Market Economics | Interest Rate Strategy - BNP PARIBAS ...

More documents

Recommendations

Info

new expansion of the Fed balance sheet without a notable deterioration in the outlook. And it is not obvious that more mortgage purchases would be effective in stimulating aggregate demand, which is to say it is not clear the balance sheet can be effective in fine-tuning the outlook. In a speech in May 2003, then Fed Chairman Alan Greenspan gave three policy prescriptions to cure the Japanese deflation and stagnation. He said the Bank of Japan should commit to a price level rather than an inflation rate, thus signalling it would allow a period of reflation, or inflation temporarily above its target. He also suggested the Bank of Japan should purchase securities without consideration of the potential balance sheet losses realised down the road. Finally, he suggested that the federal government and the central bank engage in a one-time tax cut financed by the central bank’s printing of money. This seems to be an action expressly prohibited by the Federal Reserve Act and one that would be unwelcome in the current political environment. Eurozone on a different path The Fed has stopped adding to its balance sheet for the last several months, keeping the stock of purchased assets at high levels, and is now mulling whether to engage in further unconventional measures. The ECB’s policy in unconventional space has seen more variation. Aside from a tiny amount of covered-bond purchases, the ECB’s policy in unconventional space was until May not the outright purchase of assets but rather supplying liquidity in the money market. That has had two dimensions – supplying fixed rate money at an amount to be decided by the banks, not the ECB (fixed rate, full allotment), and supplying that money for longer periods than usual (i.e. through 3-, 6- and 12-month Long Term Refinancing Operations or LTROs). Exit from this policy had already started with adjustments to duration – there have been no further 12-month LTROs since December last year. Despite the clear signs of financial stress in Greece – widening CDS and government bonds spreads, increased reliance by Greek banks on Bank of Greece funding – the ECB continued with its exit strategy, scrapping the 6-month LTRO after April and announcing that the 3-month LTRO would be a variable rate tender from April. The eurozone sovereign debt crisis put a stop to the exit in early May, with the ECB (i) reintroducing another 6-month fixed rate full allotment LTRO; (ii) 18 16 14 12 10 8 6 4 2 0 Chart 4: ECB Government Bond Purchases (EURbn) Source: ECB ECB Purchases under the Securities Markets Programme (EURbn) 1 2 3 4 5 6 7 8 9 Weeks from the start of the Programme committing to further 3-month fixed rate full allotment LTROs until September; and (iii) buying limited amounts of peripheral government debt. The lack of enthusiasm for the latter course is illustrated by the public dissent expressed by Mr Weber at the instigation of the sovereign debt purchases and also by the scaling back we have seen in the quantity of those purchases over recent weeks (see Chart 4). This trend down in purchases shows that the ECB is continuing with the exit policy as is also clear from the fall in excess reserves and increase in money market rates following the expiration of the first 12-month repo on 1 July. Overall then, the Fed is contemplating a further round of QE in order to stabilise the economy and avoid a shift down in inflation expectations while the ECB seems to be continuing, albeit with a blip, its policy of trying to exit unconventional policies. It is quite possible that, in coming months, we see the ECB continuing to exit while the Fed institutes some form of QE2. The impact of this on the markets will depend on the speed of the ECB exit, the macro backdrop and exactly what measures the Fed chooses to pursue and on what scale. In underlying philosophy, there is a big gap between the Fed – do everything possible to avoid bad outcomes – and the ECB – do as little as possible and hope for the best. There is also a difference in terms of response to developments in the real economy, with the ECB being much less activist and eschewing ‘fine-tuning’. Thus it is quite possible that we see very different policy moves in coming months on the two sides of the Atlantic, which would have important implications for bonds, spreads and currencies. Julia Coronado and Paul Mortimer-Lee 16 July 2010 Market Mover 6 www.GlobalMarkets.bnpparibas.com
US Housing: A Cold Summer • After the expiry of the first-time homebuyers’ tax credit at the end of April, housing starts in May plunged by 10.0% m/m, existing home sales declined by 2.2%, pending home sales fell 30.0%, and new home sales plummeted by 32.7%. • It is clear that much of the stabilisation in housing demand over the past year was a pulling forward of demand through low rates and the tax credit, leaving the outlook for housing highly uncertain. • Weekly data on mortgage applications to purchase indicate buyers’ interest declined further in June and early July after falling considerably in May – suggesting housing demand will remain depressed throughout the summer. 2000 1750 1500 1250 1000 750 500 Chart 1: Housing Starts to Remain Weak 250 May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May 06 07 08 09 10 Source: Reuters EcoWin Pro Building Permits (lagged 1 month, k) Housing Starts (k) Chart 2: Pending Home Sales Plunge in May • As we move into the second half of the year, residential investment is likely to weigh again on economic growth. • In Q2, part of this weakness should have been offset by strength in brokers’ commissions, as total housing sales were better supported in April. • We have revised our forecast for residential investment down to 11.5% q/q AR for Q2 and to a decline of 5.0% in Q3. The recent data point to a notable softening in economic growth. Residential construction is one sector showing weakness Economic data softened notably in June, suggesting the recovery has lost some momentum. Housing demand has fallen more sharply than expected after the expiry of the homebuyers’ tax credit; the outlook for H2 is uncertain but likely to be a neutral at best for growth. Housing starts plunged by 66k (10% m/m) to 593k annualised units in May, erasing 80% of the gains recorded so far this year. Worryingly, weakness was concentrated in the single-family sector of the market, where builders broke ground on 17.2% fewer projects in May compared to the previous month. Building permits fell for the second consecutive month in May, declining by 5.9% m/m after a 10.9% contraction in April, suggesting the pace of new construction is likely to remain depressed over the summer. Given that permits lead housing starts by Source: Reuters EcoWin Pro Chart 3: No Demand for New Homes Source: Reuters EcoWin Pro one to two months, the May decline in permits points to more weakness in new construction over the near term (Chart 1). Indeed, we expect housing starts to decline by another 13k to 580k in the June report next week. The weakness dovetails with a recent 5- point decline in the National Association of Builders Yelena Shulyatyeva 16 July 2010 Market Mover 7 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: arrest the slow growth dynamic we s
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 and 36: Table 2: BNP Paribas' Inflation For
Page 37 and 38: Inflation: Sell 30y in the UK & US
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
show all

Market Economics | Interest Rate Strategy - BNP PARIBAS ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?