CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

TR Rates: Given the CBT’s tighter liquidity management in August, deterioration in underlying inflation and higher bond yields, we expect the CBT to keep interest rates unchanged at today's MPC meeting. The market also seems to side with this view but there are a few investment houses that expect a cut. There is a risk of a 25 bp cut which could be slightly negative for the currency and long-term yields, but positive for the twoyear benchmark bond. We maintain our forecast of an eventual 25 bp cut later this year and a 9% two-year bond yield by year-end.

HU Rates: In line with expectations, the Hungarian Central Bank kept the base rate at 2.1%, discontinuing a long series of rate cuts. In the press statement they expounded the reasons for keeping rates at historically low levels: economic output is below its potential level and inflation pressure is still low. In our opinion the Monetary Council will maintain the base rate at the current level until 2H2015, but it will be a hard task to avoid hiking rates if the US Fed starts monetary tightening next year. We keep our expectation for the first hike in 2H2015, with a forecast of 2.1% for end-2014 and 3% for the end of next year. Our market forecasts remain unaffected by the news.

PL Macro: Retail sales came in at 2.1% y/y, slightly better than market expectations, but the figure is low, showing signs that domestic demand may be losing strength. This is another reading supporting the widely held view that rates will be cut and markets visibly expect such a move as 10y yields keep dropping (10Y to 3.06%). The unemployment rate dropped to 11.9%, slightly less than we expected. We continue to see 10Y yields at 3.55% at the end of 2014.

Traders’ comments:

CEE Fixed Income: It was another day void of any big catalysts for a change in longer term trends and the majority of inquiries going over the trading desks were from investors looking for offers. Longer dated paper continues to outperform as the bull-flattening of government bond yield curves continues unabated across the region. Analysts are upping the stakes for QE in the Eurozone with an increasing number of high profile pundits touting an announcement at the ECB meeting on September 4th. You can read what you like into Putins comments that talks with Poroshenko were positive or Israel’s acceptance of the Egyptian peace plan in Gaza, but geopolitical events have definitely lost their shock factor for fixed income investors recently. The CEE carry trade loves a bit of extra liquidity and the weakness of the EURUSD appears to validate those who are betting on continued economic weakness in the Eurozone and subsequent relaxation of monetary policy. CPI figures will be the focus today in the European trading session.