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Global

23 June 2010

Global Economic Perspectives

Financial Conditions Weakest Since Late '08

Deutsche Bank Securities Inc.

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010

Economics

Table of Contents

Key Economic Forecasts .................................. Page 02

Financial Conditions Weakest Since Late ’08... Page 03

Central Bank Watch............................................ Page 9

Global Data Monitor ......................................... 2

Charts of the Week .......................................... Page 13

Global Week Ahead.......................................... Page 14

Financial Forecasts ........................................... Page 16

Main Deutsche Bank Global Economics Publications ........................ Page 17

Research Team

Peter Hooper (+1) 212 250-7352 [email protected]

Thomas Mayer (+44) 20 754-72884 [email protected]

Torsten Slok (+1) 212 250-2155 [email protected]

Michael Biggs (+44) 20 7545-5506 [email protected]

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Financial conditions appear to have worsened substantially in recent quarters based on our update of the broad index of US financial variables presented earlier this year at the US Monetary Policy Forum. In the wake of recent developments in Europe, increased stress in financial markets has pushed that index halfway back to its immediate post-Lehman crisis lows.

The broad index shows a significantly larger net drop than other financial conditions indexes from most recent peaks partly because it gives greater weight to financial stock and flow variables and partly because it factors in the extent to which conditions have failed to respond positively to the recovery of GDP. The continued absence of private securitization of mortgages and subdued activity in ABS markets persists in weighing on broad conditions. Factors that have tended to give an offsetting lift to financial conditions have included a slowdown in the tightening of lending standards and more recently a drop in Treasury yields and associated easing of mortgage rates.

The worsening of financial conditions increases negative risks for economic prospects going forward and tends to delay the expected timing of Fed rate hikes. We will consider in more detail next week the implications for economic activity of the recent tightening of financial conditions.

MPF FCI slides further in Q2

-4

-3

-2

-1

0

1

2

3

4

1970 1975 1980 1985 1990 1995 2000 2005 2010

Index

-4

-3

-2

-1

0

1

2

3

4Index

Original MPF FCI Updated MPF FCI

Correlation since 1990 = 0.98

Source: U.S. Monetary Policy Forum Report 2010, DB Global Markets Research

.

23 June 2010 Global Economic Perspectives


Key Economic Forecasts

Real GDP

% growthb

Consumer Prices

% growthc

Current Account

% of GDPd

Fiscal Balance

% of GDP

2009 2010F 2011F 2009 2010F 2011F 2009 2010F 2011F 2009 2010F 2011FUS -2.4 3.5 3.6 -0.3 1.8 1.9 -2.9 -3.0 -3.1 -10.2 -8.6 -6.3

Japan -5.3 3.4 0.7 -1.4 -1.0 -0.7 2.8 4.1 5.0 -5.6 -6.3 -6.3

Euroland -4.1 0.9 1.0 0.3 1.5 1.5 -0.6 0.2 0.1 -6.1 -6.8 -5.7

Germany -4.9 2.0 1.3 0.2 1.2 1.3 5.0 6.4 6.1 -3.3 -5.3 -4.6

France -2.5 1.1 1.0 0.1 1.7 1.3 -2.0 -1.9 -2.1 -7.5 -7.9 -6.2

Italy -5.1 0.8 0.8 0.8 1.6 1.7 -3.3 -3.0 -3.1 -5.3 -4.9 -3.3

Spain -3.6 -0.7 0.0 -0.3 1.5 1.4 -5.0 -3.9 -3.6 -11.2 -9.0 -7.1

UK -4.9 1.5 2.5 2.2 3.2 0.9 -1.3 -1.0 -0.8 -11.1 -11.0 -8.0

Sweden -4.7 1.2 2.7 -0.3 1.5 2.0 7.4 7.5 8.0 -5.8 -5.0 -3.5

Denmark -5.1 1.5 2.0 1.3 2.0 1.0 3.0 2.5 2.0 -6.7 -7.0 -5.0

Norway -1.4 1.5 2.8 2.2 1.6 1.6 13.9 15.0 16.0 7.6 8.0 10.0

Poland 1.7 3.2 3.1 3.5 2.5 2.5 -0.7 -3.3 -4.1 -7.1 -6.5 -5.7

Hungary -6.3 1.5 3.4 4.2 4.2 2.2 0.3 -1.0 -2.4 -4.0 -5.0 -3.6

Czech Republic -4.2 2.7 3.0 1.0 1.6 2.3 -1.1 -2.0 -2.8 -6.5 -5.0 -4.1

Australia 1.3 2.9 3.8 1.8 2.5 3.2 -4.1 -3.9 -3.7 -2.1 -4.5 -3.5

Canada -2.5 3.5 3.5 0.3 2.2 2.3 -2.7 -2.4 -2.1 -3.5 -3.0 -1.6

Asia (ex Japan) 5.5 8.4 7.6 0.9 4.6 4.0 5.0 3.5 2.6 -3.5 -3.0 -3.0

India 5.7 9.0 8.0 2.2 9.3 6.9 -2.6 -2.7 -2.7 -10.1 -8.7 -8.2

China 8.7 9.8 9.3 -0.7 3.4 2.5 5.8 4.3 2.9 -2.9 -2.5 -2.0

Latin America -2.7 4.5 3.7 6.4 9.5 8.0 -0.6 -1.2 -1.6 -3.2 -2.2 -2.2

Brazil -0.2 7.5 4.2 4.3 5.6 5.0 -1.5 -2.4 -3.0 -3.3 -2.4 -2.4

EMEA -5.4 4.0 4.3 8.0 7.7 6.6 0.8 -0.9 -0.4 -5.7 -4.5 -2.6

Russia -7.9 4.0 4.5 8.8 8.1 7.3 4.8 1.7 2.9 -6.1 -3.3 -0.5

G7 -3.5 2.8 2.5 -0.1 1.4 1.3

World -1.1 4.4 4.0 1.2 3.2 2.9

(a) Euroland forecasts as at the last forecast round on 28/05/2010. Bold figures signal upward revisions, bold, underlined figures signal downward revisions. (b) GDP figures refer to working day adjusted data. (c) HICP figures for euro-zone countries and the UK (d) Current account figures for Euro area countries include intra regional transactions

Forecasts: G7 quarterly GDP growth

% qoq saar/annual: % yoy Q1 09 Q2 09 Q3 09 Q4 09 2009 Q1 10F Q2 10F Q3 10F Q4 10F 2010F 2011F

US -6.4 -0.7 2.2 5.6 -2.4 3.0 4.0 3.7 3.8 3.5 3.6

Japan -15.8 6.9 0.4 4.6 -5.3 5.0 3.3 1.8 0.3 3.4 0.7

Euroland -9.6 -0.4 1.6 0.5 -4.1 0.8 1.8 1.4 0.9 0.9 1.0

Germany -13.3 1.8 2.9 0.7 -4.9 0.6 4.3 1.9 1.4 2.0 1.3

France -5.6 0.9 1.0 2.2 -2.5 0.5 1.1 0.9 0.7 1.1 1.0

Italy -11.0 -1.0 1.5 -0.3 -5.1 1.7 0.8 0.4 0.4 0.8 0.8

UK -10.0 -2.7 -1.1 1.8 -4.9 0.8 2.6 2.8 2.9 1.5 2.5

Canada -7.0 -2.8 0.9 4.9 -2.5 6.1 3.8 3.6 4.0 3.5 3.5

G7 -9.2 0.6 1.6 4.0 -3.5 2.8 3.4 2.7 2.5 2.8 2.5

Sources: National authorities, DB Global Markets Research



Financial Conditions Weakest Since Late ‘08

Financial conditions appear to have worsened substantially in recent quarters based on our update of the broad index of US financial variables presented earlier this year at the US Monetary Policy Forum. In the wake of recent developments in Europe, increased stress in financial markets has pushed that index halfway back to its immediate post-Lehman crisis lows.

