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

Market Economics | Interest Rate Strategy | Forex Strategy 7 May 2010 

Market Mover 

Market Outlook 2-3 

Fundamentals 4-31 

• ECB: All Talk, No Action 4-6 

• Eurozone Periphery: Compare and 7-9 

Contrast 

• Eurozone: External Exposure 10 

• Market Stress Charts 11-13 

• Greece: The Austerity Programme 14-16 

• Germany: Downs and Ups 17-19 

• Norway: Concern over Europe 20-21 

• US: Recovery Turning into Expansion 22-24 

• US Credit: Still the Recovery’s Ball and 25-26 

Chain 

• Japan: Rising Chance of Sales Tax 27-28 

Hike? 

• BNP Paribas Surprise Indicator 29-31 

Interest Rate Strategy 32-60 

• Global: Liquidity Conditions Update 32 

• US: Supply Could Affect Swap Spread 33-35 

Curve 

• MBS: Sell MBS for Cheap Vol 36-39 

• US Gamma: Vol Playing Catch-Up with 40-41 

Market Turmoil 

• EUR: Could The Long End Collapse? 42 

• EUR: Limited Nervousness at ECB 

43 

Tenders 

• EGBs: Market Update and Top Trade 44-45 

Ideas 

• UK: Pressures on Gilts Likely? 46-47 

• Global Inflation Watch 48-51 

• Inflation: FTQ Forces Trounce 

52-53 

Breakevens 

• Europe iTraxx Credit Indices 54-57 

• Technical Analysis 58-59 

• Trade Reviews 60 

FX Strategy 61-67 

• Strategy: Judging Currencies by 61-64 

Liquidity 

• Technical Strategy: EUR dives 65-66 

• Trading Positions 67 

Forecasts & Calendars 68-83 

• 1 Week Economic Calendar 68-70 

• Key Data Preview 71-77 

• 4 Week Calendar 78 

• Treasury & SAS Issuance 79-80 

• Central Bank Watch 81 

• Economic & Interest Rate Forecasts 82 

• FX Forecasts 83 

Contacts 84 

www.GlobalMarkets.bnpparibas.com 

• The EMU crisis continues to set the tone with risk 

aversion, asset correlations and liquidity spreads on the 

rise. 

• There is an urgent need for the authorities to get ahead 

of the game but this week’s ECB meeting was a missed 

opportunity. 

• The key way of bringing support – buying government 

bonds – is very controversial but the markets need to know 

whether or not the euro area can address the crisis. 

• Panic trading and contagion risks continue to support 

the core government bond markets, with core EGBs 

outperforming in the rally. 

• The crisis will reinforce the pressure on governments to 

put their public finances in order while compounding 

deflationary pressures. 

• Hence we maintain our medium-term constructive call 

on core government bond markets. 

• Economic data are being ignored in this environment. 

Only a very large upside surprise in US payrolls would 

have a meaningful impact on the direction of the Treasury 

market. 

• An obvious way to trade the crisis has been to short the 

euro. This remains valid whether or not radical action is 

taken quickly. We reiterate our bearish call on EUR/USD. 

• The outcome of the UK election and the ability of the 

new government to tackle the budget deficit decisively will 

drive sterling markets over the coming days/weeks. 

Market Views 

Current 1 Week 1 Month 

UST 10y T-note Yield (%) 3.50 ↓ ↔↓ 

2y/10y Spread (bp) 267 ↔↓ ↓ 

EGB 10y Bund Yield (%) 2.80 ↓ ↔↓ 

2y/10y Spread (bp) 229 ↔↑ ↓ 

JGB 10y JGB Yield (%) 1.28 ↔ ↓ 

2y/10y Spread (bp) 111 ↔ ↓ 

Forex EUR/USD 1.2712 ↓ ↓↓ 

USD/JPY 93.07 ↔ ↑ 

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 

EMU crisis: contagion risk 

still escalating 

Rising risk aversion 

supports flight-to-quality 

trades 

No surprise from the ECB 

The nature of the sovereign crisis in Europe has changed dramatically over 

the past few weeks, with the contagion effects escalating from EU 

peripherals to banks and equity markets. What is now at stake is the future 

of the eurozone. There are several reasons why the markets’ reaction to 

news of the Greek aid package has been poor and why the financial stress 

remains so extreme, including the authorities not appearing to be in control 

of the situation and fears that others will be dragged into the maul. 

What is needed is first for the cash to be disbursed, second for a favourable 

ruling on the package from the German constitutional court and third for the 

Greek government to deliver on its promises – which will be monitored over 

time. There are significant differences between the Greek situation and that 

of other peripherals and it would be simplistic to group them all together. 

However, while less acute, there are chronic problems in other economies 

such as Portugal and Spain and markets do not appear minded to 

discriminate at present. The authorities need to move quickly to get ahead of 

the game. 

Flight-to-quality trades are dominating with core EGB yields hitting new lows 

and Treasuries following the move, ignoring better-than-expected recent 

economic data. The latest developments can only reinforce the pressure on 

governments to put their public finances in order while also reinforcing 

deflationary pressures – one of the key reasons to maintain our mediumterm 

constructive call on core government bond markets. 

The markets are for the moment in complete disbelief and panic trading and 

contagion risks will continue to support core EGBs in the short run. 

Treasuries may also benefit from “flight to relative liquidity” trades, 

particularly if the safety of Bunds came into question at any stage. Curve 

wise, the risk is to see some bull steepening should the setback in equity 

markets develop much further. Peripheral ASW curves should disinvert over 

the coming weeks if, as expected, the cash is made available to Greece but 

other peripheral curves (Portugal, Spain) will likely remain under pressure 

until the authorities take new initiatives. 

There is overall little flow on peripherals and a tendency to reduce exposure 

on any rebound. With no new buyers on the horizon, this explains the latest 

widening move on spreads. We also need to keep a close eye on the 

widening of the cross-currency basis as it could raise fears of a repeat of the 

post-Lehman panic. Generally speaking, the cross-currency basis can be 

modelled as a function of global risk (S&P, VIX) and local market liquidity 

(OIS/BOR). The latest move, also linked to the increase in sovereign risk, is 

adding to liquidity pressures. 

The ECB meeting and press conference delivered no fireworks. On the 

subject of buying government bonds, Mr Trichet reiterated on a number of 

occasions in response to questioning that this was not an option discussed 

at the Governing Council meeting. It wasn't, however, definitively ruled out. 

As pointed out earlier, his comment last weekend that "at this stage, we 

have absolutely no decision on the purchase of government bonds" hinted at 

a greater degree of flexibility on the issue than before. We know that at least 

one Governing Council member is against it. 

The same may be true for less radical options such as re-introducing more 

longer-term refinancing operations. Differences of opinion were explicitly 

recognised on the decision to suspend the minimum credit rating for 

collateral relating to Greek government debt. The decision was made by 

"overwhelming majority", i.e. it was not unanimous. We suggested 

beforehand that the ECB would probably need to see conditions in markets 

worsen significantly further before considering radical action. 

Cyril Beuzit 7 May 2010 


2 

www.GlobalMarkets.bnpparibas.com

UK: all eyes on the election 

US: recent economic data 

continue to push higher… 

…but Treasuries are being 

driven by rising risk 

aversion 

EUR/USD: further decline 

ahead 

GBP at risk 

A new phrase was slipped into the Introductory Statement: "Monetary policy 

will do all that is necessary to maintain price stability in the euro area over 

the medium term”. This gives the ECB more wriggle room should it need it in 

future. One could imagine this phrase being trotted out should the ECB opt 

for the 'nuclear option' of buying government bonds – linked explicitly to 

downside risks to price stability. 

The UK election outcome is not known at the time of writing but markets 

seem to have become more optimistic in recent days about a late swing to 

the Conservatives. If this does not occur and, above all, if the result and 

coalition negotiations look to have fallen short of delivering a government 

that will tackle the deficit decisively, we could see sterling and sterling 

markets becoming very twitchy. We believe markets have priced in too small 

a probability of a UK downgrade. 

The US recovery continues to build, with the recent orders component of the 

manufacturing ISM, at 65.7, close to its January high. Non-manufacturing 

ISM held steady in the mid-50s but this is still five points above the levels at 

the turn of the year. Consistent with the picture of a slowly building and 

broadening recovery, but with bumps, is a gradual improvement in payrolls. 

The ADP data were consistent with private job creation approaching 100k. 

With the census hiring, we expect an overall rise of 165k, a bit below the 

market consensus. 

The unemployment rate should stay at 9.7% and average hourly earnings 

should rise only 1%. Weak wage growth and good productivity delivered a 

5.9% q/q aar fall in unit labour costs this week, emphasising the subdued 

inflation picture. Next week should see the March trade balance widen a bit 

while we suspect that retail sales at the end of next week will be softer than 

the market expects. 

We keep a neutral call on Treasury yields and the curve in the short run. The 

reason for our recommendation is that there is no clear catalyst for a move 

in either direction in the short term, yet the market could make a substantial 

move in either direction on a whim. While there could be some pressure if 

there is a positive surprise in economic data, the current rally is fuelled by 

external problems (i.e. the eurozone) and financial reform concerns, rather 

than the domestic macroeconomic situation. It would therefore probably take 

a very large upside surprise in Payrolls on Friday to have a meaningful 

impact on market direction. Finally, we also note that the larger-thanexpected 

Treasury supply cuts are contributing to the bullish momentum. 

We have adjusted our currency projection and now call for EUR/USD to fall 

to parity in Q1 2011. Europe has played its option of fiscal transfers but this 

policy has so far failed, as illustrated by the widening of bond and OIS 

spreads. The ECB must now rescue the EMU project and this will require a 

further easing of monetary conditions. Irrespective of how this easing is 

conducted, the result will be further EUR weakness. 

Since it came into existence, the ECB has been cautious when easing 

monetary conditions while often operating ahead of the curve when 

conducting tightening moves. This asymmetric policy approach is no longer 

feasible without putting the currency project at risk. EMU looks increasingly 

like Japan, which is a surplus-generating deflationary economy. In order to 

prevent outright European deflation, the ECB will have to pursue unorthodox 

monetary policies. EUR weakness will be part of the solution for keeping the 

currency union together. 

While we see the EUR being the weakest of the major currencies, risk 

contagion will keep the USD generally supported. Sterling will be 

sandwiched between USD strength and EUR weakness. Indeed, EUR/GBP 

is the only currency pair where we call for a change of direction compared to 

our previous forecast. EUR/GBP is likely to move lower provided the UK 

elects a government able to deal with fiscal and debt issues in a credible 

way. Should we be disappointed on this side, we will not hesitate to project 

the GBP following the EUR lower step by step. 

Cyril Beuzit 7 May 2010 


3 


ECB: All Talk, No Action 

• The latest ECB press conference was long 

on words, short on action. 

• Options were left open for future action but 

differences of opinion on the Governing Council 

could slow down the response time. 

• The case for outright buying of government 

debt is short-term stress avoidance. 

• But there are longer-term drawbacks. 

• The likelihood of the ECB having to make 

such purchases is increasing though it may try 

to exhaust other routes first. 

• The risk, as so often during this crisis, is for 

too little, too late. 

Nothing doing 

Those expecting radical action from the ECB at this 

month’s press conference were, rather predictably, 

disappointed. As were markets, as speculation prior 

to the meeting that the ECB would respond to the 

continuing turmoil with a big announcement proved 

to be just that, speculation. 

There were plenty of challenging questions for Mr 

Trichet to answer during the Q & A session. Some of 

them he ducked. Specifically, on the subject of 

buying government bonds, he reiterated on a number 

of occasions in response to questioning that this was 

not an option discussed at today's Governing Council 

meeting. It was not, however, definitively ruled out. 

As we pointed out prior to the meeting, his comment 

last weekend that "at this stage, we have absolutely 

no decision on the purchase of government bonds" 

hinted at a greater degree of flexibility on the issue 

than we had heard previously. 

A positive to take from the latest meeting was that 

while no action was taken this month, Mr Trichet left 

options open for future action should the need arise 

(as we expect it will). 

Less positive are the differences of opinion on the 

Governing Council which could slow down the ECB’s 

response time. On the basis of what Mr Weber said 

on the subject prior to the meeting, we know that at 

least one Governing Council member is against the 

purchase of government bonds. He is probably not 

alone. This is one of the reasons why Mr Trichet was 

reluctant to be drawn on the issue. 

Box: Extracts from ECB Introductory 

Statement, May 2010 

Recent economic data – including positive survey indicators – 

support the view that the economic recovery in the euro area is 

continuing in 2010. While adverse weather conditions, in 

particular, dampened growth in the early part of the year, some 

strengthening appears to be taking place during the spring. 

Looking ahead, the Governing Council expects real GDP to 

expand at a moderate pace. The Governing Council continues 

to view the risks to this outlook as broadly balanced, in an 

environment of high uncertainty. 

On the upside, the global economy and foreign trade may 

recover more strongly than projected and confidence may 

improve more than expected, with the result that the recovery 

becomes self-sustained. On the downside, concerns remain 

relating to renewed tensions in some financial market 

segments. In addition, a stronger or more protracted than 

expected negative feedback loop between the real economy 

and the financial sector, renewed increases in oil and other 

commodity prices, and the intensification of protectionist 

pressures, as well as the possibility of a disorderly correction of 

global imbalances, may weigh on the downside. 

Looking ahead, global inflationary pressures may increase, 

driven mainly by price developments in commodity markets and 

in fast-growing economic regions of the world, while euro area 

domestic price pressures are still expected to remain contained. 

In the near term, given the developments in energy prices, risks 

to earlier projections for HICP inflation are tilted somewhat 

towards the upside, while risks to price stability over the 

medium term are viewed as still remaining broadly balanced. 

Upside risks over the medium term relate, in particular, to the 

evolution of commodity prices. Furthermore, increases in 

indirect taxation and administered prices may be greater than 

currently expected, owing to the need for fiscal consolidation in 

the coming years. At the same time, risks to domestic price and 

cost developments are contained. Overall, we need to monitor 

closely the future evolution of all available price indicators 

Source: Reuters EcoWin Pro 

Differences of opinion were signalled by Mr Trichet 

on the decision to suspend the minimum credit rating 

in the collateral eligibility requirements for debt 

issued or guaranteed by the Greek government. The 

decision was made by "overwhelming majority": i.e. it 

was not unanimous. This goes to show that just 

because some members of the Governing Council 

are opposed to something it does not mean it cannot 

happen. Various Governing Council members also 

expressed resistance to the deep cuts in rates in late 

2008 and early 2009 but, eventually, they were 

delivered. Our concern is the time it takes for the 

Governing Council to reach agreement. 

Paul Mortimer-Lee/Ken Wattret 7 May 2010 


4 


Event response 

The ECB is being overtaken by events. Mr Trichet 

would probably concur having seen that: 

• The IMF was welcomed into the Greek 

rescue package when he had been reported 

as having said, “If the IMF or any other 

authority exercises any responsibility instead 

of the eurogroup, instead of the 

governments, this would clearly be very, very 

bad” (Senat television); and 

• The ECB decision to suspend the minimum 

credit rating threshold for Greek debt came 

after Mr Trichet said on 14 January, “We will 

not change our collateral framework for the 

sake of any particular country. Our collateral 

framework applies to all countries concerned. 

And that has been said already by the Vice- 

President, by me and by colleagues. That is 

crystal clear.” 

The ECB is reacting to events and it cannot be 

blamed for that; it should be praised for helping the 

Greek banks, for example. But these episodes show 

that its forward vision is restricted and that it is not in 

charge of developments. Rather, it is reactive. 

Further challenges lie ahead. First is probably the 

phasing out of liquidity injections. Basically, 

unconventional measures are responses to financial 

stress. When OIS/BOR came in, VIX declined and 

bank CDS shrank; with financial stress on the wane, 

it was sensible to start to withdraw liquidity. Now 

stress is back and it is no longer sensible for the ECB 

to continue tightening through scaling back liquidity 

provision. We would cite in support of this a tendency 

for BOR/OIS to widen, the increased participation at 

the regular MRO and the marginal rate of 1.5% at the 

recent 3-month LTRO despite massive overprovision 

possibilities at that repo by the ECB. 

The potentially most toxic development is for banking 

stress to appear in economies where the sovereign is 

under pressure. If a sovereign cannot save itself, 

how can it save its banks? Such a situation can only 

lead to losses on sovereign debt that hurt the banks, 

in turn hurting the sovereign through increased 

bailout costs and likely lower future growth. 

It is best not to get into such a vicious spiral. The 

most effective way to avoid this is through massive 

liquidity provision to the banks on cheap terms and 

for a long period to remove liquidity worries. 

Change of direction 

A key event on the horizon is the expiry of last June’s 

12-month fixed term repo. We would advise replacing 

this with another fixed term repo of six or preferably 

twelve months duration at 1%. Would this be another 

ECB climb-down? Yes, but it would be a sensible 

one. 

Then there is the issue of the ECB buying the 

government debt of countries in trouble. Increasingly, 

market participants’ view this as very likely. Why? 

Because they see the real possibility of funding 

stresses and are sceptical of first, the ability of the 

Greek programme to run its full course and second, 

the willingness of Germany in particular to stump up 

for another bailout after Greece. 

If these circumstances arise, so the argument runs, 

there may be two choices: the ECB buys the afflicted 

government’s debt, or there is default. The first looks 

the lesser of two evils, as a default would set off a 

domino reaction that ultimately could lead to severe 

strains on EMU itself and at least could lead to 

further defaults and stress in the banking system. 

QE problems 

There are of course objections to the ECB effectively 

providing QE not to help the general economy but to 

help regional governments in the euro area: 

• ECB monetary policy should be decided on 

the basis of the needs of the aggregate area, 

not a small proportion of it; 

• Monetary policy should be driven by 

monetary considerations and should not be 

driven by fiscal policy; 

• Printing money because governments cannot 

finance themselves can be a precursor to 

inflation; 

• At the least, the ECB’s credibility would be 

damaged; 

• If there is a solvency problem in a country, 

the ECB has not got the balance sheet to fix 

that – only other governments can sort it. 

Dealing with a liquidity crisis alone is more 

defensible, but Greece’s liquidity crisis has 

stemmed from solvency worries; 

• The step may be one too far for Germany. 

Recourse to the constitutional court would be 

likely with large-scale monetisation 

reminiscent of the Weimar republic. Such a 

move could make EMU even more unpopular 

within the population, which has already 

manifested its opposition to plans to bail out 

Greece; 

• As the ECB has often pointed out with 

reference to US and UK QE, it may be very 

difficult to back out of such holdings; 



5 


• Large holdings could result in large losses 

and recapitalising the ECB could increase 

political influence and threaten ECB 

independence. In any case, the ECB would 

be more politicised by the move; and 

• Once you’ve started this, where do you stop? 

How to do it 

Should the ECB opt to embark on some forms of 

quantitative easing, an important issue would be the 

purchase allocation in terms of maturity and across 

countries. 

Should it be short or long-term debt? One constraint 

for the ECB would be to minimize possible distortion 

which suggests buying across the whole curve. That 

said, two considerations suggest short-term debt 

might be preferable. First, it would help ease 

immediate funding pressures reducing therefore the 

liquidity risk for many issuers. Moreover, it would 

facilitate the ‘exit strategy’, a consideration that the 

ECB gave priority to when designing the liquidity 

injections. Short-term debt would not need to be sold 

back to the market but it could simply be held until 

expiration. 

The allocation by country would pose another 

significant challenge. A pro-rata allocation (either 

linked to GDP or to contributions to ECB capital) 

would help communication. It would be easy in this 

case to sell the decision as a purely monetary policy 

action, motivated for example by increasing risks of 

deflation rather than an attempt to bail out this or that 

country. On the other hand, it would dramatically 

increase the size of total purchases needed in order 

to make a material difference for the countries which 

are currently under pressure. 

The alternative would be to focus on the sovereign 

debt of those countries under most stress, justifying 

the choice with the ‘cheap’ price they offer under the 

assumption that no country within the eurozone will 

ever be allowed to default. An obvious drawback 

would be the implied ‘moral hazard’ not to mention 

the inconsistency with the ‘no-bailout’ clause of the 

EU Treaty. 

Of course, all these relate to long-term problems that 

could result from short-term event-driven actions 

intended with the best will in the world to avoid 

problems today. We see an increasing risk that the 

ECB does end up buying government debt, but we 

would expect it to try to enhance liquidity first so that 

it is private banks not the ECB that buy government 

debt. 

The trouble with such an approach is that many 

banks already feel themselves to be overexposed to 

risky governments. Increasing liquidity might not 

work. The chances of outright ECB purchases are 

increasing. They would support markets directly, help 

to put a floor under bond prices and increase money 

market liquidity at the same time. We can envisage 

circumstances where they look like the least worst 

option. The risk is, as so often in this crisis, too little, 

too late. 

Macro picture 

Macroeconomic developments are obviously playing 

second fiddle at present when it comes to listening to 

what the ECB has to say. The assessment at this 

month’s press conference was broadly similar to its 

predecessor which was no surprise. There were a 

few changes, however, which merit comment. 

One was a reference to near-term risks to inflation 

being “somewhat tilted to the upside”. The upside 

risks relate specifically to external factors, however, 

including higher oil prices and strong growth in other 

parts of the world. 

The medium-term assessment of inflation was as 

before, i.e. pressures are low. The key to this is that 

domestic wage and cost pressures remain contained. 

The differentiation between the internal and external 

influences on inflation we see as significant. It tells us 

that the ECB will look through upward pressure on 

inflation generated by factors beyond their control 

and focus instead on domestic pressures which are 

going to remain subdued. 

The tone of Mr Trichet’s comments on growth was a 

bit more positive than previously. Specifically, there 

was a reference to the “strengthening” of the upturn 

in activity during the spring. But in bigger picture 

terms, the outlook was much as before. Growth rates 

will remain moderate and the recovery uneven. 

More flexibility 

A new phrase was also slipped into the statement: 

"Monetary policy will do all that is necessary to 

maintain price stability in the euro area over the 

medium term." We see this as a way of giving the 

ECB more room for manoeuvre should they need it in 

future - in both directions. 

This is just the kind of phrase which could be used in 

future should the ECB opt for the 'nuclear option' of 

buying government bonds. Such action would then 

be linked explicitly to the downside risks to price 

stability. Alternatively it could be deployed should, 

perish the thought, a surge in inflation and upward 

pressure on inflation expectations necessitate a rate 

hike despite economic and financial stress a la 

summer 2008. The latter we continue to believe is a 

much lower probability than the former. 



6 


Eurozone Periphery: Compare and Contrast 

• The Greek crisis is spreading to other socalled 

peripheral countries. 

Chart 1: 10yr Spreads to Bund 

• It is important to highlight significant 

differences between these economies. 

• These include differences in the size of 

deficits & debts, liquidity risks, contingent 

liabilities, fiscal credibility and social tolerance. 

• But we should also recognise that there are 

similarities which make them vulnerable to 

further market tensions. 

• Portugal shares Greece’s low saving ratio. 

• Spain’s problem is an excess of private debt 

with possible fallout on the financial sector. 

• Ireland’s fiscal reform to date has been 

impressive but sovereign risk is tied up with the 

banking system, making the recent widening of 

spreads a reason for concern. 

• Italy’s imbalances are less worrying than in 

other economies, but its high debt-to-GDP ratio 

makes it vulnerable to an interest rate shock. 


18 

16 

14 

12 

10 

8 

Chart 2: Age-Related Expenditure 

(Change 2010-2060, % of GDP) 

6 

4 

The agreement of eurozone finance ministers over 

the weekend to provide EUR 110bn worth of financial 

support to Greece has failed in its objective of 

calming markets and preventing risk aversion from 

increasing. The crisis is now spreading to other socalled 

peripheral countries. Portugal is leading the 

way but sovereign spreads have significantly 

widened in Spain, Ireland and Italy, highlighting the 

risks of an indiscriminate contagion effect. 

From a macro perspective, it is important to highlight 

that these economies are heterogeneous and differ 

significantly from Greece. At the same time, they 

share a number of structural weaknesses and 

imbalances which, in the absence of a prompt and 

decisive response from the eurozone authorities, 

make them vulnerable to further market tensions. 

Greece versus other peripherals 

Greece’ situation differs significantly from that of 

other peripheral countries on a number of counts: 

• First, the level of the public deficit and debt. At 

13.6% of GDP in 2009, the Greek public deficit 

was second only to Ireland’s (14.3% of GDP). 

Greek public debt as a share of GDP (115.1%) is 

similar to Italy’s (115.8%) but significantly higher 

2 

0 

Belgium 

Germany 

Ireland 

Greece 

Spain 

France 

Source: EU Commission 

Italy 

Cyprus 

Malta 

Netherlands 

than those of Portugal (76.8%) and Spain 

(53.2%). Ireland’s debt-to-GDP ratio can be 

relatively low (64%) or high (around 100%) 

depending on whether you choose to include all 

its interventions in the banking sector; 

• Second, liquidity risk. Greek redemptions this 

year are relatively high this year, about twice 

those of Spain and Portugal in relation to GDP. 

Moreover, Greece’s refunding tends to be heavily 

concentrated during certain months of the year – 

increasing rollover risk; 

• Third, contingent liabilities. In the absence of a 

reform of the pension system, age-related 

spending would increase by a massive 16% of 

GDP in Greece between 2010 and 2060 

according to EU Commission estimates (Chart 

2). This is about double the estimates for Spain 

(8.3% of GDP) and much higher than the 

anticipated rises in Portugal and Italy, where past 

reforms should bear fruit over the following 

years; 

Austria 

Portugal 

Slovenia 

Slovakia 

Finland 

UK 

Eurozone 

Luigi Speranza / Eoin O’Callaghan 7 May 2010 


7 


• Credibility. Spain’s record in terms of public 

finances is one of the strongest within the 

eurozone while Portugal has achieved significant 

adjustments in the past. Greece, with a record of 

having published incorrect figures on more than 

one occasion, has much less credibility; and 

• Last but not least, social tolerance. Portugal’s 

past adjustment has shown a high degree of 

social tolerance. The ability of Greek society to 

withstand the needed fiscal adjustment is one of 

the market’s primary reasons for concern. 

Yesterday’s tragic events were a harsh reminder 

of the difficulties lying ahead for the Greek 

government. 

That said, peripheral economies share a number of 

weaknesses that, in the absence of a quick and 

credible adjustment, make them vulnerable to further 

market tensions. 

More specifically, Portugal and Greece share a key 

feature: a lack of competitiveness associated with a 

low rate of national savings. This implies they rely on 

inflows of capital to finance consumption. 

Conversely, in Spain and Ireland, private debt and 

the state of the financial system are the core of the 

problem. Both economies are undergoing a 

significant adjustment in the housing sector which is 

heavily weighing on growth, with negative 

implications for the banking sector. Italy is in a group 

of its own. Both internal and external imbalances are 

less of an issue than for other peripheral economies 

but the high level of public debt is a persistent risk 

factor. 

Portugal 

As for Greece, a distinguishing feature of the 

Portuguese economy is the extremely low level of the 

national saving ratio; this has its roots in the 

structural lack of competitiveness of the economy. In 

2009, Portugal’s gross national saving amounted to a 

modest 8.6% of GDP, versus an average of 18.5% 

for the eurozone as a whole. Once adjusted for 

capital consumption, Portugal’s national saving rate 

was negative at -8.5% of GDP (Chart 3). 

Low levels of savings imply that the economy has to 

continuously rely on large inflows of capital to finance 

consumption, as shown by Portugal’s high current 

account deficit (-10.2% of GDP in 2009). Over time, 

these imbalances have led to the accumulation of a 

sizeable external debt. As of 2008, Portugal’s net 

external financial asset position was in deficit to the 

extent of 95% of GDP (Chart 4). 

Under these circumstances, when the government 

tries to achieve a deficit reduction by cutting transfer 

spending or increasing taxes, the private sector will 

find it difficult to borrow more and will be forced to cut 

Chart 3: Net National Savings (% of GDP) 


Chart 4: Total Economy Net Financial Assets 

(% of GDP) 


back investment and consumption. This is different 

from the ‘standard’ fiscal adjustment, in which the 

private sector dis-saves in reaction to fiscal 

tightening, thus partially compensating for the 

negative impact on growth of the fiscal retrenchment. 

In sum, more than a fiscal problem, Portugal has got 

a chronic problem of low growth. But persistently low 

growth is likely to frustrate any attempt to correct 

fiscal imbalances. In the absence of a combination of 

fiscal adjustment and supply-side reforms, fiscal 

trends could therefore become unsustainable. 

Spain 

Spain’s problem is an excess of private debt, which 

can be traced back to the interest rate shock due to 

the EMU accession. Historically loose credit 

conditions led to a massive credit expansion and 

debt accumulation by both households and 

corporations, which was associated with a boom in 

the housing market and growing external deficits. 

The financial crisis has triggered a sharp adjustment 

in most of these imbalances (Chart 5) which has 

already taken a significant toll on domestic demand 

(-6.5% y/y in 2009), employment (unemployment just 



8 


over 20% in Q1) and, last but not least, the public 

finances. 

This adjustment will continue to imply a protracted 

period of subdued growth and low or even negative 

inflation. In the absence of a credible adjustment in 

fiscal trends possibly associated with structural 

reforms, the most urgent being a reform of the labour 

market, this is likely to involve persistently high fiscal 

deficits and a rising public debt. In the short term, the 

biggest risk is represented by the stability of the 

banking sector. The banking sector appears to have 

withstood the financial crisis remarkably well so far, 

but the collapse in the housing market remains a 

significant source of uncertainty and a reason for 

concern especially with regard to the cajas (savings 

banks). 

The problem is that Spain’s share of eurozone GDP 

is around 12%, almost five times as big as that of 

Greece. Providing the same scale of assistance to 

Spain as to Greece would thus require a sizeable 

contribution that would be more difficult from a 

political point of view. 

Ireland 

Similar to Spain, Ireland’s problems also emanate 

from a domestic demand, housing and credit boom, 

fuelled in part by the positive interest rate shock the 

economy experienced when it joined the euro. 

The difference is that Ireland is much further down 

the path of adjustment than any of the other 

peripheral countries. Measures to reduce the deficit 

were announced as early as July 2008. Three 

budgets and two expenditure reviews over the past 

two years have produced paper savings of around 

7% of GDP and the government has made a multiyear 

commitment to find additional savings out to 

2013. These measures, as well as skilful debt 

issuance by the NTMA and the high quality of 

announced reform, helped push Irish sovereign debt 

spreads down substantially from their 2009 highs. 

The government’s impressive commitment to fiscal 

reform is, however, only part of the sovereign risk 

story in Ireland. A banking crisis at the end of 2008 

and start of 2009 prompted the government to step in 

and effectively underwrite the banking system. The 

state has guaranteed liabilities with a maturity of up 

to five years issued before September 2010, injected 

capital into some institutions and nationalised others. 

More recently, it has begun purchasing assets from 

the banks at a deep discount to book value to force 

them to crystallise losses on their commercial 

property portfolios – a process that is further 

increasing the state’s level of ownership of the 

domestic banking system. 

Chart 3: Spain’s Financial Balances 

(% of GDP, 4Q Avg.) 


The aggressiveness of Ireland’s fiscal reforms needs 

to be put in this context. With the state underwriting 

the banking system, whose liabilities amount to 

roughly 300% of GDP, the government had no 

choice but to act decisively to regain market 

confidence. This is also why the recent sharp 

widening of Irish spreads over the past few weeks is 

such a worrying development; the viability of the 

government back-stop to the banking system is 

determined by confidence in the sovereign. 

Italy 

We have all along been more positive on Italy. Italy’s 

public deficit deteriorated less than the eurozone 

average in 2009, as discretionary intervention was 

limited. Combined with more structural factors such 

as the low indebtedness of the private sector and the 

banking sector’s higher resilience to the financial 

crisis, this should continue to support Italian bonds 

compared with those of the eurozone’s peripheral 

countries. However, given the high and rising debtto-GDP 

ratio and low structural growth, Italian public 

finances are of course extremely sensitive to an 

interest rate shock. In our central scenario we 

assume that interest rates will remain low but the 

recent market reaction to the Greek deal highlights 

there are risks. 

Bottom line 

There are significant differences between the Greek 

situation and that of other peripherals and it would be 

simplistic to group all them together. But while less 

acute, there are chronic problems in peripheral 

economies. With markets not minded to discriminate 

at present, the authorities need to get ahead of the 

game. The question is – will they? 



9 


Eurozone: External Exposure 

• Portugal, like Greece, has a relatively high 

share of its public sector debt held abroad. 

• In contrast, foreign investors hold a lower 

proportion of Spanish and Italian debt. 

Chart 1: General Government Debt Held Abroad 

(% GDP) 

100 

90 

80 

70 

60 

Contagion not equal 

The contagion across sovereign debt markets in the 

eurozone has been spreading but yield spreads 

between Portuguese and German government bonds 

have widened substantially further than their Italian 

and Spanish counterparts. The underperformance in 

Portugal reflects various factors, some fundamentally 

driven, some more market-driven. 

50 

40 

30 

20 

10 

0 

Greece 

Belgium 

Source: IMF 

Portugal 

Austria 

Italy 

France 

Ireland 

Netherlands 

Germany 

Finland 

Spain 

The fundamental differences between the vulnerable 

economies in the eurozone are discussed in detail in 

the accompanying article Eurozone Periphery: 

Compare and Contrast. In short, the key problems in 

Portugal include the following: the low growth rate of 

the economy, which makes it difficult to stabilise the 

public finances; and the low level of national saving, 

linked to the lack of competitiveness of the economy, 

which leaves the Portuguese economy heavily reliant 

on capital inflows. 

While the public sector debt-to-GDP ratio in Portugal 

is much lower than in Greece – at around 75% and 

115%, respectively, in 2009 – it was the structural 

nature of the problems listed above which led us to 

conclude earlier in the year that, were problems in 

the eurozone bond markets to spread beyond 

Greece, then Portugal would be right in the firing line. 

Our concerns have been borne out. 

Foreign affairs 

There are also market-specific factors to consider. 

One is less liquidity in the Portuguese bond market 

than in other, larger bond markets in the eurozone. 

Another significant difference is the high proportion of 

public debt in Portugal held by overseas investors. 

Chart 1 shows IMF data on general government debt 

held by foreign investors as a percentage of GDP for 

the largest eleven eurozone member states. Chart 2 

then converts this data into the proportion of general 

government debt held by foreign investors, using 

debt to GDP and nominal GDP data from Eurostat. 

Foreign ownership of government debt is much lower 

in Spain and Italy than in Portugal which matters in a 

period of increasing risk aversion. 

Chart 2: General Government Debt Held Abroad 

(% Total) 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Austria 

Greece 

Finland 

Portugal 

Netherlands 

Source: IMF, Eurostat, BNP Paribas 

Ireland 

Belgium 

One positive factor for Portugal relative to Greece is 

its lower rollover risk, with redemptions in relation to 

GDP in 2010 about half those of Greece. The same 

is true for Spain. 

Spain has other problems, including the after-effects 

of the property crash and high levels of private sector 

debt. For now, markets have given Spain the benefit 

of the doubt, with the 10-year yield spread between 

Portugal and Spain rising above 200bp, the highest 

since the mid-1990s. This may not continue if stress 

in its financial sector increases. 

Austria is high in the rankings on debt held abroad 

but its fiscal situation is comparatively robust. That 

said, Austria has not been immune to market 

turbulence of its own, with the 10-year yield spread to 

Germany, currently about 40bp, having risen to more 

than 125bp in mid-2009 at the height of concern over 

its banking sector exposure to the CEE economies. 

France 

Germany 

Spain 

Italy 

Ken Wattret 7 May 2010 


10 


Market Stress Charts 

• Signs of stress in the euro govvie market 

are evident in sovereign debt and CDS spreads. 

Chart 1: 10yr Govvie Spread to Bund 

• There are also indications of bank funding 

tensions in countries such as Greece. 

