Market Mover - BNP PARIBAS - Investment Services India

Market Economics | Interest Rate Strategy | Forex Strategy 12 March 2010 

Market Mover 

Market Outlook 2-3 

Fundamentals 4-21 

• FOMC Preview: Striving for Clarity 4-5 

• US Labour Market: A Slow 6-8 

Turning 

• US: Sell Short 9-10 

• US: Productivity Growth is 11-12 

Soaring 

• Germany: The Big Chill 13-14 

• UK: Election Update 15 

• SNB: Keeping the Ball Rolling 16 

• Japan: The Target of Fiscal 17-19 

Restructuring 

• Japan: Jobless Rate Slips Below 20-21 

5% 

Interest Rate Strategy 22-42 

• US: 3y Agency Sector Still Good 22-23 

for Carry 

• US: Playing for Wider Spreads in 24 

a Sell-Off 

• EUR: Further Flattening Ahead 25 

• EUR: OAT60 Launched! 26 

• EUR: Normalisation in the EGB 27-28 

Universe 

• EUR Vega: Rolldown 

29 

Opportunities on 10y Swap 

• JGBs: June - A Devil-Plagued 30 

Period 

• Global Inflation Watch 31-34 

• Inflation: Spring Break for 35-36 

Breakevens? 

• Europe iTraxx Credit Indices 37-39 

• Technical Analysis 40-41 

• Trade Reviews 42 

FX Strategy 43-49 

• Strategy: The Way of Wen 41-46 

• Technical Strategy: Commodity 47-48 

Currency Exhaustion 

• Trading Positions 49 

Forecasts & Calendars 50-63 

• 1 Week Economic Calendar 50-51 

• Key Data Preview 52-58 

• 4 Week Calendar 59 

• Treasury & SAS Issuance 60-61 

• Central Bank Watch 62 

• FX Forecasts 63 

Contacts 64 

www.GlobalMarkets.bnpparibas.com 

• The FOMC meets next week and its ‘big picture’ 

assessment should be similar to the last as conditions 

have not changed much since January’s meeting. 

• The Fed is likely to maintain its assertion that 

conditions will ‘likely warrant exceptionally low levels of 

the federal funds rate for an extended period’. 

• The conditions justifying this – including subdued 

inflation and stable expectations – remain in place. 

• Much of the recent Fed communication has centred on 

exit strategies. More information on reserve-draining 

operations could be included in the statement. 

• Treasury yields have risen with heavy supply and firm 

stock markets. The near-term strategy call is neutral. US 

data will be plentiful in coming days, including what we 

expect will be a weak, weather-affected retail sales report. 

• Core eurozone bond markets remain solid but a 

positive tone on Treasuries and/or a setback in equities will 

be needed for a decisive break below the 3.10-3.20% range 

on 10-year Bund yields. 

• We continue to favour 2/10s flatteners and expect 

further outperformance of peripheral markets. 

• Eurozone core HICP inflation should fall to a record low 

in February, with the downward pressure to continue as 

compensation growth decelerates. 

• For JGBs, a growing trend towards extension trades is 

likely within the short- to medium-term sector. The 5-yr 

sector is likely to be particularly attractive. 

Market Views 

Current 1 Week 1 Month 

UST 10y T-note Yield (%) 3.75 ↔ ↓ 

2y/10y Spread (bp) 280 ↔ ↓ 

EGB 10y Bund Yield (%) 3.19 ↔ ↓ 

2y/10y Spread (bp) 214 ↓ ↓ 

JGB 10y JGB Yield (%) 1.33 ↓ ↓ 

2y/10y Spread (bp) 118 ↓ ↓ 

Forex EUR/USD 1.3673 ↔ ↓ 

USD/JPY 90.61 ↑ ↑ 

IMPORTANT NOTICE. Please refer to important disclosures found at the end of 

this report. Some sections of this report have been written by our strategy teams 

(shown in blue). Such reports do not purport to be an exhaustive analysis and may 

be subject to conflicts of interest resulting from their interaction with sales and 

trading which could affect the objectivity of this report.

Market Outlook 

Upward pressure on yields 

as equities do well… 

Bond yields have been climbing in recent days against a backdrop of heavy 

supply and upward moves in the major equity indices and oil prices, which 

are now approaching January’s highs. Having taken a bearish stance on 

Treasuries ahead of the supply, the strategy call is neutral for the week 

ahead. The market ought to regain at least some of its lost ground, however, 

if our forecast of a disappointing February US retail sales report is borne out. 

As mentioned in these pages before, getting a firm handle on the underlying 

state of the US and European economies is being complicated by various 

crosswinds at present. The ‘cold snap’ at the start of the year is one such 

complication. We expect it to have dampened non-essential retail sales in 

the US last month, contributing to our forecast of m/m declines on both a 

headline and ex-auto basis (consensus is for positives on both). 

…but near-term data flow 

ought to be favourable 

Another complication is the difference in the performance of large and small 

businesses. US data illustrate the contrast. The ISM is elevated, indicative of 

the boost for larger companies from their exposure to robust markets outside 

the US. Smaller businesses, in contrast, are more dependent on internal 

economic conditions and the supply of credit from banks. 

The difficulties regarding the latter continue to be reflected in the survey of 

independent businesses. The NFIB data also show both capex and hiring 

intentions at low levels (Chart 1). As small businesses are a key source of 

job creation, this will be an important influence on the Fed’s reaction function 

if, as we expect, census effects flatter payroll data in the spring. 

Chart 1: Size Matters 

15 

National Federation of Independent Businesses Survey 

10 

Hiring Intentions 

5 

0 

-5 

-10 

-15 

Capex Intentions 

-20 

-25 

R elative to M ean 

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 

Source : Reuters EcoWin Pro 

FOMC to reiterate the 

commitment to 

exceptionally low rates for 

an extended period… 

The event calendar gets busier in the coming days, including the meeting of 

the FOMC (with the accompanying announcement on Tuesday). Economic 

and financial conditions have changed little since the January meeting, 

suggesting the ‘big picture’ themes in the statement will not be subject to 

radical change. There is scope for a little tweaking though, with the outlook 

for business investment a candidate for an upgrade. 

The Fed should continue with the assertion that conditions will “likely warrant 

exceptionally low levels of the federal funds rate for an extended period.” 

The conditions which justify this – “low rates of resource utilization, subdued 

inflation trends, and stable inflation expectations” – still prevail. We expect 

the February CPI next week to show core inflation falling to 1.4%, matching 

the cycle low from August last year. 

Ken Wattret 12 March 2010 


2 

www.GlobalMarkets.bnpparibas.com

…and to elaborate on the 

exit strategy 

Much of the communication from the Fed during the inter-meeting period has 

revolved around exit strategies. A number of Fed speakers have described a 

possible roadmap to Fed tightening, with reserve-draining operations as the 

starting point. The latter issue is likely to become a regular feature of FOMC 

statements, probably starting with this one. 

Amid a busy week, a range of business surveys for March will be released; 

we expect them to remain generally elevated. It will be interesting to see 

how NAHB sentiment, i.e. confidence among homebuilders, fares. While up 

by about ten percentage points from its lows sentiment is still below the level 

seen last autumn – indicative of a faltering housing market recovery despite 

the stimulus measures introduced. 

EGB curve flatteners and 

peripheral outperformance 

favoured 

Switching to Europe, core eurozone bond markets remain solid but a more 

constructive tone on Treasuries and/or a setback in equities will be needed 

for a decisive break below the 3.10-3.20% range on 10-year Bund yields. 

We continue to favour 2/10s flatteners and expect further outperformance of 

peripheral markets. 

The imminent release on eurozone industrial production data for January is 

set to be strong, highlighting the continued outperformance of externallysensitive 

manufacturing sector data. The y/y rate of change in output will fly. 

This is base effect driven, however, and central banks should focus on levels 

rather than rates of change. Despite the rebound since spring last year, 

industrial output in the eurozone is still down by almost 20% from 2008’s 

peak. 

This is crucial for the recovery and policy. In other words, as output has 

fallen by much more than employment even as activity picks up, firms will 

not have to raise headcount in response. So the virtuous circle of job gains 

and confidence needed to get the economy really motoring will be absent. 

The employment data for Q4 next week will show the sixth consecutive q/q 

decline, albeit a less pronounced one than in prior quarters. 

Core inflation headed 

south in the eurozone and 

not just this month 

5-yr sector preferred in 

JGB market 

We forecast that core HICP inflation in the eurozone will fall to a record low 

of 0.8% in February’s release. An even lower rate was on the cards prior to 

the revisions to German data earlier this week but this is merely a matter of 

time. As wage growth will continue to moderate as a lagged response to the 

increase in unemployment and low headline inflation, unit labour cost growth 

will decelerate markedly (and we think, go negative), pushing further down 

on core inflation. The ECB is confident that inflation expectations will remain 

well anchored. We are much less so. 

The JGB market remains in a state of deadlock, but banks' bond investment 

plans for the coming fiscal year should require them to take on somewhat 

greater risk in search of carry. Hence we anticipate a growing trend towards 

extension trades within the short- to medium-term sector (such as a shift out 

of 2s into 5s). The 5-yr sector is likely to be particularly attractive in view of 

its low volatility. In the near term, JGBs may benefit from tailwinds relating to 

the possibility of additional QE and favourable supply-demand conditions. 

The 5-yr JGB auction on the 11th attracted solid demand from the domestic 

investor base. The JGB market outstanding is projected to increase by some 

JPY 27.6 trillion over the course of FY 2010 but maturities up to the 10yr 

sector will account for just JPY 11.1 trillion of this total, with the super-long 

sector set to account for the lion's share. Super-long yields are therefore 

most vulnerable to upward pressure. 



3 


FOMC Preview: Striving for Clarity 

• Economic and financial conditions have 

changed little since the January FOMC meeting, 

so we expect little change in the Fed’s 

cautiously optimistic tone. 

Chart 1: Financial Conditions are Little 

Changed on Balance 

• With high unemployment and decelerating 

core inflation, we think the Fed will continue to 

use “extended period” to describe its rate 

stance. 

• The Fed has indicated decisions about 

draining excess reserves will be monetary 

policy decisions and we think it may begin to 

describe the status of its exit strategies within 

the FOMC statement. 

Source: Reuters EcoWin Pro 

Chart 2: The Fed is Focused on Developing 

Reserve Draining Tools 

When the FOMC meets next week, it is unlikely its 

economic and inflation outlook will have changed 

very much since the January meeting. Incoming 

economic data have been consistent with its 

expectations for a gradual economic recovery and 

financial market conditions have not changed much 

in recent months. Thus while it may upgrade the 

discussion of business spending on equipment and 

software, the economic paragraph of their policy 

statement is likely to express the same cautiously 

optimistic tone which “anticipates a gradual return to 

higher levels of resource utilization in a context of 

price stability.” 

Much of the communication from the Fed during the 

inter-meeting period has revolved around exit 

strategies. Chairman Bernanke produced a 

congressional testimony on the exit strategies under 

development in early February, although he didn’t 

actually give the testimony in person owing to snow 

storms that closed the federal government. While he 

discussed the tools they were working on at some 

length, he was careful to distinguish the creation and 

testing of reserve draining tools from decisions on 

monetary policy. He reiterated that economic 

conditions will “likely warrant exceptionally low levels 

of the federal funds rate for an extended period.” 

We expect that language to remain in the statement 

released next week. All of the conditions that justify 

such a policy, namely “low rates of resource 

utilization, subdued inflation trends, and stable 

inflation expectations” still prevail. While the 

unemployment rate has dipped from 10.0% to 9.7% 

since the Fed met last, it is still quite elevated – 


suggesting a considerable amount of unused 

resources. Meanwhile, core CPI inflation 

unexpectedly dipped to 1.55% y/y in January from 

1.82% in December. In this environment, the Fed is 

unlikely to see the need to prepare markets for a rate 

hike six months down the road. Indeed, in his semiannual 

monetary policy testimony, Chairman 

Bernanke reiterated that low rates were still needed 

to spur the “nascent economic recovery.” 

A number of Fed speakers have described a possible 

roadmap to Fed tightening as starting with reserve 

draining operations that reduce excess reserves from 

the current USD 1.1trn to several hundred billion. It is 

at this point the Fed feels it will regain control of the 

effective fed funds rate (see Chart 2). Brian Sack, the 

New York Fed’s head of market operations, said in 

recent days that “Removing a portion of the excess 

reserves from the system ahead of increasing the 

rate paid on reserves is a cautious approach, as it 

should improve the Fed's control of short-term 

Julia Coronado 12 March 2010 


4 


interest rates when it comes time to tighten monetary 

policy.” He cited Chairman Bernanke as having 

suggested in his testimony that “operations to drain 

reserves could be run on a limited basis well ahead 

of policy tightening, in order to give market 

participants time to become familiar with them, and 

then could be scaled up to more significant volume 

as we approach the time for policy tightening.” He 

also indicated that the Fed feels it will have its 

primary tools fully developed by the end of Q2. 

Therefore we could see the Fed beginning regular 

reverse repo operations in H2. 

Recent communication has also indicated that “the 

ultimate size and timing of reverse repo operations 

will depend on the directive from the Federal Open 

Markets Committee to conduct such operations.” 

This suggests that the status of reserve draining 

operations will become a regular feature of FOMC 

statements. Indeed, we think the Fed may begin 

describing the state of development of its toolkit in 

the March FOMC statement. In the January 

statement the last paragraph described the status of 

the liquidity operations, laying out the schedule for 

their phase out. We think that the March statement 

may indicate that these liquidity operations have 

been successfully completed. It may then include a 

brief description of the state of the reserve-draining 

tools, much as recent communication has. Going 

forward, it would seem likely that the Fed could first 

indicate a regular low level of operations to ready the 

tools in June or August. It would then likely announce 

an acceleration of these operations at the same time 

it is ready to step away from the “extended period” 

phrasing. 

Sack discussed at some length the potential for 

reserve draining operations to confuse markets and 

lead to increased market volatility. “The burden is on 

the Fed to mitigate this risk by communicating clearly 

about its policy intentions and the purpose of any 

operational moves it might take. In this regard, the 

forward-looking policy language that the FOMC is 

currently using in its statement is important. I would 

argue that this language contains much more direct 

and valuable information about the likely path of the 

short-term interest rate target than does any decision 

about draining reserves. Indeed, it will be difficult for 

market participants to make precise inferences about 

the timing of increases in the target interest rate from 

the patterns of reserve draining alone, in part 

because the FOMC has not specified the path of 

reserves it intends to achieve before raising interest 

rates.” Thus if we are right that these operations will 

be included in the March FOMC statement, it should 

in no way be construed as a policy signal. 

It should 

reiterate 

their 

expectation 

for subdued 

inflation. 

It is likely to 

note that that 

liquidity 

operations have 

been 

successfully 

completed 

FOMC Statement January 27, 2010 

Information received since the Federal Open Market Committee met in December suggests that 

economic activity has continued to strengthen and that the deterioration in the labor market is abating. 

Household spending is expanding at a moderate rate but remains constrained by a weak labor 

market, modest income growth, lower housing wealth, and tight credit. Business spending on 

equipment and software appears to be picking up, but investment in structures is still contracting and 

employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better 

alignment with sales. While bank lending continues to contract, financial market conditions remain 

supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a 

time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of 

price stability. 

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation 

expectations stable, inflation is likely to be subdued for some time. 

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and 

continues to anticipate that economic conditions, including low rates of resource utilization, subdued 

inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the 

federal funds rate for an extended period. To provide support to mortgage lending and housing 

markets and to improve overall conditions in private credit markets, the Federal Reserve is in the 

process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of 

agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing 

the pace of these purchases, and it anticipates that these transactions will be executed by the end of 

the first quarter. The Committee will continue to evaluate its purchases of securities in light of the 

evolving economic outlook and conditions in financial markets. 

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset- 

Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper 

Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on 

February 1, as previously announced. In addition, the temporary liquidity swap arrangements 

between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve 

is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered 

on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. The 

anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 

for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans 

backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if 

necessary to support financial stability and economic growth. 

It may upgrade 

the assessment 

of business 

spending on 

equipment and 

software but the 

overall tone is 

likely to still be 

cautiously 

optimistic 

The use of 

“extended 

period” will 

remain intact 

This paragraph 

may be replaced 

with a discussion 

about the tools 

under 

development for 

reserve draining 

operations, with 

emphasis that 

testing of these 

tools should not 

be interpreted as 

monetary policy 

tightening 



5 


US Labour Market: A Slow Turning 

• The February employment report was a 

positive surprise in that it confirmed the 

ongoing gradual trend toward improvement with 

little derailment from winter weather 

Chart 1: The Household Survey Has Outpaced 

Payrolls of Late 

• Stimulus driven growth appears to be giving 

way to organic improvement in the private 

sector, although troubled sectors continue to 

impede progress 

• While the February employment report was 

a welcome indication that the labour market 

continues to improve, the pace of improvement 

is gradual and consistent with an extended 

period of economic slack that will keep the Fed 

on hold. 


Chart 2: Manufacturing Job Losses are Done 

The February employment report suggests the 

hand-over from stimulus-driven growth to 

organic growth is underway, although troubled 

sectors mean slow progress 

The February employment report on balance had a 

more positive tone than markets had expected. 

There was only a modest apparent impact from 

February snowstorms and private sector job losses 

continued to moderate. Temporary hiring remained 

strong despite the weather signalling that permanent 

hiring in the private service sector is close at hand. 

Meanwhile job losses in the construction sector and 

among state and local governments show little sign 

of slowing. The Census only added 15k workers after 

a 9k gain in January. Given its plans to hire 1mn 

workers this spring, we should see overall gains in 

nonfarm payrolls in the hundreds of thousands 

between March and May. 

Overall the slowing in job losses in recent months 

and a pick up in aggregate hours worked indicate 

that households are once again seeing modest gains 

in wage and salary income that will help fund further 

subdued gains in consumer spending. Thus the 

handoff from stimulus driven growth to private sector 

driven gains seems to be underway, albeit with 

continued headwinds from troubled sectors. The 

unemployment rate may have peaked and a slow 

and bumpy decline appears to be underway, 

although broader measures of labour utilisation still 

indicate a huge surplus of willing workers who will 

likely continue to put downward pressure on wage 

growth. 


Chart 3: Temporary Hiring Continues to Point to 

Service Sector Gains 




6 


The stronger household survey numbers may 

point to improvement among small businesses; 

the impact of weather was less than expected 

Nonfarm payrolls fell 36k after a 26k decline, above 

consensus expectations for a larger decline. Census 

hiring only added 15k, while private sector job losses 

eased to 18k from 33k in January. The 

unemployment rate held steady at 9.7% (9.687% 

unrounded) in contrast to expectations for an uptick. 

This is even more impressive as the labour force 

participation rate rose to 64.8% from 64.7%. 

However, the household survey showed a gain in 

jobs of 308k after a 541k increase in January. The 

household survey captures small businesses 

whereas the payroll survey only captures firms with 

more than 1000 workers, so the fact that hiring in the 

household survey has been greater than non-farm 

payrolls in the first two months of the year may be an 

indication that small businesses are hiring. 

Weather proved to be less of a factor than many had 

anticipated. We had been above the consensus 

forecast as we did not think the storms would have 

the kind of sizable impact on payrolls that the 

January blizzard of 1996 did. For weather to lead to a 

job loss in nonfarm payrolls a worker must be on a 

weekly pay cycle (mainly manufacturing, temporary 

and construction workers), they must have missed 

work for an entire week due to weather and didn't get 

paid as a result. The January 1996 blizzard was a 

single huge storm that wiped out the entire eastern 

seaboard, while the February storms during the 

survey period for the employment report this year 

were two smaller events that affected different 

regions over different time frames. 

For example, the Northeast Snowfall Impact Scale 

from the National Oceanic and Atmospheric 

Administration ranks the January 1996 blizzard an 

11.78, or extreme, and the 4-7 February storm this 

year a 4.3, or major, and the 9-11 February storm a 

3.93, also major. Only one, the 9-11 February storm 

that hit DC, Baltimore and Philly, really seemed to 

shut things down for an entire week. Consequently 

the manufacturing sector added 1k jobs after a 20k 

gain in January, construction job losses actually 

moderated slightly to -64k after -77k a month prior, 

and temporary hiring barely skipped a beat with a 

gain of 48k after a 50k increase. These areas all saw 

a noticeable deviation from trend in January 1996 so 

we conclude the impact of weather was modest. 

Manufacturing and the private service sector are 

where improvements are most noticeable, while 

construction and state and local governments 

are still firing workers at a rapid clip 

Manufacturing is the sector of the economy that has 

seen the most robust recovery to date. As shown in 

Chart 2, manufacturing activity has rebounded much 

Chart 4: Two Sectors in Trouble: Construction 

and State & Local Govts 


Chart 5: Wage & Salary Income Picking Up 


Chart 6: The Army of Unemployed is Still 

Sizable 


faster than in the prior cycle owing to a combination 

of the inventory cycle, the rebound in global trade 

and the fact that it probably overcorrected to the 

downside at the height of the financial crisis. The 

employment index in the ISM survey has been 

signalling a strong move into hiring, although it has 

not proven to be a reliable indicator of job gains in 

recent years. The manufacturing sector has been in 

longstanding decline as US firms seek to maintain 

margins by moving operations to lower-cost 

countries. This trend is likely to continue and we 



7 


expect only modest gains in manufacturing 

employment. 

The private service sector does seem to be moving 

gradually but decisively toward job growth Chart 3). 

Temporary hiring has been strong, averaging 46k per 

month in job creation over the past six months. This is 

an indication that many companies have seen activity 

recover to the point that they need additional labour but 

are not yet willing to commit to permanent employees. 

Nonetheless, the relationship between temporary 

hiring and permanent private service sector job gains 

looks to be intact and suggests a move into positive 

territory in the near future. Job losses in the 

professional and technical sector, which includes 

legal and accounting services among other areas, 

appear to be near an end while education and health 

care continue to steadily add 30k jobs per month. We 

expect the private service sector will carry the burden 

of leading the recovery in jobs, but the sector 

appears to be at a turning point. 

The news is not as good in the construction and state 

and local government sectors where job losses show 

few signs of slowing. The construction sector has 

been affected by the cold and snowy winter that 

began in December with the average 3-month job 

loss through February at 59k after slowing a little. 

However, the hiring numbers are not particularly out 

of synch with incoming data on the commercial and 

residential real estate sectors where demand 

remains weak and supply overhang is still an issue 

holding down activity. 

State and local governments continue to reel from 

the worst budget crisis since the 1930s and they are 

shrinking their workforce at an unprecedented rate. 

While construction job losses are likely to slow 

somewhat in the spring, the prospects for state and 

local governments are less clear and these two 

sectors will slow the overall recovery in the labour 

market through much of the year. 

The gains in hours worked in recent months are 

starting to produce income gains for consumers, 

although the huge surplus of unemployed 

workers continues to suggest the Fed will remain 

on hold 

Aggregate hours worked gave up some of their 

recent gains in February, falling 0.6% after rising 

1.0% over the prior three months. This is likely where 

weather had the biggest impact. For example 

manufacturing hours worked fell 0.9% even though 

the ISM signalled continued expansion in orders and 

activity. We therefore expect to see a significant 

rebound in the March report. However, even with the 

backtracking in February, hours worked are rising 

over the past several months indicating a modest 

pick up in wage and salary income for households 

(see Chart 5). This makes it likely that we will see 

continued modest gains in consumer spending in the 

months ahead even as actual job gains pick up only 

gradually. 

While the unemployment rate held steady, the 

expanded U6 unemployment rate rose to 16.8% from 

16.5% an indication there is still a considerable 

amount of entrenched unemployment. Average 

hourly earnings rose a meager 0.1%, and are rising 

just 1.9% y/y as the weak labour market keeps 

downward pressure on wage growth. These 

measures are an indication of how far the labour 

market has to go to make up lost ground and 

highlight that the Fed is unlikely to raise rates any 

time soon despite the improving trend. 

The February employment report was a welcome 

indication that the labour market continues to 

improve and suggests further easing in the risk of a 

double dip recession. However the pace of 

improvement is gradual and suggestive of healthy 

but subdued economic growth relative to prior 

recoveries, which means an extended period of 

economic slack that will keep the Fed on hold. 



8 


US: Sell Short 

• The extended and expanded home buyers’ 

tax credit programme has not yielded the 

hoped-for boost to home sales. 

Chart 1: Housing Demand Remains Depressed 

• Even accounting for negative weather 

effects, the underlying trend of housing demand 

remains disappointingly weak. 

• Existing homeowners must first sell their 

current primary residence before purchasing a 

new one. 

• Almost one-quarter of all residential 

properties with mortgages were ‘under water’ in 

the last quarter of 2009. 

• Homeowners with negative equity are 

concentrated in five states: Nevada, Arizona, 

Florida, Michigan and California. 

• Once a mortgaged property is underwater 

by more than 25%, the probability that a 

homeowner will default is the same as that for 

an investor. 

• A new government plan scheduled to take 

effect in early April would encourage delinquent 

borrowers to get rid of their properties by 

means of a short sale. 

• This plan should set the stage for a quicker 

recovery but lead to a more painful adjustment 

in the short-term. 

No bang for your buck 

Last year, the first-time home buyers’ tax credit (in 

effect from January to November 2009) contributed 

to successfully lift demand for existing homes. 

Indeed, the National Association of Realtors 

estimates that 2 million resale properties benefited 

from the tax credit in 2009. Given this success, the 

tax credit program was extended until the end of April 

2010 for mortgages that close in June and expanded 

to include more affluent and repeat home buyers. So 

far, the second instalment of the programme has not 

yielded the hoped-for boost to home sales. 

Existing home sales declined by 7.2% m/m in 

January, following a 16.2% m/m decline in the 

previous month, leaving resale volumes at 5.05mn 

annualised units, the lowest level in seven months. In 

addition, new home sales plunged by 11.2% m/m in 

January to 309k annualised units, falling well below a 

previous historical low of 329k reached at the 


beginning of 2009. Adverse winter conditions likely 

played a role, suggesting weakness is likely to 

intensify in February. Indeed, pending home sales, 

which lead developments in resale volumes by one 

to two months, declined by 7.6% m/m in January, 

suggesting existing home sales are likely to remain 

depressed over the next few months. 

However, even accounting for negative weather 

effects, the underlying trend of housing demand 

remains disappointingly weak, as declines in home 

sales appear widespread across regions and predate 

the heavy snow storms that pummelled the country in 

February. 

The apparent ineffectiveness of the expanded home 

buyers’ tax credit is likely the result of several 

reasons. First, because the January to November 

2009 tax credit probably borrowed strength from the 

future, demand from prospective first-time home 

buyers is now lower than it would have otherwise 

been. Second, while the tax credit was extended to 

existing home owners, this additional pool of 

prospective buyers is probably rather shallow as 

most homeowners must first sell their current primary 

residence before purchasing a new one. 

Under water 

Given that house prices have declined by around 

30% from their peak in mid-2006, a significant share 

of homeowners owe more on their mortgage than 

their homes are currently worth. According to 

FirstAmerican CoreLogic, 24% of all residential 

properties with mortgages were in negative equity in 

the last quarter of 2009, equivalent to 11.3 million 

Anna Piretti 12 March 2010 


9 


properties. Worse still, an additional 2.3 million 

mortgages were approaching negative equity, 

meaning they had less than 5% equity in the home. 

Chart 2: Boom and Bust 

Homeowners with negative equity are concentrated 

in five states: Nevada (with 70% of mortgages 

underwater at the end of last year), Arizona (51%), 

Florida (48%), Michigan (39%) and California (35%). 

Together, these five states had an average negative 

equity share of 42% compared to “only” 15% in the 

remaining 45 states. 

As negative equity increases (because of declining 

home values or increasing mortgage debt), 

homeowners have a smaller and smaller incentive to 

remain current on their mortgage payments, leading 

to higher foreclosures rates. In particular, 

FirstAmerican CoreLogic found that once a 

mortgaged property is underwater by more than 

25%, the probability that a homeowners will default is 

the same as that for an investor. 

Paying you to get out 

In the current climate of rising foreclosures, the 

administration has so far focused its efforts on 

keeping struggling homeowners in their homes by 

working with lenders to renegotiate mortgage terms. 

