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

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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. Brian Fabbri 7 May 2010 Market Mover 24 www.GlobalMarkets.bnpparibas.com
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. Source: Reuters EcoWin Pro 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 Source: Reuters EcoWin Pro 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 Market Mover 25 www.GlobalMarkets.bnpparibas.com
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Page 3 and 4: UK: all eyes on the election US: re
Page 5 and 6: Event response The ECB is being ove
Page 7 and 8: Eurozone Periphery: Compare and Con
Page 9 and 10: over 20% in Q1) and, last but not l
Page 11 and 12: Market Stress Charts • Signs of s
Page 13 and 14: Chart 7: Greek Bank CDS* 900 Greece
Page 15 and 16: • The plan also contains a number
Page 17 and 18: Germany: Downs and Ups • The impa
Page 19 and 20: Retail sales data from month to mon
Page 21 and 22: On inflation, the statement was als
Page 23: quarterly average of 2.7% in the fi
Page 27 and 28: Japan: Rising Chance of Sales Tax H
Page 29 and 30: BNP Paribas Surprise Indicator •
Page 31 and 32: UK headline After surprising to the
Page 33 and 34: US: Supply Could Affect Swap Spread
Page 35 and 36: steep curve is typically associated
Page 37 and 38: decline. We continue to maintain ou
Page 39 and 40: Chart 12: 90-119 Day Dlq for FRE 90
Page 41 and 42: the gamma sector for some time now.
Page 43 and 44: EUR: Limited Nervousness at ECB Ten
Page 45 and 46: with the big redemption (EUR 17.7bn
Page 47 and 48: measures are not promptly taken to
Page 49 and 50: Table 1: BNP Paribas' Inflation For
Page 51 and 52: Table 3: BNP Paribas' Inflation For
Page 53 and 54: Table 1: BNP Paribas Carry Analysis
Page 55 and 56: What’s the call? It is relatively
Page 57 and 58: Update on FIN SEN and FIN SUB 5/10y
Page 59 and 60: Germany 10y: Within MT falling wedg
Page 61 and 62: Judging Currencies by Liquidity •
Page 63 and 64: type of regulation would reduce mon
Page 65 and 66: Euro Dives • The euro is collapsi
Page 67 and 68: Currency Spot Trade Recommendations
Page 69 and 70: Economic Calendar: 7 - 14 May (cont
Page 71 and 72: Key Data Preview Chart 1: US Payrol
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Key Data Preview Chart 9: French GD
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Key Data Preview Chart 13: US Indus
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Treasury and SAS Issuance Calendar
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Central Bank Watch Interest Rate EU
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FX Forecasts* USD Bloc Q2 '10 Q3 '1
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RESEARCH DISCLAIMERS: IMPORTANT DIS
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