Weekly economic update

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Weekly economic update 23 29 January 2012 First days of the last week have clearly shown that the market was not really concerned about the S&P decision to downgrade 9 euro zone countries.

1 Weekly economic update January 2012 First days of the last week have clearly shown that the market was not really concerned about the S&P decision to downgrade 9 euro zone countries. After Friday s rise of volatility, the market sentiment improved markedly. Releases of better-than-expected figures (e.g. German ZEW), successful auctions of Spanish and French debt, as well as hopes for monetary easing in China have been supportive for the demand for risky assets. The zloty benefited as well. The EURPLN exchange rate broke an important support at 4.33, but the appreciation of domestic currency did not last long. EURPLN has encountered another important support area ( ), from which it rebounded on Friday. Trimming of the PLN s gains has been intensified by declining EURUSD. The most important event on the domestic debt market was the auction of two-year bonds. In line with expectations, it proved to be really successful. Finance Ministry sold OK0114 bonds worth PLN6.75bn amid demand at PLN16.5bn. After last week s auction we estimate that gross borrowing needs for 2012 are financed in 30% already, which is even better than we expected. As for the domestic data, industrial output clearly surprised on the upside. The better than expected reading supports our forecast of economic growth in 2011Q4 slightly above 4%YoY. In our view, the beginning of the week will be predominated by issue of agreement between Greek government and private investors concerning the debt reduction. Euro zone finance ministers summit is scheduled for Monday and second bailout for Greece will probably be an important subject there. Flash PMI reading in the euro zone and Germany, as well as Ifo index, will be significant for the market, as they will show the pace of slowdown in the manufacturing. Data released last week supported market expectations for positive surprises so risk aversion can rise considerably, should the data disappoint. The market will also await Fed s statement, as the bank s forecast of interest rate path will be published. At the end of the week the investors will focus on the US data and the first estimate of GDP for 2011Q4, which is due for release on Friday. Similarly as in case of European data, reading below expectations may cause some market uncertainty regarding economic growth path. In our view EURPLN will not test supports mentioned above and this week will bring a zloty weakening. Domestic debt market will also depend on the global sentiment. We do not exclude that zloty weakening could result in profit taking in 10Y sector. Economic calendar Time CET COUNTRY INDICATOR PERIOD MONDAY (23 January) No important data publications TUESDAY (24 January) MARKET FORECAST BZWBK 9:28 DE Flash PMI manufacturing Jan pts :58 EZ Flash PMI manufacturing Jan pts :00 EZ Industrial orders Nov %MoM WEDNESDAY (25 January) 10:00 DE Ifo index Jan pts :00 US Pending home sales Dec %MoM LAST VALUE 20:15 US Fed s decision % THURSDAY (2uary) 8:00 DE GfK index Feb pts :00 PL MPC minutes 14:30 US Durable goods orders Dec %MoM :30 US Initial jobless claims week k :00 US New home sales Dec k :00 US Leading indicators Dec %MoM FRIDAY (27 January) 10:00 PL Retail sales Dec %YoY :00 PL Unemoloyment rate Dec % :30 US Advance GDP Q4 %QoQ :55 US Michigan index Jan pts Source: BZ WBK, Reuters, Parkiet Maciej Reluga Chief economist ekonomia@bzwbk.pl Piotr Bielski Marcin Sulewski Agnieszka Decewicz Marcin Luziński