This approach has shown disappointing results 

especially for deeply underwater loans and for 

homeowners who lost their job and might therefore 

be unable to remain current on their mortgage 

payments even if these are lowered. In contrast, a 

new plan scheduled to take effect in early April would 

actually encourage delinquent borrowers to get rid of 

their properties by means of a short sale, whereby a 

property is sold for less than the value of the 

mortgage. Participating lenders would have to forgive 

the difference between the lower market value of the 

home and the higher value of the loan. The aim of 

the plan is to streamline and standardise the short 

sale process and to facilitate an agreement between 

borrowers and lenders. In order to do this, the 

government would pay USD 1,500 to homeowners 

for “relocation assistance”, while banks would receive 

USD 1,000. The plan has a number of advantages 

for all interested parties. In addition to receiving a 

government cheque, homeowners are likely to see a 

much smaller deterioration in their credit score than if 

they embarked on a foreclosure process. Lenders 

and investors in mortgage pools have the prospect of 

receiving a higher payment than they would if the 


Chart 3: Owners’ Equity Rose and Fell with 

House Prices 


bank were to repossess the home. Communities 

would benefit because homes would be sold rather 

than languish empty for months as a target for 

vandals waiting for the lender to sell the property. 

Details of this plan still have to be finalized and a 

number of outstanding issues remain. For example, 

many distressed properties have second or even 

third mortgages, often with different banks, 

suggesting the short-sale process is unlikely to be 

straightforward as all parties have to be in 

agreement. Nevertheless, by speeding up the 

correction, this plan should set the stage for a 

quicker recovery. An increase in short sales would 

also exert additional downward pressure on prices as 

“bad loans” would be worked off quicker than through 

the regular foreclosure process. While positive in the 

long term, this would lead to a more painful 

adjustment in the short term. 

Anna Piretti 12 March 2010 


10 


US: Productivity Growth Climbing 

• Non-farm productivity soared in 2009 well 

above trend and is expected to continue rising 

in 2010, albeit at a slower pace. 

Chart 1: Productivity Growth Picking Up 

• Higher productivity and lower unit labour 

costs boost profit margins and raise overall 

profitability. 

• Businesses have turned to capital investment 

rather than employment early in the recovery, 

which could keep productivity growth strong. 

• Another result is that corporate free cash 

flow is unusually high, implying a possible 

corporate buying spree. 

Productivity is booming 

Non-farm businesses are enjoying a boom in 

productivity growth. In 2009, productivity soared 

5.8%, hitting a peak in Q4 when non-farm 

productivity was up 6.9%. Businesses continued 

slashing payrolls and cutting hours worked through 

the end of last year despite significant growth in 

output. In Q4 2009, non-farm business output 

jumped 7.6%. Some of this surge in productivity is a 

normal cyclical phenomenon; however, the recent 

pick-up in equipment and software investment 

suggests some capital deepening that could keep 

productivity rising. 

Plunging labour costs boost profitability 

The major benefit from above-trend growth in 

productivity is significantly lower unit labour costs. 

Lower labour costs raise domestic competitiveness in 

global markets and make a substantial boost to 

corporate profitability. In the fourth quarter of 2009, 

unit labour costs were down 4.7% y/y, creating a very 

positive environment for corporate profitability. 

Margins, estimated as the non-farm price per unit 

less the estimated total unit costs, jumped by 1.3% 

y/y in Q4, one of the largest annual increases in the 

past 60 years. In addition to lower labour costs, 

which are the largest cost component of business, 

and greater profitability, the boom in productivity will 

enable companies to absorb any other input price 

increases. For example, increases in commodity 

prices (or other import prices) can be absorbed 

without having to pass along these cost increases 

into final prices in a very competitive domestic 

market place. 

Domestic profits up in 2009 

In the previous expansion, the growth in corporate 

profits had come mainly from the external sector. In 

contrast, in the first few quarters of the current 

Source: Reuters EcoWin Pro, BNP Paribas 

Chart 2: Investment in Equipment Forecast to 

Grow 


Chart 3: Rising Investment Can Lead to Greater 

Productivity 


expansion, profits from international operations were 

still declining with all of the profit growth in the past 

three quarters coming from domestic sources. In 

2009, profits from domestic operations increased in 

every quarter and now account for 76% of the total 

(having dropped to a low of 70% in 2008). Financial 

Brian Fabbri 12 March 2010 


11 


profits soared in 2009, growing by an estimated 

215%, albeit from the exceptionally low level reached 

in 2008 when banks were under siege. Domestic 

non-financial profits also grew in 2009, but much 

more slowly; they only started to rise in Q2. For the 

full year, they rose by an estimated 7.7%. The restof-world 

profits at US non-farm corporations fell in 

the first half and began rising in Q3. For the year, 

profits from rest-of-world operations are estimated to 

have been roughly flat y/y, as a return to world trade 

growth in H2 2009 helped make US affiliates abroad 

profitable again. 

Profits’ share going higher 

The boost to corporate profits came at the expense 

of labour. Profits’ share of national income jumped to 

an estimated share of 11.1% in Q3 of 2009, while 

labour compensation’s share sank to 63.2%. The 

profits outlook for this year is also promising. Growth 

in private payrolls will probably strengthen throughout 

the year, but at a relatively slow pace compared with 

output growth. Businesses usually take a significant 

amount of time before they run out of opportunities to 

produce incremental productivity. When they 

eventually do, they shift to accelerated hiring to 

maintain output growth. Business cycle history 

suggests that this time lag fluctuates between one 

and two years. Thus, profits’ share of national 

income probably will rise further and challenge the 

peak proportion (13.7%) reached in Q3 2006. 

Investment begins first 

Non-farm businesses have turned first to investment 

in new capital early in the recovery to garner further 

productivity-boosted profits rather than to 

employment. In contrast, new investment in 

commercial real estate is unlikely to begin for at least 

another year given the significant supply overhang 

and difficult financing conditions in this sector.. In 

past expansions, once business began increasing 

investing in equipment, growth has been many times 

larger than overall GDP growth. For example, in the 

expansion of the 1980s, capital investment jumped to 

nearly 20% in the 12 months after the start of the 

new expansion and then decelerated thereafter. In 

the 1990s, accelerated expansion of capital 

investment in equipment started about 18 months 

after the end of the 1991 recession, but remained 

well above trend growth for several years. In the last 

expansion, business took longer before committing to 

faster-than-trend growth in equipment investment 

partly because of the Sarbanes Oxley law of 2002 

and the overhang from the previous investment 

boom. Above-trend investment growth finally started 

in 2005, three years into the expansion. 

Record corporate free cash flow 

Chart 4: Domestic Profits Surging 


Chart 5: Profits Share is Rising 


Chart 6: Corporate Free Cash Flow is Soaring 


enjoying an unprecedented free cash flow position. 

Chart 6 highlights the extraordinarily flush position 

US corporations are enjoying relative to their free 

cash position over the past 60 years. Free cash flow 

is defined as retained earnings less capital 

investment and in Chart 6 is shown as a ratio to 

GDP. Clearly, non-farm businesses are in a rare 

position to use this free cash flow to increase 

investment in productivity-enhancing IT, and to 

engage in strategic acquisitions. Consequently, we 

estimate that business investment in equipment and 

software will surge over the next two years, rising by 

an annual rate of double its long-term average 

growth (7.1%) in 2010 and 2011 before easing to 

In this cycle, non-financial corporations are not 

burdened with new legislation, or recovering from the 

aftermath of an investment boom, as they were at the 

beginning of the last decade. Moreover, they are above-average growth in 2012. 

Brian Fabbri 12 March 2010 


12 


Germany: The Big Chill 

• Construction activity has been hit very hard 

by exceptionally cold weather early in Q1. 

• This increases the risk of a q/q contraction 

in GDP in Q1, though other indicators have been 

more positive for growth. 

• The manufacturing sector is doing well, with 

survey strength now starting to pass through to 

‘hard’ data such as new orders. 

25 

20 

15 

10 

5 

0 

-5 

-10 

Chart 1: Construction Output (% q/q) 

-15 

Data distortions 

The economic activity data in the eurozone can be 

noisy at the best of times and, in the period since the 

global financial crisis, it has been deafening. It is not 

likely to quieten down any time soon given the 

combination of: distortions related to the introduction 

and expiry of various growth stimuli; divergence of 

national and sectoral activity trends; and the time of 

year. Aspirin, please! 

Shaded Area = GDP Contractions 

-20 

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 


Chart 2: Construction Output & Expenditure 

25 

12.5 

20 

Construction Output (% q/q) 

10.0 

15 

7.5 

10 

5.0 

The turn of the year is particularly problematic for the 

activity data in Germany given the disruption caused 

by the weather. Data watchers in Germany will be all 

too familiar with the confusion caused by periods of 

weather-induced volatility in the past. 

5 

0 

-5 

-10 

-15 

Construction Expenditure (% q/q RHS) 

2.5 

0.0 

-2.5 

-5.0 

-7.5 

A particularly painful example occurred in early 2008 

when unusually mild winter weather early in the year 

prompted a bringing forward of construction sector 

activity in Germany, contributing to a misleadingly 

robust expansion in GDP. The strong GDP figures for 

Q1 were released in mid-Q2 and were a contributory 

factor to the ECB’s decision to increase its 

refinancing rate just as the global financial crisis was 

intensifying. 

Cold snap hits construction 

The opposite effect is now happening, with the 

exceptionally cold weather in Germany at the start of 

the year now starting to make its presence felt in the 

construction-related data. Output in the sector fell by 

a massive 14% m/m in January, the second biggest 

m/m fall in the series' history. 

A q/q contraction in double digits looks very likely for 

construction output in Q1. By way of illustration, if 

output in the sector was flat in both February and 

March, the q/q decline in Q1 would be in the region 

of 15%. As we know that the weather was also 

unfavourable in February, another fall is possible in a 

month’s time. 

-20 

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 


On the three occasions in the past two decades that 

a double-digit q/q decline in construction output has 

occurred, in Q1 1996, Q1 1997 and Q2 2008, GDP 

registered a q/q contraction (Chart 1). 

In its latest press conference, the ECB explicitly cited 

adverse weather in some parts of the eurozone as a 

downside risk to growth in Q1. 

Measuring the impact 

Based on the national accounts data for Germany, 

construction spending currently accounts for just 

under half of total gross fixed capital formation on a 

constant price basis. Its share of GDP on the same 

basis is roughly 10%. 

A complication is that large changes in construction 

output have not passed fully into the changes in 

construction expenditure (Chart 2). The pass-through 

from output to expenditure data in the past has 

typically been about half. 

-10.0 



13 


Assuming this relationship holds, a 10% q/q decline 

in construction output in Q1 would translate into a 5% 

q/q fall in expenditure. Given the latter’s share in 

GDP, this would imply a drag on GDP of around half 

a percentage point. It could be bigger still, of course, 

if construction output fails to rebound in the next 

couple of months. 

Sliding surplus 

German trade data for January also augur poorly for 

Q1 GDP, with the monthly surplus almost halving. It 

fell from EUR 16.6bn in December to EUR 8.7bn, the 

lowest surplus in almost a year. 

65 

60 

55 

50 

45 

40 

35 

30 

Chart 3: Divergent PMIs 

Manufacturing 

Services 

98 99 00 01 02 03 04 05 06 07 08 09 10 

Exports unexpectedly collapsed by 6.3% m/m in 

January following a series of robust gains since last 

spring. The fall was one of the biggest on record and 

goes against the positive indicators of global trade 

dynamics recently: e.g. a surge in world trade 

volumes as reported by the CPB in the Netherlands 

and much improved manufacturing surveys including 

the PMI in Germany. Given this, the drop in January 

looks like a blip and could well be another weatherrelated 

distortion. 

Positive pointers 

The recent bad news from the construction and trade 

data does not guarantee a negative q/q outcome for 

German Q1 GDP as other factors are more positive. 

One is the likelihood of at least a partial reversal of 

the unusually large drag on Q4’s q/q growth rate from 

inventories (in excess of a percentage point). 

Recent strength in domestic capital goods orders 

also suggests that capex might bounce back in Q1, 

having fallen unexpectedly sharply in Q4. 


125 

119 

113 

107 

101 

95 

89 

83 

77 

Chart 4: Level of Orders & Output 


Manufacturing Orders 

(Index 2000 = 100, 3Mth Lag, RHS) 

Industrial Production 

(Index 2000 = 100) 

133 

123 

113 

103 

93 

83 

73 

63 

Amid the various crosswinds, it is going to be more 

difficult than usual to get a handle on the underlying 

trend in activity. In short, we see it like this: the more 

externally-sensitive manufacturing sector data will do 

comparatively well but the consumer-driven data will 

struggle and, in the absence of a pick up in the latter, 

the expansion will remain subdued. 

The contrast between the two is illustrated in the 

recent divergence of the manufacturing and services 

PMIs in Germany (Chart 3). The improvement in the 

manufacturing data has not been confined to the 

surveys alone. 

The m/m rise in manufacturing orders in Germany in 

January was a whopping 4.3%, well above market 

consensus expectations and the strongest increase 

of the expansion to date. The orders data got Q1 off 

to a very strong start. Even given flat m/m outcomes 

in February and March, the q/q increase in orders in 

Q1 would be around 4%. 

Domestic orders surged by a remarkable 7.1% m/m 

in January, the second biggest increase on record. 

Domestic orders for capital goods specifically were 

even stronger still, rising by a mammoth 10% m/m – 

hence the prior mention of the possibility of a Q1 

rebound in capex. 

In perspective 

A note of caution, however. The y/y rate of increase 

in German manufacturing orders is now running at 

almost 20% but this rate of increase is being flattered 

by base effects related to the collapse in activity in 

the corresponding period of last year during the 

intensification of the financial crisis. 

Note also that the level of orders and output in 

Germany remains well down on the pre-crisis peaks 

(Chart 4). Despite the rebound in industrial output 

since last spring, it is still down by almost 20% in net 

terms from its 2008 high. 



14 


UK: Election Update 

• The Budget will be delivered on 24 March. 

Chart 1: UK Political Opinion Polls 

• We expect the latest net borrowing estimate 

to be revised down, though the government is 

likely to spend at least some of this ‘windfall’. 

• Recent opinion polls continue to highlight 

the significant risk of a hung parliament. 

Under starter’s orders… 

Gordon Brown moved closer to announcing the date 

of the general election this week by confirming the 

Budget will be delivered on 24 March. That is likely to 

be one of the final key set pieces ahead of firing the 

starting pistol for the election campaign by dissolving 

parliament. As such, and with very little leeway on 

the public finances, we expect the Budget to be 

heavy on politics and light on substance. Our full 

Budget preview will be published next week. Having 

seen the Conservatives’ rating in the opinion polls 

slip in recent months, we think the Chancellor will not 

deviate from the strategy set out so far. Part of the 

erosion in the Conservatives’ lead has probably 

resulted from its promise to tackle the budget deficit 

more aggressively, thus delivering more pain. 

When announcing the date of the Budget, Brown 

highlighted that the pay of senior civil servants (and 

senior military personnel) will be frozen. Moreover 

the prime minister said that the Budget would give 

more details on how the deficit will be cut – i.e. 

attempting to add some substance to the 

government’s claim that it would halve the deficit in 

the next four years. There may also be some token 

giveaways. If the Chancellor announces even 

tougher fiscal tightening, it will blur the dividing lines 

between the two main parties and undermine the 

Labour Party’s criticism of the Tories’ tougher stance. 

The greater than expected windfall from the raid on 

bankers’ bonuses (around GBP 2bn) is likely to be 

channelled towards ‘deserving causes’. Furthermore, 

although the latest month’s public finances data were 

awful, the prior months’ outcomes were surprisingly 

robust. In fact, we suspect that the Chancellor could 

revise down the estimate of Public Sector Net 

Borrowing (PSNB) for the 2009/10 fiscal year of GBP 

178bn by as much as GBP 10bn. However, it seems 

likely that at least part of the ‘windfall’ is spent 

supporting the recovery and thereby increasing 

Labour’s chances at the election. 

Opinion poll update 

If the election date is 6 May as most expect, the 

latest the election can be called is 12 April. More 

Source: UKpollingreport.co.uk 

Chart 2: Opinion Polls – Recent Evolution 

Source: UKpollingreport.co.uk 

likely, the announcement will come a few days 

earlier. 

Recent opinion polls have shown that the 

Conservatives’ lead continues to narrow. For March 

so far, the average lead is down to 6pp from 8pp in 

February and 10.5pp in January (Chart 1). Two polls 

have shown the lead down to just 2pp, with the 

biggest margin of any poll at just 9pp. Translating the 

latest polls into seats in the House of Commons 

gives the Conservatives roughly 298 seats – 28 short 

of an overall majority. Labour are on 276 seats with 

the Liberal Democrats on 46. 

These polls reinforce our view that the most likely 

outcome is a hung parliament. We suspect that the 

Conservatives will opt to govern as a minority 

government with tacit support from the Liberal 

Democrats. However, if the Conservatives’ lead in 

the polls continues to narrow, there is a significant 

risk of a Labour-Lib Dem coalition. After all, in the 

first instance, it is the incumbent prime minister that 

gets the first choice to set up a government. 

Alan Clarke 12 March 2010 


15 


SNB: Outlook Firming 

• The SNB left rates on hold as expected. 

Chart 1: SNB Policy Rates 

• The growth outlook was revised higher, with 

the back end of the inflation projection rising by 

virtue of the forecast moving forward a quarter. 

• We continue to expect the first hike in Q3, 

but its timing remains sensitive to 

developments in the franc. 

‘Expansionary’ monetary policy maintained 

As widely expected, the SNB left rates on hold in 

March, maintaining its target for 3m Libor towards the 

bottom of the 0-0.75% range. An apparent softening 

of the language on FX intervention appears to have 

been a translation error but there was an upward 

revision to the growth outlook. The furthest point of 

the inflation projection also moved higher, by virtue of 

the forecast kicking on by one quarter. 

The key points of the press release accompanying 

March’s decision are as follows: 

1. An apparent adjustment in the language on FX 

intervention appears to have been a translation 

error. 

The statement said the SNB will act decisively to 

prevent “an excessive appreciation” rather than “any 

excessive appreciation” of the Swiss franc against 

the euro. However, the German press release carried 

an identical statement on intervention to the 

December press release. 

2. The central bank upgraded its assessment of 

the economic recovery… 

First, the signs of an economic recovery are now 

“becoming more tangible” rather than just “gathering 

strength”. Second, and more importantly, the SNB 

revised its forecast for growth this year to “about 

1.5%” – in line with our forecast. This had looked 

inevitable; after Q4’s 0.7% q/q GDP print, the SNB’s 

previous forecast for 2009 growth of 0.5-1.0% could 

have been achieved even with zero growth each 

quarter through 2010. 

3. ...but maintained a cautious tone 

Despite this more positive assessment of the 

recovery, the SNB maintained its cautious language 

about the outlook. The revival in the economy 

“remains fragile” and “is associated with 

uncertainties”. The central bank sees the global 

economy as on “a moderate upward trend”, and 

differentiated between “surprisingly positive” growth 


in the US and the “disappointing” performance in 

Europe. 

4. The inflationary risk posed by strong money 

growth was explicitly addressed 

One of the key elements of our argument that the 

SNB will hike well before the ECB is that, with no 

signs of a credit crunch in the economy, the slug of 

narrow money created over the past year represents 

a more significant risk to medium-term price stability 

than elsewhere. This was acknowledged in the press 

release: “Although the monetary base has declined, it 

is still very high…[and] needs to be reduced in good 

time”. So too was the fact that mortgage lending has 

actually been accelerating, with the SNB requesting 

banks and borrowers “to be extremely cautious, in 

view of the growth in mortgage loans and the 

continuing increase in residential real estate prices”. 

5. The inflation forecast was changed only 

marginally 

The inflation forecast was revised up marginally near 

term (reflecting the surprise to GDP) but was revised 

down marginally in the medium term. The back end 

is now higher at 2.75% (2.55% in December), purely 

by virtue of the forecast kicking on by one quarter. 

As we wrote last week, we expect the SNB to hike 

only when it is confident that the economy will be 

resilient to the additional currency appreciation the 

first hike will likely bring. Comments on the fragility of 

the recovery in the press release suggest the SNB 

does indeed want further confirmation of the vibrancy 

of the rebound. We expect it to get such 

confirmation. Our forecast for the first hike remains 

Q3, but the timing remains sensitive to developments 

in the franc. 

Eoin O’Callaghan 12 March 2010 


16 


Japan: The Target of Fiscal Restructuring 

• When drawing up plans for fiscal 

rehabilitation, assumptions about the nominal 

growth rate and the nominal interest rate are 

very important: assuming the interest rate will 

stay below the growth rate creates the condition 

of dynamic inefficiency, wherein bubble 

formation is common; assuming that the 

interest rate will stay above the growth rate is 

the conservative way of not exposing state 

finances to such unnecessary risk. 

• If the public debt is not that great, the goal 

of fiscal restructuring could be merely achieving 

a primary balance surplus, as that would stop 

the debt-to-GDP ratio from climbing. 

• But Japan’s public debt is so huge that the 

target should be to steadily lower the debt-to- 

GDP ratio, something that requires a primary 

balance surplus of 1-2% of GDP. 

• That said, the debt-to-GDP ratio (stock 

indicator) will continue to creep higher until the 

primary balance (flow indicator) turns positive. 

In the meantime, the market, if its attention is 

directed to the debt-to-GDP ratio, could judge 

that fiscal discipline is lacking, leading to 

upward pressure on yields. 

• Thus, while it is appropriate to set the debtto-GDP 

ratio as the ultimate target of fiscal 

restructuring, it is important that the primary 

balance be concurrently made a medium-term 

target and to encourage the market to focus 

more on the latter. 

Hatoyama government mulls plans for fiscal 

restructuring 

In Japan: Recommendations for Fiscal Reform in last 

week’s Market Mover, we indicated that the 

Hatoyama government is considering a framework 

for medium-term fiscal spending and a strategy for 

long-term fiscal management. With respect to the 

framework for spending, I argued that “pay-as-yougo” 

must be the guiding principle to ensure that only 

new spending programmes that are fully-financed are 

included in the budget for FY 2011 through 2013 (if 

the programmes cannot be fully financed, they 

should be subject to micro-level vetting just like other 

spending requests). As for the fiscal management 

strategy, we stated that the long-term goal should be 

to achieve a sufficiently large primary surplus (say 1- 

Chart 1: Public Debt and Primary Fiscal Balance 

(Central + Local governments, % of Nominal GDP) 

4 

2 

0 

-2 

-4 

-6 

-8 

-10 

primary fiscal balance 

1981 

19922002 

20022007 

2009 

2010 

40 60 80 100 120 140 160 180 

long-term national debt, end of previous fiscal year 

Source: MOF, Cabinet office, BNP Paribas 

Note(1) National debt trough FY2008: end-of-year statements; FY 2009: 

supplementary budget basis. (2) Primary balance: Cabinet Office estimates. 

4 

2 

0 

-2 

-4 

-6 

-8 

-10 

Chart 2: GDP and Nomura-BPI (JGB) (%) 

NOMURA-BPI(JGB) 

00 01 02 03 04 05 06 07 08 09 

Source: Bloomberg, BNP Paribas 

Nom inal GDP (% y/y) 

2%) to ensure that the public debt (as a share of 

GDP) is steadily falling. 

According to government estimates, the deficit in the 

primary balance of the central and local governments 

combined in FY 2010 should be 7.1% of GDP, and 

the timeframe for achieving a primary surplus of 

1~2% seems to be around the turn of the current 

decade. The reason for the large deficit in 2010 is not 

only declining tax revenue but also the Hatoyama 

government’s plans to introduce new permanent 

spending programmes to be financed by tapping into 

“hidden” reserves as well as the issuance of deficitfinancing 

bonds. In this report, I intend to clarify the 

relationship between such key concepts as “primary 

balance,” “fiscal balance,” “balance of public debt” 

and “debt-to-GDP ratio.” The first two are flow 

indicators, and the latter two are stock indicators. 

Ryutaro Kono 12 March 2010 


17 


Primary balance equilibrium means benefitsburdens 

balanced that year 

Beginning with a basic definition, a deficit in the fiscal 

balance usually equals the volume of new JGB 

issuance. The primary balance is the fiscal balance 

that is reached after subtracting “expenditures 

excluding interest payment and debt redemption” (i.e. 

primary expenditures) from “tax and other revenues 

excluding bond revenue” (i.e. primary revenue). In 

other words, the primary balance indicates whether 

“expenditures for the year” are covered by the “tax 

revenue for the same year.” If equilibrium is achieved, 

benefits and burdens in that specific year are 

balanced (and there is no “bill” for future generations 

to pay). 

Assumption must be that “interest rate growth 

rate” 

When drawing up plans for fiscal rehabilitation, 

assumptions about the nominal growth rate and the 

nominal interest rate are very important. In this report, 

we will assume that “interest rate growth rate”, 

although history shows that the relationship between 

the two is not necessarily fixed. Fiscal restructuring 

tends to lose urgency when the nominal growth rate is 

constantly higher than the nominal interest rate. The 

reason is that the expanding nominal GDP enlarges 

the tax base, thereby increasing tax revenue and 

making it easier to deal with the public debt in the 

future, rather than now. In this way, the fortunate 

scenario of “nominal growth nominal interest rate” 

could justify delaying fiscal reform, including the 

overhaul of the spending/revenue structure. 

“Interest rate < growth rate” creates situation 

conducive to bubbles 

But since the turn of the century, the yield on JGBs 

has usually been much greater than the nominal 

growth rate, as shown in Chart 2, in which JGB yields 

are not the 10-year debt but the Nomura-BPI (JGB), 

an index that measures the movement of the 

average duration of government bonds in the 

secondary market. Meanwhile, as indicated in other 

reports, when the interest rate falls below the growth 

rate, you have a condition of dynamic inefficiency, 

wherein economic resources are not utilised most 

efficiently, creating an environment conducive to 

bubble formation. Plans for fiscal restructuring should 

not be based on assumptions of such abnormal 

economic/financial conditions. When drawing up 

plans for fiscal rehabilitation, the assumptions must 

be conservative so as to never expose state finances 

to unnecessary risk. 

Equilibrium in the primary balance is not the 

ultimate objective 

Chart 3 gives the relationship between “primary 

balance,” “fiscal balance,” “outstanding public debt” 

and “debt-to-GDP ratio.” Situation 1 is Japan’s 

Chart 3: Relationship between Four Key Fiscal 

Indicators 

(Current 

situation) 

 

 

primary balance 

PB0 

PB0 

(equilibrium) 

PB(nominal interest 

rate - nominal GDP) 

×debt outstanding 

fiscal balance 

Current fiscal deficit 

Debt service 

Debt serviceA 

trn. Yen 

debt-to-GDP ratio 

increase 

increase 

PBDebt service ± 0 fall 

Outstanding debt 

expand 

(faster than nominal 

interest rates) 

expand 

(at nominal interest rate) 

expand 

(at nominal GDP rate) 

PBInterest payments Debt redemption costs 

fall flat 

decline 

(Debt redemption costs) 

Source: MOF, “Decide now, Japan’s fiscal crisis won’t wait!” (p.56), BNP 

Paribas 

Chart 4: Level of Primary Balance 

in Situations 1-5 

Fiscal balance=0 

Rate of increase in outstanding 

debt=0 

Debt-to-GDP ratio=0 

PB=0 

Current situation 

Revenues 

Bond revenues 

Tax revenue 

current condition: the primary balance is in deficit, the 

fiscal balance is greatly in deficit, and both the 

balance of public debt and debt-to-GDP ratio are 

rapidly rising. Situation 2 is where the deficit has 

been erased in the primary balance (i.e. equilibrium). 

Now the fiscal balance is still in deficit, but the level 

has been reduced to that of debt servicing costs 

(interest payments and debt redemption). 

Consequently, the public debt is only increasing by 

an amount equal to interest payments. In other words, 

the debt is increasing at the speed of the nominal 

interest rate, which (given our assumption that 

interest rate nominal growth) means the debt-to- 

GDP ratio continues to steadily rise. Some might feel 

that equilibrium in the primary balance should the 

aim of fiscal rehabilitation, but the fact that the public 

debt is still growing in this situation 2 makes it clear 

that equilibrium cannot be the final goal. 

Situation 3 is where the primary balance registers a 

surplus, allowing the debt-to-GDP ratio to stabilise. 

