INTERNATIONAL PERSPECTIVE The clock is ticking Econoday International Perspective 12/14/12 By Anne D.

Picker, Chief Economist Global Markets The budget negotiations were front and center globally as investors swayed with each positive and negative word from Washington. Better than expected U.S. econo mic data did little to offset investor angst. Fed chairman Ben Bernanke added to concerns Wednesday during his press conference when he said that the Fed could not offset the fallout should no agreement be reached. The Federal Reserve still has ability to surprise some in the financial markets. While analysts mostly expected a replacement for operation twist expiring at years end, the change in guidance was largely unexpected by market players. The FOMC changed from timeframe guidance to one focused on indicators. The Fed, in accord ance with its dual mandate to boost employment while also keeping down inflation , now says it will keep its policy fed funds rate near zero until the unemployme nt rate reaches 6.5 percent before considering a tightening of monetary policy. This assumes inflation remains within its long term target of 2.0 percent and be low its trigger point of 2.5 percent rate. Mixed picture emerges from flash PMI readings The likelihood of the Eurozone recording a third successive quarter of contracti ng real GDP increased somewhat according to December flash PMI data. Of particul ar note, the composite output index, while above its final November reading and at a nine month high of 47.3, remained below the key 50 growth threshold. The ma nufacturing component remained in the doldrums, edging up just 0.1 point to a lo wer than expected 46.3. This is also a nine month peak but still deep into contr actionary territory. Services were up 1.1 points at 47.8, a five month high. Elsewhere, Chinas flash manufacturing PMI remained above the breakeven point for a second month, climbing to a reading of 50.9 in December from 50.4 the month be fore. And the U.S. manufacturing PMI jumped to a reading of 54.2 from 52.4. Global Stock Market Recap 2011 2012 % Change Index Dec 30 Dec 7 Dec 14 Asia/Pacific Australia All Ordinaries Japan Nikkei 225 8455.4 Hong Kong Hang Seng S. Korea Kospi 1825.7 Singapore STI 2646.4 China Shanghai Composite India Sensex Indonesia Malaysia Philippines Taiwan Taiex Thailand 30 Jakarta KLCI PSEi 7072.1 SET

Week 4111.0 9527.4 18434.4 1957.5 3107.1 2199.4

Year 4555.9 9737.6 22191.2 1995.0 3168.4 2061.8 19317.3 3822.0 1652.0 5707.1 0.7% 1358.5 4595.1 2.2% 22606.0 1.9% 2.0% 2150.6 -0.6% 4290.8 2.1% -1.5% 8.9% 1.8% 0.9% 15.2% 1.9% 9.3% 19.7% 4.3% 11.8% 22.6% -2.2% 12.7%

15454.9 19424.1 Composite 1530.7 1617.8 4372.0 5794.2 7642.3 7698.8 1025.3 1335.0

25.0% 4308.9 0.4% 7.9% 30.5% 32.5% 6.3% 28.8%

Europe UK FTSE 100 5572.3 5914.4 5921.8 0.1% France CAC 3159.8 3605.6 3643.3 1.0% 15.3% Germany XETRA DAX 5898.4 7517.8 7596.5 1.0%

Italy FTSE MIB 15089.7 Spain IBEX 35 8566.3 7848.5 Sweden OMX Stockholm 30 Switzerland SMI 5936.2 North America United States NASDAQ 2605.2 S&P 500 1257.6 Canada S&P/TSX Mexico Bolsa Dow 2978.0 1418.1 Comp. 37077.5 12217.6 2971.3 1413.6 11955.1 42797.7

