MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
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Market Economics | Interest Rate Strategy | Forex Strategy 23 September 2010<br />
Market Mover<br />
Market Outlook 2-3<br />
Fundamentals 4-17<br />
• US FOMC: Just Doing My Job 4-5<br />
• US: Wealth Fell as Stocks Tanked in 6-7<br />
Q2<br />
• ECB: QE through the Back Door? 8-9<br />
• Eurozone: Reality Bites 10-11<br />
• France: 2011 Budget to Push CPI Up 12-13<br />
• Norway: Cautious Approach 14-15<br />
• Japan: Tankan to Remain Upbeat 16-17<br />
Interest Rate Strategy 18-43<br />
• Global: The Debt/Equity Macro Trade 18<br />
• US: Belly of the Curve is Rich, but… 19-20<br />
• US: A Carry Trade with Extra<br />
21-22<br />
Potential<br />
• MBS: Remain Underweight, GNM 23<br />
CBRs Up<br />
• EUR: Outlook for the Curve 24<br />
• EUR: Re-Enter Flatteners on 5y/10y 25<br />
Segment<br />
• ECB Upcoming Tenders: How<br />
26<br />
Much?<br />
• EGBs: Market Update & Top Trade 27-28<br />
Ideas<br />
• EUR Covered Bonds: Market Update 29-30<br />
• GBP Curve Opportunities Update 31<br />
• Global Inflation Watch 32-35<br />
• Inflation: Bring QE to Europe! 36-37<br />
• Europe iTraxx Credit Indices 38-40<br />
• Technical Analysis 41-42<br />
• Trade Reviews 43<br />
FX Strategy 44-50<br />
• Liquidity-Driven FX Markets 44-47<br />
• Technical Strategy: NOKSEK to 48-49<br />
Extend Downtrend<br />
• Trading Positions 50<br />
Forecasts & Calendars 51-68<br />
• 1 Week Economic Calendar 51-53<br />
• Key Data Preview 54-62<br />
• 4 Week Calendar 63<br />
• Treasury & SAS Issuance 64-65<br />
• Central Bank Watch 66<br />
• Economic & Interest Rate Forecasts 67<br />
• FX Forecasts 68<br />
Contacts 69<br />
• The FOMC statement formalised the bias to ease laid<br />
out in Bernanke’s speech at Jackson Hole.<br />
• The failure to deliver on its dual mandate is prominent<br />
in Fed thinking. More of the same data-wise will open the<br />
door to balance sheet expansion – probably in November.<br />
• Yield curves are back in bull-flattening mode post-<br />
FOMC. New lows for yields will require further weakness in<br />
the data: we look for September’s ISM to fall sharply.<br />
• The Fed’s intentions and those of the ECB look<br />
increasingly divergent, though the latter’s bark may be<br />
worse than its bite. The latest PMI figures suggest the<br />
eurozone is fast losing growth momentum.<br />
• Demand from banks in the eurozone ‘periphery’ is likely<br />
to be strong at the upcoming 3-month ECB tender.<br />
• The JGB market has moved back into bull-flattening<br />
mode, in line with external developments. Volatility in<br />
super-longs has risen but demand should remain robust.<br />
• Global liquidity conditions will continue to drive<br />
currency markets. High-beta and commodity currencies<br />
remain in focus despite signs of softer global growth.<br />
• Elevated inflation is hindering the Bank of England from<br />
following the Fed’s route but there were baby steps<br />
towards more QE in this month’s MPC minutes.<br />
• Against this backdrop, we maintain our EUR/GBP long<br />
and GBP/AUD short positions.<br />
Market Views<br />
Current 1 Week 1 Month<br />
UST 10y T-note Yield (%) 2.52 ↔ ↔<br />
2y/10y Spread (bp) 209 ↔ ↔<br />
EGB 10y Bund Yield (%) 2.29 ↔ ↔<br />
2y/10y Spread (bp) 159 ↔ ↔<br />
JGB 10y JGB Yield (%) 1.04 ↔ ↔<br />
2y/10y Spread (bp) 90 ↔ ↔<br />
Forex EUR/USD 1.3341 ↑ ↓<br />
USD/JPY 84.33 ↓ ↔<br />
www.GlobalMarkets.bnpparibas.com<br />
IMPORTANT NOTICE. Please refer to important disclosures found at the end of<br />
this report. Some sections of this report have been written by our strategy teams<br />
(shown in blue). Such reports do not purport to be an exhaustive analysis and may<br />
be subject to conflicts of interest resulting from their interaction with sales and<br />
trading which could affect the objectivity of this report.
Market Outlook<br />
Fed opens the door to<br />
more stimulus…<br />
…as it fails to deliver on its<br />
mandated objectives<br />
The outcome of the FOMC meeting pretty much matched our expectations,<br />
with the Fed opening the door to “additional accommodation if needed” to<br />
“support the economic recovery” and “return inflation, over time, to levels<br />
consistent with its mandate”. This formalised the bias to ease which had<br />
been laid out in Chairman Bernanke’s speech at Jackson Hole.<br />
We had suggested prior to the FOMC meeting that failure to deliver on its<br />
dual mandate of price stability and maximum sustainable employment would<br />
figure prominently in the Fed’s thinking and so it proved. The change in the<br />
language in the statement with regard to inflation was particularly striking. To<br />
quote: "Measures of underlying inflation are currently at levels somewhat<br />
below those the Committee judges most consistent, over the longer run, with<br />
its mandate to promote maximum employment and price stability”.<br />
If the data continue to paint a picture of sub-par growth, the Fed will continue<br />
to fail to achieve its mandated objectives and additional accommodation will<br />
be required. The bar for action, therefore, is set low: more of the same will<br />
be sufficient to prompt the next phase of balance sheet expansion – which<br />
we continue to believe is most probable at the November FOMC meeting. A<br />
marked improvement in incoming data will be required to forestall the Fed<br />
taking such action.<br />
70<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
US ISM: Downside Risk?<br />
Manufacturing ISM:<br />
New Orders less Inventories (RHS)<br />
ISM Manufacturing:<br />
Headline<br />
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
-20<br />
Source: Reuters EcoWin Pro<br />
Weaker ISM to boost the<br />
case for action<br />
The next key staging post in the assessment of the data is the upcoming run<br />
of business surveys for September, including the ISM for manufacturing at<br />
the end of next week. Our expectation is for a downward surprise relative to<br />
market consensus expectations: we see the headline index forecast sliding<br />
to around 53, its lowest level since early 2009. The gap between the subindices<br />
for new orders and inventories, usually a good leading indicator of<br />
the ‘headline’ ISM index, is pointing to considerable downside potential for<br />
the latter (see chart).<br />
In between times, durable goods orders are likely to have fallen sharply in<br />
August, driven by a drop in aircraft orders. Stripping out the transport sector,<br />
we forecast that orders will rebound but the underlying trend in the ‘core’<br />
data remains weak, indicative of a slowdown in business investment – one of<br />
the better-performing areas of the economy recently.<br />
Ken Wattret 23 September 2010<br />
Market Mover<br />
2<br />
www.GlobalMarkets.bnpparibas.com
ECB on a different page…<br />
…but its bark may be<br />
worse than its bite<br />
BoE shifts towards<br />
additional QE<br />
Yield curves back in bullflattening<br />
mode, with<br />
upcoming data key<br />
High demand from banks<br />
at ECB’s 3-month op<br />
JGB market takes its lead<br />
from elsewhere; superlongs<br />
favoured<br />
Upward pressure on JPY,<br />
downward pressure on<br />
GBP<br />
The Fed’s intentions and those of the ECB look increasingly divergent. While<br />
the ECB’s decision to extend the full allotment procedure for all refinancing<br />
operations until year-end was sensible, it was accompanied in the August<br />
press conference by an assertion from President Trichet that the ECB is still<br />
“in the process of phasing out” its unconventional measures. This was then<br />
followed by comments from Governing Council members highlighting their<br />
discomfort with the “addiction” of some banks to ECB funding.<br />
Will the ECB’s bark be worse than its bite? Given the U-turns which the ECB<br />
has been forced to make before, this is our assumption. The most recent<br />
activity data in the eurozone – most notably the flash PMIs for September –<br />
also signal that the slowdown in growth is gathering momentum. Still, on the<br />
basis of what we hear from the ECB, the risk of a premature exit remains<br />
highest in the eurozone in our view.<br />
The Bank of England MPC, in contrast, seems to be taking some baby steps<br />
towards further easing. That Mr Sentance again voted for a rate rise earlier<br />
this month was not a surprise. But the MPC meeting minutes revealed a<br />
greater concern from more than one member about the increased risk of a<br />
hard landing for the UK economy. There is growing sympathy for further QE<br />
but this has not yet been sufficient to prompt a formal dissent in that<br />
direction.<br />
Unlike the Fed, the Bank of England has its hands tied by elevated inflation<br />
and the risk that this poses to inflation expectations. Our view has been that,<br />
by early 2011, more concrete signs that the downside risks to growth are<br />
materialising and the upside risks to inflation are not would open the door to<br />
additional QE. The MPC minutes, plus recent signs of a lurch downwards in<br />
UK activity, suggest even earlier action is possible.<br />
Yield curves are back in bull-flattening mode post-FOMC. The question is<br />
whether the FOMC statement was the trigger for a new bullish phase or if<br />
further evidence of a US and European slowdown is a precondition for a<br />
lasting rally. In the aftermath of the FOMC, it seems that ‘risk on’ is fizzling<br />
out, reflected in faltering equity markets.<br />
Upcoming data will be pivotal in this respect. Further evidence of slowing<br />
activity and a renewed deceleration in core inflation – both of which we<br />
expect – will be needed for yields to hit new lows.<br />
In the eurozone, keep an eye on the expiry of the ECB’s EUR 225bn of<br />
liquidity provided through 3mth, 6mth and 12mth tenders. Given the origin of<br />
demand at these tenders – mainly banks in the periphery – it is likely that<br />
demand at the 3mth tender at the end of the month will be high from this<br />
source. The upcoming operation will result in a decrease in liquidity but<br />
excess liquidity will persist for a while yet.<br />
The JGB market has moved back into bull-flattening mode, helped by market<br />
developments externally, with the 10-year JGB yield once again approaching<br />
the 1% level and the super-long sector also performing strongly. Volatility<br />
throughout the super-long sector has increased but investor demand is<br />
robust and we expect super-longs to continue to perform well.<br />
Global liquidity conditions will continue to drive currency markets. High beta<br />
and commodity currencies will remain in focus despite increasing signs that<br />
global growth is slowing.<br />
USD/JPY continues to drift lower with commercial JPY buying interest being<br />
the dominant flow. The credibility of Japanese authorities is again likely to be<br />
tested as expectations of Fed action add to pressure for further intervention.<br />
A strong JPY and weak stock prices are particularly unwelcome, given that<br />
the fiscal half-year closing is fast approaching.<br />
With the Bank of England becoming more inclined to further QE, we keep<br />
our EUR/GBP long and GBP/AUD short positions.<br />
Ken Wattret 23 September 2010<br />
Market Mover<br />
3<br />
www.GlobalMarkets.bnpparibas.com
US FOMC: Just Doing My Job<br />
• The FOMC delivered a statement at its<br />
September meeting that formalised a bias<br />
toward easing, largely as expected.<br />
Chart 1: Underlying Inflation “Somewhat<br />
Below” Fed’s Mandate<br />
• It cited its inflation mandate three times,<br />
noting that it is currently falling short.<br />
• We think this sets the bar low for further<br />
action. A failure to accelerate from the current<br />
sub-par growth environment will confirm<br />
something more pervasive than a soft patch and<br />
will lead to further balance sheet expansion as<br />
early as November.<br />
• By proceeding methodically, the FOMC is<br />
building credibility for its policy.<br />
The FOMC delivered a statement at its September<br />
meeting that codified a bias toward easing. The<br />
Committee cited its mandate three times in the<br />
statement, referencing inflation in particular. First, the<br />
statement indicated the Fed is falling short of its<br />
inflation mandate; second, it expressed confidence<br />
that the mandate will be reached over time; and third,<br />
it said the Committee might need to engage in policy<br />
easing in order to achieve the mandate. We think the<br />
take-away is that the data will need to materially<br />
improve from the current sub-par pace of growth to<br />
prevent the Fed from pulling the trigger on further<br />
easing and we continue to see the November FOMC<br />
meeting as the most likely time for the next phase of<br />
balance sheet expansion. The FOMC has no choice;<br />
it is just doing the job Congress mandated it to.<br />
The statement included only modest changes to the<br />
economic paragraph, noting that business<br />
investment is rising "less rapidly than earlier in the<br />
year" but also noting that bank lending continues to<br />
contract "but at a reduced rate”. Clearly, the pace of<br />
deleveraging is being factored into its outlook quite<br />
explicitly and the slower pace of credit contraction is<br />
being considered as a potential positive for growth.<br />
The FOMC continues to cite the slowing in the pace<br />
of hiring and growth, the gradual pace of<br />
improvement in household spending and its<br />
expectation that the economy will see a “a gradual<br />
return to higher levels of resource utilization in a<br />
context of price stability, although the pace of<br />
economic recovery is likely to be modest in the near<br />
term”.<br />
Meanwhile, it strengthened its concerns about<br />
deflationary pressures quite noticeably, saying<br />
"Measures of underlying inflation are currently at<br />
Source: Reuters EcoWin Pro<br />
Chart 2: Rates Falling on Slow Growth,<br />
Prospect of Policy Easing<br />
Source: Reuters EcoWin Pro<br />
levels somewhat below those the Committee judges<br />
most consistent, over the longer run, with its<br />
mandate to promote maximum employment and<br />
price stability”. In other words, as noted in the August<br />
FOMC statement, it is currently failing on its<br />
mandate. The statement goes on to say that inflation<br />
is likely to remain subdued for some time “before<br />
rising to levels the Committee considers consistent<br />
with its mandate”. While the Fed believes it will<br />
succeed in its mandate, the question is how it will do<br />
so. Either the economy will accelerate from here and<br />
resource slack will close over time through organic<br />
propulsion of economic growth or the FOMC will<br />
need to stimulate the economy further through the<br />
printing of more money to prevent a deflationary<br />
dynamic from taking hold. One way or another, the<br />
Fed will get the job done.<br />
The statement also included a new policy paragraph<br />
which indicated that “The Committee will continue to<br />
monitor the economic outlook and financial<br />
Julia Coronado 23 September 2010<br />
Market Mover<br />
4<br />
www.GlobalMarkets.bnpparibas.com
developments and is prepared to provide additional<br />
accommodation if needed to support the economic<br />
recovery and to return inflation, over time, to levels<br />
consistent with its mandate”. Here is the easing bias<br />
laid out in Chairman Bernanke’s Jackson Hole<br />
speech formalised in the FOMC statement.<br />
If the data continue to paint a picture of sub-par<br />
growth, the Fed will continue to fail in its mandates<br />
and additional accommodation will indeed be<br />
needed. The bar for action is therefore low; more of<br />
the same will likely lead to policy action in November.<br />
A material improvement in incoming data will be<br />
required to forestall such an easing.<br />
The Fed embarked on the path to policy easing in<br />
June with a more dovish than expected FOMC<br />
statement. This was followed by a discussion of<br />
policy options in July at the Semi-Annual Monetary<br />
Policy Testimony to Congress, a commitment to<br />
reinvest the roll-off from its mortgage portfolio at the<br />
August FOMC meeting, a frank step towards an<br />
easing bias at Jackson Hole and a formalisation of<br />
that bias by the Committee in September. This<br />
methodical progression has helped build credibility<br />
for further action without startling risky asset markets<br />
or scaring investors away from US securities.<br />
Should the data continue to suggest sub-par growth,<br />
it will become clear that the economy is not just in the<br />
midst of a temporary soft patch and the FOMC will<br />
move decisively to address deflationary risks. By<br />
tying policy actions more to its inflation than its<br />
employment mandate, the Fed is more likely to<br />
maintain credibility; monetary policy has a greater<br />
ability to prevent deflation than to lower the<br />
unemployment rate.<br />
Yet a focus on inflation also allows the FOMC to<br />
factor in the broad spectrum of economic and<br />
financial market conditions. For example, if the<br />
unemployment rate continues to rise, the downside<br />
risks to inflation intensify and the Fed can justify<br />
further policy action. We forecast the unemployment<br />
rate will rise to 9.8% in Q4 and the Fed will expand<br />
its balance sheet.<br />
Julia Coronado 23 September 2010<br />
Market Mover<br />
5<br />
www.GlobalMarkets.bnpparibas.com
US: Wealth Fell, Deleveraging Continued in Q2<br />
• The latest Flow of Funds accounts indicate<br />
that household wealth fell in Q2, largely in line<br />
with the decline in equity indexes.<br />
Chart 1: Net Worth Fell in Q2<br />
• Total domestic debt increased in the first<br />
half of the year as continued private sector<br />
deleveraging was more than offset by federal,<br />
state and local government borrowing.<br />
• Debt ratios have fallen significantly from<br />
their peaks at the beginning of 2008.<br />
Nevertheless, consumers remain cautious in<br />
their spending, focusing primarily on<br />
necessities.<br />
• The business sector data for Q2 indicate<br />
companies’ persistent caution with regard to<br />
investing in expansion or hiring more workers.<br />
Source: Reuters EcoWin Pro<br />
Chart 2: Total Debt Rose as Governments<br />
Borrowed to Finance Deficits<br />
The Federal Reserve’s Flow of Funds accounts<br />
for Q2 2010 showed a drop in household net<br />
worth on the back of stock market declines<br />
Household net worth declined USD 1.52trn to USD<br />
53.5trn in Q2, driven mainly by capital losses on<br />
equity holdings. Meanwhile, real estate values picked<br />
up slightly in Q2 as tax incentives pushed house<br />
prices higher. Broad equity indexes dropped 11.4%<br />
in Q2 but have advanced 9.1% since then –<br />
suggesting net worth will increase in Q3. As shown in<br />
Chart 1, household net worth as a percent of<br />
disposable personal income declined for the first time<br />
since the troughs reached in Q1 2009 and is now<br />
back below levels seen in 1995 (before the start of<br />
the internet bubble in equity prices). The likelihood of<br />
house prices stagnating in H2 and the possibility of<br />
below-potential GDP growth in the coming quarters<br />
have interrupted the recovery in net worth and<br />
flattened the outlook for consumer spending.<br />
Private sector deleveraging continued in Q2 at<br />
roughly the same pace as the beginning of the<br />
year<br />
The data indicate that private sector deleveraging<br />
continued at a rapid pace in Q2. As shown in Chart<br />
2, expansion in public sector borrowing more than<br />
offset the contraction in private sector credit in Q1<br />
and Q2. Federal, state and local governments<br />
borrowed to finance their massive budget deficits.<br />
Household borrowing contracted 2.3% in Q2, an<br />
acceleration from the 1.7% fall in Q1 as both<br />
mortgage and consumer credit posted sizable<br />
declines. Non-financial corporations increased their<br />
borrowing by 3.8% in Q2 following a 5.2% rise in Q1<br />
2010 as firms tapped the bond market in size.<br />
Source: Reuters EcoWin Pro<br />
However, the noncorporate sector reduced its<br />
borrowing by a similar amount and overall the<br />
business sector was neutral on aggregate borrowing.<br />
The financial sector continued to deleverage at a<br />
much faster pace than other sectors, with net<br />
borrowing declining 7.1% after a 7.5% drop the prior<br />
quarter (the pace of decline has nonetheless slowed<br />
from over 10% in 2009).<br />
Debt ratios have fallen significantly from their<br />
peaks at the beginning of 2008. Nevertheless,<br />
consumers remain cautious in their spending,<br />
focusing primarily on necessities<br />
Consumers continued to reduce their debt, largely by<br />
defaulting on their credit cards and mortgages. In<br />
fact, the quarterly government data on commercial<br />
banks suggest charge-off rates on credit cards<br />
reached their all-time highs in Q2, rising to 10.7% of<br />
banks’ average loan balance. The Federal Reserve<br />
Financial Obligation Ratio (FOR), which includes<br />
automobile lease payments, rental payments on<br />
tenant-occupied property, homeowners' insurance<br />
Yelena Shulyatyeva 23 September 2010<br />
Market Mover<br />
6<br />
www.GlobalMarkets.bnpparibas.com
and property tax payments, dropped to levels last<br />
seen in 2000. In the meantime, the ratio of total<br />
household debt to annual disposable personal<br />
income declined in Q2 to 1.2, below its peak of<br />
above 1.3 at the beginning of the last recession<br />
(Chart 3). Both measures suggest consumers<br />
improved their balance sheets and could be closer to<br />
returning to their previous spending habits. However,<br />
the Financial Obligation Ratio probably overstates<br />
the improvement as it assumes consumers can<br />
refinance all their debt at current low rates, which we<br />
know is not the case owing to tight credit and<br />
underwater mortgages. Indeed, recent surveys<br />
indicate consumer optimism remains at levels<br />
historically associated with recession (Chart 4).<br />
According to the latest Beige Book report,<br />
consumers’ “emphasis [is] on necessities and lowerpriced<br />
goods”. Given that equity and house prices<br />
are unlikely to appreciate much in the near term<br />
(indeed, we expect house prices to decline at least<br />
5% from current levels), we expect US consumers’<br />
cautious stance to continue until at least the end of<br />
2012. At that point, the deleveraging that has been<br />
weighing so heavily on growth will have progressed<br />
significantly further.<br />
The Flow of Funds data in Q2 for the nonfinancial<br />
corporate business sector show companies’<br />
persistent caution with regard to investing in<br />
expansion or hiring more workers<br />
Recent incoming data have confirmed that the<br />
recovery continues, although at a very moderate<br />
pace. Apart from consumers’ reluctance to spend,<br />
economic growth has been dampened by<br />
businesses’ reluctance to reinvest their fast-growing<br />
profits. The Q2 Flow of Funds data for the<br />
nonfinancial corporate business sector indicate that<br />
the ratio of liquid assets to short-term liabilities is little<br />
changed at 49.8%, down only slightly from 50.8% at<br />
the end of last year. Meanwhile, employment growth<br />
has slowed to a pace below that required to absorb<br />
population growth, also a reflection that businesses<br />
are loath to expand. In addition, the latest Beige<br />
Book report indicated that capacity utilisation remains<br />
below pre-recession levels. While we saw doubledigit<br />
growth in equipment and software investment<br />
earlier this year, “capital spending plans for<br />
manufacturers and firms in other industries generally<br />
indicate little change or modest increases in coming<br />
months”. While the longest recession since the Great<br />
Depression officially ended in June 2009 according<br />
to the National Bureau of Economic Research, the<br />
latest Flow of Funds accounts suggest businesses<br />
and consumers have yet to regain their confidence.<br />
We therefore see below-trend growth for another<br />
Chart 3: Debt Ratios Continued to Fall<br />
Source: Reuters EcoWin Pro<br />
The FOR includes automobile lease payments, rental payments on tenantoccupied<br />
property, homeowners' insurance and property tax payments.<br />
Chart 4: Consumers Remain Cautious<br />
Source: Reuters EcoWin Pro<br />
Chart 5: Companies Cautious to Invest<br />
Source: Reuters EcoWin Pro<br />
year as the most likely outcome even factoring in<br />
significant monetary stimulus. Monetary easing is<br />
expected to largely offset the drag on growth from<br />
fiscal tightening over the next two years and the pace<br />
of any acceleration in growth will be driven in large<br />
part by the state of the deleveraging cycle.<br />
Yelena Shulyatyeva 23 September 2010<br />
Market Mover<br />
7<br />
www.GlobalMarkets.bnpparibas.com
ECB: QE through the Back Door?<br />
• We suspect that the apparent contradiction<br />
between the phenomenon of wider peripheral<br />
spreads but good peripheral government<br />
auction results could be reconciled by local<br />
banks being the marginal buyers at auctions,<br />
with financing coming from the ECB.<br />
• While some of the effects of this are likely to<br />
be similar to that under QE, we would argue that<br />
this is not QE through the back door, not least<br />
because the scale will likely be small compared<br />
with QE proper.<br />
• Meeting a potential funding gap through<br />
commercial banks is less unpalatable to the<br />
ECB than the ECB buying peripheral debt on its<br />
own account and the EFSF looks as though it<br />
was not meant to be drawn upon. What is<br />
happening is the ‘least worst’ option.<br />
Chart 1: ECB Government Bond Purchases<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Source: ECB<br />
ECB Purchases under the<br />
Securities Markets Programme (EURbn)<br />
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19<br />
Weeks from the Start of the Programme<br />
Chart 2: Portuguese and Irish 10y Bond<br />
Spreads to Bund (bp)<br />
• The practice may make the ECB’s exit<br />
strategy a bit trickier than otherwise<br />
There has rightly been a lot of attention about the<br />
Fed’s throwing the door open to QE in its latest<br />
statement. The market finally seems to have realised<br />
that the deflation warning bells are ringing (we’ve<br />
been banging on about the danger of this for nearly<br />
two years).<br />
But the ECB has eschewed QE and has only bought<br />
a small quantity of peripheral bonds (EUR 61.6bn in<br />
total, Chart 1) for explicitly fiscal/market stability<br />
reasons rather than as a monetary policy initiative.<br />
There is more than one way to skin a cat and there is<br />
more than one way to QE. Let’s examine what’s been<br />
happening.<br />
First, in the bond markets, Ireland’s 10y bond spread<br />
to bunds reached 408bp recently – well above its<br />
high of around 310bp in May. Portugal’s spread has<br />
gone to 396bp compared with a high of 385bp in May<br />
(Chart 2). This suggests rather a low level of demand<br />
for the debt of these countries (some investors have<br />
withdrawn from buying these countries’ debt, others<br />
have scaled back a lot after having been burnt). At<br />
the same time, the auctions for peripheral debt seem<br />
to have been going remarkably well, suggesting good<br />
demand.<br />
Simultaneous signs of poor demand for a country’s<br />
debt in the secondary market but good take-up at<br />
auctions seem in conflict. How to square the circle?<br />
One hypothesis is that the people buying in the<br />
auctions are not the same bunch as those holding<br />
the stock. In particular, there are strong suspicions<br />
Source: Reuters EcoWin Pro<br />
that a lot of bids in the auctions are coming from local<br />
banks. The portion of combined liabilities of the<br />
periphery (Greece, Ireland, and Portugal) funded with<br />
the central bank reached 10.1% in July. That<br />
compares with 7% in January and an average of<br />
1.8% between 2001 and 2007 (Chart 3). The lower<br />
volatility of the 5y CDS spread also supports this<br />
conclusion. The latest monetary statistics from the<br />
ECB relate to July and do not show the big increase<br />
in credit to governments that our hypothesis about<br />
the auctions would suggest. However, we put this<br />
down to local banks’ buying increased amounts of<br />
local debt being a relatively recent phenomenon.<br />
How are the banks financing these purchases?<br />
Probably by repoing the securities with the ECB. This<br />
is where the claim of QE by the back door comes in.<br />
If the ECB lends funds to banks and the banks use<br />
those to purchase govvies, isn’t this akin to QE by<br />
the back door or through an agent, rather than acting<br />
Paul Mortimer-Lee 23 September 2010<br />
Market Mover<br />
8<br />
www.GlobalMarkets.bnpparibas.com
directly to effect outright purchases as the Bank of<br />
England has done?<br />
We would argue, yes and no.<br />
On the yes side:<br />
• There is increased demand for govvies;<br />
• This is financed ultimately by an expansion of the<br />
central bank balance sheet (full allotment tenders<br />
give control of the size of the ECB’s balance<br />
sheet to the private sector);<br />
• Broad money supply rises as does narrow<br />
money; and<br />
• There should be a price effect on the govvies<br />
bought.<br />
On the no side:<br />
• The scale will be massively short of the scale of<br />
QE proper (13% of GDP in the UK’s case);<br />
• The exit for the central bank is easier – it does<br />
not have to sell debt but merely scale back<br />
money market assistance or alter its terms;<br />
• The risks faced by the central bank are smaller<br />
because the commercial banks’ capital is the first<br />
line of defence against markdowns in the values<br />
of government securities;<br />
• The motivation is not monetary easing (though<br />
the effect may be that) but fiscal support;<br />
• It is a less overt form of QE so its effects on<br />
asset markets and the exchange rate may be<br />
smaller; and<br />
• It targets portions of the EUR govvie market, not<br />
the whole of it and so is more akin to ‘credit<br />
easing’.<br />
Overall, while there are similarities to QE proper, we<br />
would see the scale and targeted nature of the<br />
operation as ruling out the operations being seen as<br />
QE proper.<br />
It has a number of implications:<br />
• It intertwines more closely the fate of the local<br />
banks and the government;<br />
• It reduces the appetite (low in the first place) for<br />
the EU institutions to allow restructuring by a<br />
sovereign as the ECB could suffer losses if the<br />
collateral was written down (only true if the bank<br />
pledging the collateral goes under, we admit);<br />
Chart 3: Liabilities Funded with Central Bank<br />
(% of Total)<br />
20<br />
18<br />
Gr<br />
16<br />
14<br />
12<br />
10<br />
8<br />
Irl<br />
6<br />
4<br />
Pt<br />
2<br />
Sp<br />
0<br />
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10<br />
Source: Reuters EcoWin Pro<br />
• It could risk crowding out private sector access to<br />
bank credit;<br />
• It may make the ECB’s exit from extraordinary<br />
measures a bit trickier as it would have to<br />
contemplate the effects on govvie markets as<br />
well as money markets of the exit;<br />
• When it comes to normalising rates some way<br />
down the road, govvie markets may not perform<br />
well, so the ECB would risk damaging the capital<br />
of banks in struggling peripheral countries – also<br />
giving it pause for thought.<br />
Should the ECB be happy to see its facilities being<br />
used in this way? We can speculate that it might not<br />
like the principle of it effectively financing<br />
governments through an agent. However, as long as<br />
the collateral requirements are being met, why<br />
should it worry? Its facilities are there to be used.<br />
This is one way credit and money supply can be<br />
boosted.<br />
Furthermore, what are the alternatives? If institutional<br />
demand falls short of supply, there could be a<br />
renewed crisis in sovereign markets. The ECB is<br />
reluctant to buy on its own account and the EFSF<br />
appears to us as an institution that the eurozone<br />
countries never want to be used. So local bank<br />
buying of govvie debt, while relatively unpalatable to<br />
the ECB, may be the least unpalatable practical<br />
proposition.<br />
