Germany - No Truly Self-Sustaining Upswing: Upwards

27 May 2011 Economics & FI/FX Research
Friday Notes
Contents
Germany – no truly self-sustaining upswing Research Notes _____________________________ 2
Data Monitor_______________________________ 13
FI Outlook_________________________________ 20
■ Upwards. Germany’s economy posted exceptionally strong growth at the FX Outlook ________________________________ 21
beginning of the year with 1½% qoq. It has finally reached its pre-crisis CIB View _________________________________ 24
GDP level again (see chart). For 2011 on average, we have therefore revised CIB Forecasts _____________________________ 25
Calendar__________________________________ 28
up our GDP forecast to 3½% from 2¾%.
■ Broad-based. Along with the weather-related catch-up process in the CIB MACRO FORECASTS
construction sector, final domestic demand is increasingly contributing to yoy (%) 2010 2011 2012
growth. The upswing has become much more robust and will continue! GDP EMU 1.7 2.1 1.7
CPI EMU 1.6 2.7 2.0
■ Question marks. This notwithstanding, we have doubts about a truly
self-sustaining recovery. A complete decoupling of the European growth GDP Germany 3.5 3.5 2.0
locomotive from global economic developments is unlikely. CPI Germany 1.1 2.2 1.8
■ Consumption. Our analysis of truly self-sustaining upswings (1975-1980 & GDP Italy 1.2 1.1 1.2
1982-1989) shows that they are driven primarily by private consumption. CPI Italy 1.5 2.6 2.0
Despite the tailwind from the labor market, German consumers' willingness GDP US 2.9 2.5 2.7
to spend will likely be curtailed this time around. CPI US 1.6 3.2 2.7
■ Differences. The obstacles are rather moderate wage growth, the loss of CIB FI/FX FORECASTS
purchasing power due to higher energy and food prices as well as the fact 2011/12 30-Jun 31-Sep 31-Dec 31-Mar
that a strong decline in the personal savings ratio is not in the pipeline EMU 3M (%) 1.50 1.75 2.10 2.30
(as was the case during the periods mentioned above; page 2-6). EMU 10Y (%) 3.25 3.50 3.65 3.70
■ Global economy. Germany therefore remains dependent on the global US 3M (%) 0.35 0.35 0.45 0.55
economy, which is, however, weakening over the medium term. This will US 10Y (%) 3.45 3.70 4.00 4.15
dampen German GDP growth – albeit without stalling the upswing
EUR-USD 1.50 1.53 1.55 1.52
("soft patch") since there are still no signs of typical late-cycle tensions.
USD-JPY 81 82 83 84
■ Further topics: Oil Price 110 105 105 110

– Italy’s rating outlook – a warning shot for the government (page 7).
– Switzerland: Strong CHF gives central bank room to breathe (page 9).
– Data outlook: Jobs report – strong in Germany, muted in the US (page 13).
– Market outlook: EUR-USD pretty stable (page 21).
GROWTH LOCOMOTIVE GERMANY – FINANCIAL CRISIS OVERCOME

1Q11 real GDP figure compared to previous peak (1Q08=0)
1
+0.1%
0 Global Head of Research & Chief Strategist
Thorsten Weinelt, CFA (UniCredit Bank)
-1 +49 89 378-15110
-0.8% thorsten.weinelt@unicreditgroup.de
-2
-3
Germany Editor
-4.0%
-4 Nikolaus Keis (UniCredit Bank)
France +49 89 378-12560
-5 nikolaus.keis@unicreditgroup.de
Italy -5.1%
-6 Editorial deadline
Spain Friday, 27. May., 12:00H
-7
-8 Bloomberg
1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 UCGR
Internet
Source: Datastream, UniCredit Research www.research.unicreditgroup.eu
UniCredit Research page 1 See last pages for disclaimer.

Friday Notes
IN THE PASSING LANE

Germany: The long and winding
road to a sustainable recovery 1Q11 real GDP figure compared to previous peak (Q1 2008=0), in %
■ The rise of 1½% qoq in real GDP at the start of the year is 1
+0.1%
a combination of special circumstances and sound 0
fundamentals. Besides the weather-related catching-up -1

-0.8%
process in the construction sector, both the further rise in -2
private consumption & investment activity catch the eye. -3
Germany
-4.0%
-4
■ Is Germany now heading towards a fully self-sustaining -5
France
upswing driven by domestic demand? To answer this Italy -5.1%

-6
question, we examined recoveries over the last 40 years. Spain
-7
Accordingly, there were two recovery phases that deserve
-8
the label 'sustainable' in our view: from 1975 to 1980 and 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11
from 1982 to 1989.
Source: Feri, UniCredit Research
■ Looking at composition of growth in the 1970s and 1980s
shows that the willingness of private households to spend
money will ultimately determine sustainability. Private The strong rise of 1.5% in 1Q11 is a combination of special
consumer expenditures contributed more than half to total circumstances and sound fundamentals. We calculate that
GDP growth in each cycle. the weather-related catching-up process in the construction
sector boosted GDP growth by ½ percentage points. In other
■ Despite substantial tailwind via job creation, we think that words, GDP growth would (still) have been 1.0% instead of 1.5%.
the German consumers' willingness to spend will be curtailed Besides special circumstances, the further broadening of the
this time. There are three major differences to the recoveries upswing catches the eye. Not only did net exports contribute
in the 1970s and the 1980s. First, strong increases in real to overall growth (+0.5 percentage points), but internal demand
wages are unlikely. Second, energy and food prices are did as well, even if one takes the special circumstances into
denting purchasing power. Third, a strong decline in the account (cf. chart). Investment in machinery & equipment
personal savings ratio is not in the pipeline. rose strongly again despite the end of tax deductions in 4Q10,
contributing 0.3 percentage points to growth. This is strong
■ Germany is no longer on the drip feed of the global economy. empirical evidence that the investment cycle kept on rolling
The recovery has become more robust. However, a at the start of 2011. It is therefore a done deal that the build-up
completely self-sustaining upswing independent of the of new jobs will continue throughout the rest of this year, as
well-being of the global economy is not in the cards. We companies have been expanding their capacities.
expect a moderate export-driven slowdown to occur at the
turn of the year. UPSWING GETTING BROADER
The sustainability question Growth contribution by GDP components (1Q11), in percentage points
As already signaled by the preliminary estimate published a

Inventories
couple of days ago, the German economy grew a strong
1½% in 1Q11 compared to 4Q10 (+4.9% yoy on a working-day Government
consumption
adjusted basis). Accordingly, real GDP slightly exceeded its
pre-crisis level reached three years ago. This stands in stark Private consumption
contrast to other major European countries like Spain and Italy
Investment in
(cf. chart). Given the better-than-expected start into 2011, we machinery
had revised upwards our growth forecast for Germany from
Net exports
2.8% to 3½% for this year as a whole (2010: +3.6%). Some
number crunching shows how strongly the yearly average Construction
figure is influenced by the excellent 1Q11 figure and the
statistical overhang. Even if real GDP remained flat on a -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8
quarterly basis in the further course of this year (which is of

course extremely unlikely), the German economy would grow Source: FSO, UniCredit Research
2.7% in 2011.

Friday Notes
Private consumption also contributed to GDP growth (+0.2 Furthermore, the current recovery has already turned out to
percentage points), increasing for the fifth consecutive time be stronger than the (short-lived) upswings in the 1990s
on a quarterly basis. The last time this occurred was (cf. chart). However, caveats should be taken into account.
in 1996/97. Furthermore, the reading for 4Q10 was revised The recession after the Lehman collapse was brutal and
upwards from +0.2% to +0.6%. The renewed increase in unprecedented. The latest GDP rebound could therefore
consumer expenditures at the start of 2011 indicates that the partly be a yo-yo effect, i.e. "what goes down must come up".
positive impulses stemming from the labor market outweigh For instance, companies cut their inventories massively during
the loss in purchasing power caused by rising energy and the recession before restocking them again. In the last 40 years,
food prices. We stick to our view that private consumption there were two long-lasting and strong recoveries which deserve
will rise 2% in 2011 as a whole and hence at the fastest pace the label 'sustainable', in our view. From 1982 to 1989, the
since 2000. The current "rebalancing" does not only make German economy managed to grow comparatively steadily
Germany less dependent on the well-being of the global without a recession taking place.1 From peak to trough, the
economy, but also raises the hope that a further and cumulated increase in real GDP was about 20% (cf. chart).
sustainable increase in internal demand will transform Germany From 1975 to 1980, the total rise in economic activity was
into a long-lasting growth locomotive for other European comparably strong with nearly 19%. These two recovery
countries. To answer the question about the sustainability of phases served as a benchmark for comparison in the following.
the current recovery, we pursued a two-step approach as follows.
First, we examined economic upswings in Germany over the (II) HISTORICAL RECOVERIES
last 40 years and identified the ingredients of long-lasting
recoveries; and second, we examined if, and to what extent, Total real GDP increase during past recoveries, in %
the pre-conditions for sustainability are currently met.
1993-95
Lessons from the past or:
1996-98
Consumer is king
1999-01
In order to have an historical yardstick, we calculated how
the current recovery compares with historical ones over the 2009-11
last 40 years. As can be seen in our following chart, real 2005-08

GDP rose about 7% after hitting its recessionary trough
8 quarters ago in 1Q09. This is the second-highest increase 1975-80
at this stage of the business cycle. Only in the 1970s, after the 1982-89
first oil price shock, had economic activity been even 9% higher.
0 5 10 15 20 25
(I) HISTORICAL RECOVERIES

In % (real GDP loss from peak to trough; real GDP increase after 8
quarters starting from trough) What are the economic ingredients for making an upswing
long-lasting? Looking at the composition of growth in the
10
1970s and 1980s gives an unambiguous answer: the consumer
9 GDP loss
will ultimately decide. According to our calculations, private
8 GDP increase (8 quarters after hitting trough)
consumer expenditures contributed more than half to GDP
7
growth in each cycle (cf. chart on the next page). From 1975
6
to 1980, growth contribution was 11½ percentage points;
5
from 1982 to 1989, it was 10 percentage points. In contrast,
4
the importance of net exports and investment activity were,
3
on average, comparatively subdued. In the case of the recovery
2
in the 1970s, growth contribution from net exports was even
1
virtually zero.
0
1974-77 1980-84 1992-95 1995-98 2002-05 2008-11
1
Recessions are defined as at least two consecutive quarters with shrinking
real GDP. The recovery period from 1982 to 1989 contains single quarters in
which real GDP declined. However, special circumstances – such as weather-
related drops in construction activity – played an important role here.

