MARKET MOVER - BNP PARIBAS - Investment Services India

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Market Outlook Fed opens the door to more stimulus… …as it fails to deliver on its mandated objectives The outcome of the FOMC meeting pretty much matched our expectations, with the Fed opening the door to “additional accommodation if needed” to “support the economic recovery” and “return inflation, over time, to levels consistent with its mandate”. This formalised the bias to ease which had been laid out in Chairman Bernanke’s speech at Jackson Hole. We had suggested prior to the FOMC meeting that failure to deliver on its dual mandate of price stability and maximum sustainable employment would figure prominently in the Fed’s thinking and so it proved. The change in the language in the statement with regard to inflation was particularly striking. To quote: "Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability”. If the data continue to paint a picture of sub-par growth, the Fed will continue to fail to achieve its mandated objectives and additional accommodation will be required. The bar for action, therefore, is set low: more of the same will be sufficient to prompt the next phase of balance sheet expansion – which we continue to believe is most probable at the November FOMC meeting. A marked improvement in incoming data will be required to forestall the Fed taking such action. 70 65 60 55 50 45 40 35 30 25 US ISM: Downside Risk? Manufacturing ISM: New Orders less Inventories (RHS) ISM Manufacturing: Headline 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 30 25 20 15 10 5 0 -5 -10 -15 -20 Source: Reuters EcoWin Pro Weaker ISM to boost the case for action The next key staging post in the assessment of the data is the upcoming run of business surveys for September, including the ISM for manufacturing at the end of next week. Our expectation is for a downward surprise relative to market consensus expectations: we see the headline index forecast sliding to around 53, its lowest level since early 2009. The gap between the subindices for new orders and inventories, usually a good leading indicator of the ‘headline’ ISM index, is pointing to considerable downside potential for the latter (see chart). In between times, durable goods orders are likely to have fallen sharply in August, driven by a drop in aircraft orders. Stripping out the transport sector, we forecast that orders will rebound but the underlying trend in the ‘core’ data remains weak, indicative of a slowdown in business investment – one of the better-performing areas of the economy recently. Ken Wattret 23 September 2010 Market Mover 2 www.GlobalMarkets.bnpparibas.com
ECB on a different page… …but its bark may be worse than its bite BoE shifts towards additional QE Yield curves back in bullflattening mode, with upcoming data key High demand from banks at ECB’s 3-month op JGB market takes its lead from elsewhere; superlongs favoured Upward pressure on JPY, downward pressure on GBP The Fed’s intentions and those of the ECB look increasingly divergent. While the ECB’s decision to extend the full allotment procedure for all refinancing operations until year-end was sensible, it was accompanied in the August press conference by an assertion from President Trichet that the ECB is still “in the process of phasing out” its unconventional measures. This was then followed by comments from Governing Council members highlighting their discomfort with the “addiction” of some banks to ECB funding. Will the ECB’s bark be worse than its bite? Given the U-turns which the ECB has been forced to make before, this is our assumption. The most recent activity data in the eurozone – most notably the flash PMIs for September – also signal that the slowdown in growth is gathering momentum. Still, on the basis of what we hear from the ECB, the risk of a premature exit remains highest in the eurozone in our view. The Bank of England MPC, in contrast, seems to be taking some baby steps towards further easing. That Mr Sentance again voted for a rate rise earlier this month was not a surprise. But the MPC meeting minutes revealed a greater concern from more than one member about the increased risk of a hard landing for the UK economy. There is growing sympathy for further QE but this has not yet been sufficient to prompt a formal dissent in that direction. Unlike the Fed, the Bank of England has its hands tied by elevated inflation and the risk that this poses to inflation expectations. Our view has been that, by early 2011, more concrete signs that the downside risks to growth are materialising and the upside risks to inflation are not would open the door to additional QE. The MPC minutes, plus recent signs of a lurch downwards in UK activity, suggest even earlier action is possible. Yield curves are back in bull-flattening mode post-FOMC. The question is whether the FOMC statement was the trigger for a new bullish phase or if further evidence of a US and European slowdown is a precondition for a lasting rally. In the aftermath of the FOMC, it seems that ‘risk on’ is fizzling out, reflected in faltering equity markets. Upcoming data will be pivotal in this respect. Further evidence of slowing activity and a renewed deceleration in core inflation – both of which we expect – will be needed for yields to hit new lows. In the eurozone, keep an eye on the expiry of the ECB’s EUR 225bn of liquidity provided through 3mth, 6mth and 12mth tenders. Given the origin of demand at these tenders – mainly banks in the periphery – it is likely that demand at the 3mth tender at the end of the month will be high from this source. The upcoming operation will result in a decrease in liquidity but excess liquidity will persist for a while yet. The JGB market has moved back into bull-flattening mode, helped by market developments externally, with the 10-year JGB yield once again approaching the 1% level and the super-long sector also performing strongly. Volatility throughout the super-long sector has increased but investor demand is robust and we expect super-longs to continue to perform well. Global liquidity conditions will continue to drive currency markets. High beta and commodity currencies will remain in focus despite increasing signs that global growth is slowing. USD/JPY continues to drift lower with commercial JPY buying interest being the dominant flow. The credibility of Japanese authorities is again likely to be tested as expectations of Fed action add to pressure for further intervention. A strong JPY and weak stock prices are particularly unwelcome, given that the fiscal half-year closing is fast approaching. With the Bank of England becoming more inclined to further QE, we keep our EUR/GBP long and GBP/AUD short positions. Ken Wattret 23 September 2010 Market Mover 3 www.GlobalMarkets.bnpparibas.com
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Page 7 and 8: and property tax payments, dropped
Page 9 and 10: directly to effect outright purchas
Page 11 and 12: Services also on the slide The ‘f
Page 13 and 14: inflation rate is calculated exclud
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Page 17 and 18: point advance in the June Tankan. P
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Page 21 and 22: US: A Carry Trade with Extra Potent
Page 23 and 24: MBS: Remain Underweight, GNM CBRs U
Page 25 and 26: EUR: Re-Enter Flatteners on 5y/10y
Page 27 and 28: EGBs: Market Update & Top Trade Ide
Page 29 and 30: EUR Covered Bonds: Market Update
Page 31 and 32: GBP Curve Opportunities Update •
Page 33 and 34: Table 1: BNP Paribas' Inflation For
Page 35 and 36: Table 3: BNP Paribas' Inflation For
Page 37 and 38: Table 1: BNP Paribas Carry Analysis
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Page 41 and 42: Technical Analysis - Interest Rates
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Economic Calendar: 24 Sep - 1 Oct (
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Key Data Preview Chart 3: US ISM Po
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Key Data Preview Chart 7: US Consum
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Key Data Preview Chart 11: Japanese
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Key Data Preview Chart 7: UK CIPS M
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Economic Calendar: 4 - 29 October 4
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Next week's T-Bills Supply Date Cou
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Economic Forecasts GDP Year 2010 (%
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Market Coverage Market Economics Pa
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MARKET MOVER - BNP PARIBAS - Investment Services India

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