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October 17, 2012

Issue No: 12/34


Global Economics Weekly

Economics Research
Assessing the interplay of macro surprises and spread products
Macro surprises matter for spread products but in different ways
We investigate the impact of macro surprises on the corporate bond and
Agency MBS markets. We find that for both investment grade corporate
bonds and Agency MBS, it is total returns (or equivalently yields) that
respond to macro surprises. For high yield bonds, it is the spreads that
respond to macro surprises. This difference reflects a trade-off between the
rates effect, where positive surprises cause a back-up in rates, and the
spread effect, where positive surprises lower the default premium. For
investment grade bonds and Agency MBS, the rates effect largely dominates
the spread effect, while for high yield bonds the two effects cancel out.
The impact is broader and larger since the global financial crisis
Focusing on the post-global financial crisis (GFC) sample period, we
document that the impact of macro surprises on both the corporate bond
and Agency MBS markets has become larger and broader.
Recent spread rally driven by declining premia, not better data
Looking at the recent spread rally, we find that both high yield bonds and
Agency MBS have outperformed the macro data, confirming our view that
the rally has been driven mostly by risk premia compression as opposed to
a better macro picture.
The impact of macro surprises on spreads has become bigger and broader
post-crisis
The plot shows the response of credit spreads (in bp) to one standard deviation
of surprises in the non-farm payroll report.

Source: Goldman Sachs Credit Strategy, Haver Analytics, Bloomberg

Lotfi Karoui
(917) 343-1548 lotfi.karoui@gs.com
Goldman, Sachs & Co.

Kamakshya Trivedi
+44(20)7051-4005 kamakshya.trivedi@gs.com
Goldman Sachs International

Hui Shan
(212) 902-4447 hui.shan@gs.com
Goldman, Sachs & Co.

Jose Ursua
(212) 357-2234 jose.ursua@gs.com
Goldman, Sachs & Co.

George Cole
+44(20)7552-3779 george.cole@gs.com
Goldman Sachs International

Julian Richers
(212) 855-0684 julian.richers@gs.com
Goldman, Sachs & Co.

Dominic Wilson
(212) 902-5924 dominic.wilson@gs.com
Goldman, Sachs & Co.









Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification
and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc. Goldman Sachs
-15 -10 -5 0
A financials
BBB financials
B
BB
CCC
Daily change in spreads (bps)
Full Sample
Post-crisis
Pre-crisis
October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 2
Macro surprises matter (more so than in the past)
Few drivers are more important to macro investors than economic data surprises, i.e., the
difference between the realised value of macro indicators and the consensus expectation.
Perhaps surprisingly, the literature linking macroeconomic news to financial markets has
been quite extensive for the equity and Treasury markets but very limited for spread
products.
1
In this Global Economics Weekly, we address this void with an in-depth analysis
of the impact of macro surprises on the Agency MBS and corporate bond markets.
2

Exhibits 1 and 2 provide some intuition on the sensitivity of the corporate bond and
Agency mortgage-backed securities (MBS) markets to macro surprises. They plot the
standardised surprises in the US non-farm payroll report vs. the daily change in CCC- and
B-rated corporate bond spreads (Exhibit 1), as well as the daily change in the yield of the
Fannie Mae fixed rate 30-year constant maturity mortgage (CMM) (Exhibit 2).
The relationship with macro surprises is reasonably robust for both corporate bond
spreads and MBS yields: CCC and B spreads are negatively related to the surprises, while
the inverse pattern prevails for CMM yields. The intuition conveyed by Exhibits 1 and 2 is
simple: positive surprises lift growth expectations and thus cause the default risk premium
to compress and Treasury yields to back up. The result is tighter corporate bond spreads
and wider MBS yields.

Exhibit 1: CCC and B spreads are strongly related to
surprises in the non-farm payroll report
The scatter plot shows the daily change in spreads (in bp) vs.
the standardised surprise in the non-farm payroll report on
the announcement date.

Exhibit 2: Mortgage yields are also strongly related to
surprises in the non-farm payroll report
The scatter plot shows the daily change in the yield of Fannie
Mae 30-year fixed rate constant maturity mortgage (CMM) (in
percentage points) vs. the standardised surprise in the non-
farm payroll report on the announcement date.

