MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
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Market Economics | Interest Rate Strategy | Forex Strategy 24 March 2011<br />
Market Mover<br />
Market Outlook 2-3<br />
Fundamentals<br />
• US: Stirred Not Shaken 4-6<br />
• Japan: Fiscal Sustainability Now 7-10<br />
• Japan: When Will Power 11-12<br />
Rationing End?<br />
• Global: Supply Chain Disruptions 13-14<br />
• Eurozone: Holding Firm 15-16<br />
• Portugal: Towards the EFSF 17-18<br />
• UK Budget 2011: Tweaking at the 19-21<br />
Margins<br />
Interest Rate Strategy<br />
• US: A Gradual Move Higher and 22-23<br />
Steeper<br />
• US: Remember Last Year’s End 24-25<br />
of March?<br />
• US: Setup For Auctions With 26-27<br />
Spread Curve Flatteners<br />
• MBS: Staging a Comeback! 28-31<br />
• EUR: Risk of Pressure on Term 32<br />
Liquidity<br />
• EUR: Dislocation? Not Really 33<br />
• EUR: Portugal Coming Closer to 34-35<br />
the EFSF<br />
• EMU Debt Monitor: CDS, RV 36-41<br />
Charts, Trade ideas, SSA &<br />
Covered Bonds, Redemptions,<br />
• EUR Vol: Rate Hike without a Vol 42-43<br />
Rally?<br />
• JGBs: Several Factors to Weigh 44<br />
• JGBs: Trade Recommendations 45-46<br />
• Global Inflation Watch 47-50<br />
• Inflation: Cash and Carry 51-54<br />
• Technical Analysis 55-56<br />
• Trade Reviews 57<br />
FX Strategy<br />
• Strategy: JPY Liquidity Boosts 58-62<br />
Global Assets<br />
• Technical Strategy: Dollar Decline 63-64<br />
Should Continue<br />
• Trading Positions 65<br />
Forecasts & Calendars<br />
• 1 Week Economic Calendar 65-68<br />
• Key Data Preview 69-75<br />
• 4 Week Calendar 76<br />
• Treasury & SAS Issuance 77-78<br />
• Central Bank Watch 79<br />
• FX Forecasts 80<br />
Contacts 81<br />
www.GlobalMarkets.bnpparibas.com<br />
• Commodities and equity markets have rebounded<br />
sharply from severe setbacks following the Japan<br />
earthquake.<br />
• Risk appetite remains supported first and foremost by<br />
global liquidity conditions.<br />
• The situation in Japan and MENA remains uncertain.<br />
However, in the absence of worse news on those fronts,<br />
the markets will refocus on upcoming economic data and<br />
comments from central banks.<br />
• Further improvements in US confidence and payrolls<br />
would be supportive of risky assets and weigh on<br />
Treasuries.<br />
• While the FOMC now sounds more upbeat on the<br />
economy, any near-term setback would likely lead to a<br />
steeper Treasury curve.<br />
• The current concerns in Ireland and Portugal will<br />
continue to support core EGBs in the short run.<br />
• The latest ECB comments suggest the intention to<br />
follow through on the early-March heads-up for a rate rise<br />
next month.<br />
• In the UK, the call for the first BoE rate hike remains<br />
very close due to the discouraging growth-inflation mix;<br />
the latter is set to weigh on sterling.<br />
• EUR weakness should develop against other currencies<br />
than the USD, which remains supported by liquidity<br />
conditions.<br />
Market Views<br />
UST 10y T-note Yield (%)<br />
2y/10y Spread (bp)<br />
EGB 10y Bund Yield (%)<br />
2y/10y Spread (bp)<br />
JGB 10y JGB Yield (%)<br />
2y/10y Spread (bp)<br />
Forex<br />
EUR/USD<br />
USD/JPY<br />
Current 1 Week 1 Month<br />
3.39 ↔↑ ↑<br />
271 ↔↑ ↔↑<br />
3.25 ↔ ↑<br />
156 ↔↓ ↓<br />
1.21 ↓ ↓<br />
100 ↓ ↓<br />
1.4200 ↔ ↑<br />
80.91 ↔ ↑<br />
IMPORTANT NOTICE. Please refer to important disclosures found at the end of<br />
this report. Some sections of this report have been written by our strategy teams<br />
(shown in blue). Such reports do not purport to be an exhaustive analysis and may<br />
be subject to conflicts of interest resulting from their interaction with sales and<br />
trading which could affect the objectivity of this report.
Market Outlook<br />
The panic mode did not<br />
last long but a number of<br />
risks remain<br />
Upcoming US payrolls and<br />
confidence report will be<br />
key for Treasuries<br />
Last week’s risk-off period proved to be short lived. Markets have partly – for<br />
some assets, fully – reversed the post-Japan earthquake flight-to-quality<br />
move. Though the situation in Japan and MENA remains uncertain, global<br />
liquidity conditions continue to support risk appetite. After a jump into the 30<br />
area, the VIX index has moved back below 20.<br />
In the US, we remain cautiously bearish on Treasuries, firmly sticking with<br />
our view that yields may gradually rise in the coming months. However, the<br />
short-term picture will prove challenging due to global risk events spooking<br />
markets. It’s worth noting that this week’s Fed buybacks have been met with<br />
more aggressive selling than usual.<br />
We expect the upcoming US payroll (1 April) growth to be solid but<br />
unspectacular (180k). Consumer confidence (29 March) has been very<br />
sensitive to external developments and the impact on stock and oil prices.<br />
This effect is not over but the FOMC has only recently improved its<br />
assessment of the economic situation. It is unlikely to change its assessment<br />
unless confidence effects become broader based and sustained.<br />
Upcoming confidence and payrolls reports to impact risk appetite<br />
1600<br />
1500<br />
1400<br />
1300<br />
1200<br />
1100<br />
1000<br />
900<br />
800<br />
700<br />
600<br />
Consum er Confidence (RHS)<br />
S&P 500<br />
99 00 01 02 03 04 05 06 07 08 09 10<br />
150<br />
140<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
Increasing tensions on<br />
Portugal and Ireland…<br />
…are supporting core<br />
markets…<br />
Source: Reuters EcoWin Pro<br />
In Europe, the near-term focus is on the EU summit (today and tomorrow),<br />
with spreads having widened at the periphery. In Portugal, with the<br />
government failing to secure passage of its latest round of austerity<br />
measures in the lower house, the Prime Minister resigned. The probability of<br />
a bailout for Portugal (which we have long considered inevitable) has risen,<br />
but the current situation is very fluid. The path from where are today to<br />
assistance being provided by the IMF and the EU remains unclear.<br />
Irish bond yields have hit 10%, indicating that markets are pricing in<br />
insolvency risks. Ireland is more significant than Portugal in that its oversized<br />
banking sector can create significant negative spillovers when it runs into<br />
trouble. Spain, which had seen an impressive decline of its CDS spreads<br />
since January, has been alarmed by rating agencies considering<br />
downgrades of its banks.<br />
All this is happening as core countries see their room for manoeuvre and<br />
strike a deal reduced by populist trends. In Germany, Chancellor Merkel will<br />
have to renegotiate the funding of the ESM as the compromise reached at<br />
the last Summit and follow-up FinMin meeting has run into opposition even<br />
from lawmakers of parties that back her. In Finland, the 17 April general<br />
election may see the populist party 'True Fins' triumphing.<br />
Signs of stress have so far been limited outside Portugal and Ireland but<br />
current concerns will support core EGBs. The lack of resteepening of the<br />
Cyril Beuzit 24 March 2011<br />
Market Mover<br />
2<br />
www.GlobalMarkets.bnpparibas.com
…are supporting core<br />
markets…<br />
…and weighing on the<br />
euro<br />
benchmark curve shows that, if markets are taking into account potential<br />
risks, they are not as concerned as they were before. At this juncture, this<br />
context may prevail in coming days, offering core markets some support but<br />
not fuelling a strong bullish tone. We retain our constructive view on core<br />
EGBs and recommend trading from the long side.<br />
On spreads, it is worth noting that the market's assessment of risks is less<br />
elevated than it has been. This means that risk aversion could rise<br />
significantly if risks extend further. We see room for spreads to widen in the<br />
near term. This may prevent the flattening from developing significantly and<br />
exposes the back end of the curve to resteepening risks.<br />
The latest eurozone news is not good for the euro. However, global liquidity<br />
conditions have become even more supportive with the BoJ bumping<br />
liquidity into money markets and pushing this liquidity via JPY weakening<br />
intervention into global markets. Even in the US, recent housing market<br />
weakness has pushed back early rate-hike speculation. Strong liquidity<br />
conditions will keep asset prices supported and the USD on the back foot for<br />
the moment. This implies that EUR weakness should develop against other<br />
currencies than the USD. We recommend selling EURSEK, EURNOK and<br />
AUDEUR.<br />
Ireland and Portugal under the spotlight<br />
7<br />
6<br />
10 -Y ea r G ove rnm en t<br />
Bond Yield Spreads vs Germ any (% )<br />
Ireland<br />
5<br />
Portugal<br />
4<br />
3<br />
Spain<br />
2<br />
1<br />
0<br />
Jul<br />
Sep Nov Jan<br />
09<br />
Ita ly<br />
Mar May Jul Sep Nov Jan<br />
10<br />
Mar<br />
11<br />
Close call on the BoE due to<br />
the poor growth-inflation mix<br />
JGBs to remain well<br />
supported into the new<br />
fiscal year<br />
Source: Reuters EcoWin Pro<br />
In the UK, the timing of the first BoE rate hike remains a very close call. The<br />
worsening in the latest inflation data, coupled with confirmation from the BoE<br />
minutes that the MPC expects CPI inflation to exceed 5% y/y, reinforces the<br />
case for a rate hike at the May meeting. However, the minutes also showed<br />
that the committee is sensitive to news on the consumer and uncertainty<br />
about the durability of the recovery in activity indicators. We stand by our call<br />
for a hike at the May meeting, given the worsening news on inflation.<br />
Nonetheless, the increased risk of weaker activity data has made us more<br />
nervous.<br />
Sterling may have seen most of its rally. The advance since January was<br />
backed by rising nominal interest rate differentials while real yields have<br />
been declining. The discouraging growth-inflation mix suggests that real<br />
yields will stay low. Domestic demand weakness is likely as real income<br />
weakens. Unless the UK experiences a productivity growth boost – of which<br />
we have seen no evidence to date – real income will remain depressed,<br />
undermining sterling in the medium term.<br />
In Japan, equities plunged and JGB futures were bought up in the wake of<br />
11 March. With the help of emergency quantitative easing by the Bank of<br />
Japan and coordinated FX intervention, things seems to be calming<br />
somewhat. However, the headline risk remains high. Flight-to-quality<br />
considerations and the worsening economic outlook are likely to dominate<br />
sentiment in the near term.<br />
Cyril Beuzit 24 March 2011<br />
Market Mover<br />
3<br />
www.GlobalMarkets.bnpparibas.com
US: Stirred Not Shaken<br />
• The events in Japan are likely to produce a<br />
noticeable dip and recovery in US GDP growth<br />
in 2011. Limitations in supply will disrupt sales<br />
of autos and electronics.<br />
Chart 1: Share of Japan in US Trade<br />
• We forecast a slowing in GDP growth to<br />
1.5% in Q2 q/q saar from 2.3% in Q1. We then<br />
think consumers and businesses will make up<br />
for lost time in H2, with GDP accelerating to<br />
3.0% in Q3 and 4.0% in Q4.<br />
• Overall, the events in Japan are expected to<br />
reduce GDP growth by 0.2pp in 2011 while the<br />
rebound from the disaster should add 0.1pp in<br />
2012.<br />
• Japan is a relatively minor trading partner<br />
for the US, accounting for around 4.8% of all<br />
exports and 6% of imports. Japan plays a more<br />
significant role in the auto and advanced<br />
technology industries, where it accounts for<br />
13% and 7% of imports respectively.<br />
Source: Reuters EcoWin Pro<br />
Chart 2: Japanese Motor Vehicles and Parts<br />
Imports as % US Total Imported Vehicles and<br />
Parts<br />
• Most of the impact of the Japanese<br />
earthquake on the US economy is temporary in<br />
nature and comes from supply-chain<br />
disruptions.<br />
• However, it is a supply shock that is likely to<br />
add to global inflationary pressures, which will<br />
sap a little from final demand growth on<br />
balance.<br />
• The wild card continues to be any hit to<br />
consumer and business confidence which could<br />
take a larger toll on international activity.<br />
• There are few implications for US monetary<br />
or fiscal policy, which will continue to be driven<br />
by domestic concerns.<br />
Source: Reuters EcoWin Pro<br />
Chart 3: Auto Inventories on Hand Allow for a<br />
Decent Month of Sales in March<br />
A preliminary assessment of the impact of events<br />
in Japan on US economic growth suggests<br />
significant near-term supply chain disruptions<br />
The massive earthquake in Japan has wrought<br />
devastating human consequences in the world’s third<br />
largest economy. The rest of the world has looked on<br />
with sympathy and sadness as the Japanese bravely<br />
deal with the aftermath. The reaction in financial<br />
markets has swung between depression and<br />
euphoria.<br />
The reality is that the actual impact on economic<br />
activity inside and outside Japan will take time to<br />
Source: Reuters EcoWin Pro<br />
assess. The best we can do is think clearly through<br />
the likely chain of events in coming months.<br />
Our economists in Japan estimate that the hit to GDP<br />
growth in Japan in 2011 will be close to 3pp relative<br />
Julia Coronado/Yelena Shulyatyeva 24 March 2011<br />
Market Mover<br />
4<br />
www.GlobalMarkets.bnpparibas.com
to their pre-earthquake forecast, followed by a boost<br />
in 2012 as reconstruction activity gathers<br />
momentum. The reduction in growth comes from: the<br />
direct destruction of productive capacity in the<br />
affected regions; a disruption in production across<br />
Japan owing to limitations in power supply; increased<br />
risk aversion; and a decline in sentiment among<br />
household and businesses.<br />
The near-term disruptions to production have the<br />
most direct near-term implications for the rest of the<br />
world through supply-chain effects. While Japan has<br />
not been a driver of global growth for some time, it is<br />
still a source for key inputs in the automotive and<br />
electronics industry.<br />
Despite the restarting of some production featured in<br />
recent headlines, our Japan economists suggest that<br />
many large industrial companies continue to deal<br />
with disruptive shortages and limitations that will not<br />
be resolved easily in the near term. We simply need<br />
to wait and see how disruptive reduced production<br />
proves to be to the global supply chain.<br />
We look for a modest reduction in US economic<br />
growth in 2011 but a notable impact on the<br />
contour over the year<br />
Japan’s importance as a US trading partner has<br />
steadily declined in recent years (Chart 1). The<br />
country currently accounts for just 4.8% of all exports<br />
and 6% of imports. A reduction in domestic demand<br />
in Japan will likely translate into only a small<br />
reduction in the growth of US exports. Imports are<br />
also likely to be disrupted owing to production<br />
interruptions, with the impact concentrated on autos<br />
and electronics.<br />
The role of Japan is still quite significant in the motor<br />
vehicle industry as Japanese motor vehicle parts<br />
account for 13% of the US’s total imported motor<br />
vehicles and parts (Chart 2). The impact on auto<br />
availability will go beyond reduced availability of<br />
Japanese vehicles. For example, General Motors<br />
has announced the shutdown of plants in the US and<br />
Europe owing to reduced availability of Japanese<br />
parts.<br />
Auto parts are often model-specific, making it difficult<br />
to shift to other suppliers at short notice. The nearterm<br />
impact on auto sales will be mitigated by<br />
inventories on hand. The severity of the impact will<br />
therefore depend on how long the disruptions to<br />
Japanese production persist.<br />
US auto sales for March will be released next week<br />
and are likely to be largely unaffected by the<br />
interruptions in auto production following the<br />
Japanese earthquake. Auto sales had risen above<br />
13mn units saar in February on aggressive pricing<br />
Chart 4: Auto Pricing May Dampen Sales<br />
Source: Reuters EcoWin Pro<br />
Source: Reuters EcoWin Pro<br />
Chart 5: High Tech<br />
and improved consumer confidence and most<br />
analysts are looking for a March reading near<br />
February’s. Automakers have healthy levels of<br />
inventory on hand and can easily meet near-term<br />
demand (Chart 3). Beginning in April, US consumers<br />
are likely to see reduced model availability. Ward’s<br />
Automotive, a leading industry research organisation,<br />
suggested that supply limitations “almost certainly<br />
will put the brakes on April incentives, which will<br />
likely drive out price-conscious buyers who recently<br />
returned to the market”. It is looking for the pace of<br />
sales to drop “dramatically” in April, with continued<br />
sub-par sales likely to persist for a number of<br />
months. Demand for autos will be hurt by three<br />
factors:<br />
• Reduced availability of certain makes and<br />
models will reduce sales as some consumers will<br />
be unwilling to substitute to other models and will<br />
prefer to wait. Some substitution will likely occur,<br />
a development that could favour domestic<br />
producers, but such substitution is likely to be<br />
less than one for one.<br />
• The second factor hurting sales will be firmer<br />
pricing. With severe supply shortages,<br />
automakers will simply not need to offer the<br />
Julia Coronado/Yelena Shulyatyeva 24 March 2011<br />
Market Mover<br />
5<br />
www.GlobalMarkets.bnpparibas.com
aggressive incentives they have rolled out of late<br />
to clear their inventories. We expect an impact<br />
on pricing similar to what we saw during the<br />
bankruptcy of two of the big three US<br />
automakers (Chart 4). During that episode, the<br />
lack of positive profit margins led to firmer prices<br />
as automakers simply did not have the capacity<br />
to compete on price. This was a significant factor<br />
keeping sales subdued as consumers can simply<br />
extend the life of their current vehicle in many<br />
cases and wait for better pricing to return.<br />
• The third factor that will crimp sales is soaring<br />
gasoline prices. Japan specialises in the<br />
production of fuel-efficient models and engines.<br />
The lack of availability of these models and<br />
higher retail prices will be hitting just as gasoline<br />
prices will be reaching levels not seen since<br />
2008.<br />
Many consumers are likely to simply wait and see<br />
how these factors evolve before committing to a<br />
significant auto purchase.<br />
Autos and other durable goods have a powerful<br />
impact on consumer spending growth. The<br />
acceleration in consumption from 2.4% q/q saar in<br />
Q3 to 4.1% was entirely accounted for by a 21%<br />
surge in durables spending. Even if we were to see<br />
auto sales return to their Q4 2010 average of 12.4mn<br />
units in Q2 2011 from what is likely to be an average<br />
13.1mn pace in Q1, we could see a flat reading on<br />
consumer spending growth.<br />
We have reduced our forecast of real growth in<br />
consumption to 1.0% q/q saar. Consumer and<br />
business electronics are expected to be affected by<br />
some lack of availability in Q2 as well, and overall<br />
growth will suffer from a drag from inventories.<br />
Partially offsetting these factors should be a boost<br />
from trade as imports sag. On balance, the aftermath<br />
of the Japanese earthquake should bring a dip to<br />
1.5% q/q saar in US GDP growth in Q2 2011. This<br />
will be reflected broadly across economic indicators<br />
including the ISM indices, consumer confidence and<br />
retail sales.<br />
We then expect consumers and businesses to make<br />
up for lost time in spending and restocking in H2<br />
2011, with growth accelerating to 3.0% in Q3 and<br />
4.0% in Q4. The wild card will be how well business<br />
and consumer confidence hold up. We do expect<br />
some softening in the pace of hiring in Q2 but for the<br />
labour market to stay on a solid track. The labour<br />
market will be key to how markets interpret any<br />
sluggish numbers on activity.<br />
Policymakers are likely to continue along a<br />
gradual path toward normalisation<br />
In our baseline scenario, the US economy is stirred<br />
but not shaken. As in 2010, global events will lead to<br />
a soft patch from which the US economy will recover.<br />
Last year, the soft patch was accompanied by an<br />
aggressive accommodation from the Fed.<br />
However, this year, we expect the Fed to continue<br />
along its path toward gradual removal of policy<br />
accommodation. We think the Fed will end QE2 in<br />
June and hold the balance sheet steady by<br />
reinvesting the roll-off of the mortgage portfolio<br />
through at least September before allowing a gradual<br />
shrinking of the balance sheet and beginning a<br />
soaking up of excess reserves through reverse repos<br />
and the term deposit facility in early 2012. We<br />
continue to think the first rate hike will come in June<br />
2012.<br />
The US economy is clearly in a better place than<br />
when we hit the soft patch last year, and global and<br />
domestic inflationary pressures point to the need for<br />
a gradual normalisaton of policy. Of course,<br />
uncertainties abound and the Fed will remain nimble<br />
– although the potential for inflation to be a<br />
constraining factor has risen.<br />
Julia Coronado/Yelena Shulyatyeva 24 March 2011<br />
Market Mover<br />
6<br />
www.GlobalMarkets.bnpparibas.com
Japan: Fiscal Sustainability Now<br />
• If the financial markets were seriously<br />
worried about fiscal sustainability, the long-term<br />
interest rate would be rising and the yen<br />
weakening. <br />
• But in the week after the earthquake/tsunami<br />
term rates fell, the yen strengthened and share<br />
prices tumbled.<br />
• That subdued term rates and yen<br />
appreciation can coexist with the huge public<br />
debt is because Japan has succumbed to<br />
deflationary equilibrium, whereby funds<br />
continue to flow towards ‘safe’ assets.<br />
• But the earthquake disaster could bring<br />
forward the time when the debt reaches critical<br />
mass.<br />
• The most effective way to ensure that<br />
financing reconstruction does not trigger a<br />
fiscal crisis is for the government to<br />
concurrently announce plans for reconstruction<br />
and plans for long-term fiscal restructuring. The<br />
government should also give up on its favoured<br />
projects such as generous child benefits and rechannel<br />
that funding towards reconstruction.<br />
• There is a danger that the BoJ will be<br />
pressed into supplying funds for reconstruction.<br />
If the financial markets believe the BoJ is<br />
monetising the debt, deflationary equilibrium<br />
may be replaced by soaring inflation, surging<br />
term rates and a tanking yen.<br />
Chart 1: Japan's Share of Global Production of<br />
IT Electronics (%, 2009)<br />
IT Solution Service 9%<br />
Communications equipment<br />
Computers and data terminals<br />
Other electronic devices<br />
Semiconductors<br />
Dis play devices<br />
Electronic parts<br />
AV equipment<br />
Source: JEITA, <strong>BNP</strong> Paribas<br />
14%<br />
20%<br />
22%<br />
22%<br />
23%<br />
40%<br />
44%<br />
Japan's share<br />
(includes overseas<br />
production)<br />
Others<br />
0% 20% 40% 60% 80% 100%<br />
Chart 2: Combined Central and Local<br />
Government Debt (% of GDP, FY)<br />
200<br />
180<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10<br />
Source: Cabinet Office, <strong>BNP</strong> Paribas ** FY 2010 is our estimate.<br />
Doubts about Japan’s fiscal sustainability<br />
The massive earthquake/tsunamis that hit northern<br />
Japan on 11 March struck just as we were returning<br />
from the global forecasting meeting in New York. Our<br />
flight, in fact, was making its final approach to Narita<br />
Airport. However, after circling Narita several times,<br />
an announcement was made that we would be<br />
diverted to Nagoya. After landing at Nagoya, we<br />
were kept in the plane for roughly two hours, during<br />
which time we were inundated via BlackBerry with<br />
concerned messages from colleagues and clients.<br />
Beyond inquiries about our condition, we were<br />
repeatedly asked what the disaster (the Fukushima<br />
power station crisis was not yet known) meant for the<br />
Japanese economy and, especially, Japan’s already<br />
precarious fiscal condition. Questions included:<br />
Would the budget deficit swell even more if the<br />
disaster caused the economy to contract sharply,<br />
reducing tax receipts? Will the Kan administration<br />
have to forgo finalising plans in June for reforming<br />
social security, the single greatest cause of Japan’s<br />
chronic budget deficits? Will fiscal reform be further<br />
put off if the economy is weakened by the<br />
earthquake? Will the public debt snowball from the<br />
massive cost of reconstruction? With the public debt<br />
already at 180% of GDP, how will government<br />
spending on reconstruction be financed? With so<br />
many concerns about the fiscal ramifications of the<br />
earthquake, we address these concerns in this report.<br />
Disaster was actually followed by falling term<br />
rates, yen appreciation and weak share prices<br />
If the financial markets were seriously worried about<br />
the sustainability of Japan’s public debt, long-term<br />
interest rates would be rising and the yen weakening.<br />
But, contrary to the fears of some, what actually<br />
happened is that the week after the disaster saw<br />
Ryutaro Kono 24 March 2011<br />
Market Mover<br />
7<br />
www.GlobalMarkets.bnpparibas.com
term rates falling, the yen strengthening and share<br />
prices tumbling.<br />
Chart 3: Corporate Growth Expectations (real<br />
growth rate, %)<br />
While the drop in term rates, like the plunge in share<br />
prices, can be attributed to the market discounting<br />
economic deterioration from the earthquake, the<br />
yen’s strength – the cause of weak share prices<br />
owing to the damage to exporters’ earnings – could<br />
seem incongruent.<br />
7.0<br />
6.0<br />
5.0<br />
4.0<br />
3- Year Ahead<br />
5- Year Ahead<br />
Mechanism behind the yen’s appreciation<br />
As often evident in the financial markets, whenever<br />
uncertainties increase, there is a tendency to avoid<br />
risk assets in favour of safe assets. So did the<br />
disaster prompt a shift away from foreign currency<br />
and foreign-currency denominated assets with their<br />
relatively high risk in favour of the relative safety of<br />
the yen?<br />
Rampant speculation of such yen repatriation (by<br />
Japanese insurers to procure cash for payouts to<br />
policyholders, by Japanese banks to prepare for<br />
withdrawals, by corporations to prepare for<br />
emergencies) is deemed a cause of the yen’s recent<br />
appreciation.<br />
Whether there actually was massive repatriation or<br />
not is unclear but, in behavioural economics, what is<br />
important is the narrative justifying long positions on<br />
the yen – which act to bring about the expected yen<br />
appreciation.<br />
Will term rates remain subdued, even as the debt<br />
steadily grows?<br />
Even in the bond market, growing preference for safe<br />
assts (or speculation thereof) owing to heightened<br />
uncertainties, and not just bleak prospects for the<br />
economy, drove investors to buy government debt.<br />
Seeing how the cost of reconstruction will inevitably<br />
add to Japan’s already-huge public debt, will doubts<br />
of fiscal sustainability at some point prompt investors<br />
to dump JGBs and the yen?<br />
Disconnect with Japan’s public debt<br />
There has long been a disconnect between Japan’s<br />
huge public debt and the trends in prices, the yen<br />
and term rates. For a country such as Japan, with its<br />
dangerously high public debt, one would normally<br />
expect to find a tanking currency, soaring interest<br />
rates and high inflation. Instead what we have is yen<br />
appreciation, subdued interest rates and deflation.<br />
As pointed out in previous reports, this is because<br />
funds continue to flow towards government bonds, as<br />
private sector demand for funding has not revived<br />
owing to continued deflationary expectations and the<br />
dim prospects for economic growth. In other words,<br />
government debt can be smoothly absorbed because<br />
3.0<br />
2.0<br />
1.0<br />
0.0<br />
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10<br />
Source: Cabinet office, <strong>BNP</strong> Paribas<br />
540<br />
520<br />
500<br />
480<br />
460<br />
440<br />
420<br />
Chart 4: Nominal GDP (CY, JPY trn)<br />
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Cabinet office, <strong>BNP</strong> Paribas<br />
private demand for funds is falling faster than debt<br />
issuance is increasing.<br />
Why subdued term rates and yen appreciation<br />
coexist with the huge public debt<br />
Because of lacklustre growth and deflation, tax<br />
receipts are not rising and the debt continues to<br />
expand. But the same lacklustre growth and deflation<br />
also keeps the long-term interest rate steady at low<br />
levels, thereby preventing Japan’s fiscal meltdown.<br />
Keeping the interest rate down is imperative for the<br />
authorities and market participants. A rising interest<br />
rate (for whatever reason) would cause debt<br />
servicing costs to soar, thereby increasing the risk<br />
that the debt will snowball out of control. Indeed, it<br />
seems as though Japan is choosing to forgo<br />
escaping from deflation and lacklustre growth in<br />
order to avoid a fiscal meltdown. As pointed out in<br />
earlier reports, because Japan has succumbed to a<br />
deflationary equilibrium of falling prices, super-low<br />
interest rates and weak growth, it is possible for<br />
subdued term rates and yen appreciation to coexist<br />
with the huge public debt.<br />
Ryutaro Kono 24 March 2011<br />
Market Mover<br />
8<br />
www.GlobalMarkets.bnpparibas.com
Bubble for safe assets creates deflationary<br />
equilibrium<br />
But the problem is that deflationary equilibrium is not<br />
a stable equilibrium and so will not last indefinitely.<br />
When the debt finally reaches critical mass,<br />
adjustments will begin in the form of a drop in real<br />
value and deflationary equilibrium will then be<br />
transformed into a new equilibrium.<br />
While some may feel that deflationary equilibrium<br />
can go on forever, the fact that that is not so<br />
becomes clear when we realise that the excessive<br />
preference for ‘safe’ assets (currency and<br />
government bonds) fostered by deflationary<br />
equilibrium has created a bubble for safe assets.<br />
Currently, owing to deflation, the real value at home<br />
and abroad of both the bonds issued by the<br />
government and the cash issued by the BoJ<br />
continues to rise. But the fact that these assets –<br />
ultimately only government-issued scraps of paper –<br />
acquire such added value makes them a kind of<br />
bubble. It is due to this bubble for the yen and<br />
government bonds that the yen strengthens, the term<br />
interest rate stays low and prices fall.<br />
Collapse of deflationary equilibrium<br />
Bubbles do not last, so when the bubble for safe<br />
assets bursts the reverse will occur. In other words,<br />
there will be a surge in inflation, tumbling bond prices<br />
(= soaring long-term interest rates) and yen<br />
depreciation. JGBs and the currency will revert to<br />
their pre-bubble price levels.<br />
While the severity of the adjustments will depend on<br />
the size of the bubble, if matters proceed to the point<br />
of critical mass for Japan’s public debt, the likely<br />
result will be higher inflation, a collapse in bond<br />
prices and huge currency depreciation.<br />
Deflationary equilibrium erodes the tax base<br />
We can also imagine the following. If the public debt<br />
is not reined in through rising inflation, tumbling bond<br />
prices and yen depreciation, then it could be adjusted<br />
using the proper means of tax increases and<br />
spending cuts. Unfortunately, the persistence of<br />
deflationary expectations and dim prospects for<br />
economic growth that keep private demand for funds<br />
stagnant also indicate that nominal GDP growth, the<br />
broadest measure of the tax base, will continue to<br />
shrink.<br />
Thus, with deflationary equilibrium eroding the tax<br />
base, it is unlikely that the public debt can be repaid<br />
through future tax receipts and spending cuts.<br />
Disaster could further swell safe-asset bubble<br />
If the current disaster has increased investor<br />
preference for ‘safe’ assets, the safe-asset bubble<br />
can be further inflated – bringing ever closer the<br />
moment of critical mass for the public debt. The<br />
downturn in the long-term interest rate could be a<br />
manifestation of further weakening of growth<br />
expectations.<br />
That said, reconstruction should trigger public-sector<br />
demand for funds over the intermediate term. Usually,<br />
when a nation’s capital stock is destroyed by war or<br />
disaster, the potential GDP level falls, while the<br />
potential growth rate itself is bolstered by<br />
reconstruction. Growth expectations could, therefore,<br />
pick up and the long-term interest rate could also rise<br />
somewhat.<br />
Critical mass for public debt brought forward<br />
The recent disaster has also created huge supply<br />
constraints for the Japanese economy. The disasterinduced<br />
economic contractions, therefore, do not<br />
only reflect weakened aggregate demand but also<br />
large-scale supply constraints brought about by the<br />
emergence of bottlenecks.<br />
Thus, it is possible that inflationary expectations<br />
could get the upper hand over deflationary<br />
expectations, resulting in higher long-term interest<br />
rates. If so, it might not be soon but the disaster<br />
could bring forward the time when the debt reaches<br />
critical mass.<br />
How to finance reconstruction<br />
Seeing how the public debt is a virtual time bomb<br />
with a fuse of unknown length, how should the<br />
country finance reconstruction? Some might feel that<br />
debt financing of reconstruction would not be a big<br />
problem provided it is an emergency one-off that is<br />
clearly predicated on repayment via future tax<br />
receipts. Such a view seems reasonable.<br />
But the government in its budget for FY 2010 and<br />
planned budget for FY 2011 already relies heavily on<br />
issuing debt to finance new permanent spending<br />
programmes. So the public may not readily support<br />
one-time emergency financing unless the authorities<br />
can fully explain it.<br />
Pork-barrel spending in the name of<br />
reconstruction cannot be allowed<br />
Care must be taken to ensure that reconstruction<br />
spending in the name of disaster relief does not<br />
include unrelated pork-barrel spending. For instance,<br />
after the Lehman shock, the authorities spent a huge<br />
amount of taxpayers’ money on coping with a ‘oncein-a-century<br />
crisis’, but those outlays included a lot of<br />
pork. So if a source of financing cannot be clearly<br />
secured, the government should forgo its child<br />
allowances and toll road reductions – budgetary<br />
items that the opposition parties adamantly oppose –<br />
and re-channel that funding toward reconstruction<br />
Ryutaro Kono 24 March 2011<br />
Market Mover<br />
9<br />
www.GlobalMarkets.bnpparibas.com
(revenue worth JPY 3.5 trillion could be secured by<br />
forgoing the DPJ’s favoured projects).<br />
Can’t plans for reconstruction and fiscal reform<br />
be concurrently announced?<br />
Of course, if the government announces its plans for<br />
reconstruction and long-term fiscal restructuring<br />
simultaneously, the market would not harbour doubts<br />
about Japan’s fiscal sustainability. Announcing both<br />
together would be the most effective way to ensure<br />
that the unveiling of one policy to counter a crisis<br />
(reconstruction) does not trigger another crisis (fiscal<br />
meltdown).<br />
If doubts about fiscal sustainability mount, the<br />
financial system will inevitably be shaken owing to<br />
the huge JGB holdings of most domestic financial<br />
institutions. Some might question the feasibility of<br />
realising credible plans for fiscal reform at this time of<br />
crisis. However, the very fact that this is the worst<br />
crisis since WWII should make it possible for<br />
politicians of all stripes to put aside their partisan<br />
differences and work together for the good of the<br />
country.<br />
Danger of financing by BoJ<br />
In closing, we want to express our concern that the<br />
BoJ could be pressed into supplying funds to finance<br />
reconstruction. On 14 March, the BoJ moved to<br />
double the size of its outright asset purchasing<br />
programme introduced last October. Thus, in the<br />
event the government issues bonds to pay for<br />
reconstruction, we suspect that some might feel that<br />
the BoJ should support this by buying such debt.<br />
Seeing how Japan faces a national emergency, more<br />
and more politicians would probably concur. (The<br />
media, in fact, are already suggesting this kind of<br />
BoJ cooperation.)<br />
Consequences of monetisation<br />
Regardless of the label, government bonds are<br />
government bonds and the purchasing of same by<br />
the central bank constitutes monetisation.<br />
Monetisation could cause bonds and the currency to<br />
lose value, resulting in high inflation, soaring term<br />
interest rates and a plunging yen. History has shown<br />
that, all too often in Japan, emergency measures end<br />
up morphing into routine policy. Voters should not<br />
forget that the BoJ started underwriting government<br />
debt during the Great Depression as an emergency<br />