Paul Mortimer-Lee 23 September 2010<br />
Market Mover<br />
9<br />
www.GlobalMarkets.bnpparibas.com
Eurozone: Reality Bites<br />
• The slowdown in the manufacturing sector<br />
is gathering momentum, evident in both surveys<br />
and ‘hard’ activity data recently.<br />
• The latest PMI figures also showed weaker<br />
service sector activity, supporting our forecast<br />
of a marked slowdown in GDP growth.<br />
When global economic growth is slowing, there is<br />
often a period of uncertainty when, due to the lagged<br />
impact of this slowdown, the eurozone seems to be<br />
defying gravity – prompting speculation that it will be<br />
largely unaffected by the global downturn. This is<br />
usually followed by a reality check as the eurozone<br />
economy belatedly starts to weaken. The latter now<br />
seems to be occurring.<br />
Manufacturing loses momentum<br />
The eurozone 'flash' PMI figures for September came<br />
in much weaker than was initially expected, with the<br />
weakness broad based across sectors. The PMI for<br />
manufacturing dropped from 55.1 to 53.6, the fourth<br />
month in the past five to register a decline and the<br />
lowest level for the index since January.<br />
The sub-index of new orders fell from 55.3 to 52.8, its<br />
weakest level for a year and a long way down on the<br />
cycle peak of almost 60 in March this year. It is not<br />
just the surveys which are faltering. The m/m fall in<br />
industrial orders in July, of 2.4%, was the biggest<br />
since early 2009 i.e. in the aftermath of the collapse<br />
in activity post-Lehman. After a record-breaking 8%<br />
q/q surge in industrial orders in Q2, Q3’s<br />
performance will be much less impressive: an<br />
unchanged level of orders in the next two months<br />
would deliver a modest 0.5% q/q increase in Q3<br />
overall.<br />
The deterioration in the manufacturing PMI figures is<br />
already indicative of a pronounced slowdown in the<br />
y/y growth rate in actual orders (Chart 1) and the<br />
breakdown of the manufacturing PMI suggests that<br />
the weakness has further to go.<br />
When the PMI figures are released, we always keep<br />
a particularly close eye on the relationship between<br />
the sub-indices for new orders and stocks of finished<br />
goods. This can often be a good guide to the future<br />
path for the ‘headline’ PMI in the sector. In the US<br />
and UK, the differential between orders and stocks<br />
had fallen sharply in the past few months, pointing to<br />
a further deterioration in the ISM and CIPS surveys<br />
for manufacturing in the period ahead.<br />
Chart 1: Eurozone Orders & Manufacturing PMI<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Manufacturing PMI:<br />
New Orders (Lagged 2Mths)<br />
Industrial Orders<br />
(% y/y, Smoothed RHS)<br />
Chart 2: Eurozone Manufacturing PMI Breakdown<br />
1.4 Manufacturing PMI:<br />
Ratio of New Orders to Stocks of Finished Goods<br />
1.3<br />
1.2<br />
1.1<br />
0.9<br />
0.9<br />
0.8<br />
0.7<br />
0.6<br />
0.5<br />
97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Manufacturing PMI: Headline (RHS)<br />
Chart 3: Eurozone Composite PMI & Growth<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
Composite PMI:<br />
Output<br />
20<br />
98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
GDP % (q/q, RHS)<br />
The decline in the eurozone equivalent had, until the<br />
latest month’s data, been much less pronounced. We<br />
suspected that this was merely a result of lags and<br />
the September PMI data support our view: the orders<br />
to stocks ratio has fallen sharply, signalling further<br />
downward pressure on the PMI (Chart 2).<br />
15.0<br />
5.0<br />
-5.0<br />
-15.0<br />
-25.0<br />
-35.0<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
-1.5<br />
-2.0<br />
-2.5<br />
-3.0<br />
Ken Wattret 23 September 2010<br />
Market Mover<br />
10<br />
www.GlobalMarkets.bnpparibas.com
<strong>Services</strong> also on the slide<br />
The ‘flash’ PMI for the eurozone service sector also<br />
fell much more sharply than expected in September,<br />
sliding from 55.9 to 53.6 – the weakest reading since<br />
February. The deterioration was particularly striking<br />
as the services PMI had fared comparatively well in<br />
the prior few months, supported by developments in<br />
the German economy. The new business sub-index<br />
slumped to 52.5, its lowest level since February.<br />
A rare bright spot in the data was the improvement in<br />
the expectations sub-index for services. It rose to its<br />
highest level since April but, as the improvement in<br />
August’s expectations sub-index did not translate into<br />
a pick-up in activity in the sector in September, we do<br />
not see the rise as very significant.<br />
Weaker H2<br />
The composite PMI’s output index merges activity in<br />
the manufacturing and service sectors and, with the<br />
exception of the period after the intensification of the<br />
financial crisis, it has been a decent real-time guide<br />
to eurozone growth trends.<br />
Having fallen in three of the four months to August,<br />
the composite PMI's output index declined again in<br />
September, to 53.8 from 56.2. This represents the<br />
biggest m/m fall since November 2008 at the height<br />
of the panic over the financial crisis. The current level<br />
of the index is indicative of q/q GDP growth in the<br />
eurozone of less than 0.5% (Chart 3): our forecasts<br />
for Q3 and Q4’s q/q growth rates in eurozone GDP<br />
are 0.5% and 0.3%, respectively, and we appear to<br />
be on track to hit those estimates.<br />
Germany not immune<br />
The star performer of the eurozone growth-wise has<br />
been Germany but there too the 'flash' PMI data fell<br />
much further than expected in September. The PMI<br />
for manufacturing fell from 58.2 to 55.3, its lowest<br />
level since January, with the new orders sub-index<br />
down from 57.6 to 53.0. This is the lowest level since<br />
July 2009 and is twelve points down on its cycle peak<br />
in March.<br />
The orders to stocks ratio of the manufacturing PMI<br />
in Germany also fell sharply, suggesting further falls<br />
in the PMI lie ahead (Chart 4). If past relationships<br />
hold, it suggests that the PMI for manufacturing will<br />
head towards the 50 expansion/contraction<br />
threshold.<br />
The services PMI for Germany, which had done very<br />
well recently, also lost more ground than expected in<br />
September, sliding to 54.6 from 57.2, a seven-month<br />
low. The composite PMI’s output index tumbled to<br />
54.8 from 58.4, indicative of a much reduced rate of<br />
growth in German GDP (Chart 5). The new business<br />
Chart 4: German Manufacturing PMI Breakdown<br />
1.4<br />
1.2<br />
1.0<br />
0.8<br />
0.6<br />
Manufacturing PMI:<br />
Ratio of New Orders to Stocks of Finished Goods<br />
Manufacturing PMI:<br />
Headline (RHS)<br />
0.4<br />
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Chart 5: German Composite PMI & Growth<br />
2.0<br />
1.0<br />
0.0<br />
-1.0<br />
-2.0<br />
-3.0<br />
-4.0<br />
98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Composite PMI:<br />
Output (RHS)<br />
GDP (% q/q)<br />
sub-index is down by almost five points in the last<br />
two months alone (to 52.6).<br />
One of the principal uncertainties over the German<br />
outlook has been the extent to which the slowdown in<br />
the manufacturing and export sectors would damage<br />
the improvement in domestic conditions. The latest<br />
PMI figures suggest that the service sector may not<br />
be so resilient. We will watch closely the upcoming<br />
Ifo business climate index for the retail sector which,<br />
like the services PMI, had performed surprisingly well<br />
over the summer months.<br />
Best of the rest<br />
September’s ‘flash’ composite output index in France<br />
was down by just one point relative to the August<br />
level, at a still elevated 58.5, helped by a rise in the<br />
manufacturing PMI to its strongest level since May. It<br />
remains indicative of solid growth, though other<br />
surveys are less robust, and we continue to expect a<br />
gradual slowing of GDP growth in France after the<br />
0.6% q/q increase in Q2.<br />
As usual, we will have to wait until early next month<br />
for the full national breakdown of the PMI data. Top<br />
of the list for scrutiny will be the data on the Spanish<br />
service sector. The PMI in that sector has already<br />
fallen back below 50, supporting our expectation of a<br />
double dip in Spain.<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
70<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
Ken Wattret 23 September 2010<br />
Market Mover<br />
11<br />
www.GlobalMarkets.bnpparibas.com
France: 2011 Budget to Push CPI Up<br />
• The 2011 budget will be presented next<br />
week. We expect the government to revise down<br />
its estimate of the 2010 deficit-to-GDP ratio, to a<br />
still-conservative 7.8% or so.<br />
• Measures aimed at reducing the deficit to<br />
6.0% of GDP next year will push inflation higher<br />
by between 0.16pp and 0.35pp, depending on<br />
the index.<br />
0.7<br />
0.6<br />
0.5<br />
0.4<br />
0.3<br />
0.2<br />
Contribution to<br />
Headline CPI<br />
Inflation (pp)<br />
Chart 1: Tobacco Prices<br />
Tobacco Price Index<br />
(2000 = 100, RHS)<br />
225<br />
200<br />
175<br />
150<br />
125<br />
100<br />
We now expect the public deficit to come in at 7.5%<br />
of GDP this year, the same as in 2009. Indeed, the<br />
government is likely to revise down the official target<br />
of 8.0% when it presents the 2011 budget next week.<br />
In order to reduce further the deficit next year, to<br />
6.0% of GDP, a number of new measures will be<br />
implemented either at the central government level<br />
(to cut the deficit to an expected EUR 96bn) or to<br />
social security. While some of these measures will<br />
result in higher inflation, the impact will vary<br />
considerably between indices.<br />
0.1<br />
0.0<br />
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Sources: Eurostat, INSEE, Reuters EcoWin Pro<br />
Chart 2: Core HICP vs. Underlying CPI<br />
2.50<br />
2.25<br />
Underlying CPI (% y/y)<br />
Core HCPI (% y/y)<br />
2.00<br />
1.75<br />
1.50<br />
75<br />
50<br />
Duty increase…at least on tobacco<br />
The first measure is an increase in the duty on<br />
tobacco (a EUR0.30 hike on a packet of 20<br />
cigarettes). This should lead to a rise in retail tobacco<br />
prices of about 6%, similar to last year’s 5.7% when<br />
prices were raised in November. The date for the<br />
increase is still undecided, 4 October, 8 November or<br />
3 January being the most likely. The hike in duty will<br />
contribute 0.1pp to headline inflation (0.10pp to the<br />
domestic index, where tobacco has a 1.75%<br />
weighting and 0.11pp to the HICP, where the<br />
weighting is 1.91%), although the base effect will<br />
mitigate this impact; the date when it becomes<br />
effective may cause some short-term volatility.<br />
Other duties could also be increased, but this is not<br />
our base scenario. Diesel fuel would be next in line,<br />
in our view, with any rise likely to come on 1 January.<br />
VAT rules on communication services<br />
The government has said it aims to close tax<br />
loopholes in the amount of EUR 10bn in the 2011<br />
budget (with the financial impact being visible either<br />
in 2011 or 2012). Amongst these measures, some<br />
changes will affect VAT and thus inflation. The ISPs<br />
that currently offer triple-play services (phone,<br />
internet and cable TV, usually for EUR 29.90 a<br />
month) will have to apply the normal 19.6% VAT rate<br />
from January 2011. The 5.5% reduced VAT rate that<br />
applies to pay-TV (as a cultural service) will remain<br />
1.25<br />
1.00<br />
0.75<br />
0.50<br />
0.25<br />
0.00<br />
98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
VAT Cut<br />
(home repair)<br />
VAT Cut<br />
(restaurants)<br />
only for pure players. To date, the highly popular<br />
triple-play offers have been taxed half at the normal<br />
rate and half at the reduced rate, something the<br />
European Commission has complained about. The<br />
same applies for mobile phone contracts that include<br />
access to mobile TV as well as for the emerging<br />
quadruple-play (which also includes mobile phone<br />
service). This tax change will mechanically add<br />
6.26% to the price. Although the market is highly<br />
competitive, ISPs say they will pass on the VAT hike<br />
in the final bill (i.e. EUR 1.87/month). We estimate<br />
this will add 0.13pp to headline and ex-tobacco CPI<br />
inflation, a little more to HICP. Given that mobile<br />
phone operators (often the same players as the<br />
ISPs) also have to pay a new tax on antennae, they<br />
may raise prices a little more than the impact of the<br />
VAT hike alone would warrant.<br />
The VAT increase will also add some 0.20pp to core<br />
HICP. However, since the domestic underlying<br />
Dominique Barbet 23 September 2010<br />
Market Mover<br />
12<br />
www.GlobalMarkets.bnpparibas.com
inflation rate is calculated excluding taxes on<br />
consumption, the rise should have no impact on this<br />
measure of inflation (unless providers raise their<br />
prices beyond the VAT tax hike).<br />
Most other measures taken to reduce tax loopholes<br />
will affect household income tax, taxes on savings or<br />
social contributions – none of which are included in<br />
the CPI.<br />
Reducing the health care deficit…<br />
None of the measures included in the pension reform<br />
has a direct impact on inflation. The other major<br />
cause of the deficit is health care, since the share of<br />
health care in total household consumption is on the<br />
rise in France (as elsewhere). Health care costs<br />
amounted to EUR 2,724 per person last year, the<br />
bulk of which was financed by social security (75.5%,<br />
Chart 3). Public financing of health care amounts to<br />
6.5% of GDP.<br />
In order to reduce the social security deficit, further<br />
tightening of rules on health care reimbursement will<br />
be implemented next year, according to reports in the<br />
media. The changes should generate EUR 2.5bn in<br />
2011, which compares to a projected social security<br />
deficit of EUR 12bn for 2010. The economic<br />
slowdown has reduced the pace of increase in health<br />
care expenditure (as some people have cut back on<br />
poorly reimbursed, non-urgent spending such as<br />
dentistry or glasses).<br />
The prices of some goods (medicines) and services<br />
(especially biological tests and radiological<br />
examination) will be cut but the reductions will be<br />
partially offset by an increase in the standard price of<br />
a doctor's examination (from EUR 22 to EUR 23 on<br />
1 January 2011). Overall, the measures will push CPI<br />
inflation down by about 0.06pp. These measures will<br />
be implemented progressively over the course of<br />
2011, as has been the case this year.<br />
The share of standard health services reimbursed by<br />
social security (i.e. excluding hospital or care for<br />
chronic and severe diseases) will be reduced from<br />
70% to 69.5%. The share paid by private insurers will<br />
thus rise from 30% to 30.5%. It is likely that drugs<br />
which are currently reimbursed at 35% by social<br />
security will be reimbursed at 30% only. The HICP,<br />
unlike the CPI, does not capture the full price of<br />
health goods and services but only the proportion<br />
which is not reimbursed by social security. As a<br />
result, the HICP will not benefit as much from lower<br />
prices for health goods and services as the CPI (this<br />
is the main source of divergence between the two<br />
measures of inflation).<br />
Higher contribution rates for social security,<br />
especially for accidents and sickness that occur in<br />
13.8%<br />
Chart 3: Health Care Financing in 2009<br />
9.4%<br />
Source: Le Figaro<br />
1.3%<br />
75.5%<br />
State<br />
Soc. Sec.<br />
Priv. Ins.<br />
the workplace, will result in a EUR 0.8bn increase in<br />
receipts. This will come on top of the natural increase<br />
in social contributions paid by private companies;<br />
these should reach about EUR 3.0bn in 2011, up<br />
from about EUR 2.0bn this year on the back of<br />
increases in employment and wages.<br />
…will also increase the cost of private insurance<br />
A significant share of the social security savings will<br />
result in higher costs for private health insurers,<br />
which cover about 60% of the expenditure not<br />
reimbursed by the public system. However, this<br />
should be compensated by lower prices for some<br />
goods and services.<br />
Nevertheless, private insurance companies will have<br />
to raise their prices (partly paid by employers in large<br />
corporations). A favourable tax regime has been<br />
available for private health insurance, with most<br />
players taking advantage of it. This is one of the tax<br />
loopholes that will disappear in 2011, adding<br />
EUR 1.1bn to insurers’ fiscal burden (and to CADES<br />
income). Overall, private health insurers may have to<br />
hike their rates by 5-8% next year. This would add<br />
around 0.09pp to headline CPI (private health<br />
insurance has a 1.05% weighting in 2010 and this<br />
will rise over time), or 0.10pp to the HICP (where the<br />
weighting is 1.14%).<br />
Altogether, the new measures should result in a<br />
0.26pp contribution in headline CPI inflation in 2011,<br />
raising it from 1.13% to 1.39%. The increase should<br />
be limited to 0.16pp for ex-tobacco CPI, which would<br />
reach 1.32%. The fiscal impact on the headline HICP<br />
is more important at 0.35pp. The 1.5% harmonised<br />
inflation rate we expect would nevertheless be one<br />
tenth below that of the eurozone, which also<br />
incorporates the inflationary impact of fiscal policies<br />
in different countries and higher contribution of food<br />
prices.<br />
Hh<br />
Total:<br />
EUR 162.4bn<br />
Dominique Barbet 23 September 2010<br />
Market Mover<br />
13<br />
www.GlobalMarkets.bnpparibas.com
Norway: Cautious Approach<br />
Chart 1: Policy Rates (%)<br />
• The Norges Bank kept its policy rate at<br />
2.00% at its September meeting, in line with<br />
market expectations.<br />
• The statement accompanying the decision<br />
had a slightly dovish tone compared to the last<br />
one, with inflation described as “low”.<br />
• In terms of external developments, the Bank<br />
flagged up weaker growth expectations for the<br />
US and eurozone.<br />
• We believe the chances of a rate increase in<br />
December have fallen. We now expect the next<br />
hike in Q1 2011.<br />
Source: Reuters EcoWin Pro<br />
Chart 2: Real GDP (% y/y)<br />
Rates on hold<br />
The Norges Bank kept its policy rate at 2.00% at its<br />
September meeting, consistent with its projections<br />
back in June. The statement accompanying the<br />
decision had a slightly dovish tone compared to the<br />
one in August. In the opening paragraph, the Norges<br />
Bank acknowledged that inflation is low and although<br />
activity is increasing, there is “still some spare<br />
capacity in the economy”. The fact that interest rates<br />
are low in other advanced economies also motivated<br />
the Norges Bank to keep the policy rate unchanged<br />
this time round.<br />
Cautious on external developments<br />
In terms of external developments, although the<br />
Bank mentioned stronger than expected growth in its<br />
main trading partners in H1, it also noted that:<br />
• “growth prospects in the US have been lowered”;<br />
and<br />
• “slightly slower growth is also likely in the euro<br />
area ahead”.<br />
Uncertainty regarding the global economic outlook<br />
remains a cause of concern for the Norges Bank. In<br />
August, the statement merely stated that the outlook<br />
for the US economy is “more uncertain”. The recent<br />
assessment showed that the Norges Bank is more<br />
sure that growth will weaken in the US while its<br />
expectations for the eurozone are not so perky<br />
either.<br />
Lower rates justified<br />
One interesting addition to the statement was the<br />
Norges Bank’s assessment of household debt and<br />
house prices. It noted that “the low interest rate level<br />
in Norway has not triggered an increase in household<br />
Source: Reuters EcoWin Pro<br />
debt growth so far and the rise in house prices is<br />
moderate”. We believe this is one of the reasons the<br />
statement had a somewhat dovish tone compared to<br />
the previous release. Given they were singled out in<br />
the statement, developments in household debt and<br />
house prices will be important to watch, to help<br />
gauge the likely action of the Norges Bank in the<br />
coming months.<br />
In the in-depth assessment, there were also some<br />
interesting details. The Norges Bank noted that “new<br />
information may indicate that inflation in the coming<br />
months will be slightly lower than projected in June”.<br />
We believe this is a hint that a downward revision in<br />
the inflation forecasts will come in the new Monetary<br />
Policy Report in October. But in terms of the outlook<br />
for growth, the assessment was that “overall activity<br />
in the Norwegian economy seems to be expanding<br />
approximately in line with the projections” made three<br />
months ago.<br />
What next?<br />
Overall, although the Norges Bank once again noted<br />
that the interest rate should be “gradually brought<br />
Gizem Kara 23 September 2010<br />
Market Mover<br />
14<br />
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closer to a more normal level” to guard against the<br />
risk of future financial imbalances, the statement did<br />
not give any hint that this is to be done soon. In its indepth<br />
assessment, where the Norges Bank laid out<br />
its arguments for why interest rates should be kept<br />
low, it said that expectations that interest rates in<br />
other countries will “remain low for a prolonged<br />
period” also “point in this direction”.<br />
Recent economic releases suggest growth will<br />
accelerate in the quarters ahead. Positive<br />
developments on the consumer side suggest a pickup<br />
in consumer spending in the coming quarters.<br />
Consumer confidence has continued to build and the<br />
downward trend in retail sales seems to have turned<br />
(Chart 3).<br />
On the production side, manufacturing output has<br />
strengthened. Still-loose financial and monetary<br />
conditions are supportive for investment and<br />
therefore production. Although a weak start to the<br />
year suggests contraction in overall investment in<br />
2010, we expect it to gradually increase in the<br />
second half of the year.<br />
Given the key policy rate is still low compared to<br />
what a ‘neutral’ rate should be in Norway, we expect<br />
further rate hikes. But, despite a more positive<br />
domestic outlook, the expected slowdown in the<br />
global economy will limit any acceleration in growth.<br />
We previously expected the next hike to be<br />
delivered, at the earliest, at the end of this year. Back<br />
in June, the Norges Bank’s quarterly policy rate<br />
projections suggested the next rate hike would come<br />
in December, with a 50% probability.<br />
Chart 3: Private Consumption & Retail Sales<br />
Source: Reuters EcoWin Pro<br />
Chart 4: Manufacturing Confidence & Mainland<br />
<strong>Investment</strong> (% y/y)<br />
Source: Reuters EcoWin Pro<br />
Overall, the September statement was slightly more<br />
dovish than we had expected. Given moderate<br />
growth in Norway, our expectation of a slowdown in<br />
its main trading partners and policy rates likely<br />
remaining low for an extended period in the US,<br />
eurozone and UK, we believe the chances of a rate<br />
hike in December have fallen. We expect the next<br />
increase to come in Q1 2011.<br />
Gizem Kara 23 September 2010<br />
Market Mover<br />
15<br />
www.GlobalMarkets.bnpparibas.com
Japan: Tankan to Remain Upbeat<br />
• The September Tankan will likely show that<br />
the corporate sector continued to recover in Q3,<br />
albeit at a slower pace than in Q2. We expect the<br />
current conditions DI of large manufacturers to<br />
rise by 6 points to 7, with that for large<br />
manufacturers picking up 4 points to -1.<br />
• Despite the pressure from the strong yen on<br />
margins, corporate profits probably continued<br />
to increase in Q3 due to the ongoing recovery in<br />
sales volume.<br />
• We expect capex plans (FY 2010) of large<br />
firms to be little changed, with projections of a<br />
3.0% increase for manufacturers (3.3% in June)<br />
and a 2.6% rise for non-manufacturers (2.4%).<br />
Capex is on the mend, but it is hard to expect<br />
businesses to adopt a more aggressive stance<br />
in the near term due to global uncertainties and<br />
yen appreciation.<br />
Improvement in business confidence continues<br />
The September Tankan, due out on Wednesday 29th,<br />
should show that business sentiment continued to<br />
improve, albeit at a slower tempo compared to the<br />
previous survey, with the current conditions diffusion<br />
index (DI) rising to 7 for large manufacturers (1 in the<br />
June survey), -1 for large non-manufacturers (-5), -14<br />
for small manufacturers (-18) and -23 for small nonmanufacturers<br />
(-26). The DI for the corporate sector<br />
as a whole should improve to -11 (-15).<br />
Neutralising strong yen<br />
With the yen having substantially appreciated since<br />
the last survey, attention will be on how much fallout<br />
the currency will have on business confidence this<br />
time around. Even after the intervention by the<br />
Japanese government, the dollar-yen rate is still<br />
running about 5 yen stronger than what firms, on<br />
average, had expected for the second half of FY<br />
2010 in the June survey. This naturally squeezes the<br />
earnings of exporters, inflicting particular damage on<br />
small manufacturers as they have less resistance to<br />
currency appreciation. Besides casting shadows over<br />
profit forecasts, it is also likely that the strong yen will<br />
adversely impact business spending plans to some<br />
degree, as the drop in share prices triggered by yen<br />
appreciation is eroding corporate sentiment.<br />
That said, manufacturers’ sales in Q3 likely<br />
continued to expand solidly, as exports carried on<br />
growing, and the termination of domestic subsidies<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
-50<br />
-60<br />
-70<br />
Chart 1: Business conditions DI,<br />
Large Enterprises<br />
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: BoJ, <strong>BNP</strong> Paribas<br />
Non-manufacturers<br />
Manufacturers<br />
*Q3 2010 figure is <strong>BNP</strong> Paribas' forecast.<br />
for buying eco-friendly cars triggered a rush in lastminute<br />
demand. (The yen on a real effective basis –<br />
an indicator of international competitiveness – is still<br />
weak compared with its average of the past 20<br />
years). We judge that corporate profits continued to<br />
grow in Q3 as sales growth more than offset the<br />
impact of the stronger yen on margins. Incidentally,<br />
manufacturers’ sentiment continued improving in the<br />
first half of 1995 when the yen was significantly<br />
stronger than it is now. Thus, while the rate of<br />
improvement in current conditions DI will likely be<br />
slower than that of the June Tankan, the direction<br />
should still be one of improvement, confirming that<br />
the recovery in the corporate sector is on track.<br />
Uncertainties to weigh on outlook<br />
Of course, there are still strong uncertainties about<br />
the direction of the global economy, to say nothing<br />
about the unstable FX market. In Japan, there are<br />
concerns about what might happen to the economy<br />
when the programmes stimulating consumer<br />
spending end, coupled with fears of policy paralysis<br />
owing to the chaotic political scene (divided Diet,<br />
disunity within the ruling DPJ). As all of these factors<br />
are negative for business sentiment, the DIs for<br />
future business conditions will likely be generally<br />
weak. But even if the DIs for future business<br />
conditions deteriorate, it does not necessarily follow<br />
that the actual Tankan in December will follow suit.<br />
Improvement in manufacturers’ mood slows<br />
As indicated above, we expect the squeeze on profits<br />
from yen appreciation will be the main reason why<br />
business sentiment of large manufactures will<br />
improve just 6 points compared to the very robust 15-<br />
Ryutaro Kono/ Hiroshi Shiraishi 23 September 2010<br />
Market Mover<br />
16<br />
www.GlobalMarkets.bnpparibas.com
point advance in the June Tankan. Production and<br />
sales likely expanded solidly in Q3. True, the<br />
production forecast index points to output growth in<br />
Q3 of just 0.2% q/q, well off the 1.5% q/q tempo<br />
posted in Q2 (and 7.0% q/q in Q1). However,<br />
distortions in the METI’s seasonally-adjusted data –<br />
both the production index and forecast index – cause<br />
readings to have an upward bias in Q4 and Q1 and a<br />
corresponding downward bias in Q2 and Q3.<br />
Excluding such distortions (using a seasonal factor<br />
that pre-dates the Lehman shock), our calculations<br />
suggest that production in Q2 expanded 3.7% q/q<br />
and the outturn for Q3 could be around 4% q/q.<br />
Non-manufacturing sentiment still on mend<br />
Among non-manufacturers, sectors that are direct<br />
beneficiaries of higher manufacturing output and<br />
shipments – such as transport and wholesale –<br />
should show signs of continued improvement in<br />
sentiment. Profits in these sectors should also benefit<br />
over the short term from the yen’s appreciation in<br />
terms of lower energy costs and reduced input prices.<br />
Sentiment should also continue improving in the<br />
retail trade and other consumption-related sectors<br />
thanks to (i) personal consumption remaining firm on<br />
the back of stimulative programmes: (ii) the steady<br />
recovery in household income; and (iii) the boost in<br />
real purchasing power from the strong yen. This<br />
summer’s record-breaking heat wave will probably<br />
not have much overall impact, as the weather was a<br />
boon to some areas but a bane to others. Meanwhile,<br />
sentiment might not improve for construction owing<br />
to the government’s cuts to public works expenditure.<br />
Spending plans largely unchanged from June<br />
We expect the FY 2010 capital spending plans to be<br />
little changed for large firms, namely a 3.0% increase<br />
for large manufacturers (3.3% in June) and a 2.6%<br />
increase for large non-manufacturers (2.4%). [Note:<br />
Comparisons here are with the June Tankan’s<br />
reference series under the new lease accounting<br />
standard that will become the official data series from<br />
the September 2010 Tankan.] Cuts in the spending<br />
plans of small manufacturers will likely be revised to<br />
-1.2% (-7.3% in June), while that of small nonmanufacturers<br />
should be revised to -25.0% (-30.8%).<br />
On an all-enterprises basis, spending plans should<br />
be marked up to a modest -0.9% (-2.3% in June).<br />
That said, upward revisions in the plans of small<br />
companies are normal as these firms do not usually<br />
draw up investment plans at the start of the fiscal<br />
year but gradually rachet their spending up as the<br />
year progresses. Although corporate profits continue<br />
to pick up, albeit at a slower pace, global<br />
uncertainties and the strong yen make it hard to<br />
Chart 2: Real Effective Exchange Rate, JPY<br />
(Sep.1985=100)<br />
180<br />
170<br />
160<br />
Average since 1990<br />
Strong yen<br />
150<br />
140<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
70<br />
Weak yen<br />
60<br />
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10<br />
Source: BoJ, <strong>BNP</strong> Paribas<br />
140<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
Chart 3: Real Exports (2005=100)<br />
70<br />
04 05 06 07 08 09 10<br />
Source: MOF, BoJ, <strong>BNP</strong> Paribas<br />
expect businesses to adopt a more aggressive<br />
stance on capex in the near term.<br />
It is widely felt that the yen’s appreciation has made<br />
manufacturers curb domestic investment and focus<br />
more on beefing up/shifting production overseas.<br />
Certainly, that is one reason why investment<br />
continues to recover more slowly than corporate<br />
earnings. But expansion overseas is due more to the<br />
robustness of Asian economies than to the yen’s<br />
strength. Needed structural changes (termination of<br />
unprofitable production lines, shifting overseas etc.)<br />
that should have proceeded gradually were put on<br />