Source: Goldman Sachs Credit Strategy, Haver Analytics, Bloomberg

Source: Goldman Sachs Credit Strategy, Bloomberg


1
For a study on the impact of macro surprises in the Treasury market, see Fleming, M and E., Remolona, 1999,
Price formation and liquidity in the U.S. Treasury market: the response to public information, Journal of Finance, 54,
1901- 1914. For our own work on the FX and equity markets, see for example Market Surprise Indices for Canada,
Global Viewpoint, March 7, 2012 and Economic News and the Equity Market, US Economics Analyst, July 27,
2012.
2
To our best knowledge, Huang and Kong (2008) is the only study that examines the effect of macroeconomic news
announcements on corporate credit using a sample spanning the period from January 1997 through June 2003
(Huang, J and W., Kong, 2008, Macroeconomic news announcements and corporate credit spreads, Working
paper, Penn State University.)
-40
-20
0
20
40
-4 -2 0 2 4
Bps
Standardized surprise in non-farm payrolls
B CCC
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
-4 -2 0 2 4
%
Standardized surprise in non-farm payrolls
October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 3
Exhibits 1 and 2 led us to consider a more detailed and systematic investigation of the
response of corporate credit and Agency MBS to macroeconomic news. The goal of our
investigation is threefold. First, we identify the macro indicators that matter the most to
corporate bonds and Agency MBS. Second, we examine whether there is a structural shift
in the way the credit and mortgage markets respond to macro surprises after the global
financial crisis (GFC). Lastly, we discuss some market implications and construct macro
surprise indices tailored to explain the performance of high yield bonds and Agency MBS.
These indices provide some indication of the extent to which high yield bonds and the 30-
year CMM yield have over- or underperformed the recent macro data.
Our findings suggest the following:
On average, spreads on investment grade corporate bonds and MBS are relatively
insensitive to macro surprises, while high yield bond spreads exhibit a strong
sensitivity. The converse is true when one looks at total returns or yields instead of
spreads: high yield is unresponsive, whereas investment grade corporate bond
total returns and Agency MBS yields exhibit a strong sensitivity.
Focusing on the post-GFC period, we document a larger and broader impact of
macro surprises on both the corporate credit and Agency MBS markets. Pre-GFC,
spreads on financials were insensitive to macro surprises but have turned
responsive since. The same is true for CCC total returns, which have turned
responsive post-GFC. For Agency MBS yields, the size of the response has also
increased substantially post-GFC.
Lastly, we show that when benchmarked to the recent trajectory of the macro data,
both high yield spreads and Agency MBS yields have compressed more than
macro surprises would imply, a finding that reinforces our view that much of the
recent rally has been driven by a risk premium compression as opposed to better
than expected macro data.
Spread products and macro surprises: What really matters
To quantify the impact of macro surprises on corporate bonds and Agency MBS, we look at
a large number of US macroeconomic indicators and a range of corporate bond indices
over the past 15 years. Specifically, our sample comprises 28 macro indicators for which
consensus forecasts are provided by Bloomberg. Our credit market variables include the
following rating and sector buckets: A financials, BBB financials, A non-financials, BBB non-
financials, BB, B and CCC. For each of these buckets, we look at both spreads and total
returns. The response of spreads to macro surprises allows us to isolate the impact on the
default premium, while the response of total returns captures the simultaneous impact on
spreads, rates and duration.
Finally, as a proxy for the response of mortgage markets, we use the Fannie Mae fixed rate
30-year constant maturity mortgage yield (CMM). For comparison, we also report the
response of the 2-, 10- and 30-year Treasury yields (see the box on the next page for a
detailed explanation of our data construction and regression specification).
Our baseline estimation reveals three key findings.
Not all macro indicators are created equal (unsurprisingly). For both the credit and
mortgage markets, labour market indicators (non-farm payrolls, initial claims, the
ADP employment report and the unemployment rate) tend to have the strongest
impact. Survey data (such as the ISM both manufacturing and non-
manufacturing and Philly Fed) and hard data (such as retail sales and durable
goods) also appear to have a significant impact on daily moves in credit spreads
and total returns, as well as on CMM yields.