Friday Notes
Of course, this does not mean that the global economy Inside the current recovery
played no role in triggering and supporting past German
upswings in general. At least in the beginning, exports are Since the start of the upswing in 2Q09, the recovery has become
crucial before internal demand takes over the role of "growth increasingly broader. Besides net exports, internal demand
locomotive". The "classic" business cycle in Germany consists has picked up as well. However, growth contribution from
of three – sometimes overlapping – stages: consumer expenditures has still been rather subdued in
comparison to net exports and investment activity (cf. chart
– An upswing in the global economy increases German exports. above). Since 2Q09, net exports contributed 3.6 percentage
The trade balance widens, as internal demand remains points to cumulated GDP growth of 7¼% since hitting its
comparatively sluggish in the beginning. recessionary trough (investment in machinery & equipment:
+1½pp). In contrast, a still comparatively meager plus of
– The impulses from abroad increasingly carry over into 0.8pp stemmed from private consumption. As explained
investment activity. Given rising capacity utilization, above, such a pattern is not unusual, given the various
companies become more optimistic and spend additional stages of the German business cycle. Rather, the decisive
money on machinery and equipment. In the beginning, a question is: if, and to what extent, consumer spending will
replacement scheme typically takes place, i.e. old accelerate in the further course of this and next year? In the
machinery is replaced by new. If the positive impulses following, this question will be discussed in more detail by
from the global economy continue over a longer period of working through the three transmission channels again. A
time, companies then start expanding their capacities and special focus will be on differences between the past two
employ additional people. Activity in the commercial sustainable cycles and the current one. In our view, the
construction sector kicks in. impulses from the global economy will remain brisk over the next
– The additional number of jobs leads to more optimism few months. However, in line with leading indicators, a lessening
among private households and rising consumer expenditures. of momentum at the turn of the year 2011/12 is in the pipeline.
Hence, in the end the consumer is king. By opening his The forward-looking Ifo business expectations component passed
wallet, the consumer determines whether the recovery its peak recently. The OECD Leading Indicators for various major
will be self-sustaining and long-lasting. Rising consumer countries also point to softening growth dynamics in the
expenditures then become self-fueling, triggering a positive medium-term. This should be especially true for emerging
cycle consisting of higher spending, further rising GDP, markets, given substantial inflation pressure, a related loss in
declining unemployment and renewed spending activity. purchasing power and interest rate hikes increasingly feeding
In addition, residential construction gathers momentum. through into the real economy. In the last three years, German
exporters have become more and more dependent on Emerging
Asia, especially China. Nearly 11% of German exports were
LESSONS FROM THE PAST
shipped to Emerging Asia in 1Q11 (China & HK: 6.6%). Hence,
impulses from exports carrying over into investment activity will
Composition of GDP growth during recoveries, in percentage points
continue, albeit at a lower pace from the turn of the year onwards.
25
The good news is that capacity utilization is currently higher
Rest than compared to the two cycles in the 1970s and 1980s.
20 Net exports
Construction CAPACITY UITILIZATION RISING STRONGER THAN IN THE PAST

15
Investment in machinery
In the manufacturing sector, in %
Consumer expenditures
10 86
Since 3Q 1975
84
5 Since 4Q 1982
82
Since 2Q 2009
0 80
1982-89 1975-80 Since Q2 2009
78
Strikes 35-hour week
76
74
72
70
1Q 2Q 3Q 4Q 5Q 6Q 7Q 8Q 9Q 10Q 11Q 12Q

Friday Notes
Hence, although plunging to historically low levels after the However, given the further strong and sustained rises in
Lehman collapse (cf. chart above), companies have made up companies' hiring plans across sectors, we expect permanent
substantial ground in the last few quarters. This in turn bodes employment to markedly increase as well (cf. chart). In
well for additional job creation. Furthermore, employment is manufacturing, construction and retailing, hiring plans are
reacting more strongly in the current recovery than in previous currently two standard deviations above their long-term average.
ones. The number of dependent employees has risen 1.2%
since the start of the upswing, whereas job creation in the COMPANIES' HIRING PLANS RISING
1970s (+0.7%) and 1980s (+0.1%) was more subdued at this
stage of the business cycle. Employment expectations (standardized, 3-month moving average)
3
THE HISTORICAL PERSPECTIVE AGAIN
Manufacturing
Starting Real dispos- Oil price (%; 2 Construction
point of Employment Savings able income domestic Wholesale
recovery (%)* ratio (pp)* (%)* currency)* 1 Retail
3Q1975 +0.7 -4.1 +4.4 +19
4Q1982 +0.1 -0.5 +3.0 -0.5 0
2Q2009 +1.2 +0.1 +1.8** +122
-1
*8 quarters after real GDP hitting its trough; **Estimate
Source: UniCredit Research -2
-3
Germany is now reaping the rewards of structural reforms 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
implemented by former Chancellor Schroeder between 2003

and 2005. Thanks to the liberalization of temporary work, Source: Feri, UniCredit Research
companies are far more inclined to expand their workforce
now than they were in past upswings. To quantify: Dependent Although employment has been picking up strongly in recent
employment rose by roughly 200,000 in 2010 with temporary months, it would be premature to raise the green flag for
employment adding 165,000 alone (cf. chart). In the further consumer expenditures. We think that three factors are
course of this year, the total number of temporary workers dampening further increases in consumer spending and
will probably even reach a new record high, exceeding the preventing a fully self-sustained recovery à la 1970s or 1980s.
one million mark. First, given cost pressure from globalization, strong increases in
real wages are unlikely. For this year, we expect total wages
HIGHER INVESTMENT ACTIVITY TRANSLATING INTO MORE JOBS adjusted for consumer price variations (including one-off
payments and the higher number of working hours) to
Change in employment compared to previous year, in '000 rise only ½% at best. During the two recoveries in the 1970s
and the 1980s, things were different. Real disposable income
800 had already jumped at this stage of the business cycle, posting
600 rises of 3% to 4½% thanks to higher wages (cf. table above),
despite less dynamic employment increases. Second, "perceived
400
inflation" will remain at elevated levels or even increase further
200 (in a risk scenario) due to higher energy and food prices.2
Expenditures on these items are usually felt more strongly
0
than reflected in the official consumer price basket. According to
-200 our calculations, perceived inflation last month was 3.9% yoy
compared to +2.4% in official consumer prices. Again, this is
-400
Temporary employment Total dependent employment a marked difference to the two upswings in the 1970s and 1980s.
-600 At that time, the oil price shocks had already occurred and
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
were a phenomenon of the past. For instance, in the 1980s
recovery, the oil price in domestic currency remained
Source: Feri, BZA, UniCredit Research
unchanged after 8 quarters (cf. table). This compares to a
rise of more than 120% during the recent upswing. Third, a
strong decline in the personal savings ratio is unlikely to be
repeated any time soon. After the first oil price shock in the
2
Cf. A. Rees, The return of (perceived) inflation, Friday Notes, 28 January 2011.

Friday Notes
1970s, the savings ratio fell rapidly by more than four percentage (I) UPSIDE RISK
points within just two years. Recently, however, the increased
House prices adjusted for variations in consumer prices
life expectancy and the low birth rate have increased Germans'
(indices year 1995=100)
awareness of the need for private old-age provision. This will
keep the savings ratio structurally high despite the strong 100
improvement on the labor market. 95
90
Bottom line: Germany is no longer on the drip feed of the 85
global economy. The recovery has undoubtedly become 80
broader and hence more robust. Besides the pick-up in 75
overall investment activity, private consumer spending has 70 Western Germany
been rising as well. However, a completely self-sustaining 65 Eastern Germany
recovery independent of the well-being of the global economy is 60
not in the cards. The German consumer will not take off as 55
he did in the 1970s and 1980s. At the turn of the year, signs 50
of an export-driven slowdown will increase. We expect GDP 1970 1975 1980 1985 1990 1995 2000 2005 2010
growth to be 2% in 2012 after 3½% this year. Please keep in

mind that the statistical overhang alone will be about ½ a Source: UniCredit Research
percentage point lower in 2012 than compared to this year,
making the slowdown look more dramatic than it will actually be.
The second upside risk is a turnaround in net immigration. In
the last fifteen years, net immigration to Germany shrank
Let's talk about (upside) risks substantially and even became slightly negative in 2009 (last
The downside risks to our scenario are obvious and shall available data; cf. chart). According to the Cologne Institute
therefore only be discussed briefly. A stronger-than-expected for Economic Research, the new immigration rules, which
global slowdown (especially in Emerging Asia) and rapidly became effective at the beginning of May 2011, could mark a
rising commodity prices would put the German economy under turning point here. Given the new freedom of movement, it is
enormous pressure. In a worst-case scenario, the transmission expected that net immigration from EU member states in
from exports to investment activity and consumer expenditures CEE adds 800,000 to the German workforce by year-end 2012.
would be brutally interrupted, thereby endangering the whole Other think tanks derived a more conservative forecast with
recovery process. up to nearly 140,000 each year. If immigrants are able to get
a job, this could support private consumer expenditures in
What about positive surprises, especially regarding internal Germany, although remittances to their home country should
demand? Such thoughts may be tempting, as the German be taken into account.
economy has surprised steadily on the upside since the start
of the recovery two years ago. We identified two major (II) UPSIDE RISK (NET IMMIGRATION, IN '000)
sources of positive surprises. The first is the German
residential property market, which has been in the doldrums
900
since the mid-1990s (cf. chart). Adjusted for variations in the 800
CPI, house prices fell nearly 20% in Western Germany and 700
even 35% in Eastern Germany. One trigger for a turnaround 600
could be low mortgage rates. Another, probably more important 500

Net immigration
400
reason, may be the recent flaring up of Mr. Average Citizen's
300
inflation angst. Rising government debt and the liquidity support 200
by the ECB has troubled some German private households, 100
making the purchase of a house or a flat look more attractive. 0
Interestingly, the two self-sustained recoveries in the 1970s -100

-200
and 1980s were each followed by comparatively strong rises
-300
in residential property prices. In such a scenario, internal 1975 1980 1985 1990 1995 2000 2005
demand would be fostered via two additional channels: rising
activity in the construction sector and positive wealth effects Source: FSO, UniCredit Research
additionally supporting consumer expenditures.
Andreas Rees (UniCredit Bank)
+49 89 378-12576
andreas.rees@unicreditgroup.de

Friday Notes
Italy: S&P’s negative outlook – This led to Italy posting a deficit-to-GDP ratio of 4.6% at the
end of 2010 vs. 6.0% in the eurozone, and the outperformance is
a wake-up call for the government likely to continue also this year.
■ Last weekend, S&P revised Italy’s rating outlook from stable

DEFICIT: ITALY OUTPERFORMS THE EUROZONE
to negative. The rating agency sees a one-in-three chance
that the rating could be cut within the next 24 months. Budget balance, in % of GDP
■ The move reflects “the increased downside risks to the 0

government's debt-reduction plan because of potentially
-1
weaker-than-expected economic growth and possible political
gridlock that could contribute to fiscal slippage." -2
-3
■ A rating downgrade is not our core scenario. We think that
S&P’s move should be interpreted mostly as a wake-up call for -4
the government, whose efforts in terms of growth-enhancing -5 Italy EMU

measures have clearly weakened in recent months.
-6
S&P lowers the rating outlook -7

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Last weekend, S&P put Italy on negative outlook while
affirming the current A+ rating. The negative outlook reflects Source: Eurostat, UniCredit Research
S&P’s "view of the increased downside risks to the Italian
government's debt-reduction plan because of potentially
weaker-than-expected economic growth and possible political The main challenge is growth
gridlock that could contribute to fiscal slippage." Up until last Having said this, we have repeatedly warned that the main
weekend, Italy’s sovereign rating had shown remarkable challenge going forward is the disappointingly weak growth
resilience: despite the debt-to-GDP ratio hovering around performance, which remains the main threat to the debt
120% and a sluggish growth performance, sound reduction process. S&P now sees a higher probability that
macroeconomic fundamentals had shielded Italy from the structurally subdued growth will undermine the fiscal consolidation
negative rating drift that involved the whole periphery. effort. Note, however, that rating agencies base their current
rating also on the assumption that the debt-to-GDP ratio will
RATING SITUATION UP UNTIL LAST WEEKEND start declining already next year, something we expect to
happen even if we allow for some slippage with respect to
S&P Sovereign rating
the government fiscal forecasts (deficit at 3.9% in 2011
End-2007 Up to last weekend
Rating Outlook Rating Outlook
and 2.7% in 2012). While implementation risks to the
Italy A+ Stable A+ Stable
government’s consolidation plans cannot be ruled out, par-
Spain AAA Stable AA Stable ticularly after the recent political gridlock, the government’s
Greece A Stable BB- Stable commitment to fiscal consolidation remains in place and fiscal
Portugal AA- Stable BBB- Stable performance is on track so far. In the first four months of the
Ireland AAA Stable BBB+ Negative year, the state-sector borrowing requirement (SSBR)
Source: S&P, UniCredit Research amounted to EUR 40.1bn, a 5% reduction vs. the same period
in the previous year, despite the disbursement of two
In particular: tranches to Greece (in January and in March). There are
rumors that – in order to send a reassuring signal to the
1. Italy enjoys a much more balanced growth model compared to market – the government is planning to announce, next
other peripheral countries, with a relatively low level of private month already, the EUR 35-40bn needed to meet the 2013-2014
sector indebtedness, which implies virtually no need for private deficit target.
sector deleveraging; 2. Italy has a sound banking sector and
the government has no contingent liabilities related to it; Bottom line: A rating downgrade is not our core scenario. We
3. The government adopted a very cautious handling of public think that S&P’s move should be interpreted mostly as a
finances during the financial crisis: in the aftermath of the wake-up call for the government, whose efforts in terms of
Lehman bankruptcy, discretionary expansionary measures growth-enhancing measures have clearly weakened in
amounted only to a few tenths of a percent of GDP. recent months.