• BOR-OIS spreads have begun to creep 

higher… 

• …Greek bank debt securities have sold 

off… 

• …and the market-priced probability of 

default for Greek banks has risen. 

• There have also been tentative signs of 

stress in the most recent ECB auctions. 


Monitoring stress 

• Stress in the euro govvie bond markets has been 

evident for some time now and is widely gauged 

by looking at the spreads of countries’ 

benchmark bonds versus Bunds (Chart 1). 

• The CDS market, which gives us the cost of 

insuring against sovereign default, is also widely 

watched (Chart 2). 

• It is important, however, to also monitor stress 

indicators for countries’ banking sectors – 

funding problems for the sovereign typically have 

implications for banks’ funding ability in the 

market. 

• The Greek banking system has come under 

scrutiny for this reason in recent weeks. Data 

released by the Bank of Greece show a 5% fall in 

aggregate deposits of the financial sector 

(excluding the eurosystem) in the first three 

months of the year – some EUR 11bn (Chart 3). 

April may have seen this continue or accelerate. 

• The data may understate or overstate the deposit 

flight faced by Greek domestic banks because 

the statistics include the deposits of foreign 

banks with subsidiaries or branches in Greece. 

• Deposits are just one form of funding for banks. 

Money can also be raised from: 1) secured and 

unsecured borrowing from the market; 2) the 

issuance of debt securities; and 3) liquidity 

operations conducted by the European Central 

Bank. Equity represents more structural, longterm 

liquidity. 

900 

800 

700 

600 

500 

400 

300 

200 

Chart 2: 5yr Sovereign CDS 

Irl 

100 

It 

Sp 

0 

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

Source: Bloomberg 

5yr EUR Sovereign CDS (bp) 

Chart 3: MFI (excl. Bank of Greece) Domestic 

Deposits (sectors other than central govt) 

260 

240 

220 

200 

180 

160 

140 

120 

Greek Financial Institution Deposits (EURbn) 

100 

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 

Source: Bank of Greece 

Gr 

Pt 

Eoin O’Callaghan 7 May 2010 


11 


• There is little visibility on the costs Greek banks 

face in the secured or unsecured funding 

markets. Broader measures of funding stress, 

such as BOR-OIS in the eurozone as a whole, 

have been inching up in recent weeks (Chart 4). 

However, from a long-term perspective, they are 

still subdued relative to the levels recorded 

during the financial crisis (Chart 5). Note that we 

use Euribor future contracts rather than spot 

fixings because, as a traded security, they are 

more liquid. 

• The impact on Greek bank debt securities differs 

by instrument, but there is evidence of a parallel 

sell-off (Chart 6). 

• In part this reflects a rising expectation of default 

– evident in rising CDS prices for single name 

banks (Chart 7). There has also been a large rise 

in CDS for Portuguese banks (Chart 8) with 

smaller gains for Irish and Spanish institutions 

(Charts 9 and 10). 

• Indicators of funding conditions at ECB liquidity 

operations are presented at an aggregate level. 

As highlighted by our interest rate strategists, 

data on the recent ECB auctions have shown 

some possible signs of a modest increase in 

stress. 

• The first variable rate 3m tender since the end of 

2008 was conducted at the end of April. Despite 

a generous EUR 15bn allotment scheduled, the 

average bid rate was dragged up to 1.15% with 

at least one bid recorded at 1.5%, 50bp above 

the minimum bid rate and just 25bp below the 

cost of using the lending facility. 

• In addition, at the most recent main refinancing 

operation, despite over EUR 200bn of excess 

liquidity in the eurosystem, the allocation 

increased to EUR 90bn, EUR 15bn up on the 

previous week, with 76 bidders –10 higher than 

the previous week. 

• While this needs to be kept in perspective – the 

number of bidders was in the hundreds as 

recently as the end of 2009, the results of future 

auctions are worth keeping an eye on. 

• Some signs of rising tensions are evident in 

additional measures such as the volatility implied 

in swaption contracts and swap spreads. 

In sum, there are increasing signs of tension not just 

in the sovereign funding markets, but in the banking 

sector too. This is inevitable – the financial crisis 

demonstrated that it is the sovereign that ultimately 

back-stops the financial system. Sovereign risk is 

already wrapped up with banking sector risk in 

Ireland, for example. This is why sovereign funding 

crises are so dangerous – pressures on liability 

refinancing ripple beyond the obligations of the state. 

Chart 4: BOR-OIS: Rolling Euribor Contracts I 

50 

45 

1st position 

40 

35 

30 

25 

3rd 

20 

2nd 

15 

BOR (Euribor Futures) - OIS Spread 

10 

5 

0 

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

Source: Bloomberg 

Chart 5: BOR-OIS: Rolling Euribor Contracts II 

160 BOR (Euribor Futures) - OIS Spread 

140 

1st position 

120 

100 

2nd 

80 

60 

40 

3rd 

20 

0 

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 

Source: BNP Paribas 

Chart 6: Bank Cash Bullet Bonds 

105 EFG 4 & 3/8% 02/2013 Alpha 3 & 7/8% 09/2012 

100 

95 

90 

85 

NBG 3 & 7/8% 10/2016 

80 

75 Bullet Cash Bonds 

Piraeus 4% 09/2012 

70 

Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 




12 


Chart 7: Greek Bank CDS* 

900 

Greece Bank CDS 5yr Senior (bp) 

800 

700 

600 

500 

400 

300 

200 

EFG 

NBG 

100 

0 



*banks presented had CDS prices available 

Chart 8: Portuguese Bank CDS* 

500 Portugal Bank CDS 5yr Senior (bp) 

450 

400 

350 

300 

250 

200 

BCP Espirito Santo 

150 

100 

50 

Caixa 

Banco BPI 

0 




Chart 9: Irish Bank CDS* 

Chart 10: Spanish Bank CDS* 

700 

600 

600 

Ireland Bank CDS 5yr Senior (bp) 

500 

Spanish Bank CDS 5yr Senior (bp) 

500 

400 

300 

Bank of Ireland 

Allied Irish 

400 

300 

Sabadell 

Pastor 

200 

200 

Popular 

100 

Irish Life & P 

0 




100 

BBVA 

Santander 

0 




Chart 11: Eurozone Swap Spreads 

Chart 12: Eurozone 5y5y ATM Swaption Vol 

140 

120 

Swap Spreads (bp) 

2y 

91 

86 

EUR 5y5y ATM Normal Swaption Vol 

100 

81 

80 

76 

60 

5y 

71 

40 

5y 

66 

20 

10y 

61 

0 

May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 


56 

Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 




13 


Greece: The Austerity Programme 

• The austerity plan jointly agreed with the EU 

and the IMF is currently under discussion in the 

Greek parliament… 

• …and is likely to be approved soon. 

• The plan is based on a more realistic set of 

forecasts than the SGP. 

• Compared to the March auxiliary budget, it 

contains additional corrective measures worth 

2.5% of GDP in 2010. 

• The adjustment is front-loaded in the first 

year… 

• …while the target of a below-3% deficit is 

postponed to 2014 from 2012 previously. 

• Measures to boost competitiveness and 

growth and an overhaul reform of the pension 

system are included. 

• Compliance with the set targets would 

significantly enhance credibility, probably 

allowing Greece to return to the market as early 

as next year. 

• But the implications for GDP and 

employment are likely to be severe, highlighting 

the risks that social unrest may weaken or even 

halt the consolidation effort. 

The main fiscal targets and the detailed corrective 

measures of the austerity plan agreed by the Greek 

authorities with the EU/IMF last weekend are shown 

in Tables 1 and 2. Amongst the main points to note 

are: 

• The plan is based on a more realistic set of 

forecasts than the Stability and Growth Plan 

(SGP). The GDP is estimated to contract by 4% 

this year and by 2.6% in 2011. Assuming trend 

growth of 2%, the cumulative GDP fall from its 

trend since 2008 would be around 15%, which is 

close to what we had estimated (see: “Eurozone: 

The Cost of Fiscal Consolidation” in Market 

Mover, 1 April 2010). This makes the envisaged 

plan more credible but at the same time highlights 

its implementation risks, as mounting 

unemployment and social opposition could 

eventually derail the fiscal consolidation effort. 

• Inflation was revised lower along the whole 

forecast horizon. While we perceive the risks to 

the inflation assumptions as still skewed to the 

downside, the new projections are certainly more 

realistic. One of Greece’s main problems is lack of 

price competitiveness. In the absence of flexibility 

in the nominal exchange rate, this can be 

obtained through relative disinflation compared to 

its main trading partners. The risk is in our view 

that the HICP will continue to fall beyond 2011; 

• As a result of the revisions to growth and inflation, 

the projected trajectory for the debt-to-GDP ratio 

was revised up significantly. Debt to GDP is now 

estimated to peak at 149%, broadly in line with 

our own forecasts (see the desknote “Greece: 

What’s Next?” published on 29 April 2010). 

According to the plan’s assumptions, the debt-to- 

GDP ratio would then start descending from 2014. 

This is a welcome development. While there is no 

magic number or deadline when it comes to longterm 

fiscal adjustments, we believe that an 

inversion of the upward debt trajectory within a 5- 

year horizon is an important requisite for an 

adjustment plan; 

• The effort is centred on expenditure cuts, which 

account for 65% of the total adjustment between 

2010 and 2013. Spending cuts are typically more 

effective in reducing fiscal imbalances in the long 

run. As such, the balance in the adjustment is a 

positive factor; 

• The adjustment is frontloaded compared to the 

SGP. The budget balance is projected to fall by 

5.5% of GDP this year, from the improvement of 

4% envisaged in the SGP. This would assure that, 

even in the case of further upward revisions to the 

deficit from Eurostat (which have not been ruled 

out), the deficit-to-GDP ratio would still be broadly 

in line with the targets previously set in the SGP 

(Table 1). This is both a strength and a possible 

weakness of the programme. Lack of credibility is 

Greece’s main problem at the moment and a 

sharp initial adjustment would significantly help to 

restore it. On the other hand, as highlighted 

above, the drag on growth and employment of the 

measures is likely to be massive – potentially 

leading to mounting social opposition that wold 

put at risk its implementation; and 

• The initial bigger effort is offset by a slower 

adjustment later on. In the period 2011-2014, the 

deficit would fall on average in the amount of 

1.4% of GDP per year. This would help Greece 

return to growth, while reducing the political cost 

of the adjustment over time. 

Luigi Speranza/Gizem Kara 7 May 2010 


14 


• The plan also contains a number of measures to 

boost competitiveness, growth and strengthen 

capitalisation of domestic banks. These include: 

i. Restructuring of the labour legislation 

framework; 

ii. Reinforcement of flexibility in the labour 

market; 

iii. Measures to tackle uninsured and illegal 

labour; 

iv. Restructuring of the social protection 

framework; 

v. Reforming the regulatory framework for 

competition; and 

vi. Establishing a new investment framework 

through a new development law, to attract 

foreign investment. 

These measures are an essential part of the 

adjustment process. While a sharp rebalancing in 

tax revenues and spending is needed in the short 

term, fiscal sustainability in the long term requires 

a return to more elevated and sustainable growth 

rates, which in turn require a significant 

improvement in Greece’s external 

competitiveness. 

• Finally, it contains an overhaul of the pension 

system including: 

i. Increase of women’s minimum retirement 

age to 65 years by the end of 2013, with the 

process starting in 2011; 

ii. Pensions to be calculated on the basis of 

earnings over the whole labour life cycle; 

iii. Increase in the minimum early retirement 

age to 60 years; 

iv. Increase of minimum contribution period 

from 37 to 40 years by 2015; 

v. Automatic adjustment of pensions to life 

expectancy; and 

vi. Reduction in the number of social security 

organisations (to three); 

The proposed pension reforms are a relevant aspect 

of the plan with potentially significant implications in 

the long term. The EU Commission estimated that, 

on unchanged legislation, age-related public 

spending would increase by 16% of GDP between 

2010 and 2060. 

Overall, the plan is certainly coherent, based on a set 

of more realistic assumptions than in the past and 

potentially able to deliver what Greece needs most at 

the moment, which is credibility. 

But the implications for growth of the envisaged fiscal 

correction, which are more credibly spelled out this 

time, would be massive. As we emphasised in 

previous research, such an adjustment in such a 

short time is unprecedented across advanced 

economy and its drag on GDP and employment is 

likely to be significant, questioning its social 

feasibility. This emphasises there is a persistent 

implementation risk which markets will continue to 

price in for a while. 

Moreover, even if the adjustment is implemented as 

planned, Greece would still land up with a debt-to- 

GDP ratio of around 145% in 2014. Under the 

assumption of nominal growth of 4% and interest 

rates of 6%, Greece would need a primary surplus of 

2.8% to stabilise the debt-to-GDP ratio at these 

levels. But under different assumptions for growth, 

the scenario would be less favourable. Persistent low 

nominal growth (equal to or less than 2% for 

example) is likely to be associated with higher risk 

premia (interest rates at or above 6%). In that case, 

the primary surplus needed to stabilise the debt-to- 

GDP ratio would shoot to 7.1% of GDP. This would 

probably be too costly from a social point of view, 

opening the door again to alternative options such as 

debt restructuring (for more on the possible 

scenarios for the Greek outlook see “Greece: What’s 

Next?” published on 29 April 2010). 

Table 1: Greece Economic Forecasts - Under the New Fiscal Adjustment Programme and the SGP 

Forecasts under Greece's New Fiscal Adjustment Programme 

2009 2010 2011 2012 2013 2014 

Inflation (% y/y) 1.3 1.9 -0.4 1.2 0.7 0.9 

GDP (% y/y) -2.0 -4.0 -2.6 1.1 2.1 2.1 

Budget Balance (% GDP) -13.6 -8.1 -7.6 -6.5 -4.9 -2.6 

Gov Debt (% GDP) 115.1 133.3 145.1 148.6 149.1 144.3 

Forecasts under the SGP 

2009 2010 2011 2012 2013 2014 

HICP (% y/y) 1.2 1.4 1.9 1.8 1.8 - 

GDP (% y/y) -1.2 -0.3 1.5 1.9 2.5 - 

Budget Balance (% GDP) -12.7 -8.7 -5.6 -2.8 -2.0 - 

Gov Debt (% GDP) 113.4 120.4 120.6 117.4 113.2 - 

Source: Greece's SGP, Greek Ministry of Finance 



15 


Table 2: Greece Fiscal Measures (in EURmn) 

2010* 2011 2012 2013 Cum % GDP 

Revenue Measures 

Increase of VAT rates (10% to 11%, 21% to 23%) 800 1000 0 0 1800 0.8 

Broadening VAT base 0 1000 500 0 1500 0.7 

Excise tax on fuel 200 250 0 0 450 0.2 

Excise tax on cigarettes 200 300 0 0 500 0.2 

Excise tax on alcoholic beverages 50 50 0 0 100 0.0 

Excise goods on non-alcoholic beverages 0 0 300 0 300 0.1 

Excise tax on luxury goods 0 100 0 0 100 0.0 

Green taxes 0 300 0 0 300 0.1 

Gaming royalties 0 200 400 0 600 0.3 

Gaming licences 0 500 225 -725 0 0.0 

Special levy on highly profitable firms 0 600 0 0 600 0.3 

Presumptive taxation of professionals 0 400 100 0 500 0.2 

Taxation of wage in kind (cars) 0 150 0 0 150 0.1 

Book specification of incomes 0 50 0 0 50 0.0 

Increase legal value real estate 0 400 200 100 700 0.3 

Amnesty land use violations 0 500 0 0 500 0.2 

Taxation of unauthorized establishments 0 800 0 0 800 0.3 

Expenditure Measures 

Reduce wage bill by cutting bonuses/allowances 1100 400 0 0 1500 0.7 

Workforce reduction beyond 5:1 (add. 20,000) 0 0 600 500 1100 0.5 

Savings from introduction of unified public sector wages 0 100 0 0 100 0.0 

Eliminate pension bonuses (except for min. pensions) 1500 500 0 0 2000 0.9 

Additional pension reduction above a certain threshold 350 150 0 0 500 0.2 

Nominal pension freeze 0 100 250 200 550 0.2 

Means test unemployment benefit 0 0 500 0 500 0.2 

Cancel second installment of solidarity allowance 400 0 0 0 400 0.2 

Cut intermediate consumption 700 300 0 0 1000 0.4 

“Kallikratis” programme for municipalities 0 500 500 500 1500 0.7 

Cut in transfers to public enterprises 0 0 1500 0 1500 0.7 

Cut domestically funded investment spending 500 500 500 0 1500 0.7 

Yet to be quantified yield from structural reform initiatives 0 0 0 4200 4200 1.8 

Total Measures 5800 9150 5575 4775 25300 11.0 

Revenue Measures 1250 6600 1725 -625 8950 3.9 

Expenditure Measures 4550 2550 3850 5400 16350 7.1 

Total Measures (% GDP) 2.5 4.1 2.4 2.0 11.0 

Revenue Measures 0.5 3.0 0.8 -0.3 3.9 

Expenditure Measures 2.0 1.1 1.7 2.3 7.1 

Memorandum Item: 

Nominal GDP (EURbn) 231 224 228 235 

Source: Greek Ministry of Finance, IMF 

Note: * measures for 2010 are additional to those already announced in past austerity plans 



16 


Germany: Downs and Ups 

• The impact of unusually cold weather on the 

construction sector will hit Q1 GDP. 

65 

Chart 1: GDP and Composite PMI 

1.5 

• The narrowing trade surplus and weakness 

in retail sales also point to a weak outcome. 

• We have revised down our forecast: we now 

look for GDP to contract on a q/q basis in Q1. 

• However, with the improvement in leading 

indicators stepping up a gear recently, a strong 

rebound in Q2 growth is very likely. 

• Germany is set to outperform the eurozone 

beyond Q1 despite a lack of consumer demand. 

60 

55 

50 

45 

40 

35 

30 

25 

20 

15 

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


Composite PMI 

German GDP 

(% q/q, RHS) 

1.0 

0.5 

0.0 

-0.5 

-1.0 

-1.5 

-2.0 

-2.5 

-3.0 

-3.5 

Survey strength 

Our projection for German GDP in Q1 in the latest 

Global Outlook was for a q/q increase of 0.5%. On 

the basis of the leading indicators, a growth rate of 

this magnitude looks feasible (Chart 1). 

25 

20 

15 

10 

Chart 2: Construction Output (% q/q) 

The ‘hard’ activity data released for Q1 to date point 

to a much weaker outcome, however, related in large 

part to the impact of exceptionally cold weather early 

in the year on the construction sector. There is also a 

question mark over the reliability of the growth rates 

signalled by some of the leading indicators since the 

onset of the financial crisis. 

The positives 

There were two key factors which led us to make 

such a positive forecast for Q1 growth in Germany in 

the first place. The first was the improvement in 

activity in the global economy, evident in business 

surveys like the PMIs as well as in the world trade 

volumes data supplied by the CPB in the 

Netherlands. The German economy is highly 

sensitive to these developments, consistent with its 

comparatively high manufacturing and export share 

in GDP. 

The second factor was the high probability that the 

unusually large drag on q/q growth from inventories 

in Q4 last year – of around 1¼ percentage points – 

would at least partially reverse in Q1, boosting the 

q/q rate of growth. 

We also saw potential for the contribution to growth 

from investment to pick up following a downward 

surprise in Q4 last year, particularly from spending 

on machinery. The latter declined by 1.5% q/q in Q4, 

more than reversing the previous quarter’s increase 

of 0.8% q/q. 

5 

0 

-5 

-10 

-15 

Shaded Area = GDP Contraction 

-20 

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

Source: Reuters EcoWin Pro, BNP Paribas 

Forecasting q/q changes in investment spending can 

be tricky given their volatility but there have been 

encouraging signs. Business confidence has risen 

markedly across a range of surveys while the data on 

domestic capital goods orders have strengthened. 

On the basis of the data for the first two months of 

Q1, domestic orders for capital goods are on track to 

rise by around 6% q/q. 

The negatives 

The principal constraint on Q1 growth, as highlighted 

in previous analysis, is the construction sector. The 

weather in Germany at the beginning of the year was 

exceptionally harsh and this hit activity in the sector 

extremely hard. 

Construction output plunged by a massive 14% m/m 

in January, the second-biggest m/m fall in the series' 

history. Output subsequently rose in February but 

only by a comparatively modest 1% m/m. This makes 

a q/q fall of a double-digit magnitude a virtual 

certainty for construction output in Q1. 



17 


Even a m/m increase of 10% in March, which is very 

unlikely given that the weather was again unhelpful, 

would still mean that construction output in Q1 fell by 

around 12% q/q. On the three occasions in the past 

two decades that a double-digit q/q contraction has 

occurred, in Q1 1996, Q1 1997 and Q2 2008, GDP 

also registered a q/q contraction (Chart 2). 

In the national accounts for Germany, construction 

spending accounts for just under half of total gross 

fixed capital formation on a constant price basis. Its 

share of GDP on the same basis is roughly 10%. 

70 

65 

60 

55 

50 

45 

40 

35 

30 

Chart 3: Manufacturing PMI 

+1 SD 

Mean 

-1 SD 

PMI Manufacturing: 

Output 

Large changes in construction output have not been 

passed fully into changes in construction expenditure 

in the past. The pass-through has been about half. 

Assuming this relationship holds, our assumption of a 

13% q/q decline in construction output in Q1 would 

translate into a 6-7% q/q drop in construction 

expenditure which, given the latter’s share in GDP, 

would imply a drag on GDP of 0.6-0.7 of a 

percentage point. It could be even bigger if 

construction output fails to rebound strongly in the 

March release. 

Trading loss 

Trade figures in Germany for Q1 to date also augur 

less well for Q1 GDP than we originally envisaged. 

The monthly trade surplus almost halved in January, 

sliding from EUR 16.6bn in December to just 

EUR 8.8bn, the lowest surplus in almost a year. It 

partly rebounded in February, rising to EUR12.1bn. 

But for the quarter as a whole, the surplus is likely to 

be down by at least EUR 10bn, or around 25% q/q, in 

comparison to Q4 2009, implying a significant drag 

on the q/q change in GDP from net exports. 

Exports collapsed by 6.3% m/m in nominal terms in 

January and though they rebounded by almost as 

much in the following month, at best there is likely to 

be a small q/q increase in exports overall in Q1. This 

compares to 5%-plus q/q increases in both Q3 and 

Q4 last year. The poor performance of exports is also 

likely to be a casualty of the disruption caused by the 

severe weather given that it is totally out of kilter with 

other indicators of global trade. 

The latter point is an important one. While GDP in Q1 

is shaping up to be a disappointment, the data on 

global trade and manufacturing activity signal that the 

underlying trend in economic activity in Germany is 

improving substantially. There is a strong likelihood, 

therefore, that disappointing GDP data for Q1 will be 

followed by a compensating rebound in Q2. 

This should certainly be the case for industrial activity 

data in Germany give the recent surge in a variety of 

leading indicators. 

25 

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


Chart 4: EC Consumer Survey: Spending 

Intentions 

7.5 

5.0 

2.5 

0.0 

-2.5 

-5.0 

-7.5 

-10.0 

-12.5 

-15.0 

Relative to Mean (Since 1986) 

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


Eurozone 

Germany 

The most spectacular improvement has come in the 

German PMI for manufacturing: its output and orders 

sub-indices have rocketed in recent months, with the 

former reaching its highest ever level (Chart 3). 

Stripping out the construction sector, the two months 

of industrial output data released for Q1 to date are 

consistent with an overall q/q rise in Q1 of about 1%. 

A much bigger increase is likely in Q2 on the basis of 

the leading indicators, with y/y growth rates to go into 

double digits given favourable base effects. 

Strong March and April releases will set the tone for 

Q2 and given the step up in the surveys in those two 

months, robust output growth in at least one of the 

months, and probably both, looks a sure bet. Add in 

the construction sector rebound and Q2 could show 

exceptional strength in the output side of the national 

accounts data. 

Consumer contraction 

One area of the economy where we did not expect 

much good news in the short run was on consumer 

spending. Retail sales data for Q1 have once again 

been very weak. 



18 


Retail sales data from month to month have been, as 

usual, very volatile. But for Q1 as a whole, sales are 

down by just shy of 1% q/q in real terms. This is the 

fifth contraction in the past six quarters and the 

biggest since Q1 2009. Another q/q contraction in 

private consumption in Germany beckons: Q1 would 

be the third in succession, with the y/y rate of change 

to fall further into negative territory (-0.4% in Q4) 

given the unfavourable base effects related to the 

boost to spending from car purchase incentives in Q1 

2009. 

The weakness of consumer spending is a further 

reason to expect poor GDP figures in Q1 but history 

tells us that the German economy can grow without 

much of a contribution from private consumption – 

we discuss this in more detail below. 

2010 adjustment 

The Bundesbank Monthly Report for April talked of a 

‘slight decline’ in GDP in q/q terms in Q1. The Buba’s 

estimate, like our own, is hampered by the absence 

of the full set of ‘hard’ activity data for Q1 (production 

and trade figures for March are due imminently). The 

distortions due to the weather compound the difficulty 

in making an accurate forecast. Still, on the basis of 

the information available, we now forecast a q/q fall 

in Q1 GDP of 0.2%. 

But, in conjunction with the downward revision to Q1, 

we are revising up our estimate for Q2. Initially we 

had forecast a rise of 0.6% q/q but we now look for 

an increase in excess of 1% q/q. 

This necessitates an adjustment in our forecast for 

2010 as a whole. We had initially expected growth in 

Germany of 1.7% in 2010: our revised forecast is for 

growth of 1.5% (Table 1). This is a bit more optimistic 

than the forecast from the European Commission, 

updated this week, of 1.2%. 

We have adjusted our eurozone GDP forecast profile 

to reflect the changes made to the German forecast 

and some changes to our forecasts for other member 

states. The net result is that we have revised down 

our forecast for Q1 GDP growth in the eurozone to a 

rise of 0.1% q/q from 0.3% q/q initially. A rebound is 

assumed for Q2, of 0.5% q/q. The forecast for 2010 

growth is trimmed from 1.0% to 0.9%. This is in line 

with the estimate from the European Commission. 

Germany to outperform 

A key aspect of our forecasts is that while we expect 

Germany to underperform the eurozone average in 

Q1, we remain of the view that it should outperform 

thereafter. Germany is forecast to grow faster than 

the eurozone in the subsequent quarters and in 2010 

and 2011 overall. 

The likelihood of outperformance beyond Q1 is borne 

out by the leading indicators. The composite PMI for 

Germany is well above that for the eurozone and is 

indicative of q/q growth of around 1%. The German 

economic sentiment index compiled by the European 

Commission has also been outperforming. Its rise in 

April, of over four percentage points, was the second 

largest in the series’ history. 

The fundamental picture also favours the German 

economy outperforming. It is best placed to capitalise 

on the pick-up in global activity, while it is likely to be 

much less affected by the sovereign debt crisis in the 

eurozone. The widening of sovereign yield spreads 

represents a tightening of monetary and financial 

conditions for all countries other than Germany which 

has seen its long-term interest rates fall. 

This is not to suggest that Germany does not have 

problems of its own. It clearly does. One is the effect 

of recent developments on key trading partners in the 

eurozone. Another is weak consumer demand. But 

there are some grounds for cautious optimism on the 

latter. The surveys of spending intentions amongst 

German households have fared much better than in 

the eurozone on average over the past few months. 

The fiscal stance is helpful, as is the performance of 

the labour market. 

Even if the survey data do not translate into much of 

a pick-up in actual spending, as has been the case in 

the past, then Germany can still prosper without a big 

contribution to growth from private consumption. In 

the period from Q4 2005 to Q1 2008, for example, 

when the last expansion really got going, there was a 

negligible increase in German private consumption: it 

rose by a meagre 1.6% cumulatively. But GDP 

expanded by around 8% cumulatively over the same 

period, driven in large part by a near-25% rise in 

exports. The external sector is likely to remain the 

pivotal influence on Germany’s growth outlook. 

Table 1: GDP Projections 

2009 2010 2011 

2009 2010 (1) 2011 (1) Q1 Q2 Q3 Q4 Q1 (1) Q2 (1) Q3 (1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

Germany 

% q/q - - - -3.5 0.4 0.7 0.0 -0.2 1.2 0.6 0.3 0.3 0.4 0.5 0.6 

% y/y -4.9 1.5 1.8 -6.7 -5.8 -4.8 -2.4 0.9 1.7 1.6 1.9 2.4 1.6 1.5 1.8 

Eurozone 

% q/q - - - -2.5 -0.1 0.4 0.0 0.1 0.5 0.2 0.1 0.3 0.3 0.4 0.5 

% y/y -4.0 0.9 1.2 -5.0 -4.9 -4.1 -2.2 0.4 1.1 0.9 1.0 1.2 1.0 1.2 1.6 




19 


Norway: Concern over Europe 

• The Norges Bank delivered a 25bp rate hike 

at its May meeting, taking the policy rate to 

2.00%. 

Chart 1: Policy Rates (%) 

• The main reason for the rate hike was stated 

as economic developments turning out to be 

broadly in line with the Norges Bank’s 

expectations. 

• However, the Norges Bank also considered 

keeping the policy rate unchanged, due to 

developments in Europe. 

• We expect the next rate hike to come in 

September, depending on economic 

developments, the krone and uncertainty 

generated by events elsewhere in Europe. 


Chart 2: Real GDP (% y/y) 

A 25bp rate hike 

At its May policy meeting, the Norges Bank delivered 

a 25bp rate hike, taking the policy rate to 2.00%. 

Consensus was divided between a hike and no 

change. We were in the latter camp, given 

developments elsewhere in Europe. The opening 

paragraph of the statement noted that inflation was in 

line with the Bank's expectations and growth 

"appears to have picked up as anticipated”. These 

were the main reasons why the Executive Board 

delivered a rate hike at the May meeting. 

On external developments, the global economy was 

described as "rebounding". But clearly, there was 

emphasis on the loan agreement between Greece 

and the eurozone countries and the IMF and the 

turbulence in the government securities markets. 

The Norges Bank noted that "developments in 

Europe may prove to be weaker than expected, 

which may also affect the outlook for the Norwegian 

economy". That is why the Bank also "considered the 

alternative of leaving the key policy rate unchanged 

at this meeting". 

Reasons behind the move 

In its in-depth assessment, the Norges Bank gave 

further reasons for its rate hike. Although tighter bank 

lending standards for households were mentioned, it 

was noted that: 

• "Over time, household borrowing may 

nevertheless increase substantially and saving 

may decline. The aim of guarding against the 


risk of future imbalances, that may disturb 

activity and inflation somewhat further ahead, 

suggests that the interest rate should be 

gradually brought closer to a more normal level"; 

and 

• “House prices are still on the rise and household 

credit growth remains fairly strong”. 

Regarding the developments abroad, the Bank put 

emphasis on positive developments elsewhere: 

• "Activity in the US and Asia has been somewhat 

higher than assumed in the March Monetary 

Policy Report”; 

• “Labour market conditions in the US and the UK 

are improving”; and 

• “Oil prices and other commodity prices have 

increased”. 

Gizem Kara 7 May 2010 


20 


On inflation, the statement was also hawkish 

compared to the previous one. The Bank once again 

mentioned its expectation of underlying inflation to 

"edge down further in the period to summer". But the 

Governor also stated that inflation is expected to 

move up again "as activity level increases and the 

effects of the krone appreciation unwind". In its 

March statement, the Norges Bank only chose to 

mention downward pressures on inflation in 2010, 

due to a stronger krone and lower wage growth. 

That market forecasters expect policy rates to remain 

low for some time to come in the US, eurozone and 

the UK was stated in the in-depth assessment. But 

unlike last time, the Norges Bank did not mention the 

rate differentials that are likely to put upward 

pressure on the krone. Also, the appreciation in the 

import-weighted NOK, which was stronger than 

projected in the March Monetary Policy Report, was 

acknowledged. But this appears not to have had an 

impact on the Norges Bank decision. 

Chart 3: Credit to Households and House Prices 

(% y/y) 


Chart 4: Import-Weighted NOK 

Concern over developments in the eurozone 

Despite an overall positive tone, the statement 

revealed that the developments elsewhere in Europe 

are clearly a cause of concern for the central bank. 

Therefore, the Norges Bank also considered keeping 

the policy rate unchanged, as discussed in the indepth 

assessment: 

• "Developments in Europe may prove to be 

weaker than assumed and the turmoil in 

financial markets may persist”; 

• “…the krone may prove to be stronger than 

projected so that inflation remains low for a long 

period”; and 

• “The risk of a renewed downturn in Europe may 

suggest that it would be appropriate to leave the 

interest rate unchanged at this meeting". 

However, the fact that domestic developments were 

broadly in line with its expectations, household credit 

growth is robust and house prices continue to 

increase weighed more in the Norges Bank 

assessment, leading it to deliver a rate hike in line 

with its projections back in March. 

Conclusion 

We expected the Norges Bank to remain on hold at 

the May meeting. Back in March, its new policy rate 

projections suggested that the Norges Bank intended 

to deliver a 25bp rate hike in May. We highlighted 

that developments in the domestic economy did not 

give any significant reason for the Norges Bank to 

change this assessment. But in March, the Bank 

seemed to be more cautious about external 

developments. Since then, external developments 


have evolved significantly. Concerns over the high 

debt countries have led to an increase in stress in 

financial markets. This in turn led to an increase in 

uncertainty surrounding the outlook for the 

Norwegian economy. Therefore, we believed this 

was likely to lead the Norges Bank to sit on its hands 

at the May meeting. 

Looking ahead, given that the Norges Bank delivered 

a rate hike at the May meeting, we now expect the 

policy rate to remain unchanged until September. 

The fact that the Norges Bank mentioned the 

increase in uncertainty surrounding the Norwegian 

economic outlook, due to the developments in 

Europe, also suggests the Bank will deliver further 

rate hikes more slowly than it projected previously. 

On this, at the press conference, Governor Svein 

Gjedrem was quoted as saying “the debt crisis would 

have an indirect impact (on Norway) as it could 

reduce interest rate expectations in the euro region”. 

Gizem Kara 7 May 2010 


21 


US: Recovery Turning into Expansion 

• In the first three quarters of the present 

economic recovery, real GDP grew at an 

annualised pace of 3.7%. 

Chart 1: Aggregate Hours Worked 

• The drivers of economic growth are 

gradually rotating away from temporary 

adjustments in inventory management and 

fiscal stimulus toward more sustainable growth 

in investment and consumption. 

• Consequently, we are revising up our GDP 

growth forecast to 3.2% y/y in 2010 from our 

previous 2.9% estimate. 

• The risks of a double-dip recession, or a 

significant slowdown in the recovery, are fading. 

• Structural adjustments in a few sectors still 

point to a gradual acceleration in final demand. 

However, commercial real estate and state and 

local government spending will weigh on 

growth. 


Chart 2: NF Productivity and ULCs 

The recovery increasingly looks sustainable 

After three quarters of economic growth, the 

economy has grown at an annualised rate of 3.7%. 

As the nascent recovery has progressed, more 

sectors have begun to contribute to growth adding 

confidence to its sustainability. It is now becoming 

more evident that the cyclical recovery is turning into 

an enduring economic expansion. And, the recovery 

is now generating enough broad momentum to 

squash fears that another sharp downturn will occur. 

Business inventory building will diminish as a 

support to growth… 

On average, the upswing in the inventory cycle has 

contributed about 2.0pp to GDP growth in the 

recovery thus far while final sales growth has 

averaged a below potential pace of 1.6%. Business 

investment in inventories is projected to increase at a 

much slower pace over the next three quarters and 

to contribute an average of 0.3pp to estimated GDP 

growth. 

…however, a gradual increase in job growth 

should cause domestic demand to pick up the 

slack 

Perhaps the most important factor contributing to the 

increased confidence in the sustainability of the 

recovery is the beginning of private sector job 

growth. Thus far, most of the growth in the input of 

labour has come from an increase in hours worked 


and in temporary workers hired. Aggregate hours 

worked rose 1.8% in Q1 saar after two years of 

sizable declines. Moreover, over the past six months, 

private businesses have hired 313k temporary 

workers. Hiring of temporary workers tends to lead to 

permanent hiring with a lag of several quarters. 

