Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Market Economics | Interest Rate Strategy | Forex Strategy 13 January 2011 

Market Mover 

Market Outlook 2-3 

Fundamentals 4-24 

• US Employment: There is No Santa 4-6 

Claus 

• ECB: Warning Shot 7-8 

• Germany: Stronger for Longer 9-12 

• France: Slippery Forecast for Q4 13-14 

GDP 

• Japan: PM Sets Out Two Key 15-18 

Challenges 

• Japan: Estimating Q4 GDP Growth 19-20 

• China: 2010 Money Growth Exceeds 21-22 

Target 

• Brazil: Inflation Calls for Bold Policy 23-24 

Action 

Interest Rate Strategy 25-52 

• US: Where to Allocate Money in 25-27 

Rates 

• US: Treasury Curve and Fly 28-29 

Opportunities 

• EUR: Liquidity is Not a Worry for the 30 

ECB 

• EUR Swap Spreads: Summary of 31 

Forces 

• EUR: Colour On the Cross-Ccy 32 

Basis 

• EMU Debt Monitor: Trade Ideas, 33-39 

CDS, RV Charts, Redemptions, SSA 

& Covered Bonds 

• GBP: Tap of Gilt 4.25% 2036 40 

• JGBs: Demons’ Gate in Q2 41 

• Global Inflation Watch 42-45 

• Inflation: High BEs Ahead of Supply 46 

• USDi: 10y TIPS Auction Preview 47-49 

• Technical Analysis 50-51 

• Trade Reviews 52 

FX Strategy 53-58 

• AUD: The Wrong Kind of Liquidity 53-55 

• Technical Strategy: EURUSD 56-57 

Rebounds Swiftly 

• Trading Positions 58 

Forecasts & Calendars 59-73 

• 1 Week Economic Calendar 59-60 

• Key Data Preview 61-67 

• 4 Week Calendar 68 

• Treasury & SAS Issuance 69-70 

• Central Bank Watch 71 

• Economic & Interest Rate Forecasts 72 

• FX Forecasts 73 

Contacts 74 

www.GlobalMarkets.bnpparibas.com 

• There was good news and bad news in Europe this week. 

The Portuguese auction went smoothly and there were signs of 

a more supportive and coherent long-term approach to fiscal 

stresses in the eurozone as a whole. 

• The bad news was that Trichet changed tone on inflation. Is 

this to help calm the risks of inflation expectations moving up or 

is it a true precursor to an earlier rate move? The market will 

price in the latter. 

• Inflation concerns in the US are more on the downside and 

we expect the core CPI to show a rise of only 0.6% y/y. That 

could help Treasuries, especially once the 30y auction is out of 

the way. 

• US retail sales and industrial production next week should 

be solid. Michigan sentiment may slip a tad. 

• A more hawkish ECB and higher inflation will limit any gains 

on bonds in Europe, and we could see further flattening. 

• JGBs look range bound and will take their cue from the US 

and Europe. A cabinet reshuffle is in the works. 

• UK CPI inflation on Tuesday should move up to 3.6% y/y for 

December (before the VAT rise), fuelling more speculation that 

the BoE will be first in to bat on rate hikes, followed by the ECB, 

with the Fed at the tail. EUR/USD and GBP/USD have reflected 

that in recent trading. 

• German ZEW and Ifo data next week will underline that this 

is boom time for the German economy. Together with a bit of 

pressure coming off the peripherals and a hawkish ECB, this 

means that the EUR should strengthen over the week ahead. 

Market Views 

Current 1 Week 1 Month 

UST 10y T-note Yield (%) 3.33% ↔ ↓ 

2y/10y Spread (bp) 275bp ↔ ↓ 

EGB 10y Bund Yield (%) 3.04% ↔↓ ↓ 

2y/10y Spread (bp) 193.4bp ↔↓ ↓ 

JGB 10y JGB Yield (%) 1.190% ↔ ↔ 

2y/10y Spread (bp) 101.0bp ↔ ↔ 

Forex EUR/USD 1.3372 ↑ ↓ 

USD/JPY 82.71 ↓ ↑ 

IMPORTANT NOTICE. Please refer to important disclosures found at the end of 

this report. Some sections of this report have been written by our strategy teams 

(shown in blue). Such reports do not purport to be an exhaustive analysis and may 

be subject to conflicts of interest resulting from their interaction with sales and 

trading which could affect the objectivity of this report.

Market Outlook 

The major developments in advanced country bond markets have centred 

on the eurozone, where peripheral tensions remain and where Trichet has 

taken a more hawkish tone. 

Portugal’s tensions 

probably not over 

A more holistic solution 

will come in the eurozone, 

but when? 

The European authorities seem to have realised that the piecemeal 

approach to dealing with the crisis in the peripherals is not working and 

something more holistic is required. While Portugal‘s auctions went well this 

week, the underlying pressure remains. With a current account deficit of 

almost 10% of GDP last year, domestic savings are insufficient to meet the 

Portuguese government’s financing needs. Hence, there is a need for 

inflows from nervy foreigners. Despite the auction, market belief in Portugal’s 

ability to evade the EFSF remains weak. If uncertainty about Portugal 

increases then there will be spillovers to Spain and Belgium. If Portugal does 

go into the EFSF, the “who’s next?” mentality will affect them also. 

Hence the talk of increasing the EFSF’s resources (which it would only need 

if the strains went beyond Portugal) and remit, perhaps to buy existing bonds 

also. We welcome this. The European crisis could in theory result in 

integration or disintegration. We have always been in the former camp and it 

seems that we are edging towards that. However, the path will not be 

smooth. More funds for support means more conditionality and, for 

borrowers, less national fiscal (and therefore political) sovereignty. What are 

the modalities of that and how is the national political will for that to be 

mobilised? Maybe only through repeated crises. Thus, while this week’s 

news has been more positive, we are far from out of the woods. 

When we do see a more comprehensive and coherent framework, it will not 

be good news for core bonds: a) the flight-to-quality bid will be reduced; b) 

Germany’s prospective fiscal burdens will rise; and c) there will be one less 

restraint on the ECB as regards unconventional measures and rates. 

Trichet’s inflation concerns 

increase 

Trichet’s stance in the press conference was surprisingly hawkish given the 

context of stress in the periphery. The emphasis was on inflation and shows 

clearly that the ECB’s risk assessment on inflation is shifting, reflecting 

higher global prices and upward surprises to activity (see Brazil focus for an 

illustration of why EM inflation is becoming troublesome). His comment that 

the ECB is never pre-committed not to raise rates when inflation looks set to 

rise in the immediate months ahead can only be seen as hawkish. Further, it 

stands in contrast to the Fed’s undertaking to keep rates exceptionally low 

for an “extended period”. This suggests quite clearly that the ECB will move 

rates higher sooner than the Fed, as EUR/USD was not slow to price, the 

reason for that being very different inflation assessments. It is likely in the 

period ahead that the market will price in more and earlier ECB tightening. 

While we see an important obstacle to that being likely peripheral tensions, it 

is clear which way the market wind is blowing. 

In the bond markets, the negative tone could lose momentum, especially in 

the US, after this week's auctions. Statistically, there is a decent bias for 

Treasuries to richen in the days following the 30y auction, perhaps because 

the auction set-up process is over. However, near-term momentum could 

still be driven by events in Europe. 

Fed to buy more than 

expected this month 

The Fed announced the QE2 buyback schedule for the coming month, and 

the size of USD 112bn was higher than most street estimates of around 

Paul Mortimer-Lee 13 January 2011 

Market Mover 2 www.GlobalMarkets.bnpparibas.com

USD 105bn. This could give an extra bid to the market. Additionally, 

upcoming core CPI data will be soft, which may help Treasuries. 

Peripherals to remain 

under scrutiny 

The peripherals will remain under scrutiny. Portugal’s bond auctions went 

well, but demand was boosted by recent ECB purchases. The decision 

whether or not to go to the EFSF remains open. The size and scope of the 

EFSF is unsure and thus risk appetite is set to remain a key driving force. 

Given illiquid conditions in some peripheral markets, movements in yields 

can be huge, keeping a strong bid for less volatile paper. 

The rise in inflation in Europe will bear on yields, especially at the long end. 

The market’s reassessment of ECB policy may extend bearish pressures at 

the front end slightly. This could go along with a flatter bond market curve, 

especially on swaps. As long as peripheral markets remain exposed to 

selling pressures, the 2y Schatz will offer resistance. 

JGBs are range bound 

The JGB market remains range bound, with inflows from cashed-up banks 

helping to make up for a dearth of obvious buying incentives. Market 

participants will probably continue to take their direction from interest-rate 

movements in the US and Europe for the time being. Volatility declined 

towards the end of 2010 after spiking sharply higher from November 

onwards, but rose once again early in 2011; the market's overall direction 

appears to be the main driver. Volatility remains relatively high despite some 

declines over the past few days, suggesting that market participants remain 

concerned by the risk of a surge in yen interest rates. However, we believe 

that realised volatility is now on a downtrend given that the JGB market 

appears to have settled into a new range. We therefore recommend selling 

strangles in the gamma sector. 

Japan's political outlook remains uncertain, with a cabinet reshuffle expected 

as early as tomorrow (14 January). JGB market participants will be awaiting 

word of fiscal rebuilding plans, including a hike in the consumption tax rate. 

Upcoming data: look for a 

soft core US CPI 

In terms of upcoming data, we kick off with the US CPI. A hefty rise in 

gasoline prices should push up the headline rate from 1.2% y/y in November 

to 1.4%. However, we expect the core inflation rate to slip back to its low of 

0.6% y/y. Higher gasoline prices should also boost retail sales, which we 

expect to rise by 1.1% m/m on a strong holiday shopping season and 2% 

rise in auto sales. We expect January Michigan sentiment to edge down a 

tad after surging the previous month. Industrial production is expected to 

register a decent 0.5% m/m rise in December, after gaining 0.4% in 

November. 

In Europe, we final eurozone HICP figure for December, should confirm the 

flash 2.2% y/y headline figure. As in the US, energy will have played an 

important role, with food also chipping in. Our forecast for the 2011 average 

is 1.8%, above the consensus of 1.6%. If recent surges in oil and food prices 

were to be maintained, that would take our forecast for the year to just over 

2%. UK CPI inflation is expected to rise by 0.3 percentage points to 3.6% y/y 

in December (with a VAT rise in January likely to push it close to 4%). 

Boom time for German 

data 

In terms of activity data, economic strength in Germany will in focus next 

week. The ZEW index on Tuesday is expected to show a further rise in 

current conditions, already close to previous highs and expectations should 

also improve. The Ifo index next Friday should see a further rise in the 

composite measure from levels in December that were already the highest 

since unification. While the improvement in the Ifo index was originally led by 

the export sector, domestic demand is increasingly taking up the baton. 

Paul Mortimer-Lee 13 January 2011 

Market Mover 3 www.GlobalMarkets.bnpparibas.com

US Employment: There is No Santa Claus 

• The December employment report 

disappointed expectations for an acceleration in 

job creation. It also highlighted that the US 

economy continues to face a number of 

headwinds on hiring. 

Chart 1: Initial Jobless Claims Have Been Out of 

Step 

• The unemployment rate dropped sharply, 

partly owing to a decline in labour force 

participation. The ongoing decline in labour 

force engagement raises important questions 

about economic slack and the potential growth 

rate. 

• The report serves as a vindication of the 

Fed’s cautious outlook and easy policy stance. 

The employment report came in weaker than 

expected again in December. Only 103k jobs were 

created after an upward-revised 71k gain in 

November. The reading yet again confirms that 

seasonal issues are distorting initial claims data, 

making them a less reliable indicator than in the past. 

Over the past three months, private sector job 

creation has been 128k, roughly in line with where it 

was through much of 2010. 

While the unemployment rate dropped sharply, to 

9.4% from 9.8%, half of the decline owed to a fall in 

the participation rate from 64.6% to 64.4%, the 

lowest since the early 1980s. Some of this owes to 

the ageing of the baby boom generation. However, 

all age groups saw a decline, suggesting it is also a 

sign of poor hiring conditions. 

The report is not a train wreck as it confirms the 

labour force is generating modest wage and salary 

growth that will keep consumer spending reasonably 

stable. However, it calls into question the notion that 

economic activity in the US is set to accelerate 

sharply. 

The report served as a vindication of Fed policy as 

Chairman Bernanke recently highlighted before 

Congress that “progress toward the Fed’s mandates 

of maximum employment and stable prices is 

expected to remain slow”. The Fed has continued to 

highlight ongoing risks to the economy in the form of 

weakness in housing and the fiscal woes facing state 

and local governments. These themes also featured 

prominently in the employment report; state and local 

governments reduced their workforce by 250k in 

2010 and the construction industry shed 93k jobs. 

Source: Reuters EcoWin Pro 

Chart 2: Hiring has Been Steady rather than 

Accelerating 


It is also of concern that the jobs being created in 

recent months would appear to be lower paying. For 

example, over the first six months of 2010, 3.9mn 

full-time jobs were created while 2.1mn part-time jobs 

disappeared. This suggests a healthy rotation into 

full-time work that signalled recovering business 

confidence. 

Over the last six months of the year, however, the 

pattern reversed. Some 1.9mn part-time jobs were 

created while 2.6mn full-time jobs were eliminated. 

The number is a net negative owing to the fact that 

they come from the household survey, which has 

shown much weaker job growth in recent months. 

Perhaps this pattern is a lagged result of the 

concerns caused by the European fiscal crisis and 

the soft patch in the US, and is therefore set to 

reverse. A perking up in small business intentions to 

Julia Coronado 13 January 2011 


4 

www.GlobalMarkets.bnpparibas.com

hire and a pick-up in consumer spending are some 

reasons for optimism. 

We are in a period of difficult seasonal 

adjustment, resulting in mixed signals on the 

labour market 

A number of labour market indicators have given 

strong positive signals of late. Initial jobless claims 

have dropped steadily over the past two months and 

the ADP employment report, which had been underpredicting 

private payrolls through most of 2010, 

predicted a 297k gain in December. The winter is a 

period of rising jobless claims on a non-seasonally 

adjusted basis owing in large part to layoffs in the 

construction industry. The sector is prominent in the 

ADP report but a relatively small component of the 

employment report. 

For some time, we have been worrying that the 

decimation and stagnation in the construction 

industry meant that the seasonal factors in the claims 

data would overestimate the magnitude of seasonal 

layoffs. The November and December employment 

reports seem to confirm that suspicion. 

The employment indices from the ISM surveys also 

match the pattern in the employment report. The 

manufacturing employment index has declined in 

recent months in line with manufacturing payrolls and 

the non-manufacturing index has shown modest 

improvement on balance, as have service-sector 

payrolls. 

Another corroborating factor is a measure from the 

household survey (see Chart 1) that, like claims, 

measures the flow of workers from employment into 

unemployment. This has been choppy but little 

improved on balance in recent months, in contrast to 

the sharp downtrend in jobless claims. 

The participation rate has been drifting lower in 

recent months, putting downward pressure on 

the unemployment rate 

The surprise drop in the unemployment rate was 

driven by both the decline in labour force 

participation and the fact that the household survey 

showed robust hiring. The household survey hiring 

numbers are more volatile than the payroll figures 

from the establishment survey. On balance, the 

household survey has showed much weaker hiring in 

the past three to six months, so we do not put much 

weight on the December surge. 

The decline in the participation rate raises deeper 

questions about whether the unemployment rate will 

be driven lower in coming years by strong job growth 

or a shrinking workforce. The participation rate has 

dropped 1.7pp over the past three years. The key 

Chart 3: The Unemployment and Participation 

Rates Declined 


Chart 4: Wage and Salary Growth Continues at 

a Moderate Pace 


question is how much of this is cyclical and therefore 

likely to reverse course as hiring picks up. 

The ageing of the baby boomers will apply consistent 

downward pressure on the participation rate. The 

Bureau of Labour Statistics estimates that the ageing 

of the population will lead to a decline in the 

aggregate labour force participation rate of about 

0.2pp per year for a number of years. This estimate 

factors that boomers are staying in the workforce 

longer. 

The estimate also suggests that the ageing 

workforce can explain roughly a third of the decline in 

participation over the past three years. This would 

imply enormous potential for workers to re-enter the 

labour force as hiring conditions improve. 

However, just as all of the jobs lost during the 

recession may not come back, some of the workers 

who have left may choose to stay out, at least for 

some time. If work is not available and does not pay 

what it used to, people may make different work/life 

decisions as part of the recalibration of living 

standards to the new economic reality. 



5 


For example, over the past six months, the 

participation rate has dropped 0.4pp. The group 

registering the largest decline in participation over 

this period is prime-age males aged 35-44 whose 

participation rate declined 0.7pp to 90.9%. While this 

group still has the highest rate of participation overall, 

it has declined from 92.1% at the start of the cycle, 

raising questions about what these men are doing. 

Perhaps they are going back unto education in order 

to acquire a different skill set. They may be taking 

time off to raise young children. 

This recession has hit men harder than women in 

general, owing to the fact that job losses have been 

concentrated in male-dominated industries such as 

construction and manufacturing. It may be that it 

makes economic sense for some households for the 

father to stay home instead of the mother. Leaving 

the labour force is a significant economic decision for 

prime-age workers and these choices may be slow to 

reverse. 

We assume that payroll gains will accelerate from 

100k at the start of the year to 200k by the end of 

2011. If the workers returning to the labour force 

offset the baby boomers leaving and the participation 

rate is unchanged, the unemployment rate will drop 

to 9.1%. Should the participation rate register a more 

robust cyclical rebound of 0.4pp, the unemployment 

rate would rise to 9.7%. 

If people leave the labour force on a permanent or 

semi-permanent basis, they will not be queuing for 

jobs and putting downward pressure on wages. 

Therefore a decline in the unemployment rate driven 

by labour force participation instead of strong job 

growth could be a legitimate sign of improvement in 

labour market conditions as far as the Fed is 

concerned. 

Consider the following: if we get our forecast for Q4 

GDP growth of 2.6% q/q saar, we will end up with 

growth for 2010 of 2.6% q4/q4. The unemployment 

rate dropped from 10.0% in Q4 2009 to 9.7% in Q4 

2010 on job growth of only 94k per month. 

Taken at face value, this would suggest that 2.6% is 

enough above the economy’s potential rate of growth 

to reduce labour market slack. The fact that each 

paycheck has to support a larger number of people is 

consistent with a more subdued potential growth rate 

in consumer spending, and the persistence of higher 

saving rates, than in recent decades. 

Ultimately, we still expect some cyclical rebound in 

the labour force participation rate and that the 

unemployment rate will end the year at 9.3%. 

Overall, the December employment report is 

consistent with economic growth remaining in 

moderate territory, but highlights that the US 

economy continues to face a number of headwinds. 



6 


ECB: Warning Shot 

• The tone of the ECB’s press conference was 

the most hawkish in a long while. 

• The level of anxiety over inflation prospects 

has stepped up a gear. 

• Given this, the risk to our forecast of a late 

start to the ECB’s tightening cycle, from spring 

2012, is for an earlier move. 

• The hawkish tone also raises questions over 

the order of the ECB’s exit from unconventional 

and conventional policy stimulus. 

Change of tone 

There were a number of significant changes in the 

ECB's phraseology at the latest press conference, 

the majority of which were in a hawkish direction. 

In particular, the level of anxiety at the ECB over the 

inflation outlook has increased. Headline inflation has 

risen by more than had been expected recently, in 

large part due to energy prices. While this has not, 

"so far", altered the ECB's assessment that price 

stability will be delivered over the medium term, "very 

close monitoring is warranted" in this respect. 

References to monitoring developments very closely 

have appeared before in recent press conferences, 

including in December. But they related specifically 

to the accommodative policy stance and the exit from 

unconventional policy measures. Using the phrase in 

the context of developments on inflation represents 

an important change. 

Another significant change in the ECB's choice of 

language was that while risks to price stability are still 

judged to be broadly balanced, it was stated that the 

risks "could move to the upside". 

Never say never 

In the press conference Q & A session, Mr Trichet 

went on to say that while inflation expectations are 

still "firmly anchored", the ECB is "permanently alert" 

and he stressed that it has never pre-committed not 

to raise interest rates. 

For markets which have recently been focusing on 

the difficulties in sovereign debt markets, the hawkish 

tone of the comments at the press conference is a 

jolt. This is presumably the ECB’s intention. To make 

it clear that interest rates will go up if necessary even 

if markets remain volatile. 

Box 1: Extracts from Introductory Statement 

“We see evidence of short-term upward pressure on 

overall inflation, mainly owing to energy prices, but this 

has not so far affected our assessment that price 

developments will remain in line with price stability over 

the policy-relevant horizon. At the same time, very close 

monitoring is warranted. 

Inflation expectations remain firmly anchored in line with 

our aim of keeping inflation rates below, but close to, 2% 

over the medium term. The firm anchoring of inflation 

expectations is of the essence. 

With regard to price developments, euro area annual 

HICP inflation was 2.2% in December…after 1.9% in 

November. This was somewhat higher than expected and 

largely reflects higher energy prices. Looking ahead to the 

next few months, inflation rates could temporarily 

increase further. They are likely to stay slightly above 2%, 

largely owing to commodity price developments, before 

moderating again towards the end of the year. 

Risks to the medium-term outlook for price developments 

are still broadly balanced but could move to the upside. 

Upside risks relate, in particular, to developments in 

energy and non-energy commodity prices. Furthermore, 

increases in indirect taxes and administered prices may 

be greater than currently expected, owing to the need for 

fiscal consolidation in the coming years, and price 

pressures in the production chain could rise further. 

On the downside, risks relate mainly to the impact on 

inflation of potentially lower growth, given the prevailing 

uncertainties.” 

13 January 2011 

Source: ECB 

While not explicitly preparing the ground for a rate 

rise in the immediate period ahead, the ECB has 

clearly given a warning shot that if inflation prospects 

continue to deteriorate, there will be a response. To 

ram home the point, there were repeated references 

in the press conference to the rate rise in July 2008. 

This demonstrated, according to Mr Trichet, that the 

ECB was prepared to demonstrate its commitment to 

keeping inflation in check in deed as well as word. 

Emergency say exit 

The hawkish shift in the ECB’s rhetoric raises some 

questions about the order of the ECB's exit from its 

unconventional and conventional policy stimulus and, 

in particular, how the bidding process for refinancing 

operations will evolve. The exit so far has been led 

by the withdrawal of unconventional measures and 

this was generally expected to continue. 

Ken Wattret 13 January 2010 


7 


The latest developments increase the probability of 

the opposite outcome: i.e. that the refinancing rate 

could be raised before the tender procedures have 

been returned to 'normal': i.e. before competitive 

bidding is implemented across all operations. 

4.5 

4.0 

3.5 

Chart 1: Cost Pressures Contained 

Hourly Labour Costs (% y/y) 

To be fair, the ECB has kept its options very much 

open throughout the debate about its exit from policy 

stimulus and Mr Trichet was very explicit in the press 

conference that either order was possible. 

Running late 

Our own forecast has been for the ECB to deliver its 

conventional tightening 'late': i.e. the first increase in 

the refinancing rate would be delivered only in Q2 

2012. This forecast has been predicated primarily on 

low core inflation at the eurozone aggregate level, 

solid but unspectacular eurozone growth given 

substantial fiscal headwinds in some member states 

and unusually low money and bank lending growth 

rates. Ongoing market turbulence and uncertainty 

over the outlook for sovereign debt markets has also 

been a key element of our forecast of the tightening 

cycle beginning next year not this. 

Nonetheless, we have highlighted that pay trends in 

the core of the eurozone, in Germany especially, 

were likely to be a source of concern for the ECB this 

year. As such, while we did not forecast that the ECB 

would actually be hiking rates in 2011, we expected 

the debate in the market (and on the ECB Governing 

Council) to be in the direction of ‘early’ tightening. 

This debate is obviously up and running now and if 

our expectation of macroeconomic developments in 

the next few months – an acceleration in ‘hard’ 

activity data to follow the buoyant sentiment surveys, 

and above-target inflation - is borne out, the market 

will continue to price in an increasing probability of 

rate hikes this year. 

Progress at the finance ministers meeting at the start 

of next week towards expanding and/or evolving the 

EFSF would further reinforce that trend as it would 

reduce the likelihood of another bout of extreme 

stress in sovereign markets, removing one potential 

obstacle to future ECB tightening. 

Inflation developments 

Whether the ECB's bark will ultimately prove to be 

worse than its bite will depend on a range of factors. 

But the key issue, on the basis of what we heard 

from the press conference, is whether the elevation 

of headline inflation continues and leads to higher 

inflation expectations and/or 'second round' effects 

on wages which drive core inflation higher. Wage 

trends remain low by past standards (Chart 1). But 

surveys of household price perceptions have been 

shifting upwards (Chart 2). 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

Negotiated Wages (% y/y) 

Compensation per Employee (% y/y) 

97 98 99 00 01 02 03 04 05 06 07 08 09 10 


80 

70 

60 

50 

40 

30 

20 

10 

0 

-10 

-20 

Chart 2: Price Perceptions Increasing 

EC Consumer Survey: 

Price Trends 

86 88 90 92 94 96 98 00 02 04 06 08 10 


Past 12 Months 

Next 12 Months 

Our expectation is that a combination of favourable 

base effects and a moderation in oil prices will lead 

to a deceleration in headline inflation from March 

onwards, with the rate going back below 2% from 

April. The anxiety at the ECB over inflation should 

recede if so. We also expect the fiscal difficulties in 

the eurozone to remain a problem for some time yet 

and an intensification of volatility in markets could 

quickly move the focus of the ECB’s agenda away 

from policy tightening. 

Bottom line 

The ECB has given the market, and forecasters, a 

wake up call, highlighting its increasing unease over 

inflation and making it clear that higher interest rates 

will be delivered if prospects continue to deteriorate. 

The chances of the conventional exit being delivered 

earlier than the unconventional exit have also risen. 

While our own forecast remains for a ‘late’ tightening, 

the risk of earlier hikes has clearly risen. The signals 

from the ECB also reinforce our view that it will hike 

before the Fed does. As relatively little in the way of 

rate hikes has been priced in for this year, the market 

is likely to continue to shift in the direction of early 

tightening absent a resurgence in market volatility. 



8 


Germany: Stronger for Longer 

• Government and market consensus growth 

expectations for 2011 are too low. 

• Leading indicators are buoyant across all 

major sectors, with domestic as well as external 

demand contributing to growth. 

• We have revised up our already well above 

consensus forecast of 2.7% growth this year to 

3.5%, the same rate as in 2010. 

2.0 

1.0 

0.0 

-1.0 

-2.0 

Chart 1: GDP Growth & Composite PMI 

Composite PMI: 

Output (RHS) 

65 

60 

55 

50 

45 

40 

35 

• The long-awaited acceleration in consumer 

spending looks increasingly probable. 

-3.0 

GDP (% q/q) 

30 

25 

The German economy continues to do exceptionally 

well, reflected in recent sentiment surveys and hard 

activity data. Below we look at the reasons why and 

discuss the increasing likelihood that 2011 will turn 

out to be another exceptional year for German 

growth. 

Low expectations 

Why are we so confident of an upward surprise for 

German growth this year? Part of the reason is that 

expectations have been set so low. The government 

forecast for 2011 growth is just 1.8%, roughly half of 

last year's probable growth rate of 3.5%. Much the 

same applies to market consensus expectations. On 

the basis of December’s Consensus Economics, the 

median expectation for 2011 growth is 2.2%, revised 

up marginally from 2.1% the prior month. 

-4.0 

98 99 00 01 02 03 04 05 06 07 08 09 10 


5.0 

2.5 

0.0 

-2.5 

-5.0 

-7.5 

Chart 2: GDP Growth & Industrial Output 

-10.0 

Industrial 

* Estimate for Q4 2010 

Production (% q/q) * 

-12.5 

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 


GDP (% q/q RHS) 

20 

2.5 

1.5 

0.5 

-0.5 

-1.5 

-2.5 

-3.5 

-4.5 

The BNP Paribas forecast for 2011 growth, rolled out 

in the Global Outlook in November last year, was an 

above-consensus 2.7%. This is looking increasingly 

conservative on the basis of three key factors. 

Reasons to be cheerful 

The first is the re-acceleration in leading indicators 

recently. The manufacturing PMI, for example, has 

risen back towards its spring 2009 highs, with output 

and orders sub-indices well above the 60 level in the 

latest month (i.e. December last year). This has been 

accompanied by a marked improvement in the 

service sector PMI which is now at mid-2007 prefinancial 

crisis levels. 

Ifo’s business climate index is stronger now than at 

any point since the post-unification boom, with the 

strength broad based across sectors. The latter point 

is the second key reason for seeing the risks on the 

upside. The expansion in Germany is being driven by 

domestic as well as external demand. This is evident 

across a range of indicators. 

The third reason is the relatively cautious profile we 

have embedded in our forecast for q/q GDP growth 

rates in Germany over the coming quarters. 

Too slow, too soon? 

Our forecast profile in the Global Outlook assumed 

that, having risen by an average of 1.2% q/q over the 

first three quarters of 2010, GDP would expand at an 

average rate of 0.6% q/q in 2011. The government 

and market consensus estimates for 2011 growth 

must have incorporated an even weaker q/q growth 

profile than this. 

GDP data for Q4 2010 are not yet available (the first 

estimate is released in mid-February). Our working 

assumption has been for q/q growth in Germany in 

Q4 last year of 0.4% but this looks conservative on 

the basis of the latest information available. Realtime 

indicators of growth momentum, including the 

composite PMI for Germany, are currently indicative 

of a growth rate well above the 0.4% increase that 

we have assumed (Chart 1). 



9 


As Chart 1 shows, a health warning is required on 

the signals from the business surveys these days as 

their ability to predict q/q changes in GDP has been 

less accurate since the financial crisis. Still, they offer 

an indication of robust short-run growth dynamics 

which is largely backed up by the hard data. We say 

largely because, at the time of writing, the full set of 

monthly data for Q4 2010 is not available and the 

indications have been mixed. 

The signals from the industrial sector have been very 

positive, with industrial output on track to rise by over 

2% q/q on the basis of figures up to November. As 

Chart 2 shows, this pace of growth has typically been 

indicative of robust q/q GDP growth in the past. The 

5%-plus surge in manufacturing orders in November, 

one of the biggest increases on record, suggests that 

the strength in output will continue, in line with the 

signals from the surveys. 

Retail sales data, in contrast, have been surprisingly 

weak. On the basis of the figures available to date, 

up to November, a large q/q decline in sales is on the 

cards in Q4. This would compare to an average 0.7% 

q/q rise in the first three quarters of 2010 and runs 

counter to upbeat anecdotal reports from the sector 

and buoyant survey data (discussed below). The 

initial release of retail sales data from Germany is 

one of the most volatile and least transparent in 

terms of the breakdown of the figures, so we suspect 

that there will be a big rebound in sales over the 

subsequent months or that the November data will 

be revised higher – or possibly both. 

Trade figures for Q4 to date have also been a little 

disappointing. Exports rebounded in November after 

an unexpected fall in October but the increase was a 

modest 0.5% m/m. Imports, in contrast, surged by 

over 4% m/m in November. As a result, the trade 

surplus fell to a five-month low. The overall rise in 

exports in Q4 is shaping up to be around 1-1½% q/q 

in nominal terms on the basis of the trade figures, 

well down on the scorching pace of growth in the first 

three quarters of 2010 – which averaged 6% q/q. 

Based on the figures to November, the net trade 

contribution to q/q growth in Q4 is likely to be broadly 

neutral, compared to a positive contribution of 0.3 of 

a percentage point in Q3. 

Do the math 

So how strong could 2011 growth realistically be in 

Germany? Let’s start with Q4 2010’s growth rate and 

then look at some scenarios for the subsequent 

quarters. The simple models which we have used 

previously to give us a heads-up on q/q changes in 

German GDP, based on a combination of sentiment 

surveys and hard data, point to a q/q rise in Q4 GDP 

of at least 0.6%. 

10.5 

10.0 

9.5 

9.0 

8.5 

8.0 

7.5 

7.0 

6.5 

Chart 3: Investment to GDP Ratio I 

Capex (% GDP) 

6.0 

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 


15 

14 

13 

12 

11 

10 

Chart 4: Investment to GDP Ratio II 

9 

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 


If GDP was to increase by 0.6% q/q in Q4 last year, 

and if we kept our initial q/q profile for 2011 the same 

– meaning average q/q growth of 0.6% – full-year 

growth in 2011 would be around 3%. 

Alternatively, assuming 0.6% q/q growth in Q4 2010, 

followed by an acceleration in H1 this year to around 

1% q/q, as signalled by recent survey data, and then 

moderation in the second half, 2011’s annual growth 

rate would be about 3½%, in line with the expected 

growth rate in 2010. 

