MARKET MOVER - BNP PARIBAS - Investment Services India

Market Economics | Interest Rate Strategy | Forex Strategy 4 August 2011 

Market Mover 

Market Outlook 2-3 

Fundamentals 4-30 

• US: Forecast Revision & Policy 4-8 

Outlook 

• US: GDP Revisions Paint Sobering 9-10 

Picture 

• ECB: Changing Tack 11-13 

• ECB: Bond Purchases – 

14-16 

Acupuncture 

• Eurozone: Weaker for Longer 17-19 

• Norway: Norges Bank to Wait and 20 

See 

• Japan: Rebasing to Slash July Core 21-22 

CPI 

• Japan: IP Recovering But Outlook 23-24 

Unclear 

• Surprise Indicator 25-27 

• FMCI Update 28-30 

Interest Rate Strategy 31-56 

• US: Taking Stock…Reality Sinks In 31-34 

• US: Subtle Changes in the Short 35-36 

End 

• US: Short-Vol Strategy on 10y10y 37 

• EUR: Bullish 5s15s Conditional 38 

Steepener 

• EMU Debt Monitor: CDS, RV 39-43 

Charts, Trade Ideas, Redemptions 

• JGBs: 7y/10y Box 44 

• Global Inflation Watch 45-48 

• Inflation: Beta Hedge the 

49-50 

Uncertainty Away? 

• US TIPS Breakevens Look 

51-53 

Vulnerable 

• Technical Analysis 54-55 

• Trade Reviews 56 

FX Strategy 57-60 

• CHF: Rise to Persist Despite SNB’s 57-58 

Actions 

• Why EURUSD May Stay in a Range 59-60 

Forecasts & Calendars 61-73 

• 1 Week Economic Calendar 61-62 

• Key Data Preview 63-67 

• 4 Week Calendar 68 

• Treasury & SAS Issuance 69-70 

• Central Bank Watch 71 

• FX Forecasts 72 

Contacts 73 

www.GlobalMarkets.bnpparibas.com 

• Risk aversion has been rising sharply on the back of 

increased stress in the eurozone combined with weaker 

economic data. 

• The flight-to-quality move has pushed yields close to 

all-time lows. 

• All intra-EMU spreads have widened significantly. 

Although additional austerity measures are probably 

necessary, they won’t be sufficient to restore confidence. 

• Such measures could nevertheless be seen as a 

precondition for the ECB to start buying more bonds – until 

the EFSF is able to do so. 

• The reactivation of the ECB purchasing programme 

failed to impress the market. Italian and Spanish spreads 

hit new highs as only Greece, Portugal and Ireland were 

targeted. 

• Govvies look solid going into the US employment 

report. The data may add to concerns over the economic 

outlook. 

• The JGB market will continue to move in line with 

Treasuries. Though some were expecting harder-hitting 

measures from the BoJ, such as a rate cut and extending 

the duration of its JGB buying operations, the market will 

remain at recent highs. 

• In FX, attempts by the Japanese and Swiss authorities 

to limit currency strength are unlikely to reverse the recent 

appreciation trend while markets are focused on poor US 

growth prospects and eurozone bond-market concerns. 

Market Views 

UST 10y T-note Yield (%) 

2y/10y Spread (bp) 

EGB 10y Bund Yield (%) 


JGB 10y JGB Yield (%) 


Forex 

EUR/USD 

USD/JPY 

Current 1 Week 1 Month 

2.51 ↔↓ ↔ 

223 ↔↓ ↔ 

2.30 ↔↓ ↔ 

146 ↔↑ ↔ 

1.02 ↔↓ ↔ 

88 ↔↓ ↔ 

1.4164 ↓ ↑ 

78.92 ↓ ↓ 

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 

Risk aversion on the rise 

Risk aversion has gained momentum over the past week. Though the US 

debt ceiling deadlock has been resolved, we still cannot be sure about rating 

implications. Furthermore, the latest disappointing economic data (ISMs, 

GDP) have fuelled concern about whether this soft patch is continuing into 

the second half of the year. Given increasing stress within the eurozone, the 

rally on govvies has accelerated. While the situation now looks 

overstretched, it is not easy to see what could change the current mood – 

especially if upcoming economic data also surprise on the downside. 

Yields back near all-time lows on strong flight-to-quality bid 

4.5 

4.0 

G ilts 

3.5 

3.0 

2.5 

T-Note 

Bund 

2.0 

1.5 

1.0 

JGB 

ECB reactivates its buying 

programme – with no 

impact so far 

Govvies look solid going 

into the US job report 

0.5 

Jan 

Apr Jul Oct Jan 

09 

Apr Jul Oct Jan 

10 

Source: Reuters EcoWin Pro 

EU officials are finalising details of the latest measures agreed two weeks 

ago that would allow the EFSF to intervene in the bond markets; it is worth 

keeping in mind that the plan still needs to be approved by national 

parliaments. Any positive news regarding an acceleration of this process 

would help turn round the current negative mood. Recent comments 

suggesting eurozone governments are also discussing an increase in the 

EFSF’s lending capacity also sound supportive. 

In the meantime, only the ECB has the ability to intervene via its SMP 

programme; this was activated in May 2010 but had not been used for some 

time. At today’s press conference, the SMP was reactivated while the ECB 

also announced it will conduct a special liquidity operation (6 month LTRO to 

be announced on 9 August with allotment the following day) to counter 

tensions. The impact on the market has been limited and temporary, with 

spreads hitting new highs post ECB. To date, the ECB has only been buying 

Greek, Portuguese and Irish bonds. 

Reactivating the SMP to buy the same countries is not what is needed. But 

the ECB will probably not start buying BTPs unless and until the Italian 

government announces greater front-loading of spending cuts and structural 

reforms. Taking into account these uncertainties, we maintain a positive bias 

on core EGBs with long spread positions at the front end and steepeners (2- 

10s). We also recommend buying the Bund July 42 ASW. 

In the US, attention will be on the employment report; this is likely to point to 

continued weakness. A worse-than-expected report in the wake of recent 

disappointing numbers would fuel speculation about the possibility of a third 

round of quantitative easing – even if the Fed has so far downplayed the 

possibility of this. 5y5y and 10y10y rates have declined sharply in a move 

that looks similar to trading last year in the run-up to QE2. Interestingly, the 

bullish momentum has moved out from the 5-7y part of the curve, with the 

30y now leading the way. In swaps, long dated forwards are breaking 

decisively below their recent lows as a result. As for European markets, the 

Apr 

11 

Jul 

Cyril Beuzit 4 August 2011 

Market Mover 

2 

www.GlobalMarkets.bnpparibas.com

momentum is not something we would expect to fade just yet, considering 

the extent to which optimism has waned in the wake of disappointing 

numbers. The bull-flattening move has further to go. 

US yield path looks similar to the run-up to QE2 in 2010 

4.00 

Jan 

10yr Note Yield 

3.75 

Dec 

3.50 

2010 

3.25 

3.00 

2011 

2.75 

Aug 

2.50 

Jackson 

Hole 

2.25 

0 20 40 60 80 100 120 140 160 180 200 220 240 

BoJ intervention 

disappoints 

CHF and JPY to remain 

strong in the short run 


In Japan, the yen was back near its all-time high versus the US dollar amid 

concerns that the US might be downgraded. The Ministry of Finance staged 

a yen-selling intervention in the FX market this morning, and the 10y JGB 

yield temporarily broke below 1% on expectations of additional easing after 

the Bank of Japan said that its next Monetary Policy Meeting – originally 

scheduled for 4-5 August – would instead conclude on the afternoon of 4 

August. 

The BoJ announced after the meeting that it was necessary to further 

intensify monetary easing, thereby ensuring a successful transition from the 

recovery phase following the earthquake disaster to a sustainable growth 

path with price stability. The BoJ increased the total amount of its asset 

purchase programme from JPY 40trn to JPY 50trn (an additional JPY 5trn 

on the asset purchase fund, an additional JPY 5trn for 6m fixed rate 

operations). However, the JGB market was disappointed by the decision as 

some participants had expected more hard-hitting measures such as a rate 

cut and extension of the duration of the BoJ’s JGB buying operations. 

The JGB 10y sector looks a touch cheaper as investors took profit below 

1%. However, with many investors somewhat behind in their FY 2011 bondbuying 

plans, we expect that JGB yields will continue to test their downside 

unless US and European markets rapidly move out of risk-off mode. 

On the FX market, both the USD and the EUR remain weak as markets 

focus on poor US growth prospects and the ongoing issues with eurozone 

bond markets. Furthermore, the general weakness in equity markets and 

riskier assets has produced a relatively sharp unwinding of the strength in 

the commodity-linked G10 currencies: the AUD, CAD and NZD. In this 

environment, demand for the CHF and JPY as safe havens has intensified. 

We do not expect this week’s attempts by Swiss and Japanese authorities to 

weaken their currencies to reverse trend appreciation. 

Until fixed-income markets stabilise in the eurozone and the prospects for 

the US economy improve, we expect further declines in both the EUR and 

USD. We also look for a re-emergence of the CHF and JPY appreciation 

trends. In contrast, a stabilisation in global equity markets would likely 

produce a return to the risk-on approach in currency markets, thus lending 

support to commodity currencies once again. The ongoing process of 

currency reserve diversification among sovereigns favours alternatives to the 

USD and EUR. Recent trends suggest ongoing support for currencies apart 

from the USD and EUR, especially the AUD, CAD and SEK. 

Cyril Beuzit 4 August 2011 

Market Mover 

3 


US: Forecast Revision & Policy Outlook 

• We have revised our growth forecast lower 

in H2 2011 and 2012. We are looking for growth 

of 2.25% saar in H2 2011 and 2.1% q4/q4 in 2012. 

The unemployment rate is expected to reach 

9.4% by year end, and then, fall to 8.5% by the 

end of 2012 on falling labor force participation 

Chart 1: Not Your Typical Post-War Cycle 

• The main drivers of the revision are an 

intensifying fiscal tightening, downward 

revision to GDP that highlight the structural 

headwinds restraining the US economy, and a 

deterioration in the US data that point to slower 

momentum entering H2 2011. 

• We still think the economy avoids recession, 

but there is a growing likelihood and argument 

that can be made for further monetary easing. 

We think the Fed will take a modest step in that 

direction at next week’s meeting and see QE3 as 

a close call. 


Chart 2: Absolutely No Pent Up Demand 

10500 

Real Consumer Spending (USD bn) 

10000 

9500 

9000 

8500 

We have revised our forecast for growth lower 

through 2012 and pushed back our expectations 

for monetary tightening 

We have lowered our forecast for GDP growth by 

0.75pp saar in both H2 2011 and in 2012. The 

forecast and revisions are presented in Table 1. 

Growth in business investment, personal 

consumption and government spending has been 

lowered over the next six quarters. Accordingly, we 

anticipate somewhat less hiring and for the 

unemployment rate to end 2011 at 9.4%, 0.2pp 

higher than the June reading, and then, we expect it 

to fall to 8.5% by the end of 2012. We are currently 

reviewing our forecast for inflation but anticipate that 

we will lower our forecast for both core and headline 

inflation to some degree. 

We feel more uncertainty about the underlying 

potential growth rate than we did before. We had 

previously held the view that potential growth has 

slowed from 3.5% in recent decades to something 

closer to 2.0%. However, it could be even lower. 

While growth in 2012 is certainly not expected to 

exceed potential growth by much, we think the 

unemployment rate will fall on continued declines in 

the participation rate. Some of the decline reflects an 

aging population, and some reflects the structural 

nature of the economic adjustment currently under 

way. 

8000 

7500 

7000 

6500 

6000 

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 


Our expectation for fiscal policy has also changed. 

We have lowered our deficit-to-GDP estimate for 

fiscal years 2011 and 2012 as we have seen notably 

more fiscal consolidation than expected in H1 2011 

and have raised our expectations for the size and 

impact over the forecast horizon. 

With slower progress on both the Fed’s mandates, 

we now do not expect the first increase in the Fed 

funds rate until Q4 2013. Previously, we thought the 

first increase in the Fed funds rate would come in Q3 

2012. Indeed, it seems the chances of a near-term 

further easing in monetary tightening are on the rise. 

Three recent developments lie behind our 

forecast revision 

The annual revisions to GDP were a view changer 

(see following article on the revisions). Like last year, 

they confirmed and deepened the picture of the 

current economy as quite distinct from any other 

post-war business cycle (see Charts 1 and 2). In 

Julia Coronado 4 August 2011 

Market Mover 

4 


particular, estimates of consumer spending were 

marked lower and the recession now looks much 

deeper, the recovery much flatter, and there has 

been a distinct loss of momentum in 2011. 

Chart 3: Hiring Losing Momentum Again… 

The rule of thumb used to be never bet against the 

US consumer. In the brave new world, the caution is 

be wary of the fickle American. In an era of 

deleveraging in the aftermath of the greatest financial 

crisis since the Great Depression, consumers are 

quite vulnerable to any changes in their employment 

and wealth prospects. It doesn’t take much to knock 

them off course. 

This year, the combination of higher inflation, falling 

home prices, continued uncertain employment 

prospects, geopolitical uncertainties (including Middle 

Eastern tensions, the ongoing European debt crisis, 

and the discord in Washington), and the prospect of 

a future with higher tax liabilities and a thinner 

retirement safety net, have led real consumer 

spending to grind to a halt. The supply chain issues 

resulting from events in Japan exacerbated the slow 

down by depressing auto sales. Our conviction in the 

already held view that consumer behavior has 

fundamentally changed has only been deepened. 

The second development driving the revision is the 

recent fiscal dogfight in Washington. The agreed to 

fiscal package suggests a modest fiscal drag in the 

coming year in addition to the one we had already 

factored in. However, it also raises serious questions 

about the fate of a number of stimulus provisions that 

are due to expire at the end of this year. The payroll 

tax cut, the fix to the Alternative Minimum Tax, the 

investment depreciation allowance, and extended 

unemployment benefits are all set to end in 

December. 

We had assumed that, with a weak economy and an 

upcoming election, Congress would be inclined to 

extend most of these measures into 2012. The 

rancour and bent toward near-term fiscal tightening 

raise a risk that fewer provisions will be extended 

implying a greater fiscal tightening. As shown in 

Table 1, we have increased our estimated fiscal 

tightening over 2011 and 2012 by nearly 2pp. The 

key offsetting force going into 2012 is expected to be 

moderating inflation, which will allow consumers to 

recoup some lost purchasing power and growth to 

pick up a little. 

The third factor behind the revision is the continued 

deterioration in the data, which appears to reflect 

both transitory and more entrenched factors. Supply 

chain constraints resulting from events in Japan 

appeared to be a material factor behind the very 

weak consumer spending growth in Q2, and a 

bounce in auto sales in July already suggests some 


Chart 4: …But Inflation Backdrop has Changed 


Chart 5: Global Manufacturing Losing Steam 


reversal of that factor. However, the loss of 

momentum clearly is a much broader phenomenon. 

The manufacturing sector, a key source of strength 

for the US, is experiencing a slowdown globally that 

is much more pronounced than what we saw this 

time last year (see Chart 5), perhaps because 

emerging markets have been tightening policy to 

curb rising inflation (e.g. China, Brazil, India). 

While falling gas prices have provided some relief for 

consumers, crude oil prices have remained 


Market Mover 

5 


stubbornly high as have spreads between retail and 

wholesale prices so that the relief is only moderate. 

Chart 6: Inflation Expectations High Part I 

In addition, firms have been more successful than 

anticipated in passing along higher costs to 

consumers. In the short run, this has resulted in a 

larger loss of purchasing power and weaker-thanexpected 

consumer spending, as well as robust 

corporate profits. The extent to which firms can 

cannibalize their customer base seems limited, and 

the stock market declines of late may reflect that 

realization to some degree. 

A variety of political uncertainties both inside and 

outside the US have certainly intensified in recent 

months and are probably a significant driver of rising 

anxiety and caution that have slowed spending and 

hiring. This suggests downside risks have also been 

rising as a loss of business and consumer 

confidence could tip into becoming a negative selfreinforcing 

dynamic. 

The loss of wealth as stock and home prices fall only 

serve to emphasize that consumers will not be eager 

to releverage and are likely to remain cautious and 

price sensitive. Likewise, the loss of momentum in 

hiring and capital spending as well as the dormant 

mountains of corporate cash highlight continued risk 

aversion amongst firms. Indeed, we would currently 

put the chances of a recession at one in three. 

On the other hand we are seeing a solid pick up in 

July auto sales suggesting the resolution of supply 

chain issues will be a boost to GDP growth in Q3. 

Headline inflation is set to provide some relief to 

consumer purchasing power; we expect it to rise 

2.5% saar in H2 2011, down from the 3.8% pace in 

H1 2011. Finally, the earnings season for Q2 has 

been reasonably healthy and corporations are 

tapping credit markets without hesitation suggesting 

that, while firms are cautious, they are not in 

retrenchment mode. 

The FOMC is faced with some very tough choices 

in the months ahead. We think they will take a 

step toward easing at next week’s meeting by 

extending the duration of their securities 

holdings. QE3 is a close call at this point. 

By a number of measures, the economic backdrop is 

far worse than last year around this time GDP is 

weaker, the manufacturing sector is weaker, fiscal 

headwinds are greater, and home prices have been 

falling for a year. Hiring by the private and state and 

local sectors is just as weak (federal is excluded 

owing to the census hiring swings last year), and 

while the unemployment rate is lower, it is only 

because labor force participation has dropped 

sharply. The intensifying downside risks suggest the 

Fed should be considering policy easing. 


Chart 7: Inflation Expectations High Part II 


However, one key factor is different. Both headline 

and core inflation have picked up sharply over the 

last year. While headline inflation is already falling 

back, core inflation has been on a strong upward 

trajectory. Stagnant wages and fading pass through 

of past commodity price increases suggest some 

easing in core inflation may be around the corner; 

however, it has yet to materialize fully. 

Trimmed mean measures of underlying inflation did 

moderate notably in June and core PCE was also 

much softer than expected; however, it is quite early 

to declare this a trend. Thus, the Fed has made 

progress on its policy mandate to maintain stable 

prices, and deflationary risks are certainly not a 

pressing worry at this point (see Chart 4). 

Another complicating factor is that the measures of 

inflationary expectations favored by the FOMC 

remain fairly elevated despite the recent global 

economic slowdown and distress in many areas of 

the capital markets (see Charts 6 and 7). It can 

certainly be argued that a 40bp decline in the yield 

on the 30-year Treasury bond and a flattening in the 

yield curve driven by a rally, rather than a selloff, are 

in part indications of a decline in longer-term inflation 

expectations. However, the Fed still likely views the 


Market Mover 

6 


much higher inflation and inflation expectations as 

barriers to further easing, all else equal. 

It is clear we are going to see significant changes to 

the FOMC statement. The Committee needs to 

acknowledge a steady deterioration in the economy 

that reflects more than just temporary factors. In the 

policy paragraph, we expect a change that could be 

construed as an easing signal but could also be 

argued to be a move toward resolving a logical 

inconsistency: we think they will apply the extended 

period language not just to the stance of the federal 

funds rate, but also its expanded holdings of 

securities (see annotated statement). Finally, they 

will probably take a small step toward actually easing 

policy by extending the duration of their securities 

holdings. This would be a modest move, but one that 

would signal the Fed is willing to do more if economic 

momentum fails to pick up in Q3. 

There are three key things we think the Fed will be 

watching in order to determine if a full-blown QE3 is 

necessary. The first is financial conditions. Stock 

markets have fallen sharply in recent days on both 

political developments and concerns that the global 

macro economy is faltering. Should we see another 5 

to 10% stock market decline, or should credit market 

conditions indicate serious dysfunction, the FOMC 

could easily conclude the economy could tip into a 

recession as a result. 

The second is the labor market. We think the 

weakness will continue into Q4 2011 with the 

unemployment rate rising to 9.4%. This would 

present a serious backtracking in one of the Fed’s 

mandates. 

Finally, the Fed will be watching a variety of inflation 

indicators to see if their outlook for a gradual 

stabilization in underlying inflation is tilting toward a 

renewed bout of disinflation. These indicators include 

commodity prices, inflation expectations, and wages. 

A deterioration in any one, or some combination, of 

these measures could tip the Fed into more 

aggressive action. The unemployment report on 

Friday will be important in setting the tone for next 

week’s FOMC meeting. And in an uncanny 

development, we could be looking to Jackson Hole 

yet again for guidance on the future course of Fed 

policy. 

The Fed is not resetting its quarterly forecasts at the 

August meeting, and there will be no press 

conference. Nonetheless, we think they will be doing 

some soul searching behind closed doors. 

At the January meeting this year the central tendency 

forecast for GDP growth was 3.4% to 3.9%, and we 

are likely to realize less than half of that. Temporary 

factors may influence the contour of growth through 

the year but can’t explain such an underperformance. 

Despite continued evidence to the contrary, the Fed 

continues to believe that easy monetary policy can 

produce significantly above-trend growth (their own 

estimate of potential growth is 2.5% to 2.8%). Has 

two years of underperformance convinced them that 

a deleveraging cycle is different? If such a conclusion 

is reached, then they may conclude that the output 

gap is notably smaller than they previous thought, 

and the absence of a healthy credit channel means 

there is little that can be achieved through monetary 

policy. All else equal, this might make the Fed less 

inclined to take further action. 

Of course, all else isn’t equal, and it is an open 

question as to whether the economy can muddle 

along or whether there is a stall speed at which we 

tip over into recession. In addition to evaluating the 

longer-term outlook, the FOMC will have to read the 

alarming bouquet of tea leaves over the intermeeting 

period and decide whether we are at a 

tipping point. 

Perhaps, what we are learning is that QE is not for 

the faint of heart; incremental gets you less than a 

shock and awe approach. One clear lesson is there 

is a flow effect to QE; when the Fed steps away from 

the market, risk gets priced differently and markets 

and the economy become more vulnerable to bad 

news. In this sense, more QE makes perfect sense. 

It would not an antidote to the structural adjustments 

the US is in the midst of, but it would be an insurance 

policy against downside risks. We think they are not 

yet ready to reach that conclusion, but we will learn 

more about their reaction function next week. 


Market Mover 

7 


Table 1: Economic Forecasts 

% saar 2011 2012 

Q3 Q4 Q4/Q4 Q4/Q4 

GDP 2.0 (2.5) 2.5 (3.5) 1.5 (1.9)** 2.1 (2.8) 

Personal Consumer Spending 2.0 (2.0) 3.0 (3.5) 1.8 (1.9) 2.1 (2.6) 

Government Spending -2.1(-0.9) -1.6(-1.2) -2.7(-2.3) -1.7 (-0.7) 

Unemployment Rate (Q4) 9.4 (9.0) 8.5 (8.3) 

Federal Deficit as % of GDP (Annual Avg) -9.0 (-10.4) -8.1 (-8.6) 

Source: BNP Paribas 

* Numbers in parenthesis are the previously published projections ** Number in parenthesis includes GDP revision but prior H2 projection 

We expect 

significant 

changes to the 

statement. They 

will have to 

acknowledge the 

significant loss of 

economic 

momentum and 

eliminate the 

reference to its 

temporary nature. 

While the tone will 

depend to some 

degree on the July 

employment 

report, we think the 

Fed needs to 

prepare for 

possible easing 

should the pace of 

growth fail to pick 

up in Q3. 

We think they 

apply the extended 

period language to 

their expanded 

securities 

holdings. 

Release Date: June 22, 2011 

Information received since the Federal Open Market Committee met in April indicates that the 

economic recovery is continuing at a moderate pace, though somewhat more slowly than the 

Committee had expected. Also, recent labor market indicators have been weaker than 

anticipated. The slower pace of the recovery reflects in part factors that are likely to be 

temporary, including the damping effect of higher food and energy prices on consumer 

purchasing power and spending as well as supply chain disruptions associated with the tragic 

events in Japan. Household spending and business investment in equipment and software 

continue to expand. However, investment in nonresidential structures is still weak, and the 

housing sector continues to be depressed. Inflation has picked up in recent months, mainly 

reflecting higher prices for some commodities and imported goods, as well as the recent 

supply chain disruptions. However, longer-term inflation expectations have remained stable. 

Consistent with its statutory mandate, the Committee seeks to foster maximum employment 

and price stability. The unemployment rate remains elevated; however, the Committee 

expects the pace of recovery to pick up over coming quarters and the unemployment rate to 

resume its gradual decline toward levels that the Committee judges to be consistent with its 

dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation 

will subside to levels at or below those consistent with the Committee's dual mandate as the 

effects of past energy and other commodity price increases dissipate. However, the 

Committee will continue to pay close attention to the evolution of inflation and inflation 

expectations. 

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at 

levels consistent with its mandate, the Committee decided today to keep the target range for 

the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that 

economic conditions--including low rates of resource utilization and a subdued outlook for 

inflation over the medium run--are likely to warrant exceptionally low levels for the federal 

funds rate for an extended period. The Committee will complete its purchases of $600 billion 

of longer-term Treasury securities by the end of this month and will maintain its existing policy 

of reinvesting principal payments from its securities holdings. The Committee will regularly 

review the size and composition of its securities holdings and is prepared to adjust those 

holdings as appropriate. 

We think they will 

soften the language 

around inflation as 

commodity prices 

have tumbled. 

We also think they will 

target a somewhat 

longer duration for 

their portfolio 

(currently between 5 

and 6 years), thereby 

introducing modest 

stimulus 

The Committee will monitor the economic outlook and financial developments and will act as 

needed to best foster maximum employment and price stability. 


Market Mover 

8 


US: GDP Revisions Paint Sobering Picture 

• Downward revisions to GDP combined with 

weakness in incoming data paint a notably 

weaker picture of the economy. 

• New source data and methodologies drove 

the revisions. 

• The lower estimates of GDP don’t do much 

to resolve a tension between economic activity 

and labor market data. 

• This massive reduction in the utilization of 

labor was reflected in a productivity boom that 

is now in the process of reversing; the new 

estimates for H1 2011 suggest productivity 

declined more than 1% saar. 

• The latest estimates suggest a much softer 

trajectory in recent quarters for corporate 

profits, both domestic and in the rest of the 

world. A healthy increase in corporate profits in 

the last couple of years is impressive, but the 

more recent data raise concerns of how 

sustained corporate profitability will prove to be 

in 2011. 


Chart 1: Real GDP Level 

Chart 2: Revision to PCE was a Major 

Contributor 

Annual revisions were mainly driven by revisions 

to consumption and investment and don’t 

resolve Okun’s law tensions. 

The annual revisions to GDP released at the end of 

July painted a far worse picture of both the recession 

and the recovery. It felt like déjà vu since we were 

saying essentially the same thing last August after 

the 2010 annual revisions (Chart 1). 

The level of real GDP was revised down 0.8% in Q4 

2008, 1.6% in Q4 2009, and 1.2% in Q4 2010 as 

most categories of final demand were revised lower 

in the last three years. The biggest contributor to the 

lower estimates of GDP was, yet again, weaker 

estimates of consumer spending (Chart 2). In 

particular, in Q4 2010 personal spending revisions 

contributed 0.7pp to the 1.2pp downward revision to 

GDP with the bulk of it coming from services (- 

0.5pp). Meanwhile, the rebound in equipment and 

software investment has not been as strong as was 

previously estimated. The sector contributed 0.3pp to 

the GDP downward revision in Q4 2010 (Table 1). 

There were also modest downward marks to 

government and net trade. 

The lower estimates of GDP don’t do much to 

resolve a tension between economic activity and 



Chart 3: Okun’s Law 

labor market data. The historical relationship known 

as Okun’s law held that for every 2% decline in GDP 

relative to potential, the unemployment rate would 

rise roughly 1%. Yet even with the lower estimates 

from BEA, we saw a peak-to-trough decline of 5.1% 

in GDP during the past recession but a rise in the 

Yelena Shulyatyeva/Julia Coronado 4 August 2011 

Market Mover 

9 


unemployment rate of 5.7% suggesting an Okun’s 

law coefficient closer to one (Chart 3). This massive 

reduction in the utilization of labor was reflected in a 

productivity boom that is now in the process of 

reversing; the new estimates for H1 2011 suggest 

productivity declined more than 1% saar. 

The annual revisions painted a sobering picture as 

the revised estimates suggest that both final 

domestic demand and GDP are still below the 

previous business cycle peak. It was previously 

estimated that the economy recovered above that 

level (Chart 4). 

New source data and methodologies drove the 

revisions 

This year’s GDP revision includes revised estimates 

for most series for 2008 through Q1 2011. In 

addition, for selected series—including personal 

consumption expenditures, and private fixed 

investment—the estimates have been revised for the 

most recent 8 years owing to some methodological 

changes. The revision incorporates source data that 

are more complete and reliable than those previously 

available. 

Personal consumption spending estimates were 

benchmarked to the annual retail trade report (ARTS) 

for 2008 and 2009. ARTS is a mandatory census of 

retailers. Since 2009 the BEA relies on the Census 

Bureau’s monthly retail trade report (MRTS), which is 

voluntary survey. Since ARTS is mandatory, it is a 

more complete and accurate data source. However, 

it is available only with a significant lag, and 

therefore, the benchmarking process often leads to 

significant revisions in estimates of consumer 

spending. Most of the lower estimates of food and 

beverage consumption resulted from the 

benchmarking to ARTS. 

Another mark down was to services spending 

reflecting new source data and methodology in 

estimating expenditures on financial services and 

insurance. The change in methodology included the 

use of new price indices. The BEA introduced 

improved indices based on the Bureau of Labor 

Statistics Producer Price Indices (PPIs) for deflating 

expenditures for property and casualty insurance. 

Previously, these were based on CPI indices for the 

basket of goods or were implicitly derived. Both the 

new price index and source data resulted in lower 

estimates of consumption of financial services. 

