Db Oil & The Global Economy

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3 March 2011

Global Economic Perspectives Oil and the Global Economy: Measured Impact

Deutsche Bank Securities Inc.

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010

Economics

Table of Contents Key Economic Forecasts .................................... Page 2

Oil and the Global Economy: Measured Impact ............................................... Page 3

Central Bank Watch.......................................... Page 10

Global Data Monitor ......................................... Page 14

Charts of the Week .......................................... Page 15

Global Week Ahead.......................................... Page 16

Financial Forecasts .......................................... Page 18

Main Deutsche Bank Global Economics Publications ...................... Page 19

Research Team

Peter Hooper (+1) 212 250-7352 [email protected]

Thomas Mayer (+49) 69910-30800 [email protected]

Michael Spencer (+852) 220-38303 [email protected]

Torsten Slok (+1) 212 250-2155 [email protected]

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Over the past six months, oil prices have risen more than 50%, with more than one-fourth of that rise coming in recent weeks as tensions in the Middle East have risen. We estimate that most of the rise on oil prices to date (i.e., to a level of about $100/barrel Brent) can be attributed to the strengthening of aggregate demand in the global economy and therefore does not have significant negative implications for global growth.

If the roughly $10-15/barrel additional increase in oil prices in recent weeks that can be attributed to concerns about possible disruptions to oil production in and distribution from the Middle East to the rest of the world is sustained, global growth could be reduced by about ½% this year relative to our current baseline forecast for global growth in the vicinity of 4.3%.

The risk of a more severe disruption, while not high, has risen in the wake of recent events, and we would put a 10-15% probability on oil prices rising to $150/barrel in the near term and remaining near that for a time. Such a shock would reduce global growth by an estimated 2.5%, moving it back into recession territory. The positive effects of the shock on inflation would be somewhat greater in terms of percentage points than the negative effect on real GDP.

Countries that are more dependent on imported oil or do not have significant domestic sources of energy would be hit more than the global average (Japan and Korea, for example), while those with significant domestic production of energy would be hit less. Everything else equal, industrial countries would be hit less than emerging market economies given their greater energy efficiency (lower dependence of output on energy input).

Impact of oil price shocks on GDP growth and inflation for year ahead

Mild oil shock Severe oil shock

Oil prices to stay at $110/brl Oil prices reach $150/brl

GDP Inflation GDP Inflation

US -0.35 0.5 -1.75 2.6

Euro Area -0.5 0.4 -2.3 1.8

Japan -0.3 0.3 -1.5 1.5

Total Developing countries

-0.2 -1.0

Asia ex Japan -0.8 0.7 -4.0 3.5 World -0.4 -2.0 Source: DB Global Markets Research

3 March 2011 Global Economic Perspectives

Page 2 Deutsche Bank Securities Inc.

Key Economic Forecasts

Real GDP

% growthb

Consumer Prices

% growthc

Current Account

% of GDPd

Fiscal Balance

% of GDP

2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012FUS 2.8 3.5 3.9 1.6 2.2 2.4 -3.7 -4.1 -4.3 -8.8 -9.7 -6.9

Japan 3.9 1.6 2.2 -0.7 -0.1 -0.6 3.6 3.8 4.5 -8.7 -7.7 -7.4

Euroland 1.7 1.4 1.5 1.6 2.3 1.9 -0.6 0.0 0.4 -6.0 -4.8 -3.7

Germany 3.5 2.5 1.4 1.2 2.0 1.7 5.1 4.8 4.1 -3.7 -2.8 -2.0

France 1.5 1.2 1.6 1.7 1.7 1.6 -2.1 -2.2 -2.6 -7.6 -6.2 -4.8

Italy 1.1 0.9 1.2 1.5 2.1 1.9 -3.2 -2.8 -2.4 -5.0 -4.1 -3.1

Spain -0.1 0.6 1.1 1.8 1.8 1.6 -4.5 -4.5 -3.6 -9.0 -6.5 -4.8

UK 1.3 1.8 2.0 3.3 4.1 1.8 -2.4 -2.0 -1.7 -9.5 -7.9 -4.4

Sweden 5.3 3.5 2.5 1.3 1.5 2.0 6.8 6.5 6.0 -1.0 -0.5 0.5

Denmark 2.1 2.4 2.0 2.3 2.0 2.0 5.3 4.0 3.5 -5.3 -3.5 -3.0

Norway 0.4 1.5 2.5 2.4 1.5 2.0 12.8 12.9 13.0 6.8 7.5 8.5

Poland 3.8 3.9 3.5 2.6 3.4 2.7 -3.1 -3.2 -3.7 -7.9 -5.8 -4.7

Hungary 0.8 3.0 3.2 5.0 4.1 3.4 1.5 0.3 -0.4 -3.8 -2.9 -4.0

Czech Republic 2.4 2.3 3.1 1.5 2.1 2.2 -1.5 -1.0 -1.2 -5.2 -4.6 -4.2

Australia 2.7 3.2 3.1 2.8 2.9 3.0 -2.7 -2.7 -4.0 -4.5 -3.5 -2.2

Canada 3.1 2.6 3.2 1.8 2.3 2.4 -3.3 -3.6 -3.4 -3.5 -2.0 -1.7

Asia (ex Japan) 9.4 8.0 7.6 4.6 5.5 4.4 4.0 3.1 2.9 -3.1 -2.8 -2.3

India 9.8 8.2 8.5 9.4 8.2 6.7 -2.6 -3.0 -3.0 -8.5 -7.8 -7.2

China 10.3 9.4 8.6 3.3 5.0 3.5 5.2 4.3 3.8 -2.5 -2.0 -1.5

Latin America 5.9 4.3 3.9 8.9 8.8 7.4 -0.8 -1.5 -2.0 -2.6 -2.5 -2.4

Brazil 7.7 4.2 4.4 5.9 5.8 4.8 -2.3 -2.8 -3.7 -2.6 -2.9 -2.9

EMEA 4.5 4.7 5.1 8.0 7.5 7.1 0.6 -0.5 -1.3 -4.6 -3.4 -2.9

Russia 4.0 5.4 5.5 6.9 9.6 7.2 5.0 3.7 2.0 -3.9 -2.0 -1.7

G7 2.7 2.6 2.9 1.4 1.9 1.8

World 4.8 4.2 4.4 3.2 3.9 3.3

(a) Euroland forecasts as at the last forecast round on 10/12/10. Bold figures signal upward revisions, bold, underlined figures signal downward revisions. (b) GDP figures refer to working day adjusted data. (c) HICP figures for euro-zone countries and the UK (d) Current account figures for Euro area countries include intra regional transactions

Forecasts: G7 quarterly GDP growth

% qoq saar/annual: % yoy Q1 10 Q2 10 Q3 10 Q4 10F 2010F Q1 11F Q2 11F Q3 11F Q4 11F 2011F 2012F

US 3.7 1.7 2.6 2.8 2.8 3.8 4.2 4.1 4.3 3.5 3.9

Japan 6.0 2.1 3.3 -1.1 3.9 0.8 3.2 2.5 1.9 1.6 2.2

Euroland 1.5 4.1 1.4 1.2 1.7 1.2 0.9 1.1 1.3 1.4 1.5

Germany 2.6 9.2 2.8 1.5 3.5 3.0 1.1 1.3 1.4 2.5 1.4

France 1.1 2.4 1.0 1.4 1.5 1.0 0.8 1.6 1.5 1.2 1.6

Italy 1.8 1.9 1.1 0.2 1.1 1.0 0.7 0.8 1.4 0.9 1.2

UK 1.3 4.2 2.8 -2.3 1.3 1.3 2.1 2.1 2.0 1.8 2.0

Canada 5.5 2.2 1.8 3.3 3.1 3.4 3.7 3.3 2.1 2.6 3.2

G7 3.5 2.8 2.5 1.4 2.7 2.6 3.0 3.0 2.9 2.6 2.9

Sources: National authorities, DB Global Markets Research


Deutsche Bank Securities Inc. Page 3

Oil and the Global Economy: Measured Impact

Over the past six months, oil prices have risen more than 50%, with more than one-fourth of that rise coming in recent weeks as tensions in the Middle East have risen. We estimate that most of the rise on oil prices to date (i.e., to a level of about $100/barrel Brent) can be attributed to the strengthening of aggregate demand in the global economy and therefore does not have significant negative implications for global growth.