Here, the public debt is still rising, but the rate of 

growth matches that of nominal growth, enabling the 

debt-to-GDP ratio to stop climbing. Situation 4 is 

where the surplus in the primary balance has risen to 

flat 

Expenditures 

Debt redemption 

Interest payment 

General 

expenditures 

Debt 

service 

Source: “Decide now, Japan’s fiscal crisis won’t wait!” (p.57), BNP Paribas 



18 


the level of bond interest payments. Since the fiscal 

deficit is now equal to debt redemptions, the public 

debt is no longer swelling, meaning the debt-to-GDP 

ratio will steadily fall. Situation 5 is where the surplus 

in the primary balance has risen to the level of debt 

servicing costs (interest payments and debt 

redemption), meaning the fiscal balance is now in 

equilibrium. Now, not only is the debt-to-GDP ratio 

steadily falling, but the public debt is also declining. 

Aim is primary balance surplus that causes debtto-GDP 

ratio to fall 

Now, if the public debt is not that great to begin with, 

the goal could be achieving situation 3, where the 

primary balance maintains a surplus that allows the 

debt-to-GDP ratio to stop climbing (the public debt 

does not have to be cut to zero, it is only important 

that the debt-to-GDP ratio stop rising). But Japan’s 

public debt is so huge that the objective should be 

situation 4, achieving such a surplus in the primary 

balance that the debt-to-GDP ratio will steadily fall. It 

is important to avoid succumbing to a vicious cycle of 

“rising interest rates widening fiscal deficit rising 

interest rates.” To that end, the government need to 

secure a primary surplus of 1-2% of GDP (i.e., the 

surplus must equal more than just the margin 

between the interest rate and the growth rate). 

Shouldn’t the target be debt-to-GDP ratio? 

There are some that contend the objective should 

instead be to target the debt-to-GDP ratio. The 

argument here is that equilibrium in the primary 

balance alone is not sufficient but that some set 

surplus must be achieved to steadily lower the debtto-GDP 

ratio. As indicated above, we basically agree 

with this view. But it is our position that the target 

should not be the debt-to-GDP ratio per se but the 

primary balance (or a combination of the two). 

Stock indicator like debt-to-GDP ratio should not 

be market’s focal point 

The reason is that the debt-to-GDP ratio is a stock 

indicator, and as such requires more time than flow 

indicators such as the primary balance to start 

registering a decline. In other words, improvements 

could be under way in flow indicators like the primary 

balance, but the debt-to-GDP ratio will continue 

climbing until the primary balance achieves a surplus. 

Such being the case, if the target is a debt-to-GDP 

ratio, even with steady improvements in the primary 

balance, the market might misconstrue continued 

increases in this stock indicator as indicating 

inadequate fiscal discipline, something that could 

trigger a rise in the interest rate. Although the primary 

balance itself might not be affected by a rising 

interest rate, the greater cost of debt servicing would 

acerbate the fiscal deficit and the surplus needed in 

the primary balance to stabilise the debt-to-GDP ratio 

would rise, making it harder to achieve the objective. 

Thus, the debt-to-GDP ratio should not be the 

market’s focal point. 

People are influenced by the interpretation of 

facts 

If the focal point is the primary balance, the market’s 

perception of steady improvement in this flow 

indicator would likely cause the interest rate to fall (or 

at least not rise). That, in itself, would help facilitate 

fiscal restructuring. In a world governed by the laws 

of natural science, either objective (primary balance, 

debt-to-GDP ratio) would make little difference, but in 

economics, where the laws are that of social science, 

people are not affected by facts alone but are often 

influenced by the spin put on those facts. This is 

especially true of the financial markets, where 

reflexivity is very strong. Thus, even if the debt-to- 

GDP ratio is made the ultimate target of fiscal 

restructuring, it is important that the primary balance 

be concurrently made a medium-term target and to 

encourage the market to focus more on the 

latter. Effective expectations management is 

crucial in debt management strategy, and that 

requires setting indicators that would most directly 

reflect the government’s efforts at fiscal reform as 

policy targets. 



19 


Japan: Jobless Rate Slips Below 5% 

• The jobless rate in January fell 0.3pp from 

December to 4.9%, slipping below the 5% line 

for the first time in ten months. 

• Since hitting an all-time high of 5.6% in July 

2009, the jobless rate has steadily edged lower 

due largely to the declining number of 

unemployed and the shrinking work force. 

6.0 

5.5 

5.0 

4.5 

Chart 1: Unemployment Rate (sa, %) 

• However, a significant increase in 

employment (0.9% m/m) in January is likely to 

be a monthly aberration. 

• Employment is unlikely to pick up much in 

the near term: the “Japanese-style work 

sharing” that, together with flexible wages, 

allowed Japan’s job losses to be relatively low 

when the economy was contracting, will 

probably now act to hamper job growth. 

• That said, even without big increases in 

employment, if the economy maintains growth 

in the mid-1% range (i.e. above the potential 

growth rate), the jobless rate should continue to 

decline on the steadily thinning jobless ranks. 

Jobless rate falls below 5%, job-offer ratio 

improves 

According to the Labour Force Survey for January (in 

which seasonal adjustment was revised retroactively), 

the unemployment rate in January fell 0.3pp from 

December to 4.9%, slipping below the 5% line for the 

first time in ten months. The jobless ranks shrank by 

4.7% m/m (the second decline following December’s 

1.4% drop) and the employed total rose 0.9% (0.1% 

in December). Since hitting an all-time high of 5.6% 

in July 2009 (revised down from 5.7%), the jobless 

rate has steadily edged lower. 

Meanwhile, separate statistics show the job-offer 

ratio, an indicator of marginal demand, rose for the 

first time in four months, climbing 0.03 points from 

December to 0.46, as job offers rose 2.3% m/m but 

job seekers declined 3.8%. The new job-offer ratio – 

a forward indicator of the job-offer ratio – also 

improved, by 0.04 point to 0.85. However, with new 

job offers declining for the first time in five months 

(-1.1% m/m), this improvement largely reflects a 

sharp drop in new job seekers (–6.0% m/m). While it 

is good news that job offers are steadily picking up, 

the level remains low and the pace of improvement is 

anaemic. 

4.0 

3.5 

05 06 07 08 09 10 

Source: MIC, BNP Paribas 

6,450 

6,400 

6,350 

6,300 

6,250 

6,200 

Chart 2: Employed (sa, 10k) 

05 06 07 08 09 10 


Factors causing the jobless rate to decline 

What are we to make of the latest upbeat labour 

statistics? Until now, we have pointed out two 

primary reasons for the steady downturn in the 

jobless rate, namely the declining number of 

unemployed and the shrinking work force. Increases 

in employment in January seem finally to be also 

causing the unemployment rate to fall. If this can 

continue, it would no longer be a “jobless recovery.” 

Japanese-style work sharing 

With the economy having bottomed in Q1 2009 and 

growing at an annualised rate of 3.3% in the 

following three quarters, the unemployed ranks have 

steadily declined since August. Nonetheless, job 

growth has been lacklustre; the decline in 

employment came to an end in August, to be 

followed by job growth generally drifting sideways 

through the end of 2009. The reason for this lies in 

what has come to be called “Japanese-style work 

sharing.” When the economy was down, a big reason 

why job losses in Japan were small compared to the 

severity of the economy’s contraction (Japan’s 

Ryutaro Kono/ Azusa Kato 12 March 2010 


20 


jobless rate never approached the 10% seen 

overseas) is because of Japanese-style work sharing. 

This includes the adjustment of working hours, 

temporary transfers and other measures to maintain 

employment, coupled with flexible wages, as the 

downturn in labour productivity per worker was 

matched by a decline in average wages via cuts in 

base pay, overtime pay and bonuses. (In December 

total cash earning fell 5.9% y/y, led by a 9.9% drop in 

bonuses and other special earnings). Now that the 

economy has recovered, though, the fact that 

Japanese-style work sharing kept payrolls largely 

intact means companies need not quickly take on 

new employees, as increased business needs can 

be met by merely increasing the hours of the existing 

staff. 

6,700 

6,680 

6,660 

6,640 

6,620 

6,600 

6,580 

6,560 

Chart 3: Labour Force 

(sa, 10k) 

05 06 07 08 09 10 


Male (RHS) 

total 

3940 

3920 

3900 

3880 

3860 

3840 

3820 

3800 

Ageing and the shrinking work force 

The nation’s shrinking work force has been a big 

reason why Japan’s jobless rate has steadily fallen 

without employment picking up, something pointed 

out in previous reports. This involves more than just 

the rapid greying of society, which has been going on 

since the late 1990s. The problem of a shrinking 

work force has been acerbated by the escalating 

pool of discouraged workers, as people gave up on 

looking for work (i.e exit the work force) because 

deteriorating business conditions prompted 

companies to cut back on new hiring as well as reemploying 

willing senior citizens. With the economy 

having revived, we expect many of these 

discouraged workers will start looking for jobs again 

(in other words, return to the work force). But, that is 

probably not true for many seniors, as has been the 

case since the 1990s. Thus, the labour participation 

rate, which fell sharply during the recent recession, 

will probably again show only limited improvement 

even if the recovery continues. 

Employment situation not strong, but jobless rate 

will continue falling 

This brings us to the sizeable upturn in both 

employment and the work force shown in January’s 

Labour Force Survey. As indicated above, if 

increases in employment continue to cause the 

unemployment rate to fall, the job scene could prove 

stronger than expected. 

1.1 

1.0 

0.9 

0.8 

0.7 

0.6 

0.5 

0.4 

Chart 4: Job-Offer Ratio 

(sa) 

05 06 07 08 09 10 

Source: MHLW, BNP Paribas 

But given that the job-offer ratio is picking up only 

weakly, it seems safe to say that employment is 

probably not as robust as the Labour Force Survey 

suggests. The upbeat January survey may be just a 

monthly aberration. That said, given the fact that 

Japan’s work force is sure to continue trending lower, 

if the economy can maintain growth in the mid-1% 

range (that is, above the potential growth rate), the 

jobless rate will continue falling, even without any big 

increases in employment, as the jobless ranks will 

steadily thin (there will be replacements for retirees 

but little net job growth). 

Ryutaro Kono/ Azusa Kato 12 March 2010 


21 


US: 3y Agency Sector Still Good for Carry 

• Agencies have cheapened recently vs OIS 

and Libor, making entry levels attractive. 

• We particularly like the 3y from a strong 

carry and rolldown perspective. Meanwhile, the 

first three years of the curve should enjoy 

“protection” from the US government’s 

commitment to unlimited funding for GSEs 

over the next three years. 

• STRATEGY: (1) Buy agencies in 3y sector 

against a 3m forward starting matched maturity 

OIS swap with 3m time horizon for the trade 

(29bp of C&R if rates stay at current levels), or 

(2) buy agencies in 3y sector against a 

matched maturity OIS swap for up to 29bp of 

carry and rolldown over 1y. 

The agency market has enjoyed ample liquidity and a 

partial return of foreign demand for some time now. 

The US government’s commitment to unlimited 

funding for GSEs over the next three years certainly 

helped investors regain confidence. In fact, agencies 

reached pre-crisis tight levels versus OIS around the 

turn of the year (Chart 3). Meanwhile, recent agency 

issuance of bullet supply has been relatively 

conservative. However, several events have 

conspired to cheapen agencies recently (imminent 

end of Fed purchases and lack of the promised 

permanent solution for GSE are the main culprits), 

making current levels attractive (see Chart 1). 

Although carry trades are still popular in the rates 

market, investors are starting to worry as we inch 

closer to the exit from the zero-rate policy. We 

propose that carry trades should be good for another 

three months or so, based on a view that rate hikes 

are at least nine months away (see “Stressing Over 

Carry Trades”, Market Mover, 26 February 2010). In 

fact, our economists place the first rate hike in Q2 of 

2011, or at least a year away. 

We particularly like the 3y sector from a carry and 

rolldown perspective, and especially with the talk of 

the new FNMA 3y issue being as large as USD 6bn – 

helping to cheapen this sector nicely. We also think 

that the Fed’s imminent agency purchase 

programme exit should be mostly priced in. History 

tells us that rates in the 3y sector start to sell off in 

earnest around 5.5 months prior to the first rate hike. 

Chart 2 shows 3-month changes versus a breakeven 

on a long FH 3y position, which offers 29bp of carry 

and rolldown over 3m if rates stay around current 

levels. It clearly shows that in both previous on-hold 

Chart 1: Agencies in 3y Sector Have Cheapened 

25 

BP 

20 

15 

10 

5 

FH 3y OIS ASW 

0 

1/1 1/8 1/15 1/22 1/29 2/5 2/12 2/19 2/26 3/5 

Source: BNP Paribas 

FH 3y Libor ASW (RHS) 

Chart 2: 3m Changes in 3y Sector During Fedon-Hold 

Periods 

200 

BP 

150 

100 

50 

0 

-50 

'93-94 

'03-04 

Breakeven (Long 3y Agy After 3m) 

Rates in 3y Sector 

Break-Out Around 6m 

Before the First Hike 

-100 

-11m -10m -9m -8m -7m -6m -5m -4m -3m -2m -1m Hike 


Chart 3: 1y Forward OIS/Agy Spread Attractive 

180 

BP 

140 

100 

60 

20 

FH 2y OIS ASW 

-20 

Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 


Breakeven (Long 3y 

Agy vs OIS after 1y) 

2 

BP 

-2 

-6 

-10 

-14 

-18 

Sergey Bondarchuk / Suvrat Prakash / Bulent Baygun / Anish Lohokare 12 March 2010 

Market Mover, Non-Objective Research Section 

22 


periods the position would have been profitable so 

long as the rate hike was at least 5.5 months away. 

We also recommend hedging the tail risk by paying 

fixed on a 3m forward starting OIS swap. Because 

the 3y sector is about 15bp cheap to matched 

maturity OIS swap, a 3m fwd starting OIS swap rate 

a few bp below the spot yield of agency bullets in 3y 

sector. For those worried that rate hikes are less than 

nine months away and that the front end will start to 

sell off sooner, we recommend pushing the forward 

starting OIS hedge closer to spot, essentially 

shortening the carry trade. 

Alternatively, for those that do not want exposure to a 

possibility of a near term sell-off, we recommend 

being long agencies in the 3y sector versus paying 

fixed in a matched maturity OIS swap. Not only are 

current levels attractive, but also the position carries 

positive and benefits from a rolldown (agencies in 2y 

sector are richer vs OIS). This trade has potential to 

make 29bp of carry and rolldown if agencies tighten 

to turn-of-the-year levels. Meanwhile, Chart 3 shows 

that over the 1y horizon, the position offers a decent 

cushion against losses – 2y OIS/Agy spreads have 

not breached our 1 year breakeven level since June 

2009. 

Sergey Bondarchuk / Suvrat Prakash / Bulent Baygun / Anish Lohokare 12 March 2010 


23 


US: Playing for Wider Spreads in a Sell-Off 

• With long-end rates approaching the upper 

end of their range while swap spreads hover at 

historical lows, we like playing for wider 

spreads if yields go at least 20bp higher in the 

coming months. 

250 

200 

Chart 1: Low Vol/Credit Spread Environment 

10y Swap Spread 

Mtge/Tsy Spread 

3M10Y Vol (RHS) 

240 

200 

• The conditional entry level is on a par with 

the current invoice spread or forward ASW of 

the CTD, so there is no extra cost for the 

conditional implementation. 

150 

100 

160 

120 

• There are structural reasons for the current 

tight spreads, although many of these factors 

ease or reverse in a higher-rate scenario. 

• STRATEGY: Buy 2m payers versus selling 

FVM0 puts in a costless trade (see Table). 

50 

80 

0 

40 

Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 


The latest move to cycle lows in 10y spreads was 

largely a result of capitulation in long positions, and 

much of the unwinding may already have been done 

given the stabilisation at these levels. 

The trade is to sell FVM0 115 puts, which are around 

23bp out of the money compared to the expected 

futures settle price at expiry. The fwd yield of the 

Aug-14s CTD at this strike is 2.42%. Using the funds 

toward the purchase of matched-maturity swaption 

payers expiring at the same time as the puts (21 

May), we can strike the payers at 2.68%, achieving a 

conditional entry spread of 26bp which kicks in only 

after a sell-off. The entry level has typically been 

above the current invoice spread or fwd ASW of the 

CTD, although not in this case as these outright 

spreads trade at 26bp. 

In order to benefit from the expected mortgage 

community paying in a sell-off, we suggest using the 

5-10y sector. However the switch risk in TYM0 (our 

models suggest a 57% chance of a switch) poses a 

problem since a switch would mean the futures 

cheapen at a faster rate than expected, hurting the 

spread-widening trade. We thus choose FVM0, with 

close to 0% switch risk. 

To be sure, there are some structural reasons for 

persistently tight spreads: 

• Increasing debt/GDP ratio; 

• Heavy corporate issuance; 

• Low levels of implied vol; 

• Low credit spreads in Agy/MBS; and 

• Lack of balance sheet room. 

However, many of these factors ease or reverse in a 

higher-rate scenario, since that suggests improving 

growth prospects which should reduce projections for 

debt/GDP ratios. Balance sheet room should be 

expected to pick up in a recovery. Higher rate hike 

prospects would lead to higher vol. Further, the Fed’s 

exit from MBS purchases is likely to widen the 

mortgage basis from historic lows (our MBS 

strategists expect 20bp in the coming weeks, based 

also on the GSE buyouts). 

Thus, by isolating the long spread position to only 

this scenario, we like the chance of avoiding a loss in 

a sell-off, which would require more spread 

tightening. 

Table: Trade Details for FVM0 115 Puts-Payers Structure 

Structure Strike Option Exp Delivery Notional ($) PV ($) 

Buy 2m5y Payer 2.68% 21-May-10 6-Jul-10 114,000,000 590,000 

Sell FVM0 115P 2.42% 21-May-10 6-Jul-10 (100,000,000) (590,000) 


Suvrat Prakash 12 March 2010 


24 


EUR: Further Flattening Ahead 

• The long end will need some help from US 

Treasuries and risky assets to push higher. 

Further near-term consolidation looks likely. 

• The bid at the front end should give up 

further ground following the positive news on 

Greece/EMU and the ECB’s phasing out of 

unconventional measures. 

• STRATEGY: We retain our call to receive the 

2-10y segment with an initial target in the 

175/170bp area. 

Despite the outperformance of peripherals following 

stronger verbal support for Greece, core EGBs have 

remain solid so far. But the normalisation process on 

Greece has weighed on the front end of the core 

markets, allowing our 2-10s flattener trade 

recommendation to perform well over the past week. 

At this stage, such a call remains a tactical trade with 

a first target in the 175/170bp area on the 2-10s 

swap spread. We entered the trade going into the 

last ECB meeting as we thought there was an 

asymmetric risk regarding the announcement about 

the exit from unconventional policy measures. 

The ECB’s targets are to reduce the level of excess 

liquidity and to shorten the maturity of the 

Eurosystem’s funding. The Bank is also aiming to 

limit the pressure caused by the return to variable 

rate tenders for 3mth LTROs as well as by the gap 

created when LTROs mature. The ECB will smooth 

the expiry of the first 1y tender by a 6-day tender on 

1 July (the day the 1y tender expires), which will 

provide liquidity up to the following MRO (allotted 7 

July). 

We expect demand at this 6-day tender to be muted, 

as ECB liquidity looks expensive for such a shortterm 

maturity. As a result, the process will help to 

prevent strong jumps in Eonias but not a rise closer 

to the ECB’s refi rate. Demand at the final 6mth 

tender at the end of this month will have implications. 

The firmer the demand, the smoother the rise in 

Eonias will be at the start of July. 

We still believe that flatteners will become more 

structural trades going into H2, with the gradual 

phasing out from the ECB and the markets pricing an 

unrealistic Eonia convergence scenario. With further 

normalisation ahead in peripheral markets, the bid at 

the front end should also ease further. Last but not 

least, the latest inflation reports underline the 

deflationary pressures within the eurozone; these 

Chart 1: Recent Steepening Did Not Come from 

a Higher 10y Yield 

4.1 

4.0 

3.9 

3.8 

3.7 

3.6 

3.5 

3.4 

3.3 

3.2 

May 


0.0 

0.5 

1.0 

1.5 

2.0 

2.5 

3.0 

Jan 

2/10yr Swap (RHS) 

10yr Swap 

Jun Jul Aug Sep Oct Nov Dec Jan Feb 

09 

10 

Chart 2: Return towards the Bottom of the 

170/190bp Range 

Apr Jul Oct Jan 

08 


2/10yr Swap Spread (RHS) 

2yr E U R R e a l R a te (Inv. L .H .S ) 

Apr Jul Oct Jan 

09 

10 

could become a key driving force for flatteners in the 

medium term – a Japanese curve style scenario. 

Flattening pressures could spread to the longer end 

of the curve, with pension funds analysis suggesting 

an increased sensitivity to gyrations of 10/30s. 

Near term, this week’s US supply and the positive 

tone on risky assets (major equity indices and oil 

prices approaching their January highs) have 

prevented the 10y benchmark yield from breaking 

below the 3.10% area. A more constructive tone on 

Treasuries and/or a setback in equities are needed 

for a decisive break of the 3.10/3.20% range. 

The technical picture is also supportive of our 

flattening call – a break below the medium-term 

rising wedge support (180bp) would strengthen the 

flattening scenario for a move towards 173.4bp (MT 

61.8%) initially and then 162.8/163.0bp (December 

low, theoretical target and LT 50%) 

205 

200 

195 

190 

185 

180 

175 

170 

165 

160 

250 

200 

150 

100 

50 

0 

-50 

-100 

Cyril Beuzit 12 March 2010 


25 


EUR: OAT60 Launched! 

• We review the allocation of the new 50Y OAT 

in the context of demand trends and relative 

value opportunities. 

The AFT has successfully launched EUR 5bn (order 

book EUR 8.3bn) of its new OAT Apr-2060 at a 2bp 

spread to OAT Apr-2055. The deal was distributed 

primarily amongst long-term oriented value investors 

with liability hedgers (pension funds and insurance 

companies) taking almost 40% of the allocation. In 

terms of regional distribution, there was strong 

demand from “pension-managing” countries such as 

the Netherlands (28%) as well as Northern Europe 

(16%, presumably strong demand from Denmark). 

Demand and allocation facts are summarised in 

Table 1. 

OAT60’s allocation matches our analysis of pension 

fund trends and risks. Here, we again stress the 

rebalancing of pension fund asset allocations 

towards risky assets in the context of 2009’s equity 

market rally. Furthermore, the relatively low level of 

liability funding despite 7 out of 8 years of bullish 

equity markets since the dot.com bottom (2002) 

suggests that duration gaps are still a main long-term 

risk for the pension industry as a whole. In this 

context, we note a persistently wide duration gap for 

aggregate Dutch pension funds (we estimate a gap 

of about EUR 325bn of 30Y risk at the end of 2009). 

Table 1: OAT60 Demand Analysis 

Investor Type 

Investor Location 

Asset Managers 37% Netherlands 28% 

Pension Funds 30% UK 21% 

Banks 19% US 18% 

Insurers 9% Northern Europe 16% 

Hedge Funds 3% France 10% 

Other 2% Other 7% 

Source: AFT 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

120% 

110% 

100% 

90% 

80% 

70% 

60% 

Chart 1: Global Pension Funds at a Glance 

Global pension system asset allocation 

61% 

Equity Bond 

51% Cash Other 

41% 40% 

54% 

36% 

30% 

27% 

16% 

17% 

12% 

6% 

3% 

1% 

2% 

1% 

1999 2003 2008 2009 

Global pension system funding 

A/L ratio 

S&P500 (RHS) 

1500 

1400 

1300 

1200 

1100 

1000 

900 

800 

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 


Chart 2: OAT60 Relative Value 

In terms of relative value, there are several aspects 

that investors should consider (please read our 

desknote “France (Aaa/AAA/AAA): New 50Y OAT 

April 2060”, 10 March 2010 for more colour): 

120 

100 

80 

60 

OAT35 z-spread 

OAT55 z-spread 

OAT35/55 z-spread box (RHS) 

40 

35 

30 

25 

1) Convexity premium: OAT60 offers a relatively 

cheap exposure to volatility. 

40 

20 

20 

15 

2) Yield curve: There is value in the term premium 

implied by the shape of 10/30s swaps. 

0 

-20 

10 

5 

3) ASW: OAT35/55 z-spread differential is at the top 

of the 2009 range (Chart 2). 

4) Inflation: Real yield of long-end (OATei-40) looks 

low relative to comparable nominal yield. 

Overall, we think that OAT60 offers value at current 

levels given the set of relative value parameters 

described above. Moreover, we stress that the issue 

must be evaluated in the context of global pension 

fund trends. 

-40 

2007 2008 2009 2010 


0 

Alessandro Tentori 12 March 2010 


26 


EUR: Normalisation in the EGB Universe 

• GGBs tightened after the announcement of 

the new austerity measures and the successful 

10y GGB launch. This was more evident in the 

2/10s ASW steepening of the Greek curve, rather 

than in the 10y GGB/Bund spread, whose 

compression has decelerated lately. 

• Spain has been outperforming after the depricing 

of contagion risks from Greece started in 

mid-February. Portugal has lagged relative to 

Spain, although its 2/10s ASW have fully resteepened 

back to Q4 2009 levels. 

• STRATEGY: We like 5/10s steepeners on the 

Greek ASW curve as this part of the curve has 

lagged the normalisation process. We also like 

either long 10y Portugal versus short 10y Italy, or 

the long Portugal versus short Italy and Spain fly. 

GGBs after the new austerity measures 

Last week, we focused on the effect of the new 

austerity measures on GGBs, targeting a 10y 

GGB/Bund spread of 250bp and a dis-inversion of 

the Greek 2/10s ASW curve over the coming weeks. 

While on the one hand the re-steepening happened 

very quickly as the 2/10s GGBs is currently 50bp 

steeper than last week (at -32bp) and 115bp away 

from its bottom (Chart 1), it seems that it will take 

some time for the 10y spread to approach the 250bp 

level. This 2-speed normalisation between the curve 

and the spread level is due to the successful 

EUR 5bn launch of the new 10y GGB. On the one 

hand, this issuance led to a de-pricing of the funding 

risk embedded in the front end of the curve. On the 

other hand, it took place with a significant premium 

over GGB Jul-19, which stopped the positive 

momentum of the 10y spread’s compression. 

The GGB/Bund 2019s is at 293bp and the 2020s at 

307bp, only 18bp tighter compared with the levels at 

its launch. Greece proved last week that it still has 

easy access to the primary market and it has also 

been praised by the ECB for its convincing austerity 

measures. However, several factors are keeping the 

10y spreads on a very slow tightening trend at the 

moment: 1) the ongoing dialogue for a more detailed 

EU support mechanism, 2) the IMF card used by the 

Greek government as a last resort to put pressure on 

the EU and 3) the significant upcoming supply in 

April and May. 

Commissioner Rehn said that the EU is ready to 

support Greece when necessary, and if asked to do 

so. The Greek PM and FM reiterated that Greece 

Chart 1: Greek Curve Normalisation: 2/10s Dis- 

Inverting and GGB/Bund Spreads Tightening 

-200 

-150 

-100 

-50 

0 

50 

100 

150 

Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 


150 

100 

50 

0 

-50 

-100 

GGBs 2/10s ASW (inverted LHS axis) 

2y GGB/Bund ASW 

10y GGB/Bund ASW 


Targets: 2y Spread at 300bp 

10y Spread at 250bp 

Chart 2: GGB 5/10s Lagging in the 

Normalisation Process 

GGBs 5/10s lagging the normalisation process 

-150 

Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 

can’t tolerate issuing paper at such high spreads, 

and sooner or later it will need a more detailed 

description of the EU’s mechanism, which they 

believe could bring spreads much lower and allow 

Greece to borrow with much better terms. On these 

grounds, the EcoFin meeting scheduled for 16 March 

could shed more light. 

We have a first target of 300bp over Schatz for the 

2y GGB from current levels of 375bp (yield spread), 

since this part of the curve can move very quickly, as 

we saw last week. Chart 2 shows that as an 

alternative trade on the GGBs ASW curve, 5/10s 

seem to be lagging the normalisation process and 

2/5/10s is close to its highs. We like steepeners on 

GGBs 5/10s. We do not expect Greece to issue more 

paper before the end of March as the EUR 18.6bn 

500 

450 

400 

350 

300 

250 

200 

150 

100 

2/5s GGBs ASW 5/10s GGBs ASW 2/5/10s GGBs ASW 

Ioannis Sokos 12 March 2010 


27 


that Greece has raised so far is enough until mid- 

April, given that the two major redemptions 

(EUR 8.5bn each) take place in mid-April and mid- 

May. 

