first quarter

Market picture The announcement of the debt ceiling deal triggered a natural spike in interest in Bitcoin on the expectation of increased retail interest in risk assets as institutional investors in Europe and America head off for a long weekend. Bitcoin traded as high as $28.4K at the start of Monday's Asian session but fell back to $27.8K by the beginning of European trading. Meanwhile, the top cryptocurrency has been rising daily since the 25th, pushing back from support at $25.8K, near the 200-week moving average. This move looks like an exit for speculators. However, the market's attention may shift to more market-heavy issues, such as slowing economic growth and high-interest rates. The bulls are now trying to get Bitcoin back above its 50-day moving average, which would signal a return to a medium-term uptrend.   The ability to close above $28.15 at the end of the day could attract more buyers to Bitcoin, while staying lower would be a reason to sell on the upside.   News background Commodity Futures Trading Commission (CFTC) commissioner Christy Goldsmith Romero said she is ready to regulate the crypto industry with the US Securities and Exchange Commission (SEC). Users of cryptocurrency exchange Tornado Cash have sued the US Treasury Department for imposing sanctions on the service, claiming that banning open-source software violates the US Constitution.ECB board member Fabio Panetta assured that the regulator would not have access to the personal data of digital euro holders (CBDC). He noted the need to balance ensuring privacy and combating money laundering and terrorist financing. High profitability enables stablecoin issuer Tether to venture into new business areas, according to the company's CTO Paolo Ardoino. Tether made a net profit of $1.48 billion in the first quarter, double that of the previous period.

Polish first-quarter GDP shows disinflationary structure, with odds of a rate cut growing. Poland's statistics office has revised the first-quarter GDP estimate to -0.3% year-on-year. In 2023 as a whole, we expect economic growth to be around 1% on the back of the improving foreign trade balance.   Seasonally adjusted GDP rose by a hefty 3.8% quarter-on-quarter in the first quarter of 2023, following a decline of 2.3% QoQ in the fourth quarter of last year. But seasonally adjusted data have shown surprisingly high volatility in recent quarters and should be taken with a pinch of salt.   The composition of the first quarter GDP was also revealed and shows a quite disinflationary picture, with some caveats. Domestic demand contracted by 5.2% year-on-year amid a deepening decline in consumption, which fell by 2.0% YoY, following a drop of 1.1% YoY in the fourth quarter of 2022. Investment activity continues to hold up well, expanding by 5.5% YoY in the first quarter of this year (vs +5.4% YoY increase in the fourth quarter of last year).   As expected, the change in inventories had a negative impact on activity, subtracting 4.1 percentage points from the annual GDP growth rate. This was offset by an improvement in the foreign trade balance. The positive impact of net exports on the change in annual GDP amounted to 4.3 percentage points. The exports of goods and services increased by 3.2% YoY, while imports were 4.6% lower than a year earlier. The GDP deflator reached 15.6%.     With respect to value added, we saw declines in trade and repair (-4.4% YoY), industry (-1.4% YoY) and transport and storage (-1.2% YoY). Most other sectors of the economy recorded increases.   2023 GDP and inflation outlook As expected, the start of 2023 brought a decline in GDP on a year-on-year basis, but on a markedly smaller scale than we had feared. However, this does not mean that the outlook for the year as a whole is markedly better. High-frequency data point to weakness in retail sales, industry and housing construction in the second quarter. At the same time, growth in infrastructure-related construction continues.   This is accompanied by continued elevated levels of inflation, which negatively affects consumers, dragging on the performance of the economy. On the other hand, investment activity will have a positive impact on the economy. Investments will most likely concentrate in large companies and the public sector (including defence spending). We expect that the main driving force of the economy will continue to be the improving foreign trade balance, mainly due to low imports.   The structure of GDP growth should be disinflationary this year due to the weakness of consumption, rising investment and the large role of foreign trade in shaping economic activity. Combined with the eradication of the direct impact of the energy shock, this should favour a further decline in inflation, with its pace being constrained by core inflation. The latter is more sticky than the headline CPI.   One factor in the slower deceleration of core inflation will be a tight labour market and high wage growth. We forecast that by the end of 2023, both the headline CPI and core inflation may moderate to single-digit levels, but the outlook for 2024 is more uncertain.     National Bank of Poland rates outlook Expectations for a cut by the National Bank of Poland (NBP) may rise (we see 30-40% odds in the second half of the year). Theoretically, today's data show an improvement in the inflation outlook: a better GDP structure, month-on-month core CPI slowing, and NBP more vocal on rate cuts.   But the cross-country comparison (especially with the Czech Republic) suggests this could be a premature move.   Moreover, we still see important inflationary risks in the long term: a strong public acceptance of price increases, an election spending race, and strong investment mainly in energy (other sectors are still performing poorly to offset high costs).   In our view, an NBP cut would not help Polish government bonds (POLGBs) with longer maturities.   The premature cut would extend the return of CPI to the target, which is already a distant prospect (in 2025-26).