If the roughly $10-15/barrel additional increase in oil prices in recent weeks that can be attributed to concerns about possible disruptions to oil production in and distribution from the Middle East to the rest of the world is sustained, global growth could be reduced by about ½% this year relative to our current baseline forecast for global growth in the vicinity of 4%.

The risk of a more severe disruption, while not high, has risen in the wake of recent events, and we would put a 10-15% probability on oil prices rising to $150/barrel in the near term and remaining near that for a time. Such a shock would reduce global growth by more than 2%, moving it back into recession territory. The positive effects of the shock on inflation would be somewhat greater in terms of percentage points than the negative effect on real GDP.

Countries that are more dependent on imported oil or do not have significant domestic sources of energy would be hit more than the global average on impact (Japan and Korea, for example), while those with significant domestic production of energy would be hit less. Everything else equal, industrial countries would be hit less than emerging market economies given their greater energy efficiency (lower dependence of output on energy input).

Introduction

Oil prices have been on the rise, and ongoing tensions in the Middle East have again raised questions about the potential risks to the global economy associated with a possible significant disruption of oil supplies. In this week�’s GEP we address these questions in a number of dimensions. We begin with an overview of the world oil market, including a breakdown of the major demanders/users and suppliers/producers of oil. We then assess the potential effects of a sustained increase or surge in oil prices on economic activity and prices. This assessment begins with analysis of the extent to which demand factors and supply factors have contributed to

past and most recent movements in oil prices, since the effects of an oil price increase will depend importantly on what it was that drove prices higher�—increases in demand associated with strong global growth or cutbacks in supply associated with disruptions in major producing regions. The assessment then moves to a survey of various model-based and other empirical estimates of the effects of oil price increases on the growth of real GDP and consumer prices in major regions of the world. Finally, we provide quantitative estimates of the effects of the recent rise in oil prices and the potential implications of a further run-up in oil prices that could materialize if oil supplies in the Middle East are significantly disrupted.

Chart 1. Oil prices moving higher

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2006 2007 2008 2009 2010 2011

$/barrel

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100

125

150$/barrel

Brent WTI

Source: WSJ, DB Global Markets Research

Global oil market

In the past six months, world oil prices have risen by about $40/barrel or more than 50% (Chart 1).1 Roughly one-third of this increase has occurred since the flare-up of tensions in the Middle East began to hit the market a little over a month a ago (Chart 2). Before addressing the potential effects of this rise in oil prices on the global economy, it is useful to review some of the basic features of the global market for oil, including its major demand and supply features. Oil continues to be the single most important source of energy in the global economy; it currently accounts for well over one-third of total primary energy supply. Oil and gas combined account for over 60% of primary energy, and

1 We focus on the Brent price rather than the WTI series because of the extent to which the latter price has been artificially depressed in recent weeks by oil pipeline distribution problems in Cusning Oklahoma.



together with coal, these fossil fuels account for more than 80% of energy (Chart 2).

Chart 2. Relative importance of oil in total global

energy usage

Coal19.7%

Oil37.2%

Gas24.2%

Nuclear11.3%

Hydro2.1%

Combustibe renewables

4.4%

Other1.1%

OECD: total primary energy supply (2009, 5.2 mtoe)

Source: IEA, DB Global Markets Research

What has been striking about the energy market in the past few years has been the near-perfect synchronization of prices of these three major sources of energy (Chart 3). Whereas historically gas and oil prices have had a reasonably high correlation, coal had historically been uncorrelated with the other two commodities. But since 2007 the three prices have clearly moved together. This period has seen robust demand for energy of all types. And if anything, oil price increases have tended to lead gas and coal price increases since 2007.

Chart 3. Prices of oil, gas and coal moving together

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100125150175200225

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% y/y, 3mma

%y/y, 3mma

Oil Coal Gas

Source: IMF, DB Global Markets Research

Demand Demand for oil has been driven increasingly by emerging market regions. Over the past 15 years, the OECD countries�’ share of global oil consumption has fallen from

about two thirds to roughly half, as their oil usage has remained relatively stable while that of emerging market regions has risen strongly (Chart 4). These trends imply that GDP growth in emerging markets, especially Asia, have become increasingly important as a driver of world oil demand and therefore oil prices. They also imply that industrial regions of the world have become less sensitive to �“oil shocks�” over time as their dependence on oil has diminished. To some extent, decreasing oil dependency reflects a shift to other sources of energy�—natural gas in particular, and here, given the relatively high correlation of prices across energy sources noted above, exposure to oil shocks may not have declined commensurately.

Chart 4. Global demand for oil by region

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95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

mln brls per daymln brls per day Global demand for oil by region

Non OECD Other OECD US: North America Total

Source: IEA, OECD and DB Global Markets Research

However, there is also ample evidence that energy efficiency has increased substantially in response to past increases in the relative price of oil and other sources of energy. The World Bank has tracked energy efficiency (measured as the amount of energy consumed to produce one unit of real GDP) going back at least 15 years for 125 economies. It finds that In the United States and Germany, for example, between 1990/91 and 2006/07, real GDP per unit of energy consumed has increased by one-third. Gains in energy efficiency have not been limited to industrial countries. In India, the ratio of GDP per unit of energy consumed has increased more than 50% since 1990/91 and in China it has more than doubled. Interestingly, when we measure the major emerging market economies up against each other, the Latin American economies stand out as generally achieving a higher real GDP per unit of energy consumed than economies in the other regions. EMEA are over-represented at the inefficient right tail but are well represented in the middle of the range too (Chart 5).



Chart 5. Energy efficiency across EM

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GDP/kgoe

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Source: World Bank and DB Global Markets Research

Supply On the supply side of the ledger, the Middle East accounts for about 25% of total world oil production, with Saudi Arabia being the biggest producer at close to 10% of world oil production (Table 1).

Table 1. Global supply of oil by region 2010

Mil B/day Share in world supply (2010)

Saudi Arabia 8.2 9.4 Iran, I.R 3.7 4.3 Iraq 2.4 2.8 Kuwait 2.3 2.6 UAE 2.3 2.6 Venezuela 2.3 2.6 Nigeria 2.1 2.4 Angola 1.8 2.1 Libya, SPAJ 1.6 1.8 Algeria 1.3 1.5 Qatar 0.8 0.9 Ecuador 0.5 0.5 Total Middle East Countries

22.6 25.8

Non Middle East OPEC countries

6.6 7.6

Total OPEC 29.2 33.4 OECD 18.9 21.6 Former Soviet Union 13.6 15.6 Other non OECD 25.6 29.4 Total World 87.3 100.0 Source: OPEC, OECD,IEA and DB Global Markets Research

While the Middle East is not the dominant global producer, it does account for enough of world production to mean that a substantial disruption to production in that region

could have a large impact on prices. Because the short-run elasticities of demand for and supply of oil are very low, relatively small changes in supply from any source in the oil market can have a large impact on price. Supply may be elastic up to a certain point if major producers like Saudi Arabia are producing short of their full capacity and to the extent that consuming countries have built up strategic petroleum reserves. The International Energy Agency estimates that current excess capacity in major producing regions (primarily Saudi Arabia) are currently more than sufficient to replace production by Libya and Algeria if it is cut off (Chart 6). Thus it is unlikely that events in the Middle East will result in a large shock to world oil prices (pushing them to $150/barrel or more) unless production in Saudi Arabia is disrupted.