2 What s hot this week Retail sales and unemployment rate Retail sales and unemployment rate Nominal retail sales (YoY) Unemployment (%) According to the macroeconomic survey by Parkiet daily, our forecast of retail sales is most pessimistic among domestic institutions. In our view, the annual pace of growth will be negatively affected by high base effect from December 2010 (which is due to shifts in spending prior to VAT hike). However, upward surprise delivered by industrial output data created some upward risk for our forecast. December s marked rise of unemployment will be partially due to seasonal effect. Additionally, slight upward risk for our forecast is connected with monthly data on employment in corporate sector. Labour market conditions are likely to deteriorate in the upcoming months, which will results from companies reaction to slowdown in domestic economy. This week s data should not affect the market. Last week in the economy Labour market in line with trend, output surprises on the upside %YoY Wage bill in the enterprise sector Real wage bill Employment Wages Employment in corporate sector rose in December by 2.3%YoY (2.5%YoY in November). The reading was below our and market expectations (2.4%YoY). Rise of wages at was slightly below our expectations of 4.5%. At the end of 2011 the number of employed was at 5503k, by ca. 25k less than the 2011 peak in July. December s data were in line with our scenario of further development of the situation in the job market, confirming trends observed since mid-2011 (gradual drop of employment and moderate pace of growth of wages). Whole year 2011 brought an improvement of labour market conditions employment rose by 3.3%YoY as compared to 0.8%YoY in 2010, wages accelerated to 4.9%YoY from 3.5%YoY in We expect stagnation of employment and slowdown of momentum of wages more or less to level of inflation %YoY Industrial and construction output Industrial output Quote of the week Inflation above 4% cannot be tolerated Jerzy Hausner, MPC member, PAP, 1uary Probability of a quick inflation s descent towards target is much lower than a probability that it will stay at present, elevated level. ( ) In my view it is markedly more probable that we will hike interest rate than ( ) cut. Anna Zielińska-Głębocka, MPC member, PAP, 1uary Probability of interest rate cuts is getting lower and lower. It is still too early [to consider an interest rate hike]. We will watch the development of situation. Adam Glapiński, MPC member, Reuters, 19 January In my opinion, the MPC cannot tolerate inflation persistently running above 4%. If inflation will not be lower than 4% at the end of Q1, the interest rates will have to be hiked. Construction output Industrial output advanced in December by 7.7%YoY above market consensus at 6.5% and our forecast at 5.5%. After seasonal adjustment, the growth reached 9.5%YoY (0.9%MoM). Construction and assembly output rose by 14.6%YoY, which was close to our and market expectations. Solid growth continued to be observed in export oriented sectors, among others, in furniture and metals. December s data from industrial sector supports our forecast of economic growth in 2011Q4 slightly above 4%. We expect that the upcoming quarters will bring a more marked slowdown of economic activity, as the impact of slowdown abroad will offset the favourable FX effect for export-oriented sectors. Producers prices rose in December by 8.1%YoY, more or less in line with our forecast and market consensus (both at 8.2%YoY). One week after the MPC decision brought some member s comments, which, similarly as the communiqué itself, were hawkish. Jerzy Hausner indicated that probability of hikes is greater than of cuts. Hausner said that the MPC cannot ignore delay in reaching the inflation target. What is important from the point of view of our forecasts for domestic GDP and NBP interest rates, Hausner stressed that a cut is possible should the domestic economy growth deteriorate markedly, but he noted that we [the MPC] do not share such a view right now. Our economic growth forecasts for 2012 indicate a marked drop of annual pace of GDP growth (to 2.3%). A major slowdown of economic activity, combined with a gradual decline of CPI inflation (which will be supported by strengthening zloty in the second half of the year), will in our view encourage the MPC to cut interest rates; we expect two cuts with the first in mid-2012 at the earliest. 2

3 Foreign exchange market The EURPLN and EURUSD close to crucial levels EURPLN and EURUSD EURPLN (lhs) CHFPLN and USDPLN CHF (lhs) EURCHF EURUSD (rhs) USD (rhs) EURHUF and EURCZK EURHUF (lhs) EURCZK (rhs) EURPLN close to crucial support Over the past week the EURPLN exchange rate moved in a downward trend. The maintaining demand for risky assets has dragged the exchange rate below an important (on daily and weekly chart) support at In the following days the zloty s appreciation tendency was continued and consequently, at the end of the week, the EURPLN was close to next crucial support area ( ), which has not been broken. Changes observed over the past week have shown that our forecast of the EURPLN at 4.50 at the end of the month was too pessimistic and is unlikely to materialise (now we expect the exchange rate close to 4.43 at the end of January). We also see a downward risk to our forecast of average EURPLN (4.45), though the difference may be smaller (currently we expect 4.42). Still, we stick to our view of a considerable depreciation of the zloty versus the euro in 2012Q1. The upcoming week is rich in terms important events (meeting of euro zone finance ministers, several macro data publications), which may have some visible impact on the EURPLN exchange rate. From the technical analysis point of view, the situation for the zloty is not optimistic. Apart from the fact that the EURPLN exchange rate is close to the support area, the EURUSD exchange rate rebounded from resistance and a possible dollar s appreciation versus the euro might exert an additional negative pressure on the zloty. PLN to depreciate more vs. USD than vs. CHF The downward trend of EURPLN and the euro s appreciation versus the dollar, persisting during the whole week, dragged the USDPLN exchange rate down to the lowest level since December 2011 (3.31). Zloty s appreciation versus the Swiss franc was mainly due to lower EURPLN as EURCHF remained stable just below 1.21 for the whole week. The outlook for this week for USDPLN is not positive. This is due to the fact that EURPLN is close to an important support are, while EURUSD rebounded from a resistance at In our view, this means that USDPLN may be in the upward trend this week, as it is likely that the EURUSD exchange rate will decline towards This would create some negative pressure on the zloty. The domestic currency may depreciate versus the Swiss franc at a smaller scale as the room for decline of EURCHF is limited by a possible SNB intervention. Stabilisation in Hungary with no effect on the zloty Over the past week the uncertainty regarding situation in Hungary declined. The Hungarian PM expressed his eagerness to allow some concession on law of central bank s independence in talks with the IMF and European Commission. The above circumstances allowed the forint to benefit from positive market sentiment persisting on the global market. The EURHUF declined to 304, lowest level since mid-december Though the situation in Hungary has stabilised, we do not expect it to have much impact on the zloty. The fact that the Hungarian government s agreement with the Commission and IMF is more likely seems to be already priced in by the market. Apart from that, even as the situation on the global market improved in recent weeks there are still vital risk factors that constrain demand for risky assets. In such circumstances we do not expect the forint to appreciate considerably and to provide that way support for the zloty. 3

