At the same time, for the first time in 34 years, the leaders of both countries will probably talk today (Al Jazeera here). Reuters also reported (here) that Iran could allow free passage of ships through the Omani part of the Strait of Hormuz.
Sources familiar with Tehran's position informed that this is one of the elements of a conflict resolution presented to the American side. At the same time, a delegation of Pakistani mediators arrived in Iran to coordinate another round of negotiations and narrow the difference in positions between the conflict parties (Al Jazeera here).
Although there is still no official confirmation of the place and time of the second meeting between Iranian and U.S. representatives, many indications point to it taking place relatively quickly.
The White House press secretary said that direct talks will probably take place in Islamabad, and CNBC sources confirm earlier speculation about resuming talks at the beginning of next week (here).
We assess that the prospect of a truce in Lebanon and the potential clearing of the Omani part of the Strait of Hormuz meet market expectations for de-escalation of the Middle East conflict. Today's macro calendar is not particularly heavy, however.
At about 13:30 we will learn the protocol from the March EBC meeting. It will show the reaction function of the Board of Governors to the commodity shock, but given the rapidly changing geopolitical events, the discussion record should not have a major impact on FX & FI.
Half an hour later, the NBP will provide the core inflation dynamics for the last month (our and market forecast 2.6% YoY). A quarter before the opening of regular trading on Wall Street, the Fed will publish industrial production data for March (0.1% MoM).
Final CPI from Poland without surprises
The annual inflation rate for March came in at 3.0% – in line with preliminary estimates. In the breakdown by categories, the deflationary trend was confirmed for food (fall from 2.4% YoY to 2.1% YoY).
This was aided by, among other things, deeper falls in butter prices – from -17.2% YoY to -21.9% YoY. A relatively strong drop in inflation was visible in accommodation (from 5.1% YoY to 4.6% YoY) and in the healthcare category (from 5.0% YoY to 4.7% YoY).
Insurance and financial services entered marginal deflation (-0.1% YoY vs 0.8% YoY), and deeper price reductions were observed in clothing (-3.2% YoY) and household furnishings (-1.6% YoY), mainly due to lower furniture acquisition costs.
On the other hand, fuel prices were the opposite. In February gasoline was 7.5% cheaper year-on-year, and in March it was 5.7% more expensive (+12.9% MoM).
For diesel, the change was +21.4% MoM. In addition, inflation accelerated strongly in recreation components (from 4.3% YoY to 5.1% YoY) and in housing usage (from 3.8% YoY to 4.3% YoY).
Overall, we assess that aside from the commodity impulse, March brought a maintenance of subdued price pressure. This should also be confirmed by the core CPI component dynamics (our forecast 2.6% YoY), which the NBP will publish today.
No Appetite for Strengthening Core FI
Although the de-escalation scenario of the Gulf conflict was reinforced yesterday, we did not observe a decline in UST yields. This is likely related to a strong session on Wall Street – new historic records on the S&P 500 and a clear 7,000-point rally.
Investor optimism in the equity market increases the chance of improved consumer sentiment (positive wealth effect). Additionally, a capital injection into companies allows a return to investment processes planned before the Middle East conflict.
Both elements suggest that the U.S. economy may not suffer despite the Gulf war, which reduces the dovish case for the FOMC to cut rates even if fuel prices fall. As a result, UST yield changes were 0, +3 and +2 basis points to 3.76% (2Y), 4.29% (10Y) and 4.89% (30Y).
Similarly, the situation on the Bund was the same. The German curve moved up by 1, 2 and 2 basis points to 2.54% (2Y), 3.05% (10Y) and 3.60% (30Y). The Asian part of the session did not bring major changes to UST.
We assume that in contrast to yesterday's signals, the stronger ones will be those related to the potential fading of the inflationary impulse. As a result, de-escalation of the conflict in the coming days is a chance for U.S. securities yields to fall even assuming that the economy overseas improves as well.
Gentle Weakening of Debt in the Region
Base market signals did not favor strengthening of CEE FI. Czech 10Y yields rose slightly (+3 bp to 4.73%), and Hungarian ones, after a spectacular rally, stabilized around 6.20%. The domestic market did not deviate from the region.
The ASW margin remained at 97 bp, and the PLNIRS curve moved up by 1-3 bp. In the background, the Ministry of Finance sold OK0128, WS0428, NZ0331, PS0731, DS1035 and NZ0936 bonds for 10.7 billion zlotys, with a demand of 12.1 billion zlotys. This gives a bid-to-cover of 1.13 (prev. 1.17, average over the last 10 auctions 1.47). Given external conditions and uncertainty created by the Gulf conflict, we assess the auction neutrally.
We also did not see a secondary market reaction to its results or changes in spreads, including to Czech securities. Ultimately, on the main nodes, the domestic curve moved up by 5, 4 and 1 bp to 4.31% (2Y), 4.89% (5Y) and 5.52% (10Y). We assess that external conditions (de-escalation of the Gulf conflict) should favor strengthening of domestic debt. However, this may only happen after another round of U.S.-Iran talks, implying that the appreciation impulse will shift only to the next week.
Stalemate in Currencies. China Data in the Background
We had a calm session on base FX. EURUSD stayed near 1.1800. Volatility on other euro-linked pairs was symbolic (EURJPY, EURGBP, EURCHF). During today's Asian trading, we learned a series of Chinese data.
GDP growth was 5.0% YoY (cons. 4.8% YoY). March industrial production was also slightly higher (5.7% YoY vs cons. 5.5% YoY). Investment was weaker than expected (1.7% YTD YoY vs 1.9% YTD YoY).
Retail sales also disappointed. Its growth was only 1.7% YoY (cons. 2.3% YoY prev. 2.8% YoY). This reading is mitigated by a decline in clothing and footwear (-1.2% YoY vs +1.8% YoY prev.) and a sustained downturn in cars (-5.8% YoY prev. -7.3% YoY).
Household appliance sales performed relatively well (4.2% YoY), which may suggest that current household concerns about higher fuel prices do not translate into postponing expensive purchases. In the aggregate, we assess the data as neutral – maintaining weak consumer sentiment and relatively strong producer sentiment.
Marginal Strengthening of the Zloty
The increase in risk appetite after the start of overseas trading slightly supported the domestic currency and moved EURPLN closer to 4.2350 (-0.1%). The EURHUF and EURCZK quotes ended in a stalemate. The morning does not bring major moves in domestic FX.
We expect another day of limited volatility in the zloty. We also maintain our position that without breakthrough information from the Middle East, the potential for strengthening the domestic currency remains limited.