The census hiring will supplement employment 

growth 

The rise in private employment will be supplemented 

in the near term by federal government hiring for the 

2010 decennial census. These temporary part-time 

federal workers will add 700k to payroll growth 

through May and raise income and spending over the 

next two quarters. By the end of October their work 

will be finished and they will be laid off. 

Consumption growth set to remain solid even as 

the fiscal stimulus fades 

Growth in consumer spending is forecast to average 

2.9% over the next three quarters, just above its 

Brian Fabbri 7 May 2010 


22 


quarterly average of 2.7% in the first three quarters 

of the recovery. Early growth in consumer spending 

was supported by a boost to purchasing power from 

falling energy prices and the sizable federal stimulus. 

With hours worked beginning to rise, we expect 

consumers to continue to spend at a solid, if not 

spectacular, pace. 

The business recovery has been impressive 

The positive side of the savage correction in the 

labour market is that non-farm productivity surged at 

a very healthy pace of 7.4% saar during the first 

three quarters of the recovery. Such rapid growth in 

productivity contributed to a plunge in labour costs 

and spectacular profit growth. Business investment in 

IT and related equipment grew at an annualised rate 

of 11.1% in the first three quarters of the recovery. 

Given the enormous pile of free cash businesses 

have generated, they are expected to continue 

investing in productivity-enhancing IT at a robust 

pace. We forecast that growth in business 

investment in equipment will accelerate slightly to an 

annualised rate of 12.3% in the next three quarters. 

Housing expected to grow at a modest pace 

Residential investment is expected to regain some of 

its lost momentum in the next several quarters. 

Residential investment slumped in Q4 2009 and Q1 

2010 partly due to adverse winter weather and partly 

due to the aftermath of the initial homebuyers’ tax 

credit expiry in November which brought forward 

some home buying. The final expiry of this credit in 

April is causing another surge in sales and therefore 

home building in Q2. Residential investment is 

therefore forecast to surge by 15% in Q2 and then 

decelerate in Q3 on a similar, but less dramatic, pull 

forward of home buying. Thereafter, residential 

investment is forecast to continue supporting growth 

as housing rebounds at a gradual pace held back by 

tight credit conditions and uncertainty about house 

prices. 

Some sectors will continue to be a drag on 

growth 

However, not all sectors of the economy are 

expected to expand in coming quarters. Business 

investment in commercial real estate will continue to 

shrink at a very sharp pace. The woeful dynamics of 

that industry – declining rent, rising vacancies and 

falling prices – indicate that building plans will 

continue to diminish until the economy catches up 

with the leveraged over-building that occurred at the 

end of the last expansion. Consequently, we 

estimate that business investment in commercial 

construction will subtract about 0.5pp from overall 

GDP growth. 

Chart 3: Consumption’s Contribution to GDP 

Growth 


Chart 4: Inventories’ Contribution to GDP 

Growth 


Chart 5: State and Local Governments are in 

Fiscal Trouble 


State and local governments still in fiscal trouble 

Another sector that will weigh on overall GDP growth 

in the next several quarters is spending by state and 

local governments. Nationwide state and local 

budget deficits are forecast to increase rather than 



23 


improve in the next local fiscal year (which typically 

starts in July) requiring spending cuts, tax increases 

and aid from the federal government. This sector has 

subtracted an average 0.3pp from growth thus far in 

the recovery and we expect this to moderate to a 

0.15pp subtraction in coming quarters. 

Imports will offset expected strong growth in 

exports 

Net foreign trade is also expected to be roughly 

neutral for GDP growth over the next three quarters. 

As domestic demand in the US builds, imports rise 

offsetting the positive impact of strong growth in 

exports. The net trade deficit is therefore forecast to 

increase slightly through the end of the year. 

GDP set to rise by 2.9% over the next three 

quarters 

The rotation of factors contributing to growth has 

caused us to revise up our forecast for GDP growth 

in 2010 to an average of 3.2% y/y. GDP growth in the 

next three quarters is forecast to slow to 2.9% 

annualised, however the composition of sectors 

contributing to growth is far more sustainable. Final 

sales growth should accelerate to an estimated 

2.5%, which is very close to most estimates of the 

nation’s long-term potential growth rate. This still 

suggests a gradual recovery as the economy 

typically makes up lost ground by growing well above 

potential in the early stages of a recovery. 

Meanwhile, the change in the GDP deflator is 

forecast to decelerate slightly further in Q2, but 

bounce in Q3 as energy prices are forecast to 

rebound. Quarter-on-quarter changes in the GDP 

deflator are forecast to trend lower in the subsequent 

quarters. Consequently, nominal GDP growth should 

average slightly above 4% through the balance of 

2010. 



24 


US Credit: Still the Recovery’s Ball and Chain 

• The FOMC Committee noted that “tight 

credit” remains a constraint to household 

spending growth and that “bank lending 

continues to contract”. 

Chart 1: Credit Standards Are Slowly Improving 

• While larger banks have begun to relax their 

credit standards, “none of the smaller banks, 

which compose roughly half of the respondent 

panel, indicated that they had eased their 

standards”. 

• Some easing in credit standards was 

recorded for commercial and industrial (C&I) 

loans, especially among large banks extending 

credit to large and middle market firms. 

• Conditions remained challenging for 

commercial real estate (CRE) loans. 


Chart 2: Demand for Mortgages Declined 

• “Most banks reported essentially no change 

in their standards on prime and non-traditional 

mortgages over the past three months.” 

• Demand for C&I loans from large and middle 

market firms and from small firms weakened 

further, as did demand for prime mortgages and 

home equity loans. 

• While credit conditions are no longer 

worsening, tight credit standards and especially 

weak demand for loans of all types remain an 

important impediment to the recovery. 

Last week, the FOMC Committee noted that “tight 

credit” remains a constraint on household spending 

growth and that “bank lending continues to contract”, 

even though “financial market conditions remain 

supportive of economic growth”. This view was 

echoed by the recently released Senior Loan Officer 

Survey which noted that while “most banks kept their 

lending standards unchanged in the first quarter”, a 

“moderate net fractions of banks further tightened 

many terms on loans to businesses and households”. 

Financing conditions diverging for small and 

large firms 

The main message emerging from the latest Senior 

Loan Officer Survey (SLO) is that financing 

conditions for small and large firms continue to 

diverge. Similarly, while larger banks have begun to 

relax their credit standards, “none of the smaller 

banks, which compose roughly half of the respondent 

panel, indicated that they had eased their standards”. 

On the demand side, the main source driving the 

divergence between large and small firms lies in the 

fact that large firms are able to access capital 


markets to raise funds, while smaller businesses rely 

heavily on banks. On the supply side, smaller 

regional banks remain exposed to the ailing 

commercial real estate sector, constraining their 

ability to increase leading. 

Credit conditions generally unchanged 

While developments were somewhat uneven, credit 

conditions appeared generally unchanged in the 

three months to April. Some easing in credit 

standards was recorded for commercial and 

industrial (C&I) loans, especially among large banks 

with more than USD 20 billion in total assets 

extending credit to large and middle market firms 

with annual sales of USD 50 million or more. Given 

that credit standards for C&I loans had previously 

been tightened for 10 consecutive quarters, the small 

reversal recorded recently suggests that conditions 

remain stringent. In spite of this, April marked the 

second consecutive quarter of easing, a 

development which had not been observed since 

2006. While prospects appear brighter for larger 

Anna Piretti 7 May 2010 


25 


firms, standards on C&I loans to small firms were left 

largely unchanged and “net fractions of domestic 

institutions reported tightening terms on C&I loans 

extended to smaller firms”. In addition, a special 

question asking banks about standards and terms on 

credit cards for use by small firms found that “a 

majority of respondents indicated that their standards 

for approving such business credit card accounts are 

currently tighter than the longer-run average level” 

and that a “significant net fractions of respondents 

indicated that their banks had tightened their terms 

on business credit card loans to small firms over the 

past six months”. 

Conditions still challenging for CRE loans 

In spite of slightly brighter prospects in the C&I 

space, conditions remained challenging for 

commercial real estate (CRE) loans. Indeed, the 

latest SLO noted that “a significant number of 

domestic banks continued to report having tightened 

standards on CRE loans”. Nevertheless, this net 

fraction “was considerably smaller than in the 

January survey” while the “net fraction of banks 

reporting weaker demand moved below 10% for the 

first time since the financial crisis began”. 

Little change in standards for mortgages 

On the consumer side, “most banks reported 

essentially no change in their standards on prime 

and non-traditional mortgages over the past three 

months”. In spite of this, lending standards on home 

equity lines were eased on net for the first time since 

this question was introduced in January 2008. With 

respect to other types of consumer credit, standards 

for credit cards were tightened marginally compared 

to the January survey, while banks’ willingness to 

extend consumers instalment loans improved for the 

third consecutive quarter. 

Supply stabilises but demand weakens 

While credit standards remain tight, supply 

constraints have begun to reverse in some areas 

(C&I loans) or are no longer deteriorating at the 

same rapid pace in other areas (CRE loans). In spite 

of this stabilisation in supply, demand for credit 

remains an important headwind to the recovery. 

Indeed, the latest SLO reported that “demand for C&I 

loans from large and middle market firms and from 

small firms weakened further over the past three 

months”. Similarly, “a more sizable fraction of banks 

indicated that demand for prime mortgages 

weakened over the past three months and a fairly 

large net fraction of banks also reported that demand 

for home equity loans weakened over the survey 

period.” 

Chart 3: Weak Loan Demand Remains An 

Impediment to Growth 



Chart 4: The End of an Era? 

Moreover, while banks’ willingness to make 

consumer instalment loans has recovered to precrisis 

levels, consumer spending on durable goods 

remains depressed, with light vehicle sales still below 

their early 1990s levels. 

Credit remains impediment to recovery 

While the SLO report was released only this week, 

results from this survey were available to FOMC 

members before their policy meeting last week, 

helping to account for the carefully restrained tone of 

the latest FOMC statement in the face of recent 

strengthening in the economy. Indeed, while credit 

conditions are no longer worsening, tight credit 

standards and especially weak demand for loans of 

all types remain an important impediment to the 

recovery. 

Anna Piretti 7 May 2010 


26 


Japan: Rising Chance of Sales Tax Hike? 

• Support within the government for a 

consumption tax hike has been increasing. 

• Many in the government seem to be coming 

around to the idea that it cannot come up with a 

credible plan for social security reform unless it 

starts talking about raising consumption tax. 

• Meanwhile, public opinion on the tax is 

changing, with more people now opposing 

Hatayama’s “no hike” stance than supporting it. 

• The conventional wisdom that the 

consumption tax is a taboo at election time 

might not hold this time around. 

Support within the government for a tax hike 

Lately there seems to be growing support within the 

government for a consumption tax hike. Although 

Prime Minister Hatoyama himself has not abandoned 

his opposition to raising the tax anytime during the 

current four-year term of the Lower House (which 

expires in the summer of 2013), successive cabinet 

ministers, beginning with National Policy Minister 

Sengoku, have been voicing support for a tax hike 

ever since Finance Minister Kan announced in 

February that discussions on this issue would begin 

at an early date. Indeed, in a move apparently laying 

the groundwork for a future tax hike, Finance Minister 

Kan on 26 April convened the Fiscal System Council 

for the first time in roughly 15 months, and named as 

its new chairman Tokyo University Professor Hiroshi 

Yoshikawa. The latter is a proponent of raising the 

consumption to secure a permanent source of 

funding for social security. Even so, there are doubts 

that the government will actually produce concrete 

plans for raising the consumption tax prior to the 

Upper House election slated for July. 

Credibility for social welfare reform ahead of 

election 

That the government is taking up this issue at this 

juncture reflects more than just renewed concerns 

about Japan’s deteriorating fiscal condition, sparked 

by the Greek sovereign crisis, or the economy’s 

improved prospects now that the risk of a soft patch 

or worse has faded. The government is becoming 

increasingly aware that raising the consumption tax 

is inevitable, if it is to reform the country’s social 

security system. The DPJ rode into power last year 

by continually hammering the LDP-led governments 

over the past decade on issues related to Japan’s 

floundering pension system, from problems with the 

120 

100 

80 

60 

40 

20 

Chart 1: General Account Expenditures and 

Revenue (JPY trn) 

Public bond issuance (% of GDP, RHS) 

Expenditures 

Tax revenue 

0 

65 70 75 80 85 90 95 00 05 10 

Source: MOF, BNP Paribas 

Notes: Figures through FY 2008 based on end-of-year financial 

statements, FY 2009 includes second supplementary budget, FY 2010 is 

government's initial budget. 

Chart 2: Public Opinion on Hatoyama's "No Tax 

Hike" Stance (%) 

60 

50 

40 

30 

20 

10 

0 

Jan.Survey Feb. Survey Mar.Survey Apr. Survey 

2010 

Source: Nikkei Shimubun, TV Tokyo, BNP Paribas 

Oppose 

Approve 

Don't know 

Social Insurance Agency itself (scandals, misuse of 

funds etc) to problems with “lost pension records” 

and “pension premium delinquency” of some LDP 

officials (some DPJ lawmakers were delinquent too, 

but guilty parties in the LDP included several cabinet 

ministers). In other words, pension system reform 

was one of the key pledges that helped the DPJ win 

power. However, unless the party is prepared to talk 

about a consumption tax hike, it cannot come up with 

a credible reform plan ahead of the Upper House 

election (which is shaping up to be an uphill battle for 

the DPJ). 

Pre-election talk of sales tax used to be taboo 

As pointed out in earlier reports, Japan is structurally 

prone to running budget deficits because it tries to 

maintain “mid-level social welfare” with only “lowlevel 

burden-sharing.” The current social welfare 

systems (healthcare, pensions) were established in 

12 

10 

8 

6 

4 

2 

Ryutaro Kono/ Hiroshi Shiraishi 7 May 2010 


27 


the mid-1970s on the assumption that tax revenue 

would keep rising in tandem with robust economic 

expansion, but the era of robust growth ended shortly 

thereafter. Since then, financing has had to come 

from government bond issuance, as tax receipts 

have been perennially short (in the amount of 4-6% 

of GDP) even when the economy was on a cyclical 

upturn. (Dependence on government bonds declined 

only during the “bubble economy,” but bubbles 

cannot last forever.) It is widely recognised that the 

consumption tax would be the most effective way to 

fill the gap between mid-level social welfare and lowlevel 

burden-sharing. However, politicians have been 

traumatised by past attempts at raising this tax (i.e., 

voter backlash has led to the unseating of prime 

ministers), making it a taboo issue especially when 

national elections are at hand. 

Public increasingly understands need for tax hike 

Public opinion is changing. For instance, a poll 

conducted on 26-28 March by Nikkei Inc. and TV 

Tokyo Corp. found that, for the first time, more 

people opposed Hatayama’s stance on consumption 

tax (no hike) than supported it, with the percentages 

being 46% versus 43%. The most recent poll, 

conducted in April, puts the opposition to Hatoyama’s 

stance at 50% versus 37% supporting it. The public 

is clearly coming around to the idea of a tax hike, as 

the realisation sinks in that the primary cause of 

budget deficits is not wasteful spending but 

insufficient revenue. The government’s newly 

established budget screening process (in which I 

have been a screener) has been helpful in this 

regard: it has opened up the budget process to public 

scrutiny and shown the public that such micro-based 

vetting, however important in cutting waste, cannot 

easily yield significant savings – hence the need for a 

consumption tax hike to finance social welfare. 

A taboo no longer? 

We suspect that the DPJ is carefully calculating how 

many votes it stands to win or lose by taking a clear 

stand on the consumption tax. If it deems support 

can best be won by being forthright on taxes, the 

politically savvy brains behind the DPJ will naturally 

steer the party in that direction. So, perhaps the 

conventional wisdom that the consumption tax is a 

taboo at election time will not hold this time around. 

Ryutaro Kono/ Hiroshi Shiraishi 7 May 2010 


28 


BNP Paribas Surprise Indicator 

• During April, economic data were, on 

average, stronger than expected in the US, 

eurozone and the UK. 

Chart 1: US Surprise Indicator – Headline Index 

• The main driver of the overall upward 

surprise was housing data in the US, surveys in 

the eurozone and activity data in the UK. 

• On the inflation front, the data were, on 

average, stronger than expected in the eurozone 

and UK and weaker than expected in the US. 

• Surprise indicator model details 

The BNP Paribas surprise indicator shows how, on 

average, the key economic data series have surprised 

relative to consensus expectations. The index is calculated 

as the deviation of the actual reading for each indicator 

from consensus, scaled by historical volatility. The 

‘surprises’ are then averaged for the latest month. A 

reading above zero implies the data have, on average, 

surprised on the strong side of the consensus 

expectation and vice versa. 

As well as an aggregated version for each economy, 

the same methodology is applied to show the trends in 

surprises for the various categories of data (including 

surveys, activity, the labour market, inflation and housing). 

US headline 

The key US economic data releases were, on 

average, stronger than market expectations during 

April, for the first time since December 2009. The 

upward surprise in surveys and housing data more 

than offset the downward surprises in activity, labour 

and inflation data over the month. 


SD from mean 

Chart 2: US Surprise Indicator – 

Biggest Mover: Housing 


SD from mean 

Chart 3: US Surprise Indicator – 

One to Watch: Inflation 

US housing 

The main driver of the overall upward surprise in our 

surprise indicator was stronger than expected 

housing data, which surprised to the upside for the 

first time since December 2009. All housing data 

included in our surprise indicator were stronger than 

market expectations during April. 

US inflation 

Inflation data surprised to the downside for a fourth 

consecutive month during April. Over the month, this 

mainly reflected the downward surprises in import 

prices and core CPI, which offset the upward 

surprise in headline PPI. 


SD from mean 

Gizem Kara/Alan Clarke 7 May 2010 


29 


Eurozone headline 

The key eurozone economic indicators, on average, 

surprised to the upside for a second consecutive 

month during April. All data categories included in 

our surprise indicator, except activity data (which 

were on average broadly in line with market 

expectations) surprised to the upside over the month. 

Chart 4: Eurozone Surprise Indicator – Headline 

Index 


SD from mean 

Eurozone surveys 

Market forecasters continued to underestimate the 

pick-up in surveys. Surveys were stronger than 

expected for a second consecutive month in April. 

Over the past year, surveys have surprised to the 

upside eleven times. During April, this mainly 

reflected stronger than expected German ZEW and 

Ifo, French production outlook and services PMI and 

eurozone flash manufacturing PMI. 

Chart 5: Eurozone Surprise Indicator – 

Biggest Mover: Surveys 


SD from mean 

Eurozone inflation 

Inflation data surprised to the upside for a third 

consecutive month in April. German PPI and import 

prices and Italian PPI and preliminary CPI were 

stronger than expected. These offset the downward 

surprises in the eurozone HICP and PPI and German 

preliminary CPI. 

Chart 6: Eurozone Surprise Indicator – 



SD from mean 



30 


UK headline 

After surprising to the downside over the past two 

months, UK economic data, on average, surprised 

significantly to the upside during April. Weaker than 

expected surveys and housing data were offset by 

stronger than expected activity, inflation and labour 

data. 

Chart 7: UK Surprise Indicator – Headline Index 


SD from mean 

UK activity 

After consistently surprising to the downside over the 

past seven months, activity data surprised to the 

upside during April. Manufacturing and industrial 

production as well as the visible and non-EU trade 

balance were all stronger than market expectations. 

These more than offset the downward surprises in 

retail sales and Q1 GDP over the month. 

Chart 8: UK Surprise Indicator – 

Biggest Mover: Activity 


SD from mean 

UK inflation 

Inflation data were stronger than market expectations 

during April. Over the past year, inflation data have 

surprised to the upside nine times. All inflation data 

included in our surprise indicator were stronger than 

market expectations over the month. 

Chart 9: UK Surprise Indicator – 



SD from mean 



31 


Global: Liquidity Conditions Update 

• Market liquidity conditions are deteriorating, 

as suggested by a variety of ‘liquidity spreads’. 

• This stands in contrast with global central 

bank liquidity, which is still ample as gauged by 

simple indices. 

The gap between central bank liquidity and perceived 

market liquidity conditions is widening again, as has 

happened various times over the past three years. 

To complicate matters, we now have to cope with a 

new relevant variable, i.e. sovereign risk. 

In Chart 1, we plot a simple indicator of global 

liquidity (G7 real Libor rates and real effective 

exchange rates). By this measure, liquidity is ample 

and is contributing to the margin compression 

between risk-free assets and risky assets, e.g. the 

Treasury swap spread. However, the link between 

liquidity and spreads has somewhat weakened since 

2009 due to government guarantee programmes, 

quantitative easing policies and widening fiscal 

deficits. Those have affected the quality of 

government securities relative to a lower rated bank 

liability curve (swap). 

More recently, we have also witnessed a widening of 

the cross-currency basis in several markets, both in 

G7 and EMKs (Chart 2). We refer to the BIS paper 

“The spillover of money market turbulence to FX 

swap and cross-currency swap markets” (March 

2008) for a review of the causes of wider bases. On 

the EUR 2Y cross-currency, we’ve seen a 15bp 

widening since early April (now -42bp), while the 

move is even more pronounced in selected 

emerging-market currencies (e.g. HUF 40bp wider). 

Cross-currency basis is actually our preferred 

indicator of market liquidity conditions. 

A final point relates to the impact that central banks’ 

Überliquidity has had on leverage and risk. In Chart 

3, we show the usual leveraged carry trade, i.e. long 

equity financed via a low interest rate currency. We 

note how the link between DAX and EUR/CHF has 

broken down after Q1 2009 on the back of the 

excess liquidity provided by the ECB. In a world of 

low interest rates, the additional FX risk to pay for 

financing is too high. Moreover, what’s the point of 

taking FX leverage if the central bank is providing 

everybody with plenty of cash? That is true for any 

leveraged risk position in general. Note also the 

distorting effect that excess liquidity has on the link 

between interest rates and equity valuation. 

Chart 1: Ample Central Bank Liquidity, But… 

0.60 

0.40 

0.20 

0.00 

-0.20 

-0.40 

-0.60 

Global liquidity 

-0.80 

-10.0 

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 


USD 10Y swap spread (RHS) 

Tight liquidity 

150.0 

130.0 

110.0 

Chart 2: …Cross-Currency Liquidity Conditions 

are Worsening 

20 

0 

-20 

-40 

-60 

-80 

2007 2008 2009 2010 

50 

0 

-50 

-100 

-150 

-200 

-250 

-300 

Ccy Basis 5Y 

Ccy Basis 5Y 

EUR 

JPY 

GBP 

2006 2007 2008 2009 2010 


1.70 

1.65 

1.60 

1.55 

1.50 

1.45 

1.40 

5.00 

4.00 

3.00 

2.00 

1.00 

HUF 

PLN 

CZK 

Chart 3: Risk, Leverage and Liquidity 

EUR/CHF spot 

DAX (RHS) 

Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 

0.00 

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


Germany 2Y 

DAX (RHS) 

90.0 

70.0 

50.0 

30.0 

10.0 

9000 

8000 

7000 

6000 

5000 

4000 

3000 

9000 

8000 

7000 

6000 

5000 

4000 

3000 

Alessandro Tentori 7 May 2010 

Market Mover, Non-Objective Research Section 

32 


US: Supply Could Affect Swap Spread Curve 

• The Treasury followed through with the 

cuts in issuance sizes that were widely 

expected by the market. It has given explicit 

guidance as to how/where/when further cuts 

will come. 

• Expect 2y, 3y and 5y auction sizes to go 

down USD 10bn by September (USD 2bn cut at 

each auction), and the 7y by USD 5bn. 

Treasury expects to change little the 10y and 

30y sizes. 

• We explore the relative issuance between 

the front end and back end, and its possible 

effect on the 2s10s swap spread curve. We 

also recap the overall effect on outright 

spreads, and how supply explains the 

cheapening in the 10y and 30y benchmark 

points versus the hump of the curve. 

-10 

-12 

-14 

-16 

-18 

-20 

-22 

-24 

Chart 1: Spread Curve Inverting More than 

Implied by the Move in OIS/Bor 

-26 

2s10s Spread Curve 

-28 

Model (using OIS/Bor) 

-30 

Jan-10 Feb-10 Mar-10 Apr-10 May-10 


Chart 2: Longer-Term Model of Spread Curve 

• STRATEGY: In the short term, fading the 

inversion in 2s10s spread-of-spreads is risky 

and should be hedged with OIS/Bor. In the long 

term, expect the supply factor to work against 

you. Also, continue to position for wider swap 

spreads and expect the hump of the Tsy curve 

to stay historically rich vs 10s and 30s. 

60 

40 

20 

0 

-20 

-40 

2s10s Spread Curve 

Model (Using OIS/Bor and 10y Rates) 

Summary of quarterly refunding announcement 

Supply was cut USD 2bn in the 3-year, USD 1bn in 

the 10-year and left unchanged in the 30-year. This 

highlights how the cuts will be skewed toward the 

front end, because Treasury still wants to extend the 

average maturity of the debt, although "any further 

extension will likely occur at a slower pace than what 

has been observed over the past year". 

The guidance it gives is that "cuts in the offering 

amounts in shorter-term securities could be in the 

range of 25 percent by the end of the [current] fiscal 

year. Reductions in the intermediate portion of the 

curve could be as much as 15 percent”. In its supply 

calendar, it specifically forecasts 2y, 3y and 5y 

auction sizes to go down USD 10bn by September 

(USD 2bn cut at each auction), and the 7y by USD 

5bn. Treasury expects to make little change to the 

10y and 30y sizes. 

There seems to be a desire to keep the share of bills 

in the debt universe to 24% and coupons to 68% 

(TIPS being at 8%). This backs up our forecast that, 

despite Treasury's previous desire to cut bills, this 

will not prove likely since the artificially increased 

-60 

-80 

-100 

Sep-00 Mar-03 Aug-05 Feb-08 Jul-10 


demand in bills (due to money market holding rules) 

will need to be met with adequate supply. 

Impact on the 2s10s swap spread curve 

The recent risk-aversion trade has widened OIS/Bor 

and inverted the spread curve further. The link 

between the two is shown in Chart 1, and it seems 

that the spread curve has flattened more than implied 

by 1y OIS/Bor. This is not to say that one should step 

in front of the Greek tragedy that is unfolding, 

although for those who do see an opportunity, one 

possible RV play would be to trade the spread curve 

steepener and hedge this with 40% of the DV01 risk 

in 1y OIS/Bor spreads (as implied by the model beta 

of 0.4). 

Looking at the spread curve from a longer-term 

perspective (Chart 2), we find that the main factors 

driving this are the level of 10y rates and OIS/Bor. 

Suvrat Prakash 7 May 2010 


33 


The sensitivity of the spread curve to 1y OIS/Bor is 

once again 40%, which provides some level of 

comfort with this hedge ratio. 

Even when looking from a long-term perspective, 

Chart 2 suggests that the spread curve is too 

inverted after adjusting for OIS/Bor and the level of 

rates. We find some evidence that this is due to longend 

supply having risen relative to short-end supply. 

Chart 3 shows the residual of the model, and at times 

it has tracked the relative supply between 2s and 10s 

(calculated as 2y notional supply in the past year 

divided by 10y notional supply). The rationale is that 

when front-end supply drops relative to the long end 

(and this is expected to continue down the road), the 

front end could richen vs swaps to a greater extent 

than the long end, thus keeping the spread curve 

flatter. 

Our forecast for 10y rates is 3.50% for Q2 and Q3, 

close to current levels. As for OIS/Bor, while the 

optimistic view is that Europe’s debt problems should 

eventually be resolved, the risk is clearly present that 

liquidity/risk premia could rise much more. Both of 

these factors suggest that the risks to the swap 

spread curve are roughly balanced, given the typical 

driving forces of the level of rates and OIS/Bor. 

However, it is useful to know that the supply factor 

could be gradually working against the spread curve. 

The conclusion is that, in the short term, it is worth 

fading the inversion from an RV perspective, hedged 

with OIS/Bor spreads. In the long term however, the 

typical factors of liquidity premium and the level of 

rates will dictate the spread curve, and even then a 

steepening will find resistance from the supply factor. 

Looking at the longer end of the spread curve 

The ‘hump’ of the Treasury curve, or the sector of old 

bonds between the 10y and 30y maturity points, has 

been richening on the curve for over a year and the 

ASW fly is now at historically extreme levels (see 

Chart 4). We wrote about this in mid-April, and the 

Tsy supply announcement suggests that there are 

still no immediate reasons for fading the richness in 

the hump. In fact, we are watchful of a further relative 

rise in 20y ASWs as 10y and 30y supply remain near 

the current levels. 

The ASW fly can be effectively modelled using two 

inputs that we find have good explanatory power: the 

VIX volatility index and, to a lesser extent, the 

Eurodollar slope (model results also plotted on Chart 

4). A higher VIX suggests a relatively cheaper hump, 

perhaps due to a decrease in risk appetite which 

leads investors to prefer the liquidity advantage in 

benchmark 10y and 30y notes rather than old bonds. 

Meanwhile, a higher money-market slope also tends 

to bring about a cheaper hump. This is because a 

Chart 3: Spread Curve Looks Historically Low, 

But is the Ratio of 2y to 10y Supply a Factor? 

30 

25 

Residual 

Supply Factor (2y supply over 10y supply) 

6 

20 

5 

15 

10 

4 

5 

0 

-5 

3 

-10 

-15 

2 

-20 

-25 

1 

Sep-00 Mar-03 Aug-05 Feb-08 Jul-10 


0 

-20 

-40 

-60 

-80 

-100 

-120 

Chart 4: 10s20s30s ASW Fly, and Model 

10s20s30s ASW Fly 

Model 

-140 

Jan-95 Sep-97 Jun-00 Mar-03 Dec-05 Sep-08 


50 

40 

30 

20 

10 

-10 

-20 

-30 

-40 

Chart 5: Supply Can Explain Model Residual 

0 

-50% 

-50 

-100% 

Jan-95 Sep-97 Jun-00 Mar-03 Dec-05 Sep-08 Jun-11 


Residual 

YoY Change in 10y+30y Supply (14M Lag) 

150% 

100% 

50% 

0% 



34 


steep curve is typically associated with low front-end 

rates and more pronounced convexity along the yield 

curve. 

There seem to be two main periods that the model 

fails to capture – in 1999, the hump traded 20-30bp 

cheaper than implied and currently the hump is 

trading 20-30bp richer than implied. One glaring 

factor that was at play in both these periods is longend 

Tsy supply, first declining in 1999 and now on 

the rise in 2010. 

Looking at the model residual (Chart 5), the 

excessive richness/cheapness in the hump has 

historically tracked the year-on-year change in 

10y+30y supply. The chart suggests that there could 

be a further 10-20bp richening to go before 

eventually seeing a reversal, although this is only a 

rough long-term guide. 

Even then, using quantifiable inputs we find there is 

not enough evidence yet for playing for a cheapening 

in the hump. Our economists’ base-case scenario for 

the Fed to remain on hold for around a year suggests 

that the money-market slope should be kept from 

rising in the near future, and the Fed keeping 

monetary conditions loose should continue to support 

liquidity and keep the VIX low. As implied by the 

model, these factors would lead to the hump of the 

curve staying relatively rich. 

Another reason often cited to explain the hump’s 

richness is that, as balance-sheet room has been a 

concern during the crisis, this has led to some of the 

demand for Tsys shifting toward swaps and futures. 

There is already anecdotal evidence of liability 

managers and other hedgers using futures more 

actively. If this were to be at the expense of Tsys, 

then it could mean that demand has shifted from the 

benchmark points (10y and 30y) to the hump of the 

curve, which the US and WN contracts are linked to. 

We can try and isolate the activity of hedgers by 

looking at only commercial positions, and there is 

indeed heightened hedging activity in TY+US (see 

Chart 6, no breakdown available on WN contracts 

yet). 

The risk to our view is that the economic recovery is 

quicker than expected, with increased rate hike 

expectations pointing to a cheapening of the hump. 

In this scenario, the deficit outlook could improve and 

10y+30y Tsy supply would thus be expected to fall, 

also leading to a relative cheapening in the hump. 

These would be gradual factors that we can look out 

for. The only sudden cheapening we can envision is 

if there were even more heightened credit risks from 

the Greece situation, leading to a higher VIX. Barring 

this, the main takeaway is that even though the hump 

of the curve is trading historically rich vs 10s and 

Chart 6: Net Commercial Longs in TY+US 

800,000 

600,000 

400,000 

200,000 

0 

-200,000 

-400,000 

-600,000 

Jun-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 


60% 

40% 

20% 

0% 

Chart 7: Pace of Change in Treasuries 

Outstanding, and 10y Swap Spread 

YoY Change in 1+ Yrs 

-20% 

Debt Outstanding 

130 

Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 


Forecast 

10y Swap Spread (RHS, Inv.) 

30s, we would rather play for a continuation right now 

rather than fade it. 

Overall effect of supply on outright swap spreads 

We have written about this since the start of the year, 

with the main point being that empirical evidence 

supports the intuition that greater supply means 

tighter swap spreads. 

In Chart 7, we show that the best way to use 

issuance data to explain 10y spreads historically is 

by using the y/y % changes in Tsys outstanding, 

rather than the dollar changes or the cumulative 

amount of Tsys outstanding. Since the pace of 

increases is now expected to back away from the 

extreme levels of last year, issuance is unlikely to 

add to further tightening and in fact may exert less 

pressure. While there are several other structural 

factors at play (balance sheet room, low vol/credit 

spread environment, lack of convexity paying), the 

issuance factor alone should reduce the chance of 

seeing 10y spreads make new lows. 

-30 

10 

50 

90 



35 


MBS: Sell MBS for Cheap Vol 

• Mortgages OASs are tighter as MBS didn’t 

react fully to the spike in vol. Selling MBS 

versus rates (duration neutral) would be a 

cheap way to go long vol. We remain negative 

on mortgages with an expectation of overall 

rising risk premium. Payrolls could provide an 

attractive level to initiate new shorts. 

• We continue to like 15Y/30Y and GN/FN 

swaps. 

• Both GNMA and FRE delinquency data 

point to a relief. 

While the flight to quality (FTQ) continued to hurt 

mortgages, on a vol adjusted basis, mortgages have 

actually tightened, as they haven’t reacted as much 

to the sharp increase in vol. Chart 1 shows the recent 

Libor OAS history of FN 30Y 4.5s. In large vol 

moves, frequently, mortgages have tended not to 

react to the full extent. Chart 2 shows some days on 

which sharp increases in vol have caused OASs to 

tighten and sharp declines caused OASs to widen. 

With OASs at the tighter end, the discrepancy 

between vol and mortgages could correct over the 

next few days. In short, selling mortgages versus 

rates on a duration-neutral basis would be a cheap 

way to go long vol. 

Mortgages have traded to shorter durations and thus 

the current coupon rate has been kept reasonably in 

check, reducing convexity needs. Furthermore, one 

takeaway this week was that the market has rejected 

the 3.5% level on the 10Y Treasury. While investors 

may have used the rally to sell at higher dollar prices, 

believing in a range-bound environment, we are only 

a hairline away from the 3.5% level. We’re not certain 

that the 10Y can once again convincingly back away 

from the 3.5% level as it did on Wednesday, as 

selling in the next rally may be less pronounced. On 

the higher side, recall that the market had also 

rejected the 4% level on the 10Y Treasury during the 

previous auction cycle. So any break away from this 

range-bound environment may catch some investors 

off guard, and be supportive for vol. 

Despite their richening over the past week, we 

continue to favour 15Y/30Y swaps, particularly 15Y 

4/30Y 4.5s as short mortgage basis and long vol 

expression. While 15s/30s are a steepener, we have 

seen bull flatteners in the context of FTQ flows, which 

have also caused an increase in vol, making this 

trade attractive in either rate direction. 