Friday Notes
The recently published National Program of Reforms provides

only a preliminary framework for the government’s agenda
on growth-boosting measures, and S&P would have probably
preferred more concrete measures, including a stronger focus on
liberalization. Moreover, we see some similarities between the
negative outlook in Italy and that in the US, probably an indication
that S&P strives to be more pre-emptive in its assessment
(and avoid being blamed for falling behind the curve). Early
this week, Moody’s reiterated its stable outlook.
Market impact
The BTP/Bund spread has been under pressure in recent
weeks, although more moderately than in other peripheral
countries as, so far, Italy has been the only country in the
periphery group whose rating had remained unscathed during
the crisis. The yield spread between BTP Sep 21 and DBR
Jul 21 is currently 182bp, up about 12bp from Friday. We
regard this reaction as mainly emotional rather than driven by
fundamentals. As a reference, the BTP/Bund spread touched
200bp in Nov 10 and Jan 11, during periods of particularly
high market tensions. We do not expect pressure on Italy to
be long-lasting: the negative outlook does not necessarily
imply a downgrade, and S&P sees a one-in-three chance
that the rating could be lowered within the next 24 months.
Chiara Corsa (UniCredit Bank Milan)

+39 02 8862 2209
chiara.corsa@unicredit.eu
Luca Cazzulani (UniCredit Bank Milan)

+39 02 8862 0640
luca.cazzulani@unicredit.eu

Friday Notes
Switzerland: Imported deflation In combination with strong growth, inflation rates have risen
most strongly there (see chart) and are already compelling
gives SNB breathing space the central banks to implement decisive tightening measures.
In the industrialized countries, the rise in inflation thus far has
■ Commodity prices remain at very high levels and are exerting been more moderate overall. But here, too, inflation expectations
upward pressure on consumer prices around the globe. are pointing clearly to the upside. Hence, despite the unresolved
This holds true primarily for emerging markets. In Switzerland, problems in the EMU debt-crisis countries, the ECB initiated
in contrast, the strong Swiss franc is in some cases even its tightening cycle in April.
resulting in pronounced price declines.
CONSUMER PRICE INFLATION, IN % YOY
■ Although price expectations of Swiss wholesalers are now
also pointing north, in 2011 as a whole, inflation looks set
to edge steadily but only moderately higher – also because 12 Emerging markets
the wage dynamic remains under control. 10
Industrialized countries
Switzerland
■ The greatest upside risk via a strong depreciation of the 8
CHF remains small. The currency’s safe-haven status has 6

likely strengthened on a lasting basis. EUR-CHF recently
4
hit a new record low, despite the ECB interest rate reversal.
Hence, the SNB will likely remain on hold in June. 2
0
Commodity prices keep inflation
-2
pressure high around the globe Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Growth fears for the global economy have recently triggered

a substantial correction in commodity prices. However, this
does not mean that the all-clear can be sounded on the inflation
front. Commodity prices remain at very high levels (see chart). Swiss prices relatively unimpressed
The Swiss National Bank (SNB), in contrast, has remained
COMMODITY PRICE INDICES (JAN-2000=100)
on hold thus far. Even though inflation doubled temporarily
in March from 0.5% to 1.0%, the spike was due to a change
600 in the way apparel prices are recorded. Instead of six times a
Agricultural commodities year so far, prices have been recorded on a monthly basis
500 Industrial commodities since the beginning of this year (see chart).
Crude oil
400
CPI APPAREL PRICES, IN % MOM

300
200 Switch to monthly recording

20
100 15
10
0
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 5
0
Source: Feri, UniCredit Research -5
-10
Even without further price spikes, the steep upward trend in -15
commodity prices – triggered by the global economic
-20
recovery – will probably result in tangible, indirect price Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
increases – with a time lag in the further course of the year.
As a result, inflationary pressure from commodity markets Source: BfS, UniCredit Research
remains high around the globe. This is impacting emerging
markets in particular, where the share of commodity costs in
end-consumer prices is the highest.

Friday Notes
After the winter sale, this has resulted in a considerable distortion Prices for capital goods and intermediates (capital goods)
of the annual headline rate. April then brought the technical have also declined appreciably. This is helping companies in
counter-reaction. Headline inflation even fell to 0.3%. The the manufacturing sector to cushion some of the negative
change in the way apparel prices are recorded can still result competitive effects because of the firm Swiss franc. Moreover,
in heightened volatility in consumer prices until the end of food prices have fallen, despite new record high prices for
the year. agro commodities.
Apart from that, inflation in Switzerland remains rather low in Wage dynamic under control
an international comparison, although it is one of a small
number of industrialized countries reporting a V-shaped economic Alongside the currency-induced lower direct and indirect
recovery after the financial crisis. In the eurozone, inflation commodity price effects, the Swiss wage dynamic also remains
was running at 2.8% in April. And in the economically-ailing under control. The temporary economic slump triggered by
United Kingdom, the inflation rate hit a very high 4.5%. the financial crisis resulted in very moderate wage growth of
+0.8% for 2010, only marginally above the inflation rate. With
the strong improvement in the economic situation, tangibly
Imported deflation higher wage increases were agreed for this year, but the
Alongside tax hikes to consolidate public finances in the settlements in the individual sectors are in most cases in the
United Kingdom, the decisive factor behind the enormous range of 2% to 3%. From the wage side, we therefore see no
divergence in inflation dynamic is the development of danger of tangible second-round effects in 2011.
exchange rates. While sterling has weakened considerably
against the commodity currency USD since the beginning of NOMINAL WAGES, IN % YOY
the financial market crisis, the Swiss currency has appreciated
strongly in the same timeframe. As a result, the British are
having a hard time with considerable imported inflation. In 7.0
Switzerland, in contrast, import costs in domestic currency 6.0

are declining. The eurozone is somewhere in the middle. A
5.0
comparison of the detailed data on import prices for various
goods between Switzerland and Germany underscores the 4.0
different effects. In the first quarter, import prices for Switzerland
3.0
were overall only moderately above the pre-year level, while
in Germany they have risen massively (see chart). 2.0
1.0
IMPORT PRICES, IN % YOY (1Q11)

0.0
1990 1993 1996 1999 2002 2005 2008 2011p
40
35 Germany Source: BfS; SGB, UniCredit Research
30 Switzerland
25
20 Steady, but only moderate rise
15
in inflation
10
5 Overall, the inflation situation remains relatively relaxed at
0 the moment. Accordingly, the SNB inflation projections,
-5
which do not show a disturbing upward trend in the short
-10
Energy Total Food Capital goods Durable term, do not come as a surprise – despite the assumption of
consumer unchanged low interest rates for the projection horizon. In
goods
the current projections released in March, the 2% mark is not
expected to be exceeded until the second half of 2013
Source: Thomson Datastream, UniCredit Research
(see chart next page). The persistently strong currency has
clearly delayed the projected upward trend of the inflation
While import prices for energy have also risen strongly yoy in path compared to the projection released mid-2010. The
Switzerland, the rate of price increase was less than half as surge in commodity prices is therefore expected to push the
strong as for its neighbor to the north. Above all import prices headline rate for Swiss consumer prices up only temporarily.
for consumer durables have fallen markedly for Switzerland.

Friday Notes
SNB INFLATION PROJECTIONS, YOY (%) In our view, however, the probability of such a scenario is on
the low side, since the safe-haven function of the Swiss currency
3.5
has probably strengthened on a lasting basis since the
March 11
3.0 beginning of the financial crisis. The unstable fiscal situation,
June 10
not only in the EMU periphery but also in all important currency
2.5
areas, stands in stark contrast to the development of
2.0 Switzerland’s creditworthiness (see chart).
1.5
OVERALL BUDGET BALANCE, IN % OF GDP (2010)
1.0
0.5 2
0.0 0
II/10 IV/10 II/11 IV/11 II/12 IV/12 II/13 IV/13
-2
Source: SNB, UniCredit Research -4
-6
In any case, inflation expectations are now rising in Switzerland
-8
as well. Most wholesale companies are planning price
increases for the coming months, albeit by no means as strongly -10
as in the United Kingdom or Germany for example (see chart).
-12
US UK Japan EMU Switzerland
WHOLESALE OUTPUT PRICE EXPECTATIONS, DIFFERENCES (%)

Source: IMF, UniCredit Research
80
70 Switzerland
60 Germany This should also continue to have a decisive impact on the
50 UK monetary policy of the SNB. The central bankers are waiting
40 for a "window of opportunity" to initiate the normalization of
30 the interest rate level. Due to the time lag in the impact of
20 monetary policy, a gradual exit from the zero-rate policy is
10 now indicated from a real economic perspective. And the policy
0
reversal by the ECB in April should also have given the SNB
-10
more room for maneuver. However, the latest developments
-20
-30
regarding the EMU debt crisis have rapidly reversed the
I/03 I/04 I/05 I/06 I/07 I/08 I/09 I/10 I/11 temporary strength of the euro, and recently even sent EUR-CHF
to a new record low (see chart).
EUR-CHF
Overall, we assume a steady but only moderate rise in the
inflation rate in the further course of the year from currently 1.65
0.3% towards 1.0%. For 2011, we expect on average 0.8% 1.60
SNB-FX-interventions
and hence no appreciable acceleration of inflation compared 1.55

to the 0.7% recorded in the previous year.
1.50
1.45
"Safe-haven crunch" 1.40
Emergence of EMU ECB rate hike
debt crisis
The biggest upside risk for inflation is a rapid and pronounced 1.35
trend reversal for the Swiss franc. A massive depreciation 1.30
would increase inflationary pressure in Switzerland considerably. 1.25
1.20
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Source: Bloomberg, UniCredit Research

Friday Notes
The strength of the currency implies that the risk of serious

growth-retarding effects for the Swiss export and tourism industry
remains high. Since at the same time the pressure on the
SNB to act from the inflation side remains subdued, the SNB
should again keep the target rate unchanged at 0.25% at its
next quarterly meeting in mid-June. A first rate move should
not be postponed for too long, however. But given the persistently
very uncertain environment, a too early rate move will probably
do more harm than good.
Alexander Koch, CFA (UniCredit Bank)

+49 89 378-13013
alexander.koch1@unicreditgroup.de

Friday Notes
Data Monitor – Preview Europe
Monday, 30 May
SPAIN, CONSUMER PRICES PRICE PRESSURE TO CONTINUE
May CIB Cons. Mar Feb

6
yoy (%) 3.5 - 3.5 3.4 CPI (in % yoy) CIB forecast
5
We expect that harmonized consumer inflation will move 4
sideways to 3.5%, as a favorable base effect on transport 3

will partly offset an unfavorable one on food prices. 2
-1
-2
01/00 07/01 01/03 07/04 01/06 07/07 01/09 07/10
Source: INE, UniCredit Research
Tuesday, 31 May
EMU, CONSUMER PRICES PRESSURES TO CONTINUE
May CIB Cons. Apr Mar CIB forecast

5
mom (%) 0 - 0.6 1.4
CPI headline (in % yoy)
yoy (%) 2.7 2.9 2.8 2.7
4
CPI core (in % yoy)
The rise in core prices drove the April acceleration in 3
inflation to 2.8%. However, the late timing of Easter and
stronger-than-expected clothing/shoe price developments 2
“distorted” upward the April outcome and we should see

1
a reversal in May, with CPI inflation down to 2.7%, also ECB target zone
helped by declining energy prices. In coming months, 0
the inflation rate should hover around the current levels,
approaching the 3% area in the late summer. After the -1
01/05 01/06 01/07 01/08 01/09 01/10 01/11
latest developments, the composition of the balance of
risk to our CPI projections has somewhat changed: less Source: Thomson Datastream, UniCredit Research
upside risks from commodities, more from core prices.