hold by the yen’s super-weak tone in 2006-2007. The<br />
correction of that super-weak tone now is prompting<br />
manufacturers to resume their suspended overseas<br />
expansion plans. Meanwhile, non-manufacturers<br />
have also given greater weight to investing overseas,<br />
especially in the emerging economies of Asia, due to<br />
the strength of overseas sales. Thus, there is little<br />
prospect that capex will become a key growth engine<br />
for a while.<br />
Ryutaro Kono/ Hiroshi Shiraishi 23 September 2010<br />
Market Mover<br />
17<br />
www.GlobalMarkets.bnpparibas.com
Global: The Debt/Equity Macro Trade<br />
• Analysis of speculative positioning does not<br />
support a long equity / short bonds trade.<br />
• STRATEGY: Equity and debt performance is<br />
likely with rates frozen and unconventional<br />
policy in place.<br />
Chart 1: Speculative US Equity Positioning<br />
100000<br />
50000<br />
0<br />
-50000<br />
-100000<br />
Anecdotal evidence suggests that the "long equity /<br />
short bonds" trade is one of so-called smart money's<br />
big macro trades into year-end. Let's dig into the data<br />
to see what the facts are.<br />
Chart 1 shows the net positioning of non-commercial<br />
players (speculators) in futures and options on the<br />
S&P 500, Nasdaq-100 and Russell 2000. CFTC data<br />
tell us that specs are actually net short the big board<br />
and the Russell, while exposure in tech stocks is<br />
neutral. Note the negative trend in S&P positioning<br />
since 2008!<br />
Chart 2 gives us some clues as to non-commercial<br />
positioning in US government bonds (again, futures<br />
and options). Specs have recently gone net short 2y<br />
Notes, thus reversing the big 2009 roll-down<br />
strategy. On the other hand, we have neutral<br />
positioning in 10y Notes (from aggressive shorts at<br />
the start of this year) and slightly short positioning in<br />
Bonds (but again, big reversal from huge shorts in<br />
2009 and in Q1 2010).<br />
Analysis of speculative flows does not confirm either<br />
a current positioning in or a tendency towards a "long<br />
equity / short bonds" macro strategy. Of course,<br />
we're just looking at a limited window of the global<br />
investment spectrum. So, why the discussion about<br />
this macro trade? Look at Chart 3: not only has<br />
S&P's earnings yield outpaced 10y yields since 2002,<br />
but the gap has even widened during the crisis<br />
(currently, the S&P 500 generates a 6.85% yield on<br />
earnings, while 10y Notes yield about 2.60%). Some<br />
argue that on a risk/reward basis the equity trade<br />
does not make sense. In Chart 4, we show a longterm<br />
series of equity vol (VIX) and bond vol (realised<br />
6m weekly 10y US govt bonds). True, bond vol has<br />
dropped from the 2008/2009 excess, but equity vol<br />
has also dropped substantially, while still generating<br />
more yield than bonds.<br />
Conclusion: Do we really believe the Fed is going to<br />
kill stocks? Do we really believe the Fed is going to<br />
kill the Treasury? The answer is a double no. With<br />
rates frozen and unconventional policy in place, a<br />
period of equity and debt performance lies ahead.<br />
-150000<br />
S&P500 net spec positioning<br />
-200000<br />
Nasdaq100 net spec positioning<br />
-250000 Russell2000 net spec positioning<br />
-300000<br />
2003 2004 2005 2006 2007 2008 2009 2010<br />
Source: CFTC<br />
Chart 2: Speculative US Govvie Positioning<br />
800000<br />
650000<br />
TY net spec positioning<br />
TU net spec positioning (RHS)<br />
US net spec positioning (RHS)<br />
250000<br />
150000<br />
500000<br />
50000<br />
350000<br />
200000<br />
-50000<br />
50000<br />
-150000<br />
-100000<br />
-250000<br />
-250000<br />
-400000<br />
-350000<br />
2003 2004 2005 2006 2007 2008 2009 2010<br />
Source: CFTC<br />
Chart 3: Equity vs Bond Valuation Measures<br />
11.0%<br />
10Y Treasury yield<br />
10.0%<br />
S&P500 earnings yield<br />
9.0%<br />
8.0%<br />
7.0%<br />
6.0%<br />
5.0%<br />
4.0%<br />
3.0%<br />
2.0%<br />
1.0%<br />
1987 1990 1993 1996 1999 2002 2005 2008<br />
180<br />
90<br />
160<br />
10Y TSY vol (6M, bp)<br />
VIX (%, RHS)<br />
80<br />
140<br />
70<br />
120<br />
60<br />
100<br />
50<br />
80<br />
40<br />
60<br />
30<br />
40<br />
20<br />
20<br />
10<br />
0<br />
0<br />
1990 1993 1996 1999 2002 2005 2008<br />
Source: <strong>BNP</strong> Paribas<br />
Alessandro Tentori 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
18<br />
www.GlobalMarkets.bnpparibas.com
US: Belly of the Curve is Rich, but…<br />
• The flattening rally extended the richness<br />
in the belly of the curve. As a result, 2s5s10s is<br />
at an all-time low while 10s30s is close to its<br />
steepest ever.<br />
• These valuations could become even more<br />
extended if rates briskly drop further but a<br />
correction should ensue once rates begin to<br />
stabilise as investors move out along the curve<br />
to grab yield.<br />
• STRATEGY: Once the rally shows signs of<br />
running out of steam, consider the following<br />
trades either in swap or Treasuries: (i) long the<br />
2s5s10s fly (short the belly) and (ii) 10s30s<br />
flattener. Alternatively, initiate conditional bullflatteners,<br />
struck OTM, to ensure that they kick<br />
in only if rates drop further and stay there.<br />
0.8<br />
0.6<br />
0.4<br />
0.2<br />
Chart 1: 2s5s10s Is at an All-Time Low, and<br />
10s30s (Almost) as Steep as Ever<br />
0<br />
-0.2<br />
-0.4<br />
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10<br />
Source: <strong>BNP</strong> Paribas<br />
2s5s10s swap<br />
10s30s swap (RHS)<br />
Chart 2: The 5y Is Rich, but Not to the Same<br />
Extent as in August<br />
1.2<br />
1<br />
0.8<br />
0.6<br />
0.4<br />
0.2<br />
0<br />
-0.2<br />
The FOMC articulated its intention to provide further<br />
accommodation if needed, laying the groundwork for<br />
a new round of asset purchases. First, in anticipation<br />
of the Fed’s nod toward easing, and later in response<br />
to the confirmation of it, the Treasury market rallied,<br />
at times even in the face of stronger equities. With<br />
this rally, and the attendant flattening, the 5y rate has<br />
made a new low and the 10y is within shouting<br />
distance of one.<br />
bps<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
Current 6m ago 6w ago<br />
Cheap<br />
Rich<br />
The belly of the curve has come out as the clear<br />
outperformer in the rally, with 2s5s10s reaching a<br />
new all-time low (see Chart 1). However, despite all<br />
appearances, the belly has not eclipsed the wings to<br />
the same extent it did in the August rally. We say this<br />
because PCA indicates that the rich/cheap signals<br />
are nowhere near the levels seen at the time. For<br />
example the 5y, while rich on the curve, is only about<br />
12bp rich and the 10y actually looks fair (see Chart<br />
2), whereas six weeks ago they were rich by as<br />
much as 25bp and 10bp, respectively. Therefore, it<br />
would not be unprecedented for the 5y and 10y<br />
sectors to extend their valuations in the event of a<br />
further rally. In other words, if we get a brisk rally<br />
from here, there is the risk that 2s5s10s could<br />
tighten, and 5s10s as well as 10s30s could steepen<br />
further.<br />
So, what’s one to do? Our take on this is the<br />
following: 2s5s10s and 10s30s would start to<br />
“correct” once rates find a new (lower) range and<br />
begin to stabilise. This is because investors will likely<br />
extend out the curve in their search for yield once 5s<br />
runs out of juice, similar to what happened with 2s.<br />
-20<br />
-30<br />
1y 2y 3y 5y 7y 10y 15y 20y 30y<br />
Source: <strong>BNP</strong> Paribas<br />
Table 1: Cost of Carry is Not Punitive in Long<br />
2s5s10s Fly and 5s10s/10s30s Flatteners<br />
SWAP TSY<br />
Source: <strong>BNP</strong> Paribas<br />
2s5s10s 5s10s 10s30s<br />
1m -0.9 0.0 -0.8<br />
3m -1.5 0.6 -2.2<br />
6m -2.5 1.2 -4.5<br />
1m -0.7 -0.1 -0.9<br />
3m -2.5 -0.3 -2.5<br />
6m -5.2 -0.7 -5.1<br />
With the 5y Treasury yielding somewhere around<br />
1.3% already, we may not be too far from levels that<br />
would prompt this move out on the curve anyway.<br />
Indeed, the 5s10s curve has been flattening since<br />
last Friday. Given that 2s and to a lesser extent 5s<br />
Bulent Baygun 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
19<br />
www.GlobalMarkets.bnpparibas.com
are more or less hitting a brick wall, 5s10s will dictate<br />
what happens with 2s5s10s, i.e. a flatter 5s10s will<br />
likely widen 2s5s10s.<br />
Applying a similar thought process, we expect the<br />
back end of the curve to flatten as rates settle down.<br />
Treasury 10s30s is trading at 118bp, some 6bp shy<br />
of the all-time high of 124bp in August. In swaps, the<br />
corresponding figures are 79bp (current) vs 89bp,<br />
respectively.<br />
Table 1 shows the carry of these positions. The<br />
2s5s10s fly and 10s30s flatteners carry negatively<br />
but not excessively so. For example, the Treasury<br />
10s30s has a 2bp cost of carry over three months.<br />
On the other hand, 5s10s has positive carry for<br />
Treasuries and negligible carry for swaps.<br />
So, just wait until rates settle down and then act?<br />
Easier said than done, we know. What should we<br />
take as the signal that the rally is running out of<br />
steam and a new range is being established?<br />
Unfortunately, there is no magic formula here. To<br />
circumvent that rather inconvenient challenge, we<br />
make these trades contingent on rates remaining low<br />
for some time (i.e. stability). More specifically, we<br />
recommend conditional bull-flatteners using receivers<br />
struck OTM, indeed below spot levels. This ensures<br />
that we get into the flatteners if rates drop further and<br />
stay there for some time. To state the obvious, the<br />
conditional trade does not protect against a<br />
steepening scenario at low rates.<br />
5s10s is trading at 103bp spot, and 99bp 3m forward<br />
as of this writing, indicating that the carry/rolldown<br />
effect is 4bp against a flattener. Furthermore, ATMF<br />
gamma vol on 10y tails is more expensive than 5y<br />
tails, and receiver skew on 10s is higher, which<br />
means that there is an additional cost to be paid for<br />
doing the trade in conditional form. As an example,<br />
let’s suppose we choose the 5y and 10y strikes 30bp<br />
below the forwards for a 3m bull-flattener. The<br />
breakeven in this case is about 4bp below the<br />
forwards, i.e. the curve has to flatten by 4bp relative<br />
to the current forwards (8bp in total, relative to spot)<br />
to recoup the premium paid upfront. This translates<br />
to a 5s10s spread of around 95bp. For reference, at<br />
the end of August, 5s10s traded in the 91-95bp area<br />
for a brief period once 5s stuck around their lows.<br />
In other words, the conditional flattener lends itself to<br />
the scenario we are depicting in which rates drop and<br />
stay low, establishing a new range and prompting<br />
duration extension trades.<br />
Bulent Baygun 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
20<br />
www.GlobalMarkets.bnpparibas.com
US: A Carry Trade with Extra Potential<br />
• After the FOMC statement, the question<br />
arises once again about a Japan-like scenario.<br />
• We explore a carry trade with a few added<br />
kickers in case the swap and vol curves start<br />
to evolve the way they did during the<br />
beginning of Japan’s experience.<br />
• STRATEGY: Buy 4y1y vs selling 2y1y<br />
receivers, both 50bp OTM and equal notionals.<br />
Holding period is up to one year.<br />
As the front end continues to richen, the carry on<br />
offer keeps getting compressed. What should one<br />
do, since the latest FOMC statement reinforces the<br />
idea that this strategy can still be profitable?<br />
One approach would be to analyse various different<br />
long positions and hunt down the best carry or alpha.<br />
Another approach we explore here is to find a<br />
rolldown strategy that has a few added kickers in<br />
case the vol surface and swap curve start to evolve<br />
the way they did during the beginning of Japan’s<br />
experience.<br />
Rather than simply buying receivers, the trade is to<br />
buy 4y1y vs selling 2y1y receivers (both 50bp OTM,<br />
same notionals). This way, one can capitalise on<br />
the spread between these two forward rates and<br />
also the vol ratio, if we stay mired in the low rate<br />
environment for a while. As we show later, this is<br />
where we see the asymmetric risk that helps the<br />
trade when considering the beginning of Japan's<br />
experience.<br />
Table 1 shows the exact trade details and greeks.<br />
The current entry cost is 27.5c and after one year<br />
the position gains 40% (see Chart 1 for PnL<br />
profile). The rolldown is partly due to positive theta,<br />
but mainly due to the 2y1y leg having a steeper vol<br />
rolldown than the 4y1y. Chart 2 shows that the<br />
2y1y/4y1y vol ratio of around 90% drops sharply to<br />
70% after one year. In Japan, the ratio is 50%.<br />
Since the 4y1y rate is currently 10-20% more volatile<br />
than 2y1y, this makes the position trade like a long<br />
on the market since the 4y1y receiver leg will move<br />
more. Another feature which makes the trade<br />
directional is that the vol ratio tends to fall in a rally –<br />
helping the position – while rising in a selloff (see<br />
Chart 3 for relationship).<br />
250%<br />
200%<br />
150%<br />
100%<br />
50%<br />
0%<br />
Chart 1: PnL Profile Under Rate Shifts<br />
1y Holding<br />
Instantaneous<br />
-50%<br />
-75 -50 -25 0 25 50 75<br />
Change in 5y Rate (with beta-implied curve movement)<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: Sharp Rolldown in Vol Ratio over 1y<br />
140%<br />
130%<br />
120%<br />
110%<br />
100%<br />
90%<br />
80%<br />
70%<br />
2y1y over 4y1y USD Vol Ratio<br />
1y1y over 3y1y USD Vol Ratio<br />
60%<br />
Jan-06 Dec-06 Nov-07 Oct-08 Oct-09 Sep-10<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 3: Vol Ratio has been Directional to Rates<br />
110%<br />
105%<br />
100%<br />
95%<br />
90%<br />
85%<br />
Jan-10 Feb-10 Apr-10 May-10 Jul-10 Sep-10<br />
Source: <strong>BNP</strong> Paribas<br />
2y1y over 4y1y USD Vol Ratio<br />
4y1y USD Rate (right scale)<br />
5.0<br />
4.5<br />
4.0<br />
3.5<br />
3.0<br />
2.5<br />
2.0<br />
Suvrat Prakash 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
21<br />
www.GlobalMarkets.bnpparibas.com
We are comfortable with the directional exposure<br />
given our bullish view into year-end, although one<br />
could buy less notional in 4y1y to account for this.<br />
We choose to use receivers rather than straddles<br />
because this helps the position trade ‘conditional’ on<br />
a scenario of low rates. The position would still be<br />
underwater in a near-term selloff, although the<br />
sensitivity of the position would drop. Finally, we<br />
choose to strike the receivers 50bp below the<br />
forwards so that after one year the strikes are closer<br />
to the forwards, making it easier from a liquidity<br />
standpoint to get out of the position.<br />
The additional features that make us favour this<br />
position stem from the asymmetric risks we see in<br />
the yield spread and relative realised vol between the<br />
two rates. Simply put, if we stay around these rate<br />
levels or go lower, then the closer forward rate<br />
runs out of room to rally and the further-out<br />
forward rate performs relatively better. Chart 4<br />
shows that the 2y1y/4y1y spread is near the top end<br />
of its historical range and so the risk from this<br />
perspective is tilted toward a tightening.<br />
The Japan experience (or at least the beginnings of<br />
it) can provide a useful historical perspective. The<br />
BoJ cut rates to 0% for the first time in 1999, after<br />
which the 1y1y rate soon bottomed out and traded<br />
sideways for several years. Meanwhile, the 3y1y rate<br />
continued to rally and the spread compressed (see<br />
Chart 5).<br />
Another way to look at it is from a vol performance<br />
perspective. While the 1y1y rate in Japan was<br />
trading sideways, the ratio of 3y1y realised vol over<br />
1y1y steadily picked up (see Chart 6).<br />
Chart 4: 2y1y/4y1y Rate Spread Near the Highs<br />
200<br />
150<br />
100<br />
50<br />
0<br />
2y1y vs 4y1y USD Rate Spread<br />
-50<br />
Jan-99 May-01 Sep-03 Jan-06 May-08 Sep-10<br />
Chart 5: After Japan Cut Rates to 0%, the 3y1y<br />
Continued to Rally While 1y1y Went Sideways…<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
Jan-96 May-97 Sep-98 Feb-00 Jun-01 Nov-02<br />
2.5<br />
1y1y JPY Rate<br />
Spread of 1y1y/3y1y JPY Rates (right scale)<br />
Chart 6: …Meaning That 3y1y Realised Vol<br />
Vastly Outperformed 1y1y<br />
1y1y JPY Rate<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
600%<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
3y1y Realized Vol over 1y1y<br />
Realized Vol (right scale)<br />
500%<br />
400%<br />
300%<br />
200%<br />
100%<br />
0.0<br />
Jan-96 May-97 Sep-98 Feb-00 Jun-01 Nov-02<br />
0%<br />
All Charts Source: <strong>BNP</strong> Paribas<br />
Table 1: Trade Details and Greeks<br />
Structure Strike Notional ($) PV ($) PV01 ($) Vega ($) Gamma ($) Theta ($)<br />
Sell 2y1y Rec F-50bp (100,000,000) (220,000) (3,854) (35,996) (251) 385<br />
Buy 4y1y Rec F-50bp 100,000,000 495,000 4,082 63,014 187 (348)<br />
Net 275,000 228 27,017 (64) 36<br />
Source: <strong>BNP</strong> Paribas<br />
Suvrat Prakash 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
22<br />
www.GlobalMarkets.bnpparibas.com
MBS: Remain Underweight, GNM CBRs Up<br />
• Given our macro view of lower rates, we<br />
remain underweight mortgages as they are<br />
trading with shorter durations and are likely to<br />
underperform in a rally.<br />
• The August GNMA Delinquency Report<br />
showed that 30- and 60-day delinquencies were<br />
up, and CBRs increased dramatically for pools<br />
issued by BofA, Citi and GMAC.<br />
The direction of mortgage spreads continues to hinge<br />
on the rates market. Dollar price compression due to<br />
prepayment concerns keeps performance in check in<br />
a rally while a lack of substantial rate lock associated<br />
origination keeps prices from falling too much in a<br />
selloff. Given the statement from the Fed on<br />
Tuesday, which laid the groundwork for further<br />
liquidity easing, we remain bullish on the rates<br />
market. With that view, we also remain negative on<br />
mortgages.<br />
GNMA Delinquency Report<br />
The GNMA Delinquency report for August showed an<br />
increase in 60-day delinquencies for GNMAs across<br />
all products from 1.49 to 1.58; by issuer, we saw<br />
similar results. For instance, BofA 60 day<br />
delinquencies increased from 1.53% to 1.7%, Chase<br />
increased from 1.6% to 1.69%, Citi increased from<br />
1.66% to 1.74%, Wells increased from 1.1% to<br />
1.16%, GMAC increased from 2.22% to 2.34% and<br />
TBW increased from 5.03% to 5.24%. We also saw<br />
increases in 30-day delinquencies from 3.94% to<br />
4.11% across all products. The increases in 30- and<br />
60-day delinquencies are in line with our view that<br />
seasonals and home tax credit were behind the<br />
improved delinquencies earlier in the year; with the<br />
end of these effects, delinquencies have risen.<br />
Overall, 90+ day delinquencies declined from 1.27%<br />
to 1.18%, while CBRs increased from 4.02% to<br />
6.84%. The decline in 90+ day delinquencies and<br />
increase in CBRs was led by BofA, Citi and GMAC.<br />
BofA 90+ delinquencies declined from 1.09% to<br />
0.630% and CBRs increased from 0.06% to 10.52%,<br />
and that was one of the reasons why CPRs on BofA<br />
loans increased substantially in August in addition to<br />
borrowers responding to lower rates. We had<br />
mentioned in our most recent prepayment<br />
commentary that BofA CBRs had declined sharply in<br />
July and the significant increase in CPRs in August<br />
might be due to them catching up after taking a<br />
month off from buying out delinquent loans, and the<br />
delinquency report confirmed this assumption. Citi<br />
Chart 1: Empirical vs Trader Hedge Ratios to<br />
10y Swaps<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
4.0s Empr 4.0s Trader 4.5s Empr 4.5s Trader<br />
5.0s Empr 5.0s Trader 5.5s Empr 5.5s Trader<br />
14-Jun-10 5-Jul-10 26-Jul-10 16-Aug-10 6-Sep-10<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: 30,60 and 90+ Day Delinquencies by<br />
Issuer<br />
BOA CHASE CITI GMAC<br />
Wells<br />
30 60 90+ 30 60 90+ 30 60 90+ 30 60 90+ 30 60 90+<br />
Aug-10 4.28 1.70 0.63 4.89 1.69 0.77 4.60 1.74 0.86 4.66 2.34 5.46 3.22 1.16 0.16<br />
Jul-10 4.04 1.53 1.09 4.67 1.60 0.74 4.34 1.66 1.27 4.60 2.22 5.32 2.96 1.10 0.17<br />
Jun-10 4.24 1.52 0.59 4.78 1.54 0.79 4.36 1.62 1.23 4.72 2.15 5.28 3.10 1.13 0.19<br />
May-10 4.10 1.42 0.57 4.60 1.56 0.77 4.18 1.58 1.15 4.50 2.18 5.21 2.98 1.06 0.19<br />
Apr-10 3.59 1.34 0.56 3.83 1.44 2.20 3.68 1.43 1.12 4.01 1.89 5.14 2.55 0.96 0.19<br />
Mar-10 3.77 1.47 0.56 3.89 1.50 2.27 3.80 1.50 1.13 4.05 1.99 5.00 2.64 1.12 0.23<br />
Feb-10 4.13 1.64 1.12 4.46 1.66 2.53 4.61 1.76 1.25 4.33 2.06 4.93 3.08 1.28 0.27<br />
Jan-10 4.33 1.95 2.22 5.14 2.14 2.56 5.06 2.07 1.27 4.71 2.28 4.71 3.54 1.49 0.38<br />
Dec-09 4.36 1.96 1.72 5.00 2.16 2.40 4.67 2.00 1.32 4.55 2.21 4.40 3.41 1.54 0.64<br />
Nov-09 4.45 1.94 5.32 5.22 2.14 2.36 4.72 2.09 1.31 4.61 2.16 4.28 3.65 1.52 0.96<br />
Oct-09 3.91 1.83 4.87 5.01 2.17 2.16 4.33 2.14 5.71 4.23 2.08 3.87 3.42 1.51 1.27<br />
Sep-09 4.19 1.91 4.54 5.33 2.22 2.30 4.58 2.17 5.50 4.29 2.07 3.70 3.81 1.61 1.43<br />
Aug-09 4.15 1.81 4.61 5.66 2.16 2.16 4.50 2.09 5.29 4.47 1.98 3.30 3.76 1.53 1.86<br />
Jul-09 3.79 1.70 4.47 5.27 2.08 3.33 4.19 1.95 5.07 4.22 1.73 3.05 3.27 1.47 1.71<br />
Jun-09 4.08 1.74 4.45 6.11 1.99 2.75 4.44 1.98 4.84 4.26 1.74 2.86 3.64 1.42 1.59<br />
May-09 3.86 1.68 4.37 5.27 1.75 2.03 4.57 1.99 4.71 3.95 1.70 2.68 3.48 1.32 2.06<br />
Apr-09 3.67 1.64 4.21 4.89 1.61 1.35 4.24 1.92 4.49 3.61 1.59 2.53 3.15 1.27 2.57<br />
Mar-09 3.76 1.69 4.21 4.87 1.55 0.79 4.20 1.78 4.25 3.91 1.63 2.66 3.12 1.26 2.84<br />
Feb-09 4.25 1.83 4.34 5.37 1.70 0.90 4.59 2.07 4.33 4.06 1.77 2.70 3.42 1.46 3.11<br />
Jan-09 4.93 2.22 4.48 6.20 2.08 0.98 5.19 2.32 4.37 4.60 1.96 2.59 3.95 1.71 3.19<br />
Source: <strong>BNP</strong> Paribas<br />
1 Month CBRs<br />
-<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
Chart 3: CBRs by Issuer<br />
Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10<br />
Source: <strong>BNP</strong> Paribas<br />
BOA<br />
CHASE<br />
CITI<br />
GMAC<br />
Wells<br />
90+ delinquencies declined from 1.27% to 0.86%,<br />
while CBRs increased from 6.6% to 12.25%. GMAC<br />
CBRs also saw a substantial increase from 3.97% to<br />
6.1%; however, their 90+ delinquencies remains<br />
above 5%, actually increasing from 5.32% to 5.46%.<br />
Olurotimi Ajibola / Anish Lohokare 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
23<br />
www.GlobalMarkets.bnpparibas.com
EUR: Outlook for the Curve<br />
• The Fed has clearly opened the door for<br />
QEII. QEI was favourable for govvies and<br />
mortgages but also for equities as the liquidity<br />
bonanza supported risk appetite.<br />
Chart 1: QEI Supported Stocks and Bonds<br />
• Things are different this time, with<br />
significant implication for the curve – especially<br />
after the recent sell-off.<br />
• STRATEGY: Short the curve on the 5-10y<br />
segment.<br />
The prospect of more liquidity<br />
The latest FOMC statement made it clear: the Fed is<br />
on the verge of resuming quantitative easing. It is<br />
worth noting that when the Fed conducted QEI in<br />
2009, this allowed both bond and stock markets to<br />
perform well. Indeed, in addition to direct purchases<br />
of debt by the Fed, easier and larger liquidity<br />
supported risk appetite, boosting risky assets such<br />
as commodities and equities. One can therefore<br />
regard the prospect of QEII as providing firm support<br />
for all classes of assets. Of course, the size of<br />
purchases matters when it comes to the impact of<br />
QE. The Fed will have to buy a lot in order to bring<br />
about lower yields and tighter spreads. In the<br />
eurozone, the ECB is only extending non-standard<br />
conditions for tenders and continues to buy small<br />
quantities of sovereign bonds. But the outlook for<br />
coming months is that liquidity will remain ample.<br />
Big difference with 2009<br />
The backdrop for QEI was very different from the<br />
current one. When the Fed started purchases in<br />
2009, the economic outlook was for recovery and<br />
reflation. This is far from the current situation. Signs<br />
of pronounced weakness in the US economy are<br />
mounting, and the euro area is not protected against<br />
a slowdown. In addition, in both areas, the outlook for<br />
inflation is to the downside. Upcoming data should<br />
confirm that core inflation continues to ease. As a<br />
result, upcoming quantitative easing may be less<br />
favourable for riskier classes of assets, in particular<br />
stock markets. This will have major implications for<br />
the curve, particularly after the recent sell-off.<br />
The curve in coming weeks<br />
The strong rally that occurred during the first two<br />
months of summer was almost completely led by the<br />
back end of the curve. Strong receiving interest<br />
dominated, leading to lower long-term yields and a<br />
flatter curve. The sell-off that took place during the<br />
first half of September was more broadly based<br />
across the curve. Indeed, the short end suffered<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 2: Market Direction and the Curve<br />
Source: <strong>BNP</strong> Paribas<br />
significantly, preventing the curve from resteepening<br />
strongly. The question is now whether or not the<br />
resumption of a bullish tone will trigger flattening<br />
pressures.<br />
The sell-off at the short end of the benchmark curve<br />
was linked to risk appetite, which favoured stocks<br />
and weighed on short-dated sovereign debt. Against<br />
this backdrop, if the bullish tone in EGBs goes along<br />
with solid equities, the curve will flatten from the 2y<br />
area as risk appetite will prevent the short end from<br />
rallying. But if upcoming data point to worsening<br />
economic conditions, stock markets will suffer and<br />
the short end will enjoy a decent rally as well. Near<br />
term, we consider the latter situation as more likely.<br />
As a result, we see the bullish tone developing along<br />
with flattening pressures starting only from the belly<br />
of the curve (5y area).<br />
Strategy: Short the curve on the 5-10y.<br />
Patrick Jacq 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
24<br />
www.GlobalMarkets.bnpparibas.com
EUR: Re-Enter Flatteners on 5y/10y Segment<br />
• Eur 5y/10y segment is lagging red/green<br />
Euribor flattening.<br />
• RV inputs point to a spread on swaps in the<br />
mid-50s.<br />
• STRATEGY: We re-entered flatteners after<br />
the dovish FOMC meeting<br />
Eur 5y/10y segment is lagging Euribor red/green<br />
spreads<br />
Chart 1 shows Eur 5y/10y segment and 4 th / 8 th<br />
generic Euribor spread over the past decade. Not<br />
surprisingly – with the exception of some short<br />
periods of time – the series have moved very closely.<br />
However, with the richening of the belly of the Euro<br />
curve (see our desknote on Eur 2y/5y/10y swap fly),<br />
the Eur 5y/10y segment on swaps has dramatically<br />
lagged the flattening of red/green Euribor spreads<br />
materialised by the 4 th /8 th generic spread (the most<br />
correlated one).<br />
Chart 1: Eur 5y/10y Segment & Euribor 4 th /8 th<br />
Calendar Spread<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
-20<br />
Sep-99 Mar-01 Sep-02 Mar-04 Sep-05 Mar-07 Sep-08 Mar-10<br />
Eur 5y/10y spread<br />
Source: <strong>BNP</strong> Paribas<br />
60<br />
40<br />
4th/8th generic Euribor spd (R.H.S)<br />
Chart 2: Eur 5y/10y Spread Hedged with<br />
4 th /8 th Euribor Spread<br />
Eur 5y/10y too steep<br />
200<br />
150<br />
100<br />
50<br />
0<br />
-50<br />
That lag is confirmed through the regression of Eur<br />
5y/10y segment versus red/green spreads gauged by<br />
the 4 th /8 th generic spread. Using that variable since<br />
1999, the regressed 5y/10y segment is trading<br />
almost 2.5 standard deviations above its long-run fair<br />
level, a gap not seen since June 2003!<br />
20<br />
0<br />
-20<br />
-40<br />
Eur 5y/10y too flat<br />
Conditional distribution strengthens traditional<br />
approach results<br />
The excessive steepness of the Euro 5y/10y<br />
segment is also highlighted by a non-parametric<br />
approach such as conditional distribution. Chart 3<br />
represents the distribution of the Euro swap segment<br />
conditional to red/green Euribor spread. The spread<br />
is trading on the far right of its distribution, quite far<br />
from the peak in the mid-50s.<br />
The main risk for Euro flatteners was a disappointing<br />
FOMC meeting on Tuesday. The outcome was<br />
ultimately quiet dovish but the flattening mainly<br />
focused on the 2y/5y segment the following day while<br />
5y/10y marginally moved.<br />
Strategy: We entered flatteners on Wednesday<br />
afternoon on 5y/10y futures at 77.5bp (ctds) targeting<br />
a 65bp level, which is equivalent to the 55/57 area on<br />
swaps. Pure RV players could play the box versus<br />
long Sep 11/Sep 12 Euribor (40k 5y/10y vs 25K<br />
Euribor).<br />
-60<br />
Sep-99 Mar-01 Sep-02 Mar-04 Sep-05 Mar-07 Sep-08 Mar-10<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 3: Distribution of Eur 5y/10y Spread<br />
versus Euribor 4 th /8 th Generic Spread<br />
0.05<br />
0.045<br />
0.04<br />
0.035<br />
0.03<br />
0.025<br />
0.02<br />
0.015<br />
0.01<br />
0.005<br />
EUR swap 5/10 with Euribor 4/8 between 33 & 43<br />
h= 2.947<br />
Peak at 54.9<br />
0<br />
-10 0 10 20 30 40 50 60 70 80 90 100<br />
Source: <strong>BNP</strong> Paribas<br />
Current level: 67.9<br />
Eric Oynoyan 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
25<br />
www.GlobalMarkets.bnpparibas.com
ECB Upcoming Tenders: How Much?<br />
• EUR 225bn is expiring next week and there<br />
is good reason to think that liquidity will drop<br />
from current levels.<br />
• However, the sources of demand at tenders<br />
that expire next week point to significant roll,<br />
especially on the 3mth the ECB will conduct.<br />
• STRATEGY: Enter ER1-ER5 steepening<br />
position.<br />
Chart 1: Large Expiry Ahead<br />
1y MRO<br />
6m<br />
3m<br />
35.67<br />
1m<br />
19.08<br />
131.93 23.17<br />
153.77<br />
37.90<br />
96.94<br />
A very large expiry<br />
EUR 225bn is maturing next week: EUR 75.2bn from<br />
the second 1y tender the ECB carried out last year,<br />
EUR 17.9bn from the 6mth tender conducted in<br />
March and EUR 131.9bn from the 3mth tender<br />
conducted at the end of June. It is worth noting that<br />
the 3mth tender was conducted at the end of June<br />
and allowed banks to roll a significant part of the<br />
amount expiring from the first 1y tender<br />
(EUR442.2bn). The total amount expiring is very<br />
large and the current level of liquidity (EUR 591bn<br />
provided through the MRO and LTROs) is exposed<br />
to a decent decrease. However, looking at the source<br />
of demand at old tenders that expire next week, it<br />
seems that a large amount will be rolled.<br />
What can be expected for demand?<br />
A large part of the answer lies in the source of<br />
demand at the tenders that expire next week. The<br />
EUR 75.2bn 1y tender conducted in September 2009<br />
did not attract arbitrage as the 12mth eonia at that<br />
time was 0.69%, well below the refi rate. Demand<br />
therefore came largely from banks with little access<br />
to the market for long-term liquidity. It is reasonable<br />
to think that at least EUR 50bn will be rolled of the<br />
EUR 75.2bn expiring. When it comes to the EUR<br />
17.9bn from the 6mth tender (conducted at the start<br />
of April), it is interesting to note that liquidity provided<br />
in April 2010 with LTROs by the Bank of Greece to<br />
banks based in Greece increased by EUR 18bn. It is<br />
crystal clear that the EUR 17.9bn is in Greece and<br />
there is a good chance of seeing Greek banks rolling<br />
almost all the amount expiring. Finally, the bulk of<br />
next week’s expiry (EUR 131.9bn) comes from the<br />
3mth tender the ECB conducted on 1 July, the day of<br />
the expiry of the famous EUR 442.2bn tender. At that<br />
time, liquidity fell sharply as arbitrage disappeared,<br />
and demand for the 3mth came when the 3mth<br />
Euribor was at 0.78% and the 3mth eonia at 0.47%.<br />
Once again, it is worth noting that despite the fall in<br />
liquidity, the level of liquidity provided by the Bank of<br />
