Weekly 2018 Week 18 MARTIN LOBOTKA, (+420) 777 027 165, MLobotka@42fs.com, Research@42fs.com CALENDAR DAY DATE TIME (CET)* MARKET RELEASE CONSENSUS** 42FS Industrial orders, Mar'18, Monday 7-May 8:00 GER WDA 5.0% N/A 7-May 9:00 CZ Retail sales, Mar'18, 1.5% 2.0% 7-May 9:00 CZ Tuesday 8-May 8:00 GER Wednesday 9-May 8:45 FRA 9-May 9:00 CZ 9-May 9:00 SPA Trade Balance, Mar'18, CZK bn. -0.2% -0.7% 3.0% N/A 2.8% N/A 21.3 N/A 3.6% N/A Thursday 10-May 9:00 CZ CPI, Apr'18, 1.8% 1.7% 10-May 10:00 ITA * LOCAL TIME IS CET ** (REUTERS/ BLOOMBERG) POLL MAY 2018 AUCTIONS NAME DATE OF AUCTION DATE OF ISSUE MATURES ON 2.3% N/A AMOUNT OFFERED* COUPON SPP 792 3-May 4-May 2-Nov-18 CZK 0-5 bn. N/A CZGB 2015-2023** 9-May 11-May 25-Oct-23 CZK 5 bn. max 0,45% CZGB 2017-2027** 9-May 11-May 10-Feb-27 CZK 5 bn. max 0,25% CZGB 2006-2036** 9-May 11-May 4-Dec-36 CZK 2 bn. max 4,20% SPP 793 10-May 11-May 9-Nov-18 CZK 0-5 bn. N/A SPP 794 17-May 18-May 16-Nov-18 CZK 0-5 bn. N/A CZGB 2018-2021** 23-May 25-May 23-Feb-21 CZK 5 bn. max 0,75% CZGB 2015-2026** 23-May 25-May 26-Jun-26 CZK 5 bn. max 1,00% CZGB 2018-2029** 23-May 25-May 23-Jul-29 CZK 5 bn. max 2,75% SPP 795 24-May 25-May 23-Nov-18 CZK 0-5 bn. N/A SPP 796 31-May 1-Jun 30-Nov-18 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. THOUGHT OF THE WEEK MUSK IS IN GUINNESS BOOK NOW. CATEGORY: MOST EXPENSIVE EARNINGS CALL. ALSO, REMINDED ME HEAVILY OF SKILLING AT ENRON WEEK AHEAD A usual batch of Czech monthly data from the end of 1Q18 (industry, retail, foreign trade) and beginning of 2Q18 (inflation) is the only thing worth looking at this week. Retail sales and industrial production will both show headline figures affected by fewer working days in March. Adjusted for that, retail sales should retain solid dynamics, especially at the level of core retail sales (i.e., without food, fuel and cars). The big question mark remains over what happened with car sales in March recall they fell almost 5% in February, something I found very puzzling and inexplicable. As for the industrial production, WDA m/m data should show rebound after weak January and February in both industry (- 0.4 m/m and -1.2% m/m) and manufacturing (+1.7% and -3% m/m). The inflation for April will show stability, the base effect from last year now having been fully reflected in numbers. 42 Financial Services Market Research Weekly 2018 Week 18 1
WEEK BEHIND CNB refuses to admit in its May forecast that its inflation modelling may be a bit inaccurate 1Q18 GDP data confirm loss of momentum in Eurozone Eurozone retail sales ended 1Q18 on a very weak note and unemployment doesn t suggest it will change soon. Eurozone inflation also surprised negatively in April EURCZK SPIKED TO 25.80, RETURNED TO 25.50 AFTER CNB MEETING which, together with more hawkish FOMC, pushed EURUSD below 1.20 25.8 25.75 25.7 EURCZK FX 25.65 25.6 25.55 25.5 EURCZK spiked to 25.80 in the run-up to the CNB meeting, helped by banking-holidayinduced low liquidity. 25.45 25.4 27-Apr 30-Apr 1-May 2-May 3-May 4-May Once CNB released its forecast, EURCZK returned back to 25.50 where it was at the beginning of last week. GERMAN YIELDS FELL ONLY 4 BPS... AFTER THE STRING OF WEAK DATA. FI 0.8 0.75 2.55 2.40 Nothing extraordinary in the bond markets. 0.7 0.65 0.6 5 0.45 0.4 0.35 0.3 2.25 2.10 1.95 1.80 1.65 1.50 1.35 1.20 1.05 To be honest, after the string of weak data in Eurozone, I would have expected more than just 4 bps. decline in the 2Y and 10Y German yields. I expect the yields to make up for that in the coming week(s), especially if someone from ECB speaks. 0.25 0.2 GERGB 10Y, % CZGB 10Y, % 0.90 0.75 01-Jun-17 22-Jun-17 13-Jul-17 03-Aug-17 24-Aug-17 14-Sep-17 05-Oct-17 26-Oct-17 16-Nov-17 07-Dec-17 28-Dec-17 18-Jan-18 08-Feb-18 01-Mar-18 22-Mar-18 12-Apr-18 03-May-18 42 Financial Services Market Research Weekly 2018 Week 18 2