Friday Notes
GERMANY, UNEMPLOYMENT UNEMPLOYMENT, IN MILLIONS
May CIB Cons. Apr Mar

5.5
in ’000 mom, sa -35 -30 -37 -55
not seasonally adjusted
in ’000 mom, nsa -130 - -132 -103 seasonally adjusted
5.0
The spring recovery on the labor market should have 4.5

continued in May at a similarly strong pace as in the two
preceding months. In all important sectors of the economy, 4.0
growth prospects remain rather positive. Accordingly,

3.5
businesses across the board are still planning to hire
new employees. As a result, the adjusted unemployment 3.0
number should have posted another marked decline
in May. The upswing on the labor market has resulted 2.5
01/92 01/94 01/96 01/98 01/00 01/02 01/04 01/06 01/08 01/10
in almost two years of steadily falling unemployment figures.
Source: Federal Employment Agency, UniCredit Research
GERMANY, RETAIL SALES RETAIL SALES, INDEX (JAN-2008=100)
April CIB Cons. Mar Feb

106 Retail sales, ex cars (real) Cars (nominal)
mom (%) 1.8 1.8 -2.7 0.1 104
102
Despite the March slump in retail sales, private 100
consumption succeeded in posting further respectable 98
96
growth in the first quarter. Although the consumer 94
climate has weakened slightly of late due to mounting 92
inflation concerns, business expectations of retailers 90
88
remain fairly positive. Accordingly, we expect April to
86
have posted a strong counter-reaction in the volatile 84
Car scrapping premium
sales numbers. 82
80
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Source: Federal Statistical Office, UniCredit Research
FRANCE, CONSUMER SPENDING (NEW SERIES!) RECOVERY IS UNFOLDING
April CIB Cons. Mar Feb

4 8
mom (%) - -0.7 0.9
3 6
Starting with the April report, the INSEE is enlarging the 2 4
basket of goods covered by the consumer spending data 1 2

to include food and energy. The uncertainty surrounding 0 0
the precise definition of the basket obviously makes it trickier
-1 -2
than usual to forecast the monthly change in data. Focusing
on the manufacturing goods covered by the existing -2 -4
methodology, we would expect a 0.5% mom increase. -3 consumer spending (in % mom) -6
consumer spending (in % yoy, RS)
-4 -8
01/06 01/07 01/08 01/09 01/10 01/11
Source: INSEE, UniCredit Research

Friday Notes
ITALY, CONSUMER PRICES TO STABILIZE DURING THE SUMMER

0.6 4.4
mom (%) 0 - 0.5 0.4
0.5 4.0
yoy (%) 2.5 2.7 2.6 2.5
0.4 3.6
3.2
0.3
The inflation acceleration in April (to 2.6% from 2.5% 2.8
0.2
in March) was driven by energy and core prices, with the 2.4
0.1
latter mostly due to the late Easter. We expect CPI 2.0
0.0
inflation to ease slightly in May, consolidating during the 1.6
-0.1
summer and accelerating again towards the end of 1.2
-0.2
the year. For 2012, however, we expect consumer price 0.8
-0.3 0.4
inflation to decline again. CPI (in % mom ) CPI (in % yoy, RS)
-0.4 0.0
01/99 01/01 01/03 01/05 01/07 01/09 01/11
Wednesday, 1 June
UK, MANUFACTURING PMI THE TREND IS POINTING DOWN

54.5 54.0 54.6 56.7 65
60
After falling to the lowest level in seven months in April,
we expect the index to remain broadly stable in May (54.5). 55
The PMI remains at healthy levels although clearly off 50

the cyclical highs (in the 61-62 area) reached at the
45
beginning of the year. Going forward, we expect a further
Threshold level
gradual softening. 40
Manufacturing PMI
35
Services PMI
30
01/99 01/01 01/03 01/05 01/07 01/09 01/11
Source: Markit, UniCredit Research

Friday Notes
Friday, 3 June
UK, SERVICES PMI SERVICES PMI TO SLOW FURTHER

53.8 54.2 54.3 57.1 65
critical level
60
We expect the services PMI to soften in May (53.8).
Looking ahead, we forecast a moderate slowdown in the 55
coming months, as the services sector is likely to be
most affected by fiscal tightening. 50
45
Services PMI
40
3M moving average
35
01/99 01/01 01/03 01/05 01/07 01/09 01/11
Source: Markit, UniCredit Research
Tullia Bucco (UniCredit Bank Milan) Chiara Corsa (UniCredit Bank Milan)
+39 02 8862-2079 +39 02 8862-2209
tullia.bucco@unicredit.eu chiara.corsa@unicredit.eu
Alexander Koch, CFA (UniCredit Bank) Mauro Giorgio Marrano (UniCredit Bank Milan)
+49 89 378-13013 +39 02 8862-8222
alexander.koch1@unicreditgroup.de mauro.giorgiomarrano@unicredit.eu
Chiara Silvestre (UniCredit Bank Milan) Marco Valli (UniCredit Bank Milan)
chiara.silvestre@unicredit.eu +39 02 8862-8688,
marco.valli@unicredit.eu

Friday Notes
Data Monitor US – Preview of the coming week
Tuesday, 31 May
S&P/CASE SHILLER HOME PRICE INDEX HOUSE PRICES CONTINUE TO FALL
March CIB Cons. Feb Jan yoy (%)

yoy (%) -3.1 -3.5 -3.3 -3.1
20
Inflation
The tentative upward trend in house prices came to a 15
halt late last summer. After rising by close to 4¾% 10

between May 2009 and June 2010, the widely followed 5
S&P/Case Shiller index fell again by 4% in the last eight 0
months. For March, we expect another decline
-5
of 0.1% mom (the ninth straight monthly decline). But
-10
because of a basis effect (prices fell even faster in
-15
March 2010), the yoy rate should improve slightly to
-3.1% from -3.3%. -20
Deflation
-25
01/00 01/02 01/04 01/06 01/08 01/10
CONSUMER CONFIDENCE – CONFERENCE BOARD EDGING HIGHER
May CIB Cons. Apr Mar Consumer confidence index

66.5 66.4 65.4 63.8
155
After hitting a 3-year high in February, the Conference 140

Board’s consumer confidence index plummeted again by 125
8½ points in March. In April, household sentiment 110
recovered only a little, and high-frequency surveys sent 95
mixed messages about the development in May. While
80
the daily Rasmussen survey improved solidly, Bloomberg's
65
weekly consumer comfort index fell rather sharply. We
50
assume that the Conference Board's index rose slightly
Consumer confidence Conferene Board
in May, mainly on lower gasoline prices. A weaker stock 35
Consumer confidence University of Michigan
market and the devastating hurricanes in the Southern 20
01/00 01/02 01/04 01/06 01/08 01/10
part of the country should, in contrast, have been a drag.

Friday Notes
Wednesday, 1 June
ISM MANUFACTURING THIRD DECLINE IN A ROW

65
57.0 58.0 60.4 61.2
60
Even after two consecutive declines, the manufacturing
55
ISM in April was still as high as in March 2010, when it
reached a 6Y high. In May, however, the drop might 50
have been more pronounced. That is the unequivocal
45
message from regional manufacturing surveys: The
closely followed Philly Fed index plunged to a 7M low of 40
Contraction ISM manufacturing
3.9 in May, after hitting a 27Y high of 43.3 points as 35 ISM non-manufacturing
recently as March. The Empire index more than halved Critical value
between April and May (to a 5M low), while the Richmond 30
01/97 01/99 01/01 01/03 01/05 01/07 01/09 01/11
index hit a fresh 2Y low of -6 points in May. All these
surveys showed particular weakness in new orders and Source: Thomson Datastream, UniCredit Research
current production/shipments. The employment indexes,
in contrast, have been unchanged on average.
Friday, 3 June
MONTHLY EMPLOYMENT REPORT LATE EASTER TO REDUCE EMPLOYMENT GAINS IN MAY

600 2
Non-farm payrolls in k 185 195 244 221 Unemployment rate (in %, inverted, RS)
Unemployment rate in % 9.0 8.9 9.0 8.8 450 3
300 4
In April, private payrolls rose at the fastest pace in more 150 5
than 5 years, as retail employment jumped 57,000 – the 0 6
highest increase in eleven years. We suspect that this
-150 7
acceleration was due to the unusually late Easter holiday,
-300 8
for which seasonal factors did not correct properly. If this
-450 9
assumption is correct, retail employment should have Non-farm payrolls
-600 (monthly changes in thousands) 10
declined again by about 25,000 in May. And while payrolls
in other sectors most likely continued to rise at the same -750 11
01/97 01/99 01/01 01/03 01/05 01/07 01/09 01/11
pace as in the previous months, this payback in retail
would slow overall employment growth to less than Source: Thomson Datastream, UniCredit Research
200,000. Moreover, the hurricanes that hit the South earlier
this month pose some downside risk to our outlook. The
unemployment rate likely stayed at 9% after rising by
0.2pp in April. But, as repeatedly highlighted, forecasting
the unemployment rate has become more of a psychological
rather than an economic exercise. If more frustrated
workers should decide to leave the labor force (i.e. stop
to actively look for work), the rate would fall. Vice versa,
if frustrated job seekers should decide to return to the
labor market, this would inevitably push the unemployment
rate higher again.
Dr. Harm Bandholz, CFA (UniCredit Bank),

+1 212 672 5957
harm.bandholz@unicredit.eu

Friday Notes
Review Europe The impetus from foreign demand will likely decline further in
the months ahead. But German business activity indices remain
at very high levels overall. The order backlog is record-high
Ifo: Still very optimistic in many sectors. And unchanged strong employment and
The Ifo business climate showed resilience in May. The index investment plans underpin the strengthening in domestic
remained unchanged at 114.2. Expectations were down for demand. Accordingly, although firms are likely to shift down
the third consecutive month from 107.7 to 107.4. In contrast, a gear in terms of growth dynamic, the coming months can
the current situation component increased once again from be expected to show a continuing solid growth performance.
121.0 to 121.4. Among sectors, manufacturing and wholesale We expect GDP to rise 0.6% qoq in 2Q and 3Q each.
trade posted declines, construction improved marginally and
Alexander Koch, CFA (UniCredit Bank)
retail trade was up significantly. +49 89 378-13013
alexander.koch1@unicreditgroup.de
The third consecutive decline in the forward-looking business
expectations and the latest strong decline in the advance
PMI's new order component from 61.0 to 56.9 point in the
same direction: The exceptionally strong growth dynamic we
have observed at the beginning of this year cannot be sustained.
This week the Federal Statistical Office confirmed the annualized
1Q GDP growth rate of 6.1%. This compares to an estimated
potential growth rate of below 2.0%. But at the same time the
renewed rise in current business assessment confirms the
solid state of the German economy. The current level is just
shy of the all-time high reached during the reunification boom
(see chart). Despite softening business indicators worldwide
the Ifo even reported a slight increase in export expectations
in May. The export outlook remains very positive. Moreover,
the latest outperformance in sentiment in construction and
especially retail trade underscores the broadening of the
German upswing.
IFO INDEX (2005=100)
125.0 Climate
120.0 Situation
115.0 Expectations
110.0
105.0
100.0
95.0
90.0
85.0
80.0
75.0
Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
Source: Ifo, UniCredit Research