Corporate profits are now estimated to have been 

stronger earlier in the recovery but have lost 

more momentum of late 

The recent productivity boom was reflected in the 

latest surge in corporate profits. The annual revisions 

suggested that the jump in corporate profits in the 

Table 1: Real GDP Selected Component Revisions (% 

Change from the Previous Estimate) 

Q4 2008 Q4 2009 Q4 2010 Q1 2011 

GDP -0.8 -1.6 -1.2 -1.6 

PCE -0.7 -0.9 -0.7 -0.7 

Nondurable 

Goods -0.2 -0.3 -0.2 -0.2 

Services -0.7 -0.7 -0.5 -0.6 

Private Fixed 

Investment -0.2 -0.3 -0.3 -0.3 

Equipment & 

Software -0.2 -0.2 -0.3 -0.3 

Source: BEA, BNP Paribas 


Chart 4: Not There Yet 

Chart 5: Corporate profits grew faster, growth 

has slowed a lot as of late 


beginning of 2009 was even stronger than was 

previously calculated (Chart 5). The major contributor 

to the upward revision was the domestic financial 

sector. However, the latest estimates suggest a 

much softer trajectory at the end of last year – 

beginning of this year for both domestic and the rest 

of the world profits. Therefore despite the recent 

earnings readings which have been beating 

estimates, we believe growth in corporate profits is 

likely to be limited in coming quarters. 

Yelena Shulyatyeva/Julia Coronado 4 August 2011 

Market Mover 

10 


ECB: Changing Tack 

• The use of unconventional policy measures 

– including a six-month LTRO and the SMP – in 

response to the heightened market tensions is a 

very welcome development. 

• A shift in the approach to the conventional 

policy stance is also probable given increased 

uncertainty over the economic outlook. 

• We have revised our policy call, taking out 

the refi rate hikes we had previously forecast for 

October this year and January 2012. However, 

we see this as a pause in policy normalisation 

rather than an abandonment. 

Unconventional tools deployed 

The big debate prior to this month’s policy meeting 

was whether the ECB would re-start its SMP, given 

the delay before the modified EFSF becomes fully 

operational. This subject is tackled in more detail in 

the accompanying article “ECB: Bond Purchases – 

Acupuncture”. Long story short, we welcome the 

ECB’s decision to re-engage at an earlier stage than 

many in the market had feared. However, spreads 

continued to widen because there was not unanimity 

on the Governing Council over the SMP purchases 

and the strategy seems to be merely to try and ease 

the pressure on Italy and Spain by buying in other 

markets rather than those two directly. 

On the basis of the framework laid out for the use of 

the SMP, which is centred on the impairment of the 

monetary policy transmission mechanism (Box 1), we 

see a compelling case for widening the purchases to 

include the Italian and Spanish markets. The ECB 

interventions could act as a ‘bridge’ until the EFSF in 

its new form is up and running. 

One of the reasons why the ECB is perhaps reluctant 

to intervene is that it wants to see more action from 

governments first. This was hinted at in the fiscal 

section of the Introductory Statement. To quote the 

key extract: the ECB sees a need for “announcing 

and implementing additional and more frontloaded 

fiscal adjustment measures.” 

In addition to developments on the SMP, the ECB’s 

lengthening of its liquidity provision was a very 

welcome development, demonstrating an increased 

sensitivity to broadening market tensions. This took 

the form of a supplementary LTRO with a 6-month 

maturity on a full allotment basis, combined with an 

Box 1: Extracts from ECB Statement, 10 May 2010 

“The Governing Council decided on several measures to address the 

severe tensions in certain market segments which are hampering the 

monetary policy transmission mechanism. In view of the current 

exceptional circumstances prevailing in the market, the Governing 

Council decided: 

To conduct interventions in the euro area public and private debt 

securities markets (Securities Markets Programme) to ensure depth 

and liquidity in those market segments which are dysfunctional. The 

objective of this programme is to address the malfunctioning of 

securities markets and restore an appropriate monetary policy 

transmission mechanism. The scope of the interventions will be 

determined by the Governing Council. In making this decision we 

have taken note of the statement of the euro area governments that 

they “will take all measures needed to meet [their] fiscal targets this 

year and the years ahead in line with excessive deficit procedures” 

and of the precise additional commitments taken by some euro area 

governments to accelerate fiscal consolidation and ensure the 

sustainability of their public finances. 

In order to sterilise the impact of the above interventions, specific 

operations will be conducted to re-absorb the liquidity injected 

through the Securities Markets Programme. This will ensure that the 

monetary policy stance will not be affected.” 

Source: ECB 

extension of the commitment to full allotment for its 

other operations until into next year. 

Wait and see 

Switching to the ECB’s assessment of the economic 

situation and its potential impact on the conventional 

policy stance, there were some changes made in the 

latest Introductory Statement but, as we expected, 

they were comparatively minor – see Box 2. It is only 

a month since rates were increased so the ECB was 

never going to make radical changes at this point, 

giving the impression that the decision to raise rates 

was a mistake. 

Moreover, as there will be a formal review of the staff 

projections between now and September’s policy 

meeting, which Mr Trichet made a point of stressing 

in the press conference, the latest assessment was a 

holding operation. 

Most of the changes in the latest statement related to 

the growth outlook and particularly high uncertainty. 

There was a reference to downside risks to growth 

intensifying – again see Box 2 – but the overall view 

was that the risks were still broadly balanced. There 

must be a good chance that the risk assessment is 

tilted to the downside after the September review if 

market tensions persist and confidence continues to 

slide. 

Either way, the hard activity data in the eurozone are 

likely to be ‘catching down’ between now and the 

Ken Wattret 4 August 2011 

Market Mover 

11 


September and October policy meetings following a 

run of much weaker sentiment surveys. 

Given this, we have taken out the rate hike which we 

had factored in for October (as already flagged in our 

previous note ”ECB: Game Changer”, 14 July). We 

had not changed the forecast prior to the emergency 

summit in late July as we saw a possibility that 

radical action could lead to a positive reaction in the 

markets which, in turn, could boost sentiment. But 

even though the summit delivered what we consider 

to be a major step forward in dealing with the crisis, it 

has not had a lasting effect. This is partly due to the 

delay before the broader remit of the EFSF becomes 

fully operational. 

Inflation risks to the upside 

Beyond our forecast change for October, the wider 

issue is whether the ECB pause we expect could turn 

into a prolonged period of inaction, a scenario which 

the market is already discounting, and whether the 

bias could ultimately shift towards easing rather than 

tightening. Regarding the latter issue, nothing can be 

ruled out in this highly uncertain environment but we 

doubt that the ECB will give any encouragement to 

the prospect of a shift in the bias, as its assessment 

of risks to price stability is likely to stay to the upside 

for some time to come. 

For rate cuts to be contemplated, the risks to price 

stability would have to shift to the downside. This is 

possible in the event of a major adverse shock, as in 

2008. But in the absence of such a shock, this is a 

very unlikely scenario with rates so low. 

There were only minor changes to the assessment of 

the inflation outlook and risks in the latest statement 

– see Box 2. The reference to higher capacity use as 

an upside risk was removed, relating we presume to 

the weaker growth outlook. But, overall, the 

emphasis was much as before: i.e. inflation will be 

well above 2% for some time to come and the upside 

risks will need to be closely monitored. This implies 

that, while a pause in the normalisation process is 

possible in an environment of high uncertainty, the 

underlying bias will still be towards tightening. 

Given this assessment, the separation principle will 

be prominent in ECB thinking: i.e. conventional policy 

will be set on the basis of the assessment of inflation 

and its risks, while unconventional policy measures 

will deal with tensions in markets. 

Lower for longer 

The reason for forecasting an interruption to the 

ECB’s ‘quarter per quarter’ strategy of normalisation 

is clear. Given the exceptionally high uncertainty over 

the outlook, the prudent option is for the central bank 

to take a wait and see approach. This was hinted at 

Box 2: Extracts from ECB Statement, 4 August 2011 

On the Policy Stance… 

“The information that has become available since then confirms 

our assessment that an adjustment of the accommodative 

monetary policy stance was warranted in the light of upside risks 

to price stability. While the monetary analysis indicates that the 

underlying pace of monetary expansion is still moderate, 

monetary liquidity remains ample and may facilitate the 

accommodation of price pressures.” 

On Growth… 

“Data and survey releases for the second quarter point towards 

ongoing real GDP growth, albeit, as expected, at a slower pace. 

This moderation also reflects the fact that the strong growth in 

the first quarter was in part due to special factors. The underlying 

positive momentum of economic growth in the euro area remains 

in place and continued moderate expansion is expected in the 

period ahead. Growth dynamics are currently weakened by a 

number of factors contributing to uncertainty. 

“The risks to this economic outlook remain broadly balanced in 

an environment of particularly high uncertainty. On the one hand, 

consumer and business confidence, together with improvements 

in labour market conditions, could continue to provide support to 

domestic economic activity. On the other hand, downside risks 

may have intensified. They relate to the ongoing tensions in 

some segments of the euro area financial markets as well as to 

global developments, and the potential for these pressures to 

spill over into the euro area real economy. Downside risks also 

relate to further increases in energy prices, protectionist 

pressures and the possibility of a disorderly correction of global 

imbalances.” 

On Inflation... 

“Upward pressure on inflation, mainly from energy and other 

commodity prices, is also still discernible in the earlier stages of 

the production process. 

Risks to the medium-term outlook for price developments remain 

on the upside. They relate, in particular, to higher than assumed 

increases in energy prices. Furthermore, there is a risk of 

increases in indirect taxes and administered prices that may be 

greater than currently assumed, owing to the need for fiscal 

consolidation in the coming years. Upside risks may stem from 

stronger than expected domestic price pressures.” 

Source: ECB 

by Mr Trichet in the latest press conference with 

regard to the growth outlook. 

While eurozone growth is forecast to have slowed in 

Q2, as the ECB had already expected and 

highlighted, the suggestion was that we would have 

to wait and see what Q3 would bring. 

On the basis of our expectation of a weaker growth 

performance in the eurozone over the second half of 

this year than we had previously assumed (see the 

accompanying article “Eurozone: Weaker for 

Longer”) the pause from the ECB is likely to go 

beyond the October meeting. 

The shift in growth expectations relates to a range of 

factors, including the escalation in financial market 

tensions. Looking back at similar periods of high 


Market Mover 

12 


uncertainty and market turbulence in the past, they 

have usually been characterised by weak business 

investment, which typically lasts for two to three 

quarters. In the current uncertain circumstances, 

businesses are very likely to postpone their 

investment. We expect to see this in the composition 

of GDP in the second half of the year, along with a 

slowdown in exports. 

70 

65 

60 

55 

50 

45 

Chart 1: Composite PMIs Plunge 

France 

Germany 

Italy 

Spain 

Some of the eurozone sentiment surveys have been 

deteriorating alarmingly quickly recently, including 

the PMI figures in particular. They are now signalling 

a risk of a contraction in GDP during the second half 

of the year if confidence continues to slide. The most 

striking features of the recent PMI data have been 

the speed and scale of the declines in Germany and 

France. Their composite PMIs were above 60 just a 

few months ago, indicative of 1%-plus q/q rates of 

growth. But they are currently in the low 50s. This will 

have come as a major surprise to the ECB as indeed 

it did to us. The PMIs for the peripheral countries are 

already in recession territory, in line with our longstanding 

forecast of double dips. 

Significantly, the weakness has become more broad 

based across sectors, suggesting that the slowdown 

is more than just a temporary disruption caused by 

supply chain disruptions due to events in Japan. The 

likelihood, therefore, is that Q3 and Q4 data will be 

far weaker than we had expected: our assumption is 

now for quarter-on-quarter rises in GDP of 0.1% 

compared to the prior forecast of 0.3-0.4%. The 

consequence is that we have also taken out our 

forecast of the next step in the normalisation process 

– i.e. a rate hike teed up in December and delivered 

in January next year. 

Interventions elicit recovery 

Whether the pause we forecast turns into an end to 

the normalisation process will be heavily dependent 

on the prospects for growth and inflation beyond the 

weakness we expect in H2. 

As tensions in markets usually elicit a response from 

policymakers in the eurozone, albeit a tardy one, we 

assume that action will ultimately be taken to help 

stabilise markets, resulting in positive spillovers on 

the real economy. 

Consistent with this, our assumption is that growth 

prospects will start to improve later this year and into 

2012 as the market interventions bear fruit and the 

growth environment at the global level also becomes 

more supportive. The latter is obviously crucial to the 

export-sensitive economies like Germany. 

Timing is important. We believe that the underlying 

economic fundamentals in the core of the eurozone 

are relatively favourable so if credible policy action is 

40 

35 

30 

25 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 


taken soon enough to avert a downward spiral of 

confidence, there is potential for the eurozone to 

continue to grow at a decent clip beyond the period 

immediately ahead. 

Unfinished business 

On this basis, we forecast a resumption of the policy 

normalisation from the ECB, with the meeting in April 

next year the most probable timing for the next rate 

rise (to be teed up in March in tandem with a new set 

of projections, including for 2013). To be clear, we do 

not expect a re-engagement because of rampant 

growth or because inflation will be shooting upwards. 

We expect a gradual recovery in growth rates and 

headline inflation should be on a downward path in 

2012 given favourable energy base effects. 

Rather, the rationale is to reduce the exceptional 

level of conventional policy accommodation. This has 

been integral to the ECB’s decision to start raising 

rates earlier this year and we expect it to remain a 

key part of the ECB’s thinking over the longer-term. 

We are not forecasting a shift to restrictive policy, 

merely a reduction in the degree of accommodation. 

Our revised forecast is, therefore, for the refinancing 

rate to go up by 25bp each quarter from April 2012 

onwards, taking the rate to 2.25% by the end of next 

year: i.e. real rates no longer negative. 

The risks associated with this forecast are, of course, 

extensive, in terms of timing, magnitude and even 

direction, given the exceptional uncertainty over the 

economic and financial outlook. Moreover, there are 

additional complications with regard to the handover 

from Mr Trichet to Mr Draghi in November this year. 

Still, on the basis of our best judgement of the 

economic outlook and the ECB’s reaction function, 

we believe a pause until spring 2012 and a gradual 

resumption of policy normalisation thereafter is the 

most probable course of events. 


Market Mover 

13 


ECB: Bond Purchases – Acupuncture 

• We believe that the pressures on Italian and 

Spanish spreads are interfering with the 

monetary transmission mechanism. 

Chart 1: Eurozone Monetary Growth (% y/y) 

• Demand for broad money has probably risen 

while credit supply is probably falling as a result 

of the crisis. 

• The objective of stabilising markets cannot 

wait until parliaments have passed new 

legislation on the EFSF. 

• We therefore see a respectable and 

persuasive case for bond purchases by the 

ECB. 

• At the moment, we believe that relatively 

small-scale purchases could stabilise the 

market. The longer the delay, the greater any 

subsequent purchases will need to be. 


Chart 2: M3 and Nominal GDP 

• We believe respectable arguments can be 

made for EUR 230-400bn of purchases. 

• The ECB has also seen the same arguments 

and has re-engaged the SMP, though it looks 

like so far this is more narrow and limited than 

we would like to see. 

• JC Trichet was asked at the press 

conference why the intervention has been only 

in the bond markets of countries already under 

the SMP umbrella. We interpret this, in the light 

of other Trichet comments, as being because 

the ECB first wants to see action from Italy. 

• There will be relief in the market that the 

ECB has bowed to the inevitable and reengaged 

at an earlier stage than many had 

feared. 

• However, the benefit of the re-engagement 

will be tempered if the ECB only follows the 

‘acupuncture’ approach to relieving pressure on 

Italy and Spain by buying other markets but not 

these two. 

The 21 July EU Summit took some big steps forward, 

including widening the scale of the EFSF to be able 

to buy bonds in the secondary market for nonprogramme 

countries. However, the EFSF’s mandate 

will not be extended until there has been 

parliamentary approval in a number of countries; this 

could take months. So the eurozone has agreed the 

need for such a facility but does not at present have 

the means to implement it. The market is therefore 

pushing Italian and Spanish spreads wider. Our view 


is that this is exactly the circumstance where the 

flexibility of a central bank should be used to bridge 

the gap. We have seen a strong case for the ECB to 

re-instate its SMP. 

Since last year, there have been two distinct sets of 

bond-buying operations by central banks. 

The Fed and the Bank of England both engaged in 

large-scale asset purchases (LSAPs) for quite clear 

monetary policy reasons – to lower yields on 

government bonds, thereby stimulating the economy 

and reducing the risk of deflation. 

The ECB bought far fewer bonds. Its motivation was 

“to address the severe tensions in certain market 

segments which are hampering the monetary policy 

transmission mechanism”. 

We would argue that the monetary policy mechanism 

is being impeded today by the pressures in the Italian 

and Spanish government bond markets. Bond 

spreads over Germany have widened considerably 

over the last month – by over 180bp for Italy at the 

Paul Mortimer-Lee 4 August 2011 

Market Mover 

14 


10-year maturity and by about 150bp for Spain. CDS 

on Italian and Spanish banks have widened also, 

increasing the cost of funds to the banks and 

therefore the costs to private-sector borrowers. In 

other words, there has been an unintended monetary 

tightening in Spain and Italy. Term rates will have 

risen for a huge variety of actors. 

In both countries it is likely that, against the 

background of a deepening financial crisis, 

precautionary behaviour will have increased in the 

banking sector and the corporate and household 

sectors. It is likely therefore that credit availability will 

have decreased at the same time as the 

precautionary demand for money has increased. 

Hence there is a need to increase broad liquidity 

(M3) and to reduce term rates. 

We would argue that this points to a strong case for 

monetary stimulus to offset the unplanned monetary 

tightening. Cutting rates is not appropriate since 

there is a blockage in the transmission mechanism 

(and in any case would be difficult for the ECB to 

swallow since it would suggest the two hikes so far 

were a mistake). Direct intervention in the bond 

market is the alternative. Buying bonds in those 

segments that are most distressed is the appropriate 

policy since it in is those countries that the liquidity 

effects of the crisis are most acute. 

At this stage, neither Italy nor Spain has a debt 

sustainability problem. Spain’s debt/GDP level is 

lower than the eurozone average. Italy has a high 

debt/GDP ratio but it also has a small primary surplus 

that we believe will increase in coming years. 

Because there is such a high debt/GDP ratio in Italy, 

there are multiple equilibria for the economy. We 

could have a high bond yield/high required primary 

surplus equilibrium or a low bond yield/low primary 

surplus equilibrium. 

Which equilibrium we end up with is path-dependent. 

The longer Italian yields are at high levels, the 

greater the probability that they will remain there. 

There is a strong case for early intervention to bring 

a better balance to the market, to give a better 

perception of two-way risk and to avoid the high 

yield/high primary surplus equilibrium. Given the lack 

of liquidity in the market, relatively small-scale 

purchases – especially if there were the threat of 

more to come – could have big effects. 

If the ECB were to purchase bonds, what should be 

the scale? Under the SMP, the ECB bought EUR 

75bn of bonds from Greece, Italy and Ireland. These 

countries together comprise about 6% of eurozone 

GDP. Spain and Italy comprise 32%. Scaling up the 

previous purchases gives EUR 400bn. Given that the 

fundamental positions of Italy and Spain are much 

better than the three small peripherals, this would 

very much be an upper limit, we would argue. The 

amounts that might need to be bought should be 

much lower – provided action were taken relatively 

quickly. The longer the ECB waits, the more damage 

will have been done to the countries’ funding base 

and the more the ECB would ultimately have to buy 

to achieve the same effect. 

Chart 1 shows monetary growth in the eurozone and 

the rate of growth of credit to the private sector. 

Monetary growth in June was 2.1% y/y. This is 2.4pp 

below the reference value of 4.5% for M3 growth. M3 

is EUR 9652bn. As a first stab, to get M3 to its 

reference value would require bond purchases by the 

ECB totalling about EUR230bn (=.024*9652). If these 

bonds were bought from banks, the M3 effect would 

be zero, so a larger quantity of purchases would 

likely be required (purchases from non-banks raise 

M3, purchases from banks leave M3 unchanged). In 

the past, the ECB sterilised the effect of SMP 

purchases on bank liquidity. It could do so again. 

What matters from our perspective and for the 

economy is that it acts to boost M3 (which is why the 

ECB has an M3 reference value and not one for 

narrow money). 

One objection to this M3 approach is that, while 

monetary growth has been slow since the crisis, in 

2007-2008 a substantial overhang of excess liquidity 

built up. Chart 2 shows the ratio of M3 to nominal 

GDP is still above its trend level. There is a case for 

allowing the M3/GDP ratio to return to its trend level, 

the question is the optimum speed for this. We would 

argue that, since the ratio has already reduced 

substantially, the risks of a liquidity overhang (on 

inflation, asset prices) have substantially reduced. 

From here on, the adjustment should therefore be 

rather gentle. 

Overall, we see a persuasive monetary case for the 

ECB buying bonds in the secondary market, of Italy 

and Spain. Trichet opened the door to this to a 

greater degree than expected at the press 

conference, with action almost immediately; we 

applaud this. Whether buying will extend to BTPs 

and bonos at some stage is unclear but we hope so. 

It may be tempting for the ECB to go for smaller 

markets where intervention has already been made, 

so as to get more bang for its buck. Also, Trichet’s 

comments that he would like to see more action and 

greater front loading seem to be aimed at Italy, 

where Prime Minister Berlusconi yesterday showed 

no sign of reacting to recent tensions. 

Any action by the ECB is welcome, and clearly after 

a long hiatus, engaging the SMP again carries the 

threat of broader action (countries and size) if 

markets do not respond. We would argue that since 


Market Mover 15 


the strains currently are in Spain and Italy, direct 

action in those markets is required rather than the 

‘acupuncture’ approach of buying only in smaller 

markets. 

The ECB sees fiscal woes as something that should 

be addressed by governments, not the central bank. 

If Italy is unwilling to implement credibility-enhancing 

measures to save itself, then the ECB will be 

reluctant to buy BTPs, since that would let the Italian 

government off the hook. The ECB will likely only 

give something directly to Italy when it gets 

something in return. 

What is needed now to bring in BTP spreads more 

decisively is additional action from Italy, followed by 

SMP buying of BTPs and an increase in the size of 

the EFSF. Mr Trichet has showed he is willing to play 

and has put the ball firmly in the court of Mr 

Berlusconi. 


Market Mover 16 


Eurozone: Weaker for Longer 

• The second half of 2011 is shaping up to be 

much weaker than we had initially forecast. 

• The deterioration in leading indicators has 

become more broadly based across sectors and 

national economies. 

• Increased tensions in the financial markets 

and high uncertainty have been key factors. 

• We have revised down our growth forecasts 

accordingly – to 1.8% from 2.0% in 2011 and to 

1.0% from 1.5% in 2012. 

Table 1: GDP Growth Forecasts 

(%) 

2011 2012 

2011 2012 2013 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 

Revised 

GDP (% q/q) - - - 0.8 0.4 0.1 0.1 0.2 0.3 0.4 0.4 

GDP (% y/y) 1.8 1.0 1.5 2.5 1.9 1.6 1.4 0.8 0.7 1.0 1.3 

Previous 

GDP (% q/q) - - - 0.8 0.4 0.3 0.4 0.3 0.4 0.4 0.4 

GDP (% y/y) 2.0 1.5 1.5 2.5 1.9 1.7 1.9 1.4 1.4 1.6 1.5 


65 

60 

55 

Chart 1: Composite PMI & Growth 

1.5 

1.0 

0.5 

50 

0.0 

Weakness spreading… 

In the article “Eurozone: Broader Weakness”, 

published in the Market Mover on 21 July, we 

stressed that the deterioration in economic conditions 

in the eurozone was becoming more broadly based 

across both sectors and countries. 

The latter issue, with the core countries joining the 

periphery in experiencing a marked deterioration in 

the economic climate, is a key issue for our growth 

forecast, as Germany and France account for a 

much higher proportion of eurozone output than the 

most distressed peripheral countries. 

The deterioration reflects various factors, including 

weaker global growth, high uncertainty and broader 

tensions in the financial markets. The latter looks like 

the main reason for the acceleration of the slide in 

business sentiment in recent months. 

We suggested in the article which is cited above that 

a sustained positive market reaction to the summit 

agreement on 21 July could see sentiment rebound. 

Despite the summit delivering what we consider to be 

a major step forward in dealing with the crisis, it has 

not had a lasting effect on Italian and Spanish 

spreads (though the impact on Greece, Portugal and 

Ireland has been more positive). This is partly due to 

the delay before the broader remit of the EFSF 

becomes fully operational. 

The adverse impact of events inside the eurozone 

has been compounded by developments outside. In 

the US, the fiscal difficulties have not been good for 

confidence, while the economy has also been losing 

traction. At the same time, economic conditions at 

the global level have become less favourable, with 

the continued weakness of the manufacturing PMI in 

China a key example. 

45 

40 

35 

30 

25 

Composite PMI: 

Output 

20 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 


GDP (% q/q, RHS) 

…pointing to a much weaker H2… 

All things considered, revisions to our GDP growth 

forecasts for the eurozone are appropriate (Table 1). 

The first official estimates of Q2’s data will become 

available over the next couple of weeks. On the basis 

of our own ‘tracking’ estimates, our initial assumption 

of a halving of the quarter-on-quarter growth rate 

relative to Q1, from 0.8% to 0.4%, looks about right. 

The first data print, from Belgium, came in at 0.7% 

q/q, down from Q1’s 1.1% growth rate, but still 

robust. 

In H2, however, the growth rate is likely to be much 

weaker than we had assumed in the original profile in 

Table 1. We had factored in a further slowdown in Q3 

but only a marginal one, from 0.4% to 0.3% q/q, to be 

followed by a modest rebound to 0.4% q/q in Q4. The 

data available to date suggest that Q3 and Q4 will be 

significantly weaker than we had assumed. 

…as sentiment slides 

The leading indicator which has deteriorated most 

spectacularly over recent months has been the PMI 

(Chart 1). As of July, the composite output index, a 

reasonably good guide to growth dynamics in the 

past, had fallen to a level consistent with a meagre 

quarter-on-quarter growth rate of around 0.1%. 

-0.5 

-1.0 

-1.5 

-2.0 

-2.5 

-3.0 


Market Mover 

17 


As recently as April, the index was indicative of a 

quarter-on-quarter growth rate of about 0.7%, well 

above potential. The cumulative fall in the composite 

PMI over the three months since then has been 

surpassed only by the fall in the period immediately 

after the demise of Lehman Brothers. 

If, as is likely, the factors driving the deterioration in 

sentiment continue to have an adverse impact, then 

there is a high probability that the composite PMI will 

fall below the 50 expansion level. This is certainly on 

the cards for the manufacturing PMI which, at 50.4 in 

July, is only marginally above the expansion level. 

The new orders sub-index has been below 50 for the 

past two months. The ratio of new orders to 

inventories, which is usually a good leading indicator 

of the trend, does not suggest that a rebound is 

imminent. 

The more domestic demand-sensitive service sector 

PMI data had initially held up better than those for 

manufacturing, pointing to an externally-driven soft 

patch reflecting supply chain disruption related to 

events in Japan which would probably be temporary. 

But the services PMI has fallen sharply recently as 

well and is also not far above 50 (at 51.6 in July). 

National news 

The most striking feature of recent national PMI data 

has been the slump in Germany and France – see 

the charts on the next page. Their composite PMIs 

were above 60 in the spring, indicative of 1%-plus 

q/q growth rates, but are now in the low 50s. The 

PMIs for peripheral countries are already consistent 

with recession, in line with our long-standing forecast 

of double dips due to multiple headwinds to growth. 

As we have pointed out before, not all of the survey 

data in the eurozone have fallen as far as the PMI. 

This partly reflects compositional issues. But it also 

reflects lags. Some of the other sentiment surveys, 

including the European Commission indices, have a 

lot of ‘catching down’ still to do (Chart 2). The same 

applies for the hard activity data, such as industrial 

orders and output, which should follow the leading 

indicators downwards in the coming months. 

How bad? 

Looking back at similar periods of high uncertainty 

and market tensions in the past, they have usually 

been characterised by weak business investment, 

which typically lasts for two to three quarters. In the 

current uncertain circumstances, businesses are very 

likely to postpone their investment. 

We expect to see this in the composition of GDP in 

the second half of the year, along with a slowdown in 

exports. How deep the slowdown is, and how long it 

will persist, will depend on a range of factors, some 

internal and some external. 

Chart 2: Manufacturing PMI & EC Sentiment 

60 

55 

50 

45 

40 

35 

30 

25 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 


Manufacturing PMI: 

New Orders 

EC Sentiment: Industry (RHS) 

Pivotal to sentiment and firms’ behaviour will be the 

success of any measures taken to stabilise markets 

including, for example, the possibility of the ECB restarting 

its bond purchases. 

On the basis that tensions in markets usually elicit a 

response from policymakers in the eurozone, albeit a 

tardy one, we assume that action will ultimately be 

taken to stabilise markets, resulting in positive 

spillovers on the real economy. But, with the wider 

remit for the EFSF unlikely to be operational until into 

Q4, market tensions may persist in the short term. 

Consistent with this, our expectation is that growth 

prospects will start to improve from late in the year 

and into 2012 as the market interventions bear fruit 

and the growth environment at the global level also 

becomes more supportive. This is obviously crucial 

to the export-sensitive economies such as Germany. 

A sustained fall in oil prices, which has conspicuously 

not been evident despite the down shift in global 

growth expectations recently, would also be helpful 

given the boost it would give to household real 

incomes. 

Timing is important. We believe that the underlying 

economic fundamentals in the core of the eurozone 

are relatively favourable so, if credible policy action is 

taken soon enough to avert a downward spiral of 

confidence, there is potential for the eurozone to 

continue to grow at a decent clip beyond the period 

immediately ahead. This is particularly important for 

Germany, which does not suffer from the persistent 

headwinds to growth (e.g. from a burst housing 

bubble or excessive indebtedness) which will weigh 

on growth prospects elsewhere in the ‘west’. 

But even in such a scenario, a weak carry over due 

to a disappointing second half of this year will have a 

pronounced effect on growth in 2012. We assume an 

upturn next year (as Table 1 shows) but our forecast 

is still for growth in 2012 of just 1.0%, a cut of half a 

percentage point compared to our prior forecast and 

¾ of a point below the market consensus. 

5 

0 

-5 

-10 

-15 

-20 

-25 

-30 

-35 

-40 


Market Mover 

18 


This is a bigger downward revision than for 2011’s 

growth rate, which we have trimmed from 2.0% to 

1.8%. The resilience of the 2011 growth rate reflects 

an exceptionally strong start to the year. Flat GDP in 

Q3 and Q4 on a quarter-on-quarter basis would still 

imply 1.6-1.7% growth for 2011 as a whole assuming 

that Q2 is in line with our 0.4% q/q estimate. 