October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 4

S
t
=
A
t
- F
t
o

t
= o + [

28
=1
S
t
+ e
t
,
Our methodology in a nutshell

The data
Our market variables consist of the Merrill Lynch (ML) bond spread and total return indices, and the yield on Fannie
Mae 30-year current coupon mortgages. In the corporate investment grade space, we distinguish between financials
and non-financials. In high yield, we look at BB, B and CCC rating buckets. All together, we examine seven credit
variables: A non-financials, BBB non-financials, A financials, BBB financials, BB, B and CCC. For each index, we look at
both spreads and total returns.
For macro surprises, we use the following 28 macro indicators:
Labour market: Non-Farm Payrolls, the Unemployment Rate, Initial Claims, Continuing Claims and the ADP
Employment Report.
Survey data: ISM, ISM Non-Manufacturing, Philly Fed, Chicago PMI, Empire State Manufacturing Survey,
Richmond Federal Reserve Manufacturing Survey, Conference Board Consumer Confidence and University of
Michigan Survey of Consumer Confidence Sentiment.
Hard data: Industrial Production, US Durable Goods New Orders Total ex Transportation, US Trade Balance
of Payments, US Personal Consumption Expenditure, Adjusted Retail Sales Less Autos and GDP.
Inflation: Core CPI, Core PPI and the US Import Price Index.
Housing: New One Family Houses Sold, Existing Homes Sales, Pending Home Sales Index, New Privately
Owned Housing Units Started, Census Bureau Construction Spending and the National Association of Home
Builders Market Index.
The basic regression model
For each of the macro variables cited above, we define the surprise as the difference between the actual release and
the median forecast of the Bloomberg News survey, normalised by the sample standard deviation:

where S
t
is our surprise measure, A
t
denotes the actual release, F
t
denotes the median forecast in the Bloomberg
News survey, and o

denotes the standard deviation of the surprises in the sample for that specific macro indicator.
For example, the total non-farm payroll for March 2004 was released on April 2. Among the 71 forecasts in the
Bloomberg News survey, the median was 120K and the actual release was 308K. Because the standard deviation of all
non-farm payroll surprises in our sample is 91K, the 188K surprise on April 2, 2004 translates into a positive surprise
of 2.1 standard deviations.
Our basic regression model can be written as follows:
where
t
is the daily change in the market variable (spread, yield or total return) and S
t
is our surprise measure.
Our sample spans the period from January 1997 through the first week of October 2012.
The cumulative surprise indices
After estimating the regression model, we select the macro variables with estimated coefficients that are both
statistically and economically significant. Because macro indicators are typically released monthly and because daily
changes in spreads and yields can be very noisy, we sum up the cumulative impact of all macro surprises since
January 2010 and compare it with the cumulative change in high yield spreads and CMM yields over the same period.
We construct the surprise index separately for high yield spreads (cash) and mortgage yields.
October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 5
In spread terms, only high yield is sensitive to macro surprises (Exhibit 3).
Moreover, the response of high yield spreads to macro surprises is monotonic in
ratings: the lower the rating, the stronger the response. By contrast, investment
grade credit spreads are virtually unresponsive to macro surprises for both
financials and non-financials. For total returns, the opposite pattern prevails. High
yield is insensitive to macro surprises, whereas investment grade total returns
respond strongly (Exhibit 4). The unresponsiveness of high yield total returns to
macro surprises reflects the fact that the spread tightening that follows a positive
surprise is offset by a roughly equal back-up in rates. For example, for CCC-rated
bonds and non-farm payrolls, a one standard deviation of surprise translates into
close to 5bp of spread tightening, which is roughly offset by 4bp of back-up in
rates. By contrast, investment grade bonds (both financials and non-financials)
respond negatively to positive macro surprises. This reflects the stronger rates
effect relative to the spread effect.
Lastly, CMM yields respond to macro surprises in a way that is almost identical to
10-year Treasury yields (Exhibits 5 and 6). This is consistent with the notion that
agency MBS and 10-year Treasury securities are close substitutes of each other.

Exhibit 3: In spread terms, only high yield bonds respond
to macro announcement surprises
The plot shows the response of high yield spreads (in bp) to
one standard deviation of surprises.

Exhibit 4: For total returns, the inverse pattern prevails:
investment grade is responsive while high yield is not
The plot shows the response of investment grade total
returns (in percentage points) to one standard deviation of
surprises.


Source: Goldman Sachs Credit Strategy, Haver Analytics, Bloomberg

Source: Goldman Sachs Credit Strategy, Haver Analytics, Bloomberg
-6 -4 -2 0 2 4
Unemployment rate
Richmond
Retail sales
Philly fed
Payrolls
ISM non-mfg
ISM
Empire
Durable goods
Core CPI
ADP
Daily change in spreads (bps)
CCC
B
BB
-0.3 -0.2 -0.1 0
Retail sales
Payrolls
ISM non-mfg
ISM
ADP
Daily change in total returns (%)
A financials
BBB financials
A nonfinancials
BBB nonfinancials
October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 6
Exhibit 5: Mortgage yields respond to a large number of
macro surprises
The plot shows the response of the 30-year CMM yield (in
percentage points) to one standard deviation of surprises.

