unicredit - friday notes 29.9.10

8/8/2019 UniCredit - Friday Notes 29.9.10

1/31

29 October 2010 Economics & FI/FX Research

Friday Notes

UniCredit Research page 1 See last pages for disclaimer.

Fed on the move ECB on hold

Gridlock. The economic recovery in the US remains disappointing, andunemployment is still too high. This should cost President Obama hismajority in the House of Representatives and perhaps even in the Senate atthe upcoming midterm elections. Consequently, all the signs point topolitical gridlock in the next two years.

Movement. This is presumably one more reason for the Fed to announcethe large-scale purchase of Treasuries as early as the beginning ofNovember (see chart). Furthermore, it could attempt to push yields evenlower by modifying its rhetoric. Directly influencing inflation expectationsalso remains a further option (see pages 2-5).

On hold. The ECB meeting, in contrast, should be relatively uneventful.The latest business surveys were resilient overall, and lending continuesto stabilize. Even though there are still weak pockets in the bankingsector in the periphery, currently it looks as though the ECB can reducethe availability of liquidity further from the end of the year (see pages 13-14).

Improvement. The uncertainty for 2011 nevertheless remains highbecause of the debt crisis and the planned consolidation measures totalingroughly 1.2% of GDP in the entire euro zone (see pages 10-12). Thereis, however, a stability anchor: the solid situation in the core countries,first and foremost Germany, where the fiscal outlook has shown a drasticimprovement. The Maastricht deficit ceiling will probably be undercutagain as early as next year (see pages 6-9).

Further topics: Data outlook: US employment increases again; BoE doesn't move

(page 15). Market outlook: EUR-USD highly dependent on extent of Fed's QE2

(page 20).

FED TREASURY HOLDINGS, IN BN USD

300

400

500

600

700

800

900

1000

1100

1200

1/5/04 1/5/05 1/5/06 1/5/07 1/5/08 1/5/09 1/5/10 1/5/11

Source: Thomson Datastream, UniCredit Research

ContentsResearch Notes _____________________________ 2Data Monitor_______________________________ 15

FI Outlook_________________________________ 20FX Outlook ________________________________ 21CIB View _________________________________ 23CIB Forecasts _____________________________ 24Calendar__________________________________ 27

CIB MACRO FORECASTS

in % yoy 2009 2010 2011

GDP EMU -4.0 1.6 1.3

CPI EMU 0.3 1.5 1.7

GDP Germany -4.7 3.2 2.5

CPI Germany 0.3 1.1 1.4

GDP Italy -5.1 1.0 1.1

CPI Italy 0.8 1.5 1.9

GDP US -2.6 2.6 1.9

CPI US -0.3 1.6 1.8

CIB FI/FX FORECASTS

2010/11 31-Dec 31-Mar 30-Jun 31-Sep

EMU 3M (%) 1.00 1.05 1.10 1.20

EMU 10Y (%) 2.25 2.25 2.50 2.75

US 3M (%) 0.35 0.35 0.35 0.35

US 10Y (%) 2.50 2.40 2.70 2.85

EUR-USD 1.43 1.39 1.42 1.44

USD-JPY 83 85 88 90

Oil Price 83 85 85 87

Global Head of Research & Chief Strategist

Thorsten Weinelt, CFA (UniCredit Bank)+49 89 [email protected]

Head of Economics & FI/FX Research

Marco Annunziata, Ph.D. (UniCredit Bank)

Chief Economist+44 20 [email protected]

EditorAlexander Koch, CFA (UniCredit Bank)+49 89 [email protected]

Editorial deadlineFriday, 29. Oct., 11:00H

Bloomberg

UCGR

Internet

www. research.unicreditgroup.eu


2/31


Friday Notes


US after the midterm elections:Inactive fiscal policy active Fed

US midterm elections are being held on 2 November. All435 seats in the House of Representatives and one thirdof the 100 seats in the Senate are up for re-election. Whatis at stake is, therefore, the power in Congress.

The latest opinion polls suggest that incumbent Democratswill suffer punishing losses. Above all in the House, theircurrently still comfortable majority will probably turn into ano less comfortable majority for the Republicans.

Irrespective of which party ultimately gains a slim majority

in the Senate, the US is probably facing political gridlockfor the next two years. As a result, key structural reformswont be enacted, while many programs for needy familiesare unlikely to be extended.

Only one day after the Congressional elections, the UScentral bank will probably announce another round oflarge-scale Treasury purchases. In addition, the Fed couldattempt to push yields even lower by modifying the wordingof its statement.

Yes, we can?

Two years ago, an until then relatively unknown Senatorfrom Illinois enthralled the masses. With his election sloganYes, we can!, Barack Obama not only won the primaryagainst his Democratic opponent Hillary Clinton, but alsoprevailed against the Republican candidate John McCain inthe general election and ultimately became the 44th President ofthe United States. With a comfortable majority in both houses ofCongress, President Obama immediately embarked on somevery ambitious projects. Items on his agenda includedcomprehensive healthcare reform, financial market reform,and the promotion of renewable energies. In the interim, theeuphoria has dissipated, and most opinion polls show that

the majority of the population is dissatisfied with the Presidentspolicies (cf. chart next column). The main reason for this isundoubtedly the situation on the labor market. Contrary tothe hope that the situation would improve, it has evendeteriorated further for many households. In the first fewmonths under the new President, the unemployment raterose even further and has since then remained stubbornlybetween 9% and 10%. Since the unemployment rate is alagging indicator, its rise from 8% to 9% betweenFebruary and May 2009 is certainly not the result of the newadministrations policy. In addition, numerous articles andacademic papers concur that recoveries after financialmarket crises, such as the US has undoubtedly just experienced,are always much slower than upswings after recessions that

did not go hand in hand with financial market crises. 1 Suchtechnical niceties are, however, easily overlooked during anelection campaign.

DISSATISFIED WITH THE JOB THE PRESIDENT IS DOING

Survey: In general, do you approve or disapprove of the job thatBarack Obama is doing as president? Responses, in %

20

25

30

35

40

45

50

55

60

65

Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10

Approve Disapprove

Source: NBC/Wall Street Journal, pollingreport.com, UniCredit Research

The sitting President (almost) alwaysloses...

It is, of course, not unusual for voters to blame the party in

power for current economic developments. And since thereis always something to improve, and the opposition alwayshas the right answers at least during the election campaign the party of the sitting President has generally lost massivesupport at midterm elections in the past. Between 1942 and2006, the Presidents party has lost an average of 25 seatsin the House and an average of 4 seats in the Senate(cf. table next page). In the process, the losses suffered bythe Democrats were slightly greater than those suffered bythe Republicans. The only two exceptions to this ruleoccurred in the recent past: In 1998, the Clinton administrationwas able to win five seats in the House, and in 2002 the

Bush administration even added eight seats.

1 See among others: International Monetary Fund, World EconomicOutlook, April 2009; Reinhart, C. and K. Rogoff, This Time is Different:Eight Centuries of Financial Folly, 2009; Reinhart, C. and V. Reinhart,After the Fall, NBER Working PaperNo. 16334, September 2010.


3/31


Friday Notes


THE LAST 17 CONGRESSIONAL ELECTIONS IN OVERVIEW

Net gain/loss of Presidents party

Sitting President House seats Senate seats

1942 Franklin D. Roosevelt D -45 -8

1946 Harry S. Truman D -54 -12

1950 Harry S. Truman D -28 -5

1954 Dwight D. Eisenhower R -18 -2

1958 Dwight D. Eisenhower R -48 -12

1962 John F. Kennedy D -4 +2

1966 Lyndon B. Johnson D -48 -3

1970 Richard Nixon R -12 +1

1974 Richard Nixon R -48 -4

1978 Jimmy Carter D -15 -3

1982 Ronald Reagan R -26 0

1986 Ronald Reagan R -5 -8

1990 George H. W. Bush R -8 -11994 Bill Clinton D -54 -8

1998 Bill Clinton D +5 0

2002 George W. Bush R +8 +2

2006 George W. Bush R -30 -6

2010 Barack Obama D ? ?

Source: Wikipedia, UniCredit Research

that should not be different this time

Current polls unequivocally signal that the Obama administrationwill also suffer a massive loss of votes on 2 November. After

the elections, the currently still comfortable Democraticmajority in the House of Representatives (the Democratscurrently hold 255 of the 435 seats) will probably turn into ano less comfortable Republican majority. According to the well-respected internet portal Realclearpolitics.com, 222 Republicancandidates are currently fairly certain to win a seat in theHouse. That is four more than the 218 seats required for anabsolute majority (cf. top chart next column). The Democrats,in contrast, are currently expected to win only 180 seats,while the races for the remaining 33 seats are still wide open.

The battle for the majority in the Senate has, in contrast, notyet been decided. One reason for this is that the terms in the

Senate are staggered so that approximately only one-third ofthe seats are up for election this year. That is preventing asimilarly drastic shift in the breakdown of seats as in theHouse. Nevertheless, the Democrats will also have tocontend with clear losses in the Senate. According to thelatest polls, the Democrats are rather sure of keeping only 48of their current 59 seats (actually the current number is 57,but the independent Senators Lieberman and Sanders votewith the Democrats). On the other hand, the number ofRepublican Senators has most likely increase already bythree (from 41 to 44), while the remaining 8 seats are stillclosely contested (cf. bottom chart next column).