The risk to this scenario increasingly appears to be a 

deeper, more prolonged slowdown. This could come 

about via escalating tensions in markets creating a 

damaging feedback loop between the financial sector 

and the real economy. Or it could come via a less 

supportive external backdrop as inflationary concerns 

prompt policymakers in the developing world to keep 

policy tight, damaging growth prospects. Whatever 

the outcome, uncertainty over the way forward is set 

to persist for some time yet. 

Chart 3: Manufacturing PMIs 

Chart 4: Services PMIs 

65 

60 

55 

France 

Germany 

70 

65 

60 

Germany 

France 

55 

50 

45 

40 

Spain 

Italy 

50 

45 

40 

Spain 

Italy 

35 

35 

30 

30 

25 

99 00 01 02 03 04 05 06 07 08 09 10 11 


Chart 5: Germany – Composite PMI & GDP 

25 

99 00 01 02 03 04 05 06 07 08 09 10 11 


Chart 6: France – Composite PMI & GDP 

2.0 

70 

2.0 

1.0 


Output (RHS) 

65 

60 

55 

1.5 

1.0 


Output (RHS) 

65 

60 

0.0 

50 

0.5 

55 

-1.0 

45 

40 

0.0 

-0.5 

50 

45 

-2.0 

35 

-3.0 

GDP (% q/q) 

30 

25 

-1.0 

-1.5 

GDP % q/q 

40 

35 

-4.0 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 

20 

-2.0 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 

30 



Chart 7: Italy – Composite PMI & GDP 

Chart 8: Spain – Composite PMI & GDP 

2.0 

1.5 

1.0 

0.5 


Output (RHS) 

65 

60 

55 

2.0 

1.0 

GDP % q/q 

65 

60 

55 

0.0 

50 

0.0 

50 

-0.5 

-1.0 

45 

-1.0 

45 

40 

-1.5 

-2.0 

-2.5 

GDP (% q/q) 

40 

35 

-2.0 


Output (RHS) 

35 

30 

-3.0 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 

30 

-3.0 

99 00 01 02 03 04 05 06 07 08 09 10 11 

25 




Market Mover 

19 


Norway: Norges Bank to Wait and See 

• Domestic economic developments support 

the case for a rate hike next week. 

Chart 1: 3m NIBOR – Policy Spread (%) 

• However, the Norges Bank is likely to wait 

and see, mainly due to the marked increase in 

uncertainty regarding external developments. 

• A hold would represent only a pause before 

the next hike, in our view. We believe the 

strength of economic data will lead the Norges 

Bank to deliver a rate hike in September. 

The Norges Bank in June kept its key policy rate at 

2.25%, but the accompanying policy statement was 

relatively hawkish compared to May’s. The Bank also 

revised up its short-term rate profile slightly. 

Significantly, it indicated that the next rate hike 

should come in Q3. As we noted back then, June’s 

hawkish statement increased the chances of a hike 

in August, with developments in the krone and 

economic data key to the timing of the next hike. 

Improvement in domestic economic conditions… 

Developments in domestic economic conditions 

since the last policy decision favour a rate hike. On 

the consumer and production sides, signals from 

recent retail sales and manufacturing production 

figures have been supportive of the Bank’s 

expectation of stronger growth in the second half of 

the year. Given surveys tend to lead activity data, the 

developments in manufacturing confidence are 

encouraging. The manufacturing PMI, despite the 

moderation seen in many other advanced 

economies, remains broadly stable at well above the 

50-breakeven level. In addition, financial and 

monetary conditions in Norway are still not tight, 

remaining supportive for investment and therefore 

production. 

Furthermore, relatively low interest rates continue to 

spur credit demand. The Norges Bank’s Survey of 

Bank Lending for Q2 showed that both household 

and corporate credit demand continued to increase 

over the quarter. Lending to households and 

corporates also continued to grow, albeit at a modest 

rate. 

In terms of inflation, recent CPI-ATE inflation figures 

have been lower than the Norges Bank’s projections, 

although lower air fares are the main reason for this. 

The recent data are therefore unlikely to lead to a 

major change in the Norges Bank’s assessment of 

inflation, in our view. 


…but increased uncertainty elsewhere 

In contrast with the strengthening in economic 

activity in Norway, developments elsewhere have not 

been encouraging. Tensions in financial markets due 

to the broader eurozone fiscal crisis are still acute. 

Meanwhile, weaker global manufacturing activity and 

US economic growth point to some moderation in 

global growth. 

Conclusion 

Further strengthening of domestic economic 

conditions support the case for a rate hike at the 

Norges Bank’s meeting next week. However, we 

believe external developments since the last policy 

decision are likely to make the Bank cautious. The 

strength in the krone and rise in money market rates 

since end-June add weight to this view. The importweighted 

NOK has appreciated by around 2% and 

the 3-month interbank-policy rate differential has 

widened by 35bp to 89bp, reaching its highest level 

since May 2009 (Chart 1). 

Advanced country central banks, such as the ECB, 

are likely to remain on hold for some time. As such, 

the Norges Bank will not be willing to deviate too 

much from them in terms of policy rates – due to 

concerns over the krone. Hence we expect the Bank 

to remain on hold at its August meeting. This would, 

imply only a pause before the next rate hike, 

however. We believe the strength of economic data 

will lead the Bank to deliver a hike in September. The 

risk to our forecast is that the Bank delays the next 

hike beyond September, if the negative spill-over 

effects of the external developments on Norway are 

more than our expectations and/or the krone 

appreciates significantly. 

Gizem Kara 4 August 2011 

Market Mover 

20 


Japan: Rebasing to Slash July Core CPI 

• Due to a smaller increase in energy prices, 

the national core CPI rose 0.4% y/y in June, 

down from 0.6% in May. But the US-style corecore 

CPI was unchanged at 0.1% y/y. 

3.0 

2.0 

Chart 1: Core CPI (% y/y) 

National 

Tokyo 

• Japan’s core inflation rate is essentially 

trending sideways at slightly above zero, with 

monthly fluctuations reflecting changes in 

energy prices. 

• If the utilities were to pass on the entire cost 

of ramping up thermal power generation to 

make up for a total nuclear shutdown, the 

resulting higher electricity rates could raise the 

core CPI by 0.6pp. 

• The next CPI release will feature index 

rebasing (from 2005 to 2010), which could lower 

the core index by roughly 0.8pp. 

• Since our current price forecasts are based 

on the 2005-base CPI, our price projections 

could be marked down to around zero. 

1.0 

0.0 

-1.0 

-2.0 

-3.0 

06 07 08 09 10 11 

Source: MIC, BNP Paribas 

Chart 2: Core CPI Before and After Previous 

Rebasing (% y/y) 

0.8 

0.6 

0.4 

June core CPI continues slightly positive growth 

The national core CPI (which excludes perishables) 

rose 0.4% y/y in June. Although the index remained 

in positive territory for a third straight month, it 

decelerated 0.2pp from May on a smaller increase in 

energy prices. Energy prices – petroleum products 

and electricity – are the primary reason the core 

inflation rate has returned to positive growth after 27 

months. 

0.2 

0.0 

-0.2 

-0.4 

-0.6 

05 06 

Source: MIC, BNP Paribas 

2000-base 

2005-base 

But energy prices, led by gasoline, are not rising as 

swiftly as before, decelerating from a peak of 7.3% 

y/y in April to 5.7% in May and 5.2% in June. As a 

result, the item’s contribution to the index fell to 

0.44pp from 0.50pp in May. Meanwhile, the food 

component (excluding perishables) – the decline in 

which had been steadily moderating since the start of 

the year – was down 0.5% y/y in June, having been 

only 0.1% lower in May. 

As for other price indices, the US-style core-core CPI 

(excludes energy and food but not alcohol), which in 

May returned to positive growth for the first time in 31 

months, was unchanged at 0.1%. On the other hand, 

the breakdown of CPI gainers-decliners has price 

gainers falling to 29.7% (34.3% in May) and price 

decliners jumping to 57.1% (51.9% in May). 

There was also a slight deterioration in the “10% 

trimmed mean CPI” (which excludes the top and 

bottom one-tenth of components ranked by the size 

of year-on-year price changes). This key price trend 

indicator fell 0.2% in June, 0.1pp more than in May. 

Imported inflation, not output gap improvement 

In contrast to the weaker tone of national prices in 

June, the concurrently released CPI data for Tokyo in 

July registered modest acceleration, including a 

0.2pp gain in both the US-style core-core CPI, to 

0.3% y/y, and in Tokyo’s 10% trimmed mean CPI, to 

0.0%. 

Essentially, Japan’s core inflation rate is broadly 

trending sideways at slightly above zero, with 

monthly fluctuations based on changes in commodity 

prices– especially energy. In fact, as indicated in 

earlier reports, the current slightly positive inflation 

rate is entirely due to higher prices for energy and 

other commodities. While it might appear that 

Ryutaro Kono, Azusa Kato 4 August 2011 

Market Mover 

21 


inflation is on an upward trend because export-led 

growth is narrowing the output gap, this is not the 

case as prices have become unresponsive to 

changes in the gap. 

Reactor shutdown could raise core CPI by 0.6pp 

As indicated above, energy prices are the main 

reason why Japan’s inflation rate is positive. And with 

demand for fossil fuels for thermal power generation 

sure to remain strong as the inability to restart idle 

nuclear reactors increases Japan’s dependence on 

thermal power, energy prices – especially electricity 

rates – will continue to push prices upward. 

According to METI estimates, fuel costs could rise 

more than JPY 3 trillion a year if the power 

companies try to completely offset idle nuclear 

reactors with thermal power generation. If the higher 

costs are passed on in full, electricity rates could rise 

roughly 20% (JPY 3 trillion represents roughly 20% 

of the sales that Japan’s 10 utilities stand to lose if 

the costs are not defrayed). 

This in turn could raise the core CPI by 0.6pp 

(electricity’s weight in the index is c.3%). But the 

likelihood of rates being raised so much is low. 

Government authorisation is required for rate hikes 

resulting from changes in the source of energy, and 

the authorisation process entails public hearings with 

the concerned ministries and the price stability 

committee. 

By the way, compensation for the Fukushima crisis is 

expected to ultimately come from higher electricity 

rates. To help Tepco pay what promises to be a huge 

compensation bill, the government has submitted 

legislation to create an entity into which funds will be 

channelled by both the government and the utilities 

that operate nuclear power plants. 

Under the proposed legislation, the utilities would be 

allowed to pass these costs onto the consumer 

without separate authorisation. 

Next CPI release will feature 2010 base year 

The CPI report released on 29 July was the final 

official release using the base year of 2005. From the 

26 August release of the national CPI data for July 

(and the Tokyo CPI data for August), the CPI’s base 

year will shift from 2005 to 2010. Index rebasing, 

which occurs once every five years, involves an 

overhaul of the CPI market basket (adding or 

eliminating products); a revision of the calculation 

and survey methods; and the resetting of the weights 

and price index levels for all products (see “Japan: 

Impact of CPI Rebasing in 2011”, Market Mover, 25 

November 2010). 

Rebasing is necessary to correct the upward bias 

that the index assumes over time. For instance, 

products with continuous, significant price decline 

such as PCs and flat-panel TVs end up being 

understated with the passage of time. Take notebook 

PCs as an example: in 2010, the index level was just 

12.5. After resetting to 100, the index contribution will 

eight times greater (hence its current contribution is 

only one-eighth of what it should be). Because 

rebasing corrects this upward bias, the negative 

contribution from these items is enlarged – resulting 

in downward revision of the core CPI’s rate of growth. 

Rebasing likely to lower index by 0.8 pp 

Based on the new 2010-base weightings, announced 

on 8 July, we estimate that the core CPI could be 

lowered by roughly 0.8pp. Specifically, we expect 

there will be a significant increase in the negative 

contributions of products such as TVs (-0.34pp 

contribution), locally made cigarettes (-0.10pp), 

mobile phones (-0.13pp), notebook PCs (-0.04pp), 

video recorders (-0.04pp) and desktop PCs 

(-0.03pp). While lower prices for IT/digital products 

thus play a large role, policy measures (eco-point 

system) also caused a surge in consumer electronics 

purchases in 2010 that has enlarged the weightings 

(and index contributions) of the products affected. 

Incidentally, the previous rebasing (from 2000 to 

2005) resulted in the core index being revised down 

0.5pp, reflecting (1) the greater weight assigned to 

mobile phones and the use of discount plans in 

pricing this item; (2) the addition of products with 

marked price decline such as LCD TVs; and (3) the 

recalibrating to 100 of indices for products such as 

PCs that had dropped dramatically in price. 

This time around, the downward revision is expected 

to mostly reflect the resetting of weights and index 

levels. In any event, the impact will become clear on 

12 August when CPI data for January 2010-June 

2011 that have been retroactively adjusted for the 

new base year will be released. 

CPI to return to around zero 

Our current CPI forecasts – 0.5% for 2011 (0.8% on 

a FY basis) and 0.7% in 2012 (0.6%) – are based on 

the 2005 price index and do not factor in possible 

electricity rate hikes. Price forecasts by other 

economists and the BoJ are also based on the 2005 

index. 

If we were to switch to the 2010 base, our forecasts 

would be roughly -0.3% in 2011 (about zero on a FY 

basis) and -0.1% in 2012 (-0.2%). In a similar vein, 

the BoJ’s current median projections of 0.7% for both 

FY 2011 and FY 2012 would be around zero under 

the new index. 

Ryutaro Kono, Azusa Kato 4 August 2011 

Market Mover 

22 


Japan: IP Recovering But Outlook Unclear 

• Production rose for a third straight month in 

June, expanding 3.9% m/m. Factory activity is 

clearly reviving as supply chains are restored. 

• The base effect from March’s steep plunge 

caused production in Q2 to drop 4.0% q/q. 

Similarly, we expect real GDP to decline for a 

third quarter in Q2. 

• Firms expect output to continue recovering 

in the next couple of months. 

• However, the prospects for production after 

the summer are not bright, given the growing 

risk of lengthy power shortages and downside 

risks to global growth. 

Output expands for third straight month 

Industrial production rose 3.9% m/m in June. While 

this was short of expectations (consensus: 4.5%), it 

was still a third straight month of growth. The level in 

June was 5% below that of pre-disaster February but 

production is clearly reviving as disrupted supply 

chains are restored. Shipments, which had been 

lagging the recovery in production, rose a robust 

8.5% in June to stand at 95% of their pre-disaster 

level. Inventories fell 2.8% and the inventory ratio 

plunged 7.3%. 

Despite posting three straight months of growth, the 

base effect from the steep plunge posted in March 

caused production in Q2 to drop 4.0% q/q, marking a 

second consecutive decline (-2.0% in Q1). 

Incidentally, the base effect should also cause real 

GDP to contract for a third quarter in a row in Q2; our 

estimate is for a decline of 0.5% q/q (-2.0% 

annualised). 

Recovery to continue over near term 

With the production forecast index projecting 

increases of 2.2% in July and 2.0% in August, 

producers see the recovery continuing – albeit at a 

slower tempo than in May and June. Even if the 

forecast index proved accurate, however, the index’s 

level in August would still be 5.7% below its level in 

February. 

It seems the recovery in industrial production is being 

stymied by the energy conservation requirements 

this summer (large-lot users such as factories have 

to cut consumption by 15% from July through 

September in the Kanto and Tohoku regions). 

Chart 1: Real Exports and Industrial Production 

7500 

7000 

6500 

6000 

5500 

5000 

4500 

(*) Figures for Jul- 

Aug 2011are 

estimated using 

forecast index. 

Real Exports 

(billion yen) 

4000 

07 08 09 10 11 

Source: MOF, BoJ, METI, BNP Paribas 

Industrial Production (*) 

(2005=100, RHS) 

Chart 2: Maximum Power Generation of Japan's 

10 Regional Utilities (million kW) 

250 

200 

150 

100 

50 

0 

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

Source: ANRE, BNP Paribas 

2009 

2010 

Authorized capacity 

Excluding-nuclear power plant 

Outlook clouded by uncertainties 

Unfortunately, the prospects for Japanese factories 

after the summer are not very bright either. The 

summertime constraints on energy use will be lifted 

by late September (and demand for electricity tends 

to drop sharply in October and November). 

But there is a growing risk that corporations will hold 

back on domestic capital investment as the inability 

to restart idle nuclear power plants makes protracted 

power shortages throughout Japan increasingly likely. 

At best, power shortages will again become a 

problem for producers next summer. 

It is also uncertain if overseas demand will hold up as 

the global economy is slowing. With the US afflicted 

by balance sheet troubles and the EU saddled with 

financial and fiscal woes, the global economy has 

been led by emerging economies such as China, 

India and Brazil. 

115 

110 

105 

100 

95 

90 

85 

80 

75 

70 

65 

60 

Ryutaro Kono, Hiroshi Shiraishi 4 August 2011 

Market Mover 

23 


But voracious demand in these emerging economies 

has fuelled inflation and triggered supply constraints. 

Policymakers in China, India and Brazil now face the 

difficult situation of contending with rising inflation 

and slowing economic growth. Thus, there is no 

guarantee that Japanese exports will be able to 

continue expanding. 

Auto sector continues to recover 

Returning to the June IP data, the sector contributing 

the most to the index’s overall gain was transport 

equipment. After plummeting 46.7% in March and 

losing a further 1.9% in April, output of transport 

equipment rebounded 36.6% in May and another 

18.5% in June. 

Even so, the level is still 15.4% lower than in 

February. While the forecast index projects gains of 

4.6% in July and 5.6% in August, if realised the 

production level would still be 6.6% lower than in 

February. There is still much scope to increase 

output; with luck, replacement demand in disaster 

areas will help bridge this gap. 

Power shortage and global cycle affecting tech 

Production of electronic parts/devices rebounded 

5.3% in June (-0.6% in May), as the cutbacks that 

persisted though May finally ended. However, 

producers in this key sector do not see June’s 

rebound continuing, with the forecast index projecting 

a decline of 0.9% in July and no change (0.0%) in 

August. 

Such downbeat forecasts factor in the mandated 

summertime reductions in energy use (of particular 

significance for semiconductor manufacturers, which 

require stable power supplies). But the weak 

performance we expect is also due to adjustments 

that began in the spring in the global IT/digital sector. 

Thus, it is uncertain if this sector’s production level, 

still 15% below where it was before the 11 March 

disaster, will substantially improve after the power 

usage restrictions are lifted this autumn. 

Machinery output already back to normal but… 

Production of ordinary machinery dropped 0.7% after 

rising 5.6% in May. As one of the sub-sectors least 

damaged by the disaster, ordinary machinery quickly 

recovered. But with the Chinese economy steadily 

losing momentum, we were anticipating that its 

recovery could stall. 

Producers do not seem to share our concerns as the 

forecast index projects a modest decline of 0.3% in 

July followed by a leap of 8.0% in August. Whether 

or not the increase slated for August can be realised 

– let alone extended – remains uncertain. Some 

130 

120 

110 

100 

90 

80 

70 

60 

Chart 3: Transport Equipment (2005=100) 


Aug 2011are 



50 

06 07 08 09 10 11 

Source: METI, BNP Paribas 

150 

140 

130 

120 

110 

100 

90 

80 

70 

Chart 4: Electronic Parts and Devices 

(2005=100) 


Aug 2011are 



60 

06 07 08 09 10 11 

Source: METI, BNP Paribas 

degree of reconstruction demand is guaranteed, but 

an overall recovery in demand for capital goods is 

likely to be delayed by the slowing global economy 

and the domestic power supply uncertainties that are 

weighing on corporate growth expectations. 

Inventory adjustments under way in iron sector 

Chemical production rose 1.5% in June after leaping 

8.6% in May. It has now regained its pre-disaster 

level and the forecast index projects expansion will 

continue, with gains of 1.5% in July and 1.8% in 

August. 

Meanwhile, production of iron/steel rose 1.0%, 

marking the first advance in four months. But the 

outlook remains choppy, with the forecast index 

projecting a decline of 0.4% in July followed by a 

1.2% increase in August. With inventories having 

backed up on the drop in car production and stalled 

construction activity, iron/steel production will likely 

remain depressed for the time being. 

Ryutaro Kono, Hiroshi Shiraishi 4 August 2011 

Market Mover 

24 


BNP Paribas Surprise Indicator 

• Economic data were, on average, weaker 

than expected in the US, eurozone and UK 

during July. 

Chart 1: US Surprise Indicator – Headline Index 

• The main drivers of the overall downward 

surprise were activity data in the US, surveys in 

the eurozone and inflation data in the UK. 

• Activity data were, on average, stronger 

than market expectations in the eurozone, for 

the first time since December 2010. 

• In the UK, the overall downward surprise in 

inflation data is the second since August 2010. 

Source: Reuters EcoWin Pro, BNP Paribas SD from mean 

• 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 s 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, weaker than market expectations during 

July, for the fifth month in a row. Downward surprises 

in surveys and activity data more than offset upward 

surprises in inflation, labour and housing data. 

Chart 2: US Surprise Indicator – 

Biggest Mover: Activity 


Chart 3: US Surprise Indicator – 

One to Watch: Inflation 

US activity 

Following an upward surprise in June, activity data 

were weaker than market expectations during July. 

This is the ninth time that activity data have surprised 

to the downside in the past twelve months. In June, 

there were downward surprises in the trade balance, 

industrial production, durable goods orders and 

advanced Q2 GDP. These more than offset an 

upward surprise in retail sales. 

US inflation 

Inflation data surprised to the upside during July, for 

a third month in a row. This mainly reflected stronger 

than expected import prices as well as core PPI and 

core CPI. These more than offset the downward 

surprises in headline PPI and CPI. 



Market Mover 

25 


Eurozone headline 

The key eurozone economic indicators, on average, 

surprised to the downside during July, for a third 

month in a row. In terms of sub-components, upward 

surprises in activity and inflation data were offset by 

downward surprises in surveys and labour data over 

the month. 

Chart 4: Eurozone Surprise Indicator – Headline 

Index 


Eurozone surveys 

The main driver of the overall downward surprise in 

July was weaker than expected surveys. Following 

ten consecutive months of upward surprises, surveys 

have surprised to the downside for the past three 

months. Apart from German ZEW current conditions 

and eurozone consumer sentiment, which were 

stronger than market expectations, all surveys 

included in our surprise indicator either surprised to 

the downside or were in line with market 

expectations in July. 

Chart 5: Eurozone Surprise Indicator – 

Biggest Mover: Surveys 


Chart 6: Eurozone Surprise Indicator – 

One to Watch: Activity 

Eurozone activity 

Following six consecutive months of downward 

surprise, activity data surprised to the upside in July. 

Over the past year, activity data have surprised to 

the upside only three times. During July, the overall 

upward surprise was mainly driven by German 

factory orders, trade balance and retail sales and 

French industrial production. 



Market Mover 

26 


UK headline 

UK economic data were, on average, weaker than 

market expectations in July, for a third month in a 

row. All data categories included in our surprise 

indicator, except housing data, surprised to the 

downside over the month. 

Chart 7: UK Surprise Indicator – Headline Index 


Chart 8: UK Surprise Indicator – 

Biggest Mover: Inflation 

UK inflation 

Inflation data were weaker than market expectations 

during July, for the second month in a row. Note that 

this is only the second time inflation data have been 

weaker than market expectations since August 2010. 

Upward surprises in input and output PPIs were 

more than offset by weaker than expected CPI, RPI 

and RPIX. 


Chart 9: UK Surprise Indicator – 

One to Watch: Survey 

UK surveys 

Surveys, on average, surprised to the downside in 

July, for a fourth consecutive month. Downward 

surprises in CIPS manufacturing and GfK consumer 

confidence more than offset the slight upward 

surprise in CIPS services over the month. 



Market Mover 

27 


FMCI Update 

• Financial and monetary conditions 

tightened in most of the major advanced 

economies during July. 

• The slower pace of increase in equities (in 

% y/y terms) was one of the main drivers of the 

tightening of conditions over the month. 

• Among the major advanced economies, the 

US FMCI points to the loosest financial and 

monetary conditions and the Swedish FMCI, the 

tightest. 

• Meanwhile, in Asia, conditions loosened 

significantly in China. In India, conditions 

loosened slightly and in South Korea they 

remained broadly stable. 

Table 1: FMCI (Standard Deviations From Avg) 

Low 

Jul Jun May Apr Mar Since 

1990 

US -2.5 -2.5 -2.4 -2.0 -1.7 -2.5 

Eurozone 0.0 -0.1 -0.2 0.0 -0.2 -2.3 

Japan -0.7 -1.0 -1.1 -1.1 -0.4 -2.2 

UK -1.2 -1.7 -1.7 -1.7 -1.4 -3.3 

Sweden 1.3 0.9 1.1 1.1 1.3 -2.5 

China - -1.2 -0.5 -0.6 -0.8 -2.5 

India - 0.1 0.3 0.1 0.8 -2.7 

S. Korea - -0.5 -0.5 -0.5 -1.0 -2.3 


Chart 1: US FMCI 

US 

• The US FMCI was unchanged during July, 

standing 2.5 standard deviations below the longterm 

average. 

• The depreciation relative to trend in the effective 

USD exchange rate and a narrowing in the Ted 

spread proxy was offset by a slower pace of 

increase in equities (in % y/y terms) and a 

narrowing in the 10-year/2-year spread. 

• At -2.5, the US FMCI remains at its all-time low 

and points to the loosest financial and monetary 

conditions among the G7 economies. 


SD from average 

Chart 2: Eurozone FMCI 

Eurozone 

• The eurozone index rose by 0.1 of a point during 

July, to stand in line with its long-term average. 

• The depreciation relative to trend in the effective 

EUR exchange rate was more than offset by a 

narrowing in the 10-year/2-year spread and a 

slower pace of increase in equities (in % y/y 

terms). 

• The eurozone FMCI now points to neutral 

financial and monetary conditions. At its current 

level, it is 1.4 points above its recent low in 

March 2010. 



Gizem Kara/Mole Hau 4 August 2011 

Market Mover 

28 


Japan 

• The Japanese FMCI rose by 0.3 of a point during 

July, to stand 0.7 deviations below the long-term 

average. 

• The appreciation relative to trend in the effective 

JPY exchange rate was the main driver of the 

tightening over the month. 

• The Japanese FMCI points to looser than 

average conditions over the past nine months. At 

-0.7, the index is 0.4 of a point higher than its 

recent low in May. 

Chart 3: Japanese FMCI 



UK 

• The UK FMCI rose by 0.5 of a point in July, to 

stand 1.2 standard deviations below the longterm 

average. 

• This reflected an appreciation relative to trend in 

the effective GBP exchange rate and a narrowing 

in the 10-year/2-year spread. 

• At -1.2, the UK FMCI is 2.1 points higher than the 

March 2010 low and points to the third-loosest 

financial and monetary conditions among the G7 

economies, after the US and Canada (the 

Canadian FMCI stood 1.7 standard deviations 

below the long-term average in July). 

Chart 4: UK FMCI 



Sweden 

• The Swedish FMCI rose by 0.4 of a point, to 

stand 1.3 standard deviations above the longterm 

average in June. 

• The widening in the Ted spread proxy, higher 

real policy rate and a slower pace of increase in 

equities (in % y/y terms) were the main drivers of 

the tightening over the month. 

• At 1.3, the index is now back to its level in March 

and points to the tightest financial and monetary 

conditions among the main advanced 

economies. 

Chart 5: Swedish FMCI 




Market Mover 

29 


China 

• The Chinese FMCI fell significantly during June, 

by 0.7 of a point, to stand 1.2 standard deviations 

below its long-term average. 

• The fall during the month reflected a depreciation 

relative to trend in the effective RMB exchange 

rate, and lower real government bond yields and 

policy rate as CPI inflation picked up. 

• At -1.2, the index is at its lowest level since 

February 2010 but remains 0.7 of a point higher 

than the December 2009 low. 

India 

• The Indian FMCI fell during June, by 0.2 of a 

point, to stand 0.1 standard deviations above its 

long-term average. 

• An appreciation relative to trend in the effective 

INR exchange rate was more than offset by a 

narrowing in the 3-month MIBOR/repo spread, 

lower real government bond yields and a faster 

pace of money supply growth (in % y/y terms). 

• At 0.1, the index points to tighter than average 

financial and monetary conditions for the eighth 

month in a row. It also points to the tightest 

conditions among the main Asian economies. 

South Korea 

• The South Korean FMCI was unchanged during 

June to stand 0.5 standard deviations below its 

long-term average. 

• A slower pace of increase in equity prices (in % 

y/y terms) was offset by lower real government 

bond yields as CPI inflation rose. 

• At -0.5 currently, the index has consistently 

pointed to looser than average financial and 

monetary conditions in South Korea since 

December 2008. 

Chart 6: Chinese FMCI 

Source: BNP Paribas SD from average 

Chart 7: Indian FMCI 


Chart 8: South Korean FMCI 


BNP Paribas FMCI 

The Financial and Monetary Conditions Index gives a proxy of how tight monetary policy is in an economy by looking beyond the nominal 

interest rate and exchange rate. Specifically, the index is a weighted sum of the following components: 

- Equity prices (% y/y); 

- Government yield spread (10y-2y rates in developed countries (weighted in the eurozone case) and 10y-3m rates in China, India and 

South Korea); 

- Real corporate bond yield (using core inflation in developed countries, real government bond yields and headline inflation in China, India 

and South Korea); 

- Money supply growth; 

- Real interest rates (using core inflation in developed countries and headline inflation in China, India and South Korea); 

- TED spread proxy (3-month MIBOR/Repo spread in India, 1-year KIBOR/OIS spread in South Korea); and 

- Real effective exchange rate (deviation from trend). 

In the UK only, the index also incorporates house prices. 

The various components are weighted in inverse proportion to their historical volatility. 

The weighted sums are then normalised so that their mean equals zero and their standard deviation one. The result is that a reading below 

zero represents relatively loose financial and monetary conditions and vice versa. 


Market Mover 

30 


US: Taking Stock…Reality Sinks In 

• As the market prices in an extended 

economic malaise, we recommend a modest 

duration overweight and may increase the 

exposure past payrolls into FOMC next week. 

• The 10-30y part of the curve is likely to 

outperform, as the expected duration of the 

current monetary policy extends. The 2y is on 

the richer side; in 1s2s3s swaps, the 3m-fwd is 

2bp lower than spot, providing a cushion for 

bearish positioning (i.e. short the belly). 

• The 2Y point is cheaper on the Treasury 

curve relative to the swaps curve. We like 

buying the belly in the 1s2s3s swap spread fly 

and also see little downside in 2s3s Treasury 

steepeners. 

