CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HR Macro: Yesterday's August CPI release came out in line with our expectations, with the ongoing decline in the headline figure deepening to - 0.3% y/y vs. the -0.1% y/y from July, while seasonal items (i.e. lower clothing prices) were the strongest driver behind the 0.1% m/m fall. Though suppressed domestic demand and limited pressures on the supply side still keep inflation in the negative zone, we see the figure gaining pace toward the end of the year, as the base effect eases and food prices stabilize, thus pushing inflation towards higher ground and bringing the average 2014 rate to 0.2% y/y. The August CPI release is seen as having no major impact on our capital market forecasts or monetary policy i.e. we continue to see 7y yields moving down towards the 3.50 level by YE14.

PL Macro: The labour market remains in relatively good condition as employment went up 0.7% y/y in August and wages continued to grow by 3.5% y/y. The week may continue with less encouraging releases, however, as we expect the industry to have contracted by -0.9% y/y in August (to be released in the afternoon). Our forecast is rather bearish as the market expects marginally positive industrial output growth. In our view, any negative figure should strengthen rate cut expectations and would support our forecast of a low level of yields (10Y at 3.0% at the end of the year).

Traders’ Comments

CEE Fixed Income: CEE markets are treading water ahead of the FOMC and the Scottish referendum which put everything else, including developments in Ukraine, into the shade. The announcement of the first targeted LTRO tender could also play a decisive role for investors, with median expectations for the first tranche now totaling EUR 150 bn, according to Bloomberg, as forecasts for the total take-up decline and an increasing number of analysts reduce their forecasts for Bund yields in what appears to be an increasing expectation for fully-blown QE. The logic is the following: the TLTRO will be driven primarily by demand for cheap funds from the Eurozone periphery and this will fall roughly EUR 100 bn short of the initial estimates of a EUR 650 bn overall take-up of available funds. In order to increase the ECB balance sheet to the purported EUR 3 trn, the ECB will need to turn to outright purchases of ABS and Covered Bonds but the supply of product is insufficient to hit the balance sheet target, ergo the ECB will have to buy something else and the only thing left are government bonds. As such, the announcement has the potential to lend new impetus to recent market trends, specifically a weaker EUR which would also put additional downward pressure on some CEE FX, like the PLN or the HUF.