Polish inflation rises above expectations

Headlines

Currencies: Czech and Hungary posted sharp first quarter drop in GDP
Fixed Income: Polish inflation rises above expectations

Czech Republic

EUR/CZK tested the 27.0 level, but failed to break above in a sustainable manner. The support for the koruna came this time from Poland as higher than expected inflation lifted the zloty in the afternoon session.
Today, the domestic and regional calendar is very well packed. The session began with GDP figure and CNB Minutes. The market might particularly focus on the weak GDP figure, which showed a 3.4 % y/y decline in the first quarter. This is visibly weaker figure that the market expected and it just confirms that the Czech exportoriented economy is in recession, triggered by weak external demand (see today German GDP figures). We think the market might start to price in a bit deeper recession in the Czech Republic, which might put some more downward pressure on the koruna.

The Czech bond prices gained yesterday and the yield curve steepened in slightly lower trading volumes. The bond market mirrored the development on other European markets supported also by equity markets decline and strengthening domestic currency.
Today, a lot important statistics are released plus the latest CNB Minutes. The April PPI only confirmed that PPI inflation is no item. Nevertheless, a higher than expected GDP decline, following a drastic drop in German GDP earlier today should support Czech bonds. On the other hand, an eventual further weakening of the Czech currency may erase the gains.
As concern the Minutes, they showed that the Bank Board is divided in opinions about the next monetary moves. Part of the Board doubts that we see green shoots in the (global) economy and is afraid that the signs of improvement were coming from areas in which one-off support measures were being implemented, measures (scrap subsidy) whose effects would probably be only short-lived. Evidently, this dovish part of the Board has evidently the upper hand in voting.

Though the March retail sales, which have been released in the morning, were betterthan- expected, but the 1.1 year-on-year drop is hardly encouraging. Yesterday's higher risk aversion and CNB vice governor Mr.Singer about further rate cuts due to lower industrial production a higher unemployment could support interest in bonds. On the other weaker koruna might limit an expected decline in yields.

Hungary

The Hungarian forint continued this week’s weakening trend on Thursday and the pair reached a 3-weeks low at 290/€. This morning’s in line 1Q09 GDP data at -6.4% Y/Y or -5.8% Y/Y if adjusted for work-day together with a slightly better equity market sentiment abroad helped the currency to find some ground around 288-289.
The growth number suggests that Hungary might be able to avoid the worst case scenario of having an 8-10% recession in 2009, which could be a bit of a relief to the market. The inflation story is still a risk, but after today’s data we think the chance of another big currency weakening below the 300 level has decreased substantially.

The Hungarian bond market lost again with the currency and yields rose back to above the 10% level even at the very long-end 15-year maturity. The stabilizing currency could have positive effect on the bond market, while mounting inflation risks could deter real money investors.

Poland

The Polish zloty initially weakened and got above 4.50 EUR/PLN for the first time since April. The weak start was mainly driven by nervous sentiment on the risky assets markets. Later during the session the sentiment stabilized a bit and when the inflation figures surprised on the upside, the zloty regained ground and EURPLN closed at 4.4773, still a loss for the zloty compared to the 4.4565 close on Wednesday. The headline of 4% y/y was significantly above market consensus and although we expect it to decline in the upcoming moths it is a good reason for MPC to stay in wait and see mode in the upcoming sessions.
Today the zloty should stay under the influence of shaky equity markets. We have a slightly negative bias on the zloty at the end of the week. Beside equity markets the PLN could be hit by significantly worse than expected GDP figures in neighbouring CEE economies

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