Daily analysis 30.01.2017

A debate about higher and higher inflation both in the US and in the Eurozone. Fitch downgrades the rating and the S&P an outlook for Turkey. The lira is even weaker than the Mexican peso. The zloty holds last week gains. Yields on 5-year government treasury bonds are the highest since mid-2014.

The most important macro data (Central European CET time). Estimates of macroeconomic data are based on information from Bloomberg unless stated otherwise.

• 14.00 Preliminary inflation data from Germany for January (estimates: 2.0% y/y)
• 14.30 Americans’ expenditure and income (estimates: respectively + 0.5% m/m and +0.4%)
• 14.30 PCE inflation in the US (estimate: general and basic reading at 1.7% y/y)

A race for inflation

Apart from the noise caused by the first days in office of the US president, the market increasingly looks at the change of inflation in the Eurozone and the US. The debt yield of the common currency area and the US shaping up will depend on the growth speed of prices on both sides of the Atlantic.

One of the tips that will help answer the question on the CPI in the Eurozone, will be the afternoon inflation data from Germany. The market expects that it will grow by 2.0% y/y. The data which was published before noon from several federal states showed that there is a slight risk of exceeding this value. Inflation in Hesse and Saxony was 2.3% and 2.4% y/y respectively, but in Bavaria or the Brandenburg at 1.7%.

It is well known that the price increases are mainly the result of higher costs of raw materials and food, however, Germany (sensitive to inflation) may loudly demand the withdrawal from the extremely loose monetary policy of the ECB which, for example, may result in a quite rough discussion on QE exit in the third quarter of 2017.

Indeed, this is already partly visible on German debt instruments. Yields on 10-year bonds are testing the levels of 0.5%, and even at the beginning of the year they were around 0.2%. As a result, even though the American instruments of the same maturity are still relatively high (almost 2.5%) but the difference between them decreased from 2.3 percentage points to 2.0 percentage points, which also means that the EUR/USD is relatively high.

Although we still believe that the chance of a permanent increase in inflation in the Eurozone is much lesser than in the US, mainly due to a less wages pressure and a limited potential for higher prices of services. However, until the low base from the previous year (first quarter) related to the raw materials does not disappear, general inflation readings are likely to be quite high, which may further closen the spread between bond yields and thus keep the EUR/USD relatively high.

Cutting the Turkish rating

Friday’s rating changes may be added to the latest Turkish lira problems. The creditworthiness reduction was conducted by Fitch, which means that now, three leading agencies assess Turkey at the speculative level, commonly called junk level.

The main reasons for the downgrade by Fitch from BBB- to BB+ are, according to Fitch, 'political and security changes which weakened economic performance and institutional independence.’ The agency also writes: ‘the constitutional reforms are advancing and if they are adopted in March or April, it will entrench system in which checks and balances eroded.

S&P, in turn, left the rating unchanged (BB), but lowered its outlook from stable to negative. The agency mainly draws attention to the significant depreciation of the lira since the last decision, and also the need of 41% of the external debt to roll in 2017, the value of which is estimated at 180 billion dollars.

It is also worth noting that our earlier assumption that the condition of the Mexican peso will probably be better than the Turkish lira have confirmed. This morning, the TRY/MXN pair reached its historic lows, and compared with last week quotations, was more than 5 percent lower.

The zloty is stronger

The EUR/PLN decrease below the limit of 4.35 last week was mainly due to an increase in government bond yields. However, it should be noted that changes on debt instruments, at the moment, are not due to a decline in the Poland creditworthiness, but rather the higher than expected inflation and economic growth. This, in turn, should translate into future interest rate hikes by the MPC, which is good news for the currency.

To some extent, the increase in 5-year Polish government bonds to a level of 3.2% (the highest since mid-2014) corresponds to the behavior of the German treasury instruments (yield increase). However, the confirmation that the movement for the zloty is the main source of domestic events are the PLN/HUF quotes. They test around 72 levels, which means that the zloty is the strongest than the forint since September 2016.