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Published on April 9, 2008

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Outlook for US Economy and the Fed Subprime stress vs. inflation risk :  Peter Hooper Chief Economist Deutsche Bank Securities Prepared for XXV Meeting of the Latin American Network of Central Banks and Finance Ministries May 18, 2007 Outlook for US Economy and the Fed Subprime stress vs. inflation risk DISCLAIMER AND ANALYST CERTIFICATION ARE LOCATED ON THE LAST PAGE Overview:  Overview Fed’s central expectation: Goldilocks. Downside risks to growth have risen: Housing sector and subprime stresses still to come. Capital spending. Upside risks to inflation still present, but softening: Tight labor market. Energy prices. Inflation expectations. Rent inflation. Fed outlook: On hold for now, but rate cut before year quite plausible. I. Growth Risks:  I. Growth Risks US GDP Growth Outlook:  US GDP Growth Outlook Source: BEA, DB Global Markets Research 2008 y/y forecast 2003-05 y/y average Q2 Q3 Q4 Contributions Slide5:  Source: Census, BEA, DB Global Markets Research Home construction still in decline Demographically driven demand Plus demolitions Excess supply of homes has risen sharply:  Excess supply of homes has risen sharply Source: Census, NBER, DB Global Markets Research Housing vacancies as % of all homes (LS) Months supply of new homes for sale (RS) Slide7:  Source: UM ICH, NAR, DB Global Markets Research Housing affordability has begun to improve Current conditions for buying houses improving too (rs) Housing affordability (ls) turning up But lending standards tightening (Subprime fallout I):  But lending standards tightening (Subprime fallout I) % of banks tightening standards Source: Federal Reserve Senior Loan Officer Survey, DB Global Markets Research All mortgages Subprime How important is the subprime market? :  How important is the subprime market? Subprime fixed 4% Alt-A fixed 4% Mortgage debt outstanding end 2006 ($10.0 trillion) Alt-A adj 7% Subprime adjustable 10% Source:MBA,DB Global Markets Research Subprime adjustable 20% Subprime fixed 4% Alt-A adj 10% Alt-A fixed 4% Mortgage originations 2005-06 ($2.6 trillion per year) Home foreclosures will soar (Subprime fallout II):  Home foreclosures will soar (Subprime fallout II) Source: MBA,DB Global Markets Research Subprime ? Foreclosures Started Total Prime Home price inflation dropping sharply:  Home price inflation dropping sharply Source:OFHEO,NAR,DB Global Markets Research Slide12:  Source: FRB, DB Global Markets Research Impact of lower home prices on consumers Consumer spending Income Financial wealth Housing wealth Composition of household assets 2006 Interest rates Slide13:  Stock market offsetting home price drop, so far… Source: OFHEO,WSJ,BEA, DB Global Markets Research House price/income (OFHEO) Stock market/income (Wilshire 5000) Slide14:  Source: BEA, FRB, DB Global Markets Research Saving rate should rise as wealth/income falls Forecast Slide15:  Source: BEA, Census, DB Global Markets Research Capital spending trend has weakened. II. Inflation Risks:  II. Inflation Risks Slide17:  Source: BEA,DB Global Markets Research Core inflation still “somewhat elevated” Fed’s Comfort zone Consumer prices ex food and energy (Core PCE) Inflation outlook and risks:  Inflation outlook and risks Core consumer price inflation expected to decline, due to: 1. Easing of labor cost pressures but will employment growth decline? and will compensation growth ease? 2. Decline in energy price pass through but and gasoline prices rising sharply dollar falling and non-oil import prices accelerating 3. Gravitational pull from well anchored inflation expectations but are they low enough, and are they really anchored? 4. Decline in rental inflation as vacancy rates rise but subprime stress may slow that process Slide19:  Source: BLS,CBO,DB Global Markets Research 1. Labor market looks tight but should ease ahead Estimated NAIRU range Slide20:  Employment typically lags construction activity Source: BEA,,BLS DB Global Markets Research Labor cost inflation running high for comfort :  Labor cost inflation running high for comfort Source: BLS, DB Global Markets Research 2. Oil has leveled off but gasoline prices surging:  2. Oil has leveled off but gasoline prices surging Source: BLS, DB Global Markets Research West Texas Crude (RS) Retail Gasoline (LS) Cents/Gallon Slide23:  3. How much gravitational pull from expectations? Source: U.Mich,Bloomberg,Phil Fed, DB Global Markets Research Top of Fed’s comfort zone for core CPI Slide24:  Source: BLS,BEA, DB US Economics Research 4. Rent has elevated core inflation What will get the Fed to ease:  What will get the Fed to ease Fed currently has a bias toward tightening. To move to