Eyeopener daily update

Transcription

1 Rate cut coming up 29 March 2005 This week, the most important event on the Polish market will be the MPC meeting. A rate cut is widely expected by market analysts (the most popular option is 50bp cut, which is also our view). Such expectations were fuelled both by macro data (especially much better than expected inflation figures) and numerous comments of MPC members. The latter suggested that even recent zloty weakening will not keep the Council from starting cycle of interest rate cuts this month. Decision of the Polish MPC will be announced tomorrow, while today the National Bank of Hungary is also expected to announce a reduction in borrowing costs. Results of all public opinion polls carried out in March showed that if elections were held this month, PO and PiS would be unable to form a two-party coalition. This adds to political uncertainty as there is risk it will be very difficult to form a stable ruling coalition with a coherent economic program after elections later this year. What s hot this week The feature of this week on the Polish market will be the MPC meeting A rate cut is expected by all market analysts Expectations for policy easing were fuelled both by recent macro data and rate-setters comments which suggested that even recent zloty weakening will not prevent the MPC from lowering borrowing costs This week will be shorter than usually. Nevertheless, market players will have to revive from holiday moods pretty quickly, as a meeting of the Monetary Policy Council starts already today, and it is expected to end up with a change in monetary policy parameters. The MPC decision will be announced tomorrow, probably as usual around noon. Vast majority of market analysts (11 out of 17 polled by Parkiet daily last week), including ourselves, foresee that the Council will cut interest rates by 50bps this week. Few others expect that a reduction could be smaller (25bps) or larger (75bps), but there is no single analyst to bet that start of monetary easing cycle could be delayed. This is justified by the fact that most of data and information that appeared since the previous MPC meeting unanimously pointed to a risk of slower than previously expected economic growth and much lower inflation in the forthcoming quarters. Moreover, the MPC members themselves left no doubts the easing cycle is just about to begin, by saying in recent interviews that: there are no particular factors speaking against monetary easing (Sławiński), I see arguments for a rate cut at the moment (Owsiak), the Council can decide to cut rates by at least 50bps already in March (Pietrewicz), the question is not whether to cut, but about right timing and scale of cuts (Wojtyna), CPI data for January and February open very large scope for interest rate reduction (Wasilewska-Trenkner), recent inflation data validate a need of rates reduction (Nieckarz). To some extent, one could be afraid that the MPC s willingness to reduce borrowing costs could have been moderated by weakening of the zloty observed in recent weeks. However, comments of the central bankers made even after recent zloty slump showed that despite risk from FX rate they were not particularly afraid of inflation outlook. We believe that 50bps scale of a rate cut is the most likely scenario for two reasons. First, recently published statistical data significantly differed from Maciej Reluga Chief Economist (+48 22) Piotr Bielski (+48 22) Piotr Bujak (+48 22) Tomasz Terelak (+48 22) firstname.secondname@bzwbk.pl

