MARKET MOVER - BNP PARIBAS - Investment Services India

Market Economics | Interest Rate Strategy | Forex Strategy 20 September 2012
Market Mover
Market Outlook 2-3
Fundamentals 4-17
• Eurozone Inflation: Introducing the 4-6
CLIIP
• Ireland: What to Expect When You Are 7-8
Expecting
• Spain: Inching Closer to a Request for 9
Aid
• France: Ratification and the
10
Ramifications
• UK Inflation: No Pressure 11-12
• US Housing: New Channels for Policy 13-14
• Japan: The Eastern Fiscal Cliff 15-17
Interest Rate Strategy 18-36
• US: A Short Respite, That's All 18-20
• MBS: Shorter Empirical Durations 21
Under QE
• Too Steep, Too Fast? The Case of the 22-23
1y Forwards
• QE Impacts on Spread Sector Relative 24-26
Value
• EUR: Liquidity Spread Compression at 27
an End
• EMU Debt Monitor: Trade ideas 28-29
• JGBs: Increase in Issuance
30-31
Unavoidable
• Global Inflation Watch 32-35
• Trade Reviews 36
FX Strategy 37-40
• CAD: A Leader in the Commodity Bloc 37-38
• Adding USD Shorts: Ease into Long 39-40
GBPUSD
Commodity Markets Strategy 41
• Commodity Market Outlook 41
Forecasts & Calendars 42-58
• One-Week Economic Calendar 42-44
• Key Data Preview 45-53
• Four-Week Calendar 54
• Treasury & SAS Issuance 55-56
• Central Bank Watch 57
• Economic & Interest Rate Forecasts 58
• FX Forecasts 59
Contacts 60
www.GlobalMarkets.bnpparibas.com
We’d like to inform readers that this is the final edition of
Market Mover. Both it and Local Markets Mover will be
replaced with new, more focused publications from next week.
Macro Matters will cover global market economics, Global
Rates Plus will present our strategy for the major rates
markets and Latam Sniper and CEEMEA Sniper will collate
our trade ideas for the Latin American and CEEMEA rates,
credit and FX markets. FX Weekly will present our global
foreign-exchange views and trade ideas.
• As far as monetary policy in the advanced economies is
concerned, the die has largely been cast for now. The
major central banks are embarking on a new round of
‘easing’, albeit in various guises.
• With these policy measures in train, attention will settle
more on the underlying macroeconomics of these major
economies in the coming months.
• Our latest global forecasts revise down growth, albeit not
everywhere. US growth has been edged up; our eurozone
forecast has been revised down, as has China.
• For now, we would go with the Treasury bull-flattening
move, overweighting the 10y sector (vs. 5s and the back
end), as it tends to outperform on an RV basis, even if
10s30s flatten.
• Longer term, open-ended QE from the US and the ECB’s
bond buying should help support risk assets, such as
equities, so we expect the US and core eurozone curves
to steepen heading into 2013.
• Market sentiment and positioning has dominated FX
markets since the FOMC. We expect the Fed’s
commitment to ease policy to support the commodity
currencies and weigh on the USD.
Market Views
Current 1 Week 1 Month
UST 10y T-note Yield (%) 1.75 ↔ ↑
2y/10y Spread (bp) 150 ↔ ↑
EGB 10y Bund Yield (%) 1.57 ↓ ↔
2y/10y Spread (bp) 153 ↓ ↔
JGB 10y JGB Yield (%) 0.80 ↔ ↔
2y/10y Spread (bp) 70 ↔ ↔
FX EURUSD 1.2953 ↑ ↑
USDJPY 78.33 ↓ ↓
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.
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
The die has been cast in
favour of global monetary
easing
As far as monetary policy in the advanced economies is concerned, the die
has largely been cast for now. The major central banks are embarking on a
new round of ‘easing’, albeit in various guises.
In the US, the easing is coming from the Federal Reserve’s conditional
commitment to expand its balance sheet until it sees a sustained
improvement in labour-market conditions. Meanwhile, in the eurozone, the
European Central Bank has made a somewhat different commitment with its
OMT bond-buying programme. Still, it is a potentially unlimited one in terms
of size and duration and involves the further expansion of its balance sheet.
The veil of sterilisation behind which the bank is hiding cannot really obscure
the fact that it is monetary easing. We expect the ECB to sprinkle a rate cut
on top of its current policy mix in December.
In Japan, the BoJ this week announced a further JPY 10trn expansion of its
asset-purchase programme. Meanwhile, in the UK, the Bank of England is
still putting into practice its July asset-purchase extension and we expect
more from it in November.
Table 4: Economic Forecasts (% y/y)
Our latest forecasts revise
up the US (a bit) …
2010 2011 2012 2013 2014 2012
Q2 Q3 Q4
US
GDP 2.4 1.8 2.2 2.1 2.7 2.3 2.3 1.7
CPI 1.6 3.2 2.1 2.2 2.0 1.9 1.7 2.1
Core CPI 1.0 1.7 2.1 1.9 2.2 2.3 2.0 2.0
Eurozone
GDP 2.0 1.5 -0.4 0.2 1.2 -0.5 -0.7 -0.5
CPI 1.6 2.7 2.5 2.0 1.5 2.5 2.5 2.5
Core CPI 1.0 1.4 1.5 1.6 1.6 1.6 1.6 1.5
Japan
GDP 4.5 -0.8 2.2 0.6 0.2 3.2 1.5 1.3
CPI -0.7 -0.3 0.1 0.0 2.0 0.2 -0.4 0.1
US-Like Core CPI -1.2 -0.9 -0.4 -0.1 2.1 -0.5 -0.5 0.0
China
GDP 10.4 9.2 7.4 8.0 7.5 7.6 7.1 7.3
CPI 3.3 5.4 3.0 3.6 3.5 2.9 2.1 3.2
Source: BNP Paribas
With these policy measures in train, attention will settle more on the
underlying macroeconomics of these major economies in the coming
months. Our view on how they will fare is fleshed out in detail in our new
Global Economic Outlook. The clue is in the title: Soft-boiled recovery.
To summarise, in the US, we think the outlook has improved a little of late,
largely as a result of the Fed’s action. But growth is expected to be close to
trend over the next few years, which doesn’t give much scope for a
significant improvement in the labour market. So, we think the Fed will keep
on expanding its balance sheet, lifting it by as much as USD 1.5trn. The key
risk to the economy is probably the fiscal cliff, which we expect to be
resolved in a sensible and relatively timely fashion.
… and revise down the
eurozone
In the eurozone, things are, of course, more complex, with more moving
parts. Overall, the growth outlook in the eurozone is worse than at the time
of our July forecast. We now only expect growth of 0.2% in 2013. Surveys
suggest that the contraction in output should bottom this year. But as the
PMI surveys this week, especially the French numbers, highlight, there
remain risks that the downturn could become more protracted.
David Tinsley 20 September 2012
Market Mover
2
www.GlobalMarkets.bnpparibas.com

Spain set to present its
new budget next week
Risks to the eurozone from the periphery also prevail. The Spanish
government is scheduled to present its new budget next week, which should
be a stepping stone on the road to an agreement on financial aid, paving the
way for OMT/ESM bond purchases. But macro and political slippage is a risk
here, as it is throughout the periphery.
In the UK, the recent data outturns have been looking stronger and we
expect a very solid growth rate in Q3. But the bar has been set high when it
comes to dissuading the Monetary Policy Committee (MPC) from expanding
QE again, and the Committee looks set to keep the faith that underlying
inflationary pressures are soft, even if the headline rate is bubbling up.
China will be stronger in
2013, but there are risks
that the downturn has a
larger structural element
The outlook for inflation
hasn’t changed much
For now, go with the bullflattening
move in
Treasuries
It would be remiss in any discussion of the global outlook not to mention
China. Growth here looks softer than expected and we do not expect it to
bottom until later this year. We expect growth to come back up to 8% in
2013, but there are risks that embedded in the slowdown is a more structural
story depicting overcapacity and competitiveness.
All told, then, the global economy is weaker than our July forecasts. For
inflation, though, the outlook hasn’t changed much. Weaker growth in some
parts of the world is offsetting supply shocks, leaving headline inflation rates
little different.
Near term, the reversal in the Treasury markets in the past few sessions has
caused many to question whether the sell-off and steepening that happened
on the back of the Fed’s QE announcement have already run their course.
We think this is only a short-lived retracement, driven in part by transient
factors, such as profit taking, the buyback schedule and Treasury supply in
the 2y, 5y and 7y sectors next week. For these reasons, for now, we would
go with the bull-flattening move, overweighting the 10y sector (vs. 5s and the
back end), as it tends to outperform on an RV basis, even if 10s30s flatten.
In the core eurozone markets, fundamental conditions favour a further
limited rally near term. We still see room for lower yields and flatter curves.
We are, therefore, maintaining our recommendation of being long Bunds in
duration terms. As far as liquidity spreads are concerned, they look very tight
at the moment. Core markets, in particular, now look cheap in ASW terms.
Longer-term monetary
loosening should support
risk assets and curve
steepening
Sell the USD into the rally;
we expect the dollar to
decline
Bye-bye, Market Mover
Longer term, open-ended QE from the US and the ECB’s bond buying
should help support risk assets, such as equities, so we expect the curve to
steepen heading into 2013.
In the FX market, investors have failed to leap on the Fed’s aggressive
announcement as a catalyst to establish new short USD positions. To the
contrary, investors have been trimming their risk-on positions and buying the
greenback. Our FX positioning analysis suggests that investors are currently
holding relatively light positions, suggesting the recent sell-off may be short
lived. We expect the USD to weaken against the commodity currencies in
the months ahead and favour long NZDUSD positions. In Europe, we expect
improving sentiment to continue to support EURCHF. Meanwhile, we expect
GBPUSD to rally substantially this year, but are waiting for a better
opportunity to establish a long position.
Our very first issue of Market Mover noted that the rebound from the Asian
crisis owed “a good deal to easy monetary policy in the US and Europe”. We
can only hope that our new, more focused global and regional publications
from next week will be able to make a similar claim before too long.
David Tinsley 20 September 2012
Market Mover
3
www.GlobalMarkets.bnpparibas.com

Eurozone Inflation: Introducing the CLIIP
• Consumer price inflation is determined by a
mix of demand-pull and cost-push factors, as well
as broader financial and monetary conditions.
Chart 1: Eurozone Core and Headline Inflation
• We have created a Composite Leading
Indicator of Inflationary Pressure (CLIIP) for the
eurozone, designed to provide an indication of
the outlook for core inflation in the months ahead.
• Our indicator suggests that disinflationary
pressure will dominate in the coming months.
A composite leading indicator can be a useful tool
when gauging the likely future direction of an
economic variable of interest. We have created a
Composite Leading Indicator of Inflationary Pressure
(CLIIP), which standardises and combines a
selection of the numerous influences on inflation into
a single data series, providing a summary measure
of underlying inflationary pressure.
Choosing a reference indicator
Any leading indicator needs a reference indicator – a
series the leading indicator aims to predict and
against which its performance can be assessed.
Measures of underlying consumer prices, such as
the core HICP, attempt to strip out the most common
temporary disturbances to prices by excluding
consumer energy and food prices from the index. For
this reason, HICP core inflation tends to be more
stable than the headline measure and allows for
examination of the underlying trends in pricing
behaviour. For this reason, we have chosen to make
it our reference indicator.
Chart 1 shows the behaviour of core and headline
inflation over the past 15 years and demonstrates
core’s relative stability. By the core HICP measure,
underlying inflation in the eurozone has averaged
1.5% y/y since 1997.
Our composite leading indicator
We have drawn on OECD methodology in creating
our indicator 1 . The 10 time series we have selected
have predictive power for consumer price inflation
and can be categorised as indicators of cost-push
pressure on prices, of demand-pull price pressure
and indicators of financial conditions. Unless
otherwise stated, all relate to the eurozone.
Source: Reuters EcoWin Pro
The cost-push components
The components we include to capture supply-side
price pressures include both surveys and hard data.
We include the manufacturers’ selling-price survey
conducted as part of the European Commission’s
monthly business and consumer survey and the
Markit input price PMI as two forward-looking
measures of pipeline price pressures. Unit labour
costs are included as a measure of domestic input
price pressure, labour being an input to production.
The PPI is included to capture factory-gate prices. A
weaker euro increases the cost of imports to euro
countries, so we include the ECB’s EER-40 real
effective exchange rate (inverted) to capture
imported inflation.
Demand-pull components
To measure the extent to which consumer and
company demand are exerting upward pressure on
prices, we include eurozone industrial production as
a proxy for economic activity. To capture the strength
of global demand, we include world trade volumes.
To gauge the strength of domestic consumer
demand, we use unemployment (inverted) and the
DG ECFIN consumer financial conditions survey,
which indicates consumers’ optimism about their
income prospects.
Financial component
We include the BNPP Financial and Monetary
Conditions Indicator (FMCI) as a broad measure of
the tightness of financial conditions in the eurozone.
The FMCI is inverted for inclusion in the CLIIP, as
tighter monetary conditions are inflation negative.
1 http://www.oecd.org/dataoecd/37/42/42495745.pdf
Catherine Colebrook 20 September 2012
Market Mover
4
www.GlobalMarkets.bnpparibas.com

The methodology
All of the above indicators can be expected to impact
consumer price inflation with varying lags. For
example, monetary conditions can be expected to
affect prices with a lag of 1-2 years, according to
ECB analysis 2 . Shocks to producer prices tend to be
passed through more quickly, within 6-8 months.
Furthermore, these relationships are not static over
time; in general, the lags look to have shortened
since the early 2000s.
3.0
2.5
2.0
1.5
1.0
Chart 2: Core HICP and the CLIIP
Core HICP (%y/y)
We chose the optimal lag to apply to each of the
variables according to our view of the current speed
of transmission, using correlation coefficients as a
guide.
To prepare the series for aggregation, we remove
any seasonality or trends, invert where appropriate,
smooth the series using a Hodrick-Prescott filter, and
normalise them (ie. such that they all have mean 0
and standard deviation 1). The series are all given
equal weight in the aggregation. The final stage is to
transform the index such that it has a mean and
standard deviation equal to core inflation, so that the
index corresponds to an implied level of annual core
inflation. The final CLIIP index is plotted against core
inflation in Chart 2.
Over the sample from January 2003 to present, the
CLIIP has a correlation coefficient with core inflation of
0.67. Between January 2009 and May 2012, the
coefficient rises to 0.84. The components with the
quickest transmission to core inflation are the consumer
financial conditions survey and unemployment, both of
which are incorporated into the index with a lag of six
months. The index thus gives us a leading indicator for
inflationary pressure that extends six months into the
future.
What does it tell us about inflation?
Table 1 lists the components of the leading indicator
for core inflation, their level at the last available CLIIP
data point (which corresponds to expected inflation in
January 2013) and whether each is positive,
negative, or neutral for inflation on that horizon. The
components are listed in normalised form, meaning
that a value above zero implies a positive impact on
core inflation; a negative number means a negative
impact.
As we might expect given that the eurozone
economy is currently operating below potential,
components indicative of economic slack and a
subdued labour market are all inflation-negative: the
level of unemployment, consumer expectations, and
unit labour costs are all at levels consistent with
disinflationary pressure.
2 http://www.ecb.europa.eu/pub/pdf/other/mb201005en_pp85-98en.pdf
0.5
0.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Reuters EcoWin Pro
Chart 3: Unemployment and IP CLIIP Components
3
2
1
0
-1
-2
-3
-4
Unemployment (6-m lag)
-0.4
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Reuters EcoWin Pro, BNP Paribas
Core HICP (% y/y, RHS)
Financial and monetary conditions are also inflationnegative;
given that the monetary policy transmission
mechanism is still impaired, several years after the
credit crunch, this is not surprising either.
Recent large falls in the euro can be expected to
push up import prices and, therefore, domestic
inflation in the eurozone in the coming months,
although at 0.2 – less than one standard deviation
away from its the long-run average – the normalised
level of the REER component suggests the effect will
3 All component data are normalised, while the CLIIP itself corresponds to a
level of annual core inflation
CLIIP
Industrial
Production (12-m lag)
Table 1: CLIIP Component Breakdown
Component Jan 2013
Value 3
2.6
2.1
1.6
1.1
0.6
0.1
Implication for
Inflation
Consumer financial conditions survey -1.8 Negative
Unemployment rate -1.7 Negative
BNPP FMCI -0.8 Negative
Unit labour costs -0.8 Negative
PMI input prices -0.3 Negative
Real effective exchange rate 0.2 Positive
Manufacturers’ selling price expectations 0.3 Positive
Eurozone industrial production 0.4 Positive
World trade 0.5 Positive
Producer price index 0.6 Positive
CLIIP (normalised value) -1.05 Negative
Source: BNP Paribas
Catherine Colebrook 20 September 2012
Market Mover
5
www.GlobalMarkets.bnpparibas.com

e moderate in comparison with other component
effects.
The index suggests that the key sources of price
pressure over the next 6 months will be the external
economic environment and upstream prices.
Producer price inflation has been falling since mid-
2011, but the effects of previous rapid price
increases are still feeding through to prices
downstream. Although now slowing, global growth
was robust last year, and this is also still feeding
through to prices.
At first glance, the fact that the eurozone industrial
production component is inflation positive seems
counter-intuitive, considering the levels of other
output gap-related components. Its positive influence
on inflation stems from two related factors: first, it
affects inflation with a much longer lag than other
drivers, and second, industrial production had initially
picked up post-crisis, as global growth accelerated in
late 2010 and early 2011. Although industrial
production growth has slowed subsequently, this
period of above-trend production is still feeding
through to inflation (Chart 3).
Putting all of this together, the CLIIP suggests that,
overall, underlying inflationary pressure is set to
moderate. The normalised index has a value of -1.05
in January 2013, which is consistent with core
inflation of 1.1% y/y (versus the current level of
1.5% y/y). The CLIIP suggests that inflationary
pressure peaked at the start of 2012, and is now on a
declining trend.
Of course, idiosyncratic factors, such as the
methodological change applied to seasonal items
from last year, or adjustments to national VAT rates
and structure, mean that core inflation does not
always move according to underlying price pressure.
But in terms of the underlying fundamentals,
inflationary pressure in the eurozone is moderating.
Conclusion
Our composite leading indicator provides a quickreference
guide to the level of inflationary pressure
building in an economy. Inflation in the eurozone is
currently above target, but our indicator suggests
that, on balance, the macroeconomic conditions that
have provided support to prices of late have already
begun to ease and that we should see more
evidence of this in the core HICP index in the coming
months.
Catherine Colebrook 20 September 2012
Market Mover
6
www.GlobalMarkets.bnpparibas.com

Ireland: What to Expect When You Are Expecting
• June’s eurozone summit raised expectations
of a refinancing of the Irish banking bailout.
• Ireland’s ‘prize’ from such a deal is potentially
high, with the gross cost of the bailout to date at
around 40% of GDP.
• Any deal will not necessarily lower its debt-to-
GDP ratio from its 120% peak, but it would alleviate
Ireland’s funding needs significantly over the next
few years.
• It is ultimately in the interest of most of the
parties in the negotiations to produce a deal that
will move Ireland towards sustainable finances.
• It could also serve as a carrot for other
programme countries, alongside the usual sticks.
Statement of intent
The statement following the eurozone summit at the
end of June was widely considered to be very
favourable to Ireland. Specifically, the end of the first
paragraph contained a commitment to “examine the
situation of the Irish financial sector with the view of
further improving the sustainability of the wellperforming
adjustment programme.” That was
interpreted as meaning that once a single supervisory
framework for eurozone banks was up and running, the
Irish could hope for some of the huge cost of their bank
bailout to be refinanced ex post through the ESM.
Big envelopes
The potential ‘prize’ from any re-engineering of the
Irish bailout is considerable. The total gross cost to the
Irish state of the banking-sector bailout is put at
EUR 62.8bn. That is equivalent to a staggering 40% of
the island’s GDP. At this size, the IMF considers the
bailout to be the second-costliest banking crisis in an
advanced economy since the Great Depression, at
least, only pipped to the post – just – by Iceland.
Table 1 sets out the key elements of the bailout to
date. Around half of the increase in total funds injected
into the Irish banks is due to the promissory notes
injected into Anglo Irish, which is now part of the Irish
Bank Resolution Corporation Limited – in effect, the
legacy wind-down bank for Anglo and Irish
Nationwide. The other half of the bailout injections are
from government and national pension-fund (NPRF)
equity and capital injections.
In terms of the possible scope of any agreement
between the Irish government and the eurozone/ECB
to restructure the broad bank bailout, it makes sense
Table 1: Gross Costs of Ireland’s Bank Bailout
EUR bn Body Date Total
Government preference shares NPRF 2009 7
Promissory notes/special
investment shares Exchequer 2010 31.6
Ordinary share capital Exchequer 2009 4
Ordinary share capital NPRF 2010 3.7
Total pre-PCAR 2011 46.3
Following PCAR 2011
Capital Exchequer 2011 6.5
Capital NPRF 2011 10
Post-PCAR 2011 16.5
Total costs 62.8
Source: NTMA
to think about the promissory notes as distinct from
the other injections.
As a reminder, the EUR 31bn of promissory notes
injected into IBRC are just that, a promise from the
Irish sovereign to pay the bank cash each year. The
repayment schedule for these notes stretches out over
the next 20 years. For the next decade, the Irish
government is on the hook for EUR 3.1bn a year.
The full value of the promissory notes has already been
booked and is one of the major causes of the increase
in Ireland’s debt-to-GDP ratio from 64.9 % in 2009 to
92.2% in 2010. But in a cashflow sense, the funds for
the notes will be raised in the year they fall due. And
they will be a significant cash call on the sovereign
each year, with EUR 3.1bn equivalent to 1.9% of the
country’s GDP. Or, to put it another way, with an IMFforecast
Exchequer cash deficit for 2013 of EUR
14.5bn, funding the notes will be very costly indeed.
The promissory note issue is intimately bound up with
the provision of emergency liquidity assistance (ELA)
owed to the Central Bank of Ireland. Emergency
liquidity assistance is a form of monetary financing
that the ECB requires to be paid off post haste. The
idea is that as the promissory notes pay up, so they
will be used to pay down the EUR 42.3bn in ELA
funding to the IBRC. The key role of the ECB in
discussions on the promissory notes can, therefore,
be appreciated, as any re-jig of the notes impinges on
commitments to wind down the ELA.
In the past, the ECB has shown some reluctance to
re-open discussions on the promissory notes, though
it appears this reticence has softened somewhat of
late. ECB executive board member Joerg Asmussen
said at a press conference last week that the bank
was in “intense discussions” on the Irish programme.
That shows, at least, that the ECB is engaging on the
issue, which is a change from its previous stance.
David Tinsley 20 September 2012
Market Mover 7
www.GlobalMarkets.bnpparibas.com

