Weekly 2018 Week 01 MARTIN LOBOTKA, (+420) 777 027 165, MLobotka@42fs.com, Research@42fs.com CALENDAR DAY DATE TIME (CET)* MARKET RELEASE CONSENSUS** Monday 7-Jan-19 8:00 GER Retail sales, Nov'18, y/y -0.4% 7-Jan-19 8:00 GER Industrial orders, Nov'18, y/y (WDA) -2.7% 7-Jan-19 11:00 EMU Retail sales, Nov'18, y/y 0.4% Tuesday 8-Jan-19 8:45 GER 8-Jan-19 9:00 CZ Industrial production, Nov'18, y/y (WDA) Industrial production, Nov'18, y/y -0.8% 5.0% 8-Jan-19 11:00 EMU Economic Confidence, Dec'18 108.2 Wednesday 9-Jan-19 9:00 CZ Trade balance, Nov'18, CZK bn. 5.7 Thursday 10-Jan-19 9:00 CZ CPI, Dec'18, y/y 2.1% Friday 11-Jan-19 9:00 CZ Retail sales, Nov'18, y/y 1.8% 11-Jan-19 9:00 CZ (Final) 3Q18 GDP, q/q 0.6% 11-Jan-19 9:00 SPA 11-Jan-19 9:00 ITA * LOCAL TIME IS CET ** (REUTERS/ BLOOMBERG) POLL JANUARY 2019 AUCTIONS NAME DATE OF AUCTION DATE OF ISSUE Industrial production, Nov'18, y/y (SA) Industrial production, Nov'18, y/y (WDA) MATURES ON AMOUNT OFFERED* 0.3% 0.5% COUPON SPP 805* 3-Jan-19 4-Jan-19 4-Oct-19 CZK 5 bn. max N/A CZGB 2017-2027** 9-Jan-19 11-Jan-19 10-Feb-27 CZK 5 bn. max 0.25% CZGB 2006-2036** 9-Jan-19 11-Jan-19 4-Dec-23 CZK 3 bn. max 4.20% SPP 806* 17-Jan-19 18-Jan-19 19-Jul-19 CZK 5 bn. max N/A CZGB 2018-2021** 23-Jan-19 25-Jan-19 23-Feb-21 CZK 5 bn. max 0.75% CZGB 2015-2026** 23-Jan-19 25-Jan-19 26-Jun-26 CZK 5 bn. max 2.40% SPP 807 31-Jan-19 1-Feb-19 1-Nov-19 CZK 0-5 bn. N/A * FOR T-BILLS, THIS IS MAXIMUM AMOUNT PER PRIMARY DEALER. ** MINFIN CAN CHANGE THE ISSUE AT THE LATEST AT THE DAY OF THE AUCTION ANNOUNCEMENT FOR ONE WITH SIMILAR MATURITY. WEEK AHEAD Finally a week that is not (data-) weak. Key releases in the Eurozone are Nov 18 German industrial data (not much expected, especially from orders, as PMI showed) and Nov 18 Eurozone retail sales (also likely to be shown weak, but that will not be change against what we d seen throughout the previous months of last year). In the Czech Republic, final 3Q18 GDP won t bring any revision to 2 nd estimate of 0.6% q/q but there will be data on savings rate (probably up again) and profitability of NFCs (probably down again). Monthly data from November retail sales, industry - will then probably show that growth slackened mid-way through last quarter of 2018. Finally, December inflation is forecast at 2.1% but I d hazard a guess it ll be lower (CZK oil price of Brent fell 15% in December) and that most of the inflation will be shown to have been due to housing. All the CZ data should then show to the central bank that further tightening is nonsense. THOUGHT OF THE WEEK SO, PEOPLE FINALLY REALIZE YOU CAN T SELL SKODA OCTAVIA AT BMW 5 PRICE? 42 Financial Services Market Research Weekly 2019 Week 01 1
WEEK BEHIND CZ Industry about to contract, PMI says Government produced a cash deficit in great year that was 2018 Eurozone inflation down on energy prices Eurozone growth ground to almost a halt at the end of December, PMIs show FX EURCZK last week fell to lowest (25.55) since mid-september. 25.8 25.75 25.7 25.65 25.6 25.55 EURCZK FELL SHARPLY TO 25.55 EURCZK This coincided with substantial decline in Czech government bond yields and was due to renewed interest of foreign buyers who were reported in the bond market last week. But why they came back into the market now while having stayed away before the year-end (when being invested in bonds would have provided shelter from Resolution fund effects) I do not know. Maybe they expect CNB to start cutting soon 25.5 31-Dec 31-Dec 1-Jan 2-Jan 3-Jan 4-Jan FI CZECH YIELDS PLUMMET AS BUYERS JUMPED BACK INTO THIN-LIQUIDITY POST-CHRISTMAS MARKET Anyway, Czech government yields fell sharply last week, 0.8 0.7 0.6 0.5 0.4 GERGB 10Y, % CZGB 10Y, % 2.50 2.25 2.00 1.75 1.50...with 10Y down to 1.75%, lowest level since April 2018. This was due to renewed interest of both domestic and foreign buyers combined with low post-christmas liquidity, solid 2018 cash budget data (on the surface, at least), and declining German yields. 