Morning Note /

EMEA Daily: Plenty of local data for market to digest

  • Russian inflation back at pre-war levels

  • Russian debt default draws nearer, reflected in high CDS rates

  • CEE currencies firmer, ZAR retreats to key technical level

Danny Greeff
Danny Greeff

Financial Market Analyst

Edmond Muzinda
Daron Hendricks
ETM Analytics
21 April 2022
Published byETM Analytics

Plenty of local data for market to digest

Talking Points: Russian inflation back at pre-war levels

Global: Amid the meeting of G20 finance ministers, the USD has come under some pressure. The theme is for countries to work together to engineer a recovery from the pandemic, the war and the current spike in inflation. Some coordination will emerge, but finance ministers will be wary of talking too aggressively about taking steps to reduce inflation. As it is, the housing market in the US is starting to succumb to a combination of record-high house prices and rapidly rising mortgage rates. The risk of pushing too hard is that a sharp downturn follows and that would naturally curtail the authorities' ability to "normalise" monetary policy as they might.

South Africa: Headline inflation came in slightly softer than expected in March, accelerating to 5.9% y/y compared with 5.7% y/y in February, reflecting the impact of the high energy and food prices compounded by the impact of the Russia-Ukraine war. However, consumer prices rose more than expected month-on-month, rebounding from 0.6% in February to an eight-month high of 1.0%. Details from the report published by StatsSA revealed that the increase in annual consumer prices resulted from the rise in costs of food and non-alcoholic beverages, housing utilities, transport and miscellaneous goods and services. Meanwhile, the core inflation reading remained anchored below the midpoint of the SARB's target range despite accelerating slightly more than expected to 3.8% y/y. This print continues to point to relatively weak demand-side inflation pressures. Notwithstanding the recent increase, annual headline inflation remains anchored within the 3%-6% official target range, suggesting that aggressive rate hikes from the SARB are not warranted. Therefore, we expect the central bank to continue on the path of gradually hiking rates in the coming months to protect growth.

Turkey: Today investors will have portfolio flows and consumer confidence data to digest. The latter rebounded to 72.5 in March on the back of an improvement in expectations over the next 12-month regarding households' financial situation, the general economic situation and the assessment about durable goods purchases. Notwithstanding the improvement, the consumer confidence index remains within the pessimistic territory as consumers are worried about the prevailing economic environment. Sentiment amongst consumers is being hurt by the rising cost of living due to soaring inflation, eroding the buying power of households. The depressed consumer confidence will weigh on the domestic economic growth in the near term.

Russia: Weekly CPI stats released out of Russia yesterday showed inflation slowed to levels seen before the war in Ukraine, marking a notable turnaround helped by a stronger RUB and the end of panic-buying in Russia. CPI growth was just 0.2% w/w in the week of April 15, slowing for a sixth straight week and now at less than a tenth of the pace seen in early March. This remarkable turnaround has allowed the CBR to unwind some of its emergency monetary tightening, with the promise of more monetary easing still to come.  

Hungary: Following his landslide victory in the early April election, Prime Minister Viktor Orban might be considering reshuffling his cabinet. A local newspaper reported that Orban could include his economic adviser Marton Nagy in the new government next month. Nagy, the central bank's former deputy governor, would be responsible for economic strategy, energy policy, and development projects. Meanwhile, Finance Minister Mihaly Varga is expected to remain in his current post but with a smaller budget-focused portfolio.  

Poland: The local data calendar is dense today, with average gross wages, employment, sold industrial output and PPI figures all on tap. Poland's supply-side inflation pressures are likely to remain elevated in the coming months amid the lingering global supply chain problems compounded by the lockdown in China due to the rising COVID-19 cases and the spillover effects of the Russia-Ukraine war. The higher producer prices are contributing to the broader price growth, thereby corroborating the case for the NBP to keep the monetary policy tightening intact and pressure the government to implement further measures to ease the burden on households. Investors will also have an update on the Polish labour market to digest. Average gross wages rebounded in February to reach 11.7% y/y, the fastest pace of growth in more than thirteen years. The buoyant gross wages will continue to boost domestic consumption, which bodes favourably for economic growth in the near term. However, higher wages coupled with a tight labour market underscore inflation pressures in the medium to long term. Looking ahead, average gross wages are likely to remain supported in the months ahead on the back of the minimum level of slack in the labour market, recovering economic growth and the shortage of labour.

