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Monday, 25 July 2016
Dear clients, due to a regular summer break- the next CEWeekly will be released on August 29th.
P. 1
Strong hard data in Poland in June
Probability of a latter CNB’s exit from FX interventions
declines with solid PMIs in the euro-zone
The NBH on hold this time
The short-end of the Hungarian yield curve dived following the announcement of new policy measures from the NBH.
Chart of the Week: Polish private consumption
Weekly Highlights: Table of contents
Weekly Highlights: 1 Chart of the Week: Polish private consumption 1 Central Banks & Markets 2 Review of Economic Figures 3 Weekly preview 4 Calendar 4 Fixed-income in Charts 5 Medium-term Views & Issues 6 CBs’ Projections vs. Our Forecasts 7 Summary of Our Forecasts 8 Contacts 9
Monday, 25 July 2016
P. 2
Probability of a latter CNB’s exit from interventions declines
Following the Brexit vote the EUR/CZK pair has hovered just
above the intervention floor set by the Czech National Bank
(EUR/CZK 27.00). So in fact the Czech currency has been
trading at the strongest levels allowed by the central bank
FX policy. There are two reasons explaining the strength of
the CZK: first, Czech fundamentals remain strong and
secondly, financial and economic contagion from the Brexit
vote has been negligible so far.
Recall that according to the preliminary estimate, the euro
zone composite PMI weakened only marginally in July, from
53.1 to 52.9. The outcome was well above the market
consensus of 52.5. The same picture has delivered the
German Ifo this morning as it has confirmed that the
business sentiment deteriorated less than market expected
in June. So overall, it seems the German/euro area economy
continues to grow at a moderate pace at the start of the
third quarter, suggesting that the UK decision to leave the
EU is having limited impact on activity for now.
Hence, the recent business sentiment reports prove some
resilience of the Eurozone. Based on the resilience, the ECB
does not need to start thinking about imminent expansion
of monetary easing, which in the Czech case implies that the
likelihood that the CNB decides to extend its FX
interventions commitment (to defend the EUR/CZK floor)
has been reduced. We assume the probability that the CNB
commitment will be extended beyond the mid of 2017 to be
around 30% at the moment..
LastChange
1W
EUR/CZK 27.0 0.07%
EUR/HUF 313 -0.73%
EUR/PLN 4.36 -0.21%
LastChange
1W
10Y CZK 0.56 23.08
10Y HUF 1.98 3.53
10Y PLN 2.27 2.03
4.28
4.30
4.32
4.34
4.36
4.38
4.40
4.42
4.44
4.46
4.48
6/1
4/1
6
6/2
1/1
6
6/2
8/1
6
7/5
/16
7/1
2/1
6
7/1
9/1
6
EUR/PLN
309.00
310.00
311.00
312.00
313.00
314.00
315.00
316.00
317.00
318.00
6/1
4/1
6
6/2
1/1
6
6/2
8/1
6
7/5
/16
7/1
2/1
6
7/1
9/1
6
EUR/HUF
Central Banks & Markets
Monday, 25 July 2016
P. 3
Very strong Polish hard data in June
Lats week, there were quite positive releases coming from
the Polish economy. The firts set came from the Polish
labour market, which looks quite healthy bow. While
corporate wages grew strongly by 5.3% y/y in June (in real
terms by more than 6%), the employment edged up by 3.1%
y/y.
Secondly, retail sales showed really strong gains in June as
they increased by 6.5 % Y/Y in real terms. Moreover,
industrial production figures also came out in line with
(strong) expectations. It grew by 7.2% year-over-year.
The above mentioned hrad figures (for June) mean that the
growth of overall labour income has accelerated, which
should support domestic private consumption and
economic growth in Poland.
The Czech public debt on the rise
At the end of the first half of the year, the Czech Republic’s
debt reached almost CZK 1.7tn. This was CZK 18 bn more
than at the end of last year and CZK 3 bn less than in the
first quarter. Thus, after using up the cash reserves
accumulated by previous governments (which, inter alia, led
to a decline in the state debt in the previous two years), the
government has evidently returned to a borrowing policy.
After all, if the Parliament approves a fairly high state
budget deficit even at a time of an economic upturn and
record employment, there is nothing else to be done.