EGBs beyond greece 

Beyond Greece, we’ve seen some interesting 

developments on both core and peripheral bonds. A 

principal component analysis (PCA) on 10y spreads 

versus Bunds shows that Spain and Finland look rich 

at current levels, while France and Italy look 

relatively cheap (Chart 3). Indeed, Spain has been 

richening a lot lately, especially compared with Italy, 

as the de-pricing of contagion risk from Greece has 

benefited mostly Spain and Portugal, both of which 

have been more correlated to GGBs. Portugal still 

has a long way to go as is shown in Chart 4, while its 

2/10s has fully re-steepened back to Q4 2009 levels. 

SPGBs have pared back 78% of their widening since 

January while this percentage is only 55% for PGBs. 

As part of a further normalisation in the EGB 

universe we like the long 10y PGB versus short 10y 

BTP and SPGB fly, although more than 50% of the 

correction has already taken place. A compression 

on 10y PGB/BTP is also attractive for those who 

believe in the continuation of the current momentum. 

On core paper, we’ve seen OATs underperforming 

lately versus both Dutch and Finnish paper (Chart 5). 

The advanced liquidity of the French paper seems to 

have become less important lately as the large net 

supply and the condition of the public finances of 

each country are attracting the market’s attention for 

the time being. OATs are at their cheapest in recent 

months compared with DSLs and RFGBs, but as 

long as the market’s focus remains on a potential EU 

support mechanism where France and Germany will 

be in the drivers’ seat, we stay cautious on these 

spreads and continue to monitor them, waiting for 

even better entry levels. 

In summary, we believe that the details of the EU 

support mechanism for Greece will remain in the 

headlines in the coming days, with the next EcoFin 

on 16 March likely to shed some more light on this 

issue. Greek 10y spreads to Bund, although on a 

compression trend, seem to need something more to 

start tightening aggressively, and this can only come 

from the EU. The Greek PDMA will be reluctant to 

come out and keep borrowing with such high 

spreads, thus we expect pressures from the Greek 

government for a more detailed form of this support 

mechanism to mount as we approach the next GGB 

issuance, probably at the end of March or beginning 

of April. Beyond 16 March, the next key dates to 

watch will be: 31 March (look for Greek banks’ 

participation in the ECB’s 6m LTRO); end of March 

or beginning of April (the next GGB issuance – the 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

-1.5 

-2.0 

Chart 3: PCA on 10y Spreads Vs Bunds 

OAT/Bund 

NETH/Bund 

FIN/Bund 


160 

140 

120 

100 

80 

60 

BEL/Bund 

PCA Residuals 

AUS/Bund 

ITA/Bund 

IRE/Bund 

SPA/Bund 

POR/Bund 

GRE/Bund 

Chart 4: Peripheral 10y Spreads Tightening 

BTP/Bund PGB/Bund SPGB/Bund 

40 



35 

33 

31 

29 

27 

25 

23 

21 

19 

17 

Chart 5: Dislocations on 10y Core Spreads 

15 



OAT/Bund Nether/Bund RFGB/Bund 

precise date will depend on spread movements); 

mid-April and mid-May (GGB redemptions); and 

16 May (EcoFin, when Greece will be asked for more 

details about the SGP beyond 2010). 

Ioannis Sokos 12 March 2010 


28 


EUR Vega: Rolldown Opportunities on 10y Swap 

• The ECB’s macroeconomic projections 

confirm the high risk of a weak recovery 

plagued by deflation pressures and a weak 

labour market. Against this backdrop, forwards 

look too high and EUR vega too rich 

• STRATEGY: Buy 1X3 ATMF/ATMF -100bp 

2y10y Swaption Receiver Spread 

Chart 1: M3 Growth Rate vs. Money Multiplier 

13.0 

11.0 

9.0 

7.0 

5.0 

M3 growth rate (y/y) 

Money multiplier (RHS) 

2.50 

2.40 

2.30 

2.20 

3.0 

Inflation in the eurozone is disturbingly low, with 

January HICP at 1% y/y (-0.8% m/m). Monetary 

conditions as reflected by the sharp decline in broad 

money growth as well as the actual money multiplier 

(Chart 1) do not look accommodative. Clearly, 

alongside the unconventional measures operated by 

the ECB, the fall in the EUR has helped ease 

monetary conditions. However, BNPP projects HICP 

at 1.1% and 0.8% for 2010 and 2011 respectively. At 

the same time, unemployment is expected to stay 

above 10%. 

In this context, the slope of the path of the 10y swap 

forward rates looks too steep (Chart 2, upper panel). 

Alternatively, the middle panel of Chart 2 makes the 

point that 10-year nominal rates are too high versus 

real yields ahead of low inflation over the next two 

years. From yet another angle, the lower panel of 

Chart 2 suggests that the the unemployment rate 

should prevent the 10y swap rate to move 

appreciably higher in the medium term. 

Investors that agree with the above can easily trade 

such view in vanilla space. For instance, 

1) Receive 2y10y swap rate ATMF. The position 

benefits from 30bp/annum positive carry. 

1.0 

-1.0 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 

6.5 

6.0 

5.5 

5.0 

4.5 

4.0 

3.5 

Chart 2: a) Evolution of 10y Swap b) 10y 

Nominal vs. Real c) 10y Swap vs 

Unemployment Rate 

EUR 10y swap 

Forwards 

3.0 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 

5.0 

4.5 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

10y OATei Real Yield 

Nominal yield - Core 

Forwards & 

CPI Forecasts 

2.10 

2.00 

2) However, with the 10-year swap currently trading 

at 3.35%, we like the following rolldown strategy via 

options better: 

Weight Strike Premium 

Rec 2y10y 1 4.016% 340 

Rec 2y10y -3 3.016% 103 

31 

One year rolldown translates to more than 500% of 

the premium (!). The lower BE rate is 2.53% with the 

lowest value ever attained by the 10-year swap being 

3.13% at the end of Q3/2005 over its 20y+ history. In 

addition, the trade is conveniently vega negative 

against still-rich valuation given an overall cautious 

ECB and signals provided by PCA regression 

residuals. 

0.5 

0.0 

Feb-97 Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11 

11.0 

Unemplyoment rate (Eurostat) 

10.5 

EUR 10Y swap rate (RHS, INV) 

10.0 

9.5 

9.0 

8.5 

8.0 

7.5 

7.0 

6.5 

6.0 

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 


0 

1 

2 

3 

4 

5 

6 

7 

8 

Matteo Regesta 12 March 2010 


29 


JGBs: June - A Devil-Plagued Period 

• Strong external demand, mainly from Asian 

countries, is driving the upturn in Japanese 

exports. The boost to output from rising 

exports leads to higher incomes. The 

momentum of this cyclical economic recovery 

will likely persist for some time. 

• Over the near term, JGBs face tailwinds 

from the possibility of additional quantitative 

easing and the current favourable 

supply/demand conditions. 

• However, we do not expect any upward 

movement to last. The economy is recovering, 

and supply-demand conditions will loosen 

through the middle of the year. The macro 

fundamentals will be headwinds for the JGB 

market in late Q2. 

Recovery momentum to persist for some time 

The Japanese economy is performing surprisingly 

well. Teikoku Databank announced that its economic 

diffusion index hit 26.7 in February, a 1.6 point rise 

from January and the second consecutive monthly 

improvement. The manufacturing DI continues to 

improve, driven by growing demand in emerging 

economies including China, as do diffusion indices 

for domestic demand related industries such as 

retailing and services that had lost steam from last 

autumn. These results show that strong external 

demand is driving the upturn. 

January trade data revealed that the nominal value of 

exports rose by 8.6% m/m, their 11th consecutive 

increase. In real terms (a measure excluding price 

and exchange rate moves), January exports were 

also up a strong 9.6% m/m (our estimate). Emerging 

Asian economies, such as China, that enjoy steady 

demand growth are leading this recovery in exports. 

Chinese firms brought production and imports 

forward, ahead of the February Chinese New Year; 

this in particular spurred Japanese export gains in 

January. 

Corporate hiring of new graduates and mid-career 

recruiting remain limited. It will be quite some time 

before employment experiences a full-scale 

recovery. But decline in the unemployment rate and 

the recovery in working hours again show that the 

employment situation is steadily improving, as 

increased output from rising exports leads to higher 

incomes. The momentum of this cyclical economic 

recovery will likely persist for some time. 

32 

30 

28 

26 

24 

22 

20 

18 

Chart 1: Industry DIs of Teikoku Databank 

16 

08/10 09/1 09/4 09/7 09/10 10/1 


Manufacturing 


Retail 

Construction 

June will be devil-plagued time for JGBs 

The report that the BoJ is considering additional 

quantitative easing measures will also act to support 

the market over the near term, centring on the short 

and medium sectors. If the BoJ extends the maturity 

of its new fund-supplying operations, this will 

strengthen the duration effect further. However, we 

should take note of the market setback that occurred 

in December when positive factors came to an end 

with the introduction of additional quantitative easing. 

The same might occur this time; the current 

economic situation does not necessarily require 

additional easing. 

The JGB market could test its upside if US economic 

data disappoint. The current supply-demand 

conditions and the situation surrounding monetary 

policy have become tailwinds for JGBs. However, we 

do not expect any upward movement to last. As we 

noted previously, the economy is recovering, and 

supply-demand conditions will loosen through the 

middle of the year. The macro fundamentals are 

headwinds for the JGB market. 

We expect a full-scale loosening of supply-demand 

conditions at the end of Q2 for three reasons: 1) DPJ 

policies will become strongly coloured by elements of 

reckless spending as the Upper House elections 

approach; 2) it will become clear that FY09 income 

tax revenues undershot when the revised estimates 

are announced on 1 June; and 3) we expect a supply 

glut of municipal bonds to emerge during Q2. 

Pension financing is also a concern. These effects 

will likely emerge during late May extensions. June 

will probably prove to be a devil-plagued time for the 

2010 JGB market. 

Koji Shimamoto 12 March 2010 


30 


Global Inflation Watch 

More muted inflation data in the US & EZ 

Chart 1: EZ Core Goods & Core Services HICP 

The final Eurozone HICP release for February, out 

on Tuesday, should confirm the flash estimate of 

0.9% y/y for headline inflation, down 0.1pp from 

January’s 11-month high. More interesting, however, 

will be the breakdown. This should show an 

additional fall in core inflation over the month to a 

new all-time low of 0.8% y/y. 

In January, core inflation fell to 0.9%, matching the 

record low recorded in 2000. Deep January 

discounting in countries such as Germany was an 

important factor, but the decline has broadened 

across components. As a result, while we may see a 

February rebound in categories that experienced 

deep discounting in January, such as clothing, we 

still expect core inflation to fall over the month as 

other components like hotels & restaurant, leisure 

and non-energy housing inflation continue their 

descent. These dynamics were evident in Germany’s 

release for the month, even after the significant 0.2pp 

upward revision to the preliminary release this week. 

In France, we are expecting inflation to be pushed 

marginally higher in February, although rounded it 

should remain at 1.1%. As seasonal sales ended 

earlier this year than in 2009, this should push up 

prices, temporarily boosting headline inflation despite 

a base effect driven moderation in energy. Core 

inflation is trending down, however, and should revert 

to that trend in March. 

In the US, after January’s exceptional -0.1% m/m 

print on core inflation, we expect some muted 

numbers for both headline and core inflation in 

February. We are forecasting 0.1% m/m for both. 

For core inflation, after such a large fall in non-shelter 

core services prices in January, we are expecting a 

small rebound in February. In contrast, shelter prices 

should remain depressed, reflecting disappointing 

developments in the housing market and the stillelevated 

level of vacancy rates. Plummeting unit 

labour costs suggest underlying price pressures will 

remain contained in the coming months. 

Food and energy should add little to this story in 

February. Gasoline prices should ease moderately, 

but will be offset by a 5% m/m rise in natural gas 

prices and a 0.2% m/m increase in food prices over 

the month. 

Source: Reuters EcoWin Pro & BNP Paribas 

Chart 2: French Headline and Core CPI (% y/y) 

4.0 

3.5 

3.0 


2.5 

2.0 

1.5 

1.0 

Headline inflation 

0.5 

0.0 

-0.5 

Manufactured goods 

-1.0 

03 04 05 06 07 08 09 


Chart 3: US Unit Labour Costs 

15.0 

12.5 

10.0 

7.5 

5.0 

2.5 

0.0 

-2.5 

Unit Labour Cost (% y/y) 

-5.0 

50 55 60 65 70 75 80 85 90 95 00 05 10 


Luigi Speranza/Eoin O’Callaghan 12 March 2010 


31 


Table 1: BNP Paribas' Inflation Forecasts 

Eurozone 

France 

US 

Headline HICP Ex-tobacco HICP 

Headline CPI 

Ex-tobacco CPI 

CPI Urban SA CPI Urban NSA 

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 

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 

2010 (1) 109.3 - 1.2 109.0 - 1.0 120.9 - 1.3 119.5 - 1.3 219.1 - 2.1 219.1 - 2.1 

2011 (1) 110.2 - 0.8 109.7 - 0.6 122.1 - 1.0 120.7 - 0.9 222.0 - 1.3 222.0 - 1.3 

Q3 2009 108.0 - -0.4 107.8 - -0.5 119.4 - -0.4 118.1 - -0.4 215.4 - -1.6 215.7 - -1.6 

Q4 2009 108.6 - 0.4 108.4 - 0.3 119.7 - 0.4 118.4 - 0.3 216.8 - 1.5 216.2 - 1.4 

Q1 2010 (1) 108.5 - 1.0 108.2 - 0.9 120.1 - 1.2 118.8 - 1.1 217.8 - 2.5 217.3 - 2.5 

Q2 2010 (1) 109.4 - 1.0 109.1 - 0.9 120.8 - 1.2 119.4 - 1.1 218.3 - 2.3 219.3 - 2.3 

Q3 2010 (1) 109.3 - 1.2 108.9 - 1.0 121.2 - 1.5 119.8 - 1.4 219.6 - 1.9 219.8 - 1.9 

Q4 2010 (1) 110.2 - 1.5 109.8 - 1.3 121.5 - 1.5 120.1 - 1.5 220.8 - 1.9 220.2 - 1.9 

Q1 2011 (1) 109.7 - 1.1 109.2 - 0.9 121.7 - 1.3 120.2 - 1.2 221.5 - 1.7 221.0 - 1.7 

Q2 2011 (1) 110.4 - 0.9 109.9 - 0.8 122.3 - 1.3 120.9 - 1.2 221.9 - 1.6 222.8 - 1.6 

Jul 09 107.8 -0.7 -0.7 107.51 -0.7 -0.8 119.1 -0.4 -0.7 117.80 -0.4 -0.7 214.8 0.1 -2.0 215.35 -0.2 -2.1 

Aug 09 108.1 0.3 -0.2 107.89 0.4 -0.3 119.7 0.5 -0.2 118.41 0.5 -0.2 215.6 0.4 -1.5 215.83 0.2 -1.5 

Sep 09 108.2 0.0 -0.3 107.91 0.0 -0.5 119.4 -0.2 -0.4 118.12 -0.2 -0.4 215.9 0.2 -1.3 215.97 0.1 -1.3 

Oct 09 108.4 0.2 -0.1 108.16 0.2 -0.3 119.5 0.1 -0.2 118.23 0.1 -0.2 216.4 0.2 -0.2 216.18 0.1 -0.2 

Nov 09 108.5 0.1 0.5 108.28 0.1 0.4 119.6 0.1 0.4 118.31 0.1 0.3 216.9 0.2 1.8 216.33 0.1 1.8 

Dec 09 108.9 0.3 0.9 108.61 0.3 0.8 120.0 0.3 0.9 118.60 0.2 0.8 217.2 0.2 2.8 215.95 -0.2 2.7 

Jan 10 108.1 -0.8 1.0 107.75 -0.8 0.9 119.7 -0.2 1.1 118.32 -0.2 1.0 217.6 0.2 2.7 216.69 0.3 2.6 

Feb 10 (1) 108.4 0.3 0.9 108.08 0.3 0.8 120.2 0.4 1.1 118.83 0.4 1.1 217.8 0.1 2.3 217.06 0.2 2.3 

Mar 10 (1) 109.1 0.6 1.2 108.77 0.6 1.0 120.6 0.3 1.3 119.19 0.3 1.2 217.9 0.1 2.5 218.09 0.5 2.5 

Apr 10 (1) 109.4 0.3 1.1 109.06 0.3 0.9 120.7 0.1 1.2 119.35 0.1 1.1 218.1 0.1 2.5 218.88 0.4 2.6 

May 10 (1) 109.4 0.0 1.1 109.10 0.0 0.9 120.8 0.1 1.2 119.48 0.1 1.1 218.3 0.1 2.5 219.29 0.2 2.5 

Jun 10 (1) 109.4 0.0 0.8 109.01 -0.1 0.7 120.9 0.0 1.1 119.49 0.0 1.0 218.6 0.1 1.9 219.61 0.1 1.8 

Jul 10 (1) 108.9 -0.4 1.1 108.55 -0.4 1.0 120.9 0.0 1.5 119.52 0.0 1.5 219.1 0.2 2.0 219.60 0.0 2.0 

Aug 10 (1) 109.2 0.3 1.0 108.84 0.3 0.9 121.3 0.4 1.4 119.97 0.4 1.3 219.6 0.2 1.9 219.80 0.1 1.8 

Sep 10 (1) 109.6 0.3 1.3 109.23 0.4 1.2 121.3 0.0 1.7 119.98 0.0 1.6 220.1 0.2 1.9 220.09 0.1 1.9 

Oct 10 (1) 110.0 0.3 1.5 109.62 0.4 1.3 121.4 0.1 1.6 120.09 0.1 1.6 220.5 0.2 1.9 220.46 0.2 2.0 

Nov 10 (1) 110.1 0.1 1.5 109.72 0.1 1.3 121.4 0.0 1.5 120.07 0.0 1.5 220.9 0.2 1.8 220.29 -0.1 1.8 

Dec 10 (1) 110.5 0.3 1.5 110.05 0.3 1.3 121.6 0.1 1.3 120.20 0.1 1.3 221.2 0.1 1.8 219.76 -0.2 1.8 

Updated 

Next 

Release 

Mar 10 

Feb HICP (Mar 16) 

Mar 04 

Feb CPI (Mar 16) 

Mar 11 


Source: BNP Paribas, (1) Forecasts 

Chart 4: Eurozone HICP (% y/y) 

Chart 5: US Shelter Prices Drive Core CPI Lower 


Core inflation is forecast to continue grinding lower, as excess 

capacity and ongoing structural adjustment in a number of 

economies limit firms’ pricing power. 


The plunge in shelter inflation remains the driver of the underlying 

trend in the CPI. Inflation in core goods has eased, however, 

following a temporary boost from a series of tobacco tax hikes and 

a sharp contraction in vehicle inventories. 



32 



Japan 

UK 

Sweden 

Core CPI SA 

Core CPI NSA 

Headline CPI RPI 

CPI CPIF 

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 

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 

2010 (1) 99.0 - -1.3 99.0 - -1.3 113.5 - 2.5 222.0 - 3.9 304.4 - 1.6 195.6 - 2.3 

2011 (1) 98.6 - -0.4 98.6 - -0.4 114.8 - 1.1 228.2 - 2.8 313.4 - 3.0 198.3 - 1.4 

Q3 2009 99.9 - -2.3 100.1 - -2.3 111.3 - 1.5 214.4 - -1.4 299.5 - -1.2 191.6 - 1.6 

Q4 2009 99.7 - -1.8 99.9 - -1.8 112.1 - 2.1 216.9 - 0.6 301.3 - -0.4 193.2 - 2.3 

Q1 2010 (1) 99.7 - -1.3 99.3 - -1.2 112.6 - 2.9 219.1 - 3.9 301.3 - 1.0 194.1 - 2.7 

Q2 2010 (1) 98.8 - -1.7 98.8 - -1.7 113.3 - 2.5 221.5 - 4.2 303.9 - 1.4 195.6 - 2.4 

Q3 2010 (1) 98.4 - -1.5 98.7 - -1.4 113.7 - 2.2 222.6 - 3.8 304.6 - 1.7 195.5 - 2.0 

Q4 2010 (1) 99.0 - -0.7 99.2 - -0.7 114.4 - 2.1 224.7 - 3.6 307.9 - 2.2 197.3 - 2.1 

Q1 2011 (1) 99.0 - -0.7 98.6 - -0.7 114.3 - 1.5 225.7 - 3.0 308.1 - 2.3 196.4 - 1.1 

Q2 2011 (1) 98.7 - -0.1 98.7 - -0.1 115.0 - 1.5 228.0 - 2.9 312.3 - 2.8 197.9 - 1.2 

Jul 09 100.0 -0.2 -2.2 100.1 -0.2 -2.2 110.9 -0.1 1.8 213.40 0.0 -1.4 298.8 -0.5 -0.9 191.1 -0.2 1.8 

Aug 09 99.8 -0.2 -2.4 100.1 0.0 -2.4 111.4 0.5 1.6 214.40 0.5 -1.3 299.4 0.2 -0.8 191.5 0.2 1.9 

Sep 09 99.8 0.0 -2.3 100.2 0.1 -2.3 111.5 0.1 1.1 215.30 0.4 -1.4 300.4 0.3 -1.6 192.3 0.4 1.4 

Oct 09 99.7 -0.1 -2.3 100.1 -0.1 -2.2 111.7 0.2 1.5 216.00 0.3 -0.8 301.1 0.3 -1.5 193.0 0.3 1.9 

Nov 09 99.8 0.1 -1.7 99.9 -0.2 -1.7 112.0 0.3 1.9 216.60 0.3 0.3 301.0 0.0 -0.7 193.0 0.0 2.3 

Dec 09 99.7 -0.1 -1.3 99.8 -0.1 -1.3 112.6 0.6 2.9 218.00 0.6 2.4 301.7 0.2 0.9 193.5 0.2 2.7 

Jan 10 99.6 -0.1 -1.3 99.2 -0.6 -1.3 112.4 -0.2 3.4 217.96 0.0 3.7 299.8 -0.6 0.6 193.0 -0.2 2.6 

Feb 10 (1) 99.9 0.3 -1.1 99.3 0.1 -1.1 112.7 0.2 2.8 219.25 0.6 3.7 301.6 0.6 1.2 194.2 0.6 2.7 

Mar 10 (1) 99.7 -0.2 -1.3 99.4 0.1 -1.3 112.7 0.1 2.7 220.06 0.4 4.1 302.6 0.3 1.3 195.1 0.5 2.7 

Apr 10 (1) 98.9 -0.8 -1.9 98.8 -0.6 -1.9 113.0 0.3 2.7 220.96 0.4 4.5 303.7 0.4 1.5 195.7 0.3 2.7 

May 10 (1) 98.9 0.0 -1.6 98.9 0.1 -1.6 113.4 0.3 2.4 221.52 0.3 4.1 303.7 0.0 1.4 195.5 -0.1 2.4 

Jun 10 (1) 98.7 -0.2 -1.5 98.8 -0.1 -1.5 113.5 0.1 2.3 222.15 0.3 4.1 304.3 0.2 1.4 195.6 0.0 2.2 

Jul 10 (1) 98.5 -0.2 -1.5 98.6 -0.2 -1.5 113.1 -0.4 1.9 221.67 -0.2 3.9 304.0 -0.1 1.7 194.7 -0.4 1.9 

Aug 10 (1) 98.4 -0.1 -1.4 98.7 0.1 -1.4 114.1 0.9 2.4 222.90 0.6 4.0 304.0 0.0 1.5 195.2 0.2 1.9 

Sep 10 (1) 98.4 0.0 -1.4 98.8 0.1 -1.4 114.0 -0.1 2.2 223.27 0.2 3.7 305.9 0.6 1.8 196.6 0.7 2.2 

Oct 10 (1) 98.9 0.5 -0.8 99.3 0.5 -0.8 114.3 0.3 2.4 224.28 0.5 3.8 307.5 0.5 2.1 197.2 0.3 2.2 

Nov 10 (1) 99.1 0.2 -0.7 99.2 -0.1 -0.7 114.4 0.0 2.1 224.46 0.1 3.6 307.5 0.0 2.1 197.3 0.1 2.2 

Dec 10 (1) 99.1 0.0 -0.6 99.2 0.0 -0.6 114.6 0.3 1.8 225.28 0.4 3.3 308.8 0.4 2.3 197.2 -0.1 1.9 

Updated 

Next 

Release 

Feb 26 


Mar 05 


Mar 11 

Mar CPI (Apr 13) 


Chart 6: Japanese CPI (% y/y) 

Chart 7: UK CPI (% y/y) 


Inflation is likely to remain heavily in negative territory for the 

foreseeable future. 


Inflation was in line with expectations in January, accelerating to 

3.5% y/y. We believe this is the peak and that headline inflation will 

be back in line with target around the middle of the year. 



33 



Canada Norway Australia 

CPI Core CPI Headline CPI Core 

CPI 

Core 

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 

2009 114.4 0.3 113.6 1.8 125.7 2.2 118.4 2.6 167.8 - 1.8 - - 3.7 

2010 (1) 116.2 1.5 115.2 1.4 128.9 2.5 120.4 1.7 172.8 - 3.0 - - 2.8 

2011 (1) 117.8 1.4 116.6 1.2 131.7 2.2 122.8 2.0 178.5 - 3.3 - - 2.9 

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 

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 

Q1 2010 (1) 115.3 1.4 1.5 114.6 0.7 1.7 128.4 1.4 2.9 119.5 0.1 2.1 170.5 0.6 2.6 - - 3.1 

Q2 2010 (1) 115.9 2.2 1.2 115.0 1.6 1.3 129.3 0.7 2.7 120.6 0.9 1.7 171.9 0.8 2.9 - - 2.7 

Q3 2010 (1) 116.5 2.2 1.6 115.4 1.4 1.4 128.6 -0.5 2.2 120.4 -0.1 1.6 173.7 1.0 3.0 - - 2.5 

Q4 2010 (1) 117.0 1.6 1.9 115.8 1.2 1.2 129.4 0.6 2.3 121.0 0.4 1.4 175.0 0.8 3.3 - - 2.8 

Q1 2011 (1) 117.4 1.2 1.8 116.1 1.2 1.3 130.0 0.4 1.3 121.3 0.3 1.5 176.2 0.7 3.4 - - 2.9 

Q2 2011 (1) 117.6 0.9 1.5 116.4 1.0 1.2 131.5 1.2 1.8 122.8 1.2 1.8 177.8 0.9 3.4 - - 2.9 

Updated 

Feb 18 

Mar 10 Jan 27 

Next 

Release 


Mar CPI (Apr 9) Q1 CPI (Apr 28) 


Chart 8: Canadian Total vs. Core CPI 

Chart 9: Australian CPI (% y/y) 


Recent gains in house prices point to higher CPI shelter, but the still 

strong CAD is expected to depress the prices of goods. In addition, 

wage pressures continue to ease rapidly, pointing to subdued 

inflation overall. 


Underlying inflation is slowing, but remains above the RBA's target 

range. While it will continue to moderate, the relatively limited and 

diminishing degree of slack in the economy mean underlying 

inflation will settle at the top end of the range, presenting upside 

risks further ahead. 

CPI Data Calendar for the Coming Week 

Day GMT Economy Indicator Previous 

BNPP 

F’cast 

Consensus 

Fri 12/03 09:00 Spain CPI y/y : Feb 1.0% 0.9% 0.9% 

09:00 HICP y/y : Feb 0.9% 0.9% 0.9% 

Comment 

Tue 16/03 10:00 Eurozone HICP m/m : Feb -0.8% 0.3% 0.3% New all-time low 

10:00 HICP y/y : Feb 1.0% 0.9% 0.9% for core 

10:00 HICP Core m/m : Feb -1.5% 0.4% n/a 

10:00 HICP Core y/y : Feb 0.9% 0.8% 0.8% 

10:00 Ex-Tobacco Index : Feb 107.75 108.08 n/a 

07:45 France CPI m/m : Feb -0.2% 0.4% 0.4% Marginally 

07:45 CPI y/y : Feb 1.1% 1.1% 1.1% higher 

07:45 HICP m/m : Feb -0.2% 0.4% n/a 

07:45 HICP y/y : Feb 1.2% 1.2% n/a 

07:45 Ex-Tobacco CPI (Final, nsa) : Feb 118.32 118.83 n/a 

Thu 18/03 12:30 US CPI m/m : Feb 0.2% 0.1% 0.1% More muted 

12:30 CPI y/y : Feb 2.6% 2.3% 2.3% core 

12:30 Core CPI m/m : Feb -0.1% 0.1% 0.1% 

12:30 Core CPI y/y : Feb 1.6% 1.4% 1.0% 

12:30 Canada CPI m/m : Feb 0.3% 0.2% 0.2% 

12:30 CPI y/y : Feb 1.9% 1.3% 1.3% 

12:30 BoC Core CPI m/m : Feb 0.1% 0.3% 0.3% 

12:30 BoC Core CPI y/y : Feb 2.0% 1.7% n/a 

Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision 




34 


Inflation: Spring Break for Breakevens? 