Chart 6. OPEC spare capacity exceeds Libyan +

Algerian production

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1994 1996 1998 2000 2002 2004 2006 2008 2010

Mln Brl/dayMln brl/day OPEC Libya Algeria

Source: USDOE/EIA,DB Commodity Research and DB Global Markets Research

How oil price shocks affect the economy

Whether a rise in oil prices is benign or a threat to global growth depends of course on whether the price increase is driven by an expansion of demand or a cut in supply. In the former case, higher oil prices reflect a buoyant economy (i.e., are endogenous to economic developments), in the latter case they restrict economic activity (i.e., are exogenous to economic developments). One way to see whether an oil price increase is endogenous or exogenous is to check whether it precedes or follows changes in economic activity. Chart 7 shows global GDP growth and changes in the world market price for oil since the early 1970s. Clearly, the oil price spikes of 1974-75 and 1979-80 preceded the change in global growth. Thus, these periods are correctly remembered as �“oil price shocks�” triggering economic downturns. Since then, however, the lead of oil price changes over economic growth seems to have disappeared. Periods of declining growth have tended to



be followed by periods of falling oil prices, and vice versa, suggesting that oil price changes have been endogenous. The spike in oil prices in 2007-08 was a bit ambiguous. As the chart shows that spike slightly preceded the slow-down in economic growth, suggesting some influence from rising oil prices on economic activity. However, the deep recession of 2009 then clearly caused a sharp drop in oil prices, while the recovery of 2010 pushed oil prices higher again.

Chart 7. World GDP and spot oil prices

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% y/y% y/y World GDP (ls) World spot price for oil(rs)

Source: OECD, DB Global Markets Research

The relationship between oil prices and economic activity in the more recent past is explored further in Chart 8, which plots changes in oil prices against the global composite purchasing managers�’ index on a monthly basis. Again, the lead of economic activity over oil prices is clearly visible until 2007-08. Developments in 2006-07 suggest that growth had already begun to weaken when oil prices started to rise. The acceleration of oil price increases towards the end of 2007 and during the first half of 2008 then seems to have exacerbated the weakening of economic growth. This changed during the second half of 2008, when the weakening of economic activity dragged down oil prices. Recovery during 2009-10 clearly led oil prices higher again, and even the latest round of oil price increases to February 2011 appears to have followed the renewed pick-up of activity.

Chart 8. Brent prices and global PMI

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Global PMI: composite output (50+ = expansion, rs)

Source: WSJ, JPM, DB Global Markets Research

To what extent is the current level of prices supply-driven or demand driven?

As we have noted, before judging how strong an effect a given move in oil prices is going to have on activity, we need to judge whether that move is driven by supply factors or demand factors. In Chart 9, we plot monthly data on yoy changes in real oil prices (deflated by US CPI) against changes in a world industrial production index. A key indicator of growth is demand for oil. The estimated relationship indicates that the estimated 7.5% increase in world industrial production over the past year was consistent with a 35-40% increase in the price of oil. This would put the price of oil about $25-30 above where it was a year ago, or in a range of $100-105/bl, compared with its current level of about $110-115/bl (Brent). This suggests that most of the rise in oil prices over the past can be explained by demand factors, and about $10/bbl of the most recent increase can be attributed to actual or more likely anticipated/feared supply disruptions.

Chart 9. World IP growth and oil prices, 2001-2011

Oil = 5.07 x IP - 2.5R² = 0.51

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Source: IMF, BLS. Haver, DB Global Markets Research



To corroborate this finding, we consider the relationship between the S&P500 stock price index and oil prices. To the extent that oil prices are impinging on economic activity rather than respond to it we would expect the ratio of stock to oil prices to drop. If strong demand is driving oil prices up, the stock price/oil price ratio should be flat to rising. This ratio did decline in 2007-08 (Chart 10), confirming our earlier observation that concerns about oil supply disruptions played a role in the relationship between oil and activity during that period�—the jump in oil prices did contribute to the drop in growth. More recently, the stock/oil price ratio has been more stable, edging lower modestly over the past couple months and a bit more noticeably in the past few days. This suggests that demand factors have dominated the rise in oil prices until very recently.

Chart 10. Ratio of S&P500 to Brent oil price

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Ratio

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Latest value for March 1

Source: WSJ, DB Global Markets Research

Empirical estimates of the effects of oil price shocks on the global economy.

We consider a variety of model-based estimates, including two done in-house (CGE and VAR models) and several by external research groups (the IMF, OECD, and Fed). We then derive a �“consensus�” measure to be used in the sensitivity analysis that follows. CGE model-based estimates Figuring out how higher oil prices impact an economy cries out for a general equilibrium approach because beyond the immediate impact of oil prices on headline inflation and energy demand the �“second round�” effects quickly become too difficult to sort out as many of these effects operate in conflicting directions. For a small open economy, for example, an increase in the world price of oil may be genuinely a supply shock, pushing up headline inflation and reducing demand for oil. But the latter will tend to depress activity as will a decline in export growth if

the same effect is observed in export markets. So growth is likely to slow down by more than the initial impact assessment �– indeed, even an oil exporting country may find growth slows down despite a positive terms of trade shock �– but the impact on inflation is ambiguous. Slower growth means weaker demand for non-oil items, so headline inflation may rise by less than the initial impact as non-oil prices decline.

To help us sort through these complications we use a computational general equilibrium (CGE) model of the world economy calibrated to 2009 levels of activity/prices and so on2. Such a model is well suited to analyzing a shock such as an exogenous increase in oil prices, although the use of a 2009 base year in this particular instance is perhaps unfortunate given how low oil prices were then. Unlike VAR analysis, though, this approach doesn�’t allow us to identify separately the impact and eventual effects of an oil price increase. Instead, we report in the table below the changes in prices and GDP levels after the global economy has returned to equilibrium. We are cautious about reading too much into the individual figures in the tables, but view this exercise at least as offering a means of ranking economies according to their sensitivity to an oil price shock.

Table 2. Impact on levels of GDP and CPI of a 10% oil

price increase Oil Importers GDP CPI GDP CPI Chile -0.33 0.69 Philippines -0.23 0.66 China -0.27 0.46 Poland -0.41 0.64 Chech Rep -0.41 0.68 Singapore -0.25 0.44 France -0.62 0.71 S. Africa -0.29 0.7 Germany -0.43 0.65 S.Korea -0.69 0.57 HK -0.11 0.48 Spain -0.41 0.66 Hungary -0.31 0.6 Taiwan -0.53 0.46 India -0.52 0.01 Thailand -0.56 0.48 Italy -0.34 1.08 Turkey -0.46 0.58 Japan -0.29 0.73 U.K -0.72 0.53 Netherlands -0.72 0.49 U.S -0.49 0.45 Oceania -0.35 0.6 Oil Exporters GDP CPI GDP CPI Argentina -0.44 0.59 Malaysia -0.49 1.05 Brazil -0.69 0.62 Mexico -0.32 0.77

Colombia -0.71 0.98 Other MENA -0.22 0.82

Egypt 0.38 0.34 Peru -0.51 0.62 Indonesia -0.26 0.55 Russia -0.26 0.9 Iran -0.34 1.08 Venezuela -0.15 0.87 Source: DB Global Markets Research

2 Our CGE model is a modified version of the Purdue University GTAP model.



What is interesting about the results is how similar they are across regions. Of particular importance, while oil exporters see a rise in their trade surpluses (not reported) and importers generally experience a decline, by the time all the second- and third-round effects are worked out, most countries don�’t differ too much. On average, real GDP falls by about 0.4% -- slightly less for the exporters, only slightly more for the importers. Only one oil exporter �– Egypt �– is estimated to enjoy an increase in GDP, although Venezuela, possibly the most oil dependent economy in this sample �– experiences only a very mild reduction in output. But the message is that even for oil exporting countries, the impact of weaker global demand growth after an oil price shock generally more than offsets the initial gains.