There are a number of possibilities with regard to a
refinancing of the promissory notes. Following the
June summit, it appeared that a loan from the ESM
could be extended to the IBRC to replace the notes
and that this loan could, in turn, be used to pay down
the ELA. However, reports this week suggest the Irish
government is now looking at refinancing the notes via
a long-term, possibly 40-year, Irish bond. This would
then be pledged as collateral with the ECB.
The advantage of such an approach is that it could be
easier to clear through the hurdles of eurozone
decision making. For Ireland, the sovereign would still
be on the hook for the full value of the notes, meaning
the only reduction in the debt-to-GDP ratio would
come from savings on servicing costs. But the
repayment on the bond would be kicked a long way
down the road and the financing requirements over
the next few years would be alleviated significantly.
Until a single supervisory framework is agreed within
the eurozone, the option for the Irish of mutualising the
debt is not on the table, so any sort of deal – ESM loan
or Irish bonds – will keep the debt on the Irish balance
sheet. And it is not clear that agreement will be reached
on supervision as fast as the European Commission
would like. In addition, the next payment on the
promissory notes is not due until the end of March
2013. So, although the original ambition was to reach
an agreement on a refinancing of the Irish banking
sector by the time of the late October EU summit, there
may be some temptation for both Ireland and the
eurozone/ECB to let that deadline slip a little.
Equity injections
The position on equity injections is not particularly any
clearer. EUR 28.2bn has been injected into the other
(non-IBRC) banks since 2009, split between the
Exchequer and the national pension fund. At face
value, a deal in which the ESM takes over these stakes
and reimburses Ireland has the potential to knock 18
percentage points off of the debt-to-GDP ratio.
But the problem here is that even when the ESM is in
a position to take over the liability for these
investments, it is not clear at what value it would do
so. This is because the value of the government’s
stake in these banks has fallen sharply. The national
pension fund’s investments in AIB and Bank of
Ireland, for example, were valued at EUR 8.1bn at
the end of June 2012, compared with the
EUR 20.7bn it invested.
post refinancing too. But it may be difficult for the
Irish to pass on the full extent of the loss to the ESM
retrospectively, as presumably this would be a pretty
tough sell for eurozone governments to their
respective electorates, even if the absolute numbers
involved were not that large.
Implications for sustainability
In its recent Article IV, the IMF usefully considers
what a deal to refinance the promissory notes plus
an equity injection from the ESM would do for debt
sustainability. The conclusion is that it could lower
the debt-to-GDP ratio in 2013 to around 105% of
GDP from a baseline 119.3%. And the debt-to-GDP
ratio would be below 80% by 2020.
That would be an impressive achievement, but the
IMF analysis is predicated on the ESM paying the full
value of the equity injection into the banks. On the
assumption that the ESM paid something closer to
current valuations, the peak debt-to-GDP ratio might
instead fall to 112% of GDP, which might look like a
disappointment on announcement.
A carrot to add to the sticks?
On current official troika forecasts, Ireland will be
running a primary surplus in 2014 of 0.9%,
increasing to a whopping 7.0% in 2017. And with the
benefits of a deal on the promissory notes coming
through along the debt trajectory via savings on debtservicing
costs, a deal that looks a little disappointing
in terms of headline numbers could still make a
substantial contribution to moving the country
towards debt sustainability.
But even under a deal on the bank bailout, especially
a ‘disappointing’ one in headline terms, Ireland will
continue to remain more open than it might like to
disappointments on growth or fiscal slippages in
future years. There, in effect, lies the rub. With
Ireland having been feted so strongly in its delivery of
programme targets, it must ultimately be very much
in the interest of the eurozone partners and the ECB
to come up with a deal that robustly cements the
success of the programme, albeit without providing
incentives for back-sliding. A successful Ireland
would be a useful carrot to add to the numerous
sticks that are wielded at programme countries. So
while a final deal will doubtless be complex, we
would expect it to make a substantial contribution to
reducing Ireland’s financing needs medium term.
Now, it could be argued that were the ESM in
existence back at the time of these re-caps it would
be carrying the loss and so should do so in an ex-
David Tinsley 20 September 2012
Market Mover 8
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Spain: Inching Closer to a Request for Aid
• Spain is inching closer to asking for financial
aid, but it is still only inching.
• In the latter half of next week, Spain will have
an action-packed agenda. It will present its 2013
budget, announce its planned structural reforms
and publish the result of the bottom-up bank audit.
• Any subsequent bailout could be marketed as
a reward for reform and potentially remove part of
the stigma attached to a bailout.
• The country’s regional elections on 21 October
could be the last obstacle to a request.
• Any unused funds from the bank bailout could
be used to lower the final cost of a sovereign
bailout, something that should please Germany.
The timetable seems clearer
After last weekend’s Ecofin meeting and confirmation
of the publication date of the bottom-up review of the
Spanish banks, the timeline of and next steps
towards a Spanish aid request seem to be clearer.
After the Eurogroup meeting, Spanish Economic
Minister Luis de Guindos said Spain would present
its 2013 budget on 27 September. The day after, the
Spanish government will present its planned
structural reforms and, more importantly, the results
of the bottom-up audit of the Spanish banks.
The next Ecofin meeting on 8 October will assess the
reforms and the budget, as well as the details of the
bank reforms to be undertaken as soon the first
tranches of the bank bailout funds are released.
Comments over the weekend suggest that the
reforms and budget have been drafted with some
knowledge or help from the IMF and the European
Commission. Indeed, IMF chief Christine Lagarde
confirmed that an IMF team has been in Madrid
since early last week, helping on the 2013 budget.
First the reforms, then the support
So, as things currently stand, Spain seems to be
already negotiating the conditions under which it
might receive financial aid. Spain will only request
help after it has put in place the reforms required by
the Troika, as it would be easier to sell domestically.
ESM and ECB support will be seen more as a
reward for the government’s efforts and less as a
punishment for fiscal laxity.
The big question is the exact timing. As Spain will
face its biggest liquidity squeeze at the end of
October, when EUR 20bn of bonds mature, Spain
still has some time to play. But it is not unlimited and
there are several factors that could influence the
timing of a request.
France and Italy are among those countries with the
bigger interest in Spain asking for aid before the EU
summit on 18-19 October. Germany, in contrast,
would prefer, for domestic reasons, to postpone any
Spanish bailout, especially as Spain will first receive
the initial tranches of its bank recapitalisation funds.
And Spanish Prime Minister Mariano Rajoy seems
more inclined to wait until after the 21 October
regional elections in Galicia and the Basque country.
The latter is not an issue, as his Partido Popular has
little chance of winning there anyway. But Galicia is
Mr Rajoy’s home region and according to the latest
polls, the PP could lose its control. A request before
that vote would be a bitter blow to the campaign and
would be seen as a personal defeat for Mr Rajoy.
Recent comments by members of his party suggest
that Mr Rajoy may be increasingly isolated in his
position, though. So, Spain could end up asking for
support before the elections on 21 October, but after
the Ecofin meeting on 8 October.
Bank bailout funds to soften German resistance
The EU has already set aside EUR 100bn for a
programme to recapitalise the Spanish banks and,
according to the latest reports, their capital needs
may be just EUR 60bn, leaving EUR 40bn over.
Media reports suggest that one possibility could be
for Spain to transfer its unused bank bailout money
to the government. This would please Germany, as it
could be done by changing the MoU for the bank
bailout and would not require parliamentary approval.
However, beyond any possible legal objections, for
ECB intervention to occur, a country either has to be
under a “full programme” or have requested a
precautionary one. So, even if Spain were to go
down this route and the other European countries
were to agree, a new MoU would have to be signed,
with all of the conditions that go with it. And this
might not be enough. Spain’s funding needs for the
next 12 months are close to EUR 180bn. If an ESM
programme were to fund only 50% of Spanish
issuance, this would mean it would need a capacity
of close to EUR 90bn, far more than the EUR 40bn
that might be left over from the bank bailout.
So, the most likely scenario, in our view, is that Spain
will still have to request further financing, even if the
unused bank-bailout funds can be transferred. And
despite having some time left, we think Spain will
request support in October.
Ricardo Santos 20 September 2012
Market Mover
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France: Ratification and the Ramifications
• France is set to ratify the EU fiscal compact in
October and the debt-brake rule after that.
• The ECB’s OMT bond-buying plan is likely to
be well received by French policymakers, though
a possible downgrade of French sovereign debt
by Moody's and a harsh budget will cause some
unease among left-leaning politicians.
• While ratification is not in doubt, President
Hollande will need to solidify his majority ahead
of votes on the 2013 budget and structural reform.
French President François Hollande said right after
the EU summit at the end of June that he was
satisfied with the bloc’s pro-growth pact. He
subsequently decided that he would present the bill
to parliament for ratification together with the EU
fiscal compact, EU banking-union legislation and a
bill on an EU financial transaction tax. On the latter,
Europe is still dragging its feet. The European
Commission’s proposal on the first steps towards
banking union, meanwhile, is far from final, so a vote
here would be premature. However, on 2 October,
parliament should start debating the EU fiscal
compact signed in March and the pro-growth
agreement reached in late June.
Ratification process
While Mr Hollande ran for election on a platform of
renegotiating the fiscal compact, he clearly did not
manage to do so. It had already been signed by his
predecessor, Nicolas Sarkozy, so it could not be
undone. Some of Mr Hollande’s supporters have
indicated that they are reluctant to vote the compact
into law in its current form. The Communists and
supporters of the Left Front’s Jean-Luc Mélenchon
are also likely to vote against it. The president is
trying his best to secure an abstention (if not a
favourable vote) from the Greens. And even a few
Socialists have said they will not approve the pact.
Legislation governing the EU debt-brake rule, which
is required under the fiscal compact, is also due to be
presented to parliament, possibly as soon as 8
October. It requires a separate vote. The EU debtbrake
rule, known in France as the ‘golden rule’, will
not be added to the constitution, but voted into law by
way of a special loi organique. The usual lag
between such a bill being presented and a
parliamentary vote is six weeks (though a fast-track
option does exist). An absolute majority is required
(rather than the usual relative, or simple, majority).
The French Constitutional Court said in August that
going down the loi organique route would be
compliant with the compact and the French
constitution, as Article 34 of the country’s basic law
already states that "the multi-year framework for
public accounts is aimed at balanced accounts." It
says that this framework and the rules applicable to
the annual budget may be set out in a supplementary
loi organique.
Approval is not an issue, as opposition conservative
parliamentarians will vote en masse for ratification and
the ‘golden rule’ for three reasons: (i) they have always
been behind the pact, which they believe to be good for
France, (ii) to underscore that Mr Hollande has done a
U-turn on the issue and (iii) to up the pressure on the
government in the hope that subsequent austerity
measures will boost their chances of winning the 2014
local and 2017 national elections.
Good news and bad news
Mr Hollande would prefer to see this treaty approved
with a majority of his own. We believe he can
achieve this. One thing that may help him convince
his own ranks is the recent OMT announcement. He
said before being elected that then President
Sarkozy should have asked for more involvement by
the ECB in searching for a solution to the euro crisis.
Mr Hollande has not claimed to have played any role
in the ECB’s new policy line. However, the bank’s
change of heart can only help him backstage.
When changing its outlook for Germany and the
Netherlands on 23 July, Moody's said that "by the
end of the third quarter, Moody's will also assess the
implications of these developments [the rising risk of
a Greek exit, the growing likelihood of collective
support for other euro-area sovereigns and stalled
economic growth] for Aaa-rated Austria and France,
whose rating outlooks were moved to negative from
stable in February." Since then, we have had nothing
further. Back in February Moody's said France's debt
metrics, were “among the weakest of France's Aaarated
peers". So, the risk of a downgrade persists
(S&P did just that last January), which may upset
some left-leaning MPs just before they are asked to
approve a framework for future austerity.
Solidifying his majority in parliament
President Hollande will have to submit to parliament
a restrictive 2013 budget and some structural
reforms to improve France’s competitiveness. This
was not highlighted during his campaign. To get
these approved, he needs to ensure that his majority
is solid. The votes on the fiscal compact and the
golden rule will be real tests in this regard.
Dominique Barbet 20 September 2012
Market Mover
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UK Inflation: No Pressure
• UK inflation ticked up in July, raising concerns
that underlying pressures might be firming. The
subsequent drop in August looks reassuring.
• Headline inflation over the rest of 2012 will
certainly be higher than the Bank of England
forecast in its August Inflation Report. But most of
the difference looks to be down to food and
energy.
• The MPC will look through that, giving it room
to carry out more QE in November.
• RPI inflation has specific methodological risks
attached to it. A consultation has been announced
that could see the average gap between RPI and
CPI narrowed significantly.
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Chart 1: UK Headline and core CPI (% y/y)
CPI (% y/y)
Core (% y/y)
02 03 04 05 06 07 08 09 10 11 12
• The timetable for changes next year is tight.
But the ONS and the government appear keen.
Inflation reared its ugly head in July
Inflation reappeared on the radar of UK policymakers
last month after a surprising rise in the CPI annual rate
to 2.6% from 2.4% in June. That was against market
expectations of a decline in annual inflation in July.
One of the worrying things, potentially, about the rise
in inflation in July was the fairly broad-based nature of
the increase. Clothing prices, for example, showed a
smaller fall than usual for the month and contributed
0.05pp to the annual rate increase. And other notable
increases came from recreation and culture. Within
this category, games, toys and hobbies, newspapers
and periodicals and package holidays were sizeable
upward influences. Away from recreation and culture,
restaurants and hotels, alcohol and tobacco and
housing and household services also made small
upward contributions.
With the UK PMI surveys also surprising to the upside
in August, there was a hint that we might be about to
embark on one of the periodic episodes of inflation
anxiety that result in monetary-policy expectations
being revised in a more hawkish direction. For
example, earlier this year high-side inflation releases
in February and March, along with firmer surveys,
resulted in an extension of QE being taken off the
table at the May MPC meeting.
But it went back in its shell in August, mostly
This week’s August inflation release goes some way
to assuaging concerns about underlying inflation. The
annual rate of CPI inflation fell back to 2.5%, a 0.1pp
Source: ONS, BNP Paribas
reduction. On its own of course that still puts inflation
above the level it was at two months ago.
But additional reassurance can probably be gleaned
from that fact that the fall in inflation was fairly broadly
based. Clothing prices rose less this year than last,
contributing 0.04pp to the fall in annual inflation.
Meanwhile furniture and household goods prices
contributed 0.08pp to the annual change and
housing and household services also made a
downward contribution, as a gas and electricity price
rise in 2011 fell out of the calculation. On the upside,
transport prices added upward pressure to the
annual rate, as did recreation and cultural goods.
Higher inflation largely due to energy and food
This fairly widespread fall-off means the reason that
the headline rate of inflation is higher than in June
largely comes down to higher energy and food
prices. The core rate of inflation actually fell in the
August figures to 2.1%, just a shade above the Bank
of England’s 2.0% target for the headline rate.
There have been several developments of late that
mean the headline rate of inflation will finish this year
significantly higher than expected a few months ago.
Most obviously, the price of a litre of petrol keeps
rising. Indeed, petrol prices are now higher than they
have been since early May, even though the sterling
price of a barrel of crude is lower than it was then.
Other recent upside developments include an
announced rise in gas and electricity bills by one
supplier from October and the expectation that food
prices will firm in due course to reflect higher
David Tinsley 20 September 2012
Market Mover
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commodity prices, though the rise in sterling offsets
this effect to some extent.
The MPC will still have room for more QE
The bottom line is that the August BoE forecast for
consumer price inflation of 2.2% in the fourth quarter
of this year is looking a bit of a stretch. Our own
forecast is for the rate in Q4 to average 2.5%.
But because most of the reasons for the upside news
appear to be supply shock-driven price rises in
energy and food, rather than anything more broadly
based, this gives licence to the Monetary Policy
Committee to look through the firmer headline rate.
Average earnings growth remains at or below 2%,
according to the most recent data. And as unit labour
cost growth has been pushed up by falling GDP
alongside still rising employment, we would not expect
that productivity squeeze to last much longer. Indeed,
a big rise in GDP in Q3 should provide an opportunity
for some correction here. So, the underlying position
on domestically generated inflationary pressure from
the labour market is fairly benign.
This all means that on the current constellation of
data, the MPC is still likely to see room for more
quantitative easing at its November meeting, when
the current tranche of buying is completed.
A further downside risk to RPI
Alongside constrained consumer price pressures,
there are further downward risks to the retail price
index (RPI). This is, of course, the index to which
indexed-linked sovereign UK debt is anchored.
Most countries with index-linked debt link their bonds
to some version of a consumer price index. The UK
differs in that the RPI is, in effect, a fairly old, legacy
index that uses what might be called an antiquated
aggregation procedure in some parts of its
construction. The result is that UK RPI inflation,
which also includes a mortgage-based measure of
housing costs, has tended over a long run of data to
average 0.5pp higher than CPI inflation. And since
2010, that difference has been 0.9pp.
A methodological group within the Office for National
Statistics (ONS), the Consumer Prices Advisory
Committee (CPAC), is currently considering the case
for making methodological changes to RPI that will
move it closer in construction to the CPI. A statement
from the National Statistician, alongside the CPAC
3
2
1
-1
-2
-3
-4
Chart 3: UK RPI vs. CPI Inflation (%)
0
1991 1994 1997 2000 2003 2006 2009 2012
Source: ONS, BNP Paribas
average 1991 onw ards
average 2002 onw ards
average 2010 onw ards
minutes released this week, revealed the intention to
put out to public consultation a range of options to
change the aggregation of the RPI. At their most
extreme, this would involve aggregating the RPI
using the same formulae as in the CPI. That could, in
effect, narrow the gap between CPI and RPI inflation
from the aggregation bias to more-or-less zero.
The attraction to the government of such a move is
obvious. Changing the basis on which RPI is
calculated and thereby lowering its rate could, in
principle, save the sovereign GBP 3bn or so a year
in interest costs. At a time of fiscal austerity, this is
nothing to be scoffed at. On the other hand,
changing the nature of the index used for indexlinked
gilts might risk upsetting a key investor
community upon which the government relies for
considerable funding.
Major methodological change cannot be ruled out
The consultation on the changes to RPI will conclude
in late November and we should know by January
how the ONS is going to proceed. Any final decision
to change the RPI index will rest with the Chancellor
of the Exchequer. It is possible that comprehensive
changes to the RPI could come in the February 2013
inflation data, published in March. The timetable
between a decision to go ahead with a change and
publication looks exceptionally tight, however, and a
delay until March 2014 may be possible. But
contingent on the consultation, the ONS and CPAC
appear keen to press ahead with significant changes
to the RPI.
David Tinsley 20 September 2012
Market Mover
12
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US Housing: New Channels for Policy
• The housing sector has been the US
economy’s bright spot in an otherwise
disappointing economic performance in 2012.
Chart 1: Rental Homes on the Rise
• The improvement has not been driven by a
recovery in household formation and demand for
homeownership, which continue to be weak.
• Rather, the rise in rents and decline in home
values have boosted rental yields to the point that
investors have begun to clear excess housing
supply.
• The Fed’s aggressive policies have depressed
yields on safe assets to the point that solid
nominal rental yields are quite attractive.
• Thus, Fed policy is finally reaching housing,
through a less conventional channel, and may
even have a greater impact at the margin than in
the past.
Housing has turned a corner, despite the lack of
demand for homeownership
Housing has been a bright spot in the otherwise
dismal US economic performance this year, raising
hopes that QE might stimulate this critical sector with
greater force now that the sector appears to be turning
a corner. We think monetary policy, indeed, will have
more oomph, but in a different way than it has in the
past.
Single-family home sales are up roughly 10% over a
year earlier, home prices are up in the low-single digits
and measures of excess supply have shown marked
improvement. Yet, this is not a typical story of low
mortgage rates stimulating increased demand. Owneroccupied
housing units have not increased over the
past year and are still down from the peak reached in
2006 (see Chart 1).
There appears to be little demand for homeownership.
Mortgage applications for purchase have been
essentially flat over the past several years (Chart 2).
Despite mortgage rates hitting record lows,
homeownership rates continue to drop, hitting levels
not seen since 1997 (Chart 3), and total outstanding
mortgage debt is still declining as households seek to
deleverage and rebuild home equity. The New York
Fed Quarterly Report on Household Debt and Credit
published at the end of August indicated that
consumer debt continued to decline in Q2, shrinking
by another USD 52bn to USD 11.38trn. Mortgage debt
has been on a constant downward trend since the
financial crisis began in Q3 2008 (see Chart 4). The
Source: Reuters EcoWin Pro
Chart 2: Housing Demand Unmoved by QE
Source: Reuters EcoWin Pro
trend away from homeownership and housing
leverage has continued unabated, despite the Fed’s
aggressive monetary interventions.
We have long been of the view that much of the lack
of demand for housing is probably a structural
phenomenon; younger households need mobility and
liquidity in a weak labour market and have learned the
hard lessons from their parents that housing is hardly
a safe investment. The overall pace of household
formation continues to run below prior norms, driven
by new views on homeownership and the weakness in
the economy. The share of people aged 25-34, the
peak years for household formation, who are living
with their parents remained unchanged at nearly 14%
in 2011, well above the share closer to 11% that
prevailed before the crisis.
Investors are the new homeowners
If there is no demand from housing, what is driving the
improvement? It appears that rents have risen and
home prices have declined to the point where
investors see value in buying real estate for
conversion to rental. While there is no growth in
Julia Coronado and Yelena Shulyatyeva 20 September 2012
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owner-occupied housing units, renter-occupied
housing units have been on a sharp, upward trend,
adding about 1mn per year over the past two years
(Chart 1). Rental yields, calculated as annual rent
divided by home prices, have now reached their
highest levels as far back as we have data, even as
yields on other assets have been declining steadily
(see Chart 5).
As investors seek returns, housing looks increasingly
attractive. A lot of increased activity has come from
cash buyers; the National Association of Realtors
reports that the share of existing single-family home
sales purchased by cash buyers has risen to just
below 30% from 20% a few years ago. Private equity
investors have also been reportedly buying blocks of
homes for rental conversion, although comprehensive
data on this source of demand is unavailable. If prices
remain stable, banks could become more willing to
lend to potential landlords. Indeed, The Wall Street
Journal reported this week that ratings agencies are
exploring rating securities backed by home rental
contracts. A market for securitized rental contracts
could significantly increase the investor demand base.
Broadening the investor/rental market is no simple
task. Some regions have higher rental yields than
others, and each state has its own legal framework for
rental contracts and protections for renter occupants.
Regions that experienced more of a housing boom
and bust, like the South and West, currently offer the
highest rental yields. Despite the complexities
involved, rental yields are increasingly compelling on
the back of negative real yields on safe assets, and
we would expect this market to continue to grow.
A new channel for monetary policy
The Fed has tried valiantly to stimulate housing with
its unconventional policies. It has acquired a net USD
844bn in mortgage securities and roughly USD 1ttrn
in Treasuries since the crisis began. Mortgage rates
have dropped to record lows. Yet, demand for
homeownership remains dismal by historical
standards. It is tempting to conclude that the Fed’s
new efforts will have little-to-no impact on this critical
sector (Chart2).
However, the portfolio balance channel appears to
finally be reaching the housing market. QE has been
quite successful driving down yields on safe assets
and forcing investors into riskier assets, such as
corporate bonds and equities. It appears that housing
is increasingly becoming an important beneficiary as
investors are driven toward the now relatively much
more attractive investment of rental housing. This is
good news from a macroeconomic standpoint, as well,
since increased rental supply will help meet our
expectation of continued growth in rental demand.
Greater investor activity should lead to further stability
Chart 3: Homeownership Is Plunging
Source: Reuters EcoWin Pro
Chart 4: Mortgage Deleveraging Continues
Source: Reuters EcoWin Pro
Chart 5: Housing Is a Great Investment
Source: Reuters EcoWin Pro
or modest gains in home prices, and temper the
recent rise in rents, thereby, relieving upward pressure
on core inflation.
The rise in housing investors will not boost all
segments of the housing market; higher-end suburban
markets are not good candidates for investors seeking
a liquid rental market. However, many middle- and
lower-end neighbourhoods and urban areas should
continue to see improved demand dynamics on the
back of the Fed’s aggressive new policy stance and
may even lead to an increased marginal impact from
their interventions.
Julia Coronado and Yelena Shulyatyeva 20 September 2012
Market Mover
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Japan: The Eastern Fiscal Cliff
• Due to its inability to enact deficit-financing
legislation, the government has decided to
suspend for three months the disbursal of
roughly JPY 5trn in expenditure. While this
should have little economic impact, failure to
enact this legislation by December could trigger
more drastic spending cuts of roughly JPY 7trn
(almost 5.7% of GDP) in December.
• To avoid such a disastrous development, debtfinancing
legislation needs to be enacted as
soon as possible, something that will require
some kind of deal with the opposition LDP. And
here, there are two main possibilities.
• The straightforward deal would be to agree to
dissolve the lower house in exchange for
opposition support for the legislation. This would
mean a snap election by year end (or slightly
thereafter, if Prime Minister Yoshihiko Noda
insists on passing a supplementary budget).
• The other option would be for the LDP to make
its cooperation contingent on an agreement to
forswear using such legislation as a political
trump card, something that would benefit the
LDP should it return to power (as seems likely).
This would leave the dissolution of the lower
house at Prime Minister Noda’s discretion,
essentially pushing the general election back to
next summer.
Budgetary disbursement delayed for first time in
postwar era
Non-essential budgetary spending has been
postponed for the first time in the post-war era. The
government has moved to conserve cash, because
the Diet session was drawing to a close (on 8
September) without action being taken on legislation
authorising the issue of deficit-financing bonds. As
almost half of the spending in the general account
budget is covered by deficit-financing bonds, it will be
impossible to implement the budget as planned
without this key legislation. With the fate of the debtfinancing
bill still uncertain owing to the political
stalemate in the divided Diet, there is a risk that the
government could run out of cash by late October.
Consequently, in an effort to tide things over at least
through November, the government on 7 September
decided to conserve cash by suspending for three
months the disbursal of roughly JPY 5trn in spending.
These funds had been destined for (1) administrative
expenses (telephone and photocopying charges,
etc.), (2) subsidies to independent organisations,
such as national universities, (3) tax-revenue grants
to local governments, and (4) transfers to the special
accounts (including the public pension-fund special
account). To limit the impact on people’s lives and
the economy, all essential spending (social welfare,
defence, reconstruction, etc.) will not be affected.
That said, if the debt-financing legislation remains in
limbo, drastic spending cuts will become inevitable,
resulting in a partial shutdown of government. And
this would have serious ramifications for the
economy and daily life.
US faced government shutdown risk last summer
While one might shudder at the idea of a government
shutdown, it is worth remembering that the US faced
a similar risk last July because of the debt-ceiling
crisis. As in Japan, the US federal budget and the
amount the government can borrow to service the
budget deficits (debt ceiling) are agreed separately.
Congressional authorisation is required whenever the
debt ceiling is raised. In the US, where control of
Congress can often be divided between government
and opposition, negotiations on raising the debt
ceiling ran into difficulty when Democrat and
Republican views on fiscal affairs collided. And for a
while, there was a growing risk that an agreement
might not be reached, which could have resulted not
only in the delayed disbursement of social security
benefits and other payments, but also sovereign
default. While an accord was reached at the eleventh
hour, financial markets were destabilised for a while.
Little economic impact from delaying JPY 5trn
Getting back to Japan, the recent decision to save
roughly JPY 5trn basically involves the delayed
disbursal of funds, though there also is the possibility
that some of this spending might be eliminated
altogether. The targeted administrative expenses and
subsidies to independent organisations could be
axed. Together, this could save the government
roughly JPY 600bn, a fairly insignificant amount in
macro terms (ultimately, we suspect little spending
will actually be cut). The lion’s share of the spending
delays come from transfers to the special accounts
(JPY 2.3trn) and tax-revenue grants to local
government (JPY 2.1trn), which cannot be cut.
Accordingly, as these disbursements will only be
delayed for three months and duly paid out from
December, the economic impact, when averaged out
over the full period, should be pretty neutral.
Ryutaro Kono/ Makoto Watanabe 20 September 2012
Market Mover
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Potential cash shortages ahead
But if the debt-financing legislation remains blocked by
the time December comes, drastic spending cuts and
a partial shutdown of government will be unavoidable.
The impact on the economy would be severe.
Budgetary outlays are prevalent in December. For
example, in December 2011, expenditures exceeded
revenue (excluding government bonds) by almost JPY
7trn (equivalent to roughly 5.7% of Q4 GDP). In the
final quarter of FY2011, revenue exceeded spending
by roughly JPY 2trn in January, but this was followed
by shortfalls of more than JPY 5trn in February and
roughly JPY 10trn in March, for a combined quarterly
shortage of JPY 13trn (equivalent to about 11.1% of
Q1 GDP). As the budget balance this fiscal year will
likely be similar, very drastic spending cuts could
become necessary. Of course, all spending does not
directly affect the economy (delaying transfers to
special accounts absorbs the reserve surpluses
parked in some special accounts). But even if the
amount were reduced by half, the impact on the
economy would be substantial. Currently, with exports
trending lower as a result of the slowing global
economy and with economic support ending from the
eco-car subsidy programme and income transfers to
households in quake-hit areas, we expect the
economy to enter another soft patch from Q3. But if
the deficit-financing bill is not enacted by December,
cuts in government spending will make conditions far
worse than just a soft patch.
Election by year end seems likely
To avoid this, the debt-financing legislation needs to
be enacted as soon as possible. But that is easier
said than done. To win cooperation from the
opposition LDP and New Komeito, Prime Minister
Noda will have to make some kind of deal, and we
see two main possibilities here. The most
straightforward deal under current circumstances and
based on past experience would be to agree to
dissolve the lower house in exchange for opposition
support of the debt-financing legislation and another
vital bill involving electoral reform to rectify vote-value
disparities. As both the DPJ and LDP are slated to
hold leadership elections shortly (the DPJ on 21
September, the LDP on 26 September), followed by
an extraordinary Diet session in early October, such
a deal would likely mean passing the debt-financing
bill and electoral reform in October, then dissolving
the lower house in November for an election by year
end. While this election scenario is probable, there is
a possibility that Prime Minister Noda (who looks set
to be re-elected DPJ head) could put off calling an
election until the last minute, as he is also eager to
enact a supplementary budget. In this case, the
election would be pushed back to January or so.
Another condition for the LDP’s cooperation
The second potential deal involves the LDP making
its cooperation on the debt-financing legislation
contingent on an agreement to forswear using such
legislation as a political trump card, in other words,
Chart 1: Impact of Planned Spending Delays
General account expenditures (excludes outlays relating to construction bonds)
Path if budget is fully implemented
JPY
46.1 trillion
Total revenue if debt-financing bill not enacted (authorized spending total)
JPY 10
trillion +
JPY
38.6 trillion
Spending implemented as of
30 September
(MOF projection was JPY
39.3 trillion on 6 July)
Funding requested by
various agencies:
JPY 10.9 trillion
Path if spending is curbed from
September
Impact (i.e., savings) from spending curbs
*September: (Tax rev enue grants: -JPY 2.2 trillion; subsidies to Japan Health Insurance Assoc.:
-JPY 500 billion; subsidies to independent organizations: -JPY 100 billion)
*October: (Tax rev enue grants: +JPY 700 billion; transf ers to public pension special account:
-JPY 1.1 trillion; subsidies to independent organizations: -JPY 100 billion)
*November : (Tax rev enue grants: -JPY 800 billion; gov ernment subsidization of priv ate education:
-JPY 1.1 trillion; subsidies to independent organizations: -JPY 100 billion)
April May June
July August September October November
Source: MOF, BNP Paribas
Note 1: Projections as of now, figures could change.
Note 2: “Path if budget is fully implemented” incorporates normal management of the budget (including adjusting the timing of transfers to special accounts).
Note 3: “Path if spending is curbed from September” assumes tax revenue grants in November will be handled the same as those in September (the MoF has
indicated it will review this). (Meanwhile, the projected savings of JPY 2.2trn from curbing tax-revenue grants in September includes the normal grants to prefectural
governments worth JPY 1.4trn plus JPY 700bn from forgoing the front-loading of transfers to the special account for local-allocation tax.)
Ryutaro Kono/ Makoto Watanabe 20 September 2012
Market Mover
16
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an agreement that all budget-related bills will be
concurrently approved in the event that the main
budget proposal is enacted. As we pointed out in
Market Mover of 7 September (Japan: Deficit-
Financing Bill Problem), Article 60 of Japan’s
constitution gives precedence to decisions on the
budget by the lower house (but not budget-related
bills). So, in accordance with the spirit of this article,
Diet passage should be automatic for any budgetrelated
bills needed to implement the budget.
A summertime election not out of the question
As to why the LDP might prefer this kind of deal, well,
the party is confident that it can wrest power from the
government at the next election. However, as it will
still lack a majority in the upper house, the stalemate
of a divided Diet is likely to remain until next July, at
least, when half of the upper chamber must stand for
re-election. What this means is that playing the trump
card to force an already winnable general election
means gambling, too, on prevailing in the next upper
house election. If the LDP failed to secure an upperhouse
majority (a real possibility), it would be faced
with the same predicament as it is today, of not being
able to win passage of its budget-related bills. Worst
case, deficit-financing legislation would remain the
opposition’s trump card for bringing down the
government year after year (Japan’s “revolving-door
premiership”). Consequently, the LDP may deem it
more advantageous to forgo a snap election and
focus instead on a deal that forswears for good the
use of budget-related bills as a political football. That
would mean leaving the dissolution of the lower
house to the discretion of Prime Minister Noda, who,
because of his party’s dismal approval ratings, is
eager to delay the election as long as possible. This
would essentially mean hodling the upper and lower
house elections next summer (the lower house’s
term ends in August 2013). The LDP, meanwhile,
could use this time to prepare for both elections
under new leadership. As all of the candidates
running to replace LDP head Sadakazu Tanigaki are
aware of the risks of playing this trump card (it was
used against the LDP when it was in power, and the
LDP has used it to attack DPJ regimes), the
likelihood of the summertime election scenario is not
necessarily small.
Ryutaro Kono/ Makoto Watanabe 20 September 2012
Market Mover
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This section is classified as non-objective research
US: A Short Respite, That’s All
• It did not take long for scepticism to rise in
regards to whether the Fed’s latest actions will
be a lasting cure. It is not surprising that the
markets are having a “let’s think about this”
moment after the heady moves of last week, but
we attribute the pullback mostly to profit-taking
and other transitory factors.
• The underlying theme of the Fed supporting
risk appetite remains strong. We expect rates to
move slightly higher, with the 10yr settling
around 2% in the next couple of months, and
yield enhancement remaining in sharp focus.
• STRATEGY: The backdrop created by the
Fed bodes well for callables and corporates –
and the case for holding on to MBS has been
settled for good. Use the current drop in rates to
establish curve steepeners heading into
October.
5s10s30s Tsy Fly
Chart 1: The Relative Value of the 10yr Is a
Function of the Directional Moves
20
10
0
-10
-20
-30
1.3 1.6 1.8 2.1 2.3 2.6
Source: BNP Paribas
10y Tsy
Chart 2: The 10yr Treasury to Move Back to the
10yr Area
Treasuries, Duration and the Curve
The reversal in the Treasury markets in the past few
sessions has caused many to question whether the
selloff and steepening that happened on the back of
the Fed’s QE announcement have already run their
course. We think this week’s action is but a shortlived
retracement, driven partly by some transient
factors, such as:
2.5
(bp)
2.0
1.5
10y Tsy
1.8%
2.1%
• Profit-taking (after all, the 5s30s steepening
trade has been a winning position for many)
• Heavy buyback schedule through next week,
skewed toward purchases in the long end
(three out of the remaining five operations
are in the bond sector)
• Treasury supply in the 2y, 5y and 7y sectors
next week, which tilts the balance in favour
of flatteners
• Month-end purchases looming on the
horizon.
More troubling, and not as transient, the slew of
headlines about Europe have reminded everyone
that the continent is not out of the woods yet and a
plethora of issues – from the timeline for banking
regulation to Spain’s willingness (or reluctance) to
ask for aid – have yet to be sorted out. This, in turn,
has thrown cold water on the post-FOMC euphoria,
even if the ECB’s actions may have curtailed the tail
risk. Add to that signs of a slowdown in Asia, and
worries about the global picture multiply.
1.0
Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12
Source: BNP Paribas
There is a silver lining in the link to the global story
though: The fact that many markets seemingly
moved in lockstep, giving back some of the post-
FOMC moves, underlines the fact that the Treasury
market alone has not run out of room to sell off here.
It is simply responding to the ups and downs of the
global macro picture, rather than having reached
levels where investors have found tremendous value
and decided to invest in the asset class. This, we
argue, is a bigger factor that far outweighs any of the
technical factors we cited above. The immediate
implication is that, absent negative news from
Europe, the Treasury correction toward higher rates
and a steeper curve should resume, albeit gradually.
So, let’s separate what we expect between now and
the end of next week from the longer-term trend. For
Bülent Baygün / US Interest Rates Strategy Team 20 September 2012
Market Mover
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This section is classified as non-objective research
now, go with the bull-flattening move, overweighting
the 10y sector (vs 5s and the back end) since it tends
to outperform on an RV basis even as 10s30s may
flatten (5s10s flattens more, that’s all) – see Chart 1.
Furthermore, as the curve flattens in a rally, home in
on the sectors with the best rolldown, which, by the
way, is in the 4y to 5y area. As an aside, for those
who can use options, we recommend going long this
sector using options since the strong rolldown more
than offsets the decay, due to theta in structures,
such as the 4y1y ATMF receivers, etc. (See “Too
Steep, Too Fast? The Case of the 1y Forwards”, in
this week’s Market Mover for further details.)
Looking past month-end, our focus will be on a resteepening
of the curve, with rates ratcheted higher
as markets begin to feel the long-term impact of the
Fed’s actions, with risk appetite staying firm. There is
also a local steepening bias heading into the 3y, 10y
and 30y supply over Oct 9-11, but again this will be
secondary to the bigger forces in place, namely the
support of the Fed. We think that the 10y Treasury
can settle in a range from 1.80% to 2.10%, using for
guidance the lull that lasted from late-2011 through
early-2012 (see Chart 2). That was a period of
relative calm in Europe, while the US economy
appeared to show signs of resilience, both of which
proved to be too fleeting.
We do not foresee a runaway selloff beyond those
levels in the next few months, as the road ahead for
Europe will be choppy, even if the tail risk may no
longer be there. As rates rise, we expect the curve
dynamic we alluded to above to remain intact, only in
reverse, with the 10y underperforming on an RV
basis along the curve. As for 10s30s, note that this
sector of the curve steepened by 50bp from their
lows through each of the previous two rounds of QE.
To put things in perspective, so far 10s30s only
moved by about 20bp from their local lows we saw in
summer 2012, ahead of the Fed’s new QE program,
so it has room to go. Our favoured steepener position
remains 5s30s/7s30s though, as we expect the 5y to
just tread water in the 55 to 70bp area, keeping the
7y relatively anchored too.
TIPS
In TIPS, we continue to believe that there is
significant upside potential for breakevens, but we
have been sidelined now for a week, awaiting a
pullback from very rich levels in order to participate
again. We continue to emphasize that trading
breakevens from the short side constitutes too great
a risk for the potential reward, but we are happy to
stay neutral for the time being as breakevens sell off
in order to gain a better entry opportunity in the
future. For now, that means adding on dips in 10yr
breakevens back at 230bp and all the way back to
220bp, should that level arrive. The current level
around 2.50% seems justified, given the Fed’s QE,
but may need some correction in the short run.
Should the 10yr cheapen significantly further
following the auction, we would be buyers on dips.
We also believe that real money may be better
buyers, given the long-run implications of openended
QE and what we believe will be a much
greater flow into inflation products in the months
ahead. The persistent buying on dips that we have
seen convinces us that there is broader demand for
the 10yr.
Short-Term Financing
There are two headline topics in STIR right now: (1)
How fast and how far will Libor rates fall; and (2) Why
is repo still stubbornly high?
The stubborness of repo is actually serving as a soft
floor for 1m Libor rates, so we'll deal with that topic
first. As we said last week, the Fed's decision not to
halt the Treasury sellbacks in the short end has kept
primary dealer inventories of Treasury paper near
historical highs. Primary dealers borrow ~USD 500bn
of cash in the repo markets each day to finance their
books. The build-up of Treasury paper is keeping
upward pressure on Treasury GC repo rates, which
touched above 30bp late last week and are hovering
in the mid-20s now. Once again, this has made carry
on the 2y Treasury note flat to negative. It's a bit of a
head-scratcher as to why some investors prefer
lending cash unsecured at, for example, 15 bp in the
Fed funds market or 12bp for financial CP vs 25bp
collateralized by repo. It speaks not to the lack of
appetite for increasing yield, but to the lack of
fungibility and increased complexity of repo vs these
other markets. These constraints and the impending
quarter-end, no doubt, will keep repo elevated or
push it higher through the remainder of the month.
We do not expect repo to significantly decline
towards the single digits until the Fed ends their
sellbacks at year-end.
The repo effect will keep a soft floor under Libor
rates. The 3mL settings continue to fall by 0.3bp to
0.5bp per day, and are likely headed towards 25bp
by year-end. The slow decline in 1mL has ground to
a halt as – at ~22bp – it is roughly even to slightly
below overnight, secured financing. We do expect
more compression and lower rates in the front end of
the curve, and it is possible that Libor, CP, CDs and
other rates could fall well below repo ahead of yearend,
but we doubt it. Expect more compression in
3s1s and a flattening of the front Eurodollar curve
during the last quarter of 2012.
Agencies
There has been an extraordinary tightening of the
mortgage basis since the Fed confirmed that they will
Bülent Baygün / US Interest Rates Strategy Team 20 September 2012
Market Mover
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This section is classified as non-objective research
be hoovering up subtantially all agency mortgage
origination for the foreseeable future, as part of their
open-ended QE3 program. The intent is to
encourage – or arguably coerce – investors into
allocating out of agency MBS and similarly situated
products, and re-invest by going down in credit or
into equities. Despite the "crowding out" effect, many
investors are captive – in whole or in part – to the
rates market. These include the investment portfolios
of commercial banks, state and local governments,
central banks and portions of pension benefits and
insurance obligations. These investors are
substantially confined to high-quality deeply liquid
assets, such as US Treasuries and sovereign debt,
agency debt and agency MBS, other highly rated
sovereign agency and supranational paper, AAArated
covered bonds, and, in some amount, AA or
better corporate or securitized debt obligations.
Agency MBS have long been a favoured product in
many of these investment portfolios to increase yield.
Although we expect the Treasury curve to continue
steepening in the medium term, yields in maturities
out to 5 years should remain well-anchored, due to
the limited opportunities for diversification, the
shrinking supply of agency debt and the Fed’s
wholesale absorption of MBS. Agency callables and
bullets have now become the standout winners on a
relative value basis among the rates products. For
investors, we strongly prefer callable agencies to
lower and current coupon MBS. Both 10nc2y and
7nc2y berms are projected to outperform FN 2.5 and
3.0s, respectively, over a 6m horizon in this
environment. The 7-year sector of the agency curve
is also the steepest among the rates curves and 5-
year to 7-year agency bullets outperform similarduration
Treasuries and swaps. Repo for agency
paper vs Treasuries is now flat to a measly 1-2bp.
Amid declining agency debt supply and increased
buying as captive investors are forced out of MBS,
we see further agency to Treasury spread
compression ahead.
MBS
Our economists expect QE3 MBS purchases to
continue at the USD 40bn per month pace at least
until year-end 2013, and possibly into 2014. Including
reinvestments of maturing agency debt in the Fed's
portfolio into agency MBS, the net demand from the
Fed would exceed USD 500bn over the next 12
months. The issuance of the TBA deliverable bonds
where Fed purchases have been concentrated was
negative USD 172bn over the past 12 months,
roughly a negative USD 14.3bn per month average.
Thus, the Fed demand for MBS is particularly high in
relation to the negative supply of the bonds that the
Fed has traditionally purchased.
The QE3 announcement has driven MBS to very
expensive levels, and mortgages are more expensive
than Treasuries and to a greater extent than during
QE1. While there was some pullback after the
massive initial tightening, MBS, once again,
outperformed Treasuries in Wednesday’s rally. In
addition, with the announcement of QE3, volatility
has declined. The decline in vol has helped improve
hedged adjusted carry across the coupon stack.
Empirical durations have also come off, improving
MBS carry.
While we expect MBS to continue to outperform
Treasuries, riskier assets may perform even better.
The Fed would effectively be buying MBS from
money managers who are overweight MBS and
GSEs that have been forced to reduce their
portfolios. Rather than explicit sales of MBS, we
mainly expect reinvestments of mortgage
prepayments and, due to declining agency debt
outstanding, into other products. We estimate that
money managers could experience USD 150bn to
USD 200bn in prepayments and agency debt
outstanding could decline between USD 50bn to
USD 200bn over the next year.
Table 1: Market Going Through Some Growing Pains, but Risk Appetite Should Be Supported in the
Medium Term
Treasuries, Duration and the Curve Current pullback to persist through month-end, so turn neutral/slightly bullish tactically overweighting 10s vs. 5s and 30s.
Long-term bear-steepening trend to resume, so stay nimble. Buy 4y1y receiver to benefit from lofty rolldown.
TIPS
We like breakevens coming out of the 10yr auction and hope to add to our positions again on significant dips.
Short-Term Financing
Repo is likely to stay elevated through year-end and provide a soft floor to short-term funding rates. Expect compression in
3s1s as 3mL declines faster than 1mL
Agencies
We strongly recommend 7nc2y to 10nc2y berms as alternatives to current and lower coupon TBA mortgages based on
their projected outperformance.
MBS
Maintain MBS overweight as demand is strong and supply is negative. Carry has improved with declining volatility and
lower empirical durations.
Source: BNP Paribas
Bülent Baygün / US Interest Rates Strategy Team 20 September 2012
Market Mover
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This section is classified as non-objective research
MBS: Shorter Empirical Durations Under QE
• QE3 is likely to bring in lower empirical
durations akin to QE1, due to stability in rates
and mortgage prices.
• The 15bp to 30bp state-based upfront g-fee
amounts to a small 3bp to 6bp rate increase,
based on the IO multiple of 5 used by the FHFA.
With the Fed bringing an element of stability to rates
and particularly mortgage prices, empirical durations
have begun to decline. Chart 1 shows the ratio of
empirical-to-trader hedge ratios for 3.5s and 5s; we
chose just those two coupons as representatives to
provide a clearer picture of the contrast between lower
and higher coupons. While the ratios for all coupons
are declining, the declines seem to be of a greater
magnitude in higher coupons. Plus, the ratios are
greater than one in 4.0s and lower coupons, but lower
in 4.5s and higher coupons.
A similar trend was observed during QE1, when
empirical hedge were ratios shorter than trading ratios,
particularly for higher coupons (Chart 2). We show 4.5s
and 6s as representatives since the current coupon
was much higher during QE1 than at present. Lower
empirical durations would improve the hedge carry of
MBS. The decline post-QE3 announcement has also
helped to improve hedge adjusted carry across the
coupon stack (Chart 3).
We continue to expect MBS to outperform
Treasuries, despite the richening, given steep
demand from the Fed against a negative net supply.
Clearly, carry is already attractive and should
improve further with lower durations and volatility.
However, as we discuss in an accompanying article,
”QE3 Impacts on US Spread Products”, riskier asset
classes, such as corporates, may perform even
better than MBS.
State-Based G-fee
FHFA announced that it would potentially implement
an additional state-level g-fee (guarantee fee), starting
in 2013, for five states: Connecticut (20bp), Florida
(20bp), Illinois (15bp), New Jersey (20bp) and New
York (30bp). This g-fee proposal is under comment
period for 60 days. Lenders may pass the upfront fee
as an adjustment to the interest rate on the borrower’s
loan. The FHFA used the suitable IO multiple of 5 in
their example to make the adjustment to the annual
rate from upfront fee. This amounts to a small 3bp to
6bp rate increase, depending on the state.
Chart 1: Empirical vs Trader Hedge Ratios – QE3
1.2
1.0
0.8
0.6
0.4
0.2
-
Empirical Vs Trader 3.5s
Empirical Vs Trader 5s
Jan-12 Mar-12 May-12 Jul-12 Sep-12
Source: BNP Paribas
Chart 2: Empirical vs Trader Hedge Ratios – QE1
2.0
1.5
1.0
0.5
Empirical Vs Trader 4.5s
Empirical Vs Trader 6s
-
Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10
Source: BNP Paribas
1M Hedged Adjusted Carry (ticks)
8
6
4
2
0
Chart 3: Hedge Carry Has Improved
-2
FNMA 3.0s FNMA 3.5s
FNMA 4s FNMA 4.5s
-4
FNMA 5s FNMA 5.5s
7/2 7/16 7/30 8/13 8/27 9/10
Source: Yield Book, BNP Paribas
The g-fee estimation is based on three factors. The
first is the expected number of days that it takes an
Enterprise to foreclose and obtain a marketable title to
the collateral backing a mortgage in a particular state.
The second is the average per-day carrying cost that
the Enterprises incur in that state. The third is the
expected, national average default rate on singlefamily
mortgages acquired by the Enterprises. To
estimate the magnitude of the state-level differences
in the average total carrying cost, the estimation
assumes that loans originated in each state will default
at the national average default rate.
Timi Ajibola 20 September 2012
Market Mover
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This section is classified as non-objective research
US: Too Steep, Too Fast? The Case of the
1y Forwards
• Buoyed by ECB and Fed support, risk
markets have pulled back from the depths of
despair that prevailed in midsummer, with
Treasuries losing their risk premium and the
curve steepening in response.
• While we fully respect the underlying
steepening dynamic from the belly of the curve
out to the 30yr sector, we do not expect this
bias to exert itself in maturities 5 years and
under. Yet, this is what seems to have
happened in the recent selloff, creating
compelling opportunities to capitalize on.
• STRATEGY: Buy 4y1y ATMF receiver. Also
initiate 8y1y vs 9y1y flattener.
The Preamble, a.k.a as the Trade Rationale
Steepeners from the belly of the curve to the 30yr
sector have been a core position that we have
advocated for the past month or so, and the market
dynamic has made this a profitable trade (see Chart 1).
Since Monday though, the post-FOMC euphoria seems
to have given way to some soul-searching, as
scepticism about Europe re-emerged and investors
chose to take some chips off the table. However, given
the game-changing nature of the Fed’s actions, coupled
with the fact that the ECB’s actions have curtailed tail
risk in the continent, we expect risk appetite to remain
firm and the upward trend in rates to resume once we
go past the heavy buyback schedule of these two
weeks and month-end flows move out of the way.
Even then, there is little reason to expect yields in
maturities less than five years to follow suit and rise
abruptly as the 10yr conceivably pulls close to the 2%
area and the curve steepens in response to the better
tone in the markets. The linchpin of our argument is
the Fed’s professed policy of staying the course in low
rates through mid-2015. From where we stand now,
not only does this anchor rates for the first three years,
but quite possibly for a year or two afterward since the
Fed does not expect to embark on an aggressive
tightening cycle. In other words, the rates market
should not be quick to price in a quick succession of
rate hikes beyond mid-2015, especially in the absence
of a sustained improvement in the employment
outlook, which does not appear to be in the cards, at
least in the next few months, even by the Fed's own
Chart 1: Curve Has Steepened Across the Entire
Maturity Spectrum
3.5
(%)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Source: BNP Paribas
70
(bp)
40
10
-20
7/20/12
9/20/2012
2y 3y 5y 7y 10y 30y
Chart 2: The 4y1y and 5y1y Offer the Best
Rolldown Over a 1-Year Horizon
1Y1Y
2Y1Y
Source: BNP Paribas
3Y1Y
4Y1Y
5Y1Y
projections. This suggests that rolldown strategies
targeting the belly of the curve may be quite attractive.
6Y1Y
1y Rolldown
Chg in 1y Rolldown
Chart 3: The Vol-Adjusted Rolldown of the 4y1y
Is at an Historically Attractive Level
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
07 08 09 10 11 12
Source: BNP Paribas
Rolldown to Vol Ratio
7Y1Y
8Y1Y
Current Level: 0.7607
9Y1Y
10Y1Y
Bulent Baygun 20 September 2012
Market Mover
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This section is classified as non-objective research
What Are the Trades?
With an eye towards finding the time frame that
contains the largest amount of projected rate hikes, or
the highest risk premium for rate hikes, we look at the
term structure of 1yr rates on various forward dates.
The biggest jump in 1yr rates is between years three
and four, as shown in Chart 2. In other words, the 4y1y
rate offers the best rolldown, at 60+ bp over one year,
with the 5y1y coming in a close second. This area is the
sweet spot for rolldown and suggests one of two
strategies: 1) receive the 4y1y (or 5y1y) rate outright; or
2) initiate a 3y1y/4y1y flattener (or a 4y1y/5y1y
flattener). Note that the 1yr rolldown of the 4y1y is the
entry level for the 3y1y/4y1y position, etc. However,
keep in mind that despite the attractive rolldown, there
is considerable directional risk in the former trade in the
event that the market gets caught in a frenzied
response to some positive developments. As for the
curve trade, the entry level is not exactly very attractive
in historical terms, and the rolldown of the 3y1y/4y1y
flattener (i.e., the difference between the 1yr rolldown of
the 4y1y and 3y1y positions) is a less-than-compelling
15bp over one year and is negative for the 4y1y/5y1y
flattener (see the second set of bars in Chart 2).
On the other hand, the strong rolldown in the 4y1y and
5y1y rates does suggest a compelling option trade using
receivers. As vol is cheaper on the 4y1y, we will focus on
that structure. Chart 3 shows that the vol-adjusted
rolldown of the 4y1y structure is very attractive compared
to where it has been in the past. Much more to the point,
thanks to the strong rolldown, the 4y1y receiver
appreciates in value as it ages, indicating that the
rolldown effect outweighs the time decay. Therefore, one
gets paid to stay in the position, even in the absence of
any rally in the interim. In short, buy the 4y1y as a
prudent way to express the view that too much Fed
tightening has been priced in too soon in the 4 to 5yr
sector. Table 1 shows the potential returns for the
receiver over a one-year horizon under various rate
scenarios.
Chart 4: Has The Curve Steepened to an Extreme
in the 8yr to 10yr Sector?
40
7
(bp) 9y1y - 8y1y (LHS) (%)
30
20
10
0
-10
-20
00 01 02 03 04 05 06 07 08 09 10 11 12
Source: BNP Paribas
Fed Fund Target
Table 1: Rolldown Offsets Time Decay in the 4y1y
Receiver (1yr Horizon)
Change in
Yields -25bp -15bp Unchanged 15bp 25bp
Return 73% 56% 33% 12% -0.5%
Source: BNP Paribas
Last, if you notice in Chart 2, the 8y1y/9y1y flattener
currently trading at about 20bp has very small negative
rolldown as it ages over one year into a 7y1y/8y1y
position. While the premise of a flattener so far out on
the curve would not really be based on mispriced rate
hike expectations, one thing that stands out is that, for
some reason, this part of the curve is almost as steep
as it was heading into and through the last tightening
cycle (see Chart 4). Therefore, from a pure valuation
perspective, we argue that being in the 8y1y/9y1y
flattener offers a good risk/return proposition, giving
low-cost exposure to a bull-flattening of the curve in
case the growth outlook disappoints or Europe flares up
again. This is not a trade that will make your year, but it
could easily move 5-10bp in your favour without
threatening much downside.
6
5
4
3
2
1
0
Bulent Baygun 20 September 2012
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This section is classified as non-objective research
QE Impacts on Spread Sector Relative Value
• Steep MBS demand from the Fed in the face
of negative net MBS issuance has driven MBS
to negative Treasury OASs. While we expect
MBS to further outperform Treasuries, riskier
asset classes, particularly corporate bonds,
with their similar credit quality and liquidity, are
likely to do even better.
• A broad range of global debt investors who
employ benchmarks will face asset shortages in
the face of this QE-induced contraction in
available investment grade assets. This is
expected to provide technical support to US IG
credit, despite low yields and historically full
valuations, and will help to perpetuate the
current strong demand for high-quality new
issue paper. High yield and emerging markets
credit also benefit from this dynamic.
• This incremental demand from non-credit
sectors combined with significant re-investment
cash flows from the shrinkage of the large bank
balance sheets is expected to drive relative
outperformance of bank/finance bonds, quasisovereign/yankee
securities and select BBB's
over the next 6 months.
MBS Rich as Demand Far Outstrips Supply
Our economists expect QE3 MBS purchases to
continue at the USD 40bn per month pace at least
until year-end 2013, and possibly tapering into 2014.
Including reinvestments of maturing agency debt in
the Fed's portfolio into agency MBS, the net demand
from the Fed would exceed USD 500bn over the next
12 months. The issuance of the TBA deliverable
bonds where Fed purchases have been concentrated
was negative USD 172bn over the past 12 months,
roughly a negative USD 14.3bn per month average.
Thus, the Fed demand for MBS is particularly high in
relation to the negative supply of the bonds that the
Fed has traditionally purchased.
This has driven MBS to very expensive levels (as
seen in Chart 1). The chart, which shows the history
of the current coupon + 50bp OAS vs the on-the-run
Treasury curve, indicates that MBS have richened to
a greater extent than during QE1. While this
massive, initial tightening brought in some selling,
MBS were back to outperforming Treasuries on
Wednesday in the rally. Note that the current coupon
is a theoretical par priced coupon that is traditionally
used as a benchmark for valuation purposes.
Chart 1: FNMA MBS Current Coupon + 50bp
Treasury OAS – Treasury OAS Negative
160
(bp)
140
120
100
80
60
40
20
0
-20
QE1
-40
Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12
Source: BNP Paribas
Chart 2: BIG Credit Spread to Libor vs Current
Coupon + 50bp Libor OAS – Corporates wide vs
MBS
500
(bp)
450
400
350
300
250
200
150
100
50
QE1
QE2
0
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Source: BNP Paribas
Chart 3: Freddie Mac Portfolio Size vs
Outstanding Debt – Debt Declined in Sympathy
With the Portfolio Size
1,050
$ bn
950
850
750
650
Portfolio
Debt Outstanding
550
Aug-08 May-09 Feb-10 Nov-10 Aug-11 May-12
Source: BNP Paribas
Bulent Baygun / Anish Lohokare / Mark Howard 20 September 2012
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Recently, however, as MBS yields have come off
considerably, primary mortgage rates offered to
borrowers have not declined as much. Thus,
origination occurs mainly in the 3% coupon, with
reasonable pricing available for the 2.5% coupon.
With the current coupon calculated at 2.02% as of
Wednesday close by Bloomberg and the lack of
availability of market pricing for the 2% coupon, we
consider current coupon + 50bp a better benchmark
than the current coupon itself.
Fed Purchases at the Expense of Money
Managers and GSEs
The Fed would effectively be buying from money
managers who are overweight MBS and GSEs, who
have been forced to reduce their portfolios. Rather
than explicit sales of MBS, we mainly expect
reinvestments of mortgage prepayments into other
products. The latest Federal Reserve Z1 report
shows that mutual funds hold about USD 1.36trn in
agency debt and MBS; while the breakdown is not
available, we expect the share of MBS to be much
larger than debt akin to their relative sizes in the
bond market (USD 5.6trn agency MBS vs USD 2.3trn
agency debt). We estimate that money managers
could experience USD 150bn to USD 200bn in
prepayments that could be reinvested in other asset
classes over the next 12 months.
From a similar credit and liquidity perspective,
investment-grade credit seems a very likely choice
for the reinvestments. In Chart 2, we show the
difference between the Citigroup Broad Investment
Grade Credit Index spread to libor and the current
coupon mortgage Libor OAS. The chart shows the
spread between corporate bonds and MBS has
widened 25bp following the QE3 announcement.
While the spread differential remains more than 40bp
from its November 2011 wides, the level still appears
attractive enough to effect a reallocation from MBS
into corporate bonds. Notably, while mortgages are
trading more than 10bp through their QE1 tights,
corporate bonds in relation to MBS remain 70bp wide
of the tights reached during QE1 and again during
QE2. Note that we expect MBS to tighten further,
albeit gradually, and outperform Treasuries. But,
given the performance the product has already put in
after the QE3 announcement, we think that riskier
asset classes, particularly corporate bonds whose
valuations have yet to reflect this incremental
demand, are likely to do better going forward.
A similar case was observed during QE1 when
mortgages reached very tight levels and ran into a
roadblock in May 2009 (Chart 1). Subsequent QE1
MBS purchases fuelled mainly other asset classes.
Chart 2 shows that during QE1, the spread of
corporate bonds to MBS widened until early March
2009, even as the MBS spread to Treasuries
tightened during that time. But, as MBS purchases
continued, further tightening in MBS was fairly
incremental, but the spread of corporate bonds to
MBS ground steadily tighter. Thus, while the first
stage of QE1 was MBS tightening, the second stage
involved the transmission of demand to other asset
classes, leading corporate bonds to outperform MBS.
Another factor, not directly related to QE3 but likely
to help other asset classes, is the shrinkage of GSE
portfolios. As the Treasury announced in August
2012, GSE portfolios will now reduce at a 15% rate
every year from a USD 650bn base as of 31
December 2012, instead of the previous 10%. As
Chart 3 shows, the decline in GSE portfolios has also
caused a reduction in GSE debt outstanding that
funds these portfolios. As the shrinkage of GSE debt
outstanding accelerates, we estimate that USD 50bn
to USD 200bn could be freed up over the next 12
months to be reinvested in other asset classes.
US Corporate Bonds are a Likely Beneficiary
Although it is unlikely that all of these investments
will migrate into credit over the next year, we expect
these flows to drive incremental demand for US IG
credit.
The overall US corporate bond market is
approximately USD 8trn, according to SIFMA, with
USD 4.5trn par value outstanding for index eligible
debt. Approximately USD 350bn of index-eligible
corporate debt is expected to mature in 2013, and we
estimate that an additional USD 275bn of non-index
eligible debt will mature, as well. Some USD 250bn
of par value of long-term index-eligible debt was
removed from the market in 2012, likely due to calls
or tenders. Factoring in new institutional credit
inflows and other sources of demand, we estimate
that mortgage investments could increase assets
allocated to credit by at least 10-15% over the next
12 months.
The incremental demand for credit will flow into the
primary and secondary markets. IG corporate
issuance has topped USD 750bn year to date,
despite the 14% decline in financial supply, and high
yield issuance is a record USD 220bn-plus. Absent a
material reversal in economic conditions, we believe
that companies will continue to enthusiastically
access the corporate bond market.
Despite well-documented declines in dealer liquidity
provision to corporate bonds, 2012 trading volumes
(based on par value traded) have averaged USD
17bn per day, or USD 4.25trn annually. For
investment grade corporate bonds, which would be
the most likely beneficiaries of a reallocation of
funds, we estimate that 2012 annual trading volume
will approach USD 3trn. The mortgage flows would
Bulent Baygun / Anish Lohokare / Mark Howard 20 September 2012
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add an incremental 5-7% to trading volumes (if
executed entirely in the secondary market),
equivalent to the gain in trading activity from 2010 to
2012.
What does this mean for credit valuations?
a) By either metric, the strong technical demand for
cash credit is likely to continue, particularly for
investment grade, despite low yields and historically
full valuations. However, difficulty sourcing bonds will
become even more acute, exacerbating the current
“illiquidity” conditions.
b) Benchmarked investors will likely be constrained
in their attempts to reach down into high yield, due to
tracking error concerns. For these investors,
financials, Yankee corporate bonds and split-rated
triple Bs will be likely asset considerations.
c) As risk premiums compress, we believe that the
crowding-out effect will affect other, less constrained
credit investors, for whom the reach for yield will
push them into the double/single B territory and into
emerging market bonds.
d) A robust primary calendar should be well
absorbed, generally speaking. Although manageable
to date, we are concerned that a prolonged period of
“easy money” could lead to a higher degree of
shareholder-friendly actions, as well as diminished
collateral quality and loosening covenants down the
road.
Bulent Baygun / Anish Lohokare / Mark Howard 20 September 2012
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This section is classified as non-objective research
EUR: Liquidity Spread Compression at an End
• The recent decisions taken by the world’s
major central banks, many of them expected,
have eased volatility. Liquidity is benefiting in
this environment and spreads have tightened
significantly.
• At current levels, as the good news is
behind us and adverse events potentially lie
ahead, we think we could see limited spread rewidening
in the coming weeks.
• Strategy: Paying interest on spreads makes
sense now.
Chart 1: Less Stress Helping to Tighten Spreads
Central banks have further eased stress
The decision by the ECB to announce its OMT bondbuying
programme was, for the most part, expected.
However, some of the elements it announced, such as
the potentially unlimited scale of the purchases and the
bank’s waiver of seniority, were very well received. The
moves highlighted the commitment of the ECB to do
whatever is necessary to safeguard eurozone
sovereign debt eligible for OMT buying. The
combination of potential ESM buying in the primary
markets and the ECB’s intervention in the secondary
markets will, without doubt, improve liquidity conditions.
The Fed’s decision to launch open-ended QE, in
addition to pursuing Operation Twist, paved the way
for additional liquidity extension in the US.
The main impact of these decisions has been a sharp
decline in volatility and signs of liquidity improvement.
As a result, risk appetite has rebounded strongly,
offering support to equities, commodities, and weighing
temporarily on safe havens. As liquidity conditions are
set to improve, liquidity-driven spreads have
compressed significantly. This is evident in the money
markets (OIS/BOR spreads at lows) and bond markets
(cheapening of benchmark paper in ASW terms).
Back to reality
The spread compression as a result of this latest
monetary action has been sizeable, but the moves
have now been priced in and their impact is likely to
fade near term. The fundamental backdrop is set to
be a key market driver in coming weeks. Very weak
economic data in the eurozone are likely to be a
trigger for significant market reaction – and this
favours risk-averse behaviour. In this context, we see
room for a further decline in yields on benchmark
paper, as their safe-haven status is likely to attract
Source: BNP Paribas
flows. We expect the 10y Bund to rally from 1.70% to
1.58% in the week ahead and we could see a
rebound to closer to 1.40%. This will go hand-in-hand
with a flatter benchmark curve and wider spreads.
Upcoming adverse events
In addition to the economic background, several
upcoming events are expected to fuel upward pressure
in the gamma space. Budget presentations and
warnings or negative moves by the ratings agencies on
sovereign debt are among the many factors that could
weigh on risk appetite. Political developments may add
to this bias. Local elections in Spain, in particular, are
likely to be a cause of volatility.
With volatility rising, liquidity conditions are exposed
to deterioration. As a result, we see scope for wider
spreads where they are linked to liquidity conditions.
This is the case for ASW spreads, second-tier core
spreads versus benchmarks and OIS/BOR spreads.
When it comes to ASW spreads, we see room for the
10y Bund to richen in ASW terms, from 22bp at the
moment to the 30bp area. As far as second-tier core
markets are concerned, the 5y area has richened
significantly over the last couple of weeks. We see
some risk of a setback in this area.
OIS/BOR spreads, meanwhile, are now back to precrisis
levels. This looks overdone, and we see scope
for corrective re-widening.
Strategy: Sell the 10y Bund/swap spread at -22bp,
with a target of -30bp. Buy the 5y OBL vs. France,
Austria and Belgium. Pay OIS/BOR spreads at 15bp,
with a target of 18-20bp.
Patrick Jacq 20 September 2012
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EMU Debt Monitor: Trade Ideas
This section is classified as non-objective research
• We are maintaining our long-duration Bund
call at 1.65-1.70%. The 10y Bund ASW is a
buying opportunity in the -20/-22 area.
• As regards non-core CDS, the sharp decline
in the short end provides long CDS basis trade
opportunities in 1y Italy and Spain.
• The 10y Bono/BTP re-widened as we
expected last week and has come back in the
last few days. At current levels, we prefer 1y-2y
compression trades in Spain vs. Italy.
Chart 1: Rising Net Buying Flows in Bunds
No change in our long-duration Bund call
The Fed’s decision to embark on open-ended QE
triggered a rally in risky assets and a return to the
upper side of the 1.65/1.70% range for Bunds, a level
that has been rapidly rejected to date.
We do not see any reason to change our near-term
call to increase duration in 10y Bunds in the
1.65/1.70% area after the Fed meeting. The Fed’s
commitment to keep rate at exceptionally low levels
until at least mid-2015 underpins to some extent our
scenario of a lasting ECB zero interest-rate policy
(ZIRP), as we expect both GDP growth and inflation
to be lower in the eurozone than in the US.
Last week, we noted three near-term supportive
factors for Bunds: their cheap valuation due to a low
flight-to-quality premium of around 10bp for a yield of
1.70%, a negative net core/semi-core supply through
year end (compared with sizeable net positive supply
in late 2011 and 2010) and rising demand from Asian
investors above 1.60% (Chart 1). In addition, the
relative valuation of 10y-30y Bunds to swaps has
also reached very cheap levels (see our desknote
published on 18 September, entitled 10y Bund ASW:
buying opportunity in the -20/-22 area). This
cheapness could herald a near-term decline in 10y
Bund yields towards 1.40% over the coming weeks.
Non-core CDS opportunities
In mid-August, we underlined the extreme steepness
of the short end of the Italian CDS curve, which
implied a very high 1y1y forward CDS level – above
the 5y spot – and recommended selling it (at that
time, it was around 440/445). As Chart 2 shows, the
decline has been much more pronounced than we
expected, both in spot and the 1y1y forward CDS (-
190 vs. -90bp estimated). While non-core cash
outperformed CDS in August, the move has now fully
reversed. Another indicator of the excessive decline
Source: BNP Paribas
Chart 2: 1y1y CDS Has Collapsed Over the Past
Month
700
600
500
400
300
200
Launch of
SMP 2.0
ECB 3y LTRO Ann.
100
2nd ECB 3y LTRO
0
May-10 Feb-11 Nov-11 Aug-12
-190bp
since
Mid-Aug
1y Italy CDS 1y1y Italy CDS 1y Spain CDS 1y1y Spain CDS
Source: BNP Paribas
200
150
100
50
0
Chart 3: 1y and 2y Italy CDS Basis: CDS Has
Outperformed Cash Since Sep ECB Meeting
cash rich
ECB Aug
Meeting
ECB Sep Meeting
-50
June EU
Summit
Draghi's +
cash cheap
comment
-100
Mar-12 Apr-12 Apr-12 May-12 Jun-12 Jul-12 Jul-12 Aug-12 Sep-12
1y CDS basis
2y CDS basis
Source: BNP Paribas
in short-dated CDS, both in Italy and Spain, is the
decoupling of the cash and country CDS. Indeed, 1y-
2y BTPs and Bonos have been fairly stable versus
swaps, while 1y and 2y CDS have kept on declining
in the past couple of weeks. This temporary break in
Eric Oynoyan / Ioannis Sokos 20 September 2012
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correlation since the September ECB meeting has
pushed the 1y and 2y non-core CDS basis below
their late July lows, even though the ECB has
committed to an unlimited amount of 1y-3y paper
once a country asks for EFSF/ESM assistance.
In trading terms, the safest option is to buy shortdated
BTPs, such as BTP Nov 13, and 1y Italy
CDS, at around -15/20bp, with a view to a 50bp
outperformance of the cash, or Bono Oct 13 and
1y Spain CDS for a basis level of around -75bp.
Peripheral cash curves
Last week, we suggested a 10y Bono/BTP widener
on the grounds that the 10y point has outperformed
on the Spanish curve and the spread to Italy has
returned to the bottom of its recent range. The
spread widened from 60bp last week to 95bp on
Monday and since then, it has come back down to
85bp. The current level is in the middle of the recent
range and cannot be considered attractive, either for
wider or tighter spreads.
In fact, what we find interesting is the widening of the
short-end spreads between Spain and Italy. The
SPGB Oct-13 vs. BTP Nov-13 (115bp) and SPGB
Apr-14 vs. BTP Apr-14 (110bp) are wider than the
longer-dated spreads on the 2014-15 maturities. This
can be seen in Chart 5. As Spain is expected to
make an official request for financial aid before Italy,
thus becoming OMT eligible, we would expect the
short-end spreads between Spain and Italy to be
tighter than the longer-dated ones.
Even considering that these bonds will soon fall out
of the OMT purchasing basket (1y-3y), this does not
justify spreads of more than 100bp for such shortdated
time horizons. Let’s not forget that political
concern about Italy will intensify as we approach the
Italian elections in 2013. And as we no longer find
10y spreads at these entry levels attractive, we
prefer positioning ourselves for a compression in the
Apr-14 spread between Bonos and BTPs. The
spread is currently at 110bp and we are targeting a
return to 80bp.
The move in the CDS basis, shown in Chart 3, also
favours tighter cash spreads at the short end. Under
such a scenario, Spain is expected to outperform
versus Italy based on its higher beta and its tendency
to outperform in rallies and underperform in sell-offs.
The Spanish auction on Thursday went well, and the
size was above the pre-announced range. The
supply rollercoaster continues with Italy in the week
ahead, and this could work in favour of the
compression trade at the short end of the curve.
Chart 4: 1y and 2y Spain Basis: Inversion Move
Back to Late July Lows
300
250
200
150
100
50
0
-50
June EU
Summit
-100
Draghi's +
cash cheap
comment
-150
Mar-12 Apr-12 Apr-12 May-12 Jun-12 Jul-12 Jul-12 Aug-12 Sep-12
1y CDS basis
Source: BNP Paribas
140
120
100
80
60
40
20
cash rich
ECB Aug
Meeting
2y CDS basis
ECB Sep Meeting
Chart 5: Spanish/Italian Yield Spreads
10-2013 4-2014 10-2014 4-2015 7-2015
0
01-Aug 08-Aug 15-Aug 22-Aug 29-Aug 05-Sep 12-Sep 19-Sep
Source: BNP Paribas
250
200
150
100
50
0
10-2013
Chart 6: Spanish/Italian Spreads – 3m
Candlestick
Bono/BTP Spreads in Yield - 3m Range vs Current Spread
4-2014
10-2014
Source: BNP Paribas
4-2015
7-2015
4-2016
10-2016
7-2017
7-2018
10-2019
10-2020
4-2021
1-2022
Eric Oynoyan / Ioannis Sokos 20 September 2012
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JGBs: Increase in Issuance Unavoidable
• The MOF is planning to issue some
JPY 119.9trn in refunding bonds in FY2013. The
final figure will, of course, depend on the yet-tobe-drafted
FY2013 budget, but an increase in
JGB issuance appears unavoidable.
Refunding bond issuance to rise to JPY 119.9trn
FY2013 JGB issuance looks likely to be around
JPY 7.5trn higher than in the initial FY2012 budget
after counting JPY 119.9trn in refunding bonds as
well as the need to refinance previously issued
reconstruction bonds. Assumptions may need to be
entirely rethought in the event of a general election,
but, for the time being, let us assume JPY 44trn in
new financial resource bonds (the maximum
permitted under the government's self-imposed
medium-term fiscal framework), JPY 2trn in
reconstruction bond issuance (reflecting plans to
spend JPY 19trn over five years), and JPY 15trn in
FILP (fiscal investment and loan programme) bond
issuance (unchanged from the initial FY2012 budget).
With the government also needing to find an
additional JPY 2.6trn to fund its contributions to the
basic pension scheme (which were not counted in
the initial FY2012 budget), total JGB issuance for
FY2013 appears set to rise by around JPY 9.3trn to
JPY 183.5trn.
Calendar base market issuance (supply at scheduled
auctions from April through March) will not
necessarily need to be hiked by this entire amount,
however. Given that redemptions of special pension
bonds are to be funded from consumption tax
revenues, the government would be permitted to
deplete its frontloaded issuance of refunding bonds
for the purpose of covering its contributions. Similar
measures are likely to be taken during the current
fiscal year and while the uptake of the non-price
competitive auction II is down slightly from the
comparable period of FY2011 at around JPY 3.4trn
through September, it is on track to exceed the
initially budgeted issuance level (JPY 4.185trn) by
around JPY 2.6trn.
The JPY 119.9trn figure for refunding bond issuance
assumes that FY2013 buybacks will be unchanged
from FY2012 at around JPY 3trn. The MOF
explained that this would be funded by a JPY 0.3trn
transfer from the FILP, JPY 2.2trn from the
government debt consolidation fund and JPY 0.5trn
in refunding bond issuance. Buybacks of 10y
inflation-indexed JGBs have already been cut back in
Table 1: JGB Issuance Size (JPY trn)
FY2012
Initial
FY2013
Forecast
Chg
Breakdown by regal grounds
New financial resource bonds 44.2 44.0 -0.2
Refunding bonds 112.3 119.9 7.6
FILP bonds 15.0 15.0 0.0
Reconstruction bonds 2.7 2.0 -0.7
Special bonds 0.0 2.6 2.6
Total 174.2 183.5 9.3
Source: MoF, BNP Paribas
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Chart 1: Results of Non-Price Competitive
Auction II (JPY trn)
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Source: MoF, BNP Paribas
2y 5y 10y
20y 30y 40y
line with shrinking outstanding issuance and, with a
similar reduction likely for 15y floating-rate JGBs
ahead, it should be possible for the MOF to cut its
total buybacks by around JPY 0.5trn and thereby
obviate the need for refunding bond issuance.
Frontloaded issuance of refunding bonds can also be
depleted. However, projections published by the
MOF in January of this year point to a further
JPY 7trn increase in refunding bond issuance for
FY2014. Revenues are set to increase by around
JPY 6trn after the consumption tax is hiked from 5%
to 8% in April 2014, but with some of these funds
likely to be used for economic stimulus measures, we
believe that the MOF will ultimately have little option
but to increase FY2013 issuance with a view to
preserving a buffer for future depletion. Therefore,
we expect monthly issuance to be hiked by around
JPY 100bn each for two maturities.
A combination of shorter-dated and long-term
issuance
Assuming that the current pace of rinban outright
purchase operations is maintained, the BoJ rollover
is set to fall from JPY 16.7trn in FY2012 to around
JPY 15trn in FY2013. These figures do not include
asset purchase programme (APP) holdings, and the
Tomohisa Fujiki 20 September 2012
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decline can be at least partially attributed to a
lengthening of the average maturity of rinban
purchases stemming from the APP's concentration
on the short end of the curve. However, with the
BoJ's +1% "price stability goal" still looking to be well
out of reach, we would expect APP holdings to be
maintained at a high level even after the initial
purchase targets are met, thereby creating a need for
the MOF to issue JGBs to market investors.
This could provide theoretical justification for hiking
issuance of 2y JGBs. However, doing so would run
counter to the MOF's goal of lengthening the average
maturity of its debt. Hence, we expect to see an
increase in 5y issuance aimed at reducing
refinancing risk.
Turning our attention to the super-long sector, it is
worth noting that 30y and 40y issuance amounts
have been unchanged since FY2011. Minutes of
previous Meetings of JGB Market Special
Participants indicate that the MOF has considered
altering its auction frequencies in the event that
higher issuance becomes necessary. We expect that
the possibility of larger 30y or 40y offerings for
FY2013 will be discussed at least to some extent, but
with these sectors having performed relatively poorly
so far in FY2012, issuance amounts are ultimately
likely to be left on hold. The 20y sector has also
underperformed the 10y sector quite significantly
since monthly issuance was hiked (from JPY 1.1trn
to JPY 1.2trn) in April, which suggests that the
potential market impact of hiking super-long issuance
might be too great to justify the increase in the
average debt maturity.
The government may therefore be left with little
option but to increase issuance in the 10y sector,
which should cause few (if any) problems for market
0
-5
-10
-15
-20
-25
Chart 2: Yield Curve
0 5 10 15 20 25 30 35 40
Source: BNP Paribas
Change (LH S, bp) 3/30/2012 (RH S, % )
9/14/2012 (RH S, % )
Table 2: JGB Issuance Size (JPY trn)
FY2012
Initial
FY2013
Forecast
Chg
Breakdown by JGB types
40yr 1.6 1.6 0.0
30yr 5.6 5.6 0.0
20yr 14.4 14.4 0.0
15yr floater 0.0 0.0 0.0
10yr 27.6 28.8 1.2
10yr Linker 0.0 0.0 0.0
5yr 30.0 30.0 0.0
2yr 32.4 33.6 1.2
T-bill 30.9 30.9 0.0
Enhanced Liquidity 7.2 7.2 0.0
Calendar base 149.7 152.1 2.4
Source: MoF, BNP Paribas
digestion and will enable a modest lengthening of the
average maturity. 10y issuance was also hiked (from
JPY 2.2trn to JPY 2.3trn per month) from April of this
year, but this did not have any discernible impact on
pricing. The MOF might also wish to consider altering
the maturities offered at auctions for enhanced
liquidity as a means of issuing super-long JGBs
without causing too much market disruption.
2.5
2.0
1.5
1.0
0.5
0.0
Tomohisa Fujiki 20 September 2012
Market Mover
31
www.GlobalMarkets.bnpparibas.com