GDP first quarter 2023: contraction due to inventory reduction and growth in service imports       GDP outlook: sluggish growth in quarters ahead     Sectors: contraction in ICT, recreation & culture and industry in first quarter     Trade balance: especially higher service import worsened the trade balance     Exports: while total exports fell businesses also became negative about export order book   Investment: still solid investment growth     Profitability: indication of higher profitability, but especially smaller businesses are still negative about it

US household wealth rose $3tn in the first quarter A strong performance by equity markets lifted household wealth, helping to offset declines in real estate and cash, checking and time savings deposits. With wealth $35tn higher than before the pandemic households continue to have a strong platform to withstand intensifying economic headwinds, offering hope that any recession will be short and shallow.   Wealth increase led by equity market gains The value of assets held by US households increased by $3.05tn in the first three months of the year, taking the total assets held by the household sector to $168.5tn. Liabilities rose just $23bn to $19.6tn, leaving net household worth at $148.8tn.   Rising equity markets was the main factor leading to the increase, but holdings of debt securities increased $893bn. These factors more than offset the $617bn drop in household wealth in real estate and the $415bn decline in cash, checking and time savings deposits held by US households.     Excess savings are dropping We have to remember that March saw the collapse of Silicon Valley Bank and Signature Bank with deposit flight hitting many of the small and regional banking groups. We have subsequently seen this situation stabilize although some money that would typically be left in banks has been switched to money market funds.   Nonetheless, we do appear to be seeing much of the excess saving built up during the pandemic via stimulus payments and extended and uprated unemployment benefits being eroded – it is now "only" around 1.8tn above where we would expect it to be based on long run trends. This is especially the case now that households have an apparent appetite to spend, particularly on services.     Household balance sheets in a good position to help limit the downside from a recession After the most rapid and aggressive period of interest rate hikes seen in over 40 years plus the tightening of lending conditions currently being experienced in the US, recession fears are mounting. Households will play a huge role in how prolonged and deep any downturn will be given consumer spending accounts for more than two-thirds of economic activity in the United States.     Household assets are 860% of disposable income while liabilities are ‘just” 100% of disposable incomes. While this is down on the peak seen in 1Q 2022 and there are questions over wealth concentration, this is a much better position than any previous recessionary environment and means that the consumer sector should be better able to withstand intensifying economic headwinds. Consequently, we remain hopeful that a likely 2023 recession will be modest and short-lived assuming a swift easing of monetary policy from the Federal Reserve.

Relatively good, compared to the broader market, retail sales results in the clothing and footwear category for the first quarter were also reflected in Monnari Trade's revenues. Despite the fact that the first quarter is usually the worst for clothing companies and the fact that Monnari Trade has reduced the number of stores and sales space, the Company generated a record-breaking quarterly revenue of PLN 67.5 million, which is partly due to higher prices of the products offered.     The Company also managed to maintain a relatively high gross margin on sales at the level of 55.4%. Nevertheless, the environment of high inflation in Poland also generates strong pressure on the Company's cost side. Selling costs increased by 21.2% y/y, although we perceive this rather as a consequence of higher revenues due to the fact that the cost of renting space in shopping malls is related to the sales revenue. On the other hand, the increase in general management costs by as much as 57.4% is based on growing wage requirements and the general increase in prices in the country, which we assess negatively.       On the other hand, we positively assess the fact that, despite the loss on operating activities, the Company managed to generate a positive net result at the end of the first quarter, which is partly due to high financial revenues (Monnari Trade invested surplus cash after selling part of Geyer's Gardens). Finally, we are lowering our valuation to PLN 7.3 (from PLN 7.8) per share at the end of 2023, which is mainly due to the decrease in the multiples of comparable companies.    