measure. Of course, our concerns will be groundless<br />
if reconstruction is undertaken alongside a credible<br />
package of fiscal reforms.<br />
Without credible fiscal reform, support from the BoJ<br />
would be very dangerous. If the financial markets<br />
believe the BoJ is monetising the debt, deflationary<br />
equilibrium will instantly end – to be replaced by<br />
soaring inflation, surging term rates and a tanking<br />
yen. We must not let policies to counter one crisis<br />
create conditions for another.<br />
Ryutaro Kono 24 March 2011<br />
Market Mover<br />
10<br />
www.GlobalMarkets.bnpparibas.com
Japan: When Will Power Rationing End?<br />
• Japan is in for two more quarters of<br />
contraction, triggered not by the usual demand<br />
shock but by supply constraints.<br />
• Tepco’s power generation for the Kanto<br />
area, down 25%, will constrain the supply of<br />
goods and services in areas unaffected by the<br />
earthquake. Meanwhile, the disrupting of supply<br />
chains has put manufacturing at risk of grinding<br />
to a halt.<br />
• Whether or not the blackouts will really end<br />
in April is key. According to our calculations,<br />
the recovery of two of Tepco’s four damaged<br />
thermal power plants by April should allow<br />
electrical capacity to cover demand in May and<br />
June. This suggests rationing could indeed end<br />
as scheduled.<br />
• But demand for power will again exceed<br />
capacity in the summer and winter. Tepco is<br />
striving to cope by acquiring gas turbine power<br />
generation systems, which should help alleviate<br />
the power shortage in Q3.<br />
Economic slowdown will be due to supply shock<br />
Because of the bottleneck of insufficient electrical<br />
power and disrupted supply chains, Japan is in for<br />
two more quarters of negative growth (-4.0%<br />
annualised in Q1 2011 and -10.0% in Q2 on our<br />
forecasts). While weakening national sentiment will<br />
certainly weigh on aggregate demand, the economic<br />
slowdown this time will largely be due to supply<br />
constraints. In this sense, the slowdown will be like<br />
none in recent memory in that it will not be triggered<br />
by a demand shock.<br />
Supply constraint of insufficient power<br />
For starters, beyond the damage to production<br />
activities in the quake-hit Tohoku region, the supply<br />
of goods and services in the Kanto region – the<br />
economic heart of the country comprising the<br />
prefectures of Tokyo, Ibaraki, Tochigi, Gunma,<br />
Saitama, Chiba, Kanagawa, Yamanashi, and part of<br />
Shizuoka – will be severely constrained by the<br />
diminished supply of electricity.<br />
Power generation by Tepco (the company supplying<br />
the Kanto region) is down roughly 25%, meaning<br />
daytime rolling blackouts on weekdays will have to<br />
continue. This imposes a great burden on factory<br />
operations as production lines have to be shut down<br />
each time blackouts occur, and some companies<br />
have suspended operations entirely as quality would<br />
be affected by momentarily stopping operations.<br />
Chart 1: Expected Power Demand in Tepco's<br />
Service Area (million kW)<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
March<br />
April<br />
May<br />
June<br />
July<br />
August<br />
Source: Tepco, <strong>BNP</strong> Paribas<br />
Note: Expected power demand is average for last two years.<br />
Chart 2: Expected Power Demand versus Power<br />
Capacity (million kW)<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
March<br />
April<br />
May<br />
June<br />
July<br />
August<br />
Some factories in the area affected by power<br />
rationing thus remain inoperative all day long. That<br />
said, because companies can regulate their<br />
operations as they deem fit, including running<br />
production lines at night when power demand<br />
declines, and department stores and other retailers<br />
also have leeway to adjust their operating hours, the<br />
damage to economic activity might be limited.<br />
Disrupted supply chains stall manufacturing<br />
Manufacturing in particular, with its well-developed<br />
and tightly managed supply chains, is at risk of<br />
grinding to a halt if supplies run out. This could<br />
constrain economic activity in areas and sectors not<br />
affected by power rationing. Of course, with effort<br />
and ingenuity in finding new suppliers and/or shifting<br />
production to unaffected areas, the problems of<br />
bottlenecks and disrupted supply chains can be<br />
September<br />
September<br />
October<br />
October<br />
November<br />
November<br />
December<br />
Shortage<br />
December<br />
January<br />
January<br />
Power capacity<br />
Source: Tepco, <strong>BNP</strong> Paribas<br />
Note: Expected capacity is based on Tepco estimates and other sources.<br />
February<br />
February<br />
Ryutaro Kono/ Makiko Fukuda 24 March 2011<br />
Market Mover<br />
11<br />
www.GlobalMarkets.bnpparibas.com
overcome, but it will take time before conditions<br />
return to normal.<br />
End of power rationing should allow a return to<br />
growth in Q3<br />
The Kanto area did not sustain significant earthquake<br />
or tsunami damage, so infrastructure and capital<br />
stock are essentially intact. Thus, economic activity<br />
in the area should quickly return to normal levels<br />
once the rolling blackouts end. Tepco has indicated<br />
that its rolling blackouts will stop at the end of April.<br />
If this turns out to be the case, we believe the<br />
economy will return to growth in Q3 (5.9%<br />
annualised in Q3, 10.5% in Q4 and 1.9% in Q1 2012)<br />
on the back of reconstruction demand. But owing to<br />
the expected contractions in Q1 and Q2, growth in<br />
2011 overall will be negative: our forecast is -0.9%.<br />
Will blackouts really end in April?<br />
Whether the blackouts will really end in April or not<br />
depends on the state of power generation at that<br />
time. Currently, four of Tepco’s thermal power plants<br />
are out of operation: Hirono plant in Fukushima,<br />
Hitachinaka and Kashima plants in Ibaraki, and<br />
Higashi Ohgishima plant in Kanagawa. According to<br />
Tepco, operations should resume at Higashi<br />
Ohgishima in March and at the Kashima plant in April.<br />
Damage at the other two plants was more extensive<br />
so repairing them will take more time.<br />
Based on Tepco’s maximum capacity and estimates<br />
of likely demand (past two-year average), the return<br />
to operations by the Higashi Ohgishima plant will<br />
mean that the electricity shortage in April won’t be as<br />
bad as in March. Nevertheless, shortages will still<br />
exist, making continued rationing necessary.<br />
In May and June, assuming the plants in Higashi<br />
Ohgishima and Kashima are generating at maximum<br />
capacity, generation should just cover expected<br />
demand. Thus, there is a good chance that rolling<br />
blackouts will indeed end in April.<br />
Power shortages likely in summertime<br />
The problem, however, is summertime electric<br />
consumption (Q3), when usage of power soars<br />
alongside rising temperatures. On our calculations,<br />
Tepco’s likely maximum capacity of 4.7 million kW<br />
will be exceeded by estimated demand of 5.7 million<br />
kW in July-August and 5.1 million kW in September.<br />
That means some form of rationing will probably<br />
have to resume. So unless something is done to<br />
cope with summertime demand for air conditioning,<br />
economic activity could again be constrained in Q3.<br />
What is more, demand for heating from December<br />
onwards could trigger another round of power<br />
shortages. Based on our calculation of Tepco’s<br />
capacity, we believe supply could be greater than<br />
first thought in Q2 but slightly less in Q3.<br />
Chart 3: Tepco’s Expected Power Demand and<br />
Power Capacity (million kW)<br />
*Electric sales<br />
(billion kw)<br />
*Electric<br />
demand<br />
*Expected<br />
capacity<br />
Shortage<br />
March 237.3 50.1 34.0 -16.1<br />
April 243.0 42.9 40.0 -2.9<br />
May 222.7 43.0 44.0 1.0<br />
June 218.7 45.9 46.0 0.1<br />
July 257.6 57.3 47.0 -10.3<br />
August 277.7 56.9 47.0 -9.9<br />
September 286.8 51.1 47.0 -4.1<br />
October 229.4 42.3 47.0 4.7<br />
November 222.0 47.4 47.0 -0.4<br />
December 229.1 48.9 47.0 -1.9<br />
January 263.8 51.3 47.0 -4.3<br />
February 50.3 47.0 -3.3<br />
Source: Tepco, <strong>BNP</strong> Paribas<br />
Note: *Electric sales: Figures for 2010, forecasts for 2011.<br />
* Expected power demand is average for last two years.<br />
* Expected capacity is based on Tepco estimates and other sources.<br />
Chart 4: Tepco's Suspended Power Operations<br />
Location<br />
Total<br />
capacity<br />
(million kW) (Share)<br />
Termal power<br />
Fukushima<br />
3.8 (5.9%)<br />
Ibaraki<br />
1.0 (1.6%)<br />
Ibaraki<br />
4.4 (6.8%)<br />
Kanagawa<br />
2.0 (3.1%)<br />
Nuclear power<br />
Fukushima<br />
4.3 (6.6%)<br />
Fukushima<br />
4.4 (6.8%)<br />
Total 19.9 (30.8%)<br />
Tepco's total maximum capacity 64.5<br />
Source: Tepco, <strong>BNP</strong> Paribas<br />
Tepco to acquire new gas turbine power<br />
generation systems<br />
Meanwhile, Tepco has announced plans to acquire<br />
gas turbine power generation systems to ease the<br />
electricity shortage expected this summer. If the new<br />
systems are those that generate 300k kW, setting up<br />
the new power stations should be easy they should<br />
only take a few months to construct. Bringing these<br />
systems online should help alleviate the power<br />
shortage in Q3.<br />
Power cannot be transferred throughout Japan<br />
If power could be transferred from parts of Japan<br />
unaffected by the disaster, the electricity shortage in<br />
the Kanto area could be eased. Unfortunately, this is<br />
easier said than done because AC power<br />
frequencies are not the same throughout the country<br />
(Japan is the only country to use both 50Hz and<br />
60Hz). In Japan, the western part of the country<br />
(Kansai area and west) uses 60Hz and the eastern<br />
part (Kanto area and east) uses 50Hz.<br />
While there are a several substations that can<br />
convert between frequencies and transfer electricity<br />
from Kansai to Kanto, their capacity to do so is<br />
limited to only 1-1.2 million kilowatts; the shortfall is<br />
10 times that.<br />
Ryutaro Kono/ Makiko Fukuda 24 March 2011<br />
Market Mover<br />
12<br />
www.GlobalMarkets.bnpparibas.com
Global: Supply Chain Disruptions<br />
• We present below stories on supply-chain<br />
disruptions caused by the Japan earthquake<br />
which have appeared in the media since 11<br />
March.<br />
• Although some companies have resumed<br />
production in Japan, the impact of the disaster<br />
will be longer lasting for others.<br />
note, as the stories below show, some companies<br />
have resumed their operations over the past week or<br />
started to boost production in the factories located in<br />
unaffected areas in Japan. However, there is also<br />
evidence that that the negative impact of the<br />
earthquake will be long-lasting for some other<br />
companies, with some saying that they are<br />
considering temporarily shifting production overseas.<br />
• In the rest of the world, supply chain<br />
disruption is causing delays or cuts to<br />
production and poses upside risks to prices.<br />
Following Japan’s earthquake/tsunami on 11 March,<br />
one of the major concerns is the impact of these<br />
events on global economic activity. In the last issue<br />
of Market Mover (17 March 2011), the economics<br />
team published a number of articles assessing the<br />
economic impact of the developments in Japan on<br />
other parts of the world.<br />
In this piece, we focus on the anecdotal evidence of<br />
the effects on the supply chain. The earthquake and<br />
the tsunami have caused significant disruptions to<br />
the power supply and logistics generally in Japan.<br />
Given Japan is a key supplier of hi-tech products,<br />
this points to possible spillovers to other economies<br />
being considerable.<br />
In the box below, we present some stories that have<br />
appeared in the media over the past two weeks<br />
regarding the impact of the Japanese events on the<br />
supply chain, production and prices. On a positive<br />
In the rest of the world, there is evidence that supply<br />
chain disruption is causing delays or cuts to<br />
production. The decisions of some car manufacturers<br />
to cut output of vehicles in the US and Europe (or<br />
discussions on doing so) are just some to quote. On<br />
the prices front, there are already concerns that<br />
supply disruptions could drive prices of key<br />
technology parts and consumer electronic goods<br />
higher.<br />
Overall, anecdotal evidence supports our view that<br />
this is a shock to supply as well as demand, for the<br />
rest of the world. Supply chain disruptions look<br />
severe and greater than for past natural disasters.<br />
Supply disruptions may lead to some substitution for<br />
other countries’ products (which in itself suggests the<br />
negative impact on global growth would be reduced).<br />
However, such disruptions are affecting the ability of<br />
companies elsewhere to produce goods. It is difficult<br />
to gauge the magnitude of these at this stage, but the<br />
direct and indirect effects of the Japanese<br />
earthquake will reduce global growth this year in our<br />
view.<br />
Box 1: Anectodal Evidence of the Impact of Japan Quake on Supply Chain and Production<br />
Japan<br />
• The Samsung/Toshiba factory in Yokkaichi, which supplies over 40% of the world's NAND flash and DRAM chips, was<br />
stopped during the earthquake. But it is now back up and running. (14 March, electroiq.com)<br />
• The prospect of extended supply disruption caused by Japan's earthquake drove prices for key technology parts higher. (16<br />
March, canada.com)<br />
• Fuji Heavy Industries Ltd. said that it will soon restart production of some autoparts at Gunma Prefecture factories. (21 March,<br />
nikkei.com)<br />
• Toyota Motor Corp. is considering halting domestic production of completed vehicles within the week due to the difficulty of<br />
procuring parts in the wake of the earthquake. The automaker has yet to set a production schedule beyond 28 March, though<br />
it has resumed domestic production of parts for overseas use. (22 March, nikkei.com)<br />
• Sony Corp. said it has partially resumed production at a lithium-ion battery plant operated by Sony Energy Device Corp in<br />
quake-hit Tochigi Prefecture. But production lines will be suspended until 31 March at five plants. Sony said it will consider<br />
shifting production to overseas plants temporarily if the parts shortage continues. (22 March, nikkei.com)<br />
• Production has stopped at roughly 70% of domestic plants that produce zinc. (22 March, nikkei.com)<br />
• Hitachi Chemical Co., which controls more than 40% of the global market for a negative electrode material for Li-ion batteries,<br />
has been forced to halt operations at a plant in Ibaraki Prefecture. (22 March, nikkei.com)<br />
• Panasonic Corp said it has resumed operations at its Koriyama plant in Fukushima Prefecture. (23 March, nikkei.com)<br />
• Fujitsu Ltd. said it has resumed some operations at one of its chip-manufacturing factories in quake-struck northern Japan.<br />
(23 March, nikkei.com)<br />
Gizem Kara/Hiroshi Shiraishi/Mole Hau/Bricklin Dwyer 24 March 2011<br />
Market Mover<br />
13<br />
www.GlobalMarkets.bnpparibas.com
Asia Ex-Japan<br />
• Semiconductor makers in Taiwan face a "fight to get raw materials" as 50% of the world's silicon wafer stock comes from two<br />
Japanese firms, Shin-Etsu and Sumco Corp., both affected by the quake. (14 March, pcworld.com)<br />
• Taiwan-based digital camera makers Altek and Ability pointed out that they have already confirmed deliveries with their<br />
Japan-based upstream CCD suppliers and are currently seeing no shortages in short-term supply. However, longer term,<br />
suppliers could see issues from their own upstream material suppliers, as well as problems with transportation and power. (14<br />
March, digitimes.com)<br />
• Automobile production is continuing as usual at the three Toyota Motor Thailand (TMT) factories. (15 March,<br />
aseanaffairs.com)<br />
• STATS ChipPac said delivery schedules could be affected if the logistics pile-up in Japan drags on. (16 March,<br />
businesstimes.com)<br />
• "A prolonged abnormalcy in Japan will certainly affect the material supplies . . . as, incidentally, most of the electronics<br />
industry locators in the Philippines are Japanese-owned companies," Ernesto Santiago, Semiconductor and Electronics<br />
Industries in the Philippines Inc. President, said. (16 March, aseanaffairs.com)<br />
• Malaysian state oil firm Petronas said it will supply extra LNG to Japan after the earthquake forced the shutdown of several<br />
nuclear power plants, prompting increased demand for gas. (19 March, topix.com)<br />
• GM Korea Co. said that it will reduce production to prepare for a possible lack of automotive parts from Japan, following a<br />
similar decision by Renault SA's subsidiary in South Korea. (21 March, WSJ)<br />
• Chinese Dongfeng Automobile, which set up a joint venture with Nissan, imports most of its auto components from Japan. An<br />
insider said inventory will run out by end of March and production will be halted by then. (21 March, stock.591hx.com)<br />
• Chinese Shenzhen Success Electronics Co., which is a producer of LCD, imports LCD glass substrate, polarized glass and<br />
some electronic components from Japan. The company said the logistics bottleneck may affect the delivery schedule and that<br />
they can purchase polarized glass and other electronic components from South Korean, Taiwanese and mainland suppliers.<br />
(21 March, stock.591hx.com)<br />
• Chinese TCL corporation invests in a programme to produce liquid crystal panels. 80% of its manufacturing equipment relies<br />
on imports from a Japanese producer called AGC. Due to the disruption to Japanese logistics, the company said the whole<br />
program will be delayed. (21 March, stock.591hx.com)<br />
• Indonesian coal shipments to Japan are being redirected to China because of delays and damage at ports. (22 March,<br />
thejakartaglobe.com)<br />
• Local auto assemblers in Philippines are facing delays in their supplies of completely built-up vehicles and assembly parts<br />
from Japan. (22 March, mb.com)<br />
• US solar power companies are among those facing disruptions to supply. (14 March, Reuters)<br />
• Apple Inc.'s iPad 2 tablet may run into supply problems, as some hard-to-replace parts come from Japan. (18 March,<br />
nikkei.com)<br />
• General Motors has been forced to close its Shrevesport, Louisiana facility due to supply problems. (18 March,<br />
ewallstreeter.com)<br />
US<br />
• Boeing Co. officials said they are working out how to deal with possible airplane-parts shortages from suppliers in Japan. (18<br />
March, WSJ)<br />
• Caterpillar Inc. said disruptions in its supply chain in Japan could sporadically affect the company's assembly plants<br />
elsewhere in the world. (18 March, WSJ)<br />
• Honda is suspending May orders for Japan-made vehicles from U.S. dealers. (19 March, WSJ)<br />
Europe<br />
• The price of consumer electronic goods such as computers, mobile phones and DVDs could rise across the world due to<br />
shortage of electronic components from Japan. (16 March, guardian.co.uk)<br />
• The British arm of Honda said it was operating normally, although there are wider concerns in the industry about supply<br />
shortages. (16 March, guardian.co.uk)<br />
• Swedish group Ericsson said that although it expects its supply of components to be affected, it does not expect a material<br />
impact on its Q1 2011 sales. (16 March, supplychainstandard.com)<br />
• Peugeot has started to reduce production of diesel cars, due to a lack of Hitachi-made electronic components. However, the<br />
Hitachi factory has recently restarted production at a slow pace. (22 March, latribune.fr)<br />
• General Motors Co., Toyota Motor Corp. and PSA Peugeot-Citroën have cut or are making plans to curb output of thousands<br />
of vehicles in the US and Europe due to concerns about a shortage of critical parts made in Japan. (24 March, WSJ)<br />
Source: The date and sources are in parentheses after each story.<br />
Gizem Kara/Hiroshi Shiraishi/Mole Hau/Bricklin Dwyer 24 March 2011<br />
Market Mover<br />
14<br />
www.GlobalMarkets.bnpparibas.com
Eurozone: Holding Firm<br />
• The sentiment surveys for March released to<br />
date show little adverse impact from the recent<br />
run of unfavourable news.<br />
• Regarding the spillovers from the problems<br />
in Japan, there may be lags until the disruption<br />
to supply chains becomes more evident.<br />
• Price developments in the surveys show a<br />
continuation of the elevation of input costs and<br />
further signs of pass-through.<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
Chart 1: French PMI & Growth<br />
Composite PMI:<br />
Output (RHS)<br />
70<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
• In addition to the data flow, recent speeches<br />
suggest that the ECB is likely to follow through<br />
on its ‘heads up’ for a rate rise in early April.<br />
-1.5<br />
GDP % q/q<br />
35<br />
-2.0<br />
30<br />
98 99 00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro<br />
Chart 2: German PMI & Growth<br />
Strong surveys…<br />
The recent run of surveys across a number of ‘core’<br />
eurozone countries have shown sentiment holding up<br />
remarkably well given the flow of adverse news over<br />
the last few weeks.<br />
2.0<br />
1.0<br />
0.0<br />
Composite PMI:<br />
Output (RHS)<br />
65<br />
60<br />
55<br />
50<br />
In France especially, the data have been remarkably<br />
strong. The monthly business sentiment index from<br />
INSEE rose by three points in March to 109, its<br />
highest level since March 2008. The sub-index of<br />
‘own company’ output expectations, which is typically<br />
a good guide to actual output growth trends, jumped<br />
from +17 to +25, its strongest level since late 2000.<br />
The sub-index of orders from overseas also rose<br />
strongly in March.<br />
Echoing the INSEE survey, the French 'flash' PMI for<br />
March also came in strong. The composite index for<br />
output rose from 59.0 to 59.6, a whisker away from<br />
its cycle peaks over the past decade (Chart 1). The<br />
PMI is a pretty good gauge of growth momentum but<br />
it has tended to over-state growth since the financial<br />
crisis. The PMIs for services (from 59.7 to 60.7) and<br />
for manufacturing (from 55.7 to 56.6) both showed<br />
improvement relative to February.<br />
…in the core of the eurozone…<br />
In big-picture terms, Germany's 'flash' PMI data for<br />
March were pretty similar. The composite PMI output<br />
index came in at 60.6, down a little from 60.9 in the<br />
prior month, but still consistent with unusually strong<br />
growth. As we have been stressing for a long while<br />
now, the 0.4% q/q rise in German GDP in Q4 last<br />
year was not representative of the underlying growth<br />
momentum in Germany. Our forecast for Q1 GDP is<br />
a q/q increase of 1%, more in line with the signals<br />
from the composite PMI (Chart 2).<br />
-1.0<br />
-2.0<br />
-3.0<br />
-4.0<br />
20<br />
98 99 00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro<br />
GDP (% q/q)<br />
The German PMIs continue to highlight the broaderbased<br />
nature of the expansion, another recurring<br />
theme of our analysis. The services PMI rose to 60.1<br />
in March, not far short of its manufacturing sibling,<br />
which slipped to 60.9. The German economy is very<br />
sensitive to external developments but domestic<br />
demand is playing an increasingly important role in<br />
the strength of German growth.<br />
…with Germany’s labour market tightening<br />
A striking difference between Germany and other<br />
countries, including the US in particular, is the state<br />
of the labour market. The composite PMI’s sub-index<br />
for employment in Germany rose to a record high in<br />
March (of 57.4).<br />
The manufacturing PMI’s sub-index for employment<br />
is at an exceptionally high level. At 60.6 in March, it<br />
is indicative of a further strong rise in the demand for<br />
labour in the sector (Chart 3), at a time when labour<br />
shortages are already being reported.<br />
45<br />
40<br />
35<br />
30<br />
25<br />
Ken Wattret 24 March 2011<br />
Market Mover<br />
15<br />
www.GlobalMarkets.bnpparibas.com
Divergence continues<br />
At the eurozone level, the 'flash' PMI data for March<br />
showed activity across sectors is still very elevated<br />
but less spectacularly so than in France and<br />
Germany. This points to considerable divergence<br />
between the conditions in the core and periphery,<br />
which will be evident in the complete national<br />
breakdown of the PMI figures early next month.<br />
Despite the divergence, the eurozone service sector<br />
PMI for March was robust at 56.9, its highest level<br />
since August 2007. The manufacturing PMI, in<br />
contrast, slipped from 59.0 to 57.7 but this is a pretty<br />
strong reading nonetheless. Given the softening in<br />
the manufacturing data, the composite PMI for the<br />
eurozone lost some ground in March but at 57.5, it is<br />
still indicative of q/q GDP growth of at least twice the<br />
rate seen in Q4 last year (of 0.3%).<br />
Lagged effects<br />
In sum, there appears to be little disruption so far to<br />
the improvement in eurozone economic conditions<br />
which has been evident since last autumn. Note that<br />
the survey period for the PMI figures this month ran<br />
from 11 March onwards, the day of the earthquake in<br />
Japan, so the data ought to be an accurate reflection<br />
of activity trends.<br />
That said, it is too soon to conclude that there will be<br />
no disruption from developments in Japan. Lags may<br />
be an issue given the nature of the problem. The<br />
potential disruption to supply chains due to output<br />
shutdowns in Japan may take a while to show<br />
through as companies are able to use their existing<br />
inventory for the time being. Either way, the fact that<br />
the data remain so strong suggests that the damage<br />
to confidence from events in Japan, and in the MENA<br />
region, has been very limited to date.<br />
Price pressures<br />
The survey data on the activity side have reinforced<br />
the markets’ (and our own) belief that the ECB is<br />
likely to go ahead with its proposed policy tightening<br />
next month. The relationship between the composite<br />
PMI and policy changes is a pretty solid one and the<br />
PMI is clearly in the tightening zone (Chart 4). The<br />
same is true on the pricing side of the surveys.<br />
The input price sub-index of the eurozone composite<br />
PMI rose for the sixth straight month in March and is<br />
a whisker shy of its record highs. The output price<br />
sub-index went sideways in March but it too remains<br />
elevated by past standards. There has been only one<br />
month in the history of the series in which the output<br />
price sub-index of the PMI has been higher than its<br />
current level (in July 2008, when the ECB opted to<br />
hike rates with inflation well above target and inflation<br />
expectations high and rising).<br />
4<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
-4<br />
-5<br />
-6<br />
Chart 3: German PMI & Employment<br />
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro<br />
Employment in Industry (% y/y)<br />
Manufacturing PMI: Employment<br />
(RHS, 3Mth Lag)<br />
Chart 4: Composite PMI & Policy Changes<br />
0.50<br />
0.25<br />
0.00<br />
-0.25<br />
-0.50<br />
-0.75<br />
Change in Refi Rate (bp)<br />
-1.00<br />
35<br />
98 99 00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro<br />
Composite PMI (RHS)<br />
The pricing surveys are particularly elevated in the<br />
manufacturing sector. While the input price sub-index<br />
slipped back a little in March, the level of 83.0 would<br />
have represented a record high in any other month<br />
but February. The manufacturing output price subindex,<br />
meanwhile, rose to yet another record high of<br />
61.4 in March, suggesting that there is some passthrough<br />
from higher input costs – a prominent cause<br />
for concern at the ECB.<br />
Rate rise on the cards<br />
The speeches from various ECB officials in the last<br />
few days have all pointed to the same conclusion.<br />
While the decision to raise rates has not yet formally<br />
been made, the assessment of the fundamentals in<br />
early March still applies.<br />
A common theme of some of the speeches has been<br />
the concern expressed over the potential adverse<br />
consequences of keeping interest rates too low for<br />
too long. This concern is unlikely to be extinguished<br />
by a sole 25bp rate rise, suggesting that the market<br />
is right to have re-priced in a series of hikes this year.<br />
The ECB staff inflation projections going forward are<br />
likely to support this conclusion.<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
60<br />
55<br />
50<br />
45<br />
40<br />
Ken Wattret 24 March 2011<br />
Market Mover<br />
16<br />
www.GlobalMarkets.bnpparibas.com
Portugal: Towards the EFSF<br />
• The political crisis triggered by Mr Socrates’<br />
resignation makes it virtually inevitable that the<br />
country will have to seek external financial<br />
support.<br />
Chart 1: Net Financial Assets (% GDP)<br />
• However, this is complicated in the short<br />
term, as the caretaker government has not got<br />
the mandate to negotiate the terms of a possible<br />
bailout.<br />
• The ECB will probably come to the rescue<br />
but markets will remain nervous.<br />
• It is encouraging that Spanish paper has not<br />
been greatly affected by the Portuguese crisis.<br />
• But the crisis is still a reminder of the<br />
consolidation effort required in a number of<br />
countries will be very challenging from a<br />
political point of view.<br />
• This leaves the eurozone bond markets<br />
vulnerable to further tensions, as consolidation<br />
fatigue sets in.<br />
Political crisis<br />
Following former Irish PM Cowen’s defeat at the<br />
February 25 Irish general election, the fiscal crisis in<br />
the eurozone took its second victim yesterday, as<br />
Portuguese PM Socrates was forced to resign after<br />
the parliament rejected the additional austerity<br />
measures proposed by his government.<br />
Mr Socrates’ resignation makes it virtually inevitable<br />
that the country will have to seek financial support<br />
from the EU and the IMF. The political crisis has<br />
proven how challenging it is to implement the needed<br />
measures to bring credibly the public debt back onto<br />
a sustainable path. A support package could help<br />
Portugal to bridge this credibility gap, acting as a<br />
constraint for the new government while buying it<br />
some breathing space on the funding side.<br />
Support package: the benefits<br />
As we argued in past research, a support package<br />
could in fact benefit Portugal to a great extent. Unlike<br />
for countries like Greece, Portugal’s problems do not<br />
stem directly from fiscal profligacy. The country<br />
implemented fiscal consolidation reasonably<br />
successfully in 2003-2007. The fiscal deficit in 2010<br />
is estimated at around 7% of GDP (albeit on the back<br />
of some one-off measures), against a deficit of 6.3%<br />
in the eurozone and 10.5% in the UK. The public<br />
Source: Reuters EcoWin Pro<br />
debt is around 82.3% of GDP, compared with 84.1%<br />
in the eurozone on average.<br />
Portugal’s problems lie instead in a chronic lack of<br />
competitiveness, which led to a steady decline in the<br />
economy’s potential growth rate, an increasing level<br />
of household indebtedness and as result a rising<br />
level of external indebtedness (Portugal’s net<br />
international investment position shifted from -32% of<br />
GDP in 1999 to -106% of GDP in 2009, Chart 1).<br />
Against this backdrop, a credible plan of far-reaching<br />
structural reforms aimed at increasing Portugal’s<br />
growth potential is needed as much as aggressive<br />
fiscal consolidation. And here, the coercion<br />
potentially exerted by the EU/IMF conditionality could<br />
be of help, providing political room for plans that<br />
otherwise might be difficult to implement. An example<br />
of this is Greece where a number of structural<br />
reforms, unthinkable prior to the crisis, have been<br />
approved in a very short period of time.<br />
A support package is therefore not just very likely but<br />
also potentially beneficial. That said, there are a<br />
number of technical problems stemming form the<br />
political impasse the country finds itself in at the<br />
moment.<br />
Technical difficulties<br />
Following the PM’s resignation, the ball is now in the<br />
President’s camp. Mr Silva, the President of the<br />
Republic, after talks with political leaders and a<br />
number of advisors, will have to decide if there are<br />
the conditions to form another government, possibly<br />
with a limited mandate but with broader support from<br />
different political forces, or to go for early elections.<br />
At the time of writing, given the position taken by the<br />
main opposition party, the SPD, the latter appears<br />
the most likely outcome.<br />
Luigi Speranza 24 March 2011<br />
Market Mover<br />
17<br />
www.GlobalMarkets.bnpparibas.com
This presents Portugal with a technical problem.<br />
Elections cannot be called for at least 55 days, under<br />
the Portuguese law. Meanwhile, Mr Socrates would<br />
remain in charge of ordinary affairs. But according to<br />
most political commentators, a caretaker government<br />
would not have constitutional powers to ask for and<br />
negotiate the conditions of a support package.<br />
With redemptions looming, between April and June<br />
EUR 9.5bn worth of Portuguese bonds will expire,<br />
this impasse is a source of increased concern for the<br />
markets. Note that Portugal appears to be in position<br />
to refinance April’s redemptions (see: “EUR: Portugal<br />
Coming Closer to the EFSF”) but the refinancing of<br />
the June redemption is more troublesome. There are<br />
three possible alternatives:<br />
• First, the EU could still provide support, based on<br />
some informal agreement with the Portuguese<br />
authorities. But this is potentially damaging for the<br />
credibility of the EU fiscal framework. As the Irish<br />
experience has shown, the newly elected<br />
government once in power might want to<br />
renegotiate the terms of the agreement. This<br />
makes this option unpalatable;<br />
• Second, the EFSF could step in, buying<br />
Portuguese bonds on the primary market at the<br />
next auctions, something that the vehicle is able<br />
to do on the basis of the decisions taken at the<br />
March EU Summit. But this possibility is subject to<br />
‘strict conditionality’ in the context of a programme<br />
and therefore unlikely; or<br />
• Finally, the ECB might support Portuguese bonds<br />
through purchases in the secondary market,<br />
waiting for the outcome of the general election.<br />
This is the most likely scenario but would leave<br />
markets concerned that something might go<br />
wrong, causing volatility and possibly a further<br />
widening of the Portuguese bond spread over the<br />
next few days and weeks.<br />
Lessons from Portugal<br />
In a euro-wide context, two considerations are<br />
warranted.<br />
The first is that Spanish paper has held up very well.<br />
This is important, as spillovers of the Portuguese<br />
political crisis onto Spain would again raise the<br />
spectre of a systemic problem. A factor underlying<br />
this has been a shift in the attitude of EU leaders<br />
towards a more comprehensive approach to the<br />
fiscal crisis, supported by the decisions taken on the<br />
ESM which are likely to be ratified at 24-25 March<br />
EU Council. This is positive news.<br />
The second aspect is less encouraging and regards<br />
the lessons we can draw from the recent<br />
developments in Portugal.<br />
The difficulty encountered by Socrates’ government<br />
in passing the austerity measures agreed at the EU<br />
level is a reminder of the primacy of national politics.<br />
As we have often highlighted in the past, the<br />
consolidation effort required in a number of countries<br />
is very challenging, as it implies a very high cost in<br />
terms of lost output and jobs in the short term. With<br />
this, we are not questioning the need to implement<br />
the corrections, as in the absence of consolidation<br />
the fallout on activity might be even greater. But the<br />
short-term cost of the fiscal consolidation might prove<br />
to be socially and politically unfeasible.<br />
This is important especially in view of the new anticrisis<br />
mechanism that the EU Council is likely to<br />
approve today. As we have highlighted in previous<br />
research, the agreement struck amongst EU leaders<br />
implies an important shift underlying the nature of the<br />
financial support from 2013. Unlike for the EFSF,<br />
financial support from the ESM is subordinated to a<br />
debt sustainability analysis. In the case of solvency<br />
problems, private creditors will be required to<br />
participate, accepting some changes in the terms of<br />
payment that could take the form of a standstill,<br />
extension of maturity, interest-rate cut and/or haircut,<br />
depending on the specific case. In addition, the loans<br />
provided by the ESM will enjoy preferred creditor<br />
status, junior only to IMF loans.<br />
Against this backdrop, markets are likely to remain<br />
concerned that the planned adjustment in some<br />
countries could eventually fail, leading to some form<br />
of debt restructuring. This will leave the eurozone<br />
bond market vulnerable to regular tensions<br />
resurfacing.<br />
Conclusions<br />
In conclusion, recent events in Portugal raise at least<br />
three questions. The first is on the most likely<br />
evolution of the crisis in the short term. We believe<br />
that a request for external support in the context of<br />
an EU/IMF bailout programme is very likely. But the<br />
