Market Mover - BNP PARIBAS - Investment Services India

Market Economics | Interest Rate Strategy | Forex Strategy 12 February 2010 

Market Mover 

Market Outlook 2-3 

Fundamentals 4-15 

• US: Roadmap to Fed Tightening 4-6 

• Sovereign Debt: Time for Europe to 7 

Act 

• French Regional Elections 8-9 

• UK: Inflation Report – Surprisingly 10-11 

Dovish 

• Sweden: Earlier Rate Hikes on 12-13 

Agenda 

• Japan: Slowing Consumption 

14-15 

Recovery 

Interest Rate Strategy 16-37 

• US: Fed Provides More Details on Exit 16-17 

Plan 

• US: Impact of Buyouts on Rates and 18-19 

MBS 

• EUR: Limited Scope for a Rapid 

20 

Recovery 

• EUR: Demand for ECB’s Liquidity Still 21 

High 

• EUR: Monitoring Dutch Pension Funds 22 

• EUR: Peripheral ASW Curves Re- 23 

Steepening 

• EUR/GBP 2s10s Carry Box Revisited 24 

• JGBs: Wait for Price Dips in Q2 25 

• Global Inflation Watch 26-29 

• Inflation: BEs Less Sensitive to Credit 30-31 

Fears? 

• Europe iTraxx Credit Indices 32-34 

• Technical Analysis 35-36 

• Trade Reviews 37 

FX Strategy 38-44 

• Strategy: EUR Problem, Global Risks 38-41 

• Technical Strategy: SEK Steams 42-43 

Ahead 

• Trading Positions 44 

Forecasts & Calendars 45-62 

• 1 Week Economic Calendar 45-46 

• Key Data Preview 47-56 

• 4 Week Calendar 57 

• Treasury & SAS Issuance 58-59 

• Central Bank Watch 60 

• Economic Forecasts 61 

• FX Forecasts 62 

Contacts 63 

www.GlobalMarkets.bnpparibas.com 

• The focus will remain on Greece/EMU in the coming 

days. 

• The statement from the EU Head of States confirmed a 

political will to support Greece while reiterating the need 

for it to implement the necessary fiscal discipline. 

• The statement represents progress. The EU has moved 

from an implicit to explicit commitment to protect Greece. 

The strict conditions attached to it could lend Greece the 

credibility it sorely needs. 

• However, details are still lacking. We may get some 

details on a commitment to act if needed after the Finance 

Ministers’ meetings early next week. 

• EMU core markets may give up some of their recent 

gains while peripheral spreads should continue to 

normalise, although the move is likely to be a bumpy one. 

• A near-term setback in core EGBs could be reinforced 

by the negative tone on Treasuries. We expect a 

steepening bias on both curves over the week ahead. 

• The JGB market is likely to remain within the narrow 

range in place since the start of this year. 

• As previously highlighted, one consequence of the 

current EMU crisis is a weaker euro. 

• We believe any rebound following the announcement of 

more detailed measures during the coming days would be 

short-lived. 

• We expect the GBP to remain under selling pressure 

while we are positive on the AUD and SEK. 

Market Views 

Current 1 Week 1 Month 

UST 10y T-note Yield (%) 3.72 ↔↑ ↔ 

2y/10y Spread (bp) 285 ↔↑ ↔ 

EGB 10y Bund Yield (%) 3.23 ↔↑ ↔↓ 

2y/10y Spread (bp) 218 ↔↑ ↔↓ 

JGB 10y JGB Yield (%) 1.33 ↔ ↓ 

2y/10y Spread (bp) 117 ↔ ↓ 

Forex EUR/USD 1.3638 ↓ ↓ 

USD/JPY 89.81 ↑ ↑ 

IMPORTANT NOTICE. Please refer to important disclosures found at the end of 

this report. Some sections of this report have been written by our strategy teams 

(shown in blue). Such reports do not purport to be an exhaustive analysis and may 

be subject to conflicts of interest resulting from their interaction with sales and 

trading which could affect the objectivity of this report.

Market Outlook 

The market has already 

reacted positively to the 

EU statement on Greece - 

the conditions of any 

financial support will be 

key 

The Greek crisis has turned into a critical test of EMU, forcing EU officials to 

demonstrate greater coordination and solidarity. There is no alternative for 

Greece but to implement those fiscal measures already announced and 

probably more – pension reform will be discussed in the spring. But after 

pressuring Greece for several weeks to impose the necessary fiscal 

discipline, the outcome of the EU leaders’ summit on Thursday was a very 

clear message backing Greece. 

The statement represents progress. The EU has moved from an implicit to 

explicit commitment to protect Greece. Strict conditions attached could lend 

Greece the credibility it sorely needs. However, details are still lacking. We 

may get some details on a commitment to act if needed after the Finance 

Ministers’ meetings early next week. 

Details on potential financial assistance for Greece under strict conditions 

would further enhance market confidence – the 10y GGB/Bund spread has 

already compressed by roughly 90bp this week to close to 270bp, after 

peaking at 400bp at the end of January. Ultimately, the current debate is 

about EMU governments (Greece at this stage) giving up part of their 

independence in terms of fiscal policy; this has been the missing link within 

EMU since day one. The EMU framework may emerge strengthened from 

the current crisis although none of the governments will willingly cede fiscal 

autonomy. 

While the road is likely to remain bumpy, EMU political will is now strong 

enough to conclude that the highs on Greek spreads are behind us 

480 

430 

380 

10y GGB/Bund (ASW) 

GRE CDS 5y 

480 

430 

380 

240 

190 

10y PGB/Bund 

10y GGB/Bund (RHS) 

10y SPGB/Bund 

400 

300 

330 

280 

230 

Nov 16th: BoG triggers a 

sell-off in Greek Bonds 

with its warning on 

Greek banks 

330 

280 

230 

140 

90 

200 

180 

130 

180 

130 

40 

100 

80 

Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 

80 

-10 

Nov-08 Feb-09 May-09 Aug-09 Nov-09 

0 

Source: Reuters EcoWin Pro 

Core EGBs to give up 

some of their recent 

gains… 

…a move which could be 

reinforced by a negative 

tone on Treasuries 

The commitment of European political and monetary authorities to address 

the situation in a credible and coordinated way is a pre-condition for a 

durable compression of intra-EMU spreads. Support for peripherals will 

reverse part of the recent move towards safety although any setback on core 

EGBs is likely to be limited as govvies remain supported by other factors 

such as concerns about growth, the risk of tighter monetary policy in China 

and more regulation ahead. In other words, the overall mix for risk appetite is 

not favourable overall – as illustrated by the performance of the main equity 

indices since the start of the year. 

A limited sell-off of core EGBs would lead the curve to re-steepen slightly, 

allowing the 2-5-10y fly to rebound. This, our favourite scenario near term, is 

based on the ability of the European authorities to deliver a credible 

message to the markets. 

In the US, Bernanke said the FOMC’s policy outlook (“extended period”, 

subdued inflation etc.) has not changed since the last meeting and then 

Cyril Beuzit 12 February 2010 


2 

www.GlobalMarkets.bnpparibas.com

gave a few specific details on the Fed’s exit strategy. This was interpreted as 

stepping up the rhetoric on eventual tightening. The discount rate is likely to 

be raised at some point, although the discount window is barely used and 

had already failed the test of being a “cap on Libor” earlier in the crisis. The 

issue of paying interest on reserves is more relevant and could be bearish 

for Fed funds, which in turn will filter through to OIS, repo and Libor. 

All in all, Bernanke’s testimony could serve as the catalyst for even higher 

yields as the market’s attention shifts away from sovereign debt fears and 

back to the FOMC and major economic data. Recall that it only took a few 

positive data surprises for yields to jump. This asymmetric bias towards 

higher yields prompted us to be bearish at the start of the week; we remain 

in that camp. 

The technical picture looks fragile for Treasuries: when looking at a 

2007/2010 daily chart, we see that the market has drawn a wide bottom 

head-and-shoulders pattern with a neckline at 3.83% on the 10y T-note; this 

level was tested in early January. 

JGBs likely to stay rangebound 

Whatever the exit to the 

current EMU crisis, the 

medium-term outlook 

looks negative for the euro 

The JGB market has fluctuated within a narrow range since the start of 2010 

despite the global decline in stock prices. Intraday volatility has also fallen 

sharply, with the market showing very little reaction to factors that would 

ordinarily be considered buying or selling triggers. Next Tuesday's (16 Feb) 

5yr offering is likely to be readily digested, given that banks remain awash 

with surplus funds. We see no obvious ramifications for the yen bond market 

from upcoming decisions regarding the EMU crisis; JGB yields are unlikely 

to rise by more than the tiniest amount while the Nikkei 225 remains mired 

near the 10,000 mark. 

In the FX market, the euro remains at the top of the agenda. While a 

European rescue package for peripheral bond markets could allow the EUR 

to benefit from a short covering rally, the long-term prospects remain outright 

bearish for the single currency. Deflationary adjustment pressures will be 

unleashed for almost a fifth of the eurozone economy, suggesting inflation is 

likely to undershoot the ECB’s internal staff projections. Rate and yield 

differentials should continue working against the euro in the medium term. 

At the same time, when the EUR loses yield and rate attractiveness, central 

bank reserve managers are less inclined to shift USD reserves into euros. 

Last year, currency reserves rose by an impressive USD 768 bln, mainly 

driven by Asia. China has printed money and, by its quasi-fixed USDCNY 

6.82 exchange rate, has added to the supply of USDs. However, Asian 

monetary authorities generally and China’s in particular have started 

tightening monetary policy, imposing measures to curb hot money inflows 

even as net export growth is declining. As a result, currency reserve growth 

will ease, automatically reducing the supply of USDs added to the market 

and thus suggesting a lower EURUSD. 

Short GBP, long AUD & 

SEK 

A big currency investment theme is selling currencies where the credit 

multiplier is not working – as opposed to currencies benefiting from credit 

expansion. In the UK, the adjusted M4 has continued to decline, supporting 

our view that a high level of leverage is deflationary, especially if banks bear 

a substantial share of the leverage. The BoE’s revision of its two year 

inflation projection down to 1.2% will not bode well for the GBP as the 

sterling money market curve will have to flatten out. The performance of the 

GBP and 3x9 sterling FRA are tightly correlated. Hence, we expect sterling 

to remain under selling pressure. 

Australia and Sweden are two countries where there is a positive credit 

multiplier. The outperformance of the AUD and SEK has received additional 

support from the low sovereign debt levels reported in the countries. 

Cyril Beuzit 12 February 2010 


3 


US: Roadmap to Fed Tightening 

• Chairman Bernanke carefully distinguished 

between policies aimed at providing emergency 

liquidity and more traditional monetary policy in 

his testimony on Wednesday. 

Chart 1: Effective Fed Funds Has Been Volatile 

• Emergency liquidity programmes have been 

almost completely phased out, with a hike in the 

discount rate and the end of the TAF and TALF 

programs the likely next steps. 

• The most likely sequence of monetary policy 

tightening will involve a draining of excess 

reserves well before the first rate hike, and the 

target policy rate shifting to the rate paid on 

reserves. Asset sales are a last step in an 

extremely frothy macroeconomic scenario. 

• There is little in the testimony to change 

expected timing of policy tightening, which will 

still be determined by the evolution of the 

economic recovery. 

Emergency liquidity policies are near an end as 

financial market conditions normalise 

On a day when Washington DC found itself 

snowbound, making it impossible for Chairman 

Bernanke to appear before the House Financial 

Services Committee as scheduled, the Federal 

Reserve nonetheless released his testimony. The 

testimony provided more details and specifics than 

we had seen previously about the likely sequence of 

actions the Fed will take as it transitions away from 

an extremely accommodative policy stance. That 

said, the speech did not change our expectations of 

the timing of eventual rate hikes and markets were 

little changed on balance after the release of the 

testimony. 

Chairman Bernanke clearly distinguished between 

emergency liquidity policies the Fed put in place “in 

its role as liquidity provider of last resort” and those 

that allowed the Fed to effectively push through the 

zero bound on interest rates in an effort to stimulate 

economic activity. Emergency liquidity policies 

included a number of programmes that provided 

short-term funding to distressed markets. In his 

testimony, Chairman Bernanke indicated that, “as 

was intended, use of many of the Federal Reserve's 

lending facilities has declined sharply as financial 

conditions have improved”. He signalled that the next 

step in ending this emergency lending role was a 

“modest increase in the spread between the discount 

rate and the target Federal funds rate” that will be 

considered “before long” as well as a reduction in the 

maximum maturity of discount window borrowing to 


Chart 2: Banks And Credit Still Contracting 


28 days from 90 days. Prior to the crisis, the spread 

between the discount rate and Fed funds was 100bp 

and loans that were generally overnight were 

lengthened to 90 days. Furthermore, he indicated 

that he anticipates that funding through the Term 

Auction Facility (TAF) and the Term Asset-Backed 

Securities Loan Facility (TALF) “will also be phased 

out soon”. He stressed that “These changes, like the 

closure of a number of lending facilities earlier this 

month, should be viewed as further normalization of 

the Federal Reserve's lending facilities, in light of the 

improving conditions in financial markets; they are 

not expected to lead to tighter financial conditions for 

households and businesses and should not be 

interpreted as signalling any change in the outlook 

for monetary policy, which remains about as it was at 

the time of the January meeting of the FOMC.” 

Julia Coronado 12 February 2010 


4 


More clarity was given on the sequencing of 

monetary policy tightening 

The testimony provided a baseline scenario of the 

steps that would be taken to tighten monetary policy. 

He described the large-scale purchases on 

Treasuries, Agencies and MBS as a component of 

monetary policy put in place when the Fed reached 

the zero bound on interest rates and the economy 

was still under “severe stress”. These purchases 

were financed through the creation of a tremendous 

amount of excess reserves that led to loss of control 

over the effective Fed funds rate (Chart 1) even as 

they “helped improve conditions in private credit 

markets and put downward pressure on longer-term 

private borrowing rates and spreads.” However, the 

extreme liquidity in money markets has apparently 

led the Fed to decide two things: first, it will need to 

mop up some of the excess reserves before actually 

raising rates, and second, “during the transition to a 

more normal policy configuration”, the Fed is 

considering shifting its target policy rate to the rate 

paid on reserves rather than a target Fed funds rate. 

The reason that the policy to pay interest on bank 

reserves did not effectively put a floor under Fed 

funds is that the mortgage agencies are suppliers of 

funds to the overnight lending market and yet cannot 

place deposits at the Fed; therefore, the Fed funds 

has traded below the rate paid on reserves since the 

policy to pay interest on reserves was implemented 

in October 2008. A Congressional act would be 

required to allow the mortgage agencies to deposit 

money at the Fed, and it is not clear why the Fed 

does not pursue this as a way to gain more control 

over short-term rates. In any case, the Fed has 

concluded that “the Federal funds rate could for a 

time become a less reliable indicator than usual of 

conditions in short-term money markets” and is 

considering shifting to a target rate over which it 

would have absolute control. Presumably, this would 

come along with an expected range for Fed funds 

and Chairman Bernanke also suggested it could 

involve targets for reserve quantities. 

The tools for draining excess reserves, as previously 

announced, include mainly reverse repos and a term 

deposit facility at the Fed. He said “The capability to 

carry out [reverse repos] with primary dealers, using 

our holdings of Treasury and agency debt securities, 

has already been tested and is currently available. 

To further increase its capacity to drain reserves 

through reverse repos, the Federal Reserve is also in 

the process of expanding the set of counterparties 

with which it can transact and developing the 

infrastructure necessary to use its MBS holdings as 

collateral in these transactions.” Presumably, the 

counterparties beyond primary dealers could include 

money markets and possibly even the mortgage 

agencies. The Fed has had some concerns about 

Chart 3: Consumer Spending Subdued 

Reflecting Deleveraging 


Chart 4: Credit Supply and Demand are Weak 


possible market distortions from going outside the 

primary dealer community for these transactions, 

although it is clear that balance sheet constraints 

limit the amount of liquidity that dealers can absorb. 

The Fed has apparently decided that capacity is the 

bigger concern. 

The Fed has already put forward a blueprint for the 

term deposit facility and is “currently analyzing public 

comments”. It expects to conduct test transactions 

this spring and to have the facility available if 

necessary “shortly thereafter”. This facility would 

involve the auctioning of large blocks of term 

deposits to depository institutions that would reduce 

overnight cash in the market and tighten liquidity 

conditions. 

Asset sales are a last choice for policy and an 

unlikely outcome 

Chairman Bernanke clearly stated that he “currently 

[does] not anticipate that the Federal Reserve will 

sell any of its security holdings in the near term, at 

least until after policy tightening has gotten under 

way and the economy is clearly in a sustainable 

recovery”. He said the Fed will let MBS holdings run 

off over time through prepayments and maturities 



5 


and that “in the long run, the Federal Reserve 

anticipates that its balance sheet will shrink toward 

more historically normal levels and that most or all of 

its security holdings will be Treasury securities”. The 

Fed would consider selling securities only in a robust 

macroeconomic scenario, and “any such sales would 

be at a gradual pace, would be clearly communicated 

to market participants, and would entail appropriate 

consideration of economic conditions”. The clear 

signal is that the Fed is comfortable living with an 

expanded balance sheet for some time. 

The testimony provides more detail about 

sequencing and execution but does not change 

our view of the likely timing of policy tightening 

While some market participants view this clarity from 

the Fed as a signal that such operations are on the 

near-term horizon, we would stress that Chairman 

Bernanke reiterated that the current stance of policy 

has not changed and will be determined by economic 

and financial market developments. 

Indeed, it is difficult to see the Fed moving to raise 

rates when bank lending is still contracting (Chart 2). 

Small and mid-size banks continue to fail; the FDIC 

took over 148 institutions in 2009 and has already 

taken on 16 in 2010. This suggests an ongoing 

consolidation process from the financial crisis that is 

limiting credit supply. 

However, there is also a significant demand element; 

the broad economy is still deleveraging and this has 

been manifested in a subdued recovery in final sales 

to date (Chart 3 and 4). It would seem that some 

recovery in private credit creation would likely come 

before the Fed decided that the economy was 

building up too much steam and needed to be 

restrained. Rather, we view this as an indication of 

the extraordinary complexity and uncertainty in 

orchestrating policy tightening in these unusual 

circumstances and a desire by the Fed to develop 

and communicate a robust toolkit well in advance. 



6 


Sovereign Debt: Time for Europe to Act 

The sovereign debt crisis in the eurozone is about a 

lot more than Greece, Spain, Portugal and Ireland or 

any other country. It is about the collective political 

will of eurozone countries to set in stone the firm 

fiscal foundations that are necessary to underpin 

EMU. Remember that EMU stand for Economic and 

Monetary Union and not just Monetary Union. In 

short, the credibility of the project is at a testing point. 

At the end of this period, EMU will emerge stronger 

or significantly weaker. 

If one or more countries have sufficiently poor fiscal 

deficit and debt dynamics, then they risk undermining 

EMU in several ways. Speculation about credit risks 

for a sovereign can have knock-on effects on its 

partners in the union. There may be upward 

pressures on rates and dislocation in money 

markets. Risk premia and uncertainty may rise, 

undermining growth, or the currency and other asset 

markets may become volatile. Monetary policy may 

end up compromised or overburdened. For example, 

potentially the ECB could end up in the invidious 

position of having to choose between tightening 

monetary conditions to reflect economic 

developments when that would intensify a debt crisis 

or setting rates too low to avoid a debt crisis. 

As with any club, if one member imposes negative 

externalities on the other members of EMU, then the 

other members can reasonably expect to have an 

important say on the future behaviour of that 

member. 

The mechanism that is supposed to achieve this in 

the eurozone is of course the Stability and Growth 

Pact (SGP). Now, it is not delivering much stability 

and precious little growth. Unfortunately, despite the 

Commission having endorsed the Greek stability 

programme, the market has not put a lot of credibility 

in the plan. 

Greece could eventually manufacture its own 

credibility by delivering on its promises. But the 

market is unlikely to give them that amount of time. If 

a country cannot establish quickly its own credibility 

in the eyes of the market, what may be needed is an 

effective reduction of that state’s sovereignty over its 

own economic and to some extent social policies. It 

can borrow the credibility of its stronger peers. 

This is the rational behind the decision on Thursday 

to offer potential financial support if needed, and to 

bring in ECB and IMF expertise in the design and 

monitoring of Greece’s adjustment programme. The 

Commission will liase with the ECB to “closely 

monitor the implementation of the [stability 

programme’s] recommendations” and will draw on 

the expertise of the IMF to “propose additional 

measures”. These measures are designed to buy 

breathing space for Greece to implement its plans 

and for those plans to start paying dividends, while in 

the short term alleviating potential funding problems 

and market disruption. 

If this sounds like an IMF-style programme to you, 

then you are right. Note that we say an “IMF-style” 

programme. Crucially, the EU are limiting its use of 

the IMF to its expertise - a Fund programme might 

help to fix the current crisis, but as we said above, 

there is a longer-term game playing out here, which 

is for the fiscal soul of EMU. If the Fund were to bring 

a full programme to the eurozone, it will be an 

admission of failure by the Commission and the 

Council. It would be a public acknowledgement that 

the Europeans cannot put their own house in order. It 

would undermine the credibility of the institutions 

supporting EMU and will set a terrible precedent for 

the future. 

The monitoring of Greece’s adjustment programme 

in conjunction with the ECB and use of IMF expertise 

to propose additional measures is a crucial feature of 

the EU’s statement. If the EU had offered support to 

Greece without monitoring or conditions then some 

of the same problems would arise – EU institutions 

and the fiscal underpinning for the euro would be 

seen to be weak and deficient. We’ve learned a lot 

about moral hazard over recent months and years 

and the involvement of IMF expertise suggests the 

Council and Commission understand the risks. If its 

support were seen to be a pure “bailout”, then it 

would have created a terrible moral hazard, 

encouraging poor fiscal performance in the future by 

current and future members of the EMU. 

We could argue that infringing on the sovereignty of 

a member state is not enshrined in any treaty. 

Maybe, but it seems to us that the EU’s support for 

an adjustment programme under strict conditionality 

is precisely what was required. If this path is adhered 

to, then EMU can emerge from this episode 

strengthened and steeled. It will have come of age. 

Anything less will leave it much weaker than before. 

Paul Mortimer-Lee 12 February 2010 


7 


French Regional Elections 

• The direct impact of regional elections is 

limited, as is the economic power of local 

authorities. 

• However, these elections will most likely be 

followed by a modest cabinet reshuffle. Further, 

the vote will set the political tone for the 

pension reform due later this year and for the 

implementation of fiscal tightening in 2011. 

The French regional elections are due on 14 and 21 

March (see Box 1). At first sight, the stakes are not 

huge. One would expect that, right after the worst 

recession of the last 50 years (with GDP falling 2.2% 

in 2009), the ruling government is likely to experience 

what is called on the French side of the channel a 

"Waterloo". These two ideas may be too simplistic. 

Political reading 

The regions have limited economic power, although it 

has been increasing in recent years. Their budgets 

are controlled and their leeway to vote a budget with 

a deficit is limited. Moreover, the government aims to 

reduce the scope for regions to increase spending, 

and the mandate of the councils will be reduced from 

six to four years ahead of an overhaul of how local 

authorities are organised. The real economic 

influence of the regional elections is indirect, via 

future government policy and possibly the upper 

house. 

In the last regional elections, the left-wing parties 

won the council presidency in 20 of the 22 

metropolitan regions 1 . Martine Aubry, the leader of 

the Socialist Party (PS) has said she is targeting the 

grand slam. Obviously, that is highly ambitious. 

Conversely, it will be much easier for the right-wing 

coalition to win more than the only two regions 

(Alsace and Corsica) that they currently run. 

In particular, part of the 2004 disaster for the 

government was due to the strength of the extremeright 

party 2 , the National Front (FN), which has 

1 There are four overseas regions, where local branches of 

the national parties are taking part together with local 

parties. As a consequence, the results are not fully 

comparable and people always focus on the 22 mainland 

regions. 

2 The National Front was then surfing on its relative 2002 

success when it managed to oust the Socialist candidate 

from the second round of the presidential elections. 

Conversely, PS supporters voted massively in 2004 to 

avoid a repeat of the 2002 disaster. 

Deadline to present lists 

Box 1: Election Calendar 

Event Date Market 

relevance 

15 February 

Outcome of the first round 14 March 

8pm* ** 

Outcome of the second round 21 March 

8pm* * 

Possible Cabinet reshuffle 24 – 31 

March *** 

Elections of presidents of late March 

regional councils 

early April - 

Source: BNP Paribas 

* The first estimate (normally quite reliable) of the vote outcome is 

announced by the press at 8pm local time; the final results are usually 

known during the night. 

Box 2: Electoral Process 

The regional elections are held on a two-round basis. 

Parties or coalitions present one list per region (the 

number of seats averages 85 but depends on the size of 

the region). 

After the first round, if one list has an absolute majority, it 

gets 25% of the seats* with the remaining seats distributed 

among the other lists that obtained at least 5% of the 

votes. If no list has an absolute majority, there is a second 

round. 

The lists that obtained less than 5% of votes are out; the 

lists that gained over 10% may either remain or merge 

with others, and these with 5-10% can only merge with 

lists that have obtained more than 10%. The rule is 

different for overseas territories and Corsica. 

After the second round, the list that has obtained most 

votes gets 25% of the seats*. The other seats are 

distributed according to the vote outcome. 

At the next council meeting, the president of each region is 

elected by the council members (by absolute majority, in a 

secret ballot). 


* the attribution of 25% of the seats to a list that arrived first guarantees an 

absolute majority in the council to this list as long as it gathers more than 

on third of total votes. 

subsequently lost a large part of its support. 

Consequently, the FN is less likely this year than in 

2004 to take part in the second round (when they ran 

in 18 regions, see Box 2). We may see more run-offs 

than in 2004, which should favour the centre-right 

coalition. 

- 

Dominique Barbet 12 February 2010 


8 


The PS is more likely to face in the second round 

either a dissident list (e.g. in Languedoc, where the 

outgoing region's president has been banned from 

the party for making racist comments) or more 

radical left-wing lists (there are numerous extremeleft 

parties which have made partial coalitions, 

though they are struggling to come up with unified 

lists). 

Compared with 2004, the centre-right coalition has 

gained an ally (CPNT) and the PS has lost one as 

the communists have joined forces with some of the 

other extreme-left parties. 

As a result, the different left-wing and green lists may 

get more votes in the first round than in 2004 

(Chart 1); this would send a serious warning signal to 

the government. According to the most recent 

opinion polls, conducted at the national level, the 

centre-right coalition may get some 30% of the vote, 

vs. 27% for PS-led lists and 10% for the greens 3 . 

Nevertheless, the centre-right coalition is still likely to 

gain more regional presidencies in 2010 than in 

2004. 

The true economic stakes 

What matters most for financial markets is the 

distribution of votes in the first round, and whether or 

not this can be depicted as a "no confidence vote" in 

the government. The number of regions possibly won 

or lost by the centre-right coalition or the PS-green 

one (see Box 1) is less crucial. 

After the elections, a cabinet reshuffle can be 

expected. The President will argue he has heard the 

message from the popular vote and will shake up the 

cabinet to demonstrate this. He will use the 

opportunity to replace a few ministers who have been 

less successful (such as the minister of health). 

François Fillon is likely to stay as Prime Minister; he 

is currently more popular than the President and in a 

good position to lead on the pension reform, which is 

due to be discussed right after the regional elections. 

The identity of the new minister of social affairs (if a 

new appointment is made), in charge of this 

structural reform, and moreover the first speech he or 

she delivers will provide some indication as to how 

ambitious the reform could be. The markets are also 

keen to know whether the ministers in charge of the 

economy (Christine Lagarde) and budget (Eric 

Woerth) will retain their present positions. If they do, 

the credibility of the fiscal tightening policy would 

probably increase. 

70 

60 

50 

40 

Chart 1: Sarkozy’s Popularity Rating 

30 

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 

Source: 

No confidence 

Confidence 

Table 1: Outcome of the 2004 Regional 

Elections 

Coalitions Parties Votes Seats Presid. 

Extreme Left 4.95% 

Left wing 40.16% 20 

Mainstream Coalition 39.11% 1126 

Others 1.04% 36 

Right Wing 34.47% 2 

Mainstream Coalition 33.73% 522 

Others 0.74% 4 

Extreme Right 16.14% 

FN 14.70% 156 

Others 1.44% 

Miscellaneous 4.29% 4 

Fishers/Hunters 1.64% 

Other Ecologists 1.59% 

Others (incl. regionalists)* 1.07% 36 


Looking further down the road, the newly elected 

regional council members will take part in the upper 

house elections 4 . Presently the centre-right coalition 

only has a slim 52.5% majority in the upper house, 

and it could lose this next year. 

Our view 

We expect the participation rate to be lower in 2010 

than in 2004. According to opinion polls, the votes for 

the left-wing parties should significantly exceed those 

for the centre-right coalition, but probably not as 

much as in 2004. Consequently we expect that, 

though the PS will retain, by far, the largest number 

of regions, it may lose one or two vs. 2004. This 

would allow the government to push ahead with the 

planned reforms, in particular that of the pension 

system, and fiscal tightening, which is due to start in 

2011. 

3 The extreme right may get 9%, the Modem (which did not 

exist in 2004) 6% and the extreme left 11%, but in most 

regions these will be split between two or more lists. 

4 Half the upper house members will be elected in 

September 2011 by about 75k already-elected people, 

including the regional council members. 

Dominique Barbet 12 February 2010 


9 


UK: Inflation Report – Surprisingly Dovish 

• The February Inflation Report was far more 

dovish than expected. 

Chart 1: BoE Inflation Projection (Market Rate 

Expectations) 

• Based on market interest rate expectations, 

the Bank’s CPI inflation projection is 

substantially below target two years ahead and 

still below target after three years. 

• The Inflation Report reinforced our 

conviction that the first Bank Rate hike is a very 

long way off. 

Surprisingly dovish 

The February Inflation Report was far more dovish 

than expected. Most forecasters, including ourselves, 

judged that – given the incremental news since the 

November Inflation Report – an upward revision to 

the inflation projection at the two year ahead horizon 

looked likely. What actually happened was the 

inflation projection was revised down, sharply. 