25 

20 

15 

10 

5 

0 

Chart 1: Recent LOAS History of 4.5s 

1-Mar 15-Mar 29-Mar 12-Apr 26-Apr 

Source: Yield Book 

Chart 2: FN 5% OAS Changes on Large Vol 

Moves 

OAS Chg Vega Chg Gamma Chg 

5/4/10 -6 6 7 

10/9/09 -6 4 11 

7/2/09 5 -3 -10 

6/9/09 9 -3 -7 

6/1/09 -10 9 21 

Source: BNP Paribas, Yield Book, Bloomberg 

1300000 

1200000 

1100000 

1000000 

900000 

800000 

700000 

600000 

500000 

Chart 3: Excess Reserves vs. Equities 

1/1/09 

2/1/09 

3/1/09 

4/1/09 

5/1/09 

6/1/09 

7/1/09 

8/1/09 

9/1/09 

10/1/09 

11/1/09 

12/1/09 

1/1/10 

2/1/10 

3/1/10 

4/1/10 

5/1/10 


Excess Reserves 

One theme we have frequently highlighted is the 

significant decline in risk premium that can likely be 

traced back to the Fed’s mortgage purchases. But as 

mortgage purchases have ceased, and excess 

reserves are on the decline, no new cash is being 

created that can chase assets on weakness. Chart 3 

shows that equities have closely followed excess 

reserves with some lag in both directions. The 

significant correlation among risky asset classes 

seen in Charts 4 and 5 imply that if FTQ continues, 

mortgages and other risky asset classes could 

continue to suffer in tandem and reinforce the 

DJIA 

12000 

11000 

10000 

9000 

8000 

7000 

6000 

Anish Lohokare/Timi Ajibola 7 May 2010 


36 


decline. We continue to maintain our underweight 

mortgage position with an expectation of an overall 

increase in risk premia. Payrolls, usually supportive 

mortgages, may present a good opportunity to initiate 

new mortgage shorts. 

As we highlighted last week, GNs haven’t benefited 

from the rally in Treasuries due to the FTQ, despite 

representing sovereign US credit, a theme echoed 

this week. But with Asia back from Golden Week, 

and as we close in on structure final date for CMOs, 

GN/FN swaps hold value. We prefer ‘current’ coupon 

rather than premium coupon swaps due to the 

spectre of TBW buyouts. That said, as discussed in 

the next subsection, GN delinquencies and CBRs are 

on a decline, with voluntary prepayments quite low, 

and thus beyond the TBW buyout possibility, 

premium GN/FN swaps also offer value. 

GNMA DLQ and CBRs decline 

The GNMA delinquency report for March (released 

with a one-month delay) showed a decline in 90+ day 

delinquencies across most issuers. For instance, 

BofA 90+ day delinquencies declined from 1.1 to 

0.6%, Chase declined from 2.53 to 2.27, Citi declined 

from 1.25 to 1.13 and Wells declined from 0.27 to 

0.23; total delinquencies declined from 2.1 to 1.9. 

With the exception of Chase where conditional 

buyout rates “CBRs” increased from 6.2 to 7.2, CBRs 

also declined for most top issuers. For instance, 

CBRs decreased for BofA from 16.1 to 10.5, for Citi 

from 7.6 to 8.3 and for Wells from 7.9 to 5.5. The 

delinquent numbers are based on remaining balance 

of pools each month after buyouts (Charts 7-9). 

A separate FHA report released at the end of April 

also showed that delinquencies declined from 9.17 in 

February to 8.76 in March. However, TBW 

delinquencies continue to creep higher and now 

stand at 18.50%. We had also highlighted GMAC as 

having the potential for increased buyouts due to 

their 90+ day approaching the 5% threshold. GMAC's 

90+ day delinquencies increased from 4.93 to 5.00. 

The CBR increased for GMAC from 1.1 to 1.9, while 

it decreased for all GNMA issuers from 8.8 to 6.2. It 

seems like GMAC might just be buying out enough 

loans to keep in compliance with the GNMA 

requirement. 

FRE delinquencies decline as well 

Freddie Mac's aggregate 90+ day delinquencies fell 

for the first time in recent history, from 4.20% to 

4.13%; both CE and non-CE loans reflected declines, 

particularly the former (9.12% to 8.87%). Note that, 

starting this month, FRE also retroactively added 

structured transaction delinquencies to the mix. The 

90-119 and 120+ by coupon and vintages remaining 

in pools also reflected declines. The retained portfolio 

increased to USD 753.3bn from USD 732.2bn, 

12000 

11000 

10000 

9000 

8000 

7000 

6000 

Dec-08 

Jan-09 


210 

190 

170 

150 

130 

110 

90 

70 

50 

4/1/2009 

5/1/2009 

Chart 4: Equities vs. ABX 

DJIA ABX-HE 06-1 

Feb-09 

Mar-09 

Apr-09 

May-09 

Jun-09 

Jul-09 

Aug-09 

Sep-09 

Oct-09 

Nov-09 

Dec-09 

Jan-10 

Feb-10 

Mar-10 

Apr-10 

Chart 5: Corp Spreads vs. Oil 

6/1/2009 


AAA 5Y Corp CDS 

7/1/2009 

8/1/2009 

9/1/2009 

10/1/2009 

Crude Oil Px (rhs, reverse axis) 

11/1/2009 

12/1/2009 

1/1/2010 

2/1/2010 

3/1/2010 

4/1/2010 

5/1/2010 

Chart 6: GN vs. FN Premium Prepays 

Total CPRs 

GN 6 Mar FN 6 Est* GN 6.5 Mar FN 6.5 Est* 

2009 24 23 26 23 

2008 27 35 27 37 

2007 26 32 24 40 

2006 24 33 22 35 

2005 19 27 19 32 

Voluntary CPRs 

GN 6 Mar FN 6 Est* GN 6.5 Mar FN 6.5 Est* 

2009 15 18 15 23 

2008 16 27 14 25 

2007 14 23 11 22 

2006 15 23 12 21 

2005 9 14 6 16 


* Post buyout terminal speeds 

reflecting a USD 51bn increase in whole loans with 

agency MBS declining USD 28.5bn. Both numbers 

mainly reflected FRE buyouts and the latter also 

some FNM buyouts. Note that the portfolio size is 

capped at USD 810bn at the end of 2010 (Charts 10, 

11, 12 and 13). 

Positive housing seasonals and particularly the boost 

before the housing tax credit expiry in April, may 

have contributed to decline in delinquencies. 

95 

90 

85 

80 

75 

70 

65 

60 

55 

40 

45 

50 

55 

60 

65 

70 

75 

80 

85 

90 



37 


Chart 7: 90+ Day Delinquencies for Top GNMA 

Issuers 

BofA Chase CITI GMAC TBW WFHM 

31-Mar-10 0.60 2.27 1.13 5.00 18.50 0.23 

28-Feb-10 1.10 2.53 1.25 4.93 18.00 0.27 

31-Jan-10 2.20 2.56 1.27 4.71 17.50 0.38 

31-Dec-09 1.70 2.40 1.32 4.40 16.40 0.64 

30-Nov-09 5.30 2.36 1.31 4.28 15.10 0.96 

31-Oct-09 4.90 2.16 5.71 3.87 13.80 1.27 

30-Sep-09 4.50 2.30 5.50 3.70 12.00 1.43 

31-Aug-09 4.60 2.16 5.29 3.30 10.70 1.86 

31-Jul-09 4.50 3.33 5.07 3.05 8.90 1.71 

30-Jun-09 4.50 2.75 4.84 2.86 8.40 1.59 

31-May-09 4.40 2.03 4.71 2.68 7.70 2.06 

30-Apr-09 4.20 1.35 4.49 2.53 7.20 2.57 

31-Mar-09 4.20 0.79 4.25 2.66 7.20 2.84 

28-Feb-09 4.30 0.90 4.33 2.70 7.10 3.11 

31-Jan-09 4.50 0.98 4.37 2.59 6.90 3.19 


Chart 8: CBRs for Top GNMA Issuers 

BofA Chase CITI GMAC TBW WFHM 

31-Mar-10 10.5 7.2 7.6 1.9 0.5 5.5 

28-Feb-10 16.1 6.2 8.3 1.1 - 7.9 

31-Jan-10 1.5 7.0 9.5 1.0 - 10.5 

31-Dec-09 38.6 7.0 9.7 - - 10.6 

30-Nov-09 0.6 7.0 50.0 0.1 - 10.7 

31-Oct-09 0.7 10.2 6.9 3.6 - 9.0 

30-Sep-09 3.9 7.6 5.8 1.0 - 11.1 

31-Aug-09 0.8 20.5 5.8 1.1 - 4.0 

31-Jul-09 0.7 0.1 4.2 1.0 0.6 3.0 

30-Jun-09 0.6 0.1 4.4 1.1 0.6 8.9 

31-May-09 0.5 0.1 4.3 0.8 1.6 8.8 

30-Apr-09 0.2 0.3 3.8 0.9 0.9 5.4 

31-Mar-09 0.1 7.9 3.2 0.8 0.2 4.5 

28-Feb-09 2.2 8.8 5.1 0.5 0.9 3.8 

31-Jan-09 2.6 9.9 2.7 0.4 0.2 2.6 


CBRs 

Chart 9: CBRS CBRs for GMAC versus All GNMA 

Issuers 

20 

18 

GMAC 

16 

All Issuers 

14 

12 

10 

8 

6 

4 

2 

0 

Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 


Chart 10: Prepayment Improvement due to 

Lower Delinquencies 

Approx CPR benefit (calculations are UPB weighted) 

30Ys 5.0% 5.5% 6.0% 6.5% 

2009 0.0 (0.2) (0.9) (4.3) 

2008 (0.3) (0.6) (1.9) (2.2) 

2007 (1.5) (1.4) (2.6) (5.2) 

2006 (2.0) (2.0) (2.7) (3.2) 

2005 (1.0) (0.7) (2.0) (4.8) 

Source: Freddie Mac, BNP Paribas 

Chart 11: About 55-60% Loans Going From 

90-119 to 120+ Day Delinquencies 

Feb to Mar 90-119 to 120+ D Transition 

2009 66% 53% 62% 

2008 58% 57% 57% 59% 

2007 52% 57% 57% 56% 

2006 57% 59% 58% 60% 

2005 55% 58% 53% 51% 

2004 and Prior 50% 50% 48% 48% 

Source: Freddie Mac 

Fed H.8 report shows growth in bank MBS assets 

The most recent Federal Reserve H.8 report showed 

a USD 8.6bn increase to USD 982.5bn in bank MBS 

holdings for the week ending 12 April. The previous 

week had also shown a USD 9.6bn increase. Since 

the end of March, bank MBS holdings have 

increased by USD 13.2bn, but with higher dollar 

prices, it is questionable whether these purchases 

can be sustained. 

Chart 14: Domestically Chartered Commercial 

Banks’ MBS Holdings 

1,000 

$ bn 

990 

980 

970 

960 

950 

940 

930 

920 

910 

Source: Federal Reserve 

Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 



38 


Chart 12: 90-119 Day Dlq for FRE 

90-119 D Dlq in # of loan terms 

30Ys 

5 5.5 6 6.5 

Feb Mar Diff Feb Mar Diff Feb Mar Diff Feb Mar Diff 

2009 0.04% 0.04% 0.00% 0.11% 0.13% 0.02% 0.21% 0.26% 0.05% N/A 0.00% 

2008 0.38% 0.33% -0.05% 0.63% 0.55% -0.08% 0.89% 0.80% -0.09% 1.30% 1.14% -0.16% 

2007 0.73% 0.71% -0.01% 0.94% 0.82% -0.11% 1.30% 1.13% -0.17% 1.89% 1.58% -0.31% 

2006 0.74% 0.61% -0.13% 0.91% 0.79% -0.12% 1.05% 0.94% -0.10% 1.36% 1.19% -0.17% 

2005 0.60% 0.50% -0.10% 0.76% 0.66% -0.10% 1.08% 0.95% -0.13% 1.50% 1.39% -0.12% 

2004 and Prior 0.30% 0.24% -0.06% 0.43% 0.35% -0.08% 0.51% 0.43% -0.08% 0.52% 0.43% -0.09% 


Chart 13: 120+ Day Dlq for FRE 

120+ D Dlq in # of loan terms 

5 5.5 6 6.5 

30Ys Feb Mar Diff Feb Mar Diff Feb Mar Diff Feb Mar Diff 

2009 0.02% 0.02% 0.00% 0.08% 0.06% -0.02% 0.15% 0.13% -0.02% 0.43% 0.00% -0.43% 

2008 0.24% 0.22% -0.02% 0.41% 0.36% -0.05% 0.61% 0.51% -0.11% 0.98% 0.76% -0.22% 

2007 0.46% 0.38% -0.09% 0.65% 0.54% -0.11% 0.91% 0.74% -0.17% 1.38% 1.06% -0.32% 

2006 0.53% 0.43% -0.10% 0.65% 0.53% -0.11% 0.77% 0.61% -0.16% 0.97% 0.81% -0.16% 

2005 0.39% 0.33% -0.07% 0.49% 0.44% -0.05% 0.77% 0.58% -0.19% 0.96% 0.77% -0.19% 

2004 and Prior 0.18% 0.15% -0.03% 0.26% 0.22% -0.05% 0.29% 0.25% -0.04% 0.29% 0.25% -0.04% 




39 


US Gamma: Vol Plays Catch-Up with Turmoil 

• With markets in turmoil and the need for 

protection against lower rates magnified, vol 

has finally been bid up across the grid. 

However, it still lags in the gamma sector given 

the extent of the rate moves. 

• Of particular note is gamma vol on 10y 

tails, which is not only below longer expiries 

but is still low on an absolute basis given that 

the 10y rate has made new YTD lows. 

• STRATEGY: 3m10y should enjoy solid 

support until rates begin to stabilise, with 

receiver skew rising in the process. For those 

looking to be positioned for further stress in the 

financial markets, going long low strike vols is a 

good way to express this view. 

Chart 1: High Delivered Vol => High Gamma 

Vol… 

300 

225 

150 

75 

3m10y ATM Vol 

10y Realized Vol 

0 

Jan-08 Aug-08 Mar-09 Oct-09 May-10 

220 

200 

Chart 2: …and an Inverted Vol Surface 

3m10y ATM Vol 

3m10y/2y10y Vol Ratio (RHS) 

160% 

150% 

180 

140% 

Financial markets are gripped by fear, driven by the 

contagion risk in the eurozone. Spreads are widening 

briskly across all products from OIS/BOR to 

mortgages (on a nominal basis vs 10y Tsy) to 

corporates, as equities also continue to slide around 

the globe. This has led to the pain trade playing out 

in rates, with the 10y Tsy and swap rates making 

new YTD lows and the rate curve flattening in the 

rally (although in Wednesday’s move, the Treasury 

curve bull-steepened more in line with typical flight to 

quality). 

With the increased realised volatility, implieds have 

found a new life too, as they should (Chart 1), but the 

gamma sector still lags longer expiries. Typically, 

when implied vols rise in response to big swings in 

the market, that tends to boost short expiries the 

most. This time too, the relative pickup in gamma vol 

did happen, but certainly not to the extent that one 

would expect (Chart 2). The argument that there is 

more room for gamma vol to rise becomes clearer 

when the absolute level of rates is considered: as 

rates close in on and break through a wellestablished 

range, either at the top or bottom end, 

vol is typically bid up. The 10y Treasury and swap 

rates have just dipped below 3.60%, making new 

lows for the year. Yet, as can be seen in Chart 3, 

implied vols still sit close to the bottom of their range, 

especially in relation to where they were trading in 

the period surrounding Lehman’s collapse. So is the 

vol market signalling a full-blown panic? Not 

exactly…not yet anyway. 

Skew provides another perspective on this last point: 

receiver vol has been trading below payer skew in 

160 

140 

120 

100 

130% 

120% 

110% 

100% 

90% 

80 

80% 


Chart 3: New Low in Rates Should Boost Vol 

225 

200 

175 

150 

125 

100 

3m10y ATM Vol 

10y Swap Rate (RHS) 

75 

2.0 


Chart 4: Receiver Skew is Up, but Nowhere near 

the Highs Seen in 2008 

5.0 

4.5 

4.0 

3.5 

3.0 

2.5 

2.0 

0.7 



10y Swap Rate 

50bp 3m10y Rcvr/Payer Vol Ratio 

(RHS) 

1.1 

1.0 

0.9 

0.8 

5.0 

4.5 

4.0 

3.5 

3.0 

2.5 

Bulent Baygun/ Rohit Garg 7 May 2010 


40 


the gamma sector for some time now. This has 

indicated a lack of concern about the possibility of a 

near-term strong rally across the curve. If anything, 

there was more anxiety about a runaway sell-off, 

which intensified every time the 10y rate approached 

4%. Judging by the receiver to payer vol ratio, the 

most recent rate move seems to have shaken the 

market’s complacency about the risk of lower rates, 

with low strike receivers gaining ground. 

However, the ratio is still below 100%. This is in 

contrast to the picture back in late 2008 (Chart 4) 

when the rate curve experienced massive bull 

flattening. In other words, receiver skew is not priced 

fully for a continuation of the pain trade that the 

market is worried about. 

Bulent Baygun/ Rohit Garg 7 May 2010 


41 


EUR: Could The Long End Collapse? 

• The 10-30y spread of the swap curve has 

flattened aggressively over the last few days. It 

is now close to very low levels if we exclude the 

liquidity crisis period. 

Chart 1: 10-30y and Liquidity 

• The question is whether or not the spread 

will collapse again in the near term. 

• STRATEGY: Structural flatteners will take 

place in H2. The 3m10y30y looks attractive at 

30bp. 

Strong compression, sign of tension on liquidity? 

The 10-30y spread on the swap curve has tightened 

significantly from mid-April. The curve has flattened 

from 43bp to 31bp on this segment and is now close 

to very low levels in historic terms. Given the recent 

rise in risk aversion and increases in liquidity spreads 

(OIS/BOR, swap spreads), the risk of suffering a 

collapse along the lines of those seen in June and 

December 2008 could be seen as gradually rising. 

Indeed, liquidity conditions have deteriorated slightly 

recently and liquidity spreads have stretched. 

However, the magnitude of the rewidening is far 

more limited than what happened when there was a 

crash in liquidity that pulled the back end of the curve 

into negative territory. The impact of these limited 

tensions on the back end of the curve is therefore 

likely to remain relatively subdued. 

The usual suspect: a steeper front end 

The negative correlation between the slope at the 

front end and the slope at the back end of the curve 

is strong over the long term. The front end has 

recently resteepened slightly. This explains the 

flattening at the back end. The extension of the 

resteepening at the front end should remain limited. 

Not only there is little scope for aggressive short-term 

expectations with regard to rate increases, but the 

decline in excess liquidity at the start of July could 

even drive a flattening bias at the front end of the 

curve. As a result, it seems that the potential for the 

long end to flatten further is limited near term. 

A more pronounced flattening when liquidity falls 

When liquidity starts to be drained in July, the bond 

market curve will shift to a structural flattening trend 

that will take place in all segments. The back end of 

the curve will be submitted to this movement as well. 

Strategy: Near term, pay the 10-30y in the 30-32bp 

area. Structural flatteners will take place in H2. The 

3m10y30y looks attractive at 30bp. 


Chart 2: No Big Tensions on Liquidity 


Chart 3: The Front End and the Back End 


Patrick Jacq 7 May 2010 


42 


EUR: Limited Nervousness at ECB Tenders 

• Recent ECB tenders (1-week and 3-month) 

showed signs of nervousness, while liquidity 

spreads in markets reflected limited pressures. 

Chart 1: Upward Pressure on OIS/BOR Spreads 

• The global environment favours such limited 

pressures, but the ECB’s upcoming operations 

could add to them. 

• STRATEGY: Keep OIS/BOR spread paying 

interest for the moment. 

Only signs of nervousness so far… 

There were some signs of nervousness at the latest 

two tenders conducted by the ECB. At the first 

3-month tender at variable rates, while the ECB had 

announced an indicative allocation of EUR 15bn 

(versus 3.3bn maturing and a large excess of 

liquidity), and despite a low number of bidders, the 

maximum bid rate (and allocated) was 1.50%, 50bp 

above the minimum bid rate and just 25bp below the 

rate at the marginal lending facility. This was not a 

sign of pressures coming from a reduced allocation. 

Rather, it was a sign that a limited number of bidders 

feared that the ECB could, in fact, allot significantly 

less than the indicative amount and wanted to be 

sure that they would receive the amount they bid. 

This shows that as soon as the ECB allows bid rates 

to climb, the move is significant, and surely more 

significant than the ECB would like. Indeed, the 

average weighted rate was 1.15%, with a spread on 

the refi rate well above the average spread seen at 

this kind of operation before the liquidity crisis started 

in 2007 (6-7bp). 

Nervousness was also seen at this week’s weekly 

tender, despite the fixed rate and full allotment 

procedure. Demand for 1-week liquidity rose along 

with the number of bidders from the regular number 

of around 65 to 76. The increase in the number of 

bidders reflects either that a larger number of banks 

wish to remain hidden when buying liquidity, or a 

moderate increase of the number of banks struggling 

to access liquidity at market conditions. In both 

cases, this is not the sign of fully relaxed conditions. 

When, at the same time, OIS/BOR spreads widen 

significantly, though from very low levels, it is a sign 

that there is some nervousness in the market at the 

moment. The global situation (wider spreads, higher 

volatility and lower risk appetite) could explain this 

modest increase in nervousness which, clearly, has 

remained limited so far. But these signs were clear 

enough to attract attention and the ECB’s upcoming 

tenders will be closely scrutinised. 


Upcoming tenders more at risk 

As the global situation is not improving at all with 

respect to risk aversion, credit assessment and 

access to market liquidity, upcoming tenders should 

continue to point to nervousness if not tensions. The 

next 3-month LTRO will be conducted at a variable 

rate, but this time more than EUR 10bn is maturing 

(EUR 10.2bn). We saw last time that, although the 

indicative amount of EUR 15bn was more than four 

times the amount expiring, there were bids 50bp 

above the refi rate. If the ECB wants to avoid the 

same risk, it will have to keep at least the same ratio 

between the indicative amount and the amount that 

will be demanded. This is why the ECB could 

announce an indicative amount in the region of 

EUR 30-35bn in order to keep market participants 

confident they will be allotted. At the same time, the 

risk is, with a large indicative amount, to see almost 

all bids at the minimum rate. 

When it comes to the weekly tender the ECB will 

conduct next week, demand and the number of 

bidders will provide evidence as to whether this 

week’s nervousness was a short-lived incident or if 

tensions on liquidity are gradually mounting. Current 

market conditions do not point to signs of an 

improvement and therefore demand at next week’s 

tender could be as high as it was this week, although 

the market is still running with a large excess of 

liquidity compared with needs. Such a confirmation 

will keep short-term spreads on the wide side in 

coming days. 

Strategy: Current conditions are unlikely to favour a 

reduction of stress. Maintain OIS/BOR spreads 

paying interest for the moment. 

Patrick Jacq 7 May 2010 


43 


EGBs: Market Update and Top Trade Ideas 

• Contagion to Iberian countries has escalated 

as Portugal and Spain have been 

underperforming versus Ireland and Italy 

respectively. This has resulted in a pronounced 

flattening of Iberian ASW curves. We believe that 

this could be reversed once the first 

disbursement of the EUR 110bn aid package to 

Greece takes place. 

• In terms of pressure points for Iberian 

countries, Portugal faces a EUR 4.6bn 

redemption on 20 May, while Spain’s major 

redemptions of EUR 17.7bn takes place on 30 

July. 

• Trade Idea: After closing out PGBs 2/10s 

flattener vs SPGBs steepener last week at a profit 

of 68bp, we think it is time to start monitoring the 

opposite trade. Since PGBs have become too 

volatile, we prefer an outright 2/5s steepener on 

the Spanish ASW curve currently at 

-15bp. A more defensive way to play this would 

be a 2/5s BOX versus flatteners in Italy, as the 

BOX is mainly directional on the Spanish 2/5s. 

The BOX is currently at -16bp and we target the 

area of +10bp. The main risk is further 

acceleration of contagion to Spain, while Italy 

remains resilient, something we do not consider 

likely. 

Escalation of contagion to Iberia 

Agreement on a EUR 110bn package for Greece did 

not have the desired effect of containing the 

peripheral spreads widening theme, not only in 

Greece but in Iberian countries too. Chart 1 shows 

how the 10y Portuguese and Spanish spreads have 

widened lately and stand above the more resilient 

Irish and Italian spreads respectively. Rating 

downgrades and rumours of more countries seeking 

EU aid packages have played their role in the 

accelerated widening pattern that we have been 

seeing this month. 

On a positive note, Spain managed to issue EUR 

2.35bn at Thursday’s morning Bono Apr-15 auction 

with quite a good bid-to-cover ratio of 2.35 versus 

1.48 at its launch earlier in March. But the weighted 

average yield was at 3.53%, 70bp higher than at its 

launch. Despite the expensive borrowing terms, 

demonstrating that access to the primary markets 

remains intact even under these extreme market 

conditions is key. Portugal also bought back EUR 

1bn of OT May-10, the bond that matures on 20 May 

(one day after the large GGB redemption in Greece) 

250 

200 

150 

100 

Chart 1: Escalation of Contagion to Iberia 


Chart 2: Bond Redemptions in 2010 - 2015 

Billions 

50 

0 


100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

18 

5 

9 

47 

52 

10 8 

29 31 

Greece Portugal Spain 

2010 2011 2012 2013 2014 2015 


Chart 3: PCA – 2 nd Prin. Comp. Loadings 

0.8 

0.6 

0.4 

0.2 

0.0 

-0.2 

-0.4 

-0.6 

OAT/Bund 

NETH/Bund 


RAGB/Bund BGB/Bund BTP/Bund 

PGB/Bund SPGB/Bund Nether/Bund 

OAT/Bund Irish/Bund RFGB/Bund 

March 18th 

May 5th 

FIN/Bund 

BEL/Bund 

AUS/Bund 

ITA/Bund 

and also issued EUR 0.5bn of bills, thereby sending 

a strong signal to the markets that it is comfortable to 

go through with its May redemption. 

Elaborating a bit further on these countries’ funding 

needs, which work as pressure points under current 

market conditions, Chart 2 shows the Greek, Spanish 

and Portuguese bond redemptions over the next five 

years. For 2010, we only present the amount of the 

remaining redemptions. In Portugal, there is only one 

bond redemption (EUR 4.6bn) on 20 May and 

nothing beyond that. The same holds for Spain but 

46 

7 

26 

IRE/Bund 

Escalation of 

Contagion 

SPA/Bund 

41 

11 

31 

POR/Bund 

22 

10 

20 

Risk has become 

more Systemic 

GRE/Bund 

0.8 

0.6 

0.4 

0.2 

0.0 

-0.2 

-0.4 

-0.6 

Ioannis Sokos 7 May 2010 


44 


with the big redemption (EUR 17.7bn) not taking 

place until 30 July. 

The escalation of the contagion effects and the more 

systemic nature of the risk under current 

circumstances can also be seen with a PCA analysis 

on 10y spreads. The second principal component 

(PC) can be seen as a proxy for the credit slope 

among different sovereigns in analogy with a PCA on 

the term structure where the second PC accounts for 

the slope of the curve. Chart 3 shows the factor 

loadings with respect to the second PC for each 10y 

spread. If we look at the RHS of the chart where 

Irish, Spanish, Portuguese & Greek spreads lie and 

compare the loadings today with their values on 18 

March, it can be seen that this curve has flattened, 

implying that Greece has become less of an outlier 

as Portugal, Spain and Ireland to a lesser extent 

have become more sensitive to the second PC too. 

This escalation of contagion effects to other countries 

could work only as an accelerator with respect to EU 

decisions and prompt actions on Greece. The Greek 

MinFin has admitted that there are no funds available 

for the 19 May redemption, while several EU 

countries’ parliaments have yet to vote for the Greek 

aid package. While part of the recent peripherals selloff 

is based on doubts about the unanimity of the 

participation in the aid mechanism and the German 

constitutional court, these will eventually finish after 

19 May. On these grounds, we still think that a 

massive re-steepening of the Greek ASW curve is 

imminent under the umbrella of the EUR 110bn 

package. Of course once the aid mechanism 

implementation doubts are out of the way, the only 

concern will be the actual implementation of the 

Greek fiscal plan and whether or not this will be 

socially acceptable, with the quarterly reports of 

progress being key events in the second half of the 

year. 

Top Trade Ideas 

The latest escalation in contagion has resulted in a 

pronounced flattening of peripheral ASW curves. 

Chart 4 shows the 2/5s slope in Ireland, Italy, 

Portugal and Spain, where all curves now look 

inverted. Portuguese curve has out-flattened the rest, 

but remains far from the Greek 2/5s inversion, 

currently at -300bp. Speaking of the Greek 2/5s in 

ASW, we’ve seen some resistance in the last two 

days with respect to the underperformance of the 

front end. This resistance is expected to become 

stronger once the first disbursement of the aid 

package is delivered and Greece manages to go 

beyond the 19 May redemption with success. Since 

Greece won’t have to visit the primary markets for at 

least two years, the default probability within this 

period will diminish and this should lead to a resteepening 

of both CDS & ASW curves. 

Chart 4: Inversion of ASW 2/5s in Peripherals 

70 

50 

30 

10 

-10 

-30 

-50 

-70 

-90 

-110 

ITA 

SPA 

POR 

-130 



400 

350 

300 

250 

200 

150 

100 

50 

IRE 

Chart 5: ITA/POR/SPA ASW Curves 

0 

2011 2013 2015 2017 2019 


POR ITA SPA 

We believe that the Spanish and Italian inversion of 

2/5s in ASW terms is overdone and should correct 

once the unanimity around the aid mechanism is 

secured and the first disbursement is on its way. Two 

weeks ago, we’ve chosen to play a flattener in 

Portugal versus a steepener in Spain (2/5s ASW 

BOX) in order to benefit from the widespread 

uncertainty around the EU/IMF mechanism. We 

closed this trade ahead of last weekend’s EU/IMF 

announcements at a profit of 68bp. 

We believe now is the time to start monitoring the 

2/5s in order to play the opposite trade, but since 

PGBs have become extremely volatile, we would go 

for an outright steepener of the Spanish curve as our 

first choice this time. The SPGB Apr-12 Vs Apr-15 

spread of ASWs is at -15bp at the moment, and our 

first target would be a disinversion of this curve 

sector. The BTPs Mar-12 Vs Apr-15 spread is +1bp 

as the Italian curve has been more resilient. In the 

event of correction of this flattening move, we’d 

expect the Spanish curve to out-steepen the Italian 

one; therefore a 2/5s ASW BOX between these two 

would be a way to lower volatility, but would curb the 

trade’s upside as well. This BOX trade is directional 

on the Spanish 2/5s ASW, and while the main risk is 

a further acceleration of contagion to Spain, we think 

that, if this happens, not only Italy but all eurozone 

countries will feel the pressure. In that sense, the 

BOX trade offers protection vs outright steepeners. 

400 

350 

300 

250 

200 

150 

100 

50 

0 

Ioannis Sokos 7 May 2010 


45 


UK: Pressures on Gilts Likely? 

• Gilts have benefited from flight-to-quality 

flows in recent sessions. 

• While the UK differs markedly from the 

eurozone periphery, the fiscal challenge which it 

faces is daunting. 

• STRATEGY: On the base of the manifestos 

of the three main parties, we expect the current 

richness of Gilts to fade in the medium term as 

the concerns regarding the eurozone periphery 

become second-order drivers of the sterling 

market, after the domestic challenge of 

restoring fiscal sustainability. 

Chart 1: UK Exposure to Euro periphery and 

Distribution of Gilt Holdings 

250 

225 

200 

175 

150 

125 

100 

75 

50 

25 

0 

UK exposure to Euro periphery debt (USD bn) 

Greece Ireland Italy Portugal Spain 

Rest of the World 

Private non-financial institutions 

Public corporations 

Looking at the recent figures, the answer to the 

question in the title of this note is a resounding no – 

at least in the short term. Indeed, since the latest 

round of downgrades of Greece, Portugal and Spain 

in the past week, the 10-year Gilt futures has rallied 

by 256 ticks! In other words, next to core EGBs, Gilts 

have been considered safe assets by investors who 

have panic-sold euro periphery in the recent 

sessions. 

Going forward, what is the likelihood of contagion 

pressures from the eurozone developing in the Gilts 

market? As mentioned above, it looks negligible in 

the short term. First, the UK has got limited exposure 

to debt (both sovereign and corporate) issued by the 

eurozone periphery. The bottom panel of Chart 1 

shows UK claims on Greece, Ireland, Italy, Portugal 

and Spain: exposure to Greece at USD 12bn is 

negligible, in particular when compared to Germany 

and France whose positions are at USD 43bn and 

USD 74bn, respectively. UK exposure to Ireland is 

USD 193bn, which we deem high; on the other hand, 

Ireland is convincingly addressing the challenges of 

the required fiscal adjustment. Secondly, the UK is 

different from the eurozone periphery with respect to 

the distribution of Gilt holdings. Recall that around 

80% of Greek bonds are held by non-domestic 

investors. The proportion increases to 88% in the 

case of Portugal. As a result, speculation in these 

countries’ sovereign debt has been facilitated by the 

inadequate presence of domestic buy-and-hold type 

investors. Clearly, in the UK, the situation is very 

different with overseas investors accounting for only 

around 28% of the Gilt market (Chart 1, bottom 

panel). 

In the medium term, the picture is likely to gradually 

change in the event of the new government failing to 

Other financial institutions 

Local authorities 

Insurance and pension funds 

Households 

Building societies 

Banks 

Source: BIS, BNP Paribas 

Distribution of Gilt holdings (% of Mkt) 

0.0 0.2 0.4 0.6 0.8 1.0 

Chart 2: Evolution of the Average Life, Coupon 

and Yield of the Gilt Market 

8.0 

7.5 

7.0 

6.5 

6.0 

5.5 

5.0 

4.5 

4.0 

3.5 

3.0 

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 


Annual yield 

Coupon 

Years to Maturity (RHS) 

16.00 

15.00 

14.00 

13.00 

12.00 

11.00 

10.00 

implement the much-needed fiscal adjustment. 

However, it is worth highlighting that the structure of 

the Gilt market features a property which will prove 

helpful if fiscal tightening is delayed. As Chart 2 

shows, the average time to maturity of the nominal 

Gilt market has increased in the second half of the 

past decade; it is now around 14.5 years. This 

compares with 4.22 years for the US Treasury 

market. However, such trait will not be able to 

prevent structural pressure in the medium term if 

9.00 

8.00 

Matteo Regesta 7 May 2010 


46 


measures are not promptly taken to tackle the huge 

budget deficit. 

The problem is that, as has been pointed out by the 

IFS, the three main parties do not differ much in 

terms of the size and the timing of the tightening they 

plan to implement: the size is roughly GBP 71bn (or 

4.8% of national income) by 2017 while, when it 

comes to timing, the Conservatives plan to borrow 

some 6% less than Labour and Liberal Democrats by 

completing the job a year earlier. At the same time, 

and crucially, no party has clearly identified the cuts 

they would deliver to allow the above target to be 

achieved. This cannot be overlooked. Markets are 

efficient in the medium term and will wake up to the 

facts described above. 

At the time this note goes to press, polling stations 

are still open. The simple strategy we suggest is to 

ride the market in the aftermath of the election 

results. In particular, there should be scope for a rally 

in the sessions immediately following the election in 

the event of the Conservatives gaining an absolute 

majority as such result is not priced in: as discussed 

above, the current rally is not simply being generated 

by a bout of risk aversion. However, for the medium 

term, we retain our bearish outlook for the time being 

and would expect the current richness of Gilts to fade 

as the concerns regarding the eurozone periphery 

become second-order drivers of the sterling market, 

after the domestic challenge of restoring fiscal 

sustainability. 