• TIPS should underperform nominals given 

the worsening economic scenario and look rich 

in our model. We prefer being short the 5y 

sector considering the upcoming 5y TIPS 

reopening and the sizeable positive carry on the 

short position. 10y+ maturities also look 

vulnerable, but the 1y inflation swap presents a 

buying opportunity. 

• With the Fed on hold and mortgage 

negative convexity not a concern yet, vol should 

decline. 

• We expect agency debt to tighten to 

Treasuries, back to the middle of the recent 

range, With declining vol, callables should 

outperform bullets; our favourite spots include 

5nc3m and 7nc3m 

• We had moved to a modest overweight on 

MBS on the resolution of the debt ceiling issue 

and with funding having normalised since, 

we’ve increased that exposure. We favour up in 

coupon given its superior carry and ahead of 

prepays tonight. A rally to 2.30% 10Y Tsy may 

be required to elicit substantial negative 

convexity. 

• STRATEGY: Overweight Duration, Agencies 

and MBS. Underweight TIPS. Bearish Vol. 

6 

(%) 

5 

4 

Chart 1: The 5y5y Swap Rate Has Dropped 

through the Bottom of Its 2011 Range 

5y5y Swap 

3 

Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 


Chart 2: 1s2s is too flat – with virtually no cost 

of carry to put on a steepener – no room for a 

little optimism? 

90 

(bp) 

70 

50 

30 

1s2s Swap Curve 

10 



Chart 3: Buy the belly in 1s2s3s swap spread fly 

20 

(bp) 

10 

0 

1s2s3s Swap Spread Fly 

Yield Grab in Full Swing 

In the build-up to the final stage of the US debt 

ceiling – spending cut – revenue increase debate, 

the uncertainty had caused investors to remain on 

the sidelines. Some even sold securities to improve 

their liquidity positions in case of an adverse 

scenario. 

-10 

-20 



Bulent Baygun, Anish Lohokare, Sergey Bondarchuk, Mary-Beth Fisher, Suvrat Praskash 4 August 2011 

Market Mover, Non-Objective Research Section 


31

With the debt ceiling issue behind us – and with it, 

the risk of an imminent default, too – attention has 

turned to other things that matter…such as, say, the 

economy. No reason to cheer there. From ISM to 

spending to GDP, almost everything paints a gloomy 

picture, to such an extent that the catch-all 

expression “soft patch” is fast becoming a relic of the 

good old days when we were all more optimistic (and 

a tad younger). Economic forecasts are being toned 

down as we speak, and cash-rich investors – 

reaching the conclusion that this economic malaise 

may not lift for quite some time – are looking to grab 

yield. 

As if US economic woes were not enough, the 

market has also called into question the resolution of 

the other crisis, namely the one in Europe, with 

concerns flaring up anew. And there you have it: the 

perfect storm, with a sudden drop in equities (that 

have heretofore defied gravity) and a flight to quality 

– into gold and US Treasuries, on top of the already 

bullish tone predicated on the weaker economic 

outlook. 

Interestingly, in this most recent move, the bullish 

momentum has migrated farther out on the curve 

with the 10-30y sector now playing the lead role, 

whereas before, the 5-7y segment used to lead the 

way. This is an important development and could 

signal a veritable preference for duration extension. 

As a result of the newly emerging curve dynamics, 

long-dated forwards have finally broken decisively 

below their recent ranges. For example, the 5y5y 

swap rate abruptly dropped below its three-month 

range between 4.50% and 4.75%, and it is currently 

trading at around 4.13% (see Chart 1). Ditto for the 

10y10y rate: the current 4.51% level is a far cry from 

the 4.80 to 5% range it was stuck in since early May. 

Now, if we were to draw parallels to the 2010 

episode, which ultimately gave us further easing in 

the form of QE, it would not be a leap of faith to say 

that there is room for a continued rally. We would say 

that not just because the noise about QE3 is likely to 

pick up against the backdrop of dismal economic 

data and financial market jitters, but also because 

monetary policy could stay at virtually zero for a 

really long time (they really mean it when they say 

“extended period”, people!). 

That said, a stronger-than-expected payroll number 

on Friday could halt the bullish tone, perhaps 

temporarily. The possibility of S&P downgrading the 

US could also be mildly bearish for Treasuries. So, 

with all of this in mind, we maintain a modestly bullish 

stance on duration, overweighting the 10-30y part of 

the curve. Past the employment report or following 

any clarification from S&P about their stance, we 

would likely step up our duration exposure into 

FOMC next week. 

The 2y is too rich – and this time we mean it! 

Given the prospect of a Fed on hold well beyond 

2011, it is no wonder that the curve is very flat in the 

front end. In fact, that is the very reason why, up until 

recently, the belly of the curve, and now the 10-30y 

sector, have been leading the rally, rather than the 

front end – there is no juice left there. 

To wit: 3m-fwd 1s2s is just about level with spot 

1s2s, which is already hovering at its lows (see Chart 

2). In other words, the market is pricing in virtually no 

risk of a change in monetary policy outlook (and we 

emphasise “outlook”) for two years in the next three 

months ahead of us. We read this as the 2y being 

too vulnerable to any improvement in sentiment 

down the road, whether it is misguided or not. 

The richness is manifest in other ways, too. In 

1s2s3s swaps, the 3m-fwd is 2bp lower than spot, so 

there is even a cushion for bearish positioning (i.e. 

short the belly). The current level of -13bp on the 3mfwd 

is near the lowest we've seen in the spot fly. 

In Tsys, the shape of the curve is slightly different 

because of the swap spread curve. Using CMT 

spreads vs swaps, the 2y spread of 24bp is tighter 

than both 1y and 3y spreads, at 30bp and 29bp, 

respectively. The takeaway here? 2y Tsys are 

trading cheaper on the curve than 2y swaps. This 

leads to buying the belly in the swap spread fly as an 

RV play (see Chart 3). Also, perhaps because of the 

relative cheapness of 2y Tsys on the curve, the 2s3s 

Tsy curve of 18bp currently is roughly level with the 

1s2s Tsy curve of 17-18bp. Thus, there is little cost 

to holding a 2s3s Tsy steepener, and carrying it for a 

year. 

TIPS – Looking Shaky vs Nominals 

The risk-off environment is finally starting to take its 

toll on TIPS breakevens, although with a delayed 

reaction. Let’s recap: 10y+ Treasury yields are 40+bp 

lower, WTI is down USD 7+ a barrel, and stocks are 

off 7+% in a little over a week. Relative to nominal 

yields alone, a 17bp correction in 5y and 10y 

breakevens doesn’t look unreasonable as a pure 

nominal yield beta move (although the 30y is only 

6bp lower). Still, taking into consideration starting 

levels, oil and shape of nominal curve, breakevens 

look rich in our model. Thus, we recommend going 

short breakevens, and we prefer being short in the 5y 

sector considering the upcoming 5y TIPS reopening, 

and +5bp carry on the short position through 1 

September. With that being said, 10y+ maturities 

also look vulnerable. 




32

In contrast, the 1y inflation swap is at its lowest level 

since the end of 2010 and this looks like a buying 

opportunity at 1.3% currently, even considering the 

prospects of slow economic growth. The main risk is 

if the economy enters recession again – a scenario 

that our economists assign a 1/3 probability. 

Is the ULC of the volatility surface doomed? 

First, let’s dispense with the easy stuff. The Fed is 

not raising rates any time soon, and the front end is 

anchored. So, there is little reason to expect an 

upswing in volatility in short expiry, short maturity 

structures – if anything, the downward trend should 

remain intact (see Chart 4). In other words, the ULC 

is dead, and it is not coming back from the dead – for 

quite some time, anyway. 

Next, the (perhaps) less obvious stuff. The demand 

for volatility from mortgage investors should remain 

low, as mortgage negative convexity is not likely to 

be a concern unless we rally another 30bp or so from 

Wednesday’s close (down to around 2.30% on 10y 

Treasuries) as detailed in our discussion of 

mortgages below. This should weigh on structures 

such as 3y7y, 1y10y, keeping vol in that sector 

relatively muted. 

The Case for Bullet and Callable Agencies 

The fate of GSEs, at least as far as S&P ratings are 

concerned, is one and the same with US Treasuries. 

If a downgrade occurs, we don't expect any further 

spread widening because of it. In fact, once trading 

activity and callable issuance rebuilds, we expect 

spreads to tighten to Treasuries back to the middle of 

their recent ranges. 

As we pointed out above, the "lower rates for longer" 

outlook also means volatility, which has been on a 

downward trajectory of late – particularly for short 

maturity structures – is likely to fall further. This 

bodes well for owning callables. More fodder for this 

recommendation: 

• The agencies have cheapened up their funding 

levels a bit, so new issue callables - particularly 

those in the belly - look reasonable. 

• Our favourite spots include 5nc3m and 7nc3m, 

with a pick up of close to 150bp and 225bp, 

respectively, over matched-duration agencies. 

Each tolerates a 100bp sell-off before beginning 

to underperform the bullet. 5nc6m and 7nc6m 

have similar profiles, and they tolerate a bit more 

of a rally (about 25 bp) before underperforming. 

• The wider spreads (for as long as they last) 

mean 5y and 7y final maturity paper picks up 70- 

80bp over matched-maturity Treasuries, 

depending on the lockout. 

Chart 4: Short expiry, short maturity volatility 

has been in a downtrend, with nothing to stop it 

yet 

Volatility (bp/yr) 

115 

95 

75 

55 

35 

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


6mx3y 

6mx2y 

3mx3y 

3mx2y 

• Rolldown also favours the belly of the curve. 

• Once the repo market is fully resuscitated we 

expect agency repo to fall back to the low single 

digits, making carry very attractive; and 

• Since we expect vol could decline if Friday's nonfarm 

payroll report disappoints, we recommend 

putting any new money to work soon, before next 

week's Fed meeting puts the QE3 idea firmly on 

the table and we revisit last years' lows in 

volatility that we experienced running up to QE2. 

No worries about a pickup in mortgage refi’s…yet 

Mortgages had widened in response to the debt 

ceiling issue and are experiencing tightening in this 

subsequent yield grab. Clearly, as yields move lower, 

the importance of every extra bp of yield is likely to 

intensify. Down in coupon in mortgages have done 

quite well, despite the fact that lower coupons have 

better credit, and consequently, worse convexity. The 

decline in vega has also helped MBS (and down-incoupon) 

to outperform. Funding, which had 

worsened during the debt “crisis”, has since returned 

to normal. 

We had moved to a modestly overweight stance on 

MBS on Monday in response to the passage of the 

debt ceiling increase, and with the subsequent 

improvement in funding, we’ve increased the 

exposure to overweight. We think that the 10Y 

Treasury would have to rally to around 2.30% before 

the negative convexity of mortgages becomes a 

concern, and thus, this demand for mortgages could 

continue for some time. 

How do we come up with this magic 2.30% level? 

We thought you might ask. 

Recall that last year in November, primary mortgage 

rates had dipped as low as 4.17%, with refinancing 




33

starting to pick up at around 4.60%. Since then, 

credit fees have gone up and, coupled with burnout, 

this suggests that mortgage rates would have to be 

some 25bp lower than last year to get the same level 

of response. That would translate to mortgage rates 

of 4.35% where prepays start picking up (and 4.25% 

where convexity concerns could start becoming an 

issue, given the ramp of the refi index). Using a beta 

of roughly 40% between the 10y Treasury and 

mortgage rates, we find 2.30% as the level the 10y 

Treasury rate should reach to incite a concerning 

ramp up in refi's. 

Prepayments tonight are likely to reinforce the limited 

callability of higher coupons. The carry after hedging 

out the duration, curve and vol components is 

substantially better for higher coupons over the past 

week. With the significant underperformance of 

higher coupons (4s up 18+ ticks but 6s down 3¾ 

ticks vs swaps), up in coupon may finally turn a 

corner. 




34

US: Subtle Changes in the Short-End 

• Interbank lending has yet to completely 

normalise in the wake of the debt-ceiling 

induced cash-hoarding, but we expect Fed 

funds – which fell back to 12bp yesterday - will 

return to the recent “normal” of 6bp by Friday. 

Libor, on the other hand, is likely to continue to 

grind higher as Europe struggles, pressuring 

OIS-Bor spreads marginally wider. 

• Overnight repo has dropped back into the 

low double-digits, but that’s still materially 

above the near-zero level where GC traded in 

the past several weeks. Cash continues to 

come back into repo, but we suspect money 

markets will not fully re-engage until S&P 

either reaffirms the USA’s AAA-rating or 

downgrades it to AA+. An S&P announcement 

either direction should also restore liquidity to 

the term markets, which have been better bid, 

but still somewhat inactive of late. 

• STRATEGY: An abundance of liquidity in 

the Fed funds market, and a neardisappearance 

of tightening priced in, will keep 

OIS anchored and the front of the curve flat. 

We recommend OIS-Bor spread wideners to 

position for further turbulence in Europe. 

Fed Funds to Recover to Lows 

Fed funds (see Chart 1) spiked from its recent low of 

6bp to a high of 17bp as the debt-ceiling debate and 

threat of a US downgrade pushed some cash lenders 

– notably the GSEs, who lend tens of billions in the 

interbank market each day – to withdraw from the 

market. They have since re-entered, but they 

continue to keep cash on hand, likely until S&P 

makes an announcement, and Fed funds has started 

ticking lower. 

Fed funds, which used to trade very close to the 

target rate, has seen more can enter the interbank 

market throughout 2011 for a variety of reasons: 

• The FDIC changing its deposit assessment, 

which made it cumbersome and more expensive 

conduct repo operations, with many counterparties 

choosing to leave funds as excess reserves and earn 

25bp. 

• QE2 resulting in a further enormous increase 

in excess reserves from USD1 to 1.6 trn; 

(bps) 

23 

21 

19 

17 

15 

13 

11 

9 

7 

5 

Sep-10 

Chart 1: Fed Funds and 3m OIS-Bor 

Oct-10 

Nov-10 


Total Outstanding ($bn) 

Dec-10 

Jan-11 

Feb-11 

• The run-off of USD 200bn Supplementary 

Finance Program (SFP) bills beginning in February 

that will not be re-initiated near-term since the 

increase in the debt ceiling is not large enough to 

accommodate it easily. 

All of these have resulted in greater liquidity in the 

Fed funds market, which has pushed the lending rate 

down from around19bp in late 2010 to its low of 

approximately 6bp in July. 

We expect that, once S&P makes its announcement, 

the GSEs and some other substantial lenders will put 

their cash fully back to work in that market. Fed funds 

should drop back to the low single digits and hover 

there, unless or until SFP bills are issued again later 

this year. This should anchor OIS rates, and any 

continued economic weakness will conspire to keep 

the front end of the curve very flat. 

Mar-11 

Apr-11 

May-11 

Fed Funds 

3m OIS/Bor 

Chart 2: Central Bank Swap Lines with Fed 

600 

500 

400 

300 

200 

100 

- 

Aug-07 

Nov-07 

Feb-08 

May-08 


Aug-08 

Nov-08 

Feb-09 

May-09 

Aug-09 

Nov-09 

Feb-10 

May-10 

Aug-10 

Jun-11 

Nov-10 

Jul-11 

Central Bank Swap Lines 

Feb-11 

May-11 

Aug-11 

Mary-Beth Fisher 04 August 2011 


35 


3m Libor Quotes Reveal Pressure in Europe 

The number of banks in the Libor panel that 

contribute quotes for the various Libor settings has 

dropped from 20 to 19 as of 1 August. West LB, 

which consistently had the highest quote among the 

panel’s member banks, was removed from the Libor 

panel at its own request. Beginning 1 August the 

Libor setting is calculated by dropping the top 5 and 

bottom 5 quotes and averaging the remaining 9 

(trimmed mean). 

The distribution on Libor quotes tends to be skewed 

upwards (see Chart 3) – meaning the difference 

between the highest quote and the setting is greater 

than the difference between the lowest quote and the 

setting. In relatively non-stressful periods, the middle 

quotes that are averaged tend to be fairly tightly 

grouped. 

Three-month Libor began ticking upward in the 

middle of July. Note that much of the rise is 

attributable to quotes from European banks in the 

third quartile – banks such as SocGen, CSFB and 

BNP Paribas – rising. West LB, Norinchukin and 

Sumitomo – which are typically dropped as the 

highest quoting banks – barely budged their quotes 

until very late July. The banks that typically inhabit 

the lowest quartile – HSBC and BofA – have only 

raised their quotes in the past few days; and the 

strongest US banks on the panel - JPM and Citi - 

have yet to quote any pressure in their eurodollar 

funding rates. 

Central Bank Swap Lines Extended Just in Case 

The Japanese banks remain fairly insulated from the 

European sovereign crisis, as they have very little 

exposure to euro-area peripherals. It appears that it 

will be the European-based banks that may drive 

Libor higher. The Fed recently announced an 

extension through 1 August 2012 of the existing US 

dollar liquidity swap lines for the Bank of Canada, the 

Bank of England, the European Central Bank and the 

Swiss National Bank. These lines provided crucial 

liquidity during the height of the financial crisis (see 

Chart 2) but have been barely used since the 

beginning of 2010. The ECB tapped the swap lines 

for a modest USD 70mn in May of 2010 when the 

European crisis first escalated and Libor rates blew 

out, but there has been no activity since then. 

Chart 3: Dispersion of 3m Libor Submissions and Setting 

0.36 

West LB 

0.35 

Norinchukin 

3m Libor Submissions & Setting (%) 

0.34 

0.33 

0.32 

0.31 

0.30 

0.29 

0.28 

0.27 

0.26 

0.25 

0.24 

0.23 

0.22 

0.21 

0.20 

Sumitomo 

Bank of Tokyo 

Credit Agricole 

Soc Gen 

Barclays 

CSFB 

BNP Paribas 

RBS 

Lloyds 

setting 

Bank of Nova Scotia 

RBC 

Citi 

UBS 

BofA 

Rabobank 

DB 

JPM 

6/3/11 

6/10/11 

6/17/11 

6/24/11 

7/1/11 

7/8/11 

7/15/11 

7/22/11 

7/29/11 

HSBC 


Mary-Beth Fisher 04 August 2011 


36 


US: Short-Vol Strategy on 10y10y 

• The bottom-right sector of the swaption vol 

surface looks relatively rich on a PCA basis. 

• The rise in vega vol and drop in forward 

rates has actually led to an improved entry level 

for receiver spreads. 

• STRATEGY: For those who see limited 

further upside in 10y10y vol, we like expressing 

this using receiver spreads such as the 

structure below. 

Table 1: PCA on Vol Surface (Positive = Rich) 

1Y 2Y 5Y 10Y 

1Y -1.9 -2.3 -2.3 -0.3 

2Y -2.4 -2.5 -1.9 0.0 

5Y -0.4 -0.5 0.4 1.8 

10Y 0.8 0.6 1.0 1.9 


Chart 1: History of 10y10y Implied Vol 

110 

105 

Swap rates have been in freefall recently, taking 

gamma vol lower with it as the market re-attunes 

itself with the idea that the Fed will be on hold for 

quite some time. The upper-left corner of the vol 

surface (such as 1y1y) should rightly lead the way 

lower, but it’s interesting that vega vol has stayed 

relatively firm (see Chart 1). In fact, a Principal 

Components Analysis on the vol surface suggests 

that 5y10y and 10y10y look rich (see Table 1). 

For those who see limited further upside in 10y10y 

vol, the trade we show is to buy an at-the-money 

10y10y receiver (roughly 4.50% strike at the time of 

writing) and sell 1.5 times the notional in a 100bp 

out-of-the-money receiver. This reduces the upfront 

cost to 43c currently. 

100 

95 

90 

85 

80 

75 

70 

65 

60 

01/01/05 01/01/06 01/01/07 01/01/08 01/01/09 01/01/10 01/01/11 


Chart 2: PnL Profile at Expiry 

The only scenario where the trade loses money at 

expiry beyond the entry cost is if the 10y spot rate is 

at ultra-low levels (below 1.50%). Chart 2 shows the 

PnL profile, and the trade details are in Table 2. 

These types of structures have often been unwound 

well before maturity, and it helps that the trade 

carries positively by +110k after 1y, or +25% of the 

entry cost. As can be seen in Table 2, the structure is 

flat delta and gamma to begin with, but short a good 

amount of vega on 10y10y. 


Table 2: Trade Details for Receiver Spread with Current Cost of 43c 

Structure Strike Norm Vol (bp) Notional ($) PV01 ($) Vega ($) Gamma ($) Theta ($) 

Buy 10y10y rec 4.5% (ATMF) 95.6 100,000,000 30,765 693,867 1,002 (1,063) 

Sell 10y10y rec 3.5% (-100bp) 95.3 (150,000,000) (29,646) (853,122) (941) 1,455 

Net 1,119 (159,255) 61 392 


Suvrat Prakash 4 August 2011 


37 


EUR: Bullish 5s15s Conditional Steepener 

• Market conditions are likely to deteriorate 

further before they improve. 

• STRATEGY: Buy EUR 6m fwd 2.30% - 3.20% 

5s15s conditional bull steepener versus 1x2 

1.70% cap, at zero cost. 

We recommend investors enter the following trade at 

zero cost: 

Buy 230m 6m5y 2.30% Receiver Swaption 

Sell 100m 6m15y 3.20% Receiver Swaption 

Sell 28m 1x2 1.70% Cap 

140 

135 

130 

125 

120 

115 

110 

105 

Chart 1: Evolution of 5s15s vs. the Market 

5s15s (RHS) 

Bund futures 

100 

2007 2008 2009 2010 2011 

1.6 

1.4 

1.2 

1.0 

0.8 

0.6 

0.4 

0.2 

0.0 

-0.2 

-0.4 

The position is outright delta and gamma neutral. 

Multiplicative vega is around -15k. The positive 

rolldown of the position translates into around 

EUR 100k of carry P&L over a three-month period. 

The trade should suit investors who believe that the 

risk-off mode will persist in the near term since the 

amendments to the EFSF are awaiting approval from 

the parliaments of the eurozone following the July EU 

summit. Indeed, the ECB’s purchases on Thursday 

following the “reactivation” of the SMP only focused 

on Ireland and Portugal, which are already assisted 

by EU/IMF programmes. Meanwhile, yield spreads of 

Italian government to German bonds reached a new 

high following the ECB’s press conference. 

Chart 1 plots the evolution of the 5s10s segment 

versus the market. It shows that the 5y sector tends 

to outperform the 10y sector in rallies which makes 

5s15s steepener a good hedge in risk-adverse 

markets. Moreover, the positive carry on the curve is 

19bp per annum (some 8bp more than the positive 

carry on 5s10s which displays analogous 

directionality). The conditional variation on the curve 

position is attractive as it offers (limited) protection in 

the event that risk appetite gradually resurfaces: the 

15y spot rate is currently 3.36 versus 6s whilst 6m5y 

swap is 3.44%. 

Last but not least, the conditional steepener position 

is financed via an expensive 1x2 cap. In our view, the 

fresh round of non-standard liquidity measures 

announced on Thursday by the ECB argues for a 

gradual cheapening of the C/F implied volatility 

surface. 


Chart 2: Curve Spreads’ Forward Matrix 

Tenor 2s5s 2s10s 2s30s 5s10s 5s15s 

spot 59 129 149 70 103 

1M 62 131 150 69 102 

3M 66 133 149 67 99 

6M 70 134 146 65 94 

9M 72 133 140 62 89 

1Y 72 131 133 58 84 


5.0 

4.5 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

Chart 3: ECB 12Mx1M vs. 1x2 ATMF 

C/F Implied Vol 

0.0 

2008 2009 2010 2011 


ECB 12m1m 

1x2 ATMF CAP implied vol (RHS) 

140 

130 

120 

110 

100 

90 

80 

70 

60 

Matteo Regesta 4 August 2011 


38 


EMU Debt Monitor: CDS Analysis 

Chart 1: Reversal on Spain & Italy CDS basis 

Chart 2: Belgium/France CDS & OLO/OAT: decoupling 

over 

135 

5Y CDS basis 

160 

140 

5Y CDS and cash spreads 

cash expensive vs 

110 

120 

100 

85 

80 

60 

60 

40 

cash cheap vs 

35 

Jan-11 Feb-11 Mar-11 Apr-11 Apr-11 May-11 Jun-11 Jul-11 Jul-11 

ITA SPA BEL GER 

20 

0 


BEL/FRA BEL/FRA cash FRA/NETH FRA/NETH cash 

AAA CDS have continued to rise dramatically over the past week, with the most significant move observed on Finland and 

France. Finland used to have very low volatility; this week has seen the largest weekly change for a very long time. On the 

basis side, AAA countries rose further – posting new highs following further flight to quality on Germany. Regarding Finland, 

the CDS basis differential with Germany, which was at very high levels (6 month rolling z-score close to 3 last week), has 

started to tighten but remains at high levels (i.e. RFGBs cheap vs. CDS). By contrast, ATS have cheapened further versus 

CDS with Austria/France CDS differential inverting by more than 10bp. 5y ATS now appear extremely cheap vs. BTANs (CDS 

basis z-score close to 3 vs. -1 for France). For Belgium, last week we stressed the unsustainable decoupling between a tighter 

Belgium/France CDS and wider OLO/OAT spreads. As Chart 2 illustrates, the decoupling was short lived as expected but was 

followed by a massive rise in Belgium CDS over the week. The 5y OLO has richened vs. CDS but is still trading very cheap 

(Belgium is the country furthest ahead in terms of 2011 supply – close to 80% so far). 

All Charts Source: BNP Paribas 

CDS Table & Stats* 

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

CDS 59 56 133 95 222 363 415 1038 908 1700 

CDS Weekly change 13 7 20 8 43 75 80 31 10 35 

cash -38 -40 -12 -9 135 291 325 1283 879 1453 

Basis 97 96 145 103 87 73 90 -245 29 247 

Basis Box vs Gy -40.8 -41.0 7.4 -33.8 -50.0 -64.7 -47.4 -382.5 -108.0 109.5 

Average -31.5 -27.3 2.4 -15.7 -2.1 -22.2 -13.4 -178.0 -210.0 54.8 

Max -23.8 -14.3 10.8 0.8 20.4 5.5 15.8 -11.8 -43.2 878.1 

Min -46.4 -46.2 -10.3 -40.8 -50.9 -83.6 -66.3 -408.3 -417.4 -227.1 

Z score** 1.81 1.55 -1.06 1.90 2.97 1.98 1.63 1.74 -1.14 -0.18 

Change to 31/12/2010 CDS Cash 

2y 5y 10y Current Min/Max z-score Current z-score 

FIN 26 28 32 AUS/BEL -127 -128/-64 -3.5 -144 -3.6 

NETH 0 1 6 BEL/FRA 90 52/95 2.0 147 3.5 

FRA 11 30 38 FRA/NETH 77 29/76 3.6 28 3.7 

AUS -1 -2 6 FRA/FIN 74 36/73 3.4 26 3.6 

BEL -7 13 18 ITA/BEL 141 2/141 3.3 156 2.8 

ITA 152 127 99 AUS/FRA -38 -38/-3 -3.6 3 -2.0 

SPA 104 68 45 SPA/IT 51 30/118 -1.4 34 -2.1 

POR 799 540 422 POR/SPA 624 174/927 1.1 959 1.4 

IRE 520 300 178 IRE/POR -130 -141/167 -2.0 -405 -3.3 

GRE 1190 683 717 GRE/IRE 792 249/1633 0.1 575 1.1 

All Charts Source: BNP Paribas * Wednesday closing levels 

** z score measures the deviation from 6-mth rolling average CDS/cash basis of the country versus Germany, expressed in numbers of standard deviations. A 

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

Eric Oynoyan / Ioannis Sokos 4 August 2011 


39 


EMU Debt Monitor: Key RV Charts 

Chart 3: OLO/BTAN 2013/15 box: 2013 richening 

Chart 4: Diverging Spain/Italy CDS & BTP/Bono spread: 

BTPs are getting too cheap 

15 

10 

Sep 13 olo cheap 

140 

CDS and cash 

spreads 

120 

5 

0 

100 

-5 

80 

-10 

-15 

60 

-20 

Sep 13 olo expensive 

-25 

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

Olo Sep 13/Oct 13/Sep 15/Oct 15 

40 

20 


SPA/ITA SPA/ITA 10y cash SPA/ITA SPA/ITA 5y cash 

After a protracted 2y OLO cheapening in the box, quite Spain/Italy CDS has recently decoupled from tighter 

surprisingly the last leg of OLO/BTAN widening has been Bono/BTP spreads. The CDS differential tended to lead the 

pronounced on the belly of the OLO curve. 5y OLO is now very cash in the past. That decoupling strengthens our view that 

cheap vs. both BTAN and CDS. 

BTPs are too cheap vs. Bonos, especially on the 2y/3y area. 

Chart 5: Bono/BTP Yield Spreads 1y Candlestick 

Chart 6: BTP/OLO Yield Spreads 1y Candlestick 

140 

120 

100 

80 

60 

40 

20 

0 

-20 

-40 

10/12 

vs 

10/12 

4/13 

vs 

4/13 

11/13 

vs 

10/13 

4/14 

vs 

4/14 

4/15 

vs 

4/15 

Bono/BTP Spreads in Yields - 1y Range vs Current Spread 

4/16 

vs 

4/16 

8/17 

vs 

7/17 

8/18 

vs 

7/18 

9/19 

vs 

10/19 

3/20 

vs 

4/20 

9/20 

vs 

10/20 

3/21 

vs 

4/21 

3/25 

vs 

7/25 

2/37 

vs 

1/37 

9/40 

vs 

7/40 

Recent BTP underperformance vs Bonos has driven most 

Bono/BTP spreads towards their 1y lows. Looking at the chart 

above, two things stand out: the negative Apr-13 spread and 

the wide 10y spread. 2/10s is too steep in Spain vs Italy. 

250 

200 

150 

100 

50 

0 

ITA/BEL Spreads in Yields - 1y Range vs Current Spread 

3/13 vs 4/13 

9/13 vs 11/13 

3/14 vs 4/14 

9/14 vs 8/14 

3/15 vs 4/15 

9/15 vs 11/15 

3/16 vs 4/16 

9/16 vs 8/16 

3/17 vs 2/17 

9/17 vs 8/17 

3/18 vs 2/18 

3/19 vs 3/19 

9/20 vs 9/20 

9/21 vs 9/21 

3/41 vs 9/40 

On the other hand, BTPs have reached new wides versus 

OLOs but this is stronger at the short end of the curve – rather 

than the belly or even the long end. 2-3y OLOs look too rich 

versus Italy at current levels. 

