Morning Note /

EMEA Daily: Monetary tightening to remain in vogue this week with ECB meeting

  • NBP wary of sustained inflationary pressures, meeting minutes reveal

  • ZAR remains resilient against soaring USD, owing to strong terms of trade

  • Russian economy ministry says it won't default on its debt obligations

Danny Greeff
Danny Greeff

Financial Market Analyst

Edmond Muzinda
Edmond Muzinda

Financial Market Analyst

ETM Analytics
11 April 2022
Published byETM Analytics

Monetary tightening to remain in vogue this week with ECB policy meeting

Talking Points: NBP wary of sustained inflationary pressures, meeting minutes reveal 

South Africa: Manufacturing, retail, and mining output stats for February are scheduled for release today, Wednesday, and Thursday, respectively, and are expected to confirm SA's economy generally started 2022 on a firm footing. While the headline prints will be muddied by statistical base effects, underlying details will likely show an economy recovering at the margin as COVID-19 restrictions eased. Note that for the ZAR, economic recovery has contrasting effects. On the one hand, it could translate into higher demand-side inflation and, in turn, further SARB monetary tightening, while on the other, it could lead to higher import demand and narrow SA's trade surplus. All that being said, SA's broader economic recovery remains very fragile, mired by structural constraints that are preventing the kind of economic growth that can translate into materially higher inflation and a significantly weaker trade balance.

Turkey: Current account and jobless rate statistics are headlining the data calendar today for Turkey. Turkey's external position deteriorated sharply in the first month of this year, reflecting the shortfall in trade in goods, falling official reserves and portfolio outflows. Specifically, the current account deficit widened for the third consecutive month in January to reach -$7.11bn, the widest shortfall since December 2017. Looking ahead, Turkey's current account deficit is likely to remain entrenched amid the surging energy imports weighing on the trade account and negative real rates impacting portfolio flows. Given the weak external position, the lira is likely to remain under pressure due to the increased vulnerability to external shocks.

Russia: Austrian Chancellor Karl Nehammer indicated on Twitter that he plans on meeting Putin on Monday. This after meeting with Zelenskyy on Saturday. This is the first visit by an EU leader since Russia invaded Ukraine in late February. The meeting is an unusual step for Nehammer, chancellor since only December and a novice in diplomatic circles who'll look to build on militarily-neutral Austria's perceived role as a bridge between Europe's east and west. It is unclear exactly what will be discussed and what will come from this, but any dialogue is welcome if it helps to drive a negotiated settlement of any kind that can end the war.

Hungary: Data released on Friday showed that Hungary's budget deficit ballooned further in March, boosted by Prime Minister Viktor Orban's pre-election spending. According to the Finance Ministry, the YTD budget deficit widened from HUF1.43tn at the end of February to HUF2.31tn at the end of Mach, which is about 73% of the full year's target. The details show that the central budget shortfall stood at HUF2.33tn, while social security funds were HUF17.2bn in the red. Separate state funds had a surplus of HUF39.2bn. The finance ministry noted that expenditure on home subsidies and on pensions was higher in the three-month period. The widening budget deficit could trigger conversation around implementing fiscal consolidation. In addition, the finance ministry said that it is crucial importance that Hungary's economy and budget remain stable and that households do not bear the burden of the war. It is worth noting that fiscal metrics in Hungary are likely to remain under pressure going forward given the lack of EU backstops, expenditure on border defences, assistance for refugees, family support and tax reductions.,

Poland: The March 8 MPC meeting minutes reveal that the Russian military aggression against Ukraine stoked the risk of a further rise in global inflation which was already high on the back of supply-side factors, including, in particular, more expensive commodities. Zooming in on Poland, the rate-setters assessed a risk of inflation running above the NBP inflation target in the monetary policy transmission horizon. For 2022, inflation is projected to be running at a substantially elevated level, which- in addition to the factors that had already boosted price growth- would result from the economic fallout of Russian military aggression against Ukraine. Furthermore, the council members also observed that the inflation outlook was subject to high uncertainty in the current environment. The developments in the price processes are said to depend on the impact of the Ukraine war on global and domestic economic conditions, the evolution of global commodity prices, which are highly volatile at the moment and regulatory factors affecting prices.