Exhibit 6: following a similar pattern to Treasury yields
The plot shows the response of the Treasury curve (in
percentage points) to one standard deviation of surprises.

Source: Goldman Sachs Credit Strategy, Bloomberg

Source: Goldman Sachs Credit Strategy, Bloomberg
Credit and Agency MBS have turned more macro post-GFC
The above results show the average response of the credit and mortgage markets to macro
surprises from 1997 to 2012. In quantifying this response, we implicitly constrained the
sensitivity of each market variable to each macro indicator to be the same throughout the
sample period. One potential drawback with this approach is that it ignores the potential
structural shift in the way the credit and mortgage markets respond to macroeconomic
news.
Exhibits 7 and 8 provide some preliminary intuition on the post-GFC effect. They plot the
standardised surprises in the non-farm payroll report vs. the daily change in CCC spreads
and A financials spreads, pre- and post-GFC. The pre-crisis sample covers the period from
January 1997 to August 2008, while the post-GFC sample spans the period from March
2009 to today. We deliberately excluded 4Q2008 and 1Q2009 given the degree of disruption
in financials markets at that time. These exhibits show that the slope of the regression line
clearly increased post-GFC.
To further investigate potential post-GFC changes, we estimate our model using the pre-
GFC sample and the post-GFC sample separately. For ease of exhibition, we only show the
beta to surprises in the non-farm payroll report below since it is the most important macro
indicator, but our model still includes all 28 macro indictors described earlier.
Our results can be summarised into three findings.
For the same credit bucket, the impact of macro surprises has become larger post-
GFC. For example, Exhibit 9 shows that high yield spreads tighten on average in
response to positive payroll surprises. However, the magnitude of this effect is
three to four times larger post-GFC compared with the pre-GFC period.
Macro surprises affect more credit indices post-GFC. Pre-GFC, investment grade
spreads were insensitive to macro surprises. By contrast, in the post-GFC sample,
spreads of A and BBB financials have become responsive (Exhibit 9). The same is
true for the CCC total return index, which has turned responsive post-GFC (Exhibit
10). This suggests that the spread effect for CCCs has become larger than the
-0.02 -0.01 0 0.01 0.02 0.03 0.04
Initial claims
Core PPI
Empire
Durable goods
Trade
Chicago PMI
Philly fed
ISM non-mfg
ADP
Retail sales
ISM
Payrolls
Daily change in yields (%)
30-yr CMM
-0.02 -0.01 0 0.01 0.02 0.03 0.04
Unemployment rate
Initial claims
Consumer confidence
Trade
Core PPI
Existing home sales
Chicago PMI
Philly fed
ISM non-mfg
Durable goods
ADP
Retail sales
ISM
Payrolls
Daily change in yields (percentage points)
2-yr Tsy
10-yr Tsy
30-yr Tsy
October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 7
rates effect, thereby leading to an increase in the total return following positive
payroll surprises.
CMM yields still behave very much like Treasury yields post-GFC. The analysis
performed on the full sample showed that CMM and Treasury yields respond to
macro surprises in a quasi-identical way. When splitting the sample into pre- and
post-GFC, the magnitude of the beta to non-farm payroll surprises increases
substantially after the GFC for both CMM and Treasury yields. However, the
increases are commensurate to each other, suggesting that Agency MBS and
Treasury bonds remain close substitutes despite the impact of the GFC on the
landscape of both markets (Exhibit 11).
Exhibit 7: CCC spreads have become more sensitive to
macro surprises post-crisis
The scatter plot shows the daily change in CCC spreads vs.
the standardised surprise in the non-farm payroll report on
the announcement date.

Exhibit 8: A financials spreads were insensitive to macro
surprises pre-crisis but have turned more responsive
since March 2009
The scatter plot shows the daily change in A financials
spreads vs. the standardised surprise in the non-farm payroll
report on the announcement date.

Source: Goldman Sachs Credit Strategy, Haver Analytics, Bloomberg

Source: Goldman Sachs Credit Strategy, Haver Analytics, Bloomberg
Exhibit 9: The impact of macro surprises on spreads has
become bigger and broader post-crisis
The plot shows the response of credit spreads (in bp) to one
standard deviation of surprises in the non-farm payroll
report.

Exhibit 10: Same is true for investment grade total
returns
The plot shows the response of investment grade total
returns (in percentage points) to one standard deviation of
surprises in the non-farm payroll report.