But given the buoyancy of leading indicators recently, 

coupled with the broadening out of the expansion to 

reflect robust domestic as well as external demand, it 

is feasible that 2011 growth could be higher still. 

Assuming a growth rate of slightly above 0.6% q/q in 

Q4 last year, followed by an acceleration to 1% q/q 

growth which is then sustained throughout the year, 

the growth rate could be at 4% or above! 

The bottom line, our revised forecast, is in Table 1. 

We look for growth of 3.5% in 2011, the same order 

of magnitude as this year and twice the government’s 

estimate. We assume that q/q growth will pick up 

over the first half of this year, in line with the leading 

indicators, but then expect it to slow a little in the 

Mean 

Construction (% GDP) 



10 


second half. This is predicated on an assumption that 

growth in developing markets, a key reason for the 

recent acceleration, will cool somewhat as policy 

tightening kicks in. We nonetheless expect growth in 

Germany to continue to be relatively strong given the 

impetus from domestic demand. 

Domestic drivers 

From a top-down perspective, the case for above 

consensus growth in Germany in 2011 is compelling. 

A bottom-up perspective is equally convincing with, 

as highlighted already, internal as well as external 

demand fuelling the expansion. 

Business investment in particular has been strong in 

recent quarters. The average q/q rise in spending on 

machinery over the first three quarters of 2010 has 

been in excess of 4%. Business sentiment is very 

elevated, corporate profitability is improving, capacity 

utilisation rates are rising and surveys of factors 

limiting production show that shortages of machinery 

are close to their record highs. Given this backdrop, 

the strength of business investment should continue 

in the coming quarters. 

The exceptional q/q rates of growth during 2010 are 

unlikely to be sustained, however. The ratio of capex 

to GDP, for example, is now back above its average, 

though it remains low in relation to its peak in 2007/8 

(Chart 3). The fiscal incentives which boosted capex 

last year, including tax write-downs on depreciation, 

have also expired. 

Rates of growth in construction expenditure have not 

been as impressive but the context for Germany in 

this sector is also comparatively growth-friendly. In 

contrast to other countries, the construction sector in 

Germany did not experience the bubble conditions 

that led to the adjustments now blighting growth 

prospects elsewhere. The ratio of residential 

construction expenditure to GDP in Germany is well 

below its average and has been going sideways for 

several years (Chart 4). 

With interest rates in Germany to remain low relative 

to domestic economic conditions given weakness in 

other parts of the eurozone, the medium-term outlook 

for the construction sector looks favourable. 

Consumer joining in 

We also expect private consumption to contribute 

more to German GDP growth in 2011 and beyond. 

Our projection for consumption growth this year is 

1.7%, which would be the highest rate of growth 

since 2001. Driven primarily by our expectations of 

real income growth in the household sector, we look 

for a further acceleration in 2012 and 2013. The q/q 

profile we have assumed for 2011, of 0.4% q/q on 

Table 1: Revised Forecasts 

(% y/y unless stated) 2010 2011 

2010 2011 2012 Q3 Q4 Q1 Q2 Q3 Q4 

GDP (% q/q) - - - 0.7 0.6 0.9 0.9 0.7 0.7 

GDP 3.5 3.5 2.7 3.9 4.2 4.6 3.1 3.1 3.2 

Private 

Consumption 0.4 1.7 1.9 1.2 1.6 1.8 1.7 1.6 1.6 

Public 

Consumption 2.0 0.9 0.8 1.6 2.1 0.4 1.7 0.8 0.8 

Investment 5.8 5.5 3.9 7.3 9.0 9.1 4.7 4.2 4.1 

Stocks 

(Contrib.) 0.9 0.2 0.0 -0.3 0.0 0.1 0.1 0.0 0.0 

Exports 14.4 9.4 7.7 16.8 15.3 14.2 8.0 7.6 8.2 

Imports 13.7 8.1 7.2 15.1 18.4 13.0 6.6 6.3 6.8 


120 

115 

110 

105 

100 

95 

90 

85 

Chart 5: Retail Sentiment 

80 

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 


average, is conservative, implying a possibility of 

upside surprises. 

The sentiment data are certainly leaning that way. In 

absolute and relative terms, consumer-related survey 

data in Germany have performed exceptionally well. 

One of the most striking developments has been the 

improvement in Ifo’s business climate index for the 

retail sector; it has surged to its strongest level since 

the early 1990s (Chart 5). 

Consumer sentiment is also remarkably high across 

a range of indicators. The headline index of the GfK 

survey fell back in the latest month but the big picture 

changed little. The survey had previously risen to its 

highest level since 2007, prior to the intensification of 

the financial crisis. 

The GfK sub-index, which measures business cycle 

expectations, has risen to 2007 levels, while the subindex 

measuring income expectations has soared to 

its highest level for a decade. This is significant as it 

suggests that German consumers are feeling much 

more confident that they will benefit from the current 

upswing in the economy than they did in the prior 

expansion from 2005 to 2008. 

Mean 

Ifo Business Climate: 

Retail Sector 



11 


The European Commission’s measure of consumer 

sentiment in Germany, meanwhile, has risen to its 

highest level ever. The equivalent survey for the 

eurozone as a whole is only marginally above its 

historical average and has stalled in recent months, 

at the same time as the survey for Germany has 

powered ahead. 

The differentials between the German and eurozone 

consumer sentiment surveys are at, or near to, their 

record highs across a range of the sub-components 

compiled by the European Commission. Looking 

specifically at consumers’ opinions on the general 

economic outlook, the German survey has surged to 

its highest ever level, with the gap to the equivalent 

survey for the eurozone at about thirty points, a 

record high by a huge margin (Chart 6). 

The EC survey of consumers’ assessment of the 

financial outlook also shows the differential relative to 

the eurozone at an all-time high in Germany’s favour. 

This reinforces the point made earlier that not only do 

German consumers feel that the economy is doing 

exceptionally well, they also feel more confident that 

they will benefit from the improvement, much more 

than they did in the prior upswing. This is positive 

from the perspective of the consumer contribution to 

future growth. 

This is not the case elsewhere. Despite the pick-up in 

economic conditions in the eurozone since spring 

2009, the purchasing intentions survey compiled by 

the EC has been close to its record lows. The 

equivalent survey in Germany has been increasingly 

steadily. The differential between the two is, like the 

rest of the sub-surveys, at an all-time high currently, 

having turned positive in Germany’s favour last year 

for the first time in its history. 

Confirmation required 

There is a caveat with the survey data. Though the 

figures are remarkably strong, they have often been 

a poor guide to spending trends in the past. This is 

illustrated in the dynamic correlation analysis in the 

article Germany: Consumer Clues in the Market 

Mover of 4 November 2010. Even the highest of the 

correlations are not that impressive. 

Most consumer sentiment surveys in Germany have 

persistently over-predicted consumption growth since 

the upturn in the economy began in spring 2009, as 

they did in the last expansion. But this time should be 

different. 

The unemployment rate is near 20-year lows, wage 

growth is likely to pick up and monetary policy 

conditions are very loose. The longer the German 

economy does well, the higher the likelihood of a rise 

in permanent income expectations in the household 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

Chart 6: Consumer Sentiment 

EC Consumer Survey: 

Economic Outlook 

86 88 90 92 94 96 98 00 02 04 06 08 10 


Germany less Eurozone 

sector in Germany and, in turn, the higher will be the 

probability of a change in attitudes to spending and 

saving. This may not be immediate but a combination 

of very loose monetary policy, strength in the labour 

market and record-high confidence right across the 

economy must surely have an effect over time. 

Our feeling is that the circumstances in Germany 

were very much moving in this direction during the 

prior expansion, only to be brought to a shuddering 

halt by the massive fall-out from the financial crisis. 

This hit the German economy especially hard given 

its unusually high export-to-GDP ratio and sensitivity 

to global trade. 

There is considerable potential for a larger growth 

contribution in Germany from private consumption 

given that it accounts for a relatively low share of 

GDP – 56% as of Q3 2010 on a constant price basis. 

Our forecasts for stronger spending growth in coming 

years are based mainly on our prediction of higher 

household real income growth. A sustained shift 

down in the savings rate, which is relatively high in 

Germany, is an additional source of upward risk to 

our growth forecast. 

In perspective 

Note that, despite the recovery, levels of output in 

Germany remain below their pre-crisis peaks. On the 

basis of our revised forecasts, we now expect GDP 

on a constant price basis to surpass its pre-crisis 

peak level (set in Q1 2008) in Q2 2011. 

We end with a warning about cold weather-related 

complications with the data around the turn of the 

year. This regularly plays havoc with the data flow in 

Germany, leading to confusion over the underlying 

state of the economy. Extreme cold in December last 

year has already seen unemployment unexpectedly 

rise. But this is merely a temporary disruption. Any 

data weakness near-term should be followed by a 

compensating rebound thereafter. 



12 


France: Slippery Forecast for Q4 GDP 

• Business surveys have sent mixed signals 

about economic activity in the latter part of 

2010. We thus pay particular attention to hard 

data such as industrial production and retail 

sales of manufactured goods. 

• The unusually snowy and icy weather has 

affected economic activity; however, the final 

impact on overall GDP is likely to be limited. 

• We estimate Q4 GDP growth of 0.4% q/q and 

1.5% y/y, in line with the recent trend. Early 2011 

looks weaker. 

Mixed surveys 

Business surveys have shown divergent trends in 

recent months. The INSEE composite points to 

economic improvement having continued; the index 

for industry as well as that for services jumped from 

98 in Q3 to 102 in Q4. Similarly, the Bank of France 

surveys showed ongoing recovery, but with services 

less dynamic than industry. The former rose from 

95.7 in Q3 to 97.4 in Q4, while the latter soared from 

101.6 to 106.0 (Chart 1). The PMIs are less positive 

and also highlight underperformance in services, 

where the headline index eased from 59.9 in Q3 to 

54.9 in Q4. The manufacturing PMI rose modestly, 

from 55.0 to 56.8. Consequently, the growth 

assessment differs significantly, depending on which 

set of indices one is looking at. We therefore turn to 

the available hard data to tease out our Q4 growth 

forecast. 

Retail sales distorted again 

France’s car sales incentives, introduced in 

December 2008, were progressively reduced over 

the course of 2010 before finally disappearing on the 

last day of last year. New car registrations show this 

phasing-out approach attracted new buyers up to the 

very last days of December (Chart 2). The 

comparison with Q4 2009 (when a higher cash 

payment attracted more new buyers) will remain 

affected by adverse base effects. However, the 

quarterly change is likely to be strong again, despite 

some decline in Christmas 2010 sales due to 

adverse weather (see Box 1). 

November retail sales were very strong, supported 

by early Christmas shopping and already-cold 

weather that boosted sales of clothes and shoes 

(+2.9% m/m). We forecast retail sales of 

manufactured goods to rise in Q4 by around 1.8% 

115 

110 

105 

100 

95 

90 

85 

80 

75 

70 

65 

60 

55 

Chart 1: GDP vs. Business Confidence 

EU Commission Survey 

INSEE Survey 

02 03 04 05 06 07 08 09 10 11 


BoF Survey 

GDP (q/q RHS) 

Chart 2: Retail Sales and New Car Registrations 

billions 

23.0 Retail Sales of Manuf. Goods (incl. Cars, Real) 

22.5 

22.0 

21.5 

21.0 

20.5 

20.0 

19.5 

19.0 

Retail Sales of Manuf. Goods 

(excl. Cars, Real) 

18.5 

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct 

08 09 10 


1.00 

0.50 

0.00 

-0.50 

-1.00 

-1.50 

-2.00 

New Car Registrations (RHS) 

Chart 3: GDP vs. Industrial Production 

GDP (% q/q) 

01 02 03 04 05 06 07 08 09 10 


Manuf. Ouput (% 3m/3m, RHS) 

-0.00 

-0.30 

-0.60 

-0.90 

-1.20 

-1.50 

-1.80 

q/q and 0.4% y/y (with cars only up 14% q/q and 

down 6% y/y). 

However, as in Q4 2009, we need to be cautious 

when extrapolating this to overall private 

consumption (in that quarter, a 2.9% q/q rise in retail 

sales pushed PCE up 1% q/q). Services are likely to 

0.90 

0.60 

0.30 

300k 

275k 

250k 

225k 

200k 

175k 

150k 

4 

2 

0 

-2 

-4 

-6 

-8 

-10 

Dominique Barbet 13 January 2011 


13 


have been far less dynamic than sales of goods, and 

the impact of weather will generally have been 

adverse with the notable exception of winter sport 

resorts. We forecast private consumption to rise by 

0.5% q/q, with strong import content and the risk of a 

slight decline in Q1. We see the sharp decline in 

household confidence in December, largely due to 

higher prices for food and energy, as the main 

source of concern for PCE growth this year. 

What do the hard data have to say? 

Manufacturing output, after easing 0.2% m/m in 

September, fell 0.9% in October because of industrial 

action. Despite this poor start to the quarter, the 

November rebound, +2.2% m/m, almost guarantees 

a rise for Q4. If we assume manufacturing activity 

was unchanged in December, total output would be 

up 0.5% q/q. This is consistent with 0.5% q/q GDP 

growth (Chart 3). Turning to overall industrial 

production, the picture became more favourable 

each month from September to December. The cold 

weather probably caused a further increase in energy 

output in December. We forecast IP up 0.2% m/m in 

December and up 0.9% q/q in Q4. 

Assuming exports and imports were unchanged m/m 

in December, exports would rise by 1.1% q/q in Q4 

while imports would ease by 0.3%, according to 

customs data. This suggests a positive contribution 

of foreign trade to growth. However, in Q3, a similar 

gap between exports (+6.7% q/q) and imports 

(+5.4%) was associated with a negative foreign trade 

contribution of 0.5pp. For the last quarter of 2010, we 

expect net exports to have made a milder negative 

contribution to growth. 

Q4 growth in line with recent trend 

The Banque de France model repeatedly (i.e. in each 

of the three monthly estimates) showed that GDP 

growth should reach 0.6% q/q. However, this is a 

purely mathematical forecast. The INSEE forecast is 

corrected for unusual factors and gives a 0.5% 

prognosis. Based on our analysis, which takes into 

account the icy weather that may subtract 0.1pp from 

growth as well as robust private consumption, we 

forecast growth of 0.4% q/q and 1.5% y/y. This would 

leave full-year growth at 1.5%, just 0.1pp below the 

government’s forecast, unless back data are revised 

again (they were lowered in late December). 

Keeping an eye on the budget deficit 

Q4 growth of 0.4% would leave the acquired growth 1 

rate for 2011 at 0.6%, exactly the same as a year 

earlier (i.e. acquired 2010 growth as of end-Q4 

2009). More importantly, the decline in December 

PMIs and household confidence are a clear threat to 

Box 1: Snowy Christmas 

Heavy snow and a period of very cold weather started in 

late November and lasted until the last week of the year. 

There is no indication that industrial activity was hit, and 

the only impact should be positive in the form of 

increased energy output, as households cranked up the 

central heating. Of course, snow and icy temperatures 

affect construction, but building and construction is only 

6.1% of total value-added and this adverse weather is 

partly corrected for by seasonal adjustment. 

The biggest impact was on services, transport, retail and 

leisure, though it is very difficult to measure. In the 

transport business, many trains were delayed and some 

cancelled, but the impact on activity was limited. Air 

France-KLM, the number one carrier in France, said it lost 

some EUR 70mn (part of which it may be able to claim 

back from airport operators), which is equivalent to only 

0.01% of one day’s GDP (the company also reported a 

2% increase in passengers vs. December 2009). The 

road chaos has been temporary, and merchandise losses 

marginal. However, some people may have cancelled 

trips planned for Christmas because of adverse weather 

conditions. The bottom line is that tourism, leisure, 

restaurants and retail sales of food and gifts may have 

been the most affected segments. Contrary to most other 

economic disruptions, there are very few catch-up 

possibilities for this specific weather problem (with one 

exception being winter sport resorts). 

Conversely, some public services have been facing 

heavier workloads, which may result in marginally higher 

costs, in particular for overtime (thus output, since the 

production of non-merchandise public services is 

estimated through their costs). That applies to road 

security and safety and for health services, with more 

people falling and being hurt. 

While it may be noticeable for businesses such as toy 

stores, restaurants and airlines, the impact should not be 

material in December industrial production or Q4 GDP. 

The likely exception is construction, which may subtract 

0.1pp from GDP growth in the quarter. 

Source: BNP Paribas 

Q1 growth. If confirmed, these developments will 

also be a challenge for the government’s 2011 

growth forecast of 2.0%. However, cautious 

assumptions regarding fiscal income’s relationship 

with GDP growth should allow the 2011 deficit target 

to be reached even in the event of some 

disappointment on the growth front. 

When the central budget deficit for the first eleven 

months of 2010 was published this week, the Ministry 

of Finance suggested that the 2010 full-year deficit 

could be a little below its previous forecast. This is 

also an element that will help achievement of the 

2011 target. 

1 Acquired growth is the full-year growth that would be 

obtained assuming every future quarter is flat q/q. 

Dominique Barbet 13 January 2011 


14 


Japan: PM Sets Out Two Key Challenges 

• The objectives announced by Prime Minister 

Kan – to undertake comprehensive social 

security/tax reform and to “open Japan” – are 

the most pressing problems facing Japan’s 

ageing population. 

• Comprehensive social security/tax system 

reform is important both to restore the nation’s 

fiscal health and to remove constraints on 

economic growth. 

• Participation in the Trans-Pacific 

Partnership is an ideal way to arrest the effects 

of an ageing population and realise economic 

rejuvenation, in our view. 

300 

250 

200 

150 

100 

50 

Chart 1: Combined Central and Local 

Government Debt (% of GDP) 

Forecast 

0 

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 

Source: MOF, Cabinet office, BNP Paribas 

At the New Year press conference held on 4 January, 

Prime Minister Kan spelled out the challenges that 

his government aims to tackle. On the policy front, he 

cited the objectives of (1) undertaking 

comprehensive reform of social security and the tax 

system, including hiking the consumption tax; and (2) 

launching a “21 st -century opening of Japan”, 

including possible participation in the Trans-Pacific 

Partnership. The TPP is a multilateral free trade 

agreement signed by Singapore, New Zealand, 

Brunei and Chile in 2005, and five additional 

countries, including the US and Australia, are 

currently negotiating to join the group. Specifics for 

both are slated to be finalised by June. 

If the Kan government is really serious about tackling 

these two issues, we wholeheartedly support it. For, 

as pointed out in previous reports, these are the most 

pressing problems facing Japan’s ‘ageing economy’. 

Unless they are resolved, Japan will not enjoy 

increased affluence. Accordingly, we now have a 

faint sense of hope that the Kan administration will 

come good on these fronts. 

In this report, we restate why comprehensive social 

security/tax system reform and the opening up of 

Japan are so necessary. 

Looking first at social security/tax system reform, it is 

clear to everyone that this is the most pressing issue 

facing Japan today. The nation’s public debt (longterm 

government and regional bonds) already stands 

at 180% of GDP and could snowball to 250% by 

2021 unless reforms are undertaken. The reason 

Japan’s public debt has reached such 

unprecedented levels is that the budget chronically 

runs huge deficits to prop up social security. The 

80 

70 

60 

50 

40 

30 

20 

10 

Chart 2: Old-Age Dependency Ratio (age 

65+/age 15-64, %) 

Forecast 

0 

1950 60 70 80 90 2000 10 20 30 40 50 

Source: National Institute of Population and Social Security Research, 

BNP Paribas 

premiums paid by a steadily shrinking productive 

population cannot cover the benefits paid out to a 

surging pool of elderly, with the result that the state 

must make up the difference. 

Comprehensive social security/tax reform is also 

important for removing constraints on economic 

growth 

It is not just that Japan is nearing fiscal collapse, but 

the massive income transfers from the working 

population (and future generations) to retirees via the 

various social welfare systems (pensions, healthcare, 

nursing) are causing a big problem with respect to 

intergenerational inequities. Ten years ago, there 

were four workers supporting every retiree, but that 

ratio now stands at just three people of working age 

for each pensioner; by 2020, the ratio will be two to 

Ryutaro Kono 13 January 2011 


15 


one. Needless to say, unless social security is 

reformed, the burden on the working population will 

become unbearable. The lack of confidence in the 

sustainability of social security is causing the working 

population to curb spending, which, in turn, weighs 

on Japan’s economic growth. Thus, comprehensive 

social security/tax reform is important both for 

restoring the nation’s fiscal health and for removing 

constraints on economic growth. 

Consumption tax hike is not enough 

While raising the consumption tax is certainly an 

indispensable element of social security/tax system 

reform, the social security system itself must also be 

reformed to accord with a shrinking population. For 

instance, hiking the consumption tax to just under 

20% could turn the primary balance from its current 

deficit of roughly 6% of GDP to a surplus of almost 

2%, which would stop the debt-to-GDP ratio from 

expanding for a while. But because the current social 

security system is predicated on continued 

population growth, budget deficits will reoccur in due 

course owing to escalating social security costs. 

Thus, the current level of social security benefits 

must be reduced. 

What is more, social security costs are escalating not 

just because of the demographics of ageing and a 

falling birth rate, but high costs are also programmed 

into the system because regulations limit the 

suppliers of social welfare services such as medical 

and elderly care. 

Unless the social security industry can be made 

more efficient from a supply-side perspective through 

competition, there is a risk that money spent to cover 

social security costs will just be wasted. It is also vital 

that recipients of social security benefits shoulder 

more of the burden, as excessive demand is being 

fostered because upfront expenses are held down by 

government subsidies. 

Dealing with the issue of double burdens 

The way social security is designed must also be 

thoroughly overhauled. Given the reality of a 

shrinking population, the pension system and the 

nursing/healthcare system must be converted from 

the current pay-as-you-go format to fully financed 

systems. To limit the inevitable problem of paying 

double burdens when moving to a fully funded 

system, a package must be formulated to ease the 

pain by spreading the burden widely across all 

generations and over an extended period (say 50 

years). Although the current pension system might 

not seem to be heavily in debt owing to its pay-asyou-go 

format, the government should quickly deal 

with its “net liabilities” by creating a special account 

along the lines of that set up to liquidate massive 

60 

50 

40 

30 

20 

10 

Chart 3: Trade's Relative Weight in Nominal 

GDP (%, 2009) 

0 

Export 

Import 

12.512.2 

13.9 

11.2 

30.0 

27.7 

40.8 

35.9 

26.7 

22.3 

49.9 

46.0 

Japan US UK Germany PRC Korea 

Source: The World Bank, BNP Paribas 

0.8 

0.6 

0.4 

0.2 

0.0 

-0.2 

-0.4 

-0.6 

-0.8 

-1.0 

-1.2 

Chart 4: Working Age Population 

(age 15-64, % y/y) 

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 

Source: MIC, BNP Paribas 

debts held by JNR (Japanese National Railways) 

when it was privatised in the late 1980s. 

Opening up Japan could raise growth 

If comprehensive social security/tax reform removes 

impediments to economic growth, the “opening of 

Japan” can be deemed a policy for raising growth. 

Since domestic demand cannot be counted on to 

expand owing to population decline, the issue is how 

to tap into external demand. 

On this score, Japan needs to go beyond just making 

products, as the world’s premier supplier of high-end 

durables, capital goods and IT/digital products. 

Japan needs to win the hearts of overseas 

customers through its renowned customer service 

(i.e. meticulous and cordial interaction with 

customers, emphasis on satisfying customer needs), 

which can be applied to both services and 

manufacturing. 

Furthermore, by joining the TPP, the distinction 

between domestic and external demand will fade 

with the free flow of money, goods and labour across 



16 


state boundaries. For companies in the EU, business 

dealings within the eurozone no longer fall into 

categories of domestic versus external demand. 

Opening up Japan could ease the decline in 

growth expectations 

Japan’s overall population and productive population 

(age 15 to 64) are shrinking, becoming a constraint 

on aggregate supply and on aggregate demand via 

stagnant employee income. As population decline 

dims the prospects for future sales, companies curb 

business investment and employment – causing the 

output gap to deteriorate on weak aggregate demand. 

While population decline will inevitably weigh on 

economic growth to some degree, so long as 

companies can capitalise on external demand it 

should be possible to shore up growth expectations. 

Deterioration in aggregate demand would thus be 

averted and deflationary pressures reduced. By 

allowing for the free flow of money, goods and labour 

across state boundaries, it could be possible to arrest 

the effects of an ageing population and realise 

economic rejuvenation. 

“Opening Japan” is a superb slogan 

“Opening Japan” is currently sublimating into a 

popular slogan and we fully back pursuit of such a 

strategy. Having come to power in 2009 by avoiding 

all mention of deregulation (a term blindly used to 

discredit the structural reforms of the Koizumi 

government), we have long pondered how the DPJled 

government would plot a path toward economic 

growth without incorporating deregulation. 

“Opening Japan” means deregulation 

With the slogan “opening Japan”, the Kan 

government has not only made explicit its intention to 

link up with overseas markets but has also paved the 

way for substantial deregulation. Participation in the 

TPP would allow money, goods and labour to move 

freely across state boundaries, tantamount to a 

deregulation package. 

Incidentally, the Hatoyama government frequently 

used the phrase ‘regulatory reform’ rather than 

deregulation. But, more often than not, the aim was 

not deregulation per se but rather regulatory changes 

to allow the government to intervene in cases of 

market failure, for example in the promotion of 

exports such as high-speed trains and nuclear power 

plants (whose would-be buyers are largely foreign 

governments). In today’s economy, though, policy 

failure by the government is more of a problem than 

market failure. Achieving strong growth will thus be 

hard without limiting policy failure and promoting 

deregulation. 

Chart 5: International Comparison of Acreage 

under Cultivation 

Acreage (ha) 

per household 

Comparison with 

Japan 

Japan2007 1.8 - 

US(2007 181.7 99-fold 

EU2005 16.9 9-fold 

Austraria2005 3407.9 1862-fold 

Source: Tatsuo Hatta and Shin Takada, Japan’s Agriculture, 

Forestry and Fisheries Industry, Nikkei Shimbun, BNP Paribas 

Why deregulation is indispensable 

The source of sustainable economic growth is human 

creativity and ingenuity, we believe. The most 

effective way to elicit this is by making economic 

activity freer. Thus, the best growth strategy is to 

stop government intervention, which, in other words, 

means deregulation. Whenever the authorities 

intervene to support some specific industry, not only 

are resources taken from sectors that ought to 

flourish but the industries subject to intervention are 

deprived of the opportunity to grow from a long-term 

perspective, as government support weakens all 

incentive to improve. One recent case in point is that 

of Japan Air Line, which, having failed to rebuild its 

business despite repeatedly receiving financial 

support from the government, ended up asking for 

yet another rescue package in 2009. 

The reality of protectionist policies that favour 

farmers 

There are lingering suspicions that deregulation only 

makes big business stronger at the expense of 

smaller companies and households, as the pursuit of 

“efficiency” weeds out the weakest companies and 

deprives workers of employment. This, in fact, is the 

argument used by Japanese farmers to oppose the 

TPP. But those farmers claiming to be underdogs 

threatened by the TPP represent vested interests 

eager to keep their markets closed. 

For example, the agricultural segment most 

protected by custom levies, controls on market 

entrants and policies to reduce acreage under 

cultivation is rice farmers, most of whom work parttime. 

Government policy prevents intensive 

agriculture (large-scale farming) and blocks the entry 

of new farmers. Since full-time farmers and 

commercial farming are prevented from expanding 

production, Japanese agriculture overall has 



17 


significantly reduced productivity. What is more, 

Japanese consumers must pay the price through the 

tax money spent subsidising farmers and in the 

higher retail price of rice compared to other countries. 

Meanwhile, part-time farming households tend to 

have higher incomes than full-time farming 

households and households of salaried workers. This 

is a result of the protectionist policies. 

Misguided agricultural policies have deprived 

Japan’s regions of growth opportunities 

In passing, it is widely felt that protection of Japan’s 

unproductive farming sector could prevent the 

country from joining the TPP to the detriment of 

export opportunities for Japan’s manufactured goods. 

It would certainly be unfortunate if agriculture – a 

mere 1% of GDP – were to deprive Japan’s exporters 

of growth opportunities, but the problem does not 

end there. 

In the US and other developed nations, agriculture is 

not only an export sector in its own right, boasting 

high productivity, but is also an industry capable of 

attracting young workers thanks to its relatively high 

income level. Japan’s misguided agricultural policies, 

on the other hand, have deprived regional economies 

of growth opportunities and prevented income 

disparities with urban areas from being corrected. 

Maintaining protective regulations will not 

advance overall economic welfare 

Consumers suffer the most from regulations 

preserving and protecting vested interests. 

Maintaining such regulations will not advance the 

public’s economic welfare. Producers capable of 

supplying the goods/services that people want are 

not entities run or supported by the government, but 

private-sector agents capable of creating innovative 

products/services in a competitive environment. 

If the Kan government truly wants to put people’s 

lives first, deregulation is necessary 

The same thing can be said for social security 

services. Regulation – rather than a lack of fiscal 

resources – is the main reason why the 

nursing/healthcare services sought by the public are 

not being supplied. Thus, while deregulation might 

seem on the surface to be a policy benefiting 

business, it will also allow consumers to find 

companies that efficiently supply desired 

goods/services at low prices. 

If the Kan government truly wants to put people’s 

lives first, deregulation is the necessary means. 

“Opening Japan,” therefore, should lead to greater 

affluence. 



18 


Japan: Estimating Q4 GDP Growth 

• Based on data releases for October and 

November, we are currently forecasting a 1.5% 

q/q annualised decline in real GDP for Q4 2010. 

• This would be the first contraction in five 

quarters, with a slowdown in exports and the 

withdrawal of consumption stimuli apparently 

the main factors behind the weakness. 

• However, with global manufacturing activity 

rebounding since October, we expect Japanese 

exports to move back into recovery mode 

sooner rather than later. 

• Strong demand from emerging economies 

should help prevent a second successive 

quarter of contraction. 

Japanese real GDP rose 4.5% (quarter-on-quarter 

annualised) in Q3 2010 as consumers went spending 

ahead of a cigarette tax hike and the expiry of the 

"eco car" subsidy scheme. However, a negative 

growth rate appears likely for Q4 due to the 

combined impact of a pullback in consumer spending 

and a slowdown in exports. Based on data releases 

for October and November, we are currently 

forecasting a 1.5% decline in real GDP for Q4 2010, 

which would mark the first contraction in five quarters. 

That said, we would caution against growing too 

pessimistic over the economic outlook on the basis of 

a negative print for Q4, believing that an upturn in the 

global manufacturing cycle should help to push 

exports – and hence overall economic activity – back 

into positive territory during Q1 2011. 

Decline in exports and demand pullback likely to 

translate into contraction 

Our current forecasts are based solely on economic 

data releases for October and November (with the 

latter still incomplete); a relatively large margin of 

error should thus be allowed. That disclaimer aside, 

our current projections for the various components of 

GDP are as follows. 

Exports look set to mark their first contraction in 

seven quarters by falling somewhere in the order of 

3% (quarter-on-quarter; same hereafter unless 

otherwise noted) after a 2.5% increase in Q3. 

Exports have been slowing since mid-2010, 

reflecting: (1) the end of the post-crisis restocking 

phase; (2) diminished support from overseas fiscal 

Chart 1: Sales of New Motor Vehicles including 

Mini Vehicles (million, s.a., annualised) 

7.0 

6.5 

6.0 

5.5 

5.0 

4.5 

4.0 

3.5 

03 04 05 06 07 08 09 10 

Source: Japan Automobile Dealers Association, Japan Mini Vehicles 

Association, BNP Paribas 

Chart 2: Retail Sales, Household Machinery 

(2005=100, s.a.) 

150 

140 

130 

120 

110 

100 

Monthly 

Quarterly 

90 

05 06 07 08 09 10 

Source: METI, BNP Paribas 

stimulus; and (3) a moderate adjustment of 

worldwide inventory levels for IT and high-tech 

products. After five consecutive increases, imports 

look likely to decline by around 1.5%, in which case 

net exports would subtract around 0.2pp from overall 

GDP growth (Q3 contribution: 0.0pp). 

Turning our attention to domestic demand 

components, a 0.4% decline in private consumption 

would follow a 1.2% increase in Q3 2010. Data for 

October and November suggest that a last-minute 

surge in demand for flat-screen TV sets and certain 

other household appliances ahead of December's 

scaling back of the "eco points" scheme should help 

to partially offset big declines in spending on 

passenger vehicles and cigarettes. However, is likely 

to translate into another pullback in Q1 2011. 

