Economic Research

January 4, 2013

Global Data Watch

Global PMI survey shows year-end lift led by US and EM Asia The shift away from caution by corporates to gain momentum Large front-loaded US tax hike to limit global lift in 1H13 BoJ monetary policy shift leaves new Korean government with difficult choice Expected December Chinese inflation rise highlights divergence ahead between EM and DM inflation trends

Contents
US: from one cliff to the nex t Australia's 2013 outlook: mind the grow th gap! Ghana: aw aiting fiscal discipline Global Economic Outlook Summary Global Central Bank Watch Now cast of global grow th Selected recent research from J.P. Morgan Economics The J.P. Morgan View : Markets 15 17 4 6 7 8 9 19 25 29 35 37 39 41 43 45 49 53 55 57 61 63 67 68 13

Bumpy, a little better, and a lot less risky

The global economy is turning into 2013 with growth momentum building modestly and financial conditions becoming more supportive. We forecast GDP gains to pick up modestly in the coming quarters. Following a meager 2.1% gain last yeara full percentage point below our estimate of trend global GDP is projected to expand at a 2.5% annualized pace during 1H13 followed by a 3.3% rise during the second half. The initial impetus for the increase in growth is coming from the corporate sector. A substantial shift toward business caution took hold in the middle of 2012 as profit growth slowed and concerns about the Euro area and China intensified. During the middle two quarters of last year global capital spending stalled, alongside a slowing in hiring and increased efforts to reduce the pace of inventory accumulation. In the event, global final demand growth held up, largely on the back of solid consumer spending. With profits continuing to grow and policy actions successful in stabilizing Chinese growth and containing Euro area stress, business sentiment has turned up and prices of risk assets have moved higher. The recent agreement to avert the US fiscal cliff should amplify these developments. Early indications that global investment spending is rebounding and the inventory cycle is set to turn support the view that momentum is building. Both developments point to better times ahead for a beleaguered global manufacturing sector that just completed its worst non-recession year in more than two decades. It should be recognized, however, that there is a year-end manufacturing bounce underway that overstates this turn. Global manufacturing output

Data Watches United States Euro area Japan Canada Mex ico Brazil Argentina Peru United Kingdom Central Europe South Africa Australia and New Zealand China, Hong Kong, and Taiw an Korea ASEAN Asia focus Regional Data Calendars

Monthly global GDP trackers

%m/m, saar 6 5 4 3 2 1 2010 Nowcaster

Manufacturing PMI new orders

DI, sa 60 55 50 45 US

Bruce Kasman
JPMorgan Chase Bank NA

David Hensley
EM Asia EMU Japan Jul 12
JPMorgan Chase Bank NA JPMorgan Chase Bank NA

PMI 2011 2012 2013

Joseph Lupton

40 Jan 12

www.morganmarkets.com

JPMorgan Chase Bank NA Bruce Kasman David Hensley

Joseph Lupton

Economic Research Global Data Watch January 4, 2013

The projected tension between low underlying inflation and the constraint posed by the zero interest rate bound represents a unique challenge for DM central bankers. Aggressive fiscal tightening in the US and Europe in the face of high unemployment represents another. In response, central bank balance sheets are set to expand further. However, there is a major new initiative underway as central banks experiment with their communication policythe signals policymakers send about their objectives and how they will react to changing economic circumstances. The active use of communication policy, with balance sheet activities used to reinforce messages, will be the defining feature of the G-4 central bank landscape in 2013. is estimated to have risen 0.4%m/m in November and will likely produce a similar-sized gain in December. Much of this lift represents a temporary bounce as disruptions related to Hurricane Sandy and the Japan-China dispute fade. The volatility in global activity related to recent shocks is buffeting our monthly GDP nowcaster, which fell below 1% in September and October and looks set to move up to 3% in December. Our all-industry global PMI is also lifting. Smoothing the monthly profile, both indicators have moved modestly above our bottom-up forecast for last quarter. Regionally the US and Emerging Asia are leading the move up in our global surveys. In the US, early December labor market reports and consumer indicators reinforce this message. Unfortunately, the economy is about to hit a pothole as the household sector absorbs a large front-loaded drag resulting from the fiscal cliff agreement. The increase in payroll taxes and higher marginal rates on high-income households is set to depress 1H13 income growth by roughly 2%-pts at an annualized pace. Although lower inflation will cushion part of this blow, US growth is expected to slow at the start of the year, limiting the lift in overall global growth. By contrast, EM Asia will be supported by the turn in global manufacturing as well as continued solid gains in Chinese demand. Recent months have already set the ball in motion. The ECB has reluctantly taken on the role of a sovereign liquidity backstop, and the launch of the OMT program institutes a key risksharing mechanism changing the nature of sovereign debt in the region. For its part, the Fed made a significant shift in its reaction function in September in an attempt to augment the perceived diminishing returns of asset purchases. The minutes of the latest meeting also highlight the Feds concern about a large open-ended purchase plan with sentiment on the committee pointing to a scaling down of the program later this year. Our forecast that QE3 will end in the first half of 2014 would appear to be challenged by this news. However, the Feds policy forecast is predicated on a 2.7% (4Q/4Q) 2013 GDP forecast, which is well above our own 2%. Importantly, the minutes reiterate that the numerical targets on rate guidance are consistent with above-trend growth and unchanged rate policy until mid-2015.

The slack debate divides

If economic slack matters for inflation, then so, too, does the measurement of slack. Any disinflationary impulse from slack rests heavily on the measurement of actual real GDP relative to its unobserved potential. Mismeasurement of the output gap has led policymakers to make large errors in the past, particularly in the 1970s. It thus comes as little surprise that this issue underlies a heated debate taking place in the halls of central banks as this measurement either reinforces or undermines the foundation for the unprecedented levels of monetary policy support now in place. Whereas the ECB and BoE have been much more accepting of the idea of supply destruction in the wake of the global financial crisis, the Fed and the BoJ have viewed the GDP shortfall as mostly demand-driven. Based on our estimates of the output gap consistent with each central banks thinking, the Euro area and UK have experienced as much as a 6% to 10% outright reduction in productive capacity as of 4Q12,

Central bank communications are the key

Even as global growth picks up, the legacy of two full years of subpar performance will play a major role influencing macroeconomic performance. Global inflation is expected to retreat modestly this year, settling at a 2.5%oya pace in 4Q13. This would build on the even larger drop recorded in 2012 and would take inflation to the lower end of the range for the past decade, outside of recessions. The decline is expected to be focused in the developed world, where core inflation is expected to fall against a backdrop of weak (though improving) growth and dramatically lower import price inflation.

JPMorgan Chase Bank NA Bruce Kasman David Hensley

Joseph Lupton

Economic Research Global Data Watch January 4, 2013

Nominal broad trade-weighted exchange rates

Indexed Jan 3, 2011=1.0 1.08 1.04 1.00 0.96 0.92 2011 Japan 2012 2013 EM Asia

would reinforce these trends. Nevertheless, Asian policymakers are leery of sustained, rapid currency gains and regularly intervene in FX markets. Korea may be a test case. Korean policy priorities appear to have shifted in recent months, a shift that may be reinforced after the new government takes office in February. Already, the 2013 budget, which was approved by the National Assembly earlier this week, altered spending plans to improve the welfare system, while raising the tax burden on higherincome households by imposing comprehensive financial income taxes for interest and dividend income of more than Won20 million. The National Assembly also terminated temporary tax benefits for housing transactions despite concern about market weakness. Expectations are building that the new government will be more tolerant of KRW appreciation in order to boost household buying power. Yet it is unclear how far it will go with the won already having appreciated quite sharply in recent months and the export outlook still uncertain. EM Asian FX policy also will be affected by what happens in Japan. The new Japanese government has been unusually aggressive in advocating a cheaper yen. On a trade-weighted basis, the yen already is down about 12% from the recent July peak, with about half of the drop occurring over the past month. History shows that the wons appreciation against the yen tends to occur during global economic recoveries, allowing rising demand to offset any lost competitiveness. If won appreciation is driven largely by Japans monetary policy shift, Korean officials likely would intervene more heavily.

relative to pre-crisis potential growth trends. By contrast, the US and Japan have seen a much more modest 2% hit. With output gaps still depressed across the G-4, the debate is somewhat moot in the near term as inflation pressures will remain subdued again this year. However, a return to more robust growth would lead to a staggered exit from unprecedented monetary policy support, with the ECB and BoE likely to move first.

EM inflation looks set to firm modestly

Whereas inflation is expected to recede in the developed world this year, it is forecast to increase somewhat in the emerging economies, led by Asia. We estimate that the output gap is positive in Asia and near neutral in Latin America, though negative in CEEMEA. Inflation has been rising recently in China, and we look for a further increase in next weeks December report to 2.3%oya. Chinese inflation is expected to keep firming in 2013, driven by a turnaround in the food price cycle and higher unit labor costs. An expected push by the new government on resource price reform will add to the pressure. Some of the same factors are at work elsewhere in the region. Korea, Malaysia, and Taiwan will lead the pack as headline inflation in these economies is forecast to end the year more than 1%-point higher than the rate at which it started. For the most part, Asian inflation is moving up off of low levels and the forecasted gains are not expected to trigger central bank tightening. Indeed, we expect inflation to remain below the upper limit of most central bank targets this year. If our outlook proves correct, EM Asian policymakers will gradually shift focus to guarding against signs of overheating or a return to rapid growth in credit.

Egypts FX weakness tied to political unrest

Egypts political crisis over the constitutional referendum has taken a toll on domestic sentiment and pushed the currency to its weakest level ever. We believe the acceleration in dollarization in December prompted the central bank to conduct a controlled mini-devaluation. Pressure on the currency is likely to remain elevated amid dwindling international FX reserves. We believe the central bank will try to stabilize the currency ahead of parliamentary elections, likely to be held within two months. These elections are pivotal to Egypts near-term outlook and international financial support. In our view, IMF talks will likely resume in January but a US$4.8 billion loan is unlikely to be approved before parliamentary elections, while other international support from the African Development Bank, the United States, and the EU will be tied to the IMF deal.

Korean shift to be tested by yen slide

One factor that should help contain EM Asian inflation is currency appreciation. EM Asian currencies gained in value during 2H12 as reduced uncertainty about developments in Europe and China contributed to a fall in risk premia. Our forecast for a continued, gradual acceleration in global GDP

Editor: Sandy Batten

3

JPMorgan Chase Bank NA David Hensley Carlton Strong

Joseph Lupton

Economic Research Global Data Watch January 4, 2013

Global economic outlook summary

Real GDP
% over a year ago

Real GDP
% over previous period, saar

Consumer prices
% over a year ago

2011 The Americas United States Canada Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Uruguay Venezuela Asia/Pacific Japan Australia New Zealand Asia ex Japan China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Africa/Middle East Israel South Africa Europe Euro area Germany France Italy Spain United Kingdom Emerging Europe Bulgaria Czech Republic Hungary Poland Romania Russia Turkey Global Developed markets Emerging markets 1.8 2.6 4.2 8.9 2.7 6.0 5.9 8.0 3.9 6.9 5.7 4.2

2012 2.3 2.0 2.4 2.3 1.0 5.5 3.2 5.0 3.9 6.2 3.5 5.0

2013 1.8 1.7 3.7 3.6 3.4 4.5 4.0 4.0 3.6 6.0 4.0 0.0

2Q12

3Q12

4Q12

1Q13

2Q13 1.5 2.0 4.1 2.5 3.8 5.0 6.1 3.0 4.5 6.0 4.3 0.0 2.0 2.8 4.3 6.6 8.2 3.5 5.7 4.5 4.0 4.5 4.9 1.6 3.5 3.5 2.8 4.0 0.8 2.0 0.5 0.5 -1.5 1.5 2.6 0.8 0.5 2.3 3.2 3.0 2.8 1.4 5.4

3Q13 2.5 2.2 4.0 2.0 3.6 5.0 6.1 3.0 4.6 5.0 4.0 3.0 1.7 2.4 1.6 6.8 8.2 5.0 5.8 5.0 4.5 4.5 5.3 4.1 3.8 4.5 3.6 4.1 1.3 2.5 1.0 1.0 0.0 2.0 3.6 2.4 1.8 3.0 4.1 4.0 3.2 1.9 5.6

4Q13 3.0 2.5 3.9 2.0 3.8 4.6 5.3 4.0 4.0 5.0 4.0 4.0 2.7 2.4 3.1 7.0 8.2 5.0 6.0 5.5 4.5 5.0 5.3 6.1 4.0 4.5

2Q12 1.9 1.6 4.9 9.9 5.0 3.1 3.4 5.1 3.9 4.1 8.0 22.3 0.2 1.2 1.0 3.9 2.9 4.2 10.1 4.5 2.4 1.7 2.9 5.3 1.7 2.5 1.6 5.7 2.5 2.1 2.3 3.6 1.9 2.8 5.0 3.4 5.5 4.0 1.9 3.8 9.4 2.7 1.8 4.3

4Q12

2Q13

4Q13

1.3 3.1 1.5 1.0 1.7 0.6 1.5 1.7 2.0 2.2 3.9 3.9 -3.7 2.5 12.0 2.0 1.0 2.4 3.1 3.9 8.3 5.7 2.9 4.0 5.3 -2.6 3.7 4.2 4.8 3.0 5.5 5.0 3.3 1.8 2.3 3.9 6.0 5.5 6.0 6.5 2.2 7.8 2.3 6.0 -0.5 4.2 0.0 -4.0 -0.1 2.3 1.0 5.8 7.1 -0.4 5.3 6.0 1.1 6.3 5.0 0.5 -0.4 11.7 3.4 3.4 -0.7 1.1 -0.2 -2.9 -1.7 -1.5 0.6 -1.6 -1.4 0.8 0.5 1.0 1.6 0.3 4.1

1.9 1.6 1.4 1.6 1.4 2.0 5.2 5.2 5.0 10.0 10.0 11.0 5.6 6.0 5.5 2.7 2.2 3.1 2.8 2.1 2.4 5.1 5.4 4.7 4.2 3.5 3.3 2.8 2.1 2.5 8.9 8.1 7.6 18.6 30.2 35.0 0.1 2.6 1.4 3.2 2.0 3.5 9.8 4.3 1.7 1.2 2.3 3.9 1.6 3.0 1.9 5.6 2.3 2.1 1.8 2.6 3.2 2.7 5.8 2.7 5.5 2.9 5.4 6.6 6.8 2.7 1.8 4.1 0.1 3.2 1.5 3.8 3.0 3.5 9.0 3.9 2.4 2.3 2.3 3.8 1.3 3.6 1.9 5.9 1.8 1.9 1.5 1.6 2.5 2.7 5.8 2.2 3.4 1.9 6.3 7.0 6.7 2.6 1.6 4.4 0.3 2.7 2.3 4.1 3.5 3.3 8.5 4.6 3.0 2.6 2.9 4.0 2.3 3.0 2.2 5.4 1.7 1.8 1.7 2.3 2.5 2.4 5.1 2.4 3.7 2.4 5.1 5.7 6.3 2.5 1.5 4.5

-0.5 2.4 1.4 7.5 9.3 4.9 6.5 6.5 3.6 5.1 3.8 4.9 4.1 0.1

2.0 3.5 2.3 6.1 7.6 1.2 5.2 5.7 2.2 5.3 6.4 1.2 1.2 5.7

0.5 2.5 2.8 6.5 8.0 3.2 5.8 4.5 3.0 5.1 4.8 2.3 3.4 4.5

-3.5 1.9 0.8 5.7 7.7 2.4 4.1 4.9 0.2 3.6 5.2 -5.9 3.9 5.0 2.9 1.2 -0.2 0.9 0.9 -0.8 -1.1 3.8 1.4 -1.3 -0.7 1.6 -2.0 2.2 2.1 0.9 4.2

-0.5 1.1 2.5 6.5 8.2 2.5 5.1 4.5 3.5 6.5 4.5 1.8 3.8 2.5 2.8 -0.4 -1.5 -1.0 -1.5 -2.0 -2.5 0.0 1.8 -1.6 -1.0 0.5 -1.2 3.0 1.9 0.1 5.1

1.0 3.7 3.8 6.5 8.0 3.5 6.2 4.5 2.5 5.0 4.5 6.1 3.5 3.5 3.2 4.4 0.0 1.0 -0.5 -0.5 -2.5 0.8 2.4 0.0 0.0 1.3 -0.4 3.5 2.4 0.8 5.3

4.6 3.5

3.0 2.3

3.1 2.7

3.6 3.8 1.5 2.5 1.0 1.0 0.0 2.0 3.0 1.4 2.0 2.3 2.4 3.5 3.5 2.4 5.6

1.5 3.1 1.7 0.6 0.4 0.9 4.8 1.7 1.9 1.6 4.3 2.5 4.3 8.5

3.1 1.4 6.2

-0.4 0.9 0.1 -2.1 -1.4 0.0 2.5 0.7 -1.1 -1.4 2.1 0.0 3.6 2.6 2.4 1.2 4.6

0.0 1.1 0.0 -0.5 -1.6 1.2 2.5 1.5 0.0 0.0 1.6 0.8 3.0 3.7

Memo: Global PPP weighted 3.8 3.0 3.1 2.3 2.7 2.6 3.0 3.4 3.8 3.8 3.2 3.1 3.0 3.0 Note: For some emerging economies, 2012-2013 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. On July 6 we shifted to using concurrent nominal GDP weights in computing our global and regional aggregates from a static 5-year average GDP weight. We maintain the use of current FX rates but still report PPP-based aggregates. For details, see research note "Global economic aggregates get new weights in July 6, 2012 GDW.
4

2.5 1.0 5.1

JPMorgan Chase Bank NA David Hensley Carlton Strong

Joseph Lupton

Economic Research Global Data Watch January 4, 2013

G-3 economic outlook detail

Percent change over previous period; seasonally adjusted annual rate unless noted
2012 2011 United States Real GDP Private consumption Equipment investment Non-residential construction Residential construction Inventory change ($ bn saar) Government spending Exports of goods and services Imports of goods and services Domestic final sales contribution Inventories contribution Net trade contribution Consumer prices (%oya) Excluding food and energy (%oya) Federal budget balance (% of GDP, FY) Personal saving rate (%) Unemployment rate (%) Industrial production, manufacturing Euro area Real GDP Private consumption Capital investment Government consumption Exports of goods and services Imports of goods and services Domestic final sales contribution Inventories contribution Net trade contribution Consumer prices (HICP, %oya) ex unprocessed food and energy General govt. budget balance (% of GDP, FY) Unemployment rate (%) Industrial production Japan Real GDP Private consumption Business investment Residential construction Public investment Government consumption Exports of goods and services Imports of goods and services Domestic final sales contribution Inventories contribution Net trade contribution Consumer prices (%oya) General govt. net lending (% of GDP, CY) Unemployment rate (%) Industrial production 1.8 2.5 11.0 2.8 -1.4 31.0 -3.1 6.7 4.8 1.7 -0.2 0.2 3.1 1.7 -8.6 4.3 8.9 4.3 1.5 0.1 1.6 -0.1 6.5 4.3 0.3 0.2 1.0 2.7 1.7 -4.1 10.2 3.4 -0.5 0.5 3.3 5.5 -7.0 1.4 -0.4 5.9 0.8 -0.5 -0.8 -0.3 -9.7 4.6 -2.3 2012 2.3 1.9 6.8 9.7 12.2 45.3 -1.4 3.0 2.1 2.1 0.1 0.1 2.1 2.1 -6.9 3.8 8.1 4.0 -0.4 -1.1 -3.7 -0.2 3.1 -0.4 -1.3 -0.6 1.6 2.5 1.8 -3.8 11.4 -2.0 2.0 2.3 2.1 2.1 11.5 2.7 -0.5 4.5 2.7 0.0 -0.7 0.1 -10.7 4.3 -0.9 2013 1.8 1.3 4.8 3.5 18.9 37.1 -0.9 1.5 0.6 1.7 0.0 0.2 1.4 1.6 -5.5 2.7 7.7 1.5 0.0 -0.5 -2.0 -0.2 3.7 2.3 -0.7 0.0 0.7 1.8 1.6 -2.8 12.3 0.4 0.5 0.4 0.0 6.1 5.8 1.6 -3.5 -0.9 1.0 -0.1 -0.4 0.1 -10.9 4.1 0.2 1Q 2.0 2.4 5.4 12.8 20.6 56.9 -3.0 4.4 3.1 2.3 -0.4 0.1 2.8 2.2 3.6 8.3 9.8 -0.1 -1.1 -4.7 0.6 2.0 -1.1 -1.4 -0.1 1.3 2.7 1.9 10.9 -2.0 5.7 4.7 -9.3 -4.3 34.9 5.7 13.9 9.7 4.7 0.1 0.8 0.3 4.5 5.1 2Q 1.3 1.5 4.8 0.6 8.4 41.4 -0.7 5.2 2.8 1.5 -0.5 0.2 1.9 2.3 3.8 8.2 0.8 -0.7 -1.7 -6.9 -0.4 6.4 2.5 -2.3 -0.1 1.8 2.5 1.8 11.3 -2.1 -0.1 0.3 0.5 6.3 23.6 1.9 3.3 7.4 0.4 0.0 -0.5 0.2 4.4 -7.7 3Q 3.1 1.6 -2.6 0.0 13.6 60.3 3.9 1.9 -0.6 2.0 0.7 0.4 1.7 2.0 3.6 8.0 -1.1 -0.2 -0.1 -2.9 -0.6 3.5 0.8 -0.7 -0.7 1.2 2.5 1.7 11.5 1.5 -3.5 -1.7 -11.3 3.7 6.1 2.4 -18.9 -1.8 -0.3 -0.1 -3.0 -0.4 4.2 -15.8 4Q 1.5 2.2 9.9 0.3 19.4 22.5 -3.0 -8.5 -9.1 2.2 -1.1 0.4 1.9 2.0 4.1 7.8 -1.1 -1.5 -1.0 -4.0 -0.5 3.0 1.0 -1.4 -1.0 0.9 2.3 1.6 11.8 -3.5 -0.5 0.5 -5.0 5.0 5.0 1.5 -20.0 -20.0 -0.4 0.2 -0.3 0.1 4.2 -5.5 0.7 1.1 1Q 1.0 0.3 2.0 3.0 16.0 33.0 -1.5 3.0 2.0 0.6 0.3 0.1 1.4 1.8 2.2 7.8 2.0 0.0 -0.8 -3.0 -0.5 3.5 2.0 -1.1 0.3 0.8 1.9 1.6 12.1 0.5 1.0 0.6 3.0 6.0 -3.0 1.2 4.7 5.0 1.1 -0.1 0.0 -0.4 4.1 8.0 3.9 0.7 2013 2Q 1.5 0.5 6.0 6.0 23.0 36.3 -1.2 5.0 4.0 1.4 0.1 0.1 1.6 1.6 2.7 7.7 3.0 0.8 -0.5 0.0 0.0 3.5 3.0 -0.3 0.7 0.4 1.8 1.5 12.3 2.0 2.0 0.6 4.0 7.0 10.0 1.5 5.2 5.6 1.7 0.3 0.0 0.1 4.1 6.0 4.0 2.0 3Q 2.5 1.9 7.0 8.0 25.0 40.8 -1.0 5.0 6.0 2.6 0.1 -0.2 1.5 1.6 2.8 7.7 4.0 1.3 0.5 1.5 0.5 4.0 4.0 0.7 0.4 0.2 1.7 1.6 12.3 2.5 1.7 0.7 5.5 7.5 10.0 1.5 5.6 5.0 1.7 -0.2 0.2 0.5 4.1 4.0 4.4 3.2 4Q 3.0 2.5 8.0 9.0 25.0 38.3 -1.0 6.0 6.0 3.2 -0.1 -0.1 1.4 1.6 2.9 7.6 4.0 1.5 1.3 2.0 1.0 4.0 4.0 1.3 0.0 0.2 1.7 1.7 12.3 3.0 2.7 2.7 5.0 8.0 8.0 1.5 5.6 4.2 2.7 -0.2 0.3 0.3 4.0 8.0 5.1 4.3