THE BATTLE FOR CONGRESS

House of Representatives: Breakdown of seats (435 overall)

0

50

100

150

200

250

300

Currently Polls (election 2010)

De mocra ts Republicans Toss ups

218 seats = majority

0

50

100

150

200

250

300


De mocra ts Republicans Toss ups

218 seats = majority

Senate: Breakdown of seats (100 overall)

0

10

20

30

40

50

60

70


Democrats Republicans Toss ups

51 seats = majority

0

10

20

30

40

50

60

70


Democrats Republicans Toss ups

51 seats = majority

Source: Realclearpolitics.com, UniCredit Research

The political situation afterthe midterm elections

Based on the latest election polls and given the politicalclimate in Washington, we must come to terms with the ideathat there will be political gridlock in the US for the next twoyears (in 2012, both the President and a further one-third ofSenators are up for re-election). It appears, after all, at themoment that the Republicans will win a majority in the Houseof Representatives. At the same time, neither of the two

parties is likely to achieve the filibuster-proof majority of 60seats in the Senate. A filibuster is the attempt by one orseveral senators to delay or prevent indefinitely a vote on aproposed piece of legislation. To end a filibuster requires notthe absolute majority of 50 seats but the aforementioned 60votes. That alone makes it improbable that legislation passedby a now Republican majority in the House will also pass inthe Senate. And if against all odds the Senate were topass the legislation after all, there is still the threat of a veto byDemocratic President Obama. While Congress can override apresidential veto, this requires, however, the majority in theHouse and no less than a two-thirds majority in the Senate!2

2See: How our Laws are Made, US House of Representatives,

Document 110-49, July 2007.


4/31


Friday Notes


Gridlock good or bad?

Numerous political observers have recently emphasized the

positive aspects of political gridlock. James Hackett, a formerofficial in the Reagan administration, believes such politicalgridlock can hold down spending and keep bad bills frombeing passed.3 David Rivkin and Lee Casey, who bothserved in the Department of Justice under the Reagan andBush Sr. administrations, even emphasized that the framersof the US Constitution deliberately factored in gridlock: "bygenerally requiring a high level of consensus in support of

governmental action [...] the Constitution deliberately makes

achieving "legislative accomplishments" difficult.4 Inprinciple, there is probably nothing to refute this argument.However, the two parties in Washington have grown much

further apart in recent years. On the one hand, the Republicanshave moved farther to the right after the Gringrich Revolutionand under President Bush Jr. The Tea Party Movement isexacerbating this trend even further. On the other hand,Republicans feel that Democrats have moved farther to theleft under House Speaker Nancy Pelosi and PresidentObama. Finding common ground under these conditions willlikely prove extremely difficult.

Furthermore, legislative gridlock is by no means neutral. In arapidly changing world, it is in fact a step backwards. Thatapplies first to the necessary structural reforms the US musttackle. The items President Obama had on his agenda

during the 2008 presidential campaign are as relevant nowas they were then: ballooning healthcare and social securitycosts (ageing population), energy policy (dependence onfossil fuels), privatization of the real estate sector, improvingpublic education, etc. After resolving these problems hasbeen put off for decades, the US now has really no time tolose. Second, gridlock could also impact the short-termeconomic outlook. It should, after all, not be forgotten thatfederal fiscal programs have been an important driver ofgrowth in recent quarters. While that has increased thedeficit, it has slowed the rise in the unemployment rate, andcushioned the impact on household finances. It would be

primarily needy families who would suffer from politicalinactivity in Washington. According to the Census Bureau,the number of people living below the poverty line increasedto 43.6 million in 2009. That is 14.3% of the population and3.7 million more than in the previous year. The Center onBudget and Policy Priorities (CBPP) estimates that anadditional 3.3 million people would have become poor had itnot been for the extended and emergency unemploymentbenefits.5 The problem is that Congress has only extendedthese benefits until November. Further programs that will

3Hacket, J., Gridlock is Good, Washington Times, 6 October 2010.

4Rivkin, D. and L. Casey, Why Gridlock in Washington is Good, Wall

Street Journal, 21 February 2010.5See: Sherman, A., D. Trisi, R. Greenstein and M. Broaddus, Census

Data show Large Jump in Poverty and the Ranks of the Uninsured in2009, Center on Budget and Policy Priorities, 17 September 2010.

expire by the end of the year are the subsidized COBRAhealth insurance benefits, the TANF Emergency Fund,(Temporary Assistance for Needy Families), which according

to the CBPP has created 250,000 subsidized jobs for low-income unemployed parents and youth6, and the Child TaxCredit. If the latter program is not extended, the CBPP saysthere is the danger of 600,000 children to fall into povertyand another 4 million already-poor children to fall evendeeper into poverty.7

This compares with the supposed advantage that politicalgridlock eliminates the uncertainty about legislative changes(taxes, healthcare costs, regulation). But that only applies forthe next 12 to 18 months. Because then, the presidentialelection campaign will get under way and with it the renewed

uncertainty about the political direction. Moreover, there isthe question of how big the current uncertainty really is. In arecent speech Dallas Fed President Richard Fisher quotedthe CEO of a medium-sized business, who said that part ofit is uncertainty: [...]. Part of it is certainty: We know that

taxes are eventually going to have to increase to get us out

of the fiscal hole Republicans and Democrats alike have dug

for us, and we know that regulatory intervention will be

getting more intense.8 An even more important reason forthe reluctance of businesses to invest is, in my view, anywaythe combination of vastly underutilized production capacitiesand a lack of demand. This assessment is corroborated by

the monthly survey of small businesses conducted by theNational Federation of Independent Business (NFIB),according to which most businesses state that a lack ofdemand is their single-largest problem.

The litmus test for future collaboration between the twoparties will be the handling of the Bush tax cuts, which arescheduled to expire at the end of the year. If Democrats andRepublicans cannot find common ground, virtually all taxrates will increase at the beginning of 2011. This would be anoutcome that nobody wants. Because, at least in principle,both parties do agree on extending the tax cuts for therecipients of lower incomes.

6See: Schott, L. and L. Pavetti, Walking Away From a Win-Win-Win,

Center on Budget and Policy Priorities, 2 September 2010.7

See: Sherman, A., A. Feller and C. Marr, Failure to Extend Improve-

ments in Child Tax Credit would Harm Millions of Low-Income WorkingFamilies, Center on Budget and Policy Priorities, 16 February 2010. 8

Siehe: Fisher, R., Rangers, Yankees and the Federal Open MarketCommittee: One Game at a Time, Rede in New York, 19. Oktober 2010.


5/31


Friday Notes


The US central bank acts

Only one day after the Congressional midterm elections, the

US central bank is likely to announce another round of largescale Treasury purchases. The volume of the initial programwill probably be USD 300 to 500bn, with the Fed explicitlyretaining the option for further purchases. As reasons for thismove, Fed Chairman Bernanke has in recent weeks repeatedlycited too low inflation rates and a too high unemploymentrate.9 To push yields even lower, the Fed could also modifykey passages of its press release. Chairman Bernanke saidlast week that a step the Committee could consider []would be to modify the language of the statement in some

way that indicates that the Committee expects to keep the

target for the federal funds rate low for longer than markets

expect. That would probably mean that the mantra so far that the Fed would hold interest rates at this extremely lowlevel for an extended period will be modified. Onepossibility would be to state a particular period of time thatrates would remain low (as done, for example, by the Bankof Canada); another option would be to make the first ratehike contingent on the development of specific data(e.g. once the core inflation rate has risen to 2% or theunemployment rate has fallen below 7%). If such a change inthe Feds communication would succeed in pushing backmarket expectations for the first rate hike even further, thiswould also lower long-term yields. A further option to reducereal yields that the Fed discussed at its latest FOMC meeting

was directly influencing inflation expectations. One possiblestrategy to raise inflation expectations would be to directlytarget the price level rather than price changes, i.e. the inflationrate, as done so far.10 We do not, however, believe that sucha step will be resolved at the upcoming FOMC meeting.

European conditions?

A (justified) criticism of Europe often heard here in the US isthat there is no political unity in the monetary union. The focus ison national interests, with the result that Brussels ability toact is limited to key issues put in other terms: the willingness

to reach a consensus is often lacking in many countries. Atthe same time, the crisis in Greece has shown that whenpush comes to shove the ECB is indeed able to act. Interestingly,a similar constellation now appears to be emerging in theUS. While the dominant interests here are not national butpartisan, the outcome is the same: fiscal policymakers arelimited in their ability to act (are unwilling to act), while theUS central bank is taking action. The people least happyabout this constellation appear to be the central bankersthemselves. The regional Fed Presidents Fisher (Dallas),Hoenig (Kansas City), Kocherlakota (Minneapolis), Lacker

9

See, for example, Bernanke, B., Monetary Policy Objectives and Toolsin a Low-Inflation Environment, speech in Boston, 15 October 2010.10

See: Inflation expectations: The Fed is playing with fire, Friday Notesdated15 October 2010.

(Richmond) and Plosser (Philadelphia) have, for example,stressed repeatedly in recent weeks that an even moreexpansive monetary policy is hardly a suitable tool to resolve

the problems currently facing the US economy. They pointinstead to the unsustainable path of fiscal policy, theaforementioned uncertainty about taxes and healthcarecosts, as well as the lack of flexibility and the wrong skills ofmany unemployed. Finding sustainable solutions to theseproblems would be the mandate of fiscal policy in Washington.But the impending political gridlock means that any progressin these areas is far off for the time being.

Dr. Harm Bandholz, CFA (UniCredit Bank)+1 212 [email protected]


6/31


Friday Notes


Germany: Maastrichtconvergence as early as next year

The free fall is being followed by a steep ascent. After thedeep recession ripped a huge hole in government coffers,the growth spurt is bringing rapid relief. The outlook aboveall for tax revenues - has improved considerably of late.

To comply with the debt rule, the federal government haspassed substantial austerity measures from 2011. Additionalsupport comes from the low interest rate level. A onepercentage point decline in the average interest ratetranslates into annual savings of EUR 18bn.

The starting position for the development of the budgethas, therefore, improved drastically since last year. Forthis year, we expect only a slight further increase in thedeficit to 3% of GDP, and for 2011 the Maastricht criterionis already likely to be undercut.

