Global - Macro - Weekly - 8 March 2019 PDF

Global Macro Weekly
Desk Strategy Sell risk assets, buy 5y5y EMU

8 March 2019
Overview (p4): 1) a watershed week, yes, just the complete opposite way we
expected. Brexit vote looks set to fail not pass, so the short-term outlook is now murky,
with No deal being taken off the table euphoria offset by continued uncertainty over the
outcome and fears of early election etc. 2) global growth is in play this past week and a
major aid to lower yields, with Taiwan & China exports in particular showing the path
lower for the world. Risk assets look deeply vulnerable, buy high quality global FI. 3)
ECB about to inject money, we update global liquidity views, which have said to us
since Autumn 2018: sell risk assets. 4) we were the only voter for it in December and
are now about to see it: negative 10y bund yield. Receive 5y5y EMU is the sweetspot.
Trade recommendations of the week: 1) 10s30s Spain flatteners 2) receive EUR

5y5y 3) pay 5s on 2s5s10s EUR cash 4) 30y EMU asset swap spread tighteners 5)
buy 1y US breakeven (TII 4/20)
Euro Area Macro Strategy (p10): High conviction longs of Periphery. Long end Spain
is best risk-reward. We end our short 10y bunds. 2s5s steepeners, 10s30s flatteners.
Short 5y on curve. Short 30y asw.
Japan monthly flow of funds analysis (p14): The yield grab into Europe could draw
an extra €500bn/year into European FI, strong support for Spain & semi-core EMU.
China (p15): More easing policies announced to support ‘reasonable’ growth targets.
Linked-Up (p18): OATi are cheap on ASW; buy short-dated TIPS.
UK (p29): UK GDP data are expected to show a partial recovery in growth in January:
+0.2% m/m (with modest upside risks) following December’s surprisingly acute
weakness (-0.4% m/m).
UK Economy (p31): The UK Government will make a second attempt to get the Brexit
‘Meaningful Vote’ (‘MV2’ in Whitehall-speak) through the Commons on12 March.
US Economy (p37): The main focus in the coming week will be on the consumer, with
the January retail sales report and the February CPI report.
US Economy (p40): The Fed is embarking on a broad review of its strategy, tools and
communication practices. We share our thoughts on this closely-watched exercise.
US Strategy (p44): Fed anchors inflation expectations, supports steeper curve. Also,
we initiate 2yr swap spreads.
Scandinavia (p51): 5 reasons for near-term EUR/SEK downside.
Supply Update (p53): Next week, EMU sovereigns announced supply amounts to
€9.3bn, or €11.5m/bp PV01. Coupons: €3.7bn l Redemptions: €24.3bn.
This is Non-Independent Research, as defined by the Financial Conduct Authority. Not intended
NWM Strategy
for Retail Client distribution. This material should be regarded as a marketing communication and may
nwmstrategy@natwestmarkets.com
have been produced in conjunction with the NatWest Markets Plc trading desks that trade as
principal in the instruments mentioned herein. All data is accurate as of the report date, unless
www.agilemarkets.com
otherwise specified.
Bloomberg: NWMR<GO>
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Global Macro Weekly
Jim McCormick
Macro: need to know

 US economy still in solid position: +2% growth and stable inflation (link)  BOE to likely hike one more time, in November
 Fed will hike one more time in this cycle, in December (link)  China economy is stabilizing, but this is not 2015-16
 ECB will not hike until H2-2020 (link)  US/China trade tensions to ease further (link), auto tariffs still a major risk
 Next BOJ policy shift likely an ease, but in late 2020 (link)  Oil prices: stable, with modest upside risks
 A “no deal” BREXIT is highly unlikely, market moving in that direction
Our core themes

The dovish shift by central banks has helped offset weak global growth. While this is reasonable, we should not be using
Volatility is too low in this
the early cycle playbook. Growth is very weak and a recession is plausible. Global disinflation is no longer assured. And
late-cycle landscape
apart from the FOMC, central banks don’t have much ammunition (see Global Macro Weekly (25 Feb)).
FOMC dovish tilt a new Recent Fed discussion around their Monetary Policy Framework puts a floor under market inflation expectations near term
support USD steepeners (be long), and should reinforce steeper US curves (link).
Stay structurally long GBP ‘Meaningful Vote 2’ on 12 March is too close to call with any confidence (link). At this point, our risk-weighted prediction
FX: though knee-jerk would be a defeat of ~40 votes – hence temporary downside risks for GBP. But subsequent votes to rule out no deal and
downside on MV2 defeat seek an Art.50 extension should resume GBP’s uptrend. Also favour selling UK BEIs and SONIA steepener.
Dovish ECB bullish periphery The ECB was clearly dovish and has raised the hurdle rate for future rate hikes given its downgrade of the inflation
& 10s30s steepeners; bearish forecast. While new TLTROs lacked details, they should support periphery, Spain and Portugal especially (link). We also
EUR (sell vs GBP, NOK, CNH) like EUR10s30s steepeners and remain short EUR FX vs GBP, NOK and CNH.
The high-yield EM FX rally is faltering, as idiosyncratic stories combine with more crowded positioning and a stronger US
High-yield EM FX outlook still
dollar. Still, macro buffers are solid and the HY business cycles are improving. Meanwhile, the dovish tilt by CBs and
constructive
improving picture in China remain two major barriers. Recent weakness should be temporary.
Even with our benign inflation forecasts, market-based inflation levels are too low in USD and EUR (link). Fed’s renewed
USD and EUR market-based
focus on “symmetrical” inflation target helps, as does recovery in oil prices. A dovish Fed, the initiation of the carry-positive
inflation yields too low
period and cheap valuations make sub five-year TIPS attractive (link).
Shifting protectionism risks China news encouraging: leading indicators improving, policymakers committed to stabilization (link) and trade rhetoric is
suggest short EUR/CNH constructive (link). Weak European industry and risk of auto tariffs to weigh on euro. Short EUR/CNH is attractive.
Twin deficits to weigh on US US “exceptionalism” is diminishing, if slowly. Twin deficits continue to rise. This combination will weigh on the US dollar in
dollar in H2-2019 2019, but more likely in H2. In G10, JPY is a relative winner – don’t expect any BOJ easing this year (link).
Current market pricing for the Riksbank and Norges Bank looks too dovish. The Riksbank is emphasizing still high
resource utilization and current expansionary policy given stability in long-run inflation expectations. Near-term inflation
Scandi FX outperformance
risks are to the upside. Norges Bank still looks well on track for a 25bp hike later this month as a strong recovery in
petroleum investment supports growth. Near-term downside favoured in EUR/SEK and EUR/NOK (link).
NWM Strategy view at a glance

EUR GBP USD
Rates
On hold to Q2 2020 at earliest Mildly hawkish guidance diluted. Base case Fed policy framework discussion puts
Central Bank
floor on near-term market inflation
+25bp in Nov19, on orderly Brexit.
expectations, aids steeper US curves
Close sell bund recommendation after Higher yields: Too much pessimism on Neutral: break above current yield ranges
Direction
dovish ECB Brexit already in the price. may be difficult, many wait to buy dips
2s5s steeper. 10s30s flatter. Steeper: more widening in 2s10s to come.
Slope Steeper
Maintain SONIA steepeners.
Short 5y in 2s5s10s Pay belly 5s10s30s: ‘soft’ short Neutral
Curvature
30y cash to underperform swaps, but
Swap spreads
weaker conviction after this week’s 30y cash to outperform swaps Narrower long end spreads
move
Long middle of 5s10s30s breakeven Short breakevens (1y1y). Buy IL28 vs IL24, Long 5y5y US inflation swaps (link), buy
Inflation
swaps fly sell 10y RPI swap and 5y5y UK vs US sub five-year TIPS
Fragile: weak growth, trade tariff risks; Sterling is too cheap. Strong buy vs CAD,
FX Strengthening data sees resurgent USD.
short vs CNH (link) CHF & EUR
EUR (periphery) Scandinavia CAD

Rates
RIksbank and Norges Bank very dovishly Bias still hawkish, but outlook has shifted
Central Bank - priced. Norges to hike in March. more neutral alongside Fed
Long periphery. Favour Spain. Pay NOK rates (1y1y preferred). Neutral - market has already priced out a
Direction lot of BoC in a short time
10s30s flatteners in periphery. 30y Steeper curve bias on more dovish BoC,
Slope Took profit on 2s10s SEK flattener
favoured point on SPGB curve. steeper US curves.
Short EUR/Scandis now preferred over Bearish and short CAD vs. GBP and
FX - long NOK/SEK near-term NOK.
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Key Forecasts
Euro Area (end of period)
Macro Interest Rates Sov 10y vs Germany
10y fut
End of CPI y/y CPI y/y GDP ECB depo
Year 2y 5y 10y 30y asw France Italy Spain
Period Headline Core y/y rate
spread
(Latest) 1.50 1.00 1.10 -0.40 -0.54 -0.35 0.07 0.71 49.6 34.0 245.7 98.6
2019 Q1 1.00% 1.10% 1.00% -0.40% -0.68% -0.30% 0.20% 0.80% 53 bp 37 bp 220 bp 90 bp
Q2 0.80% 1.00% 0.90% -0.40% -0.70% -0.30% 0.22% 0.80% 50 bp 35 bp 225 bp 80 bp
Q3 0.80% 1.00% 0.80% -0.40% -0.70% -0.25% 0.25% 0.80% 50 bp 35 bp 230 bp 80 bp
Q4 0.70% 1.00% 0.80% -0.40% -0.65% -0.20% 0.30% 0.85% 50 bp 35 bp 230 bp 80 bp
United States
Macro Interest Rates
GDP Fed Funds 10y fut
End of CPI y/y CPI y/y
Year q/q Target 2y 5y 10y 30y asw
Period Headline Core
SAAR Range spread
(Latest) 1.60 2.20 2.60 2.25 - 2.5 2.46 2.43 2.64 3.03 2.03
2019 Q1 1.7% 2.1% 1.1% 2.25-2.50% 2.60% 2.60% 2.75% 3.15% 10.0 bp
Q2 1.7% 2.2% 2.3% 2.25-2.50% 2.70% 2.70% 2.80% 3.35% 10.0 bp
Q3 1.8% 2.3% 2.4% 2.25-2.50% 2.75% 2.75% 2.80% 3.50% 12.5 bp
Q4 1.8% 2.3% 2.4% 2.50-2.75% 2.70% 2.85% 2.90% 3.60% 12.5 bp
United Kingdom
Macro Interest Rates
10y
End of CPI y/y CPI y/y GDP generic
Year Bank Rate 2y 5y 10y 30y
Period Headline Core q/q asw
spread
(Latest) 1.80 1.90 0.20 0.75 0.74 0.91 1.19 1.69 19.2
2019 Q1 1.8% 1.7% 0.3% 0.75% 0.75% 0.90% 1.40% 1.95% 10 bp
Q2 1.7% 1.7% 0.5% 0.75% 1.10% 1.20% 1.60% 2.00% 10 bp
Q3 1.5% 1.7% 0.5% 0.75% 1.25% 1.30% 1.65% 2.05% 10 bp
Q4 1.4% 1.7% 0.4% 1.00% 1.30% 1.35% 1.75% 2.10% 10 bp
FX
End of
Year Period EUR GBP JPY CNY EUR/GBP
(Latest) 1.1233 1.3055 111.15 6.7218 0.859
2019 Q1 1.1400 1.3600 108.00 7.1000 0.8400
Q2 1.1600 1.3600 109.00 7.2000 0.8500
Q3 1.1900 1.3800 110.00 7.1400 0.8600
Q4 1.2100 1.3800 110.00 7.0400 0.8800
Source: NWM Desk Strategy
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Overview: lesson is – never sell bunds (or

get out-doved by the CB). Time to call risk
Andrew Roberts
assets a sell => hard core bullish FI
Overview: 1) a watershed week, yes, just the complete opposite way we expected.
This is Non-Independent Research, as Brexit vote looks set to fail not pass, so the short-term outlook is now murky, with No
defined by the Financial Conduct deal being taken off the table euphoria offset by continued uncertainty over the
Authority. Not intended for Retail Client
distribution. This material should be outcome and fears of early election etc. 2) global growth is in play this past week and a
regarded as a marketing communication major aid to lower yields, with Taiwan and China exports in particular showing the path
and may have been produced in lower for the world. Risk assets look vulnerable, buy high quality global FI. 3) ECB
conjunction with the NatWest Markets Plc
trading desks that trade as principal in the
about to inject money, we update global liquidity views, which have said to us since
instruments mentioned herein. All data is Autumn 2018: sell risk assets. 4) we were the only voter for it in December and are
accurate as of the report date, unless now about to see it: negative 10y bund yield. Receive 5y5y EMU is the sweetspot.
1 Watershed week? perhaps, but we had it the wrong way

round. My apologies for trying to be bearish, even if for 1
week. And is too dangerous with easy CBs and our ultra-
weak economy view
Let us open this weekly with an admittance of getting something wrong. Too often do
strategists have a poor call and then not mention it, clients tell me frequently it is one
things that can grate.
We (I) noted last week that there were 3 or 4 items on the horizon (Brexit vote about to
go through, house call for ECB to disappoint, China Congress could spur risk-on with
fiscal easing etc), all of which had the ability to drive 10y bunds modestly (5-10bp)
higher, modestly so individually but more meaningfully on a collective basis. So we
went short, hardening up Giles’ short he entered a two weeks prior.
Unfortunately for us there was indeed a watershed moment- it was just a watershed
against us.
Much of this came from Brexit. Our expectations for a successful outcome on 12
March (we should say Ross Walker was officially more 50/50 about it) were diminished
by the EU closing its doors on adoption of a legal codical, now it knows that if it gets
Ms May’s plan turned down, that another softer Brexit outcome (which the EU desires)
is likely. This presumes the vote on banning no deal Brexit goes through next week.
As such, the EU is acting logically, if a little unexpectedly overly micro-political. As

soon as the UK govt indicated early in the week that the doors had shut at the EU to
them, when they had previously been up for agreeing some letter of comfort, it showed
that the Brexiteers were not going to get the fig leaf of cover they needed to vote for
this deal. I still stand by the logic that they should be voting for the deal now, because
they could end up with a weaker Brexit in 1-2 month’s time.
The next step, as Ross Walker exhibits in his GBP weekly, is that Parliament will now
take control to some extent and there will many debates and votes. This can flop out
many ways, but there is a majority for leaving, and there is likely a majority for doing
such with some sort of Customs Union. We hesitate to be too exact in this foggy
theme, but something softer approaches.
UK assets will likely tread water, liking the kicking of the can down the road with
A50 extension and elimination of no deal Brexit, but political uncertainty
nonetheless remains high in terms of final outcome, if the Meaningful Vote gets
voted down by the 40 or so votes that Ross predicts. Long run investors can remain
long £/€ as their medium-term trade since resolution will come in the coming months,
but the very short-term is more murky now - you could even have a knee jerk £ sell-off
if markets start to panic about the government falling and an early election.
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2 global growth is in play, has driven yields down this week,

and is about to be fully in the eye of the storm. Asia is 100%
pushing the world down now. Sell risk assets, buy bonds
Last week we showed you one of our favourite charts, a 50/50 weighting of Taiwan
and SK export orders, showing them falling sharply, and charted this up against global
equity earnings, which should join the decline shortly.
I have been out most of the week doing some conferences, and indeed the chart
mentioned became one of the favourite charts of my presentations.
Last week’s chart: Asian export orders growth implies a global earnings
recession is coming
Source: NWM, Bloomberg
Avg of Taiwan export orders and South Korea exports (% y/y)

Global equity market earnings per share (% y/y, rhs)
55 85
65
35
45
25
15
5
-5 -15
-35
-25
-55
-45 -75
2002 2005 2008 2011 2014 2017
This chart is powerful enough in itself, to bear repetition. Why right now? because it
exhibits our narrative very well that growth is on a down-turn from here, which is
underway and strong enough to over-ride everything else.
Our problem going bearish bunds this past week is not only calling Brexit
wrong, but that it has coincided with another run of weak data emanating from
the world, and Asia in particular.
(For us as cheerleaders of the global slowdown, this is particularly annoying,

apologies).
I am indebted to my macro strategy colleague James Nelligan, a rare fellow traveller

down the global slowdown/recession route, and EM specialist, and who has updated
this chart (and the couple below it), now we also have the key Taiwan exports data.
Remember that we choose SK and Taiwan as bell-weathers for the region’s health.
Taiwan’s data overnight saw exports at -8.8%yoy, versus -0.7%yoy expected, so an

astonishing miss of about 8%.
This is bad stuff.
Remember that the Korean data last week was weak, but mostly discounted (expected
at -9.5%yoy, released at -11.1%yoy).
This is interesting because while the chart below looks very similar to the chart above,
it is using the final, actual data, i.e., exports not exports orders, showing the
reality on the ground, not just expectations of such; and showing what good lead
indicators export orders data is.
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So, this leaves the chart now like:
Asian exports now officially running very weak. Sell stocks, do NOT chase the
bounce (which is only reversing the Q4 fall, hardly some euphoric move at all)
Avg of Taiwan exports and South Korea exports (% y/y)

Global equity market earnings per share (% y/y, rhs)
55 85
65
35
45
25
15
5
-5 -15
-35
-25
-55
-45 -75
2002 2005 2008 2011 2014 2017
On top of this, this past week has also seen some more bad news from Asia, all very
positive for high quality global fixed-income.
First, China exports came in at -20.7%yoy versus -5yoy expected.
This is a very big elephant in the room, when the biggest economy, and so export
sensitive, registers such weak exports data, which bodes not only badly for its
economy (and offsets to some degree the easing we have seen from the Congress
this week), but is also indicative of how weak the global economy is running. (A small
portion of the weakness will emanate from the yuan’s rise, but this is only 3% in the
past 3 months, so we can hardly excuse this as a currency affected fall). Please also
read our economist Peiqian Liu’s take on it here, she thinks that part of this is down to
Lunar New Year, so we need to watch next month’s data very closely.
Weak China export data implies weakness in EM equities to come. Sell stocks
100 China exports (% y/y) EM equities (rhs, % yoy)
80 120
60
70
40
20 20
0
-30
-20
-40 -80
1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
There are other signs from Asia that the rest of the world needs to pay attention to.
Here is how Japan’s machinery orders look right now, running at -18.8%yoy, looks in
context:
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Weak Japan machine tool orders implies lower global real GDP growth ahead
Japan Machine Tool Orders (% y/y)

World Real GDP (% y/y, rhs)
65
5
45
4
25
5 3
-15
2
-35
-55 1
1987 1992 1997 2002 2007 2012 2017
This is a great lead for the world, and is perhaps the last piece of the jigsaw, all
complete, of the ‘Asia theme’ firing on all cylinders, and driving global
weakness.
It is also very helpful for our negative risk asset thoughts, and buoyant high quality
fixed-income. We will not make the mistake of shorting bonds, even for a 1-2 week
tactical trade, again, during this global slide, it is JUST FAR TOO DANGEROUS.
Stay long 5y - 5y5y EMU FI as your sweetspot market and curve.
3) last point on the dovish ECB