There is more variance across countries in terms of the impact on inflation. While the average increase in inflation for the countries we present above is 0.6%, oil exporters are estimated to see relatively higher price level increases than the importers �– where the dampening effect on growth is stronger.

The model suggests that the developed economies are slightly worse off after an oil price shock than emerging markets. The former group would see a larger drop in GDP and a slightly larger increase in inflation than the oil-importing emerging market economies would on average, although the group-wise differences are not large. Between the US and Europe, the simulation suggests that the biggest difference will be on the inflation front, with more inflation in Europe than the US after an oil shock.

We are surprised at the relative resilience of growth in Hong Kong and Singapore that falls out of the simulations �– the other �“high beta�” Asian oil importers do see a larger GDP drop than in the developed economies, as we�’d expect.

VAR model-based estimates

We have also used a VAR (vector autoregression) model to gauge the impact of changes in oil prices on the US real GDP growth and consumer price inflation. The model incorporates two lags on the quarterly annualized growth rates for each of these variables. The impulse response to a one standard deviation shock to oil price growth shows an immediate fall in real GDP growth by about -0.4 to -0.5% while the consumer price inflation rise by about 0.4 to 0.5%. The accumulated responses for GDP growth and inflation over a period of 10 quarters are -1.8% and 2.2%. These results, when translated into $10 rise in oil prices, imply a reduction in real growth rate by about 0.2% immediately and 0.6% over a period of 10 quarters. Inflation rises by 0.2% and 0.7% for a $10 rise in oil prices during the same periods.

Other model simulations

Extensive work has been done by the IMF and OECD on capturing the impact of oil price shocks on GDP and inflation of US and Euro Area. The Fed, too has reported simulations for the US economy with its FRB-US model. The results of this work, standardized to capture the effects of a $10 per barrel increase in oil prices, are summarized in Table 3A and 3B. We have also added a �“consensus�” estimate, which is our own judgmentally weighted average of the various model results, giving some weight to the CGE results discussed above.

Table 3A. Impact on GDP growth due to rise in oil prices by

$10 per barrel

OECD-Interlink model

(2004-05)

FRB/US (1999)

IMF- Mulitmod

Model (2000)

DB VAR (2011)

Consen-sus

US -0.3 -0.2 -0.6 -0.4 -0.35

Euro Area -0.5 -0.4 -0.5

Japan -0.4 -0.2 -0.3


-0.2 -0.2

Asia ex Japan

-0.8 -0.8

World -0.4 -0.4

Source: OECD, FRB, DB Global Markets Research

Table 3B. Impact on inflation due to rise in oil prices by $10

per barrel

OECD-Interlink model

(2004-05)

FRB/US (1999)

IMF- Mulitmod

Model (2000)

DB VAR (2011)

Consen-sus

US 0.5 0.5 0.6 0.5 0.5

Euro Area 0.5 0.2 0.4

Japan 0.3 0.3


Asia ex Japan

0.7 0.7

World

Source: OECD, FRB, DB Global Markets Research



Effects of mild and severe oil price shocks Using the consensus estimates in Tables 3A and B, we can consider the possible effects of two alternative scenarios involving disruption of Middle East oil supplies. The first is a mild disruption that entails holding the Brent price in the range of 110 to 115/brl for much of the year ahead. In this case, we see US, Euro area and global growth slowing by about 0.4 to 0.5% relative to our baseline forecast. The second scenario entails a more severe disruption of output, with unrest spreading meaningfully to Saudi Arabia and/or other major Middle Eastern producers by enough to push the Brent oil price up to $150 per barrel until global growth responds negatively. In this case, the hit to global growth would be five times as large as in the mild shock case, enough to reduce global growth to near recession levels (less than 2%).

Table 4. Impact of oil price shocks on GDP growth and

inflation for year ahead

Mild oil shock Severe oil shock Oil prices to stay at

$110/brl Oil prices reach

$150/brl

GDP Inflation GDP Inflation

US -0.35 0.5 -1.75 2.6

Euro Area -0.5 0.4 -2.3 1.8

Japan -0.3 0.3 -1.5 1.5


-0.2 -1.0

Asia ex Japan

-0.8 0.7 -4.0 3.5

World -0.4 -2.0

Source: DB Global Markets Research

Our estimate that a 50% supply-induced oil price shock would cut roughly 2 to 2.5% points off global growth allows for an interesting historical comparison with past supply-induced shocks. Oil prices jumped nearly 200% in 1973-75, and global growth dropped by 6% points. In 1979-80, a 67% jump in oil prices resulted in nearly a 4% point drop in olobal growth. Thus our current estimate is not too far out of line with this earlier experience. Increases in energy efficiency and reduced dependence on oil per unit of output, especially among industrial countries, would

have made the global economy less sensitive than in the past. But the increasing importance of emerging market economies to the global GDP picture and their lower energy efficiency would have tended to go the other way and increase sensitivity somewhat.

Peter Hooper, (+1) 212 250-7352

Thomas Mayer, (49) 69 910 30800

Michael Spencer, (852) 2203 8305

Torsten Slok, (+1) 212 250-2155



Central Bank Watch

US The Fed's stated intention is to purchase $600 bn of longer-term US Treasury securities by June under QE2. We expect that intention to be fulfilled and not extended beyond this commitment unless the economy takes a significant turn for the worse. The improving US economic picture suggests that once QE2 terminates, the Fed will likely turn next to ending the MBS rollover program later this summer or fall. It will likely also begin to modify its "extended period" language sometime during that time frame, signaling that the initial rate hike will follow within several meetings. With economic news improving, we see a good chance of an initial hike in policy rates occurring around the end of 2011--our US economics team's call has been for this December. Prior to hiking rates, the Fed will most likely engage in reverse repo operations and term deposits to reduce the liquidity of its liabilities. And it should begin to sell off some of its holdings of MBS and Treasury securities after it has begun to raise policy rates. How quickly it proceeds in raising rates and selling its holdings of longer-term assets will depend on how the markets and the economy are responding to this shift toward policy tightening. But on our current growth and inflation forecast, and the Fed�’s, we think that tightening could proceed somewhat faster than the market currently has priced in for 2012. Current Mar11 Jun11 Dec11 fed funds rate 0 - 0.25 0 - 0.25 0 - 0.25 0.50

Japan Had there been a severe slump in the economy in 4Q 2010 and 1Q 2011, the BoJ may have been forced to enact further monetary easing purely from the business cycle viewpoint but it seems reasonable to consider that the decline in economic activity now assumed likely has effectively eliminated the possibility of further monetary easing. After a temporary increase in the current account balance of commercial banks with the BoJ (bank reserves) to ¥22trn to satisfy year-end rise in demand for funds (Figure 12), we expect the bank reserves to settle at around the ¥18trn level once again in January 2011.The BoJ started the purchase of ¥5trn worth of financial assets proposed in the 5 October 2010 �“Comprehensive Monetary Easing�” (¥1.5trn long-term government securities, ¥2trn short-term Treasury bills, ¥500bn CPs,¥500bn corporate bonds, ¥450bn ETFs, and ¥50bn REITs) but we are not certain that the total amount will definitely lead to an increase in BoJ total assets by the same magnitude.

Current Mar11 Sep11 ON rate 0 - 0.10 0.10 0.10

Euroland We expect the ECB to leave policy rates unchanged at the next Council meeting on March 3. We expect more hawkishness but also insistence that there is �“no precommitment�” to hikes. In our opinion, the most likely occasion for the first hike is June. We see May as the earliest possible date for a hike where we expect a more definitive decision on March 3 is on the non-standard liquidity policies. Against the prevailing uncertainties (e.g., Spanish bank refinancing in the next few months, EFSF reforms, Irish and EU bank stress tests) we expect the ECB to leave the full allotment regime intact.

