POLAND: Citi Expect Less NBP Rate Cuts Due To Expansionary Fiscal Plan
Poland's FI space is getting some reprieve today (POLGB yields 4.2-5.7bp lower across the curve) after the publication of the 2024 budget draft with record borrowing needs applied some pressure starting on Friday. While fiscal matters are grabbing more attention during the pre-election period, market participants remain on the lookout for fresh clues on the NBP rate outlook, with the new spending plan providing a significant input to these considerations.
- In their weekly research note, Citi Handlowy write that the budget deficit target for next year (4.5% of GDP) exceeds the government's earlier forecast (3.4%) and market consensus (3.8%) but falls short of Citi's projection (4.8%). Still, they highlight some worrying details in the structure of the 2024 budget draft.
- Citi point out that the scope for a positive surprise in the 2024 budget deficit (which Poland has a solid track record of) is limited. They note that the Finance Ministry has corrected its forecasting model to account for so-called "natural" and recurring savings, i.e. slower than expected realisation of certain expenditures.
- At the same time, Citi believe that the government has pencilled in ambitious revenue targets. In their view, slowing inflation and the recent disappointing macroeconomic data may limit tax revenue. They write that achieving the VAT revenue target is possible only if the temporary VAT exemption on food items is cancelled.
- The hike in the VAT rate applied to food items will, in Citi's view, raise the inflation path in the NBP projection by around 1pp. Coupled with the expected increase in fiscal deficit, it will delay the return to the inflation target in the coming years. They expect the NBP to cut interest rates by end-2023 but warn that the scale of 2024 cuts may be smaller than the current market expectations.
- These comments come at a time when most desks are getting increasingly comfortable with the thought that the NBP will start cutting rates in September, while the FRA curve is pricing a fairly aggressive easing cycle going forward. Poland's 3x6 FRAs have printed fresh cyclical lows today, trading at the widest discount to 3-Month WIBOR (78bp) since 2012.
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USDCAD TECHS: Resistance At The 50-Day EMA Remains Intact
- RES 4: 1.3427 High Jun 7
- RES 3: 1.3387 High Jul 7 and a key resistance
- RES 2: 1.3288 50-day EMA
- RES 1: 1.3249 High Jul 28
- PRICE: 1.3225 @ 16:42 BST Jul 28
- SUP 1: 1.3093 Low Jul 14 and the bear trigger
- SUP 2: 1.3084 1.618 proj of the Apr 28 - May 8 - May 26 price swing
- SUP 3: 1.3032 1.764 proj of the Apr 28 - May 8 - May 26 price swing
- SUP 4: 1.2992 50.0% retracement of the 2021 - 2022 bull leg
USDCAD remains in consolidation mode and is trading above key support at 1.3093, the Jul 14 low. Moving average studies continue to highlight a dominant downtrend. A break of 1.3093 would confirm a resumption of the medium-term bear cycle. This would open 1.3084 and 1.3032, Fibonacci projection points. On the upside, clearance of the 50-day EMA, at 1.3288, is required to highlight a possible short-term reversal.
AUDUSD TECHS: Bearish Price Action
- RES 4: 0.6847 High Jul 20
- RES 3: 0.6821 High Jul 27
- RES 2: 0.6746 20-day EMA
- RES 1: 0.6714 Intraday high
- PRICE: 0.6664 @ 16:41 BST Jul 28
- SUP 1: 0.6619 Low Jul 7
- SUP 2: 0.6596 Low Jun 29 and key support
- SUP 3: 0.6562 76.4% retracement of the May 31 - Jun 16 rally
- SUP 4: 0.6485 Low Jun 1
AUDUSD traded sharply lower Friday, extending the reversal from Thursday’s 0.6821 high. The move down reinforces a bearish theme and note that the pair is trading below both the 20- and 50-day EMAs. This signals scope for weakness towards the next key support at 0.6596, the Jun 29 low. On the upside, key short-term resistance has been defined at 0.6821, where a break is required to reinstate a bullish theme.
US TSYS: Late Roundup: Tsys Hold Midrange, Focus on July Employ Next Friday
- Treasury futures remain in positive territory, off early session highs following a knee-jerk bid on lower than est Employment Cost Index gains 1.0% vs. 1.1% est, Core PCE 4.1% vs. 4.1% est.
- Rates quickly reversed the gap move as markets deemed it an overreaction to near in-line data. Services saw a mild acceleration from 0.25% to 0.275% M/M but importantly the Fed’s preferred indicator of core non-housing services eased a tenth to 0.22% M/M. Softer ECI data an afterthought while benign price pressure evinced from UofM survey helped buoy rates back to middle of the range.
- Tsy curves off early highs, currently mixed w/ 3M10Y -2.594 at -146.816, 2s10s +.600 at -92.849 (vs. -86.190 high) as short end rates lagged the rally in intermediates. As such, rate hike projections through year end remained subdued (18-36% chance of 25bp hike before year end). Markets much more eager to price in rate CUTS in 2024 (first 25bp cut in May '24, second in July'24.
- Focus turns to next week's ISMs on Tue (Mfg 46.98 est, prices paid 44.0 est), ADP on Wednesday (+188k est vs. 497k prior), and July employment data next Friday, current estimate of +200k job gains vs. +209k in June.
- Equity earnings resume Monday, premarket: Immunogen; after the close: Diamondback Energy, Tenet Health, Monolithic Power, Welltower, Rambus, and Western Digital.
