In the domestic interest rate market, we observe rapid changes in the yield curves of Treasury bonds and IRS contracts. With the long-unseen high volatility of quotations, the medium-term upward trend continues. It is worth mentioning that the yields on 10-year Polish bonds have already approached 3.40%, while a week earlier they were below 3.0%. Interest rate hikes in Hungary, as well as MPC members’ comments announcing further interest rate hikes, could have had a negative impact on the market in recent days. So far, the information on the restrictions introduced in Europe due to COVID-19 did not have a major impact on the market, except for Friday’s session (then Austria announced a full lockdown).
The upward pressure on bond yield curves can be expected to continue in the coming week
There is also an asymmetric risk on the side of higher levels. On Monday we will see industrial output sold (consensus: 6.5% YoY), PPI (consensus: 10.8% YoY), and on Tuesday retail sales (consensus: 6.5% YoY in real terms). The data should confirm strong consumer demand, despite mounting inflationary pressure. Together with other October data, they will be another argument for stronger interest rate hikes. The majority of the MPC signals a high probability of monetary tightening in December. Such signals, together with the reading of November’s inflation, may induce the MPC to a stronger reaction than 50 bp. In recent days, there has been another factor that potentially increases the scale of a potential further adjustment in monetary policy – the depreciation of the zloty, which in the case of the EUR / PLN exchange rate approached 4.70.
Additionally, the switching auction, which will be organized by the Ministry of Finance on Thursday, may have a negative impact on the market
The bonds OK0724, PS1026, WZ1126, WZ1131 and DS0432 will be offered for sale in exchange for the repurchased PS0422, OK0722, WS0922 and WZ1122. The emergence of new supply on the market may have a slight negative impact on the quotes and support increases in the yield curves. It is worth mentioning that the demand for Polish securities has decreased in recent months, mainly due to the gigantic scale of this year’s sell-off (for example, throughout 2021, the yields of 2-year securities increased by nearly 300 bps, and 10-year ones by 200 bps). . In addition, some investors failed to sell bonds during the repurchase auction organized by the NBP. This short-term weakness of the primary market may weigh on the valuation of Polish bonds in the coming weeks.
Polish bonds will not be helped by trends in the core markets
The published minutes of the recent Fed and ECB meetings will probably reveal a broad global discussion on the need to raise interest rates in the face of mounting inflationary pressure. Apart from the global inflation increase, such a scenario is also supported by signals about the improving situation in the US labor market. In this context, it is worth mentioning that the market not only began to price-in interest rate hikes in the US in the second half of 2022, but there were such speculations in the case of the ECB or even the SNB. Additionally, in the CEE-3 region we are observing an increase in expectations for further rate hikes, reaching around 4% in the Czech Republic and Hungary. In the coming months, the above-mentioned trends should intensify along with the release of next macroeconomic data on inflation in November, which will probably show its further increase.
The end of the week saw a strong outflow of capital from risky assets, creating an environment where emerging market currencies were depreciating. The EUR / PLN pair reached a daily peak slightly below 4.69, which is the highest level in over 12 years. In the case of USD / PLN, the rate increased by nearly PLN 0.05 and broke the level of 4.16.
The zloty in its Friday’s discount was not alone
Traditionally, the Turkish lira was losing the most (over 2% per day), but the currencies from Central and Eastern Europe were right behind it: the Hungarian forint, the Czech koruna and the zloty (all losses were over 1%). Deterioration of market sentiment was visible in declines of stock exchange indices in Europe. Investment moods have been weakening recently as the outlook for the scale of economic growth in the next year is limited. In recent days, negative news has been flowing from Europe due to the strong increase in coronavirus infections, which was reflected in the announcement of a lockdown in Austria.
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Currencies that are traditionally considered to be the safest, i.e. the American dollar, Swiss franc or Japanese yen, performed the best when turning away from risky assets.
The EUR / USD exchange rate fell below 1.13 again (daily low at 1.1250) which is related to the relative market expectations regarding the Fed and ECB actions. On Friday, the ECB president C. Lagarde reiterated that in the euro zone there should be no interest rate hikes, as it could negatively affect the economic recovery. Therefore, the minutes of the meeting of the US and euro zone authorities, published this week, will only emphasize this junction. In November, the Fed announced a reduction in asset purchases, and the market is convinced that there will be an interest rate hike in the middle of next year (and their scale will reach 75 bp by the end of the year).
For the zloty, apart from the return of market aversion to risk, it is also important that the central bank does not assure the interest rate hike cycle (such signals were made in the Czech Republic or Hungary). Another important factor for the PLN will be the next MPC decisions, where the market expects another interest rate hike in December by 75 bp. The NBP governor A. Glapiński commented on PAP’s questions that “in the conditions of the current elevated inflation, further depreciation of the zloty would not be consistent with the NBP interest rate policy” reduces the risk of the central bank using currency interventions (similar to those that took place in December 2020). ).
On Monday, data from the domestic economy on industrial production and inflation of producer prices will be observed
The data should confirm the trends observed recently, i.e. still solid economic activity (still moderate impact of the pandemic on economic activity) and heightened inflation trends. The impact of these publications on market quotations should be moderate.