Chart 7: ITA vs SPA/BEL Credit Barbells 2y & 10y 

Chart 8: German 2/5/10y fly: back to June 2008 dislocation 

250 

30 

Hedged Eur u11 OE CTD Fly 

5y too cheap 

200 

20 

150 

10 

100 

50 

0 

0 

-10 

-50 

-20 

US QE 

-100 

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 

BTPS 3/21 * 2 - SPGB 4/21 - BGB 9/21 BTPS 4/13 * 2 - SPGB 4/13 - BGB 3/13 

Exotic desks hedging 

5y expensive 

-30 

May-07 Sep-08 Feb-10 Jun-11 

What we mentioned in Charts 5 & 6 is summarised in Chart 7, The German cash fly is now back at June 2008 extreme 

where we show the credit barbells of 2y & 10y BTPS versus valuation levels (i.e. 25bp below its fair value). The 5y OBL 

Bonos and OLOs (2:1:1). We think that the 2y should correct repricing could come either from a steeper 2y/5y or, less likely, 

from these excessive levels & barbell offers more protection. a massive inversion of Dec 11/Dec 12 Euribor. 




40 


EMU Debt Monitor: Trade Ideas 

• Bund July 42 ASW still a buy. Alternative 

trade would be Bund Jan 21/Bund July 42 

flatteners. 

• DSL/Bund July 42 widening trade is a cheap 

put. 

• Sell Olo Mar 35 into Olo Mar 41. 

Chart 1: Bund 10y/30y ASW box back at 2009- 

2010 highs (i.e. 30y ASW too low) 

60 

40 

20 

60 

50 

40 

0 

30 

-20 

Focus on 30y AAA opportunities 

Renewed stressed on peripherals since June has led 

to some dislocation at the very long end of the AAA 

curve. We focus this week on that part of the Euro 

cash curve and highlight the potential relative value 

opportunities. 

Bund segment: long 30y ASW or 10/30y flatteners 

While the 10y/30y segment on swaps has flattened 

by 20bp since its late-June highs and the OAT one 

by 10bp, the Bund segment is still very close to its 

highs. As Chart 1 illustrates, such a decoupling has 

pushed the 10y/30y Bund ASW box very close to its 

May 2009 and May 2010 highs. Using the Euribor 

slope as a proxy for the Bund 10y/30y segment, it 

appears that the residuals of its regression are 

pointing to a Bund segment that is still 12bp too high 

(see Chart 2 for the time series of the residuals). 

Meanwhile, the OAT curve has normalised 50% of its 

mispricing, as Chart 3 underscores. 

In terms of relative value opportunities, we 

continue to like long Bund July 42 ASW as we 

recommended a week ago. The ASW has now 

widened by 10bp but the 10y/30y ASW box remains 

out of line. The 30y ASW should easily widen 

another 10bp to around -30bp. An alternative 

trade could be to sell Bund Jan 21 vs. Bund July 

42 in the current high 70s, expecting a return to 

65bp on a full normalisation. 

DSL: cheap put on DSL/Bund 42 spread 

The DSL 30y has been structurally expensive within 

the 10y/30y DSL/Bund box, given the recurrent 

demand from pension funds for 30y DSL and the 

very limited supply. However, the DSL/Bund spread 

widening on the 2013 to 2028 maturities did not 

occur on the 30y bucket. As Chart 4 underlines, while 

the 10y spread has widened by 18bp since mid-June 

with even the 2028 spread 7bp wider, the 2042 

spread has been amazingly stable at 12-13bp. Such 

a break of correlation pushed the July 2020/42 

DSL/Bund box to heavily inverted levels around - 

30bp. We consider selling DSL July 42 vs. Bund 

-40 

-60 

-80 

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

25 

20 

15 

10 

-10 

-15 

-20 

DBR 07/19 ASW (RHS) DBR 4.75 04/07/40 08 ASW (RHS) DBR 07/40 ASW-DBR 07/19 ASW 

Chart 2: Bund 2020/40 spread: observed too 

steep vs. fitted 

5 

0 

-5 

10y/30y Bund too steep 

-25 

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

Jan 20/July 40 Bund regressed vs. Euribor 

Chart 3: OAT spread: normalisation has started 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

Spec on AAA 

status loss 

10y/30y OAT spread vs Euribor 

-25 

May-09 Nov-09 May-10 Nov-10 May-11 

Oct 2019/Avr 41 OAT spd 

30y OAT too cheap 

30y OAT expensive 

Chart 4: Diverging 10y & 30y DSL/Bund spreads 

45 

40 

35 

30 

25 

20 

15 

10 

5 

Aug-10 Sep-10 Nov-10 Dec-10 Feb-11 Mar-11 May-11 Jun-11 

NETHER 3.5 15/07/20 ASW-DBR 3 04/07/20 ASW 

NETHER 3.75 15/01/42 ASW-DBR 3.25 04/07/42 ASW 

20 

10 

0 

Sources: BNP Paribas 



41 


July 42 at the current 12-12.5bp level as a cheap 

put with a potential 10bp profit. The loss is 3bp in 

the worst-case scenario. 

Olo curve: Olo Mar 35 too rich 

While the 30y Olo seems cheap within the Olo/BTP 

10y/30y box after the 10y/30y BTP flattening, the 

story is completely the opposite versus other AAA 

curves. Chart 5 plots the 2020/41 Olo/OAT box since 

April 2010. The latter is hovering close to late 2010 

highs at around two standard deviations above its 

historical average, underscoring the expensiveness 

of the 30y Olo. Using another input, i.e. the fair value 

derived from the regression versus the money 

market slope, it appears that the 10y/30y Olo is 15bp 

too flat (see Chart 6 for the time series of the 

residuals). Looking at the Olo 10y/30y segment 

specifically, the richening has been the most 

pronounced on the Olo 44 (Olo Mar 35) with the 

2020/35/41 Olo fly diverging from the OAT one in 

July; the two had tended to move very closely. 

In terms of relative value, the richening of the Olo 

Mar 35 versus 2020 and 2041 provides an 

opportunity for holders of Olo Mar 35 to switch 

into Olo Mar 41 (Olo 60), the latter offering a 9bp 

pick-up. 

40 

30 

20 

10 

0 

-10 

-20 

Chart 5: Olo/OAT 2020/41 box: Olo 30y too 

expensive 

Historical Average + 2.5 st dev 

Historical Average - 2.5 st dev 

-30 



30 

20 

10 

0 

-10 

-20 

Olo Sep 20/Apr 20/Mar 41/Apr 41 

OLO 2041 too expensive 

OLO 2041 too cheap 

Chart 6: Olo 2020/41 spread too flat 

-30 

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


Olo Sep 20/Mar 41 

Chart 7: 2020/35/41 Olo & OAT flies: cheaper 

OAT 35, richer Olo Mar 35 

0.7 

0.6 

0.5 

0.4 

0.3 

0.2 

Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 

BGB 09/20 BGB 3/35 BGB 03/41 FLY 

FRTR 10/20 FRTR 4.75 25/4/35 FRTR 4.5 25/04/41 FLY 




42 


EMU Debt Monitor: Redemptions 

EGB Monthly Redemptions 

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

ITA 0.0 18.7 30.5 0.0 14.6 12.2 0.0 20.2 46.0 0.0 15.5 0.0 157.6 

FRA 17.8 0.0 0.0 18.4 0.0 0.0 29.3 0.0 13.8 15.7 0.0 0.0 95.0 

GER 23.3 0.0 15.0 19.0 0.0 15.0 24.0 0.0 16.0 17.0 0.0 18.0 147.3 

SPA 0.0 0.0 0.0 15.5 0.0 0.0 15.5 0.0 0.0 14.1 0.0 0.0 45.1 

GRE 0.0 0.0 8.7 1.0 7.0 0.0 0.0 6.8 0.0 0.0 0.0 5.8 29.4 

BEL 0.0 0.0 11.3 0.0 0.0 3.4 0.0 0.0 12.7 0.0 0.0 0.5 27.9 

NET 13.9 0.0 0.0 0.0 0.0 0.0 14.1 0.0 0.0 0.0 0.0 0.0 27.9 

AUS 8.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 8.4 

POR 0.0 0.0 0.0 4.5 0.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 9.5 

IRE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5 0.0 4.5 

FIN 0.0 5.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.7 

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

EGB Monthly Redemptions 

T-Bill Monthly Redemptions 

T-Bills Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 

ITA 17.4 17.3 17.3 17.3 14.6 19.3 16.3 16.2 15.7 15.7 14.9 13.0 194.8 

FRA 33.3 35.9 38.3 31.9 32.1 32.7 30.9 28.7 43.0 28.8 16.1 18.8 370.4 

GER 11.0 11.0 11.0 11.0 11.0 11.0 9.0 9.0 9.0 10.0 10.0 9.0 122.0 

SPA 8.7 7.9 10.2 7.3 7.9 6.3 7.3 11.9 7.3 10.0 5.4 7.7 97.9 

GRE 4.2 0.4 1.4 3.2 1.0 4.4 2.5 3.8 3.6 2.0 2.0 28.5 

BEL 5.5 6.2 6.4 6.7 7.4 6.8 5.4 5.4 5.0 6.4 3.8 3.2 68.1 

NET 9.7 8.3 17.4 7.0 6.9 10.9 7.7 6.2 10.6 10.2 3.8 7.6 106.2 

AUS 0.1 2.2 0.9 3.4 0.5 1.9 2.4 2.0 1.5 0.7 0.3 0.0 15.8 

POR 3.4 3.5 3.8 0.0 4.0 3.1 3.5 3.3 1.7 0.4 26.7 

IRE 2.1 1.2 1.6 1.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.2 

FIN 3.5 2.3 2.6 1.5 2.2 0.7 0.0 0.6 1.3 0.1 0.0 0.0 14.8 

Total 98.9 96.2 110.9 90.6 83.6 89.6 87.4 85.3 100.8 88.7 57.9 61.6 1051.5 

T-Bill Monthly Redemptions 

100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Monthly EGBs Redemptions 


120 

100 

80 

60 

40 

20 

0 

Monthly T-Bills Redemptions 


This Month’s EGB Redemptions 

Country Bond Maturity Issued Outstanding EURs (bn) CRNCY 

ITALY BTPS 5 1/4 08/01/11 01/08/2011 01/03/2001 20.20 20.20 EUR 

GREECE GGB 3.9 08/20/11 20/08/2011 24/05/2006 6.61 6.61 EUR 

This Month’s T-Bill Redemptions 

Country T-Bill Maturity CRNCY EURs 

AUSTRIA Various small T-Bills 

2.0 

BELGIUM BGTB 0 08/18/11 18/08/2011 EUR 5.4 

FINLAND RFTB 0 08/09/11 09/08/2011 EUR 0.6 

FRANCE BTF 0 08/04/11 04/08/2011 EUR 8.3 

FRANCE BTF 0 08/11/11 11/08/2011 EUR 6.1 

FRANCE BTF 0 08/18/11 18/08/2011 EUR 6.9 

FRANCE BTF 0 08/25/11 25/08/2011 EUR 7.4 

GERMANY BUBILL 0 08/24/11 24/08/2011 EUR 4.0 

GERMANY BUBILL 0 08/10/11 10/08/2011 EUR 5.0 

GREECE GTB 0 08/19/11 19/08/2011 EUR 2.0 

GREECE GTB 0 08/12/11 12/08/2011 EUR 0.5 

ITALY BOTS 0 08/15/11 15/08/2011 EUR 7.2 

ITALY BOTS 0 08/31/11 31/08/2011 EUR 9.0 

NETHERLANDS DTB 0 08/31/11 31/08/2011 EUR 6.2 

PORTUGAL PORTB 0 08/19/11 19/08/2011 EUR 3.1 

SPAIN SGLT 0 08/19/11 

Total 

19/08/2011 EUR 11.9 

85.3 

All Charts Sources: BNP Paribas 



43 


JGBs: 7y/10y Box 

• The 10y ASW cheapened the most during 

the rally last month. 

• STRATEGY: We recommend being long 10y 

ASW against the 7y ASW as a tactical trade. 

Chart 1: ASW Difference from 1m Average (bp) 

1.5 

1m High 

1.0 

0.5 

0.0 

FX intervention and BoJ meeting 

The yen has returned close to its all-time high versus 

the US dollar amid concerns that the US might be 

downgraded. The US debt ceiling deadlock has been 

resolved, but the economic outlook is becoming 

increasingly uncertain. The Ministry of Finance 

staged yen-selling intervention in the FX market on 

the morning of 4 August and the 10y JGB yield broke 

below 1% on expectations of additional easing after 

the Bank of Japan's announcement that its next 

Monetary Policy Meeting – originally scheduled for 

4-5 August – would instead conclude in the afternoon 

of 4 August. 

After the meeting, the BoJ announced that it deemed 

it necessary to further enhance monetary easing, 

thereby ensuring a successful transition from the 

recovery phase – following the earthquake – to a 

sustainable growth path with price stability. The BoJ 

increased the total amount of the asset purchase 

programme from JPY 40trn to JPY 50trn (an increase 

of JPY 5trn for the asset purchase fund and JPY 5trn 

for 6m fixed rate operations). However, the JGB 

market was disappointed by the decision as some 

participants expected further decisive measures such 

as a rate cut and extending duration in the BoJ’s 

JGB-buying operations. 

Now, the JGB 10y sector looks much cheaper as 

investors took profit at the sub-1% level. However, 

with many investors somewhat behind in their 

FY2011 bond-buying plans, we expect JGB yields to 

continue to test the downside unless the US and 

European markets rapidly move out of a risk-off 

mode. 

7y/10y box 

We recommend a 7y/10y box as a tactical trade. 10y 

ASW looks cheap on the curve at around 0bp 

especially against the futures sector. Also, we think 

that the 10y and 20y sectors may find support from 

ASW flows especially if the 5y JGB yield declines 

further from current levels. 6m Libor is only 3bp 

below the 5y JGB yield. Domestic investors may find 

ASW attractive as a carry position above the 0bp 

level. 

-0.5 

-1.0 

-1.5 

-2.0 

1m Low 

JB280 

JB281 

JS97 

JB282 

JB283 

JB284 

JB285 

JB286 

JB287 

JB288 

JB289 

JB290 

JB291 

JB292 

JB293 

JB294 

JB295 

JB296 

JB297 

JB298 

JB299 

JB300 

JB301 

JB302 

JB303 

JB304 

JB305 

JB306 

JB307 

JB308 

JB309 

JB310 

JB311 

JB312 

JB313 

JB314 

JB315 


5 

0 

-5 

-10 

-15 

-20 

Chart 2: JGB 7y/10y Box (bp) 



1.75 

1.50 

1.25 

1.00 

0.75 

0.50 

0.25 

0.00 

-0.25 

-0.50 

(%) 

5yr JGB 

7y 10y 7y/10y box (RHS) 

Chart 3: JGB 5y and ASW Carry 

20yr ASW (RHS) 

Target Entry: 7.5bp (JB296 versus JB316) 

Profit Take: 2.5bp 

Stop Loss: 10bp 

15.0 

12.5 

10.0 

7.5 

5.0 

2.5 

0.0 

-2.5 

-5.0 

60 

(bp) 

-0.75 

-40 

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


20yr ASW Carry 

( = 6M Libor + x ) 

3M Tibor 

100 

80 

40 

20 

0 

-20 

Tomohisa Fujiki / Masahiro Kikuchi 4 August 2011 


44 


Global Inflation Watch 

Eurozone HICP: Upward Pressures Persist 

Chart 1: Italian CPI vs HICP Headline (% y/y) 

Ahead of the July eurozone HICP release on 17 

August, final data on July inflation are due this week 

in Germany, France, Italy and Spain. Preliminary 

figures showed an unexpectedly sharp fall in the 

Italian HICP reading, from 3.0% y/y in June to 2.1%. 

This was the main factor behind the significant 

downward surprise in the flash estimate for the 

eurozone July HICP. 

The deceleration in the Italian HICP was not mirrored 

in the CPI reading (Chart 1). The final reading this 

week, which includes a breakdown of the HICP, 

should confirm our expectation that the surprise was 

mainly due to seasonal factors. Unlike the CPI, the 

HICP takes into account seasonal discounts and is 

therefore subject to deeper seasonal swings. In 

addition, Eurostat has recently changed the 

methodology for harmonisation purposes widening 

the number of items subject to seasonal movements. 

In the case of Italy, the new methodology has been 

applied only from January this year, causing a 

distortion in the annual inflation rate. 

The implication is that the sharp decline in Italian 

inflation must be viewed as a temporary 

phenomenon. Further downward pressures are likely 

in August but they will very probably be followed by a 

sharp jump in September, when seasonal factors 

fade as new items hit the shelves. 

Italy’s CPI reading is more indicative of the 

underlying trend, suggesting inflation was broadly 

stable. 

Source: Reuters EcoWin Pro, BNP Paribas 

Chart 2: EC Survey Expected Prices vs. PPI 


Chart 3: Services PMI Prices and HICP 

The impact of seasonal factors is less significant in 

other economies, which we believe will show a 

persistent, albeit moderate, upward trend in core 

inflation. 

Leading indicators including a number of surveys, in 

parallel with a sharp slowdown in activity, have 

signalled recently a moderation of price pressures at 

the factory gate (Chart 2). It typically takes time, 

however, for these trends to filter along the price 

formation chain, suggesting pressure on consumer 

prices will persist over the next few months (Chart 3). 

They should, however, start abating during 2012. 


Luigi Speranza/Gizem Kara/Dominique Barbet 4 August 2011 

Market Mover 

45 


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 

2010 109.8 - 1.6 109.5 - 1.5 121.1 - 1.5 119.8 - 1.5 218.1 - 1.6 218.1 - 1.6 

2011 (1) 112.9 - 2.8 112.5 - 2.7 123.7 - 2.1 122.3 - 2.1 224.8 - 3.1 224.8 - 3.1 

2012 (1) 115.6 - 2.4 115.1 - 2.3 126.0 - 1.8 124.4 - 1.8 229.0 - 1.9 229.0 - 1.9 

Q1 2010 108.6 - 1.1 108.3 - 1.0 120.3 - 1.3 119.0 - 1.2 217.5 - 2.4 217.0 - 2.4 

Q2 2010 110.1 - 1.6 109.8 - 1.5 121.3 - 1.6 120.0 - 1.5 217.3 - 1.8 218.1 - 1.8 

Q3 2010 109.9 - 1.7 109.6 - 1.7 121.2 - 1.5 119.8 - 1.5 218.0 - 1.2 218.3 - 1.2 

Q4 2010 110.8 - 2.0 110.5 - 2.0 121.7 - 1.6 120.2 - 1.6 219.5 - 1.2 218.9 - 1.3 

Q1 2011 111.3 - 2.5 110.9 - 2.4 122.5 - 1.8 121.0 - 1.7 222.3 - 2.2 221.7 - 2.1 

Q2 2011 113.1 - 2.8 112.7 - 2.7 123.9 - 2.1 122.4 - 2.0 224.5 - 3.3 225.5 - 3.4 

Q3 2011 (1) 113.0 - 2.8 112.6 - 2.8 124.1 - 2.4 122.6 - 2.3 225.8 - 3.6 226.0 - 3.6 

Q4 2011 (1) 114.2 - 3.0 113.8 - 3.0 124.5 - 2.3 123.0 - 2.3 226.7 - 3.3 226.1 - 3.3 

Jul 10 109.6 -0.4 1.7 109.30 -0.4 1.7 121.0 -0.3 1.7 119.68 -0.3 1.6 217.6 0.3 1.3 218.01 0.0 1.2 

Aug 10 109.9 0.2 1.6 109.52 0.2 1.5 121.3 0.2 1.4 119.97 0.2 1.3 218.1 0.2 1.2 218.31 0.1 1.1 

Sep 10 110.2 0.3 1.9 109.86 0.3 1.8 121.2 -0.1 1.6 119.88 -0.1 1.5 218.4 0.2 1.1 218.44 0.1 1.1 

Oct 10 110.5 0.3 1.9 110.19 0.3 1.9 121.4 0.1 1.6 120.03 0.1 1.5 219.0 0.2 1.2 218.71 0.1 1.2 

Nov 10 110.6 0.1 1.9 110.28 0.1 1.8 121.5 0.1 1.6 120.09 0.0 1.5 219.2 0.1 1.1 218.80 0.0 1.1 

Dec 10 111.3 0.6 2.2 110.93 0.6 2.1 122.1 0.5 1.8 120.61 0.4 1.7 220.2 0.4 1.4 219.18 0.2 1.5 

Jan 11 110.5 -0.7 2.3 110.11 -0.7 2.2 121.8 -0.2 1.8 120.32 -0.2 1.7 221.1 0.4 1.7 220.22 0.5 1.6 

Feb 11 111.0 0.4 2.4 110.58 0.4 2.4 122.4 0.5 1.7 120.90 0.5 1.6 222.3 0.5 2.2 221.31 0.5 2.1 

Mar 11 112.5 1.4 2.7 112.11 1.4 2.6 123.4 0.8 2.0 121.90 0.8 1.9 223.5 0.5 2.7 223.47 1.0 2.7 

Apr 11 113.1 0.6 2.8 112.75 0.6 2.8 123.8 0.3 2.1 122.32 0.3 2.0 224.4 0.4 3.1 224.91 0.6 3.2 

May 11 113.1 0.0 2.7 112.74 0.0 2.7 123.9 0.1 2.0 122.40 0.1 2.0 224.8 0.2 3.4 225.96 0.5 3.6 

Jun 11 113.1 0.0 2.7 112.75 0.0 2.7 124.0 0.1 2.1 122.49 0.1 2.1 224.3 -0.2 3.4 225.72 -0.1 3.6 

Jul 11 (1) 112.4 -0.6 2.5 112.00 -0.7 2.5 123.7 -0.2 2.2 122.27 -0.2 2.2 225.4 0.5 3.6 225.76 0.0 3.6 

Aug 11 (1) 112.8 0.4 2.7 112.44 0.4 2.7 124.2 0.4 2.4 122.75 0.4 2.3 225.8 0.2 3.5 226.02 0.1 3.5 

Sep 11 (1) 113.7 0.8 3.2 113.32 0.8 3.1 124.2 0.0 2.5 122.77 0.0 2.4 226.3 0.2 3.6 226.28 0.1 3.6 

Oct 11 (1) 114.0 0.3 3.2 113.66 0.3 3.1 124.4 0.1 2.5 122.92 0.1 2.4 226.5 0.1 3.5 226.27 0.0 3.5 

Nov 11 (1) 114.1 0.0 3.1 113.69 0.0 3.1 124.5 0.1 2.4 122.96 0.0 2.4 226.5 0.0 3.3 226.07 -0.1 3.3 

Dec 11 (1) 114.5 0.4 2.9 114.07 0.3 2.8 124.7 0.2 2.1 123.18 0.2 2.1 227.0 0.2 3.1 225.96 0.0 3.1 

Updated 

Next 

Release 

Jul 29 

Jul HICP (Aug 17) 

Jul 21 

Jul CPI (Aug 12) 

Jul 15 


Source: BNP Paribas, (1) Forecasts 

Chart 4: Eurozone HICP (% y/y) 

Chart 5: US Core CPI (pp) 


The decline in July was merely due to methodological factors and 

has to be viewed as temporary. We expect a rebound in 

September, as distortions fade. 


Core goods inflation accelerated in June on past commodity price 

surges. Shelter inflation also soared, due to the delayed impact of 

the past rise in energy prices. However, core services remained 

subdued, helped by the on-going wage moderation. 


Market Mover 

46 



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 

2010 99.3 - -1.0 99.3 - -1.0 114.5 - 3.3 223.6 - 4.6 302.5 - 1.2 194.6 - 2.0 

2011 (1) 99.8 - 0.5 99.8 - 0.5 119.5 - 4.4 235.4 - 5.3 311.7 - 3.1 197.6 - 1.6 

2012 (1) 100.5 - 0.7 100.5 - 0.7 122.7 - 2.5 244.8 - 4.0 318.4 - 2.1 200.3 - 1.4 

Q1 2010 99.8 - -1.2 99.3 - -1.2 112.9 - 3.2 219.3 - 4.0 301.2 - 0.7 193.4 - 2.3 

Q2 2010 99.3 - -1.2 99.3 - -1.2 114.4 - 3.4 223.5 - 5.1 302.8 - 0.9 194.3 - 1.9 

Q3 2010 98.8 - -1.1 99.1 - -1.0 114.7 - 3.1 224.5 - 4.7 302.9 - 1.1 194.2 - 1.7 

Q4 2010 99.3 - -0.5 99.4 - -0.5 115.9 - 3.4 227.0 - 4.7 307.0 - 1.9 196.4 - 2.0 

Q1 2011 99.6 - -0.2 99.1 - -0.2 117.6 - 4.1 230.9 - 5.3 308.1 - 2.6 196.1 - 1.4 

Q2 2011 99.8 - 0.5 99.8 - 0.5 119.4 - 4.4 234.9 - 5.1 311.6 - 3.3 197.5 - 1.7 

Q3 2011 (1) 99.6 - 0.8 99.9 - 0.8 119.9 - 4.5 236.4 - 5.3 312.1 - 3.4 197.5 - 1.7 

Q4 2011 (1) 100.1 - 0.8 100.3 - 0.8 121.1 - 4.5 239.5 - 5.5 315.2 - 3.0 199.2 - 1.4 

Jul 10 98.8 -0.4 -1.2 99.0 -0.3 -1.1 114.3 -0.3 3.1 223.6 -0.2 4.8 302.0 -0.3 1.1 193.7 -0.3 1.7 

Aug 10 98.8 0.0 -1.0 99.1 0.1 -1.0 114.9 0.5 3.1 224.5 0.4 4.7 302.1 0.0 0.9 193.7 0.0 1.5 

Sep 10 98.7 -0.1 -1.1 99.1 0.0 -1.1 114.9 0.0 3.0 225.3 0.4 4.6 304.6 0.8 1.4 195.1 0.7 1.8 

Oct 10 99.1 0.4 -0.6 99.5 0.4 -0.6 115.2 0.3 3.1 225.8 0.2 4.5 305.6 0.3 1.5 195.7 0.3 1.8 

Nov 10 99.3 0.2 -0.5 99.4 -0.1 -0.5 115.6 0.3 3.2 226.8 0.4 4.7 306.6 0.3 1.8 196.2 0.2 1.9 

Dec 10 99.5 0.2 -0.3 99.4 0.0 -0.4 116.8 1.0 3.7 228.4 0.7 4.8 308.7 0.7 2.3 197.3 0.6 2.3 

Jan 11 99.5 0.0 -0.2 99.0 -0.4 -0.2 116.9 0.1 4.0 229.0 0.3 5.1 306.2 -0.5 2.5 195.2 -1.1 1.4 

Feb 11 99.5 0.0 -0.3 98.9 -0.1 -0.3 117.8 0.8 4.3 231.3 1.0 5.5 308.0 0.6 2.5 196.2 0.5 1.3 

Mar 11 99.7 0.2 -0.1 99.4 0.5 -0.1 118.1 0.3 4.1 232.5 0.5 5.3 310.1 0.7 2.9 196.9 0.4 1.5 

Apr 11 99.9 0.2 0.6 99.8 0.4 0.6 119.3 1.0 4.5 234.4 0.8 5.2 311.4 0.4 3.3 197.6 0.4 1.8 

May 11 99.9 0.0 0.6 99.9 0.1 0.6 119.5 0.2 4.5 235.2 0.3 5.2 312.0 0.2 3.3 197.8 0.1 1.7 

Jun 11 99.6 -0.3 0.4 99.7 -0.2 0.4 119.4 -0.1 4.2 235.2 0.0 5.0 311.3 -0.2 3.1 197.2 -0.3 1.5 

Jul 11 (1) 99.5 -0.1 0.7 99.7 0.0 0.7 119.1 -0.2 4.2 234.6 -0.2 4.9 310.9 -0.1 3.3 197.0 -0.1 1.7 

Aug 11 (1) 99.6 0.1 0.8 99.9 0.2 0.8 120.0 0.7 4.4 236.3 0.7 5.3 311.3 0.1 3.4 197.1 0.0 1.8 

Sep 11 (1) 99.7 0.1 1.0 100.1 0.2 1.0 120.6 0.5 4.9 238.2 0.8 5.7 314.0 0.9 3.4 198.5 0.7 1.7 

Oct 11 (1) 99.9 0.2 0.8 100.3 0.2 0.8 120.8 0.2 4.8 238.7 0.2 5.7 314.9 0.3 3.4 199.1 0.3 1.7 

Nov 11 (1) 100.2 0.3 0.9 100.3 0.0 0.9 120.9 0.1 4.6 239.4 0.3 5.5 315.2 0.1 3.1 199.2 0.1 1.6 

Dec 11 (1) 100.3 0.1 0.8 100.2 -0.1 0.8 121.7 0.6 4.2 240.4 0.4 5.3 315.5 0.1 2.5 199.4 0.1 1.0 

Updated 

Next 

Release 

Jul 29 


Jul 14 


Aug 03 



Chart 6: Japanese CPI (% y/y) 

Chart 7: UK CPI (% y/y) 


At 0.4% y/y, inflation was above zero for the third month running in 

June. Note, however, that from the next release on 26 August the 

CPI base year will shift from 2005 to 2010. The rebasing is 

associated with an overhaul of the basket that, we believe, will 

subtract around 0.8pp from core inflation. 


Inflation surprised to the downside in June, on slower core inflation. 

We still expect the headline inflation rate to go higher before the 

year is out given the large hikes in utility prices which are in the 

pipeline. 