The broad index shows a significantly larger net drop than other financial conditions indexes from most recent peaks partly because it gives greater weight to financial stock and flow variables and partly because it factors in the extent to which conditions have failed to respond positively to the recovery of GDP. The continued absence of private securitization of mortgages and subdued activity in ABS markets persists in weighing on broad conditions. Factors that have tended to give an offsetting lift to financial conditions have included a slowdown in the tightening of lending standards and more recently a drop in Treasury yields and associated easing of mortgage rates.


Introduction A palpable deterioration in financial market conditions associated with developments in Europe this spring has raised important questions about the duration of loose monetary policy and the probability of a double-dip recession. The challenge, as always, is how to interpret the multitude of conflicting signals about the health of financial markets. Economic surveys point to improving credit availability, the government’s long-term borrowing costs are lower, and avenues for private credit through securitization markets have begun to be unblocked. At the same time, financial markets remain extremely volatile and asset values have dropped substantially. To make sense of these signals, we utilize a newly developed index of financial system robustness introduced this year by a group of academic and private-sector economists at the 2010 US Monetary Policy Forum (MPF).1 At last check-in, the MPF financial conditions index, or MPF FCI, indicated a worsening of U.S. financial conditions in the final months of 2009. For some

1 See 2010 U.S. Monetary Policy Forum paper “Financial Conditions Indexes: A Fresh Look after the Financial Crisis*” published on February 26, 2010 (http://research.chicagobooth.edu/igm/events/docs/2010usmpfreport.pdf) and the March 3, 2010 Global Economic Perspectives “Financial Conditions Indexes: A New Look.”

components of the index, fourth-quarter data had been based on estimates rather than published sources. We now update this index completely through Q1 2010 and provide an estimate for the second quarter of 2010 based on data available for the higher-frequency components of the index through early June.

Overview of index and component indicators The MPF FCI incorporates 45 financial measurements, including interest rate spreads, the 10-year Treasury yield, asset prices, volatility measurements, quantities of financial products (stocks and flows), and economic surveys. The index addresses limitations of earlier FCIs by drawing on a substantially broader range of variables covering both the banking and shadow banking system over a longer lifespan. In addition, the index purges endogenous movements related to the business cycle and monetary policy influences. This approach allows the index to be particularly attuned to the divergence of macroeconomic and financial conditions, and reflects the common sense idea that it can be easier to overlook—or ignore—cracks in the financial system during periods of robust growth in output. The types of variables included in the MPF FCI and their frequency are indicated in Table 1; a comprehensive list of variables and sources is included in the Appendix. Table 1. Variables included in MPF FCI, by data

frequency

(number of variables of each type) Variable High

frequency Medium

frequencyLow

frequencyInterest rate levels 1

Yield spreads 10 2 2

Exchange rate 1

Stock market 2

Home prices 1

Energy prices 1

Market volatility/risk 3

Survey of lending stds 4 3

Quantitative stock, flow 5 2 8

Total 21 11 13

Note: High frequency: daily or weekly available for early June; Medium frequency: monthly available for April or May or linked closely to monthly data available for April or May; Low frequency: quarterly, available through Q1. Source: US Monetary Policy Forum Report 2010, DB Global Markets Research



Updates for Q4 and Q1, estimate for Q2. Chart 1 shows the updated MPF FCI in comparison with the original version reported in the conference paper. Differences largely reflect historical data revisions, the longer history of a few data series in the original MPF FCI, and adjustments to the regression estimation caused by the addition of two quarters of new data. After turning down in Q4, the MPF FCI held mostly steady in the first quarter before turning noticeably worse in the second quarter. The index level declined to an estimated –1.82 as of early June, from a revised level of -1.34 in the fourth quarter of 2009 (the original MPF FCI registered -1.07 in the fourth quarter).2 Financial conditions have not been this strained since the fourth quarter of 2008, though the index remains above the -2.5 to -3.5 levels posted during the worst of the 2007-2009 recession. Chart 1. MPF FCI slides further in Q2

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1

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1970 1975 1980 1985 1990 1995 2000 2005 2010

Index

-4

-3

-2

-1

0

1

2

3

4Index

Original MPF FCI Updated MPF FCI

Correlation since 1990 = 0.98


The wider coverage of the MPF FCI comes at the cost of timeliness, as some elements of the index are reported with a significant lag. For example, the Federal Reserve Board releases its senior loan officers survey only four times per year. To address this problem, we have broken down the index into its higher and lower frequency components, with the former conveying the most up-to-date view of financial conditions. Chart 2 shows the contributions of the high-frequency components—i.e. the indicators that are updated daily or weekly—to the overall FCI in recent years and to the estimated movement in Q2. Stress in these high-frequency variables is responsible for the FCI’s drop between Q1 and Q2; these indicators went from adding about 35 bps to the index in Q1 to subtracting 45 bps from the index in Q2—an 80 bp swing. Declines in medium-to-low frequency components played a more substantial role in the late 2009 FCI drop and continued Q1 weakness, when higher-frequency elements worsened more modestly or improved.

2 The estimate for Q2 holds high-frequency components at their average values in early June, holds medium frequency components at their monthly averages for April and May, and assumes the low frequency elements would remain at their Q1 levels or continue to grow at the Q1 rates of growth.

Chart 2. Lower frequency variables responsible for

most of the downturn in financial conditions

-4

-3

-2

-1

0

1

2

2005 2006 2007 2008 2009 2010

Index

-4

-3

-2

-1

0

1

2IndexContribution of high-frequncy variables

Updated MPF FCI

Early June estimate


Comparison with other FCIs. Chart 3 shows several of the alternative FCIs that were reviewed in the USMPF conference paper, including those maintained by DB, Bloomberg, the Federal Reserve Bank of Kansas City, and Macroeconomic Advisers. Overall, alternative FCIs painted a rosier view of financial conditions in the first quarter, and the indexes that are updated through Q2—the DB and MA indexes—show deterioration in the second quarter. This pattern matches the performance of the high frequency elements of the MPF FCI, which figure prominently in the construction of alternative FCIs. The drop in the DB index was largely due to a fall in stock prices, but a higher dollar and still-weak house prices were also contributing factors. Chart 3. Other FCIs showed easing conditions in Q1,

tightening in Q2

Financial condition indexes

-9

-6

-3

0

3

6

2005 2006 2007 2008 2009 2010

Index

-9

-6

-3

0

3

6Index

Updated MPF FCI DB FCI (Q2)*KC Fed (inverted) BloombergMAs' MFCI (Q2)*

* MA's MFCI's was last estimated on June 3, while DB FCI was last estimated on June 4.