Ryutaro Kono/ Hiroshi Shiraishi 13 January 2011 


19 


Growth in private non-residential investment 

(corporate capex) appears likely to slow from 1.3% in 

Q3 to less than 1% in Q4. Firms are apparently 

channelling much of their earnings growth into 

expansion of their overseas sales and manufacturing 

infrastructure rather than domestic capital investment. 

Residential investment should pick up from 1.2% in 

Q3 to around 3% in Q4, however, reflecting modest 

improvements in employment and income levels as 

well as stimulus provided by a 100bp interest rate 

discount for loans extended under the Japan 

Housing Finance Agency's Flat 35S programme. 

Housing starts – a leading indicator for residential 

investment – remain around all-time lows but 

recorded a further increase in November. 

Public investment is somewhat more difficult to 

estimate given that the relevant Integrated Statistics 

on Construction Works data have yet to be published 

for November. At this point in time, we are 

anticipating a decline of somewhere around 3% (Q3: 

-1.0%). Combining these forecasts implies that 

domestic demand will subtract around 0.1pp from 

overall GDP growth for Q4 after making a +1.1pp 

contribution in Q3. 

Economy set to stage a gradual recovery from 

early 2011 

Stripping out the distorting impacts of fiscal 

measures, the Japanese economy has been in a soft 

patch since mid-2010 due to a slowdown in exports. 

However, with global manufacturing activity having 

begun a cyclical upswing around October, we expect 

Japanese exports to move back into recovery mode 

sooner rather than later. Exports to China have 

already begun to pick up again, and other emerging 

economies look likely to be a major source of 

demand over the coming months. 

Industrial production data also paint a relatively 

positive picture, with manufacturing output levelling 

out in November and projected to increase in both 

1400 

1300 

1200 

1100 

1000 

900 

800 

700 

Chart 3: Housing Starts (k units, s.a., 

annualised) 

Monthly 

Quarterly 

600 

04 05 06 07 08 09 10 

Source: MLIT, BNP Paribas 

Chart 4: Real Exports to China (JPY bn, s.a.) 

1,400 

1,300 

1,200 

1,100 

1,000 

900 

800 

700 

600 

05 06 07 08 09 10 

Source: MOF, BoJ, BNP Paribas 

December and January. GDP in Q1 2011 will be 

pushed down at least to some extent by a pullback 

in consumer spending after the previous quarter's 

surge in demand for household appliances. 

However, we believe that stronger exports should 

help to prevent a second successive quarter of 

negative growth. 

Ryutaro Kono/ Hiroshi Shiraishi 13 January 2011 


20 


China: 2010 Money Growth Exceeds Target 

• In 2010, new loans reached RMB 7.95trn and 

M2 grew 19.7%. Both overshot the official target. 

• The incremental loan-to-deposit ratio 

dropped to 66.0% in 2010 from 73.1% in 2009, 

suggesting that a large amount of excess 

liquidity remains in the banking system. 

• Foreign reserves increased by USD 448.2bn 

to stand at USD 2.85trn at the end of 2010, a 

sizable part of which was contributed by hot 

money inflows. 

• Due to the monetary tightening in place, the 

money market rate has surged and will remain 

on an upward trend. 

• The normalisation of monetary policy is a 

key task for the monetary authorities in 2011, 

but the money supply will have to accommodate 

strong growth in activity. 

2,000 

1,800 

1,600 

1,400 

1,200 

1,000 

800 

600 

400 

200 

0 

Chart 1: New Loans (Monthly, RMB bn) 

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 

Source: BNP Paribas, PBOC 

2006 2007 2008 2009 2010 

Chart 2: Outstanding L/D Ratio versus 

Incremental L/D Ratio (%) 

90 

L/D 

L/D 

New loans failed to slow to the target 

In 2010, China departed from the extremely loose 

monetary policy of 2009, but failed to meet its 

tightening targets. Broad money supply (M2), narrow 

money (M1) and lending rose by 19.7%, 21.2% and 

19.7%, respectively, by the end of December. 

Although the growth rates were 8.0, 11.2 and 11.8 

percentage points respectively lower than in 2009, 

they continued to exceed the control target of 

17-18%. This is particularly true for new loans. The 

new loan quota was RMB 7.5trn, but the level of new 

loans reached RMB 7.95trn, 6% more than the target. 

This figure was achieved even after the extraordinary 

controlling efforts last December. In reality, the 

underlying figure should be larger: many of the loans 

called in in December would have been remade in 

January. 

The fact that new loans exceeded the quota 

suggests that the monetary authorities had to allow 

the financing that the level of economic activity 

desperately demanded. Chart 1 indicates that, 

although CBRC reinforced lending controls, in H2 

2010 the level of new loans was RMB 1.1trn more 

than in H2 2009, an increase of 49.5%. 

The monetary authorities have decided to normalise 

monetary policy (15-17% growth in money supply 

and loans) in 2011, but we believe it will only be the 

start of the normalisation which will not be completed 

in 2011. In other words, money supply growth will 

remain strong. 

80 

70 

60 

50 

40 

30 

00 01 02 03 04 05 06 07 08 09 10 

Source: BNP Paribas, PBOC 

Excessive liquidity remains in the system 

Excessive liquidity has been the outstanding 

phenomena in China’s financial system and the key 

reason behind inflation’s rise to a high level as well 

as the bubble in house prices. The outstanding loanto-deposit 

(L/D) ratio was 66.7% at the end of last 

year, exactly the same as it was in 2009. However, 

the incremental L/D ratio fell from 73.1% in 2009 to 

only 66.0% in 2010. Although the required reserve 

ratio had been raised to 18.3% on average (19.0% 

for large banks and 16.5% for medium-sized and 

small banks), theoretically there is still 15% or RMB 

10.8trn available to lend (of course, this part of 

money has been used to finance inter-bank 

borrowing and discount bills). 

Xingdong Chen 13 January 2011 


21 


Hot money inflows lie behind the surge of FX 

reserves 

China’s outstanding level of official foreign reserves 

rose to USD 2.85trn by the end of 2010, up by 

18.7% y/y, or an increase of USD 448.2bn over the 

year. It is widely believed that a large amount of the 

increase in FX reserves is attributable to “hot money”. 

The trade surplus and FDI together make up some 

79% of the increase in FX reserves according to 

official statistics. However, because a lot of hot 

money came to China through legal ways via trade 

and foreign direct investment, an important and 

famous official economist, Wang Jian, believes that 

less than 50% of foreign reserves can be explained 

by trade and foreign direct investment. 

Foreign capital inflows will continue in 2011. Indeed, 

if the US QE2 and fiscal policy do not work effectively, 

and if the eurozone’s peripheral debt crisis worsens, 

the hot money inflow into China could intensify. 

Market rate is on an upward trend 

Market interest rates started to rise strongly from 

November. 3M SHIBOR increased to 4.62% by the 

end of December, 279bp higher than at the end of 

December 2009. Meanwhile, SHIBOR seems to have 

returned to the pre-crisis level. Likewise, the 

weighted average inter-bank borrowing rate 

increased to 2.92% in December, 167bp higher than 

in 2009 December, while benchmark rates for both 

deposits and lending were increased by only 50bp. 

The rise in market interest rates well reflects the 

effects of monetary policy tightening. We expect 

market interest rates to remain on an upward trend 

and to stay firm at the higher levels. 

Chart 3: Quarterly Change in FX reserves 

versus Trade Balance plus FDI (USD bn) 

240 

220 

Incre FX Reserves Trade Suprlus + FDI 

200 

180 

160 

140 

120 

100 

80 

60 

40 

20 

0 

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 

Source: BNP Paribas, PBOC, NBS 

Chart 4: 3M SHIBOR and Interbank Borrowing 

Rates (%) 

5.0 

4.5 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

3M SHIBOR 

Weighted avg interbank lending rate 

0.5 

Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 

Source: BNP Paribas, CEIC 

Table 1: Major Financial Indicators in China 

(in RMB) 2009 2010 change 

M2 (% y/y) 27.7 19.7 (8.0) 

M1 (% y/y) 32.4 21.2 (11.2) 

M0 (% y/y) 11.8 16.7 4.9 

Outstanding RMB loans (% y/y) 31.7 19.9 (11.8) 

Outstanding RMB deposits (% y/y) 28.2 20.2 (8.0) 

New RMB loans (RMB trn) 9.6 8.0 (1.7) 

- household 2.5 2.9 0.4 

- non-financial institutions 7.1 5.1 (2.1) 

New deposits (RMB trn) 13.1 12.1 (1.1) 

- household 4.3 4.4 0.1 

- non-financial institutions 8.1 5.3 (2.8) 

- fiscal 0.4 0.3 (0.1) 

M1 growth/M2 growth 1.2 1.1 (0.1) 

M1/M2 (%) 41.0 39.0 (2.0) 

L/D 66.7 66.7 0.0 

L/D (%) 73.1 66.0 (7.1) 

(In USD) 

Outstanding FX lending (% y/y) 56.0 19.5 (36.5) 

Outstanding FX deposits (% y/y) 8.4 9.5 1.1 

New FX loans (USD bn) 136.2 74.0 (62.2) 

New FX deposits (USD bn) 16.2 20.0 3.8 

FX loans/FX deposits 8.4 3.7 (4.7) 

Foreign reserves (USD bn) 2399.2 2847.3 448.1 

Foreign reserves growth (% y/y) 23.3 18.7 (4.6) 

RMB/USD (period-end) 6.8282 6.6227 (0.2) 

RRR for large banks (%) 15.5 19.0 3.5 

Benchmark 1Y deposit rate (%) 2.25 2.75 0.5 

Benchmark 1Y lending rate (%) 5.31 5.81 0.5 

3M SHIBOR (period-end) 1.83 4.62 2.79 

Weighted avg interbank lending rate (%) 1.25 2.92 1.67 

Source: BNP Paribas, CEIC 

Xingdong Chen 13 January 2011 


22 


Brazil: Inflation Calls for Bold Policy Action 

• The inflation outlook continues to 

deteriorate. 

30 

Chart 1: CPI Inflation (% y/y) 

• Besides food, core inflation is picking up 

too. 

• Unanchored inflation expectations are 

drifting further away from the target. 

• Domestic demand is hot and wages are 

rising quickly in very tight labour markets. 

• The case is clear for prompt, bold policy 

action to contain inflation pressures. 

• A rate hike is coming. Will it be too little too 

late, or represent a decisive rescue of the BCB’s 

inflation-fighting credentials? 

• A key risk is that the current boom will be 

followed by eventual bust. 

Inflation is rising quickly and not only on the back of 

rising food prices. All measures of core inflation are 

climbing, services inflation is stubbornly high, while 

wages are growing at a double-digit pace amid 

unprecedentedly tight labour markets. Simply put, 

domestic demand is too hot to be sustainable. 

Worryingly, inflation expectations are worsening 

steadily, with the official target centre of 4.5% losing 

its effectiveness as an anchor. 

Policy response is overdue, we fear. Absent credible 

fiscal correction, monetary tightening needs to do the 

job. “Macro-prudential” measures may complement – 

but cannot replace – outright rate hikes. The central 

bank’s new administration has a unique opportunity 

to rescue the policymakers’ inflation-fighting 

credentials with a decisive rate hike, coupled with an 

explicit, unwavering commitment to do whatever it 

takes to return inflation to target soon. 

25 

20 

15 

10 

5 

0 

-5 

IP CA 

Aug-97 Aug-99 Aug-01 Aug-03 Aug-05 Aug-07 Aug-09 

Source: IBGE, BNP Paribas 

Average of three core measures 

Food 

Chart 2: Market Consensus Expectations for 

IPCA Consumer Price Inflation (% y/y) 

6.0 

5.5 

5.0 

4.5 

4.0 

Target 

12-months 

ahead CPI 

3.5 

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 

Source: BCB, BNP Paribas 

2011 CPI 

Chart 3: Brazilian Nominal and Real Earnings 

per Worker (% y/y) 

15 

10 

Nominal Earnings 

Otherwise, falling behind the curve will mean things 

stay too hot for too long, and inflation climbs yet 

higher, until policymakers are ultimately forced to 

over-tighten in delayed response. A resulting boomand-bust 

pattern is the main concern in that scenario. 

5 

0 

-5 

Real Earnings 

The inflation outlook is darkening 

The inflation environment is deteriorating visibly. 

National CPI (IPCA) inflation rose from 4.5% y/y in 

August last year to 5.9% as of December. While food 

inflation catches most attention, upward pressures 

are widespread as all measures of core inflation are 

elevated too. 

-10 

Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 

Source: IBGE, BNP Paribas 

Crucially, inflation expectations are continuing to 

deteriorate. The median consensus forecast for 2011 

inflation is rising steadily and now stands above 

Marcelo Carvalho 13 January 2011 

Markets Mover 

23 


5.0%. Even for 2012, while the headline median 

consensus forecast is stuck at the 4.5% mark, the 

average forecast has already started to increase. 

This suggests that the distribution of individual 

forecasts in the sample is biased to the right-hand 

side. Dangerously, if the official inflation target 

becomes increasingly perceived as a floor rather 

than a central policy goal, it may quickly loose its 

relevance as an effective anchor for longer-term 

expectations too. 

On recent trends, and without a convincing policy 

response, inflation could well start to threaten the 

6.5% target ceiling. In that scenario, it would not be 

unconceivable to start hearing talk about inflation 

going above 7.0%. 

After all, domestic demand is surging and resource 

utilisation in the economy is high. Brazil’s local credit 

conditions are supportive, consumer confidence has 

soared to all-time highs and labour markets are very 

tight. The unemployment rate keeps reaching all-time 

lows and nominal wage growth has accelerated into 

double digits. 

Fiscal promises, FX concerns 

The worsening inflation picture argues for a prompt, 

decisive policy response. Fiscal policy is too 

expansionary, including through quasi-fiscal stimulus 

via aggressive credit extension at subsidised rates by 

the national development bank (BNDES). While the 

authorities have pledged to pursue more disciplined 

fiscal policies, the challenge is to turn words into 

action. Sadly, the recent policy track record does not 

inspire much confidence, and observers remain 

sceptical on whether authorities will walk the fiscal 

talk. The recent reliance on accounting devices to 

achieve official fiscal goals does not bode well for 

fiscal credibility. 

In the absence of sufficient fiscal tightening, the 

burden of adjustment falls on monetary policy. As 

noted above, macro-prudential measures such as 

higher reserve requirements and credit restrictions 

are no substitute for rate hikes, given differences in 

the reach and transmission channels of these 

alternative policy tools. In fact, international 

experience suggests that macro-prudential policies 

can prove self-defeating if they turn out to be a thinly 

disguised excuse to avoid needed policy tightening. It 

may be fashionable in international circles to talk 

about macro-prudential policies, but there is no 

substitute for effective policy tightening. 

What about the currency? Today’s reluctance among 

policymakers across emerging markets to let their 

currencies appreciate can complicate monetary 

policy. Brazil’s recent measures to curb capital 

inflows call into question the role of currency 

appreciation as a relevant channel for monetary 

policy to have an impact on inflation. With the 

currency channel partially blocked, do policies then 

need to be tightened more than otherwise in order to 

achieve the same end-result? In all, as long as 

capital inflows remain strong but authorities resist 

currency appreciation, emerging-market monetary 

policymakers will continue to face a policy ‘trilemma’ 

if they try to target inflation and currency at the same 

time while still living with capital flows. Something 

has to give. 

Monetary policy action: how bold? 

It is high time monetary policy responded to rapidly 

deteriorating inflation dynamics. Now under a new 

administration, Brazil’s central bank has a unique 

opportunity at its inaugural policy Copom meeting on 

19 January to rescue its inflation-fighting credentials 

with bold action. While a 50bp rate hike is widely 

expected, the policy signal would be much stronger 

with a larger hike (say 75bp or even 100bp), if 

coupled with an unambiguously firm and explicit 

commitment to do whatever it takes to bring inflation 

back to the target in a timely manner. We trust the 

central bank understands what is at stake, but 

observers are uncertain whether there is sufficient 

latitude for autonomous monetary policy action. 

In addition, monetary policy across many emerging 

markets seems more expansionary (on currency 

fears) than domestic demand considerations alone 

would dictate. That raises the issue of whether or not 

individual central banks in emerging markets feel 

they can be more lenient as peers elsewhere also 

seem more willing to accommodate higher inflation 

than usual. 

One risk in Brazil is that inflation dynamics have 

worsened to such a degree that a 50bp rate hike at 

this stage might not be enough to re-anchor inflation 

expectations. After all, given the usual policy time 

lags and the pipeline inflation pressures that have 

been building, inflation may rise significantly higher 

before it starts to decelerate. 

If the central bank is regarded as remaining behind 

the curve, the concern is that domestic demand 

would remain too hot for too long and inflation 

pressures would build further. In that scenario, 

inflation would eventually get to a point that ultimately 

forces a more aggressive policy reaction. 

A back-loaded policy path would likely mean that 

rates would have to peak higher than otherwise, 

thereby increasing the risks of eventual overtightening 

and a resulting boom-and-bust growth 

pattern. 

Marcelo Carvalho 13 January 2011 

Markets Mover 

24 


US: Where to Allocate Money in Rates 

• With rates falling back into a range and not 

showing a strong directional trend just yet, 

curve positioning and allocation across rates 

products gain in importance in fixed income 

portfolios. 

• The 10y is the sweet spot on the curve, both 

versus the front and the back end, as well as 

against the 5y. 

• Intermediate and long TIPS BEs are trading 

in line with their pre-crisis levels, with little room 

to improve, especially as optimism about the 

economic outlook gets a reality check. 

• Mortgages, on the other hand, stand to 

benefit from a number of factors, including 

slower prepayments and low origination. 

• STRATEGY: Stay neutral duration, favor the 

10y sector along the curve. Overweight 

mortgages and favor higher coupons. Take 

profit in TIPS in the 10y+ sector. Overweight 

callable Agencies in this range trading 

environment; choose discount callables over 

new issues if you are in the slightly bullish 

camp, and prefer new issues if you have more of 

a mild bearish bias. 

Rates settling into a range 

As we mentioned in last week’s write-up (“The Macro 

Picture and Delta/Curve Bets”), the bearish 

momentum ahead of the NFP was unmistakable, 

although we questioned if the optimism had not 

gotten ahead of itself. And sure enough, the jobs 

picture turned out to be not so peachy – refuting the 

blowout signal from ADP yet again. That’s all it took 

to push rates back into a range, with the 10y now 

comfortably below the 3.50% mark. 

With Treasury supply out of the way after Thursday’s 

USD 13bn 30y auction, the short-term supply driven 

upward bias in rates should fizzle out, especially if 

the core CPI on Friday comes out below consensus 

as our economists expect (0.6% y/y versus 0.7% 

consensus). Not to mention that next week brings a 

slew of housing data – well, how do we put it? Suffice 

it to say that it will not be cause for celebration, with 

prices showing further declines…no solace for 

banks, or individuals who are desperately waiting for 

that fateful day when their biggest “asset” shows a 

pulse. So, for investors in fixed income, it is not so 

much duration, but more curve positioning and asset 

Chart 1: Directionality of Different Segments of 

the Curve (or Lack Thereof) 

Curve Level 

300 

280 

260 

240 

220 

200 

180 

160 

140 

120 

100 


bp 

25 

20 

15 

10 

5 

- 

(5) 

(10) 

2s10s Curve 

5s10s Curve 

1 1.5 2 2.5 3 

5y Tsy Rate 

Chart 2: CC Mortgage Is Fairly Valued 

Cheap 

(15) 

Rich 

(20) 

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 


8000 

7000 

6000 

5000 

4000 

3000 

2000 

1000 

Chart 3: Refinancing Remains Depressed 

0 

Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 


allocation that should be the focus. First, quickly on 

the curve, all segments of the curve remain 

historically steep. For the most part though, 2s5s and 

2s10s continue to be directional, with the curve 

Bulent Baygun / Mary- Beth Fisher / Timi Ajibola 13 January 2011 

Market Mover, Non-Objective Research Section 

25 


flattening in a rally and steepening in a sell-off. That 

is not so much the case for 5s10s, as this spread 

shows little directionality (Chart 1). This, combined 

with other factors, leads us to favor the 10y sector 

along the curve (see “Treasury Curve and Fly 

Opportunities” in this Market Mover for more details). 

We express this view through a 5s10s flattener. We 

started to scale into this position at 138.5bp. 

Next we turn to allocation among various products 

within rates. 

Mortgages look fair but are likely to continue to 

perform well 

With the majority of convexity selling done, we turned 

overweight on mortgages as convexity hedging in the 

sell-off left mortgages cheap. Since then, lower 

coupon mortgages have tightened especially on a 

nominal basis, while not as much on an OAS basis 

since the decline in volatility has kept OASs in check. 

While our regression shows mortgages are fair at this 

point (Chart 2), we continue to remain overweight as 

we expect new origination to be low as the majority 

of the refinanceable universe is now out-of-money. 

Despite an increase over the past two weeks, the 

refinancing index is still about 60% below the highs 

of 2010 and is at the lower end of the series over the 

past couple years (Chart 3). Lower refinancing 

signals slower prepayments, which was confirmed 

with December’s prepayment report, in which speeds 

were around 5% slower. Over the next couple of 

months, we expect speeds to decline by another 

50%. Refinancing accounted for around 80% of new 

origination in 2010, so lower refinancing activity 

should cause a drop in origination, which should in 

turn be supportive of the basis. 

Furthermore, with rates pulling away from their highs 

and settling back into the low to mid-3% area, we 

expect implied volatility to decline. This is another 

factor that bodes well for the mortgage basis 

(Chart 4). 

The cheapening in mortgages due to convexity 

selling in December had hurt lower coupons more 

than higher coupons. In anticipation of a reversal of 

this trend in the event of mortgage outperformance, 

going into payrolls we favored lower coupons along 

the coupon stack on a tactical basis, as NFP tends to 

be a mortgage supportive event. This trade has 

worked well and now, based on our regression 

analysis, 4 and 4.5 butterflies look fair, while the 6 

butterfly looks cheap (Chart 5). Therefore, at this 

point, we would prefer higher coupons from a 

valuation standpoint and because they offer the best 

carry after accounting for curve carry and rolldown 

and volatility, as shown in Table 1. 

Chart 4: A Further Drop in Volatility Should 

Tighten the Mortgage Basis 

100 

95 

Mtge Current Coupon vs 10y Swap Spread 

1y10y Swaption Implied Vol (R.H.S) 

140 

90 

130 

85 

120 

80 

75 

110 

70 

65 

100 

60 

90 

55 

50 

80 

Jan-10 Apr-10 Jul-10 Oct-10 Feb-11 


Chart 5: High Coupon Mortgages Look Cheap… 

Residual (ticks) 

10 

8 

6 

4 

2 

0 

-2 

-4 

-6 

Fly 4.0 

Fly 4.5 

Fly 6.0 

-8 

Cheap 

-10 

Oct-10 Nov-10 Dec-10 Jan-11 


Table 1: …and Offer the Best Carry 

Drop 

Curve 

Hedge 

Convexity 

Cost 

Total Hedged 

Carry 

FNMA 3.5 9.1 9.9 0.9 -1.7 

FNMA 4.0 10.3 9.2 2.6 -1.6 

FNMA 4.5 10.8 7.9 4.7 -1.8 

FNMA 5.0 10.0 6.6 4.2 -0.8 

FNMA 5.5 8.0 5.5 2.2 0.3 

FNMA 6.0 7.8 5.4 1.7 0.7 

FNMA 6.5 8.3 5.4 1.8 1.1 


300 

250 

200 

150 

100 

50 

Chart 6: 10y TIPS BEs Back to Typical 

Pre-Crisis Levels 

10y TIPS Breakeven (bp) Current Value 

0 

Jan-06 May-07 Sep-08 Feb-10 

Rich 




26 


Time to take some chips off the table in TIPS 

TIPS breakevens in 10y+ maturities have recovered 

to a point where they’re trading around average 

2006-07 pre-crisis levels (Chart 6). Against the 

backdrop of a mild recovery, we expect inflation to 

remain subdued for some time. Inflation is fairly well 

correlated to wages (Chart 7) and the Fed notes that 

there is no upward pressure on wages due to 

resource slack. We expect no pressure from the 

shelter component (42% of the core) either. Thus, we 

think that it may be time to scale down longs in TIPS 

until seasonality improves in March, especially if one 

has a neutral to bullish view on Treasuries. For those 

with a more bearish bent, there is no need to rush for 

the exit, since breakevens could widen in a sell-off 

owing to their typical directionality. 

Capitalize on range trading through callables 

In a range trading environment, callable Agencies 

tend to outperform their bullet siblings and Treasuries 

over time on a duration-adjusted basis. Because we 

do not foresee a sharp directional trend shaping up in 

rates in the near term, we gravitate toward callables 

as another way to add alpha. 

Let’s consider a few factors at play here: the sharp 

steepening of the yield curve over the past two 

months has resulted in higher forward rates. At the 

same time, in recent weeks the volatility market has 

come down off its highs, removing some value from 

the options market. The effect of this combined move 

in the curve and vol on the new issue callable 

universe is significant in that, in most cases, the 

projected forward rates are now higher relative to the 

par coupon on the callable bond. The duration of the 

callable bonds has extended in the process because 

term structure models project a lower probability that 

the bonds will be called in view of the higher forward 

rates and lower vol. 

Chart 7: Lack of Wage Pressure Means Little 

Inflation 


Another effect of the steeper curve and longer 

durations is that investors buying par callables have 

less downside protection when comparing 

performance versus duration-matched bullets. That 

is, the umbrella that covers the range of 

outperformance is decidedly skewed to the upside, 

with very little - if any - tendency to outperform given 

a parallel shift lower in rates. Having said that, the 

reality isn’t as dire. Any move lower in rates from 

here would likely be in the form of a bull flattening 

instead of a parallel shift, which is a very positive 

move for callables. 

The upshot is the following: first of all, you need to 

have a range trading view. Once you are in that 

camp, if you are concerned about a rally as the risk 

scenario, we suggest buying discount callables, as 

they will provide more protection on the downside 

than new issues. On the other hand, if the prospect 

of a sell-off is what worries you more, stay in the new 

issue market, though we would prefer to see a rise in 

volatility before jumping in. 



27 


US: Treasury Curve and Fly Opportunities 

• Last week’s non-farm payroll data halted the 

sell-off of rates which started from the 

beginning of this year. Since then, Treasuries 

have rallied led by the 5y. 

• PCA on the Treasury curve shows that the 

2y and 3y points look rich while the 10y looks 

cheap. 

• STRATEGY: Scale into 5s10s Tsy flatteners. 

Also consider buying the belly in 3s10s30s and 

selling the belly in 2s3s5s. 

Table 1: QE2 Fed Purchases vs Tsy Issuance 

Maturity 

Expected Fed 

Purchases 

During QE2 

Gross Supply 

During QE2 

Issuance Net of 

Fed Buying 

1.5 - 2.5y 45 280 235 

2.5 - 4y 180 256 76 

4 - 5.5y 180 280 100 

5.5 - 7y 207 232 25 

7 - 10y 207 176 -31 

10 - 17y 18 0 -18 

17 - 30y 36 112 76 


Chart 1: 5s10s Tsy Curve 

Non-farm payrolls applies brakes on optimism 

Last week’s article “The Macro Picture and 

Delta/Curve Bets” had cautioned against the 

ubiquitous optimism in the market as economic data, 

such as both the ISMs and ADP, led the sell-off in 

rates. 

The disappointing payrolls report brought a bid back 

to the market and, since then, the 2y Treasury has 

richened by 6bp, 5y by 11bp and 10y by 5bp while 

the 30y is flat. This caused 5s10s to re-steepen and 

we took the opportunity on Wednesday to start 

scaling into a flattener at 138.5bp. We briefly explain 

why we like this as a core strategic position and also 

why the timing could be favourable now. Also, there 

is value in butterfly positions that fit with the results 

from PCA and also look to be at historically extreme 

levels. 

5s10s Tsy flattener 

5s10s reached its all-time highs of 150bp around the 

time of the QE2 announcement in November last 

year. One of the main reasons for this was that the 

market was assuming Fed purchases would be 

centred on the 5y area, allowing this sector to lead 

the rally into November. However, the actual QE2 

details revealed that the 7-10y sector will probably 

get the largest Fed support, relative to how much 

supply will be coming in that sector (Table 1). 

However, since November, 5s and 10s have moved 

almost in tandem with one or the other leading the 

sell-off, keeping the curve at steep levels. We initially 

put on a flattener right after the QE2 announcement, 

successfully, and now like re-entering the position 

given 5s10s looks to have moved back to the top of 

its short-term falling channel (Chart 1). 

160 

150 

140 

130 

120 

110 

100 

Nov-09 Feb-10 May-10 Aug-10 Dec-10 


3 

2 

1 

0 

-1 

-2 

-3 

5s10s Tsy Curve 

Chart 2: 1- and 2-Factor PCA Z-Scores 

Adjusting for Level of Rates 

Adjusting for Level of Rates and Curve 

2Y 3Y 5Y 10Y 30Y 

Source: BNP Paribas, PCA on last 1 year of data 

One reason to like the timing of the trade here is that 

Principal Component Analysis (PCA) on the constant 

Rohit K Garg / Suvrat Prakash 13 January 2011 


28 


maturity Treasury curve shows that the 10y looks 

particularly cheap (Chart 2). When only adjusting for 

the level of rates, it looks like the front end is quite 

rich so this bodes well for curve flatteners out until 

the 10y sector. However, a position like 2s10s has 

traded much more directionally than 5s10s in the 

past year, so 5s10s is more of a market-neutral RV 

position. Also, Chart 3 illustrates the cheapness of 

the 10y versus the 5y. 

10y Yield 

4 

3.5 

3 

Chart 3: 5y vs 10y Scatter Plot 

Current point 

3s10s30s, 2s3s5s butterflies 

In Chart 2 the blue bars show the PCA results when 

adjusting for the level of rates as well as the curve 

(known as a 2-PC analysis). This helps better identify 

butterfly opportunities, and notice the cheapness of 

the belly compared to the richness in the short and 

ultra-long end. Chart 4 shows the level of the 50-50 

weighted 3s10s30s fly which is currently close to the 

highs and we would recommend this fly for those 

looking to overweight the belly. To limit the 

directionality one could use the PCA weights of -61% 

on the 3y, +100% in the 10y and -73% on the 30y 

(duration dollar weights). 

A less directional fly that also looks attractive is 

2s3s5s, which has recently started backing away 

from the all-time lows (Chart 5). Part of the reason for 

the richening in the 3y area has been the repo 

specialness in benchmark 3s, but the 1 st off-the-run 

is trading close to GC in the repo market so this 

would be the preferred issue to use. 1-month carry is 

flat when structuring the trade in this manner. 

2.5 

2 

1 1.5 2 2.5 3 

5y Yield 


Chart 4: 3s10s30s Backing Away From Highs 

160 

140 

120 

100 

80 

60 

40 

20 

0 

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 


Chart 5: 2s3s5s Backing Away From Lows 

-20 

-25 

2y3y5y Tsy Fly 

-30 

-35 

-40 

-45 

-50 

-55 

-60 

-65 

-70 

May-09 Dec-09 Jun-10 Jan-11 


Rohit K Garg / Suvrat Prakash 13 January 2011 


29 


EUR: Liquidity is Not a Worry for the ECB 

• After this week’s MRO, the level of liquidity 

provided to the eurosystem with MROs and 

LTROs dropped below the level seen at the end 

of September 2008, just before the ECB shifted 

to full allotment and fixed rate operations. 

• Against this backdrop, the reduction of 

liquidity in the eurosystem is no longer a matter 

of concern as it does not represent any threat. 

• STRATEGY: Keep short positions on 

6m-12m eonias. 

Chart 1: Liquidity is Back to Sept 2008’s Levels 

Accommodative liquidity policy reduced stress… 

When the ECB decided to turn on the liquidity tap in 

October 2008, to prevent the liquidity crisis from 

turning into a complete collapse of the Eurosystem, 

liquidity exploded. From the end of September to 

early November 2008, liquidity provided with open 

market operations (MROs and LTROs) surged from 

EUR 480.5bn to more than EUR 820bn. At the same 

time, the balance sheet of the Eurosystem inflated 

from EUR 1.52trn to EUR 2.0trn. Most of the 

increase was therefore driven by the strong rise of 

liquidity injected into the system by open market 

operations, on banks’ request. 

Concern about liquidity was high, as reflected in 

OIS/BOR spreads. This tension persisted for a while 

before fading gradually as the ECB decided to 

extend temporary measures. The signal given by the 

ECB was clear for money markets: it would keep 

accommodative measures as long as there was a 

risk of a liquidity squeeze, in a context where several 

banks remained largely dependant on ECB’s 

liquidity, as they have little access to market liquidity. 