Chart 2: BoE Inflation Projection (Unchanged 

Bank Rate) 

More specifically, the inflation projection based on 

market rate expectations was around 1.2% y/y at the 

two year ahead horizon. That compares to around 

1.8% at that horizon last time around and there were 

grounds for an upward revision. 

Similarly, the inflation projection based on 

unchanged Bank Rate was also revised down. Last 

time, the projection was 2¼-2½% y/y and rising 

sharply at that point. Now, that projection is around 

1.8% y/y. To be clear, the committee stresses time 

and again that the projection is about more than just 

the central ‘modal’ projection. What has changed 

here is the upside risks to the projection are 

somewhat greater than the downside risks to the 

projection. One might infer from this that the Bank 

expects a subdued inflation profile, but is 

acknowledging in the risk distribution the tendency 

for these data to surprise on the upside. 

Similarly, the profile is more than just a two year 

ahead projection. Apart from the near 1-2 quarters, 

the central inflation projection is persistently below 

target thereafter. 

Fiscal fudge 

The key message is that both inflation projections 

have undergone a huge downward revision. The 

rationale for that appears to have been influenced by 

the fiscal tightening included in the Pre-Budget 

Report. Specifically, the new report noted that: 


“A significant fiscal consolidation is in prospect. The 

precise nature and pace of that correction are 

uncertain. The Committee’s projections are 

conditioned on the plans set out in the December 

2009 Pre-Budget Report. That consolidation is likely 

to put downward pressure on spending and inflation 

over the forecast period.” 

That compared to the following in the November 

Inflation Report: 

“The Committee’s projections are conditioned on the 

fiscal plans set out in the 2009 Budget. Those plans 

implied a marked rise in the ratio of public sector 

debt to GDP. Stabilising that ratio will require some 

combination of a reduction in government spending 

and a rise in taxation as a share of GDP”. 

Hence, there has been an evolution in the Bank’s 

thinking with regard to how fiscal policy will affect the 

Alan Clarke 12 February 2010 


10 


outlook for GDP and inflation. So have forecasters 

been asleep at the wheel and should we have seen 

this revision to the Bank’s forecasts coming? Given 

what the MPC said in the January minutes, one can 

feel excused for being a little surprised by the extent 

of the revisions in the February Inflation Report: 

Chart 3: BNP Paribas vs BoE Inflation 

Projection (%, y/y) 

“A fuller analysis of the Government’s Pre-Budget 

Report than had been possible when the Committee 

had met in December implied that the published 

plans did not contain significant news for the outlook 

relative to the assumptions underlying the November 

Inflation Report”. 

We would say that a near 0.5 percentage point 

slashing of the two year ahead inflation projection is 

pretty significant news! Reading between the lines, 

the Bank got such a kicking at the November Inflation 

Report press conference for having such an upbeat 

growth projection and taking no account of the 

inevitable fiscal tightening that it wanted to avoid a 

repeat. We completely agree with the thrust of the 

revisions. After all, our own CPI inflation projection is 

even lower than the Bank’s during 2011. 

Rate hikes are a long way off 

The interpretation is crystal-clear. The fact that the 

inflation projection based on market rate 

expectations is well below target two years ahead 

shows the market is well ahead of itself in pricing in 

rate hikes. That projection is still below the 2% 

inflation target even after three years. Furthermore, 

with even more fiscal tightening likely to be 

announced in the aftermath of the election, that 

projection could be revised down yet further. 

The latest Inflation Report supports our long-held 

forecast that Bank Rate is likely to remain on hold for 

a very long time. We are at the very aggressive end 

of the consensus range. While most expect a rate 

hike before the end of this year, we expect no rate 


hikes for the whole of 2010, and probably the whole 

of next year. The new Inflation Report has reinforced 

our conviction. King stated that it is far too soon to 

conclude that no further bond buying is needed. 

Clearly the door is open to more QE, though the 

likely improving data flow will make that a much 

harder call. 

The next key event on the UK monetary policy 

horizon is next week’s MPC minutes. In November, 

the inflation projections provoked one member to 

dissent in favour of more QE than the GBP 25bn 

expansion that was delivered. Since then, the 

inflation projection has been shifted lower. Hence if 

one member saw the case for more QE back in 

November, these projections would clearly support 

the case for dissenting now. Hence we expect a split 

vote. Clearly the majority on the committee opted for 

a pause in QE. King noted that it was not the Bank’s 

job to fine-tune by using QE. 

Alan Clarke 12 February 2010 


11 


Sweden: Earlier Rate Hikes on Agenda 

• The Riksbank kept the repo rate at the 

historical low of 0.25% at its February meeting, 

as generally expected. 

• The further improvement in economic 

conditions was acknowledged, and overall the 

statement was hawkish compared to 

December’s. 

• The Riksbank thus brought forward its 

projection for the first rate hike, from autumn to 

summer or early autumn. 

• We agree with this assessment and expect 

the first rate hike to be delivered in July. 

However, if stress in financial markets 

intensifies and uncertainty increases, there is a 

risk that the Riksbank will wait until September. 

CPI 

CPIF 

GDP 

Repo rate 

(%) 

Table 1: Riksbank’s Forecasts (% y/y) 

2009 2010 2011 2012 

-0.3 

(-0.3) 

1.9 

(1.9) 

-4.5 

(-4.5) 

0.7 

(0.7) 

1.6 

(0.8) 

1.9 

(1.2) 

2.5 

(2.7) 

0.4 

(0.3) 

2.9 

(3.0) 

1.4 

(1.5) 

3.4 

(3.4) 

1.8 

(1.6) 

3.1 

(3.6) 

1.8 

(1.9) 

3.1* 

(3.5) 

3.3 

(3.6) 

Source: The Riksbank. December 2009 forecasts in brackets 

Note: * The downward revision is because, in the previous forecast for 

2012, the Riksbank used an incorrect calculation factor to take into 

account the difference in the number of working days in 2011 and 2012. 

Chart 1: Policy Rate (%) 

Further improvement in economic conditions 

The Riksbank left the policy rate unchanged at 

0.25% at its February meeting, in line with market 

expectations. The opening paragraph of the policy 

statement noted that “the assessment now is that the 

upturn in economy activity rests on more solid 

ground”. Therefore the Executive Board stated this 

time round that it has reasons for increasing the repo 

rate somewhat sooner than was assessed in 

December, when the Riksbank reiterated its 

projection that the repo rate should be kept at its low 

until the autumn. The Executive Board now expects 

that “it will begin to raise the repo rate in the summer 

or early autumn”. The statement also mentioned that 

“it will be possible to make the increases in the 

slightly longer term more gradually and the forecast 

for the repo rate in the longer term has therefore 

been adjusted downwards somewhat”. 

Hawkish tone 

The Riksbank mentioned the steady improvement in 

financial markets and slight increase in global growth 

since its last meeting in December. Compared with 

the previous statement, there was a change in 

language regarding the recovery. The Riksbank 

again stated the recovery in household consumption, 

but noted that “the development of the manufacturing 

industry is still lagging behind”. This is a more 

positive statement compared with the previous one, 

where industrial production was described as ”still 

weak”. Clearly, given the increase in surveys such as 

the manufacturing PMI, which at its current level is 

the highest among the main advanced economies, 

the Riksbank acknowledges that leading indicators 


Chart 2: Exports & Manufacturing PMI New 

Export Orders 


suggest an improvement in production in the coming 

period. The Riksbank also seemed to be more 

confident on the global economic outlook. The 

assessment was that ”demand for Swedish products 

will increase and exports will rise”. 

Gizem Kara 12 February 2010 


12 


On inflation, Riksbank’s language was hawkish 

compared with the December statement. The 

increase in inflation in recent months was noted. 

Also, the expectation of weak wage increases was 

perceived to “help reduce inflationary pressures in 

the period ahead”. This is a marked change from the 

emphasis on the “downside risks to inflation” in the 

December statement. 

Revisions to Riksbank’s forecasts 

In terms of revisions to growth and inflation 

projections, the GDP growth forecast for this year 

has been revised down from 2.7% to 2.5%. Inflation 

forecasts for 2010, on the other hand, were revised 

upwards in light of the surprises on inflation. CPI was 

revised up from 0.8% to 1.6%, hence why the 

Riksbank now expects to deliver its first rate hike 

earlier, and CPIF from 1.2% to 1.9%. 2011 forecasts 

were revised down only by 0.1pp for both CPI and 

CPIF (to 2.9% and 1.4% respectively). 

Chart 3: GDP and Unemployment 


Chart 4: Riksbank’s Policy Projections in 

December 2009 & February 2010 

Dissenter to the decision 

This time around, there was only one dissenter to the 

decision. Deputy Governor Lars E.O. Svensson once 

more entered a reservation against the decision and 

advocated cutting the repo rate to 0%. Deputy 

Governors Lars Nyberg and Barbro Wickman-Parak 

clearly did not dissent to today’s decision as the 

outcome was in line with their long-held view that ”it 

would be necessary to raise the interest rate sooner 

than indicated by the proposed interest rate path, but 

that the path would then not need to be so steep 

during the remaining forecast period”. 

4.5 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

Repo Rate (%, quarterly averages) 

Dec-09 

Feb-10 

Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 

Our policy expectations 

Last week we highlighted that the further 

improvement in domestic economic conditions does 

provide a reason (see Market Mover, 5 February 

2010) for the Riksbank to bring forward its projection 

for the first rate hike from the autumn to the summer, 

i.e. from September to July. We also noted that there 

is already disagreement among the deputy governors 

regarding growth prospects, with deputy governors 

Nyberg and Wickman-Parak having a more positive 

view on the growth outlook, which would necessitate 

earlier rate hikes than forecast by the Riksbank. 

But, given the tensions in financial markets and 

increased uncertainty due to concerns over the fiscal 

situation in high-debt countries, we expected the 

Riksbank to adopt a cautious approach this time 

around and keep its repo rate path unchanged for the 

time being. 

Source: The Riksbank 

The Riksbank, however, seems to be more certain of 

the growth outlook, given the further improvement in 

economic conditions since the December meeting. 

Therefore, we believe the first rate hike will come in 

July, as economic conditions should continue to 

improve and the increase in unemployment is likely 

to be less than generally expected by the Riksbank 

previously. 

However, if stress in financial markets intensifies on 

the back of concerns over the sustainability of fiscal 

balances in some countries and uncertainty 

increases, there is a risk that the Riksbank will wait 

until September to start its hiking cycle. 

Gizem Kara 12 February 2010 


13 


Japan: Slowing Consumption Recovery 

• Thanks largely to the effects of fiscal 

stimulus, household spending has been 

recovering since Q2 2009. However, there are 

signs that the tempo slowed significantly in Q4. 

• This is because the driver of the 

consumption recovery, stimulus-fuelled outlays 

for durable goods, is starting to lose steam, as 

evidenced by the plateauing of passenger car 

sales. 

• Owing to the severe state of household 

incomes, spending on areas unaffected by 

stimulus has remained weak, making it likely 

that the consumption recovery will falter in 

coming quarters. 

• Because the worst is over for 

employment/income conditions, an outright 

collapse in consumption is unlikely even after 

the support from fiscal stimulus ends. 

Chart 1: Sales of New Motor Vehicles including 

Mini Vehicles (annualised, sa, 10k) 

650 

600 

550 

500 

450 

400 

350 

02 03 04 05 06 07 08 09 10 

Source: Japan Automobile Dealers Association, BNP Paribas 

Chart 2: Department Store Sales (sa, JPY bn) 

690 

670 

650 

630 

610 

Consumption has been recovering since Q2 2009, 

thanks largely to the effects of fiscal stimulus. But 

areas not directly benefiting from that stimulus have 

remained lacklustre. With signs emerging that 

stimulus is losing its impact, we analyse the outlook 

for consumer spending. 

Recovery tempo slowed in Q4 

On a GDP basis, real consumer spending crested in 

Q1 2008 and over the following year plunged 3.8% 

before touching bottom in Q1 2009. Spending 

revived in Q2 2009 with a solid 1.2% q/q gain and 

advanced a further 0.9% in Q3. While monthly 

statistics suggest positive growth continued into Q4, 

we estimate that the tempo slowed to just 0.2% q/q. 

Effects of fiscal stimulus are waning 

The driver of Q4 consumption is again durable goods 

spending, the area benefiting most directly from the 

government’s various stimulative policies. But even 

here the tempo is waning. For example, car sales, 

the beneficiary of subsidies/tax breaks for the 

purchase of eco-friendly models, grew 3.0% q/q in 

Q4 according to our seasonally adjusted estimates, 

but that is well off the robust 17.4% q/q pace evident 

in Q3. (While commercial sales figures released by 

the METI show little difference between sales growth 

in Q3 and Q4 – 6.0% q/q and 6.8% q/q, respectively – 

the METI uses different seasonal adjustment and the 

reading for December is a sharp drop of 4.2% m/m, 

also suggesting slowing momentum.) 

590 

570 

550 

530 

510 

04 05 06 07 08 09 

Source: Japan Department Stores Association, BNP Paribas 

In terms of new cars sales (our seasonally adjusted 

estimates), the total bottomed out in March 2009 and 

by the summer had shifted substantially higher. 

Since October, however, this total has generally 

moved sideways. In January 2010, new cars sales 

were up a brisk 36.8% y/y but just 0.7% m/m. While 

this plateauing can partially be attributed to supply 

constraints for the hot-selling hybrid models, there 

are no such impediments for other models and their 

formerly robust sales have still stalled. 

Meanwhile, as for the stimulus benefiting household 

appliances, the eco-point system (whereby 

purchases of eco-friendly appliances earn points that 

can be redeemed for gift certificates and other items), 

sales of flat-panel TVs remain as solid as ever, due 

in part to the switchover to terrestrial digital 

broadcasting from July 2011. However, the METI’s 

Indices of Tertiary Industry Activity show a marked 

weakness for the retailers of household appliances, 

with real sales falling in both November and 

December. 

Ryutaro Kono/ Hiroshi Shiraishi 12 February 2010 


14 


Spending on other areas never did improve 

Turning to areas of consumption unaffected by the 

stimulus, the tone remains weak. The situation is 

especially dire for department stores, which primarily 

market big-ticket items that today’s frugal consumers 

shun. According to our seasonally adjusted estimates, 

department store sales plummeted 4.8% q/q in Q4, 

far worse than Q3’s 0.3% drop. While sales on a 

monthly basis revived in December on the back of 

earlier-than-usual sales campaigns, the level remains 

below that of September owing to the steep sales 

declines posted in October and November. 

Preliminary figures for individual department stores in 

January show y/y declines ranging from 0.5% to 

roughly 7%. While that might be an improvement 

from December, month-on-month sales are generally 

flat. 

According to METI’s commercial sales statistics, 

business also remains sluggish for the retailers of 

food and beverages, with nominal sales in Q4 falling 

2.0% q/q. While falling prices act to deflate nominal 

sales, this sector’s real sales in Q4 were still down 

0.6% q/q. Although supermarkets and convenience 

stores are desperately trying to shore up sales of 

food/beverages by slashing prices and introducing 

cheaper private-brand goods, such strategies have 

not sparked demand. 

Meanwhile, the index of service consumption (a subindex 

of the Indices of All Industries) remains weak, 

with the reading for October being 0.2% m/m 

followed by -0.3% m/m in November, which, when 

averaged out, yields a flat trajectory from Q3. As for 

service spending moving forward, the December’s 

Consumer Confidence Survey’s section on 

expenditure plans for services in the coming quarter 

shows weakness in all six survey categories (sports, 

concerts, amusement parks, household services, 

restaurants, self-enlightenment). 

Consumption recovery will momentarily falter 

The fundamental reason for consumption being weak 

is the severe state of households’ income conditions 

(inadequate social welfare systems also play a big 

part in explaining the structural weakness of 

consumption). Most households realise that the drop 

in income from 2008 is permanent, and not just the 

result of a cyclical shock; households have lowered 

their spending levels to reflect this. That winter 

bonuses again fell sharply this year only reinforces 

the conviction that income has permanently shifted 

lower. 

Although many companies have returned to 

profitability on the back of booming exports, they will 

likely maintain a restrictive stance towards payroll 

costs as the return rate on capital remains low. 

Accordingly, any appreciable improvement in 

103 

102 

101 

100 

99 

98 

97 

96 

95 

94 

Chart 3: Indices of All Industries Activity, 

Services Consumption (CY2005=100) 

03 04 05 06 07 08 09 

Source: METI, BNP Paribas 

4 

2 

0 

-2 

-4 

-6 

-8 

Chart 4: Total Cash Earnings (% y/y) 

04 05 06 07 08 09 

Source: MHLW, BNP Paribas 

Special Cash Earnings 

Non-scheduled 

Total Cash Earnings 

Scheduled 

employment/income conditions is unlikely anytime 

soon or, as we have stated in previous reports, it will 

be a while before a positive feedback loop between 

income and expenditure starts to function. Given this 

situation, the recovery in consumption will likely falter 

in coming quarters as the effects of fiscal stimulus 

fade. 

That said, all is not completely grim with respect to 

household income conditions, as overtime earnings 

are rising alongside revived factory activity and the 

downturn in scheduled earnings is also easing 

thanks to increased working hours (something that 

previously had been sharply cut). 

With respect to employment, the picture is also 

stabilising, with the forward indicator of the job-offer 

ratio posting improvement for four straight months. 

Thus, the worst seems to be over for 

employment/income conditions. While those 

conditions might not significantly improve anytime 

soon, consumption is unlikely to collapse after the 

fiscal stimulus ends. 

Ryutaro Kono/ Hiroshi Shiraishi 12 February 2010 


15 


US: Fed Provides More Details on Exit Plan 

• Bernanke outlined several steps and 

programmes that will help facilitate the Fed’s 

exit strategy in his speech on Wednesday. 

• The Fed is to conduct reverse repos with 

not only dealers, but also money market funds 

and other counterparties. We would argue that 

GSEs are a possibility as well. 

3 

2 

Chart 1: Fed Funds Target vs Effective 

Fed Target Rate 

Fed Effective Rate 

• By switching its policy target rate to the 

rate paid on excess reserves instead of 

effective fed funds, this should be mildly 

bearish for short-term rates. Again, GSEs are 

an obstacle to fully benefiting from this plan. 

• The Fed will offer term deposits and could 

now have greater control over 3m or longer 

rates by adjusting the supply of its offerings. 

• STRATEGY: We do expect some bearish 

impact on the 2-5y sector of the Tsy market. To 

be sure, Bernanke made it clear that there has 

been no policy shift (inflation subdued, rates to 

be held low for an extended period etc). 

However, the psychological effect of these 

measures will still be a factor as investors 

think twice about front-end carry/roll trades. 

1 

0 

May-08 Aug-08 Nov-08 Feb-09 Jun-09 Sep-09 Dec-09 


Chart 2: Commercial Paper to Remain Tight? 

400 

3m OIS vs ABCP Rate Spread 6 

350 

Fed Target Rate (R.H.S) 

5 

300 

250 

4 

200 

3 

150 

100 

2 

Bernanke outlined several steps that will help the 

Fed facilitate the unwinding of accommodative 

monetary policy. Some of these steps are not 

expected to have a noticeable impact, while the 

impact of a few programmes is unclear and warrants 

attention. However, there is no policy shift so one 

shouldn’t expect eventual Fed tightening to come any 

sooner than previously expected, although the 

impact on markets could nevertheless be bearish 

due to the symbolic nature of this detailed update on 

the Fed’s exit plan. 

Reverse repos with a twist 

Reverse repo operations by the Fed are nothing new. 

In fact, the Fed used reverse repos quite a bit in the 

beginning of the crisis to manage liquidity. By 

performing these transactions, the Fed drains cash 

out of the system. It is yet another tool for controlling 

overnight effective rates and keeping them closer to 

the target (Chart 1). 

What's new is that the Fed plans to perform these 

transactions with other counterparties besides 

primary dealers, albeit stopping short of identifying 

who those counterparties may be. Money market 

50 

0 

-50 

0 

Jan-08 Jul-08 Feb-09 Aug-09 Mar-10 


funds seem like good candidates, although they are 

already affected by the SEC’s recent ruling about 

shortening the maximum weighted-average maturity 

of a fund’s holdings from 90 to 60 days, which would 

weigh on demand in the longer end of the money 

market sector. Much of the assets bought in this 

sector are CDs and commercial paper. Chart 2 

shows that the CP spread is very tight due to the 

Fed’s liquidity programmes although it may now start 

to widen. 

Paying interest on excess reserves…but at the 

target rate 

The Fed is currently already paying 25bp on excess 

reserves, although the effectiveness of this is 

hampered by the fact that GSEs still don’t get paid on 

reserves. GSEs are big players in the Fed Funds 

market and they are a major reason why the Fed lost 

control of the effective fed funds rate (Chart 1). We 

1 

Sergey Bondarchuk / Suvrat Prakash / Bulent Baygun 12 February 2010 

Market Mover, Non-Objective Research Section 

16 


would argue that resolving this issue would help the 

Fed regain better control of overnight rates. In fact, 

the Fed might also be already considering reverse 

repos with GSEs, as it has not yet specified which 

counterparties are under consideration. 

Bernanke outlined a key change in the Fed’s 

approach which could help it gain stronger control of 

short-term rates. The Fed will shift its policy target to 

the rate paid on reserves instead of the fed effective 

rate during the early stages of tightening. Effective 

fed funds has occasionally been driven much lower 

than expected as the banking system dumps 

reserves in that market on days of excessive liquidity. 

This makes it difficult for the Fed to control effective 

rates during the early stages of rate increases. By 

protecting against unexpected plunges in the Fed 

effective rate, this should force an upward 

adjustment to OIS, GC and even Libor, although 

perhaps only slightly since most of the time there is 

not a dramatic drop in effective rates. 

Offering term deposits 

This isn't the first time a potential Term Deposit 

Facility has been mentioned by the Fed. The 

implication of introducing such a facility, especially 

ahead of rate hikes, is that it could give the Fed 

effective control of rates longer than 1m or even 3m. 

As another tool for draining liquidity, the Fed "plans 

to offer to depository institutions term deposits, which 

are roughly analogous to certificates of deposit that 

the institutions offer to their customers". 

By offering deposit out to (say) 3m, the Fed could 

arguably directly control the 3m rate, besides the 

traditional overnight fed funds rate. Although an 

argument can be made that investors will set the 

rate, the Fed could nevertheless influence it by 

adjusting the supply of its offerings. Therefore, if the 

Fed starts to use this facility before official rate hikes, 

it could at the very least increase volatility and quiet 

possibly push up short rates. Testing of the TDF is 

scheduled to start in the spring on a small scale, 

implying that the use of this facility will scale up as 

the economy improves. 

Therefore, considering that the Fed has hinted that 

liquidity draining exercises will ramp up before official 

rate hikes, we could see the potential impact on rates 

as early as mid-to-late spring. As such, 

carry/rolldown plays should be considered with this in 

mind. 

On discount window, TAF and TALF wind-down 

The Fed’s current outstanding discount window 

borrowing is down to USD 89bn from a crisis peak of 

USD 438bn. Therefore, the discount window is barely 

used despite the Fed’s intense promotion of the 

facility at the start of the crisis. The idea was that 

banks would be willing to borrow from the Fed in 

case Libor rates were higher, thus making the 

discount window a “cap in Libor”. This failed the test 

and so other liquidity programmes were needed. 

Thus, a raise in the discount rate is unlikely to 

increase Libor (or other short-term rates) although 

some investors will surely still regard this as a 

hawkish message. 

Likewise, we expect no noticeable impact from the 

wind-down of other facilities, such as TAF on 8 

March and TALF on 31 March (30 June for CMBS 

collateral) as utilisation of these programmes has 

dwindled recently. 

Asset sales 

Lastly, security sales shouldn’t be a concern in the 

short/medium term, as the Fed doesn’t anticipate 

selling security holdings “at least until after policy 

tightening has gotten under way and the economy is 

clearly in a sustainable recovery”. 

Bernanke has used very careful and measured 

language in providing a detailed update on the Fed’s 

exit plan. By filling in the holes in the plan, investors 

are now able to envision the exit path more clearly 

and some may even be bracing for hawkish 

messages at upcoming FOMC meetings/speeches. 

Thus, while Bernanke may insist there has been no 

policy shift, the market reaction in the coming weeks 

may prove otherwise. We stick with the bearish call 

we made at the start of the week. 

Sergey Bondarchuk / Suvrat Prakash / Bulent Baygun 12 February 2010 


17 


US: Impact of Buyouts on Rates and MBS 

• The GSE buyout announcements are 

bearish for mortgages, as they could shrink the 

potential base of investors post MBSPP end, 

erode carry in the interim and potentially 

remove GSEs as a backstop bid. 

• We like being long the 5Y swap spread on 

concerns around mortgage selling and a 

possible flight to quality into Treasuries. 

• The added uncertainty around the 

conclusion of MBSPP is likely to provide a bid 

to vol. We like being long gamma vol on 5y and 

10y tails. 

With GSE portfolios dedicated to buyouts, the 

possibility of them being a backstop bid after the Fed 

stops buying has diminished considerably. Money 

managers are likely to be the only major buyer of 

MBS, but would be hurt by the diminished liquidity in 

the mortgage market and unable to stem an overall 

increase in risk premia. As we have discussed 

previously, banks are unlikely to support mortgages 

in size. Overseas investors, already hurt by 

capricious GN prepayments (only 16% of the market) 

would be unlikely to support mortgages. We now look 

for a 30+bp widening in mortgages, and with the 

carry (in FGs) until Fed exit essentially lost, we've 

turned negative on mortgages. Also, with the Fed 

mostly in lower coupon fixed and other investors in 

higher coupons and ARMs, the private market is 

primarily taking the losses – and those too, quite 

suddenly. 

For FGs, with 30Y pools trading on the basis of Feb 

prepays, with large negative carry and TBAs for 

March settle, the market is likely to trade with 

difficulty. With the ratio of ARM to Fixed 

delinquencies at 5 times (12.54% vs 2.46%), the 

price depreciation is likely to impact this market 

particularly negatively. The CMO market also faces 

difficulty given the price depreciation in Inverse IOs 

due both to the type of collateral and leverage to 

prepays. 

For FNs, it is difficult to price TBAs, given the 

variable term of buyouts and also since the 

deliverability option is considerable. For example, at 

80 CPR, the carry on FN 6s is -13 ticks, at 90 CPR 

-27 ticks, at 99 CPR -79 ticks. Furthermore, very little 

information is available on products other than 30Ys. 

Since FN delinquencies for credit enhanced collateral 

are about 70% higher than FGs, market such as 

Chart 1: Mortgage Current Coupon LIBOR OAS 

vs the 5Y Swap Spread 

100 

80 

60 

40 

20 

0 

-20 

-40 

Mortgage Current Coupon LIBOR OAS 

5y Swap Spread (RHS) 

-60 

0 

Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 

Source: BNP Paribas, Yield Book 

230 

210 

190 

170 

150 

130 

110 

90 

Chart 2: Gamma Over Time 

70 

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 


3m10y ATM vol 

10 yr swap (RHS) 

140 

120 

100 

ARMs could be even more hurt in FNs, given their 

relatively higher delinquencies. Dealers, who are in 

the business of carrying inventories in mortgage 

products, are likely to be hurt considerably at the 

beginning of the year. This bodes poorly for liquidity, 

especially with the Fed exit around the corner. 

As we have argued previously, it has always been 

economical to buy out loans in the beginning, rather 

than waiting until 24 month dlq for higher coupons 

(5.5% and above). While FAS 166/167 improves the 

economics for such loans, the principle of it being 

economical for such bonds remains. The economics 

argument offered by the agencies in yesterday's 

announcements could be challenged. 

Given the potential negative impact, we place a 

decent probability of such factors being considered in 

the actual implementation of the buyout 

announcement, and amendments more favourable to 

investors or a rolling back of these policies cannot be 

ruled out. Regardless, the absence of the role of the 

GSEs being a backstop bid from the 

administration/regulator/government's point of view 

bodes poorly for the basis. 

80 

60 

40 

20 

4.5 

4 

3.5 

3 

2.5 

2 

Anish Lohokare / Bulent Baygun 12 February 2010 


18 


Ramifications for Rates, Swap Spreads and Vol 

The magnitude of losses implies that this could turn 

into a mini crisis. Depending on the interaction of the 

bearish effect of mortgages and some flight-to-quality 

flows, the net effect could be neutral to mildly bearish 

for duration. However, due to mortgage selling as 

well as a crisis-like situation, swap spreads should 

widen. In the event of a flight to quality, Treasuries 

should be the primary beneficiary with 2-5y swap 

spreads leading spread widening in the process. On 

the other hand, if the selling of mortgages brings with 

it selling/paying in Tsys and swaps, that could turn 

into a self-feeding cycle with most of the flows 

happening in the 5-10y part of the swap curve, 

thereby widening spreads in that sector. Historically 

episodes of MBS OAS widening have coincided with 

5y swap spread widening, supporting our intuition 

(Chart 1). In short, we advocate being long 5y swap 

spreads. 

In the immediate aftermath of the FNM/FRE 

announcements, vol and payer skew were slightly 

better bid but the impact has been very mild, and not 

out of line with what one would expect in a sell-off 

(recall that the rise in rates on Wednesday was 

triggered by a strong performance in equities in 

response to the Greek rescue discussions, as well as 

the tail in the 10y Treasury auction). In contrast, with 

rates virtually unchanged on the day after, vol has 

been easing off. However, given its already low 

levels relative to the range during the crisis (Chart 2), 

we expect any slide in vol to be rather muted, 

whereas any uptick should be more pronounced if/as 

mortgage selling gives rise to a self-feeding backup 

in rates, steepening the curve and widening swap 

spreads. In view of this expected asymmetric 

behaviour, we like being long gamma vol on 5y and 

10y tails. 

Anish Lohokare / Bulent Baygun 12 February 2010 


19 


EUR: Limited Scope for a Rapid Recovery 

• The recent strong deterioration in the 

peripheral world was clearly linked to concerns 

on sovereign debt as well as speculative selling. 

Chart 1: Peripherals Helped Portfolios in 2009 

• But the deterioration also has to do with the 

lack of decent demand from real accounts, 

which are already full to capacity (and maybe 

beyond) on peripherals. 

• STRATEGY: Play intra-peripheral spread 

compression. 