The ECB did not disappoint markets, as we thought it would, moving guidance and
announcing another TLTRO.
We come back to our favourite liquidity chart:
Central bank balance sheets – now not helping global risk, which has bounced a
bit from Q4 weakness. This is a terrible picture for global risk assets from here.
Source:NWM, Bloomberg
3mth rolling cumulative expansion of central bank balance sheets (LHS)

%
10 900
change,
8 800
700
6
600
4
500
2
400
0 300
-2 200
Jan09 Oct09 Jul10 Apr 11 Jan12 Oct12 Jul13 Apr 14 Jan15 Oct15 Jul16 Apr 17 Jan18 Oct18 Jul19
BoJ BoE ECB Fed SNB PBOC World equity (rhs)
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Economies need liquidity.
We have always been sceptics that stopping QE (and so stopping risk asset support in
effect) would have no effect on the world. Hence why I turned bearish risk assets in
Autumn 2018 when I redid our liquidity injection numbers and saw we were about to
move the global liquidity theme from easing to tightening.
For sure there has been a roller coaster ever since, a terrible Q4 for equities, and a
very strong bounce in Q1.
But can you really get excited about global risk assets when they are merely
attempting (and not quite achieving) to remove the Q4 sharp fall? I read so much
about this being the top 3 ever start to the year for equities, and yet no-one mentions
the -10% in December!
And yet now still are faced with challenging global liquidity, and a slowing economy.
With equities having bounced so strongly I feel very comfortable arguing that
they are NOW vulnerable to reacting to weaker economic data as it appears, and
is especially vulnerable now to earnings expectations downgrades (which our
charts suggest should now follow the data downgrades).
4 if we are right about risk assets falling, negative 10y

bunds beckons
This all bodes for negative 10y bund yields very shortly.
As an aside, we did ask this very question at our year ahead conference in December:
Not many bond bulls. Some, but not enough

Source: NWM YA conference, December 2018
There was only one vote for <0% yields.
And that was me.
The world needs to transition to a lower growth, lower CB potency (or at least less
willingness to fire on all cylinders to get where they want to go – look at the ECB’s
1.6% 2021 CPI forecast, which shows they have more or less given up, and that there
is a lot more loosening to come from them via TLTROs/FX weakness, be short €).
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Global CBs remain in play; and if we are right about modest turns down in global risk
assets from here, most assets will return poorly as I have argued for some time.
As such high quality FI remains the place to be, and is even more covetous having a
positive return.
Receive 5y5y EMU (much better carry than 10y spot, higher yield).
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Giles Gale
Euro Area Macro Strategy
This is Non-Independent Research, as
defined by the Financial Conduct Buy periphery. Buy Spain and SPGB flatteners.
distribution. This material should be Long periphery is my strongest conviction. This is a yield-grab world and Europe is at
regarded as a marketing communication
its centre. The flows mobilised by the simple economics of the FX hedge are
and may have been produced in
conjunction with the NatWest Markets Plc comparable with QE. Low vol, low inflation, dovish ECB keeps this trade solid. Spain is
trading desks that trade as principal in the our favourite risk-reward again, but we expect the whole complex to do well. Long end
instruments mentioned herein. All data is is best on the curve. We are out of our short-bund adventure. Fair value is still higher
accurate as of the report date, unless
otherwise specified. in yield for bunds, but weak data, positioning, yield grab reduce our conviction to zero.
Sell 5y on the curve as bobls approach the deposit facility rate. This is not 2016.
10s30s flatteners: fade carry-driven steepeners on rolling flattening. Stay in long-end
Euro rates views asset swap shorts.
ECB First hike Q2 2020
1. Top view: Long periphery. Favour Spain.
Bunds Closed bearish view this
week The ECB was dovish. For more on that, please see our review separately in this GMW.
Curve 2s5s steepeners For Periphery three things matter:
10s30s flatteners 1. The main feature: Low volatility and yield grab. This is the main
Flies 2s5s10s short middle reason to be long sovereign spreads.
Semi-core Spread tighteners. Most importantly, as we repeat weekly now, cross-border economics are capable of
France preferred to mobilising very substantial flows in favour of European fixed income. Unless investors
Belgium. are willing to take FX risk with their duration, and we don’t think most do, FX hedges
Periphery Spread tighteners. for high-yield, high quality paper is are prohibitive. European money is trapped at
home in its search for yield. Foreign money looking for high quality fixed income
Spain best risk-reward.
globally is drawn to Europe. This is a half a trillion dollar annual flow. That’s
Long-end periphery cheap.
comparable to QE, but likely to be focused disproportionately on certain names: Spain
ASW Tighteners and Portugal especially, but we have seen increasing interest in Italy. Japanese BoP
Inflation Long 10y vs 5y and 30y flows data for Feb, out today seem to confirm the trend and preference for semi-core
over core: Japanese were enormous buyers of France in January. See our separate
Source: NWM
one-pager on the details.
Low volatility is the ‘hygiene factor’ that greases the wheels of this trade, and it is likely
Japanese continue to rotate fixed
to continue. The ECB this week helps. But too-low, but stable inflation is the driver,
income into Europe
Source: MoF ($bn cumulative total)
and that’s a go with theme – core inflation has shown no sign of moving away from a
narrow range around 1%.
350
300 What does best in this environment? It may be Italy, just because it is the widest, but
250 the best risk reward remains Spain or Portugal. We switch back to Spain this week
200
because Portugal has performed so strongly, because we think the market is
150
comfortable with Spain’s electoral risks, and because Spanish growth expectations
100
have held up so well in the downturn.
50
0
What to buy as a yield grabber? Iberia stands head and shoulders above the rest
-50
Aug 14 Aug 15 Aug 16 Aug 17 Aug 18 Source: NWM
Core+Semi+S pain US
50% 3m Carry&Roll as % of 3m vol
… with Belgium a favourite 45%
Source: MoF (€bn/month) 40%
35%
2.0
30%
1.5 25%
1.0 20%
0.5 15%
10%
0.0
5%
-0.5
0%
-1.0
-1.5
14 15 16 17 18 19
Europe (&US) cash World sw aps
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2. The risk: Low growth and debt sustainability

What upsets this positive story? Volatility and/or a steeper US yield curve. We
see a steeper US curve, but to make enough of a dent in the cross border economics,
we may need to see Fed rate cuts, and that, of course, might serve to stabilise risk-on.
Volatility probably needs a failure of confidence in either European politics or the ECB
as a backstop.
When does low growth become a negative for Periphery because investors
switch from greed to fear over debt sustainability? We don’t think we are near. It
has been a live theme since the start of the year in our investor discussions. A related
angle, Japanification (politically impossible in Europe?), has had a bounce in interest
too. But this does not overturn the flows arguments above for us. What would change
this? We would want to see clearer signs that the economic slowdown is shaping the
political landscape negatively for markets. So far we don’t see it.
The transition from the Draghi ECB is also a medium-term theme. Investor interest in
the ECB’s role in jumping Europe back off the path toward Japanification is high. If
investors start to perceive that ideological difficulties with doing ‘whatever it takes’, as
well as quasi-legal ones are on the rise, this could be a problem. Again, this is not a
concern we share right now.
3. The sideshow: TLTRO-iii

TLTRO-iii was always just an add-on, never the main reason to be long
sovereign spreads. The announcement was clumsily delivered though.
Clearly the intention was to ‘meet market expectations’ by making an announcement.

But the late start (September) and the lack of detail on the conditions mean that
markets are in the dark about what take up will look like.
Nowotny today says that details will be ‘by June’. For once we should listen to him. We
may get details in April, but clearly there may not be any hurry. We suspect that this is
not just about lack of preparation time to design complex incentives, but also about
keeping optionality on how to calibrate them: if need be the operations can still be
made very attractive to banks.
2. Who’s afraid of European Politics? SPGBs are our

favourite again on growth and market comfort with
elections.
European parliament: populism looks smaller and more decaffeinated than
feared. The more I read about the European Parliament elections, the less I worry.
Maybe that’s because my starting point was that it could be a major event. Parties on
all sides are campaigning on platforms of reform. But the bottom line increasingly
seems to be that ‘populist’ parties are unlikely to be large enough to present a serious
block, especially as traditional parties move in their direction on immigration, which is
the key issue for most of them. Previously anti-euro parties have been concluding that
that is not a significant vote winner, and focusing instead on their own vision of
European ‘reform’.
The TAV to end the Italian government? No, but BTPs would like that. Italian
politics has been a drag on BTPs this week as the coalition partners re-discover the
Turin-Lyon TAV link as a key policy difference. This is only likely to be the excuse to
end this Italian government if M5S wants it that way, and given its polling numbers, we
strongly doubt that it does. More likely it will want to make this part of a ‘renegotiation
of Europe’ (with France at the centre of that) theme in the EP elections, and wait for
the PD, which has a new leader finally, to rebuild to offer an alternative on the left.
Salvini’s incentive is to be a figure for stability, not to end this government. From a
markets perspective, the conclusions are that Italian elections are not near, so relative
quiet that should benefit BTPs. On the other hand, new elections would be an outright
market positive given the current polls. That’s a reasonable skew of risks.
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Elections are not a negative event in Spain. Spanish politics have been off the
market’s radar because most investors seem to have accepted that the elections are
not something to worry about. We agree. A hung parliament and new elections after a
period of caretaker government is effectively status-quo. But any government would be
a relatively good outcome. Markets would prefer a right-wing coalition, we expect,
while PSOE has been pulling ahead. But a PSOE-led government with support from a
weakened Podemos would still be relatively well received, we think.
Given that Spanish growth expectations have been strikingly resilient, and with
Portuguese spreads at long-term tight levels, we return to SPGBs as our top-
conviction in risk-reward in Periphery. On the curve, we prefer the long end. Our sales
team recommended a 10s30s flattener in bond options, which we agree with – the
flattener likely has bullish directionality at this point. But the curve looks steep. In a
yield grab world, that should be too tempting to last.
10s30s Spain vs 10y since 2014. Flatteners.

Source: NWM
2s5s are very flat. So are 10s. 0% is

not a real barrier, -0.4% is the depo
rate. 5s should underperform now. 3. Bunds: Brexit and ECB end our have-a-go bearish view
Source: NWM
The turnaround in sentiment on Brexit risks for next week and the dovish ECB made
this a very bad week to be short. We stopped out bearish bund view yesterday for a
small loss compared to the level three weeks ago when we entered.
How do the risks look after a day of reflection? Still mixed. We are tempted still by the
arguments for economic stabilisation (the global picture is not a clear drag, the EU
fiscal position swings to stimulus, the consumer has more resilience than at any time in
the past 10 years, no bubbles, ECB stimulus remains strong). Data surprises have
started to rise again. Bund fair value looks around 30bp above where we are today.
But on the other hand, our over-arching theme of yield grab should extend to bunds,
and it’s not explicit in our bund model. We also don’t explicitly account for high-
10s30s Germany vs 10y. Too steep frequency indicators that have been very weak. More importantly positioning is unlikely
now. to be very long, other than CTAs perhaps. Indeed a key theme this year, buying of
Source: NWM spread, not outright, suggests that the short-base in bunds might be substantial.
3.1 Soft bearish view: 5y rich. 5s10s flatteners or sell on 2s5s10s.

The front end has been flattening dramatically. Bobls are now close to the -
0.40%. This now looks stretched. As a curve trade we like to sell. They have been
lower, but we should not compare to 2016, when repo tightness was more of an issue,
QE infinity was the theme, and rates looked like they might still be cuttable. If this is
the time for rolling flattening, now is the time for 10s to outperform vs 5s.
At the long end, we also put our preference for 10s30s steepeners as a carry
trade on hold. The trade has performed very well, it no longer looks attractive on
historic charts and we are concerned about rolling flattening.
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30y asset swaps have tightened. Our

4. Swap spreads. Stay in 30y asset swap tightening.
conviction is weakened by curve On February 8, we also entered a short Buxl recommendation. We targeted 45bp.This
flattening, but stay with this on lighter
theme has done very well this week due to substantial long-dated swapped issuance
seasonal supply.
in the middle of the week, relieving pressure on short asset swap positions. From here,
Source: NWM
lighter supply overall (so reduced asset-swap buying) should keep pressure off long-
dated asset swaps. Substantial improvements in bank credit spreads may encourage
more financial issuance (normally swapped to floating) as we saw this week. But curve
flattening raises our fair value for the spread. Our conviction overall is reduced but we
maintain this trade.
Monthly average PV01 of supply from

EUR corporates
Source: NWM
€m/bp, monthly totals

100
90
80
70
60
50
40
30
20
10
-
Jan Mar May Jul Sep Nov
Ser ies9 201 7 201 8 201 9
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Imogen Bachra
Japanese investment in global FI: Jan-19
defined by the Financial Conduct Japanese investors turned net buyers of foreign sovereign bonds in
Authority. Not intended for Retail Client Jan-19
distribution. This material should be
regarded as a marketing communication Following very small net sales in December, Japanese investors turned net buyers of
conjunction with the NatWest Markets Plc foreign sovereign bonds in January, to the tune of €12.7bn – the second largest net
trading desks that trade as principal in the buying flow since January 2018.
instruments mentioned herein. All data is
Japanese investors bought €12.7bn of foreign sovereign bonds in Jan-19
(cumulative buying flows since 2005)
€bn USA France Ger ma ny Italy

Australia UK Canad a Switzer land
500 Denmark Netherland s Swede n Others
Record purchases of Belgium
bonds… 400
2 300
1.5
1 200
0.5
0 100
-0.5
-1 0
-1.5
14 15 16 17 18 19 -100
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
…and purchases of OATs reached

recent highs Yield grab theme is alive and well
Source:
The main beneficiaries of these buying flows were France, and to a lesser extent
15
USTs, where Japanese investors bought €7.9bn and €2.9bn respectively. For France,
10 this represents the second largest monthly buying since the elections in 2017, before
which Japanese investors shed their holdings of OATs significantly (see sidebar).
5
0 Belgium bonds (corporate and sovereign) also benefitted with €1.8bn worth of
investment in January – the largest buying flow since the data began (2014). The
-5
Ministry of Finance data also shows small purchases of Spain (€1.3bn) and Italy
-10 (€0.7bn) for the fourth month in a row.
-15
Aug 15 May 16 Feb 17 Nov 17 Aug 18 Unsurprisingly, given the rally in core yields at the beginning of the year, Japanese
investors shed €3.6 sovereign German bonds in January – marking the fourth month in
a row of net selling.
We have been arguing for some time that the yield grab theme has been a large
support for semi-core and periphery yields so far in 2019. These Japanese investor
flows – albeit slightly lagged, representing January’s purchases – go some way to
validate this theme. As we wrote last week, the yield grab coming to Europe could
draw an extra €500bn/year into European FI, supporting sovereign spreads.
Japanese investor net flows of LT foreign sovereign bonds (€bn)

US FR DE IT AU UK CA CH DK NL SW Others
1m 2.9 7.9 -3.6 0.7 0.0 0.2 -0.3 0.0 0.1 -0.2 -0.2 5.2
3m 14.7 4.4 -5.1 1.1 -1.9 -0.1 -0.9 0.0 -0.1 -0.7 0.3 4.8
6m 22.3 2.6 -7.9 1.4 0.2 0.2 -1.2 -0.3 0.0 -0.6 1.2 4.4
YTD 2.9 7.9 -3.6 0.7 0.0 0.2 -0.3 0.0 0.1 -0.2 -0.2 5.2
12m -26.5 14.3 -17.6 1.0 0.6 0.1 -0.7 -0.4 -0.4 2.7 1.2 16.0
2y -50.3 11.5 -9.5 0.9 4.2 -1.5 0.6 -0.5 -0.3 2.3 0.9 29.8
3y 58.5 31.4 -7.3 1.9 9.5 -4.8 9.6 -0.8 0.1 2.7 4.1 49.3
Source: NWM, Bloomberg, MoF
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China’s Targets Remain ‘Reasonable’

Peiqian Liu  This year’s Government Work Report lowered the 2019 GDP growth target to
6.0-6.5% range.
 More easing measures and reform plans were announced to ensure growth
settles ‘within the reasonable range’.
This is Non-Independent Research, as  Despite facing a more challenging domestic and international environment,
defined by the Financial Conduct the Government will refrain from adopting aggressive and indiscriminate
Authority. Not intended for Retail Client stimulus.
This year’s Government Work Report delivered today by Premier Li Keqiang was
conjunction with the NatWest Markets Plc broadly in line with market expectations. The Government lowered the GDP target
trading desks that trade as principal in the from “around 6.5%” in 2018 to a 6.0-6.5% range for 2019. Setting GDP targets above
6% means China is still on path to achieve its longer term goal of doubling its 2010 per
otherwise specified. capita income by 2020. Meanwhile the range bound GDP target allows some flexibility
and fluctuation in short term economic growth. Premier Li reiterated the commitment to
shift towards higher quality and more sustainable growth model and pledged more
easing measures to support the bottom line growth targets. (See Table 1)
Table 1: Main Economic Targets and Policy Priorities

2018 Target 2018 Actual 2019 Target
GDP Around 6.5% 6.6% 6.0-6.5%
CPI 3.0% 2.1% 3.0%
Budget Deficit (% of GDP) 2.6% 2.6% 2.8%
Budgetary deficit CNY2.38trn CNY2.38trn CNY2.76trn
Local Government Special CNY1350bn CNY1785bn CNY2150bn
Bond Issuance
Tax Cuts (VAT and Social CNY1.1trn (~1.2% of GDP) CNY1.3trn (1.4% of GDP) CNY 2trn (~2.1% of GDP)
Insurance)
M2 and Aggregate Financing Not specified 8.1% and 9.8% In line with nominal GDP
growth growth
Fiscal Policy Stance Proactive - Proactive with greater
effectiveness and intensity
Monetary Policy Stance Prudent and Neutral - Prudent
New Urban Employment 11 million 13.61 million 11 million
Source: Government Work Report; NatWest Markets.
To achieve the growth targets we expect the government to keep up with the
pace and scale of easing. In the report the government outlined more easing by
widened the budget deficit and de-emphasised the quantitative growth targets for M2
and aggregate financing. We highlight three policy priorities in the report:
1) More proactive fiscal policies will take the burden of supporting growth
The report outlined a higher budget deficit of 2.8% of GDP in 2019, up from 2.6%
in 2018, although it fell short of market expectations of 3.0%. Off-budget local
government special bond issuance quota was increased by 60% to CNY2.15trn from
CNY1.35trn last year, in line with our expectations.
The scale of tax cuts was slightly more than expected. The report announced a VAT
cut by 3 percentage points for manufacturing industries from 16% to 13% and 1
percentage point for transport and construction industries from 10% to 9%. Social
insurance contributions from corporates will also be lowered by around 4 percentage
points from 20% to 16%. To sum up, the tax cut is estimated to be at around CNY2trn,
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or 2.1% of GDP, up from CNY1.3trn tax cuts last year. The fiscal easing here should
help corporates to alleviate some cost pressures.
The local government bond issuance quota was also increased by 60% to CNY2.15trn.
More bond issuance will help local governments to fund major infrastructure projects in
the year ahead. We expect infrastructure investments to rebound this year after a
sharp plunge in 2018 largely due to deleveraging. The NPC has approved earlier local
government special bond issuance since January to ensure a smooth implementation
of infrastructure projects. The momentum of special bond issuance will likely remain
robust throughout the year, providing some support to the aggregate financing growth.
2) The Government remains committed to fight “three critical battles”
The report kept the targets for all three key areas of supply side reforms – namely
deleveraging, poverty reduction and environmental protection. The tasks remained
unchanged although we notice a softer tone on deleveraging as the focus has
shifted from prioritising financial sector de-risking to ensuring stability in the
financial markets. Monetary policy will remain prudent and the government will refrain
from aggressive stimulus that may cause the economy to rapidly add on leverage.
(See Table 2)
With stabilising the debt to GDP ratio as the main policy goal, we see limited
room for aggressive monetary easing. However, we see more targeted easing
measures such as targeted reserve requirement ratio (RRR) cuts, preferential
credit policies to support the smaller and private companies.
Table 2: Key Policy Goals in “Three Critical Battles”
2018 Target 2018 Achievement 2019 Target

