Weekly Watch
Q3 data still supportive, but with differences
Q3 data flow is diverging so far across major regions. In the US, the most recent readings confirm the moderation in the path of expansion since the end of Q2. The whole US yield curve has witnessed this outcome, with bonds rallying over the last few weeks. In Europe, the pictures is slightly more positive, with recent releases still showing a positive tone. Nonetheless, the recent dynamism seems difficult to sustain in H2 as the improvement has been mainly driven by net exports instead of by domestic demand while the fiscal tightenig is also underway. Moreover, recent data confirms the gap between Germany and the remainder of the Eurozone. In this context, the German exports for June and the FOMC meeting will be of special interest next week.

Madrid, 6 August 2010

Economics Analysis
Financial Scenarios Sonsoles Castillo (+34) 91 374 44 32 Marcos Dal Bianco +34 91 538 63 49 María Martínez Álvarez +34 91 537 66 83 Ignacio González-Panizo +34 91 538 63 50

The monetary cycle continues with a new guest

Victoria de Zuriarrain +34 91 537 7584 Chart 1

In emerging economies the cycle of monetary tightening continued this week slow but steady, with Peru rising its key rates by 50 pbs and Indonesia reinforcing its hawkish tone. A new guest, however, has emerged over the last few weeks: the rise in the price of commodities. We do not expect this to alterate the pace of tightening as it seems to be related more to cyclical factors rather than to structural swings.
Chart 2

USA: Personal income and personal spending (m/m; sa)
2 1.5 1 0.5 0 -0.5 -1 -1.5

Commodity prices (Jan 1, 2010=100)
145 135 125 115 105 95 85 75 Feb-10 Mar-10 Jan-10



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

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

Personal income

Personal spending

CX Commodity Index Oil-Brent
Source: Datastream and BBVA Research


Source: Datastream and BBVA Research

Highlights Calendar Markets Data Market performance continues to respond to two factors: i) the difference which still exists in the growth profiles between the USA and other OECD economies. The slowdown in US data (confidence, income and personal consumption indicators are falling, fresh surges in requests for unemployment benefits) is a contrast to eurozone data which, although provides no reason for rejoicing, is continuing to improve (acceleration in Industrial Production data and there has even been a rise in growth in countries such as Spain, which recorded 0.2% for the quarter); and ii) a context of global risk premiums which are still finding support in emerging regions (fresh interest rate increases in Peru) and especially the maintenance of an upbeat tone in companys’ earnings. Against this background, in general the trend in equity markets remains supported, although there is still caution in terms of breaching new highs. In any case, part of this equities support continues to stem from the fact that interest rates still run the risk of reaching new lows in response to this US-focused risk. It must be noted that this trend has recently been having a knock-on effect on the rates of other OECD currencies (corrections in EUR and GBP rates despite their own upbeat data).




Madrid, 6 August 2010

Weekly Watch

Economics Analysis
Europe Elvira Prades +34 91 537 79 36 Financial Scenarios Marcos Dal Bianco +34 91 538 63 49 Ignacio González-Panizo +34 91 538 63 50

