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<strong>Market</strong> <strong>Economics</strong> | <strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong> | Forex <strong>Strategy</strong> 20 January 2011<br />
<strong>Market</strong> Mover<br />
<strong>Market</strong> Outlook 2-3<br />
Fundamentals 4-30<br />
• Global Inflation: Ready for Takeoff? 4-9<br />
• US: FOMC to Hold the Line 10-12<br />
• Canada: Betting on Investment and 13-14<br />
Exports<br />
• Eurozone Inflation: Forecast 15-17<br />
Revision<br />
• ECB: Bark or Bite? 18-21<br />
• ECB Inflation Performance: A 22-23<br />
Review<br />
• Eurozone: BoP Leaves Euro<br />
24<br />
Vulnerable<br />
• Norway: Norges Bank Preview 25-26<br />
• Japan: New Cabinet and Policy 27-28<br />
Outlook<br />
• Japan: Capex Outlook 29-30<br />
<strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong> 31-58<br />
• US/EUR Spreads: Further 31-32<br />
Tightening Near Term<br />
• US: Could the Short End Have a 33<br />
Pulse?<br />
• US: Setup for Auctions With Spread 34-35<br />
Curve Flatteners<br />
• MBS: Stay Long 36-38<br />
• EUR: Liquidity is No Stress 39<br />
• EUR: Bund ASW Risk/Reward 40<br />
Analysis<br />
• EMU Debt Monitor: Trade Ideas, 41-46<br />
CDS, RV Charts, Redemptions, SSA<br />
& Covered Bonds<br />
• EUR: Buy 3m5y Straddle vs 3m10y 47<br />
Straddle:<br />
• JGBs: Commodities – A Headwind 48<br />
• Global Inflation Watch 49-52<br />
• Inflation: With Supply Comes 53-55<br />
Opportunities<br />
• Technical Analysis 56-57<br />
• Trade Reviews 58<br />
FX <strong>Strategy</strong> 59-65<br />
• <strong>Strategy</strong>: Travelling Asia 59-62<br />
• Technical <strong>Strategy</strong>: EURUSD Rally 63-64<br />
Eyes 1.3750-1.3950<br />
• Trading Positions 65<br />
Commodities 66-68<br />
• Oil Update: Brent Premium the New 66-68<br />
Norm<br />
Forecasts & Calendars 69-83<br />
• 1 Week Economic Calendar 69-70<br />
• Key Data Preview 71-78<br />
• 4 Week Calendar 79<br />
• Treasury & SAS Issuance 80-81<br />
• Central Bank Watch 82<br />
• Economic & <strong>Interest</strong> <strong>Rate</strong> Forecasts 83<br />
• FX Forecasts 84<br />
Contacts 85<br />
www.Global<strong>Market</strong>s.bnpparibas.com<br />
• The short-run strategy call for Treasuries remains<br />
neutral. With the market in a narrow range, the preference<br />
is to play the curve via the 5/10s flattener.<br />
• The FOMC meeting is a two-day affair, with the Fed to<br />
set out its quarterly forecasts ahead of the Chairman’s<br />
semi-annual testimony to Congress in February.<br />
• The FOMC opted for a cautious interpretation of the<br />
improvement in the economy in December and more of the<br />
same is likely in this month’s statement.<br />
• Positives for core EGB markets are in short supply.<br />
Supply is heavy and macro news flow remains strong.<br />
Curve wise, flattening remains the call.<br />
• EGB spreads have been in a trading range, albeit a wide<br />
one, as markets await news on amendments to the EFSF.<br />
This may take a while, as politicians tend to take their<br />
collective foot off the gas when markets calm.<br />
• Anxiety at the ECB over upside risks to inflation has<br />
increased but subdued wage pressures continue to<br />
suggest that there is no need to panic.<br />
• In the UK, in contrast, inflation worries are more<br />
pressing. This should be reflected in the Bank of England<br />
MPC minutes out next week.<br />
• The JGB market continues to lack direction and 10-year<br />
yields should remain in the existing ranges.<br />
<strong>Market</strong> Views<br />
Current 1 Week 1 Month<br />
UST 10y T-note Yield (%) 3.40 ↔ ↓<br />
2y/10y Spread (bp) 280 ↔ ↓<br />
EGB 10y Bund Yield (%) 3.15 ↔ ↓<br />
2y/10y Spread (bp) 190 ↔ ↓<br />
JGB 10y JGB Yield (%) 1.21 ↔ ↔<br />
2y/10y Spread (bp) 102 ↔ ↔<br />
Forex EUR/USD 1.3445 ↑ ↓<br />
USD/JPY 82.99 ↓ ↑<br />
IMPORTANT NOTICE. Please refer to important disclosures found at the end of<br />
this report. Some sections of this report have been written by our strategy teams<br />
(shown in blue). Such reports do not purport to be an exhaustive analysis and may<br />
be subject to conflicts of interest resulting from their interaction with sales and<br />
trading which could affect the objectivity of this report.
<strong>Market</strong> Outlook<br />
Further flattening for<br />
Treasuries<br />
The strategy call for the Treasury market remains a neutral one in the short<br />
run, with a bias towards recommending long positioning later in the month.<br />
The market remains stuck in a very narrow range and instead of directional<br />
trades, the preference is to play the curve via the 5/10s flattener instead.<br />
With regard to macro news flow, the FOMC meeting next week looms large.<br />
It will be a two-day meeting, with the Fed to set out its quarterly forecasts<br />
ahead of the Chairman’s semi-annual testimony to Congress in February.<br />
Data have continued to confirm that Q4 is shaping up to be a strong quarter<br />
for final demand growth but the labour market indicators have shown little<br />
benefit to date. Headline inflation has picked up but the core rate, and wage<br />
pressure, remains unusually low.<br />
Fed status quo likely…<br />
…despite musical chairs at<br />
the FOMC<br />
Supply problem for<br />
EGBs…<br />
At December’s meeting, the FOMC opted for a cautious interpretation of the<br />
improvement in the economy and this is likely to continue. Indeed, Bernanke<br />
reiterated that cautious stance at his Congressional testimony following the<br />
release of December’s employment report, saying: “though recent indicators<br />
of spending and production have generally been encouraging, conditions in<br />
the labour market have improved only modestly at best…overall, the pace of<br />
economic recovery seems likely to be moderately stronger in 2011 than it<br />
was in 2010”. Most Fed speakers have publicly supported the completion of<br />
QE2 and we expect little change to the tone of the policy statement to be<br />
released on Wednesday.<br />
There may be some speculation over the implications of the annual rotation<br />
of FOMC voters. All Governors at the Federal Reserve Board are permanent<br />
voting members, as is the President of the New York Fed. However, four of<br />
the twelve regional bank presidents serve rotating one-year terms as voters.<br />
The regional Fed Presidents which are rotating in as voters this year have a<br />
more hawkish bent than those rotating out. This is not expected to make a<br />
material difference to the policy stance but it does open up the possibility of<br />
some dissent. President Plosser is the most probable dissenter as he has<br />
opposed nearly all of the Fed’s unconventional policies.<br />
The evolution of core EGBs over the last few sessions points to the absence<br />
of positive factors for sovereign debt during a period of huge supply. The<br />
market is struggling to absorb the paper at present, with supply apparently<br />
far outstripping demand. There is tentative evidence to suggest that what is<br />
bad news for the peripheral markets will also weigh on the core as the bigger<br />
the fiscal difficulties in the former, the bigger the burden on the latter.<br />
In this context, and with the macro news flow in Germany still going strong,<br />
positives for core markets are in short supply. The strategy call remains a<br />
neutral one, therefore. Curve wise, flattening remains the call. The front end<br />
has, according to our assessment of the economic and fiscal outlook, moved<br />
too far, too fast in discounting more than one rate hike this year. However, it<br />
makes sense for the market to discount a less favourable ECB scenario than<br />
previously given the signals of increased anxiety over inflation risks.<br />
…as we await progress on<br />
EFSF changes<br />
Regarding EGB spreads, peripheral and core markets have also been in a<br />
trading range, albeit with a wide corridor. This situation is likely to persist as<br />
long as there is no agreement forthcoming on the proposed amendments to<br />
the EFSF – this could yet take a while.<br />
Ken Wattret 20 January 2011<br />
<strong>Market</strong> Mover<br />
2<br />
www.Global<strong>Market</strong>s.bnpparibas.com
The obvious focal point is the Summit on 4 February but on the basis of the<br />
comments from the German finance minister, amongst others, reaching an<br />
agreement by that time looks optimistic. More likely it will have to wait until<br />
March. In part, the delay reflects the differences of opinion at the national<br />
level on the proposals put forward. It also reflects the German government’s<br />
desire to secure something in exchange – a constitutional commitment to<br />
balanced budgets perhaps?<br />
More worryingly, it is also due to the tendency of the politicians to take their<br />
collective foot off the gas when markets calm down. A more effective way to<br />
bolster confidence in a lasting way would be to surprise markets positively<br />
with a swift, credible agreement when the markets are already in a positive<br />
frame of mind. We live in hope.<br />
4.5<br />
Eurozone: Pay Pressures Contained<br />
4.0<br />
Hourly Labour Costs (% y/y)<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
Negotiated Wages (% y/y)<br />
1.0<br />
Compensation per Employee (% y/y)<br />
0.5<br />
97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
ECB inflation worries<br />
overdone…<br />
…given subdued pay<br />
pressures<br />
UK inflation concerns point<br />
to MPC shift<br />
JGBs in the range<br />
The level of anxiety at the ECB over upside risks to inflation has increased<br />
and the risk of an earlier start to the tightening cycle than we have forecast<br />
(from spring 2012) has risen accordingly. The ECB still expects inflation to<br />
remain in line with its definition of price stability over the medium term but it<br />
intends to monitor the risks to this scenario very closely – as will we.<br />
One of the risks to monitor is second-round effects on inflation via higher<br />
wage growth. As in December, the assessment of labour cost developments<br />
in the eurozone in this month’s ECB Monthly Bulletin was benign. To quote:<br />
“Labour cost indicators…continued to show subdued wage pressures…in<br />
line with continuously weak labour market conditions.” Growth rates in hourly<br />
labour costs and negotiated wages are both at their lowest on record. No<br />
panic required.<br />
In the UK, we expect the BoE MPC minutes next week to show increasing<br />
unease about the deterioration in inflation prospects. The MPC will have<br />
been made aware of the latest upward surprise in inflation (up to 3.7% y/y)<br />
which has reinforced our belief that inflation will exceed 4% by February –<br />
double the Bank's target. The market will look for clues as to how soon the<br />
first rate hike will be delivered. The initial focus is likely to be on whether<br />
arch hawk Andrew Sentance was joined by any other MPC members in<br />
voting for an immediate hike and to a lesser extent, whether Adam Posen<br />
has backed down in his bid to secure a second round of QE. Given the<br />
mixed picture on activity and labour market data, we suspect that the latter is<br />
more likely than the former at this stage.<br />
The JGB market continues to lack direction and 10-year yields should stay in<br />
a range of 1.1–1.3% for the time being as investors sit on the sidelines. Next<br />
week's BoJ Monetary Policy Meeting is not expected to result in any new<br />
action from the central bank.<br />
Ken Wattret 20 January 2011<br />
<strong>Market</strong> Mover<br />
3<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Global Inflation: Ready for Takeoff?<br />
• The global output gap is very small and may<br />
have closed. We look like going well beyond<br />
capacity in the next couple of years. The fact<br />
that capacity utilisation is very uneven raises<br />
the global inflation threat.<br />
Chart 1:La Niña, El Nino and Food Prices<br />
• Commodity price shocks are likely to<br />
continue due to the lagged effects of La Niña<br />
and global warming, though next year some of<br />
these effects may ease.<br />
• Monetary policy on a global basis is too<br />
slack, especially in Asia. US policy is amongst<br />
the slackest. While this is appropriate for the<br />
US, exchange rate arrangements may mean this<br />
is imported into inappropriate settings such as<br />
EMs.<br />
Source: Reuters EcoWin Pro.<br />
Chart 2:Global Output Gap<br />
• Inflationary expectations are very low in<br />
North America. Elsewhere, they are moderate to<br />
high. The objective of the US is to avoid<br />
deflation by raising inflation expectations.<br />
Countries limiting the appreciation of their<br />
currency are importing the Fed’s objective of<br />
raising inflation.<br />
• The risks of global inflation are high.<br />
Capacity is tight, monetary policy is slack and<br />
central banks are acting weak. The discipline of<br />
pegging to the reserve currency is gone from<br />
much of the world because the reserve currency<br />
has an ultra-easy policy and is aiming to raise<br />
inflation. The risk of a surge of inflation and a<br />
dislocation of inflation expectations is high in<br />
many countries.<br />
• The key thing to watch is inflation<br />
expectations. They have declined from their<br />
‘scare’ levels last year but the wild swings over<br />
the last couple of years shows they have<br />
become unstable.<br />
Source: Reuters EcoWin Pro, IMF and <strong>BNP</strong> Paribas<br />
The 50bp policy hike from BCB this week is the latest<br />
sign of concern.<br />
How anxious should we be about global inflation and<br />
what are the main drivers?<br />
There are four things we would identify as important<br />
for inflation over coming months:<br />
• Supply shocks;<br />
On 20 th Street and Constitution Avenue, the Fed is<br />
worrying about disinflation, and with good reason<br />
given the core reading of only 0.6% y/y for<br />
December.<br />
In most of the rest of the world, however, inflation is<br />
increasingly bullying its way to the top of the agenda.<br />
Mr Trichet on 13 January showed increasing<br />
concern. The UK inflation rate looks likely to top 4%<br />
soon. We recently saw a surprise rate hike from<br />
South Korea on the back of inflation worries and<br />
concerns are prominent in China, Brazil and India.<br />
• The output gap;<br />
• Monetary policy; and<br />
• Inflation expectations.<br />
Supply shocks<br />
Supply shocks are generally difficult to predict<br />
(though in La Niña years such “shocks” could be<br />
expected more than they are – wet weather on the<br />
western side of the Pacific being a frequent<br />
occurrence in such years). We are suffering from<br />
Paul Mortimer-Lee 20 January 2011<br />
<strong>Market</strong> Mover<br />
4<br />
www.Global<strong>Market</strong>s.bnpparibas.com
such shocks at the moment, such as extreme<br />
drought in Russia last year and unusually wet<br />
weather in parts of Australia now, following on from<br />
unusually cold conditions in the northern hemisphere<br />
in December. Crops are being affected and so food<br />
prices are rising faster than underlying demand and<br />
supply conditions would suggest.<br />
The traditional approach to such shocks is to argue<br />
that, while such effects may last for many months, if<br />
next year’s crops are more normal, the food price<br />
shocks may diminish or reverse. Against this, some<br />
believe that global warming is making extreme<br />
conditions more likely (e.g. the melting of sea ice in<br />
the Barents and Kara seas due to global warming<br />
may be responsible, by changing local wind systems,<br />
for the intense cold spell in Western Europe in<br />
December). There is some probability of this being<br />
correct, so our assumption is food inflation due to<br />
shocks may lessen next year. But there are unlikely<br />
to be significant falls in food prices.<br />
The output gap<br />
The output gap is a little like virtue – it’s somewhat<br />
difficult to define and tougher to measure, but you<br />
tend to find out from consequences when it’s not<br />
present.<br />
In order to calculate the global output gap, we have<br />
taken figures for the past and for forecast periods<br />
from the IMF’s WEO. We calculated the output gap<br />
using a Hodrick-Prescott filter. The results are shown<br />
in Chart 2.<br />
The chart shows a number of striking things:<br />
• The disinflationary trend in the 1990s was<br />
probably greatly helped by output being below<br />
trend;<br />
• The last burst of global inflation in 2007/2008<br />
was associated with output above trend;<br />
• The financial crisis resulted in a considerable<br />
loss of output relative to potential – about 5% on<br />
a global basis. However, output was about 2½%<br />
above potential before the crisis and so the<br />
output gap that emerged was quite small;<br />
• On the basis of IMF forecasts, output should be<br />
about potential in 2011; and<br />
• IMF growth forecasts suggest that output will be<br />
significantly above potential in coming years – by<br />
the most since the early 1980s, in fact.<br />
While the relationship between the output gap and<br />
inflation is not particularly tight on a global basis, in<br />
recent years changes in the output gap have seemed<br />
to offer a good explanation of changes in the rate of<br />
Chart 3: Global Output Gap vs GDP Deflator<br />
Source: Reuters EcoWin Pro<br />
increase in the global GDP deflator (see Chart 3). In<br />
this context, the IMF’s projection of flat inflation from<br />
here but an increase in output relative to potential<br />
seems like dreaming.<br />
Our perspective is that there may be some<br />
shortcomings with the output gap estimates. The<br />
method of filtering may imply a more permanent loss<br />
of capacity than has in fact occurred, for example.<br />
However, the increases we are seeing in inflationary<br />
pressures in a number of traded commodities and in<br />
some emerging markets suggest that, globally,<br />
capacity has closed enough to generate hotspots of<br />
inflation, with a threat of this spreading.<br />
If the IMF’s forecast for global growth is right, a<br />
substantial excess of global demand over supply<br />
looks likely to emerge. This will be spread unevenly –<br />
excess demand being most prevalent in emerging<br />
markets, persisting alongside excess supply in G10<br />
economies. This unevenness will reduce the level of<br />
output at which inflation becomes a problem (prices<br />
are more likely to be rigid downwards than upwards).<br />
The upshot from the output gap analysis is that there<br />
is at least a significant risk that inflation will become a<br />
significant problem on a global basis, even if this is<br />
not yet our main scenario.<br />
Monetary policy<br />
People often think of monetary policy being<br />
summarised by the level of interest rates. <strong>Interest</strong><br />
rates are a very useful instrument of policy, but as we<br />
have seen with QE in the US, by no means the only<br />
one. Monetary policy has many aspects and<br />
transmission channels – the level of real and nominal<br />
rates today, expectations of rates tomorrow, the<br />
exchange rate, credit spreads and equity and other<br />
asset prices. We have always been partial to our<br />
financial and monetary conditions index (FMCI). At<br />
Paul Mortimer-Lee 20 January 2011<br />
<strong>Market</strong> Mover<br />
5<br />
www.Global<strong>Market</strong>s.bnpparibas.com
this juncture, we believe that looking at the FMCI<br />
rather than just at interest rates has become more<br />
important.<br />
Our latest Global Outlook contained a detailed report<br />
on FMCIs around the world. The broad summary is<br />
shown in Charts 4 to 8. Financial and monetary<br />
conditions in the US are soft, very soft (Chart 4). Our<br />
FMCI is about one and half standard deviations<br />
below average, compared with a low since 1990 of<br />
two and a half standard deviations. In the eurozone,<br />
conditions are 0.3 standard deviations below average<br />
(Chart 5) with UK conditions, as in the US, one and a<br />
half standard deviations below average. Canada’s<br />
reading is similar. Japanese conditions are slightly<br />
tighter than average, mostly reflecting the yen.<br />
Overall, advanced country monetary and financial<br />
conditions are about a standard deviation softer than<br />
the long-term average (Chart 6).<br />
In emerging markets, our FMCI for China has<br />
remained accommodative, with the latest reading<br />
showing conditions about a standard deviation softer<br />
than average (Chart 7). Korean and Brazilian FMCIs<br />
are softer than average, India’s is about average and<br />
Mexico’s is above average. Overall, our latest<br />
readings are that, in Latin America as a whole,<br />
FMCIs are a bit softer than average. In Asia ex<br />
Japan, they are about a standard deviation below<br />
average (Chart 8).<br />
Overall, the picture is of very soft monetary<br />
conditions in the west, especially the US, Canada<br />
and the UK, less so in mainland Europe and<br />
restrictive in Japan. In emerging markets, conditions<br />
look more or less neutral in Latam but with offsetting<br />
pictures in Brazil (soft) and Mexico (tighter than<br />
average). Asia looks soft. We have to judge these<br />
monetary conditions relative to where they ought to<br />
be, given inflation and the output gap.<br />
US and European conditions look to us to be<br />
appropriate – softer than average due to low inflation<br />
in core terms and still excess capacity. Given some<br />
parts of the eurozone are softer than others,<br />
monetary conditions within the eurozone are<br />
probably too soft for Germany and too tight for<br />
Ireland and Spain, for example. Japanese conditions<br />
look too tight.<br />
Source: <strong>BNP</strong> Paribas<br />
Source: <strong>BNP</strong> Paribas<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 4: US FMCI<br />
Chart 5: Eurozone FMCI<br />
Chart 6: Advanced Country FMCI<br />
Chart 7: China FMCI<br />
We would argue that monetary conditions in<br />
emerging markets should be tighter than average<br />
given the lack of spare capacity and inflation starting<br />
to swell. In Asia, conditions violate this the most,<br />
including in China, helping to explain recent<br />
tightening moves. Brazil is also in the ‘far too soft’<br />
camp, but Latam as a whole is neutral when it should<br />
be restrictive.<br />
Source: <strong>BNP</strong> Paribas<br />
Paul Mortimer-Lee 20 January 2011<br />
<strong>Market</strong> Mover<br />
6<br />
www.Global<strong>Market</strong>s.bnpparibas.com
US monetary conditions, because the USD is the<br />
global reserve currency, also affect countries which<br />
peg or dirty float against the USD. Many of these<br />
have output gaps and inflation dynamics that are<br />
hugely different from those in the US. Importing<br />
super-soft US monetary policy is bound to lead to<br />
them having an inflation and asset-price risk. It<br />
appears to us that very few of these countries have<br />
excessively tight monetary policy, which is the usual<br />
excuse for their intervening to hold currencies down<br />
or using ‘macro-prudential’ policies (aka capital<br />
controls) to achieve the same ends. In fact, most of<br />
them have monetary policies that are too soft. We<br />
would argue that this is their choice and that inflation<br />
is a very likely result. They will see their exchange<br />
rates appreciate in real terms against the USD<br />
through excess inflation. Our preference would have<br />
been for nominal exchange rate appreciation, which<br />
would contain inflation, not aggravate it.<br />
Overall then, monetary conditions look too soft for a<br />
world where inflation is developing some hotpots and<br />
where capacity is used up. Asia is most vulnerable,<br />
Latam a bit less so.<br />
Expectations<br />
Economic theory puts a big weight on inflationary<br />
expectations in the story of how inflation is<br />
propagated. Unfortunately, these are difficult to<br />
model and predict and they may shift in a discrete<br />
way. The process by which inflation expectations are<br />
formed is probably one where they depend upon:<br />
• What people experience;<br />
• What central banks do; and<br />
• What central banks say.<br />
This determining relationship may not be stable. For<br />
example, in the UK, people have been experiencing<br />
significantly above-target inflation for a long time.<br />
The longer this continues, the greater the weight is<br />
likely to be on what they experience and the less the<br />
weight will be on what the Bank of England says.<br />
Therefore it may have to raise rates to keep inflation<br />
in check. We do have measures of inflation<br />
expectations for various countries, but for our<br />
purposes here we would like a consistent measure.<br />
The Ifo institute provides a measure of inflation<br />
expectations, with Charts 9 to 14 (attached)<br />
summarising the picture. What we find is that, after<br />
the financial crisis, inflation expectations plunged.<br />
There was a clear danger everywhere of this<br />
undermining activity and leading us into deflation, at<br />
least in some of the most important economies.<br />
Aggressive monetary policy counteracted this and<br />
inflation expectations rose sharply in late 2009-early<br />
2010. These overshot – reaching levels similar to<br />
Chart 8: Latam and Asia Ex-Japan FMCI<br />
Source: <strong>BNP</strong> Paribas<br />
those at the peak of the cycle in 2007 – and have<br />
since come back, especially in North America and<br />
Western Europe.<br />
The current picture is:<br />
• Inflation expectations in North America are very<br />
low, and declining, though not as low as in late<br />
2008/early 2009 when deflation was being<br />
expected. There is no threat to inflation from<br />
inflation expectations in N America.<br />
• Inflation expectations in Western Europe have<br />
come back from their peak, which was the<br />
highest in two decades. We should not<br />
concentrate on the fall since then as it was<br />
probably an exaggeration. The level of inflation<br />
expectations compared with the average since<br />
EMU began in 1999 is moderate to strong.<br />
Clearly, as the ECB has shown in its recent<br />
press conference, they want watching.<br />
• Inflation expectations in the CEE countries are<br />
worryingly high and on a sharp upward trajectory.<br />
CIS expectations are also high.<br />
• Asian inflation expectations have not come off<br />
their peak very much. They are high, though not<br />
as high as in the early-2008 food price scare<br />
episode. Nonetheless, with monetary conditions<br />
slack, inflation expectations in Asia look<br />
uncomfortable and deserve very close<br />
monitoring, especially as food price surges look<br />
to have an important impact in the inflation story.<br />
• Latam inflation expectations are high, even<br />
though they are lower than the peaks at the end<br />
of the last cycle and the 2010 ‘QE will cause<br />
inflation’ scare.<br />
Central banks are talking about achieving price<br />
stability, but decisive action is not being taken (e.g.<br />
Paul Mortimer-Lee 20 January 2011<br />
<strong>Market</strong> Mover<br />
7<br />
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Brazil’s 50bp rate hike this week was insufficient to<br />
meet the challenges of an economy well beyond<br />
capacity and rising inflation expectations). With<br />
monetary policy likely to remain soft and with global<br />
commodity prices under upward pressure, what<br />
central banks say and what they do are not<br />
consistent. Further, people’s experience of higher<br />
inflation, especially of food, is likely to push inflation<br />
expectations up.<br />
This will not be welcome in many countries. But in<br />
the US, higher inflation expectations are probably a<br />
policy goal. Clearly, inflation expectations are low<br />
and falling. Clearly, there is massive excess capacity,<br />
especially in the labour market. Clearly, wages are<br />
weak and so are unit labour costs. Therefore there is<br />
a real and present danger of disinflation and even of<br />
deflation. <strong>Interest</strong> rates are at their zero lower bound<br />
and, despite QE, there seems to have been a<br />
‘liquidity trap’ like behaviour of long-term yields – with<br />
the central bank unable to get them low enough to<br />
bring the economy back to full employment.<br />
So how is the Fed to avoid disinflation? The<br />
traditional means is to narrow the output gap<br />
sufficiently to end the threat. But the gap is too wide.<br />
Moreover, since the ability to lower short-term rates<br />
is gone and the ability to lower long-term rates<br />
enough is lacking, the output gap will stay wide. So<br />
the main means of fighting inflation is to raise<br />
expectations of inflation down the road. Firms and<br />
individuals expecting inflation at a future date, when<br />
spare capacity is reduced, will price differently and<br />
act differently today. That is what “considerable<br />
period” was about in 2003 and it’s what QE2 is about<br />
today.<br />
In short, to overcome deflation today, look as though<br />
you will create inflation tomorrow. It’s like telling<br />
central banks facing deflation that the responsible<br />
thing to do is to be irresponsible. There are plenty of<br />
people who think QE2 is irresponsible – the Chinese,<br />
for example. You can criticise the Fed for pursuing a<br />
policy that will create inflation the day after tomorrow.<br />
But if the alternative is deflation today, is that such a<br />
bad policy?<br />
While the threat of disinflation remains real in the US<br />
– which is to say while payroll growth remains<br />
insufficient to significantly lower unemployment and<br />
while wages and pricing power remain subdued –<br />
then it would be wrong for the Fed to do anything<br />
other than to create expectations of future inflation.<br />
Thus we would expect that policy to persist “for an<br />
extended period”.<br />
The Fed’s ability to create inflation in the domestic<br />
economy is limited by the slackness of the labour<br />
market. Because of this and the fact that what people<br />
experience is an important part of expectations<br />
formation, it follows that to create expectations of<br />
inflation, it has to create expectations of inflation in<br />
import prices. In other words, the Fed probably wants<br />
to see global inflation high at present, or a weak<br />
dollar, or both. We can argue that an increase in oil<br />
prices is the “wrong sort of inflation” since it “taxes”<br />
consumers, but if the choice is between the wrong<br />
sort of inflation and deflation, then the Fed would<br />
probably take the former.<br />
The Fed has made explicit that its aim is to raise<br />
inflation, because US inflation is too low. If countries<br />
peg or dirty float against the USD, they are implicitly<br />
adopting a target to raise their own inflation rates.<br />
Since their inflation rates are above the US and in<br />
some cases already too high, the implication is that<br />
we should expect inflation expectations in their<br />
economies to rise.<br />
Summary<br />
• The global output gap is very small and may<br />
have closed. We look like going well beyond<br />
capacity in the next couple of years. The fact that<br />
capacity utilisation is very uneven raises the<br />
global inflation threat;<br />
• Commodity price shocks are likely to continue<br />
due to the lagged effects of La Niña and global<br />
warming, though next year some of these effects<br />
may decline;<br />
• Monetary policy on a global basis is too slack,<br />
especially in Asia. US policy is amongst the<br />
slackest. While this is appropriate for the US,<br />
exchange rate arrangements may mean this is<br />
imported into inappropriate settings such as<br />
EMs;<br />
• Inflationary expectations are very low in North<br />
America. Elsewhere, they are moderate to high.<br />
The objective of the US is to avoid deflation by<br />
raising inflation expectations. Countries limiting<br />
the appreciation of their currency are importing<br />
the Fed’s objective of raising inflation.<br />
• The risks of global inflation are high. Capacity is<br />
tight, monetary policy is slack and central banks<br />
are acting weak. The discipline of pegging to the<br />
reserve currency is gone from much of the world<br />
because the reserve currency has an ultra-easy<br />
policy and is aiming to raise inflation. The risk of<br />
a surge of inflation and a dislocation of inflation<br />
expectations is high in many countries; and<br />
• The key thing to watch is inflation expectations.<br />
They have declined from their ‘scare’ levels last<br />
year but the wild swings over the last couple of<br />
years show they have become unstable.<br />
Paul Mortimer-Lee 20 January 2011<br />
<strong>Market</strong> Mover<br />
8<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Chart 9: Asia- Ifo Expected Inflation<br />
Chart 10: North America- Ifo Expected Inflation<br />
Source: Reuters EcoWin Pro<br />
Source: Reuters EcoWin Pro<br />
Chart 11: W, Europe- Ifo Expected Inflation<br />
Chart 12: CIS- Ifo Expected Inflation<br />
Source: Reuters EcoWin Pro<br />
Source: Reuters EcoWin Pro<br />
Chart 13: Eastern Europe- Ifo Expected Inflation<br />
Chart 14: Latam- Ifo Expected Inflation<br />
Source: Reuters EcoWin Pro<br />
Source: Reuters EcoWin Pro<br />
Paul Mortimer-Lee 20 January 2011<br />
<strong>Market</strong> Mover<br />
9<br />
www.Global<strong>Market</strong>s.bnpparibas.com
US: FOMC to Hold the Line<br />
• We do not expect any change in tone at the<br />
January FOMC meeting.<br />
• While the January voter rotation brings in a<br />
hawkish group, there seems to be solidarity in<br />
the near term.<br />
• The more difficult debates will arise as QE2<br />
nears completion and the Fed has still made<br />
little progress on its mandates.<br />
The FOMC will next week set its economic<br />
forecasts for the monetary policy report to<br />
Congress. It is likely to choose a cautious<br />
interpretation of recent economic strength<br />
The Fed meets next week to evaluate the economic<br />
outlook and stance of monetary policy. The meeting<br />
will last two days as the Committee is also setting its<br />
quarterly forecasts ahead of the monetary policy<br />
testimony before Congress in mid-February.<br />
Not much has changed on the economic front since<br />
the mid-December meeting. Data have continued to<br />
confirm that Q4 is shaping up to be a strong quarter<br />
for final demand growth, yet labour market indicators<br />
have shown little benefits from stronger spending<br />
with steady but lacklustre job creation.<br />
Headline inflation has surged while core inflation and<br />
wage growth remain under pressure. The equity<br />
market continued to rally while house prices have<br />
steadily fallen and interest rates remained above<br />
those that prevailed for most of the year prior to the<br />
November FOMC meeting.<br />
At the December policy meeting, the FOMC chose a<br />
cautious interpretation of the Q4 strength and that<br />
seems likely to continue. Indeed, Chairman<br />
Bernanke reiterated that cautious stance at his<br />
Congressional testimony after the December<br />
employment report. He said “Although recent<br />
indicators of spending and production have generally<br />
been encouraging, conditions in the labor market<br />
have improved only modestly at best…overall, the<br />
pace of economic recovery seems likely to be<br />
moderately stronger in 2011 than it was in 2010.”<br />
Most Fed speakers have publicly supported the<br />
completion of QE2 and we expect little change to the<br />
tone of the policy statement released next<br />
Wednesday.<br />
A hawkish rotation of voters may actually bring<br />
increased near-term solidarity<br />
Every January brings a rotation of FOMC voters. All<br />
Governors at the Federal Reserve Board are<br />
permanent voting members, as is the President of<br />
the New York Fed. However, four of the 12 regional<br />
bank presidents serve rotating one-year terms as<br />
voters. Rotating out as voters are Cleveland Fed<br />
President Pianalto, Boston Fed President<br />
Rosengren, St. Louis Fed President Bullard and<br />
Kansas City Fed President Hoenig.<br />
Presidents Pianalto and Rosengren are fairly dovish<br />
and stood solidly behind the Fed’s QE policies.<br />
Dudley V Lockhart Bernanke V Bullard Fisher V Hoenig<br />
(New York) (Atlanta) (Chairman) (St. Louis) (Dallas) (Kansas)<br />
Evans V Yellen V Duke V Warsh V Kocherlakota V Lacker<br />
(Chicago) (Vice Chair) (Governor) (Governor) (Minneapolis) (Richmond)<br />
Raskin V Tarullo V Plosser V<br />
(Governor) (Governor) (Philadelphia)<br />
Rosengren V<br />
(Boston)<br />
Pianalto<br />
(Cleveland)<br />
1 2 3 4 5 6 7 8 9 10<br />
Dove<br />
Inflation forecast informed mainly by Phillips Curve<br />
View high unemployment as mainly cyclical<br />
and therefore can be helped with policy<br />
Hawk<br />
Inflation forecast informed by monetary policy stance<br />
View high unemployment as mainly structural<br />
and therefore immune to policy<br />
Notes: “V” indicates the FOMC member is a voter in 2011. All FOMC participants without a regional affiliation are members of the Federal Reserve Board, all of whom are voters. There are currently two<br />
vacancies on the Board. Participants’ views can and do change over time.<br />
Julia Coronado 20 January 2011<br />
<strong>Market</strong> Mover<br />
10<br />
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President Bullard was generally supportive of QE2<br />
even as he advocated normalising rates, making him<br />
difficult to categorise at times. Meanwhile, President<br />
Hoenig stood out as the hawkish curmudgeon. He<br />
dissented at virtually all of the FOMC meetings in<br />
2010, first in favour of less commitment to<br />
exceptionally low rates for an extended period and<br />
then against the initiation and continuation of QE2.<br />
Rotating in as voters are Chicago Fed President<br />
Evans, Philadelphia Fed President Plosser, Dallas<br />
Fed President Fisher and Minneapolis Fed President<br />
Kocherlakota. President Evans is a vocal backer of<br />
QE2. President Kocherlakota initially expressed<br />
scepticism about QE2, but more recently said he is<br />
“very comfortable with our current monetary policy<br />
stance”. He has also indicated he remains concerned<br />
about headwinds to growth from household wealth<br />
destruction and restructuring in the banking sector.<br />
The regional Fed Presidents rotating in as voters<br />
have a clearly more hawkish bent than those rotating<br />
out. However, it seems unlikely that the rotation will<br />
lead to a greater number of dissents in the near term.<br />
We may see no dissents at the January meeting. We<br />
think President Plosser is the most likely dissenter as<br />
he has opposed nearly all of the Fed’s<br />
unconventional policies. His core view is that<br />
monetary policy has very little influence on real<br />
economic growth.<br />
Dallas Fed President Fisher was one of the FOMC<br />
members who came out with vocal criticism of QE2<br />
