CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Fiscal: Economic Minister Mihaly Varga told at the weekend that connecting the cashiers to the tax authority caused VAT income to increase by more than 0.3% of GDP in the first half of this year. Varga’s comments come after he announced a roughly 0.3-0.4% of GDP fiscal restriction earlier this summer, in order to keep the budget deficit under the target. Amid better than expected economic growth (3.5% in 1Q14 and 3.9% in the second quarter) the need to trim the fiscal position suggests that the structural budget balance is deteriorating. The growth should abate in 2H14 (we forecast 3.3% for the full year), which is also underpinned by the fiscal spending freeze (besides European weakness and the Russian spillover effects). The news does not affect our forecasts. We expect 10Y yields to gradually increase in the upcoming quarters (we see yields at 4.8% at end/2014 and at 5.0% at the end of 1H15).

Traders’ comments: In a speech at the Jackson Hole Economic Symposium, Mario Draghi addressed his concern to price stability which “exhibited significant declines”. The comments were interpreted by some market participants as a door opener for further quantitative easing measures. The EURUSD is trading nearly 1% lower in level since Friday opening. Periphery yields in Italy and Spain dropped to new record lows this morning with Italian 10Y yields trading around 2.5% at the moment. Yields in CEE bonds denominated in EUR with the exception of Hungary and Croatia also making their way to new record low levels in last week. Nevertheless, Friday was a relatively quiet trading session in CEE bonds with no significant price moves but some profit taking especially in Croatia. CEE currencies opened stronger today with the PLN outperforming other markets following comments by the Polish central banker Osiatynski which stated that “no macro-economic grounds for current very high rates, but this does not automatically mean that they should be cut”. Lastly, a key geopolitical event will occur tomorrow when the Russian president will meet with his Ukrainian counterpart in Minsk to discuss current situation in East Ukraine, which could lead to some market moving comments following the summit. In data releases today key numbers will include German IFO data and new home sales in the US.