Weekly economic update

Surprising decision of the House of Representatives to reject the Paulson’s rescue plan for the US financial sector last Monday triggered a surge in risk aversion, which resulted in a collapse in stock markets, strengthening in bond markets, strong rise in money market rates and weakening in currencies in the region. Uncertainty was additionally fuelled by information about financial problems of European banks. Work on the rescue package have been resumed in the US Congress though, and on Wednesday the Senate approved amended plan, including among others higher protection for depositors and higher tax rebates. On Friday, the plan was accepted by the House of Representatives. Green light for the US government’s takeover of “toxic assets” improved investors’ sentiment only for a while, and this week began with increased risk aversion among other due to information about problems of next financial institutions in Europe. One should take into account that uncertainty and risk aversion will remain at elevated levels for some time.Financial market players are increasingly concerned that effects of the plan may be insufficient to prevent the US economy from recession and financial market from further distress.

Download: Weekly economic update 6-12 October 2008

The end of last week was dominated by a discussion about PM Tusk’s declaration that the government would like Poland to enter the euro zone in 2011. Though we believe that chances for this scenario are insignificant, but strong government’s declaration might mean that 2012-13 would become more likely than subsequent dates. On Tuesday, government is about to meet with MPC, and surely accession to the euro zone as well as budget for 2009 will be one of the main points on the agenda. So far according to NBP the government has not consulted this issue with the central bank. It is worth to observe the comments of both sides after the meeting. Some MPC members (Filar, Wojtyna) have already suggested that faster path to the euro would require more restrictive monetary policy.

Download: Weekly economic update 15-21 September 2008

In line with our expectations, the zloty was testing 3.36 level at the start of last week. Initially it failed to break this threshold, however in the second part of the week, there was a significant weakening of currencies in the region, mainly due to dollar appreciation against euro (EURUSD clearly below 1.43). The EURPLN rate rose significantly to ca. 3.45. There was a strengthening in interest rates market, among others due to situation on core markets. Local money market and debt market did not react to publication of the Ministry of Finance’s inflation forecast that proved
to be consistent with market consensus (5.0%YoY) and slightly lower than our prediction. Comments of MPC members revealed split opinions within a rate-setting panel. Hawkish central bankers pointed to a need of further rate hikes, while dovish Council members did not rule out possibility of rate reductions in Poland next year, although they said it depends on inflation decline and clear weakening of economic growth. In our view, it is too early to expect interest rate cuts that are currently being priced-in by the market. Level of CPI inflation and upward path of core inflation, together with elevated wage growth, create a risk for inflation. Moreover, conclusion of monetary tightening cycle is not supported by current trend on the FX market.

Download: Weekly economic update 8-14 September 2008

As we expected, the last week was marked by depreciation of the zloty and rise in market interest rates. The zloty weakened despite no change in EURUSD and the fact that outcome of the MPC meeting proved more hawkish than expected by the market. As it was widely predicted, the MPC left rates on hold, but tone of the post-meeting official statement and comments from rate-setter proved more hawkish than expected by the market. In fact, as we have indicated, overall message from the Council did not differ much as compared to the previous month. Door for more monetary tightening are still open. We expect that in August the CPI inflation rose to around 5%, net inflation to around 4% and the CPI less food and energy prices to above 2.5%, while wage growth remained at two-digit level, which should persuade the Council to tighten monetary policy again. An encouraging factor for some additional tightening were stronger than expected GDP numbers for Q2.

However, we think that more and more numerous indications of economic slowdown in the next quarters (last week brought slightly weaker than predicted retail sales for July, fall in consumer confidence indices for August and confirmation of weakening in labour demand growth) will not enable to convince rate-setters to more than one hike this year.

This week we expect slight recovery of the zloty, although EURPLN may temporarily test again the level of 3.36, which was shortly broke on Friday. The domestic currency should be supported by upward correction in EURUSD expected by us. The local interest rate market will be influenced by release of the FinMin’s inflation forecast for August and performance of the core debt markets amid many crucial events scheduled abroad.