immediately after its announcement. He said it may<br />
be the “wrong medicine” for the economy, that the<br />
Fed risked its stature and independence in initiating<br />
the programme and that the Fed was basically<br />
monetising the debt.<br />
More recently, President Fisher has said he doesn’t<br />
know if he will dissent. He indicated he “would be<br />
wary” about any expansion of the Fed’s balance<br />
sheet beyond QE2 but also that he expects the<br />
programme announced in November “will be carried<br />
through”. President Plosser has also been a critic of<br />
Fed policies, recently saying “the aggressiveness of<br />
our accommodative policy may soon backfire on us if<br />
we don’t begin to gradually reverse course”.<br />
That said, he has not made clear he wants to end the<br />
programme now. He has said he wants to see how<br />
both the economy and the policy evolve. Similarly,<br />
President Fisher has indicated that he expects QE2<br />
to be completed but would not favour any expansion.<br />
In the near term, the FOMC may express more<br />
solidarity behind the already-announced USD 600bn<br />
programme of Treasury purchases than we have<br />
seen in a while.<br />
The economic<br />
paragraph is still<br />
appropriate;<br />
while Q4 GDP is<br />
likely to be<br />
robust, ongoing<br />
weakness in the<br />
labor market<br />
suggests<br />
moderation is<br />
likely. The<br />
FOMC named<br />
housing, state<br />
and local<br />
government<br />
finances and the<br />
European fiscal<br />
crisis as<br />
ongoing sources<br />
of downside risk<br />
in the December<br />
minutes.<br />
The FOMC is<br />
likely to stay the<br />
course on QE2<br />
. with little to no<br />
changes in this<br />
paragraph.<br />
FOMC Statement December 14, 2010<br />
Information received since the Federal Open <strong>Market</strong> Committee met in November confirms<br />
that the economic recovery is continuing, though at a rate that has been insufficient to bring<br />
down unemployment. Household spending is increasing at a moderate pace, but remains<br />
constrained by high unemployment, modest income growth, lower housing wealth, and tight<br />
credit. Business spending on equipment and software is rising, though less rapidly than earlier<br />
in the year, while investment in nonresidential structures continues to be weak. Employers<br />
remain reluctant to add to payrolls. The housing sector continues to be depressed. Longerterm<br />
inflation expectations have remained stable, but measures of underlying inflation have<br />
continued to trend downward.<br />
Consistent with its statutory mandate, the Committee seeks to foster maximum employment<br />
and price stability. Currently, the unemployment rate is elevated, and measures of underlying<br />
inflation are somewhat low, relative to levels that the Committee judges to be consistent, over<br />
the longer run, with its dual mandate. Although the Committee anticipates a gradual return to<br />
higher levels of resource utilization in a context of price stability, progress toward its objectives<br />
has been disappointingly slow.<br />
To promote a stronger pace of economic recovery and to help ensure that inflation, over time,<br />
is at levels consistent with its mandate, the Committee decided today to continue expanding<br />
its holdings of securities as announced in November. The Committee will maintain its existing<br />
policy of reinvesting principal payments from its securities holdings. In addition, the Committee<br />
intends to purchase $600 billion of longer-term Treasury securities by the end of the second<br />
quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the<br />
pace of its securities purchases and the overall size of the asset-purchase program in light of<br />
incoming information and will adjust the program as needed to best foster maximum<br />
employment and price stability.<br />
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and<br />
continues to anticipate that economic conditions, including low rates of resource utilization,<br />
subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally<br />
low levels for the federal funds rate for an extended period.<br />
The Committee will continue to monitor the economic outlook and financial developments and<br />
will employ its policy tools as necessary to support the economic recovery and to help ensure<br />
that inflation, over time, is at levels consistent with its mandate.<br />
The Committee<br />
has seen no real<br />
progress on its<br />
mandates.<br />
Unemployment<br />
dropped, but<br />
mainly on<br />
declining labor<br />
force participation<br />
rather than strong<br />
job creation, and<br />
weakness in core<br />
inflation has<br />
rotated from<br />
housing to<br />
services.<br />
No changes<br />
needed.<br />
Julia Coronado 20 January 2011<br />
<strong>Market</strong> Mover<br />
11<br />
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The more difficult decisions will come as QE2<br />
nears completion and the Fed has not made<br />
much progress on its mandates<br />
The real debates will occur as we move toward<br />
completion of the programme. No member of the<br />
FOMC has indicated that he or she expects<br />
significant progress on the Fed’s dual mandates for<br />
maximum employment and stable prices, but the<br />
tone of the economy will set the tone of the policy<br />
debate.<br />
Should the economy continue to perform reasonably<br />
well, even if final demand growth moderates from<br />
what should be a very strong Q4, there will be strong<br />
opposition from the hawkish members to any further<br />
expansion in the balance sheet.<br />
At this point, it seems that further expansion of<br />
securities purchases would require significant<br />
deterioration in the economy. Such a scenario would<br />
also raise questions about the efficacy of Fed policy<br />
to date, however. There is thus certain to be<br />
opposition to QE3 in any case.<br />
The most likely path of policy would be completion of<br />
QE2, maintenance of the balance sheet for some<br />
time as progress toward the mandates will be slow in<br />
coming, then allowing maturing securities to<br />
gradually reduce the size of the Fed’s portfolio. Once<br />
i) the unemployment rates has fallen to 8.5% on job<br />
growth, rather than decline in labour force<br />
participation; and ii) wages have begun to stabilise,<br />
suggesting gradual improvement in purchasing<br />
power that will stabilize core inflation, the Fed will be<br />
ready to normalise rates to 1.0%.<br />
The Fed has tools in place, including the Term<br />
Deposit Facility and reverse repos, that it believes<br />
will help sterilise the trillions of dollars in excess<br />
reserves and give it greater control over short-term<br />
rates. Thus the FOMC believes it will be able to raise<br />
rates even as it maintains an elevated balance sheet.<br />
This is a shift from the last time we thought about the<br />
sequencing of Fed tightening. At the beginning of last<br />
year, we were thinking that the Fed would have to<br />
bring down excess reserves to a considerable<br />
degree before tightening could get underway, which<br />
could include asset sales.<br />
However, Chairman Bernanke stressed in a speech<br />
in late October 2010 that, with the liquidity absorption<br />
tools the Fed has developed: “I am confident that the<br />
FOMC will be able to tighten monetary conditions<br />
when warranted, even if the balance sheet remains<br />
considerably larger than normal at that time.”<br />
We continue to think that tightening is a good way off<br />
given the pervasive weakness in the US economy<br />
that remains even after a solid quarter of growth.<br />
While many global investors and policymakers<br />
believe the Fed should consider the global<br />
ramifications of its policies, the FOMC is likely to<br />
continue to focus on its domestic mandates. We are<br />
in a period of increasing dichotomies; global markets<br />
and policymakers have calibrated their policies<br />
based on Fed actions in prior cycles. However, the<br />
US is lagging global performance in the current<br />
recovery. This is leading to rising tensions as the Fed<br />
stays easy and emerging-market central banks are<br />
reluctant to tighten even as their economies verge on<br />
overheating.<br />
Julia Coronado 20 January 2011<br />
<strong>Market</strong> Mover<br />
12<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Canada: Betting on Investment and Exports<br />
• The Bank of Canada has an optimistic<br />
outlook for its economy, based on a CAD at<br />
parity with the USD and high commodity prices.<br />
• We see the BoC’s outlook for the US as too<br />
bullish and the CAD appreciating further.<br />
• Risks for a hike later than our projected<br />
policy tightening in June lie with the CAD.<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
Chart 1: Imports vs Exports (3m % y/y)<br />
Imports<br />
Optimistic<br />
The Bank of Canada left the policy rate at 1.00% at<br />
its meeting on Tuesday. While the BoC’s statement<br />
was slightly more hawkish than expected based on<br />
an improved global growth outlook, we think risks are<br />
building that our projected rate hike in late Q2 gets<br />
pushed back. The BoC focused on stronger-thanexpected<br />
private demand growth in the US and<br />
Europe. However, it also noted that continuing<br />
strength in the CAD poses downside risks to the<br />
generally stronger outlook.<br />
The Monetary Policy Report indicated the BoC<br />
expects the CAD to weaken, averaging parity with<br />
the USD in 2011 and 2012. In contrast, we expect<br />
continued appreciation in the CAD in coming months,<br />
suggesting downside risks to the BoC’s export<br />
outlook. In addition, our own view of the US outlook<br />
is a more subdued than the BoC’s, also suggesting<br />
the possibility of delay should the US hit a softer<br />
patch.<br />
The BoC statement and Monetary Policy Report<br />
highlighted that stretched household balance sheets<br />
are expected to restrain the pace of consumption<br />
growth and residential investment, while business<br />
investment should continue growing solidly. Net<br />
exports are also expected to contribute positively to<br />
growth going forward.<br />
Exports and investments are key<br />
In Q3 2010, we saw a 5.0% q/q a.r. decline in<br />
exports, while investment posted weak, 0.9% growth.<br />
The BoC expects a recovery in both going forward,<br />
based on a stronger external outlook. In addition,<br />
recall that corporate tax rates were reduced from<br />
18.0% to 16.5% for 2011. Since the third quarter, the<br />
CAD has appreciated 4.5%, and export data in<br />
November show a decline in the 3m y/y trend for<br />
exports. However, there has also been a decline in<br />
the 3m y/y import data (see Chart 1). The monthly<br />
trade balance improved in November, while the 12m<br />
-30<br />
-40<br />
Exports<br />
Jan 00 Jan 03 Jan 06 Jan 09<br />
Source: Haver Analytics<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
Chart 2: Trade Balance (CAD bn)<br />
12m accum Trade Balance<br />
Jan 00 Jan 03 Jan 06 Jan 09<br />
Source: Haver Analytics<br />
Monthly Trade Balance<br />
Chart 3: Consumer vs Industrial Prices (% y/y)<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
-6<br />
-8<br />
Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10<br />
Source: Haver Analytics<br />
CPI<br />
Industrial Price Index<br />
accumulated trade balance continued to deteriorate<br />
(see Chart 2). Exports are smaller than imports in<br />
value so a net positive contribution to GDP growth<br />
would require a more significant improvement in<br />
exports. A rising CAD puts that scenario at risk, with<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
Bricklin Dwyer 20 January 2011<br />
<strong>Market</strong> Mover<br />
13<br />
www.Global<strong>Market</strong>s.bnpparibas.com
ate hikes probably bringing further currency<br />
appreciation.<br />
Overall, the BoC revised up its GDP forecast to 2.4%<br />
for 2011 and 2.8% for 2012. This outlook is<br />
dependent on the export recovery. We forecast 2.0%<br />
GDP growth in 2011 and 3.1% in 2012.<br />
Meanwhile, overall inflation has remained subdued<br />
despite the relatively robust recovery, and inflation<br />
expectations well anchored. Canada has remained<br />
largely immune to the global commodity price<br />
pressures, with low pipeline pressures in industrial<br />
prices and shelter prices declining.<br />
Assumptions<br />
The Monetary Policy Report released on Wednesday<br />
made the following key assumptions for the<br />
economic outlook: i/ USDCAD at parity; ii/ energy<br />
prices in line with recent futures prices; iii/ relatively<br />
steady prices for non-energy commodities; and, iv/<br />
supportive global credit conditions.<br />
In addition, the BoC assumes growth in the US of<br />
3.3% (up from 2.3%) in 2011 and 3.2% (down from<br />
3.3%) in 2012. Note: we expect the US to grow 2.6%<br />
in 2011 and 3.1% in 2012.<br />
A delay to hiking is in the cards…<br />
The BoC statement suggests further hikes are not<br />
imminent, but are not too far off either. We expect the<br />
tightening cycle to begin in late Q2 or possibly later,<br />
with the policy rate reaching 2.00% by the end of the<br />
year and 3.00% by end-2012. However, the pace of<br />
appreciation of the CAD and the strength and<br />
contour of US growth will determine the schedule for<br />
normalising rates.<br />
Bricklin Dwyer 20 January 2011<br />
<strong>Market</strong> Mover<br />
14<br />
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Eurozone Inflation: Forecast Revision<br />
• The past few months have seen an<br />
acceleration in the upward dynamics of oil and<br />
other commodity prices.<br />
Chart 1: Brent 1-Mth Futures & <strong>BNP</strong>P Forecast<br />
• In the eurozone, these trends have been<br />
compounded by the vibrancy of the German<br />
recovery.<br />
• We revise up our profile for inflation in the<br />
eurozone in response to these developments.<br />
• We expect headline inflation to average 2.2%<br />
in 2011 (from 1.8%) and 1.6% in 2012 (from 1.3%)<br />
• Core inflation, however, is still expected to<br />
remain subdued, averaging 0.9% (from 0.7%)<br />
and 1.1% (from 0.5%), respectively.<br />
Source: Reuters EcoWin Pro<br />
Chart 2: GSCI Agriculture Spot Return Index<br />
Commodity shock<br />
The past few months have seen an acceleration in<br />
the upward dynamics of oil and other commodity<br />
prices, in particular soft commodities. A number of<br />
idiosyncratic factors have contributed to these trends<br />
including adverse weather conditions, supply<br />
disruptions and protectionist threats. But the shock<br />
was primarily due to fundamental factors including<br />
slack monetary policy and a closing output gap at the<br />
global level 1 . The risks to global inflation are high.<br />
In the eurozone, these trends have been<br />
compounded by the greater-than-expected vibrancy<br />
in the economic recovery in Germany and higher<br />
taxes in a number of countries which are undergoing<br />
a significant fiscal adjustment.<br />
Revising our food, energy profiles…<br />
Oil and food prices have rallied well beyond our<br />
forecast. At the time of the last global in December,<br />
<strong>BNP</strong>P Commodity Derivatives forecast that Brent oil<br />
would reach around USD86/Bbl at the end of 2010,<br />
before correcting to an average of around USD80/Bbl<br />
in Q1. While a correction in Q1 is still the central<br />
scenario, Brent oil prices have also risen<br />
exceptionally strongly relative to WTI. As a result, our<br />
Q1 forecast has been raised by around USD5/Bbl 2 .<br />
For the eurozone, this USD5/Bbl revision adds<br />
around 0.1pp to average inflation in 2011.<br />
1 For more on this see “Global Inflation: Ready To<br />
Takeoff?” in this edition of the <strong>Market</strong> Mover<br />
2 For more information, see “Oil Update: Brent Premium<br />
The New Norm” in this edition of <strong>Market</strong> Mover.<br />
Source: Reuters EcoWin Pro<br />
Source: Reuters EcoWin Pro<br />
Chart 3: GSCI & CPI Food<br />
The rally in soft commodity prices has also gone<br />
further than we expected. Prices have already risen<br />
above the peaks of 2008 (Chart 2) – evident in the<br />
GSCI agricultural spot index, for example. In<br />
December, we had expected a correction back to the<br />
Eoin O’Callaghan 20 January 2011<br />
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upward trend evident since 2005 in the first part of<br />
this year. But following the latest leg of the rally,<br />
whether you assume the price moves higher from<br />
here, moves flat at current levels, or declines back to<br />
that trend, the levels reached in recent weeks imply<br />
our forecast for a peak in food HICP inflation of<br />
around 3.5% later this year now looks conservative.<br />
Accordingly, we have raised our forecast, with a peak<br />
rate of food inflation a pp higher in the second half of<br />
this year.<br />
…with indirect implications for core…<br />
The latest rally in soft commodity and oil prices has<br />
implications for ex-food, ex-energy inflation too.<br />
First, it will have a lagged knock-on impact on a<br />
number of core categories particularly affected by<br />
commodity prices – so called ‘indirect effects”. For<br />
example, the restaurant component of core HICP<br />
typically reacts to a food price shock with a six month<br />
lag (Chart 4). Similarly, there is indirect pass-through<br />
from energy prices to transport prices as the cost of<br />
travel rises. This occurs with a fairly long lag –<br />
around 9 months traditionally – so has implications<br />
for core inflation more in the latter part of 2011, into<br />
2012.<br />
…but second round effects likely to be limited<br />
Second, a commodity price shock can have ‘second<br />
round effects’ on inflation. If a spike in commodity<br />
prices feeds through to inflation expectations,<br />
resulting in higher wages for labour, then a jump in<br />
commodity prices can have a far broader impact on<br />
prices in the economy.<br />
We are sceptical, however, that in the current<br />
environment of high unemployment and tighter fiscal<br />
policy, workers across the euro area as a whole have<br />
sufficient bargaining power to convert higher inflation<br />
expectations into significantly strong wage growth.<br />
Labour market developments typically pass-through<br />
to wages with a long lag in the euro area (Chart 5).<br />
The peak fallout on the labour market from the<br />
recession is still weighing heavily on labour costs.<br />
The subsequent slowdown in the pace of<br />
unemployment growth is pointing to stronger wage<br />
inflation on the horizon, but to relatively tame levels.<br />
The prospect of fiscal tightening across many<br />
countries in the euro area should also limit the extent<br />
to which the commodity price spike can be<br />
transmitted to the broader economy via wages.<br />
Germany’s economic renaissance<br />
The other major development since our last inflation<br />
update has been the vibrancy of the German<br />
economic recovery.<br />
While Germany suffered an output collapse as large<br />
or larger than the other principal eurozone<br />
Chart 4: HICP Food & Hotels/Restaurants<br />
Source: Reuters EcoWin Pro<br />
Chart 5: Eurozone Labour Costs & U/R<br />
Source: Reuters EcoWin Pro<br />
Chart 6: German Output Gap & Core HICP<br />
Inflation<br />
Source: Reuters EcoWin Pro<br />
economies during the recession, it has<br />
disproportionately benefited from the rebound in<br />
world industrial activity. The strength of the industrial<br />
sector has spilled over into the labour market. The<br />
unemployment rate is now lower than at any time<br />
since the early 1990s, even as the unemployment<br />
rate across the eurozone as a whole reaches a new<br />
12-year high. It has also spilled over into domestic<br />
demand – first into investment and, we expect,<br />
increasingly into consumption. To reflect our<br />
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optimism on Germany, in last week’s <strong>Market</strong> Mover 3<br />
we revised up our growth forecast to 3.5%, the same<br />
rate of growth as in 2010.<br />
Chart 7: Core HICP – EZ & Germany<br />
With a smaller level of slack in the economy, closing<br />
at a fast rate, and being driven to a greater extent by<br />
domestic demand, this has implications for our<br />
German inflation forecast.<br />
Ironically, Germany has been one of the biggest<br />
contributors to disinflation in the euro area over the<br />
past two years. After a decade gaining<br />
competitiveness relative to other member states,<br />
core CPI was one of the fastest to fall in response to<br />
the recession, hitting 0.2% y/y in April 2010, a full<br />
0.6pp under the euro area’s record low.<br />
However, its status as a disinflationary force in the<br />
euro area is unlikely to last long. From nearly a half a<br />
percentage point under the euro area average in<br />
2010, we expect headline inflation in Germany to rise<br />
above it by early 2012, with the risk it comes earlier.<br />
Source: Reuters EcoWin Pro<br />
Chart 8: EZ Core HICP & Economic Slack<br />
The numbers<br />
In response to the above mentioned factors, we have<br />
revised upwards our profile for inflation in the<br />
eurozone. We now expect headline inflation to<br />
average 2.2% in 2011 (from 1.8% previously) and<br />
1.6% in 2012 (from 1.3%).<br />
Core inflation, meanwhile, is expected to average<br />
0.9% and 1.1% (from 0.7% and 0.5%) in 2011 and<br />
2012 respectively. While we expect indirect passthrough<br />
from the soft commodity shock, and have<br />
adjusted our forecast to allow for stronger inflation in<br />
Germany – we see core inflationary pressures<br />
remaining contained.<br />
Source: Reuters EcoWin Pro<br />
Chart 9: Core HICP – Periphery vs. Core<br />
First, we are sceptical that we will see significant<br />
second round effects across the eurozone as a<br />
whole in the current environment of high<br />
unemployment and fiscal austerity. More generally,<br />
slack in the euro area economy should continue to<br />
limit core inflationary pressure.<br />
Second, we continue to expect disinflationary<br />
pressure will resume from Ireland, Spain, Portugal<br />
and Greece – economies where disinflation is part of<br />
a structural adjustment to regain competitiveness.<br />
This process was interrupted in 2010 as most of<br />
these countries raised indirect taxes. But in 2011 we<br />
expect that trend to resume – indeed there is already<br />
evidence of that starting to happen in Greece.<br />
Source: Reuters EcoWin Pro<br />
3 “Germany: Stronger for Longer”, <strong>Market</strong> Mover, 13<br />
January 2011<br />
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ECB: Bark or Bite?<br />
• The ECB has signalled increased anxiety<br />
over the upside risks to inflation.<br />
• How labour costs and inflation expectations<br />
evolve will be key to whether this translates into<br />
‘early’ increases in the refinancing rate.<br />
• The assessment of labour cost trends in the<br />
January Monthly Bulletin was similar to that in<br />
December, i.e. relatively benign.<br />
• Broad money and bank lending data do not<br />
signal a pressing need for rate hikes either.<br />
• The key risks to our call of the ECB on hold<br />
through 2011 are persistently high commodity<br />
prices and a ‘normalisation’ approach to policy.<br />
The ECB press conference on 13 January revealed<br />
increased anxiety over upside risks to inflation.<br />
Below we discuss the probability that this increased<br />
concern over inflation prospects will translate into an<br />
‘early’ policy tightening.<br />
Shifting risks<br />
Relevant extracts from the Introductory Statement to<br />
the January press conference are in Box 1. The key<br />
point was that inflation had turned out higher than the<br />
ECB had expected, largely due to energy prices.<br />
While this had not yet led to a change in the mediumterm<br />
assessment of inflation developments, the ECB<br />
would need to monitor developments very closely to<br />
ensure that this conclusion remains valid.<br />
The market has now fully priced in the start of the<br />
tightening cycle in the second half of this year.<br />
Whether the ECB will deliver in this timeframe will<br />
depend primarily on two issues. First, whether what<br />
is currently a short-term inflation problem driven by<br />
energy prices turns into a more persistent problem<br />
via second-round effects on core inflation. Second,<br />
whether inflation expectations are at risk of becoming<br />
unanchored. Below we look at each issue in turn.<br />
Ups and downs<br />
Chart 1 shows our forecast for inflation based on our<br />
‘in house’ oil price forecast: this assumes a fall in the<br />
price of Brent to a USD88/Bbl average in Q1. On this<br />
assumption, and given energy price base effects,<br />
headline inflation is expected to fall from 2.4% y/y in<br />
February to 1.9% in April. Core inflation is also set to<br />
remain low.<br />
Box 1: Extracts from ECB Introductory Statement<br />
“We see evidence of short-term upward pressure on<br />
overall inflation, mainly owing to energy prices, but this<br />
has not so far affected our assessment that price<br />
developments will remain in line with price stability over<br />
the policy-relevant horizon. At the same time, very close<br />
monitoring is warranted.<br />
Inflation expectations remain firmly anchored in line with<br />
our aim of keeping inflation rates below, but close to, 2%<br />
over the medium term. The firm anchoring of inflation<br />
expectations is of the essence.<br />
HICP inflation was 2.2% in December. This is somewhat<br />
higher than expected and largely reflects higher energy<br />
prices. Looking ahead to the next few months, inflation<br />
rates could temporarily increase further. They are likely to<br />
stay slightly above 2%, largely owing to commodity price<br />
developments, before moderating again towards the end<br />
of the year.<br />
Risks to the medium-term outlook for price developments<br />
are still broadly balanced but could move to the upside.<br />
Upside risks relate, in particular, to developments in<br />
energy and non-energy commodity prices.”<br />
13 January 2011<br />
Source: ECB<br />
The ECB is also expecting that inflation will moderate<br />
from the spring, as is clear from the press conference<br />
– again, see Box 1.<br />
The shorter is the deviation of headline inflation from<br />
the ‘below but close to 2%’ objective, the lower is the<br />
risk of second-round effects and an upward shift in<br />
inflation expectations. So, if the ECB’s expectation of<br />
lower inflation is borne out, anxiety over upside risks<br />
to inflation should recede and with it, the probability<br />
of early hikes in the refinancing rate.<br />
On the basis of our assumption of a pick up in oil<br />
prices subsequently, we look for inflation to rise back<br />
above 2% in the second half of the year, before it<br />
falls back again in 2012 as base effects related to<br />
recent energy and food price gains kick in.<br />
What pay pressures?<br />
Chart 2 shows the three key measures of pay trends<br />
in the eurozone. Across the board, they show low y/y<br />
rates of change – remarkably low, in fact. The rate of<br />
increase in negotiated wages fell below 2% y/y in<br />
early 2010 for the first time in the series’ history and<br />
the current growth rate, of 1.4% y/y as of Q3, is the<br />
lowest since the early 1990s.<br />
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On the basis of the relationship between pay trends<br />
and the evolution of slack in the labour market, the<br />
bulk of the downward pressure on labour cost growth<br />
in the eurozone as a whole is probably behind us<br />
(Chart 3). But the lags are long and the persistently<br />
high level of the unemployment rate does not point to<br />
a pick-up in wage growth any time soon.<br />
Chart 1: HICP Forecasts(% y/y)<br />
On the basis of the assessment in the latest Monthly<br />
Bulletin, this is a view which the ECB seems to share<br />
– see the extracts in Box 2.<br />
The view on labour cost developments expressed in<br />
December's ECB Monthly Bulletin was benign. It was<br />
liberally sprinkled with terms like 'modest', 'moderate'<br />
and 'contained'. We wondered whether this would<br />
change in January's Bulletin, in line with the greater<br />
concern over inflation risks expressed at the press<br />
conference a week before. But there was no sense of<br />
an increased threat of second round risks.<br />
Managing expectations<br />
Regarding inflation expectations, the ECB’s current<br />
view is that they remain well anchored. On the basis<br />
of the information available to the ECB, this is hard to<br />
argue against. Implied breakeven inflation rates have<br />
been hovering in the region of 2% recently, with no<br />
sign of any upward drift.<br />
The ECB’s quarterly Survey of Professional<br />
Forecasters (SPF) has also demonstrated very<br />
stable long-term inflation expectations (though there<br />
is some circularity in this as inflation expectations are<br />
anchored because the ECB is expected to act in<br />
such a way as to deliver inflation in line with its below<br />
but close to 2% price stability definition in the long<br />
run). The ECB’s next SPF will be released on 10<br />
February.<br />
There has been some upward drift in households’<br />
inflation expectations. The surveys compiled by the<br />
European Commission, both forward and backward<br />
looking, have been trending higher since the autumn<br />
of 2009. But the current readings are not elevated in<br />
comparison with the past: for example, the survey of<br />
price perceptions over the year ahead is more than<br />
twenty percentage points below its average cycle<br />
peak since the mid-1980s. The ECB considers this<br />
particular measure of inflation expectations to be the<br />
least credible as it has a short time horizon, of just a<br />
year, and is therefore very sensitive to short-term<br />
price developments.<br />
No rush…<br />
Our assessment of second-round risks and inflation<br />
expectations underpins our forecast that the ECB,<br />
while more sensitive to upside risks to inflation and<br />
likely to stay that way going forward, will not raise its<br />
refinancing rate this year.<br />
Source: Reuters EcoWin Pro<br />
4.5<br />
4.0<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
Chart 2: Compensation Trends<br />
Negotiated Wages (% y/y)<br />
Compensation per Employee (% y/y)<br />
Hourly Labour Costs (% y/y)<br />
97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
-1.5<br />
-1.0<br />
-0.5<br />
0.0<br />
0.5<br />
1.0<br />
1.5<br />
Chart 3: Unemployment & Labour Costs<br />
0.5<br />
2.0<br />
Unemployment <strong>Rate</strong><br />
(1-Yr Change, 18-Mth Lag) 0.0<br />
2.5<br />
-0.5<br />
00 01 02 03 04 05 06 07 08 09 10 11 12<br />
Source: Reuters EcoWin Pro<br />
Hourly Labour<br />
Costs (% y/y, RHS)<br />
The current circumstances are very different from<br />
those in summer 2008, when the ECB felt compelled<br />
to hike rates in what was a difficult economic and<br />
financial environment. Then, headline inflation<br />
peaked at over 4%, almost twice the current level,<br />
and had been well over 2% for almost a year before<br />
the rate hike was delivered (in July). The deviation<br />
from target was much bigger and much more<br />
persistent, so inflation expectations were much more<br />
at risk of becoming unanchored then than now.<br />
4.5<br />
4.0<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
Ken Wattret 20 January 2011<br />
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The modest deviation of inflation currently relative to<br />
the ECB’s definition of price stability was a point<br />
emphasised in an interview with Governing Council<br />
member Orphanides on 14 January, the day after the<br />
‘hawkish’ press conference. He also hinted, as others<br />
have, that the market may have over-reacted to the<br />
comments in the press conference.<br />
…but there are risks<br />
There are three potential challenges to our view of no<br />
rate hike this year. First, that commodity prices<br />
remain higher for longer, outweighing the favourable<br />
base effects pushing down on headline inflation from<br />
the spring. If, as a result, inflation were to stay higher<br />
for longer, this would increase the risk of upward<br />
pressure on wages and inflation expectations. The<br />
‘emergency’ level of rates would be increasingly<br />
inappropriate in this context.<br />
In those circumstances, economic growth prospects<br />
would suffer. Commodity price rises would crimp real<br />
income growth for households and ECB rate hikes<br />
would hit confidence. This would probably limit how<br />
far the ECB tightening cycle would go.<br />
Box 2: Extracts from ECB Monthly Bulletin<br />
“Labour cost indicators for Q3 2010 continued to show<br />
subdued wage pressures. Preliminary information on<br />
negotiated wages for the first month of Q4 suggests that<br />
the pattern of moderate wage growth continued… in line<br />
with continuously weak labour market conditions.<br />
The annual rate of growth in euro area negotiated wages<br />
slowed to 1.4% in Q3 2010, a record low since the start<br />
of the series in 1991. Annual hourly labour cost growth in<br />
the euro area also slowed in Q3, to 0.8% from 1.6% in<br />
Q2. This too is the lowest growth rate observed since<br />
the start of this series in 2001.<br />
The annual growth rate of compensation per employee<br />
slowed to 1.5% in Q3 from 1.9% in Q2. This decline was,<br />
with a few exceptions, broad-based across countries.<br />
Sectoral developments show that the deceleration in the<br />
annual rate of change in the labour cost index in Q3<br />
2010 was broad-based across sectors.”<br />
Monthly Bulletin, January 2011<br />
Source: ECB<br />
Chart 4: Real Policy <strong>Rate</strong>s<br />
The second risk to our forecast of unchanged rates<br />
this year is that pay pressures emerge in the core<br />
countries of the eurozone, most likely in Germany,<br />
prompting an ECB response. A recurring theme of<br />
our analysis for some while now has been to expect<br />
a pick up in wage growth in Germany. This reflects<br />
the obvious factors including: the low unemployment<br />
rate; skill shortages in some fast-growing sectors;<br />
and looser policy than for German needs.<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
Refi <strong>Rate</strong><br />
As conditions in peripheral countries will be radically<br />
different, assessing how the Governing Council will<br />
respond to ‘local’ pay pressures is difficult to judge. If<br />
it is a problem for Germany only, it may be difficult to<br />
secure a consensus on the Governing Council in<br />
favour of hiking rates. But at the very least, we can<br />
expect the vocal hawks on the Governing Council to<br />
make a lot of noise about the upside risks to inflation<br />
and the need for a policy response.<br />
Normalisation mode<br />
An alternative scenario of earlier rate increases than<br />
we currently expect is via the ‘normalisation’ route. In<br />
short, the rationale would be that the level of policy<br />
rates has been set at an emergency level but the<br />
emergency is over – for the eurozone as a whole if<br />
not for specific member states. In this context, there<br />
is a case for taking rates higher whether secondround<br />
effects start to appear or not.<br />
The level of policy rates in real terms is unusually low<br />
(Chart 4). Measured on the basis of the headline<br />
inflation rate or inflation expectations, real short-term<br />
rates are well below zero. Measured on the basis of<br />
-1.0<br />
-1.5<br />
Relative to HICP (% y/y)<br />
EONIA<br />
99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
-4<br />
-5<br />
-6<br />
Chart 5: Nominal Growth & Policy<br />
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13<br />
Source: Reuters EcoWin Pro<br />
Real GDP (% y/y) + HICP (% y/y)<br />
ECB Refi <strong>Rate</strong> (%)<br />
<strong>BNP</strong>P Forecast<br />
core HICP inflation, real policy rates are negative still<br />
but less dramatically so.<br />
Ken Wattret 20 January 2011<br />
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The nominal policy rate and nominal growth are also<br />
out of whack (Chart 5). This was the case through<br />
most of the economic expansion from 2003 to 2008<br />
which the ECB, retrospectively, probably sees as an<br />
error. The slow pace of the rate rises from December<br />
2005 was a contributory factor to the decision to hike<br />
in July 2008 as inflation was surging and breakeven<br />
inflation rates were well north of 2%.<br />
The exceptionally low level of policy rates will be one<br />
of the main arguments put forward by the more<br />
hawkish members of the Governing Council in favour<br />
of a tightening sooner rather than later. We are<br />
already hearing from some members that the risks<br />
associated with tightening too late are greater than<br />
the risks of tightening too soon. We see this as the<br />
view of a very vocal minority. We doubt that there<br />
would be sufficient support on the Governing Council<br />
to justify a rise in interest rates on these grounds<br />
while domestically-driven inflation pressures remain<br />
contained, given the potential adverse effect on the<br />
most distressed member states’ economies and<br />
financial sectors.<br />
It is one thing for the Governing Council to reach<br />
agreement to deliver a warning shot over inflation<br />
and threaten to hike rates to make sure inflation and<br />
inflation expectations stay in check. It is another thing<br />
altogether, in the current uncertain economic and<br />
financial circumstances, to agree to hike rates.<br />
In credit<br />
Trends in money and credit growth will also be an<br />
important influence on how ECB policy evolves. The<br />
assessment in the most recent press conference and<br />
Monthly Bulletin do not point to any pressing need for<br />
a tightening of policy. Broad money and bank lending<br />
growth rates have begun to normalise but they are<br />
far from normal.<br />
As Chart 6 highlights, bank lending growth was a<br />
reasonably good guide to ECB policy developments<br />
in the first decade of EMU, albeit with a considerable<br />
lag between lending growth and policy changes. On<br />
the basis of how we expect lending growth to evolve<br />
from here (which is a relatively optimistic forecast),<br />
the lags suggest that the refinancing rates ought not<br />
to start rising until spring 2012.<br />
The relationship broke down in 2009, with the ECB<br />
slashing rates much earlier than would be implied by<br />
bank lending growth. It could be argued that this is a<br />
reason why the ECB might want to start increasing<br />
rates earlier than in the past – linked again to the<br />
‘normalisation’ concept.<br />
Chart 6: ECB Policy & Bank Lending<br />
13<br />
<strong>BNP</strong>P Fcast<br />
5.0 Bank Lending (% y/y, 18Mth Lag RHS)<br />
12<br />
11<br />
10<br />
4.0<br />
9<br />
8<br />
7<br />
3.0<br />
6<br />
5<br />