This signal helped to ease tensions significantly and 

liquidity spreads tightened sharply. 

…but raised concerns over the exit strategy 

The expansion of the eurosystem’s balance sheet 

raised questions over the exit strategy from nonstandard 

liquidity measures. Indeed, the acceleration 

of the monetary base was seen as a potential risk for 

an acceleration of money supply, itself seen as key 

driving force for inflation in the long run. As has long 

been highlighted by academic work, the chain of 

causality between these factors is far from certain as 

demand for money is not stable. However, the 

expansion of the balance sheet ─ as long as it was 

caused by a strong rise in liquidity provided by 

accommodative open market operations ─ was a 

source of concern at the ECB. 

Liquidity is no longer a matter of concern 

After this week’s MRO, liquidity provided to the 


Chart 2: Demand from Peripherals Still Elevated 

Sources of Demand for ECB's liquidity 

160.0 

Spain 

Portugal 

Greece 

Ireland 

140.0 

Aggregate (RHS) 

120.0 

100.0 

80.0 

60.0 

40.0 

20.0 

0.0 

Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 


eurosystem by open market operations dropped to 

EUR 478.2bn, i.e. below the level seen at the end of 

September 2008 although the balance sheet of the 

eurosystem is still almost EUR 450bn above its level 

at that time. Hence, liquidity provided by open market 

operations is no longer the cause of the balance 

sheet expansion. The CBPP and the SMP explain a 

third of this, but the SMP is not increasing liquidity as 

it is offset by term deposits. As a result, the main 

causes lie elsewhere with both currency and gold 

reserves large contributors to the increase. 

Open market operations are now providing liquidity 

EUR 40-50bn above needs. This prevents tensions 

on eonias from developing, but is not a concern for 

the ECB. In addition, several banks in a number of 

countries remain largely dependant on the ECB’s 

liquidity. Against this backdrop, the ECB will act 

cautiously when it comes to the exit strategy. 

However, the current price action at the front end 

remains too dovish against our view on the ECB’s 

stance and we continue to recommend keeping a 

negative view at the front end. 

Strategy: Keep short positions on 6m-12m Eonias. 

400.0 

350.0 

300.0 

250.0 

200.0 

150.0 

100.0 

50.0 

0.0 

Patrick Jacq 13 January 2011 


30 


EUR Swap Spreads: Summary of Forces 

• Swap spreads have tightened significantly 

at the long end and stretched at the short end of 

the curve in recent weeks. 

Chart 1: Decoupling on Swap Spreads 

• While a priori contradictory, this can be 

explained by current heterogeneous conditions 

in the euro area. 

• STRATEGY: Pay 2-10y Ger-Swap box 

Decoupling 

Since mid-December, the 10y Bund-Swap spread 

has tightened from 38.5bp to 28.5bp, with the bias 

being particularly significant since the start of the 

year. The 2y Schatz-Swap spread widened from 

64bp to as much as 75bp; it is now just a couple of 

bp below this level. Such a decoupling is not new. It 

has occurred in the past, particularly in periods of 

tensions in the euro area. Thus, while a priori 

contradictory, the recent decoupling is explicable. 


Chart 2: Liquidity and Volatility Favour Tight 

Spreads 

10y Bund-spread: supply, liquidity conditions 

The evolution of supply in the eurozone is one of the 

key driving forces for the 10y Bund-swap spread. 

Supply increased significantly at the start of the year 

(govvies, financials, corporate) with a significant part 

being swapped. Receiving interest on medium- and 

long-term swaps increased, fuelling a significant drop 

in 5y and 10y swap rates. While slightly positive, the 

tone in the govvies sector was not that strong, and 

the Bund lagged in the rally. In addition, liquidity 

conditions, another key driving force, remain ample, 

favouring tighter swap spreads. 

2y Schatz-spread: the turmoil in the euro area 

At the short end, things are different, with the 

widening explained by concerns over the eurozone. 

These concerns are fuelling flight-to-quality trades. 

Since the crisis started in 2008, and in a context of 

central banks providing ample liquidity, flight-toquality 

trades have been different in nature. They are 

no longer a trade-off between bonds and stocks, but 

between “good” govvies and “bad” govvies, with 

stocks and commodities benefiting from ample 

liquidity. As a result, phases of rising concerns over 

EMU are adding to 2y Schatz-spread widening. By 

the way, the weakness of EMU govvies can be 

highlighted by the weighted average 10y EUR swap 

spreads (Chart 3). 

Strategy: with no change in conditions in coming 

weeks, the 2-10y swap flattening may be more 

pronounced than on the benchmark curve. Pay 2-10y 

Ger-Swap box. 


Chart 3: EMU Prints a Weak Picture 


Patrick Jacq 13 January 2011 


31 


EUR: Colour On the Cross-Ccy Basis 

• In addition to the usual variables (global risk 

and local liquidity), a third variable – EUR 

sovereign risk premium – has entered the crossccy 

equation. 

• STRATEGY: Consider locking in wide levels 

in EUR/GBP cross-ccy basis. 

0.6 

0.4 

0.2 

0.0 

-0.2 

-0.4 

-0.6 

-0.8 

Chart 1: Global Liquidity Still Ample 

Global liquidity 

USD 10Y swap spread (RHS) 

Tight liquidity conditions 

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 

150 

100 

50 

0 

-50 

Cross-ccy basis in EUR ended the year wider by 

about 15bp in the 5y sector, with impressive volatility 

in Q4 (range: -17/-37bp). The market has been 

characterised by ample global liquidity, which has 

helped global risky assets to perform (Chart 1). This 

situation is quite different from late 2008 and early 

2009, when USD illiquidity was pushing systemic risk 

higher and making it hard to fund USD investments 

externally. 

We have also observed protracted periods of strong 

decoupling between EUR cross-ccy basis and its two 

theoretical drivers (global liquidity and local liquidity, 

see previous research). This decoupling was most 

evident in April-May and September-October (Chart 

2). In both periods, the precipitous rise in EUR 

sovereign risk premia added to the relative quality of 

USD-denominated assets (safe haven), thus 

widening the cross-ccy basis. 

The situation is even more complex within Europe, 

where EUR/GBP basis exploded in Q4 (2y +20bp). 

Again, EUR sovereign risk is the main driver, 

reflecting the difficulty of Irish financial institutions in 

funding their GBP-denominated liabilities through the 

sterling interbank market, while still being able to 

access EUR liquidity via ECB operations. The 

specificity of the intra-European liquidity flows is also 

evident in Chart 3. We can see here how cable 

cross-ccy has normalised in line with global themes 

(S&P 500 as proxy), while EUR/GBP bases have 

drifted to theoretically unsustainable levels due to 

significant liquidity differentials. 

Arbitrage arguments and seasonal issuance patterns 

need to be considered in the context of ongoing high 

sovereign risk premia (e.g. accumulation of risk 

factors at the start of Q2 with a peak in Spanish 

redemptions). However, current EUR/GBP basis 

levels look attractive both for strong names that can 

issue in the GBP market, as well as for those carry 

players who hold GBP-denominated debt and intend 

to swap back their risk into EUR, thus locking in the 

impact of cross-ccy on the ASW. 

10 

0 

-10 

-20 

-30 

-40 

-50 

-60 

-70 

EUR 5Y ccy basis 

S&P500 

Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 


Chart 2: Sovereign Risk Affecting EUR Basis 

0 

-10 

-20 

-30 

-40 

-50 

-60 

Lehman crisis 

EUR 5Y cross-ccy 

ECB SMP 

1st EUR govie crisis 

-70 

2008 2009 2010 2011 


1700 

1500 

1300 

1100 

900 

700 

500 

Irish crisis 

Chart 3: GBP Cross-Ccy Outperforming 

20 

0 

1650 

1450 

-20 

1250 

-40 

-60 

-80 

GBP 2Y cross-ccy 

S&P500 (RHS) 

1050 

850 

-100 

650 

Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 

60 

40 

20 

0 

-20 

GBP/EUR 2Y cross-ccy 



-40 

2007 2008 2009 2010 2011 


Alessandro Tentori 13 January 2011 


32 


EMU Debt Monitor: CDS Analysis 

Chart 1: AAA Country Basis Differential vs Germany: DSL 

Too Cheap 

Chart 2: Non-Core Basis Differential vs. Germany: 5y BTP 

Too Cheap 

50 

5Y CDS basis 

80 

5Y CDS basis 

40 

30 

cash cheap vs CDS 

60 

40 

20 

cash cheap vs CDS 

20 

0 

10 

-20 

0 

-40 

-10 

-20 

cash expensive vs CDS 

-60 

-80 

-100 

cash expensive vs CDS 

-30 

Jul-10 Aug-10 Aug-10 Sep-10 Oct-10 Oct-10 Nov-10 Dec-10 Jan-11 

FRA FIN AUS NETH 

-120 

Jul-10 Aug-10 Aug-10 Sep-10 Oct-10 Oct-10 Nov-10 Dec-10 Jan-11 

BEL SPA ITA POR 

Among AAA papers, the most noticeable move is the 

cheapening of DSL vs 5y CDS (6-month rolling z score rose 

from 0.6 to 2.0 in a week). French paper also cheapened but 

from expensive levels. As stressed on Tuesday, DSLs are 

back at buying levels vs. BTANs at the short end (see Trade 

Ideas page). OLOs 5y, which richened further vs. the CDS (up 

almost 50bp in a week at some stage), finally cheapened 

back quickly on the past two days’ spread compression. 


As the chart above illustrates, after a marked richening versus 

5y CDS since late November in the wake of more aggressive 

SMP buying, Portuguese bonds have started to cheapen a bit 

vs. CDS from expensive levels. The best indicator is the rise 

in the 6-mth rolling z score of the CDS basis differential vs. 

Germany from -2.4 to -1.0 over the past week. By contrast, 5y 

BTPs are now trading very cheap vs. CDS (z score at 2.7), 

something also observed within the 2y/5y/10y BTP fly. 

CDS Table & Stats 

5y FIN NETH FRA AUS BEL ITA SPA POR IRE GRE 

CDS 37 54 106 101 231 220 324 511 652 992 

cash -39 -38 -19 -9 105 125 212 327 473 802 

Basis 76.5 92.2 125.2 109.3 126.1 94.9 111.8 183.8 178.8 190.1 

Average 26.1 11.6 -11.1 -3.3 -16.2 -22.5 -24.4 -31.0 -12.0 -75.9 

Max 42.4 20.0 0.9 15.8 4.3 15.7 14.2 36.1 53.5 3.9 

Min 14.6 5.0 -24.2 -23.3 -45.4 -59.8 -52.5 -117.7 -93.1 -165.2 

Z score** 1.17 1.96 -0.73 0.66 0.05 2.71 1.87 -1.02 -1.46 -0.09 

Current CDS vs Germany Change to 31/12/2009 Change to 30/6 

2y 5y 10y 2y 5y 10y 2y 5y 10y 

FIN 24 37 48 24 35 46 34 20 20 

NETH 36 54 64 29 49 59 23 31 36 

FRA 80 106 122 75 102 116 32 54 69 

AUS 69 101 111 31 42 49 -5 -11 -13 

BEL 196 231 228 174 203 193 76 108 107 

ITA 164 220 219 118 146 140 -35 4 -11 

SPA 277 324 321 222 231 225 -33 1 27 

POR 507 511 460 452 437 380 96 129 66 

IRE 695 652 588 577 516 450 312 226 144 

GRE 1013 992 893 809 732 629 -155 -96 -155 

Source: BNP Paribas. * The z score measures the deviation from the 6-mth rolling average CDS/cash basis of the country versus Germany, expressed in numbers 

of standard deviations. A number above 1.50 means that the cash is trading historically cheap compared to its average basis level. 

Eric Oynoyan / Ioannis Sokos 13 January 2011 


33 


EMU Debt Monitor: Key RV Charts 

Chart 3: Hedged 2012/2015/2019 BTP fly: 2015 BTPs Back 

at Very Cheap Levels 

Chart 4: 2013/2017 DSL/OAT box: 2013 like 2014 BTANs 

Back at Expensive Levels 

40 

30 

BTP 5y cheap 

Top on BTP/bund 

spread 

20 

15 

BTAN July 13 

expensive 

20 

10 

Sharp BTP 

rally 

vs Bunds 

10 

5 

0 

0 

-10 

-20 

BTP 5y rich 

Active CBs 

purchase 

Sharp BTP sell-off 

-30 

May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 

Hedged 12/15/19 BTP Fly 

BTPs 2015 are back at very cheap levels vs. 2012 and 2019 

maturities (hedged fly back at 3 st dev). A similar result is seen on 

the CDS basis. Such a cheap level implies that 2012/2015 BTP 

steepeners now offer a very poor risk/reward profile. 

Chart 5: 2013/2020 OLO/ATS Box: 2020 OLO Too 

Expensive 

50 

40 

30 

20 

10 

0 

-10 

-20 

-30 

-40 

Historical Average + 2.5 st dev 

Historical Average - 2.5 st dev 

-50 


Olo Sep 13/Oct 13/Sep 20/July 20 

Last week, we stressed the decoupling between 2013 and 2020 

OLO/ATS spreads. 2020 OLOs finally cheapened vs AAA paper 

but the 2y/10y box is still far too high at around 2.5 SD above its 

historical average (i.e. 2020 OLOs still too expensive). 

-5 

BTAN July 13 

cheap 

-10 


DSL/btan July 13/July 17/Oct 17 

A new 3y DSL auction put some temporary pressure on 

2013/2014 DSLs. As the 2013/2017 DSL/OAT box above shows, 

the latter are now back at very cheap levels vs. 7y/10y maturities 

(see Trade Ideas section). 

Chart 6: 2020/2040 BTP/Bono Box: BTP 2040 Too Cheap 

0 

-5 

-10 

-15 

-20 

-25 

-30 

-35 

BTP 2040 too expensive 

-40 

Jan-10 Mar-10 Jun-10 Sep-10 Nov-10 

Bono/BTP 2020/2040 box 

BTP 2040 too cheap 

The 30y has continued to cheapen over the past week with the 

10y/30y BTP/Bono box inverting more than 2.5 SD from the 

historical average. The 2020/2040 BTP spread, now in mid 80s, 

offers huge value for strategic flatteners targeting low 60s. 

Chart 7: OFR/OTR OBL ASW History: OBL 159 Too Cheap 

Chart 8: Peripherals 2/5s Spreads vs GER - 3m Range 

10 

300 

250 

Last 

5 

200 

0 

150 

100 

-5 

50 

-10 

1 16 31 46 61 76 91 106 121 136 

obl 152/153 obl 154/155 obl 153/154 

obl 155/156 obl 156/157 Av OFR/OTR asw 

obl 157/158 

OBL 159 has recovered vs. OBL 158 with the spread falling from 

14bp to 12.5bp but still offers good value. OBL 158 is still trading 

too expensive on the curve (8bp richer than Jan 16). There is 

value in switching from OBL 158 to 159, targeting 9bp. 

All Charts Source: BNP Paribas 

0 

-50 

GRE 2/5s IRE 2/5s POR 2/5s SPA 2/5s ITA 2/5s 

We look at 5y spread vs GER - 2y spread vs GER (yields) across 

all peripheral countries. Ireland looks too steep versus Greece 

and Portugal. Greece is still below the middle of the 3m range on 

restructuring fears. We think PGB/Bund 2/5s can steepen further. 



34 


EMU Debt Monitor: Redemptions 

• Only AAA countries face EGB redemptions in January. Germany EUR 23bn, France EUR 18bn, Netherlands 

EUR 14bn and Austria EUR 8bn. 

• T-Bill redemptions will total EUR 99bn this month versus EUR 63bn of EGBs. 

EGB Monthly Redemptions 

Bonds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 

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 

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 

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 

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 

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 

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 

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 

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 

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 

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 

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 

Total 63 24 66 58 22 35 83 27 89 47 20 24 558 

T-Bill Monthly Redemptions 

Bonds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 

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 

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 

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 

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 

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 

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 

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 

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 

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 

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 

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 

Total 63 24 66 58 22 35 83 27 89 47 20 24 558 

100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Monthly EGBs Redemptions 


120 

100 

80 

60 

40 

20 

0 

Monthly T-Bills Redemptions 


This Month’s EGB Redemptions 

This Month’s T-Bill Redemptions 

Country Bond Maturity Issued EURs (bn) CRNCY 

GERMANY DBR 5 1/4 01/04/11 04/01/2011 20/10/2000 23.25 EUR 

AUSTRIA RAGB 5 1/4 01/04/11 04/01/2011 16/01/2001 8.27 EUR 

GREECE GGB 2 01/11/11 11/01/2011 11/01/2002 0.02 EUR 

FRANCE BTNS 3 01/12/11 12/01/2011 24/01/2006 17.82 EUR 

NETHERLANDS NETHER 4 01/15/11 15/01/2011 11/01/2008 13.86 EUR 

Total 63.21 


Country T-Bill Maturity CRNCY EURs 

AUSTRIA RATB 0 01/13/11 13/01/2011 EUR 0.1 

BELGIUM BGTB 0 01/20/11 20/01/2011 EUR 5.5 

FINLAND RFTB 0 01/11/11 11/01/2011 EUR 1.9 

FINLAND RFTB 0 01/19/11 19/01/2011 USD 1.7 

FRANCE BTF 0 01/13/11 13/01/2011 EUR 8.8 

FRANCE BTF 0 01/27/11 27/01/2011 EUR 8.0 

FRANCE BTF 0 01/06/11 06/01/2011 EUR 8.1 

FRANCE BTF 0 01/20/11 20/01/2011 EUR 8.5 

GERMANY BUBILL 0 01/26/11 26/01/2011 EUR 6.0 

GERMANY BUBILL 0 01/12/11 12/01/2011 EUR 5.0 

GREECE GTB 0 01/14/11 14/01/2011 EUR 1.0 

GREECE GTB 0 01/14/11 14/01/2011 EUR 2.0 

GREECE GTB 0 01/21/11 21/01/2011 EUR 1.2 

IRELAND IRTB 0 01/14/11 14/01/2011 EUR 2.1 

ITALY BOTS 0 01/31/11 31/01/2011 EUR 9.9 

ITALY BOTS 0 01/14/11 14/01/2011 EUR 7.5 

NETHERLANDS DTB 0 01/31/11 31/01/2011 EUR 9.7 

PORTUGAL PORTB 0 01/21/11 21/01/2011 EUR 3.4 

SPAIN SGLT 0 01/21/11 21/01/2011 EUR 8.7 

Total 99.0 



35 


EMU Debt Monitor: Trade Ideas 

• Stay long DSL July 14 versus BTAN July 14. 

• Buy CTZ Dec 12 versus BTP Dec 12. 

• Book profits on 2012/2015 BTP steepeners. 

• Sell BTP June 13 versus BTP Nov 15. 

12 

10 

Chart 1: 2013/2020, 2014/2020 DSL/OAT ASW 

Box: DSL 2014 Back to Cheap Levels 

8 

6 

4 

2 

Stay long DSL July 14 versus BTAN July 14 

In late November, we recommended selling BTAN 

July 14 versus DSL July 14 at 15bp to benefit from 

the low level of the 2012/2014 DSL/BTAN box (i.e 

DSL July 14 too cheap). Our view was that the 

spread would widen back close to June’s high 

around 23/25bp. After widening to the low 20s by late 

December, 2013 to 2014 DSL/BTAN spreads 

tightened back massively returning to 13bp in the 

wake of the new 3y DSL supply this week and the 

non-core spread tightening. Even though the bulk of 

DSL supply in Q1 will focus on the short end, the 

10bp compression of the 2014/2020 DSL/BTAN box 

(Chart 1) seen recently makes DSL/BTAN widening 

trades attractive in terms of their risk/reward profile. 

The short July 14 BTAN versus DSL July 14 trade 

is still worth playing targeting 23/25bp again. 

Buy CTZ Dec 12 versus BTP Dec 12 

Dec 12 CTZ launched in late December has 

recovered slightly versus BTP Dec 12 but is still 

trading very cheap. Chart 2 plots CTZ/BTP spreads 

from Sep 11 to Dec 12 maturities. The Dec 12 

CTZ/BTP spread is clearly trading too wide 

compared to other maturities which are hovering 

around 10bp with the exception of Sep 11. In spite of 

a temporary spread rewidening on the next CTZ Dec 

12 taps, the Dec 12 CTZ/BTP spread should 

gradually converge to the low 10s. Holders of BTP 

Dec 12 should switch into CTZ Dec 12 on any 

temporary spread widening to 21/22bp. A gradual 

return to the low 10s is expected. 

Book profits on 2012/2015 BTP steepeners 

The steepening position recommended in late 

November in the wake of the panic selling on shortdated 

BTPs (the box versus Germany narrowed by 

30bp in two weeks) worked quite well with the BTP 

Feb 12/Apr 15 posting new highs this week (Chart 3). 

With the 2015 part of the BTP curve becoming very 

cheap versus the 2y and 10y, the risk/reward for BTP 

steepeners is now very poor. After a more than 

30bp move, we advise booking profits on 

recommended steepeners. 

0 

-2 

-4 

-6 

-8 

2013/2014 btan richening 

-10 

Oct-10 Oct-10 Nov-10 Dec-10 Jan-11 


BTNS 07/14 ASW-NETHER 07/14 ASW-FRTR 10/20 ASW-NETHER 07/20 ASW 

BTNS 7/13 ASW-NETHER 07/13 ASW-FRTR 10/20 ASW-NETHER 07/20 ASW 

Chart 2: Sep 11 to Dec 12 CTZ/BTP Spreads: 

Dec 12 CTZ Too Cheap 

30 

20 

10 

0 

-10 

-20 

-30 

Sep-11 Feb-12 Apr-12 Aug 12 vs July 

12 


60 

50 

40 

30 

20 

10 

Last 

Dec-12 

Chart 3: 2012/2015 BTP and BTP/Bund Box: 

2012 BTPs’ Excessive Cheapness Corrected 

0 

90 

Aug-10 Sep-10 Oct-10 Oct-10 Nov-10 Dec-10 Dec-10 Jan-11 Jan-11 Feb-11 


2012/2015 BTP/Bund box (LHS) BTP Feb 12/ Apr 15 

150 

140 

130 

120 

110 

100 



36 


Sell BTP June 13 versus BTP Nov 15 

A safe way to benefit from undervalued 2015 BTPs 

(see Chart 3 on “Key RV Charts” section) within the 

BTP curve is to buy BTP Nov 2015 versus slightly 

longer maturities than 2012 such as June 2013. As 

Chart 4 shows, the ASW differential on BTP June 13 

versus Nov 15 is back above OBLs’ one around 

15/16bp while it was trading close to parity in late 

November. A similar position on the Bonos ASW 

curve is around parity and started to narrow. The 

BTP June 13/Nov 15 spread – around 87/88bp – 

should tighten back towards 75/80bp and then 

below 70bp gradually offsetting the extreme 

cheapness of BTP 2015. 

What have we seen in 2011 so far? 

Apart from specific trade ideas, it is also useful to 

provide an overview of the more general moves we 

have seen in 2011 so far. Even though it is only a 

few days since the start of the year, history has 

shown that the first days are quite critical for the 

course of the whole year. First of all we distinguish 

between three country groups: 1) SMP-supported 

members: Greece, Ireland and Portugal. 2) Victims of 

contagion: Spain, Italy and Belgium. 3) AAA 

members: Germany, the Netherlands, Finland, 

France and Austria. In Charts 5 and 6 we present the 

changes of the ASW curves across the different 

groups. 

Starting with Chart 5, we would highlight the 

significant underperformance of Belgium versus Italy 

and Spain. This underperformance is more marked in 

the 2013-16 sectors and more contained in the 10y 

maturity and beyond. The second thing to notice is 

the steepening of all these curves both in 2/5s and in 

2/10s. In late November we suggested steepeners 

on the BTP curve since we thought that the 

underperformance of the front end was overdone and 

there was no imminent risk present. We now think it 

is a good time to book profits in those steepeners 

(see trade idea number three). 

In Chart 6 we focus on three core AAA countries and 

show the marked outperformance of France versus 

the Netherlands and especially Germany. This is 

much stronger at the front end of the curve where 

BTANs have outperformed DSLs and German 

bonds. BTANs look too rich after this move which is 

why we recommend trade idea number one above. A 

potential new 5y BTAN in the week ahead could also 

reinforce this view while the Dutch have already 

launched their new DSL Jan-14. Of course, Austria is 

outperforming versus all the aforementioned 

countries and RAGBs have reached quite expensive 

levels. In our view, what differentiates Austria from 

35 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

-15 

Chart 4: 2013/2015 BTP, Bono and OBL ASW 

Differential 

Nov-10 Dec-10 Dec-10 


10 

-5 

-10 

-15 

-20 

-25 

-30 

-35 

BTPS 11/15 ASW-BTPS 06/13 ASW 

SPGB 1/16 ASW-SPGB 7/13 ASW 

OBL 158 ASW-DBR 7/13 ASW 

Chart 5: SPA/BEL/ITA ASW Changes in 2011 

5 

0 

-40 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 


SPA BEL ITA 

Chart 6: GER/NETH/FRA ASW Changes in 2011 

8 

3 

-2 

-7 

-12 

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 


NETH AUS GER FRA 

the rest is that it is not perceived as a flight-to-quality 

flows receiving country and thus it is not penalised 

when risk appetite towards peripherals improves 

either. The main reasons behind RAGBs' 

underperformance in the past related to pressure on 

Eastern European countries where Austria has a big 

exposure but these have not been in the headlines in 

the last few months. On a more general note, we 

think that the EFSF and EFSM issuance is too small 

to affect the AAA eurozone sovereign issuers. 

8 

3 

-2 

-7 

10 

5 

0 

-12 

-5 

-10 

-15 

-20 

-25 

-30 

-35 

-40 



37 


EMU Debt Monitor: SSA & Covered Bonds 

• The new EU 5y benchmark issued under the 

EFSM programme was a great success, with a 

final book in excess of EUR 20bn. 

• All eyes are likely to be on the upcoming 

EFSF bond auction; the inaugural bond is 

expected to be launched by the end of the 

month. 

• STRATEGY: SSA investors looking for 

protection in this environment of uncertainty 

should switch from EU and EIB into KFW ahead 

of the auction (switches in the 7y/10y area at 

almost no give-up in ASW space and with 

potential for better rolldown). 

Chart 1: Core SSA Term Structures (in ASW) 

30 

20 

10 

0 

-10 

-20 

-30 

EIB 

KFW 

-40 

CADES EU 

-50 

0y 2y 4y 6y 8y 10y 12y 


Chart 2: KFW/DBR ASW Differentials 

The first week of the year was marked by a new 

record supply of EUR benchmark covered bonds 

reached in only three days (EUR 18.5bn over the 

week). Nonetheless, European SSA left their print 

with heavy dollar-denominated supply (USD 12.5bn) 

and the impressive performance of the new EU 5y 

benchmark launched under the EFSM programme. 

The final book was in excess of EUR 20bn (EUR 5bn 

was issued) and the bond richened 10bp in the grey 

market in a few days. 

This week, EUR-denominated supply out of 

European SSA picked up, with EUR 8bn having been 

issued so far (from EUR 6bn last week), of which 

FADE – the new Spanish agency – priced an 

inaugural 3y EUR 2bn bond. USD-denominated 

supply lost ground, with only USD 3bn coming to the 

market. 

So far, European SSA have been holding up well 

against swaps, with asset swap spread movements 

rather contained. The notable exceptions are CADES 

and KFW in the 10y area. Indeed, we understand 

that CADES suffered again from selling pressures 

out of French OATs, while KFW cheapened on the 

back of its new 10y benchmark priced on Tuesday 

(11 January). 

The next key event to watch will be the issuance of 

the inaugural EFSF bond, expected towards the end 

of the month. If the success of the new EU 5y 

benchmark demonstrates investors’ strong appetite 

for European debt, it remains to be seen whether the 

EFSF will attract as much demand. Indeed, the 

success of the new bond is likely to rely on the 

comprehension and perception investors have of the 

credit enhancements and the structure of guarantee 

55 

50 

45 

40 

35 

30 

25 

20 

15 

10 

KFW 3.625 20/01/20 ASW - DBR 3.25 04/01/20 09 ASW 

KFW 3.875 21/01/19 ASW - DBR 3.75 4/1/19 ASW 

KFW 4.125 4/7/17 ASW - DBR 4.25 4/7/17 ASW 

Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 


10 

8 

6 

4 

2 

0 

-2 

Chart 3: EIB & EU versus KFW (ASW Diff) 

-4 

EIB 4.625 15/4/20 ASW - KFW 3.625 20/01/20 ASW 

EEC 3.375 10/05/19 ASW - KFW 3.875 21/01/19 ASW 

EIB 4.25 15/04/19 ASW - KFW 3.875 21/01/19 ASW 

-6 

EEC 2.375 22/09/17 ASW - KFW 4.125 4/7/17 ASW 

Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 


offered by the EFSF, as they tend to be more 

complex than other SSA players. On top of that, 

market conditions at the time of issuance could add 

to the challenge as we will be approaching the end of 

a month particularly loaded in terms of supply. We 

see the risks of a disappointing auction as an 

Camille de Courcel 13 January 2011 


38 


increase in market volatility, and wider spreads on 

EU and EIB, as well as wider spreads out of weaker 

jurisdictions. 

Hence, we recommend investors looking for 

protection in this environment of uncertainty to switch 

into KFW (Aaa/AAA/AAA, explicit guarantee from the 

Federal Republic of Germany), especially in the 

7y/10y sector. 

Switch from EU Sep 17 into KFW Jul 17, from EIB 

Apr 19 and EU May 19 into KFW Jan 19 and from 

EIB Apr 20 into KFW Jan 20 

Indeed, being 100% German, KFW should be less 

exposed to any volatility triggered by a disappointing 

EFSF auction. Besides, should EIB, EU and 

agencies from weaker jurisdictions suffer from a 

temporary sell-off on the back of a disappointing 

auction (driven by contagion fears), we believe that 

KFW would remain robust. 

Furthermore, while the new EFSF might attract EIB 

and EU investors who could switch from EIB/EU into 

the new EFSF (hence triggering widening pressures), 

we don’t see many switches from KFW investors as 

the nature of risk is different. Thus, supply dynamics 

arguments also play in favour of a positioning in KFW 

ahead of the upcoming EFSF. 

However, it is in the 7y/10y area that a positioning in 

KFW is particularly favourable. Indeed, KFW Jan 

2019 and 2020 cheapened on the back of the new 

10y benchmark issued last Tuesday, hence offering 

better buying levels than recently (Jan 20 is currently 

trading at 14bp in ASW, a level not seen since last 

June and KFW Jan 19 is pricing 14bp in ASW, close 

to early December’s high of 15bp, a level not seen 

since last May). Furthermore, KFW Jan 2019 and 

2020 currently offer good yield pick-ups versus 

Germany at 40bp and 38bp respectively, i.e. 6bp and 

2bp above their 1y average (Chart 2). 

Relative to EIB and EU, it is worth noting that in the 

7y/10y area, KFW is actually priced at very similar 

levels to the Supras (Chart 1). As a consequence, 

such switches can be made with almost no give-up in 

asset swap space. On a time series basis, the ASW 

differentials between the Supras and the German 

agency are actually in our favour at present, with EIB 

being particularly tight versus KFW (Chart 3). 

Finally, another argument in favour of those switches 

involves the term structure of the three entities (Chart 

1): KFW slope in this sector of the curve is steeper 

than that of EIB and EU, hence offering a better 

rolldown. 

The advantages of switching into KFW are 

summarised in the below table, which highlights a 

non-negligible potential gain in rolldown. 

Table 1: Switches into KFW in the 7y/10y Sector of the Curve (key figures) 

Bonds selection 

Pick up (+) / Give up (-) Roll Down: Comp advantage (gain (+), loss (-)) 

Sell Buy Yield (bp) ASW ASW Based on the following neighbouring bonds: 

EEC 2.375 22/09/17 KFW 4.125 4/7/17 -10 0 20 EEC 3.625 06/04/16 KFW 1.875 16/11/15 

EIB 4.25 15/04/19 KFW 3.875 21/01/19 -3 -2 12 EIB 4.75 15/10/17 KFW 2.25 21/09/17 

EEC 3.375 10/05/19 KFW 3.875 21/01/19 -5 1 6 EEC 2.375 22/09/17 KFW 2.25 21/09/17 

EIB 4.625 15/4/20 KFW 3.625 20/01/20 0 -2 0 EIB 4.25 15/04/19 KFW 3.875 21/01/19 


Camille de Courcel 13 January 2011 


39 


GBP: Tap of Gilt 4.25% 2036 

• This year, the tapping of the nominal long 

end of the Gilt curve begins next week with the 

auction of Gilt 4.25% 2036. 