Deleveraging (macro Keep macro leverage stable; Macro leverage is under Keep macro leverage
leverage as % of GDP) achieve significant progress in control, financial sector is basically stable
supply side reforms generally stable
Poverty Reduction (Reduce Reduce 10mln rural poor Rural poor population Reduce 10mln rural poor
rural poor population) population reduced by 13.86mln population
Environment Protection 3% reduction 3.1% reduction Around 3% reduction
(energy consumption per
unit of GDP)
Source: Government Work Report; NatWest Markets
3) Reforms and opening up will accelerate in the financial sector to provide

some support to growth
Reforms and opening up measures have appeared in multiple occasions in the report.
We think the Government will likely accelerate the pace of some key reforms to
support growth. In terms of monetary policy, we do not expect the PBoC to lower
benchmark lending rate but we think the central bank will deepen market based
interest rate reforms to lower the real interest rate.
The PBoC has already introduced a new open market operation tool - Target Medium
Term Lending Facility (TMLF) - in January to provide targeted support to commercial
banks’ lending to the private sector. The 1Y TMLF yield was set at 3.15%, 15bp lower
than 1Y MLF at 3.30%. We think the central bank will accelerate the issuance of TMLF
going forward to guide market rates lower. We also see scope for further RRR cuts by
another 200bps from 13.50% currently to11.50% at the end of this year to unleash
more liquidity for commercial banks to fulfil the lending targets to the private sector
which is set at 30% yoy growth.
As the government increased the local government bond issuance quota and allowed
commercial banks to issuance perpetual bonds to replenish Tier I capital, we expect
financial sector regulators to accelerate the development of bond market infrastructure
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to facilitate the rapid growth of the bond market. We think the bond market opening up
will also likely gain momentum to attract more long term capital inflows.
In terms of exchange rate policy, the report kept the phrase of “keeping yuan basically
stable at reasonable equilibrium” while the central bank continues to push forward
exchange rate reforms. We think by keeping the wording unchanged for exchange
rate policy, the authorities will unlikely change its regime or path of exchange
rate reforms in near term.
Overall, we see the economy running within a reasonable range in the year
ahead. The government will stay pre-emptive and use counter-cyclical macro
policies to offset any sharp slowdown. We expect both fiscal and monetary
policy to remain targeted in the year ahead and the government will push
forward reforms and opening up policies to unleash more growth potential.
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Theo Chapsalis, CFA

Linked-up | OATi are cheap on ASW; buy
Oriane Parmentier
short-dated TIPS
Giles Gale  EURi: We continue to like 10y on the 5s10s30s breakeven fly. The 10y sector
remains undervalued on both ZC swaps curve and cash curve. BTPei breakevens
This is Non-Independent Research, as are cheap. As a proxy positive on BTP spreads; BTPei offer better risk-reward. OATi
defined by the Financial Conduct are Cheap on ASW compared to OATei.
and may have been produced in Italian linkers are cheap. Buy BTPei28 Z-spread iota. A rising line shows that
conjunction with the NatWest Markets Plc breakeven breakeven are cheapening against
Source: NWM, Bloomberg swaps. OATi are cheap on ASW vs
accurate as of the report date, unless OATei, with the exception of OATi29.
otherwise specified. Source: NWM, Bloomberg
10y BTP/B und sp read (lhs)

3.8 0.6 0.40 OATi28s OATi29s
3.3 BTPei2 8 b reakeven vs 0.5
OATei30s OATi25s
Key views in inflation-linked swa ps OATei27s
2.8 0.4
Euro linkers
2.3 0.3 0.20
Breakevens Higher; flatter curve
1.8 0.2
Real yield Bullish 10y
1.3 0.1
Iota SPGBei to
0.8 0.0 0.00
underperform swaps
Jul-17 Jan-18 Jul-18 Jan-19 Mar-18 Sep-18 Mar-19
RV Short SPGBei iota.
Long BTPei and
OATei vs SPGBei  GBPi: We maintain our bearish RPI/BE stance but are aware that coupon money
UK linkers and index extensions may provide some headwinds to our view. Also, maintain real
yield flatteners as we expect a proportional reduction of linker DV01 issued in the FY
Breakevens Lower, steeper curve
2019/20.
Real yield Bear flattener
 USDi: Buy TII0.125 4/20 on BE and sub five-year TIPS (NEW TRADES)
Iota Marginally tighter
RV Rich 20y RPI swaps UK: Rich front-end real yields Positive US CPI m-om moves ahead
vs 30y Source: NWM, Bloomberg Source: NWM, Bloomberg
TIPS -1.5% 0.8%

SA Yield
Month-on month change
Breakevens Bullish Headline US CPI

-1.7% 0.6%
Real yield Flatter, 10s30s 0.4%
-1.9%
(%)
Basis Tighter 0.2%

-2.1%
RV Buy new 30y 0.0%
-2.3%
Source: NWM, Bloomberg -0.2%
Apr-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-19
May-19
Jun-19
Mar-19
Feb-19
Jul-19
-2.5%
0 10 20 30 40 50 60
Modified Duration
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Fixing and Forecasts

NatWest Markets inflation forecasts and market pricing
UK US EUR
NWM Index NWM y/y Market NWM Index NWM y/y Market Market
implied y/y implied y/y implied y/y
Mar-19 286.0 2.8% 2.7% 254.3 2.0% 1.6% 1.3%
Apr-19 288.6 3.2% 3.0% 255.2 1.9% 1.5% 1.5%
May-19 289.2 3.0% 2.9% 255.8 1.7% 1.3% 1.0%
Jun-19 289.8 2.9% 2.9% 256.3 1.7% 1.3% 1.1%
Jul-19 289.9 2.9% 2.9% 256.4 1.7% 1.4% 1.0%
Aug-19 292.0 2.8% 2.6% 256.8 1.8% 1.4% 1.0%
Sep-19 291.9 2.7% 2.8% 257.0 1.8% 1.4% 0.9%
Oct-19 291.2 2.3% 2.7% 256.9 1.6% 1.2% 0.7%
Nov-19 292.0 2.6% 2.8% 256.5 1.8% 1.5% 0.6%
Dec-19 293.7 2.8% 3.0% 256.2 2.0% 1.7% 0.9%
Historical commodities Implied energy futures

Source: NWM, Bloomberg Source: NWM, Bloomberg
90 475 59 68
80 58
450 64
70 57
60 56
425 60
55
50
54
40 56
400
53
30
52 52
20 375 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Mar-24 Mar-25 Mar-26
Jan-16 Jan-17 Jan-18 Jan-19
WTI Bre nt Real CRB Raw Metals ( rhs) WTI Fu ture s Bre nt Futu res
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Oriane Parmentier
Giles Gale EURi: how to be long EUR inflation-linked?
 The weak core inflation print for February last week confirmed what we have been
EUR 5y5y have started to react.
saying for over a year now: the trend is 1%, with no sign of acceleration or
deceleration.
1.8 2.8
 Growth is the most uncertain component of this story.
1.7 2.6
 EURi 5y5y/10y20y breakeven flatteners. The breakeven curve is too steep at the
2.4 long end, despite the recent correction.
1.6
2.2  We continue to like 10y on the 5s10s30s breakeven fly. 5y5y have started to react
1.5 and briefly went above the 1.50% psychological levels. The 10y sector remains
2.0
EUR 5y5y
undervalued on both ZC swaps curve and cash curve.
1.4 1.8
USD 5y5y
 BTPei breakevens are cheap. As a proxy positive on BTP spreads, BTPei offer
1.3 1.6 better risk-reward.
Mar-18 Sep -18 Mar-19
 OATi are Cheap on ASW compared to OATei.
Still like to be long EUR 5y5y vs.
10y20y, in spite of the correction. Europe’s slowdown meets long-term scepticism
It’s been a while since we’ve seen a proper flurry of interest in ‘Japanification’ of
70 Europe, but it seems like the theme is back as markets start to ask again how Europe
would respond to another slowdown without ever really having managed to lift inflation
65
expectations since the sovereign crisis. We highlighted in our recent ECB preview that
60 the fall in breakevens means that the market-implied probability of inflation averaging
55 below 1% over the next five years has jumped from around 30% to 50% over the past
six months. Clearly inflation linked continues to suffer a credibility gap and we doubt it
50
will be filled until the market theme moves on from GDP/Inflation downgrades (the
45 OECD and ECB this week the latest movers). Today’s weak Spanish auction is just the
40 latest vignette.
Feb-18 Aug -18 Feb-19
It’s hard to be on the other side of all this. But we have been arguing that that the level
BTPei breakevens vs swaps are
cheap (ie iota is wide), given historical of pessimism may be overdone for a number of reasons, and we stick to that. The
correlations with 10y BTP spreads. slowdown has been far from globally-synchronised, and in fact the global picture
Source: NWM, Bloomberg seems to have been improving since early this year, not least because of apparent
progress on US/China trade talks. Europe as the outlier may have more upside than
0.6 y = 0.0709x + 0.152
people expect. A substantial fiscal stimulus, the fall in oil prices, possibly a soft-ish
BTPei28 breakv en v s swaps
R² = 0.3434
0.5 Brexit, lack of bubbles, and a resilient household sector (yes, despite the eternal
negativity on the European consumer, consumption is the main contributor to growth)
0.4
are all silver linings that shouldn’t be ignored. The trade cycle where most of the
0.3 negativity is concentrated is highly visible, but a relatively small part of the whole.
0.2
Unfortunately we don’t hear any of this repeated much, so our confidence that these
0.1 factors are likely to take hold with markets is modest. But pessimism has been
1 2 3 catching up with the data, as can be seen by the pickup in the data surprise indices
10y BTP/Bund spread
from long-term lows. We are also entering a bit of a supply lull, and as we point out
Italian linkers are cheap. Buy BTPei28 below, March and especially April tend to be good months for EURi seasonally.
breakeven
Source: NWM, Bloomberg Directionally, we have had a low-conviction positive view of breakevens overall. We
maintain that. Italian breakevens (more below) are the best long, particularly if you
10y BTP/B und sp read (rhs) think BTP spreads can continue to tighten, as we do. On the curve, this more positive
3.75 BTPei2 8 b reakeven vs swaps 0.6
view is confined to the curve out to 10y. 5s10s30s (long middle) is still our top view,
0.5 and we are more comfortable with its bullish directional bias.
2.75
0.4
Italian linkers are cheap. Buy BTPei28 breakeven
0.3
1.75 We like long BTPei28 breakevens. It is a proxy long on BTP spreads, with improved
0.2 risk reward because (i) the recent underperformance of BTPei creates value compared
0.75 0.1 to other expressions of breakeven inflation and (ii) because, fundamentally,
Jul-17 Jan-18 Jul-18 Jan-19 breakevens should be linked to inflation expectations and breakevens are now very
low, particularly in the 10y area.
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10y is the sweet spot to be long on the EURi curve. 5y5y has been aggressively sold
as a macro theme, and the prospect of a new 10y OATei and of a new 10y BTPei have
weighed on valuations in the sector. Given current valuations, we doubt these will be
issued this month.
Italian linkers offer especially attractive value at these levels. Italian breakevens have
underperformed other breakeven inflation measures. This is unusual – Italian
breakevens normally perform better when Italian spreads tighten.
Short-term, we hold a positive view on Italy. We expect that we are in a period of

moderate calm in Italian politics.
BTPei breakevens vs swaps are cheap (ie iota is wide), given historical correlations
with 10y BTP spreads.
OATi: Cheap on ASW

French inflation swaps found a better bid after the volatility in European inflation last
month due to methodological changes in German HICP, as a result OATi are cheap on
ASW compared to OATei (with the exception of the OATi29).
The right-hand chart below illustrates the relative value between OATi and OATei on
the ‘iota’ measure. The OATi28 is the most attractive on the curve. Although the left
hand chart shows that these are not the best recent levels, we like owning OATi28s vs
OATei27s in asset swap.
Z-spread iota (spread of z-spread). A rising line shows that Z-spread iota.
breakeven are cheapening against swaps. OATi are cheap Source: Bloomberg, NatWest Markets
on ASW vs OATei, with the exception of OATi29.
Source: Bloomberg, NatWest Markets
OATi28 s OATi29 s OATei3 0s

0.35
OATi25 s OATei2 7s 1.60%
0.30 OATei curve
0.25 1.40%
0.20
1.20%
0.15
1.00%
0.10
0.05 0.80%
OATei OATi
0.00
0.60%
Mar-18 Sep -18 Mar-19
19' 24' 30' 35' 41' 46'
German package holidays methodological change: the seasonality of

the HICPxT index changes. What matters and what doesn’t.
A change in methodology in the German Package holidays led to a revision of the

several indices including the Euro HICPxT, on which European inflation-linked bonds
and swaps are indexed. German HICP constitutes close to 30% of the Eurozone
aggregated HICP index. What are the need-to-knows?
 The average inflation rate should not be impacted.
 We have only four years of revised data, which makes it hard to have much
confidence in the size of the changes to seasonal factors, but seasonal patterns
appear to have been reinforced by the change. This should be negative for
German linkers, and positive for linkers with maturity dates later in the year issued
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by France, Italy, and Spain. The repricing does not appear to have taken place,
however.
 The changes should not have significance other than for micro-RV. Linker total
Differences between old and new
returns do show seasonality. March, April and December are good months, while
expected future HICPx index levels (in
bp). January CPI may be close to August is a bad month. But returns are not driven by the seasonality of the linking
0.2pp lower in future. July may be index. The overhaul to German CPI methodology changes seasonal patterns (a bit)
0.2pp higher. but this will probably not be a driver of returns over the year.
 Finally, note that changes to seasonal patterns should not influence asset swap
20
valuations.
15
10
5 Historical seasonality of EUR breakeven performance (all maturities). Mar-Apr-
- Dec are good months. Aug is a bad month.
-5
-10
-15
-20 80 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
-25
60
40
These changes to expected future 20

seasonal patterns in HICPx imply 0
winners and losers in EUR inflation
linked bonds. -20
Approximate price (not yield) changes -40
implied for bonds with maturity dates
-60
shown.
 German linkers are most adversely -80
affected (seasonally-adjusted breakevens
should be revised higher) -100
 Italian and Spanish linkers are most Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
positively affected ( seasonally-adjusted
breakevens should be revised lower)
 Methodological changes, even substantial changes, are part of the
0.20 change is beneficial
0.15 environment for linkers. The Debt management offices of EUR linkers’ issuers
0.10 have clarified that the change in methodology will not affect the terms of their debt
0.05
0.00 instruments. The International Swaps and Derivatives Association (ISDA) also
-0.05
-0.10
indicated that this won’t affect derivatives transactions.
-0.15
-0.20 change is adverse
-0.25
Absence of correlation between the

monthly changes in inflation prints
and breakeven performance.
40
30
20
10
0
-10
-20
-30
-40
-50
-60
-2% -1% 0% 1% 2%
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UK inflation: staying cautiously bearish

Theo Chapsalis Trade views: Continue to sell 10y RPI swaps, long IL28 vs IL24 and long IL41 vs IL36
From a fundamental point of view very little has changed in the UK over the last week.
The subtle weakening in sterling and overall stable energy prices have kept inflation
expectations largely unchanged. Visually, the biggest move across front-end RPI
NatWest Markets inflation forecasts swaps was attributed to the monthly roll so it is not a “true” move.
and market pricing
Moreover, BoE Governor Mark Carney testified at the House of Lords (5 March) and
NWM Market implied touched upon the topic of RPI. The market has very lightly reacted to this news and we
y/y y/y perceive the comments as marginally supportive for linkers and especially the point
Mar-19 2.8% 2.7% that fixing of some of the flaws of RPI would likely be “detrimental to long-term bond
Apr-19 3.2% 3.0% holders” (FT, 5 March 2019). In this way the Governor may want to emphasise that
May-19 3.0% 2.9%
there are limitations to the improvements of the index that could be implemented.
Jun-19 2.9% 2.9%
Jul-19 2.9% 2.9% APF purchases kick-off again next week (beginning on 11 March) with the programme
Aug-19 2.8% 2.6%
being often seen as a driver of flatter curves. We maintain our view for both flatter
Sep-19 2.7% 2.8%
nominal and real curves. This may appear as an overly simplistic approach but if
Oct-19 2.3% 2.7%
Nov-19 2.6% 2.8% supply of longs and inflation-linked is due to be reduced and the BoE absorbs duration
Dec-19 2.8% 3.0% while there is no meaningful supply event then curves should flatten. On Wednesday
13 March, the gilt remit is due (see Spring Statement preview, 1 March 2019) so next
week might be volatile both because of political but also issuance-related news.
Moreover, on 22 March £281mn of coupon money reach the market. This is clearly
smaller than the typical May/Nov coupon flows, however with IL24 falling out of 5yr+
indices, the index extension argument provides further supportive backdrop for linkers.
Hence while we maintain our bearish inflation view, we are aware that this may face
headwinds in the near term.
Chart 1 shows the amount of total risk (in £ mn/bp) that has been issued across
different linkers. The chart allows us to easily spot points on the curve where more
issuance is warranted. Clearly IL41 and IL48 are new bonds and hence strong
candidates for syndications. At the same time IL28 is growing in size by it is still small
relative to its neighbouring IL27 and IL29. We would also expect IL56 to be re-opened
at some point in the coming months but see no appetite or need for linker issuance
beyond that point. Also going forward, linker issuance should gradually be more and
more focused around the 20y sector where the natural demand exists.
Chart 1. Issued DV01 across different UK linkers

160
140
120
DV01 (MM/bp)
100
80 DV01 (£ mn/bp)
60
40
20
0
IL19
IL20
IL22
IL24
IL24
IL26
IL27
IL28
IL29
IL30
IL32
IL34
IL35
IL36
IL37
IL40
IL41
IL42
IL44
IL46
IL47
IL48
IL50
IL52
IL55
IL56
IL58
IL62
IL65
IL68
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TIPS: value at the front-end