Performance in 2009 driven by peripherals 

The performance of bond portfolios in the euro area 

in 2009 was significantly positive for most of the year, 

and well above the performance of core EMU 

markets. The performance of euro sovereigns last 

year was around 3.5%, and the performance of AAAs 

even lower (2.9%). The performance of peripherals 

was far stronger until the attacks started in 

December. It is worth noting that the market value of 

bond portfolios increased roughly in line with the 

performance of peripheral markets. While the 

available data end before the fourth quarter, it seems 

likely that the performance over the last few months 

has deteriorated significantly. This means that, other 

things being equal, bond portfolios were probably 

overweight in peripheral markets against cores. 

Bond portfolio managers benefited from the prospect 

of tighter spreads as the situation in financial markets 

and liquidity conditions improved. Global spread 

compression was favoured by such behaviour. All 

peripherals, above all those that suffered heavily in 

late 2008 and early 2009, benefited from this trend. 

Going into December 2009, it seems clear that a 

significant part of bond portfolios were overweight 

peripherals in general – Greece, Ireland, Italy and 

Portugal in particular. Then attacks on Greece 

started, spreading to Portugal and Spain. 

No capacity to absorb 

Portfolios were therefore exposed to counter 

performance from peripherals when the crisis started, 

and this explains the lack of demand in the face of 

speculative selling. The rapidity of movements in 

yields as well as the rise in volatility put portfolios 

under pressure. While most are valued by using a 

mark-to-market approach, their time horizon is longer 

than for trading books and therefore this did not 

trigger massive selling from real accounts. However, 

it did stop them benefiting from buying opportunities 


Chart 2: Strong Spread Compression Last Year 


when yields reached irrelevant levels recently. This 

situation is unlikely to change rapidly. In other words, 

beyond the strong decline in yields, CDS and 

spreads that could follow positive readings of 

coordinated European decisions, a return to levels 

prevailing before the crisis started in December is 

unlikely for a while. In addition, beyond the positive 

reaction near term, markets will wait for hard figures 

pointing to signs of improvement before confidence is 

fully restored. 

Strategy: Beyond the near-term compression, play 

intra-peripheral spread compression rather than 

peripheral-core spread compression. 

Patrick Jacq 12 February 2010 


20 


EUR: Demand for ECB’s Liquidity Still High 

• Demand at this week’s MRO was significant 

given the existing level of excess liquidity. 

Recent limited tensions on OIS/BOR spreads 

could partly explain such behaviour. 

• As concerns over sovereign debt and 

liquidity should moderate in the coming weeks, 

we expect OIS/BOR spreads to tighten back 

slightly, preventing demand for safety from 

gaining momentum. 

• STRATEGY: Play a tactical compression of 

OIS/BOR spreads. Receive the 3mth OIS/BOR 

spread (first ER contract). 

Chart 1: Higher Demand Leads to Lower Eonias 

Demand for 1-week liquidity has increased 

Demand for liquidity at recent ECB MROs has 

increased significantly. The amount allotted this week 

was EUR 76.1bn, up 20.3bn from last week and the 

second-highest level of demand since September 

2009 (before the last two 1y tenders). The number of 

bidders increased only slightly, implying a reasonable 

rise in average demand from each bidder. Such an 

increase in demand could, at first sight, appear 

surprising given the existing level of excess liquidity 

in the eurosystem. The ECB is providing the 

eurosystem with EUR 745bn, thanks to EUR 712bn 

via open market operations and EUR 33bn of 

covered bond purchases. There is therefore no need 

to rush for ECB liquidity. Note that two tenders (3mth 

and 6mth) were expiring this week for a total amount 

of EUR 22.5bn. So, on balance, liquidity stands at 

the same level after this week’s operations. A 

stabilisation of demand at the MRO, implying a 

moderate decrease of excess liquidity after the two 

tenders’ expiry, could have been expected. The fact 

that banks increased demand at the MRO, ahead of 

the expiry of both the 3 and 6mth tenders, means 

that the need for ECB liquidity remains elevated at 

some banks, which remain unable to gain access to 

the liquidity in the market. 

Such robust demand at ECB operations, as well as 

concerns over liquidity conditions in the current 

environment of a deterioration of some sovereign 

debts, fuelled a slight decline in OIS rates while 

Euribors stopped declining. As a result, OIS/BOR 

spreads were paid further recently, adding a rise of 

Euribor rates to the decline in Eonias. While the 

OIS/BOR spread extension was not a matter of 

concern as long as it was driven by lower Eonias, it 

could be a concern when it is spurred by climbing 

Euribors. 


Chart 2: OIS/BOR Spreads to Tighten 


Things should calm down 

We do not expect an extension of the recent moves 

on Euribor rates. As concerns over sovereign debt 

gradually moderate, we see room for a modest 

decline in rates. At the same time, we doubt demand 

at upcoming ECB MROs will continue to climb. Only 

one LTRO will mature in coming weeks and the 

amount maturing is very small (EUR 2.1bn). 

Moreover, there will be a 3mth tender providing 

liquidity by the end of the month, which will allow 

banks to roll their position. A return of demand closer 

to EUR 55-60bn at upcoming MROs can be 

expected, leading to a slight decline in excess 

liquidity. This is likely to favour some compression in 

OIS/BOR spreads in coming weeks. A return closer 

to 25bp on the OIS/BOR IMM1 can be expected. 

Strategy: Receive the 3mth OIS/BOR spread (IMM1) 

with a target at 25bp. 

Patrick Jacq 12 February 2010 


21 


EUR: Monitoring Dutch Pension Funds 

• Asset allocation and duration risk analysis 

suggest that pension funds remain very 

sensitive to swap curve and equity gyrations. 

According to official DNB data and given swap and 

equity markets’ evolution over the past four months, 

we estimate the industry-wide cover ratio for Dutch 

pension funds to be around 106%. This is a minor 

deterioration from the 109% reported in Q3 2009. 

However, the interesting issue is more related to 

duration risks and less to solvency risks. In Chart 1, 

we show the evolution of assets, liabilities and cover 

ratios for Dutch pension funds. Also, we show a 

variable called “duration gap”, a measure of the 

sensitivity of pension fund portfolios to asset and 

liability dynamics. Notably, the duration gap has not 

improved in line with cover ratios and remains at very 

high levels (EUR 325bn 30Y risk). This is an 

indication that aggregate Dutch pension funds did not 

make significant changes to their asset allocation in 

2009, i.e. they have not used the proceeds from the 

rally in risky assets to hedge some of their asset vs 

liability mismatch. We validate this assumption by 

looking at the evolution of simplified asset allocations 

in recent years. In Chart 2, we can see that the 

estimated 2009 bond/equity allocation has not 

changed significantly from reported 2008 levels. 

Conclusion: We think Dutch pension funds are more 

sensitive to equity and swap curve volatility than 

previously thought on the basis of 2009’s rally in risky 

assets. As such, an equity sell-off coupled with bull 

flattening of 10/30s remains the pain trade. 

750 

700 

650 

600 

550 

500 

450 

400 

-100 

-150 

-200 

-250 

-300 

-350 

-400 

Chart 1: Cover Ratio vs Duration Gap 

EUR bn 

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 

EUR bn 

Assets 

Technical provision 

Funding ratio 

LIVE 

1997 1999 2001 2003 2005 2007 Q3/09 

Source: BNP Paribas, DNB 

55% 

50% 

45% 

40% 

35% 

30% 

25% 

Chart 2: Asset Allocation 

Equities 

Duration gap (30Y risk) 

1997 1999 2001 2003 2005 2007 

Source: BNP Paribas, DNB 

Fixed income 

2009 (Est.) 

160% 

140% 

120% 

100% 

80% 

60% 

Live 

COVER RATIO PROJECTION - RISK SCENARIO: BULL FLATTENING 

SWAP CURVE 

EQUITY 

10Y -100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 

30Y -110 -99 -88 -77 -66 -55 -44 -33 -22 -11 0 11 22 33 44 55 66 77 88 99 110 

CURVE 0.25 0.26 0.27 0.28 0.29 0.30 0.31 0.32 0.33 0.34 0.35 0.36 0.37 0.38 0.39 0.40 0.41 0.42 0.43 0.44 0.45 

-50 73% 74% 75% 76% 77% 79% 80% 81% 82% 83% 85% 86% 87% 89% 90% 91% 92% 94% 95% 96% 97% 

-45 75% 76% 77% 78% 79% 81% 82% 83% 84% 86% 87% 88% 89% 91% 92% 93% 95% 96% 97% 99% 100% 

-40 76% 77% 79% 80% 81% 82% 84% 85% 86% 88% 89% 90% 92% 93% 94% 96% 97% 99% 100% 101% 103% 

-35 78% 79% 80% 82% 83% 84% 86% 87% 88% 90% 91% 93% 94% 95% 97% 98% 100% 101% 102% 104% 105% 

-30 80% 81% 82% 84% 85% 86% 88% 89% 90% 92% 93% 95% 96% 98% 99% 100% 102% 103% 105% 106% 108% 

-25 81% 83% 84% 85% 87% 88% 90% 91% 92% 94% 95% 97% 98% 100% 101% 103% 104% 106% 107% 109% 110% 

-20 83% 84% 86% 87% 89% 90% 92% 93% 94% 96% 97% 99% 101% 102% 104% 105% 107% 108% 110% 111% 113% 

-15 85% 86% 88% 89% 91% 92% 93% 95% 97% 98% 100% 101% 103% 104% 106% 107% 109% 111% 112% 114% 115% 

-10 87% 88% 89% 91% 92% 94% 95% 97% 99% 100% 102% 103% 105% 107% 108% 110% 111% 113% 115% 116% 118% 

-5 88% 90% 91% 93% 94% 96% 97% 99% 101% 102% 104% 105% 107% 109% 110% 112% 114% 115% 117% 119% 120% 

0 90% 92% 93% 95% 96% 98% 99% 101% 103% 104% 106% 108% 109% 111% 113% 114% 116% 118% 120% 121% 123% 

5 92% 93% 95% 96% 98% 100% 101% 103% 105% 106% 108% 110% 112% 113% 115% 117% 119% 120% 122% 124% 126% 

10 94% 95% 97% 98% 100% 102% 103% 105% 107% 108% 110% 112% 114% 116% 117% 119% 121% 123% 125% 126% 128% 

15 95% 97% 98% 100% 102% 103% 105% 107% 109% 110% 112% 114% 116% 118% 120% 121% 123% 125% 127% 129% 131% 

20 97% 99% 100% 102% 104% 105% 107% 109% 111% 113% 114% 116% 118% 120% 122% 124% 126% 128% 130% 131% 133% 

25 99% 100% 102% 104% 106% 107% 109% 111% 113% 115% 117% 118% 120% 122% 124% 126% 128% 130% 132% 134% 136% 

30 100% 102% 104% 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 128% 130% 132% 134% 136% 138% 

35 102% 104% 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 133% 135% 137% 139% 141% 

40 104% 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 133% 135% 137% 139% 141% 143% 

45 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 133% 135% 138% 140% 142% 144% 146% 

50 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 134% 136% 138% 140% 142% 144% 146% 149% 

Alessandro Tentori 12 February 2010 


22 


EUR: Peripheral ASW Curves Re-Steepening 

• As the contagion from Greece to other 

peripherals has been mainly taking place 

through a flattening of their ASW curves… 

• …we expect this to correct once the EU 

support package for Greece is announced. The 

correction has already started for Portugal but 

Spain has lagged relative to other peripherals. 

• STRATEGY: Expect the Spanish 2/10s to resteepen 

in the coming days. This could also be 

expressed via a 2/10s BOX of Spain vs Italy. 

In the past few weeks, we have been analysing the 

contagion from Greece to other peripheral countries 

through the development of flattening forces on their 

ASW curves. The Greek curve has been inverted 

since mid-January (maximum inversion of -146bp) 

while the Portuguese 2/10s also inverted slightly 

(max of -8bp) at the beginning of February. 

Moreover, even the Spanish and Italian curves 

started flattening aggressively although their 10y 

spread to Bund level was more resilient to the recent 

widening episode. This week’s headlines on EU 

support for Greece led to a reversion of these latest 

trends, with non-core spreads tightening massively 

and peripheral ASW curves re-steepening. Chart 1 

shows the change in the periphery’s ASW levels 

since Tuesday 9 February, the day when rumours of 

a Greek bailout started. Greek and Portuguese 2/10s 

steepened by a massive 61bp (as of Thursday 1pm 

GMT), while Italian & Spanish 2/10s steepened by 

15bp & 23bp respectively, thereby paring back most 

of their previous flattening (more details on the table 

in Chart 1). 

Chart 2 shows the accumulated change in 2/10s of 

peripheral ASW curves since 19 November, the start 

of the Greek crisis. While the Portuguese curve resteepened 

to such an extent that it is now trading at 

a higher level in 2/10s than on 19 Nov, the Greek 

and Spanish 2/10s have further steepening ahead in 

order to reach November’s levels. This translates to 

around 18bp for SPGBs 2/10s and 172bp for GGBs. 

Of course, in the case of Greece, part of the credit 

risk premium may remain in the front end so we 

could see the curve not reaching pre-crisis levels, but 

in the case of Spain we expect a similar outcome to 

Portugal, where the curve totally pared back the 

previous flattening in only three days. A more 

defensive way to express this view would be to play 

the BOX of SPGB 2/10s steepening versus BTPs 

flattening (Short SPGB 10y vs Long BTP 10y & 

opposite in 2y maturity). Spain’s higher credit rating 

Chart 1: Past 3 Days Change in Peripheral ASW 

Curves. Massive Re-Steepening Taking Place 

10 

-10 

-30 

-50 

-70 

-90 

-110 

-130 

-150 

-170 

2012 2014 2017 2020 2022 2025 

should at least be visible in the front end of the curve, 

where 2y SPGBs should trade tighter than 2y BTPs. 

This is not the case at the moment, as is shown in 

Chart 3: BTP and SPGB curves have almost identical 

curves. 

SPA 

GRE 

IRE 

ITA 

POR 

ASW 2/10s GER FRA ITA SPA IRE POR GRE 

Change since Nov 19th: 11.10 8.96 -0.05 -17.83 -26.78 12.13 -172.78 

MAX (Change in 2/10s) 16.0 18.2 12.9 6.0 12.8 21.0 2.2 

MIN (Change in 2/10s) 

Since Mon Feb 8th: 


-1.4 0.0 -19.3 -43.0 -46.7 -56.2 -239.3 

Peripherals felt most of the flattening forces 

-3.86 -8.14 15.70 23.35 19.91 60.86 61.22 

Massive steepening correction in the last 3-days 

Chart 2: 2/10s (ASW) Change Since 19 Nov – 

Further Steepening Potential for Spanish Curve 

30 

20 

10 

0 

-10 

-20 

-30 

-40 

-50 

-60 

-100 

-150 

-200 

-250 

-70 

-300 

Nov-09 Dec-09 Jan-10 Feb-10 


ITA 

POR 

SPA 

IRE 

GRE (RHS) 

Chart 3: 2/10s in ASW Vs 2y ASW Levels & POR 

vs SPA vs ITA ASW Curves 

2/10s ASW 

130 

110 

FRA 

90 

70 

50 

30 

10 

-10 

AUS 

GER 

100 

60 

BEL 

20 

-60 

-100 

ITA 

SPA 

IRE 

POR 

-50 0 50 100 150 200 250 300 350 400 450 

-20 

2y ASW 

GRE 

2012 2014 2016 2018 2020 2022 2024 


POR ITA SPA 

50 

0 

-50 

130 

110 

90 

70 

50 

30 

10 

-10 

Ioannis Sokos 12 February 2010 


23 


EUR/GBP 2s10s Carry Box Revisited 

• Rolldown strategies continue to be pursued 

in a still-low yield environment. We review the 

EUR/GBP 2s10s swap carry box trade, which 

proved to be popular last year. 

• STRATEGY: Given the weaker correlation 

structure, we would monitor the forward term 

structure in order to lock in a higher profit of 

carry than currently available. Enter the trade for 

total carry ex-ante of around 50bp. 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

Chart 1: EUR vs GBP Spot Curves 

EUR 2s10s 

GBP 2s10s 

After having weakened somewhat in Q4 2009, the 

correlation between the EUR and the GBP swap 

curve has strengthened again. On 2s10s, the 6M 

rolling correlation is currently around 0.61, having 

fallen as low as 0.28 in mid December. 

In previous research, we have discussed how to 

capture the positive carry on the swap curve, while 

limiting the curve/delta risk implied by curve 

strategies: assuming a positive correlation structure 

between the EUR and the GBP curve: paying GBP 

1y fwd 2s10s vs receiving 1y fwd EUR 2s10s allows 

the locking in of a positive total carry as a result of 

the significantly wider spread between GBP 2s10s 

spot and GBP 1y fwd 2s10s. 

Chart 2 plots the evolution of the total one year carry 

of the combined position which could be locked in by 

entering the trade at different points in time. We can 

see that it reached values above 50bp in Q3 2009. 

Instead, if we were to pay the GBP 2s10s start Z10 

vs EUR today, we could lock in 39bp profit of carry 

until the end of 2010 (Table 1). Such number is still 

attractive but we would caution against entering the 

position at the current juncture. 

On the one hand, we remain convinced that the GBP 

curve will stay entrenched at steep levels in the 

medium term on the back of the combined forces of a 

dovish BoE and relentless supply. On the other hand, 

correlation is positive but rather low with respect to 

the trading range throughout the crisis. 

Hence, the hedge against total curve risk looks poor 

at present. In addition, we don’t expect the EUR 

curve to flatten in the short term: excess liquidity in 

the eurosystem is still elevated and bear flattening 

pressures resulting from the ECB’s implementation of 

exit strategies are not likely to develop before the 

beginning of H2. In fact, in the short term, bear 

steepening pressures might prevail on the EUR 

curve as a result of still unabated concerns regarding 

sovereign credit risk. 

-0.5 

-1.0 

2006 2007 2008 2009 2010 


Chart 2: Evolution of Ex-Ante Total Carry From 

1y fwd EUR/GBP 2s10s Swap Box 

0.6 

0.5 

0.4 

0.3 

0.2 

0.1 

0 

-0.1 

2006 2007 2008 2009 2010 


Chart 3: EUR/GBP 2s10s Swap Box Carry 

Analysis 

Ccy GBP Ccy EUR 

IMM Swap Curve Rolldown IMM Swap Curve Rolldown Box Rolldown 

0 2 0 2 

0 10 232 6 0 10 182 3 50 2 

H10 2 H10 2 

H10 10 226 18 H10 10 179 11 48 7 

M10 2 M10 2 

M10 10 209 20 M10 10 168 11 41 9 

U10 2 U10 2 

U10 10 189 21 U10 10 157 10 32 10 

Z10 2 Z10 2 

Z10 10 168 20 Z10 10 147 10 21 10 

H11 2 H11 2 

H11 10 148 H11 10 137 11 

Total Carry 84 45 39 

In sum, given the weaker correlation structure, we 

would monitor the forward term structure in order to 

lock in a higher profit of carry than currently 

available. Enter the trade for total carry ex-ante of 

around 50bp. 

Matteo Regesta 12 February 2010 


24 


JGBs: Wait for Price Dips in Q2 

• JGBs tend to fall in the second quarter of 

the fiscal year, due to the reduction of 

purchases by postal savings and public 

pensions. In addition, numerous factors will 

combine to loosen JGB supply-demand 

conditions in Q2 FY 2010. 

• Our fundamental recommendation is that 

investors wait for sufficient price dips before 

starting to buy JGBs in H1 FY 2010. 

• Moreover, investors need to note the 

unexpected resilience of the economy, equities 

and the dollar. Such resilience could sway 

expectations about BoJ easing, depending on 

how it unfolds. 

• Looking out through March book closings, 

we will remain cautious on the medium sector 

of the curve where banks have significantly 

increased their long positions. 

Many factors to loosen JGB supply/demand in Q2 

There is a reason for JGBs’ recent weakness. A 

devil-plagued period for many market participants is 

approaching. JGBs fell sharply in the second quarter 

of both FY 2008 and FY 2009. This was not mere 

coincidence. As the repayment of funds entrusted to 

the FILP runs its course, JGB purchases by postal 

savings and public pensions gradually fall at the start 

of each fiscal year. Moreover, other investors, 

understanding this, wait for price dips before buying, 

exerting further downward pressure on JGBs in Q2 of 

the new fiscal year. 

That US Treasuries and JGBs are quite closely 

linked is well known. As Chart 1 shows, however, the 

two markets move independently when monetary 

policy is altered or when particular factors impacting 

supply-demand conditions come to the fore. In recent 

years, there has been a rise in the number of 

occasions when Treasuries strengthened 

independently or JGBs weakened independently. 

The tone of the JGB market has again deteriorated 

since the start of 2010. Investors should view this as 

the market starting to anticipate the customary “Q2 

anomaly”. 

Numerous factors will combine to loosen JGB 

supply-demand conditions in Q2 FY 2010. Aside 

from 1) the anomaly previously outlined, 2) we 

expect net JGB supply to increase by JPY 2trn-3trn 

compared to Q2 FY 2009; 3) the government may 

launch additional stimulus measures after the budget 

is passed; 4) it will become clear that tax revenues 

Chart 1: A Comparison of 10-year Yields in 

Japan and the US 

2.0 (%) JGB supply-demand 

(%) 5.4 

1.8 Japan 

conditions loosen 

5.0 

"Sell Japan" 4.6 

1.6 

4.2 

1.4 

1.2 

1.0 

Fed Treasury purchases 

BoJ additional easing 

0.8 

07/10 08/4 08/10 09/4 09/10 


US (RHS) 

have undershot more than currently projected when 

government accounts are settled at the end of May; 

and 5) we expect the DPJ manifesto for the Upper 

House elections to contain elements of reckless 

spending. 

Wait for price dips before starting to buy JGBs 

Finance Minister Kan has repeatedly pledged he will 

announce a medium-term fiscal reform outline by 

June of this year. However, it will be difficult to devise 

a convincing plan since a consumption tax hike is off 

the table ahead of July Upper House elections. If the 

plan is a mere formality that lacks true substance, it 

will inevitably stoke market unease. That said, after 

the election it is unlikely to be further postponed. 

Our fundamental recommendation is that investors 

wait for sufficient price dips before starting to buy 

JGBs in H1 FY 2010. We suspect the impact of the 

above factors loosening JGB supply-demand 

conditions has not been fully discounted. Moreover, 

investors need to note the unexpected resilience of 

the economy, equities and the dollar. Such resilience 

could sway expectations about BoJ easing, 

depending on how it unfolds. 

The short end will continue to find support, since the 

BoJ has intensified its quantitative easing. However, 

if uncertainties overseas and in the domestic political 

situation retreat and equity prices rise, institutional 

investors’ dependency on the benefit of carry will 

ease somewhat. Looking out through March book 

closings, we will remain cautious on the medium 

sector of the curve, where banks have significantly 

increased their long positions. 

3.8 

3.4 

3.0 

2.6 

2.2 

1.8 

Koji Shimamoto 12 February 2010 


25 


Global Inflation Watch 

Large jumps in headline inflation over 

In the US, UK and eurozone, headline inflation has 

risen sharply over the past six months. As the sharp 

falls in food and energy inflation at the end of 2008 

have dropped out of the y/y comparison, it has 

mechanically pushed headline inflation up from its 

lows last summer. In the US and UK, headline CPI 

and RPI inflation have risen by around 5pp in just six 

months, reaching 2.7% and 3.5% y/y respectively in 

December. Eurozone CPI inflation gained around 

2pp over the same period to reach 0.9% y/y at the 

end of last year. 

The bulk of the base effects, however, are now past, 

and, on our forecasts, headline inflation is fast 

approaching its peaks for the year in all three 

countries. 

This should be evident in this week’s US CPI release, 

where a 0.3% m/m print that we are expecting for the 

month would lift the y/y rate by just 0.1pp to 2.8%. In 

the breakdown, we expect energy prices to have 

risen by 2.4% m/m, and food CPI by 0.2% m/m. 

Core inflation, meanwhile, should rise by 0.2% m/m. 

Underlying price pressures remain contained, but 

metal prices have been trending higher in recent 

months, and having surfaced in import and producer 

price inflation, have scope to have an impact on the 

CPI too. Auto prices would probably be the first CPI 

component to be affected by this upside risk. 

Otherwise, sluggish shelter prices and plummeting 

unit labour costs suggest underlying price pressures 

will remain contained. 

In the UK, the CPI should post a final month of 

accelerating inflation during January. The big story 

this month is the return of the rate of VAT to 17½%. 

Given the extent of the upward surprise last month, 

there is a suggestion that some firms have already 

passed on the VAT hike early. However, we also 

believe that conservative management of Christmas 

inventories has meant that the degree of discounting 

was probably less generous than last year. 

If there is full pass-through of the VAT hike, this could 

add a full percentage point to y/y inflation. However, 

several retailers have reported that they will not pass 

on the VAT hike, while others have said it will be 

deferred. Hence we expect a near ¾%pp addition in 

January. 

RPI inflation is likely to rise slightly more sharply, not 

least given accelerating house price inflation and 

base effects related to the mortgage interest 

component. 

Chart 1: Headline Inflation (US, EZ, UK) 

Source: Reuters EcoWin Pro, BNP Paribas 

Chart 2: US Core CPI & ULCs 


Chart 3: UK CPI vs. RPI 

Source: European Commission, BNP Paribas 

Luigi Speranza/Eoin O’Callaghan 12 February 2010 


26 


Table 1: BNP Paribas' Inflation Forecasts 

Eurozone 

France 

US 

Headline HICP Ex-tobacco HICP 

Headline CPI 

Ex-tobacco CPI 

CPI Urban SA CPI Urban NSA 

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 

2009 108.1 - 0.3 107.9 - 0.2 119.3 - 0.1 118.0 - 0.1 214.6 - -0.3 214.5 - -0.4 

2010 (1) 109.5 - 1.3 109.1 - 1.1 120.9 - 1.3 119.5 - 1.3 219.9 - 2.5 219.9 - 2.5 

2011 (1) 110.4 - 0.8 109.8 - 0.7 122.1 - 1.0 120.7 - 1.0 222.4 - 1.1 222.4 - 1.1 

Q3 2009 108.0 - -0.4 107.8 - -0.5 119.4 - -0.4 118.1 - -0.4 215.2 - -1.6 215.7 - -1.6 

Q4 2009 108.6 - 0.4 108.4 - 0.3 119.7 - 0.4 118.4 - 0.3 217.1 - 1.5 216.2 - 1.4 

Q1 2010 (1) 108.6 - 1.1 108.3 - 0.9 120.1 - 1.1 118.7 - 1.0 218.6 - 2.8 217.9 - 2.8 

Q2 2010 (1) 109.5 - 1.1 109.2 - 0.9 120.8 - 1.1 119.4 - 1.0 219.4 - 2.8 220.5 - 2.9 

Q3 2010 (1) 109.4 - 1.3 109.0 - 1.2 121.2 - 1.5 119.8 - 1.4 220.4 - 2.4 220.9 - 2.4 

Q4 2010 (1) 110.3 - 1.6 109.9 - 1.5 121.5 - 1.5 120.1 - 1.5 221.4 - 2.0 220.4 - 2.0 

Q1 2011 (1) 109.8 - 1.2 109.4 - 1.0 121.7 - 1.3 120.2 - 1.3 221.9 - 1.5 221.2 - 1.5 

Q2 2011 (1) 110.6 - 1.0 110.1 - 0.9 122.3 - 1.3 120.9 - 1.2 222.3 - 1.3 223.3 - 1.3 

Jul 09 107.8 -0.7 -0.7 107.51 -0.7 -0.8 119.1 -0.4 -0.7 117.80 -0.4 -0.7 214.5 0.0 -1.9 215.35 -0.2 -2.1 

Aug 09 108.1 0.3 -0.2 107.89 0.4 -0.3 119.7 0.5 -0.2 118.41 0.5 -0.2 215.4 0.4 -1.4 215.83 0.2 -1.5 

Sep 09 108.2 0.0 -0.3 107.91 0.0 -0.5 119.4 -0.2 -0.4 118.12 -0.2 -0.4 215.8 0.2 -1.3 215.97 0.1 -1.3 

Oct 09 108.4 0.2 -0.1 108.16 0.2 -0.3 119.5 0.1 -0.2 118.23 0.1 -0.2 216.4 0.3 -0.2 216.18 0.1 -0.2 

Nov 09 108.5 0.1 0.5 108.28 0.1 0.4 119.6 0.1 0.4 118.31 0.1 0.3 217.3 0.4 1.9 216.33 0.1 1.8 

Dec 09 108.9 0.3 0.9 108.61 0.3 0.8 120.0 0.3 0.9 118.60 0.2 0.8 217.5 0.1 2.8 215.95 -0.2 2.7 

Jan 10 (1) 108.1 -0.7 1.1 107.80 -0.7 0.9 119.8 -0.2 1.2 118.41 -0.2 1.1 218.2 0.3 2.9 217.05 0.5 2.8 

Feb 10 (1) 108.5 0.3 1.0 108.17 0.3 0.8 120.1 0.3 1.1 118.79 0.3 1.0 218.6 0.2 2.6 217.72 0.3 2.6 

Mar 10 (1) 109.1 0.6 1.2 108.80 0.6 1.1 120.4 0.2 1.1 119.02 0.2 1.0 218.9 0.1 2.9 218.91 0.5 2.9 

Apr 10 (1) 109.4 0.3 1.1 109.08 0.3 1.0 120.6 0.2 1.1 119.25 0.2 1.1 219.2 0.1 3.1 219.93 0.5 3.1 

May 10 (1) 109.5 0.1 1.2 109.20 0.1 1.0 120.8 0.2 1.2 119.45 0.2 1.1 219.4 0.1 3.1 220.60 0.3 3.2 

Jun 10 (1) 109.5 0.0 1.0 109.18 0.0 0.8 120.9 0.1 1.1 119.52 0.1 1.0 219.7 0.1 2.4 220.99 0.2 2.5 

Jul 10 (1) 109.1 -0.4 1.2 108.69 -0.4 1.1 120.9 0.0 1.5 119.51 0.0 1.5 220.0 0.2 2.6 220.94 0.0 2.6 

Aug 10 (1) 109.4 0.3 1.2 108.98 0.3 1.0 121.3 0.4 1.4 119.96 0.4 1.3 220.4 0.2 2.3 220.83 0.0 2.3 

Sep 10 (1) 109.8 0.3 1.5 109.37 0.4 1.4 121.3 0.0 1.7 119.99 0.0 1.6 220.8 0.2 2.3 220.95 0.1 2.3 

Oct 10 (1) 110.1 0.3 1.6 109.76 0.4 1.5 121.5 0.1 1.6 120.10 0.1 1.6 221.1 0.1 2.2 220.96 0.0 2.2 

Nov 10 (1) 110.3 0.1 1.6 109.87 0.1 1.5 121.4 0.0 1.5 120.08 0.0 1.5 221.4 0.1 1.9 220.44 -0.2 1.9 

Dec 10 (1) 110.6 0.3 1.6 110.21 0.3 1.5 121.6 0.1 1.3 120.21 0.1 1.4 221.6 0.1 1.9 219.93 -0.2 1.8 

Updated 

Next 

Release 

Feb 09 

Jan HICP (Feb 26) 

Jan 29 

Jan CPI (Feb 23) 

Feb 08 


Source: BNP Paribas, (1) Forecasts 

Chart 4: Eurozone HICP (% y/y) 

Chart 5: US Shelter Prices Drive Core CPI Lower 


While headline inflation troughed in July, core inflation is forecast 

to continue grinding lower, as the output gap weighs on ex-food, 

ex-energy prices. 


