PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

27 May 2010

1 Lenders Are Becoming More Reluctant To Lend To

European Banks But Likely To Be Manageable

2 US Home Sales And Durable Goods New Orders Picked

Up In April

3 Singapore’s Industrial Production Picked Up In April

Tracking The World Economy...

Today’s Highlight

Lenders Are Becoming More Reluctant To Lend To European Banks But Likely To Be Manageable

Lenders to the major European banks are becoming increasingly cautious, demanding higher rates for shorter- period
loans, risking a repeat of the credit crunch that gripped credit markets in 2008 following the collapse of Lehman Brothers,
if left uncheck. The rate banks paid for 3-month US dollar loans climbed for the 12th consecutive day, as concerns over
Europe’s sovereign debt crisis is making banks wary of lending to each other. The London interbank offered rate, or
Libor, for such loans advanced to 0.538%, the highest level since July 6. Indeed, Spain’s Banco Bilbao Vizcaya Argentaria
(BBVA) has been unable to renew roughly US$1bn of short-term funding in the US commercial-paper market since the
beginning of the month. Also, Spain’s two largest banks, Banco Santander and BBVA, recently boosted the amount of
funds they parked it overnight with the European Central Bank (ECB), indicating that they preferred risk-free return rather
than lend it to competitors. Similarly, the US dollar Libor-Overnight Indexed Swaps (OIS) spread, a gauge of banks’
reluctance to lend rose to 31.5 basis points on 26 April, from 8.6 basis points at end-December 2009. Nevertheless,
it was still far lower than the peak of 365.9 basis points spread recorded on 10 October 2008 during the US credit crisis.
The OIS tracks the expected path of the Fed’s benchmark Federal funds rate. Despite the deterioration in confidence,
it has yet to reach a panicky stage, as indicated by the US dollar Libor-OIS spread. Indeed, the Euroland governments
could provide some form of guarantees to calm down the situation like what the US Treasury did during the credit crisis.
Also, the US Federal Reserve could provide help by lowering the interest rate it charges on US dollar loans it makes
through the ECB to US dollar-starved commercial banks in Europe.

The US Economy

New And Existing Home Sales Grew In April

◆ US new home sales rose by 14.8% mom to an annual pace of 504,000 units in April, albeit at a more
moderate pace compared with +29.9% in March. This was the second month of increase in six months, as buyers
were attracted by lower prices and they rushed to qualify for a government tax incentive. Recall that the
government offered homebuyer incentive worth as much as US$8,000 for contracts closed by the end of June and
the incentive is broadened to include more affluent buyers. A gradual improvement in job market also helped to
boost sales. Meanwhile, median prices of new homes fell by 9.7% mom in April, after remaining unchanged in
March, indicating that developers cut prices to attract buyers. Compared to a year ago, median prices of new
homes fell by 9.5% yoy in April, the sharpest drop in nine months and compared with +7.1% in March. Yoy, new
home sales strengthened to 46.1% in April, from +32.2% in March. This was the third month of increase in four

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 27 May 2010

months, suggesting that the housing sector is improving, albeit uneven. The pick-up in new home sales pushed
down the supply of new homes for sales to 5.0 months of stocks in April, from 6.2 months of stocks in March and
a high of 8.2 months of stocks in February.

◆ US existing home sales grew at a faster pace of 7.6% mom or at an annual rate of 5.77 million units
in April, compared with +7.0% in March. This was the second month of increase in five months, as buyers took
advantage of a government tax credit incentive. Yoy, the existing home sales grew at a stronger pace of 22.8%
in April, compared with +16.3% in March. Despite the pick-up in existing home sales, the supply of new homes
for sales rose to 8.4 months of stocks in April, from 8.1 months of stocks in March. Meanwhile, the median existing
home prices inched up by 2.1% mom in April, after rising by 3.0% in March. Yoy, the median prices of existing
homes rose by 4.0%, a rebound from -0.2% during the same period. As a whole, the pick-up in both new and
existing home sales in March-April suggests that the government’s tax incentive has yielded positive results and
the government is hoping that a recovery in economy and employment will help sustain housing demand in 2H
2010 when the tax incentive lapses.

Durable Goods New Orders Picked Up Mom In April

◆ US durable goods new orders, items meant to last at least three years, rose by 2.9% mom in April, after
remaining unchanged in March and compared with +0.5% in February, mainly driven by a pick-up in orders for
non-defence aircraft (which is lumpy and often volatile). A slowdown in new orders for fabricated metals,
computers & electronic products and automobiles as well as declines in orders for primary metals, machinery and
electrical equipment, however, offset part of the gain. Excluding transportation, durable goods new orders contracted
by 1.0% mom in April, after rising by 4.8% in March and +2.1% in February. Similarly, new orders for capital
goods, excluding defence goods and aircraft, fell by 2.4% mom in April, compared with +6.5% in March,
suggesting that businesses have turned cautious in spending. Yoy, total new orders for durable goods
strengthened to 21.6% in April, the fourth consecutive month of increase and after picking up to 16.3% in March.
New orders for capital goods, excluding defence goods and aircraft, strengthened to 23.5% yoy in April, the fifth
consecutive month of increase and from +18.7% in March, suggesting that business spending is improving. As
a whole, April’s durable goods new orders suggest that manufacturing activities are likely to improve in the
months ahead.

Asian Economies

Singapore’s Industrial Production Picked Up In April

◆ Singapore’s industrial production strengthened to 51.0% yoy in April, from +43.0% in March, after
slowing down to +17.9% in February, as factories resumed their production after the festive break. This was the
fifth straight month of growth due partly to a low base effect. Stronger growth was reflected in a pick-up in the
production of biomedical products, which grew at a faster pace of 95.8% yoy in April, compared with +66.4% in
March, on account of a pick-up in the production of pharmaceutical products. This was, however, offset partially
by a slowdown in the production of electronic products, which eased to 60.0% yoy in April, but remained strong
compared with +76.9% in March. The moderation was due to a slowdown in the production of semiconductors,
computer peripherals, data storage products, information & communication and consumer electronic products.
Mom, industrial production rebounded to increase at a seasonally adjusted rate of 24.3% in April, from -
0.8% in March. This suggests that Singapore’s economy will continue to expand in the 2Q, after at an annualised
rate of +38.6% in the 1Q.

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