15699.2 8024.1 987.9 6925.3 13155.1 -0.2% -0.3% 12159.8 43050.9

15908.1 2.2% 1098.6 6902.5

1.3% 5.4% -6.3% 1098.1 0.0% -0.3% 16.3% 7.5% 2.9%

11.2%

13135.0 -0.2% 14.1% 12.4% 12296.7 1.1% 0.6% 16.1%

Europe and the UK Investors continue to monitor the Washington budget negotiations closely and eff ectively neutralizing better than expected economic data from China and the U.S. However, European data continues to show contracting growth although at a slowe r pace. The FTSE crept up 0.1 percent on the week while both the CAC and DAX wer e 1.0 percent higher. The SMI slipped 0.3 percent. The MIB and IBEX were up 1.3 percent and 2.4 percent respectively on the news that the Eurogroup finally appr oved the release of a second disbursement of bailout funds to Greece on the comp letion of the government s debt buyback operation. At its meeting in Brussels Th ursday, Eurogroup authorized the bailout fund, the European Financial Stability Facility (EFSF), to release the next installment for a total amount of 49.1 billi on. The disbursement will be made in several tranches. Greece will receive 34.3 b illion shortly. The remaining amount will be disbursed in the first quarter of 2 013. Thursday was the first opportunity that investors here could react to the Federa l Reserves actions at their FOMC meeting. Comments made by Fed Chairman Ben Berna nke at his press conference Wednesday raised concerns regarding the potential da mage that the stalemate is causing. The Fed chairman warned that Fed support can not fully offset the downside risks presented by the fiscal cliff. Bernanke expe cts Congress to reach a deal, but noted that inaction has already resulted in a troubling drop in business confidence. Progress in Europe this week was two-fold Greece finally will get some money and a banking structure has been agreed upon. However a lot remains to be done. EU finance ministers agreed to a deal on Thursday to provide nearly 50 billion in lo ng delayed aid to Greece, prompting Prime Minister Antonis Samaras to declare an end to talk of a Greek exit from the single currency. It averts a catastrophic default and secures Greece s survival in the Eurozone after months of doubt and political turmoil. The ministers also finalized an agreement that gives the European Central Bank m ore powers to oversee the functioning of banks. The decision came ahead of the t wo day EU summit in Brussels which began Thursday. The ministers plan to make th e supervisory system fully operational by March 2014 or 12 months after the entr y into force of the legislation, whichever is later, according to statement issu ed after the meeting. The Single Supervisory Mechanism (SSM) will be composed of the ECB and national competent authorities. As the chief watchdog, the ECB will be responsible for the overall functioning of the SSM and will have direct over sight of Eurozone banks, but "in a differentiated way and in close cooperation w ith national supervisory authorities," the ministers said in the statement. Swiss National Bank As universally expected, the SNB s Monetary Policy Assessment left the target ra nge for 3-month CHF Libor unchanged at zero to 0.25 percent with a central targe t rate of zero. The SNB also again restated its determination to prevent the Swi