Consequently, also the debt ratio moves towards asustainable path again. In the short term, the creation ofthe "Bad Banks" for WestLB and Hypo Real Estate will,however, trigger a further increase in the debt ratio by upto 10 percentage points, to 85% of GDP by year-end.

Strong economy seeing taxes flow again

The free fall is being followed by a steep ascent. With theexceptionally strong growth dynamic in the spring, theGerman economy has put itself clearly at the front of theEuropean growth train, while GDP in many other countriesposted only meager growth or even contracted further (seechart next column). And while the data currently available forthe quarter that has just ended show that the pace of growthhas slowed considerably, it nevertheless remains robust (seehere also the Research Note "German GDP: Normalizationin the summer", Friday Notes dated 22 October 2010).

The rapid economic recovery also has tangible consequencesfor the fiscal situation of the public sector. The deep recession,during which GDP contracted by a total of 6.6%, was namelya massive strain on the public coffers even independent ofthe fiscal packages. Despite relatively stable employmentnumbers, the sharp decline in the total numbers of hoursworked as well as the dramatic slump in corporate profitsdrove transfer expenditures higher and, at the same time,ripped a huge hole in the revenue side. According tocalculations by the OECD, the cyclical elasticity of theGerman fiscal budget in the past was roughly 0.511. Thatmeans that a 1% decline in GDP triggers a 0.5 percentagepoint increase in the deficit ratio (in % of GDP), i.e. the financialcrisis has increased the deficit by more than 3 percentage points.

11Girouard, Andr (2005): Measuring Cyclically-Adjusted Budget Balances for

OECD Countries; OECD Economics Department Working Paper No. 434

GDP, REAL, IN % QOQ, II/10

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5

Germany

France

Italy

Portugal

Spain

Ireland

Greece

Source: Bloomberg, UniCredit Research

The V-shaped recovery of export demand has recently seencapacity utilization in most sectors rise rapidly again towardsaverage levels. On the assumption that the global economydoes not slide into a double-dip recession, real GDP inGermany could have returned to the pre-crisis level by theend of next year. Simple filter methods (Hodrick-Prescott)already suggest that the output gap has closed (see chart).

GERMAN GDP, REAL, LOGARITHMED

6.20

6.22

6.24

6.26

6.28

6.30

6.32

6.34

6.36

6.38

I/00 I/01 I/02 I/03 I/04 I/05 I/06 I/07 I/08 I/09 I/10

GDPHP-filter

Output g ap

Source: Statistisches Bundesamt, UniCredit Research

Recently, this gratifying development has also had anincreasingly positive impact on the monthly data for the mostimportant sources of tax revenues. The numbers for thecorporation tax as proxy for corporate tax revenues show aclear trend reversal with a still rising trend. Wage and incometaxes have stabilized despite the permanent, tangible taxbreaks passed as part of the fiscal program, and VATrevenues are rising moderately but steadily as privateconsumption increasingly rebounds (see chart).


7/31


Friday Notes


TAX REVENUES, 12-MONTH SUM, INDEX (JAN-2008 = 100)

20

30

40

50

60

70

80

90

100110

120

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

W age tax

Corporate income tax

Value added tax

Source: Bundesfinanzministerium, UniCredit Research

In the last official bi-annual tax projection from May, thecommittee of experts still assumed that this year would seeoverall tax revenues decline by a strong 2.6% yoy toEUR 510.3bn, on top of the record decline of 6.6% already in2009 (see chart).

TAX PROJECTION MAY 2010, REVENUES IN BN EUR

450

475

500

525

550

575

2005 2006 2007 2008 2009 2010 2011 2012 2013

Projection

Source: Bundesfinanzministerium, UniCredit Research

The reading will, however, be clearly exceeded because ofthe strong upswing. While in May the federal governmentassumed GDP growth for 2010 of 1.4%, the forecast whichis the benchmark for the tax revenue projection has nowbeen raised drastically to 3.4%. In the interim, it can beassumed that tax revenues in 2010 will if at all not be farbelow those of the previous year and will continue to trendhigher in the coming year. The results of the coming taxprojection will be published at the beginning of November.

Fiscal program has lifted the structuraldeficit appreciably

The far-reaching fiscal program that the federal governmentpassed during the deep recession has triggered a strongincrease in the structural i.e. adjusted for cyclical influences deficit. Alongside the two fiscal packages passed by theGrand Coalition, government finances are also coming underpressure from the "Growth Acceleration Act" passed by thecurrent conservative government and from the rulingshanded down by the Federal Constitutional Court on thestandard commuter deduction and the tax deductibility ofhealth insurance contributions. The tax breaks for house-holds and firms as well as the government investmentprograms total just over 3% of GDP for the years 2009 and

2010. Many of the measures are permanent in nature andwill, therefore, increase the structural deficit on a sustainedbasis. After the auto scrapping premium and the one-timechild benefit already expired last year, basically the onlymajor measure scheduled to expire this year is the accelerateddepreciation option for corporate investments. Above andbeyond that, the investment in the future program with a totalvolume of EUR 13.3bn expires officially at the end of theyear. The federal governments share of EUR 10bn is,however, off budget and is booked to the so-called investmentand redemption fund.

Consolidation begins in 2011In addition to the cyclically-induced improvement of thebudget situation, the federal government has passed a raft ofausterity measures from 2011 to comply with the debt ruleanchored in the Basic Law. While there are indications thaton their implementation there will be some changes to theoriginal plans, the consolidation volume targeted for nextyear totaling approximately EUR 11bn is likely to be almostreached. Overall, the package of measures is designed tolower the structural deficit of the federal government by overEUR 27bn or 1% of GDP by 2014 (see table next page).Beyond the consolidation measures for the federal budget

agreed on at the austerity summit (Sparklausur), thegovernment has also decided to reduce the deficits in thesocial security system. Alongside the decision taken sometime ago to partially raise the contribution rate for unem-ployment insurance again from 2.8% to 3.0%, the contribu-tion rate for statutory health insurance will be raised at thebeginning of 2011 from 14.9% back to 15.5% of grossincome. Both contribution rates had previously been loweredduring the crisis as part of the economic stimulus program, atthe expense of federal subsidies.


8/31


Friday Notes


RESULTS OF THE AUSTERITY SUMMIT, IN BN EURO

2011 2012 2013 2014

Subsidy reduction 2.0 2.5 2.5 2.5

Corporate contribution 3.3 5.3 5.3 5.3

Readjusting social benefits 3.0 7.0 9.4 10.9

Armed forces reform - - 1.0 3.0

Administrative savings 2.3 3.3 3.9 3.9

Other measures 0.6 1.1 1.7 2.0

11.2 19.1 23.7 27.6Total

81.6

Source: Bundesregierung, UniCredit Research

EMU debt crisis reduces interest bill

The German fiscal budgets are receiving additional, albeitless obvious, support from the debt crisis in the euro zone.Even though Germany can be asked to contribute under theguarantees already given to Greece and possible guaranteesfor other EU members in the event of a default, Germany iscurrently profiting in concrete terms from the persistently veryloose monetary policy for the entire monetary union. Despitethe solid economic situation in Germany and other corecountries, the situation in the peripheral countries does notcurrently permit any normalization of the ECBs interest ratepolicy. Bolstered by Germanys safe-haven status within theeuro zone, the public-sector budgets are facing extremelyfavorable terms and conditions for borrowing on capital

markets. The yield of 10-year Bunds was recently under2%, compared to still close to 4.7% at mid-2008 (see chartnext column). The interest rate level will help lower theinterest bill over the short and medium term. Last year, theGerman government had to spend EUR 62.2bn on interestfor the public-sector debt. The interest ratio was 2.6% ofGDP, with an overall deficit of 3.1%. The average interestrate on the public-sector debt was 3.5%. New borrowing atthe currently more favorable conditions will lower theaverage interest rate further. Based on the current debtposition of roughly EUR 1.8 trillion, a 1 percentage pointreduction in the average interest rate accordingly translates

into a cost saving of EUR 18bn per year.

10-YEAR GOVERNMENT BONDS YIELDS, IN %

0

1

2

3

4

5

6

7

8

9

10

11

12

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Greece

SpainIreland

Germany


Deficit should fall below the Maastrichtceiling as early as 2011

At the middle of last year, market expectations for the overallpublic-sector fiscal deficit climbed to over 6% of GDP. Thestarting position has, however, taken a dramatic turn for thebetter. The rapid economic recovery combined with theausterity measures implemented now point to a much lowerdeficit. In 2010, we expect the deficit of the federal govern-ment, Lnder governments and local authorities to be underEUR 90bn or 3% of GDP. In the coming year, the deficit

should then already fall below the Maastricht ceiling of 3%(see chart).

TOTAL PUBLIC-SECTOR FISCAL BALANCE, IN % OF GDP

-4.5

-4.0

-3.5-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

2002 2003 2004 2005 2006 2007 2008 2009 2010p 2011p

Maastricht criterion



9/31


Friday Notes


Accordingly, the outlook for the debt ratio is now also muchmore favorable than feared only one year ago. Based on thesubstantially worse growth expectations at the time and

without measures to consolidate the budget, calculationsbased on the Domar debt formula showed the debt ratioincreasing to 100% of GDP by 2030. Factoring in the strongeconomic recovery, the consolidation measures planned tocomply with the debt rule as well as temporarily morefavorable financing conditions, the Maastricht ceiling forgovernment debt of 60% of GDP could, according to theDomar Rule, already be clearly undercut by 2030 (see chart).

GROSS GOVERNMENT DEBT, IN % OF GDP,PROJECTION BASED ON THE DOMAR RULE

0

10

20

30

40

50

60

70

80

1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030

Maastricht ceiling

Source: Statistisches Bundesamt, Bloomberg, UniCredit Research

"Bad Banks" drive debt level higher

In the short term, the debt ratio will, however, increaseconsiderably again because of exceptional expenditures. Bythe end of last year, the capital which the public sector hadinjected into the banking sector already totaled EUR 46bn(see table).