Download: Weekly economic update 1-7 September 2008

Last week passed under the sign of slight zloty rebound against main currencies amid correction in EURUSD and surge in oil prices. Bonds continued strengthening trend since the start of the week despite higher than expected data about wages and employment. Data about industrial output and PPI were much lower than predicted and contributed to further strengthening in interest rate market. Net inflation increased in line with market consensus to 3.5%YoY and MPC minutes showed that the hawkish camp in the Council opted for interest rate hike already in July and it will probably not change at the next meeting.

Main event of the week will be the MPC meeting that will conclude with no change in interest rates. The statement after the meeting may include references to the exchange rate (substantial weakening since the last meeting) and to a scale of economic slowdown.

An important issue for the MPC may be a change in expectations concerning monetary policy perspectives in the euro zone, as well as a drop in oil prices. However, in our view the MPC statement will not be less hawkish than the previous one. Moreover, we expect that retail sales data will show higher growth than predicted by the market, which should prevent further strengthening on the interest rate market. A slight depreciation of the zloty is possible with 3.34 versus euro as a resistance level. At the end of the week, the CSO will release GDP data for Q2 that are likely to show slight economic slowdown as compared to Q1.

Download: Weekly economic update 25- 31 August 2008

In the past week the zloty depreciation trend was continued and the EURPLN rate as we expected exceeded 3.30, while the bond market experienced yields decline. The weakening of the domestic currency resulted mostly from the strengthening of the dollar in the international markets. It was gaining as result of concerns the weakening of other economies than US and of further drop in commodities’ prices. Oil prices dropped to 110$ per barrel.

Data about June’s balance of payments disappointed, as trade deficit increased to €1.7bn and cumulated 12-month current account deficit rose to 4.5% of GDP. Inflation data were in line with median market forecast and similarly to current account figures had negligible impact on the financial market. Higher impact had dovish comments of the Ministry of Finance about estimates of inflation in August not exceeding 5%.

We predict further weakening of the domestic currency amid deceleration in dollar appreciation. We also do not expect further fall in yields on the debt market because of publication of new local data for July. Industrial output and PPI will be in our opinion higher than market consensus and core inflation will remain at elevated levels. Even though wage growth may be lower than predicted by the market, it will remain very high, strengthening inflationary pressure. We still expect a slight slowdown in employment growth. Minutes of the MPC meeting in June should have no significant impact on the local financial market. High number of important publications will be released abroad and they may impact the relation between the dollar and euro and core debt markets.

Download: Weekly economic update 18 - 24 August 2008

Interest rate cut in the Czech Republic and dollar appreciation after the ECB meeting suggesting no soon interest rate hikes in the euro zone contributed to weakening of currencies in our region last week, including the zloty. At the same time, bond market strengthened, which was favoured by situation on core debt markets and expectations that CNB’s rate cut may herald near end of tightening cycle in other countries in the region.

After short break in data releases, this week markets will focus on monthly macroeconomic indicators again. The most important will be inflation data on Wednesday, which we predict to have risen to 4.7% in July, slightly below market consensus and FinMin’s forecast. One should pay attention to a scale of food prices deflation, as it may hint on what will be the impact of this year’s dry weather on domestic inflation rate. Also, the MPC members’ comments that may follow the CPI release may be important for the market.

Tuesday’s data about balance of payments should favour continuation of zloty correction, showing a rise in current account deficit despite faster export growth than in May.

Abroad, inflation data will be also in focus this week and may affect expectations concerning monetary policy perspectives in the US and euro zone. Besides, there will be numerous important figures on economic activity (among others, industrial output and GDP in the euro zone, output and retail sales in the US).

Download: Weekly economic update 11 - 17 August 2008

Although last week the zloty reached new high against the euro, EURPLN did not managed to break 3.20. There were a few corrections, but not on a large scale and maximum level of EURPLN during the week was 3.23. At the end of the week the zloty was at similar level versus the euro as a week earlier. At the same time, the domestic currency weakened to the dollar amid the greenback’s strengthening in the international markets. We still think that potential for the zloty strengthening is running low and we expect more significant correction. An impulse for that may be a rate hike in the Czech Republic suggested in recent comment from Czech central bankers. Such a decision could weaken the zloty. Tone of MPC statement after its meeting last week and fresh comments from Polish central bankers showed that prospects for domestic monetary policy abroad are different than in Poland’s southern neighbours.