Friday Notes
Fixed Income Outlook Against this backdrop, it is astonishing that 10Y Bund yields
have not yet fallen below 3% on a lasting basis. Looking forward,
there are – besides the key rate normalization by the ECB –
Lulled, startled, overreacted few reasons to expect a rapid trend reversal to the recent
It is not only the Icelandic volcano Grimsvötn that is on the verge peak yields. The second big topic – the Fed’s termination of the
of triggering a renewed exodus in European air transportation; Treasury purchase program on 30 June – does not necessarily
the rating agencies are also firing a broadside at the already mean that global yields will rise. It can have a contrary effect
heavily-listing "aircraft carrier" EURO. At times, there is a if risky asset classes were to be brought to their knees. And
temptation to “buy into” conspiracy theories. When a US rating even the pace of ECB normalization will likely be a subject of
agency assigns Italy a “negative outlook“ on a Saturday at discussion due to the – rather intensifying – credibility erosion.
0:27 hours due to chronic growth weakness, the question is Ultimately, the ECB raises, with each key rate hike, the refi-
legitimate whether this was really necessary or whether nancing costs of every single country in the eurozone
massive frictions have built up between US rating agencies (presupposing the traditional pattern of a bear flattening in
and European countries. Admittedly, S&P had leveled the the event of a tightening cycle). Furthermore, key rate hikes
same warning at Japan and the US. But this takes on a by a relevant central bank, with US monetary policy on hold at
completely different quality for the already skittish eurozone the same time, have an inflationary impact in the short term.
bond market, as demonstrated by the massive opening price The widening interest rate differential strengthens the EUR-USD
losses on Monday in Bunds and in EUR-USD. The new hunting exchange rate and an, in turn, weakening external value of the
season on EGBs appears to have opened. Fitch and Moody's USD is still one of the decisive impulses for rising commodity
held their fire in the case of Italy, but they trained their guns prices, the main driver behind the global rise in inflation.
elsewhere. Belgium, together with Italy the next usual suspect
after Spain, received a negative outlook from Fitch. Given this short-term interaction, nobody would like to be in
the ECB’s shoes. In the short term, it will probably forge
ahead with the key rate normalization, and there is little
TROUBLE IN PARADISE: "THE NEXT USUAL SUSPECTS"
(10Y YIELD GOVERNMENT BONDS) doubt that money market rates will edge steadily higher, at
least until the end of the year. The development at the long
end, however, largely depends on the rating agencies. In
6
Spain Italy Belgium Germany light of the political inability to bring calm to the discussion
5.5
(the vested interests of 17 sovereign states also make this a
5
physical impossibility), expectations of sharply rising yields in
4.5
the core countries are off the table for the time being.
4
3.5 Michael Rottmann (UniCredit Bank)
3 +49 89 378 15121
michael.rottmann1@unicreditgroup.de
2.5
2
1/1/2008
4/1/2008
7/1/2008
10/1/2008
1/1/2009
4/1/2009
7/1/2009
10/1/2009
1/1/2010
4/1/2010
7/1/2010
10/1/2010
1/1/2011
4/1/2011
7/1/2011
But to remain fair, it was not only the rating agencies. In the
case of Spain, home-made problems, first and foremost the
youth unemployment (<25 years) rate of over 44%, were also
responsible for a resounding defeat of the ruling Socialists at
the regional elections. And the situation was not much better
in Germany. Even though elections in Bremen – Germany’s
smallest state – are normally not considered a benchmark let
alone important, the fact that the election result for the FDP
(Free Democratic Party) was even below the 10Y Bund yield
(2.4% vs. 3.0%) raises fears that the FDP will close ranks in
the fall and – to make its mark – oppose the ESM.

Friday Notes
Forex Outlook EUR-USD: At crossroads

■ FX View: The eurozone debt crisis will continue to move The toxic mix of euro weakness and safe-haven-related dollar
FX markets. Though fundamentals have been completely appreciation has been exerting strong selling pressure on
ignored so far, this might change with next week's very this cross over the last couple of weeks and may continue
important US data releases. once the strong support at 1.3985 is broken, followed by a
gradual slide towards 1.34 levels. But even then we would
■ EUR: Even though we cannot deny the risk of more downside consider the euro a strong currency since it is still far away
potential, we still consider the euro a strong currency. from long-term averages measured by both EUR-USD and
the effective euro index (chart right column). Nevertheless,
■ JPY: Due to ongoing Japanese capital inflows, we expect taking into account the EMU debt crisis as the most influential
JPY to continue to remain on the strong side next week. factor so far, while fundamentals on both sides of the Atlantic
have been broadly ignored, we even see a chance for EUR-USD
■ GBP: EUR-GBP should continue to struggle between to receive some relief. If the series of very important US events
0.86 and 0.87, with the long US and UK weekend favoring like the ISM data and the unemployment report are in line
further consolidation. with recent disappointing US economic figures and with the
next crucial ECB meeting impending, the cross may stabilize
■ CHF: The CHF remains the strongest G10 currency for at levels of 1.42-1.43.
the time being. Its status as a safe haven is in demand as
THE EURO IS STILL A STRONG CURRENCY
seldom before. In the short term, EUR-CHF will likely continue
to head towards 1.20. 1.70 110
EUR-USD EUR-Index (effective), RS
1.60 106
Euro still far from facing a real crisis 1.50

Long-term average 90.79 (weekly basis)
102
1.40 98
What else other than the eurozone debt crisis could have
1.30 94
moved FX markets this week? Widespread discussion about
1.20 90
the handling of the Greek drama and neologisms regarding this
1.10 86
topic like "large restructuring", "soft restructuring", "rescheduling"
or "reprofiling" have continued to unsettle euro investors, let 1.00 82
Long-term average 1.1958 (weekly basis)
alone rumors that Premier Papandreou intends to resign with 0.90 78
subsequent snap elections. And with S&P cutting the rating 0.80 74
outlook for Italy and Zapatero's defeat at Spanish regional 0.70 70

Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
elections, two economic heavyweights have also been
dragged into the spotlight. At the moment, the euro is suffering
a lot and it can be considered almost a miracle that the currency
is still capable of avoiding the worst.
While we cannot rule out further losses due to the tricky JPY: Strong again
Greek situation, which in the meantime has also developed a With respect to USD-JPY we do not expect much more leeway
strong grip on the global risk picture as is reflected in sliding to the upside, even though the dollar might keep its current
equities, lower Bund yields and subdued or weaker commodity status as a safe-haven currency. Astonishingly, JPY has also
prices, we would still like to emphasize that the Greek drama received strong demand from investors abroad (right chart
alone won't bring the euro to its knees. Admittedly, a similar below), which can be expected to continue next week, totally
serious state of Portugal and/or Ireland could severely ignoring weak Japanese data. In the case of a disappointing
scratch the euro's reputation, but talking about a real euro US unemployment report on the other hand, USD-JPY may
crises would, from our point of view, only be appropriate if even develop strong downward potential to around 80.50.
Spain were also on the brink of collapse, which is not yet the Either constellation would not bode well for EUR-JPY. To the
case, as can be seen by the stable sideways movement of upside, levels above 117.50 will be almost out of reach, while
Spanish bond yields. a slide toward 112 may occur rather rapidly.

Friday Notes
STRONG JAPANESE CAPITAL INFLOWS OVER THE LAST

FOUR WEEKS
EUR-CHF:
For the time being, still in freefall
1500
As recently as the beginning of February, there were still a
inflows
1000 very large number of berths available in the safe haven CHF.
Even in April following the outbreak of the political crises in
500 the MENA region, the CHF was unable to claw back much
lost ground, since the focus was directed almost exclusively
0
at the prospering economy in the eurozone and exaggerated
speculation on strongly rising ECB key interest rates. At the
-500
time, however, EUR-CHF was also unable to develop any
-1000 sustained upward potential, as in light of the weak US economy,
Net Purchases, total (inward), JPYbn Bonds Stocks USD-CHF exerted a strong retarding effect on parity. The
-1500 picture then changed completely when ECB interest rate
Jan-11 Feb-11 Mar-11 Apr-11 May-11
speculation flagged and euro structural deficiency, primarily
in the guise of the apparently unending Greece debt crisis,
hit home mercilessly, while at the same time the commodity
bubble deflated and markets switched from risk-on to risk-off.
GBP: Within the space of a few days, the safe haven CHF was
More dependent on external factors again filled to overflowing, and EUR-CHF has posted several
new all-time lows in the interim.
Sterling’s behavior has been quite odd this week, as the
economic data calendar at home was quite poor with the
CHF SOARS AND EUR-CHF IN FREEFALL
second revision of UK GDP for 1Q11 coming in unchanged
at 0.5 qoq. Instead, the stronger CBI distributive trade survey 145 1.62
had greater impact. Indeed, at the end of the day cable, and CHF-Index (effective)
EUR-CHF, RS
to some extent EUR-GBP, have again mostly been driven by 140 1.55
EUR-USD moves and the greenback’s dynamics across the

135 1.48
board. As in the case of EUR-USD, for which the rebound
close to 1.42 can at least make a new drop towards this
130 1.41
week’s low at 1.3868 less likely, for cable the ongoing
rebound above 1.63 will make a retreat back to the 1.61-1.60 125 1.34
band less probable, although a definite break above 1.64 at
least is required to reopen an assault on the 1.66-1.67 area. 120 1.27
The data releases scheduled in the UK in the coming days
115 1.20
are limited again, with just the two manufacturing and service
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11
PMI surveys in the pipeline on Thursday and Friday, and on
balance, they are not very encouraging for sterling bulls, as Source: Bloomberg, UniCredit Research
the former is expected to stay flat at around 54.5, while the
latter should fall to 53.8 from previously 54.3. Likewise, EUR-GBP
is likely to continue to struggle between 0.86 and 0.87, with As long as the topic of Greece is the elephant in the room,
the long US and UK weekend favoring further consolidation. and Portugal and Ireland have to be monitored closely, and
the fear of a spillover to Spain persists, the chances of a
sustained recovery in EUR-CHF are conceivably poor, even
though USD-CHF is not exerting any additional pressure at
the moment. On top of this, the problems in the MENA
region, residual risk from Japan, and the suspicion that
China could try to cool down its overheated economy with
stronger measures than assumed so far are holding the
global propensity for risk at least in check. Basically, we see
further downside risks for EUR-CHF, because growth
dynamics in the eurozone will probably also weaken soon,
and corresponding economic indicators will then hurt the
euro slightly overall. No SNB interventions should be
expected for the time being.

Friday Notes
Even though Switzerland is currently miles removed from an

inflation problem, the SNB cannot make out any deflation
risks either. Renewed FX market intervention before a level
of around 1.18 to 1.20 is reached is, therefore, improbable,
even though SNB Vice-Chairman Jordan recently let it be
known that the SNB is very concerned about the general
strength of the CHF.
We do not, however, wish to go to the other extreme and

now see nothing positive in EUR-CHF. The crux of the matter
is and remains the EMU debt crisis. If Spain is spared, if the
structural reforms in Ireland and Portugal prove sustainable
and – on top of that – ECB rhetoric becomes more hawkish
again in the coming weeks, scope for a correction to a level
between 1.26-1.28 could very rapidly emerge, depending on
when the downtrend was halted. Greece alone will not bring
down entirely either the euro in general or EUR-CHF in
particular. It is also conceivable that some pressure could
also be vented if at mid-June the SNB again refrains from an
initial rate hike. In the short term, we would, however, not
rule out even a test of 1.20.
Armin Mekelburg (UniCredit Bank)

+49 89 378-14307
armin.mekelburg@unicredigroup.de
Roberto Mialich (UniCredit Bank Milan)

+39 02 8862-0658
roberto.mialich@unicreditgroup.de

Friday Notes
CIB View – Our Global Picture ■ We expect further mini-moves on a quarterly basis, which
will see the refi rate raised to 1¾% at the end of 2011.
Global economy The exceptional measures, however, above all the full
allotment of its short-term tenders, will be retained for several
■ After softening last summer, real global GDP growth
more months to come. For 2012, we expect further hikes
re-accelerated again at the turn of the year. But more recently,
adding up to 100bp.
economic headwind forces have increased again (ongoing
EMU debt crisis, higher oil prices/rising inflationary pressures,
intensifying geopolitical risks as well as the catastrophe Government bond markets
in Japan). For 2011, we expect real GDP to increase ■ Despite continuing US economic risks as well as the Fed's
4¼% on a PPP basis (2012: +4½%). ZIRP, yields should tend to rise over the medium term.
The upcoming end of Quantitative Easing 2 coupled with
■ Economic activity in industrialized countries should grow only
investors starting to price in the first Fed rate hike should
below-average at 2¼% and 2½%, respectively. China and
send 10Y Treasuries yields higher reaching 4% at the end
Emerging Asia, which were first to achieve a trend reversal
of 2011. The US debt discussion will be a further burden.
after the financial market crisis, will clearly remain at the
top of the global growth league (2011/12: +6½%). ■ Bund yields should follow their US counterparts, rising
to 3¾% twelve months from now.
US
■ After re-accelerating in 2H 2010, real GDP growth started Exchange rates
2011 on a weak note. Despite the additional support of an ■ The ECB’s ("announced") key rate reversal combined with a
additional huge tax package, real GDP should grow by a still reluctant Fed acted as a mighty tailwind for the euro –
meager 2.5% on average this year (2012: +2.7%). despite the ongoing debt crisis in EMU's periphery. Besides
short-term fluctuations (Japanese catastrophe) EUR-USD
■ A hike of the Fed Funds Target Rate any time soon is out
is, therefore, expected to rise further and tackle 1.55 by
of the question. Ongoing economic risks coupled with still
the end of 2011.
high unemployment (core) inflation in check seem to
"guarantee" that Quantitative Easing 2 will be executed as ■ The JPY should weaken in 2H11, bringing USD-JPY back
planned. We do not expect the first hike of the target rate to 83 at the end of the year.
(currently at 0%-0.25%) before early 2012.
OUR MACRO FORECASTS

