Weekly Highlights: Chart of the Week: Zloty strikes back

(1)

P. 1

 Reshuffled NBP kept monetary policy setting unchanged

 ECB easing actions should not trigger CNB’s rate into negative territory

 Czech labour market conditions have continued to improve

 Weekly preview: watch Polish inflation

-1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4

00:00 02:00 04:00 06:00 08:00 10:00 12:00 14:00 16:00 18:00 20:00 22:00

FX intraday

EURUSD EURCZK EURHUF EURPLN

3/11/2016

The zloty significantly strengthened on Friday...

(Source: BBG, CSOB)

Chart of the Week: Zloty strikes back Weekly Highlights:

Table of contents

Weekly Highlights: 1 Chart of the Week: Zloty strikes

back 1

Market’s editorial 2 Review of Economic Figures 3

Weekly preview 4

Calendar 5

Fixed-income in Charts 6 Medium-term Views & Issues 7 CBs’ Projections vs. Our

Forecasts 8

Summary of Our Forecasts 9

Contacts 10

(2)

P. 2 Reshuffled NBP kept monetary policy setting unchanged

In line with expectations, the Polish central bank (NBP) left interest rates unchanged last Friday. Evidently, the reshuffled Monetary Policy Council (MPC) has been satisfied with the existing monetary policy setup. Its members argue, for instance, that “The Council continues to assess that – given the available data and forecasts – the current level of interest rates is conducive to keeping the Polish economy on the sustainable growth path and maintaining macroeconomic balance.” The attitude is in line with our base scenario that bets on stable interest rates in 2016. In contrast, the money market still bet on a 25 bps rate cut in a 6 month horizon.

Regarding the zloty, the currency has soon wiped off its loss of Thursday and rebounded below the EUR/PLN 4.30 level.

As for the second quarter 2016, we expect the zloty trading around current levels due to elevated political risk (like that of appointment the new head of the NBP). Stability of the zloty, in turn, should prevent the NBP from cutting official interest rates in the first half of this year. Strengthening of the currency in the second half of the year, should it happen, would, of course, raise odds for a rate cut anew.

What does the ECB meeting imply for the CNB,

However, the highlight of the last week was definitely the ECB meeting, which might strongly influence policy-makers oin Central Europe, especially the Czech central bank. Hence What does the ECB meeting held in March imply for the Czech National Bank? Firstly, the decision to not extend the QE policy beyond March 2017 means that the CNB can, as we anticipate in our baseline scenario, abandon its interventions in early 2017 (February/May). If the ECB had extended its direct printing of money in the economy until

the end of 2017, the CNB would not have dared terminate its interventions so early and sooner or later it would probably have postponed its planned departure until the second half of 2017.

Secondly, yesterday Mario Draghi presented a slightly more ambitious monetary easing policy than expected. Rates were cut more or less in line with expectations (depo by -10 bps) but the stronger increase in QE by €20bn a month was a surprise. This may theoretically boost the inflow of ‘hot money’ into korunas. A faster inflow of speculative money, which compelled the CNB to defend the weak koruna more actively in both January and February, was the fundamental reason why the CNB started to consider negative rates. The money inflow has decreased in March so far and, judging from lower liquidity increases in the Czech banking system, the CNB did not have to be very active. However, with the prospects for a stronger QE in the euro area, this may change before the next CNB meeting in late March, and then the introduction of negative rates in the Czech Republic would be seriously on the agenda.

However, on Thursday, Mario Draghi also provided arguments to opponents of negative rates on the CNB Board. He told the press conference that another rate cut was not very probable and, if needed, he would prefer easing the monetary policy in a different way. Thus the CNB can be fairly sure that the interest rate differential, stimulating the inflow of speculative money, will not widen any more. A minor problem may be that Mario Draghi had already previously promised markets that interest rates would not be cut any more. And as we know, he changed his mind later…

Last Change 1W

EUR/CZK 27.1 0.05%

EUR/HUF 311 0.10%

EUR/PLN 4.28 -1.16%

Last Change 1W

10Y CZK 0.68 14.29 10Y HUF 2.18 -5.23 10Y PLN 2.24 -0.78

Market’s editorial

(3)

P. 3 Czech labour conditions improve and support retail sales

After the temporary seasonal increase in unemployment at the turn of the year due to expiring fixed-term jobs, unemployment is starting to fall again. Unemployment fell to 6.3% in February, which means a year-on-year improvement by more than 1%. Thus the number of applicants fell by 87,000 compared to February last year, when unemployment reached 8.4%, by as many as 150,000 . The favourable labour market developments are primarily attributable to strong economic growth, which is distributed over the whole economy. Nevertheless, the main contributors to falling unemployment are industry and services, which recruit new staff during upturns.