ECB: The only news is the good mood
In contrast with the cautious approach on the side of the Fed, the ECB adopted a more optimistic mood in yesterday’s ECB council meeting and press conference. Instead of highlighting the high uncertainties regarding global outlook, Mr. Trichet chose to emphasize the positive tone of EMU macro data and the results of European stress tests, which were considered as a “very impressive success” which confirmed the resilience of the euro area financial system becoming a key step forward towards restoring market confidence. On monetary policy, the ECB decided (as expected) to keep the official rate unchanged at 1% as this is the “appropriate” level given that the risks to price developments are “broadly balanced” and inflation expectations are firmly anchored. However, the main decisions regarding EMU monetary policy, as to whether to continue with long-term full allotment auctions, are delayed until September. He also explained that the reduction of the size of the Government bond purchases program (from an average of €9.4 bn in the first five weeks to a €0.1 bn in the last two) is the result of the normalization of European debt markets. However, when asked about their intention to finish the program, he highlighted that he is not complacent with the results as the situation is still challenging. Regarding the rises in Eonia, he said that it is “absolutely normal to see some augmentations” as it reflects that the situation is “normalizing”; and remarked that this is neither signaling nor representing a change in the monetary policy stance. Hence, the ECB seems comfortable with this environment. The ECB Chairman considered that the evolution of monetary aggregates, especially the fact that loans to non-financial firms are lagging behind to those to households, is in line with observations during historical recessions. Mr. Trichet also lessened the importance of the bad results on the last banking lending survey as it was undertaken in “not the best survey period that could be imagined” (14-June to 2-July). When asked about the possibility of a credit crunch in the Eurozone, Mr. Trichet firmly denied that scenario. On activity, the emphasis was made on the strong performance of the Eurozone economy in 2Q10 and on the better-thanexpected start of 3Q10. He mentioned that 2H10 will be significantly less dynamic, in line with our forecasts, but he clearly ruled out a double-dip scenario. There was no question on any specific country affected by the European sovereign crisis. Mr. Trichet explicitly thanked the absence of questions on Greece and mentioned the positive common statement made by the IMF-EU-ECB, signaling that Greece is part of the (positive) overall picture. The market’s reaction was more or less muted with stocks and bonds almost flat during the statement and the Q&A; the euro depreciating somewhat at the end of the press conference and the implicit official rate in Eonia futures also falling after the press conference. For further information, see our ECB Watch.
Chart 3

Victoria de Zuriarrain +34 91 537 7584

Euro area: implicit official rate in EONIA futures
1.00 0.75 0.50 0.25 0.00

Chart 4

ECB: sovereign bond purchase program
60 50 40 30 20 10 Week 1 Week 2 Week 3 Week 4 Week 5 0 Avg. Weekly purchases Week 6 Week 7 Week 8 Week 9 Week 10 Week 11








Home Calendar Markets Data

BBVA forecast Eonia futures 3 Aug 2010 Eonia futures 5 Aug 2010
Source: Bloomberg and BBVA Research




Per week


Source: BBVA Research


Madrid, 6 August 2010

Weekly Watch

Economics Analysis
Europe Elvira Prades (+34) 91 537 79 36 US Kristin Lomicka +1 713 881 0655 Asia Stephen Schwartz +852 2582 3218 Mexico Julián Cubero +52 5556214143

Calendar: Indicators
USA: Consumer Price Index (headline, core) (July, August 13th)
Forecast: 0.1%, 0.2%; Consensus: 0.2%, 0.1% Previous: -0.1%, 0.2% Comment: Consumer price inflation is expected to remain subdued in July. Energy prices will minimally impact the headline figure, while economic slack will weigh on the core. One notable change is that shelter prices are beginning to firm, which indicates that the downward spiral in core prices may have reached bottom. Market Impact: A negative surprise in core inflation could reinforce the deflationary fears. As a result, the Fed could keep rates low for longer than market expectations.

USA: Retail Sales (July, August 13th)
Forecast: 0.5%, 0.3% Consensus: 0.4%, 0.3% Previous: -0.5%, -0.1% Comment: Retail sales are expected to firm after slipping for the past two months. Better than expected auto sales will help to boost the overall figure in July. Retails sales will continue to improve throughout the year, but the pace will be slow due to the outlook for the employment situation. Market Impact: A negative surprise in retail sales would raise concerns about the strength of private demand. While business spending is picking up, consumer spending remains fragile given the slow recovery of the labor market.

Eurozone: GDP (Q2, August 13th)
Forecast: 0.4 % q/q Consensus: 0.7% q/q Previous: 0.2 % q/q Comment: We expect the Eurozone’s economy to grow by 0.4% q/q in Q2. Nonetheless, our Synthetic Activity Index points to an upward bias as overall leading indicators have performed slightly better than expected over the last three months. Also during the week national account figures for Germany and France will be released. Market Impact: We do not expect any major market reaction as Q2 data was better-than-expected and analysts are mostly focused on Q3 figures.

Eurozone: Industrial production index (June, August 12th)
Forecast: 0.5% m/m Consensus: 0.6% m/m Previous: 0.9% m/m Comment: After the release of domestic industrial data in the major European economies, we expect aggregate industrial production in the Eurozone to be sligthly below in June vis-à-vis the previous month. Market Impact: Given that the industrial production index is a lagging indicator we do not expect any major market reaction.