ss franc moving from below the 1.20 level against the euro and indicated a conti nued willingness to buy euros in unlimited quantities. The steady hand on policy reflected an essentially unchanged conditional inflation forecast which, at 0.2 percent for the end of next year, matched exactly the September projection. How ever, immediately ahead prices are expected to be a little stronger than last qu arter with a positive annual inflation rate now seen next quarter, two quarters ahead of the previous forecast. Real GDP growth is now put at 1.0 percent this y ear and 1.0 percent to 1.5 percent in 2013. The partial easing of tensions in Eurozone financial markets since the announcem ent of the so-called Draghi Plan has reduced upside pressure on the CHF in recen t months there were modest declines in the central bank s foreign reserves in bo th October and November. Nonetheless, the SNB s determination to keep its minimu m exchange rate target intact remains as resolute as ever and has even prompted speculation about the introduction of negative official interest rates. The SNBs foreign currency reserves have surged almost 70 percent over the past year to 42 4.8 billion Swiss francs at the end of November as policy makers stepped up euro purchases to curb flows sparked by the regions debt crisis. Asia Pacific Most equity indexes were up after economic data pointed to signs of improvement in Chinas economy. Sentiment improved as investors continued to hope that the Ban k of Japan will pursue aggressive monetary easing after Sunday s Lower House Ele ction. Positive news from Europe also helped. The next tranche of loans to Greec e and the political agreement on a Eurozone banking union helped counterbalance worries over the progress of U.S. budget talks. On the week, the Nikkei gained 2.2 percent, the Hang Seng was up 1.9 percent and the Shanghai Composite soared 4.3 percent. Japanese equities rallied to an eigh t month high after the yen declined following the announcement of the Feds new bo nd buying program and expectations of policy actions at home. The Shanghai Compo site jumped on hopes new policies will emerge from the central economic work con ference over the weekend. Also helping the index was the December flash manufact uring PMI reading that climbed to 50.9, a 16 month high. Equities in Australia w ere up 0.9 percent, near a 17 month high with ongoing worries about the fiscal c liff talks continuing to cap the upside. Bank of Korea The Bank of Korea kept borrowing costs unchanged before the presidential electio n to be held on December 19th, and after North Korea launched a rocket in defian ce of international sanctions. Governor Kim Choong Soo and his board kept its ke y seven day repurchase rate at 2.75 percent after 25 basis point cuts in July an d October. South Koreas economic data have given mixed signals and a rapid reboun d in growth is unlikely, according to Kim. At the same time, Korea is poised for a moderate export led recovery and inflation will remain low, the BoK said in its s tatement, bolstering the view that the Bank will remain on hold. Currencies The dollar was down against most of its major counterparts last week with the ex ception of the yen. Even though traders were cautious as they listened to the rh etoric from the fiscal cliff negotiations in Washington. At the same time, conce rns about the Eurozones sovereign debt woes eased when the Euro area finance mini sters agreed finally to release a second tranche of funds for Greece and then su bsequently agreed to give the European Central Bank regulatory power over banks. The yen extended its losses against other major currencies for variety of reason s, including the likelihood of a big opposition party victory in Japan s general

elections Sunday and a solid batch of economic data from China. Analysts cited strong expectations for an aggressive stance on monetary and fiscal policy by ke y opposition leader Shinzo Abe whose Liberal Democratic Party (LDP) is expected to win a major victory. An upbeat economic report from China and reduced concern s over the U.S. fiscal cliff were also factors behind the yens weakening at weeks end. The yen, along with the U.S. dollar, served as a safe haven during the wor st of the Eurozones debt woes which pushed the Japanese currencys value ever highe r to the pain of its export industries. Expectations for additional easing by the Bank of Japan were kept intact by the BoJ s Tankan survey of business sentiment showing Japanese companies more pessim istic about business conditions in the three months to December. The closely wat ched large manufacturers business sentiment index deteriorated to minus 12 from minus 3 in the previous survey. Selected currencies weekly results 2011 2012 % Change Dec 30 Dec 7 Dec 14 Week 2012 U.S. $ per currency Australia A$ 1.023 1.049 New Zealand NZ$ 0.778 0.833 Canada C$ 0.982 1.010 1.014 Eurozone euro ( ) 1.294 UK pound sterling () 1.554 Currency per U.S. $ China yuan 6.295 6.224 6.246 Hong Kong HK$* 7.767 7.750 India rupee 53.065 54.475 54.485 Japan yen 76.975 82.430 83.490 Malaysia ringgit 3.168 3.056 Singapore Singapore $ 1.297 South Korea won 1152.450 7.2% Taiwan Taiwan $ 30.279 29.064 Thailand baht 31.580 30.630 Switzerland Swiss franc 0.939 *Pegged to U.S. dollar Source: Bloomberg

Indicator scoreboard EMU October industrial output dropped 1.4 percent on the month and declined 3.6 perc ent when compared with a year ago. With the exception of nondurable consumer goo ds, which posted a 1.2 percent advance, output was down on the month in all majo r sub-sectors. Durables declined 3.8 percent, capital goods were off 3.0 percent and intermediates 1.2 percent. Energy contracted 1.5 percent. The second consec utive hefty drop in industrial production left the level of output 2.7 percent b elow its third quarter average when it was up 0.4 percent. Regionally, it was Ge rmany that did much of the damage with a sizeable 2.4 percent slump from Septemb er, its third decline in as many months. France saw a 0.6 percent slide after a 2.8 percent drop last time and Italy a 1.1 percent contraction, that following S eptember s 1.3 percent gain. Some of the smaller states fared rather better but the strongest monthly gain, 4.8 percent in Portugal, came nowhere close to offse tting the previous period s 12.1 percent plunge. Eurozone industrial production is now at its weakest level since April 2010.