Current Mar11 Jun 11 Dec 11 Refi rate 1.00 1.00 1.25 1.75

Key rates in the G3 countries

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

1999 2001 2003 2005 2007 2009 2011

%% Key rates in the G 3 countries

BoJ

ECB ref i

Fed FundsForecast

Source: DB Global Markets Research, Bloomberg Finance LP

UK The minutes of the last MPC meeting show that three of the nine committee members are now voting for rate hikes, with Andrew Sentence voting for 50bp; Adam Posen continues to support additional QE. Among the five members voting for the status quo, there are �“some�” who worry about inflation developments but want to be sure the Q4 GDP contraction is an aberration before taking action. Q1 GDP will be available by the time of the May MPC meeting. We still see risks of a delay on the first hike until August.

Current Mar11 Jun 11 Dec 11 Bank rate 0.50 0.50 0.50 1.00

Sweden The Riksbank raised rates from 1.25% to 1.50% at its February meeting, as the market expected. The next meeting is on 20th April.

Current Mar11 Jun 11 Dec 11 Repo rate 1.50 1.50 2.00 2.50



Central Bank Watch (continued)

Switzerland The SNB left policy rates unchanged in December. While the economy has performed better than expected, we see the franc continuing to limit the rise in core inflation. The next meeting is on 17 March.

Current Mar11 Jun 11 Dec 11 3M Libor tgt 0.25 0.25 0.50 1.00

Key rates in the peripheral European countries

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

1999 2001 2003 2005 2007 2009 2011

%% Switzerland 3m interbank rate

UK repo rate

Sweden repo rate Forecast


Canada The Bank of Canada left its target for the overnight rate unchanged at 1% today as expected. Policy Rate announcement is considerably more dovish that we expected given the strong pattern of full time job growth over the past six months, the stronger than expected (by the Bank) growth of GDP in the fourth quarter of 2010 and the evidence of stronger inflationary expectations noted in the most recent BoC Business Outlook Survey. Looking forward, it is still possible that the Bank will begin to tighten at its April 15 Policy Rate Announcement. However, the emphasis on downside risks in this Policy Rate Announcement makes it unlikely it will do so. This being said, given sustained growth of US/global economic activity, persisting strength of domestic demand in Canada, a further intensification of domestic inflationary expectations and an abatement of concerns regarding the risk of an oil shock, it appears more likely that the Bank will adopt a more restrictive policy stance in late May.

Current Mar11 Jun11 Dec11 ON rate 1.00 1.00 1.50 2.25

Australia With a positive global and domestic backdrop, RBA views the monetary stance in Australia as mildly restrictive and look for inflation to be consistent with the 2-3% target over the year aheadWe therefore see nothing in the statement to suggest that the Bank is contemplating any near-term change in policy. Hence, even though our year-end cash rate target of 5.50% is likely (in our assessment) to be at the relatively hawkish end of views, we continue to struggle to see the Bank tightening again before mid-year (i.e. June / July).

Current Mar11 Jun11 Dec11 OC rate 4.75 4.75 5.00 5.50

New Zealand higher prices for energy, food and other raw materials probably explain an increase in both the number of firms intending to rise selling prices (up 4pts to +26) and a rise in surveyed inflation expectations (up 0.18bps to 3.02%). Whilst the latter will not be welcomed by the RBNZ, we do not expect this to be an obstacle to an easing of the OCR when the Bank formally reviews policy settings on 10 March. A rate hike could occur marginally earlier (perhaps in July) if the economy and/or underlying inflation strengthens considerably more than we presently expect or be delayed beyond September if the economy fails to gather pace over coming months. Whilst clearly not on the table at present, in the near term we think the only conceivable change is a wind-back of the rate hikes implemented last year should signs emerge that the economy is set to continue a sideways crawl of the second half of 2010 for a significant part of 2011.

Current Mar11 Jun11 Dec11 OC rate 3.00 2.50 2.50 2.50

Key rates in the Peripheral $-bloc

0

1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

6

7

8

9

1999 2001 2003 2005 2007 2009 2011

%% Official interest rates (cash rates)

New Zealand Australia Canada

Forecast


China China's official CPI inflation came in at 4.9% yoy in January, up from 4.6% in December but significantly below market and our expectations of 5.3-5.4%. The widely speculated reason for this lower-than-expected figure -- the government adjustment to the CPI weights -- was incorrect. The main surprises were that the official mom increase in food prices (at 2.8%) was significantly lower than our expectation of 3.7% (based on 6.2% mom rise in the agriculture price index in January, as reported by the Ministry of Agriculture), and that clothing prices fell in Jan (which is difficult to explain, after a 86% rise in cotton prices last year). We believe that Feb food price inflation in the official CPI statistics will likely surprise on the upside, as the pass-through from agriculture prices to processed food prices are being delayed. We maintain our annual average CPI inflation forecast of 5%, and continue to expect yoy inflation to peak in June (at 5.8%yoy according to our latest forecast, vs the previous 6%). For the second half of this year, we expect CPI inflation to fall



Central Bank Watch (continued)

gradually towards 4% at the end of the year. The key assumptions behind this projection include a 3% cumulative decline in mom food prices in March-May, a stable global oil price, a stable velocity of money, and limited pass-through of raw materials and wage inflation to consumer prices.

Current Mar11 Jun11 Dec11 1-year rate 3.00 3.20 3.50 3.50 India Stressing that �“inflation is clearly the dominant concern,�” the Reserve Bank of India resumed monetary policy tightening in its January review, raising the repo and reverse repo rates to 6.5% and 5.5%, respectively. Apart from elevated food and fuel inflation risks, the central bank sees emerging demand side risk to inflation as well. The output gap has been closing, wage growth is robust, and public social spending programs are boosting income of the rural poor. Given these risks, the central bank revised up its inflation forecast for March 2011 to 7% (from 5.5%), lower than our projection of 8%. It also recognized that the risk to the forecast was to the upside. Curiously, the RBI statement did not entertain the inflation trajectory beyond March. Incorporating the risks highlighted by the central bank, we see inflation remaining around 8% through the course of the year. [January inflation print of 8.2% further reinforces our concerns]. The RBI justified the rate hikes by arguing that the growth-inflation balance of risk has tilted toward the intensification of inflation. We see the RBI remaining open to further rate hikes, especially as we see no major respite from inflation pressure in the coming months. The central bank also seems ready to allow for some growth to be sacrificed, if necessary, in its fight on inflation. If the non-core to core price spillover begins, which seems rather likely in our view, the central bank will have no choice but to act. We expect 100 more basis points in rate hikes during 2011.

Current Mar11 Sep11 Dec11 Repo rate 6.50 6.75 7.50 7.50 Brazil The Central Bank initiated a new tightening cycle in January, raising the SELIC overnight rate by 50bp to 11.25%. The increase in interest rates was inevitable given the strength of domestic demand and sharp deterioration in inflation expectations. Market participants currently expect inflation to surpass the 4.5% target in 2011 and 2012. The official statement released by the Central Bank explained that the hike in the SELIC rate was the �“beginning of a process of adjustment,�” indicating that it planned to implement additional hikes. At the same time, however, the Central Bank stated that �“macro-prudential measures�” (such as the increase in reserve requirements on bank deposits announced in December)

would complement the increase in interest rates, implying that they could help reduce the magnitude of the tightening cycle. We expect two additional 50bp hikes in March and in April, although the sharp deterioration in inflation expectations has increased the likelihood of a longer cycle.