CZECH ECONOMY CNB REVISED ITS FORECAST, BUT ONLY AS A FAR AS 2018 INFLATION IS CONCERNED CNB didn t change the setting of the monetary policy and neither its outlook. 2.4 2.2 2.0 1.8 1.6 1.4 CPI (CNB forecast May'18) CPI (CNB forecast Feb'18) 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 While the former wasn t surprising at all, the latter was. See, the heavy undershooting of the inflation vs. the expectations of the February forecast (March inflation was 0.6 pp below what that forecast said it d be) was bound to cause the reticence on the CNB part. But one could have reasonably expected also the outlook to change, if for nothing else then to account for the facts that a) Eurozone economy clearly lost momentum and b) that Czech inflation showed less of a sensitivity to labor market tightness than previously expected. CNB would, however, have none of it. Although the new forecast is significantly lower than the previous one when it comes to this year s inflation (see picture), everything else stayed the same. In other words, CNB still expects inflation to rise to target in 2019 but not without the strengthening of the CZK (which is still forecast at 24.30 at the end of 2019 and 24.60 at the end of this year) and not without higher rates (3M PRIBOR at 1% in 4Q18 and over 2% in 4Q19). Long story short: CNB didn t seem to learn anything. It is still implicitly saying it ll need 4 hikes and 5% strengthening of the currency over next 6 quarters to contain inflation. And the recent disconnectedness between labor market and inflation isn t the only reason CNB should think twice about making such bullish (or foolish?) forecasts of inflation. Last week s data from Eurozone low April inflation, weak March retail sales (see below), no improvement in the labor market point to a noticeable loss of dynamics in our biggest partner. That for sure will dampen inflationary pressures, almost non-existent to start with, there, and consequently, here. My view thus doesn t change: the inflation may have already hit the bottom in Czech Republic but it will rise to 2% only gradually and will not grow much above this year or next. But, importantly, this will be so and here I differ from CNB without 42 Financial Services Market Research Weekly 2018 Week 18 3
stronger CZK and need for tighter policy. The fact that Czech manufacturing worsened further in April (though marginally: PMI fell 0.1 pts to 57.2, lowest since September 2017), though with little direct link to consumer inflation, also suggests that economic momentum cooled off. The implication of that for inflation outlook are clear. EUROZONE ECONOMY 1Q18 GDP CONFIRMS LOSS OF MOMENTUM IN EUROZONE 1.0 0.0 - -1.0-1.5-2.0-2.5-3.0 2007Q1 Eurozone-19 Quarterly Growth rate (%, SA, WDA) 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 Hard data confirm Euro area economy indeed lost momentum in 1Q18. Eurozone GDP growth slowed notably in 1Q18 (0.4% q/q), confirming (in hard data) the loss of momentum indicated by leading indicators throughout the 1Q18. That the economy slowed was likely even before the first official GDP data came out for the entire