global inflation strategy aug2011

Global Inflation Strategy

Introduction to the euro-area

inflation markets

August 2011

Any authors named on this report are research analysts unless otherwise indicated.Please see analyst certifications and important disclosures starting on page 23.

Nomura International plc

Laurent Bilke

+44 20 710 22566

[email protected]

Rohit Garg

+44 20 710 39794

[email protected]

Inflation measures: HICP, CPI, composition

Euro-area linkers: outstanding and conventions

Illustrative real yields and breakevens spreads

Inflation swaps

Outline

2

The euro inflation market was launched on 15 September 1998 with the

issuance of the OATi 3% July 2009 based on French CPI. It then developed

a euro area HICP-based market following the launch of the euro in 1999.

Euro area HICPxT (Harmonised Index of Consumer Prices, excluding

tobacco)

for all linkers issued by Italy (BTPei), Germany (Bundei) and Greece

(GGBei), about half of French linkers (OATei) and euro inflation swaps

French CPIxT (Consumer Price Index, excluding tobacco)

for the other half of French linkers (OATi) and French inflation swaps

Other national indices: Italian CPI FOIxT, Spanish CPI, German CPI, Dutch

CPI, Belgium Health CPI

for domestic inflation swaps

Main inflation indexes

3

In most countries, two inflation measures coexist

HICP, which has similar methodology across Europe

national CPIs, which follow their own rules

There are various differences between the HICP and the national CPIs, most

noticeably:

Sales: sales prices have to be included into the HICP, but are not necessarily in

the CPI, which can lead to stronger seasonality in the HICP than the CPI (e.g.

Italy)

Owner-occupied housing: excluded from HICP, while national CPIs use a

variety of methods to include them (or not)

Aggregation formulae: The HICP uses ratios of arithmetic mean prices or of

geometric means, while some national CPIs may use other formulae

Geographical and population coverage: The HICP covers all expenditures

within the territory, whether by residents or visitors, while some national CPIs

cover expenditures by domestic residents both within and outside the country

Treating subsidised healthcare and education: The HICP includes net prices

paid by consumers, while some national CPIs exclude these purchases or

record gross price

HICPs and national CPIs

4

Flash estimate

Last working day of the month for that month

No breakdown (only headline HICP, no HICPxT)

Based on partial country data and energy prices

HICP full release

Published two weeks after flash, around the middle of following month

Complete breakdown across product groups (including HICPxT level)

The national HICP previously released can be revised in the meantime

Linkers are valued with this first HICPxT release, ignoring later revisions

Two monthly releases

5

Typical publication schedule (HICP for month m)

6

Germany (P)

Italy (P)

Slovenia

HICP Flash

Netherlands

Belgium

Spain (P)

Italy (F)

HICP Final

Germany (F) Spain (F) France

27-29/m27-30/m

29-31/m

6-10/m+1

P = Preliminary

F = Final

No mention means there is only one release

9-12/m+1 11-15/m+1 12-15/m+1

14-16/m+1

End of HICP month

The euro-area HICP is a weighted average of national HICPs

The weights depend on the countries‟ share of relative household

consumption expenditure in the euro area

They are updated annually with the January release

Country aggregation in the HICP

7

Country HICP weight (%)

Germany 25.9

France 20.7

Italy 18.5

Spain 12.7

Netherlands 4.8

Greece 3.8

Belgium 3.3

Austria 3.2

Portugal 2.2 Note: 2011 weights

Source: Eurostat, Nomura Inflation Strategy

Country HICP weight (%)

Finland 1.7

Ireland 1.3

Slovakia 0.7

Slovenia 0.4

Luxembourg 0.3

Cyprus 0.3

Estonia 0.1

Malta 0.1

Euro HICPxT sub-components

8

Note: 2011 weights


Food and beverages17%

Clothing and footwear7%

Housing, furnishings and water

17%

Health4%Transport without fuel

11%

Communications and education

4%

Recreation and culture10%

Restaurants and hotels10%

Miscellaneous goods and services

9%

Energy11%

Usual HICP sub-indices

9


Eurostat HICP data are neither calendar nor seasonally adjusted

ECB provides seasonally adjusted data for the headline HICP, processed

food, unprocessed food, non-energy industrial goods and services

Euro area HICP special aggregates (2011 weights)

HICP 100.00

HICP ex tobacco 97.31

HICP ex energy and seasonal food 85.64

HICP ex food, energy, alcohol and tobacco (usual “core” measure) 69.23

Processed food (incl. alcohol and tobacco) 12.83

Unprocessed food 7.31

Energy 10.62

Non-energy industrial goods 28.92

Services 40.31

Euro HICP vs US CPI and UK RPI inflation

Source: Eurostat, ONS, BLS, Bloomberg, Nomura Global Economics

10

-3

-2

-1

0

1

2

3

4

5

6

Jan-00 May-02 Sep-04 Jan-07 Apr-09 Aug-11 Dec-13

% y-o-yUS Euro area UK

Euro index-linked bonds: conventions

11

Germany

(DBRei, OBLei)