GOVERNMENT RESCUE MEASURES IN THE BANKINGSECTOR 2009/2010

Capital injections EUR bn

Landesbanken 21.0

Aareal Bank 0.5

Hypo Real Estate 6.3

Commerzbank 18.2

Total 46.0

Bad Banks

EAA WestLB 77

FMS WM Hypo Real Estate 191

Total 268

Source: Soffin, State governments, UniCredit Research

While this amount has not impacted the deficit statistics, themeasures did have to be factored in when calculating thegross debt position12. In principle, however, the additional

debt as a result of the capital stakes is matched by assetvalues. And in the event of a successful sale of the governmentsequity stakes, the proceeds can again be used to redeem thefinancing contribution. The creation of the Bad Banks forWestLB and Hypo Real Estate has the same impact ongovernment debt this year. In the case of WestLB EUR 77bnand in the case of Hypo Real Estate 191bn EUR in assetswere transferred to government-backed Bad Banks. Overall,this will therefore increase the debt ratio by roughly 10% ofGDP. After a debt ratio of 74% at the end of 2009, we thereforeexpect this year to bring an increase to 85% (see chart).

GROSS GOVERNMENT DEBT, IN % OF GDP

0

10

20

30

40

50

60

70

80

90

2005 2006 2007 2008 2009 2010p

with aid for the financial sector

without aid for the financial sector


Alexander Koch, CFA (UniCredit Bank)+49 89 [email protected]

12The decisive element in this context is whether the financial aid takes the

form of subsidies, or as in the concrete case of the complete recapitalization ofthe banks means an equity stake and/or the acquisition of assets. In the formercase, the measures are recorded in both the deficit and the debt position, inthe latter, only in the debt position.


10/31


Friday Notes


EMU fiscal austerity: Will it hurt?Yes, but not dramatically so

After the presentation of the 2011 Budget Law in severaleurozone countries, we re-assess our estimate of the size offiscal consolidation at the area-wide level and its impacton GDP.

We argue that the fiscal stance will remain broadly neutralthis year and turn restrictive next year by around 1.2% ofGDP. Most likely, the dampening effect on 2011 GDPshould be in the 0.7-0.8pp area.

The estimate is vindicated by a recent IMF analysis, which

carries out simulations under different hypothesis formonetary policy, degree of coordination in fiscal tighteningacross advanced economies, sovereign risk premia, andcomposition of the fiscal adjustment.

Austerity measures ahead

In the past few weeks, several eurozone countries havepresented their 2011 pre-budget to their respective parliamentsfor approval, which is due before year-end. This seems to us the best time to re-assess the estimate of the size of fiscalconsolidation at the area-wide level and its likely impact on2011 real GDP13.

For peripheral countries like Greece, Spain and Portugal,which had already announced new consolidation measuresin May to avoid an escalation of the sovereign debt crisis, thedrafting of the budget was supposed to merely translate thecommitments already undertaken into specific measures. Infact, this was true only for Greece, which strictly adhered tothe agreements with the IMF/EU. The situation is different forthe other two countries. On the one hand, Portugal wasforced to strengthen its fiscal adjustment in order to addressthe lack of improvement in the central government budgetbalance so far. Accordingly, our new estimate for Portugals

2011 fiscal tightening reflects additional austerity measuresworth 0.5% and 2.1% of GDP for 2010 and 2011, respec-tively. On the other hand, Spain disappointingly refrainedfrom specifying the measures that would make it possible toachieve an 8% reduction in the central governments non-financial public expenditures a measure worth 1% of GDPthat was announced in late May, in addition to the EUR 15bnpackage announced earlier the same month as a backstop tocontagion from Greece. Accordingly, we left our estimate ofthe size of the Spanish fiscal adjustment for 2011 unchangedversus our July projection.

13We provided a preliminary assessment of the size of fiscal consolida-

tion at area wide level in our Economic Special When austerity meetsgrowth, July 2010.

For the rest of the eurozone countries, less strained by marketpressures, the drafting of the budget portended a moremoderate consolidation, in line with earlier announcements.

Our only revision concerns France: we raised the size of thefiscal adjustment planned for 2011 by 0.1pp to 0.9% of GDP.

In the table below, we summarize the fiscal adjustmenttargeted over 2010-2011 by Greece, Portugal, Spain, Italy,France and Germany which, together, account for 80% ofeurozone GDP. A simple weighted average of national fiscalplans suggests that the fiscal stance at the area-wide levelwill remain broadly neutral this year and turn restrictive nextyear by around 1.2% of GDP. These estimates are virtuallyunchanged with respect to the ones that we provided in July.At that time, we foresaw a budgetary adjustment of 0.1% and

1.1% of GDP in 2010 and 2011, respectively.

FISCAL ADJUSTMENT

GR PT ES IT DE FRwholeEMU

impacton EMUGDP(in pp)

weight (in % ofEMU GDP)

2.4 1.7 10.4 16.2 29.0 21.6 100

fiscal stance in2010 (% of GDP)

-7.9 -2.7 -3.0 0.0 0.9 0.6 -0.2 -0.1

fiscal stance in2011 (% of GDP)

-4.3 -4.3 -3.5 -0.8 -0.4 -0.9 -1.2 -0.7/-0.8

Note: A positive number signals an expansionary stance, a negative numberindicates fiscal retrenchment. Source: UniCredit Research

Impact likely not too dramatic

A comprehensive analysis of the effects of fiscal consolidationrecently published by the IMF14 is particularly useful toassess the implications of the fiscal adjustment on eurozoneGDP (far-right column of the above table). The Fundsanalysis highlights that a fiscal consolidation equal to 1% ofGDP typically reduces domestic demand by 0.5pp in the firstyear, with about half of the drag on GDP being offset byhigher net exports via a nominal exchange rate depreciation.

The negative impact on GDP is ultimately around 0.25pp,implying a fiscal multiplier of 0.25. If we had to rely on pastexperience, but we exclude any cushioning impact that mayderive from changes in the nominal exchange rate which isfixed within the monetary union, the GDP drag at area-widelevel of a consolidation worth 1.2% of GDP would be in arange of 0.6-0.8pp (fiscal multiplier: 0.5-0.7). However, wethink that the average response of GDP to historical episodesof fiscal tightening may provide only a lower-bound estimateof the fiscal multiplier that might apply today, given theexceptional features of the current fiscal tightening phase.

14Will it hurt? Macroeconomic effects of fiscal consolidation, World

Economic Outlook (Chapter 3), IMF, October 2010.


11/31


12/31


Friday Notes


and Ardagna to identify fiscal expansions a large increasein the cyclical adjusted budget balance biases the analysistowards downsizing contractionary effects and overstating

expansionary ones. The method based on changes in thecyclical adjusted budget balance tends to select periodsassociated with favorable outcomes but during which noausterity measures were actually taken, whereas it alsotends to omit cases of fiscal austerity associated withunfavorable outcomes. To put it bluntly, when you measurefiscal policy action precisely (i.e. focusing only on intendedfiscal adjustment) there is not such a thing as an expan-sionary fiscal consolidation in the near term. Certainly, thenegative impact on GDP may be mitigated by a sound andcredible fiscal adjustment, but it can hardly be totally offset. Itis only over the longer term that it makes sense to talk about

expansionary effects of consolidation. Lower governmentdebt levels eventually reduce real interest rates, therebystimulating private investment and creating fiscal room forcutting discretionary taxes, notably labor taxes. In specific,for a permanent 10pp decline in the debt/GDP, the level ofGDP rises by 1.4% in the longer term. It typically takes threeyears from the beginning of consolidation before somepositive effects on GDP start materializing.

Tullia Bucco (UniCredit Bank Milan)+39 02 8862 [email protected]


13/31


Friday Notes


ECB: Rendez-vous in December

The 4 November ECB meeting is going to be fairlyuneventful. For market-sensitive announcements, the"rendez-vous" is in December.

Business surveys keep providing reassuring evidence onthe health of the eurozone economy. If anything, theyindicate some upside risks to the ECBs GDP projectionsfor the final part of 2010.

M3 and loan growth remain subdued, but the first positivesigns on corporate lending will probably make the ECBmore confident that the credit cycle is about to turn. TheOctober Bank Lending Survey confirms the picture ofmoderate improvement.

Recent developments on the liquidity front support ourview that the ECB will drop the full-allotment on 3M LTROsat the December meeting.

The ECB has done nothing to hide its disappointment onthe agreement reached by euro area finance ministers onthe reform of economic governance. This will probably bea topic of discussion during the Q&A session.

Expect no major news on 4 November

The 4 November ECB meeting is unlikely to bring majornews for market-sensitive announcements, the "rendez-vous"is in December, with the publication of updated macro-economic forecasts (including for the first time the estimatesfor 2012) and new details on the liquidity strategy. Nextweek, Trichet should confirm that the central bank remainscautiously optimistic on the areas growth prospects, withhigher interbank rates seen reflecting the ongoing process ofnormalization in the financial sector. The ECBs disappointmentabout recent proposals to reform economic governance inthe euro area will probably be a topic of discussion duringthe Q&A session.

Economic and monetary analysis

On balance, the October round of business surveys providedreassuring evidence on the health of the eurozone economy,validating the ECBs assessment that the recovery remainson track. If anything, the most recent growth data indicatesome upside risks to the central banks GDP projections forthe final part of 2010. The renewed acceleration in theGerman Ifo to the highest level since mid-2007, with asurprising rebound also in the expectations index, points toan increasingly sustainable upswing in the largest economy

of the area. This helps further reduce the (already low)probability that the eurozone will face nasty GDP surprisesdown the road. Even the growth implications of the recent

euro appreciation should not be overestimated, in our view.This is because prospects of further expansionary measuresby the Fed the key driver of USD weakness since the end

of August led to a generalized increase in equity prices anda drop in volatility and corporate bond spreads, which willprobably suffice to neutralize some of the damaging growthimpact of a stronger euro.