political stalemate created by Mr Socrates’<br />
resignation might make this difficult in the short term.<br />
This means uncertainty is likely to persist on this<br />
front. The second issue regards the immediate<br />
spillover effects from the Portuguese crisis. The<br />
impact on Spanish paper has been limited to date,<br />
which is encouraging. The political shift towards a<br />
more comprehensive approach to the crisis<br />
continues to bear fruit. Finally, what lessons can we<br />
draw from the events unfolding in Portugal? Portugal<br />
provides fresh evidence that the cost in terms of<br />
output and jobs of the fiscal consolidation may<br />
eventually make the adjustment unfeasible from a<br />
social and political point of view. This is a risk<br />
looming elsewhere too, which leaves the eurozone<br />
bond market vulnerable to further tensions<br />
resurfacing.<br />
Luigi Speranza 24 March 2011<br />
Market Mover<br />
18<br />
www.GlobalMarkets.bnpparibas.com
UK Budget 2011: Tweaking at the Margins<br />
• The Budget was a package of micro<br />
measures that didn’t change the underlying<br />
thrust of the fiscal consolidation plan.<br />
Chart 1: GDP Forecast 2011 HMT vs<br />
Consensus, <strong>BNP</strong>P and BoE<br />
• Measures were judged to be fiscally neutral<br />
though at the margins the pace of discretionary<br />
fiscal tightening is slightly less aggressive than<br />
previously.<br />
• The level of public sector net borrowing was<br />
raised by around GBP 10bn per year from next<br />
year onwards.<br />
• Gilt issuance for the coming fiscal year was<br />
in line with our forecast, but around GBP10bn<br />
higher than consensus expectations.<br />
The Chancellor set out the big picture in the<br />
Emergency Budget last year. Osborne laid out the<br />
master plan of where the coalition government<br />
intends to steer the public finances over the next 4-5<br />
years and how it intends to get there. Today’s Budget<br />
was about fine-tuning, tweaking at the margins, but<br />
not changing the underlying thrust of the plan set out<br />
in 2010.<br />
It was unveiled as the “Budget for Growth” which<br />
rather looks at the situation with a glass half full. It<br />
was labelled the Budget for growth, but the growth<br />
projection was revised down! Fiscal policy is not<br />
going to boost growth – the biggest fiscal<br />
consolidation in a generation is going to be a huge<br />
drag on growth. Based on the updated OBR<br />
forecasts for government consumption and<br />
government investment there will be a 0.5<br />
percentage point subtraction from growth this year<br />
compared with 2010 – with precious little to offset<br />
that. A more realistic assessment is that this is a<br />
budget to minimise the drag from the fiscal<br />
consolidation.<br />
The Chancellor’s measures are essentially aimed at<br />
minimising the size of the fiscal multiplier. In other<br />
words, the aim is to minimise the reduction to GDP<br />
growth implied by each GBP1 reduction in<br />
government spending. That may help, but it doesn’t<br />
change the big picture which is the economy faces<br />
significant headwinds to growth from fiscal tightening.<br />
Key forecasts<br />
Table 2 shows how the key forecasts have evolved<br />
since the November-2010 Economic and Fiscal<br />
Update. To summarise:<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas, BoE, HMT<br />
Table 1: Key Forecasts<br />
2010 2011 2012 2013 2014 2015<br />
GDP % y/y 1.3 1.7 2.5 2.9 2.9 2.8<br />
CPI % y/y 3.3 4.2 2.5 2.0 2.0 2.0<br />
PSNB GBP bn -145.9 -122 -101 -70 -47 -28<br />
PSNB % of GDP -9.9 -7.9 -6.2 -4.1 -2.6 -1.5<br />
Cyc Adj PSNB % of GDP -7.4 -5.3 -3.7 -2.0 -1.0 -0.4<br />
1y-Chg In Cyc Adj PSNB<br />
% of GDP 1.5 2.1 1.6 1.7 0.9 0.6<br />
Source: HMT<br />
• The OBR’s growth projection was revised lower<br />
to 1.7% y/y for 2011 – fractionally lower than<br />
consensus, though still a little too optimistic in<br />
our view;<br />
• The OBR’s inflation projection was revised<br />
sharply higher;<br />
• The projection for net borrowing was revised up<br />
by a total of GBP 35bn over the next four years;<br />
• With regards to the economic context, the<br />
cyclically adjusted public sector net borrowing<br />
forecast was revised to show a slightly slower<br />
pace of fiscal consolidation. In the very near<br />
term, the structural deficit will narrow by 2.1% of<br />
GDP over the coming fiscal year compared with<br />
the 2.4% of GDP projected in November 2010.<br />
By the end of the parliament, the structural deficit<br />
is projected to be 0.4% of GDP, compared with<br />
0.0% previously.<br />
Key policy announcements<br />
Most of the key policy announcements were widely<br />
anticipated. The main measures were:<br />
• The planned increase from April onwards in duty<br />
on petrol has been abandoned. In addition, duty<br />
Alan Clarke/Shahid Ladha 24 March 2011<br />
Market Mover<br />
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will be reduced by 1p per litre immediately. A fuel<br />
price stabiliser has been introduced to pay for<br />
this – increasing the tax on oil companies when<br />
the price of oil is high – though reversed when<br />
the price of oil falls below USD 75 bbl;<br />
• Income tax personal allowance was raised by<br />
GBP 1000, in line with the plan set out in the<br />
coalition agreement;<br />
• Clampdowns on tax avoidance estimated to be<br />
worth GBP 1bn;<br />
• Delay the planned increase in air passenger duty<br />
scheduled for April, funded for by introducing a<br />
tax on private jets;<br />
• Reduce the corporate tax rate by an additional<br />
1pp (the rate will now fall by 2pp points rather<br />
than the 1pp previously announced);<br />
• The Bank levy will be adjusted higher so that<br />
banks don’t benefit from the lower corporation<br />
tax rate;<br />
• Support for entrepreneurs and small businesses;<br />
• Simplification of planning legislation;<br />
• Investigation into whether income tax and<br />
national insurance could be merged to simplify<br />
the tax system;<br />
• Introduce 21 enterprise zones;<br />
• GBP 250mn to support first time home buyers;<br />
• Support for research and development; and<br />
• A GBP 2bn increase in the resources available to<br />
the Green <strong>Investment</strong> Bank.<br />
To summarise, the Budget consisted of a package of<br />
micro-measures. The combined total of all<br />
discretionary measures over the next five years<br />
amounted to a GBP 30mn giveaway.<br />
At the margins, some of the measures should help to<br />
prevent a more protracted slowdown in growth. The<br />
reduction in fuel duty represents a slight easing in the<br />
burden on household real incomes and could reduce<br />
the drag on household consumption on growth this<br />
year. Similarly, the support for first-time buyers is<br />
potentially good news for the housing market. A<br />
similar programme in Australia some years ago<br />
helped to prop up house prices. In turn that could<br />
also reduce one of the headwinds to household<br />
consumption this year. That said, the size of the<br />
package is such that it appears to be limited to<br />
10,000 households, which would represent only 1k<br />
per month on mortgage approvals. If that is the case,<br />
it could be small beer. Much of the spin was on<br />
supporting small business. According to the<br />
Table 2: Evolution of Key Forecasts<br />
GDP % y/y<br />
2010 2011 2012 2013 2014 2015<br />
OBR (Mar-11) 1.3 1.7 2.5 2.9 2.9 2.8<br />
OBR (Nov-10) 1.8 2.1 2.6 2.9 2.8 2.7<br />
Change -0.5 -0.4 -0.1 0 0.1 0.1<br />
<strong>BNP</strong> 1.3 1.4 1.7 2.6 2 2<br />
Consensus 1.9 2.1<br />
CPI % y/y<br />
2010 2011 2012 2013 2014 2015<br />
OBR (Mar-11) 3.3 4.2 2.5 2.0 2.0 2.0<br />
OBR (Nov-10) 3 2.8 1.9 2 2 2<br />
Change 0.3 1.4 0.6 0 0 0<br />
<strong>BNP</strong> 3.4 4.7 2.4 1.8 2 2<br />
Consensus 3.9 2.1<br />
PSNB GBP bn<br />
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16<br />
OBR (Mar-11) -145.9 -122 -101 -70 -47 -28<br />
OBR (Nov-10) -148.5 -117.5 -90.9 -60.2 -35 -18.2<br />
Change 2.6 -4.5 -10.1 -9.8 -12 -9.8<br />
<strong>BNP</strong> -146 -124 -105 -76 -58 -41<br />
Consensus -121 -98<br />
PSNB % of GDP<br />
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16<br />
OBR (Mar-11) -9.9 -7.9 -6.2 -4.1 -2.6 -1.5<br />
OBR (Nov-10) -10.0 -7.6 -5.6 -3.5 -1.9 -0.9<br />
Change 0.1 -0.3 -0.6 -0.6 -0.7 -0.5<br />
Cyc Adj PSNB % of GDP<br />
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16<br />
OBR (Mar-11) -7.4 -5.3 -3.7 -2.0 -1.0 -0.4<br />
OBR (Nov-10) -7.5 -5.2 -3.3 -1.7 -0.5 0.0<br />
Change 0.2 -0.1 -0.4 -0.3 -0.5 -0.4<br />
1-y Change in Cyc Adj PSNB % of GDP<br />
2010-11 2011-12 2012-13 2013-14 2014-15 ave<br />
OBR (Mar-11) 1.5 2.1 1.6 1.7 0.9 1.6<br />
OBR (Nov-10) 1.3 2.4 1.8 1.7 1.1 1.7<br />
Change 0.2 -0.3 -0.3 0.1 -0.2 -0.1<br />
Source: HMT, <strong>BNP</strong> Paribas, Consensus Economics<br />
Federation of Small Business, these account for 59%<br />
of total employment and the vast majority of new job<br />
creation. However, the measures were as much<br />
about political spin as they were fundamental. A<br />
tweaking in the inheritance tax rules were a building<br />
block towards the Prime Minister’s flagship ‘Big<br />
Society’ initiative.<br />
Gilt issuance – funding via gilts at GBP 169bn in<br />
FY 10/11<br />
Table 3 displays the updated financing arithmetic. To<br />
summarise, the financing requirement for 2011-12<br />
remains GBP 169bn – unchanged from the<br />
November update. That was in line with our<br />
expectation for the full year, though around GBP 9bn<br />
higher than consensus expectations. The gilt market<br />
should be disappointed on the news.<br />
Alan Clarke/Shahid Ladha 24 March 2011<br />
Market Mover<br />
20<br />
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More shorts and inflation but less medium/longs<br />
In terms of instrument type, we will see an increase<br />
in shorts and index-linked gilts but a reduction in<br />
mediums and longs – all in the region of 2-2.5%.<br />
Despite the disappointment in the net funding<br />
requirements via gilts (being higher than expected),<br />
the market is rallying given lower medium and longend<br />
issuance. This is likely to be a temporary<br />
reaction and we keep our view of gilt<br />
underperformance ahead.<br />
With respect to distribution, FY 11/12 will see GBP<br />
132.8 billion in 47 outright auctions, GBP 31.6 billion<br />
by a supplementary programme of up to eight<br />
syndicated offerings and GBP 4.6 billion in a<br />
programme of sales via mini-tenders. In Table 5, we<br />
show the recent evolution of Gilt Distribution Method.<br />
Renewed issuance will weigh on gilts<br />
The onset of the new fiscal year (and a ‘full’<br />
significant issuance calendar) will weigh on gilts<br />
especially with the low level of issuance in Q1 2011 –<br />
Chart 2. Furthermore, the lack of material predictable<br />
cashflow inflows (from coupon and redemption<br />
payments) before June at the earliest leave gilts at<br />
risk – particularly if there is no safe-haven bid from<br />
the eurozone (with core/non-core spreads<br />
tightening). We target 55bp on 10y Gilt/Bund<br />
spreads, vs. just above 30bp currently (an 18-month<br />
low).<br />
Table 3: Financing Arithmetic<br />
HMT Mar-11 2011-12<br />
CGNCR 120.4<br />
Redemptions 49<br />
Other 0<br />
Planned Short Term Financing Adjustment 0<br />
Financing Requirement 169.4<br />
Less Financing from NS&I 2<br />
Net Financing Requirement 167.4<br />
Financed by:<br />
Tbills -1.6<br />
Gilts 169<br />
Source: DMO<br />
Table 4: FY 11/12 Gilt Issuance vs. FY 12/13<br />
Sector Short Medium Long Linker Total % change<br />
2010/11 53 38 41 34 165 -27.0%<br />
2011/12 58 34.9 37.7 38.4 169 + 2.4%<br />
Sector % Short % Medium % Long % Linker<br />
2010/11 32.1% 23.0% 24.8% 20.6%<br />
2011/12 34.3% 20.7% 22.3% 22.7%<br />
% Difference 2.2% -2.4% -2.5% 2.1%<br />
Table 5: Distribution Methods in Recent FYs<br />
Auction Syndication Mini-tender<br />
FY 09/10 82% 14% 4%<br />
FY 10/11 80% 17% 3%<br />
FY 12/13 78% 19% 3%<br />
Chart 2: Past & Future Gilt Issuance by Quarter<br />
70,000<br />
60,000<br />
50,000<br />
40,000<br />
30,000<br />
20,000<br />
10,000<br />
0<br />
Q1 05 Q3 05 Q1 06 Q3 06 Q1 07 Q3 07 Q1 08 Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 10 Q3 11 Q1 12<br />
Source: <strong>BNP</strong> Paribas<br />
Alan Clarke/Shahid Ladha 24 March 2011<br />
Market Mover<br />
21<br />
www.GlobalMarkets.bnpparibas.com
US: A Gradual Move Higher and Steeper<br />
• So far in 2011, the US rates market has had<br />
its range defined not by Fed policy or<br />
economic fundamentals but in response to<br />
geopolitical events.<br />
3.80<br />
3.70<br />
3.60<br />
Chart 1: 10y Treasury Yield<br />
• Treasury rates (Chart 1) have cautiously<br />
recovered from their recent lows since the<br />
‘worst-case scenario’ in Japan appears not to<br />
be developing.<br />
Yield (%)<br />
3.50<br />
3.40<br />
3.30<br />
3.20<br />
Unrest in MENA<br />
begins to intensify<br />
Earthquake in<br />
Japan<br />
• Rates currently occupy the same tight,<br />
lower end of the range where they traded for<br />
most of January, before the unrest in MENA<br />
sparked inflation fears due to surging oil prices<br />
(Chart 2).<br />
• The most rapid retracement has been in<br />
volatility, which has declined towards the lows<br />
of the year after the earthquake-induced spike<br />
(Chart 3). This is a bit surprising given that we<br />
would expect to see the curve steeper and/or<br />
rates higher for vol to be this low.<br />
• STRATEGY: We have a bearish short-term<br />
outlook on US rates, and expect them to<br />
retrace towards the middle of the range on the<br />
basis of strength in equities, falling<br />
unemployment and risks of higher inflation.<br />
• Barring another geopolitical crisis (fingers<br />
crossed), the move higher and steeper is likely<br />
to be gradual. In such a scenario, volatility –<br />
particularly gamma – should stay range-bound<br />
or perhaps decline further.<br />
3.10<br />
3.00<br />
3-Jan<br />
10-Jan<br />
17-Jan<br />
Source: <strong>BNP</strong> Paribas<br />
Dubai Crude ($)<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
3-Jan<br />
24-Jan<br />
31-Jan<br />
7-Feb<br />
Chart 2: Dubai Crude (USD /bbl)<br />
10-Jan<br />
Unrest in MENA<br />
begins to intensify<br />
17-Jan<br />
Source: <strong>BNP</strong> Paribas<br />
24-Jan<br />
31-Jan<br />
7-Feb<br />
14-Feb<br />
14-Feb<br />
21-Feb<br />
21-Feb<br />
28-Feb<br />
28-Feb<br />
Chart 3: 1m x 10y Volatility<br />
7-Mar<br />
7-Mar<br />
14-Mar<br />
Earthquake in<br />
Japan<br />
14-Mar<br />
21-Mar<br />
21-Mar<br />
50<br />
130<br />
1mx10y (bp)<br />
Defining the range, returning to ‘normal’<br />
Geopolitical events have been the primary driver of<br />
the rates market so far this year.<br />
• The upper end of the range – when 10yT closed<br />
at 3.74% in early Feb – was touched as unrest in<br />
MENA sent oil prices and the dollar surging, stoking<br />
fears of inflation.<br />
• The lower bound was tested – when 10yT broke<br />
through 3.20% – in the aftermath of the earthquake<br />
in Japan as the extent and containment of the<br />
nuclear disaster began to unfold.<br />
Normalized Vol (bps)<br />
120<br />
110<br />
100<br />
90<br />
80<br />
3-Jan<br />
10-Jan<br />
17-Jan<br />
24-Jan<br />
Source: <strong>BNP</strong> Paribas<br />
31-Jan<br />
1mx10y (%)<br />
7-Feb<br />
14-Feb<br />
21-Feb<br />
28-Feb<br />
7-Mar<br />
14-Mar<br />
21-Mar<br />
45<br />
40<br />
35<br />
30<br />
25<br />
Volatility (%)<br />
Treasury rates have cautiously recovered from their<br />
recent flight-to-quality driven lows since the ‘worstcase<br />
scenario’ in Japan appears not to be<br />
developing. Yields are now at the lower end of their<br />
normal range for late 2010-2011 (the QE2 cycle).<br />
Mary-Beth Fisher 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
22<br />
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“Normal” in this context is the period from about mid-<br />
December to the end of January, just prior to the<br />
escalation of instability in the MENA region. During<br />
that period, 10yT traded in a very tight range of about<br />
3.35% to 3.50%, and the 2s10s Treasury curve<br />
hovered between 270bp and 280bp.<br />
Outlook: gradually higher rates, steeper curve<br />
From here, we lean a bit bearish on Treasury rates<br />
and anticipate a steepening curve. Rates should<br />
slowly head back towards the middle of the range<br />
over the coming weeks while the front end remains<br />
anchored as QE2 operations continue. Central-bank<br />
officials from the EU and the US have commented<br />
that the events in Japan are unlikely to influence<br />
monetary policy decisions. That implies that the ECB<br />
is still on track to hike in the coming weeks, and the<br />
Federal Reserve appears on target to wind up QE2<br />
as scheduled in June.<br />
Despite our bearish outlook, we acknowledge there<br />
are both technical and fundamental factors holding<br />
back a quick or more substantial sell-off. These<br />
include:<br />
• Everyone and their accountant is short the<br />
Treasury market here. These are expensive positions<br />
to hold (e.g. the breakeven is ~1 bp per week in<br />
10yT) so even a modest rally could flush the shorts<br />
out of the market. Such a reversal could be<br />
particularly rapid as we head into quarter-end.<br />
• The 2011 US budget has still not been<br />
approved, and the government is functioning under<br />
yet another Continuing Resolution (its sixth since the<br />
fiscal year began in October 2010). This CR expires<br />
8 April and the budget negotiations still seem stuck in<br />
a quagmire. There continues to be a lot of talk about<br />
implementing fiscal discipline but little concrete<br />
action from Congress, as taxpayers seem unwilling<br />
to accept the necessary sacrifices in government<br />
entitlement programmes.<br />
• Meanwhile, the government is a mere USD<br />
123bn away from the USD 14.3trn debt ceiling, and<br />
the deficit typically adds ~USD 40bn per week.<br />
Although April could actually produce a week or two<br />
of surpluses thanks to tax receipts, buying the<br />
government some time, the picture gets muddy if we<br />
get close to April month-end and the ceiling has not<br />
been raised. We don't expect even a partial<br />
government shut-down to trigger a steep sell-off in<br />
Treasuries, but it could stagnate the markets while a<br />
resolution is hammered out. On balance, like the<br />
budget morass, increasing indebtedness without<br />
fiscal restraint could put modest upward pressure on<br />
rates.<br />
Trades: sell volatility, biased short<br />
All of these hurdles contribute to near-term<br />
uncertainty. This makes us think we should sell<br />
volatility, since we don’t see enough momentum for a<br />
sharp sell-off in rates in the near term.<br />
In such an environment, we recommend buying<br />
mortgages and callable bonds or selling gamma<br />
outright (prefer 1m options). Callables and<br />
mortgages can withstand a fairly large sell-off (up to<br />
100bp depending on the structure) and still<br />
outperform their duration-matched peers over a 6m<br />
horizon, so a 20-50bp sell-off isn't a worry.<br />
The 2s10s Treasury curve has historically hit its<br />
steepest point just as the Fed finishes an easing<br />
cycle. If that occurs, we would expect the curve to resteepen<br />
as the Fed exits its QE2 cycle in late spring /<br />
early summer. Although we like steepeners the cost<br />
of, e.g. a 2s10s Treasury steepener, is ~1.5bp per<br />
month. We recommend waiting until after quarter-end<br />
and a clearer outlook regarding the situation in Japan<br />
before entering such a trade.<br />
Mary-Beth Fisher 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
23<br />
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US: Remember Last Year’s End of March?<br />
• We still remember how 10y swap spreads<br />
traded negative for the first time, going against<br />
what any model would indicate.<br />
• On this occasion we don’t expect sparks to<br />
fly again, but it’s still worth highlighting the<br />
typical month-end and quarter-end trends. End-<br />
March in particular could have a more<br />
pronounced effect due to the fiscal schedule for<br />
banks and Japan.<br />
• STRATEGY: Expect moderately tighter swap<br />
spreads until quarter-end but look for a reversal<br />
shortly after that as corporate issuance tends to<br />
lighten in April. In Treasuries, favour benchmark<br />
issues given their tendency to outperform vs<br />
off-runs into month-end due to liquidity<br />
preference.<br />
Global risks are driving swap spreads, but<br />
quarter-end and corp issuance also matter<br />
10y spreads have traded in a tight range in recent<br />
weeks, and it’s worth recalling that one year ago we<br />
saw a similarly tight range in the 10bp area before<br />
Tsys came under pressure and underperformed<br />
swaps massively (see Chart 1).<br />
Dealers look to cut their balance sheets into quarterend<br />
and the impact is seen in Chart 2, which shows<br />
that swap spreads tend to tighten consistently and<br />
materially in the last week of quarter-end. (note that<br />
there looks to be an outlier in Q1 2010 when 10y<br />
spreads widened 6bp. This was right after 10y<br />
spreads narrowed 12bp in two days and turned<br />
negative.)<br />
Chart 1: 10y Spreads Marched Off a Cliff in 2010<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
Jan-09 Jul-09 Feb-10 Aug-10 Mar-11<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: 10y Spreads during Quarter Ends (bp<br />
change in last week)<br />
8<br />
6<br />
4<br />
2<br />
0<br />
-2<br />
-4<br />
-6<br />
-8<br />
-10<br />
Q1<br />
08<br />
Q2<br />
08<br />
Q3<br />
08<br />
Source: <strong>BNP</strong> Paribas<br />
Q4<br />
08<br />
Q1<br />
09<br />
Q2<br />
09<br />
Q3<br />
09<br />
Q4<br />
09<br />
Q1<br />
10<br />
Q2<br />
10<br />
Q3<br />
10<br />
Q4<br />
10<br />
Chart 3: Corp Issuance Tends to Drop Off From<br />
March to April<br />
We don’t expect quite as dramatic a tightening since<br />
some US banks have now adjusted their fiscal<br />
schedules. Also, there were other factors last year<br />
that combined to send swap spreads sharply lower.<br />
In the last week of March 2010 there was a series of<br />
weak coupon auctions that left dealers having to take<br />
down a larger allocation than usual, forcing them to<br />
shed Tsys in just a few sessions.<br />
90<br />
75<br />
60<br />
45<br />
30<br />
Average Issuance since 2000<br />
The impact of corporate supply on swap spreads in a<br />
very steep curve environment has been easily<br />
identifiable. Issuers switch from fixed to floating debt<br />
payments by receiving in swaps which puts<br />
tightening pressure on spreads. The insatiable<br />
demand for corporate paper means that supply could<br />
continue to be healthy going forward, and March is<br />
one of the busiest issuance months in the year (see<br />
15<br />
0<br />
Jan<br />
Feb<br />
Mar<br />
Source: <strong>BNP</strong> Paribas<br />
Apr<br />
May<br />
June<br />
July<br />
Aug<br />
Sep<br />
Oct<br />
Nov<br />
Dec<br />
Suvrat Prakash 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
24<br />
www.GlobalMarkets.bnpparibas.com
Chart 3). In April we have typically seen a decent<br />
drop-off by about $15bn and so many players could<br />
look to set up long positions right after quarter-end.<br />
We also find a bias for benchmarks to outperform<br />
into month-end<br />
When we look at the yield spread between the 3rd<br />
off-the-run (OTR) and benchmark, then there seems<br />
to be a downward bias heading into month-end<br />
(meaning that the benchmark outperforms). This is<br />
shown in Chart 4 where we take the average<br />
movement around month-ends from the past 2 years<br />
(rolls are adjusted for).<br />
It could be that the overall yield curve is simply<br />
driving this bias. In the 30y sector we do find a 46%<br />
correlation between the 3rd OTR vs benchmark<br />
spread and 10s30s. This could be driven by monthend<br />
duration extension flows that flatten the overall<br />
curve, although this doesn’t change the fact that the<br />
tendency has been for benchmarks to outperform<br />
into month-end (in other analyses we have found that<br />
the market tends to rally in the last few days of the<br />
month, also supporting the idea that month-end<br />
buying flows add a bias to the market).<br />
To limit the curve effect, we now look at ASW<br />
differentials between 3rd OTRs and benchmarks,<br />
instead of looking at yield spreads. A very similar<br />
trend can be seen in Chart 5 (note that ASWs are<br />
quoted as the Tsy yield minus swap yield, so if<br />
benchmarks outperform then this would show up as<br />
a flattening in Chart 5).<br />
Chart 4: Yield Spreads – Average Movement<br />
Through Month-Ends in Past Two Years<br />
0.80<br />
0.60<br />
0.40<br />
0.20<br />
0.00<br />
-0.20<br />
-0.40<br />
Source: <strong>BNP</strong> Paribas<br />
10y Benchmark vs 3rd OTR, Yield Spread<br />
30y Benchmark vs 3rd OTR, Yield Spread<br />
T-6 T-4 T-2 T T+1 T+2 T+3<br />
Chart 5: ASW Spreads – Average Movement<br />
Through Month-ends in Past Two Years<br />
0.80<br />
0.60<br />
0.40<br />
0.20<br />
0.00<br />
-0.20<br />
-0.40<br />
10y Benchmark vs 3rd OTR, ASW Curve<br />
30y Benchmark vs 3rd OTR, ASW Curve<br />
T-6 T-4 T-2 T T+1 T+2 T+3<br />
Source: <strong>BNP</strong> Paribas<br />
Suvrat Prakash 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
25<br />
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US: Setup for Auctions with Spread Curve Flatteners<br />
• In general, 2y Tsy tends to cheapen relative<br />
to the long end going into the auction and<br />
reverses direction post auction on an average.<br />
(2s10s, 2s30s flatteners followed by steepeners)<br />
• 5y and 7y notes have a tendency to move<br />
almost in line with the long end going into the<br />
auctions and to richen relative to the long end<br />
after auctions. (5s10s, 5s30s steepeners)<br />
• There is a clear trend of belly spread<br />
widening relative to the front end and long end<br />
spreads throughout the auction.<br />
• STRATEGY: Consider paying 5y spreads vs<br />
10y spreads. Also consider paying 5y spreads<br />
vs 2y and 10y spreads for a higher average<br />
move which comes with higher volatility.<br />
With 2y, 5y and 7y auctions taking place next week,<br />
we highlight auction based systematic trades which<br />
we have been recommending in the past issues of<br />
our weekly publication.<br />
While doing this analysis, we look at auctions since<br />
Jan 2010 (total of 12 auctions) and keep the issues<br />
fixed through each auction (i.e. always use the<br />
current issue pre auction which becomes old<br />
post auction) so that there is no spurious roll<br />
effect.<br />
Outright Treasury curve behaviour around<br />
auctions<br />
Chart 1 shows that while the front end cheapens<br />
relative to the long end going into the auctions, the<br />
belly moves more or less along with the long end.<br />
Post auctions, while both the front end and belly<br />
richen relative to the long end, a more pronounced<br />
steepening effect is seen in 5s10s and 5s30s Tsy<br />
curve.<br />
Table 1 (at the end of this article) helps us put some<br />
numbers in perspective for the above mentioned<br />
curve trades. 5s10s Tsy curve steepener has turned<br />
in a profit 10 times in the past 12 auctions. The<br />
average movement in favour of this strategy has<br />
been about 5.2bp with a volatility of 3.8bp.<br />
Disclosure: Given our existing structural Tsy 5s10s<br />
flattening view initiated at 138.5, now at 139.5, we<br />
will choose not to put on a tactical steepener but may<br />
use any potential steepening as an opportunity to<br />
increase our flattening position.<br />
Chart 1: Treasury Yield Trends Around 2y, 5y<br />
and 7y Auction days<br />
8<br />
6<br />
4<br />
2<br />
-<br />
(2)<br />
2s10s 2s30s 5s10s<br />
5s30s 7s10s 7s30s<br />
T-5 T-3 T-1 T T+1 T+3 T+5<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: Spread-of-Spreads Trends Around 2y,<br />
5y and 7y Auction Days<br />
3<br />
2<br />
1<br />
-<br />
(1)<br />
(2)<br />
(3)<br />
2s10s 2s30s 5s10s<br />
5s30s 7s10s 7s30s<br />
T-5 T-3 T-1 T T+1 T+3 T+5<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 3: Comparison of 5s10s Spread Flattener<br />
with 2s5s10s Spread Fly<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Jan-09<br />
Source: <strong>BNP</strong> Paribas<br />
5s10s 2s5s10s Sharpe Ratio<br />
5s10s : 1.57<br />
2s5s10s : 1.36<br />
Combined : 1.85<br />
Feb-09<br />
Mar-09<br />
Apr-09<br />
May-09<br />
Jun-09<br />
Jul-09<br />
Aug-09<br />
Sep-09<br />
Oct-09<br />
Nov-09<br />
Dec-09<br />
Jan-10<br />
Feb-10<br />
Rohit Garg 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
26<br />
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Trades with higher hit ratio and Sharpe ratio in<br />
swap spreads<br />
The swap spread curve witnesses a consistent<br />
flattening trend around these month end auction<br />
cycles. Chart 2 shows a clear trend of spread curve<br />
flattening going into the auction across all maturities.<br />
This spread flattening trend becomes more<br />
pronounced post auction, especially in 5s10s.<br />
Based on the rankings (in Table 1, which takes into<br />
account average move, volatility and hit ratio), 5s10s<br />
spread curve flattener post 5y auction emerges as a<br />
clear winner. However, another strategy with a higher<br />
average movement at the expense of higher volatility<br />
is the 2-5-10 spread fly (go long 5y spreads vs 2y<br />
and 10y spreads) which has also worked 12 times in<br />
last 12 auctions (see Chart 3).<br />
One other important take away from this chart is that<br />
on occasions when the spread curve flattener hasn’t<br />
worked well, the spread fly has worked very well and<br />
vice versa. Hence, it might be beneficial to take<br />
positions in both these trades simultaneously to<br />
increase the chances of net profit margin in terms of<br />
risk taken. Note that while the Sharpe ratio of 5s10s<br />
spread flattener is 1.57 and for 2s5s10s spread fly is<br />
1.36, it is higher when we diversify our risk in both<br />
these positions.<br />
Table 1: Auction Trades with Hit Ratios Adjusted for Vol and Hit Ratio (T – respective auction day)<br />
Average<br />
Move (in bp)<br />
Overall<br />
Rating<br />
Entry Exit Hit Ratio<br />
Vol (in bp)<br />
When did it not work<br />
2y Auction<br />
2s3s Tsy Flattener T+1 T+5 9/12 2.34 3.1 0.45 March/May/Nov<br />
2s5s Tsy Flattener T-1 T+5 8/12 4.07 7.19 0.33 March/May/Dec/Jan (2011)<br />
2s10s Tsy Flattener T-5 T 10/12 5.74 9.21 0.47 July/Oct<br />
2s30s Tsy Flattener T-5 T 9/12 7.05 9.31 0.53 July/Oct/Feb (2011)<br />
2s5s10s Tsy Fly trading lower T+1 T+5 11/12 6.49 7.3 0.75 Nov<br />
2s5s30s Tsy Fly trading lower T+1 T+5 10/12 6.39 10.74 0.46 Nov/Feb (2011)<br />
2s10s Spd Flattener T-3 T+5 9/12 3.26 5.62 0.33 Sept/Oct/Jan(2011)<br />
2s30s Spd Flattener T-3 T+5 10/12 3.36 7.59 0.29 Oct/Dec<br />
2s5s10s Spd Fly trading higher T+1 T+5 12/12 4.08 2.82 1.18<br />
2s5s30s Spd fly trading higher T+1 T+5 10/12 3.70 3.45 0.71 Nov/Dec<br />
5y Auction<br />
5s10s Tsy Steepener T T+5 10/12 4.24 3.99 0.78 June/Nov<br />
5s30s Tsy Steepener T T+5 10/12 5.34 8.76 0.46 Nov/Jan(2011)<br />
3s5s7s Tsy Fly trading lower T-3 T+5 8/12 2.55 3.5 0.39 March/May/Nov/Feb (2011)<br />
3s5s10s Tsy Fly trading lower T-3 T+5 11/12 5.45 5.8 0.78 Nov<br />
3s5s30s Tsy Fly trading lower T-3 T+5 11/12 7.56 9.91 0.65 Nov<br />
5s10s Spd Flattener T T+5 12/12 2.69 1.91 1.01<br />
5s30s Spd Flattener T T+5 10/12 2.53 2.8 0.53 Dec/Jan(2011)<br />
3s5s7s Spd Fly trading higher T-3 T+5 10/12 1.88 1.89 0.50 March/Feb (2011)<br />
3s5s10s Spd Fly trading higher T-3 T+5 11/12 4.39 2.63 1.27 Nov<br />
3s5s30s Spd Fly trading higher T-3 T+5 10/12 4.89 4.72 0.73 Nov/Dec<br />
5s10s30s Spd Fly trading lower T T+5 11/12 2.34 2.44 0.60 Sept<br />
7y Auction<br />
7s10s Tsy Steepener T-3 T+5 9/12 1.81 3.44 0.29 June/Nov/Feb (2011)<br />
7s10s Spd Flattener T-5 T+3 11/12 2.00 1.71 0.67 Nov<br />
7s30s Spd Flattener T-5 T+3 9/12 2.12 4.77 0.22 Oct/Nov/Dec<br />
3s7s10s Spd fly trading higher T-3 T 8/12 1.04 3.81 0.09 March/June/Nov<br />
3s7s30s Spd fly trading higher T-3 T 8/12 1.60 4.19 0.18 March/June/Nov<br />
Source: <strong>BNP</strong> Paribas<br />
Rohit Garg 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
27<br />
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MBS: Staging a Comeback!<br />
• Treasury purchases were part of the GSE<br />
conservatorship and could carry a taint of<br />
bailout, especially if there are losses under Fed<br />
hikes. Fed tightening anticipated by the market<br />
for Q1 2012 could cause losses and the 1-year<br />
period of Treasury sales appears consistent<br />
with these expectations. To that extent, higher<br />
negative convexity coupons 4.5s and 5s may be<br />
sold first, followed by others.<br />
• We think that Treasury sales are part of<br />
continued efforts to wind down emergency<br />
programmes and not a precursor to Fed MBS<br />
sales.<br />
• Housing may be negatively impacted by<br />
Fed hikes as post reset ARM borrowers see<br />
payment increases and banks see delinquent<br />
loan carrying costs step up. Note how 2007<br />
reflected the euphoria around economic data<br />
right before mortgage delinquencies took<br />
precedence.<br />
• We remain positive on mortgages. On the<br />
stack, we favour 4s and 6s vs 4.5s and 5s, while<br />
remaining neutral on 5.5s. Pre-HARP fast pools<br />
from the Treasury could hurt 4.5s and 5s. In 6s,<br />
2008s don’t really stand out. The float in 5.5s<br />
isn’t as sizeable as in 4.5s and 5s but probably<br />
not as welcomed as in 6s.<br />
• Treasury’s largest purchases were in<br />
December 2008 when payups had suffered<br />
immensely into year-end. We’re positive on<br />
specified 4.5s, loan balance 5s and seasoned<br />
6s, but think that seasoned 5s and 5.5s could<br />
come under pressure, particularly if the<br />
Treasury holds such paper.<br />
• Investors should look out for 23-26 WALA<br />
FNs, most of which are newly HARP eligible and<br />
were also likely purchased by the Treasury.<br />
• GNMA 60-day delinquencies declined in<br />
February and the overall GNM delinquency<br />
profile continues to show improvement.<br />
The Treasury announcement to sell its mortgage<br />
portfolio came on the heels of the earthquake in<br />
Japan. With concerns around Japan being a net<br />
seller of MBS due to repatriation and the MBS<br />
widening that resulted, from a taxpayer perspective,<br />
it would be prudent for the Treasury to sell its MBS.<br />
Moreover, the economic data prior to current events<br />
in Japan or the Middle East had recently renewed<br />
concerns around Fed hikes, causing selling in<br />
Chart 1: Treasury’s MBS Purchases by Month –<br />
Dec 08 Largest Month as Payups Collapsed<br />
$ bn<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Sep-08<br />
Oct-08<br />
Nov-08<br />
Source: US Treasury<br />
Dec-08<br />
Jan-09<br />
Feb-09<br />
Mar-09<br />
Apr-09<br />
May-09<br />
Jun-09<br />
Jul-09<br />
Aug-09<br />
Sep-09<br />
Oct-09<br />
Nov-09<br />
Dec-09<br />
Chart 2: Treasury’s MBS Holdings<br />
FN 30Y<br />
Coupon Total Bal Fed Treasury CMOs Net Tsy/Net<br />
3.5 29.0 0.2 0.0 28.8 0%<br />
4 256.8 90.1 1.4 3.0 162.3 1%<br />
4.5 411.6 232.1 17.2 21.1 141.3 12%<br />
5 352.5 91.4 22.4 55.7 183.0 12%<br />
5.5 356.8 71.4 19.1 71.1 195.3 10%<br />
6 229.0 10.7 8.7 57.9 151.7 6%<br />
6.5 73.6 0.9 0.0 21.9 50.7 0%<br />
7 21.8 6.6 15.2 0%<br />
FG 30Y<br />
Coupon Total Bal Fed Treasury CMOs Net Tsy/Net<br />
3.5 8.4 8.4 0%<br />
4 150.9 47.3 6.5 28.3 68.8 9%<br />
4.5 309.2 171.0 28.0 27.1 83.2 34%<br />
5 266.8 91.3 21.1 71.7 82.6 26%<br />
5.5 223.6 10.5 9.0 98.0 106.0 9%<br />
6 141.8 0.4 2.2 61.4 77.8 3%<br />
6.5 44.2 0.5 23.6 20.1 0%<br />
7 9.0 4.9 4.2 0%<br />
FN + FG 30Y<br />
Coupon Total Bal Fed Treasury CMOs Net Tsy/Net<br />
3.5 37.4 0.2 - 0.0 37.1 0%<br />
4 407.7 137.5 7.9 31.3 231.1 3%<br />
4.5 720.9 403.1 45.1 48.1 224.6 20%<br />
5 619.3 182.7 43.6 127.4 265.6 16%<br />
5.5 580.4 81.8 28.1 169.1 301.4 9%<br />
6 370.8 11.1 10.9 119.3 229.5 5%<br />
6.5 117.8 1.4 0.0 45.6 70.8 0%<br />
7 30.8 - - 11.5 19.4 0%<br />
Source: US Treasury<br />
Anish Lohokare/Timi Ajibola 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
28<br />
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inverse IOs and investors seeking higher caps for<br />
example.<br />
With short duration funding, the key risk for the<br />
Treasury would be a Fed tightening and a related<br />
sell-off, which could erase the returns on its MBS<br />
portfolio. Durations would extend as funding costs<br />
increase, and prices decline. The market appears to<br />
be looking at Fed tightening starting Q1-2012. The 1-<br />
year timeline of Treasury’s MBS sales would be<br />
consistent with that period. While Fed purchases of<br />
MBS could face a similar situation, they were<br />
purchased as part of monetary policy and paid for by<br />
excess reserves and wouldn’t have the same funding<br />
concern. Being part of GSE consevatorship,<br />
Treasury purchases could carry the taint of a bailout,<br />
unlike Fed purchases. As the Treasury indicated, the<br />
sales were part of continued efforts to wind down<br />
emergency programmes. As an extension of this<br />
logic, coupons with high negative convexity – 4.5s<br />
and 5s may be sold before others to minimize the<br />
risk as we get closer to hikes.<br />
As pointed out by our rates strategists, there was a<br />
mere USD 123bn clearance left on the debt limit as<br />
of last Friday, and every bit helps, including the<br />
approximate USD 14bn in monthly MBS sales and<br />
prepayments. Furthermore, once the Treasury gives<br />
back a decent chunk of its MBS holdings to the<br />
market, the TMPG (Treasury Markets Practice<br />
Group) may be better placed to impose a fail penalty.<br />
The concern in the minds of investors in general and<br />
mortgage investors in particular are the implications<br />
of Treasury sales on the future of the Fed portfolio.<br />
