CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

PL Macro and Politics: Data on nominal wage growth (4.8% y/y in May) and employment (0.7% y/y) were overshadowed by political developments. While the relatively strong growth of wage supports an increase in consumer spending, employment stagnated. Elsewhere, the Minister of Finance commented on the proposed bill designed to change the regulations of the NBP (rotation of MPC members, empower the NBP to buy government bonds in critical situations) that most probably will be passed by government.
Governor Belka, on the other hand, had meetings with the President and the MPC, where he was expected to explain (and excuse) himself regarding his taped comments that undermine the independence of the NBP. Most likely, he will suffer no consequences and remain in office. The biggest political risk lies, currently, in an upcoming no-confidence vote that should be filed by the opposition sometime soon. The current political crisis has not influenced our long term forecasts as we continue to believe that there is a high probability of a rate cut and low yields (10Y at 3.40%) at the end of 3Q14.

RO Politics: The Romanian Parliament voted on Tuesday for a new board of the central bank. There were some important changes made to the NBR board, with three new members appointed (one executive and two nonexecutive board members). Surprisingly, former vice-governor Cristian Popa, a technocrat in charge of monetary policy and the central bank’s front man for the investment community, was not elected to the executive board after sixteen years in this position. We think that market participants will carefully monitor future central bank moves following these changes but for the time being, we maintain our end-year call for 5-year ROMGB yields at 4.3%.

Traders’ Comments:

CEE Fixed Income: All eyes will be on the Fed today but there is little expectation for anything radical coming out of the FOMC meeting. May US CPI broke through the 2% level in yesterday’s reading but is unlikely to ruffle feathers too much within the decision making council as it looks increasingly apparent that the US central bank is willing to risk future financial market instability in order to support the nascent economic recovery. Closer to home, the NBP is very much the focus for investors in Poland. POLGBs underperformed yesterday and the PLN has not been able to recoup losses following the sudden gap upwards in EURPLN in reaction to the scandal surrounding Marek Belka. Money markets, however, continue to price in an increasing probability of a rate. The 6x9 FRA is currently 13 bps below 3M WIBOR. Industrial Output and PPI data scheduled for release later today probably won’t change investor expectations in this respect. Elsewhere in our region, HGBs are also under pressure along with the HUF even as money markets continue to draw strong investor interest. Primary dealers submitted HUF 198 bn worth of bids on a HUF 60 bn offering of 3M T-bills yesterday with bids filled at an average yield of 2.29%, a 5 bp drop compared to the last auction in 3M T-bills a week ago. The AKK reported that non-residents raised their holdings of domestic government debt to HUF 4.97 trillion on June 12, the highest level since January. Foreign investors hold more than 40% of outstanding notes in Hungary, increasing the risk of a sudden outflow if we see a sudden shift in sentiment away from emerging markets. While this risk may be growing, we do not see much evidence of investor concern within CEE cash corporates. Turnover is admittedly low but yesterday’s trading action revolved around investors looking for offers.