The plunge in shelter inflation remains the driver of the underlying 

trend in the CPI. Inflation in core goods has eased, however, 

following a temporary boost from a series of tobacco tax hikes and 

a sharp contraction in vehicle inventories. 



27 



Japan 

UK 

Sweden 

Core CPI SA 

Core CPI NSA 

Headline CPI RPI 

CPI CPIF 

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 

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 

2010 (1) 98.7 - -1.6 98.7 - -1.6 113.6 - 2.5 221.2 - 3.5 304.8 - 1.7 195.4 - 2.2 

2011 (1) 98.4 - -0.4 98.4 - -0.4 114.7 - 1.0 227.3 - 2.7 313.4 - 2.8 199.0 - 1.8 

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 

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 

Q1 2010 (1) 99.4 - -1.6 99.0 - -1.5 112.8 - 3.1 218.5 - 3.6 301.6 - 1.2 193.7 - 2.5 

Q2 2010 (1) 98.6 - -1.9 98.6 - -1.9 113.4 - 2.5 220.8 - 3.8 303.8 - 1.4 195.0 - 2.1 

Q3 2010 (1) 98.2 - -1.7 98.4 - -1.7 113.7 - 2.1 221.7 - 3.4 304.8 - 1.8 195.6 - 2.1 

Q4 2010 (1) 98.8 - -0.9 99.0 - -0.9 114.4 - 2.0 223.8 - 3.2 308.9 - 2.5 197.4 - 2.2 

Q1 2011 (1) 98.8 - -0.7 98.3 - -0.7 114.2 - 1.3 224.7 - 2.9 308.7 - 2.4 197.2 - 1.8 

Q2 2011 (1) 98.5 - -0.1 98.5 - -0.1 114.9 - 1.4 227.1 - 2.9 311.8 - 2.6 198.4 - 1.7 

Jul 09 100.0 -0.2 -2.2 100.1 -0.2 -2.2 110.9 -0.1 1.8 213.40 0.0 -1.4 298.8 -0.5 -0.9 191.1 -0.2 1.8 

Aug 09 99.8 -0.2 -2.4 100.1 0.0 -2.4 111.4 0.5 1.6 214.40 0.5 -1.3 299.4 0.2 -0.8 191.5 0.2 1.9 

Sep 09 99.8 0.0 -2.3 100.2 0.1 -2.3 111.5 0.1 1.1 215.30 0.4 -1.4 300.4 0.3 -1.6 192.3 0.4 1.4 

Oct 09 99.7 -0.1 -2.3 100.1 -0.1 -2.2 111.7 0.2 1.5 216.00 0.3 -0.8 301.1 0.3 -1.5 193.0 0.3 1.9 

Nov 09 99.8 0.1 -1.7 99.9 -0.2 -1.7 112.0 0.3 1.9 216.60 0.3 0.3 301.0 0.0 -0.7 193.0 0.0 2.3 

Dec-09 99.7 -0.1 -1.3 99.8 -0.1 -1.3 112.6 0.6 2.9 218.01 0.7 2.4 301.7 0.2 0.9 193.5 0.2 2.7 

Jan 10 (1) 99.5 -0.2 -1.4 99.1 -0.7 -1.4 112.6 0.0 3.6 217.63 -0.2 3.6 300.9 -0.3 1.0 193.2 -0.1 2.7 

Feb 10 (1) 99.5 0.0 -1.5 98.9 -0.2 -1.5 112.9 0.2 3.0 218.54 0.4 3.4 301.4 0.2 1.2 193.6 0.2 2.4 

Mar 10 (1) 99.3 -0.2 -1.7 99.0 0.1 -1.7 112.9 0.0 2.8 219.27 0.3 3.8 302.6 0.4 1.3 194.2 0.3 2.2 

Apr 10 (1) 98.6 -0.7 -2.2 98.5 -0.5 -2.2 113.2 0.2 2.8 220.20 0.4 4.1 303.7 0.4 1.5 194.9 0.4 2.3 

May 10 (1) 98.7 0.1 -1.8 98.7 0.2 -1.8 113.5 0.3 2.5 220.76 0.3 3.7 303.7 0.0 1.4 194.9 0.0 2.1 

Jun 10 (1) 98.4 -0.3 -1.8 98.5 -0.2 -1.8 113.6 0.1 2.3 221.39 0.3 3.7 304.1 0.1 1.3 195.1 0.1 1.9 

Jul 10 (1) 98.2 -0.2 -1.8 98.3 -0.2 -1.8 113.1 -0.4 2.0 220.89 -0.2 3.5 303.2 -0.3 1.5 194.6 -0.3 1.8 

Aug 10 (1) 98.1 -0.1 -1.7 98.4 0.1 -1.7 114.0 0.8 2.4 221.99 0.5 3.5 304.1 0.3 1.6 195.3 0.4 1.9 

Sep 10 (1) 98.2 0.1 -1.6 98.6 0.2 -1.6 114.0 -0.1 2.2 222.36 0.2 3.3 307.2 1.0 2.3 196.8 0.8 2.3 

Oct 10 (1) 98.6 0.4 -1.1 99.0 0.4 -1.1 114.3 0.3 2.3 223.37 0.5 3.4 308.7 0.5 2.5 197.4 0.3 2.3 

Nov 10 (1) 98.9 0.3 -0.9 99.0 0.0 -0.9 114.3 0.0 2.0 223.55 0.1 3.2 308.5 0.0 2.5 197.5 0.0 2.3 

Dec 10 (1) 98.8 -0.1 -0.9 98.9 -0.1 -0.9 114.6 0.2 1.7 224.36 0.4 2.9 309.6 0.3 2.6 197.3 -0.1 1.9 

Updated 

Next 

Release 

Jan 29 


Feb 11 


Feb 11 



Chart 6: Japanese CPI (% y/y) 

Chart 7: UK CPI (% y/y) 


Inflation is likely to remain heavily in negative territory for the 

foreseeable future. 


Inflation surprised to the upside in December for the 16 th time in the 

past 21 months. We expect CPI inflation to breach the 3% y/y 

threshold in January but to moderate subsequently. 



28 



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) 116.2 1.6 115.5 1.6 128.3 2.1 120.4 1.7 172.8 - 3.0 - - 2.8 

2011 (1) 117.9 1.4 116.8 1.2 131.1 2.1 122.8 2.0 178.5 - 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 (1) 115.3 1.6 1.5 114.8 1.4 1.9 128.0 1.1 2.6 119.5 0.1 2.0 170.5 0.6 2.6 - - 3.1 

Q2 2010 (1) 116.0 2.2 1.2 115.3 1.7 1.5 128.6 0.5 2.2 120.6 0.9 1.7 171.9 0.8 2.9 - - 2.7 

Q3 2010 (1) 116.6 2.2 1.6 115.7 1.4 1.6 128.0 -0.5 1.7 120.4 -0.1 1.6 173.7 1.0 3.0 - - 2.5 

Q4 2010 (1) 117.1 1.6 1.9 116.0 1.2 1.4 128.8 0.6 1.8 121.0 0.4 1.4 175.0 0.8 3.3 - - 2.8 

Q1 2011 (1) 117.4 1.2 1.8 116.4 1.2 1.4 129.3 0.4 1.1 121.3 0.2 1.5 176.2 0.7 3.4 - - 2.9 

Q2 2011 (1) 117.7 0.9 1.5 116.7 1.0 1.2 130.9 1.2 1.8 122.7 1.2 1.8 177.8 0.9 3.4 - - 2.9 

Updated 

Feb 05 

Feb 10 Jan 27 

Next 

Release 


Feb CPI (Mar 10) Q1 CPI (Apr 28) 


Chart 8: Canadian Total vs. Core CPI 

Chart 9: Australian CPI (% y/y) 


After plunging to a 56-year low last July, headline inflation is already 

back into positive territory. However, the large amount of spare 

capacity and the strong CAD suggest core inflation will continue to 

ease well into this year. 


Underlying inflation is slowing, but remains above the RBA's target 

range. While it will continue to moderate, the relatively limited and 

diminishing degree of slack in the economy mean underlying 

inflation will settle at the top end of the range presenting upside 

risks further ahead. 

CPI Data Calendar for the Coming Week 

Day GMT Economy Indicator Previous 

BNPP 

F’cast 

Consensus 

Fri 12/03 08:00 Spain CPI (Final) m/m : Jan 0.0% -1.0% -1.0% 

08:00 CPI (Final) y/y : Jan 0.8% 1.0% 1.0% 

08:00 HICP (Final) m/m : Jan 0.0% -1.0% -1.0% 

08:00 HICP (Final) y/y : Jan 0.9% 1.1% 1.1% 

Comment 

Tue 16/02 09:30 UK CPI m/m : Jan 0.6% 0.0% 0.1% Rising 

09:30 CPI y/y : Jan 2.9% 3.6% 3.7% 

09:30 RPI y/y : Jan 2.4% 3.6% 3.8% 

09:30 RPIX y/y : Jan 3.8% 4.5% 4.6% 

Thu 18/02 08:30 Sweden CPI (nsa) m/m : Jan 0.2% -0.3% n/a 

08:30 CPI (nsa) y/y : Jan 0.9% 1.0% n/a 

08:30 CPIF m/m : Jan 0.2% -0.1% n/a 

08:30 CPIF y/y : Jan 2.7% 2.7% n/a 

12:00 Canada CPI m/m : Jan -0.3% 0.3% 0.3% Increase 

12:00 CPI y/y : Jan 1.3% 2.1% 1.9% 

12:00 BoC Core CPI m/m : Jan -0.3% 0.2% 0.0% 

12:00 BoC Core CPI y/y : Jan 1.5% 2.1% 1.9% 

Fri 19/02 13:30 US CPI m/m : Jan 0.1% 0.3% 0.3% Moderate Increase 

13:30 CPI y/y : Jan 2.7% 2.9% 2.8% 

13:30 Core CPI m/m : Jan 0.1% 0.2% 0.2% 

13:30 Core CPI y/y : Jan 1.8% 1.8% 1.8% 

Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision 




29 


Inflation: BEs Less Sensitive to Credit Fears? 

• GLO: Some value in BE, not ASW discounts. 

• EUR: 2y (OATei-12) BE rich, 10y fair/cheap. 

• USD: Neutral on BE. 30y supply could weigh. 

• GBP: Neutral on BE Level & curve into RPI. 

GLOBAL: Anticipation of a bailout of Greece has 

been supporting global asset markets since early in 

the week. Equity and commodity markets have 

retraced some of last week’s falls but remain volatile. 

As discussed during the initial EGB/sovereign CDS 

spread widening, breakevens and ASW discounts 

have been less sensitive to credit concerns than 

during other stress periods (Q4 ’08 and Mar ’09) like 

other asset classes, although they clearly remain a 

driving factor of sentiment. Accordingly, breakevens 

have rebounded somewhat in Europe but the move 

has been relatively muted. Sovereign credit spreads, 

asset markets and breakevens are likely to remain 

volatile as details of any bailout plan unfold. Given 

the improvement in sentiment, we are less negative 

on breakevens everywhere but still see limited value 

in ASW discounts, particularly in Europe (Chart 1). 

We prefer to focus on domestic factors including the 

strong negative carry on front-end linkers in EUR, 

supply and the Inflation Report in the UK and 

upcoming 30y supply in TIPS. Abrupt market moves 

have affected liquidity and accentuated relative value 

distortions, at least in Europe. 

EUR: Slightly flatter inflation curve with expectations 

of a bailout. Moves have been messy given the 

volatility in EGB spreads. There has been some 

evidence of EUR real spread tightening lagging their 

nominal counterparts. Ahead of the strong negative 

carry in March, 2y breakevens remain exposed 

especially the rich OATei-12. OATei-12 BE has 

massively outperformed BTPei-12 BE since the start 

of February and its 1-Apr BE fwd is (well) above its 

10m high whilst OATei-20 BE spot is close to its low 

(or middle of the range for 1-Apr fwd). Assuming a 

coherent and consistent bailout plan, 10y breakevens 

should find support – BUNDei-20 and particularly 

BTPei-19 are still cheap vs. the OATei curve. Given 

the re-flattening in the inflation curve and RV 

considerations, selective 2/10y breakeven 

steepeners look attractive – OATei-12/BTPei-19 

1-Apr BE spread at flat makes little sense given the 

steepness of global inflation curves. That said, the 

pricing in of March’s negative carry is typically 

complete by the end of February and the risk of 

BTPei-19 supply in late February remains. The 5y5y 

inflation forward via OATei-15/-20 has quickly 

corrected lower following its spike in late 

T 1: Moves Since 3 Feb (Pre-Peripheral ‘Crisis’) 

January/early February and is now more consistent 

with BTPei and inflation swap 5y5y forward 

breakevens. Final German HICP at -0.6% m/m 

exceeded the preliminary release but Italy’s CPI 

came in 0.1% lower. Focus on AFT linker auction on 

Thursday. Eurozone and FRF data late in the month. 

USD: Breakevens are up but marginally relative to 

last week’s tightening. With TIPS BEs looking 

relatively rich vs. equities, oil and Treasuries (based 

on relationship since April ’09), this is no surprise. 

Note, the very front-end (Jan-11) remains attractive 

vs. BNPP CPI forecasts. Looming 30y TIPS issue on 

22 March will be a good test of institutional (LDI) 

demand which is not usually prevalent in the US. 

10y+ TIPS should remain under pressure until the 

supply. CPI NSA expected at +0.5% m/m on Friday. 

GBP: Poor performance with real yields up 20bp+ 

and breakevens down by 5-12bp with 10-15y area 

underperforming. The concession ensured a strong 

GBP 900mn UKTi-22 tap (b/c of 2.42, premium of 

0.5/1bp). The February BoE report was incredibly 

dovish on inflation. With SONIA repricing towards 

lower rates for longer (consistent with BNPP), we 

prefer to turn neutral on UK BEs (from bearish) given 

conflicting forces of lower base rates (direct RPI 

impact vs. inflationary impact) and into Jan RPI data 

which tend to surprise (usually to the downside). 

Shahid Ladha/ Herve Cros 12 February 2010 


30 


Description 

FTSE Global 

OIL 

Change since 03 Feb 2010 

-2.8% 

-2.8% 

(bp) 2y 5y 10y 30y 

EUR NY (OATei) -6 -3 -4 -6 

EUR NY (BTPei) -26 -8 -7 -5 

USD NY -2 -4 -1 1 

GBP NY -4 5 8 10 

EUR BE (OATei) 2 -8 -10 -6 

EUR BE (BTPei) -14 -3 -13 -5 

USD BE -11 -10 -13 -12 

GBP BE -11 -12 -13 -9 

EUR ASW Disc. -6 1 0 0 

GBP ASW Dis. -2 2 3 1 

USD ASW Disc. 0 -4 5 5 

DEM CDS 6 

FRF CDS 10 

ITL CDS -7 

GRK CDS -60 

GBP CDS -5 

USD CDS 3 

Chart 1: BTPei-17 BE, ASW Discount & ITL CDS 

100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

0.8 

BTPei-17 

1.0 

1.2 

1.4 

1.6 

1.8 

2.0 

2.2 

2.4 

Breakeven 

CDS 

2.6 

Discount 

2.8 

Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 

All Charts Source: BNP Paribas 

220 

200 

180 

160 

140 

120 

100 

80 

60 

40 

20

Table 1: BNP Paribas Carry Analysis 

EUR 

Pricing Date 

11-Feb-10 

Term 1 

Term 2 

3m 

6m 

12m 

Repo Rate 

0.37% 

0.40% 

0.41% 0.51% 

0.76% 

EUR DRI 

108.45679 

108.61000 

107.80400 108.49289 

109.18747 

110.05376 

FRF DRI 

118.46536 

118.60000 118.41112 

118.90539 

119.48748 

120.14912 

Sett. Date 

16-Feb-10 

01-Mar-10 

01-Apr-10 

17-May-10 

16-Aug-10 

16-Feb-11 

Real BE Real BE Real BE Real BE Real BE Real BE 

BTANEI Jul-10 -1.21% 1.55% 21.0 21.5 -247.5 -244.4 -191.3 -178.2 - 

BTPEI Sep-10 -0.54% 1.29% 20.1 18.0 -157.6 -165.0 -62.1 -80.4 179.0 124.0 - - 

OATEI Jul-12 -0.28% 1.53% 5.1 3.5 -30.6 -35.9 -6.6 -17.8 14.8 -7.6 29.3 -12.5 

BTPEI Sep-12 0.37% 1.55% 5.7 3.5 -25.3 -33.0 0.9 -15.5 29.3 -4.9 68.5 -5.0 

BOBLEI Apr-13 0.31% 1.20% 4.7 3.2 -21.1 -26.2 -0.1 -10.9 21.7 -0.2 47.6 5.9 

BTPEI Sep-14 1.07% 1.57% 3.9 1.9 -12.4 -19.3 4.7 -9.8 24.4 -5.2 52.1 -7.7 

OATEI Jul-15 0.83% 1.64% 3.1 1.4 -10.9 -16.4 2.8 -8.6 17.7 -5.1 36.1 -8.7 

BUNDEI Apr-16 0.97% 1.54% 2.8 1.4 -9.4 -14.3 2.9 -7.2 16.5 -3.8 33.7 -5.8 

BTPEI Sep-17 1.72% 1.68% 2.8 1.0 -6.5 -12.5 5.2 -7.2 19.5 -5.5 40.1 -9.2 

BTPEI Sep-19 2.10% 1.77% 2.4 0.8 -4.8 -10.2 5.4 -5.8 18.1 -4.4 36.8 -8.0 

BUNDEI Apr-20 1.45% 1.78% 2.0 0.8 -5.3 -9.4 3.1 -5.4 12.8 -4.2 25.6 -7.2 

OATEI Jul-20 1.54% 1.90% 2.0 0.6 -5.1 -9.7 3.4 -6.1 13.5 -5.6 26.7 -10.4 

BTPEI Sep-23 2.43% 1.93% 1.9 0.5 -3.2 -8.1 4.7 -5.4 14.8 -5.5 29.8 -9.7 

GGBEI Jul-25 4.38% 1.59% 2.2 0.3 -1.4 -8.2 8.5 -5.5 22.6 -5.6 45.9 -11.5 

GGBEI Jul-30 4.41% 1.72% 1.8 0.0 -1.0 -7.5 6.7 -6.7 17.8 -9.5 35.7 -19.7 

OATEI Jul-32 1.78% 2.30% 1.1 0.2 -2.7 -5.9 2.2 -4.4 8.0 -5.3 15.5 -10.0 

BTPEI Sep-35 2.32% 2.43% 1.1 0.0 -2.0 -5.7 2.6 -5.1 8.4 -7.0 16.5 -13.2 

OATEI Jul-40 1.75% 2.37% 0.8 0.0 -1.9 -4.6 1.6 -3.9 5.7 -5.0 10.9 -9.5 

BTPEI Sep-41 2.54% 2.28% 1.0 0.0 -1.6 -5.0 2.6 -4.3 7.9 -5.9 15.6 -11.4 

FRF 


OATI Jul-11 -0.73% 1.45% 5.2 4.1 -14.4 -18.2 7.3 -1.0 25.6 10.7 -21.4 8.0 

OATI Jul-13 0.01% 1.70% 3.0 1.4 -3.1 -8.7 8.9 -2.8 21.7 -1.7 28.1 -17.5 

OATI Jul-17 1.06% 1.90% 1.9 0.4 0.4 -4.7 7.7 -2.7 17.1 -3.6 27.7 -12.9 

OATI Jul-19 1.35% 2.00% 1.7 0.3 0.7 -4.1 7.0 -2.8 15.4 -4.2 25.4 -12.8 

OATI Jul-23 1.69% 2.13% 1.4 0.2 0.9 -3.1 6.0 -2.2 13.0 -3.6 21.7 -10.2 

OATI Jul-29 1.76% 2.27% 1.1 0.0 0.8 -2.9 4.8 -2.5 10.4 -4.1 17.2 -10.7 

USD 

Pricing Date 

11-Feb-10 

Term 1 

Term 2 

3m 

6m 

12m 

Repo Rate 

0.14% 

0.15% 

0.17% 0.21% 

0.39% 

USD DRI 

216.18032 

215.94900 

217.05358 

218.14008 

220.73697 

220.20611 

Sett. Date 

12-Feb-10 

01-Mar-10 

01-Apr-10 

12-May-10 12-Aug-10 14-Feb-11 

Yield BE Real BE Real BE Real BE Real BE Real BE 

TIPS Apr-10 -1.74% 1.80% -157.4 -154.2 398.0 430.4 - - - - - - 

TIPS Jan-11 -0.97% 1.32% -18.3 -19.4 32.4 29.1 92.8 86.2 358.5 343.1 - - 

TIPS Apr-11 -0.76% 1.24% -13.4 -14.8 27.6 23.4 73.7 65.6 240.1 221.9 427.9 386.1 

TIPS Jan-12 -0.50% 1.37% -7.5 -9.3 18.2 12.8 45.3 35.0 125.4 102.5 109.5 58.5 

TIPS Apr-12 -0.38% 1.36% -6.3 -8.2 16.7 11.1 40.8 30.0 109.2 86.0 95.3 43.3 

TIPS Jul-12 -0.42% 1.51% -5.8 -7.7 14.7 9.2 36.0 25.4 95.3 72.3 77.0 27.4 

TIPS Apr-13 -0.20% 1.71% -4.0 -6.1 11.9 5.7 28.0 16.3 71.0 46.0 58.7 4.6 

TIPS Jul-13 -0.03% 1.66% -3.5 -5.7 11.9 5.7 27.7 15.9 69.5 44.1 61.6 7.8 

TIPS Jan-14 0.23% 1.64% -2.7 -4.9 11.3 5.0 25.9 13.9 63.6 38.1 60.6 6.8 

TIPS Apr-14 0.20% 1.83% -2.6 -4.8 10.4 4.0 23.8 11.8 58.1 32.9 53.9 0.3 

TIPS Jul-14 0.36% 1.72% -2.3 -4.5 10.5 4.1 23.7 11.7 57.5 32.1 55.9 2.8 

TIPS Jan-15 0.57% 1.78% -1.9 -4.1 10.0 3.4 22.3 9.9 53.3 27.2 54.2 -0.1 

TIPS Jul-15 0.64% 1.92% -1.6 -3.9 9.3 2.7 20.7 8.2 49.2 22.9 50.4 -4.1 

TIPS Jan-16 0.83% 1.91% -1.3 -3.6 9.0 2.4 19.9 7.5 46.9 20.8 49.8 -4.1 

TIPS Jul-16 0.89% 2.02% -1.2 -3.5 8.6 2.0 18.9 6.5 44.3 18.3 47.4 -6.3 

TIPS Jan-17 1.04% 2.03% -1.0 -3.3 8.3 1.8 18.2 5.9 42.3 16.6 46.3 -6.5 

TIPS Jul-17 1.09% 2.14% -0.9 -3.2 7.9 1.4 17.3 5.1 40.1 14.6 44.0 -8.2 

TIPS Jan-18 1.19% 2.20% -0.8 -3.0 7.4 1.2 16.1 4.4 37.1 12.7 41.2 -8.6 

TIPS Jul-18 1.24% 2.26% -0.7 -2.9 7.0 0.8 15.2 3.5 35.0 10.6 39.0 -10.6 

TIPS Jan-19 1.33% 2.29% -0.6 -2.7 7.0 1.1 15.0 4.0 34.5 11.6 39.0 -7.6 

TIPS Jul-19 1.38% 2.31% -0.6 -2.7 6.7 0.7 14.3 3.2 32.7 9.7 37.1 -9.5 

TIPS Jan-20 1.43% 2.27% -0.5 -2.6 6.3 0.5 13.5 2.6 30.8 8.6 35.1 -10.3 

TIPS Jan-25 1.96% 2.34% -0.2 -2.1 5.2 -0.4 10.9 0.4 24.4 2.8 29.5 -13.9 

TIPS Jan-26 2.00% 2.39% -0.1 -2.0 4.8 -0.4 10.2 0.4 22.8 2.6 27.5 -12.9 

TIPS Jan-27 2.05% 2.37% -0.1 -2.0 4.7 -0.4 10.0 0.3 22.3 2.4 27.0 -12.7 

TIPS Jan-28 2.08% 2.38% -0.1 -1.9 4.4 -0.7 9.2 -0.3 20.5 1.4 24.9 -13.5 

TIPS Apr-28 2.12% 2.38% -0.1 -1.8 4.9 0.1 10.2 1.2 22.7 4.2 27.8 -9.1 

TIPS Jan-29 2.10% 2.42% -0.1 -1.8 4.4 -0.3 9.2 0.5 20.6 2.6 25.1 -10.9 

TIPS Apr-29 2.12% 2.40% -0.1 -1.8 4.7 0.0 9.9 1.1 22.0 3.9 26.9 -9.1 

TIPS Apr-32 2.11% 2.43% -0.1 -1.7 4.1 -0.4 8.6 0.2 19.1 2.0 23.3 -10.9 

GBP 

Pricing Date 

11-Feb-10 Term 1 

Term 2 

3m 

6m 

12m 

Repo Rate 

0.51% 

0.50% 

0.53% 

0.58% 

0.75% 

Sett. Date 

12-Feb-10 

01-Mar-10 

01-Apr-10 

12-May-10 

12-Aug-10 

14-Feb-11 

Yield BE Real BE Real BE Real BE Real BE Real BE 

UKTi Aug-11 -1.05% 1.71% -29.7 -30.4 -10.7 -12.9 7.2 3.3 62.0 55.7 491.1 643.7 

UKTi Aug-13 -0.20% 2.32% -12.0 -14.4 -1.2 -8.2 9.5 -3.5 36.5 9.1 77.0 17.0 

UKTi Jul-16 0.74% 2.59% -6.0 -8.3 1.5 -5.1 9.2 -3.1 27.7 2.2 55.5 2.0 

UKTi Nov-17 0.89% 2.79% 5.6 3.3 2.5 -3.9 10.6 -1.2 26.2 1.8 48.7 -2.0 

UKTi Apr-20 1.19% 2.83% -3.7 -5.8 1.6 -4.2 7.2 -3.6 20.2 -2.0 40.0 -5.8 

UKTi Nov-22 1.23% 3.16% 3.8 2.0 2.0 -2.8 7.5 -1.4 18.1 0.0 33.2 -3.8 

UKTi Jul-24 1.28% 3.10% -2.7 -4.4 1.3 -3.5 5.5 -3.4 15.2 -3.0 29.4 -7.6 

UKTi Nov-27 1.19% 3.21% 2.7 1.2 1.4 -2.8 5.3 -2.5 12.7 -3.1 22.9 -8.8 

UKTi Jul-30 1.18% 3.25% -2.2 -3.5 1.0 -2.7 4.2 -2.6 11.8 -2.0 22.5 -5.0 

UKTi Nov-32 1.07% 3.36% 2.1 0.8 1.0 -2.6 4.1 -2.7 9.8 -4.0 17.6 -10.0 

UKTi Jan-35 1.03% 3.42% -1.7 -2.9 0.6 -2.8 3.0 -3.2 8.5 -4.1 16.0 -9.3 

UKTi Nov-37 0.92% 3.51% 1.7 0.6 0.8 -2.5 3.2 -2.8 7.8 -4.4 13.8 -10.6 

UKTi Nov-42 0.82% 3.60% 1.4 0.3 0.6 -2.4 2.5 -3.1 6.1 -5.2 10.7 -11.8 

UKTi Nov-47 0.70% 3.68% 1.2 0.2 0.5 -2.3 2.2 -3.0 5.3 -5.2 9.2 -11.6 

UKTi Mar-50 0.69% 3.68% 1.1 0.2 0.4 -2.3 2.0 -3.1 4.8 -5.3 8.3 -11.7 

UKTi Nov-55 0.66% 3.67% 1.1 0.2 0.4 -2.1 2.0 -2.8 4.8 -4.8 8.3 -10.6 

JPY 

Pricing Date 

11-Feb-10 

Term 1 Term 2 

3m 

6m 

12m 

Repo Rate 

0.12% 

0.12% 

0.12% 

0.13% 0.14% 

JPY DRI 

99.879 

99.800 

99.100 

98.923 

98.661 98.979 

Sett. Date 

16-Feb-10 

10-Mar-10 

10-Apr-10 

17-May-10 

16-Aug-10 

16-Feb-11 

Yield BE Yield BE Yield BE Real BE Real BE Real BE 

JGBI-1 Mar-14 1.37% -0.96% -0.6 -1.1 -16.4 -17.5 -18.9 -20.7 -17.4 -21.2 10.2 1.5 

JGBI-2 Jun-14 1.34% -0.90% -0.6 -1.0 -15.4 -16.5 -17.7 -19.7 -16.4 -20.4 8.8 -0.3 

JGBI-3 Dec-14 1.34% -0.83% -0.5 -1.0 -13.7 -14.9 -15.7 -17.9 -14.4 -18.9 7.5 -2.3 

JGBI-4 Jun-15 1.42% -0.85% -0.3 -0.9 -12.0 -13.3 -13.6 -15.9 -11.9 -16.6 8.7 -1.6 

JGBI-5 Sep-15 1.30% -0.68% -0.5 -1.1 -12.0 -13.4 -13.8 -16.2 -12.8 -17.7 5.4 -5.3 

JGBI-6 Dec-15 1.37% -0.72% -0.4 -1.0 -11.3 -12.7 -12.9 -15.3 -11.5 -16.6 6.8 -4.3 

JGBI-7 Mar-16 1.40% -0.70% -0.4 -1.0 -10.8 -12.3 -12.3 -14.8 -10.8 -16.1 6.8 -4.6 

JGBI-8 Jun-16 1.54% -0.81% -0.2 -0.8 -10.0 -11.6 -11.2 -13.8 -9.1 -14.5 9.4 -2.2 

JGBI-9 Sep-16 1.45% -0.68% -0.3 -1.0 -10.0 -11.5 -11.2 -13.9 -9.6 -15.2 7.3 -4.6 

JGBI-10 Dec-16 1.47% -0.66% -0.2 -0.9 -9.6 -11.2 -10.8 -13.5 -9.1 -14.8 7.3 -4.9 

JGBI-11 Mar-17 1.53% -0.67% -0.2 -0.9 -9.1 -10.8 -10.2 -13.0 -8.3 -14.2 8.0 -4.4 

JGBI-12 Jun-17 1.60% -0.69% -0.1 -0.8 -8.6 -10.3 -9.5 -12.4 -7.4 -13.4 9.0 -3.8 

JGBI-13 Sep-17 1.59% -0.64% -0.2 -0.9 -8.5 -10.2 -9.3 -12.3 -7.4 -13.5 8.4 -4.6 

JGBI-14 Dec-17 1.62% -0.63% -0.1 -0.8 -8.1 -9.9 -8.9 -12.0 -6.9 -13.1 8.5 -4.6 

JGBI-15 Mar-18 1.65% -0.62% -0.1 -0.8 -8.0 -9.7 -8.7 -11.7 -6.7 -12.8 8.6 -4.5 

JGBI-16 June-18 1.71% -0.64% 0.0 -0.8 -7.6 -9.4 -8.2 -11.4 -6.0 -12.4 9.3 -4.3 

Shahid Ladha/ Herve Cros 12 February 2010 


31 


Europe ITraxx Credit Indices 

• Outright: the positive newsflow is allowing 

MAIN to squeeze tighter but we are very 

doubtful it can break 80. We advise to be very 

slightly long with the objective to position a 

short between 82 and 83. 