Matteo Regesta 7 May 2010 


47 


Global Inflation Watch 

April Inflation: Easter Effect Unwinding 

The eurozone flash estimate for April printed 1.5% 

y/y, up 0.1pp on the month and the highest rate since 

December 2008. 

We will have to wait until mid-May to get the 

breakdown, but we expect it to reveal that the rise in 

inflation over the month was purely driven by food 

and energy inflation. Energy price base effects are 

now past, but a rise in oil prices over the month to 

above USD 85/bbl should have pushed up energy 

inflation. In addition, food price base effects are only 

now really kicking in and point to a rise in food 

inflation through the rest of the spring and the 

summer. 

In contrast, core inflation should have declined 

sharply in April after rising in March, as the timing of 

Easter continued to play havoc with the data. Nearly 

all the strength in core in March was explained by 

just two components – package holiday and hotel 

prices. Because Easter fell in early April this year, we 

believe that some of the traditional Easter strength 

you typically see in these components bled into the 

March data. As a result, this should have unwound in 

April, pushing core back down to a new record low of 

0.7% y/y. These dynamics are consistent with what 

we saw in the weak preliminary German data, which 

suggested that core inflation there fell by 0.7pp in 

April to reach 0.2% y/y. 

Easter distortions will finally work their way out in 

May, when core inflation is likely to increase again 

but finish at a lower level than in February, confirming 

that the trend in core inflation remains downwards. 

We will get more insight into the dynamics for April in 

the coming week with data for France, Spain, Italy 

and Germany. The French data is the most important 

release – we have already had preliminary data for 

the others. We expect French CPI inflation to have 

ticked higher in April by 0.1pp to reach 1.7%, its 

highest level since November 2008. The move 

should be entirely due to energy – following a near 

10% hike in the regulated price of natural gas. In 

contrast, core inflation should have eased, even 

though the French data are typically not as affected 

by Easter seasonality as the German numbers. 

Service price inflation should prove the driver, 

pushed lower by declining wage costs. 

Chart 1: Package Holiday Prices 

(Spain and Germany) 


Chart 2: Eurozone HICP (% y/y) 


Chart 3: French HICP (% y/y) 


Finally, note that there is a chance that core inflation 

turned negative in Spain when we get the breakdown 

in the final release on 14 May. 

Luigi Speranza/Eoin O’Callaghan 7 May 2010 


48 


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) 109.6 - 1.4 109.3 - 1.3 121.2 - 1.6 119.8 - 1.5 218.7 - 1.9 218.7 - 2.0 

2011 (1) 110.8 - 1.0 110.3 - 0.9 122.5 - 1.1 121.0 - 1.0 220.8 - 1.0 220.8 - 1.0 

Q3 2009 108.0 - -0.4 107.8 - -0.5 119.4 - -0.4 118.1 - -0.4 215.4 - -1.6 215.7 - -1.6 

Q4 2009 108.6 - 0.4 108.4 - 0.3 119.7 - 0.4 118.4 - 0.3 216.8 - 1.5 216.2 - 1.4 

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 (1) 109.9 - 1.5 109.6 - 1.4 121.4 - 1.7 120.1 - 1.6 217.8 - 2.0 218.8 - 2.1 

Q3 2010 (1) 109.7 - 1.5 109.3 - 1.4 121.4 - 1.7 120.1 - 1.6 219.1 - 1.7 219.4 - 1.7 

Q4 2010 (1) 110.4 - 1.7 110.1 - 1.6 121.6 - 1.6 120.3 - 1.6 220.3 - 1.6 219.7 - 1.6 

Q1 2011 (1) 110.1 - 1.4 109.7 - 1.3 121.9 - 1.3 120.5 - 1.3 220.5 - 1.3 220.0 - 1.4 

Q2 2011 (1) 110.9 - 0.9 110.5 - 0.8 122.6 - 1.0 121.2 - 0.9 220.6 - 1.3 221.5 - 1.3 

Jul 09 107.8 -0.7 -0.7 107.51 -0.7 -0.8 119.1 -0.4 -0.7 117.80 -0.4 -0.7 214.8 0.1 -2.0 215.35 -0.2 -2.1 

Aug 09 108.1 0.3 -0.2 107.89 0.4 -0.3 119.7 0.5 -0.2 118.41 0.5 -0.2 215.6 0.4 -1.5 215.83 0.2 -1.5 

Sep 09 108.2 0.0 -0.3 107.91 0.0 -0.5 119.4 -0.2 -0.4 118.12 -0.2 -0.4 215.9 0.2 -1.3 215.97 0.1 -1.3 

Oct 09 108.4 0.2 -0.1 108.16 0.2 -0.3 119.5 0.1 -0.2 118.23 0.1 -0.2 216.4 0.2 -0.2 216.18 0.1 -0.2 

Nov 09 108.5 0.1 0.5 108.28 0.1 0.4 119.6 0.1 0.4 118.31 0.1 0.3 216.9 0.2 1.8 216.33 0.1 1.8 

Dec 09 108.9 0.3 0.9 108.61 0.3 0.8 120.0 0.3 0.9 118.60 0.2 0.8 217.2 0.2 2.8 215.95 -0.2 2.7 

Jan 10 108.1 -0.8 1.0 107.75 -0.8 0.9 119.7 -0.2 1.1 118.32 -0.2 1.0 217.6 0.2 2.7 216.69 0.3 2.6 

Feb 10 108.4 0.3 0.9 108.09 0.3 0.8 120.4 0.6 1.3 118.99 0.6 1.2 217.6 0.0 2.2 216.74 0.0 2.1 

Mar 10 109.4 0.9 1.4 109.09 0.9 1.3 120.9 0.5 1.6 119.58 0.5 1.5 217.7 0.1 2.4 217.63 0.4 2.3 

Apr 10 (1) 109.8 0.4 1.5 109.54 0.4 1.4 121.3 0.3 1.7 119.97 0.3 1.7 217.7 0.0 2.3 218.52 0.4 2.5 

May 10 (1) 110.0 0.2 1.6 109.72 0.2 1.5 121.5 0.1 1.7 120.15 0.1 1.7 217.7 0.0 2.2 218.78 0.1 2.3 

Jun 10 (1) 109.9 -0.1 1.3 109.57 -0.1 1.2 121.5 0.0 1.6 120.15 0.0 1.5 217.9 0.1 1.6 219.07 0.1 1.6 

Jul 10 (1) 109.4 -0.5 1.5 109.00 -0.5 1.4 121.1 -0.3 1.7 119.77 -0.3 1.7 218.6 0.3 1.8 219.23 0.1 1.8 

Aug 10 (1) 109.6 0.2 1.4 109.26 0.2 1.3 121.6 0.4 1.6 120.26 0.4 1.6 219.2 0.3 1.7 219.43 0.1 1.7 

Sep 10 (1) 109.9 0.2 1.6 109.54 0.3 1.5 121.5 -0.1 1.8 120.13 -0.1 1.7 219.7 0.2 1.7 219.67 0.1 1.7 

Oct 10 (1) 110.2 0.3 1.7 109.83 0.3 1.5 121.5 0.0 1.7 120.19 0.1 1.7 220.1 0.2 1.7 219.97 0.1 1.8 

Nov 10 (1) 110.4 0.1 1.7 109.97 0.1 1.6 121.6 0.1 1.6 120.25 0.1 1.6 220.4 0.1 1.6 219.81 -0.1 1.6 

Dec 10 (1) 110.8 0.4 1.7 110.37 0.4 1.6 121.8 0.2 1.5 120.44 0.2 1.6 220.5 0.1 1.5 219.17 -0.3 1.5 

Updated 

Next 

Release 

Apr 30 

Apr HICP (May 18) 

Apr 30 

Apr CPI (May 12) 

May 06 


Source: BNP Paribas, (1) Forecasts 

Chart 4: Eurozone HICP (% y/y) 

Chart 5: US Shelter Prices Drive Core CPI Lower 


Core inflation is forecast to continue grinding lower, as excess 

capacity and the ongoing structural adjustment in a number of 

economies limit firms’ pricing power. 



49 



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 - -1.0 114.3 - 3.1 222.4 - 4.1 302.9 - 1.1 195.1 - 2.0 

2011 (1) 98.8 - -0.5 98.9 - -0.5 116.2 - 1.7 228.9 - 2.9 310.5 - 2.5 198.0 - 1.5 

Q3 2009 99.9 - -2.3 100.1 - -2.3 111.3 - 1.5 214.4 - -1.4 299.5 - -1.2 191.6 - 1.6 

Q4 2009 99.7 - -1.8 99.9 - -1.8 112.1 - 2.1 216.9 - 0.6 301.3 - -0.4 193.2 - 2.3 

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 (1) 99.4 - -1.1 99.4 - -1.1 114.2 - 3.3 222.2 - 4.5 302.3 - 0.9 195.1 - 2.1 

Q3 2010 (1) 98.9 - -1.0 99.2 - -0.9 114.6 - 3.0 223.4 - 4.2 302.5 - 1.0 194.9 - 1.7 

Q4 2010 (1) 99.2 - -0.5 99.4 - -0.5 115.3 - 2.9 224.9 - 3.7 305.4 - 1.4 196.5 - 1.7 

Q1 2011 (1) 99.1 - -0.7 98.6 - -0.7 115.2 - 2.0 226.1 - 3.1 305.5 - 1.4 196.0 - 1.0 

Q2 2011 (1) 98.9 - -0.5 98.9 - -0.5 116.2 - 1.7 228.6 - 2.9 309.6 - 2.4 197.7 - 1.3 

Jul 09 100.0 -0.2 -2.2 100.1 -0.2 -2.2 110.9 -0.1 1.8 213.4 0.0 -1.4 298.8 -0.5 -0.9 191.1 -0.2 1.8 

Aug 09 99.8 -0.2 -2.4 100.1 0.0 -2.4 111.4 0.5 1.6 214.4 0.5 -1.3 299.4 0.2 -0.8 191.5 0.2 1.9 

Sep 09 99.8 0.0 -2.3 100.2 0.1 -2.3 111.5 0.1 1.1 215.3 0.4 -1.4 300.4 0.3 -1.6 192.3 0.4 1.4 

Oct 09 99.7 -0.1 -2.3 100.1 -0.1 -2.2 111.7 0.2 1.5 216.0 0.3 -0.8 301.1 0.3 -1.5 193.0 0.3 1.9 

Nov 09 99.8 0.1 -1.7 99.9 -0.2 -1.7 112.0 0.3 1.9 216.6 0.3 0.3 301.0 0.0 -0.7 193.0 0.0 2.3 

Dec 09 99.7 -0.1 -1.3 99.8 -0.1 -1.3 112.6 0.5 2.8 218.0 0.6 2.4 301.7 0.2 0.9 193.5 0.2 2.7 

Jan 10 99.6 -0.1 -1.3 99.2 -0.6 -1.3 112.4 -0.2 3.4 217.9 0.0 3.7 299.8 -0.6 0.6 193.0 -0.2 2.6 

Feb 10 99.8 0.2 -1.2 99.2 0.0 -1.2 112.9 0.4 3.0 219.2 0.6 3.7 301.6 0.6 1.2 194.2 0.6 2.7 

Mar 10 99.8 0.0 -1.2 99.5 0.3 -1.2 113.5 0.5 3.4 220.7 0.7 4.4 302.3 0.2 1.2 194.7 0.3 2.5 

Apr 10 (1) 99.6 -0.2 -1.2 99.5 0.0 -1.2 114.0 0.4 3.5 221.6 0.4 4.8 302.8 0.2 1.2 195.1 0.2 2.4 

May 10 (1) 99.4 -0.2 -1.1 99.4 -0.1 -1.1 114.3 0.3 3.3 222.2 0.2 4.4 302.0 -0.3 0.8 195.0 -0.1 2.1 

Jun 10 (1) 99.2 -0.2 -1.0 99.3 -0.1 -1.0 114.4 0.0 3.0 222.8 0.3 4.4 302.2 0.1 0.7 195.0 0.0 1.9 

Jul 10 (1) 99.0 -0.2 -1.0 99.1 -0.2 -1.0 114.1 -0.2 2.9 222.6 -0.1 4.3 300.7 -0.5 0.6 194.2 -0.4 1.6 

Aug 10 (1) 98.9 -0.1 -0.9 99.2 0.1 -0.9 114.8 0.7 3.1 223.7 0.5 4.3 302.5 0.6 1.0 194.5 0.2 1.6 

Sep 10 (1) 98.8 -0.1 -1.0 99.2 0.0 -1.0 114.8 0.0 3.0 224.0 0.1 4.0 304.4 0.6 1.3 195.9 0.7 1.8 

Oct 10 (1) 99.2 0.4 -0.5 99.6 0.4 -0.5 115.1 0.2 3.0 224.4 0.2 3.9 304.4 0.0 1.1 196.5 0.3 1.8 

Nov 10 (1) 99.2 0.0 -0.6 99.3 -0.3 -0.6 115.2 0.1 2.9 224.6 0.1 3.7 306.1 0.5 1.7 196.6 0.1 1.9 

Dec 10 (1) 99.1 -0.1 -0.6 99.2 -0.1 -0.6 115.7 0.4 2.7 225.6 0.5 3.5 305.7 -0.1 1.3 196.5 -0.1 1.5 

Updated 

Next 

Release 

Apr 30 


May 06 


May 06 



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. 


CPI inflation surprised again to the upside in March, with strength 

widespread across components. We now expect inflation to remain 

above target for the remainder of the year. 



50 



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) 116.2 1.5 115.3 1.5 128.7 2.3 120.2 1.5 173.3 - 3.2 - - 2.7 

2011 (1) 117.9 1.5 116.8 1.3 131.2 2.0 122.5 1.9 179.0 - 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 (1) 116.0 1.9 1.2 115.2 1.1 1.5 128.9 0.4 2.4 120.3 0.8 1.5 172.3 0.8 3.2 - - 2.7 

Q3 2010 (1) 116.5 1.6 1.5 115.5 1.1 1.4 128.3 -0.5 2.0 120.2 -0.1 1.4 174.1 1.0 3.3 - - 2.5 

Q4 2010 (1) 116.8 1.3 1.7 115.8 1.0 1.2 129.2 0.7 2.0 120.8 0.4 1.2 175.5 0.8 3.5 - - 2.6 

Q1 2011 (1) 117.3 1.6 1.6 116.2 1.5 1.2 129.5 0.3 0.9 121.1 0.2 1.4 176.8 0.7 3.3 - - 2.7 

Q2 2011 (1) 117.7 1.3 1.5 116.7 1.5 1.3 131.0 1.2 1.7 122.5 1.2 1.8 178.1 0.7 3.3 - - 2.9 

Updated 

Next 

Release 

Apr 23 


May 04 


Apr 28 

Q2 CPI (Jul 28) 


Chart 8: Canadian Total vs. Core CPI 

Chart 9: Australian CPI (% y/y) 


Recent gains in house prices point to higher CPI shelter, but the still 

strong CAD is expected to depress the prices of goods. In addition, 

wage pressures continue to ease sharply, pointing to subdued 

inflation overall. 


In the near term, inflation pressures should remain muted. However, 

with the economy growing at an above-trend pace and employment 

picking up quickly, it will not be long before the limited slack in the 

economy is used up, implying upside inflation pressure. 

CPI Data Calendar for the Coming Week 

BNPP 

Day GMT Economy Indicator Previous 

F’cast 

Consensus 

Comment 

Mon 10/05 08:00 Norway CPI (nsa) m/m : Apr 0.5% -0.3% -0.2% 

08:00 CPI (nsa) y/y : Apr 3.4% 2.8% 2.9% 

08:00 CPI-ATE (nsa) y/y : Apr 1.7% 1.7% 1.7% 

Tue 11/05 06:00 Germany CPI (Final) m/m : Apr -0.1% (p) -0.1% -0.1% 

06:00 CPI (Final) y/y : Apr 1.0% (p) 1.0% 1.0% 

06:00 HICP (Final) m/m : Apr -0.1% (p) -0.1% n/a 

06:00 HICP (Final) y/y : Apr 1.0% (p) 1.0% n/a 

07:30 Sweden CPI (nsa) m/m : Apr 0.2% 0.2% n/a 

07:30 CPI (nsa) y/y : Apr 1.2% 1.2% n/a 

07:30 CPIF m/m : Apr 0.3% 0.2% n/a 

07:30 CPIF y/y : Apr 2.5% 2.4% 2.4% 

07:30 Neths CPI m/m : Apr 1.2% 0.2% n/a 

07:30 CPI y/y : Apr 1.0% 1.0% n/a 

Wed 12/05 06:45 France CPI m/m : Apr 0.5% 0.3% 0.3% Up Again 

06:45 CPI y/y : Apr 1.6% 1.7% 1.8% 

06:45 HICP y/y : Apr 0.5% 0.3% n/a 

06:45 HICP y/y : Apr 1.7% 1.9% n/a 

06:45 Ex-Tobacco CPI (Final, nsa) : Apr 119.58 119.97 n/a 

Fri 14/05 07:00 Spain CPI m/m : Apr 1.1% 1.1% n/a 

07:00 CPI y/y : Apr 1.6% 1.5% n/a 

08:00 Italy CPI (Final) m/m : Apr 0.4% (p) 0.4% n/a 

08:00 CPI (Final) y/y : Apr 1.5% (p) 1.5% n/a 

08:00 HICP (Final) m/m : Apr 0.9% (p) 0.9% n/a 

08:00 HICP (Final) y/y : Apr 1.6% (p) 1.6% n/a 

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




51 


Inflation: FTQ Forces Trounce Breakevens 

• GLOBAL: EUR fears hurt BEs everywhere. 

1: Core Outperform Periphs in BE & ASW Disc. 

• EUR: More disparity between core and 

peripherals’ BEs. 

• USD: Increased supply esp. 10y. TIPS rich. 

10 

5 

0 

-5 

-10 

0 

-5 

-10 

BTPEI19 / BUNDEI20 / BTPEI23 Breakeven 

-15 

-20 

-25 

-30 

• GBP: 20y+ inflation swap still the best sell. 

-15 

-20 

-15 

-35 

-40 

GLOBAL: Flight-to-quality forces are dominating 

asset markets as the Greek aid package fails to 

provide support whilst contagion fears (to Portugal, 

Ireland and Spain) are intensifying. Little action from 

the ECB to help and the German Constitutional Court 

challenge are likely to keep uncertainly high in 

Europe. Equities are down 3-5% and oil has fallen 

over 7% and is currently close to, but below, 

USD80/bbl. Global inflation markets have taken a 

battering this week unlike last week when most of the 

decline in breakevens was concentrated in the 

eurozone and a recovery was seen late on. After 

their recent resilience, TIPS breakevens tightened 

the most in line with our view of TIPS richness in real 

yield and breakeven space. Directionality of the 

inflation curve may be returning in EUR and GBP 

where inflation curves steepened significantly in the 

fall in breakevens. In the ongoing volatility and 

illiquidity, we continue to recommend light positioning 

in inflation markets and have a bearish bias on 

breakevens. 

EUR: Breakevens are down sharply led by shorter 

maturities. Peripheral linkers have been under the 

most pressure in breakeven space (and obviously 

real yield space) with the disparity between core and 

non-core ASW discounts growing (up to 20y 

maturities). Core breakevens/ASW discounts held up 

well especially DBReis. We are not convinced risk 

aversion is over and prefer to stay relatively neutral 

despite selective value in EUR breakevens amidst 

strong positive seasonals/carry. Violent market 

moves have left significant RV opportunities although 

we would wait for a stabilisation in risk appetite 

before entering. BUNDei-16 looks extremely rich as 

does the OBLei-13 particularly versus ‘cheap’ 

BTPeis. At the very front end, 1y EUR swaps are 

pricing in around 0.5% more inflation than our 

economists (due to risk of higher indirect taxes?) 

whilst the 2y point (in swap and cash) remains the 

most strikingly rich versus BNPP’s forecasts. We 

continue to favour selling 1y1y inflation forwards 

(almost) everywhere with EUR (and USD) 1y1y 

forward real yield at 0bp! On EUR/FRF speads, we 

still find 5y5y EUR inflation swap fwd relatively 

attractive at 30bp below its FRF counterpart (its low). 

-25 

-30 

-35 

-40 

-45 

-20 

-25 

BTPEI14 / BUNDEI16 / BTPEI19 Breakeven 

BTPEI12 / BOBLEI13 / BTPEI14 Breakeven Rhs 

-30 

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

2: 5y5y EUR Inf Swap at Low Levels Esp. vs FRF 

240 

230 

220 

210 

200 

190 

180 

170 

160 

150 

140 

5 

0 

-5 

-10 

-15 

-20 

-25 

-30 

OATEI20 Breakeven 

OATI23 / OATEI20 / OATI17 Breakeven Rhs 

-35 

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

All Charts Source: BNP Paribas 

E5.5 / F5.5 Breakeven 

USD: TIPS are not immune as a significant 

correction in breakevens takes place, finally. The 

quarterly refunding announcement stated that the US 

Treasury will increase TIPS supply from USD 70- 

80bn to 80-85bn in 2010 with ‘more’ in FY 2011. The 

10y area will bear the brunt of this supply with an 

additional re-opening for new 10y TIPS. Jan maturity 

10y TIPS will be re-opened in March and May, whilst 

Jul maturity 10y TIPS will be re-opened in September 

and November (six 10y TIPS auctions in total) whilst 

the size of 10y auctions will probably be increased 

(to region of USD 10-14bn). The market did not take 

the news well, especially the 10y area. As we have 

stated before, TIPS remain rich in both real yield and 

breakeven space and we stay bearish on BEs here. 

GBP: Strong tightening in front-end breakevens 

sending the inflation curve much steeper. We were 

correct in recommending taking profit on long front 

BEs and 3/30y BE flatteners last week. UKTi-11 is 

still a tad rich vs. BNPP forecasts but UKTi-13 is 

starting to look interesting again at 20bp+ cheap. As 

expected, 20y+ real/nominal ASW discounts have 

been tightening (5-10bp on the week) despite a 

climate of decreasing liquidity/increasing risk 

aversion. We continue to prefer shorting 20y+ 

breakevens via swap and maintain a bearish bias on 

breakevens. 

-45 

-50 

-55 

-60 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

-25 

Shahid Ladha / Herve Cros 7 May 2010 


52 


Table 1: BNP Paribas Carry Analysis 

EUR 

Pricing Date 

06-May-10 

Term 1 

Term 2 

3m 

6m 

12m 

Repo Rate 

0.36% 

0.39% 

0.45% 0.53% 

0.64% 

EUR DRI 

108.34237 

109.01935 

109.47065 109.60318 

109.29290 

109.73865 

FRF DRI 

119.18032 

119.58000 119.97325 

120.14822 

120.21343 

120.67336 

Sett. Date 

11-May-10 

01-Jun-10 

01-Jul-10 

11-Aug-10 

12-Nov-10 

11-May-11 

Real BE Real BE Real BE Real BE Real BE Real BE 

BTANEI Jul-10 -4.82% 5.03% 206.3 215.9 429.9 523.5 - - - 

BTPEI Sep-10 -1.98% 3.23% 169.2 157.2 341.4 306.4 574.3 486.2 - - - - 

OATEI Jul-12 -1.07% 1.70% 25.9 25.1 41.5 39.7 40.9 38.4 4.8 1.6 -35.3 -32.5 

BTPEI Sep-12 0.70% 1.64% 28.8 23.7 50.2 37.7 59.8 36.8 53.5 3.2 102.2 -23.7 

BOBLEI Apr-13 -0.45% 1.34% 20.4 19.2 33.5 30.7 35.4 30.6 15.8 6.9 9.2 -6.0 

BTPEI Sep-14 1.28% 1.51% 16.7 12.9 29.2 20.0 35.3 18.8 34.6 0.7 60.9 -12.4 

OATEI Jul-15 0.33% 1.65% 12.7 10.6 21.3 16.3 23.9 15.1 17.4 -0.5 24.3 -12.6 

BUNDEI Apr-16 0.40% 1.60% 11.1 9.2 18.7 14.2 21.0 13.1 15.5 -0.4 21.9 -10.1 

BTPEI Sep-17 1.91% 1.69% 10.7 7.5 19.0 11.2 23.5 9.6 25.1 -2.8 44.0 -13.4 

BTPEI Sep-19 2.18% 1.79% 8.9 6.1 15.8 9.2 19.8 7.9 21.9 -2.4 38.3 -11.1 

BUNDEI Apr-20 0.94% 1.85% 7.2 5.5 12.4 8.2 14.4 7.0 12.5 -2.3 19.2 -9.9 

OATEI Jul-20 1.11% 2.03% 7.4 5.5 12.8 8.1 15.0 6.8 13.6 -3.0 21.4 -11.9 

BTPEI Sep-23 2.44% 2.07% 6.7 4.2 12.0 6.0 15.2 4.3 17.2 -4.4 30.0 -13.4 

GGBEI Jul-25 7.55% 2.10% 10.0 4.0 19.7 5.1 28.6 2.0 43.1 -11.8 82.5 -30.3 

GGBEI Jul-30 6.05% 3.67% 7.0 1.1 13.4 -0.8 18.9 -6.9 27.1 -26.2 50.6 -58.8 

OATEI Jul-32 1.36% 2.40% 4.1 2.7 7.1 3.6 8.4 2.3 8.0 -4.3 12.5 -11.2 

BTPEI Sep-35 2.24% 2.68% 3.9 2.0 6.9 2.3 8.6 0.3 9.4 -7.0 15.9 -16.5 

OATEI Jul-40 1.35% 2.47% 2.9 1.8 5.0 2.3 6.0 1.1 5.6 -4.1 8.8 -10.2 

BTPEI Sep-41 2.49% 2.50% 3.5 1.8 6.3 2.1 7.9 0.5 8.9 -6.1 15.2 -14.3 

FRF 

OATI Jul-11 -1.17% 1.54% 21.3 21.2 41.1 41.5 42.0 44.9 0.4 18.4 - - 

OATI Jul-13 -0.49% 1.54% 9.3 7.9 18.1 14.7 20.1 14.4 13.5 2.3 5.4 -16.2 

OATI Jul-17 0.62% 1.92% 5.1 3.0 10.2 5.2 12.8 4.0 14.2 -3.7 20.5 -15.8 

OATI Jul-19 0.98% 1.99% 4.3 2.3 8.7 3.9 11.3 2.7 13.5 -3.9 20.6 -14.4 

OATI Jul-23 1.12% 2.36% 3.3 1.5 6.7 2.4 8.7 1.1 10.5 -4.7 16.2 -13.7 

OATI Jul-29 1.27% 2.45% 2.6 1.1 5.3 1.7 7.0 0.4 8.6 -4.6 13.4 -12.8 

USD 

Pricing Date 

06-May-10 

Term 1 

Term 2 

3m 

6m 

12m 


0.20% 

0.21% 

0.22% 0.28% 

0.45% 

USD DRI 

216.91326 

217.63100 

218.55190 

218.96534 

219.52698 

219.94124 

Sett. Date 

07-May-10 

01-Jun-10 

01-Jul-10 

09-Aug-10 08-Nov-10 09-May-11 

Yield BE Real BE Real BE Real BE Real BE Real BE 

TIPS Jan-11 -1.06% 1.36% 39.5 38.5 105.2 102.7 142.8 138.4 285.8 281.0 - - 

TIPS Apr-11 -0.86% 1.27% 29.6 28.0 75.2 71.6 97.5 90.9 144.4 130.4 - - 

TIPS Jan-12 -0.85% 1.56% 16.3 14.1 39.5 34.6 47.6 38.9 54.5 36.4 13.4 -21.9 

TIPS Apr-12 -0.64% 1.44% 14.8 12.6 35.4 30.5 43.4 34.6 52.0 33.6 31.9 -5.4 

TIPS Jul-12 -0.73% 1.65% 12.9 10.6 30.9 25.5 37.1 27.7 42.2 22.9 18.0 -20.7 

TIPS Apr-13 -0.30% 1.64% 10.4 7.6 24.4 18.2 30.3 19.4 37.6 15.0 33.0 -14.3 

TIPS Jul-13 -0.20% 1.66% 10.0 7.1 23.4 16.9 29.2 17.8 36.7 13.7 34.9 -12.7 

TIPS Jan-14 0.05% 1.66% 9.2 6.1 21.4 14.6 27.1 15.3 35.4 11.4 38.4 -10.9 

TIPS Apr-14 0.11% 1.77% 8.6 5.5 19.9 13.2 25.4 13.6 33.3 9.1 36.7 -13.7 

TIPS Jul-14 0.17% 1.75% 8.3 5.2 19.3 12.4 24.7 12.6 32.5 8.2 36.5 -13.1 

TIPS Jan-15 0.39% 1.78% 7.7 4.6 17.9 10.8 23.1 10.8 31.2 6.5 37.6 -12.9 

TIPS Jul-15 0.45% 1.88% 7.1 4.0 16.5 9.5 21.3 9.2 28.9 4.6 35.0 -14.3 

TIPS Jan-16 0.58% 1.93% 6.7 3.5 15.5 8.4 20.2 7.9 27.7 3.3 34.5 -14.8 

TIPS Jul-16 0.64% 2.04% 6.3 3.2 14.6 7.5 19.1 6.8 26.2 1.8 33.0 -16.2 

TIPS Jan-17 0.82% 2.02% 6.1 3.0 14.0 7.0 18.5 6.3 25.8 1.8 33.7 -14.7 

TIPS Jul-17 0.87% 2.10% 5.8 2.7 13.3 6.4 17.6 5.6 24.6 0.9 32.2 -15.4 

TIPS Jan-18 1.00% 2.15% 5.4 2.4 12.4 5.6 16.4 4.8 23.2 0.2 31.0 -15.0 

TIPS Jul-18 1.04% 2.24% 5.1 2.0 11.6 4.9 15.4 3.8 21.9 -1.1 29.3 -16.7 

TIPS Jan-19 1.14% 2.27% 5.0 2.1 11.5 5.1 15.4 4.3 21.9 0.0 29.8 -13.8 

TIPS Jul-19 1.21% 2.28% 4.8 1.9 10.9 4.5 14.6 3.5 21.0 -1.0 28.7 -15.1 

TIPS Jan-20 1.27% 2.24% 4.5 1.7 10.3 4.1 13.8 3.1 19.9 -1.4 27.4 -15.3 

TIPS Jan-25 1.64% 2.36% 3.5 0.8 7.9 1.9 10.7 0.5 15.8 -4.3 22.4 -17.1 

TIPS Jan-26 1.69% 2.38% 3.2 0.7 7.4 1.8 10.0 0.5 14.7 -3.9 21.0 -15.5 

TIPS Jan-27 1.72% 2.37% 3.2 0.7 7.2 1.7 9.8 0.4 14.4 -3.9 20.6 -15.3 

TIPS Jan-28 1.76% 2.38% 2.9 0.6 6.6 1.5 9.0 0.2 13.3 -4.2 19.0 -15.7 

TIPS Apr-28 1.80% 2.38% 3.2 0.9 7.2 2.2 9.9 1.2 14.8 -2.3 21.2 -12.1 

TIPS Jan-29 1.77% 2.43% 2.9 0.7 6.6 1.7 9.0 0.5 13.3 -3.3 19.1 -13.5 

TIPS Apr-29 1.79% 2.41% 3.1 0.8 7.0 2.0 9.6 1.1 14.3 -2.4 20.5 -12.1 

TIPS Apr-32 1.80% 2.43% 2.7 0.6 6.1 1.4 8.4 0.3 12.4 -3.4 17.7 -13.1 

TIPS Feb-40 1.81% 2.56% 2.0 0.2 4.5 0.6 6.2 -0.5 9.1 -3.9 12.9 -12.4 

GBP 

Pricing Date 

06-May-10 Term 1 

Term 2 

3m 

6m 

12m 


0.53% 

0.53% 

0.59% 

0.65% 

0.80% 

Sett. Date 

07-May-10 

01-Jun-10 01-Jul-10 09-Aug-10 

08-Nov-10 

09-May-11 

Yield BE Real BE Real BE Real BE Real BE Real BE 

UKTi Aug-11 -0.77% 1.34% 24.0 23.7 37.0 36.1 58.7 59.5 99.6 112.1 - - 

UKTi Aug-13 -0.95% 2.77% 9.0 6.1 12.9 6.3 19.1 7.8 25.6 2.5 54.2 5.2 

UKTi Jul-16 0.16% 2.86% 6.2 3.2 9.9 3.1 15.2 3.6 23.3 0.1 47.4 -0.1 

UKTi Nov-17 0.27% 3.15% 7.5 4.4 13.3 6.5 17.2 5.7 25.6 2.6 41.4 -5.1 

UKTi Apr-20 0.62% 3.19% 4.4 1.5 7.1 0.8 11.0 0.3 17.5 -3.9 34.7 -8.3 

UKTi Nov-22 0.70% 3.52% 5.0 2.7 9.0 3.8 11.8 2.9 17.9 0.3 29.1 -5.8 

UKTi Jul-24 0.83% 3.39% 3.3 1.0 5.5 0.3 8.5 -0.4 13.5 -4.1 26.3 -8.6 

UKTi Nov-27 0.79% 3.51% 3.6 1.5 6.5 1.8 8.6 0.7 12.9 -2.6 20.9 -9.7 

UKTi Jul-30 0.81% 3.53% 2.6 0.8 4.4 0.3 6.7 -0.2 10.6 -2.9 20.5 -6.0 

UKTi Nov-32 0.76% 3.58% 2.9 1.0 5.1 1.1 6.8 -0.1 10.2 -3.3 16.3 -10.2 

UKTi Jan-35 0.78% 3.61% 2.0 0.3 3.3 -0.5 5.0 -1.3 7.9 -4.6 15.2 -9.3 

UKTi Nov-37 0.72% 3.67% 2.4 0.7 4.2 0.6 5.6 -0.6 8.3 -3.8 13.2 -10.5 

UKTi Nov-42 0.69% 3.69% 1.9 0.4 3.4 0.0 4.5 -1.3 6.7 -4.5 10.6 -11.3 

UKTi Nov-47 0.63% 3.73% 1.7 0.2 3.0 -0.1 4.0 -1.4 5.9 -4.6 9.2 -11.1 

UKTi Mar-50 0.62% 3.74% 1.5 0.1 2.8 -0.3 3.6 -1.6 5.3 -4.8 8.4 -11.4 

UKTi Nov-55 0.58% 3.76% 1.5 0.2 2.7 -0.2 3.6 -1.3 5.3 -4.3 8.2 -10.4 

JPY 

Pricing Date 

06-May-10 

Term 1 Term 2 

3m 

6m 

12m 


0.12% 

0.12% 

0.12% 

0.13% 0.14% 

JPY DRI 

99.210 

99.500 

99.500 

99.397 

99.200 98.506 

Sett. Date 

11-May-10 

10-Jun-10 

10-Jul-10 

11-Aug-10 

11-Nov-10 

11-May-11 

Yield BE Yield BE Yield BE Real BE Real BE Real BE 

JGBI-1 Mar-14 1.12% -0.80% 10.6 10.1 13.2 12.3 13.1 11.7 15.4 12.5 10.2 3.8 

JGBI-2 Jun-14 1.24% -0.89% 10.1 9.6 12.8 11.8 13.0 11.4 16.0 12.9 13.4 6.3 

JGBI-3 Dec-14 1.04% -0.61% 8.5 8.0 10.5 9.3 10.2 8.3 11.4 7.6 5.6 -2.7 

JGBI-4 Jun-15 1.20% -0.71% 7.9 7.3 9.9 8.6 10.0 8.0 12.0 7.9 9.1 0.2 

JGBI-5 Sep-15 1.11% -0.59% 7.5 6.9 9.3 8.0 9.1 7.1 10.5 6.3 6.5 -2.6 

JGBI-6 Dec-15 1.16% -0.61% 7.3 6.6 9.0 7.7 8.9 6.9 10.5 6.2 7.2 -2.1 

JGBI-7 Mar-16 1.17% -0.59% 7.0 6.3 8.7 7.3 8.6 6.5 10.2 5.7 7.1 -2.5 

JGBI-8 Jun-16 1.31% -0.69% 6.9 6.2 8.7 7.3 8.9 6.7 11.0 6.4 9.6 -0.4 

JGBI-9 Sep-16 1.22% -0.57% 6.6 5.8 8.2 6.7 8.2 5.9 9.9 5.0 7.5 -2.8 

JGBI-10 Dec-16 1.24% -0.55% 6.4 5.6 8.0 6.4 8.0 5.6 9.6 4.7 7.5 -3.1 

JGBI-11 Mar-17 1.30% -0.56% 6.2 5.4 7.9 6.2 8.0 5.5 9.8 4.6 8.3 -2.7 

JGBI-12 Jun-17 1.36% -0.57% 6.1 5.2 7.7 6.0 7.9 5.3 9.9 4.6 9.1 -2.3 

JGBI-13 Sep-17 1.35% -0.51% 5.9 5.0 7.5 5.7 7.6 4.9 9.5 4.0 8.5 -3.2 

JGBI-14 Dec-17 1.37% -0.48% 5.7 4.8 7.2 5.4 7.4 4.7 9.3 3.6 8.4 -3.6 

JGBI-15 Mar-18 1.44% -0.51% 5.7 4.8 7.3 5.4 7.5 4.7 9.6 3.8 9.3 -2.9 

JGBI-16 June-18 1.53% -0.56% 5.6 4.7 7.2 5.3 7.6 4.7 9.9 3.9 10.2 -2.4 


Shahid Ladha / Herve Cros 7 May 2010 


53 


Europe ITraxx Credit Indices 

• Outright: Being long or short MAIN has 

moved further towards being a macro call on 

European sovereigns. The trade which offers 

the best risk/reward to play further volatility in 

Sovereign is the “Long risk XO / Short risk MAIN 

x5” trade. 