Source: Goldman Sachs Credit Strategy, Haver Analytics, Bloomberg Source: Goldman Sachs Credit Strategy, Haver Analytics, Bloomberg

Pre-GFC: y = -4.9x - 0.7
Post-GFC: y = -11.7x - 3.0
-80
-60
-40
-20
0
20
40
60
80
100
-4 -2 0 2 4
Bps
Standardized surprise in non-farm payrolls
Pre-GFC
Post-GFC
Post-GFC: y = -2.6x - 1.2
-15
-10
-5
0
5
10
15
-4 -2 0 2 4
Bps
Standardized surprise in non-farm payrolls
Pre-GFC
Post-GFC
Pre-GFC: No significant
relationhsip
-15 -10 -5 0
A financials
BBB financials
B
BB
CCC
Daily change in spreads (bps)
Full Sample
Post-crisis
Pre-crisis
-0.6 -0.4 -0.2 0 0.2 0.4
A financials
BBB financials
A nonfinancials
BBB nonfinancials
CCC
Daily change in total returns (%)
Full sample
Post-crisis
Pre-crisis
October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 8
Exhibit 11: CMM and Treasury yields behave similarly
The plot shows the response of mortgage and Treasury yields (in percentage points) to one
standard deviation of surprises in the non-farm payroll report.

Source: Goldman Sachs Credit Strategy, Bloomberg

Deconstructing the spread rally: Aggressive policy has eclipsed
lacklustre macro data
Armed with the estimated coefficients on the macro surprises, we construct surprise
indices that are tailored for high yield bond spreads and CMM yields. These surprise
indices can be thought of as the portion of the cumulative change in spreads or yields that
is due to macro surprises. Any disconnect between the surprise index and the actual
change in spreads or yields therefore indicates potential under- or outperformance relative
to macro surprises.
Exhibits 12 and 13 provide time series for our surprise indices alongside the cumulative
change in high yield spreads and CMM yields since January 2010. For high yield spreads,
positive surprises push the index down and tighten spreads, while the converse is true for
the 30-year CMM yields, which behave in a similar way to Treasury yields.
Starting with high yield spreads, it is clear that up until a few weeks ago, high yield spreads
significantly outperformed macro surprises. This outperformance started after the
European summit in June, further intensified following ECB President Mario Draghis
speech, and culminated with the aggressive policy moves by the ECB and the Fed. The gap
between the surprise index and the change in high yield spreads has recently started to
close. This pattern is by and large reflective of waning negative surprises and a stalling
rally in the high yield bond market.
The above findings confirm our existing view that the recent compression in corporate
credit spreads has been driven mostly by premium compression as opposed to better than
expected macro data. While growth expectations and risk premium are closely coupled
concepts each feeds heavily into the other we suspect the current round of policy action
will be more effective in reducing systemic concerns than meaningfully improving the
growth outlook.
0.00 0.02 0.04 0.06 0.08 0.10
30-yr CMM
30-yr Tsy
10-yr Tsy
2-yr Tsy
Daily change in yields (percentage points)
Full sample
Post-crisis
Pre-crisis
October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 9
Exhibit 12: Current high yield bond spreads have
outperformed macro surprises since June
The plot shows our high yield surprise index alongside the
cumulative change in high yield spreads since January 2010.

Exhibit 13: Mortgage yields have also diverged from
macro surprises recently
The plot shows our CMM yield surprise index alongside the
cumulative change in yields since January 2010.

Source: Goldman Sachs Credit Strategy, Haver Analytics, Bloomberg

Source: Goldman Sachs Credit Strategy, Bloomberg

We have long favoured high-quality high yield as the best place to express this view in
corporate credit. Although high yield spreads have tightened more than 200bp from the
wides of roughly 700bp in May 2012, we think spreads driven more by a search for yield
than by growth optimism could continue to grind tighter from here. As we have pointed
out in previous research (see, for example, Affirming the case for HY bonds, The Credit
Line, August 30, 2012), we think high yield credit risk remains compelling, especially the BB
and B buckets, for at least three reasons. First, our own Credit Risk Premium estimates still
indicate that, with the exception of the CCC bucket, the premia for BB and B bonds is above
average. Second, credit metrics remain close to their best levels in 25 years. This is true
despite a slight deterioration since the fourth quarter of 2011. Third, the current macro
environment remains typical of a post-bust recovery, with low rates and inflation. Coupled
with the exceptionally accommodative stance of monetary policy, this should support
demand for spread assets by enhancing search for yield motives.
Turning to CMM yields, they have continued to decline despite the modest improvement in
the macro data (see Exhibit 13). Of course, the Feds decision to purchase an additional
$40bn Agency MBS per month on an open-ended basis can explain much of this
divergence. But with the QE3 announcement now behind us, we think there is probably
some pressure for mortgage yields to catch up with the data, all else equal. Thus, unless
macro surprises turn negative, we think the rally in Agency MBS is probably done.