Memo: Global industrial production 4.2 1.8 2.6 6.3 -1.1 -0.2 %oya 2.8 2.5 1.0 Note: More forecast details for the G-3 and other countries can be found on J.P. Morgans Morgan Markets client web site

JPMorgan Chase Bank NA David Hensley Michael Mulhall

Joseph Lupton

Economic Research Global Data Watch January 4, 2013

Global Central Bank Watch

Official rate Global excluding US Developed Emerging Latin America EMEA EM EM Asia The Americas United States Canada Brazil Mexico Chile Colombia Peru Uruguay Europe/Africa Euro area Refi rate United Kingdom Bank rate Czech Republic 2-wk repo Hungary Israel Poland Romania Russia South Africa Turkey Asia/Pacific Australia New Zealand Japan Hong Kong China Korea Indonesia India Malaysia Philippines Thailand Taiwan Cash rate Cash rate O/N call rate Disc. wndw 1-yr working Base rate BI rate Repo rate O/N rate Rev repo 1-day repo Official disc. 2-wk dep Base rate 7-day interv Base rate Repo rate Repo rate Effctve rate Fed funds O/N rate SELIC O/N Repo rate Disc rate Repo rate Reference Reference Current rate (%pa) 2.24 2.93 0.50 5.51 6.08 4.83 5.54 1.44 0.125 1.00 7.25 4.50 5.00 4.25 4.25 9.25 1.61 0.75 0.50 0.05 5.75 1.75 4.25 5.25 5.50 5.00 5.56 3.72 3.00 2.50 0.05 0.50 6.00 2.75 5.75 8.00 3.00 3.50 2.75 1.875 Change since (bp) 05-07 avg Trough -214 -139 -299 -157 -468 -162 -32 -388 -438 -273 -800 -337 31 -306 19 200 -225 -223 -444 -235 -138 -250 -27 -294 N/A -329 -1037 2 -294 -488 -17 -548 -14 -140 -412 113 -24 -356 -108 -71 40 45 0 61 0 89 103 27 0 75 0 0 450 125 300 300 6 0 0 0 50 125 75 0 N/A 0 0 81 0 0 0 0 69 75 0 325 100 0 150 62.5
1

Last change

Next mtg

Forecast next change

Forecast (%pa) Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 2.22 2.90 0.49 5.46 6.05 4.74 5.51 1.43 2.21 2.89 0.49 5.44 6.05 4.69 5.48 1.43 0.125 1.00 7.25 4.50 5.00 3.75 4.25 9.25 1.58 0.75 0.50 0.05 5.00 1.75 3.50 5.25 5.50 5.00 5.40 3.66 2.75 2.50 0.05 0.50 6.00 2.50 5.75 7.75 3.00 3.50 2.75 1.875 2.21 2.89 0.49 5.44 6.05 4.68 5.48 1.43 0.125 1.00 7.25 4.50 5.00 3.75 4.25 9.25 1.58 0.75 0.50 0.05 5.00 1.75 3.50 5.25 5.50 5.00 5.35 3.66 2.75 2.75 0.05 0.50 6.00 2.50 5.75 7.75 3.00 3.50 2.75 1.875 2.22 2.91 0.50 5.45 6.10 4.68 5.48 1.46 0.125 1.25 7.25 4.50 5.00 4.50 4.25 9.25 1.58 0.75 0.50 0.05 5.00 1.75 3.50 5.25 5.50 5.00 5.35 3.66 2.75 2.75 0.05 0.50 6.00 2.50 5.75 7.75 3.00 3.50 2.75 1.875 2.29 3.00 0.52 5.61 6.54 4.60 5.63 1.58 0.125 1.50 8.00 4.50 5.00 4.75 4.25 9.00 1.56 0.75 0.50 0.05 5.00 1.75 3.50 5.25 5.25 5.00 5.50 3.78 3.00 3.00 0.05 0.50 6.25 2.50 5.75 7.75 3.00 3.50 2.75 2.00

Jul 11 -47 -56 -32 -76 -295 49 -44 -60 0 0 -525 0 -25 -25 0 125 -34 -75 0 -70 -25 -150 -25 -100 N/A -50 -69 -42 -175 0 0 0 -56 -50 -100 0 0 -100 -50 0 4 Dec 12 (-25bp) 5 Oct 10 (-5bp) 7 Jul 12 (-31bp) 9 Feb 12 (-25bp) 5 Jul 12 (-25bp) 5 Mar 09 (-50bp) 1 Nov 12 (-20bp) 10 Jan 13 10 Jan 13 6 Feb 13 16 Dec 08 (-87.5bp) 30 Jan 13 8 Sep 10 (+25bp) 23 Jan 13 10 Oct 12 (-25bp) 16 Jan 13 17 Jul 09 (-25bp) 18 Jan 13 12 Jan 12 (-25bp) 17 Jan 13 12 May 11 (+25bp) 10 Jan 13 28 Dec 12 (+25bp) 27 Mar 13

On hold 4Q 13 (+25bp) 1Q 14 (+25bp) 2Q 14 (+25bp) On hold On hold 1Q 14 (-25bp)

0.125 1.00 7.25 4.50 5.00 3.75 4.25 9.25 1.59

23 Nov 12 (-25bp) 18 Jan 13 18 Jan 13 (-25bp)

2Q 14 (+25bp) On hold On hold On hold 9 Jan 13 (-25bp) On hold 1Q 14 (-25bp) On hold N/A

0.75 0.50 0.05 5.50 1.75 3.75 5.25 5.50 5.00 5.40 3.68

18 Dec 12 (-25bp) 29 Jan 13 29 Jan 13 (-25bp) 24 Dec 12 (-25bp) 28 Jan 13 5 Dec 12 (-25bp) 29 Mar 12 (-25bp) 13 Sep 12 (+25bp) 19 Jul 12 (-50bp) N/A 9 Jan 13 7 Jan 13 Jan 13 24 Jan 13 Jan 13

4 Feb 13 4 Feb 13 (-25bp) 22 Jan 13 10 Jan 13 On hold On hold 1Q 14 (+25bp) On hold On hold On hold On hold 1Q 14 (+12.5bp)

2.75 2.50 0.05 0.50 6.00 2.75 5.75 7.75 3.00 3.50 2.75 1.875

10 Mar 11 (-50bp) 31 Jan 13 Sep 13 (+25bp) 17 Dec 08 (-100bp) 31 Jan 13

11 Oct 12 (-25bp) 11 Jan 13 11 Apr 13 (-25bp) 17 Apr 12 (-50bp) 29 Jan 13 29 Jan 13 (-25bp) 5 May 11 (+25bp) 31 Jan 13 25 Oct 12 (-25bp) 24 Jan 13 17 Oct 12 (-25bp) 30 Jun 11 (+12.5bp) 9 Jan 13 1Q 13

1 Refers to trough end-quarter rate from 2009-present Effective rate adjusted on daily basis Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting during upcoming week. Aggregates are GDP-weighted averages.

JPMorgan Chase Bank NA Joseph Lupton David Hensley

Economic Research Global Data Watch January 4, 2013

Nowcast global growth: 4Q12 momentum builds into year-end

Although the first of the official 4Q GDP reports are still a few weeks off, monthly activity data through November and business surveys through December are now available. Our bottom-up J.P. Morgan forecast continues to see global GDP having expanded at a weak 1.8% annualized last quarter, as modest gains in the US and EM were held back by contractions in Europe and Japan. We attribute part of the weakness to one-off factors related to the hurricane in the US, geopolitical tension between Japan and China, and abnormal swings in auto production in Europe. As these fade, and recovery dynamics take hold in Europe, global GDP is expected to accelerate to a 2.3% pace this quartera still-soft pace owing to a fiscal drag in the US. The shift in momentum is already showing up in the monthly data flow. The December all-industry PMI report shows global economic activity accelerating. Importantly, the manufacturing PMI continues to underscore a constructive turn in the inventory cycle as surprisingly resilient global final demand amplified the stock-building drawdown implied by the sharp contraction in global factory output in the three months through October. Our global nowcaster provides a useful lens through which to view the moving parts underlying the business surveys and the production and final demand data now in hand. According to the filtering of these data, global GDP expanded at a 2% annualized pace last quarter, a touch stronger than the bottom-up forecast. This top-down projection relies importantly on a judgmental assumption that global IP will expand at a solid 0.4% in November, an estimate based on reported data (including the US, China, and Japan) amounting to 54% of global value-added. The monthly global GDP tracking implied by our nowcaster underscores how depressed economic activity was at the start of 4Q12 and that the unwinding of one-off factors is leading to a sharp buildup in momentum into year-end. This leveraging of growth via the inventory cycle certainly amplifies the manufacturing bounce, but this will be temporary. More important to watch is the building momentum in final demand. Retail sales volume growth is expected to get a boost from falling inflation, while the stumble in global capex in mid-2012 looks set to reverse, based on the latest pickup in G-3 capital goods orders.

Global real GDP

%q/q, saar (current forecast shaded) 3Q12 J.P. Morgan Nowcaster (DFM-Eco) Global PMI model 2.0 1.4 1.7 Current 1.8 2.0 2.2 4Q12 Last week 1.8 1.7 2.2 4 weeks ago 1.7 1.3 1.5

Nowcasting global real GDP by forecast date, 4Q2012

%q/q, saar 2.0 1.8 1.6 1.4 1.2 J.P.Morgan Nowcast

Feb 01

Feb 08

Feb 15

Nov 02

Nov 09

Nov 16

Nov 23

Nov 30

Dec 07

Dec 14

Dec 21

Dec 28

J.P. Morgan global aggregates

Quarters are %3m,saar (PMIs avg level); Months are %m/m (PMIs level) 3Q12 4Q12 Oct 12 Nov 12 PMI, mfg 48.7 49.7 48.5 50.1 PMI, serv 52.9 53.8 52.0 54.8 1.9 0.0 0.4 IP -3.1 2.4 0.1 0.3 Retail sales 2.2 15.0 2.2 1.5 Auto sales -21.8 7.4 2.3 -1.2 Cap. orders -19.6 Nowcast 1.4 2.0 0.9 2.6 Dec 12 50.5 54.8 0.0 0.2 -0.2 0.8 2.6

Note. Shaded values show forecasts computed by the Kalman filter estimates from the dynamic factor model. Underlined values are our estimates based on available data and our judgment.

Global real GDP

%chg; Boxes are J.P. Morgan forecast 3Q and 4Q12 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Nowcaster through Dec; Monthly GDP (%m/m, saar) 0.5 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Actual/JPM

Feb 22
7

Jan 04

Jan 11

Jan 18

Jan 25

1.0

JPMorgan Chase Bank NA, New York Bruce Kasman Joseph Lupton David Hensley

Economic Research Global Data Watch January 4, 2013

Selected recent research1 from J.P. Morgan Economics

Global
Global consumers: look for solid holiday shopping season, Nov 30, 2012 EM bank tightening is gradually abating, Oct 19, 2012 FX reserve accumulation nears stall speed, Oct 19, 2012 Fed, ECB shock and deliver, Sep 21, 2012 Tracking a low-level bottom in global growth, Aug 3, 2012 Expecting a wide but shallow global monetary easing cycle, Jul 27, 2012 EM inflation slide tempered by jump in agriculture prices, Jul 13, 2012 Global economic aggregates get new weights, Jul 6, 2012 Global manufacturing will remain weak in 3Q, Jun 29, 2012 Global inflation falls below target, risks to the downside, Jun 29, 2012 A downgrade to global growth, Jun 8, 2012 Gauging the upside to the global outlook, Mar 9, 2012

Central Europe, Middle East, and Africa

MENA: regional turmoil sends tourists to Southern Europe, Dec 14, 2012 Romania elections: USL win, temporary political setback, Nov 30, 2012 Egypt: unexpected power play to test outlook, Nov 23, 2012 Turkey: CAD narrows even apart from gold exports, Nov 9, 2012 Ukraine election preview and what to expect afterward, Oct 26, 2012 CE-4: Romania hit most by food price shock, Poland least, Oct 19, 2012 South Africa: perfect storm leads to likely GDP contraction, Oct 5, 2012 South Africa: CPI re-weighting to lift inflation projections, Aug 31, 2012

Japan
Japan: Abe trying to end deflation with "Abenomics," Dec 21, 2012 Second chance for next PM Abe to change Japan, Dec 21, 2012 Japan: what can and cannot be expected from the election, Nov 23, 2012 Macroeconomic impacts of Japan/China dispute, Oct 5, 2012 The BoJ eased, what's next? Sep 21, 2012 Japan: recession or stagnation, that is the question, Sep 14, 2012 Japan: hope and anxiety, consumption by the elderly, Aug 17, 2012

United States and Canada

Accounting for the US current account improvement, Dec 14, 2012 Will unlimited QE limit US bank lending? Dec 7, 2012 US: a numerical thresholds primer, Nov 30, 2012 US households know how to read the labor market data, Nov 30, 2012 Six more weeks of fiscal cliff, if you dont jump off one, Nov 9, 2012 Just what is recovering in the US housing recovery? Nov 9, 2012 US: here comes the story of the hurricane, Nov 2, 2012 The US fiscal cliff: an update and a downgrade, Oct 19, 2012 Revival of capex is key to near-term US growth, Oct 19, 2012 US: the impact of higher dividend and cap gains taxes, Oct 5, 2012 US inflation will be hibernating through the winter, Oct 5, 2012 Breaking Good: US consumer gets unexpected help, Sep 21, 2012 US: the Feds novus ordo seclorum, Sep 14, 2012 US house prices are up; supply overhang has vanished, Aug 31, 2012 US: drought means lower GDP now, higher inflation later, Aug 17, 2012 US: interest income in an era of ultra-low interest rates, Aug 10, 2012 US: the Treasury-Fed discord, Jul 27, 2012 US slowdown: it's not just about the uncertainty, Jul 27, 2012 US: would a decent economy be too much to ask for? Jul 20, 2012 Sorry, the Fed wont be buying your equities from you, Jul 13, 2012

Non-Japan Asia and Pacific

Something has to give in Australia's flow of funds, Dec 14, 2012 Korea: house rent prices and consumption doldrums, Dec 14, 2012 Can Aussie dwelling starts shoulder growth expectations? Nov 30, 2012 Economics to trump arithmetic in Aussie tradable inflation, Nov 23, 2012 EM Asia's unit labor costs: not quite goldilocks, Nov 23, 2012 Hong Kong: tackling strong capital inflows, Nov 9, 2012 RBNZ leadership change: new boss same as the old boss? Nov 2, 2012 Thailand: fiscal transfers pushing up public debt, Oct 26, 2012 Aussie exports performing well given global headwinds, Oct 12, 2012 Indonesia: tracking signs of a credit cycle inflection, Oct 12, 2012 Chinas local government stimulus: castles in the air, Oct 5, 2012 Mixed messages in Emerging Asias manufacturing data, Sep 28, 2012 Singapore: MAS to ease or not to ease? A tough question, Sep 28, 2012 A brief history of Indonesias fiscal financing, Sep 28, 2012 Taiwan trade hinges on G-3 demand as China stabilizes, Sep 21, 2012

Western Europe
Treaty constraints on the ECB's behavior, Dec 14, 2012 UK: Carney plants a seed in fertile ground, Dec 14, 2012 UK: zombie households are not a threat to growth, Dec 7, 2012 OSI and Greece: what has been achieved thus far, Dec 7, 2012 Euro area growth, credit, and bank deleveraging, Nov 30, 2012 UK: the case against zombie firms, Nov 30, 2012 Spain: import compression is preventing bigger GDP fall, Nov 30, 2012 UK: the recession that wasnta new way to track GDP, Nov 23, 2012 Financing Greece leaves unfinished business, Nov 9, 2012 ECB shuns Portugal to save its blushes on Greece, Nov 9, 2012 What if UK growth stays weak? A look at the policy options, Nov 2, 2012 Euro area: a look at the prospect of lift from inventory, Oct 26, 2012 Catalan challenge asks real questions of Europe, Oct 26, 2012 UK: the deflationary dog that didnt bark, Oct 26, 2012

Latin America
Brazil can't blame its growth disappointment on China alone, Dec 21, 2012 Mexico: a structural challenge ahead, Oct 19, 2012 Chile: a conscientious objector faces "currency war" draft, Oct 5, 2012 Brazil at a crucial juncture to address potential growth, Sep 28, 2012 Brazil: BRL close to, but still stronger than, fair value, Aug 31, 2012

Special Reports and Global Issues

The time is always now: introducing J.P. Morgans global nowcasters, Sep 5, 2012 Moving towards a much larger ECB balance sheet, Jul 31, 2012 Chinese housing market revisited, Jul 5, 2012 Global impact of the Euro area crisis, Jun 21, 2012

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.

JPMorgan Chase Bank NA Jan Loeys

Economic Research Global Data Watch January 4, 2013

The J.P. Morgan View: Markets

Game changers or new games in town?

Asset allocation: We stay with significant overweights of equities and credit over cash and bonds. We prefer the bond UW over the short duration trade as we do not see an early Fed QE exit. Economics: Better activity data and PMIs are comforting, but they still only support the expected grinding up in growth rates toward trend by midyear, and are not enough to upgrade growth prospects, in our view. We do raise Japan by a notch to 0.5% given a weaker yen. Fixed income: We are fading the early QE exit trade and go flat duration, even as we remain UW bonds vs. credit and equities. Equities: EM equities continue to outperform their DM counterparts for four straight months helped by strong flows. Credit: Stay long but hedge duration risk. Currencies: Remain short JPY. Commodities: We close our long gold position. We would look to reopen the position around $1,550/oz. Risk markets started the new year in a strong fashion, and bonds fell badly, as the US Congress clinched a lastminute deal to avoid much of the fiscal cliff tax hikes, and the FOMC minutes showed the committee discussed an early exit from QE. At issue for investors now are whether the new-found compromise in Congress and hawkishness at the Fed are true game changers, or only short-term tactical market games that will soon fade. The same can be asked about the Japanese reflation and the EMU yield convergence trades that were put in the later months of last year. To this analyst, the Japanese reflation tradeor Abenomicshas the highest chance of becoming a game changer, followed by EMU, with the new Washington compromise or Fed hawkishness more in the camp of shorter-term tactical games. Starting in Japan, new Prime Minister Abe has strong convictions, incentives, and we believe the ability to push true fiscal stimulus financed by massive QE. Expectations of Japanese reflation have driven down the yen 10% vs. the dollar since mid-November and pushed up the Nikkei 23%, three times the gain in the S&P500. For Japanese reflation to become a true game changer, though, we believe the policy needs to be implemented and needs to produce results. There

seems little doubt about implementation, with Abe co-opting the BoJ to raise its inflation target to 2%, and then replacing the top three officials at the BoJ at the end of the quarter. Expect rapid action on fiscal policy also. Results will likely be harder to come by. The 10% drop in the yen vs. the dollar will only have a small impact on domestic inflation. But it is helping us to raise growth expectations with calendar year growth raised from 0.4% to 0.5% (see Japan data watch in this GDW). In the Euro area, we continue to see the beneficial impact of the ECBs promised OMT, even as not a cent has been spent yet, with liquidity for sovereigns and bonds continuing to improve. But so far, few of these gains have shown up in overall credit supply or the economy. And EMU policymakers are not exactly using the relative quiet productively at the moment, in our view. Euro equities have been outperforming the US for the past six months, and we keep the Euro OW, but this is one trade we are eyeing nervously for the right time to take profit. In the US, the December 31 budget deal came in largely as expected and thus does not require any change in economic forecasts. But this was likely the easy part. Now Congress has to work on deciding what to do with the debt ceiling that will effectively be breached within two months, the automatic spending cuts in entitlements and the military coming from sequestration that now start on March 1, and the expiration of the continuing resolution on March 27. It would indeed be a game changer if both sides of the aisle recognize that governing is all about the art of compromise and that both the health of the economy and the countrys finances require a combination of still higher revenues and lower spending. The body language and new composition of Congress give us no such confidence. Expect thus an ugly two months of difficult negotiations, even as we expect an ultimately last-minute deal to prevent default and shutdown of the government. A last and most tantalizing potential game changer was raised by this weeks FOMC minutes from its Dec 11-12 meeting. The minutes were quite surprising as they showed members again discussing the timing of an eventual exit from QE large-scale asset purchases in terms of calendar guidance, instead of the economic objectives that they told us they were moving to. The range of likely QE exit timings was shown to be mid-to-late this year and thus well before the early 2014 that we have assumed. The bond markets reacted badly to this, but equities have been largely ignoring it. We retain a best guess that the Fed will keep buying until early next year, as our 2% 4q/4q growth projection is well below the FOMCs forecast of 2.7%. That is, we think the FOMC will see a weaker economy than it currently expects and thus be induced to extend its purchases. That said, the minutes probably
9

JPMorgan Chase Bank NA Jan Loeys

Economic Research The J.P. Morgan View: Markets January 4, 2013

also show that the FOMC is a bit more hawkish than we or the market had assumed. How do we position on these new games in town? Our overall strategy remains long equities and credit against cash and bonds on the argument that equity and credit risk premia provide greater compensation for risk than is likely to be realized. Low delivered risk and continued asset reflation from QE were also our major themes for 2012. We accept that these drivers are becoming spent and are thus not as powerful anymore. The major tail risks a year agoChina hard landing, EMU exits, Middle East war, and US fiscal crushwere not realized. From here, investors probably do not have as many fears and have thus likely reduced a decent part of their safe asset allocations. We do not go as far as to say that the market has become complacent, but it is surely not as driven by fear anymore. Our long in risk assets is more a broad value and momentum consideration than outright bullishness on the world economy, earnings, or event risk. The four mini game changers, and more likely new tactical games in town, keep us overweight Japanese and euro equities against the US, and short the yen. We fade the Feds are coming short-duration trade by taking profit on our shorts in the Euro area, and staying neutral in the US. At the same time, given we are only in the first week of the year, the early QE exit trade probably has a bit further to go, as managers do not yet have a lot of profit to show. We thus tactically exit our long gold, and wait for a lower re-entry point. Our overall long equities to bonds should also benefit from any further backup in bond yields, as we do not see yields going up to a level that threatens the economy and equities. (If they did, the Fed would likely send a quick message it has been misunderstood.) And finally, we continue to hedge the duration of our longs in credit (except HY) by selling government debt against them.

2012 returns
%, equities in lighter color 25 20 15 10 5
GSCI TR US cash Gold

EMBIG

US High Grade

US High Yield

EM FX

US Fixed Income

EM Local Bonds

MSCI AC World

S&P500

Europe Fixed Inc

Global Gov Bonds

2013 global GDP growth forecasts: J.P. Morgan versus consensus

% 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 Jan 12

Consensus

J.P. Morgan

Mar 12

May 12

Jul 12

Sep 12

MSCI Europe

EM $ Corp.