Source: Bloomberg Finance LP, Kansas City Fed, Haver Analytics, U.S. Monetary Policy Forum Report 2010, DB Global Markets Research

Breadth of weakness in the MPF FCI. Of the 45 component variables in the MPF FCI, 27 have contributed to the weakening in the first half of 2010. Financial quantity variables (excluded from some traditional FCIs) weighed most heavily on the MPF FCI from the fourth quarter of 2009 to the second quarter of 2010 (Table 2). Higher



systematic volatility and changes in the value of U.S. equities and the dollar were a significant drag as well. Mitigating the declines were more confident readings from surveys of bank loan officers and consumers, lower risk-free interest rates, and tighter spreads to Treasuries. Table 2. Contribution to index changes, by type of

variable Contribution Variable Number of

variables in

category Q4-Q1 Q1-Q2 Q4-Q2Interest rate levels 1 -0.06 0.12 0.07Yield spreads 14 0.40 -0.32 0.08Exchange rate 1 -0.08 -0.06 -0.15Stock market 2 0.26 -0.28 -0.02Home prices 1 -0.02 0.01 -0.01Energy prices 1 0.00 -0.01 -0.01Market volatility/risk 3 0.15 -0.34 -0.19Survey of lending stds 7 0.26 0.03 0.29Quantitative stock, flow 15 -0.85 0.31 -0.54Total 45 0.05 -0.54 -0.48Source: US Monetary Policy Forum Report 2010, DB Global Markets Research

Drivers of weakening financial conditions. A handful of variables played a particularly large role in the index’s deterioration of late, with the effects of greater market volatility as indicated by the VIX index causing a 17 bps index decline in the MPF FCI from Q4 to Q2 (Table 3). The VIX, an indicator of how much volatility investors expect in the stock market, can suggest greater doubts about both the inherent worth of assets and other investors’ behavior. 3 Implied volatility of S&P 500 index options surged amid fears about the European sovereign debt crisis (Chart 4). The real broad trade-weighted dollar and the Wilshire 5000 contributed -15 and -12 bps respectively to the MPF FCI’s decline. As of early June, the Wilshire 5000 index was off 10½ percent from its recent peak in April, though it has recovered somewhat since then (Chart 5).

3 For a more in-depth discussion of volatility and financial conditions, see “Financial Stress: What Is It, How Can It Be Measured, and Why Does It Matter,” by Craig S. Hakkio and William Keeton of the Federal Reserve Bank of Kansas City.

Table 3. Largest contributors to the MPF FCI change,

Q4-Q2 Contribution to index change

Q4-Q1 Q1-Q2 Q4-Q25 indicators with the biggest downside impactVIX Index 0.11 -0.28 -0.17Real Broad Trade-Weighted Dollar -0.08 -0.06 -0.15Wilshire 5000 0.02 -0.15 -0.12Non-mortgage ABS Issuance -0.02 -0.07 -0.10Broker Dealer Leverage -0.08 0.00 -0.085 indicators with the biggest upside impactBanks’ Willingness to Lend to 0.10 0.02 0.12Financial Market Cap 0.24 -0.14 0.10Banks’ Tightening C&I Loans to 0.08 -0.01 0.0710-Year Treasury Yield -0.06 0.12 0.07Jumbo/30yr Conventional Spread 0.06 0.00 0.05Source: DB Global Markets Research

Chart 4. Volatility is up

10

15

20

25

30

35

40

45

50

2004 2005 2006 2007 2008 2009 2010

Index

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

Index

VIX Index (ls)

Idiosyncratic bank risk (rs) Early June level

Source: Bloomberg Finance LP, S&P, DB Global Markets Research

Chart 5. Stocks are off 8.6 percent since late April

8000

10000

12000

14000

16000

2004 2005 2006 2007 2008 2009 2010

Index

8000

10000

12000

14000

16000

Index

Wilshire 5000 stock price index

Early June level

Source: Bloomberg Finance LP, DB Global Markets Research



Additional factors driving the MPF FCI lower over the first half of the year included a drop in non-mortgage ABS issuance, greater broker-dealer leverage, ongoing low levels of commercial paper issuance and paper outstanding. While yield spreads included in the index were tighter overall, the Libor-OIS spread widened (Chart 6). The European situation has driven up risk exposures across all risky asset classes. Chart 6. Libor-OIS widened

0

50

100

150

200

250

300

350

400

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

bps

0

50

100

150

200

250

300

350

400

bps3 months LIBOR-OIS spot

3 months LIBOR-OIS 3months forward

Source: Bloomberg Finance LP, DB Global Markets Research

Factors mitigating the weakening of financial conditions. Chief among the mitigating factors were surveys indicating banks’ greater willingness to lend, as well as the financial sector’s greater share of U.S. market capitalization (Charts 7 and 8). These factors reflect better-capitalized banks and easier conditions for raising capital, which is a plus for credit conditions. Note, however, that surveys of bank lending officers do reflect somewhat out-of-date conditions and do not reflect any recent deterioration of lending conditions; the Q2 data were released at the beginning of May. This is a general issue with survey data. Also, financial market capitalization as a share of S&P 500 capitalization saw an up-trend through April, before ticking down in the second quarter. There has been a distinct shift in recent weeks toward the downside in these indicators. Other factors that helped prevent a greater decline in the MPF FCI were narrower yield spreads and a drop in the 10-year Treasury yield, the risk-free rate off which many of the spreads are calculated. The increased stress in financial markets and associated flight to quality has meant a drop in Treasury yields, which has eased financial conditions. The contribution of spreads and the 10-year yield to the FCI rose from -0.36 in Q4 to -0.21 in Q2 (Chart 9). Spreads and yields are high-frequency data series and thus are better reflections of more up-to-the-minute conditions.

Chart 7. Banks have become more willing to lend FRB Sr Officers Survey:

Banks' willingness to make consumer installment loans

-60

-45

-30

-15

0

15

30

2004 2005 2006 2007 2008 2009 2010

%

-60

-45

-30

-15

0

15

30

%

Source: FRB, DB Global Markets Research

Chart 8. Financial sector capitalization has recovered

10

13

16

19

22

25

2004 2005 2006 2007 2008 2009 2010

%

10

13

16

19

22

25

%

Financial market cap as a percent of S&P 500

Early June level

Source: S&P, DB Global Markets Research

Chart 9. The contribution from spreads and the 10-year

yield to the MPF FCI rose slightly from 2009Q4 to

2010Q2

-4

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-2

-1

0

1

2

2004 2005 2006 2007 2008 2009 2010

Index

-4

-3

-2

-1

0

1

2IndexContribution of yield spreads and 10-yr Treasury

Updated MPF FCI

Early June estimate




Conclusions Financial conditions appear to have worsened substantially in recent quarters based on our update of the broad index of US financial variables presented earlier this year at the US Monetary Policy Forum. In the wake of recent developments in Europe, increased stress in financial markets has pushed that index halfway back to its immediate post-Lehman crisis lows. The broad index shows a significantly larger net drop than other financial conditions indexes from most recent peaks partly because it gives greater weight to financial stock and flow variables. The continued absence of private securitization of mortgages and subdued activity in ABS markets persists in weighing on broad conditions. Factors that have tended to give an offsetting lift to financial conditions of late have included a drop in Treasury yields and tighter yield spreads, factors that receive relatively greater weight in alternative FCIs.