We do not think that Treasury MBS sales are a<br />
precursor to Fed sales. Note that the Fed is still<br />
completing its QE2 programme, and the effects of<br />
events in Japan and the Middle East are still not<br />
completely clear, so to view these sales as a<br />
monetary policy tool would be premature. These<br />
purchases do provide the Fed a roadmap in case it<br />
wants to sell its MBS portfolio, but to infer that these<br />
purchases are in fact a part of that plan is not<br />
justified in our opinion. Also given the Treasury’s<br />
stance on GSE reform on getting private investors<br />
more involved in the housing market, selling their<br />
MBS holdings seems like a logical expression of this<br />
view.<br />
In fact, as mortgage investors (particularly) can attest<br />
to, positive economic data caused the 10Y to sell off<br />
beyond the 5.25% level towards the middle of 2007,<br />
before being cut to size by mortgage delinquencies.<br />
It was perceived then that the positive economic<br />
data, particularly low unemployment, would<br />
overcome the delinquency picture. But borrowers<br />
were not able to digest higher mortgage rates then.<br />
Given that the employment scenario is much worse<br />
35,000<br />
30,000<br />
25,000<br />
20,000<br />
15,000<br />
10,000<br />
5,000<br />
Chart 3: Fed Paydowns Have Come Off<br />
0<br />
Dec-09<br />
Jan-10<br />
Total Total Paydowns Paydowns ($mm) ($mm)<br />
Source: Federal Reserve, <strong>BNP</strong> Paribas<br />
$ bn<br />
Feb-10<br />
Mar-10<br />
Apr-10<br />
May-10<br />
Jun-10<br />
Jul-10<br />
Aug-10<br />
Sep-10<br />
Oct-10<br />
Nov-10<br />
Dec-10<br />
Jan-11<br />
Feb-11<br />
Chart 4: Gross MBS Supply Has Declined<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Apr-<br />
10<br />
May-<br />
10<br />
Source: Bloomberg<br />
Jun-<br />
10<br />
Jul-<br />
10<br />
Aug-<br />
10<br />
FG<br />
Sep-<br />
10<br />
now, the ability of borrowers, particularly post reset<br />
ARM borrowers who have seen considerable<br />
payment relief, to withstand rate hikes, is<br />
questionable. Latest housing data has been less than<br />
stellar. Also, minimal funding costs have helped<br />
banks navigate the unwieldy foreclosure process of<br />
delinquent loans. If these costs step up, shadow<br />
inventory could come to market at an accelerated<br />
pace as carrying costs on delinquent loans go up.<br />
FN<br />
Oct-<br />
10<br />
Nov-<br />
10<br />
Dec-<br />
10<br />
Jan-<br />
11<br />
Feb-<br />
11<br />
Mar-<br />
11<br />
Chart 5: Prime Non Agency Delinquencies by<br />
Stage – 90D and Foreclosure have Ballooned<br />
25<br />
20<br />
15<br />
10<br />
5<br />
30D<br />
90D<br />
REO<br />
60D<br />
Forecl<br />
BK<br />
Prime Delinquencies<br />
0<br />
Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10<br />
Source: Bloomberg<br />
Anish Lohokare/Timi Ajibola 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
29<br />
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The risk to housing under a premature hike could<br />
thus be substantial.<br />
Shortly after the Treasury announcement on MBS<br />
sales, we discussed that we like purchasing MBS on<br />
weakness. While that recommendation went through<br />
rough weather initially, Wednesday saw higher<br />
coupons making a comeback. We continue to<br />
maintain our positive outlook on mortgages. Fed<br />
paydowns have come off from USD 32bn to about<br />
USD 12bn over the past four months. Gross supply<br />
has declined drastically (FN Feb USD 52.1bn vs Mar<br />
MTD USD 37.1bn) as mortgage rates are relatively<br />
high. Credit fee increases should choke supply<br />
further. Net supply, with a 1 month lag, to account for<br />
the lag between prepays and issuance (which<br />
typically occurs in the following month), was USD<br />
5bn last month, and should decline further.<br />
CMO issuance is robust, and to the extent that Tsy<br />
holds good quality spec pools, they should be<br />
absorbed readily by CMOs. FRE is already below its<br />
2011 end portfolio size limit of USD 729bn (at USD<br />
695bn) though FNM is above that limit (at USD<br />
777bn). Overall, we think that the extra (up to) USD<br />
10bn MBS selling by the Treasury is absorbable by<br />
other investors, including banks, money managers<br />
and REITs. Treasury selling may also somewhat<br />
alleviate the fail situation in higher coupons.<br />
The portfolio size history of the Treasury indicates<br />
that purchases occurred mainly from Oct 08 to Mar-<br />
09. Dec 08 was the largest purchase month, and<br />
would’ve allowed purchases of specified pools (at<br />
that time) for historically low payups. Other bonds<br />
though would be late 2008 - early 09 pre-HARP fast<br />
paying bonds. While we remain positive on the<br />
mortgage basis overall, Treasury sales could skew<br />
coupon valuation. In terms of the coupon stack, we<br />
dropped 5.5s from our previous barbell<br />
recommendation of 4s, 5.5s and 6s vs 4.5s and 5s,<br />
due to sizeable Treasury holdings in that coupon.<br />
This recommendation was based on picking up<br />
positive convexity given that we were (and still are) at<br />
the cusp where prepays could ramp up in a rally. But<br />
given that 5.5% holdings aren’t as high relative to<br />
float as in 4.5s and 5s we are neutral on that coupon<br />
and favour 4s and 6s vs 4.5s and 5s. Clearly, given<br />
relative sizes, GD/FN 4.5s and 5s should be<br />
negatively impacted, and GN/FN 4.5s and 5s may<br />
relatively appreciate on the relative<br />
underperformance of those conventional coupons.<br />
Our thoughts by coupon:<br />
1) 4.5s: This coupon remains the key production<br />
coupon and between GDs and FNs, Treasury<br />
holdings of USD 45bn add 20% of the current float<br />
ex-CMOs, Fed and Tsy back to the market. As<br />
discussed above, the pre HARP pools are likely to<br />
impact the TBA market negatively, and also affect<br />
rolls. However, given the reasonable proximity of the<br />
coupon to par, in a sell-off, 2008 pools may hold<br />
value due to extension protection. Seasoned 4.5s,<br />
created during the 2003 refi wave are very well<br />
protected, relatively unique, and should be well<br />
supported. Loan balance should be supported as<br />
well, as we are at the point at which refi’s could ramp<br />
up in a further rally.<br />
2) 5s: USD 43bn Treasury holdings add 20% of the<br />
current float ex-CMOs, Fed and Tsy back to the<br />
market. As with 4.5s, fast paying bonds should<br />
negatively impact TBA and rolls at current rate levels.<br />
At these premium prices loan balance paper remains<br />
attractive. However, seasoned 5s had proven equally<br />
callable in the recent rally to historic rate lows and<br />
with demand not as strong, could come under<br />
pressure.<br />
3) 5.5s: USD 28bn add 9% of the current float ex-<br />
CMOs, Fed and Tsy back to the market. This is<br />
muted relative to 4.5s and 5s, but once again, the<br />
prospect of pre-HARP paper could hurt rolls and<br />
TBA. Seasoned 5.5% payups which have already<br />
suffered could be negatively impacted if there’s<br />
supply in that sector. While seasoned 5.5s hadn’t<br />
converged to recent vintages like in 5s, they still sped<br />
up a decent bit.<br />
4) 6s: We think that the USD 10.9bn addition would<br />
add liquidity to this coupon and demand should be<br />
forthcoming. Note that 2008 6s do not stand out in<br />
terms of prepays to the extent they do in lower<br />
coupons and thus the effect on rolls and TBA should<br />
be contained. At these USD prices, seasoned pools<br />
in 6s should be supported as well, particularly as<br />
they didn’t speed up as seen in 5s and to a decent<br />
extent in 5.5s.<br />
Watch out for 23-26 WALA FNs<br />
In a recent note regarding the HARP extension, we<br />
noted that the eligibility date change for HARP<br />
should be negative for 23-26 WALA FNs most of<br />
whom would be newly eligible under that change (if<br />
they weren’t already). The Treasury may hold some<br />
of these bonds given its purchases during that time<br />
and the prepay history of these bonds may<br />
underestimate their future convexity.<br />
Key elements of Treasury MBS sales<br />
Treasury will monitor supply and demand dynamics<br />
in the market and determine the optimal timing for<br />
the sale of securities. Decisions to sell bonds will be<br />
based on both quantitative and qualitative market<br />
metrics. State Street Global Advisors (SSgA) is the<br />
manager for Treasury’s portfolio and will assist in this<br />
analysis. Unlike the Fed, the Treasury is not<br />
disclosing CUSIPS. According to the Treasury, its<br />
Anish Lohokare/Timi Ajibola 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
30<br />
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portfolio consists primarily of 30Y conventionals.<br />
There is also a smaller amount of 15Y conventionals<br />
and one 10/20 MBS guaranteed by FNM. The<br />
Treasury will not be engaging in coupon swaps and<br />
dollar rolls. All transactions will be outright sales.<br />
Bonds will be sold as initially purchased and won’t be<br />
structured into CMOs. While dealers are encouraged<br />
to show interest in specific trades or securities, but<br />
trades will be executed competitively. Many<br />
securities carry a payup and will be traded as<br />
specified pools.<br />
Treasury Portfolio Link<br />
0http://www.treasury.gov/resource-center/data-chartcenter/Documents/February%202011%20Portfolio%<br />
20by%20month.pdf<br />
FAQ Link<br />
1Hhttp://www.treasury.gov/press-center/pressreleases/Documents/03.21%20Portfolio%20Dispositi<br />
on%20FAQs%20FINAL.pdf<br />
Announcement Link<br />
2Hhttp://www.treasury.gov/press-center/pressreleases/Pages/tg1111.aspx<br />
GNM Delinquencies<br />
The GNMA Delinquency report for February showed<br />
a decline in 60-day delinquencies across all products<br />
from 1.57% to 1.41%. By Issuer, we saw similar<br />
results. For instance, BofA 60 day delinquencies<br />
declined from 1.61% to 1.41%, Chase declined from<br />
1.98% to 1.8%, Citi declined from 1.92% to 1.69%,<br />
GMAC declined from 1.75% to 1.62%, Wells declined<br />
from 1.15% to 1.05% and TBW declined from 5.06%<br />
to 4.73%. In addition, 30-day delinquencies also<br />
declined from 4.02% to 3.78%. In general, the<br />
substantial declines in delinquencies in February are<br />
in line with seasonals, as delinquencies tend to reach<br />
their trough around tax rebate period.<br />
Chart 6: GNM (Fixed and ARMs) 30, 60 and 90+<br />
Day Delinquencies<br />
30 Day 60 Day 90+ Day<br />
Feb-11 3.78 1.41 1.17<br />
Jan-11 4.02 1.57 1.26<br />
Dec-10 4.02 1.59 1.20<br />
Nov-10 4.15 1.61 1.40<br />
Oct-10 4.13 1.58 1.36<br />
Sep-10 4.05 1.54 1.25<br />
Aug-10 4.11 1.58 1.18<br />
Jul-10 3.94 1.49 1.27<br />
Jun-10 4.05 1.49 1.64<br />
May-10 3.95 1.44 1.65<br />
Apr-10 3.48 1.32 1.84<br />
Mar-10 3.59 1.44 1.88<br />
Feb-10 4.10 1.62 2.08<br />
Jan-10 4.61 1.93 2.42<br />
Dec-09 4.52 1.95 2.36<br />
Nov-09 4.82 2.00 3.40<br />
Oct-09 4.60 1.98 3.60<br />
Sep-09 5.07 2.11 3.67<br />
Aug-09 5.48 2.03 3.88<br />
Jul-09 4.27 1.87 3.88<br />
Jun-09 4.68 1.89 3.79<br />
May-09 4.46 1.80 3.71<br />
Apr-09 4.16 1.71 3.64<br />
Mar-09 4.10 1.66 3.52<br />
Feb-09 4.43 1.78 3.56<br />
Jan-09 5.02 2.07 3.51<br />
Source: <strong>BNP</strong> Paribas<br />
Overall GNMA 90+ day delinquencies declined from<br />
1.26% to 1.17%, while CBRs increased from 4.96 to<br />
5.57. The increase in CBRs was primarily led by<br />
BofA. BofA CBRs increased from 2.81 to 7.08, while<br />
its 90+ day delinquency declined from 0.93 to 0.69.<br />
TBW CBRs also declined from 12.71 to 12.18 but<br />
remain elevated. TBW buyouts continue to remain<br />
high possibly to keep 90+ day delinquency below<br />
5%. In fact, if TBW CBRs were zero then its 90+ day<br />
delinquency would have been around 5.2%. GMAC<br />
90+ day delinquency marginally declined from 6.30 to<br />
6.28 and CBRs declined from 6.43 to 4.92.<br />
Anish Lohokare/Timi Ajibola 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
31<br />
www.GlobalMarkets.bnpparibas.com
EUR: Risk of Pressure on Term Liquidity<br />
• Despite lower demand at this week’s MRO,<br />
excess liquidity is set to increase in coming<br />
days.<br />
Chart 1: Term Liquidity Gradually Decreasing<br />
• However, risks on term liquidity may<br />
increase after next week’s LTRO. OIS/BOR<br />
spreads have potential to widen.<br />
• STRATEGY: Play OIS/BOR spread widening<br />
and front-end steepeners.<br />
Lower demand but liquidity ample after the MRO<br />
The ECB allotted EUR 89.4bn at its weekly MRO.<br />
EUR 100.5bn were maturing. After this operation,<br />
liquidity provided by open market operations<br />
(excluding CBP & SMP effects) dropped from EUR<br />
443.4 to EUR 432.3bn. However, excess liquidity<br />
remains elevated at well above EUR 50bn. Liquidity<br />
needs can be estimated around EUR 370-385bn on<br />
average for the rest of the period. Indeed, the<br />
average reserve requirement for the rest of the<br />
period is at EUR 193.9bn and autonomous factors<br />
are in the EUR175-190bn area. Thus, the level of<br />
excess liquidity is enough to allow banks to continue<br />
to frontload reserve requirements in coming days,<br />
before reducing gradually their holdings during the<br />
second half of the period. The level of liquidity is<br />
consistent with a gradual decrease of the eonia<br />
towards 0.65% in coming days and is set to decrease<br />
further during the second half of the reserve<br />
maintenance period.<br />
Term liquidity more exposed to pressures<br />
While short dated liquidity remains ample, term<br />
liquidity (3mth and beyond) is more exposed to<br />
pressures. The LTRO expiring next week is very<br />
large (EUR 149.5bn). Demand at the last two 3mth<br />
LTRO was in line with the amount expiring<br />
(February) or well above (January). However, the<br />
strong demand in February may be explained by<br />
tensions on eonias during the reserve maintenance<br />
period in January, as well as by the risk of a return to<br />
variable rate tenders. This is not the case this time as<br />
the ECB will keep fixed rate full allotment tenders at<br />
least until June. In addition, while the cost of one<br />
3mth ECB liquidity (exposed to rate hikes) is similar<br />
to the cost of three STROs, there is uncertainty on<br />
the rate at the 3mth tender. This could weigh on<br />
demand given the prospect on ECB rates. Demand<br />
may therefore be around the amount expiring. On the<br />
other hand, the 3mth LTRO expiring seems to be<br />
largely held in countries where banks are highly<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: Lower Eonia in Coming Days<br />
Source: <strong>BNP</strong> Paribas<br />
dependent on ECB liquidity. It makes sense therefore<br />
to rule out a significant fall in demand.<br />
If liquidity provided at the LTRO next week is in line<br />
with the amount expiring, very short-dated eonia will<br />
have potential to ease. But when it comes to 3mth<br />
rates, especially euribors, pressures could mount.<br />
Indeed, market term liquidity supply may drop in<br />
coming weeks, as the prospect of ECB rate hikes is<br />
likely to lead money market funds to reduce the<br />
maturity of their portfolios, in order to benefit from<br />
rate hikes. The reduction of 3mth liquidity supply by<br />
investors may push 3mth rates higher faster than<br />
rates at the very front end with the pressure being<br />
greater on euribors than on eonias.<br />
Strategy: Pay OIS/BOR (June contract) at 26bp. Pay<br />
ERM1-ERU1 at 27.<br />
Patrick Jacq 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
32<br />
www.GlobalMarkets.bnpparibas.com
EUR: Dislocation? Not Really<br />
• Last week’s short-lived but intense risk-off<br />
period has had a surprisingly modest impact on<br />
EUR relative value space.<br />
• STRATEGY: Long Schatz ASW spread, pay<br />
EUR 10Y10Y/20Y10Y (structural).<br />
Contrary to other episodes of tail risk or rather risk of<br />
tail risk, the Japan event has had no significant<br />
impact on the space of EUR relative value strategies.<br />
In Table 1, we track the performance of standard<br />
positions during the period from Thursday 10 March<br />
to Wednesday 16 March (COB), i.e. five days after<br />
the Japan earthquake. The bulk of the move was<br />
recorded in delta space, where the EUR 1Y1Y rate<br />
dropped about 30bp – going from 13bp above the<br />
21-day average (bearish trend) to 18bp below<br />
average. This performance reflects the intensified<br />
discussion about the likelihood of the ECB skipping<br />
the well-trailed April rate hike. The discussion has not<br />
changed much in terms of ECB anticipation, as we<br />
still have a full 25bp rate hike in April, while Dec ECB<br />
(1.65%) seems to have stabilised 10bp below the<br />
pre-Japan high.<br />
The performance of typical risk-off trades has been<br />
quite modest – if not disappointing. Based on<br />
previous episodes, we would have expected Schatz<br />
spreads to widen substantially on the back of the<br />
10pp increase in implied equity volatility. In reality,<br />
Schatz spreads moved only marginally (Chart 1).<br />
Most likely, market positioning has prevented a much<br />
stronger reaction to the jump in volatility.<br />
Also, the performance of core/non-core spreads in<br />
EUR sovereign space has been somewhat<br />
surprising. Looking at BTP/Bund spreads (Chart 2),<br />
we note a 12.5bp outperformance of Italy during the<br />
risk-off period following the earthquake. This is<br />
clearly counter-trend, as spreads widened by about<br />
25bp in the month prior to Japan’s shock. Moreover,<br />
it is probably the only risk-off compression in<br />
BTP/Bund since the fiscal crisis started. Admittedly,<br />
Italian credit is less exposed to factors that affect<br />
problematic issuers within the eurozone. Not least,<br />
the very strong domestic investor base could be a<br />
valid reason behind the risk-off compression.<br />
TRADE: We continue to like Schatz spreads as a<br />
cheap option against liquidity and credit risk as well<br />
as a period of protracted risk-off mode. The position’s<br />
behaviour in the aftermath of the Japanese<br />
Instrument<br />
Table 1: Dislocation Analysis<br />
10-Mar-11<br />
Deviation from<br />
21D MAV<br />
16-Mar-11<br />
Deviation from<br />
21D MAV<br />
Absolute Change<br />
vs 10-Mar-11<br />
OIS/Bor 28.3 0.0 28.5 0.1 0.2<br />
1Y 1s3s 14.5 -0.4 17.8 2.6 3.4<br />
2Y ccy -30.3 0.6 -31.0 -0.4 -0.8<br />
1Y1Y 2.72 0.13 2.41 -0.18 -0.31<br />
3M2Y vol 84.1 -0.2 88.4 3.6 4.3<br />
5Y5Y vol 84.3 0.0 85.3 0.7 1.0<br />
2Y ASW -45.0 -0.6 -45.2 -0.8 -0.2<br />
10Y ASW -15.8 -1.0 -17.4 -2.4 -1.6<br />
OAT spread 33.0 0.2 31.1 -1.4 -1.9<br />
BTP spread 167.5 13.1 155.2 -1.4 -12.4<br />
2/5s 0.70 -0.05 0.73 0.00 0.03<br />
2/10s 1.24 -0.11 1.32 0.00 0.08<br />
5/10s 0.54 -0.06 0.58 0.00 0.05<br />
5/30s 0.76 -0.07 0.84 0.03 0.08<br />
10/30s 0.22 -0.01 0.25 0.02 0.03<br />
2/5/10s 0.16 0.01 0.15 0.00 -0.02<br />
5/10/30s 0.32 -0.05 0.33 -0.02 0.01<br />
10/20/30s 0.51 -0.02 0.52 0.00 0.01<br />
Source: <strong>BNP</strong> Paribas<br />
30<br />
28<br />
25<br />
23<br />
20<br />
18<br />
Chart 1: Dislocation vs Equity Volatility<br />
VIX<br />
Schatz Z spread (RHS)<br />
15<br />
-40<br />
01-Feb-11 11-Feb-11 21-Feb-11 03-Mar-11 13-Mar-11 23-Mar-11<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: Non-Core Performance<br />
170<br />
165<br />
160<br />
BTP/Bund 10Y<br />
21D average<br />
155<br />
150<br />
145<br />
140<br />
135<br />
130<br />
125<br />
120<br />
1-Feb-11 11-Feb-11 21-Feb-11 3-Mar-11 13-Mar-11 23-Mar-11<br />
Source: <strong>BNP</strong> Paribas<br />
earthquake suggests that investors may have<br />
lightened up on this strategy. In terms of structural<br />
dislocation trades, we again highlight long-end<br />
convexity positions such as EUR 10Y10Y/20Y10Y<br />
(discussed in previous editions of Market Mover, e.g.<br />
9 September 2010).<br />
-47<br />
-46<br />
-45<br />
-44<br />
-43<br />
-42<br />
-41<br />
Alessandro Tentori 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
33<br />
www.GlobalMarkets.bnpparibas.com
EUR: Portugal Coming Closer to the EFSF<br />
• The final act of the Portuguese minority<br />
government took place on Wednesday, when all<br />
the opposition parties voted against the recently<br />
announced round of fiscal measures.<br />
• PM Socrates offered his resignation to<br />
President Silva. He will be attending the critical<br />
EU summit in a caretaker capacity.<br />
• Refinancing needs will spike in April and<br />
June. We believe that year-to-date funding<br />
should be adequate for April’s needs but not for<br />
June’s.<br />
• This increases the likelihood that Portugal<br />
will soon have to ask for external assistance<br />
since access to the markets will become even<br />
more challenging now.<br />
The end of the minority government<br />
The final act of the Portuguese minority government<br />
took place on Wednesday evening when the<br />
opposition parties voted against the measures<br />
recently announced by PM Socrates and which were<br />
welcomed by EU authorities in the 11 March EU<br />
Council meeting. This did not come as a total shock<br />
to the market as the main opposition party had<br />
already warned that it would vote against this new<br />
round of measures. Indeed, spreads started widening<br />
at the beginning of the week when the opposition<br />
party expressed its stance (Chart 1). This is not the<br />
first time that a parliamentary vote in Portugal has<br />
turned into a saga. We had a similar story back in<br />
October 2010, when the 2011 budget was passed<br />
only because the main opposition party abstained<br />
from the vote at the last moment after tough<br />
negotiations with the government.<br />
After this week’s result, PM Socrates offered his<br />
resignation to the President Silva. However, he is<br />
expected to attend the EU summit in a caretaker<br />
capacity. What becomes more likely after these<br />
recent developments is that Portugal will have to ask<br />
for external aid in order to cover its upcoming funding<br />
needs. To quote the FinMin, rejecting the<br />
government’s proposed austerity package would<br />
create “additional difficulties for the country’s<br />
financing which I doubt we will be able to bear on our<br />
own”. We agree with him on this one, and Portugal<br />
seems very likely to follow the examples of Greece<br />
and Ireland although it is in a very different state from<br />
these two countries.<br />
Chart 1: OT/Bund Spreads<br />
550<br />
PGB 10/14-OBL 10/14 PGB 6/20 -DBR 7/20 PGB 6/12 -BKO6/12<br />
500<br />
450<br />
400<br />
350<br />
300<br />
250<br />
Jan-11 Feb-11 Mar-11<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: Portugal’s Refinancing Needs in 2011<br />
8<br />
Coupon<br />
Bills<br />
7<br />
PGBs<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 3: Portugal’s Funding in 2011 So Far<br />
5<br />
4.52bn<br />
3.83bn<br />
4<br />
3<br />
2.01bn<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
-4<br />
-5<br />
Jan-11 Feb-11 Mar-11<br />
Placements (since mid-Dec) Bills Issued<br />
Bills Maturing<br />
Bonds Issued<br />
Cumulative Net Funding<br />
Source: <strong>BNP</strong> Paribas<br />
Ioannis Sokos 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
34<br />
www.GlobalMarkets.bnpparibas.com
Refinancing needs spike in April and June<br />
This becomes clearer when you monitor the<br />
breakdown of Portugal’s refinancing needs in 2011;<br />
these are shown in Chart 2. As we’ve written many<br />
times in the past, April and June are by far the<br />
heaviest months in terms of refinancing needs with<br />
EUR 5bn and 7bn respectively. Portugal has used<br />
private placements, one OT syndication, OT<br />
reopenings and T-bill auctions in order to fund itself<br />
so far this year. Taking all this into consideration, we<br />
estimate that Portugal is in a position to refinance<br />
April’s redemptions and May’s deficit but not the big<br />
spike in refinancing needs in June. This means that it<br />
would have to keep issuing in the primary market in<br />
the next couple of months, something that has<br />
become too expensive and unsustainable in the<br />
medium term. Conditions could deteriorate further<br />
after the recent political developments, with the risk<br />
of further downgrades increasing.<br />
Funding so far this year<br />
Portugal’s funding year-to-date is shown in Chart 3.<br />
Cumulative net funding is at EUR 3.8bn but this<br />
number needs to be adjusted by the cash balance at<br />
the start of the year and the deficit during Q1. As far<br />
as the cash balance at the start of the year is<br />
concerned, this is estimated at EUR 2-4bn according<br />
to unofficial reports. Even taking the worst case of<br />
EUR 2bn and adding it to the cumulative net<br />
issuance year-to-date, we come up with EUR 5.8bn<br />
from which we need to subtract the Q1 deficit. We<br />
have data only for the months of January and<br />
February: there was a budget surplus of 77 million on<br />
aggregate. So unless the March budget data surprise<br />
to the downside (not likely as there are no coupon<br />
payments), Portugal can remain fully funded through<br />
April.<br />
Potential EFSF/IMF programme for Portugal<br />
Discussions on the potential size of an EFSF/IMF<br />
programme for Portugal have already begun, with the<br />
market focusing on a figure of EUR 70-80bn. While<br />
there is no scientific way to estimate this, we provide<br />
some analysis on some of the constituents of this<br />
figure that can be monitored. In Chart 4, we present<br />
the cumulative sum of PGB redemptions and<br />
projected budget deficit (<strong>BNP</strong>P estimates) until the<br />
end of 2013. In this analysis, we exclude T-bills that<br />
could continue to be rolled over in the market, as<br />
Greece does at the moment. Thus, excluding T-bills,<br />
we get a total sum of redemptions and deficit of<br />
around EUR 53bn up to the end of 2013. This is the<br />
minimum Portugal would need in order to be fully<br />
funded until the end of that year. We use the word<br />
“minimum” because there is some ongoing<br />
discussion on the inclusion of some state-owned<br />
companies in the public debt figure, according to the<br />
Portuguese press.<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
Chart 4: Minimum Cumulative Funding Needs<br />
0<br />
Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13<br />
Source: <strong>BNP</strong> Paribas<br />
Sum of Bond Redemptions & Projected Budget deficit (<strong>BNP</strong>)<br />
On top of that, we should add some funds for the<br />
Portuguese banking system. Certainly, this is going<br />
to be much lower than the EUR 35bn approved for<br />
the Irish programme. Our analysts estimate that<br />
Portuguese banks could need in the region of EUR<br />
5bn under an EFSF/IMF programme. This adds up to<br />
a total EFSF/IMF programme size of around EUR<br />
60bn.<br />
Another tricky issue with a potential EFSF/IMF<br />
programme for Portugal is that some of the last<br />
disbursements of that programme will fall under the<br />
ESM’s jurisdiction since they take place after July<br />
2013. This could be solved by agreeing to a much<br />
more frontloaded and possible smaller package for<br />
Portugal, given that it is in a better state than Greece<br />
and Ireland and some of its problems are political in<br />
nature.<br />
Nevertheless, this could fire up a more extensive and<br />
realistic discussion on the issue of seniority of ESM<br />
loans over existing debt. The last disbursement for<br />
Greece is scheduled for June 2013 and for Ireland in<br />
November 2013. However, in both these cases, the<br />
ESM was discussed on a theoretical basis when<br />
these programmes were signed and nothing was<br />
certain with respect to the seniority of these loans<br />
and the inclusion of CACs. In the case of Portugal<br />
though, this could become an important turning point<br />
with respect to the horizon of the programme and the<br />
schedule of the disbursements.<br />
As mentioned in the latest Moody’s report following<br />
the downgrade of Portugal to A3, “The new<br />
measures in the recent update on the stability and<br />
growth programme announced by the Portuguese<br />
government figured prominently in the rating<br />
conclusion”. This raises the risk of further<br />
downgrades now that these measures have not been<br />
passed in the parliamentary vote.<br />
Ioannis Sokos 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
35<br />
www.GlobalMarkets.bnpparibas.com
EMU Debt Monitor: CDS Analysis<br />
Chart 1: AAA 5y CDS basis*: Austria back at H2 2010<br />
extremes<br />
Chart 2: Non-core CDS basis*: OT richened versus CDS<br />
50<br />
5Y CDS basis<br />
40<br />
5Y CDS basis<br />
40<br />
cash cheap vs CDS<br />
20<br />
cash cheap vs CDS<br />
30<br />
0<br />
20<br />
-20<br />
10<br />
-40<br />
0<br />
-60<br />
-10<br />
-80<br />
-20<br />
cash expensive vs CDS<br />
-30<br />
Sep-10 Oct-10 Oct-10 Nov-10 Dec-10 Jan-11 Jan-11 Feb-11 Mar-11<br />
FRA FIN AUS NETH<br />
-100<br />
cash expensive vs CDS<br />
-120<br />
Sep-10 Oct-10 Nov-10 Nov-10 Dec-10 Jan-11 Jan-11 Feb-11 Mar-11<br />
BEL SPA ITA POR<br />
The decline has been impressive among the CDS of AAA As observed last week, non-cores have divided into two<br />
countries such as Austria over the past week – roughly a 10bp groups with lower CDS on Spain, Italy and Belgium and higher<br />
move, pushing Austria/France 5y CDS differential almost to its CDS for Portugal and Ireland. The richening of BTPs and<br />
2010 extremes. While Germany and France are still 10bp Bonos versus CDS flagged last week occurred but has been<br />
above their October lows, Netherlands and Austria are back at fairly limited compared to that for OTs, Irish and GGBs despite<br />
or below these lows. The main implication of the CDS move the lack of SMP activity (Portugal and Ireland 5y CDS basis<br />
has been a further cheapening of ATS and to a lesser extent of have moved 30bp and 20bp, respectively). We expect a further<br />
DSL vs. CDS, with the former back at their cheapest levels vs. richening, especially on OTs, with the risk of a return to<br />
CDS seen in early Dec (see the high z-score level above 2.50). December extremes on the CDS basis (see Chart 2).<br />
All Charts Source: <strong>BNP</strong> Paribas. * CDS basis vs. Germany’s one<br />
CDS Table & Stats<br />
5y FIN NETH FRA AUS BEL ITA SPA POR IRE GRE<br />
CDS 31 39 75 61 141 156 217 527 626 1006<br />
CDS Weekly change -3 -3 -4 -11 -8 -5 -9 21 29 -6<br />
cash -30 -31 -19 -13 36 62 101 381 599 780<br />
Basis 61 70 94 74 105 94 116 146 28 226<br />
Basis Box vs Gy 29.2 20.1 -3.6 15.9 -14.6 -3.7 -25.3 -55.2 62.8 -135.3<br />
Average 29.1 13.9 -11.1 1.2 -16.1 -10.5 -23.3 -45.5 -19.7 -79.8<br />
Max 42.4 21.2 -2.4 15.9 0.5 19.8 2.4 -1.5 83.1 3.9<br />
Min 18.2 5.0 -24.2 -12.9 -45.4 -61.6 -52.5 -117.7 -93.1 -194.1<br />
Z score** 0.01 1.41 1.82 2.64 0.16 0.45 -0.16 -0.31 2.06 -1.25<br />
Current CDS Change to 31/12/2009 Change to 30/6<br />
2y 5y 10y 2y 5y 10y 2y 5y 10y<br />
FIN 17 31 42 4 5 9 -3 -3 3<br />
NETH 21 39 49 0 9 14 -14 -6 0<br />
FRA 49 75 91 30 46 55 -25 -14 -3<br />
AUS 29 61 72 -22 -22 -21 -37 -27 -21<br />
BEL 103 141 145 67 89 79 -25 -5 -4<br />
ITA 81 156 168 21 58 58 -103 -33 -9<br />
SPA 152 217 226 83 100 99 -133 -45 -16<br />
POR 500 527 484 431 429 374 115 210 213<br />
IRE 676 626 553 544 465 385 381 356 304<br />
GRE 1038 1006 884 820 722 590 44 114 105<br />
All Charts Source: <strong>BNP</strong> Paribas<br />
** z score measures the deviation from 6-mth rolling average CDS/cash basis of the country versus Germany, expressed in numbers of standard deviations. A<br />
number above 1.50 means that the cash is trading historically cheap compared to its average basis level.<br />
Eric Oynoyan / Ioannis Sokos 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
36<br />
www.GlobalMarkets.bnpparibas.com
EMU Debt Monitor: Key RV Charts<br />
Chart 3: 2015 BTP/Bund: still too high compared to 2013<br />
Chart 4: Hedged 2013/2016/20 Olo spread<br />
250<br />
200<br />
Nov15 BTP/Bund Jan16<br />
spread<br />
40<br />
30<br />
20<br />
US QE/ Equity<br />
indices bottom<br />
OLO 16<br />
cheap<br />
150<br />
10<br />
0<br />
100<br />
-10<br />
-20<br />
50<br />
OLO 16 expensive<br />
-30<br />
2013 BTP/OBL<br />
spread<br />
-40<br />
0<br />
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11<br />
30 55 80 105 130 155 180 205 230<br />
2013/2016/2020 OLO Fly<br />
2015 BTPs are still lagging the compression trend seen on 2y<br />
maturities with the spread roughly 15-18bp too wide relative to<br />
shorter maturities like Apr 13. Buying BTP Aug 15 vs. Bunds<br />
provides some opportunities with a medium-target in low 90s.<br />
Chart 5: BTP/CTZ spds: Feb 12 on highs, Dec 12 on lows<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
Sep-11 Feb-12 Apr-12 Aug 12 vs July 12 Dec-12<br />
Last<br />
While the belly of the Olo curve has started to normalise,<br />
retracing half of its cheapness, this week’s launch of the new<br />
Olo 5y led to a 7-8bp pullback. At current valuations, Olos are<br />
more mispriced than Bono Apr 16 – which makes little sense.<br />
Chart 6: OT 2013/16/20 hedged fly: 5y OT not recovering<br />
90<br />
70<br />
50<br />
30<br />
10<br />
-10<br />
-30<br />
-50<br />
-70<br />
-90<br />
Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11<br />
Hedged 2013/2016/2020 OT Fly<br />
Fair value + 3 st deviations<br />
Fair value - 3 st deviations<br />
BTP/CTZ spds have diverged recently with Feb 12 on the In contrast to BTPs and Bonos, political uncertainty in Portugal<br />
highs and Dec 12 reaching our 10-12 target. Switching long has prevented 2016 OTs from recovering on the local curve.<br />
BTP Feb 12 into CTZ Feb 12 at 9-10bp offers opportunities. Taking into account the current extreme levels on 5y, the most<br />
For Dec 12, we would wait for 18-19 to again buy CTZ versus likely scenario is a further richening of the cash vs. CDS.<br />
BTP.<br />
Chart 7: 2012/13 BTP ASW: still some potential for 2013 Chart 8: Olo/ATS 13/20 box: Olo 2y becoming expensive<br />
Bono fly<br />
40<br />
BTP & Bonos ASW Spreads<br />
50<br />
40<br />
OLO 2013 too cheap<br />
2013 Olo<br />
richening<br />
30<br />
30<br />
20<br />
Historical Average + 2.0 st dev<br />
20<br />
10<br />
0<br />
10<br />
-10<br />
0<br />
-20<br />
-30<br />
OLO 2013<br />
expensive<br />
-10<br />
Oct-10 Dec-10 Feb-11 Apr-11<br />
BTPS 2 15/12/12/BTPS 2 01/06/13 BTPS 2 15/12/12/BTPS 4.25 1/8/13<br />
SPGB 3.9 31/10/12/SPGB 2.30 30/04/13 SPGB 3.9 31/10/12/SPGB 2.5 31/10/13<br />
Since late Feb, 2013 BTP and Bonos richened vs. 2012 in<br />
ASW terms. However, as Chart 7 shows, BTP June 13 is still<br />
too cheap – 20bp cheaper than BTP Dec 12, lagging the Bono<br />
Oct 12/Apr 13 ASW tightening which is around 6bp.<br />
All Charts Source: <strong>BNP</strong> Paribas<br />
-40<br />
Historical Average - 2.0 st dev<br />
-50<br />
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11<br />
Olo Sep 13/Oct 13/Sep 20/July 20<br />
While 10y Olo was trading v. expensive in Jan, the Olo curve<br />
has more than normalised – pushing Olo 2y to expensive<br />
levels. Olo 2y also overshot the Belgium CDS move. We do<br />
not see value in Olo Mar 13/BTAN July 13 at 22bp.<br />
Eric Oynoyan / Ioannis Sokos 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
37<br />
www.GlobalMarkets.bnpparibas.com
EMU Debt Monitor: Trade Ideas<br />
• Sell DSL July 12 into DSL Jan 13.<br />
Chart 1: 1y/2y/3y Euro fly & ECB repo: Fly<br />
almost back to cyclical highs<br />
• Sell Fin Sep 12 into July 13.<br />
• Sell Bono July 25 into Bono Jan 29.<br />
• Sell Bono July 32 into Bono July 40.<br />
• Sell BTP Nov 29 into BTP Aug 39.<br />
• We like OLO 2017/2020 steepeners vs<br />
flatteners in BTPs; box is at extreme levels.<br />
4.5<br />
4<br />
3.5<br />
3<br />
2.5<br />
2<br />
1.5<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
1<br />
-40<br />
We focus this week both on the short end of the AAA<br />
curve and on the 30y part of non-core curves in the<br />
wake of the protracted cheapening of 2013 AAA<br />
maturities and the dislocation of 30y non-core since<br />
the 11 March EU council meeting.<br />
AAA 1y/3y area: 2y DSL and Fin attractive<br />
The market’s gradual reassessment of future ECB<br />
monetary policy since early September has led to a<br />
marked cheapening of the 2y maturity versus 1y and<br />
3y on the swap curve and to a lower extent among<br />
the AAA curves. Chart 1 plots the Eur 1y/2y/3y swap<br />
fly and the ECB repo rate since January 2005. While<br />
the ECB has not yet started its tightening policy, the<br />
2y maturity is trading close to its cyclical cheapest<br />
levels witnessed in late 2005 after a few ECB hikes<br />
or in mid-2009, when investors were pricing in a V<br />
shape recovery. On the cash, as Chart 2 illustrates,<br />
the cheapening of AAA 2y maturities has been<br />
the most pronounced on Finland and DSLs. In<br />
terms of pure relative value, it is worth noting the July<br />
12/Jan 13 DSL/Bund box is back at its highs, i.e.<br />
DSL Jan 13 too cheap. In order to exploit that<br />
cheapness, we would recommend holders of DSL<br />
July 12 to switch into Jan 13, enjoying a 20-20.5bp<br />
pick-up compared to 5bp in mid-November and 15bp<br />
on bunds. On Finland, selling Fin Sep 12 into July<br />
13 – providing a 28bp pick-up – is also attractive.<br />
30y non-core: more dislocation on BTPs and<br />
Bonos<br />
The resumption of intra-EMU spread tightening<br />
following the EU council focused on shorter<br />
maturities, which led to a bull steepening of the Bono<br />
and BTP curves. Such a move led to some<br />
dislocation at the very long end of the two curves,<br />
even though 10y/30y Bono/Bund and BTP/Bund<br />
boxes were already at all-time highs before the EU<br />
council meeting. Chart 3 and 4 exhibits the hedged<br />
10y/30y segments versus the money market slope.<br />
0.5<br />
Jan-05 Jun-06 Nov-07 Apr-09 Sep-10<br />
ECB repo<br />
Source: <strong>BNP</strong> Paribas<br />
Eur 1y/2y/3 swap fly (R.H.S)<br />
Chart 2: AAA 1y/2y/3y flies (BTAN, DSL,Fin)<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
2013 area expensive<br />