Lotfi Karoui and Hui Shan
-20
0
20
40
60
80
-300
-200
-100
0
100
200
300
400
Jan-10 Jul-10 Feb-11 Aug-11 Mar-12 Oct-12
Bps Bps
Cumulative spread change
Cumulative surprise (RHS)
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
Jan-10 Jul-10 Feb-11 Aug-11 Mar-12 Oct-12
%
%
Cumulative yield change (LHS)
Cumulative surprise (RHS)
October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 10
Global Economic Forecasts
Real GDP, %ch yoy

Consumer Prices, %ch yoy

Source: Goldman Sachs Global ECS Research.
For India we use WPI not CPI. For a list of the members within groups, please refer to ERWIN.
For our latest Bond, Currency and GSDEER forecasts, please refer to the Goldman Sachs 360 website: (https://360.gs.com/gs/portal/research/econ/econmarkets/).
2010 2011 2012 2013
USA 2.4 1.8 2.2 1.9
Euro area 2.0 1.5 -0.5 0.1
Japan 4.5 -0.8 2.4 1.1
Australia 2.5 2.1 3.5 2.6
Canada 3.2 2.4 2.1 2.4
France 1.6 1.7 0.2 0.6
Germany 4.0 3.1 1.0 1.2
Italy 1.8 0.5 -2.2 -0.7
New Zealand 1.7 1.3 2.5 2.7
Norway 0.6 1.5 4.1 2.0
Spain -0.3 0.4 -1.3 -1.7
Sweden 6.3 3.9 1.3 1.9
Switzerland 2.7 2.1 1.2 1.1
UK 1.8 0.9 0.1 1.9
China 10.4 9.3 7.6 8.0
Hong Kong 7.0 5.1 3.5 5.2
India 8.4 6.5 5.7 7.0
Indonesia 6.1 6.5 6.0 6.4
Malaysia 7.2 5.1 4.6 5.3
Philippines 7.3 3.9 4.9 5.3
Singapore 14.8 4.9 2.0 4.0
South Korea 6.3 3.6 2.6 3.5
Taiwan 10.7 4.0 3.0 4.5
Thailand 7.8 0.1 5.7 4.8
Czech Republic 2.6 1.7 -0.2 1.7
Hungary 1.2 1.7 -1.0 1.2
Poland 3.9 4.3 2.8 2.4
Russia 4.0 4.3 3.8 4.3
South Africa 2.9 3.1 2.6 3.4
Turkey 9.2 8.5 3.2 5.5
Argentina 9.2 8.9 3.0 4.1
Brazil 7.5 2.7 1.6 4.0
Chile 6.1 6.0 4.5 5.2
Mexico 5.5 3.9 3.7 4.0
Venezuela -1.5 4.2 4.5 2.9
BRICS 8.9 7.4 6.2 6.9
G7 2.8 1.4 1.5 1.5
EU27 2.1 1.6 -0.2 0.6
G20 4.9 3.8 3.1 3.6
Asia ex Japan 9.3 7.4 6.3 7.0
Central and Eastern Europe 3.2 3.3 1.5 2.1
Latin America 6.4 4.6 3.2 4.2
Emerging Markets 8.1 6.8 5.6 6.3
Advanced Economies 3.0 1.6 1.4 1.5
World 5.0 3.8 3.1 3.6
Latin America
Regional Aggregates
G3
Advanced Economies
Asia
CEEMEA
2010 2011 2012 2013
USA 1.6 3.1 2.1 2.1
Euro area 1.6 2.7 2.5 2.2
Japan -0.7 -0.3 0.1 0.2
Australia 2.8 3.4 2.0 3.2
Canada 1.8 2.9 2.0 2.0
France 1.7 2.3 2.2 1.8
Germany 1.2 2.5 2.1 2.0
Italy 1.6 2.9 3.5 2.7
New Zealand 2.3 4.0 1.4 2.4
Norway 2.4 1.3 1.0 1.3
Spain 2.0 3.1 2.3 2.3
Sweden 1.3 2.6 1.3 1.3
Switzerland 0.7 0.2 0.4 0.7
UK 3.3 4.5 2.7 2.1
China 3.3 5.4 2.8 3.0
Hong Kong 2.4 5.3 4.2 4.4
India 9.6 8.9 7.2 5.7
Indonesia 5.1 5.4 4.5 5.7
Malaysia 1.7 3.2 1.8 2.8
Philippines 4.1 4.7 3.4 4.2
Singapore 2.8 5.2 4.3 3.4
South Korea 2.9 4.0 2.4 2.8
Taiwan 1.0 1.4 1.2 1.7
Thailand 3.3 3.8 3.1 4.4
Czech Republic 1.5 1.9 3.3 1.7
Hungary 4.9 3.9 5.7 4.0
Poland 2.6 4.3 3.8 2.8
Russia 6.8 9.8 5.1 6.4
South Africa 4.3 5.0 5.7 5.0
Turkey 8.6 6.5 9.2 9.0
Argentina 10.5 9.8 10.0 9.6
Brazil 5.0 6.6 5.3 4.9
Chile 1.4 3.3 3.0 3.2
Mexico 4.2 3.4 4.2 3.7
Venezuela 29.1 27.1 21.2 27.0
BRICS 5.3 6.8 4.2 4.2
G7 1.4 2.6 1.9 1.8
EU27 1.9 3.0 2.6 2.2
G20 3.1 4.3 3.1 3.0
Asia ex Japan 4.6 5.7 3.7 3.7
Central and Eastern Europe 2.7 3.7 4.0 2.7
Latin America 6.1 6.7 6.1 5.7
Emerging Markets 5.5 6.5 4.7 4.6
Advanced Economies 1.6 2.7 2.1 2.0
World 3.1 4.3 3.2 3.1
G3
Advanced Economies
Asia
CEEMEA
Latin America
Regional Aggregates
October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 11
Key Charts: The GLI, GS FSI, ERP and the Credit Premium