Greece in July thanks to the LTRO was unchanged<br />
17.88<br />
Maturity (days)<br />
75.24<br />
-20 0 20 40 60 80 100 120<br />
Source: <strong>BNP</strong> Paribas<br />
from June. This means that Greek banks rolled the<br />
expiry of the 1y with the 3mth. LTROs in Ireland fell<br />
almost EUR 20bn in July from June after increasing<br />
by EUR 40bn in June 2009, suggesting that demand<br />
from Irish banks at the 3mth tender in July was a<br />
floor. Given the level of the 3mth Euribor and the<br />
3mth eonia starting on 30 September, respectively<br />
0.90% and 0.54%, it makes sense to see relatively<br />
firm demand as the cost of ECB liquidity is relatively<br />
cheaper than it was three months ago. Against this<br />
backdrop, we see a very large roll of the 3mth expiry,<br />
well above EUR 100bn. As a result, we expect total<br />
demand at next week’s tenders of around EUR<br />
190bn. Two ECB tenders will offer banks the<br />
opportunity to be allotted. The ECB will conduct a<br />
fine-tuning, short-term 6day tender to allow banks to<br />
find liquidity until the next MRO. Given the evolution<br />
of demand at the MRO over many weeks, it appears<br />
that demand for short-term liquidity is roughly stable<br />
in the EUR 150-155bn area. Needs for short-term<br />
liquidity are unlikely to increase next week and we<br />
therefore expect the 6day tender will attract only<br />
moderate demand. Demand at the 3mth will<br />
therefore be very strong.<br />
As a result, with no change in demand at the MRO,<br />
we expect demand for next week’s 3mth tender could<br />
be in the EUR 165bn area and demand at the 6day<br />
close to EUR 25bn. This would lead to a EUR 35bn<br />
drop in liquidity. Given the current level of excess<br />
liquidity, just below EUR 100bn, a drop of EUR 35bn<br />
should not lead to significant upward pressures on<br />
short-term rates. Moreover, the extension of nonstandard<br />
procedures for open market operations<br />
means that there is no rush for very short-term<br />
liquidity. Eonia should remain close to current lows.<br />
This may favour limited resteepening pressures<br />
beyond the 3mth area.<br />
Strategy: Enter ER1-ER5 steepening position.<br />
Patrick Jacq 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
26<br />
www.GlobalMarkets.bnpparibas.com
EGBs: Market Update & Top Trade Ideas<br />
• Greece is outperforming across peripherals,<br />
Portugal and Ireland are breaking new wides<br />
while Spain and Italy are more resilient than in<br />
the past widening episodes.<br />
• This 3-speed Europe’s periphery has been<br />
with us for over a month now and could persist<br />
for the coming months.<br />
• STRATEGY: Italy remains our favourite pick<br />
among the eurozone periphery. We believe the<br />
Greek curve’s steepening could continue in the<br />
near term. On a risk/return framework, we find<br />
Irish Gilts more attractive than PGBs at current<br />
levels.<br />
The way peripheral Europe trades has changed<br />
fundamentally over the past few weeks. We are not<br />
used to seeing Greece outperforming versus the rest<br />
of the periphery while Ireland and Portugal are<br />
breaking new wides every day. For the first time,<br />
Greece is actually feeling the protection of the<br />
EU/IMF mechanism while the market’s focus has<br />
shifted towards the other two small peripheral<br />
countries, i.e. Ireland and Portugal. Spain has been<br />
trading like Italy since the release of the stress test<br />
results in July and this has led to a 3-speed periphery<br />
of (i) Greece, (ii) Portugal and Ireland and (iii) Italy<br />
and Spain. Chart 1 clearly illustrates this point,<br />
showing the changes in ASW since the beginning of<br />
September.<br />
Starting with Greece, the massive steepening move<br />
in 1/2s and 2/10s has continued in the last few<br />
weeks. The disbursement of the second tranche of<br />
the EU/IMF package has been a catalyst for the rally<br />
in the 2011 GGBs. Beyond that, some positive<br />
rhetoric from EU authorities and a bit of praise for the<br />
tough decisions and the degree of fiscal<br />
consolidation that the Greek government has<br />
achieved in the first eight months of the year have<br />
pushed Greek spreads lower. Of course, we have to<br />
treat this compression with a pinch of salt as it is<br />
taking place in very thin markets. It will take longer to<br />
convince investors that Greece can actually avoid<br />
default or restructuring. Irrespective of this, and in<br />
line with the IMF wording, Greece has made a strong<br />
start on its programme and has slowly started being<br />
rewarded for this in terms of spreads behaviour,<br />
especially at the front end. Chart 2 shows the change<br />
in Greek yields across the curve in September.<br />
Continuing with Ireland and Portugal, we saw a<br />
significant widening ahead of their auctions in the<br />
past week. A combination of negative sentiment<br />
Chart 1: 3-Speed Europe’s Periphery in Sep.<br />
100<br />
50<br />
0<br />
-50<br />
-100<br />
-150<br />
-200<br />
-250<br />
Source: <strong>BNP</strong> Paribas<br />
ASW Changes of Peripheral Spread in September<br />
2y 5y 10y 30y<br />
Chart 2: The Steepening of the Greek Curve<br />
Source: <strong>BNP</strong> Paribas<br />
GRE<br />
ITA<br />
SPA<br />
POR<br />
Chart 3: POR & IRE Underperformance in Sep.<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
50<br />
0<br />
-50<br />
-100<br />
-150<br />
-200<br />
-250<br />
-300<br />
-350<br />
-400<br />
-450<br />
3-<br />
2011<br />
8-<br />
2011<br />
Changes in ASW in September<br />
POR<br />
0<br />
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025<br />
Source: <strong>BNP</strong> Paribas<br />
GGBs Yields Change in September<br />
2012 GGBs Following the Rally<br />
2011 GGBs Massive Rally<br />
5-<br />
2012<br />
5-<br />
2013<br />
1-<br />
2014<br />
8-<br />
2014<br />
8-<br />
2015<br />
Longer-end is more resilient to<br />
the compression move<br />
4-<br />
2017<br />
7-<br />
2018<br />
10-<br />
2019<br />
10-<br />
2022<br />
3-<br />
2026<br />
towards peripherals and the upcoming auctions<br />
amplified the usual pre-auction widening that we see<br />
in smaller peripherals. Chart 3 shows the widening<br />
and the flattening that we have seen on both Irish<br />
and Portuguese curves in September so far. 2013/14<br />
maturity bonds have suffered most of the widening<br />
while the longer end has been the most resilient.<br />
After the auction, we witnessed a short-lived<br />
correction in both countries but this was not enough<br />
to pare back the widening of the last weeks.<br />
IRE<br />
IRE<br />
9-<br />
2040<br />
Ioannis Sokos 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
27<br />
www.GlobalMarkets.bnpparibas.com
Next we compare Ireland and Portugal and try to<br />
identify the potential threats and opportunities in the<br />
coming months. Starting with the funding needs and<br />
issuance calendar in these countries, Ireland has<br />
already reached 2010’s funding needs and has<br />
actually started pre-funding for 2011. Despite that,<br />
NTMA officials have stated that there is no plan to<br />
skip an auction and thus we could have some more<br />
prefunding in the remainder of the year, most likely<br />
two more auctions (depending on market conditions).<br />
On the other hand, Portugal has completed 90% of<br />
its issuance target (EUR 19bn of EUR 21bn) and we<br />
expect another EUR 2bn before year-end. Hence,<br />
funding pressures will be limited in the remainder of<br />
the year while the main focus will be on the budget<br />
reports and the projections for 2011 funding needs.<br />
In terms of fiscal consolidation, Portugal appears to<br />
be on a weaker path. Chart 4 shows the Portuguese<br />
cash-basis budget balance, where the development<br />
has been disappointing so far according to our<br />
economists. Over the first eight months of this year,<br />
the deficit was EUR 0.5bn larger than over the same<br />
period last year. On the contrary, in Ireland, there<br />
have been many concerns lately with respect to the<br />
massive amount of government guaranteed bonds<br />
that mature in September. This has led to an<br />
acceleration of the widening of Irish spreads in<br />
combination with the developments on ANGIRI. We<br />
don’t think that these redemptions will cause any<br />
significant problem for the Irish banks and we expect<br />
some risk to be priced out of Irish Gilts once<br />
September has passed. The key statistic to watch in<br />
the near term will be the ECB liquidity absorbed by<br />
Irish banks, where we could see a spike in<br />
September’s data. This spike has already taken<br />
place in Portugal: as Chart 5 shows, the dependence<br />
of Portuguese banks on the ECB has exploded since<br />
April. This is a very worrying trend that could create<br />
more pressure on PGBs as the ECB’s exit strategy<br />
has already become a hot topic in the market.<br />
Chart 6 shows the Irish/Portuguese spreads in all<br />
sectors. The 2y IRE/POR spread has widened the<br />
most from August lows but remains the tightest<br />
sector versus the rest. An overshooting can be seen<br />
on the 5y sector but this is also affected by the fact<br />
that there has been no new 5y benchmark in 2010 in<br />
either country. When we look at the non-parametric<br />
conditional distribution of the 2y IRE/POR spread<br />
based on the latest trading range of the 10y spread,<br />
it is clear from Chart 6 (bottom) that 2y spreads are<br />
on the wide side.<br />
All in all, BTPs remain our favourite pick across the<br />
periphery. We prefer Irish Gilts to PGBs, especially<br />
after September and the end of the government<br />
guaranteed bond massive redemptions. However,<br />
Chart 4: Portugal – Cash-Basis Budget Balance<br />
0<br />
-2<br />
-4<br />
-6<br />
-8<br />
-10<br />
-12<br />
-14<br />
-16<br />
Cash Balance<br />
(EURbn)<br />
2010<br />
2009<br />
Consistent with the<br />
Year-End Target<br />
2007<br />
2006<br />
2008<br />
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 5: ECB Liquidity & Portuguese Banks<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
5 5 5 5 5<br />
Jan-09<br />
Feb-09<br />
Mar-09<br />
Apr-09<br />
Source: <strong>BNP</strong> Paribas<br />
MROs & LTROs<br />
May-09<br />
Bank of Portugal B/S<br />
11 9 9 9 11 12 16 15 15 15 18 36 40 49<br />
Jun-09<br />
Jul-09<br />
Aug-09<br />
Sep-09<br />
excessive volatility makes relative value trades look<br />
too risky as liquidity remains very thin.<br />
Oct-09<br />
Nov-09<br />
+175% Increase<br />
Chart 6: IRE/POR Spreads and Conditional<br />
Distribution of 2y Spreads on 10y Current<br />
Levels<br />
150<br />
100<br />
50<br />
0<br />
-50<br />
-100<br />
-150<br />
-200<br />
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10<br />
0.035<br />
0.03<br />
0.025<br />
0.02<br />
0.015<br />
0.01<br />
0.005<br />
0<br />
10y IRE/POR<br />
2y IRE/POR<br />
Dec-09<br />
Jan-10<br />
Feb-10<br />
Mar-10<br />
15y IRE/POR<br />
5y IRE/POR<br />
-80 -60 -40 -20 0 20 40 60<br />
Source: <strong>BNP</strong> Paribas<br />
Conditional Distribution of 2y IRE/POR Spreads on current<br />
range of 10y spreads<br />
Apr-10<br />
May-10<br />
Jun-10<br />
Jul-10<br />
At current level they<br />
are on the wide side<br />
Ioannis Sokos 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
28<br />
www.GlobalMarkets.bnpparibas.com
EUR Covered Bonds: Market Update<br />
• Activity in the primary market has delivered<br />
several good signs: despite the end of the ECB<br />
CBPP, new EUR issuance has soared in<br />
September and the average size is back to<br />
almost EUR 1bn.<br />
• After an easing in ASW around July/August,<br />
mainly due to the summer lull, covered bonds in<br />
peripheral markets have re-widened since late<br />
August.<br />
• STRATEGY: 1) Underweight Irish and<br />
Portuguese covered bonds, which we expect to<br />
widen further; 2) overweight Spanish and Italian<br />
covered bonds which should start compressing<br />
again; and 3) PGB 4y is priced cheaper than<br />
Caixa Geral De Depositos Covered 4y (CXGD)!<br />
CXGD/PGB 4y and BKIR/GILT 5y ASW<br />
differentials should widen by at least 55bp and<br />
44bp respectively.<br />
Chart 1: New Issuance Soared in September<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Nb. EUR Issues<br />
New EUR Supply (bn)<br />
Total EUR Supply incl. taps (bn)<br />
2006 2007 2008 2009 2010<br />
Source: <strong>BNP</strong> Paribas, Bond Radar<br />
Chart 2: ASW have Re-Widened in Peripherals<br />
Since Late August<br />
350<br />
350<br />
The activity in the primary market has delivered<br />
several good signs. According to Bond Radar, 23<br />
new EUR covered bonds have been issued so far in<br />
September, bringing monthly supply to EUR 22.4bn,<br />
just EUR 5bn below the September 2009 level (Chart<br />
1). Given that i) Sep 2009 was actually the heaviest<br />
September supply and ii) Sep 2010 is close to those<br />
levels even without the ECB’s buying force, this is<br />
impressive and clearly demonstrates a significant reopening<br />
of the covered bond market despite the end<br />
of the ECB CBPP. Another positive development is<br />
the recent increase in the average size of new<br />
covered bonds. The latest had slumped to EUR<br />
700m in May from EUR 1-1.3bn over the past year,<br />
but is now almost back to EUR 1bn (EUR 974mn).<br />
Furthermore, it is noteworthy that Spanish banks<br />
have been able to re-enter the primary market, slowly<br />
in July and August, and significantly this month with<br />
five new bonds totalling EUR 4.5bn. Italian banks<br />
have also been quite active in September with five<br />
new bonds amounting to EUR 4bn, their heaviest<br />
monthly supply so far this year.<br />
However, the situation is different in Ireland and<br />
Portugal where fiscal concerns and stress over Irish<br />
banks are preventing banks from tapping the market.<br />
Further, let’s remember that the latest Irish covered<br />
bond goes back to November last year while the<br />
latest Portuguese covered bond was issued in<br />
March.<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10<br />
Spanish Cedulas Portugal Covered Italy Covered Ireland Covered<br />
Source: <strong>BNP</strong> Paribas, iBoxx Covered Indices (4y-6y)<br />
400<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
-50<br />
Chart 3: PGB 5Y ASW Now Above the iBoxx<br />
Portugal Covered Index ASW<br />
50<br />
0<br />
iBoxx € Portugal Covered<br />
-100<br />
Jul 08 Jan 09 Jul 09 Jan 10 Jul 10<br />
Source: <strong>BNP</strong> Paribas, iBoxx<br />
PGB 5Y<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
Camille de Courcel 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
29<br />
www.GlobalMarkets.bnpparibas.com
After an easing in ASW around July/August,<br />
mainly due to the summer lull, the re-widening<br />
trend observed since late August in the<br />
peripheral markets needs to be differentiated. On<br />
one hand, the iBoxx Ireland Covered index was at a<br />
new high for the year (+20bp compared with early<br />
July levels) at the time of writing, reflecting growing<br />
concerns over the current situation, despite the fact<br />
that the Irish government is now funded until the end<br />
of H1 2011. Given that the risks perceived by<br />
investors with relation to both the issuer and<br />
sovereign bonds are the main drivers of ASW in<br />
peripheral covered bonds, we expect further<br />
widening as long as uncertainties over the banks’<br />
situation prevail, and as long as the growth outlook<br />
does not improve significantly.<br />
With respect to Portuguese banks, the iBoxx<br />
Portugal Covered index remains 20bp below early<br />
July levels so far, despite a fiscal lag and<br />
uncertainties weighing on the country. While<br />
Portuguese covered bonds appear more resilient<br />
than Irish covered bonds for the time being, we<br />
expect more widening in ASW given the current<br />
outlook, but also given the recent jump in reliance on<br />
ECB funding by Portuguese banks.<br />
Chart 4: Irish GILT 5Y ASW Now Equal to the<br />
iBoxx Ireland Covered Index ASW<br />
450<br />
400<br />
iBoxx € Ireland Covered Irish GILT 5Y<br />
350<br />
300<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
-50<br />
-100<br />
Jul 08 Jan 09 Jul 09 Jan 10 Jul 10<br />
Source: <strong>BNP</strong> Paribas, iBoxx<br />
And at a lesser extent:<br />
2) BKIR 5Y is 46bp cheaper than Irish GILT 5Y, but<br />
compared with historical data, BKIR/GILT 5Y ASW<br />
differential should widen by at least 44bp.<br />
On the other hand, as far as Spain and Italy are<br />
concerned, the re-widening has been quite limited so<br />
far (around +10bp from their trough in August) and<br />
they are slightly below their levels early July. We<br />
view this re-widening as a consequence of heavy<br />
supply that needed to be digested by the market.<br />
Once this is over, we expect some ASW<br />
compression since the outlook in Spain and Italy has<br />
improved and since the share of Spanish banks in<br />
ECB funding has somewhat decreased.<br />
Market abnormality<br />
Because covered bonds tend to lag during spread<br />
movements (compared to their respective banks<br />
senior and government bonds) and because they are<br />
less volatile, the jump in Irish GILT and PGB ASW<br />
has not been followed yet by Irish and Portuguese<br />
covered bonds in some cases. Looking at iBoxx<br />
Portugal and Ireland Covered indices in comparison<br />
with their corresponding govvies (Chart 3 and 4), we<br />
are now in a situation where the govvies ASW has<br />
reached the same level as that of the respective<br />
iBoxx Covered index ASW. In the case of Portugal,<br />
PGB ASW is even wider than the iBoxx Covered<br />
index!<br />
In particular, we have spotted the following distortion:<br />
1) PGB 4y is 25bp cheaper than Caixa Geral de<br />
Depositos (CXGD) Covered 4y! Looking at their<br />
historical ASW differential, CXGD/PGB 4y should<br />
widen by at least 55bp.<br />
Camille de Courcel 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
30<br />
www.GlobalMarkets.bnpparibas.com
GBP Curve Opportunities Update<br />
• Sterling curve: enter long reds vs. fronts<br />
and greens.<br />
Chart 1: June 11/June 12/June 13 Sterling Fly<br />
• GBP swap curve: keep here 2y/5y/10y GBP<br />
fly, 5y still has to normalise.<br />
• Cross spreads: Get ready to enter 5y/10y<br />
GBP/Eur compression trades.<br />
45<br />
30<br />
15<br />
0<br />
GBP fly cheap vs. Dollar one<br />
Update on key GBP opportunities<br />
September sell-off provided a few opportunities on<br />
the GBP curve. We do an update here of the trades<br />
recommended recently.<br />
Short-Sterling curve: There has been a dramatic<br />
decoupling between the convexity of the Eurodollar<br />
curve and the Short-Sterling one. The box differential<br />
is back on the upper side of its range in the wake of<br />
the 20bp spike on the Sterling fly. The Latest BoE<br />
minutes highlighted the persistent downside risks on<br />
the UK economy, enhanced by massive and<br />
necessary public spending cuts. In such a context,<br />
the protracted BoE status quo is supportive for<br />
front/red Sterling flatteners while red/green spread<br />
should keep some premium as rate hikes will be<br />
gradually moved from 2011 into 2012. This should<br />
push back front/red/green flies towards August lows.<br />
In terms of RV, we found June 11/June 12/June 13<br />
fly the most interesting one (10bp rolldown). We keep<br />
short positions entered at -4, would add at +1.<br />
Target: -18/-20. Stop loss: +5.<br />
GBP Swap curve: Two weeks ago, we highlighted<br />
the extreme expensiveness of the 5y given the shape<br />
of the money market curve. Nonetheless, the fly<br />
disinverted a bit while the steepening of the money<br />
market curve has been more pronounced, which has<br />
pushed the GBP 5y swap fly to more expensive<br />
levels around 3.5 standard deviations from fair value.<br />
In the past, we saw some flies temporarily reaching<br />
four standard deviations such as the Euro one on the<br />
Lehman collapse but the normalisation occurred in<br />
less than a quarter. So far it seems to be the best<br />
trade in terms of reward profile on the GBP swap<br />
curve with a potential of 30bp (see Chart 3).We<br />
entered 2/3 of the position and are ready to add the<br />
rest on a further overshoot.<br />
GBP/Eur 5y/10y swap box: That box is another way<br />
to play the expensiveness of 5y GBP. In contrast, to<br />
the Euro curve, the GBP 5y/10y segment has been<br />
remarkably stable in the mid-90s over the past six<br />
months. The GBP segment is too high vs. the Euro<br />
using the conditional distribution approach. We would<br />
-15<br />
GBP fly expensive<br />
vs. Dollar one<br />
-30<br />
Jan-10 Mar-10 May-10 Jul-10 Sep-10<br />
Source: <strong>BNP</strong> Paribas<br />
45<br />
35<br />
25<br />
15<br />
5<br />
-5<br />
-15<br />
-25<br />
3/7/11 Sterling fly 3/7/11 Eurodollar fly<br />
Chart 2: Hedged GBP 2y/5y/10y swap fly<br />
Hedged GBP Swap Fly<br />
(1y/2y spread)<br />
5y cheap<br />
5y expensive<br />
-35<br />
Dec-01 Apr-03 Sep-04 Jan-06 Jun-07 Oct-08 Mar-10<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 3: Distribution of GBP Fly vs. Short-<br />
Sterling Front/Red Spread<br />
0.08<br />
0.07<br />
0.06<br />
0.05<br />
0.04<br />
0.03<br />
0.02<br />
0.01<br />
GBP swap 2/5/10 with GBP 2/6 between 48 & 58<br />
h= 1.716<br />
0<br />
-20 -10 0 10 20 30 40 50 60<br />
Source: <strong>BNP</strong> Paribas<br />
Peak at 14.4<br />
Current level: -11.4<br />
2009 regime<br />
enter compression trades on any spike to the<br />
28/31bp area.<br />
Eric Oynoyan 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
31<br />
www.GlobalMarkets.bnpparibas.com
Global Inflation Watch<br />
Eurozone: September HICP Under Focus<br />
Chart 1: German CoL<br />
The figures for the German States, due for release<br />
from Tuesday, and the flash estimate for the<br />
eurozone out on Thursday will provide the first hints<br />
on inflation dynamics in September.<br />
In both cases, following a moderation in August, we<br />
expect energy prices to push the inflation rate higher<br />
over the month together with food. Conversely, core<br />
inflation is forecast to remain broadly stable as some<br />
upward pressures in prices of consumer goods is<br />
offset by subdued dynamics in services.<br />
More specifically in the eurozone, the 1.3% m/m<br />
decline in eurozone energy prices last September will<br />
not be repeated this month, mechanically pushing<br />
energy inflation higher to around 8% y/y, from 6% in<br />
August.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Chart 2: Eurozone HICP<br />
Food inflation should also rise further on the month.<br />
The boost from food price base effects is now past,<br />
but we should increasingly begin to see pass-through<br />
from the recent soft commodity price shock to food<br />
prices in the coming months.<br />
Core inflation, meanwhile, should remain flat for a<br />
second consecutive month at 1.0% y/y. Core inflation<br />
has recovered a little since April’s 0.77% record low,<br />
with both core goods and core services contributing<br />
to the rise. We see scope for core goods inflation to<br />
rise a little further – in part, its strength reflects passthrough<br />
of past euro weakness. But core services<br />
should resume its downward trend given the weak<br />
state of consumer demand and an absence of any<br />
pressure from labour costs. Net, we expect core<br />
inflation to trade flat in September.<br />
Overall, the rise in food and energy will help drive a<br />
rebound in headline inflation to 1.8% y/y, its highest<br />
level since the end of 2008 (ex-tobacco index at<br />
109.79).<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Chart 3: GSCI vs. Eurozone Food Alchool and<br />
Tobacco (FAT) Index<br />
Looking beyond August, headline inflation is likely to<br />
trend slightly higher over the remainder of the year,<br />
as some stabilisation in core inflation is combined<br />
with higher inflation in the most volatile components<br />
of the index (Chart 3).<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Luigi Speranza/Eoin O’Callaghan 23 September 2010<br />
Market Mover<br />
32<br />
www.GlobalMarkets.bnpparibas.com
Table 1: <strong>BNP</strong> Paribas' Inflation Forecasts<br />
Eurozone<br />
France<br />
US<br />
Headline HICP Ex-tobacco HICP<br />
Headline CPI<br />
Ex-tobacco CPI<br />
CPI Urban SA CPI Urban NSA<br />
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<br />
2009 108.1 - 0.3 107.9 - 0.2 119.3 - 0.1 118.0 - 0.1 214.5 - -0.3 214.5 - -0.4<br />
2010 (1) 109.8 - 1.6 109.5 - 1.5 121.1 - 1.5 119.7 - 1.4 218.3 - 1.7 218.2 - 1.7<br />
2011 (1) 111.5 - 1.6 111.1 - 1.5 122.7 - 1.4 121.3 - 1.3 221.5 - 1.5 221.4 - 1.5<br />
Q3 2009 108.0 - -0.4 107.8 - -0.5 119.4 - -0.4 118.1 - -0.4 215.4 - -1.6 215.7 - -1.6<br />
Q4 2009 108.6 - 0.4 108.4 - 0.3 119.7 - 0.4 118.4 - 0.3 216.8 - 1.5 216.2 - 1.4<br />
Q1 2010 108.6 - 1.1 108.3 - 1.0 120.3 - 1.3 119.0 - 1.2 217.6 - 2.4 217.0 - 2.4<br />
Q2 2010 110.0 - 1.5 109.7 - 1.4 121.3 - 1.6 120.0 - 1.5 217.2 - 1.8 218.1 - 1.8<br />
Q3 2010 (1) 109.9 - 1.7 109.5 - 1.6 121.2 - 1.5 119.8 - 1.5 218.1 - 1.3 218.3 - 1.2<br />
Q4 2010 (1) 110.7 - 1.9 110.4 - 1.9 121.4 - 1.5 120.0 - 1.4 220.0 - 1.5 219.3 - 1.5<br />
Q1 2011 (1) 110.5 - 1.8 110.2 - 1.7 121.8 - 1.2 120.4 - 1.2 220.9 - 1.5 220.4 - 1.5<br />
Q2 2011 (1) 111.6 - 1.5 111.2 - 1.4 122.8 - 1.2 121.3 - 1.1 221.3 - 1.9 222.1 - 1.9<br />
Jan 10 108.1 -0.8 1.0 107.75 -0.8 0.9 119.7 -0.2 1.1 118.32 -0.2 1.0 217.6 0.2 2.7 216.69 0.3 2.6<br />
Feb 10 108.4 0.3 0.9 108.10 0.3 0.8 120.4 0.6 1.3 118.99 0.6 1.2 217.6 0.0 2.2 216.74 0.0 2.1<br />
Mar 10 109.4 0.9 1.4 109.09 0.9 1.3 120.9 0.5 1.6 119.58 0.5 1.5 217.7 0.1 2.4 217.63 0.4 2.3<br />
Apr 10 109.9 0.5 1.5 109.58 0.4 1.4 121.3 0.3 1.7 119.90 0.3 1.6 217.6 -0.1 2.2 218.01 0.2 2.2<br />
May 10 110.0 0.1 1.6 109.71 0.1 1.5 121.4 0.1 1.6 120.04 0.1 1.6 217.2 -0.2 2.0 218.18 0.1 2.0<br />
Jun 10 110.0 0.0 1.4 109.70 0.0 1.3 121.4 0.0 1.5 120.02 0.0 1.4 216.9 -0.1 1.1 217.97 -0.1 1.1<br />
Jul 10 109.7 -0.3 1.7 109.31 -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<br />
Aug 10 109.9 0.2 1.6 109.54 0.2 1.5 121.3 0.2 1.4 119.97 0.2 1.3 218.2 0.3 1.2 218.31 0.1 1.1<br />
Sep 10 (1) 110.1 0.2 1.8 109.79 0.2 1.7 121.2 -0.1 1.5 119.85 -0.1 1.5 218.7 0.3 1.3 218.71 0.2 1.3<br />
Oct 10 (1) 110.5 0.3 1.9 110.18 0.3 1.9 121.3 0.1 1.5 119.95 0.1 1.5 219.5 0.4 1.5 219.40 0.3 1.5<br />
Nov 10 (1) 110.6 0.1 1.9 110.25 0.1 1.8 121.4 0.0 1.4 119.93 0.0 1.4 219.8 0.1 1.4 219.25 -0.1 1.4<br />
Dec 10 (1) 111.0 0.4 2.0 110.68 0.4 1.9 121.6 0.2 1.4 120.16 0.2 1.3 220.6 0.4 1.6 219.24 0.0 1.5<br />
Jan 11 (1) 110.0 -0.9 1.8 109.68 -0.9 1.8 121.3 -0.3 1.4 119.84 -0.3 1.3 220.8 0.1 1.5 219.91 0.3 1.5<br />
Feb 11 (1) 110.4 0.4 1.9 110.07 0.4 1.8 121.9 0.5 1.3 120.45 0.5 1.2 220.9 0.1 1.5 220.15 0.1 1.6<br />
Mar 11 (1) 111.1 0.6 1.6 110.74 0.6 1.5 122.2 0.3 1.1 120.78 0.3 1.0 221.1 0.1 1.5 221.08 0.4 1.6<br />
Apr 11 (1) 111.4 0.3 1.4 111.05 0.3 1.3 122.6 0.3 1.1 121.10 0.3 1.0 221.2 0.1 1.7 221.66 0.3 1.7<br />
May 11 (1) 111.6 0.2 1.5 111.25 0.2 1.4 122.8 0.2 1.2 121.36 0.2 1.1 221.3 0.0 1.9 222.23 0.3 1.9<br />
Jun 11 (1) 111.7 0.1 1.6 111.36 0.1 1.5 122.9 0.1 1.3 121.49 0.1 1.2 221.4 0.0 2.1 222.54 0.1 2.1<br />
Updated<br />
Next<br />
Release<br />
Sep 23<br />
Sep Flash HICP (Sep 30)<br />
Sep 23<br />
Sep CPI (Oct 13)<br />
Sep 17<br />
Sep CPI (Oct 15)<br />
Source: <strong>BNP</strong> Paribas, (1) Forecasts<br />
Chart 4: Eurozone Core HICP (% y/y)<br />
Chart 5: US Core CPI (% y/y)<br />
Source: Reuters EcoWin Pro<br />
Since printing an all-time low in April, core inflation has been a<br />
touch stronger in recent months, reflecting gains in both core<br />
goods and core services inflation. While we expect core services<br />
inflation to head lower, the rebound in core goods has further to<br />
run. We expect a brief interruption to the downward trend in core.<br />
Source: Reuters EcoWin Pro<br />
The downward trend in shelter inflation was recently interrupted<br />
and leading indicators suggest its strength will continue to year<br />
end. The renewed collapse in the housing market should see a<br />
reversion to a downward trend from early next year.<br />
Luigi Speranza/Eoin O’Callaghan<br />
Market Mover<br />
33<br />
23 September 2010<br />
www.GlobalMarkets.bnpparibas.com
Table 2: <strong>BNP</strong> Paribas' Inflation Forecasts<br />
Japan<br />
UK<br />
Sweden<br />
Core CPI SA<br />
Core CPI NSA<br />
Headline CPI RPI<br />
CPI CPIF<br />
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<br />
2009 100.3 - -1.3 100.3 - -1.3 110.8 - 2.1 213.7 - -0.5 299.7 - -0.3 191.2 - 1.9<br />
2010 (1) 99.2 - -1.1 99.3 - -1.0 114.4 - 3.3 223.3 - 4.5 303.0 - 1.1 194.9 - 1.9<br />
2011 (1) 98.6 - -0.6 98.6 - -0.6 117.2 - 2.4 229.9 - 2.9 309.2 - 2.0 197.2 - 1.2<br />
Q3 2009 99.9 - -2.3 100.1 - -2.3 111.3 - 1.5 214.4 - -1.4 299.5 - -1.2 191.6 - 1.6<br />
Q4 2009 99.7 - -1.8 99.9 - -1.8 112.1 - 2.1 216.9 - 0.6 301.3 - -0.4 193.2 - 2.3<br />
Q1 2010 99.7 - -1.3 99.3 - -1.2 112.9 - 3.2 219.3 - 4.0 301.2 - 1.0 194.0 - 2.6<br />
Q2 2010 99.3 - -1.2 99.3 - -1.2 114.4 - 3.4 223.5 - 5.1 302.8 - 1.1 194.9 - 2.1<br />
Q3 2010 (1) 98.8 - -1.1 99.1 - -1.0 114.7 - 3.0 224.3 - 4.6 302.6 - 1.0 194.6 - 1.6<br />
Q4 2010 (1) 99.1 - -0.6 99.3 - -0.6 115.6 - 3.1 226.3 - 4.3 305.4 - 1.4 195.9 - 1.4<br />
Q1 2011 (1) 98.8 - -0.9 98.4 - -0.9 116.1 - 2.8 227.4 - 3.7 305.2 - 1.3 195.2 - 0.6<br />
Q2 2011 (1) 98.6 - -0.7 98.6 - -0.7 117.1 - 2.4 229.5 - 2.7 308.3 - 1.8 197.0 - 1.0<br />
Jan 10 99.6 -0.1 -1.3 99.2 -0.6 -1.3 112.4 -0.2 3.4 217.9 0.0 3.7 299.8 -0.6 0.6 193.0 -0.2 2.6<br />
Feb 10 99.8 0.2 -1.2 99.2 0.0 -1.2 112.9 0.4 3.0 219.2 0.6 3.7 301.6 0.6 1.2 194.2 0.6 2.7<br />
Mar 10 99.8 0.0 -1.2 99.5 0.3 -1.2 113.5 0.5 3.4 220.7 0.7 4.4 302.3 0.2 1.2 194.7 0.3 2.5<br />
Apr 10 99.3 -0.5 -1.5 99.2 -0.3 -1.5 114.2 0.6 3.7 222.8 1.0 5.3 302.4 0.0 1.0 194.8 0.0 2.2<br />
May 10 99.3 0.0 -1.2 99.3 0.1 -1.2 114.4 0.2 3.3 223.6 0.4 5.1 302.9 0.2 1.2 195.0 0.1 2.1<br />
Jun 10 99.2 -0.1 -1.0 99.3 0.0 -1.0 114.6 0.2 3.2 224.1 0.2 5.0 303.0 0.0 0.9 195.0 0.0 1.9<br />
Jul-10 98.9 -0.3 -1.1 99.0 -0.3 -1.1 114.3 -0.3 3.1 223.6 -0.2 4.8 302.0 -0.3 1.1 194.3 -0.3 1.7<br />
Aug 10 (1) 98.8 -0.1 -1.0 99.1 0.1 -1.0 114.9 0.5 3.1 224.5 0.4 4.7 302.1 0.0 0.9 194.3 0.0 1.4<br />
Sep 10 (1) 98.8 0.0 -1.0 99.2 0.1 -1.0 114.9 0.0 3.0 224.7 0.1 4.4 303.6 0.5 1.1 195.2 0.5 1.5<br />
Oct 10 (1) 99.2 0.4 -0.5 99.6 0.4 -0.5 115.2 0.3 3.1 225.6 0.4 4.4 305.0 0.5 1.3 195.9 0.3 1.5<br />
Nov 10 (1) 99.2 0.0 -0.6 99.3 -0.3 -0.6 115.5 0.2 3.1 226.2 0.3 4.4 305.3 0.1 1.4 196.0 0.1 1.5<br />
Dec 10 (1) 99.0 -0.2 -0.7 99.1 -0.2 -0.7 116.2 0.6 3.2 227.2 0.4 4.2 306.0 0.3 1.4 195.9 -0.1 1.2<br />
Jan 11 (1) 98.9 -0.1 -0.7 98.5 -0.6 -0.7 115.8 -0.3 3.1 226.7 -0.2 4.0 303.7 -0.8 1.3 194.4 -0.7 0.7<br />
Feb 11 (1) 98.8 -0.1 -1.0 98.2 -0.3 -1.0 116.2 0.3 2.9 227.5 0.3 3.8 305.1 0.5 1.2 195.2 0.4 0.5<br />
Mar 11 (1) 98.7 -0.1 -1.1 98.4 0.2 -1.1 116.4 0.2 2.5 228.0 0.2 3.3 306.8 0.6 1.5 196.1 0.4 0.7<br />
Apr 11 (1) 98.6 -0.1 -0.7 98.5 0.1 -0.7 116.8 0.3 2.3 228.7 0.3 2.7 307.8 0.3 1.8 196.7 0.3 1.0<br />
May 11 (1) 98.7 0.1 -0.6 98.7 0.2 -0.6 117.2 0.3 2.4 229.5 0.4 2.7 308.3 0.2 1.8 197.0 0.2 1.0<br />
Jun 11 (1) 98.5 -0.2 -0.7 98.6 -0.1 -0.7 117.3 0.1 2.4 230.2 0.3 2.7 308.9 0.2 1.9 197.2 0.1 1.1<br />
Updated<br />
Next<br />
Release<br />
Sep 16<br />
Aug CPI (Oct 1)<br />
Sep 16<br />
Sep CPI (Oct 12)<br />
Sep 16<br />
Sep CPI (Oct 12)<br />
Source: <strong>BNP</strong> Paribas, (1) Forecasts<br />
Chart 6: Japanese CPI (% y/y)<br />
Chart 7: UK CPI (% y/y)<br />
Source: Reuters EcoWin Pro<br />
Prices are expected to continue falling but the pace of decline is<br />
easing as the economy recovers.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
We expect inflation to remain above target for the remainder of the<br />
year, although trending down.<br />
Luigi Speranza/Eoin O’Callaghan<br />
Market Mover<br />
34<br />
23 September 2010<br />
www.GlobalMarkets.bnpparibas.com
Table 3: <strong>BNP</strong> Paribas' Inflation Forecasts<br />
Canada Norway Australia<br />
CPI Core CPI Headline CPI Core<br />
CPI<br />
Core<br />
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<br />
2009 114.4 0.3 113.6 1.8 125.7 2.2 118.4 2.6 167.8 - 1.8 - - 3.7<br />
2010 (1) 116.5 1.8 115.5 1.6 128.6 2.3 120.0 1.4 173.2 - 3.2 - - 2.7<br />
2011 (1) 118.6 1.8 117.1 1.4 130.4 1.4 121.9 1.5 179.0 - 3.4 - - 2.9<br />
Q3 2009 114.7 0.5 -0.9 113.9 1.2 1.6 125.8 0.0 1.8 118.5 0.0 2.4 168.6 1.0 1.3 - - 3.5<br />
Q4 2009 114.9 0.6 0.8 114.4 1.9 1.6 126.6 0.6 1.4 119.3 0.7 2.3 169.5 0.5 2.1 - - 3.3<br />
Q1 2010 115.4 2.0 1.6 114.9 1.6 1.9 128.4 1.4 2.9 119.4 0.1 2.0 171.0 0.9 2.9 - - 3.1<br />