Czech Republic: The Czech Republic's unemployment rate fell from 3.5% in February to 3.4% in March, in line with market expectations. The number of job seekers fell by 10.6k from the previous month to 253.8k. Meanwhile, the number of job vacancies decreased by 3.7k to 360.2k. In March of 2021, the unemployment rate was higher at 4.2%. Going forward, the recovery in the labour market will depend on, among other things, the development of the pandemic and the Russia-Ukraine war. According to available data, more than 12k Ukrainians have joined employers in the Czech Republic since the war began. The spotlight today will be on inflation, which is expected to have accelerated to 12.5% y/y in March, mainly due to the increase in fuel and food prices in connection with the Ukraine war. According to current estimates, inflation should peak in May, when it should be above 13% y/y.

Forex: ZAR remains resilient against soaring USD, owing to strong terms of trade

 South Africa: Steepening pressure in the curve is notable with the R2048-R186 spread shifting higher on the back of R186 outperformance. Outperformance of the front end suggests that the SARB's aggressive hike resolve is being tested but seasonality could also be at play. Therefore, reading too much into price action at this time of the year could be a mistake. The market remains likely to see position-squaring in the run-up to the Easter break, which tends to support front end bonds over the long end.

Turkey: The USD-TRY remained in a consolidatory trend on Friday, with the steady performance primarily a function of the FX interventions by Turkey's state banks in the market to manage volatility. However, zooming out, the pair gained about 0.44% last week, extending its year-to-date gains to 10.82%, leaving the local currency as the laggard amongst twenty-four emerging market currencies tracked by Bloomberg. Going forward, the local currency will likely remain under pressure due to the idiosyncratic underlying negative macroeconomic factors and the monetary policy normalisation happening at major global central banks.

Russia: The RUB continued to trade with artificial stability last week, consolidating between 80.00/$ and 85.00/$ as capital controls and President Putin's demand that non-friendly countries pay for Russian gas in RUB support demand. Accordingly, the RUB has been one of only a handful of EM currencies able to hold out against a surging USD recently, although not too much can be read into this performance given the lack of free-market activity in the Russian FX market at present.  

Hungary: The EUR-HUF failed to hold onto its earlier gains on Friday and ended the day relatively flat. The broader picture showed that the cross's bulls were in control in the first week of the new month after ramping up gains of about 2.96%. Rising risk aversion due to the lingering geopolitical tension, dialled up bets of the FOMC hiking rates more aggressively at the next meeting, coupled with tensions between Budapest and Brussels, could underpin the topside momentum EUR-HUF. However, moderating global crude oil prices and NBH rate hikes could limit the gains in the cross.

Poland: Friday was an uneventful session for the EUR-PLN, which traded relatively flat. Intraday, the cross was subject to some whipsaw action before ending the day at 4.633, which lines up with the previous close, leaving it firmly wedged between the 50-and 100-SMAs. The broader picture shows that the EUR-PLN was marginally weaker, losing about 0.10% last week, suggesting that the unfavourable external environment is limiting movement to the downside. The prospects of the US Fed tightening monetary policy, developments in the Ukraine war and rising COVID-19 cases in China, which have triggered new lockdowns, are some of the factors that could keep weighing on the local currency.

Czech Republic: The EUR-CZK's bullish momentum came to a halt on Friday, with the pair closing at 24.426. Nonetheless, the pair advanced 0.3% in the first week of April. These gains might be reversed at the start of the new week with the publication of inflation data for March, which could strengthen the CZK somewhat. In pre-market trade, the EUR-CZK is trading on the back foot, below the 24.450 mark in the build-up to the release. Any hawkish remarks by the CNB would spur on the CZK bulls.