Theo Chapsalis Trade views: Buy TII0.1254/20 on BE (NEW), buy sub five-year TIPS, maintain long
US 5y5y vs UK
It feels like the right time to be long TIPS. From the fundamental point of view, the Fed
continues to be moving towards the dovish end of the spectrum and it is rethinking its
inflation target. This ongoing debate has largely and will continue to shift overall
inflation expectations higher. In our view this is supportive for short-dated real yields
(sub five-year sector) and investors can also benefit by selective long positions in
front-end BEs.
After allowing for a seasonal adjustment, sub five-year real rates are hovering slightly
above 70bp with the corresponding BE rates at around 180bp. From a level
perspective, this is low. Over the last five years the average core inflation rate has
been 2% and in theory the BE slope should allow for some inflation risk premium. We
believe that this inflation risk-premium could increase, especially if the Fed is willing to
slow down its tightening cycle while economic activity and especially the labour market
continue to be robust. This is in line with the view that our US team has expressed in
th
the Treasury Morning Call, March 4 2019.
So TIPS are best positioned to perform from a dovish Fed and a pick-up in headline
inflation and we would expect a 30bp performance relative to the current levels. There
is potential for realised headline inflation to exceed the levels implied in breakevens. At
the same time, there is substantial support from carry for long real rate positions due to
the upcoming month-on-month increases in CPI (see Chart 2). The pattern shows
month-on-month increases of at least 0.2% up until June, which translates into positive
carry up until the end of August. With real yields around 0.7% and repo at around
2.5% at least a 0.15% month-on month increase is needed for carry to remain positive.
Last but not least, March and April have historically been months when TIPS
outperformed USTs so investors with a long bias are better off buying TIPS now.
At the very front-end TII0.125 4/20 is a cheap security in various metrics. First, it offers
a BE rate of around 163bp once adjusting for seasonals. Our economists expect yoy
headline inflation to be running at about 230bp so there is a substantial difference.
Second, the bond appears to be cheap in terms of Z-spread iota (difference between
the TIPS and UST Z-spreads). Third, bonds that are usually about to fall below the 1y
maturity threshold tend to be at their cheapest point, i.e. it pays off buying and holding
them to maturity. Clearly such a trade would be sensitive to moves in energy so
investors may have to consider some hedging either through Brent or gasoline futures.
Chart 2. Month-on-month increase to keep carry positive until end of August

0.8%
0.7%
0.6%
Month-on month change (%)
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%
-0.1%
-0.2%
Jan-19 Feb-19 Mar-19 Apr -19 May-19 Jun-19 Jul-19 Aug -19 Sep -19 Oct-19 Nov-19 Dec-19
Headlin e US CPI
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Relative value charts

Euro Area, real yield, seasonally adjusted Euro Area, breakeven inflation, seasonally adjusted
3.5%
1.65%
2.5%
1.40%
1.5%
1.15%
0.5%
-0.5% 0.90%
-1.5% 0.65%
-2.5% 0.40%
19' 24' 30' 35' 41' 46' 19' 24' 30' 35' 41' 46'
Bundei OATei OATi BTPei SPGBei Bundei OATei OATi BTPei SPGBei
Euro Area, Z-spread (Italy on the rhs) Euro Area, Z-spread iota (spread of Z-spreads)
100 300 70
80 60
250
60
50
200
40
40
20 150
30
0
100
20
-20
50 10
-40
-60 0 0
19' 24' 30' 35' 41' 46' 19' 24' 30' 35' 41' 46'
Bundei OATei OATi SPGBei BTPei (rhs) Bundei OATei OATi BTPei SPGBei
UK Seasonally adjusted real yields UK, Z-spread

-1.5%
55 z-spread
SA Yield
vs Sonia (bp)
-1.7% 45
-1.9% 35
-2.1% 25
-2.3% 15
-2.5% 5 Modified Duration

0 10 20 30 40 50 60
Modified Duration
-5 0 5 10 15 20 25 30 35 40 45 50 55
US, real yield, seasonally adjusted US, breakeven inflation, seasonally adjusted
1.20% 2.0%
1.10%
1.8%
1.00%
0.90% 1.6%
0.80%
1.4%
0.70%
0.60% 1.2%
0.50%
1.0%
19' 24' 29' 34' 39' 44' 49'
19' 24' 29' 34' 39' 44' 49'
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US, Z-spread US, Z-spread iota (spread of Z-spreads)

50 30
45
40
25
35
30
25 20
20
15
10 15
5
0
10
19' 24' 30' 35' 40' 46'
19' 24' 30' 35' 40' 46'
Please go to the next page for our issuance charts.
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Issuance charts
Bubble Size = PV01 of issuance
EMU inflation-linked issuance France inflation-linked issuance

Source: NWM, Debt offices, Bloomberg Source: NWM, Debt offices, Bloomberg
25 25
20 20 Q3
Q2Q3 Q2 Q1Q2Q3
Q2
15 Q1 Q4 Q3 Q3 15
Q1
Q4 Q1 Q1Q2 Q4 Q3 Q4 Q2 Q1 Q3
Q4 Q3 Q1 Q3
Q3 Q2 Q4 Q2 Q4
10 Q4
Q4Q1Q2 10 Q1Q2 Q4 Q4Q1Q2
Q1Q2Q3 Q1
5 Q4 5
2013 2014 Q3 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018
0 0
Germany inflation-linked issuance Italy BTP Italia and BTPei issuance

30 20
Q4
18
25 Q2
16 Q1
Q2 Q3 Q3
20 Q3 Q3 14 Q1 Q2
Q4 Q4 Q4 Q1 Q3 Q4 Q3 Q4 Q2
12 Q4
Q3 Q2 Q1 Q2 Q3 Q2
15 Q3 Q1Q2 Q1Q2 Q2 10 Q1 Q3 Q1 Q4
Q2 Q3 Q1
Q4 8
10 Q1Q2Q3Q4Q1 Q1 Q4 Q4 6
5 4
2013 2014 2015 2016 2017 2018 2 2013 2014 2015 2016 2017 2018
0 0
Spain inflation-linked issuance UK inflation-linked issuance

16 40
14
Q3
Q1 Q3 35
12 Q1 Q1 Q3
Q1 Q4 Q3 Q1
Q2Q3 Q2 30 Q1 Q3 Q1
10 Q3 Q3
Q2Q3 Q2 Q4
Q3 Q4 Q2
8
Q2
Q1 Q4 25
Q4 Q4Q1 Q4
6 Q4 Q4Q1 Q2 Q4 Q3
Q4 Q2 20
4 Q2 Q2
15 Q2
2 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018
0 10
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Amount
Time Auction Announce- New/ Amount Outs.
(UKT) Date ment Date Country Tenor Tap Bond Isin (bn)* (bn)*
09:30 07-Mar 01-Mar Spain Linker Tap SPGBEI 1.00 11/30/2030 ES00000127C8 1.00 9.6
09:50 21-Mar 15-Mar France Linker Linker auction 1.75
17:00 21-Mar 14-Mar US 10y Tap 10y TIPS
10:00 26-Mar 21-Mar Italy Linker BTP€I auction 1.25
10:30 26-Mar UK Linker Tap UKTI 0 ⅛ 08/10/48 GB00BZ13DV40 7.9
09:30 04-Apr 29-Mar Spain Linker Linker auction 1.50
10:30 09-Apr Germany Linker Linker auction 0.75
09:50 18-Apr 12-Apr France Linker Linker auction 1.50
17:00 18-Apr 11-Apr US 5y Tap 5y TIPS
10:00 24-Apr 18-Apr Italy Linker BTP€I auction 1.50
10:30 07-May Germany Linker Linker auction 0.50
09:30 09-May 03-May Spain Linker Linker auction 1.25
10:50 16-May 10-May France Linker Linker auction 2.00
17:00 23-May 16-Apr US 10y 10y TIPS
10:00 28-May 23-May Italy Linker BTP€I auction 1.25
10:30 4-Jun Germany Linker Linker auction 0.75
09:30 6-Jun 31-May Spain Linker auction
09:50 20-Jun 14-Jun France Linker auction
17:00 20-Jun 13-Jun US 5y 5y TIPS
10:00 25-Jun 20-Jun Italy BTP€I auction
09:30 04-Jul 28-Jun Spain Linker auction
10:30 09-Jul Germany Linker Linker auction 0.75
09:50 18-Jul France Linker auction
17:00 18-Jul 11-Jul US 10y 10y TIPS
10:00 26-Jul 23-Jul Italy BTP€I auction
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UK: Data & events previews

Ross Walker Highlight of the week: UK GDP data are expected to show a partial recovery in
growth in January: +0.2% m/m (with modest upside risks) following December’s
This is Non-Independent Research, as surprisingly acute weakness (-0.4% m/m). Such an outturn would be consistent with
defined by the Financial Conduct GDP growth remaining at around 0.2% q/q in Q1, below trend but lessening recession
Authority. Not intended for Retail Client risks.
We continue to lean against a UK technical recession in 2019 – fiscal stimulus will
conjunction with the NatWest Markets Plc support demand (we forecast Government consumption growth of 1.8% this year)
trading desks that trade as principal in the while household income growth should remain relatively resilient given ongoing
instruments mentioned herein. All data is buoyancy in the employment data and a modest pick-up in wage inflation, thereby
otherwise specified. underpinning household consumption growth (1.5%). The corporate sector remains the
principal source of vulnerability (we forecast capex to fall by 0.4% this year, with
downside risks). Overall, that would yield 2019 GDP growth of 1.3%.
UK data & events, week beginning 11 March 2019
Time Period NatWest Median Previous Comments
Tuesday 12 March
House of Commons to hold ‘Meaningful Vote #2’. Debate to begin around 1pm. Voting expected around 7pm.
GDP, % m/m 09:30 Jan 0.2 0.1 -0.4 Upside risks (0.3% q/q)
GDP, % y/y 09:30 Jan 1.2 1.1 1.1
GDP, % 3m/3m 09:30 Jan 0.2 0.1 0.2 Quarterly growth forecast to stabilise at 0.2% q/q – sub-trend
GDP, % 3m y/y 09:30 Jan 1.2 n/a 1.4 but lessening near-term risks of technical recession
Index of services, % m/m 09:30 Jan 0.2 0.2 -0.2 Rebound led by consumer-facing sectors
Index of services, % 3m/3m 09:30 Jan 0.5 0.5 0.4
Industrial production, % m/m 09:30 Jan 0.2 0.0 -0.5
Industrial production, % y/y 09:30 Jan -1.3 -1.4 -0.9
Manufacturing output, % m/m 09:30 Jan 0.2 -0.2 -0.7 Modest rebound after out-sized decline
Manufacturing output, % y/y 09:30 Jan -1.7 -2.1 -2.1
Construction output, % m/m 09:30 Jan 0.8 1.0 -2.8 Modest rebound after out-sized decline
Construction output, % y/y 09:30 Jan -0.1 -0.7 -2.4
Trade (G&S) balance, £bn 09:30 Jan -3.0 -3.4 -3.2
Trade in goods, balance, £bn 09:30 Jan -12.0 -12.1 -12.1
Wednesday 13 March
UK Spring Statement, 1pm. OBR forecasts, HM Treasury documents & DMO remit information published once the Chancellor has sat down
House of Commons to vote on ‘no deal’ Brexit (if ‘Meaningful Vote #2’ defeated)
Thursday 14 March
RICS house price balance 00:01 Feb -27 -24 -22
House of Commons to vote on Article 50 extension (if ‘Meaningful Vote #2’ and ‘no deal’ votes are defeated)
January GDP data – partial rebound

We forecast UK GDP to stage a partial rebound in January: 0.2% m/m, following
a 0.4% m/m fall in December. The risks around our forecast are skewed to the
upside (0.3% m/m).
Services output: ONS services output fell 0.2% m/m in December 2018, the largest
monthly decline since the weather-affected drop in February 2018. We expect a partial
claw-back in the January 2019 data, supported by a solid monthly rebound in retail
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sales activity and some evidence of stabilisation in survey data. (NB, although in reality
the % m/m moves in the ONS retail sales data are largely meaningless statistical
‘noise’, these out-sized moves do nevertheless have an observable impact on the
monthly services output data). We forecast services output to rise 0.2% m/m,
nudging the 3m/3m rate up to 0.5% from 0.4%.
- Retail sales volumes rose 1.2% in January, following a 1.0% fall in December.
Retail sales expenditure data correlate closely with retail services output, so
this should be the main upside influence in January.
- For business services, the services PMI slipped in January but recovered in
February to levels in line with the Q4 average (ONS services output growth
averaged 0.2% m/m in Q4). The services PMI survey, though a good guide to
underlying trends in the official data, can be a little prone to occasional extreme
(but temporary) moves. To the extent that Brexit risks have weighed on
sentiment, the official data are likely to be more resilient. The BoE Agents’
Scores survey also tends to reinforce the notion of some stabilisation in
services growth, albeit at sub-trend rates: its reading for ‘total business
services’ has remained broadly stable at 1.7 for several months.
- Public administration services output (aside from healthcare) has been broadly
flat in recent months and it is too early to expect any 2019 fiscal boost.
Industrial production: ONS manufacturing output has fallen for six successive
months, lowering the y/y rate to -2.1%, the weakest annual rate since mid-2013. The
scale of December’s fall (-0.7% m/m in manufacturing output) suggests some scope
for a modest upside level-correction. Survey data hint at some stabilisation in the
months ahead: the manufacturing PMI survey’s output balance fell by a point in
January, but remains in expansionary territory at 51.5 (and staged a modest rebound
in February). The BoE Agents survey showed marginally weaker output readings in
January vs November (domestic stable at 1.2, export edging down to 1.4 from 1.5).
The CBI industrial trends survey’s expected output balance was unchanged in January
(before edging down in February). Overall, another sluggish outturn on the official data
seems likely and we forecast manufacturing output to rise 0.2% m/m in January
(modest upside risks).
We expect trend-like outturns from the other industrial components. Met Office data
show January 2019 brought average temperatures, so there is no particular reason to
expect any large swing in utilities output (though the trend here has been negative,
with declines in each of the past five months). Mining & quarrying output showed some
signs of normalisation after rather erratic outturns in the autumn. We forecast overall
industrial production to rise 0.2% in January (modest upside risks).
Construction: The ONS construction output data remain highly erratic. The reported
2.8% m/m fall in December 2018 is dubious, but clearly complicates forecasting a %
m/m outturn in January – upward revisions and/or a level-correction seem likely.
Construction survey data have been somewhat mixed in early 2019: the construction
PMI fell to a 10-month low of 49.1 in January from 52.5 in December, while the BoE
Agents’ Scores construction output balance edged up to 0.7 in January from 0.5 in
November (its highest outturn for a year). We some level-correction in construction
output in January: +0.8% m/m.
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Macro Spotlight | Brexit Meaningful Vote

Ross Walker The UK Government will make a second attempt to get the Brexit ‘Meaningful Vote’
(‘MV2’ in Whitehall-speak) through the Commons on12 March. If passed, the UK
would head for EU exit on (or shortly after) 29 March 2019, with a 21-month transition
period (including status quo economic arrangements). The MV2 vote outcome appears
to be a very close call. Whilst last-minute deals are hardly an unimaginable feature of
EU negotiations, as things stand the NWM central case is for MV2 to be defeated by
This is Non-Independent Research, as around 40 votes (think of this figure as a risk-weighted mean rather than a modal
defined by the Financial Conduct
Authority. Not intended for Retail Client outcome) – the back-stop concessions still appear inadequate, so we would expect
distribution. This material should be the 10 DUP MPs and around 25 Conservative eurosceptics to vote against (Table 1,
regarded as a marketing communication p.3).
If MV2 is defeated, then Parliament would vote on a ‘no deal’ Brexit on 13 March.
instruments mentioned herein. All data is This motion would be likely to be defeated (it is still possible – though unlikely in our
accurate as of the report date, unless view – that the Government would whip MPs to try to retain a no deal option). Defeat
otherwise specified. here would move the process on to the third and final vote of the week, on 14 March,
on whether to seek an extension of Article 50. This would be likely to be passed
and would amount to the clearest tangible evidence of Parliament wresting
greater control of the Brexit process.
The Parliamentary arithmetic is uncomfortably tight for the Government: a supermodel-

thin working majority of just 8 (including the 10 DUP MPs, whose support on MV2 is far
from guaranteed). We set out the arithmetic in greater detail in Table 1 below. The
principal problem is that voting intentions among 50 or so ‘swing voters’ remain
distinctly hazy.
The number of Labour eurosceptic rebels remains in doubt – in theory there are
around 30, but how many actually vote with the Government remains to be seen. The
prospect of inflicting another major defeat on the Government will increase the political
pressure on potential Labour rebels not to back Mrs May’s Brexit deal.
Nor is a high degree of support from the hundred or so Conservative eurosceptics a

given. Rifts are increasingly apparent within the ERG and despite warnings that
voting down MV2 would allow a softer-Brexit inclined Parliament to take back control, a
number of eurosceptics are reportedly holding out in the hope that the Government
would whip the no deal vote and, if that failed, would regard a 21-month Art.50
extension as preferable to the existing Withdrawal Treaty (there is a clear exit
mechanism under the former – Article 50 itself – in contrast to the back-stop).
nd
It is possible that a handful of ‘Remainer’ / pro-2 referendum Conservatives
oppose MV2. Whilst this caucus is smaller in number, and has been less inclined to
rebel, could still prove important in any finely balanced vote.
Rates: Monetary policy is dependent on politics. Given the unclear political outlook,
the BoE is incentivised to wait before taking action. This steamrollers the front-end of
the curve and especially the money market sector. Following the recent re-flattening at
the front-end, there is barely any tightening priced in so we maintain our May’19 –
Mar’20 SONIA steepeners.
Brexit | Numbers game

Our subjective probability of Mrs May winning that Meaningful Vote on 12 March is
40%. Betfair prices the chances of MV2 passing on 12 March at just 19%.
The Parliamentary arithmetic is very tight. The Government has a supermodel-thin 8-

seat majority in the 650-seat House of Commons. There are 638 MPs eligible to vote
(650 minus the Speaker and 3 Deputy Speakers, 7 Sinn Fein MPs who do not take
their seats and 1 vacant seat). So up to 320 votes are needed to secure a majority.
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The complication around predicting the outcome of the second Meaningful Vote (‘MV2’
in Whitehall-speak) on 12 March reflects not only the Government’s narrow majority
but also the lack of visibility over how a sizeable number of MPs – of different parties
and different Brexit persuasions – intend to vote.
Table 1 provides an indication of the number of MPs in each of the main caucuses –
these groupings can be somewhat fluid and the numbers in Table 1 are our estimates.
Table1: Parliamentary caucuses (NWM estimates)

Current number Scenario 1: Scenario 2: NWM central
of MPs MV2 ‘Pass’ MV2 ‘Defeat’ case
(votes for Gov’t) (votes for Gov’t) (votes for Gov’t)
Conservatives
- Government ‘payroll’ vote 136 136 136 136
- Brexit Delivery Group (party loyalists) 51 51 51 51
- ERG & other eurosceptics 98 98 88 73
- 2nd Referendum supporters 6 6 3 3
- Other / Unaffiliated 22 22 15 15
Total (voting) Conservatives 313 313 293 278
DUP 10 10 10 0
Labour eurosceptics 10-30 20 15 20
Government majority 8* 48 -2 -42
*Includes 10 DUP MPs under the confidence & supply agreement. Source: NWM, UK Government, House of Commons
We estimate there are 136 Conservative MPs on the ‘payroll’ vote (98 Ministers plus
38 PPSs). Precise tallies are complicated by a number of recent resignations by PPSs
(unpaid ministerial aides who are required to vote with the Government). A payroll
vote of 136 would leave the Government requiring up to 184 additional votes.
We would expect all of the 51 ‘Brexit Delivery Group’ of loyalist Conservative MPs
to support the Government on MV2 (as they did on the first Meaningful Vote). That
would cut the required total to 133.
DUP | Ulster says . . .