1y BTAN, DSL, RFGB ASW Flies<br />
2013 area cheap<br />
-20<br />
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11<br />
BTNS Jan 13/14/15 DSL July 12/13/14 Fly RFGB Sep 12/13/14 Fly<br />
Source: <strong>BNP</strong> Paribas<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
Chart 3: Hedged 2020/40 BTP spread: 30y<br />
getting close to June 2010 extremes<br />
-15<br />
May-10 Aug-10 Nov-10 Feb-11<br />
Source: <strong>BNP</strong> Paribas<br />
10y BTP/Bund spread at<br />
the widest<br />
Sep 20/ Sep 40 BTP spread<br />
-50<br />
Eric Oynoyan / Ioannis Sokos 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
38<br />
www.GlobalMarkets.bnpparibas.com
The BTP segment – the steepest among all cash<br />
curves – is trading two standard deviations above its<br />
fair value but is not yet back at June 2010 highs. The<br />
return to such extremely cheap 30y valuation would<br />
mean another 5bp 10y/30y BTP steepening, i.e. BTP<br />
Sep 20/Sep 40 spread overshooting to 99/100bp<br />
level.<br />
Chart 4: Hedged 2020/40 Bono spread: 30y back<br />
at May 2010 extremes<br />
40<br />
30<br />
20<br />
10<br />
Regarding the Spanish curve, as Chart 4<br />
underscores, 10y/30y segment valuation versus<br />
Euribor slope is already back at May 2010 Greek<br />
crisis levels – even though there are no signs yet of a<br />
stabilisation.<br />
In terms of relative value, the curve steepening has<br />
been quite heterogeneous among OFR 30y bonos.<br />
As Chart 5 underscores, the bulk of the recent<br />
steepening has been focused on the 2025-2029<br />
segment (Bono 2025 has actually richened 15bp<br />
within the Bono 2019/2025/2040 fly since early<br />
March). A bit further along the curve, Bono Jan<br />
29/Bono July 32 spread has also remained<br />
amazingly stable at its lows. Taking into account this<br />
decoupling, we would recommend holders of<br />
Bono July 25 to exploit the recent steepening to<br />
switch into Bono Jan 29 (yield pick-up at new<br />
highs at 23bp, targeting 15bp) and holders of<br />
Bono July 2032 to switch into July 2040 (yield<br />
pick-up back to 8-8.5bp).<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
-50<br />
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11<br />
Source: <strong>BNP</strong> Paribas<br />
0.35<br />
0.25<br />
0.15<br />
0.05<br />
Jul 2019/Jul 40 Bono spread<br />
Chart 5: 10y/30y Bonos & 20y/30y spreads:<br />
Bono 2025 and 2032 richer<br />
0.9<br />
0.85<br />
0.8<br />
0.75<br />
0.7<br />
0.65<br />
0.6<br />
0.55<br />
0.5<br />
0.45<br />
As far as OFR 30y BTPs are concerned, we<br />
recommend benefiting from the recent spike in the<br />
BTP Nov 29/BTP Aug 39 spread to sell the former<br />
in favour of the latter, enjoying an 18bp pick-up.<br />
The spread hovered around 11-12bp for most of<br />
2010.<br />
OLOs versus BTPs in 2017 vs 2020 sectors<br />
Belgium launched a new OLO Jun-2017 at quite<br />
cheap levels in the past week. Indeed, the<br />
2017/2020 part of the Belgian curve appears to be<br />
too flat vs the relative curves of Italy and Spain.<br />
OLOs have richened a lot vs core paper since they<br />
have tended to benefit from the recent rally in<br />
peripheral markets. Versus peripherals like BTPs or<br />
Bonos, OLOs are actually trading in a parallel fashion<br />
– only with a lower beta. This makes the outright<br />
OLO/BTPs or OLO/Bonos spread quite directional.<br />
However, the recent trading pattern does not justify<br />
the dislocation mentioned above on the 2017/2020<br />
sectors. Chart 6 shows the box between BTPs<br />
2017/20s and the relative OLOs. The box is close to<br />
its historical highs and we expect it to correct from<br />
these extreme levels. Instead of using the OLO Mar-<br />
17, one could use the new Jun-17 which is even<br />
cheaper than the Mar-17, i.e. a 6bp yield pickup.<br />
-0.05<br />
0.4<br />
Jul-10 Aug-10 Oct-10 Nov-10 Jan-11 Feb-11 Mar-11<br />
SPGB 4.9 30/7/40 YLD-SPGB 6 31/1/29 (ESP) YLD (RHS) SPGB 5.75 30/7/32 YLD-SPGB 6 31/1/29 (ESP) YLD (RHS)<br />
SPGB 6 31/1/29 (ESP) YLD-SPGB 4.65 30/07/25 YLD SPGB 4.9 30/7/40 YLD-SPGB 4.85 31/10/20 YLD<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 6: BTPs vs OLOs 2017/20: Olo 17 too cheap<br />
35<br />
[BTPs Sep-20 vs Feb-17] - [OLO Sep-20 vs Mar-17]<br />
30<br />
25<br />
20<br />
15<br />
10<br />
28bp move on the BOX<br />
5<br />
0<br />
Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11<br />
Source: <strong>BNP</strong> Paribas<br />
Eric Oynoyan / Ioannis Sokos 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
39<br />
www.GlobalMarkets.bnpparibas.com
EMU Debt Monitor: SSA & Covered Bonds<br />
• The richening of Austrian agencies relative<br />
to Dutch ones and CADES is still ongoing. We<br />
question the sustainability of the relative levels<br />
reached in the 10y area.<br />
• A theoretical model suggests that OBND<br />
and CADES are rather rich compared to BNG<br />
and NEDWBK.<br />
• STRATEGY: Buy NEDWBK Jan 21 (32bp<br />
asw).<br />
In this analysis, we discuss further the richening of<br />
Austrian agencies, a topic discussed in January. As<br />
highlighted in Chart 1, OBND (as well as OKB and<br />
ASFINAG) prolonged further the tightening bias and<br />
is now as rich as CADES Oct 20 in ASW space. BNG<br />
Sep 20 has still not recovered from the 3bp widening<br />
that occurred at the end of 2010, and new NEDWBK<br />
Jan 21 is still at a 2bp premium to BNG.<br />
Overall, Dutch agencies remain cheaper than OBND<br />
and CADES in the 10y area. This sounds bizarre at<br />
first glance, given the respective macro fundamentals<br />
of each country. Indeed, as shown in Chart 2, the<br />
gross government debt-to-GDP ratio, a key variable<br />
in the long run, is lower in the Netherlands, followed<br />
by Austria and then France, reflecting the respective<br />
levels of sovereign CDS.<br />
However, further criteria should be considered. For<br />
instance, in the EGB space, OATs trade richer than<br />
ATs because the liquidity surplus offered by OATs,<br />
relative to ATs more than offsets the credit premium<br />
differentiation.<br />
On the agencies’ side, we need to take into account<br />
the fundamentals behind each agency in addition to<br />
pricing levels of underlying govvies, liquidity criteria<br />
and other factors. Essentially, unlike CADES, BNG<br />
and NEDWBK, Austrian agencies benefit from an<br />
explicit, direct, unconditional and irrevocable<br />
guarantee from the state. The intrinsic value of such<br />
guarantee could actually richen in a bail-in<br />
environment. But taking into account the type of<br />
guarantee and other strong support(s) from the state,<br />
net supply forecasts for the year, a proxy for liquidity,<br />
and the underlying sovereign debt asset swap<br />
spread, we come up with a theoretical model that we<br />
compare to the actual market pricing (Chart 3). The<br />
model suggests that OBND and CADES are rather<br />
rich compared to BNG and NEDWBK. This supports<br />
our belief that the richening of OBND Oct 20 is<br />
somewhat overdone and that the persistence of<br />
CADES Oct 20 is fragile.<br />
Chart 1: Dutch Agencies Look Cheap vs CADES<br />
& Austrian Agencies<br />
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
ASW<br />
OBND 3.5 19/10/20 CADES 3.75 25/10/20<br />
NEDWBK 3.5 14/01/21 NEDWBK 3.875 17/2/20<br />
BNG 2.625 01/09/20<br />
Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11<br />
Chart 2: Better Fundamentals in Netherlands<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
France 5y Sov CDS Nether 5y Sov CDS<br />
0<br />
Austria 5y Sov CDS<br />
Sep 09 Mar 10 Sep 10 Mar 11<br />
Gross Gov Debt (% GDP)<br />
2010 2011 2012 2013<br />
Nether 64.1 66.2 67 67<br />
Austria 69.5 70.8 74.2 77.6<br />
France 84 88 90.5 90.5<br />
Chart 3: Rich OBND & CADES Oct 20<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Market A SW<br />
KFW<br />
NEDWBK<br />
BNG<br />
ASFINAG<br />
Rich OBND (L)<br />
& CADES (R)<br />
0 10 20 30 40<br />
Source: <strong>BNP</strong> Paribas<br />
At current levels, we still believe it is worth<br />
positioning into BNG Sep 20 and especially<br />
NEDWBK Jan 21, which offer better premium to<br />
underlying govvies (35bp ASW compared to 18bp in<br />
the case of CADES and 13bp in the case of OBND!).<br />
The differential of the premium to govvies is actually<br />
the highest in that area of the curve.<br />
FV<br />
Theoritical ASW<br />
Camille de Courcel 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
40<br />
www.GlobalMarkets.bnpparibas.com
EMU Debt Monitor: Redemptions<br />
EGB redemptions fall marginally in April to EUR 58bn but remain at relatively high levels. Most importantly, we’ll have EUR<br />
4.34bn of redemptions in Portugal (almost 45% of its annual redemptions) and EUR 15.5bn (almost 1/3 of annual redemptions)<br />
in Spain. France and Germany also have significant redemptions.<br />
EGB Monthly Redemptions<br />
Bonds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011<br />
ITA 0.0 18.7 30.5 0.0 14.6 12.2 0.0 20.2 46.0 0.0 15.5 0.0 157.6<br />
FRA 17.8 0.0 0.0 18.4 0.0 0.0 29.3 0.0 13.8 15.7 0.0 0.0 95.0<br />
GER 23.3 0.0 15.0 19.0 0.0 15.0 24.0 0.0 16.0 17.0 0.0 18.0 147.3<br />
SPA 0.0 0.0 0.0 15.5 0.0 0.0 15.5 0.0 0.0 14.1 0.0 0.0 45.1<br />
GRE 0.0 0.0 8.7 1.0 7.0 0.0 0.0 6.8 0.0 0.0 0.0 5.8 29.4<br />
BEL 0.0 0.0 11.3 0.0 0.0 3.4 0.0 0.0 12.7 0.0 0.0 0.5 27.9<br />
NET 13.9 0.0 0.0 0.0 0.0 0.0 14.1 0.0 0.0 0.0 0.0 0.0 27.9<br />
AUS 8.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 8.4<br />
POR 0.0 0.0 0.0 4.5 0.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 9.5<br />
IRE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5 0.0 4.5<br />
FIN 0.0 5.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.7<br />
Total 63 24 66 58 22 35 83 27 89 47 20 24 558<br />
EGB Monthly Redemptions<br />
T-Bill Monthly Redemptions<br />
T-Bills Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011<br />
ITA 17.4 17.3 17.3 17.3 14.6 15.8 16.3 7.2 7.7 7.2 6.1 4.2 148.0<br />
FRA 33.3 35.9 38.3 31.9 15.8 16.4 16.3 7.4 5.6 7.1 5.8 5.5 219.3<br />
GER 11.0 11.0 11.0 11.0 11.0 11.0 9.0 4.0 4.0 5.0 3.0 2.0 93.0<br />
SPA 8.7 7.9 10.2 7.3 5.8 5.1 6.1 9.7 5.8 8.5 4.0 5.1 84.3<br />
GRE 4.2 0.4 1.4 3.2 0.4 0.0 2.4 0.0 0.0 0.0 0.0 0.0 12.0<br />
BEL 5.5 6.2 6.4 6.7 5.7 3.6 3.6 2.1 2.0 2.0 1.8 1.6 47.4<br />
NET 9.7 8.3 17.4 7.0 4.0 8.0 2.4 0.0 5.0 0.0 0.0 2.3 64.1<br />
AUS 0.1 2.2 0.9 3.4 0.0 0.0 0.1 0.9 0.1 0.2 0.3 0.0 8.3<br />
POR 3.4 3.5 3.8 0.0 0.0 0.0 2.3 1.8 1.4 1.4 1.4 0.0 19.0<br />
IRE 2.1 1.2 1.6 1.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.0<br />
FIN 3.5 2.3 2.6 1.5 1.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 11.7<br />
Total 98.9 96.2 110.9 90.5 59.0 59.9 58.6 33.1 31.7 31.3 22.4 20.6 713.1<br />
T-Bill Monthly Redemptions<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Monthly EGBs Redemptions<br />
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
Monthly T-Bills Redemptions<br />
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec<br />
This Month’s EGB Redemptions<br />
Country Bond Maturity Issued EURs (bn) CRNCY<br />
FRANCE FRTR 6 1/2 04/25/11 25/04/2011 26/02/1996 18.40 EUR<br />
GERMANY OBL 3 1/2 04/08/11 08/04/2011 24/03/2006 19.00 EUR<br />
SPAIN SPGB 4.1 04/30/11 30/04/2011 15/01/2008 15.54 EUR<br />
GREECE GREECE 0 04/05/11 05/04/2011 05/04/2004 1.00 EUR<br />
PORTUGAL PGB 3.2 04/15/11 15/04/2011 16/11/2005 4.35 EUR<br />
Total 58.29<br />
This Month’s T-Bill Redemptions<br />
Country T-Bill Maturity CRNCY EURs<br />
AUSTRIA Many small T-Bills EUR 4.6<br />
BELGIUM BGTB 0 04/14/11 14/04/2011 EUR 6.7<br />
FINLAND RFTB 0 04/20/11 20/04/2011 USD 0.6<br />
FINLAND RFTB 0 04/12/11 12/04/2011 EUR 2.2<br />
FRANCE BTF 0 04/07/11 07/04/2011 EUR 7.6<br />
FRANCE BTF 0 04/14/11 14/04/2011 EUR 8.3<br />
FRANCE BTF 0 04/21/11 21/04/2011 EUR 7.5<br />
FRANCE BTF 0 04/28/11 28/04/2011 EUR 8.5<br />
GERMANY BUBILL 0 04/20/1120/04/2011 EUR 6.0<br />
GERMANY BUBILL 0 04/13/1113/04/2011 EUR 5.0<br />
GREECE GTB 0 04/26/11 26/04/2011 EUR 0.8<br />
GREECE GTB 0 04/15/11 15/04/2011 EUR 1.4<br />
GREECE GTB 0 04/15/11 15/04/2011 EUR 1.0<br />
IRELAND IRTB 0 04/18/11 18/04/2011 EUR 1.3<br />
ITALY BOTS 0 04/15/11 15/04/2011 EUR 8.3<br />
ITALY BOTS 0 04/29/11 29/04/2011 EUR 9.0<br />
NETHERLANDS DTB 0 04/29/11 29/04/2011 EUR 12.5<br />
SPAIN SGLT 0 04/21/11 21/04/2011 EUR 7.3<br />
Total 98.4<br />
All Charts Sources: <strong>BNP</strong> Paribas<br />
Eric Oynoyan / Ioannis Sokos 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
41<br />
www.GlobalMarkets.bnpparibas.com
EUR Vol: Rate Hike without a Vol Rally?<br />
• Implied volatility has recently featured<br />
negative correlation with the level of rates. This<br />
is unusual given the current phase of the cycle<br />
but we expect such dynamics to persist for<br />
some time as a result of the legacy of recent<br />
exogenous shocks<br />
• In the meantime, we expect rates at the front<br />
end to continue to drift higher as the ECB<br />
begins the tightening cycle in April<br />
• STRATEGY: Pay the 2y swap and sell<br />
2.1- 3.0% 3m2y collar.<br />
The market is pricing in a rate hike to be delivered by<br />
the ECB at the next meeting in April. We agree with<br />
the market and maintain our bearish view on the front<br />
end. In the meantime, the 2y swap rate hovers<br />
around 2.24% whereas the 3m2y swap rate is<br />
around 2.47%. As shown by the literature, the<br />
forward rate is not an unbiased predictor of the future<br />
spot rate unless, as suggested by E. Fama, it is not<br />
adjusted by a term premium. This, clearly, is quite<br />
complex to model.<br />
To gauge where the 2y swap could be in three<br />
months’ time, or more precisely, in three months after<br />
the first rate hike, it is a simpler task to look at the<br />
previous two hiking cycles. The first began in<br />
November 1999, when the ECB was still in its infancy<br />
and started the cycle with a 50bp hike. The second<br />
was in December 2005, when the ECB raised the<br />
Refi by 25bp. The Refi was increased by an<br />
additional 25bp over the period in both instances. In<br />
the former case, the 2y swap surged by 60bp over<br />
the following three months whereas in the latter case<br />
the rate increased by 43bp. Against this backdrop,<br />
the 23bp increase implied by the 3m2y rate looks<br />
insufficient. Accordingly, we favour paying the 2y<br />
swap at current levels (either spot or 3M forward).<br />
The negative carry on a short 2y payer position is<br />
25bp/3m whereas the negative rolldown to spot for<br />
3m2y is 23bp.<br />
What if the base case scenario is not realised and<br />
ECB does not hike/the market rallies? Investors who<br />
wish to purchase insurance for the trade above<br />
against an expected collapse of rates could buy a<br />
3m2y receiver swaption. This looks cheap, given the<br />
steep skew (Chart 1). If cash infusion into the<br />
position needs to be minimised, investors could<br />
choose to finance the long receiver swaption position<br />
with expensive payer swaption. For example, a short<br />
140<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
Chart 1: 3M2Y Smile<br />
70<br />
1.5 2.5 3.5 4.5<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: Short 3m2y Collar, Short 3m2y Swap<br />
Terminal PnL Profile<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
1.50<br />
1.75<br />
2.00<br />
Source: <strong>BNP</strong> Paribas<br />
94<br />
92<br />
90<br />
88<br />
86<br />
84<br />
82<br />
80<br />
78<br />
76<br />
2.25<br />
2.50<br />
2.75<br />
Chart 3: 3m2y Implied Vol vs Underlying in<br />
March<br />
3m2y implied vol<br />
2y swap (RHS)<br />
74<br />
01 02 03 04 07 08 09 10 11 14 15 16 17 18 21 22 23<br />
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar<br />
Source: <strong>BNP</strong> Paribas<br />
3.00<br />
3.25<br />
3.50<br />
3.75<br />
4.00<br />
4.25<br />
4.50<br />
2.25<br />
2.20<br />
2.15<br />
2.10<br />
2.05<br />
2.00<br />
1.95<br />
1.90<br />
1.85<br />
1.80<br />
1.75<br />
Matteo Regesta 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
42<br />
www.GlobalMarkets.bnpparibas.com
position in the 2.10-3.00% collar could recently be<br />
entered for a few cents. In turn, the upside potential<br />
of trade is capped with max PnL for EUR 100mn<br />
notional at EUR 1mn if the swap rate settles at 3% in<br />
turn; the payoff profile is shown in Chart 2. The rate<br />
needs to increase by 25bp to break even.<br />
We make a final and key remark: the trade is<br />
gamma/vega neutral. However, vega would decrease<br />
in a sell-off (vanna profile implies that vega<br />
decreases by 9k on a 10bp move). Note that this risk<br />
profile perfectly suits the current market. Implied<br />
volatility seems to be negative correlated with the<br />
level of rates (Chart 3). This is unusual given the<br />
current phase of the cycle but we expect such<br />
dynamics to persist for some time as a result of the<br />
legacy of recent exogenous shocks (e.g. Japan<br />
earthquake/tsunami, MENA unrest).<br />
Matteo Regesta 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
43<br />
www.GlobalMarkets.bnpparibas.com
JGBs: Several Factors to Weigh<br />
• Over the medium term, the 11 March<br />
earthquake/tsunami will result in enormous<br />
damage to the JGB market.<br />
• First, the shrinking output gap will put<br />
upward pressure on the CPI.<br />
• Second, reconstruction demand and a<br />
higher fiscal burden will lead to more JGB<br />
issuance.<br />
• Third, since the earthquake is causing<br />
financial bottlenecks, the corporate cash<br />
surplus will shrink, leading to the decline in<br />
excess liquidity that has been supporting<br />
JGBs.<br />
Shrinking output gap will prompt higher CPI<br />
Reflecting the earthquake effects, the JGB market<br />
will probably remain firm, if somewhat unsettled.<br />
JGBs will be supported in the near term by 1) the<br />
slumping real economy, 2) the emergency easing<br />
measures introduced by the BoJ and 3) flight-toquality<br />
effects in financial markets. However, JGBs<br />
face surprising resistance on the upside, as already<br />
seen this past week. This is because investors are<br />
anticipating reconstruction demand and higher future<br />
fiscal burdens. Moreover, we expect the impact of<br />
these negative factors to grow over time.<br />
Over the medium term, we expect the<br />
earthquake/tsunami to result in enormous damage to<br />
the JGB market. The most severe harm will result<br />
from a shrinking output gap. Distribution bottlenecks<br />
– as well as panic buying – are causing local<br />
shortages of goods such as petrol and batteries. We<br />
expect supply constraints to persist in coming<br />
months, putting upward pressure on prices.<br />
Rising fiscal burden will lead to more issuance<br />
We also cannot overlook the damage caused by a<br />
rising fiscal burden. The 1995 Kobe Earthquake<br />
resulted in three supplementary budgets totalling<br />
JPY 3.4trn. Since damage from the 11 March quake<br />
is already estimated to be more than double that of<br />
Kobe, government spending on reconstruction will<br />
mount accordingly. It is unrealistic to expect tax<br />
increases to cover the total rise in expenditure so the<br />
government will have to increase JGB issuance by<br />
several trillion yen, even if it appropriates some<br />
portion of reserve funds and funds for child<br />
allowances.<br />
There have already been some calls for the BoJ to<br />
underwrite reconstruction bonds issued by the<br />
Chart 1: Japanese Corporate Cash Flow and<br />
Capital Expenditure (All Companies)<br />
(¥trn, 7 4QMA)<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
1980 1985 1990 1995 2000 2005 2010<br />
Source: <strong>BNP</strong> Paribas<br />
Cash flow<br />
Capital expenditure<br />
All manufacturers<br />
government on an emergency basis. However,<br />
should the government rush ahead with measures<br />
associated with monetisation, financial markets could<br />
interpret this as hoisting a white flag in the face of the<br />
disaster. The debate about the BoJ underwriting<br />
JGBs is itself a negative for both the JPY and the<br />
JGB market. Because the Japanese economy runs a<br />
current account surplus and enjoys a savings<br />
surplus, the government should in our view first issue<br />
construction bonds and deficit bonds directly to the<br />
market.<br />
Excess liquidity will diminish<br />
Private-sector demand for funds will be the third<br />
source of damage to the market. In addition to<br />
distribution and power bottlenecks, the earthquake is<br />
causing financial bottlenecks. Although the BoJ is<br />
continuing to supply liquidity through emergency<br />
easing measures, companies may well have<br />
problems raising funds, particularly through March<br />
book closings, due to earthquake damage. The<br />
corporate sector in particular has increased its<br />
discretionary cash flow during the post-Lehman<br />
economic recovery but this will change as time<br />
passes.<br />
Corporate expenditure on plant and equipment has<br />
been picking up since last year. Given the substantial<br />
discretionary cash flow of domestic corporations,<br />
they will be compelled to increase investment to<br />
restore existing facilities, move factories and<br />
headquarter operations, and rebuild distribution<br />
infrastructures. This increased investment will reduce<br />
the cash surplus of the corporate sector. In other<br />
words, excess liquidity, which has supported JGBs,<br />
will diminish. Therefore, while JGBs should remain<br />
firm through Q2, they will face a correction phase<br />
from the middle of the year.<br />
Koji Shimamoto 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
44<br />
www.GlobalMarkets.bnpparibas.com
JGBs: Trade Recommendations<br />
• The Nikkei 225 dropped below 8,300 at one<br />
point last week on flight-to-quality trades<br />
triggered by the 11 March earthquake/tsunami,<br />
but has since recovered to around 9,400.<br />
45<br />
40<br />
Chart 1: Current Account Balances<br />
(JPY trn)<br />
• The JGB market has also seen a reversal in<br />
the super-long swap spreads and a decline in<br />
the somewhat excessive premium that had<br />
been priced into futures. The USD/JPY<br />
exchange rate has rebounded to around 81 on<br />
G7 yen-selling intervention after repatriation<br />
concerns had driven it through the 77 mark to<br />
a new all-time low.<br />
• Markets are likely to remain volatile for<br />
some time amid very high levels of headline<br />
risk. This week we set out our latest trade<br />
recommendations.<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Jan01 Jan02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11<br />
Source: Bloomberg<br />
Chart 2: JGB 2y vs OIS 2y<br />
0.50<br />
60<br />
Outright long positions in short-end JGBs<br />
The Bank of Japan has injected more than JPY 100<br />
trillion into financial markets since 14 March, in line<br />
with its emergency quantitative-easing measures,<br />
and is expected to keep monetary conditions highly<br />
accommodative for the near future. BoJ current<br />
account balances rose to a seven-year high of JPY<br />
41.8 trillion on 23 March, but short-end JGBs<br />
currently look quite cheap – both outright and versus<br />
overnight indexed swaps following a temporary selloff<br />
to secure cash and a decline in OIS rates. The<br />
lead-up to today's (24 March) 2y auction may also<br />
have created a certain amount of selling pressure,<br />
but the auction result was robust. We continue to<br />
recommend long positions in short-end JGBs.<br />
5s10s JGB steepener<br />
The Cabinet Office announced on 23 March that it<br />
expects the 11 March earthquake and tsunami to end<br />
up costing between JPY 16 trillion and JPY 25 trillion<br />
in terms of direct economic damage. This would<br />
make it considerably more expensive than the Great<br />
Hanshin-Awaji Earthquake of January 1995 (around<br />
JPY 10 trillion) and suggests that substantial<br />
payments will be needed from the national coffers.<br />
The Cabinet Office also indicated that FY 2011 GDP<br />
is likely to be reduced by between JPY 1.25 trillion<br />
and JPY 2.75 trillion (around 0.2-0.5%) due to<br />
distribution delays. However, these estimates do not<br />
take into account the impact of rolling power<br />
stoppages following the shutdown of TEPCO<br />
Fukushima Daiichi and Daini nuclear power plants. It<br />
is therefore likely that actual economic losses will<br />
0.45<br />
0.40<br />
0.35<br />
0.30<br />
0.25<br />
0.20<br />
0.15<br />
0.10<br />
OIS 2y (LHS, %)<br />
JGB 2y (LHS, %)<br />
0.05<br />
Spread (RHS, bp)<br />
0.00<br />
Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10 Jan11<br />
Source: Bloomberg, <strong>BNP</strong> Paribas<br />
2.50<br />
2.00<br />
1.50<br />
1.00<br />
0.50<br />
Chart 3: 5s10s JGB Steepener<br />
JGB 10y (LHS, %)<br />
0.00<br />
Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11<br />
Source: Bloomberg, <strong>BNP</strong> Paribas<br />
JGB 5y (LHS, %)<br />
Spread (RHS, bp)<br />
prove to be even greater, particularly if the<br />
government is forced to pay compensation to those<br />
affected by ongoing radiation leaks.<br />
Supply/demand conditions in the long-term and<br />
super-long sectors look likely to deteriorate amid<br />
concerns that an emergency supplementary budget<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
Tomohisa Fujiki / Masahiro Kikuchi 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
45<br />
www.GlobalMarkets.bnpparibas.com
will necessitate higher levels of issuance. We<br />
therefore expect to see further steepening pressure<br />
on the JGB yield curve. The 5s10s spread has<br />
remained within its post-December range of 70–75bp<br />
despite the events of 11 March, and we recommend<br />
a target level of 80bp while acknowledging the<br />
possibility that the 5y sector might lag temporarily if<br />
the market continues to rally.<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
Chart 4: 3s5s10s Swap Butterfly<br />
Pay 3s5s10s swap butterfly<br />
We recommended paying a 3s5s10s butterfly in<br />
swaps on 10 March (i.e. before the earthquake),<br />
citing the likelihood that the belly of the curve will<br />
underperform in the medium term as the economy<br />
continues to recover; a relatively low carry cost; and<br />
a historically attractive level. 5s have outperformed<br />
during the subsequent market surge, but with the<br />
butterfly spread now approaching its all-time low, we<br />
stand by our original recommendation as a long-term<br />
strategic play with an attractive risk/reward profile.<br />
Moreover, the carry is now almost flat on a 6m<br />
horizon.<br />
Other recommended investment strategies<br />
Our economics team predicts that Japan will face<br />
growing inflationary pressure as a consequence of<br />
rising global commodity prices and local supply<br />
shortages. Inflation-indexed JGBs (linkers) may be<br />
worth considering given that a higher CPI would<br />
translate into higher coupon income irrespective of<br />
the supply/demand balance. However, linkers do<br />
indeed tend to underperform nominal JGBs during<br />
flight-to-quality phases. The Ministry of Finance is<br />
currently scheduled to buy back JPY 150 billion in<br />
JGB linkers in the April-June quarter, while the BoJ is<br />
set to purchase a further JPY 40 billion. Outstanding<br />
issuance continues to steadily decline (with new<br />
offerings remaining on hold), but the JGB linker<br />
market is still highly illiquid. This reflects an<br />
extremely high level of uncertainty over factors such<br />
as the sustainability of commodity-driven inflation,<br />
the future of the Fed's QE2 programme (currently<br />
scheduled to end in June), ECB rate hikes and a<br />
rebasing of the Japanese CPI from 2005 to 2010 in<br />
August this year.<br />
-50<br />
-60<br />
-70<br />
-80<br />
Jan01 Jan02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11<br />
Source: <strong>BNP</strong> Paribas<br />
Table 1: Economic Forecasts<br />
2011 2012<br />
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q<br />
Real GDP (QoQ) -1.0 -2.6 1.5 2.5 0.5 0.5 0.3 0.3<br />
(QoQ Ann.) -4.0 -10.0 5.9 10.5 1.9 2.1 1.1 1.1<br />
CPI Core (YoY) -0.2 0.7 1.3 1.2 1.1 0.8 0.7 0.6<br />
Source: <strong>BNP</strong> Paribas<br />
Table 2: JGBi Outstanding (as of Feb 2011, JPY<br />
100 million)<br />
Holder<br />
Issue MOF BOJ Market<br />
JBI1 998 0 3 995<br />
JBI2 2,995 2,098 90 807<br />
JBI3 5,004 2,701 435 1,868<br />
JBI4 5,282 3,723 567 992<br />
JBI5 5,435 3,867 159 1,409<br />
JBI6 5,084 3,488 699 897<br />
JBI7 4,997 3,788 341 868<br />
JBI8 9,996 5,500 636 3,860<br />
JBI9 4,997 1,898 358 2,741<br />
JBI10 10,334 6,117 847 3,370<br />
JBI11 5,044 2,433 358 2,253<br />
JBI12 10,254 4,961 519 4,774<br />
JBI13 5,005 2,874 203 1,928<br />
JBI14 10,133 5,444 1540 3,149<br />
JBI15 5,395 2,924 265 2,206<br />
JBI16 10,493 4,421 326 5,746<br />
101,446 56,237 7,346 63,583<br />
Source: MOF, BoJ, <strong>BNP</strong> Paribas<br />
We also expect Japan's near-term economic slump<br />
to be somewhat deeper than the apparent market<br />
consensus, in which case JGB yields could<br />
accelerate lower over the coming weeks. However,<br />
fiscal concerns are likely to put yields under a certain<br />
amount of upward pressure in the second half of this<br />
year as attention starts to focus on how the<br />
government will finance the post-quake rebuilding<br />
process. Those who agree with these views may<br />
therefore consider buying short expiry OTM receivers<br />
or OTM calls on JGB futures.<br />
Tomohisa Fujiki / Masahiro Kikuchi 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
46<br />
www.GlobalMarkets.bnpparibas.com
Global Inflation Watch<br />
Eurozone HICP Inflation: Higher Again<br />
Chart 1: Eurozone HICP Energy vs Oil<br />
The release of the preliminary data for German<br />
CPI/HICP and the flash estimate for the eurozone<br />
HICP will the coming week’s data focus.<br />
In both cases, our expectations are moderately<br />
higher than the market consensus, reflecting the<br />
anticipation of an acceleration in energy prices linked<br />
in particular to the housing component and some<br />
pressures from the ‘seasonal’ components of the<br />
core index such as clothing. The methodological<br />
changes introduced in January in a number of<br />
countries have exacerbated seasonal movements.<br />
This has probably depressed the outcome in January<br />
and February, implying some payback in March’s<br />
data.<br />
More specifically, we expect headline eurozone<br />
inflation to accelerate again in March, to stand at<br />
2.5% y/y – the highest since October 2008.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Chart 2: Eurozone HICP Food vs Restaurants &<br />
Hotels<br />
In the breakdown, food inflation is forecast to<br />
continue accelerating, as the HICP catches up with<br />
the surge in agricultural commodities. We expect<br />
further upside beyond March, helping to push<br />
headline inflation yet higher.<br />
Similarly, energy price inflation is likely to accelerate<br />
by ½ percentage point to 13.5% y/y. The extent of<br />
the acceleration is likely to be limited by base effects<br />
due to the sizeable increase posted this time last<br />
year.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Finally, core inflation is likely to be stable at 1.0% y/y,<br />
though with risks skewed to the upside. In particular,<br />
we expect clothes inflation to accelerate – again<br />
reflecting a catch-up with the jump in raw materials<br />
prices and the seasonal factors mentioned above.<br />
3<br />
2<br />
Chart 3: Japanese CPI (% y/y)<br />
Core CPI<br />
The weekly calendar includes the Japanese February<br />
CPI. In January, the rate of decline in the national<br />
core CPI eased 0.2pp from December to -0.2% y/y,<br />
as the index has improved faster than expected.<br />
The Tokyo CPI numbers for February suggest the<br />
national index will deteriorate slightly to -0.3% y/y in<br />
February. But the trend remains one of<br />
improvements, thanks to resurgent commodities<br />
prices, led by oil. We expect the core CPI’s negative<br />
margin will narrow again in March, followed by small<br />
positive price rise in April.<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
CPI excluding energy and<br />
food, but not alcohol<br />
02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Luigi Speranza / Eoin O’Callaghan / Alan Clarke 24 March 2011<br />
Global Inflation Watch<br />
47<br />
www.GlobalMarkets.bnpparibas.com
Table 1: <strong>BNP</strong> Paribas' Inflation Forecasts<br />
Eurozone<br />
France<br />
US<br />
Headline HICP Ex-tobacco HICP<br />
Headline CPI<br />
Ex-tobacco CPI<br />
CPI Urban SA CPI Urban NSA<br />
Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y index % m/m % y/y Index % m/m % y/y Index % m/m % y/y<br />
2010 109.8 - 1.6 109.5 - 1.5 121.1 - 1.5 119.8 - 1.5 218.1 - 1.6 218.1 - 1.6<br />
2011 (1) 112.8 - 2.7 112.4 - 2.6 123.8 - 2.2 122.3 - 2.1 224.2 - 2.8 224.2 - 2.8<br />
2012 (1) 115.0 - 2.0 114.5 - 1.8 126.1 - 1.9 124.5 - 1.8 228.3 - 1.8 228.2 - 1.8<br />
Q1 2010 108.6 - 1.1 108.3 - 1.0 120.3 - 1.3 119.0 - 1.2 217.5 - 2.4 217.0 - 2.4<br />
Q2 2010 110.1 - 1.6 109.8 - 1.5 121.3 - 1.6 120.0 - 1.5 217.3 - 1.8 218.1 - 1.8<br />
Q3 2010 109.9 - 1.7 109.6 - 1.7 121.2 - 1.5 119.8 - 1.5 218.0 - 1.2 218.3 - 1.2<br />
Q4 2010 110.8 - 2.0 110.5 - 2.0 121.7 - 1.6 120.2 - 1.6 219.5 - 1.2 218.9 - 1.3<br />
Q1 2011 (1) 111.2 - 2.4 110.9 - 2.3 122.5 - 1.8 121.0 - 1.7 222.2 - 2.1 221.6 - 2.1<br />
Q2 2011 (1) 112.8 - 2.5 112.4 - 2.4 123.8 - 2.0 122.3 - 2.0 223.3 - 2.8 224.1 - 2.8<br />
Q3 2011 (1) 113.0 - 2.8 112.6 - 2.8 124.1 - 2.4 122.6 - 2.3 224.8 - 3.1 225.0 - 3.1<br />
Q4 2011 (1) 114.1 - 3.0 113.7 - 2.9 124.8 - 2.5 123.2 - 2.5 226.6 - 3.3 225.9 - 3.2<br />
Jul 10 109.6 -0.4 1.7 109.30 -0.4 1.7 121.0 -0.3 1.7 119.68 -0.3 1.6 217.6 0.3 1.3 218.01 0.0 1.2<br />
Aug 10 109.9 0.2 1.6 109.52 0.2 1.5 121.3 0.2 1.4 119.97 0.2 1.3 218.1 0.2 1.2 218.31 0.1 1.1<br />
Sep 10 110.2 0.3 1.9 109.86 0.3 1.8 121.2 -0.1 1.6 119.88 -0.1 1.5 218.4 0.2 1.1 218.44 0.1 1.1<br />
Oct 10 110.5 0.3 1.9 110.19 0.3 1.9 121.4 0.1 1.6 120.03 0.1 1.5 219.0 0.2 1.2 218.71 0.1 1.2<br />
Nov 10 110.6 0.1 1.9 110.28 0.1 1.8 121.5 0.1 1.6 120.09 0.0 1.5 219.2 0.1 1.1 218.80 0.0 1.1<br />
Dec 10 111.3 0.6 2.2 110.93 0.6 2.1 122.1 0.5 1.8 120.61 0.4 1.7 220.2 0.4 1.4 219.18 0.2 1.5<br />
Jan 11 110.5 -0.7 2.3 110.11 -0.7 2.2 121.8 -0.2 1.8 120.32 -0.2 1.7 221.1 0.4 1.7 220.22 0.5 1.6<br />
Feb 11 111.0 0.4 2.4 110.57 0.4 2.4 122.4 0.5 1.7 120.90 0.5 1.6 222.3 0.5 2.2 221.31 0.5 2.1<br />
Mar 11 (1) 112.3 1.2 2.5 111.91 1.2 2.4 123.3 0.8 1.9 121.83 0.8 1.9 223.2 0.4 2.6 223.31 0.9 2.6<br />
Apr 11 (1) 112.6 0.3 2.4 112.23 0.3 2.3 123.6 0.3 2.0 122.18 0.3 1.9 223.3 0.0 2.6 223.75 0.2 2.6<br />
May 11 (1) 112.8 0.2 2.5 112.45 0.2 2.4 123.8 0.1 2.0 122.36 0.2 1.9 223.1 -0.1 2.6 223.92 0.1 2.6<br />
Jun 11 (1) 113.0 0.2 2.6 112.62 0.2 2.6 123.9 0.1 2.1 122.47 0.1 2.0 223.4 0.2 3.0 224.61 0.3 3.0<br />
Jul 11 (1) 112.6 -0.4 2.7 112.17 -0.4 2.6 123.7 -0.2 2.2 122.21 -0.2 2.1 224.1 0.3 3.0 224.62 0.0 3.0<br />
Aug 11 (1) 112.9 0.3 2.8 112.53 0.3 2.8 124.2 0.4 2.4 122.72 0.4 2.3 224.7 0.3 3.0 224.98 0.2 3.1<br />
Sep 11 (1) 113.5 0.5 3.0 113.13 0.5 3.0 124.3 0.1 2.5 122.84 0.1 2.5 225.5 0.4 3.2 225.51 0.2 3.2<br />
Oct 11 (1) 113.8 0.3 3.0 113.43 0.3 2.9 124.5 0.2 2.6 123.00 0.1 2.5 226.1 0.3 3.3 225.88 0.2 3.3<br />
Nov 11 (1) 114.0 0.1 3.0 113.55 0.1 3.0 124.7 0.1 2.6 123.13 0.1 2.5 226.5 0.2 3.3 225.94 0.0 3.3<br />
Dec 11 (1) 114.4 0.4 2.8 114.00 0.4 2.8 125.1 0.3 2.4 123.51 0.3 2.4 227.2 0.3 3.2 226.04 0.0 3.1<br />
Updated<br />
Next<br />
Release<br />
Mar 24<br />
Mar Final HICP (Mar 31)<br />
Mar 17<br />
Mar CPI (Apr 13)<br />
Mar 17<br />
Mar CPI (Apr 15)<br />
Source: <strong>BNP</strong> Paribas, (1) Forecasts<br />
Chart 4: Eurozone Core HICP (% y/y)<br />
Chart 5: US Core CPI (% y/y)<br />
Source: Reuters EcoWin Pro<br />
Core inflation has been stronger in recent months, mainly reflecting<br />
gains in core goods inflation. This has further to run.<br />
Source: Reuters EcoWin Pro<br />
Core inflation should trend slowly higher over the course of the year<br />
as core goods inflation rises on past commodity price surges.<br />
Shelter has bottomed but is not expected to continue higher at its<br />
current pace.<br />
Luigi Speranza / Eoin O’Callaghan / Alan Clarke 24 March 2011<br />
Global Inflation Watch<br />
48<br />
www.GlobalMarkets.bnpparibas.com
Table 2: <strong>BNP</strong> Paribas' Inflation Forecasts<br />
Japan<br />
UK<br />
Sweden<br />
Core CPI SA<br />
Core CPI NSA<br />
Headline CPI RPI<br />
CPI CPIF<br />
Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y<br />
2010 99.3 - -1.0 99.3 - -1.0 114.5 - 3.3 223.6 - 4.6 302.5 - 1.2 194.6 - 2.0<br />
2011 (1) 99.7 - 0.4 99.7 - 0.4 119.7 - 4.6 236.1 - 5.6 311.7 - 3.0 198.7 - 2.1<br />
2012 (1) 99.9 - 0.2 99.9 - 0.2 122.6 - 2.3 245.0 - 3.8 318.9 - 2.3 201.8 - 1.6<br />
Q1 2010 99.8 - -1.2 99.3 - -1.2 112.9 - 3.2 219.3 - 4.0 301.2 - 0.7 193.4 - 2.3<br />
Q2 2010 99.3 - -1.2 99.3 - -1.2 114.4 - 3.4 223.5 - 5.1 302.8 - 0.9 194.3 - 1.9<br />
Q3 2010 98.8 - -1.1 99.1 - -1.0 114.7 - 3.1 224.5 - 4.7 302.9 - 1.1 194.2 - 1.7<br />
Q4 2010 99.3 - -0.5 99.4 - -0.5 115.9 - 3.4 227.0 - 4.7 307.0 - 1.9 196.4 - 2.0<br />
Q1 2011 (1) 99.5 - -0.2 99.1 - -0.2 117.7 - 4.2 230.9 - 5.3 308.2 - 2.6 196.4 - 1.6<br />
Q2 2011 (1) 99.7 - 0.4 99.7 - 0.4 119.6 - 4.5 235.8 - 5.5 311.5 - 3.2 198.6 - 2.2<br />
Q3 2011 (1) 99.7 - 0.9 100.0 - 0.9 120.1 - 4.7 237.3 - 5.7 311.6 - 3.2 198.8 - 2.4<br />
Q4 2011 (1) 99.8 - 0.5 99.9 - 0.5 121.5 - 4.8 240.6 - 6.0 315.5 - 3.1 200.9 - 2.3<br />
Jul 10 98.8 -0.4 -1.2 99.0 -0.3 -1.1 114.3 -0.3 3.1 223.6 -0.2 4.8 302.0 -0.3 1.1 193.7 -0.3 1.7<br />
Aug 10 98.8 0.0 -1.0 99.1 0.1 -1.0 114.9 0.5 3.1 224.5 0.4 4.7 302.1 0.0 0.9 193.7 0.0 1.5<br />
Sep 10 98.7 -0.1 -1.1 99.1 0.0 -1.1 114.9 0.0 3.0 225.3 0.4 4.6 304.6 0.8 1.4 195.1 0.7 1.8<br />
Oct 10 99.1 0.4 -0.6 99.5 0.4 -0.6 115.2 0.3 3.1 225.8 0.2 4.5 305.6 0.3 1.5 195.7 0.3 1.8<br />
Nov 10 99.3 0.2 -0.5 99.4 -0.1 -0.5 115.6 0.3 3.2 226.8 0.4 4.7 306.6 0.3 1.8 196.2 0.2 1.9<br />
Dec 10 99.5 0.2 -0.3 99.4 0.0 -0.4 116.8 1.0 3.7 228.4 0.7 4.8 308.7 0.7 2.3 197.3 0.6 2.3<br />
Jan 11 99.5 0.0 -0.2 99.0 -0.4 -0.2 116.9 0.1 4.0 229.0 0.3 5.1 306.2 -0.5 2.5 195.2 -1.1 1.4<br />