GLI Momentum vs. Global Industrial Production*

GS Financial Stress Index

* Includes OECD countries plus BRICs, Indonesia and South Africa
See Global Economics Paper 199 for methodology
Source: OECD, Goldman Sachs Global ECS Research.

See the November 2008 Fixed Income Monthly for methodology
Source: Goldman Sachs Global ECS Research.

US Equity Risk Premium

US Equity Credit Premium

See Global Economics Weekly 02/35 for methodology
Source: Goldman Sachs Global ECS Research.

See Global Economics Weekly 02/35 for methodology
Source: Goldman Sachs Global ECS Research.
-4
-3
-2
-1
0
1
2
00 01 02 03 04 05 06 07 08 09 10 11 12 13
%mom
GLI Momentum
Global Industrial Production*, 3mma
-2
-1
0
1
2
3
4
5
6
96 98 00 02 04 06 08 10 12
Index
1 standard
deviation band
1.7
2.1
2.5
2.9
3.3
3.7
4.1
4.5
4.9
5.3
5.7
6.1
6.5
04 05 06 07 08 09 10 11 12 13
%
US ERP, calculated daily
US ERP, 200 Day Moving Average
-3
-2
-1
0
1
2
3
4
5
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
%
1985-1998
average
2 standard deviations
band
Credit
relatively
expensive
October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 12
The World in a Nutshell