Financial results of KGL in the first quarter were better than our expectations, but above all they indicated a noticeable improvement compared to the poor last year. Particularly noteworthy is the return of the margin in the key production segment to a level slightly exceeding 20%.   If we combine this with a similarly satisfactory distribution margin of 12.6%, the company managed to achieve the highest gross profit on sales in history. There are many indications that a successful Q1 heralds a good year, although we remain cautious about the company's long-term prospects and the possibility of maintaining margins in the longer term.   Nevertheless, after a successful start to the year, we are raising our earnings forecasts for the full year. The company's results are supported both by the market situation in the form of a decrease in the prices of raw materials and energy, but also by the positive results of the optimization carried out. We are therefore increasing our valuation per KGL share from PLN 14.2 to PLN 16.6. At the same time, at the current price of PLN 14.5 per share, we maintain our accumulate rating.     Our valuation and recommendation assume stabilization of margins in the coming years at lower levels than at present. The strategic position of the company remains difficult due to the fact that its key suppliers and customers remain much larger than it, which means their strong negotiating position.   At the same time, the recently observed favorable environment due to the decline in the prices of petroleum products will not last forever. On the other hand, the company improved the management of selected risks that hit it last year and moved margins in the manufacturing segment to record lows.     In the medium term, KGL also benefits from the SUP directive adopted by the Polish parliament, which forces the replacement of polystyrene packaging used in gastronomy with products manufactured by the company. In distribution, a higher share of technical plastics in sales improves margins, albeit at a noticeably lower value of the segment's revenues.   In the longer term, however, the risk related to the possibility of introducing restrictions on selected categories of plastic products remains high. The Management Board of KGL undertook actions which led to the reduction of the company's debt. The concluded sale and leaseback transaction will result in a one-off profit on the transaction in the amount of approx. PLN 5 million, which will be booked in the second quarter. Therefore, it seems that the first half of this year will be very successful for the company.   Only later will it be possible to verify whether the optimization measures introduced by the company will actually achieve lasting success. Especially if in the meantime they were put to the test by changing the market environment to a less favorable one.   Risk factors: The most important risk factors that may affect the operations of KGL company include:     ❑ Regulatory risks. The EU tries to influence the limitation of the use of plastic and increase the share of its recycling through restrictions and taxes. The impact of these regulations on the company is difficult to determine at the moment without knowing the details of the regulations being implemented. The fact that plastic is negatively perceived by lawmakers is certainly a threat to the industry.     ❑ Risk of exchange rates and commodity prices. A significant part of goods and materials is purchased in foreign currencies (mainly EUR). Due to higher liabilities in EUR than receivables in EUR, the unrealized negative exchange rate differences with a 1% increase in EUR / PLN would amount to approx. PLN 0.5 million (sensitivity at the end of 2022). The prices of raw materials depend to a large extent on oil prices. As a result of the increase in oil prices, the company's revenues and costs are rising, but at the same time the margin decreases and the net effect is negative.     ❑ The risk of rising remuneration costs and shortage of employees. The share of employee costs in total costs in 2022 remained above 19%, despite a significant increase in the share of energy prices in the total cost. As a result of employee shortages and wage pressure, the increase in the cost of salaries reached as much as 27% in 2021. As a result of optimization, the company managed to reduce the growth dynamics in 2022, but it remained at a two-digit level of 10%. Due to demographic trends and high inflation, tensions in the labor market will continue.     ❑ The risk of a conflict of interest. In the company, four long-term managers and founders hold a total of 85.1% of votes at the company's AGM. Additionally, four members of the supervisory board have family ties to them. In such a situation, there is a risk of a conflict of interest at the expense of minority shareholders (mitigated by two independent members of the supervisory board).     ❑ Risk of over-indebtedness. After 4 years of intensive investments, the company significantly increased its interest debt, which reached the level of 5.1x EBITDA at the end of 2022. This ratio fell in Q1 to 3.8x EBITDA, but it should still be considered elevated. However, the company took steps to reduce it by concluding a sale and leaseback transaction.   The risks that we consider to be high include regulatory issues (political decisions are quite unpredictable and have a large impact on the company), indebtedness and the risk of commodity prices.  