China: Industrial Production (July, August 11th)
Forecast: 13.1% Consensus: 13.1% Previous: 13.7% Comment: Industrial production (IP) data will be released along with a batch of key indicators. We expect IP growth to continue easing in July, consistent with recent declining PMI outturns. The trend is in line with our baseline for an economic soft-landing in H2. Market Impact: with markets worried about a sharper than expected slowdown in coming months and the impact on global growth, a weaker IP outturn (along with other indicators to be released from China in the coming week) would undermine sentiment.

Mexico: Inflation (July, August 9th)
Forecast: 0.28% m/m Home Highlights Markets Data Consensus: 0.29% m/m Previous: -0.03% m/m Comment: After three consecutive months of falls, we expect July to show the first rise (0.28% m/m), in line with the consensus. One of the main drivers of the inflationary process over the last few months has been the farm products dynamics which is strarting to reverse. Market Impact: A positive surprise would obey to cyclical factors and will not justify, in our oppinion, any further cut in the policy rate.



Madrid, 6 August 2010

Weekly Watch

Markets Data
Close Interest Rates
3-month Libor rate 0.41 0.54 2.90 0.91 0.75 2.56 1.317 0.83 1.38 3.93 1.75 1817 516 12.58 2.80 85.91 1159.28 0.917 81.1 1195.2 492.0 10867 2833 1126 2433 68412 13575 20707 32907 14746 63843 9642 21679 102 471 37 228 190 36 210 796 115 120 76 115 106

Weekly change
-4 -1 0 1 -3 -11 1.0 -0.2 1.7 -0.2 -0.4 -1.4 -0.9 -0.6 -0.7 -0.6 -2.0 1.4 3.8 1.2 1.0 3.5 3.3 2.2 1.6 1.3 2.2 2.0 1.9 3.3 -0.4 1.1 3.1 -3 -9 0 3 14 1 -3 2 -2 -4 -2 -2 -3

Monthly change
-12 -8 -13 10 3 -7 4.1 -0.9 3.8 -0.1 -1.1 -3.8 -3.9 -1.9 -0.8 -2.8 -4.1 5.2 8.6 -0.2 4.2 7.8 6.2 5.2 6.3 7.8 8.5 7.3 3.0 6.7 -3.4 1.1 8.1 -16 -63 -4 -62 -51 -1 -41 -133 -16 -21 -20 -14 -22

Annual change
-5 -76 -95 2 -83 -95 -7.1 -2.4 -10.0 2.8 -3.9 -9.6 -5.0 -2.9 -4.6 -12.0 -5.2 9.6 10.2 25.2 10.8 -0.7 4.7 11.4 35.2 21.4 30.1 33.4 16.8 6.2 38.3 -7.4 6.4 15 -112 13 180 130 ---88 -825 1 -25 5 -27 -17

US EMU Europe America Asia Euro America Asia Ind. Sovereign risk

(changes in bps)

2-yr yield 10-yr yield 3-month Euribor rate 2-yr yield 10-yr yield Dollar-Euro Pound-Euro Swiss Franc-Euro Argentina (peso-dollar) Brazil (real-dollar) Colombia (peso-dollar) Chile (peso-dollar) Mexico (peso-dollar) Peru (Nuevo sol-dollar) Japan (Yen-Dollar) Korea (KRW-Dollar) Australia (AUD-Dollar) Brent oil ($/b) Gold ($/ounce) Base metals Ibex 35 EuroStoxx 50 USA (S&P 500) Argentina (Merval)

Exchange Rates Comm. Stock Markets

(chg %)

(changes in %)

(changes in %)

Brazil (Bovespa) Colombia (IGBC) Chile (IGPA) Mexico (CPI) Peru (General Lima) Venezuela (IBC) Nikkei225 HSI Itraxx Main Itraxx Xover CDS Germany CDS Portugal CDS Spain CDS USA CDS Emerging CDS Argentina CDS Brazil CDS Colombia CDS Chile CDS Mexico CDS Peru

Sources: Bloomberg, Datastream and JP Morgan


(changes in bps)



Madrid, 6 August 2010

Weekly Watch

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