Czech inflation and industrial production decline

Headlines

Currencies: Czech inflation and industrial production decline
Fixed Income: Dovish comment from one of the key swing Polish voters

Czech Republic

After a weak start, the Czech koruna came back to the initial levels at 26.80 EUR/CZK. Beside negative correction on the equity markets, also domestic figures could have played a role in initial weakness. Unemployment rose from 7.7% in March to 7.9% in April, the highest level in 2 years. Industrial production fell by 17.0% Y/Y in March, a somewhat disappointing result for the first month in which we count the German scrap premium effect to play. Furthermore, consumer price inflation fell by 0.1% M/M to 1.8% Y/Y in April, which is much sharper drop in inflation than expected and supports the dovish voices on the CNB´s board.

Today there are no interesting domestic events and the Czech currency should stay under moderate negative pressure driven by the sentiment on the global equity markets. We believe the pair should stay in tighter range below 27.00 EUR/CZK

The Czech yield curve in above average trading volumes strengthened, as an unexpected CPI drop together with higher unemployment and low industrial production pressed the yield curve in short and medium segments.

The main issue on today’s Czech bond market’s agenda is the bond auction. The ministry of finance offers CZK 7 bln of 3-year floaters. As investors have preferred shorter maturities we expect that also this auction could invoke rather solid demand. Also previous tranche of the same paper issued mid April raised high interest.

As for today it is worth mentioning that CNB vice governor Mr. Singer has mentioned in the morning that low CPI and higher unemployment might initiate an other rate cut. Such declaration could support interest in bonds today.

Hungary

The Hungarian forint remained broadly stable around the 280/€ level as higher inflation prospects kept it strong against a less favorable global background. April inflation rose to 3.4% Y/Y from 2.9% Y/Y and above expectations for a 3.0% reading. Beside the increase of fuel prices, durable goods got more expensive during the month likely because of the extremely weak exchange rate.

A news agency reported that the government could raise the deficit forecast to 3.9% of GDP from 2.9%. This may cause some negative reactions on the market, but probably many expected a higher deficit figure anyway due to the deepening recession. The government in February revised the growth forecast to -3-3.5% Y/Y and this now could be changed to -6.7%. The deep recession makes the 3% budget deficit target almost impossible to reach, while the cyclically-adjusted deficit could still be lower.

The Hungarian bond market lost some 10bps across the curve, but the move was fairly small and trading remained quiet. Participants seem to take a cautious approach before the IMF/EU team announces with the government the new macro targets.

Poland

As on the neighboring markets, also in Poland, trading was calm yesterday. After initial pressure driven by the ongoing correction on the equity markets, the zloty came back below 4.40 EUR/PLN. Poland euro doubts as well as dovish comments from NBP did not hurt the zloty and we could see further decline in the Polish CDS. One of key swing voters Jan Czekaj said that Poland may struggle to reach 1% growth in 2009 and that he cannot rule out further rate cuts in case of further GDP downward revisions.

There are no interesting domestic events scheduled for today. The markets should stay relatively stable with modest negative bias as the global equities attempts to correct persist. Although in the mid term we remain clearly positive, in the short term we see further space for temporary losses that could bring the pair to 4.60 EUR/PLN.

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