Global Inflation Watch
First Flash Estimates for Sept. Out Next Week
Chart 1: Oil and Energy Price Forecasts
The key releases of the week will come from the
eurozone, where several national statistics offices will
release flash estimates of September HICP and CPI
inflation. The eurozone flash HICP is out next Friday.
We saw a jump in headline rates across the
eurozone in August, as the lagged effects of oil price
rises fed through to fuel price indices and boosted
headline inflation rates. Although further upward price
pressure from energy is unlikely this month, price
falls are also unlikely, so annual energy inflation
should be flat on the month for much of the region.
Our forecast for oil prices assumes little movement in
either direction over the remainder of the year. This
should mean that energy inflation in the eurozone
continues to moderate. In the first quarter of 2013,
we should see the pace of moderation pick up on
base effects. Our current forecast suggests that by
April 2013, energy price inflation in the eurozone will
have fallen to 3% y/y (Chart 1).
In terms of core price inflation in September, Italy and
Spain will be mirror images of each other (Chart 2), as
Italy’s 1pp VAT increase of last year washes out of the
annual inflation rates and Spain’s new, higher VAT
rates become effective. Spain’s VAT increase of 3pp
on the standard rate (from 18% to 21%) is much larger
than Italy’s increase last year (from 20% to 21%), so
the boost to the Spanish indices this month should
dwarf the falls in Italian inflation. However, at the
eurozone level, Spain is a smaller fraction of the
eurozone aggregate than Italy, so these tax effects
should broadly offset each other at the eurozone level.
The squeeze on the Spanish consumer is set to
continue: the Spanish government announced this
week that electricity tariffs would rise 10% from
January 2013. We think this will add 0.5pp to energy
price inflation in Spain in January, equivalent to
0.06pp on headline HICP inflation. The impact on
eurozone headline inflation will be minimal.
The preliminary estimate of Belgian inflation in
September will also be released next week. In a sign
that weak domestic demand is depressing prices, car
manufacturers have recently been offering heavy
discounts. We think core inflation as a whole will
moderate this month, contributing to a moderation in
the headline rate from 2.9% y/y to 2.6%.
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: Core Inflation in Italy and Spain
Source: Reuters EcoWin Pro, BNP Paribas
Source: Reuters EcoWin Pro
Chart 3: Inflation in Belgium
Catherine Colebrook 20 September 2012
Market Mover
32
www.GlobalMarkets.bnpparibas.com