Q2 2010 116.2 2.6 1.4 115.5 2.3 1.8 129.1 0.6 2.6 120.3 0.8 1.5 172.1 0.6 3.1 - - 2.7<br />
Q3 2010 (1) 117.0 2.7 2.0 115.6 0.3 1.5 128.2 -0.7 1.9 120.0 -0.3 1.2 174.1 1.2 3.3 - - 2.6<br />
Q4 2010 (1) 117.4 1.5 2.2 116.0 1.2 1.4 128.8 0.5 1.7 120.5 0.4 1.0 175.4 0.7 3.5 - - 2.7<br />
Q1 2011 (1) 117.9 1.6 2.1 116.4 1.6 1.4 129.1 0.2 0.5 120.7 0.2 1.1 177.0 0.9 3.5 - - 2.7<br />
Q2 2011 (1) 118.3 1.7 1.9 116.9 1.7 1.2 130.4 1.0 1.0 122.0 1.0 1.4 177.9 0.5 3.4 - - 2.8<br />
Updated<br />
Sep 21<br />
Sep 16 Sep 16<br />
Next<br />
Release<br />
Sep CPI (Oct 22)<br />
Sep CPI (Oct 11) Q3 CPI (Oct 27)<br />
Source: <strong>BNP</strong> Paribas, (1) Forecasts<br />
Chart 8: Canadian Total Versus Core CPI<br />
Chart 9: Australian CPI (% y/y)<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Wage pressures appear subdued, suggesting that underlying<br />
inflation should remain close to the BoC's 2% target.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Near-term inflation pressures should be muted but, with the limited<br />
spare capacity in the labour market being eroded, underlying<br />
inflation is likely to settle near the top of the RBA's target range.<br />
CPI Data Calendar for the Coming Week<br />
Day GMT Economy Indicator Previous<br />
<strong>BNP</strong>P<br />
F’cast<br />
Consensus Comment<br />
Tue 28/09 Germany CPI (Prel) m/m : Sep 0.0% -0.2% -0.1% Energy and food<br />
CPI (Prel) y/y : Sep 1.0% 1.2% 1.3%<br />
HICP (Prel) m/m : Sep 0.1% -0.1% -0.2%<br />
HICP (Prel) y/y : Sep 1.0% 1.3% 1.3%<br />
09:15 Belgium CPI m/m : Sep 0.1% 0.0% n/a<br />
09:15 CPI y/y : Sep 2.3% 2.6% n/a<br />
Wed 29/09 07:00 Spain HICP (Flash) y/y : Sep 1.8% 2.1% 2.1%<br />
Thu 30/09 09:00 Eurozone HICP (Flash) y/y : Sep 1.6% 1.8% 1.8% Energy and food<br />
09:00 Italy CPI (NIC, Prel) m/m : Sep 0.2% -0.1% n/a<br />
09:00 CPI (NIC, Prel) y/y : Sep 1.6% 1.7% n/a<br />
09:00 HICP (Prel) m/m : Sep 0.2% 0.7% n/a<br />
09:00 HICP (Prel) y/y : Sep 1.8% 1.7% n/a<br />
Fri 01/10 23:30 Japan CPI National y/y : Aug -0.9% -0.9% -0.9%<br />
23:30 Core CPI National y/y : Aug -1.1% -1.0% -1.0%<br />
23:30 CPI Tokyo y/y : Sep -1.0% -0.8% -0.8%<br />
23:30<br />
(30/09)<br />
Core CPI Tokyo y/y : Sep -1.1% -1.0% -1.0%<br />
Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision<br />
Source: <strong>BNP</strong> Paribas<br />
Luigi Speranza/Eoin O’Callaghan<br />
Market Mover<br />
35<br />
23 September 2010<br />
www.GlobalMarkets.bnpparibas.com
Inflation: Bring QE to Europe!<br />
• GLOBAL: Mixed reception to dovish CBs<br />
• EUR: Stay Negative. Keep long EUR/FRF.<br />
• USD: Volatile. Low RY. 5/10y BE flattener.<br />
• GBP: Correction in the Gilt rally. 1y rich.<br />
GLOBAL: Central bank rhetoric from the US and UK<br />
remains very dovish. The FOMC is “prepared to<br />
provide additional accommodation if needed to<br />
support the economic recovery and to return inflation,<br />
over time, to levels consistent with its mandate”. This<br />
has fuelled a rally in bonds although equities are<br />
weaker following their initial positive reaction.<br />
Commodities have not benefited hugely from USD<br />
weakness given struggling risk appetite although<br />
enhanced liquidity should help asset and commodity<br />
markets to perform. Real yields offer more protection<br />
from a depreciating currency and the inflationary<br />
impact of quantitative easing. Indeed, US real yields<br />
have rallied by 30bp in a couple of sessions.<br />
Between 9 and 23 March 2009 – the onset of QE –<br />
we also saw a tremendous rally in real yields and<br />
breakevens did not suffer much as TIPS were<br />
included in the programme whilst BEs rose in the<br />
eventual yield sell-off – Chart 1. The UK issued<br />
550mn UKTi-27 via mini-tender whilst Tesoro will reopen<br />
BTPei-21 for up to EUR 1.5bn. Breakevens<br />
suffered elsewhere and we continue to find EUR and<br />
especially FRF breakevens rich and exposed here.<br />
EUR: Core/peripheral spreads generally remain<br />
under widening pressure, causing disparity in<br />
linker/breakeven performance. BTPeis breakevens<br />
have outperformed core linkers at the front end but<br />
have underperformed materially at 7-15y maturities<br />
with real spreads widening much more than nominal<br />
ones. Supply is partly to blame, with 7y+ BTPeis<br />
suffering on the announcement of EUR 1.5bn BTPei-<br />
21 supply next week. Whilst the BTPei-21 has<br />
underperformed vs. OATei, it has outperformed vs.<br />
BTPei-23. The BTPei-21 may look attractive in the<br />
inflation and ASW discount curve, but it is hit by the<br />
richness of its nominal (BTP Mar-21 and the<br />
cheapness of BTP Aug-23, nominal comparator for<br />
BTPei-23). After adjusting for this, we find the BTPei-<br />
21 no longer looks cheap vs. either OATei or BTPei<br />
curves and we expect a further concession – both<br />
outright and in relative terms ahead of its auction on<br />
Tuesday 28 September. BTPei-21 offers amongst<br />
the highest real ASW on the curve, whilst the bond<br />
does have a closer-to-money inflation floor. OATi<br />
breakevens are underperforming their EUR<br />
counterparts sharply at the front end, as we called<br />
for. Our long OBLei-13/short OATi-13 BE spread has<br />
moved above -40bp from -45bp mid last Friday –<br />
Chart 1: 10y USD RY, NY & BE into/out of QEI<br />
2.50<br />
2.30<br />
2.10<br />
1.90<br />
1.70<br />
1.50<br />
23-Mar<br />
1.30<br />
3.00<br />
1.10<br />
0.90<br />
10y USD Generic Real Yield<br />
2.50<br />
10y USD Generic Breakeven<br />
0.70<br />
06-Mar<br />
10y USD Generic Tsy Yield, Rhs<br />
0.50<br />
2.00<br />
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10<br />
Chart 2: Long OBLei-13/Short OATi-13 BE Spd<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
-50<br />
-60<br />
BOBLEI13 / OATI13 Breakeven<br />
EUR_HICP / FRF_CPI m/m (0m lag) Rhs<br />
-70<br />
-2.0<br />
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11<br />
All Charts Source: Bloomberg, <strong>BNP</strong> Paribas<br />
Chart 2. To recap, cumulative inflation (from Aug-<br />
Dec) is expected at 1.30% in EUR compared to<br />
0.75% in FRF and this is not priced with forwards<br />
below the 18m range. We see further potential in this<br />
trade.<br />
USD: Strong rally in real yields post FOMC meeting<br />
although the move is retracing fast on breakevens.<br />
Market felt squeezed (although dealers reported long<br />
on 9-Sep) with 10y real yields at all-time lows and no<br />
supply until end-Oct. Still, Next FOMC is in 6 weeks<br />
and our models find TIPS BEs expensive with poor<br />
seasonals and mixed total return breakevens<br />
dynamics in Q4. Meanwhile, Barcap US Agg Index<br />
story should still add some vol. We expect news from<br />
Friday evening but all depends on the index sponsor,<br />
which is said to be active in the market. Overall we<br />
have no strong opinion near term but are not keen to<br />
short US BEs and expect volatility ahead. We<br />
continue to find the 5y area cheap and 20y area rich.<br />
GBP: Breakevens down sharply (10bp) in the strong<br />
gilt rally. GBP 550mn UKTi-27 mini-tender did not<br />
help although it was digested smoothly (2.2<br />
bid/cover) after concession pre-tender. Real yields<br />
are close to their lower bound and BEs will continue<br />
to experience increased sensitivity to conventionals if<br />
real yields stay this low. We still like selling 1y<br />
inflation swap with a hedge against Dec-10 RPI (via<br />
UKTi-11) and early BoE rate hikes (via the money<br />
market).<br />
5.00<br />
4.50<br />
4.00<br />
3.50<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
-1.5<br />
Shahid Ladha / Herve Cros 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
36<br />
www.GlobalMarkets.bnpparibas.com
Table 1: <strong>BNP</strong> Paribas Carry Analysis<br />
EUR<br />
Pricing Date<br />
23-Sep-10<br />
Term 1<br />
Term 2<br />
3m<br />
6m<br />
12m<br />
Repo Rate<br />
0.47%<br />
0.51%<br />
0.58% 0.70%<br />
0.87%<br />
EUR DRI<br />
109.34900<br />
109.54000<br />
109.79265 110.12671<br />
109.81139<br />
110.88334<br />
FRF DRI<br />
119.71400<br />
119.97000 119.85339<br />
119.94133<br />
119.88290<br />
121.17136<br />
Sett. Date<br />
28-Sep-10<br />
01-Nov-10<br />
01-Dec-10<br />
28-Dec-10<br />
28-Mar-11<br />
28-Sep-11<br />
Real BE Real BE Real BE Real BE Real BE Real BE<br />
OATEI Jul-12 -0.99% 1.68% 2.2 0.8 8.5 6.4 20.0 18.3 -32.3 -31.0 -56.8 -22.0<br />
BTPEI Sep-12 0.12% 1.76% 7.7 0.6 19.0 5.7 35.0 16.3 9.3 -30.1 67.8 -33.0<br />
BOBLEI Apr-13 -0.40% 1.12% 3.9 2.8 10.6 8.7 20.7 18.9 -6.3 -6.8 7.8 20.0<br />
BTPEI Sep-14 1.01% 1.52% 6.1 0.6 13.6 3.2 23.0 8.5 17.5 -11.8 54.5 -9.2<br />
OATEI Jul-15 0.05% 1.54% 3.0 0.5 7.2 2.6 13.0 6.8 2.3 -9.3 15.7 -5.8<br />
BUNDEI Apr-16 0.10% 1.43% 2.7 0.6 6.4 2.6 11.5 6.4 2.5 -6.8 14.1 -2.6<br />
BTPEI Sep-17 1.72% 1.54% 4.6 0.1 9.9 1.4 16.1 4.2 15.7 -8.0 40.9 -7.8<br />
BTPEI Sep-19 2.05% 1.65% 4.1 -0.1 8.6 0.8 13.9 3.0 14.5 -7.0 36.2 -7.0<br />
BUNDEI Apr-20 0.61% 1.62% 2.2 0.1 4.9 1.0 8.3 3.0 4.5 -5.5 14.3 -4.6<br />
OATEI Jul-20 0.85% 1.80% 2.4 -0.1 5.3 0.6 8.9 2.5 5.8 -6.7 17.4 -7.0<br />
BTPEI Sep-21 2.29% 1.60% 3.6 -0.2 7.6 0.4 12.1 2.1 13.2 -6.4 32.1 -7.2<br />
OATEI Jul-22 1.04% 1.72% 2.1 -0.4 4.6 0.0 7.6 1.3 5.5 -6.7 15.5 -8.2<br />
RFFEI Feb-23 1.42% 1.51% 2.5 0.2 5.4 1.2 8.8 3.0 7.7 -3.4 19.8 -2.0<br />
BTPEI Sep-23 2.44% 1.77% 3.3 -0.3 6.9 0.1 11.0 1.5 12.4 -6.5 29.6 -8.4<br />
GGBEI Jul-25 8.49% 1.57% 8.9 -1.8 17.5 -2.6 26.3 -2.4 42.7 -15.2 94.7 -23.4<br />
GGBEI Jul-30 7.14% 3.09% 5.9 -4.5 11.8 -8.1 17.7 -10.5 27.7 -29.5 61.1 -55.0<br />
OATEI Jul-32 1.23% 2.00% 1.5 -0.4 3.2 -0.2 5.3 0.5 4.2 -4.9 11.1 -6.6<br />
BTPEI Sep-35 2.37% 2.38% 1.9 -0.9 4.0 -1.4 6.3 -1.2 6.9 -7.8 16.2 -13.1<br />
OATEI Jul-40 1.26% 2.04% 1.1 -0.4 2.3 -0.4 3.8 0.0 3.0 -4.3 7.9 -6.1<br />
BTPEI Sep-41 2.69% 2.13% 1.8 -0.8 3.8 -1.1 6.0 -0.9 6.9 -6.6 15.9 -10.7<br />
FRF<br />
OATI Jul-11 -1.01% 1.50% 9.5 9.2 -24.7 -23.5 -36.5 -28.6 -214.6 -73.5 - -<br />
OATI Jul-13 -0.54% 1.48% 4.3 2.4 -3.0 -6.3 -3.7 -7.7 -21.0 -27.0 -10.9 -15.5<br />
OATI Jul-17 0.28% 1.82% 2.9 0.3 1.0 -3.8 1.8 -4.9 -1.2 -14.0 11.0 -13.6<br />
OATI Jul-19 0.58% 1.90% 2.7 0.1 1.4 -3.4 2.3 -4.4 1.0 -11.9 12.4 -12.5<br />
OATI Jul-23 0.92% 2.01% 2.2 -0.1 1.6 -2.6 2.4 -3.4 2.2 -8.9 12.1 -9.8<br />
OATI Jul-29 1.09% 2.10% 1.8 -0.2 1.4 -2.3 2.1 -3.1 2.3 -7.9 10.3 -9.2<br />
USD<br />
Pricing Date<br />
23-Sep-10<br />
Term 1<br />
Term 2<br />
3m<br />
6m<br />
12m<br />
Repo Rate<br />
0.20%<br />
0.20%<br />
0.21% 0.23%<br />
0.27%<br />
USD DRI<br />
218.00027<br />
218.31200<br />
218.71229<br />
219.22253<br />
219.73273<br />
222.12726<br />
Sett. Date<br />
24-Sep-10<br />
01-Nov-10<br />
01-Dec-10<br />
24-Dec-10 24-Mar-11 26-Sep-11<br />
Yield BE Real BE Real BE Real BE Real BE Real BE<br />
TIPS Jan-11 0.24% -0.07% 71.6 73.5 271.2 277.0 945.6 964.8 -<br />
TIPS Apr-11 -0.01% 0.24% 26.8 26.3 77.5 76.5 164.3 163.4 - - - -<br />
TIPS Jan-12 -0.27% 0.60% 7.9 7.0 21.6 19.7 42.3 39.9 68.1 63.1 450.4 438.2<br />
TIPS Apr-12 -0.27% 0.60% 6.6 5.7 17.6 15.8 33.9 31.7 52.0 47.3 245.0 235.5<br />
TIPS Jul-12 -0.44% 0.80% 4.5 3.6 13.0 11.3 26.1 23.8 35.8 31.2 147.9 138.3<br />
TIPS Apr-13 -0.43% 0.95% 3.1 1.8 8.8 6.3 17.3 14.0 22.5 15.5 75.4 59.8<br />
TIPS Jul-13 -0.34% 0.92% 3.3 1.8 8.8 6.0 16.9 13.2 22.6 14.9 71.7 54.2<br />
TIPS Jan-14 -0.17% 0.93% 3.4 1.5 8.5 5.0 15.7 11.0 21.8 12.1 64.3 42.2<br />
TIPS Apr-14 -0.19% 1.04% 3.0 1.0 7.6 4.0 14.1 9.2 19.4 9.1 56.3 33.2<br />
TIPS Jul-14 -0.11% 1.03% 3.1 1.0 7.7 3.8 13.9 8.8 19.5 8.7 55.1 30.8<br />
TIPS Jan-15 0.06% 1.06% 3.1 0.8 7.5 3.2 13.3 7.4 19.2 7.0 52.2 25.0<br />
TIPS Apr-15 -0.07% 1.26% 2.6 0.2 6.4 2.0 11.5 5.6 16.0 3.7 43.5 16.6<br />
TIPS Jul-15 0.09% 1.17% 2.9 0.4 6.9 2.4 12.1 6.0 17.5 4.9 46.4 18.6<br />
TIPS Jan-16 0.20% 1.22% 2.9 0.2 6.7 1.9 11.5 5.1 16.9 3.6 44.0 14.7<br />
TIPS Jul-16 0.20% 1.36% 2.7 -0.1 6.2 1.2 10.7 4.0 15.6 1.9 40.2 10.2<br />
TIPS Jan-17 0.35% 1.39% 2.7 -0.1 6.2 1.0 10.5 3.5 15.7 1.4 39.5 8.4<br />
TIPS Jul-17 0.34% 1.52% 2.5 -0.4 5.7 0.5 9.8 2.7 14.5 0.0 36.3 5.0<br />
TIPS Jan-18 0.43% 1.56% 2.4 -0.4 5.5 0.3 9.2 2.3 13.8 -0.4 34.2 3.7<br />
TIPS Jul-18 0.45% 1.66% 2.3 -0.6 5.1 -0.1 8.6 1.5 13.0 -1.5 31.8 0.8<br />
TIPS Jan-19 0.56% 1.70% 2.4 -0.5 5.2 0.0 8.7 1.7 13.3 -1.0 32.2 1.8<br />
TIPS Jul-19 0.60% 1.78% 2.3 -0.7 5.0 -0.3 8.3 1.1 12.7 -2.0 30.5 -0.6<br />
TIPS Jan-20 0.66% 1.76% 2.2 -0.8 4.8 -0.6 7.9 0.7 12.2 -2.5 29.1 -1.7<br />
TIPS Jul-20 0.72% 1.77% 2.1 -0.8 4.6 -0.6 7.6 0.5 11.8 -2.6 28.1 -2.2<br />
TIPS Jan-25 1.15% 1.89% 2.0 -1.0 4.1 -1.2 6.6 -0.6 10.5 -4.0 24.2 -6.3<br />
TIPS Jan-26 1.20% 1.93% 1.9 -0.9 3.9 -1.2 6.2 -0.6 9.9 -3.8 22.7 -5.9<br />
TIPS Jan-27 1.25% 1.92% 1.8 -0.9 3.8 -1.1 6.0 -0.6 9.7 -3.7 22.2 -5.8<br />
TIPS Jan-28 1.28% 1.96% 1.7 -1.0 3.5 -1.4 5.6 -1.0 9.0 -4.3 20.5 -6.9<br />
TIPS Apr-28 1.33% 1.97% 1.9 -0.7 4.0 -0.8 6.2 -0.2 10.1 -2.7 22.9 -3.8<br />
TIPS Jan-29 1.30% 2.04% 1.7 -0.9 3.6 -1.1 5.6 -0.6 9.1 -3.5 20.6 -5.6<br />
TIPS Apr-29 1.37% 1.97% 1.9 -0.7 3.9 -0.8 6.1 -0.2 9.9 -2.7 22.4 -3.8<br />
TIPS Apr-32 1.39% 2.04% 1.6 -0.9 3.4 -1.1 5.3 -0.7 8.6 -3.6 19.3 -5.8<br />
TIPS Feb-40 1.54% 2.15% 1.3 -0.9 2.6 -1.2 4.0 -1.1 6.6 -3.7 14.7 -6.5<br />
GBP<br />
Pricing Date<br />
23-Sep-10 Term 1 Term 2<br />
3m<br />
6m<br />
12m<br />
Repo Rate<br />
0.55%<br />
0.55%<br />
0.55%<br />
0.61%<br />
0.70%<br />
Sett. Date<br />
24-Sep-10<br />
01-Nov-10 01-Dec-10 24-Dec-10<br />
24-Mar-11<br />
26-Sep-11<br />
Yield BE Real BE Real BE Real BE Real BE Real BE<br />
UKTi Aug-11 -0.33% 0.82% 9.2 10.9 52.7 56.7 79.7 87.0 - - - -<br />
UKTi Aug-13 -1.63% 2.53% -2.2 -3.9 5.3 2.3 7.8 3.7 7.8 -0.1 12.5 -1.8<br />
UKTi Jul-16 -0.30% 2.41% 1.4 -1.7 7.3 1.6 10.2 2.5 16.8 1.4 34.7 2.6<br />
UKTi Nov-17 -0.07% 2.60% 4.2 0.8 5.0 -1.0 8.8 0.7 16.1 -0.3 31.7 -2.1<br />
UKTi Apr-20 0.30% 2.66% 1.7 -1.6 6.0 0.0 8.2 0.2 14.1 -2.1 28.3 -4.8<br />
UKTi Nov-22 0.53% 2.73% 3.2 0.1 4.2 -1.5 6.8 -0.7 12.6 -2.5 24.7 -6.1<br />
UKTi Jul-24 0.60% 2.93% 1.4 -1.5 4.7 -0.6 6.5 -0.7 11.2 -3.1 22.4 -6.6<br />
UKTi Nov-27 0.66% 3.06% 2.3 -0.4 3.1 -1.8 5.0 -1.5 9.3 -3.7 17.9 -8.5<br />
UKTi Jul-30 0.60% 3.29% 1.1 -1.3 3.7 -0.7 5.1 -0.8 8.8 -2.9 17.4 -6.3<br />
UKTi Nov-32 0.64% 3.26% 1.8 -0.6 2.4 -2.0 3.9 -2.0 7.2 -4.5 13.9 -9.9<br />
UKTi Jan-35 0.62% 3.35% 0.9 -1.4 2.8 -1.3 3.9 -1.7 6.6 -4.3 13.1 -8.9<br />
UKTi Nov-37 0.59% 3.38% 1.5 -0.7 2.0 -2.0 3.2 -2.1 5.9 -4.6 11.2 -10.1<br />
UKTi Mar-40 0.61% 3.38% 1.3 -0.8 1.7 -2.1 2.8 -2.3 5.2 -5.1 9.8 -10.7<br />
UKTi Nov-42 0.58% 3.41% 1.2 -0.8 1.6 -2.1 2.6 -2.3 4.7 -5.0 9.0 -10.7<br />
UKTi Nov-47 0.54% 3.46% 1.1 -0.9 1.4 -2.1 2.3 -2.3 4.2 -5.0 7.9 -10.5<br />
UKTi Mar-50 0.54% 3.46% 1.0 -0.9 1.3 -2.1 2.1 -2.4 3.8 -5.0 7.1 -10.6<br />
UKTi Nov-55 0.50% 3.48% 0.9 -0.8 1.2 -1.9 2.0 -2.2 3.7 -4.6 7.0 -9.6<br />
JPY<br />
Pricing Date<br />
23-Sep-10<br />
Term 1 Term 2<br />
3m<br />
6m<br />
12m<br />
Repo Rate<br />
0.12%<br />
0.12%<br />
0.12%<br />
0.13% 0.14%<br />
JPY DRI<br />
99.120<br />
99.100<br />
99.200<br />
99.432<br />
98.752 98.600<br />
Sett. Date<br />
28-Sep-10<br />
10-Nov-10<br />
10-Dec-10<br />
28-Dec-10<br />
28-Mar-11<br />
28-Sep-11<br />
Yield BE Yield BE Yield BE Real BE Real BE Real BE<br />
JGBI-1 Mar-14 1.07% -0.89% 3.3 3.1 9.0 8.7 17.1 16.7 5.8 4.9 17.7 16.1<br />
JGBI-2 Jun-14 1.22% -1.03% 3.7 3.4 9.4 9.0 17.1 16.6 8.0 6.8 22.1 19.9<br />
JGBI-3 Dec-14 1.11% -0.87% 2.9 2.5 7.6 7.0 14.1 13.4 5.2 3.6 14.8 11.5<br />
JGBI-4 Jun-15 1.21% -0.94% 2.8 2.4 7.2 6.5 15.4 14.5 5.9 4.0 15.8 11.9<br />
JGBI-5 Sep-15 1.17% -0.88% 2.5 2.1 6.6 5.9 12.2 11.3 4.9 3.1 13.5 9.6<br />
JGBI-6 Dec-15 1.10% -0.79% 2.3 1.9 6.1 5.3 11.3 10.4 4.0 2.0 11.1 7.0<br />
JGBI-7 Mar-16 1.19% -0.86% 2.3 1.9 6.1 5.3 11.2 10.1 4.7 2.5 12.6 8.0<br />
JGBI-8 Jun-16 1.30% -0.94% 2.6 2.0 6.3 5.4 11.3 10.2 5.7 3.3 14.5 9.5<br />
JGBI-9 Sep-16 1.28% -0.90% 2.3 1.8 5.9 5.0 10.7 9.6 5.2 2.7 13.4 8.2<br />
JGBI-10 Dec-16 1.27% -0.85% 2.3 1.7 5.7 4.7 10.3 9.0 4.9 2.2 12.4 6.8<br />
JGBI-11 Mar-17 1.31% -0.87% 2.2 1.6 5.6 4.5 10.0 8.7 5.0 2.2 12.6 6.8<br />
JGBI-12 Jun-17 1.37% -0.90% 2.3 1.7 5.7 4.5 10.0 8.5 3.7 0.8 13.4 7.1<br />
JGBI-13 Sep-17 1.33% -0.82% 2.1 1.4 5.3 4.1 9.4 7.9 4.8 1.7 12.1 5.4<br />
JGBI-14 Dec-17 1.33% -0.78% 2.1 1.3 5.2 3.9 9.1 7.5 4.7 1.3 11.6 4.6<br />
JGBI-15 Mar-18 1.37% -0.78% 2.0 1.3 5.0 3.7 9.0 7.3 4.7 1.3 11.7 4.4<br />
JGBI-16 June-18 1.48% -0.85% 2.2 1.4 5.3 3.9 9.2 7.4 5.4 1.8 13.1 5.3<br />
Source: <strong>BNP</strong> Paribas<br />
Shahid Ladha / Herve Cros 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
37<br />
www.GlobalMarkets.bnpparibas.com
Europe ITraxx Credit Indices<br />
• XO/MAIN: we advise to take profit on the<br />
compression trade we recommended last week;<br />
more than 20bp gain. Compression will remain a<br />
major theme in the coming months and we are<br />
now waiting for a better entry level to re-position<br />
it.<br />
• SUB/SEN: the more mixed picture in Bank<br />
Capital instruments –T1 being the sole<br />
exception– should trigger the underperformance<br />
of FIN SUB. Given the recent collapse of the<br />
SUB/SEN ratio, we think it makes sense to take<br />
profit on our compression trade “long risk FIN<br />
SUB / Short risk FIN SEN x1.5” even if further<br />
pressure on GIIPS could further compress the<br />
ratio. Net gain on the trade: 11bp.<br />
• MAIN/CDX: the increase in GIIPS sovereign<br />
risk and decrease in concerns of a double-dip<br />
scenario are making iTraxx MAIN unlikely to<br />
outperform CDX IG. Our trade “long Europe /<br />
short US” which is back to entry level will be<br />
closed as soon as MAIN has retraced from<br />
current oversold levels.<br />
• MAIN 5/10y: the 5/10y is now too steep vs.<br />
the 5y and the forward is very toppish; we<br />
advise to buy the 5y in 5y. Entry levels: 10y:<br />
129; 5y: 119.<br />
• MAIN 3/5y: the 3/5y is steep vs. the 5y and<br />
the forward is high but it has not reached a nobrainer<br />
level. We stay away for now.<br />
• XO 5/10y: we take profit on our 5/10y<br />
steepener in s13 which trades now too steep<br />
given the level of the 5y. The total P&L of the<br />
trade, including carry, is equivalent to a<br />
steepening of 20bp.<br />
Chart 1: 1m correlation MAIN vs. SOVX<br />
120%<br />
100%<br />
80%<br />
60%<br />
40%<br />
20%<br />
0%<br />
-20%<br />
-40%<br />
-60%<br />
-80%<br />
9/09 10/09 11/09 12/09 1/10 2/10 3/10 4/10 5/10 6/10 7/10 8/10 9/10<br />
Source: <strong>BNP</strong> Paribas<br />
Correl 1m MAIN / SOVX<br />
Chart 2: XO – 4x MAIN history<br />
300<br />
250<br />
200<br />
150<br />
100<br />
-<br />
50<br />
3/10 4/10 4/10 5/10 5/10 6/10 6/10 7/10 7/10 7/10 8/10 8/10 9/10<br />
Source: <strong>BNP</strong> Paribas<br />
iTraxx s12: XO - 4 x MAIN<br />
Q1 (6m)<br />
Median (6m)<br />
Q3 (6m)<br />
Chart 3: SUB -1.5x FIN SEN history<br />
30<br />
25<br />
20<br />
15<br />
10<br />
iTraxx s12: SUB - 1.5 x SEN<br />
Q1 (6m)<br />
Median (6m)<br />
Q3 (6m)<br />
XO Tight<br />
XO Wide<br />
SUB Wide<br />
5<br />
Update on Pair-trades:<br />
XO/MAIN:<br />
The compression trend between the High-Yield and<br />
High-Grade cash markets somewhat halted this<br />
week in the context of 1/ still relatively active primary<br />
markets and 2/ end-accounts unwilling to put their<br />
cash into secondary markets. Even in Bank Capital,<br />
flows between buyers and sellers have been more<br />
balanced. On a weekly basis, the BoA-ML High-Yield<br />
index is only tighter by 6bp against the iBoxx High-<br />
Grade Non-financials index wider by 1bp.<br />
-<br />
-5<br />
-10<br />
-15<br />
3/10 4/10 4/10 5/10 5/10 6/10 6/10 7/10 7/10 7/10 8/10 8/10 9/10<br />
Source: <strong>BNP</strong> Paribas<br />
SUB Tight<br />
In contrast, we have had decent compression in<br />
iTraxx indices and the ratio between XO and MAIN in<br />
Series 13 reached a new low of 4.27x. It has been<br />
partially supported by the dynamics of the roll:<br />
actually, the bid for MAIN s13 has remained alive<br />
with real-money selling decent amounts of roll –<br />
perhaps as a result of the 0.5bp differential of skew<br />
between the two indices – while on XO, hedgers<br />
Pierre Yves Bretonniere 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
38<br />
www.GlobalMarkets.bnpparibas.com
have been happy to buy the roll to position on the<br />
riskier new index.<br />
In addition to these technical factors, we continue to<br />
think that MAIN trades too wide relative to various<br />
other markets (EUROSTOXX 600 in particular) and<br />
do not rule out a tightening of 5 to 10bp, all other<br />
things being equal. A complete realignment to equity<br />
and volatility indices would imply an outperformance<br />
of about 13bp. It is also worth noting the further drop<br />
in 1-week and 1-month correlations between MAIN<br />
and SOVX; we do not expect the two indices to<br />
completely de-correlate as it is the case for XO but<br />
we see room for MAIN to outperform in the short run.<br />
What’s next? We think compression will remain one<br />
of the main themes in the coming weeks and months<br />
and are now waiting for a new entry point to re-enter<br />
the XO/MAIN trade. In terms of ratio, we would aim<br />
at 4.80x on the new Series, i.e. 110 on MAIN vs. 528<br />
in XO.<br />
SUB/SEN:<br />
With the level of volatility in Ireland CDS and Irish<br />
banks still very elevated – the Sovereign CDS is<br />
80bp wider this week; AIB and BKIR about 120bp<br />
wider – and the level of correlation between SOVX<br />
and FIN SEN still high, we had this week a massive<br />
underperformance of FIN SEN relative to MAIN and<br />
relative to FIN SUB, the latter being perceived as<br />
less systemic. On a weekly basis, FIN SEN and SUB<br />
are respectively wider by 21bp and 26bp; as a result,<br />
the SUB/SEN ratio reached a new 5-month low of<br />
1.47x.<br />
In cash, the momentum has turned much less bullish<br />
for Lower Tier 2, in particular for bullet bonds. We<br />
also saw some profit taking on Tier 1 after the<br />
massive performance of the asset class since the<br />
beginning of the month (120bp in two weeks) but the<br />
tone remains constructive overall, thanks to strong<br />
technicals. Note that the regulatory changes are also<br />
unfolding into the relative performance of Banks in<br />
equity markets and the sector comes as the clear<br />
underperformer on a weekly and monthly basis.<br />
What’s the call?<br />
The more mixed picture in Bank Capital instruments<br />
– T1 being the exception – is making us expect some<br />
underperformance of FIN SUB; given the recent<br />
collapse of the SUB/SEN ratio, we think it makes<br />
sense to take profit on our compression trade “long<br />
risk FIN SUB / Short risk FIN SEN x1.5”, although we<br />
reckon that further pressure on weaker sovereigns<br />
could further compress the ratio. Net gain on the<br />
trade: 11bp01 .<br />
Chart 4: 1m performance by sector (EUROSTOXX 600)<br />
14.0%<br />
12.0%<br />
10.0%<br />
8.0%<br />
6.0%<br />
4.0%<br />
2.0%<br />
0.0%<br />
STOXX 600<br />
Banks<br />
Financial <strong>Services</strong><br />
Insurance<br />
Telecommunications<br />
Media<br />
Technology<br />
Utilities<br />
Oil & Gas<br />
Food & Beverage<br />
Health Care<br />
Retail<br />
Travel & Leisure<br />
Chemicals<br />
Construction & Materials<br />
Basic Resources<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 5: iTraxx MAIN – CDX IG history<br />
-<br />
20<br />
15<br />
10<br />
5<br />
-5<br />
-10<br />
-15<br />
-20<br />
MAIN vs. CDX IG:<br />
Industrial Goods & <strong>Services</strong><br />
Personal & Household<br />
Goods<br />
Automobiles & Parts<br />
3/10 4/10 4/10 5/10 5/10 5/10 6/10 6/10 7/10 7/10 8/10 8/10 9/10 9/10<br />
Source: <strong>BNP</strong> Paribas<br />
EU MAIN - 1 x US CDX IG (5Y)<br />
Q1 (6m)<br />
Median (6m)<br />
Q3 (6m)<br />
iTraxx MAIN has naturally underperformed CDX IG<br />
this week given the pressure on GIIPS sovereign<br />
debt and European banks. Note that financial<br />
institutions represent 20% of the European basket<br />
and only 12% of the US one, not mentioning the<br />
disproportionate exposure to GIIPS between<br />
European and US financials.<br />
Our trade “long risk MAIN s13 / short risk IG 14<br />
x0.85” is now back to our entry level and is likely to<br />
post losses should the market remain weak and<br />
focussed on GIIPS sovereign debt. This<br />
recommendation initially aimed to perform with the<br />
increase in the likelihood of a double-dip scenario; in<br />
such a scenario, the weaker credit quality of the US<br />
basket relative to the European one would have<br />
ensured the underperformance of the US index. With<br />
these concerns much beyond European sovereign<br />
1 Entry levels: 205 (SUB s13) and 135 (SEN s13);<br />
Closing levels 215.5 (SUB s13) and 149.5 (SEN<br />
s13).<br />
Pierre Yves Bretonniere 23 September 2010<br />
Market Mover Non-Objective Research Section<br />
39<br />
www.GlobalMarkets.bnpparibas.com
isk in market participants’ minds, the trade is highly<br />
unlikely to post strong gains now.<br />
That being said, MAIN trades much too wide when<br />
compared to other risky asset markets; a simple<br />
model based on European equities and equity<br />
volatility is pricing MAIN about 7bp below its current<br />
valuations. In the US, the similar model indicates that<br />
IG is trading fair-value vs. the S&P500 and VIX<br />
indices. With this in mind, we think MAIN could<br />
momentarily outperform IG and we aim at closing the<br />
“Long Europe / Short US” trade as soon as we<br />
achieve 2 or 3bp of outperformance.<br />
What’s the call? Increase in GIIPS sovereign risk<br />
and decrease in concerns of a double-dip scenario<br />
are making iTraxx MAIN unlikely to outperform CDX<br />
IG. We aim at closing our “long Europe / short US” as<br />
soon as MAIN retraced from current oversold levels.<br />
Update on Curves:<br />
steepener recommendation (dated 25-Mar) to take<br />
profit at current levels.<br />
Chart 6: Curves’ levels and changes<br />
5y 3/5y 1W Chg 1M Chg 5/10y 1W Chg 1M Chg<br />
MAIN s13 118 25 11<br />
MAIN s12 112.75 26 +0 +3 14 +1.5 +5<br />
SEN s13 153.5 7<br />
SEN s12 150.5 10 +1 +3<br />
SUB s13 225 5<br />
SUB s12 218 8 +2 +4<br />
HVL s13 177 15<br />
HVL s12 157 20 +5 +11<br />
XO s13 530 80 5<br />
XO s12 470 80 +0 +10 15 +10 +18<br />
Source: <strong>BNP</strong> Paribas<br />
Chart 7: Fwd 5y in 5y MAIN in past 2y<br />
Main 5/10y: Last week, we believed this curve was<br />
fully discounting the upcoming roll; actually it didn’t<br />
and the curve managed to steepen further from 12.5<br />
to 14 despite the volatile/bearish context. We believe<br />
that this curve is too steep relative to the level of the<br />
5y (chart7).<br />
250<br />
225<br />
200<br />
175<br />
150<br />
125<br />
100<br />
Fwd 5y in 5y<br />
spot 5y<br />
90<br />
130<br />
Given our view that MAIN has overshot, we think the<br />
best way to play the steepness of the curve is to go<br />
long the 5y in 5y which has broken its long-term<br />
resistance.<br />
What’s the call? The 5/10y is now too steep vs. the<br />
5y and the forward is very toppish; we advise to buy<br />
the 5y in 5y. Entry levels: MAIN 10y: 129; MAIN 5y:<br />
119<br />
Main 3/5y: the call on the 3/5y is much less obvious;<br />
yes, the level of the 3/5 looks too steep vs. the 5y but<br />
the strength of the relationship between the outright<br />
and the curve is much weaker than for the 5/10y. The<br />
key decision factor is the level of the forward 2y in 3y<br />
which is quite high but it did not break the 155 level<br />
which will be the buying signal.<br />
What’s the call? The 3/5y is very steep relative to<br />
the 5y and the forward is high but it has not reached<br />
a level where the flattener is a no-brainer. We stay<br />
away for now.<br />
XO 5/10y: in line with our expectations, we had<br />
further steepening of XO 5/10y curves with the roll.<br />
We closed last week our steepener in s12 and kept<br />
the one in s13 to benefit from the last bit of the rally.<br />
We now see little upside in the curve at current levels<br />
– it trades quite steep relative to the outright level of<br />
the 5y - and advise the investors who followed our<br />
75<br />
50<br />
25<br />
0<br />
9/08 11/08 1/09 3/09 5/09 7/09 9/09 11/09 1/10 3/10 5/10 7/10 9/10<br />
Source: <strong>BNP</strong> Paribas<br />
resistances of the<br />
5y in 5y<br />
Chart 8: Fwd 2y in 3y MAIN in past 2y<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
9/08 11/08 1/09 3/09 5/09 7/09 9/09 11/09 1/10 3/10 5/10 7/10 9/10<br />
Source: <strong>BNP</strong> Paribas<br />
MAIN Spot 2y<br />
MAIN Fwd 2y in 3y (rhs)<br />
105<br />
155<br />
resistance levels of<br />
2y in 3y<br />
Note that the level of the forward 5y in 5y has also<br />
significantly increased in the past 2 weeks; it does<br />
not signal a buying signal yet.<br />
What’s the call? We take profit on our 5/10y<br />
steepener in s13 which trades now too steep given<br />
the level of the outright. The total P&L of the trade,<br />
including carry, is equivalent to a steepening of 20bp.<br />
Pierre Yves Bretonniere 23 September 2010<br />
Market Mover Non-Objective Research Section<br />
40<br />
www.GlobalMarkets.bnpparibas.com
Technical Analysis – Interest Rates & Commodities<br />
Bond & Short-Term Contracts<br />
• Europe 10y: Supportive MT bias again within MT falling channel but needs to break below 2.24 to extend fall<br />
• US 10y: Regained a slight MT positive bias below 2.58 but failure to sustain it would rekindle previous bear tone<br />
• Short-term contracts z0: Supportive tone on ED back on its top but still a toppish/consolidative one on Euribor<br />
Equities & Commodities<br />
• WTI (Cl1): Neutral MT between key 70.76/71.39 & key 78.31/40 but weak ST, back on 73.50/74.00 ST support<br />
• Equity markets: Markets remain supportive MT but showing a ST toppish bias which could last<br />
US 10y: Slight move back below 2.58 pivot reopened way for 2.41 first MT Trend: Neutral/down Range: 2.40/2.65<br />
The break above MT falling wedge 2.03 3.03<br />
(2.21/2.58) was negative & triggered a<br />
classic pullback move on key 2.79 (LT<br />
61.8%) area around which it stalled to be<br />
back now below critical 2.58 (ST 61.8% &<br />
MT falling wedge resistance).<br />
That rekindled the MT bullish bias for 2.415<br />
August low initially but a break below it is<br />
needed to strengthen the previous MT<br />
bullish bias towards 2.03 (2008 low).<br />
A renewed break above 2.58 is needed to<br />
turn slightly negative again, key resistance<br />
above being 2.85/86 (last top & ST 61.8%)<br />
which break would turn it negative again MT<br />
for 3% then.<br />
Tech Snapshot<br />
- Back below 2.58 (ST/MT pivot now)<br />
-Still below key LT 61.8% (2.79) for 2.03 low<br />
- Still a weekly bottom reversal<br />
Strategy: Short 2.58/62 stopped 2.53.<br />
Keep long now if you are below 2.58<br />
US/EUR 10y bond: 6.6 will be ST target if we move back below 22.4 low MT Trend: Neutral/down Range: 10.0/30.0<br />
Failure to overcome MT falling channel<br />
-20.9
Germany 10y: Keeping MT bullish bias below 2.50/56. Watch 2.24 now MT Trend: Neutral/down Range: 2.20/2.40<br />
It stalled below critical 2.52/2.56 (MT falling<br />
1.94/1.95 2.84<br />
channel resistance & ST 61.8%) & took the<br />
way down again with 2.44 gap left for a<br />
move towards key 2.24 (61.8%), next<br />
targets being psychological 2% level &<br />
1.94/1.95 ( MT falling channel support + LT<br />
161.8% extension)<br />
Break below 2.24 is now needed to<br />
strengthen the MT bullish scenario for a<br />
return initially to 2.087 low.<br />
If not, the risk will be to regain a ST negative<br />
bias for a move back towards key 2.50/<br />
52/2.56 (last top + MT falling channel resistance<br />
& ST 61.8%). Note such a move<br />
would imply the risk of a negative rising ABC<br />
Tech Snapshot<br />
- Within LT falling wedge/MT falling channel<br />
- ST rising channel break calls for 2.24<br />
Strategy: Short 2.37 covered 2.50. Play<br />
long small only below 2.24 with close S/L<br />
UK 10y: Keeping MT bullish bias below 3.15 but watch 2.95 now MT Trend: Neutral/down Range: 2.85/3.05<br />
Sharp fall within a MT falling channel<br />
2.57 3.37<br />
(2.57/3.15) allowed reaching 2.93 (2009 low)<br />
around which it is now trading.<br />
The MT tone remains rather positive within<br />
this MT falling channel & a break above its<br />
up boundary (3.15) is needed to turn MT<br />
study negative again with 3.25 (ST 61.8%)<br />
then as a bearish confirmation level.<br />
It needs now a break below 2.93/2.95 (2009<br />
low & 61.8%) to strengthen MT positive bias<br />
for 2.79 low initially.<br />
Note a failure to do so would increase risk of<br />
a negative rising ABC scenario developing.<br />
Tech Snapshot<br />
- Within MT falling channel<br />
- Testing 2.95 (61.8%)<br />
Strategy:Play long only below 2.95 with<br />
close S/L. Play short only above 3.15<br />