0.3 1.25 0.2 1.00 19-Nov-17 19-Dec-17 19-Jan-18 19-Feb-18 19-Mar-18 19-Apr-18 19-May-18 19-Jun-18 19-Jul-18 19-Aug-18 19-Sep-18 19-Oct-18 19-Nov-18 19-Dec-18 42 Financial Services Market Research Weekly 2019 Week 01 2
CZECH ECONOMY It ain t going well in industry. FIRST CONTRACTION IN PMI IN OVER 2 YEARS 12.5 Average Seasonallyadjusted 6 manufacturing in next 3 months from 1 57.5 given month (% y/y) PMI Manufacturing, given month 7.5 55.0 5.0 52.5 2.5 5 PMI in December fell below 50 for the first time since July 2016, signaling marginal deterioration of the overall conditions in the industry. It is not unique to Czech Republic, though in Poland, PMI also fell to 47.6, the lowest in 5 years. Czech slide was driven by two main factors: first, the decline, to lowest in 9 ½ years, of new export orders (which is, not surprisingly, attributed to trade war, though why now and not six months back remains unexplained) and, second, the decline, though to lesser extent, of domestic orders. Firms also remain fairly pessimistic regarding future: the sub-index of confidence was second-lowest in 6 years (and only higher than November 2018 low). -2.5 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 47.5 45.0 The takeaway is clear: industry is in for an outright contraction y/y pretty soon. The good times are over. And yet the government couldn t care less, bragging about great budgetary results of 2018 15 10 5 0 BUT GOVERNMENT LIVED 2018 LIKE GOOD TIMES ARE FOREVER. Change in selected expenditures categories (2018 vs. 2017, y/y %) 11.2 1.4 5.0 Salaries Interest on debt Social spending (pensions etc.) 1.8 State Agricultural Fund The (cash) budget deficit (after adjusting for EU money on both sides of the budget) was CZK 2.2 bn. in 2018, about the same as in 2017 (CZK -1.3 bn.). That looks great on surface. The problem is that, in one of the best years since the crisis when tax revenues rose CZK 83.3 bn. y/y, the government couldn t produce a surplus. But then, how could it have? Current expenditures went up exactly the same CZK 83.3 bn. (what a coincidence, right?), with salaries up CZK 13 bn. (11%), social spending up CZK 26.6 bn. (5%), transfers to lower levels of administration (mostly to pay for higher wages of their employees like teachers) up CZK 19 bn. (13.6%). Really, the government has been living like there s no tomorrow and there s election tomorrow. 2019 is shaping up to be a (so far not very loud) get-real call. 42 Financial Services Market Research Weekly 2019 Week 01 3
EUROZONE ECONOMY 2.5 2.0 1.5 1.0 0.5 EUROZONE INFLATION FELL Eurozone inflation,% Eurozone inflation declined further in December 2018 due to the energy prices. This was to be expected: EUR oil price declined another 10% in December, extending the total decline from the peak in early October to a third month and bringing the cumulative decline over that period to almost 40%. Energy prices will thus soon turn to a negative contributor to inflation. -0.5-1.0 12.0 1 8.0 6.0 4.0 2.0-2.0-4.0-6.0-8.0-1 -12.0 Headline HICP Core inflation 2012M01 2012M04 2012M07 2012M10 2013M01 2013M04 2013M07 2013M10 2014M01 2014M04 2014M07 2014M10 2015M01 2015M04 2015M07 2015M10 2016M01 2016M04 2016M07 2016M10 2017M01 2017M04 2017M07 2017M10 2018M01 2018M04 2018M07 2018M10 2010M10 2011M02 2011M06 AS ENERGY PRICES DECLINED. 