Eurozone - as I mentioned last week, France slowed strongly, Spain and Italy didn t quicken and monthly data on industry and retail were weak. With 0.4% q/q for the whole of Eurozone (and 0.7% q/q in Spain and in 0.3% q/q in Italy) it thus looks very likely that Germany slowed as well (Germany didn t release the growth estimate yet; it will do so in mid-may). The structure of Euro area 1Q18 GDP growth is not yet known but France can give some indication. French growth was dragged down by household demand, falling exports (which likely will also be reflected in German data) and fixed investments. Although 1Q18 GDP numbers are last quarter s news, it doesn t look like situation got better in 2Q18. The April leading indicators indicate that the economy is now still growing at about 0.4- % quarterly rate: final April service PMI was even revised down to 54.7 (first estimate was 55) and while manufacturing was revised up to 56.2 (first estimate 56), it is still lowest since March 2017 (and the revision is less important than the revision of service PMI as manufacturing is far smaller part of the economy). 42 Financial Services Market Research Weekly 2018 Week 18 4
5 RETAIL SALES SURPRISED NEGATIVELY IN MARCH AND 8 Although not that important with GDP data in, for completeness: retail sales in Eurozone were again disappointingly weak in March. 15 14 13 12 11 10 9 8 7 6 0-5 -10-15 -20-25 -30 2011M01 Consumer Confidence EMU-19 Retail Sales, % WDA, EMU-19 Retail sales, 3m avg. 2012M05 2012M08 2012M11 2013M02 2013M05 2013M08 2013M11 2014M02 2014M05 2014M08 2014M11 2015M02 2015M05 2015M08 2015M11 2016M02 2016M05 2016M08 2016M11 2017M02 2017M05 2017M08 2017M11 2018M02 EUROZONE UNEMPLOYMENT REMAINED UNCHANGED Unemployment in Eurozone, % (SA) Eurozone Italy France Spain (right axis) 2011M05 2011M09 2012M01 2012M05 2012M09 2013M01 2013M05 2013M09 2014M01 2014M05 2014M09 2015M01 2015M05 2015M09 2016M01 2016M05 2016M09 2017M01 2017M05 2017M09 2018M01 EUROZONE APRIL CORE INFLATION SURPRISES NEGATIVELY 2.5 2.0 1.5 Eurozone inflation,% 6 4 2 0-2 -4-6 27.25 26.00 24.75 23.50 22.25 21.00 19.75 18.50 17.25 16.00 They increased just 0.1% m/m in March for a meagre annual growth of 0.8%. This was way less than expected (% m/m) and certainly not what ECB would want to see. There was a 0.2% monthly gain in food sales, % m/m fall in nonfood products and 0.4% gain in automotive fuels. Although I don t know how it could impact the sales, let us keep in mind that Easter was in March-April in 2018 whereas it was in middle of April of 2016. It thus may have or may not have had the impact: we ll see when April data are released. However, retail sales growth would ve been weak in 1Q18 even if March sales were % m/m. And Eurozone unemployment isn t falling fast enough to let me think this will change soon. In March, unemployment stayed the same as in February (8.5%) and rate of improvement in the rate worsened to -0.9 pp. (from -1 pp in previous months). France (8.8%), Germany (3.4%) and Spain (16.1%) saw small improvement (0.1 pp) in the unemployment rate, Italy saw none (11%). In other words, the labor market is still at least 2 years from the state where some demand pressures could be expected. Eurozone April inflation surprised negatively, especially in its core component. This is another reason to think that ECB will have hard time pulling the plug on QE in September. 