MARKET MOVER - BNP PARIBAS - Investment Services India

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commodity prices, though the rise in sterling offsets this effect to some extent. The MPC will still have room for more QE The bottom line is that the August BoE forecast for consumer price inflation of 2.2% in the fourth quarter of this year is looking a bit of a stretch. Our own forecast is for the rate in Q4 to average 2.5%. But because most of the reasons for the upside news appear to be supply shock-driven price rises in energy and food, rather than anything more broadly based, this gives licence to the Monetary Policy Committee to look through the firmer headline rate. Average earnings growth remains at or below 2%, according to the most recent data. And as unit labour cost growth has been pushed up by falling GDP alongside still rising employment, we would not expect that productivity squeeze to last much longer. Indeed, a big rise in GDP in Q3 should provide an opportunity for some correction here. So, the underlying position on domestically generated inflationary pressure from the labour market is fairly benign. This all means that on the current constellation of data, the MPC is still likely to see room for more quantitative easing at its November meeting, when the current tranche of buying is completed. A further downside risk to RPI Alongside constrained consumer price pressures, there are further downward risks to the retail price index (RPI). This is, of course, the index to which indexed-linked sovereign UK debt is anchored. Most countries with index-linked debt link their bonds to some version of a consumer price index. The UK differs in that the RPI is, in effect, a fairly old, legacy index that uses what might be called an antiquated aggregation procedure in some parts of its construction. The result is that UK RPI inflation, which also includes a mortgage-based measure of housing costs, has tended over a long run of data to average 0.5pp higher than CPI inflation. And since 2010, that difference has been 0.9pp. A methodological group within the Office for National Statistics (ONS), the Consumer Prices Advisory Committee (CPAC), is currently considering the case for making methodological changes to RPI that will move it closer in construction to the CPI. A statement from the National Statistician, alongside the CPAC 3 2 1 -1 -2 -3 -4 Chart 3: UK RPI vs. CPI Inflation (%) 0 1991 1994 1997 2000 2003 2006 2009 2012 Source: ONS, <strong>BNP</strong> Paribas average 1991 onw ards average 2002 onw ards average 2010 onw ards minutes released this week, revealed the intention to put out to public consultation a range of options to change the aggregation of the RPI. At their most extreme, this would involve aggregating the RPI using the same formulae as in the CPI. That could, in effect, narrow the gap between CPI and RPI inflation from the aggregation bias to more-or-less zero. The attraction to the government of such a move is obvious. Changing the basis on which RPI is calculated and thereby lowering its rate could, in principle, save the sovereign GBP 3bn or so a year in interest costs. At a time of fiscal austerity, this is nothing to be scoffed at. On the other hand, changing the nature of the index used for indexlinked gilts might risk upsetting a key investor community upon which the government relies for considerable funding. Major methodological change cannot be ruled out The consultation on the changes to RPI will conclude in late November and we should know by January how the ONS is going to proceed. Any final decision to change the RPI index will rest with the Chancellor of the Exchequer. It is possible that comprehensive changes to the RPI could come in the February 2013 inflation data, published in March. The timetable between a decision to go ahead with a change and publication looks exceptionally tight, however, and a delay until March 2014 may be possible. But contingent on the consultation, the ONS and CPAC appear keen to press ahead with significant changes to the RPI. David Tinsley 20 September 2012 Market Mover 12 www.GlobalMarkets.bnpparibas.com
US Housing: New Channels for Policy • The housing sector has been the US economy’s bright spot in an otherwise disappointing economic performance in 2012. Chart 1: Rental Homes on the Rise • The improvement has not been driven by a recovery in household formation and demand for homeownership, which continue to be weak. • Rather, the rise in rents and decline in home values have boosted rental yields to the point that investors have begun to clear excess housing supply. • The Fed’s aggressive policies have depressed yields on safe assets to the point that solid nominal rental yields are quite attractive. • Thus, Fed policy is finally reaching housing, through a less conventional channel, and may even have a greater impact at the margin than in the past. Housing has turned a corner, despite the lack of demand for homeownership Housing has been a bright spot in the otherwise dismal US economic performance this year, raising hopes that QE might stimulate this critical sector with greater force now that the sector appears to be turning a corner. We think monetary policy, indeed, will have more oomph, but in a different way than it has in the past. Single-family home sales are up roughly 10% over a year earlier, home prices are up in the low-single digits and measures of excess supply have shown marked improvement. Yet, this is not a typical story of low mortgage rates stimulating increased demand. Owneroccupied housing units have not increased over the past year and are still down from the peak reached in 2006 (see Chart 1). There appears to be little demand for homeownership. Mortgage applications for purchase have been essentially flat over the past several years (Chart 2). Despite mortgage rates hitting record lows, homeownership rates continue to drop, hitting levels not seen since 1997 (Chart 3), and total outstanding mortgage debt is still declining as households seek to deleverage and rebuild home equity. The New York Fed Quarterly Report on Household Debt and Credit published at the end of August indicated that consumer debt continued to decline in Q2, shrinking by another USD 52bn to USD 11.38trn. Mortgage debt has been on a constant downward trend since the financial crisis began in Q3 2008 (see Chart 4). The Source: Reuters EcoWin Pro Chart 2: Housing Demand Unmoved by QE Source: Reuters EcoWin Pro trend away from homeownership and housing leverage has continued unabated, despite the Fed’s aggressive monetary interventions. We have long been of the view that much of the lack of demand for housing is probably a structural phenomenon; younger households need mobility and liquidity in a weak labour market and have learned the hard lessons from their parents that housing is hardly a safe investment. The overall pace of household formation continues to run below prior norms, driven by new views on homeownership and the weakness in the economy. The share of people aged 25-34, the peak years for household formation, who are living with their parents remained unchanged at nearly 14% in 2011, well above the share closer to 11% that prevailed before the crisis. Investors are the new homeowners If there is no demand from housing, what is driving the improvement? It appears that rents have risen and home prices have declined to the point where investors see value in buying real estate for conversion to rental. While there is no growth in Julia Coronado and Yelena Shulyatyeva 20 September 2012 Market Mover 13 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: Spain set to present its new budget
Page 5 and 6: The methodology All of the above in
Page 7 and 8: Ireland: What to Expect When You Ar
Page 9 and 10: Spain: Inching Closer to a Request
Page 11: UK Inflation: No Pressure • UK in
Page 15 and 16: Japan: The Eastern Fiscal Cliff •
Page 17 and 18: an agreement that all budget-relate
Page 19 and 20: This section is classified as non-o
Page 33 and 34: Table 1: BNP Paribas' Inflation For
Page 35 and 36: Table 3: BNP Paribas' Inflation For
Page 43 and 44: Economic Calendar: 21 - 28 Sep (con
Page 45 and 46: Key Data Preview Chart 1: UK Cumula
Page 47 and 48: Key Data Preview Chart 5: German He
Page 49 and 50: Key Data Preview Chart 9: German ES
Page 51 and 52: Key Data Preview Chart 13: Japanese
Page 53 and 54: Key Data Preview 7000 6500 6000 550
Page 55 and 56: Treasury and SAS Issuance Calendar
Page 57 and 58: Central Bank Watch Interest Rate EU
Page 61: For Production and Distribution, pl

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