• Update on curves: 5/10s in MAIN, FIN SEN 

and SUB have experienced sharp flattening and 

are now lagging in the market recovery. In 

addition, they trade significantly below intrinsic 

value. Steepeners make sense, MAIN 5/10 at +12 

in particular; it has an asymmetric 

upside/downside, pays about 1.2bp of 

breakeven per month and its negative convexity 

is trivial. 

• MAIN/SEN: this spread differential remains 

extremely directional; it has reached a new 

extreme point of -13.5 this week and is now 

lagging in the rally. SOVX at 92 implies a 

MAIN/SEN differential at 7.5bp, i.e. 1.5bp tighter 

than the current market. Recompression is a 

good opportunity for bullish players only. 

• MAIN/XO: the XO/MAIN ratio is yo-yoing with 

the market: lower when spreads widen and 

higher when spreads tighten. Our lack of 

conviction on the overall market direction 

makes the decompression trade hazardous, 

even if very attractive on a pure historical basis. 

In this context, we much prefer the beta-hedged 

trade (with a ratio of x4); it presents a very 

asymmetric risk/reward with a very manageable 

negative carry (2.5bp breakeven per month). 

Slightly weaker results in the XO basket than in 

the aggregated market are also supportive of 

the trade. 

Outright 

Indices have retraced quite sharply on the back of 

the positive newsflow regarding the bailout of 

Greece; movements have been amplified by the fact 

that the street was short, expecting the agreement 

between EU officials to make much more time. The 

details of the bailout still need to be detailed but no 

one can deny both news and reactivity are not 

positive signals. 

Chart 1: Changes in 5/10y Curves Since 31 - 

Dec and 11- Jan (Bottom of Market) 

5/10y 

Current 

5/10y 

11-Jan 

Chg vs. 

11-Jan 

5/10y 

31-Dec 

Chg vs. 

31-Dec 

MAIN s12 +12.0 +20.5 -8.5 +19.25 -7.25 

FIN SEN s12 +3.0 +17.0 -14.0 +13.0 -10.0 

FIN SUB s12 +4.0 +17.0 -13.0 +13.0 -9.0 

MAIN s12 +12.0 +20.5 -8.5 +19.25 -7.25 


That being said, the pressure on sovereign is not 

something that we can put behind us. During 

Moody’s conference call on Wednesday, the rating 

agency reminded the market that Greece could be 

downgraded further in coming months should the 

planned budget reforms not be fully implemented. 

The Greek government will obviously meet internal 

resistances and Portugal, Spain and to a lesser 

extent Italy remain good wild cards. 

What’s the call? 

The retracement in iTraxx indices has been massive 

and MAIN is now trading at 86, just 1bp above 85 

which will be a psychological level difficult to break. 

Technical analysis indicates different resistance 

levels at 83, 82 and 81bp. Moreover, regressions 

between credit and equity indices imply that MAIN 

should trade around the 81 mark even it the level of 

correlation between the two markets has significantly 

decreased. 

All in all, MAIN could continue to benefit from the 

positive newsflow but we doubt it will break 80. Now 

the big squeeze has cleaned the market from its big 

short positions, we expect players to reposition 

shorts between 85 and 80. We are positive on the 

very short term with a close target at 83, level where 

the short will offer a much more attractive risk/reward 

profile. 

Pierre Yves Bretonniere 12 February 2010 


32 


Update on curves 

5/10y indices’ curves have experienced a massive 

flattening this week, in harmony with the widening of 

the outright levels. Taking the MAIN and FIN SEN 

and SUB as references – they are the only liquid 

curves – the extent of the flattening is of 4bp for 

MAIN and 6bp for both SEN and SUB financial 

indices. From the tightest of the market (65bp for 

MAIN 5y and 63bp for SEN 5y reached the 11-Jan), 

which also corresponds to the steepest level of 5/10y 

curves (20.5bp for MAIN and 17bp for SEN), the 

retracements are quite impressive. They are of 9bp 

in MAIN, 14bp in SEN and 13bp in SUB! 

While 5/10y curves were perfectly correlated to the 

outright level of the 5y before the last leg of volatility, 

there has been some de-correlation recently. With 

the market essentially focussed on the outright, 

curves are becoming more illiquid, which has the 

consequence of making their moves brutal and 

excessive. 

Note that the latest moves wider in MAIN have not 

implied further flattening in 5/10y which seems to 

indicate that MAIN 5/10y found a resistance at 10bp 

(Chart1). It has not been the case in FIN SEN and 

SUB curves given the higher stress on the banking 

sector. This pattern is quite new and contrasts with 

the past behaviour of financials single-names’ and 

indices’ curves, consistently less volatile than nonfinancials 

ones (Chart 2). 

Last but not least, curves trade significantly flatter 

than their intrinsic; the differences are of c.3bp in 

MAIN, c.6bp in SEN and c.3bp in SUB. 

What’s next? 

At +12, we find the 5/10y steepener in MAIN 

relatively attractive. Given the insignificant lack of 

jump-to-default risk on all of its 125 constituents and 

our perception that the street position is much less 

crowed with the steepener, we see downside risks 

relatively limited. The curve can possibly reach +5 

but that would occur only if there is a massive selloff, 

pushing MAIN in the [120-130] range. The key 

points supporting the trade remain: (1) a good level 

of carry thanks to the widening of the outright and the 

flattening of the curve (about 1.2bp of performance 

per month) and (2) the fact that the supply in nonfinancials, 

which represent 80% of the index, is 

skewed towards longer maturities. 

Update on “MAIN vs. SEN” 

The turnaround of the market has made all indices 

gap tighter, the obvious outperformers being SOVX, 

FIN SEN and finally MAIN. In the short-squeeze, the 

spread differential MAIN – FIN SEN re-steepened but 

by less than what was implied by the sharp drop in 

Chart 1: 5/10y MAIN vs. Outright 5y in Series 12 

5/10y 

23 

21 

19 

17 

15 

13 

11 

9 

7 

5/10Y MAIN 12 (lhs) 

5Y MAIN 12 (rhs inverted) 

60 

65 

70 

75 

80 

85 

90 

95 

100 

5 

105 

09/09 10/09 10/09 11/09 11/09 11/09 12/09 12/09 01/10 01/10 02/10 

Chart 2: 5/10y MAIN, SEN and SUB in Series 11 

30 

20 

10 

0 

-10 

-20 

-30 

3/09 4/09 5/09 6/09 7/09 8/09 9/09 10/09 11/09 12/09 1/10 

MAIN _ FIN SEN 

- 

20 

15 

10 

5 

-5 

-10 

-15 

-20 

MAIN s11 

FIN SEN s11 

FIN SUB s11 

Chart 3: MAIN – FIN SEN vs. SOVX 

y = -0.3963x + 28.857 

R 2 = 0.9411 

40 50 60 70 80 90 100 110 120 


"Fair-vlaue" MAIN 

- FIN SEN 

SOVX 

SOVX, which is evidenced on Chart4, where the last 

point corresponds to 10-Feb closing levels. At the 

time of writing, the spread MAIN - FIN-SEN stands at 

-9bp, about 1.5bp above the spread implied by the 

current level of SOVX (92). The “fair-value” spread is 

-7.5bp. 


It is extremely difficult to have a strong call on this 

spread given its strong directionality. That being said, 

investors with a constructive view on the market can 

play further tightening given its relative 

underperformance. We do not expect SOVX to break 

mid-January level (85) which implies that the spread 

MAIN – FIN SEN is likely to stay below -5bp. From 

Last 

5y 

Since Sep-09 


Market Mover Non-Objective Research Section 

33 


current level (-9bp), the maximum upside is therefore 

4bp. Maximum downside is also 4bp, should the 

spread come back to 9-Feb level (-13.5bp). 

Update on “MAIN vs. XO” 

Over the past week, there have been big swings in 

the XO/MAIN relationship with, first, a collapse of 

ratio to a new historical low (x5.24) and then an 

increase to x5.44 in the market rally. Obviously, this 

ratio is directional and the MAIN/XO decompression 

trade based on the spread ratio between the two 

indices is bullish. 

While the decompression trade looks attractive on a 

pure historical basis, our lack of conviction on the 

direction of the market prevents us from advising to 

play the XO/MAIN relationship based on the spread 

ratio. However, if weights are adjusted with the 1- 

month historical beta (x3.94) – which is much lower 

than the 1-year beta (x5.5), see Chart 6 – the trade 

makes more sense. 

Lastly, the reporting season is not boding particularly 

well for the constituents of the XO index. Amongst its 

50 members, 18 reported so far and, on average, 

results have been just in line with expectations. It is a 

tad weaker than the overall market; taking the 

EUROSTOXX 600 as a reference, the ratio of 

positive vs. negative surprises comes at 60%/40%. 


Based on a ratio of x4, the XO/MAIN decompression 

trade offers a very asymmetric upside/downside 

profile and should be relatively immune to market 

swings. The negative carry of the position is of - 

125bp running per year, equivalent to 2.5bp of 

breakeven per month, which is trivial in relation to the 

volatility of the strategy. 

Chart 4: 

MAIN – FIN SEN Differential History 

50 

iTraxx s12: MAIN x1 - Fin Sen 

Q1 (6m) 

FIN SEN Tight 

40 

Median (6m) 

Q3 (6m) 

30 

20 

10 

- 

-10 

-20 

-30 

FIN SEN Wide 

-40 

1/09 2/09 3/09 4/09 5/09 6/09 7/09 8/09 9/09 10/09 11/09 12/09 1/10 2/10 

8.0 

7.5 

7.0 

6.5 

6.0 

5.5 

5.0 

Chart 5: 

XO / MAIN Spread Ratio History 

XO / MAIN 

XO wide 

XO tight 

4.5 

10/08 12/08 2/09 4/09 6/09 8/09 10/09 12/09 2/10 

XO 

Chart 6: 

1,250 

1,150 

1,050 

950 

850 

750 

650 

550 

450 

MAIN vs. XO Historical Betas 

XO Wide 

y = 3.9403x + 127.04 

y = 5.33x + 166.82 

R 2 = 0.8949 

350 

60 80 100 120 140 160 180 200 

MST 

XO Tight 

Last 

3M-2M 

12M-3M 

1M 



Market Mover Non-Objective Research Section 

34 


Technical Analysis – Interest Rates & Commodities 

Bond & Short-Term Contracts 

• Europe: ST pullback on key 3.09/12 area may be over but a further rebound is needed to rekindle MT rising bias 

• US: ST pullback seen on key 3.50/55 area & market is now trying to resume MT rising bias towards 4% initially 

• Short-term contracts m0: Still a MT supportive bias but ST bias remains toppish/slightly consolidative 

Equities & Commodities 

• WTI (Cl1): Rebounded slightly above its MT rising channel support, but be beware of a renewed break below it 

• Equity markets: ST bias turned consolidative given break of MT rising pattern’s supports 

US 10y: Bottoming from MT falling channel resistance towards 3.80/4.0% MT Trend: Up Range: 3.60/3.85 

The break above the MT falling channel 

pattern in December strengthened the MT 

rising scenario which still calls for 4.35 (MT 

theoretical target) 

The recent ST pullback, which allowed a 

return to its 3.534 resistance support area, 

could be over and US 10y is now seen 

correcting its January down move towards 

3.766 (ST 61.8%) initially 

However, to regain a MT weak bias, it still 

needs to overcome 3.814 (H&S neckline) 

initially, then 4.0 (June 09 top) & 4.067 (LT 

61.8%) 

3.152 ⇐ 3.441 ⇐ 3.534 –!– 3.766 ⇒ 3.814 ⇒ 4.00/4.067 

Tech Snapshot 

- Above weekly falling flag (2.826/3.534) 

- MT rising wave “5” scenario still developing 

- Bottom H&S pattern (neckline 3.814) 

Strategy: Used dips within 3.55/65 to reenter 

short side, S/L 3.50, for 4.00/4.35 &/or 

add above 3.814 neckline S/L 3.70 

EUR 2/30y swap: Risk towards 200 area once current pullback is over MT Trend: Down Range: 200/220 

Last rebound failed to overcome the MT 

61.8% (224.1) & it has broken below MT 

rising wedge support (224.00) & ST rising 

channel support (218.6). That increased the 

risk of developing at least a ST flattening 

bias towards 200 area (theoretical target of 

ST rising channel break). A classic pullback 

sent it back on ST channel support but risk 

remains to the downside & first bearish 

confirmation would come from a renewed 

break below 209.4 (61.8% of recent rise). If 

fall then extends beyond the 200 area, risk 

will be to extend MT flattening bias towards 

170/175 area (theoretical target of MT rising 

wedge break & MT 61.8%) 

187.8 ⇐ 199.5 ⇐ 209.4 –!– 218.6 ⇒ 224.0/224.1 ⇒ 239.2 

Tech Snapshot 

- MT rising wedge support break (224.0) 

- ST rising channel support break (218.6) 

STRATEGY: Short 216/222 stopped 212. 

Resell 218/222, S/L 226, for 200 & 180 

Christian Sené 12 February 2010 


35 


10Y Germany: ST bottoming/up tone from critical 3.09/3.12 area MT Trend: Bottoming/Up Range: 3.17/3.35 

Technical pullback extended below key 

3.193 (old MT 61.8%) to reach key 

3.093/127 (October low & MT slight rising 

channel support) from which it is trying to 

rebound 

This area should be the base for resumption 

of previous MT weak bias (theoretical target 

is 3.70) but decisive breaks above 3.307 

(61.8%) & then 3.37 MT falling resistance) 

are needed to be confirmed with a break 

above 3.433 (top) 

3.093/3.108 ⇐ 3.127 ⇐ 3.193 –!– 3.307 ⇒ 3.37 ⇒ 3.433 ⇒ 3.498 

Tech Snapshot 

- Rebound from key 3.093/3.127 (October 

low & MT rising channel support) 

- Bottoming/up around key MT 61.8% (3.193) 

Strategy: Short 3.20/23 stopped 3.15. Reenter 

short within 3.15/20 for 3.45/70. S/L 

below 3.09 

UK 10y: Pullback on 3.80 may be over given ST flag resistance break MT Trend: Up Range: 3.90/4.15 

Break above 3.78 (MT falling channel res) a 

month ago strengthened the MT rising 

scenario towards 4.30/4.50 theoretical target 

area but it stalled around key 4.084 (June 09 

top) & then developed a technical pullback 

on 3.80 area. This move seems over & MT 

rise should now resume given break above 

3.942 (ST falling channel res) although a 

decisive break above 4.084/114 (tops) is 

needed to rekindle previous MT up bias 

3.644 ⇐ 3.723 ⇐ 3.78 –!– 4.001 ⇒ 4.084/114 ⇒ 4.248 ⇒ 4.559 

Tech Snapshot 

- 3.78 (MT falling channel res) broken 

- Stalled on 4.084 (wave “A” top) 

- ST falling flag (3.756/3.944) breakout 

Strategy: Retried short within 3.80/3.85, 

S/L 3.74, for 4.10/4.50 

S&P: Question is: is corrective wave “4” over as target stays at 1000? MT Trend: Consolidative/up Range: 1040/1100 

Break below MT rising wedge support & ST 

rising channel support (1170) opened the ST 

way down towards 1009 (theoretical target & 

6-months’ 61.8%). As it is rebounding from 

ST 38.2% (1043), the question is whether 

corrective wave “4” is over. There are now 3 

possibilities. First is to continue the fall 

directly to 1000 target area. Second is to see 

a ST rebound before it falls again (ABC) to 

reach this 1000 area. Third is that the wave 

“4” is over & wave “5” is now starting for key 

1228 (LT 61.8%). For the time being, we 

think the risk lies between the first two 

965/976 ⇐ 1010 ⇐ 1043 –!– 1095 ⇒ 1110 ⇒ 1150 

Tech Snapshot 

- MT rising wedge break 

- ST rising channel break 

Strategy: Wait for a rebound around 1100 

/10 to try a short again S/L 1130 for 1010/40 

Christian Sené 12 February 2010 


36 


Trade Reviews 

Options, Money Market and Bond Trades – Tactical & Strategic Trades 

This page summarises our main tactical (T) and strategic (S) trades. The former focus on short-term horizons (a few weeks) 

allowing one to play any near-term corrections within a defined trend, while the latter rely on a medium-term assumed trend. 

For each trade we provide the expected target and the recommended stop loss. 

Current* Targets Stop Entry 

Closed Strategies 

Sovereign CDS Buy SovX 5Y 

Trade closed (10/2). PnL: EUR +76k. 

Existing Strategies 

Yield Curves 

USD Butterfly Pay USD 2M-fwd 2y3y5y 

Near low end of historical range. We are positioned for a Fed on hold and this is an 

ideal hedge. Negative carry/roll is less in forward than spot. 

Money Markets 

Euribor Spread Buy ERM0M1 

Front curve on tech support and unch ECB with Eonia normalisation now fully priced 

in. 

Euribor Basis Buy ERM0 Basis 

OIS/Bor spreads are at very interesting entry levels compared to the evolution of 

CDS and other risk indicators. Moreover, ECB liquidity volatility should be 

supportive of this strategy. 

Eurodollar Spread Buy EDZ0Z1 

The hawkish FOMC statement should lead to higher rate hike expectations, and the 

recent flattening in whites/reds on flight-to-quality concerns provides a decent entry 

point. Spread rolls up from Dec/Dec to Sep/Sep. 

-30.0 

(S) 

48.0 

(T) 

26.0 

(S) 

143.0 

(T) 

120.0 80.0 88.75 

(29-Jan) 

-5.0 -38.0 -27.75 

(15-Jan) 

65.0 45.0 55.0 

(29-Jan) 

40.0 20.0 24.0 

(29-Jan) 

180.0 130.0 146.0 

(27-Jan) 

Options 

Bund Spread Buy RXH0 Mar 122/12150 PS 

10.0 25.0 0.0 8.5 

Monthly option strategy playing a pull-back to the lows of the MT channel. Also, 

12350 strong resistance area should hold. 

(T) 

(03-Feb) 

Euribor Fly Buy ERU0 9862/75/87 P 

1.5 12.5 0.0 1.5 

Cheap downside strategy, playing the normalisation of Eonia. The position 

(S) 

(13-Jan) 

complements the upside fly (no-normalisation strategy). 

Euribor Fly Buy ERU0 9912/25/37 C 

1.5 12.5 0.0 1.5 

Upside protection in case of liquidity spill-over post June. Rolldown trade. 

(S) 

(12-Jan) 

Eurodollar Call Buy EDU0 99.25 C 

29.0 50.0 0.0 23.5 

Expectations for a Fed on hold make rolldown strategies attractive. In this case, the (T) 

(08-Jan) 

theta loss over 3m or 6m is more than compensated by the rolldown in an 

unchanged scenario. 

Sterling Fly Buy L Z0 9900/25/50 C 

6.0 25.0 0.0 3.5 

Rolldown strategy for unchanged MPC thru 2010. 

(S) 

(05-Jan) 

*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps. 

Carry 

/ mth 

Risk** 

P/L 

(ccy/Bp) 

5k/01 EUR +76k 

+15bp 

15k/01 USD -34k 

-2bp 

6.25k/01 EUR -44k 

-7bp 

5k/01 EUR +10k 

+2bp 

10k/01 USD -30k 

-3bp 

1.2k/01 EUR 

+1.5k 

+1.5c 

10k/01 EUR 0k 

0bp 

10k/01 EUR 0k 

0bp 

5k/01 USD +28k 

+5.5c 

5k/01 GBP +13k 

+2.5c 

Interest Rate Strategy 12 February 2010 


37 


EUR Problem, Global Risks 

• The focus on Europe has intensified as the 

problems in Greece and the other European 

peripheral currencies increases… 

• ….we see little chance of a euro positive 

solution… 

• …hence, it is not a question of if to sell the 

euro, but when to sell 

• However, the problems in Europe are adding 

to the already deteriorating global investment 

environment… 

• …suggesting that the commodity currencies 

and sterling could be at even greater risk 

• USD to benefit, not just as a safe haven, but 

as an investment desination of choice 

2.00 

1.95 

1.90 

1.85 

1.80 

1.75 

1.70 

1.65 

1.60 

1.55 

Jun 

Chart 1: Relative Europe/US Financials 

Performance and EURUSD 

Relative Europe/US Financials 

Aug Oct Dec 

09 

Source: Reuers EcoWin Pro, BNP Paribas 

EURUSD 

Feb 

10 

Chart 2: EMU Credit Growth and EMU 

1.550 

1.525 

1.500 

1.475 

1.450 

1.425 

1.400 

1.375 

1.350 

1.325 

EUR/USD 

Not just a European problem 

Investor attention on the problems in Greece has 

intensified over the past week, providing the euro 

with little respite. But we suggest that the problems in 

Greece are not only a European concern, but also 

risk adding to a broader challenge to global risk 

appetite that we believe is starting to take hold and 

could become a major theme for 2010. Global 

liquidity withdrawal is gaining momentum and will 

remove an important source of support for higher risk 

asset markets. It also has significant implications for 

currency markets, leaving the commodity and procyclical 

currencies particularly vulnerable. Moreover, 

we suggest that 2010 is likely to see the return of the 

USD, not only as a safe haven, but as an investor 

destination of choice. 

15.0 

EUR-TWI (RHS) 

12.5 

10.0 

7.5 

5.0 

2.5 

EMU credit growth (% y/y) 

0.0 

98 00 02 04 06 08 10 

Source: Reuters EcoWin, BNP Paribas 

110 

105 

100 

95 

90 

85 

80 

75 

70 

We have discussed over recent weeks the various 

options and implications for Greece and the other 

countries at the periphery of Europe that are 

suffering from fiscal problems. The dilemma facing 

the monetary authorities within the eurozone is to 

balance the costs of failure in Greece (with potential 

spillover into Portugal and Spain) with the moral 

hazard of a bailout. Our conclusion is that there is 

unlikely to be a euro positive outcome, regardless of 

the route taken. While we have one of the most 

bearish euro forecasts in the market, we do not 

appear to be alone with our bearish assessment, 

especially within the trading community. Indeed, the 

extent of euro bearish positioning among speculative 

investors has hit the headlines as surveys, such as 

the CFTC, reveal record levels of euro short 

positions on the futures market. This extreme level of 

positioning is certain to make the euro more sensitive 

to developments that challenge the market 

perception in the near term. 

This has been the case over the past week, with 

rumours regarding the possibility of a bailout of 

Greece increasing volatility. Hence, some caution 

regarding euro short positions is advisable during the 

major eurozone events and meetings over the 

coming weeks. However, despite the potential for 

volatility in the near term, we continue to see little 

hope of a happy outcome for the euro and even 

suggest that a lower euro could be part of the 

solution. 

Little hope of a happy outcome for the euro 

In our recent publication, Greece: Bridging the Fiscal 

Gap – Four Scenarios, we examined the four most 

likely outcomes and conclude that all are likely to 

Ian Stannard 12 February 2010 


38 


leave the euro significantly lower. Under the first 

scenario, Adjustment, the Greek authorities are 

successful in implementing the required reforms and 

slowly regain the confidence of markets. However, 

this would be a slow process and still runs high risks, 

suggesting that any euro recovery is likely to remain 

limited. Although this would likely be the most 

favourable outcome for the euro, much would still 

depend on the developments in the other peripheral 

countries, especially how Portugal and Spain 

implement their reforms. Ultimately, 

underperformance of the euro would still be expected 

as a high risk premium would remain in place and 

our EURUSD 1.27 year-end forecast would still be 

achievable. 

Under the second scenario, Financial Support or 

bailout, Greece would effectively have to borrow the 

credibility of other states or international institutions, 

buying Greece time to carry out reforms. However, 

although the announcement of a bailout may cause 

an initial euro rebound, we would not expect this to 

be sustained as the longer-term implications would 

likely be extremely negative, with the issue of moral 

hazard playing a major role. In fact we would expect 

the EURUSD to come under even greater pressure 

than in the first scenario, with EURUSD declines 

likely to exceed our 1.27 forecast targeting at least 

1.25 by year-end. 

The third scenario examined was Debt Restructuring 

or soft default. In this case, Greece would lose 

credibility and fail to borrow credibility from 

elsewhere, suggesting that it could encounter 

problems meeting its obligations – forcing it to 

restructure its debt. We would consider such an 

outcome as outright euro bearish, especially if there 

were spill-over effects into the rest of the European 

periphery. Significant portfolio and capital outflows 

from the eurozone would be seen. Under such 

circumstances, EURUSD would be vulnerable to a 

collapse towards the 1.10 area. 

Disorderly Default was the fourth and final scenario 

examined, where events unfolded beyond the control 

of the Greek authorities. This would be clearly the 

most bearish scenario for the euro, where the decline 

in the currency would likely be very abrupt, with even 

the 1.10 area exceeded. 

Bailout will not support the euro 

Given the extent of recent market rumours and 

media speculation, some sort of assistance or aid 

package to support Greece currently looks the more 

likely outcome, although there still appears to be 

significant disagreement with regards to how this 

may be carried out, not to mention the legal issues 

as to how this would be consistent with the 

Maastricht Treaty. While the risk of moral hazard 

30 

20 

10 

0 

-1 0 

-2 0 

-3 0 

-4 0 

-5 0 

-6 0 

-7 0 

-8 0 

-9 0 

-100 

Chart 3: Net Financial Positions (% GDP) 

Portugal 

96 97 98 99 00 01 02 03 04 05 06 07 08 

Source: CEIC, BNP Paribas 

Germany 

Ireland 

Greece 

Chart 4: Public Debt as % of GDP 

Ita ly 

Spain 

Public Debt (% GDP) 2008 2009 2010 2011 

Sweden 38.0 42.1 43.6 44.1 

Norway 49.9 54.3 50.6 45.2 

UK 52.0 68.6 80.3 88.2 

EMU 69.3 78.2 84.0 88.2 

Greece 99.2 112.6 124.9 135.4 

Spain 39.7 54.3 66.3 74.0 

Portugal 66.3 77.4 84.6 91.1 


associated with such a solution has been discussed 

in detail, the size and cost is currently conveniently 

being overlooked. Some initial calculations by the 

BNP Paribas Market Economics group based on past 

bailout packages in emerging markets reveals that 

such a solution will not be cheap. A bailout would 

have to be large enough to convince markets that it 

would be successful. Previous examples suggest 

rescue packages need to be around 20% of GDP. In 

the case of Greece this could be EUR 50bn, although 

large it could be manageable. However, if a broader 

bailout was required, including Portugal and Spain 

than the cost could be a far greater, over EUR 

300bn. So while the euro could take some initial 

comfort from any bailout, the longer-term implications 

would remain extremely bearish. Hence, we continue 

to recommend using any EURUSD rebounds post 

the EU summit to establish bearish strategies. 

Indeed, in our view it is no longer a case of if to sell 

the euro, but more a case of when to sell. Hence, we 

recommend option strategies, such as downside 

One-Touch strategies to provide protection against a 

renewed EURUSD decline. 



39 


Global risks 

While the stress in the eurozone has intensified over 

the past week and the euro has come under 

significant pressure, it is interesting to note that the 

euro has not been the weakest currency. In fact 

since the beginning of the year, although the euro is 

lower against the USD, it has remained supported on 

many of the crosses. The underperformers are the 

commodity currencies and sterling. In fact the 

commodity currencies could well be the main 

casualties of the year, along with sterling. 

Sterling stands out – as vulnerable 

In many cases sterling and the commodity currencies 

are exposed to the very risks that are currently 

causing the most concern within Europe. Indeed, the 

UK net debt to GDP ratio is expected to increase 

rapidly over the next few years, reaching 67% in 

2010 and 74% in 2011 on our forecasts. This is likely 

to be worse than in Spain, where government debt is 

expected to reach 66.3% of GDP in 2010 and 74.0% 

in 2011. 

