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Weekly Watch
Madrid, 6 August 2010
Q3 data still supportive, but with
Economics Analysis
Financial Scenarios
Q3 data flow is diverging so far across major regions. In the US, the most recent readings confirm the
Sonsoles Castillo moderation in the path of expansion since the end of Q2. The whole US yield curve has witnessed this
(+34) 91 374 44 32 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
Marcos Dal Bianco
to sustain in H2 as the improvement has been mainly driven by net exports instead of by domestic
+34 91 538 63 49 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
María Martínez Álvarez FOMC meeting will be of special interest next week.
+34 91 537 66 83
The monetary cycle continues with a new guest
Ignacio González-Panizo 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
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emerged over the last few weeks: the rise in the price of commodities. We do not expect this to alterate
Victoria de Zuriarrain the pace of tightening as it seems to be related more to cyclical factors rather than to structural swings.
+34 91 537 7584 Chart 1
USA: Personal income Chart 2
and personal spending (m/m; sa) Commodity prices (Jan 1, 2010=100)
2 145
1.5 135
1 125
0.5 115
0 105
-0.5 95
-1 85
-1.5 75




Personal income Personal spending CX Commodity Index Wheat


Source: Datastream and BBVA Research Source: Datastream and BBVA Research

Highlights 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
Markets Data 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).
Weekly Watch
Madrid, 6 August 2010

Economics Analysis
ECB: The only news is the good mood
Elvira Prades 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
+34 91 537 79 36
regarding global outlook, Mr. Trichet chose to emphasize the positive tone of EMU macro data and the
Financial Scenarios results of European stress tests, which were considered as a “very impressive success” which confirmed
Marcos Dal Bianco 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
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1% as this is the “appropriate” level given that the risks to price developments are “broadly balanced” and
Ignacio González-Panizo 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
+34 91 538 63 50
explained that the reduction of the size of the Government bond purchases program (from an average of
Victoria de Zuriarrain €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
+34 91 537 7584 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-than-
expected 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
Euro area: Chart 4
implicit official rate in EONIA futures ECB: sovereign bond purchase program
1.00 60


0.50 30

Avg. Weekly
0.25 purchases

0.00 0
Week 1

Week 2

Week 3

Week 4

Week 5

Week 6

Week 7

Week 8

Week 9

Week 10

Week 11







BBVA forecast
Eonia futures 3 Aug 2010 Per week Cumulated
Calendar Eonia futures 5 Aug 2010
Source: Bloomberg and BBVA Research Source: BBVA Research
Markets Data


Weekly Watch
Madrid, 6 August 2010

Economics Analysis
Calendar: Indicators
USA: Consumer Price Index (headline, core) (July, August 13th)
Elvira Prades Forecast: 0.1%, 0.2%; Consensus: 0.2%, 0.1% Previous: -0.1%, 0.2%
(+34) 91 537 79 36 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
Kristin Lomicka 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
+1 713 881 0655 fears. As a result, the Fed could keep rates low for longer than market expectations.
Stephen Schwartz USA: Retail Sales (July, August 13th)
+852 2582 3218 Forecast: 0.5%, 0.3% Consensus: 0.4%, 0.3% Previous: -0.5%, -0.1%
Mexico Comment: Retail sales are expected to firm after slipping for the past two months. Better than expected
Julián Cubero auto sales will help to boost the overall figure in July. Retails sales will continue to improve throughout
+52 5556214143
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 Consensus: 0.29% m/m Previous: -0.03% m/m
Home 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
Highlights 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.
Markets Data


Weekly Watch
Madrid, 6 August 2010

Markets Data
Close Weekly change Monthly change Annual change
3-month Libor rate 0.41 -4 -12 -5
Interest Rates

(changes in bps)

2-yr yield 0.54 -1 -8 -76

10-yr yield 2.90 0 -13 -95
3-month Euribor rate 0.91 1 10 2

2-yr yield 0.75 -3 3 -83

10-yr yield 2.56 -11 -7 -95
Dollar-Euro 1.317 1.0 4.1 -7.1

Pound-Euro 0.83 -0.2 -0.9 -2.4

Swiss Franc-Euro 1.38 1.7 3.8 -10.0
Argentina (peso-dollar) 3.93 -0.2 -0.1 2.8
Exchange Rates

Brazil (real-dollar) 1.75 -0.4 -1.1 -3.9

(changes in %)


Colombia (peso-dollar) 1817 -1.4 -3.8 -9.6

Chile (peso-dollar) 516 -0.9 -3.9 -5.0
Mexico (peso-dollar) 12.58 -0.6 -1.9 -2.9
Peru (Nuevo sol-dollar) 2.80 -0.7 -0.8 -4.6
Japan (Yen-Dollar) 85.91 -0.6 -2.8 -12.0

Korea (KRW-Dollar) 1159.28 -2.0 -4.1 -5.2

Australia (AUD-Dollar) 0.917 1.4 5.2 9.6
Brent oil ($/b) 81.1 3.8 8.6 10.2
(chg %)

Gold ($/ounce) 1195.2 1.2 -0.2 25.2

Base metals 492.0 1.0 4.2 10.8
Ibex 35 10867 3.5 7.8 -0.7

EuroStoxx 50 2833 3.3 6.2 4.7

USA (S&P 500) 1126 2.2 5.2 11.4
Argentina (Merval) 2433 1.6 6.3 35.2
Stock Markets

Brazil (Bovespa) 68412 1.3 7.8 21.4

(changes in %)


Colombia (IGBC) 13575 2.2 8.5 30.1

Chile (IGPA) 20707 2.0 7.3 33.4
Mexico (CPI) 32907 1.9 3.0 16.8
Peru (General Lima) 14746 3.3 6.7 6.2
Venezuela (IBC) 63843 -0.4 -3.4 38.3
Nikkei225 9642 1.1 1.1 -7.4

HSI 21679 3.1 8.1 6.4

Itraxx Main 102 -3 -16 15

Itraxx Xover 471 -9 -63 -112

CDS Germany 37 0 -4 13
CDS Portugal 228 3 -62 180
CDS Spain 190 14 -51 130
(changes in bps)

CDS USA 36 1 -1 ---

Sovereign risk

CDS Emerging 210 -3 -41 -88

CDS Argentina 796 2 -133 -825
CDS Brazil 115 -2 -16 1
CDS Colombia 120 -4 -21 -25
CDS Chile 76 -2 -20 5
CDS Mexico 115 -2 -14 -27
CDS Peru 106 -3 -22 -17
Sources: Bloomberg, Datastream and JP Morgan


Weekly Watch
Madrid, 6 August 2010

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