• GLOBAL: Supportive seasonals / asset mkts 

1: 10y EUR Cash BE Still Too Low vs. BE Curve 

• EUR: Renewed opportunity for long 10y BE 

• USD: More constructive BEs. 1y or 10y BE 

120 

110 

100 

OATEI12 / OATEI20 Breakeven 

OATEI20 Breakeven Rhs 

150 

160 

170 

180 

190 

• GBP: Keep long UKTi-13 BE position. 

90 

80 

GLOBAL: Risk appetite returns after a strong US 

labour market report. Equities up 2-3% on the week. 

Oil is around USD 82/bbl supported by bullish 

inventory data. US Treasuries are bull-steepening 

whilst EGBs remain more robust (and exhibit 

flattening), especially peripherals with further 

tightening in CDS/EGB spreads. Accordingly, US 

breakevens have outperformed EUR ones although 

inflation curves have flattened across regions. The 

positive seasonal effect from March seems to be 

having some impact. Given our economists’ 

deflationary expectations from late 2010 and 

throughout 2011, the current environment (positive 

asset markets and inflation seasonals) may 

represent one of the final opportunities to enter long 

breakeven exposure. Consequently, we are more 

constructive on breakevens everywhere but remain 

selective. Supply has been received smoothly – 

particularly encouragingly for Europe given the 

difficulties in the first two months of 2010. Next week 

will see the usual AFT linker auction on Thursday 

and a focus on February inflation data. 

EUR: Mixed moves in Europe with tighter nominal 

core/peripheral spreads not linearly reflected in real 

space (as usual). Nonetheless, front-end breakevens 

performed strongly, assisted by the 0.2pp upward 

surprise in the final German HICP release. It came in 

at +0.4% m/m vs. 0.2% for the initial states' release 

due to ‘miscellaneous prices’. On the supply front, 

the EUR 1bn BUNDei-20 offering was quite strong, 

as expected, coming with a premium of 1bp and 

Bid/Cover of 2.1. We expect AFT to tap OATi-19 and 

OATei-40 next week. The 10y area has 

underperformed a little in the cash inflation curve and 

remains rather attractive vs. wings, allowing entry 

into our favoured trades at good levels. We favour 

long 10y cash breakeven, long 5y5y breakeven fwd 

and long 2y8y breakeven fwd. For bearish inflation 

investors, selling 1y1y inflation fwd above 1.80% 

remains attractive especially vs. our economists’ 

forecasts. OATi breakevens are still outperforming 

EUR ones and a continuation of the move may allow 

attractive entry levels for long EUR/FRF BE plays 

once the carry differential improves. Next week, FRF 

CPI Ex-tob is expected at 118.83, +0.43% m/m whilst 

EUR HICP Ex-tob is forecast at 108.08, +0.31% 

m/m. In terms of relative value, OATeis still look 

expensive at the front end with OBLei-13 and 

70 

60 

50 

40 

30 

20 

Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 

Chart 2: EUR Seasonal RV at 1-Apr Fwd 

20 bp 17.1 

13.4 11.8 

10 

0 

-10 

OBLei-13 

-1.5 

BTPei-19 

10.7 

5.9 

BUNDei-20 

13.6 

Rich / Cheap vs OATei Curve 

Credit Ref = Nom spread 

BTPeis 

-20 

-15.5 

-16.2 

BUNDei-16 

-25.8 

-30 

2010 2015 2020 2025 2030 2035 2040 2045 

All Charts Source: BNP Paribas 

especially BTPei-14 looking cheap – although the 

BUNDei-16 remains rich. At the 10-15y point, both 

BTPei-19 and -23 look attractive. 

USD: Strong week for breakevens, with 1-5y BEs 

leading the charge to a higher and flatter inflation 

curve. Despite the move, the TIPS market has been 

relatively quiet with the exception of significant longend 

activity/interest on Wednesday. Amidst strong 

positive seasonals/carry and higher Treasury yields / 

oil, we turn constructive on TIPS breakevens. We 

favour the very front end (Jan-11) and the 10y area 

to intermediate sector or long end. We reiterate the 

general attractiveness of July maturities relative to 

January and especially to richer April maturities. 

February US CPI NSA is expected at 217.06, 

+0.17% m/m and core at 0.1% m/m. 

GBP: Lower but flatter inflation curve. So far in 

March, long-end cash BEs have not benefited hugely 

from typical LDI demand although swaps have – 

sending real/nominal ASW materially wider (+15bp 

on the week). Beyond some anxiety over UKTi 

issuance plans into the 24 March Budget (and DMO 

Remit FY 10/11), we expect long-end cash BEs to 

recover. We still favour the front end – UKTi-13 BE 

remains our favourite bond and looks 2.4% (or 65bp) 

cheap vs. BNPP RPI forecasts. UK RPI is expected 

at 219.25, +0.59% m/m. 

-3.6 

200 

210 

220 

230 

240 

250 

Shahid Ladha / Herve Cros 12 March 2010 


35 


Table 1: BNP Paribas Carry Analysis 

EUR 

Pricing Date 

11-Mar-10 

Term 1 

Term 2 

3m 

6m 

12m 

Repo Rate 

0.40% 

0.41% 

0.39% 0.49% 

0.69% 

EUR DRI 

108.19387 

107.75000 

108.08317 108.91286 

108.78084 

109.44985 

FRF DRI 

118.46452 

118.32000 118.82544 

119.26739 

119.50554 

120.02025 

Sett. Date 

16-Mar-10 

01-Apr-10 

01-May-10 

16-Jun-10 

16-Sep-10 

16-Mar-11 

Real BE Real BE Real BE Real BE Real BE Real BE 

BTANEI Jul-10 -2.01% 2.30% -159.6 -157.4 -170.7 -162.1 47.7 95.9 - 

BTPEI Sep-10 -1.25% 1.88% -105.5 -107.3 -83.1 -88.7 100.6 86.5 - - - - 

OATEI Jul-12 -0.53% 1.64% -20.1 -21.7 -10.2 -14.9 21.1 11.3 2.0 -18.1 -4.5 -46.4 

BTPEI Sep-12 0.11% 1.62% -17.5 -20.0 -6.0 -13.2 26.9 11.8 17.8 -14.0 39.0 -32.8 

BOBLEI Apr-13 0.10% 1.30% -14.6 -16.2 -5.1 -10.0 21.0 10.8 13.2 -7.7 27.1 -15.9 

BTPEI Sep-14 0.87% 1.64% -9.2 -11.6 -1.1 -8.0 19.4 5.2 19.2 -9.9 40.1 -20.1 

OATEI Jul-15 0.66% 1.75% -7.9 -9.8 -1.4 -7.1 15.0 3.7 13.6 -9.4 27.0 -19.8 

BUNDEI Apr-16 0.78% 1.67% -6.9 -8.6 -1.1 -6.0 13.5 3.4 12.8 -7.9 25.5 -15.8 

BTPEI Sep-17 1.56% 1.72% -5.3 -7.4 0.6 -5.5 14.3 2.0 16.6 -8.1 33.8 -15.7 

BTPEI Sep-19 1.97% 1.81% -4.1 -6.0 1.1 -4.4 12.9 1.7 16.0 -6.6 32.2 -13.1 

BUNDEI Apr-20 1.36% 1.82% -4.1 -5.6 0.1 -4.1 10.0 1.4 11.1 -6.2 21.9 -12.0 

OATEI Jul-20 1.45% 2.02% -4.0 -5.6 0.3 -4.4 10.4 1.0 11.8 -6.9 23.1 -14.0 

BTPEI Sep-23 2.36% 1.96% -2.9 -4.7 1.2 -3.8 10.4 0.1 13.6 -7.0 27.1 -13.3 

GGBEI Jul-25 4.37% 1.84% -2.1 -4.7 3.4 -4.1 14.6 -0.5 22.1 -8.4 44.1 -17.9 

GGBEI Jul-30 4.39% 2.01% -1.6 -4.2 2.7 -4.6 11.4 -3.2 17.3 -12.4 34.2 -26.2 

OATEI Jul-32 1.78% 2.29% -2.1 -3.3 0.4 -3.0 6.2 -0.7 7.4 -6.3 14.2 -12.3 

BTPEI Sep-35 2.33% 2.48% -1.7 -3.1 0.7 -3.3 6.1 -1.9 7.8 -8.1 15.3 -15.7 

OATEI Jul-40 1.77% 2.38% -1.5 -2.5 0.3 -2.5 4.4 -1.1 5.2 -5.7 10.0 -11.4 

BTPEI Sep-41 2.55% 2.35% -1.5 -2.7 0.8 -2.8 5.7 -1.6 7.5 -7.0 14.6 -13.9 

FRF 

OATI Jul-11 -0.95% 1.59% -13.9 -15.0 10.3 7.2 30.5 23.8 17.5 4.9 -93.2 -71.0 

OATI Jul-13 -0.21% 1.79% -4.7 -6.6 7.0 1.8 17.5 6.7 19.0 -3.2 17.6 -28.4 

OATI Jul-17 0.93% 2.01% -1.5 -3.3 5.3 0.0 11.9 1.4 16.7 -4.6 25.3 -17.4 

OATI Jul-19 1.23% 2.07% -1.0 -2.7 4.7 -0.3 10.5 0.6 15.1 -4.7 23.6 -15.7 

OATI Jul-23 1.55% 2.22% -0.6 -2.1 3.9 -0.3 8.6 0.2 12.7 -4.1 20.2 -12.5 

OATI Jul-29 1.70% 2.33% -0.5 -1.8 3.2 -0.6 7.0 -0.5 10.4 -4.3 16.6 -12.3 

USD 

Pricing Date 

11-Mar-10 

Term 1 

Term 2 

3m 

6m 

12m 

Repo Rate 

0.14% 

0.15% 

0.17% 0.21% 

0.40% 

USD DRI 

216.21087 

216.68700 

217.05721 

218.43290 

219.60343 

220.06342 

Sett. Date 

12-Mar-10 

01-Apr-10 

01-May-10 

14-Jun-10 13-Sep-10 14-Mar-11 

Yield BE Real BE Real BE Real BE Real BE Real BE 

TIPS Apr-10 -2.95% 3.03% 131.6 139.1 - - - - - - - - 

TIPS Jan-11 -1.28% 1.62% 17.9 16.5 27.4 23.6 111.5 103.7 239.4 220.6 - - 

TIPS Apr-11 -0.86% 1.36% 16.1 14.2 26.5 21.6 91.1 81.2 173.7 150.9 573.4 499.6 

TIPS Jan-12 -0.67% 1.55% 10.0 7.7 16.6 10.7 52.2 40.6 85.3 60.2 86.4 31.5 

TIPS Apr-12 -0.45% 1.44% 9.4 7.0 16.0 10.0 47.8 36.1 78.2 53.4 85.5 31.4 

TIPS Jul-12 -0.50% 1.60% 8.3 6.0 14.0 8.0 42.0 30.3 67.2 42.4 67.3 15.2 

TIPS Apr-13 -0.21% 1.72% 6.7 4.1 11.7 5.0 32.9 20.2 52.3 26.2 55.7 0.6 

TIPS Jul-13 -0.05% 1.69% 6.5 3.9 11.6 4.9 32.2 19.3 51.7 25.0 58.0 2.9 

TIPS Jan-14 0.21% 1.65% 6.1 3.5 11.2 4.5 30.0 17.0 48.5 22.0 58.1 3.7 

TIPS Apr-14 0.21% 1.84% 5.7 3.0 10.4 3.5 27.7 14.6 44.5 17.9 52.7 -2.7 

TIPS Jul-14 0.35% 1.72% 5.6 3.0 10.4 3.6 27.4 14.4 44.3 17.9 53.9 0.2 

TIPS Jan-15 0.56% 1.77% 5.3 2.6 9.9 3.0 25.5 12.3 41.6 14.8 52.4 -2.0 

TIPS Jul-15 0.64% 1.91% 4.9 2.2 9.2 2.3 23.7 10.3 38.6 11.6 48.9 -5.8 

TIPS Jan-16 0.82% 1.92% 4.7 2.0 9.0 2.0 22.7 9.3 37.2 10.2 48.3 -6.1 

TIPS Jul-16 0.90% 2.01% 4.5 1.7 8.6 1.6 21.5 8.2 35.3 8.4 46.1 -7.8 

TIPS Jan-17 1.07% 2.01% 4.3 1.6 8.4 1.5 20.7 7.5 34.1 7.6 45.5 -7.6 

TIPS Jul-17 1.12% 2.11% 4.1 1.4 8.0 1.1 19.7 6.6 32.4 6.2 43.3 -9.0 

TIPS Jan-18 1.23% 2.15% 3.8 1.2 7.5 0.9 18.3 5.8 30.2 5.2 40.8 -9.2 

TIPS Jul-18 1.28% 2.22% 3.6 1.0 7.1 0.5 17.3 4.8 28.5 3.5 38.6 -11.3 

TIPS Jan-19 1.37% 2.24% 3.6 1.1 7.1 0.9 17.1 5.3 28.3 4.8 38.7 -8.0 

TIPS Jul-19 1.42% 2.28% 3.4 0.9 6.7 0.5 16.2 4.4 26.9 3.2 36.7 -10.2 

TIPS Jan-20 1.48% 2.25% 3.2 0.8 6.4 0.2 15.3 3.7 25.4 2.4 34.8 -11.0 

TIPS Jan-25 2.02% 2.29% 2.6 0.3 5.2 -0.6 12.3 1.1 20.6 -1.6 29.4 -14.2 

TIPS Jan-26 2.06% 2.35% 2.4 0.2 4.9 -0.6 11.5 1.0 19.2 -1.6 27.4 -13.2 

TIPS Jan-27 2.11% 2.33% 2.4 0.2 4.8 -0.6 11.2 0.9 18.8 -1.6 26.9 -13.1 

TIPS Jan-28 2.13% 2.35% 2.2 0.1 4.4 -0.9 10.3 0.3 17.3 -2.3 24.7 -14.0 

TIPS Apr-28 2.18% 2.35% 2.4 0.4 4.9 -0.2 11.4 1.8 19.2 0.2 27.7 -9.5 

TIPS Jan-29 2.16% 2.39% 2.2 0.2 4.5 -0.5 10.4 1.0 17.5 -1.2 25.0 -11.4 

TIPS Apr-29 2.19% 2.37% 2.4 0.4 4.8 -0.2 11.1 1.6 18.7 0.0 26.9 -9.5 

TIPS Apr-32 2.19% 2.40% 2.1 0.2 4.2 -0.6 9.7 0.7 16.3 -1.5 23.3 -11.3 

TIPS Feb-40 2.19% 2.52% 1.5 -0.1 3.1 -0.9 7.1 -0.3 11.9 -2.7 16.9 -11.5 

GBP 

Pricing Date 

11-Mar-10 Term 1 

Term 2 

3m 

6m 

12m 

Repo Rate 

0.51% 

0.52% 

0.56% 

0.62% 

0.76% 

Sett. Date 

12-Mar-10 

01-Apr-10 

01-May-10 

14-Jun-10 

13-Sep-10 

14-Mar-11 

Yield BE Real BE Real BE Real BE Real BE Real BE 

UKTi Aug-11 -1.26% 1.91% 29.2 28.4 47.8 45.8 77.3 74.4 81.3 79.1 - - 

UKTi Aug-13 -0.71% 2.77% 13.3 10.6 22.0 15.0 34.5 21.4 36.8 9.9 67.8 9.1 

UKTi Jul-16 0.43% 2.90% 8.5 5.8 14.8 8.0 23.8 11.0 29.7 3.8 54.9 1.1 

UKTi Nov-17 0.71% 3.04% 0.0 -2.7 8.4 1.8 16.4 3.8 27.0 1.7 49.2 -2.9 

UKTi Apr-20 0.98% 3.12% 5.9 3.5 10.5 4.4 17.0 5.4 22.1 -1.0 40.7 -6.4 

UKTi Nov-22 1.08% 3.43% 0.2 -1.9 5.9 0.8 11.4 1.7 18.8 -0.4 33.7 -4.7 

UKTi Jul-24 1.15% 3.36% 4.4 2.4 7.9 2.8 12.9 3.2 16.8 -2.3 30.5 -7.9 

UKTi Nov-27 1.11% 3.44% 0.1 -1.7 4.2 -0.4 8.1 -0.4 13.4 -3.4 23.7 -9.5 

UKTi Jul-30 1.09% 3.49% 3.5 1.9 6.3 2.3 10.2 2.7 13.2 -1.4 23.7 -5.1 

UKTi Nov-32 1.00% 3.58% 0.1 -1.5 3.3 -0.7 6.3 -1.2 10.3 -4.3 18.2 -10.7 

UKTi Jan-35 0.98% 3.63% 2.6 1.2 4.7 1.1 7.5 0.7 9.6 -3.8 17.1 -9.5 

UKTi Nov-37 0.91% 3.68% 0.0 -1.4 2.7 -0.9 5.1 -1.6 8.3 -4.7 14.5 -11.1 

UKTi Mar-40 0.89% 3.71% 0.0 -1.3 2.3 -1.1 4.5 -1.9 7.3 -5.2 12.6 -12.1 

UKTi Nov-42 0.81% 3.76% 0.0 -1.3 2.1 -1.2 4.1 -2.1 6.6 -5.5 11.4 -12.2 

UKTi Nov-47 0.74% 3.80% 0.0 -1.2 1.9 -1.2 3.6 -2.2 5.8 -5.4 9.9 -12.0 

UKTi Mar-50 0.73% 3.81% 0.0 -1.2 1.7 -1.3 3.3 -2.3 5.2 -5.7 9.0 -12.3 

UKTi Nov-55 0.71% 3.80% 0.0 -1.1 1.7 -1.1 3.3 -2.0 5.2 -5.1 8.9 -11.1 

JPY 

Pricing Date 

11-Mar-10 

Term 1 Term 2 

3m 

6m 

12m 

Repo Rate 

0.12% 

0.12% 

0.12% 

0.13% 0.14% 

JPY DRI 

99.684 

99.200 

99.300 

99.280 

98.760 99.103 

Sett. Date 

16-Mar-10 

10-Apr-10 

10-May-10 

16-Jun-10 

16-Sep-10 

16-Mar-11 

Yield BE Yield BE Yield BE Real BE Real BE Real BE 

JGBI-1 Mar-14 1.47% -1.10% -10.7 -11.1 -5.2 -6.2 -1.6 -3.3 -6.9 -10.4 25.1 17.3 

JGBI-2 Jun-14 1.53% -1.12% -10.0 -10.5 -4.7 -5.8 -1.2 -3.0 -5.6 -9.4 25.0 16.6 

JGBI-3 Dec-14 1.42% -0.95% -9.0 -9.6 -4.6 -5.7 -1.7 -3.7 -6.3 -10.4 18.4 9.3 

JGBI-4 Jun-15 1.52% -0.98% -8.0 -8.5 -3.8 -5.0 -1.0 -3.1 -4.4 -8.8 18.7 9.1 

JGBI-5 Sep-15 1.39% -0.82% -7.8 -8.4 -4.0 -5.3 -1.5 -3.8 -5.6 -10.2 14.8 4.9 

JGBI-6 Dec-15 1.46% -0.85% -7.5 -8.1 -3.7 -5.1 -1.2 -3.6 -4.8 -9.5 15.5 5.2 

JGBI-7 Mar-16 1.45% -0.80% -7.1 -7.7 -3.5 -4.9 -1.2 -3.6 -4.6 -9.5 14.6 4.0 

JGBI-8 Jun-16 1.60% -0.92% -6.7 -7.4 -3.0 -4.5 -0.5 -3.0 -3.1 -8.1 17.0 6.1 

JGBI-9 Sep-16 1.51% -0.79% -6.6 -7.2 -3.1 -4.6 -0.8 -3.3 -3.7 -8.9 14.6 3.5 

JGBI-10 Dec-16 1.53% -0.77% -6.4 -7.1 -3.0 -4.6 -0.8 -3.4 -3.5 -8.8 14.2 2.8 

JGBI-11 Mar-17 1.59% -0.78% -6.1 -6.7 -2.7 -4.3 -0.5 -3.1 -2.9 -8.3 14.8 3.1 

JGBI-12 Jun-17 1.66% -0.82% -5.8 -6.5 -2.5 -4.1 -0.2 -3.0 -2.1 -7.8 15.5 3.5 

JGBI-13 Sep-17 1.63% -0.74% -5.6 -6.4 -2.4 -4.1 -0.3 -3.1 -2.3 -8.1 14.5 2.2 

JGBI-14 Dec-17 1.65% -0.72% -5.5 -6.3 -2.4 -4.1 -0.3 -3.2 -2.2 -8.1 14.1 1.6 

JGBI-15 Mar-18 1.69% -0.72% -5.3 -6.1 -2.2 -3.9 -0.1 -3.0 -1.8 -7.8 14.4 1.8 

JGBI-16 June-18 1.78% -0.76% -5.1 -6.0 -2.0 -3.9 0.2 -2.9 -1.2 -7.4 15.1 2.0 


Shahid Ladha / Herve Cros 12 March 2010 


36 


Europe ITraxx Credit Indices 

• Outright: we were bullish last week with a 

target of 75. The strength of the market 

surprised us and enabled us to take our profit at 

74 after two days. Direction will now be given by 

equities, which are back to January’s highs and 

await a strong catalyst. At 75 on MAIN, we are 

neutral. 

• Update on 5/10y curves: what happened this 

week in indices is bang in line with what we 

predicted last week. Continuation of the 

steepening momentum in MAIN 5/10y. No value 

in HVL 5/10y. Catch-up of 5/10y curves for FIN 

SEN and SUB. 

• MAIN 5/10y: We keep our steepener for 

MAIN 5/10y with a Target of 19bp. 

MAIN 

Chart 1: MAIN vs. EUROSTOXX 600 

100 

last 3M 

95 

last 

90 

85 

80 

75 

70 

R 2 = 0.7827 

65 

60 

230 235 240 245 250 255 260 265 

EUROSTOXX 600 


Chart 2: MAIN vs. VIX 

• FIN SEN and SUB curves should be 

supported by too flat single-names’ curves and 

and the perspective of the roll. Target for both: 

13bp. 

100 

95 

90 

85 

R 2 = 0.4891 

• MAIN/XO trade: could supply trigger 

decompression? 

MAIN 

80 

75 

70 

last 3M 

last 

65 

Outright 

Last week, in the context of the global increase in 

risk appetite and the underperformance of credit 

indices relative to equity, volatility and commodity 

markets, we turned bullish on MAIN at 81 with the 

view that the index could reach 75 in the coming 

days. In about 2 days, the catch-up has been made 

and we closed our outright long on Monday with 

MAIN at 73.5/74. Since then, the market has been 

oscillating between 73.5 and 75.5. 

What’s next? 

The market has clearly found a resistance at the 74 

level, where it settled at the end of December. MAIN 

now trades almost in line with the levels suggested 

by the VIX and EUROSTOXX 600 indices; based on 

these 2 markets, the fair-value level probably stands 

at 72. The main obstacle to further tightening is the 

reluctance of the S&P to break the January’s highs in 

the absence of a fresh catalyst. It is also important to 

realize that the yield given by equity indices (3.27% 

for EUROSTOXX 600) is actually in line with the yield 

provided by investment grade credit indices; 

compounding the extremely low level of volatility in 

equities, equities look like a better play from a pure 

risk/reward perspective. 

60 

15 17 19 21 23 25 27 29 


All things considered, we are neutral at 75 as (1) 

there is no great value in being long at current levels 

and (2) a real correction is relatively unlikely 10 days 

before the roll in the absence of a strong catalyst. We 

do not see it. 

VIX 

Table 1: Curves’ levels and changes 

5y 5/10y 1W Chg 1M Chg 

MAIN 75 17 +1 +5 

SEN 80 11 +3 +8 

SUB 135 11 +3 +7 

HVL 111 25 - - 

XO 415 20 +10 +5 


Pierre Yves Bretonniere 12 March 2010 


37 


Continuation of the steepening momentum in 

MAIN 5/10y: 

What happened this week in indices’ curves is bang 

in line with what we predicted last week: 

Our 5/10y steepener (recommended at +12 the 12- 

Feb), is now 5bp in the money. We see little catalyst 

for the flattening and expect the trade to stay immune 

to a retracement in 5y provided that it is limited; there 

is no incentive to cut the steepener ahead of the roll. 

Note that MAIN 3/5y trades at 24, which induces 

about 1b of curve per month. 

MAIN 5/10y is now 1bp steeper than theoretical. 

No upside in HVL 5/10y: 

Catch-up of 5/10y curves for FIN SEN and SUB. 

Last week, we pointed out these 2 steepeners as the 

best opportunities in curves. In particular, we 

highlighted that SEN and SUB 5/10y were trading 

much too flat compared to the outright 5y levels. The 

two curves steepened by 3bp this week. 

Taking into account the skews of these two curves 

(SEN 5/10y in line with intrinsic and SUB 5/10y 1.5bp 

steeper than intrinsic), we have no preferences 

between the two steepeners. The steepening 

potential on single-names curves is about 4-5bp, 

which means about 2-3bp of further steepening in the 

2 indices curves. 

5/10y 

Chart 3: 5/10y MAIN vs. outright 5y MAIN 

23 

21 

5/10Y MAIN (lhs) 

5Y MAIN (rhs inverted) 

60 

65 

19 

70 

17 

75 

15 

80 

13 

85 

11 

90 

9 

95 

7 

100 

09/09 10/09 11/09 12/09 01/10 02/10 


5/10y 

Chart 4: 5/10y HVL vs. outright 5y HVL 

40 

35 

5/10Y HVL (lhs) 

5Y HVL (rhs inverted) 

75 

95 

30 

25 

115 

20 

135 

15 

10 

155 

5 

175 

0 

09/09 10/09 11/09 12/09 01/10 02/10 


Chart 5: 5/10y FIN SEN vs. outright 5y FIN SEN 

18 

60 

16 

70 

14 

5y 

5y 

What’s the call? 

Keep MAIN 5/10y steepener. It should perform 

further in the roll. Target: 19bp. 

Keep FIN SEN 5/10y steepeners. Perspective of the 

roll and steepening potential in single-names CDS 

curves should make them steepen by 2-3bp. Target: 

13bp. 

5/10y 

12 

10 

8 

6 

5/10Y FIN SEN (lhs) 

4 

5Y FIN SEN (rhs inverted) 

2 

- 

9/09 10/09 11/09 12/09 1/10 2/10 


80 

90 

5y 

100 

110 

120 


Market Mover Non-Objective Research Section 

38 


Update on “MAIN vs. XO”: 

We have seen this week again strong compression 

between XO and MAIN, with respective 

performances of -5.5bp and -28bp. The pace of the 

compression stands at x5, similar to last week. XO 

has been trading this week close to January’s 

tightest level (384 on 11-Jan) as did the US S&P 500 

and EUROSTOXX 600. The picture is quite different 

for MAIN which is trading around 10bp wider than 

January’s tights (65 on 11-Jan). 

The High-Yield cash market, which has been lagging 

in previous weeks, is now catching up and has 

tightened by 41bp this week; its High-Grade peer 

only tightened 5bp this week. The Merrill Lynch High- 

Yield index is now 25bp wider from the tights (11- 

Jan) to compare to about 3bp for the iBoxx High- 

Grade Non-Financials. 

What’s the call? 

There is absolutely no momentum in the carryneutral 

and beta-adjusted compression trades; the 

spread ratio XO/MAIN is steady at x5.5. 

There should be more volatility in this trade with the 

re-opening of the primary market. Our expectations 

are that new issuance in High-Yield should at one 

stage impact the level of the XO index; what we have 

seen this week (STENA and RENAULT in EUR and 

CEVA in USD) is clearly insufficient to trigger 

something. 

We keep our trade “Long risk 4 x MAIN / Short risk 

XO”. 

