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Table 3: BNP Paribas' Inflation Forecasts Canada Norway Australia CPI Core CPI Headline CPI Core CPI Core 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 2009 114.4 0.3 113.6 1.8 125.7 2.2 118.4 2.6 167.8 - 1.8 - - 3.7 2010 (1) 116.5 1.8 115.8 1.9 128.8 2.4 120.2 1.6 173.2 - 3.2 - - 2.8 2011 (1) 118.6 1.8 117.8 1.7 131.1 1.8 122.3 1.7 179.0 - 3.3 - - 2.9 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 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 - - 3.4 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 Q2 2010 (1) 116.3 3.0 1.5 115.6 2.7 1.9 129.1 0.6 2.6 120.3 0.8 1.5 172.3 0.8 3.2 - - 2.7 Q3 2010 (1) 116.9 2.2 1.9 116.2 2.0 2.1 128.5 -0.5 2.1 120.3 0.0 1.5 174.2 1.1 3.3 - - 2.6 Q4 2010 (1) 117.4 1.5 2.2 116.6 1.2 1.9 129.2 0.6 2.1 120.9 0.4 1.3 175.2 0.5 3.5 - - 2.7 Q1 2011 (1) 117.8 1.6 2.1 117.0 1.6 1.9 129.6 0.3 1.0 121.1 0.2 1.4 176.7 0.9 3.3 - - 2.7 Q2 2011 (1) 118.3 1.7 1.7 117.5 1.7 1.6 131.0 1.0 1.5 122.4 1.0 1.7 178.0 0.8 3.3 - - 2.8 Updated Next Release Jun 22 Jun CPI (Jul 23) Jul 09 Jul CPI (Aug 10) Jun 17 Q2 CPI (Jul 28) Source: BNP Paribas, (1) Forecasts Chart 8: Canadian Total vs. Core CPI Chart 9: Australian CPI (% y/y) Source: Reuters EcoWin Pro, BNP Paribas Wage pressures appear subdued, suggesting underlying inflation should remain close to the BoC's 2% target. Source: Reuters EcoWin Pro, BNP Paribas Near-term inflation pressures should be muted but, with the limited spare capacity in the labour market being eroded, underlying inflation is likely to settle near the top of the RBA's target range. CPI Data Calendar for the Coming Week Day GMT Economy Indicator Previous BNPP F’cast Consensus Comment Fri 16/07 12:30 US CPI m/m : Jun -0.2% -0.1% -0.1% 12:30 CPI y/y : Jun 2.0% 1.2% 1.2% 12:30 Core CPI m/m : Jun 0.1% 0.0% 0.1% Subdued core 12:30 Core CPI y/y : Jun 0.9% 0.9% 0.9% Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision Source: BNP Paribas Luigi Speranza/Eoin O’Callaghan 16 July 2010 Market Mover 36 www.GlobalMarkets.bnpparibas.com
Inflation: Sell 30y in the UK & US • GLOBAL: Stocks are hot but CPIs are not. Chart 1: OATei22/20 Too Steep vs OATei & OAT • EUR: Long OATei22/20 RY Spd. Short Vol. 30 OATEI22 / OATEI20 Real OATEI40 / OATEI20 Nominal Rhs 90 • USD: 10/20y to react to nominals & supply. 85 • GBP: Short UKTi-40 BE post CPI reform and into supply. 25 80 75 20 70 EUR: The OATei auction went well: EUR 1.8bn was issued (top of the range), of which 0.6bn of OATi-19 (premium of 15 cents, bid cover of 2.4) and 1.2bn of OATei-22 (18c premium, 1.9 b/c). We entered a long OATei-22 / OATei-20 real yield flattener at 26.5bp, targeting 19bp by the end of the month. The spread looks steep in the real and nominal curves (Chart 1) while the trade should benefit from the payment of the 10bn BTANei-10, 4bn of coupons and the 0.4y index extension at the end of the month. Overall, we keep a neutral/negative bias on breakevens into BTPei supply, favouring 5 and 10y maturities (benchmarks) over 2 and 30y. In addition, inflation volatility is starting to come off, after having reached and traded at expensive levels last week. Today, the 10y inflation swap breakeven is still at 2% while clients can sell 10y 0% y/y EURxt floor for a premium of 350bp (against 600bp last week). Chart 2 compares the annualised premium to current inflation forwards and BNPP’s long-term inflation forecasts. The trade is attractive for clients who can deal with volatility in P&L. USD: The market has benefited from the strong results of the 10y TIPS auction and the recovery in stocks and oil in July. However, ahead of CPI and post weak PPI, 10y real yields are back to their historical low, which should slow, if not reverse, the rally in breakevens. The focus will gradually switch towards the auction of the 30y