Unemployment is falling practically throughout the Czech Republic. Only three districts report higher unemployment than in February last year. At the same time, the number of applicants per vacancy has fallen to the current average of 4 jobless people per vacancy. Overall, however, the situation has been constantly improving over the last three years.

With continuing economic growth, the number of vacancies also continues to rise. There are currently almost 115,000 vacancies and the last time there were more vacancies was in 2007.

The latest wage data confirm that wage growth in the Czech Republic is accelerating. In the last quarter of last year, the average wage in the economy grew by 3.9% which, given negligible inflation, translated into real wage growth of

3.8%. The last time that wages grew so rapidly in real terms was in 2009. The good news is that not only average but also median wages accelerated – by as much as 5.4%.

Moreover, wages are growing in both the private and the public sectors, in practically all sectors except agriculture.

The greatest percentage increase occurred in the hospitality and accommodation sector, which has always been one of the weakest according to official figures. By contrast, wages in the country’s largest and last year’s super-successful sector (industry) grew below average – by ‘only’ 3.7%.

For 2015 as a whole, wages in the Czech Republic grew by 3.4%, i.e., CZK 860 per month in gross terms. In absolute figures, the greatest increases occurred in the public sector, healthcare and construction, which had a hard time performing orders hurriedly financed from EU Funds. This year, the Czech Republic’s wage growth may continue to accelerate, and even in industry, which has been a long- term driver of the country’s economic growth. Given the labour market situation, businesses are going to face a lack of skilled staff, and this will translate in their increased willingness to raise wages sooner or later. We predict this year’s wage growth at 3.8%.

As for fresh data on Czech retail sales in January, the outcome confirmed their recent growing trend (+5.8 % Y/Y in WDA terms). It looks like the Czech growth can be driven by consumption this year. Nonetheless, we do not expect that a faster consumption growth would produce substantially higher inflation pressures.

Review of Economic Figures

(4)

P. 4 TUE 9:00

Jan-16 Dec-15 Jan-15

Monhtly -1.0 0.7 2.7

cummulative (YTD) -1.0 4.4 2.7 CZ Industry (y/y change in %)

TUE 14:00

Feb-16 Jan-16 Feb-15

CPI y/y -0.8 -0.7 -1.6

Food (ex Alc.) y/y 0.4 0.1 -3.7 Transport (including

fuel) -6.7 -6.1 -11.6

PL Inflation (change in %)

CZ: Industry defined by carmakers’ performance

Industry probably opened this year with slightly weaker figures. This was primarily attributable to the one less business day in the month, and also likely lower metal production and the lower performance of the energy sector. Therefore, the existing trends should not change very much. Likewise, industry will continue to be led by car production, enjoying strong demand on the domestic as well as foreign markets. After all, orders still suggest that demand for domestic production is definitely not decreasing. This year, industry will continue to keep its position as the driver of the whole economy, and will also largely contribute to the improving situation on the labour market. We expect this year’s production growth in industry to be just below 3%.

PL: Economy remains in deflationary waters

Poland’s deflation did not wane in February according to our forecasts. On the contrary, the year-on-year decline in prices accelerated by 0.1% to -0.8%. Month-on-month prices fell by 0.2%, to which the falling fuel prices heavily contributed again in particular. Let us add that the Statistical Office will also release a revised figure for January along with February’s data, and thus the uncertainty associated with the forecast is greater than usual.

Weekly preview

(5)

P. 5

-410 389

PL 14:00 Current account

CZ 10:00 Current account

CZ 9:00 Industrial output

23 28.4

1 -1

PL 0:00 Earnings Energa PLN 4Q/2015

0.9 5.4 0.9 -0.2 -0.8 -0.1

CZ 9:00 Construction output

02/2016

PL 14:00 Trade balance

Budget balance

PL 14:00 CPI

03/16/2016

3.3 -25.6 0.9 -0.2 -1.3 -0.5 -1.2

PL 14:00 Retail sales % 02/2016

5.5 -8 1.4

PL 14:00 PPI % 02/2016

14:00 Industrial output % 02/2016

PL

4

PL 14:00 Core CPI % 02/2016 0 0.1

CZ 0:00 Earnings Pegas NW CZK 4Q/2015

PL 14:00 Wages % 3.9 -9.2

02/2016 *F

1760

CZ 9:00 PPI % 02/2016 -0.2

PLN M 01/2016

-3.5 -1.6 -3.4

PL 15:00

03/17/2016

EUR M 01/2016

-0.4

0.6 10 10.2

-0.7 -0.4 -0.7

900 373

% Earnings CEZ

% CZK

02/2016 4Q/2015

Indicator Period Forecast

Country Tim e

PL 14:00

y/y m /m m /m

Consensus

Money supply M3

CZ 0:00

CZK

%

CZ 9:00 Retail sales

CZ 0:00 Earnings Kof ola

03/15/2016 03/15/2016 03/16/2016

01/2016

Previous y/y 4Q/2015

3.4 0.7 m /m y/y

6

6 8.7

01/2016 01/2016 01/2016 01/2016

10.51

%

% CZK B EUR M Date

03/14/2016 03/14/2016 03/14/2016 03/15/2016 03/15/2016 03/15/2016 03/15/2016 03/15/2016 03/15/2016 03/15/2016

