Morning Note /

EMEA Daily: US CPI numbers to confirm Fed's policy trajectory today

  • Ukraine braces for another Russian military offensive

  • RUB loses ground as Russia relaxes capital controls

  • SARB monetary policy review to map response to Fed tightening trajectory

Danny Greeff
Danny Greeff

Financial Market Analyst

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

US CPI numbers to confirm Fed's policy trajectory today

Talking Points: Ukraine braces for another Russian military offensive   

Global: The resilience of risk assets may again be tested today as UST yields look set to rise further on the back of another red-hot US CPI print. US inflation is expected to have accelerated further in March as the war in Ukraine compounded external price pressures. Consensus expectations as per Bloomberg surveys suggest that headline inflation rose to 8.4% y/y, which, if confirmed, would mark a new four-decade high. Such a high print would keep the US Federal Reserve firmly committed to an aggressive monetary tightening trajectory this year and justify the amount of rate-hike risk currently priced into the USD. There may even be more topside potential in this ongoing USD uptrend, with two 50bp rate hikes at the Fed's May and June not yet fully priced into the market.

South Africa: Data released yesterday showed manufacturing production rose 0.2% in February 2022 compared with the corresponding period in 2021. This rise was significantly lower than the 2% rise in January and the 2.8% estimate of economists polled by Bloomberg. Meanwhile, month-on-month output growth decelerated sharply from an upwardly revised 2% in January (prior: 1.9%) to -1.1% in February. The largest positive contributors to the annual print came from food and beverages, basic iron and steel, non-ferrous metal products, metal products, and machinery sectors. While the largest negative contributions were made by the motor vehicles, parts, and accessories, and other transport equipment division and then petroleum, chemical products, rubber, and plastic products division. Although the sector still improved compared to the previous year, headwinds such as load shedding, higher input, fuel and electricity costs, and supply-side bottlenecks could see the recovery continue to stall in the coming months. PMI numbers still look promising, but these factors coupled with slowing global growth will need to be watched and could see sentiment in the sector take a hit going forward.

Turkey: Turkey's factory output growth decelerated in the first month of 2022 to 7.6%, snapping the trend seen two months prior. Forecasts compiled by Bloomberg show that output growth slowed further in February, and this can be attributed to the rising inflation in the country and a weaker local currency that is driving higher the cost of imported raw materials. Additional headwinds to the industrial sector stem from rising global commodity prices, elevated freight charges and the persistent supply-side constraints compounded by the fallout between Russia and Ukraine. The continued deceleration in factory output growth could detract from the economic growth outlook in the near term.

Russia: Notwithstanding background negotiations and mediation efforts, Ukraine is still bracing for another onslaught from Russian forces in the South East. Sanctions have not deterred Moscow, and the EU is now actively looking to lend strong arms support. Giving arms to Ukraine will again frustrate Russia and is starting to tread into a grey area where some countries lending support to Ukraine are indeed NATO members. As long as the Ukraine war persists, Russia's economy will remain under pressure. Moscow may, however, be preparing for a major offensive in the weeks, so as to have something to celebrate during the May 9 Victory Day celebrations.

Hungary: Foreign Minister Peter Szijjarto was on the wires saying that Hungary will continue to pay for imports of Russian natural gas in euros, quelling speculation that Budapest may pay in rubles in a potential violation of the bloc's sanctions. The statement from the Foreign Minister comes after PM Viktor Orban told reporters last week that he has no problem paying rubles for Russian gas, fuelling speculation that Hungary may break EU unity over economic sanctions levied against Moscow for its aggression on Kyiv. 

Poland: The World Bank Economic update report published yesterday revealed that Poland's GDP growth is projected at 3.9% this year, down from 4.7% previously estimated in January. The lower revision in growth estimates comes on the back of the impact of the Russian invasion of Ukraine, which is hitting the economies in Europe and Central Asia. The Washington based lender noted that the spillover effects of the war are likely to be significant. Furthermore, the WB notes that the influx of refugees fleeing the war in Ukraine will likely result in substantial increases in demand for public services and housing, with pressures on public finances.

Czech Republic: Headline inflation in the Czech Republic continued its trend higher for nine consecutive months, outperforming market expectations to hit a twenty-four-year high. Specifically, consumer prices rose to 12.7% y/y last month, accelerating from 11.10% y/y in February. The latest figure came in well above the Czech National Bank's (CNB's) forecast, which is outdated, given the developments in Ukraine. The exceptionally high increase in fuel prices in March was due to a marked rise in oil prices due to the Ukraine war and a temporary weakening of the crown for the same reason. The rise in consumer prices was also reflected in soaring food prices.

Forex: RUB loses ground as Russia relaxes capital controls   

South Africa: The ZAR started the new week on a positive note, continuing where it left off on Friday by advancing around 0.35% against a soaring USD yesterday. While most emerging-market currencies have struggled to hold out against the greenback's Fed-driven bull run, the ZAR has traded with remarkable resilience as it has benefitted from elevated commodity prices due to supply shocks from the Russia-Ukraine war. While surging US Treasury yields have weighed on equities and supported the USD ahead of today's US CPI release, the ZAR has continued to outperform most of its emerging-market peers overnight. The local unit has broken back below the R14.6000/$ mark with ease, and currently looks set to test R14.5000/$ before today's closing bell rings. Much depends on the US inflation data, however, which could temporarily halt the ZAR bulls' charge.