While the state posted a surplus in the first half of the year,
it still needed tens of billions of crowns to redeem mature
bonds, which were replaced with new ones. Nevertheless,
we should not criticise overmuch as financial market
conditions are so favourable that they are literally
encouraging faster bond issues. Therefore, it would be no
great surprise to see the Ministry of Finance build up koruna
cash reserves for the future, all the more so because the
times are favourable for issuing bonds at negative yields.
The direction of the Czech Republic’s debt in the second half
of the year will largely correspond to the state budget
performance. Although the budget still remains in surplus, it
is likely to go into deficit in the autumn. However, if the
state’s fiscal policy remains moderate – as it has been so far
– the deficit may be much lower than originally approved by
the Chamber of Deputies.
This would certainly be quite a good signal, which would not
at all threaten the still-expansive fiscal policy at a time when
the economy is faring well, unemployment is rapidly falling,
and employment is hitting all-time highs. If this is combined
with the increasing standard of living and positive consumer
mood, leading to record-breaking shopping at stores, the
economy does not need any strong additional debt stimuli.
In any event, it will be interesting to see how the structural
deficit of public budgets will develop, as this deficit is likely
to deteriorate this year despite the decent overall figure.
This deficit indicates that all of those positive data
overshadow structural problems that will surface when the
performance of the economy may not be that good. And, as
usual, the longer the economy prospers, the closer it
approaches another recession.
0
5
10
15
20
25
30
35
40
45
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Q1
20
16
Q2
% o
f G
DP
CZK
bn
CZ: Central government debt
CZK bn (l-h-s) % of GDP (r-h-s)
Review of Economic Figures
Monday, 25 July 2016
P. 4
TUE 14:00
rate level (in %) 0.90 5/2016
change in bps 0 -15
This
meeting
Last
change
NBH base rate
HU: The NBH on hold this time
The National Bank of Hungary can be satisfied with the outcome of its
last measure, which has reduced commercial banks’ access to depo
operations, thus improving demand for the other instruments and
consequently cutting Hungary’s market interest rates. As a result,
there will be no need to change official interest rates – all the more so
because the Brexit fallout has proved to be negligible and no central
bank except the Bank of England is likely to react to it..
Date
07/25/2016
07/26/2016
07/28/2016
07/28/2016
07/29/2016
07/29/2016
08/01/2016
08/01/2016
08/01/2016
08/01/2016
08/05/2016
08/05/2016
08/05/2016
06/2016
07/2016
07/2016
07/2016
50.9
51.8
%
-2.2
07/2016
Previous
y/y
06/2016
9.6
8.7
m/m y/y
0.90.9
1.2
9:00
y/y m/mm/m
Consensus
9.1
Unemployment rate
PL 15:00
%
%HU 14:00 NBH meeting
PL 10:00 Unemployment rate
08/01/2016
08/02/2016
08/03/2016
Budget balance
%
PLN M
06/2016
06/2016
Indicator PeriodForecast
Country Time
HU
% 07/2016 *P
5.55.4
-13483
40.6
0.2 -0.8
CZK B
0.05
07/2016
755
HU 9:00 Retail sales % 06/2016
EUR M 05/2016 *F
5.7
HU 9:00
HU 9:00 Industrial output % 06/2016 -0.7 4.2
HU 9:00 Trade balance EUR M 06/2016 *P
CZ 13:00 CNB meeting %
11.19:00 Retail sales % 06/2016CZ
CZ 10:00 Money supply M2
08/2016 0.05
PL 14:00 CPI
Trade balance
CZ 14:00 Budget balance
08/04/2016
9:00 PPI % 06/2016
51.8CZ 9:30 PMI manufacturing
PL 9:00 PMI manufacturing
HU 9:00 PMI manufacturing
HU
Weekly preview
Calendar
Monday, 25 July 2016
P. 5
Source: Reuters
0.0
0.1
0.2
0.3
0.4
0.5
0.6
2Y 4Y 6Y 8Y 10Y
%
CZ IRS
25/07/16 18/07/16
0.0
0.5
1.0
1.5
2.0
2.5
2Y 4Y 6Y 8Y 10Y
%
HU IRS
25/07/16 01/12/14
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
2.30
2.40
2Y 4Y 6Y 8Y 10Y
%
PL IRS
25/07/16 18/07/16
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
10/1
9/1
5
11/1
9/1
5
12/1
9/1
5
01/1
9/1
6
02/1
9/1
6
03/1
9/1
6
04/1
9/1
6
05/1
9/1
6
06/1
9/1
6
07/1
9/1
6
%
FRA 3x6
Slovakia
Czech Republic
Poland
Hungary
0
1
1
2
2
3
3
4
4
5
5
10/9