Current Mar11 Jun11 Dec11 CBR refi rate 11.25 11.75 12.25 12.25 Russia Most recently, the CBR declared that it would hike interest rates across the spectrum of its instruments of monetary policy. Starting from the last day of February, the refinancing rate, the key benchmark rate of the Russian money market, is be set at 8% - 25bps above its current value of 7.75%. Overnight deposit rates were hiked 25bp from 2.75% to 3% and overnight credit rates reached 8%. Separately, reserve requirements were raised on Friday from 3.5% to 4.5% in foreign currency and from 3% to 3.5% in local currency. We note that this is the second time (the first one was at the end of January), when the CBR raises reserve requirements in foreign currency together with local currency reserve requirements. We link these hawkish actions by the CBR with the still high inflation levels, which reached 2.4% in January and 0.7% thus far in February. The high levels of inflation observed in February were observed despite the significant reduction in fuel prices, which suggests that the in-built inflationary momentum remains substantial. Furthermore, we note that the CBR opted to raise rates in spite of the disappointing growth figures for January, which suggests that inflation concerns have taken on prime importance for the monetary authorities. As for inflation prospects later this year, Deutsche Bank forecasts the oil prices to remain high in 2011, averaging at USD101/bbl for Brent. We think that with oil prices at such a high level, the government�’s forecast (and the CBR�’s target) of 6-7% CPI inflation in 2011 will be hardly achievable. We currently forecast the inflation to reach 8.5% in 2011.

Current Mar11 Sep11 Dec CBR refi rate 8.00 8.25 8.25 8.00 Key rates in major emerging markets

0

5

10

15

20

25

30

0

5

10

15

20

25

30

2002 2004 2006 2008 2010

%%Brazil China India

Forecast




2009 2010 2011

Aug Oct Nov Dec Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

Israel 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 200

Australia 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 175

Norway 1.25% 1.50% 1.75% 2.00% 75

Vietnam 7.00% 8.00% 9.00% 11.00% 400

Malaysia 2.00% 2.25% 2.50% 2.75% 75

India 4.75% 5.00% 5.25% 5.75% 6.00% 6.25% 6.50% 175

Brazil 8.75% 9.50% 10.25% 10.75% 11.25% 250

Peru 1.25% 1.50% 1.75% 2.00% 2.50% 3.00% 3.25% 3.50% 225

Canada 0.25% 0.50% 0.75% 1.00% 75

Chile 0.50% 1.00% 1.50% 2.00% 2.50% 2.75% 3.00% 3.25% 3.50% 300

New Zealand 2.50% 2.75% 3.00% 50

Taiwan 1.25% 1.38% 1.50% 1.63% 38

Sweden 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 125

S Korea 2.00% 2.25% 2.50% 2.75% 75

Thailand 1.25% 1.50% 1.75% 2.00% 2.25% 100

Serbia 8.00% 8.50% 9.00% 9.50% 10.50% 11.50% 12.00% 400

Uruguay 6.25% 6.50% 25

Nigeria 6.00% 6.25% 6.50% 50

China 2.25% 2.50% 2.75% 3.00% 75

Hungary 5.25% 5.50% 5.75% 6.00% 75

Poland 3.50% 3.75% 25

Indonesia 6.50% 6.75% 25

Colombia 3.00% 3.25% 25

Russia 7.75% 8.00% 25

Note: Reserve Bank of India hiked twice in July, each by 25bps

Globa l cent ra l bank policy ra te hikes s ince September 2008Trough

policy rate

Total bps

hike



Global data monitor: Recent developments and near-term forecasts B�’bergcode Q1-10 Q2-10 Q3-10 Q4-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

OECD leading indicators (6M change, %, ann.) OECD 10.1 8.2 4.1 1.4 2.0 1.4 0.9 US OLEDUSA 11.2 9.9 5.3 2.5 3.2 2.5 1.9 Euro area OLEDEU12 9.6 6.9 2.4 -0.4 0.3 -0.4 -0.9 Japan OLEDJAPN 7.4 7.6 4.7 2.5 3.0 2.4 2.0 China OLEDCHIN 23.7 17.6 12.4 10.8 11.2 10.8 10.3 India OLEDINDI 14.8 11.4 8.9 6.5 7.4 6.5 5.7 Russia OLEDRUSS 15.9 14.4 10.6 8.8 9.1 8.8 8.5 Brazil OLEDBRAZ 20.8 13.3 5.5 2.7 3.2 2.6 2.4

Purchasing manager indices Global (manufacturing) 56.0 56.4 54.3 55.4 54.9 55.2 56.2 57.4 US (manufacturing ISM) NAPMPMI 58.6 57.6 55.2 57.9 56.9 58.2 58.5 60.8 62.0 Euro area (composite) 54.4 56.6 55.7 55.0 53.8 55.5 55.5 57.0 58.4 f Japan (manufacturing) SEASPMI 52.5 54.1 50.8 47.6 47.2 47.3 48.3 51.4 52.9 China (manufacturing) EC11CHPM 56.7 52.8 51.4 54.8 54.8 55.3 54.4 54.5 51.7 India (manufacturing) 58.0 57.8 56.6 57.4 57.2 58.4 56.7 56.8 57.9 Russia (manufacturing) 50.4 52.2 52.3 52.2 51.8 51.1 53.5 53.5 55.2 Other business surveys US dur. goods orders (%pop1) DGNOCHNG 1.8 0.7 1.8 -1.2 -3.1 -0.1 -0.4 2.7 Japanese Tankan (LI) JNTSMFG -14.0 1.0 8.0 5.0 Euro area EC sentiment EUESEMU 96.4 99.1 102.2 105.6 104.3 105.6 106.9 106.8 107.8Industrial production (%pop1) US IP CHNG 7.2 7.1 6.4 3.0 -0.1 0.3 1.2 -0.1 0.6 Euro area EUITEMUM 9.8 9.9 4.4 6.9 0.8 1.4 -0.1 Japan JNIPMOM 30.9 6.2 -7.1 -6.1 -2.0 1.0 3.3 2.4 Retail sales (%pop1) US RSTAMOM 8.9 5.0 3.3 13.7 1.6 0.8 0.5 0.3 1.0 Euro area RSSAEMUM 1.9 0.1 1.4 -1.7 0.0 -0.1 -0.6 Japan (household spending) 1.5 -6.4 6.0 -6.3 -0.8 0.2 -2.4 1.0 Labour market US non-farm payrolls2 NFP TCH 39 181 -46 128 171 93 121 36 250 Euro area unemployment (%) UMRTEMU 9.9 10.0 10.0 10.0 10.1 10.0 10.0 9.9 Japanese unemployment (%) JNUE 5.1 5.1 5.0 5.0 5.1 5.1 4.9 4.9 CP inflation (%yoy) US CPICHNG 2.4 1.8 1.2 1.3 1.2 1.1 1.5 1.6 Euro area ECCPEMUY 1.1 1.6 1.7 2.0 1.9 1.9 2.2 2.3 2.5 Japan JNCPIYOY -1.2 -0.9 -0.8 0.1 0.2 0.1 0.0 0.0 China CNCPIYOY 2.1 2.7 3.3 4.7 4.3 5.2 4.8 5.1 India 9.4 10.6 9.3 8.3 8.7 8.1 8.3 8.1 Russia RUCPIYOY 7.2 5.9 6.1 8.1 7.5 8.1 8.8 9.6 Brazil 4.9 5.1 4.6 5.6 5.2 5.6 5.9 6.0 Current account (USD bn)3 US (trade balance, g+s) USTBTOT -38.0 -44.2 -44.7 -39.1 -38.3 -38.3 -40.6 -41.0 Euro area -0.8 -2.8 -6.2 -15.1 -13.3 -14.3 -17.6 Japan 17.1 13.7 17.2 16.8 17.9 13.9 18.7 China (trade in goods) 11.1 15.9 19.3 14.2 15.0 13.7 13.9 5.4 Russia (trade in goods) 16.0 12.7 9.5 13.1 11.5 12.7 15.0 Other indicators Oil prices (Brent, USD/b) EUCRBRDT 76.3 78.3 77.6 87.2 83.7 85.9 92.1 97.7 103.1FX reserves China (USD bn) CNGFOREX 2447.1 2454.3 2648.3 2847.3 2760.9 2767.8 2847.3

Quarterly data in shaded areas are quarter-to-date. Monthly data in the shaded areas are forecasts. (1) % pop = % change this period over previous period. Quarter on quarter growth rates is annualised. (2) pop change in �‘000, quarterly data are averages of monthly changes. (3) Quarterly data are averages of monthly balances. (4) �‘f�’ stands for flash estimate.