• SUB/SEN: the attractive entry point and the 

non-directionality of the trade over the mediumterm 

prompt us to recommend the SUB/SEN 

decompression trade with a ratio of 1.5 x 1. 

That’s a normalization trade with limited 

downside. 

• XO/MAIN: although the ratio has reached 

new lows this week, we think there is more to 

come and keep our recommendation “Long risk 

XO / Short risk MAIN x5” trade which has 

already performed by 85bp. 

• LVL/FIN SEN: thanks to further 

underperformance of FIN SEN vs. MAIN and 

some decompression HVL/MAIN, LVL has kept 

on outperforming all other indices. We advise 

investors to took profit on the “Long risk LVL / 

Short risk FIN SEN” recommended the 18-Feb. 

• FIN SEN and SUB 5/10y: we have been right 

to call for the flattening of these two curves. 

After their retracement of 6bp (in SEN and SUB), 

the downside at +4 in SEN and +3 in SUB looks 

extremely limited. We like the two steepeners as 

mid-term normalization/carry-trades. 

• XO 5/10y: we keep our steepeners in s12 

and s13. 

Outright 

Being long or short MAIN has moved further towards 

being a macro call on European sovereigns; it is 

mainly due to the spill-over of the Greek crisis into 

Spain and Portugal and the increase of single-names 

related to threatened sovereigns; there is only one 

Greek name (OTE) but the number of PIIGS names 

is 18 (Portugal: 3; Ireland: 0; Italy: 8; Greece: 1; 

Spain: 6). Actually, the picture is a bit more complex 

with direct exposure of non-PIIGS based financials 

(and to a lower extent non-financials) to PIIGS risk. 

In any case, the correlation between MAIN and 

SOVX has reached new highs. 

The direct consequence of the loss of confidence in 

the weakest members of the Eurozone has been 

further pressure on the EUR currency, which has 

Table 1: Curves’ Levels and Changes 

5y 5/10y 1W Chg 1M Chg 

MAIN s13 109 10 -2 -4 

MAIN s12 105 16 -0 -2 

SEN s13 153 4 -3 -6 

SEN s12 149 12 - -1 

SUB s13 225 3 -2 -6 

SUB s12 221 10 - -3 

HVL s13 151 15 -5 -5 

HVL s12 141 25 - - 

XO s13 502 15 -5 - 

XO s12 466 30 - +5 

MAIN 

XO 

120 

110 

100 

Chart 1: MAIN 5y vs. EUROSTOXX 600 

90 

80 

70 

R 2 = 0.5135 

60 

230 240 250 260 270 280 

575 

555 

535 

515 

495 

475 

455 

435 

415 

395 

EUROSTOXX 600 

Chart 2: XO 5y vs. EUROSTOXX 600 

last 3M 

reached new 12-month lows (versus USD) this week. 

The correlation between iTraxx MAIN and EUR/USD 

which was almost inexistent in previous months has 

now clearly increased (Chart 2) and MAIN is now 

more correlated to EUR/USD than to the 

EUROSTOXX 600. 

last 

R 2 = 0.9137 

375 

230 240 250 260 270 280 


EUROSTOXX 600 

last 3M 

last 

Pierre Yves Bretonniere 7 May 2010 


54 


What’s the call? 

It is relatively hazardous to take a view in this market; 

the underlying trend remains negative for the 

weakest members of the Eurozone and for the EUR 

currency which does not bode well for SOVX and 

MAIN as well as for FIN SEN and SUB indices. That 

being said, a lot of efforts are made by officials to 

stop the bleeding and a momentarily snapback is 

very likely to come in the next days. 

For us, the index which should continue to 

outperform is XO as it should remain relatively more 

immune to developments in PIIGS. We nevertheless 

note that some High-Yield names like Irish Eircom 

and Spanish Codere, ONO and Sol Melia have 

recently underperformed the market. 

All in all, we continue to expect the XO/MAIN ratio to 

decrease and see the risk/reward of the “Long risk 

XO / Short risk MAIN x5” trade, which is a disguised 

bearish call on MAIN, more attractive than an outright 

short on MAIN. 

Update on FIN SEN vs. FIN SUB 

It is probably the pair trade on which we have the 

highest level of conviction given (1) its very attractive 

entry level and (2) its relative lack of directionality. 

Regarding the entry level, we view a very favourable 

risk/reward in the decompression trade at x1.50. The 

downside is probably limited to x0.10 while its upside 

can be as high as x0.30 if the ratio catches up with 

SUB/SEN levels prevailing when the SEN index was 

trading in the 130-150 range. 

Moreover, the widest member of the basket (BESPL) 

is already trading at a SUB/SEN ratio of x1.17, a 2- 

year historical low and an already very compressed 

level where hedgers could start thinking about buying 

SUB protection rather than SEN keeping in mind that 

all the debt deliverable into the SEN CDS can also 

be delivered into the SUB. That being said, UK 

single-names RBS and HBOS, with SUB/SEN ratio 

between x1.6 and x1.7 have some room to compress 

further. 

Regarding directionality of the trade, the long-term 

history of the ratio has shown that the SUB/SEN ratio 

is a non-directional play. It is evidenced on Chart 3 

which displays the value of the SUB/SEN ratio 

against the absolute level of the SEN index. It is less 

valid if we consider the past month (orange dots on 

Chart 3) which shows a relatively resilient regime in 

which the SUB/SEN ratio decreases as the SEN 

index widens and inversely. The very basic 

explanations for this new regime are 1/ hedging 

needs are putting more pressure on SEN CDS than 

on SUB CDS and 2/ the slight outperformance of LT2 

vs. Senior in cash (2-week spread changes of iBoxx 

LT2 and SEN indices of 20% and 23% respectively). 


Chart 3: SUB/SEN Ratio vs. FIN SEN in Past 12 

Months 

- 

SUB/SEN ratio 

2.20 

2.10 

2.00 

1.90 

1.80 

1.70 

1.60 

1.50 

2.0 

1.9 

1.8 

1.7 

1.6 

1.5 

y = -0.0026x + 1.8623 

1.4 

35 55 75 95 115 135 155 

FIN SEN 

12M-3M 

3M-2M 

Chart 4: SUB/SEN in Past 4 Years 

iTraxx Sub / Sen (s13) 

Q1 (6m) 

Median (6m) 

Q3 (6m) 

1.40 

12/05 4/06 8/06 12/06 4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09 12/09 4/10 

Chart 5: 1.5 x FIN SEN – 1 x FIN SUB History 

20 

-20 

-40 

-60 

-80 

-100 

-120 

-140 

09/08 11/08 01/09 03/09 05/09 07/09 09/09 11/09 01/10 03/10 05/10 


The attractiveness of the entry level prompts us to 

jump in the SUB/SEN decompression trade (Long 

risk EUR15m SEN vs. Short risk EUR10m SUB). At 

the time of writing, entry levels are 160 for SEN and 

235 for SUB. Starting from these levels, we see 

about 20bp potential in the trade. 

Update on XO vs. MAIN 

We have been pushing the outperformance of the 

XO index relative to the MAIN since the beginning of 

April (8-Apr) via a compression trade “Long risk XO / 

Short risk MAIN x5”. The trade is now 85bp in the 

Last 

1M 


Market Mover Non-Objective Research Section 

55 


money thanks to widenings of 34bp for MAIN and 

“only” 86bp for XO. Over the same period, the Merrill 

Lynch High-Yield index is wider by 32 bp while the 

iBoxx Non-financials and Financials indices are 

respectively wider by 11bp and 37bp. 


As mentioned previously, we continue to see the 

compression trade “XO vs. MAIN x5” as a good 

way to take a bearish call on sovereigns/banks 

despite its very good run. The market is willing to 

push where it hurts and pressure on Portugal, Spain 

and potentially Italy and Ireland are likely to persist. 

In this backdrop, the likely snapback in MAIN and 

FIN indices should be limited in time and extent. 

The strong earning season and the latest macro 

economic data (in both the US and Europe) are 

relatively supportive for the High-Yield asset class as 

evidenced in the relative behaviour of the High-Yield 

and High-Grade cash markets. 

Update on LOW-VOL vs. FIN SEN 

In the past 2 months, we have been pushing the 

strategy of being “Long risk Low-Vol. / Short risk FIN 

SEN” to play 1/ a resurgence of systemic/bank risk 

and 2/ a re-pricing of HVL vs. MAIN. While the 

HVL/MAIN has not materially decompressed, the 

sharp underperformance of FIN SEN vs. MAIN 

enabled us to close this trade with a net profit of 

20bp. 

Update on curves 

With the focus of the market essentially on the 

outright, there has been little trading in curves in the 

past two weeks. Regarding indices specifically, 5/10s 

have been re-marked slightly flatter, in line with the 

move in underlying names. 

We have being hammering in past weeks that we 

see more downside than upside in MAIN, FIN SEN 

and FIN SUB curves as all of them were trading too 

steep relative to the outright level of the 5y. They 

have nicely retraced from their steepest points. We 

still see more downside than upside in MAIN, while 

the risk/reward for SEN and SUB 5/10 steepeners 

has turned more favourable. We continue to like the 

5/10y steepeners in XO s12 and s13. 

Update on MAIN 5/10y Curve 

Taking MAIN s12 as a starting point to assess the 

steepness of the curve relative to the outright in 

history, we see the “fair-value” of the 5/10 s12 at 

c.7bp. It is 9bp below current level. Regarding the 

5/10 s13, we estimate the downside at c.5bp 

considering the difference of skews between the two 

curves. 

200 

150 

100 

- 

50 

Chart 6: XO – 5x MAIN Trade History 

iTraxx s12: XO - 5 x MAIN 

Q1 (6m) 

Median (6m) 

Q3 (6m) 

XO Wide 

-50 

XO Tight 

-100 

9/09 10/09 11/09 12/09 1/10 2/10 3/10 4/10 

- 

20 

10 

-10 

-20 

-30 

-40 

-50 

- 

20 

10 

-10 

-20 

Chart 7: 1.25 x LVL – 1 x FIN SEN 

iTraxx s12:1.25 x LVL - FIN SEN 

Q3 (6m) 

Median (6m) 

Q1 (6m) 

FIN SEN Tight 

FIN SEN Wide 

1/09 3/09 5/09 7/09 9/09 11/09 1/10 3/10 5/10 

Chart 8: MAIN – FIN SEN 

FIN SEN Tight 

-30 

iTraxx s12: MAIN x1 - Fin Sen 

Q1 (6m) 

-40 

Median (6m) 

Q3 (6m) 

FIN SEN Wide 

-50 

9/09 10/09 11/09 12/09 1/10 2/10 3/10 4/10 5/10 



The focus is unlikely to turn on curves in the short 

term. Having said that, should the market continue to 

be volatile, 5/10y MAIN is likely to flatten further. In 

the stabilization scenario (MAIN back to mid 90s), 

there is less chance that this curve flattens but we 

see it extremely unlikely to steepen. Note that the 

carry of the 5/10y has increased to 1.4bp per month. 



56 


Update on FIN SEN and FIN SUB 5/10y 

The sharp sell-off in banks’ single-names has 

triggered 4-5bp of flattening in 5/10s and has 

impacted indices’ curves to a similar extent. Looking 

at the relationship ‘curve vs. outright’ suggests much 

more downside in FIN SEN and SUB curves, even 

negative values. Actually, the downside is for us 

much more limited and 5/10 curves are very unlikely 

to break +3bp. Note that in each occasion the on-therun 

5y SEN traded around 150 – that was at end Apr- 

09 in s11 and mid Dec-08 in s10 - the 5/10y curve 

traded in the [+2; +3] range. 


We have been right to call for the flattening of 

SEN and SUB 5/10 curves but we see now the 

downside at +4 in SEN and +3 in SUB extremely 

limited. 

Current levels are bang in line with previous “crisis” 

levels but given the better visibility the market has on 

both single-names and macro-economic 

environment, we do expect some kind of 

normalization in the foreseeable future. In this 

context, 5/10 SEN and SUB present extremely 

limited downside and the steepeners could now 

be seen as good carry plays. In s13, 5/10 SEN and 

SUB are generating 1.7bp and 2.5bp of positive carry 

per month. 

Update on XO 5/10y 

We have been pushing the steepener in XO s12 and 

s13 at the end of March, at +18 and +25bp. We are 

now back to our entry levels but continue to see 

some juice in these 2 trades. Should XO keep on 

widening, we could see those curves flatten 

marginally but the positive carry (monthly breakevens 

of 5.1bp for s12 and 6.3bp for s13) and the 

fundamental developments on the constituents of the 

s12 and 13 baskets remain very supportive for the 

steepeners. 

Chart 9: Curves’ Levels and Changes 

5y 5/10y 1W Chg 1M Chg 

MAIN s13 109 10 -2 -4 

MAIN s12 105 16 -0 -2 

SEN s13 153 4 -3 -6 

SEN s12 149 12 - -1 

SUB s13 225 3 -2 -6 

SUB s12 221 10 - -3 

HVL s13 151 15 -5 -5 

HVL s12 141 25 - - 

XO s13 502 15 -5 - 

XO s12 466 30 - +5 

Chart 10: 5/10y vs. 5y Outright in MAIN s12 

5/10y 

23 

21 

19 

17 

15 

13 

11 

9 

7 

5/10Y MAIN (lhs) 

5Y MAIN (rhs inverted) 

5 

09/09 10/09 11/09 12/09 01/10 02/10 03/10 04/10 

60 

65 

70 

75 

80 

85 

90 

95 

100 

105 

110 

Chart 11: 5/10y vs. 5y Outright in FIN SEN s12 

5/10y 

20 

15 

60 

70 

80 

10 

90 

5 

100 

- 

110 

-5 

5/10Y FIN SEN (lhs) 

120 

5Y FIN SEN (rhs inverted) 

130 

-10 

140 

-15 

150 

9/09 10/09 11/09 12/09 1/10 2/10 3/10 4/10 

5y 

5y 




57 


Technical Analysis – Interest Rates & Commodities 

Bond & Short-Term Contracts 

• Europe: Positive bias within MT falling wedge toward key 2.789 (LT falling support) with 2.849 (2009 low) tested 

• US: Supportive as pullback extended below key 3.751 (LT H&S neckline) to almost reach 3.45 (ST 61.8%) 

• Short-term contracts u0: A ST toppish tone on Euribor (below its ST channel) & ED (below its 2-dip neckline) 

Equities & Commodities 

• WTI (Cl1): Still up MT within LT rising channel but weak ST given ST rising channel & 2-dip neckline breaks 

• Equity markets: Markets turned consolidative/weak ST within Europe for a move below MT 61.8% 

US 10y: Pullback around key 3.756 but beware of a ST falling channel break MT Trend: Toppish Range: 3.45/3.70 

The break above the MT falling channel in 3.104

Germany 10y: Within MT falling wedge testing key 2.789/2.849 MT Trend: Down Range: 2.78/3.00 

Decisive break below key 3.093 (October 

2.576 3.208 => 3.243 

low & October/April MT trading range low 

boundary), opened MT way down towards 

2.73 target area with 2.849 (2009 low) 

tested, next support being MT falling support 

line at 2.789 

It is now on a key support area (2.789/ 

2.849) & a failure to break it down could 

allow a technical rebound towards 3.068 

(38.2%). However, we need now a break 

above 3.171/243 to turn again negative on a 

MT basis. 

The bias will now be neutral but supportive 

between 2.79/2.85 & 3.17/3.24 

Tech Snapshot 

- Below key 3.093 (October low) 

- Within MT falling wedge & ST channel 

- 2.849 (2009 low) tested 

Strategy: Waiting now for a bearish signal 

to enter short. Bullish will keep long below 

3% but could already take at least some 

profit on 2.80/85 area. 

UK 10y: Will stay supportive within the channel. Watch LT rising wedge support MT Trend: Toppish Range: 3.75/3.92 

Break above 4.084 (June 09 top & wave “A” 

top) in February strengthened the MT rising 

scenario towards 4.50 theoretical target area 

but return seen below it weakened MT rising 

scenario with fall close to critical 3.791 (LT 

rising wedge sup) . A break now below it is 

the main risk for 3.618 (LT 50%) initially 

A break above ST falling channel (4.004) is 

needed now to reopen the ST way up even 

though a renewed break above 4.084 (wave 

“A” top) and then 4.105 (61.8%) is needed to 

rekindle the MT rising scenario 

3.456 4.302 

Tech Snapshot 

- Within ST falling channel 

-Testing LT rising wedge support 

Strategy: Wait for a ST falling channel 

break to re-enter short. 

S&P: Top reversal done on key 1228 with break below ST rising channel MT Trend: Consolidative Range: 1130/1190 

1150 (wave “3” top) breakout strengthened 

the rising wave “5” scenario towards potential 

1111 ⇐ 1132 ⇐ 1150/53 –!– 1228 ⇒ 1278 ⇒ 1330 

1325 target but it stalled just below key 1228 

(LT 61.8%) with a top reversal printed 

Break below ST rising channel & now daily 

Head & Shoulders neckline (1180) turned ST 

study consolidative & gave a first corrective 

signal now to develop a ST technical 

correction towards key 1153/55 (38.2%+ LT 

rising channel sup) initially & on a breakout 

1132 and 1111 (50, 61.8%). 

Tech Snapshot 

- Close to LT rising channel support 

- Topped below key LT 61.8% 

- Break below ST rising channel 

- Top reversal printed 

Strategy: Keep short if you are below 1185 

for 1130/50 

Christian Sené 7 May 2010 


59 


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. 

Current* Targets Stop Entry 

Closed Strategies 

USD Steepener Pay USD 3M-fwd 2s10s 

Trade closed (4/5). PnL EUR -127k. 

Euribor Spread Buy ERU0Z0 

Trade closed (4/5). PnL: EUR -72k. 

Existing Strategies 

Yield Curves 

EUR Flattener Receive EUR 1M-fwd 2s10s 

Asymmetric near-term response to "gradual" phasing out of unconventional 

policy/liquidity measures. 

GBP steepener Pay GBP 1Y-fwd 2s10s 

A dovish BoE and a toxic sovereign debt/deficit combination should keep the spot 

swap curve at steep levels in the medium term. 

Money Markets 

Euribor Basis Buy ERM0 Basis 

OIS/Bor spreads are at very interesting entry levels compared to the evolution of 

CDS and other risk indicators. Moreover, ECB liquidity volatility should be 

supportive of this strategy. 

180.8 

(T) 

163.0 

(S) 

37.0 

(S) 

270.0 228.0 242.25 

(22-Apr) 

35.0 10.0 20.0 

(31-Mar) 

170.0 190.0 184.8 

(04-Mar) 

200.0 139.0 147.0 

(12-Feb) 

40.0 20.0 24.0 

(29-Jan) 

Options 

Euribor Fly Buy ERU0 9862/75/87 P 

1.0 12.5 0.0 1.5 

Cheap downside strategy, playing the normalisation of Eonia. The position 

complements with the upside fly (no-normalisation strategy). 

(S) 

(13-Jan) 

Euribor Fly Buy ERU0 9912/25/37 C 

4.0 12.5 0.0 1.5 

Upside protection in case of liquidity spillover post June. Rolldown trade. 

(S) 

(12-Jan) 

Eurodollar Call Buy EDU0 99.25 C 

50.0 0.0 23.5 

Trade closed (19/4). PnL: EUR +30k. 

(08-Jan) 

Sterling Fly Buy L Z0 9900/25/50 C 

7.0 25.0 0.0 3.5 

Rolldown strategy for unchanged MPC through 2010. 

(S) 

(05-Jan) 

*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps. 

Carry 

/ mth 

Risk** 

P/L 

(ccy/Bp) 

10k/01 USD - 

165k 

-16.5bp 

6.25k/01 EUR -72k 

-11.5bp 

-3bp 10k/01 EUR +40k 

+4bp 

5k/01 GBP +80k 

+16bp 

5k/01 EUR +65k 

+13bp 

10k/01 EUR -5k 

-1c 

10k/01 EUR +25k 

+2.5c 

5k/01 USD +40k 

+8c 

5k/01 GBP +18k 

+4c 

Interest Rate Strategy 7 May 2010 


60 


Judging Currencies by Liquidity 

• The assessment of global liquidity will 

remain important for the judgement of 

currencies. We regard global liquidity growth as 

at risk and cite financial sector regulation, EMU 

stability concerns and Asian tightening of 

monetary conditions as the main factors to 

watch. 

• Reduced global liquidity will be an outright 

bullish USD factor. Should equity markets 

decline, the EUR will drop hard. 

• Commodity currencies are extremely 

bullishly positioned. China absorbing liquidity 

will undermine commodity prices. China’s CPI 

release on 10 May will be trend-setting. 

• Any post-election sterling rally should be 

sold. Sterling undervaluation talk has no 

substance taking into account the degree of 

private and public sector leverage. 

Risk-off strategy remains valid 

Currency markets will have to deal with four big 

themes going forward. Global liquidity, financial 

sector regulation, EMU stability issues and the pace 

of monetary tightening in EMKs will affect the 

performance of risky assets directly and indirectly. At 

first glance, these themes seem to be independent 

topics, but they are not. In fact, global liquidity 

conditions – hence the performance of various asset 

classes – will be impacted by the structure of 

upcoming financial sector regulations, the decline of 

monetary velocity due to the weakening confidence 

in-EUR denominated assets and the pace of 

tightening in emerging markets in general and China 

in particular. All these factors bode poorly for liquidity 

conditions, suggesting sticking to the disinvestment 

strategy that we spelled out three weeks ago. 

Deficits, deficits, deficits 

Importantly, the current economic cycle is different in 

nature from previous cycles witnessed since WWII. 

This cycle is all to do with balance sheets in 

conjunction with global imbalances – very different 

from economic downturns triggered by 

overinvestment in capacity or inventories. Economic 

upswings starting from a new equilibrium level 

between investment and savings can develop into a 

prolonged period of prosperity but, this time round, 

aggressive policy measures including quantitative 

easing and a fiscal expansion never witnessed 

before during peace time have pushed economies 

back on to the growth path. However, imbalances 

have never been adjusted. In fact, the aggregate of 

16 

14 

12 

10 

8 

Chart 1: Total Net Borrowing Needs of the 

Sovereign Sector (% of GDP) 

6 

4 

2 

0 

Euro area 

United States 

United Kingdom 

2003-08 average 2009 2010 (estimate) 2011 (estimate) 

Source: IMF, BNP Paribas 

120 

110 

100 

90 

80 

70 

60 

50 

Untied States 

Households 

Non-financial 

corporates 

40 

00 02 04 06 08 10 

Source: IMF, BNP Paribas 

Chart 2: Credit to GDP (%) 

120 

110 

100 

90 

80 

70 

60 

50 

Euro area 

Non-financial 

corporates 

Households 

40 

00 02 04 06 08 10 

120 United Kingdom 

Non-financial 

110 corporates 

100 

public and private debt in industrialised economies is 

now higher in absolute and relative-to-GDP terms 

than in 2007. The conclusion to draw from this 

observation is straightforward. Industrialised 

countries do not have the resources for strong, 

domestically driven growth. Instead, the growth 

impulse will have to come from outside, requiring a 

higher level of competitiveness. This can either be 

achieved by adjusting to higher productivity levels or 

by allowing currencies to depreciate. Within the 

group of industrialised nations, the US probably has 

the most flexible economy, leaving Europe and 

Japan lagging behind. Chart 3 shows that the current 

advance of the greenback is underpinned by US 

productivity gains. When we project USD strength 

within our G10 currency analysis, we mean a 

stronger USD in the context of the currencies of other 

industrialised nations. Indeed, we expect most 

emerging-market currencies to outperform the USD 

over the next few years, only interrupted by periods 

90 

80 

70 

60 

50 

Households 

40 

00 02 04 06 08 10 

Hans Redeker 7 May 2010 


61 


of consolidation, which of course may be violent. 

However, weaker emerging-market currencies 

should be seen as providing buying opportunities. 

Rebalancing economies via currencies 

In fact, stronger EMK currencies will help rebalance 

the global economy and, from this perspective, are 

good news. However, this does not mean that EMK 

currency strength comes without costs. EMK 

authorities were happy running undervalued 

exchange rates for a long time, allowing their 

economies to accumulate liquid foreign assets, 

mainly government bonds, at an ever-increasing 

pace. The strategy was convenient and came with 

few short-term risks as long as Western demand for 

EMK products was solid and inflation in emerging 

markets not an issue. However, overleveraged 

Western economies will not offer the buoyant 

demand for foreign-made products compared to the 

times when leverage was built up. Moreover, Asian 

inflation has started accelerating, requiring Asian 

monetary authorities to tighten policy. Emerging 

markets will thus have to change their growth 

strategies, becoming less export- and more 

domestic-demand oriented; their monetary 

authorities will have to tighten policy in order to deal 

with higher inflation rates. The combination of 

stronger domestic demand growth with a higher 

valuation of domestic currencies will boost 

industrialised exports into this region, which is 

positive. The bad news is that Asia will not export as 

much capital to Western financial markets, 

weakening liquidity conditions here. 

China’s inflation will reduce liquidity 

The next few months could see some dramatic 

changes in respect of Asian liquidity’s effects on 

Western markets. Chinese money supply and credit 

growth peaking at 28% (M2) and 35% (private credit) 

has unleashed a dramatic real estate boom. Real 

estate has often become an object of speculation, 

pushing valuations to extreme levels. Price to income 

levels have generated alarm with the political elite 

seeing the risk of a boom-bust scenario coming into 

play. Within a closed capital account system, money 

supply exceeding nominal GDP must lead either to 

higher asset prices or a higher level of consumer 

price inflation unless the GDP-exceeding supply of 

money is neutralised by a decline in monetary 

velocity. Unfortunately, monetary velocity has 

increased over the past year, leaving China 

monetary authorities little option but to tighten 

monetary conditions. Some analysts argue that 

administrative measures to calm the housing market 

would do the trick of easing the inflation risk. We 

agree that administrative measures such as 

increasing funding costs for second or third home 

purchases should dampen demand in the 

overheating real estate market. However, if the 

excess of money supply is not channelled into buying 

Chart 3: USD Rally is Supported by US 

Productivity Gains 


Chart 4: Asian Currency Reserve Growth has 

Rolled Over 


assets, consumer price inflation will rise unless 

authorities take quick and drastic actions to absorb 

excess liquidity. China’s PPI and CPI data will be 

released on 10 May and an upward surprise might 

not send only Shanghai’s equity market lower. China 

absorbing domestic liquidity will have global 

ramifications. The chance of seeing risky asset 

markets trading lower on the back of China tightening 

liquidity should not be underestimated. 

USD liquidity still important 

Meanwhile, the Fed confirmed in its latest interest 

rate statement its intention to keep rates low for an 

‘extended period of time’. The Fed is referring to the 

repo rate but market rates have already moved 

higher as the Fed’s balance sheet is longer 

expanding. However, US liquidity conditions will not 

be influenced very much by the Fed’s rate policy; 

they will be affected by the Fed considering selling 

assets off its inflated balance sheets and, potentially 

more importantly, by changes in the regulation of the 

US financial sector. The balance sheet implications 

of moving the derivative holdings of banks into 

special entities suggests the US banking sector 

losing USD 285bn of equity; this could force 

shrinking balance sheets and reduced lending. This 



62 


type of regulation would reduce monetary velocity 

and, if the decline in velocity were not compensated 

by a sufficient increase of central bank liquidity, 

would push the USD higher. In addition, less USD 

liquidity would not bode well for risky assets, which in 

recent years have enjoyed a liquidity-supported rally. 

EMU’s contagion and liquidity 

Most commentators are debating the pro and cons of 

a currency union in terms of diverging intra-EMU 

competitiveness and wealth levels, leaving liquidity 

considerations outside the debate. The IMF and 

EMU on the one hand and Greece on the other have 

finally agreed on a EU 110bn support package 

spread over three years, with Greece committing 

itself to a substantial budget consolidation 

programme. Concerning the liquidity implications of 

the programme, we have to differentiate between 

IMF and EMU funds. IMF funds have a liquidity 

increasing effect as the IMF takes SDRs out of its 

balance sheet and converts them into EUR. Hence, 

IMF funds work like a monetary/fiscal support 

programme. The EMU part of the programme has 

fiscal but no monetary effects. 

EMU has provided Greece with a EUR 75bn bridge 

loan aimed at keeping the country out of capital 

markets for three years. EMU countries will mostly 

raise these funds off balance sheet by issuing bonds 

and transferring these funds to Greece. If these offbalance-sheet 

programmes have no effect on 

national budgets in the sense that expenditure plans 

are left unchanged, raising these funds in the capital 

market would be a plus from a global liquidity point. 

However, national budget deficits are high across the 

eurozone and off-balance-sheet funding will not fool 

financial markets with regard to the risk premium to 

be paid for these assets. Remember the German 

unification days when GDR-related expenditure was 

funded via unification bonds? At that time, German 

bond yields reflected the higher German borrowing 

needs and the market did not care if the additional 

funds needed for German unification were funded on 

or off the federal balance sheet. Nowadays there will 

be no difference. In order not to see their own 

financial credibility being undermined, EMU countries 

supporting Greece financially will have to cut 

domestic expenditure or increase domestic taxes. 

This will especially apply to countries with high debt 

or deficit levels such as Portugal, Spain, Ireland, Italy 

and France. So the EMU bridge loan represents a 

fiscal transfer, but will not increase the pool of fiscal 

means available for the eurozone. In this sense, the 

EMU package is different from the IMF money, which 

in fact brings new funds into the eurozone and hence 

provides a measure of relief. 

However, we still believe that EMU instability will 

negatively affect global liquidity. Greece illustrated 

how the sovereign crisis has undermined the banking 

Chart 5: Liquidity versus Equities 


Chart 6: EURUSD Rate Differential to Turn 

Negative 


sector. Financial interdependencies among the 

Greek insurance and the banking industry are a 

worry given that Greek pension funds were not using 

the golden rule of investment diversification. Rather, 

they were putting most of their assets into domestic 

bonds and to a lesser degree into equities. Greek 

pension funds hold EUR 29bn of Greek bonds. 

Meanwhile, Greek banks’ access to private money 

market funding is not sufficient to allow their liquidity 

needs to be covered by ECB repos. Hence, ECB 

collateral rules will be crucial for Greek bank funding. 

On Monday, the ECB loosened its collateral rules. 

This does not only effectively represent an easing of 

monetary conditions, it will also expand the ECB’s 

balance sheet risk –working against the EUR. 

Bank funding conditions have tightened 

The spread between euro-denominated German T- 

Bill rates and rates paid on the interbank market has 

moved to its highest level since November 2009, 

indicating that money market risk premia are on the 

rise. Banks of peripheral countries in particular are 

facing higher funding costs and, while the TED 

spread may not have reached alarming levels we 

watch it to assess the level of financial risks. A 

further widening of this spread in conjunction with 

tightening monetary conditions in Asia and the US 

implementing financial sector reform may cause 



63 


markets to slide, reminding us of the adage: ‘Sell in 

May and go away’. This means following a risk-off 

strategy for currency markets, favouring the USD, 

CHF and JPY in that order. 

EURUSD and equities: The correlation will return 

Should equity and other risky asset markets decline, 

the EUR will be a victim. This finding might surprise 

given that the correlation between EURUSD and the 

performance of share markets has collapsed over 

recent months. However, the correlation has 

collapsed due to inflows into the EMU bond market 

weakening at a faster pace than the inflows into 

European share markets. Financial account data 

show that the 12-month sum of inflows into European 

bond markets has collapsed from EUR 285bn to 

EUR 20bn within the course of a year. But during the 

same period, foreign investors kept on buying shares 

and short-dated money market instruments, keeping 

total portfolio inflows at a reasonably strong EUR 

320bn. The combination of weak bond and strong 

equity inflows led the EURUSD-capital market 

correlation to decline. However, should the equity 

markets lose their upward momentum or even turn 

south, EURUSD will trade sharply lower. 

The Aussie case 

Should global liquidity decline, putting risky assets 

out of favour, we see commodity currencies coming 

under selling pressure too. Of course, changes to 

Asian liquidity most notably via China increasing 

domestic interest rates will impact commodity 

currencies more compared to liquidity declines due to 

(i) difficulties within the European banking system 

developing on the back of the Greek or more broadly 

speaking European peripheral crisis or (ii) the US 

introducing tough financial sector reforms. However, 

once equity markets turn down, investors will not ask 

what caused the decline. People will just take profits 

on commodity- and high-yielding currencies. The 

exposure within this FX market segment is 

significant, suggesting the first wave of a sell-off 

would be sharp. 

Sterling undervalued? Dream on 

Last not least, we turn again to sterling. A 

Conservative-led government would no doubt be less 

damaging to capital markets than another Labour 

government, but the Institute for Fiscal Studies 

suggested that all main three party elections 

manifestos were showing significant budget gaps. 

These range from GBP 38bn in the case of the 

Liberal Democrats to more than GBP 52bn for the 

Conservatives. We cannot repeat often enough that 

the over-leveraged British economy will find it difficult 

to grow out of its problems (leverage is always 

deflationary in a country unless debt is monetised) 

suggesting the government will either have a higher 

tax take or lower revenues. The Sunday Times 

newspaper reported that BoE chief Mervyn King 

Chart 7: EUR: Net Financial including Bond 

flows have collapsed 


Chart 8: There is no yield in core Euroland 


privately admitted that sterling rates will have to stay 

low for several years, implying that the sterling 

forward curve is wrongly priced. Whichever way we 

look at it, sterling remains a clear sell. Either it will 

trade lower as investors lose trust in the country’s 

ability to reduce its debt and deficit levels or it will 

decline due to the impact of budget consolidation on 

growth. One could argue that budget consolidation 

gives greater scope for the private sector to invest as 

rates and yields should fall due to lower public 

borrowing, creating a ‘crowding-in’ effect. 

Unfortunately, it will not work this way in the UK. 

