Wednesday, December 8, 2010

Hungary and Poland Macro review

Hungary Macro review

Last week was relatively quiet on the macro data front and  debate about Hungary remained  centered about the medium-term fiscal outlook as  one-off revenue measures will expire in 2013 implying a risk of higher deficit.

Wage data and employment figures showed continuation of the labour market’s slow recovery.  Unemployment lowered to 10.8% in October, while wage growth remained moderate at 2.3% Y/Y in September  underpinning the slack in the economy, which may curtail cost-side pressures in inflation.

Retail trade reflects this with a mere 0.2% Y/Y growth, despite households’ relatively strong 8% Y/Y net wage increase due to more favourable taxation of the average income since the beginning of the year. Minutes of the October Monetary Council meeting revealed a more balanced approach to rate changes as there were 1-1 votes for both directions.

We looked into some more details about Hungary’s longterm trend and found that wage per employee could play an important role behind population and employment trends. We found that per worker real income started to decline after the late ‘70s, while per  capita real income kept on growing until 1989. This meant that there had been a widening gap between the two and in favour of non-workers’ income, like pensions or capital income.

Unfortunately, working became less attractive vs passive income and this had probably some negative consequences onto the labour market, which began to deteriorate shortly thereafter.

After 1979, number of actively working people started to decrease and a few years later families began to show less willingness for having babies, while resulted in a declining population since then. By the late ‘90s, Hungary lost about 1m jobs, which the government is now trying to win back over the next 10-years.


Since the currency weakened to  the key level of 278/€ last week, good news about Ireland helped it to recover sharply to the 272.50 level by the beginning of this week.  This is a tad weaker than this month’s record high of 269.50/€ and could suggest that the market is in a stabilization mode  around the pivotal level of 275.00/€.

The next key event could be the central bank’s meeting next week, which could soften the  hawkish tone of the August outlook, but may keep uncertainty about interest rate changes and therefore may not help much to the currency.

Fixed income 
The bond market did not recover much with the currency as yields on high risk eurozone debt markets remained high and Hungary’s CDS did not declined much from the level of 330bps.  The 10-year bond has been trading around the 7.30% level, just above the key level of 7.25%, but foreign demand remained solid.  Foreign investors bought about Ft360bn bonds since the summer.

The short-end softened a bit on its rate hike expectation and the 9x12 FRA tenor kept about 50bps rate hike intact, less than the 75bps it had a week-ago. Lack of demand side pressure in inflation however keeps us
convinced that rate hikes  are probably less likely than implied by markets.

Poland Macro review

Regarding previous week, releases of Polish macroeconomic indicators did not bring any significant surprises and in our opinion supported current rather dovish policy stance. On Monday, the figure on October’s CPI inflation was in line with market expectation (2.8% y/y) and was slightly surprising from the viewpoint of Polish Ministry of Finance, which expected 0.1 percentage point  higher growth. As far as month on month dynamics is concerned, inflation rose by 0.5%, mainly due to higher food and clothing prices.

Labor market statistics released on Thursday showed a bit faster than expected growth in October’s employment (2.1% y/y), but at the same time  slower development in gross wages (3.9% y/y). Although surprised negatively, the October's result of industrial output (8.0% growth y/y) released on Friday confirmed
that the Polish economy is in good shape and producer prices reading was a little lower than market expectations (4% y/y).

Apart from quantitative releases, minutes of the Monetary Policy Council’s (MPC) October's meeting were published on Thursday. While some Council members argued that currently observed economic recovery can potentially create inflationary pressures, other MPC members claimed the recent positive development in consumption may slacken unless supported by stronger growth of gross wages.

Thus, in our opinion, MPC should on its meeting held this Tuesday (23.11.) decide to keep interest rates at the current levels. (3.9375): New reaction low off 4.2400 has met 2nd target of daily Triple Top off 4.0405 (see graph) at 3.8760.

1st Support area at 3.9100 (break-up hourly), with next levels at 3.8964 (weekly modified Alpha Beta
trend bottom) and 3.8760/ .8750 (current reaction low off 4.2400 + see above/ 3rd target off 4.0405),
where pause favored. If unable to hold, next level at 3.8680 (weekly Bollinger bottom): tough on 1st attempts.

1st Resistance comes in at 3.9650/ .9700 (breakdown daily/ Nov 17 high + weekly modified Alpha Beta trend top): ideal area to stay below to keep current mood on Zloty. Failure to cap would see next level at 4.0005 (Oct 29 high), where pause favored.

Full report: Hungary  and Poland  Macro review 

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