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Higher energy prices pushing up inflation After consistently surprising the Norges Bank to the downside over the previous couple of months, CPI- ATE inflation at 1.0% y/y in December was in line with the Bank’s expectations. However, higher electricity prices due to cold weather led to a significant upward surprise in headline inflation. Higher energy prices are likely to lead the Norges Bank to raise its headline inflation forecasts in its Monetary Policy Report in March. In terms of core, CPI-ATE, inflation, we expect it to start to pick up this year as the improving labour market leads to a strengthening of both demand and wages. The appreciation of the Norwegian krone, however, suggests some downside risk to inflation. Overall, core inflation should remain below the Norges Bank’s target of 2.5% throughout the year. Source: Reuters EcoWin Pro Chart 4: CPI & CPI-ATE (% y/y) Chart 5: Import-Weighted NOK Policy decision Given the key policy rate is still low compared to what the neutral rate should be in Norway, we expect rate hikes. However, we believe the Norges Bank will keep the policy rate at 2.00% at its meeting next week. We expect the next hike to come in Q2. But, given the hawkish statement in December, we noted that we might see an upward revision to the Norges Bank’s rate projections at its March meeting. Recent domestic developments, which suggest a pick-up in growth in the quarters ahead, support this view. Overall, we believe the risk of rate hike in Q1 has increased. However, developments in the coming months will still be key for the timing of the hike. With policy rates generally expected to remain low for some time in the main advanced economies, the Norges Bank will not want to deviate too much from other advanced country central banks in terms of policy rates. Appreciation of the domestic currency due to higher rate differentials would not be welcomed by the Norges Bank. Since end-November, the importweighted NOK has appreciated by around 3%. Developments since the start of the year suggest the appreciation in January will also surprise the Norges Bank to the upside. As a stronger currency would bring downside risks to inflation and hurt export industries, the Norges Bank will probably wait to deliver a rate hike if the currency continues to appreciate in the coming months. Source: Reuters EcoWin Pro On the other hand, high house prices, robust credit growth and the increase in household spending are other issues the Norges Bank will be looking at. As these had been mentioned in the previous policy statement, the Norges Bank will likely remain cautious about the risk of financial imbalances building up in the economy. Overall, if we do not see a significant appreciation in the currency, economic data continue to surprise to the upside relative to the Norges Bank’s forecasts and house prices increase markedly, the Bank is likely to deliver a rate hike in Q1. But if the krone appreciates significantly and still-acute tensions in financial markets intensify, the Bank will wait until Q2 to strike. Gizem Kara 20 January 2011 Market Mover 26 www.GlobalMarkets.bnpparibas.com
Japan: New Cabinet and Policy Outlook • Prime Minster Kan has reshuffled his cabinet to avert an opposition boycott of parliament. But with all parties gearing up for the local elections in April, the going promises to be tough for the 2011 budget and budgetrelated bills. • That said, Kan’s tenure could prove long, given that no national elections are due until 2013. Because it is politically damaging for the opposition to keep on blocking bills and be seen as the cause of political paralysis, policy cooperation on specific issues seems likely once the April local elections are over. • The policies most likely to garner supraparty support are (1) comprehensive social security/tax reform and (2) “opening Japan” (Trans-Pacific Partnership participation). • The appointment of Kaoru Yosano as the point man on social security/tax reform should help reconcile the ideas of the opposition and ruling camps. • Opening up Japan and TPP participation, however, face strong opposition from factions in both the DPJ and LDP. Headway on this issue may be blocked or could trigger political realignment. More “crises” down the road? Prime Minster Kan reshuffled his cabinet and the DPJ leadership on 14 January. With the opposition threatening to boycott the regular session of parliament set to convene on 24 January unless Chief Cabinet Secretary Sengoku and Land Minister Mabuchi were replaced (they had been censured by the opposition-controlled Upper House), the sacking of both allowed Kan to avert a “January crisis” (opposition boycott of parliament). But now the new government faces even bigger challenges as it lacks the two-thirds majority in the Lower House needed to override bills rejected by the Upper House (it is seven seats short). With the opposition gearing up to fight the ruling coalition in the unified nationwide local elections slated for April, the going promises to be rough for the 2011 budget and budget-related bills. These are being dubbed by pundits the “March crisis” and “April crisis”, respectively. We expect there will be a good deal of negotiating with the opposition before the budget and budgetrelated bills are submitted to the Diet. Negotiating on the specifics of any legislation is certainly constructive. However, political manoeuvring and grandstanding over how the Diet’s daily agenda is set could provoke public disgust at the procedural games parliamentarians play. Incidentally, the government has let it be known that it is open to amending the budget in parliament, something that would be epoch-making in its own right. Bigger test will be budget-related bills The government, by virtue of its majority in the Lower House, can secure passage of the budget without Upper House approval. Under the constitution, the budget is automatically enacted 30 days after approval by the Lower House, regardless of what the Upper House does. But the same rules do not apply to budget-related bills. If rejected by the Upper House, these will require some degree of cooperation from opposition lawmakers in the Lower House to achieve the twothirds majority needed for an override vote. While this process can be time-consuming, this time around there are no budget-related bills on tap that could cause the kind of confusion witnessed at the gas pumps in 2008. At that time, the provisional surcharge tax on gasoline could not be renewed on time due to the divided Diet. This led to the tax momentarily expiring, lowering gasoline prices, only to be reinstated one month later. In any event, even if the public is inconvenienced by the failure to promptly enact budget-related bills, most such bills are applied retroactively when they are eventually passed. A prime concern for market participants is a special law enacted each year that controls deficit-financing bonds. While failure to re-enact this legislation by 1 April would not trigger chaos, government cash flow could be seriously impaired if the legislation is put on hold indefinitely. Increasing cooperation, once April’s election are over Ultimately, we expect the opposition New Komeito party to be won over to support budget-related bills, just as it was convinced to support the supplementary budget last year. Of course, in the run-up to the April elections, it is very likely that New Ryutaro Kono/ Azusa Kato 20 January 2011 Market Mover 27 www.GlobalMarkets.bnpparibas.com
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Page 31 and 32: US/EUR Spreads: Further Tightening
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Page 37 and 38: ange bound, as we expect, given tha
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Page 41 and 42: EMU Debt Monitor: Trade Ideas • K
Page 43 and 44: EMU Debt Monitor: CDS Analysis Char
Page 45 and 46: EMU Debt Monitor: Redemptions • O
Page 47 and 48: EUR: Buy 3m5y Straddle vs 3m10y Str
Page 49 and 50: Global Inflation Watch Eurozone HIC
Page 51 and 52: Table 2: BNP Paribas' Inflation For
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Page 55 and 56: Pricing Date Repo Rate Sett. Date T
Page 57 and 58: Germany 10y: MT 61.8% (3.12) break
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Page 61 and 62: Capitalism requires business cycles
Page 63 and 64: EURUSD Rally Eyes 1.3750-1.3950 •
Page 65 and 66: Currency Spot Trade Recommendations
Page 67 and 68: than an unrelenting rise in prices
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Page 71 and 72: Key Data Preview 120 115 110 105 10
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Key Data Preview 3 2 1 0 -1 Chart 1
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Economic Calendar: 31 Jan - 25 Feb
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Next Week's T-Bills Supply Date Cou
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Economic Forecasts GDP Year 2010 20
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Market Coverage Market Economics Pa
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