2 We think 50bp rate cut is the most likely option as a compromise between advocates of deeper cuts and those who prefer conservative policy The National Bank of Hungary also expected to trim rates this week The only data release in Poland this week will be balance of payments figures for January The key event on core markets will be the US non-farm payrolls data due on Friday readings expected by analysts and the MPC. Thus, they also notably affected forecasted inflation path and balance of risks for future inflation perceived by the MPC. Significance of this impact was well reflected in a statement of the MPC member Halina Wasilewska-Trenkner who said that revision of CPI data [...] weakens Mr. Rybiński s declaration that interest rate cut by 150bps within 12 months time [...] would markedly increase risk of inflation staying above the target. Wasilewska-Trenkner also added that she was not sure whether inflation would start rising after such deep, 150bps reduction in main rates. It shows that the assessment of economic perspectives by the Council members has shifted substantially after recent data releases, which might result in decisive change in monetary policy parameters. Second, the decision is likely to be a compromise, as usually between those who would probably opt for even deeper reduction already in the first step (potentially Nieckarz and Pietrewicz), and those who are likely to prefer gradual and cautious moves (Balcerowicz, Filar). Given that even the MPC members with rather balanced and pragmatic approach (Wasilewska-Trenkner, Wojtyna, Sławiński) were pointing that ca. 5.25% (level of NBP reference rate before EU accession) is a good reference point for interest rates in Poland, a reduction of 50bps in the first step seems to be well justified given the size of positive inflation surprise experienced at the beginning of this year. Polish MPC will be probably not the only central bank in the region reducing borrowing costs this week, as the National Bank of Hungary is also widely expected to relax monetary policy amid falling inflation. Most of analysts surveyed by Reuters last week predicted the NBH to engineer 50bps rate cut during its meeting today. On Thursday, we will see the only one data release in Poland this week balance of payments figures for January. Data should have limited significance for the market, as they are expected to show no significant changes in foreign trade developments and Poland s external imbalance. Current account balance is forecasted to reach - 200m against - 275m in December (market consensus is - 260m), which will correspond to 12-month cumulative deficit of 1.5% of GDP, the same as in December. Trade balance probably reached - 400m (market consensus is the same). Both exports and imports should grow robustly (18.7%YoY and 17.9%YoY, respectively), reflecting persistently strong external demand for Polish goods and building internal demand, dragging imports up. The main focus on international markets will be on the US non-farm payrolls report to be released on Friday. Payrolls increased by 262,000 in February, which was ahead of consensus forecasts. Leading indicators suggest another healthy increase for March, with the market anticipating a rise of 223,000. Expectations of a strong payrolls number should keep the dollar in an upbeat mood ahead of Friday's release, and publication of good figure could trigger another rise in treasuries yields. Bottom line: MPC decision will be key for Polish market this week. 50bps rate cut is commonly expected, and thus should not result in significant market frictions. In turn, smaller scale of reduction would trigger a slump in the market. International markets will await non-farm payrolls report, which could support the dollar showing another strong reading in March. 2

3 What s hot today Stable coalition after election still questionable March results of public opinion polls show that PO and PiS would not be able to form a two-party coalition if election were held this month There is still high uncertainty as regards election results. This was suggested again by four opinion polls conducted in March (see table below). According to results published recently, a possible coalition between the Civic Platform (PO) and the Law and Justice (PiS) could count on slightly above 40% of votes maximum in the election if it was held already this month (lower support as compared to results in February). This would mean no majority in the Lower House, which could be dangerous from the point of view of a coherent economic policy after What is more, support for populist Samoobrona (Self-Defence) rose in March according to all pollsters, which might be an additional risk factor for financial markets. The newly-formed Democratic Party, collecting Freedom Union s (UW) politicians as well as Prime Minister Marek Belka and deputy PM Jerzy Hausner, reached support of a mere 6%. Support for political parties in March Pentor Ipsos CBOS OBOP PO 28 (28) 25 (24) 22 (25) 23 (23) Self-Defence 18 (14) 19 (15) 14 (12) 16 (14) PiS 14 (11) 17 (22) 16 (15) 12 (15) LPR 10 (12) 10 (8) 11 (13) 10 (11) SLD 5 (8) 7 (8) 6 (6) 9 (7) SdPl 5 (5) 4 (6) 3 (4) 5 (7) PSL 4 (6) 6 (6) 8 (7) 9 (7) UW 6 (4) - (9) 5 (5) 7 (4) PD Note: February s results in parenthesis Bottom line: Opinion polls still show high uncertainty as regards formation of a stable coalition with coherent economic program. Another problem is that timing of election is not known. One-third of Paris Club debt to be repaid So far, lower than expected part of Paris Club debt has been agreed to be repaid by Poland Deputy finance minister said that Poland already negotiated early repayment of 4.4bn out of 12.3bn Paris Club debt. This is lower amount than one could have expected after earlier comments of the Ministry of Finance s officials. Countries which agreed to finalise the operation were Germany, the United Kingdom, the United States, Spain, the Netherlands, Finland, Denmark, Switzerland and partly (in one-seventh) Canada. A couple of countries who lent Poland money within the Paris Club do not want Poland to pay off their share of the Polish debt owed to the Club. According to the ministry, there is still a chance to convince Japan, France and Austria (Poland owes the latter two almost 4.5bn). Bottom line: Although one could have expected more than 50% of the Paris Club to be repaid, news are neutral for the market. 3