While sterling stands out as the most vulnerable of 

the major currencies given its poor and deteriorating 

fiscal position, which is likely to see the UK’s AAA 

rating called into question post the election if action is 

not taken, the commodity currencies are also 

exposed to the additional risk of global liquidity 

withdrawal. Indeed, signs that the action already 

taken by China is beginning to bite is starting to have 

a direct negative impact on the AUD far earlier than 

originally anticipated. The RBA has also signalled a 

slowing of the pace of tightening, citing the 

anticipated tightening of policy in China. As a result, 

we have also lowered our AUDUSD forecast. 

Most bearish 

In the case of sterling we have the most bearish 

GBPUSD forecast in the market for end-2010 

(GBPUSD 1.31) and the data from the UK provide 

little reason to change this bearish assessment. The 

UK has shown the weakest and most fragile of 

recoveries, especially compared to its developed 

economy peers. Taking a full quarter longer to 

emerge from recession than most other major 

economies, with a weak 0.1% q/q print in Q4, there 

are also signs that the brighter spots within the UK 

economy are already running out of steam. The 

latest survey evidence from the UK consumer sector 

(BRC) is showing some worrying signs, but the 

biggest concern has to be the collapse in the new 

buyer enquires in the housing market as revealed by 

the RICS house price survey. This is widely regarded 

as one of the better leading indicators of the UK 

housing market and the current pace of deterioration 

does not bode well for the housing market. 

Chart 5: BoE Corrects Rate Expectations, which 

Will Move GBPUSD Lower 

1.750 

1.725 

1.700 

1.675 

1.650 

1.625 

1.600 

1.575 

1.550 

1.525 

Jul 

Rate expectations (FRA 3x9) 

GBPUSD (lhs) 


75 

50 

25 

0 

-25 

-50 

-75 

Sep Oct Nov Dec Jan 

09 

10 

Chart 6: RICS House Price Survey 

RICS House Price Expectations 

RICS New Buyer Enquires 

00 01 02 03 04 05 06 07 08 09 


BoE dovish 

The BoE has also delivered a very dovish 

assessment, which is consistent with our view that 

interest rates will remain at an extremely low level for 

an extended period of time, probably throughout 

2010 and well into 2011. In fact BoE Governor King 

has left the door wide open for a resumption of the 

asset purchase programme if required (the asset 

purchase programme was paused at the February 

MPC meeting). Meanwhile, the BoE has undertaken 

a significant downward revision of its inflation 

forecasts, suggesting that inflation will remain below 

the target throughout the two year forecast period. 

An adjustment of market interest rate expectations 

will also add to the negative picture for sterling. 

Liquidity withdrawal gains momentum 

Global liquidity withdrawal remains a major risk for 

global asset markets and the commodity currencies, 

where we expect increased volatility to develop in the 

coming months. While, the BoE has left the door 

1.0 

0.9 

0.8 

0.7 

0.6 

0.5 

0.4 

0.3 

0.2 

0.1 

75 

50 

25 

0 

-25 

-50 

-75 

-100 



40 


open for further measures if required, elsewhere the 

withdrawal of liquidity is gaining momentum. Despite 

the fiscal problems in eurozone, the ECB has 

continued on the path of unwinding unorthodox 

measures, with the more hawkish members 

reiterating the need to normalise money markets. In 

the US, Fed Chairman Bernanke has also laid out 

the process of liquidity withdrawal and policy 

normalisation. This removal of liquidity from the 

global financial system will have a huge impact given 

that this was the fuel driving asset and commodity 

markets over the past year. We would suggest that 

the asset markets currencies which were the biggest 

beneficiaries of this liquidity injection will now be the 

most at risk. 

Chart 7: AUDUSD and Commodity Prices 

1.00 Indust Commodities Index (rhs) 

0.95 

0.90 

0.85 

0.80 

0.75 

0.70 

0.65 

AUDUSD Spot 

0.60 

05 06 07 08 09 10 


275 

250 

225 

200 

175 

150 

125 

100 

AUD exposed 

We would place the AUD near the top of the list of 

currencies now exposed, especially given the close 

links to China. Indeed, it is worth remembering that 

China has been a huge source of USD liquidity over 

the course of the past year. China has also been 

running ultra loose monetary policy with the 

management of the yaun generating huge reserve 

accumulation (Chinese reserves have grown by USD 

453bn over the past year) and diversification, adding 

to the USD liquidity. However, the explosion in 

Chinese credit growth at the beginning of the year 

appears to have triggered a stepping up of tightening 

measures in China to bring money supply and 

lending back under control. Initial signs suggest that 

these measures are having an impact already. If the 

Chinese authorities are successful in limiting the 

more speculative aspects of investment then the 

AUD will suffer as a direct result as commodity and 

equity markets come under pressure. Note the sharp 

decline in equity market over the past month, with the 

S&P 500 down over 6%, the Eurostoxx down over 

10%, and the Shanghai index down over 7%. 

Safe havens? 

The USD is expected to be the main beneficiary of 

the global reduction in risk appetite resulting from the 

liquidity withdrawal process, with the fiscal problems 

in Europe undermining the euro’s fledgling reserve 

status. But, we expect the USD’s appeal to go 

beyond its safe haven status, with global investors 

once again seeing the US as a destination of choice. 

There is already evidence of this among Japanese 

investors where the Lifer companies are under 

increasing pressure to extend exposure to overseas 

assets and US Treasuries in particular. JGB yields 

are set to remain at low levels for a extremely long 

period of time, with even the prospect of Japan 

entering quantitative easing (just when everyone else 

is looking for the exit) to keep yields down. Japanese 

investors are also expressing an interest in lower 

hedge ratios on their US exposure as rate 

Chart 8: Swedish Retail Sales and SEK 

90.0 

87.5 

SEK-TWI 

85.0 

82.5 

80.0 

77.5 

75.0 

72.5 

70.0 

67.5 

65.0 

62.5 

R etail sales (% y/y, RH S) 

60.0 

98 00 01 02 03 04 05 06 07 08 09 


10 

9 

8 

7 

6 

5 

4 

3 

2 

1 

0 

-1 

-2 

expectations in the US start to rise. This will provide 

USDJPY with medium-term support and we reiterate 

our USDJPY 108 forecast for end-2010. 

Within Europe, the Scandinavia countries are now in 

a unique position. Norway and Sweden have not 

been tainted with the fiscal problems seen 

throughout much of the rest of Europe. Indeed, by 

comparison, debt levels in Norway and Sweden are 

low, projected to be at 50.6% and 43.6% of GDP 

respectively in 2010 and at 45.2% and 44.1% of GDP 

in 2011 (European Commission forecasts). The 

relatively strong fiscal position, especially in Norway, 

should provide support. 

However, with the Norges Bank having already 

started tightening monetary policy and the Riksbank 

relatively hawkish, both currencies will benefit from 

relative interest rate expectations. We would also 

recommend short GBPSEK positions in this 

environment, to take advantage of relative fiscal and 

debt positions. 



41 


SEK Steams Ahead 

• The Scandinavian currencies have remained very well supported and have continued to deliver 

positive technical signals… 

• …the SEK is now starting to gain even further momentum and we would expect gains to be 

sustained over the medium term 

• Indeed, EUR/SEK has broken sharply lower through the major medium-term support to trigger 

another bearish signal… 

• …while NOK/SEK is now expected to develop a significant correction lower with the long-term up 

trendline support set to be challenged. 

The SEK has resumed its major uptrend with an 

acceleration of gains over the past week breaking 

though key technical levels against the euro and 

on many of the crosses. Indeed, the SEK has 

been one of the best performing currencies over 

the past week (second only to the AUD among 

the G10). The BNP Paribas SEK Trade Weighted 

Index is also set to break higher from the recent 

trading range, which will confirm the broad-based 

nature of SEK gains. 

EUR/SEK has already broken sharply lower 

through the major support in the 10.05 area, 

confirming the medium-term bearish outlook that 

has now developed. We expect the down trend to 

be extended towards the major support clustered 

in the 9.85/9.80 area, which also coincides with 

the 76.40% retracement level of the rally 

developed from the May 2008 lows. Over the 

medium term, the broad down trend that has 

developed from the 11.785 March 2009 high is 

expected to be extended towards the 9.555 

support zone. 

GBP/SEK has broken sharply lower over the course 

of the past week, breaking through the major up 

trendline support that had been in place since 

October. GBP/SEK losses are now approaching 

major support at the 11.265 area, which represents 

the bottom end of the major three-month trading 

range. A further break below here will generate a 

major negative signal leaving GBP/SEK vulnerable to 

a decline back towards the 10.955 lows seen in 

October. Longer term, a decline towards the 10.475 

area is expected. Technical indicators are also 

developing significant negative momentum signals, 

confirming that the pressure is clearly to the 

downside. 

NOK/SEK is expected to undergo a significant 

correction lower. Major up trendline support has 

already been broken and a test of the 1.2150 support 

is now expected ahead of the longer-term up 

trendline support that currently intervenes at 1.2030. 

EUR/USD corrective 

rebounds have 

remained extremely 

limited keeping the 

major downtrend 

intact. 

A break below the 

1.3585 low will extend 

the down trend 

towards the 1.3425 

area. 

Over the medium 

term, even a return to 

the 1.3095 area is 

now possible. 

Chart 1: EUR/USD – keeping the pressure to the downside 

1.52 

1.50 

1.48 

1.46 

1.44 

1.42 

1.40 

1.38 

1.36 

1.34 

1.4340 

1.3750 

22-Jun-09 

1.4446 

1.4015 

19-Aug-09 

1.4842 

1.4480 

1.5060 

16-Oct-09 

1.4630 

1.5144 

1.4219 

15-Dec-09 

1.4582 

11-Feb-10 




42 


EUR/SEK has broken 

sharply lower through 

the major support at 

the 1.0400/1.0350 

levels to trigger 

another bearish signal. 

We now expect a 

decline extending the 

major down trend 

towards the 9.80 

support zone initially. 

Over the medium term, 

even a decline towards 

the 9.555 area is 

becoming likely. 


NOK/SEK has traded 

a peak at the 1.2580 

level and we would 

now expect a 

significant correction of 

the major up trend to 

develop. 

Indeed, initial up 

trendline support has 

been breached and we 

would now expect a 

decline to test the 

1.2150 support ahead 

of the longer-term up 

trendline support at 

1.2030. 


GBP/SEK is 

developing an 

extremely bearish 

pattern on longer-term 

charts. 

The sharp decline 

seen over the past 

week confirms that the 

11.900 recent peak is 

a corrective top. 

Major support at 

11.265 is now being 

targeted. A break 

below here will extend 

the downtrend towards 

10.475. 


Chart 2: EUR/SEK – major bearish breakout 

11.152 

11.10 

10.90 

10.70 

10.685 

10.535 

10.50 

10.30 

10.170 

10.10 

10.035 10.065 

9.90 

22-Jun-09 19-Aug-09 16-Oct-09 15-Dec-09 11-Feb-10 

Chart 3: NOK/SEK – major correction lower developing 

1.27 

1.2580 

1.25 

1.2420 

1.2550 

1.23 

1.2320 

1.21 

1.1975 

1.2150 

1.19 

1.17 

1.1645 

1.15 

Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 

Chart 4: GBP/SEK – major support now being tested 

13.50 

13.170 

13.00 

12.910 

12.50 

12.445 

12.00 

11.845 

11.900 

11.50 

1.305 

11.00 

10.955 

10.50 

Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 



43 


Currency Spot Trade Recommendations Date 

GBP/SEK 11.380 Sell 11.510, stop 11.650, target 10.600 11 Feb 2010 

NOK/SEK 1.2275 Sell 1.2340, stop 1.2440, target 1.20 11 Feb 2010 

GBP/USD 1.5685 Sell 1.5870, stop 1.6115, target 1.51 05 Feb 2010 

USD/JPY 89.75 Buy 88.10, stop 87.10, target 96.00 05 Feb 2010 

AUD/USD 0.9000 Short at 0.8780, stop 0.8930, target 0.8160 09 Feb 2010 

EUR/USD 1.3655 Short at 1.3835, lower stop to 1.3835, target 1.31 09 Feb 2010 

USD/CHF 1.0735 Long at 1.0560, stop raise to 1.0590, target 1.10 01 Feb 2010 




44 


Economic Calendar: 12 - 19 February 

GMT Local Previous Forecast Consensus 

Fri 12/02 07:00 08:00 Germany GDP (Flash) q/q : Q4 0.7% 0.4% 0.2% 

07:00 08:00 GDP (Flash) y/y : Q4 -4.8% -2.1% -2.2% 

07:45 08:45 France Wages (nsa, Prel) q/q : Q4 0.5% 0.3% 0.3% 

07:45 08:45 Wages (Prel) y/y : Q4 2.0% 2.0% n/a 

07:45 08:45 GDP (Prel) q/q : Q4 0.3% 0.6% 0.5% 

07:45 08:45 GDP (Prel) y/y : Q4 -2.3% -0.2% -0.3% 

07:45 08:45 Non-Farm Payrolls (Prel) q/q : Q4 -0.6% -0.2% -0.3% 

07:45 08:45 Non-Farm Payrolls (Prel) y/y : Q4 -2.7% -2.4% n/a 

08:00 09:00 Spain CPI (Final) m/m : Jan 0.0% -1.0% -1.0% 

08:00 09:00 CPI (Final) y/y : Jan 0.8% 1.0% 1.0% 

08:00 09:00 HICP (Final) m/m : Jan 0.0% -1.0% -1.0% 

08:00 09:00 HICP (Final) y/y : Jan 0.9% 1.1% 1.1% 

08:00 09:00 Eurozone ECB’s Nowotny Speaks in Vienna 

10:00 11:00 Industrial Production (sa) m/m : Dec -0.2% -0.8% 0.1% 

10:00 11:00 Industrial Production (wda) y/y : Dec -6.8% -2.5% -1.7% 

10:00 11:00 GDP (Flash) q/q : Q4 0.4% 0.4% 0.3% 

10:00 11:00 GDP (Flash) y/y : Q4 -4.0% -1.8% -1.9% 

08:30 09:30 Neths GDP (Prel) q/q : Q4 0.5% 0.6% 0.5% 

08:30 09:30 GDP (Prel) y/y : Q4 -3.7% -1.9% -2.5% 

08:30 09:30 Retail Sales y/y : Dec -6.4% -7.5% n/a 

09:00 10:00 Italy GDP (Prel) q/q : Q4 0.6% 0.1% 0.1% 

09:00 10:00 GDP (Prel) y/y : Q4 -4.6% -2.5% -2.6% 

13:30 08:30 US Retail Sales m/m : Jan -0.3% -0.9% 0.3% 

13:30 08:30 Retail Sales Ex-Autos m/m : Jan -0.2% 0.1% 0.5% 

14:30 09:30 Fed’s Tarullo Testifies on Systemic Risk to Senate Panel 

14:55 09:55 Michigan Sentiment (Prel) : Feb 74.4 76.5 75.0 

15:00 10:00 Business Inventories : Dec 0.4% 0.2% 0.2% 

Mon 15/02 Holiday US, Canada 

23:50 08:50 Japan GDP (Prel) q/q : Q4 0.3% 0.9% 0.9% 

23:50 08:50 GDP (Prel) y/y : Q4 -5.1% -1.2% n/a 

(14/02) 

00:01 00:01 UK Rightmove House Price Index : Feb 

09:00 10:00 Italy EU Trade Balance : Dec EUR-0.8bn EUR-1.0bn n/a 

16:00 17:00 Eurozone Finance Ministers Meet 

Tue 16/02 00:30 01:30 Australia RBA MPC Minutes 

00:30 01:30 NAB Business Confidence : Jan 8 12 n/a 

00:30 01:30 NAB Business Conditions : Jan 10 9 n/a 

07:00 08:00 Eurozone EU25 New Car Registrations : Jan 

08:30 09:30 EU Finance Ministers Meet 

09:30 09:30 UK CPI m/m : Jan 0.6% 0.0% 0.1% 

09:30 09:30 CPI y/y : Jan 2.9% 3.6% 3.7% 

09:30 09:30 RPI y/y : Jan 2.4% 3.6% 3.8% 

09:30 09:30 RPIX y/y : Jan 3.8% 4.5% 4.6% 

09:30 09:30 DCLG UK House Prices y/y : Dec 

10:00 11:00 Germany ZEW Expectations : Feb 47.2 40.0 41.0 

10:00 11:00 ZEW Current Assessment : Feb -56.6 -51.0 -52.0 

13:30 08:30 US Empire State Survey : Feb 16 19 17 

14:00 09:00 TICS Data : Dec USD26.6bn USD25.0bn n/a 

17:00 12:00 Fed’s Hoenig speaks at Budget Policy Forum in Washington 

17:45 12:45 Fed’s Kocherlakota Speaks on the Economic Outlook in Minnesota 

18:00 13:00 NAHB Housing Market Index : Feb 15 16 16 

Wed 17/02 23:50 08:50 Japan Tertiary Index (sa) m/m : Dec -0.2% -0.3% -0.3% 

(16/02) 

05:00 06:00 Eurozone ECB’s Quaden Speaks 

10:00 11:00 Foreign Trade Balance (nsa) : Dec EUR4.8bn EUR8.0bn n/a 

08:00 09:00 Spain GDP (Final) q/q : Q4 -0.1% (p) -0.1% n/a 

08:00 09:00 GDP (Final) y/y : Q4 -3.1% (p) -3.1% n/a 

Market Economics 12 February 2010 


45 


Economic Calendar: 12 - 19 February 

GMT Local Previous Forecast Consensus 

Wed 17/02 09:30 09:30 UK BoE MPC Minutes 

(cont) 09:30 09:30 Unemployment Change : Jan -15k -15k -10k 

09:30 09:30 Unemployment Rate (Claimant) : Jan 5.0% 4.9% 5.0% 

13:30 08:30 US Import Prices m/m : Jan 0.0% 1.0% 0.9% 

13:30 08:30 Import Prices Ex Petroleum m/m : Jan 0.5% 0.5% n/a 

13:30 08:30 Housing Starts : Jan 557k 580k 581k 

14:15 09:15 Industrial Production m/m : Jan 0.6% 0.9% 0.7% 

14:15 09:15 Capacity Utilisation Rate : Jan 72.0% 72.8% 72.6% 

17:45 12:45 Fed’s Plosser Speaks on the Financial Crisis in Philadelphia 

19:00 14:00 FOMC Minutes 

14:00 15:00 Belgium GDP (Flash) q/q : Q4 0.5% 0.3% n/a 

14:00 15:00 GDP (Flash) y/y : Q4 -3.5% -1.1% n/a 

Thu 18/02 Japan BoJ Rate Announcement 

08:30 09:30 Sweden CPI (nsa) m/m : Jan 0.2% -0.3% n/a 

08:30 09:30 CPI (nsa) y/y : Jan 0.9% 1.0% n/a 

08:30 09:30 CPIF m/m : Jan 0.2% -0.1% n/a 

08:30 09:30 CPIF y/y : Jan 2.7% 2.7% n/a 

08:30 09:30 Unemployment Rate (nsa) : Jan 8.6% 9.4% n/a 

08:30 09:30 Neths Unemployment Rate : Jan 5.3% 5.5% n/a 

09:00 10:00 Norway GDP (Mainland, sa) q/q : Q4 0.5% 0.6% 0.8% 

09:00 10:00 GDP (Mainland) y/y : Q4 -1.4% 0.6% n/a 

09:00 10:00 GDP (Total, sa) q/q : Q4 0.9% 0.7% 0.7% 

09:00 10:00 GDP (Total) y/y : Q4 -0.7% -0.1% n/a 

09:30 09:30 UK PSNCR : Jan GBP23.6bn GBP-17.8bn GBP-17.8bn 

09:30 09:30 PSNB : Jan GBP15.7bn GBP-2.6bn GBP-2.8bn 

11:00 11:00 CBI Monthly Industrial Trends : Feb 

Eurozone ECB Governing Council Meeting (No Rate Announcement) 

12:00 07:00 Canada CPI m/m : Jan -0.3% 0.3% 0.3% 

12:00 07:00 CPI y/y : Jan 1.3% 2.1% 1.9% 

12:00 07:00 BoC Core CPI m/m : Jan -0.3% 0.2% 0.0% 

12:00 07:00 BoC Core CPI y/y : Jan 1.5% 2.1% 1.9% 

13:30 08:30 US PPI (sa) m/m : Jan 0.2% 0.8% 0.8% 

13:30 08:30 PPI (sa) y/y : Jan 4.4% 4.6% 4.4% 

13:30 08:30 PPI Core (sa) m/m : Jan 0.0% 0.2% 0.1% 

13:30 08:30 PPI Core (sa) y/y : Jan 0.9% 0.8% 0.8% 

13:30 08:30 Initial Claims 440k 450k n/a 

15:00 10:00 Philadelphia Fed Survey : Feb 15.2 20.0 17.0 

15:00 10:00 Leading Indicators m/m : Jan 1.1% 0.6% 0.5% 

16:00 11:00 EIA Oil Inventories 

18:00 12:00 Fed’s Bullard Speaks to Economic Club of Memphis 

00:00 

(19/02) 

20:00 Fed’s Lockhart Speaks on the Economic Outlook in Georgia 

Fri 19/02 07:00 08:00 Germany PPI m/m : Jan -0.1% 0.3% 0.3% 

07:00 08:00 PPI y/y : Jan -5.2% -3.9% -3.9% 

07:45 08:45 France Industry Survey : Feb 92 93 n/a 

09:00 10:00 Eurozone PMI Manufacturing (Flash) : Feb 52.4 52.6 52.8 

09:00 10:00 PMI Services (Flash) : Feb 52.5 52.5 52.5 

09:00 10:00 PMI Composite (Flash) : Feb 53.7 53.4 53.5 

09:00 10:00 Current Account (nsa) : Dec EUR0.1bn EUR5.0bn n/a 

09:00 10:00 Italy Industrial Orders y/y : Dec 0.0% -2.7% n/a 

09:30 09:30 UK Retail Sales m/m : Jan 0.3% -0.6% -0.6% 

09:30 09:30 Retail Sales y/y : Jan 2.1% 1.0% 1.0% 

13:00 08:00 US Fed’s Dudley Speaks at Economic Conference in Puerto Rico 

13:30 08:30 CPI m/m : Jan 0.1% 0.3% 0.3% 

13:30 08:30 CPI y/y : Jan 2.7% 2.9% 2.8% 

13:30 08:30 Core CPI m/m : Jan 0.1% 0.2% 0.2% 

13:30 08:30 Core CPI y/y : Jan 1.8% 1.8% 1.8% 

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 



46 


Key Data Preview 

115 

105 

95 

85 

75 

65 

Chart 1: Eurozone Growth & Sentiment 

EC Survey: 

Economic Sentiment 

GDP (% y/y, RHS) 

55 

-6 

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 


Seas. Adjusted Q4 09 (f) Q3 09 Q2 09 Q1 09 

GDP % q/q 0.4 0.4 -0.1 2.5 

GDP % y/y -1.8 -4.0 -4.8 -5.0 

Key Point: 

Survey data signal another robust q/q growth rate in 

Q4 although ‘hard’ data highlight the continued 

weakness of consumer demand. 

5 

4 

3 

2 

1 

0 

-1 

-2 

-3 

-4 

-5 

BNP Paribas Forecast: Picking Up 

Eurozone: GDP (Q4 2009, ‘Flash’ Estimate) 

Release Date: Friday 12 February 

We forecast that eurozone GDP will continue to expand on 

a q/q basis in Q4, consistent with the high level of 

improvement in a range of leading indicators of activity. 

Our prediction of a q/q rate of increase of 0.4% is broadly 

in line with the pointers from the reliable survey data such 

as the PMI. The industrial sector remains pivotal to the 

rebound in the economy. Industrial production is forecast to 

expand by over 1% q/q for the second consecutive quarter 

after five consecutive contractions up to Q2 2009. 

Looking at GDP by expenditure components, exports will 

again expand on the basis of the trade figures released for 

Q4 to date. Domestic demand, however, remains weak. 

Private consumption has increased only once in the past 

six quarters on a q/q basis, in Q2 2009, boosted by car 

purchase incentives. Retail sales data for Q4 to date point 

to another contraction in Q4. Investment has fallen on a q/q 

basis for six straight quarters though the rate of contraction 

has been moderating. 

The y/y rate of contraction in GDP will decelerate markedly 

due to base effects and, for the same reason, a return to 

positive rates of change is likely from Q1 2010 (see chart). 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

-1.5 

-2.0 

-2.5 

-3.0 

-3.5 

Chart 2: German GDP 

-4.0 

-7.0 

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 


% y/y (RHS) 

% q/q 

Seas. Adjusted Q4 09 (f) Q3 09 Q2 09 Q1 09 

GDP % q/q 0.4 0.7 0.4 -3.5 

GDP % y/y -2.1 -4.8 -5.8 -6.7 

Key Point: 

Surveys signal another solid q/q rise in GDP, driven 

by external rather than domestic demand. 

5.0 

4.0 

3.0 

2.0 

1.0 

0.0 

-1.0 

-2.0 

-3.0 

-4.0 

-5.0 

-6.0 

BNP Paribas Forecast: External Boost 

Germany: GDP (Q4 2009, ‘Flash’ Estimate) 


We expect German GDP to rise on a q/q basis for the third 

straight quarter in Q4, albeit at a slower pace than Q3. The 

y/y rate of contraction in GDP will decelerate markedly due 

to base effects and a return to positive rates of change is 

highly probable from Q1 2010 onwards. 

The rebound in global manufacturing activity is pivotal to 

the pick-up in activity in Germany. Industrial production is 

on course to deliver another strong q/q increase in Q4. 

Consistent with the global upswing and continued poor 

state of domestic demand, the main contribution to growth 

in GDP in Germany will be net exports. The trade data for 

Q4 to date point to an unusually high contribution from net 

trade, outweighing what is likely to be another very weak 

quarter for private consumption. 

Private consumption fell by 0.9% q/q in Q3, the biggest fall 

in ten quarters. This follows two unusually strong quarters, 

driven by car purchase incentives. The latter are likely to 

have brought demand forward from 2010 which, combined 

with what we expect will be a further rise in unemployment 

this year, will weigh on spending. Retail sales data for Q4 

point to the sixth q/q decline in seven quarters. 

Investment is likely to be subdued by high uncertainty and 

low capacity utilisation rates. 



47 



Chart 3: France GDP (% q/q) v. Industrial Production 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

-1.5 

-2.0 

-2.5 

GDP (% q/q) 

IP (% 3m/3m, RHS) 

02 03 04 05 06 07 08 09 


Volume SA-/WDA Q4 (f) Q3 Q2 Q4 08 

GDP % q/q 0.6 0.3 0.3 -1.5 

GDP % y/y -0.2 -2.3 -2.8 -1.7 

PCE % q/q 0.8 0.1 0.4 0.0 

External contrib. (pt) -0.6 0.3 0.9 -0.6 

Key Point: 

We expect a strong rebound, driven by consumption 

and inventories. 

4 

3 

2 

1 

0 

-1 

-2 

-3 

-4 

-5 

-6 

-7 

-8 

-9 

BNP Paribas Forecast: Rebound 

France: GDP (Q4 2009, First Estimate) 


Retail sales of manufactured goods rose 3.0% q/q in Q4, 

boosted by car sales (ahead of the reduction of purchase 

incentives); excluding autos, retail still printed a strong 

1.5% q/q gain. This should obviously benefit GDP growth. 

However, a large part of that increase will materialise in 

imports (assuming December is unchanged m/m, imports 

in Q4 will be up 6.1% q/q). 

Another key issue, as in the US, is the behaviour of 

inventories. In the past two quarters, inventory contraction 

was equivalent to 2.5 percentage points of GDP. This pace 

of contraction is clearly unsustainable. More and more 

companies are now reporting that stocks are below normal 

levels, and some indicated in the latest INSEE survey that 

the lack of inventories may create production bottlenecks. 

The jump in imports is surely also a sign that the pace of 

inventory contraction has eased. 

As a result, we forecast PCE and inventory change to be 

the main contributors to GDP growth in Q4 and foreign 

trade to be the main negative factor. 

We forecast GDP growth of 0.6% q/q, the highest rate 

since Q3 2007. That, combined with the base effect, should 

allow the y/y rate of change to recover to close to zero. 

5 

4 

3 

2 

1 

0 

-1 

-2 

-3 

-4 

Chart 4: French Labour Market 

GDP (% y/y) 

Private Sector Employment (Non-farm Payrolls, % y/y) 

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 


% Q4 (f) Q3 Q2 Q4 08 

NF Payrolls (sa) q/q -0.2 -0.6 -0.6 -0.5 

NF Payrolls y/y -2.4 -2.7 -2.4 -0.9 

Monthly Wage nsa q/q 0.3 0.5 0.4 0.3 

Monthly Wage y/y 2.0 2.0 2.2 3.0 

Key Point: 

The labour market is showing signs of stabilisation. 

We expect fewer job losses in Q4 but a pick-up in 

wages is only likely to occur in the course of 2010. 

BNP Paribas Forecast: Stabilisation 

France: NF Payrolls and Wages (Q4 2009) 


The adjustment of employment to the sharp economic 

slowdown was more rapid than in prior recessions. Rather 

than reflecting labour market reforms, this was primarily 

due to the corporate sector adapting to existing regulation. 

The share of temporary employees and the use of interim 

staff have increased in recent years, allowing for a quick 

bringing into line of manpower resources with corporate 

needs. The increased flexibility of working hours as well as 

the rising number of part-time workers has further 

increased flexibility. The bottom line is that employment is 

likely to stabilise rapidly once the economy shows clear 

signs of recovery. Unemployment was still on the rise in 

Q4, suggesting continued job losses during that quarter, 

but this may soon end. 

On the wage front, the rising unemployment rate, absence 

of inflation and extremely low capacity utilisation rate all 

point to ongoing wage moderation in Q4. The annual 

increase in the average monthly wage has fallen a full 

percentage point over the last three quarters to an 

unsustainably low level of 2.0%. That is consistent with 

general wage increases of no more than 0.5% and 

individual pay hikes of 1.5%. However, it will be some time 

before wages do pick up. 