Nov 12

lack of upgrades of earnings or growth expectations. But the rally is consistent with the steady fading of tail risk fears that kept some investors on the sidelines. In our GMOS model equity portfolio, we continue to focus on regional and sector allocations: UW US equities, OW home builders and banks within the US, and OW commodity equity sectors. EM equities have been outperforming their DM counterparts for four straight months. The improvement in EM equities is reflected in flows. Over these four months close to $40 billion was injected into EM equity funds. For the year as a whole, we estimate that flows into EM equities improved by almost $90 billion in 2012 relative to 2011 (see this weeks Flows & Liquidity). And that flow improvement is providing strong support to EM equities. Indeed, the chart at the top shows that the performance of EM vs. DM equities, i.e., between MSCI EM and MSCI World, correlates well with EM equity flows. The flow trend should remain positive into 2013 helped by stabilization in Chinese growth following two years of downshifting and by a steady improvement in overall bank lending conditions in EM. We capture the EM theme via a long in MSCI EM Asia vs. S&P500.

Fixed income
Bonds backed violently this week, due to both the US fiscal cliff deal and the hawkish FOMC minutes. Technically, and because most traders only went short over the past 24 hours, yields will likely rise further near term. We are not changing yield forecasts, as we need to see significant growth upgrades for us to become confident of an early Fed QE exit. In the meantime, we cover shorts that we still had on in Europe. Be short duration, here.

Equities
Equity markets rose sharply over the past month with the MSCI AC World index marking a new high for the past year to a level that is only 3% below its May 2011 peak. The rally in equities over the past month may seem excessive given the
10

MSCI EM

Topix

JPMorgan Chase Bank NA Jan Loeys

Economic Research Global Data Watch January 4, 2013

Credit
Spreads have come in significantly this week, on both the US budget deal and the backup in government yields. We stay long, focused on crossover, EM, and HY, but hedge duration risks. We do not expect an imminent rotation from credit to equities until investors start upgrading their growth and earnings projections significantly.

Commodities
Gold sold off sharply this week following the release of the FOMC minutes, which suggested that the Feds open-ended asset purchase program could end as early as June. Many investors had put on long gold positions based on a view of unlimited QE for the foreseeable future, and we think the FOMC minutes mean gold will fall further as more of these trades are unwound. We still like gold as a hedge against future inflation once global growth returns to trend, but we do not expect this anytime soon, and so we tactically take profit on our gold position and wait for a better entry point. We would look to reopen a long in gold at around $1,550/oz. Our commodity strategists have published their 2013 outlook and expect a 10% total return for the GSCI index for the coming year. Energy is forecast to make the largest gain with close to 14%, closely followed by base metals and precious metals with 12% and 9% respectively. Our oil strategists see Brent at $120/bbl by year-end, driven by higher demand as the global economy should improve sequentially towards the end of 2013. Agriculture prices are expected to continue to fall, losing another 5% in total return terms by year end (see Commodity Markets Outlook and Strategy, Colin Fenton et al., Dec 18, 2012).

Foreign exchange
The dollar is starting 2013 quite mixedhigher vs. EUR, JPY, and GBP but lower versus AUD, CAD, and most of Latin America and Asia. Thus, there has been little trend in the broad dollar, despite the 18bp backup in US Treasury yields this week. There may be some optimism toward the US economy and the dollar given how little fiscal tightening Congress has delivered and how recent Fed minutes suggest less commitment to unlimited asset purchases, but we do not think the first week of trading is indicative of much. All of our short-term fair-value models and position indicators were suggesting that the dollar was entering 2013 slightly cheap/oversold versus all currencies but the yen, so it is natural that this weeks Treasury sell-off has prompted some short-covering. Note, however, that the sell-off in US bonds is no more extreme than that of several other government bond markets (Germany +22bp, UK +29bp, Australia +17bp). When government bond sell-offs reflect a global rather than a solely US phenomenon, USD rallies tend to represent corrections rather than trend shifts. Last week, we raised our USD/JPY forecasts from a 2013 range of 75-85 to a range of 80-90. We have always been skeptical that the Bank of Japan would be able to drive up Japanese inflation and drive down real yields versus the US to power USD/JPY higher throughout 2013, but there is no denying the pairs momentum. There is also no denying that USD/JPY continues to rally well beyond what shifts in US versus Japan interest rate spreads would imply, such that the yen is about 7% weaker than Fed versus Bank of Japan policy implies. This is a massive disconnect relative to the occasional overshoots of FX relative to rates, and would appear to reflect a growing consensus that this time is different. We suspect the consensus will be disappointed but not until later this spring when BoJ policies likely prove ineffective. In the interim, we remain short the yen versus a basket of USD, EUR, CHF, NOK, and KRW, which was one of the top trades from the 2013 Global FX Strategy Outlook.

11

JPMorgan Chase Bank NA Jan Loeys

Economic Research The J.P. Morgan View: Markets January 4, 2013

Interest rates
United States Euro area United Kingdom Japan GBI-EM hedged in $ Fed funds rate 10-year yields Refi rate 10-year yields Repo rate 10-year yields Overnight call rate 10-year yields Yield - Global Diversified

Current 0.125 1.93 0.75 1.54 0.50 2.12 0.05 0.84 5.45 Current 160 161 548 649 244 319 Current 111 1645 8137 6.85 Current 1.30 88.2 1.60 1.05 2.03 6 1063.68 1.78 2012 Return

Mar 13 0.125 1.80 0.75 1.55 0.50 2.00 0.05 0.75

Jun 13 0.125 1.80 0.75 1.75 0.50 2.25 0.05 0.75

Sep 13 0.125 1.80 0.75 1.85 0.50 2.35 0.05 0.85

Dec13 0.125 2.00 0.75 2.00 0.50 2.40 0.05 0.90 5.90

2012 Return* 2.2% 4.5% 2.6% 1.8% 8.9% 2012 Return* 9.9% 11.2% 15.4% 24.9% 18.5% 16.7%

Credit Markets
US high grade (bp over UST) Euro high grade (bp over Euro gov) USD high yield (bp vs. UST) Euro high yield (bp over Euro gov) EMBIG (bp vs. UST) EM Corporates (bp vs. UST)

Index JPMorgan JULI Portfolio Spread to Treasury iBoxx Euro Corporate Index JPMorgan Global High Yield Index STW iBoxx Euro HY Index EMBI Global JPM EM Corporates (CEMBI) Quarterly Averages 1Q13 112 1750 8500 8.50 Mar 13 1.28 88 1.58 1.04 2.10 6 1070.00 1.80 2Q13 105 1775 8700 8.25 Jun 13 1.30 90 1.60 1.05 2.08 6 1060.00 1.80 US 3Q13 120 1800 9000 7.00 Sep 13 1.32 88 1.61 1.06 2.07 6 1040.00 1.75 4Q13 120 1775 9200 6.50 Dec 13 1.34 87 1.63 1.07 2.05 6 1020.00 1.75 Europe 2012 -3.0% 15.8% 21.4% 32.1% 15.8% 17.6% 30.0% 25.4% -5.8% 5.1% 16.4% GSCI Index Energy Precious Metals Industrial Metals Agriculture 3m Cash EUR JPY GBP AUD BRL CNY KRW TRY Japan 2012 0.2% 14.6% 16.8% 30.0% 17.9% 14.9% 58.7% 11.0% 7.0% -4.5% 20.9%

Commodities
Brent ($/bbl) Gold ($/oz) Copper ($/metric ton) Corn ($/Bu)

2012 Return* -1.4% 6.1% 1.4% 6.5% 2012 Return* in USD 2.8% 10.7% 6.0% 6.2% -2.1% 2.4% 10.3% 14.0% EM 2012 ($) 6.4% 10.4% 17.2% 16.5% 25.6% 33.5% 25.9% 29.0% 14.5% 6.8% 18.6%

Foreign Exchange
EUR/USD USD/JPY GBP/USD AUD/USD USD/BRL USD/CNY USD/KRW USD/TRY

Equities
S&P Nasdaq Topix FTSE 100 MSCI Eurozone* MSCI Europe* MSCI EM $* Brazil Bovespa Hang Seng Shanghai SE

Current 1459 3105 889 6047 155 1176 1083 62632 23331 2277

(local ccy) 16.0% 16.6% 20.9% 10.0% 20.6% 16.4% 18.6% 7.5% 27.6% 5.2%

Sector Allocation *
Energy Materials Industrials Discretionary Staples Healthcare Financials Information Tech. Telecommunications Utilities Overall

2012 4.6% 15.0% 15.3% 23.9% 10.8% 17.9% 28.8% 14.8% 18.3% 1.3% 16.0%

*Levels as of Dec 31, 2012/returns as of Jan 3, 2012 Local currency except MSCI EM $

12

JPMorgan Chase Bank NA Michael Feroli

Economic Research Global Data Watch January 4, 2013

Economic Research Note

Income tax rates for 2012

Taxable income Single Married, filing jointly Up to $8,700 Up to $17,400 $8,701 to $35,350 $17,401 to $70,700 $35,351 to $85,650 $70,701 to $142,700 $85,651 to $178,650 $142,701 to $217,450 $178,651 to $388,350 $217,451 to $388,350 Over $388,351 Over $388,351 Marginal tax rate 10% 15% 25% 28% 33% 35%

US: from one cliff to the next

Tax deal left lower- and middle-income taxes intact, raised upper-income tax revenue The expiration of the payroll tax holidayaffecting almost all taxpayerswill weigh on spending The sequestration and debt ceiling remain unresolved, and promises to linger on into late February In all these budget battles, little will be done to establish long-run fiscal sustainability The tortured US fiscal debate has made it past one obstacle the expiration of the Bush tax cutsbut another obstacle remainsthe sequestration and the debt ceiling. The resolution of the tax debate played out fairly close to our expectations: the Bush tax cuts were permanently extended for lower- and middle-income households, while upper-income taxes were increased. Finally, the 2%-pt temporary reduction in payroll taxes expired as scheduled at the beginning of the year. While this so-called payroll tax holiday received little media attention, we think it could present a meaningful headwind to growth in the first half of this year. On the spending side of the ledger, the only item that has been resolved so far is the relatively small amount associated with extending Emregency Unemployment Compensation, a temporary measure first put in place in 2008. What has not been dealt with is the sequestration, or automatic across-the-board spending cuts, which has been pushed back to March. Also left unresolved is the fate of the debt ceiling, which will become a binding constraint on government funding in late February or early March. These two issuesthe sequestration and the debt ceilingare bound to be debated together, and their resolution will likely only come after a long and bruising political showdown. Enduring this debate would be more bearable if one actually sensed that the end result would be a more sustainable course for federal finances. Instead, the theatrics around the fiscal cliff appear headed to produce little in the way of long-run reforms to entitlement spending. Federal spending in this areaparticularly for health careis essentially automatically programmed to grow at a pace faster than nominal GDP. This means that in coming years and decades we may face numerous fiscal-cliff-like crises.

Income tax rates for 2013

Taxable income Single Married, filing jointly Up to $8,700 Up to $17,400 $8,701 to $35,350 $17,401 to $70,700 $35,351 to $85,650 $70,701 to $142,700 $85,651 to $178,650 $142,701 to $217,450 $178,651 to $388,350 $217,451 to $388,350 $388,351 to $400,000 $388,351 to $450,000 Over $400,000 Over $450,000 Marginal tax rate 10% 15% 25% 28% 33% 35% 39.6%

Other tax changes

Old law Estate tax Rate Exemption 35% $5 mn New law 40% $5 mn

Capital gains and dividends <25% bracket 0% >25% bracket 15%

Low/mid income taxed same as old law, upper income taxed at 20%1

1. Low/mid income defined as income below $400,000 (individual filers) and $450,000 (married filing jointly). Upper income is income in excess of these thresholds.

More taxes
The core of the resolution of the tax side of the fiscal cliff was a permanent extension of the Bush-era tax rate structure as it applies to lower- and middle-income taxpayers. This also included permanently adjusting the parameters of the Alternative Minimum Tax (AMT) so it would not impact as many middle-income taxpayers. The deal also extended for five years many of the new lower-income tax credits contained in the 2009 Recovery Act, such as the expanded earned income tax credit. Finally, most so-called business tax extenders such as the R&D tax credit were extended, generally for another two years. At the Administrations insistence, the deal also raises revenue from upper-income individuals through a number of avenues, all of which together raise $624 billion of revenue over 10 years (or about $40-$50 billion per annum in the first few years). These measures include:

13

JPMorgan Chase Bank NA Michael Feroli

Economic Research US: from one cliff to the next January 4, 2013

Increasing the top marginal income tax rate from 35% to 39.6% for individuals earning over $400,000 (or $450,000 if married filing jointly). Phasing out the personal exemption for upper-income taxpayers as well as reinstating a measure that existed prior to 2001 that reduced deductions available to upper-income taxpayers. Both these measures apply to individuals earning over $250,000 (or $300,000 if married filing jointly). The capital gains and dividend tax rate will increase from 15% to 20% for individuals earning over $400,000 (or $450,000 if married filing jointly). Note that on top of the 20% will be added the new 3.8% tax on investment income associated with Obamacare. The estate tax rate is increased from 35% to 40% while the exemption amount was left unchanged at $5 million. An even bigger tax increase took place through the expiration of the payroll tax holiday. In late 2010, Congress and the President agreed to a one-year, 2%-pt reduction in Social Security taxes. This was extended for another year in late 2011. This year, however, the temporary relief expired as scheduled. This expiration implies that the houshold tax burden will increase for the year by about $125 billion. Since payroll taxes are levied entirely through wage and salary withholding, this should be felt in consumer paychecks as early as mid-January. We anticipate the hit to household spending could be significant, and we anticipate that the end of the payroll tax holiday implies about a 0.6%-pt subtraction from GDP growth in 2013. The drag on spending from upper-income tax increases is smaller, probably on the order of 0.1%-0.2%-pt.

Publicly held debt to GDP

% 250 200 150 100 50 0 00 10 20 30 40 50 60 70 80 90 00 10 20 30 40 CBO estimate with policy before New Year's deal CBO estimate with policy after New Year's deal

measures will likely be exhausted by early March, or perhaps late February, which is to say, right around the time that the sequester would take effect. After these extraordinary measures run their course, the government will no longer be able to meet its obligations. There is some uncertainty as to whether the Treasury Secretary can legally prioritize certain payments over others, but the risk of a Treasury default remains the doomsday scenario in the debt ceiling debate. We believe this scenario will be averted and cooler heads will prevail, but not before an acrimonious debate that pushes the issue into late February.

But so far, little progress on sustainability

The budget battles have produced a lot of ill will, but very little in the way of solving the nations long-run deficit problems. For example, the increase in tax revenue from the New Years Day agreement$624 billion over 10 yearsis about 6% of the almost $10 trillion in deficits that the CBO projects in the coming decade. Looked at another way, the tax bill increases the federal governments annual revenue by about 0.3% of GDP. In the longer run, though, federal spending is projected to increase by several percentage points worth of GDP. Much of this increase is due to the expected growth in federal spending on health care programs, which will likely grow by 5%-pts as a share of GDP over the next 25 years. (In contrast, Social Security is projected to grow by only about 1%-pt over that same period.) Failure to address the growth in federal health spending will cause the nations debt to spiral out of control, beginning around 2025. The other alternative is to increase taxes much more massively than was done this past week.

More battles
The tax deal did extend more generous unemployment benefits for another year, but beyond that did little to address the spending side of the fiscal cliff. In particular, the automatic spending cuts associated with the Budget Control Act have been pushed back to March. While these spending cuts have been delayed they have not been taken off the table, and unless savings are found elsewhere in the budget through either higher revenue or reduced spending later on along the 10year budget horizonthen those spending cuts are mandated to take effect. The deadline for the sequestration, March 1, is also likely to be quite close to when the debt ceiling becomes a binding constraint. In late December the US Treasury exhausted its statutory authority to issue more debt. Since then the Treasury has resorted to certain extraordinary measures to fund the budget shortfallmostly this involves effectively borrowing from the civil service retirement funds. These extraordinary
14

J.P. Morgan Australia Limited Stephen Walters

Economic Research Global Data Watch January 4, 2013

Economic Research Note

Annual growth in real GDP

% oya 6 4 2 0 -2 85 90 95 00 05 10 J.P. Morgan forecasts

Australia's 2013 outlook: mind the growth gap!

Growth is rebalancing away from mining investment to firmer non-mining activity The transition will not be seamless, with a gap opening up alongside weak income growth Jobless rate will rise to 6% owing to sub-trend growth, compounded by productivity and participation effects Benign inflation will allow RBA to ease policy, although fiscal policy now a smaller drag The outlook for Australia hangs largely on how tidy the rebalancing of growth will be, as the main driver of activity shifts away from the fading mining investment boom and toward lift in the non-mining economy, where activity remains weak. The forecast anticipates a short gap, where growth dips beneath trend only briefly. An untidy transition, however, would trigger a more prolonged adjustment. Australia has not suffered recession since the early 1990s, so the idea that the economy is overdue an extended downturn is often bandied about. A recession in the near term, though, looks unlikely given the reduced but still-impressive mining investment pipeline and the significant policy flexibility still available to government and central bank officials, which they could deploy to support the non-mining economy. AUD also has scope to fall if the outlook weakens significantly.

Investment spending
Constant prices, A$ billion 25 20 15 10 5 0 93 95 97 99 01 03 05 07 09 11 13 Non-mining Mining

Patchy lift in non-mining output so far

Thus far, the evidence of lift outside mining is unconvincing, particularly in manufacturing and non-mining construction. The rate cuts by the RBA have helped house prices, and leading indicators of dwelling starts have perked up a little, but policy has gained little traction outside housing. Indeed, firms in retailing, manufacturing, and tourism continue to suffer from high AUD, rising costs, and tepid demand. RBA officials, aware that the transition away from mining may not be seamless, already have trimmed the cash rate six times. Governor Stevens, however, whose current term ends around the time mining investment will peak, recently gave a rare interview in which he raised the limitations of monetary policy and the RBAs ability to fine-tune the economy. Another dynamic in the outlook is uncertainty over the impact of the recent plunge in growth of real domestic income, which, until recently, had been growing faster than output. The soaring terms of trade has boosted the economys real purchasing power relative to real output. This allowed real household spending to rise strongly despite a fall in nominal spending relative to income, as households increased their saving rate. The sharp reversal in the terms of trade, however, owing to midyear plunges in bulk commodity prices as global demand softened, has seen these positions reverse. Growth in real income now has been below growth in real output for the last three quarters. Real domestic income has fallen outright
15

Mind the growth gap in 2013

The unprecedented boom in mining investment in recent years was stoked by record-high commodity prices. Mining investment spending rose to a record-high 7% of GDP, but the peak in spending is coming ever-closer. Prices for iron ore and coal showed significant volatility in 2H12, which called into question the economics of some major projects. Industry expectations show an extended plateau in spending on mining projects, followed by gradual decline. Our estimate is that the peak will be passed in 2H13. Sustainable growth in the economy will be maintained only if there is material lift in nonmining activity and a rise in export volumes. The anticipated gap means the forecast for GDP growth for CY13 is just 2.5%, a full percentage point below the likely outcome for CY12. The gap could be wider, though, if sentiment stays fragile. Another risk is that the adjustment caused by high AUD and weak growth in national income, owing to lower commodity prices, could be more abrupt than the forecast anticipates. Then, there are challenges to the global outlook, including for China, Australias major trading partner, where the sources of growth also are rebalancing.

J.P. Morgan Australia Limited Stephen Walters

Economic Research Australia's 2013 outlook: mind the growth gap! January 4, 2013

in two of the last four quarters, and has declined over the year to 3Q, the weakest period since the global crisis. This loss of income firepower is key to our forecast that the consumer will lose steam in 2013.

Mining investment projects by status as at September 2012

A$ billion 250 200

Mining boom fading, but not yet over

The latest official report on investment shows that firms in mining have lifted their spending for 12 straight quarters. Industry surveys indicate that the mining investment boom has some way to run, but some firms have scaled back spending plans in response to softer prices and demand, high AUD, and rising costs. The value of work in the mining investment pipeline still sums to more than A$420 billion (28% of GDP). Some key projects, however, seem becalmed in the early stages of development; projects considered by sponsors to be possible or under consideration have been slow to move into the committed and under construction phases of the pipeline. The intentions component of the 3Q survey showed that planned spending for the year ended June 2013 slipped in each of the last two quarters. Firms in mining still plan to spend twice as much as they did just two years ago, but the level of spending has flattened out.

150 100 50 0
Under construction Committed Under consideration Possible

Exports and productivity to improve

The forecast anticipates firmer growth in export volumes, a product of the expected improvement in global growth and the capacity added by the miners. One dividend of higher export volumes and lower mining investment is that productivity should continue to improve. Growth in output per hour worked averaged just 1% over the last decade, but has improved to more than 3% in 2012. This improvement is more about fading investment spending (i.e., lower inputs relative to output) than a product of major reforms or faster uptake of innovative work practices and technology. The slow accumulation of slack and higher productivity mean underlying inflation likely will stay benign; the forecast anticipates core inflation to stay within target this year and next, allowing room for the RBA to further ease policy. The downside of improved productivity, of course, is that labor market outcomes will be even softer than implied by the subtrend growth rates we forecast. The jobless rate is likely to peak later in CY13 at 6%, assuming participation normalizes as the economy decelerates. instrument to win support in the federal election due by October 2013. Opinion polling shows that Labor will lose government, so leaders may unleash new stimulus to try and win over undecided voters. Our forecasts already incorporated a deficit in 2013, but new stimulus on top of the cyclical slippage already in evidence could reduce the need for the RBA to provide policy support. Recent decisions by the Board have been close calls, implying Board members believe the end of the easing cycle is near. The 25bp rate cut in December, for example, was partly tactical, with officials wanting to calibrate policy ahead of the summer break (there is no Board meeting in January). We anticipate one further and final rate cut in February, a move most likely to be triggered by AUD strength and the accumulation of evidence of non-mining sluggishness. This will take the cash rate to a record low of 2.75%. The fact that commercial banks routinely do not pass all of the RBAs cuts on to market rates, however, means todays 2.75% effectively is the old 4.25%. One constraint on monetary policy is that pushing the cash rate to record lows could encourage households to re-lever, possibly fueling a credit-funded splurge. If activity outside mining is even slower to budge, officials may overstoke a fire that could merely be smoldering. A final constraint would be lower wholesale funding costs, which could see the banks make out of cycle cuts to mortgage rates. This would ease financial conditions without the RBA having to adjust policy.

RBA nearing end of easing cycle

On policy, Treasurer Swan was forced to announce in late December what most already had thought was obvious; the government will fail on its solemn pledge to deliver a Budget surplus this fiscal year. The government abandoning this pledge means the fiscal drag in 1H13 will be smaller; Budget policy still will be tighter, but less so than before. One risk, however, is that, with the government now free of the surplus pledge constraint, officials may use fiscal policy as an
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JPMorgan Chase Bank NA Robert E Mellman

Economic Research Global Data Watch January 4, 2013

United States
Job growth on trend: December payroll employment up 155,000, while the unemployment rate holds at 7.8% The tone of incoming economic data strengthened a bit toward the end of last year But payroll and other tax hikes included in the fiscal policy agreement will likely dampen growth in 1Q13 The forecast still looks for 1.5% real GDP growth in 4Q12, with real final sales accelerating to a 2.6% pace and an inventory correction holding back overall growth. The latest economic reports for December are consistent with that forecast and suggest that the economy may have been strengthening a bit into year-end. But the increase in payroll and other taxes that start to bite this month are expected to hold real GDP growth to only 1.0% this quarter. Recent data a little stronger: Most early reports on activity in December suggest the economy was gaining a little strength into year-end. Nonfarm payroll employment increased 155,000 in December, only slightly more than the average of the prior two months. Labor demand as measured by hours worked increased a relatively strong 0.4% samr in both November and December. December manufacturing surveys are mixed. But manufacturing detail of the payroll survey and independent information on auto output suggest that factory output increased a solid 0.4% last month. The nonmanufacturing ISM survey for December reached its highest level since 1Q12, for both the index and the key new orders component. Finally, new car and light truck sales reached 15.5 million in November and 15.4 million in December, up from an average 14.5 million in 3Q12. Auto sales appear to have improved toward year-end even apart from hurricane effects. But tax hikes likely to hold down 1Q13 growth: Despite the slightly stronger tone of most recent data, the forecast continues to look for a slowing to 1.0% saar real GDP growth this quarter. This weeks agreement on fiscal policy (including the $125 billion increase in payroll taxes and higher marginal tax rates at the upper end of the income distribution) was about as expected in terms of fiscal tightening. Higher taxes are expected to dampen real income, consumer spending, and overall real GDP growth through the first half of this year. It will take some time to know the exact timing and extent of the drag on growth from further fiscal tightening. Reports on January auto sales and retail sales to be released in the first half of February will provide the first hard information on 1Q13 consumer spending.