Peter Hooper, (1) 212 250-7352 Torsten Slok, (1) 212 250-2155 Daniel Sorid, (1) 212 250-1407

Christine Dobridge, (1) 240 994-4716



Appendix

Table A. MPF FCI variables: by source Variable Source 10-Year Treasury Note Yield at Constant Maturity (% p.a.) FRB FedFunds/3monthTBill Spread FRB 2YrT-note/3monthTbill Spread FRB 10YrT-note/3monthTbill Spread FRB Baa/10yr T-note Spread FRB High Yield / Baa Spread Haver Analytics/ FRB Auto finance company loan rate, New Car/2Yr T-note Spread FRB 30-yr Conventional mortgage/ 10yr T-note Spread FRB Jumbo/30yr Conventional Spread Bloomberg Finance LP/FRB TED Spread (Using Constant Maturity T-bill) FRB 3-month LIBOR/OIS Bloomberg Finance LP/FRB Bank rate on new car loans, 48-month/Two-year Treasury Spread Haver Analytics/FRB Bank rate on personal loans, 24-month/Two-year Treasury Spread FRB Citigroup Bond Yields: Credit {Corp} Spread/Finance Haver Analytics Banks CDS Spread Bloomberg Finance LP Real Broad Trade-Weighted Exchange Value of the US$ (Mar-73=100) FRB Wilshire 5000 Bloomberg Finance LP Financial Market Cap (percent of S&P 500) S&P Loan Performance National House Price Index (SA, Jan.2000=100) Haver Analytics Price of Oil Relative to 2Year MA (PPI Crude Oil) Haver Analytics Bank Credit: All Commercial Banks (SA) FRB Commercial Paper Outstanding: All Issuers (SA) FRB Commercial Paper issuance (relative to 4Q MA) FRB ABS Issuance (Relative to 5-yr MA) Bloomberg Finance LP/Deutsche Bank CMBS Issuance (Alert Database) (Relative to 5-yr MA) Alert Database/Deutsche Bank Money Stock: MZM {Zero Maturity} (SA) FRB of St. Louis State & Local Government: Liability: Credit Market Instruments (SA, Bil.$) FRB Nonfederal Sectors: Liability: Credit Market Debt Outstanding (SA) FRB Pvt nonfinancial debt outstanding FRB Total Finance: Liabilities: Security RPs (NSA) FRB ABS Issuers: Assets; Consumer Credit (NSA) FRB ABS Issuers: Asset; Mortgages on 1-4 Family Structures (NSA) FRB Asset-Backed Security Issuers: Asset; Commercial Mortgages (NSA) FRB Total Non-mortgage ABS Issuance (NSA) Relative to 5-yr MA Deutsche Bank Broker Dealer Leverage FRB NFIB: Percent Reporting that Credit Was Harder to Get Last Time, Net (SA, %) Haver Analytics Michigan Survey: Good/Bad Conditions for Buying Large HH Goods Spread Haver Analytics Michigan Survey: Good/Bad Conditions for Buying Houses Spread Haver Analytics Michigan Survey: Good/ Bad Conditions for Buying Autos Spread Haver Analytics FRB Sr Officers Survey: Banks Tightening C&I Loans to Large Firms (%) FRB FRB Sr Officers Survey: Banks Tightening C&I Loans to Small Firms (%) FRB FRB Sr Officers Survey: Banks Willingness to Lend to Consumers (%) FRB Correlation of Returns on Equitities and Treasuries DB GMR calculations based on S&P and US

Treasury data Idiosyncratic Bank Stock Volatility DB GMR calculations based on S&P data VIX Index Bloomberg Finance LP Source: DB Global Markets Research



Central Bank Watch

US The deterioration of financial conditions as the level of stress in financial market has risen in response to developments in Europe, and the recent run of softer than expected data on US activity and prices has likely shifted the Fed's assessment of the balance of risks a bit further to the downside. Accordingly, we see the Fed's commitment to holding rates low for an extended period as indicating that action on rates is increasingly unlikely until after the end of 2010. To signal a possible rate increase, the Fed will need to see clear evidence that the above-trend economic expansion is becoming sustainable. This means employment growing fast enough to reduce the unemployment rate over time and underlying support from growth in private spending gathering some momentum. They will also likely need to see some evidence that credit conditions facing households and smaller firms have been improving and the situation in Europe is stabilizing. At this juncture, these conditions seem unlikely to be in place in the months just ahead. Current Jun10 Sep10 Mar11 Fed funds rate 0 - 0.25 0 - 0.25 0.25 1.25

Japan The BoJ has focused on stability of money markets and financial position of corporate sectors. Although they have introduced outright purchase of CP, corporate bonds and equities, they have maintained 0.1% at their policy rate with interest payments on excess reserve at the same rate. We believe the Bank of Japan would maintain its passive stance toward a return to the zero interest rate regime and quantitative monetary easing. The target overnight call rate would remain 0.1% for a long time. Current Jun10 Sep10 Mar11 ON rate 0.10 0.10 0.10 0.10

Euroland This crisis may not be over yet, but at least the ECB did nothing to aggravate it at the June press conference. As we said prior to the event, critical to the success of the June press conference would be the ECB's flexibility with the bond purchasing programme and on the timing of the liquidity exit. While the bond purchasing programme remains opaque, there were no hints of caps or limits. On exit, the ECB has further stalled the gradual exit by agreeing unanimously to hold the July, August and September 3-month tenders on full allotment. It may be a small move, but it is a signal of the ECB's flexibility. Rates remain ‘appropriate’. Current Jun10 Sep10 Mar11 Refi rate 1.00 1.00 1.00 1.25

Key rates in the G3 countries Key rates in the G3 countries

0

1

2

3

4

5

6

7

1999 2001 2003 2005 2007 2009 2011

%

0

1

2

3

4

5

6

7%

BoJ

ECB refi

Fed FundsForecast

Source: DB Global Markets Research

UK UK rate markets have rallied over recent weeks in response to developments in the euro area and (to a lesser extent) the positive outcome of the coalition negotiations. Ten year gilt yields have fallen sharply, by around 65bps since their recent peak in February to just over 3.5%, while short sterling has rallied sharply too. Indeed, the Dec11 contract has rallied by 80bps (the rate is now 1.80%) over the past month, and the strip is now pricing in only just over 100bps of official rate hikes over the next two years. While we maintain, for now, our view of the first rate hike coming towards the end of this year, the risks have clearly moved towards a more delayed tightening from the Bank. Current Jun10 Sep10 Mar11

Bank rate 0.50 0.50 0.50 0.75

Sweden The Riksbank left policy unchanged at its April meeting, and said that rates could begin rising as soon as the summer. Next meeting: 1 July. Current Jun10 Sep10 Mar11 Repo rate 0.25 0.25 0.50 1.50

Switzerland The SNB left policy rates unchanged at the March meeting. With the economy having performed better than expected, we see the first move up in rates before the end of the year. Next meeting: September 16.