XO 

Chart 6: Chart1: XO vs. MAIN 

625 

XO MAIN 

103 

98 

575 

93 

525 

88 

83 

475 

78 

73 

425 

68 

375 

63 

09/09 10/09 11/09 12/09 01/10 02/10 


HY Cash 

Chart 7: HY Cash vs. HG Cash 

1000 

950 

EUR ML HY Aggregate (OAS) 

EUR iBoxx Non-Fins (OAS) 

145 

140 

135 

900 

130 

850 

125 

800 

120 

750 

115 

110 

700 

105 

650 

100 

600 

95 

9/09 10/09 11/09 12/09 1/10 2/10 


-100 

-120 

Chart 8: 4 x MAIN – 1 x XO trade history 

MAIN 

HG Cash (Non-Fin) 

-140 

-160 

-180 

-200 

-220 

-240 

-260 

-280 

09/09 10/09 10/09 11/09 11/09 11/09 12/09 12/09 01/10 01/10 02/10 02/10 03/10 



Market Mover Non-Objective Research Section 

39 


Technical Analysis – Interest Rates & Commodities 

Bond & Short-Term Contracts 

• Europe: ST pullback seen again on key 3.093 area but failure to break it keeps MT tone bottoming/up 

• US: Market is trying to resume MT rising bias towards 4% initially but must still break above key 3.775/793 area 

• Short-term contracts m0: Expensive conditions now & a ST toppish tone developing. 

Equities & Commodities 

• WTI (Cl1): Supportive back within MT rising channel but needs to break above last top to rekindle MT rising bias 

• Equity markets: Supportive MT given pullback around their tops (US) or 61.8% (Europe). Watch them closely 

US 10y: Up for 4.35 target but still needs to break above 3.77/79 initially MT Trend: Up Range: 3.65/3.80 

The break above the MT falling channel 3.412 169.0 

However, current attempt to break above ST 

falling channel resistance (137.6) could 

allow a ST technical pullback on MT channel 

support (150.2). That is ST risk but won’t 

cancel current MT falling scenario. 

Tech Snapshot 

- MT rising channel & 2-dip neckline break. 

- Trying to break above ST falling channel 

STRATEGY: Cautious will use a pullback on 

146//150 to sell for 115/120 S/L 155 

Christian Sené 12 March 2010 


40 


Germany 10y: Rebound again from key 3.093 low. Watch now 3.328 MT Trend: Neutral/Up Range: 3.10/3.30 

Last fall extended below key 3.193 (old MT 

61.8%) to again reach key 3.093 (October 

low & last range trading low boundary) from 

which it is rebounding once more. 

This area should be the basis to resume 

previous MT weak bias (theoretical target is 

3.70) but decisive break above 3.307/3.328 

(61.8% & MT falling resistance) is needed. 

If not, main risk remains a break below 

3.093 to open way towards 2.849 (2009 low) 

2.849 3.411/433 

Tech Snapshot 

- Rebound from key 3.093 (October low) 

- Back around key MT 61.8% (3.193) 

Strategy: Still short within 3.15/20 for 

3.45/70 S/L below 3.09 now 

UK 10y: Still up MT for 4.50 but watch ST rising wedge support (4.076) MT Trend: Up Range: 4.02/4.25 

Break above MT falling channel & above 

4.084 (June 09 top & wave “A” top) 

strengthened the MT rising scenario towards 

4.30/4.50 theoretical target area. Trading 

back around key 4.076/4.84 (ST weekly 

rising wedge support +June 09 top) 

A break below it is still ST risk as it would 

3.836

Trade Reviews 

Options, Money Market and Bond Trades – Tactical & Strategic Trades 

This page summarises our main tactical (T) and strategic (S) trades. The former focus on short-term horizons (a few weeks) 

allowing one to play any near-term corrections within a defined trend, while the latter rely on a medium-term assumed trend. 

For each trade we provide the expected target and the recommended stop loss. 

Current* Targets Stop Entry 

Existing Strategies 

Yield Curves 

EUR Flattener Receive EUR 1M-fwd 2s10s 

Asymmetric near-term response to "gradual" phasing out of unconventional 

policy/liquidity measures. 

GBP Steepener Pay GBP 1Y-fwd 2s10s 

A dovish BoE and a toxic sovereign debt/deficit combination should keep the spot 

swap curve at steep levels in the medium term. 

USD Butterfly Pay USD 2M-fwd 2y3y5y 

Near low end of historical range. We are positioned for a Fed on hold and this is an 

ideal hedge. Negative carry/roll is less in forward than spot. 

Money Markets 

Euribor Basis Buy ERM0 Basis 

OIS/Bor spreads are at very interesting entry levels compared to the evolution of 

CDS and other risk indicators. Moreover, ECB liquidity volatility should be 

supportive of this strategy. 

Eurodollar Spread Buy EDZ0Z1 

Hawkish FOMC statement should lead to higher rate hike expectations, and the 

recent flattening in whites/reds on flight-to-quality concerns provides a decent entry 

point. Spread rolls up from Dec/Dec to Sep/Sep. 

183.0 

(T) 

148.0 

(S) 

-31.0 

(S) 

24.0 

(S) 

138.0 

(T) 

170.0 190.0 184.8 

(04-Mar) 

200.0 139.0 147.0 

(12-Feb) 

-5.0 -38.0 -27.75 

(15-Jan) 

40.0 20.0 24.0 

(29-Jan) 

180.0 130.0 146.0 

(27-Jan) 

Options 

Sterling Fly Buy L H0 9912/25/37 P 

3.0 

Suspension of QE appears to have generated moderated funding pressures: 3M (T) 

Libor has been creeping higher since the beginning of Feb. 

Euribor Fly Buy ERU0 9862/75/87 P 

1.5 

Cheap downside strategy, playing the normalisation of Eonia. The position 

(S) 

complements with the upside fly (no-normalisation strategy). 

Euribor Fly Buy ERU0 9912/25/37 C 

2.0 

Upside protection in case of liquidity spillover post June. Rolldown trade. 

(S) 

Eurodollar Call Buy EDU0 99.25 C 

32.0 

View for a Fed on hold makes rolldown strategies attractive. In this case, the theta (T) 

loss over 3m or 6m is more than compensated by the rolldown in an unchanged 

scenario. 

Sterling Fly Buy L Z0 9900/25/50 C 

7.0 

Rolldown strategy for unchanged MPC through 2010. 

(S) 

*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps. 

12.5 0.0 3.0 

(18-Feb) 

12.5 0.0 1.5 

(13-Jan) 

12.5 0.0 1.5 

(12-Jan) 

50.0 0.0 23.5 

(08-Jan) 

25.0 0.0 3.5 

(05-Jan) 

Carry 

/ mth 

Risk** 

P/L 

(ccy/Bp) 

-3bp 10k/01 EUR +18k 

+1.8bp 

5k/01 GBP +5k 

+1bp 

15k/01 USD -49k 

-3bp 

5k/01 EUR +0k 

+0bp 

10k/01 USD -90k 

-9bp 

7k/01 GBP 0k 

0bp 

10k/01 EUR 0k 

0bp 

10k/01 EUR +5k 

+0.5bp 

5k/01 USD +43k 

+9c 

5k/01 GBP +18k 

+3.5c 

Interest Rate Strategy 12 March 2010 


42 


FX: The Way of Wen 

• Wen has set a course for China to 

encourage domestic growth by developing 

social policies. Under this benign thesis… 

• …global demand should rise, but G10 

financing will be more expensive and labour will 

tend to inflate more easily. 

• We repeat our call since December for lower 

FX vols and particularly EURMXN and USDCAD. 

We note that the lower bound for these vols is 

much higher than in previous cycles. 

• Spot wise, we remain positive on USDJPY 

and CADJPY and especially once Japanese 

year-end effects fade in a week or two. 

• The next downtrend in EURUSD may be 

triggered by an eventual shift of the market out 

of sovereign into corporate bonds. 

The way of Wen 

Last weekend, Premier Wen Jiabao stated the goal 

of Chinese economic policy. Simply put, it will be to 

replace an externally driven model by a more 

internally driven one through the use of social policy. 

The experiences of post-war US/Europe offer some 

guidance. 

Chart 1: Secular Rise in US Consumption 

Source: Ecowin Reuters, BNP Paribas. Note: Social policy in the right 

proportions can be the trigger for an acceleration of consumption much as 

the development of securities markets was for the development of 

Western companies in the past centuries. The triggers were the 

development of limited personal responsibility and enforceable laws. Since 

the 1950s, we have seen a rise in government expenditure partly on the 

back of rising social spending. These programmes accelerated in the 60’s 

and started kicking later (e.g. Medicare) as the ability to leverage rose in 

the 1980s. A corollary was a switch out of manufacturing into services and 

rising demand for foreign goods as wealth increased. 

8% 

7% 

Chart 2: Precautionary Savings Fall 

14 

12 

Post-war, government spending rose trend-wise on 

the back of social programmes, allowing 

consumption to sharply accelerate as a proportion of 

GDP. The following generation, of baby boomers, 

consumed even more. Boomers started leveraging, 

helped by de-regulation and Asia keeping its 

currencies undervalued – offering cheap funding 

conditions. This trend accelerated exponentially 

following the Asian crisis as a reaction to USD 

shortages in that period. 

6% 

Volatility of growth 

5% 

4% 

Personal savings rate 

3% 

2% 

1% 

0% 

Mar-50 Mar-56 Mar-62 Mar-68 Mar-74 Mar-80 Mar-86 Mar-92 Mar-98 Mar-04 

10 

8 

6 

4 

2 

0 

While G10 economies may have reached limits in the 

ability to transfer risk from current generations to 

future generations via the state and securities 

markets, China and parts of Asia stand at the other 

extreme of this spectrum with less-developed 

securities and social markets. A credible shift in the 

many years to come would reduce Asian savings 

significantly as well as help to develop the local 

financial markets. 

Source: Bloomberg, BNP Paribas. Note: Precautionary savings are 

savings linked to uncertainty in the volatility of instantaneous future income 

as well as its expected path. In finance and insurance parlance, they 

correspond to the development of a risk transfer market between the 

individual agents and the state. Here, we are referring to a combination of 

social policy and aggressive counter-cyclical policy (inflation targeting & 

Greenspan put). Starting in 1983, we see a regime shift linked to a 

combination of an ability for consumers to leverage, a shift in monetary 

policy target and social programmes still kicking in from the 1970s and 

1960s. The impact of the shift in policy target and higher leverage reduces 

the volatility or risks linked to growth. This seems to be the cause of a 

rather brutal drop in the personal savings rate. 

Lower Asian savings boosts global consumption 

As Asian consumption increases as a percentage of 

GDP, demand for non-tradable goods will rise, 

particularly as services gain ground relative to 

Sebastien Galy 12 March 2010 


43 


manufacturing. Demand for services should feed into 

increased demand for skilled labour. 

The combined impact should be inflation in the nontraded 

sector, especially as services are less 

productive. Should the CNY remain stable, the 

external sector will overheat, leading to wider 

inflationary pressure in the country. Indeed, on a 

purely qualitative basis, there have already been 

reports in the past weeks of firms specialising in 

recruitment for coastal factories significantly 

increasing compensation to attract new workers in 

some regional areas. 

Eventually, China and the broader Asia will no longer 

export deflation and excess supply to the rest of the 

world but inflation and rising demand (in relative 

rather than absolute terms). Such a boost in demand 

at a time when technology is likely to pick up in G10 

to compensate for less leveraged internal demand is 

likely to be a positive for risk, assuming the process 

of rebalancing goes well – especially on the political 

front. We would warn that, to get such a boost in 

productivity, parts of Europe are poorly placed 

relative to the US as they did not adjust their labour 

costs to generate the income for such investments. 

Indeed, given that credit/equity has performed 

similarly in the US and Europe, a reassessment of 

this seems likely as the sovereign thematic abates. 

Chart 3: OECD Growth and FX Reserves 

25 

20 

15 

10 

5 

0 

-5 

Global FX Reserves (% y/y lhs) 

-10 

OECD Growth (% y/y) (rhs) 

-15 

82 86 88 90 92 94 96 98 00 02 04 06 08 

Source: Reuters Ecowin Pro/BNP Paribas 

Chart 4: Asian Share of Global Imports 

7 

6 

5 

4 

3 

2 

1 

0 

-1 

-2 

-3 

-4 

-5 

Lower savings means higher financing costs for 

G10 

As savings fall as a percentage in GDP in Asia so will 

global savings, as rising income and savings in the 

US and UK will probably not compensate. Hence, 

G10 countries which require external financing such 

as the UK will find it increasingly costly to attract 

Asian demand in this new equilibrium. As the trend in 

Asia/USD starts again, foreign reserve recycling into 

the USD and especially the EUR will fall so that their 

yield curves will be steeper than would otherwise be 

the case. 

The good news for the US is that there is natural 

demand for savings coming from Japan, replacing 

official buying by Chinese state authorities. China, 

which is reorienting its economic growth from supply 

towards demand, will ultimately see its current 

account surplus shrink. The declining current account 

surplus will reduce the need for the Chinese 

authorities to buy foreign debt assets. 

In 2005, Japanese life insurers were buying even as 

the Fed tightened, attracted by rising bond US yields. 

Note, US bond yields received a boost after China 

converted its currency peg into a free float as 

markets assumed that China’s new currency regime 

would reduce China’s demand for USD-denominated 

debt assets. The US yield curve developed into a 


bearish flattening regime, with private investors 

increasingly attracted by rising bond yields buying 

into the market on a currency un-hedged basis. 

USDJPY, which initially declined from 113 to 109 

following China’s decision to de-peg, then rallied 

strongly. Please note, Japan has been the biggest 

private foreign buyer of US bonds over the past five 

years, with yield differentials attracting these flows. 

What we foresee is that China’s official accounts will 

be replaced by Japanese private accounts in funding 

Western sovereign deficits. Initially, most of these 

flows will be directed into the US bond market as the 

US is one of the most advanced of the G7 

economies in terms of its recovery process. Once the 

Fed starts hiking rates, JPY-based investors will 

reduce their currency hedges on existent bond 

positions, which could then spark a major rally of 

USDJPY. We therefore regard China de-pegging as 

a long-term bullish USDJPY signal. 



44 


Leaders have more control on tradables 

Finally, in a world where EMKs are more prominent 

as the G10 countries clean up bank and government 

balance sheets, emerging-market economies are 

more likely to provide the incremental source of 

demand or capital which will tip the global business 

cycle and consequently cause spikes in 

commodities. This suggests that G10 economies 

such as Canada are less likely to be the drivers of 

tradable goods than they were in the past. This 

would again argue that G10 central banks will find if 

more onerous to control inflation. 

An example – BoC will turn more hawkish 

The case for the Bank of Canada to tighten faster 

than the Fed is strengthening. Strong internal 

demand, evidence of existing excesses in credit and 

reduced risks of outsourcing in the coming cycle are 

all factors underpinning that argument. 

While non-Canadians widely see the country as an 

economic extension of the US, their business cycles 

can differ quite significantly depending on monetary 

and fiscal policy. Q4 GDP growth accelerated to 5%, 

not far from the US’s 5.9%, but was supported by 

consumption, residential investment and net exports 

– adding to bullish CAD sentiment. 

Chart 5: Leading Indicator Suggests Tightening 

and a Flattening of the Yield Curve 

-2 

-1 

0 

1 

2 

3 

4 

OECD leading indicator (RHS) 

10s2s (LHS inv) 

5 

Oct-89 Oct-92 Oct-95 Oct-98 Oct-01 Oct-04 Oct-07 

Source: BNP Paribas, Bloomberg. Note: The leading indicator is pushed four months 

into the future, which represents its forecasting ability at publication time. The carry 

between 2s and 10s is roughly 2% or the exact premium required by Japanese lifers. 

Chart 6: CAD and Monetary Velocity 

108 

106 

104 

102 

100 

98 

96 

94 

92 

90 

The mix of cheap liquidity from foreign central banks 

investing in Canada and the BoC are already 

showing signs of creating some localised excesses in 

the housing market. 

Foreign central banks’ move away from deposits in 

commercial banks, likely joined by Japanese lifers, 

will further flatten the steepness in the 2s10s curve, 

boosting liquidity. The costs of financing a house or 

other long-term liabilities will be reduced. Hence, 

central banks and large scale asset managers – by 

increasing their duration as the economy improves 

and in light of the clean Canadian balance sheet – 

will accelerate the supply of cheap liquidity. 

The first stage at the beginning of a very difficult 

economic period is extreme cautiousness against a 

tightening bias. Reports from the BoC do not see 

signs of housing bubbles and lending is indeed not 

accelerating. Nonetheless, policy today is relevant for 

what will happen 6-18 months down the road. 

Risk - Link between liquidity and commodities 

A key risk for the CAD is that it would suffer two 

types of shocks. The first is linked to fiscal 

contraction globally, which is typically of such a slow 

and prolonged nature that it is unlikely to be a source 

of shock. The second is a brutal correction in 

commodities. As USD-based liquidity is reduced by 

policy tightening in Asia and Asian countries buying 

fewer US Bills and Treasuries, two impacts are 

Source: Reuters EcoWin, BNP Paribas. Note: Playing the devil’s advocate, monetary 

velocity in Canada has simply not accelerated. Given that the banks have clean 

balance sheets, this is a sign of weak demand. While there are signs that capex has 

started to pick up again in the US as cost cutting is no longer the easy way out, it is 

also worth considering that the M&A cycle is centred around vertical integration, which 

is consistent with a view of weak expected growth in the coming years. 

starting to make themselves felt: 1) the USD is 

strengthening relative to non-EM currencies and may 

have a negative impact on commodity prices; and 2) 

falling demand for commodities out of China (used 

partly as a hedge against QE). Another risk is the 

ability to rebalance Canadian exports away from the 

weaker US consumer; there, the story is more 

encouraging as the main determinant is global 

growth (Chart 8). 

Spot and vol implication 

While we are constructive on short USDCAD, the 

more interesting trade remains in the volatility space 

where volatilities even after very sharp drops remain 

expensive. 



45 


The question is when to stop selling volatility. The 

answer this time round is much sooner than in 

previous cycles. The ability to share risks was 

significantly reduced as was the ability to leverage 

long-term cheap capital. In addition, banks will 

penalise much more heavily non-hedgeable or nontradable 

risks. As risk compression is a mix of an 

ability to reduce idiosyncratic (e.g. via a CDS swap) 

and systemic risks (e.g. growth fears), the lower 

bound that can be reached will be significantly higher 

than in the past. 

Similarly in Mexico, FX volatilities remain somewhat 

high, yet the economic environment has stabilised, 

leverage has dropped like a stone and measures 

taken by the central bank to increase its foreign 

reserves vastly reduce any risk of another dangerous 

funding crisis. 

Hence, we continue to recommend short vega 

positions in the 3-12M bucket and see the best 

opportunity in EURMXN given that the correlation 

risk between EURUSD and USDMXN is overpriced, 

as are to some extent EURUSD vols. 

Chart 7: CAD and Commodity Index 

Source: BNP Paribas, Ecowin Reuters 

2000 

1500 

1000 

500 

Chart 8: Canadian Trade Balance 

0 

-500 

Trade Balance NSA 

Trade Balance with Asia 

Trade Balance with US 

Source: BNP Paribas, Bloomberg. Note: The main determinant of net exports is not 

rebalancing out of the US into Asia but overall global demand. Hence, rebalancing is 

only a secondary mechanism. As such it suggests that, in the case of Canada, the 

performance of the US surely puts it a disadvantage but the main driver remains global 

growth. Nonetheless, one should be wary of where the final consumer resides, that is 

Asian exports re-exported to the US or Europe. 



46 


Commodity Currency Exhaustion 

• The commodity currencies were among the top performers throughout much of 2009, but at the 

end of last year and the beginning of 2010 a far more mixed picture is developing… 

• …indeed, the commodity currencies appear to be running out of steam ahead of the highs seen in 

early 2008 

• AUDUSD gains have been capped since October with major channel support as being challenged 

as technical indicators generate negative momentum signals 

• NZDUSD is developing the most negative momentum among the commodity currencies 

Commodity currencies rebounded strongly 

throughout much of 2009, putting them among 

the top performers of last year. However, this 

strong upward momentum is now running out of 

steam, with most of the commodity currencies 

stalling ahead of the highs seen in early 2008 

and have subsequently been confined to a 

narrow trading range over the past four months. 

Technical indicators are also starting to suggest 

that momentum is turning negative in most cases 

suggesting that a bearish breakout from these 

trading ranges is now likely. 

The AUDUSD uptrend has been capped since 

October resulting in a broad consolidation range 

developing over recent months. Technical 

indicators suggest that momentum is now turning 

negative implying that the up trend is set to be 

challenged. The most recent attempt to rebound 

appears to have run out of steam well ahead of 

the top end of the range, leaving down trendline 

resistance unchallenged. In fact near-term 

channel support in the 0.9100 area is now set to 

be tested and a break below here will trigger 

Some further nearterm 

corrective gains 

are still possible in the 

coming week, but we 

expect the medium 

term EURUSD trend 

to remain bearish. 

Down trendline 

resistance currently 

intervenes at the 

1.3785 level with 

further resistance at 

1.3835. From 1.3835 

we expect the down 

trend to be resumed. 


1.52 

1.50 

1.48 

1.46 

1.44 

1.42 

1.40 

1.38 

1.36 

1.34 

Chart 1: EUR/USD – rebound to remain limited 

1.3835 

20-Jul-09 

1.4446 

another bearish signal opening the way for a decline 

towards the lower end of the broad trading range 

targeting 0.8800 initially and the 0.8780 February 

low. Over the medium term, a break below here will 

generate a major negative signal opening the way for 

a decline towards the 0.8260/0.8200 support area 

which also coincides with the 38.2% retracement 

level of the rally seen from February to November 

last year. 

The most bearish signals among the major 

commodity currencies are being generated by the 

NZD. The NZDUSD pullback from the 0.7635 

recovery peak seen in October last year is starting to 

develop negative momentum. Up trendline support 

has already been broken and medium term technical 

indicators are now triggering outright bearish signals. 

A test of the 0.6810 February low is expected with a 

break below here opening initial downside potential 

towards major channel support at 0.6755 and then 

the 0.6585 support which also coincides with the 

38.2% retracement of the rally seen in 2009. 

1.4842 

16-Sep-09 

1.4480 

1.5060 

1.4630 

1.5144 

13-Nov-09 

1.4219 

1.4582 

12-Jan-10 

1.3435 

11-Mar-10 

Ian Stannard 12 March 2010 


47 


The latest AUDUSD 

attempt to rebound is 

running out of steam 

well ahead of the 

upper end of the major 

trading range. 

Technical indicators 

are turning lower 

giving momentum sell 

signals. 

A test of the key 

support at 0.9100 is 

expected. A break 

here will target 0.8800 

and 0.8780. 


Among the major 

commodity currencies 

the NZD is developing 

the most bearish 

signals with technical 

indicators now 

breaking lower. 

Major up trendline 

support has already 

been broken and we 

now expect a test of 

the 0.6810 February 

low. 

A break here targets 

0.6585. 


USDCAD has retested 

the major support at 

the 1.0220/05 levels 

which forms the base 

of the trading range 

that has developed 

over the course of the 

past six months. 

Technical indicators 

are now rebounding 

suggesting that 

USDCAD will also 

develop a rebound. A 

break of 1.0370 

triggers a bullish 

signal. 


Chart 2: AUD/USD – rebound is running out of steam 

0.9400 

0.9330 

0.92 

0.8910 

0.87 

0.8735 

0.8475 

0.8580 

0.82 

0.8155 

0.7705 

0.77 

20-Jul-09 16-Sep-09 13-Nov-09 12-Jan-10 11-Mar-10 

Chart 3: NZD/USD – Developing bearish signals 

0.77 

0.7635 

0.75 

0.7440 

0.73 

0.7150 

0.71 

0.6975 

0.69 

0.67 

0.6810 

0.65 

0.63 

0.6195 

0.61 

20-Jul-09 16-Sep-09 13-Nov-09 12-Jan-10 11-Mar- 

Chart 4: USD/CAD – major support remains intact 

1.10 1.0992 

1.09 

1.0869 

1.08 

1.0780 

1.0750 

1.07 

1.0680 

1.06 

1.05 

1.04 

1.03 

1.0205 

1.0225 

1.02 

16-Sep-09 

13-Nov-09 

12-Jan-10 

11-Mar-1 



48 


Currency Spot Trade Recommendations Date 

NZD/USD 0.6990 Sell 0.7060, stop 0.7260, target 0.6260 11 Mar 2010 

GBP/SEK 10.705 Sell 10.950, stop 11.05, target 10.300 04 Mar 2010 

NOK/SEK 1.2130 Sell 1.2210, stop 1.2310, target 1.1910 25 Feb 2010 

GBP/USD 1.5040 Sell 1.5300, stop 1.5500, target 1.4480 04 Mar 2010 

USD/CHF 1.0690 Long at 1.0560, stop raise to 1.0640, target 1.10 01 Feb 2010 

USD/CAD 1.0270 Long at 1.0275, stop 1.0200, target 1.0550 08Mar 2010 

EUR/JPY 123.80 Shorts from 121.55 stopped at 123.55 26 Feb 2010 

AUD/JPY 82.70 Shorts from 79.85 stopped at 80.85 02 Mar 2010 




49 


Economic Calendar: 12 - 19 March 

GMT Local Previous Forecast Consensus 

Fri 12/03 07:45 08:45 France Current Account (nsa) : Jan EUR-3.6bn EUR-4.0bn EUR-3.9bn 

09:00 10:00 Spain CPI m/m : Feb -1.0% -0.1% -0.1% 

09:00 10:00 CPI y/y : Feb 1.0% 0.9% 0.9% 

09:00 10:00 HICP m/m : Feb -1.1% -0.1% -0.1% 

09:00 10:00 HICP y/y : Feb 0.9% 0.9% 0.9% 

10:00 11:00 Eurozone ECB’s Weber Speaks in Bonn 

11:00 12:00 Industrial Production (sa) m/m : Jan -1.5% 1.5% 0.7% 

11:00 12:00 Industrial Production (wda) y/y : Jan -4.7% -1.2% -1.6% 

20:45 21:45 ECB’s Trichet Speaks at Economic Summit of Stanford Institute of Economic Policy Research 

11:00 11:00 UK BoE’s Dale Speaks 

12:00 07:00 Canada Unemployment Rate : Feb 8.3% 8.4% 8.3% 

12:00 07:00 Payroll Jobs (chg) m/m : Feb 43.0k 10.0k 15.5k 

13:30 08:30 US Retail Sales m/m : Feb 0.5% -0.7% -0.2% 

13:30 08:30 Retail Sales Ex-Autos m/m : Feb 0.6% -0.2% 0.1% 

14:55 09:55 Michigan Sentiment (Prel) : Mar 73.6 74.5 74.0 

15:00 10:00 Business Inventories : Jan -0.2% 0.1% 0.1% 

Sun 14/03 07:00 02:00 US Clocks Go Forward 1 Hour 

Mon 15/03 00:01 00:01 UK Rightmove House Price Index : Mar 

10:00 11:00 Eurozone Employment q/q : Q4 -0.5% -0.3% n/a 

10:00 11:00 Employment y/y : Q4 -2.1% -2.0% n/a 

12:00 13:00 ECB’s Gonzalez-Paramo Speaks in Zaragoza 

16:00 17:00 Finance Ministers Meet in Brussels 

12:30 08:30 US Empire State Survey : Mar 24.9 20.0 22.0 

13:00 09:00 TICS Data : Jan USD60.9bn USD40.0bn n/a 

13:15 09:15 Industrial Production m/m : Feb 0.9% 0.0% 0.1% 

13:15 09:15 Capacity Utilisation Rate : Feb 72.6% 72.6% 72.6% 

17:00 13:00 NAHB Housing Market Index : Mar 17 17 17 

Tue 16/03 00:30 11:30 Australia RBA MPC Minutes 

07:00 08:00 Eurozone EU25 New Car Registrations : Feb 

10:00 11:00 HICP m/m : Feb -0.8% 0.3% 0.3% 

10:00 11:00 HICP y/y : Feb 1.0% 0.9% 0.9% 

10:00 11:00 HICP Core m/m : Feb -1.5% 0.4% n/a 

10:00 11:00 HICP Core y/y : Feb 0.9% 0.8% 0.8% 

10:00 11:00 Ex-Tobacco Index : Feb 107.75 108.08 n/a 

07:45 08:45 France CPI m/m : Feb -0.2% 0.4% 0.4% 

07:45 08:45 CPI y/y : Feb 1.1% 1.1% 1.1% 

07:45 08:45 HICP m/m : Feb -0.2% 0.4% n/a 

07:45 08:45 HICP y/y : Feb 1.2% 1.2% n/a 

07:45 08:45 Ex-Tobacco CPI (Final, nsa) : Feb 118.32 118.83 n/a 

08:30 09:30 EU Finance Ministers Meet in Brussels 

08:30 09:30 Neths Industrial Production m/m : Jan -2.2% 1.8% 1.0% 

08:30 09:30 Industrial Production y/y : Jan 0.9% 2.2% n/a 

08:30 09:30 Retail Sales y/y : Jan 3.2% -4.5% n/a 

09:00 10:00 Italy CPI (Final) m/m : Feb 0.1% (p) 0.1% n/a 

09:00 10:00 CPI (Final) y/y : Feb 1.2% (p) 1.2% n/a 

09:00 10:00 HICP (Final) m/m : Feb 0.0% (p) 0.0% n/a 

09:00 10:00 HICP (Final) y/y : Feb 1.1% (p) 1.1% n/a 

09:30 09:30 UK DCLG UK House Prices y/y : Jan 

10:00 11:00 Germany ZEW Expectations : Mar 45.1 43.0 44.0 

10:00 11:00 ZEW Current Assessment : Mar -54.8 -52.0 -51.0 

12:30 08:30 US Import Prices m/m : Feb 1.4% -0.3% -0.2% 

12:30 08:30 Import Prices Ex-Petroleum m/m : Feb 0.6% 0.5% n/a 

12:30 08:30 Housing Starts : Feb 591k 555k 570k 

18:15 14:15 FOMC Rate Announcement 

Market Economics 12 March 2010 


50 


Economic Calendar: 12 - 19 March (cont) 