Coming to the monetary analysis, the main novelty is thesecond consecutive increase in the monthly flow of lendingto Non-financial corporations (NFCs) in September, whichwill probably make the ECB more confident that the creditcycle is about to turn.

FIRST SIGNS OF IMPROVEMENT IN CORPORATE LENDING

Lending to NFCs

-40

-30

-20

-10

0

10

20

30

40

50

60

70

38016 38321 38625 38929 39233 39538 39843 40147 40451

-4

-2

0

2

4

6

8

10

12

14

16

EUR bn - LS

In %, yoy - RS

Source: ECB, UniCredit Research

Although overall lending to the private sector remained veryweak at 1.2% yoy and M3 growth fell back to only 1% yoy,the ECB could be temped to start sounding slightly moreupbeat on the monetary pillar. The October Bank LendingSurvey showed mixed results, but on balance confirmed apicture of moderate improvement.

Money market normalization

On 19 October, the 3M Euribor rate rose above the refi ratefor the first time since July 2009. This adjustment, which isendogenously determined by the decline in excess liquidityand therefore contains no monetary policy signal, certifiesthat the financial sector continues to recover, as also shownby the fact that Spain, Greece and Portugal in Septemberreported a decline in central bank funding. We also point outthat the upward trend in the 3M Euribor rate has tracked veryclosely the fair refi rate prescribed by our Taylor rule inresponse to some narrowing of the output gap and amoderate recovery in lending to the private sector. In otherwords, money market normalization is now fully justified by

the improvement recorded both in the financial sector andthe real economy. Whats more, the last leg up of interbankrates has been relatively fast, a signal that the ECB doesnt


14/31


Friday Notes


need to be overly cautious in its exit. Note that higherdemand at the last 3M LTRO (EUR 42bn bid vs. EUR 23bnexpiring) is unlikely to have reflected increased money

market tensions. Rather, it was probably due to the fact thatthe Euribor rate is now slightly above the refi rate, with risksskewed towards a further increase in the coming weeks. Ifanything, this suggests that the full-allotment is creatingsome distortions in demand for liquidity and offers argumentsfor removing it as soon as possible. Although there remainconsiderable pockets of weakness in the banking sector ofperipheral countries, our view that the ECB will drop the full-allotment on 3M LTROs at the December meeting seemsincreasingly fully on track.

Economic governance

The ECB has done nothing to hide its disappointment on theagreement reached by euro area finance ministers on thereform of economic governance. By de-facto leaving thedecision to impose sanctions in political hands, the finalaccord is weak on all the main points that the central bankdeemed as important to solve the problem of moral hazard,namely automatism and timeliness in the application ofsanctions. This low-profile compromise puts the ECB in adifficult position: the central bank has the right to forcefullyargue its point of view on economic governance issues,because it is ultimately the ECB that is left holding the bag,i.e. acting to ensure financial stability: this is the case both

for its enhanced liquidity support measures to help theresidual pockets of weakness in the banking sector, and forthe government bond purchase program. Remember that thegovernment bond purchase program has been particularlycontroversial, and Governing Council member Weber hasrecently again called for it to be discontinued soon. Lack ofsignificant and credible progress on strengthening theStability and Growth Pact, instead, flags the risk that the programmight need to remain in place for quite a while longer.

Marco Annunziata, Ph.D. (UniCredit Bank)+44 20 [email protected]

Marco Valli (UniCredit Bank Milan)+39 02 8862-8688,[email protected]


15/31


Friday Notes


Data Monitor Preview Europe

Monday, 1 November

UK, PMIS PMIS TO FLAG A MODERATE SLOWDOWN

October CIB Cons. Sept Aug

Manufacturing 53.2 53.0 53.4 53.7

Services 52.0 52.6 52.8 51.3

30

35

40

45

50

55

60

65

01/99 01/01 01/03 01/05 01/07 01/09

PMI Manufacturing

PMI Services

Threshold level

In September, the manufacturing PMI eased marginally,while the services counterpart rose decisively. In October,we expect to see a technical correction in the servicesPMI and another small decline in the manufacturingindex. Still, at this level the PMIs signal a decent pace of

economic expansion at the beginning of the final quarter.

Source: Markit, UniCredit Research

Thursday, 4 November

UK, BANK OF ENGLAND ON HOLD

November CIB Cons. Oct Sep

Asset purchases 200bn 200bn 200bn 200bn

Repo rate in % 0.5 0.5 0.5 0.5

0

1

2

3

4

5

6

7

01/99 07/00 01/02 07/03 01/05 07/06 01/08 07/09 01/11

Repo rate (%)

3M Libor (%)

3M Libor futures (%)

MIB forecast 3M Libor (%)

MIB forecast repo rate (%)

CIB forecast

The latest macro data underpinned our view that theBoE will not resume its quantitative easing policy at thenext meeting and it is, in fact, still unlikely to extendthe program next year in our view. On the one hand,GDP growth for 3Q10 came in much stronger thanexpected at 0.8% qoq, dispelling fears that the economymight be heading towards a double-dip recession. Onthe other hand, medium-term inflation expectation rosein September to the highest level in almost two years,something which will surely attract the BoEs attention.We expect the BoE to remain on hold both on the repo rateand the asset purchase program in November.

Source:BOE, UniCredit Research


16/31


Friday Notes


Friday, 5 October

GERMANY, NEW ORDERS NEW ORDERS, IN % YOY

September CIB Cons. Aug July

in % mom -1.0 -0.2 3.4 -1.6

in % yoy 18.1 18.9 21.2 18.4

-40

-30

-20

-10

0

10

20

30

40

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Orders for other vehicles have been very volatilerecently, triggering strong fluctuations in the overall neworders figures. After the spike in the previous month, weexpect September to bring a (technical) correction.Overall, businesses assessment of the order situationhas remained clearly expansive of late, despite theinevitable strong slowdown in the upward dynamic. At

least in the short term, the prospects for a still risingorder volume trend remain good.

Source: Bundesbank, UniCredit Research

Chiara Corsa, (UniCredit Bank Milan)+39 02 [email protected]

Alexander Koch, CFA (UniCredit Bank)+49 89 [email protected]


17/31


Friday Notes


Data Monitor US - Preview of the coming week

Monday, November 1

ISM MANUFACTURING MANUFACTURING SECTOR CONTINUES TO SLOW


53.0 54.0 54.4 56.3

30

35

40

45

50

55

60

65

01/99 01/01 01/03 01/05 01/07 01/09 01/11

ISM manufacturing

Critical value

The manufacturing ISM eased again in September, butto a still healthy 54.4 points. The details of the report,however, were much weaker than that. In particular, theforward looking new orders declined to 51.1, the lowestlevel since mid-2009. A sharper decline in the headlineindex was only prevented by a jump in inventories to a

26-year high of 55.6. As a result of these two developments,the new orders-to-inventory ratio dropped to 0.92, thelowest level since January 2009. This signals that themanufacturing sector is likely to further lose momentumin the coming months. Behind this is the slowdown in theinventory cycle, but the short boom in capex spending isapparently also coming to an end.


Wednesday, November 3

ISM NON-MANUFACTURING SIGNALING A MODERATE RECOVERY


53.0 53.5 53.2 51.5

35

40

45

50

55

60

65

01/99 01/01 01/03 01/05 01/07 01/09 01/11

ISM non-manufacturing

Critical value

The non-manufacturing ISM rose back in September toa solid 53.2 points from a 7-month low in August. In general,however, the moderate downward trend of the indexcontinued. We expect the non-manufacturing ISM tostabilize at around 53 points in October. According to thelatest Beige Book, demand for nonfinancial serviceswas reported to be stable to modestly increasing overall.This is corroborated by weekly retail sales numbers, whichcontinued to improve modestly in October. In addition,

home sales the real estate sector is part of the non-manufacturing universe picked up solidly. Source: Thomson Datastream, UniCredit Research


18/31


Friday Notes


FOMC MEETING HOW BIG WILL THE TREASURY PURCHASE PROGAM BE?

CIB Cons. current before Key interest rates in %

Target rate in % 0.25 0.25 0.25 0.25

0

1

2

3

4

5

6

7

8

01/99 07/00 01/02 07/03 01/05 07/06 01/08 07/09 01/11

Fed funds target rate

3M Eurodollar

3M Eurodollar FRAs

CIB forecast (3M)

CIB forecast (target rate)

CIB forecast

Despite ongoing objections from several regional FedPresidents, we expect the FOMC to announce anotherround of large-scale Treasury purchases at this meeting.The question is, therefore, not if but how many Treasuriesthe Fed is going to buy. Eventually, the purchases willhave to be significant (about USD 1 trillion) in order tohave an impact. But the Fed is unlikely to announcesuch a huge amount at this meeting. Instead, we expectan initial purchase volume of USD 300-500bn, with theexplicit option of expanding the program further if needed.

Another possibility would be that the Fed announces itsintention to buy a certain amount (USD 50-100bn) permonth, reviewed every quarter. Such a more gradualapproach, however, might disappoint markets and wouldimply a reversal in risk appetite. In addition, the Fedcould attempt to push yields even lower by modifying thewording of its statement. That would probably mean thatthe mantra so far that the Fed would hold interest ratesat this extremely low level "for an extended period" willbe modified.


Thursday, November 4

PRODUCTIVITY & UNIT LABOR COSTS NO PRODUCTIVITY GAINS IN THE THIRD QUARTER

III/10 CIB Cons. II/10 I/10

Nonfarm productivity (in %, qoq) 0.0 0.8 -1.8 3.9

Unit labor costs (in %, qoq) 0.5 0.9 1.1 -4.6

-10

-5

0

5

10

15

20

I/98 I/99 I/00 I/01 I/02 I/03 I/04 I/05 I/06 I/07 I/08 I/09 I/10

Unit labor costs (in % qoq)

Productivity (in % qoq)

Output in the third quarter probably increased slightlyless than 2%. As the index of aggregate working hoursrose by about the same pace (1.9%), nonfarm productivity(output per hour) was likely flat in 3Q. Compensation perhour might have edged up slightly (+%), after decliningin the previous two quarters. As a result, unit labor costswould have also risen by %.



