CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

CZ Macro: CPI growth came in at 0.6% y/y in August, the highest figure since the beginning of 2014 (0.5% y/y in July). Contrary to the expected decline in the prices of commodities falling under the Russian import ban, growth in prices within the food and non-alcoholic beverages division further accelerated to 1.3% y/y, from 0.8% in July (adding 0.2pp to the overall CPI growth). During the remainder of 2014, we see Czech CPI growth accelerating further (to 0.9% y/y at the end of the year), due to a large extent to the expected continuing recovery of the Czech economy (up to now clearly visible in the accelerating prices of services: 1.2% y/y in August compared to -0.1% y/y in January). Hence, we consider the probability that the CNB will be forced to further increase the current FX intervention floor (EURCZK above 27; due to threats of deflationary developments) as very small and maintain our current EURCZK forecast unchanged (27.50 at the end of 2014).

HU Bonds: Yields at 3M T-bill auctions seem to be falling further, despite the central bank’s announcement that it ended the rate-cutting cycle at 2.1% in July. The Debt Management Agency sold HUF 50bn in 3M bills, the same as planned, while investors bid HUF 62bn. Despite a bid-cover ratio of just 1.24, yields fell further, dropping by 2 bps vs. the auction held last week, and also declining 1 bp vs. secondary market yields a day earlier. The average accepted yield came in at a mere 1.38%. These results come against the backdrop of a falling Hungarian currency and increase of bond yields in Hungary yesterday. We continue to expect 10Y yields at 4.8% at the end of this year. Domestic factors should work in the opposite direction to an ECB easing: risks for converting FX loans to HUF could create increased demand for HUF funding from banks, which could lower the banking sector’s interest in purchasing govies (which was enhanced earlier by the central bank’s overhaul of the monetary policy framework).

PL Politics: Donald Tusk resigned and it is expected that President Komorowski will accept the resignation (and dismissal of the Cabinet) on Thursday. Ewa Kopacz should, most likely, become the new Prime Minister. From the moment of accepting the resignation by the President there are two weeks to form the new government (that has to happen on Sept 25 the latest) that has to be further accepted by parliament. Reshuffling on the political scene should be neutral for markets.

Traders’ Comments:

CEE Fixed Income: The prevailing theme yesterday was weaker CEE currencies and higher yields. In Romania, local bonds weakened 14 bps at the long end of the curve, while the short end 4 bps higher. Yields in Hungary also rose between 7 to 14 bps with the long end of the curve underperforming. The HUF weakened against the EUR trading above 317.00 in the afternoon and 245.00 against the dollar, a two year low. If the 317.00 will firm up we can expect the currency to weaken further. No major data releases expected today apart of this morning CPI data from Romania.