TIPS on 23 August, i.e. only 11 days before the tap of the 10y TIPS. This accumulation of supply at this level of real yield has little chance of being well received by dealers, who are probably still long from the largest auction ever. We still prefer 2 and 10y maturities to 5 and 20y+ ones. For a time, the 10/20y real yield spread looked rather steep versus nominal but this is no longer the case (Chart 3) and we expect 20y+ breakevens to underperform versus 10y in the coming weeks. GBP: The switch from the RPI to CPI seems to have triggered more fuss amongst analysts than fund managers. Indeed, after initially dropping by up to 15bp, 30y cash breakevens have recovered fully and are actually above 7 July levels, i.e. the close before Mr Webb’s announcement, and we saw a reasonable 15 14-May 29-May 13-Jun 28-Jun 13-Jul Chart 2: 10y 0% y/y EURxt Inflation Floor Premium vs Inflation Forwards & Forecasts % 2.5 2 1.5 1 0.5 0 -0.5 0 1 2 3 4 5 6 7 8 9 10 ZC Fwds GBP 1.2bn auction of the UKTI-22 with a 1.5bp premium. As detailed in the following article “GBP: Market Downplays Shift to CPI”, on the one hand the reform should affect 40 to 80% of members of defined benefit pension funds and the RPI/CPI spread is volatile while the DMO still has to issue around GBP 25bn of RPI-linked UKTi before April 2011. On the other hand, breakevens are relatively low and there is no obvious alternative market for pent-up LDI demand, which could also benefit from falling deficits. Still, we think there is enough material to send breakevens through the bottom of their recent range and we entered a short UKTI-40 breakeven at 3.40%, targeting 3.20% or below into supply. BNP Floor Chart 3: TIPS 10/20y Real & Nominal Spreads 80 75 70 65 60 55 50 45 40 35 TIIJAN19 / TIIJAN29 Real 30 15-Apr 16-Jul 16-Oct 16-Jan 18-Apr 19-Jul 19-Oct Source: BNP Paribas, Bloomberg TIIJAN19 / TIIJAN29 Nominal Rhs 65 60 105 100 95 90 85 80 75 70 Herve Cros / Shahid Ladha 16 July 2010 Market Mover, Non-Objective Research Section 37 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: 2-10s receivers attractive in the 1
Page 5 and 6: arrest the slow growth dynamic we s
Page 7 and 8: US Housing: A Cold Summer • After
Page 9 and 10: we expect residential investment to
Page 11 and 12: ebounded from -13% y/y to +8%. That
Page 13 and 14: At first glance, this latest develo
Page 15 and 16: But property prices have barely cor
Page 17 and 18: political leaders persuaded the pub
Page 19 and 20: …average fiscal multiplier is 1,
Page 21 and 22: US: 10y Range Trade with a Receiver
Page 23 and 24: give-up because we’re switching f
Page 25 and 26: term structure models mentioned bel
Page 27 and 28: swaps. The overall volume of USD 9.
Page 29 and 30: EUR: Deflation Macro Hedge Via Opti
Page 31 and 32: EUR: SAS Diversification to Enhance
Page 33 and 34: Global Inflation Watch June CPI in
Page 35: Table 2: BNP Paribas' Inflation For
Page 39 and 40: GBP: Market Downplays Shift to CPI
Page 41 and 42: averaging introduces sizable upside
Page 43 and 44: Europe ITraxx Credit Indices • Ou
Page 45 and 46: SEN vs. SUB There has been no stron
Page 47 and 48: Technical Analysis - Interest Rates
Page 49 and 50: Trade Reviews Options, Money Market
Page 51 and 52: should not come as a complete surpr
Page 53 and 54: EUR/USD Rally Sets Sights on 1.3000
Page 55 and 56: Currency Spot Trade Recommendations
Page 57 and 58: Economic Calendar: 16 - 23 July (co
Page 59 and 60: Key Data Preview Chart 3: US Housin
Page 61 and 62: Key Data Preview Chart 8: French Hh
Page 63 and 64: Key Data Preview Chart 11: UK GDP v
Page 65 and 66: Treasury and SAS Issuance Calendar
Page 67 and 68: Central Bank Watch Interest Rate EU
Page 69 and 70: FX Forecasts* USD Bloc Q3 '10 Q4 '1
Page 71: RESEARCH DISCLAIMERS: IMPORTANT DIS

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