Market Outlook - BNP PARIBAS - Investment Services India

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Global Inflation Watch Very Weak German CPI Data Wednesday’s large downward surprise to German inflation constituted the latest piece of evidence that policymakers should be far more worried about deflation rather than inflation in the euro area. The national headline CPI fell by 0.6% m/m in January, double the -0.3% m/m print expected by the market and weaker than our own -0.5% m/m estimate. That left the y/y rate flat at 0.8% y/y after three straight months of big gains. The HICP numbers were even weaker at -0.7% m/m, 0.7% y/y. There were two key drivers of the downward surprise relative to consensus. First, the increase in energy prices in January was weaker than the country’s fuel data had implied. Second, and much more importantly, there was a very weak core inflation print. Based on the five states’ data, we estimate core inflation decelerated to 0.8% y/y in January from 1.1% in December at the national level – its lowest level since October 2006. Chart 1: German Clothing CPI (% m/m), Sliced* Source: Reuters EcoWin Pro, BNP Paribas *Lines show past 5 years %m/m changes between January and December. Chart 2: Eurozone HICP (% y/y) The cut in VAT on restaurants that took effect this month played a small part in this fall. Rather, the softness of core was relatively widespread, with evidence of particularly aggressive discounting in clothing prices – which dropped by double their previous record fall (Chart 1). That alone sliced 0.2pp from core inflation over the month. Following the German data, we have revised our estimate for today’s eurozone flash HICP release. We now expect headline inflation to print 1.1% y/y, still up 0.2pp from December thanks to upward pressures from food (cold weather) and energy (oil price rises in January). We had core inflation ticking 0.1pp lower to 1.0% on strong seasonal discounting, but following the larger than expected decline in German core inflation, our estimates suggest we should see a 0.9% y/y – which would equal the series’ all-time low recorded in 2000. This week’s data calendar includes the Japanese CPI for December. The rate of decline in the national core CPI has steadily moderated for three straight months, coming in at -1.7% y/y in November from a low of -2.4% in August. We expect this trend to continue with the inflation rate forecast at -1.4% y/y in December. But the moderation in the decline in the CPI does not reflect the easing of deflationary pressures, rather it is just a technical reaction to falling petroleum product prices a year earlier. This factor should continue to temper the CPI’s rate of decline in January, after which the fall in the CPI will re-accelerate as base effects fade. Source: Reuters EcoWin Pro, BNP Paribas Chart 3: Japanese CPI (% y/y) 3 Core CPI 2 1 0 -1 CPI excluding energy and food, but not alcohol -2 -3 02 03 04 05 06 07 08 09 Source: MIC, BNP Paribas Luigi Speranza/Eoin O’Callaghan 29 January 2010 Market Mover 40 www.GlobalMarkets.bnpparibas.com
