Financial markets today expect a drop in NB rates by 25 bb or 50 bb (Rann from the financial market at first)

At the daily meeting, according to us and the consensus of analysts, NB should cut the interest rate by 50 bp in ad years. However, the market instruments are generally divided between a drop of 25 bb and 50 bb, so we could determine the reactions to the market rates and the exchange rate of the koruna after the public decision. NB should therefore offer us its view on the neutral annual rate, which according to the banking board’s discussions so far, is only found at 3%, not at the 3% considered so far. In the United States today, however, we gave pro-inflation data in the form of above-consensual growth of unit wage costs for Q1 24, which could slightly correct the dovishness of the announcement of the Fed’s public meeting in the markets.

The growth of labor costs in the USA accelerated sharply in Q1 24

The key domestic event today is the monetary policy session of the NB. We and the thorn consensus expect the dream base year rate by 50 bps to 5.25%. Thorn contracts started to kill it in the second half of the last week, and it started with something between -25 bb and -50 bb. Whatever the outcome of the day’s session could be, there would be a strong response. In their recent releases, the central banks confirmed their preference for a collateralized monetary policy policy, which, in addition to the weakness of the crown, is also driven by the rising prices of services and foreign interest rates. Let’s expect that the central bank will continue at the same pace as before in the years of interest rate hikes at the June and August meetings. For z, November and December, let’s expect it to decrease by the standard 25 bps to 3.5% at the end. NB should also publish the results of the analysis at the fourth meeting, which should show where, according to them, the level of interest rates is balanced and politically neutral. While the central bank has been working with 3% until now, the banking council would prefer 3.5-4.0% according to their reports. We consider the lower limit of this interval to be more likely, and in the forecast we have thus increased the neutral repo rate from 3.0% to 3.5%, which was also influenced by the upward revision of the Fed and ECB terminal rates within the framework of the external assumptions for the forecasts. Vce peme in naich Economic insights (https://bit.ly/CEO_2Q24_CZ).

From the global calendar, we believe that the data on unit labor costs in the USA will be particularly interesting. Colleagues from SG believe that the slow growth of wages, in combination with the subdued dynamics of labor productivity, could contribute to their above-consensus growth of a whopping 5% quarter-on-quarter annualized (consensus 4.0%).

esk economy ov, the Fed wants to see the data deflated

In the first quarter of this year, domestic GDP grew by 0.5% quarter-on-quarter. This was in line with the forecast, but slightly above the consensus (0.4% q/q). After a growth of 0.4% q/qv over the last year, the dynamics of domestic economic activity has therefore increased slightly. According to comment S (the structure will be published at the end of May), the main contributor to the quarter-on-quarter growth was household demand, through rising household consumption and investment. Weak foreign demand, on the other hand, hampered the growth of the domestic economy. percent of the growth of the domestic economy is also related to the relatively low starting position, when GDP R in Q1 24, based on the preliminary estimate, lagged by 0.5% behind its pre-pandemic level. According to predictions, the economy should reach it this quarter. The preliminary estimate of S totals confirms the prominent predictions from our last ones Economic insight (https://bit.ly/CEO_2Q24_CZ), where we estimate the growth of the domestic economy for the whole year at 1.4%. More on the public estimate of GDP for Q1 24 in a separate comment here: https://bit.ly/44klA8a.

Economic performance in Q1 24 also increased in Germany and the Eurozone. While the Eurozone slightly surprised with its dynamics (+0.3 q/q vs. consensus +0.1% q/q), the German economy continues to be subdued. From a quarter-on-quarter perspective, although growth of 0.2% q/qo was reported, 0.1 pp above the median estimate, revisions to previous data meant that interannual dynamics (NSA) at vi -0.9% was, on the contrary, 0.1 pp below thorn oekvnm. Although the economic indicators in Germany have started to improve in recent months, we believe that the economy there will be very slow. On a year-round basis, the German economy should roughly stagnate this year.

According to forecasts, inflation in the eurozone remained at 2.4% y/y in April. The data slightly surprised core inflation, which fell from a new 2.9% y/y to 2.7% y/y, while the median market estimate expected it to be 0.1 pp lower. From the point of view of the ECB, it is a good start that the dynamics of service prices fell to 3.7%, after struggling to 4% y/y for several months. In the autumn, according to our estimate, the total inflation in the Eurozone could reach below 2% y/y with the high level of the comparative base and the continued decline in prices on the wholesale energy markets. However, core inflation will likely remain above 2.5% y/y until the end of the year, which should be mainly related to the tight labor market.

The Fed meeting wasn’t as busy as the markets rallied after external price pressures in Q1. There was no change in annual rates in accordance with the budget. The corridor in which the US central bank rate will move in the next few years is 5.25-5.50%. At the Fed’s press conference, J. Powell repeated that the key to the implementation of the first annual interest rate target is new data, which will first have to clearly indicate a sustainable return of inflation to the 2% target. At the same time, he stated that, in his opinion, it is unlikely that he would give the right annual rates if they were invited. Powell did not rule out a drop in interest rates this summer, but in our opinion, even weak inflation in the coming months would not be enough, so in the basic scenario, we expect the cycle of annual interest rate cuts to start, and in the fifth year at a rate of 25 bp per quarter. The neutral level, which we estimate at 3.00-3.25%, could thus be reached at the beginning of 2027.

The dovish announcement of the Fed meeting was evident in the development of three-year rates, the dollar weakened to Monday’s level. Dollar thorn years rates at the short end of the swing fell to 8 bp below. The dollar against the euro erased the tern and the sten and the steden sent and hovered at 1.072 USD/EUR. On the contrary, many developing markets were strengthening in this environment. The Czech koruna, against the euro, strengthened by 0.3% to 25.10 CZK/EUR.