Saturday, December 11, 2010

EMEA Weekly: Key macro numbers Polish inflation accelerates and Fixed income market update

Key macro numbers 
Polish inflation accelerates 

It will be a busy week next week in terms of Polish macro data. Most focus undoubtedly
will be on inflation data and the industrial production numbers – both for November. We
expect inflation to have inched up to 3.0% y/y in November from 2.8% y/y in October as
higher food and energy prices are beginning to be felt. We now expect Polish inflation to
inch up further in the coming months and we are likely to see inflation even above 3.5%
in the coming months – meaning that inflation will rise above the upper limit of the
Polish central bank’s inflation target of 2.5 +/- 1 percentage points.

The consensus expectation on the Polish inflation numbers is 2.9% y/y – so we are
looking for a slight upside surprise. On the other hand, we are forecasting industrial
production at 7.2% y/y – down from 8% y/y in October and well below the consensus
expectation of 10.1% y/y.

South African inflation will inch up again but temporarily
South African inflation for November, to be published next week, should, according to
our forecast show a further rise in headline inflation to 3.5% y/y in November, up from
3.4% y/y in October. Nonetheless, the rise should only be temporary and inflation should
ease again in December. Looking ahead, inflation should remain fairly contained over the
next year, though it will most likely move to the upper end of the inflation target range of
3%-6%, especially in H2 11. The fairly balanced inflation outlook allows some further
monetary easing especially considering the weak economic performance of the South
African economy. In fact, our Monetary Policy Tracker points to a further minor 25bp cut
mainly due to the macroeconomic performance. Hence, in our view, the door is still open
for a further rate cut next year.

Fixed income market update  

Remarkable Turkish outperformance
Two themes have dominated a highly interesting week in the EMEA fixed income
markets – sharply rising global bond yields and a remarkable outperformance in the
Turkish fixed income markets.

Concerning US and euroland bond markets it has been suggested that the rise in yields
has to be attributed to an increase in worries over the US budget situation. However, even
though one certainly could worry about the stance of US fiscal policy we do not believe
that this has been the main driver of the spike in US (and European) yields. Rather, the
US stock markets have performed relatively well recently and the dollar has been
relatively stable against the euro. This indicates to us that the rise in US yields is more
driven by growth optimism rather the budget worries. This is good news for the EMEA
fixed income markets as global growth optimism should be positive for risk appetite,
which should support continued outperformance for the EMEA fixed income markets
relative to the US and euroland. That said, if US and euro land yields continue to inch up
going forward, then they will likely push up EMEA yields. However, as long as investors
remain upbeat on the global recovery we expect less of a steep rise in EMEA yields than
in the US and euro land.

The remarkable drop in Turkish yields recently has in our view three overall explanations.
First, the Turkish central bank’s decision to cut overnight rates on deposits dramatically
recently is “forcing” foreign investors to move out on the curve and switch from holding
deposits to buying bonds. Second, the Turkish inflation numbers for November surprised
strongly on the downside. Thirdly, the mere mention of possible rate cuts in the recently
published  Financial Stability Report from the Turkish central bank (TCMB) has
increased market speculation about rate cuts to curb the strengthening of the Turkish lira.

TCMB to remain on hold for long
Overall, we believe that the downward move in Turkish yields is justified by exactly
these factors and see little reason why investors should go against the trend at the moment
– even though we do not expect rate cuts from the TCMB, it is also obvious that there is
no reason to expect rate hikes anytime soon in Turkey. In fact, the Turkish GDP numbers
for Q3 disappointed strongly on the downside and GDP growth was “only” 5.5% y/y –
well below our expectations and the consensus expectation. The apparent “softening” of
Turkish growth makes it even more likely that the TCMB will keep rates on hold for

Given the strong downside surprise on Q3 GDP and the November inflation numbers, we
find it likely that the TCMB will soften its rhetoric even further when the central bank
next week announces its rate decision. We forecast the TCMB to keep its key policy rate
on hold, but the communication from the TCMB is expected to be quite dovish and we
would not rule out the TCMB signaling that the risk on rates going forward is equally
split to the upside and to the downside. Our Monetary Policy Tracker  (see next page)
continues to indicate a 25bp hike from the TCMB in H2 11. However, it is notable that
domestic factors – inflation and growth –point to unchanged rates. Hence, it is only the
global rise in yields that is really giving a reason to expect a moderate hike from the
TCMB over the coming year. This further justifies the downward move in Turkish yields
even given the rise in global yields we have seen recently.
Full report: EMEA Weekly: Key macro numbers  Polish inflation accelerates  and Fixed income market update

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