The 10 DUP MPs voted against the MV1 and it remains unclear whether they will back
the Government on 12 March. Without the support of the 10 DUP MPs the chances of
MV2 passing fall significantly.
The media is awash with speculative, and inevitably contradictory, reports. The Times
claimed that the DUP was ‘looking for a ladder to climb down’ in order to vote for MV2
(1 March 2019). But DUP Brexit spokesman Sammy Wilson MP this week insisted it
was ‘very unlikely’ that Attorney General Cox is ‘going to come back with anything that
satisfies Parliament and that the Withdrawal Agreement will be supported next week.’
(Bloomberg, 5 March 2018). The following day, Mr Wilson sounded even more
entrenched, stating that: no deal would be better than the existing deal; that the short-
term impact of no deal could be mitigated; that an arbitration mechanism on Brexit
(one of the mooted compromises) was unacceptable; and that the Withdrawal Treaty
text must be changed (which the EU27 has repeatedly refused to do).
It is not just the direct impact of the DUP’s 10 votes but also the possible influence on
the unionist contingent within the ERG. Were the DUP to oppose, or abstain on, MV2
then a similar number (possibly more) unionist Conservative eurosceptics might follow
suit.
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ERG | Which is the least bad option?

On our estimates the ERG numbers 88 Conservative MPs (higher estimates appear
to include 2 DUP MPs and several PPSs). We estimate there are a further 10
eurosceptic Conservative MPs who voted against the Government in the first MV
(although two of this group campaigned for Remain in the 2016 referendum we take
our steer from their recent Parliamentary votes and bracket them with the ERG): which
amounts to 98 ‘eurosceptics’.
A rift is emerging within the ERG between those MPs seemingly minded to support
MV2 on the basis that voting it down would allow a softer-Brexit inclined Parliament to
wrest control of the agenda vs those determined to again oppose the MV on the
grounds that its back-stop provisions pose unacceptable risks and it would instead be
preferable to seek a longer Art.50 extension. The logic of replacing any MV2 transition
period to end-2020 with Art.50 extension / continued EU membership to end-2020 is
that there is an exit mechanism from the former (Article 50 itself) whereas there is no
explicit time-limit or unilateral exit mechanism from the back-stop. This case has been
articulated by the lawyer Martin Howe.
On the back-stop ‘If it were to be an Sentiment has swung of late. Earlier in the week several key ERG figures, including
appendix that would be satisfactory, Chairman Jacob Rees-Mogg, appeared to hint at support for MV2 – their conditions
but then the backstop is itself an around what would constitute legally-binding assurances over the back-stop appeared
appendix, so you can add to the to be being diluted. Later in the week, given the absence of any evidence of progress
withdrawal agreement without re- by Attorney General Geoffrey Cox, a more hawkish tone resurfaced. Other ERG
opening it . So, that would work, but it members, notably Steve, have maintained a consistently more hardline stance.
must be of equal legal standing.’
(Jacob Rees-Mogg, 28 February 2019). In the last major Brexit vote in the Commons – an amendment to enshrine the
Government’s commitment to hold a vote on Article 50 extension in the event of MV2
not being passed (and on which the Government imposed a three-line whip) – some
‘Without real change from Geoffrey 20 Conservative MPs (all eurosceptics, mostly ERG members) voted against
Cox’s negotiations, I will vote against this. A further ~80 Conservative eurosceptics abstained. Although the read-across
the motion next week.’ (Jacob Rees- to MV2 is limited, this provides a gauge of the potential strength of feeling among Tory
Mogg, FT, 7 March 2019). eurosceptics on MV2. As many as 20 Conservative eurosceptics voting against
MV2 would almost certainly result in defeat for the Government (or would
probably require more than 30 Labour eurosceptics to support the Government –
unlikely).
In short, although past performance is not necessarily a guide to the future,

sufficient ERG support to get MV2 passed looks increasingly doubtful.
The other wing of the Conservative Party

On the other wing of the Conservative Party, 6 ‘pro-European’ MPs opposed the
nd
Government during the first Meaningful Vote and are pressing for a 2
referendum. This figure does not include the three defectors to The Independent
Group (Allen, Soubry & Wollaston).
That leaves 22 Conservative MPs whom we classify as non-aligned. Most of this

group backed ‘Remain’ in the 2016 referendum, with 12 voting against the
Government in the first MV. We would expect some of those 12 dissenters to back
the Government in MV2, but all 22 votes supporting MV2 seems unlikely.
Scenarios
On the ‘most optimistic’ scenario for the Government (Scenario 1 in Table 1 above),
MV2 passes with a majority of 40-50. This scenario requires the support of the entire
Parliamentary Conservative Party: the entire ‘payroll’ vote (136), the Brexit Delivery
nd
Group (51), Conservative eurosceptics (98) and supporters of a 2 referendum (6)
together with virtually all 10 DUP MPs. For good measure, we assume 20 Labour
eurosceptics vote with the Government, giving a majority of 48.
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The actual MV2 outcome is likely to be much narrower than this – and the Government
faces a very real risk of defeat. Scenario 2 in Table 1 sketches out a plausible defeat
scenario for the Government. The margin of defeat is deliberately small (just 2 votes)
in order to emphasise how little dissent is required for MV2 to be voted down: just 10
nd
ERG/eurosceptic MPs vote against MV2, just 3 pro-2 referendum MPs, and 7 MPs
from the non-aligned group (12 of whom opposed MV1). Scenario 2 assumes that the
entire payroll and BDG vote remains intact – hence, even a small number of
resignations within this block could scupper MV2’s prospects. It also assumes that all
10 DUP MPs support the Government.
Labour pains
The number of Labour eurosceptic rebels could well be decisive. As a rough guide: 30
Labour eurosceptic votes for the Government would leave passage of MV2 on 12
March looking strong favourite. 20 would probably get it over the line – provided the
DUP were supportive. Less than 20 would leave MV2 in the balance.
Whilst this is partially a Brexit issue for Labour MPs, it is also highly political: dissenting
votes in favour of MV2 would inevitably shore-up the Conservative Government to
some degree. For a handful of hardline Labour eurosceptics, this is clearly a price
worth paying to honour the result of the 2016 referendum. But by no means for all. The
extent to which the Labour frontbench tries to exert influence could well be crucial.
How many Labour eurosceptics are likely to actually vote in favour of MV2? In the
Brexit vote on 14 February, just 4 Labour MPs voted for the Government’s Brexit
motion (in essence expressing support for leaving the EU on 29 March 2019): Ian
Austin, Kevin Barron, Jim Fitzpatrick and John Mann. On 29 January, 14 Labour MPs
(including the 4 above) defied the party whip to oppose Labour MP Yvette
Cooper’s amendment (which sought to extend Art.50). A further 8 Labour
frontbench MPs abstained on the Cooper amendment.
Labour sources and a number of commentators seem to agree there are around 30
Labour eurosceptic MPs who might, in principle, be prepared to support MV2, but
there is much less consensus on how many will actually vote for it on 12 March. The
FT reckons ‘fewer than 10 have signalled support’ for Mrs May’s deal (7 March 2019).
At this stage, our central case would be for most, if not all, of the 14 Labour
rebels to vote for MV2. How many additional Labour MPs join them is open to
debate. We are sceptical that many of the 8 frontbench abstainers will vote with the
Government (thus having to resign their shadow ministerial posts). That might
suggest a central case of just 20, which would leave the MV2 vote in the balance.
Some of the mood music in Labour circles has not been overly positive from the
perspective of passing MV2. The Government’s ‘Stronger Towns’ fund proposal (aka
the ‘Brexit bribe’) has not obviously gone down well among Labour MPs in Leave-
voting constituencies: £1.6bn over seven years spread across, say, 40 towns would
equate to less than £6m a year – not obviously a game-changing sum. Similarly,
Government proposals to give the UK Parliament the opportunity to implement all
future EU commitments on workers’ rights appears to have failed to win trade union
support.
What gives?
For the Government to win MV2, there will have to be compromises. The
Government’s hope is that Tory eurosceptics will regard the existing withdrawal
agreement as preferable to risking allowing a softer-Brexit inclined Parliament wresting
control of the process. Tory eurosceptics would probably have to accept the back-stop
– even if there is a separate ‘legally-binding’ document or codicil this clearly could not
contradict or have precedence over the Withdrawal Treaty itself. If that proves
sufficient to allow a large enough cohort of eurosceptics to save face and back Mrs
May’s deal, then it is easier to see MV2 passing.
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Yet, at the time of writing, it is far from clear that a sufficient number of Tory
eurosceptics would be prepared to accept this. Indeed, the odds appear to be shifting
towards greater ERG opposition. A number would seemingly prefer to take their
chances with a longer Art.50 extension. The pronouncements of the so-called ‘star
chamber’ of eurosceptic legal experts (including veterans of the cause such as Bill
Cash MP) could be decisive.
We would expect any further legal assurances or concessions secured by the UK

Government to be unveiled at a late stage – probably as late as Monday 11 March,
especially if the substance is rather thin (to try to avoid too much scrutiny).
It remains to be seen whether the Government would whip MPs on any ‘no deal’ or
‘Article 50 extension’ votes. Whilst losing this vote would be particularly awkward for
the Prime Minister, who continues to insist that ‘no deal is better than a bad deal’,
allowing a free vote in order to prevent ministerial resignations appears to be the less
damaging option. Of course, this would still carry a political cost: a free vote would
convey a sense of chronic weakness – a Government in office but not in power.
Article 50 extension
Would the EU27 agree to an Art.50 extension? Almost certainly – the EU27 has no
obvious interest in allowing a disorderly ‘no deal’ Brexit as soon as 29 March 2019. EU
officials responded to Mrs May’s concessions on holding a vote on extension (if MV2 is
defeated) by welcoming ‘rational arguments being heard’. Messrs Tusk and Juncker
have repeatedly signalled a preparedness to allow an Art.50 extension if it would
facilitate a softer-Brexit outcome.
One interesting recent snippet was an ‘EU source’ comment noting that Art.50 does
not specify exactly how it would be extended. The EU Treaty merely states that Art.50
takes effect two years after being triggered 'unless the European Council, in
agreement with the Member State concerned, unanimously decides to extend this
period.' The case against an extension happening tend to centre on the argument that
the 'unanimity' requirement means a formal vote must take place – hence, just one EU
state could block this. The ambiguity in the EU source comment above suggests to us
that EU27 agreement to extend Art.50 would probably be reached in a more informal
way – the European Council's modus operandi is 'by consensus'. In short, if the
Commission and the major member states (Germany, France) want this then the
others will fall into line.
The void created by an Art.50 extension would need to be filled by something –

debates and indicative votes as a ‘discovery process’ to find where a consensus might
lie. This process would be less predictable in the sense that it would be much more
cross-party in nature than the process thus far (where the Prime Minister and a small
coterie of senior ministers and advisers has handled the negotiation).
Markets – rollercoaster
For markets, next week’s votes might prove to be something of a rollercoaster. The
simplest course would be MV2 passing on 12 March, thus paving the way for the
UK to leave the EU on 29 March (or soon after) with a 21-month transition period.
We would expect this outcome to be immediately GBP-positive, pushing
GBP/USD up to $1.37.
By contrast, MV2 being defeated would be likely to result in some – probably

temporary – downside for the pound as uncertainty rose and markets mused about the
Government falling or an early election. Nevertheless, the likely rejection of a no deal
outcome on 13 March and likely majority-support for an Art.50 extension on 14
March would presumably be GBP-positive – albeit the outlook would be less
linear as a 3-month extension would not in and of itself resolve the Brexit
settlement issue. On this scenario, we would look for GBP/USD to make near-
term gains to $1.3450, having initially slipped below $1.30. Of course, to the
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extent that this would mark a necessary staging post a softer-Brexit outcome (e.g., a
customs union), there would be further upside for sterling over the medium-term – the
NWM forecast for this scenario sees GBP/USD reaching $1.40 levels later this
year and into 2020.
Rates | Focus on politics and issuance

Theo Chapsalis Tactical trades ahead of the gilt remit:
 Buy UKT 1T 49 on ASW

 Maintain IL41 vs IL36 real yield flattener
 Buy IL41 on iota
Other trades:
 Sell 10y RPI

 Receive May’19, pay Mar’20 SONIA
Summary of views:
The MV2 (12 March) and the gilt remit (13 March) will be the main drivers of yield
moves in the coming week. We expect higher-than-usual moves and will be keeping
an eye for opportunities that are usually created in such an environment. A
proportional decrease in the announced DV01 issuance to flatten the curve at the
back-end (10s30s) while inflation expectations will be responsive to political news and
any FX moves.
Flatter long-end
It is just a few days ahead of the gilt remit and we believe that there are strong
tailwinds behind back-end flattener trades. This remit is likely to indicate a proportional
reduction in the issuance of both linkers and longs. This will have an impact on the
DV01 issued and along with APF flows places a lid to any steepening (for more see
P.7 of UK Spring Statement 2019 Preview, 1 March 2019). In terms of security
selection, we have a preference for UKT 1T 49 and for the short position UKT 1F 28.
Challenges for money-market steepeners

It may seem counterintuitive that we argue for a steeper money market curve at the
front-end and a flatter 10s30s but there are different forces at play hence the two don’t
have to move in tandem. While our SONIA steepener managed to gain 8bp in the first
weeks of setting it up, it lost 6bp of those in 2 trading sessions this week due to a
smaller likelihood for the MV2 to pass and a dovish ECB.
The market assigns a probability below 50% for a hike to happen between May’19 and
Mar’20. To the extent that there is some more clarity on a UK-EU deal, market
attention will shift to the timing of any upcoming hikes hence the curve will steepen.
The extension of Article 50 clearly does not favour steepeners but at the same time
such an extension is already largely in the price so the downside is limited in our view.
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US Economy Preview
Michelle Girard
Kevin Cummins Highlight of the week: The main focus in the coming week will be on the consumer,
with the January retail sales report (Monday) and the February CPI report (Tuesday).
Retail sales were exceptionally weak in December, as overall sales tumbled by 1.2%
defined by the Financial Conduct (sharpest decline since 2009). The results seem at odds with the upbeat anecdotal
Authority. Not intended for Retail Client reports about the holiday shopping season. Overall sales may have put in another soft
performance in January, perhaps rising by only 0.1%. However, core sales (excl. autos
and may have been produced in and gasoline), the picture is likely to have looked much better (+0.6% after -1.4% in
conjunction with the NatWest Markets Plc January). Nevertheless, the weakness recorded in December puts the spending pace
trading desks that trade as principal in the on a very weak trajectory heading into Q1. Meanwhile, we expect the headline CPI to
accurate as of the report date, unless have advanced by 0.3% in February and the core CPI to have posted another uptick of
otherwise specified. 0.2% (0.200% unrounded). In year/year terms, readings in line with our estimates keep
both the headline (1.6%) and core (2.2%) inflation measures steady. Rounding out the
week will be reports on manufacturing activity, with the March Empire State survey and
the February industrial production report (both due Friday).
Key US data & events, week beginning 11th March 2019
Time Period NatWest Median Previous Comments
Monday 11 March
Retail Sales, % m/m 08:30 Jan +0.1 +0.1 -1.2 Drop in autos likely restrained headline sales in Jan
- Retail Sales ex. Autos, % m/m 08:30 Jan +0.6 +0.5 -1.8 Ex autos picture is likely to have looked much better
- Retail Sales ex. Autos & Gas, % m/m 08:30 Jan +0.6 +0.6 -1.4 -1.4% in Dec -- largest decline since March 2009
Business Inventories, % m/m 10:00 Dec +0.6 -0.1
Tuesday 12 March
CPI, %m/m 08:30 Feb +0.3 +0.2 0.0 Energy-led rise in headline CPI
- CPI ex. Food & Energy, % m/m 08:30 Feb +0.2 +0.2 +0.2 Another firm core CPI gain (0.200% unrounded)
- CPI NSA Index 08:30 Feb 253.065 251.7
Wednesday 13 March
Durable Goods Order, % m/m 08:30 Jan -1.1 -0.8 +1.2 Dip in aircraft orders likely weighed on durables
PPI, Final Demand Index, % m/m 08:30 Feb +0.3 +0.2 -0.1 Rebound led by energy and trade services
- PPI ex. Food, Energy & Trade, % m/m 08:30 Feb +0.2% +0.2 +0.2
Construction Spending, % m/m 10:00 Jan -0.6
Thursday 14 March
Initial Unemployment Claims 08:30 Mar-9 223,000 226,000 latest 4-week moving average
Import/Export Price Index, % m/m 08:30 Feb +0.3 -0.5
New Home Sales 10:00 Jan 621,000
Friday 15 March
Empire State Manufacturing Index 08:30 Mar +10.0 +8.8 ISM-Adjusted Empire State Index was 52.6 in Feb
Industrial Production, % m/m 09:15 Feb +0.7 -0.6
Capacity Utilization, % 09:15 Feb 78.8 78.2
University of Michigan Sentiment 10:00 Mar 95.0 93.8 2.3% in Feb 5-10yr inflation exp — all-time low
Firm CPI reading expected for February

The CPI was little changed in January, restrained b y a 3.2% plunge in energy costs
even as the food component and core index posted firm gains of 0.2% each. In
February, we expect the headline index to have advanced by 0.3% and the core
CPI to have posted another 0.2% uptick. In year/year terms, readings in line with our
estimates keep both the headline (1.6%) and core (2.2%) inflation measures steady.
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In February, we look for the energy component within the CPI to have posted its first
monthly gain since October. We forecast an increase of 1.2%. Prices at the pump
last month were up by 3.2%, as reported by AAA. That increase implies a 2.0%
increase in seasonally adjusted gasoline prices within the CPI. We also expect
electricity prices to have edged up in February, following a 0.6% decline in January. In
contrast, natural gas prices may have slipped last month. Meanwhile, the food
component which showed firm gains in both December (+0.4%) and January
(+0.2%), could have increased by another 0.2% in February.
On an unrounded basis, the core CPI posted a solid increase of 0.240% in January,
well above the average monthly gain of 0.183% recorded in 2018. In February, we
expect the core measure to have posted an increase of 0.200%. The January core
CPI was boosted by firmer rent costs, a 1% jump in apparel prices, a slight increase in
vehicle prices (used car prices were up by 0.1% and new car prices rose 0.2%) and
decent upticks (+0.3% each) in the costs of recreation and household goods and
operations. In February, we expect rent costs to have maintained their 0.3% clip, while
the lodging away from home component could have been little changed following back
to back gains. Meanwhile, airfares could have slipped for a fourth straight month,
perhaps by 1.1%. In contrast, motor vehicle insurance costs, which slipped by 0.2% in
January, may have rebounded by 0.5% in February. Across core goods, used car
prices may have slipped by 0.4%, while new vehicle prices could have ticked lower by
0.1%. In the other direction, apparel prices could have jumped by another 1% (after a
1.1% rise in January).
Headline and Core CPI

Source: BLS, NWM
4.5%
4.0%
3.5%
Forecast
Year/Year % Change
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
CPI Core CPI
Core retail sales probably rebounded after unexpected plunge in Dec

