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Bank Leumi (Switzerland) Claridenstrasse 34 8002 Zürich Telefon 44/207 95 66 e-Mail [email protected] Statements by the president of the Kansas City Federal Reserve The devaluation of the EUR continues after a short time of consoli- bank seem at odds with the current market thinking. According to dation. Considering the fact that the Eurozone is still evaluating his view, the federal fund rate should rise from close to zero to 1 new members, such as Estonia which has been approved for entry % by the end of summer, arguing that even at that level mone- in 2011 only a few weeks ago and showed the second worst tary policy would remain extraordinarily stimulative. After assess- economic growth amid the EU-27 members or even more trouble- ing the outlook, rates ought to be moved to 3 % reasonably some, Hungary, which apparently elected a headline-catching quickly. In the final stage, fed funds could reach 4.5 %. While communicator as the prime ministers spokesperson, the troubles Thomas Hoenig was the only FOMC voting member which openly with the EUR seem far from over. Given the massive problems in dissented for the last three meeting, statements by other Fed the Eurozone the best outcome seems a further significant de- Banks presidents seem slowly to move in his direction. The main valuation of the EUR and the worst outcome a strong alteration of argument is based on the assessment that extraordinary low rates the member states, or alternatively, the dissolution of this currency are dangerous to the outlook and caused high cost in the past: all-together. Of course, this is a process, which might occur over Inexpensive money in the 2003-04 period, when deflationary several years. Nice words out of China (it became an important fears reigned, have substantially contributed to the housing bub- holder of EUR investments) and central bank interventions may ble and led to a general misjudgment on investment risks. While periodically lead to a countermove. USD, CHF and JPY are for most central bankers acknowledge the necessity to raise rates, the timing seems most important, particularly given the trouble-some clutter in Europe and the loan bubble in China. Importantly, low interest rates also support the financial industry. Additionally, still low inflation rates and well-anchored inflation expectations are cited. The crucial role of inflation expectations has been documented in various studies. The problem is that market expec- tations can change within hours. Economic systems which are flooded with liquidity when such sudden alternation in assessment occurs will be especially vulnerable to inflation fears. A timely normalization of interest rates in the US is hence desirable. US government debt once more fulfilled the role as safe haven. The name of the game seems to be where to lose the least among Investors accept ridiculous low yields again for the sake of pre- volatile moves, full of emotions, empty of volumes. Johnson & serving their capital. We are somewhat concerned about the Johnson (JNJ) is considered a more defensive investment in these ease investors show when considering bonds, particularly of uncertain times. The company hosted the bi-annual review of its longer duration. It seems out of question that interest rates may Medical Device and Diagnostics (MD&D) unit last week, which is rise and bond values slide as a consequence. But this is exactly the largest, fastest growing and highest margin business in medi- our scenario (particularly in the US) - increasing interest rates for cal technology worldwide. MD&D is anticipated to show top line years to come. We therefore strongly advise to choose short growth of 6-7 % over the next five years based on an impressive duration, despite the apparent unattractive yields. The FOMC has pipeline and focus on emerging markets. Double-digit growth practically disentangled from most initiatives which have been from Ethicon (recent acquisitions of Omrix, Acclarent and Mentor created to support markets during the crisis. The only remaining offer a promising pipeline) and high single-digit growth from program, the Term Asset-Backed Securities Loan Facilities, is Ethicon-Endosurgery, DePuy as well as Diagnostics represent the scheduled to close on June 30. Additionally, the normalization of main drivers. The MD&D division has already received approval the discount rate is now in process. After having raised the rate for a dozen new products and should add about 80 submissions already once, various Federal Reserve Banks push for further between 2010 to 2012. In their pharma unit, growth is antici- adjustments. The way is increasingly cleared in order to address pated to accelerate after patent expiration of important products also the federal fund rate. We currently prefer some corporate (Risperdal and Topamax) last year. A weakening EUR and a bonds, which corrected in recent weeks and we like TBF/TBTs. product recall seem well discounted in the current share price. Notice: This report is provided to you solely for informational purposes and does not constitute an offer or a solicitation of an offer, or any ad-vice or recommendation to purchase any securities and may not be construed as such. Furthermore, investors should be aware that prices may rise or fall.

Source: http://www.leumi.ch/static-files/MediaServer/LeumiSwitzerland/deflationinflationorworse.pdf