Total nonfarm payroll employment and private hours-worked

%ch saar over 3 months 6 4 Hours worked 2 0 -2 Jan 11
Sa 62 59 56 53 50 Jan 12 New orders

Employment

Jul 11

Jan 12

Jul 12
Nsa 68 66 64 62 60 Inventory sentiment 58 56

ISM nonmanufacturing survey: new orders and inventory sentiment

Jul 12

Most FOMC members expect to end QE3 this year: The major news in the latest Fed minutes is that most of the Committee expects the open-ended asset purchase program to end sometime this year. Fed guidance had previously been vague and only indicated that an end to QE3 would depend on substantial improvement in the labor market. The risk to our forecast that QE3 ends in 1H14 is now biased toward an earlier end date. Importantly, however, much of the difference in views on the timing of exit from QE3 reflects differences in economic forecasts. The Feds policy outlook is based on a central tendency forecast of 2.7% real GDP growth this year, while the J.P. Morgan forecast looks for only 2.0% growth.

Payroll growth stays on trend in December

The pace of job growth was little changed in December. Total nonfarm payrolls increased 155,000, about 12,000 more than the average over the prior three months. And private sector employment increased 168,000, which is 3,000 more than the average of the prior three months. But details of the report are generally on the strong side, including an increase in the average workweek both for all workers and for production workers. Manufacturing and construction hiring strong: Employment in the more cyclically sensitive goods-producing industries was especially strong, with job gains of 59,000, the most since January, including 25,000 in manufacturing and 30,000 in construction. Construction jobs may have been temporarily boosted by post-hurricane clean-up and rebuilding activities,
19

JPMorgan Chase Bank NA Robert E Mellman

Economic Research United States January 4, 2013

but the rise could equally well reflect the strong upturn in homebuilding activity. Hourly earnings not looking quite as weak: Previous reports had highlighted a very sharp slowing in average hourly earnings, a negative for consumer spending and a source of potential concerns regarding eventual deflationary risks. The December report shows 0.3% gains in average hourly earnings for all employees in December and an upwardly revised 0.3% in November as well, taking hourly earnings to 2.1%oya from a recent low of only1.6% oya in October. Unemployment rate stabilizes: The unemployment rate held at 7.8% in December but just barely. The rate came in at 7.849% to three digits, just shy of 7.9%. Employment as measured by the household survey increased only 28,000 in December, but this survey is much more volatile than the payroll survey and average job growth for the two surveys over the past six months is similar. The employment/population ratio edged down 0.1% to 58.6% in December and remains low. Part of the decline relative to pre-recession levels reflects an aging population, but even for so-called prime age workers (25-54 years), the December employment/population ratio of 75.9% is much closer to its cyclical low (74.8%) than its prerecession level (79.8%).

Employment to population ratio

%, sa, both scales 64 63 62 61 60 59 58 2006 2007 2008 2009 2010 2011 2012 25-54 year olds Total 81 80 79 78 77 76 75 74

Nominal construction spending

%ch saar over 3 months 60 45 30 15 0 -15 -30 -45 Jan 11 Jul 11 Public Private nonresidential Private new residential

Jan 12

Jul 12

It looks like a mfg upturn into year-end

Manufacturing output stalled through most of 2012, and the latest November reading on factory IP is slightly below the 1Q12 average. But impressive recent gains in new orders for durable goods and, especially, for core capital goods (up a cumulative 5.7% in October and November, not annualized) hint that output may be strengthening into year-end. The two major national manufacturing surveys for December send mixed messages. The ISM manufacturing survey rose 1.2pts in December, but to a lackluster 50.7 reading. And December results for the headline reading, new orders (50.3), and production (52.6) were each below their OctoberNovember averages. The Markit PMI also increase 1.2pts in December, but to a higher 54.0 level. And readings for the headline index for new orders (54.7) and for output (54.5) were each at their highest level since at least May. Manufacturing detail of the payroll report suggests that the PMI is giving the right message. As noted, employment increased 25,000 in manufacturing and hours worked by production workers increased 0.4% samr. The tentative forecast looks for a solid 0.4% samr increase in manufacturing IP for the month. While the surveys send conflicting messages as to whether manufacturing is starting to break out of its doldrums, the surveys are in accord on one detail. The ISM measure of export orders rose 4.5pts to 51.5, its first reading above 50 since
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May. Similarly, the PMI measure of export orders rose 2.3pts to 52.3, its highest level since March. The nonmanufacturing ISM survey also shows activity strengthening into the end of the year. Both the headline index (56.3) and new orders (59.3) reached their highest levels since February. Meanwhile the measure of inventory sentiment (nsa) declined to its lowest level of the year.

Construction recovery a housing story

The November report on construction spending came in on the weak side of expectations, with overall spending down 0.3% samr and with a net downward revision of 0.5% to previously reported figures for the prior two months. November figures were at least a little below the recent trend for all three major categories of spending. But the main message of the report is that the upturn in homebuilding continued in 4Q12, while growth in both private nonresidential activity and public activity held close to flat. Private new residential construction rose 1.2% samr in November and has accelerated to exceptionally strong growth of 43.4% saar through the first two months of the quarter. But private nonresidential construction activity is running -2.0% saar so far in the quarter, and public spending is up 2.1%.

JPMorgan Chase Bank NA Michael Feroli Robert E Mellman

Daniel Silver Jimmy Coonan

Economic Research Global Data Watch January 4, 2013

Data releases and forecasts

Tue Jan 8 7:30am

NFIB Small-Business Optimism survey

Index, 1986=100, sa Sep Optimism Index Capex plans Hiring plans Planned price increases 92.8 21.0 4.0 19.0 Oct 93.1 22.0 4.0 16.0 Nov 87.5 19.0 5.0 16.0 Dec

Fri Jan 11 8:30am

International trade
$ bn, samr Aug Balance (BoP basis) Services Merchandise Exports (%m/m) Imports (%m/m) -42.6 16.3 -58.9 -1.0 -0.4 Sep -40.3 17.0 -57.3 3.1 1.5 Oct -42.2 16.9 -59.2 -3.6 -2.1 Nov -41.3 17.1 -58.4 -0.4 -0.7

The NFIB surveys headline plunged 5.6pts to 87.5 in November, which likely reflected a response to the election as well as concerns related to the fiscal cliff. The uncertainty surrounding the fiscal cliff persisted into December, so it is unclear how the NFIB survey should behave during the month. Data already released by the organization showed that a net 1% of firms planned to increase employment, which was the lowest reported figure since March and one of the weakest from the past few years. Sixteen percent of firms reported job openings in December, which was very close to the figures reported for the prior few months.
Thu Jan 10 8:30am

Jobless claims
000s, sa New claims (wr.) Wkly 4-wk avg Oct 27 Nov 3 Nov 10 Nov 17 Nov 24 Dec 1 Dec 8 Dec 15 Dec 22 Dec 29 Jan 5 363 361 451 416 395 371 344 362 362 372 365 367 372 387 398 406 408 382 368 360 360 365 Continuing claims Wkly 4-wk avg 3174 3367 3359 3305 3219 3213 3238 3201 3245 3240 3266 3291 3301 3313 3274 3244 3218 3224 Insured Jobless,% 2.5 2.6 2.6 2.6 2.5 2.5 2.5 2.5 2.5

We estimate that the nominal trade balance narrowed from -$42.2 billion in October to -$41.3 billion in November with imports falling 0.7% and exports declining 0.4%. For real goods trade, we look for imports to increase 0.3% in November while exports edged up 0.2%, with these gains undoing only a small portion of the declines reported for October. Real trade flows were very weak in October, and some of the weakness in the October data was likely related to disruptions caused by Hurricane Sandy. And while there could be some related bounce back in the November report, the port strike on the West Coast that started in late November should weigh on the activity data for that month. Combined, container traffic data for the two ports that were affected by the strike (Port of Los Angeles and Port of Long Beach) look pretty weak in November, but there is actually a sharp contrast between the data for the individual ports (trade flows for the Port of Los Angeles tumbled while trade flows through the Port of Long Beach looked strong, when seasonally adjusted).
Fri Jan 11 8:30am

Import prices
%m/m nsa, unless noted Sep Import prices %oya Ex.-fuel import prices %oya 1.0 -0.6 0.2 -0.5 Oct 0.3 0.0 0.4 0.2 Nov -0.9 -1.6 -0.2 0.2 Dec 0.1 -1.5 0.0 0.1

1. Payroll survey week

We forecast that initial jobless claims declined 7,000 to 365,000 during the week ending January 5. The claims data can be volatile during the holiday season because of large swings in the seasonal factors. Our forecasted decline would reverse most of the increase reported for the previous week. The four-week moving averagewhich smooths through some of the weekly volatility in the datawas basically unchanged at 360,000 during the week ending December 29, which is around the lowest figure of the expansion to date. The four-week moving average would increase if our forecast is correct, but it would still remain at a pretty favorable level for the recovery. There could also be a larger-than-normal revision to the data associated with the week ending December 29 as the Department of Labor had to estimate data for nine states because of the short workweek. We do not see a bias for this potential revision.

We anticipate that the import price index ticked up 0.1% in December (-1.5%oya) on a slight increase in fuel prices and flat nonfuel prices. Recent gains in spot crude prices signal a small rise in the price of imported crude. We also expect a gain in imported natural gas prices based on movements in relevant spot prices. We forecast that nonfuel prices were unchanged in December (+0.1%oya). The nominal trade-weighted dollar was relatively stable between early November and early December (when most prices for the import price index are collected), which should help prevent broad-based swings in prices for imported goods. We anticipate an increase in food prices based on recent gains in the GSCI livestock index. We also expect rising prices for metals and building materials based on movements in relevant spot prices. These increases should be offset by falling prices for paper and materials associated with nondurable supplies, which have been trending down in the past few months of data. We forecast that prices for capital goods and consumer goods ex. autos were unchanged in December.

21

JPMorgan Chase Bank NA Michael Feroli Robert E Mellman

Daniel Silver Jimmy Coonan

Economic Research United States January 4, 2013

Review of past two weeks data

S&P/Case-Shiller home price index (Dec 26)
%oya, unless noted 20-city composite %m/m sa 10-city composite Aug 2.0 0.4 1.3 Sep 3.0 0.4 2.1 Oct 4.3 0.7

Markit manufacturing PMI (Jan 2)

Index, sa Nov Composite1 New orders (30%) Output (25%) Employment (20%) Sup. del., (15%, inv.) Stks of purch (10%) New export orders Backlogs of work Output prices Input prices Stocks of fin. goods Quantity of purchases ISM-weighted comp.2 52.8 53.6 53.5 52.6 46.3 47.7 50.3 50.1 52.4 63.8 47.7 52.0 52.2 Flash Dec 54.2 54.8 55.1 54.4 45.7 49.3 53.8 50.2 54.0 62.0 48.1 54.8 53.6 Final Dec 54.0 54.7 54.5 54.5 46.3 49.8 52.6 50.3 53.9 61.9 48.7 54.5 53.4

3.4

The Case-Shiller 20-city composite index increased 0.7% samr in October (+4.3% oya). This report continued to show evidence of firming house prices while the housing market recovers. The Case-Shiller index increased 6.1% saar over the three months through October and other house price measures that are reported separately also have shown similar increases in prices lately. New home sales (Dec 27)
Sep Total (000s,saar) %m/m %oya nsa Months supply Median price (%oya) 369 0.8 20.8 4.7 14.3 374 1.9 25.0 16.2 Oct 368 -0.3 16.0 4.8 5.7 361 -3.5 4.9 5.6 Nov 380 3.3 16.2 377 4.4 17.4 4.7 14.9 Sa

63.7

1. Weights in parentheses 2. Attributes ISM-composite weights (equal weights) to corresponding PMI series

ISM manufacturing survey (Jan 2)

Oct Overall index Production New orders Inventories Employment Supplier deliveries Export orders Imports Prices 51.7 52.4 54.2 50.0 52.1 49.6 48.0 47.5 55.0 Nov 49.5 53.7 50.3 45.0 48.4 50.3 47.0 48.0 52.5 Dec 50.5 50.7 52.6 50.3 43.0 52.7 54.7 51.5 51.5 55.5

New single-family home sales increased 4.4% to 377,000 saar in November and revisions to recent months were mixed, but down 1,000 on net. Although the trend in new home sales has flattened out lately (+4.4% saar over the past six months), other details in the new home sales report and most separate indicators look consistent with continued improvement in the housing market. Consumer confidence (Dec 27)
Sa Conference Bd index Present situation Jobs plentiful Jobs hard to get Labor mkt diff Expectations Oct 73.1 56.7 10.4 38.8 -28.4 84.0 Nov 73.7 56.6 11.2 38.8 -27.6 85.1 71.5 57.4 11.0 37.4 -26.4 80.9 Dec 70.0 65.1 62.8 10.3 35.6 -25.3 66.5

The Conference Board consumer confidence index dropped 6.4pts to 65.1 in December and the November data were revised to now show a 1.6pt decline during the month rather than a 0.6pt increase. This recent drop-off in confidence has been concentrated in the surveys expectations measure, which fell a cumulative 17.5pts to 66.5 over the past two months. This significant weakening in expectations was also evident in the separate University of Michigan consumer sentiment survey and signals concerns about the fiscal cliff, which so far have not translated into weaker activity data. Pending home sales
Sa, unless noted Total (mn, ar) %ch m/m %oya (nsa) Sep 99.6 0.4 8.7 Oct 104.8 5.2 18.0 104.6 5.0 17.8 Nov 105.3 0.5 8.7 106.4 1.7 8.9

The ISM manufacturing indexs headline increased from 49.5 to 50.7 in December, keeping the headline in the range reported in recent months, and details of the latest report were mixed. While the ISM survey has been fluctuating lately, the separate Markit manufacturing PMI has shown signs of improvement in the sector. The headline for Markit PMI was revised down from 54.2 to 54.0 between the flash and final reports for December, but the revised figure was still up 1.2pts relative to November and the strongest since May. Looking at the broad set of manufacturing indicators, there are signals that activity picked up heading into the end of 2012 after a weak stretch during the summer, including an encouraging rebound in export orders. Construction spending (Jan 2)
%m/m sa Nominal Private Residential Nonresidential Public Sep 0.5 0.8 1.1 0.5 -0.1 0.7 1.7 2.9 -1.2 Oct 1.4 1.6 3.0 0.3 0.8 0.7 0.6 1.3 -0.2 1.0 Nov 0.9 1.1 1.9 0.3 0.4 -0.3 -0.2 0.4 -0.7 -0.4

The pending home sales index increased 1.7% in November on top of a 5.0% gain reported for October (revised from 5.2%). These recent increases in pending home sales point to upcoming gains in existing home sales because pending home sales counted when contracts are signedtypically become existing home salescounted when transactions are completedin one or two months.
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Construction spending declined 0.3% in November, and there were net downward revisions to the data reported for September and October. Growth related to residential construction spending still looks solid as the housing market recovers, even with the latest disappointing data. New residential construction spending increased 38% saar over the six months through November, with fairly balanced growth related to single-family and multifamily units. And spending on home improvements increased 14% saar over the six months through November. Meanwhile, private nonresidential construction spending has been drifting lower lately, declining 3.3% saar over the same six months. Public construction spending has been basically flat lately though with some monthly volatility.

JPMorgan Chase Bank NA Michael Feroli Robert E Mellman

Daniel Silver Jimmy Coonan

Economic Research Global Data Watch January 4, 2013

Motor vehicle sales (Jan 3)

Mn, saar Oct 14.2 3.1 11.1 5.2 5.9 Nov 15.5 3.5 12.0 5.6 6.4 Dec 15.4

Light trucks and autos Imports Domestics Autos Light trucks

Labor market report (Jan 4)

Sa Payroll employment (ch, m/m, 000s) Private payrolls Goods-producing Construction Manufacturing Service-providing Private service-providing Wholesale trade Retail trade Professional services Temporary help Education/health Leisure and hospitality Government Average weekly hours Index, hrs worked (%m/m) Hourly earnings (%m/m) (%oya) Unemployment rate (%) Oct 137 203 26 25 7 111 177 4 44 58 14 32 26 -66 34.3 -0.3 Nov 146 147 -22 -20 -7 168 169 13 53 43 18 18 23 -1 34.4 0.2 0.2 1.7 7.7 161 171 -1 -10 5 162 172 10 63 32 8 24 29 -10 0.4 0.3 1.9 7.8 Dec 195 200 0 10 -10 195 200 155 168 59 30 25 96 109 0 -11 19 -1 65 31 -13 34.5 0.4 0.3 2.1 7.8

The household survey details werent quite as upbeat as the hours and earnings data. The unemployment rate held steady at 7.8%, but on an unrounded basis nearly ticked up from 7.753% to 7.849%. The participation rate was unchanged at 63.6% and over the past few months appears to be stabilizing. The employment-to-population ratio slipped a tenth to 58.6% and is back to around where it was in the first half of the year. The household measure of employment has softened some recently, and increased only 28,000 last month. Unemployment rose 164,000, though in what may be an encouraging sign of confidence, re-entrants into the labor market increased 262,000. The broad U-6 measure of unemployment held steady at 14.4%. Factory goods report (Jan 4)
%m/m sa, unless noted New orders Shipments Inventories Inventory/sales ratio Sep 4.5 0.7 0.6 1.28 Oct 0.8 0.4 0.1 1.27 0.3 0.0 1.28 Nov 0.2 0.6 0.0 1.27 0.0 0.4

18 15 10 8 51 55 14 24 20 -51 34.4 -0.1 0.0 1.6 7.9

-5 34.4 0.2 0.2 2.0 7.7

The December jobs report was light on drama, as employment increased 155,000 last month, about the same as the average over the last 3, 6, and 12 months. Most of the other details were equally ho-hum, pointing to a labor market and an economy that are slowly but steadily advancing at around a trend growth rate. The hours and earnings data might have looked a little better than average, while the household survey was modestly disappointing. All in all, the report indicates that on the eve of the fiscal cliff, the economy was expanding placidly. In level terms, however, the labor market continues to disappoint, as the tick down in the employment-to-population ratio reminds us. Until these measures of the labor market improve we can expect the Fed to remain hesitant and cautious in removing monetary accommodation. While the headline numbers were unexciting, there were some notable details. Both major goods-producing sectors had a good month, with construction adding 30,000 jobs and manufacturing up 25,000. The rise in construction jobs could reflect Sandy rebuilding, though the overall pickup in the housing market is an equally plausible explanation. Private service payrolls expanded a relatively modest 109,000 last month; temp help was soft and retail employment suffered some payback after three very strong months. The health care and social assistance category had its biggest gain ever, increasing 55,000 last month. The government sector lost 13,000 jobs last month, about in line with the recent trend. The data on private hours worked were solid, which was mostly due to the tick up in the average workweek to 34.5 hours. The series for production and nonsupervisory workers also ticked up, as the construction workweek moved up to almost an all-time high of 39.6 hours. The recent data on average hourly earnings also looked a little better, increasing 0.3% in each of the past two months. On a trend basis earnings growth is still quite soft, though, increasing only 2.1% over the past year.

New orders for factory goods were unchanged in November while shipments increased 0.4% and related inventories were also flat. The important details related to core capital goods orders and shipments still show a recent pickup in activity after the revisions released in Fridays report (orders revised down slightly, shipments unrevised on net), and there are other signals that manufacturing activity started to improve at the end of 2012: core capital goods orders jumped 23% saar over the three months through November while related shipments increased 8% saar. The factory goods report also showed declines in the nominal figures related to nondurable goods, likely due in part to the drop in petroleum prices during the month. Nondurable orders and shipments declined 0.6% in November and nondurable inventories slipped 0.3%. ISM non manufacturing survey (Jan 4)
Sa Nonmfg. index (NMI) Business activity New orders Employment Prices Oct 54.2 55.4 54.8 54.9 65.6 Nov 54.6 61.2 58.1 50.3 57.0 Dec 54.5 56.1 60.3 59.3 56.3 56.6

The ISM nonmanufacturing survey surprised to the upside in December, increasing 1.4pts to 56.1. This was the strongest reading for the headline index since February, and most of the underlying details were favorable as well. The ISM survey and some other related indicators show activity picking up some steam heading into the end of 2012, but overall, the recent service sector data look mixed.

23

JPMorgan Chase Bank NA Daniel Silver

Economic Research Global Data Watch January 4, 2013

Focus: positive signs for manufacturing

Most manufacturing indicators have been upbeat recently, and it looks like activity was picking up heading into the end of 2012 despite the uncertainty related to the fiscal cliff that persisted through December. For the main manufacturing surveys, the trend in the PMI has been more favorable than that of the ISM lately, though both improved between November and December. The PMIs headline increased 1.2pts to 54.0 in December, the strongest reading since May, and most of the surveys underlying details were also at multi-month highs in December. The ISM surveys headline increased 1.2pts to 50.7 in December, which kept the headline in the range that has been reported over the past few months, and the underlying details were mixed and mostly softer than the corresponding figures in the PMI. Encouragingly, other related indicators have been more consistent with the recent PMI data than the recent ISM data. The BLSs employment data point to an increase in manufacturing activity in December. Manufacturing production payrolls increased 22,000, the strongest monthly gain since March; the workweek for production workers ticked up for the second straight month (not shown); and the diffusion index for the manufacturing sector also increased. Data on core capital goods orders and shipments have also improved lately. Orders jumped 23% saar over the three months through November while related shipments increased 8% saar. The latest PMI report also showed increases in orders and production (not shown). After a strong buildup of manufacturing inventories in 3Q, there appears to be some slowing in the pace of growth in the data available so far for 4Q (we believe the change in inventories will be a sizable drag on 4Q GDP growth). Nominal manufacturing inventories increased 2.1% saar over the three months through November after increasing at a 7.7% annualized pace over the three months through September; data on real inventories also signal slowing growth in the figures reported through October. Softer inventories could be providing a lift to manufacturing activity and could help production in the near term. The monthly production schedules provided by Wards and IHS show conflicting figures for December through March (using our own seasonal adjustment). Despite these differences, both production schedules show a modest decline in auto production over these four months, on net (not shown).