The MPC again included informal restrictive bias in the official statement. However, one should note that also a few new dovish elements appeared in the document, which lowers risk of more radical steps than in our scenario of rise in the reference rate to 6.25-6.5% in September and/or October. Arguments for further tightening will be increase in inflation and inflation expectations, which pose a threat of the second-round effects. Therefore, we think that fall in domestic yield curve continued last week may soon be reversed at least to some extent. This week Polish bonds may be negatively affected by comments from the ECB, which in our view remains in hawkish mood. After a series of quite strong data from the US, the FOMC is also unlikely to be dovish. This may lead to increase in yields on the core markets and thus harm the domestic debt market.

Download: Weekly economic update 4-10 August 2008

At the beginning of last week there was significant correction of the zloty driven by fall in EURUSD, quite dovish comments from MPC members and suggestion by governor of the Czech central bank about a possibility of a rate hike already at the bank’s meeting on August 7, which weakened currencies in the region. In the last two days of the week the zloty recovered, erased earlier losses and reached new high against the euro, but EURPLN failed to break 3.20. We think that also this week the zloty will not strengthened below that level for longer and one should rather wait for another wave of correction. In our view the zloty may be negatively affected by rather dovish message after the MPC meeting this week.

Significant moves in the FX market and in the core debt markets translated into large volatility in the local debt market. At the end of the week yields were slightly lower than at a week earlier. Overall influence of the domestic macro data released last week was neutral for the zloty and bonds.

An effect of slightly higher than expected net inflation was offset by lower than predicted retail sales. The data has not changed our assessment of monetary policy prospects. Recent comments from MPC members confirmed our view that likelihood of a rate hike in July is close to zero and further tightening may only take place in autumn.

Apart from the MPC meeting (with no uncertainty regarding decision on rates, the market will wait for official statement and central bankers’ comments) key events for the Polish market this week include release of the FinMin’s inflation estimate for July and many major data releases abroad. Moods in the stock markets and performance of crude oil prices will also be important for the FX and debt markets.

Download: Weekly economic update 27 July– 3 August 2008

W tym tygodniu w raporcie:

• What’s hot this week - Last data releases before the MPC meeting
• Economy last week - Dovish data, except for wages
• Quote of the week - Strong zloty and possible slowdown worrying MPC
• Market monitor

Among data released last week in fact only acceleration in wage growth in enterprises sector to 12%YoY was a “hawkish” surprise, while other publications were either neutral (CPI) or lower than forecast (employment, industrial output, export, PPI), fitting well in a picture of Polish economy undergoing a gradual slowdown. Those data will be arguments for the Monetary Policy Council for several months of observation of situation and no interest rate hikes in the summer period. Nevertheless, the Council will remain vigilant, as definitely accelerating wage growth could be a worrying signal.

This week will bring about lower number of publications either local and on international markets. The most important domestic data will be those about retail sales growth. They may be slightly negative for bonds, as we predict higher sales growth than the market (thanks to solid rise in revenues). Core inflation data, that are likely to show slight increase in most of measures, should be quite neutral for market sentiment, as well as business climate indicators and minutes of June MPC meeting. Abroad, the housing market should be the focus of attention in the US. Other data of note in a relatively quiet week include durable goods for June and the final reading for July’s Michigan Sentiment survey. Amid a light data schedule, markets will be keeping a close eye on half year corporate earnings reports/trading statements and the performance of stock markets, as well as developments on oil prices.

Download: Weekly economic update 21 – 27 July 2008

• What’s hot this week - Heavy data calendar in Poland and abroad
• Economy last week - Slovakia allowed to join euro zone in 2009
• Quote of the week - Strong zloty may delay rate hikes?
• Market monitor

Especially if data about inflation and wages will not be higher than predicted by the market, which will confirm expectations for a pause in interest rate hikes. Calendar of economic data releases abroad is also heavy this week. The market will pay close attention to data about inflation in the euro zone and in the US, as well as production figures for both areas, business climate indicators and news from the US housing market. With a host of companies due to report half year earnings, the performance of stock markets will be closely watched, as will the Fed Chairman Bernanke’s speeches on Tuesday and Wednesday.