Current Jun10 Sep10 Mar11 3M Libor tgt 0.25 0.25 0.25 1.00



Central Bank Watch (continued) Key rates in the peripheral European countries

0

1

2

3

4

5

6

7

1999 2001 2003 2005 2007 2009 2011

%

0

1

2

3

4

5

6

7%Switzerland 3m interbank rate

UK repo rateSweden repo rate Forecast


Canada According to the BoC, the broad forces of household, bank, and sovereign deleveraging will add to the variability, and temper the pace, of global growth. The spillover into Canada from tensions in Europe was described as “limited to a modest fall in commodity prices and some tightening of financial conditions.” As far as the Canadian economy is concerned, the BoC suggested that activity and inflation was unfolding largely as expected. The BoC concluded by noting that even after the decision considerable monetary stimulus remains in place, consistent with achieving the 2% inflation target in light of the significant excess supply in Canada, the strength of domestic spending and the uneven global recovery. Moreover “Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments“.

Current Jun10 Dec10 Mar11 ON rate 0.50 0.50 1.50 2.00

Australia The key aspect of the RBA June meeting minutes was the nomination of the June quarter CPI, due in late July, as a key upcoming data point. For us, this is useful in the context of the “near term” – the phrase used by the RBA in its post-meeting statement to describe the time-frame over which the current policy setting (4.5%) might extend. In other words, we suspect that August is looming as the next 'live' meeting for the RBA, once the latest round of prices data are available and clarity about the “situation in Europe” has been given further time to evolve. Whether this 'live' meeting is acted upon of course depends on the outcome of these events, but our long-held outlook remains unchanged - the RBA's relatively optimistic outlook for the Australian economy will see further cash rate rises in the second half of this year.

Current Jun10 Dec10 Mar11 OC rate 4.50 4.50 5.00 5.25

New Zealand As widely expected, the RBNZ announced that it has raised the OCR by 25bps to 2.75%. In the accompanying statement, the Bank noted that it is expecting the economy to grow about 3½% this year and next. Current Jun10 Dec10 Mar11

OC rate 2.75 2.75 3.75 4.25 Key rates in the Peripheral $-bloc

Official interest rates (cash rates)

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7

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9

1999 2001 2003 2005 2007 2009 2011

%

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2

3

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5

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New ZealandAustraliaCanada

Forecast


China As we had expected, the PBOC announced that it would reform the RMB exchange rate regime by resuming the official daily trading band of +/-0.5% for the RMB/USD rate. There will be no upfront one-off revaluation. For the next 3-5 years, we believe the RMB will appreciate about 3% p.a. on an NEER basis. Based on our CGE model, a 3-4% annual RMB appreciation will reduce GDP growth by 0.2% and export volume by 0.7%. On inflation and interest rate side, we maintain our forecast of peak CPI at 4.5% in Q3, and once 27bps rate hike before year-end.

Current Jun10 Sep10 Mar11 1-year rate 2.25 2.52 2.52 2.52 India The Reserve Bank of India raised interest rates for the second time this year on April 20, raising the repo and reverse repo rates under the Liquidity Adjustment Facility (LAF) by 25 basis points each. It also raised the Cash Reserve Ration (CRR) by 25bps. This marked a firming of the central bank's exit strategy from a highly accommodative stance that had been in place for more than a year. Since then, the economy has continued to be characterized by rising economic momentum (supported by strong industrial production, PMI, retails sales, and trade figures) and sustained inflation pressures. The



Central Bank Watch (continued)

central bank has expressed concern that WPI inflation was uncomfortably high, but has also stressed that it would raise rates in a "calibrated" manner as it balances inflation risks against its other goals, namely supporting economic growth and the management of the government's large borrowing program.

WPI inflation crossed 10% in May, with inflation drivers widening from food to fuel and manufacturing goods. Although there are incipient signs of some easing of inflation pressures (due to flat commodity prices and a favorable start to the monsoon season), the risk of prices remaining elevated is high. Following the two 25bps rate hikes in March and April, we expect the RBI to raise rates by another 100bps through the course of 2010. This would still leave real interest rates in negative territory, and hence would not slow economic growth (we expect real GDP growth to be around 8% this year). But if global risk aversion rises yet again, more modest rate hikes could well be entertained by the central bank. Current Sep10 Dec10 Jun11 Repo rate 5.25 5.75 6.25 6.75

Brazil After raising the SELIC rate by 75bp to 9.50% in April, the COPOM repeated the dosage and implemented another 75bp hike in June, in line with expectations. The rate hikes were a response to strong domestic growth and rising inflation expectations. Economic activity has been boosted by relatively low interest rates, growing labor income, high consumer confidence, and expansionary fiscal policy. We have revised our 2010 GDP growth forecast again, to 7.5% from 6.7%. We expect consumer prices to rise 5.6% this year, exceeding the official inflation target of 4.5%. In order to slow the economy, we expect the COPOM to implement two additional hikes of 75bp each this year, which would raise the SELIC rate to 11.75% by year-end. Current Jun10 Sep10 Mar11 O/N rate 10.25 10.25 11.75 11.75

Russia Starting from May 30th the CBR reduced the refinancing rate by 25 basis points to7.75%.This was already 14th reduction in the refinancing rate since April2009 when the rate stood at a 13%. According to the statement released by the CBR, the decision to reduce the refinancing rate is partly due to the moderation in inflationary pressures as the 12-month inflation rate declined from 8.8% at the end of last year to 6.0% as of beginning May. Moreover, the CBR explicitly referred in its statement to the absence of factors that could lead to a significant acceleration in inflation this year. At the same time the statement points to the instability in the path of economic recovery, with

the main rationale for the reduction in interest rates being the need to boost economic activity via higher lending. Also, according to the CBR statement 'CBR considers likely to keep the current level of the refinancing rate for the nearest months'. Next CBR meeting will take place in the end of June, and on our view, the rate will likely remain at the current 7.75% for the nearest summer months. However, the risks are more on the downside. First, CBR head Sergey Ignatiev recently stated that inflation in June-July will likely stay at May-April level in MoM terms. If this forecast realizes, then in YoY terms inflation will decline by low-5% in July, thus leaving more space for further refinancing rate decline. Second, if the jitters on the global markets continue and start taking its toll on the global economic growth, this could be another factor for the Central Bank's authorities to continue their easing campaign.

