Market Outlook - BNP PARIBAS - Investment Services India

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Fewer sales = higher inventories = lower prices Estimates of the tax credit’s impact on house prices are complicated by the interaction of demand and supply. In particular, as buying conditions worsened, prospective home sellers likely grew discouraged and stopped advertising for their properties, preferring to wait for better times. Therefore, as home sales increase, inventories are likely to increase as well, as properties which had been previously removed from the market are put back up for sale. While we do not have specific information regarding prospective sellers’ intentions, we estimate that the tax credit accounted for an additional 690k existing home sales in 2009. Assuming that these homes had remained unsold (and thus available) suggests the uptrend in existing housing inventories observed over the first half of 2009 would have extended over the rest of the year, pushing the number of unsold available properties towards 4.39 million units, well above the 3.29 million units reached in December (Chart 7). Given the inverse relationship between house price inflation and existing inventories, the steady decline in inventories recorded in 2009 clearly contributed to support house prices in recent months (Chart 8). However, given our estimate for lower home sales and higher inventories in the absence of government support, it appears that home prices would have likely eased further in early 2009 and would still be languishing near their cycle lows (Chart 9). Conclusion Given that the homebuyers’ tax credit has now been extended and expanded, we expect the plunge in existing home sales recorded in December to be temporary, suggesting housing demand should rebound in January. Nevertheless, recent volatility in sales dovetails with our view that the housing market recovery remains fragile. In particular, tight credit conditions, ongoing deleveraging, a likely increase in mortgage rates and an unemployment rate at or above 10% all point to sluggish housing demand after the tax credit programme expires in mid-2010. Chart 7: Fewer Sales Higher Inventories Source: Reuters EcoWin Pro Chart 8: Lower Inventories Higher Prices Source: Reuters EcoWin Pro Chart 9: Higher Inventories Lower Prices Source: Reuters EcoWin Pro Anna Piretti 29 January 2010 Market Mover 10 www.GlobalMarkets.bnpparibas.com
France: Roaring Consumption • Retail sales rocketed in Q4, partly driven by auto sales, with the surge pushing PCE higher. • However, the positive impact on Q4 GDP will be mitigated by higher imports. Moreover, these factors should unwind in Q1. 1.2 1.0 0.8 0.6 Chart 1: Retail sales vs. PCE (3m % change) Retail Sales of Manuf. Goods (% q/q, RHS) Ex Autos Total 4 3 2 1 French retail sales of manufactured goods rose 2.1% m/m in December (way above the consensus of a 0.6% rise). This pushed the y/y change up to 5.9%, the highest level since July 2007. More importantly, the quarterly gain reached 3.0% q/q (12.7% annualised) – the strongest gain since Q3 1999, when a previous car purchase incentive ended. New car sales…and other stuff As widely expected, the main driver was car sales (up 9.1% m/m and 31.8% y/y) as households rushed to benefit from the full amount of the car purchase incentive and the bonus for low carbon-emitting cars. In 2009, the car purchase scheme attracted 600k clients for a direct cost of EUR 0.6bn; this was probably entirely covered by extra VAT receipts (with c. 300k to 400k additional new car sales and 200k to 300k being opportunistic buying). However, consumption of other goods was also strong. Sales of clothes and shoes also did very well, up 2.0% m/m, favoured by cold weather and solid Christmas trading. Other items also printed gains on the month, as the car sales boom had little adverse impact on the sales of other items. Ex-auto sales rose 1.5% q/q in Q4. Car sales have been primarily financed by a decline in savings or via bank loans (see France: Misleading Credit Data, Market Mover, 15 January 2010). The rise in the savings ratio to 17% in Q3 (the second-highest quarterly figure since 1983) was partly due to tax cuts and should suffer a massive correction in Q4. Mitigated impact on GDP A 3.0% jump for manufactured goods sales is usually consistent with a 1.2-1.5% q/q increase for total personal consumption expenditure (as defined in GDP, Chart 1). However, car sales were driven up by specific factors, so consumption of other services is more likely to replicate the pattern of ex-auto sales. The PCE gain consistent with a 1.5% q/q retail sales rise is thus likely to be in the 0.6% to 0.9% range, according to the long-term historical relationship; our forecast is +0.8%. This will of course push GDP higher in Q4, but part of this contribution to GDP will result in further auto inventory decline (although the contraction of 0.4 0.2 0.0 -0.2 PCE (% q/q) -0.4 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 05 06 07 08 09 Sources: INSEE, Reuters EcoWin Pro Chart 2: Trade Balance - Cars (EUR bn/month) 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 01 02 03 04 05 06 07 08 09 Source: Reuters EcoWin Pro Imports Exports inventories of other items should slow in Q4) and an increase in imports. The trade deficit for the first two months of Q4 jumped to EUR 4.8bn per month vs. a EUR 2.5bn average monthly deficit in Q3. Car imports soared (Chart 2), with most new cars bought under the incentive programme small cars which are most often produced outside France (except Toyotas). We thus forecast GDP growth of 0.6% q/q in Q4, with a strong negative contribution from net exports. Since the jump of car sales will progressively unwind over the next three months, the reverse impact is likely to arise in Q1. Already, anecdotal evidence points to a decline in seasonal sales vs. last year, not only because of heavy snow. We expect a contraction of retail sales ex-autos as early as January (and new car registrations due for release on 1 February are also likely to decline). While net exports should recover, we expect a negative PCE figure in Q1, cutting GDP growth to 0.4%. 0 -1 -2 -3 -4 Dominique Barbet 29 January 2010 Market Mover 11 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: GGBs and other peripherals will rem
Page 5 and 6: The subtle changes in the wording o
Page 7 and 8: US: Get It While You Can • As the
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Page 23 and 24: Japan: Polarisation in Machine Tool
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Key Data Preview Chart 11: US PMI M
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Key Data Preview Chart 15: US Non-F
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Economic Calendar: 8 February - 5 M
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Economic Forecasts GDP Year 2009 20
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Market Coverage Market Economics Pa
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