Eurozone
yoy (%) 2010 2011 2012
■ Despite slowing down in 2H10, EMU-wide economic GDP EMU 1.7 2.1 1.7
growth proved more resilient than expected before. Domestic CPI EMU 1.6 2.7 2.0
demand was increasingly joining exports as a growth
GDP Germany 3.5 3.5 2.0
driver, at least in Germany. The picture was similar in France,
CPI Germany 1.1 2.2 1.8
with both countries lifting EMU-wide activity. Nevertheless,
growth divergences within the EMU were intensifying. GDP Italy 1.2 1.1 1.2
Given the strong start to the year (+0,8% qoq, also as a CPI Italy 1.5 2.6 2.0
technical payback for the weather-related weakness in 4Q10),
GDP US 2.9 2.5 2.7
eurozone GDP should expand by 2.1% this year followed 1.6 3.2 2.7
CPI US
by a 1.7% plus in 2012.
■ The fear of inflation expectations to resurface in the wake of OUR FI/FX & OIL PRICE FORECASTS
rapidly rising oil and agro prices led the ECB to hike its refi
2011/12 30-Jun 31-Sep 31-Dec 31-Mar
rate hike after 23 months of a record-low 1% figure – despite EMU 3M (%) 1.50 1.75 2.10 2.30
the ongoing sovereign debt crisis, doubts concerning the EMU 10Y (%) 3.25 3.50 3.65 3.70
soundness of European banks, as well as economic
US 3M (%) 0.35 0.35 0.45 0.55
divergences within the EMU.
US 10Y (%) 3.45 3.70 4.00 4.15
EUR-USD 1.50 1.53 1.55 1.52

USD-JPY 81 82 83 84
Oil Price 110 105 105 110

Friday Notes
Macro Forecasts
GDP, real (%, yoy) 2005 2006 2007 2008 2009 2010 2011f 2012f
World economy * 4.3 5.0 5.0 2.8 -0.6 4.8 4.3 4.4
Industrialized countries * 2.5 2.8 2.5 0.2 -3.3 2.9 2.3 2.4
US 3.1 2.7 1.9 0.0 -2.6 2.9 2.5 2.7
Euro area 1.8 3.2 2.8 0.3 -4.1 1.7 2.1 1.7
Germany 0.9 3.6 2.8 0.7 -4.7 3.5 3.5 2.0
France 1.9 2.7 2.2 -0.2 -2.6 1.4 2.3 1.8
Italy 0.8 2.1 1.4 -1.3 -5.2 1.2 1.1 1.2
Spain 3.6 4.0 3.6 0.9 -3.7 -0.1 0.8 1.4
Austria 2.5 3.6 3.7 2.2 -3.9 2.0 2.8 1.8
UK 2.2 2.8 2.7 -0.1 -4.9 1.3 1.5 2.0
Switzerland 2.6 3.6 3.6 1.9 -1.9 2.6 2.4 1.7
Sweden 3.1 4.6 3.4 -0.8 -5.3 5.3 4.0 2.4
Japan 1.9 2.0 2.3 -1.2 -6.3 4.3 1.0 2.5
Developing countries * 7.0 7.9 8.3 6.0 2.5 7.1 6.4 6.5
Asia 9.0 9.8 10.6 7.7 7.2 9.5 8.4 8.4
China 10.4 11.6 13.0 9.6 9.2 10.3 9.6 9.5
India 9.1 9.7 9.3 6.4 6.8 10.4 8.2 7.8
Latin America 4.7 5.7 5.7 4.3 -1.7 6.1 4.7 4.2
Brazil 3.2 3.8 5.7 5.1 -0.6 7.5 4.5 4.1
Central and Eastern Europe 6.1 7.2 6.9 4.0 -5.9 3.5 3.8 4.2
Russia 6.4 7.7 8.1 5.6 -7.9 3.4 4.3 4.1
Consumer prices, CPI (%, yoy) 2005 2006 2007 2008 2009 2010 2011f 2012f
US 3.4 3.2 2.9 3.8 -0.3 1.6 3.2 2.7
core rate (ex food & energy) 2.1 2.5 2.3 2.3 1.7 1.0 1.4 1.9
Euro area, HICP 2.2 2.2 2.1 3.3 0.3 1.6 2.7 2.0
Germany 1.6 1.6 2.3 2.6 0.3 1.1 2.2 1.8
France 1.7 1.7 1.5 2.8 0.1 1.5 2.1 1.7
Italy 2.0 2.1 1.8 3.3 0.8 1.5 2.6 2.0
Spain 3.4 3.5 2.8 4.1 -0.3 1.8 3.5 2.5
Austria 2.3 1.5 2.2 3.2 0.5 1.9 2.7 2.1
UK 2.0 2.3 2.3 3.6 2.1 3.3 4.1 2.5
Switzerland 1.2 1.1 0.7 2.4 -0.5 0.7 1.0 1.1
Sweden 0.5 1.4 2.2 3.5 -0.3 1.3 2.5 1.5
Japan -0.3 0.2 0.0 1.4 -1.4 -1.0 -0.3 0.4
GDP, real (%, qoq) I/10 II/10 III/10 IV/10 I/11f II/11f III/11f IV/11f
US (annualized) 3.7 1.7 2.6 3.1 1.8 2.6 3.2 2.8
Euro area 0.4 1.0 0.4 0.3 0.8 0.5 0.3 0.4
Germany 0.5 2.1 0.8 0.4 1.5 0.6 0.6 0.5
France 0.2 0.5 0.4 0.3 1.0 0.5 0.4 0.4
Italy 0.6 0.5 0.3 0.1 0.1 0.4 0.2 0.3
Spain 0.1 0.3 0.0 0.2 0.3 0.2 0.2 0.3
Austria 0.2 1.0 1.1 0.8 0.9 0.4 0.3 0.3
UK 0.2 1.1 0.7 -0.5 0.5 0.4 0.4 0.5
Switzerland 0.8 0.7 0.8 0.9 0.6 0.5 0.3 0.3
Sweden 1.6 2.1 2.1 1.2 0.7 0.6 0.5 0.4
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/10 IV/10 I/11f II/11f III/11f IV/11f
US 2.4 1.8 1.2 1.2 2.2 3.3 3.6 3.6
Euro area, HICP 1.1 1.6 1.7 2.0 2.5 2.8 2.8 2.8
Germany 0.8 1.1 1.2 1.5 2.1 2.2 2.2 2.4
France 1.3 1.6 1.5 1.6 1.8 2.1 2.3 2.3
Italy 1.3 1.4 1.6 1.8 2.3 2.6 2.6 2.7
Spain 1.3 2.3 2.0 2.5 3.2 3.6 3.5 3.6
Austria 1.4 2.0 1.8 2.1 2.7 2.7 2.8 2.6
UK 3.3 3.4 3.1 3.4 4.1 4.4 4.3 3.8
Switzerland 1.1 1.0 0.3 0.3 0.6 0.8 1.3 1.3
Sweden 0.7 0.9 1.1 1.9 2.6 3.4 3.6 3.3
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 GDPs
GDP = Gross Domestic Product, HICP = Harmonized Index of Consumer Prices, CPI = Consumer Price Index, f = forecast

Friday Notes
Interest & Exchange Rate Forecasts (I)

INTEREST RATE FORECASTS (%, END QUARTER)
2011/12 current end-Q2 end-Q3 end-Q4 end-Q1

Eurozone bond market (Bunds)
Refi rate 1.25 1.25 1.50 1.75 2.00
3M Euribor 1.43 1.50 1.75 2.10 2.30
2Y 1.59 1.90 2.20 2.50 2.80
5Y 2.25 2.60 2.85 3.10 3.25
10Y 2.99 3.25 3.50 3.65 3.70
30Y 3.51 3.70 3.90 4.00 4.00
10Y swap spread (in bp) 34 25 20 10 10
US Treasury Market
Fed funds target rate 0.13 0.25 0.25 0.25 0.25
3M USD Libor 0.25 0.35 0.35 0.45 0.55
2Y 0.48 0.70 0.90 1.25 1.50
5Y 1.73 2.08 2.40 2.78 2.98
10Y 3.07 3.45 3.70 4.00 4.15
30Y 4.24 4.50 4.70 4.90 5.00
10Y swap spread (in bp) 9 5 0 0 0
Japan
Target rate 0.10 0.10 0.10 0.10 0.10
3M JPY Libor 0.20 0.20 0.25 0.25 0.25
10Y JGB 1.13 1.20 1.10 1.10 1.15
United Kingdom
Repo rate 0.50 0.50 0.75 1.00 1.25
3M GBP Libor 0.83 0.90 1.05 1.30 1.55
10Y Gilt 3.30 3.85 4.00 4.25 4.50
Switzerland
3M CHF Libor mid target rate 0.25 0.25 0.50 0.75 1.00
3M CHF Libor 0.18 0.50 0.80 1.05 1.30
10Y Swissie 1.83 2.10 2.30 2.50 2.60
EXCHANGE RATE FORECASTS (END QUARTER)

EUR-USD 1.4235 1.50 1.53 1.55 1.52
EUR-JPY 115.41 122 125 129 128

EUR-GBP 0.8667 0.89 0.88 0.87 0.85
EUR-CHF 1.2193 1.29 1.30 1.32 1.34
USD-JPY 81.06 81 82 83 84
GBP-USD 1.6425 1.69 1.74 1.78 1.79
USD-CHF 0.8565 0.86 0.85 0.85 0.88
COMMODITY PRICE FORECASTS

Oil price (Brent, USD/b) 112.66 110 105 105 110
DJ commodity price index 328.62 320 310 310 320

Friday Notes
Interest & Exchange Rate Forecasts (II)

INTEREST RATE FORECASTS (%, END QUARTER)

Sweden
Key rate 1.75 1.75 2.25 2.75 3.00
3M rate 2.45 2.50 2.80 3.25 3.30
10Y yield 2.86 3.10 3.40 4.00 4.20
10Y spread to Bunds (in bp) -13 -40 -25 35 55
Norway
Key rate 2.25 2.25 2.50 2.75 3.00
3M rate 2.84 2.75 3.00 3.25 3.35
10Y yield 3.39 3.70 4.00 4.25 4.35
10Y spread to Bunds (in bp) 41 20 50 75 85
Canada
Key rate 1.00 1.25 1.50 1.50 1.75
3M rate 1.20 1.50 1.75 1.75 2.00
10Y yield 3.04 3.40 3.70 4.00 4.25
Australia
Key rate 4.75 5.00 5.25 5.25 5.50
3M rate 4.96 5.40 5.75 5.75 5.85
10Y yield 5.23 5.65 6.00 6.20 6.30
New Zealand
Key rate 2.50 2.50 2.50 2.50 2.75
3M rate 2.77 2.75 2.85 3.00 3.05
10Y yield 5.09 5.50 5.80 6.00 6.00
EXCHANGE RATE FORECASTS (END QUARTER)

EUR-SEK 8.9097 8.90 8.80 8.70 8.65
EUR-NOK 7.7728 7.85 7.80 7.75 7.70
EUR-CAD 1.3907 1.46 1.45 1.49 1.49
EUR-AUD 1.3326 1.36 1.35 1.41 1.41
EUR-NZD 1.7444 1.88 1.84 1.94 1.97
USD-SEK 6.2584 5.93 5.75 5.61 5.69

USD-NOK 5.4601 5.23 5.10 5.00 5.07
USD-CAD 0.9769 0.97 0.95 0.96 0.98
AUD-USD 1.0682 1.10 1.13 1.10 1.08
NZD-USD 0.8161 0.80 0.83 0.80 0.77
EUR-USD 1.4235 1.50 1.53 1.55 1.52