1.056 0.845 0.4% 1.293 1.604

0.7% 1.5% 3.3% 1.316 1.616

3.2% 8.6% 1.8% 0.8% 1.7% 4.0%

-0.3% 0.8% 7.750 0.0% 0.0% -2.6% -1.3% -7.8% 3.057 0.0% 1.221 1.220 1081.550 29.059 0.0% 30.610 0.1% 0.934 0.918

0.2% 3.6% 0.0% 6.3% 1074.680 4.2% 3.2% 1.7%

0.6%

2.3%

November harmonized index of consumer prices was down 0.2 percent on the month a nd was 2.2 percent higher on the year, down from 2.5 percent in October. Much of the deceleration was due to the effects of the more volatile categories, notabl y energy which saw a 1.4 percent monthly decline in prices that reduced its annu al inflation rate from 8.0 percent at the start of the quarter to 5.7 percent. H owever, excluding food, drink tobacco & petroleum, the 12-month rate slipped a n otch to 1.4 percent and without just seasonal food and petroleum, the rate simil arly edged 0.1 percentage points lower to 1.6 percent. Omitting unprocessed food & petroleum, inflation was steady at also 1.6 percent. Germany December ZEW current conditions index was up a smaller than expected 0.3 points to 5.7 it was still its first increase since May. More importantly, expectations climbed a surprisingly steep 22.6 points to 6.9, the strongest gain since Septe mber and the highest reading since April. Even so, further anticipated weakness in overseas demand means that ZEW does not see any significant upswing in busine ss activity over the first half of 2013. October seasonally adjusted merchandise trade surplus narrowed from a marginally smaller revised 16.9 billion in September to 15.2 billion at the start of the cur rent quarter. The unadjusted surplus was 15.8 billion, down 1.1 billion from last time. The smallest adjusted surplus since March reflected a 2.5 percent monthly surge in imports that swamped a modest 0.2 percent increase in exports. Imports, which were up 6.0 percent from October 2011, hit their highest level since May while exports, which have now fallen in three of the last five months, were up 1 0.6 percent on the year and are now 2.2 percent short of their August peak. France October industrial production (excluding construction) declined 0.7 percent on t he month following an unrevised 2.7 percent drop in September. Output was down 3 .6 percent on the year, a much steeper rate of decline than the drop of 2.5 perc ent seen last time. The latest decline, which left output at its lowest level si nce December 2009, was largely attributable to a 2.4 percent monthly slide in tr ansport equipment. However, production also contracted in both the other manufac tured goods category (1.2 percent) and electronics & machinery (0.5 percent). Pa rtial offsets were registered by food (up 0.1 percent) and refining (up 3.6 perc ent) and energy was up 1.7 percent. However, construction was off 1.1 percent an d manufacturing output dropped 0.9 percent after a 3.4 percent slump at the end of last quarter. United Kingdom November claimant count unemployment declined 3,000 monthly its first fall since August. October s increase had been revised to just 6,000 from 10,100. This lef t the jobless rate steady at the 4.8 percent level to which it first fell back i n July. ILO employment increased a solid 40,000 over the three months to October to a record high of 29.601 million. Moreover, the entire gain was attributable to full time positions which were up 44,000. At the same time, unemployment decl ined 82,000, leaving the jobless rate at 7.8 percent. Asia/Pacific Japan Third quarter unrevised gross domestic product was down 0.9 percent on the quart er or contracted at an annualized rate of 3.5 percent. On the year, GDP was up 0 .5 percent. The estimates of the expenditure components were little changed from the first estimate. Domestic demand was down an unrevised 0.2 percent. However,