Retail sales were exceptionally weak in December, as overall sales tumbled by 1.2%
(sharpest decline since 2009). However, the government shutdown (which began
December 22) could have complicated the process of compiling the December report.
If anything, the results seem at odds with the upbeat anecdotal reports about the
holiday shopping season. Meanwhile, weakness in retail sales in December was
exacerbated by a 5.1% plunge in gasoline station receipts. (Retail sales data are in
nominal terms.) The weakness in that category alone subtracted 0.4 percentage points
from the headline in December (after subtracting 0.4 point in November). Any impact
from gasoline is likely to have been negligible on retail sales in January. Meanwhile, a
pullback in auto sales likely restrained the headline move in retail sales in
January. (Unit vehicle sales slipped from 17.5 million units annualized in December to
16.7 million units in January.) Indeed, we look for retail sales to have only eked out a
0.1% rise in the first month of the year, but a much healthier rebound excluding autos.
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Excluding autos and gasoline, the picture is likely to have looked much better.
Given the positive fundamentals currently supporting the household sector (e.g.
rebound in confidence after the end of the government shutdown, increased
purchasing power associated with lower energy costs, stronger job gains contributing
to solid growth in aggregate wages and salaries, etc), we look for a better
underlying performance, with retail sales excluding both autos and gasoline
rebounding in January, perhaps by 0.6% (after a 1.4% plunge in December). In
January, we look for sales to have rebounded in most categories, partially reversing
the outsized drops recorded in December.
Nonetheless, the weakness recorded in December puts the spending pace on a

very weak trajectory heading into Q1. At this time, we look for the growth in real
PCE to slow in Q1 to 1.0% annualized clip from the 2.8% pace recorded in Q4. The Q1
annualized growth rate for real spending is a major reason why some GDP tracking
estimates have fallen below 1%.
Retail Sales Excluding Autos and Gasoline

Source: Census Bureau and NatWest Markets
1.2 Since recovery began (average 0.3% m/m)

Retail sales excluding autos
1.0
and gasoline, m/m % chg
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18
Durable goods will provide early read on capex in Q1

We estimate that durable goods orders slipped 1.1% in January, dragged lower by a
drop in civilian aircraft bookings. Excluding that lumpy category, we think orders will
be close to flat, including orders for nondefense capital goods excluding aircraft (a
proxy for capex). Encouragingly, business investment in equipment made a
notable positive contribution to real GDP growth last quarter, but a flattish
performance in core capex orders in January would put this cyclical component
on track to be a modest drag in Q1. Of course, that figure could pick up as the
quarter progresses.
Thanks to Deepika Dayal and Garima Ahuja for their contribution to this
publication.
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US Economy
Michelle Girard A Closer Look at the Fed's Monetary Policy Review
Kevin Cummins The Fed is embarking on a broad review of its strategy, tools and communication
practices. Below we share our thoughts on this closely-watched exercise.
Why now?
The official motivation for undertaking this review now appears two fold. First,
This is Non-Independent Research, as other central banks -- for example, the Bank of Canada -- conduct periodic
Authority. Not intended for Retail Client reviews to incorporate new knowledge with respect to monetary economics and
distribution. This material should be the structure of the economy, as well as to assess obvious failures of previous
regarded as a marketing communication regimes. Routine examination ensures that the monetary policy framework
conjunction with the NatWest Markets Plc remains effective as policymakers' understanding of the economy and monetary
trading desks that trade as principal in the transmission mechanisms evolve. Second, both interest rates and the Fed
instruments mentioned herein. All data is balance sheet are close to their long-term neutral levels following unprecedented
actions undertaken during the financial crisis. With monetary policy nearly
normalized, labor market conditions around full employment, and inflation close to
the FOMC's 2% objective, now is an optimal time for policymakers to undertake
such a review.
Unofficially, recent comments from both Fed Chair Powell and Vice Chair
Clarida suggest dovish motivations for the review. Clarida noted that the research
that informed the Fed’s current policy approach was largely conducted before the
financial crisis and, since that time, the economy has evolved. Specifically, neutral
interest rates appear to have fallen in both the US and abroad, and inflation
appears less responsive to resource slack (or the lack thereof). Both of these
developments hint that the Vice Chair is observing the upcoming review through a
fairly dovish lens.
Indeed, one important byproduct of conducting the review now is that it

should serve to anchor inflation expectations. While certainly not the direct
intention of this effort, the current discussion around framework
(specifically, consideration of "makeup" strategies with respect to the Fed's
inflation target) may serve to bolster current inflation expectations, which
policymakers believe are presently too low to be consistent with its 2% inflation
target. If inflation expectations rise as a result of the current review, that would
not be an unwelcome development for Fed officials.
What is the process and time frame for this review?

In conducting the review, the Fed's dual mandate will be taken as given, along with the
longer run inflation objective of 2% (policymakers have stated that they do not plan to
consider raising or lowering that target). Beyond that, the review will be "wide-ranging"
and will include outreach to those interested in the US economy, e.g.
industry representatives, community and economic development officials, academics,
and nonprofit business executives. To gather input, regional Reserve Banks will hold
"Fed Listens" town hall events across the country. In addition, the Chicago Fed will
hold a research conference on June 4-5 with both academic and non-academic
speakers from outside the Federal Reserve system. In mid-2019, the FOMC will begin
discussing the economic research and perspectives offered. Policymakers plan to
report their findings during the first half of 2020.
What exactly does the review cover?

In his speech on February 22, Vice Chair Clarida noted three main questions the
current exercise will look to answer:
1. Should policymakers consider strategies that aim to reverse past misses of the
inflation objective?
2. Should the Fed's toolkit be expanded?
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3. How can the FOMC's communication be improved?
What new strategies are being considered with respect to the Fed's inflation
objective?
The FOMC's current monetary policy strategy is presented in its Statement on Longer-
Run Goals and Monetary Policy Strategy, which says that the Committee seeks to
mitigate deviations of inflation from 2% and deviations of employment from
assessments of its maximum level.
The Fed's current strategy (similar to that followed by most global central banks)
incorporates a "flexible inflation targeting" approach, where persistent shortfalls in
inflation below target are treated as "bygones" -- that is, temporary misses in inflation
are ignored as long as inflation returns to target over the medium term. As part of the
current review, the Fed is examining a potential shift to some kind of "makeup"
strategy, under which policymakers commit to reversing any temporary deviations in
inflation from the target (e.g. targeting a temporary overshoot in inflation following a
period of undershoot).
The two "makeup" strategies discussed most often now are (1) price-level targeting,
which could be implemented either permanently or as a temporary response to
extraordinary circumstances or (2) average-inflation targeting over a multi-year period.
Price-level targeting: Under this approach, the Fed would adjust policy (either
permanently or temporarily) to achieve a pre-announced level of a particular price
index over the medium term. Nominal GDP targeting is an offshoot of this approach
(though, to date, has received little to no heightened market
attention). Communicating a price-level target (as opposed to an inflation rate
target) to the public could be very challenging. In addition, price-level targeting is an
essentially untested approach (the only historical example being Sweden in the
1930s.)
Average-inflation targeting: Under this approach, the Fed would target an average
inflation rate over a multi-year period. In a speech in November, NY Fed President
Williams described that, under this approach, a central bank "purposely aims to
achieve an above-target inflation rate in 'good' times when the lower bound is not a
constraint. Properly designed and implemented, such an overshoot can offset the
inflation undershoot during 'bad' times so that the longer-run average inflation rate and
inflation expectations are in line with the target." Note that, in Williams' example, the
Fed tolerates/targets higher inflation even before an undershoot has occurred.
The appeal of "makeup" strategies for policymakers is that, in a low-inflation

environment, both price-level targeting and average-inflation targeting can help to
anchor inflation expectations. Moreover, in "bad" times, such approaches should
boost expectations of higher future inflation, helping to keep real interest rates
negative and contributing to economic recovery
Is a shift to a "makeup" inflation strategy likely to be seen?
While some market participants may speculate over an imminent shift to a "makeup"
strategy, we think it is unlikely that either price-level targeting or average-inflation
targeting are adopted before interest rates have fallen back to the Effective Lower
Bound (ELB). If the Fed were to announce a change in 2020, we'd expect a less
formal "makeup" strategy where policymakers keep the current goal of "mitigating
deviations" around 2.0%, but pledge to allow inflation to run over for some time
after a period of low inflation.
Markets are enthusiastic about the possibility and implications of a shift in the Fed's
inflation-targeting approach. However, "makeup" strategies are a double-edged
sword. At the current time, most of the discussion around a shift to either price-level or
average-inflation targeting lead to the Fed either engineering or tolerating an inflation
overshoot. However, "makeup strategies" could also result in the Fed being forced to
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undertake actions that undermine the economy at vulnerable times. For example,
should a supply shock temporarily drive up inflation, "makeup" strategies would force
the Fed to hike rates in order to push inflation not just back to target but perhaps
below, exacerbating the weakness in employment and output related to the supply
shock. To avoid this scenario, former Fed Chair Bernanke favors temporary price-
level targeting -- a strategy where price-level targets are implemented only when short-
term rates are at or near zero and where policymakers are not required to tighten
policy to push inflation below target following a temporary inflation overshoot when
rates are away from the ELB. In any case, credible "makeup" strategies -- like other
monetary policy rules -- could tie the Fed's hands, a reality that we believe the Fed will
want to avoid for as long as possible.
The other (potentially underappreciated) risk we see with "makeup" strategies is that
monetary accommodation in recent cycles has fueled a rise in asset prices much
faster than consumer prices. If the Fed maintains excessive accommodation to
orchestrate an inflation overshoot, the result may be an overheating in financial
markets instead. The recent post-crisis experience provides a useful example. We
can only imagine how accommodative financial conditions would be today if
policymakers had slowed or delayed rate hikes in 2016-2018 as they waited for
inflation to meaningfully overshoot 2%. Ultimately, financial stability concerns could
impact the Fed's decision to shift its inflation-targeting approach.
In any case, no matter what is announced in 2020, we believe reviewing the monetary
framework will become a regular exercise -- perhaps undertaken every five years
(following the Bank of Canada's protocol).
What other policy tools and changes to Fed communications may be

announced?
In addition to its inflation-targeting strategy, Fed officials will also consider what
additional tools might be useful to ease policy at the ELB. Vice Chair Clarida cited the
Bank of Japan's establishment of a temporary ceiling for 10-year yields as
potentially one such tool. While this option and others will no doubt be explored, we do
not expect any decisions on this front to be announced in the near term. More likely,
potential tools will not be formally vetted and added to the Fed's toolkit until interest
rates are at or near the ELB. Note: A shift to "makeup" strategies (described above)
could itself prove a policy tool -- instituted (as Bernanke suggests) only when rates are
near the ELB, essentially representing a form of forward guidance where the Fed
commits to keeping interest rates lower for longer.
The most tangible development to emerge from this monetary policy review may
be changes to the Fed's communication strategy. We have long felt the FOMC "dots"
would be changed or replaced. With policy normalized and the Fed now data
dependent, the "dots" in their current form are not only of diminished value but are
arguably counter-productive. In the minutes from the January FOMC meeting, the
Committee debated this point:
"A few participants expressed concerns that in the current environment of increased
uncertainty, the policy rate projections prepared as part of the Summary of Economic
Projections (SEP) do not accurately convey the Committee's policy outlook. These
participants were concerned that, although the individual participants' projections for
the federal funds rate in the SEP reflect their individual views of the appropriate path
for the policy rate conditional on the evolution of the economic outlook, at times the
public had misinterpreted the median or central tendency of those projections as
representing the consensus view of the Committee or as suggesting that policy was on
a preset course. However, some other participants noted that the policy rate
projections in the SEP are a valuable component of the overall information provided
about the monetary policy outlook."
The exact changes that will ultimately be made to the FOMC "dot plot" remain unclear,
though some revamp of the Summary of Economic Projections could be announced
next year.
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What's the bottom line?

The Fed's monetary policy review is a slow burn story with dovish undertones that will
rightfully bolster inflation expectations in the near term.
Fed Chair Powell indicated that the FOMC was re-evaluating its monetary policy
framework with the goal of “making that inflation 2% target highly credible, so that
inflation averages around 2%, rather than only averaging 2% in good times and then
averaging way less than that in bad times”. The Fed has made clear that it is actively
considering whether to tolerate/target inflation above 2% following an inflation
undershoot (such as been experienced in recent years). In addition, Fed officials have
expressed concern that inflation expectations may be too low to be consistent with a
2% inflation target. All of this suggests to us that policymakers this year will be more
concerned about anchoring inflation expectations and ensuring the expansion is
sustained than they will be worried about the risk of an inflation overshoot. Partly for
this reason, this week we reduced our forecast for the number of Fed rate hikes in
2019 from two to one, and we continue to see the risk of an even more dovish
outcome.
Thanks to Deepika Dayal and Garima Ahuja for their contribution to this
publication.
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US Rates Market Brief

John Briggs Key Developments
Brian Daingerfield Treasuries bull steepened through the week into Friday’s payroll report and
Blake Gwinn after the selloff last week, as Fed Governors Williams and Brainard reinforced
recent messaging around a lower policy path, the current Fed pause, and
John Roberts their concern about anchoring inflation expectations at 2%. This helped
Treasuries not only hold their ground in the face of early-week stronger than
defined by the Financial Conduct expected data, such as ISM Non-Manufacturing rising to a high level of 59.7
Authority. Not intended for Retail Client (and the New Orders component to the third highest on record at 65.2), but
distribution. This material should be even before the payroll report, rates recovered most of last week’s selloff.
conjunction with the NatWest Markets Plc All this led to the February employment report, which posted a surprisingly
trading desks that trade as principal in the weak headline number of +20k, versus expectations of +180k. The miss was
instruments mentioned herein. All data is large, but we are hesitant to make too much of it for several reasons. There is
otherwise specified. little anecdotally to corroborate such a falloff in employment growth, Q1 data
is already potentially suspect due to government shut down issues, the fall in
the unemployment rate and stronger than expected earnings tell a slightly
different story, and if you average this month with the +311k gain in January,
you get an average of 166k, which is still decent. Nevertheless, the market,
Direction already downbeat on the outlook for global growth, pushed Treasury yields
Neutral, seeking to buy dips lower and our 5s30s curve to new steeps.
Our Views
Curve
US steeper in 5s30s Since the Fed introduced the potential to rework the inflation portion of their
Monetary Policy Framework, we have argued that this should put a floor
Curvature under market inflation expectations, as the Fed is clearly discussing options to
better anchor them. Hardening their commitment to symmetry around their
Neutral 2% inflation target is a clear signal that the October-January fall in inflation
expectations bothered them, to the point they are willing to discuss altering
Swap Spreads their Monetary Policy Framework.
Long 2yr swap spreads
Fed 5yr Forward Breakeven Inflation– fell almost 50bps from Oct. to Jan. low
Inflation Source: Bloomberg
Long 5y5y inflation swaps
2.50
2.40
2.30
2.20
2.10
2.00
Frankly, in the end we think the Fed will not make any major changes to their
inflation mandate, but that is a 2020 story. For now, however, we believe that
the Fed has put a floor under inflation expectations, and we expect if they
were to slip once again, rhetoric on this subject will ramp back. Even before
this overall discussion was raised, we felt that the Fed would need evidence
of inflation and inflation expectations in order to raise rates again in 2019, and
this is now only accentuated. It is not really about growth, as stronger growth
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data is not enough to move the needle, it’s about inflation and inflation
expectations.
The price action in the Treasury market this week reinforced our above belief,
rallying in the face of strong ISM Non-Manufacturing as Fed’s Williams, who
along with Clarida we believe is one of the architects of this review, discussed
his desire to anchor inflation expectations at 2% as they have declined in the
last five to ten years. Brainard also provided support, with a speech laden with
concerns about slowing growth in the US and abroad, as well as a myriad of
downside risks. So the trend was cemented even before we got to Friday’s
soft employment report.
Further, in addition to being supportive of TIPS, we see this as supportive for

curve steepeners. Not only is the idea of potentially seeking higher inflation
supportive going forward, but the Fed’s Monetary Policy Review could also
inject some term premium into the market as a more symmetric inflation
reaction function could cause inflation risk premium to rise. In addition, other
potential changes that could result in a step back in transparency (end of
“dots”, less forward guidance, etc.) could increase disagreement and
uncertainty in Fed forecasts. With term premium already low, and at the point
of the cycle (end of hike/start of easing cycle) when it tends to bottom, the risk
here appears asymmetric.
10-Year Term Premium (%)

Source: Bloomberg, Federal Reserve, NatWest Markets
-1
01-Jan-68 01-Jan-79 01-Jan-90 01-Jan-01 01-Jan-12
10y Term Premium Start of Easing Cycle "Taper Tantrum"
Lastly, this week we initiated a 2yr swap spread widener at 12.0bps. This is
largely on our view that LIBOR-GC spreads should stabilize, and start to
widen. More specifically, we think LIBOR may be poised for some
retracement while GC is likely to remain well-contained.
With regards to LIBOR, virtually none of the decline in 3M LIBOR this year
can be tied to the shift in Fed expectations, given that 3M OIS rates are nearly
flat on the year. Instead, we attribute most of the decline to shifts in the
supply/demand of unsecured funding. On the supply side, prime funds – who
are one of the primary sources of unsecured funding for banks – have seen
persistent inflows since late last year. This abundance of cash being put to
work has put pricing power in the hands of banks and pushed LIBOR lower.
At the same time, we think banks’ demand for unsecured funding was also
declining, putting even more downward pressure on LIBOR.
But as we noted, there are signs that these dynamics are shifting. On the
supply side, we think prime funds may be growing more reluctant to buy 3-
month paper, even with the increase in AUM, since the pickup for extending
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out the curve has deteriorated. Notably, the spread between 3M/1M LIBOR
has collapsed to its lowest level since late-2017.
On the demand side, our desk recently noted that, “Excess cash which had
moved to bank deposits in Q418 is moving back out, putting banks back into
equilibrium.” As such, we think banks may be more motivated to issue CP and bid
for corporate deposits than they have been so far this year. Indeed, 90-day CP
rates for financials – which are highly correlated to 3M LIBOR - have started
to gradually tick up after having fallen fairly steadily since year-end.
LIBOR/OIS and CP/OIS Spreads (%)

Source: Bloomberg, Federal Reserve, NatWest Markets
0.65
0.6
0.55
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
01/01/2018 01/04/2018 01/07/2018 01/10/2018 01/01/2019
Spread (LHS) 3M Financial CP/OIS (10-Day MA, RHS) 3M LIBOR/OIS (LHS)
But perhaps one of the most important signs in our view, is the fact that
forwards are pointing to near-term LIBOR/OIS widening for the first time since
December. As we have discussed many times in the past, we think short-
dated forwards can be a somewhat self-fulfilling prophecy where LIBOR is
concerned, both directly as derivative price action may feed into panel banks’
LIBOR submission methodology, and indirectly as moves in forward pricing
may serve as a guide for funding market transactions – which in turn also feed
into LIBOR submissions.
Spot LIBOR-OIS and Forward Measures (bps)

Source: Bloomberg, NatWest Markets
45 15
40 10
35 5
30 0
25 -5
20 -10
15 -15
Spread (1Mfwd - SPOT, RHS) FRA/OIS 3Mfwd (LHS)