• STRATEGY: We expect healthy appetite 

from investors on the back of RV and demand 

factors. 

4.8 

4.6 

4.4 

4.2 

Chart 1: Evolution of 30y Yield 

4.0 

The tapping of the nominal long end this year begins 

next week. On Thursday, the DMO will re-open Gilt 

4.25% 2036 for GBP 2.25bn, thereby taking the total 

amount issued to GBP 22.48bn. The free float 

(amount outstanding net of BoE and DMO holdings) 

will increase to around GBP 15.1bn. 

The bond was launched in early 2003 and has been 

re-opened five times since. The average b/c is 1.62. 

The bond trades on the cheap side in our view, with 

the yield currently hovering around 4.44%. This is 

some 14bp above the average for 2009-now (Chart 

1). In asset swap space, it is around 6M Libor 

+ 27bp. Value has also been detected by our 

parametric model of the Gilt curve (Chart 2). 

In terms of strategy, we like overweighting the 30y 

sector relative to the 10y sector as a medium-term 

position. Chart 3 (upper panel) explains the rationale. 

The long end of the Gilt flattens in an environment of 

rising rates and vice versa. The relationship only 

broke down in 2009 due to the distortions produced 

by the BoE’s asset purchase programme. As shown 

by the lower panel, the relationship has gradually 

resumed since early 2010. 

While our economists call for one rate hike by the 

end of August at the latest, CPI and RPI data for 

December to be released next Tuesday could trigger 

another wave of sell-off at the front end. In the 

meantime, September Short£ contracts at 98.67 

imply two rate hikes assuming stable OIS/Bor while 

Sep MPC hovers around 88bp. In fact, if spreads 

compress going forward – as the early SLS 

repayment profile would suggest – further (expected) 

tightening is required to put fair value around current 

valuation. 

In terms of demand, note that the PPF 7800 

aggregated index surplus was GBP 20bn at the end 

of December while seasonality also supports LDI 

activity from pension funds at the start of the year. 

Supply is often the trigger. 

Overall, we expect next week’s auction to meet good 

demand. 

3.8 

Fitted 30y yield 

Gilt 4.25% 2036 

3.6 

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 


Chart 2: Residuals from Fair Value Gilt Curve 

Model 

8.0 

6.0 

4.0 

2.0 

0.0 

-2.0 

-4.0 

-6.0 

-8.0 

-10.0 

Series1 

Series3 

1y 1y 3y 4y 5y 7y 9y 10y 14y 18y 21y 25y 29y 32y 39y 49y 


2.0 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

-1.5 

Chart 3: Gilt 10s30s vs Front End 

Gilt 10s30s 

1y1y (RHS, INV) 

-2.0 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

1.2 

1.1 

1.0 

0.9 

0.8 

0.7 

0.6 

0.5 

0.4 

2.6 



Gilt 10s30s 

1y1y (RHS, INV) 

1 

2 

3 

4 

5 

6 

7 

8 

1.0 

1.2 

1.4 

1.6 

1.8 

2.0 

2.2 

2.4 

Matteo Regesta 13 January 2011 


40 


JGBs: Demons’ Gate in Q2 

• JGBs should be range bound in Q1, as 

investors check the market levels against the 

real economy after yields rose sharply in Q4 

2010. 

• However, many difficult and important 

events are concentrated in Q2. In particular, 

political risk will be at its peak in Q2. 

• If a ratings downgrade coincides with the 

derailment of the PM’s pledge on tax reform 

and the postponement of fiscal reconstruction, 

the damage to JGBs could be substantial. 

Market volatility is likely to increase from Q2. 

A temporary lull is likely in January-May 

How will the JGB market unfold this year? How long 

will the economic recovery, the main determinant of 

the bond market’s performance, persist? If the US is 

unable to enact further reflationary measures this 

year, the current upturn in the Japanese economy is 

likely to follow the previous pattern and last a year. 

The 2003–2004 cycle and the 2005–2006 cycle that 

followed the bursting of the IT bubble are examples 

of miniature upturns and downturns, small economic 

fluctuations that ensue after a major shock. As Chart 

1 illustrates, the JGB market peaked in June in both 

cycles (P) and bottomed in June or July of the 

following year (B). 

There are many other similarities between these two 

correction periods. 1) Precisely one year elapsed 

from the peak to the low in the JGB market; 2) the 

market began to stop falling 1-2 quarters (3-7 

months) after the peak. This suggests that the period 

immediately after these rapid market declines 

following the peak offered an opportunity to check 

market levels against the real economy. If the JGB 

market peaked in October of last year, this temporary 

lull would correspond to January-May of 2011. 

Many crucial events are concentrated in Q2 

A review of the events scheduled for 2011 reveals 

that many issues will be clarified by end-Q2. QE2 in 

the US, the major market focus, is set to end in June; 

the FOMC will clarify its future policy in April at the 

earliest. In addition, worries about eurozone finances 

will face a crucial juncture in Q2 when Portugal faces 

large bond redemptions. Finally, bank stress tests 

will take place February through June. 

In the Chinese system of Feng Shui, the northeast 

corner — the demon’s gate — marks a location and 

Chart 1: Correction Pattern of the JGB Market 

(10-Year Yield) 

2.2 

2 

1.8 

1.6 

1.4 

(%) 

2005-06 

1.2 

2003-04 

1 

P 

2010- 

0.8 

P 

0.6 

0.4 

P 

Jan Apr Jul Oct Jan Apr Jul Oct Jan 


B 

B 

time of instability. This corresponds to Q2 this year. 

Many difficult, important events are concentrated in 

this quarter. In his first press conference of the year 

on 4 January, PM Kan suggested June as the 

deadline for deciding both 1) the course of major tax 

reform (including the consumption tax) and 2) 

Japan’s participation in the Trans-Pacific Partnership 

free-trade pact (TPP). On television the next day, he 

staked his political life on this timeline. 

Volatility will increase from Q2 

Of course, the Diet’s battle to enact the FY2011 

budget stands between June’s deadlines for these 

two major decisions. Prioritising the budget debate, 

the PM is trying to postpone convening the Diet until 

28 January in order to first reshuffle his cabinet. That 

said, it will be difficult for the DPJ to recover lost 

ground in the 6 February triple elections in Aichi. In 

fact, we expect the PM to face mounting difficulties in 

governing, with increased criticism from DPJ 

members (including Upper House President T. 

Nishioka). 

Political risk will be at its peak in Q2. Passage of 

budget-related bills might drag on into the new fiscal 

year. If this occurs and the DPJ loses in April’s 

unified local elections, the government would be in a 

tight corner. This would be a major risk for the 

Japanese economy because it would also tie up the 

FY2011 budget, an important influence on economic 

activity. If a ratings downgrade for JGBs coincides 

with the derailment of the PM’s pledge on tax reform 

and the postponement of fiscal reconstruction, the 

damage to the JGB market could be substantial. 

After remaining range bound in Q1, the JGB market 

is likely to face an increase in volatility from Q2. 

Koji Shimamoto 13 January 2011 


41 


Global Inflation Watch 

Higher inflation on food and energy 

Chart 1: Eurozone HICP Energy & Brent (EUR) 

Strong food and energy inflation is characterising the 

CPI data across the US and Europe for December. 

We have already seen inflation pick up to 2.2% y/y in 

the euro area in December on these two factors; the 

first 2%+ print since late 2008. Similar dynamics 

drove Swedish inflation to a two-year high in 

December too. 

Energy inflation has risen on a combination of base 

effects and an increase in the price of oil. In the euro 

area its rise has also been boosted by the sharp fall 

in the euro exchange rate in November. Food 

inflation is also moving north, as the soft commodity 

price shock that started in H2 2010 filters through to 

consumer prices. 

In contrast, core inflation remains at muted levels in 

both the US and the euro area. The breakdown 

provided with Friday’s final eurozone HICP release, 

for example, should reveal that core inflation 

remained constant at 1.1% y/y for the third month in 

a row. 

Similar dynamics are expected in the US on Friday. 

We are expecting a 0.5% m/m gain in the headline 

index on stronger energy and food prices, which 

would push headline inflation up 0.3pp to 1.4% y/y, 

its highest level since last May. But with the core CPI 

expected to rise 0.1% m/m for a second month 

running, that would push the y/y rate of core inflation 

down 0.2pp to 0.6% y/y – equal to October’s record 

low. 

The UK is another story. In addition to stronger food 

and energy inflation, the UK’s CPI and RPI are being 

boosted by the impact of past sterling weakness and 

indirect tax increases. 

In December, we expect CPI inflation to have 

accelerated by 0.3pp to 3.6% y/y. The acceleration is 

likely to reflect the combination of rising food, 

transport, gas and electricity inflation while core 

inflation should hold at 2.8% y/y. Regarding the rise 

in utility price inflation, three of the major providers 

have announced price increases that will be captured 

by the December CPI. These are likely to push up 

the gas component by 5% m/m and the electricity 

component by just under 3%. There is more to come 

in January given announcements from other 

providers – we are expecting 4%+ and 5%+ prints on 

CPI and RPI inflation, respectively, in the first couple 

of months this year. 

Source: Reuters EcoWin Pro, BNP Paribas 

Chart 2: US Core CPI Inflation 


Chart 3: UK CPI and RPI Inflation 


Luigi Speranza/Eoin O’Callaghan 13 January 2011 


42 


Table 1: BNP Paribas' Inflation Forecasts 

Eurozone 

France 

US 

Headline HICP Ex-tobacco HICP 

Headline CPI 

Ex-tobacco CPI 

CPI Urban SA CPI Urban NSA 

Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y index % m/m % y/y Index % m/m % y/y Index % m/m % y/y 

2009 108.1 - 0.3 107.9 - 0.2 119.3 - 0.1 118.0 - 0.1 214.5 - -0.3 214.5 - -0.4 

2010 (1) 109.8 - 1.6 109.5 - 1.5 121.1 - 1.5 119.8 - 1.5 218.1 - 1.6 218.0 - 1.6 

2011 (1) 111.8 - 1.8 111.4 - 1.7 123.3 - 1.8 121.8 - 1.7 221.3 - 1.5 221.3 - 1.5 

Q1 2010 108.6 - 1.1 108.3 - 1.0 120.3 - 1.3 119.0 - 1.2 217.6 - 2.4 217.0 - 2.4 

Q2 2010 110.0 - 1.5 109.7 - 1.4 121.3 - 1.6 120.0 - 1.5 217.2 - 1.8 218.1 - 1.8 

Q3 2010 109.9 - 1.7 109.5 - 1.6 121.2 - 1.5 119.8 - 1.5 218.0 - 1.2 218.3 - 1.2 

Q4 2010 (1) 110.8 - 2.0 110.4 - 1.9 121.7 - 1.6 120.2 - 1.6 219.4 - 1.2 218.8 - 1.2 

Q1 2011 (1) 110.9 - 2.1 110.5 - 2.1 122.4 - 1.7 121.0 - 1.7 220.9 - 1.5 220.3 - 1.5 

Q2 2011 (1) 111.8 - 1.6 111.4 - 1.6 123.2 - 1.5 121.7 - 1.4 221.1 - 1.8 221.9 - 1.8 

Q3 2011 (1) 111.7 - 1.7 111.3 - 1.6 123.4 - 1.8 121.9 - 1.8 221.4 - 1.6 221.7 - 1.6 

Q4 2011 (1) 112.7 - 1.7 112.2 - 1.6 124.0 - 1.9 122.5 - 1.9 221.8 - 1.1 221.1 - 1.1 

Jul 10 109.7 -0.3 1.7 109.31 -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 

Aug 10 109.9 0.2 1.6 109.54 0.2 1.5 121.3 0.2 1.4 119.97 0.2 1.3 218.2 0.3 1.2 218.31 0.1 1.1 

Sep 10 110.1 0.2 1.8 109.76 0.2 1.7 121.2 -0.1 1.6 119.88 -0.1 1.5 218.4 0.1 1.1 218.44 0.1 1.1 

Oct 10 110.5 0.4 1.9 110.16 0.4 1.8 121.4 0.1 1.6 120.03 0.1 1.5 218.9 0.2 1.2 218.71 0.1 1.2 

Nov 10 110.6 0.1 1.9 110.27 0.1 1.8 121.5 0.1 1.6 120.09 0.0 1.5 219.1 0.1 1.1 218.80 0.0 1.1 

Dec 10 (1) 111.3 0.6 2.2 110.90 0.6 2.1 122.1 0.5 1.8 120.61 0.4 1.7 220.2 0.5 1.4 218.89 0.0 1.4 

Jan 11 (1) 110.5 -0.7 2.3 110.11 -0.7 2.2 122.0 -0.1 1.9 120.52 -0.1 1.9 220.7 0.2 1.4 219.84 0.4 1.5 

Feb 11 (1) 110.8 0.3 2.2 110.44 0.3 2.2 122.5 0.4 1.8 121.01 0.4 1.7 221.0 0.1 1.6 220.23 0.2 1.6 

Mar 11 (1) 111.5 0.6 1.9 111.08 0.6 1.8 122.8 0.3 1.6 121.36 0.3 1.5 220.9 -0.1 1.4 220.86 0.3 1.5 

Apr 11 (1) 111.7 0.2 1.6 111.28 0.2 1.6 123.1 0.2 1.5 121.59 0.2 1.4 221.0 0.1 1.6 221.44 0.3 1.6 

May 11 (1) 111.8 0.1 1.6 111.38 0.1 1.5 123.2 0.1 1.5 121.75 0.1 1.4 221.1 0.0 1.8 222.01 0.3 1.8 

Jun 11 (1) 111.8 0.1 1.7 111.43 0.0 1.6 123.3 0.1 1.6 121.83 0.1 1.5 221.2 0.0 2.0 222.33 0.1 2.0 

Jul 11 (1) 111.5 -0.3 1.7 111.03 -0.4 1.6 123.1 -0.2 1.7 121.60 -0.2 1.6 221.3 0.1 1.7 221.83 -0.2 1.8 

Aug 11 (1) 111.7 0.2 1.7 111.29 0.2 1.6 123.6 0.4 1.8 122.08 0.4 1.8 221.4 0.0 1.5 221.64 -0.1 1.5 

Sep 11 (1) 112.0 0.3 1.8 111.61 0.3 1.7 123.6 0.1 2.0 122.16 0.1 1.9 221.5 0.0 1.4 221.58 0.0 1.4 

Oct 11 (1) 112.5 0.4 1.8 112.07 0.4 1.7 123.9 0.2 2.1 122.40 0.2 2.0 221.6 0.0 1.3 221.44 -0.1 1.2 

Nov 11 (1) 112.6 0.1 1.8 112.14 0.1 1.7 124.0 0.0 2.0 122.45 0.0 2.0 221.8 0.1 1.2 221.31 -0.1 1.1 

Dec 11 (1) 113.0 0.3 1.5 112.51 0.3 1.4 124.2 0.2 1.7 122.64 0.2 1.7 221.9 0.1 0.8 220.62 -0.3 0.8 

Updated 

Next 

Release 

Jan 13 

Dec Flash HICP (Jan 14) 

Jan 13 

Jan CPI (Feb 23) 

Jan 06 

Dec CPI (Jan 14) 

Source: BNP Paribas, (1) Forecasts 

Chart 4: Eurozone Core HICP (% y/y) 

Chart 5: US Core CPI (% y/y) 


After reaching an all-time low in April 2010, core inflation has been 

a touch stronger in recent months, mainly reflecting gains in core 

goods inflation. While we expect core services inflation to head 

lower, the rebound in core goods has further to run. We expect a 

brief interruption to the downward trend in core inflation. 


The downward trend in shelter inflation was recently interrupted. 

However, the renewed collapse in the housing market should see a 

reversion to a downward trend from early this year. 



43 



Japan 

UK 

Sweden 

Core CPI SA 

Core CPI NSA 

Headline CPI RPI 

CPI CPIF 

Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y 

2009 100.3 - -1.3 100.3 - -1.3 110.8 - 2.1 213.7 - -0.5 299.7 - -0.3 191.2 - 1.9 

2010 (1) 99.3 - -1.0 99.3 - -1.0 114.5 - 3.3 223.6 - 4.6 303.5 - 1.3 195.2 - 2.1 

2011 (1) 98.6 - -0.7 98.6 - -0.7 118.6 - 3.6 233.6 - 4.5 310.0 - 2.2 199.0 - 1.9 

Q1 2010 99.7 - -1.3 99.3 - -1.2 112.9 - 3.2 219.3 - 4.0 301.2 - 1.0 194.0 - 2.6 

Q2 2010 99.3 - -1.2 99.3 - -1.2 114.4 - 3.4 223.5 - 5.1 302.8 - 1.1 194.9 - 2.1 

Q3 2010 98.8 - -1.1 99.1 - -1.0 114.7 - 3.1 224.5 - 4.7 302.9 - 1.1 194.8 - 1.7 

Q4 2010 (1) 99.2 - -0.5 99.4 - -0.5 115.8 - 3.3 227.1 - 4.7 307.0 - 1.9 197.0 - 2.0 

Q1 2011 (1) 98.8 - -0.9 98.4 - -0.9 117.3 - 3.9 230.1 - 4.9 307.2 - 2.0 196.8 - 1.5 

Q2 2011 (1) 98.6 - -0.7 98.6 - -0.7 118.4 - 3.5 233.0 - 4.3 309.8 - 2.3 198.5 - 1.9 

Q3 2011 (1) 98.5 - -0.3 98.7 - -0.3 118.8 - 3.6 234.0 - 4.2 309.9 - 2.3 199.2 - 2.2 

Q4 2011 (1) 98.4 - -0.8 98.6 - -0.8 120.0 - 3.6 237.4 - 4.6 313.3 - 2.1 201.3 - 2.2 

Jul 10 98.9 -0.3 -1.1 99.0 -0.3 -1.1 114.3 -0.3 3.1 223.6 -0.2 4.8 302.0 -0.3 1.1 194.3 -0.3 1.7 

Aug 10 98.8 -0.1 -1.0 99.1 0.1 -1.0 114.9 0.5 3.1 224.5 0.4 4.7 302.1 0.0 0.9 194.3 0.0 1.4 

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 1.4 195.8 0.8 1.8 

Oct 10 99.1 0.4 -0.6 99.5 0.4 -0.6 115.2 0.2 3.1 225.8 0.2 4.5 305.6 0.3 1.5 196.3 0.3 1.8 

Nov 10 99.3 0.2 -0.5 99.4 -0.1 -0.5 115.6 0.4 3.2 226.8 0.4 4.7 306.6 0.3 1.8 196.8 0.2 1.9 

Dec 10 (1) 99.2 -0.1 -0.5 99.3 -0.1 -0.5 116.6 0.9 3.6 228.6 0.8 4.9 308.7 0.7 2.3 197.9 0.6 2.3 

Jan 11 (1) 99.0 -0.2 -0.6 98.6 -0.7 -0.6 116.8 0.1 3.9 229.0 0.2 5.1 305.9 -0.9 2.0 196.0 -1.0 1.5 

Feb 11 (1) 98.8 -0.2 -1.0 98.2 -0.4 -1.0 117.4 0.5 4.0 230.2 0.5 5.0 307.4 0.5 1.9 196.8 0.4 1.3 

Mar 11 (1) 98.7 -0.1 -1.1 98.4 0.2 -1.1 117.8 0.4 3.8 231.1 0.4 4.7 308.3 0.3 2.0 197.7 0.5 1.5 

Apr 11 (1) 98.6 -0.1 -0.7 98.5 0.1 -0.7 118.3 0.4 3.6 232.7 0.7 4.5 309.5 0.4 2.4 198.3 0.3 1.8 

May 11 (1) 98.7 0.1 -0.6 98.7 0.2 -0.6 118.5 0.2 3.6 233.1 0.2 4.3 309.9 0.1 2.3 198.6 0.2 1.8 

Jun 11 (1) 98.5 -0.2 -0.7 98.6 -0.1 -0.7 118.5 0.0 3.4 233.3 0.1 4.1 309.8 0.0 2.3 198.8 0.1 1.9 

Jul 11 (1) 98.5 0.0 -0.4 98.6 0.0 -0.4 118.3 -0.2 3.5 232.8 -0.2 4.1 308.9 -0.3 2.3 198.3 -0.2 2.1 

Aug 11 (1) 98.4 -0.1 -0.4 98.7 0.1 -0.4 118.7 0.4 3.3 233.5 0.3 4.0 309.5 0.2 2.5 198.8 0.2 2.3 

Sep 11 (1) 98.5 0.1 -0.2 98.9 0.2 -0.2 119.4 0.6 3.9 235.6 0.9 4.6 311.3 0.6 2.2 200.4 0.8 2.4 

Oct 11 (1) 98.4 -0.1 -0.7 98.8 -0.1 -0.7 119.6 0.2 3.8 236.5 0.4 4.7 313.2 0.6 2.5 201.1 0.4 2.4 

Nov 11 (1) 98.5 0.1 -0.8 98.6 -0.2 -0.8 119.8 0.1 3.6 237.0 0.2 4.5 313.5 0.1 2.2 201.2 0.1 2.3 

Dec 11 (1) 98.4 -0.1 -0.8 98.5 -0.1 -0.8 120.5 0.6 3.3 238.9 0.8 4.5 313.1 -0.1 1.4 201.5 0.2 1.8 

Updated 

Next 

Release 

Jan 04 


Jan 13 


Jan 13 



Chart 6: Japanese CPI (% y/y) 

Chart 7: UK CPI (% y/y) 


Prices are expected to continue falling but the pace of decline is 

easing as the economy recovers. 


We expect inflation to remain above target for the remainder of the 

year, although trending down. We think CPI is going to hit 4% or 

above in the early months of this year. 



44 



Canada Norway Australia 

CPI Core CPI Headline CPI Core 

CPI 

Core 

Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y 

2009 114.4 0.3 113.6 1.8 125.7 2.2 118.4 2.6 167.8 - 1.8 - - 3.7 

2010 (1) 116.5 1.8 115.5 1.6 128.7 2.4 120.0 1.4 172.9 - 3.1 - - 2.8 

2011 (1) 118.6 1.8 117.1 1.4 130.4 1.4 121.6 1.3 178.3 - 3.3 - - 2.9 

Q3 2009 114.7 0.5 -0.9 113.9 1.2 1.6 125.8 0.0 1.8 118.5 0.0 2.4 168.6 1.0 1.3 - - 3.5 

Q4 2009 114.9 0.6 0.8 114.4 1.9 1.6 126.6 0.6 1.4 119.3 0.7 2.3 169.5 0.5 2.1 - - 3.4 

Q1 2010 115.4 2.0 1.6 114.9 1.6 1.9 128.4 1.4 2.9 119.4 0.1 2.0 171.0 0.9 2.9 - - 3.1 

Q2 2010 116.2 2.6 1.4 115.5 2.3 1.8 129.1 0.6 2.6 120.3 0.8 1.5 172.1 0.6 3.1 - - 2.7 

Q3 2010 116.8 2.2 1.8 115.6 0.3 1.6 128.2 -0.7 1.9 119.9 -0.3 1.2 173.3 0.7 2.8 - - 2.4 

Q4 2010 (1) 117.4 1.5 2.2 116.0 1.2 1.4 129.4 0.9 2.2 120.5 0.5 1.0 174.6 0.8 3.0 - - 2.5 

Q1 2011 (1) 117.9 1.6 2.1 116.4 1.6 1.4 129.5 0.3 0.9 120.6 0.1 1.0 176.5 1.1 3.2 - - 2.5 

Q2 2011 (1) 118.3 1.7 1.9 116.9 1.7 1.2 130.5 0.8 1.1 121.8 0.9 1.2 178.0 0.8 3.3 - - 2.6 

Updated 

Next 

Release 

Dec 21 


Jan 10 


Jan 06 

Q4 CPI (Jan 25) 


Chart 8: Canadian Total versus Core CPI 

Chart 9: Australian CPI (% y/y) 


Wage pressures appear subdued, suggesting that underlying 

inflation will remain within the target range. 


Risks to our inflation forecast over coming months lay to the upside 

given the impact of the floods. 

CPI Data Calendar for the Coming Week 

Day GMT Economy Indicator Previous BNPP F’cast Consensus 

Fri 13/10 07:00 Germany CPI (Final) m/m : Dec 1.0% (p) 1.0% 1.0% 

07:00 CPI (Final) y/y : Dec 1.7% (p) 1.7% 1.7% 

07:00 HICP (Final) m/m : Dec 1.2% (p) 1.2% 1.2% 

07:00 HICP (Final) y/y : Dec 1.9% (p) 1.9% 1.9% 

10:00 Eurozone HICP (Final) m/m : Dec 0.1% 0.6% 0.6% 

10:00 HICP (Final) y/y : Dec 1.9% 2.2% 2.2% 

10:00 HICP Core m/m : Dec -0.1% 0.4% n/a 

10:00 HICP Core y/y : Dec 1.1% 1.1% 1.1% 

10:00 Ex-Tobacco Index : Dec 110.27 110.90 n/a 

08:00 Spain CPI y/y : Dec 2.3% 3.0% 2.9% 

10:00 Italy CPI (Final) y/y : Dec 1.9% (p) 1.9% n/a 

10:00 HICP (Final) y/y : Dec 2.0% (p) 2.0% n/a 

13:30 US CPI m/m : Dec 0.1% 0.5% 0.4% 

13:30 CPI y/y : Dec 1.1% 1.3% 1.3% 

13:30 Core CPI m/m : Dec 0.1% 0.1% 0.1% 

13:30 Core CPI y/y : Dec 0.8% 0.6% 0.8% 

09:30 UK CPI m/m : Dec 0.4% 0.9% 0.6% 

09:30 CPI y/y : Dec 3.3% 3.6% 3.3% 

09:30 RPI m/m : Dec 0.4% 0.8% 0.6% 

09:30 RPI y/y : Dec 4.7% 4.9% 4.7% 

09:30 RPIX y/y : Dec 4.7% 4.8% 4.5% 

Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision 




45 


Inflation: High BEs Ahead of Supply 

• GLOBAL: Back at the top for commodities. 

• EUR: 4bp premium for the Bundei20. 

Chart 1: Net Spec Positions in WTI, SPX, 2y 

&10y UST 

• USD: 10y TIPS next week. 

• GBP: Solid auction & sentiment. 

GLOBAL: Commodities and the USD are back at 

resistances / support. The big reversal is still not in 

the pipeline. The market remains very long WTI and 

is flat or short stocks and nominals (Chart 1). As 

expected given the small size, supply in the UK and 

EZ has been well absorbed but the serious tests are 

ahead. France is expected to issue at least EUR 2bn 

next week while the US should launch around USD 

12bn of TIPS Jan-21. The week after, we expect the 

UK to issue a new 50y linker while Italy may have a 

window to issue a new linker. 

EUR: The EUR 1bn tap of the Bundei20 came out 

very well with a 4bp premium at the auction. The 

breakeven has managed to stay 2bp above preauction 

levels. We find levels of breakeven 

expensive versus nominal yield, oil, EURUSD, carry 

and EGB spreads. That said, the move is fuelled by 

upwards surprises in activity and inflation data and 

highlights increasing interest in inflation protection. 

We expect issuers to take note and either France or 

Italy should issue a new linker in the coming two 

weeks. Besides, FRF CPI printed as expected and 

the remuneration rate of the French Livret A will be 

increased to 2% from 1 February. See last week’s 

Inflation Monitor for more details but we do not 

expect a significant impact on inflows in the product. 

Nevertheless, FRF breakevens are underperforming 

too much and are starting to offer (tactical) value 

again vs. EUR ones (in ASW as well), especially 

ahead of flash estimate at the end of January 

(usually weaker than expected). 

USD: See article on 10y TIPS. 

GBP: A much higher and flatter inflation curve, in line 

with our call. The GBP 900mn UKTi-32 was well 

received with a bid/cover of 1.97 and premium of 

30cents. We stay positive on breakevens but the rich 

15-20y sector of the curve should continue 

underperforming in real yield and inflation space. 

Whilst long front-end cash BEs was our favoured 

trade into 2011 (and long 10y RPI swap), the UKTi- 

13 BE has already moved up by 45bp! It still looks 

cheap vs. our economists' RPI profile but we could 

see better entry levels after RPI (BRC shop prices a 

tad weak in December but this was very misleading 

220 

210 

200 

190 

180 

170 

160 

150 

140 

Chart 2: BTPei19 BE vs BTP/Bund Spread 

130 

Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 

35 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

BTPEI19 Breakeven 

BTPEI19 / BUNDEI20 Nominal Rhs 

Chart 3: OBLEI13/OATI13 BE vs NY, 

BOBLEI13 / OATI13 Breakeven Residuals 

1m Carry 

Fwd Carry 

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 May-11 

BOBLEI13 / OATI13 B Yield Move Carry P&L ? 

1m -22.9 5.8 -17.1 

2m -33.3 -2.4 -35.7 

3m -9.1 -21.0 -30.1 

Sources: BNP Paribas, Bloomberg 

in November; we expect RPI at +0.73% m/m, 4.8% 

y/y) and especially after the large, 0.4y 5y+ linkers 

index extension at end-Jan. Further support for 25y+ 

linkers will come from likely LDI activity, with the 30y 

gilt auction next week and an ultra linker syndication 

in the last week of January. The latest PPF data 

confirmed our expectations of a PF aggregate 

surplus at end 2010 - PPF7800 Index +GBB 20bn 

from GBP-1bn in Nov. This should allow the real 

curve (and nominal curves) to flatten at least on the 

15/30y+ segment and the inflation curve to resteepen. 

40 

60 

80 

100 

120 

140 

160 

180 

200 

35 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

Herve Cros / Shahid Ladha / Sergey Bondarchuk 13 January 2011 


46 


USDi: 10y TIPS Auction Preview 

• Treasury: to auction USD 13bn of new 10y 

TIPS. 

• Fed: to buy more than USD 20bn of TIPS. 

• Net supply: slightly negative through H1. 

• Demand: dealer positioning may be 

favourable; retail investors are buying again. 

• Real yields are attractive, although BEs 

look stretched in the 10y sector. 

• STRATEGY: Buy 10y TIPS outright; favour 

5s10s RY flattener. 

The US Treasury will auction USD 13bn of new TIPS 

January 2021. This will be the first of 12 auctions that 

we estimate will total a record USD 120bn supply 

package for calendar year 2011 (Chart 1). We expect 

the auction to go fairly well despite the USD 1bn 

bump in size, although there are also several caution 

flags to be aware of. 

Support from the Fed 

The Fed has committed to spend 3% out of its USD 

850-900bn (including reinvestments) QE2 purchase 

programme on TIPS, which translates into USD 26- 

27bn through the end of June. By the auction date, 

we expect the Fed will have purchased over USD 

8bn of TIPS, with roughly a third of that in the 8-10y 

sector (Chart 2). Furthermore, purchases in the 10y 

sector were heavily concentrated on the benchmark 

TIPS Jul-20, of which the Fed has accumulated in 

excess of USD 1.6bn since the beginning of QE2 

with one more operation left before supply. This 

should boost demand for the benchmarks and thus 

demand at the auctions. 

Negative net supply through the end of June 

We expect net supply through the end of June to be 

negative, which is clearly supportive for TIPS. Here is 

how the net supply breaks down: USD 60bn of 

auctions - USD 36bn of redemptions - USD 6bn+ of 

coupon payments - USD 20bn of remaining Fed 

purchases = -USD 2bn. 

Chart 1: TIPS Auction Schedule 

Auction Tenor New/Reop. Size ($bn) 

Thursday, January 20, 2011 10y n 13 

Thursday, February 17, 2011 30y n 8 

Thursday, March 24, 2011 10y r 10 

Wednesday, April 21, 2010 5Y n 12 

Thursday, May 19, 2011 10y r 10 

Thursday, June 23, 2011 30y r 7 

Thursday, July 21, 2011 10y n 13 

Thursday, August 18, 2011 5y r 10 

Thursday, September 22, 2011 10y r 10 

Thursday, October 20, 2011 30y r 7 

Thursday, November 17, 2011 10y r 10 

Thursday, December 22, 2011 5y r 10 

Total 120 


3500 

$mm 

3000 

2500 

2000 

1500 

1000 

500 

0 

Chart 2: Fed TIPS Purchases by Sector 

QE2 Cumulative 

2010 Cumulative 

2-4y 4-6y 6-8y 8-10y 10-20y 20y+ 

Source: BNP Paribas, Bloomberg 

3500 

$mm 

2500 

1500 

500 

-500 

-1500 

-2500 

Chart 3: TIPS Mutual Fund/ETF Flows 

Jan-08 

Mar-08 

May-08 

Jul-08 

Sep-08 

Nov-08 

Jan-09 

Mar-09 

Source: BNP Paribas, Bloomberg 

May-09 

Domestic TIPS ETF & Funds 

Net Assets Added 

(Total Assets Tracked ~$100bn) 

Jul-09 

Sep-09 

Nov-09 

Jan-10 

10y TIPS BE (rhs) 

Only ETF Data is Avail for Jan 

Mar-10 

May-10 

Jul-10 

Sep-10 

Nov-10 

Jan-11 

2.50 

2.00 

1.50 

% 

1.00 

0.50 

0.00 

Demand and dealer positioning 

This is where the picture is somewhat mixed, both in 

terms of retail demand and dealer positioning. TIPS 

Mutual Funds and ETFs experienced outflows in 

December, the first negative number in more than 

two years (Chart 3). And it wasn’t just ETF flows, 

which tend to be volatile, that were responsible for 

Sergey Bondarchuk 13 January 2011 


47 


this. Mutual Funds inflows have been growing 

steadily for the better part of 2010, but experienced a 

big drop-off in growth in December. On a positive 

note, retail investors are buying ETFs again in 

January, even if not at a brisk pace. While Mutual 

Funds data are not available until the end of the 

month, we’re seeing a decent amount of buying from 

real money accounts even as breakevens are at precrisis 

levels and near post-2009 highs. 