2.0<br />
4<br />
3<br />
2<br />
1.0<br />
ECB Refi <strong>Rate</strong> (%)<br />
1<br />
0<br />
0.0<br />
-1<br />
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14<br />
Source: Reuters EcoWin Pro<br />
Table 1: Key Forecasts<br />
2011 2012<br />
(%) 2010 2011 20122013 Q1 Q2 Q3 Q4 Q1 Q2<br />
GDP y/y 1.7 1.6 1.6 2.0 2.1 1.6 1.5 1.5 1.5 1.4<br />
HICP y/y 1.6 2.2 1.6 1.6 2.3 1.9 2.2 2.3 1.9 1.7<br />
Core HICP y/y 1.0 0.9 1.1 1.6 1.1 0.9 0.9 0.9 1.0 1.0<br />
ECB Refi <strong>Rate</strong> 1.00 1.00 1.75 2.75 1.00 1.00 1.00 1.00 1.00 1.25<br />
Source: Reuters EcoWin Pro<br />
Note also that our current forecasts for the y/y growth<br />
rate in bank lending imply that the refinancing rate<br />
should rise to around 3-3½% in our forecast horizon<br />
out to 2013, below the 4% peak in the 2005/8 cycle.<br />
Bottom line<br />
The level of anxiety at the ECB over the upside risks<br />
to inflation has increased and the risk of an earlier<br />
start to the tightening cycle than we have forecast<br />
(i.e. from Q2 2012) has risen accordingly. While the<br />
ECB still expects inflation to remain in line with its<br />
definition of price stability over the medium term, it<br />
intends to monitor the various risks to this scenario<br />
very closely – as will we. Two key influences on<br />
whether the threat of action will actually translate into<br />
a higher refinancing rate this year, which markets will<br />
continue to price in while inflation is above target, will<br />
be developments relating to second round effects on<br />
inflation and the evolution of inflation expectations.<br />
On the basis of our assessment of those and other<br />
economic and financial developments going forward,<br />
we conclude, on balance, that the ECB’s bark is<br />
likely to be worse than its bite.<br />
Ken Wattret 20 January 2011<br />
<strong>Market</strong> Mover<br />
21<br />
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ECB Inflation Performance: A Review<br />
• The eurozone inflation broke above the 2.0%<br />
threshold in December. More importantly,<br />
average eurozone inflation since January 1999<br />
rose from 1.98% in November to 2.01% in<br />
December.<br />
• Other indicators show that inflation remains<br />
subdued and below headline HICP, the measure<br />
the ECB has chosen to target. This implies the<br />
ECB has chosen the most demanding target.<br />
• The latest inflation figure has not altered<br />
ECB policy, but the language was toughened.<br />
Jean-Claude Trichet revisited the wording of the<br />
ECB achievement and that of the policy outlook.<br />
128<br />
124<br />
120<br />
116<br />
112<br />
108<br />
104<br />
100<br />
Base<br />
98=100<br />
Chart 1: HICP vs. Ceiling<br />
Ceiling 2%/year<br />
Actual HICP<br />
(SA by <strong>BNP</strong> Paribas)<br />
96<br />
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Eurostat, Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Chart 2: HICP Inflation<br />
The 2.2% flash estimate for eurozone inflation in<br />
December was described in the media as the first<br />
time inflation has exceeded the ECB’s target for more<br />
than two years. The reality and the potential<br />
consequences for ECB policy are more subtle.<br />
What is the ECB’s true target?<br />
As Jean-Claude Trichet usually puts it, the ECB’s<br />
inflation goal is ‘below 2%, but close to 2%, over the<br />
medium term’. This time horizon should not be<br />
ignored. The cumulative average inflation rate since<br />
January 1999 had been above the 2% ‘ceiling’ for a<br />
long time by the end of the tightening cycle in July<br />
2008 but the ECB had nonetheless refrained from<br />
putting in place a restrictive monetary policy.<br />
Mr Trichet recently insisted that, since the start of<br />
monetary union, average inflation had been below<br />
2%. He added that he felt "moved" by the EU<br />
Parliament applause when he said that average<br />
inflation was 1.97%. With the December print, the<br />
average has gone to 2.01%...too bad!<br />
Will that trigger quick policy action? This is unlikely.<br />
When the ECB governing council decided in June<br />
2008 to hike in July, it had at its fingertips the May<br />
inflation estimate. This stood at 3.7% y/y, compared<br />
with a 4% refi rate. This pushed the average inflation<br />
rate from January 1999 as high as 2.22%. That rate<br />
hike is often viewed in retrospect as a policy mistake,<br />
but not within the ECB.<br />
What do other inflation indicators say?<br />
The ECB focuses on the headline HICP rather than<br />
the ex-food and energy index; the Fed, for example,<br />
favours the core PCE deflator. Over the short run,<br />
4.0 Headline HICP (% y/y)<br />
3.0<br />
2.0<br />
1.0<br />
0.0<br />
-1.0<br />
2.0<br />
1.0<br />
0.0<br />
-1.0<br />
-2.0<br />
Core HICP (% y/y)<br />
99 00 01 02 03 04 05 06 07 08 09 10 11<br />
99 00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Eurostat, Reuters EcoWin Pro<br />
Headline - Core (y/y)<br />
Lagged 1 year<br />
Core Inflation y/y Change<br />
ignoring highly volatile factors can make sense.<br />
However, over the medium term, all elements need to<br />
be included in the index that the central bank targets<br />
(especially vital elements such as food and energy).<br />
Experience also shows that headline inflation tends to<br />
lead core inflation (Chart 2). Nevertheless, core<br />
inflation remains less volatile.<br />
Using one measure rather than the other does make<br />
a difference. In December, average inflation since<br />
January 1999 was 2.01% while average core inflation<br />
was 1.55%. This gap highlights that the main sources<br />
of inflation have been food and energy, items over<br />
which ECB interest rate policy has less influence.<br />
As noted above, the Fed prefers to look at the PCE<br />
deflator, a broader measure of inflation. However, the<br />
Fed favours the less volatile ex-food and energy<br />
definition of the deflator. Although the ECB has not<br />
gone down this route, looking at the eurozone PCE<br />
deflator would also make a lot of sense. By definition,<br />
this index covers all goods and services consumed by<br />
Dominique Barbet 20 January 2011<br />
<strong>Market</strong> Mover<br />
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households. Furthermore, the statistical construction<br />
of the deflator captures more effectively changes in<br />
consumption patterns. As Chart 3 shows, this<br />
measure gives a result very close to that of headline<br />
HICP. The average inflation rate until Q3 2010 is<br />
marginally below the HICP measure, but the gap is<br />
only 4bp.<br />
We could also look at the total GDP deflator. By<br />
construction, this index is not designed to measure<br />
inflation for consumption but for the eurozone<br />
domestic economy, since imported inflation is<br />
eliminated. This measure shows lower inflation than<br />
headline HICP and is less volatile. From the start of<br />
monetary union to Q3 2010, average inflation on this<br />
measure was 1.68% (0.32pp below the official target).<br />
New words to back unchanged ECB policy<br />
In the latest press conference, Trichet presented a<br />
different gauge of long-term inflation, now referring to<br />
the average annual inflation rate over the last 12<br />
years. This measure allows him to still highlight a<br />
1.97% figure (when the inflation from January 1999 to<br />
December 2010 is 2.01%). The good thing about this<br />
wording is that the reference period and thus the<br />
achievement will last for a few months (possibly<br />
almost a year), although inflation is likely to remain at<br />
or above 2.2% in the next two months of published<br />
data.<br />
This issue is primarily a question of wording, since<br />
other indicators provide comfort on inflation’s past<br />
performance as well as the present underlying trend.<br />
We expect core inflation for the eurozone stayed at<br />
1.1% in December. The GDP deflator has been<br />
subdued: all the quarterly changes (SAAR) since Q1<br />
2009 have been below 1.7%; the latest y/y print is<br />
1.1%; and average inflation over the last three years<br />
stands at 1.3%.<br />
The ECB currently has no economic reasons to be<br />
concerned over the inflation outlook. Even money<br />
130<br />
125<br />
120<br />
115<br />
110<br />
105<br />
100<br />
Chart 3: Price Indices (Q1 1999=100)<br />
HICP Headline<br />
HICP Core<br />
PCE Deflator<br />
GDP Deflator<br />
99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Eurostat, Reuters EcoWin Pro<br />
Chart 4: Main Inflation Indices (quarterly, % y/y)<br />
4.0<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
HICP Core<br />
GDP Deflator<br />
HICP Headline<br />
-0.5<br />
PCE Deflator<br />
-1.0<br />
Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2<br />
04 05 06 07 08 09 10<br />
Source: Eurostat, Reuters EcoWin Pro<br />
supply and credit growth, through rising, are not<br />
alarming. Trichet merely had a positioning problem<br />
since he has lost one argument he had been using<br />
heavily – the below 2% average inflation rate since the<br />
start of monetary union. The wording change solves<br />
this issue for the time being.<br />
This device can also be seen as a way for the ECB to<br />
avoid current inflation figures exerting too much<br />
pressure on the policy setting.<br />
Dominique Barbet 20 January 2011<br />
<strong>Market</strong> Mover<br />
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Eurozone: BoP Leaves Euro Vulnerable<br />
• Despite the worsening of the eurozone debt<br />
crisis last November, foreign investors turned<br />
net buyers of bonds and notes in that month.<br />
• The fact that non-eurozone capital flows<br />
were not the cause of the bond crisis is not<br />
reassuring for the euro.<br />
Chart 1: EMU Current Account (EUR bn/m, s.a.)<br />
10<br />
Goods<br />
Services<br />
5<br />
0<br />
-5<br />
-10<br />
Current account deficit is widening<br />
The eurozone’s current account deficit widened<br />
sharply in November, from EUR 2.1bn in October to<br />
EUR 6.0bn (unadjusted). While in unadjusted terms<br />
the eurozone posted its largest deficit for the year<br />
back in September (EUR 6.5bn), in seasonally<br />
adjusted terms the deficit rose from EUR 9.6bn in<br />
September to EUR 11.2bn in November – the largest<br />
monthly deficit since late 2008.<br />
The situation has been deteriorating rapidly<br />
(Chart 1). The main reason for the widening of the<br />
current account deficit is the widening of the<br />
merchandise trade deficit, where nominal export<br />
gains (22.9% y/y in November) have been outpaced<br />
by the increase in imports (28.2%) boosted by<br />
stronger inflation on imported goods. (For example,<br />
in Germany, import prices rose 10.0% y/y compared<br />
to a 4.5% increase in export prices.) The surplus on<br />
services, not subject to such price developments,<br />
remained strong in November, supported by rising<br />
exports (13.2% y/y).<br />
The deficit on income is also widening. Inflows,<br />
mostly interest payments, are declining, while<br />
outflows are rising and are likely to continue to do so<br />
given the impact of the financial crisis on payments.<br />
Capital flows show a surprising pattern<br />
On the capital account, foreign direct investment<br />
printed a monthly surplus in November, for the first<br />
time this year. The surplus reflected significant loans<br />
to eurozone subsidiaries by foreign entities and is<br />
likely to have disappeared in December. Net outflows<br />
in equities were modest in November and corrected<br />
part of the previous month’s inflow.<br />
The main surprise on the capital account in<br />
November came from bonds and notes (Chart 2).<br />
While the eurozone sovereign bond market was in<br />
disarray, foreign investors bought a net amount of<br />
EUR 10.8bn of eurozone bonds in November. This,<br />
combined with net sales of foreign bonds from<br />
eurozone investors, raised net inflows on bonds and<br />
notes to EUR 19.8bn. Thus foreign investors, rather<br />
than fleeing the Eurobond market, actually increased<br />
-15<br />
-20<br />
-25<br />
05 06 07 08 09 10<br />
Source: ECB, Reuters EcoWin Pro<br />
Total<br />
Chart 2: EMU BoP, Flows on Bonds and Notes<br />
(EUR bn/m, n.s.a.)<br />
75<br />
50<br />
25<br />
0<br />
-25<br />
-50<br />
-75<br />
Inflow<br />
Outflow<br />
2008 2009 2010<br />
Source: ECB, Reuters EcoWin Pro<br />
Balance<br />
their purchases during the crisis. Note the same<br />
occurred in April-May 2010, when Greece was<br />
subject to the market's scrutiny. They are also keen<br />
to exit the market when it is quieter, either to take<br />
short-term profit or, for real money investors,<br />
because such instruments are a more limited share<br />
of their total portfolio than for most eurozone<br />
domestic investors. Despite November’s surge,<br />
foreign appetite for eurozone bonds shows a trend<br />
decline.<br />
The bottom line is that, despite a large current<br />
account deficit, the eurozone’s basic balance (the<br />
current deficit and flows of long-term capital)<br />
registered a surplus in November of EUR 31.7bn, the<br />
largest for any month in 2010. With the basic balance<br />
in solid surplus, the euro’s decline in November<br />
reflected the impact on other flows of concerns over<br />
the debt crisis and uncertainties over the longer-term<br />
outlook of the eurozone. Such concerns are likely to<br />
persist longer than November’s capital inflow.<br />
Dominique Barbet 20 January 2011<br />
<strong>Market</strong> Mover<br />
24<br />
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Norway: Norges Bank Preview<br />
• We continue to expect the Norges Bank to<br />
keep its policy rate on hold at its January<br />
meeting.<br />
Chart 1: Private Consumption & Retail Sales<br />
• Since the December policy decision,<br />
economic data, on average, have been strong,<br />
signalling a pick-up in growth.<br />
• This, together with high house prices and<br />
robust credit growth, is likely to be mentioned in<br />
the policy statement – giving it a hawkish tone.<br />
• However, the appreciation in the NOK is<br />
likely to lead to the Norges Bank remaining<br />
cautious.<br />
Stable policy rate for now<br />
The Norges Bank left its policy rate unchanged for a<br />
fifth consecutive meeting in December. But the<br />
statement accompanying the decision had a hawkish<br />
tone. The Bank’s quarterly rate projections in<br />
October suggested that it intended to deliver a rate<br />
hike, at the earliest, in summer 2011. Although we<br />
believe a hawkish statement in December and recent<br />
strong economic data have increased the chances of<br />
its striking sooner, we expect the Norges Bank to<br />
keep the policy rate at 2.00% at its meeting next<br />
week.<br />
Economic growth picking up<br />
There are increasing signs that economic recovery<br />
has gained momentum in Norway. In line with our<br />
long-held view, an increase in consumer spending is<br />
now evident. The strong retail sales print for<br />
November and consumer confidence in Q4 hitting its<br />
highest level since late 2007 signal that private<br />
consumption remained a key growth driver in Q4.<br />
With interest rates still relatively low, household<br />
consumption also seems to be supported by robust<br />
growth in credit to households.<br />
Another issue, likely to be mentioned by the Norges<br />
Bank, is the increase in house prices. Although<br />
posting slight q/q declines in Q3 and Q4, they are<br />
well above their pre-crisis levels and overall 8.3%<br />
higher last year than in 2009.<br />
Source: Reuters EcoWin Pro<br />
Chart 2: Consumer and Manufacturing<br />
Confidence<br />
Source: Reuters EcoWin Pro<br />
Chart 3: House Prices (Index, Q1 2005 = 100)<br />
Source: Reuters EcoWin Pro<br />
On the production side, although financial and<br />
monetary conditions have tightened recently due to<br />
an appreciation relative to trend in the effective NOK<br />
exchange rate, they are now broadly neutral. Given<br />
lags, however, we should see a further improvement<br />
in production in the period ahead. More forwardlooking<br />
data, such as manufacturing surveys, support<br />
this view. Another positive factor, which should<br />
provide a boost to the economy overall, is the<br />
increase in oil prices.<br />
Gizem Kara 20 January 2011<br />
<strong>Market</strong> Mover<br />
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Higher energy prices pushing up inflation<br />
After consistently surprising the Norges Bank to the<br />
downside over the previous couple of months, CPI-<br />
ATE inflation at 1.0% y/y in December was in line<br />
with the Bank’s expectations. However, higher<br />
electricity prices due to cold weather led to a<br />
significant upward surprise in headline inflation.<br />
Higher energy prices are likely to lead the Norges<br />
Bank to raise its headline inflation forecasts in its<br />
Monetary Policy Report in March. In terms of core,<br />
CPI-ATE, inflation, we expect it to start to pick up this<br />
year as the improving labour market leads to a<br />
strengthening of both demand and wages. The<br />
appreciation of the Norwegian krone, however,<br />
suggests some downside risk to inflation. Overall,<br />
core inflation should remain below the Norges Bank’s<br />
target of 2.5% throughout the year.<br />
Source: Reuters EcoWin Pro<br />
Chart 4: CPI & CPI-ATE (% y/y)<br />
Chart 5: Import-Weighted NOK<br />
Policy decision<br />
Given the key policy rate is still low compared to<br />
what the neutral rate should be in Norway, we expect<br />
rate hikes. However, we believe the Norges Bank will<br />
keep the policy rate at 2.00% at its meeting next<br />
week.<br />
We expect the next hike to come in Q2. But, given<br />
the hawkish statement in December, we noted that<br />
we might see an upward revision to the Norges<br />
Bank’s rate projections at its March meeting. Recent<br />
domestic developments, which suggest a pick-up in<br />
growth in the quarters ahead, support this view.<br />
Overall, we believe the risk of rate hike in Q1 has<br />
increased.<br />
However, developments in the coming months will<br />
still be key for the timing of the hike. With policy rates<br />
generally expected to remain low for some time in<br />
the main advanced economies, the Norges Bank will<br />
not want to deviate too much from other advanced<br />
country central banks in terms of policy rates.<br />
Appreciation of the domestic currency due to higher<br />
rate differentials would not be welcomed by the<br />
Norges Bank. Since end-November, the importweighted<br />
NOK has appreciated by around 3%.<br />
Developments since the start of the year suggest the<br />
appreciation in January will also surprise the Norges<br />
Bank to the upside. As a stronger currency would<br />
bring downside risks to inflation and hurt export<br />
industries, the Norges Bank will probably wait to<br />
deliver a rate hike if the currency continues to<br />
appreciate in the coming months.<br />
Source: Reuters EcoWin Pro<br />
On the other hand, high house prices, robust credit<br />
growth and the increase in household spending are<br />
other issues the Norges Bank will be looking at. As<br />
these had been mentioned in the previous policy<br />
statement, the Norges Bank will likely remain<br />
cautious about the risk of financial imbalances<br />
building up in the economy.<br />
Overall, if we do not see a significant appreciation in<br />
the currency, economic data continue to surprise to<br />
the upside relative to the Norges Bank’s forecasts<br />
and house prices increase markedly, the Bank is<br />
likely to deliver a rate hike in Q1. But if the krone<br />
appreciates significantly and still-acute tensions in<br />
financial markets intensify, the Bank will wait until Q2<br />
to strike.<br />
Gizem Kara 20 January 2011<br />
<strong>Market</strong> Mover<br />
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Japan: New Cabinet and Policy Outlook<br />
• Prime Minster Kan has reshuffled his<br />
cabinet to avert an opposition boycott of<br />
parliament. But with all parties gearing up for<br />
the local elections in April, the going promises<br />
to be tough for the 2011 budget and budgetrelated<br />
bills.<br />
• That said, Kan’s tenure could prove long,<br />
given that no national elections are due until<br />
2013. Because it is politically damaging for the<br />
opposition to keep on blocking bills and be seen<br />
as the cause of political paralysis, policy<br />
cooperation on specific issues seems likely<br />
once the April local elections are over.<br />
• The policies most likely to garner supraparty<br />
support are (1) comprehensive social<br />
security/tax reform and (2) “opening Japan”<br />
(Trans-Pacific Partnership participation).<br />
• The appointment of Kaoru Yosano as the<br />
point man on social security/tax reform should<br />
help reconcile the ideas of the opposition and<br />
ruling camps.<br />
• Opening up Japan and TPP participation,<br />
however, face strong opposition from factions<br />
in both the DPJ and LDP. Headway on this issue<br />
may be blocked or could trigger political<br />
realignment.<br />
More “crises” down the road?<br />
Prime Minster Kan reshuffled his cabinet and the<br />
DPJ leadership on 14 January. With the opposition<br />
threatening to boycott the regular session of<br />
parliament set to convene on 24 January unless<br />
Chief Cabinet Secretary Sengoku and Land Minister<br />
Mabuchi were replaced (they had been censured by<br />
the opposition-controlled Upper House), the sacking<br />
of both allowed Kan to avert a “January crisis”<br />
(opposition boycott of parliament).<br />
But now the new government faces even bigger<br />
challenges as it lacks the two-thirds majority in the<br />
Lower House needed to override bills rejected by the<br />
Upper House (it is seven seats short). With the<br />
opposition gearing up to fight the ruling coalition in<br />
the unified nationwide local elections slated for April,<br />
the going promises to be rough for the 2011 budget<br />
and budget-related bills. These are being dubbed by<br />
pundits the “March crisis” and “April crisis”,<br />
respectively.<br />
We expect there will be a good deal of negotiating<br />
with the opposition before the budget and budgetrelated<br />
bills are submitted to the Diet. Negotiating on<br />
the specifics of any legislation is certainly<br />
constructive. However, political manoeuvring and<br />
grandstanding over how the Diet’s daily agenda is<br />
set could provoke public disgust at the procedural<br />
games parliamentarians play. Incidentally, the<br />
government has let it be known that it is open to<br />
amending the budget in parliament, something that<br />
would be epoch-making in its own right.<br />
Bigger test will be budget-related bills<br />
The government, by virtue of its majority in the Lower<br />
House, can secure passage of the budget without<br />
Upper House approval. Under the constitution, the<br />
budget is automatically enacted 30 days after<br />
approval by the Lower House, regardless of what the<br />
Upper House does.<br />
But the same rules do not apply to budget-related<br />
bills. If rejected by the Upper House, these will<br />
require some degree of cooperation from opposition<br />
lawmakers in the Lower House to achieve the twothirds<br />
majority needed for an override vote. While this<br />
process can be time-consuming, this time around<br />
there are no budget-related bills on tap that could<br />
cause the kind of confusion witnessed at the gas<br />
pumps in 2008.<br />
At that time, the provisional surcharge tax on<br />
gasoline could not be renewed on time due to the<br />
divided Diet. This led to the tax momentarily expiring,<br />
lowering gasoline prices, only to be reinstated one<br />
month later. In any event, even if the public is<br />
inconvenienced by the failure to promptly enact<br />
budget-related bills, most such bills are applied<br />
retroactively when they are eventually passed.<br />
A prime concern for market participants is a special<br />
law enacted each year that controls deficit-financing<br />
bonds. While failure to re-enact this legislation by 1<br />
April would not trigger chaos, government cash flow<br />
could be seriously impaired if the legislation is put on<br />
hold indefinitely.<br />
Increasing cooperation, once April’s election are<br />
over<br />
Ultimately, we expect the opposition New Komeito<br />
party to be won over to support budget-related bills,<br />
just as it was convinced to support the<br />
supplementary budget last year. Of course, in the<br />
run-up to the April elections, it is very likely that New<br />
Ryutaro Kono/ Azusa Kato 20 January 2011<br />
<strong>Market</strong> Mover<br />
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Komeito will maintain its resistance to the<br />
government, including opposition to the budget itself.<br />
Nonetheless, we expect New Komeito to eventually<br />
back the budget-related bills in order to avoid<br />
adverse consequences for the public. It is even<br />
conceivable that New Komeito cooperation at this<br />
juncture could open the door to some kind of alliance<br />
with the DPJ, once the local elections are over.<br />
Some observers believe the Kan government could<br />
be shaken by a “June crisis”, in the event junior<br />
partner the People’s New Party pulls out of the ruling<br />
coalition, due to the failure to enact that party’s pet<br />
project (reversing postal privatisation). However, we<br />
think that, after April, the Kan government will find<br />
ways of working with the LDP and New Komeito so<br />
that key legislation can be enacted.<br />
If the LDP and New Komeito can change and<br />
cooperate with the DPJ, the anti-reformist bent of the<br />
People’s New Party will also have to change to some<br />
degree. It is our view that, once the April elections<br />
are over, all political parties will modify their<br />
approach to parliamentary affairs.<br />
Could Kan’s tenure be long-lived?<br />
Looking further ahead, there is a possibility,<br />
depending on the policies pursued, that Kan’s tenure<br />
as prime minister could be long by Japanese<br />
standards. One reason is that the political schedule<br />
is free of nationwide elections until 2013 (Upper<br />
House in July, Lower House in August).<br />
While Kan’s tenure as DPJ president (hence prime<br />
minister) is due to expire in September 2012, we<br />
expect he will be re-elected as replacing him at that<br />
juncture would likely mean a quick general election.<br />
Otherwise, the DPJ would again be slammed by the<br />
public and opposition for elevating its leader to the<br />
prime minister without the legitimacy of a Lower<br />
House election victory.<br />
Given the lengthy period without national elections, it<br />
would be hard for the opposition to fight the<br />
government on each and every issue. Accordingly, it<br />
is likely that some opposition parties will seek to link<br />
up with the Kan government on specific policies<br />
issues. This would allow them to build a record of<br />
achievement that could bolster their election<br />
prospects.<br />
Policy-wise, affinity is especially strong with New<br />
Komeito (one concern with a DPJ-New Kometo<br />
linkup is the fact that both tend to favour increased<br />
spending on social welfare etc). If Kan manages to<br />
survive the April local elections, his tenure as prime<br />
minister could prove long-lived provided supra-party<br />
cooperation is achieved on key policies.<br />
Non-partisan policies stand best change of<br />
enactment<br />
What kind of policies are likely to be enacted? The<br />
reality of a divided parliament means the DPJ’s wish<br />
list of programmes enshrined in its 2009 election<br />
manifesto must be revised, in the face of some<br />
internal resistance.<br />
Thus, the policies most likely to be enacted by a<br />
divided Diet are those that are truly nonpartisan in<br />
nature, such as: (1) comprehensive social<br />
security/tax reform including hiking the consumption<br />
tax; and (2) opening up Japan, including participation<br />
in the Trans-Pacific Partnership (TPP).<br />
These two issues were singled out by Prime Minister<br />
Kan in his press conference on 4 January.<br />
Comprehensive social security/tax reform is widely<br />
deemed to be the most pressing issue facing Japan<br />
today. In fact, the LDP and New Komeito have put<br />
forward similar proposals in this regard.<br />
The appointment of Kaoru Yosano as the minister for<br />
economic and fiscal policy in the new Kan<br />
government may be aimed at luring the LDP and<br />
New Komeito into cooperating on social security/tax<br />
reform. Yosano is an ex-LDP lawmaker who once<br />
served as finance minister. In that capacity, he<br />
helped draft plans for social welfare reform that were<br />
promoted by the former LDP-New Komeito coalition<br />
government.<br />
With Yosano as the point man on social security/tax<br />
reform, it should be easier to reconcile the ideas of<br />
the opposition and ruling camps. After all, if your<br />
ideas are accepted, continued opposition for<br />
opposition’s sake is absurd. Thus, if the obstacles to<br />
supra-party discussions can be overcome, perhaps<br />
real progress can be made on social security/tax<br />
reform. Unfortunately, at this juncture, this is<br />
probably still wishful thinking.<br />
Political realignment on TPP?<br />
As for the opening of Japan, the desirability of joining<br />
the TPP is not shared by all lawmakers. In fact, there<br />
is strong opposition to the TPP within both the DPJ<br />
and LDP, though opposition in the former case has<br />
more to do with Kan’s abrupt announcement than<br />
policy particulars.<br />
Given the strength of the farm lobby in Japan,<br />
discussions on the TPP probably won’t make much<br />
headway, even though “opening Japan” would be a<br />
good way to realise economic rejuvenation, as<br />
pointed out in Japan: PM Sets Out Two Key<br />
Challenges, <strong>Market</strong> Mover, 13 January 2011. On the<br />
other hand, progress in the TPP talks could lead to a<br />
realignment of the political landscape.<br />
Ryutaro Kono/ Azusa Kato 20 January 2011<br />
<strong>Market</strong> Mover<br />
28<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Japan: Capex Outlook<br />
• Core machinery orders undershot<br />
expectations, falling 3.0% m/m in November.<br />
Despite this third straight drop, the net decline<br />
is within the range of payback for earlier gains.<br />
• Given the upturn in global manufacturing,<br />
domestic capex should pick up once exports<br />
and production escape their soft patch.<br />
• But with yen appreciation, changes in the<br />
demand structure and Japan’s shrinking<br />
workforce causing firms to focus more on<br />
expansion overseas, a vigorous recovery in<br />
domestic investment seems unlikely.<br />
• To arrest the effects of an ageing<br />
population, Japan in our view needs to<br />
participate in the Trans-Pacific Partnership.<br />
Orders fall for third straight month<br />
Undershooting expectations, core machinery orders<br />
fell 3.0% m/m in November, the third straight<br />
contraction. However, coming after gains of 8.8% in<br />
July and 10.1% in August, the net three-month drop<br />
is within the range of a reactionary decline. While the<br />
level for October-November is 6.9% lower than the<br />
Q3 average, it is still 2.1% above Q2, which suggests<br />
that orders continue to trend modestly higher. On this<br />
score, core orders minus mobile phones (which are<br />
not capital goods) posted 0.8% growth in November<br />
following a 0.6% advance in October.<br />
Capex to pick up, albeit modestly<br />
We believe that domestic spending on new plants<br />
and machinery will accelerate moving forward,<br />
though not to the extent of becoming a main growth<br />
engine for the Japanese economy anytime soon.<br />
Currently, the economy is in a soft patch, brought on<br />
by the slowdown in exports. Economic growth in Q4<br />
2010 is likely to turn negative due to fallout from the<br />
end of stimulus programmes.<br />
But with global manufacturing picking up again from<br />
autumn, exports should resume expanding shortly<br />
(early indications suggest real exports could revive in<br />
December). Thus, once statistics confirm that exports<br />
and production have indeed escaped the soft patch,<br />
domestic capex should pick up the pace – especially<br />
among manufacturers eager to tap into voracious<br />
global demand for smart phones, tablets and other<br />
innovative products.<br />
That said, due to the correcting of the yen’s super<br />
weak tone – which, in our view, is the proper way to<br />
Chart 1: Core Machinery Orders (JPY bn, s.a.)<br />
1300<br />
1200<br />
1100<br />
1000<br />
900<br />
800<br />
700<br />
600<br />
Monthly<br />
Quarterly<br />
03 04 05 06 07 08 09 10<br />
Source: Cabinet Office, <strong>BNP</strong> Paribas<br />
Chart 2: Machinery Orders (JPY bn, s.a.)<br />
700<br />
650<br />
600<br />
550<br />
500<br />
450<br />
400<br />
350<br />
300<br />
250<br />
200<br />
Manufacturing<br />
Nonmanufacturing<br />
03 04 05 06 07 08 09 10<br />
Source: Cabinet Office, <strong>BNP</strong> Paribas<br />
see the yen’s appreciation since the Lehman shock –<br />
coupled with changes in the demand structure<br />
(weakening of domestic demand due to population<br />
decline, emergence of Asian middle-class demand),<br />
to say nothing of Japan’s shrinking workforce, firms<br />
are focusing more on expansion overseas than<br />
investment at home. Hence, a significant<br />
acceleration in the domestic capex recovery looks<br />
unlikely.<br />
Manufacturers’ orders trending mildly higher<br />
A closer look at November’s machinery orders shows<br />
bookings by manufacturers jumped 10.6% m/m after<br />
rising 1.4% in October. Despite seesawing, orders by<br />
this sector are trending modestly higher. Core orders<br />
by non-manufacturers, meanwhile, fell sharply for a<br />
second straight month, plunging 10.5% in November<br />
(-8.7% in October). While the decline is more modest<br />
if mobile phones are excluded, at -4.8% in November<br />
(-0.2% in October), such sluggishness still suggests<br />
the nascent recovery in this sector has flattened out.<br />
Ryutaro Kono/ Hiroshi Shiraishi 20 January 2011<br />
<strong>Market</strong> Mover<br />
29<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Orders from abroad (not part of the headline core<br />
figure) were down 17.8% in November, but this<br />
reflects negative payback for the 16.0% gain posted<br />
in October. When averaged out, the level for<br />
overseas orders in October-November is 9.1% higher<br />
than in Q3. While the large-lot orders posted in<br />
October make it hard to say with confidence that<br />
overseas demand is accelerating again, Asian<br />
demand for capital goods is likely to pick up given the<br />
recovery in global manufacturing. On this score, the<br />
latest data for machine tool orders show Asian<br />
demand, led by China, on the rise again.<br />
Domestic capital stock weakly recovering<br />
Meanwhile, recently released figures for capital stock<br />
show capital accumulation is still recovering only<br />
weakly. According to the Cabinet Office’s preliminary<br />
estimates, real gross capital investment rose 11.0%<br />
y/y in Q3 2010. But while this confirms that spending<br />
is on a recovery track, the level is still only 85% of<br />
the peak set in Q1 2008. The ratio of cumulative<br />
gross capital investment over the past year to the<br />
existing capital stock a year ago is 6.0%. This is on a<br />
par with the level in 2002, which represented the<br />
bottom of the previous capital investment cycle. With<br />
4.4% of existing capital having been scrapped over<br />
the past year, capital stock expanded at the modest<br />
rate of 1.5% y/y.<br />
Growth expectations falling<br />
In terms of the capital stock cycle, investment prior to<br />
2005 increased at a rate corresponding to an<br />
expected growth rate of slightly under 2%. However,<br />
the current rate of spending growth matches growth<br />
expectations of slightly under 1%. The change is<br />
most pronounced for manufacturers, whose<br />
investment in 2005-2006 corresponded to an<br />
expected growth rate of slightly more than 2%. This<br />
climbed to roughly 3% in 2007 but the level now<br />
stands at slightly under 1%.<br />
Non-manufacturers, on the other hand, invested prior<br />
to the Lehman shock at a level corresponding to an<br />
expected growth rate of slightly more than 1%, and<br />
their level now also stands at slightly under 1%. Such<br />
diminishing growth expectations can be attributed to<br />
(1) the collapse of the export boom of 2005-2007 that<br />
was fuelled by credit bubbles overseas and the yen’s<br />
super weak tone; and (2) population decline, whose<br />
adverse impact on domestic demand is becoming<br />
apparent after being concealed by the export boom.<br />
Stabilise growth expectations by joining the TPP<br />
Even if the recovery in the capital stock cycle picks<br />
up somewhat, it is hard to imagine domestic<br />
Chart 3: Capital Stock Cycle – All Industries<br />
(CY, from 1981)<br />
(Capital Investment, % y/y)<br />
20%<br />
1990<br />
15% 2010<br />
2005<br />
10%<br />
5%<br />
0%<br />
-5%<br />
1981<br />
-10%<br />
-15%<br />
-20%<br />
-25% 2009<br />
0<br />
1 2 3<br />
-30%<br />
5% 6% 7% 8% 9% 10% 11% 12%<br />
(Capital Investment in previous year/Capital Stock at end of previous year)<br />
Source: METI, <strong>BNP</strong> Paribas. Note: CY2010 is 2010 Q3 data.<br />
7.0<br />
6.0<br />
5.0<br />
4.0<br />
3.0<br />
2.0<br />
1.0<br />
Chart 4: Corporate Growth Expectations<br />
(real growth rate, %)<br />
0.0<br />
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08<br />
Source: Cabinet Office, <strong>BNP</strong> Paribas<br />
3- Year Ahead<br />
5- Year Ahead<br />
investment robustly increasing so long as the effects<br />
of the ageing population persist. Because population<br />
decline inevitably means reduced prospects for<br />
future sales, companies will naturally curb domestic<br />
business spending. If the authorities try to remedy<br />
this with discretionary policies designed to stimulate<br />
more investment, there is a risk that the result could<br />
be a glut of unprofitable capital stock that weighs on<br />
the nation’s potential to grow.<br />
What is needed, therefore, are new growth areas that<br />
can bolster the return on capital. To this end, we<br />
believe the authorities should consider aggressively<br />
tapping into overseas demand by participating in the<br />
Trans-Pacific Partnership. The free flow of money,<br />
goods and labour across state boundaries would<br />
inevitably bolster growth expectations, thereby<br />
making it possible to arrest the effects of an “ageing<br />
economy” and realise economic rejuvenation (see<br />
Japan: PM Sets Out Two Key Challenges in <strong>Market</strong><br />
Mover, 13 January 2011).<br />
Ryutaro Kono/ Hiroshi Shiraishi 20 January 2011<br />
<strong>Market</strong> Mover<br />
30<br />
www.Global<strong>Market</strong>s.bnpparibas.com
US/EUR Spreads: Further Tightening Near Term<br />