19/31


Friday Notes


Friday, November 5

MONTHLY EMPLOYMENT REPORTEXPIRATION OF GOVERNMENT PROGRAM TO WEIGHON LABOR MARKET


Nonfarm payrolls in k 50 60 -95 -57

Unemployment rate in % 9.7 9.6 9.6 9.6

-750

-600

-450

-300

-150

0

150

300

450

600

01/97 01/99 01/01 01/03 01/05 01/07 01/09 01/11

2

3

4

5

6

7

8

9

10

11

Non-farm payrolls

(monthly changes in thousands)

Unemployment rate (in %, inverted, RS)

Following four straight declines, nonfarm payrolls likelyexpanded again moderately in October. Private payrollsshould have continued to expand, while governmentemployment most likely was unchanged. There aresome downside risks to our forecasts, however, due tothe expiration of the TANF Emergency Fund (Temporary

Assistance for Needy Families) at the end of September.According to the Center on Budget and Policy Priorities(CBPP), the TANF program has helped to create about250k subsidized jobs. The failure to extend the fund,therefore, might have been a bigger drag on the labormarket than we have factored in. We expect theunemployment rate to edge up to 9.7% from 9.6%, asthe increase in the labor force likely exceeds the pace ofjob creation.


Dr. Harm Bandholz, CFA (UniCredit Bank)+1 212 672 [email protected]


20/31


Friday Notes


Fixed Income Outlook

Rocky Horror Picture Show hurts domestic bond market

FOMC meeting with unpredictable options

Rocky Horror Picture Show hurtsdomestic bond market

"It's just a jump to the left and then a step to the right. Withyour hands on your hips, you bring your knees in tight. Thenit's a pelvic thrust, that nearly drives you insane, let's do thetime warp again".

This describes exactly the battle over a stability pact with

teeth. The abandonment of positions and a continuoussearch for compromise with the risk of losing the hoped-for"teeth" ultimately impacted sentiment towards Europeangovernment bonds across the board. Furthermore, thebickering over austerity packages in Portugal and the discussionof early elections in Greece are of course poisonous.

ECB rhetoric that increasingly sounds like the central bank isdetermined to forge ahead with the exit strategy as quicklyas possible is also taking its toll.

From a domestic standpoint, the ECB press conference nextweek is once again of paramount importance. Details on thefuture timing of the exit strategy will probably be held backuntil the December meeting, but we see only few chances for"dovish" overtones.

CLEAR RISK OF FURTHER TIGHTENING OF MONEY MARKETFORWARDS

1.22 1.321.39 1.49

1.59 1.691.78

0

1

2

3

4

5

6

12/31/07

3/31/08

6/30/08

9/30/08

12/31/08

3/31/09

6/30/09

9/30/09

12/31/09

3/31/10

6/30/10

9/30/10

12/31/10

3/31/11

6/30/11

9/30/11

12/31/11

3/31/12

6/30/12

Key rate

3M EUR Libor

Eonia

3M FRAs


There is, therefore, the fear that the money market forwardswill shift slightly higher again and pull the long end up withthem, even though developments here will depend to a verylarge extent on US influences. In the US, by far the most

interesting FOMC meeting in several months is on theagenda, and the usual data heavyweights.

FOMC meeting with risks in all directions

There has been no end to the metaphors. Rogoff compared

the US strategy to a bunker shot in golf. What is needed herein his view is an explosion shot the stronger the better.Whether you overshoot the green is irrelevant, the main thingis that you are out of the bunker. Using a turkey Thanksgivinganalogy in an article entitled "Run Turkey Run", Bill Grossespoused the view that - one way or another - the FOMCannouncement on Wednesday will mark the final turningpoint at the long end.

But what is more important than a volume of USD 400 or 600bnis the message between the lines. If investors conclude thatthe US central bank will continue this program doggedly until,for example, an annual rate of change in the core deflator of

2% or higher is reached, the reaction is likely to be positive.There is reason to doubt whether there will already be such acommitment in the current situation where FOMC membersare in some cases espousing diametrically opposing views.

Overall, there is the fear that the current rise in yields at thelong end in the euro zone is not over yet. Money marketrates will probably continue their extensively linear path inthe direction of 1.2%, irrespective of the QE2 decision in the US.

FED BALANCE SHEET, CORE PCE AND 10Y YIELD

0

500

1000

1500

2000

2500

1/1/07 1/1/08 1/1/09 1/1/10

1

2

3

4

5

6FED balance sheet in USD bn (LS)

10Y UST (RS)

core PCE y-o-y (RS)


Michael Rottmann (UniCredit Bank)+49 89 378 [email protected]


21/31


Friday Notes


Forex Outlook

FX View: 3Q GDP, the FOMC decision on QE2, non-farmpayrolls and mid-term elections all from the US shapethe picture and on balance may result in a weaker USD.

EUR: EUR-USD should be highly dependent on the sizeof QE2 by the Fed. Asset purchasing of good size maypush the pair to 1.43 in the medium term, while a moregradual approach could cement current levels.

GBP: The healthy 3Q UK GDP reading is to keep sterlingon bid, especially against the greenback.

QE2 its crunch time for the USDThe meeting of G-20 finance ministers and central bankgovernors resulted in an accord of non-belligerence, which,although it helped to stabilize the greenback, at least intheory could have even implied a stronger USD in the shortterm. This was particularly so due to the fact that investorskeep scaling back their quantitative easing 2 (QE2) betsahead of the November 2-3 FOMC meeting, which helped tostabilize the greenback across the board, but failed to triggera USD recovery. Furthermore, US data on the housingmarket and consumer confidence finally came out strongertoo, helping the dollar, but risks of a much weaker USD

might still be realized following the Fed decision next week.The reaction of the USD to the theoretically possible Fedoutcomes might in the end prove to be asymmetrical. Forexample, an expected USD depreciation, in the case of astrong Fed signal regarding bond purchases, with the Fedannouncing to embark on a large-scale asset purchaseprogram, might be of a bigger magnitude than the respectiveUSD appreciation, in case the Fed announces a smaller-than-expected bond purchasing program. Market positioningmaintains a dollar-bearish bias as indicated by non-commercial contracts at the CFTC. Our baseline scenarioremains an announcement of Fed asset purchases of aroundUSD 300-500bn. An outcome at the lower end of this rangemight already prove slightly USD positive, while an outcomeat the higher end may lead to more pronounced USD losses.The influence of major US data releases, such as theadvance estimate of 3Q US GDP, and next Fridays non-farm payrolls report, should not be underestimated, and thesame holds true for Monday's US mid-term elections, whichcould potentially prove USD negative if the outcome shouldmean gridlock in Congress.

QE2 size to make EUR-USD fortunes

The ECB rate decision is coming up next week, but, with

rates firmly on hold, the Q&A session of Mr. Trichets pressconference might easily attract the most interest again,especially if further information on the ECB exit strategy isprovided. The main drivers should still be the above-mentioned US key events and data releases. The gradualscaling back of the expectations on the size of QE2 hasstabilized EUR-USD below 1.40, but the 1.37 support levelproved safe for now, even with stronger US housing dataand consumer confidence. Todays 3Q US advance GDPestimate, the QE2 decision on Wednesday, and the non-farmpayrolls reading next Friday, should determine the medium-term outlook of EUR-USD, especially if the worries about the

Irish and Portuguese budget processes will continue toattract only minor interest on FX markets. GDP and non-farmpayrolls may both fall short of market consensus, helpingEUR-USD, while for the impact of QE2 the same logic usedabove should apply. If the Fed in the end will opt for asmaller initial asset purchase target, between USD 200 and300bn, EUR-USD, although maintaining its current moderateupside bias, may return to the 1.4150 level only if USmacroeconomic data releases should disappoint. On theother hand, if the Fed might announce initially asset purchasesof USD 400-500bn, investors should take this as a sign thatthe Fed aims at a substantial easing in monetary conditionsand this should warrant a return in EUR-USD to levels not

seen since the beginning of the year, around 1.43 and above.

3Q GDP reading to keep sterling bid

UK 3Q GDP coming in ahead of expectations definitelyhelped sterlings medium-term outlook as fears about morequantitative easing by the Bank of England were largelyswept away.

EUR-GBP SPOT & 2Y SWAP RATE DIFFERENTIAL

-0.75

-0.50

-0.25

0.00

0.25

0.50

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

0.80

0.85

0.90

0.95

1.00

EMU2y-UK2y

EUR-GBP (RS)



22/31


Friday Notes


A quick look at our graph shows that interest rate differentialsbetween the eurozone and the UK began to tighten followingthe better-than-expected UK GDP reading, thus putting EUR-

GBP under pressure too, and stopping the euros first assaulton the psychologically important 0.90 level since March,which had been mainly motivated by largely overdonemarket fears that the BoE could decide to do more QE, too.In the very short term, further sterling strength may beexplored more through GBP-USD long positions thanthrough EUR-GBP shorts, as EUR-GBP should find buyerson falls between the important 0.87 level and 0.86, whilecable might still have some upside potential, given the Feddecision on QE2 and as the US GDP and payroll numbersmay fall short of expectations. Cable again got close to the1.60 level, and the essential stability of next weeks UK

PMIs, might increase chances to finally stay above this levelif the Fed will not disappoint markets on QE2 expectations.The BoE meeting should not interfere too much with sterlingbulls as the healthy 3Q GDP reading seems to have pulledthe carpet from under the feet of supporters of more monetaryeasing at the BoE.