Feb 11 (1) 99.5 0.0 -0.3 98.9 -0.1 -0.3 117.8 0.8 4.3 231.3 1.0 5.5 308.0 0.6 2.5 196.2 0.5 1.3<br />
Mar 11 (1) 99.6 0.1 -0.2 99.3 0.4 -0.2 118.3 0.4 4.3 232.4 0.5 5.3 310.3 0.7 3.0 197.8 0.9 1.9<br />
Apr 11 (1) 99.7 0.1 0.4 99.6 0.3 0.4 119.2 0.7 4.4 234.9 1.1 5.4 311.3 0.3 3.3 198.4 0.3 2.2<br />
May 11 (1) 99.7 0.0 0.4 99.7 0.1 0.4 119.7 0.4 4.6 235.8 0.4 5.5 311.6 0.1 3.2 198.6 0.1 2.1<br />
Jun 11 (1) 99.7 0.0 0.5 99.8 0.1 0.5 119.9 0.2 4.6 236.6 0.3 5.6 311.6 0.0 3.2 198.7 0.1 2.2<br />
Jul 11 (1) 99.7 0.0 0.9 99.9 0.1 0.9 119.7 -0.2 4.7 236.1 -0.2 5.6 310.4 -0.4 3.1 198.1 -0.3 2.3<br />
Aug 11 (1) 99.7 0.0 0.9 100.0 0.1 0.9 120.2 0.4 4.6 236.9 0.3 5.5 310.9 0.2 3.3 198.5 0.2 2.5<br />
Sep 11 (1) 99.7 0.0 1.0 100.1 0.1 1.0 120.6 0.3 4.9 238.8 0.8 6.0 313.4 0.8 3.2 199.9 0.7 2.5<br />
Oct 11 (1) 99.7 0.0 0.6 100.1 0.0 0.6 121.1 0.5 5.1 239.9 0.4 6.2 315.0 0.5 3.4 200.6 0.3 2.5<br />
Nov 11 (1) 99.8 0.1 0.5 99.9 -0.2 0.5 121.3 0.1 4.9 240.4 0.2 6.0 315.5 0.1 3.2 200.8 0.1 2.4<br />
Dec 11 (1) 99.9 0.1 0.4 99.8 -0.1 0.4 122.0 0.6 4.5 241.4 0.4 5.7 316.1 0.2 2.7 201.2 0.2 2.0<br />
Updated<br />
Next<br />
Release<br />
Mar 10<br />
Feb CPI (Mar 24)<br />
Mar 24<br />
Feb CPI (Mar 22)<br />
Mar 10<br />
Mar CPI (Apr 12)<br />
Source: <strong>BNP</strong> Paribas, (1) Forecasts<br />
Chart 6: Japanese CPI (% y/y)<br />
Chart 7: UK CPI (% y/y)<br />
Source: Reuters EcoWin Pro<br />
Prices are expected to continue falling.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
We expect inflation to remain well above target for the remainder of<br />
the year.<br />
Luigi Speranza / Eoin O’Callaghan / Alan Clarke 24 March 2011<br />
Global Inflation Watch<br />
49<br />
www.GlobalMarkets.bnpparibas.com
Table 3: <strong>BNP</strong> Paribas' Inflation Forecasts<br />
Canada Norway Australia<br />
CPI Core CPI Headline CPI Core<br />
CPI<br />
Core<br />
Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y<br />
2010 116.5 1.8 115.6 1.7 128.8 2.4 120.1 1.4 172.6 2.8 - 2.6<br />
2011 (1) 119.0 2.2 116.8 1.1 130.9 1.7 121.9 1.5 179.4 3.9 - 2.6<br />
2012 (1) 122.1 2.6 118.9 1.8 134.0 2.3 124.5 2.2 184.4 2.8 - 2.8<br />
Q3 2010 116.9 2.2 1.4 116.9 0.3 1.7 128.2 -0.7 1.9 119.9 -0.3 1.2 173.3 0.7 2.8 - - 2.5<br />
Q4 2010 117.5 2.3 1.8 117.5 2.0 1.7 129.4 0.9 2.2 120.5 0.5 1.0 174.0 0.4 2.7 - - 2.3<br />
Q1 2011 (1) 118.3 2.1 1.9 118.3 -0.6 1.5 130.0 0.5 1.3 120.3 -0.2 0.8 176.5 1.4 3.4 - - 2.3<br />
Q2 2011 (1) 119.1 2.4 2.2 119.1 1.7 1.2 130.7 0.5 1.3 121.8 1.2 1.2 178.8 1.3 3.9 - - 2.6<br />
Q3 2011 (1) 119.3 1.6 2.2 119.3 1.6 1.2 130.8 0.0 2.0 122.1 0.2 1.8 180.5 0.9 4.1 - - 2.7<br />
Q4 2011 (1) 120.1 2.0 2.2 120.1 2.5 1.1 132.3 1.2 2.3 123.3 1.0 2.3 181.6 0.6 4.2 - - 2.9<br />
Q1 2012 (1) 121.1 3.3 2.2 121.1 1.4 1.3 132.7 0.3 2.1 123.4 0.1 2.6 182.8 0.7 3.6 - - 2.8<br />
Q2 2012 (1) 122.0 3.1 2.2 122.0 1.5 1.5 134.0 1.0 2.5 124.7 1.0 2.4 183.6 0.4 2.7 - - 2.7<br />
Updated<br />
Next<br />
Release<br />
Mar 10<br />
Feb CPI (Mar 18)<br />
Mar 10<br />
Mar CPI (Apr 11)<br />
Mar 10<br />
Q1 CPI (Apr 26)<br />
Source: <strong>BNP</strong> Paribas, (1) Forecasts<br />
Chart 8: Canadian Total versus Core CPI<br />
Chart 9: Australian CPI (% y/y)<br />
7.0<br />
6.0<br />
5.0<br />
4.0<br />
3.0<br />
(% y/y)<br />
Headline CPI<br />
Underlying CPI<br />
2.0<br />
1.0<br />
0.0<br />
-1.0<br />
Q193 Q195 Q197 Q199 Q101 Q103 Q105 Q107 Q109 Q111 Q113<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Wage pressures appear subdued, suggesting that underlying<br />
inflation will remain within the target range.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Food prices should drive headline inflation sharply higher in 2011.<br />
Underlying inflation should drift higher, but remain within the target<br />
range. Risks to inflation are to the upside, particularly in the near<br />
term.<br />
CPI Data Calendar for the Coming Week<br />
Day GMT Economy Indicator Previous <strong>BNP</strong>P F’cast Consensus<br />
Fri 25/03 23:30 Japan CPI National y/y : Feb 0.0% 0.0% 0.0%<br />
23:30 Core CPI National y/y : Feb -0.2% -0.3% -0.3%<br />
23:30 CPI Tokyo y/y : Mar -0.1% 0.0% -0.1%<br />
23:30<br />
(24/03)<br />
Core CPI Tokyo y/y : Mar -0.4% -0.3% -0.3%<br />
Tue 29/03 Germany States’ Cost of Living m/m : Mar 0.5% 0.5% 0.5%<br />
States’ Cost of Living y/y : Mar 2.1% 2.2% 2.2%<br />
HICP (Prel) m/m : Mar 0.6% 0.6% 0.4%<br />
HICP (Prel) y/y : Mar 2.2% 2.3% 2.1%<br />
Wed 30/03 07:00 Spain HICP Flash y/y : Mar 3.4% 3.5% n/a<br />
09:15 Belgium CPI m/m : Mar 0.6% 0.4% n/a<br />
09:15 CPI y/y : Mar 3.4% 3.4% n/a<br />
Thu 31/03 09:00 Eurozone HICP (Flash) y/y : Mar 2.4% 2.5% 2.3%<br />
09:00 Italy CPI (NIC, Prel) m/m : Mar 0.3% 0.3% n/a<br />
09:00 CPI (NIC, Prel) y/y : Mar 2.4% 2.4% n/a<br />
09:00 HICP (Prel) m/m : Mar 0.2% 1.7% n/a<br />
09:00 HICP (Prel) y/y : Mar 2.1% 2.3% n/a<br />
Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision<br />
Source: <strong>BNP</strong> Paribas<br />
Luigi Speranza / Eoin O’Callaghan / Alan Clarke 24 March 2011<br />
Global Inflation Watch<br />
50<br />
www.GlobalMarkets.bnpparibas.com
Inflation: Cash and Carry<br />
• GLOBAL: Still bullish front-end EUR & UK.<br />
Chart 1: 5y EUR Inf Swap vs. NY, Brent & EQ<br />
• EUR: Stay long front BEs. BTPei-16 a buy.<br />
• USD: Buy 5y5y BE swap fwd at 10y auction.<br />
• GBP: Stay long front cash BEs & 30y RPI.<br />
GLOBAL: Nominal yields and oil prices are back at<br />
their highs (Chart 1), with some tightening in<br />
Brent/WTI spread – Chart 2. MENA tensions are<br />
escalating allowing crude to reach new local highs<br />
above USD 106/bbl. Equity and interest rate volatility<br />
indices have also almost returned to their lows.<br />
Macroeconomic data released do not yet reflect the<br />
Japanese disaster. UK RPI came out much stronger<br />
than expected and the focus is still on food and<br />
energy prices in international media. Next week will<br />
see the first evidence of strong eurozone inflation for<br />
March via German prel. data releases and the flash<br />
estimate. Given the strong positive carry – partly<br />
seasonal and commodity driven – and ongoing<br />
escalation risks of MENA tensions, the rebound in<br />
front-end breakevens (Chart 3) is rational and there<br />
is more to come in our view. Thus, we continue to<br />
favour front-end inflation exposure in the UK and<br />
Europe. This said, equities are still 3-6% below their<br />
mid-February highs and agriculture indices are 8%<br />
below their highs of early March. In the US, more of a<br />
risk premium due to oil is seemingly priced in TIPS<br />
whilst the 7y+ sector has suffered ahead of supply –<br />
hence we favour 3y and 10y maturities there. In<br />
terms of supply, next Tuesday will see a EUR 1.25-<br />
1.75bn BTPei-16 tap.<br />
EUR: Inflation breakevens have continued to<br />
recover, with a flattening bias. As a reminder, in<br />
March, breakevens are rising in order to offset the<br />
negative carry (-20bp for BTPei-16 for instance) and<br />
to price in the positive carry of April and May (+3bp<br />
and +19bp respectively). Between 24-Feb value date<br />
(1 March settlement date) and 24 March (29 March<br />
settlement date), EUR and FRF breakevens have not<br />
significantly overshot as illustrated in Chart 4. Having<br />
said that, assuming a stabilisation in oil prices, we<br />
still see more value at the front end of the inflation<br />
curve than at the long end. The regression of<br />
breakeven vs. nominal yield, oil and EURUSD shows<br />
that 2012 breakevens could rise further ahead of<br />
strong positive carry. We keep our call for a flatter<br />
breakeven curve in Euroland.<br />
Chart 2: Oil vs. BRENT/WTI Spread & Crack<br />
Chart 3: Carry-adj BE moves since 10-March<br />
4: Residuals (BE vs NY+Oil+EURUSD) vs Carry<br />
80<br />
60<br />
40<br />
20<br />
0<br />
-20<br />
-40<br />
BTPEI12 Breakeven / BRENT / EURUSD Residuals<br />
1m Carry<br />
Fwd Carry<br />
-60<br />
-60<br />
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11<br />
BTPEI12 Breakeven / BRENT / EU Yield Move Carry P&L ?<br />
1m 26.6 5.5 32.1<br />
2m -29.3 76.4 47.1<br />
3m -41.2 91.3 50.1<br />
80<br />
60<br />
40<br />
20<br />
0<br />
-20<br />
-40<br />
All Charts Source : <strong>BNP</strong> Paribas, Bloomberg<br />
Shahid Ladha / Herve Cros / Sergey Bondarchuk 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
51<br />
www.GlobalMarkets.bnpparibas.com
Next week, Italy will tap EUR 1.25-1.75bn of the EUR<br />
2.8bn BTPei-16. This will be its first tap and it should<br />
be well received, especially as it looks at least 6bp<br />
cheap on the BTPei curve. Chart 5 shows ASW<br />
discounts without inflation floors. Even discounting<br />
for the deflation floor, the BTPei16 looks cheap. We<br />
would overweight BTPei-16, -19 and -21 vs. BTPei-<br />
14, -17 and -23. The BTPei-23 is especially rich in<br />
our view. Chart 5 also highlights the cheapness of<br />
the OATi-13 and BTANi-16.<br />
On the demand side, we have data from Holland<br />
regarding pension funds and France regarding Livret<br />
A. In Holland, funding ratios improved significantly in<br />
Q4 2010, moving from 99% to 107%. We estimate<br />
them at around 105% currently. In Q4, Dutch pension<br />
funds were net sellers of EUR 20bn of government<br />
bonds (including EUR 15bn of derivatives) but have<br />
little invested in inflation assets, with more buying<br />
activity in swap than cash according to the DNB. We<br />
expect more investments in linkers reported for Q1<br />
2011, given the increasing focus on longevity risks.<br />
However, uncertainties regarding a change of<br />
regulation and potential 30y BUNDei could weigh on<br />
investments. The move in nominal derivatives could<br />
have many explanations, one of them being the<br />
increasing unpopularity of derivatives. This would<br />
benefit the launch of a 30y BUNDei. In that context,<br />
Germany announced its intention to issue EUR 2-3bn<br />
of linkers in Q2. In our view, this is purely indicative<br />
and does not prevent Germany from issuing EUR<br />
3bn or more of a new 30y BUNDei.<br />
In France, after two strong months, inflows reached<br />
only EUR 1.6bn in Livret A + Livret Bleu + LDD<br />
savings products (Chart 7). This is unlikely to have a<br />
significant impact. Noticeably, 2019+ OATi ASW has<br />
richened significantly and now offers limited value vs.<br />
OATei (Chart 8). As said before, this is still not yet<br />
the case for the OATi-13 and BTANi16, which<br />
continue to offer around 20bp of pick-up vs. OATei<br />
ASW curve. The tightening of the OATi/OATei ASW<br />
spread is mainly due to the move in the swap curve.<br />
At -15bp to -20bp, the 10y EUR/FRF inflation<br />
breakeven spread still looks too low in absolute<br />
terms. However, it is at the middle of its post-Lehman<br />
range and uncertainties on peripherals and Germany<br />
inflation suggest there is little potential either way. At<br />
this stage, being long EUR vs. FRF inflation is more<br />
a long-term carry trade than a tactical trade. As far as<br />
cash breakevens are concerned, OATei will benefit<br />
from a 1.20% increase in HICP in March vs. +0.8%<br />
expected in France. Next Thursday, the flash<br />
estimate for March HICP will be released. The<br />
market seems to expect 2.3% y/y vs. 2.53% for <strong>BNP</strong><br />
Paribas. This justifies our bullish stance on<br />
breakevens.<br />
Chart 5: Real/Nominal ASW Discounts, Without<br />
floors<br />
40<br />
30<br />
20<br />
10<br />
0<br />
OATi<br />
OATei<br />
Bundei<br />
BTPei16<br />
BTPei<br />
ASW Discounts (z-spds, excl. floor)<br />
-10<br />
-10<br />
Apr-11 Apr-16 Apr-21 Apr-26 Apr-31 Apr-36 Apr-41<br />
Chart 6: Quarterly changes in Inflation and non<br />
inflation linked bonds vs Funding ratio<br />
EUR %<br />
20<br />
185<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
-20<br />
Inflation Assets<br />
Government bond, not<br />
indexed linked<br />
Funding Ratio, RHS<br />
-25<br />
5<br />
07-Q1 07-Q3 08-Q1 08-Q3 09-Q1 09-Q3 10-Q1 10-Q3 11-Q1<br />
Chart 7: Livret A rate vs. Livret A Flows<br />
EUR bn Livret A + Livret Bleu + LDD Monthly flows<br />
%<br />
25<br />
Livret A rate<br />
4.5<br />
20<br />
15<br />
10<br />
-5<br />
-10<br />
-15<br />
1.0<br />
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11<br />
60<br />
30<br />
0<br />
5<br />
0<br />
Chart 8: Real/Nominal ASW Discounts, with<br />
floors<br />
OATI19 Real ASW<br />
-30<br />
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11<br />
All Charts Source : <strong>BNP</strong> Paribas, Bloomberg<br />
OATEI20 Real ASW<br />
BUNDEI20 Real ASW<br />
40<br />
30<br />
20<br />
10<br />
0<br />
165<br />
145<br />
125<br />
105<br />
85<br />
65<br />
45<br />
25<br />
4.0<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
Shahid Ladha / Herve Cros / Sergey Bondarchuk 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
52<br />
www.GlobalMarkets.bnpparibas.com
GBP: UK RPI surprised to the upside for the 18 th<br />
time in 24 months, at 231.3, +1% m/m, 5.5% y/y and<br />
0.3pp above consensus. Core CPI printed 3.4% y/y<br />
vs. consensus of 3.1%. This was not just a lagged<br />
impact of VAT hike – CPIY (ex. taxes) rose to 2.83%<br />
from 2.4% in Jan and 2% in Dec. Clothing and<br />
footwear (women’s clothes especially) surprised to<br />
the upside. Unfortunately, we got stopped out of our<br />
long UKTi-16 BE call following FTQ pressures after<br />
the Japanese disaster but we could easily see a<br />
further 10-20bp widening in 5y cash breakevens from<br />
here. Chart 9 shows the regression of UKTi-17<br />
breakeven vs. nominal yields, Brent in GBP and<br />
carry and suggests significant upside potential<br />
ahead. The risk, as we experienced, is that the<br />
market is already long. The FY 11/12 DMO Remit<br />
showed gilt issuance will be unchanged (vs. Pre<br />
Budget Remit) at GBP 169bn, but higher than<br />
consensus of around GBP 161bn. The split of gilt<br />
issuance shows an increase of linker supply by 2.5%<br />
to GBP 38.4bn and more short-dated gilts but fewer<br />
mediums and longs – see Table 1. The news<br />
weighed on breakevens across the curve with signs<br />
of ongoing profit-taking. The GBP 38.4bn will consist<br />
of 15 auctions to raise GBP 18.6bn resulting in a<br />
greater average auction size of GBP 1.2bn. Still, 52%<br />
of linker issuance is expected to come from<br />
syndication (and mini-tenders) although the DMO<br />
stays more flexible on distribution type than<br />
maturity/instrument split. Despite the rally in gilts and<br />
fall in breakevens post Remit, 20y+ ASW discounts<br />
tightened on the day. This makes little sense given<br />
the distribution of gilt issuance and the richness of<br />
cash vs. swap breakevens. We expect wider ASW<br />
discounts, especially around the extreme 30y point.<br />
With respect to the Budget, the most pressing impact<br />
is the abandonment of the planned increase in petrol<br />
duty from April and an immediate reduction by 1p.<br />
This should have a minimum impact on our<br />
economists’ forecasts given the continued rise in oil<br />
prices.<br />
USD: Oil continues to support the front end of the<br />
inflation curve, while supply weighs on longer<br />
maturities. Since the beginning of the year, the 2s10s<br />
BE flattened by almost 80bp (Chart 10) with the<br />
flattener supported by positive carry. While the 2s10s<br />
BE steepener may look tempting in the US, the carry<br />
profile is prohibitive (at least vs our economists’<br />
forecast). Even so, the front end looks rich, pricing in<br />
the risk premium of higher oil prices, while longer<br />
maturities offer better value and the 10y sector<br />
already looks slightly cheap vs. nominals/oil. The 10y<br />
sector has also underperformed the 30y sector since<br />
the beginning of March and we like 10/30s BE<br />
flattener after supply, especially considering the<br />
positive carry (Chart 11). Finally, the 10y sector looks<br />
cheap vs. 5y as well and our favourite trade is to buy<br />
5y5y fwd BE post supply, which looks too low<br />
considering the upside risk of inflation in the medium<br />
Chart 9: UKTi-17 BE Residuals vs. NY/Brent &<br />
Carry<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
UKTI17 Breakeven / BRENT Residuals<br />
1m Carry<br />
Fwd Carry<br />
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11<br />
UKTI17 Breakeven / BRENT Resid Yield Move Carry P&L ?<br />
1m 5.7 9.6 15.3<br />
2m 14.8 13.4 28.2<br />
3m 5.2 26.3 31.5<br />
Table 1: FY 11/12 Gilt Issuance vs. FY 10/11<br />
Sector Short Medium Long Linker Total % change<br />
2010/11 53 38 41 34 165 -27.0%<br />
2011/12 58 34.9 37.7 38.4 169 + 2.4%<br />
Sector % Short % Medium % Long % Linker<br />
2010/11 32.1% 23.0% 24.8% 20.6%<br />
2011/12 34.3% 20.7% 22.3% 22.7%<br />
% Difference 2.2% -2.4% -2.5% 2.1%<br />
Chart 10: US 10y Underperforms vs. 2y and 30y<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
TIIJAN20 / TIIFEB40 Breakeven<br />
TIIJUL13 / TIIJUL20 Breakeven Rhs<br />
10<br />
-20<br />
Jul-10 Oct-10 Jan-11 Apr-11 Jul-11<br />
Chart 11: 5y5y Too Low Considering the Risks<br />
3.25<br />
3.00<br />
2.75<br />
2.50<br />
2.25<br />
2.00<br />
1.75<br />
1.50<br />
5y5y BE<br />
Last Value<br />
06 07 08 09 10 11<br />
All Charts Source: Bloomberg, <strong>BNP</strong> Paribas<br />
term courtesy of the growing economy, easy<br />
monetary policy and already-accelerating inflation.<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
Shahid Ladha / Herve Cros / Sergey Bondarchuk 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
53<br />
www.GlobalMarkets.bnpparibas.com
Table 1: <strong>BNP</strong> Paribas Carry Analysis<br />
Benchmark Carry<br />
Pricing Date<br />
24-Mar-11<br />
Term 1<br />
Term 2<br />
3m<br />
6m<br />
12m<br />
Repo Rate<br />
0.42% 0.41% 0.34% 0.34% 0.56%<br />
Sett. Date<br />
25-Mar-11 01-May-11 01-Jun-11<br />
27-Jun-11<br />
26-Sep-11<br />
26-Mar-12<br />
Yield BE Real BE Real BE Real BE Real BE Real BE<br />
Short-end<br />
OATei Jul-12 -1.58% 2.93% 10.4 5.3 100.6 90.7 113.4 100.1 54.5 33.9 -166.2 -77.2<br />
OATI Jul-13 -0.35% 2.17% 16.0 11.2 48.3 38.9 58.0 45.1 46.4 23.0 35.4 35.4<br />
TIPS Jul-12 -2.51% 2.93% 27.0 24.9 89.4 85.2 93.6 87.5 90.1 75.8 41.4 3.0<br />
UKTi Aug-13 -1.97% 3.25% 11.7 7.8 50.5 43.3 60.7 51.0 55.0 37.1 112.6 80.4<br />
5y<br />
OATei Jul-15 0.30% 2.21% 7.3 3.1 37.0 28.9 42.9 31.6 37.8 16.6 41.9 3.0<br />
OATi Jul-17 0.74% 2.27% 7.5 3.7 20.3 13.1 24.7 14.6 24.4 5.3 30.0 30.0<br />
TIPS Apr-15 -0.56% 2.26% 13.4 9.2 35.5 27.8 39.4 28.5 48.5 26.1 68.9 20.3<br />
UKTi Jul-16 -0.26% 2.91% 8.9 4.6 29.3 21.4 36.0 25.2 41.6 20.6 80.0 38.5<br />
JGBI-4 June-15 0.84% -0.42% -5.4 -6.2 6.2 4.7 14.9 13.0 39.9 35.8 57.2 48.2<br />
10y<br />
OATei Jul-20 1.28% 2.24% 4.7 1.4 20.2 14.0 23.8 15.1 23.9 7.3 31.2 0.3<br />
OATI Jul-19 1.06% 2.31% 6.2 2.7 16.4 9.8 20.1 10.8 20.8 3.1 27.1 27.1<br />
TIPS Jul-20 0.86% 2.40% 7.7 3.6 19.0 11.4 21.8 11.2 29.4 8.2 45.1 1.8<br />
UKTi Nov-22 0.56% 3.17% 10.1 6.5 14.7 8.1 23.5 14.5 30.3 12.6 48.3 13.9<br />
JGBI-16 June-18 1.28% -0.51% -2.5 -3.7 5.0 3.1 10.6 8.1 26.7 21.5 38.7 27.7<br />
30y<br />
OATei Jul-40 1.68% 2.45% 1.9 0.1 7.7 4.2 9.1 4.3 9.4 0.2 12.5 -4.4<br />
OATI Jul-29 1.67% 2.38% 3.8 1.3 9.8 5.1 12.2 5.5 13.5 0.9 18.6 18.6<br />
TIPS Feb-40 1.86% 2.61% 3.6 0.8 8.5 3.4 9.9 2.8 13.9 -0.1 21.8 -5.9<br />
UKTI Mar-40 0.74% 3.55% 4.1 1.8 5.9 1.8 9.4 3.7 12.1 1.1 18.9 -2.2<br />
Short-end<br />
Term 1 -> Term 2 Term 2 -> 3m<br />
3m -> 6m<br />
6m -> 12m<br />
OATei Jul-12 90.3 85.4 19.0 15.3 -59.0 -66.2 -220.6 -111.1<br />
OATI Jul-13 32.3 27.7 11.5 7.6 -11.6 -22.1 -11.1 12.4<br />
TIPS Jul-12 62.4 60.3 19.1 16.6 -3.5 -11.6 -48.7 -72.9<br />
UKTi Aug-13 38.9 35.5 10.9 7.7 -5.7 -13.9 57.7 43.3<br />
5y<br />
OATei Jul-15 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0<br />
OATi Jul-17 29.7 25.8 7.9 4.4 -5.1 -15.0 4.1 -13.6<br />
TIPS Apr-15 12.8 9.4 5.1 2.0 -0.3 -9.3 5.7 24.8<br />
UKTi Jul-16 22.1 18.5 8.9 5.0 9.2 -2.4 20.4 -5.8<br />
JGBI-4 June-15 11.6 10.9 11.8 11.2 25.0 22.9 17.4 12.4<br />
10y<br />
OATei Jul-20 15.5 12.5 4.6 1.9 0.1 -7.7 7.3 -7.1<br />
OATI Jul-19 10.3 7.1 4.3 1.4 0.7 -7.7 6.2 23.9<br />
TIPS Jul-20 11.3 7.8 5.3 1.6 7.6 -3.0 15.7 -6.5<br />
UKTi Nov-22 4.6 1.6 9.9 6.7 6.7 -1.8 18.0 1.2<br />
JGBI-16 June-18 7.6 6.7 7.6 6.8 16.1 13.4 12.0 6.2<br />
30y<br />
OATei Jul-40 5.8 4.2 1.8 0.3 0.3 -4.0 3.1 -4.7<br />
OATI Jul-29 6.0 3.8 2.7 0.6 1.3 -4.6 5.2 17.8<br />
TIPS Feb-40 4.9 2.5 2.5 0.0 4.0 -2.9 7.9 -5.8<br />
UKTI Mar-40 1.8 -0.1 3.9 2.0 2.7 -2.7 6.8 -3.3<br />
Source: <strong>BNP</strong> Paribas<br />
Shahid Ladha / Herve Cros / Sergey Bondarchuk 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
54<br />
www.GlobalMarkets.bnpparibas.com
Technical Analysis – Interest Rates & Commodities<br />
Bond & Short-Term Contracts<br />
• Europe 10y: Toppish but must break now below key 3.06/3.11 to strengthen a ST falling scenario again<br />
• US 10y: Must sustain break below key 3.37 (MT 61.8% & wave “A” low) to resume last ST falling bias<br />
• Short-term contracts u1: Supportive but ST toppish tone on ED while Euribor is still bottoming/slightly up ST<br />
Equities & Commodities<br />
• WTI (Cl1): Up MT within LT rising channel & slightly above critical 103.39 (LT 61.8%) but risk of 2-top on 107 area<br />
• Equity markets: ST study turned toppish/consolidative but wider correction is still needed to turn negative MT<br />
US 10y: Positive ST but must move again below key 3.37 (MT 61.8%) MT Trend: Up/Toppish Range: 3.22/3.42<br />
MT SCENARIO remains up<br />
Market remains up oriented MT within a LT<br />
rising “C of ABC” scenario which is likely to<br />
send it towards key 4.00/4.07 (April top & LT<br />
61.8%) initially and perhaps then key 4.56 (LT<br />
falling channel res). However, a renewed<br />
break above key 3.37 (MT 61.8%) & 3.52/<br />
3.55 (61.8%+4-year falling res) is now<br />
needed to rekindle MT bearish scenario<br />
2.88 3.77 => 4.00/4.07<br />
ALTERNATIVE SCENARIO...ST correction<br />
It failed to extend the rise beyond 3.55 (LT<br />
falling resistance line) & started a ST consolidation<br />
strengthened by the move back seen<br />
below key 3.37 (MT 61.8% & wave “A” low)<br />
with 3.22 (ST 38.2% & wave “C” mini target)<br />
reached, next target being now 3.05 (MT<br />
50%).<br />
STRATEGY<br />
Flat could use rebound on 3.37 S/L 3.42 now<br />
to re-enter long for 3.10/3.20<br />
US/EUR 10y bond: Within main falling wave with wave “3” developing MT Trend: Down Range: 5/25<br />
MT SCENARIO is down within wave “C”<br />
-21.4 47.0<br />
After the 5 waves down move (major wave<br />
“A”?) which reached an 8.2 low, it developed<br />
a correction (major wave “B”) which ended<br />
below key 56.2 (ST 61.8%) on ST 50% (47.0).<br />
Main risk now is to be within the main falling<br />
wave “C” with 8.2 (wave “A” low) already<br />
reached, next targets being then 0.0 (LT<br />
50%) & key -21.4 (LT 61.8%). ST bearish<br />
confirmation came from a break below key<br />
17.5 low to develop the falling wave “3” of “C”.<br />
ALTERNATIVE SCENARIO..ST rise resumes<br />
It will fail to break below 8.2 low & perhaps<br />
started now a ST technical rebound by<br />
breaking daily ST falling wedge. It could<br />
trigger a wider correction towards 22.9<br />
(38.2%) initially<br />
STRATEGY<br />
Short covered position on 10. Wait for<br />
rebound now to re-sell. One can play current<br />
daily wedge breakout for 23 area<br />
Christian Sené 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
55<br />
www.GlobalMarkets.bnpparibas.com
Germany 10y: A break below key 3.06/11 is needed to turn down again MT Trend: Up/toppish Range: 3.11/3.30<br />
MT SCENARIO is still up<br />
The negative break above the LT falling<br />
wedge has allowed developing a rising move<br />
beyond key 3.11 (MT 61.8%) towards 3.39<br />
(LT 50%) initially and then key 3.70 (LT<br />
61.8%). Needs a break now above 3.335 (2-<br />
top area) to rekindle rising scenario<br />
ALTERNATIVE SCENARIO...ST correction<br />
Wave “5” of last 5 wave’s up move perhaps<br />
ended on 3.34 area and a ST correction is<br />
now developing after break seen below ST<br />
rising channel. Pullback done on its support &<br />
on 61.8% (3.23) area but stalling there now<br />
could allow renewed down move below key<br />
3.11 (MT up 61.8%) for 3.03 (ST 61.8%)<br />
STRATEGY<br />
Long on 3.29 sold 3.15. Buy again 3.25 S/L<br />
now at 3.30 for 3.05/15<br />
2.86/2.89 3.39 => 3.70<br />
UK 10y: Positive break below MT rising wedge & 61.8% for 3.40 target MT Trend: Up/toppish Range: 3.45/3.62<br />
MT SCENARIO remains up<br />
It took the way up from the LT falling wedge<br />
support. It needs now to overcome decisively<br />
critical 3.68/3.73 (LT falling wedge res & MT<br />
61.8%) to extend the MT bearish bias towards<br />
3.94 last top first & 4.30 (2010 top). Trend<br />
indicator (DMI) still slightly sustain up bias but<br />
is still narrowing while MACD crossed down<br />
ALTERNATIVE SCENARIO… ST correction?<br />
It failed to sustain slight break above key<br />
3.68/3.73 to develop now a ST correction<br />
after the breaks seen below ST rising wedge<br />
& below 3.60 (61.8%). Fall is still developing<br />
within a ST falling channel (3.35/3.59) towards<br />
3.40 target area initially<br />
STRATEGY<br />
Long on 3.58 break stopped at cost. Keep<br />
long below 3.59 if you are for 3.40<br />
3.25 3.94 => 4.30<br />
S&P: Still up within LT rising channel but negative ST rising wedge break MT Trend: Toppish Range: 1250/1315<br />
MT SCENARIO is still up<br />
The rise above the critical 1220/28 (April top &<br />
LT 61.8%) strengthened the latest MT bullish<br />
bias towards 1460 (LT rising channel res) &<br />
then 1576 (2007 top). It remains up oriented<br />
within LT rising channel (1184/1460).but tone<br />
has been weakened with break seen below<br />
ST rising wedge<br />
1138
Trade Reviews<br />
Options, Money Market and Bond Trades – Tactical & Strategic Trades<br />
This page summarises our main tactical (T) and strategic (S) trades. The former focus on short-term horizons (a few weeks),<br />
allowing one to play any near-term corrections within a defined trend, while the latter rely on a medium-term assumed trend.<br />
For each trade we provide the expected target and the recommended stop loss.<br />
Closed Strategies<br />
BTP Flattener Long BTP 5% Sep40 Short BTP 4% Sep20<br />
Position closed (14/03). PnL: -125k (incl. 3bp cost of carry).<br />
Current Strategies<br />
Yield Curves<br />
USD Swap Fly Pay USD 1/2/3s<br />
1s2s3s swap fly is currently around -11 bps and the recent lows have been<br />
around -12 bps as compared to the recent highs of around -4 bps. Although this fly<br />
is directional with 2y swap, it has recently dropped more than what is suggested by<br />
the 2y rate.<br />
EUR Butterfly Receive EUR 2/5/10s M1 IMM<br />
Proxy for 2/10s flatteners with positive carry.<br />
Cross Markets<br />
Schatz Spread Buy DUM1 TED<br />
Protection vs high vol scenario.<br />
USD Agency Callable Long FNMA 5nc6M 2.60 Jan16 Short T 0.75 Aug13<br />
Short-vol bullish strategies in the short end are attractive given the Fed status.<br />
Callables outperform in a range-bound environment, but currently tolerate a larger<br />
rise in rates (+115 bps) than a rally (-20 bps) before breaking even over a 6m<br />
horizon.<br />
Current* Targets Stop Entry<br />
.<br />
(S)<br />
-9.5<br />
(T)<br />
12.5<br />
(T)<br />
42.5<br />
(T)<br />
0k<br />
(S)<br />
70.0 96.0 85.5<br />
(13-Jan)<br />
-5.0 -13.0 -11.25<br />
(11-Mar)<br />
0.0 17.5 11.5<br />
(05-Jan)<br />
55.0 35.0 42.5<br />
(07-Mar)<br />
300k -150k 0k<br />
(06-Jan)<br />
Money Markets<br />
Eurodollar Fly Buy Eurodollar Z1M2Z2<br />
-16.0<br />
Fly is at 2y lows and offers good risk/reward for those looking for a rebound in front (T)<br />
end rates over the next few weeks. Also note that the fly has dramatically diverged<br />
from the EUR and UK flies.<br />
Eurodollar/Euribor Fly Buy ED U1H2U2 Sell ER U1H2U2<br />
-36.0<br />
RV position exploiting extreme valuation in both butterflies.<br />
(S)<br />
*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps.<br />
10.0 -30.0 -12.5<br />
(09-Mar)<br />
-15.0 -50.0 -40.0<br />
(09-Mar)<br />
Carry<br />
/ mth<br />
Risk**<br />
P/L<br />
(ccy/Bp)<br />
-1.5bp 10k/01 EUR -<br />
125k<br />
-12.5bp<br />
-3.0 10k/01 USD<br />
+17.5<br />
+1.75bp<br />
+1.0bp 10k/01 EUR -10k<br />
-1bp<br />
15k/01 EUR 0k<br />
0bp<br />
1k/01 USD<br />
0k<br />
5k/01 USD -<br />
17.5k<br />
-3.5bp<br />
8.75k/01 EUR +35k<br />
+4bp<br />
Interest Rate Strategy 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
57<br />
www.GlobalMarkets.bnpparibas.com
JPY Liquidity Boosts Global Assets<br />
• JPY printing and JPY weakening<br />
intervention suggest that JPY liquidity will go<br />
outside Japan in the quest for yield.<br />
• The BoJ and its G7 partners have drawn a<br />
line in the sand that points to USDJPY levels<br />
below 80.00 not being tolerated for long.<br />
• JPY-supportive repatriation fears are<br />
overblown. Japan’s foreign asset holdings are<br />
substantial, but holdings in relatively liquid<br />
assets such as bonds have largely been<br />
currency hedged.<br />
• The commodity rally should last for longer<br />
than we originally thought, stoked by JPY<br />
liquidity and additional demand on the back of<br />
Japan’s reconstruction needs.<br />
• Local markets’ currency reserves are<br />
rising, supported by the inflow of hot money.<br />
Reallocation needs will keep the USD weak.<br />
• We like the EUR, CAD, NOK, AUD and NZD<br />
and sell the CHF, USD and JPY.<br />
Japan shock has not helped the USD<br />
Japan will not cause the deflationary shock to the<br />
global economy that had initially been feared as a<br />
result of the earthquake, tsunami and nuclear power<br />
issues. When such extraordinary developments<br />
occur, investors scale back positions as they seek<br />
cover in liquid assets. But, once again, money being<br />
pulled out of local markets and high-yield currencies<br />
did not support the USD. Indeed, the USD has<br />
remained on its downtrend against all other G10<br />
currencies. At first glance, the USD’s inability to rally<br />
must surprise. Local-market and high-yielding<br />
investments had been USD funded and one would<br />
have assumed that the liquidation of USD-funded<br />
positions would have led to USD inflows. The<br />
explanation for this unusual USD behaviour is that<br />
Asian central banks have continued reallocating their<br />
currency reserves, creating USD supply that has<br />
benefited the EUR the most.<br />
The USD’s fortune remain in the hands of<br />
currency-reserve managers<br />
For now, central-bank currency-reserve managers<br />
will continue offering USD as currency-reserve<br />
growth is still running at record pace (Chart1). It is<br />
being pushed up by hot money flooding into Asia in<br />
anticipation of currency appreciation (Chart 2). The<br />
incoming reserves are USD denominated and<br />
decreasing the weight of USDs in global currency<br />
billions<br />
Chart 1: China’s Currency Reserves Shot Up<br />
USD 400bn in Six Months (USD bn)<br />
Source: Reuters Ecowin Pro<br />
billions<br />
400<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
Chart 2: China’s Currency Reserves<br />
Increasingly Driven by Hot Money Flows (USD<br />
bn)<br />
800<br />
700<br />
600<br />
500<br />
400<br />
300<br />
200<br />
100<br />
0<br />
-100<br />
03 04 05 06 07 08 09 10<br />
FDI<br />
hot money<br />
trade<br />
00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters Ecowin Pro<br />
reserves has become a common theme. However, it<br />
is not only the re-allocation of incoming currency<br />
reserves that is driving reserve managers out of the<br />
USD.<br />
Many local economies are overheating, developing<br />
capacity constraints. Domestic inflation pressures are<br />
rising and the last thing now needed is higher<br />
commodity prices pushing import prices up. Hence,<br />
Asian central banks will have to allow domestic<br />
currencies to rise against the USD. The intensifying<br />
commodity rally will increase this pressure. Rising<br />
Asian currency appreciation expectations will bring<br />
even more hot money into the region, forcing central<br />
banks to attempt to control the pace of the<br />
appreciation of local currencies by absorbing some of<br />
the incoming USDs – pushing currency reserves up<br />
Hans-Guenter Redeker 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
58<br />
www.GlobalMarkets.bnpparibas.com
again, boosting global liquidity. This in turn will push<br />
commodity prices even higher.<br />
This pattern will only come to an end when Asian<br />
currencies are viewed by markets as fairly valued.<br />
Taking the size of Asian current account surpluses<br />
as a guide, Asian currencies will have to rise<br />
substantially before investors stop placing hot money<br />
bets on Asia and other local markets.<br />
Central banks’ different reaction functions<br />
Commodity prices affect headline inflation rates, to<br />
which central banks have different reaction functions.<br />
The most extreme reaction functions within the G10<br />
can be seen at the ECB and Fed. The ECB is ready<br />
to increase rates on the 7 April, using headline<br />
inflation and spill-over risks as the justification.<br />
However, the Fed is set to stay put, arguing that<br />
headline inflation pressure will be transitory. It<br />
regards short-term inflation pressure as outweighed<br />
by the reduced real income associated with rising<br />
commodity prices. EURUSD will stay bid for now due<br />
to relative rate expectations<br />
Taking a look at commodity prices<br />
Commodity prices are driven by cyclical, structural<br />
and liquidity factors, which currently all point to the<br />
upside. While we will not dig too deeply into<br />
commodity markets here, we refer to an IMF study<br />
(Rising Prices on the Menu,<br />
http://www.imf.org/external/pubs/ft/fandd/2011/03/hel<br />
bling.htm#4), released last week. This concluded that<br />
food inflation is not only cyclical and weather related,<br />
but that structural factors are also pushing prices up.<br />
Such factors include increasing demand on the back<br />
of rising global income levels and declining<br />
CNY (thousand billions)<br />
Chart 3: PBoC Slow to Absorb Inflowing<br />
Liquidity<br />
20.0<br />
17.5<br />
15.0<br />
12.5<br />
10.0<br />
7.5<br />
5.0<br />
2.5<br />
0.0<br />
-2.5<br />
-5.0<br />
00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters Ecowin Pro<br />
productivity in the agricultural sector. The IMF writes:<br />
“Over the past decade, global productivity growth –<br />
as measured by the amount of crop produced per<br />
hectare – has fallen for rice and wheat compared<br />
with the 1980s and 1990s and has been broadly<br />
stagnant for corn and soybeans. Less productivity<br />
growth means higher prices, everything else being<br />
equal”. These findings define a new stance by the<br />
IMF, which previously argued that soft commodity<br />
prices were mainly driven by cyclical factors. We<br />
note that generally improved technology and<br />
knowledge have not prevented productivity growth<br />
from being low and subsequently food prices high.<br />
Rising prices for food and other commodities could<br />
have far-reaching consequences for global<br />
economies, global liquidity and currency markets.<br />
Commodities and FX<br />
PBoC Bonds Issued<br />
FX Reserves (Liquidity)<br />
Graphic 1: Food Price Contribution to Inflation<br />
Source: Reuters Ecowin Pro<br />
Hans-Guenter Redeker 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
59<br />
www.GlobalMarkets.bnpparibas.com
Graphic 2: Fuel Price Contribution to Inflations<br />
The experience of the past two decades has been<br />
that risks of a pass-through from rising food prices to<br />
core inflation are low for advanced economies, but<br />
significant for emerging economies. The graphics<br />
shown above have been taken from an IMF study<br />
released in October 2008: ‘Is inflation back?<br />
Commodity prices and inflation’<br />
(http://www.imf.org/external/pubs/ft/weo/2008/02/pdf/<br />
c3.pdf). It illustrates the first-round effects of higher<br />
food and fuel prices on various economies.<br />
Asian economies are the most affected by rising food<br />
prices, but Asia is also the region where capacity<br />
constraints due to overheating economies are most<br />
visible. Fuel prices seem to be less of an issue for<br />
Asia, but this is due to subsidies protecting<br />
consumers at the expense of state budgets. The<br />
correlation between fuel prices and energy costs has<br />
steadily increased due to ethanol being used as a<br />
substitute for oil. Hence, rising fuel prices will add to<br />
the structural forces driving food prices higher.<br />
Chart 4 shows China’s wages relative to GDP<br />
breaking sharply higher, indicating that China’s core<br />
inflation will move higher too. The last thing China<br />
and other Asian countries need is domestic price<br />
pressures to be amplified by rising import prices.<br />
Since commodities are priced in USDs, there is<br />
therefore a need to allow domestic currencies to<br />
appreciate against the USD.<br />
However, emerging-market authorities are known for<br />
their cautious approach – i.e. they will not be willing<br />
to exacerbate the risks to growth posed by the<br />
difficulties in the world’s third-largest economy.<br />
Hence, the pace of the appreciation of Asian<br />
currencies will remain controlled by central banks.<br />
This could lead to a situation where rising commodity<br />
prices boost currency appreciation expectations,<br />
steering additional short-term funds into the region.<br />
This in turn would leave central banks with little<br />
choice but to absorb this incoming liquidity, adding to<br />
their currency reserves. Investing these reserves in<br />
Western liquid assets would increase global liquidity,<br />
boosting commodity prices and pushing funds<br />
around the globe in circles.<br />
BoJ opens monetary flood gates<br />
Meanwhile, the BoJ has left little doubt that it is ready<br />
to pump additional funds into its money markets if<br />
required. The additional JPY liquidity will not stay at<br />
home and coordinated G7 intervention to weaken the<br />
yen indicates that JPY strength will not be tolerated<br />
at a time when rebuilding the country is top of the<br />
