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

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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 Market Mover 28 www.GlobalMarkets.bnpparibas.com
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. Source: Reuters EcoWin Pro, BNP Paribas SD from mean Chart 2: US Surprise Indicator – Biggest Mover: Housing Source: Reuters EcoWin Pro, BNP Paribas 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. Source: Reuters EcoWin Pro, BNP Paribas SD from mean Gizem Kara/Alan Clarke 7 May 2010 Market Mover 29 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 and 24: quarterly average of 2.7% in the fi
Page 25 and 26: US Credit: Still the Recovery’s B
Page 27: Japan: Rising Chance of Sales Tax H
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
Page 73 and 74: Key Data Preview Chart 5: UK Manufa
Page 75 and 76: Key Data Preview Chart 9: French GD
Page 77 and 78: 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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