RBA minutes state that the rate hike decision was close China’s central bank trims key lending rates The Australian dollar has hit a bump in the road and is down 1% this week. In the European session, AUD/USD is trading at 0.6795, down 0.80% on the day.   RBA minutes – rate decision was close The Reserve Bank of Australia has a habit of surprising the markets. The RBA’s rate hike earlier this month was a shocker, as the markets had expected rates to remain unchanged. The minutes of the meeting, released today, indicated that the decision was “finely balanced” between a pause and a hike. In support of a pause, members noted that the sharp increases in rates raised the possibility of the economy stalling. In the end, however, concerns over persistent inflation won the day as the Bank voted to hike rates by 0.25%. The takeaway from the dovish minutes is that the RBA was very close to taking a pause and will be open to holding rates at the July meeting, depending on the data, especially inflation. The Australian dollar has fallen sharply today as investors have lowered their expectations over future rate hikes. The RBA has backed up hawkish words with action, raising rates to 4.1%, the highest level since 2011. Still, inflation has been stickier than expected, and headline inflation jumped in April from 6.3% to 6.8%. The core rate fell from 6.9% to 6.5%, but that is incompatible with the target of 2%. The RBA has projected that inflation will not fall to 2% until mid-2025, which means more hikes are likely, barring a sharp drop in inflation. China’s central bank announced on Tuesday that it was cutting key lending rates, in a move to boost investment and consumption. The post-pandemic recovery has been slow, and soft demand for exports has been bad news for Australia, as China is a key trading partner. China posted 4.5% growth in the first quarter, which was better than expected, but key indicators such as retail spending and industrial output missed expectations in May. . AUD/USD Technical 0.6772 is under pressure in support. Below, there is support at 0.6668 0.6836 and 0.6940 are the next resistance lines        

Glimmers of hope for US inflation slowdown The Federal Reserve's favoured measure of inflation slowed fractionally more than expected, but there was clearer evidence of softening in the so-called "super core" measure that Fed Chair Jay Powell has been focusing on. There is also evidence of a loss of momentum in spending which will dampen prices pressures further down the line   Incomes rose, but spending stalled in May The May US personal income and spending report in aggregate is a touch softer than predicted. Incomes rose 0.4% month-on-month, above the 0.3% MoM expectation, but then we had a corresponding 0.1pp downward revision to April's growth rate from 0.4% to 0.3%. The more interesting story is on the expenditure side with nominal personal spending rising only 0.1% MoM versus 0.2% expected and there were downward revisions to April (from 0.8% to 0.6%). This leaves "real" consumer spending softer at 0% and April was revised down to 0.2% MoM from 0.5%. This means the savings rate has risen from 4.3% to 4.6%.   2Q growth looks to be a fair bit weaker than 1Q as momentum fades For those that like digging into data, the MoM real consumer spending change was -0.03% MoM to two decimal places. This means if we get a +0.2% MoM real consumer spending print for June, we will have quarter-on-quarter annualised consumer spending of 1% for the second quarter, down from 4.2% in the first. 0.1% MoM for June works out at 0.9% QoQ annualised for 2Q. while 0% MoM reading for June real spending generates 0.8% QoQ annualised. This report suggests a fair bit of spending momentum has been lost as we progress through 2Q. We are currently pencilling in 0.2% MoM for real spending growth in June. So far, weekly chain store data (Redbook) has been soft and restaurant dining is currently (according to Opentable) running at -3% year-on-year and hotel occupancy is running at roughly -1.5% YoY for June (to June 24) according to our interpretation of STR data. TSA airport security check numbers are up though. A 1% QoQ annualised consumer spending number would leave us struggling to get GDP growth above 1.5% in 2Q.   Service sector inflation appears to be topping out (YoY%)   Early signs of softening in Fed's "super core" inflation measure Rounding the report out, we see the Fed's favoured measure of inflation, the core PCE deflator coming in at 0.3% MoM/4.6% YoY. A touch softer than the 0.3%/4.7% expected. At 4.6%, this is the slowest rate of core PCE inflation since October 2021. Based on my calculations, the core PCE deflator ex-energy and ex-housing (Fed Chair Powell is focusing on this as it is this component that is most heavily influenced by the tightness in the jobs market since wages make up the biggest cost input and in which demand has been robust) also slowed to 4.6% from 4.7% YoY while Bloomberg’s calculations back this up, saying on a MoM basis it came in at 0.23% MoM versus 0.42% in April. This is a really encouraging story since we need to see 0.1s or 0.2s MoM to get inflation to 2% YoY over time. It is early days, but NFIB corporate pricing intentions data and ISM prices series offer clear hope that we will soon consistently see these sorts of figures.