Sources: Bloomberg Finance LP, Reuters, Eurostat, European Commission, OECD, Bank of Japan, National statistical offices.



Charts of the Week

Chart 1. In the US, optimism was seen in consumer

expectations...

40

50

60

70

80

90

100

110

1997 1999 2001 2003 2005 2007 2009 2011-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

UoM expectations (ls)

Real PCE (rs)

% yoyIndex University of Michigan consumer expectations and PCE

Source: UoM, BEA, DB Global Markets Research

Chart 3. In Euro zone, core inflation remain contained in

January�… Euro zone inflation

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Headline CPI

Core CPI

% yoy

Source: Eurostat, DB Global Markets Research

Chart 5. In the UK, CBI retailer survey plunged in

February�…

-60

-40

-20

0

20

40

60

80

100

1997 1999 2001 2003 2005 2007 2009 2011-6

-4

-2

0

2

4

6

8

10

CBI retail survey (ls)

Retail sales, volume (rs)

UK CBI retail survey and retail sales % yoyNet respondents

Source: CBI, ONS, DB Global Markets Research

Chart 2. �…while the core inflation pulse rose from 2010

lows

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

%

3 month, saar6 month, saaryoy

US core PCE deflator

Source: BEA, DB Global Markets Research

Chart 4. �…however, the private sector bank loan growth

recovered

-3

0

3

6

9

12

15

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Private sector bank loansM3 growth

Euro zone M3 and private sector loan growth% yoy

Source: ECB, DB Global Markets Research

Chart 6. �…while in China manufacturing PMI dipped

further China PMI and industrial production

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010

% yoy

35

40

45

50

55

60

65

Index

IP (ls) PMI (rs)

Source: NBS, CFL, DB Global Markets Research



Global Week Ahead: Thursday, Thursday, 3 March �– Wednesday, 9 March • Dollar Bloc: In the US, markets will keenly watch the February employment report �– we envisage unemployment rate to come down

to 8.9%. The January factory orders number should accelerate. Besides, non-farm productivity, labour costs, consumer credit and non-mfg ISM and consumer credit numbers are also due this week. In Australia, January�’s trade balance report is releasing this week �– we project a surplus of AUD 1.5bn. In Canada, housing starts is the most important data release. In New Zealand, the RBNZ will announce its official cash rate decision on Wednesday. Data-wise, we have manufacturing activity index for Q4.

• Europe: In the Eurozone, focus will be on the ECB rate setting meeting �– we believe the ECB to keep rates unchanged. Data- wise, we will get services PMI from across the board. The release of area-wide Q4 GDP along with German and Spanish IP figures should tell us about the activity level in the region, while Euroarea and German retail sales will capture the consumption trends. Elsewhere, German factory orders, French trade balance and Italian PPI data are scheduled for release. In the UK, trade balance and services PMI data are the most important release. In Switzerland, we will get retail sales and unemployment rate figures. In Scandinavia, the week will see the release of IP data from across the region.

Asia incl. Japan: In Japan, all eyes will be on the final estimate of Q4 GDP data. Besides, we will also monitor the money supply and

trade balance figures.

Country GMT Release DB Expected Consensus Previous Thursday, 3 March

AUSTRALIA 00:30 Dwelling approvals (Jan) -5.5% -3.3% (-6.6%) 8.7% (-5.0%)

AUSTRALIA 00:30 Intl. trade in G and S (Jan) AUD1.5bn AUD1.6bn AUD2.0bn

GERMANY 07:00 Retail sales (Jan) 0.5% (1.7%) -0.3% (-1.3%)

SLOVAKIA 08:00 GDP(final) (Q4) (3.5%) (3.8%)

TURKEY 08:00 CPI (Feb) 0.7% 0.8% (4.2%) 0.4% (4.9%)

SWITZERLAND 08:15 Adjusted real retail sales (Jan) (-0.8%)

SPAIN 08:15 PMI services (Feb) 49.8 49.3

ITALY 08:45 PMI services (Feb) 51.0 51.1 49.9

FRANCE 08:50 PMI services (Feb) 60.8 60.8 57.8

GERMANY 08:55 PMI services (Feb) 59.5 59.5 60.3

EUROLAND 09:00 PMI services (Feb) 57.2 55.9

EUROLAND 09:00 PMI composite (Feb) 58.4 57.0

ITALY 09:00 PPI (Jan) 0.9% (4.6%) 0.6% (4.6%)

UK 09:30 PMI services (Feb) 53.5 53.7 54.5

EUROLAND 10:00 Retail sales (Jan) 0.3% (0.0%) -0.6% (-0.9%)

EUROLAND 10:00 GDP first estimate (Q4) 0.3% (2.0%) 0.3% (1.9%)

BRAZIL 12:00 GDP IBGE (Q4) 0.9% (5.5%) 0.8% (5.2%) 0.5% (6.7%)

EUROLAND 12:45 ECB rate decision (Mar) 1.00% 1.00%

US 13:30 Initial jobless claims (Feb 26) 395.0k 391.0k

US 13:30 Productivity (Q4) 2.1% 2.3% 2.3% (2.5%)

US 13:30 Unit labor costs (Q4) -0.2% -0.5% -0.1% (-1.1%)

US 15:00 ISM non-mfg (Feb) 59.5 59.4 59.4 Events and Meetings: US: Fed�’s Bernanke to hold speech in New York �– 01:00 GMT. SWITZERLAND: SNB�’s Jordan to hold speech in Bern �– 08:30 GMT. EUROLAND: ECB to hold Governing Council meeting, interest rate announcement scheduled �– 12:45 GMT; news conference by Trichet to follow at 13:30 GMT. EUROLAND: ECB�’s Mersch to hold speech in Frankfurt �– 14:45 GMT. US: Fed�’s Kocherlakota to hold speech in Minnesota �– 16:00 GMT. US: Fed�’s Lockhart to hold speech in Tallahassee �– 17:15 GMT.

Friday, 4 March

SPAIN 08:00 Industrial production (Jan) (1.2%) (0.5%) (-0.1%)

BRAZIL 12:00 IBGE inflation IPCA (Feb) 0.9% (6.1%) 0.8% (6.0%) 0.8% (6.0%)

US 13:30 Avg hourly earning (Feb) 0.3% 0.2% (1.9%) 0.4% (1.9%)

US 13:30 Avg workweek (Feb) 34.4hours 34.3hours 34.2hours

US 13:30 Index of agg hours (Feb) -0.3% (1.4%)

US 13:30 Payrolls (Feb) 250.0k 190.0k 36.0k

US 13:30 Unemployment rate (Feb) 8.9% 9.1% 9.0%

US 15:00 Factory orders (Jan) 4.0% 2.0% 0.2% (8.1%)

MEXICO 15:00 Overnight rate (Mar) 4.50% 4.50% 4.50%



Country GMT Release DB Expected Consensus Previous Friday, 4 March (continued)

Events and Meetings: GERMANY: German Chancellor Merkel to hold speech in Helsinki. EUROLAND: ECB�’s Noyer (07:45 GMT &

17:10 GMT), Weber (08:00 GMT), Draghi (10:15 GMT), Bini Smaghi (10:15 GMT) and Orphanides (13:00 GMT) to hold speech in Paris. EUROLAND: ECB�’s Gonzalez Paramo to hold speech in Cape Town �– 10:50 GMT. MEXICO: Central Bank of Mexico to announce overnight rate �– 15:00 GMT. US: Fed�’s Yellen to hold speech in Paris �– 15:00 GMT

Monday, 7 March

JAPAN 05:00 Leading economic index (Jan) 70.0

JAPAN 05:00 Coincident index (Jan) 50.0

DENMARK 08:30 Industrial production (Jan) -1.1%

NORWAY 09:00 Industrial production (Jan) 0.9% (-2.7%)

CHILE 11:30 Economic activity (Jan) (5.8%) (5.7%)

CANADA 13:30 Building permits (Jan) 2.4%

US 20:00 Consumer credit (Jan) USD5.0bn USD4.0bn USD6.1bn

NEW ZEALAND 21:45 Manufacturing activity (Q4) 1.3%

JAPAN 23:50 BoP trade balance (Jan) JPY699.5bn

JAPAN 23:50 Money supply M2 and CDS (Feb) (2.3%) Events and Meetings: EUROLAND: ECB�’s Trichet to hold speech in Basel �– 11:30 GMT. US: Fed�’s Lockhart to hold speech in Virginia �– 13:00 GMT. US: Fed�’s Fisher to hold speech in Washington �– 14:15 GMT.