/15
11/9
/15
12/9
/15
1/9
/16
2/9
/16
3/9
/16
4/9
/16
5/9
/16
6/9
/16
7/9
/16
%
10Y GB Yields
Czech Republic
Poland
Hungary
020406080
100120140160180200
10/1
9/1
5
11/1
9/1
5
12/1
9/1
5
1/1
9/1
6
2/1
9/1
6
3/1
9/1
6
4/1
9/1
6
5/1
9/1
6
6/1
9/1
6
7/1
9/1
6
bp
s
CDS 5Y
Slovakia
Czech Republic
Poland
Hungary
Fixed-income in Charts
Monday, 25 July 2016
P. 6
The Czech Republic Hungary Poland
Gro
wth
& k
ey is
sue
s
The Czech economy entered a stage of
moderately decelerating growth, at the
mercy of household consumption and
exports. Inflation remains subdued
despite the anticipated solid GDP rate,
and will unlikely approach the CNB’s
inflation target before 2017, thus
enabling the central bank to continue its
exchange rate policy. At the moment,
we cannot expect any fundamental
economic changes or reforms, except for
the abolition of the pension reform and
the introduction of the electronic
registration of sales. Progress in the
country’s preparations for joining the
euro area is not expected in this
electoral term either.
Growing net real wages and the
postponed consumption since the crises
(we calculate around 5% of GDP under
consumption) boost the retail sales and it
may be the main driver of this year’s
economic growth of around 2% Y/Y.
Prospects of the Polish economy
remain good in our view. For the
whole year 2016 we expect GDP
growth may reach 3.5 - 4.0 percent.
Apart from low interest rates (further
cuts cannot be excluded) and a
relatively weak zloty, we expect the
economy to draw additional support
from policy measures of the new
government (stimuli for private
consumption). The risks thus stem
mainly from a possible deterioration
in the external environment, most
notably in China, Russia and other
emerging markets.
Ou
tlo
ok
for
off
icia
l & m
arke
t ra
tes
The latest forecast does not envisage
the return of inflation to the target
before early 2017, with inflation not
significantly diverging from it afterwards
either. The CNB has extended its
exchange rate commitment until the
first half of 2017. The possibility of
introducing negative interest rates has
been increasing, in light of the widening
of the interest rate differential vis-à-vis
the euro area and developments in
domestic financial markets. But we still
don't expect negative CNB's rates. There
are two main preconditions for negative
official rates: 1) significant ECB's rate
cut, 2) continuing large monthly fx
interventions of the CNB.
A relatively strong and continuously
robust consumption is expected to push
inflation gradually higher. So this figure
suggests that NBH won’t cut the base
interest rate (0.9%) further in June despite
of the surprise drop in inflation back to
negative territory.
We expect the NBP to keep official
rates stable, but we think that risks
for of further rate cuts have
increased. The main reason is the
combination of the “inflow of cheap
euros from the ECB”, ongoing
deflation and stronger currency
(PLN). Hence, should the zloty get
strong there could be a window of
opportunity for the NBP to ease its
policy in the second quarter of this
year. Nevertheless this is not our
main scenario yet.
Fore
x O
utl
oo
k
Relatively strong economic growth,
current and capital account surpluses
and ongoing QE in the euro zone have
been the key factors behind the recent
strength of the koruna. With regard to
the inflation outlook and ECB’s policy,
we anticipate an exit from the fx regime
in the first quarter of 2017. The above
mentioned factors should however keep
the koruna close to EURCZK 27.0 in the
months ahead. Current turmoil on the
Chinese market poses negative risks for
the Central Europe. We however think
the impact on the koruna should only be
limited.
Outlook currently under the review. We think that zloty’s sell-off related
to markets’ fears coming from
appointment of new members of the
Monetary Policy Council (MPC) is
over now. Nevertheless, while
domestic fundamentals should be
relatively supportive for the zloty,
the currency should be mostly driven
by sentiment in emerging markets
and the ECB or the Fed policy actions
respectively.