Cutbacks in temporary agency jobs Nearly one in five temporary employment firms experienced declining demand for temporary agency workers at the beginning of the second quarter of 2023. This is also evident in the number of temp jobs. In the first quarter of 2023, the number of temporary agency jobs contracted by 45,000 (-6%) compared to the same period a year earlier, the first drop in two years.   The decrease in temporary jobs has also been caused by the fact that temporary workers are often offered a permanent contract more quickly in the current tight labour market. In addition, under current legislation and regulations, it is more attractive to work as a self-employed person than as a temp worker in certain sectors – such as health, hospitality and construction.   Strong cutbacks in temporary agency jobs in the first quarter of 2023 Growth in the number of temporary agency jobs in the first quarter, year-on-year       

After exceptionally strong growth for Portugal, a slowdown is looming The Portuguese economy, driven by strong export dynamics in the first quarter, is expected to face a significant slowdown due to a weakening global economic context and rising financing costs. Although a further decline in inflation is expected, the inflation slowdown is hampered by increased wage growth.   Strong first-quarter growth will not be sustained In the first quarter, the Portuguese economy experienced 1.6% quarter-on-quarter growth, primarily driven by robust export dynamics. However, this positive momentum will be increasingly challenged by the tightening of monetary policy. As households and companies become more cautious about taking on new loans, consumption and investment will slow down. The coordinated tightening of global monetary policy will also contribute to weaker global growth prospects, which will dampen Portuguese export dynamics –an essential driver of economic growth in the first quarter. Despite numerous interest rate hikes, we maintain a positive growth scenario. For the second quarter, we still anticipate growth of 0.4% quarter-on-quarter, which is expected to decrease further to 0.2% in both the third and fourth quarters of this year. Positive factors such as favourable labour market developments, increased inflows of European funds, government measures to support income, and a thriving tourism sector partially mitigate the impact of higher interest rates. Additionally, consumer confidence has risen to its highest level since the start of the war in Ukraine, boosted by rising wages which have already risen more than 7% in certain sectors.   Cautious recovery in consumer confidence

Romanian inflation edges lower Inflation in Romania closed 2023 at 6.6%, slightly higher than our estimate of 6.5%, largely in line with the consensus call of 6.65%. The breakdown by components matched our expectations, with only the non-food item prices ending slightly above our call   Compared to the previous month, December price pressures stopped dropping in month-on-month terms and recorded small increases in all categories. The largest positive contribution was again from services. Fuel items continued to get slightly cheaper due to positive developments in the world oil markets, while heating got slightly more expensive in line with seasonal heating demand. Core inflation ended up at 8.2%, decelerating from 9.1%. Overall, such small monthly changes reconfirm that price pressures have been milder than the market had expected at the end of the year. What’s more, the reading also sets the stage for price pressures to remain well-behaved in the first quarter of this year when higher taxes and excise duties kick in. These are likely to briefly push the headline back above 7.0% in January 2024 and create a hump in the inflation profile. However, by the end of the first quarter of this year, inflation should be largely back where we are today and continue the gradual descent towards our 4.7% estimate for December 2024.   Inflation outlook - core to continue to remain above headline Source: NSI, ING Looking at the outlook for 2024, once the impact of higher taxation has been largely incorporated by firms, we think that wage pressures will continue to be the main driver against the disinflationary trend. Wage data for November showed a robust annual increase of 15.1%, in line with our view that real income growth should fuel consumption ahead. The main risk to our view is whether consumers will start to act on their extra income earlier and more forcefully than expected, giving firms the full confidence to maintain their profit margins after the tax hikes. However, at this stage, we keep our 4.7% forecast for the end of the year.   As for the outlook for the National Bank of Romania, we don’t see much change at the moment. Our expectation is that the Bank will avoid being too dovish at today’s meeting, even though it will most likely welcome the positive developments on the inflation front at the end of the year, as we explain in more detail here. We hold on to our view of a first rate cut in May, although April is equally likely if firms choose a more cautious pricing strategy in early 2024.  