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
2010 109.8 - 1.6 109.5 - 1.5 121.1 - 1.5 119.8 - 1.5 218.1 - 1.6 218.1 - 1.6
2011 112.8 - 2.7 112.4 - 2.7 123.7 - 2.1 122.2 - 2.1 224.9 - 3.1 224.9 - 3.2
2012 (1) 115.7 - 2.5 115.2 - 2.5 126.3 - 2.1 124.7 - 2.0 229.7 - 2.1 229.7 - 2.1
Q1 2011 111.3 - 2.5 110.9 - 2.4 122.5 - 1.8 121.0 - 1.7 222.1 - 2.1 221.7 - 2.1
Q2 2011 113.1 - 2.8 112.7 - 2.7 123.9 - 2.1 122.4 - 2.0 224.5 - 3.3 225.5 - 3.4
Q1 2012 114.3 - 2.7 113.8 - 2.6 125.3 - 2.3 123.8 - 2.2 228.3 - 2.8 227.9 - 2.8
Q2 2012 115.9 - 2.5 115.4 - 2.4 126.3 - 2.0 124.8 - 1.9 228.8 - 1.9 229.8 - 1.9
Q3 2012 (1) 115.7 - 2.5 115.2 - 2.5 126.3 - 2.0 124.7 - 1.9 230.0 - 1.7 230.2 - 1.7
Q4 2012 (1) 116.9 - 2.5 116.4 - 2.4 127.1 - 2.0 125.4 - 1.9 231.7 - 2.1 230.9 - 2.1
Q1 2013 (1) 116.7 - 2.1 116.2 - 2.0 127.7 - 1.9 125.9 - 1.7 233.0 - 2.0 232.6 - 2.0
Q2 2013 (1) 118.0 - 1.9 117.5 - 1.8 128.6 - 1.8 126.8 - 1.6 234.2 - 2.4 235.2 - 2.4
Jan-12 113.4 -0.8 2.7 112.96 -0.8 2.6 124.7 -0.4 2.3 123.06 -0.4 2.3 227.5 0.2 2.9 226.67 0.4 2.9
Feb-12 114.0 0.5 2.7 113.53 0.5 2.7 125.2 0.4 2.3 123.58 0.4 2.2 228.4 0.4 2.9 227.66 0.4 2.9
Mar-12 115.5 1.3 2.7 115.03 1.3 2.6 126.2 0.8 2.3 124.63 0.8 2.2 229.1 0.3 2.6 229.39 0.8 2.7
Apr-12 116.0 0.5 2.6 115.56 0.5 2.5 126.4 0.1 2.1 124.80 0.1 2.0 229.2 0.0 2.3 230.09 0.3 2.3
May-12 115.9 -0.1 2.4 115.38 -0.2 2.3 126.3 -0.1 2.0 124.73 -0.1 1.9 228.5 -0.3 1.7 229.82 -0.1 1.7
Jun-12 115.8 -0.1 2.4 115.29 -0.1 2.3 126.4 0.0 1.9 124.78 0.0 1.9 228.6 0.0 1.7 229.48 -0.1 1.7
Jul-12 115.1 -0.5 2.4 114.65 -0.6 2.3 125.8 -0.4 1.9 124.22 -0.4 1.9 228.7 0.0 1.4 229.10 -0.2 1.4
Aug-12 115.6 0.4 2.6 115.10 0.4 2.5 126.6 0.7 2.1 125.06 0.7 2.0 230.1 0.6 1.7 230.38 0.6 1.7
Sep 12 (1) 116.4 0.7 2.6 115.93 0.7 2.5 126.4 -0.2 2.0 124.86 -0.2 1.9 231.2 0.5 1.9 231.17 0.3 1.9
Oct 12 (1) 116.8 0.3 2.5 116.27 0.3 2.5 126.9 0.3 2.1 125.16 0.2 2.0 231.3 0.0 2.0 230.86 -0.1 2.0
Nov 12 (1) 116.7 0.0 2.4 116.24 0.0 2.4 127.0 0.1 1.9 125.30 0.1 1.9 231.8 0.2 2.1 231.01 0.1 2.1
Dec 12 (1) 117.1 0.3 2.4 116.60 0.3 2.4 127.5 0.4 1.9 125.82 0.4 1.9 232.2 0.2 2.3 230.77 -0.1 2.3
Jan 13 (1) 116.0 -1.0 2.3 115.44 -1.0 2.2 127.1 -0.3 2.0 125.28 -0.4 1.8 232.6 0.2 2.2 231.72 0.4 2.2
Feb 13 (1) 116.5 0.4 2.2 115.91 0.4 2.1 127.7 0.5 2.0 125.91 0.5 1.9 233.0 0.2 2.0 232.23 0.2 2.0
Mar 13 (1) 117.7 1.0 1.9 117.13 1.1 1.8 128.3 0.5 1.7 126.52 0.5 1.5 233.4 0.2 1.9 233.74 0.7 1.9
Apr 13 (1) 117.9 0.2 1.6 117.38 0.2 1.6 128.5 0.2 1.7 126.72 0.2 1.5 233.8 0.2 2.0 234.74 0.4 2.0
May 13 (1) 118.0 0.1 1.9 117.47 0.1 1.8 128.6 0.1 1.8 126.82 0.1 1.7 234.2 0.2 2.5 235.52 0.3 2.5
Jun 13 (1) 118.2 0.1 2.1 117.62 0.1 2.0 128.6 0.0 1.8 126.81 0.0 1.6 234.6 0.1 2.6 235.43 0.0 2.6
Updated
Next
Release
Sep 14
September Flash (Sep 28)
Sep 12
September CPI (Oct 11)
Sep 14
September CPI (Oct 16)
Source: BNP Paribas, (1) Forecasts
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
Chart 4: Eurozone HICP (% y/y)
-1.0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Reuters EcoWin Pro
Core HICP
Headline HICP
Inflation ticked up to 2.6% y/y in August, largely on the back of
energy prices. We expect only a slight moderation over the rest of
this year, while base effects from energy should mean the annual
rate falls more swiftly in early 2013. Core price pressures remain
subdued, with indirect taxes the only significant source of upward
pressure.
6
5
4
3
2
1
0
-1
-2
Chart 5: US CPI
CPI % y/y - Contribution to Inflation
Energy
Food
Core (ex-food & energy)
-3
Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May
08 09 10 11 12
Source: Reuters EcoWin Pro
Headline inflation picked up in August, accelerating to 1.7% y/y as
previously favourable base effects from energy dissipated, though
core inflation continued to moderate. We expect continued core
price moderation in the coming months.
Catherine Colebrook 20 September 2012
Market Mover
33
www.GlobalMarkets.bnpparibas.com