Manufacturing surveys
Index, sa 60 58 56 54 52 50 48 2010
Monthly change, 000s, sa 60 40 20 0 -20 -40 2010 %ch over 3 months, saar 60 40 20 0 -20 -40 2010 %ch over 3 months, saar 20 15 10 5 Real 0 -5 2010 Nominal Shipments 2011 2012 2013 Orders 3m diffusion index Production worker payrolls

ISM

Markit PMI

2011

2012

2013
%, sa 80 70 60 50 40 30 2013

Manufacturing employment indicators

2011

2012

Core capital goods orders and shipments

Growth in manufacturing inventories

2011

2012

2013

24

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi David Mackie

Economic Research Global Data Watch January 4, 2013

Euro area
2013 will not be easy, but it should be calmer than 2012 ECBs OMT announced change of course of the crisis and will help the region exit the recession in early 2013 No policy changes expected at next weeks ECB meeting In the first two and a half years of the sovereign debt crisis, policymakers tried to address the crisis within the original Maastricht vision of full national sovereignty and limited risk and burden sharing. Cheap funding was being provided to sovereigns via official bailout packages and to banks via the ECB (LTROs, TARGET2), but it was ultimately up to governments and banks to eventually regain market access by deleveraging sufficiently (including via private sector involvement). However, the sovereign and bank leverage was so great that financial market concerns about solvency could not be assuaged without a shift to increased risk and burden sharing. Crisis management finally shifted direction in the middle of 2012, with a political commitment to move to a greater degree of banking and fiscal integration. This political commitment enabled the ECB to adopt a new approach (Outright Monetary Transactions), designed to eliminate inappropriate risk premia in government bond markets. In many countries such a lender-of-last-resort function to sovereigns is implicit. But, due to the Euro areas unique structure and the perceived treaty constraints on the ECBs behavior, it had to be made more specific. We view the OMT as a key risk-sharing mechanism that transforms the growth outlook by changing the nature of sovereign debt in the region. It does not work by buying up huge amounts of government debt. Instead it works by changing the risk characteristics of sovereign debt, thereby making existing investors more willing to continue holding peripheral government bonds (and indeed buy more). We have been interpreting this as heralding a shift in the regions position on the trade-off between national sovereignty and risk/burden sharing. Some of the required institutional structure is now in place, the ESM/OMT, and some still has to be built. The first step toward a banking unionan agreement on a single supervisory mechanism under the authority of the ECBhas been agreed, but further steps toward common resolution and bank guarantee mechanisms still need to be negotiated. Meanwhile, ideas about a common Euro area budget are still embryonic. Despite the fact that significant progress still needs to be made, financial markets have sensed that policy is changing in a way that significantly reduces the risks related to sovereign and bank solvency and to EMUs survival. This judgment is correct in our view.

A framework for understanding Euro area growth

%q/q saar Growth potential Conventional monetary policy Fiscal policy Exchange rate Global growth Terms of trade Residual Actual GDP 2011 1.3 1.6 -1.1 0.1 -0.1 -0.4 -0.8 0.6 2012 1.3 2.0 -1.4 0.2 -0.2 -0.2 -2.3 -0.6 2013 1.3 2.1 -1.0 0.0 0.0 0.3 -1.8 0.9 Ch. 11/12 0.0 0.4 -0.3 0.1 -0.1 0.2 -1.5 -1.2 Ch. 12/13 0.0 0.1 0.4 -0.2 0.2 0.5 0.5 1.5

GDP is q/q saar. Monetary policy is the gap between a normal nominal interest rate of 3.5% and the actual overnight interest rate multiplied by 0.6. Fiscal policy is the European Commissions assessment of the change in the cyclically adjusted primary position adjusted for one-offs. The exchange rate effect is the quarter on quarter change in the nominal trade weighted exchange rate multiplied by 4 and then multiplied by -0.05. Global growth effect is global GDP quarterly annualized minus potential (3.1) multiplied by 0.2. The terms of trade effect is headline CPI (ex taxes) %oya minus 2% multiplied by 0.6. Taxes are excluded from inflation to avoid double counting with the fiscal policy impact. The financial conditions/sentiment component is the residual in the past.

This is not to say that 2013 will be an easy year, but it should be a lot calmer than 2012. On the political side, the Italian election in the first quarter could lead to some uncertainty, although we expect a pro-European government to emerge. Similarly, we expect a constructive outcome from the German election in September (a Merkel-led government, possibly in the form of a Grand Coalition, which would be more accommodative to fiscal transfers). Apart from this, progress will need to be made on banking and fiscal union, which is likely to be slow. There will also need to be further progress in the periphery and some core countries in terms of fiscal positions and competitiveness. Overall, we expect governments to do enough to not undermine the consensus on the ECBs Governing Council for the OMT. In terms of the growth outlook for this year, we tend to think of this in the context of last years slide into recession. In particular, many of the growth drivers did not change much last year and hence cannot explain the slide into recession. This applies to the fiscal drag, which was not much larger than in 2011, and to the global backdrop and to the ECBs monetary policy stance. Hence, we think that last years slide into recession was mainly caused by a deterioration in financial conditions, by increased pressure to delever, and by an uncertaintyrelated fall in economic sentiment (i.e., by the residual category in the table). Looking ahead, we think that the OMTrelated improvement in financial markets will lead to less restrictive financial conditions this year and that this will also help to improve sentiment. By supporting government bonds, the OMT is already acting to strengthen bank balance sheets, given banks significant holdings of sovereign debt. This in turn is improving banks access to wholesale funding and encouraging a return of deposit funding in the periphery. In the coming months, it will be important that these improvements lead to a stabilization in bank lending standards and to
25

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi David Mackie

Economic Research Euro area January 4, 2013

a fall in the interest rates that banks charge on new loans to households and corporates. Hence, if financial conditions do improve, reversing a third of last years deterioration, then the Euro area economy should be able to exit the recession early this year. In 2013, the fiscal drag will already be a bit less than in 2012, according to government plans. From a longer-term perspective, the increased risk sharing (via the OMT, banking union, etc.) also has an important impact on the required fiscal journeys. Crucially, governments are being given more time to meet their near-term fiscal objectives. This has been made particularly explicit for Spain, where the European Commission has stated that Spain will not be asked to do any more structural tightening before 2014. This is particularly important given that Spain is the country likely to experience the greatest fiscal slippage in 2012 relative to its objective. Greater risk sharing should also change medium-term fiscal objectives, as less self insurance against shocks is needed by each country in the form of low government debt. But, this debate has barely begun. The 60% debtto-GDP objective in the original Maastricht vision, reinforced in the fiscal compact, refers to an equilibrium level of leverage for a standalone sovereign issuing debt with credit risk. Given that risk-sharing changes the nature of sovereign debt in the Euro area, the equilibrium level of leverage should be higher. Once this is recognized, the medium-term fiscal journeys will be changed accordingly.

Bank deposits of nonbank private sector

Cumulative sum of flows since January 2008 300 250 200 150 100 50 0 -50 2008 2009 2010 2011 2012 Spain Italy

cutting the main refinancing rate to 0.5% while leaving the deposit facility rate at zero. This would have much less impact, however, and recent ECB communication is not clearly pointing to this. Of greater significance would be further liquidity and collateral easing to improve the monetary transmission channel. In particular, the ECB could change its collateral framework so that it encourages banks to lend more to households and corporates. Draghi was hinting at this early last year. But, it appears that the central bank now thinks that it has done enough via the OMT. In terms of next weeks policy meeting, we are not expecting any policy changes and our expectations are also low for subsequent meetings.

Less growth dispersion

As the overall economy moved back into recession in late 2011, the dispersion of growth across the region increased. This was not surprising given that the tightening of financial conditions was most severe in those countries experiencing the greatest fiscal austerity. As we look into 2013, it is reasonable to expect growth dispersion to decline. The easing of the fiscal drag is sizable in Spain and Italy. On the basis of current plans, fiscal austerity in Spain moderates from 3.2% of GDP in 2012 to 1.9% of GDP in 2013, although the backloading of the 2012 measures will ensure that the macro impact spills into 2013. In Italy, meanwhile, fiscal austerity moderates from 2.9% of GDP in 2012 to 1.0% of GDP in 2013. In addition, the easing in financial conditions seen since the middle of 2012 has been greatest in the periphery. In the periphery, excluding Greece, two-year sovereign bond yields have fallen by almost 300bp since late June. This compares with a decline of 110bp in the region as a whole. In this weeks data, the composite PMIs have improved recently in the perhiphery, including in Spain where an intensified fiscal drag is currently impacting the economy. And in the M3 report for November, there was a further increase in deposit funding in peripheral banking systems. This does not yet reverse much of the sharp declines seen particularly in Spain earlier last year, but the change in direction reflects a broader shift in sentiment toward the periphery.

ECB to start in wait-and-see mode

In July 2012, ECB President Draghi said, within our mandate, the ECB is ready to do whatever it takes to preserve the euro. The OMT announcement that followed has changed the course of the Euro area crisis. It is not out of character, but nevertheless somewhat surprising, that the ECB has not followed this up with additional measures, despite the ongoing underperformance of the macroeconomy and only a very gradual improvement in the transmission mechanism. This does not reflect any treaty constraints, which mainly affect the ECBs ability to support sovereigns. Instead, we think it reflects concern about the supply side of the economy and hence the inflation outlook, an aversion to fine-tuning, worries about doing too much and creating moral hazard, a limited appetite for taking inflation and balance sheet risks, worries about unintended consequences (e.g. of a negative deposit rate), and questions about the efffectiveness of further policy easing. Our sense is that the ECB feels that it has already done a lot, that it views its policy stance as very accommodative, and that it expects the OMT-related improvement in financial markets to feed through slowly to the real economy. Hence, unless the growth outlook deteriorates significantly, the ECB is unlikely to cut its deposit facility rate to below zero. A more likely option is that the ECB narrows its interest rate corridor by
26

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi Raphael Brun-Aguerre

Economic Research Global Data Watch January 4, 2013

Data releases and forecasts

Week of January 7 - 11

Output and surveys

European Commission survey
Tue Jan 8 11:00am Sep Euro area % balance of responses, sa Industrial conf. -16 Economic conf. 85.2 Recent prod. trend -20 Prod. expectations -10 Export order books -27 Stocks of finished prod. 7 Selling-price exp. 1 Construction conf. -32 Retail confidence -19 Service confidence -11.9 Consumer conf. -25.9 Oct Nov Dec

German orders surged in October due to a big jump in the bulky other transport equipment category. Excluding these bulk orders, the trend was soft (despite a 0.8%m/m gain in October) due to drags from domestic and Euro area orders. In November, we expect payback at the headline level, while the underlying trend should remain soft. German industry is turning, but only very slowly.

Demand and labor markets

-18 84.3 -24 -11 -31 9 1 -33 -17 -12.1 -25.7 -15 85.7 -18 -7 -29 6 1 -36 -15 -11.9 -26.9 86.5 Tue Jan 8 11:00am

Unemployment
Aug Euro area Harmonized measure (Eurostat) Unemployment rate (%) 11.5 Sep Oct Nov

11.6

11.7

11.8

-26.6

We expect a new record high in November, consistent with weak business surveys and the recent dynamics of the unmployment data. Unemployment is rising a bit faster than suggested by an Okuns Law relationship, as firms are not hoarding labor as they did in 2008-09. Retail sales
Aug Tue Jan 8 11:00am Euro area Total sales, volumes %m/m sa %oya, working-day adj. Sep Oct Nov

Economic sentiment may have increased to 86.5 in December, consistent with the recent improvements of the PMI. Looking ahead, we still expect the Euro area recession to end in 1Q13, which requires the surveys to rise further in the coming months. Industrial production
Aug Wed Jan 9 12:00pm Germany Production sector (%m/m sa) %oya sa Prod sec ex constr (%m/m sa) %oya sa Industry (%m/m sa) %oya sa France Ind production (%m/m sa) %oya sa Manuf prod (%m/m sa) %oya sa -0.4 -1.4 -0.2 -1.5 -0.3 -1.7 1.8 -1.1 2.1 -0.4 Sep -1.3 -0.6 -1.6 -0.9 -2.1 -1.7 -2.7 -2.5 -3.4 -2.6 Oct -2.6 -3.6 -2.4 -3.8 -2.4 -4.4 -0.7 -3.6 -0.9 -4.0 Nov 1.0

-0.2 -0.7

-0.6 -1.6

-1.2 -3.6

0.3

We expect Euro area retail sales to rise just 0.3%m/m, leaving 4Q12 tracking a big decline of 5%-6% ar.

External trade and payments

Foreign trade
Aug Tue Jan 8 8:00am Germany bn, values, sa Trade balance - year earlier Exports %m/m Imports %m/m Sep Oct Nov

Thu Jan 10 8:45am

18.1 13.6 94.9 2.3 76.8 0.4

16.8 15.1 92.6 -2.4 75.7 -1.4

15.1 12.6 92.8 0.2 77.6 2.5

German IP slumped in October, with the leve1 13.6% ar below 3Q12. This reflects a weak underlying trend, consistent with the slow improvement in the manufacturing surveys, and auto-related payback after a strong summer. We expect IP to remain weak in the very near term, with only a small improvement in November. Manufacturing orders
Aug Tue Jan 8 11:00am Germany Volumes, sa Total (%m/m) %oya Domestic (%m/m) %oya Foreign (%m/m) %oya Sep Oct Nov

German exports got off to a weaker start in 4Q12. Business surveys still point to weak export orders, although some firms have become less pessimistic recently.

Inflation
Consumer prices
Sep Thu Jan 10 7:30am France %m/m nsa Index ex tobacco nsa %oya nsa HICP (%oya) -0.3 124.74 1.9 2.2 Oct 0.2 124.81 1.9 2.1 Nov -0.2 124.61 1.4 1.6 Dec

-0.8 -4.9 -1.7 -7.3 0.0 -2.9

-2.4 -3.7 -1.8 -6.4 -2.9 -1.5

3.9 -2.0 0.4 -6.4 6.7 1.5

-2.5

27

JPMorgan Chase Bank N.A, London Branch Greg Fuzesi Raphael Brun-Aguerre

Economic Research Euro area January 4, 2013

Review of past weeks data

Output and surveys
Purchasing managers index final (manufacturing)
Oct Euro area Overall region Germany France Italy Spain 45.4 46.0 43.7 45.5 43.5 Nov 46.2 46.8 44.5 45.1 45.3 Dec 46.3 46.3 44.6 46.1 46.0 46.7 44.6

Unemployment
Oct Germany Registered (ch m/m, 000s,sa) 000s, nsa Unempl. rate (%, sa) 19.0 2753.4 6.9 Nov 5.0 2751.5 6.9 Dec 10.0 6.9 3.0 2839.8

Employment
Sep Germany Change m/m, 000s -8.0 -20.0 Oct 2.0 -10.0 Nov -5.0 -1.0

Purchasing managers index final (services)

Oct Euro area Overall region Germany France Italy Spain 46.0 48.4 44.6 46.0 41.2 Nov 46.7 49.7 45.8 44.6 42.4 Dec 47.8 52.1 46.0

The German labor market softened only slightly in December. Even though 4Q12 GDP will be very weak, firms are retaining workers. Business surveys even suggest some jobs growth.
52.0 45.2 45.6 44.3

Inflation
Consumer prices
Oct Euro area (flash) HICP (%oya nsa) Germany (prelim) %m/m nsa %oya HICP (%oya) Italy (prelim) %m/m nsa %oya nsa HICP (%oya nsa) Spain (flash) HICP (%oya nsa) 2.5 0.0 2.0 2.1 0.0 2.6 2.8 3.5 Nov 2.2 -0.1 1.9 1.9 -0.2 2.5 2.6 3.0 Dec 2.2 0.7 1.9 1.9 0.1 2.2 2.4 3.0 0.9 2.1 2.1 0.3 2.4 2.6

Purchasing managers index final (composite)

Oct Euro area Overall region Germany France Italy Spain 45.7 47.7 43.5 45.6 41.5 Nov 46.5 49.2 44.3 44.4 43.4 Dec 47.3 50.5 45.0 47.2 50.3 44.6 45.7 43.9

The Euro area composite PMI was confirmed to have increased significantly in December. To become consistent with stable GDP in 1Q13, the PMI needs to increase another 2pts over the next two months, which is ambitious but possible. The gain in December was led by services, while manufacturing was unchanged (and with weaker details). The periphery improved as well in December, which is encouraging (considering the intensified fiscal drag in Spain at year-end).

Euro area inflation was unchanged at 2.2%oya in December. Energy inflation eased a bit further while core inflation ticked up one tenth to 1.5%oya. This may partly relate to the timing of the Christmas sales (especially in Germany).

Demand and labor markets

Retail sales
Sep Germany Sales ex autos and petroleum, volumes %m/m sa 0.1 %oya sa -0.9 Oct Nov

Financial activity and public finance

Money and credit data
Sep 1.2 -1.0 Euro area M3 (%m/m sa) M3 (%oya) M3 (%oya 3mma) Loans (%oya)1 Loans (m/m, bn)1 -0.4 2.6 3.0 -0.4 -11.8 Oct 1.1 3.9 3.1 -0.4 7.5 Nov -0.1 3.8 3.4 -0.5 -11.2

-1.3 -2.6

Domestic consumption
Sep France Consumption of goods, real terms %m/m sa 0.0 0.1 %oya sa -0.3 -0.2 Oct Nov

-0.5 5.8

1. Loans to nonbank private sector, adjusted for securitization

-0.2 -0.5

-0.1 -0.3

0.2 -0.2

German retail sales recovered in November, but 4Q12 is still set to post a big decline (of around 3% ar). This implies a disappointing 2H12 for German retailers. French consumption is faring a bit better, but it also looks softer in 4Q12.

Bank lending remained soft in November, with an increase in household loans not quite offsetting another decline in corporate loans. The declines are not dramatic, however. And, encouragingly, deposit funding is rising again in the periphery.

28

JPMorgan Securities Japan Co., Ltd. Masamichi Adachi

Economic Research Global Data Watch January 4, 2013

Japan
With expectations of a weaker yen in 2013, FY2013 growth forecast revised up from 1.1% to 1.3% IP report and PMI send contradicting messages on near-term manufacturing activity Small firms business sentiment remains depressed Abenomics (ultra easy monetary policy plus easy fiscal policy) is set to start soon In our view, the Japanese economy entered recession in spring of last year, but already had hit the bottom by November. While a contraction of real GDP likely continued in 4Q after a large 3.5%q/q saar fall in 3Q, we expect growth to resume this quarter, mainly due to a pickup in business investment and less drag from net trade. In this regard, last weeks monthly data were a mixed bag of encouragements and disappointments. November IP fell as expected, but the manufacturers output projection survey showed an impressive expected jump in December, followed by a solid gain in January. While the magnitude of the pickup shown in the projection survey seems exaggerated, the direction of manufacturers activity is in line with our positive view of this quarter. However, the December PMI was very weak, showing a plunge in new orders. Also, small firms business sentiment remains depressed as the outlook for January deteriorated. Labor market- and income-related data for November did not deteriorate much, but remained soft. Still, consumption-related data were generally firm in the first two months of 4Q last year. In all, we think that our near-term view does not need to be revised, although our conviction has lessened with the weak business surveys. While incoming data were rather mixed for the near-term forecast, our view on Japanese economy has improved somewhat as our FX research team revised up their USD/JPY forecast for this year from an average of 80.25 to 88.25which means that the yen is forecast to be 10% weaker than before. According to the Cabinet Offices econometric model, a 10% depreciation of the yen against USD raises real GDP growth by 0.24%-pt in the first year. While the exact timing of when the positive effect will emerge is uncertain from the model, we have raised our GDP growth forecast from 2Q this year, leaving the FY2013 (starting from April) forecast up to 1.3% from the previous 1.1%. The more than 2% growth in 2H this year may look quite strongJapans potential growth rate is a mere 0.5%, but it should be noted that this partly reflects the expected frontloading of consumption ahead of the consumption tax (VAT) rate hike in April 2014. However, uncertainty toward the

Japan economic forecast

%ch saar Real GDP Prior forecast 4Q12 1Q13 2Q13 3Q13 4Q13 CY12 CY13 FY12 FY13 -0.5 1.0 2.0 1.7 2.7 2.0 0.5 1.0 1.3 -0.5 1.0 1.8 1.5 2.5 2.0 0.4 1.0 1.1

IP and manufacturers' output projection

2005=100, sa 100 95 90 85 80 75 2010 Index, sa 60 55 50 45 40 35 2010 2011 2012 2013 Exports Total 2011 Projection 2012 2013 IP

PMI manufacturing new orders

growth forecast around year-end 2013 and 2014 is extremely high now, as the new government may delay the timing of the tax hike, and consumer behavior ahead and after the tax hike is difficult to forecast. Next week, the new government is expected to hold the first meeting of the Council on Economic and Fiscal Policy (CEFP) that will determine the basic guidelines of economic and fiscal policies. Since the BoJ Governor is a member of this council, Governor Shirakawa will likely effectively accept a 2% inflation target at this meeting. On fiscal policy, Prime Minister Abe and his key cabinet members have all suggested that a supplementary budget for this fiscal year will be large (at least 10 trillion), but we are not sure whether the medium- to long-term agenda will be discussed at this time.

IP report versus PMI

The November IP report and the December PMI manufacturing were a mixed bag of good and bad news. IP fell more than expected in November at -1.7%m/m sa, but manufacturers output projection showed a 6.7% jump in December (revised down from +7.5% in the previous report) and a further 2.4% gain in January. If the projection is realized, IP would fall
29

JPMorgan Securities Japan Co., Ltd. Masamichi Adachi

Economic Research Japan January 4, 2013

only 2.8%q/q saar in 4Q after a 15.8% plunge in 3Q, and jump 27.6% in 1Q13, assuming no change in February or March. The expected gain in IP is consistent with our view that the Japanese economy will resume growth from 1Q this year (our forecast looks for a 0.5% contraction in real GDP in 4Q, followed by 1.0% gain in 1Q this year). However, the December PMI was decisively weak: the headline index fell to 45.0 from 46.5 in November, with the key leading indicator component (new orders) showing the sharpest fall since April 2011, one month after the Tohoku earthquake. Export orders continued to fall, which clearly challenges our view that foreign demand began to pick up at the end of year. Unfortunately, we do not have a good explanation for the contradicting messages from the output projection survey and the PMI report at this moment. Still, we think that the reading of the output survey is more reliable for predicting the direction of output in the near term, while the size of the gain is likely exaggerated as usual. While total manufacturing activity remains subdued, the electronics parts and devices sector is an exception: output and shipments rose 17.5% (not annualized) and 15.3%, respectively, from the recent bottom (August for output and September for shipments), while the inventory to shipments ratio index fell 14.6% from the peak in July. In the PMI report, there is a comment that intermediate goods recorded a net gain in foreign orders. The recovery of this sector is in line with the positive news on the high-tech sector in Japans Asian neighbors, mainly benefiting from the introduction of new smart phones and tablets. On the other hand, equipment investment-related goods remain depressed. While core capital goods edged up 0.1% in November, it was after an accumulated 15.4% decline in five consecutive months, and both inventory and the inventory to shipment ratio continued to rise. Moreover, the anecdotes in the PMI report highlight particular weakness in the investment goods category.

Factory shipments
2005=100, sa for both scales 135 130 125 120 115 110 105 2010 Electronic parts and devices 2011

Core capital goods 90 85 80 75 70 2013

2012

Shoko-Chukin small firms' business sentiment

DI, dotted lines show January outlook 55 Nonmanufacturing 50 45 40 35 2010 Manufacturing

2011

2012

2013

Labor market and income stayed soft but consumption looks relatively firm in 4Q
November labor market indicators were mixed, but basically stayed soft. Indeed, the unemployment rate edged down to 4.1% from 4.2% in October but total employment (including self-employed) fell in the month, while the job offers-toapplicants ratio was unchanged at 0.8. To be sure, payroll employment rose in the month and the smoothed six-month moving average showed a continued increase to a level close to the one seen before the Tohoku earthquake. But, total wages per regular worker fell 1.1%oya in November after a revised 0.4% decline in November (from +0.2%). These readings are not decisive in either direction, but they suggest that overall labor market conditions (and income) stayed soft. On the other hand, retail sales were flat in November after a 0.8%m/m sa gain a month ago, while core real private consumption fell only 0.6% after an impressive 2.0% gain. While these are not very accurate indicators for tracking GDP-based consumption (the Cabinet Offices consumption index, expected to be released on January 11, is more reliable), we are comfortable leaving our forecast of GDP-based consumption at +0.5% ar in 4Q after -1.7% in 3Q. Looking ahead, though, the expected decline in winter bonuses is likely to weigh on consumption.