Anecdotal evidence suggests that the dealers are 

short TIPS and will look to cover at the auction. 

However, primary dealer positioning is somewhat at 

odds with this notion and shows that dealers are net 

long USD 2.3bn of TIPS (still a relatively light 

positioning). Chart 4 actually suggests that dealers 

should have somewhat lower inventory given how far 

the BEs have come. However, we acknowledge that 

dealer position report is not duration neutral and thus 

the overall picture could be distorted somewhat (for 

instance, 5s10s RY steepener would show up as a 

net long position). 

On balance, we could still see a stop short (strong 

auction) depending on concession, as traders should 

take advantage of this liquidity window to cover their 

potential shorts while real money accounts buy to get 

ahead of January index extension and coupon 

reinvestment. 

Real yields look good, but BEs stretched 

As a result of the recent selloff in rates, 10y TIPS 

yield is 55bp higher than it was at the last auction, 

even though 10y breakeven is almost 30bp wider 

(Chart 5). We like to receive real yields at these 

levels and we think that the 10y point is likely to lead 

the way in a rally, so a 5s10s RY flattener is also 

attractive (Chart 6). 

Chart 4: Dealer Inventory vs 10y BE 

$bn Primary Delaer Net TIPS Position ($bn) 

6 

10y TIPS BE (%, Inverted RHS) 

5 

4 

3 

2 

1 

0 

-1 


Chart 5: Jul20 TIPS RY vs BE 

TIIJUL20 Real 

TIIJUL20 Breakeven RHS 

140 

120 

100 

80 

60 

40 

20 

15-Jul 15-Oct 15-Jan 


130 

120 

110 

100 

90 

80 

70 

Chart 6: 5y/10y RY Spread at 1y Highs 

TIIJAN15 / TIIJAN20 Real 

1.00 

% 

1.20 

1.40 

1.60 

1.80 

2.00 

2.20 

2.40 

2.60 

240 

230 

220 

210 

200 

190 

180 

170 

160 

150 

140 

On the other hand, TIPS breakevens, especially in 

10y+ maturities have recovered to a point where 

they’re trading around average 2006-07 pre-crisis 

levels (Chart 7) and near post-2009 highs. Thus, we 

see little value in 10y BE, especially in light of our 

CPI forecast in H2. Unlike an outright long TIPS 

position, BEs also carry slightly negative at the 

moment. Against this backdrop, expectation of some 

concession into supply (at least breakeven-wise), 

and with commodities / USD back to support/ 

resistance, we still like 5s10s BE flatteners and short 

5s10s20s fly. 

In the meantime, as an asset class, TIPS typically do 

well in H1 as seasonals improve and net TIPS supply 

situation is favorable. The TIPS market should also 

benefit from coupon payment mid-Jan which could 

favor the 9/10y area since 1y+ TIPS duration is 7.7. 

60 

50 

1-Jan 3-Apr 4-Jul 4-Oct 4-Jan 


Chart 7: TIPS BEs vs Highs 

70 

63 

BPs Below Post-2009 High 

60 

BPs Below 2006-07 Avg 

50 

42 

40 

30 

20 

10 

11 

7 

9 

6 6 

3 

3 

0 

0 

6 

0 

2y BE 3y BE 5y BE 7y BE 10y BE 20y BE 30y BE 


Sergey Bondarchuk 13 January 2011 


48 


Table 1: BNP Paribas Carry Analysis 

Benchmark Carry 

Pricing Date 

13-Jan-11 

Term 1 

Term 2 

3m 

6m 

12m 

Repo Rate 

0.42% 0.42% 0.34% 0.34% 0.56% 

Sett. Date 

14-Jan-11 01-Feb-11 01-Mar-11 

14-Apr-11 14-Jul-11 16-Jan-12 

Yield BE Real BE Real BE Real BE Real BE Real BE 

Short-end 

OATei Jul-12 -1.26% 2.10% -1.7 -2.7 27.5 25.1 -36.1 -40.8 -2.5 -7.1 -100.0 -62.9 

OATI Jul-13 -0.54% 1.73% -0.9 -2.1 14.1 10.8 11.6 4.8 32.2 20.2 29.0 8.9 

TIPS Jul-12 -1.41% 1.85% -4.1 -4.7 -10.8 -12.6 13.3 9.4 50.3 41.3 -109.5 -133.3 

UKTi Aug-13 -1.91% 3.26% 20.0 18.1 18.6 13.4 46.5 36.4 78.1 57.5 106.0 60.1 

5y 

OATei Jul-15 0.34% 1.72% 0.9 -0.6 13.4 9.0 -1.4 -10.8 20.0 1.7 32.0 -4.9 

OATi Jul-17 0.74% 1.95% 0.5 -1.0 7.8 3.3 9.5 0.0 21.9 3.4 32.1 -5.2 

TIPS Apr-15 -0.29% 1.93% 0.0 -1.8 -0.1 -4.6 11.2 2.1 28.5 9.4 18.3 -24.6 

UKTi Jul-16 -0.21% 3.00% 11.2 9.0 13.0 7.2 29.9 18.7 51.8 29.3 78.9 32.0 

JGBI-4 June-15 0.85% -0.42% -1.3 -1.8 -2.3 -3.3 -20.1 -22.0 -14.1 -18.1 0.2 -8.5 

10y 

OATei Jul-20 1.33% 2.00% 0.9 -0.5 8.1 4.0 2.2 -6.5 15.7 -1.4 27.1 -6.9 

OATI Jul-19 1.11% 2.04% 0.5 -0.9 6.6 2.3 8.6 -0.7 19.3 1.3 29.4 -6.6 

TIPS Jul-20 0.93% 2.31% 0.7 -1.2 1.7 -3.2 8.6 -1.1 19.8 -0.1 22.9 -19.1 

UKTi Nov-22 0.66% 3.24% 2.4 0.6 9.4 4.6 13.3 4.0 30.1 11.6 44.9 7.2 

JGBI-16 June-18 1.29% -0.46% -0.5 -1.1 -0.5 -2.0 -10.8 -13.4 -5.2 -10.6 7.2 -4.3 

30y 

OATei Jul-40 1.66% 2.30% 0.4 -0.4 3.2 0.9 1.2 -3.7 6.4 -3.1 10.9 -7.5 

OATI Jul-29 1.59% 2.29% 0.4 -0.6 4.1 0.9 5.6 -1.2 12.3 -0.9 19.0 -6.8 

TIPS Feb-40 1.91% 2.59% 0.5 -0.8 1.3 -2.1 4.6 -2.1 10.1 -3.4 13.4 -14.2 

UKTI Mar-40 0.78% 3.66% 1.0 -0.2 3.8 0.8 5.4 -0.5 12.1 0.4 17.6 -5.6 

Short-end 

Term 1 -> Term 2 Term 2 -> 3m 

3m -> 6m 

6m -> 12m 

OATei Jul-12 29.2 27.8 -27.2 -28.5 33.6 33.6 -97.5 -55.7 

OATI Jul-13 15.0 12.9 2.7 0.5 20.6 15.4 -3.2 -11.2 

TIPS Jul-12 -6.7 -7.8 15.0 13.5 37.0 32.0 -159.8 -174.7 

UKTi Aug-13 -1.4 -4.7 27.0 23.6 31.6 21.1 27.9 2.6 

5y 

OATei Jul-15 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

OATi Jul-17 12.5 9.6 -4.8 -8.0 21.4 12.6 12.0 -6.7 

TIPS Apr-15 7.3 4.4 2.8 -0.5 12.4 3.4 10.2 -8.6 

UKTi Jul-16 0.0 -2.8 7.3 4.0 17.3 7.3 -10.2 -34.0 

JGBI-4 June-15 -1.0 -1.6 -13.4 -14.1 6.0 3.9 14.3 9.6 

10y 

OATei Jul-20 7.2 4.5 -1.4 -4.4 13.5 5.1 11.4 -5.6 

OATI Jul-19 6.1 3.2 2.5 -0.6 10.7 2.0 10.1 -8.0 

TIPS Jul-20 1.1 -1.9 4.5 1.1 11.2 1.0 3.1 -19.0 

UKTi Nov-22 6.9 4.0 3.2 0.1 16.8 7.6 14.8 -4.3 

JGBI-16 June-18 -0.1 -0.9 -7.7 -8.6 5.6 2.8 12.4 6.3 

30y 

OATei Jul-40 2.8 1.3 -0.4 -2.1 5.2 0.7 4.5 -4.4 

OATI Jul-29 3.6 1.5 1.7 -0.6 6.7 0.3 6.8 -5.9 

TIPS Feb-40 0.8 -1.3 2.2 -0.1 5.5 -1.4 3.3 -10.8 

UKTI Mar-40 2.8 0.9 1.3 -0.7 6.7 0.9 5.5 -6.0 


Herve Cros / Shahid Ladha / Sergey Bondarchuk 13 January 2011 


49 


Technical Analysis – Interest Rates & Commodities 

Bond & Short-Term Contracts 

• Europe 10y: Stalling below key 3.08/3.11 (LT 38.2% & MT 61.8%) with risk of ST wave “4” towards 2.70/75 area 

• US 10y: Toppish around key 3.37 (MT 61.8%) and below LT falling resistance (3.64) with risk towards 3.10 

• Short-term contracts m1: MT toppish bias on ED and Euribor with still risk of developing a falling ABC scenario 

Equities & Commodities 

• WTI (Cl1): Sill up MT within a MT rising channel but is still stalling around 91.86 wave “A” top, key to extend rise 

• Equity markets: MT positive bias persists with new tops in US while European markets retest November tops 

US 10y: Toppish around key 3.37 (MT 61.8%) with risk towards ST 38.2% MT Trend: Up Range: 3.25/3.45 

MT SCENARIO remains up 

Market remains up oriented MT within a MT 

rising “C of ABC” scenario which is likely to 

send it towards key 4.00/4.07 (April top & LT 

61.8%) initially and then key 4.59 (LT falling 

channel res). A break above 3.64 (4-years 

falling resistance) is now needed to 

strengthen this MT bearish scenario 

2.80

Germany 10y: Stalling below MT 61.8% could trigger a fall towards ST 38.2% MT Trend: Up Range: 2.85/3.10 

MT SCENARIO is still up 

Negative break above the MT falling channel 

and 2.50 (wave “1” top) allowed the rising 

wave “3” to develop beyond key 2.58 (LT 

falling wedge res) to extend the MT rise 

towards the key 3.08/3.11 (LT 38.2% & MT 

61.8%) area initially. A break now would see 

an extension towards 3.39 (LT 50%) 

ALTERNATIVE SCENARIO...ST correction 

Wave “3” perhaps ended below key 3.11 (MT 

61.8%) and it now tries a classic pullback 

within a falling wave “4” towards 2.70 (ST 

38.2%) initially and perhaps then 2.58 (LT 

falling wedge res) 

STRATEGY 

Long 3.00, S/L 3.08, for 2.70/2.80 

2.47

Trade Reviews 

Options, Money Market and Bond Trades – Tactical & Strategic Trades 

This page summarises our main tactical (T) and strategic (S) trades. The former focus on short-term horizons (a few weeks), 

allowing one to play any near-term corrections within a defined trend, while the latter rely on a medium-term assumed trend. 

For each trade we provide the expected target and the recommended stop loss. 

New Strategies 

BTP Flattener Long BTP 5% Sep 40 Short BTP 4% Sep 20 

we enter 2/3 now and the rest on any overshoot to 90bp. 

Tsy Flattener Sell UST 5Y Buy UST 10Y 

Structurally, we like the trade given QE2 purchases. PCA also shows that 10s look 

cheap while 5s look rich, which makes us comfortable with the timing of this trade. 

Also, there is a slight flattening bias beginning next week going into the following 

week's 5y auction. 

GBP OIS Swap Pay May11 MPC 

Media and economists are beating on the inflation drum. The front-end has been 

listening: we tactically try to ride the bearish momentum in the market via OIS swap 

at small size. 

Existing Strategies 

Yield Curves 

EUR Butterfly Receive EUR 2/5/10s M1 IMM 

Proxy for 2/10s flatteners with positive carry. 

Cross Markets 

USD Agency Callable Long FNMA 5nc6M 2.60 01/16 Short T 0.75 08/13 

Short-vol bullish strategies in the short end are attractive given the Fed status. 

Callables outperform in a range-bound environment, but currently tolerate a larger 

rise in rates (+115 bps) than a rally (-20 bps) before breaking even over a 6m 

horizon. 

85.5 

(S) 

138.5 

(S) 

0.68 

(T) 

14.5 

(T) 

-4k 

(S) 

70 94 85.5 

(13-Jan) 

130 146 138.5 

(13-Jan) 

0.75 0.64 0.67 

(11-Jan) 

0.0 16.5 11.5 

(05-Jan) 

300k -150k 0k 

(06-Jan) 

Options 

Euribor Put Spread Buy ERU1 9862/50 P/S 

5.0 12.0 0.0 3.0 

Bearish long-term strategy, playing improved macro conditions, ECB's exit strategy 

as well as the risk of a rate hike in Q2. Good entry level for shorts after aggressive 

rally at the end of 2010. 

(S) 

(04-Jan) 

*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps. 

-1.5bp 10k EUR 0k 

0bp 

5k/01 USD 0k 

0bp 

7.5k/01 

GBP 

+7.5k 

+1bp 

+1.0bp 10k/01 EUR -30k 

-3bp 

1k/01 USD 

-4k 

12.5k/01 EUR +25k 

+2bp 

Interest Rate Strategy 13 January 2011 


52 


AUD: The Wrong Kind of Liquidity 

• Our call for the AUD for 2011 revolves 

around the potential for withdrawal of the 

excess global liquidity that was behind its 

outperformance over the last year and more. 

Chart 1: USD Liquidity & AUD, CRB 

• In the meantime, markets have reacted 

negatively to the damage and disruption caused 

by the Queensland floods. But we question this 

reaction: while the floods are undoubtedly a 

negative for the country, they do not necessarily 

spell doom for the currency. 

• AUD may come under further pressure as 

markets react to bad news; but we stick to our 

view that the real damage to the AUD will come 

later, when the tightening impact of Chinese and 

US liquidity withdrawal begins to bite. 

Source: Reuters EcoWin Pro, Bloomberg, BNP Paribas 

Chart 2: Chinese Inflation 

China withdrawing liquidity support 

Behind the spectacular recovery of the AUD against 

the USD over the past two years were three main 

factors. The first was the insatiable Chinese demand 

for Australian commodity exports. The second was 

the higher interest rates demanded by an economy 

booming on the back of those commodity exports. 

And last, but by no means least, the pair benefited 

from the debasement of the USD as a result of 

quantitative easing – and doubly so as QE pushed 

commodity prices higher. 2011 is likely to see all 

three factors come under threat, underpinning our 

view that the AUD will head lower through the year. 

15 

10 

5 

0 

-5 

-10 

-15 

Jan-05 

Jul-05 

Jan-06 

Jul-06 

Jan-07 


M1 %YoY - M2 %YoY (LHS) 

CPI %YoY (RHS) 

Jul-07 

Jan-08 

Jul-08 

Jan-09 

Jul-09 

Jan-10 

Jul-10 

10 

8 

6 

4 

2 

0 

-2 

-4 

The Chinese authorities can no longer afford to 

ignore inflation. While the global economy was on the 

brink, it made sense to tolerate a higher level of price 

increases as a buffer against further downturns. But 

deposit rates are now significantly below inflation at 

5.1%: the destructive impact on the value of savings 

risks pushing households to deploy their hard-earned 

cash. The result is either increased spending or 

further investment in shallow asset markets, in turn 

fuelling another round of inflation or another leg up in 

the asset bubble. Chinese non-market steps to rein 

in inflation are reaching a limit. 

Over the next year price increases will be addressed 

through a combination of more capital controls, rate 

hikes, further quantitative tightening through reserve 

requirement ratio (RRR) hikes and some currency 

appreciation. But the outcome must be in some 

shape or form a tightening of liquidity conditions. The 

result will slow demand for commodities as inputs 

into construction and other capital investments. It will 

also reduce the liquidity available for speculative 

asset purchases – including those of commodities. 

As such Australia is likely to face an easing in the 

growth in demand for its exports. 

US to close the floodgates in June? 

The additional liquidity provided by the Fed – and 

indeed magnified by the intervention and recycling of 

those USD proceeds by Asian central banks – has 

resulted in almost two years of USD weakness. But 

there are now signs that the floodgates may be 

closed in the near future. 

After a burst of optimism on the back of a strong ADP 

number, the aggressive hopes for an early US 

rebound have been moderated somewhat by a less 

impressive NFP. But while the NFP print was not the 

blow-out figure that some hoped for, it does add to 

evidence of a continuing recovery. ISM and PMIs 

suggest corporate America is ready to rebound as 

uncertainty surrounding additional regulation and 

Rob Ryan 13 January 2011 


53 


taxes eases after the November election. And on the 

consumer front, strong vehicle sales suggest that 

consumers are increasingly confident about their 

prospects. While housing remains in the doldrums, a 

few months of decent job growth may see that 

confidence extended to house purchases. An 

extension to QE2 will be harder to advocate if a solid 

if not spectacular recovery is in place by June. 

At that stage, a reversal of the post-crisis dynamic 

can be expected. The Fed’s liquidity has flown to 

emerging-market bonds and equities, to commodities 

and to higher-yielding currencies such as the AUD. 

All can be expected to come under pressure as the 

liquidity is withdrawn. But this US withdrawal of 

liquidity is by no means assured. There remains 

considerable uncertainty as to whether the required 

boost to employment will materialise. The Fed has 

made it clear that if necessary it will extend and 

enlarge the QE2 programme. If anything was learned 

from the Japanese experience, it is that premature 

tightening can have disastrous consequences. The 

Fed is using its weapon of last resort and must be 

sure that it has been successful before it puts it back 

on the shelf. Thus the end to the trend of USD 

weakness is unlikely to be verifiable for some months 

yet. 

La Niña liquidity not helpful 

In the meantime, AUDUSD has come under pressure 

as the market reacts to the escalating costs of the 

Queensland floods. Latest estimates put flood 

damage in the region of AUD 5bn and the RBA’s 

McKibbin suggests that a 1% hit to GDP (equivalent 

to AUD 13bn) should not be ruled out. The mining 

industry in particular has been hit hard, with many 

mines in the area either flooded or unable to 

transport commodities to ports. While the flooding till 

this week was confined in the main to sparsely 

populated areas, the inundation of Brisbane will have 

a much larger impact on economic activity. 

The floods are undeniably a negative for Australia 

and its people but the same may not be true 

regarding the currency. It is true that export volumes 

from Queensland are likely to drop over the next 

quarter or two but some of this drop will be made up 

from other regions in Australia, notably Western 

Australia. These exports will fetch higher prices as 

markets tighten. And these higher prices will cause 

commodity users abroad to run down inventories in 

the short term. At some stage inventories will have to 

be rebuilt: if production and export from Queensland 

can resume in the next few months, the interruption 

in supply may not have a significant impact on export 

volumes over the longer term. 

While in the near term falling exports may subtract 

from GDP, there will be a positive effect from the 

Chart 3: Fed Balance Sheet vs Global Reserves 

Source: Reuters EcoWin Pro, Bloomberg 

Chart 4: Nikkei & JPY Post-Kobe 


clean-up and rebuilding operations. Central and state 

governments will spend to restore lost or damaged 

infrastructure and to deliver support payments to 

those worst affected. While PM Gillard has said that 

the government would divert spending from other 

areas to pay for reconstruction, the amounts involved 

will likely be too large to be able to rebuild without 

increased government borrowing. Given conservative 

estimates putting foreign holdings of Australian debt 

at about 50% of the total, this would imply a 

significant inflow to finance the borrowing. With 

Australian debt-to-GDP levels in the region of 28%, 

there should be no concern about the government’s 

ability to borrow. 

Insurance payments will also contribute to available 

funds – although historically the level of insurance 

coverage for flood damage has been low – and to the 

extent that Australian insurers have re-insured that 

exposure (with foreign re-insurers), there may be 

further inflows into the AUD. 

The floods will likely delay the next RBA rate hike, 

and certainly rule out an early ‘surprise’ move by the 

central bank. But as food prices rise – particularly in 

Queensland – higher inflation will be seen as 

boosting the chances of further rate hikes down the 



54 


oad. BNP Paribas economists have already revised 

up inflation estimates and now see CPI peaking at 

3.7% in Q3 and Q4 this year. Accordingly, while the 

RBA is unlikely to do anything soon, it may have to 

do more at a later stage than was priced in prior to 

the floods. 

Currencies and catastrophes 

The factors above suggest that in theory the floods 

need not be a negative for the currency. But what 

about in practice? There are only a few modern 

instances where a large part of an economy was 

temporarily decommissioned that would provide a 

valid comparison. The closest is probably that of the 

Kobe earthquake in 1995, where Japan’s secondlargest 

port was destroyed and the complex just-intime 

supply chains of the region’s exporters were 

dismantled. The cost of the damage in the immediate 

aftermath was estimated at JPY 5-10trn – or about 1- 

2% of GDP, probably of a similar magnitude to the 

Queensland floods. While the immediate impact was 

a fall in the stock market (down over 8% in a week) 

and a less than 2% retreat in the yen, the impact was 

short-lived. Within two weeks of the disaster, the 

currency had recovered; three months later, the JPY 

was over 20% stronger at 79.75, its all-time high 

against the USD. [Stocks took almost 12 months to 

recover, but this can be attributed to the impact of a 

stronger JPY on exporter earnings.] 

Back in Australia, the Newcastle earthquake of 1989 

had an even smaller and even shorter-lived impact 

on financial markets. AUDUSD fell 2% in the 

immediate aftermath of the quake, but no more. The 

stock market was largely immune to the disaster. 

The Indian Ocean tsunami in 2004 wiped out large 

parts of the Sri Lankan and Indonesian economies. 

In the case of Sri Lanka, the inflows of aid caused 

significant appreciation of the currency; in Indonesia 

the effect was less pronounced but the IDR 

appreciated over the following month nonetheless. 

While Australia is unlikely to be a significant receiver 

of foreign aid, the inflows of foreign capital borrowed 

for reconstruction will act in a similar way. 

In comparison, the Queensland floods have seen the 

stock market lose 2.6% from peak to trough (the S&P 

500 gained abut 1.5% over the same period) – hardly 

a worrying collapse. Indeed, from its peak of about 

1.0250, the AUD has already lost in the region of 3- 

4%, more than was lost by the yen after the Kobe 

earthquake. As such, there is little from these past 

cases to suggest that the AUD must fall significantly 

further. 

AUD fall to come later 

To be sure, there remains a risk that the floods 

trigger a more significant sell-off in the currency. 

Chart 5: IDR & LKR Post-Tsunami 


Chart 6: AUD Long Positioning – IMM and TFX 


There is no denying that the market retains a 

sizeable long AUD position, and while uncertainty 

remains about the scale of the impact, there may be 

a tendency for investors to want to reduce risk. IMM 

data show speculators long a net 62,500 contracts – 

not a record position, but a sizeable one nonetheless 

(Chart 8). Japanese margin investors similarly retain 

large AUDJPY longs, even if recently they have been 

shifting some of this position towards USDJPY. But 

the Japanese remain keen buyers of the highyielding 

AUD on dips, with interest from both the 

retail and institutional communities. While interest 

rate differentials remain as large as they are 

currently, we suggest that this bid is unlikely to 

evaporate. 

As such, while we see the current slide in the 

Australian dollar as somewhat inevitable given the 

uncertainty and long positioning, we do not believe 

that it marks the beginning of a more significant slide 

in the AUD. The AUD will indeed fall as China and 

the US tighten, but we are not there yet. We remain 

comfortable with our call for an AUDUSD decline 

towards the middle of the year. 



55 


EURUSD Rebounds Swiftly 

• Last week’s sharp EURUSD decline has been substantially reversed by this week’s rebound… 

• …with a sustained rise above 1.3325 favored, triggering medium-term extension towards 1.3500/80- 

1.3745 during the next 2-4 weeks 

• EURUSD gains should get a boost from rising risky markets led by Wall Street and platinum 

• USDJPY has a bullish medium-term bias towards 84.50 with a break extending to 85.20-85.95 

Last week, EURUSD began 2011 trading with a 

severe 5.55-cent decline posting a bearish outside 

range week amid one of the biggest weekly 

declines of the past year. This sharp decline initially 

suggested more downside ahead. This week, 

however, EURUSD has substantially reversed last 

week’s collapse testing pivotal resistance at 

1.3300/35. The combination of bullish momentum 

and medium-term pattern analysis favor further 

gains: keep a close eye on near-term price action 

since a New York daily close above 1.3325 pivotal 

resistance would indicate EURUSD has completed 

its November decline (1.4280-1.2875) and is in the 

initial stages of a corrective rebound towards 

1.3500/80-1.3745 spanning the next 2-4 weeks. 

Signs of healthy risk appetite on Wall Street and 

among key commodities have helped EURUSD 

reverse last week’s decline and may fuel mediumterm 

EURUSD gains. Fuelled by the strongest bout 

of monthly momentum since Q3 2009 and bullish 

seasonal factors, the S&P 500 Index has mediumterm 

scope toward 1303-1313 (Aug-Sep’08 

congestion zone) with a break potentially extending 

to 1350-1361 (76.4% retracement of the 2007-09 

bear market). Platinum, another “risky market,” has 

broken out to a new cycle high with medium-term 

scope towards $1900/35. A medium-term platinum 

rally could drive gold and silver higher with 

constructive implications for the commodity 

currencies. 

The dollar also began the year with a sharp rise 

versus JPY. As a result, USDJPY generated a 

weekly bullish snap-back reversal signal last week. 

Pattern analysis implies the 80.95 Jan 3 low is a 

secondary low reinforcing the 80.25 Nov 1 primary 

low. Combined with the breakout above the May 

downtrend in November plus current bullish weekly 

divergence, the medium-term bias is moderately 

bullish targeting 84.50 (December high) and likely 

extending toward 85.20-85.95 (swing 

target/September high). A further rise above 85.95 

would confirm the May-Nov decline (94.99-80.25) is 

complete and due for a larger multi-month reversal 

targeting the 50% retracement of the May-Nov’10 

decline at 87.60. In this regard USDJPY should 

follow – with a lag – the explosive rise in US 

Treasury yields that has occurred since last quarter. 

Chart 1: EURUSD – The November decline appears complete 

The rapid decline and 

recovery during the 1.42 

1.4160 

1.4280 

first 2 weeks of 2011 

trading suggest the 

1.38 1.3690 

Nov selloff is 

complete (1.4280- 

1.3335 

1.2875). Weekly 1.34 

1.3500 

momentum has 

undergone a bullish 

reversal off oversold 

1.30 

1.2965 

favoring a confirming 

1.26 

rise above 1.3325 

triggering a multiweek 

1.2642 

corrective 

1.22 

rebound to 1.3500/80 

and if exceeded 

1.1875 

1.18 

1.3745/85. 

24-May-10 21-Jul-10 17-Sep-10 16-Nov-10 


1.2870 

13-Jan-11 

Andrew Chaveriat 13 January 2011 


56 


Chart 2: USDJPY – Secondary low in place; gradual rise expected 

The breakout above 95 

95.00 

the May downtrend 

(early Nov) triggered a 93 

longer-term bullish 

92.15 

trend reversal. The 91 

bullish bias has been 

reinforced as pattern 

analysis suggests a 

2ndary low is in place 

89 

87 

88.00 88.00 

85.95 

at 80.95. The logical 

target is testing 84.50 

85 

84.40 

mid-Dec congestion, 83 

with a break extending 

82.85 

to 85.20 and potentially 81 

85.95 (Sep postintervention 

high). 79 

80.90 

80.20 

26-Jan-10 25-Mar-10 24-May-10 21-Jul-10 17-Sep-10 16-Nov-10 13-Jan-11 


The impressive 

USDMXN decline has 

bounced precisely off 

12.0440 long-term 

Fibonacci support (.618 

retracement of the 

2008-09 rally) favoring 

short-term 

consolidation. The 

medium-term bearish 

bias favors a decline to 

12.00 and 11.81. This 

could be a rapid selloff 

as the pseudo gap 

(rapid rise) created by 

the Lehman Crisis (Sep- 

Oct’08) is back-filled. 

Chart 3: USDMXN – Bouncing off 12.04 Fibonacci support; sell rallies 

13.40 

13.20 

13.00 

12.80 

12.60 

12.40 

12.20 

12.00 

13.40 

24-May-10 

12.10 

13.20 

12.45 

21-Jul-10 

13.25 

17-Sep-10 

12.15 

16-Nov-10 

12.60 

12.05 

13-Jan-11 


After stalling just above 

$1800 in early Nov and 

suffering a sharp 

pullback to $1625, 

platinum has resumed 

its rally, breaking above 

$1810 today. 

Guided by the August 

up channel and bullish 

weekly momentum, 

platinum bulls have 

unfinished business to 

deal with. We favor 

medium-term extension 

towards $1935 (longterm 

76.4% retracement 

of the 2008 collapse). 