• Eurozone factors (hawkish ECB, EFSF<br />
speculation, heavy supply) have – unusually –<br />
been the main driving forces behind the<br />
compression of US/EUR spreads so far this<br />
year.<br />
Chart 1: Mostly Directional…But Not Uniquely<br />
• Fundamentals and technicals should<br />
support further tightening of spreads in the<br />
short run.<br />
• The US market will continue to set the tone<br />
over the medium term. With the bearish bias set<br />
to develop during the course of 2011, this will<br />
lead to a gradual re-widening of US/EUR<br />
spreads.<br />
• STRATEGY: Be positioned for a return of the<br />
10y T-note/Bund spread to the 10bp area in the<br />
weeks ahead.<br />
Source: Reuters EcoWin<br />
Chart 2: The Impact of Inflation Differentials…<br />
US/EUR spreads remain mostly directional,<br />
tightening during rallies on the Treasury market<br />
(April-October 2010) and widening on setbacks<br />
(November-December 2010). However, the EMU<br />
crisis has distorted this relationship for short periods,<br />
as seen since the start of 2011 (Chart 1).<br />
While the Treasury market has been stuck in a<br />
narrow range for several weeks, US/EUR spreads<br />
have tightened significantly. The recent dynamic<br />
reflects changes in market anticipation in Europe as<br />
well as expectations of new measures to reinforce<br />
the existing EMU safety mechanisms (EFSF, ESM<br />
etc).<br />
Source: Reuters EcoWin<br />
Chart 3: …and Business Cycle Gaps<br />
Following the accumulation of better-than-expected<br />
economic data in core economies (especially<br />
Germany) over the past couple of months, the ECB<br />
‘officially’ became more hawkish at its 13 January<br />
meeting – triggering a sharp sell-off at the front end<br />
of the curve. The move has translated into a more<br />
pronounced inversion of short US/EUR spreads,<br />
pushing the 2y US/Eur spreads back close to their<br />
October lows both on the cash (-65bp area) and<br />
swap (-110bp area) curves.<br />
The setback has been less pronounced on 10s and<br />
primarily driven by the latest developments in the<br />
EMU sovereign debt crisis. The ‘successful’ auctions<br />
in several peripheral markets plus talks and<br />
speculation about a new shape, scope and limits for<br />
the EFSF (extension, possibility of buying bonds…)<br />
put some pressure on the benchmark curve. Unlike<br />
during the early stage of the crisis, when some in the<br />
Source: Reuters EcoWin<br />
market were questioning the future of the euro and<br />
buying Germany as pure flight-to-quality trades, it<br />
should now be clear that the political will is strong<br />
enough to reinforce further EMU safety nets. This<br />
Cyril Beuzit 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
31<br />
www.Global<strong>Market</strong>s.bnpparibas.com
also means that, the more peripherals suffer, the<br />
more core will have to bear the burden.<br />
Chart 4: Technicals Plead for Further ST<br />
Tightening<br />
What’s next?<br />
While the long-term outlook is for higher yields and<br />
wider US/EUR spreads, the near-term picture<br />
remains supportive of tighter spreads, notably in the<br />
10y area. Regarding short spreads, there is a risk of<br />
re-widening / disinversion as Fed expectations have<br />
barely moved while both EUR and GBP front-end<br />
levels have significantly changed. Both the BoE and<br />
ECB are expected to hike rates before the FOMC, a<br />
situation that does not fit with previous cycles.<br />
Overall, the front end of the euro curve now faces<br />
asymmetric risks. While it may have been too quick<br />
to discount more than one rate hike by the end of the<br />
year, it makes sense for the front end to discount a<br />
less favourable ECB scenario than previously. Any<br />
further data – notably on the inflation front –<br />
surprising on the upside will reinforce this new bias.<br />
With regard to longer maturities, speculation about<br />
an agreement on the EFSF will remain high going<br />
into 4 February and the late-March EU summit,<br />
maintaining pressures on core EGBs during a period<br />
of high supply.<br />
In other words, as long as Treasuries remain stuck in<br />
the same narrow range, EMU/ECB news will set the<br />
tone and on balance favour additional US/EUR<br />
spread tightening. A more constructive tone in<br />
Treasuries would obviously reinforce this bias.<br />
Though govvies look heavy, the latest signals on<br />
risky assets indicate a risk of a pause/setback which<br />
would likely benefit the Treasury market – watch<br />
carefully the earnings season and behaviour of the<br />
S&P 500.<br />
Technicals (Chart 4) as well as fundamentals (Charts<br />
2 and 3) are also supportive of such a trend over the<br />
coming weeks/months. The 10y T-Note/Bund spread<br />
has broken below the 22.7/24.5bp area (61.8%),<br />
opening the way for a move towards the 4.0/6.9bp<br />
lows (“wave C”). The core inflation differential<br />
between the US and the eurozone also supports a<br />
further tightening in the short run. Further, our model<br />
(3m Euro$/Euribor spreads, inflation differential,<br />
business cycle expectations - ISM) also points to<br />
tighter spreads over the months ahead.<br />
The fundamental relationship (see inflation<br />
differential forecasts, Chart 3), however, supports a<br />
re-widening of US/EUR spreads later in the year.<br />
This is in line with our bearish views on the market,<br />
i.e. US yields resuming their rise in the spring. A<br />
likely rise in volatility later in the year (the VIX is<br />
currently on lows) would also support this mediumterm<br />
call (Chart 6).<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 5: Partly Driven by Risk Appetite…<br />
Source: Reuters EcoWin<br />
Source: Reuters EcoWin<br />
Chart 6: …and Volatility<br />
Cyril Beuzit 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
32<br />
www.Global<strong>Market</strong>s.bnpparibas.com
US: Could the Short End Have a Pulse?<br />
• With inflation concerns gaining more<br />
attention in Europe and UK, more investors are<br />
asking if the US could follow suit, sooner or<br />
later, despite lacklustre growth and high<br />
unemployment so far.<br />
• While an inflation-induced selloff is not our<br />
base case, the market could nonetheless get<br />
jittery – as it is prone to do – in response to any<br />
sign of a pick-up in headline inflation, pushing<br />
rates higher.<br />
• STRATEGY: Consider defensive bearish<br />
strategies using mid-curve puts on red<br />
Eurodollars. We recommend buying mid June<br />
9875/9825 put spread @ around 12 as an<br />
effective strategy with a 4:1 payout.<br />
With the ECB officially turning more hawkish in view<br />
of better-than-expected data (especially in Germany)<br />
and inflation becoming a more pressing concern in<br />
the UK, the question we are hearing more and more<br />
is, could the US be far behind? We are all familiar<br />
with the counter arguments: high unemployment,<br />
absence of wage pressures, still-deleveraging<br />
consumers, depressed home prices and housing<br />
activity, a core inflation reading a far cry from being<br />
anything that smells of inflation, and on and on. Yet,<br />
the market does sometimes get very fickle, and<br />
responds disproportionately if signs of a nonconsensus<br />
scenario begin to emerge. This is<br />
especially true after a period of relatively limited rate<br />
movements, as has been the case since mid-<br />
December. So, even though we are firmly in the<br />
camp that inflation is a non-issue in the US for the<br />
time being for all the reasons cited above, we should<br />
still be cognizant of the risk of an abrupt selloff.<br />
With that in mind, we canvas the spectrum of bearish<br />
trades. In the risk scenario we depict, where market<br />
sentiment moves toward inflation and prices in<br />
potentially aggressive Fed action against it down the<br />
road, we expect the 18mo to 3y part of the curve to<br />
take the brunt of the selloff, depending on how soon<br />
the market perceives the beginning of any potential<br />
tightening. We want limited downside, so our focus is<br />
on option strategies. The most obvious choice is to<br />
simply buy a put on red Eurodollars, but we do not<br />
necessarily want to spend too high a premium to<br />
cover a really long period to expiry. This leads us to<br />
mid-curve options.<br />
We will illustrate the idea using mid June puts. The<br />
red June is currently trading at 98.77. The rolldown<br />
Chart 1: Spread between 5 th ED and Fed Funds<br />
4<br />
3.5<br />
3<br />
2.5<br />
2<br />
1.5<br />
1<br />
0.5<br />
0<br />
-0.5<br />
-1<br />
-1.5<br />
Nov-90<br />
Nov-91<br />
Nov-92<br />
Nov-93<br />
Nov-94<br />
Nov-95<br />
Nov-96<br />
Nov-97<br />
Nov-98<br />
Nov-99<br />
Nov-00<br />
Nov-01<br />
Nov-02<br />
Nov-03<br />
Nov-04<br />
Nov-05<br />
Nov-06<br />
Nov-07<br />
Nov-08<br />
Nov-09<br />
Nov-10<br />
Source: <strong>BNP</strong> Paribas<br />
1200<br />
1000<br />
800<br />
600<br />
400<br />
200<br />
0<br />
-200<br />
-400<br />
Chart 2: PnL Chart of the Put Spread<br />
96.0<br />
96.2<br />
Source: <strong>BNP</strong> Paribas, Bloomberg<br />
1/20/2011<br />
3/8/2011<br />
4/24/2011<br />
6/10/2011<br />
96.4<br />
96.6<br />
96.8<br />
97.1<br />
97.3<br />
97.5<br />
97.7<br />
97.9<br />
98.1<br />
98.3<br />
98.5<br />
98.7<br />
98.9<br />
99.2<br />
99.4<br />
99.6<br />
99.8<br />
100.0<br />
over three months is 28bp. While hefty, this level is<br />
close to the median of the history of the rolldown<br />
over the past year. One would not gain anything in<br />
terms of rolldown by moving the trade to the March<br />
or September contract.<br />
We select strikes in such a way to increase the odds<br />
of the trade making money in a reasonable selloff.<br />
Chart 1 shows the historical spread between the 5 th<br />
Eurodollar contract and fed funds. By June 2011, at<br />
the expiry of the option, targeting a spread above<br />
100bp seems reasonable in the event of a selloff.<br />
This suggests that the Jun 2012 contract should be<br />
priced below 98.75. We prefer a put spread, rather<br />
than a put at 98.75, for better % returns on the<br />
premium spent. Specifically, we recommend buying<br />
the 9875/9825 put spread, paying around 12 ticks. At<br />
or below 98.25, the maximum payout is 4.2:1 for this<br />
trade. For comparison, an outright 9875 put would<br />
have a 2.3:1 payout ratio at the same level. To reach<br />
4.2:1 payout ratio with the single put, the June 2012<br />
should trade at 97.9 in June 2011, close to a 200bp<br />
spread over fed funds, which is clearly a higher<br />
hurdle to clear.<br />
Bulent Baygun 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
33<br />
www.Global<strong>Market</strong>s.bnpparibas.com
US: Setup for Auctions with Spread Curve Flatteners<br />
• In general, 2y Tsy tends to cheapen relative<br />
to the long end going into the auction and<br />
reverse direction post auction (2s10s, 2s30s<br />
flatteners followed by steepeners).<br />
• 5y and 7y notes have a tendency to move<br />
almost in line with the long end going into the<br />
auctions and to richen relative to the long end<br />
post auctions (5s10s, 5s30s steepeners).<br />
• There is a clear trend of belly spread<br />
widening relative to the front end and long end<br />
spreads throughout the auction.<br />
• STRATEGY: Consider paying 5y spreads vs<br />
10y spreads. Also consider paying 5y spreads<br />
vs 2y and 10y spreads for a higher average<br />
move which comes with higher volatility.<br />
With 2y, 5y and 7y auctions taking place next week,<br />
we highlight auction-based systematic trades which<br />
we have been recommending in the past issues of<br />
our weekly publication.<br />
While doing this analysis, we look at auctions since<br />
Jan 2010 (total of 12 auctions) and keep the issues<br />
fixed through each auction (i.e. always use the<br />
current issue pre auction which becomes old<br />
post auction) so that there is no spurious roll<br />
effect.<br />
Outright treasury curve behaviour around<br />
auctions<br />
Chart 1 shows that, while the front end cheapens<br />
relative to the long end going into the auctions, the<br />
belly moves more or less along with the long end.<br />
Post auctions, while both the front end and belly<br />
richen relative to the long end, a more pronounced<br />
steepening effect is seen in 5s10s and 5s30s Tsy<br />
curve.<br />
Chart 1: Treasury Yield Trends Around 2y, 5y<br />
and 7y Auction days<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
(1)<br />
(2)<br />
(3)<br />
2s10s<br />
2s30s<br />
5s10s<br />
5s30s<br />
7s10s<br />
7s30s<br />
T-5 T-3 T-1 T T+1 T+3 T+5<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: Spread-of-Spreads Trends Around 2y,<br />
5y and 7y Auction Days<br />
2<br />
1<br />
0<br />
(1)<br />
(2)<br />
(3)<br />
(4)<br />
T-5 T-3 T-1 T T+1 T+3 T+5<br />
2s10s<br />
2s30s<br />
5s10s<br />
5s30s<br />
7s10s<br />
7s30s<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 3: Comparison of 5s10s Spread Flattener<br />
with 2s5s10s Spread Fly<br />
10<br />
8<br />
5s10s<br />
2s5s10s<br />
Table 1 (at the end of this article) helps us put some<br />
numbers in perspective for the above-mentioned<br />
curve trades. 5s10s Tsy curve steepener has turned<br />
in a profit 10 times in the past 12 auctions. The<br />
average movement in favour of this strategy has<br />
been about 5.2bp with a volatility of 3.8bp.<br />
6<br />
4<br />
2<br />
Sharpe Ratio<br />
for 5s10s:<br />
1.82<br />
Sharpe Ratio<br />
for 2s5s10s:<br />
1.64<br />
Disclosure: Given our existing structural Tsy 5s10s<br />
flattening view initiated at 138.5, now at 139.5, we<br />
will choose not to put on a tactical steepener but may<br />
use any potential steepening as an opportunity to<br />
increase our flattening position.<br />
0<br />
Jan<br />
Feb<br />
Mar<br />
Source: <strong>BNP</strong> Paribas<br />
Apr<br />
May<br />
June<br />
July<br />
Aug<br />
Sept<br />
Oct<br />
Nov<br />
Dec<br />
Rohit Garg 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
34<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Trades with higher hit ratio and Sharpe ratio in<br />
swap spreads<br />
The swap spread curve witnesses a consistent<br />
flattening trend around these month-end auction<br />
cycles. Chart 2 shows a clear trend of spread curve<br />
flattening going into the auction across all maturities.<br />
This spread-flattening trend becomes more<br />
pronounced post auction, especially in 5s10s.<br />
Based on the rankings (in Table 1, which takes into<br />
account average move, volatility and hit ratio), 5s10s<br />
spread curve flattener post 5y auction emerges as a<br />
clear winner. However, another strategy with a higher<br />
average movement at the expense of higher volatility<br />
is the 2-5-10 spread fly (go long 5y spreads vs 2y<br />
and 10y spreads) which has also worked 12 times in<br />
last 12 auctions (see Chart 3).<br />
One other important take-away from this chart is that<br />
on occasions when the spread curve flattener hasn’t<br />
worked well, the spread fly has worked very well and<br />
vice versa. Hence, it might be beneficial to take<br />
positions in both these trades simultaneously to<br />
increase the chances of net profit margin in terms of<br />
risk taken.<br />
Table 1: Auction Trades with Hit Ratios Adjusted for Vol and Hit Ratio (T – respective auction day)<br />
Average<br />
Move (in bp)<br />
Overall<br />
Rating<br />
When did it not work<br />
Entry Exit Hit Ratio<br />
Vol (in bp)<br />
2y Auction<br />
2s3s Tsy Flattener T+1 T+5 9/12 2.47 3.07 0.60 March/May/Nov<br />
2s5s Tsy Flattener T-1 T+5 9/12 4.70 7.14 0.49 March/May/Dec<br />
2s10s Tsy Flattener T-5 T 10/12 5.47 9.3 0.49 July/Oct<br />
2s30s Tsy Flattener T-5 T 9/12 7.03 8.74 0.60 Jan/July/Oct<br />
2s5s10s Tsy Fly trading lower T+1 T+5 11/12 7.41 7.19 0.94 Nov<br />
2s5s30s Tsy Fly trading lower T+1 T+5 11/12 7.77 10.5 0.68 Nov<br />
2s3s Spd Flattener T-5 T+1 9/12 1.17 2.4 0.37 July/Oct/Dec<br />
2s10s Spd Flattener T-3 T+5 10/12 3.66 5.4 0.56 Sept/Oct<br />
2s30s Spd Flattener T-3 T+5 10/12 3.76 7.5 0.42 Oct<br />
2s5s10s Spd Fly trading higher T+1 T+5 12/12 4.40 2.7 1.63<br />
2s5s30s Spd fly trading higher T+1 T+5 11/12 3.95 3.4 1.06 Nov<br />
5y Auction<br />
5s10s Tsy Steepener T T+5 10/12 5.19 3.82 1.13 June/Nov<br />
5s30s Tsy Steepener T T+5 11/12 6.99 8.3 0.77 Nov<br />
3s5s7s Tsy Fly trading lower T-3 T+5 9/12 3.68 3.67 0.75 March/May/Nov<br />
3s5s10s Tsy Fly trading lower T-3 T+5 11/12 6.87 6.12 1.03 Nov<br />
3s5s30s Tsy Fly trading lower T-3 T+5 11/12 9.41 10 0.86 Nov<br />
5s10s Spd Flattener T T+5 12/12 3.24 1.78 1.82<br />
5s30s Spd Flattener T T+5 11/12 2.95 2.66 1.02 Dec<br />
3s5s7s Spd Fly trading higher T-3 T+5 11/12 2.46 1.97 1.15 March<br />
3s5s10s Spd Fly trading higher T-3 T+5 11/12 4.91 2.74 1.64 Nov<br />
3s5s30s Spd Fly trading higher T-3 T+5 10/12 5.34 4.74 0.94 Nov/Dec<br />
5s10s30s Spd Fly trading lower T T+5 11/12 3.04 2.53 1.10 Sept<br />
7y Auction<br />
2s7s Tsy Flattener T-3 T+5 7/12 3.70 11.64 0.19 March/May/Aug/Nov/Dec<br />
7s10s Tsy Steepener T-3 T+5 10/12 2.39 3.25 0.61 June/Nov<br />
7s30s Tsy Steepener T-3 T+5 8/12 4.65 11.53 0.27 March/April/June/Nov<br />
3s7s10s Tsy Fly trading lower T-3 T+5 7/12 3.11 8.79 0.21 March/May/Aug/Nov/Dec<br />
3s7s30s Tsy Fly trading lower T-3 T+5 7/12 5.38 16.12 0.19 March/April/May/Nov/Dec<br />
7s10s Spd Flattener T-5 T+3 11/12 1.82 1.51 1.10 Nov<br />
7s30s Spd Flattener T-5 T+3 9/12 1.94 4.76 0.31 Oct/Nov/Dec<br />
3s7s10s Spd fly trading higher T-3 T 9/12 1.60 3.82 0.31 March/June/Nov<br />
3s7s30s Spd fly trading higher T-3 T 9/12 2.14 4 0.40 March/June/Nov<br />
Source: <strong>BNP</strong> Paribas<br />
Rohit Garg 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
35<br />
www.Global<strong>Market</strong>s.bnpparibas.com
MBS: Stay Long<br />
• We recommend staying long the mortgage<br />
basis. Valuations remain reasonable and the<br />
carry in back months is attractive, fully<br />
reflecting the slowdown in speeds.<br />
• In a rally, servicer convexity costs keep<br />
primary rates in check and in a sell-off<br />
incremental extension is low. If rates remain<br />
range bound as we expect, the curve hedged<br />
carry (adding back convexity costs) remains<br />
formidable in this low yield environment.<br />
• We continue to like going up in coupon into<br />
5s through 6s due to the attractive carry.<br />
15s/30s appear to be on the richer side.<br />
• Investors considering front sequentials off<br />
CK collateral may also find value in similar<br />
bonds off FG collateral, given that FG 4.5s are<br />
trading 9 ticks below parity while CKs 4 ticks.<br />
• STRATEGY: Long MBS, Long UIC.<br />
The poor performance of mortgages on Tuesday was<br />
partially erased on Wednesday and, week over<br />
week, mortgages were tighter by 4-8 ticks depending<br />
on the coupon. We continue to remain overweight on<br />
the mortgage basis. As shown in Chart 1, the<br />
regression of the current coupon versus rates, curve<br />
and vol (to capture market rather than model<br />
sensitivities to these factors) indicates that<br />
mortgages are marginally cheap. However, we would<br />
argue that, considering the low rate environment we<br />
are in and the need for spread, the regression does<br />
not reflect the overall attractiveness of the product.<br />
Chart 1: Regression of Current Coupon versus<br />
<strong>Rate</strong>s, Curve and Vol<br />
bp<br />
25<br />
20<br />
15<br />
10<br />
5<br />
-<br />
(5)<br />
(10)<br />
(15)<br />
(20)<br />
Jan-10<br />
Feb-10<br />
Source: <strong>BNP</strong> Paribas, Bloomberg<br />
Curr Cpn Rich Cheap<br />
Mar-10<br />
Apr-10<br />
May-10<br />
Jun-10<br />
Jul-10<br />
Aug-10<br />
Sep-10<br />
Oct-10<br />
Cheap<br />
Chart 2: Mortgage Carry in Ticks<br />
Curve and Convexity<br />
Hedged Carry<br />
Rich<br />
Nov-10<br />
Dec-10<br />
Jan-11<br />
Curve Hedged Carry<br />
Cpn 1M 2M<br />
Back Month<br />
(2M-1M) 1M 2M<br />
Back Month<br />
(2M-1M)<br />
3.5 -1.6 -2.4 -0.9 -0.7 -0.7 0.0<br />
4 -1.3 -1.8 -0.5 1.0 2.8 1.8<br />
4.5 -1.1 -1.0 0.1 3.0 7.3 4.3<br />
5 -0.2 1.4 1.6 3.3 8.6 5.3<br />
5.5 0.3 2.4 2.1 2.2 6.3 4.0<br />
6 0.8 3.9 3.1 2.3 6.9 4.7<br />
Source: <strong>BNP</strong> Paribas, Yield Book<br />
Chart 3: S-Curve of the Refi Index (Refi Index<br />
versus Freddie Mac Survey <strong>Rate</strong>)<br />
5500<br />
For example, consider the carry of mortgages on a 1<br />
month and 2 month basis, both considerably<br />
negative for lower coupons. But the carry of<br />
mortgages is quite attractive in the back month, as<br />
the impact of low prepays is fully reflected.<br />
Convexity concerns in a sell-off are likely to be<br />
muted. As we have discussed previously, when the<br />
10y Treasury went beyond the 3.50% level, the bulk<br />
of the convexity flows were done. We have rallied<br />
somewhat since then but prepays haven’t picked up<br />
materially as reflected in the refi index since primary<br />
rates haven’t budged to levels where borrowers care.<br />
This may be due to increased convexity hedging<br />
costs of servicers in a rally that keeps primary rates<br />
in check. Thus with mortgage rates sticky in a rally<br />
and relatively low extension in a sell-off, mortgages<br />
are poised to do well in rate moves. If rates remain<br />
5.4<br />
5.2<br />
Source: Bloomberg<br />
5<br />
4.8<br />
4.6<br />
4.4<br />
4.2<br />
5000<br />
4500<br />
4000<br />
3500<br />
3000<br />
2500<br />
2000<br />
1500<br />
4<br />
Anish Lohokare / Timi Ajibola 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
36<br />
www.Global<strong>Market</strong>s.bnpparibas.com
ange bound, as we expect, given that the curve<br />
hedged carry (without hedging convexity) is quite<br />
attractive helps.<br />
Also consider the refi index, currently hovering<br />
around the 2000-2500 level. Chart 3 shows that the<br />
refi index level in a sell-off is likely to remain sticky,<br />
akin to the prepay S-curve flattening out at the lower<br />
end of prepays. Historical data indicate that the refi<br />
index has not fallen below 1000 and the lows were<br />
reached in the later part of 2008, as mortgages rates<br />
soared beyond 6% even breaching 6.50% for some<br />
time (Chart 4). With a 4.7-5% handle on primary<br />
mortgage rates, we are substantially away from<br />
those levels. Thus the precipitous drop from 5000+ to<br />
2000+ levels in response to the sell-off until now<br />
cannot be sustained; further declines should be more<br />
gradual and this is yet another way of confirming the<br />
benign convexity picture.<br />
As is clear from the carry by coupon in Chart 2, up in<br />
coupon remains an attractive trade. 15s/30s appear<br />
to be on the richer side, and may see a correction.<br />
CMOs<br />
We have seen demand for front sequentials backed<br />
by new production (0 to 3 WALA) CK 4.5s as<br />
investors look to put money to work in the new year.<br />
While structures off CK collateral continue to look<br />
attractive due to the cheapness of the collateral<br />
around 23 ticks back to TBA, we think structures off<br />
Gold 4.5s also offer value. The Gold/FN 4.5 swap<br />
remains cheap at around -6 ticks; equal OAS<br />
valuation in Yield Book points to a swap level of +3<br />
ticks, overall a 9 tick pickup. On an equal OAS basis,<br />
CKs should trade 19 ticks back of TBA and current<br />
valuations represent a 4 tick pickup.<br />
Chart 5 shows analytics for FG 4.5s versus CK 4.5; it<br />
reflects similar OASs for both collateral, with Gold<br />
4.5s having a shorter duration but higher convexity.<br />
While models may show a higher convexity number<br />
per se, the s-curve over the past two years for CK<br />
4.5s and Gold 4.5s in Chart 6 demonstrate that Gold<br />
4.5s clearly have a better convexity profile. The<br />
WALA ramp in Chart 7 reflects the same tendency.<br />
In Chart 8, we show analytics for two front<br />
sequentials, one backed by Gold 4.5s and the other<br />
backed by new WALA CK 4.5s. It shows that the<br />
Gold 4.5 sequential looks cheaper on an OAS basis<br />
with a better convexity profile and a higher price.<br />
Thus the investor is more than compensated for the<br />
higher price through better convexity. In Chart 9 we<br />
show WAL and Yield table profiles of both front<br />
sequentials, which confirms that structure off gold<br />
4.5s has a better convexity profile. The structure off<br />
CK collateral currently has slower speeds than Gold<br />
4.5s. However the s-curve shows that CKs collateral<br />
Chart 4: The Refi Index Doesn’t Have All That<br />
Much To Fall and Should Do So Gradually<br />
7<br />
6.5<br />
6<br />
5.5<br />
5<br />
4.5<br />
4<br />
Jan-<br />
06<br />
Jul-<br />
06<br />
Jan-<br />
07<br />
Jul-<br />
07<br />
Jan-<br />
08<br />
Source: <strong>BNP</strong> Paribas, Bloomberg<br />
Mortgage <strong>Rate</strong><br />
Jul-<br />
08<br />
Jan-<br />
09<br />
Jul-<br />
09<br />
Refi Index<br />
Jan-<br />
10<br />
Jul-<br />
10<br />
Chart 5: Analytics for FG versus CK 4.5s<br />
(Tuesday close, indicative only)<br />
0<br />
Jan-<br />
11<br />
OAS ZV OAD OAC<br />
FHLG 4.5 14 74 4.9 -2.6<br />
FNMA 4.5 CK 13 72 5.6 -2.2<br />
Source: Yield Book<br />
1m CPRs<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Chart 6: S-Curve of CK versus FG 4.5s<br />
Source: <strong>BNP</strong> Paribas<br />
1m CPRs<br />
Gold 4.5s<br />
FN 4.5 CKs<br />
-75 -50 -25 0 25 50 75 100 125 150<br />
Moneyness<br />
Chart 7: WALA Ramp of CK versus FG 4.5s<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
8000<br />
7000<br />
6000<br />
5000<br />
4000<br />
3000<br />
2000<br />
1000<br />
0 2 4 6 8 10 12 14 16 18 20 22 24<br />
Source: <strong>BNP</strong> Paribas<br />
Gold 4.5s<br />
FN 4.5 CKs<br />
WALA<br />
Anish Lohokare / Timi Ajibola 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
37<br />
www.Global<strong>Market</strong>s.bnpparibas.com
is much more responsive to rates at the same level<br />
of moneyness and the WALA ramp is also<br />
considerably steeper. We would expect speeds on<br />
new WALA CKs to surpass that of Gold 4.5s fairly<br />
soon at current rate levels.<br />
Chart 8: Front Sequential Analytics<br />
(Tuesday close, indicative only)<br />
Price OAS OAD OAC<br />
PRLM PB-1566 A 103-18+ -3 3.8 -3.0<br />
PRLM PB-1571 A 103-05 -15 3.1 -3.3<br />
Source: <strong>BNP</strong> Paribas, Yield Book<br />
Chart 9: Front Sequential Analytics at <strong>Rate</strong><br />
Shocks (Tues close, indicative only)<br />
WAL -300 -200 -100 0 100 200 300<br />
PRLM PB-1566 A 1.15 1.40 2.06 3.59 6.74 7.92 8.36<br />
PRLM PB-1571 A 0.98 1.08 1.54 2.40 7.22 8.32 8.72<br />
Yield -300 -200 -100 0 100 200 300<br />
PRLM PB-1566 A 1.227 1.799 2.627 3.392 3.871 3.955 3.981<br />
PRLM PB-1571 A 0.961 1.287 2.219 3.014 3.960 4.024 4.044<br />
Source: Yield Book<br />
Anish Lohokare / Timi Ajibola 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
38<br />
www.Global<strong>Market</strong>s.bnpparibas.com
EUR: Liquidity is No Stress<br />
• The reserve maintenance period started with<br />
a lower level of liquidity, fuelling concerns of<br />
potential tension on eonia.<br />
Chart 1: Excess Liquidity has Declined<br />
• However, with no stress on liquidity given<br />
the ECB’s pipeline for the next few months,<br />
tensions will remain limited. The eonia curve will<br />
resteepen over the next couple of weeks.<br />
• STRATEGY: Take advantage of a flattening<br />
correction on ERs to re-enter bear steepeners.<br />
Lower demand at the ECB…<br />
Demand at this week’s ECB tenders fell slightly short<br />
of levels expiring. The ECB allotted EUR 247.3bn<br />
while EUR 248.2bn were maturing. This was a little<br />
surprising as demand usually increases during the<br />
first week of the reserve maintenance period. Indeed,<br />
banks usually hold more than reserve requirements<br />
in their current accounts during the first part of the<br />
reserve period, in order to avoid the risk of running<br />
out of cash before the period ends. In such a context<br />
and given lower liquidity, there was the risk of<br />
tensions on eonia beyond the usual rise on the last<br />
day of the previous reserve period.<br />
…as long as the ECB pipeline remains open<br />
The lack of stress apparent in banks’ demand at ECB<br />
tenders can be explained by the fact that near term,<br />
i.e. at least until April, the ECB will continue to<br />
provide liquidity on request without any cap. There is<br />
therefore no hurry to ask for a large excess of<br />
liquidity. In addition, it seems that banks adjusted<br />
their level of excess reserves at the start of the new<br />
reserve period. They currently hold EUR 222bn in<br />
their current accounts (EUR 9.7bn above<br />
requirements), while excess reserves are usually<br />
closer to EUR 40-50bn at the start of the period.<br />
Moreover, while demand at the MRO fell, demand at<br />
the LTRO (3 weeks) rose. This will prevent stress<br />
from developing.<br />
A gradual resteepening at the front end<br />
Beyond the first couple of days at the start of the<br />
period, it makes sense that eonia should decline.<br />
This will go along with a steeper spot eonia curve.<br />
Steepening pressures will also resume on the ER<br />
curve. After last week’s ECB press conference, the<br />
ER1-ER steepened 15bp under selling pressures.<br />
From a peak of 75bp, the spread tightened back to<br />
72.5bp. Over the next few days, the potential for a<br />
bull-flattening correction on ERs will fade. The<br />
regime at the front end has changed. For sure, the<br />
ECB did not want to flag up the risk of a rate hike<br />
Source: <strong>BNP</strong> Paribas<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: Excess Reserves Lower<br />
over the next few months. But the ECB is gradually<br />
reassessing risks. Last year, bear-steepening<br />
movements at the front end offered bull-flattening<br />
trade opportunities. This year, the opposite is true.<br />
The current movement on the Euribor curve is<br />
temporary. A flattening below 70bp along with an<br />
ERH2 close to 98.25 offers an opportunity to re-enter<br />
bear steepeners. It is worth noting that, over the long<br />
run, the average spread between the refi and the<br />
3mth Euribor is 15-20bp in a status quo, rises to<br />
35bp ahead of a rate hike cycle and is close to 50bp<br />
when the rate hike process starts. As long as the<br />
market discounts a rate hike by early 2012, the<br />
Mar12 implied rate must be at least 1.75%.<br />
<strong>Strategy</strong>: Beyond a near-term correction, there is no<br />
scope for a bullish bias on ERs. Benefit from a bullflattening<br />
correction to re-enter bear steepeners.<br />
Patrick Jacq 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
39<br />
www.Global<strong>Market</strong>s.bnpparibas.com
EUR: Bund ASW Risk/Reward Analysis<br />
• We combine swap spreads’ single-factor<br />
sensitivity into a scenario matrix.<br />
• STRATEGY: Buy Bund 10Y ASW at 22bp,<br />
target 35bp, based on risk/reward analysis.<br />
0<br />
-5<br />
-10<br />
-15<br />
Chart 1: Impact of Fiscal Variables<br />
Germany federal govt budget (EUR bn)<br />
Bund 10Y swap spread (RHS)<br />
0.70<br />
0.60<br />
0.50<br />
We aggregate the single drivers of Bund swap<br />
spreads into a scenario matrix. The idea is to provide<br />
scenario projections and thus minimum/maximum<br />
boundaries for spreads. We can then derive a<br />
strategy based on risk/reward arguments.<br />
We look at the following factors:<br />
• Fiscal variables (German budget);<br />
• ECB expectations (Eonia forwards);<br />
• Yield curve (EUR 2/10s);<br />
• Liquidity (OIS/Bor spreads);<br />
• Credit variables (iTraxx and SovX); and<br />
• Global variables (Tsy swap spread and Vix).<br />
Estimating swap spread sensitivity is not a trivial<br />
exercise, especially during the transition from a precrisis<br />
to a crisis environment. Nonetheless, we report<br />
the aggregate impact of two distinct scenarios (“risk<br />
on” versus “risk off”) on the Bund swap spread in the<br />
table below. Note how the risk/reward is tilted<br />
towards a spread widening strategy.<br />
-20<br />
0.40<br />
-25<br />
-30<br />
0.30<br />
-35<br />
0.20<br />
-40<br />
<strong>BNP</strong><br />
-45<br />
Paribas 0.10<br />
f<br />
-50<br />
0.00<br />
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015<br />
Source: <strong>BNP</strong> Paribas<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
Chart 2: Impact of Liquidity<br />
OIS/BOR<br />
Bund 10Y z-spread (RHS)<br />
0<br />
10<br />
Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11<br />
Source: <strong>BNP</strong> Paribas<br />
-90<br />
-80<br />
-70<br />
-60<br />
-50<br />
-40<br />
-30<br />
-20<br />
-10<br />
0<br />
Trade: Buy Bund 10Y ASW at 22bp, target 35bp.<br />
Bund 10Y Swap Spread Scenario Analysis<br />
Bund 10Y ASW 22<br />
Protracted Risk Scenario Variable Current Level E2011 level Change Weight Impact on ASW<br />
Government Budget (%) -3.5 -5 -2 0.125 7<br />
<strong>Rate</strong> expectations (bp) 0.793 0.5 -0.3 0.125 16<br />
EUR 2/10s yield curve (bp) 153 200 47 0.125 10<br />
EUR OIS/BOR (bp) 34 50 16 0.125 38<br />
VIX (% pts) 17 30 13 0.125 38<br />
EUR iTraxx Master 10Y (bp) 120 150 30 0.125 44<br />
SovX 5Y 190 250 60 0.125 45<br />
US TSY 10Y ASW 7 30 23 0.125 36<br />
Bund 10Y ASW projection 29<br />
Risk Normalisation Scenario Current Level E2011 level Change Weight Impact on ASW<br />
Government Budget (%) -3.5 -1.5 2 0.125 42<br />
<strong>Rate</strong> expectations (bp) 0.793 1.1 0.307 0.125 28<br />
EUR 2/10s yield curve (bp) 153 100 -53 0.125 35<br />
EUR OIS/BOR (bp) 34 20 -14 0.125 8<br />
VIX (% pts) 17 10 -7 0.125 13<br />
EUR iTraxx Master 10Y (bp) 120 100 -20 0.125 6<br />
SovX 5Y 190 150 -40 0.125 5<br />
US TSY 10Y ASW 7 0 -7 0.125 18<br />
Bund 10Y ASW projection 19<br />
Alessandro Tentori 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
40<br />
www.Global<strong>Market</strong>s.bnpparibas.com
EMU Debt Monitor: Trade Ideas<br />
• Keep BTP Sep 20/Sep 40 flatteners.<br />
• Close 10y/20y/30y swap rec around 50bp.<br />
• Sell BTP Feb 37 vs. BTP Sep 40.<br />
• Buy Bund July 20 vs. July 39 in mid 40s.<br />
• Sell Bono July 40 vs. BTP Sep 40 below 40.<br />
Chart 1: 2020/2040 BTP, Bono, Bund Spreads<br />
110<br />
100<br />
90<br />
80<br />
70<br />
60<br />
We focus this week on the very long end of cash<br />
curves and their potential RV opportunities.<br />
On the 10y/30y segment and its convexity, we have<br />
pushed two key trades over the past month. On the<br />
convexity side, we recommended receiving<br />
10y/20y/30y swap fly in the 60/62 area in late<br />
November, targeting the 48/50bp level. The swap fly<br />
is now close to our target. On the curve itself, we<br />
stressed last week that 10y/30y flatteners were the<br />
most attractive on the BTP curve given box levels vs.<br />
other cash curves. We entered Sep 20/Sep 40<br />
flatteners at 85.5bp last Thursday, targeting 70bp<br />
then 60bp in Q1 2011.<br />
10y/30y flatteners supported by the shift in ECB’s<br />
policy expectations<br />
The main advantage of 10y/30y flatteners –<br />
especially on peripherals – is the optionality linked to<br />
a kind of a panic flattening/inversion such as that<br />
seen on the Greek curve and its sensitivity to a repricing<br />
of ECB rate hike expectations, especially after<br />
last week’s ECB press conference. More precisely, if<br />
the past is any guide, a resteepening of the Euribor<br />
front/red segment on a shift of market participants<br />
regarding future policy will have a flattening impact<br />
on the curve. Table 1 summarises the sensitivity of<br />
the main core and non-core 10y/30y segments<br />
(Bund, OAT, Dsl, ATS, Olo, BTP and Bono) to the<br />
money market curve, gauged with the 3 rd /7 th generic<br />
Euribor spread. The highest correlation is obtained<br />
for the OAT and BTP segments (above 55%) while<br />
Olos and especially BTP segments have the highest<br />
beta, with 10bp Euribor spread steepening leading to<br />
2bp and 2.7bp flattening respectively. Taking into<br />
account the relationship between the cash segment<br />
and the Euribor curve, the Bund with DSLs and Bono<br />
segments are the ones that seem too flat. Chart 2<br />
exhibits the residual of the regression of the Bund<br />
July 20/Bund July 40 vs. the money market curve<br />
while Chart 3 plots the DSL/OAT 10y/30y box. Both<br />
highlight the expensiveness of 30y Bunds and 2042<br />
DSL. Recurrent pension fund buying of 30y Bunds<br />
50<br />
40<br />
Apr-10 Jul-10 Oct-10 Jan-11<br />
Sep 20/ Sep 40 BTP spd Apr 2020/Jul 40 Bono spd Jul 2020/Jul 40 Bund spd<br />
Source: <strong>BNP</strong> Paribas<br />
Table 1: Cash 20/40 Spreads vs. 10y/30y Swap<br />
& Euribor Curve: BTP has Highest Sensitivity<br />
Jul 2020/Jul 40 Bund spd Oct 2019/Avr 41 OAT spd DSL July 19/Jan 37 ATS July 20/Mar 37<br />
Correl Eur 10y/30y 78.6% -10.3% 34.7% 84.7%<br />
Beta 0.80 0.42 0.82<br />
Alpha 44.12 44.49 26.62<br />
Correl Eur 3/7 -16.0% -55.9% -25.4% 33.4%<br />
Beta -0.10 -0.12 -0.09 0.16<br />
Alpha 72.10 77.56 65.71 35.71<br />
Olo Sep 20/Mar 41 Sep 20/ Sep 40 BTP spd Jul 2019/Jul 40 Bono spd<br />
Correl Eur 10y/30y 80.1% 32.3% 37.3%<br />
Beta 1.39 0.30 0.61<br />
Alpha<br />
Correl Eur 3/7 -21.7% -59.5% -33.8%<br />
Beta -0.20 -0.27 -0.19<br />
Alpha 71.85 104.15 91.66<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: 10y/30y Bund vs. Euribor curve: Bund<br />
Curve Too Flat<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
-20<br />
-25<br />
Apr-10 Jul-10 Oct-10 Jan-11<br />
Source: <strong>BNP</strong> Paribas<br />
Jan 2020/Jul 40 Bund spd<br />
Eric Oynoyan / Ioannis Sokos 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
41<br />
www.Global<strong>Market</strong>s.bnpparibas.com
and DSLs maturities, which are now above 3.50%,<br />
could explain that temporary richening. On Bonos,<br />
the richening of the 30y is actually a higher premium<br />
over 10y Bonos, which pushed the 10y/30y<br />
Bono/Bund box to low levels (see Chart 4). However,<br />
the GGB 10y/30y inversion since April 2010 does not<br />
give any incentive to jump into 2020/2040 Bono<br />
steepeners.<br />
Recommended trades<br />
Bund July 20 / July 39 spread steepeners<br />
As stressed earlier, the Bund segment has<br />
overreacted to the shift in ECB expectations since<br />
October and appears more than 10bp too flat. Use<br />
any pullback to 44/46bp to enter steepeners,<br />
targeting the 55/58bp area. For HF, the safest trade<br />
would be to remove the money curve component<br />
through Euribor U1U2 steepeners (Euribor DV01 15k<br />
vs. 100k Bund steepeners). 1-mth profit of carry:<br />
1.1bp per month.<br />
10y/20y/30y swap fly receivers<br />
After a period of stabilisation in the low 60s, the 20y<br />
swap has finally recovered, allowing the swap fly to<br />
move towards the low 50s. Book profits on our<br />
48/50bp target.<br />
Sell BTP Feb 37 vs. BTP Sep 40<br />
As Chart 5 illustrates, this spread has dramatically<br />
decoupled from the 10y/30y BTP flattening since late<br />
November. With the 2037/40 spread almost back at<br />
2010 highs while the 2020/40 BTP spread has<br />
flattened 25bp, holders of BTP Feb 37 should take<br />
advantage of the current high spread level to switch<br />
into BTP Sep 40. The spread of around 15.5bp<br />