Small firms sense no improvement of business conditions

The Shoko Chukin small firms sentiment index edged up to 43.8 in December from 43.3 in November, but the firms outlook for January looks for a decline to 42.4, lower than the 4Q average of 43.6. While some improvement in December was in line with firms outlook reported last month and our forecast (both at 44.0), the outlook was decisively weaker than we had expected. To be sure, we think that the recovery of the economy is being led by large manufacturers, so the weak small firms sentiment is not necessarily unusual at this time. Still, this outcome is a challenge to our view that the economy started to improve at the beginning of this year.
30

JPMorgan Securities Japan Co., Ltd. Miwako Nakamura

Economic Research Global Data Watch January 4, 2013

Data releases and forecasts

Week of January 7 - 11
During the week

The adverse effect from the China/Japan dispute on the travel account has not yet been visible in the BoP report; the increase in tourists from Taiwan and the recovery in those from Korea have been anecdotally reported.

Cabinet Office private consumption index

%m/m sa Aug Overall 1.6 Sep -0.5 Oct 0.5 Nov -0.4

Service account balance

Yen bn, sa 0 -70 -140 -210 Overall -280 Travel

Based on the softness in last weeks spending data in the Household survey and nominal retail sales in the Commercial sales report, we think that the November index gave back most of its strong gain in October. It appears that consumer spending has been tracking a modest recovery in 4Q after having declined in 3Q.
Mon Jan 7 2:00pm

Auto registrations
Sep Total %oya -8.1 Mn units saar 2.87 J.P. Morgan adjusted (incl. light vehicles) Mn units saar 3.60 Oct -9.0 2.89 3.66 Nov -3.3 2.97 3.72 Dec -1.8 3.10 Fri Jan 11 8:50am

-350 2009

2010

2011

2012

2013

Bank lending
Sep %oya %m/m sa by J.P. Morgan 1.2 0.3 Oct 1.1 0.0 Nov 1.3 0.0 Dec 1.3 0.0

The more modest decline after the end of the second subsidy program for eco-friendly cars up to November, compared to the drop after the end of the first program in September 2010, is encouraging and broadly in line with optimistic prospects for the transport machinery sector in the IP report.

Production in transport machinery sector

2005=100, sa, boxes denotes survey predictions 140 120 100 80 60 40 07
Fri Jan 11 8:50am Fri Jan 11 2:00pm

The underlying trend in bank lending has been soft. The softness is expected to continue for a while, though the recent weakness in corporate profits may boost loan demand, but only to replace declining profits, not to reflect an increase in spending. Economy Watchers survey
DI Sep Current conditions Households Business Employment 41.2 40.2 40.0 50.8 Oct 39.0 38.4 38.3 44.3 Nov 40.0 39.2 40.6 44.5 Dec 40.5

08

09

10

11

12

13

14

Balance of payments
Aug Current account ( bn sa) Trade balance Services Income Current transfers Current account ( bn nsa) 722 -236 -246 1278 -74 455 Sep -142 -977 -311 1226 -79 504 Oct 414 -557 -237 1278 -70 377 Nov 373 -600 -250 1298 -75 -107

We expect the index rose further in December, based on the overall upbeat tone from other surveys at the end of 2012. Note, however, that concern has been raised by the Shoko Chukin survey, another important small firm survey, which showed respondents looking for deterioration in business conditions in the first month of 2013, and by the unexpectedly weak December manufacturing PMI.

The report should reiterate the declining underlying trend, which mainly reflects weakness in the trade balance.

31

JPMorgan Securities Japan Co., Ltd. Miwako Nakamura

Economic Research Japan January 4, 2013

Review of past two weeks data

Corporate service prices (Dec 25)
%oya Sep Overall Ex international transport -0.3 -0.2 -0.5 -0.3 Oct -0.7 -0.6 Nov -0.5 -0.4 -0.4

Housing starts
Mn units, saar 1.2 3mma 1.0

The November CSPI report continued to show underlying softness, with the three-month moving average of the CSPI ex. international transportation remaining at the October level, the lowest since the current series started in 2005. In the details, advertising service and office rental fees remained extremely weak (-2.1%oya after -3.9% in October and -0.8% in 3Q, and -2.4% after -2.6% and -2.7%, respectively), while business sentiment has been depressed. Meanwhile, construction machinery rental and temporary material fees were still solid but appear to be stabilizing (+7.2%oya after +6.4% in October and +7.4% in 3Q, and +13.9% after +16.9% and +17.7%). Shoko Chukin small firm survey (Dec 26)
Diffusion index Oct Sentiment index Manufacturing Nonmanufacturing 43.7 41.3 45.6 Nov 43.3 40.3 45.7 Dec 44.0 43.8 40.7 46.4

0.8

0.6 2008

2009

2010

2011

2012

2013

Purchasing managers survey (manufacturing) (Dec 28)

Diffusion index Oct Overall index %m/m sa Sep Production Shipments Inventories Inventory/shipments ratio -4.1 -4.3 -0.9 4.2 Oct 1.6 -0.1 -0.1 -2.1 Nov -1.0 -1.7 -1.1 -1.2 -0.3 46.9 Nov 46.5 Dec 47.0 45.0

Industrial production-preliminary (Dec 28)

Both manufacturing and nonmanufacturing firms reported improvement in business conditions in December, but at the same time, looked for some deterioration in January (the manufacturers outlook DI marked 38.8 and the nonmanufacturing outlook DI 45.4). It is also worrisome that small firms assessed their employment as excess for the first time since July. Nonetheless, we maintain our view that the Japanese economy started to pick up at year-end. Housing starts (Dec 27)
Sep Housing units %oya %m/m sa Mn units saar 15.5 -2.5 0.87 Oct 25.2 13.0 0.98 Nov 10.0 -7.3 0.91 10.3 -7.2

See main essay. Consumer prices (Dec 28)

%oya Oct Tokyo Overall Core (ex fresh food) Ex food and energy Nationwide Overall Core (ex fresh food) Ex food and energy -0.8 -0.4 -1.0 -0.4 0.0 -0.5 Nov -0.5 -0.5 -0.9 -0.1 -0.1 -0.5 -0.2 Dec -0.4 -0.5 -0.8 -0.6 -0.6 -1.0

Unit starts fell in November, but as partial payback for the strong gain in the previous month. Indeed, the sequential change in unit starts marked +26.2%3m/3m saar, compared to +20.0% in October and -1.8% in September. Housing construction is likely being boosted by reconstruction in earthquake-affected areas, low interest rates, and front-loading ahead of the expected hike in the consumption tax in April 2014 (the last factor has been noted by a number of respondents in the latest Economy Watchers survey). As for residential investment in GDP (which is measured in putin-place terms), the six-month moving average of starts by floor space, a better indicator, is now tracking +8.8%q/q saar for the current quarter, after +6.5% in 3Q and +13.8% in 2Q. The risk to our real GDP residential investment forecast appears to be balanced (we currently expect residential investment to rise 5.0%q/q saar in this quarter after +3.7% in 3Q and +6.3% in 2Q).

The nationwide core CPI fell 0.1%oya in November, after having improved to unchanged oya in October (it was -0.1%oya in September and -0.2%oya in the 3Q average). The core core CPI (all items ex. food and energy) fell 0.5%oya, the same as in October though better than the -0.6% in 3Q. The result reiterates that the underlying moderation of consumer price deflation is very gradual although electric power companies are now asking the government to approve hikes in their household rates on April 1. In the details, the energy CPI fell 0.8%m/m nsa after -0.2% in the previous month, mainly on a further drop in gasoline (marking -1.7%m/m nsa, after -0.1% in October and +4.8% in September). As a result, the contribution from energy to the oya change in the core CPI fell 0.09%-pt, to 0.307%-pt. The nonperishable food CPI did not show a boost from the previous surge in global agricultural prices, being unchanged m/m and leaving

32

JPMorgan Securities Japan Co., Ltd. Miwako Nakamura

Economic Research Global Data Watch January 4, 2013

its oya change at -0.3%, the same as in the previous month. Within the core core measure, the impact of aggressive discounting in cellular phones was offset by a bigger contribution from flat panel TVs, as well as from foreign package tours, which mainly reflected a favorable base effect. In the preliminary December report for the Tokyo metropolitan area, the pace of oya decline in the core CPI further accelerated to -0.6% from -0.5% in November and -0.4% in October. This occurred as the pace of the oya rise in energy prices slowed while the pace of decline in nonperishable food and the core core prices picked up. Note, however, that the core core CPI has been exhibiting seesaw changes since mid-2012, rather than a weakening trend (1.0%oya in December and -0.9% in November, and -1.0% in October).

Unemployment rate and job offers ratio

% of workforce, sa 5.5 Unemployment rate 5.0 Ratio, sa 1.1 1.0 0.9 0.8 0.7 0.6 Job offers ratio 3.5 2007 2008 2009 2010 2011 2012 0.5 0.4 2013

4.5

4.0

Nationwide CPI
%oya, 2010-based 0.5 Core

Household survey of expenditures (Dec 28)

%m/m sa, incl. agricultural worker households Sep All households Real spending %oya Core %oya Worker households Real disposable income Propensity to spend (%) -1.9 -0.9 -2.7 -2.0 -1.5 74.7 Oct 0.6 -0.1 2.0 0.5 2.3 74.0 Nov 1.0 1.0 -0.1 0.2 -0.6 0.5 -1.6 75.0

0.0

-0.5 Core core

-1.0

-1.5 Jan 11

Jul 11

Jan 12

Jul 12

Commercial sales (Dec 28)

%oya Sep Oct -1.4 -1.2 0.8 Nov 1.5 1.0 -1.5 1.3 0.0 Wholesale sales Total retail sales %m/m sa -4.9 0.4 -3.5

Labor force survey (Dec 28)

%m/m sa Sep Unemployment rate (% sa) Labor force (%m/m sa) Total employment (%m/m sa) Unemployed (%m/m sa) Job offers ratio (sa) 4.2 0.1 0.1 0.4 0.81 Oct 4.2 0.5 0.5 0.0 0.80 Nov 4.3 4.1 -0.2 -0.1 -0.7 0.80

0.79

Quantitative labor market indicators sent mixed signals in November, providing some confirmation of our view that labor market conditions have been soft. The job offers to applicants ratio remained unchanged from October, when it fell for the second straight month after consecutive increases since September 2009. More discouraging, the rising trend of new job offers appears to have ended, as its 3m/3m sequential change marked a decline for the third consecutive month. The unemployment rate in November fell to 4.1% sa, after staying at 4.2% in the previous three months (prior to that, it had been on a declining trend since early this year), but the latest decline mainly reflected a decline in the labor force (-0.2%m/m sa after a total 0.6% increase in the previous two months). Total employment, which includes self-employed and family workers, edged down by 0.1% in the month, though the number employed at firms posted a second consecutive rise (marking +0.2%m/m sa after +0.6% in October).

Both real spending in the Household survey and nominal retail sales in the Commercial Sales report were much weaker than expected in November. Survey reports, new auto registration data, and the department store sales report all pointed to solid m/m rises helped by cooler weather (which accelerated sales of winter apparel) and only a limited negative impact from the end of the government subsidy for eco-friendly cars. The previous upside risk to our 4Q real GDP consumption forecast, which looks for +0.5%q/q saar after -1.7% in 3Q, has now receded. Looking at nominal retail sales in detail, sales at home appliance retailers were extremely weak (-0.8%m/m, on top of the 8.0% drop in the previous month). This seems consistent with the sharp decline in shipments at the information/communication equipment sector in the latest November IP report, but somewhat at odds with anecdotal reports on good sales of smart phones.

33

JPMorgan Securities Japan Co., Ltd. Miwako Nakamura

Economic Research Japan January 4, 2013

Employers' survey (Dec 28)

%oya Sep Total earnings per employee Contract wages Scheduled payments Overtime payments Special payments Total hours worked Regular employment Full-time workers Part-time workers -0.5 -0.4 -0.4 0.1 1.6 -1.5 0.6 -0.3 2.6 Oct -0.4 -0.3 -0.1 -2.1 0.9 1.1 0.8 -0.1 2.9 Nov 0.0 -1.1 0.3 0.5 -1.3 -26.8 2.0 0.6 0.7 0.4

Japan PMIs
DI, sa 60 50 40 30 20 Jan 07 Manufacturing (output)

In the November preliminary report, contract wages, a measure of core wages, rose 0.3%oya, after oya declines in the previous five months. That said, initial readings on wages in this survey have tended to be revised down significantly in final reports. For example, the October reading of contract wages was revised down 0.5%-pt, from +0.2%oya to the current -0.3%. It was also worth noting that overtime payments, which are likely a timelier reflection of economic conditions, continued to show a large oya drop. Services/composite PMIs (Jan 4)
Diffusion index Oct Services (business activity) Composite (output) 50.0 48.9 Nov 51.4 49.9 Dec 51.5 49.3

Services (business activity) Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13

The services PMI business activity index edged up to 51.5 in December, compared to 51.4 in November, 50.0 in October, and a 3Q average of 48.6. The result was consistent with the message from other surveys that sentiment among service providers had been holding up well until the end of last year, in contrast to worsening in the manufacturing PMI. Worth noting in this report is that the business expectations index (which asks about prospects 12 months ahead) rose solidly to the highest level since November 2007, and that the new business index posted its fifth consecutive rise. Meanwhile, the outstanding business DI stayed at the November level, which was modestly lower than in October but almost the same as the 3Q average. And the employment DI, which is thought to represent firms medium-term prospects, showed only a marginal payback for the previous months robust gain. Note, though, the services PMI does not include the retail/wholesale trading and construction sectors, and that the outlook DI for the overall nonmanufacturing sector in the Shoko Chukin small firm survey looks for some moderation in the business conditions at the start of this year. The composite PMI output index for the month fell 0.6pt to 49.3, as the manufacturing PMI output index fell meaningfully between December and November, at odds with very optimistic predictions for December output in the latest November IP report. Still, the current level of the composite PMI was higher than in any month in the five months through October.

34

JPMorgan Chase Bank NA Sandy Batten Silvana Dimino

Economic Research Global Data Watch January 4, 2013

Canada
Another stronger-than-expected labor market report for December But recent employment gains are unlikely to be sustained Near-term outlook heavily dependent on events south of the border After a quiet holiday season, the only data release of consequence this week was the December labor force survey. The Canadian labor market surprised once again on the upside, adding 39,800 jobs in December, the fourth outsized monthly gain in the past five months. The labor market continues to outperform the overall economybut this is unsustainable and so some payback is to be expected ahead. Looking into 2013, global headwinds have dominated the economic landscape in Canada in 2012 and should as well in 2013. The Canadian economy began 2012 on strong footing, having grown at nearly a 4% annual rate in the second half of 2011. But external headwinds began to blow hard again by the middle of 2012 and so the economy slowed sharply in the second half of the year, edging up only 0.6%q/q ar in 3Q, and is on track to bounce back only slightly in 4Q. By our forecast, Canadian real GDP should rise at only slightly more than a 1% ar in the second half of 2012 and continue to perform significantly below trend in the first half of 2013. An anemic US economy, a modest fall off the fiscal cliff in early 2013 (even with the recent agreement, we estimate US fiscal drag in 2013 to be nearly twice as large as in 2012), a Euro area recession, along with a peppy CAD are the primary headwinds facing the Canadian economy as it enters 2013. However, we look for the US economy to strengthen and the Euro area to emerge from recession in 2H13, thereby significantly reducing the force of these headwinds by the second half of the year. While inflation should remain benign, the Bank of Canada will likely retain its hawkish rate bias, as household leverage continues to pose a threat to the overall economy and financial system and the output gap is extremely narrow. The economy is not currently weak enough to motivate a move to further accommodation. The Bank considers current financial conditions to be accommodative. And more important, it is already concerned over the extent of household leverage and would likely require a marked deterioration in the domestic economy for it to provide more accommodation. But, with the economy likely to post subpar growth in the first half of 2013, we look for the Bank to remain on the policy sidelines for much of 2013 with no policy action until the fourth quarter.

Change in employment
000s, sa 100 50 0 -50 -100 -150 05 07 09 6-mo avg 11 m/m

Implied labor income (hours x wages)

%oya 10 8 6 4 2 0 -2 00 02 04 06 08 10 12

Another employment surprise in December

The Canadian labor market continued to show surprising strength in December, with jobs rising 39,800 following a 59,300 jump in November. For all of 4Q, employment rose 100,800. For all of 2012, 312,000 jobs were created versus 190,000 in 2011. The unemployment rate fell 0.1%-pt to 7.1% in December as the number unemployed declined 12,500 with the participation rate unchanged. This is the lowest unemployment rate since December 2008. Over the past three months, employment has increased 33,600 jobs per month on average, while over the past six months, employment is up 26,100 per month. The details of the report were extremely solid. Full-time jobs more than accounted for the monthly increase. They were up 41,200 on top of a 55,200 jump in November, while part-time jobs slipped 1,400 after a tepid 4,100 rise in November. Private sector employment soared 59,400 on top of a 48,200 jump in November. Public sector jobs rose only 3,200 while the number self employed slumped 22,800. Jobs in the goods-producing sectors rose for the first time in three months, increasing 15,200 in December after a cumulative 16,500 drop in October and November. Manufacturing jobs rose 9,300 after a 19,600 decline in November. Construction employment staged a more robust rebound, rising 17,800 after a 8,400 drop in November. Jobs in forestry, fishing,
35

JPMorgan Chase Bank NA Sandy Batten Silvana Dimino

Economic Research Canada January 4, 2013

mining, oil and gas and in utilities fell in December with forestry/mining/oil jobs plunging 13,900, the largest monthly decline since November 2005. Service-producing jobs continued to motor along in December, gaining 24,500 on top of the 65,700 surge in November. For all of 4Q, service jobs rose a torrid 111,200. The December gains were widespread, held down by an outsized 41,500 drop in professional, scientific, and technical jobs. Total hours worked in the economy edged up 0.1%m/m in December following a 0.2%m/m gain in November. However, hours had plunged in October. So for all of 4Q, hours worked were up only 0.3%q/q ar, in line with other indications of only tepid 4Q GDP growth. Wages of permanent workers rose 0.4%m/m in December, offsetting a 0.4%m/m decline in November. This pushed up the oya rate to 2.4% from 2.2% in November, a rate depressed by a very unfavorable base effect. Accordingly, the pace of growth of labor income also recovered some from the November slowdownrising 4.0%oya in December from 3.5%oya in November. Still, this is well above the current rate of inflation and should continue to provide support for consumer spending (real household consumption rose 3.8%q/q ar in 3Q and contributed 2%-pts to overall GDP growth). This December labor market report continued a string of reports that have clearly been stronger than the rest of the economy would indicate. The current state of the economy is consistent with monthly job gains south of 20,000. So, expect significantly more modest employment reports going forward. This report likely does little to alter the Bank of Canadas view on the economy. It should reinforce the Banks view that its current stance is sufficiently accommodative and that the next move in the overnight rate will be up. However, the timing of this action has become even more uncertain with increased US fiscal drag in 2013 (even though a complete fall off the fiscal cliff was averted) and the Euro area remaining in recession. We continue to expect the next monetary policy action to be a 25bp rate hike but do not expect it to occur until 4Q13 after external headwinds have likely diminished significantly.

Wed Jan 9 8:15am

Housing starts
Saar Sep Total (000) (%m/m) (%oya) 224.0 -2.1 6.8 Oct 203.5 -9.2 -3.7 Nov 196.1 -3.6 5.5 Dec 196.0 -0.1 -2.2

Thu Jan 10 8:30am

Building permits
%m/m sa, unless as noted Aug Total %oya 9.5 23.8 Sep -12.7 16.2 Oct 15.0 19.7 Nov -7.2 12.3

Thu Jan 10 8:30am

New house prices

Nsa Aug Total, %m/m %oya 0.2 2.4 Sep 0.2 2.4 Oct 0.2 2.4 Nov 0.1 2.2

Fri Jan 11 8:30am

International trade
Sa Aug Balance (C$ bn) Exports (%m/m) Imports (%m/m) Real balance -1.17 -0.3 -4.1 -0.67 Sep -1.01 1.0 0.6 -1.30 Oct -0.17 1.0 -1.2 -0.53 Nov 0.1 2.8 2.1

Review of past weeks data

Labor force survey (Jan 4)
Sa Oct Employment (mn) (ch, m/m, 000s) (%m/m) (%oya) Labor force (mn) (%m/m) (%oya) Unemployment rate (%) Avg hrly earnings (%oya) Hours worked (%m/m) 17.57 1.8 0.0 1.3 18.98 0.1 1.4 7.4 3.9 -0.3 Nov 17.63 59.3 0.3 1.7 19.00 0.1 1.4 7.2 2.2 0.2 Dec 17.63 17.67 5.0 39.8 0.0 0.2 1.6 1.8 19.03 19.02 0.2 0.1 1.5 1.4 7.3 7.1 3.0 2.5 0.2 0.1

Industrial PPI (Jan 4)

%m/m nsa, unless noted Sep Total %oya Ex energy %oya 0.5 -0.3 0.1 -0.7 -0.2 Oct -0.1 -0.2 0.2 -0.4 -0.1 0.1 Nov -0.3 -0.6 -0.1 -0.5 -0.5 0.2 -0.2

Data releases and forecasts

Weeks of January 7 - 11
Mon Jan 7 10:00am Composite index (sa) Purchasing index (sa) Purchasing index (nsa)

Ivey PMI
Sep 55.4 60.4 68.5 Oct 54.2 58.3 58.3 Nov 52.6 47.5 46.4 Dec 55.0 51.4 43.4

1. Calculated and seasonally adjusted by J.P. Morgan

36

JPMorgan Chase Bank N.A, London Branch Allan Monks Malcolm Barr

Economic Research Global Data Watch January 4, 2013

United Kingdom
2013 outlook: better than last year, but still not good enough PMI surveys in December send mixed signals on growth BoE credit conditions survey indicates significant easing Previewing CPAC RPI announcement next week The year 2012 was deeply disappointing for the UK economy. Although we doubt that the currently reported decline in GDP will survive the revision process, the fact that output probably did not register an underlying contraction is nothing to cheer about. Given a very depressed level of activity and significant monetary policy support, the failure to sustain a recovery since 2010 is a big concern. As 2012 has progressed, there has been an increasing acceptance that overall economic conditions are not fairly characterized as recessionary. But that has been tempered by acknowledgement that the UKs ability to take policy steps to improve growth meaningfully is constrained. The Chancellor remains committed to underlying fiscal tightening running at a pace of 1%-1.5% of GDP on an annual basis, even if he is prepared to allow realized deficit and debt outturns to vary with the cycle. Meanwhile, the limits of the effectiveness of reserve funded gilt purchases (the MPCs preferred means of implementing QE) appear to have been reached. Although innovations like the Funding for Lending Scheme may improve credit availability at the margin (particularly in the housing market), they do not address the problem of weak expectations for overall demand, and hence demand for credit. The uncertainty over expectations for demand growth has also limited the UKs ability to exploit a weaker exchange rate, as investment in sectors that are competitive at a low level of sterling is required. With limited ability to use domestic policy tools to generate growth, the UK outlook remains dependent on the global and Euro area context. To the extent that global conditions disappoint, the UK is not well placed to dodge the bullet. However, should confidence in a global upswing grow, the UK is probably better placed to take advantage of that than others in Western Europe. J.P. Morgans forecast is for a gradual strengthening in global growth as the year progresses, and the UK forecast sees growth at a near-trend pace by year-end. The absence of bank holiday and other distortions should also make the trend in UK growth a little more linear and easier to discern. Two related puzzles as 2012 progressed that matter for the 2013 outlook are the resilience of employment and the stickiness of

GDP growth
%q/q, sa 1.0 0.5 0.0 -0.5 -1.0 2010

2011

2012

2013

J.P. Morgan inflation forecast

%oya, forecast shown from dotted line onwards CPI Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 2.7 2.7 2.7 2.5 2.5 2.2 2.5 3.0 2.8 2.6 2.6 2.4 2.4 2.3 2.3 2.2 2.2 2.2 2.2 2.4 2.3 2.3 2.2 2.1 2.1 2.3 Core CPI 2.6 2.5 2.6 2.4 2.3 2.1 2.1 2.4 2.2 2.3 2.2 2.0 2.0 2.0 2.0 1.9 1.9 2.0 2.0 2.2 2.1 2.0 2.0 2.0 1.9 2.2 RPI 3.0 3.1 3.4 3.0 2.9 2.6 2.9 3.3 3.1 3.0 2.9 2.7 2.9 2.8 2.8 2.8 2.8 2.9 2.8 3.0 2.9 2.9 2.8 2.8 2.8 2.9 RPIX 2.9 3.1 3.4 2.9 2.9 2.6 2.9 3.3 3.1 3.0 3.0 2.8 2.9 2.8 2.8 2.8 2.8 2.8 2.8 2.9 2.8 2.8 2.7 2.7 2.7 2.8 RPI Level 245.6 246.8 246.0 247.0 247.9 248.8 249.4 249.7 249.5 250.2 251.4 252.3 252.8 253.7 253.0 253.9 254.8 255.9 256.5 257.1 256.8 257.5 258.5 259.3 259.8 261.1

core inflation. The poor performance of productivity as overall hours worked has risen relative to output is not well understood. We are skeptical that the currently trendy explanation, that damaged banks are misallocating capital between sectors, can carry much weight. Our suspicion is that a recovery in demand growth would see productivity trends improve markedly, independent of conditions in the financial system. With the data suggesting the recent strength in the official employment data is beginning to abate, we anticipate a period of more muted job growth while output growth accelerates.