4 Interest rate market Short-end stronger, the yield curve more steeper proc FRA FRA1x4 FRA6x9 FRA3x6 FRA9x12 % Yields of Polish bonds Net borrowing requirements Foreign debt redemption Domestic debt redemption Jan/10 Gross borrowing requirements Total: PLN 176.1bn: Mar/ Y (lhs) 5L 10Y Expected to be received in Feb-Dec 2012: PLN 124bn ca 70% as of Jan, : Total: PLN 52.1bn 30% Funding Yields of 10Y benchmarks (PL, DE) and spread May/10 Jul/10 Sep/10 Nov/10 Jan/11 Mar/11 May/11 Jul/11 Sep/11 10Y PL 10Y Bund Spread (bps, rhs) Foreign Foreign Domestic Domestic Nov/11 Jan/ Limited expectations for NBP s rates cuts The market rates up to 1 year have remained at the elevated level. It resulted from the limited activity of Polish banks on the money market, who preferred NBP s bills over lending money to other banks. On the other hand MPC members suggestion that monetary tightening is more likely as the CPI inflation is running well above the upper limit of NBP s target has cooled expectations for interest rate cuts this year. FRA rates (especially longer tenors 6x9 and 9x12) suggest rather a normalisation of situation on the money market (spread between WIBOR3M and NBP s reference rate will narrow) than a cut of NBP s interest rates. Such a situation could continue in the upcoming week. Therefore, the next important local event will be the preliminary reading of January s CPI in mid-february. but auction results supported the short-end The improvement of global sentiment has supported mainly mid and long-end of the curve (in weekly terms yields fell by 8bps in 5Y sector and by 9bps in 10Y sector). Yield decrease in case of 2Y was amounted to 5bps only. Favourable auction results of OK0114 have strongly supported 2Y sector. The Ministry of Finance sold twoyear benchmark worth PLN6.75bn with demand hitting a record high at PLN16.5bn (demand to supply ratio amounted to 2.75). Yield was at 4.724%, below levels seen on the secondary market. These results gave a strong impulse for further 2Y yield decrease towards 4.70% (the lowest level since November 2011). January is a month with a very good realisation of the MF s issuance plan. We estimate that gross budgetary requirements for 2012 are financed in 30% after auction of OK0114. Such a result allows the MF to offer treasury securities in more comfortable situation. It seems that the MF, similarly as in 2011, will try to finance the majority of this year budgetary requirements in the first half of the year. Situation in the euro zone comes to the fore this week This week the situation of the fixed income market will mainly depend on sentiment on the global financial market. News flow from the euro zone will be crucial, especially information from Monday s meeting of euro zone finance ministers. We believe that the main point on the agenda will be situation in Greece and discussion about second aid package for this country (this bailout package is of high importance, taking into account that in March Greece has to redeem bonds worth ca. 14bn). As mentioned above, the 10Y sector strengthened significantly over the last days. Yields of 10Y benchmark stood at 5.68% at the middle of Friday s session, which is the lowest level since October However, higher risk appetite caused the 10Y Bund yield to increase towards 1.898%. As a consequence, spread between 10Y Bund and 10Y Polish bond narrowed to ca. 378bps. In our view, even if global positive sentiment maintains, the potential for further strengthening of 10Y Polish benchmark is rather limited. The crucial support for this sector lies at 5.65%. If our scenario for this week, which assumes the EURPLN increase, comes true, we are likely to see a profit taking on the long-end of the Polish bond yield curve. 4

This publication has been prepared by Bank Zachodni WBK S.A. for information purposes only. It is not an offer or solicitation for the purchase or sale of any financial instrument.

5 This publication has been prepared by Bank Zachodni WBK S.A. for information purposes only. It is not an offer or solicitation for the purchase or sale of any financial instrument. Information presented in the publication is not an investment advice. All reasonable care has been taken to ensure that the information contained herein is not untrue or misleading. But no representation is made as to its accuracy or completeness. No reliance should be placed on it and no liability is accepted for any loss arising from reliance on it. Forecasts or data related to the past do not guarantee future prices of financial instruments or financial results. Bank Zachodni WBK S.A.. its affiliates and any of its or their officers may be interested in any transactions. securities or commodities referred to herein. Bank Zachodni WBK S.A. or its affiliates may perform services for or solicit business from any company referred to herein. This publication is not intended for the use of private investors. Clients should contact analysts at and execute transactions through a Bank Zachodni WBK S.A. entity in their home jurisdiction unless governing law permits otherwise. Copyright and database rights protection exists in this publication. Additional information is available on request. Please contact Bank Zachodni WBK S.A. Treasury Division, Economic Analysis Unit, ul. Marszałkowska 142, Warsaw, Poland, phone , ekonomia@bzwbk.pl, 5

Weekly economic update

Weekly economic update 20 26 May 2013 Last week was marked by a correction on both domestic FX and interest rate markets. This was due to, among others, macroeconomic data showing that economic growth