Current Jun10 Sep10 Mar11 CBR refi rate 7.75 7.75 7.75 8.00 Key rates in major emerging markets

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Global data monitor: Recent developments and near-term forecasts

B’bergcode Q3-09 Q4-09 Q1-10 Q2-10 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10OECD leading indicators (6M change, %, ann.) OECD -2.1 5.5 9.9 9.3 10.1 10.2 9.7 US OLEDUSA -4.4 4.5 10.9 9.7 11.2 11.8 11.7 Euro area OLEDEU12 -0.7 6.4 9.3 9.2 9.5 9.1 8.2 Japan OLEDJAPN -7.9 0.3 7.6 5.9 7.9 8.9 9.1 China OLEDCHIN 23.2 26.0 22.0 24.2 22.1 19.7 17.6 India OLEDINDI 7.6 12.8 15.3 15.3 15.5 15.2 14.5 Russia OLEDRUSS -3.5 11.1 17.8 17.4 18.2 Brazil OLEDBRAZ -0.9 15.0 20.4 21.1 20.9 19.2 16.4 Purchasing manager indices Global (manufacturing) 51.2 53.4 56.0 57.1 55.6 55.3 57.0 57.4 56.7US (manufacturing ISM) NAPMPMI 51.4 54.6 58.2 60.1 58.4 56.5 59.6 60.4 59.7 59.0Euro area (composite) 49.5 53.6 54.4 56.9 53.7 53.7 55.9 57.3 56.4Japan (manufacturing) SEASPMI 52.8 53.5 52.5 54.3 52.5 52.5 52.4 53.8 54.7China (manufacturing) CPMINDX 54.3 55.7 56.7 54.0 57.4 55.8 57.0 55.2 52.7India (manufacturing) 54.5 54.4 58.0 58.1 57.7 58.5 57.8 57.2 59.0Russia (manufacturing) 50.0 49.2 50.4 52.1 50.8 50.2 50.2 52.1 52.0Other business surveys US dur. goods orders (%pop1) DGNOCHNG 2.7 0.2 1.8 4.9 0.5 0.1 2.8 -1.5Japanese Tankan (LI) JTFIFILA -33.0 -24.0 -14.0 Euro area EC sentiment EUESEMU 84.1 91.9 96.6 99.5 96.0 95.9 97.9 100.6 98.4Industrial production (%pop1) US IP CHNG 6.4 7.0 7.6 6.0 1.1 0.0 0.3 0.7 1.2Euro area EUITEMUM 3.6 9.2 17.4 2.0 0.8 1.6 0.9 Japan JNIPMOM 22.8 25.9 30.9 4.3 -0.6 1.2 1.3 Retail sales (%pop1) US RSTAMOM 7.4 7.5 8.2 6.4 0.3 0.6 2.1 0.6 -1.2Euro area RSSAEMUM -0.9 0.1 0.8 -0.3 -0.1 0.5 -1.3 Japan (household spending) JHHSLERY 3.1 4.3 -1.4 -1.3 -1.6 5.9 -6.3 Labour market US non-farm payrolls2 NFPTCH -261 -90 87 361 14 39 208 290 431 -150Euro area unemployment (%) UMRTEMU 9.7 9.8 10.0 9.9 10.0 10.0 10.1 Japanese unemployment (%) JNUE 5.4 5.2 4.9 5.0 4.9 4.9 5.0 5.1 CP inflation (%yoy) US CPICHNG -1.6 1.4 2.4 1.8 2.6 2.1 2.3 2.2 2.0Euro area ECCPEMUY -0.4 0.4 1.1 1.5 1.0 0.9 1.4 1.5 1.6 1.4Japan JCPNSGM -2.2 -2.0 -1.2 -1.3 -1.1 -1.1 -1.2 -1.1China CNCPIYOY -1.3 0.4 2.1 2.9 1.3 2.7 2.2 2.6 2.8India INWHOLEY -0.2 5.0 10.2 9.7 9.5 10.1 11.1 9.6 10.2Russia RUCPIYOY 11.4 9.2 7.2 5.7 8.0 7.2 6.5 6.1 6.0Brazil 4.4 4.2 4.9 5.0 4.6 4.8 5.2 5.3 5.2Current account (USD bn)3 US (trade balance, g+s) USTBTOT -33.1 -34.9 -38.4 -35.1 -40.1 -40.0 -40.3 Euro area -4.1 -3.8 -2.1 -2.4 -6.2 2.3 Japan JNBPAB 12.9 14.7 16.7 18.8 11.8 19.5 14.8 China (trade in goods) 13.8 12.6 6.2 16.9 12.0 9.6 -3.1 9.6 24.2Russia (trade in goods) RUCACAL 9.8 11.9 18.1 18.4 19.4 16.4 13.8 Other indicators Oil prices (Brent, USD/b) EUCRBRDT 68.2 74.6 76.3 80.0 76.3 73.7 79.0 84.7 75.2FX reserves China (USD bn) CNGFOREX 2272.6 2399.2 2447.1 2415.2 2424.6 2447.1

Quarterly data in shaded areas are quarter-to-date. Monthly data in the shaded areas are forecasts. (1) % pop = % change this period over previous period. Quarter on quarter growth rates is annualised. (2) pop change in ‘000, quarterly data are averages of monthly changes. (3) Quarterly data are averages of monthly balances.

Sources: Bloomberg, Reuters, Eurostat, European Commission, OECD, Bank of Japan, National statistical offices.



Charts of the Week

Chart 1. In US, IP improvement was in line with what the

OECD’s leading indicator has signaled… US IP and OECD leading index

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1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

% yoy, adv 6m

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15% yoy

OECD leading index (ls) Industrial production (rs)

Source: FRB, OECD, DB Global Markets Research

Chart 3. German business confidence unexpectedly

improved in June… German Ifo

76

81

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91

96

101

106

111

116

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Index

76

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Expectations Current assessment

Source: Ifo, DB Global Markets Research

Chart 5. UK retail sales a bit better than expected…

UK retail sales and RICS house price balance

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% yoy

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Retail sales (ls)RICS house price balance (rs)

Source: ONS, RICS, DB Global Markets Research

Chart 2….while the Philly Fed headline number

disappointed the market Philly Fed business conditions & composite

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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Philly Fed business conditionsDB Philly Fed composite

Source: FRB, DB Global Markets Research

Chart 4.…and Italian factory orders strengthened in April

Italian industrial orders and sales

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2000 2002 2004 2006 2008 2010

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Orders (ls) Sales (rs)

Source: ISTAT, DB Global Markets Research

Chart 6. …and Canadian leading indicator remains

robust

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Canadian leading Indicator and GDP % yoy% yoy

Source: STCA, DB Global Markets Research



Global Week Ahead: Thursday, 24 June – Wednesday, 30 June

• Dollar Bloc: In the US, we will receive the final revisions to Q1 real GDP and June consumer sentiment numbers, each of which is expected to be unrevised at readings of 3% and 75.5 respectively. We expect deterioration in May’s durable goods orders on account of payback in transportation, while durables ex transportation are expected to rise 0.8%. Elsewhere, May’s personal income report, June’s consumer confidence and Chicago PMI figures are due for release. In Australia, private sector credit data is the only important release. In Canada, attention will be on the May IP data. In New Zealand, we expect trade balance to show surplus of 701 millions.

• Europe: In the Eurozone, markets will be focused on EC’s economic sentiment survey report and Italian ISAE data. The release of area-wide, German and French HICP number together with Italian and Spanish PPI numbers will tell us about the inflation scenario, while French consumer spending, Italian and Spanish retail sales data should capture consumption pattern. Besides, Euro area industrial orders, M3 money supply, German and Italian unemployment rate; along with French final estimate of Q1 GDP data are also due for release. In the UK, the release of Q1 GDP data should attract markets attention. Other important releases include – consumer credit, M4 money supply and mortgage approvals numbers. In Switzerland, the June KoF economic survey is releasing on Wednesday. In Scandinavia, we will get the final estimate of Danish Q1 GDP data. In CE3, we will closely monitor Polish monetary policy meeting.