S&P: Needs now to break above key 1127/1140 to turn positive MT MT Trend: Neutral/Up Range: 1100/1150<br />
Last sharp rebound allowed reaching critical 1053/63 1219/1228<br />
1127/1140 (Bottom Head & Shoulders<br />
neckline & MT 61.8%), which decisive break<br />
would call for crucial 1219/28/45 (April top<br />
+LT 61.8%+ H&S target).<br />
This 1127/40 is now the ST/MT pivot area.<br />
A failure to break it up now would call for a<br />
return below 1100<br />
However, it needs a break below 1153/63<br />
(ST rising channel support & MT 61.8%) to<br />
regain a MT negative study<br />
Tech Snapshot<br />
- Testing critical 1127/1140 resistance area<br />
- Falling ABC may be over & a MT rising<br />
wave “3” starting<br />
Strategy: Tried long on 1050/70 S/L 1110<br />
now for 1200 with ½ sold at 1140<br />
Christian Sené 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
42<br />
www.GlobalMarkets.bnpparibas.com
Trade Reviews<br />
Options, Money Market and Bond Trades – Tactical & Strategic Trades<br />
This page summarises our main tactical (T) and strategic (S) trades. The former focus on short-term horizons (a few weeks)<br />
allowing one to play any near-term corrections within a defined trend, while the latter rely on a medium-term assumed trend.<br />
For each trade we provide the expected target and the recommended stop loss.<br />
Current* Targets Stop Entry<br />
Existing Strategies<br />
Yield Curves<br />
EUR Flattener Sell OEZ0 Buy RXZ0<br />
We re-enter flatteners after FOMC. 5y/10y offers the best risk/reward profile.<br />
GBP RV Pay GBP 2/5/10Y 3M Sell L H1H2<br />
5y GBP is back at extremly expensive levels. We entered 2/3 of the position.<br />
Cross Markets<br />
USD Spread Flattener Sell 10Y ASW Buy 2Y ASW<br />
Auction analysis suggests 5y spread tends to widen more compared to 10y and 30y<br />
spreads post-auction (from T-5 to T+5). 5s10s spread curve has flattened<br />
consistently in the past eight auctions, by an average of 4.66bp.<br />
Gilt ASW Buy Gilt 2.75% 2015 OIS ASW<br />
Pure RV trade that looks to play the cheapness of the 5y sector.<br />
Linkers<br />
EUR/FRF BE Spread Buy OBLei-13 BE 2.25% Apr-13 Sell OATi-13 BE 2.50%<br />
Jul-13<br />
Front-end EUR/FRF cash BE spreads do not seem to be pricing the carry<br />
differential ahead with 3m fwds below the 18m range.<br />
Money Markets<br />
Sterling Fly Sell L M1M2M3<br />
Fly decoupled from US one and BoE on hold for a while. Enter half now and on a<br />
move to +1.<br />
Eurodollar box Sell EDM1Z1 Buy EDM2Z2<br />
That box is a safer way to play a protracted Fed status quo.<br />
78.0<br />
(S)<br />
-9.0<br />
(T)<br />
-20.5<br />
(T)<br />
23.0<br />
(S)<br />
-36.0<br />
(T)<br />
-11.0<br />
(S)<br />
-13.0<br />
(T)<br />
65.0 82.0 77.5<br />
(22-Sep)<br />
10.0 -13.0 -5.75<br />
(09-Sep)<br />
-24.75 -18.75 -20.75<br />
(23-Sep)<br />
10.0 26.0 29.0<br />
(09-Aug)<br />
Carry<br />
/ mth<br />
-20.0 -49.0 -43.0 0/+10/+2<br />
(17-Sep) 5bp<br />
-18/-20 5.0 -4.0<br />
(22-Sep)<br />
-18/20.0 -3.0 -7.5<br />
(09-Sep)<br />
Options<br />
USD Conditional Bull-Flattener Sell 6M1Y ATMF Rec Buy 6M5Y ATMF Rec +52k 300k -150k 0k<br />
Realized curve move in a rally is attractive in beating the hurdle of paying upfront for<br />
this trade, and 6m fwd curve is 10bp steeper than spot which makes up for the cost<br />
(typically has been the reverse during crisis).<br />
(S)<br />
(03-Sep)<br />
Sterling Put Spread Buy L M1 9825/9875 P/S 1X2<br />
1.0 50.0 0.0 1.0<br />
Cheap hedge vs the SLS expiry.<br />
(T)<br />
(17-Aug)<br />
Euribor Put Spread Buy ERZ0 9875/50 P 1x2<br />
1.0 12.0 -1.0 1.0<br />
Playing the normalisation of liquidity by year end.<br />
(S)<br />
(30-Jul)<br />
USD Payer Spread 1x2 Buy 1Y10Y Pay ATMF+50 Sell 1Y10Y Pay ATMF + -10k 300k -150k 0k<br />
97.5<br />
(S)<br />
(29-Jul)<br />
In the coming months we see the 10y staying under 3.5% as it has since the Euro<br />
debt crisis unfolded, and probably trading closer to 3%.<br />
Beyond that, we expect a normalization to higher rates although it would be a<br />
stretch to look for 5% in 2011. This trade loses money in 1y time only if we selloff by<br />
almost 200bp.<br />
*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps.<br />
Risk**<br />
P/L<br />
(ccy/Bp)<br />
10K/01 EUR -5k<br />
-0.5bp<br />
-2.0 7k/01 GBP -21k<br />
-3bp<br />
10k/01 USD -2.5k<br />
-0.25bp<br />
15k/01 EUR +90k<br />
+6bp<br />
15k/01 EUR<br />
+105k<br />
+7bp<br />
5K/01 GBP +35k<br />
+7bp<br />
17.5k/01 USD +92k<br />
+5.5bp<br />
1k/01 USD<br />
+52k<br />
5k/01 GBP<br />
+0k<br />
25k/01 EUR 0k<br />
0bp<br />
1k/01 USD<br />
-10k<br />
Interest Rate Strategy 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
43<br />
www.GlobalMarkets.bnpparibas.com
Liquidity-Driven FX Markets<br />
• Global asset markets are set to overshoot as<br />
G4 central banks increase excessive reserves<br />
while local market monetary authorities try to<br />
control the pace at which their currencies<br />
appreciate.<br />
• Consequently, liquidity is seeking out<br />
investment opportunities.<br />
• Meanwhile, global rebalancing remains a<br />
theme. China has become the trend setter for<br />
successful rebalancing, with its improving<br />
domestic demand conditions offering export<br />
opportunities for the country’s trading partners<br />
• Commodity currencies will remain strong.<br />
The EUR will sail in the slipstream of the sharply<br />
rising AUD.<br />
• The CAD will rally should markets convert<br />
the theme of ‘Japanisation’ into a bullish asset<br />
theme.<br />
• GBPSEK shorts are a conservative way to<br />
trade the bullish China story as the UK’s trading<br />
relationship with China is less developed than<br />
Sweden’s.<br />
US money market outflows will keep the USD<br />
under selling pressure<br />
The USD is likely to remain under selling pressure for<br />
the rest of this year as cheap USD liquidity finds its<br />
way into higher-yielding asset classes. Money market<br />
outflows into local market funds have reduced money<br />
market holdings, but with US rates set to stay low in<br />
the years ahead, there will be little incentive to keep<br />
funds in USD-denominated debt. The rebalancing of<br />
the global economy will keep return expectations for<br />
local markets high, but the highly leveraged<br />
economies in the West will have to save in order to<br />
bring down debt ratios. These savings will be partly<br />
stashed in domestic financial instruments, keeping<br />
bond yields low and reducing the attractiveness of<br />
these assets to foreign investors. Reduced inflows<br />
from abroad will put the USD under selling pressure.<br />
Risk of confidence crisis in US assets is small<br />
Hence, the long-term trend of the USD seems locked<br />
to the downside. However, the real effective<br />
exchange rate of the USD has already fallen by 20%<br />
over the past decade. Nonetheless, an undervalued<br />
exchange rate can become even more undervalued<br />
in extreme situations and an extreme situation could<br />
arise should the US face a buyers’ strike with regard<br />
Chart 1: US Private Entities Deposit and Money<br />
Market Fund Holdings (USD trn)<br />
Source: Reuters EcoWin Pro<br />
to funding its external liability position. 10-year<br />
Treasury yields trading near 2.5% do not look<br />
appealing to investors given that their portfolios of<br />
expiring US bonds often provide nominal bond yields<br />
of around 5%. The USD has been the world’s<br />
number-one reserve currency and hence US bond<br />
market dynamics should not be compared to those of<br />
Greece or Ireland; vigilance will nonetheless still be<br />
required. For instance, a clear indication that a<br />
confidence crisis concerning the US debt position<br />
has hit the US would be if bond yields increased at<br />
the time as US shares were selling off and the USD<br />
losing value in FX markets. This is not our main<br />
scenario but we do not ignore this risk.<br />
Risk appetite assessment remains the decisive<br />
factor for the USD trend<br />
The other factor capable of driving the USD for<br />
several months is the USD’s funding currency status.<br />
It is unusual to see a current account deficit currency<br />
used as a funding currency, as deficit countries tend<br />
to show higher yield and rates compared to those<br />
running surpluses. However, this has not been the<br />
case in the US. The US has run current account<br />
deficits since 1994, but as the current account deficit<br />
was widening, foreign investors were keen to buy US<br />
assets even at relatively low yields. This paradox<br />
developed on the back of the Asian crisis. Following<br />
that crisis, Asian central banks kept a tight grip on<br />
their capital accounts, leaving currencies<br />
undervalued even as their current account surpluses<br />
went through the roof. Closed capital accounts<br />
suggested that the recycling of Asia’s current<br />
account surpluses had to occur through currency<br />
reserve managers happily investing in USDdenominated<br />
debt. The liquidity and depth of the US<br />
Hans Redeker 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
44<br />
www.GlobalMarkets.bnpparibas.com
ond market attracted huge swathes of global<br />
currency reserves, providing a stable inflow of capital<br />
into the US for most of the past decade. Despite<br />
these inflows, the USD remained weak because the<br />
US provided cheap USD liquidity globally via its<br />
powerful banking system. Hence, the funding<br />
position of the USD is key to explaining its reverse<br />
relationship with risk appetite. This relationship,<br />
which is likely to persist, constitutes the reason why<br />
we expect the USD to stay weak for the remainder of<br />
this year. Nonetheless, we see a period of USD<br />
strength again next year when we expect slower<br />
global growth in combination with a potential EMU<br />
bond crisis to hit investor confidence once again. The<br />
USD’s position as a funding currency underlines its<br />
status as a safe haven play at times of financial<br />
market stress.<br />
What drives risk appetite?<br />
The assessment of risk appetite requires analysing<br />
liquidity in the context of economic circumstances.<br />
Within stable economic conditions (inflation not<br />
deviating substantially from the 2% target and real<br />
growth operating around the growth potential of<br />
economies), the relationship between liquidity and<br />
risk appetite is linear. The more liquidity there is in<br />
the market, the better for risk appetite. Liquidity can<br />
come from various sources: central bank liquidity<br />
(narrow money supply); the private sector taking out<br />
loans from banks (credit multiplier); and foreign<br />
liquidity, which itself can be divided into income from<br />
abroad via trade or investment-related flows. At<br />
present, central bank liquidity is the focus, while the<br />
other factors of liquidity generation can be ignored.<br />
This applies especially to the credit multiplier, which<br />
will have to remain slow in the context of deleveraging.<br />
For the next quarter, we see central bank<br />
liquidity continuing to support risk appetite. Also<br />
supportive are:<br />
• Japan intervening on the FX markets, leaving<br />
added reserves unsterilised in the system;<br />
• Other Asian central banks limiting the pace of<br />
currency appreciation causing currency reserve<br />
growth gaining momentum again;<br />
• The Fed interest rate statement released this<br />
week, which was dovish – supporting our projection<br />
that it will increase funding into the system in<br />
November;<br />
• The ECB continuing to allocate unlimited repos;<br />
and<br />
• The likelihood that the BoE will soon rejoin the<br />
club of liquidity-adding central banks.<br />
Chart 2: US Cash Position Relative to Total<br />
Assets (measured by total equity market cap)<br />
Still High<br />
Source: Reuters EcoWin Pro<br />
Chart 3: Dow Jones versus Changes in Global<br />
Currency Reserves<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Apr-05 Apr-07 Apr-09<br />
Y/Y %Change Global Reserves<br />
Source: Reuters EcoWin Pro<br />
14000<br />
13000<br />
12000<br />
11000<br />
10000<br />
9000<br />
8000<br />
7000<br />
DOW Monthly Close (rhs)<br />
While this liquidity creation will support asset prices<br />
in the short term, the longer-term implications are<br />
less clear. There have been very few cases where<br />
the success or failure of quantitative easing can be<br />
evaluated. BoJ President Shirokawa points out that<br />
quantitative easing may be able to stabilise<br />
expectations via rising asset prices, but that<br />
supportive effects on the economy should not be<br />
overestimated. This assessment is probably correct<br />
given that the elasticity of the economy to changes in<br />
interest rates or rate expectations is low when rates<br />
are near zero. Once the asset price boosting effect<br />
has worked into higher prices for shares and other<br />
risky assets, markets will look for new direction. This<br />
direction will come from the assessment of the<br />
economy. Despite our bullish risk and equity market<br />
outlook for the next quarter, we maintain that the<br />
long-term outlook for equity markets does not look<br />
promising should Western economies not pick up<br />
momentum next year. In fact, we see global growth<br />
slowing from 5% in Q2 2010 to 3.7% in Q2 2011.<br />
Currency markets will trade accordingly. While high<br />
Hans Redeker 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
45<br />
www.GlobalMarkets.bnpparibas.com
eta, yield and commodity currencies will remain firm<br />
this year, the outlook for 2011 is less upbeat.<br />
Successful intervention?<br />
The BoJ intervening on behalf of the MOF has<br />
stabilised JPY markets. But further intervention will<br />
be needed to prevent the JPY from appreciating<br />
again. An analysis of JPY-related flows demonstrates<br />
this. While Japanese institutional investors have<br />
invested heavily in foreign bond markets, betting on<br />
the ‘Japanisation’ of Western economies, these JPY<br />
outflows have all been currency hedged.<br />
Consequently, portfolio flows have been currency<br />
neutral. Since M&A related flows have been<br />
insignificant, we believe that most of the JPY<br />
strength has been caused by commercially related<br />
JPY demand. Japanese exports have been JPY<br />
bidding and, if the semi-official Japanese Postbank<br />
had not quietly offered JPY, the USDJPY decline<br />
seen since March would have been even more<br />
dramatic. Currently, commercial JPY flows are<br />
dominant and intervention will not change Japanese<br />
exporters’ need to buy JPY. Hence, the BoJ will have<br />
to intervene in the amount roughly matching the size<br />
of Japan’s current account surplus. Given that<br />
Japan’s reserve to GDP ratio has over the past six<br />
years risen from 16% to 21%, the BoJ has ample<br />
scope to conduct JPY weakening intervention to<br />
keep USDJPY above 80.00. The coming quarter<br />
should see USDJPY slowly grinding lower, but with<br />
the BoJ in the market, the risk of a sharp move lower<br />
may have been prevented.<br />
ECB repo allocation…<br />
Hence, JPY markets should not dent risk appetite,<br />
allowing us to shift focus to the EUR. EMU<br />
economies show a split performance: Germany is<br />
surprising with its strength, while Spain and other<br />
peripheral economies face a double-dip recession.<br />
However, the market has always believed that<br />
Germany is the trend setter for the eurozone and it<br />
will continue doing so until proven wrong. Indeed,<br />
German export-oriented growth has received a big<br />
boost from booming Asian and Middle Eastern<br />
markets. With Chinese economic statistics showing<br />
domestic demand rising strongly and China allowing<br />
its currency to appreciate at a moderate pace,<br />
exporter optimism in coming surveys could be<br />
buoyed even further. Meanwhile, outstanding ECB<br />
reserves have decreased from EUR 900bn to EUR<br />
600bn, indicating that Europe’s banking sector<br />
overall has become less dependent on ECB liquidity.<br />
Nonetheless, this is the extent of the good news. The<br />
ECB has allocated unlimited repo liquidity at the fixed<br />
1% rate. Some 61% of reserves provided by the ECB<br />
have been absorbed by peripheral banks located in<br />
Spain, Portugal, Greece and Ireland. As long as the<br />
ECB provides unlimited access to central bank<br />
Chart 4: Japan: Current Account Surplus Drives<br />
USDJPY<br />
Source: Reuters EcoWin Pro; Current account (12mths sum) (USD), (Bln)<br />
Chart 5: Excess of Reserves Held by European<br />
Commercial Banks with the ECB Reduced<br />
Source: Reuters EcoWin Pro<br />
liquidity, the solvency of peripheral banks is almost<br />
guaranteed. Peripheral banks can even get access to<br />
short-term private funds. However, once the ECB<br />
begins to exit from the unlimited provision of liquidity,<br />
the outlook will change radically. In this case,<br />
peripheral banks will run short of funds, forcing<br />
sovereigns to step in. The creditworthiness of<br />
peripheral sovereigns has been damaged and, with<br />
bond spreads wide, it is not clear that sovereigns’<br />
fund-raising capabilities are sound enough to deal<br />
with additional liquidity demands from its banking<br />
sector.<br />
…will be important for assessing investment<br />
risks<br />
Indeed, the weak banking sector could easily<br />
undermine EMU credit markets. The successful<br />
Spanish sovereign auctions saw little international<br />
participation, with domestic banks the main investors.<br />
Should the ECB cut banks off from unlimited liquidity,<br />
demand for local bonds will suffer – driving spreads<br />
up. Remember, in November 2009, the ECB’s<br />
Hans Redeker 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
46<br />
www.GlobalMarkets.bnpparibas.com
warning to Greek banks that it might have to impose<br />
haircuts on Greek bonds used as collateral for ECB<br />
funding triggered what proved to be a significant<br />
widening of Greek bond spreads. Again, the ECB is<br />
now in a very uncomfortable position and can only<br />
hope that growth picks up quickly enough in the<br />
eurozone periphery to reduce balance sheet risks<br />
within its banking sector.<br />
As long as growth is weak, peripheral banks will<br />
remain hooked on ECB liquidity – putting the ECB<br />
between a rock and a hard place with regard to<br />
monetary policy. Providing unlimited liquidity<br />
prevents peripheral banks going down the drain, but<br />
such monetary conditions will become far too loose<br />
for core countries. The inflation-fearing German<br />
people will certainly not like the idea of inflating way<br />
peripheral countries’ problems. Alternatively, letting<br />
unlimited repos expire without replacement will send<br />
shock waves across peripheral bond markets which<br />
could easily lead to another round of EUR weakness.<br />
We expect the ECB to try to win time by keeping<br />
unlimited repos in the market well into 2011. While<br />
this implies keeping the floodgates of monetary<br />
policy open, with the ECB effectively acting as the<br />
‘liquidity provider of last resort for the embattled<br />
peripheral banking sector, banking-related issues will<br />
not be the main focus for currency traders this year.<br />
The ECB’s accommodative monetary conditions<br />
suggest the EUR will underperform against highyielding<br />
currencies. Against the USD, the EUR is<br />
expected to make moderate gains. However, next<br />
year, things may look very different. The ECB will not<br />
be able to keep its current approach indefinitely<br />
without risking its own balance sheet. But should the<br />
ECB be forced to exit its policy of providing unlimited<br />
repos at a time when peripheral Europe still needs<br />
life support, all hell would break loose. In such a<br />
case, the EUR trend would reverse quickly.<br />
Trading themes: CAD may play catch-up<br />
Trading opportunities over the next few weeks and<br />
months will come from projected USD weakness<br />
coming on the back of the Fed preparing for another<br />
round of quantitative easing. Over the past few<br />
weeks, it has been the ‘Japanisation’ theme driving<br />
the relative performance of currencies against the<br />
USD – putting the AUD in an out-performing position.<br />
Lower bond yields globally suggested investors<br />
playing the ‘yield pick-up’ theme, putting yielding<br />
currencies into demand. Although the decline in the<br />
USD was accompanied by commodity prices<br />
breaking higher, the CAD has not benefited from the<br />
USD decline. Rather, AUDCAD has rallied by more<br />
than 15% since June. In the short term, this advance<br />
looks overstretched and will be corrected if the<br />
Japanisation theme converts into an asset theme as<br />
we expect. The CAD should receive support once the<br />
Chart 6: Sweden: Export Structure<br />
Sweden Exports by Destination<br />
Scandinavia<br />
23%<br />
Asia<br />
incl<br />
Japan<br />
3%<br />
UK<br />
9%<br />
Oceania<br />
2%<br />
Canada<br />
2%<br />
Others<br />
12%<br />
EU<br />
39%<br />
US<br />
10%<br />
Pulp &<br />
Paper<br />
20%<br />
Sweden Exports by Type<br />
Motor<br />
19%<br />
Pharmaceuticals<br />
15%<br />
Basic metals<br />
2%<br />
Machinery<br />
29%<br />
Chemicals<br />
14%<br />
Communication<br />
1%<br />
Source: Statistics Sweden Exports in SEK bln, using 2009 totals<br />
(sourced via Bloomberg), Statistics Sweden Exports in SEK bln, using<br />
2009 totals (sourced via Bloomberg)<br />
EU<br />
56%<br />
Chart 7: UK: Export Structure<br />
UK Exports by Destination<br />
Asia Scandinavia<br />
incl Japan 7%<br />
4%<br />
Oceania<br />
2%<br />
Canada<br />
4%<br />
Others<br />
6%<br />
US<br />
21%<br />
Food, Beverages<br />
& Tobacco<br />
20%<br />
Finishedmanufactures<br />
12%<br />
UK Exports by Type<br />
Basic Materials<br />
19%<br />
All<br />
manuf<br />
14% Fuel<br />
18%<br />
Semimanufactures<br />
17%<br />
Source: ONS UK Trade in goods by volume indices using 2009 totals<br />
(sourced via Bloomberg), OECD International Trade Statistics Database<br />
expressed in current USD, using 2009 totals<br />
currently dominant bond-related cross-currency flow<br />
converts into an equity flow. We showed above that<br />
central bank liquidity has determined the equity trend<br />
over the past year. With central bank liquidity being<br />
printed not only in the G4 but also Asian central<br />
banks operating looser conditions than warranted by<br />
their domestic fundamental situation, there is a good<br />
chance of seeing share prices move higher. An<br />
increasing focus on equity markets should allow the<br />
CAD to catch up with the AUD.<br />
GBPSEK shorts are the conservative way to play<br />
the China boom<br />
The other big currency trading theme is China and its<br />
increasingly important domestic market. Export<br />
opportunities to China vary significantly between<br />
countries. Generally, countries with a strong<br />
manufacturing sector stand to benefit more than<br />
countries with an underdeveloped manufacturing<br />
sector. Sweden falls into the first category. It is not<br />
only the direct trade relationship that counts.<br />
Machinery exports comprise 21% of Sweden’s total<br />
exports and are exactly what Asian economies are<br />
demanding. Globally, the machinery sector is<br />
booming and Sweden is participating in this boom.<br />
On the other hand, the UK is not known for its<br />
machinery and the financial services it exports are of<br />
little use to China, with its closed capital account.<br />
Hans Redeker 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
47<br />
www.GlobalMarkets.bnpparibas.com
NOKSEK to extend downtrend<br />
• Scandinavian currencies have been the out performers over the past week and in the case of SEK<br />
over the past month<br />
• The SEK uptrend has been accelerated with multi-year trendlines currently being tested; a break of<br />
which will open further significant appreciation potential<br />
• The NOK has remained supported, but the medium term technical position is less encouraging<br />
than that of the SEK…<br />
• …hence we expect NOKSEK to extend the major downtrend, especially given the sharp break<br />
lower through long term support<br />
The Scandinavian currencies have been the out<br />
performers over the course of the past week and<br />
in the case of the SEK the top performer among<br />
the G10 currencies over the past month as well.<br />
Technical indicators are still giving bullish signals<br />
for the SEK and the break through key technical<br />
levels suggests that the SEK has further upside<br />
potential. Indeed, EURSEK is now testing long<br />
term up trendline support currently intervening at<br />
9.1065. A break below here will trigger another<br />
bearish signal leaving EURSEK vulnerable to a<br />
decline towards 8.9595 and then the 2005 low of<br />
8.8800.<br />
EURNOK has been keeping the pressure on<br />
support in the 7.8405 and 7.8125 areas, which<br />
represents the bottom end of the three month<br />
trading range. A break below here is needed to<br />
trigger a decline back towards the 7.6785 May<br />
low. However, medium term technical indicators<br />
have now started to develop positive signals with<br />
both the 9-day and 9-week RSI moving higher.<br />
Hence, the ability to hold above the<br />
7.8405/7.8125 support is likely to see a EURNOK<br />
rebound to test the major down trendline resistance<br />
at 8.0120. A break above here will trigger a renewed<br />
bullish signal opening upside potential towards the<br />
8.2280 level, which is the peak from May as well as<br />
the 38.2% retracement level of the decline from the<br />
9.1460 June 2009 high.<br />
The diverging technical picture between the NOK and<br />
SEK suggests that NOKSEK is now vulnerable.<br />
Indeed, NOKSEK has extended the major down<br />
trend, breaking lower through the bottom end of the<br />
long term trading range in the 1.1645 area to test the<br />
initial channel support at the 1.1495 level. The initial<br />
rebound from here has been limited by the key<br />
resistance at 1.1660 and down trendline resistance at<br />
1.1685. Failure to overcome this resistance will keep<br />
the down trend intact. Indeed, medium term technical<br />
indicators are giving bearish signals. Hence, we<br />
expect a decline below the recent 1.1645 lows<br />
opening downside potential towards the major<br />
channel support at 1.1315 and then long term<br />
support at 1.1195.<br />
EURUSD has<br />
extended the recent<br />
recovery rally to test<br />
channel resistance in<br />
the 1.3445 area.<br />
From here a near-term<br />
correction lower is<br />
likely targeting the<br />
1.32 and 1.3155 area.<br />
The ability to hold<br />
above 1.3155 will<br />
keep the outlook<br />
bullish allowing a<br />
move to 1.3690.<br />
Chart 1: EUR/USD – near-term correction lower<br />
1.46 1.4580<br />
1.41<br />
1.3820<br />
1.3690<br />
1.36<br />
1.3280<br />
1.3400<br />
1.3445<br />
1.31<br />
1.3275<br />
1.26<br />
1.2920<br />
1.21<br />
1.2180<br />
1.16<br />
1.1880<br />
01-Feb-10 31-Mar-10 28-May-10 27-Jul-10 23-Sep-10<br />
Source: <strong>BNP</strong> Paribas<br />
Ian Stannard 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
48<br />
www.GlobalMarkets.bnpparibas.com
Chart 2: EUR/SEK – major support being tested<br />
EURSEK has extended<br />
the major down trend to<br />
test the lower boundary<br />
10.25<br />
10.2480<br />
of the major<br />
10.05<br />
9.9570<br />
descending channel<br />
9.8815<br />
and the long term up<br />
9.85<br />
trendline support which<br />
coincide at<br />
9.1065/9.0930.<br />
A break below here will<br />
9.65<br />
9.6640<br />
trigger another bearish 9.45<br />
10.153<br />
signal leaving EURSEK<br />
vulnerable to a decline 9.25<br />
9.3585<br />
towards 8.8800 over<br />
the medium term. 9.05<br />
01-Feb-10 31-Mar-10 28-May-10 27-Jul-10<br />
9.5300<br />
9.0850<br />
23-Sep-10<br />
Source: <strong>BNP</strong> Paribas<br />
The technical picture<br />
for the NOK is less<br />
bullish with EURNOK<br />
failing to break lower<br />
through support.<br />
8.40<br />
8.30<br />
8.20<br />
Chart 3: EUR/NOK – holding above support<br />
8.2640<br />
8.2305<br />
8.1735<br />
Technical indicators<br />
are also giving bullish<br />
signals.<br />
8.10<br />
8.00<br />
7.90<br />
A break above the<br />
down trendline<br />
7.80<br />
resistance at 8.0120<br />
will trigger gains 7.70<br />
towards the 8.1735<br />
and 8.2280 area. 7.60<br />
8.1140<br />
7.9950<br />
01-Feb-10<br />
31-Mar-10<br />
7.6735<br />
28-May-10<br />
7.8000<br />
27-Jul-10<br />
7.9960<br />
7.8500<br />
23-Sep-10<br />
Source: <strong>BNP</strong> Paribas<br />
The NOKSEK rebound<br />
has remained limited<br />
keeping the down<br />
trend intact.<br />
Chart 4: NOK/SEK – extending the down trend<br />
1.28<br />
1.26 1.2550<br />
1.2585<br />
1.2530<br />
Major support at the<br />
1.1645 level, which<br />
represents the bottom<br />
end of the major<br />
trading range has<br />
been broken.<br />
1.24<br />
1.22<br />
1.20<br />
1.18<br />
1.2120<br />
1.1870<br />
1.2280<br />
1.2035<br />
We now expect the<br />
down trend to be<br />
extended towards<br />
1.1315 and 1.1195.<br />
1.16<br />
1.14<br />
06-Oct-09<br />
03-Dec-09<br />
01-Feb-10<br />
31-Mar-10<br />
28-May-10<br />
1.1615<br />
27-Jul-10<br />
23-Sep-10<br />
Source: <strong>BNP</strong> Paribas<br />
Ian Stannard 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
49<br />
www.GlobalMarkets.bnpparibas.com
Currency Spot Trade Recommendations Date<br />
NOKSEK 1.1590 Sell 1.1590, stop 1.1670, target 1.12 23 Sep 2010<br />
AUDNZD 1.3005 Buy 1.2890, stop 1.2790, target 1.3340 23 Sep 2010<br />
AUDUSD 0.9535 Buy 0.9300, stop 0.92, target 0.9700 16 Sep 2010<br />
GBPKRW 1809 Short at 1825, lower stop to 1825, target 1740 17 Sep 2010<br />
EURGBP 0.8500 Long at 0.8250, raise stop to 0.8400, target 0.8600 2 Sep 2010<br />
CHFJPY 85.65 Long at 82.10, raise stop to 84.60, target 86.10 10 Sep 2010<br />
USDZAR 7.0360 Short at 7.20, lower stop to 7.18, target 6.80 3 Sep 2010<br />
USDMXN 12.61 Shorts from 12.95 achieved the 12.65 target 3 Sep 2010<br />
EURNOK 7.9675 Shorts from 8.0400 closed at 7.9700 31 Aug 2010<br />
EURKRW 1537 Shorts from 1505, stopped at 1530 14 Sep 2010<br />
USDKZT 147.36 Short at 147.00, stop at 149.50, target 135.00 28 May 2010<br />
Source: <strong>BNP</strong> Paribas<br />
Ian Stannard 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
50<br />
www.GlobalMarkets.bnpparibas.com
Economic Calendar: 24 Sep - 1 Oct<br />
GMT Local Previous Forecast Consensus<br />
Fri 24/09 05:30 07:30 France GDP (Final) q/q : Q2 0.6% (p) 0.6% 0.6%<br />
05:30 07:30 GDP (Final) y/y : Q2 1.7% (p) 1.7% 1.7%<br />
06:45 08:45 Wages (Final) q/q : Q2 0.4% (p) 0.4% n/a<br />
06:45 08:45 Wages (Final) y/y : Q2 1.9% (p) 1.9% n/a<br />
16:00 18:00 Job Seekers (ILO def. sa) : Aug -14k 0k -5k<br />
07:30 09:30 Sweden PPI m/m : Aug 0.1% -0.2% -0.4%<br />
07:30 09:30 PPI y/y : Aug 1.0% 1.6% 1.4%<br />
07:30 09:30 Eurozone Eurocoin : Sep 0.37 0.35 n/a<br />
08:00 10:00 Germany Ifo Business Climate : Sep 106.7 106.7 106.4<br />
08:00 10:00 Ifo Current Conditions : Sep 108.2 109.2 108.7<br />
08:00 10:00 Ifo Expectations : Sep 105.2 104.2 104.0<br />
08:00 10:00 Italy Retail Sales y/y : Jul 0.5% 0.9% 0.0%<br />
12:30 08:30 US Durable Goods Orders m/m : Aug 0.4% -1.7% -1.0%<br />
13:00 09:00 Fed’s Duke Speaks at Mortgage Hearing in Washington<br />
13:15 09:15 Fed’s Cumming Speaks at Chicago Fed’s Banking Conference<br />
14:00 10:00 New Home Sales : Aug 276k 300k 295k<br />
14:00 10:00 Fed’s Alvarez Testifies at Compensation Hearing<br />
17:00 13:00 Fed’s Lacker Speaks on Economic Outlook in Kentucky<br />
18:00 14:00 Fed’s Plosser speaks on Monetary Policy in Zurich<br />
20:30 16:30 Fed’s Bernanke Speaks in Princeton on ‘Implications of the Financial Crisis for Economics’<br />
Mon 27/09 23:50 08:50 Japan Trade Balance (nsa) : Aug JPY802bn JPY347bn JPY322bn<br />
(26/09)<br />
07:00 09:00 Eurozone ECB’s Trichet Speaks at ECB-CFS Conference in Frankfurt<br />
07:15 09:15 ECB’s Tumpel-Gugerell Speaks at ECB-CFS Conference in Frankfurt<br />
08:00 10:00 M3 y/y : Aug 0.2% 0.4% 0.4%<br />
08:00 10:00 M3 3m y/y : Aug 0.1% 0.2% n/a<br />
13:00 15:00 ECB’s Trichet Speaks at Economic & Monetary Affairs Cmte of the EU Parliament in Brussels<br />
15:00 17:00 ECB’s Tempel-Gugerell Speaks at EUROFI Debate in Brussels<br />
18:00 20:00 ECB’s Constancio Speaks at ECB-CFS Conference in Frankfurt<br />
07:30 09:30 Neths Producer Confidence : Sep 0.4 -1.0 n/a<br />
Tue 28/09 06:00 08:00 Germany GfK Consumer Confidence : Oct 4.1 4.5 4.1<br />
CPI (Prel) m/m : Sep 0.0% -0.2% -0.1%<br />