48 



Chart 5: Italian GDP and IP 

Source: Reuters EcoWin Pro, BNP Paribas. Note: Q4 IP based on our 

estimates for December 

% Q4 (f) Q3 Q2 Q1 

GDP q/q 0.1 0.6 -0.5 -2.7 

GDP y/y -2.5 -4.6 -5.9 -6.0 

Key Point: 

Growth will slow from Q3 on seasonal distortions. 

The underlying trend is for a modest recovery going 

into 2010. 

BNP Paribas Forecast: Payback 

Italy: GDP (Q4 2009) 


The 0.6% q/q rise in Q3 GDP overstated the strength in the 

underlying trend due to seasonal distortions. A sharp 

increase in August industrial output artificially boosted Q3’s 

IP (+4.4% q/q) at the expense of Q4, when we expect 

production to have fallen by around 1% q/q. This will be 

partly offset by another, albeit modest, increase in services 

activity, in line with the persistent improvement shown by 

recent surveys. 

On the demand side, flat growth in retail sales and survey 

evidence point to persistent weakness in consumer 

demand. Noteworthy has been the contrast in the services 

survey between the sharp improvement in activity for 

services to businesses and financials and the weaker 

assessment in services for households. Poor employment 

prospects and a slowdown in real wage growth will 

continue to weigh on consumer demand going into 2010. 

Similarly, we expect investment spending to remain 

sluggish, given very low capacity utilisation and persistent 

uncertainty. Finally, we expect a positive albeit modest 

contribution to growth from net trade (+0.2% q/q). 

Weakness in domestic demand will persist in 2010. While 

we expect the economic recovery to continue, growth will 

remain modest. 

Chart 6: US Retail Sales in Gradual Recovery 


% m/m Jan (f) Dec Nov Oct 

Retail Sales -0.2 -0.3 1.8 1.2 

Ex-autos 0.1 -0.2 1.9 0.0 

Key Point: 

Retail sales are forecast to decline by 0.2% in 

January as auto sales declined and sales of general 

merchandise weakened. 

BNP Paribas Forecast: Small Decline 

US: Retail Sales (January) 


Retail sales are expected to decline by 0.2% in January 

following a small fall in December. Consumers apparently 

purchased holiday presents early in Q4 during pre- 

Christmas sales and then retreated. In January, retailers 

had far less inventory to offer in post-Christmas sales and 

therefore sales of general merchandise declined by an 

estimated 1%. However, consumers also reduced their 

purchases of autos as well. The unit volume of domestic 

vehicle sales plunged by 7% in January, with larger SUVs 

the hardest hit. The Toyota problems contributed to the fall, 

but were not the principle factor behind the large decline. 

Retail sales ex automobiles rose by an estimated 0.1%. 

Apart from food and healthcare, the only major component 

of retail sales to rise in January was gasoline – due to an 

estimated 4% rise in gasoline prices. Retail sales in 

January ex-gasoline contracted at an estimated 0.5%. 

Consequently, the budget constraints faced by many 

consumers and ignored before the holidays are finally 

causing consumers to hunker down and purchase just the 

necessities. 



49 



Chart 7: US: The Future/Present Wedge Has 

Peaked 


Feb p (f) Jan H2 Jan p Jan Dec 

Michigan 

Sentiment 76.5 75.0 72.8 74.4 72.5 

Key Point: 

The University of Michigan Index of Consumer 

Confidence should increase further in early January 

and reach 76.0. 

BNP Paribas Forecast: Increase 

US: Michigan Consumer Sentiment (Feb, Preliminary) 


The final Michigan consumer sentiment index for January 

increased to 74.4, 1.9 points higher than the final 

December reading of 72.5. This is well above the trough 

reached back in November 2008 and the index is at its 

strongest since the beginning of recession in January 2008 

(when it was at 78.4). The present situation measure has 

begun to catch up with the future expectations index lately 

and the wedge between present and future has been 

trending down toward its long-run mean. This usually 

happens when the expansion begins (see Chart). 

Sentiment in the Conference Board survey was improving 

on hopes for the future rather than on current conditions 

until recently. In January, it rebounded to 25.0 from its 26- 

year low of 20.2 reached back in December 2009. Oil 

prices have reseeded slightly in recent weeks, implying 

gasoline costs are likely to decrease in February. In 

addition, strong GDP growth in Q4 should support 

consumer optimism. Overall, we expect the University of 

Michigan index to improve further in early February, 

increasing by 2.1 points to 76.5. 

2 

1 

0 

-1 

-2 

-3 

-4 

Chart 8: Japanese Real GDP (sa, % q/q) 

Domestic Demand 

(excluding Private inventory) 

Private inventory 

External 

Demand 

03 04 05 06 07 08 09 

Source: Cabinet Office, BNP Paribas 

Q4 09 (f) Q3 09 Q2 09 Q1 09 

Real (% q/q) 0.9 0.3 0.7 -3.1 

Real (% annualized) 3.8 1.3 2.7 -11.9 

Real (% y/y) -1.2 -5.1 -5.8 -8.9 

Key Point: 

Led by brisk exports, coupled with a rebound in 

domestic demand, Q4 2009 real GDP will likely show 

robust annualised growth of 3.8%. Even so, it will be 

a while yet before an autonomous growth 

mechanism begins. 

BNP Paribas Forecast: Robust Growth 

Japan: GDP (Q4 2009) 

Release Date: Monday 15 February 

The preliminary (first) estimate of Q4 2009 GDP will likely 

show that the growth accelerated from 0.3% q/q in Q3 

(1.3% annualised) to 0.9% q/q (3.8% annualised). Growth 

in Q4 will have been led by booming exports, while 

domestic demand has also finally stopped contracting 

thanks to the stabilisation of capital investment (this had 

been weak for a long time). However, a large revision in 

the second estimate cannot be ruled out, as occurred the 

previous quarter (Q3 growth was marked down to an 

annualised 1.3% from 4.8%, with revisions in capital 

investment and inventories the key factors). 

That said, the domestic economy remains fundamentally 

weak as the positive cyclical feedback loop between 

income and expenditure has yet to kick in. Meanwhile, the 

impact of fiscal stimulus is expected to fade in coming 

quarters and the economy will likely enter a soft patch in 

the spring. With exports (especially to the rest of Asia) 

likely to continue expanding solidly, we believe that the soft 

patch will be mild. However, it will be a while yet before an 

autonomous growth mechanism starts to function. 



50 




Chart 9: UK CPI vs RPI 

Jan (f) Dec Nov Oct 

CPI % m/m 0.0 0.6 0.3 0.2 

CPI % y/y 3.6 2.9 1.9 1.5 

RPI Index 217.6 218.0 216.7 216.0 

RPI % y/y 3.6 2.4 0.3 -0.8 

RPIX % y/y 4.5 3.8 2.7 1.9 

Key Point: 

We expect a final month of accelerating inflation in 

January, largely due to the VAT hike. 

BNP Paribas Forecast: Rising 

UK: CPI (January) 

Release Date: Tuesday 16 February 

We expect UK CPI to post a final month of accelerating 

inflation during January. The big story this month is the 

return of the rate of VAT to 17.5%. Given the extent of the 

upward surprise last month, there is some suggestion that 

some firms passed on the VAT hike early. However, we 

also believe that conservative management of Christmas 

inventories has meant that the degree of discounting was 

probably less generous than last year. 

When VAT was cut, this tended to depress the CPI by 

around 0.7 percentage points – slightly less than if there 

had been full pass-through. Full pass-through of the VAT 

hike could add a full percentage point to % y/y inflation. 

However, several retailers have reported that they will not 

pass on the VAT hike while others have said it will be 

deferred. Hence we expect an addition of around 0.75 

points in January. 

RPI inflation is likely to rise slightly more sharply, not least 

given accelerating house price inflation and base effects 

related to the mortgage interest component. 

We believe that January will mark the peak, with base 

effects becoming more favourable from February onwards. 

Chart 10: UK Employment and GDP 



Claimant Count Chg -15k -15k -11k 6.0k 

ILO Unemp 3m-Chg -5k -7k 21k 

ILO Emp 3m-Chg 5k -14k 52k 

Weekly Earns 3m/yr 0.9% 0.7% 0.6% 

Ex-Bonus 3m/yr 1.2% 1.1% 1.2% 

Key Point: 

We expect another robust month of improvement in 

the key labour market indicators. The new measure 

of wage inflation is likely to rise from a low level. 

BNP Paribas Forecast: Improving 

UK: Labour Report (January) 

Release Date: Wednesday 17 February 

We expect further signs of firming in the UK labour market 

in the January Labour Report. Claimant count 

unemployment has been lower than expected for the last 

nine consecutive months, culminating in a 15k decline in 

unemployment during December. Given the continued 

upward trajectory in survey indicators of output growth, we 

expect further improvement in the labour data. We expect 

another robust reading in January, a 15k fall. 

The ILO data (which are a month behind the claimant 

count) have also been on an improving trend. We expect 

employment to have posted an increase in the last three 

months and unemployment to have registered a small 

decline. Since these data are a 3-month change, they take 

a little longer to turn the corner. Data in the coming months 

are likely to show a more substantial improvement. 

The ONS has changed its preferred measure of wage 

inflation. The average earnings index has been replaced by 

average weekly earnings. This is based on the same 

underlying data, but different methodology. The new series 

tends to be more variable, partly because it includes more 

outliers, so we are braced for some big surprises. We 

expect a small acceleration in December, though from a 

low level. 



51 



Chart 11: US: Housing Starts & Building Permits 



Housing Starts 

(000s, saar) 580 557 580 524 

Key Point: 

Housing starts are forecast to increase by 4.1% m/m 

in January to 580k annualised units. 

BNP Paribas Forecast: Small Increase 

US: Housing Starts (January) 


After troughing in spring 2009, housing starts picked up 

during the summer months and then stalled towards the 

end of the year. We forecast starts will resume their 

moderate upward trend going forward, although at a much 

slower pace than during previous cycles, and will reach 

580k in January. Inventories of new homes have declined 

noticeably in recent months, suggesting a pick-up in 

activity. Nevertheless, record foreclosures and 

unemployment near a 26-year high represent hurdles that 

may prevent the industry from strengthening much further. 

Building permits unexpectedly jumped 10.9% in December, 

signalling gains in housing will be sustained into 2010. 

Nonetheless, there is some anecdotal evidence that the 

leap in building permits at the end of 2009 was due to 

builders submitting applications in anticipation of cost 

increases in 2010. Thus, we expect a longer lag between 

permits and starts and the recent increase in permits to 

feed through to starts over the next three months. 

Chart 12: US Industrial Production 



Ind. Prod. (% m/m) 0.9 0.6 0.6 0.2 

Cap. Util (%) 72.8 72.0 71.5 71.0 

BNP Paribas Forecast: Another Solid Gain 

US: Industrial Production (January) 


Industrial production is expected to surge 0.9% m/m in 

January after solid 0.6% gains in December and 

November. Our forecast would imply an increase in 

capacity utilisation to 72.8%, the highest reading since 

November 2008. The gains should be broad-based, 

reflecting the strength in the January ISM and 

manufacturing hours worked. A number of sectors appear 

to have worked off excess inventories, allowing firms to 

ramp up production. Auto production is expected to be a 

positive factor as is utility output: Data on electricity 

generation showed a further increase on continued cold 

temperatures. Mining activity should also see a moderate 

gain as this sector benefits from the more robust recovery 

in many emerging markets. 

Key Point: 

Industrial production is expected to rise 0.9% in 

January, leading capacity utilisation to increase to 

72.8%. 



52 



Chart 13: Norwegian Mainland GDP 


Q4 (f) Q3 Q2 Q1 

Mainland GDP % q/q 0.6 0.5 0.3 -0.9 

Mainland GDP % y/y 0.6 -1.4 -2.0 -1.7 

Total GDP % q/q 0.7 0.9 -0.9 -0.7 

Total GDP % y/y -0.1 -0.7 -2.3 -1.1 

Key Point: 

Both activity data and surveys indicate that the GDP 

continued to expand in Q4. 

BNP Paribas Forecast: Further Expansion 

Norway: GDP (Q4 2009) 

Release Date: Thursday 18 February 

In Q3, Norwegian mainland GDP growth at 0.5% q/q was 

weaker than market expectations at 0.8%, while total GDP 

growth surprised slightly to the upside. The main 

contributor to growth was net trade. Oil sector output also 

rose, by 2.0% q/q after falling 4.8% in Q2, leading to a 

significant increase in total GDP growth. 

In Q4, we expect mainland GDP to have continued 

expanding on a q/q basis. On the consumer side, retail 

sales rose by 0.8% q/q in Q4. Although this is down from 

1.2% in Q3, it is still a robust reading. Also, new car 

registrations rose for a third quarter in a row, posting a 

17.8% q/q increase in Q3. These, together with an 

improvement in consumer confidence, point to an increase 

in private consumption over the quarter. 

Monthly export data show that exports including oil and 

natural gas rose further in Q4, but at a slower pace. After a 

fall in Q3, imports also ticked higher. Therefore, we expect 

both exports and imports to rise, but the contribution from 

net trade should decline. Also, the pace of improvement in 

manufacturing production eased in Q4, suggesting 

continued contraction in investment, but to a lesser extent 

than in Q3. 

Overall, we expect mainland and total GDP to have 

expanded by 0.6% and 0.7 q/q in Q4 respectively. 

Chart 14: US: Pressure on Core PPI Eases 



Headline 0.8 0.2 1.8 0.3 

Ex-food & energy 0.2 0.0 0.5 -0.6 

Key Point: 

Stronger food and energy prices suggest PPI should 

increase by 0.8% m/m in January. 


US: PPI (January) 


We expect PPI to have increased by 0.8% m/m in January. 

Strength should be driven by energy prices which are 

forecast to increase by 2.8% m/m, as gasoline prices rose 

around 4.5% on the month. Food prices are forecast to 

increase by 1.5% m/m in January, reflecting mounting 

pressures in commodity food costs. Indeed, while sluggish 

demand in 2009 probably delayed the pass-through to 

consumer prices last year, higher food prices have now 

trickled through the food production pipeline and are 

expected to support headline inflation over the next few 

months. Core PPI is forecast to increase by 0.2% m/m after 

remaining unchanged the previous month. Ongoing 

strength in metal prices points to upside risks in auto 

prices. In addition, while tight credit conditions and 

subdued final demand have so far constrained investment 

spending, recent durable goods orders data suggest firms 

have increased spending on equipment and software. 

Against this background of firmer industrial demand, higher 

commodity prices risk being passed on to final goods 

prices, pointing to upside risks for producer prices. 



53 



Chart 15: US Leading Indicators Suggest Growth 



Lead Index (% m/m) 0.6 1.1 1.0 0.3 

6-mo. ann. chg. (%) 10.0 10.8 10.2 11.0 

BNP Paribas Forecast: A More Modest Gain 

US: Leading Indicators (January) 


The index of leading indicators is expected to rise 0.6% in 

January after surging 1.1% in December. Our forecast 

would suggest a slight cooling in the 6-month annualised 

rate to 10.0% from 10.8% in December. This is line with the 

deceleration we anticipate in GDP growth to 2.4% q/q saar 

in Q1 from 5.7% in Q4. The index will be influenced by a 

number of cross currents; the decline in the stock market 

and a backing up in initial jobless claims will weigh on the 

index while an increase in the ISM index of supplier 

deliveries, a still-steep yield curve, an improvement in 

consumers’ assessments of future conditions and a modest 

rise in building permits will be positive factors that keep the 

index rising overall. 

Key Point: 

A more modest gain in the index of leading 

indicators is expected in January. 

Chart 16: Canadian Inflation 


Canada: CPI (January) 



m/m % Jan (f) Dec Nov Oct 

CPI 0.3 -0.3 0.5 -0.1 

Bank of Canada Core 0.2 -0.3 0.4 0.1 

Key Point: 

Higher gasoline prices, a rebound in clothing prices 

and mounting pressures on shelter costs suggest 

Canadian CPI inflation will increase by 0.3% m/m in 

January. 

Canadian CPI inflation is forecast to increase by 0.3% m/m 

in January. Because headline CPI declined by 0.3% m/m in 

January 2009, large base effects will push the headline 

index up by 1.9% on a year-on-year basis, marking the 

highest reading in over a year. Strength should be driven 

by gasoline prices, which are forecast to have increased by 

3.0% m/m. Additional upward pressures should come from 

clothing prices. In December, clothing prices plunged by 

4.7% m/m, the largest monthly decline for this month in the 

series’ 60-year history. Given that large discounts during 

the holiday shopping season tend to be followed by higher 

prices earlier in the year, we expect apparel prices to 

increase by 1.0% m/m in January. Shelter prices are 

expected to increase by 0.2%, reflecting an up-tick in 

household energy costs and recent increases in house 

prices (which feed into the CPI index directly through their 

effect of the CPI replacement component). Excluding the 

eight most volatile components and the effect of indirect 

taxes, the Bank of Canada core CPI is expected to 

increase 0.2% m/m in January. Base effects will play a 

very large role as the core CPI index declined by 0.4% 

m/m in January 2009. As a result, we expect core inflation 

to jump to 2.1% y/y in January from 1.5% previously. 



54 



Chart 17: UK Retail Sales vs BRC Retail Sales 

Monitor 



% m/m -0.6 0.3 -0.3 0.5 

% y/y 1.0 2.1 2.7 3.5 

% 3m/3m 0.2 0.7 0.7 1.1 

% 3m/yr 1.9 2.7 3.0 2.8 

Key Point: 

We expect a weather-induced contraction in retail 

sales in January. 

BNP Paribas Forecast: Weather distortion 

UK: Retail Sales (December) 


We expect UK retail sales to post a 0.6 percentage point 

contraction in January, heavily influenced by the weather. 

More specifically, the worst snowfall in decades brought 

many parts of the country to a standstill. This will have 

physically prevented consumers from getting to the shops. 

There is also the possibility that the VAT hike may have 

acted as a drag on spending. 

Survey indicators have been pretty poor indicators of 

official retail sales in recent months. Nonetheless, for what 

it is worth, both the CBI and BRC gauges of high street 

spending suffered setbacks in January. The accompanying 

commentary attributed this to the poor weather. 

December’s retail sales data were disappointing despite 

upbeat survey indications. We suspect that less generous 

than usual discounting was responsible. In turn, this is 

likely to have reflected cautious Christmas inventory 

management, restricting the need to slash prices. If this is 

the case, it is also likely to have suppressed retail sales 

growth during January. 

Overall, we expect a weather-distorted reading. The 

flipside is that February’s data are likely to enjoy a bounce 

following the big thaw. 

30 

20 

10 

0 

-10 

-20 

-30 

-40 

-50 

-60 

-70 

-80 

Chart 18: French Industrial Survey 

Own Production Outlook 

General Production Outlook 

Composite Indicator (RHS) 

01 02 03 04 05 06 07 08 09 


115 

110 

105 

100 

95 

90 

85 

80 

75 

70 

65 

SA Feb (f) Jan 10 Dec Feb 09 

Composite index 93 92 88 70 

Overall Manuf. Outlook -4 -4 -11 -76 

Own Manuf. Outlook -6 -9 -8 -46 

Key Point: 

The financial markets turmoil may weigh on 

business confidence, but should not affect the 

INSEE industrial survey too heavily. 

BNP Paribas Forecast: Smaller Gain 

France: Monthly Industrial Survey (February) 


After a correction at the end of 2009, industrial confidence, 

according to the monthly INSEE survey, started to recover 

in January. The correction was stronger for the own 

production average and the recovery has not yet started, 

while the general outlook has performed better. 

Looking at other business surveys for France, it is notable 

that PMIs have either stabilised (for manufacturing) or 

declined (for services) over the last few months, while Bank 

of France and European Commission surveys are still on a 

rising trend. This difference may be explained by the fact 

that PMIs have been above their long-term average since 

last summer while the two others only reached this level in 

December. 

We believe the own production outlook should recover, 

while the general perception should stabilise. The former 

should be supported by the higher orders already reported 

in January survey, while the latter sub-index may suffer 

from the general economic uncertainties. 

Clearly, the very poor equity market performance and the 

turmoil seen on the bond market during the first week of 

February are a threat to business confidence. However, we 

believe that the INSEE industrial survey should not be 

overly affected. 



55 



Chart 21: US Total vs. Core CPI Inflation 



CPI 0.3 0.1 0.4 0.3 

Core 0.2 0.1 0.0 0.2 

NSA (index) 217.05 215.95 216.33 216.18 

Key Point: 

CPI should increase by 0.3% in December, driven by 

higher energy prices. 

BNP Paribas Forecast: Moderate Increase 

US: Consumer Price Index (January) 


Headline CPI is expected to increase 0.3% m/m in 

January. The forecast for January is complicated by the 

fact that the BLS will revise its seasonal adjustment factors 

as well as the weights of the CPI basket. Weights depend 

on relative prices and gasoline prices have increased since 

last year. Therefore, the weight for CPI energy will likely be 

revised higher in 2010, suggesting gasoline price swings 

will have a large impact on headline CPI this year. In 

January, we forecast that energy prices increased by 2.4% 

m/m, driven by a 4.3% expected rise in gasoline prices. 

Food prices are expected to increase by 0.2% m/m, 

reflecting upward pressures on supermarket prices. The 

CPI food-at-home component rose by 0.3% m/m in 

December and is expected to post a similar gain in 

January, as pressures in food commodity prices have 

intensified recently. Excluding food and energy, core CPI 

should increase by 0.2% m/m. While underlying price 

pressures remain contained, metal prices have been 

trending higher in recent months. Upward pressures have 

already surfaced in import and producer prices and have 

the potential to filter through to CPI prices. Auto prices 

would likely be the first CPI component to be affected by 

this upside risk. Despite this, sluggish shelter prices and 

plummeting unit labour costs suggest underlying price 

pressures should remain contained. In non-seasonally 

adjusted terms, headline CPI should increase to 217.05 in 

January from 215.95 previously. 



56 


Economic Calendar: 15 February – 12 March 

22 February 23 February 24 February 25 February 26 February 

Italy: Non-EU Trade 

Balance Jan 

Neths: Consumer 

Confidence Feb 



Japan: BoJ Monetary 

Policy Meeting Minutes 

UK: CBI Distributive 

Trades Jan 

Germany: Ifo Survey Feb 

France: Retail Sales Jan, 

CPI Jan, Housing Starts 

Jan 

Italy: CPI Jan, ISAE 

Consumer Confidence 

Feb 

Neths: Producer 


Belgium: Business 


US: Consumer 

Confidence Feb, 

S&P/Case-Schiller Home 

Price Index Dec 

Japan: Trade Balance 

Jan 

Eurozone: Industrial 

Orders Dec 

Germany: GDP (Final) 

Q4, GfK Consumer 

Confidence Mar 

France: Job Seekers Jan 

Italy: Retail Sales Dec 

Norway: Labour (sa) Dec 

US: New Home Sales Jan 

Eurozone: Monetary 

Developments Jan, 

Business & Consumer 

Survey Feb, Retail PMI 

Feb 

Germany: Labour Jan 

France: PPI Feb, 


Feb 

Italy: ISAE Business 


Spain: PPI Jan 

Sweden: PPI Jan, 

Consumer Conf Feb 

Norway: Labour (nsa) Dec 

Belgium: CPI Feb 

US: Durable Goods 

Orders Jan, FHFA HPI 

Dec & Q4 

During Week: Germany Import Prices Jan, UK Nationwide House Prices Feb 

1 March 2 March 3 March 4 March 5 March 

Eurozone: Labour Jan, 

PMI Man (Final) Feb 

UK: CIPS Man Feb, Net 

Consumer Credit Jan, 

Mortgage Approvals Jan 

Italy: GDP 2009 

Sweden: GDP Q4 

Norway: Retail Sales Jan 

Switz: PMI Feb 

US: Personal Inc & Exp 

Jan, ISM Man Feb, 

Construction Spending 

Jan, Help Wanted Feb 

Canada: GDP Dec & Q4 

Japan: Labour Jan, 

Household Consumption 

Jan 

Australia: Retail Sales 

Jan, RBA Rate 

Announcement 

Eurozone: HICP (Flash) 

Feb, PPI Jan 

Italy: CPI Feb 

Switz: GDP Q4 

US: Vehicle Sales Feb 

Canada: BoC Rate 

Announcement 

Australia: GDP Q4 

Eurozone: Retail Sales 

Jan, PMI Services (Final) 

Feb 

UK: CIPS Services Feb 

US: ISM Services Feb, 

Challenger Layoffs Feb, 

ADP Employment Change 

Feb, Beige Book 

Australia: Trade Balance 

Jan 

Eurozone: GDP (2 nd Est) 

Q4, ECB Rate Ann & 

Press Conference 

UK: BoE Rate Ann, BoE 

Asset Purchase Target 

Mar 

Neths: CPI Feb 

US: Non-Farm 

Productivity (Final) Q4, 

ULC (Final) Q4, Factory 

Orders Jan, Pending 

Home Sales Jan 

During Week: Germany Retail Sales Jan, Import Prices Jan, UK Halifax House Prices Feb 


Japan: M2 Feb, Current 

Account Jan 

Germany: Industrial 

Production Jan 

France: BoF Survey (Prel) 

Feb 

Japan: Leading indicator 

Jan 

Australia: NAB Business 

Confidence Feb, Westpac 


Mar 

UK: RICS House Price 

Balance Jan, BRC Retail 

Sales Monitor Feb, Trade 

Balance Jan 

France: Trade Balance 

Jan 

Switz: CPI Feb 

Japan: CGPI Feb, 

Machinery Orders Jan 

UK: IP Jan 

Germany: Trade Balance 

Jan, CPI Feb, HICP Feb 

France: IP Jan 

Italy: IP Jan, GDP (Final) 

Q4 

Spain: Retail Sales Jan 

Belgium: GDP (Rev) Q4 

Sweden: IP Jan, AMV 

Unemployment Feb 

Norway: CPI Feb, PPI Feb 

US: Wholesale Trade Jan, 

Treasury Statement Feb 

Japan: GDP (Rev) Q4 

Australia: Labour Feb 

Eurozone: ECB Monthly 

Bulletin 

Germany: LCI Q4 

France: Budget Balance 

Jan, Non-Farm Payrolls 

(Final) Q4 

Sweden: CPI Feb 

Switz: SNB Rate 

Announcement 

US: Trade Balance Jan 

During Week: Germany WPI Feb 


Eurozone: Employment 

Q4 

UK: Rightmove House 

Prices Mar 

US: Empire State Survey 

Mar, Industrial Production 

Feb, TICS Data Jan, 

NAHB Housing Market 

Index Mar 


Australia: RBA MPC 

Minutes 

Eurozone: HICP Feb, 

EU25 New Car Reg Feb 

UK: DCLG House Prices 

Jan 

Germany: ZEW Survey 

Mar 

France: CPI Feb 

Italy: CPI Feb 

Neths: IP Jan, Retail 

Sales Jan 

US: Import Prices Feb, 

Housing Starts Feb, 

FOMC Rate Ann 

Japan: BoJ Rate 

Announcement 

Eurozone: LCI Q4 

UK: BoE MPC Minutes, 

Labour Feb 

US: PPI Feb 

World: Opec Meeting 

Japan: CPI Tokyo Feb, 

CPI National Jan, IP Jan, 

Housing Starts Jan, Retail 

Sales Jan 

Eurozone: HICP Jan, 

Eurocoin Feb 

UK: GfK Consumer Conf 

Feb, GDP (2 nd Est) Q4 

Germany: States’ CoL 

Feb, HICP (Flash) Feb 

Italy: PPI Jan 

Spain: HICP (Prel) Feb 

Sweden: Retail Sales Jan 

Switz: KOF Leading 

Indicator Feb 

US: GDP (2 nd Release) 

Q4, Chicago PMI Feb, 

Existing Home Sales Jan, 

UoM Sentiment (Final) Feb 

UK: PPI Feb 

Germany: Factory Orders 

Jan 

Spain: Industrial 


Norway: Industrial 


US: Labour Feb, 

Consumer Credit Jan 

Eurozone: Industrial 


France: Current Account 

Jan 

Spain: CPI Feb 

US: Retail Sales Feb, UoM 

Sentiment (Prel) Mar, 

Business Inventories Jan 

Canada: Labour Feb 

Eurozone: Governing Germany: PPI Feb 

Council Meeting (No France: Non-Farm 

Rate Announcement), Payrolls (Final) Q4, Wages 

Current Account Jan, (Final) Q4 

Trade Balance Jan Italy: Industrial Production 

UK: PSNCR Feb, PSNB Jan 

Feb 

Sweden: PPI Jan 

Italy: EU Trade Bal Jan Canada: CPI Feb 

Sweden: Labour (nsa) Feb 

Neths: Consumer 

Confidence Mar, Labour 

Feb 

US: CPI Feb, Leading 

Indicators Feb, Philly Fed 

Mar, Current Account Q4 

Release dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions 

57 


Treasury and SAS Issuance Calendar 

Daily update onto https://globalmarkets.bnpparibas.com, Tools & Apps, Analytical Tools, Market Calendar, Government Flows 

In the pipeline - Treasuries: 

Spain: To issue a new syndicated 15y Obligacion in Feb (exact date to be confirmed) 

France: To consider a dollar-denominated bond issue in 2010 

Germany: Reserves the right to issue foreign currency bonds, as market conditions allow 

Greece: Plans to issue a 10y bond via a syndicated deal (EUR 3-5bn) (not to be held before the end of February at the earliest) 

Poland: Plans to sell at least USD 1bn of dollar-denominated bonds (maturity shorter than 10y) in Q1 

UK: Gilt 4% Jan 2060 to be tapped (syndication) in the period 17-25 February 

Finland: To issue new 5y & 10y RFGBs and to tap 4 to 5 auctions with possibly 2-3 in H1 (details announced a week prior to auctions). 