should tighten back to October lows around<br />
9/10bp.<br />
Sell Bono July 40 vs. BTP Sep 40<br />
After a 35bp compression since late December, the<br />
30y BTP/Bono spread has stabilised in a tight<br />
40/50bp trading range. Using the conditional<br />
distribution approach, any tightening to the mid 30s<br />
would provide very good entry levels, targeting<br />
December’s mid-60s (peak of Q4 2010 regime).<br />
Enter widening trades on a compression to the<br />
35/40bp area, targeting the mid 60s.<br />
30<br />
25<br />
20<br />
15<br />
10<br />
Chart 3: 10y/30y OAT/DSL Box: 30y DSL Too<br />
Expensive<br />
5<br />
OAT Apr 20 / DSL 42<br />
expensive<br />
OAT Apr 20/DSL<br />
42 cheap<br />
0<br />
May-10 Aug-10 Nov-10 Feb-11<br />
Source: <strong>BNP</strong> Paribas<br />
DSL July 20/OAT Apr 20/Jan 42/OAT Apr 41<br />
Chart 4: 2020/40 Cash Boxes vs. Bund: Bono<br />
Back at its Lows while BTP One is the Highest<br />
45<br />
35<br />
25<br />
15<br />
5<br />
-5<br />
-15<br />
-25<br />
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10<br />
2020/40 OAT/Bund 2020/40 ATS/Bund 2020/40 olo/Bund<br />
2020/40 BTP/Bund 2020/40 Bono/Bund<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 5: 10y/30y BTP & 2037/2040 BTP Spreads<br />
1.1<br />
1.05<br />
1<br />
0.95<br />
0.9<br />
0.85<br />
0.8<br />
0.75<br />
0.7<br />
0.65<br />
0.6<br />
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Dec-10 Jan-11 Feb-11<br />
BTPS 5.00 01/09/40 / BTPS 4.00 01/09/20<br />
Source: <strong>BNP</strong> Paribas<br />
BTPS 5.00 01/09/40 / BTPS 4 1/2/37 (R.H.S)<br />
Chart 6: 2040 BTP/Bono Distribution<br />
Conditional on 2020 Spread: Selling Area<br />
around 35/40bp<br />
0.18<br />
0.17<br />
0.16<br />
0.15<br />
0.14<br />
0.13<br />
0.12<br />
0.11<br />
0.1<br />
4.5<br />
4<br />
3.5<br />
December regime<br />
3<br />
2.5<br />
2<br />
Selling<br />
area<br />
1.5<br />
1<br />
0.5<br />
0<br />
0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9<br />
Source: <strong>BNP</strong> Paribas<br />
Eric Oynoyan / Ioannis Sokos 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
42<br />
www.Global<strong>Market</strong>s.bnpparibas.com
EMU Debt Monitor: CDS Analysis<br />
Chart 1: Non-core basis diff vs. Gy: 1-week richening<br />
Chart 2: 2y CDS basis diff vs. Germany: ATS expensive<br />
80<br />
5Y CDS basis<br />
30<br />
2Y CDS basis<br />
60<br />
40<br />
cash cheap vs CDS<br />
20<br />
cash cheap vs CDS<br />
20<br />
10<br />
0<br />
-20<br />
0<br />
-40<br />
-60<br />
-10<br />
-80<br />
-100<br />
-120<br />
cash expensive vs CDS<br />
Jul-10 Aug-10 Sep-10 Sep-10 Oct-10 Nov-10 Nov-10 Dec-10 Jan-11<br />
BEL SPA ITA POR<br />
Among non-core, the cheapness of 5y BTPs and to some<br />
extent Bonos vs. CDS has changed little. Both 6-month<br />
rolling z scores are over 2.00. As stressed last week, 5y<br />
BTPs were trading too cheap within the BTP curve and also<br />
vs. CDS. Although Italian CDS and BTP spread declined<br />
30bp in a week, 5y BTPs are still too cheap vs. 2y and 10y<br />
BTPs (see Chart 3). We expect 5y BTP to recover vs. CDS<br />
in coming weeks but this time with wider spreads (see Trade<br />
Ideas section).<br />
-20<br />
cash expensive vs CDS<br />
-30<br />
Jul-10 Aug-10 Sep-10 Sep-10 Oct-10 Nov-10 Nov-10 Dec-10 Jan-11<br />
FRA FIN AUS NETH<br />
Among core, while the Belgium/France 5y CDS is back at<br />
the cash level, French paper continues to trade with a high<br />
premium to DSLs compared to the CDS differential, even<br />
though that premium narrowed on a lower French CDS. The<br />
reduction of that premium can be played on the cash through<br />
wider BTAN/DSL spreads on July 14. Regarding Austria, 2y<br />
cash vs. France is now far too rich compared to the flat CDS<br />
(see chart above and Chart 8).<br />
Source: <strong>BNP</strong> Paribas<br />
CDS Table & Stats<br />
5y FIN NETH FRA AUS BEL ITA SPA POR IRE GRE<br />
CDS 37 53 97 97 190 190 280 465 625 890<br />
cash -36 -35 -18 -12 74 96 173 308 457 714<br />
Basis 73.6 88.8 115.6 109.3 116.4 93.6 106.9 156.9 167.6 175.8<br />
Box vs Gy 34.3 19.2 -7.7 -1.3 -8.5 14.3 1.0 -48.9 -59.7 -67.8<br />
Average 26.8 11.9 -11.1 -2.9 -16.4 -21.8 -25.0 -34.1 -16.5 -75.8<br />
Max 42.4 20.0 0.9 15.8 4.3 14.4 2.4 36.1 50.6 3.9<br />
Min 15.7 5.0 -24.2 -23.3 -45.4 -59.8 -52.5 -117.7 -93.1 -165.2<br />
Z score** 1.14 2.05 0.70 0.25 0.72 2.44 2.30 -0.35 -1.13 0.20<br />
Current CDS vs Germany Change to 31/12/2009 Change to 30/6<br />
2y 5y 10y 2y 5y 10y 2y 5y 10y<br />
FIN 24 37 48 24 35 46 34 20 20<br />
NETH 36 53 63 28 48 58 22 30 35<br />
FRA 71 97 113 66 93 108 23 45 60<br />
AUS 65 97 107 27 38 45 -9 -15 -17<br />
BEL 155 190 187 133 162 152 35 67 66<br />
ITA 135 190 190 89 116 111 -65 -26 -41<br />
SPA 232 280 278 178 188 181 -77 -43 -17<br />
POR 463 465 414 407 391 334 52 84 20<br />
IRE 670 625 560 552 488 423 287 199 117<br />
GRE 915 890 796 711 630 532 -253 -198 -252<br />
Source: <strong>BNP</strong> Paribas<br />
** z score measures the deviation from 6-mth rolling average CDS/cash basis of the country versus Germany, expressed in numbers of standard deviations. A<br />
number above 1.50 means that the cash is trading historically cheap compared to its average basis level.<br />
Eric Oynoyan / Ioannis Sokos 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
43<br />
www.Global<strong>Market</strong>s.bnpparibas.com
EMU Debt Monitor: Key RV Charts<br />
Chart 3: Hedged Dec 12/Nov 15/Mar 20 BTP fly<br />
Chart 4: 2020/2040 BTP/Bono box: normalisation started<br />
40<br />
Top on BTP/bund<br />
5<br />
30 BTP 5y cheap<br />
spread<br />
0<br />
BTP 2040 too expensive<br />
20<br />
Sharp BTP<br />
-5<br />
10<br />
rally<br />
vs Bunds<br />
-10<br />
-15<br />
0<br />
-20<br />
-10<br />
-25<br />
-20<br />
Active CBs<br />
purchase<br />
-30<br />
BTP 2040 too cheap<br />
-30<br />
-35<br />
BTP 5y rich<br />
Sharp BTP sell-off -40<br />
-40<br />
Jan-10<br />
May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11<br />
Mar-10 Jun-10 Sep-10 Nov-10<br />
Hedged Dec 12/Nov 15/Mar 20 BTP Fly<br />
2015 BTPs are trading again at very cheap levels on the<br />
BTP curve – a bit cheaper than June 2010 levels. We expect<br />
a rebound and recommend playing it through June 13/Nov<br />
15 BTP compression trades (see last week’s Trade Ideas<br />
section).<br />
Chart 5: 5y H1 ctd valuation: around 7bp too cheap<br />
Bono/BTP 2020/2040 box<br />
The normalisation has started with a 5bp box tightening. The<br />
latter remains 15bp from its average, however. We played<br />
the compression last week through Sep 20/Sep 40 BTP<br />
flatteners entered at 85.5, targeting 70bp then low 60s.<br />
Chart 6: 10y/30y DSL/OAT box: 2042 DSL too expensive<br />
30<br />
50<br />
Hedged Eur h11 CTD Fly<br />
OAT Apr 20 / DSL 42<br />
5y too cheap<br />
expensive<br />
40<br />
25<br />
30<br />
20<br />
20<br />
10<br />
15<br />
0<br />
-10<br />
10<br />
-20<br />
5y expensive<br />
OAT Apr 20/DSL<br />
5<br />
-30<br />
42 cheap<br />
-40<br />
Exotic desks hedging<br />
US QE 0<br />
-50<br />
May-10 Aug-10 Nov-10 Feb-11<br />
May-07 Dec-07 Jun-08 Jan-09 Jul-09 Feb-10 Aug-10 Mar-11<br />
DSL July 20/OAT Apr 20/Jan 42/OAT Apr 41<br />
The last sell-off following the ECB press conf led to a<br />
marginal cheapening of 5y ctd. Currently, 5y German H1 ctd<br />
is 7bp too cheap on the curve compared to only 3bp on<br />
swaps. Even though it is on the cheap side, it is far from<br />
April 2010 levels.<br />
Chart 7: CTZ Feb 12 too expensive on the CTZ curve<br />
Recurrent PF buying of 30y Bunds and DSLs has pushed<br />
the 10y/30y DSL/OAT box to extreme levels (i.e. DSL too<br />
expensive). We have the opposite situation at the short end.<br />
Keep July 14 DSL/BTAN widening trades.<br />
Chart 8: RFGB/ATS 2013, 15,17: ATS Oct 13 too expensive<br />
50<br />
-5<br />
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Feb-10 Mar-10 Apr-10 Jun-10 Jul-10 Aug-10 Sep-10 Nov-10 Dec-10 Jan-11<br />
Sep 11/Feb 12 Feb 12/Aug 12 CTZ Feb 12/Apr 12 Apr 12/Aug 12<br />
CTZ Feb 12 outperformed both within the CTZ curve and<br />
within the CTZ/BKO box (the former is back at new lows).<br />
Holders of Feb 12 should either switch into Sep 11 or - for<br />
the most aggressive – into Aug 12, enjoying a 38/40bp pickup.<br />
-15<br />
-25<br />
-35<br />
-45<br />
-55<br />
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11<br />
Fin July 13/ ATS Oct 13 Fin July 15/ ATS July 15 Fin Sep 17/ ATS Sep 17<br />
While RFGB/ATS tightened all along the curve, 2013<br />
spreads overshot, falling below March 2010 lows. Other<br />
maturities are 15/20bp above. Holders of ATS Oct 2013<br />
should switch back into other AAA such as OAT Oct 13,<br />
enjoying some pick-up.<br />
All Charts Source: <strong>BNP</strong> Paribas<br />
Eric Oynoyan / Ioannis Sokos 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
44<br />
www.Global<strong>Market</strong>s.bnpparibas.com
EMU Debt Monitor: Redemptions<br />
• Only AAA countries face EGB redemptions in January: Germany EUR 23bn, France EUR 18bn, Netherlands EUR 14bn<br />
and Austria EUR 8bn.<br />
• T-bill redemptions will total EUR 99bn this month versus EUR 63bn of EGBs.<br />
EGBs Monthly Redemptions<br />
Bonds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011<br />
ITA 0.0 18.7 30.5 0.0 14.6 12.2 0.0 20.2 46.0 0.0 15.5 0.0 157.6<br />
FRA 17.8 0.0 0.0 18.4 0.0 0.0 29.3 0.0 13.8 15.7 0.0 0.0 95.0<br />
GER 23.3 0.0 15.0 19.0 0.0 15.0 24.0 0.0 16.0 17.0 0.0 18.0 147.3<br />
SPA 0.0 0.0 0.0 15.5 0.0 0.0 15.5 0.0 0.0 14.1 0.0 0.0 45.1<br />
GRE 0.0 0.0 8.7 1.0 7.0 0.0 0.0 6.8 0.0 0.0 0.0 5.8 29.4<br />
BEL 0.0 0.0 11.3 0.0 0.0 3.4 0.0 0.0 12.7 0.0 0.0 0.5 27.9<br />
NET 13.9 0.0 0.0 0.0 0.0 0.0 14.1 0.0 0.0 0.0 0.0 0.0 27.9<br />
AUS 8.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 8.4<br />
POR 0.0 0.0 0.0 4.5 0.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 9.5<br />
IRE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5 0.0 4.5<br />
FIN 0.0 5.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.7<br />
Total 63 24 66 58 22 35 83 27 89 47 20 24 558<br />
T-Bills Monthly Redemptions<br />
Bonds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011<br />
ITA 0.0 18.7 30.5 0.0 14.6 12.2 0.0 20.2 46.0 0.0 15.5 0.0 157.6<br />
FRA 17.8 0.0 0.0 18.4 0.0 0.0 29.3 0.0 13.8 15.7 0.0 0.0 95.0<br />
GER 23.3 0.0 15.0 19.0 0.0 15.0 24.0 0.0 16.0 17.0 0.0 18.0 147.3<br />
SPA 0.0 0.0 0.0 15.5 0.0 0.0 15.5 0.0 0.0 14.1 0.0 0.0 45.1<br />
GRE 0.0 0.0 8.7 1.0 7.0 0.0 0.0 6.8 0.0 0.0 0.0 5.8 29.4<br />
BEL 0.0 0.0 11.3 0.0 0.0 3.4 0.0 0.0 12.7 0.0 0.0 0.5 27.9<br />
NET 13.9 0.0 0.0 0.0 0.0 0.0 14.1 0.0 0.0 0.0 0.0 0.0 27.9<br />
AUS 8.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 8.4<br />
POR 0.0 0.0 0.0 4.5 0.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 9.5<br />
IRE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5 0.0 4.5<br />
FIN 0.0 5.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.7<br />
Total 63 24 66 58 22 35 83 27 89 47 20 24 558<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Monthly EGBs Redemptions<br />
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
Monthly T-Bills Redemptions<br />
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec<br />
This month’s EGB redemptions<br />
This month’s T-Bill redemptions<br />
Country Bond Maturity Issued EURs (bn) CRNCY<br />
GERMANY DBR 5 1/4 01/04/11 04/01/2011 20/10/2000 23.25 EUR<br />
AUSTRIA RAGB 5 1/4 01/04/11 04/01/2011 16/01/2001 8.27 EUR<br />
GREECE GGB 2 01/11/11 11/01/2011 11/01/2002 0.02 EUR<br />
FRANCE BTNS 3 01/12/11 12/01/2011 24/01/2006 17.82 EUR<br />
NETHERLANDS NETHER 4 01/15/11 15/01/2011 11/01/2008 13.86 EUR<br />
Total 63.21<br />
Country T-Bill Maturity CRNCY EURs<br />
AUSTRIA RATB 0 01/13/11 13/01/2011 EUR 0.1<br />
BELGIUM BGTB 0 01/20/11 20/01/2011 EUR 5.5<br />
FINLAND RFTB 0 01/11/11 11/01/2011 EUR 1.9<br />
FINLAND RFTB 0 01/19/11 19/01/2011 USD 1.7<br />
FRANCE BTF 0 01/13/11 13/01/2011 EUR 8.8<br />
FRANCE BTF 0 01/27/11 27/01/2011 EUR 8.0<br />
FRANCE BTF 0 01/06/11 06/01/2011 EUR 8.1<br />
FRANCE BTF 0 01/20/11 20/01/2011 EUR 8.5<br />
GERMANY BUBILL 0 01/26/11 26/01/2011 EUR 6.0<br />
GERMANY BUBILL 0 01/12/11 12/01/2011 EUR 5.0<br />
GREECE GTB 0 01/14/11 14/01/2011 EUR 1.0<br />
GREECE GTB 0 01/14/11 14/01/2011 EUR 2.0<br />
GREECE GTB 0 01/21/11 21/01/2011 EUR 1.2<br />
IRELAND IRTB 0 01/14/11 14/01/2011 EUR 2.1<br />
ITALY BOTS 0 01/31/11 31/01/2011 EUR 9.9<br />
ITALY BOTS 0 01/14/11 14/01/2011 EUR 7.5<br />
NETHERLANDS DTB 0 01/31/11 31/01/2011 EUR 9.7<br />
PORTUGAL PORTB 0 01/21/11 21/01/2011 EUR 3.4<br />
SPAIN SGLT 0 01/21/11 21/01/2011 EUR 8.7<br />
Total 99.0<br />
All Charts Source: <strong>BNP</strong> Paribas<br />
Eric Oynoyan / Ioannis Sokos 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
45<br />
www.Global<strong>Market</strong>s.bnpparibas.com
EMU Debt Monitor: SSA & Covered Bonds<br />
• The recent richening of OBND, the Austrian<br />
agency, in the 10y area seems overrated.<br />
• In this segment of the curve, Dutch agencies<br />
offer a better yield and positive rolldown.<br />
• STRATEGY: Sell OBND Oct 2020 / Buy BNG<br />
Sep 2020 or NEDWBK Jan 2021 (yield pickup:<br />
7bp and 9bp resp.).<br />
Supply out of European SSA is not slowing. Seven<br />
benchmarks have been issued so far this week.<br />
NRW.BANK and ICO each issued a new EUR 1bn<br />
benchmark while KFW, CADES, EIB and NIB<br />
launched new bonds denominated in USD (USD<br />
1.5bn, 2.5bn, 4.5bn and 1bn respectively). The<br />
inaugural EFSF transaction is expected to be<br />
launched by the end of the month. The new 5y EUR<br />
benchmark is likely to add EUR 3-5bn to the USD<br />
54bn (equivalent) European SSA issued so far this<br />
month. This will be a key event to watch.<br />
In the meantime, we highlight below an attractive RV<br />
trade amongst Dutch and Austrian agencies. Indeed,<br />
the gradual richening of the Austrian agency OeBB<br />
Infrastruktur, in the 10y area (OBND Oct 20), seems<br />
excessive at current levels. That is, compared to the<br />
neighbouring maturity bullets of the OBND curve, to<br />
underlying RAGB but also its compatriot agency,<br />
ASFINAG (Chart 1).<br />
It is even more interesting to compare OBND Oct 20<br />
to BNG and NEDWBK, the Dutch agencies. First of<br />
all, let’s recall that being exposed to Austria is<br />
perceived as riskier than being long the Netherlands,<br />
as priced by the CDS and government bond markets.<br />
Netherlands CDS 5y is trading close to Germany and<br />
is 36bp tighter than Austria; in govvies space, RAGB<br />
Jul 20 is 21bp wider than DSL Jul 20.<br />
OBND Oct 20 is currently richer than BNG Sep 20<br />
(ASW diff: +3bp) and NEDWBK Jan 21 (ASW diff:<br />
+5bp) (Charts 1 & 2). However, such relative levels<br />
are recent (Chart 2). We do not believe that the<br />
current positive ASW differentials can be long lived,<br />
especially as fundamentals support the opposite.<br />
One could of course question the relative levels<br />
amongst EGBs. However, there is no equivalent<br />
richening of ATs versus DSLs in the 10y area, none<br />
that could explain the richening of OBND versus<br />
Dutch agencies. Agencies’ spreads to underlying<br />
govvies play in favour of the Dutch agencies. Indeed,<br />
if the premium BNG has to offer versus DSLs has<br />
been rather stable over the past 6 months, it has<br />
widened over the past year (from 16bp early 2010 to<br />
34bp today) while OBND has richened versus ATs<br />
over the past 6 months (from 24bp to 10bp).<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Chart 1: Dutch & Austrian Agencies’ Term<br />
Structures (ASW)<br />
ASW<br />
OBND Oct 20 looks rich<br />
-10<br />
ASFING OBND<br />
NEDWBK BNG<br />
-20<br />
0y 5y 10y 15y 20y<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: Agencies’ ASW Differentials<br />
8<br />
6<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
-6<br />
-8<br />
-10<br />
-12<br />
OBND Oct 20 vs BNG 3.875 04/11/19<br />
OBND Oct 20 vs BNG 2.625 01/09/20<br />
OBND Oct 20 vs NEDWBK 3.5 14/01/21<br />
-14<br />
Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 3: Spreads to Govvies Differentials<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
BOX 1: BNG/DSL 2020 vs OBND/AT 2020<br />
0<br />
BOX 2: BNG/DSL 2019 vs OBND/AT 2020<br />
-5<br />
BOX 3: NEDWBK/DSL 2021 vs OBND/AT 2020<br />
Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 3 depicts the effects of both the richening of<br />
OBND versus Dutch agencies and the widening of<br />
the relative agencies’ premiums to govvies, also in<br />
favour of BNG. With the exception of June 2010<br />
(when ATs jumped to extreme levels), we are<br />
currently in the upper range.<br />
Dutch agencies in the 10y area currently offer great<br />
value vs OBND Oct 20 and DSLs. Further, the<br />
rolldown is positive on BNG and NEDWBK while<br />
negative on OBND Oct 2020. Investors long OBND<br />
Oct 20 should switch into BNG Sep 20 or NEDWBK<br />
Jan 21.<br />
Camille de Courcel 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
46<br />
www.Global<strong>Market</strong>s.bnpparibas.com
EUR: Buy 3m5y Straddle vs 3m10y Straddle<br />
• The 3m5y/3m10y implied volatility ratio is<br />
currently hovering around 0.97, having almost<br />
monotonically increased from around 0.86 in<br />
mid- December<br />
• We expect the implied ratio to increase<br />
further. Also, we expect gamma 5y options to<br />
deliver more volatility in the context of<br />
heightened concern over inflation.<br />
• STRATEGY: Buy 3m5y straddle vs 3m10y<br />
straddle.<br />
Table 1: Implied/Rls vs (3M)<br />
1y 2y 5y 7y 10y 20y 30y<br />
1m 147% 115% 115% 113% 112% 112% 111%<br />
3m 131% 119% 103% 112% 110% 111% 109%<br />
6m 115% 119% 107% 108% 107% 108% 105%<br />
1y 115% 115% 104% 104% 101% 100% 97%<br />
3m5y implied volatility is hovering around 85bp<br />
whereas 3m10y implied volatility is around 88bp.<br />
Indeed, the 3m5y/3m10y implied volatility ratio is<br />
hovering around 0.97, having almost monotonically<br />
increased from around 0.86 in mid-December<br />
In the meantime, 3m5y volatility is currently<br />
delivering more than 3m10y volatility over a threemonth<br />
horizon (Table 1). At the ECB’s January press<br />
conference, there was a hawkish shift in the<br />
assessment of inflation risk. After some dovish<br />
remarks by the ECB’s Orphanides, expectations<br />
have stabilised at one 25bp rate hike by year-end.<br />
However, the debate on inflation in the eurozone is<br />
gradually taking centre stage. At the current level of<br />
rates, the risk of the market pricing in a tighter<br />
monetary policy in the short term is significant, in our<br />
view. In fact, the latest hawkish comments by ECB<br />
Stark on Wednesday are telling. In his view, both “the<br />
global economy and the Euro region recovered faster<br />
than thought”, and it is “important that the emergency<br />
measures remain temporary”. Against this backdrop,<br />
we expect the 5y swap to deliver more volatility than<br />
the 10y going forward. Accordingly, we like long<br />
(dynamic) gamma positions on the 3m5y point vs the<br />
3m10y point.<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: 3m5y/3m10y Implied Vol Ratio vs Refi<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
Jan-<br />
05<br />
Jul-<br />
05<br />
Refi<br />
Jan-<br />
06<br />
Source: <strong>BNP</strong> Paribas<br />
EUR 3m5y/3m10y Implied Vol Ratio (RHS)<br />
Jul-<br />
06<br />
Jan-<br />
07<br />
Jul-<br />
07<br />
Jan-<br />
08<br />
From a vega risk perspective, a further increase in<br />
the 3m5y/10y ratio is consistent with a higher interest<br />
rate regime and/or monetary policy normalisation by<br />
the ECB (Chart 1).<br />
Table 2 shows our preferred trade construction for a<br />
long position in the 3m5y/3m10y swaption spread.<br />
Jul-<br />
08<br />
Jan-<br />
09<br />
Jul-<br />
09<br />
Jan-<br />
10<br />
Jul-<br />
10<br />
1.4<br />
1.3<br />
1.2<br />
1.1<br />
1.0<br />
0.9<br />
0.8<br />
Jan-<br />
11<br />
Table 2: Trade Construction<br />
Notional<br />
Implied<br />
ATMF rate Premium PV PV01 Gamma Vega<br />
(EUR mn)<br />
Vol<br />
BE vol Theta/d Theta (EUR)<br />
Buy 3m5y Straddle 186 2.81 156 2,897,936 4,581 16,636 291,451 85 5.4 -1.2 -22,602<br />
Sell 3m10y Straddle -100 3.43 290 -2,898,583 -2,942 -15,581 -291,228 88 5.5 2.3 22,607<br />
-647 1,639 1,056 223 5<br />
Source: <strong>BNP</strong> Paribas<br />
Matteo Regesta 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
47<br />
www.Global<strong>Market</strong>s.bnpparibas.com
JGBs: Commodities – A Headwind<br />
• Inflation concerns will mount if the oil price<br />
rises above USD 100/bbl.<br />
• In December, the domestic CGPI rose<br />
1.2% y/y, its third consecutive monthly<br />
advance and its biggest gain since November<br />
2008. Following the rise in raw material prices,<br />
intermediate goods prices have started to<br />
move up.<br />
• It will be some time before final Japanese<br />
inflation moves into positive territory.<br />
However, price declines are drawing to a close;<br />
increases in raw material prices will tend to<br />
spread to other goods.<br />
• Investors will note the halt in price declines<br />
in H2 this year, which will prove to be a<br />
persistent headwind for the bond market.<br />
Higher oil price should lead to inflation concerns<br />
Amongst international commodity prices, investors<br />
should probably focus on crude oil. The WTI futures<br />
price has risen to USD 92/bbl for the first time since<br />
2008, breaking through the USD 90 level, a 50%<br />
retracement of the plunge in prices following the<br />
Lehman shock. In his congressional testimony on 7<br />
January, Fed chairman Bernanke noted that<br />
economic growth would be impeded should petrol<br />
prices rise excessively.<br />
US retail gasoline prices have risen above USD 3 per<br />
gallon for the first time since October 2008. Inflation<br />
worries rapidly took centre stage when the gasoline<br />
price rose above USD 4 in the summer of 2008,<br />
pushing the Fed chairman to pause temporarily in his<br />
drive to cut Fed funds rates. Inflation concerns will<br />
increasingly mount if the oil price rises above the<br />
USD 100 mark.<br />
Input costs for corporations are rising<br />
Investors should pay heed to the wide range of<br />
surging commodity prices that include not just oil but<br />
precious metals and grains. Price increases are not<br />
only the result of expectations of tighter demand<br />
conditions due to the bubble-like economic growth in<br />
emerging economies. Industrialised nations, the US<br />
in particular, are also responsible because of the<br />
asset substitution effect generated by their monetary<br />
easing and currency depreciation. In other words, it<br />
is probable that the surge in commodity prices will be<br />
both broad in range and prolonged in duration.<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
Chart 1: Japan’s Domestic CGPI (% y/y)<br />
Intermediate goods<br />
Final goods<br />
-15<br />
05 06 07 08 09 10 11<br />
Source: <strong>BNP</strong> Paribas<br />
Raw materials<br />
(RHS)<br />
Will commodity price surges spread to final inflation?<br />
The December flash estimate of the corporate goods<br />
price index (CGPI) released by the BoJ on 14<br />
January showed that the domestic CGPI rose<br />
1.2% y/y, its third consecutive monthly advance and<br />
its biggest gain since November 2008. Following the<br />
rise in raw material prices, intermediate goods prices<br />
have started to move up. However, final goods prices<br />
continue to fall in year-on-year terms.<br />
Declining trend in CPI is drawing to a close<br />
Corporate pricing power is decidedly weak. This is<br />
particularly true for manufacturers, who face weak<br />
final demand and intense competition from abroad.<br />
That said, amongst commodities, even grain prices<br />
are advancing. These increases are the result of 1)<br />
growing demand in emerging economies, such as<br />
China, and 2) supply constraints caused by a series<br />
of unseasonable weather events, including droughts<br />
in Russia/Latin America and floods in Australia.<br />
Investors should note that higher raw material input<br />
costs for food easily translate into higher final goods<br />
prices.<br />
The base year for the Japanese CPI will be changed<br />
this August. We expect this to result in approximately<br />
a 0.5pp downward revision to the year-on-year<br />
change in the core CPI. In other words, it will be<br />
some time before final Japanese inflation moves into<br />
positive territory. That said, price declines are<br />
drawing to a close; increases in raw material prices<br />
will tend to spread to other goods. Investors will note<br />
the halt in price declines in H2 this year, which will<br />
prove to be a persistent headwind for the bond<br />
market.<br />
60<br />
45<br />
30<br />
15<br />
0<br />
-15<br />
-30<br />
-45<br />
Koji Shimamoto 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
48<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Global Inflation Watch<br />
Eurozone HICP: Upward Revisions<br />
Chart 1: GSCI & CPI Food<br />
The past few months have seen an acceleration in<br />
the upward trend in oil and other commodity prices,<br />
in particular soft commodities. A number of<br />
idiosyncratic factors have contributed to these trends<br />
including adverse weather conditions, supply<br />
disruptions and threats of protectionism. But the<br />
increase has been primarily due to fundamental<br />
factors including slack monetary policy and the<br />
closing of the output gap at the global level (for more<br />
on this see “Global Inflation: Ready To Takeoff?”).<br />
The risks to global inflation are high.<br />
In the eurozone, these trends have been<br />
compounded by greater-than-expected strength in<br />
the economic recovery in Germany and higher taxes<br />
in a number of countries which are undergoing a<br />
significant fiscal adjustment.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Chart 2: German Output Gap & Core HICP Inflation<br />
In particular, following a collapse in activity in 2009,<br />
the German economy has been a significant<br />
beneficiary of the rebound in world economic activity.<br />
Growth is likely to be higher than we previously<br />
thought (we revised up our GDP growth forecast for<br />
2011 from 2.7% to 3.5%) and more balanced, thanks<br />
to a greater contribution from domestic demand.<br />
Over time, this recovery will put upward pressure on<br />
domestically-generated inflation.<br />
As a result of the above-mentioned factors, we have<br />
revised up our forecasts for inflation in the eurozone.<br />
We now expect headline inflation to average 2.2% in<br />
2011 (from 1.8% previously) and 1.6% in 2012 (from<br />
1.3%).<br />
In the short term, the main contributors to these<br />
revisions are food and energy prices. Pressure on<br />
core prices should remain limited to those<br />
components for which food and energy are an<br />
important input, such as restaurants and transport<br />
services. But core inflation, forecast to average 0.9%<br />
and 1.1% in 2011 and 2012 respectively, is still<br />
expected to remain contained.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Chart 3: Core HICP – Periphery vs. Core<br />
The continued low level of core inflation is predicated<br />
mainly on wage growth remaining subdued by high<br />
unemployment and tighter fiscal policies. Recent<br />
trends in wages support this view.<br />
Note that the outlook differs significantly between<br />
countries. In particular, beyond a temporary boost<br />
from higher taxes, we believe risks of deflation are<br />
still high in the eurozone’s periphery as a result of the<br />
ongoing adjustment in fiscal and external<br />
imbalances.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Luigi Speranza/Eoin O’Callaghan 20 January 2011<br />
<strong>Market</strong> Mover<br />
49<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Table 1: <strong>BNP</strong> Paribas' Inflation Forecasts<br />
Eurozone<br />
France<br />
US<br />
Headline HICP Ex-tobacco HICP<br />
Headline CPI<br />
Ex-tobacco CPI<br />
CPI Urban SA CPI Urban NSA<br />
Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y index % m/m % y/y Index % m/m % y/y Index % m/m % y/y<br />
2009 108.1 - 0.3 107.9 - 0.2 119.3 - 0.1 118.0 - 0.1 214.5 - -0.3 214.5 - -0.4<br />
2010 109.8 - 1.6 109.5 - 1.5 121.1 - 1.5 119.8 - 1.5 218.1 - 1.6 218.1 - 1.6<br />
2011 (1) 112.2 - 2.2 111.8 - 2.1 123.6 - 2.0 122.1 - 1.9 221.4 - 1.5 221.3 - 1.5<br />
Q1 2010 108.6 - 1.1 108.3 - 1.0 120.3 - 1.3 119.0 - 1.2 217.6 - 2.4 217.0 - 2.4<br />
Q2 2010 110.0 - 1.5 109.7 - 1.4 121.3 - 1.6 120.0 - 1.5 217.2 - 1.8 218.1 - 1.8<br />
Q3 2010 109.9 - 1.7 109.5 - 1.6 121.2 - 1.5 119.8 - 1.5 218.0 - 1.2 218.3 - 1.2<br />
Q4 2010 110.8 - 2.0 110.5 - 1.9 121.7 - 1.6 120.2 - 1.6 219.4 - 1.2 218.9 - 1.3<br />
Q1 2011 (1) 111.1 - 2.3 110.7 - 2.2 122.5 - 1.8 121.1 - 1.8 220.9 - 1.5 220.4 - 1.6<br />
Q2 2011 (1) 112.1 - 1.9 111.7 - 1.8 123.5 - 1.8 122.0 - 1.7 221.2 - 1.8 222.0 - 1.8<br />
Q3 2011 (1) 112.3 - 2.2 111.8 - 2.1 123.8 - 2.1 122.3 - 2.0 221.5 - 1.6 221.7 - 1.6<br />
Q4 2011 (1) 113.3 - 2.3 112.9 - 2.2 124.4 - 2.3 122.9 - 2.2 221.8 - 1.1 221.2 - 1.1<br />
Jul 10 109.7 -0.3 1.7 109.31 -0.4 1.7 121.0 -0.3 1.7 119.68 -0.3 1.6 217.6 0.3 1.3 218.01 0.0 1.2<br />
Aug 10 109.9 0.2 1.6 109.54 0.2 1.5 121.3 0.2 1.4 119.97 0.2 1.3 218.2 0.3 1.2 218.31 0.1 1.1<br />
Sep 10 110.1 0.2 1.8 109.76 0.2 1.7 121.2 -0.1 1.6 119.88 -0.1 1.5 218.4 0.1 1.1 218.44 0.1 1.1<br />
Oct 10 110.5 0.4 1.9 110.16 0.4 1.8 121.4 0.1 1.6 120.03 0.1 1.5 218.9 0.2 1.2 218.71 0.1 1.2<br />
Nov 10 110.6 0.1 1.9 110.27 0.1 1.8 121.5 0.1 1.6 120.09 0.0 1.5 219.1 0.1 1.1 218.80 0.0 1.1<br />
Dec 10 111.3 0.6 2.2 110.93 0.6 2.1 122.1 0.5 1.8 120.61 0.4 1.7 220.3 0.5 1.4 219.18 0.2 1.5<br />
Jan 11 (1) 110.6 -0.6 2.3 110.17 -0.7 2.2 122.1 0.0 2.0 120.58 0.0 1.9 220.8 0.3 1.5 219.95 0.4 1.5<br />
Feb 11 (1) 111.0 0.4 2.4 110.56 0.4 2.3 122.5 0.4 1.8 121.07 0.4 1.7 221.1 0.1 1.6 220.29 0.2 1.6<br />
Mar 11 (1) 111.7 0.6 2.1 111.27 0.6 2.0 123.0 0.4 1.7 121.53 0.4 1.6 220.9 -0.1 1.5 220.91 0.3 1.5<br />
Apr 11 (1) 112.0 0.3 1.9 111.56 0.3 1.8 123.3 0.3 1.7 121.85 0.3 1.6 221.1 0.1 1.6 221.50 0.3 1.6<br />
May 11 (1) 112.1 0.2 1.9 111.73 0.2 1.8 123.5 0.2 1.8 122.06 0.2 1.7 221.2 0.0 1.8 222.06 0.3 1.8<br />
Jun 11 (1) 112.2 0.1 2.0 111.79 0.1 1.9 123.6 0.1 1.8 122.13 0.1 1.8 221.3 0.0 2.0 222.38 0.1 2.0<br />
Jul 11 (1) 111.9 -0.2 2.1 111.49 -0.3 2.0 123.4 -0.2 2.0 121.93 -0.2 1.9 221.4 0.1 1.7 221.89 -0.2 1.8<br />
Aug 11 (1) 112.3 0.3 2.2 111.84 0.3 2.1 123.9 0.4 2.1 122.40 0.4 2.0 221.5 0.0 1.5 221.69 -0.1 1.5<br />
Sep 11 (1) 112.6 0.3 2.3 112.17 0.3 2.2 124.0 0.1 2.3 122.48 0.1 2.2 221.6 0.0 1.5 221.64 0.0 1.5<br />
Oct 11 (1) 113.1 0.5 2.4 112.70 0.5 2.3 124.3 0.3 2.4 122.76 0.2 2.3 221.7 0.0 1.3 221.49 -0.1 1.3<br />
Nov 11 (1) 113.2 0.1 2.4 112.78 0.1 2.3 124.4 0.1 2.4 122.83 0.1 2.3 221.8 0.1 1.2 221.36 -0.1 1.2<br />
Dec 11 (1) 113.6 0.3 2.1 113.13 0.3 2.0 124.7 0.2 2.1 123.10 0.2 2.1 222.0 0.1 0.8 220.80 -0.3 0.7<br />
Updated<br />
Next<br />
Release<br />
Jan 20<br />
Jan Flash HICP (Jan 31)<br />
Jan 20<br />
Jan CPI (Feb 23)<br />
Jan 14<br />
Jan CPI (Feb 17)<br />
Source: <strong>BNP</strong> Paribas, (1) Forecasts<br />
Chart 4: Eurozone Core HICP (% y/y)<br />
Chart 5: US Core CPI (% y/y)<br />
Source: Reuters EcoWin Pro<br />
After reaching an all-time low in April 2010, core inflation has been<br />
a touch stronger in recent months, mainly reflecting gains in core<br />
goods inflation. While we expect core services inflation to head<br />
lower, the rebound in core goods has further to run. We expect a<br />
brief interruption to the downward trend in core inflation.<br />
Source: Reuters EcoWin Pro<br />
The downward trend in shelter inflation was recently interrupted.<br />
However, the renewed collapse in the housing market should see a<br />
reversion to a downward trend from early this year.<br />
Luigi Speranza/Eoin O’Callaghan 20 January 2011<br />
<strong>Market</strong> Mover<br />
50<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Table 2: <strong>BNP</strong> Paribas' Inflation Forecasts<br />
Japan<br />
UK<br />
Sweden<br />
Core CPI SA<br />
Core CPI NSA<br />
Headline CPI RPI<br />
CPI CPIF<br />
Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y<br />
2009 100.3 - -1.3 100.3 - -1.3 110.8 - 2.1 213.7 - -0.5 299.7 - -0.3 191.2 - 1.9<br />
2010 (1) 99.3 - -1.0 99.3 - -1.0 114.5 - 3.3 223.6 - 4.6 303.5 - 1.3 195.2 - 2.1<br />
2011 (1) 98.6 - -0.7 98.6 - -0.7 118.9 - 3.9 233.8 - 4.6 310.3 - 2.3 199.5 - 2.2<br />
Q1 2010 99.7 - -1.3 99.3 - -1.2 112.9 - 3.2 219.3 - 4.0 301.2 - 1.0 194.0 - 2.6<br />
Q2 2010 99.3 - -1.2 99.3 - -1.2 114.4 - 3.4 223.5 - 5.1 302.8 - 1.1 194.9 - 2.1<br />
Q3 2010 98.8 - -1.1 99.1 - -1.0 114.7 - 3.1 224.5 - 4.7 302.9 - 1.1 194.8 - 1.7<br />
Q4 2010 (1) 99.2 - -0.5 99.4 - -0.5 115.8 - 3.3 227.0 - 4.7 307.0 - 1.9 197.0 - 2.0<br />
Q1 2011 (1) 98.8 - -0.9 98.4 - -0.9 117.5 - 4.1 230.0 - 4.9 308.1 - 2.3 197.8 - 2.0<br />
Q2 2011 (1) 98.6 - -0.7 98.6 - -0.7 118.8 - 3.8 233.2 - 4.4 310.6 - 2.6 199.4 - 2.3<br />
Q3 2011 (1) 98.5 - -0.3 98.7 - -0.3 119.2 - 3.9 234.3 - 4.4 310.0 - 2.4 199.6 - 2.5<br />
Q4 2011 (1) 98.4 - -0.8 98.6 - -0.8 120.3 - 3.9 237.7 - 4.7 312.5 - 1.8 201.2 - 2.1<br />
Jul 10 98.9 -0.3 -1.1 99.0 -0.3 -1.1 114.3 -0.3 3.1 223.6 -0.2 4.8 302.0 -0.3 1.1 194.3 -0.3 1.7<br />
Aug 10 98.8 -0.1 -1.0 99.1 0.1 -1.0 114.9 0.5 3.1 224.5 0.4 4.7 302.1 0.0 0.9 194.3 0.0 1.4<br />
Sep 10 98.7 -0.1 -1.1 99.1 0.0 -1.1 114.9 0.0 3.0 225.3 0.4 4.6 304.6 0.8 1.4 195.8 0.8 1.8<br />
Oct 10 99.1 0.4 -0.6 99.5 0.4 -0.6 115.2 0.2 3.1 225.8 0.2 4.5 305.6 0.3 1.5 196.3 0.3 1.8<br />
Nov 10 99.3 0.2 -0.5 99.4 -0.1 -0.5 115.6 0.4 3.2 226.8 0.4 4.7 306.6 0.3 1.8 196.8 0.2 1.9<br />
Dec 10 (1) 99.2 -0.1 -0.5 99.3 -0.1 -0.5 116.7 1.0 3.7 228.4 0.7 4.8 308.7 0.7 2.3 197.9 0.6 2.3<br />
Jan 11 (1) 99.0 -0.2 -0.6 98.6 -0.7 -0.6 117.0 0.2 4.1 228.8 0.2 5.0 306.8 -0.6 2.3 197.0 -0.5 2.1<br />
Feb 11 (1) 98.8 -0.2 -1.0 98.2 -0.4 -1.0 117.6 0.5 4.2 230.1 0.6 5.0 308.2 0.5 2.2 197.8 0.4 1.8<br />
Mar 11 (1) 98.7 -0.1 -1.1 98.4 0.2 -1.1 118.0 0.3 4.0 230.9 0.3 4.6 309.3 0.3 2.3 198.7 0.4 2.0<br />
Apr 11 (1) 98.6 -0.1 -0.7 98.5 0.1 -0.7 118.6 0.5 3.8 232.8 0.8 4.5 310.5 0.4 2.7 199.2 0.3 2.3<br />
May 11 (1) 98.7 0.1 -0.6 98.7 0.2 -0.6 118.8 0.2 3.9 233.3 0.2 4.4 310.7 0.1 2.6 199.5 0.1 2.3<br />
Jun 11 (1) 98.5 -0.2 -0.7 98.6 -0.1 -0.7 118.9 0.1 3.7 233.5 0.1 4.2 310.4 -0.1 2.5 199.5 0.0 2.3<br />
Jul 11 (1) 98.5 0.0 -0.4 98.6 0.0 -0.4 118.6 -0.2 3.8 233.0 -0.2 4.2 309.5 -0.3 2.5 199.1 -0.2 2.4<br />
Aug 11 (1) 98.4 -0.1 -0.4 98.7 0.1 -0.4 119.1 0.4 3.7 233.9 0.4 4.2 309.6 0.0 2.5 199.2 0.1 2.5<br />
Sep 11 (1) 98.5 0.1 -0.2 98.9 0.2 -0.2 119.8 0.5 4.2 235.9 0.9 4.7 311.1 0.5 2.1 200.6 0.7 2.5<br />
Oct 11 (1) 98.4 -0.1 -0.7 98.8 -0.1 -0.7 119.9 0.2 4.2 236.7 0.3 4.8 312.7 0.5 2.3 201.1 0.3 2.4<br />
Nov 11 (1) 98.5 0.1 -0.8 98.6 -0.2 -0.8 120.1 0.1 3.9 237.2 0.2 4.6 312.8 0.0 2.0 201.2 0.0 2.2<br />
Dec 11 (1) 98.4 -0.1 -0.8 98.5 -0.1 -0.8 120.9 0.7 3.6 239.1 0.8 4.7 312.1 -0.2 1.1 201.3 0.0 1.7<br />
Updated<br />
Next<br />
Release<br />
Jan 04<br />
Dec CPI (Jan 27)<br />
Jan 20<br />
Jan CPI (Feb 15)<br />
Jan 19<br />
Jan CPI (Feb 17)<br />
Source: <strong>BNP</strong> Paribas, (1) Forecasts<br />
Chart 6: Japanese CPI (% y/y)<br />
Chart 7: UK CPI (% y/y)<br />
Source: Reuters EcoWin Pro<br />
Prices are expected to continue falling but the pace of decline is<br />
easing as the economy recovers.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
We expect inflation to remain above target for the remainder of the<br />
year, although trending down. We expect CPI inflation to hit 4% or<br />
above in the early months of this year.<br />
Luigi Speranza/Eoin O’Callaghan 20 January 2011<br />
<strong>Market</strong> Mover<br />
51<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Table 3: <strong>BNP</strong> Paribas' Inflation Forecasts<br />
Canada Norway Australia<br />
CPI Core CPI Headline CPI Core<br />
CPI<br />
Core<br />
Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y<br />
2009 114.4 0.3 113.6 1.8 125.7 2.2 118.4 2.6 167.8 - 1.8 - - 3.7<br />
2010 (1) 116.5 1.8 115.5 1.6 128.8 2.4 120.1 1.4 172.8 - 2.9 - - 2.7<br />
2011 (1) 118.6 1.8 117.1 1.4 131.1 1.9 121.8 1.4 178.9 - 3.7 - - 2.7<br />
Q3 2009 114.7 0.5 -0.9 113.9 1.2 1.6 125.8 0.0 1.8 118.5 0.0 2.4 168.6 1.0 1.3 - - 3.5<br />
Q4 2009 114.9 0.6 0.8 114.4 1.9 1.6 126.6 0.6 1.4 119.3 0.7 2.3 169.5 0.5 2.1 - - 3.4<br />
Q1 2010 115.4 2.0 1.6 114.9 1.6 1.9 128.4 1.4 2.9 119.4 0.1 2.0 171.0 0.9 2.9 - - 3.1<br />
Q2 2010 116.2 2.6 1.4 115.5 2.3 1.8 129.1 0.6 2.6 120.3 0.8 1.5 172.1 0.6 3.1 - - 2.7<br />
Q3 2010 116.8 2.2 1.8 115.6 0.3 1.6 128.2 -0.7 1.9 119.9 -0.3 1.2 173.3 0.7 2.8 - - 2.4<br />
Q4 2010 (1) 117.4 1.5 2.2 116.0 1.2 1.4 129.4 0.9 2.2 120.5 0.5 1.0 174.7 0.8 3.0 - - 2.5<br />
Q1 2011 (1) 117.9 1.6 2.1 116.4 1.6 1.4 131.1 1.3 2.1 120.6 0.1 1.0 176.4 1.0 3.3 - - 2.5<br />
Q2 2011 (1) 118.3 1.7 1.9 116.9 1.7 1.2 131.4 0.2 1.8 121.9 1.0 1.3 178.0 0.9 3.6 - - 2.7<br />
Updated<br />
Dec 21<br />
Jan 19 Jan 20<br />
Next<br />
Release<br />
Dec CPI (Jan 25)<br />
Jan CPI (Feb 10) Q4 CPI (Jan 25)<br />
Source: <strong>BNP</strong> Paribas, (1) Forecasts<br />
Chart 8: Canadian Total versus Core CPI<br />
Chart 9: Australian CPI (% y/y)<br />
7.0<br />
6.0<br />
5.0<br />
4.0<br />
3.0<br />
(% y/y)<br />
Headline CPI<br />
Underlying CPI<br />
2.0<br />
1.0<br />
0.0<br />
-1.0<br />
Q193 Q195 Q197 Q199 Q101 Q103 Q105 Q107 Q109 Q111 Q113<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Wage pressures appear subdued, suggesting that underlying<br />
inflation will remain within the target range.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Food prices should drive headline inflation sharply higher in 2011.<br />
Underlying inflation should drift higher, but remain within the target<br />
range. Risks to inflation are the upside, particularly in the near term.<br />
CPI Data Calendar for the Coming Week<br />
Day GMT Economy Indicator Previous <strong>BNP</strong>P F’cast Consensus<br />
Tue 25/01 00:30 Australia CPI q/q : Q4 0.7% 0.8% n/a<br />
00:30 CPI y/y : Q4 2.8% 3.0% n/a<br />
12:00 Canada CPI m/m : Dec 0.1% 0.2% 0.1%<br />
12:00 CPI y/y : Dec 2.0% 2.6% 2.5%<br />
12:00 BoC Core m/m : Dec 0.0% 0.0% -0.1%<br />
12:00 BoC Core y/y : Dec 1.4% 1.8% 1.7%<br />
Thu 27/01 10:15 Belgium CPI m/m : Jan 0.4% 0.2% n/a<br />
10:15 CPI y/y : Jan 3.1% 2.9% n/a<br />
Germany States’ Cost of Living m/m : Jan 1.0% -0.5% -0.2%<br />
States’ Cost of Living y/y : Jan 1.7% 1.8% 2.1%<br />
HICP (Prel) m/m : Jan 1.2% -0.5% -0.3%<br />
HICP (Prel) y/y : Jan 1.9% 2.0% 2.3%<br />
Fri 28/01 23:30 Japan CPI National y/y : Dec 0.1% -0.1% -0.2%<br />
23:30 Core CPI National y/y : Dec -0.5% -0.5% -0.5%<br />
23:30 CPI Tokyo y/y : Jan -0.2% 0.1% -0.2%<br />
23:30<br />
(27/01)<br />
Core CPI Tokyo y/y : Jan -0.4% -0.2% -0.3%<br />
Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision<br />
Source: <strong>BNP</strong> Paribas<br />
Luigi Speranza/Eoin O’Callaghan 20 January 2011<br />
<strong>Market</strong> Mover<br />
52<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Inflation: With Supply Comes Opportunities<br />
• GLOBAL: Supply discount except for TIPS.<br />
• EUR: Long FRF/EUR BE. Watch prel. data.<br />
• USD: 10y TIPS a test without concession.<br />
• GBP: UKTi-55 – value in RY, BE and ASW.<br />
GLOBAL: Equities, commodities and breakevens<br />
are back towards local highs (Chart 1) but have yet<br />
to break above the post-Lehman range. Positioning<br />