Dr. Stephan Maier (UniCredit Bank Milan)+39 02 8862 [email protected]


23/31


Friday Notes


CIB View Our Global Picture

Global economyHaving accelerated up until this spring after the end of theGreat Recession, real global GDP growth is now weakeningagain. But we do not expect a double-dip recession. Never-theless, global economic growth should not re-acceleratebefore late next year.

For 2010, we expect real GDP to rise 4% on a PPPbasis (2011: +4%). Economic activity in industrialized countriesshould post only a modest 2% increase (2011: +1.7%).China and Emerging Asia, which were the first to achievea trend reversal last year, will clearly remain at the top ofthe global growth league.

US

Real GDP growth accelerated to a strong 5% in 4Q09 anda satisfactory 3.7% in 1Q10. But this pace of expansionwas not sustainable since growth was primarily fuelled bythe re-stocking process as well as the advance effectsdue to federal fiscal programs. Economic growth hasbeen, therefore, decelerating since spring. But we do notexpect a relapse into recession. For 2010 as a whole, weforecast real GDP to grow by 2.6%, falling back further to1.9% next year.

A hike of the Fed funds target rate any time soon is out ofthe question. Furthermore, the palpable economic slowdownalready under way in conjunction with growing economicrisks and an inflation considered too low may be sufficientto prompt the central bank to make additional purchases ofTreasury securities soon (Quantitative Easing II). We expectthe Fed to stick to its Zero Interest Rate Policy (target ratecurrently at 0%-0.25%) up until early 2012.

Eurozone

The eurozone exited The Great Recession also in autumnlast year. But it was primarily the turnaround in the inventory

cycle, the growth effects of economic stimuli programsand improving net exports that lent a helping hand. After aweather-supported rebound last quarter, the economicslowdown is now underway. But we do not expect theEMU-wide economy to fall back into recession again.Eurozone GDP should grow by 1.6% this year. For 2011,we expect EMU-wide GDP growth to slow to 1%.

Taking into account the ongoing sovereign debt/spreadcrisis, doubts concerning the solidity of European bankstogether with the economic slowdown, the ECB shouldleave its key interest rate unchanged at currently 1% wellinto next year. We expect the first hike in 4Q11 (25bp).

But the central bank will continue to remove excess liquiditybefore the rate hike at a measured pace.

Government bond markets

Accentuated QE and ongoing ZIRP by the Fed coupled with

the current economic slowdown will keep US governmentbond yields exceptionally low over the next 6-9 months.But by summer next year, when investors start to price inthe first Fed rate hike, yields should start to rise again. Bythe end of 2011, we expect 10Y Treasuries to yield 3%.

Bund yields should follow their US counterparts, rising to2% twelve months from now.

Exchange rates

Opening the door wide for additional bond purchases bythe Fed (Quantitative Easing II) resulted in a tumbling USD.

The euro appreciated the most, despite the ongoingdebt/spread/banking crisis. EUR-USD is expected tostrengthen further, reaching 1.43 at the end of 2010.Signs of a stabilizing US economy coupled with weakerEMU data will drive EUR-USD back below 1.40 in springnext year, before it heads higher again thereafter. An ECBhike before the Fed should lead to a surge to 1.46 at theend of next year.

JPY should weaken over the next year or so, bringingUSD-JPY back to 93 by year-end 2011.

OUR MACRO FORECASTS

in % yoy 2009 2010 2011

GDP EMU -4.0 1.6 1.3

CPI EMU 0.3 1.5 1.7

GDP Germany -4.7 3.2 2.5

CPI Germany 0.3 1.1 1.4

GDP Italy -5.1 1.0 1.1

CPI Italy 0.8 1.5 1.9

GDP US -2.6 2.6 1.9

CPI US -0.3 1.6 1.8

OUR FI/FX & OIL PRICE FORECASTS

2010/11 31-Dec 31-Mar 30-Jun 31-Sep

EMU 3M (%) 1.00 1.05 1.10 1.20

EMU 10Y (%) 2.25 2.25 2.50 2.75

US 3M (%) 0.35 0.35 0.35 0.35

US 10Y (%) 2.50 2.40 2.70 2.85

EUR-USD 1.43 1.39 1.42 1.44

USD-JPY 83 85 88 90

Oil Price 83 85 85 87


24/31


Friday Notes


Macro ForecastsGDP, real (%, yoy) 2004 2005 2006 2007 2008 2009 2010f 2011f

World economy * 4.7 4.3 5.0 5.0 2.7 -0.7 4.6 4.0Industrialized countries * 2.9 2.5 2.8 2.5 0.1 -3.3 2.4 1.8

US 3.6 3.1 2.7 1.9 0.0 -2.6 2.7 1.9

Euro area 1.9 1.8 3.2 2.9 0.3 -4.0 1.6 1.3

Germany ** 0.7 0.9 3.6 2.8 0.7 -4.7 3.2 2.5

France 2.3 2.0 2.4 2.3 0.1 -2.5 1.5 1.4

Italy 1.4 0.8 2.1 1.4 -1.3 -5.1 1.0 1.1

Spain 3.3 3.6 4.0 3.6 0.9 -3.7 -0.3 0.4

Austria 2.5 2.5 3.6 3.7 2.2 -3.9 1.9 1.7

UK 3.0 2.2 2.8 2.7 -0.1 -4.9 1.6 1.8

Switzerland 2.5 2.6 3.6 3.6 1.9 -1.9 2.8 1.5

Sweden 3.7 3.1 4.6 3.4 -0.6 -5.1 4.2 3.2

Japan 2.7 1.9 2.0 2.3 -1.2 -5.2 2.7 1.2

Developing countries * 7.4 7.0 7.9 8.3 6.0 2.4 7.0 6.4

Asia 8.6 9.0 9.8 10.6 7.7 6.9 9.4 8.4

China 10.1 10.4 11.6 13.0 9.6 9.1 10.5 9.6

India 7.9 9.1 9.7 9.3 6.4 5.7 9.7 8.4Latin America 6.0 4.7 5.7 5.7 4.3 -1.7 5.7 4.0

Brazil 5.7 3.2 3.8 5.7 5.1 -0.2 7.5 4.1

Central and Eastern Europe 7.5 6.1 7.2 6.9 4.0 -5.9 3.5 3.8

Russia 7.2 6.4 7.7 8.1 5.6 -7.9 3.4 4.3

Consumer prices, CPI (%, yoy) 2004 2005 2006 2007 2008 2009 2010f 2011f

US 2.7 3.4 3.2 2.9 3.8 -0.3 1.6 1.8

core rate (ex food & energy) 1.8 2.1 2.5 2.3 2.3 1.7 1.0 1.2

Euro area, HICP 2.1 2.2 2.2 2.1 3.3 0.3 1.5 1.7


Germany 1.7 1.6 1.6 2.3 2.6 0.3 1.1 1.6

France 2.1 1.7 1.7 1.5 2.8 0.1 1.5 1.6

Italy 2.2 2.0 2.1 1.8 3.3 0.8 1.5 1.9

Spain 3.4 3.6 3.5 2.8 4.1 -0.3 1.8 2.2

Austria 2.1 2.3 1.5 2.2 3.2 0.5 1.8 2.0

UK 1.3 2.0 2.3 2.3 3.6 2.2 3.1 2.5

Switzerland 0.8 1.2 1.1 0.7 2.4 -0.5 0.7 0.7

Sweden 0.4 0.5 1.4 2.2 3.5 -0.3 1.2 1.5

Japan 0.0 -0.3 0.2 0.0 1.4 -1.4 -1.0 -0.3

GDP, real (%, qoq) I/10 II/10 III/10f IV/10pf I/11pf II/11pf III/11f IV/11f

US (annualized) 3.7 1.7 1.7 1.7 2.0 2.0 2.2 2.2

Euro area 0.3 1.0 0.4 0.3 0.2 0.3 0.4 0.4

Germany 0.5 2.2 0.6 0.6 0.6 0.4 0.3 0.3

France 0.2 0.6 0.3 0.3 0.3 0.3 0.4 0.5

Italy 0.4 0.5 0.3 0.2 0.3 0.3 0.4 0.4

Spain 0.1 0.2 -0.1 0.0 0.1 0.1 0.2 0.3

Austria 0.0 1.2 0.8 0.5 0.3 0.3 0.2 0.3

UK 0.3 1.2 0.5 0.5 0.3 0.2 0.4 0.5

Switzerland 0.7 0.0 0.4 0.4 0.4 0.4 0.4 0.4

Sweden 1.5 1.9 0.7 0.5 0.6 0.8 1.0 1.2

Japan 1.2 0.4 0.2 0.0 0.5 0.6 0.5 0.5

Consumer prices, CPI (%, yoy) I/10 II/10 III/10f IV/10pf I/11pf II/11pf III/11f IV/11f

US 2.4 1.8 1.2 1.1 1.2 1.9 2.0 2.1


Euro area, HICP 1.1 1.5 1.7 1.8 1.7 1.6 1.7 1.9


Germany 0.8 1.1 1.2 1.4 1.7 1.5 1.6 1.5

France 1.3 1.6 1.5 1.5 1.3 1.3 1.6 1.9

Italy 1.3 1.4 1.6 1.8 1.8 1.8 1.9 2.0

Spain 1.2 1.6 2.0 2.6 2.5 2.3 2.1 2.1

Austria 1.4 2.0 1.8 1.9 2.1 2.0 2.1 1.9

UK 3.3 3.4 3.1 2.8 2.5 2.3 2.6 2.6

Switzerland 1.1 1.0 0.3 0.2 0.1 0.2 0.7 0.9

Sweden 1.0 1.0 1.1 1.6 1.9 2.1 2.3 2.5

Japan -1.2 -0.9 -0.9 -0.5 -0.6 -0.3 -0.1 -0.1

Comments: *The GDP shares used for aggregation are based on the purchasing-power-parity (PPP) valuation of country GDPsGDP = Gross Domestic Product, HICP = Harmonized Index of Consumer Prices, CPI = Consumer Price Index, f = forecast