Neths: To issue a new 30y DSL (DDA, before the summer) - No plans for inflation-linked bonds - May issue a dollar-denominated bond (in '10) 

Czech Rep.: Issue in euros possible and a dollar-denominated bond is under consideration 

Denmark: To issue a EUR 5y loan (EUR 1-2bn) in H1 '10 - To open new 5y & 10y DGBs H2 '10 - To launch a T-bill programme on 25 Feb 

Slovak Rep.: Plans an up to EUR 1.5bn syndicated 10y before the end of Q1 

During the week: 

UK: Index-Linked Gilt 0.75% Nov 2047 (mini tender) 

FHLB: February Global Notes auction details to be announced on Wed 17 Feb 

Date Day Closing Country Issues Details BNPP forecasts 

Local GMT 

12/02 Fri 12:00 03:00 Japan Bonds (buyback) 

10:55 09:55 Italy BTP 3% Apr 2015 EUR 2.5-3.5bn 

BTP 3.75% Aug 2021 

EUR 1-2bn 

BTP 5% Mar 2025 

EUR 2-2.5bn 

16/02 Tue 12:00 03:00 Japan JGB Dec 2014 JPY 2.4tn 

10:00 10:00 Ireland Gilt 4% Jan 2014 

Gilt 4.5% Apr 2020 

12 Feb EUR 1-1.5bn 

Denmark DGB 4% Nov 2019 DKK 5bn 

12:00 17:00 Canada Repurchase of 8 Cash Mgt Bonds (Jun-10-Jun-11) CAD 1bn 

17/02 Wed 11:00 10:00 Germany Schatz Mar 2012 (new) EUR 7bn 

10:30 10:30 Portugal OT 3.2% Apr 2011 (reverse auction) EUR 0.5bn 

12:00 17:00 Canada CAN 30-year 11 Feb 

18/02 Thu 10:30 09:30 Spain Obligacion 4.2% Jan 2037 15 Feb EUR 2-3bn 

10:50 09:50 France BTANs 2- &/or 5-year 12 Feb EUR 7-9bn 

11:50 10:50 France OATis , OATeis, BTANeis 12 Feb 

11:00 10:00 Sweden ILB 3.5% Dec 2015 (# 3105) SEK 0.5bn 

19/02 Fri 12:00 03:00 Japan Auction for enhanced liquidity 12 Feb JPY 0.6tn 

22/02 Mon 12:00 11:00 Belgium OLO 15 Feb 

Slovak Rep. SLOVGB 3.5% Feb 2016 (#213) (new) EUR 0.3-0.5bn 

13:00 18:00 US TIPS 30-year (new) 18 Feb USD 12bn 

23/02 Tue 12:00 03:00 Japan JGB 20-year 16 Feb JPY 1.1tn 

10:55 09:55 Italy CTZ 18 Feb 

Neths DSLs (off-the-run facility) 17 Feb EUR 1bn 

13:00 18:00 US Notes 2-year (new) 18 Feb USD 44bn 

24/02 Wed 10:55 09:55 Italy BTPeis 18 Feb 

11:00 10:00 Sweden T-bonds 17 Feb 

10:30 10:30 Portugal OTs (to be confirmed) 18 Feb 

10:30 10:30 UK Gilt 3.75% Sep 2019 16 Feb 

Denmark DGB 4% Nov 2010 (buyback) 

12:00 17:00 Canada CANi 30-year 18 Feb 


25/02 Thu 12:00 03:00 Japan JGB 2-year 18 Feb JPY 2.6tn 

10:55 09:55 Italy 3 & 10y BTPs and CCT 18 Feb EUR 7-9bn 


02/03 Tue 12:00 03:00 Japan JGB 10-year 23 Feb JPY 2.2tn 

10:30 10:30 UK Gilt 4.25% Sep 2039 23 Feb 

03/03 Wed 11:00 10:00 Germany OBL 2.5% Feb 2015 (Series 156) EUR 5bn 

10:30 10:30 UK Gilt 2.75% Jan 2015 23 Feb 

12:00 17:00 Canada CAN 5-year 25 Feb 

04/03 Thu 12:00 03:00 Japan Auction for enhanced liquidity 25 Feb JPY 0.6tn 

10:30 09:30 Spain Bono 5-year (2015) (new) 1 Mar 

10:50 09:50 France OATs 10- &/or 15- &/or 30-year 26 Feb 

Sources: Treasuries, BNP Paribas 



58 


Next week's T-Bills Supply 

Date Country Issues Details 

12/02 UK T-Bills Mar 2010 GBP 1bn 

T-Bills May 2010 

GBP 2bn 

T-Bills Aug 2010 

GBP 1.5bn 

15/02 France BTF May 2010 EUR 3.5bn 

BTF Aug 2010 

EUR 2bn 

BTF Feb 2011 

EUR 2.5bn 

Germany Bubills Aug 2010 (new) EUR 5bn 

Neths DTC Apr 2010 EUR 1-2.5bn 

DTC May 2010 

EUR 0.5-1.5bn 

DTC May 2010 

EUR 0.5-1.5bn 

DTC Dec 2010 

EUR 1-2.5bn 

16/02 Japan T-Bills Feb 2011 JPY 2.5tn 

Spain Letras Feb 2011 15 Feb 

Letras Aug 2011 

15 Feb 

Belgium TC May 2010 12 Feb 

TC Feb 2011 

12 Feb 

US T-Bills May 2010 USD 25bn 

T-Bills Aug 2010 (new) USD 28bn 

FHLMC Bills 3-month & 6-month 12 Feb 

FHLB Discount Notes 

17/02 Japan T-Bills May 2010 JPY 5.7tn 

Sweden T-Bills May 2010 SEK 15bn 

Portugal BT Feb 2011 (new) EUR 1bn 

US T-Bills 4-week 16 Feb 

FNMA Bills 3-month & 6-month 12 Feb 

18/02 FHLB Discount Notes 

19/02 UK T-Bills 12 Feb 

Sources: Treasuries, BNP Paribas 

Comments and charts 

• EGB gross supply increases slightly to EUR 20bn in 

the week ahead from EUR 19bn in the past week. In 10y 

duration-adjusted terms, it falls to EUR 9.6bn from EUR 

16.8bn as the bulk of supply will take place in the 2y-5y 

sector. 

• Germany will launch a new Schatz Mar-12 for EUR 

7bn on Wednesday. On Tuesday, Ireland will re-open 

Gilts Jan-14 & Apr-20 for an expected size of EUR 1- 

1.5bn. Spain will tap the longer end of the curve with the 

re-opening of SPGB Jan-37 for an expected amount of 

around EUR 2bn on Thursday. On the same day, 

France will conduct its mid-month BTAN auctions and 

inflation-linked bonds auctions too. More details will be 

announced on Friday 12 February. 

• Outside the eurozone, Japan, Denmark, Canada 

and Sweden will also issue paper in the week ahead. 

Next week's Eurozone Redemptions 

Date Country Details Amount 

15/02 Italy BOT 12mth EUR 8.2bn 

15/02 Neths DTC EUR 5.8bn 

15/02 Ireland T-Bills EUR 1.8bn 

17/02 Germany Bubills EUR 7.0bn 

18/02 France BTF EUR 11.0bn 

18/02 Belgium TC EUR 5.2bn 

19/02 Spain Letras EUR 11.7bn 

Total Eurozone Short-term Redemption EUR 50.7bn 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

-25 

-30 

20 

18 

16 

14 

12 

10 

25 

8 

6 

4 

2 

0 

Chart 1: Investors’ Net Cash Flows 

(EUR bn, 10y equivalent) 

Net Investors' Cash Flows 

(EUR bn , 10y equivalent) 

Week of Feb 15th Week of Feb 22nd Week of Mar 1st Week of Mar 8th 

Chart 2: EGB Gross Supply Breakdown by 

Country (EUR bn, 10y equivalent) 

Germany Italy Portugal Belgium 

France Spain Netherlands Austria 

Finland Greece Ireland 


Chart 3: EGB Gross Supply Breakdown by 

Maturity (EUR bn, 10y equivalent) 

EGBs Gross Supply (EUR bn, 10y equivalent) 

20 

2-3-YR 5-7-YR 10-YR >10-YR 

15 

10 

5 

0 


All Charts Source: BNP Paribas 



59 


Central Bank Watch 

Interest Rate 

EUROZONE 

Current 

Rate 

Minimum Bid Rate 1.00 

US 

Fed Funds Rate 0 to 0.25 

Discount Rate 0.50 

JAPAN 

Call Rate 0.10 

Basic Loan Rate 0.30 

UK 

Bank Rate 0.5 

DENMARK 

Lending Rate 1.05 

SWEDEN 

Repo Rate 0.25 

NORWAY 

Sight Deposit Rate 1.75 

SWITZERLAND 

3 Mth LIBOR Target 

Range 

CANADA 

0.0-0.75 

Overnight Rate 0.25 

Bank Rate 0.50 

AUSTRALIA 

Cash Rate 3.75 

CHINA 

1Y Bank Lending 

Rate 

BRAZIL 

5.31% 

Selic Overnight Rate 8.75% 


Date of Last 

Change 

-25bp 

(7/5/09) 

-75bp 

(16/12/08) 

-75bp 

(16/12/08) 

-20bp 

(19/12/08) 

-20bp 

(19/12/08) 

-50bp 

(5/3/09) 

-10bp 

(14/1/10) 

-25bp 

(2/7/09) 

+25bp 

(16/12/09) 

-25bp 

(12/3/09) 

-25bp 

(21/4/09) 

-25bp 

(21/4/09) 

+25bp 

(1/12/09) 

-27bp 

(22/12/08) 

-50bp 

(22/7/09) 

Next Change in 

Coming 6 Months 

No Change 

No Change 

+25bp 

(Mar/May) 

No Change 

No Change 

No Change 

-5bp 

(Feb/Mar) 

+25bp 

(1/7/10) 

+25bp 

(24/3/10) 

No Change 

No Change 

No Change 

+25bp 

(6/4/10) 

+27bp 

(Q3) 

No Change 

Comments 

In early March, the ECB will announce the details of its exit 

strategy from unconventional measures for Q2. We do not expect 

any conventional tightening, i.e. rises in the refi rate, in 2010. 

The FOMC will end its purchases of mortgage-backed securities 

and agency debt by 31 March. It will maintain the funds rate at 0 

to 0.25% for an extended period while the ending of extreme 

liquidity initiatives in the next few weeks will foreshadow a 

probable rise in the discount rate. 

With the BoJ forecasting negative CPI inflation through H1 of FY 

2011, we expect its ultra-low interest rate policy to remain in 

place for some time. 

The latest Inflation Report highlighted that the first interest rate 

hike is a very long way off and there is a greater risk of more 

quantitative easing. 

We expect the lending rate to fall further. The timing will depend 

on foreign exchange reserve developments. 

Given a further improvement in the economy, the Riksbank now 

intends to deliver its first hike in the summer or early autumn. 

We expect it in July. However, if the stress in financial markets 

intensifies, the Riksbank is likely to wait until September. 

The Norges Bank is now more cautious and uncertain about 

external developments ahead. Economic conditions warrant 

further rate hikes, but an increase in March will be postponed if 

stress in financial markets intensifies and uncertainty increases. 

By relaxing its commitment to prevent currency appreciation the 

SNB is de facto tightening policy and has kept the ball rolling 

towards an eventual increase in rates. The strong franc remains 

the biggest hurdle to the first hike. 

The BoC committed to keep rates unchanged until mid-2010, 

conditional on the outlook for inflation. While domestic conditions 

are stronger than in the US, the BoC is unlikely to begin raising 

interest rates well ahead of the Fed. 

The RBA surprised by leaving rates unchanged in February and 

signalled that it wants to assess the impact of previous 

tightening. This favours waiting until April before hiking again. 

The latest 50bp RRR hike is likely to mark the beginning of a 

series of measures to tighten policy. The first hike in key policy 

rates is expected in Q3 when the CPI rate is forecast to exceed 

3%. However, given the authorities' rising caution about excess 

credit, an earlier move cannot be ruled out. 

The BCB frontloaded monetary easing by cutting rates by 

500bp. Given signs of a stabilisation of the Brazilian economy 

and an improvement in global conditions, we expect the BCB to 

remain on hold for a long period. 

Change since our last weekly in bold and italics 

For the full EMK Central Bank Watch please see our Local Markets Mover 



60 


Economic Forecasts 

GDP 

Year 2009 

2010 

(% y/y) ’08 ’09 (1) ’10 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US 0.4 -2.4 2.8 -3.3 -3.8 -2.6 0.1 2.4 3.1 3.1 2.4 

Eurozone 0.5 -3.9 1.3 -5.0 -4.8 -4.0 -1.6 1.2 1.6 1.3 0.9 

Japan -1.2 -5.3 1.2 -8.9 -5.8 -5.1 -1.7 1.7 1.2 0.9 0.8 

World (2) 3.2 -0.8 3.9 -2.2 -1.9 -0.8 1.5 4.0 4.2 3.8 3.7 

Industrial Production 

Year 

2009 

2010 

(% y/y) ’08 ’09 (1) ’10 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US -2.2 -9.7 4.1 2.0 5.6 4.6 4.2 4.1 4.4 4.6 4.4 

Eurozone -1.7 -14.4 3.3 -17.7 -18.2 -15.0 -6.2 4.2 5.5 2.5 1.0 

Japan -3.4 -22.3 15.6 -34.6 -27.8 -20.1 -4.7 28.1 19.2 11.5 6.9 

Unemployment Rate 

Year 

2009 2010 

(%) ’08 ’09 (1) ’10 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US 5.8 9.3 10.1 7.0 8.2 9.3 10.0 10.2 10.1 10.2 10.0 

Eurozone 7.6 9.4 10.4 8.8 9.3 9.6 9.9 10.2 10.4 10.6 10.6 

Japan 4.0 5.1 5.3 4.4 5.2 5.5 5.3 5.3 5.3 5.3 5.2 

CPI 

Year 

2009 

2010 

(% y/y) ’08 ’09 ’10 (1) Q1 Q2 Q3 Q4 Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US 3.8 -0.4 2.5 0.0 -1.2 -1.6 1.4 2.8 2.9 2.4 2.0 

Eurozone 3.3 0.3 1.3 1.0 0.2 -0.4 0.4 1.1 1.1 1.3 1.6 

Japan 1.4 -1.4 -1.4 -0.1 -1.0 -2.2 -2.1 -1.4 -1.8 -1.7 -0.6 

Current Account 

(% GDP) ’08 

Year 

’09 (1) ’10 (1) General Government 

(% GDP) 

’08 

Year 

’09 (1) ’10 (1) 

US -4.9 -3.5 -4.4 US (4) -3.1 -11.0 -10.2 

Eurozone -1.6 -0.8 -0.8 Eurozone -1.9 -6.5 -6.9 

Japan 3.2 2.7 3.0 Japan -6.7 -11.3 -9.5 

Interest Rate Forecasts 

Interest Rate (3) 

Year 

2009 

2010 

(%) ’08 ’09 ’10 (1) Q1 Q2 Q3 Q4 Q1 (1) Q2 (1) Q3 (1) Q4 (1) 

US 

Fed Funds Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 

3-month Rate 1.43 0.25 0.45 1.19 0.60 0.29 0.25 0.30 0.30 0.40 0.45 

2-year yield 0.77 1.14 1.30 0.80 1.12 0.95 1.14 1.00 0.90 1.15 1.30 

10-year yield 2.22 3.84 3.75 1.67 2.56 2.31 2.68 3.25 3.00 3.30 3.75 

2y/10y Spread (bp) 145 270 245 87 144 136 154 225 210 215 245 

Eurozone 

Refinancing Rate 0.00 0.00 1.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 

3-month Rate 2.50 1.00 1.10 1.50 1.00 1.00 1.00 0.60 0.60 0.65 1.10 

2-year yield 1.74 1.37 1.50 1.23 1.38 1.28 1.37 1.25 1.25 1.50 1.50 

10-year yield 2.35 2.45 3.50 2.24 2.51 2.42 2.45 3.10 2.90 3.20 3.50 

2y/10y Spread (bp) 61 108 200 101 113 114 108 185 165 170 200 

Japan 

O/N Call Rate 0.00 0.00 0.10 0.00 0.00 0.00 0.00 0.10 0.10 0.10 0.10 

3-month Rate 0.10 0.10 0.35 0.10 0.10 0.10 0.10 0.45 0.45 0.40 0.35 

2-year yield 0.40 0.15 0.45 0.41 0.32 0.25 0.15 0.20 0.25 0.35 0.45 

10-year yield 0.71 0.47 1.70 0.78 0.71 0.60 0.47 1.40 1.50 1.60 1.70 

2y/10y Spread (bp) 31 32 125 37 39 35 32 120 125 125 125 

Footnotes: (1) Forecast (2) Country weights used to construct world growth are those in the IMF World Economic Outlook Update 

October 2009 (3) End Period (4) Fiscal year Figures are y/y percentage change unless otherwise indicated 


Market Economics / Interest Rate Strategy 12 February 2010 


61 


FX Forecasts* 

USD Bloc Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

EUR/USD 1.40 1.36 1.32 1.27 1.30 1.32 1.34 1.36 1.36 1.36 1.36 

USD/JPY 93 97 100 108 110 115 120 118 116 114 112 

USD/CHF 1.04 1.05 1.10 1.16 1.15 1.15 1.16 1.15 1.18 1.18 1.19 

GBP/USD 1.59 1.49 1.39 1.31 1.38 1.42 1.46 1.49 1.49 1.51 1.53 

USD/CAD 1.07 1.09 1.13 1.15 1.11 1.09 1.06 1.04 1.02 1.05 1.08 

AUD/USD 0.86 0.85 0.84 0.84 0.87 0.90 0.92 0.92 0.92 0.93 0.92 

NZD/USD 0.72 0.70 0.68 0.67 0.66 0.66 0.68 0.69 0.72 0.69 0.67 

USD/SEK 7.07 7.35 7.42 7.64 7.38 7.27 7.16 6.84 6.76 6.91 7.06 

USD/NOK 5.79 6.10 6.14 6.30 6.15 5.91 5.67 5.51 5.44 5.51 5.59 

EUR Bloc Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

EUR/JPY 130 132 132 137 143 152 161 160 158 155 152 

EUR/GBP 0.88 0.91 0.95 0.97 0.94 0.93 0.92 0.91 0.91 0.90 0.89 

EUR/CHF 1.45 1.43 1.45 1.47 1.49 1.52 1.55 1.57 1.60 1.61 1.62 

EUR/SEK 9.90 10.00 9.80 9.70 9.60 9.60 9.60 9.30 9.20 9.40 9.60 

EUR/NOK 8.10 8.30 8.10 8.00 8.00 7.80 7.60 7.50 7.40 7.50 7.60 

EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 

Central Europe Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

USD/PLN 2.80 3.09 3.30 3.19 3.15 3.03 2.84 2.94 2.79 2.72 2.65 

EUR/CZK 26.0 26.2 26.2 25.8 25.2 25.5 25.0 24.7 24.3 24.0 23.9 

EUR/HUF 255 280 278 265 260 255 250 260 255 255 255 

USD/ZAR 8.00 8.20 8.30 8.50 8.40 8.50 8.40 8.20 7.80 7.80 7.50 

USD/TRY 1.48 1.53 1.58 1.55 1.60 1.58 1.55 1.50 1.43 1.45 1.45 

EUR/RON 4.30 4.30 4.40 4.35 4.40 4.30 4.20 4.00 3.90 3.80 3.75 

USD/RUB 30.51 31.84 30.59 29.42 28.19 27.10 26.02 25.82 25.29 25.88 26.84 

EUR/PLN 3.92 4.20 4.35 4.05 4.10 4.00 3.80 4.00 3.80 3.70 3.60 

USD/UAH 8.9 8.4 8.6 8.7 8.5 8.3 7.9 7.5 5.5 5.3 5.4 

EUR/RSD 92 105 95 93 90 87 85 87 90 86 87 

Asia Bloc Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

USD/SGD 1.37 1.36 1.36 1.34 1.33 1.32 1.31 1.30 1.30 1.30 1.30 

USD/MYR 3.31 3.28 3.26 3.20 3.18 3.15 3.13 3.10 3.10 3.10 3.10 

USD/IDR 9000 8800 8700 8600 8500 8400 8300 8200 8100 8000 8000 

USD/THB 32.70 32.50 32.30 32.00 31.70 31.50 31.30 31.00 31.00 31.00 31.00 

USD/PHP 45.50 45.00 44.50 44.00 43.50 43.00 42.70 42.50 42.00 42.00 42.00 

USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 

USD/RMB 6.83 6.83 6.72 6.62 6.57 6.52 6.47 6.42 6.37 6.32 6.27 

USD/TWD 30.70 30.50 30.30 30.00 29.70 29.50 29.30 29.00 29.00 29.00 29.00 

USD/KRW 1120 1090 1070 1050 1030 1020 1010 1000 1000 1000 1000 

USD/INR 45.00 44.00 43.00 42.00 41.00 40.00 39.00 38.00 38.00 38.00 38.00 

USD/VND 17300 17000 16700 16500 16400 16300 16200 16000 16000 16000 16000 

LATAM Bloc Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

USD/ARS 3.89 4.20 4.10 4.20 4.25 4.35 4.45 4.50 4.60 4.70 4.80 

USD/BRL 1.75 1.90 1.80 1.75 1.75 1.80 1.80 1.85 1.85 1.85 1.85 

USD/CHL 505 530 525 530 530 535 535 535 540 540 540 

USD/MXN 13.00 13.75 13.10 12.50 12.50 12.50 12.50 12.50 12.25 12.25 12.00 

USD/COP 1900 2100 2050 2000 2000 2050 2100 2100 2150 2150 2200 

USD/VEF priority (1) 2.59 2.59 2.59 2.59 2.59 2.59 2.59 2.59 5.30 5.30 5.30 

USD/VEF oil (1) 4.60 4.60 4.60 4.60 4.60 4.60 4.60 4.60 8.80 8.80 8.80 

Others Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 

USD Index 79.19 81.91 84.85 88.70 86.73 86.04 85.28 83.79 83.46 83.47 83.46 

*End Quarter 

(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 


Foreign Exchange Strategy 12 February 2010 



62

Market Coverage 

Market Economics 

Paul Mortimer-Lee Global Head of Market Economics London 44 20 7595 8551 paul.mortimer-lee@uk.bnpparibas.com 

Ken Wattret Chief Eurozone Market Economist London 44 20 7595 8657 kenneth.wattret@uk.bnpparibas.com 

Luigi Speranza Head of Inflation Economics, Eurozone, Italy London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.com 

Alan Clarke UK London 44 20 7595 8476 alan.clarke@uk.bnpparibas.com 

Eoin O’Callaghan Inflation, Eurozone, Switzerland, Ireland London 44 20 7595 8226 eoin.ocallaghan@uk.bnpparibas.com 

Gizem Kara Scandinavia London 44 20 7595 8783 gizem.kara@uk.bnpparibas.com 

Dominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.com 

Brian Fabbri Chief Economist North America New York 1 212 841 3633 brian.fabbri@americas.bnpparibas.com 

Julia Coronado Senior US Economist New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.com 

Anna Piretti US, Canada New York 1 212 841 3663 anna.piretti@americas.bnpparibas.com 

Ryutaro Kono Chief Economist Japan Tokyo 81 3 6377 1601 ryutaro.kono@japan.bnpparibas.com 

Hiroshi Shiraishi Japan Tokyo 81 3 6377 1602 hiroshi.shiraishi@japan.bnpparibas.com 

Azusa Kato Japan Tokyo 81 3 6377 1603 azusa.kato@japan.bnpparibas.com 

Richard Iley Head of Asia Economics Hong Kong 852 2108 5104 richard.iley@asia.bnpparibas.com 

Dominic Bryant Asia, Australia Hong Kong 852 2108 5105 dominic.bryant@asia.bnpparibas.com 

Chan Kok Peng Chief Economist Singapore 65 6210 1946 kokpeng.chan@asia.bnpparibas.com 

Michal Dybula Central & Eastern Europe Warsaw 48 22 697 2354 michal.dybula@pl.bnpparibas.com 

Rafael de la Fuente Chief Economist Latin America ex Brazil New York 1 212 841 3637 rafael.delafuente@americas.bnpparibas.com 

Italo Lombardi Latin America New York 1 212 841 6599 italo.lombari@americas.bnpparibas.com 

Alexandre Lintz Latin America São Paulo 55 11 3841 3418 alexandre.lintz@br.bnpparibas.com 

Diego Donadio Latin America São Paulo 55 11 3841 3421 diego.donadio@@br.bnpparibas.com 

Interest Rate Strategy 

Cyril Beuzit Global Head of Interest Rate Strategy London 44 20 7595 8639 cyril.beuzit@uk.bnpparibas.com 

Patrick Jacq Europe Strategist Paris 33 1 4316 9718 patrick.jacq@bnpparibas.com 

Hervé Cros Chief Inflation Strategist London 44 20 7595 8419 herve.cros@uk.bnpparibas.com 

Shahid Ladha Inflation Strategist London 44 20 7 595 8573 shahid.ladha@uk.bnpparibas.com 

Alessandro Tentori Chief Alpha Strategy Europe London 44 20 7595 8238 alessandro.tentori@uk.bnpparibas.com 

Matteo Regesta Europe Alpha Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.com 

Ioannis Sokos Europe Alpha Strategist London 44 20 7595 8671 ioannis.sokos@uk.bnpparibas.com 

Bülent Baygün Head of Interest Rate Strategy US New York 1 212 471 8043 bulent.baygun@americas.bnpparibas.com 

Sergey Bondarchuk US Strategist New York 1 212 841 2026 sergey.bondarchuk@americas.bnpparibas.com 

Suvrat Prakash US Strategist New York 1 917 472 4374 suvrat.prakash@americas.bnpparibas.com 

Anish Lohokare MBS Strategist New York 1 212 841 2867 anish.lohokare@americas.bnpparibas.com 

Koji Shimamoto Head of Interest Rate Strategy Japan Tokyo 81 3 6377 1700 koji.shimamoto@japan.bnpparibas.com 

Takafumi Yamawaki Japan Strategist Tokyo 81 3 6377 1705 takafumi.yamawak@bnpparibas.com 

Tomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1702 Tomohisa.fujiki@japan.bnpparibas.com 

Christian Séné Technical Analyst Paris 33 1 4316 9717 christian.séné@bnpparibas.com 

FX Strategy 

Hans Redeker Global Head of FX Strategy London 44 20 7595 8086 hans-guenter.redeker@uk.bnpparibas.com 

Ian Stannard FX Strategist London 44 20 7595 8086 ian.stannard@uk.bnpparibas.com 

James Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.com 

Sebastien Galy FX Strategist New York 1 212 841 2492 sebastien.galy@bnpparibas.com 

Andy Chaveriat Technical Analyst New York 1 212 841 2408 andrew.chaveriat@americas.bnpparibas.com 

FX & Interest Rate Strategy 

Drew Brick Head of FX & IR Strategy Asia Singapore 65 6210 3262 Drew.brick@asia.bnpparibas.com 

Chin Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 chin.thio@asia.bnpparibas.com 

Robert Ryan FX & IR Asia Strategist Singapore 65 6210 3314 robert.ryan@asia.bnpparibas.com 

Gao Qi FX & IR Asia Strategist Singapore 65 6210 3264 gao.qi@asia.bnpparibas.com 

Shahin Vallée Head of FX & IR Strategy CEEMEA London 44 20 7595 8306 shahin.vallee@uk.bnpparibas.com 

Elisabeth Gruié FX & IR CEEMEA Strategist London 44 20 7595 8492 elisabeth.gruie@uk.bnpparibas.com 

Bartosz Pawlowski FX & IR CEEMEA Strategist London 44 20 7595 8195 Bartosz.pawlowski@uk.bnpparibas.com 

For Production and Distribution, please contact: 

Ann Aston, Market Economics, London. Tel: 44 20 7595 8503 Email: ann.aston@uk.bnpparibas.com 

Danielle Catananzi, Interest Rate Strategy, London. Tel: 44 20 7595 4418 Email: danielle.catananzi@uk.bnpparibas.com 

Derek Allassani, FX Strategy, London. Tel: 44 20 7595 8486 Email: derek.allassani@uk.bnpparibas.com 

Martine Borde, Market Economics/Interest Rate Strategy, Paris. Tel: 33 1 4298 4144 Email martine.borde@bnpparibas.com 

Editors 

Amanda Grantham-Hill, Interest Rate Strategy/Market Economics, London. Tel: 44 20 7595 4107 Email: amanda.grantham-hill@bnpparibas.com 

Nick Ashwell, FX/Market Economics, London. Tel: 44 20 7595 4120 Email: nick.ashwell@uk.bnpparibas.com 

BNP Paribas Global Fixed Income Website 

www.globalmarkets.bnpparibas.com 

Bloomberg 

Fixed Income Research BPCM Market Economics BPEC 

Interest Rate Strategy BPBS Forex Strategy BPFR 

63

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Certain countries within the European Economic Area: 

This report is solely prepared for professional clients. It is not intended for retail clients and should not be passed on to any such persons. 

This report has been approved for publication in the United Kingdom by BNP Paribas London Branch. BNP Paribas London Branch is 

authorised by CECEI and AMF and authorised and subject to limited regulation by the Financial Services Authority. Details of the extent of our 

authorisation and regulation by the Financial Services Authority are available from us on request. 

This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the 

CECEI and the AMF, whose head office is 16, Boulevard des Italiens 75009 Paris, France. 

This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Paribas Niederlassung Frankfurt am Main, 

regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). 

United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate of BNP Paribas 

that is not registered as a US broker-dealer to US major institutional investors only. BNP Paribas Securities Corp., a subsidiary of BNP Paribas, 

is a broker-dealer registered with the Securities and Exchange Commission and a member of the National Association of Securities Dealers, the 

New York Stock Exchange and other principal exchanges. BNP Paribas Securities Corp. accepts responsibility for the content of a report 

prepared by another non-US affiliate only when distributed to US persons by BNP Paribas Securities Corp. 

Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch, or by a subsidiary or 

affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of 

the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited, Tokyo Branch, a subsidiary of BNP 

Paribas, is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the 

Japan Securities Dealers Association. BNP Paribas Securities (Japan) Limited, Tokyo Branch accepts responsibility for the content of a report 

prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo 

Branch. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of 

Japan. 

Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in 

Paris, France. BNP Paribas Hong Kong Branch is regulated as a Registered Institution by Hong Kong Monetary Authority for the conduct of 

Advising on Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance. 

© BNP Paribas (2010). All rights reserved.

Market Mover - BNP PARIBAS - Investment Services India

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