France

(OATei)

France

(OATi)

Italy

(BTPei)

Greece

(GGBei)

Inflation index EA HICPxT EA HICPxT France CPIxT EA HICPxT EA HICPxT

Settlement T+3

Coupon freq Annual Annual Annual Semi-annual Annual

Floor Par floor

Indexation lag 2-3 months

Inflation adj.

dirty price(Quoted price + Accrued interest) x Index ratio

Outstanding

bonds4 7 6 10 2

Outstanding

amount (€bn)44.0 78.9 66.4 109.1 14.7

Euro index-linked bonds

12

BondOutstanding amount

(nominal, €bn)Last supply Nominal benchmark

Germany (OBLei/DBRei)

OBLei 2.25% 15-Apr-13 11.0 07-Apr-10 OBL 3.50% 12-Apr-13

DBRei 1.50% 15-Apr-16 15.0 08-Sep-10 DBR 3.50% 04-Jan-16

OBLei 0.75% 15-Apr-18 3.0 12-Apr-11 DBR 4.00% 04-Jan-18

DBRei 1.75% 15-Apr-20 15.0 09-Mar-11 DBR 3.25% 04-Jan-20

Italy (BTPei)

BTPei 1.85% 15-Sep-12 10.4 27-Aug-08 BTPS 4.25% 15-Oct-12

BTPei 2.15% 15-Sep-14 14.5 27-May-05 BTPS 4.25% 01-Aug-14

BTPei 2.10% 15-Sep-16 5.8 27-Apr-11 BTPS 3.75% 01-Aug-16

BTPei 2.10% 15-Sep-17 14.6 27-May-10 BTPS 5.25% 01-Aug-17

BTPei 2.35% 15-Sep-19 13.7 24-Feb-10 BTPS 4.25% 01-Sep-19

BTPei 2.10% 15-Sep-21 12.3 27-Jul-11 BTPS 3.75% 01-Sep-21

BTPei 2.60% 15-Sep-23 14.7 29-Mar-10 BTPS 4.75% 01-Aug-23

BTPei 3.10% 15-Sep-26 3.0 08-Jun-11 BTPS 4.50% 01-Mar-26

BTPei 2.35% 15-Sep-35 13.7 28-Jan-09 BTPS 5.00% 01-Aug-34

BTPei 2.55% 15-Sep-41 6.4 27-Oct-10 BTPS 5.00% 01-Sep-40

Euro index-linked bonds (contd..)

13

BondOutstanding amount

(nominal, €bn)Last supply Nominal benchmark

France (OATei)

FRTRei 3.00% 25-Jul-12 13.9 20-Sep-04 BTNS 4.50% 12-Jul-12

FRTRei 1.60% 25-Jul-15 14.1 18-Feb-10 FRTR 3.50% 25-Apr-15

FRTRei 2.25% 25-Jul-20 20.0 15-Apr-10 FRTR 3.50% 25-Apr-20

FRTRei 1.10% 25-Jul-22 10.3 21-Jul-11 FRTR 3.75% 25-Apr-21

FRTRei 1.85% 25-Jul-27 3.4 19-May-11 FRTR 3.50% 25-Apr-26

FRTRei 3.15% 25-Jul-32 9.4 17-Sep-09 FRTR 5.75% 10-Oct-32

FRTRei 1.80% 25-Jul-40 7.9 21-Jul-11 FRTR 4.00% 25-Oct-38

France (OATi)

FRTRi 2.50% 25-Jul-13 15.7 19-Mar-09 FRTR 4.00% 25-Apr-13

BTANi 0.45% 25-Jul-16 6.6 21-Jul-11 FRTR 3.25% 25-Apr-16

FRTRi 1.00% 25-Jul-17 20.2 17-Jun-10 FRTR 3.75% 25-Apr-17

FRTRi 1.30% 25-Jul-19 7.7 16-Jun-11 FRTR 4.25% 25-Apr-19

FRTRi 2.10% 25-Jul-23 8.7 21-Oct-10 FRTR 4.25% 25-Oct-23

FRTRi 3.40% 25-Jul-29 7.5 16-Jul-09 FRTR 5.50% 25-Apr-29

Greece (GGBei)

GGBei 2.90% 25-Jul-25 7.2 12-Apr-06 GGB 5.90% 22-Oct-22

GGBei 2.30% 25-Jul-30 7.5 29-Jan-08 GGB 4.50% 20-Sep-37

Seasonality impact

14

Country

[Maturity]