25/31


Friday Notes


Interest & Exchange Rate Forecasts (I)

INTEREST RATE FORECASTS (%, END QUARTER)2010/11 current end-Q4 end-Q1 end-Q2 end-Q3

Eurozone bond market (Bunds)

Refi rate 1.00 1.00 1.00 1.00 1.00

3M Euribor 1.05 1.00 1.05 1.10 1.20

2Y 1.02 0.80 0.80 1.10 1.40

5Y 1.74 1.30 1.35 1.70 2.03

10Y 2.55 2.25 2.25 2.50 2.75

30Y 3.02 2.75 2.80 3.05 3.10

10Y swap spread (in bp) 29 30 30 25 20

US Treasury Market

Fed funds target rate 0.13 0.25 0.25 0.25 0.25

3M USD Libor 0.29 0.35 0.35 0.35 0.35

2Y 0.36 0.45 0.50 0.80 0.90

5Y 1.21 1.33 1.35 1.70 1.88

10Y 2.65 2.50 2.40 2.70 2.85

30Y 4.03 3.50 3.35 3.50 3.60

10Y swap spread (in bp) 8 5 5 10 10

Japan

Target rate 0.10 0.10 0.10 0.10 0.10

3M JPY Libor 0.20 0.20 0.20 0.20 0.25

10Y JGB 0.94 0.90 0.90 1.00 1.00

United Kingdom

Repo rate 0.50 0.50 0.50 0.50 0.50

3M GBP Libor 0.74 0.75 0.75 0.75 0.90

10Y Gilt 3.13 2.80 2.70 2.90 3.10

Switzerland

3M CHF Libor mid target rate 0.25 0.25 0.50 0.75 1.00

3M CHF Libor 0.17 0.25 0.50 0.75 1.00

10Y Swissie 1.54 1.50 1.75 2.00 2.25

EXCHANGE RATE FORECASTS (END QUARTER)

2010/11 current end-Q4 end-Q1 end-Q2 end-Q3

EUR-USD 1.3854 1.43 1.39 1.42 1.44

EUR-JPY 111.68 119 118 125 130

EUR-GBP 0.8713 0.89 0.88 0.87 0.86

EUR-CHF 1.3685 1.33 1.30 1.33 1.36

USD-JPY 80.62 83 85 88 90

GBP-USD 1.5900 1.61 1.58 1.63 1.67

USD-CHF 0.9878 0.93 0.94 0.94 0.94

COMMODITY PRICE FORECASTS


Oil price (Brent, USD/b) 83.24 83 85 85 87

DJ commodity price index 295.01 290 290 300 310


26/31


Friday Notes


Interest & Exchange Rate Forecasts (II)

INTEREST RATE FORECASTS (%, END QUARTER)2010/11 current end-Q4 end-Q1 end-Q2 end-Q3

Sweden

Key rate 1.00 1.00 1.25 1.50 1.75

3M rate 1.53 1.30 1.40 1.65 2.15

10Y government bond yield 2.88 2.50 2.75 3.00 3.25

10Y spread to Bunds (in bp) 32 25 50 50 50

Norway

Key rate 2.00 2.25 2.50 2.75 3.00

3M rate 2.52 2.75 3.00 3.25 3.50



Canada

Key rate 1.00 1.00 1.00 1.25 1.503M rate 1.22 1.10 1.30 1.50 1.75



Australia

Key rate 3.50 4.50 4.75 4.75 5.00

3M rate 4.74 5.05 5.25 5.25 5.25



New Zealand

Key rate 3.00 3.25 3.25 3.50 3.75

3M rate 3.30 3.40 3.40 4.00 4.25



EXCHANGE RATE FORECASTS (END QUARTER)


EUR-SEK 9.4023 9.25 9.20 9.15 9.10

EUR-NOK 8.2269 8.05 7.95 7.90 7.85

EUR-CAD 1.4172 1.43 1.36 1.45 1.51

EUR-AUD 1.4234 1.43 1.43 1.49 1.50

EUR-NZD 1.8374 1.86 1.85 1.95 1.89

USD-SEK 6.7868 6.47 6.62 6.44 6.32

USD-NOK 5.9381 5.63 5.72 5.56 5.45

USD-CAD 1.0229 1.00 0.98 1.02 1.05

AUD-USD 0.9733 1.00 0.97 0.95 0.96

NZD-USD 0.7540 0.77 0.75 0.73 0.76

EUR-USD 1.3854 1.43 1.39 1.42 1.44


27/31


Friday Notes


Economic Event & Data Release CalendarTime Consensus

Date (ECB) Country Indicator Period CIB est. (Bloomberg) Prev. period

29 October to 05 November 2010

Fri, 29 Oct '10 14:30 US Employment cost index (in % qoq) Q3 0.5 0.5 0.5

14:30 US PCE def la tor ( in % qoq annua lized) Q3 1.0 1.0

14:30 US Real GDP ( in % qoq annual ized) Q3 1 .7 2.0 1.7

15:45 US Chicago Purchasing Managers Index Oct 58.0 60.4

15:55 US University of Michigan consumer confidence Nov 68.0 67.9

Mon, 01 Nov '10 9:30 SZ Manufacturing PMI (index) Oct 58.0 59.2 59.7

9:50 FR Manufacturing PMI (index) Oct 55.2

10:30 UK Manufactur ing PMI ( index) Oct 53.2 53.0 53.4

14:30 US PCE core inflation (in % mom) Sep 0.1 0.1

14:30 US Personal expend itures ( in % m-om) Sep 0.4 0.4

14:30 US Personal income (in % mom) Sep 0.3 0.5

16:00 JN BOJ to Release October 4-5 Board Meetings Minutes

16:00 US Construct ion spending ( in % mom) Sep -0.5 0.4

16:00 US ISM manufacturing ( index) Oct 53.0 54.0 54.4

Tue, 02 Nov '10 0:00 UK House price (HBOS, in % 3M yoy) Oct 0.6 2.6

9:45 IT Manufactur ing PMI ( index) Oct 52 .6 52.6

9:55 GE Manufactur ing PMI ( index) Oct 56 .1 56.1

10:00 EMU Manufactur ing PMI ( index) Oct 54 .1 54.1

20:00 IT Budget balance (EUR bn) Oct -12.7

Wed, 03 Nov '10 10:30 UK Services PMI (index) Oct 52.0 52.6 52.8

13:00 US MBA mortgage applications Oct 29 3.2

14:15 US ADP employment index (change in thousands mom) Oct 20 -39

16:00 US ISM Non-manufactur ing ( index) Oct 53.5 53.2

16:00 US New orders (in % mom) Sep 1.2 -0.5

17:15 SZ SNB's Jordan speaks in Zurich

20:15 US Federal funds target rate (in %) 0.25 0.25 0.25

23:00 US Auto sales (in mn) Oct 11.8 11.7

Thu, 04 Nov '10 3:30 JN BOJ Governor Shirakawa to Speak at Economic Forum in Tokyo9:15 SZ Consumer pr ice index ( in % yoy) Oct 0.3 0 .3 0.3

9:45 IT Services PMI (index) Oct 50.3 51.3

9:50 FR Services PMI (index) Oct 55.3

9:55 GE Services PMI (index) Oct 56.6 56.6

10:00 EMU Composite PMI (index) Oct 53.4 53.4

10:00 EMU Services PMI (index) Oct 53.2 53.2

11:00 EMU Producer pr ice index, PPI ( in % yoy) Sep 4.2 3.6

13:00 UK Bank of England repo rate (in %) 0.5 0.5 0.5

13:45 EMU ECB Announces Interest Rates 1.0 1.0 1.0

14:30 EMU Trichet Speaks at ECB Monthly News Conference

14:30 US Uni t labor costs ( in % qoq annua lized) Q3 0 .5 0.9 1.1

14:30 US Non-farm productivity (in % qoq annualized) Q3 0.0 0.8 -1.8

14:30 US Initial jobless claims (in thousands) Oct 29 434

18:00 SZ SNB's Danthine Speaks in Geneva

Fri, 05 Nov '10 0:00 JN Bank of Japan key rate (in %) 0.1

10:30 UK Producer price index, manuf. products (in % mom) Oct 0.2 0.3

11:00 EMU Retai l sales (volume, in % mom) Sep 0 .1 -0.4

12:00 GE Indust rial o rders ( in % mom) Sep -1.0 -0.2 3.4

14:30 US Fed's Hoenig Speaks to Realtors Convention in New Orleans

14:30 US Unemployment rate (in %) Oct 9.7 9.6 9.6

14:30 US Non-farm payrolls (change in thousands mom) Oct 50 60 -95

16:00 US Pending home sales (in % mom) Sep 3.0 4.3

19:00 US Bernanke Speaks with College Students in Florida

21:00 US Consumer credit (USD bn) Sep -3.0 -3.3

*Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted


28/31


Friday Notes


Economic Event & Data Release Calendar The week afterTime Consensus

Date (ECB) Country Indicator Period CIB est. (Bloomberg) Prev. period

08 November to 12 November 2010

Mon, 08 Nov '10 7:45 SZ Unemployment rate (in %) Oct 3.7

8:00 GE Exports (in % mom) Sep -0.4

10:30 GE Sentix growth expectations Nov 8.7852

12:00 GE Industrial production (in % mom) Sep 1.7

18:30 US Fed's Bullard to Speak to New York Analysts Society

19:00 US Fed's Fisher Speaks in San Antonio

21:30 US Fed's Warsh Speaks at Sifma Conference in New York

Tue, 09 Nov '10 0:00 GE EU President Van Rompuy Gives Speech in Berlin

1:01 UK House price (RI

unicredit - friday notes 29.9.10

Documents