4 Market monitor The zloty trading ranges ( ) Min Max Fixing USD EUR F/X rates (today s opening) EURUSD CADPLN USDPLN DKKPLN EURPLN NOKPLN CHFPLN SEKPLN JPYPLN* CZKPLN GBPPLN HUFPLN* *per 100 units T-bills auction ( ) T-bills Bid Sale Average Change PLN m Yields (bp) 52-week week Treasury yield curve ( ) T-bills Yield Change (bp) 3M M M M Bonds 2Y Y Y Y Y Y WIBOR rates ( ) Term Rates Change (pb) O/N T/N SW W M M M M Y Throughout the last two sessions of pre-easter week the zloty managed to retain levels recorded last, as EURUSD rate did not deteriorated further after its recent poor performance. However fluctuations of Polish currency had an impact on debt market sentiment. On Thursday following gradual gains boosted additionally by lower than expected US numbers (3.165 to the dollar and to the euro) the market saw reversion to opening levels on USDPLN (3.19) and even pullback in case of EURPLN versus performance posted in the morning. On Friday, as major markets were closed zloty s changes were only marginal with very few customer related transactions. Actually active trading in Polish market ended with closing on Thursday. In the morning polish market found support in Bund market performance, which in turn advanced on the back of Treasuries improvement. PS0310 reached 5.64%. In early afternoon, when the zloty started to weaken after EURUSD pullback 5y benchmark erased all daily gains closing unchanged against opening levels. 52-weel treasury bill yield rose 5 bp at Thursday's primary tender after investors bid for PLN1.94bn against an PLN800m offer. The average yield on the 52-week bill came at 5.507% compared to 5.459% at the previous tender. The ministry also sold PLN100m of 13-week bills at an average yield of 5.619%. Course of the Thursday s session pointed clearly to a lack of willingness to conclude larger deals in the face of usual lower liquidity ahead of Easter. The zloty was taking inspiration from the EURUSD market and bonds responded positively to foreign papers gains, however negatively to any weakness of domestic currency. Beginning of the next week will go by with awaiting MPC decision. Tuesday should be rather quiet in Polish market, as normal liquidity will revert only on Wednesday. Today Hungarian central bank will surely announce a decision on rate cut, but move by 50 bp has been already priced in, so there will be no surprises that could spill over to Polish market. It is generally agreed among market participants that rates will be cut, discrepancies remain only in the matter of its scale. Because recent zloty weakening revived concerns if MPC may be prone to deeper cut, the market currently prices in a scenario of the cut between 25 and 50 bp. However given that presently long positions in bonds prevail, Polish market is more vulnerable to lesser reduction, though ultimately pressure may be alleviated by its positive impact on the currency. As usual, the first Friday in the month will bring a release of US labour market data. Expectations, shored up by weekly data on low number of new jobless in March, point to a reading above 200,000 of new jobs. But it seems that current performance of the dollar and US Treasuries prices in even higher payrolls gains, so a publication at consensus level may restrain dollar and advancement in yields of American papers. Bottom line: Minor changes in the markets ahead of Easter pause. This week will bring virtually priced-in monetary policy easing in Poland and Hungary and improvement in labour market conditions in the US. 4

5 International update New orders for durable goods edged up an unexpectedly weak 0.3% last month as declining demand for goods was offset by strong aircraft orders. Excluding volatile transportation category, orders for durable goods slipped 0.2%. Today, March results for US consumer confidence survey will be released. TIME GMT COUNTRY INDICATOR PERIOD FORECASTS LAST VALUE 15:00 USA Consumer confidence Mar This publication has been prepared by Bank Zachodni WBK S.A. (a member of AIB Group) for information purposes only. It is not an offer or solicitation for the purchase or sale of any financial instrument. 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. 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 or an AIB Group 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 (+48 22) , ekonomia@bzwbk.pl, Bank Zachodni WBK is a member of Allied Irish Banks Group 5