45

JPMorgan Chase Bank N.A, London Branch Allan Monks Malcolm Barr

Economic Research United Kingdom January 4, 2013

A succession of plausibly one-off shocks has helped to keep inflation high. These have included increases in import prices, energy bills, VAT, and tuition fees. But measures of inflation that clean up for those influences have not moved below 2% on a sustained basis, and show little sign of doing so in the data in hand. We would attribute that to three forces. First, the poor performance of productivity has meant that unit labor costs have not seen a prolonged period of sub-2% growth at any stage since 2008. Second, measures of capacity use within firms have not been weak enough to suggest firms are prepared to take an ongoing hit to margins in order to boost output levels. And third, the end of a long period of rising penetration of cheap imports has shifted the average run rate for core goods pricing. Our best guess is that the pressures on the unit labor costs side may abate slowly as output growth builds. But that downtrend in core inflation will be slow moving, and the headline data will be dominated by other influences. The good news, however, is that measures of inflation expectations have remained well-behaved throughout the period of above-target inflation. All told, we expect inflation to spend most of the year above the 2% target.

PMI output readings

% balance, sa 62 60 58 56 54 52 50 48 46 44 42 2010 2011

Services

Manufacturing

2012

2013

Bank loan availability

% balance, BoE survey, past 3 months, triangles denote expectations 40 30 20 10 0 -10 -20 -30 -40 -50 -60 07 08 Firms Easing

Household secured Tightening 09 10 11 12 13

Near-term data look mixed

The December services PMI dealt a blow to growing expectations of an imminent recovery in output. The business activity reading dropped unexpectedly from 50.2 to 48.9, a third consecutive decline and consistent with a modest contraction in services output. The composite PMI is at 50, thanks to a strong gain in the manufacturing component for the same month. And we remain comfortable with our forecast for flat GDP growth in 4Q, given upside risks that had appeared around that forecast previously. That said, the survey is certainly a challenge to our view that we will see a return to growth this quarter. The January surveys will be important in gauging the momentum of the slide in the services PMI. But at this stage, we continue to expect better growth in 1Q due to three fundamental factors that will be helping the economy: lower sequential inflation, a slightly more supportive global backdrop (including lower funding costs in international capital markets) and signs of an easing in credit conditions. The latter was evident this week from a marked improvement in the BoEs 4Q credit conditions survey. Though last quarters survey had already indicated a clear improvement in mortgage credit availability, it was corporate loan conditions that saw the biggest improvement this time round. The OMT announcement has played a key role in improving wholesale funding conditions across Europe, and its influence is likely at work in the BoE survey. At the same time, however, the BoE will feel comforted that its Funding for Lending Scheme is likely to be driving at least part of the improvement in credit conditions, even if usage to date has been very modest. On the heels of the BoEs credit survey this week, the BoEs money and credit data continue to show an advance in mortgage approvals to
46

Bank loan spreads

% balance, BoE survey, past 3 months, triangles denote expectations 60 40 20 0 -20 -40 -60 -80 07 08 09 10 11 12 13 Tightening Firms Easing Household secured

Demand versus supply of bank loans for firms

% balance, BoE survey, past 3 months 30 20 10 0 -10 -20 -30 -40 -50 -60 2007 Improving Supply

Demand

Deteriorating 2008 2009 2010 2011 2012 2013

54,000, an impressive move up from their low this year of 44,500. The effective rate on new borrowing to PNFCs also dropped to its lowest since March of this year.

JPMorgan Chase Bank N.A, London Branch Allan Monks Malcolm Barr

Economic Research Global Data Watch January 4, 2013

CPAC meeting on RPI changes

Next Thursday the National Statistician will announce her recommendation regarding changes to RPI inflation. This decision will be made at a CPAC meeting held two days earlier, at which the ONS will report the responses of the recently conducted public consultation. As a brief recap, a short list of four possible outcomes has been drawn up for recommendation. These options all relate to which averaging method should be used to aggregate items in the RPI where no detailed weights are available. These are the options users were asked to comment on in the ONSs public consultation: Option 1. No methodological changes to the RPI, leaving the current contribution of the formula effect to the gap between RPI and CPI inflation at current levels for the foreseeable future. Option 2. Changes just to clothing. This would lower the RPI by 0.5%-0.6%-pt, creating an outcome that would look similar to the pre-2010 environment before any related changes were made. Option 3. Change the whole RPI to an alternative averaging method (Dutot). This would significantly lower RPI inflation by almost 1%-pt. Option 4. Change the averaging method to mirror the CPI. A very similar outcome to option three as described above. The results of the public consultation are not yet known. Early indications suggest the responses have been mixed, but may lean in favor of the first option. Even if true, however, it is very difficult to gauge how much weight CPAC will put on this consultation, given they themselves have a bias for more radical change. Ultimately, the National Statistician must decide which option to put forward (following CPACs advice). If option two, three, or four is recommended, the BoE would then have to decide whether the change would be detrimental to the interests of some index-linked bond holders. Though Mervyn King has publicly backed the more extreme options, this is really a separate issue from how it affects bondholders. Should the BoE conclude that a change would not be detrimental to bondholders, the decision would then be deferred to the Chancellor. Though the decision by the National Statistician will be announced on January 10, it is not known when the responses by the BoE and Chancellor will be made public (should the decision be deferred to these entities). At the end of the process, our view has been that an outcome resembling option two was most likely. Even if option one is selected, the ONS could still tweak the methodology used in the collection of clothing prices, which over time would deliver an outcome observationally equivalent to option two. This would allow the ONS to correct the adverse consequences of the changes it made back in 2012, while avoiding some

Scenarios for RPI inflation

%oya No change (Option 1) RPI RPI-CPI 3.0 0.3 3.1 0.3 3.4 0.6 3.0 0.4 2.9 0.5 2.6 0.4 2.9 0.4 3.3 0.3 3.1 0.3 3.0 0.3 2.9 0.4 2.7 0.3 2.9 0.5 2.8 0.5 2.8 0.6 2.8 0.6 2.8 0.6 2.9 0.6 2.8 0.6 3.0 0.6 2.9 0.6 2.9 0.7 2.8 0.6 2.8 0.6 2.8 0.7 2.9 0.6 Just clothing (Option 2) RPI RPI-CPI 2.5 -0.2 2.6 -0.2 2.9 0.1 2.5 -0.1 2.4 0.0 2.1 -0.1 2.4 -0.1 2.8 -0.2 2.6 -0.2 2.5 -0.2 2.4 -0.1 2.2 -0.2 2.4 0.0 2.3 0.0 2.3 0.1 2.3 0.1 2.3 0.1 2.4 0.1 2.3 0.1 2.5 0.1 2.4 0.1 2.4 0.2 2.3 0.1 2.3 0.1 2.3 0.2 2.4 0.1 Full harmonization (Option 4) RPI RPI-CPI 2.1 -0.5 2.2 -0.5 2.5 -0.2 2.1 -0.4 2.1 -0.4 1.7 -0.5 2.0 -0.5 2.4 -0.6 2.2 -0.6 2.1 -0.5 2.1 -0.5 1.9 -0.6 2.1 -0.4 1.9 -0.3 2.0 -0.3 1.9 -0.2 1.9 -0.3 2.0 -0.2 2.0 -0.2 2.1 -0.3 2.1 -0.2 2.1 -0.2 2.0 -0.2 1.9 -0.2 1.9 -0.2 2.1 -0.2

Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14

of the barriers associated with pushing forward the more extreme alternatives. Though we have stood by this call through the twists and turns in the story, there is significant uncertainty around the decision. Applying logic to the decision-making process only gets us so farwith the outcome being driven by the subjective judgment of a number of senior statisticians and policymakers. Reflecting the uncertainty around the decision, we have set out three possible scenarios for RPI inflation (and its implied gap over the CPI). Our central view is the second of these scenarios. Even if option one from the bullet points above is selected, we would expect the ONS to make further changes to the descriptions used for clothing price collection, which deliver an observed outcome close to the second scenario shown in the table above over time. The first scenario in the table is consistent with no further changes at all. And the third scenario in the table captures both options three and four as laid out by CPAC. Though this scenario would push RPI below CPI, this is likely to be a temporary occurrence. At present, the other differences between RPI and CPI inflation are unusually low, and we would expect this to reverse in the long run, assuming no further methodological changes.
47

JPMorgan Chase Bank N.A, London Branch Allan Monks Malcolm Barr

Economic Research United Kingdom January 4, 2013

Data releases and forecasts

Week of January 7 - 11
Mon Jan 7 9:30am

Fri Jan 11 9:30am

Construction output
Nsa, constant prices % m/m Aug -0.6 Sep -2.9 Oct 8.3 Nov

New car registrations

%3m/12m nsa Total Private (ex business and fleet) Sep 2.0 4.5 Oct 2.2 4.4 Nov 3.0 5.3 Dec

Review of past two weeks data

Nationwide house price index
Sa %m/m %oya %3m/3m saar Oct 0.6 -0.9 1.6 Nov 0.0 -1.2 2.1 Dec -0.1 -1.0 2.7

Tue Jan 8 12:01am

BCC quarterly economic survey

Index Manufacturing- Deliveries Manufacturing- Prices Services- Deliveries Services- Prices 1Q12 12 26 10 24 2Q12 9 9 10 18 3Q12 3 15 1 16 4Q12

1.4

1.9

BBA lending
Sa Sep Secured lending (ch bn, sa) Loan approvals (000s sa)1
1. For house purchase.

Oct 0.1 31.6 33.0 33.1

Nov 0.2 33.6

Tue Jan 8 12:01am

BRC retail sales monitor

%oya Like for like sales Total Sep 1.5 3.4 Oct -0.1 1.1 Nov 0.4 1.8 Dec

0.3 31.5

BoE housing equity withdrawal

Sa bn, sa 1Q12 -9.6 -8.1 2Q12 -9.8 3Q12 -9.4 -8.0

Tue Jan 8 12:01am

RICS housing market survey

%bal, sa Prices in last 3 months Stocks of homes on books Sales in last 3 months Sales to stocks ratio (%) New buyer enquiries Sep -14.3 65.2 14.9 22.9 5.3 Oct -7.0 66.2 15.4 23.3 17.5 Nov -8.7 69.2 15.8 22.8 10.6 Dec

PMI survey, manufacturing

% balance, sa Overall index Oct 47.3 47.9 Nov 49.1 49.2 Dec 50.0 51.4

Wed Jan 9 12:01am

Markit report on jobs

% balance, sa Permanent placements Permanent salaries Availability of permanent staff Sep 49.7 51.0 52.0 Oct 55.0 51.4 51.3 Nov 56.0 51.9 50.1 Dec

Money supply
Sa Sep M4 ex IOFCs (%m/m) (%3m/3m, ar) M4 (%m/m) M4 (%oya) M4 lending (%m/m)1 (%oya)1 0.4 7.5 0.2 -3.7 0.3 -6.2 Oct 0.4 5.4 0.2 -3.2 -0.2 -5.0 Nov 0.3 4.3 -0.2 -2.8 0.2 -4.3

Wed Jan 9 9:30am

Trade balance
bn, sa Total balance (goods) Trade balance (services) Total trade balance Aug -10.1 6.0 -4.1 Sep -8.4 5.9 -2.5 Oct -9.5 5.9 -3.6 Nov

-3.1

1. Excludes the effect of securitization.

PMI survey, construction

% balance, sa Overall index Oct 50.9 Nov 49.3 Dec 48.7

Thu Jan 10 12:00pm Fri Jan 11 9:30am

MPC rate announcement & asset purchase target

No change expected.

PMI survey, services

% balance, sa Aug -0.5 -1.2 -1.2 -1.7 Sep -2.1 -3.3 0.0 -1.7 Oct -0.8 -3.0 -1.3 -2.1 Nov 0.6 -2.1 0.2 -1.6 Overall index Oct 50.6 Nov 50.2 Dec 50.5 48.9

Industrial production
Sa IP (%m/m) %oya Manufacturing (%m/m) %oya

We assume a partial rebound following the large drop in manufacturing in October. Some recovery in oil and gas extraction after the recent plant shutdowns is also likely to lift overall IP.
48

J.P. Morgan Australia Limited Stephen Walters Ben K Jarman

Tom Kennedy

Economic Research Global Data Watch January 4, 2013

Australia and New Zealand

In the absence of domestic data, AUD and NZD appreciate as US fiscal cliff risks are (partially) avoided Aussie retail and building approvals data next week to deliver further judgment on the power of rate cuts NZ and Aussie trade reports to be supported by improving commodity price dynamics Over the New Year period there has been little new domestic information to guide the outlook for the Antipodean economies. In that echo chamber, the removal, albeit partial, of the US fiscal cliff concerns this week made the risk on bells ring louder, such that both AUD and NZD appreciated significantly alongside the global equity rise and bond sell-off. Next week marks the resumption of the data flow, most of it for Australia, where we expect the numbers to show the household sectors limp response to aggressive monetary easing having persisted into the end of 2012. The news will be somewhat better on the trade front, though, with the turning tide in the Asian economies and better news on global commodity prices to have stabilized exports in both Australia and New Zealand.

AUD and MSCI world equity index (local currency terms)

/USD 1.1 1.0 0.9 0.8 0.7 0.6 2008 2009 2010 2011 2012 2013 MSCI World AUD Index 450 400 350 300 250 200

Australia: private sector credit

%3m ar 20 15 10 5 0 -5 2006 2007 2008 2009 2010 2011 2012 2013 Housing credit Total credit %3m ar 18 14 10 6 2

2013 to show opposing growth dynamics

Trade factors aside, we view the Antipodean economies as being subject to distinctly different dynamics in 2013. In the same sense that the two economies performances have diverged in recent years due to external shocks that benefited Australia over New Zealand, our forecasts show a rolereversal occurring this year. While the growth rates we are projecting in the two economies are similar, the difference in potential growth rates means that we expect slack to accumulate in Australia, and be whittled away in New Zealand. Australia is moving into a world where the terms of trade are shifting from a tailwind to a headwind for national purchasing power. As a result, the corporate sector has turned very cautious on hiring, such that job ads now are in a state of persistent decline. Only a falling participation rate has kept the unemployment rate low. In 2013, we expect the labor market to slow further, which will weigh on real household spending, as will the hit to purchasing power as prior disinflation from AUD fades away. The plateau in mining capex will lay bare the weakness in non-mining activity. In New Zealand, the household and government sectors remain in retrenchment mode, but the economy nevertheless will benefit substantially from the reconstruction boost to GDP. Already there are broader signs of life in the housing market data, as rents and building activity pick up after a long malaise, while prices and

activity are being sparked by loosening credit conditions. For more details on our forecasts for growth and policy, see our 2013 outlook pieces on Australia (in this GDW) and New Zealand (in next weeks GDW).

Is Aussie housing credit growth turning?

While the total pool of private sector credit outstanding in Australia was unchanged in November, housing credit was once again the strongest performer, and posted a further modest acceleration, increasing 0.4%m/m. This is certainly nothing to get too excited about, as it is close to the average run rate for 2012. However, given that the accumulated effects of prior easing tend to mechanically shrink the pool of credit, as existing mortgage holders use lower rates to pay down more principal, the fact that the housing numbers have been pushing higher over the last few months is notable. The threemonth run-rate on housing credit has edged up to its strongest pace since April, having generally fallen during the RBAs easing cycle, which started in November 2011. And with new housing finance commitments growing somewhat stronger than the pool of credit, there could be more interesting composition effects unfolding as well, with new borrowers entering the housing market and paying down the debt of existing mortgage holders. This represents a change in the distribution of debt that could have financial stability implications later.

55

J.P. Morgan Australia Limited Stephen Walters Ben K Jarman

Tom Kennedy

Economic Research Australia and New Zealand January 4, 2013

Outside of housing, there are few signs of life in credit demand. Business credit growth was unusually strong during 1H12, which has been attributed to firms switching credit lines away from offshore lenders (namely European) toward domestic banks. Novembers result, though, which saw business credit contract 0.6%m/m, provides further confirmation that this shift has run its course and that business credit growth will remain soft heading into 2013.

RBA non-rural commodity price index and Global Dairy Trade NZTWI
Index 200 150 100 50 1000 GDT trade-weighted index of NZ dairy prices RBA index of non-rural commodities Index 2000

1500

Retail and building approvals to limp higher

Next weeks reports on retail sales and building approvals for November should see only slight improvements on recent run rates. Even the modest returns shown in recent months on retail sales have been flattered by the strength in food price inflation, which has lifted nominal outlays, while discretionary spending has been consistently disappointing. We expect a slight improvement in total sales in November (+0.2%m/m from flat in October), and a shift in the composition toward better outcomes in household goods and department store sales, for example. However, the overall sense that households are keeping the purse strings taut will remain. Similarly, building approvals should recover somewhat after a shocking October (we expect a 2.6%m/m rise), but the normalization will stem from a temporary bounce in higher-density approvals, with the trend measure of house approvals to keep pushing lower.

0 04 06 08 10 12 14

500

Australia Data releases and forecasts

Week of January 7 - 11
Tue Jan 8 11:30am

Trade balance
Aug A$ bn -1.9 Sep -1.4 Oct -2.1 Nov -2.6

Wed Jan 9 11:30am

Retail sales
Aug %m/m 0.3 Sep 0.5 Oct 0.0 Nov 0.2

Price drags to fade in trade reports

The effect of commodity price drags on export revenues has been clear in both Australia and New Zealand. As of October, goods revenues were down 12% in Australia, due to the slide in iron ore and coal prices. However, these price effects come through with a lag, and iron ore in particular has been on a tear recently. As the earlier price drags fade, and coal shipments improve, we expect export revenues to stabilize, treading water in November. However, strength in imports, which preliminary reports show posted broad-based gains, will push the deficit wider still, to A$2.6 billion. In New Zealand, imports strength will also be a drag, but a larger rebound is expected in export volumes, and Global Dairy Trades tradeweighted index shows prices up 3% in November. This should see the trade deficit narrow slightly to NZ$670 million. The auction payout results show this price strength continuing through December and January.

Thu Jan 10 11:30am

Building approvals
Aug %m/m 8.4 Sep 9.5 Oct -7.6 Nov 2.6

Review of past two weeks data

Private sector credit
Sep %m/m 0.3 Oct 0.1 Nov 0.2 0.0

New Zealand Data releases and forecasts

Week of January 7 - 11
Thu Jan 10 8:45am

Trade balance
Aug NZ$ mn -811 Sep -775 Oct -718 Nov -670

Review of past two weeks data

No data released.