GMT Local Previous Forecast Consensus 

Wed 17/03 23:50 08:50 Japan Tertiary Index (sa) m/m : Jan -0.9% 0.9% 1.3% 

(16/03) 

BoJ Rate Announcement 

09:30 09:30 UK Unemployment Change : Feb 23.5k -10.0k 6.0k 

09:30 09:30 Unemployment Rate (Claimant) : Feb 5.0% 5.0% 5.1% 

09:30 09:30 BoE MPC Minutes 

10:00 11:00 Eurozone Labour Cost Index (y/y) : Q4 3.2% 2.9% n/a 

OPEC 156th OPEC Meeting 

12:30 08:30 US PPI (sa) m/m : Feb 1.4% 0.0% -0.2% 

12:30 08:30 PPI (sa) y/y : Feb 4.6% 5.2% 4.9% 

12:30 08:30 PPI Core (sa) m/m : Feb 0.3% 0.2% 0.1% 

12:30 08:30 PPI Core (sa) y/y : Feb 1.0% 1.1% 1.0% 

14:30 10:30 EIA Oil Inventories 

20:00 16:00 Fed’s Fisher Speaks on ‘Learning from Each Other in Crisis Response’ in Dallas 

Thu 18/03 08:30 09:30 Sweden Unemployment Rate : Feb 9.4% 9.2% n/a 

08:30 09:30 Neths Unemployment Rate : Feb 5.6% 5.8% n/a 

08:30 09:30 Consumer Confidence : Mar -13 -14 n/a 

09:00 10:00 Eurozone Current Account : Jan EUR1.9bn EUR-8.0bn n/a 

10:00 11:00 Foreign Trade Balance (sa) : Jan EUR7.0bn EUR1.0bn EUR6.0bn 

ECB Governing Council Meeting (No Rate Announcement) 

09:30 09:30 UK PSNCR : Feb GBP-11.8bn GBP-9.0bn n/a 

09:30 09:30 PSNB : Feb GBP4.3bn GBP12.0bn n/a 

11:00 11:00 CBI Monthly Industrial Trends : Mar 

11:30 07:30 US Fed’s Duke Speaks to Bankers in Washington 

12:30 08:30 CPI m/m : Feb 0.2% 0.1% 0.1% 

12:30 08:30 CPI y/y : Feb 2.6% 2.3% 2.3% 

12:30 08:30 Core CPI m/m : Feb -0.1% 0.1% 0.1% 

12:30 08:30 Core CPI y/y : Feb 1.6% 1.4% 1.0% 

12:30 08:30 Initial Claims 462k 460k n/a 

13:00 09:00 Fed’s Hoenig, Lacker, Pianalto Speak to Bankers in Washington 

14:00 10:00 Philadelphia Fed Survey : Mar 17.6 19.0 17.0 

14:00 10:00 Leading Indicators m/m : Feb 0.3% 0.2% 0.1% 

Fri 19/03 07:00 08:00 Germany PPI m/m : Feb 0.8% 0.1% 0.1% 

07:00 08:00 PPI y/y : Feb -3.4% -2.8% -2.8% 

07:45 08:45 France Wages (Final) q/q : Q4 0.5% 0.2% n/a 

08:30 09:30 Sweden PPI m/m : Jan 2.0% -0.3% n/a 

08:30 09:30 PPI y/y Jan 0.3% 0.2% n/a 

12:30 08:30 Canada CPI m/m : Feb 0.3% 0.2% 0.2% 

12:30 08:30 CPI y/y : Feb 1.9% 1.3% 1.3% 

12:30 08:30 BoC Core CPI m/m : Feb 0.1% 0.3% 0.3% 

12:30 08:30 BoC Core CPI y/y : Feb 2.0% 1.7% n/a 

15:50 11:50 US Ex-Fed’s Greenspan Speaks on the Financial Crisis at Brookings Institute, Washington 

Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision 




51 


Key Data Preview 

Chart 1: US Retail Sales in Gradual Recovery 


% m/m Feb (f) Jan Dec Nov 

Retail sales -0.7 0.5 -0.1 2.0 

Ex-autos -0.2 0.6 -0.2 2.0 

Key Point: 

Retail sales are forecast to decline by 0.7% in 

February as weather significantly reduced nonessential 

sales. Sales ex-vehicles declined by an 

estimated 0.2%. 

BNP Paribas Forecast: Weather Slows Sales 

US: Retail Sales (February) 

Release Date: Friday 12 March 

Retail sales are forecast to decline in February, largely 

because adverse winter weather (primarily on the east 

coast) caused consumers to stay at home. Total sales are 

forecast to fall by 0.7% following the moderate increase of 

0.5% in January. Total unit vehicle sales decreased by 

4.3% in February, with larger declines experienced by 

foreign manufacturers. The 5.8% drop in foreign unit sales 

was mainly due to the troubles Toyota was having rather 

than adverse winter weather. Excluding automobile sales 

from the total produced a small decline of 0.2%. Most of 

that loss was probably weather-related as department 

stores initially recorded a moderate increase in sales for 

the month. However, building material sales, furniture, 

sporting goods and electronics suffered as they are nonessential 

items that consumers probably did not venture in 

the snow to buy. Sales of gasoline also dropped as 

gasoline prices fell 1.5% in February. Food prices 

continued to rise in February and therefore food purchases 

and health care sales offset some of the losses from autos 

and gasoline. After excluding gasoline and vehicle sales, 

the forecast for the remainder is for a 0.1% decline. 

Chart 2: US Present Conditions Compared 


Mar p (f) Feb 2H Feb p Feb Jan 

Michigan 

Sentiment 74.5 73.5 73.7 73.6 74.4 

Key Point: 

The University of Michigan Index of Consumer 

Confidence should increase slightly in early March, 

to 74.5. 

BNP Paribas Forecast: Increase 

US: Michigan Consumer Sentiment (March, Prel) 


The University of Michigan consumer sentiment index 

declined to 73.6 in February from 74.4 in January. Despite 

the decline, the Michigan survey paints a much more 

optimistic picture than the Conference Board index, which 

plunged by 10.5 points in February. The Michigan current 

conditions index tends to reflect recent changes in the 

economy, while the Conference Board’s present situation 

index closely tracks the nation’s unemployment rate. Thus, 

the Conference Board’s present situation index tends to lag 

the University of Michigan current situation indicator. The 

Michigan’s current conditions index generally peaks in the 

early stages of economic recovery, when growth is high. By 

contrast, the Conference Board’s generally peaks in the 

late stages of economic expansion, when unemployment is 

low and the level of economic activity is high. Strong GDP 

growth in Q4 should support consumer optimism. In 

addition, stocks have resumed some upward trend lately 

and oil prices have stabilised slightly in recent weeks, 

implying gasoline costs are likely to decrease in March. 

Overall, we expect the University of Michigan index to 

improve in early March to 74.5. 



52 



Chart 3: Canadian Employment 


Feb (f) Jan Dec Nov 

Unemployment rate % 8.4 8.3 8.4 8.4 

Payroll jobs (k) 10.0 43.0 -28.3 72.2 

BNP Paribas Forecast: Upward Momentum 

Canada: Labour Report (February) 


We expect Canadian employment to have increased by 

10k in February. This would follow a strong 43k gain in the 

previous month and would leave employment at +19.1k on 

a smoother, six-month moving average. In spite of recent 

volatility, Canadian employment appears to be rebounding 

at a moderate pace. This view is strengthened by a steady 

uptrend in the Survey of Employment Payrolls and Hours, 

which lags the Labour Force Survey by two months. Job 

gains have also become more widespread. In December, 

61% of industries surveyed by the SEPH recorded 

employment gains, the highest share since October 2007. 

While adverse weather conditions point to a moderation in 

the pace of job creation in February, we expect labour 

market conditions to strengthen further over the spring. 

Despite positive employment growth, an expected up-tick 

in the participation rate suggests the unemployment rate 

will inch up to 8.4% in February from 8.3% previously. 

Key Point: 

Canadian employment is forecast to increase by 10k 

in February after surging in January. 

Chart 4: US Industrial Production 



Ind. Prod. (% m/m) 0.0 0.9 0.7 0.6 

Cap. Util (%) 72.6 72.6 71.9 71.3 

BNP Paribas Forecast: A Winter Pause 

US: Industrial Production (February) 

Release Date: Monday 15 March 

We look for a flat reading on industrial production in 

February after a 0.9% surge in January. Our forecast would 

imply capacity utilisation holding steady at 72.6%. Winter 

storms disrupted manufacturing activity, as reflected in the 

0.9% decline in manufacturing hours worked and the 

decline in the ISM production index to 58.4 from 66.2. Data 

on motor vehicle production suggest this sector should 

weigh on overall activity although we look for a broadbased 

interruption after a string of stronger readings. 

Meanwhile, the decline in many manufacturing industries 

should be offset by an increase in electricity generation on 

continued cold temperatures. Given that we are still in the 

midst of the upswing of the inventory cycle and global trade 

activity is ramping up, the weather disruption in February 

should lead to a bounce back in March. We will therefore 

not draw too much signal from the February interruption. 

Key Point: 

We expect a flat reading in February reflecting an 

interruption owing to winter storms. 



53 



Chart 5: Eurozone Core HICP (% y/y) 



Headline m/m 0.3 -0.8 0.3 0.1 

Headline y/y 0.9 1.0 0.9 0.5 

Core m/m 0.4 -1.5 0.5 -0.1 

Core y/y 0.8 0.9 1.1 1.0 

Ex-tobacco 108.08 107.75 108.61 108.28 

Key Point: 

Headline inflation should tick lower over the month, 

with core slipping further to 0.8%. 

BNP Paribas Forecast: All-Time Low for Core 

Eurozone: HICP (February) 

Release Date: Tuesday 16 March 

With the bulk of the commodity price base effects past, 

headline’s ascent in 2010 is proving a slower affair than we 

saw in the second half of 2009. After a 0.1pp increase in 

January, we expect headline inflation to tick back down to 

0.9% in February. A modest decline in energy and further 

drop in core inflation should dominate a second 

consecutive monthly increase in food inflation. 

Energy inflation should have fallen thanks to a falling back 

in oil prices from their January USD 80/bbl high. Food 

inflation is likely to have risen further, meanwhile, on a 

combination of base effects and stronger fresh food prices 

linked to the cold weather at the start of the year. 

The most important development will be an additional fall in 

core inflation over the month. In January, core inflation fell 

to 0.9%, matching the record low recorded in 2000. Deep 

January discounting in countries such as Germany was an 

important factor, but the decline has now broadened across 

components. As a result, while we may see a February 

rebound in categories that experienced deep discounting in 

January, we expect core inflation to fall further over the 

month as other components continue down – dynamics we 

have already seen in Germany’s preliminary release. We 

are forecasting a 0.8% y/y a new record low. 

100 

75 

50 

25 

0 

-25 

-50 

-75 

Mean 

Chart 6: German ZEW Indices 

ZEW Expectations 

Mean 

ZEW Current Conditions 

-100 

91 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 


Mar(f) Feb Jan Dec 

Expectations 43.0 45.1 47.2 50.4 

Current Conditions -52.0 -54.8 -56.6 -60.6 

Average -4.5 -4.9 -4.7 -5.1 

Key Point: 

Expectations have topped out but the current 

conditions index has scope to rise further. 

BNP Paribas Forecast: Mixed Picture 

Germany: ZEW Survey (March) 


The ZEW survey data reflect the opinions of approximately 

300 analysts and fund managers. The expectations index 

dropped in each of the five months to February, declining 

by around twelve percentage points relative to its peak but 

remaining above its long-run average (see chart). 

The factors cited for the declines include uncertainty over 

the performance of the labour market, developments in the 

public finances and the strong exchange rate. Opinion on 

the export sector was positive in the prior survey in contrast 

to pessimism over the consumer and retail sectors. 

Experience of past cycles suggests that, when the index of 

expectations turns downwards or upwards, it tends to head 

in the same direction for some time. We therefore expect to 

see a further deterioration in March’s survey. 

The index that measures the assessment of the current 

economic situation in Germany typically lags the evolution 

of the expectations index. The current assessment rose in 

each of the nine months to February and, as it is still a long 

way below its historic average (again, see the chart), there 

is scope for further improvement in coming months. 

Our preferred measure is the average of the two main ZEW 

indices; this tracks growth in Germany relatively well. On 

the basis of the recent data and our forecast for March, a 

moderate improvement in GDP growth is likely. 



54 



Chart 7: French Headline and Core CPI (% y/y) 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

Manufactured goods 

Headline inflation 


03 04 05 06 07 08 09 


% Feb (f) Jan Dec Feb 09 

Total (nsa) m/m 0.42 -0.23 0.27 0.38 

Total (nsa) y/y 1.14 1.10 0.91 0.87 

Core (sa) m/m 0.29 -0.03 0.17 0.21 

Core (sa) y/y 1.65 1.56 1.76 1.92 

Ex-Tob. index 118.83 118.32 118.60 117.59 

Key Point: 

Although energy inflation should ease marginally in 

February, early ending of seasonal sales may push 

inflation slightly higher. 

BNP Paribas Forecast: Marginally Higher 

France: Consumer Price Index (February) 


Over the last six months, the headline inflation rate has 

jumped from -0.7% to +1.1%, entirely due to energy prices. 

The decline in core inflation has compensated rising 

inflation for food. 

We expect energy prices to have increased marginally in 

February and, as prices rose a little during the same month 

last year, this should allow the contribution of energy to 

inflation to ease slightly. Food price inflation should 

accelerate further, but the bulk of the adverse weather was 

probably captured in the January data. 

Manufactured goods prices will jump and, as the seasonal 

sales season ended earlier this year than in 2009, this 

should temporarily boost headline inflation. The 

contribution of services has been declining over the past 

few months and this trend should persist in February. 

Consequently, core inflation may rise but this should be 

transitory; the declining trend should prevail again from 

March. 

The inflation spread with the eurozone reversed in 

December and widened in January. We expect this trend to 

continue in February, with a possible temporary correction 

in March. 

Chart 8: US Housing Starts & Building Permits 



Housing Starts 

(000s, saar) 555 591 575 579 

Key Point: 

Housing starts are forecast to drop 6.1% to 555k in 

February due to weather-related disruptions. 

BNP Paribas Forecast: Small Decline 

US: Housing Starts (February) 


Housing starts are expected to decline to 555k in February 

after increasing modestly to 591k the previous month. 

Severe weather conditions likely disrupted new 

construction activity in February, suggesting builders broke 

ground on fewer houses. Indeed, aggregate hours worked 

in the construction industry plunged by 4% in February, the 

second-largest monthly decline since 1995. In addition, 

building permits declined by 4.9% m/m, but this followed a 

cumulative 17.8% increase over the previous two months. 

Anecdotal evidence suggests builders rushed to take out 

permits at the end of 2009 as permit costs are expected to 

increase this year. Therefore, the decline in permits 

recorded in January does not point to a decline in future 

building activity but rather reflects a temporary downward 

correction. As such, the ramp-up in permits observed at the 

end of last year is likely to translate into a strong increase 

in March and a modest upward trend over a number of 

months after weather-related effects taper off. 

Nevertheless, record foreclosures and unemployment near 

a 26-year high represent hurdles that may prevent the 

industry from strengthening much further. 



55 



Chart 1: UK Employment vs GDP 



Claimant Count (k) -10.0 23.5 -9.6 -10.8 

ILO Emp 3m/yr (k) 0 -12 -16 

ILO Unemp 3m/yr (k) -30 -4 -7 

Ave Earns % 3m/yr 2.5 0.8 0.8 

Ex Bonus % 3m/yr 1.5 1.2 1.2 

Key Point: 

We expect better news on unemployment and a 

sharp increase in wage inflation due to base effects. 

BNP Paribas Forecast: Improving 

UK : Labour Report (February) 

Release Date: Wednesday 17 March 

We expect claimant count unemployment to post a 

moderate 10k decline in February, following the much 

weaker than expected January outcome. We suspect that 

the latter was partly related to poor weather, as snow could 

have delayed the hiring process. In particular, the 

breakdown showed that, although there was a steady 

stream of people becoming unemployed, there was a sharp 

drop in the number of people leaving the jobless pool. A 

firming in the claimant count as well as improvement in the 

ILO measures of unemployment and employment are 

consistent with the strengthening in activity surveys and 

GDP growth. 

Perhaps the biggest news in this release will be the 

average earnings data. In January-February 2009, there 

was a significant drop in wages (around 7 percentage 

points over the two months combined). This reflected 

sharply lower bonus payments. Our assumption is that 

bonus payments were at least stable in early 2010 and 

more likely somewhat higher. Hence significant base 

effects are likely to propel headline wage inflation sharply 

higher. We also expect ex-bonus wage inflation to 

accelerate, albeit to a lesser extent. We expect this on the 

basis of some financial sector firms shifting emphasis away 

from bonus payments into basic pay. 

Chart 10: US Pressures on Core PPI Ease 



Headline 0.0 1.4 0.4 1.5 

Ex-food & energy 0.2 0.3 0.0 0.5 

Key Point: 

Headline PPI should remain flat as PPI Energy likely 

declined and PPI Food continued to increase in 

February. Core PPI is expected to increase by 0.2%. 


US: PPI (February) 

Release Date: Wednesday 17 March 

We expect PPI to be unchanged in February. Energy 

prices are forecast to drop by 0.5% m/m, as gasoline prices 

declined by 2.6% m/m in February. Food prices are 

forecast to increase by 0.4% m/m, reflecting mounting 

pressures in commodity food costs. Indeed, while sluggish 

demand in 2009 likely delayed the pass-through to final 

prices last year, higher food prices have now trickled 

through the food production pipeline and are expected to 

support headline inflation over the next few months. Core 

PPI is forecast to increase by 0.2% m/m after rising by 

0.3% in the previous month. Ongoing strength in metal 

prices points to upside risks in auto prices. 

In addition, while tight credit conditions and subdued final 

demand have so far constrained investment spending, 

recent durable goods orders data suggest firms have 

increased spending on equipment and software. Against 

this background of firmer industrial demand, higher 

commodity prices risk being passed on to final goods 

prices, pointing to upside risks for producer prices. 



56 



Chart 11: US Total vs. Core CPI Inflation 



CPI 0.1 0.2 0.2 0.2 

Core 0.1 -0.1 0.1 0.0 

NSA (index) 217.06 216.69 215.95 216.33 

Key Point: 

US CPI is expected to increase by 0.1% m/m in 

February, reflecting a similar gain in core prices. 

Weak energy costs should largely offset an up-tick in 

food. 

BNP Paribas Forecast: Moderate Increase 

US: Consumer Price Index (February) 

Release Date: Thursday 18 March 

Headline CPI is expected to increase 0.1% m/m in 

February. Base effects suggest that inflation will ease to 

2.3% on a y/y basis from 2.7% in January. Weekly EIA 

data indicate that pump prices declined 2.6% m/m in 

February. However, an increase in the seasonal 

adjustment factor between January and February suggests 

seasonally adjusted CPI gasoline prices should ease by a 

more moderate 1.2% on the month. Weakness in gasoline 

should be partially offset by a gain in natural gas prices, 

which are forecast to increase by around 5% m/m. Food 

prices are forecast to increase 0.2% m/m in February. The 

gain should be driven by food-at-home prices, as pipeline 

pressures point to higher prices on supermarket shelves. In 

contrast, restaurant prices should remain contained, 

reflecting sluggish discretionary spending. Excluding food 

and energy, core CPI is expected to increase 0.1% m/m. 

Strength should be concentrated in core service prices 

excluding shelter which should see a small rebound after 

substantial weakness in January. In contrast, shelter prices 

should remain depressed, reflecting disappointing 

developments in the housing market and still-high vacancy 

rates. Going forward, plummeting unit labour costs suggest 

underlying price pressures remain contained. In nonseasonally 

adjusted terms, total CPI is expected to 

increase to 217.06 in February from 216.69 previously. 

Chart 12: US Leading Indicators Suggest Growth 



Lead Index (% m/m) 0.2 0.3 1.2 1.1 

6-mo. ann. chg. (%) 9.0 9.8 11.8 10.6 

BNP Paribas Forecast: A Modest Gain 

US: Leading Indicators (February) 

Release Date: Thursday 18 March 

The index of leading indicators is expected to rise just 0.2% 

in February after a 0.3% gain in January. Gains in the 

index have slowed in recent months and our forecast would 

suggest a further cooling in the 6-month annualised rate to 

9.0%, down from 9.8% a month prior. The index will be 

influenced by disruptive winter weather that contributed to 

a decline in manufacturing hours worked, a dip in the 

supplier delivery index, and a rise in jobless claims. 

In addition, consumer expectations became more 

pessimistic in February. Meanwhile, financial conditions 

continued to be favourable with a still-steep yield curve and 

a rise in the stock market set to continue to boost the 

index. The cooling in the index is in line with the slowing we 

anticipate in GDP growth to 2.4% q/q saar in Q1 from 5.9% 

in Q4. 

Key Point: 

We look for a subdued 0.2% gain in February, in part 

owing to disruptive winter weather. 



57 




Chart 13: Canadian Inflation 

m/m % Feb (f) Jan Dec Nov 

CPI 0.2 0.3 -0.3 0.5 

Bank of Canada Core 0.3 0.1 -0.3 0.4 

Key Point: 

Weak gasoline prices should restrain headline CPI 

developments. However, core CPI should increase by 

0.3% m/m, reflecting higher clothing and shelter 

costs. 


Canada: CPI (February) 


Canadian CPI inflation is forecast to increase by 0.2% m/m 

in February following a 0.3% rise in January. However, 

because of large base effects, yearly inflation is expected 

to drop to 1.3% y/y in February from 1.9% previously. 

Weekly gasoline pump prices declined 1.6% m/m in 

February after increasing by 5.0% the previous month. In 

addition, natural gas prices are expected to moderate after 

surging in January, restraining headline developments. 

Upward pressures should come from clothing prices. In 

December, clothing prices plunged by 4.7% m/m, the 

largest monthly decline for this month in the series’ 60-year 

history. Prices eased by an additional 0.6% m/m in 

January. Such large discounts around the turn of the year 

are usually followed by price increases in February and 

March, as the new spring collection reaches stores. In 

February, we forecast that apparel prices will increase 

2.0% m/m. Shelter prices are expected to increase by 

0.2%, reflecting recent rises in house prices (which feed 

into the CPI index directly through their effect on the CPI 

replacement component). Excluding the eight most volatile 

components and the effect of indirect taxes, the Bank of 

Canada core CPI is expected to increase 0.3% m/m in 

February. 