Table 2: BNP Paribas' Inflation Forecasts
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
2010 100.0 - -1.0 100.0 - -1.0 114.5 - 3.3 223.6 - 4.6 302.5 - 1.2 194.6 - 2.0
2011 99.8 - -0.3 99.8 - -0.3 119.6 - 4.5 235.2 - 5.2 311.4 - 3.0 197.3 - 1.4
2012 (1) 99.8 - 0.0 99.8 - 0.0 122.9 - 2.8 242.6 - 3.2 314.9 - 1.1 199.5 - 1.1
Q3 2011 99.8 - 0.2 99.9 - 0.2 120.1 - 4.7 236.2 - 5.2 311.9 - 3.3 197.2 - 1.6
Q4 2011 99.6 - -0.2 99.7 - -0.2 121.3 - 4.6 238.6 - 5.1 314.1 - 2.7 198.2 - 0.9
Q1 2012 99.9 - 0.1 99.6 - 0.1 121.7 - 3.5 239.6 - 3.7 313.5 - 1.8 198.1 - 1.0
Q2 2012 99.8 - 0.0 99.9 - 0.0 122.7 - 2.8 242.2 - 3.1 315.1 - 1.1 199.4 - 1.0
Q3 2012 (1) 99.6 - -0.2 99.7 - -0.2 123.0 - 2.4 243.1 - 2.9 314.0 - 0.7 199.2 - 1.0
Q4 2012 (1) 99.8 - 0.2 99.9 - 0.2 124.2 - 2.5 245.6 - 2.9 317.0 - 0.9 201.2 - 1.5
Q1 2013 (1) 99.9 - 0.0 99.6 - 0.0 124.7 - 2.4 247.1 - 3.1 316.7 - 1.0 201.5 - 1.7
Q2 2013 (1) 99.9 - 0.1 100.0 - 0.1 125.8 - 2.6 250.2 - 3.3 318.4 - 1.1 202.9 - 1.7
Jan-12 99.7 0.1 -0.1 99.3 -0.3 -0.1 121.1 -0.5 3.6 238.0 -0.6 3.9 311.9 -0.9 1.9 196.9 -0.7 0.9
Feb-12 99.9 0.2 0.1 99.5 0.2 0.1 121.8 0.6 3.4 239.9 0.8 3.7 313.9 0.7 1.9 198.3 0.7 1.1
Mar-12 100.0 0.1 0.2 100.0 0.5 0.3 122.2 0.3 3.5 240.8 0.4 3.6 314.8 0.3 1.5 199.1 0.4 1.1
Apr-12 100.1 0.1 0.2 100.2 0.2 0.2 122.9 0.6 3.0 242.5 0.7 3.5 315.5 0.2 1.3 199.6 0.3 1.0
May-12 99.8 -0.3 -0.1 100.0 -0.2 -0.1 122.8 -0.1 2.8 242.4 0.0 3.1 315.2 -0.1 1.0 199.6 0.0 0.9
Jun-12 99.5 -0.3 -0.2 99.6 -0.4 -0.2 122.3 -0.4 2.4 241.8 -0.2 2.8 314.5 -0.2 1.0 199.1 -0.3 0.9
Jul-12 99.5 0.0 -0.3 99.5 -0.1 -0.3 122.5 0.1 2.6 242.1 0.1 3.2 313.2 -0.4 0.7 198.3 -0.4 0.8
Aug 12 (1) 99.5 0.0 -0.3 99.6 0.1 -0.3 123.1 0.5 2.5 243.0 0.4 2.9 313.6 0.1 0.7 198.6 0.1 0.9
Sep 12 (1) 99.7 0.2 0.0 99.9 0.3 0.0 123.6 0.4 2.3 244.2 0.5 2.6 315.1 0.5 0.6 200.5 1.0 1.2
Oct 12 (1) 99.8 0.1 0.2 100.0 0.1 0.2 123.8 0.2 2.4 244.7 0.2 2.8 316.4 0.4 0.9 200.9 0.2 1.5
Nov 12 (1) 99.8 0.0 0.2 99.8 -0.2 0.2 124.2 0.3 2.5 245.6 0.3 3.0 317.3 0.3 1.0 201.2 0.1 1.4
Dec 12 (1) 99.8 0.0 0.2 99.8 0.0 0.2 124.7 0.4 2.5 246.6 0.4 3.0 317.2 0.0 0.8 201.4 0.1 1.6
Jan 13 (1) 99.9 0.1 0.2 99.5 -0.3 0.2 124.1 -0.5 2.5 245.7 -0.3 3.2 314.8 -0.8 0.9 200.3 -0.6 1.8
Feb 13 (1) 99.9 0.0 0.0 99.5 0.0 0.0 124.8 0.5 2.4 247.3 0.6 3.1 317.0 0.7 1.0 201.7 0.7 1.7
Mar 13 (1) 99.8 -0.1 -0.2 99.8 0.3 -0.2 125.1 0.3 2.4 248.2 0.4 3.1 318.2 0.4 1.1 202.6 0.4 1.8
Apr 13 (1) 99.9 0.1 -0.2 100.0 0.2 -0.2 125.7 0.5 2.3 249.7 0.6 3.0 318.3 0.0 0.9 202.8 0.1 1.6
May 13 (1) 99.9 0.0 0.1 100.1 0.1 0.1 125.9 0.2 2.5 250.4 0.3 3.3 318.7 0.1 1.1 203.1 0.1 1.7
Jun 13 (1) 99.9 0.0 0.4 100.0 -0.1 0.4 125.9 0.0 2.9 250.5 0.0 3.6 318.3 -0.1 1.2 202.9 -0.1 1.9
Updated
Next
Release
Sep 11
Aug CPI (Sep 28)
Sep 20
Sep CPI (Oct 16)
Sep 13
Sep CPI (Oct 11)
Source: BNP Paribas, (1) Forecasts
Chart 6: Japanese CPI (% y/y)
Chart 7: UK CPI
2.5
2.0
'Core'
1.5
1.0
Headline
0.5
0.0
-0.5
-1.0
-1.5
Ex Food and Energy
-2.0
-2.5
06 07 08 09 10 11 12
Source: Reuters EcoWin Pro
Core inflation was flat on the month in July, below our expectation
of a 0.1% m/m rise. This caused the annual rate to fall further into
negative territory, to -0.3% y/y. The US-style core CPI fell 0.1% on
the month versus our expectation of no change. We expect core
inflation to remain at the -0.3% level in August.
Source: Reuters EcoWin Pro, BNP Paribas
Inflation fell back to 2.5% y/y in August, partially undoing the
increase to 2.6% y/y in July. The falls, like the increases the month
before, were broad based, suggesting that any talk of building
inflationary pressure is premature.
Catherine Colebrook 20 September 2012
Market Mover
34
www.GlobalMarkets.bnpparibas.com

Table 3: BNP Paribas' Inflation Forecasts
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
2010 116.5 1.8 115.6 1.7 128.8 2.4 120.1 1.4 172.6 2.8 - 2.8
2011 119.9 2.9 117.5 1.7 130.4 1.3 121.2 1.0 178.4 3.4 - 2.6
2012 (1) 121.8 1.6 119.6 1.8 131.1 0.5 122.7 1.2 181.7 1.8 - 2.1
Q3 2011 120.6 0.2 3.0 118.4 0.4 1.9 130.1 -0.7 1.5 121.2 -0.3 1.1 179.3 0.6 3.5 - - 2.5
Q4 2011 120.2 0.3 2.7 118.2 0.6 2.0 130.5 0.4 0.9 121.8 0.5 1.1 179.3 0.0 3.1 - - 2.6
Q1 2012 121.7 0.5 2.3 119.2 0.2 2.1 131.2 0.5 0.8 122.0 0.1 1.4 179.5 0.1 1.6 - - 2.2
Q2 2012 121.6 0.6 1.6 119.4 0.7 2.0 131.5 0.2 0.4 122.9 0.8 1.1 180.4 0.5 1.2 - - 2.0
Q3 2012 (1) 122.2 -0.1 1.3 119.9 -0.1 1.5 130.5 -0.7 0.4 122.6 -0.3 1.1 182.2 1.0 1.6 - - 2.3
Q4 2012 (1) 122.2 0.3 1.3 120.3 0.6 1.5 131.3 0.6 0.6 123.3 0.6 1.2 183.3 0.6 2.2 - - 2.2
Q1 2013 (1) 124.0 0.8 1.7 121.6 0.6 1.9 131.8 0.4 0.4 123.5 0.2 1.3 184.8 0.9 3.0 2.4
Q2 2013 (1) 124.8 1.2 2.2 121.9 0.7 1.9 133.0 0.9 1.2 124.8 1.0 1.6 185.7 0.4 2.9 2.5
Updated
Next
Release
Sep 19
Aug CPI (Sep 21)
Sep 10
Sep CPI (Oct 10)
Jul 25
Q3 CPI (Oct 24)
Source: BNP Paribas, (1) Forecasts
Chart 8: Canadian Headline vs. Core CPI (% y/y)
Chart 9: Australian 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
BoC Mid-Point Inflation Target
BoC CPI Core (% y/y)
CPI Total (% y/y)
04 05 06 07 08 09 10 11 12
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
(% y/y)
Headline CPI
Underlying CPI
BNPP
Fcast
-1.0
Q193 Q195 Q197 Q199 Q101 Q103 Q105 Q107 Q109 Q111 Q113
Source: Reuters EcoWin Pro, BNP Paribas
Core inflation in Canada has fallen back after peaking in February,
while wage growth is below the inflation rate. There is, therefore,
little pressure on the Bank of Canada to change its policy stance.
Source: Reuters EcoWin Pro, BNP Paribas
Inflation continued to moderate in Q2, with the decline to 1.2% y/y
marking the second consecutive downside surprise – the market
had expected inflation of 1.3% y/y. Our forecast is for a gradual
acceleration in both core and headline inflation this year.
CPI Data Calendar for the Coming Week
Day GMT Economy Indicator Previous BNPP Forecast Consensus
Wed 26/09 12:00 Germany CPI (Prel) m/m : Sep 0.3% -0.1% 0.0%
12:00 CPI (Prel) y/y : Sep 2.0% 1.9% 2.0%
12:00 HICP (Prel) m/m : Sep 0.3% -0.1% 0.0%
12:00 HICP (Prel) y/y : Sep 2.3% 2.0% 2.1%
Thu 27/09 09:15 Belgium CPI m/m : Sep 0.4% 0.0% n/a
09:15 CPI y/y : Sep 2.9% 2.6% n/a
23:30 Japan CPI National y/y : Aug -0.4% -0.6% -0.6%
23:30 CPI Tokyo y/y : Sep -0.7% -0.6% -0.6%
Fri 28/09 07:00 Spain HICP Flash y/y : Sep 2.7% 3.6% n/a
09:00 Eurozone HICP (Flash) y/y : Sep 2.6% 2.6% 2.3%
09:00 Italy CPI (NIC, Prel) m/m : Sep 0.4% -0.3% n/a
09:00 CPI (NIC, Prel) y/y : Sep 3.2% 2.9% n/a
09:00 HICP (Prel) m/m : Sep 0.2% 1.5% n/a
09:00 HICP (Prel) y/y : Sep 3.5% 2.8% n/a
Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision
Source: BNP Paribas
Catherine Colebrook 20 September 2012
Market Mover
35
www.GlobalMarkets.bnpparibas.com

