- Export ban contains inflation impact in Russia "We expect a smaller inflation impact of the wheat shortage than widely believed. The export ban more than offsets the 25% shortfall in the harvest. Moreover, the government is tapping into its reserves, while producers will be nudged to absorb some of the price increases. We revise our inflation forecast up by only 0.8ppts for end-year (to 7.8%) and 0.7ppts for the 2010 average (to 6.7%). However, we still think this will prevent the further rate cuts we had expected until now."
- CEE floods do not change our dovish bias "Also in Hungary and Poland, where floods have been severe, and harvests are expected to be 7-15% down relative to 2009, we maintain our dovish bias. In both cases, food price inflation is very low, and core inflation remains (or is expected to come soon) under control. Pricing power remains weak—clearly in Hungary but also in Poland where productivity is growing well in excess of wages. We expect inflation to remain within the target corridor despite the food price shock in Poland and to return to close to the target in Hungary. We recommend receiving 1y IRS in Hungary and see the risk to our 25bp hike in Poland this year to the downside."
- Another reason for Turkey linkers; Egypt’s budget hit hard "Ironically, Turkey linkers may be the best way to position for higher wheat prices in Russia, in our view. Yes, Turkey is a net exporter of wheat, but higher world prices will likely affect domestic prices. And Turkey is most prone to second round effects, with inflation expectations above target and credit and wage growth also pointing towards higher inflation. Egypt, in turn, will be hit hard fiscally due to the wheat subsidies; these, however, should contain the inflationary impact."
- The week behind & week ahead "July CPI surprised to the downside in Russia and Turkey, but food price inflation is around the corner the former, while the upcoming Ramadan effects together with solid domestic demand look set to exert upward pressure for the latter. Meanwhile, the CNB kept rates steady but struck a dovish tone. The central bank explicitly warned of possible actions (ie, intervention or rate cuts) should the rapid pace of CZK appreciation continue. Still, EUR-CZK only moved 0.3% higher. A busy data calendar in the week ahead with a slew of data on inflation and output. The base effects should subtract from inflation in Hungary, Poland and possibly Egypt, but are less supportive for the Czech R. In Romania, the VAT hike will likely see a spike in inflation last month. Meanwhile, GDP growth likely accelerated in Q2 across CEE (Czech R, Hungary, Romania), driven mainly by external demand – downside risks from here though. In Russia, we also expect GDP growth to accelerate in Q2 on the back improving domestic demand and net exports. Separately, we expect IP growth to slow in Turkey and South Africa."
- CEE floods do not change our dovish bias "Also in Hungary and Poland, where floods have been severe, and harvests are expected to be 7-15% down relative to 2009, we maintain our dovish bias. In both cases, food price inflation is very low, and core inflation remains (or is expected to come soon) under control. Pricing power remains weak—clearly in Hungary but also in Poland where productivity is growing well in excess of wages. We expect inflation to remain within the target corridor despite the food price shock in Poland and to return to close to the target in Hungary. We recommend receiving 1y IRS in Hungary and see the risk to our 25bp hike in Poland this year to the downside."
- Another reason for Turkey linkers; Egypt’s budget hit hard "Ironically, Turkey linkers may be the best way to position for higher wheat prices in Russia, in our view. Yes, Turkey is a net exporter of wheat, but higher world prices will likely affect domestic prices. And Turkey is most prone to second round effects, with inflation expectations above target and credit and wage growth also pointing towards higher inflation. Egypt, in turn, will be hit hard fiscally due to the wheat subsidies; these, however, should contain the inflationary impact."
- The week behind & week ahead "July CPI surprised to the downside in Russia and Turkey, but food price inflation is around the corner the former, while the upcoming Ramadan effects together with solid domestic demand look set to exert upward pressure for the latter. Meanwhile, the CNB kept rates steady but struck a dovish tone. The central bank explicitly warned of possible actions (ie, intervention or rate cuts) should the rapid pace of CZK appreciation continue. Still, EUR-CZK only moved 0.3% higher. A busy data calendar in the week ahead with a slew of data on inflation and output. The base effects should subtract from inflation in Hungary, Poland and possibly Egypt, but are less supportive for the Czech R. In Romania, the VAT hike will likely see a spike in inflation last month. Meanwhile, GDP growth likely accelerated in Q2 across CEE (Czech R, Hungary, Romania), driven mainly by external demand – downside risks from here though. In Russia, we also expect GDP growth to accelerate in Q2 on the back improving domestic demand and net exports. Separately, we expect IP growth to slow in Turkey and South Africa."
Merrill Lynch Emerging EMEA Macro Weekly 20100806
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