Tuesday, 8 March

SWITZERLAND 06:45 Unemployment rate (Feb) 3.8%

FRANCE 07:45 Trade balance (Jan) -EUR5.0bn

SLOVAKIA 08:00 Industrial production (Jan) (19.7%)

TURKEY 08:00 Industrial production (Jan) (16.9%)

CZECH 08:00 Unemployment rate (Feb) 9.7%

GERMANY 11:00 Factory orders (Jan) -3.4% (19.7%)

GERMANY 11:00 Domestic factory orders (Jan) -2.4% (14.2%)

GERMANY 11:00 Foreign factory orders (Jan) -4.2% (24.3%)

CANADA 13:15 Housing starts (Feb) 170.4k

Events and meetings: No significant events scheduled.

Wednesday, 9 March

SWEDEN 08:30 Industrial production (Jan) -2.1% (10.0%)

CZECH 09:00 CPI (Feb) 0.7% (1.7%)

UK 09:30 Trade balance non EU25 (Jan) -GBP5.4bn -GBP5.8bn

UK 09:30 Visible trade balance (Jan) -GBP9.0bn -GBP9.3bn

MEXICO 15:00 CPI (Feb) 0.5% (3.8%)

US 15:00 Wholesale inventories (Jan) 0.8% 1.0% 1.0% (10.5%)

NEW ZEALAND 20:00 RBNZ official cash rate (Mar) 2.88% 3.00%

JAPAN 23:50 Real GDP (annualised) (Q4) 4.5%

JAPAN 23:50 Real GDP (Q4) 1.1%

JAPAN 23:50 GDP deflator (Q4) (-2.4%)

Events and meetings: AUSTRALIA: Reserve Bank of Australia�’s Stevens to hold speech in London �– 10:00 GMT. NEW ZEALAND: Reserve Bank of New Zealand to announce official cash rate �– 20:00 GMT. Source: Australian Bureau of Statistics; Bank of Canada; Bank of Japan; BEA; BLS; Bundesbank; Bureau of Labor Statistics, U.S. Department of Labor; Cabinet Office, Government of Japan; ECB; Eurostat; Indian Central Statistical Organization; INE; INSEE; ISTAT; ISTAT.IT; Ministry of Finance japan; National Association of Realtors; National Bureau of Statistics; National Statistics Office; OECD - Composite Leading Indicator; People's Bank of China; Reserve Bank of Australia; Reserve Bank of New Zealand; Statistics Canada; Statistics Netherlands; Statistics of New Zealand; U.S. Census Bureau; U.S. Department of Labor, Employment & Training Administration; U.S. Department of the Treasury; U.S. Federal Reserve. Note: Unless otherwise indicated, numbers without parenthesis are either % month-on-month or % quarter-on-quarter, depending on the frequency of release, while numbers in parenthesis are % year-on-year. * on the release time means indicative release time. * on indicator name means indicative/earliest release date.



Financial Forecasts US Jpn Euro UK Swe* Swiss* Can* Aus* NZ*

3M Interest Actual 0.31 0.34 1.05 0.80 1.50 0.25 1.00 4.75 3.00 Rates1 Mar11 0.30 0.35 1.10 0.80 1.50 0.25 1.00 4.75 2.50

DB forecasts futures 0.32 0.34 1.15 0.84 --- --- --- --- ---

& Futures Jun11 0.30 0.30 1.40 0.90 2.00 0.50 1.50 5.00 2.50

futures 0.36 0.35 1.45 1.10 --- --- --- --- --- Dec11 0.75 0.30 2.00 1.40 2.50 1.00 2.25 5.50 2.50 futures 0.62 0.38 1.93 1.59 --- --- --- --- ---

10Y Gov�’t2 Actual 3.44 1.29 3.17 3.60 3.26 1.68 3.03 5.45 5.14 Bond Mar11 3.50 1.30 3.40 3.70 3.30 2.00 3.50 5.75 5.50

Yields/ futures 3.57 1.35 3.26 3.71 --- --- --- --- ---Spreads3 Jun11 4.00 1.30 3.60 3.80 3.55 2.25 3.50 5.50 5.25

DB forecasts futures 3.70 1.40 3.34 3.81 --- --- --- --- ---& Forwards Dec11 4.00 1.40 4.00 4.00 4.05 2.75 3.50 5.00 5.00

futures 3.91 1.49 3.46 3.96 --- --- --- --- ---

EUR/

USD

USD/

JPY

EUR/

GBP

GBP/

USD

EUR/

SEK

EUR/

CHF

CAD/

USD

AUD/

USD

NZD/

USDExchange Actual 1.38 82.1 0.85 1.63 8.73 1.29 0.97 1.02 0.75

Rates 3M 1.35 80.0 0.86 1.57 8.50 1.29 1.00 0.95 0.70 6M 1.40 75.0 0.86 1.63 8.20 1.35 1.00 0.90 0.68 12M 1.30 78.0 0.84 1.55 8.00 1.37 1.05 0.85 0.67

(1) Future rates calculated from the March, June and December 3M contracts. Forecasts are for the same dates. * indicates policy interest rates. (2) Forecasts in this table are produced by the regional fixed income strategists. Forwards estimated from the asset swap curve for 2Y and 10Y yields. (3)Bond yield spreads are versus Euroland. Sources: Bloomberg Finance LP, DB Global Markets Research. Revised forecasts in bold type. All current rates taken as at Tuesday 11:00 GMT.

US 10Y rates

1.0

2.0

3.0

4.0

5.0

6.0

1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010-1.0

0.0

1.0

2.0

3.0

4.0

5.0

10Y

2Y/10Y spread (rhs)

US government bond yields, %


Japan 10Y rates

0.5

1.0

1.5

2.0

2.5

1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/20100.0

0.5

1.0

1.5

2.0

10Y2Y/10Y spread (rhs)

Japan government bond yields, %

Source DB Global Markets Research, Bloomberg Finance LP

Euroland 10Y rates

1.0

2.0

3.0

4.0

5.0

6.0

1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010-0.50.00.51.01.52.02.5

10Y2Y/10Y spread (rhs)

Euro government bond yields, %


UK 10Y rates




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Appendix 1 Important Disclosures

Additional information available upon request

For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

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The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Peter Hooper

Deutsche Bank debt rating key

CreditBuy (�“C-B�”): The total return of the Reference Credit Instrument (bond or CDS) is expected to outperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditHold (�“C-H�”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to perform in line with the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditSell (�“C-S�”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to underperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditNoRec (�“C-NR�”): We have not assigned a recommendation to this issuer. Any references to valuation are based on an issuer�’s credit rating. Reference Credit Instrument (�“RCI�”): The Reference Credit Instrument for each issuer is selected by the analyst as the most appropriate valuation benchmark (whether bonds or Credit Default Swaps) and is detailed in this report. Recommendations on other credit instruments of an issuer may differ from the recommendation on the Reference Credit Instrument based on an assessment of value relative to the Reference Credit Instrument which might take into account other factors such as differing covenant language, coupon steps, liquidity and maturity. The Reference Credit Instrument is subject to change, at the discretion of the analyst.



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Risks to Fixed Income Positions

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates �– these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

GRCM2011PROD021396

David Folkerts-Landau Managing Director

Global Head of Research

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