Chart 4: Platinum – Bullish breakout targets $1935 

1850 

1800 

1750 

1750 

1725 

1700 

1650 

1610 1605 

1600 

1550 

1500 

1450 

1450 

1400 

24-May-10 21-Jul-10 17-Sep-10 

1805 

16-Nov-10 

1635 

1805 

13-Jan-11 




57 


Currency Spot Trade Recommendations Date 

AUDUSD 0.9980 Sell 1.0050, stop 1.0150, target 0.9420 6 Jan 2011 

AUDCAD 0.9870 Sell 0.9995, stop 1.0090, target 0.9460 6 Jan 2011 

USDCHF 0.9645 Buy 0.9560, stop 0.9460, target 0.9990 6 Jan 2011 

USDJPY 82.85 Buy 82.40, stop 81.40, target 85.40 6 Jan 2011 

GBPUSD 1.5870 Shorts from 1.5840 closed at 1.5700 14 Dec 2011 

USDKZT 147.00 Short at 147.00, stop at 149.50, target 135.00 28 May 2010 




58 


Economic Calendar: 14 - 21 January 

GMT Local Previous Forecast Consensus 

Fri 14/01 23:50 08:50 Japan CGPI y/y : Dec 0.9% 0.9% 1.0% 

(13/01) 

07:00 08:00 Germany CPI (Final) m/m : Dec 1.0% (p) 1.0% 1.0% 

07:00 08:00 CPI (Final) y/y : Dec 1.7% (p) 1.7% 1.7% 

07:00 08:00 HICP (Final) m/m : Dec 1.2% (p) 1.2% 1.2% 

07:00 08:00 HICP (Final) y/y : Dec 1.9% (p) 1.9% 1.9% 

07:00 08:00 Eurozone EU25 New Car Registrations : Dec 

10:00 11:00 Foreign Trade Balance (sa) : Nov EUR3.6bn EUR2.0bn EUR1.7bn 

10:00 11:00 HICP (Final) m/m : Dec 0.1% 0.6% 0.6% 

10:00 11:00 HICP (Final) y/y : Dec 1.9% 2.2% 2.2% 

10:00 11:00 HICP Core m/m : Dec -0.1% 0.4% n/a 

10:00 11:00 HICP Core y/y : Dec 1.1% 1.1% 1.1% 

10:00 11:00 Ex-Tobacco Index : Dec 110.27 110.90 n/a 

08:00 09:00 Spain CPI m/m : Dec 0.5% 0.6% 0.6% 

08:00 09:00 CPI y/y : Dec 2.3% 3.0% 2.9% 

09:00 10:00 Italy EU Trade Balance : Nov 

10:00 11:00 CPI (Final) m/m : Dec 0.4% (p) 0.4% n/a 

10:00 11:00 CPI (Final) y/y : Dec 1.9% (p) 1.9% n/a 

10:00 11:00 HICP (Final) m/m : Dec 0.3% (p) 0.3% n/a 

10:00 11:00 HICP (Final) y/y : Dec 2.0% (p) 2.0% n/a 

09:30 09:30 UK Input PPI (nsa) m/m : Dec 0.9% 2.0% 1.7% 

09:30 09:30 Output PPI (nsa) y/y : Dec 3.9% 4.3% 3.9% 

09:30 09:30 Output PPI (Ex-FDT, nsa) y/y : Dec 3.3% 3.4% 3.0% 

13:30 08:30 US CPI m/m : Dec 0.1% 0.5% 0.4% 

13:30 08:30 CPI y/y : Dec 1.1% 1.3% 1.3% 

13:30 08:30 Core CPI m/m : Dec 0.1% 0.1% 0.1% 

13:30 08:30 Core CPI y/y : Dec 0.8% 0.6% 0.8% 

13:30 08:30 Retail Sales m/m : Dec 0.8% 1.1% 0.8% 

13:30 08:30 Retail Sales Ex-Autos m/m : Dec 1.2% 0.8% 0.7% 

14:15 09:15 Industrial Production m/m : Dec 0.4% 0.5% 0.5% 

14:15 09:15 Capacity Utilisation Rate : Dec 75.2% 75.4% 75.6% 

14:55 09:55 Michigan Sentiment (Prel) : Jan 74.5 74.0 75.5 

15:00 10:00 Business Inventories : Nov 0.7% 0.6% 0.7% 

17:45 12:45 Fed’s Lacker Speaks on US Outlook in Richmond 

18:15 13:15 Fed’s Rosengren Speaks in Mashantucket, Connecticut 

Mon 17/01 00:01 00:01 UK Rightmove House Price Index y/y : Jan 

US Public Holiday 

12:15 09:15 US Fed’s Plosser Speaks in Santiago, Chile 

Tue 18/01 00:01 00:01 UK RICS House Price Balance : Dec -44 -40 -44 

09:30 09:30 CPI m/m : Dec 0.4% 0.9% 0.6% 

09:30 09:30 CPI y/y : Dec 3.3% 3.6% 3.3% 

09:30 09:30 RPI m/m : Dec 0.4% 0.8% 0.6% 

09:30 09:30 RPI y/y : Dec 4.7% 4.9% 4.7% 

09:30 09:30 RPIX y/y : Dec 4.7% 4.8% 4.5% 

09:30 09:30 DCLG House Prices : Nov 

10:00 11:00 Germany ZEW Expectations : Jan 4.3 15.0 5.8 

10:00 11:00 ZEW Current Assessment : Jan 82.6 85.0 82.7 

13:30 08:30 US Empire State Survey : Jan 10.6 13.0 12.0 

14:00 09:00 TICS Data : Nov USD7.5bn USD50.0bn n/a 

15:00 10:00 NAHB Housing Market Index : Jan 16 16 17 

14:00 09:00 Canada BoC Rate Announcement 

Market Economics 13 January 2011 


59 


Economic Calendar: 14 - 21 January (cont) 

GMT Local Previous Forecast Consensus 

Wed 19/01 23:30 10:30 Australia Westpac Consumer Confidence : Jan 110.0 102.5 n/a 

23:50 08:50 Japan Tertiary Index (nsa) m/m : Nov 0.5% 0.8% 0.7% 

(18/01) 

09:00 10:00 Eurozone Current Account (nsa) : Nov EUR-2.3bn EUR-6.0bn n/a 

09:30 09:30 UK Unemployment Change : Dec -1.2k 10.0k -1.5k 

09:30 09:30 Unemployment Rate (Claimant) : Dec 4.5% 4.6% 4.5% 

14:00 15:00 Belgium Consumer Confidence : Dec -2 -5 n/a 

13:30 08:30 US Housing Starts : Dec 555k 550k 552k 

15:30 10:30 Canada BoC Monetary Policy Report 

Thu 20/01 07:00 08:00 Germany PPI m/m : Dec 0.2% 0.5% 0.5% 

07:00 08:00 PPI y/y : Dec 4.4% 5.1% 5.1% 

08:30 09:30 Neths Unemployment Rate (sa): Nov 5.2% 5.3% n/a 

08:30 09:30 Consumer Confidence : Jan -14 -10 n/a 

09:00 10:00 Eurozone ECB Monthly Bulletin 

09:00 10:00 Italy Industrial Orders y/y : Nov 

11:00 11:00 UK CBI Industrial Trends : Q4 

13:30 08:30 US Initial Claims 445k 435k n/a 

15:00 10:00 Philadelphia Fed Survey : Jan 24.3 22.0 22.0 

15:00 10:00 Existing Home Sales : Dec 4.68mn 4.87mn 4.85mn 

15:00 10:00 Leading Indicators m/m : Dec 1.1% 0.6% 0.6% 

16:00 11:00 EIA Oil Inventories 

Fri 21/01 09:00 10:00 Germany Ifo Headlines : Jan 109.9 110.9 109.8 

09:00 10:00 Ifo Expectations : Jan 106.9 107.9 106.3 

09:00 10:00 Ifo Current Assessment : Jan 112.9 113.9 113.5 

09:30 09:30 UK Retail Sales (inc Autos) m/m : Dec 0.3% -2.0% 0.1% 

09:30 09:30 Retail Sales (inc Autos) y/y : Dec 1.1% -0.8% 1.4% 

14:00 15:00 Belgium Business Confidence : Dec 3.1 2.0 n/a 

Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision 




60 


Key Data Preview 

114 

112 

110 

108 

106 

104 

102 

100 

Chart 1: Japanese CGPI (2005=100) 

Excluding electric 

power, gas & water 

Total 

06 07 08 09 10 


Dec (f) Nov Oct Sep 

% y/y 0.9 0.9 0.8 -0.1 

% m/m 0.1 0.1 0.1 0.0 

Key Point: 

We expect the index to again rise slightly in 

December due to the pick-up in commodity prices. 

BNP Paribas Forecast: Slight Rise 

Japan: CGPI (December) 

Release Date: Friday 14 January 

We expect the domestic CGPI to again edge up 0.1% m/m 

in December, as gains in materials prices (petroleum/coal) 

offset price declines in processing industries. In November, 

the index rose 0.1%, led by strong price increases in 

petroleum/coal products and nonferrous metals. In 

November, there were also signs that the resurgent global 

commodities market is starting to affect the domestic 

economy, with yen-based import prices rising for the first 

time in six months. Trend-wise, the domestic CGPI’s long 

downward trek stabilised in the latter half of 2009. The 

index rallied to 0.3% q/q growth in Q1 2010 and 0.6% q/q 

in Q2 on the rising commodities market and domestic 

output gap improvements, but the index has subsequently 

been either flat or slightly weak. This reflects continued 

modest price decline in the processing industries and 

downward pressure from yen appreciation. Recently, 

though, the index has again started showing some modest 

firming, as the global commodities market continues to rise 

on the back of strong Asian demand and the spilling over of 

the Fed’s monetary easing. 


Chart 2: Eurozone HICP 


HICP % m/m 0.6 0.1 0.4 0.2 

HICP % y/y 2.2 1.9 1.9 1.8 

HICP Core % m/m 0.4 -0.1 0.4 0.2 

HICP Core % y/y 1.1 1.1 1.1 1.0 

Ex-Tobacco Index 110.90 110.27 110.16 109.76 

Key Point: 

The flash estimate of 2.2% should be confirmed, with 

inflation driven higher by food and energy. Core 

inflation should be flat at 1.1% y/y. 

BNP Paribas Forecast: Up On Energy & Food 

Eurozone: HICP (December) 


In December, the flash estimate printed 2.2%, the first 

reading above 2% since late 2008. We expect that to be 

confirmed in the final release, with the breakdown showing 

the rise was driven by a strong gain in energy inflation, and 

a modest further rise in food inflation. Core inflation, 

meanwhile, should remain at 1.1% for the third straight 

month. 

Oil prices rose strongly in December on a combination of 

stronger dollar prices and the impact of the near 7% 

depreciation of the euro against the dollar over the course 

of November. The boost to y/y energy inflation will be 

exacerbated by a base effect – energy prices fell by around 

0.5% m/m in December 2009. In all, we are looking for a 

2.5pp increase in energy inflation to 10.5%. 

Adverse weather conditions – most recently in Australia – 

are continuing to push soft commodity prices up, but the 

rally started last summer. This is starting to pass through 

into consumer prices, and we expect food inflation to rise 

strongly in the coming months. 

Looking forward, headline inflation should remain around 

these levels until spring, when energy price base effects 

begin to drag it back below 2%. 



61 



Chart 3: US Core CPI Inflation 


% m/m Dec (f) Nov Oct Sep 

CPI 0.5 0.1 0.2 0.1 

Core 0.1 0.1 0.0 0.0 

NSA (index) 218.89 218.803 218.711 218.439 

BNP Paribas Forecast: Oil Fuelled 

US: Consumer Price Index (December) 


Consumer prices are expected to surge 0.5% in December 

on surging gasoline prices and a solid increase in food 

costs. Gasoline prices typically fall in December but this 

time round rose more than 4%, suggesting a whopping 

7.7% increase in seasonally adjusted gas prices. The gain 

in energy will drive the NSA index up to 218.89 from 

218.80. Our forecast would bring the annual pace of overall 

inflation to 1.4%, up from 1.1% in November. 

Meanwhile, we expect core inflation to round up to 0.1% 

after a firm 0.1% gain a month earlier. We see continued 

discounting in apparel and vehicle prices and a moderate 

gain in owner’s equivalent rent. Our forecast would lead 

the annual rate of core inflation to drop to 0.6% from 0.8% 

in November, matching the record low recorded in October. 

The dichotomy between headline and core inflation 

highlights the lack of pricing power in an economy that 

continues to operate with substantial slack. 

Key Point: 

Gasoline prices are expected to drive a 0.5% surge in 

the CPI even as core inflation returns to its record 

low on an annual basis. 

Chart 4: US Retail Sales in Gradual Recovery 


% m/m Dec (f) Nov Oct Sep 

Retail Sales 1.1 0.8 1.7 0.9 

Ex-Autos 0.8 1.2 0.8 0.8 

BNP Paribas Forecast: Solid Gain 

US: Retail Sales (December) 


Retail sales are expected to register another solid gain in 

December, rising 1.1% on a strong holiday shopping 

season. Auto sales rose more than 2% in December as 

overall unit sales remained above 12 million units for the 

third month in a row. Ex-autos, we look for a robust gain of 

0.8%, driven in part by surging gas prices which are 

expected to lift nominal sales at gasoline stations. We also 

look for a solid gain in core retail sales, as indicated by 

chain store indicators; these pointed to another step up in 

spending in December. Our forecast would be consistent 

with a solid gain in consumer spending in Q4 overall. 

Consumers are spending on goods with renewed vigour, 

reflecting increased optimism about the recovery. 

Key Point: 

Retail sales are expected to continue to surge in 

December, rising 1.1% on higher auto sales, surging 

gas prices and a solid gain in core spending. 



62 



Chart 5: US Industrial Production 



Ind. Prod. (% m/m) 0.5 0.4 -0.2 0.1 

Cap. Util (%) 75.4 75.2 74.9 75.1 

BNP Paribas Forecast: Steady Growth 

US: Industrial Production (December) 


We look for industrial production to rise in December by 

0.5% m/m after a 0.4% gain in November. The main driver 

is likely to be manufacturing production. While this has 

been slowing (3m y/y declined from 2.3% in May to 0.7% in 

October and November), it has still been producing positive 

m/m readings for the past four months and should show 

some of the strength reflected in recent surveys. Utility 

production is likely to provide a limited supporting role, due 

to its weight in the index, as it is expected to increase by 

1.0% m/m. 

Industrial indicators including the ISM manufacturing index 

have remained in expansionary territory, pointing to 

ongoing strength in the manufacturing sector, although the 

employment figures demonstrate the limitation of this 

expansion. Our forecast would imply capacity utilisation 

rising to 75.4% from 75.2% previously. 

Key Point: 

Manufacturing continues to drive the index, 

although the sustainability of the strength remains 

in question. 

Chart 6: US Confidence is Slowly Improving 


Jan p (f) Dec 2H Dec p Dec 

Michigan Sentiment 74.0 74.8 74.2 74.5 

BNP Paribas Forecast: Edging Down 

US: Michigan Consumer Sentiment (Jan, preliminary) 


The recent extension of tax cuts and unemployment 

benefits helped boost consumer confidence in December. 

The University of Michigan consumer sentiment index 

increased in December to 74.5 from 71.6 in the previous 

month, bringing confidence to the highest level since June 

2010. At the beginning of January, the index is expected to 

give back some of its December’s strength, edging down 

half a point to 74.0. The current pace of job creation can 

only absorb new entrants to the workforce and is not strong 

enough to push the unemployment rate down. A depressed 

participation rate continues to suggest some upside risk to 

an already-elevated reading. As the recovery progresses, 

confidence should continue to pick up gradually, although 

optimism levels remain subdued by historical standards, 

limiting sales of big-ticket items such as cars. 

Key Point: 

At the beginning of January, the University of 

Michigan Index of Consumer Confidence is expected 

to give back some of December’s strength. 



63 




Chart 7: UK CPI vs RPI 


CPI % m/m 0.9 0.4 0.3 0.0 

CPI % y/y 3.6 3.3 3.2 3.0 

RPI Index 228.6 226.8 225.7 225.3 

RPI % y/y 4.9 4.7 4.5 4.6 

RPIX % y/y 4.8 4.7 4.6 4.6 

Key Point: 

We expect a sharp acceleration in headline CPI 

inflation largely due to rising food and energy 

prices. 

BNP Paribas Forecast: Sharp Increase 

UK: CPI (December) 

Release Date: Tuesday 18 January 

We expect CPI inflation to accelerate by 0.3pp to 3.6% y/y 

in December. The acceleration is likely to reflect the 

combination of rising food, transport, gas and electricity 

inflation while core inflation should hold at 2.8% y/y. 

Three of the major utility providers have announced price 

increases that will be captured by the December CPI. 

These are likely to push up the gas component by 5% m/m 

and the electricity component by just under 3%. There is 

more to come in January given announcements from other 

providers. Furthermore, given the surge in wholesale gas 

prices, there are likely to be even more price hikes 

announced this year. 

Petrol price increases of around 3% m/m (set against little 

change a year ago) are likely to push up the transport 

component. Meanwhile, ongoing pass-through of the surge 

in wheat and other soft commodities are likely to push food 

inflation higher. 

Beyond December we expect a continued acceleration, 

taking headline CPI up to 4.1% by February. 

RPI inflation is likely to rise to a slightly lesser extent, by 

0.2pp to 4.9% y/y – held back by slowing house price 

inflation. 

100 

75 

50 

25 

0 

-25 

-50 

-75 

Chart 8: German ZEW Indices 

Expectations (RHS) 

-100 

-75 

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 


Current Assessment 

Jan (f) Dec Nov Oct 

Expectations 15.0 4.3 1.8 -7.2 

Current Conditions 85.0 82.6 81.5 72.6 

Average 50.0 43.5 41.7 32.7 

Key Point: 

The ZEW survey data should continue to be 

supported by buoyant activity data. 

100 

75 

50 

25 

0 

-25 

-50 

BNP Paribas Forecast: Current Confidence 

Germany: ZEW Survey (January) 

Release Date: Tuesday 18 January 

The ZEW survey data reflect the opinions of approximately 

300 analysts and fund managers unlike other survey data, 

such as Ifo’s business climate index, which are derived 

from the opinions of actual businesses. 

Given its composition, the ZEW survey is very sensitive to 

recent news flow; this has remained exceptionally upbeat. 

Manufacturing orders rose by over 5% m/m in November, 

one of the biggest increases in the history of the series. At 

the same time, leading indicators have continued to rise, 

with the PMIs for both manufacturing and services rising 

towards their cycle highs in December. 

Internal as well as external demand is contributing to GDP 

growth in Germany. Business investment has surged in 

recent quarters while the outlook for private consumption 

has also improved as the unemployment rate has declined 

to its lowest level in almost twenty years. 

In light of the continued buoyancy of the activity data, the 

ZEW indices are likely to remain very high in January. The 

sub-index measuring the current economic situation in 

Germany has already risen to a level close to the high in 

the prior expansion (see chart). 

The expectations sub-index of the ZEW survey has fared 

less well. But it rebounded in November and December 

and we look for a further increase in the January survey as 

the prospect of broader-based growth kicks in. 



64 



Chart 9: UK Employment vs GDP 



Claimant Count Chg +10.0k -1.2k -5.2k 1.3k 

ILO Emp 3m Chg -13k -33k 166k 

ILO Unemp 3m Chg 44k 35k -9k 

Ave Earns % 3m/yr 2.2 2.2 2.1 

Ex Bonus % 3m/yr 2.2 2.3 2.2 

Key Point: 

We expect snow-related disruption to lead to a 

temporary increase in the claimant count measure of 

unemployment. 

BNP Paribas Forecast: Sluggish 

UK: Labour (December) 

Release Date: Wednesday 19 January 

We expect a relatively downbeat labour report, though this 

is likely to be partly a reflection of snow-related disruption. 

Widespread snow in January 2010 caused a sharp, albeit 

temporary, disruption in the claimant count measure of 

unemployment. The main reason for this was the number 

of people who left unemployment dropped sharply – 

presumably as the snow obstructed the hiring process. We 

suspect the same will happen in the December data, 

though probably to a lesser extent. In particular, given the 

proximity to Christmas, there may have been less hiring 

activity than at an earlier stage of the year. Nonetheless, 

we expect a 10k increase in this measure of unemployment 

– a deterioration compared with the small falls recorded in 

October and November. 

The ILO data suffered a setback in the November labour 

report. However, we judge that the 33k fall in employment 

was payback for the super-strong performance over 

previous months. Furthermore, given that the calculation is 

a 3-month change, it will take some time for last month’s 

weak reading to drop out of the calculation. 

Average earnings growth is likely to be broadly stable at 

2.2% 3m/yr on both the headline and ex-bonus measures. 

Base effects and the upcoming end-of-year bonus 

payments are likely to cause volatility in the months ahead. 

Chart 10: US Housing Starts & Building Permits 


BNP Paribas Forecast: Edging Down 

US: Housing Starts (December) 

Release Date: Wednesday 19 January 

In November, starts jumped 3.9% m/m to 555k annualised 

units, rebounding somewhat after the previous month’s 

11.1% plunge. The increase was driven by a 6.9% m/m 

increase in single family starts. Meanwhile, multifamily 

starts continued to decline, falling by 9.1% m/m in 

November. Multifamily permits declined by 14.2% m/m in 

November, pointing to multifamily starts weakness going 

forward. In addition, the Labor Department indicated that 

aggregate hours worked in the construction industry fell by 

0.2% m/m in December following a 0.2% decline in October 

and 0.4% decline in November. Therefore in December, we 

expect housing starts to decline by 0.9% m/m to 550k. 


Housing Starts 

(000s, saar) 550 555 534 601 

Key Point: 

In December, we expect housing starts to decline by 

0.9% m/m to 550k on multifamily starts weakness. 



65 



Chart 11: US Existing & Pending Home Sales 



Existing Home Sales 

(millions saar) 4.87 4.68 4.43 4.53 

BNP Paribas Forecast: Up 

US: Existing Home Sales (December) 

Release Date: Thursday 20 January 

Existing home sales are expected to increase 4% m/m to 

4.87mn annualised units in December building on the last 

month’s 5.6% increase. Pending sales that are based on 

contract signings and lead existing sales by one to two 

months 10.1% m/m in October and continued to improve in 

November growing by 3.5% m/m. In addition, mortgage 

applications to purchase increased by 0.5% m/m in 

December following a 12.2% surge in November further 

supporting our forecast for an increase in existing home 

sales. Together with November’s increase in pending home 

sales the recent increase in mortgage applications to 

purchase is in line with ongoing gradual pick-up in existing 

home sales in December. Housing demand should 

continue its uneven recovery entering 2011 as housing 

oversupply should keep pushing housing prices down. 

Key Point: 

Existing home sales are expected to increase 4% 

m/m to 4.87mn annualised units in December, 

building on the previous month’s 5.6% increase. 

Chart 12: UK Retail Sales vs RICS Sales to Stocks 



% m/m -2.0 0.3 0.7 -0.5 

% y/y -0.8 1.1 0.4 0.3 

% 3m/3m -0.1 0.2 0.5 1.1 

% 3m/yr 0.2 0.6 0.6 0.8 

Key Point: 

We expect retail sales to show an initial fall of 2% 

m/m, with the risk of a downward revision at a later 

stage. 

BNP Paribas Forecast: Sharp Fall 

UK: Retail Sales (December) 


We expect UK retail sales to fall by 2% m/m in December, 

largely due to snow-related disruption. The coldest 

December on record and widespread snow prevented 

shoppers from getting to the high street and deliveries to 

stores. As a guide, the last time there was disruption of this 

nature (January 2010), the initial estimate of retail sales 

was for a 1.2% m/m fall. This was subsequently revised 

down to a decline of over 3% m/m. We suspect a similar 

outcome is likely this time round. 

Within the breakdown, clothing sales are likely to perform 

well given the experience of January 2010 and anecdotal 

reports – not least from the BRC retail sales monitor. 

Meanwhile, the headline measure also includes auto fuel 

sales. These plunged by 8.5% m/m in January 2010 as 

fewer road journeys were made. Given the proximity to 

Christmas and the likelihood that travel plans were 

abandoned, we expect this component to fall by at least as 

much. 

The bottom line is there is likely to be a sizeable fall that 

will be vulnerable to revision. Further, the fall is likely to be 

temporary and a bounce back to some extent the following 

month is likely. We suspect that the VAT hike in January 

will mean the bounce is rather muted. 



66 



120 

115 

110 

105 

100 

95 

90 

85 

80 

Chart 13: German Ifo Business Climate 

Expectations (4-Mth Lag) 

Current Conditions 

75 

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 


Jan (f) Dec Nov Oct 

Headline 110.9 109.9 109.3 107.7 

Expectations 107.9 106.9 106.3 105.2 

Current Conditions 113.9 112.9 112.3 110.2 

Key Point: 

Sentiment will remain elevated, with the economic 

expansion broadening out. 

BNP Paribas Forecast: Stronger for Longer 

Germany: Ifo Business Climate (January) 


Ifo’s business climate index climbed for the seventh month 

in succession in December, rising above its high point 

during the previous expansion of 2005-2008. 

The sub-indices measuring current business conditions 

and future expectations both improved, with the former at 

an exceptionally elevated level (see chart). 

The assessment of current business conditions in Germany 

is still a little short of its cycle high in 2006 (115.5) and we 

expect a further improvement in December. 

The improvement in Ifo’s sentiment surveys was initially 

due to the exceptional strength in the manufacturing and 

export sectors but domestic sectors, including retail, have 

also shown a pronounced improvement more recently. The 

business climate index for the retail sector has risen to its 

strongest level since the early 1990s. Survey participants 

have signalled a moderation in the rate of externally driven 

growth relative to the spring peaks but domestic demand is 

taking up the baton. 

The latest round of hard activity data has been strong in 

Germany, with industrial orders recording one of the largest 

increases on record in November. This points to a further 

pick-up in expectations. 



67 


Economic Calendar: 24 Jan – 18 Feb 

24 January 25 January 26 January 27 January 28 January 

Australia: PPI Q4 

Eurozone: Industrial 

Orders Nov, PMIs (Flash) 

Jan 

France: Business Survey 

Jan 

Neths: Producer 

Confidence Jan 

Australia: CPI Q4 

Japan: BoJ Rate 

Announcement 

UK: GDP (Adv) Q4 

France: Retail Sales Dec, 

Housing Starts Dec, 

Quarterly Industrial 

Survey Q1 

Spain: PPI Dec 

US: S&P/CaseShiller 

House Prices Nov, 

Consumer Confidence 

Jan, FHFA House Prices 

Nov 

Canada: CPI Dec 

UK: BoE Minutes 

France: Job Seekers Dec 

Italy: Retail Sales Nov 

Norway: Norges Bank 

Rate Announcement 

US: New Home Sales 

Dec, FOMC Rate 

Announcement 

Japan: Trade Balance 

Dec 

Eurozone: Business & 

Consumer Survey Jan 

UK: CBI Distributive 

Trades Jan 

Germany: HICP (Prel) 

Jan 

France: Consumer 


Spain: Retail Sales Dec 

Sweden: Labour Dec, PPI 

Dec, Consumer 


US: Durable Goods 

Orders Dec, Pending 

Home Sales Nov 

During Week: Germany GfK Consumer Confidence Jan, Import Price Index Dec, UK Nationwide House Prices Jan 

31 January 1 February 2 February 3 February 4 February 

Japan: IP Dec, Housing 

Starts Dec 

Eurozone: HICP (Flash) 

Jan 

UK: GfK Cons Conf Jan 

Italy: PPI Dec 

Spain: HICP (Flash) Jan 

Norway: Retail Sales Dec 

US: Personal Income & 

Spending Dec, Chicago 

PMI Jan 

Canada: GDP Nov 

Australia: RBA Rate 

Announcement, NAB 

Business Conditions Dec 

Eurozone: Labour Dec, 

Manu PMI (Final) Jan 

UK: CIPS Manu Jan, Net 

Consumer Credit Dec, 

Mortgage Approvals Dec 

Germany: Labour Dec 

France: PPI Dec 

US: Construction Dec, 

ISM Manufacturing Jan 

Eurozone: PPI Dec 

Norway: Labour Nov 

US: Challenger Job 

Losses Jan, ADP Labour 

Jan 

Australia: Trade Balance 

Dec 

Eurozone: ECB Rate 

Announcement & Press 

Conference, Retail Sales 

Dec, Services PMI (Final) 

Jan 

UK: CIPS Services (Final) 

Jan 

US: Productivity & Costs 

(Prel) Q4, Factory Orders 

Dec, ISM Services Jan 

Japan: BoJ Meeting 

Minutes, CPI Tokyo Jan, 

CPI National Dec, Labour 

Dec, Hh Consumption 

Dec, Retail Sales Dec 

Eurozone: Eurocoin Jan, 

Monetary Developments 

Dec, Retail PMI Jan 

Italy: Wages Dec 

Sweden: Retail Sales Dec 

Norway: Labour (nsa) Jan 

Belgium: CPI Jan 

Switz: KOF Leading 

Indicator Jan 

US: ECI Q4, GDP (Adv) 

Q4, UoM Sentiment 

(Final) Jan 

Italy: CPI (Prel) Feb 

Spain: Industrial 

Production Dec 

US: Labour Jan 

Canada: Labour Jan 

During Week: Germany Retail Sales Dec, UK Halifax House Prices Jan 

7 February 8 February 9 February 10 February 11 February 

Australia: Retail Sales 

Dec 

Japan: Leading Indicator 

Dec 

Germany: Factory Orders 

Dec 

Norway: Industrial 


US: Consumer Credit 

Dec 

Japan: M2 Jan, CA Dec 

UK: BRC Retail Sales 

Monitor Jan, RICS House 

Prices Jan 

Germany: Industrial 


France: BoF Survey Jan, 

Trade Balance Dec, 

Budget Balance Dec 

Neths: Industrial 


US: NFIB Small Business 

Optimism Jan 

Australia: Westpac 

Consumer Confidence 

Feb 

UK: Trade Balance Dec 

Germany: Trade Balance 

Dec 

France: Investment 

Survey Jan 

Australia: Labour Jan 

Japan: CGPI Jan, 

Machinery Orders Dec 

Eurozone: ECB Bulletin 

UK: BoE Rate Ann, IP Dec 

France: IP Dec 

Italy: IP Dec 

Sweden: IP Dec 

Norway: CPI Jan, PPI Jan 

Neths: CPI Jan 

Switz: CPI Jan 

US: Wholesale Inv Dec, 

Treasury Statement Jan 

UK: PPI Jan 

Germany: HICP Jan 

France: Current Account 

Dec, Non-Farm Payrolls 

(Prel) Q4, Wages (Prel) 

Q4 

Spain: GDP (Flash) Q4 

Sweden: AMV Labour 

Jan 

US: Trade Balance Dec, 

UoM Sentiment (Prel) 

Feb 

During Week: Germany WPI Jan 

14 February 15 February 16 February 17 February 18 February 

Eurozone: Industrial 



Australia: NAB Business 

Conditions Jan 

Eurozone: GDP (Flash) 

Q4, Trade Balance Dec 

UK: DCLG House Prices 

Dec, CPI Jan 

Germany: GDP (Flash) 

Q4, ZEW Survey Feb 

France: GDP (Prel) Q4 

Italy: Trade Balance Dec 

Spain: HICP Jan 

Sweden: Rate Ann 

Neths: GDP (Prel) Q4, 

Retail Sales Dec 

US: Empire State Survey 

Feb, Retail Sales Jan, 

Import Prices Jan, TICS 

Data Dec, Business 

Inventories Dec, NAHB 

Housing Market Feb 

UK: Labour Dec, BoE 

Inflation Report 

Spain: GDP (Final) Q4 

Belgium: GDP (Flash) Q4 

US: New Home Starts 

Jan, PPI Jan, Industrial 

Production Jan, FOMC 

Minutes 

Eurozone: Current 

Account Dec, ECB 

Governing Council 

Meeting (No Rate 

Announcement) 

Sweden: CPI Jan, Labour 

Jan 

Norway: GDP Q4 

Neths: Labour Jan 

US: CPI Jan, Philly Fed 

Feb, Leading Indicators 

Jan 

Release dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions 

UK: Retail Sales Jan 

Germany: PPI Jan 

Italy: Non-EU Trade 

Balance Jan 

Belgium: Consumer 

Confidence Feb 

Neths: Consumer 

Confidence Feb 

Canada: CPI Jan 



68 


Treasury and SAS Issuance Calendar 

Daily update onto https://globalmarkets.bnpparibas.com, Research & Apps, Tools & Applications, Mkt Calendar, Government Flows 

In the pipeline - Treasuries: 

Japan: To buy back JPY 410bn of 15y floating-rate JGBs and JPY 210bn of 10y inflation-indexed JGBs in Q1 

Ireland: To resume borrowing as soon as market conditions permit 

Spain: Plans a new syndicated 10y bond (EUR) in January 

Spain: As from January, will announce its debt issuance on a monthly basis (on Bono auction day after market closing) 

France: To issue one new 2y, two new 5y and one new 10y benchmarks in 2011. New 15y & 30y if demand warrants and will examine the 

opportunity to issue new IL bonds including a new 15y OATei and a new 5y OATi 

Italy: BTP Sep 2021 (new) to be issued in Q1 

Germany: To issue inflation-linked Federal securities (EUR 2-3bn quarterly) and reserves the right to issue foreign currency bonds in 2011 

Poland: Plans to issue dollar-denominated bonds in H1. Is also considering issuing bonds denominated in yen and euros 

Portugal: Expects to launch a new bond via a syndicate in Q1. Another new bond issue is possible at a later date. Also plans to tap 4 to 6 

bonds in Q1 via auctions (EUR 0.75 to 1.25bn each) 

UK: Index-linked Gilt 2050 or longer (syndicated) in the week commencing 24 January and two mini tenders, one in Feb and the other in March 

Belgium: Likely to issue 3 new OLO benchmarks (launched through syndications) in 2011. Also plans to buy back bonds maturing in 2012 for 

EUR 2.19bn in 2011 

Finland: To launch two new euro-denominated benchmark bonds in 2011, a new 10y in H1. 4 to 5 tap auctions in 2011 with 2-3 in H1. T-bills 

with monthly maturity dates to be issued starting in January 

Czech Rep.: Plans at least one eurobond benchmark in 2011 - currency denomination to be defined 

Denmark: In 2011, to issue a 5-year EUR loan (EUR 1-2bn) and EUR or USD loans may be issued in the 2-5y maturity segment 

Slovak Rep.: Will open two new bond issues in 2011, a 3y zero-coupon bond (up to EUR 1.5bn) and a 7y or 10y bond (EUR 3bn). Two new 

issues of T-bills will also be opened 

During the week: 

US: Announcement of 2-, 5- & 7y Notes (new) details on Thursday 20 January 

FHLB: January Global Notes auction details to be announced on Tuesday 18 January 

Date Day Closing Country Issues Details BNPP forecasts 

Local GMT 

14/01 Fri 11:00 16:00 US Outright Treasury Coupon Purchase (2015 - 2016) USD 6-8bn 