private consumption was revised to a drop of 0.4 percent from a 0.5 percent dec line in the first estimate. CAPEX was revised to a decline of 3.0 percent from t he earlier estimate of a 3.2 percent drop on the quarter. October tertiary industry activity index slipped 0.1 percent and was up 0.2 perc ent from a year ago. Among the industries that declined on the month were wholes ale & retail trade, living related & personal services & amusement services, ele ctricity, gas, heat supply & water, accommodations, eating & drinking services, information & communications, medical, health care & welfare, real estate & good s rental & leasing, finance & insurance and compound services. Industries that w ere up on the month were miscellaneous services (except government services etc. ), transport & postal activities, scientific research, professional & technical services, and learning support. November corporate goods price index was unchanged on the month and down 0.9 per cent for its eighth consecutive drop from a year ago. Food, beverages, tobacco & feedstuffs were up 0.7 percent on the year after increasing 0.5 percent in Octo ber. Iron & steel prices dropped 9.8 percent after dropping 10.1 percent the mon th before. Textile products slipped 0.3 percent after rising 0.2 percent on the year. Elsewhere, prices for information & communications equipment dropped 7.9 p ercent after sliding 10.0 percent in October. October core private sector machinery orders excluding volatile items from elect ric utilities and ships were up 2.6 percent on the month but were down 4.6 perce nt on the year. This was the first monthly increase since July. However, the gov ernment downgraded its view for the first time in four months as overseas demand remains weak. Core orders were up from carmakers, refineries, construction firm s and information services in a rebound after September s widespread declines ra nging from the car and electronics industries to construction and farming. Total machinery orders were down 1.6 percent and 6.9 percent on the year. Overseas or ders were up 9.4 percent but sank 12.8 percent on the year. The Tankan survey was slightly worse than analysts expected. Fourth quarter Tank an reading for large manufacturers was minus 12, down from the third quarters rea ding of minus 3. Analysts expected minus 10. This was the third straight quarter drop, hit by depressed exports. Small manufacturers index reading was minus 18 a fter a reading of minus 14 last time, and slightly better than the consensus est imate of minus 20. Large non-manufacturing index was at plus 4 while small non-m anufacturers index reading was minus 11. But capital investment plans by all fir ms for fiscal 2012 have been revised up. Total CAPEX for fiscal year 2012 was pr ojected at 7.1 percent, up from Septembers 5.8 percent. Big firms see CAPEX was u p 6.8 percent after saying it would rise 6.4 percent in June. Small firms see CA PEX increasing 6.2 percent after third quarters unchanged. China November consumer price index was up 2.0 percent from a year ago after increasin g 1.7 percent in October. For year to date, the index is up 2.7 percent for a se cond month when compared with the same months a year ago. On the month, the CPI edged up 0.1 percent. The urban CPI was up 2.1 percent while rural gained 1.9 pe rcent. Food prices jumped 3.0 percent after increasing 1.5 percent in October. N onfood prices were up a tame 1.6 percent on the year. The CPI will end 2012 well within the governments official 4.0 percent inflation target. November producer price index declined 2.2 percent from a year ago. Year to date