Germany

[15-Apr-XX]

France (OATei)

[25-Jul-XX]

Italy

[15-Sep-XX]

Greece

[25-Jul-XX]

Germany 110 85 110

France (OATei) -110 -24 0

Italy -85 24 24

Greece -110 0 -24

Seasonality expressed in basis points

The table reads as follows: the French OATei should be 110bp more expensive

than a German Bundei of the same maturity to reflect the seasonality

difference

Real yield spreads: OATei and BTPei vs Bundei

Note: Last observation is for July 29, 2011

Source: Nomura Inflation Strategy

15

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

0

50

100

150

200

250

300

350

400

Mar-06 Apr-07 May-08 Jun-09 Jul-10 Jul-11

bpbp

BTPei17-Bundei16 (lhs)

OATei15-Bundei16 (rhs)

Breakeven spreads: OATei and BTPei vs Bundei



16

-20

-10

0

10

20

30

40

50

60

Mar-06 Apr-07 May-08 Jun-09 Jul-10 Jul-11

bp

OATei15-Bundei16

BTPei17-Bundei16

Real yield spreads: French vs Euro inflation (OAT

curve)



17

-60

-50

-40

-30

-20

-10

0

10

20

30

Dec-06 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11

bp

OATei15-OATi17

Breakeven spreads: French vs Euro inflation (OAT

curve)



18

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

Dec-06 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11

bp

OATei15-OATi17

10yr breakevens: euro vs US and UK



19

-200

-150

-100

-50

0

50

100

150

200

Oct-03 Nov-04 Dec-05 Jan-07 Mar-08 Apr-09 May-10 Jun-11

bp

10yr BE TIPS-OATei

10yr BE UKTi-OATei

Inflation swap

Euro HICPxT

Linked to Index: Euro area HICP ex Tobacco

Bloomberg ticker: CPTFEMU Index

Lag: Flat 3-month

Quoted on zero coupon

Settlement: T+2

French CPIxT

Linked to Index: France CPI ex Tobacco

Bloomberg ticker: FRCPXTOB Index

Lag: Linear 2-3 month

Quoted on zero coupon

Settlement: T+2

20

Other inflation swap markets

21

Country Linking Index Bloomberg Ticker Lag

Italy Italian CPI FOI ex Tobacco ITCPI Index Flat 3-month

Spain Spanish CPI SPIPC Index Flat 3-month

Netherlands Netherlands CPI NECPIND Index Flat 3-month

Belgium Belgium CPI health BECPHLTH Index Flat 3-month

Germany Bundesbank German CPI GRBC2000 Index Linear 2-3 month

Global Inflation Strategy

NomuraNow - Fixed Income

http://go.nomuranow.com/research/globalresearchportal/pages/fixedincome/fixedincome.aspx?p=3

Global Inflation Monitor (Monthly)

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=453108

Weekly Carry Tables


On Bloomberg: NOMR4 (also includes weekly forecast updates)

UK linkers primer


TIPS primer


Other publications (see on NomuraNow)

European Rates Weekly

US Rates Weekly

Global Weekly Economic Monitor

Nomura research references

22

http://www.nomura.com/research/getpub.aspx?pid=407550













Contacts

23

Global

Laurent Bilke Global Head of Inflation Strategy [email protected] 44-20-7103-0022

North America

George Goncalves Head of Rates Strategy - Americas [email protected] 1-212-667-2254

Stanley Sun US Inflation Strategist [email protected] 1-212-667-1236

David Resler Chief US Economist [email protected] 1-212-667-2415

Europe

Laurent Bilke Head of Rates Strategy - Europe [email protected] 44-20-7103-0022

Rohit Garg Inflation Analyst [email protected] 44-20-7103-9794

Philip Rush UK Economist [email protected] 44-20-7102-9595

Lavinia Santovetti European Economist [email protected] 44-20-7102-6364

Irena Sekulska Macro-Strategy Analyst [email protected] 44-20-7103-1453

Emerging markets

Olgay Buyukkayali Head of EEEMA Strategy [email protected] 44-20-7102-3242

Peter Attard Montalto Economist SA, CEE [email protected] 44-20-7102-8440

Anton Kudlay Emerging Markets Analyst [email protected] 44-20-7102-0501

Japan

Naka Matsuzawa Head of Rates Strategy - Japan [email protected] 81-3-6703-3864

Neale Vincent Head of Quant Strategy - Japan [email protected] 81-3-6703-3842

Takenobu Nakashima Quant Strategist [email protected] 81-3-6703-3873

ANALYST CERTIFICATIONS

We, Laurent Bilke and Rohit Garg, hereby certify (1) that the views expressed in this report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

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global inflation strategy aug2011

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