MARKET MOVER - BNP PARIBAS - Investment Services India

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US: Wealth Fell, Deleveraging Continued in Q2 • The latest Flow of Funds accounts indicate that household wealth fell in Q2, largely in line with the decline in equity indexes. Chart 1: Net Worth Fell in Q2 • Total domestic debt increased in the first half of the year as continued private sector deleveraging was more than offset by federal, state and local government borrowing. • Debt ratios have fallen significantly from their peaks at the beginning of 2008. Nevertheless, consumers remain cautious in their spending, focusing primarily on necessities. • The business sector data for Q2 indicate companies’ persistent caution with regard to investing in expansion or hiring more workers. Source: Reuters EcoWin Pro Chart 2: Total Debt Rose as Governments Borrowed to Finance Deficits The Federal Reserve’s Flow of Funds accounts for Q2 2010 showed a drop in household net worth on the back of stock market declines Household net worth declined USD 1.52trn to USD 53.5trn in Q2, driven mainly by capital losses on equity holdings. Meanwhile, real estate values picked up slightly in Q2 as tax incentives pushed house prices higher. Broad equity indexes dropped 11.4% in Q2 but have advanced 9.1% since then – suggesting net worth will increase in Q3. As shown in Chart 1, household net worth as a percent of disposable personal income declined for the first time since the troughs reached in Q1 2009 and is now back below levels seen in 1995 (before the start of the internet bubble in equity prices). The likelihood of house prices stagnating in H2 and the possibility of below-potential GDP growth in the coming quarters have interrupted the recovery in net worth and flattened the outlook for consumer spending. Private sector deleveraging continued in Q2 at roughly the same pace as the beginning of the year The data indicate that private sector deleveraging continued at a rapid pace in Q2. As shown in Chart 2, expansion in public sector borrowing more than offset the contraction in private sector credit in Q1 and Q2. Federal, state and local governments borrowed to finance their massive budget deficits. Household borrowing contracted 2.3% in Q2, an acceleration from the 1.7% fall in Q1 as both mortgage and consumer credit posted sizable declines. Non-financial corporations increased their borrowing by 3.8% in Q2 following a 5.2% rise in Q1 2010 as firms tapped the bond market in size. Source: Reuters EcoWin Pro However, the noncorporate sector reduced its borrowing by a similar amount and overall the business sector was neutral on aggregate borrowing. The financial sector continued to deleverage at a much faster pace than other sectors, with net borrowing declining 7.1% after a 7.5% drop the prior quarter (the pace of decline has nonetheless slowed from over 10% in 2009). Debt ratios have fallen significantly from their peaks at the beginning of 2008. Nevertheless, consumers remain cautious in their spending, focusing primarily on necessities Consumers continued to reduce their debt, largely by defaulting on their credit cards and mortgages. In fact, the quarterly government data on commercial banks suggest charge-off rates on credit cards reached their all-time highs in Q2, rising to 10.7% of banks’ average loan balance. The Federal Reserve Financial Obligation Ratio (FOR), which includes automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance Yelena Shulyatyeva 23 September 2010 Market Mover 6 www.GlobalMarkets.bnpparibas.com
and property tax payments, dropped to levels last seen in 2000. In the meantime, the ratio of total household debt to annual disposable personal income declined in Q2 to 1.2, below its peak of above 1.3 at the beginning of the last recession (Chart 3). Both measures suggest consumers improved their balance sheets and could be closer to returning to their previous spending habits. However, the Financial Obligation Ratio probably overstates the improvement as it assumes consumers can refinance all their debt at current low rates, which we know is not the case owing to tight credit and underwater mortgages. Indeed, recent surveys indicate consumer optimism remains at levels historically associated with recession (Chart 4). According to the latest Beige Book report, consumers’ “emphasis [is] on necessities and lowerpriced goods”. Given that equity and house prices are unlikely to appreciate much in the near term (indeed, we expect house prices to decline at least 5% from current levels), we expect US consumers’ cautious stance to continue until at least the end of 2012. At that point, the deleveraging that has been weighing so heavily on growth will have progressed significantly further. The Flow of Funds data in Q2 for the nonfinancial corporate business sector show companies’ persistent caution with regard to investing in expansion or hiring more workers Recent incoming data have confirmed that the recovery continues, although at a very moderate pace. Apart from consumers’ reluctance to spend, economic growth has been dampened by businesses’ reluctance to reinvest their fast-growing profits. The Q2 Flow of Funds data for the nonfinancial corporate business sector indicate that the ratio of liquid assets to short-term liabilities is little changed at 49.8%, down only slightly from 50.8% at the end of last year. Meanwhile, employment growth has slowed to a pace below that required to absorb population growth, also a reflection that businesses are loath to expand. In addition, the latest Beige Book report indicated that capacity utilisation remains below pre-recession levels. While we saw doubledigit growth in equipment and software investment earlier this year, “capital spending plans for manufacturers and firms in other industries generally indicate little change or modest increases in coming months”. While the longest recession since the Great Depression officially ended in June 2009 according to the National Bureau of Economic Research, the latest Flow of Funds accounts suggest businesses and consumers have yet to regain their confidence. We therefore see below-trend growth for another Chart 3: Debt Ratios Continued to Fall Source: Reuters EcoWin Pro The FOR includes automobile lease payments, rental payments on tenantoccupied property, homeowners' insurance and property tax payments. Chart 4: Consumers Remain Cautious Source: Reuters EcoWin Pro Chart 5: Companies Cautious to Invest Source: Reuters EcoWin Pro year as the most likely outcome even factoring in significant monetary stimulus. Monetary easing is expected to largely offset the drag on growth from fiscal tightening over the next two years and the pace of any acceleration in growth will be driven in large part by the state of the deleveraging cycle. Yelena Shulyatyeva 23 September 2010 Market Mover 7 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Euromoney Interest Rates Survey 201
Page 3 and 4: ECB on a different page… …but i
Page 5: developments and is prepared to pro
Page 9 and 10: directly to effect outright purchas
Page 11 and 12: Services also on the slide The ‘f
Page 13 and 14: inflation rate is calculated exclud
Page 15 and 16: closer to a more normal level” to
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
Page 37 and 38: Table 1: BNP Paribas Carry Analysis
Page 39 and 40: have been happy to buy the roll to
Page 41 and 42: Technical Analysis - Interest Rates
Page 43 and 44: Trade Reviews Options, Money Market
Page 45 and 46: ond market attracted huge swathes o
Page 47 and 48: warning to Greek banks that it migh
Page 49 and 50: Chart 2: EUR/SEK - major support be
Page 51 and 52: Economic Calendar: 24 Sep - 1 Oct G
Page 53 and 54: Economic Calendar: 24 Sep - 1 Oct (
Page 55 and 56: Key Data Preview Chart 3: US ISM Po
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Key Data Preview Chart 7: US Consum
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Key Data Preview Chart 11: Japanese
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Key Data Preview Chart 7: UK CIPS M
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Economic Calendar: 4 - 29 October 4
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Next week's T-Bills Supply Date Cou
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Economic Forecasts GDP Year 2010 (%
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Market Coverage Market Economics Pa
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MARKET MOVER - BNP PARIBAS - Investment Services India

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