1.0 0.0 - -1.0 2013M01 Headline HICP 2013M04 2013M07 2013M10 2014M01 2014M04 Core inflation 2014M07 2014M10 2015M01 2015M04 2015M07 2015M10 2016M01 2016M04 2016M07 2016M10 2017M01 2017M04 2017M07 2017M10 2018M01 2018M04 Headline inflation declined to 1.2%, marginally below March 1.3%, but core inflation fell from 1% in March to 0.7% in April. Partially, this was the base effect (last year, core changed from 0.7 to 1.2% between March and April) so it will be reversed in May, but the monthly dynamics also undershot the expectations: in Italy, inflation rose % m/m instead of forecast 0.6%, in Spain it stagnated (instead of +0.1% m/m), in Germany it fell 0.1% 42 Financial Services Market Research Weekly 2018 Week 18 5
FOMC AND WEAK EURO AREA DATA PUSH EURUSD LOWER m/m instead of stagnating. And the monthly data on retail sales, unemployment etc. mentioned above give little hope that inflation will start rising toward 2% soon. 1.215 1.21 EURUSD FOMC meeting didn t produce any change in the monetary policy but made it pretty clear it will come soon. 1.205 1.2 1.195 1.19 29-Apr 30-Apr 1-May 2-May 3-May 4-May No wonder: core PCE inflation jumped to 1.9% in March 2018 (as March 2017 decline of prices telecommunications services fell from the base) and the private sector wage growth was strongest since crisis (although that means just 2.9% ). Inflation, moreover, is running at around 2.5% annualized rate, based on monthly growth rates, so unless there is a marked economic slowdown ahead (and nothing in the data suggests there is) there will be a space to tighten the policy. The statement reflected the increased confidence: Committee dropped the language that it is monitoring inflation developments closely, indicating it is fairly certain inflation will stay at or around 2% from now on, and that it will thus permit the tightening. Although Fed didn t explicitly say it was going to hike faster than what its latest forecast calls for, the combination of the hawkish shift in the language and the weak data from Eurozone pushed EURUSD below 1.20. This strengthening, however, shouldn t do anything to FED s outlook: it is too small to cause any monetary policy tightening in an economy as closed as US one. Therefore, 2 more hikes are almost a certainty this year, and risks are skewed towards more. 42 Financial Services Market Research Weekly 2018 Week 18 6
42 Financial Services Market Research Weekly 2018 Week 18 7
MARKETS MM / IRS % bps. % ASW spread* CZGB** 3M PRIBOR 6M PRIBOR 2Y 5Y 7Y 10Y Actual 0.709 0.969 1.290 1.675 1.760 1.863-1M 0.709 0.969 1.275 1.635 1.720 1.810-3M 0.709 0.969 1.390 1.835 1.930 2.050-6M 0.709 0.969 1.130 1.460 1.577 1.710 2Y 3Y 4Y 5Y 7Y 10Y Actual -74-0.678-0.608-0.483-0.259-0.134-1M -42-94 -41-0.424-0.178 0.033-3M -0.820-0.904-0.731-0.749-0.623-0.097-6M -0.893-0.749-0.710-0.717-98 -0.063 2Y 3Y 4Y 5Y 7Y 10Y Actual 0.716 0.777 0.972 1.192 1.501 1.729-1M 0.733 0.843 1.013 1.211 1.542 1.843-3M 70 0.696 1.019 1.086 1.307 1.953 2.5 2.0 1.5 1.0 0.0 0.00-0.15-0.30-0.45-0.60-0.75-0.90-1.05 2.5 2.0 1.5 1.0 Act ual -3M -6M 3M 6M 2Y 5Y 7Y 10Y PRIBOR PRIBOR Act ual -3M -6M 2Y 3Y 4Y 5Y 7Y 10Y Act ual -3M -6M FX -6M 0.237 27 0.670 0.743 0.979 1.647 EURCZK EURPLN EURHUF EURRON EURTRY EURUSD Actual 25.488 4.246 313.64 4.659 5.055 1.196-1M 25.326 4.201 311.27 4.664 4.912 1.228-3M 25.237 4.171 309.91 4.647 4.697 1.246-6M 25.682 4.245 310.80 4.594 4.514 1.161 0.0 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 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 2018 Week 18 8
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