MARKET MOVER - BNP PARIBAS - Investment Services India

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Norway: Cautious Approach Chart 1: Policy Rates (%) • The Norges Bank kept its policy rate at 2.00% at its September meeting, in line with market expectations. • The statement accompanying the decision had a slightly dovish tone compared to the last one, with inflation described as “low”. • In terms of external developments, the Bank flagged up weaker growth expectations for the US and eurozone. • We believe the chances of a rate increase in December have fallen. We now expect the next hike in Q1 2011. Source: Reuters EcoWin Pro Chart 2: Real GDP (% y/y) Rates on hold The Norges Bank kept its policy rate at 2.00% at its September meeting, consistent with its projections back in June. The statement accompanying the decision had a slightly dovish tone compared to the one in August. In the opening paragraph, the Norges Bank acknowledged that inflation is low and although activity is increasing, there is “still some spare capacity in the economy”. The fact that interest rates are low in other advanced economies also motivated the Norges Bank to keep the policy rate unchanged this time round. Cautious on external developments In terms of external developments, although the Bank mentioned stronger than expected growth in its main trading partners in H1, it also noted that: • “growth prospects in the US have been lowered”; and • “slightly slower growth is also likely in the euro area ahead”. Uncertainty regarding the global economic outlook remains a cause of concern for the Norges Bank. In August, the statement merely stated that the outlook for the US economy is “more uncertain”. The recent assessment showed that the Norges Bank is more sure that growth will weaken in the US while its expectations for the eurozone are not so perky either. Lower rates justified One interesting addition to the statement was the Norges Bank’s assessment of household debt and house prices. It noted that “the low interest rate level in Norway has not triggered an increase in household Source: Reuters EcoWin Pro debt growth so far and the rise in house prices is moderate”. We believe this is one of the reasons the statement had a somewhat dovish tone compared to the previous release. Given they were singled out in the statement, developments in household debt and house prices will be important to watch, to help gauge the likely action of the Norges Bank in the coming months. In the in-depth assessment, there were also some interesting details. The Norges Bank noted that “new information may indicate that inflation in the coming months will be slightly lower than projected in June”. We believe this is a hint that a downward revision in the inflation forecasts will come in the new Monetary Policy Report in October. But in terms of the outlook for growth, the assessment was that “overall activity in the Norwegian economy seems to be expanding approximately in line with the projections” made three months ago. What next? Overall, although the Norges Bank once again noted that the interest rate should be “gradually brought Gizem Kara 23 September 2010 Market Mover 14 www.GlobalMarkets.bnpparibas.com
closer to a more normal level” to guard against the risk of future financial imbalances, the statement did not give any hint that this is to be done soon. In its indepth assessment, where the Norges Bank laid out its arguments for why interest rates should be kept low, it said that expectations that interest rates in other countries will “remain low for a prolonged period” also “point in this direction”. Recent economic releases suggest growth will accelerate in the quarters ahead. Positive developments on the consumer side suggest a pickup in consumer spending in the coming quarters. Consumer confidence has continued to build and the downward trend in retail sales seems to have turned (Chart 3). On the production side, manufacturing output has strengthened. Still-loose financial and monetary conditions are supportive for investment and therefore production. Although a weak start to the year suggests contraction in overall investment in 2010, we expect it to gradually increase in the second half of the year. Given the key policy rate is still low compared to what a ‘neutral’ rate should be in Norway, we expect further rate hikes. But, despite a more positive domestic outlook, the expected slowdown in the global economy will limit any acceleration in growth. We previously expected the next hike to be delivered, at the earliest, at the end of this year. Back in June, the Norges Bank’s quarterly policy rate projections suggested the next rate hike would come in December, with a 50% probability. Chart 3: Private Consumption & Retail Sales Source: Reuters EcoWin Pro Chart 4: Manufacturing Confidence & Mainland <strong>Investment</strong> (% y/y) Source: Reuters EcoWin Pro Overall, the September statement was slightly more dovish than we had expected. Given moderate growth in Norway, our expectation of a slowdown in its main trading partners and policy rates likely remaining low for an extended period in the US, eurozone and UK, we believe the chances of a rate hike in December have fallen. We expect the next increase to come in Q1 2011. Gizem Kara 23 September 2010 Market Mover 15 www.GlobalMarkets.bnpparibas.com
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Page 3 and 4: ECB on a different page… …but i
Page 5 and 6: developments and is prepared to pro
Page 7 and 8: and property tax payments, dropped
Page 9 and 10: directly to effect outright purchas
Page 11 and 12: Services also on the slide The ‘f
Page 13: inflation rate is calculated exclud
Page 17 and 18: point advance in the June Tankan. P
Page 19 and 20: US: Belly of the Curve is Rich, but
Page 21 and 22: US: A Carry Trade with Extra Potent
Page 23 and 24: MBS: Remain Underweight, GNM CBRs U
Page 25 and 26: EUR: Re-Enter Flatteners on 5y/10y
Page 27 and 28: EGBs: Market Update & Top Trade Ide
Page 29 and 30: EUR Covered Bonds: Market Update
Page 31 and 32: GBP Curve Opportunities Update •
Page 33 and 34: Table 1: BNP Paribas' Inflation For
Page 35 and 36: Table 3: BNP Paribas' Inflation For
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Page 39 and 40: have been happy to buy the roll to
Page 41 and 42: Technical Analysis - Interest Rates
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Economic Forecasts GDP Year 2010 (%
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