• Asia incl. Japan: In Japan, we will have many crucial releases – CPI, retail trade, unemployment rate and IP figures.

Country GMT Release DB

Expected Actual Consensus Previous Thursday, 24 Jun

FRANCE 06:45 Consumer spending (May) 0.3% (1.2%) 0.4% (1.4%) -1.2% (1.1%)

ITALY 08:00 Retail sales (Apr) -0.1% -0.1% (2.1%) 0.5% (2.9%)

POLAND 08:00 Retail sales (May) (3.4%) 2.0% (3.3%) (-1.6%)

POLAND 08:00 Unemployment rate (May) 12.0% 12.0% 12.3%

EUROLAND 09:00 Industrial new orders (Apr) -1.0% (19.1%) 1.6% (21.8%) 5.2% (19.8%)

ITALY 09:00 Unemployment rate (Q1) 8.6% 8.6% 8.2%

BRAZIL 12:00 Unemployment rate (May) 7.1% 7.1% 7.3%

US 12:30 Initial jobless claims (Jun 19) 460.0k 472.0k

US 12:30 Durable goods ex transport (May) 0.8% 1.0% -1.0% (18.0%)

US 12:30 Durable goods (May) -1.5% -1.4% 2.9% (18.9%)

MEXICO 14:00 Mexico bi-weekly CPI (Jun) 0.2% 0.1% -0.5%

MEXICO 14:00 Unemployment rate (May) 5.3% 5.2% 5.4%

NEW ZEALAND 22:45 Overseas merchandise trade (May) NZD701.0m NZD850.0m NZD656.0m

JAPAN 23:30 National CPI ex fresh food (May) 0.2% (-1.4%) (-1.3%) -0.5% (-1.5%)

JAPAN 23:30 National CPI (May) 0.1% (-1.1%) (-1.1%) -0.3% (-1.2%) Events and Meetings: EUROLAND: ECB to hold Governing Council meeting, no interest rate announcement scheduled. NORWAY: Norges Bank’s Gjedrem to hold speech in Oslo – 07:00 GMT. POLAND: National Bank of Poland to publish minutes of its May 25 MPC meeting – 12:00 GMT.UK: Bank of England to publish Financial Stability report – 23:01 GMT.

Friday, 25 Jun

FRANCE 06:45 GDP (Q1) 0.1% (1.2%) 0.6% (-0.3%)

SPAIN 07:00 PPI (May) 0.6% (4.1%) 1.0% (3.7%)

US 12:30 Corporate profits (Q1) 8.0% (30.6%)

US 12:30 GDP deflator (Q1) 1.0% 1.0% 0.5% (0.7%)

US 12:30 GDP (Q1) 3.0% 3.0% 5.6% (0.1%)

US 13:55 Consumer sentiment (Jun) 75.5 75.5 73.6 Events and Meetings: EUROLAND: ECB’s Orphanides to hold speech in Oslo – 10:20 GMT.

Sunday, 27 Jun

JAPAN 23:50 Retail trade (May) (4.9%) Events and Meetings: No significant event scheduled for the day.

Monday, 28 Jun

GERMANY - HICP preliminary (Jun) 0.1% (1.2%)

FRANCE 06:45 PPI (May) 1.0% (4.0%)

US 12:30 Core PCE deflator (May) 0.1% 0.1% (1.2%)

US 12:30 PCE deflator (May) (1.8%) 0.0% (2.0%)



Country GMT Release DB

Expected Actual Consensus Previous Monday, 28 Jun (continued)

US 12:30 PCE (May) 0.2% 0.2% 0.0% (4.6%)

US 12:30 Personal income (May) 0.4% 0.5% 0.4% (2.5%)

MEXICO 14:00 Global economic indicator (IGAE) (Apr) 6.9%

JAPAN 23:30 Unemployment rate (May) 5.1%

JAPAN 23:50 Industrial production (May) 1.3% Events and Meetings: US: Fed’s Warsh to hold speech on economy in Atlanta – 16:30 GMT.

Tuesday, 29 Jun

FRANCE 06:45 Consumer confidence (Jun) -38.0

SPAIN 07:00 HICP flash estimate (Jun) (1.8%)

SPAIN 07:00 Retail sales (May) (-2.3%)

EUROLAND 08:00 M3 3mmca (May) (-0.2%)

EUROLAND 08:00 M3 (May) (-0.1%)

UK 08:30 M4 growth (May) 0.0% (3.3%)

UK 08:30 M4 lending (May) -GBP9.8bn

UK 08:30 Mortgage approvals (May) 51.0k 49.9k

UK 08:30 Net consumer credit (May) GBP0.1bn -GBP0.1bn

UK 08:30 Net mortgage lending (May) GBP1.2bn GBP0.5bn

EUROLAND 09:00 Consumer confidence (Jun) -18.0

EUROLAND 09:00 Economic confidence (Jun) 98.4

CANADA 12:30 Industrial product prices (May) 0.3%

US 14:00 Consumer confidence (Jun) 58.0 62.8 63.3

Events and meetings: No significant event scheduled for the day.

Wednesday, 30 Jun

POLAND - MPC meeting (Jul) 3.50% 3.50%

JAPAN 01:30 Labour cash earnings (May) (1.5%)

AUSTRALIA 01:30 Private sector credit (May) 0.2% (2.1%)

TURKEY 07:00 GDP (Q1) (6.0%)

DENMARK 07:30 GDP final estimate (Q1) 0.2% (-3.2%)

ITALY 07:30 ISAE business confidence (Jun) 96.2

GERMANY 07:55 Unemployment rate (Jun) 7.7%

NORWAY 08:00 Retail sales (May) 0.2% (-5.1%)

ITALY 08:00 HICP preliminary (Jun) 0.1% (1.6%)

ITALY 08:00 PPI (May) 1.2% (3.2%)

UK 08:30 Current account (Q1) -GBP2.2bn -GBP1.7bn

UK 08:30 GDP (Q1) 0.3% (-0.2%) 0.4% (-3.1%)

EUROLAND 09:00 HICP flash estimate (Jun) (1.6%)

SWITZERLAND 09:30 KOF economic barometer (Jun) 2.2

US 13:45 Chicago PMI (Jun) 58.0 59.3 59.7

JAPAN 23:50 Tankan-all industry capex (Q2) (5.1%) (-0.4%)

Events and meetings: POLAND: National Bank of Poland to announce interest rate decision. EUROLAND: ECB’s Trichet and Draghi to hold speech in Rome – 14:30 GMT. US: Fed’s Lockhart to speak in Baton Rouge – 17:30 GMT. Source: Australian Bureau of Statistics; Bank of Canada; Bank of Japan; BEA; BLS; Bundesbank; Bureau of Labor Statistics, U.S. Department of Labor; Cabinet Office, Government of Japan; ECB; Eurostat; Indian Central Statistical Organization; INE; INSEE; ISTAT; ISTAT.IT; Ministry of Finance japan; National Association of Realtors; National Bureau of Statistics; National Statistics Office; OECD - Composite Leading Indicator; People's Bank of China; Reserve Bank of Australia; Reserve Bank of New Zealand; Statistics Canada; Statistics Netherlands; Statistics of New Zealand; U.S. Census Bureau; U.S. Department of Labor, Employment & Training Administration; U.S. Department of the Treasury; U.S. Federal Reserve. Note: Unless otherwise indicated, numbers without parenthesis are either % month-on-month or % quarter-on-quarter, depending on the frequency of release, while numbers in parenthesis are % year-on-year. * on the release time means indicative release time. * on indicator name means indicative/earliest release date.