CPI (Prel) y/y : Sep 1.0% 1.2% 1.3%<br />
HICP (Prel) m/m : Sep 0.1% -0.1% -0.2%<br />
HICP (Prel) y/y : Sep 1.0% 1.3% 1.3%<br />
06:45 08:45 France Household Consumption m/m : Jul -1.4% 1.6% 0.5%<br />
06:45 08:45 Household Consumption y/y : Jul -1.9% 1.0% n/a<br />
06:45 08:45 Household Consumption m/m : Aug n/a -0.5% n/a<br />
06:45 08:45 Household Consumption y/y : Aug n/a 1.4% n/a<br />
06:45 08:45 Housing Starts (3-mths) y/y : Aug 1.3% 4.5% n/a<br />
06:45 08:45 Eurozone ECB’s Tumpel-Gugerell Speaks in Brussels<br />
07:30 09:30 ECB’s Stark Speaks in Istanbul<br />
08:00 10:00 ECB’s Liikanen Speaks in Helskini<br />
07:30 09:30 Sweden Retail Sales (sa) m/m : Aug 0.5% 0.2% n/a<br />
07:30 09:30 Retail Sales (nsa) y/y : Aug 2.0% 4.8% n/a<br />
07:30 09:30 Italy ISAE Consumer Confidence : Sep 104.1 103.0 n/a<br />
08:00 10:00 Wages m/m : Aug 0.1% 0.1% n/a<br />
08:00 10:00 Wages y/y : Aug 2.4% 2.2% n/a<br />
08:30 09:30 UK GDP (Final) q/q : Q2 1.2% (p) 1.2% 1.2%<br />
08:30 09:30 GDP (Final) y/y : Q2 1.7% (p) 1.7% 1.7%<br />
10:00 11:00 CBI Distributive Trades Survey : Sep<br />
09:15 11:15 Belgium CPI m/m : Sep 0.1% 0.0% n/a<br />
09:15 11:15 CPI y/y : Sep 2.3% 2.6% n/a<br />
13:00 09:00 US S&P/Case-Schiller Home Price Index : Jul<br />
14:00 10:00 Consumer Confidence : Sep 53.5 52.0 52.8<br />
21:30 17:30 Fed’s Lockhart to Speaks on Economy in Tennessee<br />
Market Economics 23 September 2010<br />
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Economic Calendar: 24 Sep - 1 Oct (cont)<br />
GMT Local Previous Forecast Consensus<br />
Wed 29/09 23:50 08:50 Japan Tankan (Large Manufacturers DI) : Sep 1 7 7<br />
(28/09)<br />
06:45 08:45 France Consumer Confidence : Sep -39 (Jul) -39 -40<br />
2011 Budget<br />
07:00 09:00 Spain HICP (Flash) y/y : Sep 1.8% 2.1% 2.1%<br />
07:00 09:00 Retail Sales (Adjusted) y/y : Aug 0.5% 0.9% n/a<br />
07:15 09:15 Sweden Consumer Confidence : Sep 25.2 24.0 n/a<br />
07:30 09:30 Italy ISAE Business Confidence : Sep 100.5 98.5 n/a<br />
08:10 10:10 Eurozone Retail PMI : Sep 49.7 50.5 n/a<br />
09:00 11:00 Economic Sentiment : Sep 101.8 101.5 101.0<br />
09:00 11:00 Industrial Sentiment : Sep -4 -5 -5<br />
09:00 11:00 Consumer Sentiment : Jul -11 -11 -11<br />
14:00 16:00 ECB’s Gonzalez-Paramo Speaks in La Paz<br />
08:30 09:30 UK Mortgage Approvals : Aug 49k 47k 46k<br />
08:30 09:30 Net Consumer Credit : Aug GBP0.2bn GBP0.2bn n/a<br />
09:30 11:30 Switzerland KoF Leading Indicator : Sep 2.18 2.05 n/a<br />
14:30 10:30 US EIA Oil Inventories<br />
17:15 13:15 Fed’s Rosengren Speaks in New York<br />
Thu 30/09 23:01 00:01 UK GfK Consumer Confidence : Sep -18 -19 n/a<br />
(29/09)<br />
08:30 09:30 BoE Credit Conditions Survey<br />
23:50 08:50 Japan Industrial Production (Prel, sa) m/m : Aug -0.2% 1.5% 1.2%<br />
23:50 08:50 Retail Sales y/y : Aug 3.8% 4.9% 4.2%<br />
23:50 08:50 Housing Starts y/y : Aug 4.3% 7.6% 9.8%<br />
(29/09)<br />
06:00 08:00 UK Nationwide House Prices Index m/m : Sep -0.9% -0.3% -0.0%<br />
06:00 08:00 Nationwide House Prices Index y/y : Sep 3.9% 2.5% 2.9%<br />
06:45 08:45 France PPI m/m : Jul 0.0% 0.6% n/a<br />
06:45 08:45 PPI y/y : Jul 0.5% 4.3% n/a<br />
06:45 08:45 PPI m/m : Aug n/a 0.0% n/a<br />
06:45 08:45 PPI y/y : Aug n/a 0.5% n/a<br />
07:00 09:00 Eurozone Finance Ministers Meet in Brussels<br />
09:00 11:00 HICP (Flash) y/y : Sep 1.6% 1.8% 1.8%<br />
10:30 12:30 EU Finance Ministers & Central Bankers Meet in Brussels<br />
07:55 09:55 Germany Unemployment (Chg, sa) : Sep -17k -15k -18k<br />
07:55 09:55 Unemployment Rate : Sep 7.6% 7.6% 7.6%<br />
08:00 10:00 Norway Retail Sales (sa) m/m : Aug 1.3% 0.0% n/a<br />
08:00 10:00 Retail Sales (nsa) y/y : Aug 2.0% 5.3% n/a<br />
09:00 11:00 Italy CPI (NIC, Prel) m/m : Sep 0.2% -0.1% n/a<br />
09:00 11:00 CPI (NIC, Prel) y/y : Sep 1.6% 1.7% n/a<br />
09:00 11:00 HICP (Prel) m/m : Sep 0.2% 0.7% n/a<br />
09:00 11:00 HICP (Prel) y/y : Sep 1.8% 1.7% n/a<br />
12:30 08:30 US GDP (Final, saar) q/q : Q2 1.6% 1.3% 1.6%<br />
12:30 08:30 GDP Deflator (Final, saar) q/q : Q2 1.9% 1.8% 1.9%<br />
12:30 08:30 Initial Claims 465k 458k n/a<br />
13:45 09:45 Chicago PMI : Sep 56.7 58.0 56.0<br />
Market Economics 23 September 2010<br />
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Economic Calendar: 24 Sep - 1 Oct (cont)<br />
GMT Local Previous Forecast Consensus<br />
Fri 01/10 23:30 08:30 Japan CPI National y/y : Aug -0.9% -0.9% -0.9%<br />
23:30 08:30 Core CPI National y/y : Aug -1.1% -1.0% -1.0%<br />
23:30 08:30 CPI Tokyo y/y : Sep -1.0% -0.8% -0.8%<br />
23:30 08:30 Core CPI Tokyo y/y : Sep -1.1% -1.0% -1.0%<br />
23:30 08:30 Household Consumption y/y : Aug 1.1% 1.3% 1.4%<br />
23:30 08:30 Unemployment Rate (sa) : Aug 5.2% 5.2% 5.1%<br />
(30/09)<br />
06:30 08:30 Eurozone EU Finance Ministers & Central Bankers Conclude Meeting<br />
08:00 10:00 PMI Manufacturing (Final) : Sep 53.6 (p) 53.6 n/a<br />
09:00 11:00 Unemployment Rate : Aug 10.0% 10.0% 10.0%<br />
16:30 18:30 ECB’s Constancio Speaks in Lisbon<br />
07:00 09:00 Norway Unemployment Rate (sa) : Sep 2.9% 2.8% n/a<br />
07:30 09:30 Switzerland PMI Manufacturing : Sep 61.4 60.0 59.2<br />
08:30 09:30 UK CIPS Manufacturing : Sep 54.3 53.0 53.9<br />
08:30 09:30 BoE Housing Equity Withdrawal : Q2<br />
12:30 08:30 US Personal Income m/m : Aug 0.2% 0.3% 0.3%<br />
12:30 08:30 Personal Spending m/m : Aug 0.4% 0.3% 0.3%<br />
12:30 08:30 Fed’s Dudley Speaks At SABHEW Conference in New York<br />
13:55 09:55 Michigan Sentiment (Final) : Sep 68.9 67.3 67.0<br />
14:00 10:00 Construction Spending m/m : Aug -1.0% - 0.6 -0.4%<br />
14:00 10:00 ISM Manufacturing : Sep 56.3 53.0 54.9<br />
During 28/9-5/10 Germany Retail Sales (Real, sa) m/m : Aug -0.3% 0.5% 0.3%<br />
Week Retail Sales (Real, sa) y/y : Aug 0.8% 2.9% 3.6%<br />
Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision<br />
Source: <strong>BNP</strong> Paribas<br />
Market Economics 23 September 2010<br />
Market Mover<br />
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Key Data Preview<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
80<br />
Chart 1: German Ifo Business Climate<br />
Expectations (4-Mth Lag)<br />
Current Conditions<br />
75<br />
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Sep (f) Aug Jul Jun<br />
Headline 106.7 106.7 106.2 101.8<br />
Expectations 104.2 105.2 105.6 102.5<br />
Current Conditions 109.2 108.2 106.8 101.2<br />
Key Point:<br />
Ifo’s business climate index remains very strong but<br />
expectations are likely to moderate given evidence of<br />
weaker external growth.<br />
<strong>BNP</strong> Paribas Forecast: Cooling Expectations<br />
Germany: Ifo Business Climate (September)<br />
Release Date: Friday 24 September<br />
Ifo’s business climate index rose to its highest level in over<br />
three years in August, propelled by the strength of the subindex<br />
measuring current business conditions.<br />
The latter rose by a cumulative eighteen points in the six<br />
months to August, the strongest run of data in the history of<br />
the series since unification.<br />
This strength largely reflects the exceptional strength in the<br />
manufacturing and export sectors, though domestic sectors<br />
including retail have also shown a marked improvement in<br />
recent months.<br />
As the chart shows, the current assessment is still several<br />
points below its high in the previous expansion, implying<br />
further upside potential, though recent ’hard’ data such as<br />
industrial output, manufacturing orders and exports have<br />
shown signs of weakening.<br />
Given the evidence of a moderation in activity in some of<br />
Germany’s most important markets, including the US and<br />
China, Ifo’s survey of future expectations is likely to top out<br />
in the period ahead.<br />
Net, we expect Ifo’s business climate index to go sideways<br />
in September, though given the external backdrop, we look<br />
for a moderation in the subsequent months.<br />
0.6<br />
0.5<br />
0.4<br />
0.3<br />
0.2<br />
0.1<br />
0.0<br />
-0.1<br />
-0.2<br />
-0.3<br />
-0.4<br />
-0.5<br />
Chart 2: France Job Seekers<br />
01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Unemployment Rate<br />
(3-m change, percentage points)<br />
Job Seekers (3m change, thousands, RHS)<br />
200<br />
150<br />
100<br />
50<br />
0<br />
-50<br />
-100<br />
-150<br />
SA Aug (f) Jul Jun Aug 09<br />
Job Seekers m/m k 0.0 -14.4 -8.6 28.6<br />
Job Seekers y/y % 4.2 5.4 6.9 26.0<br />
Key Point:<br />
The trend has changed from rising to declining, but<br />
the August figure may blip slightly higher.<br />
<strong>BNP</strong> Paribas Forecast: Stable<br />
France: Job Seekers (August)<br />
Release Date: Friday 24 September<br />
In the last two months, the number of job seekers has<br />
dropped; this represents a reversal in the unemployment<br />
trend. However, the decline has been moderate and, since<br />
it is recent, another month of increase cannot be ruled out.<br />
August is a particular month in that a significant number of<br />
seasonal jobs in the tourism activity can be subject to early<br />
ending because of adverse weather. The level of industrial<br />
activity is also still weak in absolute terms so the need for<br />
temps to replace workers on holidays is less acute. Since<br />
the number of job seekers is adjusted in accordance with<br />
the usual seasonal pattern, we have forecast the number of<br />
unemployed people to remain steady in August.<br />
Nevertheless, the underlying trend has now switched from<br />
the increase that prevailed since Q2 2008 to a modest<br />
decline.<br />
The unemployment rate reported by Eurostat has not<br />
declined yet but we expect this to occur very soon –<br />
probably in the figure for August – unless the summer<br />
months (June and July) are revised down from the present<br />
estimate of 10.0%. The Eurostat figure will be released on<br />
1 October.<br />
Market Economics 23 September 2010<br />
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Key Data Preview<br />
Chart 3: US ISM Points to Moderation<br />
Source: Reuters EcoWin Pro<br />
<strong>BNP</strong> Paribas Forecast: Mixed Report<br />
US: Durable Goods (August)<br />
Release Date: Friday 24 September<br />
Durable goods orders are expected to fall 1.7% in August,<br />
after a 0.4% increase in July, reflecting a sharp drop in<br />
Boeing orders. Excluding transportation, we look for a<br />
modest 0.9% rebound after a sharp 3.7% decline in July.<br />
Orders for durable goods appear to be slowing as the<br />
inventory cycle runs its course and global trade cools. The<br />
new orders component of the ISM manufacturing index has<br />
declined for three consecutive months, pointing to a<br />
noticeable slowing (see chart). Our forecast would be<br />
consistent with a solid but smaller contribution to GDP from<br />
business investment in Q3.<br />
% m/m Aug (f) Jul Jun May<br />
Durable Goods -1.7 0.4 -0.2 -0.7<br />
Ex-Transport 0.9 -3.7 0.2 1.4<br />
Key Point:<br />
The negative headline reading we expect would be<br />
driven by a sharp decline in Boeing orders; extransport<br />
should post a modest gain.<br />
Chart 4: Japan: Trade Balance (JPY bn, sa)<br />
1400<br />
1200<br />
1000<br />
800<br />
600<br />
400<br />
200<br />
0<br />
-200<br />
-400<br />
-600<br />
-800<br />
00 01 02 03 04 05 06 07 08 09 10<br />
Source: MOF, <strong>BNP</strong> Paribas<br />
JPY bn Aug (f) Jul Jun May<br />
Trade balance (nsa) 347.0 802.0 682.2 316.0<br />
Trade balance (sa) 541.3 610.4 514.5 345.8<br />
<strong>BNP</strong> Paribas: Slightly Smaller Surplus<br />
Japan: Trade Data (August)<br />
Release Date: Monday 27 September<br />
Based on trade data through mid-August, we expect<br />
nominal exports in the month as a whole to have declined<br />
more sharply than nominal imports, with the result that the<br />
seasonally adjusted trade surplus should modestly shrink.<br />
Owing to the yen’s appreciation (which causes yen-based<br />
prices to decline for imports and exports), nominal exports<br />
have declined for three straight months and imports have<br />
declined for two. On the other hand, real exports (adjusted<br />
for exchange rate and price fluctuations) continue to trend<br />
higher, led by shipments to Asia. In August, though, there<br />
could be a momentary lull as real exports could contract<br />
slightly (real imports should slightly expand). While the<br />
yen’s dramatic appreciation has not damaged export<br />
volume (real exports) so far, the pace of real export growth<br />
is no longer as robust as before, owing to the fading impact<br />
of overseas inventory restocking and fiscal stimulus.<br />
Key Point:<br />
We expect nominal exports to have declined more<br />
sharply than nominal imports, with the result that the<br />
seasonally adjusted trade surplus should modestly<br />
shrink.<br />
Market Economics 23 September 2010<br />
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Key Data Preview<br />
12.5<br />
10.0<br />
7.5<br />
5.0<br />
2.5<br />
0.0<br />
Chart 5: Eurozone M3 & Lending (% y/y)<br />
Private Sector<br />
Bank Lending<br />
M3<br />
-2.5<br />
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
% y/y Aug (f) Jul Jun May<br />
M3 0.4 0.2 0.2 0.0<br />
M3 (3-mth Avg.) 0.2 0.1 0.0 -0.1<br />
Private Sector Loans 1.2 0.9 0.5 0.2<br />
Key Point:<br />
Rates of growth in M3 and bank lending remain low<br />
but have started to pick up.<br />
<strong>BNP</strong> Paribas Forecast: Signs of Life<br />
Eurozone: Monetary Developments (August)<br />
Release Date: Monday 27 September<br />
At 0.2% in July, the y/y rate of change in M3 was roughly<br />
half a percentage point above its cycle low in February. We<br />
forecast a further acceleration in August and given that the<br />
base effects over the remainder of the year are favourable,<br />
the y/y acceleration has further to go.<br />
The differential between narrow and broad money growth<br />
remains unusually wide but the gap is closing. The y/y rate<br />
of increase in M1, having been in double digits for almost a<br />
year from mid-2009, slowed to around 8% y/y in July.<br />
The y/y rate of change in M3 minus M2 has been negative<br />
since early 2009, with the relative steepness of yield curves<br />
having encouraged purchases of longer-term assets which<br />
are not captured in M3. This effect has started to diminish<br />
as yield curves have flattened.<br />
As with M3, the y/y rate of increase in bank lending to the<br />
private sector remains very low but has picked up in recent<br />
months. August’s 0.9% y/y growth rate was the highest in<br />
over a year. A further acceleration is forecast in August.<br />
Loan growth to households is the main reason for the pick<br />
up. It has been improving since October last year, with the<br />
y/y rate of change in July, of 2.8%, up by three percentage<br />
points from its cycle low in September 2009. Bank lending<br />
growth to non-financial corporates continues to lag.<br />
Chart 6: French Sales of Manuf. Goods (3m avg)<br />
12.5<br />
10.0 Retail Sales of Manuf. Goods (including cars, Volume % y/y)<br />
7.5<br />
5.0<br />
2.5<br />
0.0<br />
-2.5<br />
-5.0<br />
03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
New Car Registrations (% y/y, RHS)<br />
Volume index Aug (f) Jul Jun Aug 09<br />
SA-WDA<br />
% m/m -0.5 1.6 -1.4 -0.9<br />
% y/y 1.4 1.0 -1.9 -0.7<br />
Key Point:<br />
July should be much stronger than August. But the<br />
underlying trend is subdued.<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
<strong>BNP</strong> Paribas Forecast: Volatile<br />
France: Hh Consumption of Manuf. Goods (Jul.-Aug.)<br />
Release Date: Tuesday 28 September<br />
The raw data are more difficult to collect in August, so<br />
INSEE publishes the July and August retail sales figures<br />
together in September.<br />
Car sales, which are included in the retail sales data, are<br />
the main source of short-term volatility. Car registrations<br />
declined in both July and August, more in the former<br />
month. The progressive ending of the sales incentive<br />
caused a sharp decline through H1 2010; it seems we are<br />
now close to the low point, although the y/y rate will<br />
continue to plunge because of the base effect. Sales of<br />
other manufactured goods were reportedly quite dynamic<br />
during the seasonal sales in July. Tourism activity was also<br />
relatively strong in July after a poor performance in June.<br />
As a result, we estimate retail sales jumped in July, fully<br />
correcting the June decline. However, sales probably<br />
declined again in August. Such a pattern would still open<br />
the door for a solid gain in Q3. Retail sales in July and<br />
August are among the first hard data for that quarter,<br />
allowing us to have a clearer view of how much growth will<br />
decelerate H2 2010 after a respectable 0.6% q/q GDP<br />
increase in Q2.<br />
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Key Data Preview<br />
Chart 7: US Consumer Confidence<br />
Source: Reuters EcoWin Pro<br />
Sep (f) Aug 2H Sep p Aug<br />
Conference Board 52.0 53.5<br />
Michigan Sentiment 67.3 68.0 66.6 68.9<br />
<strong>BNP</strong> Paribas Forecast: Still Sluggish<br />
US: Consumer Confidence (September)<br />
Release Date: Tuesday 28 September<br />
The Conference Board Index of Consumer Confidence is<br />
expected to edge down to 52.0 in August after improving<br />
1.5 points to 53.5 in the previous month. The University of<br />
Michigan index of consumer confidence declined in the<br />
beginning of September to 66.6 from 68.9, the lowest<br />
reading for more than a year. Leading the decline, future<br />
conditions dropped to 59.1, the lowest reading since March<br />
2009, suggesting consumers are becoming pessimistic<br />
about future business prospects, jobs and family income.<br />
Recent weakness is particularly worrying as the stock<br />
market has rebounded significantly from its May/June<br />
crash, oil prices have been stable and corporate earnings<br />
reports have been upbeat about Q2 results (which have<br />
generally beat analysts’ estimates). We expect the<br />
recovery to continue and payrolls to keep growing,<br />
although at a moderate pace. Therefore, we should see<br />
confidence stabilise at current depressed levels.<br />
Key Point:<br />
The Conference Board Index of consumer<br />
confidence is expected to edge down in September.<br />
Source: Reuters EcoWin Pro<br />
Chart 8: German CoL<br />
% Sep (f) Aug Jul Jun<br />
CoL m/m -0.2 0.0 0.3 0.1<br />
CoL y/y 1.2 1.0 1.2 0.9<br />
HICP m/m -0.1 0.1 0.2 0.0<br />
HICP y/y 1.3 1.0 1.2 0.8<br />
Key Point:<br />
Energy price base effects should help drive headline<br />
inflation higher in September.<br />
<strong>BNP</strong> Paribas Forecast: Energy Base Effects<br />
Germany: CoL (September, preliminary)<br />
Release Date: Tuesday 28 September<br />
In August, energy price base effects pushed down inflation<br />
despite stronger food and core inflation. In September,<br />
energy base effects will be in play once again. A 1.5% m/m<br />
decline in energy prices last September will not be<br />
repeated this month, mechanically pushing energy inflation<br />
higher.<br />
Food inflation should also rise further on the month. The<br />
boost from food price base effects is now past, but we<br />
should increasingly begin to see pass-through from the<br />
recent soft commodity price shock to food prices in the<br />
coming months.<br />
Core inflation should creep higher on modest gains in<br />
clothing and non-energy transport price inflation, though<br />
rounded it should remain at 0.6%.<br />
Looking beyond August, German headline inflation is likely<br />
to trend higher over the remainder of the year, but is not<br />
expected to rise above 2%. Core inflation is likely to remain<br />
subdued, although with consumption in Germany gaining<br />
momentum, we do not expect the discount to the euro area<br />
average to continue for long.<br />
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Key Data Preview<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
-20<br />
-25<br />
-30<br />
-35<br />
Chart 9: Eurozone Sentiment by Sector<br />
Consumer<br />
Industry<br />
-40<br />
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Sep (f) Aug Jul Jun<br />
Economic Sentiment 101.5 101.8 101.1 98.9<br />
Industry -5 -4 -4 -6<br />
<strong>Services</strong> 7 7 7 4<br />
Consumer -11 -11 -14 -17<br />
Key Point:<br />
The economic sentiment index is likely to remain<br />
elevated but a moderation in the industrial sector is<br />
forecast, in line with other survey data.<br />
<strong>BNP</strong> Paribas Forecast: Topping Out<br />
Eurozone: Economic Sentiment (September)<br />
Release Date: Wednesday 29 September<br />
The eurozone economic sentiment index improved in five<br />
of the six months to August, reaching its highest level since<br />
March 2008. The pick-up in sentiment has also been more<br />
broad based over recent months.<br />
The key driver of the improvement in sentiment early in the<br />
expansion was industrial sentiment, which has the highest<br />
weighting of the five main sub-sectors (at 40% of the total).<br />
The moderation of other leading indicators for the industrial<br />
sector, however, including the PMI for manufacturing, is<br />
indicative of industrial sentiment losing ground in coming<br />
months against a backdrop of slowing global growth.<br />
Having lagged during the initial stages of the recovery, the<br />
domestically driven sentiment sub-surveys, such as those<br />
for the services and retail sectors, have improved markedly<br />
over the summer months. The improvement in these areas<br />
has been most pronounced in Germany, which is linked to<br />
the relative strength of its labour market.<br />
Preliminary September figures for the eurozone, however,<br />
showed consumer sentiment flat at -11, the first month in<br />
four not to show an improvement.<br />
Surveys of price expectations in the household sector have<br />
risen sharply from 2009’s lows, as have pricing intentions<br />
of industrial firms, but they remain well below past peaks.<br />
Net balance<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
-50<br />
Chart 10: French Hh Confidence<br />
Good Time to Save<br />
Good Time to Spend<br />
Headline Index<br />
03 04 05 06 07 08 09 10<br />
Source: Reuters EcoWin Pro<br />
Diffusion Index,<br />
SA Sep (f) Aug Jul Sep 09<br />
INSEE indices:<br />
Overall -39 n.a. -39 -35<br />
Buying opportunity -22 n.a. -24 -26<br />
EU Commis. Index:<br />
Headline -20.0 -18.2 -22.3 -24.4<br />
Key Point:<br />
Economic developments are favourable, but the<br />
political context is highly adverse.<br />
<strong>BNP</strong> Paribas Forecast: Stable<br />
France: Household Confidence (September)<br />
Release Date: Wednesday 29 September<br />
As usual no survey is carried out in August, so the<br />
September results will be compared to July’s.<br />
Over the summer, inflation eased. Petroleum product<br />
prices, to which consumers pay special attention, declined.<br />
Employment rose in 0.2% q/q in Q2 with Q3 probably also<br />
seeing an increase. That resulted in a slight decline in the<br />
number of job seekers. Although households will not feel<br />
this easing, they probably understood that some<br />
improvement has occurred in the labour market. Overall,<br />
economic trends are positive for confidence but politics are<br />
clearly adverse.<br />
In terms of political developments, we saw a slight recovery<br />
of the president and prime Minister in the polls over the<br />
summer, but this move has now reversed. The massive<br />
demonstrations on 7 September show how concerned the<br />
public is about the pension reform and more generally<br />
about its standard of living.<br />
As a result, we forecast the headline confidence index to<br />
be unchanged although the opportunity to make important<br />
purchases should have improved slightly. Since the<br />
savings ratio trend is key for future consumption, it will also<br />
be of interest to see whether the recent divergence<br />
between the willingness and the ability to save persists.<br />
Market Economics 23 September 2010<br />
Market Mover<br />
www.GlobalMarkets.bnpparibas.com<br />
58
Key Data Preview<br />
Chart 11: Japanese Production and Exports<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
80<br />
75<br />
70<br />
65<br />
(2005=100, seasonally adjusted)<br />
00 01 02 03 04 05 06 07 08 09 10<br />
Source: METI, <strong>BNP</strong> Paribas<br />
Production<br />
Exports (RHS)<br />
150<br />
140<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
Aug (f) Jul Jun May<br />
% m/m 1.5 -0.2 -1.1 0.1<br />
Key Point:<br />
Production in August should firmly expand thanks to<br />
a surge in last-minute demand for cars ahead of the<br />
end of a stimulus programme.<br />
<strong>BNP</strong> Paribas Forecast: Strong Growth<br />
Japan: Industrial Production (August)<br />
Release Date: Thursday 30 September<br />
We expect production in August to be up 1.5% m/m,<br />
rebounding from two months of decline. But the weak tone<br />
of production since spring should not be taken at face<br />
value, as distortions in the METI’s seasonally-adjusted data<br />
– both the production index and forecast index – have<br />
resulted in a downward bias in readings for Q2 and Q3.<br />
Thus, the actual state of production in August is probably<br />
stronger than indicated by the METI data. In any event,<br />
production in August is likely to get a big boost from the<br />
surge in last-minute demand for cars ahead of the<br />
September termination of subsidies for buying eco-friendly<br />
models. Output in other key sectors should also remain<br />
firm thanks to solid export growth and the revival of<br />
domestic appetite for capital investment. Although negative<br />
payback for the fiscal stimulus programmes could cause<br />
production to momentarily lose some steam moving<br />
forward, so long as export growth does not come to an<br />
abrupt end, the factory sector recovery should continue. As<br />
for fallout from yen appreciation, a strong yen squeezing<br />
profits is certainly is a headwind for producers, but<br />
currency appreciation is a price shock, rather than a<br />
demand (quantity) shock. There should thus be only limited<br />
short-term impact on export volume and production.<br />
Source: Reuters EcoWin Pro<br />
Chart 12: Eurozone HICP<br />
% Sep (f) Aug Jul Jun<br />
HICP m/m 0.2 0.2 -0.3 0.0<br />
HICP y/y 1.8 1.6 1.7 1.4<br />
HICP Core m/m 0.2 0.4 -0.5 0.0<br />
HICP Core y/y 1.0 1.0 1.0 0.9<br />
Key Point:<br />
Inflation should rise to 1.8%, driven up by food<br />
inflation and energy price base effects.<br />
<strong>BNP</strong> Paribas Forecast: Up On Food & Energy<br />
Eurozone: Flash HICP (September)<br />
Release Date: Thursday 30 September<br />
In August, inflation moderated on energy price base<br />
effects, and in September, they will be in play once again.<br />
A 1.3% m/m decline in energy prices last September will<br />
not be repeated this month, mechanically pushing energy<br />
inflation higher.<br />
Food inflation should also rise further on the month. The<br />
boost from food price base effects is now past, but we<br />
should increasingly begin to see pass-through from the<br />
recent soft commodity price shock to food prices in the<br />
coming months.<br />
Core inflation, meanwhile, should remain flat for a second<br />
consecutive month at 1.0%. Core inflation has recovered a<br />
little since April’s 0.77% record low, with both core goods<br />
and core services contributing to the rise. We see scope for<br />
core goods inflation to rise a little further – in part, its<br />
strength reflects pass-through of past euro weakness. But<br />
core services should resume its downward trend given the<br />
weak state of consumer demand and an absence of any<br />
pressure from labour costs. Net, we expect core inflation to<br />
trade flat in September.<br />
Overall, the rise in food and energy will help drive a<br />
rebound in headline inflation to 1.8% y/y, its highest level<br />
since the end of 2008.<br />
Market Economics 23 September 2010<br />
Market Mover<br />
59<br />
www.GlobalMarkets.bnpparibas.com
Key Data Preview<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
Chart 13: Japanese CPI (% y/y)<br />
CPI excluding energy and food, but not alcohol<br />
Core CPI<br />
02 03 04 05 06 07 08 09 10<br />
Source: MIC, <strong>BNP</strong> Paribas<br />
% y/y Aug (f) Jul Jun May<br />
Core CPI -1.0 -1.1 -1.0 -1.2<br />
CPI -0.9 -0.9 -0.7 -0.9<br />
<strong>BNP</strong> Paribas Forecast: Slightly Smaller Decline<br />
Japan: CPI (National, August)<br />
Release Date: Friday 1 October<br />
The rate of decline in national core CPI deepened 0.1pp in<br />
July to -1.1% y/y as the decline in food prices accelerated<br />
slightly and price growth in petroleum products slowed.<br />
Other national price indices were either unchanged –<br />
US-style core CPI came in at -1.5% y/y – or improved: the<br />
negative margin of the “10% trimmed mean CPI” eased<br />
0.2pp to -0.5% y/y. Based on CPI data for Tokyo in August,<br />
we estimate that the national index in August should<br />
rebound and improve 0.1 pct point to 1.0%. Thanks to<br />
improvements in the output gap, the downturn in consumer<br />
prices is steadily easing. While such moderating of<br />
deflationary pressures is expected to continue, the pace<br />
moving forward will be tempered by slower improvements<br />
in the output gap and yen appreciation.<br />
Key Point:<br />
We expect, based on Tokyo’s CPI data for August,<br />
that the rate of decline in the national core index will<br />
ease by 0.1pp to -1.0% y/y in August.<br />
Chart 14: Japanese Unemployment Rate (% sa)<br />
6.0<br />
5.5<br />
5.0<br />
4.5<br />
4.0<br />
3.5<br />
00 01 02 03 04 05 06 07 08 09 10<br />
Source: MIC, <strong>BNP</strong> Paribas<br />
% sa Aug (f) Jul Jun May<br />
Unemployment rate 5.2 5.2 5.3 5.2<br />
Key Point:<br />
Improvements in the unemployment rate have stalled<br />
of late as better economic conditions have<br />
encouraged a growing number of people to quit work<br />
in the hope of finding better employment while<br />
prompting formerly discouraged workers to return to<br />
active job seeking.<br />
<strong>BNP</strong> Paribas Forecast: Flat<br />
Japan: Unemployment Rate (August)<br />
Release Date: Friday 1 October<br />
We expect the unemployed rate in August to be unchanged<br />
from July at 5.2%. In July, the unemployment rate fell 0.1pp<br />
from June, marking the first improvement in six months.<br />
After hitting an all-time high of 5.6% in July 2009, the<br />
unemployment rate rapidly fell until January, when<br />
improvements essentially stalled. That this should happen,<br />
while the economy this past year has expanded at around<br />
an annualised 4% on average, is due to stronger economic<br />
conditions, which have prompted many discouraged<br />
workers to return to active job seeking and encouraged<br />
dissatisfied jobholders to voluntarily quit one position in the<br />
hope of landing a better one. Meanwhile, job growth is also<br />
still slow in recovering, as corporations, which kept payrolls<br />
intact by cutting working hours during the recession, are<br />
now responding to the improving economy with increased<br />
working hours, rather than hiring.<br />
Market Economics 23 September 2010<br />
Market Mover<br />
60<br />
www.GlobalMarkets.bnpparibas.com
Key Data Preview<br />
Chart 7: UK CIPS Manufacturing vs FMCI<br />
Source: Reuters EcoWin Pro<br />
Sep (f) Aug Jul Jun<br />
53.0 54.3 56.9 57.5<br />
Key Point:<br />
We expect the CIPS to fall again in September, with<br />
further downside potential in the coming months.<br />
<strong>BNP</strong> Paribas Forecast: Down Again<br />
UK: CIPS Manufacturing (September)<br />
Release Date: Friday 1 October<br />
We expect the manufacturing sector CIPS to continue to<br />
fall in September, by 1.3 points to 53.0; this would be the<br />
lowest since November 2009. Prior to August, the CIPS<br />
had clearly topped out but had managed to avoid the falls<br />
that had been experienced in other major economies. That<br />
came to an end in August, when the index fell by 2.6<br />
points.<br />
The fall was consistent with the tightening in financial and<br />
monetary conditions highlighted by our FMCI (chart). The<br />
same relationship points to further downside in September.<br />
Furthermore, the orders-inventories balance tends to<br />
provide a guide to future trends in the output component<br />
and indeed the headline index. At current levels, this<br />
relationship points to a sub-50 reading on the headline<br />
CIPS over the next three months.<br />
In combination with the OECD leading indicator, the drop in<br />
the CIPS so far and the likelihood that this trend continues<br />
points to a contraction in output by the end of the year.<br />