is much less extreme on equities and rates than in<br />
November/December (Chart 2) while on commodities<br />
net speculative oil positioning remains close to multiyear<br />
highs (i.e. on the long side). Inflation concerns<br />
continue to dominate with December data showing<br />
inflation rates rising, albeit largely due to food and<br />
energy as expected. Indeed, the market’s increasing<br />
anticipation of monetary tightening, at least in the UK<br />
and eurozone, is ultimately not bullish for inflation<br />
especially inflation forwards. More pressing in the<br />
near term and potentially weighing on breakevens<br />
generally is the significant supply in the final week(s)<br />
of January – France’s EUR 3bn BTANi-16 launch on<br />
Thursday, BTPei supply next week, USD 13bn TIPS<br />
Jan-21 launch and the syndicated re-opening of<br />
UKTi-55 (likely to be around GBP 2.7bn notional).<br />
With the exception of the US where there has been<br />
limited (if any) cheapening ahead of supply, BTANi-<br />
16, UKTi-55 and probably BTPei supply offer good<br />
value after previous underperformance/cheapness.<br />
EUR: The AFT issued 2.995bn (top of the range) of<br />
BTANi 0.45% July 2016 at an average price of 99.48,<br />
i.e 12 cents above grey market levels. A bid/cover at<br />
2.11 is good for such a size and compares with 1.8<br />
for the OATi-19 launch a year ago and 1.5 for OATei-<br />
22 in May. The BTANi-16 is currently trading 21bp<br />
through the OATi-17 and still looks a bit cheap in our<br />
view even though the floor has already lost a third of<br />
its value (given the move to lower inflation volatility).<br />
We like the BTANi-16 in the OATi curve, in ASW and<br />
especially versus EUR breakevens. As written<br />
previously, French linkers will experience much less<br />
negative carry than in Europe and this does not look<br />
priced in at least at the front end (Chart 3).<br />
Admittedly, it is difficult to short EUR breakevens<br />
(outright) in the current market environment of rising<br />
headline inflation – our economists have raised their<br />
HICP forecasts with stronger food, energy and core<br />
inflation by the year-end. Nonetheless, January’s<br />
preliminary HICP data have surprised to the<br />
downside in 5 of the last 8 years and only once to the<br />
upside (Chart 3) – first indications in Germany from<br />
27 January. Meanwhile, upcoming BTPei supply<br />
could help the concession on ‘rich-looking’ EUR<br />
Ch. 1: Commodities, EQ and BEs at Local Highs<br />
Chart 2: Asset Positioning – Less Long than in<br />
November/December Except Commodities<br />
Chart 3: OATei-12/OATi-17 BE versus NY, Oil &<br />
EURUSD: Regression Residuals versus Carry<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
OATEI12 / OATI17 Breakeven / OIL / EURUSD Residuals<br />
1m Carry<br />
Fwd Carry<br />
-50<br />
Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11<br />
OATEI12 / OATI17 Breakeven / OIL / E Yield Move Carry Potential?<br />
1m 52.1 -21.4 30.7<br />
2m 17.5 22.2 39.7<br />
3m -18.9 31.2 12.3<br />
4: Watch Out for Downward Jan HICP Surprise<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
Jan uses to suprise<br />
on the downside<br />
jan feb mar apr may jun jul aug sep oct nov dec<br />
All charts source: <strong>BNP</strong> Paribas, Bloomberg<br />
Below In Line Above<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
-50<br />
Shahid Ladha / Herve Cros / Sergey Bondarchuk 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
53<br />
www.Global<strong>Market</strong>s.bnpparibas.com
eakevens. Italy should announce details of its<br />
scheduled 26-Jan auction on Friday (21 January).<br />
The 10y and 30y benchmarks (BTPei-21 and ei-41)<br />
are good candidates for re-opening, but there is a<br />
risk Italy could issue a new 5y or 15y BTPei given<br />
little EURxt issuance in January (only EUR 1bn from<br />
Germany). Reminder: BTPeis generally look cheap<br />
versus OATei and especially against rich DBRei<br />
paper which have enjoyed a scarcity premium<br />
suggesting the BTPei supply will offer value.<br />
GBP: Breakevens are little changed on the week.<br />
December’s CPI was very strong at 3.7% y/y (versus<br />
consensus at 3.4%). Food, petrol and utility bills were<br />
strong as expected. But core was also strong at 2.9%<br />
y/y (+0.2 upward surprise) on recreation/goods prices<br />
despite weaker clothing. Meanwhile, RPI printed<br />
228.4, +0.7% m/m, in line with consensus but below<br />
<strong>BNP</strong>P’s call. The strong CPI headline and core is not<br />
the ideal (policy) mix for breakevens MT given the<br />
risk of monetary tightening ahead, even though RPI<br />
does benefit directly from base rate hikes via MIPS<br />
ST. We continue to receive May MPC’s meeting – a<br />
rate hike is now 80% priced in. We continue to<br />
recommend taking profit on our favourite trade into<br />
2011, long the UKTi-13 breakeven, after its 40bp<br />
performance net of carry in 2011 ahead of likely<br />
extension activity.<br />
The strong 25y Gilt auction confirms the bid for<br />
duration and we expect next week’s UKTi-55<br />
syndication to meet with strong demand. The<br />
underperformance of the belly (10-20y) in nominal,<br />
real yield and breakeven space could continue at<br />
least in inflation space. Supportive demand<br />
conditions include pension funds in surplus likely LDI<br />
needs, coupon payments (GBP 770mn, 75% in the<br />
final week), 5y+ Linkers Index extension (+0.35y)<br />
versus a limited size (we estimate up to GBP 3bn<br />
notional) due to DMO Remit. Strong outright value<br />
and convincing RV arguments add further support.<br />
Our favourite trades include 10/50y real yield<br />
flattener and long UKTi-55 breakeven. See our<br />
upcoming extensive desknote, “GBPi: UKTi-55<br />
Syndication – Selling Note” for further details.<br />
USD: As we expected, the Fed concentrated<br />
purchases in TIPS Jul-20 (56%) and TIPS Feb-40<br />
(28%). The remaining 16% of the USD 1.74bn was<br />
scattered across the curve, with 7% (USD 179mm)<br />
spent on
Pricing Date<br />
Repo <strong>Rate</strong><br />
Sett. Date<br />
Table 1: <strong>BNP</strong> Paribas Carry Analysis<br />
Benchmark Carry<br />
20-Jan-11<br />
Term 1<br />
Term 2<br />
2m<br />
3m<br />
6m<br />
12m<br />
0.42% 0.42% 0.34% 0.34% 0.34% 0.56%<br />
21-Jan-11 01-Feb-11 01-Mar-11<br />
21-Mar-11 21-Apr-11 21-Jul-11 23-Jan-12<br />
Yield BE Real BE Real BE Real BE Real BE Real BE Real BE<br />
Short-end<br />
OATei Jul-12 -1.09% 2.15% -0.9 -1.4 31.8 29.2 -16.3 -20.7 -20.0 -26.5 29.5 22.0 -1.8 46.4<br />
OATI Jul-13 -0.39% 1.87% -0.5 -1.1 14.0 10.7 10.4 4.7 21.0 12.2 48.4 33.0 48.3 23.8<br />
TIPS Jul-12 -1.36% 1.80% -2.3 -2.8 1.3 -0.5 12.1 9.3 20.4 15.9 63.8 52.4 -92.6 -124.4<br />
UKTi Aug-13 -1.66% 2.94% 0.9 -0.2 0.6 -3.3 2.3 -3.7 22.7 13.9 50.3 33.0 130.1 97.0<br />
5y<br />
OATei Jul-15 0.50% 1.81% 0.4 -0.4 14.0 10.2 1.0 -5.6 3.7 -6.5 28.2 8.8 47.0 9.7<br />
OATi Jul-17 0.80% 2.08% 0.2 -0.6 7.2 3.4 7.0 0.7 12.6 2.8 26.5 7.9 35.7 -0.6<br />
TIPS Apr-15 -0.20% 1.88% 0.1 -1.1 3.5 -0.5 8.6 2.5 13.7 4.0 32.5 12.0 22.8 -23.0<br />
UKTi Jul-16 -0.06% 2.81% 1.4 0.0 3.7 -1.0 6.3 -0.9 18.5 7.7 38.8 17.2 85.3 41.1<br />
JGBI-4 June-15 0.86% -0.42% -1.7 -1.9 -2.6 -3.5 -9.1 -10.4 -22.6 -24.6 -14.0 -18.2 -2.4 -11.5<br />
10y<br />
OATei Jul-20 1.33% 2.12% 0.4 -0.3 8.0 4.7 2.1 -3.6 4.3 -4.4 18.6 1.9 31.7 -0.8<br />
OATI Jul-19 1.12% 2.16% 0.2 -0.5 6.0 2.4 6.1 0.1 10.8 1.5 22.6 4.9 31.4 -3.0<br />
TIPS Jul-20 1.01% 2.29% 0.4 -0.7 3.1 -1.2 6.2 -0.3 9.7 -0.4 21.4 0.8 24.4 -18.9<br />
UKTi Nov-22 0.80% 3.09% 1.5 0.4 8.3 4.3 9.6 3.5 14.0 4.9 29.0 10.7 46.0 9.3<br />
JGBI-16 June-18 1.30% -0.44% -0.8 -1.2 -0.8 -2.2 -4.6 -6.4 -12.3 -15.1 -5.2 -10.8 5.6 -6.4<br />
30y<br />
OATei Jul-40 1.61% 2.40% 0.2 -0.2 3.1 1.2 1.0 -2.2 1.9 -2.9 7.3 -1.8 12.2 -5.1<br />
OATI Jul-29 1.58% 2.36% 0.2 -0.3 3.7 1.1 3.9 -0.4 6.8 0.1 13.9 1.3 19.9 -4.4<br />
TIPS Feb-40 1.97% 2.61% 0.3 -0.5 1.7 -1.2 3.2 -1.2 5.0 -1.8 10.7 -3.3 13.9 -14.6<br />
UKTI Mar-40 0.86% 3.58% 0.6 -0.1 3.4 0.8 3.9 0.0 5.6 -0.2 11.5 0.0 17.7 -4.8<br />
Short-end<br />
Term 1 -> Term 2 Term 1 -> Term 2 Term 2 -> 3m<br />
3m -> 6m<br />
6m -> 12m<br />
OATei Jul-12 32.7 30.7 -43.2 -45.4 -3.7 -5.8 49.5 48.5 -31.3 24.4<br />
OATI Jul-13 14.5 11.8 -1.6 -4.4 10.5 7.5 27.5 20.8 -0.1 -9.1<br />
TIPS Jul-12 3.6 2.3 11.7 10.4 8.3 6.6 43.4 36.5 -156.4 -176.7<br />
UKTi Aug-13 -0.2 -3.0 2.2 -0.6 20.4 17.7 27.7 19.1 79.8 64.0<br />
5y<br />
OATei Jul-15 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0<br />
OATi Jul-17 13.6 10.5 -11.0 -14.2 2.7 -0.9 24.5 15.3 18.8 0.8<br />
TIPS Apr-15 7.0 4.0 0.8 -2.2 5.5 2.1 14.0 5.1 9.1 -8.5<br />
UKTi Jul-16 3.4 0.5 6.0 3.1 5.1 1.6 18.8 8.0 -9.7 -35.0<br />
JGBI-4 June-15 -0.9 -1.6 -8.2 -8.8 -13.5 -14.2 8.6 6.4 11.7 6.6<br />
10y<br />
OATei Jul-20 7.6 4.9 -4.8 -7.5 2.2 -0.9 14.3 6.3 13.1 -2.7<br />
OATI Jul-19 5.8 2.9 0.9 -2.0 4.7 1.4 11.7 3.3 8.9 -7.8<br />
TIPS Jul-20 2.6 -0.4 3.8 0.8 3.5 -0.1 11.7 1.2 3.0 -19.7<br />
UKTi Nov-22 6.8 3.9 3.2 0.4 4.4 1.3 14.9 5.8 17.0 -1.4<br />
JGBI-16 June-18 0.0 -1.0 -4.5 -5.4 -7.7 -8.6 7.1 4.2 10.8 4.4<br />
30y<br />
OATei Jul-40 2.9 1.4 -1.7 -3.2 0.9 -0.8 5.4 1.1 4.9 -3.3<br />
OATI Jul-29 3.5 1.4 0.7 -1.3 2.8 0.5 7.1 1.2 6.0 -5.7<br />
TIPS Feb-40 1.4 -0.7 1.9 -0.2 1.8 -0.6 5.7 -1.4 3.2 -11.3<br />
UKTI Mar-40 2.7 0.9 1.3 -0.5 1.7 -0.2 5.8 0.2 6.3 -4.9<br />
Source: <strong>BNP</strong> Paribas<br />
Shahid Ladha / Herve Cros / Sergey Bondarchuk 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
55<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Technical Analysis – <strong>Interest</strong> <strong>Rate</strong>s & Commodities<br />
Bond & Short-Term Contracts<br />
• Europe 10y: Breaking slightly above key 3.09/3.12 (LT 38.2% & MT 61.8%), opening the way for 3.25 area<br />
• US 10y: Toppish around key 3.37 (MT 61.8%) within a ST triangle (3.25/3.44) and below 3.63 (LT falling res)<br />
• Short-term contracts m1: MT toppish bias on ED & Euribor, but a ST rising one on ED while Euribor is down<br />
Equities & Commodities<br />
• WTI (Cl1): Sill up MT within MT rising channel but still stalling around 91.86 wave “A” top, with risk now of 2-tops<br />
• Equity markets: MT positive bias persists but a ST toppish tone is developing. Larger fall is needed to turn down<br />
US 10y: Toppish around key 3.37 (MT 61.8%) with risk towards ST 38.2% MT Trend: Up Range: 3.20/3.45<br />
MT SCENARIO remains up<br />
<strong>Market</strong> remains up oriented MT within a MT<br />
rising “C of ABC” scenario which is likely to<br />
send it towards key 4.00/4.07 (April top & LT<br />
61.8%) initially and then key 4.59 (LT falling<br />
channel res). A break above 3.44 (daily<br />
triangle res) and the key 3.63 (4-year falling<br />
resistance) level is needed to strengthen this<br />
MT bearish scenario<br />
2.80 4.00/4.07<br />
ALTERNATIVE SCENARIO...ST correction<br />
It fails to extend the rise beyond 3.63 (LT<br />
falling resistance line), capped by top<br />
reversal, and starts a ST consolidation<br />
towards 3.09 (ST 38.2%) initially. First<br />
positive step would be a break below 3.25<br />
(wave “A” low & ST triangle support)<br />
STRATEGY<br />
Enter long on 3.40 area, S/L 3.46, for<br />
3.15/3.25 or buy stop 3.25 break, S/L 3.31,<br />
for 3.05/3.10<br />
US/EUR 10y bond: Is it now developing the main falling wave ? MT Trend: Down Range: 15/30<br />
MT SCENARIO is down<br />
After the 5 waves down move (major wave<br />
“A”?) which reached the key 0.2/0.6 support<br />
area, it has started a correction (major wave<br />
“B”?) above the MT falling wedge. This move<br />
may end close to key 56.2 (ST 61.8%) and<br />
the main risk now is to have started the main<br />
falling wave “C” towards 8.2 (wave “A” low)<br />
initially and then key -21.4 (LT 61.8%). ST<br />
bearish confirmation will come from a<br />
sustained break below 22.6/24.5 (61.8%)<br />
-21.4 4.2 => 56.2/57.0<br />
ALTERNATIVE SCENARIO.Wave B extends<br />
Rising correction (major wave “B”?) is not<br />
over and rise resumes from key 22.7/24.5<br />
area towards 45.7 top again and then towards<br />
critical 56.2 (ST 61.8%). A break then above it<br />
would call for a move towards key 85.8/85.9<br />
(wave “5” top & LT falling channel resistance)<br />
STRATEGY<br />
Wait for a rebound to enter short<br />
Christian Sené 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
56<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Germany 10y: MT 61.8% (3.12) break could trigger a rise towards 3.25 MT Trend: Up Range: 3.00/3.20<br />
MT SCENARIO is still up<br />
2.56
Trade Reviews<br />
Options, Money <strong>Market</strong> and Bond Trades – Tactical & Strategic Trades<br />
This page summarises our main tactical (T) and strategic (S) trades. The former focus on short-term horizons (a few weeks),<br />
allowing one to play any near-term corrections within a defined trend, while the latter rely on a medium-term assumed trend.<br />
For each trade we provide the expected target and the recommended stop loss.<br />
Existing Strategies<br />
Yield Curves<br />
BTP Flattener Long BTP 5% Sep 40 Short BTP 4% Sep 20<br />
We enter 2/3 now and the rest on any overshoot to 90bp.<br />
Tsy Flattener Sell UST 5Y Buy UST 10Y<br />
Structurally, we like the trade given QE2 purchases. PCA also shows that 10s look<br />
cheap while 5s look rich, which makes us comfortable with the timing of this trade.<br />
Also, there is a slight flattening bias beginning next week going into the following<br />
week's 5y auction.<br />
EUR Butterfly Receive EUR 2/5/10s M1 IMM<br />
Proxy for 2/10s flatteners with positive carry.<br />
Cross <strong>Market</strong>s<br />
USD Agency Callable Long FNMA 5nc6M 2.60 01/16 Short T 0.75 08/13<br />
Short-vol bullish strategies in the short end are attractive given the Fed status.<br />
Callables outperform in a range-bound environment, but currently tolerate a larger<br />
rise in rates (+115 bps) than a rally (-20 bps) before breaking even over a 6m<br />
horizon.<br />
Money <strong>Market</strong>s<br />
U1U2 Euribor/Eurodollar box Long Eurodollar Short Euribor<br />
We entered 2/3 of the position and would add at 10bp.<br />
GBP OIS Swap Pay May11 MPC<br />
Media and economists are beating on the inflation drum. The front end has been<br />
listening: we tactically try to ride the bearish momentum in the market via OIS swap<br />
at small size.<br />
78.5<br />
(S)<br />
138.5<br />
(S)<br />
15.5<br />
(T)<br />
-4k<br />
(S)<br />
17<br />
(T)<br />
0.71<br />
(T)<br />
70 94 85.5<br />
(13-Jan)<br />
-1.5bp 10k EUR 70k<br />
7bp<br />
130 146 138.5<br />
5k/01 USD 0k<br />
(13-Jan)<br />
0bp<br />
0.0 16.5 11.5<br />
(05-Jan)<br />
300k -150k 0k<br />
(06-Jan)<br />
30/35 7 15<br />
(14-Jan)<br />
0.75 0.64 0.67<br />
(11-Jan)<br />
Options<br />
Euribor Put Spread Buy ERU1 9862/50 P/S<br />
5.5 12.0 0.0 3.0<br />
Bearish long-term strategy, playing improved macro conditions, the ECB's exit<br />
strategy as well as the risk of a rate hike in Q2. Good entry level for shorts after<br />
aggressive rally at the end of 2010.<br />
(S)<br />
(04-Jan)<br />
*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps.<br />
+1.0bp 10k/01 EUR -40k<br />
-4bp<br />
1k/01 USD<br />
-4k<br />
10k EUR 20k<br />
+2bp<br />
7.5k/01 GBP +30k<br />
+4bp<br />
12.5k/01 EUR +32k<br />
+2.5bp<br />
<strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong> 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
58<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Travelling Asia<br />
• Inflation has emerged in Asia. Changes in<br />
relative competitiveness are in train,<br />
suggesting Asia’s surpluses will erode over<br />
time.<br />
• China’s booming economy will be most at<br />
risk should inflation accelerate further. But<br />
markets may have started with an<br />
inappropriate distribution of risk.<br />
• Asset-driven currencies such as the AUD<br />
are the most vulnerable. The EUR will benefit<br />
from the credibility of its central bank…<br />
• …but the ECB’s inflation-fighting<br />
credentials will be challenged by diverging<br />
monetary conditions.<br />
• Rising global inflation will put the JPY<br />
under selling pressure.<br />
The challenge of inflation: The example of India<br />
I am writing this document during a business trip to<br />
Asia. It has been fascinating talking to our clients and<br />
to policymakers. While Asia is clearly booming, the<br />
clouds of inflation are appearing in the blue sky; the<br />
outlook is no longer universally sunny.<br />
India, which had been hoping to become a second<br />
China because of its growth dynamics, is now<br />
hopelessly behind the curve in respect of tackling<br />
inflation. The RBI has allowed real rates to become<br />
negative, the current account deficit is taking off and<br />
the government is acting only slowly to reduce its<br />
fiscal deficit.<br />
Still, India is an agriculturally driven country, with the<br />
monsoon heavily influencing the state of the<br />
economic cycle. Last year’s good monsoon season<br />
helped push GDP growth up to 8% but industrial<br />
production growth has now declined to 2.7%. Rising<br />
inflation rates will undermine India’s competitiveness,<br />
not boding well for its already-weakening trade and<br />
current account deficits.<br />
Meanwhile, the RBI stands at a crossroads. Either it<br />
understands the inflation risks and acts accordingly,<br />
putting rates up aggressively or it remains behind the<br />
curve.<br />
In the first scenario, India would face a cyclical<br />
slowdown due to rising real rates. In the second<br />
case, India would be heading into troubled waters<br />
where rising inflation expectations kill off inward<br />
investment. Falling real rates would start<br />
undermining the INR.<br />
9.5<br />
9<br />
8.5<br />
8<br />
7.5<br />
7<br />
6.5<br />
6<br />
5.5<br />
5<br />
Chart 1: India Behind the Curve<br />
4.5<br />
Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10<br />
Source: Bloomberg, <strong>BNP</strong> Paribas<br />
0.34<br />
0.33<br />
0.32<br />
0.31<br />
0.3<br />
0.29<br />
0.28<br />
0.27<br />
0.26<br />
0.25<br />
0.24<br />
WPI (y/y, RHS)<br />
RBI CRR<br />
Chart 2: China Wages Relative to Output are<br />
Rising<br />
China Wages are a proportion of GDI<br />
China CPI (y/y, RHS)<br />
Mar-92 Sep-94 Mar-97 Sep-99 Mar-02 Sep-04 Mar-07 Sep-09<br />
Source: Reuters Ecowin Pro, <strong>BNP</strong> Paribas<br />
We discussed this topic with a well-respected Asianbased<br />
hedge fund manager. The conclusion we<br />
reached was that either scenario would lead to lower<br />
share prices. Last week, the Indonesian equity<br />
market moved into a higher volatility regime. In 2009<br />
and especially 2010, the Indonesian market saw a lot<br />
of inward investment and was one of the best<br />
performers globally. That might be changing now as<br />
inflation is on the rise. India is in the same boat as its<br />
equity market was the main destination for foreign<br />
inflows into the country. Since November, shares in<br />
Bombay have lost around 10% and we wonder when<br />
there will be a bigger correction in the FX market on<br />
the back of this development.<br />
China: domestically funded leverage<br />
The other big theme is China and its satellite<br />
economies. Looking out of the hotel room window, I<br />
5<br />
0<br />
-5<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
30<br />
25<br />
20<br />
15<br />
10<br />
-2<br />
Hans Redeker 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
59<br />
www.Global<strong>Market</strong>s.bnpparibas.com
notice construction activity as far as the eye can see.<br />
In downtown Hong Kong, real estate is selling for<br />
EUR 5000 per square foot, driving house prices<br />
relative to income to unrealistic levels. However,<br />
lending restrictions have been introduced that limit<br />
the leverage relative to the cost of the real estate<br />
project to 75%; this will provide the housing market<br />
with a good cushion. Hence we do not envisage the<br />
Hong Kong real estate market undergoing a Dubaistyle<br />
crash.<br />
However, we wish to highlight the impact of a<br />
booming real estate market on consumer price<br />
inflation. Unlike Dubai, Hong Kong’s real estate<br />
boom is only moderately leveraged and is funded by<br />
Chinese real money. Nonetheless, real estate prices<br />
rising out of all proportion to income will squeeze<br />
low-income groups out of the cities. As low-income<br />
groups tend to be service providers, it should not be<br />
a surprise to see Hong Kong’s real estate boom<br />
leading to a period where inflation is an issue.<br />
Rising bills<br />
Each time I go to Asia, my bills are higher than on<br />
previous visits. There is a lot of anecdotal evidence<br />
suggesting Asia is inflating its relative<br />
competitiveness away. Official data may understate<br />
real inflation by a substantial margin and the Chinese<br />
administration’s endorsement of 20% wage<br />
increases may be viewed as a move to calm the<br />
population’s anger as real incomes are eroded by<br />
rising prices.<br />
The motivation behind the PBoC’s current policy<br />
mix<br />
Last Friday, the PBoC again increased its minimum<br />
reserve requirements with the aim of reducing the<br />
velocity of money and credit in the Chinese<br />
economy. This policy has become known as<br />
quantitative tightening. There has been a lively<br />
discussion on why China has largely been refraining<br />
from using the traditional interest rate tool to fight<br />
inflation. An argument often deployed is that higher<br />
RMB money market rates could trigger an inflow of<br />
unwanted hot money, pushing currency reserves up<br />
even up rapidly. Indeed, absorbing incoming<br />
reserves by selling sterilization bonds has become<br />
an increasingly costly business for the PBoC given<br />
the negative spread between the yield from foreign<br />
currency reserves and the yield offered by the<br />
sterilisation bonds.<br />
Nonetheless, the main reason why China is using the<br />
interest rate tool only reluctantly is the highly<br />
leveraged “state-owned” corporate sector. Here,<br />
higher interest rates could burst the leverage bubble.<br />
China’s households have on average saved 35% of<br />
their income on average over the past decade. As<br />
authorities run a closed capital account and<br />
50.0<br />
49.0<br />
48.0<br />
47.0<br />
46.0<br />
45.0<br />
44.0<br />
43.0<br />
Chart 3: US Wages Relative Output have<br />
Declined<br />
42.0<br />
Sep-75Jun-79 Mar-83 Dec-86Sep-90Jun-94 Mar-98Dec-01Sep-05Jun-09<br />
Source: Bloomberg, <strong>BNP</strong> Paribas<br />
Percent<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
-1<br />
US Wages are a proportion of GDI<br />
US CPI (y/y, RHS)<br />
Chart 4: USD Vs CNY 3m Bill <strong>Rate</strong>s<br />
USD 3m bill yield<br />
households have saved for pension and rainy-day<br />
purposes, savings were accumulated into bank<br />
deposits. Domestic banks have only been allowed to<br />
lend domestically, which in a booming economy is<br />
relatively unproblematic. However, Chinese bankers<br />
(as everywhere else in the world) are paid to ride the<br />
yield curve and convert deposits into vast amounts of<br />
credit. China’s household savings relative to GDP<br />
have reached 100% but state-owned corporate<br />
liabilities are now a multiple of that.<br />
China’s national accounts data are not yet as<br />
comprehensive enough as those provided by<br />
Western statistics offices. However, given the closed<br />
capital account and huge private household savings,<br />
either the corporate or sovereign sector must be<br />
deeply in the red. In China, it is the state-owned<br />
corporate sector which is highly leveraged and thus<br />
sensitive to changing funding costs. The Chinese<br />
authorities know that, explaining why they have been<br />
reluctant to use the interest rate tool.<br />
12.0<br />
10.0<br />
Nov May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb<br />
06 07<br />
08<br />
09<br />
10 11<br />
Source: Reuters Ecowin Pro, <strong>BNP</strong> Paribas<br />
CNY 3m bill yield<br />
8.0<br />
6.0<br />
4.0<br />
2.0<br />
0.0<br />
-2.0<br />
-4.0<br />
-6.0<br />
-8.0<br />
Hans Redeker 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
60<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Capitalism requires business cycles<br />
There has been much admiration for the Chinese<br />
state-controlled economic model. We predicted that<br />
China in 2009 would be the anchor of stability for the<br />
global economy and so it turned out. However, we<br />
are not sure that the same can be said for the next<br />
12 months. Yugoslavia showed that a statecontrolled<br />
market economy cannot ignore the need<br />
for business cycles to correct wasteful investment.<br />
The business cycle works in the capitalist economy<br />
as a quality control for the efficient use of resources.<br />
Business cycles are necessary and useful. In its<br />
2006 stability report, the IMF illustrated that delaying<br />
cyclical downturns only makes the following<br />
recession deeper and more painful. In this sense, the<br />
absence of a Chinese business cycle is worrying and<br />
implicitly suggests that there must be a certain<br />
degree of wasteful investment in the economy which<br />
at one point will have to be cleared out. What should<br />
not be forgotten either is that wasteful investment<br />
reduces efficiency, turning a competitive and noninflationary<br />
economy slowly into a non-competitive<br />
and inflationary one.<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
70<br />
Graph 5: USD – CNY REER gap has Widened<br />
by 30%<br />
Jan-94<br />
Apr-95<br />
J u l -96<br />
O c t -97<br />
Jan-99<br />
Apr-00<br />
Jul-01<br />
Oct-02<br />
Source: Reuters Ecowin Pro, <strong>BNP</strong> Paribas<br />
CNY Broad BIS REER<br />
Jan-04<br />
A p r- 05<br />
USD Broad BIS REER<br />
Chart 6: Chinese Shares have Underperformed<br />
Jul-06<br />
Oct-07<br />
Jan-09<br />
Apr-10<br />
Does that mean the consensus has started the year<br />
with a wrong distribution of risk preference? Most<br />
think that the main risk of economic<br />
underperformance should be associated with the US.<br />
They have allocated their currency portfolios<br />
accordingly, using the USD as a funding currency.<br />
Along with a better-than-expected performance by<br />
the US economy, Asia’s inflation rate could<br />
undermine this investment strategy.<br />
The meaning of inflation for currency markets<br />
Indeed, the economic outlook for China and by<br />
extension Asia depends on the seriousness of the<br />
current inflation wave. The consensus sees inflation<br />
as mainly driven by commodity-driven cost-push<br />
effects. If this assumption proved correct, current<br />
prices would stabilise within a year. What we find<br />
disturbing is that the rhetoric has taken the same<br />
angle as in the early 1970s when the Yom Kippur<br />
war triggered the first oil price shock. Then, It was<br />
argued that higher oil prices would reduce real<br />
disposable income and would in fact prove to be<br />
deflationary in the long run. Hence they did not<br />
require attention from monetary authorities. This view<br />
backfired in the 1970s, a decade when inflation<br />
proved a real problem. <strong>Interest</strong>ingly, the 1960s had<br />
seen a sharp expansion of the monetary base,<br />
exceeding GDP by a multiple. Over the past couple<br />
of years, the same has happened on a global scale.<br />
That is good enough reason in our view to discuss<br />
what will happen on FX markets, should inflation<br />
become a theme.<br />
Changing the way we look at FX<br />
Source: Reuters Ecowin Pro, <strong>BNP</strong> Paribas<br />
First, we will have to change the way of analysing FX<br />
markets. During the time of the ‘Great Moderation’,<br />
central bank credibility advanced to ever-higher<br />
rates, allowing us to use nominal interest rate and<br />
yield differentials to predict currencies. At times of<br />
corporate-dominated cross-border flows, we used<br />
corporate bond market yields but, most of the time,<br />
sovereign flows dominated cross flows anyway,<br />
keeping the emphasis on sovereign yield<br />
differentials.<br />
When inflation comes back, it will be real yield<br />
differentials that tell us if currencies have upside or<br />
downside potential.<br />
The relative credibility of central banks will<br />
determine the value of FX<br />
Secondly, central banks will be differentiated<br />
according to their willingness to tackle inflation head<br />
on. In the case of Indonesia and India, markets have<br />
started expressing doubts, putting their asset<br />
markets under selling pressure. The selling pressure<br />
Hans Redeker 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
61<br />
www.Global<strong>Market</strong>s.bnpparibas.com
will be strong for those currencies that have seen<br />
solid foreign inflows beforehand.<br />
When discussing inflation-fighting credentials, the<br />
ECB stands out. Only last week, the ECB’s Trichet<br />
expressed his unease at EMU HICP moving above<br />
the ECB’s 2% ceiling. Instantly, the euro rushed<br />
higher. However, in the case of the EUR, the<br />
credibility of the ECB must also be viewed in the<br />
context of outstanding credit risks, leading to nonhomogenous<br />
monetary conditions within the<br />
eurozone. Table 7 alongside has been constructed<br />
with the help of the IMF. It shows debt levels and the<br />
interest rate-growth differentials of selected EMU<br />
countries. At the start of the currency union, rates<br />
were way too loose for peripheral countries. The rule<br />
of thumb suggests that nominal GDP and rates<br />
should be at approximately the same level. The rule<br />
should particularly apply in the long term.<br />
Table 7: Public Debt and <strong>Interest</strong> <strong>Rate</strong>–Growth<br />
<strong>Rate</strong> Differential (pp)<br />
Country<br />
Debt/GDP<br />
2007 2009 2015 1/ Historical /2 Projected /1<br />
France 63.8 77.4 94.8 0.8 0.5<br />
Germany 65 72.5 81.5 2.6 1.5<br />
Greece 95.6 114.7 158.6 -1.5 2.2<br />
Ireland 24.9 64.5 94 -5.8 3.2<br />
Italy 103.4 115.8 124.7 1.4 1.7<br />
Portugal 63.6 77.1 98.4 -0.6 2.2<br />
Spain 36.1 55.2 94.4 -2.4 2.6<br />
Median 63.8 77.1 94.8 -0.6 2.2<br />
Mean 64.6 82.5 106.6 -0.8 2<br />
Source: IMF’s WEO database, <strong>BNP</strong> Paribas<br />
<strong>Interest</strong> rate-Growth rate Differential<br />
Chart 8: USD Liquidity vs. S&P 500, CRB<br />
However, before the crisis, peripheral countries<br />
enjoyed relative to their nominal GDP growth very<br />
low funding costs, which led to booming and<br />
consequently busting assets. The table shows that<br />
Ireland ran a negative interest rate-growth gap of<br />
5.6%. But now, as assets have tanked, peripheral<br />
countries are exposed to liabilities no longer covered<br />
by asset values.<br />
The funding costs of these liabilities have soared and<br />
will stay high if you believe the IMF numbers, leading<br />
to the perverse situation that monetary conditions in<br />
the recessionary countries of Europe’s periphery<br />
have tightened while booming Germany faces superloose<br />
monetary conditions. This environment will put<br />
the inflation-fighting credentials of the ECB to the<br />
test.<br />
We recall the situation from August to early<br />
November, when the ECB channelled 3mths Euribor<br />
rates up by about 60bp. At the same time, intra-EMU<br />
credit spreads widened, leaving us confident with our<br />
EURUSD 1.34 year-end call for 2010. Now as<br />
inflation is moving up and the ECB rhetoric is<br />
becoming more hawkish, we are watching credit<br />
spreads with interest. As long as credit does not pop<br />
up, the euro will strengthen, supported by<br />
expectations of a hawkish central bank reaction to<br />
rising inflation.<br />
However, recessionary peripheral economies facing<br />
already-tight monetary conditions are unlikely to cope<br />
well with monetary tightening. Inflation and the<br />
reaction of central banks must always be viewed in<br />
the context of credit; this is particularly the case for<br />
EMU.<br />
Inflation will kill the ‘quasi-China trade’<br />
Source: Reuters Ecowin Pro, <strong>BNP</strong> Paribas<br />
Third, the emergence of inflation might actually be<br />
good news for countries currently stuck in deflation or<br />
facing the threat of deflation (e.g. Japan and the US,<br />
respectively). On the other hand, inflation represents<br />
the biggest threat in countries where there has been<br />
domestically built up leverage.<br />
Above, we discussed the case of China, where<br />
inflation will either undermine the real value of<br />
household assets (in the case of deposit rates<br />
remaining below inflation) or the highly leveraged<br />
corporate sector faces rising funding costs (should<br />
the central bank take on the fight against inflation by<br />
increasing official lending rates). In our view, the<br />
inflation trade is the ‘anti quasi-China trade’ working<br />
against shares, commodities and last and not least<br />
the AUD. Inflation will bring the USD-funded carry<br />
trade to an abrupt halt, leading to a higher USD.<br />
Inflation will weaken the JPY<br />
Fourth, rising inflation globally will put the JPY under<br />
significant selling pressure. Japan has accumulated<br />
foreign currency hedged assets as hedging costs<br />
became virtually zero in a world where quantitative<br />
easing is a common policy tool. When inflation<br />
comes back and central banks tighten policy, the<br />
JPY will fall victim to the process.<br />
Hans Redeker 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
62<br />
www.Global<strong>Market</strong>s.bnpparibas.com
EURUSD Rally Eyes 1.3750-1.3950<br />
• The EURUSD rally is poised to break out above 1.3500 sparking a larger medium-term rally toward<br />
1.3745-1.3980<br />
• Bullish weekly momentum appears strong enough to fuel a larger rise toward 1.40-1.41 over the<br />
next 3-5 weeks<br />
• However, a break above 1.40 would increase the odds of a multi-month EURUSD rally toward<br />
1.4335-1.4455<br />
• The US Dollar Index (DXY) has broken its December base favouring a deeper dive towards 76.25<br />
The EURUSD rally has broken above 1.3500 this<br />
week hitting its highest level since late November.<br />
By overcoming 6 weeks of resistance between<br />
1.3435 and 1.3500, the rise favours a medium-term<br />
extension towards the 1.3745/85 resistance<br />
including the 61.8% Fibonacci retracement point of<br />
November-January’s decline.<br />
The bullish tone of weekly momentum suggests the<br />
EURUSD rally may reach 1.40-1.41 in the next 3-4<br />
weeks. Currently, weekly momentum (51% on the<br />
8-week stochastic indicator) is strongly bullish,<br />
accelerating and just crossing the neutral zone<br />
(50%). This is similar to weekly momentum<br />
conditions in early July 2010 when EURUSD was in<br />
the midst of its 1.1875-1.3335 summer rally. On a<br />
comparative basis, this suggests the EURUSD rally<br />
has scope to climb another 5-6 cents towards<br />
1.40-1.41 by the end of February.<br />
A further rise above 1.40, however, would be a very<br />
bullish longer-term development opening scope<br />
toward 1.4335-1.4455. It would suggest the June<br />
2010 rise is continuing and will ultimately be<br />
comparable to the October 2008-November 2009<br />
rise, targeting 1.4375 (the 76.4% retracement point<br />
of the November 2009-June 2010 decline) and the<br />
July 2008 downtrend near 1.4455. Such a rise could<br />
persist until mid-March to early April forming a<br />
major EURUSD top in the process.<br />
In the short term, EURUSD could see a pullback<br />
correcting some of its recent gains. Support near<br />
1.3245-1.3200 should limit such losses and provide<br />
a EURUSD buying opportunity.<br />
As the mirror image of EURUSD, the US Dollar<br />
Index (DXY) is falling sharply off its<br />
November/January 81.44/31 double-top. This<br />
week’s break of 78.77 key support (December low)<br />
risks extending the sell-off to the 76.25 double-top<br />
objective. Such a decline would increase the<br />
probability of a longer-term DXY decline towards<br />
75.50-74 akin to a EURUSD rise towards 1.43-1.45.<br />
Chart 1: EURUSD – Medium-term scope to 1.3745/85 and potentially 1.3950/80<br />
EURUSD has cleared<br />
1.4280<br />
the 1.3500 level<br />
1.4160<br />
implying the Nov-Jan<br />
1.40<br />
decline is being<br />
retraced with<br />
1.3500<br />
medium-term scope 1.36<br />
towards 1.3745/85<br />
1.3335<br />
over the next few<br />
weeks.<br />
Bullish weekly and<br />
monthly momentum<br />
could extend the rally<br />
1.32<br />
1.28<br />
1.2965<br />
1.2870<br />
towards 1.3950/80<br />
retracing 3/4ths of the<br />
Nov-Jan decline.<br />
Short-term pullbacks<br />
1.24<br />
1.20<br />
1.2642<br />
towards 1.3245<br />
1.1875<br />
support would<br />
provide a buying<br />
1.16<br />
opportunity.<br />
31-May-10 28-Jul-10 24-Sep-10 23-Nov-10 20-Jan-11<br />
Source: <strong>BNP</strong> Paribas<br />
Andrew Chaveriat 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
63<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Chart 2: US Dollar Index (DXY) – Double-top targets a decline towards 76.25<br />
DXY posted a doubletop<br />
during Nov/Jan, 89<br />
88.35<br />
now favouring a<br />
deeper medium-term 87<br />
decline toward the<br />
76.25 double-top 85<br />
83.55<br />
objective. Accelerating<br />
83<br />
bearish weekly<br />
81.45<br />
momentum risks an 81<br />
even larger dive<br />
towards 75.50 and 79<br />
80.10<br />
potentially 74. Use<br />
short-term rebounds 77<br />
towards 79.50-80.00<br />
75.65<br />
75<br />
resistance to initiate<br />
31-May-10 28-Jul-10 24-Sep-10 23-Nov-10<br />
DXY short positions.<br />
Source: <strong>BNP</strong> Paribas<br />
USDMXN has<br />
posted a sharp<br />
decline during the<br />
past 6 weeks<br />
breaking long-term<br />
12.0440 Fibonacci<br />
support and trading<br />
at levels last seen<br />
during the Lehman<br />
crisis.<br />
This decline saw<br />
USDMXN become<br />
deeply oversold. We<br />
now expect a rebound<br />
off the recent 11.9440<br />
low towards the<br />
12.17-12.23 area.<br />
Source: <strong>BNP</strong> Paribas<br />
USDTRY has broken<br />
sharply lower through<br />
November’s major<br />
uptrend support.<br />
The bearish trend<br />
reversal has been<br />
validated by the further<br />
break below 1.5375<br />
key support.<br />
We now expect a<br />
multi-week decline<br />
towards 1.5150-1.49.<br />
Use short-term rallies<br />
towards the 1.56-1.57<br />
area to enter sell setup.<br />
Chart 3: USDMXN – Rebounding off multi-year low<br />
13.60<br />
13.40<br />
13.20<br />
13.00<br />
12.80<br />
12.60<br />
12.40<br />
12.20<br />
12.00<br />
11.80<br />
11.60<br />
13.40<br />
31-May-10<br />
12.10<br />
13.20<br />
12.45<br />
28-Jul-10<br />
13.25<br />
24-Sep-10<br />
12.15<br />
Chart 4: USDTRY – Breaking lower through major uptrend<br />
1.65<br />
1.60<br />
1.55<br />
1.50<br />
1.45<br />
1.40<br />
1.35<br />
1.5965<br />
21-May-10<br />
1.6065<br />
1.4810<br />
20-Jul-10<br />
1.5355<br />
16-Sep-10<br />
1.3830<br />
12.60<br />
23-Nov-10<br />
1.5920<br />
19-Nov-10<br />
81.30<br />
20-Jan-11<br />
11.95<br />
20-Jan-11<br />
1.5935<br />