agenda. Hence, motivated by central-bank<br />
intervention, JPY liquidity may have to seek a home<br />
outside Japan – boosting risky assets globally,<br />
including commodities. Indeed, it could be argued<br />
that Japan’s disaster may only have very limited<br />
domestic short-term deflationary effects, but massive<br />
global long-term inflationary implications.<br />
The nuclear exit will boost prices for alternative<br />
energies<br />
Nuclear power has been discredited. Even if nuclear<br />
power is still used, the costs of running nuclear<br />
power plants will inevitably rise. Germany has taken<br />
seven of its oldest plants out of action and the<br />
Energy Ministry has released a plan to increase<br />
safety standards at the remaining nuclear plants. The<br />
cost of raising such standards will effectively price<br />
out nuclear energy. Fossil and green technologies<br />
Hans-Guenter Redeker 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
60<br />
www.GlobalMarkets.bnpparibas.com
will be used instead. No wonder that carbon<br />
emissions, natural gas and coal prices have shot up<br />
in light of Japan’s nuclear accident.<br />
The combination of easier monetary conditions and<br />
rising commodity prices may remind investors of<br />
what happened in the early 1970s. Then, central<br />
banks focused on the negative income effect of rising<br />
commodity prices and less on inflation. Inflation<br />
became an issue, first leading to equity and<br />
commodity price rallies as investors looked for ‘real’<br />
exposure. However, by the end of the decade, all<br />
asset classes were in retreat. Taking some guidance<br />
from the 1970s investment cycle might not be a bad<br />
idea now.<br />
Chart 4: China’s Wages relative to GDP<br />
0.280<br />
0.275<br />
0.270<br />
0.265<br />
0.260<br />
0.255<br />
0.250<br />
0.245<br />
96 98 00 02 04 06 08 10<br />
Source: Reuters EcoWin<br />
AUD remain bid for now<br />
Strong global liquidity conditions, rising commodity<br />
prices and a general attitude of investors taking risk<br />
on will keep the AUD supported. Before Japan’s<br />
disaster, we were convinced that rising inflation rates<br />
would eventually lead to growth-reducing tightening<br />
of monetary conditions in Asia and other local<br />
economies – which would have worked against the<br />
AUD. Now, with Japan’s short-term supply chain<br />
problems cooling economic conditions in its trading<br />
partners, this fear has been removed for now from<br />
investors’ minds. Once again, the AUD looks<br />
attractive with its nominal yield differential working as<br />
a magnet for international capital.<br />
Inflation will work against the JPY and the CHF<br />
Previous research pieces analysed the impact of<br />
rising global inflation rates on fx markets. Rising<br />
inflation rates will push bond yields up and the higher<br />
yields will increase the opportunity cost of holding<br />
non-yielding assets. Cash is a low-yielding asset and<br />
the CHF and the JPY are currency cash trades.<br />
Inflation rates will start to rise in most G10 countries<br />
from very moderate levels, initially working in favour<br />
of equity markets and keeping the pro-risk trade alive<br />
for now. JPY crosses should benefit.<br />
What about Japan’s repatriation threat?<br />
Japan’s USD 3trn net foreign asset position has fed<br />
speculation that Japan will see a wave of funds being<br />
repatriated to help fund rebuilding costs. We think<br />
that those fears, which suggest a higher JPY, have<br />
been overblown. Sure, cleaning up the rubble and<br />
rebuilding Japan’s production capacity, housing and<br />
infrastructure will be expensive. And with national<br />
savings falling sharply, capital from abroad will have<br />
to come in – closing the gap between domestic<br />
capital demand and supply. However, Japan’s bond<br />
yields will not be high enough to entice private<br />
accounts to move foreign asset holdings back home.<br />
Chart 5: Japan’s 5-year JGB versus 5-year CDS<br />
(bps)<br />
Source: Reuters Eco Win<br />
Repatriation flows depend on yield differentials<br />
Out of the USD 3trn total foreign asset holdings,<br />
about USD2trn are held by private accounts including<br />
investment trusts. A decline in bond spreads could<br />
convince these accounts to reduce foreign holdings<br />
in favour of domestic investments. In the past, we<br />
have seen the JPY appreciate at times when bond<br />
yield differentials had been falling. Last week’s<br />
decline in nominal yield spreads also saw JPY<br />
strength.<br />
However, this time it has been Japan’s increasing<br />
CDS spreads keeping nominal bond yields up, while<br />
global yields have been coming down. Japan’s risk<br />
premium was the main contributor to the declining<br />
yield differential – hardly a convincing reason for<br />
Japan’s private investors to repatriate funds.<br />
Japan cannot afford higher bond yields<br />
Japan’s declining domestic savings in conjunction<br />
with increasing capital demand related to Japan’s<br />
rebuilding efforts should push local bond yields up<br />
and steepen the JGB yield curve. However, rising<br />
Hans-Guenter Redeker 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
61<br />
www.GlobalMarkets.bnpparibas.com
ond yields increase sovereign funding costs –<br />
adding to already-elevated deficit and debt levels.<br />
Attracting foreign capital via rising yields is not an<br />
option, but with JGB bond yields low, private<br />
accounts will have little incentive to move funds back<br />
to Japan. We think Japan will have to under-price its<br />
currency, taking it to a low valuation level with the<br />
help of very easy monetary conditions, to attract<br />
foreign funds. However, should JGB yields rise,<br />
investors would price in higher solvency risks –<br />
pushing CDS spreads wider.<br />
As Japan cannot afford higher bond yields without<br />
undermining its fiscal position further, it has two<br />
options:<br />
• It can increase private savings (higher<br />
taxation) to fund its rebuilding efforts; or<br />
• It can introduce super-easy monetary<br />
conditions, including moderate monetisation of its<br />
sovereign debt and devaluation of the JPY.<br />
The second choice is less costly and more likely.<br />
Nonetheless, should Japan use option one and<br />
increase taxes, JGB bond yields will remain low and<br />
Japan’s deflationary equilibrium will continue for<br />
longer. In this case, foreign interest rates and yield<br />
trends will determine the fate of the JPY.<br />
Both our scenarios suggest the BoJ will keep rates<br />
near zero for a long time. Outside Japan, our base<br />
scenario sees the Fed as the last G10 central bank<br />
to begin raising rates. However, by next year, rate<br />
hike trends should be generally in place – weakening<br />
the JPY from a cyclical perspective, even against the<br />
USD.<br />
Our trading strategy<br />
What will Japan’s disaster mean for currencies<br />
outside the JPY spectrum? If our working assumption<br />
of rising commodity prices stoked by JPY liquidity<br />
and higher demand related to Japan’s rebuilding<br />
work is correct, EURUSD has further upside<br />
potential.<br />
Summer 2008 provides proof that the ECB keeps on<br />
fighting inflation even when growth risks are on the<br />
rise – keeping the odds high for a rate hike on 7<br />
April. Commodity and high-yielding currencies will<br />
remain supported as liquidity conditions receive<br />
another boost from i) the BoJ opening the monetary<br />
floodgates and ii) central banks’ allocation of<br />
currency reserves. The CHF, USD and the JPY will<br />
suffer.<br />
Hans-Guenter Redeker 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
62<br />
www.GlobalMarkets.bnpparibas.com
Dollar Decline Should Continue<br />
• The dollar remains on the defensive versus most key currencies, tumbling to new cycle lows this<br />
week versus EUR and GBP<br />
• The dollar finds temporary support in the form of strong EUR/USD resistance at 1.4280, GBP/USD<br />
resistance at 1.6460, AUD/USD resistance at 1.0255, and US Dollar Index support at 75.00…<br />
• …but the medium-term outlook calls for further dollar weakness<br />
• EUR/USD has medium-term scope to 1.4335-1.4450-1.4580, GBP/USD to 1.65-1.6665 and AUD/USD<br />
to 1.0325-1.05 aided by our bullish medium-term forecasts for the S&P 500 Index, gold and copper<br />
• The USD/JPY V-bottom off 76.25 suggests current consolidation (80.50-81.30) will be followed by a<br />
rise towards 82.00-83.00/30 medium-term resistance<br />
The dollar remains under pressure versus most key<br />
currencies this week with the US Dollar Index (DXY)<br />
falling to a 4-month low, EUR/USD rising to a 4-month<br />
high and GBP/USD hitting to a 14-month high. The<br />
current bout of dollar weakness is being lead by the<br />
commodity currencies and spearheaded by<br />
AUD/USD, which is enjoying its sharpest upswing of<br />
the year. However, the dollar has found support as<br />
these markets test key levels: the EUR/USD rise is<br />
currently capped by strong resistance from the 1.4280<br />
November high, with the GBP/USD rally capped by<br />
1.6460 resistance from the Jan’10 high, and the<br />
AUD/USD advance facing stiff resistance from its<br />
historic 1.0255 December historic. On the flip side,<br />
the DXY tests strong 75.00/20 support.<br />
Following sharp reversals in equity markets and key<br />
commodities during February-March, we suspect<br />
“risk-on” trading has returned. Our medium-term<br />
forecast calls for new cycle highs in the S&P 500<br />
Index plus new record highs for gold and copper. This<br />
should have bullish implications for the commodity<br />
currencies, EUR/USD and GBP/USD. The 95-pt<br />
decline in the S&P 500 Index during Feb-March is<br />
similar to the 89-pt August correction. If history<br />
repeats itself – and we think it will – the current<br />
rebound will extend as the S&P 500 sets a new cycle<br />
high in the months ahead: we target the 1350-1361-<br />
1376 zone heading into May, with deference to the<br />
“Sell in May and go away” Wall Street adage. After its<br />
sharp 12% Feb-March decline, COMEX copper is<br />
swiftly rebounding; we see scope towards 475-500<br />
over the next several weeks. Silver has set a fresh<br />
31-year high this week and next targets $38.62-40.00.<br />
We expect spot gold to post a new historic high, with<br />
medium-term scope towards $1460-1500/30.<br />
Pattern analysis suggests dollar support will be<br />
temporary, followed by resumption of the entrenched<br />
dollar downtrend. This implies EUR/USD will<br />
eventually extend above 1.4280 towards its<br />
1.4335/75-1.4450-1.4580 medium-term target zone,<br />
as the DXY declines towards 74.00-73.25. With<br />
strong bullish weekly momentum, the AUD/USD rally<br />
targets new all-time highs between 1.0325-1.05 over<br />
the medium-term. Given its weaker momentum,<br />
GBP/USD is expected to lag the EUR/USD advance,<br />
but should still extend towards 1.6500-1.6665-1.6720.<br />
Chart 1: EUR/USD — Temporary pullback ahead of 1.4280 resistance<br />
The recent EUR/USD<br />
rise has temporarily<br />
stalled just below strong<br />
1.4280 resistance from<br />
the November high. This<br />
is typical price action as<br />
stiff resistance often<br />
holds on initial test.<br />
Favor short-term<br />
consolidation followed by<br />
a breakout above 1.4280<br />
toward 1.4335/75-<br />
1.4450-1.4580 over the<br />
next several weeks.<br />
1.43<br />
1.39<br />
1.35<br />
1.31<br />
1.27<br />
1.23<br />
1.19<br />
1.2150<br />
1.3335<br />
02-Aug-10<br />
1.2640<br />
Last week’s USD/JPY collapse and subsequent sharp<br />
rebound (fuelled by G7 intervention) created a V-<br />
bottom off the 76.25 spike low. Current 80.50-81.30<br />
consolidation is expected to be followed by a further<br />
rise testing strong 82.00/30-83.00/10/30 resistance.<br />
29-Sep-10<br />
26-Nov-10<br />
25-Jan-11 24-Mar-11<br />
Source <strong>BNP</strong> Paribas<br />
Andrew Chaveriat 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
63<br />
www.GlobalMarkets.bnpparibas.com<br />
1.4280<br />
1.3860<br />
1.2875<br />
1.3505
Last week’s collapse to<br />
76.25 and rapid G7<br />
intervention-led rebound<br />
to 82.00 created a V-<br />
bottom. This bullish<br />
pattern suggests current<br />
80.50-81.30 sideways<br />
consolidation will be<br />
followed by a further rise<br />
testing strong mediumterm<br />
resistance between<br />
82.00/30-83.00/10/30.<br />
Daily and weekly<br />
momentum are bullish<br />
aiding USD/JPY upside<br />
potential.<br />
88<br />
86<br />
84<br />
82<br />
80<br />
78<br />
76<br />
02-Aug-10<br />
Chart 2: USD/JPY — V-bottom off 76.25<br />
85.95<br />
82.85<br />
29-Sep-10<br />
80.20<br />
84.50<br />
26-Nov-10<br />
80.90<br />
Chart 3: GBP/USD — Pullback off 1.6400/60 resistance<br />
25-Jan-11<br />
84.00<br />
76.25<br />
24-Mar<br />
Source <strong>BNP</strong> Paribas<br />
GBP/USD rallied to a 14-<br />
month high this week<br />
1.65<br />
1.6300<br />
1.6400<br />
before stalling at the<br />
1.6400 round-number 1.61<br />
1.6200<br />
barrier just below 1.6460<br />
1.5980<br />
long-term resistance from 1.57<br />
the January’10 high.<br />
1.5525<br />
1.5485<br />
1.53<br />
The medium-term pattern<br />
1.5295<br />
1.5345<br />
is bullish implying 1.6460<br />
1.49<br />
will eventually be broken<br />
opening a test of the<br />
broad H2 2009 rounded 1.45<br />
congestion zone starting<br />
at 1.6665-1.6720. 1.41<br />
1.4230<br />
06-Apr-10 03-Jun-10 02-Aug-10 29-Sep-10 26-Nov-10 25-Jan-11 24-Mar-11<br />
Source <strong>BNP</strong> Paribas<br />
Chart 4: AUD/USD — Medium-term scope to new all-time highs<br />
As we’ve seen many<br />
times before, AUD/USD<br />
is leading the USD selloff<br />
as Commodity<br />
Currencies get a boost<br />
from the revival of “riskon”.<br />
The breakout above the<br />
1.0200 Feb/March local<br />
double-top now targets<br />
the historic 1.0255<br />
December high with a<br />
break of that level<br />
opening medium-term<br />
scope to 1.0325-1.05.<br />
1.02<br />
0.98<br />
0.94<br />
0.90<br />
0.86<br />
0.82<br />
0.8315<br />
0.9220<br />
02-Aug-10<br />
0.8770<br />
29-Sep-10<br />
1.0180 1.0255<br />
0.9535<br />
26-Nov-10<br />
25-Jan-11<br />
0.9705<br />
1.0200<br />
24-Mar-11<br />
Source <strong>BNP</strong> Paribas<br />
Andrew Chaveriat 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
64<br />
www.GlobalMarkets.bnpparibas.com
Currency Spot Trade Recommendations Date<br />
AUDCHF 0.9255 Buy 0.9155, stop 0.9055, target 0.9650 24 Mar 2011<br />
EURUSD 1.4190 Buy 1.4010, stop 1.3910, target 1.4350 18 Mar 2011<br />
AUDNZD 1.3610 Sell 1.3820, stop 1.3920, target 1.32 17 Mar 2011<br />
EURGBP 0.8785 Long at 0.8530, raise stop to 0.8650, raise target to 0.8810 24 Feb 2011<br />
USDKZT 146.70 Short at 147.00, stop at 149.50, target 135.00 28 May 2010<br />
AUDMXN 12.210 Shorts from 12.230 stopped at 12.010 7 Mar 2011<br />
AUDCAD 0.9965 Shorts from 0.9830 stopped at 0.9800 4 Mar 2011<br />
Source : <strong>BNP</strong> Paribas<br />
Ian Stannard 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
65<br />
www.GlobalMarkets.bnpparibas.com
Economic Calendar: 25 March - 1 April<br />
GMT Local Previous Forecast Consensus<br />
Fri 25/03 23:30 08:30 Japan CPI National y/y : Feb 0.0% 0.0% 0.0%<br />
23:30 08:30 Core CPI National y/y : Feb -0.2% -0.3% -0.3%<br />
23:30 08:30 CPI Tokyo y/y : Mar -0.1% 0.0% -0.1%<br />
23:30 08:30 Core CPI Tokyo y/y : Mar -0.4% -0.3% -0.3%<br />
(24/03)<br />
06:30 07:30 France GDP (Final) q/q : Q4 0.3% (p) 0.3% 0.3%<br />
06:30 07:30 GDP (Final) y/y : Q4 1.5% (p) 1.5% 1.5%<br />
07:45 08:45 Consumer Confidence : Mar 85 85 n/a<br />
07:00 08:00 Germany Import Prices m/m : Feb 1.5% 1.0% 0.9%<br />
07:00 08:00 Import Prices y/y : Feb 11.8% 11.7% 11.6%<br />
09:00 10:00 Ifo Business Climate : Mar 111.2 109.5 110.5<br />
09:00 10:00 Ifo Current Conditions : Mar 114.7 114.2 114.6<br />
09:00 10:00 Ifo Expectations : Mar 107.9 104.9 106.8<br />
08:00 09:00 Spain PPI m/m : Feb 2.4% 0.5% 0.9%<br />
08:00 09:00 PPI y/y : Feb 6.8% 7.1% 7.5%<br />
08:30 09:30 Neths Producer Confidence : Mar 1.7 2.0 1.8<br />
09:00 10:00 Italy Retail Sales y/y : Jan 0.4% 1.2% 0.7%<br />
09:00 10:00 Eurozone M3 y/y : Feb 1.5% 2.0% 1.7%<br />
09:00 10:00 M3 3m y/y : Feb 1.7% 1.7% 1.6%<br />
20:15 21:15 ECB’s Gonzalez-Paramo Speaks at Annual Meeting on Spanish Events in Washington<br />
11:30 07:30 US Fed’s Fisher Speaks at Bruegel Research Institute in Brussels<br />
12:30 08:30 GDP (Final, saar) q/q : Q4 2.8% (p) 2.8% 3.0%<br />
12:30 08:30 GDP Deflator (Final, saar) q/q : Q4 0.4% (p) 0.4% 0.4%<br />
12:30 08:30 Corporate Profits q/q : Q4 6.6% 3.2% n/a<br />
12:30 08:30 Fed’s Evans Briefs Reports at a Chicago Fed Breakfast<br />
13:15 09:15 Fed’s Lockhart Speaks on Economy in Florida<br />
13:55 09:55 Michigan Sentiment (Final) : Mar 68.2 (p) 66.6 68.0<br />
16:15 12:15 Fed’s Plosser Speaks on Monetary Policy in New York<br />
17:00 13:00 Fed’s Fisher Speaks in Brussels at Forum<br />
EU EU Leaders Hold Summit in Brussels<br />
Sun 27/03 02:00 03:00 Europe Clocks Go Forward One Hour<br />
Mon 28/03 07:30 09:30 Sweden Retail Sales (sa) m/m : Feb -0.1% 0.4% n/a<br />
07:30 09:30 Retail Sales (nsa) y/y : Feb 2.8% 4.4% n/a<br />
12:30 08:30 US Personal Income m/m : Feb 1.0% 0.2% 0.4%<br />
12:30 08:30 Personal Spending m/m : Feb 0.2% 0.7% 0.5%<br />
14:00 10:00 Pending Home Sales : Feb<br />
16:40 12:40 Fed’s Lockhart to Speak on US Economy in Atlanta<br />
19:40 15:40 Fed’s Evans Speaks to Reporters in South Carolina<br />
22:00 18:40 Fed’s Rosengren Speaks in Boston<br />
Tue 29/03 23:30 08:30 Japan Household Consumption y/y : Feb -1.0% 0.2% -0.3%<br />
23:30 08:30 Unemployment Rate (sa) : Feb 4.9% 4.9% 4.9%<br />
23:50 08:50 Retail Sales y/y : Feb 0.1% -0.5% -0.5%<br />
(28/03)<br />
06:00 08:00 Germany GfK Consumer Confidence : Apr 6.0 5.7 5.8<br />
States’ Cost of Living m/m : Mar 0.5% 0.5% 0.5%<br />
States’ Cost of Living y/y : Mar 2.1% 2.2% 2.2%<br />
HICP (Prel) m/m : Mar 0.6% 0.6% 0.4%<br />
HICP (Prel) y/y : Mar 2.2% 2.3% 2.1%<br />
06:45 08:45 France Housing Starts (3-mths) y/y : Feb 26.1% 34.0% n/a<br />
06:45 08:45 Household Consumption m/m : Feb -0.4% 0.9% n/a<br />
06:45 08:45 Household Consumption y/y : Feb 2.4% 5.0% n/a<br />
08:00 10:00 Italy ISAE Business Confidence Survey : Mar 103.0 102.5 102.5<br />
08:30 09:30 UK GDP (Final) q/q : Q4 -0.6% (p) -0.6% -0.6%<br />
08:30 09:30 GDP (Final) y/y : Q4 1.5% (p) 1.5% 1.5%<br />
08:30 09:30 Net Consumer Credit : Feb GBP-0.3bn GBP0.0bn n/a<br />
08:30 09:30 Mortgage Approvals : Feb 45.7k 46.0k 46.5k<br />
10:00 06:00 US Fed’s Bullard Speaks on Monetary Policy in Prague<br />
13:00 09:00 S&P/Case-Shiller Home Price Index : Jan<br />
Market Economics 24 March 2011<br />
Market Mover<br />
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GMT Local Previous Forecast Consensus<br />
14:00 10:00 Consumer Confidence : Mar 70.4 55.0 65.4<br />
14:00 16:00 Eurozone ECB’s Mersch Speaks at Luxembourg Conference<br />
Wed 30/03 23:50 08:50 Japan Industrial Production (Prel, sa) m/m : Feb 1.3% 0.7% -0.1%<br />
(29/03)<br />
07:00 09:00 Spain Retail Sales (Adjusted) y/y : Feb<br />
07:00 09:00 HICP Flash y/y : Mar 3.4% 3.5% n/a<br />
08:00 10:00 Italy Wages m/m : Feb 0.1% 0.6% n/a<br />
08:00 10:00 Wages y/y : Feb 1.7% 1.9% n/a<br />
08:10 10:10 Eurozone Retail PMI : Mar 49.9 52.5 n/a<br />
09:00 10:00 Economic Sentiment : Mar 107.8 107.3 107.5<br />
09:00 10:00 Consumer Sentiment : Mar -10.0 -10.6 -10.6<br />
09:00 10:00 Industry Sentiment : Mar 6.5 5.5 6.0<br />
11:30 13:30 Bank of Portugal Governor Speaks at Luncheon in Lisbon<br />
European Commission Issues Quarterly Report on the Euro Area<br />
09:15 11:15 Belgium CPI m/m : Mar 0.6% 0.4% n/a<br />
09:15 11:15 CPI y/y : Mar 3.4% 3.4% n/a<br />
09:30 11:30 Switzerland KOF Leading Indicator : Mar<br />
10:00 11:00 UK CBI Distributive Trades Survey : Mar<br />
11:30 07:30 US Challenger Layoffs : Mar<br />
12:15 08:15 ADP Labour Change : Mar 217k 200k 210k<br />
14:30 10:30 EIA Oil Inventories<br />
17:00 13:00 Fed’s Bullard Speaks at UBS Dinner in London<br />
18:30 14:30 Fed’s Hoenig Speaks at London School of Economics<br />
Thu 31/03 23:01 00:01 UK GfK Consumer Survey : Mar -28 -32 -29<br />
(30/03)<br />
06:00 07:00 Nationwide House Prices Index m/m : Mar 0.3% -0.3% -0.2%<br />
06:00 07:00 Nationwide House Prices Index y/y : Mar -0.1% -0.9% -0.8%<br />
08:30 09:30 BoE Credit Conditions Survey : Q1<br />
23:00 01:00 Eurozone Irish Central Bank Releases Banking Stress Test Results<br />
(30/03)<br />
07:30 09:30 Eurocoin : Mar 0.57 0.65 n/a<br />
09:00 11:00 HICP (Flash) y/y : Mar 2.4% 2.5% 2.3%<br />
00:30 11:30 Australia Retail Sales m/m : Feb 0.4% 0.6% n/a<br />
00:30 11:30 Retail Sales y/y : Feb 1.8% 3.6% n/a<br />
05:00 14:00 Japan Housing Starts y/y : Feb 2.7% 27.4% 6.5%<br />
06:45 08:45 France PPI m/m : Feb 0.9% 0.3% n/a<br />
06:45 08:45 PPI y/y : Feb 5.6% 5.7% n/a<br />
07:55 09:55 Germany Unemployment (Chg, sa) : Mar -52k -25k -24k<br />
07:55 09:55 Unemployment Rate : Mar 7.3% 7.2% 7.2%<br />
08:00 10:00 Italy PPI m/m : Feb 1.1% 0.7% n/a<br />
08:00 10:00 PPI y/y : Feb 5.2% 5.5% n/a<br />
09:00 11:00 CPI (NIC, Prel) m/m : Mar 0.3% 0.3% n/a<br />
09:00 11:00 CPI (NIC, Prel) y/y : Mar 2.4% 2.4% n/a<br />
09:00 11:00 HICP (Prel) m/m : Mar 0.2% 1.7% n/a<br />
09:00 11:00 HICP (Prel) y/y : Mar 2.1% 2.3% n/a<br />
08:00 10:00 Norway Retail Sales (sa) m/m : Feb 0.1% 1.1% n/a<br />
08:00 10:00 Retail Sales (nsa) y/y : Feb 0.4% 1.0% n/a<br />
12:30 08:30 Canada GDP m/m : Jan<br />
12:30 08:30 US Initial Claims 382k 385k n/a<br />
13:45 09:45 Chicago PMI : Mar 71.2 69.0 70.0<br />
14:00 10:00 Factory Orders m/m : Feb 3.1% 0.5% 1.3%<br />
14:30 10:30 Fed’s Lacker to Speak at 2011 Credit Symposium in Charlotte<br />
16:30 12:30 Fed’s Tarullo to Speak at 2011 Credit Symposium in Charlotte<br />
Fri 01/04 23:50 08:50 Japan Tankan (Large Manufacturers DI) : Q1 5 2 6<br />
(31/03)<br />
07:00 09:00 Norway Unemployment Rate (sa) : Mar 3.0% 3.0% n/a<br />
08:00 10:00 Italy Unemployment Rate : Q4 8.3% 8.4% n/a<br />
08:00 10:00 Eurozone PMI Manufacturing (Final) : Mar 57.7 (p) 57.7 57.7<br />
09:00 11:00 Unemployment Rate : Feb 9.9% 9.8% 9.9%<br />
08:30 09:30 UK CIPS Manufacturing : Mar 61.5 60.5 61.0<br />
Market Economics 24 March 2011<br />
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GMT Local Previous Forecast Consensus<br />
12:15 08:15 US Fed’s Plosser Speaks on the Economy in Harrisburg, Pennsylvania<br />
12:30 08:30 Non-Farm Payrolls (Chg) : Mar 192k 180k 194k<br />
12:30 08:30 Unemployment Rate : Mar 8.9% 9.0% 8.9%<br />
12:30 08:30 Average Hourly Earnings m/m : Mar 0.0% 0.1% 0.2%<br />
13:00 09:00 Fed’s Dudley Speaks in San Juan, Puerto Rico<br />
14:00 10:00 Construction Spending m/m : Feb -0.7% -1.0% 0.6%<br />
14:00 10:00 ISM Manufacturing : Mar 61.4 61.0 61.0<br />
During 30-31/3 Eurozone Weber, Rehn, Juncker, Schaeuble at Berlin Banking Congress<br />
Week 28/3-1/4 Germany Retail Sales (BBK, Real, sa) m/m : Feb 0.4% 0.6% 0.3%<br />
Retail Sales (BBK, Real, sa) y/y : Feb 2.6% 2.0% 1.7%<br />
Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision<br />
Source: <strong>BNP</strong> Paribas<br />
Market Economics 24 March 2011<br />
Market Mover<br />
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Key Data Preview<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
Chart 1: Japanese CPI (% y/y)<br />
CPI excluding energy and<br />
food, but not alcohol<br />
Core CPI<br />
02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro<br />
% y/y Feb (f) Jan Dec Nov<br />
Core CPI -0.3 -0.2 -0.4 -0.5<br />
CPI 0.0 0.0 0.0 0.1<br />
Key Point:<br />
Thanks to the resurgent commodities market, the<br />
core CPI has recently improved more than expected.<br />
Although the index could deteriorate slightly in<br />
February, the trend remains one of improvement.<br />
The negative margin will continue to narrow, leading<br />
to a small rise in prices in April.<br />
<strong>BNP</strong> Paribas Forecast: Slightly Faster<br />
Rate of Decline<br />
Japan: CPI (National, February)<br />
Release Date: Friday 25 March<br />
In January, the rate of decline in the national core CPI<br />
eased 0.2pp from December to -0.2% y/y, as the index has<br />
improved faster than expected.<br />
Although the Tokyo CPI numbers for February suggest the<br />
national index could deteriorate slightly to -0.3% y/y in<br />
February, the trend remains one of improvements, thanks<br />
to resurgent commodities prices, led by oil, we expect the<br />
core CPI’s negative margin should narrow again in March<br />
followed by small positive price rise in April.<br />
The chronic weakness of domestic demand due to the rise<br />
in the average age of the aging population has prevented<br />
commodity prices to be passed down to the retail level.<br />
However, if the commodities market continues to rise<br />
corporate earnings could be squeezed enough that high<br />
costs gradual filter down to various goods and services,<br />
beginning with food.<br />
Food prices, which are moving sideways, should be closely<br />
monitored, as this item trailed only petroleum products as<br />
the price growth leader during the last commodities market<br />
boom (H2 2007-H1 2008).<br />
Chart 2: Eurozone M3 and Bank Lending (% y/y)<br />
12.5<br />
10.0<br />
7.5<br />
5.0<br />
2.5<br />
0.0<br />
Private Sector<br />
Bank Lending<br />
M3<br />
-2.5<br />
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
% y/y Feb (f) Jan Dec Nov<br />
M3 2.0 1.5 1.7 2.1<br />
M3 (3-mth Avg.) 1.7 1.7 1.6 1.4<br />
Private Sector Loans 2.5 2.4 1.9 2.0<br />
Key Point:<br />
Rates of growth in M3 and bank lending are still low<br />
by past standards but are trending higher.<br />
<strong>BNP</strong> Paribas Forecast: Trending Upwards<br />
Eurozone: Monetary Developments (February)<br />
Release Date: Friday 25 March<br />
The headline year-on-year growth rate in M3 decelerated in<br />
both December and January. However, the three-month<br />
average rate of growth has continued to trend upwards. At<br />
1.7% as of January, it has risen by almost 2pp from its<br />
trough in May 2010.<br />
The year-on-year growth rate in private-sector bank lending<br />
is also on an upward trend. The rate of increase of<br />
2.4% y/y of January was over 3pp above its trough in<br />
October 2009 (of -0.8%). We look for a further, modest,<br />
pick-up in February’s data.<br />
Loans to households have been the main driver of the rise,<br />
with lending for mortgages particularly robust. The rate of<br />
growth in the latter accelerated from 3.7% y/y to 3.9% in<br />
January, its highest growth rate since autumn 2008, before<br />
the financial crisis intensified.<br />
In contrast, consumer credit has continued to contract on a<br />
year-on-year basis (-0.8% in January).<br />
Lending to the non-financial corporate sector is lagging that<br />
for households, as is typically the case. The rate of growth<br />
has turned positive, however, at 0.4% y/y in January, from<br />
a trough of -2.7% the year before.<br />
Market Economics 24 March 2011<br />
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Key Data Preview<br />
Chart 3: Germany Ifo Business Climate and<br />
Growth<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
-4<br />
-5<br />
-6<br />
Ifo Business Climate (RHS)<br />
GDP (% y/y)<br />
-7<br />
60<br />
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro<br />
Mar (f) Feb Jan Dec<br />
Headline 109.5 111.2 110.3 109.8<br />
Expectations 104.9 107.9 107.8 106.8<br />
Current Conditions 114.2 114.7 112.8 112.9<br />
Key Point:<br />
Sentiment will remain positive but the recent news<br />
flow points to a drop in expectations.<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
80<br />
75<br />
70<br />
65<br />
<strong>BNP</strong> Paribas Forecast: Correction<br />
Germany: Ifo Business Climate (March)<br />
Release Date: Friday 25 March<br />
Ifo’s business climate index improved for the ninth month in<br />
a row in February, rising to its strongest level for over four<br />
decades and indicating a further acceleration in growth<br />
from an already robust rate (see chart).<br />
The sub-indices measuring current business conditions<br />
and future expectations have both been improving over the<br />
past few months but we expect to see more divergence in<br />
the period ahead.<br />
The expectations sub-index is forecast to drop markedly in<br />
March given the flow of adverse news during the survey<br />
period. The ECB has been signalling a more hawkish<br />
policy stance and oil prices are higher in response to<br />
greater turbulence in the MENA region. More recently,<br />
events in Japan have added to uncertainty about the<br />
outlook.<br />
Falls in the expectations index in the first month after<br />
external shocks include 5-point falls in October 2008 (after<br />
the collapse of Lehman Brothers) and in September 2001<br />
(after the 9/11 terrorist attacks). We forecast a 3-point fall<br />
this month.<br />
The assessment of current business conditions in Germany<br />
should remain very positive, with recent orders data strong.<br />
Domestic conditions have also improved, leaving the<br />
economy less dependent on exports.<br />
Chart 4: French Hh Confidence vs. CPI (% y/y)<br />
-1.0<br />
-0.5<br />
0.0<br />
0.5<br />
1.0<br />
1.5<br />
2.0<br />
2.5<br />
3.0<br />
3.5<br />
4.0<br />
CPI Inflation Rate (% y/y, inverted)<br />
Household Confid. (RHS)<br />
02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Diffusion Index, SA Mar (f) Feb Jan Mar 10<br />
INSEE indices:<br />
Overall 85 85 85 88<br />
Buying opportunity -22 -21 -23 -23<br />
EU Commis. Index:<br />
Headline -20.0 -20.1 -18.9 -19.0<br />
Key Point:<br />
Higher prices for energy are weighing on confidence<br />
and preventing any recovery from the present weak<br />
level.<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
80<br />
75<br />
<strong>BNP</strong> Paribas Forecast: Stable Again<br />
France: Household Confidence (March)<br />
Release Date: Friday 25 March<br />
The labour market has shown some signs of improvement<br />
recently, with fewer job seekers in January and a decline in<br />
the unemployment rate (which eased 0.1pp in Q4<br />
according to INSEE, and 0.1pp in January according to<br />
Eurostat). This improvement was confirmed by the upward<br />
revision of non-farm payrolls in Q4, now up 0.2% q/q and<br />
0.8% q/q.<br />
However, the impact of such good news is most probably<br />
compensated, if not outweighed, by further increases in<br />
energy prices. Gasoline in particular, reached an all-time<br />
high in the first week of March, before rising again the<br />
following week. This is putting more downward pressure on<br />
perceived purchasing power than the decline of core<br />
inflation (seen in the first two months of the year) is<br />
removing.<br />
It is very difficult to estimate the impact of the social and<br />
political crisis in the Middle East and north Africa. The<br />
same is true for the catastrophes that have hit Japan since<br />
11 March. We expect these to have no material effect on<br />
confidence, but a negative impact cannot be ruled out,<br />
mainly through fear of higher energy prices in the long run.<br />
Market Economics 24 March 2011<br />
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Key Data Preview<br />
Chart 5: US Confidence vs Consumption<br />
Source: Reuters EcoWin Pro<br />
% m/m Feb (f) Jan Dec Nov<br />
Personal Income 0.2 1.0 0.4 0.3<br />
Consumption 0.7 0.2 0.5 0.3<br />
Core PCE Prices 0.2 0.1 0.0 0.1<br />
Key Point:<br />
Nominal spending should surge on a real rebound<br />
and a surge in inflation; income should be more<br />
subdued.<br />
<strong>BNP</strong> Paribas Forecast: Moderate gains<br />
US: Personal Income & Spending (Feb)<br />
Release Date: Monday 28 March<br />
Personal consumption is forecast to rise 0.7% in February<br />
after a 0.2% gain in January that will be driven in part by a<br />
0.4% gain in prices as rising food and gasoline prices<br />
boosted nominal spending growth. On a real basis,<br />
consumers should increase spending 0.3% after a 0.1%<br />
decline a month prior as spending on autos picked up and<br />
service spending should rebound a little. On balance,<br />
consumers appear to be taking a breather after a strong<br />
pick-up in Q4 and we look for a moderate gain in Q1<br />
overall.<br />
Meanwhile, personal income is forecast to rise a paltry<br />
0.2% as wages and hours worked were both flat in<br />
February. This comes after a 1.0% surge that was driven<br />
by the implementation of the payroll tax holiday. The surge<br />
in spending combined with subdued income growth should<br />
lead the personal saving rate to fall back a little.<br />
The core PCE price index is expected to rise 0.2% in<br />
February, which would lead the y/y pace to pick up to 0.9%<br />
from the record low of 0.8%. Core inflation remains well<br />
below the Fed’s comfort zone but incoming data suggest<br />
the trough is behind us.<br />
Chart 6: Japanese Unemployment Rate (% s.a.)<br />
6.0<br />
5.5<br />
5.0<br />
4.5<br />
4.0<br />
3.5<br />
00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro<br />
% s.a. Feb (f) Jan Dec Nov<br />
Unemployment rate 4.9 4.9 4.9 5.1<br />
Key Point:<br />
The earthquake/tsunami has resulted in job losses<br />
for many in the quake-hit regions, but this will not<br />
rapidly translate into a higher unemployment rate.<br />
<strong>BNP</strong> Paribas Forecast: Flat<br />
Japan: Unemployment Rate (February)<br />
Release Date: Tuesday 29 March<br />
We expect the unemployment rate for February to remain<br />
at 4.9% for the third straight month. In the January report,<br />
seasonal adjustments were recalibrated and past data<br />
were revised to iron out distortions linked to the Lehman<br />
shock.<br />
As a result, the trend for the jobless rate is more moderate.<br />
The rate hit a high of 5.5% in July 2009, steadily improving<br />
thereafter. In any event, despite improvements on the job<br />
front, the decline is being hampered by the growing<br />
number of individuals seeking new jobs (including<br />
discouraged workers) or better working conditions<br />
(dissatisfied jobholders).<br />
Meanwhile, the earthquake/tsunami on 11 March has<br />
resulted in job losses for many in the quake-hit regions.<br />
However, we do not expect this to quickly translate into a<br />
higher jobless rate as many people are in no condition to<br />
start job hunting, while those who are should easily find<br />
positions in reconstruction-related projects.<br />
Market Economics 24 March 2011<br />
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Key Data Preview<br />
Chart 7: Germany Cost of Living<br />
Source: Reuters EcoWin Pro<br />
Mar (f) Feb Jan Dec<br />
CoL % m/m 0.5 0.5 -0.4 1.0<br />
CoL % y/y 2.2 2.1 2.0 1.7<br />
HICP % m/m 0.6 0.6 -0.6 1.2<br />
HICP % y/y 2.3 2.2 2.0 1.9<br />
Key Point:<br />
We expect another uptick in headline inflation,<br />
reflecting higher energy prices.<br />
<strong>BNP</strong> Paribas Forecast: Another increase<br />
Germany: Preliminary CoL (March)<br />
Release Date: Tuesday 29 March<br />
We expect German inflation to tick slightly higher in March,<br />
up to 2.2% y/y on the national measure. The acceleration is<br />
likely to reflect slightly higher energy, while food and core<br />
inflation is stable.<br />
While we expect food prices to post a chunky increase, that<br />
will be set against a similar sized increase a year ago. The<br />
impact on y/y inflation should therefore be neutral this<br />
month. We expect an increasing addition to headline<br />
inflation from next month onwards as this base effect<br />
passes.<br />
Meanwhile, we expect energy inflation to accelerate,<br />
largely due to housing energy. With regard to transport<br />
energy, although fuel costs are likely to have risen by a<br />
substantial 4½% m/m, that is around a percentage point<br />
slower than the same month a year ago. Combined, energy<br />
price inflation is likely to stand slightly above 10% y/y.<br />
Core inflation is likely to move sideways at 0.8% y/y.<br />
Clothes inflation has been surprisingly subdued in the last<br />
two months. That is despite the surge in cotton prices that<br />
has caused sharp increases in other economies. We<br />
expect some catch-up in March.<br />
Chart 8: French Sales of Manuf. Goods (3m avg)<br />
16<br />
12<br />
8<br />
4<br />
0<br />
-4<br />
Total (% 3m/3m annualised)<br />
-8<br />
Sales excl. autos (% 3m/3m annualised)<br />
-12<br />
Jan May Sep Jan May Sep Jan May Sep Jan May Sep<br />
07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Volume Feb (f) Jan 11 Dec Feb 10<br />
SA-WDA<br />
% m/m 0.9 -0.4 0.4 -1.7<br />
% y/y 5.0 2.4 0.1 1.1<br />
Key Point:<br />
Car and electronic goods are likely to support sales<br />
in February, and a strong base effect will boost the<br />
y/y change.<br />
<strong>BNP</strong> Paribas Forecast: Dynamic<br />
France: Hh Consumption of Manuf. Goods (February)<br />
Release Date: Tuesday 29 March<br />
Over the past few months, the strength of car sales has<br />
driven total retail sales of manufactured goods (see chart).<br />
New car registrations were still particularly strong in<br />
February, which should support the next retail sales report.<br />
The ending of the government car purchase incentive was<br />
followed by promotions from manufacturers, allowing them<br />
to capture a client base that was not eligible for the<br />
government incentives.<br />
The late start of seasonal sales may also provide extra<br />
support to February sales. In the last two months, sales of<br />
electronic goods have been dynamic. The progressive<br />
ending of analogue TV broadcasting (especially on 8<br />
March in the Paris region) is boosting sales of new TV sets<br />
and recorders.<br />
The sharp decline in household confidence in December<br />
has not led to a fall in private consumption. We do not<br />
expect a setback in February.<br />
We forecast sales up nearly 1% m/m and 5% y/y in real<br />
terms. This strength is also a result of a favourable base<br />
effect as sales were unusually weak in February last year.<br />
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Key Data Preview<br />
Chart 9: US Consumer Confidence<br />
Source: Reuters EcoWin Pro<br />
Mar (f) Mar 2H Mar p Feb<br />