Czech Republic: The Czech Republic reported the steepest rise in producer prices in three decades last month due to rising commodity prices and supply-side complications, which the Russia-Ukraine war has exacerbated. Specifically, the y/y PPI index accelerated to a new multi-year record high in March, with a figure of 24.7%. The latest reading quickened from 21.3% in the previous month and topped market expectations for a less pronounced increase of 23.1%. Looking at the development of producer prices, the primary driver is high commodity prices, including energy, which is increasing pressure on producer prices and overall manufacturing activity. The price pressure in the industrial sector suggests that increased producer prices will culminate in consumer prices. Inflationary pressures in the Czech economy are becoming increasingly costly, and given that they are supply-side driven, monetary policy is unlikely to contain price pressures. 

Fixed Income: Russian debt default draws nearer, reflected in high CDS rates     

South Africa: The decision of the authorities to reduce the fuel levy has further assisted the SARB to achieve its mandate for a while longer. In a few months, base effects will strengthen, and the y/y growth cycle will turn lower. In the interim, it is an achievement that the domestic inflation rate has remained contained within the SARB's 3-6% inflation target range when inflation in many developed countries is substantially higher. Bond investors took the decision in their stride, although the rising yield bias across the yield curve remains intact. More specifically, it was notable that the curve steepened with the longer dates underperforming the shorter end, partly because inflation surprised the downside and perhaps removed the burning necessity of the SARB to act more aggressively. In summary, yesterday's data did not change much for the SARB, which will continue to lift rates in the coming months to ensure normalisation remains on track and that real interest rates are lifted to more sustainable levels.,

Turkey: Turkish USD-denominated bonds attracted some strong demand on Wednesday, with yields falling across the curve through the session. Moves were more pronounced at the short end of the curve, leading to a bull-steepening thereof on the day. This steepening bias was consistent with the market's broader trend, which has seen the Turkish USD yield curve steepen sharply year to date. The bias also remains towards further steepening going forward, as global financing conditions look set to continue tightening in the weeks and months ahead.

Russia: Russia was judged by the Credit Derivatives Determinations Committee to have breached the terms of two bonds, marking another milestone on the nation's path to debt default. The committee noted that Russia's RUB payments to USD-denominated debt was a "Potential Failure-to-Pay" event for credit-default swaps (CDS). The nation could still avert a default if it pays bondholders in dollars before a 30-day grace period ends on May 4, and there are a number of ways it can do this. Russia is exploring ways to reroute payments through domestic institutions as well as its own clearing agent. But it remains unclear if the efforts stand any chance of success and whether the moves would even help the country avoid default. Nevertheless, the market is positioned for a bad outcome, with CDS rates pricing in a near-100% of default at this time.

Hungary: Hungarian bonds took a breather yesterday, halting the selloff seen in the previous session. Tenors at the front and belly of the curve saw yields drop between 2bps and 5bps, respectively, while at the long end, the 10yr tenor's yield was relatively flat. Falling UST yields and broad-based dollar weakness provided some respite in the local debt market. However, this respite could be short-lived amid the interest rate risk priced in the markets due to elevated inflation pressures amid soaring energy prices and the hawkish signals from major central banks.       

Poland: In its early estimate, the Finance Ministry reported that Polish treasury debt edged up at the end of March by PLN3.3bn (or 0.3% m/m) to PLN1.148tn, marking the second consecutive monthly increase. The increase, albeit at a slower pace than the previous month, resulted from growing domestic debt. For context, domestic debt stood at PLN895.7bn in March, up from PLN884.3bn in the trailing month. Meanwhile, external debt fell from PLN260.6bn in February to PLN252.5bn. While borrowing locally will eliminate foreign exchange risk, the rising interest rates as the central bank fights runaway inflation will put pressure on the government as borrowing costs increase.