Market Mover 

47 



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 

2010 116.5 1.8 115.6 1.7 128.8 2.4 120.1 1.4 172.6 2.8 - 2.6 

2011 (1) 119.8 2.8 117.6 1.7 130.5 1.3 121.4 1.1 178.6 3.5 - 2.7 

2012 (1) 122.7 2.4 120.0 2.1 132.6 1.6 123.6 1.8 183.7 2.8 - 2.7 

Q3 2010 116.9 2.2 1.4 116.9 0.3 1.7 128.2 -0.7 1.9 119.9 -0.3 1.2 173.3 0.7 2.8 - - 2.4 

Q4 2010 117.5 2.3 1.8 117.5 2.0 1.7 129.4 0.9 2.2 120.5 0.5 1.0 174.0 0.4 2.7 - - 2.2 

Q1 2011 119.4 3.3 2.0 119.4 0.7 1.6 130.2 0.6 1.4 120.3 -0.2 0.8 176.6 1.5 3.3 - - 2.3 

Q2 2011 119.8 5.6 2.5 119.8 3.4 1.5 130.9 0.6 1.4 121.5 1.0 1.0 178.0 0.8 3.6 - - 2.7 

Q3 2011 (1) 120.1 -0.4 2.7 120.1 1.4 1.6 129.8 -0.9 1.2 121.2 -0.3 1.1 179.3 0.7 3.6 - - 2.8 

Q4 2011 (1) 120.9 2.6 2.8 120.9 3.4 1.7 131.0 1.0 1.3 122.4 1.0 1.6 180.6 0.7 3.7 - - 2.9 

Q1 2012 (1) 122.2 3.3 2.9 122.2 2.0 2.1 131.4 0.3 0.9 122.6 0.1 1.9 182.0 0.8 3.0 - - 2.7 

Q2 2012 (1) 122.9 4.0 2.6 122.9 1.3 2.2 132.6 1.0 1.3 123.7 1.0 1.8 182.9 0.5 2.6 - - 2.5 

Updated 

Next 

Release 

Jul 28 


Aug 03 


Jul 27 

Q3 CPI (Oct 26) 


Chart 8: Canadian Total versus Core CPI 

Chart 9: Australian CPI (% y/y) 

BoC Mid-Point Inflation Target 

7.0 

(% y/y) 

6.0 

5.0 

Headline CPI 

Underlying CPI 

4.0 

3.0 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

2.0 

0.5 

BoC CPI Core (% y/y) 

0.0 

-0.5 

CPI Total (% y/y) 

-1.0 

04 05 06 07 08 09 10 11 


In Canada, inflation surprised on the downside in June. More 

importantly, the move was driven by core inflation. Core inflation will 

increase due to the past rise in the headline CPI, but the starting 

point is reassuringly low. 

1.0 

0.0 

-1.0 

Q193 Q195 Q197 Q199 Q101 Q103 Q105 Q107 Q109 Q111 Q113 


Food prices should drive headline inflation sharply higher in 2011. 

Underlying inflation should drift higher, but remain within the target 

range. Risks to inflation are to the upside, particularly in the near 

term. 

CPI Data Calendar for the Coming Week 

Day GMT Economy Indicator Previous BNPP F’cast Consensus 

Fri 05 07:15 Switzerland CPI m/m : Jul -0.2% -0.6% -0.6% 

07:15 CPI y/y : Jul 0.6% 0.7% 0.7% 

Wed 10/08 06:00 Germany CPI (Final) y/y : Jul 2.4% (p) 2.4% 2.4% 

06:00 HICP (Final) y/y : Jul 2.6% (p) 2.6% 2.6% 

08:00 Norway CPI m/m : Jul -0.4% -0.5% n/a 

08:00 CPI y/y : Jul 1.3% 1.3% n/a 

08:00 CPI-ATE y/y : Jul 0.7% 0.9% n/a 

07:30 Sweden CPI m/m : Jul -0.2% -0.1% n/a 

07:30 CPI y/y : Jul 3.1% 3.3% n/a 

07:30 CPIF y/y : Jul 1.5% 1.7% n/a 

Fri 05:30 France CPI y/y : Jul 2.1% 2.2% n/a 

05:30 HICP y/y : Jul 2.3% 2.4% n/a 

05:30 Ex-Tobacco CPI (Final, nsa) : Jul 122.49 122.27 n/a 

07:00 Spain CPI (Final) y/y : Jul 3.2% 3.1% n/a 

07:00 HICP (Final) y/y : Jul 3.0% 3.0% n/a 

09:00 Italy CPI (Final) y/y : Jul 2.7% (p) 2.7% 2.7% 

09:00 HICP (Final) y/y : Jul 2.1% (p) 2.1% 2.1% 

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



Market Mover 

48 


Inflation: Beta Hedge the Uncertainty Away? 

• Global: Weak. Focus on cross mkt spreads. 

Chart 1: 10y US BE vs. CPI & ISM Prices Paid 

• EUR: Overweight OATi vs. ei for carry. 

• USD: Sell 5-10y US BEs with beta hedge. 

• GBP: Real yields at their lower bound? 

Global – Weak. Sell US BE with beta hedge 

Further deterioration in activity data (especially 

manufacturing surveys) and continued concerns over 

the eurozone’s peripheral states have seen the flight 

to quality intensify. Equities, core bond yields and 

commodities (particularly energy but excluding 

precious metals) have fallen. Global breakevens 

have been much less immune than in July, with a 

material correction led by TIPS; the latter seem the 

most expensive at 5y+ maturities (vs. UK and EUR). 

With seasonals deteriorating in the summer, carry is 

now negative for all major linker markets, and 

support from index extensions is over. Furthermore, 

supply may weigh with a 5y TIPS auction, 10y and 

30y UKTi auctions in the UK and a scheduled BTPei 

auction in late August. There is no French linker 

supply in August. Given low (core) real yield levels 

everywhere and an 8%+ fall in crude over the past 

week, we stay negative on breakevens. 

Potential support/intervention may limit the scope of 

the FTQ. The ECB has increased the supply of 

liquidity (via 6m LTROs), SMP buying has restarted 

and media reports have suggested the potential for 

QE3 in the US. In Chart 2, we find the level and 

evolution of 10y Treasury yields have been similar in 

2011 to in 2010. The key difference is the much 

higher level of 10y US breakevens. As well as 

highlighting their richness, much higher US inflation 

expectations (5y5y TIPS BE forward at 2.80%) and 

the associated very rich level of real yields may act 

as a barrier to further QE from the Fed. Given 

increased uncertainty and the low level of rates, we 

prefer selling rich 5-10y TIPS breakevens but hedged 

with a beta at 80%. We consider various cross 

market opportunities in the domestic sections. On the 

subject of uncertainty, we plot implied interest rate 

and inflation Vol in Europe (Chart 3). Whilst Vol has 

increased marginally, we are surprised not to see a 

larger move given the increase in uncertainty over 

the macro picture. This is more the case with inflation 

Vol, which is typically very sensitive to downside 

economic risks, although we have seen some limited 

richening of 0% inflation floors vs. inflation caps. 


Chart 2: 10y US Tsy & BE in 2010 (QE2) & 2011 

4.50 

4.00 

3.50 

3.00 

2.50 

2.00 


10y UST (2010), Lhs 

10y UST (2011), Lhs 

10y US BE (2010), Rhs 

10y US BE (2011), Rhs 

Jackson Hole (10-Aug-2010) 

Chart 3: Implied Inflation & Interest Rate Vol 


2.80 

2.60 

2.40 

2.20 

2.00 

1.80 

1.60 

1.40 

1.20 

1.00 

Shahid Ladha / Herve Cros 4 August 2011 


49 


EUR – Overweight OATi vs. ei for summer carry 

The inflation curve is much lower and steeper 

although the move was quite uniform across OATei, 

BTPei and DBRei breakevens. Based on our 

seasonally adjusted relative value analysis, we 

continue to favour DBRei and especially cheap 

BTPei breakevens to richer OATei and OATi 

breakevens. Given the relative richness of EUR 

breakevens vs. FRF despite the fall in breakevens, it 

is not surprising to see OATis outperforming – 

especially given they carry much better over the next 

two months. This will only be temporary as BNPP’s 

economists forecast cumulative inflation in the 

eurozone for the last four months of 2011 at 1.4% vs. 

only 0.35% in France. Given the aforementioned 

richness of US TIPS, we like buying BUNDei-20 vs. 

TIPS Jul-20 in breakeven and especially real yield 

space (Chart 4). 

GBP – Real yields at their lower bound? 

Following the significant correction in UKTi 

breakevens at the end of July, August began with 

some buying interest in UKTis. However, this was 

short-lived, with the flight to quality and associated 

rally in gilts weighing further on breakevens. 

Although August seemed to start early, we do not 

think the fall in UKTi breakevens is over. Real yields 

look very rich and appear to have reached their lower 

bound (with UKTi-55 approaching lows around 

30bp). Consequently, breakevens are likely to 

experience increased directionality from here. We 

continue to find the 10y20y UK cash breakeven 

forward rich vs. 5y5y forward, given the cheapness of 

the 10-15y area in cash. Unlike in both the US and 

Europe, the UK inflation curve has continued to 

flatten despite the fall in oil and relative steepening of 

the conventional Gilts curve vs. flattening in US and 

European nominal curves. This is particularly 

noticeable relative to TIPS, and we like 30y UKTi real 

yields vs. US. Alternatively, the most attractive 

UK/US trade seems to be the 5/30y real yield box – 

at least judged by Chart 6. Next week, the DMO will 

re-open UKTi-42 for GBP 825mn. 

USD – Sell US BE with beta hedge 

Despite the 20bp collapse in TIPS breakevens over 

the past week, they remain rich given the ongoing 

rally in Treasuries and sharp decline in oil prices. At 

these levels, we still like being short 5-10y TIPS 

breakevens ahead of 5y supply in mid-July, but 

suggest beta hedged plays – especially for investors 

concerned by the ultra-low levels of yields. Please 

see our US TIPS focus, “US: TIPS Breakevens Look 

Vulnerable”. 

Chart 4: 5y EUR-FRF Cash & Swap BE Spds 

5 

OATEI15 / OATI17 / OATEI20 Breakeven 

-10 

0 

E5.0 / F5.0 Breakeven Rhs 

-15 

-5 

-20 

-10 

-25 

-15 

-30 

-20 

-35 

-25 

-30 

-40 

-35 

-45 

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


Chart 5: 10y US/EUR Cash RY & NY Spreads 

40 

60 

30 

TIIJUL20 / BUNDEI20 Real 

TIIJUL20 / BUNDEI20 Nominal Rhs 

50 

20 

40 

10 

30 

0 

20 

-10 

10 

-20 

0 

-30 

-10 

-40 

-20 

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


Chart 6: 5/30y US/UK RY & NY Box 

-20 

TIIJAN16 / UKTI16 / TIIFEB40 / UKTI40 Real 

TIIJAN16 / UKTI16 / TIIFEB40 / UKTI40 Nominal Rhs 

-10 

-20 

-40 

-30 

-60 

-40 

-50 

-80 

-60 

-100 

-70 

-80 

-120 

-90 

-140 

-100 

Feb-10 May-10 Aug-10 Nov-10 Mar-11 Jun-11 Sep-11 Dec-11 




50 


US: TIPS Breakevens Look Vulnerable 

• TIPS breakevens look rich after the recent 

massive re-pricing in markets (10y Tsys are 

40bp lower in yield and WTI down USD 7 a barrel 

in a little over a week!). 

Chart 1: Markets Re-Price the Economy/Risks 

• We prefer to be short in the 5y sector 

considering upcoming supply and 5bp of 

positive carry through 1 September, although 

10y+ maturities look vulnerable as well. 

• STRATEGY: Short 5y TIPS BE; take profit on 

Jul-12 TIPS w/energy hedge (initially 

recommended on 22 June); stay long 2y1y and 

2.5y1y fwd cash BEs; buy 1y inflation on CPI. 

Source: BNP Paribas, Bloomberg 

Chart 2: TIPS Breakevens Look Exposed 

The risk-off environment is finally starting to take toll 

on TIPS breakevens, although with a delayed 

reaction. 10y+ Tsys are 40+bp lower in yield, WTI is 

down USD 7+ a barrel, and stocks are off 7%+ in a 

little over a week (Chart 1). Relative to nominal yields 

alone, a 17bp correction in 5y and 10y breakevens 

doesn’t look unreasonable as a pure nominal yield 

beta move (although the 30y is only 6bp lower). 

However, taking into consideration starting levels, oil 

and shape of nominal curve, breakevens look rich in 

our model (R^2 in 82%-91% range, Chart 2). Thus, 

we recommend going short breakevens, and we 

prefer being short in the 5y sector considering the 

upcoming 5y TIPS reopening, and +5bp carry 

through 1 September. With that being said, 10y+ 

maturities also look vulnerable. Meanwhile, we keep 

long 2y1y and 2.5y1y fwd cash BE 

recommendations, which have dipped below 2% 

level. 

The correction in energy helped our recommended 

Jul-12 TIPS hedged for energy (w/ gasoline and nat. 

gas) trade to outperform vs un-hedged long. We 

recommend taking profit on this strategy (Chart 3, 

PnL +USD 220k per USD 100mn not’l vs +USD 105k 

for un-hedged position). Besides negative carry 

going forward, energy has already corrected quite a 

bit; 1y rates may have a hard time rallying beyond 

already low levels while recent data revealed 

considerable downside risks to economic recovery. 

Furthermore, we could see a trough in inflation 

around mid-2012 due to base effects and lag to 

slowing economic growth. With that being said, the 

1y inflation swap is at its lowest level since the end of 

2010 and looks like a buying opportunity at 1.3% 

currently (Chart 4), even considering the prospects of 

slow economic growth. The main risk is if the 

Rich 

Cheap 

35 

25 

15 

5 

-5 

-15 

2y BE 

Rich/Cheap 

1m Carry 

3y BE 


$600,000 

$500,000 

$400,000 

$300,000 

$200,000 

$100,000 

$- 

$(100,000) 

$(200,000) 

5y BE 

10y BE 

Chart 3: TIPS Jul-12 PnL 

22-Jun 

24-Jun 

26-Jun 

28-Jun 

30-Jun 

2-Jul 

4-Jul 

6-Jul 

8-Jul 

10-Jul 

12-Jul 

14-Jul 

16-Jul 

18-Jul 

20-Jul 

22-Jul 


20y BE 

TIPS Jul-12 PnL w Energy Hedge ($100mm notional) 

TIPS Jul-12 PnL ($100mm notional) 

30y BE 

Sergey Bondarchuk 4 August 2011 


51 


economy enters recession again (our economists 

estimate a 1/3 probability of this scenario). 

Notes from Refunding Statement 

Treasury officials are happy with demand for TIPS, 

“particularly given Treasury’s goal to gradually 

increase TIPS supply”. “Although Treasury expects 

to modestly decrease nominal coupon issuance in 

the coming months … it does not affect plans to 

continue to gradually increase TIPS issuance.” 

Treasury expects to issue over USD 125 billion in 

TIPS (our estimate is USD 130bn) in 2011, with 

guidance for 2012 issuance to come in November 

refunding. 

Chart 4: 1y Inflation Swap Looks Like a Buy 

3.75 

3.00 

2.25 

1.50 

0.75 

0.00 

1/1/2010 

3/1/2010 

5/1/2010 

7/1/2010 

1y CPI Swap 

Last Value 

y/y CPI 

9/1/2010 

11/1/2010 

1/1/2011 

3/1/2011 

5/1/2011 

7/1/2011 

Source for Above Charts: BNP Paribas, Bloomberg 

Sergey Bondarchuk 4 August 2011 


52 


Table 1: BNP Paribas Carry Analysis 

Benchmark Carry 

Pricing Date 

03-Aug-11 

Term 1 

Term 2 

3m 

6m 

12m 

Repo Rate 

0.42% 0.41% 0.34% 0.34% 0.56% 

Sett. Date 

04-Aug-11 01-Sep-11 01-Oct-11 

04-Nov-11 06-Feb-12 06-Aug-12 

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

Short-end 

OATei Jul-12 -0.43% 1.57% -11.5 -10.3 -110.8 -108.1 -71.6 -66.2 9.1 30.9 

OATI Jul-13 0.05% 1.29% -1.4 -1.7 -17.4 -18.1 -2.0 -3.1 -10.2 -11.2 29.0 29.0 

TIPS Jul-12 -0.96% 1.16% -20.5 -21.3 -31.6 -33.2 -32.3 -35.1 -116.8 -122.1 

UKTi Aug-13 -2.52% 3.15% -23.7 -24.0 -1.1 -1.6 28.0 27.3 41.9 41.4 91.8 98.2 

5y 

BUNDEI Apr-16 0.08% 1.51% -1.6 -2.1 -19.0 -20.1 -8.9 -10.9 7.4 3.9 19.8 13.8 

BTANI Jul-16 0.36% 1.82% -0.1 -1.5 -5.6 -8.8 1.0 -4.6 0.2 -11.0 15.0 15.0 

TIPS Apr-16 -0.74% 1.74% -3.5 -5.2 -4.7 -8.2 -3.9 -9.5 -9.6 -21.4 6.4 -18.5 

UKTi Nov-17 -0.94% 2.96% -1.9 -3.9 -7.5 -11.7 3.3 -3.3 19.0 5.4 48.3 19.8 

JGBI-4 June-15 0.66% -0.39% -4.1 -4.4 -3.0 -3.6 3.8 2.8 20.1 18.0 39.9 35.3 

10y 

OATEI Jul-22 1.14% 1.96% 0.0 -1.5 -6.7 -10.1 -1.2 -7.0 8.5 -3.2 19.1 -4.5 

OATI Jul-19 0.75% 2.05% 0.3 -1.3 -2.8 -6.3 2.0 -4.1 2.9 -9.2 14.9 14.9 

TIPS Jan-21 0.26% 2.26% -1.0 -3.2 -0.6 -5.4 0.9 -6.6 1.3 -14.3 15.5 -16.4 

UKTi Nov-22 0.04% 3.00% -0.4 -2.6 -2.9 -7.5 4.3 -2.9 15.9 1.0 36.9 6.4 

JGBI-16 June-18 1.02% -0.45% -1.9 -2.5 -0.8 -2.0 3.6 1.8 14.1 10.4 26.8 18.9 

30y 

OATei Jul-40 1.32% 2.45% 0.0 -0.9 -2.9 -5.0 -0.3 -4.0 4.1 -3.2 8.9 -5.6 

OATI Jul-29 1.19% 2.45% 0.3 -1.0 -1.0 -4.0 1.8 -3.2 3.1 -7.0 10.7 10.7 

TIPS Feb-41 1.27% 2.59% 0.0 -1.7 0.5 -3.1 1.5 -4.1 2.8 -8.7 10.3 -12.6 

UKTI Mar-40 0.48% 3.47% 0.0 -1.5 -0.9 -4.0 2.1 -2.9 6.9 -3.2 15.4 -4.9 

Short-end 

Term 1 -> Term 2 Term 2 -> 3m 

3m -> 6m 

6m -> 12m 

OATei Jul-12 -99.3 -97.7 33.5 35.7 80.6 97.1 -9.1 -30.9 

OATI Jul-13 -16.0 -16.4 10.4 10.1 -8.2 -8.1 39.2 40.2 

TIPS Jul-12 -11.1 -12.0 -0.6 -1.7 -84.5 -87.0 116.8 122.1 

UKTi Aug-13 22.7 22.4 29.1 29.0 13.9 14.2 49.9 56.8 

5y 

BUNDEI Apr-16 -17.4 -18.1 8.2 7.6 16.4 14.8 12.3 9.9 

BTANI Jul-16 -5.5 -7.3 4.5 2.7 -0.7 -6.4 14.8 26.0 

TIPS Apr-16 -1.2 -3.1 0.8 -1.2 -5.8 -11.9 16.0 2.9 

UKTi Nov-17 -5.6 -7.8 9.9 7.7 15.7 8.6 29.3 14.5 

JGBI-4 June-15 1.1 0.8 6.7 6.4 16.3 15.2 19.8 17.3 

10y 

OATEI Jul-22 -6.7 -8.6 4.5 2.6 9.7 3.8 10.6 -1.3 

OATI Jul-19 -3.1 -5.0 3.3 1.4 1.0 -5.2 11.9 24.1 

TIPS Jan-21 0.3 -2.1 1.4 -1.2 0.3 -7.7 14.3 -2.1 

UKTi Nov-22 -2.5 -4.9 6.6 4.2 11.6 3.9 21.0 5.5 

JGBI-16 June-18 1.2 0.5 4.3 3.8 10.5 8.6 12.7 8.5 

30y 

OATei Jul-40 -2.9 -4.1 2.0 0.9 4.4 0.8 4.8 -2.4 

OATI Jul-29 -1.4 -3.0 2.0 0.4 1.3 -3.8 7.6 17.7 

TIPS Feb-41 0.5 -1.3 0.9 -1.0 1.3 -4.5 7.6 -3.9 

UKTI Mar-40 -0.8 -2.5 2.7 1.0 4.8 -0.3 8.5 -1.7 




53 


Technical Analysis – Interest Rates & Commodities 

Bond & Short-Term Contracts 

• Europe 10y: Break below 2.63 (MT 61.8%) opened the way for a move towards 2.09 low 

• US 10y: Break below key 2.88 (MT 61.8%) opened the way down towards the LT triangle support (2.47) 

• Short-term contracts z1: Still a ST toppish/supportive bias on ED while Euribor has broken above its 61.8% 

Equities & Commodities 

• WTI (Cl1): Return below key 103.39 (LT 61.8%) & break below critical 93.49 (LT rising channel sup) are worrying 

• Equity markets: Sharp fall weakened markets with, on S&P, a worrying break below the LT rising wedge support 

US 10y: Remains up MT but weakness close to critical 2.47 (LT triangle support) MT Trend: Up Range: 2.50/2.70 

MT SCENARIO remains up 

Market remains up oriented LT within a LT 

rising “C of ABC” scenario which is likely to 

send it towards key 4.00/4.07 (April top & LT 

61.8%) initially, although current move below 

MT 61.8% (2.88) has weakened this scenario. 

It now needs to preserve 2.47 (LT triangle 

support) and break above ST falling pattern 

resistance at 3.01 to rekindle MT rising 

scenario (a wave “3” ?) with confirmation then 

above key 3.30/37(61.8% & LT 61.8%). 

2.03 2.87 => 2.96/3.01 

ALTERNATIVE SCENARIO...Fall extends 

Break below critical 2.88 (MT 61.8%) allowed 

it to continue last ST falling bias towards key 

2.47 (LT triangle lower boundary). Risk is now 

to extend fall with a break below it for a move 

towards 2.33 (2010 low) and 2.03 (end 2008 

low). 

STRATEGY 

Could sell on dips around 2.50, S/L below 

2.45 

WTI: Break below LT rising channel support is worrying MT Trend: Up/toppish Range: 89/97 

MT SCENARIO is up 

83.34/83.57 100.62 => 103.39 

MT bias is still rather up oriented despite the 

current break below the LT rising channel 

(93.49/120.60). Indeed, we could still be at 

the start of a MT rising wave “5”. A renewed 

move within the LT channel and then a break 

above the critical LT 61.8% at 103.39 are 

needed to rekindle MT rising bias towards 

114.83 last top initially. 

ALTERNATIVE SCENARIO…ST fall extends 

The MT study weakened and ST one turned 

rather weak again given break below 93.49/ 

93.82 (LT rising channel support & 61.8%). 

Risk is now to extend fall beyond 89.61 low 

and especially 87.15 (wave “1” top). Such 

breaks would strengthen a bearish scenario 

with negative confirmation then below 83.57 

(MT 61.8%). 

STRATEGY 

Keep short if you are below 93.49. Wait for a 

rebound within the channel to enter long 

Christian Sené 4 August 2011 


54 


Germany 10y: Down oriented again below 2.63 (MT 61.8%) MT Trend: Up Range: 2.26/2.50 

MT SCENARIO is still slightly up 

Break above the LT falling wedge allowed a 

MT rise to develop beyond 3.11 (MT 61.8%) 

towards key 3.70 (LT 61.8%). However, the 

break seen below MT rising channel and now 

return below 2.63 (MT 61.8%) has delayed 

and weakened this MT rising scenario. It 

remains possible but a renewed significant 

rise is now needed to regain a MT rising bias 

and develop rising wave “C of ABC” scenario. 

ALTERNATIVE SCENARIO...Fall extends 

The last corrective scenario suggested by 

April’s top 2 bars reversal and break below 

MT rising channel could extend further given 

decisive break below critical 2.63 (MT 61.8%) 

which opened way for a return towards 2.26 

(ST falling channel sup) and 2.09 (2010 low). 

STRATEGY 

Keep long if you are below 2.50 for 2.10 and 

2.25. No signal yet to try a short 

1.64 2.92 => 3.06 

UK 10y: Falling move in 5 waves with key 2.65/2.70 support area now reached. MT Trend: Down Range: 2.65/2.85 

MT SCENARIO… Down oriented 

2.22 3.14 /18 

Wide down move below 2009 and 2010 lows 

cancelled the MT rising scenario, turning 

study rather positive again within LT falling 

wedge (2.70/3.74). It remains down oriented 

within MT falling channel (2.65/3.18), within 

which fall developed in 5 waves, and within a 

ST falling one (2.63/3.00), within which the 

wave “5” developed. Now needs to break 

below key 2.65/2.70 to extend fall towards 

138.2% extension at 2.36. 

ALTERNATIVE SCENARIO… ST rebound 

Failure to break below key 2.65/2.70 could 

trigger a rebound to be strengthened with a 

break above 3.00 (ST falling channel res) for 

key 3.14/3.18. 

STRATEGY 

Could try to sell 2.65/2.70, S/L 2.60, for 2.95 

S&P: Worrying break below key 1264/76 (LT rising channel+H&S neckline)MT Trend: Up/Toppish Range: 1210/1280 

MT SCENARIO is still up 

Rise above key 1220/28 (April 10 top & LT 

61.8%) strengthened MT bullish bias towards 

1576 (2007 top) within a LT rising wedge 

(1276/1418). It now needs to avoid a decisive 

break below its support and especially 1220 

(wave “I” top) to keep ability to develop a LT 

rising wave “V” scenario by then breaking 

above 1371 top to rekindle last MT rising bias. 

1148 1370 

ALTERNATIVE SCENARIO…Fall extends 

The corrective irregular falling “C of ABC” 

which developed recently to now be back 

below key 1264//76 (H&S neckline & LT rising 

channel) and close to 1220/28 (Wave “I” top & 

LT 61.8 %) could extend towards 1148 area 

(MT 61.8% & target of H&S breakout). 

STRATEGY: Bullish will buy dips around 

1230, S/L below 1210, to play wave “V” but 

bearish will keep short below 1264/76 for 1150 

Christian Sené 4 August 2011 


55 


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. 

Closed Strategies 

Cross Markets 

USD 5s10s Spread Flattener Long 5Y Spread Short 10Y Spread 

Trade Closed (02/08). PnL: EUR +3k. 

Current Strategies 

Yield Curves 

USD 2s10s Box Spread Buy 6m-fwd 2s10s Sell 1y-fwd 2s10s 

Flattening implied from 6m- to 1y-fwd is too little compared to history, and position 

has little negative roll. Will tend to work in a sell-off, and risk-reward looks better 

than for other bearish trades. 

Money Markets 

Eurodollar 1-2-3 Fly Sell ED U1Z1H2 

It makes no macro sense for the fly to be positive given that hikes are more likely to 

be later rather than sooner. Strong selling flows in Z1 (for Libor protection) have 

pushed the fly to attractive levels. 

Eurodollar blues/golds fly Sell ED M5Z5M6 

Z5 looks quite cheap on the curve vs surrounding contracts (same goes for 4y1y 

swaps). On the fly, these points are close to all-time cheap levels; an added feature 

of the trade is its lack of directionality. 

Current* Targets Stop Entry 

. 

(T) 

2.0 

(S) 

6.0 

(T) 

9 

(T) 

-22.0 -11.0 -15.5 

(21-Jul) 

30.0 0.0 10.0 

(19-Jul) 

-3.0 11.0 6.0 

(13-Jul) 

-3.0 16.0 9.5 

(19-Jul) 

Options 

USD 7s10s15s Conditional Bear-Tightener Buy 1Y7Y Payer Sell 1Y10Y Payer -20k 

Buy 1Y15Y Payer 

(S) 

7s10s15s (either spot or 1y-fwd) has rarely gone above the current level of 11bp in 

its entire history but, using payers, one can sell the fly at 17bp (due to vol 

advantage) if the trade is in the money at expiry. 

Euribor Call Spread Buy Euribor Z1 9825/50 CS 

13 

Upside risk with good risk/reward. ECB priced at 2% year-end, could see significant (S) 

retracement in between. 

*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps. 

300k -150k 0k 

(14-Jun) 

25.0 0.0 3.25 

(12-Apr) 

Carry 

/ mth 

Risk** 

P/L 

(ccy/Bp) 

15k/01 USD 

3.75k 

0.25bp 

15k/01 USD- 

120k-8bp 

20k/01 USD 0k 

0bp 

30k/01 USD +15k 

0.5bp 

1k/01 USD 

-20k 

. 12.5k/01 EUR 

+125k 

+10c 

Interest Rate Strategy 4 August 2011 


56 


CHF: Rise to Persist Despite SNB’s Actions 

• The SNB chooses to focus on monetary 

easing to reduce the economic impact of CHF 

strength. 

1.3800 

Chart 1: EURCHF vs. Italian-German 

Yield Spread 

0.7500 

• This may be a tactic to avoid conflict with 

markets. The factors driving the CHF higher 

remain in place. 

• STRATEGY: Stay Short USDCHF as USD 

prospects remain weak. 

1.3300 

1.2800 

1.2300 

1.1800 

1.1300 

EURCHF 

1.2500 

1.7500 

2.2500 

2.7500 

1.0800 

Italy-German 10Y Spread 

(RHS Inverse Scale) 

3.2500 

The opening paragraph of this week’s SNB 

statement that followed its reduction of interest rates 

highlights that it will not tolerate a continual tightening 

of monetary conditions and is therefore taking action 

against the strength of the CHF. It is this focus on 

monetary conditions that is probably key. We believe 

that the recent deterioration in Swiss growth 

prospects, the emergence of deflationary risks and 

the overall tightening in monetary conditions are the 

principal motivations behind these measures. The 

goal of reversing the recent trends in USDCHF and 

EURCHF are probably not the principal aims. 

Such an initiative dovetails well with the central 

bank’s probable goal of avoiding direct confrontation 

with the forces in the foreign exchange market. As 

market players seek a safe-haven alternative to 

economic weakness in the US and bond market 

volatility in the eurozone, both the JPY and the CHF 

remain extremely attractive. It would take significant 

and well-timed direct intervention to reverse the 

CHF’s appreciation. We acknowledge that the CHF is 

extremely overvalued – significantly more so than the 

JPY according to our estimates. Still, other drivers, 

such as the relationship with Italian-German yield 

spreads, continue to signal even further downside for 

EURCHF (Chart 1). 

