U.S. Personal Consumer Spending Rises - Personal Income Much Stronger

Personal consumer expenditure (PCE) rose a minimal 0.1% in February which was in line with market expectations. This represented a slowing in growth from the 0.4% gain achieved in January. The minimal gain in spending occurred despite an unexpected jump in growth in income in February to 0.5% which was up from the 0.3% gain recorded in January. With income growth outstripping the rise in spending, the savings rate managed to return to positive territory rising to 0.3% from -0.1% in January. Consumer spending on a volumes basis remained unchanged in the month following a negligible 0.1% gain in January.

The modest overall gain in nominal consumer spending largely reflected weakness in the nondurables component which fell 0.2% in February. Greater strength was evident in the purchase of durables and services which both rose 0.3% in the month.

Overall personal consumer expenditure (PCE) prices were up a minimal 0.1% in the month as was the core, or ex food and energy, component. On a year-over-year basis, the overall measure continues to rise at an elevated 3.4% due to earlier gains in energy prices though this does represent a modest easing from the 3.5% recorded in January. The annual increase in core prices is rising a much more moderate 2.0%, which came in slightly under market expectations and was unchanged from the downwardly revised increase in January. The increase in core prices still remains at the upper end of the Fed's so-called “1% to 2% comfort zone.”

Despite the volume of PCE remaining unchanged in February after rising only 0.1% in January, earlier increases have still left the level of spending up an annualized ½% relative to the fourth quarter. This does reinforce the expectation that consumer spending likely slowed from the 1.9% recorded in Q4 though growth does appear likely to have remained in positive territory. With housing expected to continue to subtract almost a full percentage point from quarterly growth over the first half of the year, growth in other key expenditure areas like consumer spending and business investment will need to remain in positive territory to minimize the negative hit to overall GDP. Thus the Fed is expected to continue to try and ease the pressures in financial markets that are currently pressuring the cost of capital higher and weighing on consumer confidence. The response by policymakers will likely entail both measures to deal with illiquidity in specific asset market along further interest rate reductions. Our forecast assumes that Fed funds will be cut a further 75 basis points over the next two FOMC meeting dropping to a near-term trough of 1.50% by mid-2008.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

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Indonesia's annual CPI to surge in March; central bank to keep BI rate on hold

Indonesia's inflation data for March, due next Tuesday, is expected to show a sharp annual increase in March and prompt the central bank to keep its key BI rate on hold instead of yielding to expectations for an interest rate cut.

On a monthly basis, the consumer price index (CPI) may reflect a slowdown, given that food prices reached abnormally high levels in recent months on the back of record global commodity prices, according to estimates by most economists polled by Thomson Financial.

"I think the danger about the CPI data is that although it is easing on a monthly basis, the annual rise is even higher. That will spark negative sentiment," said Anton Gunawan, an economist at Bank Danamon Indonesia.

Forecasts for the CPI by the 10 economists polled by Thomson range from a rise of 0.21-0.5 percent in March from February. In February, the CPI was up 0.65 percent from the preceding month.

Year-on-year, the CPI is expected to show a rise of between 7.37 percent and 7.63 percent. This range compares with the actual annual increase of 7.4 percent posted in February, driven by food prices.

One basic assumption for a month-on-month slowdown is a decline in rice prices following the start of the harvest season this month in some parts of the country, said Destry Damayanti, an economist at Mandiri Securities.

"I think some food components like spices, cooking oil, still rose but not as strongly as in the previous month. We may also see pressure from kerosene prices during the month," Bank Danamon's Gunawan said.

Kerosene prices in some cities were driven higher by scarce supply as a result of the government's program to replace non-subsidized kerosene, which is used mostly by poor families for cooking, with liquefied petroleum gas (LPG) to reduce its burden of oil subsidies.

Apart from the fall in rice prices, fiscal measures such as the removal of import tax on wheat and soybean should have also helped stabilize food prices, said Eric Sugandi, an economist at Standard Chartered Bank.

Monetary implications

Amid threats of mounting prices, the central bank is expected to keep its key interest rate unchanged in April, instead of giving in to expectations for a rate cut, economists said.

The BI rate has been steady at 8.0 percent over the last four months, a level viewed by many as high enough to contain inflation in the coming months.

The monthly CPI in April is bound to be pushed up by the same risks faced by the global economy, which require central banks to balance out the effects of accelerating inflation and slowing economic growth. The CPI in April 2007 was down 0.16 percent from March.

"Like many central banks across the region, BI is likely to remain patient in the face of growing uncertainties surrounding the conflicting pressures of accelerating inflation versus a potential global economic slowdown, " said David Cohen, an economist at Singapore-based Action Economics.

The threat of rising food and energy prices will continue to fuel inflation going forward, making it difficult to cut interest rates, said Mandiri's Damayanti.

"I don't see BI easing rates should inflation stay above 7.0 percent, although toward the latter part of the year we must reassess the situation" said Gundy Cahyadi, an economist at Ideaglobal Ltd in Singapore.

Damhuri Nasution, an economist at Danareksa Research Institute, said Bank Indonesia will certainly keep the BI rate steady to maintain real interest rates in the range of 1.5-2.0 percent.

Eric Sugandi of Standard Chartered said in the event the central bank finds a reason to cut its rates, the earliest it would do so would be in May, when food prices are expected to ease.

Damayanti said she is maintaining her year-end inflation forecast at 7.5 percent and the BI rate at 8.0 percent.

Following is a summary of forecasts for monthly and annual CPI changes, along with the BI rates:

1. Mega Capital - up 0.19 percent; up 7.35 percent; 8.0 percent

2. BII - up 0.21 percent; up 7.37 percent: 8.0 percent

3. Ideaglobal Ltd - N/A; up 7.4 percent; 8.0 percent

4. Danareksa - up 0.24 percent; up 7.40 percent; 8.0 percent

5. Bank Lippo - up 0.30 percent; up 7.46 percent; 8.0 percent

6. StanChart - up 0.30 percent; up 7.5 percent; 8.0 percent

7. Mandiri Securities - up 0.33 percent; up 7.5 percent; 8.0 percent

8. Action Economics - up 0.5 percent; up 7.5 percent; 8.0 percent

9. Bank Danamon - up 0.28 percent; up 7.44 percent; 8.0 percent

10. Samuel Securities - up 0.47 percent; up 7.63 percent; 8.0 percent

aloysius.bhui@thomson.com

alo/nt

--- By Aloysius Bhui ---

ab/nt/nt

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