Friday Notes
Economic Event & Data Release Calendar

Time Consensus
Date (ECB) Country Indicator Period CIB est. (Bloomberg) Prev. period
27 May to 03 June 2011
Fri, 27 May '11 14:30 US PCE core inflation (in % mom) Apr 0.2 0.1
14:30 US Personal expenditures (in % mom) Apr 0.5 0.6
14:30 US Personal income (in % mom) Apr 0.4 0.5
15:55 US University of Michigan consumer confidence Jun 72.4 72.4
16:00 US Pending home sales (in % mom) Apr -1.0 5.1
Mon, 30 May '11 3:00 JP Tankan survey small business May 36.1
15:30 EC ECB Announces Bond Purchases
Tue, 31 May '11 1:15 JP PMI (Nomura) May 45.7

1:30 JP Unemployment rate (in %) Apr 4.7 4.6
1:50 JP Industrial production (in % yoy) Apr -12.4 -13.1
7:45 SZ Real GDP (in % qoq) Q1 0.6 0.9
8:00 GE Retail sales (real, in % mom) Apr 1.8 1.8 -2.7
8:45 FR Household consumption (manufactured goods, in % mom) Apr -0.4 -0.7
8:45 FR Producer price index, PPI (in % mom) Apr 0.8 0.9
9:55 GE Unemployment rate (in %) May 7.0 7.1
9:55 GE Unemployment change (in thousands) May -35 -30 -37
10:30 IT Governor Draghi Speaks at Annual Meeting of the Bank of Italy
11:00 IT Consumer price index (in % yoy) May 2.5 2.7 2.6
11:00 EMU Consumer price index, CPI (in % yoy, flash estimate) May 2.7 2.9 2.8
11:00 EMU Umemployment rate (in %) Apr 9.9 9.9
12:00 IT Producer price index, PPI (in % yoy) Apr 6.1
15:00 US S&P/Case-Shiller home priceindex (in % yoy) Mar -3.1 -3.5 -3.3
15:45 US Chicago Purchasing Managers Index May 63.0 67.6
16:00 US Conference Board consumer confidence May 66.5 66.4 65.4
Wed, 01 Jun '11 9:30 SZ Manufacturing PMI (index) May 57.8 58.4
9:45 IT Manufacturing PMI (index) May 55.5
9:50 FR Manufacturing PMI (index) Jun 55.0 55.0
9:55 GE Manufacturing PMI (index) Jun 58.2 58.2
10:00 EMU Manufacturing PMI (index) Jun 54.8 54.8
10:30 UK Mortgage approvals (in thousands) Apr 47.9 47.6
10:30 UK Manufacturing PMI (index) May 54.5 54.0 54.6
12:59 UK House price (HBOS, in % 3M yoy) May -3.9 -3.7
13:00 US MBA mortgage applications May 27 1.1
14:15 US ADP employment index (change in thousands mom) May 177.5 179.0
15:00 EC ECB's Trichet Speaks in Aachen, Germany
16:00 US Treasury Secretary Geithner Testifies to House Committee
16:00 US Construction spending (in % mom) Apr 0.4 1.4
16:00 US ISM manufacturing (index) May 57.0 58.0 60.4
18:00 IT New car registration (in % yoy) May -2.2
19:00 IT Budget balance (EUR bn) May -8.8
23:00 US Auto sales (in mn) May 12.8 13.1
Thu, 02 Jun '11 14:30 US Unit labor costs (in % qoq annualized) Q1 0.8 1.0
14:30 US Non-farm productivity (in % qoq annualized) Q1 1.8 1.6
14:30 US Initial jobless claims (in thousands) May 27 424
16:00 US New orders (in % mom) Apr -0.8 3.4
Fri, 03 Jun '11 9:45 IT Services PMI (index) May 52.2

9:50 FR Services PMI (index) Jun 62.8 62.8
9:55 GE Services PMI (index) Jun 54.9 54.9
10:00 EMU Composite PMI (index) Jun 55.4
10:00 EMU Services PMI (index) Jun 55.4 55.4
10:30 UK Services PMI (index) May 53.8 54.2 54.3
14:30 US Unemployment rate (in %) May 9.0 8.9 9.0
14:30 US Non-farm payrolls (change in thousands mom) May 185 195 244
16:00 US ISM Non-manufacturing (index) May 54.3 52.8
*Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted

Friday Notes
Economic Event & Data Release Calendar – The week after

Time Consensus
Date (ECB) Country Indicator Period CIB est. (Bloomberg) Prev. period
6 June to 10 June 2011
Mon, 06 Jun '11 10:30 GE Sentix growth expectations Jun 10.8799

11:00 EMU Producer price index, PPI (in % yoy) Apr 6.7
15:30 EC ECB Announces Bond Purchases
Tue, 07 Jun '11 9:15 SZ Consumer price index (in % yoy) May 0.3
11:00 EMU Retail sales (volume, in % mom) Apr -1.1
12:00 GE Industrial orders (in % mom) Apr -4.0
21:00 US Consumer credit (net change in USD bn) Apr 6.016
Wed, 08 Jun '11 7:45 SZ Unemployment rate (in %) May 3.1

8:00 GE Exports (in % mom) Apr 7.3
8:00 GE Imports (in % mom) Apr 3.1
8:45 FR Budget balance (EUR bn) Apr -33.595
8:45 FR Trade balance (EUR bn) Apr -5746
11:00 EMU Private consumption (in % qoq) Q1 0.4
11:00 EMU Government consumption (in % qoq) Q1 0.1
11:00 EMU Gross fixed capital formation (in % qoq) Q1 -0.5
11:00 EMU Real GDP (in % yoy) Q2 2.5
11:00 EMU Real GDP (in %qoq) Q2 0.8
12:00 GE Industrial production (in % mom) Apr 0.7
12:00 GE Industrial production (in % yoy) Apr 11.2
20:00 US Fed Releases Beige Book Economic Survey
Thu, 09 Jun '11 1:50 JP Real GDP (in % qoq) Q1 -0.9

7:30 FR Non-farm payrolls (in % qoq) Q1 0.4
10:00 US Fed's Plosser Speaks on U.S. Economy in London
10:30 UK Trade balance (EUR bn) Apr -3005
13:00 UK Bank of England repo rate (in %) Jan 1 0.5 0.5 0.5
13:45 EMU ECB refi rate (in %) Jan 1 1.25 1.25 1.25
14:30 EC Trichet Speaks at ECB Monthly News Conference
14:30 US Trade balance (USD bn) Apr -48.5 -48.2
Fri, 10 Jun '11 8:45 FR Industrial production (in % mom) Apr -0.9
10:00 IT Real GDP (in % yoy) Q1 1.0
10:00 IT Real GDP (in % qoq) Q1 0.1
10:30 UK Producer price index, manuf. products (in % mom) May 0.8
10:30 UK Industrial production (in % mom) Apr 0.2
14:30 US Import prices (in % mom) May -0.2 2.2
20:00 US Federal budget (USD bn) May -40.49
*Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted

Friday Notes
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a) UniCredit Bank AG, Am Tucherpark 16, 80538 Munich, Germany, (also responsible for the distribution pursuant to §34b WpHG). The company belongs to UCI Group.
Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany.
b) UniCredit Bank AG London Branch, Moor House, 120 London Wall, London EC2Y 5ET, United Kingdom.
Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany and subject to limited regulation by the Financial Ser-
vices Authority (FSA), 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom. Details about the extent of our regulation by the Financial Services Authority
are available from us on request.
c) UniCredit Bank AG Milan Branch, Via Tommaso Grossi 10, 20121 Milan, Italy, duly authorized by the Bank of Italy to provide investment services.
Regulatory authority: “Bank of Italy”, Via Nazionale 91, 00184 Roma, Italy and Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany.
d) UniCredit Bank AG Vienna Branch, Julius-Tandler-Platz 3, 1090 Vienna, Austria
Regulatory authority: Finanzmarktaufsichtsbehörde (FMA), Praterstrasse 23, 1020 Vienna, Austria and subject to limited regulation by the “BaFin“ – Bundesanstalt für Finanz-
dienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany. Details about the extent of our regulation by the Bundesanstalt für Finanzdienstleistungsaufsicht are available
from us on request.
e) UniCredit Securities, Boulevard Ring Office Building, 17/1 Chistoprudni Boulevard, Moscow 101000, Russia
Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow 119991, Russia
f) UniCredit Menkul Değerler A.Ş., Büyükdere Cad. No. 195, Büyükdere Plaza Kat. 5, 34394 Levent, Istanbul, Turkey
Regulatory authority: Sermaye Piyasası Kurulu – Capital Markets Board of Turkey, Eskişehir Yolu 8.Km No:156, 06530 Ankara, Turkey
g) UniCredit Bulbank, Sveta Nedelya Sq. 7, BG-1000 Sofia, Bulgaria
Regulatory authority: Financial Supervision Commission (FSC), 33 Shar Planina str.,1303 Sofia, Bulgaria
h) Zagrebačka banka, Paromlinska 2, HR-10000 Zagreb, Croatia
Regulatory authority: Croatian Agency for Supervision of Financial Services, Miramarska 24B, 10000 Zagreb, Croatia
i) UniCredit Bank, Na Príkope 858/20, CZ-11121 Prague, Czech Republic
Regulatory authority: CNB Czech National Bank, Na Příkopě 28, 115 03 Praha 1, Czech Republic
j) Bank Pekao, ul. Grzybowska 53/57, PL-00-950 Warsaw, Poland
Regulatory authority: Polish Financial Supervision Authority, Plac Powstańców Warszawy 1, 00-950 Warsaw, Poland
k) UniCredit Bank, Prechistenskaya emb. 9, RF-19034 Moscow, Russia
Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow 119991, Russia
l) UniCredit Bank, Šancova 1/A, SK-813 33 Bratislava, Slovakia
Regulatory authority: National Bank of Slovakia, Stefanikovo nam. 10/19, 967 01 Kremnica, Slovakia
m) Yapi Kredi, Yapi Kredi Plaza D Blok, Levent, TR-80620 Istanbul, Turkey
Regulatory authority: Sermaye Piyasası Kurulu – Capital Markets Board of Turkey, Eskişehir Yolu 8.Km No:156, 06530 Ankara, Turkey
n) UniCredit Tiriac Bank, Ghetarilor Street 23-25, RO-014106 Bucharest 1,Romania
Regulatory authority: CNVM, Romanian National Securities Commission, Foişorului street, no.2, sector 3, Bucharest, Romania
o) ATFBank, 100 Furmanov Str., KZ-050000 Almaty, Kazakhstan
Agency of the Republic of Kazakhstan on the state regulation and supervision of financial market and financial organisations, 050000, Almaty, 67 Aiteke Bi str., Kazakhstan
POTENTIAL CONFLICTS OF INTEREST

UniCredit Bank AG acts as a Specialist or Primary Dealer in government bonds issued by the Italian, Portuguese and Greek Treasury. Main tasks of the Specialist are to partici-
pate with continuity and efficiency to the governments' securities auctions, to contribute to the efficiency of the secondary market through market making activity and quoting re-
quirements and to contribute to the management of public debt and to the debt issuance policy choices, also through advisory and research activities.
ANALYST DECLARATION
The author’s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly.
ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST
To prevent or remedy conflicts of interest, UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit Bank AG Vienna Branch, UniCredit Bank AG Milan Branch,
UniCredit Securities, UniCredit Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank have es-
tablished the organizational arrangements required from a legal and supervisory aspect, adherence to which is monitored by its compliance department. Conflicts of interest aris-
ing are managed by legal and physical and non-physical barriers (collectively referred to as “Chinese Walls”) designed to restrict the flow of information between one
area/department of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit Bank AG Vienna Branch, UniCredit Bank AG Milan Branch, UniCredit Securities, UniCredit
Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank and another. In particular, Investment
Banking units, including corporate finance, capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries
from Markets Units, as well as the research department. In the case of equities execution by UniCredit Bank AG Milan Branch, other than as a matter of client facilitation or delta
hedging of OTC and listed derivative positions, there is no proprietary trading. Disclosure of publicly available conflicts of interest and other material interests is made in the re-
search. Analysts are supervised and managed on a day-to-day basis by line managers who do not have responsibility for Investment Banking activities, including corporate fi-
nance activities, or other activities other than the sale of securities to clients.
UniCredit Research page 30