58 


Economic Calendar: 22 March – 16 April 

22 March 23 March 24 March 25 March 26 March 

Italy: Non-EU Trade 

Balance Feb 



Japan: BoJ Monetary 

Policy Meeting Minutes 

UK: CPI Feb 

France: Industry Survey 

Mar 

Belgium: Business 

Confidence Mar 

US: Existing Home Sales 

Feb, FHFA House Price 

Index Jan 

Japan: Trade Balance Feb 

Eurozone: Industrial 

Orders Jan, PMIs (Flash) 

Mar 

UK: Budget, CBI Dist 

Trades Mar 

Germany: Ifo Mar 

France: Job Seekers Feb 

Italy: ISAE Consumer 

Conf Mar, Labour Q4 

Sweden: Consumer 


Norway: Norges Bank Rate 

Ann & Monetary Policy 

Report, Labour (sa) Jan 

US: Durable Goods 

Orders Feb, New Home 

Sales Feb 

Eurozone: Monetary 

Developments Feb 

UK: Retail Sales Feb 

Germany: GkF 

Consumer Confidence 

Apr 

France: Retail Sales Feb 

Italy: Retail Sales Jan, 

ISAE Business 


Spain: PPI Feb 

Sweden: PPI Feb 

Norway: Labour (nsa) 

Mar 

Neths: GDP Q4 (Final), 

Producer Confidence 

Mar 

Japan: CPI Tokyo Mar, 

CPI National Feb 

Eurozone: Eurocoin Mar 

France: Consumer 


Sweden: PPI Feb 

US: GDP (Final) Q4, 

Corporate Profits Q4, UoM 

Sentiment (Final) Mar 

During Week: Germany Import Prices Feb 

Europe – Clocks go forward 1 hour 

29 March 30 March 31 March 1 April 2 April 

Japan: Retail Sales Feb 

Eurozone: Business & 

Consumer Survey Mar 

UK: Net Consumer Credit 

Feb, Mortgage Approvals 

Feb 

Germany: States’ Cost of 

Living Mar, HICP (Flash) 

Mar 

Sweden: Retail Sales Feb 

US: Personal Income & 

Spending Feb 

Japan: Labour Feb, 

Household Consumption 

Feb, IP Feb 

Eurozone: Retail PMI Mar 

UK: GDP (Final) Q4 

France: Housing Starts 

Feb, GDP (Final) Q4, 

Housing Starts Feb 

Spain: HICP (Flash) Feb, 

Retail Sales Feb 

Belgium: CPI Mar 

Norway: Retail Sales Feb 

US: S&P/CS HPI Jan, 

Consumer Confidence Mar 

Australia: Retail Sales Feb 

Japan: Housing Starts Feb 

Eurozone: HICP (Flash) 

Mar, Labour Feb 

UK: GfK Consumer 


Germany: Labour Feb 

France: PPI Feb 

Italy: PPI Feb, CPI 

(Flash) Mar 

Switz: KOF Leading 

Indicator Mar 

US: Factory Orders Feb, 

Chicago PMI Mar, Help 

Wanted Mar, ADP Labour 

Mar 

Canada: GDP Jan 

Australia: Trade Balance 

Feb 

Japan: Tankan Mar 

Eurozone: Manufacturing 

PMI Mar 

UK: CIPS Manufacturing 

Mar 

Italy: Wages Jan-Feb 

Switz: PMI Mar 

US: Challenger Layoffs 

Mar, Construction Feb, 

ISM Manufacturing Mar, 

Vehicle Sales Mar 

Public Holiday: UK, 

Germany, Spain, Sweden, 

Norway, Neths, Denmark 

US: Labour Mar 

During Week: UK Nationwide House Prices Mar, Halifax House Prices Mar, Germany Retail Sales Feb Australia - Clocks go back 1 hour 

5 April 6 April 7 April 8 April 9 April 

Public Holiday: UK, 

Germany, France, Italy, 

Spain, Sweden, Norway, 

Neths, Denmark 

US: Non-Manufacturing 

ISM Mar, Pending Home 

Sales Feb 

Australia: RBA Rate 

Announcement 

Japan: Leading Indicator 

Feb 

Switz: CPI Mar 

US: FOMC Minutes 

Japan: BoJ Rate 

Announcement 

Eurozone: PPI Feb, GDP 

(Final) Q4, Services PMI 

(Final) Mar 

UK: PMI Services Mar 

Germany: Factory Orders 

Feb 

US: Consumer Credit Feb 

Australia: Labour Mar 

Japan: C/A Feb, 

Machinery Orders Feb 

Eurozone: ECB Rate 

Ann & Press Conference, 

Retail Sales Feb 

UK: BoE Rate Ann, BoE 

Asset Purchase Target 

Apr, IP Feb 

Germany: IP Feb 

France: Trade Balance 

Feb, Budget Balance Feb 

Spain: IP Feb 

Neths: CPI Mar 

During Week: Germany WPI Mar 

12 April 13 April 14 April 15 April 16 April 

Japan: BoJ Monetary 

Policy Meeting Minutes, 

M2 Mar 

Italy: Industrial Production 

Feb 

US: Treasury Statement 


Australia: NAB Business 

Survey Mar 

Japan: CGPI Mar 

UK: BRC Retail Sales 

Monitor Mar, RICS House 

Price Balance Mar, Trade 

Balance Feb, DCLG 

House Prices Feb 

Germany: CPI Mar 

France: CPI Mar, BoP Feb 

Sweden: CPI Mar 

Neths: IP Feb 

US: Trade Balance Feb, 

Import Prices Mar 

Australia: Westpac 

Consumer Confidence 

Eurozone: Industrial 

Production Feb 

Sweden: AMV 

Unemployment Mar 

US: CPI Mar, Retail 

Sales, Mar, Business 

Inventories Feb, Beige 

Book 

Eurozone: Trade 

Balance Feb, ECB 

Monthly Bulletin 

Italy: Foreign Trade 

Balance Feb 

Spain: CPI Mar 

Neths: Retail Sales Feb 

US: Empire State Survey 

Apr, TICS Data Feb, 

Industrial Production Mar, 

Philly Fed Apr, NAHB Apr 

Release dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions 

59 

UK: PPI Mar 

Germany: Trade Balance 

Feb 

France: Industrial 

Production Feb, BoF 

Survey Mar 

Sweden: Industrial 

Production Feb 

Norway: CPI Mar, PPI Mar 

Neths: IP Feb 

US: Wholesale Inventories 

Feb 

Canada: Labour Mar 

Eurozone: HICP Mar, 

EU25 New Car 

Registrations 

Italy: CPI Mar 

US: Housing Starts Mar, 

UoM Sentiment (Prel) Apr 


Treasury and SAS Issuance Calendar 

Daily update onto https://globalmarkets.bnpparibas.com, Tools & Apps, Analytical Tools, Market Calendar, Government Flows 

In the pipeline - Treasuries: 

Ireland: Considering the possibility of a syndicated 30y bond 

France: To consider dollar-denominated bond issue in 2010 

Germany: Reserves the right to issue foreign currency bonds, as market conditions allow 

Greece: May proceed with one or two more syndicated issues before resorting to regular re-openings of benchmark bonds 

Poland: Plans to issue an up to USD 1.5bn bond probably in Q2 and possibly as early as April. Most likely a 5y but a 10y paper not excluded 

Belgium: OLO auction scheduled for 29 March is cancelled 

Finland: To hold a second syndicated auction (5y), most likely in H2; possibly to issue a 5y USD bond in '10 

Neths: To issue a new 30y DSL (DDA, before the Summer) - No plans for Inflation-linked bonds - May issue a dollar-denominated bond (in '10) 

Denmark: To issue a EUR 5y loan (EUR 1-2bn) in H1 '10 - To open new 5y & 10y DGBs H2 '10 

Slovak Rep.: Bond 10-year (new, syndicated, EUR) to be issued in the coming weeks 

During the week: 

UK: Gilt 6% Dec 2028 (mini tender) 

US: Announcement of 2y,5y & 7y Notes (new) details on Thu 18 Mar 

FHLB: March Global Notes auction details to be announced on Wed 17 Mar 

Date Day Closing Country Issues Details BNPP forecasts 

Local GMT 

12/03 Fri 10:55 09:55 Italy BTP 3% Apr 2015 EUR 2.5-3.5bn 

BTP 5% Sep 2040 

EUR 1-1.5bn 

16/03 Tue 12:00 03:00 Japan JGB Mar 2030 JPY 1.1tn 

10:00 10:00 Ireland Gilt 4.6% Apr 2016 

Gilt 4.5% Apr 2020 

12 Mar EUR 1-1.5bn 

12:00 16:00 Canada Repurchase of 8 Cash Mgt Bonds (Jun-10 - Jun-11) CAD 1bn 

17/03 Wed 11:00 10:00 Germany Bund 3.25% Jan 2020 EUR 5bn 

10:30 10:30 Portugal OT 5.15% Jun 2011 (Reverse auction) EUR 0.3bn 

12:00 16:00 Canada CAN 30-year (Repurchase/Switch) 11 Mar 

18/03 Thu 12:00 03:00 Japan JGBs 10y Auction for Enhanced-liquidity issue 270-302 

JGBs 20y Auction for Enhanced-liquidity issue 54-80 

JPY 0.3tn 

10:30 09:30 Spain Obligacion 4% Apr 2020 

Obligacion 4.7% Jul 2041 

15 Mar EUR 4-6bn 

10:50 09:50 France BTANs 2- &/or 5-year 12 Mar EUR 6-8bn 

11:50 10:50 France OATis , OATeis, BTANeis 12 Mar EUR 1-2bn 

Sweden Exchange Offer ILBs 4% Dec-20 vs. 3.5% Dec-15 SEK 2.5bn 

Exchange Offer ILBs 3.5% Dec-28 vs. 3.5% Dec-15 

SEK 1.6bn 

10:30 10:30 UK Gilt 4.75% Mar 2020 GBP 3.25bn 

22/03 Mon 11:00 10:00 Sweden T-bonds (Buyback) 15 Mar 

Denmark DGB 17 Mar 

Slovak Rep. SLOVGB Jan 2012 (#212) 

23/03 Tue 11:00 10:00 Sweden T-bonds (Buyback) 16 Mar 

Neths DSLs (Off-the-run facility) 17 Mar 

13:00 17:00 US Notes 2-year (new) 18 Mar USD 44bn 

24/03 Wed 11:00 10:00 Sweden T-bonds 17 Mar 

10:30 10:30 Portugal OTs (To be confirmed) 18 Mar 

12:00 16:00 Canada CAN 3-year 18 Mar 


25/03 Thu 12:00 03:00 Japan JGB 2-year 18 Mar JPY 2.6tn 


26/03 Fri 10:55 09:55 Italy CTZ 23 Mar 

29/03 Mon 10:55 08:55 Italy BTPeis 23 Mar 

Denmark DGB 4% Nov 2010 (buy back) 

30/03 Tue 10:55 08:55 Italy 3 & 10y BTPs and CCT 23 Mar 

01/04 Thu 10:50 08:50 France OAT 26 Mar 

Slovak Rep. SLOVGB (#214) (new) 

05/04 Mon 13:00 17:00 US TIPS 10-year 1 Apr 

06/04 Tue 12:00 03:00 Japan JGB 10-year 30 Mar JPY 2.2tn 

11:00 09:00 Austria RAGBs 30 Mar 

13:00 17:00 US Notes 3-year (new) 1 Apr USD 40bn 

07/04 Wed 11:00 09:00 Germany Schatz 1% Mar 2012 (date to be confirmed) EUR 6bn 

11:00 09:00 Sweden T-bonds 31 Mar 

13:00 17:00 US Notes 10-year 1 Apr USD 21bn 

08/04 Thu 12:00 03:00 Japan Auction for Enhanced-liquidity 1 Apr JPY 0.3tn 

10:30 08:30 Spain Bonos 18 Mar 

13:00 17:00 US Bond 30-year 1 Apr USD 13bn 

Sources: Treasuries, BNP Paribas 



60 


Next week's T-Bills Supply 

Date Country Issues Details 

12/03 UK T-Bills Apr 2010 GBP 1.5bn 

T-Bills Jun 2010 

GBP 2bn 

T-Bills Sep 2010 

GBP 1.5bn 

15/03 Japan T-Bills Mar 2011 JPY 2.5tn 

France BTF Jun 2010 EUR 4bn 

BTF Sep 2010 

EUR 2bn 

BTF Mar 2011 

EUR 2bn 

Germany Bubills Sep 2010 (new) EUR 5bn 

Norway T-Bills Mar 2011 (new) NOK 6bn 

Neths DTC May 2010 EUR 0.5-1.5bn 

DTC Jun 2010 

EUR 1-2.5bn 

DTC Aug 2010 

EUR 1-2.5bn 

DTC Sep 2010 

EUR 1-2.5bn 

Slovak Rep. T-Bills Jul 2010 (#03) 

US T-Bills Jun 2010 USD 27bn 

T-Bills Sep 2010 (new) USD 29bn 

FHLMC Bills 3-month & 6-month 12 Mar 

16/03 Japan T-Bills Jun 2010 JPY 5.7tn 

Spain Letras Mar 2010 15 Mar 

Letras Aug 2011 

15 Mar 

Belgium TC Jun 2010 12 Mar 

TC Mar 2011 

12 Mar 

US T-Bills 4-week 15 Mar 

FHLB Discount Notes 

17/03 Sweden T-Bills Jun 2010 SEK 10bn 

T-Bills Sep 2010 

SEK 10bn 

Portugal BT Mar 2011 (new) EUR 1.25bn 

FNMA Bills 3-month & 6-month 15 Mar 

18/03 FHLB Discount Notes 

19/03 Japan T-Bills 2-month 12 Mar 

UK T-Bills 12 Mar 

Sources: Treasuries, BNP Paribas 

Comments and charts 

• EGB gross supply falls to around EUR 20bn in the 

week ahead from EUR 32bn in the past week. In 10y 

duration-adjusted terms, it falls to EUR 17bn from EUR 

25.7bn. 

• Ireland will kick off next week’s issuance on 

Tuesday with the reopening of Gilts Apr-16 & Apr-20 for 

EUR 1-1.5bn. Germany follows on Wednesday with a 

EUR 5bn tap of 10y Bund Jan-20. On Thursday, we will 

see Spain reopening SPGBs Apr-20 & Jul-41 for an 

expected amount of EUR 4-6bn. France will also issue 

2y- &/or 5y BTANs and OATeis/BTANeis. Expect a total 

size of around EUR 7-10bn. 

• Outside EMU, UK will issue GBP 3.25bn of Gilt 

Mar-20. There will also be auctions in Japan, Canada 

and Sweden. 

Next week's Eurozone Redemptions 

Date Country Details Amount 

15/03 Italy BOT 12mth EUR 8.2bn 

15/03 Neths DTC EUR 6.1bn 

15/03 Ireland T-Bills EUR 1.5bn 

16/03 Austria ATB EUR 0.1bn 

17/03 Germany Bubills EUR 7.0bn 

17/03 Austria ATB EUR 0.1bn 

18/03 France BTF EUR 7.5bn 

18/03 Belgium TC EUR 5.3bn 

19/03 Spain Letras EUR 9.3bn 

19/03 Portugal BT EUR 3.9bn 

Total Eurozone Short-term Redemption 

EUR 49bn 

Next week's Eurozone Coupons 

Country 

Amount 

Italy 

EUR 1.6bn 

Ireland 

EUR 0.4bn 

Austria 

EUR 1.0bn 

Total Long-term Coupon Payments 

EUR 3bn 

Chart 1: Investors’ Net Cash Flows 

(EUR bn, 10y equivalent) 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

-25 

-30 

25 

20 

15 

10 

5 

0 

Net Investors' Cash Flows 

(EUR bn , 10y equivalent) 

Week of Mar 15th Week of Mar 22nd Week of Mar 29th Week of Apr 5th 

Chart 2: EGB Gross Supply Breakdown by 

Country (EUR bn, 10y equivalent) 

Germany Italy Portugal Belgium 

France Spain Netherlands Austria 

Finland Greece Ireland 


Chart 3: EGB Gross Supply Breakdown by 

Maturity (EUR bn, 10y equivalent) 

25 

20 

2-3-YR 5-7-YR 10-YR >10-YR 

EGBs Gross Supply (EUR bn, 10y equivalent) 

15 

10 

5 

0 


All Charts Source: BNP Paribas 



61 


Central Bank Watch 

Interest Rate 

EUROZONE 

Current 

Rate 

Minimum Bid Rate 1.00 

US 

Fed Funds Rate 0 to 0.25 

Discount Rate 0.75 

JAPAN 

Call Rate 0.10 

Basic Loan Rate 0.30 

UK 

Bank Rate 0.5 

DENMARK 

Lending Rate 1.05 

SWEDEN 

Repo Rate 0.25 

NORWAY 

Sight Deposit Rate 1.75 

SWITZERLAND 

3 Mth LIBOR Target 

Range 

CANADA 

0.0-0.75 

Overnight Rate 0.25 

Bank Rate 0.50 

AUSTRALIA 

Cash Rate 4.00 

CHINA 

1Y Bank Lending 

Rate 

BRAZIL 

5.31% 

Selic Overnight Rate 8.75% 


Date of Last 

Change 

-25bp 

(7/5/09) 

-75bp 

(16/12/08) 

+25bp 

(18/2/10) 

-20bp 

(19/12/08) 

-20bp 

(19/12/08) 

-50bp 

(5/3/09) 

-10bp 

(14/1/10) 

-25bp 

(2/7/09) 

+25bp 

(16/12/09) 

-25bp 

(12/3/09) 

-25bp 

(21/4/09) 

-25bp 

(21/4/09) 

+25bp 

(2/03/09) 

-27bp 

(22/12/08) 

-50bp 

(22/7/09) 

Next Change in 

Coming 6 Months 

No Change 

No Change 

+25bp 

(Mar/May) 

No Change 

No Change 

No Change 

-5bp 

(Mar) 

+25bp 

(1/7/10) 

+25bp 

(Mar/May) 

+25bp 

(Sep) 

No Change 

No Change 

+25bp 

(4/5/10) 

+27bp 

(Q3) 

No Change 

Comments 

The combination of an insipid economic recovery and low inflation 

points to no conventional tightening, i.e. refi rate hikes, in 2010. 

The FOMC will end its purchases of mortgage-backed securities 

and agency debt by 31 March. It will maintain the funds rate at 0 

to 0.25% for an extended period and will probably raise the 

discount rate again after the next FOMC meeting in March. 

The BoJ could expand its liquidity provisions in order to 

cooperate with the government in countering deflation and the 

yen’s appreciation. 

We expect the MPC to reengage in asset purchases from 

August onwards. 

We expect the lending rate to fall further. The timing will depend 

on foreign exchange reserve developments. 

Given a further improvement in the economy, the Riksbank now 

intends to deliver its first hike in the summer or early autumn. 

We expect it in July. However, if the stress in financial markets 

intensifies, the Riksbank is likely to wait until September. 

Domestic economic conditions warrant further rate hikes as 

early as March. But the Norges Bank is now more cautious and 

uncertain about external developments ahead and therefore 

might wait until May, also given weaker-than-expected data 

since the last rate decision. 

By relaxing its commitment to prevent currency appreciation, the 

SNB is de facto tightening policy and has kept the ball rolling 

towards an eventual increase in rates. The strong franc remains 

the biggest hurdle to the first hike. 

The BoC’s conditional commitment is set to expire at the end of 

June. However, downside risks to activity remain, namely an 

expected slowdown in US growth and CAD strength. We see 

rates on hold through the summer and autumn and expect the 

first hike in Q4 2010. 

Following March’s rate hike, above-trend economic growth, the 

lack of spare capacity and the RBA’s desire to get rates to an 

“average level” suggest the cash rate will be raised further. 

The latest two RRR hikes are likely to mark the start of a series 

of more concrete measures to tighten policy. The first hike in key 

policy rates is expected in Q3 when the CPI rate is forecast to 

exceed 3%. However, given the authorities' rising caution about 

excess credit, an earlier move cannot be ruled out. 

The BCB frontloaded monetary easing by cutting rates by 

500bp. Given signs of a stabilisation of the Brazilian economy 

and an improvement in global conditions, we expect the BCB to 

remain on hold for a long period. 

Change since our last weekly in bold and italics 

For the full EMK Central Bank Watch please see our Local Markets Mover 



62 


FX Forecasts* 

USD Bloc Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

EUR/USD 1.40 1.36 1.32 1.27 1.30 1.32 1.34 1.36 1.36 1.36 1.36 

USD/JPY 93 97 100 108 110 115 120 118 116 114 112 

USD/CHF 1.04 1.05 1.10 1.16 1.15 1.15 1.16 1.15 1.18 1.18 1.19 

GBP/USD 1.59 1.49 1.39 1.31 1.38 1.42 1.46 1.49 1.49 1.51 1.53 

USD/CAD 1.07 1.09 1.13 1.15 1.11 1.09 1.06 1.04 1.02 1.05 1.08 

AUD/USD 0.86 0.85 0.84 0.84 0.87 0.90 0.92 0.92 0.92 0.93 0.92 

NZD/USD 0.72 0.70 0.68 0.67 0.66 0.66 0.68 0.69 0.72 0.69 0.67 

USD/SEK 7.07 7.35 7.42 7.64 7.38 7.27 7.16 6.84 6.76 6.91 7.06 

USD/NOK 5.79 6.10 6.14 6.30 6.15 5.91 5.67 5.51 5.44 5.51 5.59 

EUR Bloc Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

EUR/JPY 130 132 132 137 143 152 161 160 158 155 152 

EUR/GBP 0.88 0.91 0.95 0.97 0.94 0.93 0.92 0.91 0.91 0.90 0.89 

EUR/CHF 1.45 1.43 1.45 1.47 1.49 1.52 1.55 1.57 1.60 1.61 1.62 

EUR/SEK 9.90 10.00 9.80 9.70 9.60 9.60 9.60 9.30 9.20 9.40 9.60 

EUR/NOK 8.10 8.30 8.10 8.00 8.00 7.80 7.60 7.50 7.40 7.50 7.60 

EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 

Central Europe Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

USD/PLN 2.80 3.09 3.30 3.19 3.15 3.03 2.84 2.94 2.79 2.72 2.65 

EUR/CZK 26.0 26.2 26.2 25.8 25.2 25.5 25.0 24.7 24.3 24.0 23.9 

EUR/HUF 265 280 278 265 260 255 250 260 255 255 255 

USD/ZAR 8.00 8.20 8.30 8.50 8.40 8.50 8.40 8.20 7.80 7.80 7.50 

USD/TRY 1.48 1.53 1.58 1.55 1.60 1.58 1.55 1.50 1.43 1.45 1.45 

EUR/RON 4.30 4.30 4.40 4.35 4.40 4.30 4.20 4.00 3.90 3.80 3.75 

USD/RUB 30.51 31.84 30.59 29.42 28.19 27.10 26.02 25.82 25.29 25.88 26.84 

EUR/PLN 3.92 4.20 4.35 4.05 4.10 4.00 3.80 4.00 3.80 3.70 3.60 

USD/UAH 8.9 8.4 8.6 8.7 8.5 8.3 7.9 7.5 5.5 5.3 5.4 

EUR/RSD 92 105 95 93 90 87 85 87 90 86 87 

Asia Bloc Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

USD/SGD 1.37 1.36 1.36 1.34 1.33 1.32 1.31 1.30 1.30 1.30 1.30 

USD/MYR 3.31 3.28 3.26 3.20 3.18 3.15 3.13 3.10 3.10 3.10 3.10 

USD/IDR 9000 8800 8700 8600 8500 8400 8300 8200 8100 8000 8000 

USD/THB 32.70 32.50 32.30 32.00 31.70 31.50 31.30 31.00 31.00 31.00 31.00 

USD/PHP 45.50 45.00 44.50 44.00 43.50 43.00 42.70 42.50 42.00 42.00 42.00 

USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 

USD/RMB 6.83 6.83 6.72 6.62 6.57 6.52 6.47 6.42 6.37 6.32 6.27 

USD/TWD 30.70 30.50 30.30 30.00 29.70 29.50 29.30 29.00 29.00 29.00 29.00 

USD/KRW 1120 1090 1070 1050 1030 1020 1010 1000 1000 1000 1000 

USD/INR 45.00 44.00 43.00 42.00 41.00 40.00 39.00 38.00 38.00 38.00 38.00 

USD/VND 19000 19500 20000 20500 20500 20500 20500 20500 16000 16000 16000 

LATAM Bloc Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

USD/ARS 3.89 4.20 4.10 4.20 4.25 4.35 4.45 4.50 4.60 4.70 4.80 

USD/BRL 1.90 1.90 1.80 1.75 1.75 1.80 1.80 1.85 1.85 1.85 1.85 

USD/CHL 505 530 525 530 530 535 535 535 540 540 540 

USD/MXN 13.00 13.75 13.10 12.50 12.50 12.50 12.50 12.50 12.25 12.25 12.00 

USD/COP 1900 2100 2050 2000 2000 2050 2100 2100 2150 2150 2200 

USD/VEF (Priority) (1) 2.59 2.59 2.59 2.59 2.59 2.59 2.59 2.59 5.30 5.30 5.30 

USD/VEF (Oil) (1) 4.60 4.60 4.60 4.60 4.60 4.60 4.60 4.60 8.00 8.00 8.00 

Others Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

USD Index 79.19 81.91 84.85 88.70 86.73 86.04 85.28 83.79 83.46 83.47 83.46 

*End Quarter 

(1) Following the devaluation of the VEF, there is now an official ‘priority’ exchange rate and a so-called ‘oil’ exchange rate used for certain transactions 


Foreign Exchange Strategy DD Month 2009 


www.GlobalMarkets.bnpparibas.com 

63

Market Coverage 

Market Economics 

Paul Mortimer-Lee Global Head of Market Economics London 44 20 7595 8551 paul.mortimer-lee@uk.bnpparibas.com 

Ken Wattret Chief Eurozone Market Economist London 44 20 7595 8657 kenneth.wattret@uk.bnpparibas.com 

Luigi Speranza Head of Inflation Economics, Eurozone, Italy London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.com 

Alan Clarke UK London 44 20 7595 8476 alan.clarke@uk.bnpparibas.com 

Eoin O’Callaghan Inflation, Eurozone, Switzerland, Ireland London 44 20 7595 8226 eoin.ocallaghan@uk.bnpparibas.com 

Gizem Kara Scandinavia London 44 20 7595 8783 gizem.kara@uk.bnpparibas.com 

Dominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.com 

Brian Fabbri Chief Economist North America New York 1 212 841 3633 brian.fabbri@americas.bnpparibas.com 

Julia Coronado Senior US Economist New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.com 

Anna Piretti US, Canada New York 1 212 841 3663 anna.piretti@americas.bnpparibas.com 

Ryutaro Kono Chief Economist Japan Tokyo 81 3 6377 1601 ryutaro.kono@japan.bnpparibas.com 

Hiroshi Shiraishi Japan Tokyo 81 3 6377 1602 hiroshi.shiraishi@japan.bnpparibas.com 

Azusa Kato Japan Tokyo 81 3 6377 1603 azusa.kato@japan.bnpparibas.com 

Richard Iley Head of Asia Economics Hong Kong 852 2108 5104 richard.iley@asia.bnpparibas.com 

Dominic Bryant Asia, Australia Hong Kong 852 2108 5105 dominic.bryant@asia.bnpparibas.com 

Chan Kok Peng Chief Economist Singapore 65 6210 1946 kokpeng.chan@asia.bnpparibas.com 

Michal Dybula Central & Eastern Europe Warsaw 48 22 697 2354 michal.dybula@pl.bnpparibas.com 

Rafael de la Fuente Chief Economist Latin America ex Brazil New York 1 212 841 3637 rafael.delafuente@americas.bnpparibas.com 

Italo Lombardi Latin America New York 1 212 841 6599 italo.lombardi@americas.bnpparibas.com 

Alexandre Lintz Latin America São Paulo 55 11 3841 3418 alexandre.lintz@br.bnpparibas.com 

Diego Donadio Latin America São Paulo 55 11 3841 3421 diego.donadio@@br.bnpparibas.com 

Interest Rate Strategy 

Cyril Beuzit Global Head of Interest Rate Strategy London 44 20 7595 8639 cyril.beuzit@uk.bnpparibas.com 

Patrick Jacq Europe Strategist Paris 33 1 4316 9718 patrick.jacq@bnpparibas.com 

Hervé Cros Chief Inflation Strategist London 44 20 7595 8419 herve.cros@uk.bnpparibas.com 

Shahid Ladha Inflation Strategist London 44 20 7 595 8573 shahid.ladha@uk.bnpparibas.com 

Alessandro Tentori Chief Alpha Strategy Europe London 44 20 7595 8238 alessandro.tentori@uk.bnpparibas.com 

Matteo Regesta Europe Alpha Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.com 

Ioannis Sokos Europe Alpha Strategist London 44 20 7595 8671 ioannis.sokos@uk.bnpparibas.com 

Bülent Baygün Head of Interest Rate Strategy US New York 1 212 471 8043 bulent.baygun@americas.bnpparibas.com 

Sergey Bondarchuk US Strategist New York 1 212 841 2026 sergey.bondarchuk@americas.bnpparibas.com 

Suvrat Prakash US Strategist New York 1 917 472 4374 suvrat.prakash@americas.bnpparibas.com 

Anish Lohokare MBS Strategist New York 1 212 841 2867 anish.lohokare@americas.bnpparibas.com 

Olurotimi Ajibola MBS Strategist New York 1 212 8413831 olurotimi.ajibola@americas.bnpparibas.com 

Koji Shimamoto Head of Interest Rate Strategy Japan Tokyo 81 3 6377 1700 koji.shimamoto@japan.bnpparibas.com 

Takafumi Yamawaki Japan Strategist Tokyo 81 3 6377 1705 takafumi.yamawak@bnpparibas.com 

Tomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1702 Tomohisa.fujiki@japan.bnpparibas.com 

Christian Séné Technical Analyst Paris 33 1 4316 9717 christian.séné@bnpparibas.com 

FX Strategy 

Hans Redeker Global Head of FX Strategy London 44 20 7595 8086 hans-guenter.redeker@uk.bnpparibas.com 

Ian Stannard FX Strategist London 44 20 7595 8086 ian.stannard@uk.bnpparibas.com 

James Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.com 

Sebastien Galy FX Strategist New York 1 212 841 2492 sebastien.galy@bnpparibas.com 

Andy Chaveriat Technical Analyst New York 1 212 841 2408 andrew.chaveriat@americas.bnpparibas.com 

Emerging Markets FX & Interest Rate Strategy 

Drew Brick Head of FX & IR Strategy Asia Singapore 65 6210 3262 Drew.brick@asia.bnpparibas.com 

Chin Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 chin.thio@asia.bnpparibas.com 

Robert Ryan FX & IR Asia Strategist Singapore 65 6210 3314 robert.ryan@asia.bnpparibas.com 

Gao Qi FX & IR Asia Strategist Singapore 65 6210 3264 gao.qi@asia.bnpparibas.com 

Shahin Vallée Head of FX & IR Strategy CEEMEA London 44 20 7595 8306 shahin.vallee@uk.bnpparibas.com 

Elisabeth Gruié FX & IR CEEMEA Strategist London 44 20 7595 8492 elisabeth.gruie@uk.bnpparibas.com 

Bartosz Pawlowski FX & IR CEEMEA Strategist London 44 20 7595 8195 Bartosz.pawlowski@uk.bnpparibas.com 

For Production and Distribution, please contact: 

Ann Aston, Market Economics, London. Tel: 44 20 7595 8503 Email: ann.aston@uk.bnpparibas.com 

Danielle Catananzi, Interest Rate Strategy, London. Tel: 44 20 7595 4418 Email: danielle.catananzi@uk.bnpparibas.com 

Derek Allassani, FX Strategy, London. Tel: 44 20 7595 8486 Email: derek.allassani@uk.bnpparibas.com 

Martine Borde, Market Economics/Interest Rate Strategy, Paris. Tel: 33 1 4298 4144 Email martine.borde@bnpparibas.com 

Editors 

Amanda Grantham-Hill, Interest Rate Strategy/Market Economics, London. Tel: 44 20 7595 4107 Email: amanda.grantham-hill@bnpparibas.com 

Nick Ashwell, FX/Market Economics, London. Tel: 44 20 7595 4120 Email: nick.ashwell@uk.bnpparibas.com 

BNP Paribas Global Fixed Income Website 

www.globalmarkets.bnpparibas.com 

Bloomberg 

Fixed Income Research BPCM Market Economics BPEC 

Interest Rate Strategy BPBS Forex Strategy BPFR 

64

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