FRA/OIS 1Mfwd (LHS) LIBOR/OIS Spot (LHS)
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But as we noted above, our 2-year swap spread recommendation is largely

driven by our view on LIBOR/GC spreads. Even if LIBOR was to stabilize at
current levels, this trade could still be at risk if GC were to see any persistent
pressure. However, we expect repo to stay fairly well contained over the next
few months.
While several past repo stress dates (year-end, Bush funeral) have shown
increased volatility, day-to-day levels have been fairly stable despite heavy
UST issuance and saturated dealer balance sheets. 3M term GC was in the
st
mid-2.50s on Friday March 1 and roughly the same this week. While UST
issuance (both coupons and bills) may remain somewhat heavy into the first
half of April, we expect markets to absorb this without significant pressure on
repo aside from the coming quarter-end, for which SOFR futures are currently
pricing in a fair amount of stress. Moreover, if any supply-related stress in
repo were to materialize in March, it should quickly dissipate after the tax
deadline, as Treasury will be flush with cash around the same time that they
will have to start maneuvering to stay under the recently reinstated debt
ceiling.
Weekly Net UST Supply ($bn)

Source: US Treasury, Federal Reserve, NatWest Markets
80.0
Projected>
60.0
40.0
20.0
0.0
-20.0
-40.0
Net Bill Supply Net Coupon Supply
So with LIBOR looking like it may be stabilizing, and repo well contained
(outside of statement dates), and the short dated forwards signalling some
slight widening, we think the risk-reward for front-end spread wideners is
favorable. Own 2yr swap spreads at 12.0bps, target 22bps, stop on close
under 6bps, carry +5bps/3m.
From The Mailbag

In this weekly section, we will share interesting and topical questions received from
clients, as well as our responses.
Q: What are your thoughts on the St. Louis Fed’s blog post on a
potential Federal Reserve Standing Repo Facility?
This week the St. Louis Fed published a blog post titled “Why the Fed Should
Create a Standing Repo Facility,” which can be found here. This idea has
been bouncing around policy circles and markets recently, but in our opinion,
it is still far from being realized.
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Before we get to that though, a brief summary: a standing repo facility would
presumably be similar to the existing O/N-RRP facility only in reverse – with
daily operations in which market participants could give the Fed collateral in
exchange for cash. While there would likely be a cap of some sort, with
regards to both aggregate and individual use, the degree to which the facility
was utilized each day would be a function of market participant demand. This
stands at the opposite side of the push-pull spectrum from the periodic repo
operations that the Fed conducted prior to the crisis, in which the Fed’s
objective was to inject a certain amount of reserves into the banking system.
In our view, there are essentially two different ways to think about the function
of a standing repo facility. The first is to establish a rate that the Fed directly
controls which could serve as a “ceiling” for short-term market rates, and
compliment the “floor” provided by IOER and the O/N-RRP rate. This line of
thinking was highlighted in the January minutes which showed that a “couple”
of FOMC participants thought that, “a ceiling facility to mitigate temporary
unexpected pressures in reserve markets could play a useful role in
supporting policy implementation at lower levels of reserves.”
But there is a second way to view the function of a standing repo facility.
Rather than thinking about the administered rate at the facility as a ceiling or
backstop for market rates in times of stress, the primary objective could be to
reduce the day-to-day demand for reserves, thus allowing the Fed to run with
a smaller balance sheet. Due to a variety of regulations, internal liquidity
requirements, day-to-day payments, and the potential risk of large deposit
outflows (among other factors) banks have a much greater need for intraday
liquidity than they did pre-crisis. As such, there is a massive demand for High
Quality Liquid Assets (HQLA).
Reserve balances held at the Fed are one example of HQLA, as are US
Treasuries. But even though reserves and Treasuries are both viewed as top
tier HQLA in the eyes of regulators, reserves are virtually frictionless when it
comes to converting into cash or meeting intraday liquidity needs. In contrast,
Treasuries are still generally traded on a T+1 basis, and the holder may have
to realize capital losses, which could be exaggerated in a fire-sale type
scenario. A Treasury could be converted into cash same-day via repo
markets, but as we have seen, these markets periodically come under stress
and users’ ability to access repo liquidity may be subject to intermediaries’
balance sheet constraints.
Selected Responses to Federal Reserve’s Senior Financial Officer Survey

Source: Federal Reserve, NatWest Markets
How important are these factors in determining the lowest level of reserves your bank
would be comfortable holding? (1=not important, 2=somewhat important, 3=important,
and 4=very important)
Satisfying internal liquid stress metrics:

Meeting routine intraday payment flows:
Meeting potential deposit outflows:
Satisfying reserve requirements:
Monetization assumptions for HQLA:
IOER rate > return on other HQLA:
1.00 1.50 2.00 2.50 3.00
Average Response
These frictions may be why many banks would view Treasuries as an inferior
source of HQLA and instead hold high levels of reserves, even if it means
passing up a potentially higher return to do so. But if the Fed stood ready to
exchange reserves for Treasuries, in nearly unlimited amounts at a
reasonable (likely fixed) price, perhaps Treasuries and reserves would be on
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a more equal footing with regards to their perceived ability to be monetized.

This could lower the aggregate amount of reserves demanded by the market,
and in turn allow the Fed to operate an ample reserve system (IE “floor”
system) with a much smaller balance sheet.
This way of thinking about the facility would be more in line with the statement
in the December minutes which said, “participants noted that it might be
useful to explore ways to encourage banks to reduce their demand for
reserves”. It also seems to be more in line with the reasoning laid out in the
St. Louis blog post. Obviously these two utilities of a standing repo facility – as
either a backstop for repo rates or a method to alter the demand curve for
reserves - aren’t mutually exclusive, but it makes a difference when you start
thinking about the potential operational hurdles or how you might structure the
program or measure its success.
One potential operational hurdle we see would be the counterparty list. For
banks to view a standing repo facility as an effective way to monetize
Treasury holdings, they would likely need direct access to the facility. Relying
on a primary dealer to serve as a conduit to the Fed’s facility might be subject
to many of the same frictions as accessing regular repo market liquidity. Or in
other words, a standing repo facility could make sure that water is always
flowing to the market, but it can’t control the size of the hose (in this case
dealer balance sheets). As such, there might not be a significant shift in the
way banks view the trade-off between Treasuries and reserves in their HQLA
portfolio. Also, Fed liquidity - at least delivered via dealer balance sheets -
could end up being a somewhat softer ceiling on repo rates than expected.
So banks might need direct access to the Fed’s repo facility. Right now, the
O/N RRP operations are handled by the New York Fed with a list of
counterparties that only includes 16 banks (along with the Primary Dealers,
money funds, and GSEs). To be sure, the Fed could likely capture a very
large portion of the reserve universe with a relatively small number of big
banks as counterparties, given the concentration in reserve balances. But this
would introduce some serious optics issues – given that big banks would
enjoy a near endless pool of repo funding at very attractive rates, and without
the stigma of the discount window, while small regional banks were excluded.
That likely wouldn’t go over very well in the Chair’s future Congressional
hearings.
The Fed could lower the standards to expand the counterparty list to include
smaller banks, but then things get much more difficult from an operational
perspective. For the Fed, setting up, training, and maintaining counterparties
for operations is not a trivial matter, and the more counterparties you have,
the greater the operational risk.
It’s possible the Federal Reserve Board could manage such a facility, perhaps
utilizing the existing discount window or Term Auction Facility (TAF)
infrastructure which does provide collateralized loans to banks. But even this
would likely have some operational issues to overcome, and in the end, might
be seen as more of a 1-day TAF or discount loan, rather than a repo.
Away from the counterparty issue, timing could also be a problem. Reserves
provide on-demand intraday liquidity. But a Fed facility would only offer the
chance to monetize Treasury holdings at one (or perhaps several?) times
during the day. We would argue that operations would need to be held
somewhat late in the day to be viewed as an adequate source of intraday
liquidity, given that cash needs can arise at any point during the day.
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Spread between IOER and 3-Month Bill Rate (bps)

Source: Bloomberg, NWM
30
20
10
-10
-20
-30
-40
01/01/2010 01/07/2011 01/01/2013 01/07/2014 01/01/2016 01/07/2017 01/01/2019
3M Bill / IOER Spread (bps)
These are some of the biggest potential pitfalls in our mind, but in the end the
better question might by why? We think the lack of substitutability between
holding UST and reserves as HQLA has been overstated. In a world where
reserves are wildly abundant, and bills don’t offer a significant yield pickup (a
3-month bill is currently flat to IOER), of course banks would prefer to hold the
more liquid instrument. But as Treasury supply increases, reserves decline,
and the spread to holding bills becomes more attractive, we think banks may
readily shed reserves that today they might deem necessary. The Fed’s
recent Senior Financial Officer Survey showed that nearly 46% of
respondents would hold less than the level of reserves they currently deem as
their minimum if the opportunity cost to holding reserves were 25bps higher.
In the end, the Fed may not find the operational risk, market footprint, and
potential optics issues worth it if it simply means they get to run a slightly
smaller balance sheet or repo stress is less extreme on quarter- and month-
ends. Of course, this calculus could change if the Fed were to start targeting
SOFR instead of the Fed funds rate at some point in the future, but that is a
conversation for another day. (Blake Gwinn)
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Scandinavia
Nick Mannion 5 reasons for near-term EUR/SEK downside
We establish tactical short EUR/SEK exposure at 10.5540. Target 10.22, with a
stop at 10.71.
Authority. Not intended for Retail Client Alternatively, buy a 3-month (4th June) EURSEK 10.4250 / 10.2050* put spread in
distribution. This material should be 1x1.5 for 32.5 bps (6:1 pay-out ratio, vols 6.10 and 6.075 respectively). Further details
regarded as a marketing communication here.
trading desks that trade as principal in the We remain concerned about the medium-term inflation outlook in Sweden and
instruments mentioned herein. All data is associated implications for Riksbank policy normalisation (particularly if anticipated
accurate as of the report date, unless spot inflation weakness in H2 weighs on long-run inflation expectations).
Nevertheless, we see 5 compelling reasons for near-term SEK outperformance in
coming weeks:
1) The Riksbank’s reaction function has shifted less dovish and more forward-
Long-run surveyed inflation
looking over the past year. Inflation and long-run inflation expectations are at target
expectations back close to target
Source: Macrobond, NatWest Markets
and the conditions for inflation to remain close to target are still seen as good. Growth
is slowing but resource utilisation remains high and the labour market is tight. But
2.5 CPI (2y) CPI (5y)
Target CPIF (2y)
policy is still very expansionary and arguably calibrated for an inflation credibility
CPIF (5y) problem which is now less of a concern. This supports the case for gradual
2.0
normalisation, suggesting a higher hurdle than before to delaying projected rate hikes.
Markets may be disappointed looking for the Riksbank to postpone tightening in April.
1.5 2) Riksbank commentary has been SEK +ve in recent weeks. Having said last week
that she finds SEK weakness since the start of the year ‘surprising’, Deputy Governor
Skingsley was again on the wires this week, arguing “It’s hard to see that the changes
1.0
in macro picture motivates the weakening of the exchange rate… I will incorporate it
12 13 14 15 16 17 18 19
into my monetary policy evaluation from the perspective that a large move in the
exchange rate which in turn has an effect on inflation has to be taken into
consideration.”
We see scope for SEK constructive commentary to continue in coming days. Ingves
and Skingsley are participating in an open parliament hearing on Thursday, while
Floden and Ohlsson are also giving speeches on Friday and Monday respectively. All
are relative hawks on the Board except for Governor Ingves, who has also been much
less dovish in his remarks since last autumn.
3) Current Riksbank pricing is very dovish. The market currently doesn’t price a full
25bp hike until April 2020. This looks low versus current guidance for a hike in H2:19
(most likely Sep-19 according to the current rate path). NWM Scandi Rates Trading
see scope for markets to price further normalisation back in following strong Q4 GDP
data and recent balanced Riksbank rhetoric. Current SEK weakness vs the EUR also
looks hard to justify either on front-end Riksbank pricing or long-term rate spreads.
EUR/SEK rich vs rate spreads… …and front-end Riksbank pricing

Source: Bloomberg, NatWest Markets Source: Bloomberg, NatWest Markets
EUR/S EK EUR/S EK
10.6 5y r ate spread (rh s) 0.3 10.8 Sep -19 FRA (RHS, inverted) -0.22
10.2 10.5
0.1
-0.02
9.8 10.2
-0.1
9.4 9.9
0.18
-0.3 9.6
9.0
9.3 0.38
8.6 -0.5
Sep -17 Mar-18 Sep -18 Mar-19
15 16 17 18 19
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4) Swedish data surprises recovering (from record lows). Q4 GDP was significantly
stronger than expected (1.2% q/q vs 0.6% expected), and the February surveys also
stabilized (PMIs and economic tendency survey). Suppressed expectations suggest a
higher hurdle for further negative surprises and further improvement in the (mean-
reverting) data surprise index. EUR/SEK has been closely correlated with relative Euro
area/Swedish data surprises in recent months.
Data surprises close to record lows Relative surprises driving EUR/SEK

Source: Bloomberg, NatWest Markets Source: Bloomberg, NatWest Markets
SEK 1 SD 2 SD Relative Data Surpri ses (EUR vs SEK )

100 100
EUR/S EK
50
50
0 10.5
0
-50
-50 -100
Stronger SEK data
-100 -150 10.0
Jun-15 Jun-16 Jun-17 Jun-18 Jun-18 Aug -18 Oct-18 Dec-18 Feb-19
5) Near-term upside risks to inflation. Inflation was very weak in January, -0.4ppts
below central bank expectations on both headline CPIF and core (ex. energy). But
while risks are clearly now to the downside of the central bank’s expectations,
weakness was mainly driven by volatile components (foreign travel and clothing &
footwear), which may rebound in coming months. The weak SEK also suggests
upward pressure on core inflation near-term. This should support the Riksbank’s
th
confidence in the medium-term inflation outlook. February inflation data is due 12
March. We expect CPIF to rise to 2.2% y/y from 2.0% prior and CPIF ex. energy to
1.7% y/y from 1.4%.
Near-term upside risks to core inflation from weak SEK

Source: Macrobond, NatWest Markets
-12%
2.0%
-8%
-4%
1.5%
0%
1.0% 4%
CPIF ex. energy, banking services & foreign travel
CPIF ex. energy 8%
0.5% Target
SEK TWI (y/y, 7m ahead, inverted, rhs) 12%
Assuming constant SEK
0.0% 16%
13 14 15 16 17 18 19 20
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Supply Update
Jan Nevruzi Next week, EMU sovereigns announced supply amounts to €9.3bn, or €11.5m/bp PV01.
Coupons: €3.7bn. Redemptions: €24.3bn
13- March, Germany will tap its Aug-48 DBR for €1bn. Italy will auction its medium-long term
defined by the Financial Conduct bonds for an estimated amount of €8.25bn. Sweden will tap its Nov-29 SGB for SEK1.5bn
distribution. This material should be 14- March, the UK will tap its Jan-49 gilt for £1.5bn
th th
and may have been produced in Supply review for the week : 04 March – 08 March
Date Issuer Bucket New/Tap Bond Amt (bn)
instruments mentioned herein. All data is 05-Mar Austria 10y Tap RAGB 0 ½ 02/20/29 € 0.86
accurate as of the report date, unless 05-Mar Austria 30y Tap RAGB 1 ½ 02/20/47 € 0.40
otherwise specified. 05-Mar Germany Linker Tap DBRI 0.1 04/15/26 € 0.75
05-Mar EIB 7y New EIB Float 03/12/26 £ 0.50
05-Mar FMS 3y Tap FMSWER 1 ⅛ 09/15/21 £ 0.50
06-Mar UK 5y Tap UKT 1 04/22/24 £ 3.00
07-Mar Sweden Linker Tap SGBI 0 ⅛ 12/01/27 SEK 0.50
07-Mar France 10y New FRTR 0 ½ 05/25/29 € 6.49
07-Mar France 15y Tap FRTR 1 ¼ 05/25/34 € 2.30
07-Mar France 30y Tap FRTR 3 ¼ 05/25/45 € 0.70
07-Mar Spain 5y Tap SPGB 0.35 07/30/23 € 1.02
07-Mar Spain Linker Tap SPGBEI 1.011/30/2030 € 0.75
Source: Bloomberg, NatWest Markets, Debt offices
EMU-10 supply in €m/bp by week. Next week is in orange (announced supply)

45 42
40 39
35
35 30 30 34
29 29 30 29
30 26 28 26
23 22 24 25
25 23 22
20 20 2120 21 19 22
20 19 20 19
15 13 16 15 17 18 17 15 15 14
19 16 16
15 14 12 12 12 10
10 10 9 8
10 8 6 6
5 4 4 4
5 1 4
0 1
0
02 Jul
16 Jul
30 Jul
08 Oct
22 Oct
11 Feb
25 Feb
11 Mar
25 Mar
12 Feb
26 Feb
12 Mar
26 Mar
05 Nov
19 Nov
03 Dec
17 Dec
31 Dec
01 Jan
15 Jan
29 Jan
14 Jan
28 Jan
07 May
21 May
04 Jun
18 Jun
09 Apr
23 Apr
13 Aug
27 Aug
10 Sep
24 Sep
Ratings reviews
 Moody’s to review Italy (Baa3, Stable)
 S&P to review Austria (AA+, Stable); Finland (AA+, Stable); Portugal (BBB-, Positive)
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EMU Funding
2019 Gross Issuance (€ bn)
*adjusted for buybacks
NWM 2019 Year To Date % Gross Bond YTD PV01 as a % of Coupons Redemptions
Supply Estimate Supply Supply Complete 2019 Bond Supply Remaining Remaining
Germany 163 33 20% 33% 11 108
France* 230 62 27% 37% 37 120
Italy 248 63 26% 48% 35 148
Spain 128 38 30% 33% 21 74
Netherlands 21 7 35% 31% 3 14
Belgium 28 11 39% 49% 10 20
Austria 21 9 41% 30% 5 26
Finland 11 3 29% 19% 2 5
Ireland 18 5 29% 21% 4 13
Portugal 15 5 32% 23% 4 8
Total EMU-10 883 237 27% 34% 132 536
ESM 10 2 20% - 1 5
EFSF 23 8 33% - 2 13
Gross Issuance 2019 Year-To-Date & Remaining (€ bn)

300 YTD Gross Supply Supply Remaining 30
250 25
200 17 20
150 185 12 15
168 14
130 13
100 10 10
90
8
50 11 5
7 9
62 63 5 5
33 38 3
0 0
Germany France Italy Spain NL Belgium Austria Finland Ireland Portugal
2019 Supply Overview (€ bn)

Gross Net Net Supply Net Supply
2019 Net Gross Supply Coupons Redemptions
Supply Supply Remaining Remaining
Supply (ex R) Remaining Remaining Remaining
2019 (NWM) (ex C&R) (ex R) (ex C&R)
Germany 163 15 -5 130 11 108 22 11
France 230 101 64 168 37 120 48 10
Italy 248 53 4 185 35 148 36 1
Spain 128 36 9 90 21 74 16 -5
Netherlands 21 -9 -15 14 3 14 0 -3
Belgium 28 6 -3 17 10 20 -3 -12
Austria 21 -5 -10 12 5 26 -13 -19
Finland 11 6 4 8 2 5 3 1
Ireland 18 5 1 13 4 13 0 -4
Portugal 15 7 2 10 4 8 2 -2
Total EMU-10 883 216 51 646 132 536 110 -22
Page 54/60
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Global Macro Weekly
2019 Weekly Supply Flows (€ bn) – announced supply only

