Sunday, November 14, 2010

EMEA Weekly: Key macro numbers : Polish numbers look set to surprise on the upside

Polish numbers look set to surprise on the upside

In the coming week we are getting a number of macroeconomic numbers out of Poland. The numbers will likely confirm that the relatively robust recovery in the Polish economy is continuing. The industrial production numbers for October are likely to show that the Polish manufacturing continues to do quite well and we expect industrial production to have grown by 11% y/y – slightly down from 11.8% y/y in September, but above the consensus expectation of 9.6% y/y. Similarly we are looking for a small upside surprise on the inflation and wage data for October. Hence, we expect Polish inflation to have increased to 2.9% y/y in October, up from 2.5% y/y in September and above the consensus expectation of 2.8% y/y. We expect wages to have grown by 4.3% y/y in October – an acceleration from 3.7% y/y in September. That said wage and prices developments seem to be relatively benign and even though we are looking for upside surprises it can hardly be said to be a very worrying development – nonetheless, it is likely to be an argument for the hawks on the Polish central bank’s Monetary Policy Council.

Fixed income market update

PIIGS worries once again hit CEE markets
We have had a very decent rally in the EMEA fixed income markets, where yields have come down mostly on the back of the Federal Reserve’s announcement to step up the quantitative easing of monetary policy. However, this week the fun has been spoiled by renewed concerns of European debt problems and especially concerns over the Irish debt situation and even though there is very little direct connection between Irish debt
concerns and the CEE, there has been quite a spill-over to the Hungarian fixed income markets especially this week.

It is not surprising that the Hungarian fixed income markets have been the hardest hit given Hungary’s large external debt. Furthermore, it should be noted that Hungarian inflation came out at 4.2% y/y in October – well above the Hungarian central bank’s inflation target of 3% y/y. Hence, with inflation remaining stubbornly high and the forint weakening, the risk of a Hungarian rate hike is clearly rising.

Excessive strengthening of rand forces SARB to yet another cut
It will be a close call as to when the South African Reserve Bank (SARB) will announce its rate decision next week. The market is certainly priced for a rate cut and the consensus expectation is also for a rate cut and even though the overall macroeconomic situation in South Africa does not really warrant monetary easing at this stage we would agree with the consensus expectation and expect yet another 50bp rate cut from SARB.

The key reason why we now expect a cut is the continued (excessive) appreciation of the rand. Against a rate cut next week clearly argues the fact that the macroeconomic situation in South Africa has not really changed since the SARB's last rate cut, which SARB at that time indicated would be the last cut. So again, this cut is basically only a result of the excessive strengthening of the rand and nothing else.

The very strong rand is obviously frustrating South African policymakers and the South African government has already floated numerous ideas to curb the strengthening of the rand and even though SARB is probably less alarmed by the continued rand strengthening there is no doubt that the Reserve Bank shares the overall view the appreciation of the rand is excessive. Furthermore, the inflation outlook is relatively positive with inflation likely to remain well within the SARB’s inflation target range of 3-6% for the coming 12-18 months.

Therefore, there seems to be room to cut rates in South Africa. That said, we doubt that a 50bp cut or even a 100bp will do much to curb the strengthening of the rand in the present global environment where investors remain on the hunt of higher yields. Therefore, the question remains when we should see the introduction of alternative measures to curb the strengthening of the rand. We would not be surprised that the South African government could announce such measures very soon and these measures obviously would have to be
announced in close coordination with SARB. It would therefore be natural that the upcoming rate cut, if it came about, would coincide with such measures being announced. That of course could be the real game-changer for the rand.

EMEA Monetary Policy Tracker

  • The EMEA Monetary Policy Tracker (MPT) is illustrated by the charts on this page.
  • The EMEA MPT shows expected rate changes on a 9-12M horizon based on three factors: inflation and growth, as well as global considerations.
  • The global factor takes into account market expectations of monetary policy in the US and Euroland over the next year.
  • The inflation factor measures whether a wide range of inflationary indicators (CPI, PPI, wages, oil price, etc.) are accelerating or decelerating.
  • The growth factor measures the momentum of economic growth based on a number of monthly indicators (PMI, exports, industrial production, unemployment, money supply, growth, etc.), i.e. whether growth is speeding up or slowing down.
  • The signals from the three factors are accumulated into an expected rate change over the next 9-12M. This is “calibrated" to fit the historical reaction of the central bank – as not all central banks react in the same way to, for example, inflationary surprises or a slowdown in growth.
Full report: EMEA Weekly: Key macro numbers : Polish numbers look set to surprise on the upside

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