2011M10 2012M02 2012M06 2012M10 2013M02 Eurozone energy inflation,% 2013M06 2013M10 2014M02 2014M06 ECONOMY CONTINUED TO DECELERATE AT THE END OF LAST YEAR. 62.5 60 57.5 55 52.5 50 47.5 45 42.5 May-12 Nov-12 May-13 Nov-13 EMU PMI Industry May-14 Nov-14 May-15 2014M10 2015M02 Nov-15 2015M06 2015M10 May-16 2016M02 2016M06 2016M10 2017M02 2017M06 EMU PMI Services Nov-16 May-17 2017M10 Nov-17 2018M02 2018M06 May-18 2018M10 Nov-18 As regards core inflation, nothing changed: it remained at 1% just like in November, and thus hasn t been out of the 0.8-1.1% range since September 2017. Nothing that would justify the ECB s continuing inflationary optimism, if you ask me. And nothing that would increase the probability of 2019 hike of ECB. And there was nothing to increase that probability in final Dec 18 PMI data either. The manufacturing PMI declined further to lowest since February 2016 and service PMI saw a sharp drop to lowest since November 2014. While manufacturing PMI was the same as in preliminary report (51.4), service PMI was 0.2 pts. lower at 51.2. Service index was dragged down by France, which saw a very sharp decline to a 34-month low of 49.7 pts. (vs. 55.1 in November), it being attributed to yellow vests protests that rocked France at the end of last year. But, it wasn t only France: Germany declined to 51.8, 27-month low, for example. Italy was moribund, as is usual, and the only big country where service sector (so far) seems to be doing well was Spain. Manufacturing was weak in all big economies: Spain (51.1, 28-month low), Germany (51.5, 33- month low), France (49.7. 27-month low), Italy (49.2 pts., small improvement on November but still in contraction). 42 Financial Services Market Research Weekly 2019 Week 01 4
Bottom line: economy is grinding to halt. At December PMIs, there will be no growth in 1Q19. 42 Financial Services Market Research Weekly 2019 Week 01 5
42 Financial Services Market Research Weekly 2019 Week 01 6
MARKETS MM / IRS % bps. % ASW spread* CZGB** 3M PRIBOR 6M PRIBOR 2Y 5Y 7Y 10Y Actual 2.010 2.070 2.135 1.870 1.784 1.750-1M 2.010 2.070 2.290 2.330 2.295 2.270-3M 1.740 1.810 2.330 2.560 2.564 2.580-6M 1.170 1.250 1.700 1.900 1.926 1.970 2Y 3Y 4Y 5Y 7Y 10Y Actual -0.439-0.334-0.263-0.155-34 33-1M -0.715-0.716-0.662-0.551-0.344-0.239-3M -0.782-0.822-0.810-0.718-0.493-0.432-6M -0.574-0.611-0.454-0.305-15 0.205 2Y 3Y 4Y 5Y 7Y 10Y Actual 1.696 1.682 1.681 1.715 1.750 1.783-1M 1.575 1.612 1.674 1.779 1.951 2.031-3M 1.548 1.634 1.713 1.842 2.071 2.148 3.0 2.5 2.0 1.5 1.0 0.5 0.30 0.15 0-0.15-0.30-0.45-0.60-0.75-0.90 2.5 2.0 1.5 1.0 0.5 3M 6M PRIBOR PRIBOR Act ual -3M -6M 2Y 5Y 7Y 10Y Act ual -3M -6M 2Y 3Y 4Y 5Y 7Y 10Y Act ual -3M -6M FX -6M 1.126 1.191 1.411 1.595 1.911 2.175 EURCZK EURPLN EURHUF EURRON EURTRY EURUSD Actual 25.572 4.290 320.85 4.662 6.079 1.140-1M 25.881 4.281 323.02 4.652 6.083 1.137-3M 25.758 4.305 324.81 4.671 7.068 1.152-6M 25.898 4.355 322.97 4.654 5.374 1.175 27.20 27.00 26.80 26.60 26.40 26.20 26.00 25.80 25.60 25.40 25.20 2Y 3Y 4Y 5Y 7Y 10Y EURCZK 1-16 2-16 3-16 4-16 5-16 6-16 7-16 8-16 9-16 10-16 11-16 12-16 1-17 2-17 3-17 4-17 5-17 6-17 7-17 8-17 9-17 10-17 11-17 12-17 1-18 2-18 3-18 4-18 5-18 6-18 7-18 8-18 9-18 10-18 11-18 12-18 1-19 As of Sunday night * Spreads to generic bonds ** Generic bond CONTACTS MARTIN LOBOTKA, ANALYST RESEARCH (+420) 777 027 165, MLobotka@42fs.com Research@42fs.com AVAILABLE AT THOMSON REUTERS EIKON MESSENGER PREVIOUS ISSUES OF WEEKLY AND OTHER REPORTS ARE AVAILABLE HERE 42 Financial Services Market Research Weekly 2019 Week 01 7
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