20-Jan-11<br />
Source: <strong>BNP</strong> Paribas<br />
Andrew Chaveriat 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
64<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Currency Spot Trade Recommendations Date<br />
NOKSEK 1.1355 Sell 1.1360, stop 1.1440, target 1.1060 20 Jan 2011<br />
AUDMXN 11.930 Sell 11.980, stop 12.120, target 11.600 20 Jan 2011<br />
AUDUSD 0.9890 Short at 1.0050, stop 1.0150, target 0.9420 19 Jan 2011<br />
AUDCAD 0.9900 Short at 0.9995, stop 1.0090, target 0.9460 19 Jan 2011<br />
USDCHF 0.9630 Long at 0.9560, stop 0.9460, target 0.9990 18 Jan 2011<br />
USDJPY 82.70 Long at 82.40, stop 81.40, target 85.40 17 Jan 2011<br />
USDKZT 146.95 Short at 147.00, stop at 149.50, target 135.00 28 May 2010<br />
Source: <strong>BNP</strong> Paribas<br />
Andrew Chaveriat 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
65<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Oil Update: Brent Premium the New Norm<br />
• WTI has tested the top of a loose USD 80-<br />
90/Bbl range that we believe will be in place for<br />
H1 2011. Fundamentals have not tightened<br />
sufficiently to sustain a durable move higher in<br />
WTI.<br />
• The spread between WTI and North Sea<br />
Brent has widened significantly. Brent has<br />
developed a large premium, leading us to reassess<br />
the spread assumption to WTI we use to<br />
derive a price path for the North Sea marker.<br />
• Among the fundamental hurdles the market<br />
faces are significant spare production capacity<br />
in OPEC countries; still-elevated stocks in<br />
consuming countries; and decent y/y non-OPEC<br />
supply growth in Q1 and Q2 2011.<br />
• This year, we expect growth in world oil<br />
demand to slow to around 1.5 mb/d,<br />
commensurate with an easing of global<br />
economic growth from 4.7% to 4%.<br />
• It would not be surprising to see more funds<br />
diverted Brent’s way this year to minimise<br />
negative roll-yield, providing an additional factor<br />
of support for Brent relative to WTI in addition to<br />
the fundamentals.<br />
Testing our view for H1 2011<br />
Over the past couple of weeks, WTI has attempted<br />
but failed to sustain a rise above USD 92/Bbl. We<br />
believe that WTI will probably trade within a loose<br />
USD 80-90/Bbl range that will be in place for H1<br />
2011. Fundamentals have not yet tightened<br />
sufficiently to sustain a durable move higher in WTI.<br />
However, more noteworthy, since December, the<br />
spread between WTI and North Sea Brent has<br />
widened significantly (Chart 1). Brent has developed<br />
a large premium, leading us to re-assess the spread<br />
assumption to WTI we use to derive a price path for<br />
the North Sea marker.<br />
As we discuss further on, the persistence (against<br />
our initial views) of several factors contribute to<br />
making a Brent premium over WTI more the norm<br />
than the exception, at least for 2011 and potentially<br />
2012. As a result, we have revised up our quarterly<br />
profile, with Brent now averaging USD 90/Bbl in<br />
2011, USD 3/Bbl higher than we previously expected<br />
(Table 1). We make only marginal changes to our<br />
WTI profile, with little impact on the annual average.<br />
This is seen at USD 89/Bbl.<br />
Table 1: <strong>BNP</strong>P Crude Oil Price Forecast (18<br />
January 2011)<br />
WTI Revision (2) Brent (1) Revision (2)<br />
Q1 10 (actual) 78.78 .. 77.29 ..<br />
Q2 10 (actual) 78.04 .. 79.47 ..<br />
Q3 10 (actual) 76.11 .. 76.96 ..<br />
Q4 10 (actual) 85.19 -0.81 87.32 0.32<br />
Q1 11 85.00 2.00 88.00 5.00<br />
Q2 11 86.00 2.00 89.00 4.00<br />
Q3 11 90.00 1.00 91.00 3.00<br />
Q4 11 95.00 0.00 97.00 2.00<br />
2009 (actual) 61.79 .. 62.51 ..<br />
2010 (actual) 79.53 0.47 80.26 0.26<br />
2011 89.00 1.00 90.00 3.00<br />
2012 95.00 -1.00 97.00 2.00<br />
Source: <strong>BNP</strong> Paribas 1) Brent is derived from an assumed spread. * 2012 is<br />
based on the forward curve spreads at the time of forecast. 2) vs. 18/11/10 Issue<br />
Chart 1: NYMEX WTI vs. ICE Brent<br />
$/Bbl<br />
NYMEX WTI Mth1 (LHS)<br />
NYMEX WTI ‐ ICE Brent Mth1 (RHS)<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10<br />
Source: Bloomberg and <strong>BNP</strong> Paribas.<br />
Chart 2: Oil Spreads vs. Cushing Stocks<br />
mb<br />
(Inverted)<br />
25<br />
30<br />
35<br />
40<br />
Cushing Crude Stocks (LHS)<br />
NYMEX WTI ‐ ICE Brent Mth1 (RHS)<br />
MYMEX WTI Mth1‐Mth3 (RHS)<br />
Jan 09 Jul 09 Jan 10 Jul 10 Jan 11<br />
Source: Bloomberg, U.S. EIA and <strong>BNP</strong> Paribas<br />
$/Bbl<br />
<strong>Market</strong> conditions not materially different<br />
In our previous forecast 1 , issued on 18 November<br />
2010, we said we expected only a level shift up in the<br />
trading range of WTI for the first half of 2011, rather<br />
1 Oil <strong>Market</strong> Comment “Past the QE sugar rush, then what? (18/11/10)<br />
5<br />
0<br />
‐5<br />
15<br />
10<br />
5<br />
0<br />
‐5<br />
$/Bbl<br />
‐10<br />
‐15<br />
‐10<br />
Harry Tchilinguirian 20 January 2011<br />
<strong>Market</strong> Mover Non-Objective Research Section<br />
66<br />
www.Global<strong>Market</strong>s.bnpparibas.com
than an unrelenting rise in prices as witnessed in<br />
2007-2008. This view was based on the belief that<br />
the market’s balance would tighten progressively. As<br />
such, a sustained leg-up in the price appears more<br />
sustainable in the second half of 2011.<br />
Among the fundamental hurdles the market faces,<br />
we find:<br />
• Spare production capacity in OPEC<br />
countries of about 5.5 mb/d (most of which, unlike in<br />
2008, can be processed with the additions to global<br />
refining conversion capacity over the past two years);<br />
• Still-elevated stocks in consuming countries<br />
(on a volume and demand cover basis); and<br />
• Decent y/y non-OPEC supply growth in Q1<br />
and Q2 2011. We have not changed our point of view<br />
on this assessment.<br />
If global oil demand continues to recover in 2011, this<br />
will be down to emerging markets; the West<br />
continues to struggle. As we ended 2010, world oil<br />
demand had more than recouped its recession and<br />
financial crisis induced declines of 2008-2009. Indeed,<br />
it was up almost 2.7 mb/d y/y at just under 88 mb/d.<br />
This year, we expect growth in world oil demand to<br />
slow to around 1.5 mb/d, commensurate with an<br />
easing of global economic growth from 4.7% to 4%.<br />
Even if we were to assume last’s year pace of growth<br />
in oil demand and zero non-OPEC supply growth,<br />
this would not be enough to exhaust spare<br />
production capacity in OPEC countries in 2011.<br />
Equally, in our last update, we highlighted the risk to<br />
oil prices stemming from inflationary pressures in<br />
emerging markets. We stressed that subsequent<br />
monetary policy tightening would challenge risk<br />
appetite. As a result, liquidity put into risky assets,<br />
including commodities, might be withdrawn. But the<br />
impact of tightening does not end there: expectations<br />
for economic growth and therefore oil demand growth<br />
may become challenged.<br />
Chief among countries in this situation is China, a lead<br />
contributor to oil and commodity demand growth. It<br />
has taken gradual, repeated steps towards tightening<br />
monetary conditions at home through hikes in reserve<br />
requirement for its commercial banks (as well as<br />
outright interest rate hikes and other measures)<br />
As we highlighted in our last price update and in<br />
previous market comments 2 , WTI’s behaviour relative<br />
to Brent was contemporaneous in 2009-2010 with that<br />
mb/d<br />
4.0<br />
3.5<br />
3.0<br />
Chart 3: North Sea Crude Oil Production<br />
Crude Supply<br />
Diff to 5 yr avg<br />
North Sea Crude Production<br />
0.2<br />
0.0<br />
2.5<br />
Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11<br />
Source: IEA Oil <strong>Market</strong> Report, <strong>BNP</strong> Paribas.<br />
'000 Contracts<br />
1600<br />
1500<br />
1400<br />
1300<br />
1200<br />
Chart 4: WTI vs. Brent Open <strong>Interest</strong><br />
NYMEX WTI (LHS)<br />
ICE Brent (RHS)<br />
‐0.2<br />
‐0.4<br />
‐0.6<br />
‐0.8<br />
‐1.0<br />
‐1.2<br />
1000<br />
900<br />
800<br />
700<br />
1100<br />
600<br />
Jan 09 Jul 09 Jan 10 Jul 10 Jan 11<br />
Source: Bloomberg, <strong>BNP</strong> Paribas.<br />
Chart 5: Share of WTI, Brent in the S&P GSCI*<br />
40%<br />
30%<br />
20%<br />
10%<br />
WTI Brent<br />
36.2%<br />
32.4% 32.7%<br />
12.7%<br />
14.3% 15.1%<br />
Jan 09 Jan 10 Jan 11<br />
Source: Index sponsor and <strong>BNP</strong> Paribas. * Indicative.<br />
of its contango on the short-dated portion of the<br />
futures curve (Chart 2). While US crude oil inventories<br />
have regularly declined, mainly on the Gulf Coast,<br />
those at Cushing bucked the trend in December by<br />
climbing higher. At the last count, they stood at 37 mb,<br />
or near their mid-March peak, when both the front<br />
month contango on the WTI curve and WTI’s spread<br />
to Brent widened considerably.<br />
This accumulation of stocks, driven by either weaker<br />
off-take of crude by refiners or excess supply trapped in<br />
a landlocked location, matters less than the fact that<br />
2 Oil <strong>Market</strong> Comment “Brent/WTI Premium the Usual Suspects<br />
(24/11/10)<br />
Oil <strong>Market</strong> Comment “Brent Premium to WTI, Live to die another day<br />
(23/08/10)<br />
Harry Tchilinguirian 20 January 2011<br />
<strong>Market</strong> Mover Non-Objective Research Section<br />
67<br />
www.Global<strong>Market</strong>s.bnpparibas.com
available capacity to store surplus crude oil is limited.<br />
While capacity at Cushing has been growing, some of<br />
this storage will be used to increase supplies of heavier<br />
Canadian grades. Alternatives in the form of floating<br />
storage will progressively fall as oil demand recovers.<br />
Given that we see lacklustre prospects for gasoline<br />
demand on the back of a jobless recovery, the scope<br />
for a recovery in US light crude demand seems limited,<br />
notably when, given the addition of conversion capacity,<br />
the heavier (and cheaper) barrel is likely to be favoured.<br />
In addition, the second phase of TransCanada’s<br />
Keystone pipeline expansion will reportedly begin<br />
service this quarter, delivering more Canadian oil<br />
directly to Cushing. A further extension of the pipeline to<br />
the Gulf Coast is still some time away, so without<br />
geographic ‘optionality’, the potential for episodic supply<br />
surpluses remains intact, as does the contango and/or<br />
weakness relative to Brent.<br />
On the Brent side, if an increase in February North<br />
Sea loadings eases supply tensions, the y/y declines<br />
in North Sea crude production (Chart 3) structurally<br />
favour a stronger Brent price. And as the production<br />
base continues to shrink, the benchmark can only<br />
become more upwardly sensitive to disruptions in<br />
comparable quality supplies (Nigerian Bonny Light<br />
for Brent and Angolan Cabinda for Forties, part of the<br />
dated Brent benchmark).<br />
Brent and commodity index switching<br />
Investors’ behaviour may finally be changing, as they<br />
seek to reduce the incidence of large negative rollyields<br />
on the WTI curve by switching to the Brent<br />
contract. While the trend in open interest for WTI and<br />
Brent over 2009-2010 has not shown clear and<br />
present divergence (Chart 4), this could change with<br />
persistence of bouts of WTI weakness tied to<br />
Cushing storage developments.<br />
Contrasting the share of WTI and Brent in the GSCI,<br />
a large long-only passive commodity index (Chart 5),<br />
the re-balancing of weightings in 2011 has been in<br />
Brent’s favour, though WTI still retains the lion’s<br />
share of oil’s contribution to the index.<br />
But investors are not confined to indices, and long<br />
positions on futures can be held independently. As<br />
such, it would not be surprising to see this year more<br />
funds diverted Brent’s way to minimise negative rollyield,<br />
providing an additional factor of support for<br />
Brent relative to WTI in addition to the fundamentals<br />
discussed above.<br />
Harry Tchilinguirian 20 January 2011<br />
<strong>Market</strong> Mover Non-Objective Research Section<br />
68<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Economic Calendar: 21 - 28 January<br />
GMT Local Previous Forecast Consensus<br />
Fri 21/01 07:45 08:45 France Industry Survey (sa) : Jan 103 102 n/a<br />
09:00 10:00 Germany Ifo Headline : Jan 109.9 110.9 109.9<br />
09:00 10:00 Ifo Expectations : Jan 106.9 107.9 106.5<br />
09:00 10:00 Ifo Current Assessment : Jan 112.9 113.9 113.2<br />
09:30 09:30 UK Retail Sales (inc Autos) m/m : Dec 0.3% -2.0% -0.2%<br />
09:30 09:30 Retail Sales (inc Autos) y/y : Dec 1.1% -0.8% 1.1%<br />
14:00 15:00 Belgium Business Confidence : Dec 3.1 2.0 2.6<br />
Sun 23/01 Portugal Presidential Election<br />
Mon 24/01 00:30 11:30 Australia PPI q/q : Q4 1.3% 0.5% n/a<br />
00:30 11:30 PPI y/y : Q4 2.2% 3.2% n/a<br />
08:30 09:30 Netherlands Producer Confidence : Jan 2.5 4.0 n/a<br />
09:00 10:00 Eurozone PMI Manufacturing (Flash) : Jan 57.1 57.1 60.5<br />
09:00 10:00 PMI Services (Flash) : Jan 54.2 54.2 59.0<br />
09:00 10:00 PMI Composite (Flash) : Jan 55.5 55.5 n/a<br />
10:00 11:00 Industrial Orders m/m : Nov 1.4% 2.0% 2.4%<br />
Tue 25/01 00:30 11:30 Australia CPI q/q : Q4 0.7% 0.8% n/a<br />
00:30 11:30 CPI y/y : Q4 2.8% 3.0% n/a<br />
Japan BoJ <strong>Rate</strong> Announcement<br />
07:00 08:00 Germany GfK Consumer Confidence : Feb 5.4 5.4 5.4<br />
07:45 08:45 France Household Consumption m/m : Dec 2.8% -0.5% 0.3%<br />
07:45 08:45 Household Consumption y/y : Dec 1.5% -0.3% 0.3%<br />
07:45 08:45 Housing Starts (3-mths) y/y : Dec 12.1% 9.0% n/a<br />
07:45 08:45 Industry Survey : Q1 9 5 n/a<br />
08:00 09:00 Spain PPI m/m : Dec 0.3% 0.6% n/a<br />
08:00 09:00 PPI y/y : Dec 4.4% 5.0% n/a<br />
09:30 09:30 UK GDP (Prel) q/q : Q4 0.7% 0.3% 0.5%<br />
09:30 09:30 GDP (Prel) y/y : Q4 2.7% 2.4% 2.6%<br />
09:30 09:30 PSNCR : Dec GBP16.8bn GBP16.3bn GBP18.0bn<br />
09:30 09:30 PSNB : Dec GBP22.8bn GBP16.0bn GBP20.0bn<br />
12:00 07:00 Canada CPI m/m : Dec 0.1% 0.2% 0.1%<br />
12:00 07:00 CPI y/y : Dec 2.0% 2.6% 2.5%<br />
12:00 07:00 BoC Core m/m : Dec 0.0% 0.0% -0.1%<br />
12:00 07:00 BoC Core y/y : Dec 1.4% 1.8% 1.7%<br />
14:00 09:00 US S&P/Case-Shiller Home Price Index : Nov<br />
15:00 10:00 Consumer Confidence : Jan 52.5 54.0 54.7<br />
15:00 10:00 FHFA HPI : Nov<br />
Wed 26/01 Australia Public Holiday<br />
09:00 10:00 Italy Retail Sales y/y : Nov -0.6% 1.5% n/a<br />
09:30 09:30 UK BoE MPC Minutes<br />
13:00 14:00 Norway Norges Bank <strong>Rate</strong> Announcement<br />
15:00 10:00 US New Home Sales : Dec 290k 300k 300k<br />
15:30 10:30 EIA Oil Inventories<br />
19:15 14:15 FOMC <strong>Rate</strong> Announcement<br />
16:00 17:00 Eurozone ECB’s Stark Speaks in Kiel, Germany<br />
17:00 18:00 France Job Seekers (ILO def. sa) : Dec 21k -5k n/a<br />
Thu 27/01 23:50 08:50 Japan Trade Balance (nsa) : Dec JPY163bn JPY572bn JPY493bn<br />
(26/01)<br />
07:45 08:45 France Consumer Confidence : Jan -36 -38 -36<br />
08:00 09:00 Spain Retail Sales (Adjusted) y/y : Dec -1.5% -2.2% n/a<br />
08:15 09:15 Sweden Consumer Confidence : Jan 20.8 20.0 n/a<br />
08:30 09:30 Unemployment <strong>Rate</strong> : Dec 7.1% 7.1% n/a<br />
08:30 09:30 PPI m/m : Dec 0.8% 0.6% n/a<br />
08:30 09:30 PPI y/y : Dec 2.2% 2.6% n/a<br />
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Economic Calendar: 21 - 28 January (cont)<br />
GMT Local Previous Forecast Consensus<br />
Thu 27/01 10:00 11:00 Eurozone Economic Sentiment : Jan 106.2 106.4 106.9<br />
(cont) 10:00 11:00 Industry Sentiment : Jan 4.0 5.0 4.5<br />
10:00 11:00 Consumer Sentiment : Jan -11 -11 n/a<br />
10:30 11:30 ECB’s Bini Smaghi Speaks in Bologna<br />
18:00 19:00 ECB’s Tumpel Gugerell Speaks in Mainz, Germany<br />
10:15 11:15 Belgium CPI m/m : Jan 0.4% 0.2% n/a<br />
10:15 11:15 CPI y/y : Jan 3.1% 2.9% n/a<br />
11:00 11:00 UK CBI Distributive Trades Survey : Jan<br />
Germany States’ Cost of Living m/m : Jan 1.0% -0.5% -0.2%<br />
States’ Cost of Living y/y : Jan 1.7% 1.8% 2.1%<br />
HICP (Prel) m/m : Jan 1.2% -0.5% -0.3%<br />
HICP (Prel) y/y : Jan 1.9% 2.0% 2.3%<br />
13:30 08:30 US Durable Goods Orders m/m : Dec -0.3% 2.1% 1.5%<br />
13:30 08:30 Initial Claims 404k 425k 410k<br />
15:00 10:00 Pending Home Sales : Nov<br />
Fri 28/01 23:30 08:30 Japan CPI National y/y : Dec 0.1% -0.1% -0.2%<br />
23:30 08:30 Core CPI National y/y : Dec -0.5% -0.5% -0.5%<br />
23:30 08:30 CPI Tokyo y/y : Jan -0.2% 0.1% -0.2%<br />
23:30 08:30 Core CPI Tokyo y/y : Jan -0.4% -0.2% -0.3%<br />
23:30 08:30 Household Consumption y/y : Dec -0.4% -0.1% -0.7%<br />
23:30 08:30 Unemployment <strong>Rate</strong> (sa) : Dec 5.1% 5.1% 5.1%<br />
(27/01)<br />
BoJ Minutes<br />
08:00 09:00 Spain Unemployment <strong>Rate</strong> : Q4 19.8% 20.1% n/a<br />
08:00 09:00 Norway Unemployment <strong>Rate</strong> (nsa) : Jan 2.7% 2.7% n/a<br />
08:30 09:30 Eurozone Eurocoin : Jan<br />
09:00 10:00 M3 y/y : Dec 1.9% 2.0% 2.0%<br />
09:00 10:00 M3 y/y (3-Mth) : Dec 1.3% 1.6% 1.6%<br />
09:00 10:00 Bank Lending y/y : Dec 2.0% 2.3% n/a<br />
09:10 10:10 Retail PMI : Jan 52.9 53.2 n/a<br />
08:30 09:30 Sweden Retail Sales (sa) m/m : Dec 0.1% 0.3% n/a<br />
08:30 09:30 Retail Sales (nsa) y/y : Dec 5.3% 5.0% n/a<br />
08:30 09:30 Italy ISAE Consumer Confidence : Jan 109.1 108.6 108.9<br />
09:00 10:00 Wages m/m : Dec 0.2% 0.0% n/a<br />
09:00 10:00 Wages y/y : Dec 1.7% 1.6% n/a<br />
10:30 11:30 Switzerland KOF Leading Indicator : Jan 2.10 2.05 n/a<br />
13:30 08:30 US GDP (Adv, saar) q/q : Q4 2.6% 2.9% 3.4%<br />
13:30 08:30 GDP Deflator (Adv, saar) q/q : Q4 2.1% 1.5% 1.7%<br />
13:30 08:30 Employment Cost Index q/q : Q4 0.4% 0.5% 0.5%<br />
13:30 08:30 Employment Cost Index y/y : Q4 1.9% 2.0% n/a<br />
14:55 09:55 Michigan Sentiment (Final) : Jan 72.7 (p) 73.5 73.0<br />
During 27/1-4/2 Germany Import Prices m/m : Dec 1.2% 1.0% 1.0%<br />
Week Import Prices y/y : Dec 10.0% 10.6% 10.6%<br />
27-31 UK Nationwide House Prices Index m/m : Jan 0.4% -0.5% n/a<br />
Nationwide House Prices Index y/y : Jan 0.4% -1.1% n/a<br />
Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision<br />
Source: <strong>BNP</strong> Paribas<br />
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Key Data Preview<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
80<br />
Chart 1: German Ifo Business Climate<br />
Expectations (4-Mth Lag)<br />
Current Conditions<br />
75<br />
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Jan (f) Dec Nov Oct<br />
Headline 110.9 109.9 109.3 107.7<br />
Expectations 107.9 106.9 106.3 105.2<br />
Current Conditions 113.9 112.9 112.3 110.2<br />
Key Point:<br />
Sentiment will remain elevated, with the economic<br />
expansion broadening out.<br />
<strong>BNP</strong> Paribas Forecast: Stronger for Longer<br />
Germany: Ifo Business Climate (January)<br />
Release Date: Friday 21 January<br />
Ifo’s business climate index climbed for the seventh month<br />
in succession in December, rising above its high point<br />
during the previous expansion of 2005-2008.<br />
The sub-indices measuring current business conditions<br />
and future expectations both improved, with the former at<br />
an exceptionally elevated level (see chart).<br />
The assessment of current business conditions in Germany<br />
is still a little short of its cycle high in 2006 (115.5) and we<br />
expect a further improvement in December.<br />
The improvement in Ifo’s sentiment surveys was initially<br />
due to the exceptional strength in the manufacturing and<br />
export sectors but domestic sectors, including retail, have<br />
also shown a pronounced improvement more recently. The<br />
business climate index for the retail sector has risen to its<br />
strongest level since the early 1990s. Survey participants<br />
have signalled a moderation in the rate of externally driven<br />
growth relative to the spring peaks but domestic demand is<br />
taking up the baton.<br />
The latest round of hard activity data has been strong in<br />
Germany, with industrial orders recording one of the largest<br />
increases on record in November. This points to a further<br />
pick-up in expectations.<br />
Chart 2: UK Retail Sales vs RICS Sales to Stocks<br />
Source: Reuters EcoWin Pro<br />
Dec (f) Nov Oct Sep<br />
% m/m -2.0 0.3 0.7 -0.5<br />
% y/y -0.8 1.1 0.4 0.3<br />
% 3m/3m -0.1 0.2 0.5 1.1<br />
% 3m/yr 0.2 0.6 0.6 0.8<br />
Key Point:<br />
We expect retail sales to show an initial fall of 2%<br />
m/m, with the risk of a downward revision at a later<br />
stage.<br />
<strong>BNP</strong> Paribas Forecast: Sharp Fall<br />
UK: Retail Sales (December)<br />
Release Date: Friday 21 January<br />
We expect UK retail sales to fall by 2% m/m in December,<br />
largely due to snow-related disruption. The coldest<br />
December on record and widespread snow prevented<br />
shoppers from getting to the high street and deliveries to<br />
stores. As a guide, the last time there was disruption of this<br />
nature (January 2010), the initial estimate of retail sales<br />
was for a 1.2% m/m fall. This was subsequently revised<br />
down to a decline of over 3% m/m. We suspect a similar<br />
outcome is likely this time round.<br />
Within the breakdown, clothing sales are likely to perform<br />
well given the experience of January 2010 and anecdotal<br />
reports – not least from the BRC retail sales monitor.<br />
Meanwhile, the headline measure also includes auto fuel<br />
sales. These plunged by 8.5% m/m in January 2010 as<br />
fewer road journeys were made. Given the proximity to<br />
Christmas and the likelihood that travel plans were<br />
abandoned, we expect this component to fall by at least as<br />
much.<br />
The bottom line is there is likely to be a sizeable fall that<br />
will be vulnerable to revision. Further, the fall is likely to be<br />
temporary and a bounce back to some extent the following<br />
month is likely. We suspect that the VAT hike in January<br />
will mean the bounce is rather muted.<br />
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Key Data Preview<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
Chart 3: Eurozone PMI by Sector<br />
Services<br />
Manufacturing<br />
99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Jan (f) Dec Nov Oct<br />
Manufacturing 57.1 57.1 55.3 54.6<br />
Services 54.2 54.2 55.4 53.3<br />
Composite 55.5 55.5 55.5 53.8<br />
Key Point:<br />
PMI data will again highlight divergence between the<br />
core and peripheral economies.<br />
<strong>BNP</strong> Paribas Forecast: Internal Divergence<br />
Eurozone: ‘Flash’ PMIs (January)<br />
Release Date: Monday 24 January<br />
Activity in manufacturing has re-accelerated since autumn<br />
last year, with the eurozone PMI for the sector increasing<br />
in each of the three months to December.<br />
The levels of the headline index and the main sub-indices<br />
for orders and output have risen back towards their cycle<br />
highs of spring 2009. The employment sub-index has also<br />
improved markedly, rising to its highest level in more than<br />
a decade (to 53.8 in December).<br />
This strength, however, has been driven largely by robust<br />
activity in the ‘core’ countries and in Germany in particular.<br />
The latter’s headline, output and orders sub-indices have<br />
all risen back above the 60 level, consistent with unusually<br />
strong growth rates in the manufacturing sector.<br />
The growth rates signalled by the peripheral countries’ PMI<br />
data, while improving, have been much less elevated. The<br />
service sector PMIs in the peripheral countries have been<br />
deteriorating, consistent with weak consumer demand, in<br />
turn due to fiscal austerity programmes.<br />
In Germany, in contrast, the service sector has been doing<br />
well, as the expansion becomes more broad based. This<br />
has been insufficient to prevent the service sector PMI for<br />
the eurozone as a whole from losing ground.<br />
The input price sub-index for the manufacturing PMI in the<br />
eurozone has risen sharply, due to commodity price rises.<br />
Output prices have also been rising, but by less.<br />
Chart 4: UK GDP vs Composite CIPS<br />
Source: INSEE, Reuters EcoWin Pro<br />
Q4 (f) Q3 Q2 Q1<br />
GDP % q/q 0.3 0.7 1.1 0.3<br />
GDP % y/y 2.4 2.7 1.6 -0.3<br />
Ind Prod % q/q 0.4 0.6 1.1 1.0<br />
Services % q/q 0.2 0.5 0.6 0.3<br />
Key Point:<br />
We expect a sluggish 0.3% q/q pace of expansion,<br />
held back to a large extent by snow-related<br />
disruption.<br />
<strong>BNP</strong> Paribas Forecast: Sluggish<br />
UK: GDP (Prel Q4)<br />
Release Date: Tuesday 25 January<br />
We expect GDP growth to decelerate to 0.3% q/q during<br />
Q4, held back by snow-related disruption. Industrial<br />
production growth had been solid in the first two months of<br />
the quarter. However, we expect a weak December<br />
reading for manufacturing to dampen the quarterly<br />
average. Business services output growth ground to a halt<br />
during Q3, consistent with the dip in the services sector<br />
CIPS. We expect a slight improvement during Q4, though<br />
again a weak December is likely to hold back the quarterly<br />
average.<br />
Manufacturing and business services accounted for only<br />
0.1% point of the 0.7% q/q expansion during Q3. The bulk<br />
of the growth was accounted for by construction and<br />
government output. We expect construction to continue to<br />
decelerate from the super-strong pace recorded in mid-<br />
2010. Similarly, distribution output is likely to have suffered,<br />
not least given the poor performance of retail sales during<br />
Q4.<br />
Overall, we expect a sluggish pace of expansion though<br />
dampened to a large extent by temporary weather related<br />
influences. These should reverse during Q1 helping growth<br />
to reaccelerate. However, at that stage the impact of fiscal<br />
tightening should prevent growth from rebounding<br />
drastically.<br />
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Key Data Preview<br />
Chart 5: French Sales of Manuf. Goods (3m avg)<br />
16<br />
12<br />
8<br />
4<br />
0<br />
-4<br />
-8<br />
Total (% 3m/3m annualised)<br />
Sales excl. autos (% 3m/3m annualised)<br />
-12<br />
Jan May Sep Jan May Sep Jan May Sep Jan May Sep<br />
07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Volume index Dec (f) Nov Oct Dec 09<br />
SA-WDA<br />
% m/m -0.5 2.8 -0.6 1.4<br />
% y/y -0.3 1.5 -0.3 5.4<br />
Key Point:<br />
The surge in sales seen in November should be<br />
partly corrected in December, despite very strong<br />
car sales.<br />
<strong>BNP</strong> Paribas Forecast: Correction<br />
France: Hh Consumption of Manuf. Goods (December)<br />
Release Date: Tuesday 25 January<br />
Retail sales of manufactured goods were extremely strong<br />
in November, rising 2.8% m/m. This was due to a<br />
combination of favourable factors. Christmas shopping<br />
started early, cold weather favoured sales of winter clothes<br />
and shoes (+2.9% m/m) and, most importantly, car sales<br />
soared 14.9% m/m. Since that gain was triggered by the<br />
prospect of the end of the car sales incentive (EUR 500 per<br />
car), car sales will increase further in December. However<br />
sales will remain below end-2009 levels as the incentive<br />
was twice that amount at the time.<br />
The decline in sales of other items should outweigh the<br />
positive impact of car sales in December. Sales of<br />
electronic items seem to have lost momentum in the last<br />
few months. The cold weather may have maintained<br />
demand for clothes and shoes, but the level of sales has<br />
probably eased. In any case, snowy and icy weather surely<br />
curbed sales in the week leading up to Christmas, with little<br />
prospect of catch-up thereafter. This slower pace of sales<br />
in the second half of December likely continued into early<br />
January, in particular because of the late official starting<br />
date for the seasonal sales.<br />
The correction of the November surge is thus likely to be<br />
split over the following two months.<br />
Chart 6: US Consumer Confidence<br />
Source: Reuters EcoWin Pro<br />
Jan (f) Jan 2H Jan p Dec<br />
Conference Board 54.0 - - 52.5<br />
Michigan Sentiment 73.5 74.3 72.7 74.5<br />
<strong>BNP</strong> Paribas Forecast: Up<br />
US: Consumer Confidence (January)<br />
Release Date: Tuesday 25 January<br />
The Conference Board Index of Consumer Confidence<br />
dropped to 52.5 from 54.3 in December. In January, we<br />
expect a partial rebound in the index to 54.0. While<br />
consumer confidence measures have struggled to find a<br />
consistent upward path lately, it should continue trending<br />
upward as the economy continues to expand and the<br />
labour market gradually improves. Indeed, according to the<br />
latest Beige Book, “Labor markets in most Districts appear<br />
to be firming somewhat”. In addition, earlier this month, the<br />
latest weekly index of consumer sentiment by Langer<br />
Research Associates (formerly known as the ABC News<br />
Consumer Confidence Index), increased to the highest<br />
level since 2008. However, certain factors such as surging<br />
gasoline prices and high unemployment rates should<br />
continue to limit confidence from accelerating above the<br />
recent trend.<br />
Key Point:<br />
In January, we expect a partial rebound in the<br />
Conference Board index to 54.0 after the previous<br />
month’s decline.<br />
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Key Data Preview<br />
Chart 7: Canadian Inflation<br />
<strong>BNP</strong> Paribas Forecast: Short-lived Pressure<br />
Canada: CPI (December)<br />
Release Date: Tuesday 25 January<br />
Source: Reuters EcoWin Pro<br />
m/m % Dec (f) Nov Oct Sep<br />
CPI 0.2 0.1 0.4 0.2<br />
Bank of Canada Core 0.0 0.0 0.4 0.2<br />
Key Point:<br />
Energy prices are likely to push prices higher in<br />
December, but this looks like a bump in y/y inflation.<br />
We expect Canadian headline CPI to increase by 0.2% in<br />
November, as higher energy prices continue to pressure<br />
the headline inflation index. Consequently, headline<br />
inflation should pick up to 2.6% y/y in December from 2.0%<br />
in November. This high y/y reading is likely just a one-off<br />
as we expect the y/y inflation to be limited moving forward<br />
as a result of base effects.<br />
The Bank of Canada core CPI is expected to be flat at<br />
0.0% m/m in December. Shelter costs are likely to be a<br />
significant factor in November’s reading. Note that food,<br />
shelter and transportation prices make up 63.5% of the<br />
headline inflation index.<br />
Looking forward, the main upside risks to the inflation<br />
outlook are higher commodity prices and more energy<br />
price pressures. On the other hand, a deceleration in the<br />
growth of unit labour costs and a more pronounced<br />
correction in the housing market should limit core inflation<br />
growth.<br />
Chart 8: Japan Trade Balance (JPY bn, s.a.)<br />
1400<br />
1200<br />
1000<br />
800<br />
600<br />
400<br />
200<br />
0<br />
-200<br />
-400<br />
-600<br />
-800<br />
00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
JPYbn Dec (f) Nov Oct Sep<br />
Trade balance (nsa) 571.8 162.8 821.3 788.5<br />
Trade balance (sa) 677.0 425.7 575.7 626.8<br />
Key Point:<br />
Real export growth should stabilise shortly and<br />
return to pronounced expansion from the spring.<br />
<strong>BNP</strong> Paribas Forecast: Larger Surplus<br />
Japan: Trade Data (December)<br />
Release Date: Thursday 27 January<br />
Based on trade data through mid-December, we expect<br />
exports (both nominal and real) to have expanded in<br />
December and imports (both nominal and real) to have<br />
been flat. The seasonally adjusted trade surplus should<br />
thus expand over November.<br />
In November, nominal exports rose on rebounding export<br />
prices but real exports fell for a fourth straight month,<br />
reflecting the fading impact of overseas inventory<br />
restocking and fiscal stimulus, coupled with moderate<br />
adjustments of worldwide inventory levels for IT/high-tech<br />
products. Even so, with exports to China, Japan’s top<br />
trading partner, again accelerating, there are signs that real<br />
exports are set to revive. Such strength dovetails with<br />
recent Chinese indicators showing domestic demand is<br />
expanding and the Chinese manufacturing cycle has<br />
recovered (manufacturing PMI has been soaring since<br />
bottoming out in July). What is more, the manufacturing<br />
cycles in the US and EU are belatedly following China’s<br />
lead, showing signs of improvement from October.<br />
Accordingly, we expect real export growth will stabilise<br />
shortly and return to pronounced expansion from the<br />
spring.<br />
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Key Data Preview<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
-20<br />
-25<br />
-30<br />
-35<br />
-40<br />
Chart 9: Eurozone Sentiment by Sector<br />
Consumer<br />
Industry<br />
Construction<br />
99 00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro<br />
Jan (f) Dec Nov Oct<br />
Economic Sentiment 106.4 106.2 105.1 103.8<br />
Industry 5 4 1 0<br />
Services 9 10 10 8<br />
Consumer -11 -11 -9 -11<br />
Key Point:<br />
Sentiment remains elevated but divergence persists<br />
at the sectoral and national level.<br />
<strong>BNP</strong> Paribas Forecast: Internal Divergence<br />
Eurozone: Economic Sentiment (January)<br />
Release Date: Thursday 27 September<br />
The eurozone economic sentiment index improved in eight<br />
of the nine months to December, reaching its highest level<br />
since October 2007 prior to the financial crisis.<br />
The key driver of the improvement in sentiment has been<br />
the industrial sector, which has the highest weighting of the<br />
five main sub-sectors (at 40% of the total). Other leading<br />
indicators for the sector, including the manufacturing PMI,<br />
remain elevated, implying that sentiment will continue to do<br />
well, supported by strong global demand.<br />
The domestically-driven sentiment sub-surveys, like retail<br />
and consumer confidence, have fared less well. This is due<br />
in part to austerity programmes in the economies with their<br />
public finances in worst shape.<br />
In the core countries, and Germany in particular, the overall<br />
level of sentiment is much more elevated and domesticallydriven<br />
sub-surveys have done comparatively well. The gap<br />
between the level of consumer sentiment in Germany and<br />
for the eurozone as a whole is at a record high.<br />
Surveys of price expectations in the household sector have<br />
risen sharply from 2009’s lows, as have pricing intentions<br />
of industrial firms, linked to commodity price trends. They<br />
remain well below past peaks, however.<br />
Chart 10: Germany Preliminary CoL<br />
Source: Reuters EcoWin Pro<br />
Jan (f) Dec Nov Oct<br />
CoL m/m -0.5 1.0 0.1 0.1<br />
CoL y/y 1.8 1.7 1.5 1.3<br />
HICP m/m -0.5 1.2 0.1 0.1<br />
HICP y/y 2.0 1.9 1.6 1.3<br />
Key Point:<br />
We expect a further acceleration, led by food and<br />
core prices.<br />
<strong>BNP</strong> Paribas Forecast: Further Acceleration<br />
Germany: Preliminary Cost of Living (January)<br />
Release Date: Thursday 27 January<br />
We expect headline CPI inflation to accelerate further in<br />
January, up by 0.1pp point to 1.8% y/y – the highest since<br />
October 2008. We expect the HICP measure to rise by the<br />
same margin, to 2.0% y/y.<br />
The acceleration is likely to be largely due to a combination<br />
of higher core inflation and food prices while energy<br />
inflation ticks lower. More specifically, food prices are likely<br />
to continue accelerating in y/y terms as the CPI catches up<br />
with the jump in soft commodities during late 2010.<br />
Rising core inflation is likely to be driven by the clothing<br />
and household goods components. Clothing should<br />
accelerate mainly due to base effects related to a<br />
substantial drop last January that we don’t expect to be<br />
repeated this January. It is a similar story for household<br />
goods.<br />
Energy inflation is likely to reflect two opposing forces.<br />
Rising utility bills should add to inflation but be more than<br />
offset by the fall in transport prices as fuel costs rose by<br />
less than they did during the same month a year earlier.<br />
<strong>Market</strong> <strong>Economics</strong> 20 January 2011<br />
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Key Data Preview<br />
Chart 11: French Household Confidence Vs. CPI<br />
-1.0<br />
-0.5<br />
0.0<br />
0.5<br />
1.0<br />
1.5<br />
2.0<br />
2.5<br />
3.0<br />
Inflation <strong>Rate</strong> (%y/y, inverted)<br />
3.5<br />
4.0<br />
02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
EU Commission Index (RHS)<br />
New INSEE Index (RHS)<br />
Diffusion Index, SA Jan 11 (f) Dec Nov Jan 10<br />
INSEE indices:<br />
Overall -38 -36 -33 -30<br />
Buying opportunity -22 -21 -20 -21<br />
EU Commis. Index:<br />
Headline -18.5 -17.5 -16.6 -16.0<br />
Key Point:<br />
Higher food and energy prices are exerting<br />
downward pressure on wage earners' purchasing<br />
power and confidence.<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
-20<br />
-25<br />
-30<br />
-35<br />
-40<br />
-45<br />
-50<br />
<strong>BNP</strong> Paribas Forecast: Under Pressure<br />
France: Household Confidence (January)<br />
Release Date: Thursday 27 January<br />
French household confidence fell heavily in December.<br />
According to INSEE, the headline index lost 3 points,<br />
pushing it down to its lowest level since July. This fall is<br />
clearly due to accelerating inflation; in particular, food and<br />
energy prices, to which households are highly sensitive,<br />
have been rising sharply.<br />
This caused a sharp drop in the personal financial situation<br />
as well as living standards, both present and future.<br />
Spending plans as well as expected savings fell as a result.<br />
Since food and energy prices have increased further since<br />
the December survey was carried out, January confidence<br />
is unlikely to post any recovery. The improvement in the<br />
labour market has been very slow recently, which does not<br />
help. We forecast further deterioration of confidence, for<br />
the same reasons as in December, though at a slower<br />
pace.<br />
What matters for economic growth is the impact on actual<br />
private consumption. The INSEE indicators have<br />
underestimated the level of consumption for several years,<br />
and the situation is not as bad as it looks. However, the<br />
deterioration is undeniable as the EU Commission index<br />
shows.<br />
Chart 12: US: Investment to Slow in Q4<br />
Source: Reuters EcoWin Pro<br />
<strong>BNP</strong> Paribas Forecast: Increase on Aircraft<br />
US: Durable Goods (December)<br />
Release Date: Thursday 27 January<br />
Durable goods orders are expected to increase 2.1% m/m<br />
in December, reflecting a solid increase in orders for<br />
Boeing aircraft. Meanwhile, we look for orders ex<br />
transportation to increase by 0.5% m/m after surging 3.6%<br />
a month prior. The November ex-transportation reading<br />
was the second-strongest monthly increase in 2010, largely<br />
driven by defence orders and expected to reverse in<br />
December. However, consistent with a similar dynamic in<br />