Conference Board 55.0 - - 70.4<br />
Michigan Sentiment 66.6 65.0 68.2 77.5<br />
<strong>BNP</strong> Paribas Forecast: Down<br />
US: Consumer Confidence (March)<br />
Release Date: Tuesday 29 March<br />
The University of Michigan index of consumer confidence<br />
dropped sharply at the beginning of March, driven by<br />
surging gasoline prices and the Middle East turmoil. This<br />
follows a recent series of increases driven by improving<br />
labour market conditions. While the index of unfavorable<br />
news heard about unemployment has dropped to the<br />
lowest level since the middle of 2007, the index of<br />
unfavorable news about high prices has hit the highest<br />
level since the end of 2008. We expect the University of<br />
Michigan index to decline further in the second half of the<br />
month on disturbing news from Japan. Similarly, global<br />
events could shatter consumer optimism. This is likely to<br />
be reflected in the Conference Board index, which we<br />
expect to plunge to 55.0 in March from 70.4 in the previous<br />
month.<br />
Key Point:<br />
Global events could shatter consumer optimism.<br />
This is likely to be reflected by the Conference<br />
Board index, which we expect to plunge to 55.0 in<br />
March from 70.4 in the previous month.<br />
Chart 10: Japanese Production and Exports<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
80<br />
75<br />
70<br />
65<br />
(2005=100, seasonally adjusted)<br />
Production<br />
00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro<br />
Exports (RHS)<br />
150<br />
140<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
Feb (f) Jan Dec Nov<br />
% m/m 0.7 1.3 3.3 3.0<br />
Key Point:<br />
Although production is expected to expand for a<br />
fourth straight month, the earthquake/tsunami will<br />
likely cause a sharp downturn in coming months.<br />
<strong>BNP</strong> Paribas Forecast: Up, For Now<br />
Japan: Industrial Production (February)<br />
Release Date: Wednesday 30 March<br />
We expect production in February to expand 0.7% m/m,<br />
marking a fourth straight advance. After a soft patch in the<br />
summer, factory activity has revived thanks to the upturn in<br />
global manufacturing. While a degree of caution is in order<br />
given the upward bias in the METI data, various sentiment<br />
surveys also indicated that business conditions were<br />
improving for manufacturers.<br />
Unfortunately, however, the earthquake/tsunami on 11<br />
March will likely cause a sharp downturn in factory activity<br />
in the coming months. Beyond the damage to capital stock<br />
and infrastructure from the earthquake itself, power<br />
shortages in Kanto (Tokyo area) and Tohoku will become a<br />
big constraint on production.<br />
On the demand side, deterioration in household and<br />
corporate sentiment should lead to weaker domestic<br />
consumption. The upcoming production report will include<br />
forecasts for March and April, but because the cut-off date<br />
for the survey is the 10 th , these forecasts will not reflect the<br />
earthquake disaster.<br />
Market Economics 24 March 2011<br />
Market Mover<br />
73<br />
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Key Data Preview<br />
10<br />
-5<br />
-10<br />
-15<br />
-20<br />
-25<br />
-30<br />
-35<br />
-40<br />
Chart 11: Eurozone Sentiment by Sector<br />
5<br />
0<br />
Consumer<br />
Industry<br />
Construction<br />
99 00 01 02 03 04 05 06 07 08 09 10 11<br />
Source: Reuters EcoWin Pro<br />
Mar Feb Jan Dec<br />
Economic Sentiment 107.3 107.8 106.8 106.9<br />
Industry 6 7 6 5<br />
<strong>Services</strong> 11 11 10 10<br />
Consumer -11 -10 -11 -11<br />
Key Point:<br />
Sentiment remains very elevated but recent external<br />
events point to a correction.<br />
<strong>BNP</strong> Paribas Forecast: Correction<br />
Eurozone: Economic Sentiment (March)<br />
Release Date: Wednesday 30 March<br />
The eurozone economic sentiment index improved in eight<br />
of the nine months to February, reaching its highest level<br />
since August 2007 prior to the financial crisis.<br />
The main driver of the improvement in sentiment has been<br />
the industrial sector. This is now back at the highs seen in<br />
the previous expansion (see chart).<br />
The run of adverse news in the latest survey period points<br />
to a drop in sentiment in March, with the tragic events in<br />
Japan accompanying a pick-up in uncertainty and oil prices<br />
related to developments in the MENA region.<br />
How the economic sentiment index has reacted to previous<br />
external shocks offers some perspective in assessing the<br />
upcoming data. Following 9/11, economic sentiment fell by<br />
two points in the same month as the terrorist attacks took<br />
place.<br />
We are forecasting a more moderate decline this time, in<br />
line with the signals from the survey data already released<br />
at the time of writing. They suggest that manufacturing<br />
activity in the eurozone moderated but the service sector<br />
remained relatively unaffected.<br />
Price indices in the EC survey, from both a business and<br />
household perspective, will remain very elevated.<br />
Source: Reuters EcoWin Pro<br />
Chart 12: Eurozone HICP<br />
Mar (f) Feb Jan Dec<br />
HICP % m/m 1.2 0.4 -0.7 0.6<br />
HICP % y/y 2.5 2.4 2.3 2.2<br />
HICP Core % m/m 1.2 0.3 -1.6 0.4<br />
HICP Core % y/y 1.0 1.0 1.1 1.0<br />
Key Point:<br />
We expect an acceleration in headline inflation on<br />
the back of faster food and energy price inflation.<br />
<strong>BNP</strong> Paribas Forecast: Up Again<br />
Eurozone: HICP Flash (March)<br />
Release Date: Thursday 31 March<br />
We expect headline eurozone inflation to accelerate again<br />
in March, to stand at 2.5% y/y – the highest since October<br />
2008. Although no breakdown is published at this stage,<br />
when it is released we expect the acceleration to reflect a<br />
combination of higher food and energy price inflation, while<br />
core inflation is stable.<br />
More specifically, we expect food inflation to continue to<br />
accelerate and the HICP to catch up with the surge in<br />
agricultural commodities. We expect further upside beyond<br />
March, helping to push headline inflation yet higher.<br />
Meanwhile, energy price inflation is likely to accelerate by<br />
½ percentage point to 13.5% y/y. The extent of the<br />
acceleration is likely to be limited by base effects due to the<br />
sizeable increase posted this time last year.<br />
Meanwhile, core inflation is likely to be stable at 1.0% y/y,<br />
though with risks skewed to the upside. In particular, we<br />
expect clothes inflation to accelerate – again reflecting a<br />
catch-up with the jump in raw materials prices. More<br />
sluggish increases elsewhere in the breakdown are likely to<br />
hold back an acceleration in overall core inflation for now.<br />
However, that is likely to be temporary and we expect the<br />
acceleration in core inflation to resume in the coming<br />
months.<br />
Market Economics 24 March 2011<br />
Market Mover<br />
74<br />
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Key Data Preview<br />
Chart 13: Japanese Tankan<br />
Actual Expectation Actual Expectation<br />
Business Large manufacturers 5 -2 2 -3<br />
conditions Large non-manufacturers 1 -1 -2 -7<br />
DI Small manufacturers -12 -23 -16 -24<br />
Small non-manufacturers -22 -29 -26 -34<br />
Large enterprises<br />
Capex plan (*) Manufacturers<br />
(FY2011) Non-manufacturers<br />
(% y/y) Small enterprises<br />
Manufacturers<br />
Non-manufacturers<br />
Source: Reuters EcoWin Pro<br />
December Survey<br />
March Survey<br />
(<strong>BNP</strong>P forecast)<br />
1.0<br />
1.5<br />
0.7<br />
-22.7<br />
-20.5<br />
-24.0<br />
Business condition DI Mar (f) Dec (f) Sep Jun<br />
Large manufactures 2 5 8 1<br />
Large nonmanufactures -2 1 2 -5<br />
Key Point:<br />
Because only a small proportion of responses will<br />
reflect the earthquake disaster, the March Tankan<br />
cannot be deemed an accurate assessment of<br />
corporate sentiment.<br />
<strong>BNP</strong> Paribas Forecast: Inaccurate<br />
Japan: Tankan (March)<br />
Release Date: Friday 1 April<br />
In the BoJ’s March Tankan, we expect the current<br />
conditions DI for large manufacturers to fall 3 points to 2<br />
and the DI for large nonmanufacturers to also drop 3<br />
points, to -2. While the survey period (late February<br />
through the end of March) straddles the 11 March<br />
earthquake/tsunamis, most companies (roughly 70%) tend<br />
to send in their replies prior to what the BoJ designates as<br />
the ‘record date’, which this time happened to be 11 March.<br />
Thus, the upcoming Tankan will only partially reflect the<br />
earthquake disaster. Prior to the quake, it seemed that the<br />
recovery of global manufacturing would put the Japanese<br />
economy back on a recovery track in 2011 after the soft<br />
patch that began in the summer. However, the earthquake<br />
has dramatically changed the near-term outlook.<br />
The March Tankan cannot be deemed an accurate<br />
assessment of corporate sentiment. We expect the strongly<br />
pessimistic assessments from companies responding after<br />
the quake to temper the growing optimism of those<br />
responding before the quake, with the result that the overall<br />
tone will be modestly downbeat.<br />
Chart 14: UK CIPS Manufacturing vs Industrial<br />
Production<br />
Source: Reuters EcoWin Pro<br />
Mar (f) Feb Jan Dec<br />
CIPS Manufacturing 60.5 61.5 61.5 58.7<br />
Key Point:<br />
We expect a slight dip in March, but the level of the<br />
index will remain super-strong.<br />
<strong>BNP</strong> Paribas Forecast: Dipping<br />
UK: CIPS Manufacturing (March)<br />
Release Date: Friday 1 April<br />
We expect the manufacturing sector CIPS to nudge lower<br />
in March, while remaining extremely high. At 61.5, the<br />
headline index is at its highest level on record. At that level,<br />
the survey is consistent with very robust expansion in<br />
industrial production, which should provide a solid<br />
contribution to headline GDP growth this year.<br />
The buoyancy of the survey has been driven by robust<br />
orders, particularly from overseas. Although the weakness<br />
of the GBP exchange rate has helped, the strength of the<br />
UK’s biggest export partner in the eurozone – Germany –<br />
has been a major boost.<br />
We expect a minor setback in March on the back of the<br />
increase in global uncertainty following the unfortunate<br />
events in Japan. Similarly, the jump in the price of oil has<br />
intensified the burden of costs on firms, only part of which<br />
is being passed on to end customers. That is likely to be a<br />
drag, though it shouldn’t derail the recovery in the sector.<br />
Overall, we expect a dip but the overriding message is that<br />
manufacturing is powering ahead.<br />
Market Economics 24 March 2011<br />
Market Mover<br />
75<br />
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Economic Calendar: 4 – 29 April<br />
4 April 5 April 6 April 7 April 8 April<br />
Eurozone: PPI Feb Australia: RBA Rate<br />
Announcement, Trade<br />
Balance Feb<br />
Eurozone: <strong>Services</strong> PMI<br />
(Final) Mar, Retail Sales<br />
Feb<br />
UK: CIPS <strong>Services</strong> Mar<br />
US: ISM <strong>Services</strong> Mar,<br />
FOMC Minutes<br />
Japan: Leading<br />
indicator Feb<br />
Eurozone: GDP (Final)<br />
Q4<br />
UK: Industrial<br />
Production Feb<br />
Germany: Factory<br />
Orders Feb<br />
Spain: Industrial<br />
Production Feb<br />
Switz: CPI Mar<br />
Japan: BoJ Rate<br />
Announcement<br />
Australia: Labour Mar<br />
Eurozone: ECB Rate<br />
Announcement<br />
UK: BoE Rate Ann.<br />
Germany: IP Feb<br />
France: Trade Balance Feb<br />
Norway: IP Feb<br />
Neths: CPI Mar<br />
US: Consumer Credit Feb<br />
During Week: UK Halifax House Prices Mar<br />
11 April 12 April 13 April 14 April 15 April<br />
Japan: Machinery Orders<br />
Feb<br />
France: Industrial<br />
Production Feb<br />
Italy: Industrial Production<br />
Feb<br />
Norway: CPI Mar, PPI Mar<br />
Market Economics 24 March 2011<br />
Market Mover<br />
Japan: M2 Mar, BoJ<br />
Minutes<br />
Australia: NAB Business<br />
Confidence Mar<br />
UK: RICS HP Mar, DCLG<br />
House Prices Feb, Trade<br />
Bal. Feb, CPI Mar<br />
Germany: CPI Mar, ZEW<br />
Survey Apr<br />
France: Current Acc. Feb<br />
Spain: CPI Mar<br />
Sweden: CPI Mar<br />
US: Trade Bal. Feb, Import<br />
Prices Mar, NFIB Small<br />
Business Optimism Mar,<br />
Treasury Statement Mar<br />
Canada: BoC Rate Ann.<br />
Japan: CGPI Mar<br />
Australia: Westpac<br />
Consumer Confidence<br />
Apr<br />
Eurozone: Industrial<br />
Production Feb<br />
UK: Labour Mar<br />
France: CPI Mar<br />
Sweden: Labour (nsa)<br />
Mar<br />
US: Retail Sales Mar,<br />
Business Inventories<br />
Feb, Beige Book<br />
Canada: BoC Monetary<br />
Policy Report<br />
Eurozone: ECB Monthly<br />
Bulletin<br />
Neths: Retail Sales Feb<br />
US: PPI Mar<br />
18 April 19 April 20 April 21 April 22 April<br />
UK: Rightmove House<br />
Prices Apr<br />
US: NAHB Housing Index<br />
Apr<br />
Australia: RBA Minutes<br />
Eurozone: Current<br />
Account Feb, EU25 New<br />
Car Registrations Mar,<br />
PMIs (Flash) Apr<br />
US: New Home Starts Mar<br />
Canada: CPI Mar<br />
Japan: Trade Bal. Mar,<br />
Tertiary Index Feb<br />
UK: BoE Minutes, PSNB<br />
Mar, PSNCR Mar<br />
Germany: PPI Mar<br />
Italy: Indust. Orders Feb<br />
Sweden: Riksbank Rate<br />
Announcement<br />
Belgium: Consumer<br />
Confidence Apr<br />
Neths: Consumer<br />
Confidence Apr<br />
US: Existing Home Sales<br />
Mar<br />
Australia: PPI Q1<br />
UK: Retail Sales Mar<br />
Germany: Ifo Survey Apr<br />
Italy: Non-EU Trade<br />
Balance Mar<br />
Belgium: Business<br />
Confidence Apr<br />
Neths: Labour Mar<br />
US: Philly Fed Apr, FHFA<br />
HPI Feb, Leading<br />
Indicators Mar<br />
25 April 26 April 27 April 28 April 29 April<br />
Spain: PPI Mar<br />
US: New Home Sales Mar<br />
Neths: Producer<br />
Confidence Apr<br />
Sweden: Labour Mar<br />
US: S&P/Case-Shiller<br />
Home Prices Feb,<br />
Consumer Confidence Apr<br />
Japan: Retail Sales Mar<br />
Australia: CPI Q1<br />
Eurozone: Industrial<br />
Orders Feb<br />
UK: GDP (Adv) Q1<br />
Germany: CPI (Prel)<br />
Apr, GfK Consumer<br />
Confidence May<br />
France: Consumer<br />
Confidence Apr, Housing<br />
Starts Mar, Job Seekers<br />
Mar<br />
US: Durable Goods<br />
Orders Mar, FOMC Rate<br />
Announcement<br />
During Week: Germany Retail Sales Mar, Import Prices Mar, UK Nationwide House Prices Apr<br />
Source: <strong>BNP</strong> Paribas<br />
Japan: CPI Tokyo Apr,<br />
CPI National Mar, Labour<br />
Mar, Household<br />
Consumption Mar, IP Mar,<br />
Housing Starts Mar, BoJ<br />
Rate Announcement &<br />
Outlook Report<br />
UK: GfK Consumer<br />
Confidence Apr<br />
Germany: Labour Mar<br />
France: Retail Sales Mar<br />
Belgium: CPI (Apr)<br />
Sweden: Consumer<br />
Confidence Apr, PPI Mar<br />
US: GDP (Adv) Q1,<br />
Pending Home Sales Mar<br />
Japan: Current Account<br />
Feb<br />
UK: PPI Mar<br />
Germany: Trade<br />
Balance Feb<br />
France: Budget Balance<br />
Feb, BoF Survey Mar<br />
Sweden: IP Feb<br />
Neths: IP Feb<br />
US: Wholesale Trade Mar<br />
Canada: Labour Mar<br />
Eurozone: Trade<br />
Balance Feb, HICP Mar<br />
Italy: EU Trade Balance<br />
Feb, CPI (Prel) Mar<br />
US: Empire State Survey<br />
Apr, CPI Mar, Industrial<br />
Production Mar, UoM<br />
(Prel) Apr, TICS Data<br />
Feb<br />
Holiday: Australia,<br />
Germany, Neths, UK,<br />
Spain, Sweden, Norway,<br />
Switz, Canada, US,<br />
France: Industry Survey<br />
Apr<br />
Italy: Retail Sales Feb<br />
Japan: Holiday<br />
Eurozone: Eurocoin Apr,<br />
Monetary Developments<br />
Mar, Labour Mar, HICP<br />
(Flash) Apr, Business &<br />
Consumer Survey Apr<br />
France: PPI Mar<br />
Italy: CPI (Prel) Apr, PPI<br />
Mar<br />
Spain: Retail Sales Mar,<br />
Labour Q1, HICP (Flash)<br />
Apr<br />
Sweden: Retail Sales Mar<br />
Norway: Labour Apr<br />
Switz: KOF Leading<br />
Indicator Apr<br />
US: Personal Income &<br />
Spending Mar, ECI Q1,<br />
Chicago PMI Apr, UoM<br />
Sentiment (Final) Apr<br />
Canada: GDP Feb<br />
Release dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions<br />
76<br />
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Treasury and SAS Issuance Calendar<br />
In the pipeline - Treasuries:<br />
Germany: As announced in December, intends to issue inflation-linked federal securities (EUR 2-3bn) in Q2; reserves the right to issue foreign<br />
currency bonds, as market conditions permit<br />
Greece: Will return to the market in April<br />
Poland: Min. USD 1bn benchmark planned for H1<br />
Belgium: Cancelled its OLO auction initially scheduled for 28 March<br />
Belgium: Plans to launch a new syndicated 15- or 20-year benchmark bond later this year, depending on market conditions<br />
Finland: To launch another new euro-denominated benchmark bond in 2011<br />
Czech Rep.: May sell up to EUR 2bn of bonds in May<br />
In the pipeline – Agencies:<br />
EFSF: Plans to issue a second benchmark bond, likely a 10y maturity, in Q2<br />
Date Day Closing Country Issues Details <strong>BNP</strong>P forecasts<br />
Local GMT<br />
25/03 Fri 11:00 15:00 US Outright Treasury Coupon Purchase (2012 - 2013) USD 4-6bn<br />
28/03 Mon 10:55 08:55 Italy CTZ 31 Dec 2012 EUR 2.5bn<br />
11:00 15:00 US Outright Treasury Coupon Purchase (2015 - 2016) USD 5.5-7.5bn<br />
13:00 17:00 US Notes 0.625% 31 Mar 2013 (new) USD 35bn<br />
29/03 Tue 10:55 08:55 Italy BTPei 2.1% 15 Sep 2016 EUR 1.25-1.75bn<br />
12:00 16:00 Canada Repurchase of 10 Cash Mgt Bonds (Jun11 to Jun12) CAD 1bn<br />
11:00 15:00 US Outright TIPS Purchase (2013 - 2041) USD 1-2bn<br />
13:00 17:00 US Notes 2% 31 Mar 2016 (new) USD 35bn<br />
30/03 Wed 10:55 08:55 Italy BTP 3% 1 Apr 2014 (new)<br />
CCTeu 15 Oct 2017<br />
25 Mar EUR 9-10bn<br />
BTP 4.75% 1 Sep 2021<br />
11:00 15:00 US Outright Treasury Coupon Purchase (2013 - 2015) USD 5.5-7.5bn<br />
13:00 17:00 US Notes 2.75% 31 Mar 2018 (new) USD 29bn<br />
31/03 Thu 11:00 15:00 US Outright Treasury Coupon Purchase (2021 - 2027) USD 1.5-2.5bn<br />
04/04 Mon Slovak Rep. SLOVGB (#217) (new)<br />
11:00 15:00 US Outright Treasury Coupon Purchase (2016 - 2018) USD 6.5-8.5bn<br />
05/04 Tue 12:00 03:00 Japan JGB 10-year 29 Mar JPY 2.2tn<br />
11:00 09:00 Austria RAGBs 29 Mar EUR 1.3bn<br />
11:00 15:00 US Outright Treasury Coupon Purchase (2018 - 2021) USD 6.5-8.5bn<br />
06/04 Wed 11:00 09:00 Germany Schatz 1.5% 15 Mar 2013 EUR 5bn<br />
11:00 09:00 Sweden T-bonds 30 Mar SEK 2bn<br />
11:00 15:00 US Outright Treasury Coupon Purchase (2028 - 2041) USD 1.5-2.5bn<br />
07/04 Thu 10:30 08:30 Spain Bono 3-year (new) 4 Apr EUR 3-4bn<br />
10:50 08:50 France OATs 1 Apr EUR 7-9bn<br />
11:00 15:00 US Outright Treasury Coupon Purchase (2015 - 2016) USD 5.5-7.5bn<br />
08/04 Fri 12:00 03:00 Japan Auction for Enhanced-liquidity 1 Apr JPY 0.3tn<br />
11/04 Mon 11:00 15:00 US Outright Treasury Coupon Purchase (2016 - 2018) USD 6.5-8.5bn<br />
12/04 Tue 12:00 03:00 Japan JGB 30-year 5 Apr JPY 0.7tn<br />
Neths DSLs 6 Apr EUR 3-4bn<br />
Denmark DGB 2% 15 Nov 2014 (new) DKK 5bn<br />
13:00 17:00 US Notes 3-year (new) 7 Apr USD 32bn<br />
13/04 Wed 11:00 09:00 Germany Bund 3.25% 4 Jul 2042 EUR 2bn<br />
10:30 09:30 Portugal OTs (To be confirmed) 7 Apr EUR 0.75-1.25bn<br />
13:00 17:00 US Notes 10-year 7 Apr USD 21bn<br />
14/04 Thu 12:00 03:00 Japan JGB 5-year 7 Apr JPY 2.4tn<br />
10:55 08:55 Italy 5-year BTP and possibly 15- or 30-year BTP 7 Apr EUR 5-7bn<br />
11:00 09:00 Sweden ILBs 7 Apr SEK 0.75bn<br />
13:00 17:00 US Bond 30-year 7 Apr USD 13bn<br />
18/04 Mon 12:00 10:00 Belgium OLOs 11 Apr EUR 2-3bn<br />
19/04 Tue 12:00 03:00 Japan Auction for Enhanced-liquidity 12 Apr JPY 0.3tn<br />
20/04 Wed 10:30 08:30 Spain Obligaciones 7 Apr EUR 3-4bn<br />
11:00 09:00 Germany OBL 8 Apr 2016 (Series 160) (new) EUR 6bn<br />
11:00 09:00 Sweden T-bonds 13 Apr SEK 2bn<br />
21/04 Thu 12:00 03:00 Japan JGB 20-year 14 Apr JPY 1.1tn<br />
10:50 08:50 France BTANs 2- &/or 5-year 15 Apr EUR 7-9bn<br />
11:50 09:50 France OATis , OATeis, BTANeis 15 Apr EUR 1.5-2bn<br />
Slovak Rep. SLOVGB 4% 27 Apr 2020 (#214)<br />
13:00 17:00 US TIPS 5-year (new) 14 Apr USD 12bn<br />
Sources: Treasuries, <strong>BNP</strong> Paribas<br />
Interest Rate Strategy 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
77<br />
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Next week's T-Bills Supply<br />
Date Country Issues Details<br />
25/03 UK T-Bills Apr 2011 GBP 1.5bn<br />
T-Bills Jun 2011<br />
GBP 1.5bn<br />
T-Bills Sep 2011<br />
GBP 1.5bn<br />
28/03 France BTF Jun 2011 EUR 3.5bn<br />
BTF Oct 2011<br />
EUR 2bn<br />
BTF Nov 2011<br />
EUR 1bn<br />
BTF Mar 2012<br />
EUR 1bn<br />
Italy BOT Sep 2011 EUR 8bn<br />
Germany Bubills Mar 2012 (new) EUR 3bn<br />
US T-Bills Jun 2011 USD 32bn<br />
T-Bills Sep 2011 (new) USD 30bn<br />
FHLMC Bills 3-month & 6-month 25 Mar<br />
29/03 Canada T-Bill Jul 2011 CAD 7.7bn<br />
T-Bill Sep 2011<br />
CAD 2.9bn<br />
T-Bill Mar 2012<br />
CAD 2.9bn<br />
US T-Bills 4-week 28 Mar<br />
FHLB Discount Notes<br />
30/03 Sweden T-Bills Sep 2011 SEK 10bn<br />
Denmark T-Bills 28 Mar<br />
FNMA Bills 3-month & 6-month 28 Mar<br />
31/03 FHLB Discount Notes<br />
01/04 Japan T-Bills 3-month 25 Mar<br />
UK T-Bills 25 Mar<br />
Sources: Treasuries, <strong>BNP</strong> Paribas<br />
Next week's Eurozone Redemptions<br />
Date Country Details Amount<br />
28/03 Belgium OLO 3.5% (OLO 53) EUR 6.2bn<br />
30/03 Greece GGB 5.35% EUR 0.2bn<br />
31/03 Italy CTZ EUR 11.6bn<br />
Total Eurozone Long-term Redemption<br />
EUR 18bn<br />
30/03 Germany Bubills EUR 6.0bn<br />
31/03 France BTF EUR 5.1bn<br />
31/03 Italy BOT (6m) EUR 9.1bn<br />
31/03 Neths DTC EUR 17.4bn<br />
31/03 Austria ATB (EU26) EUR 0.1bn<br />
Total Eurozone Short-term Redemption EUR 37.7bn<br />
25<br />
20<br />
Next week's Eurozone Coupons<br />
Country<br />
Italy<br />
Belgium<br />
Austria<br />
Greece<br />
Total Long-term Coupon Payments<br />
Chart 1: Investors’ Net Cash Flows<br />
(EUR bn, 10y equivalent)<br />
Amount<br />
EUR 0.1bn<br />
EUR 6.1bn<br />
EUR 0.1bn<br />
EUR 0.0bn<br />
EUR 6.3bn<br />
Net Investors' Cash Flows<br />
(EUR bn , 10y equivalent)<br />
15<br />
10<br />
5<br />
Comments and charts<br />
• EGB supply will remain below average in the week<br />
ahead as only Italy is scheduled to issue paper. We<br />
expect gross EGB supply to reach EUR 14bn (including<br />
CTZ) in the week ahead from EUR 10.5bn in the past<br />
week. In 10y duration adjusted terms, it will fall to EUR<br />
5.6bn from EUR 7bn in the past week.<br />
• Italy will kick off issuance with a tap of CTZ Dec-12<br />
on Monday for EUR 2.5bn. Then on Tuesday it will<br />
reopen index-linked BTPei Sep-16 for EUR 1.5-2bn.<br />
Finally, on Wednesday, it will launch a new 3y BTP Apr-<br />
14 and reopen CCT Oct-17 and BTP Sep-21 for a total<br />
expected amount of EUR 9-10bn.<br />
• Outside the eurozone, the US will issue USD 99bn<br />
of 2y, 5y and 7y notes and will carry on with its purchase<br />
programme. Canada will also repurchase (Cash<br />
Management) Bonds for CAD 1bn.<br />
0<br />
-5<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Week of Mar 21st Week of Mar 28th Week of Apr 4th Week of Apr 11th<br />
Chart 2: EGB Gross Supply Breakdown by<br />
Country (EUR bn, 10y equivalent)<br />
Germany Italy Portugal Belgium<br />
France Spain Netherlands Austria<br />
Finland Greece Ireland<br />
Week of Mar 21st Week of Mar 28th Week of Apr 4th Week of Apr 11th<br />
Chart 3: EGB Gross Supply Breakdown by<br />
Maturity (EUR bn, 10y equivalent)<br />
18<br />
16<br />
14<br />
12<br />
EGBs Gross Supply (EUR bn, 10y equivalent)<br />
2-3-YR 5-7-YR<br />
10-YR >10-YR<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Week of Mar 21st Week of Mar 28th Week of Apr 4th Week of Apr 11th<br />
All Charts Source: <strong>BNP</strong> Paribas<br />
Interest Rate Strategy 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
78<br />
www.GlobalMarkets.bnpparibas.com
Central Bank Watch<br />
Interest Rate<br />
EUROZONE<br />
Current<br />
Rate (%)<br />
Minimum Bid Rate 1.00<br />
US<br />
Fed Funds Rate 0 to 0.25<br />
Discount Rate 0.75<br />
JAPAN<br />
Call Rate 0 to 0.10<br />
Basic Loan Rate 0.30<br />
UK<br />
Bank Rate 0.5<br />
DENMARK<br />
Lending Rate 1.05<br />
SWEDEN<br />
Repo Rate 1.50<br />
NORWAY<br />
Sight Deposit Rate 2.00<br />
SWITZERLAND<br />
3 Mth LIBOR Target<br />
Range<br />
CANADA<br />
0.0-0.75<br />
Overnight Rate 1.00<br />
Bank Rate 1.25<br />
AUSTRALIA<br />
Cash Rate 4.75<br />
CHINA<br />
1Y Bank Lending<br />
Rate<br />
BRAZIL<br />
6.06<br />
Selic Overnight Rate 11.75<br />
Date of<br />
Last<br />
Change<br />
-25bp<br />
(7/5/09)<br />
-75bp<br />
(16/12/08)<br />
+25bp<br />
(18/2/10)<br />
-10bp<br />
(5/10/10)<br />
-20bp<br />
(19/12/08)<br />
-50bp<br />
(5/3/09)<br />
-10bp<br />
(14/1/10)<br />
+25bp<br />
(15/2/11)<br />
+25bp<br />
(5/5/10)<br />
-25bp<br />
(12/3/09)<br />
+25bp<br />
(8/9/10)<br />
+25bp<br />
(8/9/10)<br />
+25bp<br />
(2/11/10)<br />
+25bp<br />
(8/2/11)<br />
+50bp<br />
(2/3/11)<br />
Next Change in<br />
Coming 6 Months<br />
+25bp (7/4/11)<br />
No Change<br />
No Change<br />
No Change<br />
No Change<br />
+25bp<br />
(5/5/11)<br />
No Change<br />
+25bp<br />
(20/4/11)<br />
+25bp<br />
(12/5/11)<br />
No Change<br />
No Change<br />
No Change<br />
No Change<br />
+25bp<br />
(Mar 11)<br />
+50bp<br />
(20/4/11)<br />
Source: <strong>BNP</strong> Paribas<br />
For the full EMK Central Bank Watch, please see our Local Markets Mover.<br />
Comments<br />
The combination of recent speeches and macroeconomic news<br />
suggests the ECB is likely to deliver the rate hike that had been<br />
lined up for April at the previous meeting in early March.<br />
The FOMC is expected to maintain the funds rate at 0 to 0.25%<br />
until June 2012. It will execute its QE2 programme through H1<br />
2011; we no longer expect QE3.<br />
We expect the BoJ to continue to respond to the developments<br />
surrounding earthquake disaster by expanding liquidity.<br />
Events in Japan are likely to have reduced the upside skew to<br />
the BoE’s inflation projection. Hence the case for a hike as soon<br />
as May has weakened.<br />
Higher money market rates in the eurozone are likely to<br />
continue to put pressure on the krone. Thus, further increases in<br />
the interest rate on certificates of deposit are on the agenda.<br />
Strong domestic economic growth and higher inflationary<br />
pressures ahead should lead to further rate hikes. We expect<br />
the Riksbank to deliver the next hike at April’s meeting.<br />
The Norges Bank’s March statement had a hawkish tone,<br />
supporting our view that a rate hike will be delivered in Q2. We<br />
are looking for a hike in May, with a risk of it being delayed to<br />
June.<br />
The economy has continued to outperform despite the strong<br />
Franc, but the central bank remains very cautious about the<br />
exchange rate. We have no hike until Q3 but an ECB hike in Q2<br />
could give them room to move earlier.<br />
In light of developments in global financial markets, the US<br />
economic outlook, a strong CAD and low core inflation, the BoC<br />
is likely to pause to allow further progress in the recovery. Rate<br />
hikes should resume in 2012.<br />
The effective cash rate is moderately restrictive while financial<br />
and monetary conditions are outright tight. Below-trend growth<br />
is likely this year, especially given the impact of the Queensland<br />
floods. Underlying inflation is contained, albeit with upside risks.<br />
There is little need for further tightening in the near term.<br />
The latest rate hike points to policymakers’ hawkish view on<br />
inflation and asset bubbles. As CPI inflation is very likely to hit<br />
5.5% in Q1 and stay high for some months, we expect a further<br />
100bp in hikes to the benchmark rate in 2011.<br />
After being on hold since July 2010, the BCB hiked 50bp in<br />
January 2011 and again in March 2011. In light of a worrisome<br />
inflation picture, the monetary authority is likely to continue<br />
tightening policy in coming months.<br />
Change since our last weekly in bold and italics<br />
Market Economics 24 March 2011<br />
Market Mover<br />
79<br />
www.GlobalMarkets.bnpparibas.com
FX Forecasts*<br />
USD Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
EUR/USD 1.41 1.45 1.46 1.40 1.37 1.33 1.30 1.29 1.33 1.34 1.35<br />
USD/JPY 83 84 86 92 93 98 102 105 119 118 116<br />
USD/CHF 0.93 0.94 0.96 0.98 0.99 1.02 1.06 1.09 1.06 1.07 1.07<br />
GBP/USD 1.62 1.65 1.62 1.52 1.51 1.48 1.46 1.48 1.66 1.70 1.73<br />
USD/CAD 0.95 0.96 0.93 0.95 0.98 1.00 1.05 1.09 1.11 1.14 1.16<br />
AUD/USD 1.02 0.99 0.92 0.93 0.92 0.93 0.92 0.90 0.87 0.85 0.83<br />
NZD/USD 0.79 0.78 0.74 0.73 0.72 0.69 0.67 0.66 0.64 0.62 0.60<br />
USD/SEK 6.24 6.00 5.89 6.07 6.28 6.54 6.69 6.74 6.99 6.94 6.96<br />
USD/NOK 5.53 5.17 5.00 5.14 5.40 5.64 5.85 5.81 5.49 5.30 5.19<br />
EUR Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
EUR/JPY 117 122 126 129 127 130 133 135 158 158 157<br />
EUR/GBP 0.87 0.88 0.90 0.92 0.91 0.90 0.89 0.87 0.80 0.79 0.78<br />
EUR/CHF 1.31 1.36 1.40 1.37 1.35 1.36 1.38 1.40 1.41 1.44 1.44<br />
EUR/SEK 8.80 8.70 8.60 8.50 8.60 8.70 8.70 8.70 9.30 9.30 9.40<br />
EUR/NOK 7.80 7.50 7.30 7.20 7.40 7.50 7.60 7.50 7.30 7.10 7.00<br />
EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46<br />
Central Europe Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
USD/PLN 2.77 2.72 2.67 2.71 2.85 2.89 2.92 2.91 2.78 2.69 2.74<br />
EUR/CZK 24.7 24.5 24.3 24.5 24.1 23.9 23.8 23.5 23.7 24.0 23.5<br />
EUR/HUF 275 280 275 275 269 265 265 260 260 255 260<br />
USD/ZAR 7.00 6.90 6.80 7.15 7.30 7.25 7.25 7.40 7.20 7.10 7.00<br />
USD/TRY 1.59 1.54 1.46 1.52 1.58 1.64 1.62 1.60 1.59 1.59 1.56<br />
EUR/RON 4.15 4.05 4.20 4.15 4.20 4.15 4.10 4.05 4.20 4.20 4.10<br />
USD/RUB 27.69 27.03 27.34 28.22 28.72 28.30 28.63 28.31 27.86 27.32 28.51<br />
EUR/PLN 3.90 3.95 3.90 3.80 3.90 3.85 3.80 3.75 3.70 3.60 3.70<br />
USD/UAH 7.9 7.9 7.8 7.8 7.5 7.5 7.5 7.5 7.5 7.5 7.5<br />
EUR/RSD 105 115 105 100 98 97 96 95 93 92 91<br />
Asia Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
USD/SGD 1.25 1.23 1.22 1.21 1.21 1.20 1.19 1.18 1.17 1.16 1.15<br />
USD/MYR 3.03 3.00 2.95 2.90 2.87 2.85 2.83 2.80 2.77 2.75 2.73<br />
USD/IDR 8800 8600 8500 8400 8300 8200 8100 8000 7900 7800 7800<br />
USD/THB 30.50 30.00 29.80 29.50 29.30 29.00 28.70 28.50 28.30 28.00 28.00<br />
USD/PHP 43.00 42.50 42.00 41.50 41.00 40.50 40.00 39.50 39.00 39.00 39.00<br />
USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80<br />
USD/RMB 6.53 6.50 6.47 6.45 6.40 6.35 6.30 6.26 6.23 6.20 6.17<br />
USD/TWD 28.70 28.00 27.70 27.30 27.00 26.70 26.50 26.00 26.00 26.00 26.00<br />
USD/KRW 1100 1070 1060 1050 1040 1030 1020 1010 1000 1000 1000<br />
USD/INR 45.50 46.00 45.50 45.00 44.50 44.00 43.50 43.00 43.00 42.50 42.50<br />
USD/VND 20500 20500 22550 22550 22550 22500 22500 22500 22500 22500 22500<br />
LATAM Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
USD/ARS 4.03 4.06 4.12 4.20 4.28 4.35 4.42 4.50 4.60 4.70 4.80<br />
USD/BRL 1.66 1.64 1.63 1.60 1.61 1.63 1.65 1.65 1.66 1.67 1.68<br />
USD/CLP 490 440 450 460 463 468 472 475 473 475 478<br />
USD/MXN 11.90 11.70 11.45 11.30 11.30 11.45 11.55 11.75 11.85 11.95 12.00<br />
USD/COP 1900 1875 1845 1870 1840 1800 1780 1760 1770 1780 1790<br />
USD/VEF 4.29 4.29 4.29 4.29 4.29 4.29 4.29 4.29 8.80 8.80 8.80<br />
USD/PEN 2.76 2.73 2.68 2.67 2.70 2.70 2.71 2.72 2.73 2.74 2.75<br />
Others Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13<br />
USD Index 75.95 74.68 74.55 77.97 79.53 82.06 84.28 85.22 84.22 83.77 83.14<br />
*End Quarter<br />
(1) Following the devaluation of the VEF, there is now an official ‘priority’ exchange rate and a so-called ‘oil’ exchange rate used for certain transactions<br />
Source: <strong>BNP</strong> Paribas<br />
Foreign Exchange Strategy 24 March 2011<br />
Market Mover, Non-Objective Research Section<br />
80<br />
www.GlobalMarkets.bnpparibas.com
Market Coverage<br />
Market Economics<br />
Paul Mortimer-Lee Global Head of Market Economics London 44 20 7595 8551 paul.mortimer-lee@uk.bnpparibas.com<br />
Ken Wattret Chief Eurozone Market Economist London 44 20 7595 8657 kenneth.wattret@uk.bnpparibas.com<br />
Luigi Speranza Head of Inflation Economics, Eurozone, Italy London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.com<br />
Alan Clarke UK London 44 20 7595 8476 alan.clarke@uk.bnpparibas.com<br />
Eoin O’Callaghan Inflation, Eurozone, Switzerland, Ireland London 44 20 7595 8226 eoin.ocallaghan@uk.bnpparibas.com<br />
Gizem Kara Scandinavia London 44 20 7595 8783 gizem.kara@uk.bnpparibas.com<br />
Dominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.com<br />
Julia Coronado Chief US Economist New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.com<br />
Yelena Shulyatyeva US, Canada New York 1 212 841 2258 yelena.shulyatyeva@americas.bnpparibas.com<br />
Bricklin Dwyer US, Canada New York 1 212 471-7996 bricklin.dwyer@americas.bnpparibas.com<br />
Ryutaro Kono Chief Economist Japan Tokyo 81 3 6377 1601 ryutaro.kono@japan.bnpparibas.com<br />
Hiroshi Shiraishi Japan Tokyo 81 3 6377 1602 hiroshi.shiraishi@japan.bnpparibas.com<br />
Azusa Kato Japan Tokyo 81 3 6377 1603 azusa.kato@japan.bnpparibas.com<br />
Makiko Fukuda Japan Tokyo 81 3 6377 1605 makiko.fukuda@japan.bnpparibas.com<br />
Richard Iley Head of Asia Economics Hong Kong 852 2108 5104 richard.iley@asia.bnpparibas.com<br />
Dominic Bryant Asia, Australia Hong Kong 852 2108 5105 dominic.bryant@asia.bnpparibas.com<br />
Mole Hau Asia Hong Kong 852 2108 5620 mole.hau@asia.bnpparibas.com<br />
Xingdong Chen Chief China Economist Beijing 86 10 6561 1118 xd.chen@asia.bnpparibas.com<br />
Isaac Y Meng China Beijing 86 10 6561 1118 isaac.y.meng@asia.bnpparibas.com<br />
Chan Kok Peng Chief Economist South East Asia Singapore 65 6210 1946 kokpeng.chan@asia.bnpparibas.com<br />
Marcelo Carvalho Head of Latin American Economics São Paulo 55 11 3841 3418 marcelo.carvalho@br.bnpparibas.com<br />
Italo Lombardi Latin America New York 1 212 841 6599 italo.lombardi@americas.bnpparibas.com<br />
Nader Nazmi Latin America New York 1 212 471 8216 nader.nazmi@us.bnpparibas.com<br />
Florencia Vazquez Latin American Economist Buenos Aires 54 11 4875 4363 florencia.vazquez@ar.bnpparibas.com<br />
Michal Dybula Central & Eastern Europe Warsaw 48 22 697 2354 michal.dybula@pl.bnpparibas.com<br />
Julia Tsepliaeva Russia & CIS Moscow 74 95 785 6022 julia.tsepliaeva@ru.bnpparibas.com<br />
Interest Rate Strategy<br />
Cyril Beuzit Global Head of Interest Rate Strategy London 44 20 7595 8639 cyril.beuzit@uk.bnpparibas.com<br />
Patrick Jacq Europe Strategist Paris 33 1 4316 9718 patrick.jacq@bnpparibas.com<br />
Hervé Cros Chief Inflation Strategist London 44 20 7595 8419 herve.cros@uk.bnpparibas.com<br />
Shahid Ladha Inflation Strategist London 44 20 7 595 8573 shahid.ladha@uk.bnpparibas.com<br />
Alessandro Tentori Chief Alpha Strategy Europe London 44 20 7595 8238 alessandro.tentori@uk.bnpparibas.com<br />
Eric Oynoyan Europe Alpha Strategist London 44 20 7595 8613 eric.oynoyan@uk.bnpparibas.com<br />
Matteo Regesta Europe Alpha Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.com<br />
Ioannis Sokos Europe Alpha Strategist London 44 20 7595 8671 ioannis.sokos@uk.bnpparibas.com<br />
Camille de Courcel Europe Alpha Strategist London 44 20 7595 8295 camille.decourcel@uk.bnpparibas.com<br />
Bülent Baygün Head of Interest Rate Strategy US New York 1 212 471 8043 bulent.baygun@americas.bnpparibas.com<br />
Mary-Beth Fisher US Senior Strategist New York 1 212 841 2912 mary-beth.fisher@us.bnpparibas.com<br />
Sergey Bondarchuk US Strategist New York 1 212 841 2026 sergey.bondarchuk@americas.bnpparibas.com<br />
Suvrat Prakash US Strategist New York 1 917 472 4374 suvrat.prakash@americas.bnpparibas.com<br />
Rohit Garg US Strategist New York 1212 841 3937 rohit.k.garg@americas.bnpparibas.com<br />
Anish Lohokare MBS Strategist New York 1 212 841 2867 anish.lohokare@americas.bnpparibas.com<br />
Olurotimi Ajibola MBS Strategist New York 1 212 8413831 olurotimi.ajibola@americas.bnpparibas.com<br />
Koji Shimamoto Head of Interest Rate Strategy Japan Tokyo 81 3 6377 1700 koji.shimamoto@japan.bnpparibas.com<br />
Tomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1703 Tomohisa.fujiki@japan.bnpparibas.com<br />
Masahiro Kikuchi Japan Strategist Tokyo 81 3 6377 1703 masahiro.kikuchi@japan.bnpparibas.com<br />
Christian Séné Technical Analyst Paris 33 1 4316 9717 christian.séné@bnpparibas.com<br />
FX Strategy<br />
Hans Redeker Global Head of FX Strategy London 44 20 7595 8086 hans-guenter.redeker@uk.bnpparibas.com<br />
Ian Stannard FX Strategist London 44 20 7595 8086 ian.stannard@uk.bnpparibas.com<br />
James Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.com<br />
Kiran Kowshik FX Strategist London 44 20 7595 1495 kiran.kowshik@bnpparibas.com<br />
Ray Attrill FX Strategist New York 1 212 841 2492 raymond.attrill@us.bnpparibas.com<br />
Mary Nicola FX Strategist New York 1 212 841 2492 mary.nicola@americas.bnpparibas.com<br />
Andy Chaveriat Technical Analyst New York 1 212 841 2408 andrew.chaveriat@americas.bnpparibas.com<br />
Local Markets FX & Interest Rate Strategy<br />
Drew Brick Head of FX & IR Strategy Asia Singapore 65 6210 3262 Drew.brick@asia.bnpparibas.com<br />
Chin Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 chin.thio@asia.bnpparibas.com<br />
Robert Ryan FX & IR Asia Strategist Singapore 65 6210 3314 robert.ryan@asia.bnpparibas.com<br />
Jasmine Poh FX & IR Asia Strategist Singapore 65 6210 3418 jasmine.j.poh@asia.bnpparibas.com<br />
Gao Qi FX & IR Asia Strategist Shanghai 86 21 2896 2876 gao.qi@asia.bnpparibas.com<br />
Bartosz Pawlowski Head of FX & IR Strategy CEEMEA London 44 20 7595 8195 Bartosz.pawlowski@uk.bnpparibas.com<br />
Elisabeth Gruié FX & IR CEEMEA Strategist London 44 20 7595 8492 elisabeth.gruie@uk.bnpparibas.com<br />
Dina Ahmad FX & IR CEEMEA Strategist London 44 20 7 595 8620 dina.ahmad@uk.bnpparibas.com<br />
Erkin Isik FX & IR CEEMEA Strategist Istanbul 90 (216) 635 29 87 erkin.isik@teb.com.tr<br />
Raffaele Semonella EMEA Corporates Analyst London 44 20 7 595 8813 raffaele.semonella@uk.bnpparibas.com<br />
Diego Donadio FX & IR Latin America Strategist São Paulo 55 11 3841 3421 diego.donadio@@br.bnpparibas.com<br />
81
For Production and Distribution, please contact:<br />
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