This section is classified as non-objective research
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.
Closed Strategies
BUY Germany 5y CDS BUY
Position stopped on 18/09. P&L: -150k
Receive EUR 5y5y swap. Pay USD 5y5y swap.
Position closed on the stop win on 20/09. P&L: +150k
Current Strategies
Outright
JPY long JL135 swap spread BUY
With the 5y JGB yield at 23bp, long-end ASWs should attract demand as a carry
position.
Yield Curves
JPY fwd swap steepener REC
1y1y/2y1y spread (versus six-month Libor) is historically low.
Current* Targets Stop Entry
.
(S)
.
(S)
L+14.8
(S)
Inflation
Long (pay fixed, receive inflation) 10y HICPxT BUY 2.15
(T)
Options
JPY: 2y2y/2y5y volatility ratio SELL
The upper left-hand corner looks rich on the volatility matrix and there are some
signs of overshooting.
1
(S)
-340k
(S)
80/85 49 56.5
(23-Aug)
20bp 10bp 5bp
(06-Sep)
L+0 L+16 L+11
(23-May)
10 -1 3
(23-May)
2.15 2.00 2.09
(04-Sep)
2300k -1500k -200k
(13-Sep)
*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps.
Carry
/month
Risk**
20k
30k
JPY 500k
JPY 500k
P&L
(ccy/bp)
EUR
-150k
EUR
180k
JPY
-1900k
JPY
-1000k
0bp 20k EUR
120k
JPY1.7mn
per 10%
relative
vega
JPY
-140k
Interest Rate Strategy 20 September 2012
Market Mover
36
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This section is classified as non-objective research
CAD: A Leader in the Commodity Bloc
• Fed and ECB policy will remain supportive of
the CAD.
• The BoC is likely to hike rates in mid-2013.
• USDCAD is heading for a low of 0.92 by Q3
2013.
Chart 1: US GDP vs. Canadian GDP
The commitments by the Federal Reserve and the
ECB to support the markets suggest that a risk rally
is set to ensue for the unforeseeable future. The Fed
intends to keep US interest rates low until mid-2015
and buy bonds until the US economy improves and
unemployment declines. The ECB will help to reduce
risk premia in the eurozone by buying the short-dated
government bonds of the peripheral countries once
they sign up to an EFSF/ESM programme. With the
central banks almost suppressing volatility in the
markets, the environment bodes well for risky assets.
We are most bullish on commodity currencies into
year end, but expect the CAD to outperform its peers
into 2013. We believe USDCAD is likely to drift to
0.9200, a new low, by mid-2013.
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: USDCAD vs. USD-CAD 2yr Swap
Ratio
The Fed and ECB policies allow investors to pile into
higher-yielding assets. The Fed’s policy stance, in
particular, ensures that the USD will once again
become the funding currency of choice. USD
weakness is set to take hold until the Fed stops
purchasing bonds at the end of 2013 or in mid-2014.
Open-ended QE may translate into a USD1-1.5trn
expansion of the Fed’s balance sheet, making it one
of the most aggressive central banks on the stimulus
front.
The Fed’s goal to get the economy back on track
bodes well for those economies most dependent on
the US, not least Canada. With 70% of Canadian
exports destined for the US market, the likely
improvement in consumption in the US should boost
growth in Canada. Indeed, we expect Canadian
exports to outpace imports heading into 2013, not
only because of the improvement of both the US and
the global economy, but also the rise in oil prices.
The Fed’s stimulative policy will push up oil prices,
improving Canada’s terms of trade as an exporter of
oil. After Q3, exports are expected to make a positive
contribution to Canadian growth.
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: CAD TWI vs. Brent
While Fed policy is crucial to the outlook for the CAD,
the domestic backdrop also remains supportive.
Business investment, which has been a key
contributor to growth, thanks to investment in mining,
should continue to expand at a solid pace. In
addition, personal consumption is likely to grow near
Source: Reuters EcoWin Pro, BNP Paribas
FX Strategy / Mary Nicola 20 September 2012
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This section is classified as non-objective research
trend. The only variable of the GDP formula that will
remain flat is government consumption as the
government continues to cut its fiscal deficit in a bid
to achieve a balanced budget by late 2014/early
2015.
Chart 4: USDCAD vs. DJIA
With the economy set to grow at trend of 2.1% in
2013, the Bank of Canada (BoC) will likely cut rates
in mid-2013, but at a gradual pace. Despite the
global backdrop and the increased market volatility in
recent months, the BoC has maintained a tightening
bias in its statements, while acknowledging the risks.
Inflation in Canada remains subdued and well below
the BoC’s 2% target. The bank is in no rush to lift
rates, but expected green shoots in the economy
should see it hiking in 2013.
As one of only two central banks (the other is
Norway’s Norges Bank) looking to hike in 2013, the
CAD stands to benefit, standing out in an
environment in which central banks have made it
very clear that monetary policy will remain stimulative
for a long time. Expectations of a hike from the BoC
should push USDCAD to new lows, 0.92 by the end
of Q3 2013. A stronger CAD may not be in the BoC’s
favour, but USDCAD below parity has become the
new norm for Canada and it looks like the economy
will have to adjust accordingly. The strength of the
CAD will be less of an issue if the economy sustains
trend growth.
Besides the potential risks in the global economy i.e.
a slower-than-expected Chinese recovery, the US
fiscal cliff, resurfacing concerns over the eurozone,
Source: Reuters EcoWin Pro, BNP Paribas
the Canadian economy faces some of its own.
Household debt continues to rise and a potential
correction to the housing market would devastate the
economy. However, our main scenario is that the
global economy will improve into 2013, which should
help the Canadian economy avert these risks.
While we are bullish on the CAD and expect it to
outperform its commodity-currency peers, particularly
the AUD, we are reluctant to recommend a long CAD
trade. Current positioning in the CAD looks
overstretched and suggests limited potential upside
from here. We think any pullbacks in the CAD would
offer good buying opportunities.
FX Strategy / Mary Nicola 20 September 2012
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This section is classified as non-objective research
Adding USD Shorts: Ease into Long GBPUSD
• The Fed’s bold policy initiative will extend
USD downside.
• We favour GBPUSD higher as UK
fundamentals improve.
• We initiate a conditional GBPUSD long
recommendation on a pullback to 1.60, target 1.67,
stop at 1.5750.
Chart 1: GBP TWI vs. UK Bank of England
Balance Sheet
The Fed’s policy action on open-ended QE has set
the trend for the USD over the coming months. We
believe USD depreciation will persist for some time.
ECB chief Mario Draghi’s strong rhetoric, pledging
support for eurozone peripheral bonds, will add
further momentum to a rally in risky assets and a
yield-seeking environment. Our favoured way to play
this trend in the FX markets is via long NZDUSD
(targeting 0.8470), but the strength of our conviction
in USD weakness encourages us to pursue further
USD shorts, with GBPUSD our next preferred
candidate.
Looking at our FX forecasts, the most upside
potential is in GBPUSD, with our forecasts for 1.67 at
end Q3 and 1.73 at year end. These forecasts are
driven largely by USD weakness on the back of
open-ended QE, but also by expectations that the
sharp run of very weak UK economic data has likely
come to an end. We believe the GBP is set to
outperform both the USD and EUR.
Our US economists believe the Fed has initiated a
bold new experiment in monetary policy that will
result in balance-sheet expansion through to at least
end 2013 and which will likely produce total balancesheet
expansion of between USD 1.2trn and USD
1.7trn. This is substantially more than QE1 or QE2.
Accordingly, the USD is set to slide, just as it did
during the previous bouts of Fed QE. We agree with
Fed Chairman Ben Bernanke that the law of
diminishing returns do not necessarily apply to
balance-sheet expansion.
In the UK, we believe the long spate of poor
economic data may be coming to an end. Three
straight quarters of GDP contraction has hurt the
GBP, but our economists believe that UK GDP will
rebound by 0.7% in Q3. Furthermore, BNP Paribas
forecasts UK GDP growth of 1.1% in 2013 and 1.7%
in 2014. As the market reassesses the recovery
prospects for the UK economy, the GBP should start
to outperform against not just the USD, but also the
EUR. Additionally, even if the BoE expands its
balance sheet further under its QE programme recent
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: GBPUSD vs. BNPP STEER
1.62
1.60
1.58
1.56
1.54
1.52
21-Jun-2012 21-Jul-2012 21-Aug-2012
Fair Value
GBPUSD
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: Overall FX Positioning
CAD
11-Sep-12
24
NOK
18-Sep-12
23
NZD
22
AUD
21
SEK
18
GBP
13
EUR
12
CHF
-11
USD
-15
JPY
-21
-50 -30 -10 10 30 50
Source: Reuters EcoWin Pro, BNP Paribas
FX Strategy / Steven Saywell 20 September 2012
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This section is classified as non-objective research
evidence suggests that GBP will not weaken in
response.
We considered establishing a long GBPUSD
recommendation simultaneously with our long
NZDUSD position prior to the Fed’s announcement
last week. We shied away from the GBPUSD idea,
because the pair had already rallied sharply in
contrast to NZDUSD, which had lagged. Long
NZDUSD has performed strongly, however;
GBPUSD would have, too. Still, opportunity may
have knocked twice, as there are several factors that
now suggest GBPUSD may retrace to allow for an
attractive entry level. First, our BNP Paribas STEER
model suggests that GBPUSD is overvalued on a
short-term basis (see chart), signalling that fair value
is around 1.60 (vs. spot at 1.62). Second, our BNP
Paribas positioning indicator signals that FX investors
are still long GBP. However, long GBP positioning
has retreated sharply over the past week. The GBP
was the most owned currency a week ago, but has
fallen to rank sixth. This move suggests that the GBP
is approaching a level at which extreme positioning
may no longer present a barrier to further
appreciation.
Our technical analysts note that GBPUSD is trading
mid-range within a long-term triangle formation. Short
term, GBPUSD has stalled at horizontal resistance
around 1.63 and looks very overbought. A correction
back to 1.5890 is now very probable (the 38.2%
Chart 4: GBPUSD Vulnerable to Near-Term
Correction
Source: Reuters EcoWin Pro, BNP Paribas
correction of the rise to 1.6274). Such a move would
still respect the lower bound of the long-term triangle
formation, while our overall FX strategy view is that
an ultimate breakout will occur to the top side.
To benefit from a near-term retracement in GBPUSD,
but an ultimate move to the upside, we are initiating a
conditional long GBPUSD spot FX recommendation
on a pullback to 1.60. We target a move to 1.67 (our
end-Q3 forecast), with a stop at 1.5750.
FX Strategy / Steven Saywell 20 September 2012
Market Mover
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This section is classified as non-objective research
Commodity Market Outlook
• We expect a rise in oil prices over the next
18 months.
• Base metals prices have moved in a pack in
2012, but are expected to diverge in 2013.
• Higher demand and Black Sea trade barriers
may lead to a leg up in agriculture.
Oil and natural gas
Despite the economic headwinds, we expect world oil
demand to prove resilient, notably in emerging
markets. Tighter sanctions on Iranian oil are likely to
be accompanied by greater geopolitical tension and
an erosion of spare production capacity in the OPEC
countries. In non-OPEC countries, the only oil supply
growth will come from the US but it will remain
confined to the domestic market, while outages and
declines in mature fields will persist elsewhere. The
forthcoming global monetary-policy easing should
bring about lower volatility, greater risk appetite and, in
the case of the Fed, a weaker US dollar. All of this
suggests a higher price for oil for the balance of 2012
and into 2013. In the US natural gas markets, the
oversupply from shale plays will continue to dominate
market direction over the next quarter, but eventually
ebb in 2013. We will only see demand-driven price
support when winter demand picks up, eroding the
overhang in stocks. We expect switches in baseload
electricity generation and producer cutbacks to tighten
balances progressively, suggesting gas prices will
strengthen markedly in the second half of 2013.
Metals
A strong rally late in the quarter looks set to leave
base metal prices down no more than 3-4%, on
average, in Q3 2012. Monetary easing, other stimulus
measures and tight supply in the flagship copper
market are expected to drive further price recovery in
Q4. Base metals have mostly moved in a pack this
year, but we expect greater divergence in 2013.
Copper prices may come under downward pressure
due to faster supply growth, but the fundamentals of
other metals should improve. We expect monetary
accommodation to support gold and silver in Q4 2012.
Higher liquidity and inflation expectations, plus a
depreciating USD, should be positive factors. Officialsector
purchases and a rebound in Chinese demand
should more than offset shrinking Indian jewellery
demand. Platinum and palladium, too, should benefit
from higher liquidity and risk appetite, while South
African supply disruptions will erode market surpluses.
Agriculture
Grains and oilseeds prices surged by more than 50%
this summer, as July was the hottest month on
record in 48 US states. As a result, the US 2012-13
corn yield may be at least 22% below its historical
trend dating back to 1965, while the soybean yield
may be cut further in Q4. Feed demand destruction,
a stronger US dollar than last year and seasonal
pressure linked to crop harvests across the northern
hemisphere may offset part of US field losses short
term and push prices down slightly by November.
But, tight global stocks-to-use ratios, reviving biofuel
demand and trade barriers in the Black Sea region
may trigger a new leg up in agriculture this winter.
Table 1: BNP Paribas commodity price forecasts, period averages
Issue date 2012 (f) 2013 (f) Q4 2012 (f) Q1 2013 (f) Q2 2013 (f) Q3 2013 (f) Q4 2013 (f)
NYMEX WTI 1m (USD/bbl) 07/09/2012 98 112 104 116 110 108 112
ICE Brent 1m (USD/bbl) 07/09/2012 113 120 117 125 118 116 120
NYMEX Henry Hub (USD/MBTU) 18/07/2012 2.70 4.00 3.05 3.60 3.65 4.15 4.65
Aluminium cash (USD/t) 11/09/2012 2,055 2,350 2,145 2,250 2,325 2,375 2,450
Copper cash (USD/t) 11/09/2012 8,100 8,000 8,500 8,525 8,225 7,825 7,425
Nickel cash (USD/t) 11/09/2012 17,600 18,375 17,425 18,000 18,500 18,250 18,750
Zinc cash (USD/t) 11/09/2012 1,980 2,325 2,080 2,175 2,250 2,350 2,525
Lead cash (USD/t) 11/09/2012 2,065 2,550 2,235 2,375 2,475 2,600 2,750
Tin cash (USD/t) 11/09/2012 21,200 25,500 22,000 24,000 25,500 26,000 26,500
Gold spot (USD/oz) 14/09/2012 1,685 1,900 1,795 1,865 1,900 1,925 1,915
Silver spot (USD/oz) 14/09/2012 32.75 41.45 39.15 42.60 43.00 41.85 38.35
Platinum spot (USD/oz) 14/09/2012 1,575 1,820 1,705 1,785 1,815 1,835 1,840
Palladium spot (USD/oz) 14/09/2012 665 900 725 800 860 925 1,010
Corn (USD¢/bu) 12/09/2012 708 854 790 855 930 845 785
Cotton (USD¢/lb) 12/09/2012 83 105 80 95 120 115 90
Soybeans (USD¢/bu) 12/09/2012 1526 1793 1720 1900 1830 1730 1710
Wheat (USD¢/bu) 12/09/2012 750 905 855 925 995 870 820
Live cattle (USD¢/lb) 22/11/2011 122 140 128 135 140 140 145
Sugar (USD¢/lb) 12/09/2012 22 26 22 25 28 27 25
Source: BNP Paribas (f) Forecast
Commodity Markets Strategy 20 September 2012
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Economic Calendar: 21 – 28 September
GMT Local Previous Forecast Consensus
Fri 21/09 06:45 08:45 France Wages (Final) q/q : Q2 0.5% (p) 0.5% n/a
08:00 10:00 Eurozone ECB's Liikanen Speaks in a Finnish Parliament Hearing
08:30 09:30 UK PSNCR : Aug GBP-22.9bn
08:30 09:30 PSNB : Aug GBP-1.8bn
08:30 09:30 PSNB Ex-Interventions : Aug GBP0.6bn GBP15.5bn GBP15.0bn
12:30 08:30 Canada CPI m/m : Aug -0.1% 0.3% 0.3%
12:30 08:30 CPI y/y : Aug 1.3% 1.3% 1.3%
12:30 08:30 BoC Core CPI m/m : Aug -0.1% 0.2% 0.3%
12:30 08:30 BoC Core CPI y/y : Aug 1.7% 1.5% 1.5%
13:00 15:00 Belgium Business Confidence : Sep -11.8 -11.3 -11.3
16:40 12:40 US Atlanta Fed's Lockhart Speaks on Policy and Economy in Atlanta
Sun 23/09 07:00 10:00 Eurozone ECB's Coeuré Speaks on the Eurozone Crisis in a Medium and Long Term Perspective in
Ramallah, Palestinian Territories
Mon 24/09 23:50 08:50 Japan BoJ Minutes
(23/09)
07:30 09:30 Neths Producer Confidence : Sep -4.6 -4.0 n/a
07:30 09:30 GDP (Final) q/q : Q2 0.2% (p) 0.2% n/a
07:30 09:30 GDP (Final) y/y : Q2 -0.5% (p) -0.5% n/a
08:00 10:00 Germany Ifo Business Climate : Sep 102.3 102.2 102.8
08:00 10:00 Ifo Current Conditions : Sep 111.1 110.9 111.1
08:00 10:00 Ifo Expectations : Sep 94.2 94.0 95.5
08:00 10:00 Italy Non-EU Trade Balance (Prel) : Aug EUR0.3bn EUR-0.2bn n/a
19:30 12:30 US San Francisco Fed's Williams to Speak at the City Club of San Francisco
Tue 25/09 06:00 08:00 Germany GfK Consumer Confidence : Oct 5.9
06:45 08:45 France Housing Starts (3-mths) y/y : Aug -9.4% -6.0% n/a
06:45 08:45 Industry Survey : Sep 90 89 89
06:45 08:45 Services Survey : Sep 85 85 n/a
07:30 09:30 Sweden PPI (nsa) m/m : Aug -1.1% -0.2% n/a
07:30 09:30 PPI (nsa) y/y : Aug -1.1% -1.6% n/a
08:00 10:00 Italy ISAE Consumer Confidence : Sep 86.0 85.5 n/a
09:00 11:00 Wages m/m : Aug 0.0% 0.0% n/a
09:00 11:00 Wages y/y : Aug 1.5% 1.5% n/a
13:00 15:00 Eurozone ECB President Draghi Speaks at Event in Berlin
13:00 09:00 US S&P/Case-Shiller Home Price Index : Jul 142.2
14:00 10:00 Consumer Confidence : Sep 60.6 64.0 63.0
14:00 10:00 FHFA House Price Index m/m : Jul 0.7%
16:00 12:00 Philadelphia Fed's Plosser Speaks on Economic Outlook in Philadelphia
Wed 26/09 23:00 00:00 Eurozone ECB Vice President Constancio Speaks in London
(25/09)
06:45 08:45 France Consumer Confidence : Sep 87 86 86
16:00 18:00 Jobseekers (ILO def) m/m : Aug 1.4% 0.7% n/a
07:00 09:00 Sweden Consumer Confidence (sa) : Sep 5.4 6.1 n/a
08:00 10:00 Italy Retail Sales m/m : Jul 0.4%
08:00 10:00 Retail Sales y/y : Jul -0.5% -0.8% n/a
08:00 10:00 Norway Unemployment Rate AKU (sa) : Jul 3.0% 3.0% .3.0%
10:00 11:00 UK CBI Reported Sales : Sep -3
Market Economics 20 September 2012
Market Mover
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Economic Calendar: 21 – 28 Sep (cont)
GMT Local Previous Forecast Consensus
Wed 26/09 12:00 14:00 Germany CPI (Prel) m/m : Sep 0.3% -0.1% 0.0%
(cont) 12:00 14:00 CPI (Prel) y/y : Sep 2.0% 1.9% 2.0%
12:00 14:00 HICP (Prel) m/m : Sep 0.3% -0.1% 0.0%
12:00 14:00 HICP (Prel) y/y : Sep 2.3% 2.0% 2.1%
14:00 10:00 US New Home Sales : Aug 372k 365k 380k
14:30 10:30 EIA Oil Inventories
17:15 13:15 Chicago Fed’s Evans Speaks to Chamber of Commerce in Hammond, Indiana
Thu 27/09 07:00 09:00 Spain Retail Sales y/y : Aug -7.3% -7.5% n/a
07:55 09:55 Germany Unemployment (Chg, sa) : Sep 9k 2k 10k
07:55 09:55 Unemployment Rate : Sep 6.8% 6.8% 6.8%
08:00 10:00 Eurozone Economic Sentiment : Sep 86.1 85.7 n/a
08:00 10:00 Industrial Sentiment : Sep -15.3 -15.0 -15.0
08:00 10:00 Consumer Sentiment : Sep -25.9 (p) -25.9 n/a
08:00 10:00 M3 y/y : Aug 3.8% 3.2% 3.6%
08:00 10:00 M3 3m y/y : Aug 3.4% 3.4% n/a
08:30 09:30 UK GDP (Final) q/q : Q2 -0.5% (p) -0.5% -0.5%
08:30 09:30 GDP (Final) y/y : Q2 -0.5% (p) -0.5% -0.5%
09:00 11:00 Italy ISAE Business Confidence : Sep 87.2
09:00 10:00 Portugal Consumer Confidence : Sep -49.2 -53.0 n/a
09:00 10:00 Economic Climate Indicator : Sep -4.0 -4.2 n/a
09:15 11:15 Belgium CPI m/m : Sep 0.4% 0.0% n/a
09:15 11:15 CPI y/y : Sep 2.9% 2.6% n/a
12:30 08:30 US Durable Goods Orders m/m : Aug 4.1% -4.9% -4.5%
12:30 08:30 GDP (Final, saar) q/q : Q2 1.7% (p) 1.7% 1.7%
12:30 08:30 Initial Claims 382k 385k n/a
14:00 10:00 Pending Home Sales m/m : Aug 2.4% -1.0% -0.3%
Fri 28/09 23:01 00:01 UK Gfk Consumer Confidence : Sep -29
(27/09)
23:30 08:30 Japan CPI National y/y : Aug -0.4% -0.6% -0.6%
23:30 08:30 CPI Tokyo y/y : Sep -0.7% -0.6% -0.6%
23:30 08:30 Household Consumption y/y : Aug 1.7% 2.5% 1.8%
23:30 08:30 Unemployment Rate (sa) : Aug 4.3% 4.3% 4.3%
23:50 08:50 Industrial Production (Prel, sa) m/m : Aug -1.0% -0.7% -0.7%
23:50 08:50 Retail Sales y/y : Aug -0.7% 1.0% 0.2%
(27/09)
05:00 14:00 Housing Starts y/y : Aug -9.6% -5.5% -9.0%
France Budget 2013
05:30 07:30 GDP (Final, wda) q/q : Q2 0.0% (p) -0.1% n/a
05:30 07:30 GDP (Final, wda) y/y : Q2 0.3% (p) 0.2% n/a
06:45 08:45 Retail Sales m/m : Jul 0.1% 0.3% n/a
06:45 08:45 Retail Sales y/y : Jul 0.2% 0.7% n/a
06:45 08:45 Retail Sales m/m : Aug n/a -1.5% -0.4%
06:45 08:45 Retail Sales y/y : Aug n/a -1.2% n/a
07:45 09:45 PPI m/m : Jul -0.9% 1.5% n/a
07:45 09:45 PPI y/y : Jul 1.3% 2.3% n/a
07:45 09:45 PPI m/m : Aug n/a 1.0% 0.6%
07:45 09:45 PPI y/y : Aug n/a 3.4% n/a
07:00 09:00 Spain HICP Flash y/y : Sep 2.7% 3.6% n/a
07:30 09:30 Sweden Retail Sales (sa) m/m : Aug 0.3% 0.5% n/a
07:30 09:30 Retail Sales (nsa) y/y : Aug 2.4% 3.3% n/a
Market Economics 20 September 2012
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Economic Calendar: 21 – 28 Sep (cont)
GMT Local Previous Forecast Consensus
Fri 28/09 08:00 10:00 Italy PPI m/m : Aug 0.4% 0.3% n/a
(cont) 08:00 10:00 PPI y/y : Aug 2.4% 2.4% n/a
09:00 11:00 CPI (NIC, Prel) m/m : Sep 0.4% -0.3% n/a
09:00 11:00 CPI (NIC, Prel) y/y : Sep 3.2% 2.9% n/a
09:00 11:00 HICP (Prel) m/m : Sep 0.0% 1.5% n/a
09:00 11:00 HICP (Prel) y/y : Sep 3.3% 2.8% n/a
08:00 10:00 Norway Retail Sales (sa) m/m : Aug -0.1% 0.8% n/a
08:00 10:00 Retail Sales (nsa) y/y : Aug 2.7% -1.1% n/a
08:00 10:00 Unemployment Rate (nsa) : Sep 2.6% 2.4% 2.4%
08:30 10:30 Eurozone Eurocoin : Sep
09:00 11:00 HICP (Flash) y/y : Sep 2.6% 2.6% 2.3%
11:00 12:00 ECB's Godeffroy Speaks at Conference in Oporto, Portugal
11:30 13:30 ECB's Asmussen Speaks in Berlin
09:30 11:30 Switzerland KoF Leading Indicator : Sep 1.57
10:00 11:00 Portugal Retail Sales y/y : Aug -7.9% -8.4% n/a
12:30 08:30 Canada GDP (monthly) m/m : Jul 0.2% 0.2% n/a
12:30 08:30 US Personal Income m/m : Aug 0.3% 0.2% 0.2%
12:30 08:30 Personal Spending m/m : Aug 0.4% 0.3% 0.5%
13:45 09:45 Chicago PMI : Sep 53.0 52.3 53.1
13:55 09:55 Michigan Sentiment (Final) : Sep 79.2 (p) 78.0 78.8
During 24-28/09 UK Nationwide House Prices Index m/m : Sep 1.3%
Week Nationwide House Prices Index y/y : Sep -0.7%
24-30/09 Germany Import Prices m/m : Aug 0.7%
Import Prices y/y : Aug 1.2%
Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision
Source: BNP Paribas
Market Economics 20 September 2012
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Key Data Preview
Chart 1: UK Cumulative PSNB (GBP bn)
180
160 2008 2009 2010
140
120
2011 2012
100
80
60
40
20
0
April May June July Aug Sept Oct Nov Dec Jan Feb Mar
Sources: Reuters EcoWin Pro
Aug (f) July June May
PSNB (ex interventions) 15.5 0.6 14.6 18.5
BNP Paribas Forecast: Better, but Only a Bit
UK: Public sector (August)
Release Date: Friday 21 September
The recent figures for UK public finances have been
disappointing. In July, the monthly public finances posted a
GBP 0.6bn deficit, despite it normally being a bumper month
for corporation- and income-tax receipts. Over the four
months of the 2012/13 fiscal year to July, the deficit was
GBP 9bn more than it was a year earlier, despite the Office
for Budget Responsibility (OBR) forecasting borrowing for the
full fiscal year at GBP 120bn, down from GBP 126bn in
2011/12. Revisions and time issues could still markedly
improve the deficit picture this year, but it appears that the
weak cyclical position is also taking its toll.
In the August data, we are expecting some of the weakness
in tax receipts to unwind, though the underlying picture will
still look a trifle worrying.
Key Point:
The August data should look okay, but the trend is not
so encouraging.
Sources: Reuters EcoWin Pro
Chart 2: Canadian Inflation
m/m % Aug (f) Jul Jun May
Headline CPI 0.1 -0.1 -0.4 -0.1
Bank of Canada Core -0.1 -0.1 -0.4 0.2
BNP Paribas Forecast: Missing the Target
Canada: CPI (August)
Release Date: Friday 21 September
Food and energy prices likely increased in August, which is
expected to drive headline CPI higher on a m/m basis;
however, due to base effects, the y/y pace of inflation is
expected to be close to 1.1%. Meanwhile, core prices are
expected to post another negative number with the y/y pace
of core inflation likely to move significantly lower (from 1.7%
in July to our expected 1.2% in August).
The underlying pace of economic growth, wages and inflation
has been weak as of late, which leaves little underlying
pressure on the BoC to worry about inflation running above
their 2% target (see chart). Given our current subdued GDP
growth trajectory, we believe there is little reason for the BoC
to be concerned with the current inflation outlook, and we
expect the BoC to leave interest rates unchanged for some
time.
Key Point:
Despite a likely monthly increase in food and energy
prices, underlying price pressures are absent, taking
any pressure off the BoC to raise interest rates anytime
soon.
Market Economics 20 September 2012
Market Mover
45
www.GlobalMarkets.bnpparibas.com

Key Data Preview
Chart 3: Ifo Business Cycle Clock
Sources: Reuters EcoWin Pro
Sep (f) Aug Jul Jun
Headline 102.2 102.3 103.2 105.2
Current conditions 110.9 111.2 111.5 113.8
Expectations 94.0 94.2 95.5 97.2
BNP Paribas Forecast: Moderate Decline
Germany: Ifo Business Climate (September)
Release Date: Monday 24 September
The Ifo business climate index decreased for the fourth
month running in August. The assessment of the current
situation worsened, with the index standing at 102.3, only 2
points above its long-term average.
Expectations for the half year to come deteriorated, too. Ifo
underscored that it was the first time in three years that
export expectations had declined.
We expect a further deterioration in both indicators in the
September print, although the scope of the decline should
continue to slow. The September surveys could be
somewhat volatile, though, because a number of key events
happened during the survey period, including the German
Constitutional Court ruling on the ESM. We expect the
uncertainty surrounding the ruling, as well as the negative
public response to the ECB’s announcement of a bondbuying
programme, to affect business sentiment in
September. In October, however, we should see some
improvement.
Key Point:
The deterioration is likely to continue in September, but
things should improve after that.
Sources: Reuters EcoWin Pro
Chart 4: US Consumer Confidence
Sep (f) Sep 2H (f) Sep p Aug
Conference Board 64.0 – – 60.6
Michigan Sentiment 78.0 76.8 79.2 74.3
BNP Paribas Forecast: Rising Confidence
US: Consumer Confidence (September)
Release Date: Tuesday 25 September
The University of Michigan index of consumer confidence
jumped 4.9 index points in the beginning of September and
reached the highest level since May, which was the highest
reading in this cycle. The index surged in the first half of
September, despite the negative news heard, particularly
about labour market developments and climbing prices at
the pump. The recent improvement in financial conditions,
following the new monetary policy stimulus that was
introduced by the Fed (and reflected in stock prices),
should boost consumers’ optimism. We estimate the
Conference Board index to increase to 64.0 in September
from 60.6 in August.
.
Key Point:
The Conference Board index is expected to show a solid
increase on the back of a strong pick-up in stocks, after the
new Fed stimulus implemented last week, which should
outweigh the negative news heard, particularly about labour
market developments and climbing prices at the pump.
Market Economics 20 September 2012
Market Mover
46
www.GlobalMarkets.bnpparibas.com

Key Data Preview
Chart 5: German Headline and Core CPI
Sources: Reuters EcoWin Pro
Sep (f) Aug Jul Jun
HICP (% m/m) -0.1 0.4 0.4 -0.2
HICP (% y/y) 2.0 2.2 1.9 2.0
CPI (% y/y) 1.9 2.1 1.7 1.7
BNP Paribas Forecast: Slowing Again
Germany: ‘Flash’ CPI and HICP (September)
Release Date: Wednesday 26 September
German consumer price inflation accelerated relatively
dramatically in August. The HICP index posted a 0.4% m/m
increase, driving annual inflation up to 2.2% y/y from 1.9% in
July. One of the key drivers was transport prices. Core
prices, meanwhile, only increased 0.2% m/m, leaving the
annual inflation rate unchanged at 1.2% y/y.
For the September prints, we expect a contraction of
0.2% m/m in core prices, mainly due to the end of the
summer season and its effect on leisure-related services
prices. That should, again, leave core inflation unchanged in
annual terms. Looking beyond that, we do not expect
significant changes in core inflation before mid-2013.
In September, we expect the effect on annual inflation of the
surge in transport prices to be partly offset in September, so
this should contribute less to the headline inflation rate than
in August. The headline HICP index should therefore contract
0.1% m/m and annual inflation should slow again to 2.0%.
Key Point:
The transport price surge in August should be partly
offset in September. Core price inflation should remain
unchanged.
Chart 6: French Household Confidence & Elections BNP Paribas Forecast: Weaker
115
110
105
100
95
2002
2007
1995
1988
1981
90
2012
85
Presidential
election
month
80
0 1 2 3 4 5 6 7 8 9 10 11 12
Source: Reuters EcoWin Pro
Index (sa) Sep (f) Jul Jun Sep 11
Overall (normalised index) 86 87.0 89.5 81.4
Buying opportunity
(diffusion index)
-28 -26 -20 -26
Key Point:
The post-election feel-good factor is likely to wane
further. The willingness to spend could fall to extremely
low levels.
France: Household Confidence (September)
Release Date: Wednesday 26 September
As usual, in France, there was no household confidence
survey conducted in August due to the summer holidays.
Consequently, we will have to compare the September data
with July’s result.
Back in March, when the French public realised that a
change of government was a sure thing, confidence soared.
The strongest gains were seen in surveys on future personal
financial situation and future nationwide standard of living.
These hopes have since been dashed and we expect a
further decline in both items.
Although confidence has been very low by historical
standards since the start of the year, we expect it to weaken
even more. The ECB’s bond-buying announcement and a cut
in the tax on petrol have probably not been sufficient to have
a material positive effect on confidence.
What’s more, the situation in the labour market has
worsened, according to the latest data, and all this is likely to
weigh on purchasing plans. At -28, the diffusion index of
willingness to make important purchases is expected to fall
very close to the lowest print of the last three-and-a-half
years, at -29.
Market Economics 20 September 2012
Market Mover
47
www.GlobalMarkets.bnpparibas.com