THE GLOBAL ECONOMY
OUTLOOK KEY ISSUES
UNITED STATES We expect growth of 2.2% in 2012 and 1.9% in 2013. On a
sequential basis, growth should settle at 2.0% in 2012Q4
before falling to 1.5% in 2013Q1. We then expect a pick-up
to 2.5% sequential growth in the second half of 2013.
Despite weak growth, we expect the unemployment rate
to fall to 7.7% by end-2013 as long-term unemployment
continues to depress labour force participation.
Our forecast of around 2.0% growth over the coming
quarters is supported by factors that should prevent
growth from falling further from here. These include
strong real disposable income, a gradual housing
recovery, easier financial conditions and an end to the
inventory drag on manufacturing. However, we worry that
the fiscal cliff at year-end could potentially weigh more
heavily on financial markets and the real economy.
JAPAN We expect real GDP growth of 2.4% in 2012 and 1.1% in
2013. The relative robustness of growth this year reflects
(1) the statistical boost from January-March strength and
(2) the current role of domestic demand as the key source
of growth. With public-sector reconstruction demand
gradually fading, we expect real GDP growth to decline
slowly through the rest of the year.
Exports are crucial to Japans production activity. As
public reconstruction measures have faded, external
demand is again becoming the key determinant. Exports
to China and Europe have recently fallen significantly, and
as Chinas recovery remains slow, we see little indication
of a reversal of this trend.
EUROPE The Euro area-wide macroeconomic picture has
deteriorated in recent months. As a result, we downgraded
our forecasts and now foresee a contraction of 0.5% in
2012, followed by sub-trend growth of 0.1% in 2013. Cross-
country divergence remains a key theme in this baseline
scenario, with economic weakness expected to be more
marked in peripheral economies. Our baseline is still that
the Euro area will muddle through but remain intact. A
potential delay in Spains request for EFSF support poses
downside risks to markets in the immediate term.
The open question remains whether the follow-through
on fundamental political decisions (periphery reform
programmes, the building of a new regime of
macroeconomic discipline and the intra-Euro area risk-
sharing inherent in an enlarged EFSF/ESM) turns out to be
weak or lacking. We perceive the ECB as willing to lend
substantial support in the process but only see this as an
incremental step in a long cumulative process to deliver a
governance structure sufficient to create a better
functioning Euro area.
NON-JAPAN ASIA For Asia ex-Japan, we expect growth of 6.3% and 7.0% in
2012 and 2013, respectively. In 2012, we expect below-
trend growth throughout the region, while in 2013 the
smaller AEJ economies are likely to recover to around
trend as the external environment improves. We do not
currently expect precautionary policy easing in most of the
region.
In China, we expect below-trend GDP growth of 7.6% in
2012 and 8.0% in 2013. Looking forward, we expect
further easing in macro policy (via rate cuts, an easing in
bank lending restrictions, less currency appreciation and
new investment projects) and a pick-up in sequential
growth, although the economy should remain softer in
the next few quarters.
LATIN AMERICA We forecast that real GDP growth in Latin America will
slow to 3.2% in 2012, and then rebound to 4.2% in 2013.
We expect monetary policy stances to remain mixed
across the region in the near term, and subsequent broad
tightening in 2013.
In Brazil, we expect real GDP growth of 1.6% and 4.0% in
2012 and 2013, respectively. Brazil has been in an easing
cycle, including interest rate cuts and macro-prudential
measures to ease credit conditions. We expect policy to
remain at current levels until mid-2013 despite the recent
uptick in inflation.
CENTRAL &
EASTERN EUROPE,
MIDDLE EAST AND
AFRICA
We expect CEEMEA to continue on its sluggish path to
recovery, with growth well below potential. Renewed
stresses in the Euro area have led the region to
underperform LatAm and NJA but recent improvements
there allow for green shoots of growth. In 2013, we
expect growth to reaccelerate, in line with a more benign
global growth environment.
Within the region, we see balance sheet strength and
domestic demand robustness as the key macro
differentiation theme coming out of the 2012 soft patch.
Growth improvements are concentrated in countries with
better domestic demand dynamics, i.e., Russia, Turkey
and Poland. Hungary and the Czech Republic also show
improvement, although from very low bases.

CENTRAL BANK INTEREST RATE POLICIES
CURRENT SITUATION NEXT MEETINGS EXPECTATION
UNITED STATES:
FOMC
The Fed cut the funds rate to a range
of 0%-0.25% on December 16, 2008.
October 24
December 12
We expect the Fed to keep the funds rate near 0%
through the end of 2013.
JAPAN: BoJ Monetary
Policy Board
The BoJ cut the overnight call rate to a
range of 0%-0.1% on October 5, 2010.
October 30
November 20
We expect the BoJ to keep the policy rate near 0%
through the end of 2013.
EURO AREA: ECB
Governing Council
The ECB cut refi/deposit rates by 25bp
to 0.75%/0.00% on July 5, 2012.
November 8
December 6
We expect the ECB to keep policy rates on hold
through the end of 2013.
UK: BoE Monetary
Policy Committee
The BoE cut rates by 50bp to 0.5% on
March 5, 2009.
November 8
December 6
We expect the BoE to keep the policy rate unchanged
but to deliver further quantitative easing at its
November meeting.

October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 13
Disclosure Appendix
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the specific recommendations or views expressed in this report.

We, Kamakshya Trivedi, Jose Ursua, George Cole, Julian Richers and Dominic Wilson, hereby certify that all of the views expressed in this report
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October 17, 2012 Global Economics Weekly

Goldman Sachs Global Economics, Commodities and Strategy Research 14
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