Medium-term Views & Issues
Monday, 25 July 2016
P. 7
Source: CNB, NBP, NBH, KBC
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2015Q
1
2015Q
3
2016Q
1
2016Q
3
2017Q
1
2017Q
3
CZ: GDP outlook (Y/Y, %)
diff
ČNB
our est.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2015Q
1
2015Q
3
2016Q
1
2016Q
3
2017Q
1
2017Q
3
CZ: Inflation outlook (Y/Y, %)
diff
ČNB
our est.
target
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2015Q
1
2015Q
3
2016Q
1
2016Q
3
2017Q
1
2017Q
3
PL: GDP outlook (Y/Y, %)
diff
NBP
our est.
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2015Q
1
2015Q
3
2016Q
1
2016Q
3
2017Q
1
2017Q
3
PL: Inflation outllok (Y/Y, %)
diff
NBP
our est.
target
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2015Q
1
2015Q
3
2016Q
1
2016Q
3
2017Q
1
2017Q
3
HU: GDP outlook (Y/Y, %)
diff
NBH
our est.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2015Q
1
2015Q
3
2016Q
1
2016Q
3
2017Q
1
2017Q
3
HU: Inflation outlook (Y/Y, %)
diff
NBH
our est.
target
CBs’ Projections vs. Our Forecasts
Monday, 25 July 2016
P. 8
Official interest rates (end of the period)
Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3
Czech Rep. 2W repo rate 0.05 0.05 0.05 0.05 0.05 0.05 -20 bps 9/27/2012
Hungary 2W deposit r. 0.90 0.90 2.75 0.90 0.90 0.90 -10 bps 5/24/2016
Poland 2W inter. rate 1.50 1.50 1.50 1.50 1.50 1.50 -50 bps 3/5/2015
Short-term interest rates 3M *IBOR (end of the period)
Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3
Czech Rep. PRIBOR 0.00 0.25 0.29 0.28 0.28 0.28
Hungary BUBOR 0.94 1.01 2.90 0.90 0.90 0.90
Poland WIBOR 1.71 1.71 1.65 1.70 1.70 1.70
Long-term interest rates 10Y IRS (end of the period)
Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3
Czech Rep. CZ10Y 0.56 0.50 0.62 0.80 0.90 1.00
Hungary HU10Y 1.98 2.18 4.20 2.80 2.80 2.90
Poland PL10Y 2.27 2.22 2.40 2.50 2.70 2.80
Exchange rates (end of the period)
Current 2016Q2 2016Q3 2017Q1 2017Q2 2017Q3
Czech Rep. EUR/CZK 27.05 27.06 27.15 27.05 26.70 26.20
Hungary EUR/HUF 313 315 305 315 310 313
Poland EUR/PLN 4.36 4.37 4.27 4.25 4.24 4.23
GDP (y/y)
2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4
Czech Rep. 2.3 2.0 2.2 2.3 2.3 2.2 2.3
Hungary 2.4 2.8 3.0 3.6 3.2 2.8 3.3
Poland 3.3 3.4 3.6 3.7 3.8 3.8 3.8
Inflation (CPI y/y, end of the period)
2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4
Czech Rep. 0.1 0.3 1.0 1.4 1.5 1.6 1.8
Hungary -0.2 2.4 2.4 2.5 2.1 2.2 2.4
Poland -0.8 -0.4 0.0 0.4 0.8 1.2 1.5
2016 2017 2016 2017
Czech Rep. 1.2 1.1 Czech Rep. -0.7 -1.1
Hungary 4.1 3.5 Hungary -2.0 -2.5
Poland -1.5 -1.3 Poland -2.9 -3.0 Source: KBC, Bloomberg
Last change
Public finance balance as % of GDPCurrent Account
Summary of Our Forecasts
Monday, 25 July 2016
P. 9
Brussels Research (KBC) Global Sales Force
Piet Lammens +32 2 417 59 41 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Joke Mertens +32 2 417 30 59 Institutional Desk +32 2 417 46 25 Mathias van der Jeugt +32 2 417 51 94 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 Prague Research (CSOB) Jan Cermak +420 2 6135 3578 Prague +420 2 6135 3535 Jan Bures +420 2 6135 3574 Petr Baca +420 2 6135 3570 Bratislava Research (CSOB) Marek Gabris +421 2 5966 8809 Bratislava +421 2 5966 8820 Budapest Research David Nemeth +36 1 328 9989 Budapest +36 1 328 99 85
ALL OUR REPORTS ARE AVAILABLE ON WWW.KBCCORPORATES.COM/RESEARCH
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
Contacts
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