17/01 Mon 11:00 10:00 Norway NGB 3.75% 25 May 2021 (NST 474) NOK 3bn 

18/01 Tue 12:00 03:00 Japan JGB 20 Dec 2015 JPY 2.4tn 

13:00 11:00 Finland RFGB 1.75% 15 Apr 2016 EUR 1.5bn 

12:00 17:00 Canada Repurchase of 10 Cash Mgt Bonds (Jun11 - Jun12) CAD 1bn 

11:00 16:00 US Outright TIPS Purchase (2013 - 2040) USD 1-2bn 

19/01 Wed 11:00 10:00 Germany Schatz 1% 14 Dec 2012 EUR 6bn 

10:30 10:30 UK Gilt 4.25% 7 Mar 2036 GBP 2.25bn 

11:00 16:00 US Outright Treasury Coupon Purchase (2013 - 2014) USD 6-8bn 

20/01 Thu 12:00 03:00 Japan JGB 20 Dec 2030 JPY 1.1tn 

10:30 09:30 Spain Obligacion 4.85% 31 Oct 2020 17 Jan EUR 3-4bn 

10:50 09:50 France BTANs 2- &/or 5-year 14 Jan EUR 7-9bn 

11:50 10:50 France OATis , OATeis, BTANeis 14 Jan EUR 2-3bn 

11:00 16:00 US Outright Treasury Coupon Purchase (2028 - 2040) USD 1.5-2.5bn 

13:00 18:00 US TIPS 0.875% 15 Jan 2021 (new) USD 13bn 

21/01 Fri 11:00 16:00 US Outright Treasury Coupon Purchase (2018 - 2020) USD 7-9bn 

24/01 Mon 12:00 03:00 Japan Auction for Enhanced-liquidity 17 Jan JPY 0.3tn 

Slovak Rep. SLOVGB 14 Oct 2013 (#215 - floating rate) EUR 0.2bn 


25/01 Tue Neths DSL 5% 15 Jul 2012 (Off-the-run facility) 

DSL 4.5% 15 Jul 2017 (Off-the-run facility) 

EUR 2-3bn 

Denmark DGBs 20 Jan 


13:00 18:00 US Notes 2-year (new) 20 Jan USD 35bn 

26/01 Wed 10:55 09:55 Italy CTZ 21 Jan 

11:00 10:00 Germany Bund 3.25% 4 Jul 2042 EUR 2bn 

11:00 10:00 Sweden T-bonds 19 Jan 

10:30 10:30 Portugal OTs (To be confirmed) 20 Jan EUR 0.75-1.25bn 

12:00 17:00 Canada CAN 2-year 20 Jan 


27/01 Thu 12:00 03:00 Japan JGB 2-year 20 Jan JPY 2.6tn 

10:55 09:55 Italy BTPeis 21 Jan EUR 2-3bn 



28/01 Fri 10:55 09:55 Italy 3 & 10y BTPs and CCT 21 Jan EUR 7-9bn 


Sources: Treasuries, BNP Paribas 



69 


Next Week's T-Bills Supply 

Date Country Issues Details 

14/01 UK T-Bills Feb 2011 GBP 0.5bn 

T-Bills Apr 2011 

GBP 1bn 

T-Bills Jul 2011 

GBP 1.5bn 

17/01 Japan T-Bills Jan 2012 JPY 2.5tn 

France BTF Apr 2011 EUR 4bn 

BTF Jul 2011 

EUR 1.5bn 

BTF Jan 2012 

EUR 2.5bn 

Germany Bubills Oct 2011 EUR 2bn 

Neths DTC Mar 2011 EUR 2-3bn 

DTC Apr 2011 

EUR 2.5-3.5bn 

DTC Sep 2011 

EUR 1.5-2.5bn 

Slovak Rep. T-Bills Jan12 (#06) (new) EUR 0.2bn 

18/01 Spain Letras Jan 2012 17 Jan 

Letras Jun 2012 

17 Jan 

Belgium TC Apr 2011 14 Jan 

TC Jan 2012 

14 Jan 

Canada T-Bill Apr 2011 CAD 6.2bn 

T-Bill Jul 2011 (new) CAD 2.4bn 

T-Bill Jan 2012 (new) CAD 2.4bn 

US T-Bills Apr 2011 USD 29bn 

T-Bills Jul 2011 (new) USD 28bn 

FHLB Discount Notes 

FHLMC Bills 3-month & 6-month 14 Jan 

19/01 Japan T-Bills Apr 2011 JPY 4.8tn 

Sweden T-Bills Apr 2011 SEK 10bn 

T-Bills Jun 2011 

SEK 5bn 

Portugal BT Jan 2012 (new) EUR 0.75bn 

US T-Bills 4-week 18 Jan 

FNMA Bills 3-month & 6-month 14 Jan 

20/01 Japan T-Bills Mar 2011 JPY 2.5tn 

FHLB Discount Notes 

21/01 UK T-Bills 14 Jan 

Sources: Treasuries, BNP Paribas 

Comments and charts 

• In the coming week, EGB gross supply will remain 

at a high level around EUR 21bn from EUR 24.6bn in 

the past week. In 10y duration-adjusted terms it will fall 

to EUR 10bn from EUR 16.1bn. 

• Finland will kick off EGB issuance with a tap of 

RFGB Apr-16 for EUR 1.5bn on Tuesday. On 

Wednesday Germany issues paper for a third week in a 

row, tapping Schatz Dec-12 for EUR 6bn. Finally, Spain 

and France will issue on Thursday. Spain will tap SPGB 

Oct-20 for an expected amount around EUR 3-4 while 

France will issue 2y &/or 5y BTANs and inflation-linked 

bonds as well. 

• Outside of the eurozone, there is only a US TIPS 

auction for USD 13bn. The UK will tap Gilt Mar-36 for 

GBP 2.25bn. Norway and Japan will also issue paper in 

the week ahead. 

20 

18 

16 

14 

12 

10 

8 

6 

4 

2 

0 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

25 

20 

15 

10 

5 

0 

Next Week's Eurozone Redemptions 

Date Country Details Amount 

15/01 Neths DSL 4% EUR 13.9bn 

Total Eurozone Long-term Redemption EUR 13.9bn 

20/01 France BTF EUR 8.5bn 

20/01 Belgium TC EUR 5.5bn 

21/01 Spain Letras EUR 9.3bn 

21/01 Greece GTB (13W) EUR 1.2bn 

21/01 Portugal BT EUR 3.4bn 

Total Eurozone Short-term Redemption EUR 27.9bn 

Next Week's Eurozone Coupons 

Country 

Amount 

Italy 

EUR 0.1bn 

Total Long-term Coupon Payments 

EUR 0.1bn 

Chart 1: Investors’ Net Cash Flows 

(EUR bn, 10y equivalent) 

Net Investors' Cash Flows 

(EUR bn , 10y equivalent) 

Week of Jan 10th Week of Jan 17th Week of Jan 24th Week of Jan 31st 

Chart 2: EGB Gross Supply Breakdown by 

Country (EUR bn, 10y equivalent) 

Germany Italy Portugal Belgium 

France Spain Netherlands Austria 

Finland Greece Ireland 


Chart 3: EGB Gross Supply Breakdown by 

Maturity (EUR bn, 10y equivalent) 

EGBs Gross Supply (EUR bn, 10y equivalent) 

2-3-YR 5-7-YR 10-YR >10-YR 





70 


Central Bank Watch 

Interest Rate 

EUROZONE 

Current 

Rate (%) 

Minimum Bid Rate 1.00 

US 

Fed Funds Rate 0 to 0.25 

Discount Rate 0.75 

JAPAN 

Call Rate 0 to 0.10 

Basic Loan Rate 0.30 

UK 

Bank Rate 0.5 

DENMARK 

Lending Rate 1.05 

SWEDEN 

Repo Rate 1.25 

NORWAY 

Sight Deposit Rate 2.00 

SWITZERLAND 

3 Mth LIBOR Target 

Range 

CANADA 

0.0-0.75 

Overnight Rate 1.00 

Bank Rate 1.25 

AUSTRALIA 

Cash Rate 4.75 

CHINA 

1Y Bank Lending 

Rate 

BRAZIL 

5.81% 

Selic Overnight Rate 10.75 

Date of 

Last 

Change 

-25bp 

(7/5/09) 

-75bp 

(16/12/08) 

+25bp 

(18/2/10) 

-10bp 

(5/10/10) 

-20bp 

(19/12/08) 

-50bp 

(5/3/09) 

-10bp 

(14/1/10) 

+25bp 

(15/12/10) 

+25bp 

(5/5/10) 

-25bp 

(12/3/09) 

+25bp 

(8/9/10) 

+25bp 

(8/9/10) 

+25bp 

(2/11/10) 

+25bp 

(25/12/10) 

+50bp 

(21/7/10) 

Next Change in 

Coming 6 Months 

No Change 

No Change 

No Change 

No Change 

No Change 

No Change 

No Change 

+25bp 

(15/2/11) 

+25bp 

(12/5/11) 

No Change 

+25bp 

(1/6/11) 

+25bp 

(1/6/11) 

+25bp 

(1/3/11) 

+25bp 

(Feb 11) 

+50bp 

(19/1/11) 


For the full EMK Central Bank Watch please see our Local Markets Mover 

Comments 

Doubts about the sustainability of the recovery and low inflation 

pressures imply no rise in the refinancing rate for a considerable 

period of time: we expect the first increase only in H2 2012. 

The FOMC is expected to maintain the funds rate at 0 to 0.25% 

for an extended period. It will execute its QE2 programme through 

H1 2011, with a high probability of an extension through H2 2011. 

We expect the BoJ to maintain its overnight call rate at 0 to 

0.1% for an extended period. It could well expand its asset 

purchase programme, depending mainly on moves in the yen. 

Despite sluggish growth, we expect persistent upward surprises 

on inflation and rising inflation expectations to provoke an 

interest rate hike in Q3 – with the risk of an earlier move. 

Higher money market rates in the eurozone are likely to 

continue to put pressure on the krone. Thus, further increases in 

the interest rate on certificates of deposit are on the agenda. 

Strong domestic economic growth should lead to further rate 

hikes. We expect the Riksbank to deliver the next rate hike at 

February’s meeting. 

We expect the Norges Bank to raise rates in Q2 2011. Given the 

Bank’s hawkish statement in December, the risk is that the rate 

hike comes in Q1 if economic data surprise to the upside and 

the krone does not appreciate significantly. 

The rally in the franc is delivering a tightening of monetary 

conditions independent of SNB policy. The timing of the first hike 

remains dependent on exchange rate developments. 

In light of developments in global financial markets and the US 

economic outlook in particular, the BoC is pausing to allow 

further progress in the recovery. Rate hikes should resume in 

June 2011, with 75bp of increases delivered by the end of next 

year. 

The RBA’s December statement said policy is “appropriate for 

the economic outlook”, suggesting it is now more data 

dependent. We expect above-trend growth in late 2010 and 

early 2011 on the back of strength in Asia. This should be 

enough to prompt a further rate rise in March. 

Inflation pressure remains strong and the property market 

continues to overheat. We thus expect RRR to be hiked to 23% to 

slow M2 and lending growth to a 16-17% y/y pace. Further, we 

expect at least two 25bp hikes in H1 2011, supplemented by strict 

liquidity controls and tight money market rates. 

The BCB has been on hold since the last hike in July. However, 

as the inflation picture is worsening, the monetary authority is 

likely to resume hiking rates by January 2011, to tame inflation 

expectations and pull inflation back towards the target. 

Change since our last weekly in bold and italics 



71 


Economic Forecasts 

GDP 

Year 2010 

2011 

(% y/y) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US -2.6 2.8 2.4 2.4 3.0 3.2 2.6 2.2 2.4 2.5 2.5 

Eurozone -4.0 1.7 1.6 0.8 2.0 1.9 2.0 2.1 1.5 1.5 1.5 

Japan -5.2 3.6 1.4 5.0 2.7 4.4 2.6 1.4 1.4 1.0 1.9 

World (2) -0.6 4.8 4.1 4.8 5.0 4.8 4.5 4.1 4.0 4.1 4.2 

Industrial Production 

Year 

2010 

2011 

(% y/y) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US -9.3 5.5 3.0 2.7 7.4 6.6 5.3 4.2 3.0 2.4 2.5 

Eurozone -14.6 6.8 2.8 4.6 9.0 6.9 6.6 4.6 2.6 2.2 1.8 

Japan -21.9 15.0 1.2 27.4 21.0 13.4 2.6 -1.3 -1.6 1.2 6.2 

Unemployment Rate 

Year 

2010 2011 

(%) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US 9.3 9.7 9.5 9.7 9.7 9.6 9.7 9.7 9.7 9.5 9.3 

Eurozone 9.4 10.0 10.2 9.9 10.0 10.0 10.1 10.1 10.2 10.2 10.2 

Japan 5.1 5.1 4.6 4.9 5.2 5.1 5.0 4.8 4.7 4.5 4.5 

CPI 

Year 

2010 

2011 

(% y/y) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US -0.4 1.6 1.5 2.4 1.8 1.2 1.2 1.5 1.8 1.6 1.1 

Eurozone 0.3 1.6 1.8 1.1 1.5 1.7 2.0 2.1 1.6 1.7 1.7 

Japan -1.4 -0.7 -0.9 -1.2 -0.9 -0.8 0.0 -0.9 -1.0 -0.7 -1.1 

Current Account 

(% GDP) ’09 

Year 

’10 (1) ’11 (1) General Government 

(% GDP) 

’09 

Year 

’10 (1) ’11 (1) 

US -2.7 -3.4 -3.3 US (4) -10.0 -8.9 -9.9 

Eurozone -0.6 -0.5 -0.2 Eurozone -6.3 -6.2 -4.7 

Japan 2.8 3.5 3.5 Japan -10.2 -8.2 -6.8 

Interest Rate Forecasts 

Interest Rate (3) 

Year 

2011 

2012 

(%) ’09 ’10 ’11 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US 

Fed Funds Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50 

3-month Rate 0.25 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.45 0.75 0.90 

2-year yield 1.14 0.61 1.00 0.50 0.75 0.85 1.00 1.10 1.50 2.15 2.40 

10-year yield 3.84 3.29 3.75 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.60 

2y/10y Spread (bp) 269 268 275 250 250 265 275 290 275 235 220 

Eurozone 

Refinancing Rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50 1.75 


2-year yield 1.37 0.85 1.50 1.00 1.20 1.30 1.50 1.70 2.05 2.30 2.45 

10-year yield 3.40 2.96 3.35 2.75 2.90 3.15 3.35 3.50 3.75 3.90 4.10 

2y/10y Spread (bp) 203 211 185 175 170 185 185 180 170 160 165 

Japan 

O/N Call Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 


2-year yield 0.15 0.18 0.25 0.25 0.25 0.25 0.25 0.25 0.30 0.30 0.30 

10-year yield 1.30 1.12 1.40 1.20 1.30 1.40 1.40 1.40 1.40 1.50 1.50 

2y/10y Spread (bp) 115 95 115 95 105 115 115 115 110 120 120 

Footnotes: (1) Forecast (2) Country weights used to construct world growth are those in the IMF World Economic Outlook Update 

April 2010 (3) End Period (4) Fiscal year Figures are y/y percentage change unless otherwise indicated 


Market Economics / Interest Rate Strategy 13 January 2011 


72 


FX Forecasts* 

USD Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

EUR/USD 1.27 1.25 1.20 1.23 1.25 1.30 1.32 1.32 1.33 1.34 1.35 

USD/JPY 85 84 88 92 95 100 110 120 119 118 116 

USD/CHF 1.01 1.05 1.11 1.09 1.08 1.05 1.05 1.06 1.06 1.07 1.07 

GBP/USD 1.55 1.51 1.46 1.45 1.52 1.55 1.57 1.61 1.66 1.70 1.73 

USD/CAD 0.95 0.96 0.93 0.95 0.95 1.00 1.02 1.09 1.11 1.14 1.16 

AUD/USD 1.02 0.99 0.92 0.93 0.92 0.93 0.92 0.90 0.87 0.85 0.83 

NZD/USD 0.79 0.78 0.74 0.73 0.72 0.69 0.67 0.66 0.64 0.62 0.60 

USD/SEK 7.09 7.04 7.58 7.56 7.36 7.08 6.89 6.89 6.99 6.94 6.96 

USD/NOK 6.22 6.16 6.33 6.10 5.92 5.77 5.76 5.68 5.49 5.30 5.19 

EUR Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

EUR/JPY 108 105 106 113 119 130 145 158 158 158 157 

EUR/GBP 0.82 0.83 0.82 0.85 0.82 0.84 0.84 0.82 0.80 0.79 0.78 

EUR/CHF 1.28 1.31 1.33 1.34 1.35 1.36 1.38 1.40 1.41 1.44 1.44 

EUR/SEK 9.00 8.80 9.10 9.30 9.20 9.20 9.10 9.10 9.30 9.30 9.40 

EUR/NOK 7.90 7.70 7.60 7.50 7.40 7.50 7.60 7.50 7.30 7.10 7.00 

EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 

Central Europe Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

USD/PLN 3.07 3.16 3.25 3.09 3.12 2.96 2.88 2.84 2.78 2.69 2.74 

EUR/CZK 24.7 24.5 24.3 24.5 24.3 24.0 23.9 23.8 24.0 23.8 23.5 

EUR/HUF 290 285 280 275 270 270 270 265 260 255 260 

USD/ZAR 7.30 7.50 7.40 7.30 7.40 7.30 7.30 7.50 7.20 7.10 7.00 

USD/TRY 1.50 1.52 1.48 1.47 1.49 1.46 1.47 1.46 1.45 1.43 1.42 

EUR/RON 4.35 4.50 4.50 4.40 4.20 4.30 4.20 4.20 4.20 4.20 4.10 

USD/RUB 30.32 30.11 31.19 29.90 30.11 29.07 28.85 28.41 27.86 27.32 28.51 

EUR/PLN 3.90 3.95 3.90 3.80 3.90 3.85 3.80 3.75 3.70 3.60 3.70 

USD/UAH 7.9 7.9 7.8 7.8 7.5 7.5 7.5 7.5 7.5 7.5 7.5 

EUR/RSD 105 115 105 100 98 97 96 95 93 92 91 

Asia Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

USD/SGD 1.25 1.23 1.22 1.21 1.21 1.20 1.19 1.18 1.17 1.16 1.15 

USD/MYR 3.03 3.00 2.95 2.90 2.87 2.85 2.83 2.80 2.77 2.75 2.73 

USD/IDR 8800 8600 8500 8400 8300 8200 8100 8000 7900 7800 7800 

USD/THB 29.50 29.00 28.70 28.50 28.30 28.00 27.70 27.50 27.30 27.00 27.00 

USD/PHP 43.00 42.50 42.00 41.50 41.00 40.50 40.00 39.50 39.00 39.00 39.00 

USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 

USD/RMB 6.58 6.52 6.49 6.45 6.40 6.35 6.30 6.26 6.23 6.20 6.17 

USD/TWD 28.70 28.00 27.70 27.30 27.00 26.70 26.50 26.00 26.00 26.00 26.00 

USD/KRW 1100 1070 1060 1050 1040 1030 1020 1010 1000 1000 1000 

USD/INR 44.50 44.30 44.00 43.70 43.50 43.00 42.50 42.00 41.50 41.00 40.50 

USD/VND 20500 20500 20500 20500 20500 20500 20500 20500 20500 20500 20500 

LATAM Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

USD/ARS 4.00 4.09 4.19 4.28 4.36 4.44 4.52 4.60 4.68 4.75 4.83 

USD/BRL 1.68 1.66 1.65 1.63 1.63 1.65 1.67 1.70 1.71 1.73 1.74 

USD/CLP 529 516 500 485 480 475 473 471 473 475 478 

USD/MXN 12.00 11.70 11.45 11.30 11.30 11.50 11.80 12.00 12.08 12.15 12.24 

USD/COP 1800 1750 1720 1700 1705 1730 1745 1760 1770 1780 1790 

USD/VEF (Priority) (1) 

USD/VEF (Oil) (1) 

Others Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

USD Index 82.04 83.11 86.11 85.63 84.56 83.26 83.51 84.81 84.22 83.77 83.14 

*End Quarter 

(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 


Foreign Exchange Strategy 13 January 2011 


73 


Market Coverage 

Market Economics 

Paul Mortimer-Lee Global Head of Market Economics London 44 20 7595 8551 paul.mortimer-lee@uk.bnpparibas.com 

Ken Wattret Chief Eurozone Market Economist London 44 20 7595 8657 kenneth.wattret@uk.bnpparibas.com 

Luigi Speranza Head of Inflation Economics, Eurozone, Italy London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.com 

Alan Clarke UK London 44 20 7595 8476 alan.clarke@uk.bnpparibas.com 

Eoin O’Callaghan Inflation, Eurozone, Switzerland, Ireland London 44 20 7595 8226 eoin.ocallaghan@uk.bnpparibas.com 

Gizem Kara Scandinavia London 44 20 7595 8783 gizem.kara@uk.bnpparibas.com 

Dominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.com 

Julia Coronado Chief US Economist New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.com 

Yelena Shulyatyeva US, Canada New York 1 212 841 2258 yelena.shulyatyeva@americas.bnpparibas.com 

Bricklin Dwyer US, Canada New York 1 212 471-7996 bricklin.dwyer@americas.bnpparibas.com 

Ryutaro Kono Chief Economist Japan Tokyo 81 3 6377 1601 ryutaro.kono@japan.bnpparibas.com 

Hiroshi Shiraishi Japan Tokyo 81 3 6377 1602 hiroshi.shiraishi@japan.bnpparibas.com 

Azusa Kato Japan Tokyo 81 3 6377 1603 azusa.kato@japan.bnpparibas.com 

Makiko Fukuda Japan Tokyo 81 3 6377 1605 makiko.fukuda@japan.bnpparibas.com 

Richard Iley Head of Asia Economics Hong Kong 852 2108 5104 richard.iley@asia.bnpparibas.com 

Dominic Bryant Asia, Australia Hong Kong 852 2108 5105 dominic.bryant@asia.bnpparibas.com 

Mole Hau Asia Hong Kong 852 2108 5620 mole.hau@asia.bnpparibas.com 

Xingdong Chen Chief China Economist Beijing 86 10 6561 1118 xd.chen@asia.bnpparibas.com 

Isaac Y Meng China Beijing 86 10 6561 1118 isaac.y.meng@asia.bnpparibas.com 

Chan Kok Peng Chief Economist South East Asia Singapore 65 6210 1946 kokpeng.chan@asia.bnpparibas.com 

Marcelo Carvalho Head of Latin American Economics São Paulo 55 11 3841 3418 marcelo.carvalho@br.bnpparibas.com 

Italo Lombardi Latin America New York 1 212 841 6599 italo.lombardi@americas.bnpparibas.com 

Florencia Vazquez Latin American Economist Buenos Aires 54 11 4875 4363 florencia.vazquez@ar.bnpparibas.com 

Michal Dybula Central & Eastern Europe Warsaw 48 22 697 2354 michal.dybula@pl.bnpparibas.com 

Julia Tsepliaeva Russia & CIS Moscow 74 95 785 6022 julia.tsepliaeva@ru.bnpparibas.com 

Interest Rate Strategy 

Cyril Beuzit Global Head of Interest Rate Strategy London 44 20 7595 8639 cyril.beuzit@uk.bnpparibas.com 

Patrick Jacq Europe Strategist Paris 33 1 4316 9718 patrick.jacq@bnpparibas.com 

Hervé Cros Chief Inflation Strategist London 44 20 7595 8419 herve.cros@uk.bnpparibas.com 

Shahid Ladha Inflation Strategist London 44 20 7 595 8573 shahid.ladha@uk.bnpparibas.com 

Alessandro Tentori Chief Alpha Strategy Europe London 44 20 7595 8238 alessandro.tentori@uk.bnpparibas.com 

Eric Oynoyan Europe Alpha Strategist London 44 20 7595 8613 eric.oynoyan@uk.bnpparibas.com 

Matteo Regesta Europe Alpha Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.com 

Ioannis Sokos Europe Alpha Strategist London 44 20 7595 8671 ioannis.sokos@uk.bnpparibas.com 

Camille de Courcel Europe Alpha Strategist London 44 20 7595 8295 camille.decourcel@uk.bnpparibas.com 

Bülent Baygün Head of Interest Rate Strategy US New York 1 212 471 8043 bulent.baygun@americas.bnpparibas.com 

Mary-Beth Fisher US Senior Strategist New York 1 212 841 2912 mary-beth.fisher@us.bnpparibas.com 

Sergey Bondarchuk US Strategist New York 1 212 841 2026 sergey.bondarchuk@americas.bnpparibas.com 

Suvrat Prakash US Strategist New York 1 917 472 4374 suvrat.prakash@americas.bnpparibas.com 

Rohit Garg US Strategist New York 1212 841 3937 rohit.k.garg@americas.bnpparibas.com 

Anish Lohokare MBS Strategist New York 1 212 841 2867 anish.lohokare@americas.bnpparibas.com 

Olurotimi Ajibola MBS Strategist New York 1 212 8413831 olurotimi.ajibola@americas.bnpparibas.com 

Koji Shimamoto Head of Interest Rate Strategy Japan Tokyo 81 3 6377 1700 koji.shimamoto@japan.bnpparibas.com 

Tomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1703 Tomohisa.fujiki@japan.bnpparibas.com 

Masahiro Kikuchi Japan Strategist Tokyo 81 3 6377 1703 masahiro.kikuchi@japan.bnpparibas.com 

Christian Séné Technical Analyst Paris 33 1 4316 9717 christian.séné@bnpparibas.com 

FX Strategy 

Hans Redeker Global Head of FX Strategy London 44 20 7595 8086 hans-guenter.redeker@uk.bnpparibas.com 

Ian Stannard FX Strategist London 44 20 7595 8086 ian.stannard@uk.bnpparibas.com 

James Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.com 

Kiran Kowshik FX Strategist Singapore 65 6210 3264 kiran.kowshik@bnpparibas.com 

Mary Nicola FX Strategist New York 1 212 841 2492 mary.nicola@americas.bnpparibas.com 

Andy Chaveriat Technical Analyst New York 1 212 841 2408 andrew.chaveriat@americas.bnpparibas.com 

Local Markets FX & Interest Rate Strategy 

Drew Brick Head of FX & IR Strategy Asia Singapore 65 6210 3262 Drew.brick@asia.bnpparibas.com 

Chin Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 chin.thio@asia.bnpparibas.com 

Robert Ryan FX & IR Asia Strategist Singapore 65 6210 3314 robert.ryan@asia.bnpparibas.com 

Jasmine Poh FX & IR Asia Strategist Singapore 65 6210 3418 jasmine.j.poh@asia.bnpparibas.com 

Gao Qi FX & IR Asia Strategist Shanghai 86 21 2896 2876 gao.qi@asia.bnpparibas.com 

Bartosz Pawlowski Head of FX & IR Strategy CEEMEA London 44 20 7595 8195 Bartosz.pawlowski@uk.bnpparibas.com 

Elisabeth Gruié FX & IR CEEMEA Strategist London 44 20 7595 8492 elisabeth.gruie@uk.bnpparibas.com 

Dina Ahmad FX & IR CEEMEA Strategist London 44 20 7 595 8620 dina.ahmad@uk.bnpparibas.com 

Diego Donadio FX & IR Latin America Strategist São Paulo 55 11 3841 3421 diego.donadio@@br.bnpparibas.com 

74

For Production and Distribution, please contact: 

Ann Aston, Market Economics, London. Tel: 44 20 7595 8503 Email: 0ann.aston@uk.bnpparibas.com, 

Danielle Catananzi, Interest Rate Strategy, London. Tel: 44 20 7595 4418 Email: 1Hdanielle.catananzi@uk.bnpparibas.com, 

Derek Allassani, FX Strategy, London. Tel: 44 20 7595 8486 Email: 2Hderek.allassani@uk.bnpparibas.com, 

Martine Borde, Market Economics/Interest Rate Strategy, Paris. Tel: 33 1 4298 4144 Email 3Hmartine.borde@bnpparibas.com 

Editors: Amanda Grantham-Hill, Interest Rate Strategy/Market Economics, London. Tel: 44 20 7595 4107 Email: 4Hamanda.grantham-hill@bnpparibas.com; 

Nick Ashwell, FX/Market Economics, London. Tel: 44 20 7595 4120 Email: 5Hnick.ashwell@uk.bnpparibas.com 

BNP Paribas Global Fixed Income Website 

6Hwww.globalmarkets.bnpparibas.com 

Bloomberg 

Fixed Income Research BPCM Market Economics BPEC 

Interest Rate Strategy BPBS Forex Strategy BPFR 

RESEARCH DISCLAIMERS: 

IMPORTANT DISCLOSURES: Please see important disclosures in the text of this report. 

Some sections of this report have been written by our strategy teams. These sections are clearly labelled and do not purport to be an exhaustive analysis, 

and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report. (Please 

see further important disclosures in the text of this report). These sections are a marketing communication. They are not independent investment 

research. They have not been prepared in accordance with legal requirements designed to provide the independence of investment research, and are 

not subject to any prohibition on dealing ahead of the dissemination of investment research. 

The information and opinions contained in this report have been obtained from, or are based on, public sources believed to be reliable, but no 

representation or warranty, express or implied, is made that such information is accurate, complete or up to date and it should not be relied upon as such. 

This report does not constitute an offer or solicitation to buy or sell any securities or other investment. Information and opinions contained in the report are 

published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any 

recipient, are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any 

reference to past performance should not be taken as an indication of future performance. To the fullest extent permitted by law, no BNP Paribas group 

company accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from any use of or reliance on material 

contained in this report. All estimates and opinions included in this report are made as of the date of this report. Unless otherwise indicated in this report 

there is no intention to update this report. BNP Paribas SA and its affiliates (collectively “BNP Paribas”) may make a market in, or may, as principal or 

agent, buy or sell securities of any issuer or person mentioned in this report or derivatives thereon. BNP Paribas may have a financial interest in any 

issuer or person mentioned in this report, including a long or short position in their securities and/or options, futures or other derivative instruments based 

thereon, or vice versa. BNP Paribas, including its officers and employees may serve or have served as an officer, director or in an advisory capacity for 

any person mentioned in this report. BNP Paribas may, from time to time, solicit, perform or have performed investment banking, underwriting or other 

services (including acting as adviser, manager, underwriter or lender) within the last 12 months for any person referred to in this report. BNP Paribas may 

be a party to an agreement with any person relating to the production of this report. BNP Paribas, may to the extent permitted by law, have acted upon or 

used the information contained herein, or the research or analysis on which it was based, before its publication. BNP Paribas may receive or intend to 

seek compensation for investment banking services in the next three months from or in relation to any person mentioned in this report. Any person 

mentioned in this report may have been provided with sections of this report prior to its publication in order to verify its factual accuracy. 

BNP Paribas is incorporated in France with limited liability. Registered Office 16 Boulevard des Italiens, 75009 Paris. This report was produced by a BNP 

Paribas group company. This report is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any 

other person without the prior written consent of BNP Paribas. By accepting this document you agree to be bound by the foregoing limitations. 

Certain countries within the European Economic Area: 

This report is solely prepared for professional clients. It is not intended for retail clients and should not be passed on to any such persons. 

This report has been approved for publication in the United Kingdom by BNP Paribas London Branch. BNP Paribas London Branch is authorised by 

CECEI and AMF and authorised and subject to limited regulation by the Financial Services Authority. Details of the extent of our authorisation and 

regulation by the Financial Services Authority are available from us on request. 

This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the CECEI 

and the AMF, whose head office is 16, Boulevard des Italiens 75009 Paris, France. 

This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Paribas Niederlassung Frankfurt am Main, regulated by the 

Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). 

United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate of BNP Paribas that is not 

registered as a US broker-dealer to US major institutional investors only. BNP Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer 

registered with the Securities and Exchange Commission and a member of the National Association of Securities Dealers, the New York Stock Exchange 

and other principal exchanges. BNP Paribas Securities Corp. accepts responsibility for the content of a report prepared by another non-US affiliate only 

when distributed to US persons by BNP Paribas Securities Corp. 

Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch, or by a subsidiary or affiliate 

of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial 

Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited, Tokyo Branch, a subsidiary of BNP Paribas, is a financial 

instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers 

Association. BNP Paribas Securities (Japan) Limited, Tokyo Branch accepts responsibility for the content of a report prepared by another non-Japan 

affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch. Some of the foreign securities stated 

on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. 

Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in Paris, 

France. BNP Paribas Hong Kong Branch is regulated as a Registered Institution by Hong Kong Monetary Authority for the conduct of Advising on 

Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance. 

© BNP Paribas (2011). All rights reserved.

Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Create successful ePaper yourself

Delete template?

Save as template?