Under regular market conditions, this week’s easing 

of Swiss monetary policy would have weakened 

prospects for the CHF. However, we believe that 

relative yields do not currently play the dominant role 

in CHF demand. We argue that the link between 

demand for Swiss savings deposits and the CHF is 

key to the CHF’s sharp appreciation (Chart 2). The 

recent upswing commenced from the start of Q4 

2008 – immediately following the collapse of Lehman 

Brothers and the escalation of global concerns. 

Looking further back, increases in demand for Swiss 

savings deposits from 1990 and 2001 were also 

associated with surges in the CHF. The increase 

from 1990 led to a particularly sharp CHF 

1.0300 

0.9800 

24-Jan 28-Feb 04-Apr 09-May 13-Jun 18-Jul 16-Aug 


3.7500 

Chart 2: EURCHF vs. Swiss Savings Deposits 

(shaded bars = US recessions) 

1.1 

1.2 

1.3 

1.4 

1.5 

1.6 

1.7 

1.8 

1.9 

90 92 94 96 98 00 02 04 06 08 10 


EURCHF Inverse (LHS) 

Saving Deposits in CHF bn (RHS) 

appreciation. Interestingly, all three cases of surges 

in Swiss savings deposits have occurred during US 

recessions. 

The SNB states that it is watching developments in 

the foreign exchange market and will take further 

measures against the strength of the CHF if 

necessary. Beyond additional monetary easing or 

direct FX intervention – both of which we view as 

suboptimal in achieving a sustained reversal of CHF 

strength – the SNB could impose capital controls or 

engineer significant negative interest rates on capital 

inflows. Switzerland imposed taxes on non-resident 

deposits between 1972 and 1978 that started at 2% 

per quarter and rose to 10% per quarter – an 

effective tax of 40% per annum. These measures did 

not curb the CHF, which rose throughout the entire 

period. Furthermore, exchange rate targeting 

following this strategy was later abandoned as a 

result of unwanted inflation. The conclusion is that 

275 

250 

225 

200 

175 

150 

125 

100 

75 

billions 

Steven Saywell 4 August 2011 


57 


the SNB will probably struggle to reverse the current 

bout of CHF strength given the market preference for 

CHF as a safe haven from economic and market 

conditions in both the US and the eurozone. 

An improvement in the sovereign risk climate in the 

eurozone (e.g. via the ECB resuming use of the SMP 

to buy some Italian debt) offers perhaps the best 

chance of a reversal in EURCHF’s fortunes. In the 

meantime, the SNB has wisely chosen to focus on 

monetary measures to ease the impact on the Swiss 

economy – history suggests other possible measures 

may not be a resounding success. Amid the current 

market conditions of risk-off trades and concerns 

over the major blocs, the CHF should remain in 

vogue. 

Steven Saywell 4 August 2011 


58 


Why EURUSD May Stay in a Range 

• While real risk-adjusted yields on US 

government securities continue to mark new 

lows, the big change has been in eurozone real 

risk-adjusted yields. 

• Into Q3, rising risk premia for some of the 

larger eurozone countries have collectively 

taken EUR real risk-adjusted yields into negative 

territory. 

• This in turn explains why the EUR 

sovereign bid may have weakened as well, and 

why EURUSD could remain range bound. 

Chart 1: Real Risk-Adjusted EUR Yield Joins 

Japan, US, UK Below Zero 

250.0 

200.0 

150.0 

100.0 

50.0 

0.0 

-50.0 

-100.0 

-150.0 

-200.0 

Australia 

Sweden 

Eurozone 

Japan 

US 

UK 

-250.0 

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 

Source: Bloomberg, BNP Paribas 

Following real risk-adjusted yields for 

perspective 

In past strategy notes, we have emphasised how the 

USD sovereign offer was a major driver of the FX 

markets. We assume that sovereigns, as with any 

buy-and-hold investor, seek fixed income 

investments that at least compensate over and 

above expected inflation and credit risk. Given that 

the monetary/fiscal policy mix in the US has led to 

US inflation expectations and credit risk rising, both 

these factors led to a downtrend in US real riskadjusted 

rates. They thus provided an explanation for 

USD weakness as FX reserves were ballooning into 

2011, prompting a continued rebalancing of USD FX 

receipts so as to prevent USD allocations from rising. 

Chart 1 shows 5Y real risk-adjusted yields for a 

number of countries. We calculate these by 

subtracting the 5Y inflation swap and 5Y sovereign 

CDS from the respective interest-rate swap rate. On 

this measure, US real risk-adjusted yields fell 

throughout March-April, a period associated with 

broad USD weakness. During that time, the USD 

was universally weaker – down 8.3% on average 

against the rest of G10 (led by the AUD and NZD), 

11% off versus CEEMEA (led by the HUF) and just 

shy of 5% weaker versus Asia (led by the KRW). 

While US yields stabilised during May-June – 

coinciding with a pause in USD selling – the 

downtrend in real risk-adjusted US yields resumed as 

we entered July. Since then, this measure has fallen 

from -85bp to -132bp, and USD weakness has 

returned. 

However, there has been a difference in recent 

months; alongside the downtrend in real riskadjusted 

yields that started in July, eurozone yields 

Chart 2: 5Y Sovereign CDS – Change since 1 

June (%) 

120 

100 

80 

60 

40 

20 

0 

Greece Ireland Portugal Spain Germany France Italy 

Source: Bloomberg, BNP Paribas 

too have fallen below the breakeven line. As a result, 

the EUR may no longer be a clear beneficiary of the 

USD sovereign offer. The prior assumption had been 

that, with a credibly hawkish ECB, eurozone bond 

markets would receive the lion’s share of 

diversification flows away from the US dollar. At the 

time, while risk premia had been rising rapidly for the 

likes of Greece, Ireland and Portugal, the risk premia 

for the larger eurozone countries was broadly 

constant. Since July, that has not been the case. 

As Chart 2 shows, while sovereign CDS rates for 

Greece, Ireland and Portugal have only moved 

slightly higher, those for France, Italy, Germany and 

Spain have actually risen by at least 50%. This 

matters a great deal as these countries comprise 

some 75% of eurozone GDP (Greece, Ireland and 

Portugal together comprise only about 6%). 

If we are moving along the path towards ever-greater 

eurozone fiscal union with more burden-sharing 

Kiran Kowshik 4 August 2011 


59 


amongst member countries, this rise in aggregate 

risk premium could well be maintained. This in turn 

has us wondering if the marginal decline in EURdenominated 

reserves seen in the Q1 IMF COFER 

data (evident once reserves are adjusted for 

exchange rate changes) will be more enduring – 

even if the USD share of global reserves remains 

broadly constant or even declines. 

If sovereigns continue to seek value by diversifying 

away from the two main reserve currencies, other 

currencies will by definition stand out. In G10, 

Australia and Sweden are most notable for having 

positive real risk-adjusted yields. We expect both to 

continue finding favour with reserve managers, even 

though they are equally susceptible to sell-offs on 

any broader bout of risk aversion. 

Kiran Kowshik 4 August 2011 


60 


Economic Calendar: 5 - 12 August 

GMT Local Previous Forecast Consensus 

Fri 05/08 Australia RBA Policy Statement 

06:45 08:45 France Trade Balance : Jun EUR-7.4bn EUR-6.9bn EUR-6.5bn 

07:00 09:00 Spain Industrial Production (wda) y/y : Jun -0.4% -0.6% n/a 

07:15 09:15 Switzerland CPI m/m : Jul -0.2% -0.6% -0.6% 

07:15 09:15 CPI y/y : Jul 0.6% 0.7% 0.7% 

07:30 09:30 Neths Industrial Production m/m : Jun 0.3% -1.5% -0.6% 

07:30 09:30 Industrial Production y/y : Jun 2.6% 1.1% n/a 

08:00 10:00 Italy Industrial Production m/m : Jun -0.6% -0.2% 0.2% 

08:00 10:00 Industrial Production (wda) y/y : Jun 1.8% 1.2% 1.8% 

09:00 11:00 GDP (Prel) q/q : Q2 0.1% 0.2% 0.3% 

09:00 11:00 GDP (Prel) y/y : Q2 1.0% 0.7% 0.8% 

08:00 10:00 Norway Manufacturing Prod (sa) m/m : Jun 2.4% 1.0% n/a 

08:00 10:00 Manufacturing Prod (nsa) y/y : Jun 5.6% 2.0% n/a 

08:30 09:30 UK Input PPI (nsa) m/m : Jul 0.4% 0.6% 0.7% 

08:30 09:30 Output PPI (nsa) y/y : Jul 5.7% 5.8% 5.8% 

08:30 09:30 Output PPI (Ex-FDT, sa) y/y : Jul 3.2% 3.2% 3.2% 

10:00 12:00 Germany Industrial Production m/m : Jun 1.2% -0.5% 0.1% 

10:00 12:00 Industrial Production y/y : Jun 7.6% 7.8% 8.1% 

11:00 07:00 Canada Unemployment Rate : Jul 7.4% 7.5% 7.5% 

11:00 07:00 Payroll Jobs y/y : Jul 28.4k 13.0k 20.0k 

12:30 08:30 US Non-Farm Payrolls (Chg) : Jul 18k 50k 85k 

12:30 08:30 Unemployment Rate : Jul 9.2% 9.3% 9.2% 

12:30 08:30 Average Hourly Earnings m/m : Jul 0.0% 0.1% 0.2% 

19:00 15:00 Consumer Credit : Jun USD5.1bn USD5.0bn USD5.0bn 

Sat 06/08 13:30 09:30 US Fed’s Lockhart Speaks at University of Georgia Commencement 

Mon 08/08 23:50 08:50 Japan Current Account (nsa) : Jun JPY591bn JPY1201bn JPY680bn 

23:50 08:50 M2 y/y : Jun 1.9% 2.8% 2.8% 

(07/08) 

06:30 08:30 France BdF Business Survey (Prel) : Jul 99 98 n/a 

Tue 09/08 23:01 00:01 UK BRC Retail Sales Monitor y/y : Jul -0.6% 0.8% n/a 

23:01 00:01 RICS House Price Balance : Jul -27 -28 n/a 

(08/08) 

08:30 09:30 Industrial Production m/m : Jun 0.9% 0.4% 0.4% 

08:30 09:30 Industrial Production y/y : Jun -0.8% 0.2% 0.2% 

08:30 09:30 Manufacturing Production m/m : Jun 1.8% 0.2% 0.2% 

08:30 09:30 Manufacturing Production y/y : Jun 2.8% 2.8% 2.9% 

08:30 09:30 Visible Trade Balance : Jun GBP-8.5bn -8.2% GBP-8.1bn 

01:30 11:30 Australia NAB Business Confidence : Jul -2 -4 n/a 

01:30 11:30 NAB Business Conditions : Jul 2 0 n/a 

06:00 08:00 Germany Trade Balance (sa) : Jun EUR12.8bn EUR13.0bn EUR14.0bn 

06:45 08:45 France Budget Balance (Cumulative) : Jun EUR-61.7bn EUR-60.0bn n/a 

12:30 08:30 US Non-Farm Productivity (Prel, saar) q/q : Q2 1.8% -1.5% -0.8% 

12:30 08:30 Unit Labour Costs (Prel, saar) q/q : Q2 0.7 1.0 2.5 

11:30 07:30 NFIB Small Business Optimism : Jul 

18:15 14:15 FOMC Rate Announcement 

Wed 10/08 23:50 08:50 Japan CGPI y/y : Jul 2.5% 2.6% 2.6% 

23:50 08:50 Tertiary Index (sa) m/m : Jun 0.9% 1.2% 0.4% 

(09/08) 

BoJ Minutes 

00:30 10:30 Australia Westpac Consumer Confidence : Aug 92.8 91.8 n/a 

06:00 08:00 Germany CPI (Final) m/m : Jul 0.4% (p) 0.4% 0.4% 

06:00 08:00 CPI (Final) y/y : Jul 2.4% (p) 2.4% 2.4% 

06:00 08:00 HICP (Final) m/m : Jul 0.5% (p) 0.5% 0.5% 

06:00 08:00 HICP (Final) y/y : Jul 2.6% (p) 2.6% 2.6% 

Market Economics 4 August 2011 

Market Mover 

61 


Economic Calendar: 5 - 12 August (cont) 

GMT Local Previous Forecast Consensus 

Wed 10/08 06:45 08:45 France Industrial Production m/m : Jun 2.0% -0.2% n/a 

(cont) 06:45 08:45 Industrial Production y/y : Jun 2.6% 4.6% n/a 

06:45 08:45 Manufacturing Production (sa) m/m : Jun 1.5% -0.4% n/a 

06:45 08:45 Manufacturing Production (sa) y/y : Jun 5.4% 6.0% n/a 

06:45 08:45 Current Account : Jun EUR-5.5bn EUR-5.0bn n/a 

08:00 10:00 Norway CPI m/m : Jul -0.4% -0.5% n/a 

08:00 10:00 CPI y/y : Jul 1.3% 1.3% n/a 

08:00 10:00 CPI-ATE y/y : Jul 0.7% 0.9% n/a 

08:00 10:00 PPI m/m : Jul -0.9% 1.1% n/a 

08:00 10:00 PPI y/y : Jul 14.4% 15.6% n/a 

12:00 14:00 Norges Bank Rate Announcement 

09:30 10:30 UK BoE Inflation Report 

14:00 10:00 US Wholesale Inventories m/m : Jun 1.8% 1.0% 1.0% 

14:30 10:30 EIA Oil Inventories 

18:00 14:00 Treasury Statement : Jul USD-43.1bn 

Thu 11/08 23:50 08:50 Japan Machinery Orders (sa) m/m : Jun 3.0% 1.0% 1.7% 

(10/08) 

01:30 11:30 Australia Unemployment Rate : Jul 4.9% 4.9% n/a 

01:30 11:30 Employment Change : Jul 23.4k 20.0k n/a 

07:30 09:30 Sweden CPI m/m : Jul -0.2% -0.1% n/a 

07:30 09:30 CPI y/y : Jul 3.1% 3.3% n/a 

07:30 09:30 CPIF y/y : Jul 1.5% 1.7% n/a 

08:00 10:00 Unemployment (nsa) : Jul 4.1% 4.3% n/a 

08:00 10:00 Eurozone ECB Monthly Bulletin 

12:30 08:30 US Initial Claims 400k 405k n/a 

12:30 08:30 Trade Balance : Jun USD-50.2bn USD-47.0bn USD-47.6bn 

Fri 12/08 05:30 07:30 France CPI m/m : Jul 0.1% -0.2% n/a 

05:30 07:30 CPI y/y : Jul 2.1% 2.2% n/a 

05:30 07:30 HICP m/m : Jul 0.1% -0.2% n/a 

05:30 07:30 HICP y/y : Jul 2.3% 2.4% n/a 

05:30 07:30 Ex-Tobacco CPI (Final, nsa) : Jul 122.49 122.27 n/a 

05:30 07:30 GDP (Prel) q/q : Q2 0.9% 0.2% n/a 

05:30 07:30 GDP (Prel) y/y : Q2 2.2% 2.0% n/a 

06:45 08:45 Non-Farm Payrolls (Prel) q/q : Q2 0.4% 0.1% n/a 

06:45 08:45 Wages (Prel) q/q : Q2 1.0% 0.6% n/a 

06:45 08:45 Wages (Prel) y/y : Q2 2.0% 2.1% n/a 

07:00 09:00 Spain CPI (Final) m/m : Jul -0.1% -0.5% n/a 

07:00 09:00 CPI (Final) y/y : Jul 3.2% 3.1% n/a 

07:00 09:00 HICP (Final) m/m : Jul -0.2% -1.2% n/a 

07:00 09:00 HICP (Final) y/y : Jul 3.0% 3.0% n/a 

08:00 10:00 Norway Retail Sales (sa) m/m : Jun 1.6% -0.2% n/a 

08:00 10:00 Retail Sales (nsa) y/y : Jun 7.7% 3.7% n/a 

08:00 10:00 Italy EU Trade Balance : Jun EUR-0.6bn n/a 

09:00 11:00 CPI (Final) m/m : Jul 0.3% (p) 0.3% 0.3% 

09:00 11:00 CPI (Final) y/y : Jul 2.7% (p) 2.7% 2.7% 

09:00 11:00 HICP (Final) m/m : Jul -1.7% (p) -1.7% -1.7% 

09:00 11:00 HICP (Final) y/y : Jul 2.1% (p) 2.1% 2.1% 

09:00 11:00 Eurozone Industrial Production (sa) m/m : Jun 0.4% 0.0% 0.2% 

09:00 11:00 Industrial Production (wda) y/y : Jun 4.0% 4.5% n/a 

12:30 08:30 US Retail Sales m/m : Jul 0.1% 0.5% 0.2% 

12:30 08:30 Retail Sales Ex-Autos m/m : Jul 0.0% 0.3% 0.2% 

13:55 09:55 Michigan Sentiment (Prel) : Aug 63.8 63.0 64.0 

14:00 10:00 Business Inventories : Jun 0.9% 0.6% 0.6% 

14:00 10:00 Fed’s Dudley Speaks on Regional Economy in New York 

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



Market Mover 

62 


Key Data Preview 

Chart 1: US Claims, ADP, Private Payrolls 


Jul (f) Jun May Apr 

Payroll Jobs k 50 18 25 217 

Private Payrolls k 100 57 73 241 

Unemployment Rate % 9.3 9.2 9.1 9.0 

Key Point: 

Public sector layoffs and tepid private hiring are 

expected to produce just 50k in nonfarm payrolls and 

another uptick in the unemployment rate to 9.3% 

BNP Paribas Forecast: Still Weak 

US: Labour Report (July) 

Release Date: Friday 5 August 

Nonfarm payrolls are expected to post another weak 

reading in July with a gain of 50k after just 18k in jobs were 

added in June. We expect private sector hiring to improve 

to 100k after a 57k increase a month earlier as some of the 

extreme weakness in private education and health care 

fades. Meanwhile, the large number of teacher layoffs at 

the end of the school year and an ongoing slowdown in 

federal government spending are expected to combine to 

shave 50k jobs from total nonfarm payrolls. Another tepid 

gain in jobs is expected to lead the unemployment rate to 

rise to 9.3%, the fourth straight month of backtracking. 

Average hourly earnings are expected to rise 0.1% after a 

flat reading as wage and salary growth remains subdued in 

the face of elevated unemployment. The report would be 

consistent a broad swath of indicators that show the 

economy lost significant momentum in Q2. Since 

employment tends to follow activity, and in light of elevated 

global and political uncertainties, we think firms will remain 

cautious early in Q3. 

Chart 2: Canadian Employment (thousands) 

150 

100 

50 

0 

-50 

-100 

-150 

Monthly Change 

Full-Time 

Part-Time 

Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 


Jul (f) Jun May Apr 

Unemployment Rate % 7.5 7.4 7.4 7.6 

Payroll Jobs k 13.0 28.4 22.3 58.3 

BNP Paribas Forecast: Modest Gains 

Canada: Labour Report (July) 


Canadian employment is forecast to improve by 13k in July 

following a below-average 28.4k increase in the previous 

month. The pace of employment growth has averaged an 

impressive 32.0k per month for the previous six months. In 

June, the goods sector gained 3.3k jobs (after losing 11.3k 

in April and another 14.9k in May), leaving the services 

sector with average gains of 44k jobs for the previous three 

months. We expect to see some pull-back in service sector 

jobs from the April-May-June persistence as the weak 

domestic demand in Q2 begins to show up in the 

employment reports. We forecast the unemployment rate 

to tick up to 7.5% as a result of a small increase in the 

labour force participation rate as more students than usual 

enter the workforce. 

Key Point: 

Some pullback as the employment report is likely to 

begin reflecting the weaker consumption in Q2. 


Market Mover 

63 



Chart 3: US Non-Farm Productivity 


% q/q, AR Q2 (p) Q1 (est) Q4 (est) Q3 (est) 

NF Productivity -1.5 -0.6 2.3 2.1 

ULC 1.0 3.1 -2.2 0.4 

BNP Paribas Forecast: Into Negative Territory 

US: Non-Farm Productivity & ULC (Q2, preliminary) 

Release Date: Tuesday 9 August 

Non-farm productivity is forecast to fall by 1.5% q/q AR in 

Q2 following what we estimate will be a 0.6% q/q AR drop 

in Q1 (down from the previously published 1.8% increase 

in Q1) as output grew much less than aggregate hours 

worked. The history of productivity and unit labour costs 

will be revised in the report as a result of the 

comprehensive revision of the National Income and 

Product Accounts. Productivity has surged in this recovery; 

however, the trajectory of the past few years will likely be 

revised downward. Unit labour costs growth should slow to 

1.0% q/q AR in Q2 after an estimated upwardly revised 

3.1% increase in Q1. Unit labour costs are also likely to be 

substantially revised as wage and salary payments 

underwent significant revision. 

Key Point: 

Productivity is forecast to fall 1.5 q/q AR in Q2 as 

output grew much less than aggregate hours worked. 

The previous quarter growth should also be revised 

to show a 0.6% q/q AR decline. 

114 

112 

110 

108 

106 

104 

102 

100 

Chart 4: Japanese CGPI (2005=100) 

Excluding electric 

power, gas & water 

Total 

06 07 08 09 10 11 

Source: BoJ, BNP Paribas 

Jul(f) Jun May Apr 

% y/y 2.6 2.5 2.2 2.5 

% m/m 0.0 -0.1 -0.1 0.9 

Key Point: 

Falling prices for iron/steel and petroleum 

products will be offset by upward pressures 

from higher summertime electricity rates. 

BNP Paribas Forecast: Flat 

Japan: CGPI (July) 

Release Date: Wednesday 10 August 

We expect the domestic CGPI to be flat at 0.0% m/m in 

July. In June, the index fell 0.1%, for a second straight 

decline, as prices for petroleum products, formerly the price 

growth leader, dropped on the yen’s appreciation and 

downturn in the crude oil market. Prices for iron/steel also 

declined in June, the first drop in seven months, reflecting 

reduced demand from the construction industry and falling 

prices for some raw materials. 

Moreover, prices remained weak in such processing 

industries as information/communications equipment, 

electrical machinery/equipment, and transportation 

equipment. 

With the strong yen continuing to push down import prices, 

coupled with anaemic domestic demand, prices are 

expected to remain weak in July in the processing 

industries as well as for materials such as iron/steel and 

petroleum products. 

But because the start of higher summertime rates is 

expected to see electricity charges rise 4%, downward 

price pressures in the domestic CGPI will be offset by the 

0.2pp boost from electricity. 


Market Mover 

64 



Chart 5: Japanese Machinery Orders (JPY bn) 

1200 

1100 

1000 

900 

800 

700 

600 

3M average 

00 01 02 03 04 05 06 07 08 09 10 11 

Source: Cabinet Office, BNP Paribas 

Jun (f) May Apr Mar 

Core % m/m 1.0 3.0 -3.3 1.0 

Key Point: 

Reconstruction demand should underpin 

machinery orders for the time being but 

increasing risks cloud the outlook. 

BNP Paribas Forecast: Slight Increase 

Japan: Machinery Orders (June) 

Release Date: Thursday 11 August 

We expect core machinery orders to rise a modest 1.0% 

m/m in June. Thanks to the 3.0% rise posted in May, 

orders on average in April-May are only 0.6% below the 

level of Q1. Although some firms are holding back on 

capital investment after the earthquake, machinery orders 

are being underpinned by reconstruction demand and 

increased spending on private power generators to cope 

with the uncertain supply situation. That said, considering 

that reconstruction demand is already kicking in, an 

increase in June of the magnitude we expect would 

suggest the underlying trend of demand for capital goods is 

subdued. 

The outlook for capex in the second half of the year does 

not look too bright either. On one hand, the global economy 

is clearly slowing, with the risks skewed to the downside. At 

home, there is a growing risk that power shortages will 

persist beyond this summer due to the difficulty in 

restarting nuclear plants. Given these factors, it is difficult 

to envisage a solid capex upturn in the near future, despite 

support from reconstruction demand. 

Chart 6: US Trade Deficit Components 

BNP Paribas Forecast: Narrower 

US: International Trade (June) 

Release Date: Thursday 11 August 

The US trade deficit is expected to narrow in June, both on 

a nominal and real basis, after significant nominal widening 

in May. Import prices fell 0.5% in June on the back of a 

1.6% decline in petroleum prices and a 0.2% drop in other 

categories. Meanwhile, export prices fell 0.1%. All else 

equal, this would imply a modest USD 1.2bn narrowing in 

the trade deficit. Real goods exports are expected to 

rebound a little in June while real goods imports are 

expected to reflect weak consumer spending and decline 

modestly. Our forecast would confirm the 0.6pp 

contribution of trade to GDP in Q2. 


USD bn Jun (f) May Apr Mar 

Merchandise: -61.9 -64.9 -58.2 -61.1 

Services: 14.9 14.7 14.5 14.3 

Total: -47.0 -50.2 -43.6 -46.8 

Key Point: 

Lower oil prices are likely to drive a nominal 

narrowing while weak personal consumption is likely 

to drive a real narrowing of the trade deficit. 


Market Mover 

65 



Chart 7: French Food Prices – CPI & PPI (% y/y) 

10.0 

7.5 

5.0 

2.5 

0.0 

-2.5 

-5.0 

-7.5 

-10.0 

-12.5 

CPI Food Total 

CPI Food excl. Fresh 

PPI Agric. & Food 

01 02 03 04 05 06 07 08 09 10 11 


% Jul (f) Jun May Jul 10 

Total (nsa) m/m -0.18 0.08 0.06 -0.28 

Total (nsa) y/y 2.22 2.12 2.03 1.67 

Underlying (sa) m/m 0.10 0.13 0.10 0.13 

Underlying (sa) y/y 1.18 1.21 1.16 0.83 

Ex-Tobacco index 122.27 122.49 122.40 119.68 

Key Point: 

Food and energy are forecast to push headline 

inflation marginally up in July. 

BNP Paribas Forecast: Slightly Up 

France: Consumer Price Index (July) 


We expect headline inflation to have edged up in July. 

Seasonal sales in clothes and footwear explain the 

expected 0.2% m/m decline, which would be consistent 

with a 0.2% s.a. rise. 

We expect a small negative impact from manufactured 

goods and a small positive contribution from services to 

headline inflation. Altogether, this should leave core 

inflation largely unchanged. 

However, electricity prices will increase as regulated prices 

were hiked 2.9% on 1 July. Consequently, the contribution 

of energy to inflation should rise. This will partly reverse in 

August and September, since a 3% electricity price hike 

occurred on 15 August last year. Nevertheless, petroleum 

products may continue to push inflation up. 

The rise of the producer prices index for food and 

agricultural products signals future increases in food prices 

at the retail level (see chart). So far the food component of 

the CPI has posted only a muted increase, as the prices of 

fresh food have declined (because of warm weather during 

the spring) – largely compensating for increases in other 

products. When fruit and vegetable prices return to a 

normal level in the coming months, the impact of higher 

prices for manufactured food will be much more visible. 

Chart 8: French GDP vs. Industrial Production 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

-1.5 

-2.0 

-2.5 

GDP (% q/q) 

IP (% 3m/3m, RHS) 

02 03 04 05 06 07 08 09 10 11 


Volume SA-/WDA Q2 (f) Q1 Q4 Q2 10 

GDP % q/q 0.2 0.9 0.3 0.5 

GDP % y/y 2.0 2.2 1.4 1.5 

PCE % q/q -0.3 0.5 0.4 0.1 

External contrib (pp) -0.1 -0.4 0.3 -0.2 

Key Point: 

The growth level and pattern are likely to change 

from a strong Q1, when expansion was driven by 

consumption, to a poorer Q2 – driven by investment. 

3 

2 

1 

0 

-1 

-2 

-3 

-4 

-5 

-6 

-7 

-8 

-9 

BNP Paribas Forecast: Much Slower 

France: GDP (Q2, first estimate) 


Looking at quarterly averages, the monthly business 

surveys show little change in Q2 compared to Q1. 

However, while Q1 growth was well above what surveys 

had suggested, we expect the opposite to occur in Q2. We 

expect GDP to have risen just 0.2% q/q, with the risks 

skewed to the downside. 

The hard data send conflicting messages. Industrial 

production jumped in May and, assuming June is 

unchanged on the month, output would be up 0.4% q/q. 

However, demand looks poor. Exports declined in real 

terms, sharply in April and again in May. We expect a 

rebound in June, but the quarterly figure will be weak and 

net exports’ contribution should be negative. Retail sales 

collapsed in Q2, dropping 1.8% q/q according to the new 

INSEE definition; this is the weakest figure since Q4 1996. 

Despite a likely increase in consumption of services, 

overall PCE will most probably decline. 

We expect a positive contribution from inventories, though 

a much smaller one than the 0.7pp recorded in Q1, and 

from investment. Corporate investment should continue to 

rise at a rapid pace and housing should massively push up 

construction activity after a flat Q1. 


Market Mover 

66 




Chart 9: US Retail Sales 

BNP Paribas Forecast: A Rebound 

US: Retail Sales (July) 


Retail sales are expected to rebound in July on a pick up in 

auto sales and gasoline prices. Auto sales have been 

clobbered by supply chain issues emanating from events in 

Japan. July unit sales of cars and light trucks posted a solid 

rebound as these issues begin to get resolved and should 

contribute positively to the headline reading. In a lesswelcome 

development, retail gas prices also rebounded as 

the spread between retail and wholesale prices remains 

stubbornly elevated. Retailers’ reports of July sales were 

mixed and on balance we expect a modest gain in nominal 

core sales. Our forecast would confirm a modest recovery 

in consumer spending after no growth in Q2. 

% m/m Jul (f) Jun May Apr 

Retail sales 0.5 0.1 -0.1 0.2 

Ex-autos 0.3 0.0 0.2 0.3 

Key Point: 

A rebound in auto sales and solid summer clearance 

traffic should lead to a rebound in July retail sales. 