Money market rates are already low and the 

crowding-in effect will not develop: there was no 

crowding-out effect when UK deficits were rising as 

the BoE counterbalanced any possible effect through 

its quantitative easing policy. The BoE has stopped 

buying gilts, at least for now, suggesting that the 

deficit may have to be completely funded via the 

capital market. This means that 2010 and 2011 will 

see more net capital demand from the public sector 

than 2009 – even if the deficit reduction process 

turns out to be successful. Hence, crowding in is not 

going to happen. Sterling is the only variable the UK 

can manipulate to create the positive growth impulse 

that will sorely be needed to compensate for the loss 

of public demand. 



64 


Euro Dives 

• The euro is collapsing across the board with a break through major support levels on most 

crosses suggesting that an acceleration of the downtrend is now unfolding 

• EURUSD is currently accelerating the downtrend following the break below major support with the 

bottom end of the six month channel being tested 

• EURJPY has collapsed breaking below the February low, opening the way for further significant 

losses over the medium term 

• EURGBP now approaching major medium term support, a break of which will turn the longer term 

outlook bearish 

The euro has accelerated its recent decline, with 

losses across the board triggering important 

bearish technical signals suggesting that further 

significant downside potential is now developing. 

Indeed, it is interesting to note that the euro is 

already the weakest currency year-to-date 

among the majors, with losses of over 11% 

against the USD. The current collapse is 

confirming the medium term bearish outlook for 

the euro. 

Indeed, EURUSD has accelerated the major 

downtrend through the key support at the 1.2890 

level to confirm the longer term bearish technical 

picture and the bottom end of the six-month 

descending channel at the 1.2595 level is now 

being targeted. A further break below here will 

open downside potential back to the 1.2330 lows 

seen in October 2008. Longer term, the structure 

of the decline seen since the 1.5145 November 

2009 high implies an eventual break below the 

1.2330 support. Such a break lower confirms the 

long term bearish outlook for the euro, putting the 

focus on the 1.1645 November 2005 lows. The 

overall bearish picture is consistent with the negative 

signals currently being generated by technical 

indicators, which suggest that bearish momentum is 

set to be sustained in the coming weeks. 

However, one of the most bearish technical signals 

currently being generated by the euro is on EURJPY, 

where the long term pivotal support at the 119.70 

level has been broken. This break lower has now 

turned the longer term EURJPY outlook bearish and 

losses are expected to target the 115.95 level 

initially, which represents the bottom end of the sixmonth 

descending channel. Over the medium term, 

the 112.10 January 2009 low is also expected to be 

targeted. Longer term charts suggest that the 

EURJPY trading activity seen since the beginning of 

2009 is corrective and that the down trend from the 

169.95 July 2008 high is set to be resumed target 

100.35. 

Chart 1: EUR/USD – accelerating the downtrend 

EURUSD is 

accelerating the down 

trend with the break 

below the 1.2890 level 

confirming the 

medium term bearish 

outlook. 

We now expect a test 

of the channel support 

at 1.2595, with a 

further break below 

here targeting the 

1.2330 lows of 

October 2008. 

1.5060 

1.51 

1.5144 

1.4842 

1.46 

1.4582 

1.4630 

1.4480 

1.41 

1.4219 

1.36 

1.3435 

1.31 

1.3815 

1.3270 

1.3690 

1.26 

14-Sep-09 

11-Nov-09 

08-Jan-10 

09-Mar-10 

06-May-10 


Ian Stannard 7 Mayl 2010 


65 


Chart 2: EUR/JPY – the most bearish euro signals are being triggered on EURJPY 

EURJPY is triggering 

the most euro bearish 

signals among the 

139 

138.51 

euro crosses 

134.55 

134.35 

suggesting significant 134 

downward pressure. 

The break below long 

term pivotal support at 

the 119.70 level 

confirms the bearish 

outlook. 

We now expect a 

decline towards 

115.95 and then 

112.10. 


129 

124 

119 

14-Sep-09 

129.10 

126.90 

11-Nov-09 

127.45 

08-Jan-10 

119.70 

09-Mar-10 

Chart 3: EUR/GBP– targeting longer term pivotal support at 0.8400 

EURGBP has 

accelerated the recent 

down trend following 

0.942 

0.9410 

the break below the 

0.8605 support and a 

test of the longer term 

pivotal support at 

0.8400 is now 

expected. 

A break below 0.8400 

will turn the longer 

0.922 

0.902 

0.882 

0.9155 

0.8835 

0.9150 

term outlook bearish 0.862 

opening the way for a 

0.8605 

decline towards 

0.8095. 0.842 

14-Sep-09 11-Nov-09 08-Jan-10 09-Mar-10 


EURCHF has broken 

sharply lower through 

the 1.4320 support. 

1.520 

Chart 4: EUR/CHF – breaking sharply lower 

1.5240 

1.5140 

127.90 

06-May-10 

0.8865 

06-May-10 

We now expect some 

further losses in the 

near-term to target 

1.40 and 1.3980, 

which also coincides 

with the lower 

boundary of the 

descending channel 

that has been in place 

since December. 

1.500 

1.480 

1.460 

1.440 

1.420 

1.5015 

1.4900 

1.4150 

1.4465 

1.400 

14-Sep-09 

11-Nov-09 

08-Jan-10 

09-Mar-10 

06-May-10 


Ian Stannard 30 April 2010 


66 


Currency Spot Trade Recommendations Date 

EUR/JPY 116.90 Sell 118.00, stop at 120.00, target 110.00 6 May 2010 

EUR/USD 1.2720 Sell 1.2860, stop 1.2960, target 1.2360 6 May 2010 

USD/JPY 92.30 Longs from 93.60 stopped at 92.60 27 Apr 2010 

TRY/CZK 13.15 Longs from 12.77 achieved the 13.30 target 27 Apr 2010 

AUD/USD 0.8925 Short at 0.9280, lower stop to 0.9180, target 0.86 20 Apr 2010 

USD/CHF 1.1085 Longs from 1.0530 achieved the 1.11 target 15 Apr 2010 

GBP/USD 1.4915 Short at 1.5430, lower stop to 1.5150, target 1.4700 15 Apr 2010 


Ian Stannard 30 April 2010 


67 


Economic Calendar: 7 - 14 May 

GMT Local Previous Forecast Consensus 

Fri 07/05 01:30 11:30 Australia RBA Policy Statement 

06:45 08:45 France Trade Balance : Mar EUR-3.6bn EUR-3.9bn EUR-3.4bn 

06:45 08:45 Budget Balance (Cumulative) : Mar EUR-43.7bn EUR-30.0bn n/a 

07:30 09:30 Sweden Industrial Production (sa) m/m : Mar -0.8% 0.6% n/a 

07:30 09:30 Industrial Production (nsa) y/y : Mar -1.5% 0.1% 0.7% 

08:00 10:00 Norway Manufacturing Production m/m : Mar 0.8% 1.0% 0.5% 

08:00 10:00 Manufacturing Production y/y : Mar 0.2% 1.6% 1.3% 

08:00 09:00 Halifax House Prices m/m : Apr 1.1% 0.5% 0.5% 

08:00 09:00 Halifax House Prices y/y : Apr 5.2% 9.6% 7.0% 

08:30 09:30 UK Input PPI (nsa) m/m : Apr 3.6% 1.0% 1.0% 

08:30 09:30 Output PPI (nsa) y/y : Apr 5.0% 5.2% 4.8% 

08:30 09:30 Output PPI (Ex-FDT, nsa) y/y : Apr 3.6% 4.0% 3.5% 

09:30 11:30 Eurozone ECB’s Trichet Speaks at Conference in Lisbon 

17:00 19:00 EU Leaders Hold Summit on Greek Aid Package 

10:00 12:00 Germany Industrial Production m/m : Mar 0.0% 2.0% 1.5% 

10:00 12:00 Industrial Production y/y : Mar 5.4% 6.8% 6.4% 

11:00 07:00 Canada Unemployment Rate : Apr 8.2% 8.2% 8.2% 

11:00 07:00 Payroll Jobs y/y : Apr 17.9k 20.0k 25.0k 

12:30 08:30 US Non-Farm Payrolls (Chg) : Apr 162k 165k 190k 

12:30 08:30 Unemployment Rate : Apr 9.7% 9.7% 9.7% 

12:30 08:30 Average Hourly Earnings m/m : Apr -0.1% 0.1% 0.1% 

16:30 10:30 Fed’s Plosser Speaks on Economic Outlook in Delaware 

17:15 13:15 Ex-Fed’s Greenspan Speaks at University of North Carolina 

19:00 15:00 Consumer Credit : Mar USD-11.5bn USD-5.0bn USD-3.7bn 

Sat 08/05 13:30 09:30 US Fed’s Bernanke Speaks at University of South Carolina 

Mon 10/05 23:50 08:50 Japan BoJ Minutes 

(09/05) 

06:00 08:00 Germany Trade Balance (sa) : Mar EUR12.1bn EUR15.5bn EUR14.5bn 

06:30 08:30 France BdF Business Survey (Prel) : Apr 103.3 104.0 n/a 

06:45 08:45 Industrial Production m/m : Mar 0.0% 0.3% 0.2% 

06:45 08:45 Industrial Production y/y : Mar 3.3% 5.2% n/a 

06:45 08:45 Manufacturing Production (sa) m/m : Mar 0.4% 0.2% n/a 

06:45 08:45 Manufacturing Production (sa) y/y : Mar 4.6% 6.1% n/a 

08:00 10:00 Italy Industrial Production m/m : Mar 0.0% 1.0% n/a 

08:00 10:00 Industrial Production (wda) y/y : Mar 2.7% 8.1% n/a 

08:00 10:00 Norway CPI (nsa) m/m : Apr 0.5% -0.3% -0.2% 

08:00 10:00 CPI (nsa) y/y : Apr 3.4% 2.8% 2.9% 

08:00 10:00 CPI-ATE (nsa) y/y : Apr 1.7% 1.7% 1.7% 

08:00 10:00 PPI m/m : Apr 2.3% 4.5% n/a 

08:00 10:00 PPI y/y : Apr 21.7% 27.9% n/a 

11:00 12:00 UK BoE Rate Announcement 

17:00 13:00 US Fed’s Kocherlakota Speaks in Minneapolis 

Tue 11/05 23:01 00:01 UK BRC Retail Sales Monitor : Apr 

23:01 00:01 RICS House Price Balance : Apr 9 5 n/a 

(10/05) 

08:30 09:30 Industrial Production m/m : Mar 0.9% 0.2% 0.3% 

08:30 09:30 Industrial Production y/y : Mar -0.1% 0.3% 0.4% 

08:30 09:30 Manufacturing Production m/m : Mar 1.3% 0.4% 0.3% 

08:30 09:30 Manufacturing Production y/y : Mar 1.4% 1.5% 1.5% 

01:30 11:30 Australia NAB Business Confidence : Apr 14 14 n/a 

01:30 11:30 NAB Business Conditions : Apr 13 10 n/a 

06:00 08:00 Germany CPI (Final) m/m : Apr -0.1% (p) -0.1% -0.1% 

06:00 08:00 CPI (Final) y/y : Apr 1.0% (p) 1.0% 1.0% 

06:00 08:00 HICP (Final) m/m : Apr -0.1% (p) -0.1% n/a 

06:00 08:00 HICP (Final) y/y : Apr 1.0% (p) 1.0% n/a 

07:15 09:15 Eurozone ECB’s Ordonez Speaks in Madrid 

Market Economics 7 May 2010 


68 


Economic Calendar: 7 - 14 May (cont) 


Tue 11/05 07:30 09:30 Sweden CPI (nsa) m/m : Apr 0.2% 0.2% n/a 

(cont) 07:30 09:30 CPI (nsa) y/y : Apr 1.2% 1.2% n/a 

07:30 09:30 CPIF m/m : Apr 0.3% 0.2% n/a 

07:30 09:30 CPIF y/y : Apr 2.5% 2.4% 2.4% 

08:00 09:00 AMV Unemployment (nsa) : Apr 5.2% 5.1% n/a 

07:30 09:30 Neths CPI m/m : Apr 1.2% 0.2% n/a 

07:30 09:30 CPI y/y : Apr 1.0% 1.0% n/a 

11:30 07:30 US NFIB Small Business Optimism : Apr 

12:30 08:30 Fed’s Lacker Speaks at University of North Carolina 

14:00 10:00 Wholesale Inventories m/m : Mar 0.6% 0.3% 0.5% 

17:15 13:15 Fed’s Lockhart Speaks at Atlanta Financial Markets Conference 

17:30 13:30 Fed’s Plosser Speaks at Atlanta Financial Markets Conference 

Wed 12/05 05:00 14:00 Japan Leading Indicator (Chg) : Mar 

05:00 14:00 Coincident Indicator (Chg) : Mar 

06:00 08:00 Germany GDP (Flash) q/q : Q1 0.0% -0.2% -0.1% 

06:00 08:00 GDP (Flash) y/y : Q1 -2.4% 0.9% 1.1% 

06:45 08:45 France GDP (Prel) q/q : Q1 0.6% 0.2% 0.3% 

06:45 08:45 GDP (Prel) y/y : Q1 -0.3% 1.3% 1.4% 

06:45 08:45 CPI m/m : Apr 0.5% 0.3% 0.3% 

06:45 08:45 CPI y/y : Apr 1.6% 1.7% 1.8% 

06:45 08:45 HICP y/y : Apr 0.5% 0.3% n/a 

06:45 08:45 HICP y/y : Apr 1.7% 1.9% n/a 

06:45 08:45 Ex-Tobacco CPI (Final, nsa) : Apr 119.58 119.97 n/a 

06:45 08:45 Current Account : Mar EUR-3.6bn EUR-3.7bn n/a 

06:45 08:45 Investment Survey (Plans for 2010) : Q2 4% 6% n/a 

07:00 09:00 Spain GDP (Flash) q/q : Q1 -3.1% -0.1% 0.0% 

07:00 09:00 GDP (Flash) y/y : Q1 -0.1% -1.5% -1.4% 

07:30 09:30 Neths GDP q/q : Q1 0.2% 0.3% n/a 

07:30 09:30 GDP y/y : Q1 -2.2% 0.0% n/a 

07:30 09:30 Retail Sales y/y : Mar -3.1% -2.5% n/a 

07:30 09:30 Industrial Production m/m : Mar -2.4% 2% n/a 

07:30 09:30 Industrial Production y/y : Mar 4.3% 7.4% n/a 

08:00 10:00 Italy GDP (Prel) q/q : Q1 -0.3% 0.4% n/a 

08:00 10:00 GDP (Prel) y/y : Q1 -3.0% 0.1% n/a 

08:30 09:30 UK Unemployment Change : Apr -32.9k -25.0k -20.0k 

08:30 09:30 Unemployment Rate (Claimant) : Apr 4.8% 4.7% n/a 

08:30 09:30 Average Earnings (3m-y/y) : Mar 2.3% 2.2% n/a 

09:30 11:30 BoE Inflation Report 

09:00 11:00 Eurozone GDP (Flash) q/q : Q1 0.0% 0.1% 0.2% 

09:00 11:00 GDP (Flash) y/y : Q1 -2.2% 0.4% 0.4% 

09:00 11:00 Industrial Production (sa) m/m : Mar 0.7% 1.2% 0.7% 

09:00 11:00 Industrial Production (wda) y/y : Mar 4.0% 6.5% n/a 

12:30 08:30 US Trade Balance : Mar USD-39.7bn USD-40.5bn USD-39.7bn 

14:15 10:15 Fed’s Rosengren Speaks on Financial Markets Panel in Atlanta 

14:30 10:30 EIA Oil Inventories 

16:30 12:30 Fed’s Lockhart Speaks at Atlanta Financial Markets Conference 

17:15 13:15 Fed’s Bullard Speaks on Economy in Nashville 

18:00 14:00 Treasury Statement : Apr USD-65.4bn USD-40.5bn USD-20.0bn 



69 


Economic Calendar: 7 - 14 May (cont) 


Thu 13/05 23:50 08:50 Japan Current Account (nsa) : Mar JPY1471bn JPY2020bn n/a 

23:50 08:50 M2 y/y : Apr 2.6% 2.7% n/a 

(12/05) 

01:30 11:30 Australia Unemployment Rate : Apr 5.3% 5.2% n/a 

01:30 11:30 Employment Change : Apr 19.6k 29.7k n/a 

08:00 10:00 Eurozone ECB Monthly Bulletin 

08:30 09:30 UK Trade Balance : Mar GBP-6.2bn GBP-6.5bn n/a 

08:30 09:30 Non-EU Trade Balance : Mar GBP-3.3bn GBP-3.5bn n/a 

08:30 09:30 DCLG UK House Prices y/y : Mar 

12:30 08:30 US Import Prices m/m : Apr 0.7% 0.8% 0.8% 

12:30 08:30 Import Prices Ex Petroleum m/m : Apr -0.2% 0.1% n/a 

12:30 08:30 Initial Claims 444k 430k 436k 

13:00 09:00 Fed’s Kohn Speaks on Monetary Policy in Ottawa 

17:00 13:00 Fed’s Kocherlakota Speaks in Winsconsin 

Fri 14/05 07:00 09:00 Spain CPI m/m : Apr 1.1% 1.1% n/a 

07:00 09:00 CPI y/y : Apr 1.6% 1.5% n/a 

08:00 10:00 Eurozone ECB’s Constancio Speaks at Conference in Lisbon 

08:00 10:00 Italy CPI (Final) m/m : Apr 0.4% (p) 0.4% n/a 

08:00 10:00 CPI (Final) y/y : Apr 1.5% (p) 1.5% n/a 

08:00 10:00 HICP (Final) m/m : Apr 0.9% (p) 0.9% n/a 

08:00 10:00 HICP (Final) y/y : Apr 1.6% (p) 1.6% n/a 

12:30 08:30 US Retail Sales m/m : Apr 1.9% -0.1% 0.3% 

12:30 08:30 Retail Sales Ex-Autos m/m : Apr 0.9% 0.2% 0.5% 

13:15 09:15 Industrial Production m/m : Apr 0.1% 0.8% 0.6% 

13:15 09:15 Capacity Utilisation Rate : Apr 73.2% 74.0% 73.7% 

13:55 09:55 Michigan Sentiment (Prel) : May 72.2 71.0 73.5 

14:00 10:00 Business Inventories : Mar 0.5% 0.3% 0.4% 

During 17-18 Eurozone Finance Ministers Meet 

Week 

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




70 


Key Data Preview 

Chart 1: US Payrolls on the Upswing 


Apr (f) Mar Feb Jan 

Payroll Jobs k 165 162 -14 14 

Unemployment Rate % 9.7 9.7 9.7 9.7 

Key Point: 

Nonfarm payrolls will pretty much match the March 

pace with a 165k gain; the unemployment rate should 

hold at 9.7%. 

BNP Paribas Forecast: Payrolls to Stay Positive 

US: Labour Report (April) 

Release Date: Friday 7 May 

We forecast a gain of 165k jobs in nonfarm payrolls in April 

after a 162k increase in March. The tone of the report will 

be a little less positive than March as the composition of 

hiring will be more tilted to temporary Census workers who 

we look to account for 110k jobs after a 48k gain a month 

prior. Meanwhile, private sector hiring is expected to stay 

positive, but to fall back somewhat from the March pace 

(this was boosted by weather-related swings). Private 

sector hiring is expected to add 70k after a 123k gain in 

March. The construction sector should see job losses 

resume after a recovery from February weather disruptions 

last month. The manufacturing sector should continue to 

add to nonfarm payrolls, as should the private service 

sector led by temporary hiring. Meanwhile, state and local 

governments are expected to continue to weigh on overall 

job growth as governments grapple with the ongoing 

budget crisis. The lack of downward momentum in initial 

jobless claims highlights that hiring is picking up gradually. 

We expect job growth will keep pace with labour force 

gains and for the unemployment rate to hold steady at 

9.7%. Hours worked should post a robust gain, leading to 

an improvement in disposable income for consumers while 

average hourly earnings are expected to remain soft. 

Chart 2: Canadian Employment 



Unemployment rate % 8.2 8.2 8.2 8.3 

Payroll jobs (k) 20.0 17.9 20.9 43.0 

BNP Paribas Forecast: Upward Momentum 

Canada: Labour Report (April) 


We expect Canadian employment to increase by 20.0k in 

April, marking the fourth consecutive monthly rise. 

While the labour market remains on a healthy rebound, the 

pace of improvement has eased slightly compared to the 

beginning of the year, pointing to some moderation in 

economic growth. Indeed, hours worked slipped 0.4% in 

March, following a three-month run of gains that saw backto-back 

0.2% rises in January and February and a 0.6% 

jump in December. 

Earnings growth should also remain subdued in April, 

supportive of our expectations for non-threatening 

underlying inflation. 

We forecast the unemployment rate to remain unchanged 

at 8.2% as the expected monthly gain in employment 

should largely offset an increase in the labour force. 

Key Point: 

Canadian employment should increase further in 

April, but wage gains are set to remain subdued. 



71 



110 

100 

90 

80 

70 

60 

50 

Chart 3: French Manufacturing Output 

Business Confidence (INSEE) 

Industrial Output (Index 2005=100) 

Industrial Output (% y/y, RHS) 

-2.5 

-5.0 

-7.5 

-10.0 

-12.5 

-15.0 

-17.5 

-20.0 

01 02 03 04 05 06 07 08 09 10 


% sa - wda Mar (f) Feb Jan 10 Mar 09 

Total m/m 0.3 0.0 1.1 -1.5 

Total y/y 5.2 3.3 2.6 -16.1 

Manufacturing m/m 0.2 0.4 0.6 -1.2 

Manufacturing y/y 6.1 4.6 3.6 -18.0 

Key Point: 

Production should resume its upward trend after a 

pause in February. But it remains way below the precrisis 

level. 

5.0 

2.5 

0.0 

BNP Paribas Forecast: Slowly Recovering 

France: Industrial Production (March) 

Release Date: Monday 10 May 

Industrial output should continue to recover on a trend 

basis. Business surveys are improving after a correction in 

February that was accompanied by a pause in IP growth. 

This pause may have affected output the following month. 

On the demand side, conditions are not highly supportive. 

In absolute terms, orders remain at a low level. Signs of 

investment recovery are lacking, although the worst is 

clearly over. Export increases remain moderate. More 

importantly, retail sales were lacklustre throughout the first 

quarter. 

The rebound in new car registrations in France in March 

and ongoing increase of sales in Europe (except Germany) 

should be supportive for the auto industry. Cold weather 

should help support March electricity output. 

Our forecast is conservative with a modest increase 

manufacturing output, +0.2% m/m. Nevertheless, the 

comparison with severely depleted production in the same 

period last year should push the y/y gain to c.6%. 

This would result in a 0.7% q/q increase in manufacturing 

output and a 1.3% q/q jump in total industrial production in 

Q1. 

Chart 4: Norwegian CPI Electricity (% m/m) 



CPI % m/m -0.3 0.5 1.3 0.2 

CPI-ATE % m/m 0.4 0.2 0.7 -0.6 

CPI % y/y 2.8 3.4 3.0 2.5 

CPI-ATE % y/y 1.7 1.7 1.9 2.3 

Key Point: 

Given the fall in electricity prices, headline inflation 

should moderate in April. 

BNP Paribas Forecast: Headline to Moderate 

Norway: CPI (April) 

Release Date: Monday 10 May 

In March, both headline and CPI-ATE inflation at 3.4% and 

1.7% y/y respectively were slightly lower than market 

expectations. Electricity prices were once again the main 

driver for the increase in the headline rate of inflation, while 

core, CPI-ATE, inflation reached its lowest level since 

November 2007. 

In April, we expect headline inflation to moderate from 

3.4% y/y to 2.8%. Given electricity prices lag developments 

in Nordpool electicity prices by a month, the fall in the latter 

by around 25% m/m in March points to a fall in electricity 

inflation in April (Chart 2). Overall, we expect housing and 

utilities inflation to add 1.7pp to headline inflation, after a 

contribution of 2.2pp in March. In terms of other 

components, a further increase in oil prices in NOK terms 

over the month points to an increase in fuel inflation. 

Overall, transport inflation should add 0.7pp to inflation, 

broadly the same contribution as in March. 

CPI-ATE inflation should remain broadly stable, at 1.7% 

y/y. We expect it to trend lower in the coming months given 

the impact of the stronger currency and some spare 

capacity in the economy. However, this moderation is 

unlikely to be as marked as in some other advanced 

economies. 



72 



Chart 5: UK Manufacturing Production vs CIPS 


Mar (f) Feb Jan Dec 

Ind Prod % m/m 0.2 0.9 -0.5 0.5 

Ind Prod % y/y 0.3 -0.1 -1.4 -3.6 

Man Prod % m/m 0.4 1.3 -0.9 0.9 

Man Prod % y/y 1.5 1.4 0.1 -2.0 

Key Point: 

We expect manufacturing production to post a 

robust gain, consistent with upbeat surveys and 

accommodative policy conditions. 

BNP Paribas Forecast: Robust Expansion 

UK: Industrial Production (March) 

Release Date: Tuesday 11 May 

We expect UK industrial production to post a 0.2% m/m 

gain in March, underpinned by a more rapid acceleration in 

manufacturing production. We expect manufacturing to 

expand by 0.4% m/m. 

Manufacturing output is being boosted by accommodative 

financial and monetary conditions, as seen in the 

depreciation in the effective GBP exchange rate and loose 

monetary policy. This has helped to push the CIPS 

manufacturing survey higher pretty much continuously for 

the last year. We expect the buoyancy of the survey 

indicators to translate into hard output over the coming 

months. One minor risk is that the volatility in output over 

recent months (which in turn reflected snow-related 

disruption) may hold back the extent of the March 

improvement. Nonetheless, the underlying trend should be 

robust for a number of months. 

Manufacturing aside, the initial breakdown of the Q1 GDP 

data suggested that utilities output and mining and 

extraction were weaker on the month. These are likely to 

hold back the headline pace of output growth below that of 

manufacturing. 

65 

60 

55 

50 

45 

40 

35 

30 

25 

Chart 6: Eurozone GDP & PMI 

Composite PMI 

20 

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


Eurozone GDP % (q/q, RHS) 

Seas. Adjusted Q1 10(f) Q4 09 Q3 09 Q2 09 

GDP % q/q 0.1 0.0 0.4 -0.1 

GDP % y/y 0.4 -2.2 -4.1 -4.9 

Key Point: 

Weather effects and weak consumer spending will 

weigh on Q1 growth though leading indicators point 

to stronger growth in Q2. 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

-1.5 

-2.0 

-2.5 

-3.0 

BNP Paribas Forecast: Weak Start 

Eurozone: GDP (Q1 2010, ‘Flash’ Estimate) 

Release Date: Wednesday 12 May 

While the recent sentiment surveys signal an improvement 

in GDP growth going forward (see chart), the ‘hard’ activity 

data released for Q1 to date suggest that GDP is likely to 

show a marginal q/q increase at best. 

A significant drag will come from the impact of unusually 

cold weather on the German construction sector, which 

saw record declines in output at the start of the year. 

Retail sales data in the eurozone also suggest that private 

consumption is likely to remain weak in Q1. Sales were flat 

on a q/q basis in Q1. We have to go back to Q1 2008 to 

find a quarter in which private consumption even expanded 

on a q/q basis in the eurozone. The weakness of the labour 

market and fiscal consolidation measures in some member 

states will continue to weigh on spending, with surveys of 

spending intentions near record low levels. 

The narrowing of the trade surplus in Q1 is also indicative 

of a drag on GDP from net exports, unwinding the modest 

boost from this area in Q4 last year. 

The rebound in manufacturing activity points to a pick-up in 

the rate of growth beyond Q1, but with domestic demand 

still subdued and sentiment fragile given recent turbulence 

in financial markets, the outlook remains difficult. Our GDP 

growth estimate for 2010 remains at around 1%. 



73 



Chart 7: UK GDP vs Unemployment 



Claimant Count Chg -25k -32.9k -40.1k 16.2k 

ILO Emp 3m Chg -71k -90k -54k 

ILO Unemp 3m Chg 25k 43k -33k 

Ave Earns % 3m/yr 2.2 2.3 0.8 

Ex Bonus % 3m/yr 2.0 1.7 1.5 

Key Point: 

We expect the pace of improvement in claimant 

count unemployment to begin to moderate. 

BNP Paribas Forecast: Mixed 

UK: Labour Report (April) 


We expect the labour report to continue to show a mixed 

picture. The claimant count measure of unemployment has 

been significantly more robust than expected for several 

months – registering a fall in unemployment in excess of 

70k over the last two months. Meanwhile, the ILO measure 

has shown the exact opposite – a near 70k rise in 

unemployment and a 160k fall in employment. 

Part of the divergence may be due to timing, since the ILO 

measure is a 3-month change and may still be reflecting 

snow-related disruption. However, the other element of the 

difference is likely to reflect eligibility to claim 

unemployment benefits as well as alternatives to seeking 

employment such as training programmes. 

The recent pace of decline in claimant count 

unemployment (approaching 100k per quarter) would 

typically be consistent with GDP growth in excess of 1.5% 

q/q – stronger than even our above-consensus forecast. 

Hence we expect the pace of improvement to moderate 

from this release onwards. 

Average earnings growth has accelerated due to base 

effects, though by less than it might have been expected 

to. We expect the headline measure to be broadly stable in 

March as the base effects have now worked through. 

65 

60 

55 

50 

45 

40 

35 

30 

25 

20 

Chart 8: German GDP & PMI 

15 

-3.5 

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


Composite PMI 

German GDP 

(% q/q, RHS) 

Seas. Adjusted Q4 10 Q4 09 Q3 09 Q2 09 

GDP % q/q -0.2 0.0 0.7 0.4 

GDP % y/y 0.9 -2.4 -4.8 -5.8 

Key Point: 

The impact of unusually cold weather on 

construction activity will hit GDP in Q1 but survey 

data point to a much stronger Q2. 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

-1.5 

-2.0 

-2.5 

-3.0 

BNP Paribas Forecast: Q1 Weakness 

Germany: GDP (Q1 2010, ‘Flash’ Estimate) 


While leading indicators point to a marked improvement in 

German GDP growth going forward, the adverse impact of 

the unusually cold weather on activity, in the construction 

sector in particular, is consistent with a weak performance 

in Q1: we forecast a 0.2% q/q contraction in GDP. 

Construction output is on track to decline at a double-digit 

q/q rate in Q1, which we calculate will subtract around ¾ of 

a percentage point from GDP. The narrowing of the trade 

surplus in Q1 is consistent with a significant drag on GDP 

from net exports also, following an unusually large boost to 

growth from this area in Q4 last year. 

Another weak quarter for private consumption is probable 

too. Retail sales fell by 0.9% q/q in Q1, the fifth contraction 

in the past six quarters. 

The good news is that the rebound in global manufacturing 

activity has seen leading indicators step up a gear in recent 

months, indicative of an acceleration in growth beyond Q1 

(see chart). Data on domestic capital goods orders have 

also signalled a pick-up in investment spending, in line with 

the improvement in business confidence. 

The y/y rate of change in GDP will rise into positive territory 

in Q1 for the first time since Q3 2008, although this is 

purely a consequence of favourable base effects. 



74 



Chart 9: French GDP Growth (contribution % q/q) 

2.10 

1.40 

0.70 

-0.00 

-0.70 

-1.40 

-2.10 

Total GDP (% q/q) 

Exports 

Investment 

Imports 

Invent. Ch. 

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 

2008 2009 

Sources: Reuters EcoWin Pro, INSEE, BNP Paribas 

PCE 

Volume SA-/WDA Q1 (f) Q4 Q3 Q1 09 

GDP % q/q 0.2 0.6 0.2 -1.3 

GDP % y/y 1.3 -0.3 -2.3 -3.4 

PCE % q/q -0.2 1.0 0.1 0.1 

External contrib. (pt) 0.0 -0.8 0.3 -0.1 

Key Point: 

GDP growth should be better balanced in Q1, 

although investment remains the weakest link. 

2.1 

1.4 

0.7 

-0.0 

-0.7 

-1.4 

-2.1 

BNP Paribas Forecast: Slowing 

France: GDP First Estimate (Q1) 


The growth structure in Q4 was distorted by the car 

purchase incentive. This boosted private consumption and 

imports. We expect this special factor to unwind in Q1. 

While consumption was only driven higher by car sales in 

the last quarter of 2009, demand was broad based. 

According to the retail sales data, we should get a 

contraction in car sales but also in other manufactured 

goods (ex-auto sales declined 0.2% in Q1 after soaring 

1.5% in Q4). Nevertheless, we expect consumption of 

services to support total PCE so that this item should 

continue to contribute positively to growth, as it did in each 

of the preceding four quarters. 

Inventory change contributed a massive 1 percentage point 

to GDP growth in Q4. We do not expect this to be 

repeated, but given that inventories continued to contract in 

Q4 (by as much 1.1% of GDP after 2.0% in Q3), a milder 

drop would result in another positive contribution to growth. 

We are less optimistic about the investment outlook. The 

uncertain level of demand, massive overcapacity in 

manufacturing and the adverse weather are the three main 

factors likely to have pushed investment further down in 

Q1. Altogether, we forecast GDP growth of 0.2% q/q, a 

more conservative view than that of INSEE or BoF (they 

both expect a 0.4% gain). 

Chart 10: French Inflation (Energy HICP Components) 

200 

180 

160 

140 

120 

100 

80 

Natural Gas 

Electricity 

EMU 

France 

EMU 

France 

96 97 98 99 00 01 02 03 04 05 06 07 08 09 

Sources: Eurostat, Reuters EcoWin Pro 

% Apr (f) Mar Feb Apr 09 

Total (nsa) m/m 0.32 0.48 0.56 0.16 

Total (nsa) y/y 1.74 1.58 1.28 0.13 

Core (sa) m/m -0.03 -0.05 0.48 0.09 

Core (sa) y/y 1.56 1.68 1.85 1.61 

Ex-Tob. index 119.97 119.58 118.99 118.00 

Key Point: 

Energy should be the only reason for the inflation 

pick-up we expect. Core inflation should ease again 

in April. 

BNP Paribas Forecast: Up Again 

France: Consumer Price Index (April) 


We expect French inflation to have accelerated by 0.16 

percentage points in April to 1.74%, the highest level since 

November 2008. This is entirely due to energy, whose 

contribution to inflation is forecast at 1.0pp. The regulated 

price for natural gas, on which more than 90% of 

households still rely, was hiked by 9.7%. This jump will add 

about 0.1pp to headline inflation and should close the gap 

between French and eurozone gas prices as shown in the 

chart. The gap will remain for electricity. For oil products, 

no such gap existed and we forecast French prices to 

increase in line with the eurozone’s, adding another 0.14pp 

or so to headline inflation. 

Food prices were pushed higher by particularly cold 

weather this winter; we now expect this trend to correct. 

Lower fresh food prices should compensate the rising trend 

for manufactured food, leaving total food inflation nearly flat 

at around 0.6% to 0.7% y/y. 

Core inflation is forecast to ease. Contrary to some other 

countries, French inflation is not significantly affected by 

the timing of Easter. It did not push inflation higher in 

March and consequently we do not expect a correction in 

April. Services, helped by declining wage costs, should be 

the main factor for the moderate 0.1 point decline of 

underlying inflation. 



75 



Chart 11: US Trade Deficit Components 


USD bn Mar (f) Feb Jan Dec 

Merchandise: -52.3 -51.3 -49.4 -51.9 

Services: 11.8 11.6 12.4 12.0 

Total: -40.5 -39.7 -37.0 -39.9 

BNP Paribas Forecast: Further Widening 

US: International Trade (March) 


The nominal US trade deficit is expected to widen to 

USD 40.5bn in March from USD 39.7bn in February. A 

small amount of the widening is likely to be nominal and 

owes to the fact that import prices rose a little faster than 

export prices. In addition, we expect the real deficit to 

widen as imports probably rose to meet strong production 

and consumer demand in March. A modest decline in oil 

imports will partially offset strength in other categories. The 

number will have implications for GDP growth as the 

estimate for Q1 included an assumption for March trade. 