Financial Forecasts

US Jpn Euro UK Swe* Swiss* Can* Aus* NZ*

3M Interest Actual 0.54 0.38 0.66 0.73 0.25 0.25 0.50 4.50 2.75 Rates1 Sep10 0.40 0.40 0.90 0.90 0.50 0.25 0.50 4.50 2.75

DB forecasts futures 0.66 0.36 0.94 0.86 --- --- --- --- --- & Futures Dec10 0.40 0.40 0.90 0.90 0.50 0.25 1.50 5.00 3.75

futures 0.78 0.35 1.07 1.00 --- --- --- --- --- Jun11 1.50 0.40 1.50 1.30 1.50 1.00 2.00 5.25 4.25 futures 1.02 0.35 1.20 1.29 --- --- --- --- ---

10Y Gov’t2 Actual 3.24 1.20 2.74 3.47 2.63 1.51 3.16 5.35 5.32Bond Sep10 2.75 1.30 3.25 4.30 3.40 2.15 4.25 5.75 6.00

Yields/ forwards 3.35 1.25 2.83 3.58 --- --- --- --- ---Spreads3 Dec10 3.25 1.20 3.25 4.30 3.40 2.15 4.00 5.25 5.75

DB forecasts forwards 3.45 1.30 2.91 3.67 --- --- --- --- ---& Forwards Jun11 3.75 1.30 3.60 4.70 3.60 2.35 3.75 5.00 5.50

forwards 3.61 1.38 3.05 3.83 --- --- --- --- ---

EUR/

USD

USD/

JPY

EUR/

GBP

GBP/

USD

EUR/

SEK

EUR/

CHF

CAD/

USD

AUD/

USD

NZD/

USDExchange Actual 1.23 90.8 0.84 1.47 9.54 1.37 0.98 0.88 0.71

Rates 3M 1.25 88.0 0.81 1.54 9.50 1.40 1.00 0.80 0.66 6M 1.30 85.0 0.80 1.63 9.25 1.45 0.95 0.80 0.66 12M 1.35 82.0 0.78 1.73 9.00 1.50 0.95 0.80 0.66

(1) Future rates calculated from the September, December and June 3M contracts. Forecasts are for the same dates. * indicates policy interest rates. (2) Forecasts in this table are produced by the regional fixed income strategists. Forwards estimated from the asset swap curve for 2Y and 10Y yields. (3)Bond yield spreads are versus Euroland. Sources: Bloomberg Finance LP, DB Global Markets Research. Revised forecasts in bold type. All current rates taken as at Tuesday 11:00 GMT.

US 10Y rates

1.0

2.0

3.0

4.0

5.0

6.0

1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010-1.0

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10Y

2Y/10Y spread (rhs)

US government bond yields, %


Japan 10Y rates

0.5

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1.5

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1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/20100.0

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1.0

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10Y2Y/10Y spread (rhs)

Japan government bond yields, %

Source DB Global Markets Research

Euroland 10Y rates

1.02.03.04.05.06.0

1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010

-1.0

0.0

1.0

2.0

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UK 10Y rates

2.0

3.0

4.0

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1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010-1.0-0.50.00.51.01.52.02.53.03.5


UK government bond yields, %




Main Deutsche Bank Global Economics Publications

Global Dbdaily – European Edition (daily) Dbdaily – Asian Edition (daily) Dbdaily – Pacific Edition (daily)

Global Economics Perspectives (weekly)

The World Outlook (quarterly)

Global Macro Issues (occasional paper series)

Credit impulse: Lessons from the Great Depression (13 March 2009) The impact of credit on growth (19 November 2008) Commodities: Falling off their peak (31 July 2008) How far could US Home Prices Fall? (Oct 5, 2007) Why Hasn’t Homebuilding Employment Dropped? (July 10, 2007) Is Emerging Asia Holding Down US Inflation (Feb 26, 2007) Evolution in Bretton-Woods II: Controlled Reflation as the Path of Least Resistance (Dec 7, 2006) US Trend Employment Growth Has Fallen To 100,000 Per Month (Dec 6, 2006) Understanding MEW and How It Is Spent (Nov 17, 2006) Financial system modernisation and economic growth in Europe: Financial markets as risk

managers for the economy (Oct 27, 2006) Housing and the US Consumer: What Foreign Experience Has to Say (Oct 16, 2006) The Transatlantic Productivity Divide: Reasons and Consequences (Oct 13, 2006)

US US Daily Economic Notes (daily)

US Economics and Strategy Weekly (weekly) US Housing Watch Monthly (monthly)

Europe Europe Inflation Report (weekly) Focus Europe (weekly)

Japan Japan Economics Weekly (weekly) Emerging Markets Emerging Markets Daily – European Edition (daily) Emerging Markets Daily – Asian Edition (daily) Emerging Markets Daily – US Edition (daily) EMEA & LatAm Event Radar (weekly) EMEA & LatAm Monetary Policy Rate Calls (bi-weekly) Emerging Markets Monthly (monthly)

EMEA & LatAm Balance of Payment Monitor (quarterly) Emerging Markets Special Publications (occasional series)

Dollar Bloc Dollar Bloc Weekly (weekly) Australian Economics Monthly (monthly)

Asia Asia Economics Daily (daily) Asia Economics Monthly (monthly) Real Exchange Rate Monitor (monthly)



Appendix 1 Important Disclosures

Additional information available upon request

For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Peter Hooper

Deutsche Bank debt rating key

CreditBuy (“C-B”): The total return of the Reference Credit Instrument (bond or CDS) is expected to outperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditHold (“C-H”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to perform in line with the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditSell (“C-S”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to underperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditNoRec (“C-NR”): We have not assigned a recommendation to this issuer. Any references to valuation are based on an issuer’s credit rating. Reference Credit Instrument (“RCI”): The Reference Credit Instrument for each issuer is selected by the analyst as the most appropriate valuation benchmark (whether bonds or Credit Default Swaps) and is detailed in this report. Recommendations on other credit instruments of an issuer may differ from the recommendation on the Reference Credit Instrument based on an assessment of value relative to the Reference Credit Instrument which might take into account other factors such as differing covenant language, coupon steps, liquidity and maturity. The Reference Credit Instrument is subject to change, at the discretion of the analyst.



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Risks to Fixed Income Positions

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

GRCM2010PROD018902

David Folkerts-Landau Managing Director

Global Head of Research

Stuart Parkinson Chief Operating Officer

Guy Ashton Global Head Company Research

Marcel Cassard Global Head Fixed Income Strategies and Economics

Germany Asia-Pacific Americas

Andreas Neubauer Regional Head

Michael Spencer Regional Head

Steve Pollard Regional Head

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