Download: Weekly economic update 14 – 20 July 2008

In the first part of last week, with rise in EURUSD, the zloty was table against the euro and reached the strongest level to the dollar since 1993. Later in the week, EURPLN fell below historical low of 3.3407 from June 2001. However, it did not happen as a consequence of strengthening expectations for more interest rate hikes by the ECB, which could have increased room for monetary tightening in Poland. Actually, the comment after the ECB meeting was less hawkish than expected by the market, and the US data were better than some market participants feared, and in effect there was a significant weakening of the euro against the dollar in the international markets.

This led to zloty appreciation against the euro and simultaneous weakening versus the dollar. Numerous comments from MPC members last week had neutral impact on the Polish market. They have not changed our view on monetary policy prospects. We still believe there is substantial risk of further rise in the reference rate to 6.25-6.5%. Likely months for further rate hikes will be September (after Q2 GDP data and August inflation at ca. 5%) and/or October (next inflation projection).

After falling below the historical low level, EURPLN may go into direction of 3.30 (on Friday it tell below 3.32). The zloty may be positively influenced by the Eurogroup’s final decision on Slovakia’s entry to the euro zone and the Slovak crown conversion rate to the euro. We lower expected range for EURPLN to 3.28-3.38 and for USDPLN to 2.08-2.18. Among data from the euro zone and US due for release this week, the most important will be preliminary Michigan index for July.

Changes in risk aversion and moods on stock markets will be also important for the local financial market. The meeting of the Bank of England will be important for the British pound. In our view, amid expected rise in inflation in the nearest months and at simultaneously strengthening signs of deep economic slowdown the BoE will not decide to lift main interest rates this year.

Download: Weekly economic update 7 – 13 July 2008

In the international markets there was a significant rise in bond yields and the largest weekly strengthening of the dollar in 3 years. As compared to the market moves abroad, volatility in the Polish market was moderate as investors waited for CPI inflation figures.

The data showed that CPI inflation in May rose to 4.4%YoY from 4% in April, in line with our forecast and slightly above the FinMin’s estimate and market consensus of 4.3%. At the same time, a structure of price growth was slightly different from what we expected, which lowered our estimate of net inflation in May to 3.3% from 3.6%.

Money supply growth was slightly higher than forecast and remained at high level of 15%YoY. All in all, we have not changed our expectations regarding monetary policy prospects. We predict a rate hike and see significant risk of further tightening later in the year.

This week will be busy in terms of major data releases both locally and internationally. While according to our forecasts domestic output and PPI figures should be lower than the market consensus, which may temporarily strengthen the interest rate market, the other data releases and accompanying them possible comments from the MPC are likely to confirm high probability of the rate hike in June and risk of further tightening later on.

The international FX markets will be under influence of result of the referendum in Ireland and next data from abroad.

Download: Weekly economic update 16 – 22 June 2008

Last week, the only important event scheduled in the Polish financial market was publication of the FinMin’s estimate of CPI inflation in May. The official inflation figures will be released by the stats office on Friday, 13. The ministry estimates that the headline inflation rate in May increased to 4.3% after a monthly price growth of 0.7%. Our estimate of inflation and the median of market forecasts are at 4.4%. In a comments to the FinMin’s estimate a few MPC members said that the estimate is consistent with NBP internal short-term forecasts and does not change assessment of the inflation outlook and monetary policy prospects. We think the Council is going to continue the monetary policy tightening and one should expect an interest rate hike already in June. What is more, according to some of Polish rate-setters, comments from the ECB president at the post-meeting press conference, suggesting a rate hike in the euro zone as soon as in July, create some additional room for rate hikes in Poland. In our view this increases risk of further rate hikes after the move in June expected by us for a long time.

Apart from local events, we will also get next portion of important data from abroad this week. The key focus of attention will be on retail sales and inflation figures from the US. Besides, market participants will pay much attention to Euro2008 that will last from 7 to 29 June. Analysis of statistical data indicates that Polish national team has low chances for a success, but there are people rather than statistics playing on a pitch and everything can happen.

Download: Weekly economic update 9 – 15 June 2008