56

JPMorgan Chase Bank N.A., New York Daniel Silver

Economic Research Global Data Watch January 4, 2013

US economic calendar
Monday 7 Jan 8 Jan
NFIB survey (7:30am) Dec Consumer credit (3:00pm) Nov
Auction 3-year note $32 bn Richmond Fed President Lacker speaks on economy in South Carolina (3:00pm)

Tuesday 9 Jan

Wednesday 10 Jan

Thursday 11 Jan

Friday

Auction 10-year note (r) $21 bn

Initial claims (8:30am) w/e prior Sat 365,000 Wholesale trade (10:00am) Nov JOLTS (10:00am) Nov
Auction 30-year bond (r) $13 bn Kansas City Fed President George speaks on economy in Kansas City (1:10pm) St. Louis Fed President Bullard speaks on monetary policy in Wisconsin (2:00pm) Minneapolis Fed President Kocherlakota speaks in Minneapolis (8:00pm)

International trade (8:30am) Nov -$41.3bn Import prices (8:30am) Dec 0.1% Federal budget (2:00pm) Dec
Philadelphia Fed President Plosser speaks on economy in New Jersey (9:30am)

14 Jan
San Francisco Fed President Williams speaks on economy in California (11:55am) Atlanta Fed President Lockhart speaks on economy in Atlanta (12:40pm) Chairman Bernanke speaks at University of Michigan (4:00pm)

15 Jan
Retail sales (8:30am) Dec PPI (8:30am) Dec Empire State survey (8:30am) Jan Business inventories (10:00am) Nov
Philadelphia Fed President Plosser speaks on economy in New York (12:30pm)

16 Jan
CPI (8:30am) Dec TIC data (9:00am) Nov Industrial production (9:15am) Dec NAHB survey (10:00am) Jan Beige book (2:00pm)

17 Jan
Initial claims (8:30am) w/e prior Sat Housing starts (8:30am) Dec Philadelphia Fed survey (10:00am) Jan
Announce 10-year TIPS $15 bn

18 Jan
Consumer sentiment (9:55am) Jan preliminary

21 Jan
Martin Luther King, Jr. Day Markets closed

22 Jan
Existing home sales (10:00am) Dec Richmond Fed survey (10:00am) Jan

23 Jan
FHFA HPI (9:00am) Nov

24 Jan
Initial claims (8:30am) w/e prior Sat Manufacturing PMI (8:58am) Jan flash Leading indicators (10:00am) Dec KC Fed survey (11:00am) Jan
Auction 10-year TIPS $15 bn Announce 2-year note $35 bn Announce 5-year note $35 bn Announce 7-year note $29 bn

25 Jan
New home sales (10:00am) Dec

28 Jan
Durable goods (8:30am) Dec Pending home sales (10:00am) Dec Dallas Fed survey (10:30am) Jan
Auction 2-year note $35 bn

29 Jan
S&P/Case-Shiller HPI (9:00am) Nov Consumer confidence (10:00am) Jan Housing vacancies (10:00am) 4Q FOMC meeting
Auction 5-year note $35 bn

30 Jan
ADP employment (8:15am) Jan Real GDP (8:30am) 4Q advance FOMC statement (2:15pm)
Auction 7-year note $29 bn

31 Jan
Initial claims (8:30am) w/e prior Sat Personal income (8:30am) Dec Employment cost index (8:30am) 4Q Chicago PMI (9:45am) Jan

1 Feb
Employment (8:30am) Jan Manufacturing PMI (8:58am) Jan final Consumer sentiment (9:55am) Jan final ISM manufacturing (10:00am) Jan Construction spending (10:00am) Dec Light vehicle sales Jan

68

JPMorgan Chase Bank, London Greg Fuzesi

Economic Research Global Data Watch January 4, 2013

Euro area economic calendar

Monday 7 Jan
Euro area: PPI (11:00am) Nov

Tuesday 8 Jan
Euro area: EC business conf. (11:00am) Dec 86.5%bal, sa EC cons. conf. (11:00am) Dec -26.6%bal, sa Retail sales (11:00am) Nov 0.3%m/m, sa MFI interest rates (10:00am) Nov Unemployment (11:00am) Nov 11.8%, sa Germany: Foreign trade (8:00am) Nov Mfg orders (12:00pm) Nov -2.5%m/m, sa France: Foreign trade (8:45am) Nov

Wednesday 9 Jan
Germany: Industrial production (12:00pm) Nov 1.0%m/m, sa

Thursday 10 Jan
Euro area: ECB rate announcement (1:45pm) No change expected France: CPI (8:45am) Dec Industrial production (8:45am) Nov Netherlands: CPI (9:30am) Dec

Friday 11 Jan
France: Monthly budget situation (8:45am) Nov

14 Jan
Euro area: Industrial production (11:00am) Nov Italy: Industrial production (10:00am) Nov

15 Jan
Euro area: Foreign trade (8:00am) Nov Germany: Annual GDP 2012 (8:00am) CPI (8:00am) Dec Italy: CPI (10:00am) Dec Spain: CPI (9:00am) Dec

16 Jan
Euro area: HICP final (11:00am) Dec New car regs (8:00am) Dec Italy: Foreign trade (10:00am) Nov

17 Jan
Euro area: ECB Monthly Bulletin (9:00am) Jan

18 Jan

21 Jan
Germany: PPI (8:00am) Dec Netherlands: CBS cons. conf. (9:30am) Jan

22 Jan
Germany: ZEW bus. survey (11:00am) Jan

23 Jan
Euro area: EC cons. conf. prelim (4:00pm) Jan France: INSEE bus. conf. (8:45am) Jan

24 Jan
Euro area: Balance of payments (10:00am) Nov PMI flash (10:00am) Jan Manufacturing, Services and Composite Germany: PMI flash (9:30am) Jan Manufacturing, Services and Composite Import prices (9:30am) Dec France: PMI flash (9:00am) Jan Manufacturing, Services and Composite Spain: Unemployment rate (9:00am) 4Q Belgium: BNB bus. conf. (3:00pm) Jan

25 Jan
Germany: IFO bus. survey (10:00am) Jan Netherlands: CBS bus. conf. (9:30am) Jan

28 Jan
Euro area: M3 (10:00am) Dec Germany: Retail sales (9:30am) Dec Italy: Contractual wages (11:00am) Dec ISAE cons. conf. (10:00am) Jan

29 Jan
Euro area: Sector accounts (10:00am) 3Q Germany: GfK cons. conf. (8:00am) Feb France: INSEE cons. conf. (8:45am) Jan

30 Jan
Euro area: EC capacity utilization (11:00am) 1Q EC business conf. (11:00am) Jan EC cons. conf. (11:00am) Jan Italy: ISAE bus. conf. (10:00am) Jan Spain: GDP prelim (9:00am) 4Q Belgium: GDP prelim (3:00pm) 4Q

31 Jan
Euro area: HICP flash (11:00am) Jan Germany: Employment (9:55am) Dec Unemployment (9:55am) Jan CPI prelim (9:00am) Jan France: Cons. of mfg goods (8:45am) Dec PPI (8:45am) Dec Italy: PPI (10:00am) Dec Spain: CPI prelim (9:00am)

1 Feb
Euro area: PMI Mfg final (10:00am) Jan Unemployment (11:00am) Dec MFI interest rates (10:00am) Dec Germany: PMI Mfg final (9:55am) Jan France: PMI Mfg final (9:50am) Jan Italy: PMI Mfg (9:45am) Jan Spain: PMI Mfg (9:15am) Jan

Highlighted data are scheduled for release on or after the date shown. Times shown are local.

69

JP Morgan Securities Japan Co., Ltd Miwako Nakamura

Economic Research Global Data Watch January 4, 2013

Japan economic calendar

Monday 7 Jan
Auto registrations (2:00 pm) Dec

Tuesday 8 Jan 9 Jan

Wednesday 10 Jan

Thursday 11 Jan

Friday

Bank lending (8:50 am) Dec Current account (8:50 am) Nov Economy Watchers survey (2:00 pm) Dec

Auction 3-month bill Auction 10-year bond During the week: CAO private consumption index Nov

Auction 3-month bill Auction 30-year bond

Auction 6-month bill

14 Jan
Holiday: Japan

15 Jan
Money stock (8:50 am) Dec BoJ Governor Shirakawas addres at branch managers meeting

16 Jan
Corporate goods prices (8:50 am) Dec Private machinery orders (8:50 am) Nov Consumer sentiment (2:00 pm) Dec

17 Jan
Tertiary sector activity index (8:50 am) Nov Construction spending (2:00 pm) Nov

18 Jan
IP final (8:50 am) Nov

Auction 1-year note Auction 5-year note During the week: Department store sales Dec

Auction 3-month bill

21 Jan
BoJ Monetary Policy Meeting

22 Jan
BoJ Monetary Policy Meeting and statement BoJ Governor Shirakawas press conference (3:30 pm)

23 Jan
BoJ monthly economic report (2:00 pm)

24 Jan
Reuters Tankan (8:30 am) Jan Trade balance (8:50 am) Dec

25 Jan
Nationwide core CPI (8:30 am) Dec Minutes of Dec 19-20 BoJ Monetary Policy Meeting (8:50 am)

Auction 2-month bill

Auction 3-month bill Auction 20-year bond

28 Jan
Corporate service prices (8:50 am) Dec

29 Jan

30 Jan
Total retail sales (8:50 am) Dec

31 Jan
IP preliminary (8:50 am) Dec Nominal wages (10:30 am) Dec Housing starts (2:00 pm) Dec

1 Feb
All household spending (8:30 am) Dec Unemployment rate (8:30 am) Dec Job offers to applicants ratio (8:30 am) Dec

During the week: Shoko Chukin small firm sentiment Jan Highlighted data are scheduled for release on or after the date shown. Times shown are local.

70

JPMorgan Chase Bank NA Silvana Dimino

Economic Research Global Data Watch January 4, 2013

Canada economic calendar

Monday 7 Jan
Ivey PMI (10:00am) Dec 51.4 (43.4 nsa) J.P. Morgan composite index 55.0 (sa)

Tuesday 8 Jan 9 Jan

Wednesday 10 Jan

Thursday 11 Jan

Friday

Housing starts (8:15am) Dec 196,000 (-0.1%)

Building permits (8:30am) Nov -7.2% New housing price index (8:30am) Nov 0.1% BOC Senior Deputy Governor Tiff Macklem speaks at Queens University in Kingston, Ontario (4:00pm)

International trade (8:30am) Nov C$0.1bn

14 Jan
BoC Business Outlook Survey (10:30am) 4Q BoC Senior Loan Officer Survey (10:30am) 4Q

15 Jan
Existing home sales (9:00am) Dec

16 Jan

17 Jan
New vehicle sales (8:30am) Nov Nonresidential construction (8:30am) 4Q

18 Jan
Manufacturing sales (8:30am) Nov

21 Jan
Wholesale sales (8:30am) Nov

22 Jan
Retail sales (8:30am) Nov

23 Jan
Teranet/National Bank HP Index (9:00am) Nov Bank of Canada rate announcement /Monetary Policy Report (10:00am)

24 Jan
TNS Canada Consumer Confidence Index (9:00am) Jan

25 Jan
CPI (8:30am) Dec

28 Jan

29 Jan

30 Jan
Payroll employment (8:30am) Nov

31 Jan
CFIB Business Barometer Index (6:00am) Jan IPPI (8:30am) Dec Monthly GDP (8:30am) Nov

1 Feb

All existing home sales are tentative. Times shown are local.

71

JPMorgan Chase Bank, New York Carmen Collyns

Economic Research Global Data Watch January 4, 2013

Latin America economic calendar

7 Jan
Brazil: IGP-DI Dec 0.72% Chile: Trade balance Dec Economic activity index Nov 5.1%oya

8 Jan
Chile: CPI Dec 0.1%m/m Mexico: Central bank reserves (Prior week)

9 Jan
Brazil: IGP-M 1st release Mexico: CPI Dec Headline 0.29%m/m Core 0.22%m/m Headline 3.63%oya Core 3.00%oya Peru: Trade balance Nov

10 Jan
Brazil: IPCA Dec 0.77% Fipe CPI Jan 7 Peru: BCRP meeting on hold Mexico: Gross fixed investment 9.3%oya

11 Jan
Mexico: Industrial production Nov 3.2%oya Wage negotiations Dec 4.7% Uruguay: IP Nov

During the week: Brazil: Commodity price index Dec Vehicle production (ANFAVEA) Dec Chile: Vehicle sales Dec Mexico: Auto report Dec

Colombia: Auto sales Dec CPI Dec

14 Jan

15 Jan
Argentina: WPI Dec CPI Dec Brazil: Retail sales Nov Mexico: Central bank reserves (Prior week) Peru: Economic activity index Nov Unemployment rate Dec Uruguay: Unemployment rate Nov

16 Jan
Brazil: COPOM meeting

17 Jan
Argentina: Consumer confidence Jan Brazil: IGP-10 Jan Fipe CPI Jan 15 Chile: BCCh meeting

18 Jan
Argentina: Economic activity index Nov Mexico: Banxico interest rate decision

During the week: Brazil: Economic activity index Nov Caged formal job creation Dec Tax collections Dec

Colombia: Trade balance Nov

21 Jan
Brazil: IGP-M 2nd release Mexico: Employment report Dec

22 Jan
Mexico: Central bank reserves (Prior week) Banamex survey of economic expectations

23 Jan
Argentina: Trade balance Dec Brazil: IPCA-15 Jan Current account Dec Mexico: Retail sales Nov

24 Jan
Argentina: IP Dec Brazil: COPOM minutes Mexico: CPI Jan-1H IGAE (GDP proxy) Nov

25 Jan
Brazil: Outstanding loans Dec Mexico: Trade balance Dec

During the week: Colombia: Retail sales Banrep meeting

28 Jan

29 Jan
Mexico: Central bank reserves (Prior week)

30 Jan
Brazil: IGP-M Jan Chile: Retail sales Dec Mexico: PS budget balance Dec

31 Jan
Brazil: Unemployment rate Dec Chile: Unemployment rate Dec Mexico: Commercial bank credit Dec

1 Feb
Brazil: Industrial production Dec Manufacturing PMI Jan Trade balance Jan Chile: Central bank meeting minutes Mexico: Banxico survey Monetary policy meeting minutes Family remittances Dec Uruguay: Trade balance Peru: WPI Jan

During the week: Argentina: Govt tax revenue

Brazil: Central govt budget

72

JPMorgan Chase Bank N.A, London Branch Malcolm Barr Allan Monks

Economic Research Global Data Watch January 4, 2013

UK economic calendar
Monday 7 Jan
New car regs (9:30am) Dec

Tuesday 8 Jan
BCC economic survey (12:01am) 4Q BRC retail sales monitor (12:01am) Dec RICS HPI (12:01am) Dec

Wednesday 9 Jan
Markit jobs report (12:01am) Dec Trade balance (9:30am) Nov

Thursday 10 Jan
MPC rate announcement and Asset purchase target (12:00pm) No change expected

Friday 11 Jan
Construction output (9:30am) Nov Industrial production (9:30am) Nov 0.6%m/m, sa Quoted mortgage interest rates (9:30am) Dec

14 Jan

15 Jan
RICS HPI (12:01am) Dec CPI (9:30am) Dec ONS HPI (9:30am) Dec PPI (9:30am) Dec

16 Jan

17 Jan

18 Jan
Retail sales (9:30am) Dec

21 Jan
Rightmove HPI (12:01am) Jan

22 Jan
Public sector finances (9:30am) Dec CBI industrial trends (11:00am) 4Q and Jan

23 Jan
Labor market report (9:30am) Dec MPC minutes (9:30am) Jan

24 Jan
BBA mortgage lending (9:30am) Dec CBI distributive trades (11:00am) Jan

25 Jan
Index of services (9:30am) Nov Real GDP 1st est. (9:30am) 4Q

28 Jan

29 Jan

30 Jan
M4 & M4 lending final (9:30am) Dec Net lending to individuals (9:30am) Dec

31 Jan
Gfk cons. conf. (12:01am) Jan

1 Feb
PMI Mfg (9:30am) Jan

During the week: Nationwide HPI Jan (28 Jan -1 Feb) Times shown are local.

73

JPMorgan Chase Bank N.A, London Branch Anthony Wong

Economic Research Global Data Watch January 4, 2013

Emerging Europe/Middle East/Africa economic calendar

Monday 7 Jan
Czech Republic: Industrial output (9:00am) Nov 0%m/m, sa; -1.9%oya, nsa Trade balance (9:00am) Nov CZK22.4bn Hungary: PPI (9:00am) Nov Romania: NBR rate decision no change Holiday: Russia During the week: Russia: CBR rate decision (9-15 Jan)

Tuesday 8 Jan
Hungary: Industrial output (9:00am) Nov -4.0%oya, wda Romania: Retail sales (10:00am) Nov 0.5%m/m, sa Turkey: Industrial output (10:00am) Nov South Africa: Gross reserves (8:00am) Dec

Wednesday 9 Jan
Czech Republic: CPI (9:00am) Dec 2.4%oya Hungary: Trade balance (9:00am) Nov 775mn Poland: NBP rate decision -25bp Romania: Trade balance (10:00am) Nov GDP (10:00am) 3Q final Russia: CPI Dec Current account 4Q

Thursday 10 Jan
Romania: Industrial output (10:00am) Nov -0.3%m/m, sa South Africa: Manufacturing output (1:00pm) Nov -0.5%m/m sa

Friday 11 Jan
Czech Republic: Retail sales (9:00am) Nov Romania: CPI (10:00am) Dec 4.6%oya Turkey: Current account (10:00am) Nov

14 Jan
Turkey: Unemployment rate (10:00am) Oct

15 Jan
Czech Republic: PPI (9:00am) Dec Hungary: CPI (9:00am) Dec 5.2%oya Poland: CPI (2:00pm) Dec Budget balance (3:00pm) Dec Israel: CPI (6:30pm) Dec South Africa: Mining production (11:30am) Nov

16 Jan
Hungary: NBH minutes (2:00pm) Poland: Core inflation (2:00pm) Dec Russia: Foreign trade Nov South Africa: Kagiso PMI (11:00am) Dec Retail sales (1:00pm) Dec Israel: GDP 3Q final

17 Jan

18 Jan
Czech Republic: Current account (10:00am) Nov CZK1.1bn Hungary: Average gross wages (9:00am) Nov Poland: Average gross wages and Employment (2:00pm) Dec Current account (2:00pm) Nov Industrial output (2:00pm) Dec PPI (2:00pm) Dec Romania: Current account Nov -4.6bn ytd

21 Jan

22 Jan
Russia: Industrial production Dec PPI Dec Turkey: CBRT rate decision (2:00pm)

23 Jan
South Africa: CPI (10:00am) Dec Turkey: Capacity utilization Jan

24 Jan
Russia: Retail sales, unemployment, and investment Dec South Africa: SARB rate decision

25 Jan
Hungary: Retail sales (9:00am) Nov

28 Jan
Israel: BoI rate decision (5:30pm) Turkey: Trade balance Dec

29 Jan
Hungary: Unemployment (9:00am) Nov NBH rate decision (2:00pm) Poland: Retail sales (10:00am) Dec Unemployment (10:00am) Dec

30 Jan
Russia: GDP 4Q South Africa: Private sector credit (8:00am) Dec Budget (2:00pm) Dec

31 Jan
Hungary: PPI (9:00am) Dec Poland: NBP inflation expectations (2:00pm) Jan South Africa: PPI (11:30am) Dec Trade balance (2:00pm) Dec

1 Feb
Czech Republic: PMI (9:30am) Jan Hungary: PMI (9:00am) Jan Poland: PMI (9:00am) Jan Russia: Manufacturing PMI (9:00am) Jan Turkey: PMI (10:00am) Jan

Times shown are local.

74

JPMorgan Chase Bank, N.A., Singapore Branch Benjamin Shatil

Economic Research Global Data Watch January 4, 2013

Non-Japan Asia economic calendar

Monday 7 Jan
Taiwan: CPI (8:30am) Dec 1.1%oya Trade balance (4:00pm) Dec US$3.0bn

Tuesday 8 Jan
Australia: Trade balance (11:30am) Nov -A$2.6bn

Wednesday 9 Jan
Australia: Retail sales (11:30am) Nov 0.2%m/m New Zealand: Building permits (10:45am) Dec Korea: Unemployment rate (8:00am) Dec 3.0%, sa Malaysia: Trade balance (12:00pm) Nov US$2.5bn Thailand: BoT monetary policy meeting (2:30pm) No change

Thursday 10 Jan
Australia: Building approvals (11:30am) Nov 2.6%m/m New Zealand: Trade balance (10:45am) Nov -NZ$670mn Indonesia: BI monetary policy meeting No change Korea: Export price index (6:00am) Dec -5.3%oya Import price index (6:00am) Dec -7.4%oya Money supply (12:00pm) Nov 4.2%oya Malaysia: IP (12:00pm) Nov 5.2%oya Philippines: Exports (9:00am) Nov 23.9%oya

Friday 11 Jan
China: CPI (9:30am) Dec 2.3%oya PPI (9:30am) Dec -1.7%oya India: IP (11:00am) Nov Korea: BoK monetary policy meeting (9:00am) No change

During the week:

India: Trade balance Nov (10-15 Jan)

China: Money supply Dec (10-15 Jan) 13.2%oya, Trade balance Dec (10-13 Jan) US$21.7bn

14 Jan
Australia: ANZ job advertisements (11:30am) Dec Housing finance (11:30am) Nov India: CPI Dec WPI (12:00pm) Dec During the week:

15 Jan
Philippines: OFW remittances Nov Singapore: Retail sales (1:00pm) Nov

16 Jan
Australia: New motor vehicle sales (11:30am) Dec

17 Jan
Australia: Unemployment rate (11:30am) Dec Hong Kong: Unemployment rate (4:30pm) Dec Korea: PPI (6:00am) Dec Singapore: NODX (8:30am) Dec

18 Jan
China: FAI (10:00am) Dec GDP (10:00am) 4Q IP (10:00am) Dec Retail sales (10:00am) Dec

21 Jan
Australia: PPI (11:30am) 3Q Hong Kong: CPI (4:30pm) Dec Taiwan: Export orders (4:00pm) Dec Holiday: New Zealand During the week:

22 Jan
Taiwan: Unemployment rate (8:30am) Dec

23 Jan
Australia: CPI (11:30am) 4Q Malaysia: CPI (5:00pm) Dec Singapore: CPI (1:00pm) Dec Taiwan: IP (4:00pm) Dec Vietnam: Trade balance Jan (25-31 Jan)

24 Jan
China: Flash PMI (9:45am) Jan Hong Kong: Trade balance (4:30pm) Dec Korea: GDP prelim (8:00am) 4Q Philippines: BSP monetary policy meeting Holiday: Malaysia

25 Jan
Singapore: IP (1:00pm) Dec

Holiday: India

Thailand: Mfg. production Dec (25-28 Jan)

28 Jan
Korea: Consumer survey (6:00am) Jan Taiwan: Leading index (4:00pm) Dec

29 Jan
Australia: NAB business confidence (11:30am) Dec New Zealand: Trade balance (10:45am) Dec India: RBI monetary policy meeting (11:00am) Jan

30 Jan
New Zealand: Building permits (10:45am) Dec Korea: Current account balance (8:00am) Dec IP (8:00am) Dec

31 Jan
Australia: Pvt. sector credit (11:30am) Dec New Zealand: RBNZ official rate (9:00am) Hong Kong: Retail sales (4:30pm) Nov Malaysia: BNM monetary policy meeting Philippines: GDP (10:00am) 4Q Taiwan: GDP prelim (8:30am) 4Q Thailand: PCI, PII (1:30pm) Dec Trade balance (1:30pm) Dec

1 Feb
China: PMI mfg. (NBS) (9:00am) Jan PMI mfg. (Markit) (9:45am) Jan Indonesia: CPI (11:00am) Jan Trade balance (11:00am) Dec Korea: CPI (8:00am) Jan Trade balance (9:00am) Jan PMI mfg. (9:01am) Jan Taiwan: PMI mfg. (10:00am) Jan Thailand: CPI Jan

Holiday: Australia, New Zealand Malaysia During the week: Times shown are local.

75

JPMorgan Chase Bank NA Michael Mulhall

Economic Research Global Data Watch January 4, 2013

Global Data Diary

Week / Weekend 5 - 11 January
Brazil Auto sales (Dec) China Trade report (Dec)* Japan CAO prv cons index (Nov) Russia CBR mtg: no chg**

Monday 7 January
Japan Auto registrations (Dec) Romania BNR mtg: no chg Taiwan CPI (Dec) Trade report (Dec) United Kingdom Auto registrations (Dec)

Tuesday 8 January
Euro area EC bus conf (Dec) EC cons conf (Dec) Retail sales (Nov) MFI interest rates (Nov) Unemp rate (Nov) Germany Mfg orders (Nov)

Wednesday 9 January
Germany IP (Nov) Mexico CPI (Dec) Poland NBP mtg: -25bp Thailand BoT mtg: no chg

Thursday 10 January
Brazil IPCA (Dec) Euro area ECB mtg: no chg France IP (Nov) Indonesia BI mtg: no chg Peru BCRP mtg: no chg United Kingdom BoE MPC mtg: no chg

Friday 11 January
China CPI (Dec) India IP (Nov) Japan Econ Watchers surv (Dec) Korea BoK mtg: no chg Mexico IP (Nov) United Kingdom IP (Nov) United States Trade report (Nov)

* To be released Jan 10-13 ** January 9-15

12 - 18 January
Brazil BCB IBC-Br index (Nov)

14 January
Euro area IP (Nov) India CPI (Dec) WPI (Dec) United States Bernanke speech

15 January
Brazil Retail sales (Nov) Japan Shirakawa speech United Kingdom CPI (Dec) United States Retail sales (Dec) NY Fed survey (Jan) Busnss inventories (Nov)

16 January
Brazil COPOM mtg: no chg Euro area HICP final (Dec) Japan Private mach orders (Nov) Consumer sentiment (Dec) United States CPI (Dec) IP (Dec) NAHB survey (Jan) Beige book

17 January
Chile BCCh mtg: no chg Singapore NODX (Dec) United States Housing starts (Dec) Philly Fed survey (Jan)

18 January
China GDP (4Q) FAI (Dec) IP (Dec) Retail sales (Dec) Colombia BanRep mtg: -25bp Mexico Banxico mtg: no chg United Kingdom Retail sales (Dec) United States UMich cons sent prl (Jan)

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