, the PPI was down 1.7 percent, little changed from the drop of 1.6 percent seen in October. On the month, the PPI slipped 0.1 percent. Raw chemical materials p rices declined 4.5 percent after dropping 5.7 percent in October. Production mat erials deflation was down 3.0 percent, the best showing since June s 2.9 percent decline. November industrial production improved to an increase of 10.1 percent on the ye ar after rising 9.6 percent in October. This was the first double digit increase since March s 11.9 percent gain. Improving growth was seen in key categories, i ncluding steel, where production growth jumped to 16.5 percent from 11.7 percent despite overcapacity and pricing problems in the industry. Electricity output w as up 7.9 percent on the year marking a fifth month of improvement after registe ring zero growth in March. November retail sales were up 14.9 percent on the year. Urban retail sales were up 15.0 percent while rural sales advanced 14.6 percent. Auto sales showed signs of recovery, rising 8.3 percent in November from 7.0 percent the month before. However, sales of building and decoration materials was 19.0 percent higher afte r increasing 24.7 percent in October, suggesting cooling housing demand. Furnitu re growth cooled to 23.9 percent from 29.8 percent. November merchandise trade surplus was $19.63 billion, lower than analyst expect ations of a $25.5 billion surplus. Exports were up 2.9 percent on the year while imports were unchanged. Expectations were that exports would climb 9.3 percent and imports, 2 percent. Exports for 11 months are up 7.3 percent while imports a re 4.1 percent higher from the same months a year ago. The trade surplus so far this year is $199.54 billion. In 2011 the trade surplus for 11 months was $141.3 billion. Americas Canada October seasonally adjusted trade balance returned a surprisingly small deficit of just C$0.17 billion, down sharply from a slightly wider revised C$1.01 billio n shortfall in September. The improvement reflected a 1.0 percent monthly increa se in exports together with a 1.2 percent decline in imports. A similar pattern in the volumes data meant that the real trade position was also much stronger th an last time. Within the monthly advance in overall nominal exports, sales to th e U.S. market slipped 0.2 percent which, with imports up 1.6 percent, saw Canada s bilateral trade surplus with its neighbor narrow from C$3.21 billion at the e nd of last quarter to C$2.77 billion. Among the major export product categories, most areas saw gains over the previous month, notably metal & non-metallic mine ral products (5.1 percent), farming & fishing products (18.3 percent) which hit a record high, and energy (3.0 percent). However, there were declines in metal o res & non-metallic minerals (21.9 percent) and motor vehicles & parts (1.6 perce nt). Imports were weighed down by monthly declines in a number of categories, mo st notably industrial chemicals, plastics & rubber (8.4 percent), metal & non-me tallic mineral products (5.7 percent) and electronic equipment (3.1 percent). Bottom line Positive economic data were neutralized by investors concerns about the progress of the U.S. budget negotiations. News out of the Eurozone concerning Greece and a banking union helped improve investors sentiment. U.S. data were mostly better than anticipated. The Federal Reserve surprised by changing its policy guidance. The Bank of Japan meets and bank watchers closely will watch what policy changes

are made given the streak of poor economic data and the outcome of the national elections. Investors will monitor the South Korean elections mid-week. And ever yone will be watching and listening to Washington as they await the outcome of t he U.S. budget negotiations as the deadline draws ever closer. Looking Ahead: December 17 through December 21, 2012 Central Bank activities December 19, 20 Japan Bank of Japan Monetary Policy Meeting December 19 UK Bank of England Meeting Minutes The following indicators will be released this week... Europe December 17 Eurozone Merchandise Trade Balance (October) December 18 UK Consumer Price Index (November) Producer Price Index (November) December 19 Germany Ifo Business Survey (December) December 20 Germany Producer Price Index (November) UK Retail Sales (November) December 21 UK Gross Domestic Product (Q3.2012 final) Asia/Pacific December 19 Japan Merchandise Trade Balance (November)

Americas December 20 Canada Retail Sales (October) December 21 Canada Consumer Price Index (November) Monthly Gross Domestic Product (October) Anne D Picker is the author of International Economic Indicators and Central Ban ks.

Important Legal Notice: Econoday has attempted to verify the information contain ed in this calendar. However, any aspect of such info may change without notice. Econoday does not provide investment advice, and does not represent that any of the information or related analysis is accurate or complete at any time. Legal Notices 1998-2012 Actual Data Source: Haver Analytics | Consensus Data Sources: Econoday and Marke t News International