The widening we expect would be in line with the modest 

weight of trade in Q1 GDP growth reflected in the advance 

estimate. 

Key Point: 

The nominal US trade deficit is expected to widen 

again in March owing to strength in imports. 

Chart 12: US Retail Sales in Gradual Recovery 


% m/m Apr (f) Mar Feb Jan 

Retail sales -0.1 1.9 0.5 0.5 

Ex-autos 0.2 0.9 1.0 0.6 

Key Point: 

Sales of most products remain healthy but vehicle 

and gasoline sales are in retreat. 

BNP Paribas Forecast: Auto Sales Fall in April 

US: Retail Sales (April) 


After soaring in March when generous discounts on vehicle 

prices boosted vehicle sales and virtually all other 

consumer goods performed strongly, consumers paused in 

April. Sales are forecast to decline 0.1% in April. The 

monthly pattern of sales in the past nine months has been 

one of an outsized m/m gain usually associated with public 

or private sales promotions followed by one or two months 

of lacklustre sales activity. The March and April sales 

performance again appears to fit this pattern. Vehicle sales 

are forecast to slump, falling by an expected 2.0% as unit 

volume sales decreased by 4.8% after jumping 13.5% in 

March. Retail sales ex vehicles are forecast to increase by 

a miniscule 0.2% in April. Gasoline prices fell again in April, 

this time by an estimated 2.6% after seasonal adjustment. 

Consequently, sales ex autos and gasoline are forecast to 

rise by 0.4% compared with 0.7% in March. Sales at 

department stores and apparel retailers are forecast to rise 

by 0.5%, approximately the same pace as in March. Sales 

at building materials stores should continue their robust 

revival, increasing by an estimated 2.5% after sales 

jumped by 3.1% in March. Sales are expected to be mildly 

positive in food, health care, sporting goods and 

electronics. 



76 



Chart 13: US Industrial Production 



Ind. Prod. (% m/m) 0.8 0.1 0.3 1.0 

Cap. Util (%) 74.0 73.2 73.0 72.7 

BNP Paribas Forecast: A Spring Rebound 

US: Industrial Production (April) 


We look for industrial production to rise 0.8% in April after a 

more subdued 0.1% gain in March that was held down by a 

notable drop in utilities production as the weather warmed 

up. Our forecast would imply capacity utilization jumping to 

74.0%, the highest reading since 2008. Industrial indicators 

including the ISM manufacturing index have continued to 

point to robust growth driven by global trade and an upturn 

in business spending. Data on motor vehicle production 

suggest this sector should help drive the strong reading in 

March. Utilities output should decline again as 

temperatures continued to be above seasonal norms in 

much of the country. Thus manufacturing output should be 

even stronger than the headline number and we anticipate 

a 0.9% gain after a similar increase a month earlier. 

Key Point: 

A strong reading is expected in industrial production 

in April 

Chart 14: US Present Conditions Compared 


May p (f) Apr 2H Apr p Apr Mar 

Michigan 

Sentiment 71.0 74.9 69.5 72.2 73.6 

Key Point: 

The preliminary University of Michigan index is likely 

to decline in May as the oil spill pushes gasoline 

prices higher and as the number of people who will 

exhaust their unemployment benefits is projected to 

start increasing. 

BNP Paribas Forecast: Decline 

US: Michigan Consumer Sentiment (May, preliminary) 


The University of Michigan Survey of Consumer 

Confidence index fell in April to 72.2 from 73.6 in March, 

although confidence improved in the second half of the 

month from a preliminary fall to 69.5 in the first half of April. 

We expect to see another decline in confidence at the 

beginning of May as the oil spill pushes gasoline prices 

higher and as the number of people who will exhaust their 

unemployment benefits is projected to increase in coming 

months. In addition, stocks’ gains appear to have lost 

momentum lately. Moreover, the latest Senior Loan Officer 

Survey showed a modest net fraction of banks continued to 

tighten standards and terms on credit card loans over the 

past three months. In the next few months, we expect 

confidence to remain on an upward trend as the labour 

market continues to improve. Five year ahead median 

inflation expectations, the figure tracked by Fed 

policymakers, is likely to remain at the lower end of its 

range or even fall below it, as Core CPI on a y/y basis 

continues to decelerate. 



77 


Economic Calendar: 17 May – 11 June 

17 May 18 May 19 May 20 May 21 May 

Japan: CGPI Apr, 

Machinery Orders Mar 

Eurozone: EU25 New Car 

Registrations Apr 

UK: Rightmove House 

Prices May 

US: Empire State Survey 

May, TICS Data Mar, 

NAHB May 



Australia: RBA MPC 

Minutes 

Japan: Tertiary Index Mar 

Eurozone: HICP Apr, 

Trade Balance Mar 

UK: CPI Apr, CBI 

Industrial Trends May 

Germany: ZEW May 

France: Non-Farm 

Payrolls (Prel) Q1, Wages 

(Prel) Q1 

Italy: Trade Balance Mar 

US: PPI Apr, Housing 

Starts Apr 

Australia: Westpac 

Consumer Confidence 

May 

UK: BoE MPC Minutes 

Spain: GDP (Final) Q1 

US: FOMC Minutes, CPI 

Apr 

Japan: GDP (Prel) Q1 

Eurozone: FOMC 

Minutes 

UK: Retail Sales Apr 

Germany: PPI Apr 

Italy: Industrial Orders 

Mar 

Norway: GDP Q1 

US: Leading Indicators 

Apr, Philly Fed May 

24 May 25 May 26 May 27 May 28 May 

Italy: Retail Sales Mar 

US: Existing Home Sales 

Apr 

Canada: Public Holiday 

Eurozone: Industrial 

Orders Mar 

UK: GDP (2 nd Est) Q1 

Italy: ISAE Consumer 

Confidence May, Retail 

Sales Mar 

Spain: PPI Apr 

Sweden: Labour Apr 

Neths: Producer 

Confidence May 

US: S&P/CS HPI Mar, 

FHFA HPA Mar & Q1, 


May 

Japan: BoJ Monetary 

Policy Meeting Minutes 

France: Housing Starts 

Apr, Retail Sales Apr, 

Industry Survey May 

Belgium: Business 


US: Durable Goods 

Orders Apr, New Home 

Sales Apr 

Japan: Trade Balance 

Apr 

UK: CBI Distributive 

Trades Q1 

Germany: States’ Cost of 

Living May, HICP (Prel) 

May 

France: Consumer 


Italy: Wages Apr, ISAE 

Business Confidence May 

Spain: Retail Sales Apr 

Sweden: PPI Apr, 


May 

Norway: Labour May 

US: GDP Q1, Corporate 

Profits Q1 

During Week: Germany Import Prices Apr, UK Nationwide House Prices May 

31 May 1 Jun 2 Jun 3 Jun 4 Jun 

Japan: IP Apr 

Eurozone: Monetary 

Developments Apr, 

Business & Consumer 

Survey May, HICP (Flash) 

May 

Italy: CPI (Prel) May 

Sweden: Consumer 


Norway: Retail Sales Apr 

US: Public Holiday 

Canada: GDP Q1 

Australia: RBA Rate 

Ann, Retail Sales Apr 

Eurozone: Labour Apr, 

Manu PMI (Final) May 

UK: CIPS Manu May 

Germany: Labour Apr 

France: PPI Apr 

Switz: GDP Q1, PMI May 

US: Construction Apr, 

ISM Manufacturing May, 

Help Wanted May 

Canada: BoC Rate Ann 

Australia: GDP Q1 

Eurozone: PPI Apr 

UK: Net Consumer Credit 

Apr, Mortgage Approvals 

Apr 

US: Challenger Layoffs 

May, ADP Labour May, 

Pending Home Sales Apr, 

Vehicle Sales May 

Australia: Trade Balance 

Apr 

Eurozone: Retail Sales 

Apr, Services PMI (Final) 

May 

UK: CIPS Services May 

Neths: CPI May 

US: Non-Farm 

Productivity Q1, Factory 

Orders Apr, ISM Services 

May 

During Week: Germany Retail Sales Apr, UK Halifax House Prices May 

7 June 8 June 9 June 10 June 11 June 

Germany: Factory Orders 

Apr 

Norway: Industrial 

Production Apr 

US: Consumer Credit Apr 

UK: BRC Retail Sales 

Monitor May 

Germany: Industrial 

Production Apr, Trade 

Balance Apr 

France: Trade Balance 

Apr, BoF Survey May, 

Budget Balance Apr 

Switz: CPI May 

Neths: Industrial 


US: NFIB Small Business 

Optimism Jun 

Australia: NAB Business 

Conditions & Confidence 

May 

UK: Trade Balance Apr 

Germany: LCI Q1 

Belgium: GDP (Rev) Q1 

Sweden: Industrial 


Neths: General Election 

US: Wholesale 

Inventories Apr, Beige 

Book 

Australia: Labour May 

Eurozone: ECB Rate 

Ann & Press Conference 

UK: BoE Rate Ann 

Germany: Trade Bal Apr, 

CPI May, HICP (Prel) May 

France: IP Apr, Non- 

Farm Payrolls (Final) Q1 

Italy: IP Apr, GDP (Final) 

Q1 

Sweden: CPI May, AMV 

Labour May 

Norway: CPI May, PPI 

May 

US: Trade Balance Apr, 

Treasury Statement May 

During Week: Germany WPI May 


Release dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions 

78 

Japan: BoJ Rate 

Announcement 

Eurozone: Current 

Account Mar, PMIs (Flash) 

May 

UK: PSNCR Apr, PSNB 

Apr 

Germany: GDP (Final) 

Q1, Ifo Survey May 

Italy: Non-EU Trade 

Balance Mar 

Neths: Labour Apr, 

Consumer Confidence May 

Canada: CPI Apr 

Japan: CPI Tokyo May, 

CPI National Apr, Labour 

Apr, Hh Consumption Apr, 

Retail Sales Apr 

Eurozone: Eurocoin May, 

Retail PMI May 

UK: GfK Consumer 


France: Job Seekers Apr 

Italy: PPI Apr 

Spain: HICP (Flash) May 

Belgium: CPI May 

Sweden: GDP Q1, Retail 

Sales Apr 

Norway: Labour Mar 

Switz: KoF Leading 

Indicator May 

US: Personal Income & 

Spending Apr, Trade Bal 

Apr, Chicago PMI May, 

UoM Sentiment (Final) May 

Eurozone: GDP (2 nd Est) 

Q1 

Spain: Industrial 


US: Labour May 

Canada: Labour May 

UK: PPI May, Industrial 


France: Current Account 

Apr, CPI May 

Spain: CPI (Final) May 

US: Retail Sales May, 

Business Inventories Apr, 

UoM Sentiment (Prel) Jun 


Treasury and SAS Issuance Calendar 

Daily update onto https://globalmarkets.bnpparibas.com, Tools & Apps, Analytical Tools, Market Calendar, Government Flows 

In the pipeline – Treasuries: 

Ireland: May not hold its 18 May bond auction. Considering the possibility of a syndicated 30y bond 

Italy: To issue another new BTP (Jun-13) in Q2 

Poland: May sell around USD 1bn of bonds and about JPY 0.5trn of bonds by the middle of the year 

Portugal: New syndicated OT (EUR 3bn) expected in Q2 

UK: To hold two syndications: H2 May, IL gilt (30-40y); H2 Jun, long-dated gilt (for both offerings, details about two weeks in advance) 

Finland: To hold a second syndicated auction (new 5y) more likely in H2. May issue a 5y USD bond in 2010 

Czech Rep.: To issue at least EUR 1bn depending on market conditions 

Denmark: To issue a EUR 5y loan (EUR 1-2bn) in H1 2010. To open new 5y & 10y DGBs H2 '10 

Slovak Rep.: Considering issuing new syndicated 15y benchmark bond (around EUR 1.5bn) in the autumn 

During the week: 

FHLB: May Global Notes auction details to be announced on Wednesday 12 May 

Date Day Closing Country Issues Details BNPP forecasts 

Local GMT 

07/05 Fri 12:00 03:00 Japan JGBs 20y Auction for Enhanced-liquidity issue 82-113 

JGBs 30y Auction for Enhanced-liquidity issue 4-31 

JPY 0.3tn 

11/05 Tue 12:00 03:00 Japan JGB 20 Mar 2020 JPY 2.2tn 

10:30 09:30 UK Gilt 4.25% 7 Dec 2027 GBP 2.25bn 

Neths DSL 2.75% 15 Jan 2015 EUR 2-2.5bn 

Denmark DGB 4% 15 Nov 2019 DKK 4bn 

12:00 16:00 Canada Repurchase of 8 Cash Mgt Bonds (Jun-10 - Jun-11) CAD 1bn 

13:00 17:00 US Notes 1.375% 15 May 2013 (new) USD 38bn 

12/05 Wed 11:00 09:00 Germany Schatz 15 Jun 2012 (new) EUR 7bn 

10:30 09:30 Portugal OT 4.8% 15 Jun 2020 EUR 0.3-1bn 

12:00 16:00 Canada CAN 3-year 6 May 

13:00 17:00 US Notes 3.5% 15 May 2020 (new) USD 24bn 

13/05 Thu 12:00 03:00 Japan JGB 20 Mar 2050 JPY 0.3tn 

10:55 08:55 Italy BTPs 10 May EUR 7-9bn 

10:30 09:30 UK Index-Linked Gilt 1.875% 22 Nov 2022 GBP 1.1bn 

13:00 17:00 US Bond 4.25% 15 May 2040 (new) USD 16bn 

17/05 Mon Slovak Rep. SLOVGB 3.5% 24 Feb 2016 (#213) EUR 0.15bn 

18/05 Tue 12:00 03:00 Japan JGB 5-year 11 May JPY 2.4tn 

10:00 09:00 Ireland Gilts 11 May EUR 1-1.5bn 

Neths DSL 15 Jan 2042 (DDA) (new) EUR 4bn 

19/05 Wed 11:00 09:00 Germany Bund 3% 4 Jul 2020 EUR 6bn 

11:00 09:00 Norway NGBs 10 May 

11:00 09:00 Sweden T-bonds 12 May SEK 3bn 


20/05 Thu 12:00 03:00 Japan JGB 20-year 13 May JPY 1.1tn 

10:30 08:30 Spain Obligacion 4% 30 Apr 2020 17 May EUR 4bn 

10:50 08:50 France BTANs 2- &/or 5-year 14 May EUR 7bn 

11:50 09:50 France OATis , OATeis, BTANeis 14 May 

10:30 09:30 UK Gilt 4.75% 7 Mar 2020 11 May 

25/05 Tue 12:00 03:00 Japan Auction for Enhanced-liquidity 18 May JPY 0.3tn 

Neths DSLs (Off-the-run facility) 19 May EUR 1bn 

13:00 17:00 US Notes 2-year (new) 20 May USD 44bn 

26/05 Wed 10:55 08:55 Italy CTZ 21 May 

11:00 09:00 Germany OBL 2.25% 10 Apr 2015 (#157) EUR 7bn 

10:30 09:30 Portugal OTs (To be confirmed) 20 May EUR 1bn 

Denmark DGB 21 May 

12:00 16:00 Canada CANi 30-year 20 May 


27/05 Thu 12:00 03:00 Japan JGB 2-year 20 May JPY 2.6tn 

10:55 08:55 Italy BTPeis 21 May 

11:00 09:00 Sweden ILBs 20 May SEK 0.75bn 

Denmark DGB 4% 15 Nov 2010 (buy back) 


28/05 Fri 10:55 08:55 Italy 3 & 10y BTPs and CCT 21 May EUR 8-9bn 

31/05 Mon Slovak Rep. SLOVGB 27 Jan 2012 (#212) (new) EUR 0.2bn 

01/06 Tue 12:00 03:00 Japan JGB 10-year 25 May JPY 2.2tn 

02/06 Wed 11:00 09:00 Sweden T-bonds 26 May SEK 3bn 

10:30 09:30 UK Gilt 2.75% 22 Jan 2015 25 May 


03/06 Thu 12:00 03:00 Japan Auction for Enhanced-liquidity 27 May JPY 0.3tn 

10:50 08:50 France OATs 28 May 

10:30 09:30 UK Gilt 4.5% 7 Sep 2034 25 May 

Sources: Treasuries, BNP Paribas 



79 


Next Week's T-Bills Supply 

Date Country Issues Details 

07/05 Japan T-Bills Aug 2010 JPY 5.4tn 

UK T-Bills Jun 2010 GBP 1bn 

T-Bills Aug 2010 

GBP 1.5bn 

T-Bills Nov 2010 

GBP 1.5bn 

10/05 France BTF Aug 2010 EUR 4bn 

BTF Nov 2010 

EUR 2.5bn 

BTF May 2011 

EUR 1.5bn 

Germany Bubills Nov 2010 (new) EUR 5bn 

US T-Bills Aug 2010 USD 26bn 

T-Bills Nov 2010 (new) USD 26bn 

FHLMC Bills 3-month & 6-month 7 May 

11/05 Japan T-Bills Nov 2010 JPY 3.5tn 

Italy BOT May 2011 EUR 5.5bn 

Norway T-Bills Mar 2011 (NST 10) NOK 3bn 

Sweden T-Bills Aug 2010 SEK 10bn 

Canada T-Bill Aug 2010 CAD 6.8bn 

T-Bill Nov 2010 (new) CAD 2.6bn 

T-Bill May 2011 (new) CAD 2.6bn 

US T-Bills 4-week 10 May 

FHLB Discount Notes 

12/05 Japan T-Bills Aug 2010 JPY 5.4tn 

FNMA Bills 3-month & 6-month 10 May 

13/05 Ireland T-Bills 11 May 

FHLB Discount Notes 

14/05 UK T-Bills 7 May 

Sources: Treasuries, BNP Paribas 

Next Week's Eurozone Redemptions 

Date Country Details Amount 

11/05 Finland T-Bills EUR 2.5bn 

12/05 Germany Bubills EUR 6.0bn 

12/05 France BTF EUR 7.5bn 

14/05 Italy BOT 12mth EUR 7.2bn 

Total Eurozone Short-term Redemption EUR 23.2bn 

25 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

-25 

-30 

Chart 1: Investors’ Net Cash Flow 

(EUR bn, 10y equivalent) 

Net Investors' Cash Flows 

(EUR bn , 10y equivalent) 

Week of May 10th Week of May 17th Week of May 24th Week of May 31st 

Chart 2: EGB Gross Supply Breakdown by 

Country (EUR bn, 10y equivalent) 

Comments and charts 

30 

25 

Germany Italy Portugal Belgium 

France Spain Netherlands Austria 

Finland Greece Ireland 

• EGB gross supply will increase to around 

EUR 19bn in the week ahead from EUR 13bn in 

the past week. In 10y duration-adjusted terms, 

supply will fall to EUR 11.2bn from EUR 12.8bn. 

• The Netherlands will re-open DSL Jan-15 for 

EUR 2-2.5bn on Tuesday, a week ahead of the 

launch of the new 30y DSL. Germany will launch a 

new Schatz Jun-12 for EUR 7bn on Wednesday 

while, on the same day, Portugal will also tap OT 

Jun-20 for an amount of EUR 0.3-1bn and this will 

be a crucial test given the current situation in 

peripheral markets. Finally, on Thursday, Italy will 

perform its end-of-month BTP auctions for an 

expected size of EUR 7-9bn. 

• Outside of the eurozone, the US will issue a 

total of USD 78bn of 3y, 10y and 30y notes. In the 

UK, Gilt Dec-27 will be re-opened for GBP 2.25bn 

and index-linked Gilt Nov-22 for GBP 1.1bn. 

Japan, Denmark and Canada will also issue paper. 

30 

25 

20 

15 

10 

5 

20 

15 

10 

5 

0 


Chart 3: EGB Gross Supply Breakdown by 

Maturity (EUR bn, 10y equivalent) 

2-3-YR 5-7-YR 10-YR >10-YR 

EGBs Gross Supply (EUR bn, 10y equivalent) 

0 


All Charts Source: BNP Paribas 



80 


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 0.10 

Basic Loan Rate 0.30 

UK 

Bank Rate 0.5 

DENMARK 

Lending Rate 1.05 

SWEDEN 

Repo Rate 0.25 

NORWAY 

Sight Deposit Rate 2.00 

SWITZERLAND 

3 Mth LIBOR Target 

Range 

CANADA 

0.0-0.75 

Overnight Rate 0.25 

Bank Rate 0.50 

AUSTRALIA 

Cash Rate 4.25 

CHINA 

1Y Bank Lending 

Rate 

BRAZIL 

5.31% 

Selic Overnight Rate 9.50 


Date of Last 

Change 

-25bp 

(7/5/09) 

-75bp 

(16/12/08) 

+25bp 

(18/2/10) 

-20bp 

(19/12/08) 

-20bp 

(19/12/08) 

-50bp 

(5/3/09) 

-10bp 

(14/1/10) 

-25bp 

(2/7/09) 

+25bp 

(5/5/09) 

-25bp 

(12/3/09) 

-25bp 

(21/4/09) 

-25bp 

(21/4/09) 

+25bp 

(6/04/09) 

-27bp 

(22/12/08) 

+75bp 

(28/4/10) 

Next Change in 

Coming 6 Months 

No Change 

No Change 

No Change 

No Change 

No Change 

No Change 

-5bp 

(May) 

+25bp 

(1/7/10) 

+25bp 

(22/9/10) 

+25bp 

(Sep) 

+25bp 

(1/6/10) 

+25bp 

(1/6/10) 

+25bp 

(4/5/10) 

+27bp 

(Q3) 

+75bp 

(9/6/10) 

Comments 

The combination of an insipid economic recovery and low inflation 

points to no conventional tightening, i.e. refi rate hikes, in 2010. 

The FOMC should maintain the funds rate at 0 to 0.25% for an 

extended period and will probably keep the discount rate where 

it is for now. 

The BoJ could expand its liquidity provisions further in order to 

cooperate with the government in countering deflation and the 

yen’s appreciation. 

We expect the MPC to reengage in asset purchases from 

August onwards. 

We expect the lending rate to fall further. The timing will depend 

on the krone and foreign exchange reserve developments. 

The Riksbank still intends to deliver its first hike in the summer 

or early autumn. We expect it in July. However, the Riksbank 

could wait until September if downside risks to foreign trade 

materialise, the krona appreciates more than expected and/or 

concerns about the fiscal situation in high-debt countries rise. 

We expect the next rate hike to be delivered in September, 

depending on economic developments, the krone and the level 

of uncertainty surrounding the Norwegian economic outlook due 

to developments in Europe. 

By relaxing its commitment to prevent currency appreciation, the 

SNB is de facto tightening policy and has kept the ball rolling 

towards an eventual increase in rates. The strong franc remains 

the biggest hurdle to the first hike. 

The BoC has removed its conditional commitment and noted 

that “it is appropriate to begin to lessen the degree of monetary 

stimulus”. We expect the BoC to begin tightening in June and to 

deliver 125bp of hikes before pausing to reassess the situation. 

The RBA is aiming to take the policy rate to an average level, 

which we view to be 4.50%. The next hike should come in May 

after which a pause is likely to assess the impact of policy 

tightening delivered thus far. 

The latest RRR hikes are likely to presage a series of more 

concrete measures to tighten policy. The first hike in key policy 

rates is expected in Q3 when the CPI rate is forecast to exceed 

3%. However, given the authorities' rising caution about excess 

credit, an earlier move cannot be ruled out. 

Given the robust recovery in domestic demand and deterioration 

of inflation expectations, the BCB should continue to tighten 

monetary conditions. 

Change since our last weekly in bold and italics 

For the full EMK Central Bank Watch please see our Local Markets Mover 



81 


Economic Forecasts 

GDP 

Year 2009 

2010 

(% y/y) ’08 ’09 (1) ’10 (1) Q1 Q2 Q3 Q4 Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US 0.4 -2.4 3.2 -3.3 -3.8 -2.6 0.1 2.5 3.5 3.6 3.0 

Eurozone 0.5 -4.0 0.9 -5.0 -4.9 -4.1 -2.2 0.4 1.1 0.9 1.0 

Japan -1.2 -5.2 2.2 -8.9 -5.7 -5.2 -1.0 2.7 1.7 2.3 1.9 

World (2) 3.1 -0.6 4.3 -2.1 -1.7 -0.6 1.8 4.2 4.5 4.4 4.3 

Industrial Production 

Year 

2009 

2010 

(% y/y) ’08 ’09 (1) ’10 (1) Q1 Q2 Q3 Q4 Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US -2.2 -9.7 4.8 -11.6 -12.9 -9.4 -4.7 2.4 6.3 5.7 4.9 

Eurozone -12.5 -3.9 3.9 -18.0 -18.0 0.0 -14.6 0.0 0.0 0.0 5.5 

Japan -3.4 -22.4 16.4 -34.6 -27.8 -20.1 -5.4 26.8 18.9 12.6 9.8 

Unemployment Rate 

Year 

2009 2010 

(%) ’08 ’09 (1) ’10 (1) Q1 Q2 Q3 Q4 Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US 5.8 9.3 9.5 7.0 8.2 9.3 10.0 9.7 9.6 9.5 9.3 

Eurozone 7.6 9.4 10.3 8.8 9.3 9.6 9.9 10.1 10.2 10.4 10.5 

Japan 4.0 5.1 4.7 4.5 5.1 5.4 5.2 4.9 4.8 4.7 4.5 

CPI 

Year 

2009 

2010 

(% y/y) ’08 ’09 ’10 (1) Q1 Q2 Q3 Q4 Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US 3.8 -0.4 2.0 0.0 -1.2 -1.6 1.4 2.4 2.2 1.7 1.6 

Eurozone 3.3 0.3 1.4 1.0 0.2 -0.4 0.4 1.1 1.5 1.5 1.7 

Japan 1.4 -1.4 -0.9 -0.1 -1.0 -2.2 -2.1 -1.2 -1.0 -1.1 -0.4 

Current Account 

(% GDP) ’08 

Year 

’09 (1) ’10 (1) General Government 

(% GDP) 

’08 

Year 

’09 (1) ’10 (1) 

US -4.9 -2.9 -3.3 US (4) -3.2 -9.9 -10.0 

Eurozone -1.6 -0.6 -0.3 Eurozone -2.0 -6.3 -6.8 

Japan 3.2 2.8 3.7 Japan -2.6 -9.2 -7.8 

Interest Rate Forecasts 

Interest Rate (3) 

Year 

2009 

2010 

(%) ’08 ’09 ’10 (1) Q1 Q2 Q3 Q4 Q1 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 0.25 

3-month Rate 1.43 0.25 0.45 1.19 0.60 0.29 0.25 0.29 0.30 0.40 0.45 

2-year yield 0.77 1.14 1.25 0.80 1.12 0.95 1.14 1.02 0.90 1.00 1.25 

10-year yield 2.22 3.84 3.75 2.67 3.54 3.31 3.84 3.83 3.50 3.50 3.75 

2y/10y Spread (bp) 145 269 250 186 242 236 269 281 260 250 250 

Eurozone 

Refinancing Rate 2.50 1.00 1.00 1.50 1.00 1.00 1.00 1.00 1.00 1.00 1.00 


2-year yield 1.74 1.37 1.30 1.23 1.38 1.28 1.37 0.97 1.00 1.15 1.30 

10-year yield 2.35 3.40 3.10 3.00 3.38 3.23 3.40 3.09 3.00 3.00 3.10 

2y/10y Spread (bp) 61 203 180 177 200 195 203 212 200 185 180 

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 0.40 0.15 0.15 0.41 0.32 0.25 0.15 0.18 0.25 0.35 0.40 

10-year yield 1.18 1.30 1.65 1.35 1.36 1.31 1.30 1.40 1.40 1.60 1.65 

2y/10y Spread (bp) 78 115 150 94 104 106 115 122 115 125 125 

Footnotes: (1) Forecast (2) Country weights used to construct world growth are those in the IMF World Economic Outlook Update 

October 2009 (3) End Period (4) Fiscal year Figures are y/y percentage change unless otherwise indicated 


Market Economics / Interest Rate Strategy 7 May 2010 


82 


FX Forecasts* 

USD Bloc Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 

EUR/USD 1.22 1.16 1.08 1.00 1.04 1.07 1.10 1.15 1.20 1.24 1.30 

USD/JPY 88 92 100 105 110 115 118 120 122 124 126 

USD/CHF 1.17 1.22 1.31 1.40 1.34 1.31 1.29 1.25 1.21 1.19 1.15 

GBP/USD 1.47 1.43 1.35 1.28 1.30 1.26 1.22 1.26 1.33 1.39 1.44 

USD/CAD 1.06 1.10 1.09 1.04 1.00 0.95 0.90 0.95 1.00 1.02 1.09 

AUD/USD 0.87 0.82 0.85 0.87 0.90 0.92 0.92 0.92 0.93 0.92 0.90 

NZD/USD 0.69 0.67 0.67 0.66 0.66 0.68 0.69 0.72 0.69 0.67 0.66 

USD/SEK 7.79 8.10 8.61 9.20 8.75 8.69 8.45 8.00 7.83 7.74 7.46 

USD/NOK 6.31 6.47 6.76 7.20 7.12 7.10 6.82 6.43 6.25 6.13 5.77 

EUR Bloc Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 

EUR/JPY 107 107 108 105 114 123 130 138 146 154 164 

EUR/GBP 0.83 0.81 0.80 0.78 0.80 0.85 0.90 0.91 0.90 0.89 0.90 

EUR/CHF 1.43 1.42 1.42 1.40 1.39 1.40 1.42 1.44 1.45 1.48 1.49 

EUR/SEK 9.50 9.40 9.30 9.20 9.10 9.30 9.30 9.20 9.40 9.60 9.70 

EUR/NOK 7.70 7.50 7.30 7.20 7.40 7.60 7.50 7.40 7.50 7.60 7.50 

EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 

Central Europe Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 

USD/PLN 3.20 3.53 3.70 4.05 3.85 3.64 3.59 3.39 3.21 3.06 2.88 

EUR/CZK 26.2 26.5 26.0 25.8 25.5 25.0 24.7 24.3 24.0 23.9 23.8 

EUR/HUF 258 265 260 260 255 250 250 250 250 250 245 

USD/ZAR 7.70 7.80 8.00 7.90 8.20 8.00 8.00 7.80 7.80 7.50 7.70 

USD/TRY 1.58 1.65 1.60 1.60 1.58 1.55 1.50 1.50 1.45 1.45 1.47 

EUR/RON 4.00 4.25 4.20 4.20 4.15 4.10 4.05 4.00 3.95 3.90 3.80 

USD/RUB 30.48 30.41 30.41 32.00 30.45 29.08 28.71 27.53 27.59 28.15 28.34 

EUR/PLN 3.90 4.10 4.00 4.05 4.00 3.90 3.95 3.90 3.85 3.80 3.75 

USD/UAH 7.7 7.5 7.5 7.5 7.7 7.5 7.5 7.4 7.2 7.0 6.8 

EUR/RSD 105 95 93 90 87 85 87 90 86 87 85 

Asia Bloc Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 

USD/SGD 1.36 1.36 1.34 1.33 1.32 1.31 1.30 1.30 1.30 1.30 1.30 

USD/MYR 3.15 3.13 3.10 3.07 3.05 3.03 3.00 3.00 3.00 3.00 3.00 

USD/IDR 8800 8700 8600 8500 8400 8300 8200 8100 8000 8000 8000 

USD/THB 32.50 32.30 32.00 31.70 31.50 31.30 31.00 31.00 31.00 31.00 31.00 

USD/PHP 44.00 43.50 43.00 42.50 42.00 41.50 41.00 41.00 41.00 41.00 41.00 

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 6.83 6.72 6.62 6.57 6.52 6.47 6.42 6.37 6.32 6.27 6.22 

USD/TWD 30.50 30.30 30.00 29.70 29.50 29.30 29.00 29.00 29.00 29.00 29.00 

USD/KRW 1090 1070 1050 1030 1020 1010 1000 1000 1000 1000 1000 

USD/INR 44.00 43.00 42.00 41.00 40.00 39.00 38.00 38.00 38.00 38.00 38.00 

USD/VND 19500 20000 20500 20500 20500 20500 20500 20500 20500 20500 20500 

LATAM Bloc Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 

USD/ARS 4.00 4.10 4.20 4.25 4.35 4.45 4.50 4.60 4.70 4.80 4.90 

USD/BRL 1.85 1.80 1.75 1.75 1.80 1.80 1.85 1.85 1.85 1.85 1.90 

USD/CHL 530 525 515 515 510 500 500 500 500 500 500 

USD/MXN 12.50 12.25 12.00 12.00 11.75 11.75 11.75 12.00 12.00 12.00 12.00 

USD/COP 2000 1950 1900 1875 1850 1825 1800 1800 1800 1800 1800 

USD/VEF (Priority) (1) 2.59 2.59 2.59 2.59 2.59 2.59 2.59 5.30 5.30 5.30 5.30 

USD/VEF (Oil) (1) 4.29 4.29 4.29 4.29 4.29 4.29 4.29 8.80 8.80 8.80 8.80 

Others Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 

USD Index 86.54 90.51 96.47 102.22 99.67 98.46 96.95 94.48 92.04 90.13 87.79 

*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 7 May 2010 


www.GlobalMarkets.bnpparibas.com 

83

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 

Brian Fabbri Chief Economist North America New York 1 212 841 3633 brian.fabbri@americas.bnpparibas.com 

Julia Coronado Senior US Economist New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.com 

Anna Piretti US, Canada New York 1 212 841 3663 anna.piretti@americas.bnpparibas.com 

Yelena Shulyatyeva US, Canada New York 1 212 841 2258 yelena.shulyatyeva @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 

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 

Chan Kok Peng Chief Economist South East Asia Singapore 65 6210 1946 kokpeng.chan@asia.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 

Italo Lombardi Latin America New York 1 212 841 6599 italo.lombardi@americas.bnpparibas.com 

Diego Donadio Latin America São Paulo 55 11 3841 3421 diego.donadio@@br.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 

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 

Bülent Baygün Head of Interest Rate Strategy US New York 1 212 471 8043 bulent.baygun@americas.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 

Takafumi Yamawaki Japan Strategist Tokyo 81 3 6377 1705 takafumi.yamawak@bnpparibas.com 

Tomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1702 Tomohisa.fujiki@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 

Sebastien Galy FX Strategist New York 1 212 841 2492 sebastien.galy@bnpparibas.com 

Andy Chaveriat Technical Analyst New York 1 212 841 2408 andrew.chaveriat@americas.bnpparibas.com 

Emerging 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 

Gao Qi FX & IR Asia Strategist Singapore 65 6210 3264 gao.qi@asia.bnpparibas.com 

Shahin Vallée Head of FX & IR Strategy CEEMEA London 44 20 7595 8306 shahin.vallee@uk.bnpparibas.com 

Elisabeth Gruié FX & IR CEEMEA Strategist London 44 20 7595 8492 elisabeth.gruie@uk.bnpparibas.com 

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For Production and Distribution, please contact: 

Ann Aston, Market Economics, London. Tel: 44 20 7595 8503 Email: ann.aston@uk.bnpparibas.com 

Danielle Catananzi, Interest Rate Strategy, London. Tel: 44 20 7595 4418 Email: danielle.catananzi@uk.bnpparibas.com 

Derek Allassani, FX Strategy, London. Tel: 44 20 7595 8486 Email: derek.allassani@uk.bnpparibas.com 

Martine Borde, Market Economics/Interest Rate Strategy, Paris. Tel: 33 1 4298 4144 Email martine.borde@bnpparibas.com 

Editors 

Amanda Grantham-Hill, Interest Rate Strategy/Market Economics, London. Tel: 44 20 7595 4107 Email: amanda.grantham-hill@bnpparibas.com 

Nick Ashwell, FX/Market Economics, London. Tel: 44 20 7595 4120 Email: nick.ashwell@uk.bnpparibas.com 

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84

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Advising on Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance. 

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

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