Week starting DEM FRF ITL ESP NLG BEL ATS FIN IEP PTE GRE Total
Issuance 1.0 - 8.3 - - - - - - - - 9.3

Coupons - - 1.5 - - - 1.5 - 0.7 - 0.0 3.7
11-Mar
Redemptions 13.0 - - - - - 11.3 - - - 0.0 24.3

Net Flow (R) (12.0) - 8.3 - - - (11.3) - - - (0.0) (15.1)
Net Flow (C+R) (12.0) - 6.7 - - - (12.8) - (0.7) - (0.0) (18.8)
Issuance 4.0 10.8 - 5.5 - 3.8 - - - - - 24.0
Coupons - - - - - - - - 0.6 - 0.1 0.7
18-Mar
Redemptions - - - - - - - - - - - -
Net Flow (R) 4.0 10.8 - 5.5 - 3.8 - - - - - 24.0
Net Flow (C+R) 4.0 10.8 - 5.5 - 3.8 - - (0.6) - (0.1) 23.3
Issuance 7.0 - 13.3 - - - - - - - - 20.3
Coupons - - - - - 4.5 - - - - - 4.5
25-Mar
Redemptions - - - - - 9.2 - - - - - 9.2

Net Flow (R) 7.0 - 13.3 - - (9.2) - - - - - 11.1
Net Flow (C+R) 7.0 - 13.3 - - (13.7) - - - - - 6.6
Issuance - 6.0 - 4.8 - - - - - - - 10.8
Coupons - - 0.3 - - - - - - - - 0.3
01-Apr
Redemptions - - - - - - - - - - - -
Net Flow (R) - 6.0 - 4.8 - - - - - - - 10.8
Net Flow (C+R) - 6.0 (0.3) 4.8 - - - - - - - 10.4
Issuance 3.8 - 10.0 5.0 - - 1.2 - - - - 19.9
Coupons 0.1 - 0.0 - - - - - - 0.4 - 0.5
08-Apr
Redemptions 16.0 - - - - - - - - - - 16.0

Net Flow (R) (12.3) - 10.0 5.0 - - 1.2 - - - - 3.9
Net Flow (C+R) (12.3) - 10.0 5.0 - - 1.2 - - (0.4) - 3.4
Issuance 1.0 9.5 - - - - - - - - - 10.5
Coupons 0.4 - 0.5 - - - 0.4 0.7 0.5 0.9 0.1 3.5
15-Apr
Redemptions - - 10.7 - - - - - - - 2.5 13.2

Net Flow (R) 1.0 9.5 (10.7) - - - - - - - (2.5) (2.7)
Net Flow (C+R) 0.6 9.5 (11.2) - - - (0.4) (0.7) (0.5) (0.9) (2.6) (6.2)
(Note: Net flow (R) excludes Redemptions, whilst net flow (C+R) excludes coupons and redemptions. Issuance numbers contain some NWM estimates)
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Global Macro Weekly
NWM 2019 Supply Estimate by Maturity (€ bn)
Country 2/3Y 5Y 7Y 10Y 15Y 20y 30y Ultra Linkers CTZ CCTeu Total
Germany 55.0 43.0 44.0 14.0 7.0 163.0
France 40.0 38.0 17.0 57.0 20.0 11.0 18.0 3.0 26.0 230.0
Italy 39.0 31.0 28.0 42.0 19.0 6.0 13.0 1.0 25.0 27.0 17.0 248.0
Spain 15.0 22.0 6.0 46.0 14.0 5.0 6.0 1.0 13.0 128.0
NL 4.0 12.0 4.0 1.0 21.0
Belgium 2.0 1.0 15.0 1.0 2.0 5.0 2.0 28.0
Austria 2.0 3.0 1.5 9.5 3.0 1.5 0.5 21.0
Finland 4.0 5.0 1.0 0.5 10.5
Ireland 1.5 11.0 0.5 1.0 4.0 18.0
Portugal 3.5 8.9 1.0 2.0 15.4
Total 151.0 152.0 53.5 250.4 56.5 32.0 65.0 7.5 71.0 27.0 17.0 882.9
2019Year-To-Date Supply (€ bn)

Country 2/3Y 5Y 7Y 10Y 15Y 20Y 30Y Ultra Linker CTZ CCTeu Total
Germany 10.0 8.0 - 10.0 - - 3.0 - 2.0 - - 33.0
France 12.2 7.3 1.1 22.3 4.7 1.7 9.3 - 3.3 - - 61.9
Italy 5.7 7.5 5.2 9.5 10.0 - 9.5 - 2.8 7.6 5.7 63.4
Spain 5.1 6.3 1.2 16.6 6.7 - 0.6 - 2.1 - - 38.5
NL - 1.6 - 5.9 - - - - - - - 7.4
Belgium - - - 6.0 - - 5.0 - - - - 11.0
Austria 1.3 - - 6.5 - - 0.9 - - - - 8.7
Finland - - - 3.0 - - - - - - - 3.0
Ireland - - - 5.0 - 0.3 - - - - - 5.3
Portugal - - - 4.7 0.3 - - - - - - 5.0
Total 34.2 30.6 7.4 89.4 21.7 2.0 28.3 - 10.2 7.6 5.7 237.1
2019 Remaining Supply (€ bn)

Country 2/3Y 5Y 7Y 10Y 15Y 20Y 30Y Ultra Linker CTZ CCTeu Total
Germany 45.0 35.0 - 34.0 - - 11.0 - 5.0 - - 130.0
France 27.9 30.7 15.9 34.7 15.3 9.3 8.7 3.0 22.7 - - 168.1
Italy 33.3 23.5 22.8 32.5 9.0 6.0 3.5 1.0 22.2 19.4 11.3 184.6
Spain 9.9 15.7 4.8 29.4 7.3 5.0 5.4 1.0 10.9 - - 89.5
NL - 2.5 - 6.1 - 4.0 1.0 - - - - 13.6
Belgium - 2.0 1.0 9.0 1.0 2.0 - 2.0 - - - 17.0
Austria 0.8 3.0 1.5 3.0 - 3.0 0.6 0.5 - - - 12.3
Finland - 4.0 - 2.0 1.0 - 0.5 - - - - 7.5
Ireland - 1.5 - 6.1 0.5 0.7 4.0 - - - - 12.8
Portugal - 3.5 - 4.2 0.7 - 2.0 - - - - 10.4
Total 116.8 121.4 46.1 161.0 34.8 30.0 36.7 7.5 60.8 19.4 11.3 645.8
Page 56/60
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Global Macro Weekly
Rich/Cheap for the German sovereign curve Rich/Cheap for the French sovereign curve
Source: NatWest Markets, Bloomberg Source: NatWest Markets, Bloomberg
Aug-48
3 Rich 5 Rich
4 Jun-39
2
3
Aug-27 May -48
1 2 Nov-25
-25
May
Nov -24
Jan-31 Jul-42 Oct-27
Sep-19
Jan-30 1 May -36 May -45
0Oct-19 Jul-28 Aug-46 Apr-41
Aug-28 Apr-22
0
Apr-35
-1 Jul-34Jan-37
Apr-23 Jul-39 -1 Mar-24
Feb-29
-2 -2 May -28
-3 Nov -28 Oct-32

-3 Oct-19
Cheap -4 Cheap
May -30
(years) (years)
-4 Nov-19
May -19
-5
19' 21' 24' 27' 30' 32' 35' 38' 41' 43' 46' 49' '19 '21 '24 '27 '30 '32 '35 '38 '41 '43 '46 '49
Rich/Cheap for the Spanish sovereign curve Rich/Cheap for the Italian sovereign curve
6 20 Rich
Jan-37 Rich Dec-26 Sep-36
Jul-35
Oct-22 15 Mar-47
4
Oct-46 10 Oct-20
Apr-22 Jul-33 Jun-26
Jan-23
Oct-20
2 Oct-48 Jun-27
Jul-19 Jul-32 Jul-40 5 Sep-46
Apr-28
Jul-41 Dec-21
Aug-21 Sep-28
0 Oct-26 0 Sep-38
Jan-22 Apr-29 Mar-35 Mar-48
May -24
Apr-22 Feb-37
-5 Mar-23
Nov -25
Mar-26 Mar-30
-2 Apr-21 Apr-24 Nov -26 Aug-34
Oct-44 -10 Apr-19 Nov -29
Jan-29 May -31
-4 Jan-21 Feb-33 Sep-49
Oct-28 -15
Sep-44
-6 -20 Aug-39
Jul-26
Sep-40
(years) Cheap
-8 (years) Cheap -25
'19 '21 '24 '27 '30 '32 '35 '38 '41 '43 '46 '49 '19 '21 '24 '27 '30 '32 '35 '38 '41 '43 '46 '49
Rich/Cheap for the Dutch sovereign curve Rich/Cheap for Belgium government paper
Jun-31
8
3
Rich Jun-28 Rich
Jul-21
6
Mar-32
Jul-26 Mar-41
2 4 Jun-29
Mar-28
Jan-28 2 Mar-35
1 Jul-20 Jan-23 Jul-25
Jul-19
Jul-22 Mar-26 Jun-45
Jan-47
Jan-42 0 Oct-24 Jun-38
Jul-28
Jul-27
Apr-33
0 Jul-24
-2 Sep-22
Jan-37 Jun-37
-1
Jan-22
Jul-29
Jan-33 Cheap -4
-2 (years)
(years) Cheap
-6
19' 21' 24' 27' 30' 32' 35' 38' 41' 43' 46' 49' 19' 21' 24' 27' 30' 32' 35' 38' 41' 43' 46' 49'
Page 57/60
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Global Macro Weekly
Sovereign Auction Calendar
European Auction Calendar 2019
Time Announ New/ Outstan

Date Country Tenor Bond ISIN Amt. (bn) PV01 Comments
(UKT) cement Tap ding
10:30 13-Mar Germany 30y Tap DBR 1 1/4 08/15/48 DE0001102432 1.00 13.5 2.9
10:00 13-Mar 8-Mar Italy Medium-long term 8.25 8.7 NWM Est. size
10:00 13-Mar 6-Mar Sweden Bond auction 1.50
10:30 14-Mar 5-Mar UK 30y Tap UKT 1 ¾ 01/22/49 GB00BFWFPP71 1.50 4.5 3.6
11:00 18-Mar Belgium OLO auction 3.75 6.0 NWM Est. size
10:30 20-Mar Germany 5y Tap OBL 0 04/05/24 #179 DE0001141794 4.00 8.0 2.1
10:00 21-Mar 14-Mar Sweden Linker auction 0.50
09:50 21-Mar 15-Mar France Medium -term and I/L 10.75 7.5 NWM Est. size
09:30 21-Mar 15-Mar Spain Medium-long term 5.50 6.1 NWM Est. size
10:30 26-Mar Germany 2y Tap Bond auction DE0001104750 4.00 5.0 0.8
10:00 26-Mar 21-Mar Italy CTZ/BTP€I auction 4.75 1.7 NWM Est. size
10:30 26-Mar UK Linker Tap UKTI 0 ⅛ 08/10/48 GB00BZ13DV40 7.9
10:30 27-Mar Germany 10y Tap DBR 0 02/15/29 DE0001102465 3.00 10.0 3.0
10:00 27-Mar 20-Mar Sweden Bond auction 1.50
10:00 28-Mar 25-Mar Italy Medium-long term 8.50 4.3 NWM Est. size
10:00 4-Apr 28-Mar Sweden Linker auction 0.50
09:50 4-Apr 29-Mar France Long Term auction 6.00 6.6 NWM Est. size
09:30 4-Apr 29-Mar Spain Medium -term and I/L 4.75 4.5 NWM Est. size
10:15 9-Apr 2-Apr Austria Bond auction 1.15 1.5 NWM Est. size
10:30 9-Apr Germany Linker Linker auction 0.75 1.5 NWM Est. size
10:30 10-Apr Germany 5y Tap OBL 0 04/05/24 #179 DE0001141794 3.00 8.0 1.6
10:00 10-Apr 3-Apr Sweden Bond auction 1.50
10:00 11-Apr 8-Apr Italy Medium-long term 10.00 12.7 NWM Est. size
09:30 11-Apr 5-Apr Spain Medium-long term 5.00 4.1 NWM Est. size
10:30 17-Apr Germany 30y Tap DBR 2 1/2 07/04/44 DE0001135481 1.00 26.5 3.1
09:50 18-Apr 12-Apr France Medium -term and I/L 9.50 4.1 NWM Est. size
10:30 24-Apr Germany 10y Tap DBR 0 02/15/29 DE0001102465 3.00 10.0 3.0
10:00 24-Apr 18-Apr Italy CTZ/BTP€I auction 3.50 1.9 NWM Est. size
10:00 24-Apr 17-Apr Sweden Bond auction 1.50
11:00 29-Apr Belgium OLO auction 3.50 NWM Est. size
10:30 30-Apr Germany 2y Tap Bond auction DE0001104750 4.00 5.0
10:00 30-Apr 26-Apr Italy Medium-long term 8.50 NWM Est. size
10:00 2-May 25-Apr Sweden Linker auction
09:50 2-May 26-Apr France Long Term auction 9.50 NWM Est. size
10:15 7-May 30-Apr Austria Bond auction 1.20 NWM Est. size
10:30 7-May Germany Linker Linker auction 0.50 NWM Est. size
10:30 8-May Germany 5y Tap OBL 0 04/05/24 #179 DE0001141794 3.00 8.0
wc = week commencing; sh = second half; mc = month commencing Source: Bloomberg, NatWest Markets, Debt offices
Page 58/60
Internal
Global Macro Weekly
Desk Strategy team
James McCormick Andrew Roberts

Global Head of Desk Strategy Head of European Macro Strategy
+44 20 7085 3104 +44 20 7085 1702
james.mccormick@natwestmarkets.com andrew.roberts@natwestmarkets.com
Ross Walker
Giles Gale
Head of European Economics
Head of European Rates Strategy
Desk Strategist
+44 20 7085 5971
+44 20 7085 3670
giles.gale@natwestmarkets.com
ross.walker@natwestmarkets.com
Imogen Bachra, CFA Oriane Parmentier

European Rates Strategy European Rates Strategy
+44 20 7085 8381 +44 20 3361 1743
imogen.bachra@natwestmarkets.com oriane.parmentier@natwestmarkets.com
Jan Nevruzi Theo Chapsalis, CFA

European Rates Strategy Head of UK Rates Strategy
+44 20 7085 7449 +44 20 7085 9884
jan.nevruzi@natwestmarkets.com theo.chapsalis@natwestmarkets.com
Nick Mannion
Paul Robson
European Economics
Head of G10 FX Strategy, EMEA
Desk Strategist
+44 20 7085 6125
+44 20 7085 6400
paul.robson@natwestmarkets.com
nicholas.mannion@natwestmarkets.com
Galvin Chia James Nelligan

Emerging Markets FX Strategy Currency Strategy
+44 20 7085 1864 +44 20 7085 7305
galvin.chia@natwestmarkets.com james.nelligan@natwestmarkets.com
John Briggs Blake Gwinn

Head of Strategy, Americas US Rates Strategist
+1 203 897 4689 +1 203 897 3546
john.briggs@natwestmarkets.com blake.gwinn@natwestmarkets.com
Kevin Cummins Michelle Girard

Senior US Economist Chief US Economist
+1 203 897 2818 +1 203 897 2818
kevin.cummins@natwestmarkets.com michelle.girard@natwestmarkets.com
Brian Daingerfield John Roberts

Head of G10 FX Strategy, US Strategy Analyst
+1 203 897 6806 +1 203 897 6612
brian.daingerfield@natwestmarkets.com john.roberts@natwestmarkets.com
Page 59/60
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Global Macro Weekly
All data is accurate as of the report date, unless otherwise specified.

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Global Macro Weekly

Desk Strategy Sell risk assets, buy 5y5y EMU

Trade recommendations of the week: 1) 10s30s Spain flatteners 2) receive EUR

Linked-Up (p18): OATi are cheap on ASW; buy short-dated TIPS.

Scandinavia (p51): 5 reasons for near-term EUR/SEK downside.

Macro: need to know

Our core themes

NWM Strategy view at a glance

EUR (periphery) Scandinavia CAD

Overview: lesson is – never sell bunds (or

1 Watershed week? perhaps, but we had it the wrong way

As such, the EU is acting logically, if a little unexpectedly overly micro-political. As

2 global growth is in play, has driven yields down this week,

Avg of Taiwan export orders and South Korea exports (% y/y)

(For us as cheerleaders of the global slowdown, this is particularly annoying,

I am indebted to my macro strategy colleague James Nelligan, a rare fellow traveller

Taiwan’s data overnight saw exports at -8.8%yoy, versus -0.7%yoy expected, so an

This is bad stuff.

So, this leaves the chart now like:

Avg of Taiwan exports and South Korea exports (% y/y)

First, China exports came in at -20.7%yoy versus -5yoy expected.

100 China exports (% y/y) EM equities (rhs, % yoy)

Japan Machine Tool Orders (% y/y)

Stay long 5y - 5y5y EMU FI as your sweetspot market and curve.

3) last point on the dovish ECB

We come back to our favourite liquidity chart:

3mth rolling cumulative expansion of central bank balance sheets (LHS)

Economies need liquidity.

4 if we are right about risk assets falling, negative 10y

Not many bond bulls. Some, but not enough

There was only one vote for <0% yields.

And that was me.

2. The risk: Low growth and debt sustainability

3. The sideshow: TLTRO-iii

Clearly the intention was to ‘meet market expectations’ by making an announcement.

2. Who’s afraid of European Politics? SPGBs are our

10s30s Spain vs 10y since 2014. Flatteners.

2s5s are very flat. So are 10s. 0% is

3.1 Soft bearish view: 5y rich. 5s10s flatteners or sell on 2s5s10s.

30y asset swaps have tightened. Our

Monthly average PV01 of supply from

€m/bp, monthly totals

Ser ies9 201 7 201 8 201 9

€bn USA France Ger ma ny Italy

…and purchases of OATs reached

Japanese investor net flows of LT foreign sovereign bonds (€bn)

China’s Targets Remain ‘Reasonable’

Table 1: Main Economic Targets and Policy Priorities

2) The Government remains committed to fight “three critical battles”

Table 2: Key Policy Goals in “Three Critical Battles”

2018 Target 2018 Achievement 2019 Target

3) Reforms and opening up will accelerate in the financial sector to provide

Theo Chapsalis, CFA

10y BTP/B und sp read (lhs)

TIPS -1.5% 0.8%

Breakevens Bullish Headline US CPI

Basis Tighter 0.2%

Fixing and Forecasts

Historical commodities Implied energy futures

Short-term, we hold a positive view on Italy. We expect that we are in a period of

OATi: Cheap on ASW

OATi28 s OATi29 s OATei3 0s

German package holidays methodological change: the seasonality of