Chart 10: US Confidence is Stuck 


Aug p (f) Jul 2H Jul p Jul Jun 

Michigan 

Sentiment 63.0 63.6 63.8 63.7 71.5 

BNP Paribas Forecast: Further Down 

US: Michigan Consumer Sentiment (Aug, preliminary) 


The preliminary August reading on consumer confidence 

from the University of Michigan is expected to edge slightly 

down falling further from the weak July reading. Factors 

contributing to the estimated decline in the beginning of 

August are falling stock and rising gasoline prices. In 

addition, downward revisions to GDP combined with 

weakness in incoming data paint a notably weaker picture 

of the economy. We look for the index to move down to 

63.0 in August from 63.7 in July, which would be 

significantly below the June reading of 71.5. Consumer 

sentiment has reflected the slow and fragile nature of the 

current recovery; it is still off the troughs of the recession 

but remains far below prior norms and has lately resumed 

its downward trajectory. 

Key Point: 

In the early August reading, consumer sentiment is 

expected to decline further following the July 

decline. 


Market Mover 

67 


Economic Calendar: 15 Aug – 9 Sep 

15 Aug 16 Aug 17 Aug 18 Aug 19 Aug 

Japan: GDP (Prel) Q2 

Holiday: France, Italy, 

Spain, Belgium 

UK: Rightmove House 

Prices Aug 

Sweden: Industrial 

Production Jun 

US: Empire State Survey 

Aug, TICS Data Jun, 

NAHB Housing Market 

Aug 


Market Mover 

Australia: RBA MPC 

Minutes 

Eurozone: GDP (Flash) 

Q2, Trade Balance Jun 

UK: DCLG House Prices 

Jun, CPI Jul 

Germany: GDP (Prel) Q2 

Spain: GDP (Flash) Q2 

Neths: GDP Q2, Retail 

Sales Jun 

US: New Home Starts 

Jul, Import Prices Jul, 

Industrial Production Jul 

Eurozone: HICP Jul, 

Current Account Jun 

UK: BoE MPC Minutes, 

Labour Jul 

US: PPI Jul 

Japan: Trade Balance 

Jul 

Germany: Employment 

Q2 

UK: Retail Sales Jul 

Neths: Consumer 

Confidence Aug, Labour 

Aug 

US: CPI Jul, Philly Fed 

Aug, Existing Home Sales 

Jul, Leading Indicators Jul 

22 Aug 23 Aug 24 Aug 25 Aug 26 Aug 

Eurozone: PMIs (Flash) 

Aug 

Germany: ZEW Survey 

Aug 

Norway: GDP Q2 

US: New Home Sales Jul 

Eurozone: Industrial 

Orders Jun 

Germany: Ifo Survey Aug 

Belgium: Business 

Confidence Aug 

Norway: Labour Jun 

US: Durable Goods 

Orders Jul, FHFA HPI Jun 

France: Job Seekers Jul 

Spain: PPI Aug 

Sweden: Consumer 

Confidence Aug, Labour 

Jul, PPI Jul 

Neths: Producer 


During Week: Germany Import Price Index Jul, Retail Sales Jul, UK Nationwide House Prices Aug 

29 Aug 30 Aug 31 Aug 1 Sep 2 Sep 

UK: Holiday 

Germany: CPI (Prel) Aug 

Italy: ISAE Consumer 


Spain: Retail Sales Jul 

Sweden: Retail Sales Jul 

US: Personal Income & 

Spending Jul, Pending 

Home Sales Jul 

Japan: Labour Jul, 

Household Consumption 

Jul, Retail Sales Jul 

Eurozone: Business & 

Consumer Survey Aug, 

Retail PMI Aug 

UK: Net Consumer Credit 

Jul, Mortgage Approvals 

Jul 

Germany: HICP (Flash) 

Aug 

Italy: Retail Sales Jun, 

ISAE Business Conf Aug 

Spain: HICP (Flash) Aug 

Belgium: CPI Aug 

US: S&P/Case-Shiller 

Home Prices Jun, 

Consumer Confidence 

Aug, FOMC Minutes 

Japan: IP May 

Eurozone: HICP (Flash) 

Aug, Labour Jul 

UK: GfK Consumer 


Germany: Labour Jul 

Norway: Retail Sales Jul 

Italy: CPI Aug, PPI Jul 

US: Chicago PMI, Factory 

Orders Jun, ADP Labour 

Aug, Challenger Layoffs 

Aug 

Canada: GDP Q2 & Jun 

Australia: Retail Sales 

Jul 

Eurozone: PMI 

Manufacturing (Final) Aug 

UK: CIPS Manufacturing 

Aug 

Germany: GDP (Final) 

Q2 

Italy: Wages Jul 

Switz: GDP Q2, PMI 

Manufacturing Aug 

US: Productivity and 

Costs (Final) Q2, ISM 

Manufacturing Aug, 

Construction Jul 

During Week: UK Halifax House Prices Aug 

5 Sep 6 Sep 7 Sep 8 Sep 9 Sep 

Eurozone: Retail Sales 

Jul, PMI Services (Final) 

Aug 

UK: CIPS Services Aug 

Italy: Non-EU Trade 

Balance Jul 

US: Public Holiday 

During Week: Germany WPI Aug 


Australia: RBA Rate 

Announcement 

Eurozone: GDP (2 nd Est) 

Q2 

UK: BRC Retail Sales 

Monitor Aug 

Germany: Factory 

Orders Jul 

Switz: CPI Aug 

US: ISM Services Aug 

Australia: GDP Q2 

Japan: BoJ Rate 

Announcement 

UK: Industrial Production 

Jul 

Germany: Industrial 

Production Jul 

Sweden: Riksbank Rate 

Announcement & 

Monetary Policy Report 

Norway: Industrial 


US: Beige Book 

Canada: BoC Rate 

Announcement 

Australia: Labour Aug 

Japan: Current Account 

July, Machine Orders July, 

Leading indicator Aug 

Eurozone: ECB Rate Ann 

UK: BoE Rate Ann 

Germany: LCI Q2, Trade 

Balance Jul 

France: NF Payrolls 

(Final) Q2, BdF Bus Conf 

Aug, Trade Balance Jul 

Spain: IP Jul 

Neths: CPI Aug 

US: Trade Balance Jul, 

Consumer Credit Jul 

UK: PSNB Jul, PSNCR Jul 

Germany: PPI Jul 

Belgium: Consumer 


Canada: CPI Jul 

Japan: CPI Tokyo Aug, 

CPI National Jul 

Eurozone: Monetary Devs 

Jul, Eurocoin Aug 

France: Investment 

Survey Jul 

UK: GDP (Prel) Q2 

Germany: GfK Consumer 

Survey Sep 

Spain: GDP (Final) Q2 

Switz: KOF Leading 

Indicator Aug 

US: GDP (Rev) Q2, 

Corporate Profits Q2, UoM 

Sentiment (Final) Aug 

Eurozone: PPI Jul 

Norway: Labour nsa Aug 

US: Labour Aug 

Japan: GDP (Rev) Q2, M2 

Aug 

UK: PPI Aug, Trade 

Balance Jul 

Germany: CPI Aug 

France: Industrial 

Production Jul, Budget 

Balance Jul 

Italy: GDP Q2 

Sweden: Industrial 


Norway: CPI Aug, PPI Aug 

Neths: IP Jul 

US: Wholesale Trade Jul 

Canada: Labour Aug 

Release dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions 

68 


Treasury and SAS Issuance Calendar 

In the pipeline - Treasuries: 

Japan: To buy back 15y floating-rate JGBs (JPY 600bn) and 10y Inflation-Indexed JGBs (JPY 150bn) in Q3 

France: Cancelled the auction initially planned for 4 August 

Italy: Still considering the launch of a new 30y syndicated BTP in the last four months of the year, subject to market conditions 

Italy: To issue four new securities in Q3 (BTPs Jul-14, Mar-22 & Sep-16 and CTZ Sep-13) 

Germany: In Q3, intends to issue inflation-linked federal securities (EUR 2 to 3bn) and reserves the right to issue foreign currency bonds 

Poland: Has no plans for a benchmark foreign bond in Q3 

UK: Index-Linked Gilt Mar 2034 (tap, syndicated, GBP) scheduled for the week commencing 25 July 

UK: Mini-tender in the week commencing 5 Sep (choice of Gilt on Fri 6 Aug) 

UK: Long-dated Gilt (syndicated) in the second half of Sep (details around two weeks in advance) 

Finland: Planning to issue a new syndicated EUR benchmark bond (likely a 5y) in H2. To sell one more EUR benchmark bond in Q3 (details 

one week prior to the auction). Will not issue T-bills in July 

Neths: Still looking to issue debt denominated in USD, depending on market conditions 

Czech Rep.: To launch a syndicated euro benchmark in H2 

In the pipeline – Agencies: 

EFSF: In addition to the issues for the Portuguese programme (see below), is expected to issue two benchmark bonds in H2 2011 in support 

of the programme for Ireland 

EFSF: Expected to issue two further bonds in 2011 in support of the programme for Portugal, EUR 3-5bn per transaction 

During the week: 

FHLB: August Global Notes auction details to be announced on Wed 10 Aug 

Date Day Closing Country Issues Details BNPP forecasts 

Local GMT 

08/08 Mon 11:00 15:00 US Outright TIPS Purchase (2013 - 2041) USD 0.25-0.5bn 

09/08 Tue 12:00 03:00 Japan JGB 40-year JPY 0.4tn JPY 0.4tn 

13:00 17:00 US Notes 3-year (new) USD 32bn USD 32bn 

10/08 Wed 12:00 16:00 Canada CAN 3-year 4 Aug 

13:00 17:00 US Notes 10-year (new) USD 24bn USD 24bn 

11/08 Thu 12:00 03:00 Japan JGB 5-year JPY 2.4tn JPY 2.4tn 

10:30 09:30 UK Index-Linked Gilt 0.625% 22 Nov 2042 GBP 0.825bn 

13:00 17:00 US Bond 30-year (new) USD 16bn USD 16bn 

16/08 Tue Denmark DGBs 11 Aug 

17/08 Wed 11:00 09:00 Germany Schatz 13 Sep 2013 (new) EUR 7bn 

12:00 16:00 Canada CAN 2-year 11 Aug 

18/08 Thu 10:30 09:30 UK Gilt 22 Jan 2017 (new) 9 Aug 

13:00 17:00 US TIPS 5-year 11 Aug USD 12bn 

22/08 Mon 12:00 10:00 Belgium OLOs 16 Aug 

Slovak Rep. SLOVGB 4% 27 Apr 2020 (#214) 

23/08 Tue 12:00 03:00 Japan Auction for Enhanced-liquidity 16 Aug JPY 0.3tn 

10:30 09:30 UK Index-Linked Gilt 1.875% 22 Nov 2022 16 Aug 

13:00 17:00 US Notes 2-year (new) 18 Aug USD 35bn 

24/08 Wed 11:00 09:00 Germany Bund 4 Sep 2021 (new) EUR 6bn 

12:00 16:00 Canada CAN 30-year (Repurchase-Switch) 18 Aug 


25/08 Thu 12:00 03:00 Japan JGB 20-year 18 Aug JPY 1.1tn 


26/08 Fri 10:55 08:55 Italy CTZ 23 Aug EUR 2.5bn 

29/08 Mon 10:55 08:55 Italy BTPeis 23 Aug EUR 1-2bn 

30/08 Tue 12:00 03:00 Japan JGB 2-year 23 Aug JPY 2.6tn 

10:55 08:55 Italy 3 & 10y BTPs and CCT 23 Aug EUR 6-9bn 

31/08 Wed 12:00 16:00 Canada CANi 30-year 25 Aug 

01/09 Thu 12:00 03:00 Japan JGB 10-year 25 Aug JPY 2.2tn 

10:30 08:30 Spain Bonos 4 Aug 

10:50 08:50 France OATs 26 Aug EUR 7-9bn 

11:00 09:00 Sweden ILBs 25 Aug SEK 0.75bn 

10:30 09:30 UK Gilt 3.75% 7 Sep 2021 23 Aug 

Source: Treasuries, BNP Paribas 



69 


Next week's T-Bill Supply 

Date Country Issues Details 

05/08 UK T-Bills Sep 2011 GBP 0.5bn 

T-Bills Nov 2011 

GBP 1bn 

T-Bills Feb 2012 

GBP 1.5bn 

08/08 France BTFs Nov 2011 EUR 4.5bn 

BTFs Feb 2012 

EUR 2.5bn 

BTFs Jul 2012 

EUR 1bn 

Germany Bubills Feb 2012 (new) EUR 4bn 

US T-Bills 13-week & 26- 4 Aug 

week 

FHLMC Bills 3-month & 6-month 5 Aug 

09/08 Japan T-Bills 3-month JPY 4.77tn 

US T-Bills 4-week 8 Aug 

FHLB Discount Notes 

10/08 Japan T-Bills 2-month JPY 2.5tn 

Italy BOT Aug 2012 (& 5 Aug 

possibly BOT 3mth) 

FNMA Bills 3-month & 6-month 8 Aug 

11/08 FHLB Discount Notes 

12/08 UK T-Bills 5 Aug 

Source: Treasuries, BNP Paribas 

Comments and charts 

• There are no EGB auctions scheduled for the week 

ahead as Italy, Austria and France have decided to skip 

their mid-August auctions (as usually happens due to 

the summer lull). There are no long-term redemptions 

either. 

• Outside the eurozone, the US will issue a total of 

USD 72bn of 3y, 10y and 30y notes. Japan and Canada 

will also issue bonds in the week ahead. 

Next week's Eurozone Redemptions 

Date Country Details Amount 

09/08 Finland T-Bills EUR 0.6bn 

10/08 Germany Bubills EUR 5.0bn 

11/08 France BTF EUR 6.1bn 

12/08 Greece GTB (26W) EUR 0.5bn 

Total Eurozone Short-term Redemption EUR 12.2bn 

Next week's Eurozone Coupons 

Country 

Amount 

Greece 

EUR 1.0bn 

Total Long-term Coupon Payments 

EUR 1bn 

35 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

20 

18 

16 

14 

12 

10 

8 

6 

4 

2 

0 

Chart 1: Investors’ Net Cash Flows 

(EUR bn, 10y equivalent) 

Net Investors' Cash Flows 

(EUR bn , 10y equivalent) 

Week of Aug 1st Week of Aug 8th Week of Aug 15th Week of Aug 22th 

Chart 2: EGB Gross Supply Breakdown by 

Country (EUR bn, 10y equivalent) 

Germany Italy Portugal Belgium 

France Spain Netherlands Austria 

Finland Greece Ireland 


Chart 3: EGB Gross Supply Breakdown by 

Maturity (EUR bn, 10y equivalent) 

8 

EGBs Gross Supply (EUR bn, 10y equivalent) 

7 

6 

5 

4 

2-3-YR 

10-YR 

5-7-YR 

>10-YR 

3 

2 

1 

0 





70 


Central Bank Watch 

Interest Rate 

EUROZONE 

Current 

Rate (%) 

Minimum Bid Rate 1.50 

US 

Fed Funds Rate 0 to 0.25 

Discount Rate 0.75 

JAPAN 

Call Rate 0 to 0.10 

Basic Loan Rate 0.30 

UK 

Bank Rate 0.5 

DENMARK 

Lending Rate 1.55 

SWEDEN 

Repo Rate 2.00 

NORWAY 

Sight Deposit Rate 2.25 

SWITZERLAND 

3 Mth LIBOR Target 

Range 

CANADA 

0 to 0.25 

Overnight Rate 1.00 

Bank Rate 1.25 

AUSTRALIA 

Cash Rate 4.75 

CHINA 

1Y Bank Lending 

Rate 

BRAZIL 

Selic Overnight Rate 

6.56 

Date of 

Last 

Change 

+25bp 

(7/7/11) 

-75bp 

(16/12/08) 

+25bp 

(18/2/10) 

-10bp 

(5/10/10) 

-20bp 

(19/12/08) 

-50bp 

(5/3/09) 

+25bp 

(7/7/11) 

+25bp 

(5/7/11) 

+25bp 

(12/5/11) 

-50bp 

(3/8/11) 

+25bp 

(8/9/10) 

+25bp 

(8/9/10) 

+25bp 

(2/11/10) 

+25bp 

(6/7/11) 

12.50 +25bp 

(20/7/11) 

Next Change in 

Coming 6 Months 

No Change 

No Change 

No Change 

No Change 

No Change 

No Change 

-5bp 

(Aug 11) 

+25bp 

(7/9/11) 

+25bp 

(21/9/11) 

No Change 

+25bp (6/12/11) 

+25bp (6/12/11) 

+25bp 

(4/10/11) 

No Change 

+25bp 

(31/8/11) 


For the full EM Central Bank Watch, please see our Local Markets Mover. 

Comments 

The recent weakness of leading indicators, including in the ‘core’ 

of the eurozone, linked to increased financial market tensions, is 

indicative of unchanged policy rates in the coming months. 

The FOMC is expected to maintain the Fed funds rate at 0 to 

0.25% until 2013. We see the chances of another round of 

quantitative easing as rising, although it would require further 

deterioration in the growth outlook and the re-emergence of 

deflationary risks. 

Economic activity has been picking up steadily on an easing of 

the supply-side constraints caused by the 11 March earthquake. 

However, should the yen appreciate sharply again, the BoJ may 

once more be forced to ease policy. 

Given persistent headwinds to growth, and with inflation to fall 

next year, Bank Rate is forecast to stay at the current level for 

some time. We assume no change through 2011 and 2012. 

Given the marked appreciation of the krone, we expect the 

Danish central bank to deliver a rate cut in August, which could 

come as early as this week. 

The upward trend in inflation and wage expectations, as well as 

Sweden’s robust fundamentals, should lead to further rate hikes. 

We expect the Riksbank to deliver the next hike at its 

September meeting. 

We expect the next hike to come in September. The risk to this 

forecast is that the hike is delayed if external developments 

have significant negative spill-over effects on Norway and/or the 

krone appreciates significantly. 

The SNB lowered the upper limit of its target range by 50bp in 

response to a further tightening of monetary conditions caused 

by the exceptional strength of the exchange rate. 

Underlying inflation pressures remain subdued. Meanwhile, high 

levels of household debt tied to variable rate mortgages and the 

expected "temporary" inflationary pressures have left the BoC 

wary of normalising policy. We expect the BoC to remain on 

hold until at least December 2011. 

Stronger-than-expected underlying inflation should prompt the 

RBA to nudge up the cash rate by 25bp once current 

uncertainties in the global economy have dissipated somewhat. 

Inflation is set to peak in June/July and growth has lost more 

momentum than policymakers had anticipated. Hence we 

expect selective easing in H2 2011. We may have seen the last 

rate hike in this cycle unless July’s CPI inflation is higher than 

June’s. 

Copom again hiked by 25bp in July but dropped hawkish 

language saying hiking would be for a “sufficiently prolonged” 

period. While the central bank is keeping its options open, with a 

pause now possible, it still has tightening work to do in our view. 

Change since our last weekly in bold and italics 


Market Mover 

71 


FX Forecasts* 

USD Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 

EUR/USD 1.50 1.55 1.45 1.40 1.35 1.35 1.30 1.30 1.30 1.30 1.34 

USD/JPY 78 83 85 90 95 95 95 95 95 95 92 

USD/CHF 0.83 0.83 0.90 0.93 1.00 1.00 1.04 1.04 1.04 1.04 0.97 

GBP/USD 1.65 1.68 1.59 1.56 1.53 1.53 1.53 1.53 1.53 1.53 1.70 

USD/CAD 0.98 0.93 0.95 0.97 1.01 1.01 1.04 1.04 1.04 1.04 1.00 

AUD/USD 1.09 1.13 1.07 1.04 0.99 0.99 0.96 0.96 0.96 0.96 0.95 

NZD/USD 0.82 0.84 0.81 0.80 0.76 0.76 0.74 0.74 0.74 0.74 0.76 

USD/SEK 5.93 5.48 5.93 6.21 6.67 6.67 6.92 6.92 6.92 6.92 6.94 

USD/NOK 4.98 4.77 5.07 5.26 5.56 5.56 5.77 5.77 5.77 5.77 5.07 

EUR Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 

EUR/JPY 117 129 123 126 128 128 124 124 124 124 123 

EUR/GBP 0.91 0.92 0.91 0.90 0.88 0.88 0.85 0.85 0.85 0.85 0.79 

EUR/CHF 1.25 1.28 1.30 1.30 1.35 1.35 1.35 1.35 1.35 1.35 1.30 

EUR/SEK 8.90 8.50 8.60 8.70 9.00 9.00 9.00 9.00 9.00 9.00 9.30 

EUR/NOK 7.47 7.40 7.35 7.37 7.50 7.50 7.50 7.50 7.50 7.50 6.80 

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 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 

USD/PLN 2.60 2.48 2.69 2.75 2.81 2.78 2.85 2.77 2.85 2.85 2.65 

EUR/CZK 24.3 24.5 24.1 23.9 23.8 23.5 23.7 24.0 23.5 23.3 23.1 

EUR/HUF 275 275 269 265 265 260 260 255 260 260 250 

USD/ZAR 6.80 6.60 6.55 6.60 6.50 6.50 7.20 7.10 7.00 6.90 6.69 

USD/TRY 1.52 1.50 1.56 1.59 1.63 1.65 1.65 1.67 1.69 1.69 1.54 

EUR/RON 4.20 4.15 4.20 4.25 4.15 4.10 4.20 4.20 4.10 3.95 3.90 

USD/RUB 27.51 27.25 27.86 27.97 28.08 27.65 28.19 27.75 29.07 27.75 27.75 

EUR/PLN 3.90 3.85 3.90 3.85 3.80 3.75 3.70 3.60 3.70 3.70 3.55 

USD/UAH 7.8 7.8 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.3 7.4 

EUR/RSD 100 100 98 97 96 95 93 92 91 90 85 

Asia Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 

USD/SGD 1.20 1.19 1.18 1.17 1.16 1.15 1.14 1.13 1.13 1.13 ----- 

USD/MYR 2.95 2.90 2.87 2.85 2.83 2.80 2.77 2.75 2.73 2.70 ----- 

USD/IDR 8400 8300 8200 8100 8000 7900 7800 7700 7600 7500 ----- 

USD/THB 29.50 29.30 29.00 28.70 28.50 28.30 28.00 27.70 27.50 27.50 ----- 

USD/PHP 42.00 41.50 41.00 40.50 40.00 39.50 39.00 38.50 38.00 38.00 ----- 

USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 ----- 

USD/RMB 6.40 6.31 6.25 6.21 6.17 6.13 6.23 6.20 6.17 6.15 ----- 

USD/TWD 28.00 27.50 27.00 26.70 26.50 26.00 26.00 26.00 26.00 26.00 ----- 

USD/KRW 1040 1030 1020 1010 1000 990 980 970 960 950 ----- 

USD/INR 44.00 43.50 43.00 42.50 42.00 41.50 41.00 41.00 41.00 41.00 ----- 

USD/VND 20500 20000 20000 20000 20000 20000 20000 20000 20000 20000 ----- 

LATAM Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 

USD/ARS 4.18 4.25 4.34 4.43 4.51 4.60 4.69 4.78 4.86 4.95 ----- 

USD/BRL 1.58 1.55 1.53 1.55 1.56 1.58 1.59 1.60 1.61 1.62 ----- 

USD/CLP 450 435 425 430 435 440 442 445 447 450 ----- 

USD/MXN 11.40 11.10 11.00 10.90 11.00 11.10 11.10 11.17 11.25 11.30 ----- 

USD/COP 1730 1690 1690 1700 1710 1720 1725 1730 1740 1750 ----- 

USD/VEF 4.29 4.29 4.29 4.29 4.29 4.29 8.80 8.80 8.80 8.80 ----- 

USD/PEN 2.70 2.65 2.63 2.63 2.64 2.66 2.67 2.68 2.69 2.70 ----- 

Others Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 

USD Index 72.30 70.76 74.87 77.62 80.72 80.72 82.99 82.99 82.99 82.99 79.73 

*End Quarter 

Foreign Exchange Strategy 4 August 2011 



72

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 & Fiscal Economics, London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.com 

Eurozone, Italy 

Gizem Kara Scandinavia London 44 20 7595 8783 gizem.kara@uk.bnpparibas.com 

Dominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.com 

Julia Coronado Chief Economist North America New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.com 

Yelena Shulyatyeva US New York 1 212 841 2258 yelena.shulyatyeva@americas.bnpparibas.com 

Bricklin Dwyer US, Canada New York 1 212 471-7996 bricklin.dwyer@americas.bnpparibas.com 

Ryutaro Kono Chief Economist Japan Tokyo 81 3 6377 1601 ryutaro.kono@japan.bnpparibas.com 

Hiroshi Shiraishi Japan Tokyo 81 3 6377 1602 hiroshi.shiraishi@japan.bnpparibas.com 

Azusa Kato Japan Tokyo 81 3 6377 1603 azusa.kato@japan.bnpparibas.com 

Makiko Fukuda Japan Tokyo 81 3 6377 1605 makiko.fukuda@japan.bnpparibas.com 

Richard Iley Head of Asia Economics Hong Kong 852 2108 5104 richard.iley@asia.bnpparibas.com 

Dominic Bryant Asia, Australia Hong Kong 852 2108 5105 dominic.bryant@asia.bnpparibas.com 

Mole Hau Asia Hong Kong 852 2108 5620 mole.hau@asia.bnpparibas.com 

Xingdong Chen Chief China Economist Beijing 86 10 6535 3327 xd.chen@asia.bnpparibas.com 

Chan Kok Peng Chief Economist South East Asia Singapore 65 6210 1946 kokpeng.chan@asia.bnpparibas.com 

Marcelo Carvalho Head of Latin American Economics São Paulo 55 11 3841 3418 marcelo.carvalho@br.bnpparibas.com 

Italo Lombardi Latin America New York 1 212 841 6599 italo.lombardi@americas.bnpparibas.com 

Nader Nazmi Latin America New York 1 212 471 8216 nader.nazmi@us.bnpparibas.com 

Florencia Vazquez Latin American Economist Buenos Aires 54 11 4875 4363 florencia.vazquez@ar.bnpparibas.com 

Michal Dybula Central & Eastern Europe Warsaw 48 22 697 2354 michal.dybula@pl.bnpparibas.com 

Julia Tsepliaeva Russia & CIS Moscow 74 95 785 6022 julia.tsepliaeva@ru.bnpparibas.com 

Selim Cakir Chief Economist TEB Istanbul 90 216 635 2972 selim.cakir@teb.com.tr 

Emre Tekmen Economist TEB Istanbul 90 216 635 2975 emre.tekmen@teb.com.tr 

Interest Rate Strategy 

Cyril Beuzit Global Head of Interest Rate Strategy London 44 20 7595 8639 cyril.beuzit@uk.bnpparibas.com 

Patrick Jacq Europe Strategist Paris 33 1 4316 9718 patrick.jacq@bnpparibas.com 

Hervé Cros Chief Inflation Strategist London 44 20 7595 8419 herve.cros@uk.bnpparibas.com 

Shahid Ladha Inflation Strategist London 44 20 7 595 8573 shahid.ladha@uk.bnpparibas.com 

Alessandro Tentori Chief Alpha Strategy Europe London 44 20 7595 8238 alessandro.tentori@uk.bnpparibas.com 

Eric Oynoyan Europe Alpha Strategist London 44 20 7595 8613 eric.oynoyan@uk.bnpparibas.com 

Matteo Regesta Europe Alpha Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.com 

Ioannis Sokos Europe Alpha Strategist London 44 20 7595 8671 ioannis.sokos@uk.bnpparibas.com 

Camille de Courcel Europe Alpha Strategist London 44 20 7595 8295 camille.decourcel@uk.bnpparibas.com 

Bülent Baygün Head of Interest Rate Strategy US New York 1 212 471 8043 bulent.baygun@americas.bnpparibas.com 

Mary-Beth Fisher US Senior Strategist New York 1 212 841 2912 mary-beth.fisher@us.bnpparibas.com 

Sergey Bondarchuk US Strategist New York 1 212 841 2026 sergey.bondarchuk@americas.bnpparibas.com 

Suvrat Prakash US Strategist New York 1 917 472 4374 suvrat.prakash@americas.bnpparibas.com 

Anish Lohokare MBS Strategist New York 1 212 841 2867 anish.lohokare@americas.bnpparibas.com 

Olurotimi Ajibola MBS Strategist New York 1 212 8413831 olurotimi.ajibola@americas.bnpparibas.com 

Koji Shimamoto Head of Interest Rate Strategy Japan Tokyo 81 3 6377 1700 koji.shimamoto@japan.bnpparibas.com 

Tomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1703 Tomohisa.fujiki@japan.bnpparibas.com 

Masahiro Kikuchi Japan Strategist Tokyo 81 3 6377 1703 masahiro.kikuchi@japan.bnpparibas.com 

Christian Séné Technical Analyst Paris 33 1 4316 9717 christian.séné@bnpparibas.com 

FX Strategy 

Ray Attrill Head of FX Strategy – North America New York 1 212 841 2492 raymond.attrill@us.bnpparibas.com 

Mary Nicola FX Strategist New York 1 212 841 2492 mary.nicola@americas.bnpparibas.com 

Steven Saywell Head of FX Strategy - Europe London 44 20 7595 8487 steven.saywell@uk.bnpparibas.com 

Kiran Kowshik FX Strategist London 44 20 7595 1495 kiran.kowshik@bnpparibas.com 

James Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.com 

Local Markets FX & Interest Rate Strategy 

Drew Brick Head of FX & IR Strategy Asia Singapore 65 6210 3262 Drew.brick@asia.bnpparibas.com 

Chin Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 chin.thio@asia.bnpparibas.com 

Robert Ryan FX & IR Asia Strategist Singapore 65 6210 3314 robert.ryan@asia.bnpparibas.com 

Jasmine Poh FX & IR Asia Strategist Singapore 65 6210 3418 jasmine.j.poh@asia.bnpparibas.com 

Gao Qi FX & IR Asia Strategist Shanghai 86 21 2896 2876 gao.qi@asia.bnpparibas.com 

Bartosz Pawlowski Head of FX & IR Strategy CEEMEA London 44 20 7595 8195 Bartosz.pawlowski@uk.bnpparibas.com 

Dina Ahmad FX & IR CEEMEA Strategist London 44 20 7 595 8620 dina.ahmad@uk.bnpparibas.com 

Erkin Isik FX & IR CEEMEA Strategist Istanbul 90 (216) 635 29 87 erkin.isik@teb.com.tr 

Raffaele Semonella EMEA Corporates Analyst London 44 20 7 595 8813 raffaele.semonella@uk.bnpparibas.com 

Diego Donadio FX & IR Latin America Strategist São Paulo 55 11 3841 3421 diego.donadio@@br.bnpparibas.com 

73

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