other manufacturing indicators, we expect core capital<br />
goods orders to improve by 1.5% m/m. We look for<br />
equipment and software investment to moderate from<br />
15.4% q/q a.r. in Q3, but still grow by a solid 5.0% in Q4.<br />
% m/m Dec (f) Nov Oct Sep<br />
Durable Goods 2.1 -0.3 -3.1 4.9<br />
Ex-Transport 0.5 3.6 -2.0 1.1<br />
Key Point:<br />
Durable goods orders are expected to increase 2.1%<br />
m/m in December, reflecting a solid increase in<br />
orders for Boeing aircraft.<br />
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Key Data Preview<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
Chart 13: Japanese CPI (% y/y)<br />
Core CPI<br />
<strong>BNP</strong> Paribas Forecast: Same <strong>Rate</strong> of Decline<br />
Japan: CPI (National, December)<br />
Release Date: Friday 28 January<br />
In November, the rate of decline in the national core CPI<br />
eased 0.1pp from October to -0.5% y/y on higher prices for<br />
petroleum products and food (prices for both components<br />
were unchanged m/m). Excluding energy and food (but not<br />
alcohol), the US-like core CPI fell 0.1pp faster than<br />
October, coming in at -0.9% y/y.<br />
-2<br />
-3<br />
CPI excluding energy and food, but not alcohol<br />
02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
% y/y Dec (f) Nov Oct Sep<br />
Core CPI -0.5 -0.5 -0.6 -1.1<br />
CPI -0.1 0.1 0.2 -0.6<br />
Based on the Tokyo CPI numbers for December (after<br />
making allowances for differences with the national index),<br />
we estimate that the national core CPI should be<br />
unchanged from November at -0.5% y/y. While deflationary<br />
pressures are easing, the rate of improvement is being<br />
tempered by downward pressures from the yen’s<br />
appreciation in the summer, coupled with the stalling of<br />
improvements in the output gap. In this respect, slowing<br />
exports and fallout from the end of green car subsidies are<br />
likely to cause the economy to contract in Q4.<br />
Key Point:<br />
While deflationary pressures are easing,<br />
improvements in the national core CPI will likely<br />
stall in December.<br />
Chart 14: Japanese Unemployment <strong>Rate</strong> (% s.a.)<br />
6.0<br />
5.5<br />
5.0<br />
4.5<br />
4.0<br />
3.5<br />
00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
% s.a. Dec (f) Nov Oct Sep<br />
Unemployment rate 5.1 5.1 5.1 5.0<br />
Key Point:<br />
With the economy expected to contract in Q4,<br />
improvements on the job front will probably remain<br />
stalled for the time being.<br />
<strong>BNP</strong> Paribas Forecast: Flat<br />
Japan: Unemployment <strong>Rate</strong> (December)<br />
Release Date: Friday 28 January<br />
We expect the unemployment rate in December to remain<br />
at 5.1% for the third straight month. After rapidly improving<br />
from a record-high of 5.6% in July 2009 to 4.9% in<br />
January-February 2010, the jobless rate has subsequently<br />
seesawed in the low 5% range, as improvements on the<br />
job front have stalled.<br />
While job losses from downsizing/business failures has<br />
declined, individuals seeking new jobs or better working<br />
conditions are finding few opportunities. Corporations are<br />
reluctant to aggressively hire owing to lingering perceptions<br />
of over-staffing, as labour adjustments during the last<br />
recession focused on working hours, thereby leaving<br />
payrolls relatively intact.<br />
Although perceptions of excessive employment are steadily<br />
waning, it will be some time before job growth clearly picks<br />
up, especially since the economy looks headed for a<br />
momentary contraction in Q4 due to the winding down of<br />
stimulus programmes.<br />
<strong>Market</strong> <strong>Economics</strong> 20 January 2011<br />
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Key Data Preview<br />
Chart 15: Eurozone M3 & Bank Lending (% y/y)<br />
12.5<br />
10.0<br />
7.5<br />
5.0<br />
2.5<br />
0.0<br />
Private Sector<br />
Bank Lending<br />
M3<br />
-2.5<br />
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
% y/y Dec (f) Nov Oct Sep<br />
M3 2.0 1.9 0.9 1.1<br />
M3 (3-mth Avg.) 1.6 1.3 1.0 0.8<br />
Private Sector Loans 2.3 2.0 1.5 1.3<br />
Key Point:<br />
<strong>Rate</strong>s of growth in M3 and bank lending are low by<br />
past standards but are trending higher.<br />
<strong>BNP</strong> Paribas Forecast: Low But Rising<br />
Eurozone: Monetary Developments (December)<br />
Release Date: Friday 28 January<br />
The y/y growth rate in M3 accelerated to its strongest level<br />
in fifteen months in November, rising from 0.9% to 1.9%.<br />
This was driven, in part, by base effects. The three-month<br />
average y/y rate of growth rose for the seventh successive<br />
month but to a less elevated 1.3%.<br />
The y/y growth rate in private sector bank lending rose to a<br />
20-month high in November, from 1.5% to 2.0%. The m/m<br />
rise of 0.7% was the biggest since before the intensification<br />
of the financial crisis (March 2008 to be precise). The y/y<br />
rate of change is almost three percentage points above its<br />
trough in October 2009 (of -0.8%).<br />
Loans to households have been the main driver of the pickup,<br />
though the rate of growth has lost some momentum in<br />
recent months. The y/y rate of increase slipped to 2.7% in<br />
November and has been going sideways for the past three<br />
quarters. Lending for mortgages has been robust, rising by<br />
over 3% y/y since May 2010, while consumer credit has<br />
continued to contract on a y/y basis.<br />
Lending to the non-financial corporate sector is lagging that<br />
for households, as is typically the case. The rate of decline<br />
has moderated, however, to -0.1% y/y in November.<br />
Looking beyond special factors, the ECB continues to view<br />
M3 and lending growth rates as “low”.<br />
Source: Reuters EcoWin Pro<br />
Chart 16: US: Final Demand<br />
Q4 (a) Q3 Q2 Q1<br />
GDP % q/q AR 2.9 2.6 1.7 3.7<br />
GDP Deflator % q/q AR 1.5 2.1 1.9 1.0<br />
Key Point:<br />
The moderate 2.9% q/q saar gain in overall GDP we<br />
expect would reflect a 4.4% surge in final demand<br />
and a 1.5pp drag from inventories.<br />
<strong>BNP</strong> Paribas Forecast: Strong Final Demand<br />
US: GDP (Q3a 2010)<br />
Release Date: Friday 29 October<br />
GDP is forecast to grow 2.9% q/q saar in Q4, up from 2.6%<br />
in Q3. The tone of the report should be much stronger than<br />
the headline suggests, however, as inventories are<br />
expected to subtract 1.5pp from growth while final demand<br />
is forecast to surge 4.4%. The reading would represent the<br />
first time since the recovery began that final demand grew<br />
at a pace above the economy’s potential (see chart).<br />
For the year as a whole, final demand will have risen 1.9%.<br />
Trade is expected to contribute 1.7pp to growth after<br />
subtracting an average 2.6pp over the prior two quarters.<br />
Consumer spending is also expected to surge 3.5%, on<br />
strong holiday spending. Meanwhile, government should<br />
be subdued as contraction in state and local government<br />
spending nearly offsets surging federal outlays on defence.<br />
Equipment and software spending is expected to grow at a<br />
more moderate pace while both commercial and residential<br />
real estate should post modest declines. The GDP deflator<br />
is expected to rise 1.5%, which would lead to reasonably<br />
healthy nominal GDP growth of 4.4%, similar to the prior<br />
quarter.<br />
<strong>Market</strong> <strong>Economics</strong> 20 January 2011<br />
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Economic Calendar: 31 Jan – 25 Feb<br />
31 January 1 February 2 February 3 February 4 February<br />
Japan: IP Dec, Housing<br />
Starts Dec<br />
Eurozone: HICP (Flash)<br />
Jan<br />
UK: GfK Consumer<br />
Confidence Jan<br />
Italy: PPI Dec<br />
Spain: HICP (Flash) Jan<br />
Norway: Retail Sales Dec<br />
US: Personal Income &<br />
Spending Dec, Chicago<br />
PMI Jan<br />
Canada: GDP Nov<br />
<strong>Market</strong> <strong>Economics</strong> 20 January 2011<br />
<strong>Market</strong> Mover<br />
Australia: RBA <strong>Rate</strong><br />
Announcement, NAB<br />
Business Conditions Dec<br />
Eurozone: Labour Dec,<br />
Manufacturing PMI (Final)<br />
Jan<br />
UK: CIPS Manu Jan, Net<br />
Consumer Credit Dec,<br />
Mortgage Approvals Dec<br />
Germany: Labour Dec<br />
France: PPI Dec<br />
US: Construction Dec,<br />
ISM Manufacturing Jan<br />
Eurozone: PPI Dec<br />
Norway: Labour Nov<br />
US: Challenger Job<br />
Losses Jan, ADP Labour<br />
Jan<br />
Australia: Trade Balance<br />
Dec<br />
Eurozone: ECB <strong>Rate</strong><br />
Announcement & Press<br />
Conference, Retail Sales<br />
Dec, Services PMI (Final)<br />
Jan<br />
UK: CIPS Services (Final)<br />
Jan<br />
US: Productivity & Costs<br />
(Prel) Q4, Factory Orders<br />
Dec, ISM Services Jan<br />
Italy: CPI (Prel) Feb<br />
Spain: Industrial<br />
Production Dec<br />
US: Labour Jan<br />
Canada: Labour Jan<br />
During Week: Germany Retail Sales Dec, UK Halifax House Prices Jan<br />
7 February 8 February 9 February 10 February 11 February<br />
Australia: Retail Sales<br />
Dec<br />
Japan: Leading Indicator<br />
Dec<br />
Germany: Factory Orders<br />
Dec<br />
Norway: Industrial<br />
Production Dec<br />
US: Consumer Credit<br />
Dec<br />
Japan: M2 Jan, Current<br />
Account Dec<br />
UK: BRC Retail Sales<br />
Monitor Jan, RICS House<br />
Prices Jan<br />
Germany: Industrial<br />
Production Dec<br />
France: BoF Survey Jan,<br />
Trade Balance Dec,<br />
Budget Balance Dec<br />
Neths: IP Dec<br />
US: NFIB Small Business<br />
Optimism Jan<br />
Australia: Westpac<br />
Consumer Confidence<br />
Feb<br />
UK: Trade Balance Dec<br />
Germany: Trade Balance<br />
Dec<br />
France: Investment<br />
Survey Jan<br />
Australia: Labour Jan<br />
Japan: CGPI Jan,<br />
Machinery Orders Dec<br />
Eurozone: ECB Bulletin<br />
UK: BoE <strong>Rate</strong> Ann, IP Dec<br />
France: IP Dec<br />
Italy: IP Dec<br />
Sweden: IP Dec<br />
Norway: CPI Jan, PPI Jan<br />
Neths: CPI Jan<br />
Switz: CPI Jan<br />
US: Wholesale Inv Dec,<br />
Treasury Statement Jan<br />
UK: PPI Jan<br />
Germany: HICP Jan<br />
France: Current Account<br />
Dec, Non-Farm Payrolls<br />
(Prel) Q4, Wages (Prel)<br />
Q4<br />
Spain: GDP (Flash) Q4<br />
Sweden: AMV Labour<br />
Jan<br />
US: Trade Balance Dec,<br />
UoM Sentiment (Prel)<br />
Feb<br />
During Week: Germany WPI Jan<br />
14 February 15 February 16 February 17 February 18 February<br />
Eurozone: Industrial<br />
Production Dec<br />
Australia: NAB Business<br />
Conditions Jan<br />
Eurozone: GDP (Flash)<br />
Q4, Trade Balance Dec<br />
UK: DCLG House Prices<br />
Dec, CPI Jan<br />
Germany: GDP (Flash)<br />
Q4, ZEW Survey Feb<br />
France: GDP (Prel) Q4<br />
Italy: Trade Balance Dec<br />
Spain: HICP Jan<br />
Sweden: <strong>Rate</strong> Ann<br />
Neths: GDP (Prel) Q4,<br />
Retail Sales Dec<br />
US: Empire State Survey<br />
Feb, Retail Sales Jan,<br />
Import Prices Jan, TICS<br />
Data Dec, Business<br />
Inventories Dec, NAHB<br />
Housing <strong>Market</strong> Feb<br />
UK: Labour Dec, BoE<br />
Inflation Report<br />
Spain: GDP (Final) Q4<br />
Belgium: GDP (Flash) Q4<br />
US: New Home Starts<br />
Jan, PPI Jan, Industrial<br />
Production Jan, FOMC<br />
Minutes<br />
Eurozone: Current<br />
Account Dec, ECB<br />
Governing Council<br />
Meeting (No <strong>Rate</strong><br />
Announcement)<br />
Sweden: CPI Jan, Labour<br />
Jan<br />
Norway: GDP Q4<br />
Neths: Labour Jan<br />
US: CPI Jan, Philly Fed<br />
Feb, Leading Indicators<br />
Jan<br />
UK: Retail Sales Jan<br />
Germany: PPI Jan<br />
Italy: Non-EU Trade<br />
Balance Jan<br />
Belgium: Consumer<br />
Confidence Feb<br />
Neths: Consumer<br />
Confidence Feb<br />
Canada: CPI Jan<br />
21 February 22 February 23 February 24 February 25 February<br />
UK: Rightmove House<br />
Prices Feb, PSNB Jan,<br />
PSNCR Jan<br />
Eurozone: PMIs (Flash)<br />
Feb<br />
Germany: Ifo Survey Jan<br />
Neths: Producer<br />
Confidence Feb<br />
US: Public Holiday<br />
Japan: BoJ Monetary<br />
Policy Meeting Minutes<br />
France: Housing Starts<br />
Jan, Industry Survey Feb<br />
Belgium: Business<br />
Confidence Feb<br />
US: S&P/Case-Shiller<br />
House Prices Dec,<br />
Consumer Confidence<br />
Feb<br />
Japan: Trade Balance<br />
Jan<br />
Australia: Wage Cost<br />
Index Q4<br />
Eurozone: Industrial<br />
Orders Dec<br />
UK: BoE Minutes<br />
France: CPI Jan<br />
Italy: CPI Jan<br />
Norway: Labour Dec<br />
US: Existing Home Sales<br />
Jan<br />
During Week: Germany Import Price Index Jan, GfK Consumer Confidence Mar<br />
Source: <strong>BNP</strong> Paribas<br />
Eurozone: Business &<br />
Consumer Survey Feb<br />
Germany: GDP (Final)<br />
Q4<br />
France: Consumer<br />
Confidence Feb, Job<br />
Seekers Jan<br />
Italy: Retail Sales Dec<br />
Sweden: Consumer<br />
Confidence Feb<br />
US: Durable Goods<br />
Orders Jan, FHFA House<br />
Prices Dec, New Home<br />
Sales Jan<br />
Release dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions<br />
79<br />
Japan: CPI Tokyo Feb,<br />
CPI National Jan<br />
Eurozone: Monetary<br />
Developments Jan,<br />
Eurocoin Feb<br />
UK: GDP (Prel) Q4<br />
Germany: HICP (Prel)<br />
Feb<br />
France: Retail Sales Jan<br />
Spain: PPI Jan<br />
Belgium: CPI Feb<br />
Switz: KOF Leading<br />
Indicator Feb<br />
US: GDP (2 nd Est) Q4,<br />
UoM Sentiment (Final)<br />
Feb<br />
www.Global<strong>Market</strong>s.bnpparibas.com
Treasury and SAS Issuance Calendar<br />
0Global <strong>Market</strong>s, Home Page<br />
just one click on “<strong>Market</strong> Calendar” for more details<br />
In the pipeline - Treasuries:<br />
Ireland: To resume borrowing as soon as market conditions permit<br />
Italy: BTP Sep 2021 (new) to be issued in Q1<br />
Poland: Plans to issue dollar-denominated bonds in H1. Is also considering issuing bonds denominated in yen and euros<br />
Portugal: Expects to launch a new bond via a syndicate in Q1. Another new bond issue is possible at a later date<br />
UK: Two mini tenders, one in February and another in March<br />
Belgium: Cancelled its bond auction scheduled for 31 January<br />
Finland: To launch two new euro-denominated benchmark bonds in 2011, a new 10y in H1<br />
Czech Rep.: May sell up to EUR 2bn of bonds in May<br />
Denmark: In 2011, to issue a 5-year EUR loan (EUR 1-2bn); EUR or USD loans may be issued in the 2-5y maturity segment<br />
Slovak Rep.: Plans to raise as much as EUR 4bn through syndicated sales<br />
During the week:<br />
UK: Index-Linked Gilt 1.25% Nov 2055 (re-opening, syndicated, GBP)<br />
FNMA: Second syndicated auction in January, details announced on 27 January<br />
Date Day Closing Country Issues Details <strong>BNP</strong>P forecasts<br />
Local GMT<br />
21/01 Fri 11:00 16:00 US Outright Treasury Coupon Purchase (2018 - 2020) USD 7-9bn<br />
24/01 Mon 12:00 03:00 Japan JGBs 10y Auction for Enhanced-liquidity issue 208-309<br />
JGBs 20y Auction for Enhanced-liquidity issue 59-88<br />
JPY 0.3tn<br />
Slovak Rep. SLOVGB 14 Oct 2013 (#215 - floating rate)<br />
EUR 0.2bn<br />
11:00 16:00 US Outright Treasury Coupon Purchase (2016 - 2017) USD 7-9bn<br />
25/01 Tue Neths DSL 5% 15 Jul 2012 (Off-the-run facility)<br />
DSL 4.5% 15 Jul 2017 (Off-the-run facility)<br />
EUR 2-3bn<br />
Denmark DGB 5% 15 Nov 2013<br />
DGB 3% 15 Nov 2021<br />
12:00 17:00 Canada Repurchase of 10 Cash Mgt Bonds (Jun11 - Jun12) CAD 0.5bn<br />
11:00 16:00 US Outright Treasury Coupon Purchase (2015 - 2016) USD 6-8bn<br />
13:00 18:00 US Notes 0.5% 31 Jan 2013 (new) USD 35bn<br />
26/01 Wed 10:55 09:55 Italy CTZ 21 Jan<br />
11:00 10:00 Germany Bund 3.25% 4 Jul 2042 EUR 2bn<br />
11:00 10:00 Sweden T-bonds 5% 1 Dec 2020 (# 1047) SEK 2bn<br />
12:00 17:00 Canada CAN 2-year 20 Jan<br />
13:00 18:00 US Notes 2% 31 Jan 2016 (new) USD 35bn<br />
27/01 Thu 12:00 03:00 Japan JGB 15 Feb 2013 JPY 2.6tn<br />
10:55 09:55 Italy BTPeis 21 Jan EUR 2-3bn<br />
11:00 16:00 US Outright Treasury Coupon Purchase (2012 - 2013) USD 4-6bn<br />
13:00 18:00 US Notes 2.75% 31 Jan 2018 (new) USD 29bn<br />
28/01 Fri 10:55 09:55 Italy 3 & 10y BTPs and CCT 21 Jan EUR 7-9bn<br />
11:00 16:00 US Outright Treasury Coupon Purchase (2018 - 2020) USD 7-9bn<br />
31/01 Mon 11:00 16:00 US Outright Treasury Coupon Purchase (2013 - 2014) USD 6-8bn<br />
01/02 Tue 12:00 03:00 Japan JGB 10-year 25 Jan JPY 2.2tn<br />
11:00 10:00 Austria RAGBs 25 Jan EUR1.5-2.5bn<br />
10:30 10:30 UK Gilt 2% 22 Jan 2016 25 Jan<br />
11:00 16:00 US Outright TIPS Purchase (2013 - 2040) USD 1-2bn<br />
02/02 Wed 12:00 17:00 Canada CAN 10-year 27 Jan<br />
11:00 16:00 US Outright Treasury Coupon Purchase (2021 - 2027) USD 1.5-2.5bn<br />
03/02 Thu 12:00 03:00 Japan Auction for Enhanced-liquidity 27 Jan JPY 0.3tn<br />
10:30 09:30 Spain Bono 2.5% 31 Oct 2013 31 Jan EUR 3-4bn<br />
10:50 09:50 France OATs 28 Jan EUR 7-9bn<br />
11:00 10:00 Sweden ILBs 27 Jan<br />
10:30 10:30 UK Gilt 4.25% 7 Dec 2040 25 Jan<br />
11:00 16:00 US Outright Treasury Coupon Purchase (2016 - 2018) USD 7-9bn<br />
04/02 Fri 11:00 16:00 US Outright Treasury Coupon Purchase (2013 - 2015) USD 6-8bn<br />
Sources: Treasuries, <strong>BNP</strong> Paribas<br />
<strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong> 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section<br />
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Next Week's T-Bills Supply<br />
Date Country Issues Details<br />
21/01 UK T-Bills Feb 2011 GBP 0.5bn<br />
T-Bills Apr 2011<br />
GBP 1bn<br />
T-Bills Jul 2011<br />
GBP 1.5bn<br />
24/01 France BTF Apr 2011 EUR 4bn<br />
BTF Jul 2011<br />
EUR 2bn<br />
BTF Jan 2012<br />
EUR 1.5bn<br />
Germany Bubills Jan 2012 (new) EUR 3bn<br />
US T-Bills Apr 2011 USD 29bn<br />
T-Bills Jul 2011<br />
USD 28bn<br />
FHLMC Bills 3-month & 6-month 21 Jan<br />
25/01 Spain Letras Apr 2011 24 Jan<br />
Letras Jul 2011<br />
24 Jan<br />
US T-Bills 4-week 24 Jan<br />
FHLB Discount Notes<br />
26/01 Japan T-Bills Apr 2011 JPY 4.8tn<br />
Italy BOT Jul 2011 21 Jan<br />
FNMA Bills 3-month & 6-month 24 Jan<br />
27/01 FHLB Discount Notes<br />
28/01 UK T-Bills 21 Jan<br />
Denmark T-Bills<br />
Sources: Treasuries, <strong>BNP</strong> Paribas<br />
Comments and charts<br />
• EGB gross supply will fall to EUR 13.5bn (ex-CTZ)<br />
in the week ahead from EUR 28.5bn in the past week. In<br />
10y duration-adjusted terms, it falls to EUR 10.3bn from<br />
EUR 15bn in the past week.<br />
• The Netherlands will conduct its first off-the-run taps<br />
for 2011 on Tuesday under the new schedule of a<br />
quarterly instead of a monthly frequency and with a<br />
bigger size. DSLs Jul-12 and Jul-17 will be tapped for a<br />
total amount of EUR 2-3bn. Italy will tap CTZ on<br />
Wednesday while, on the same day, Germany will tap<br />
30y Bund Jul-42 for EUR 2bn. On Thursday there will be<br />
BTPeis auction in Italy and on Friday the usual 3y and<br />
10y BTPs and CCT auctions. The inaugural EFSF bond<br />
issuance is expected to take place in the week ahead as<br />
the end of January has been suggested as the most<br />
likely timing of this issuance.<br />
• Outside of the eurozone, US will issue USD 99bn of<br />
2y, 5y and 7y notes. Denmark, Canada and Japan will<br />
also issue paper in the week ahead.<br />
Next Week's Eurozone Redemptions<br />
Date Country Details Amount<br />
26/01 Germany Bubills EUR 6.0bn<br />
27/01 France BTF EUR 8.0bn<br />
Total Eurozone Short-term Redemption<br />
EUR 14bn<br />
Next Week's Eurozone Coupons<br />
Country<br />
Amount<br />
Italy<br />
EUR 0.1bn<br />
Austria<br />
EUR 0.0bn<br />
Total Long-term Coupon Payments<br />
EUR 0.1bn<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
-20<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Chart 1: Investors’ Net Cash Flows<br />
(EUR bn, 10y equivalent)<br />
Net Investors' Cash Flows<br />
(EUR bn , 10y equivalent)<br />
Week of Jan 10th Week of Jan 17th Week of Jan 24th Week of Jan 31st<br />
Chart 2: EGB Gross Supply Breakdown by<br />
Country (EUR bn, 10y equivalent)<br />
Germany Italy Portugal Belgium<br />
France Spain Netherlands Austria<br />
Finland Greece Ireland<br />
Week of Jan 10th Week of Jan 17th Week of Jan 24th Week of Jan 31st<br />
Chart 3: EGB Gross Supply Breakdown by<br />
Maturity (EUR bn, 10y equivalent)<br />
20<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
EGBs Gross Supply (EUR bn, 10y equivalent)<br />
2-3-YR 5-7-YR 10-YR >10-YR<br />
Week of Jan 10th Week of Jan 17th Week of Jan 24th Week of Jan 31st<br />
All Charts Source: <strong>BNP</strong> Paribas<br />
<strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong> 20 January 2011<br />
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Central Bank Watch<br />
<strong>Interest</strong> <strong>Rate</strong><br />
EUROZONE<br />
Current<br />
<strong>Rate</strong> (%)<br />
Minimum Bid <strong>Rate</strong> 1.00<br />
US<br />
Fed Funds <strong>Rate</strong> 0 to 0.25<br />
Discount <strong>Rate</strong> 0.75<br />
JAPAN<br />
Call <strong>Rate</strong> 0 to 0.10<br />
Basic Loan <strong>Rate</strong> 0.30<br />
UK<br />
Bank <strong>Rate</strong> 0.5<br />
DENMARK<br />
Lending <strong>Rate</strong> 1.05<br />
SWEDEN<br />
Repo <strong>Rate</strong> 1.25<br />
NORWAY<br />
Sight Deposit <strong>Rate</strong> 2.00<br />
SWITZERLAND<br />
3 Mth LIBOR Target<br />
Range<br />
CANADA<br />
0.0-0.75<br />
Overnight <strong>Rate</strong> 1.00<br />
Bank <strong>Rate</strong> 1.25<br />
AUSTRALIA<br />
Cash <strong>Rate</strong> 4.75<br />
CHINA<br />
1Y Bank Lending<br />
<strong>Rate</strong><br />
BRAZIL<br />
5.81%<br />
Selic Overnight <strong>Rate</strong> 11.25<br />
Date of<br />
Last<br />
Change<br />
-25bp<br />
(7/5/09)<br />
-75bp<br />
(16/12/08)<br />
+25bp<br />
(18/2/10)<br />
-10bp<br />
(5/10/10)<br />
-20bp<br />
(19/12/08)<br />
-50bp<br />
(5/3/09)<br />
-10bp<br />
(14/1/10)<br />
+25bp<br />
(15/12/10)<br />
+25bp<br />
(5/5/10)<br />
-25bp<br />
(12/3/09)<br />
+25bp<br />
(8/9/10)<br />
+25bp<br />
(8/9/10)<br />
+25bp<br />
(2/11/10)<br />
+25bp<br />
(25/12/10)<br />
+50bp<br />
(19/1/11)<br />
Next Change in<br />
Coming 6 Months<br />
No Change<br />
No Change<br />
No Change<br />
No Change<br />
No Change<br />
No Change<br />
No Change<br />
+25bp<br />
(15/2/11)<br />
+25bp<br />
(12/5/11)<br />
No Change<br />
+25bp<br />
(1/6/11)<br />
+25bp<br />
(1/6/11)<br />
No change<br />
+25bp<br />
(Feb 11)<br />
+50bp<br />
(2/3/11)<br />
Source: <strong>BNP</strong> Paribas<br />
For the full EMK Central Bank Watch please see our Local <strong>Market</strong>s Mover<br />
Comments<br />
Doubts about the sustainability of the recovery and low inflation<br />
pressures imply no rise in the refinancing rate for a considerable<br />
period of time: we expect the first increase only in H2 2012.<br />
The FOMC is expected to maintain the funds rate at 0 to 0.25%<br />
for an extended period. It will execute its QE2 programme through<br />
H1 2011, with a high probability of an extension through H2 2011.<br />
We expect the BoJ to maintain its overnight call rate at 0 to<br />
0.1% for an extended period. It could well expand its asset<br />
purchase programme, depending mainly on moves in the yen.<br />
Despite sluggish growth, we expect persistent upward surprises<br />
on inflation and rising inflation expectations to provoke an<br />
interest rate hike in Q3 – with the risk of an earlier move.<br />
Higher money market rates in the eurozone are likely to<br />
continue to put pressure on the krone. Thus, further increases in<br />
the interest rate on certificates of deposit are on the agenda.<br />
Strong domestic economic growth should lead to further rate<br />
hikes. We expect the Riksbank to deliver the next rate hike at<br />
February’s meeting.<br />
We expect the Norges Bank to raise rates in Q2 2011. Given the<br />
Bank’s hawkish statement in December, the risk is that the rate<br />
hike comes in Q1 if economic data surprise to the upside and<br />
the krone does not appreciate significantly.<br />
The rally in the franc is delivering a tightening of monetary<br />
conditions independent of SNB policy. The timing of the first hike<br />
remains dependent on exchange rate developments.<br />
In light of developments in global financial markets and the US<br />
economic outlook in particular, the BoC is pausing to allow<br />
further progress in the recovery. <strong>Rate</strong> hikes should resume in<br />
June 2011, with 75bp of increases delivered by the end of the<br />
year.<br />
The effective cash rate is moderately restrictive while financial<br />
and monetary conditions are outright tight. Below-trend growth<br />
is likely this year, especially given the impact of the Queensland<br />
floods. Underlying inflation is contained, albeit with upside risks.<br />
There is limited need for further tightening in the near term.<br />
Inflation pressure remains strong and the property market<br />
continues to overheat. We thus expect RRR to be hiked to 23% to<br />
slow M2 and lending growth to a 16-17% y/y pace. Further, we<br />
expect at least two 25bp hikes in H1 2011, supplemented by strict<br />
liquidity controls and tight money market rates.<br />
After being on hold since a hike in July 2011, the BCB resumed<br />
hiking in January 2011. In light of a worrisome inflation picture,<br />
the monetary authority is likely to continue tightening monetary<br />
policy in coming months.<br />
Change since our last weekly in bold and italics<br />
<strong>Market</strong> <strong>Economics</strong> 20 January 2011<br />
<strong>Market</strong> Mover<br />
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Economic Forecasts<br />
GDP<br />
Year 2010<br />
2011<br />
(% y/y) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)<br />
US -2.6 2.8 2.4 2.4 3.0 3.2 2.6 2.2 2.4 2.5 2.5<br />
Eurozone -4.0 1.7 1.6 0.8 2.0 1.9 2.0 2.1 1.5 1.5 1.5<br />
Japan -5.2 3.6 1.4 5.0 2.7 4.4 2.6 1.4 1.4 1.0 1.9<br />
World (2) -0.6 4.8 4.1 4.8 5.0 4.8 4.5 4.1 4.0 4.1 4.2<br />
Industrial Production<br />
Year<br />
2010<br />
2011<br />
(% y/y) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)<br />
US -9.3 5.5 3.0 2.7 7.4 6.6 5.3 4.2 3.0 2.4 2.5<br />
Eurozone -14.6 6.8 2.8 4.6 9.0 6.9 6.6 4.6 2.6 2.2 1.8<br />
Japan -21.9 15.0 1.2 27.4 21.0 13.4 2.6 -1.3 -1.6 1.2 6.2<br />
Unemployment <strong>Rate</strong><br />
Year<br />
2010 2011<br />
(%) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)<br />
US 9.3 9.7 9.5 9.7 9.7 9.6 9.7 9.7 9.7 9.5 9.3<br />
Eurozone 9.4 10.0 10.2 9.9 10.0 10.0 10.1 10.1 10.2 10.2 10.2<br />
Japan 5.1 5.1 4.6 4.9 5.2 5.1 5.0 4.8 4.7 4.5 4.5<br />
CPI<br />
Year<br />
2010<br />
2011<br />
(% y/y) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)<br />
US -0.4 1.6 1.5 2.4 1.8 1.2 1.3 1.6 1.8 1.6 1.1<br />
Eurozone 0.3 1.6 2.2 1.1 1.5 1.7 2.0 2.3 1.9 2.2 2.3<br />
Japan -1.4 -0.7 -0.9 -1.2 -0.9 -0.8 0.0 -0.9 -1.0 -0.7 -1.1<br />
Current Account<br />
(% GDP) ’09<br />
Year<br />
’10 (1) ’11 (1) General Government<br />
(% GDP)<br />
’09<br />
Year<br />
’10 (1) ’11 (1)<br />
US -2.7 -3.4 -3.3 US (4) -10.0 -8.9 -9.9<br />
Eurozone -0.6 -0.5 -0.2 Eurozone -6.3 -6.2 -4.7<br />
Japan 2.8 3.5 3.5 Japan -10.2 -8.2 -6.8<br />
<strong>Interest</strong> <strong>Rate</strong> Forecasts<br />
<strong>Interest</strong> <strong>Rate</strong> (3)<br />
Year<br />
2011<br />
2012<br />
(%) ’09 ’10 ’11 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)<br />
US<br />
Fed Funds <strong>Rate</strong> 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50<br />
3-month <strong>Rate</strong> 0.25 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.45 0.75 0.90<br />
2-year yield 1.14 0.61 1.00 0.50 0.75 0.85 1.00 1.10 1.50 2.15 2.40<br />
10-year yield 3.84 3.29 3.75 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.60<br />
2y/10y Spread (bp) 269 268 275 250 250 265 275 290 275 235 220<br />
Eurozone<br />
Refinancing <strong>Rate</strong> 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50 1.75<br />
3-month <strong>Rate</strong> 0.70 1.01 1.35 1.20 1.25 1.30 1.35 1.50 1.75 1.75 2.00<br />
2-year yield 1.37 0.85 1.50 1.00 1.20 1.30 1.50 1.70 2.05 2.30 2.45<br />
10-year yield 3.40 2.96 3.35 2.75 2.90 3.15 3.35 3.50 3.75 3.90 4.10<br />
2y/10y Spread (bp) 203 211 185 175 170 185 185 180 170 160 165<br />
Japan<br />
O/N Call <strong>Rate</strong> 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10<br />
3-month <strong>Rate</strong> 0.46 0.34 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35<br />
2-year yield 0.15 0.18 0.25 0.25 0.25 0.25 0.25 0.25 0.30 0.30 0.30<br />
10-year yield 1.30 1.12 1.40 1.20 1.30 1.40 1.40 1.40 1.40 1.50 1.50<br />
2y/10y Spread (bp) 115 95 115 95 105 115 115 115 110 120 120<br />
Footnotes: (1) Forecast (2) Country weights used to construct world growth are those in the IMF World Economic Outlook Update<br />
April 2010 (3) End Period (4) Fiscal year Figures are y/y percentage change unless otherwise indicated<br />
Source: <strong>BNP</strong> Paribas<br />
<strong>Market</strong> <strong>Economics</strong> / <strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong> 20 January 2011<br />
<strong>Market</strong> Mover<br />
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FX Forecasts*<br />
USD Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
EUR/USD 1.27 1.25 1.20 1.23 1.25 1.30 1.32 1.32 1.33 1.34 1.35<br />
USD/JPY 85 84 88 92 95 100 110 120 119 118 116<br />
USD/CHF 1.01 1.05 1.11 1.09 1.08 1.05 1.05 1.06 1.06 1.07 1.07<br />
GBP/USD 1.55 1.51 1.46 1.45 1.52 1.55 1.57 1.61 1.66 1.70 1.73<br />
USD/CAD 0.95 0.96 0.93 0.95 0.95 1.00 1.02 1.09 1.11 1.14 1.16<br />
AUD/USD 1.02 0.99 0.92 0.93 0.92 0.93 0.92 0.90 0.87 0.85 0.83<br />
NZD/USD 0.79 0.78 0.74 0.73 0.72 0.69 0.67 0.66 0.64 0.62 0.60<br />
USD/SEK 7.09 7.04 7.58 7.56 7.36 7.08 6.89 6.89 6.99 6.94 6.96<br />
USD/NOK 6.22 6.16 6.33 6.10 5.92 5.77 5.76 5.68 5.49 5.30 5.19<br />
EUR Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
EUR/JPY 108 105 106 113 119 130 145 158 158 158 157<br />
EUR/GBP 0.82 0.83 0.82 0.85 0.82 0.84 0.84 0.82 0.80 0.79 0.78<br />
EUR/CHF 1.28 1.31 1.33 1.34 1.35 1.36 1.38 1.40 1.41 1.44 1.44<br />
EUR/SEK 9.00 8.80 9.10 9.30 9.20 9.20 9.10 9.10 9.30 9.30 9.40<br />
EUR/NOK 7.90 7.70 7.60 7.50 7.40 7.50 7.60 7.50 7.30 7.10 7.00<br />
EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46<br />
Central Europe Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
USD/PLN 3.07 3.16 3.25 3.09 3.12 2.96 2.88 2.84 2.78 2.69 2.74<br />
EUR/CZK 24.7 24.5 24.3 24.5 24.3 24.0 23.9 23.8 24.0 23.8 23.5<br />
EUR/HUF 290 285 280 275 270 270 270 265 260 255 260<br />
USD/ZAR 7.30 7.50 7.40 7.30 7.40 7.30 7.30 7.50 7.20 7.10 7.00<br />
USD/TRY 1.50 1.52 1.48 1.47 1.49 1.46 1.47 1.46 1.45 1.43 1.42<br />
EUR/RON 4.35 4.50 4.50 4.40 4.20 4.30 4.20 4.20 4.20 4.20 4.10<br />
USD/RUB 30.32 30.11 31.19 29.90 30.11 29.07 28.85 28.41 27.86 27.32 28.51<br />
EUR/PLN 3.90 3.95 3.90 3.80 3.90 3.85 3.80 3.75 3.70 3.60 3.70<br />
USD/UAH 7.9 7.9 7.8 7.8 7.5 7.5 7.5 7.5 7.5 7.5 7.5<br />
EUR/RSD 105 115 105 100 98 97 96 95 93 92 91<br />
Asia Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
USD/SGD 1.25 1.23 1.22 1.21 1.21 1.20 1.19 1.18 1.17 1.16 1.15<br />
USD/MYR 3.03 3.00 2.95 2.90 2.87 2.85 2.83 2.80 2.77 2.75 2.73<br />
USD/IDR 8800 8600 8500 8400 8300 8200 8100 8000 7900 7800 7800<br />
USD/THB 29.50 29.00 28.70 28.50 28.30 28.00 27.70 27.50 27.30 27.00 27.00<br />
USD/PHP 43.00 42.50 42.00 41.50 41.00 40.50 40.00 39.50 39.00 39.00 39.00<br />
USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80<br />
USD/RMB 6.58 6.52 6.49 6.45 6.40 6.35 6.30 6.26 6.23 6.20 6.17<br />
USD/TWD 28.70 28.00 27.70 27.30 27.00 26.70 26.50 26.00 26.00 26.00 26.00<br />
USD/KRW 1100 1070 1060 1050 1040 1030 1020 1010 1000 1000 1000<br />
USD/INR 44.50 44.30 44.00 43.70 43.50 43.00 42.50 42.00 41.50 41.00 40.50<br />
USD/VND 20500 20500 20500 20500 20500 20500 20500 20500 20500 20500 20500<br />
LATAM Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
USD/ARS 4.00 4.09 4.19 4.28 4.36 4.44 4.52 4.60 4.68 4.75 4.83<br />
USD/BRL 1.68 1.66 1.65 1.63 1.63 1.65 1.67 1.70 1.71 1.73 1.74<br />
USD/CLP 529 516 500 485 480 475 473 471 473 475 478<br />
USD/MXN 12.00 11.70 11.45 11.30 11.30 11.50 11.80 12.00 12.08 12.15 12.24<br />
USD/COP 1800 1750 1720 1700 1705 1730 1745 1760 1770 1780 1790<br />
USD/VEF 4.29 4.29 4.29 4.29 4.29 4.29 4.29 4.29 8.80 8.80 8.80<br />
USD/PEN 2.76 2.73 2.68 2.67 2.70 2.70 2.71 2.72 2.73 2.74 2.75<br />
Others Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
USD Index 82.04 83.11 86.11 85.63 84.56 83.26 83.51 84.81 84.22 83.77 83.14<br />
*End Quarter<br />
Foreign Exchange <strong>Strategy</strong> 20 January 2011<br />
<strong>Market</strong> Mover, Non-Objective Research Section www.Global<strong>Market</strong>s.bnpparibas.com<br />
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<strong>Market</strong> Coverage<br />
<strong>Market</strong> <strong>Economics</strong><br />
Paul Mortimer-Lee Global Head of <strong>Market</strong> <strong>Economics</strong> London 44 20 7595 8551 paul.mortimer-lee@uk.bnpparibas.com<br />
Ken Wattret Chief Eurozone <strong>Market</strong> Economist London 44 20 7595 8657 kenneth.wattret@uk.bnpparibas.com<br />
Luigi Speranza Head of Inflation <strong>Economics</strong>, Eurozone, Italy London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.com<br />
Alan Clarke UK London 44 20 7595 8476 alan.clarke@uk.bnpparibas.com<br />
Eoin O’Callaghan Inflation, Eurozone, Switzerland, Ireland London 44 20 7595 8226 eoin.ocallaghan@uk.bnpparibas.com<br />
Gizem Kara Scandinavia London 44 20 7595 8783 gizem.kara@uk.bnpparibas.com<br />
Dominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.com<br />
Julia Coronado Chief US Economist New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.com<br />
Yelena Shulyatyeva US, Canada New York 1 212 841 2258 yelena.shulyatyeva@americas.bnpparibas.com<br />
Bricklin Dwyer US, Canada New York 1 212 471-7996 bricklin.dwyer@americas.bnpparibas.com<br />
Ryutaro Kono Chief Economist Japan Tokyo 81 3 6377 1601 ryutaro.kono@japan.bnpparibas.com<br />
Hiroshi Shiraishi Japan Tokyo 81 3 6377 1602 hiroshi.shiraishi@japan.bnpparibas.com<br />
Azusa Kato Japan Tokyo 81 3 6377 1603 azusa.kato@japan.bnpparibas.com<br />
Makiko Fukuda Japan Tokyo 81 3 6377 1605 makiko.fukuda@japan.bnpparibas.com<br />
Richard Iley Head of Asia <strong>Economics</strong> Hong Kong 852 2108 5104 richard.iley@asia.bnpparibas.com<br />
Dominic Bryant Asia, Australia Hong Kong 852 2108 5105 dominic.bryant@asia.bnpparibas.com<br />
Mole Hau Asia Hong Kong 852 2108 5620 mole.hau@asia.bnpparibas.com<br />
Xingdong Chen Chief China Economist Beijing 86 10 6561 1118 xd.chen@asia.bnpparibas.com<br />
Isaac Y Meng China Beijing 86 10 6561 1118 isaac.y.meng@asia.bnpparibas.com<br />
Chan Kok Peng Chief Economist South East Asia Singapore 65 6210 1946 kokpeng.chan@asia.bnpparibas.com<br />
Marcelo Carvalho Head of Latin American <strong>Economics</strong> São Paulo 55 11 3841 3418 marcelo.carvalho@br.bnpparibas.com<br />
Italo Lombardi Latin America New York 1 212 841 6599 italo.lombardi@americas.bnpparibas.com<br />
Florencia Vazquez Latin American Economist Buenos Aires 54 11 4875 4363 florencia.vazquez@ar.bnpparibas.com<br />
Michal Dybula Central & Eastern Europe Warsaw 48 22 697 2354 michal.dybula@pl.bnpparibas.com<br />
Julia Tsepliaeva Russia & CIS Moscow 74 95 785 6022 julia.tsepliaeva@ru.bnpparibas.com<br />
<strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong><br />
Cyril Beuzit Global Head of <strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong> London 44 20 7595 8639 cyril.beuzit@uk.bnpparibas.com<br />
Patrick Jacq Europe Strategist Paris 33 1 4316 9718 patrick.jacq@bnpparibas.com<br />
Hervé Cros Chief Inflation Strategist London 44 20 7595 8419 herve.cros@uk.bnpparibas.com<br />
Shahid Ladha Inflation Strategist London 44 20 7 595 8573 shahid.ladha@uk.bnpparibas.com<br />
Alessandro Tentori Chief Alpha <strong>Strategy</strong> Europe London 44 20 7595 8238 alessandro.tentori@uk.bnpparibas.com<br />
Eric Oynoyan Europe Alpha Strategist London 44 20 7595 8613 eric.oynoyan@uk.bnpparibas.com<br />
Matteo Regesta Europe Alpha Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.com<br />
Ioannis Sokos Europe Alpha Strategist London 44 20 7595 8671 ioannis.sokos@uk.bnpparibas.com<br />
Camille de Courcel Europe Alpha Strategist London 44 20 7595 8295 camille.decourcel@uk.bnpparibas.com<br />
Bülent Baygün Head of <strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong> US New York 1 212 471 8043 bulent.baygun@americas.bnpparibas.com<br />
Mary-Beth Fisher US Senior Strategist New York 1 212 841 2912 mary-beth.fisher@us.bnpparibas.com<br />
Sergey Bondarchuk US Strategist New York 1 212 841 2026 sergey.bondarchuk@americas.bnpparibas.com<br />
Suvrat Prakash US Strategist New York 1 917 472 4374 suvrat.prakash@americas.bnpparibas.com<br />
Rohit Garg US Strategist New York 1212 841 3937 rohit.k.garg@americas.bnpparibas.com<br />
Anish Lohokare MBS Strategist New York 1 212 841 2867 anish.lohokare@americas.bnpparibas.com<br />
Olurotimi Ajibola MBS Strategist New York 1 212 8413831 olurotimi.ajibola@americas.bnpparibas.com<br />
Koji Shimamoto Head of <strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong> Japan Tokyo 81 3 6377 1700 koji.shimamoto@japan.bnpparibas.com<br />
Tomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1703 Tomohisa.fujiki@japan.bnpparibas.com<br />
Masahiro Kikuchi Japan Strategist Tokyo 81 3 6377 1703 masahiro.kikuchi@japan.bnpparibas.com<br />
Christian Séné Technical Analyst Paris 33 1 4316 9717 christian.séné@bnpparibas.com<br />
FX <strong>Strategy</strong><br />
Hans Redeker Global Head of FX <strong>Strategy</strong> London 44 20 7595 8086 hans-guenter.redeker@uk.bnpparibas.com<br />
Ian Stannard FX Strategist London 44 20 7595 8086 ian.stannard@uk.bnpparibas.com<br />
James Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.com<br />
Kiran Kowshik FX Strategist Singapore 65 6210 3264 kiran.kowshik@bnpparibas.com<br />
Mary Nicola FX Strategist New York 1 212 841 2492 mary.nicola@americas.bnpparibas.com<br />
Andy Chaveriat Technical Analyst New York 1 212 841 2408 andrew.chaveriat@americas.bnpparibas.com<br />
Local <strong>Market</strong>s FX & <strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong><br />
Drew Brick Head of FX & IR <strong>Strategy</strong> Asia Singapore 65 6210 3262 Drew.brick@asia.bnpparibas.com<br />
Chin Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 chin.thio@asia.bnpparibas.com<br />
Robert Ryan FX & IR Asia Strategist Singapore 65 6210 3314 robert.ryan@asia.bnpparibas.com<br />
Jasmine Poh FX & IR Asia Strategist Singapore 65 6210 3418 jasmine.j.poh@asia.bnpparibas.com<br />
Gao Qi FX & IR Asia Strategist Shanghai 86 21 2896 2876 gao.qi@asia.bnpparibas.com<br />
Bartosz Pawlowski Head of FX & IR <strong>Strategy</strong> CEEMEA London 44 20 7595 8195 Bartosz.pawlowski@uk.bnpparibas.com<br />
Elisabeth Gruié FX & IR CEEMEA Strategist London 44 20 7595 8492 elisabeth.gruie@uk.bnpparibas.com<br />
Dina Ahmad FX & IR CEEMEA Strategist London 44 20 7 595 8620 dina.ahmad@uk.bnpparibas.com<br />
Diego Donadio FX & IR Latin America Strategist São Paulo 55 11 3841 3421 diego.donadio@@br.bnpparibas.com<br />
85
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Editors: Amanda Grantham-Hill, <strong>Interest</strong> <strong>Rate</strong> <strong>Strategy</strong>/<strong>Market</strong> <strong>Economics</strong>, London. Tel: 44 20 7595 4107 Email: 4Hamanda.grantham-hill@bnpparibas.com;<br />
Nick Ashwell, FX/<strong>Market</strong> <strong>Economics</strong>, London. Tel: 44 20 7595 4120 Email: 5Hnick.ashwell@uk.bnpparibas.com<br />
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