Friday Notes
ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED
Notice to Austrian investors
This document does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any securities and neither this document
nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever.
This document is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in
whole or part, for any purpose.
Notice to Czech investors
This report is intended for clients of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit Bank AG Vienna Branch, UniCredit Bank AG Milan Branch, UniCredit Se-
curities, UniCredit Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank in the Czech Republic
and may not be used or relied upon by any other person for any purpose.
Notice to Italian investors
This document is not for distribution to retail clients as defined in article 26, paragraph 1(e) of Regulation n. 16190 approved by CONSOB on October 29, 2007.
In the case of a short note, we invite the investors to read the related company report that can be found on UniCredit Research website www.research.unicreditgroup.eu.
Notice to Japanese investors
This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document
nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever.
Notice to Polish investors
This document is intended solely for professional clients as defined in Art. 3 39b of the Trading in Financial Instruments Act of 29 July 2005.The publisher and distributor of the
recommendation certifies that it has acted with due care and diligence in preparing the recommendation, however, assumes no liability for its completeness and accuracy.
Notice to Russian investors
As far as we are aware, not all of the financial instruments referred to in this analysis have been registered under the federal law of the Russian Federation "On the Securities
Market" dated 22 April 1996, as amended (the "Law"), and are not being offered, sold, delivered or advertised in the Russian Federation. This analysis is intended for qualified in-
vestors, as defined by the Law, and shall not be distributed or disseminated to a general public and to any person, who is not a qualified investor.
Notice to Turkish investors
Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities. Investment advisory services are provided in
accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the cli-
ents. Comments and recommendations stated herein rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not suit
your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely on the information stated here may not result in consequences
that meet your expectations.
Notice to UK investors
This communication is directed only at clients of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit Bank AG Vienna Branch, UniCredit Bank AG Milan Branch,
UniCredit Securities, UniCredit Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank in the
Czech Republic who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unin-
corporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be
communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted on or relied on by persons who are not relevant per-
sons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons.
Notice to U.S. investors
This report is being furnished to U.S. recipients in reliance on Rule 15a-6 ("Rule 15a-6") under the U.S. Securities Exchange Act of 1934, as amended. Each U.S. recipient of this
report represents and agrees, by virtue of its acceptance thereof, that it is such a "major U.S. institutional investor" (as such term is defined in Rule 15a-6) and that it understands
the risks involved in executing transactions in such securities. Any U.S. recipient of this report that wishes to discuss or receive additional information regarding any security or
issuer mentioned herein, or engage in any transaction to purchase or sell or solicit or offer the purchase or sale of such securities, should contact a registered representative of
UniCredit Capital Markets, LLC (“UCI Capital Markets”).
Any transaction by U.S. persons (other than a registered U.S. broker-dealer or bank acting in a broker-dealer capacity) must be effected with or through UCI Capital Markets.
The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S. re-
porting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing and
reporting standards as U.S. issuers.
The information contained in this report is intended solely for certain "major U.S. institutional investors" and may not be used or relied upon by any other person for any purpose.
Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as
amended, or under any other U.S. federal or state securities laws, rules or regulations. The investment opportunities discussed in this report may be unsuitable for certain inves-
tors depending on their specific investment objectives, risk tolerance and financial position. In jurisdictions where UCI Capital Markets is not registered or licensed to trade in se-
curities, commodities or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to jurisdic-
tion and which may require that a transaction be made in accordance with applicable exemptions from registration or licensing requirements.
The information in this publication is based on carefully selected sources believed to be reliable, but UCI Capital Markets does not make any representation with respect to its
completeness or accuracy. All opinions expressed herein reflect the author’s judgment at the original time of publication, without regard to the date on which you may receive
such information, and are subject to change without notice.
UCI Capital Markets may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. These publications
reflect the different assumptions, views and analytical methods of the analysts who prepared them. Past performance should not be taken as an indication or guarantee of future
performance, and no representation or warranty, express or implied, is provided in relation to future performance.
UCI Capital Markets and any company affiliated with it may, with respect to any securities discussed herein: (a) take a long or short position and buy or sell such securities; (b)
act as investment and/or commercial bankers for issuers of such securities; (c) act as market makers for such securities; (d) serve on the board of any issuer of such securities;
and (e) act as paid consultant or advisor to any issuer.
The information contained herein may include forward-looking statements within the meaning of U.S. federal securities laws that are subject to risks and uncertainties. Factors
that could cause a company’s actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic condi-
tions that adversely affect the level of demand for the company’s products or services, changes in foreign exchange markets, changes in international and domestic financial
markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this
cautionary statement
This document may not be distributed in Canada or Australia.

Friday Notes
UniCredit Research*
Thorsten Weinelt, CFA Dr. Ingo Heimig
Global Head of Research & Chief Strategist Head of Research Operations
+49 89 378-15110 +49 89 378-13952
thorsten.weinelt@unicreditgroup.de ingo.heimig@unicreditgroup.de
Economics & FI/FX Research
Economics & Commodity Research EEMEA Economics & FI/FX Strategy

European Economics Gillian Edgeworth, Chief EEMEA Economist
+44 0207 826 1772, gillian.edgeworth@unicredit.eu
Marco Valli, Chief Eurozone Economist
+39 02 8862-8688 Gyula Toth, Head of EEMEA FI/FX Strategy
marco.valli@unicredit.eu +43 50505 823-62, gyula.toth@unicreditgroup.at
Andreas Rees, Chief German Economist Güldem Atabay, Economist, Turkey
+49 89 378-12576 +90 212 385 9551, guldem.atabay@unicreditgroup.com.tr
andreas.rees@unicreditgroup.de
Dmitry Gourov, Economist, EEMEA
Stefan Bruckbauer, Chief Austrian Economist +43 50505 823-64, dmitry.gourov@unicreditgroup.at
+43 50505 41951
stefan.bruckbauer@unicreditgroup.at Hans Holzhacker, Chief Economist, Kazakhstan
+7 727 244-1463, h.holzhacker@atfbank.kz
Tullia Bucco
+39 02 8862-2079 Marcin Mrowiec, Chief Economist, Poland
tullia.bucco@unicredit.eu +48 22 656-0678, marcin.mrowiec@pekao.com.pl
Chiara Corsa Vladimir Osakovsky, Ph.D., Head of Strategy and Research, Russia
+39 02 8862-2209 +7 495 258-7258 ext.7558, vladimir.osakovskiy@unicreditgroup.ru
chiara.corsa@unicredit.eu Rozália Pál, Ph.D., Chief Economist, Romania
Dr. Loredana Federico +40 21 203-2376, rozalia.pal@unicredit.ro
+39 02 8862-3180 Kristofor Pavlov, Chief Economist, Bulgaria
Loredana.Federico@unicredit.eu +359 2 9269-390, kristofor.pavlov@unicreditgroup.bg
Mauro Giorgio Marrano Goran Šaravanja, Chief Economist, Croatia
+39 02 8862-8222 +385 1 6006-678, goran.saravanja@unicreditgroup.zaba.hr
mauro.giorgiomarrano@unicredit.eu
Pavel Sobisek, Chief Economist, Czech Republic
Alexander Koch, CFA +420 2 211-12504, pavel.sobisek@unicreditgroup.cz
+49 89 378-13013
alexander.koch1@unicreditgroup.de Dmitry Veselov, Ph.D., Economist, EEMEA
+44 207 826 1808, dmitry.veselov@unicredit.eu
Chiara Silvestre
chiara.silvestre@unicredit.eu Vladimír Zlacký, Chief Economist, Slovakia
+421 2 4950-2267, vladimir.zlacky@unicreditgroup.sk
US Economics Global FI/FX Strategy

Dr. Harm Bandholz, CFA, Chief US Economist Michael Rottmann, Head
+1 212 672 5957 +49 89 378-15121, michael.rottmann1@unicreditgroup.de
harm.bandholz@unicredit.eu
Dr. Luca Cazzulani, Deputy Head, FI Strategy
+39 02 8862-0640, luca.cazzulani@unicredit.eu
Commodity Research Chiara Cremonesi, FI Strategy
Jochen Hitzfeld +44 20 7826-1771, chiara.cremonesi@unicredit.eu
+49 89 378-18709
Elia Lattuga, FI Strategy
jochen.hitzfeld@unicreditgroup.de
+39 02 8862-2027, elia.lattuga@unicredit.eu
Nikolaus Keis
Dr. Stephan Maier, FX Strategy
+49 89 378-12560
+39 02 8862-8604, stephan.maier@unicredit.eu
nikolaus.keis@unicreditgroup.de
Armin Mekelburg, FX Strategy
+49 89 378-14307, armin.mekelburg@unicreditgroup.de
Roberto Mialich, FX Strategy
+39 02 8862-0658, roberto.mialich@unicredit.eu
Kornelius Purps, FI Strategy
+49 89 378-12753, kornelius.purps@unicreditgroup.de
Herbert Stocker, Technical Analysis
+49 89 378-14305, herbert.stocker@unicreditgroup.de
Publication Address
UniCredit Research
Corporate & Investment Banking Bloomberg
UniCredit Bank AG UCGR
Arabellastrasse 12
D-81925 Munich Internet
Tel. +49 89 378-18927 www.research.unicreditgroup.eu
Fax +49 89 378-18352
*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit CAIB Group (UniCredit CAIB), UniCredit Securities (UniCredit Securities),
UniCredit Menkul Değerler A.Ş. (UniCredit Menkul), UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank and ATFBank.

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27 May 2011 Economics & FI/FX Research

■ Further topics: Oil Price 110 105 105 110

GROWTH LOCOMOTIVE GERMANY – FINANCIAL CRISIS OVERCOME

UniCredit Research page 1 See last pages for disclaimer.

IN THE PASSING LANE

fundamentals. Besides the weather-related catching-up -1

upswing driven by domestic demand? To answer this Italy -5.1%

As already signaled by the preliminary estimate published a

quarterly basis in the further course of this year (which is of

UniCredit Research page 2 See last pages for disclaimer.

last 40 years. As can be seen in our following chart, real 2005-08

(I) HISTORICAL RECOVERIES

Source: Feri, UniCredit Research

UniCredit Research page 3 See last pages for disclaimer.

Construction CAPACITY UITILIZATION RISING STRONGER THAN IN THE PAST

Source: Feri, UniCredit Research

UniCredit Research page 4 See last pages for disclaimer.

Source: UniCredit Research -2

implemented by former Chancellor Schroeder between 2003

UniCredit Research page 5 See last pages for disclaimer.

growth to be 2% in 2012 after 3½% this year. Please keep in

could be low mortgage rates. Another, probably more important 500

Interestingly, the two self-sustained recoveries in the 1970s -100

UniCredit Research page 6 See last pages for disclaimer.

■ Last weekend, S&P revised Italy’s rating outlook from stable

■ The move reflects “the increased downside risks to the 0

the government, whose efforts in terms of growth-enhancing -5 Italy EMU

S&P lowers the rating outlook -7

UniCredit Research page 7 See last pages for disclaimer.

The recently published National Program of Reforms provides

Chiara Corsa (UniCredit Bank Milan)

Luca Cazzulani (UniCredit Bank Milan)

UniCredit Research page 8 See last pages for disclaimer.

■ The greatest upside risk via a strong depreciation of the 8

CHF remains small. The currency’s safe-haven status has 6

Growth fears for the global economy have recently triggered

CPI APPAREL PRICES, IN % MOM

200 Switch to monthly recording

UniCredit Research page 9 See last pages for disclaimer.

Switzerland, in contrast, import costs in domestic currency 6.0

IMPORT PRICES, IN % YOY (1Q11)

UniCredit Research page 10 See last pages for disclaimer.

Source: SNB, UniCredit Research -4

WHOLESALE OUTPUT PRICE EXPECTATIONS, DIFFERENCES (%)

and hence no appreciable acceleration of inflation compared 1.55

Source: Bloomberg, UniCredit Research

UniCredit Research page 11 See last pages for disclaimer.

The strength of the currency implies that the risk of serious

Alexander Koch, CFA (UniCredit Bank)

UniCredit Research page 12 See last pages for disclaimer.

Data Monitor – Preview Europe

May CIB Cons. Mar Feb

We expect that harmonized consumer inflation will move 4

sideways to 3.5%, as a favorable base effect on transport 3

Source: INE, UniCredit Research

May CIB Cons. Apr Mar CIB forecast

“distorted” upward the April outcome and we should see