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 2009 108.1 - 0.3 107.9 - 0.2 119.3 - 0.1 118.0 - 0.1 214.6 - -0.3 214.5 - -0.4 2010 (1) 109.5 - 1.3 109.1 - 1.1 120.9 - 1.3 119.5 - 1.3 219.9 - 2.5 219.9 - 2.5 2011 (1) 110.2 - 0.7 109.7 - 0.6 122.1 - 1.0 120.6 - 0.9 222.2 - 1.1 222.2 - 1.1 Q3 2009 108.0 - -0.4 107.8 - -0.5 119.4 - -0.4 118.1 - -0.4 215.2 - -1.6 215.7 - -1.6 Q4 2009 108.6 - 0.4 108.4 - 0.3 119.7 - 0.4 118.4 - 0.3 217.1 - 1.5 216.2 - 1.4 Q1 2010 (1) 108.7 - 1.2 108.4 - 1.1 120.3 - 1.3 118.9 - 1.2 218.6 - 2.8 217.9 - 2.8 Q2 2010 (1) 109.5 - 1.1 109.2 - 1.0 120.8 - 1.1 119.4 - 1.1 219.4 - 2.8 220.5 - 2.9 Q3 2010 (1) 109.4 - 1.3 109.0 - 1.1 121.1 - 1.5 119.8 - 1.4 220.3 - 2.4 220.8 - 2.4 Q4 2010 (1) 110.3 - 1.5 109.8 - 1.4 121.4 - 1.4 120.1 - 1.4 221.3 - 1.9 220.3 - 1.9 Q1 2011 (1) 109.7 - 0.9 109.2 - 0.8 121.6 - 1.1 120.2 - 1.1 221.7 - 1.5 221.1 - 1.5 Q2 2011 (1) 110.4 - 0.9 109.9 - 0.7 122.2 - 1.2 120.8 - 1.1 222.1 - 1.2 223.1 - 1.2 Jul 09 107.8 -0.7 -0.7 107.51 -0.7 -0.8 119.1 -0.4 -0.7 117.80 -0.4 -0.7 214.5 0.0 -1.9 215.35 -0.2 -2.1 Aug 09 108.1 0.3 -0.2 107.89 0.4 -0.3 119.7 0.5 -0.2 118.41 0.5 -0.2 215.4 0.4 -1.4 215.83 0.2 -1.5 Sep 09 108.2 0.0 -0.3 107.91 0.0 -0.5 119.4 -0.2 -0.4 118.12 -0.2 -0.4 215.8 0.2 -1.3 215.97 0.1 -1.3 Oct 09 108.4 0.2 -0.1 108.16 0.2 -0.3 119.5 0.1 -0.2 118.23 0.1 -0.2 216.4 0.3 -0.2 216.18 0.1 -0.2 Nov 09 108.5 0.1 0.5 108.28 0.1 0.4 119.6 0.1 0.4 118.31 0.1 0.3 217.3 0.4 1.9 216.33 0.1 1.8 Dec 09 108.9 0.3 0.9 108.61 0.3 0.8 120.0 0.3 0.9 118.60 0.2 0.8 217.5 0.1 2.8 215.95 -0.2 2.7 Jan 10 (1) 108.2 -0.6 1.1 107.88 -0.7 1.0 119.9 -0.1 1.3 118.51 -0.1 1.2 218.1 0.3 2.8 216.98 0.5 2.8 Feb 10 (1) 108.7 0.4 1.2 108.35 0.4 1.0 120.4 0.4 1.3 119.00 0.4 1.2 218.6 0.2 2.6 217.77 0.4 2.6 Mar 10 (1) 109.2 0.5 1.3 108.94 0.5 1.2 120.5 0.1 1.2 119.16 0.1 1.1 218.9 0.1 2.9 218.93 0.5 2.9 Apr 10 (1) 109.5 0.2 1.2 109.16 0.2 1.0 120.7 0.1 1.2 119.32 0.1 1.1 219.2 0.1 3.1 219.93 0.5 3.1 May 10 (1) 109.5 0.0 1.2 109.21 0.0 1.0 120.8 0.1 1.2 119.46 0.1 1.1 219.4 0.1 3.1 220.59 0.3 3.1 Jun 10 (1) 109.5 0.0 1.0 109.14 -0.1 0.8 120.9 0.0 1.1 119.50 0.0 1.0 219.6 0.1 2.4 220.88 0.1 2.4 Jul 10 (1) 109.1 -0.4 1.2 108.66 -0.4 1.1 120.8 0.0 1.5 119.48 0.0 1.4 219.9 0.2 2.5 220.83 0.0 2.5 Aug 10 (1) 109.3 0.3 1.1 108.94 0.3 1.0 121.3 0.4 1.4 119.93 0.4 1.3 220.3 0.2 2.3 220.72 -0.1 2.3 Sep 10 (1) 109.7 0.3 1.4 109.32 0.3 1.3 121.3 0.0 1.6 119.95 0.0 1.6 220.7 0.2 2.3 220.84 0.1 2.3 Oct 10 (1) 110.1 0.3 1.5 109.69 0.3 1.4 121.4 0.1 1.6 120.05 0.1 1.5 221.0 0.1 2.1 220.84 0.0 2.2 Nov 10 (1) 110.2 0.1 1.5 109.77 0.1 1.4 121.4 0.0 1.4 120.02 0.0 1.4 221.3 0.1 1.9 220.32 -0.2 1.8 Dec 10 (1) 110.5 0.3 1.5 110.08 0.3 1.4 121.5 0.1 1.3 120.12 0.1 1.3 221.5 0.1 1.8 219.80 -0.2 1.8 Updated Next Release Jan 28 Jan Flash HICP (Jan 29) Jan 15 Jan CPI (Feb 23) Jan 15 Jan CPI (Feb 19) Source: BNP Paribas, (1) Forecasts Chart 4: Eurozone HICP (% y/y) Chart 5: US Shelter Prices Drive Core CPI Lower Source: Reuters EcoWin Pro While headline inflation troughed in July, core inflation is forecast to continue grinding lower, as the output gap weighs on ex-food, ex-energy prices. Source: Reuters EcoWin Pro The plunge in shelter inflation remains the driver of the underlying trend in the CPI. Inflation in core goods has eased, however, following a temporary boost from a series of tobacco tax hikes and a sharp contraction in vehicle inventories. Luigi Speranza/Eoin O’Callaghan 29 January 2010 Market Mover 41 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 and 24: Japan: Polarisation in Machine Tool
Page 25 and 26: Australia: The Next Step • Data r
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: JGBs: Supply Continues to Weigh •
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

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