Key Data Preview
12.5
10.0
7.5
5.0
2.5
0.0
Chart 7: Eurozone M3 & Bank Lending
Bank Lending to
Private Sector
M3
(% y/y)
-2.5
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: Reuters EcoWin Pro
% y/y Aug (f) Jul Jun May
M3 3.2 3.8 3.2 3.1
M3 (3-mth avg.) 3.4 3.4 3.0 3.0
Private-Sector Loans -0.2 0.1 -0.2 -0.1
Key Point:
The growth rate in M3 has picked up, but bank lending
to the private sector remains very weak.
BNP Paribas Forecast: Still Soft
Eurozone: Monetary Developments (August)
Release Date: Thursday 27 September
The y/y growth rate in M3 has accelerated markedly in recent
months (see chart). The 3.8% y/y rise in July was the highest
in more than three years. The principal reason is the pickup
in the y/y growth rate of overnight deposits, which almost
trebled in the period from April to July (rising to 4.5%). In turn,
this is a reflection of a preference for liquidity in an
environment of high uncertainty and low interest rates.
The divergence between growth in M3 and bank lending to
the private sector has become more pronounced (see chart).
The latter remains weak. The key reason for the divergence
is the pickup in bank lending to governments (i.e. sovereign
debt purchases), which expanded by 9.4% y/y in July.
The y/y rate of change in bank lending to the private sector
has been hovering around zero since the spring. While the
ECB’s Bank Lending Survey has shown a moderation in the
tightening of credit conditions, the demand for loans remains
weak across all sectors.
The y/y rate of change in mortgage lending to households
was stable at just 0.8% in July, well below the peak (of 4.5%
in March 2011). The y/y change in consumer credit has been
sub-zero (-2.0% in July) for more than three years. Lending
growth to non-financial corporates also contracted in y/y
terms in July (-0.4%) for the second straight month.
Chart 8: Eurozone ESI Country Comparison
Sources: Reuters EcoWin Pro
Sep (f) Aug Jul Jun
Economic Sentiment 85.7 85.8 87.9 89.9
Industry Sentiment -15.0 -15.3 -15.1 -12.8
Services Sentiment -10.3 -10.8 -8.5 -7.4
Consumer Confidence -24.0 -24.6 -21.5 -19.8
BNP Paribas Forecast: Moderate Decline
Eurozone: Economic Sentiment Indicator (September)
Release Date: Thursday 27 September
Economic sentiment in the eurozone continued to deteriorate
in August. The country breakdown showed that sentiment
deteriorated most in the ‘big’ eurozone countries (Spain, Italy
and Germany), with France a notable exception. Sector-wise,
the deterioration was strongest in the retail trade and
construction sector, as well on the consumer side.
In September, we will take a careful look at the country
breakdown once again. We expect the aggregate headline
figure to remain nearly unchanged for the eurozone, but the
trends in the individual countries could differ once again.
The theme of recent months has been the ‘catch-down’ in
sentiment in Germany, with the deterioration driven primarily
by a weak industry sector. Here, growth prospects have been
significantly affected by weakening new orders. Industrials
had relied heavily on a backlog of work to smooth activity in
the sector. But although German sentiment has weakened
sharply of late, it still remains one of the most buoyant in the
eurozone, suggesting that although growth may slow in the
eurozone’s biggest economy, it is still set to outperform.
Key Point:
Economic sentiment should stabilise on aggregate in
the eurozone, but the disparities between individual
countries will persist.
Market Economics 20 September 2012
Market Mover
48
www.GlobalMarkets.bnpparibas.com

Key Data Preview
Chart 9: German ESI Employment Expectations
Sources: Reuters EcoWin Pro
Unemployment Sep (f) Aug Jul Jun
Change (‘000) 2 9 9 7
Rate (%)) 6.8 6.8 6.8 6.8
BNP Paribas Forecast: Easing Pressure
Germany: Labour-Market Data (September)
Release Date: Thursday 27 September
The tightness of the German labour market is the key driver
of the relatively stable consumer confidence in Germany.
Confidence in the employment situation, coupled with higher
real disposable income, is stabilising consumer demand and
contributing to growth.
However, the survey data suggest that hiring is gradually
grinding to a halt. The PMI employment components have
been oscillating around 50 for several months, while the
European Commission’s economic sentiment subcomponents
have also been signalling slowing labour-market
dynamics. Consequently, German unemployment has risen
for five months in a row now, and we expect another
moderate increase in September, though this will not yet
affect the unemployment rate.
Looking ahead, we do not expect a major deterioration.
Conditions will loosen compared with a year ago, but will
remain relatively tight on an historical basis.
Key Point:
Tensions in the labour market will ease, but overall,
unemployment will remain at historically low levels.
6
4
2
0
-2
-4
Chart 10: Portuguese Economic Climate
GDP
% y/y
Economic Climate
Indicator
( 3mth Avg)
-6
Mar-98 Sep-99 Mar-01 Sep-02 Mar-04 Sep-05 Mar-07 Sep-08 Mar-10 Sep-11
Sources: Reuters EcoWin Pro
% y/y Sep (f) Aug Jul Jun
Economic Climate -4.2 -4.0 -4.4 -4.6
BNP Paribas Forecast: Further Contraction
Portugal: Economic Climate (September)
Release Date: Thursday 27 September
Portugal’s economic climate indicator is likely to fall to -4.2 in
September from -4.0 in August, by our estimates. This will be
the first pickup in the pace of contraction since January.
This bigger fall will come mostly on the back of increasing
uncertainty over the need for further austerity measures in
the last quarter of 2012 or early 2013.
The deceleration in exports due to a contraction in economic
activity in Portugal’s main eurozone trading partners (mainly
Spain) should also take its toll and contribute to the decline in
Portuguese economic activity
The economic climate indicator suggests a slower pace of
decline in GDP in Q3 after an expected contraction of 1.2%
q/q in Q2. In Q4, we expect the weakening to continue,
though at a faster pace, as wage and pension cuts, in
particular, are felt later in the year.
Key Point:
Contraction to intensify has exports are likely to slow
and domestic demand is likely to fall further.
Market Economics 20 September 2012
Market Mover
49
www.GlobalMarkets.bnpparibas.com

Key Data Preview
Chart 11: US Durable Goods Orders vs Shipments
(% 3m/3m saar)
40
20
0
-20
-40
-60
% 3m/3m ar
Core Shipments
Core Capital Goods Orders
Feb 01 Feb 03 Feb 05 Feb 07 Feb 09 Feb 11
Sources: Reuters EcoWin Pro
% m/m Aug (f) Jul Jun May
Durable Goods -4.9 4.1 1.6 1.5
Ex-Transport 0.1 -0.6 -2.2 0.7
Core Cap Goods Ship -1.0 -0.5 1.4 1.0
BNP Paribas Forecast: A Boeing Drop
US: Durable Goods (August)
Release Date: Thursday 27 September
Durable goods orders are expected to fall by 4.9% m/m in
August, as Boeing orders totalled a whopping 1 order for the
month, after an impressive 260 in the prior month. Boeing
orders had been a source of strength previously, averaging
164.6 orders from November to March; however, with just 36
orders accumulated between April and June, that strength
looked to have been fading until the July pop. We will look
closely at the trend over the coming months. Meanwhile,
excluding transportation, orders should be decent with a
0.1% m/m gain for August, although the 3m/3m saar trend is
expected to contract at a 9.1% pace in the month.
Core capital goods shipments (shipments ex-defence and
aircraft) are expected to decline by 1.0% in an atypical
second month of the quarter, however, moving in line the 3m
trend in core capital goods orders. In all, we see the pace of
shipments slowing in Q3, although still contributing positively
to GDP growth, but with some significant risks that Q4 could
move into negative territory.
Key Point:
In August, just one Boeing order came in for the month,
which is expected to drag the headline print into
negative territory. Meanwhile, core capital goods
shipments are expected to be in line with the negative
trend in core orders.
3
2
1
0
-1
-2
-3
Chart 12: Japanese Core CPI (% y/y)
CPI excluding energy and
food, but not alcohol
Core CPI
05 06 07 08 09 10 11 12
Sources: MIC, BNP Paribas
% y/y Aug (f) Jul Jun May
Core CPI -0.3 -0.3 -0.2 -0.1
CPI -0.6 -0.4 -0.2 0.2
Key Point:
With petroleum product inflation decelerating on the
drop in crude oil prices in May and June, we expect core
CPI to have remained soft through August.
BNP Paribas Forecast: Slight Decline
Japan: CPI (National, August)
Release Date: Friday 28 September
Based on the Tokyo CPI report for August, and after making
allowances for its disparities with other areas, we estimate
that national core CPI inflation in August should have
remained unchanged from July at -0.3% y/y. In July, the
index’s rate of decline expanded 0.1pp from June, as the
drop in the crude oil price in May and June caused price
growth for petroleum products to decelerate substantially.
While US-style core-core CPI inflation (excluding energy and
food, but not alcohol) was unchanged for a third straight
month at -0.6%, other price-trend indicators showed a
modest deterioration, including the “10% trimmed mean CPI”
(which excludes the top and bottom one-tenth of components
ranked by the size of year-on-year price changes), which has
been slightly below zero since May. But with energy prices
stabilising in August (the month-on-month declines ended)
thanks to higher electricity rates and the rebound in
petroleum product prices in July-August, we expect energy
prices at the national level to have risen in September,
allowing the core CPI to recover.
Market Economics 20 September 2012
Market Mover
50
www.GlobalMarkets.bnpparibas.com

Key Data Preview
Chart 13: Japanese Unemployment Rate (% sa)
5.7
5.5
5.3
5.1
4.9
4.7
4.5
4.3
4.1
3.9
3.7
3.5
00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: MIC, BNP Paribas
BNP Paribas Forecast: Unchanged
Japan: Unemployment Rate (August)
Release Date: Friday 28 September
We expect the jobless rate for August to be unchanged from
July at 4.3%. Despite some degree of support from latent
demand from the nursing-healthcare industry, employment
conditions are likely to have started to weaken gradually, as
factory-sector activity remains flat because of the slowing
global economy and the effects of reconstruction demand at
home are waning. There are signs that job offers, which have
continued to steadily rise, could also be weakening. Even so,
because the effects of a rapidly greying population continue
to weigh on the jobless rate, the unemployment rate moving
forward should basically remain flat or modestly on the
decline.
% sa Aug (f) Jul Jun May
Unemployment rate 4.3 4.3 4.3 4.4
Key Point:
Although employment conditions are likely to start
weakening, the unemployment rate should stay flat or
modestly on the decline, as the effects of a rapidly
greying society continuing to weigh on the jobless rate.
Chart 14: Japanese Production and Exports
120
115
110
105
100
95
90
85
80
75
70
65
(2005=100, seasonally adjusted)
Production
00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: METI. MOF, BNP Paribas
Exports (RHS)
Industrial production Aug (f) Jul Jun May
% m/m -0.7 -1.0 0.4 -3.4
Key Point:
With external demand dropping a further notch and
domestic car sales already tumbling, production in
August is likely to have been weak.
150
140
130
120
110
100
90
80
70
60
50
BNP Paribas Forecast: Decline
Japan: Industrial Production (August)
Release Date: Friday 28 September
We expect industrial production to have fallen 0.8% m/m in
August (-1.0% in July), a second straight contraction.
Corrected for the distortions that have plagued METI’s
seasonally adjusted data, factory output has been generally
trending sideways, but we project that even without
distortions, production should have declined in August. The
reason for the weakness is not the supply constraints
resulting from reduced summertime power consumption,
which have had only a marginal impact, but rather the
floundering of demand. Until now, weakness in overseas
demand has largely been offset by fiscal policy factors such
as the reconstruction-related spending and eco-car
subsidies. But with external demand dropping again
(previously firm exports to US have started falling) and
domestic car sales tumbling even before subsidy programme
ends in September, production in August is likely to have
been weak. While the forecast index projects a further
sideways movement of 0.1% m/m, the actual outturn should
be a contraction. Although we do not expect overall factory
activity to enter into a pronounced slowdown as long as the
global economy avoids a shock, such as a further deepening
of the European crisis, industrial output seems set to soften
further in the coming months owing to weakness in the global
economy and fallout at home from plunging cars sales.
Market Economics 20 September 2012
Market Mover
51
www.GlobalMarkets.bnpparibas.com

Key Data Preview
8
7
6
5
4
3
2
1
0
Chart 15: Eurozone HICP Inflation
Frequency of revisions to flash estimate by 0.1pp or more since 2001
(to 1d.p.), by month
Final higher than flash
Final lower than flash
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Sources: Reuters EcoWin Pro
Sep (f) Aug Jul Jun
HICP All Items (% y/y) 2.6 2.6 2.4 2.4
HICP All Items (% m/m) 0.7 0.4 -0.1 0.1
Key Point:
Tax effects should be broadly offsetting this month, and
we expect no change to the headline rate.
BNP Paribas Forecast: Stable
Eurozone: HICP (September)
Release Date: Friday 28 September
Inflation accelerated across the eurozone in August, primarily
as a result of rising fuel prices. The headline All Items rate
ticked up to 2.6% y/y from 2.4%, a level it had stabilised at for
the previous three months. Food price inflation was broadly
unchanged, while core price inflation fell 0.2pp to 1.5% y/y: the
first time core inflation had moderated since January.
September is typically a strong month for core prices,
although the balance of items going up in price versus those
being discounted as summer makes way for autumn means
greater potential for volatility and/or revisions of preliminary
estimates (see chart). On the one hand, clothing prices
should rise strongly as the sale of full-price autumn-winter
stock gets underway. New furnishings and household goods
should also boost core prices, as should annual educational
fee increases. Acting to push inflation down will be holidayrelated
goods and services, including airfares.
An additional unknown this month is the Spanish VAT hike,
which became effective on 1 September. Assuming that we
see most of the expected pass-through in the September
figures, we expect a 1.3pp boost to Spanish HICP inflation,
which would add 0.2pp to eurozone All Items HICP inflation
this month. This should broadly offset any downward
pressure from the Italian VAT hike of the previous September
dropping out of year-on-year comparisons, meaning core
inflation spends a second month at 1.5% y/y.
115
110
105
100
95
Chart 16: French Retail Sales Breakdown
Indices
2005=100
Food
Cars
Total Retail Sales
Energy
90
Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan
08 09 10 11 12
Source: INSEE, Reuters EcoWin Pro
Volume (sa-wda) Aug (f) Jul (f) Jun Aug 11
% m/m -1.5 0.3 0.1 0.5
% y/y -1.2 0.7 0.2 0.5
Key Point:
Average sales for July and August are likely to be weak.
BNP Paribas Forecast: Weak
France: Retail Sales (July and August)
Release Date: Friday 28 September
As they are every year, French retail sales data for July
and August will be published together, as the data are
collected simultaneously in September. This should
provide us with a major piece of information for the Q3
GDP outlook on the day when the revised growth data for
Q2 are released (we expect a downward revision from
unchanged to -0.1% q/q).
The unpredictable weather, cold and rainy in July, warm and
sunny in August, may have caused some volatility in the
consumption of food and energy. The cut in taxes on petrol
may also have prompted some people to postpone refuelling
their cars until early September. Car registrations were poor
in both months, continuing the trend we have seen since the
start of the year. The Bank of France's retailer survey
suggests that demand for manufactured goods was relatively
strong in July, but very weak in August, as people were
keener to hit the shopping malls on rainy days.
Our forecast reflects this evolution, with a gain in July
followed by a collapse in August. For a fair assessment of the
economic situation, we should look at the average of the two
months, and this is likely to be weak, probably below the
2011 average.
Market Economics 20 September 2012
Market Mover
52
www.GlobalMarkets.bnpparibas.com

Key Data Preview
7000
6500
6000
5500
5000
4500
Chart 17: US Real PCE Services
Real Consumer Spending on Services (USD bn)
4000
95 95 96 97 98 99 00 01 02 03 04 05 06 06 07 08 09 10 11
Sources: Reuters EcoWin Pro
% m/m Aug (f) Jul Jun May
Personal Income 0.2 0.3 0.3 0.3
Consumption 0.3 0.4 0.0 -0.2
Core PCE Prices 0.1 0.0 0.2 0.1
Key Point:
Nominal consumer spending should post a moderate
increase in August on higher energy prices. Real
spending and core inflation should be weak.
BNP Paribas Forecast: Subdued Gain in Spending
US: Personal Income & Spending (August)
Release Date: Friday 28 September
Nominal personal spending is expected to register a 0.3% gain
in August, driven by higher energy prices. Meanwhile, real
spending is expected to post a small decline. Auto sales
posted a solid gain in August; however, virtually every other
category of spending should be weak. Core retail sales fell
back in August, and utility output plunged, which should weigh
on services spending. The projected weakness in August
comes after a solid 0.4% gain in July, and on balance,
consumer spending is expected to grow moderately in Q2
Personal income is forecast to increase 0.2% in August after
rising 0.3% in July. Hours worked grew a modest 0.1%, and
average hourly earnings were essentially flat, pointing to a
subdued increase in wage income. With income growing just
a touch slower than spending, the personal savings rate
should post a small decline in the month.
We think that the headline PCE deflator will rise 0.4%, on
higher gas prices, pushing the annual pace to rise to 1.5%
from 1.3%. Meanwhile, core inflation is expected to rise
0.1%, with the annual pace edging down to 1.5% from 1.6%.
This cooling in core pricing should further increase the Fed’s
confidence that there are few indications of incipient inflation
pressures.
Market Economics 20 September 2012
Market Mover
53
www.GlobalMarkets.bnpparibas.com

