the first quarter of this year, compared with forecast of a.% gain. Meanwhile, the headline figure in the fourth quarter was upwardly revised to.% annualized from that of.8% in the earlier estimate. Looking into the details, the overall growth was mainly supported by the external sector, as the global recovery helped push up Japan s exports. Net exports contributed.7 percentage point. Another encouraging sign was that business investment registered a % gain, the second consecutive quarterly increase. This might suggest a turning point for capital spending. However, a boost in exports failed to boost consumer spending. Consumer spending contributed a mere.% in the quarter, less than last quarter s.%. This might raise concern about consumption after the fiscal stimulus measures wore off. On the price front, deflation remains the main concern in the Japanese economy. The GDP deflator, the broadest measure of prices, dropped by a record pace of %. Japan Household Spending vs Consumer Confidence 9 7 9 7 9 7 7 8 9 Household Spending Consumer Confidence - - - - - - (yoy %) Source: Reuters EcoWin Looking ahead, some recent forward indicators painted a mixed picture on the outlook of the economy. Machine orders, an indicator of business investment in three to six months, rose for the first time in three months by.% in March, though the figure was less than a consensus forecast of a.% growth. Demand for services dropped for two consecutive months, hindered by lower spending at wholesalers and on information and communication. The tertiary index, representing % of the economy, plummeted a more-than-expected % from the previous month. Looking into the details, the headline figure was mainly hindered by information and communication service demand (-8.%) and wholesale and retail trade (-.%). Consumer confidence jumped to the highest level since October 7, as it is believed that the export-led recovery continued to spread to households. The sentiment rose to in April from.9 in the previous month.
Key Economic Forecast Update US Euro Zone Japan May (Percent) 8 9 F 8 9 F 8 9 F Real GDP. -..8. -.. -. -. CPI Inflation Rate.9 -..... -. Unemployment Rate.8 9. 9.8 7. 9. 9.8.9..8 Official Short Rate # -. -. -...... -Year Bond Yield #..8..9.9..7.. Notes: # End-of-period data; E Estimates F - Forecasts US Dollar Forecast Update 9 Q QF QF QF EUR/USD....8. USD/JPY 9. 9.7 9. 9 98. GBP/USD.7.8..8. AUD/USD.8977.97.8.88.9 NZD/USD.78.7.8.7.7 USD/CAD..... USD/CNY.88.8.8.7. Notes: End-of-period figures; F denotes forecast Interest Rate Forecast Update 9 Q QF QF QF US Fed Funds Target Rate -. -. -. -. -. Japanese Target Rate..... Euro Refinancing Rate..... British Repo Rate..... Australian Cash Rate.7.... New Zealand Cash Rate Canadian Bank Rate..... Notes: End-of-quarter figures; F denotes forecast Sources: Central Bank Data, Bloomberg L.P., Reuters, Hang Seng Bank This document has been issued by Hang Seng Bank Limited ( HASE ) and the information herein is based on sources believed to be reliable and the opinions containe herein are for reference only and may not necessarily represent the view of HASE. The research analyst(s) who prepared this report certifies(y) that the view expressed herein accurately reflect the research analyst s(s) personal views about the financial instrument or investments and that no part of his/her/their compensatio was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Nothing herein shall constitute as offers o solicitation of offers to buy or sell foreign exchange contracts, securities, financial instruments or other investments. Re-distribution of any part of this document by an means is strictly prohibited. The information contained in this document may be indicative only and has not been independently verified and no guarantee, representation, warranty or undertaking express or implied is made as to the fairness, accuracy, completeness or correctness of any information, projections or opinions contained in this document or the basi upon which any such projections or opinions have been based and no responsibility or liability is accepted in relation to the use of or reliance on any information projections or opinions whatsoever contained in this document. Investors must make their own assessment of the relevance, accuracy and adequacy of the informatio and opinions contained in this document and make such independent investigations as they may consider necessary or appropriate for the purpose of such assessmen All such information, projections and opinions are subject to change without notice. HASE and its affiliates may trade for their own account in, may have underwritten, or may have a position in, all or any of the securities or investments mentioned in thi document. Brokerage or fees may be earned by HASE or its affiliates in respect of any business transacted by them in all or any of the securities or investments referre to in this document. The investments mentioned in this document may not be suitable for all investors. Investors must make investment decisions based on their own investment objectives financial position and particular needs and consult their own professional advisers where necessary. This document is not intended to provide professional advice an should not be relied upon in that regard. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Investment involves risk. Investor should note that value of investments can go down as well as up and past performance is not necessarily indicative of future performance. This document does no purport to identify all the risks that may be involved in the securities or investments referred to in this document. Hang Seng Treasury Strategic Unit Joanne Yim Yvonne Ma Thomas Shik Hang Seng Bank Limited 8 Des Voeux Road Central Hong Kong 7