The 3Q GDP was the most important Czech release of the week. The growth came out a touch below forecast. The economy stagnated compared with the previous quarter; year-on-year growth slowed to 1.5 pct. The preliminary release did not provide any details but it is likely that domestic demand is the drag, while exports still contributed positively to the growth. The data are in line with our current view on the Czech economy that is, however, not very optimistic.
Czech central bank´s last economic projection opened the door for monetary easing. But as news from the Eurozone is worsening and the koruna is weakening, a rate cut is less likely. Also the central bankers have recently indicated that they start to prefer the bank´s alternative scenario, counting with stable rates.
Macro figures from the local economy, including also the current account and PPI, had minimal impact on the koruna. Nevertheless, the currency has pared its recent losses, helped by the region. Hungary announced it will resume the talks with the IMF and will negotiate about a new type of cooperation. Instead of immediate credit link the Hungarians would like to have a deal ensuring an external help in case market conditions worsen significantly. The negotiations are good news and can prevent a rating downgrade that some of the rating agencies have warned of. Moreover, interest rate hike becomes more likely in Hungary, which is also positive for the currency. Poland continued to support the zloty with interventions through state-owned bank BGK. Besides that, the Polish government plans to cut budget deficit below the EU´s ceiling.
The CE currencies performed quite well despite the continuing pressure seen on the euro-dollar, equity markets and bonds. Especially bond markets are now an important driver of market sentiment. As contagion is spreading, it is not just Italian bonds, but also Spanish and French bonds. Some positive news has come from Italy – the new government has been formed and has easily won confidence. It will focus on implementing the fiscal measures passed by the previous government and will also prepare some new. However, the last auction was not a big success. Italian five-year bonds attracted a sufficient demand but the yield increased significantly. Later on, Spanish auction led to a surge in ten-year yield to 7 pct. Furthermore, spread between French and German yields has widened during the week.
The ECB keeps intervening in the bond markets and dampens the yield growth, but it fails to stop it. Last week, the amount of interventions halved compared with the week before and the ECB still opposes bigger purchases. Obviously, the central bank itself cannot ensure long-term fiscal stability, but for stabilizing the bond markets in the short run, its involvement is still seen as crucial. Any news about the ECB stance on this problem, therefore, remains very important.
Recent data from the US were rather good, except for the Philly Fed index. They are somewhat supportive for the markets, although the debt crisis and bond yields are more important. week, the Fed will release minutes from the last FOMC meeting that may influence the euro-dollar as the question about more easing is still there. Also a couple of European soft indicators are in the calendar. The data from Eurozone are currently worsening and thus we see them as a negative risk.
The CE currencies were able to go their own way this week thanks to one-off factors. However, as their effect will fade out, the major markets will show the region direction again.