Turkey: The USD-TRY snapped out of the consolidatory trend to the downside yesterday, driven by the intervention of state banks in the FX market. The retreat in the pair was also supported by the current account, which improved more than expected. As a result, the USD-TRY pulled back by more than 0.50% and ended at 14.6875, its lowest level in nine sessions. However, the retreat has not continued in the early morning session, with the USD-TRY trading relatively flat at the time of writing. Rising UST yields, a stronger greenback and idiosyncratic underlying negative macroeconomic factors continue to limit movement to the downside for the pair.

Russia: The RUB lost some ground at the start of the week after the CBR said it would scrap a 12% commission for buying foreign currency through brokerages and lift a temporary ban on selling foreign exchange cash to individuals ahead of the weekend. These measures signalled that Russian authorities don't desire further RUB appreciation, with the currency still finding strong support from export revenues as oil prices remain elevated. The currency will likely remain stable around pre-war levels in the near term, with Moscow still doing what is necessary to prevent another inflation-inducing selloff.

Hungary: Consolidation was the order of the day for the EUR-HUF yesterday as the market searches for new catalysts to provide directional momentum. It was a pull and push situation before the cross ended the day in a very tight range for the third consecutive session, suggesting that the topside momentum seen previously is running out of steam. Despite the steady performance, the EUR-HUF bias is skewed to the upside amid the lingering geopolitical risk, the EU's disciplinary action against Hungary which could deprive Budapest billions of euros and more hawkish signals from the US Fed.

Poland: The EUR-PLN bulls regained control yesterday, buoyed by souring risk sentiment amid worries about the rising spread of the COVID-19 in China, and the increase in UST yields due to increased prospects of the US Fed tightening monetary policy aggressively. The cross advanced by more than 0.45% to reach 4.6542, the highest level in more than a week. Ahead of the euro open, the EUR-PLN is trading with a bullish tilt. Piercing above the 50-SMA at 4.655 could potentially open the door for the cross to kick another leg higher.

Czech Republic: The CZK bulls were little impressed by rate hike expectations yesterday following the above-expected rise in inflation. The local currency temporarily rallied to 24.400/EUR, but towards the end of the session, it gave up most of its gains due to the risk-averse trading environment, closing at 24.434/EUR. The CZK, which initially performed well when interest rates rose, may begin to suffer as the economy faces stagflation risks. So far this year, the CZK has gained 1.8% against the EUR and is the best performing currency in the CEE region. Heading into the European Open, the currency is offered and is likely to find sustained resistance at 24.400/EUR. The underlying bias is still bearish.

Fixed Income: SARB monetary policy review to map response to Fed tightening trajectory   

South Africa: There will be two key events in the session today: The weekly bond auction and a SARB publication called the Monetary Policy Review. Total demand levels have been improving at the auctions, and it will be interesting to see whether demand holds up despite rising rate hike guidance at the Federal Reserve in the US. The auction slate is relatively long in terms of duration, with the R2035, R2044 and R2048 on offer. Given the recent steepening in the curve, the long end may offer some relative value, but seems to be out of favour for now as SA's long term prospects remain bearish. The SARB presentation of its monetary policy review will hold some clues to the bank's thinking as a key representation of monetary policy trends and reasons for the bank's perspective.

Turkey: Turkish USD-denominated bonds generally remained under pressure at the start of the week, although some mild demand at the short-end of the curve meant the yield curve steepened yesterday. This 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 to the topside going forward, as global financing conditions look set to continue tightening in the weeks and months ahead.

Russia: According to Bloomberg, a panel of dealers and investors in the CDS market was asked to rule whether Russia triggered a potential "failure to pay" event, in what would be the first step toward a potential derivatives payout. This follows Russia's move last week to pay interest on its foreign-currency bonds in RUB after after foreign banks declined to process USD payments. Russia has blamed the sanctions for impeding its ability to make sovereign payments, and said it would follow legal proceedings if it were forced into an artificial default.

Hungary: Credit default swaps remain elevated in Hungary, suggesting that investors are protecting themselves in case of debt defaulting. The 5yr CDS spread rose last week to sit north of 100bps, significantly higher than pre-invasion levels. The conditionality mechanism triggered by the EU, which deprives Hungary of accessing EU backstops, rising fiscal risks and the planned rapid withdrawal of global liquidity are some of the key factors driving premiums needed to hedge against credit risks.  

Poland: Poland's Eurobonds yield edged higher amid plans by the government to return to the international bond market. In an emailed response to questions from Bloomberg, the Finance Ministry said that it would be 'advisable for Poland to return to the offshore debt market with a euro-denominated bond given the country's last such transaction took place in 2020. According to local reports, the ministry is currently holding a virtual roadshow with investors from Germany and Austria. Now, tapping into the international debt market is ideal rather than later, given the prospects of borrowing rates going up further in the coming months. It is worth noting that borrowing locally is now expensive amid the NBP hiking interest rate continuously to try and stem inflation that is running hot. However, given the high levels of uncertainty in the region due to the Russia-Ukraine war, investors are likely to demand a higher premium to hedge against this risk.   

Czech Republic: CZK bond yields rose yesterday, with the benchmark 10yr bond yield climbing towards 4.20%, a level not seen in a decade, as the market moved to price in more aggressive policy tightening by the central bank following yesterday's hot CPI reading. The CNB is expected to raise interest rates by a further 50bps at its May meeting as an extremely tight labour market, combined with the highest inflation rate since 1998, has the central bank turning hawkish. Investors are positioned for about 100bps of further interest-rate increases in the next six to nine months.