03/16/2016 03/17/2016 03/17/2016 03/17/2016

Calendar

(6)

P. 6 Source: Reuters 0,0

0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8

2Y 4Y 6Y 8Y 10Y

%

CZ IRS

14/03/16 07/03/16

1,0 1,2 1,4 1,6 1,8 2,0 2,2 2,4

2Y 4Y 6Y 8Y 10Y

%

HU IRS

14/03/16 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

14/03/16 07/03/16 -1,0

-0,5 0,0 0,5 1,0 1,5 2,0 2,5

6/8/2015 7/8/2015 8/8/2015 9/8/2015 10/8/2015 11/8/2015 12/8/2015 1/8/2016 2/8/2016 3/8/2016

%

FRA 3x6

Slovakia

Czech Republic Poland

Hungary

-1 0 1 2 3 4 5

6/2/2015 7/2/2015 8/2/2015 9/2/2015 10/2/2015 11/2/2015 12/2/2015 1/2/2016 2/2/2016 3/2/2016

%

10Y GB Yields

Hungary

0 20 40 60 80 100 120 140 160 180 200

6/8/2015 7/8/2015 8/8/2015 9/8/2015 10/8/2015 11/8/2015 12/8/2015 1/8/2016 2/8/2016 3/8/2016

bps

CDS 5Y

Slovakia

Hungary

Fixed-income in Charts

(7)

P. 7

The Czech Republic Hungary Poland

Growth & key issues

Growth significantly accelerated, primarily driven by the manufacturing industry, albeit most sectors of the economy are showing a positive trend.

On the demand side, we can see an investment boom by the private and public sectors, with private consumption – encouraged by growing real wages and employment – becoming a strong stimulus. 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.

The 4Q15 GDP growth might bounce back closer to 3% Y/Y, as EU funds money use was accelerated, the government increased the spending and the industrial production and domestic consumption might be stronger, so the growth might be around 2.7% Y/Y in 2015. The outlook is less favorable. The investments started to fall, the EU funds money use may substantially lower in this year due to the new budgetary period. The government tries to boost the construction via new government program, which targets new homes for households. The domestic consumption may remain strong thanks to the increasing wage mass. In case there is no substantial slowdown of international growth and the agriculture provides an average harvest, the economic growth might be around 2.3% Y/Y in 2016.

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.

Outlook for official & market rates

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.

The last NBH statement and Mr. Nagy’s words full fit into our expectation. The NBH may cut the overnight deposit rate to zero or to -0.1% in March from the current level of 0.1%. The NBH also tries to push down the Bubor rates (the loans are priced with the Bubor), because they said the real rates on the secondary market are below the official Bubor levels. As concerns the base rate – a rate cut is unlikely in Mach or April. Our view that NBH may cut the key rate after Hungary is over of the heavy refinancing need of government debt in the first 5 months this year, and in case Hungary is upgrade in May or June and additionally the EUR/HUF is traded around or below 305.

We expect the NBP to keep rates at new lows (1.50%) this year, but we cannot completely rule out the likelihood of further rate cuts. The main reason is the combination of the “inflow of cheap euros from the ECB” to mar ets and the unusually open commitment by the NBP not to continue to cut rates. This promise will probably be hold, while we should wait how the MPC will be changed in 2016 as new President and Sejm will appoint almost all Board members.

Forex Outlook

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.

We think that the NBH’s commitment to the long time low interest rate may lead to short-term HUF weakening. Although compared to other emerging markets HUF looks like quite stable, the fears of Chinese hard lending scenario pushed EURHUF trading range between 313 and 318.

Although the huge trade and current account balance supports HUF in medium term, the ongoing foreign sell-off of HUF denominated gov. bonds and the uncertain sentiment keeps weakening pressure on HUF, so we see bigger risk on the weak side on short term, which means that EURHUF may be pushed towards 325.

Although the new government may eventually turn out to be more market-friendly than had been expected, we think that pressures on zloty´s depreciation may intensify again at the beginning of 2016 when most members of the Monetary Policy Council (MPC) will be replaced and probability of further monetary easing will rises. Although Fed hikes and weaker zloty could prevent the altered MPC from cutting rates again we target the EUR/PLN peak at 4.40.