neutral, Fed will need to see core inflation move into the comfort zone and labor market pressure ease (unemployment rate move up higher or labor cost inflation moderate). To cut rates, Fed will need to see core inflation move further into comfort zone and unemployment rate rise significantly. Source: FRB, DB Global Markets Research Risks: How Things Could Turn Out Differently:  Risks: How Things Could Turn Out Differently Recession scenario Subprime stress spreads, residential investment and home prices plunge. Consumer confidence/spending and labor markets weaken substantially. Fed cuts rates aggressively, setting stage for stronger growth in 2008 and beyond. Inflation pressures build further Housing bottoms, consumer spending remains buoyant. Labor cost and consumer prices accelerate. Fed raises rates, setting stage for slowdown in 2008. Inflation risk in the longer term: the political dimension :  Inflation risk in the longer term: the political dimension Barney Frank Wright Patman Era Consumer prices (PCE) less food and energy Source: BEA, DB Global Markets Research Social Security spending nearing take-off :  Social Security spending nearing take-off Source: CBO, DB Global Markets Research Medical spending likely to soar :  Medical spending likely to soar Social Security 2-1/2% 1% Assumes medical inflation premium of: Source: CBO, DB Global Markets Research Conclusions:  Conclusions Downside risks to growth have increased, centered on housing sector and potential spillovers. Upside risks to inflation remain but may be starting to ease. Slow growth and receding inflation risks should eventually elicit rate cut, by late 2007. Longer-term risks to US rates lie to the upside. Peter Hooper :  Peter Hooper Managing Director, Chief Economist Deutsche Bank Securities, Inc. Peter Hooper oversees a team of economists that analyze and forecast developments in the US economy and financial markets. Dr. Hooper joined Deutsche Bank Securities in the fall of 1999 as Chief US Economist, and was appointed Chief Economist in 2006. Dr. Hooper frequently comments on US economic and financial developments in the news media. Prior to joining the firm, Dr. Hooper enjoyed a distinguished 26-year career at the Federal Reserve Board in Washington, D.C. He held numerous positions at the Fed, including as an economist on the FOMC and as Deputy Director of the Division of International Finance. In doing so, he developed an informed view of the Fed's policy making process. Dr. Hooper earned a BA in Economics (cum laude) from Princeton University and an MA and Ph.D. in Economics from University of Michigan. He has published numerous books, journal articles, and reviews on economics and policy analysis. Slide32:  The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively “Deutsche Bank”). The information herein is believed by Deutsche Bank to be reliable and has been obtained from public sources believed to be reliable. With the exception of information about Deutsche Bank, Deutsche Bank makes no representation as to the accuracy or completeness of such information. This published research report may be considered by Deutsche Bank when Deutsche Bank is deciding to buy or sell proprietary positions in the securities mentioned in this report. For select companies, Deutsche Bank equity research analysts may identify shorter-term opportunities that are consistent or inconsistent with Deutsche Bank's existing, longer-term Buy or Sell recommendations. This information is made available on the SOLAR stock list, which can be found at http://gm.db.com. Deutsche Bank may trade for its own account as a result of the short term trading suggestions of analysts and may also engage in securities transactions in a manner inconsistent with this research report and with respect to securities covered by this report, will sell to or buy from customers on a principal basis. Disclosures of conflicts of interest, if any, are discussed at the end of the text of this report or on the Deutsche Bank website at http://gm.db.com. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, except if research on the subject company is withdrawn. Prices and availability of financial instruments also are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction or as an advertisement of any financial instruments. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. If a financial instrument is denominated in a currency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor’s home jurisdiction . In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10) Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting. Copyright © 2006 Deutsche Bank AG Analyst Certification 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

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