Economic Calendar: 1 – 26 October
1 Oct 2 Oct 3 Oct 4 Oct 5 Oct
Australia: Holiday
Japan: BoJ Tankan Sep
Eurozone: Manufacturing
PMI (Final) Sep, Labour
Aug
UK: CIPS Manufacturing
Sep, Net Consumer Credit
Aug, Mortgages Aug, M4
Aug
Germany: Retail Sales
Aug
Switz: Manufacturing PMI
Sep
US: Construction Aug,
ISM Manufacturing Sep
Australia: RBA Rate
Announcement
Eurozone: PPI Aug
US: Vehicle Sales Sep
Australia: Trade Balance
Aug
Eurozone: Services PMI
(Final) Sep, Retail Sales
Aug
UK: CIPS Services Sep
Germany: Holiday
US: ADP Sep, ISM Non-
Manufacturing Sep,
FOMC Minutes
Australia: Retail Sales
Aug
Eurozone: ECB Rate
Announcement & Press
Conference
UK: BoE Rate
Announcement
Neths: CPI Sep
US: Challenger Layoffs
Sep, Factory Orders Aug
During Week: UK Halifax House Prices Sep
8 Oct 9 Oct 10 Oct 11 Oct 12 Oct
Holiday: Japan, US,
Canada
Germany: Industrial
Production Aug, Trade
Balance Aug
Switz: CPI Sep
Australia: NAB Business
Survey Sep
Japan: Current Account
Aug
UK: IP Aug, BRC Retail
Sales Monitor Sep, Trade
Balance Aug, RICS
House Price Balance Sep
France: Budget Balance
Aug, Trade Balance Aug
Italy: GDP (Final) Q2
Neths: IP Aug
US: NFIB Optimism Sep
Australia: Westpac
Consumer Confidence
Oct
France: IP Aug
Italy: IP Aug
Sweden: IP Aug
Norway: CPI Sep, PPI
Sep
US: Beige Book,
Wholesale Trade Aug
Australia: Labour Sep
Japan: BoJ Monetary
Policy Meeting Minutes,
Machinery Orders Aug
Eurozone: ECB Bulletin
Germany: CPI (Final) Sep
France: CPI Sep
Spain: CPI (Final) Sep
Portugal: HICP Sep
Sweden: CPI Sep, PES
Labour Sep
US: Import Prices Sep,
Trade Balance Aug,
Treasury Statement Sep
During Week: Germany WPI Sep, France BoF Survey Sep
15 Oct 16 Oct 17 Oct 18 Oct 19 Oct
US: Empire
Manufacturing Survey
Oct, Retail Sales Sep,
Business Inventories Aug
Australia: RBA MPC
Minutes
Eurozone: HICP Sep,
Trade Balance Aug,
EU27 New Car
Registrations Sep
UK: ONS HPI Aug, CPI
Sep, PPI Sep
Germany: ZEW Oct
Italy: EU Trade Balance
Aug
Neths: Retail Sales Aug
US: CPI Sep, TICS Data
Aug, IP Sep, NAHB HPI
Oct
UK: BoE Minutes, Labour
Sep
US: Housing Starts Sep
Eurozone: Governing
Council Meeting (No Rate
Announcement)
UK: Retail Sales Sep
Neths: Consumer
Confidence Oct, Labour
Sep
Belgium: Consumer
Confidence Oct
Sweden: Labour Sep
US: Philly Fed Survey
Oct, Leading Indicators
Sep
During Week: UK CBI Monthly Industrial Trends Oct
22 Oct 23 Oct 24 Oct 25 Oct 26 Oct
Japan: Trade Balance
Sep
Eurozone: Consumer
Confidence (Prel) Oct
France: Business Survey
Oct
Italy: Non-EU Trade
Balance (Prel) Sep
Belgium: Business
Confidence Oct
Canada: BoC Rate
Announcement
Australia: CPI Q3
Eurozone: PMIs (Flash)
Oct
Germany: Ifo Survey Oct
France: Job Seekers Sep
Italy: Consumer
Confidence Oct
US: FOMC Rate
Announcement, New
Home Sales Sep, FHFA
HPI Aug
Canada: BoC Monetary
Policy Report
Eurozone: Monetary
Developments Sep
UK: GDP (Prel) Q3
Italy: Wages Sep, Retail
Sales Aug
Spain: PPI Sep
Neths: Producer
Confidence Oct
Sweden: Riksbank Rate
Announcement &
Monetary Policy Report,
Consumer Confidence
Oct, PPI Sep
US: Durable Goods
Orders Sep, Pending
Home Sales Sep
Japan: BoJ Rate
Announcement
Eurozone: GDP (Final)
Q2
Germany: Factory Orders
Aug, GDP (Final) Q2
Spain: Industrial
Production Aug
Portugal: Holiday
Norway: Industrial
Production Aug
US: Labour Sep,
Consumer Credit Aug
Canada: Labour Sep
Japan: M2 Sep, Tertiary
Index Aug, CGPI Sep
Eurozone: IP Aug
France: Current Account
Aug
Italy: CPI (Final) Sep
Spain: Holiday
Sweden: Current Account
Aug
US: PPI Sep, UoM
Sentiment (Prel) Oct
Eurozone: Current
Account Aug
UK: PSNB Sep, PSNCR
Sep
Germany: PPI Sep
Italy: Industrial Orders
Aug
US: Existing Home Sales
Sep
Canada: CPI Sep
Japan: CPI Tokyo Oct,
CPI National Sep
Eurozone: Eurocoin Oct
Germany: GfK Consumer
Confidence Nov
France: Consumer
Confidence Oct
Italy: Business Confidence
Oct
Spain: Labour Q3
Switz: KOF Leading
Indicator Oct
US: GDP (Adv) Q3, UoM
Sentiment (Final) Oct
During Week: UK CBI Reported Sales Oct, Germany Import Prices Sep
Source: BNP Paribas
Release dates as of c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions.
Market Economics 20 September 2012
Market Mover
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Treasury and SAS Issuance Calendar
This publication is classified as non-objective research
In the pipeline - Treasuries:
Italy: To issue a new CTZ Sep 14 in Q3
UK: DMO will consider scheduling up to two gilt mini-tenders in Q4
UK: Gilt 30-year (new, syndicated) to be offered in the second half of October (details a month in advance)
UK: Index-Linked Gilt to be offered via syndication in the second half of November (details a month in advance)
Finland: Likely to arrange 1 or 2 tap auctions in H2
During the week:
UK: Index-Linked Gilt 0.25% Mar 2052 (new, syndicated)
FHLMC: Second Optional Reference Notes announcement in September on Thursday 27
Date Day Closing Country Issues Details BNPP forecasts
Local GMT
21/09 Fri 11:00 15:00 US Outright Treasury Coupon Purchase (Nov22-Feb31) USD 1.5-2bn
24/09 Mon 11:00 09:00 Norway NGB 4.5% 22 May 2019 (NST 473) NOK 2bn
14:45 13:45 UK Gilt Purchase (7 Gilts 2016-2019) GBP 1bn
12:00 10:00 Belgium OLO 3.50% 28 Jun 2017 (OLO 63)
OLO 3.00% 28 Sep 2019 (OLO 67)
OLO 4.25% 28 Sep 2021 (OLO 61)
21 Sep EUR 2-3bn
OLO 4.25% 28 Sep 2022 (OLO 65)
11:00 15:00 US Outright Treasury Coupon Purchase (Feb36-Aug42) USD 1.5-2bn
25/09 Tue 12:00 03:00 Japan JGBs 10-year Auction for Enhanced-liquidity issue
289-319; 7 issues excl
JGBs 20-year Auction for Enhanced-liquidity
issue 51-101; 15 issues excl.
JPY 0.3tn
10:55 08:55 Italy CTZ 21 Sep EUR 2.5-3.5bn
BTPeis 21 Sep EUR 1-1.5bn
14:45 13:45 UK Gilt Purchase (15 Gilts 2027-2060) GBP 1bn
Neths DSL 2.5% 15 Jan 2033 EUR 1.5-2.5bn
12:00 16:00 Canada Repurchase of 6 Cash Mgt Bonds (Dec12 to Nov13) CAD 1bn
11:00 15:00 US Outright Treasury Coupon Purchase (Nov20-Aug22) USD 4.50-5.50bn
13:00 17:00 US Notes 0.250% 30 Sep 2014 (new) USD 35bn
26/09 Wed 11:30 09:30 Germany Bund 1.50% 4 Sep 2022 EUR 5bn
14:45 13:45 UK Gilt Purchase (5 Gilts 2020-2025) GBP 1bn
10:15 08:15 Denmark DGB 4% 15 Nov 2012 (Buy-back)
DGB 5% 15 Nov 2013 (Buy-back)
12:00 16:00 Canada CAN 2-year 20 Sep
11:00 15:00 US Outright Treasury Coupon Purchase (Sep18-Aug20) USD 4.25-5bn
13:00 17:00 US Notes 0.625% 30 Sep 2017 (new) USD 35bn
27/09 Thu 12:00 03:00 Japan JGB 15 Oct 2014 JPY 2.7tn
10:55 08:55 Italy 5 & 10y BTPs and possibly CCTeu 24 Sep EUR 6-7bn
13:00 17:00 US Notes 1.125% 30 Sep 2019 (new) USD 29bn
Outright Treasury Coupon Sales (Sep15-Nov15)
USD 7-8bn
28/09 Fri 11:00 15:00 US Outright Treasury Coupon Purchase (Feb36-Aug42) USD 1.5-2bn
01/10 Mon 14:45 13:45 UK Gilt Purchase (3-7 year Gilts) GBP 1bn
02/10 Tue 12:00 03:00 Japan Auction for Enhanced-liquidity 25 Sep JPY 0.3tn
11:00 09:00 Austria RAGBs 25 Sep EUR 1-1.5bn
10:30 09:30 UK Gilt 1.75% 7 Sep 2022 25 Sep GBP 3.5bn
14:45 13:45 UK Gilt Purchase (over 15 year Gilts) GBP 1bn
03/10 Wed 11:30 09:30 Germany OBL 0.50% 13 Oct 2017 (Series 164, date TBC) EUR 4bn
11:00 09:00 Sweden T-bonds 26 Sep SEK 3.5bn
14:45 13:45 UK Gilt Purchase (7-15 year Gilts) GBP 1bn
04/10 Thu 12:00 03:00 Japan JGB 10-year 27 Sep JPY 2.3tn
10:30 08:30 Spain Bonos 28 Sep EUR 3-5bn
10:50 08:50 France OATs 28 Sep EUR 7-9bn
08/10 Mon 11:00 09:00 Norway NGBs 3 Oct
14:45 13:45 UK Gilt Purchase (3-7 year Gilts) GBP 1bn
09/10 Tue 10:30 09:30 UK Gilt 4.25% 7 Jun 2032 2 Oct GBP 2bn
14:45 13:45 UK Gilt Purchase (over 15 year Gilts) GBP 1bn
Neths DSLs EUR 2-2.5bn
10:15 08:15 Denmark DGBs (Tentative date) 4 Oct
13:00 17:00 US Notes 3-year (new) 4 Oct USD 32bn
10/10 Wed 11:30 09:30 Germany Schatz 0.00% 12 Sep 2014 (Date to be confirmed) EUR 5bn
14:45 13:45 UK Gilt Purchase (7-15 year Gilts) GBP 1bn
13:00 17:00 US Notes 10-year 4 Oct USD 21bn
11/10 Thu 12:00 03:00 Japan JGB 30-year 4 Oct JPY 0.7tn
10:55 08:55 Italy 3-year BTP and possibly 15- or 30-year BTP 8 Oct EUR 5-7bn
11:00 09:00 Sweden ILBs 4 Oct SEK 0.5bn
10:30 09:30 UK Index-Linked Gilt 22 Mar 2024 (new) 2 Oct GBP 1.3bn
13:00 17:00 US Bond 30-year 4 Oct USD 13bn
12/10 Fri 12:00 10:00 Belgium ORI (Optional Reverse Inquiry OLO Auction) 11 Oct EUR 0.4bn
Sources: Treasuries, BNP Paribas
Interest Rate Strategy 20 September 2012
Market Mover
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This publication is classified as non-objective research
Next week's T-Bills Supply
Date Country Issues Details
21/09 Japan T-Bills Nov 2012 JPY 2.5tn
UK T-Bills Oct 2012 GBP 1bn
T-Bills Dec 2012
GBP 0.5bn
T-Bills Mar 2013
GBP 1.5bn
Canada T-Bill Oct12 (Cash Mgt) (new) CAD 2bn
24/09 France BTFs 21 Sep
Germany Bubills Sep 2013 (new) EUR 3bn
US T-Bills Dec 2012 USD 32bn
T-Bills Mar 2013 (new) USD 28bn
FHLMC Bills 3-month & 6-month 24 Sep
25/09 Spain Letras Dec 2012 24 Sep
Letras Mar 2013
24 Sep
Canada T-Bill Jan 2013 CAD 8.6bn
T-Bill Mar 2013 (new)
CAD 3.2bn
T-Bill Sep 2013 (new)
CAD 3.2bn
US T-Bills 4-week 24 Sep
FHLB Discount Notes
26/09 Italy BOT Mar 2013 21 Sep
Sweden T-Bills Dec 2012 SEK 5bn
T-Bills Mar 2013
SEK 10bn
FNMA Bills 3-month & 6-month 24 Sep
27/09 Japan T-Bills Jan 2013 JPY 5.7tn
Denmark T-Bills 25 Sep
FHLB Discount Notes
28/09 UK T-Bills 21 Sep
Sources: Treasuries, BNP Paribas
Next week's Eurozone Redemptions
Date Country Details Amount
28/09 Belgium OLO 5% (OLO 38) EUR 7.7bn
Total Eurozone Long-term Redemption
EUR 7.7bn
26/09 Germany Bubills (12m) EUR 3.0bn
27/09 France BTF EUR 9.4bn
28/09 Italy BOT (6m) EUR 8.5bn
28/09 Neths DTC EUR 6.4bn
Total Eurozone Short-term Redemption EUR 27.3bn
20
15
10
5
0
Next week's Eurozone Coupons
Country
France
Italy
Belgium
Greece
Portugal
Total Long-term Coupon Payments
Chart 1: Investors’ Net Cash Flows
(EUR bn, 10y equivalent)
Net Investors' Cash Flows
(EUR bn , 10y equivalent)
Amount
EUR 0.3bn
EUR 0.4bn
EUR 4.4bn
EUR 0.0bn
EUR 0.5bn
EUR 5.6bn
-5
-10
Comments and charts
• EGBs gross supply is likely to increase further in the
week ahead from already elevated levels. We indeed
expect EUR 22bn of gross supply, up from EUR 19bn,
while only EUR 7.7bn debt will redeem (OLO). In 10y
duration-adjusted terms, this would be equivalent to
EUR 16bn.
• On Monday, Belgium will kick off a busy week with
EUR 2-3bn (forecast) issuance in OLOs Jun-17, Sep-19,
Sep-21 and Sep-22. On Tuesday, Italy will sell CTZ and
BTPeis for forecast amounts of EUR 3bn and EUR
1.5bn respectively. Later on, the Netherlands plan to sell
EUR 1.5-2.5bn of DSL Jan-33. On Wednesday,
Germany will sell EUR 5bn of Bund Sep-22. And on
Thursday, Italy will come back to the market for the sale
of 5y and 10y BTPs and possibly CCTeu, for a forecast
amount of EUR 6-7bn.
• Outside of the eurozone, Norway will sell NOK 2bn
of NGB May-19, the US will sell a new 2y, 5y and 7y
notes for a total of USD 99bn, and Japan will reopen
JGB Oct-14 for JPY 2.7tn. Finally, Canada will raise
cash in a 2y format.
18
16
14
-15
-20
20
18
16
14
12
10
8
6
4
2
0
Week of Sep 17th Week of Sep 24th Week of Oct 1st Week of Oct 8th
Chart 2: EGB Gross Supply Breakdown by
Country (EUR bn, 10y equivalent)
Germany Italy Portugal Belgium
France Spain Netherlands Austria
Finland Greece Ireland
Week of Sep 17th Week of Sep 24th Week of Oct 1st Week of Oct 8th
Chart 3: EGB Gross Supply Breakdown by
Maturity (EUR bn, 10y equivalent)
EGBs Gross Supply (EUR bn, 10y equivalent)
2-3-YR
10-YR
5-7-YR
>10-YR
12
10
8
6
4
2
0
Week of Sep 17th Week of Sep 24th Week of Oct 1st Week of Oct 8th
All Charts Source: BNP Paribas
Interest Rate Strategy 20 September 2012
Market Mover
56
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Central Bank Watch
Interest Rate
EUROZONE
Current
Rate (%)
Minimum Bid Rate 0.75
US
Fed Funds Rate 0 to 0.25
Discount Rate 0.75
JAPAN
Call Rate 0 to 0.10
Basic Loan Rate 0.30
UK
Bank Rate 0.5
DENMARK
Lending Rate 0.20
SWEDEN
Repo Rate 1.25
NORWAY
Sight Deposit Rate 1.50
SWITZERLAND
3 Mth LIBOR Target
Range
CANADA
0 to 0.25
Overnight Rate 1.00
Bank Rate 1.25
AUSTRALIA
Cash Rate 3.50
CHINA
1Y Bank Lending
Rate
BRAZIL
6.00
Selic Overnight Rate 7.50
Date of
Last
Change
-25bp
(5/7/12)
-75bp
(16/12/08)
+25bp
(18/2/10)
-10bp
(5/10/10)
-20bp
(19/12/08)
-50bp
(5/3/09)
-25bp
(5/7/12)
-25bp
(6/9/12)
-25bp
(14/3/12)
-50bp
(3/8/11)
+25bp
(8/9/10)
+25bp
(8/9/10)
-25bp
(6/5/12)
-31bp
(5/7/12)
-50bp
(29/8/12)
Next Change in
Coming 6 Months
-25bp
(6/12/12)
No Change
No Change
No Change
No Change
-25bp
(702/13)
-15bp
(6/12/12)
-25bp
(18/12/12)
No Change
No Change
No Change
No Change
-25bp
(2/10/2012)
-25bp
(Q3 2012)
No Change
Source: BNP Paribas
For the full Emerging Market Central Bank Watch, please see our Local Markets Mover.
Comments
Because of the economic outlook, the door is still open for the ECB
to cut policy rates further. We see December as the most likely
timing, in tandem with the staff projections, which will include 2014
for the first time. Downward surprises on the economy and/or a
return to more turbulent markets could prompt an earlier move.
The FOMC announced an aggressive open-ended programme of
quantitative easing at its September meeting. We think the Fed will
end up expanding its balance sheet by an additional USD 1-1.5trn.
It also pushed the forward guidance for the first rate hike into mid-
2015.
Under its de facto flexible inflation-targeting regime, the BoJ will
probably undertake additional easing (increase in JGB
purchases under its asset purchase programme) at a gradual
tempo until the goal of 1% inflation is in sight.
QE was increased by GBP 75bn in October 2011, GBP 50bn in
February 2012 and GBP 50bn in July 2012. We expect another
GBP 50bn in QE in November and again in February 2013. We
also expect a 25bp cut in the Bank Rate in February.
We expect a 15bp cut of the policy rate in December, a smaller
cut than the ECB, to keep the policy rate above zero.
The Riksbank is likely to deliver one more rate cut this year, in
Q4, as economic activity slows and inflation remains low.
Domestic economic conditions continue to strengthen. But, due to
uncertainty stemming from the eurozone, we do not expect a
change in the policy rate this year.
The SNB maintains a minimum exchange rate of 1.20 to the
euro. We do not expect a shift in the policy stance, but emphasis
on rising imbalances in the real estate market is likely to
increase in upcoming statements.
Inflation has fallen sharply, as wage pressures remain subdued and
growth has disappointed. Despite this, the BoC has maintained a
hiking bias, as high household debt and risks in the domestic
housing market remain key vulnerabilities. We expect the BoC to
keep its policy rate on hold until mid-2013.
Downside risks emanating from Europe and, increasingly,
China, argue for some further modest policy easing later in the
year.
Although the economy has yet to show signs of recovery,
borrowing costs have risen. Hence, another rate cut is still
needed near term. We also expect one more RRR cut this year.
BCB has cut rates by 500bp since mid-2011. A final 25bp cut in
October remains a possibility, but the most likely outcome is that
rates are now kept on hold.
Change since our last weekly in bold and italics
Market Economics 20 September 2012
Market Mover
57
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Economic Forecasts
GDP
Year 2012
(% y/y) ’11 (1) ’12 (1) ’13 (1) Q1 Q2 (1) Q3 (1) Q4 (1)
US 1.8 2.2 2.1 2.4 2.3 2.3 1.7
Eurozone 1.5 -0.4 0.2 0.0 -0.5 -0.7 -0.5
Japan -0.8 2.2 0.6 2.9 3.2 1.5 1.3
World (2) 4.0 3.1 3.4 3.4 3.2 3.0 2.9
Industrial Production
Year
2012
(% y/y) ’11 ’12 (1) ’13 (1) Q1 Q2 (1) Q3 (1) Q4 (1)
US 4.1 3.7 2.3 4.4 4.8 3.3 2.3
Eurozone 3.5 -2.3 0.3 -1.7 -2.4 -3.5 -1.7
Japan -2.4 0.2 0.8 4.7 5.3 -3.6 -4.3
Unemployment Rate
Year
2012
(%) ’11 ’12 (1) ’13 (1) Q1 Q2 (1) Q3 (1) Q4 (1)
US 9.0 8.2 7.9 8.3 8.2 8.2 8.1
Eurozone 10.2 11.4 12.2 10.9 11.2 11.5 11.8
Japan 4.6 4.4 4.0 4.5 4.4 4.3 4.2
CPI
Year
2012
(% y/y) ’11 ’12 (1) ’13 (1) Q1 Q2 (1) Q3 (1) Q4 (1)
US 3.2 2.1 2.2 2.8 1.9 1.7 2.1
Eurozone 2.7 2.5 2.0 2.7 2.5 2.5 2.5
Japan (Core) -0.3 0.0 0.2 0.1 0.0 -0.2 0.2
Current Account
Year
Budget Bal
Year
(% GDP) ’11 (1) ’12 (1) ’13 (1) (% GDP) ’11 (1) ’12 (1) ’13 (1)
US -3.0 -2.8 -2.2 -8.7 -7.4 -6.3
Eurozone 0.0 0.9 1.4 -4.1 -3.3 -2.4
Japan 2.0 1.2 1.0 -9.7 -8.3 -7.2
Interest Rate Forecasts
Year
2012
(%) ’11 ’12 (1) ’13 (1) Q1 Q2 Q3 (1) Q4 (1)
US
Fed Funds Rate 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25
3-month Rate 0.58 0.40 0.40 0.47 0.46 0.38 0.40
2-year yield 0.25 0.25 0.25 0.34 0.31 0.26 0.25
10-year yield 1.88 2.00 2.95 2.21 1.64 1.81 2.00
2y/10y Spread (bp) 163 175 270 188 134 155 175
Eurozone
Refinancing Rate 1.00 0.50 0.50 1.00 1.00 0.75 0.50
3-month Rate 1.36 0.05 0.05 0.78 0.65 0.24 0.05
2-year yield (5) 0.14 0.10 0.45 0.22 0.13 0.08 0.10
10-year yield (5) 1.83 1.45 2.00 1.81 1.60 1.64 1.45
2y/10y Spread (bp) (5) 169 135 155 159 147 156 135
Japan
O/N Call Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10
3-month Rate 0.33 0.35 0.35 0.33 0.33 0.35 0.35
2-year yield 0.14 0.10 0.15 0.12 0.11 0.10 0.10
10-year yield 0.99 0.70 1.00 0.99 0.84 0.80 0.70
2y/10y Spread (bp) 85 60 85 87 74 70 60
Footnotes: (1) Forecast (2) BNPP estimates based on country weights in the IMF World Economic Outlook Update
October 2011 (3) End Period (4) Fiscal year Figures are y/y percentage change unless otherwise indicated (5) German benchmark
Source: BNP Paribas
Market Economics 20 September 2012
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This section is classified as non-objective research
FX Forecasts*
USD Bloc Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15
EUR/USD 1.30 1.35 1.32 1.35 1.32 1.35 1.31 1.29 1.27 1.25 1.25
USD/JPY 78 77 76 76 75 75 78 80 85 85 90
USD/CHF 0.94 0.93 0.95 0.93 0.98 0.96 1.03 1.05 1.06 1.08 1.04
GBP/USD 1.67 1.73 1.74 1.78 1.78 1.82 1.82 1.79 1.81 1.79 1.52
USD/CAD 0.98 0.96 0.95 0.94 0.92 0.92 0.96 1.00 1.05 1.05 0.98
AUD/USD 1.06 1.08 1.00 1.02 1.04 1.06 1.05 1.05 1.00 0.95 0.93
NZD/USD 0.84 0.86 0.83 0.85 0.88 0.90 0.87 0.83 0.80 0.76 0.78
USD/SEK 6.85 6.56 6.70 6.67 6.82 6.67 6.72 6.82 6.77 6.88 7.20
USD/NOK 5.85 5.56 5.68 5.48 5.61 5.48 5.65 5.74 5.83 5.92 6.00
EUR Bloc Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15
EUR/JPY 101 104 100 103 99 101 102 103 108 106 113
EUR/GBP 0.78 0.78 0.76 0.76 0.74 0.74 0.72 0.72 0.70 0.70 0.82
EUR/CHF 1.22 1.25 1.25 1.25 1.30 1.30 1.35 1.35 1.35 1.35 1.30
EUR/SEK 8.90 8.85 8.85 9.00 9.00 9.00 8.80 8.80 8.60 8.60 9.00
EUR/NOK 7.60 7.50 7.50 7.40 7.40 7.40 7.40 7.40 7.40 7.40 7.50
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 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15
USD/PLN 3.15 3.15 3.26 3.11 3.14 3.04 3.13 3.02 3.11 3.28 3.08
EUR/CZK 24.6 25.5 26.2 25.8 25.0 24.1 23.6 24.1 23.8 23.1 22.7
EUR/HUF 282 275 275 273 277 272 280 282 275 270 240
USD/ZAR 8.37 8.50 8.00 8.10 8.00 7.85 7.65 7.68 7.80 7.93 7.93
USD/TRY 1.80 1.74 1.72 1.74 1.79 1.79 1.84 1.85 1.89 1.90 1.84
EUR/RON 4.47 4.52 4.45 4.42 4.35 4.37 4.35 4.33 4.25 4.25 4.15
USD/RUB 30.75 30.24 29.98 29.81 31.29 31.10 31.07 30.87 31.92 32.54 33.17
EUR/PLN 4.10 4.25 4.30 4.20 4.15 4.10 4.10 3.90 3.95 4.10 3.85
USD/UAH 8.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0
EUR/RSD 115 110 105 100 103 102 100 99 95 90 87
Asia Bloc Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15
USD/SGD 1.24 1.24 1.22 1.20 1.18 1.15 1.15 1.15 1.15 1.15 1.15
USD/MYR 3.10 3.10 3.05 3.00 2.95 2.90 2.85 2.80 2.80 2.80 2.80
USD/IDR 9600 9800 9850 9900 9950 9900 9800 9700 9800 9600 9500
USD/THB 31.00 30.00 29.50 29.00 28.70 28.40 28.40 28.40 28.40 28.40 28.40
USD/PHP 41.00 40.00 39.50 39.00 38.50 38.00 38.00 38.00 38.00 38.00 38.00
USD/HKD 7.75 7.75 7.75 7.75 7.75 7.75 7.80 7.80 7.80 7.80 7.80
USD/RMB 6.35 6.30 6.27 6.25 6.30 6.29 6.25 6.27 6.21 6.20 6.00
USD/TWD 29.60 29.00 28.50 28.00 27.80 27.50 27.50 27.50 27.50 27.50 27.50
USD/KRW 1125 1100 1080 1050 1030 1000 1000 1000 1000 1000 1050
USD/INR 55.00 55.00 54.50 54.00 53.50 53.00 52.50 51.00 50.50 50.00 50.00
USD/VND 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000 21000
LATAM Bloc Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15
USD/ARS 4.68 4.85 5.00 5.15 5.35 5.55 5.70 5.85 6.05 6.25 -----
USD/BRL 2.00 1.98 1.98 1.96 1.95 1.95 1.98 2.00 2.02 2.05 -----
USD/CLP 485 482 480 483 486 490 495 500 502 505 -----
USD/MXN 13.00 12.75 12.60 12.50 12.30 12.10 12.20 12.30 12.45 12.60 -----
USD/COP 1800 1850 1875 1830 1815 1800 1810 1820 1830 1840 -----
USD/VEF 4.30 4.30 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 -----
USD/PEN 2.62 2.60 2.59 2.58 2.57 2.55 2.55 2.56 2.57 2.58 -----
Others Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15
USD Index 79.21 76.71 77.60 76.24 77.15 75.82 78.10 79.60 81.25 82.25 83.99
*End Quarter
FX Strategy 20 September 2012
Markets Mover
59
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Market Cover
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 & Fiscal Economics London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.com
David Tinsley UK, Ireland London 4420 7595 8150 david.tinsley@uk.bnpparibas.com
Gizem Kara Scandinavia, Greece London 44 20 7595 8783 gizem.kara@uk.bnpparibas.com
Evelyn Herrmann Germany, Austria, Switzerland, Europe London 44 20 7595 8476 evelyn.herrmann@uk.bnpparibas.com
Ricardo Santos Spain, Portugal, Europe London 44 20 7595 8369 ricardo.a.santos@uk.bnpparibas.com
Catherine Colebrook Eurozone Inflation London 44 20 7595 1298 catherine.colebrook@uk.bnpparibas.com
Dominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.com
Michelle Lam Economist London 44 20 7595 8226 michelle.h.lam@uk.bnpparibas.com
Julia Coronado Chief Economist North America New York 1 212 841 2281 julia.l.coronado@us.bnpparibas.com
Jeremy Lawson US New York 1 212 471-8180 Jeremy.lawson@us.bnpparibas.com
Yelena Shulyatyeva US New York 1 212 841 2258 yelena.shulyatyeva@us.bnpparibas.com
Bricklin Dwyer US, Canada New York 1 212 471-7996 bricklin.dwyer@us.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
Makoto Watanabe Japan Tokyo 81 3 6377 1605 makoto.watanabe@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
Mole Hau Asia Hong Kong 852 2108 5620 mole.hau@asia.bnpparibas.com
Xingdong Chen Chief China Economist Beijing 86 10 6535 3327 xd.chen@asia.bnpparibas.com
Ken Peng Senior Economist, China China 86 10 6535 3380 ken.peng@asia.bnpparibas.com
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Gustavo Arruda Latin America Economist São Paulo 55 11 3841 3466 gustavo.arruda@br.bnpparibas.com
Nader Nazmi Latin America Economist New York 1 212 471 8216 nader.nazmi@us.bnpparibas.com
Florencia Vazquez Latin America Economist Buenos Aires 54 11 4875 4363 florencia.vazquez@ar.bnpparibas.com
Michal Dybula Chief Economist CEEMEA Warsaw 48 22 697 2354 michal.dybula@pl.bnpparibas.com
Julia Tsepliaeva Russia & CIS Moscow 74 95 785 6022 julia.tsepliaeva@ru.bnpparibas.com
Selim Cakir Chief Economist Turkey and GCC Istanbul 90 216 635 2972 selim.cakir@teb.com.tr
Emre Tekmen Economist Turkey and GCC Istanbul 90 216 635 2975 emre.tekmen@teb.com.tr
Nazli Toraganli Economist Turkey and GCC Istanbul 90 216 635 2986 nazli.toraganli@teb.com.tr
Interest Rate Strategy
Patrick Jacq Europe Strategist Paris 33 1 4316 9718 patrick.jacq@bnpparibas.com
Christophe Duval-Kieffer Global Head of Inflation Strategy London 44 20 7 595 8351 christophe.duval-kieffer@bnpparibas.com
Shahid Ladha Inflation & UK Strategist London 44 20 7 595 8573 shahid.ladha@uk.bnpparibas.com
Eric Oynoyan Europe Strategist London 44 20 7595 8613 eric.oynoyan@uk.bnpparibas.com
Matteo Regesta Europe Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.com
Ioannis Sokos Europe Strategist London 44 20 7595 8671 ioannis.sokos@uk.bnpparibas.com
Camille de Courcel Europe Strategist London 44 20 7595 8295 camille.decourcel@uk.bnpparibas.com
Bülent Baygün Head of Interest Rate Strategy US New York 1 212 471 8043 bulent.baygun@us.bnpparibas.com
Mary-Beth Fisher US Strategist New York 1 212 841 2912 mary-beth.fisher@us.bnpparibas.com
Aaron Kohli US Strategist New York 1 212 841 2026 aaron.kohli@us.bnpparibas.com
Suvrat Prakash US Strategist New York 1 917 472 4374 suvrat.prakash@us.bnpparibas.com
Anish Lohokare MBS Strategist New York 1 212 841 2867 anish.lohokare@us.bnpparibas.com
Olurotimi Ajibola MBS Strategist New York 1 212 8413831 olurotimi.ajibola@us.bnpparibas.com
Bo Peng US Strategist New York 1 212 8412241 bo.peng@us.bnpparibas.com
Tomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1703 Tomohisa.fujiki@japan.bnpparibas.com
Hidehiko Maejima Japan Strategist Tokyo 81 3 6377 1701 Hidehiko.maejima@japan.bnpparibas.com
Satoshi Igarashi Japan Strategist Tokyo 81 (0)3 6377 1710 satoshi.igarashi@japan.bnpparibas.com
Christian Séné Technical Analyst Paris 33 1 4316 9717 christian.séné@bnpparibas.com
FX Strategy
Steven Saywell Head of FX Strategy - Europe London 44 20 7595 8487 steven.saywell@uk.bnpparibas.com
Michael Sneyd FX Strategist London 44 20 7595 1307 michael.sneyd@uk.bnpparibas.com
Kiran Kowshik FX Strategist London 44 20 7595 1495 kiran.kowshik@bnpparibas.com
James Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.com
Mary Nicola FX Strategist New York 1 212 841 2492 mary.nicola@us.bnpparibas.com
Local Markets FX & Interest Rate Strategy
Chin Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 chin.thio@asia.bnpparibas.com
Jasmine Poh FX & IR Asia Strategist Singapore 65 6210 3418 jasmine.j.poh@asia.bnpparibas.com
Bartosz Pawlowski Head of CEEMEA Strategy London 44 20 7595 8195 Bartosz.pawlowski@uk.bnpparibas.com
Dina Ahmad FX & IR CEEMEA Strategist London 44 20 7 595 8620 dina.ahmad@uk.bnpparibas.com
Erkin Isik FX & IR CEEMEA Strategist Istanbul 90 (216) 635 29 87 erkin.isik@teb.com.tr
Vivek Tawadey Head of Credit Strategy CEEMEA London 44 20 7 595 8894 vivek.tawadey@uk.bnpparibas.com
Diego Donadio FX & IR Latin America Strategist São Paulo 55 11 3841 3421 diego.donadio@br.bnpparibas.com
Thiago Alday FX & IR Latin America Strategist São Paulo 55 11 3841 3445 thiago.alday@br.bnpparibas.com
Market Mover
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Ann Aston, Market Economics, London. Tel: 44 20 7595 8503 Email: ann.aston@uk.bnpparibas.com,
Jessica.Bakkioui, Market Economics, London. Tel: 44 20 7595 8478 Email: jessica.bakkioui@uk.bnpparibas.com,
Judith Moretto, Market Economics, London. Tel: 44 20 7595 8161 Email: Judith.moretto@us.bnpparibas.com
Danielle Catananzi, Interest Rate Strategy, London. Tel: 44 20 7595 4418 Email: danielle.catananzi@uk.bnpparibas.com,
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Editors: Amanda Grantham-Hill, Interest Rate Strategy/Market Economics, London. Tel: 44 20 7595 4107 Email: amanda.grantham-hill@bnpparibas.com;
Poilin Breathnach, Interest Rate Strategy/Market Economics, London. Tel: 44 20 7595 3145 Poilin.Breathnach@uk.bnpparibas.com,
Louise Bylicki, Interest Rate Strategy/Market Economics, New York. Tel: 212 841 8449 Email: louise.bylicki@us.bnpparibas.com
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