Czech Republic: The cost of insuring exposure to Czech government bonds has stabilised around the 40bps mark in the first half of April, following a sharp selloff after the invasion of Ukraine. While the Czech Republic maintains the lowest default risk in Developing Europe, the current 5yr USD CDS spread is trading at a level last seen in June 2020. There is still room for the spread to widen on concerns of aggressive US interest rate hikes and further Western sanctions on Russia, which is stoking inflationary pressure and hurting economic growth.

Forex: CEE currencies firmer, ZAR retreats to key technical level     

South Africa: The ZAR remained under pressure on Wednesday, extending losses as the market continued to price in concerns over the economic impact of the Kwa-Zulu Natal floods and ongoing load-shedding. On top of that, a softer-than-expected CPI print also didn't help, as it contained nothing to bolster the argument for a steeper SARB rate-hike cycle than what was already priced in. By the end of the local session, the ZAR was 0.65% weaker, trading at levels not seen in over a month. Since then, the USD-ZAR has had another unsuccessful attempt at 15.1000 overnight. This is a key technical resistance level for the pair, and coincidentally also lines up with its 200-session moving average and the 38.2% Fibo retrace level of its December-March downtrend. A sustained break of this level would suggest a continuation towards 15.5000 is on the cards, while failure would likely trigger a retracement of recent USD-ZAR gains and a decline beyond April lows around 14.5000.

Turkey: It was another uneventful session for the USD-TRY as it continued within its consolidatory channel despite the broader weakness in the dollar. The movement to the downside continues to be capped by the underlying weak macroeconomic dynamics, lingering geopolitical tension, hawkish signals from major central banks, rising prospects of a faster withdrawal of global liquidity and political uncertainty in Turkey.

Russia: The RUB firmed past 77.00/$ in volatile trade yesterday, at one point even testing the 71.00/$ mark. Investors are still watching developments in Ukraine closely, although energy exports and capital controls are keeping the RUB strong at present. These factors are offsetting debt-default fears and concerns over the impact of sanctions, and look set to keep the RUB firm for a while longer. In the near term, further RUB strength is even on the cards, with month-end tax payments set to bolster the currency as export-focussed firms sell foreign currency to pay their dues.

Hungary: The bearish bias in the EUR-HUF remained entrenched on Wednesday, retreating for the eighth consecutive session. The cross slipped 0.34% and ended the day just north of the 370 mark, its lowest level in more than two weeks. The downside impetus resulted from the speculation of further rate hikes amid the high inflation. Punching below the 50-SMA could suggest that the bias may favour the bears over the near term. However, lingering concerns over the Ukraine war and the EC's announcement of disciplinary action against Hungary, which will deny Budapest access to EU backstops, could cap the losses in the EUR-HUF.   

Poland: The EUR-PLN bears regained control yesterday, retreating by about 0.22% to return firmly within the 50-and 100-SMA wedge. Downside impetus came on the back of a weaker dollar due to the stronger EUR after the hawkish comments from the ECB. However, further losses in the cross are likely to be capped by progressively more aggressive tightening signals from the US Fed and developments in the Ukraine war, which is showing no signs of subsiding. Investors will also be paying attention to the local data calendar for direction guidance. 

Czech Republic: The EUR-CZK retreated yesterday following the CNB governor's remarks over further policy tightening while leaving the door open for the use of the exchange rate at the upcoming meeting. The pair fell below the 24.400 support and closed at 24.380, paving the path for the pair to fall further. The next support level will be 24.300, a breach of which could send the EUR-CZK down to its 2022 low of 24.100. For the pair to drop 1.2% in the coming sessions, a catalyst and improved market appetite would be necessary.