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Thursday, February 29, 2024

Economy. What awaits us this week

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This week, attention will focus, among others, on the decision of the Monetary Policy Council (MPC), the conference of the President of the National Bank of Poland in the context of a stronger than expected drop in inflation in December, and the Sejm will proceed with the draft budget act for 2024. Globally, the CPI inflation reading for December from the United States and a number of macroeconomic data from Europe will be important. Central bankers will speak publicly.

“Despite lower inflation, we do not expect a significant acceleration in interest rate cuts. We do not assume that the Monetary Policy Council could make any move before the next projection in March, which assumes no changes in rates at the next meeting. In the base scenario, we assume the first cut in the fourth quarter of this year “This week, in the context of the latest CPI data, the tone of the NBP president will obviously be important,” Santander BP economists wrote in their weekly report.

MPC meeting

“We expect stabilization of monetary policy parameters by March 2024. The Monetary Policy Council clearly communicates a wait-and-see attitude to assess the durability of the disinflation process, the effects of the current interest rate cuts, as well as the prospects for fiscal policy. Chances for an interest rate cut will appear in March when the Monetary Policy Council will have a new macroeconomic projection,” Bank Millennium economists predict.

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Economists surveyed before the January MPC meeting by PAP Biznes expect that the Council will return to interest rate cuts only in the second half of 2024 in moves of 25 bp. per quarter, and by the end of 2025 the NBP reference rate will drop to 4.25%.

Interest ratesPAP

The Monetary Policy Council will present its decision on Tuesday, January 9. Most likely, a conference of the President of the NBP, Adam Glapiński, will be held a day later. Although the market does not expect a change in the monetary policy parameters at the January meeting of the Council, – in the context of a stronger than expected drop in inflation in December – the tone of the conference after the MPC meeting and signals from President Glapiński regarding the development of interest rates may be crucial. later in the year.

Inflation in December

According to the preliminary estimate of the Central Statistical Office, CPI inflation in Poland decreased to 6.1 percent in December. y/y from 6.6 percent y/y in November. The market expected a reading of 6.5%. rdr.

“The scale of the surprise was large, and if we look at the whole year, inflation surprised much more often downwards (8 times) than ups (2 times). The sum of surprises in the last twelve months is as much as -2.8 percentage points. Reasons for lower inflation readings were different, and in December it was food prices, which increased by only 0.2% m/m. The impact of drought on the prices of vegetables and fruit is relatively small, but there is a visible correlation of food prices with the lagged FAO price index, which has been falling for a long time time,” Santander BP economists point out.

In their opinion, after a deep decline in the first quarter of 2024, inflation will increase again and may start to surprise upwards.

“After the December reading, our reduced forecast now assumes a decline in CPI dynamics to approximately 2.5-3% y/y in March. This is mainly the result of the extension of anti-inflation shields: reduced VAT on food and freezing of electricity prices. Their subsequent unfreezing will ultimately lead to higher CPI readings (6-7% yoy), especially since the simultaneous support for household disposable income in the first quarter may delay the decline in core inflation (our estimate for December is 6.8% yoy),” Santander wrote in the report BP.

Inflation in December 2023PAP

“We assume that the dynamics of changes in base prices may remain elevated for several more quarters, supported by, among others, economic recovery (our forecast for 2024-25 is close to 4.5-5% y/y, i.e. on average approx. 0.4%). . and 0.3% m/m)” – it was added.

The Sejm and the budget

The second and third sessions of the 10th term of office of the Sejm are scheduled for this week, during which MPs will discuss the bill Budget Act for 2024 According to the initial plan, The second reading of the bill will take place on Wednesday, and the third reading, i.e. voting, is to take place on Friday. The Senate is scheduled to finish considering the bill by January 22. It is expected that the budget will be signed by the president on January 29.

At the end of the week, investors will learn the minutes of the December MPC meeting (Thursday) and data on the balance of payments (Friday).

On the domestic currency market, the first week of the year brought a slight depreciation of the zloty, which gradually made up for losses in the second part of the week. However, analysts see potential for further strengthening of the zloty.

“We assume that in the next weeks, but also for the entire half-year, there is potential for further slight strengthening of the zloty. A drop in inflation in the US or weak production data in the euro zone will have a counterproductive effect on the EUR/USD exchange rate, but Basically, we assume relative stabilization of this currency pair in the short term and growth in the longer term, which may also favor the zloty,” Santander BP economists forecast.

In turn, on the debt market, after several days of increases in market rates in the country, the end of last week brought a slight decline.

“This could have been supported by a lower CPI reading. However, a correction has begun in the core markets, supported by, among others, a higher inflation reading from Germany and better-than-expected data from the American labor market. In our opinion, it may take some time, probably at least until Thursday’s data on inflation in the US. This may keep domestic yields at a relatively high level,” Santander BP economists estimate.

“However, the high demand at the last bond auction suggests that there is no problem with debt placement, which in turn, given the market’s attention to the decline in inflation to very low levels in Q1, may drive yields down in the next month,” they add.

Inflation in the USA

According to macroeconomic data, it will be crucial in the coming weeke CPI inflation reading from the United States, which will be published on Thursday. A day later, investors will learn data on producer prices in the US. Inflation readings from overseas will be important in the context of further developments in interest rates in the United States. The gradual decline in inflation in recent months has fueled market expectations that the Fed may start cutting interest rates as early as March.

In the last weeks of 2023, expectations for a quick easing of monetary policy in the US helped US stock indices grow, but since the beginning of 2024, investors have been more cautious and are closely monitoring any signals regarding the possible path of interest rates in the United States. All the more so because Friday’s US employment report for December weakened hopes for a quick easing.

According to the US Department of Labor, the number of new jobs in non-agricultural sectors increased by 216,000 in December, while the market expected an increase of 175,000. On the other hand, the ISM index for activity in services in the US fell to 50.6 points in December. with 52.7 points in last month.

In the context of monetary policy, speeches by representatives of the US Federal Reserve will be important this week. The head of the Atlanta Fed, Raphael Bostic (Monday), Fed board member Michael S. Barr (Tuesday) and the head of the New York Fed, John Williams (Wednesday), are scheduled to speak in the coming days.

Data from Europe

In Europe, numerous data from the real economy will be crucial – including orders in industry, industrial production and retail sales from the largest economies, as well as trade balances. The business climate indices will be published on Monday euro zone.

In addition to macro data, the financial results of the largest companies will be crucial for investors in the coming days. Major U.S. banks will kick off earnings season this week, with JPMorgan Chase, Bank of America and Citigroup planning to report fourth-quarter and full-year results on Friday. Analysts expect profits of S&P500 companies to increase by 11% in 2024, after growing by just 3%. in 2023 – according to LSEG data quoted by Reuters.

Geopolitics

Geopolitics also remains in the focus of investors’ attention. Concerns persist in the market regarding navigation in the Red Sea after Houthi rebels from Yemen said on Thursday that they had targeted another container ship. In a joint statement, U.S. and coalition government officials warned that Yemen’s Houthi rebels would face consequences if they continued to threaten commercial ships transiting the Red Sea. This is a reaction to weeks of attacks by an Iranian-backed organization on ships in the area of ​​the Bab al-Mandab Strait.

The US Department of State announced that the US Secretary of State Antony Blinken is scheduled to go on Thursday Near Eastto spend a week there for diplomatic purposes. This will be Blinken’s fourth visit to the region since Hamas attacked Israel on October 7.

Main photo source: Shutterstock



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