Fixed Income: Russian economy ministry says it won't default on its debt obligations       

South Africa: A surging recovery late on Friday meant the ZAR ended last week slightly in the green, with this reflecting its continued resilience against a broadly-firmer USD. The local unit was one of only a handful of EM currencies able to hold out against the greenback, which has appreciated to its strongest levels in two years (on a trade-weighted basis) on the back of market positioning for a more aggressive Fed monetary tightening trajectory. Investors across the globe are preparing for a rapid reduction in global liquidity, and with the prospect of less money going around they are becoming more judicious over where they invest their capital, in turn leading to a reduction in overall levels of risk appetite. Today, the USD has regained its footing after Friday afternoon's temporary slide, and has been gaining against most EM currencies through the Asian session. Accordingly, the USD-ZAR has stabilised just north of 14.6500, sticking to its broader consolidatory trend of late.

Turkey: Turkey's USD-denominated debt came under some strong selling pressure last week, with the yield curve bear-steepening sharply on account of a more pronounced selloff at the long-end relative to the short-end. This stands to reason, as the market has been reacting to rising UST yields and the prospect of tightening global financing conditions after the US Federal Reserve signalled an accelerated monetary tightening trajectory is on the cards. Turkish bonds will likely remain under pressure in the near term, and for as long as US Treasury yields continue to rise.

Russia: Russian Deputy Economy Minister Ilya Torosov maintained that Russia wouldn't default on its debt obligations. However, the market continues to price in a near-100% risk of default, after the US Treasury halted USD payments from Russia's accounts in US banks. Russia responded to this action by breaching the terms on two bonds by paying investors in RUB instead of USD, starting the countdown to default. The situation remains highly uncertain, though, with Russia now threatening to take legal action if the West tries to force an artificial default on its sovereign debt. CDS markets will thus likely remain busy in the days ahead, as the market navigates all this uncertainty.

Hungary: Hungarian bond yields are likely to spike further, driven largely by the interest rate hike risks as inflation shows no signs of subsiding and a deterioration in the country's fiscus. Data released on Friday showed that headline inflation continued to climb higher after accelerating for the third consecutive month as the effects of the record pre-election spending, weaker currency, and soaring energy prices following Russia's invasion of Ukraine fed through to prices across the economy. Specifically, headline inflation quickened from 8.3% y/y in February to 8.5% y/y in March, reaching its fastest pace of growth since June 2007. Although CPI increased, it fell short of the 8.8% growth anticipated by economists surveyed by Bloomberg. With inflation stuck above the NBH's 2%-4% official target range, the market will see the cycle of monetary policy tightening pursued for a prolonged period, keeping the flattening bias in the yield curve entrenched.

Poland: Polish bonds continued to sell off last week amid the persistent rise in global yields and expectations for more rate hikes by the National Bank of Poland, aiming to combat inflation. An additional headwind to the local debt market stems from the rising prospects of the US Fed aggressively hiking interest rates and also a more pronounced withdrawal of global liquidity. Against this backdrop, the Polish yield curve shifted higher, with a more pronounced jump evident at the belly of the curve. The 5yr POLGB yield climbed more than 83bps last week, while the 2yr and 10yr yields rose more than 73bps and 69bps, respectively.  

Czech Republic: Czech bond yields rose throughout last week, driven by yields on the front-end and belly of the curve, which increased by 50bps and 30bps, respectively. The move higher was driven by heightened worries about inflation risks and tightening financial conditions. On the other hand, long-term bond yields climbed no more than 20bps. Overall, the yield curve shifted broadly higher, while the 10v2 bond yield spread fell further into negative territory, with a reading of -108bps. Oil markets have kicked off the new week on the defensive, with rising concerns over China's COVID outbreak weighing on the demand outlook, which should alleviate some inflation concerns.