Market Outlook - BNP PARIBAS - Investment Services India

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China leads recovery in overseas demand A closer look at the country breakdown of machine tool orders confirms that the drivers of overseas demand are the emerging economies of Asia. In fact, orders from Asia ex-Japan have been so brisk that December’s level was in line with the previous peak. Naturally, the most conspicuous strength is shown by China (whose economy in Q4 2009 surged 10.7% q/q, returning to double-digit growth for the first time in six quarters). Chinese orders began reviving at the start of 2009, with the tempo accelerating sharply from the autumn. By December, the level was well above its past peak. Orders from South Korea and Taiwan are also solid, though the magnitude is less than China’s. As is widely known, domestic demand in China and the other Asian EMKs is expanding briskly thanks to (1) very aggressive domestic stimulus programmes, coupled with the lack of balance sheet problems, and (2) very accommodative monetary conditions from the influx of capital via escalating dollar carry trades. US and European demand remain weak Meanwhile, orders from the US and Europe are as lacklustre as Japan’s. Orders for the EU are especially weak, with the recovery (if it can be called that) so anaemic that the level in December is still just 20% of its former peak. Orders coming from the US stood in December at 28% of their former peak, and the pace of recovery there also remains slow. Polarisation unlikely to end soon Recently, concerns have emerged about fund flows into the EMKs being substantially reduced by Washington’s latest plans to rein in the banking sector, something that could reduce risk taking by US financial institutions. What is more, in China the authorities are also starting to tighten monetary policy. Nevertheless, as long as the US and Europe face balance sheet troubles, they will have to maintain their super-low interest rate regimes, and this argues against any drying up of the fund flows from the developed nations to the EMKs. (Of course, over the long run, the strengthening of banking regulations may greatly affect global fund flows as well as the pace of global growth.) Furthermore, given the political risks involved, Beijing is unlikely to tighten monetary policies to the extent that it appreciably dampens growth in the near future. Thus, the current global polarisation is unlikely to end anytime soon. Chart 4: China Orders (sa, CY 2005=100) 300 Monthly 250 200 150 100 Quarterly 50 0 03 04 05 06 07 08 09 Source: JMTBA, BNP Paribas Chart 5: US Orders (sa, CY 2005=100) 140 Monthly 120 100 80 60 Quarterly 40 20 0 03 04 05 06 07 08 09 Source: JMTBA, BNP Paribas Chart 6: EU Orders (sa, CY 2005=100) 250 Monthly 200 150 100 Quarterly 50 0 03 04 05 06 07 08 09 Source: JMTBA, BNP Paribas Ryutaro Kono/ Hiroshi Shiraishi 29 January 2010 Market Mover 24 www.GlobalMarkets.bnpparibas.com
Australia: The Next Step • Data released since the disappointing Q3 GDP number have generally been robust. Chart 1: Employment Growth • The labour market is turning out stronger than many expected. Underlying inflation remains on the high side. • These factors should convince the RBA that further policy normalisation is warranted at its February meeting. Hike odds on The RBA has moved well ahead of most central banks in hiking its policy rate at the past three consecutive meetings. This reflects the fact that Australia is in a very different place economically relative to the likes of the US, eurozone and UK. With the Australian economy normalising and policy rates at exceptionally low levels, beginning to withdraw the excess of accommodation was entirely sensible and, therefore, not a difficult decision. However, with the policy rate less accommodative than it once was, the RBA’s decisions are set to become a closer call. For the 2 February meeting, we remain in the rate hike camp – expecting the RBA to raise the cash rate by 25bp to 4.00%. This is now very much the consensus view. But when Q3 GDP data disappointed late last year, the December minutes were more dovish than expected and Deputy Governor Battelino suggested policy was less accommodative than the cash rate suggested, it would have been easy to think that a February rate hike was beginning to look unlikely. This raises the question: what has happened since these events to make the market so convinced that a hike will be delivered? After all, at the time of writing, only one out of 21 economists in the Bloomberg survey expects rates to be left unchanged. Hard labour One key swing factor for the RBA is likely to be the labour market data. The market has been surprised significantly on the upside for the past four months running. On average, employment has increased by 35k, or 0.3%, per month more than the consensus forecast. Employment is now rising at 1.0% y/y. But this figure is sure to increase given the three- and six-month changes (Chart 1) and the positive tone of employment indicators, such as the NAB survey, job adverts and vacancies. Source: Reuters EcoWin Pro Chart 2: Unemployment & the NAIRU Source: Reuters EcoWin Pro Strong employment growth has pushed the unemployment rate down by a total of 0.3pp since October. At 5.5%, it is not that far above the OECD estimate of the NAIRU (Chart 2). Certainly, the amount of slack in the labour market is far less than seen at the beginning of previous recoveries, which argues for policy to be more pre-emptive, especially given the policy rate is coming from a very low level. The improvement in the labour market is likely to be one factor supporting consumer confidence. Confidence surged through 2009 and, after two months of decline, bounced back in January (Chart 3). The January bounce should give the RBA some confidence that the rate hikes delivered thus far have not been detrimental to the recovery. General strength Other data related to the consumer have also been firm since the December RBA meeting. Passenger and SUV sales rose by over 7.0% q/q in Q4, the third strongest q/q increase (excluding a tax-related spike Dominic Bryant 29 January 2010 Market Mover 25 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
Page 9 and 10: 500,000, the months-supply level of
Page 11 and 12: France: Roaring Consumption • Ret
Page 13 and 14: should be particularly true for the
Page 15 and 16: UK Inflation: Bridging the Gap •
Page 17 and 18: eceive roughly 60/40 weight within
Page 19 and 20: 1.2% m/m in November, partly offset
Page 21 and 22: or absence of competitors in a spec
Page 23: Japan: Polarisation in Machine Tool
Page 27 and 28: US: Post-FOMC Treasury Market Overv
Page 29 and 30: US: Rolling Down the Agency Spread
Page 31 and 32: US: Poor Housing Underscores MBS Su
Page 33 and 34: Fannie Mae has not discussed the in
Page 35 and 36: EUR: Timing the 20Y Point • The l
Page 37 and 38: EUR 3-5bn (new 10y) in February? Co
Page 39 and 40: JGBs: Supply Continues to Weigh •
Page 41 and 42: Table 1: BNP Paribas' Inflation For
Page 43 and 44: Table 3: BNP Paribas' Inflation For
Page 45 and 46: Pricing Date Repo Rate EUR DRI FRF
Page 47 and 48: CNY: Revaluation and FX Reserves
Page 49 and 50: domestic-demand led one is underway
Page 51 and 52: USD Bullish Signals • USD Trade W
Page 53 and 54: Currency Spot Trade Recommendations
Page 55 and 56: Economic Calendar: 29 Jan - 5 Feb (
Page 57 and 58: Key Data Preview Chart 3: Japanese
Page 59 and 60: Key Data Preview Chart 7: Change in
Page 61 and 62: Key Data Preview Chart 11: US PMI M
Page 63 and 64: Key Data Preview Chart 15: US Non-F
Page 65 and 66: Economic Calendar: 8 February - 5 M
Page 67 and 68: Next week's T-Bills Supply Date Cou
Page 69 and 70: Economic Forecasts GDP Year 2009 20
Page 71 and 72: Market Coverage Market Economics Pa

Market Outlook - BNP PARIBAS - Investment Services India

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