Container liner profitability expected to recover in 1Q Only part of the price increases can be attributed to higher fuel and wage costs, which means container liners will benefit from the sudden mismatch and imbalances between demand and supply, as we have seen previously. Profits skyrocketed in 2021 and 2022. But container rates plummeted in 2022 and trended down over most of 2023, even dropping below pre-pandemic levels last autumn. With locked-in higher contract rates expiring, elevated profitability levels have been declining since the second half of 2022. This continued over 2023 with some liners approaching break-even in the third quarter and ZIM even encountering negative levels. With the current price hikes, profitability is likely to turn a corner, and we may see margin improvement either in the fourth quarter or by the first quarter of 2024.   Sinking margins of container liners will likely turn around in 1Q in wake of the Red Sea disruption Operational profit (EBIT) per container liner, per quarter

The consensus view in 2024 is that the dollar will decline. We agree but suspect that a back up in short-term rates and seasonal patterns could frustrate dollar bears through the first quarter. The second quarter should see a re-acceleration of the dollar bear trend as the Fed prepares to pull the trigger on its first rate cut.   As outlined in our 2024 FX Outlook, we expect a broader dollar trend to become more apparent through the second quarter as lower US rates unleash portfolio flows more broadly to the Rest of the World. Of course, geopolitical risks remain. It is not in our baseline view, but a major escalation in the Middle East and another energy supply shock would see the dollar outperform at the expense of Europe and Asia. To the forecasts. We retain a 1.15 end year forecast for EUR/USD but see range trading in the near term. While a re-assessment of the aggressively priced European Central Bank easing cycle could in theory be positive for the euro, a deteriorating investment environment could well curtail any sizable near-term gains in EUR/USD and other risk-sensitive currencies. The Japanese yen could well be an outperformer if, as our team thinks, the Bank of Japan does significantly shift policy in April. And sterling could prove something of a dark horse. We are currently mildly bearish sterling on the view that the Bank of England cuts rates 100bp. However, looser UK fiscal policy could keep sterling better supported. Across the EM space, easing cycles continue in parts of EMEA and Latam. Patience is again advised for the rally in CEE currencies. And China will continue to hold Asia FX back.

Eurozone PMIs show very tentative signs of bottoming out The eurozone economy continues to trend around 0% growth and there are no signs of any imminent recovery. Price pressures are still increasing for the service sector, which provides another argument for the ECB not to hike before June. How you read today’s PMI release for the eurozone reveals whether you’re an optimist or a pessimist. The increase from 47.6 to 47.9 in the composite PMI for January cautiously shows signs of bottoming out but also still indicates contraction. We also note that France and Germany saw declining PMIs, making the increase dependent on the smaller markets. Manufacturing price pressures remain moderate despite the Red Sea disruptions, but the service sector indicates another acceleration in input costs. To us, this shows that the eurozone economy remains in broad stagnation and that risks to inflation are not small enough to expect an ECB rate cut before June. The eurozone continues to be plagued by falling demand for goods and services, although new orders did fall at a slower pace than in recent months. Current production and activity were weaker than in recent months, though, suggesting that January started with contracting output still. The slowing pace of contracting orders does suggest that there is a bottoming out happening though. Whether this is enough to show positive GDP growth in the first quareter depends on February and March. In any case, GDP growth is so close to zero that we still qualify the current environment as broad stagnation anyway. The PMI continues to show some concern around inflation. Even though demand remains lacklustre, services cost pressures are on the rise again due to higher wage costs which are being transferred to consumers. Cost pressures on the goods side remain low despite Red Sea disruptions as energy prices trend lower and demand overall remains weak. This also means that goods inflation continues to trend down according to the survey. So, despite Red Sea problems prominently featuring in the news, inflation concerns currently stem more from services than goods, interestingly. For the ECB, enough worries about inflation not trending down to 2% quickly still remain. We think that makes a first cut before June unlikely.