Output never caught up with the peaks in the survey<br />
indicators, which probably highlighted relief that the<br />
recession was over. The drop in surveys is partly a<br />
correction of that over-optimism but is also likely to reflect a<br />
genuine slowing in hard output.<br />
Chart 8: US Confidence vs Consumption<br />
Source: Reuters EcoWin Pro<br />
% m/m Aug (f) Jul Jun May<br />
Personal Income 0.3 0.2 0.0 0.3<br />
Consumption 0.3 0.4 0.0 0.1<br />
Core PCE Prices 0.1 0.1 0.0 0.1<br />
<strong>BNP</strong> Paribas Forecast: Modest Gains<br />
US: Personal Income & Spending (August)<br />
Release Date: Friday 1 October<br />
Personal consumption is forecast to rise 0.3% in August<br />
after a 0.4% gain in July as rising gasoline prices and a<br />
moderate gain in core sales spurred by back-to-school<br />
spending more than offset a decline in auto sales. Looking<br />
through the gain in prices, our forecast would imply a<br />
relatively subdued 0.1% increase in real spending as<br />
consumers remain cautious about allocating their<br />
purchasing power.<br />
Personal income is forecast to rise by 0.3% after a 0.2%<br />
gain a month prior as the increase in hours worked and<br />
solid gain in average hourly earnings should support wage<br />
and salary income.<br />
The core PCE price index is expected to rise 0.1% despite<br />
the flat reading on core CPI as the weakness in the CPI<br />
reading was driven by a softening in owner’s equivalent<br />
rent (this is weighted less heavily in the PCE measure).<br />
Our forecast would leave the annual rate steady at 1.4%.<br />
Key Point:<br />
We expect modest gains in income and spending and<br />
a steady reading for core inflation.<br />
Market Economics 23 September 2010<br />
Market Mover<br />
61<br />
www.GlobalMarkets.bnpparibas.com
Key Data Preview<br />
Chart 13: US: PMI Manufacturing Surveys<br />
Source: Reuters EcoWin Pro<br />
Sep (f) Aug Jul Jun<br />
Headline index 53.0 56.3 55.5 56.2<br />
Prices Paid 62.0 61.5 57.5 57.0<br />
<strong>BNP</strong> Paribas Forecast: Down<br />
US: ISM (September)<br />
Release Date: Friday 1 October<br />
We look for the ISM manufacturing index to fall in<br />
September, to 53.0 from 56.3 in August. The new orders<br />
component of the ISM has been declining for three months,<br />
dropping a total of 12.6 points. The September readings of<br />
the Empire and Philly indices point to further deceleration.<br />
On the ISM-adjusted basis, the Philly Fed Index dropped<br />
through the 50 breakeven level in August to 46.3, edging<br />
up only to 46.6 in September. In the meanwhile the ISMadjusted<br />
Empire State index was at 50.3 in August and<br />
moved up to just 50.9. The pace of manufacturing growth is<br />
settling as the inventory cycle cools. Our forecast would<br />
still be consistent with expansion in the sector, albeit at a<br />
much more sustainable pace. Meanwhile we look for the<br />
prices paid index to remain virtually flat as energy prices<br />
have stabilised recently.<br />
Key Point:<br />
The ISM is expected to cool to 53.0 in September, a<br />
pace consistent with much more sustainable<br />
expansion in the sector.<br />
Market Economics 23 September 2010<br />
Market Mover<br />
62<br />
www.GlobalMarkets.bnpparibas.com
Economic Calendar: 4 – 29 October<br />
4 October 5 October 6 October 7 October 8 October<br />
Eurozone: PPI Aug<br />
US: Pending Home Sales<br />
Jul, Factory Orders Aug<br />
Market Economics 23 September 2010<br />
Market Mover<br />
Australia: RBA Rate<br />
Announcement, Trade<br />
Balance Aug, Retail Sales<br />
Aug, NAB Business<br />
Confidence Sep<br />
Japan: BoJ Rate<br />
Announcement<br />
Eurozone: Retail Sales<br />
Aug, <strong>Services</strong> PMI (Final)<br />
Sep<br />
UK: CIPS <strong>Services</strong> Sep<br />
Switz: CPI Sep<br />
US: ISM <strong>Services</strong> Sep<br />
Eurozone: GDP (Final)<br />
Q2<br />
Germany: Factory Orders<br />
Aug<br />
Spain: Industrial<br />
Production Aug<br />
US: ADP Labour Sep,<br />
Challenger Labour Sep<br />
Australia: Labour Sep<br />
Japan: Leading indicator<br />
Aug<br />
Eurozone: ECB Rate<br />
Announcement & Press<br />
Conference<br />
UK: BoE Rate<br />
Announcement, IP Aug<br />
Germany: Industrial<br />
Production Aug<br />
France: Trade Balance<br />
Aug<br />
Norway: IP Aug<br />
Neths: CPI Sep<br />
US: Consumer Credit Aug<br />
During Week: UK Halifax House Prices Sep<br />
11 October 12 October 13 October 14 October 15 October<br />
Holiday: Japan, US,<br />
Canada<br />
France: Industrial<br />
Production Aug<br />
Italy: Industrial Production<br />
Aug<br />
Norway: CPI Sep, PPI<br />
Sep<br />
UK: BRC Retail Sales<br />
Monitor Sep, RICS House<br />
Prices Sep, CPI Sep,<br />
Trade Balance Aug,<br />
DCLG House Prices Aug<br />
France: C/A Aug<br />
Germany: CPI Sep<br />
Sweden: CPI Sep<br />
US: FOMC Minutes, NFIB<br />
Small Business Optimism<br />
Sep<br />
Australia: Westpac<br />
Consumer Confidence<br />
Oct<br />
Japan: M2 Sep,<br />
Machinery Orders Aug<br />
Eurozone: Industrial<br />
Production Aug<br />
UK: Labour Sep<br />
France: CPI Sep<br />
Sweden: AMV Labour<br />
Sep<br />
US: Import Price Index<br />
Sep, Treasury Statement<br />
Sep<br />
Japan: CGPI Sep<br />
Eurozone: ECB Monthly<br />
Bulletin<br />
Spain: CPI Sep<br />
Neths: Retail Sales Aug<br />
US: Trade Balance Aug,<br />
PPI Sep<br />
18 October 19 October 20 October 21 October 22 October<br />
Japan: Tertiary Index Aug<br />
UK: Rightmove House<br />
Price Index Oct<br />
US: Industrial Production<br />
Sep, TICS Data Aug,<br />
NAHB Housing Market<br />
Index Oct<br />
Australia: RBA MPC<br />
Minutes<br />
Eurozone: Current<br />
Account Aug<br />
Germany: ZEW Survey<br />
Oct<br />
US: New Home Starts<br />
Sep<br />
Canada: BoC Rate<br />
Announcement<br />
UK: BoE MPC Minutes,<br />
PSNCR Sep, PSNB Sep<br />
Germany: PPI Sep<br />
Italy: Industrial Orders<br />
Aug, Non-EU Trade<br />
Balance Sep<br />
Neths: Consumer<br />
Confidence Oct<br />
US: Beige Book<br />
Canada: BoC Monetary<br />
Policy Report<br />
Eurozone: Governing<br />
Council Meeting (No Rate<br />
Ann), PMIs (Flash) Oct<br />
UK: Retail Sales Sep<br />
France: Business<br />
Confidence Oct<br />
Sweden: Labour Sep<br />
Neths: Labour Sep<br />
US: Philly Fed Oct,<br />
Leading Indicators Sep,<br />
Retail Sales Sep<br />
During Week: Germany WPI Sep<br />
25 October 26 October 27 October 28 October 29 October<br />
Australia: PPI Q3<br />
Japan: Trade Balance Sep<br />
Eurozone: Industrial<br />
Orders Aug<br />
Spain: PPI Sep<br />
US: Existing Home Sales<br />
Sep<br />
UK: GDP (Adv) Q3<br />
France: Consumer<br />
Confidence Oct, Housing<br />
Starts Sep, Job Seekers<br />
Sep<br />
Sweden: Riksbank Rate<br />
Announcement &<br />
Monetary Policy Report,<br />
PPI Sep<br />
Neths: Producer<br />
confidence Oct<br />
US: S&P/Case-Shiller<br />
Home Prices Aug, FHFA<br />
House Prices Aug,<br />
Consumer Confidence<br />
Oct<br />
Australia: CPI Q3<br />
Eurozone: Monetary<br />
Developments Sep<br />
Germany: CPI (Prel) Oct<br />
France: Retail Sales Sep<br />
Spain: Retail Sales Sep<br />
Norway: Norges Bank<br />
Rate Announcement &<br />
Monetary Policy Report<br />
Belgium: GDP (Flash) Q3<br />
US: Durable Goods Sep,<br />
New Home Sales Sep<br />
Japan: BoJ Rate<br />
Announcement & Outlook<br />
Report, Retail Sales Aug<br />
Eurozone: Business &<br />
Consumer Survey Oct,<br />
Retail PMI Oct<br />
Germany: Labour Oct<br />
France: PPI Sep<br />
Italy: Wages Sep<br />
Sweden: Retail Sales<br />
Sep<br />
Norway: Labour (nsa)<br />
Oct<br />
During Week: UK: Nationwide House Prices Oct<br />
Source: <strong>BNP</strong> Paribas<br />
Release dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions<br />
63<br />
Japan: BoJ Monetary<br />
Policy Meeting Minutes,<br />
Current Account Aug<br />
UK: PPI Sep<br />
Germany: Trade Balance<br />
Aug<br />
France: BoF Survey Sep,<br />
Budget Balance Aug<br />
Sweden: IP Aug<br />
Neths: Industrial<br />
Production Aug<br />
US: Labour Sep,<br />
Wholesale Trade Aug<br />
Canada: Labour Sep<br />
Eurozone: HICP Sep,<br />
Trade Balance Aug, EU25<br />
New Car Registrations<br />
Sep<br />
Italy: Foreign Trade Aug,<br />
CPI Sep<br />
US: Empire State Oct, CPI<br />
Sep, Retail Sales Sep,<br />
Business Inventories Aug,<br />
UoM Sentiment (Prel) Oct<br />
Australia: PPI Sep<br />
Germany: Ifo Oct<br />
France: Industrial Survey<br />
Q4<br />
Italy: Retail Sales Aug<br />
Canada: CPI Sep<br />
Japan: CPI Tokyo Oct,<br />
CPI National Sep, Labour<br />
Sep, Household<br />
Consumption Sep, IP Sep,<br />
Housing Starts Sep<br />
Eurozone: Labour Sep,<br />
HICP (Flash) Oct,<br />
Eurocoin Oct<br />
UK: GfK Consumer<br />
Confidence Oct, Net<br />
Consumer Credit Sep,<br />
Mortgage Approvals Sep<br />
Germany: Wages Q3<br />
Italy: PPI Sep, CPI (Prel)<br />
Oct<br />
Spain: HICP (Flash) Oct<br />
Norway: Retail Sales Sep<br />
Switz: KoF Leading<br />
Indicator Oct<br />
US: GDP (Adv) Q3, ECI<br />
Sep, Chicago PMI Oct,<br />
UoM Sentiment (Final) Oct<br />
Canada: GDP Aug<br />
www.GlobalMarkets.bnpparibas.com
Treasury and SAS Issuance Calendar<br />
Daily update onto https://globalmarkets.bnpparibas.com, Tools & Apps, Analytical Tools, Market Calendar, Government Flows<br />
In the pipeline - Treasuries:<br />
Ireland: Possibility of a syndicated offering towards the end of 2010<br />
Germany: Plans to issue EUR 2-3bn in inflation-linked bonds and reserves right to issue foreign currency bonds in Q4<br />
Poland: Plans to issue yen-denominated bonds in November and may issue euro-denominated bonds as early as January 2011<br />
UK: Plans a syndicated offering: H2 October, conventional gilt (30-50y area), further details around 2 weeks in advance<br />
Denmark: H2 2010, to issue a 5y EUR loan (EUR 1-2bn). Opening of new 5y (Nov 2016) & 10y (Nov 2021) DGBs postponed to the beginning<br />
of 2011<br />
Slovak Rep.: Considering issuing new syndicated 15y benchmark bond (around EUR 1.5bn) in the autumn<br />
During the week:<br />
UK: Choice of gilt for w.c. 11 Oct mini tender on Fri 1 Oct<br />
Date Day Closing Country Issues Details <strong>BNP</strong>P forecasts<br />
Local GMT<br />
24/09 Fri Sweden Exch. Offer ILB 0.5% Jun 2017 vs. 3.5% Dec15 (# 3105) SEK 6bn<br />
11:00 15:00 US Outright Treasury Coupon Purchase (2014-2016)<br />
FNMA Notes 26 Oct 2015 (new, syndicated)<br />
27/09 Mon 10:55 08:55 Italy CTZ 31 Aug 2012 EUR 3bn<br />
Sweden Exch. Offer ILB 0.5% Jun 2017 vs. 5% Dec20 (# 3102) SEK 6bn<br />
12:00 10:00 Belgium OLO 2.75% 28 Mar 2016 (OLO 59)<br />
OLO 3.75% 28 Sep 2020 (OLO 58)<br />
24 Sep EUR 2-2.8bn<br />
OLO 4.25% 28 Mar 2041 (OLO 60)<br />
Slovak Rep. SLOVGB 3.5% 24 Feb 2016 (#213)<br />
EUR 0.150bn<br />
13:00 17:00 US Notes 0.375% 30 Sep 2012 (new) USD 36bn<br />
28/09 Tue 12:00 03:00 Japan JGB 15 Oct 2012 JPY 2.6tn<br />
10:55 08:55 Italy BTPei 2.1% 15 Sep 2021 EUR 1-1.5bn<br />
Sweden Exch. Offer ILB 0.5% Jun 2017 vs. 3.5% Dec15 (# 3105) SEK 3bn<br />
Neths DSL 3.25% 15 Jul 2015 (Off-the-run facility)<br />
DSL 4% 15 Jul 2018 (Off-the-run facility)<br />
EUR 0-2bn<br />
Denmark DGB 4% 15 Nov 2010 (buy back)<br />
12:00 16:00 Canada Repurchase of 7 Cash Mgt Bonds (Dec10 - Dec11) CAD 1bn<br />
11:00 15:00 US Outright Treasury Coupon Purchase (2011-2040)<br />
13:00 17:00 US Notes 1.25% 30 Sep 2015 (new) USD 35bn<br />
29/09 Wed 10:55 08:55 Italy BTP 2% 1 Jun 2013<br />
CCT 15 Dec 2015 (CCTeu)<br />
BTP 3.75% 1 Mar 2021<br />
24 Sep EUR 5-7bn<br />
11:00 09:00 Sweden T-bonds 4.5% 12 Aug 2015 (# 1049) SEK 2.5bn<br />
13:00 17:00 US Notes 1.875% 30 Sep 2017 (new) USD 29bn<br />
30/09 Thu 11:00 15:00 US Outright Treasury Coupon Purchase (2021-2040)<br />
01/10 Fri 12:00 03:00 Japan Auction for Enhanced-liquidity 24 Sep JPY 0.3tn<br />
05/10 Tue 11:00 09:00 Austria RAGBs 28 Sep<br />
10:30 09:30 UK Index-Linked Gilt 0.625% 22 Nov 2042 28 Sep GBP 0.8bn<br />
Denmark DGB 30 Sep<br />
11:00 15:00 US Outright Treasury Coupon Purchase (2016-2020)<br />
06/10 Wed 11:00 09:00 Germany Schatz 0.75% 14 Sep 2012 EUR 5bn<br />
11:00 09:00 Norway NGBs 29 Sep<br />
11:00 15:00 US Outright Treasury Coupon Purchase (2013-2014)<br />
07/10 Thu 12:00 03:00 Japan JGB 10-year 30 Sep JPY 2.2tn<br />
10:30 08:30 Spain Bono 2.5% 31 Oct 2013 4 Oct<br />
10:50 08:50 France OATs 1 Oct<br />
Sweden Exchange Offer ILBs 30 Sep<br />
11/10 Mon Slovak Rep. SLOVGB (For decision) 4 Oct<br />
12/10 Tue Neths DSL 6 Oct<br />
13:00 17:00 US Notes 3-year (new) 7 Oct USD 33bn<br />
13/10 Wed 11:00 09:00 Germany Bund 2.25% 4 Sep 2020 EUR 5bn<br />
11:00 09:00 Sweden T-bonds 6 Oct<br />
13:00 17:00 US Notes 10-year 7 Oct USD 21bn<br />
14/10 Thu 12:00 03:00 Japan JGB 30-year 7 Oct JPY 0.6tn<br />
10:55 08:55 Italy 5-year BTP and possibly 15- or 30-year BTP 7 Oct<br />
10:30 09:30 UK Gilt 4.75% 7 Sep 2015 5 Oct<br />
13:00 17:00 US Bond 30-year 7 Oct USD 13bn<br />
Sources: Treasuries, <strong>BNP</strong> Paribas<br />
Interest Rate Strategy 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
64<br />
www.GlobalMarkets.bnpparibas.com
Next week's T-Bills Supply<br />
Date Country Issues Details<br />
24/09 UK T-Bills Oct 2010 GBP 1bn<br />
T-Bills Dec 2010<br />
GBP 1.5bn<br />
T-Bills Mar 2011<br />
GBP 1.5bn<br />
27/09 France BTF Dec 2010 EUR 4bn<br />
BTF Feb 2011<br />
EUR 1bn<br />
BTF Mar 2011<br />
EUR 2bn<br />
BTF Jun 2011<br />
EUR 1.5bn<br />
Italy BOT Mar 2011 EUR 9bn<br />
Germany Bubills Sep 2011 (new) EUR 4bn<br />
US T-Bills Dec 2010 USD 29bn<br />
T-Bills Mar 2011 (new) USD 29bn<br />
FHLMC Bills 3-month & 6-month 24 Sep<br />
28/09 Spain Letras Dec 2010 27 Sep<br />
Letras Mar 2011<br />
27 Sep<br />
Canada T-Bill Jan 2011 CAD 7.7bn<br />
T-Bill Mar 2011 (new) CAD 2.9bn<br />
T-Bill Sep 2011 (new) CAD 2.9bn<br />
US T-Bills 4-week 27 Sep<br />
FHLB Discount Notes<br />
29/09 Japan T-Bills Jan 2011 JPY 4.8tn<br />
Denmark T-Bills<br />
FNMA Bills 3-month & 6-month 27 Sep<br />
30/09 FHLB Discount Notes<br />
01/10 UK T-Bills 24 Sep<br />
Sources: Treasuries, <strong>BNP</strong> Paribas<br />
Comments and charts<br />
• EGB gross supply will fall to around EUR 12/13bn in<br />
the week ahead from EUR 14bn in the past week. In 10y<br />
duration adjusted terms, it falls to around EUR 6.3bn.<br />
There well be also a significant amount of long-term and<br />
short-term redemptions, leading to negative net supply<br />
figures.<br />
• Italy will kick off EGB issuance with a CTZ Aug-12<br />
tap for EUR 3bn. On the same day, Belgium will tap<br />
three OLO lines: Mar-16, Sep-20 and Mar-41. Then on<br />
Tuesday, Italy will tap BTPei Sep-21 for EUR 1-1.5bn<br />
and Netherlands will conduct off-the-run taps of DSLs<br />
Jul-15 and Jul-18 for EUR 1-2bn. Finally, on Wednesday<br />
Italy will reopen BTPs Jun-13 and Mar-21 and also tap<br />
CCTeu Dec-15 for an expected amount of EUR 4-6bn.<br />
• Outside the eurozone, the US will issue USD 100bn<br />
of 2y, 5y and 7y maturity notes. Sweden and Japan will<br />
also issue paper.<br />
Next week's Eurozone Redemptions<br />
Date Country Details Amount<br />
28/09 Belgium OLO 5.75% EUR 15.8bn<br />
29/09 Greece GGB 6% EUR 0.2bn<br />
30/09 Italy CTZ EUR 16.4bn<br />
Total Eurozone Long-term Redemption EUR 32.4bn<br />
27/09 Austria ATB (EU38) EUR 0.1bn<br />
27/09 Austria ATB (EU37) EUR 0.2bn<br />
29/09 Germany Bubills EUR 5.0bn<br />
30/09 France BTF EUR 10.0bn<br />
30/09 Italy BOT 6mth EUR 9.0bn<br />
30/09 Neths DTC EUR 12.3bn<br />
Total Eurozone Short-term Redemption EUR 36.6bn<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
20<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Next week's Eurozone Coupons<br />
Country<br />
Belgium<br />
Total Long-term Coupon Payments<br />
Chart 1: Investors’ Net Cash Flows<br />
(EUR bn, 10y equivalent)<br />
Net Investors' Cash Flows<br />
(EUR bn , 10y equivalent)<br />
Week of Sep 27th Week of Oct 4th Week of Oct 11th Week of Oct 18th<br />
Chart 2: EGB Gross Supply Breakdown by<br />
Country (EUR bn, 10y equivalent)<br />
Germany Italy Portugal Belgium<br />
France Spain Netherlands Austria<br />
Finland Greece Ireland<br />
Amount<br />
EUR 4.7bn<br />
EUR 4.7bn<br />
Week of Sep 27th Week of Oct 4th Week of Oct 11th Week of Oct 18th<br />
Chart 3: EGB Gross Supply Breakdown by<br />
Maturity (EUR bn, 10y equivalent)<br />
14<br />
12<br />
2-3-YR 5-7-YR 10-YR >10-YR<br />
EGBs Gross Supply (EUR bn, 10y equivalent)<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Week of Sep 27th Week of Oct 4th Week of Oct 11th Week of Oct 18th<br />
All Charts Source: <strong>BNP</strong> Paribas<br />
Interest Rate Strategy 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
65<br />
www.GlobalMarkets.bnpparibas.com
Central Bank Watch<br />
Interest Rate<br />
EUROZONE<br />
Current<br />
Rate (%)<br />
Minimum Bid Rate 1.00<br />
US<br />
Fed Funds Rate 0 to 0.25<br />
Discount Rate 0.75<br />
JAPAN<br />
Call Rate 0.10<br />
Basic Loan Rate 0.30<br />
UK<br />
Bank Rate 0.5<br />
DENMARK<br />
Lending Rate 1.05<br />
SWEDEN<br />
Repo Rate 0.75<br />
NORWAY<br />
Sight Deposit Rate 2.00<br />
SWITZERLAND<br />
3 Mth LIBOR Target<br />
Range<br />
CANADA<br />
0.0-0.75<br />
Overnight Rate 1.00<br />
Bank Rate 1.25<br />
AUSTRALIA<br />
Cash Rate 4.50<br />
CHINA<br />
1Y Bank Lending<br />
Rate<br />
BRAZIL<br />
5.31%<br />
Selic Overnight Rate 10.75<br />
Date of Last<br />
Change<br />
-25bp<br />
(7/5/09)<br />
-75bp<br />
(16/12/08)<br />
+25bp<br />
(18/2/10)<br />
-20bp<br />
(19/12/08)<br />
-20bp<br />
(19/12/08)<br />
-50bp<br />
(5/3/09)<br />
-10bp<br />
(14/1/10)<br />
+25bp<br />
(2/9/10)<br />
+25bp<br />
(5/5/09)<br />
-25bp<br />
(12/3/09)<br />
+25bp<br />
(8/9/10)<br />
+25bp<br />
(8/9/10)<br />
+25bp<br />
(5/5/10)<br />
-27bp<br />
(22/12/08)<br />
+50bp<br />
(21/7/10)<br />
Next Change in<br />
Coming 6 Months<br />
No Change<br />
No Change<br />
No Change<br />
No Change<br />
No Change<br />
No Change<br />
No Change<br />
+25bp<br />
(26/10/10)<br />
+25bp<br />
(26/01/11)<br />
No Change<br />
+25bp<br />
(20/10/10)<br />
+25bp<br />
(20/10/10)<br />
+25bp<br />
(2/11/10)<br />
No Change<br />
+50bp<br />
(26/1/11)<br />
Source: <strong>BNP</strong> Paribas<br />
For the full EMK Central Bank Watch please see our Local Markets Mover<br />
Comments<br />
Doubts about the sustainability of the recovery and low inflation<br />
pressures imply no rise in the refinancing rate for a considerable<br />
period of time: we expect the first increase only in H2 2012.<br />
The FOMC is expected to maintain the funds rate at 0 to 0.25%<br />
for an extended period and is likely to initiate a second round of<br />
quantitative easing in Q4 2010.<br />
We expect the BoJ to maintain its super-low rate policy until<br />
2012, but it may in the meantime further expand its liquidity<br />
provision to cooperate with the government in countering<br />
deflation and the yen’s appreciation.<br />
We expect the MPC to reengage in asset purchases although<br />
elevated inflation could delay this until February 2011. We do<br />
not expect the BoE to start raising Bank Rate before H1 2012.<br />
We expect the central bank to keep its policy rate on hold until<br />
H2 2012, in line with our expectation for the ECB.<br />
As economic growth remains strong and labour market<br />
conditions improve further, we expect the Riksbank to deliver a<br />
further hike at its October meeting.<br />
Moderate growth since the start of the year and our<br />
expectations of a slowdown in growth in Norway’s main trading<br />
partners suggest further rate hikes will come gradually. We<br />
expect the next hike in Q1 2011.<br />
Rates are looking inappropriate given the strength of the<br />
domestic economy. But the first hike is being delayed by<br />
financial stress in the markets and the exceptional strength of<br />
the CHF.<br />
Depending on developments in global financial markets and the<br />
US economic outlook in particular, we expect the BoC to deliver<br />
an additional 25bp of tightening in October. The BoC is then<br />
expected to pause at 1.25% to allow further progress in the<br />
recovery.<br />
The RBA noted in its June statement that policy was appropriate<br />
for the “near term”. This appears to rule out any move in the<br />
coming months, especially in the context of volatility in global<br />
markets. However, likely strong Q2 growth should be enough to<br />
prompt a hike late in the year.<br />
The benchmark lending rate (12-month) should be left<br />
unchanged this year. However, given that housing prices are<br />
failing to correct, the government might hike the mortgage loan<br />
rate in Q4 10. Accordingly, the deposit rate might also be raised<br />
in order to keep the general interest spread unchanged.<br />
The BCB has become much more dovish, sounding more<br />
comfortable with the balance of risks for inflation on the heels of<br />
recent data. However, the monetary authority is likely to resume<br />
hiking rates in early 2011 to tame inflation expectations.<br />
Change since our last weekly in bold and italics<br />
Market Economics 23 September 2010<br />
Market Mover<br />
66<br />
www.GlobalMarkets.bnpparibas.com
Economic Forecasts<br />
GDP<br />
Year 2010<br />
(% y/y) ’09 ’10 (1) ’11 (1) ’12 (1) ’13 (1) Q1 Q2 Q3 Q4<br />
US -2.6 2.6 1.6 2.6 3.1 2.4 3.0 2.9 2.0<br />
Eurozone -4.0 1.7 1.1 1.4 2.0 0.8 1.9 1.9 2.1<br />
Japan -5.2 3.2 1.6 1.6 1.7 4.7 2.4 3.2 2.6<br />
CPI<br />
(% y/y) ’09 ’10 (1) Year<br />
’11 (1) ’12 (1) ’13 (1) Q1 Q2 Q3 Q4<br />
US -0.3 1.7 1.4 0.7 1.1 2.4 1.8 1.3 1.4<br />
Eurozone 0.3 1.6 1.6 1.0 1.2 1.1 1.5 1.7 1.9<br />
Japan -1.4 -0.8 -0.8 0.1 0.6 -1.2 -0.9 -0.9 -0.4<br />
Source: <strong>BNP</strong> Paribas. End Period, Spot Rates as at 16 September<br />
* Preliminary, to be confirmed in the Global Outlook<br />
Interest Rate Forecasts<br />
Interest Rate (3)<br />
(%) Spot Q4'10 Q1'11 Q2'11 Q3'11 Q4'11<br />
US<br />
Fed Funds 0.25 0.25 0.25 0.25 0.25 0.25<br />
10-year 2.77 2.00 2.00 2.25 2.50 2.75<br />
Eurozone<br />
Refi 1.00 1.00 1.00 1.00 1.00 1.00<br />
10-year 2.48 1.90 1.90 2.00 2.25 2.50<br />
Japan<br />
ODR 0.30 0.30 0.30 0.30 0.30 0.30<br />
Call Rate 0.10 0.10 0.10 0.10 0.10 0.10<br />
10-year 1.05 0.90 0.90 1.00 1.10 1.10<br />
Source: <strong>BNP</strong> Paribas. End Period, Spot Rates as at 16 September<br />
* Preliminary, to be confirmed in the Global Outlook<br />
Market Economics / Interest Rate Strategy 23 September 2010<br />
Market Mover<br />
67<br />
www.GlobalMarkets.bnpparibas.com
FX Forecasts*<br />
USD Bloc Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13<br />
EUR/USD 1.29 1.34 1.27 1.23 1.22 1.20 1.22 1.24 1.26 1.25 1.22<br />
USD/JPY 85 82 85 87 90 92 95 100 110 120 119<br />
USD/CHF 0.98 0.93 1.01 1.07 1.09 1.12 1.11 1.10 1.10 1.12 1.16<br />
GBP/USD 1.54 1.58 1.48 1.40 1.45 1.46 1.49 1.48 1.50 1.52 1.53<br />
USD/CAD 1.02 0.96 0.92 0.90 0.87 0.90 0.95 1.00 1.02 1.09 1.11<br />
AUD/USD 0.94 1.02 1.00 0.99 0.97 0.95 0.92 0.93 0.92 0.90 0.87<br />
NZD/USD 0.73 0.78 0.76 0.75 0.74 0.73 0.72 0.69 0.67 0.66 0.64<br />
USD/SEK 7.13 6.64 6.93 7.32 7.46 7.75 7.54 7.42 7.22 7.28 7.62<br />
USD/NOK 6.12 5.82 6.14 6.26 6.23 6.25 6.07 6.05 6.03 6.00 5.98<br />
EUR Bloc Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13<br />
EUR/JPY 110 110 108 107 110 110 116 124 139 150 145<br />
EUR/GBP 0.84 0.85 0.86 0.88 0.84 0.82 0.82 0.84 0.84 0.82 0.80<br />
EUR/CHF 1.27 1.25 1.28 1.31 1.33 1.34 1.35 1.36 1.38 1.40 1.41<br />
EUR/SEK 9.20 8.90 8.80 9.00 9.10 9.30 9.20 9.20 9.10 9.10 9.30<br />
EUR/NOK 7.90 7.80 7.80 7.70 7.60 7.50 7.40 7.50 7.60 7.50 7.30<br />
EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46<br />
Central Europe Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13<br />
USD/PLN 3.06 2.87 2.99 3.13 3.20 3.25 3.20 3.10 3.02 3.00 3.03<br />
EUR/CZK 26.5 24.4 24.5 24.7 25.0 24.7 24.3 24.0 23.9 23.8 24.0<br />
EUR/HUF 275 280 275 270 270 265 250 250 250 245 235<br />
USD/ZAR 7.30 7.00 6.90 7.10 7.00 7.30 7.80 7.80 7.50 7.70 7.00<br />
USD/TRY 1.50 1.45 1.40 1.42 1.40 1.45 1.50 1.52 1.56 1.58 1.45<br />
EUR/RON 4.50 4.25 4.35 4.25 4.20 4.20 4.00 3.95 3.90 3.80 3.90<br />
USD/RUB 29.19 29.49 29.42 29.45 29.12 28.90 28.21 27.75 27.31 27.15 29.12<br />
EUR/PLN 3.95 3.85 3.80 3.85 3.90 3.90 3.90 3.85 3.80 3.75 3.70<br />
USD/UAH 7.9 7.9 7.6 7.6 7.5 7.4 7.4 7.2 7.0 7.5 -----<br />
EUR/RSD 110 110 105 115 105 100 90 86 87 85 86<br />
Asia Bloc Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13<br />
USD/SGD 1.34 1.33 1.32 1.31 1.30 1.29 1.28 1.27 1.26 1.25 1.25<br />
USD/MYR 3.10 3.07 3.05 3.03 3.00 2.95 2.93 2.90 2.87 2.85 2.85<br />
USD/IDR 8800 8600 8500 8400 8300 8200 8100 8000 7900 7800 7800<br />
USD/THB 30.50 30.00 29.50 29.00 28.70 28.50 28.30 28.00 27.70 27.50 27.50<br />
USD/PHP 44.00 43.00 42.50 42.00 41.50 41.00 40.50 40.00 39.50 39.00 39.00<br />
USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80<br />
USD/RMB 6.70 6.65 6.60 6.55 6.50 6.45 6.40 6.35 6.30 6.26 6.23<br />
USD/TWD 31.60 31.00 30.50 30.00 29.80 29.50 29.00 28.50 28.80 28.50 28.50<br />
USD/KRW 1150 1100 1080 1060 1050 1040 1030 1020 1010 1000 1000<br />
USD/INR 46.00 45.50 45.00 44.50 44.30 44.00 43.50 43.00 42.80 42.50 42.50<br />
USD/VND 20000 20500 20500 20500 20500 20500 20500 20500 20500 20500 20500<br />
LATAM Bloc Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13<br />
USD/ARS 3.95 4.05 4.15 4.20 4.30 4.40 4.55 4.70 4.80 4.90 5.00<br />
USD/BRL 1.75 1.70 1.67 1.65 1.68 1.70 1.73 1.75 1.77 1.79 1.80<br />
USD/CLP 495 485 480 470 475 480 483 485 488 492 494<br />
USD/MXN 12.65 12.40 12.25 12.10 11.80 11.90 12.00 12.20 12.40 12.50 12.55<br />
USD/COP 1810 1790 1760 1730 1720 1740 1755 1780 1800 1825 1835<br />
USD/VEF (Priority) (1) 4.29 4.29 4.29 4.29 4.29 4.29 8.80 8.80 8.80 8.80 8.80<br />
USD/VEF (Oil) (1) 2.59 2.59 2.59 2.59 2.59 2.59 5.30 5.30 5.30 5.30 5.30<br />
Others Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13<br />
USD Index 81.87 78.63 82.19 84.73 85.01 86.48 86.16 86.35 86.57 88.46 90.03<br />
*End Quarter<br />
(1) Following the devaluation of the VEF, there is now an official ‘priority’ exchange rate and a so-called ‘oil’ exchange rate used for certain transactions<br />
Source: <strong>BNP</strong> Paribas<br />
Foreign Exchange Strategy 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
68<br />
www.GlobalMarkets.bnpparibas.com
Market Coverage<br />
Market Economics<br />
Paul Mortimer-Lee Global Head of Market Economics London 44 20 7595 8551 paul.mortimer-lee@uk.bnpparibas.com<br />
Ken Wattret Chief Eurozone Market Economist London 44 20 7595 8657 kenneth.wattret@uk.bnpparibas.com<br />
Luigi Speranza Head of Inflation Economics, Eurozone, Italy London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.com<br />
Alan Clarke UK London 44 20 7595 8476 alan.clarke@uk.bnpparibas.com<br />
Eoin O’Callaghan Inflation, Eurozone, Switzerland, Ireland London 44 20 7595 8226 eoin.ocallaghan@uk.bnpparibas.com<br />
Gizem Kara Scandinavia London 44 20 7595 8783 gizem.kara@uk.bnpparibas.com<br />
Dominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.com<br />
Julia Coronado Senior US Economist New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.com<br />
Yelena Shulyatyeva US, Canada New York 1 212 841 2258 yelena.shulyatyeva @americas.bnpparibas.com<br />
Ryutaro Kono Chief Economist Japan Tokyo 81 3 6377 1601 ryutaro.kono@japan.bnpparibas.com<br />
Hiroshi Shiraishi Japan Tokyo 81 3 6377 1602 hiroshi.shiraishi@japan.bnpparibas.com<br />
Azusa Kato Japan Tokyo 81 3 6377 1603 azusa.kato@japan.bnpparibas.com<br />
Makiko Fukuda Japan Tokyo 81 3 6377 1605 makiko.fukuda@japan.bnpparibas.com<br />
Richard Iley Head of Asia Economics Hong Kong 852 2108 5104 richard.iley@asia.bnpparibas.com<br />
Dominic Bryant Asia, Australia Hong Kong 852 2108 5105 dominic.bryant@asia.bnpparibas.com<br />
Mole Hau Asia Hong Kong 852 2108 5620 mole.hau@asia.bnpparibas.com<br />
Xingdong Chen Chief China Economist Beijing 86 10 6561 1118 xd.chen@asia.bnpparibas.com<br />
Isaac Y Meng China Beijing 86 10 6561 1118 isaac.y.meng@asia.bnpparibas.com<br />
Chan Kok Peng Chief Economist South East Asia Singapore 65 6210 1946 kokpeng.chan@asia.bnpparibas.com<br />
Marcelo Carvalho Head of Latin American Economics São Paulo 55 11 3841 3418 marcelo.carvalho@br.bnpparibas.com<br />
Italo Lombardi Latin America New York 1 212 841 6599 italo.lombardi@americas.bnpparibas.com<br />
Florencia Vazquez Latin American Economist Buenos Aires 54 11 4875 4363 florencia.vazquez@ar.bnpparibas.com<br />
Michal Dybula Central & Eastern Europe Warsaw 48 22 697 2354 michal.dybula@pl.bnpparibas.com<br />
Julia Tsepliaeva Russia & CIS Moscow 74 95 785 6022 julia.tsepliaeva@ru.bnpparibas.com<br />
Interest Rate Strategy<br />
Cyril Beuzit Global Head of Interest Rate Strategy London 44 20 7595 8639 cyril.beuzit@uk.bnpparibas.com<br />
Patrick Jacq Europe Strategist Paris 33 1 4316 9718 patrick.jacq@bnpparibas.com<br />
Hervé Cros Chief Inflation Strategist London 44 20 7595 8419 herve.cros@uk.bnpparibas.com<br />
Shahid Ladha Inflation Strategist London 44 20 7 595 8573 shahid.ladha@uk.bnpparibas.com<br />
Alessandro Tentori Chief Alpha Strategy Europe London 44 20 7595 8238 alessandro.tentori@uk.bnpparibas.com<br />
Eric Oynoyan Europe Alpha Strategist London 44 20 7595 8613 eric.oynoyan@uk.bnpparibas.com<br />
Matteo Regesta Europe Alpha Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.com<br />
Ioannis Sokos Europe Alpha Strategist London 44 20 7595 8671 ioannis.sokos@uk.bnpparibas.com<br />
Camille de Courcel Europe Alpha Strategist London 44 20 7595 8295 camille.decourcel@uk.bnpparibas.com<br />
Bülent Baygün Head of Interest Rate Strategy US New York 1 212 471 8043 bulent.baygun@americas.bnpparibas.com<br />
Mary-Beth Fisher US Senior Strategist New York 1 212 841 2912 mary-beth.fisher@us.bnpparibas.com<br />
Sergey Bondarchuk US Strategist New York 1 212 841 2026 sergey.bondarchuk@americas.bnpparibas.com<br />
Suvrat Prakash US Strategist New York 1 917 472 4374 suvrat.prakash@americas.bnpparibas.com<br />
Rohit Garg US Strategist New York 1212 841 3937 rohit.k.garg@americas.bnpparibas.com<br />
Anish Lohokare MBS Strategist New York 1 212 841 2867 anish.lohokare@americas.bnpparibas.com<br />
Olurotimi Ajibola MBS Strategist New York 1 212 8413831 olurotimi.ajibola@americas.bnpparibas.com<br />
Koji Shimamoto Head of Interest Rate Strategy Japan Tokyo 81 3 6377 1700 koji.shimamoto@japan.bnpparibas.com<br />
Tomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1703 Tomohisa.fujiki@japan.bnpparibas.com<br />
Masahiro Kikuchi Japan Strategist Tokyo 81 3 6377 1703 masahiro.kikuchi@japan.bnpparibas.com<br />
Christian Séné Technical Analyst Paris 33 1 4316 9717 christian.séné@bnpparibas.com<br />
FX Strategy<br />
Hans Redeker Global Head of FX Strategy London 44 20 7595 8086 hans-guenter.redeker@uk.bnpparibas.com<br />
Ian Stannard FX Strategist London 44 20 7595 8086 ian.stannard@uk.bnpparibas.com<br />
James Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.com<br />
Kiran Kowshik FX Strategist London 44 20 7595 8086 kiran.kowshik@bnpparibas.com<br />
Sebastien Galy FX Strategist New York 1 212 841 2492 sebastien.galy@bnpparibas.com<br />
Mary Nicola FX Strategist New York 1 212 841 2492 mary.nicola@americas.bnpparibas.com<br />
Andy Chaveriat Technical Analyst New York 1 212 841 2408 andrew.chaveriat@americas.bnpparibas.com<br />
Emerging Markets FX & Interest Rate Strategy<br />
Drew Brick Head of FX & IR Strategy Asia Singapore 65 6210 3262 Drew.brick@asia.bnpparibas.com<br />
Chin Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 chin.thio@asia.bnpparibas.com<br />
Robert Ryan FX & IR Asia Strategist Singapore 65 6210 3314 robert.ryan@asia.bnpparibas.com<br />
Jasmine Poh FX & IR Asia Strategist Singapore 65 6210 3418 jasmine.j.poh@asia.bnpparibas.com<br />
Gao Qi FX & IR Asia Strategist Shanghai 86 21 2896 2876 gao.qi@asia.bnpparibas.com<br />
Shahin Vallée Head of FX & IR Strategy CEEMEA London 44 20 7595 8306 shahin.vallee@uk.bnpparibas.com<br />
Elisabeth Gruié FX & IR CEEMEA Strategist London 44 20 7595 8492 elisabeth.gruie@uk.bnpparibas.com<br />
Bartosz Pawlowski FX & IR CEEMEA Strategist London 44 20 7595 8195 Bartosz.pawlowski@uk.bnpparibas.com<br />
Diego Donadio FX & IR Latin America Strategist São Paulo 55 11 3841 3421 diego.donadio@@br.bnpparibas.com<br />
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For Production and Distribution, please contact:<br />
Ann Aston, Market Economics, London. Tel: 44 20 7595 8503 Email: 0ann.aston@uk.bnpparibas.com,<br />
Danielle Catananzi, Interest Rate Strategy, London. Tel: 44 20 7595 4418 Email: 1Hdanielle.catananzi@uk.bnpparibas.com,<br />
Derek Allassani, FX Strategy, London. Tel: 44 20 7595 8486 Email: 2Hderek.allassani@uk.bnpparibas.com,<br />
Martine Borde, Market Economics/Interest Rate Strategy, Paris. Tel: 33 1 4298 4144 Email 3Hmartine.borde@bnpparibas.com<br />
Editors: Amanda Grantham-Hill, Interest Rate Strategy/Market Economics, London. Tel: 44 20 7595 4107 Email: 4Hamanda.grantham-hill@bnpparibas.com;<br />
Nick Ashwell, FX/Market Economics, London. Tel: 44 20 7595 4120 Email: 5Hnick.ashwell@uk.bnpparibas.com<br />
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