CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

PL Macro and Rates: Given the recent development of macro indicators as well as expectations for the inflation rate to remain low, we currently see considerable downward risks for our baseline scenario of an overall 50 bp cut in key rates this year. Moreover, the recent, rather dovish comments of MPC members suggest that a majority supports a bigger move. Furthermore, the fragile Eurozone recovery and aftermath of the Russia-Ukraine conflict prompt us to revise our growth forecast for next year downward. We thus expect the long end of the curve to rise only slightly to around 3.0% at the end of the year.

CZ Rates: After its meeting yesterday, the Czech National Bank decided to keep both the key two-week repo rate (0.05%) and current FX intervention floor (EURCZK above 27, floating freely on the weaker side) unchanged. The CNB also reaffirmed its previous intention to keep on using the exchange rate as a monetary policy instrument at least until 2016. With respect to CPI being expected to remain sufficiently above the zero level in 2H14 (0.9% at the end of the year, in our view), we see the probability that the CNB may consider a further increase of the current FX intervention floor in EURCZK during the remainder of 2014 as fairly limited. Therefore, as in 1H14, the EURCZK should remain stable around 27.50, at least for the remainder of 2014, according to our forecast.

TR Rates: The CBT left key interest rates unchanged in line with the consensus. The absence of any upper boundary cut was a relief for the currency, but the CBT has softened the emphasis on inflationary risks and the statement was less hawkish than the previous one, which could weigh on the TRY. The possibility for our expectation of a final 25 bp cut in the CBT’s key rate has visibly declined, posing also some upside risk to our 9% year-end forecast for the two-year bond yield.

HU Macro: The Hungarian National Bank gave detailed data on the significant retrospective modification in the balance of external payments data. The CB turned to a new EU-methodology but the main changes in the current account balance were made due to the revision of data. As a result, the C/A surplus has increased dramatically to EUR 4.16 bn from EUR 2.9 bn. The top-down approach of external financing capability has been increased to 7.8 bn (8.0% of GDP) from 6.3 bn (6.4% of GDP) for last year. The biggest difference between the new and previous data can be found in the balance of employee’s compensation. Due to the revision, this element has changed by 1.3 billion euro (from 0.8 to 2.1 billion euro). This means that the transfers of those who work abroad explains more than half of the C/A surplus or more than a quarter of the external financing capability of Hungary. Hence we elevate our C/A balance forecasts for this year to 4.1% (from 3.6%) and for next year to 3.2% (from 3.0%). We continue to see the EURHUF at around 307 at the end of this year, and around 310-311 in the first half of 2015.

Traders’ Comments

CEE Fixed Income: Whilst CEE government bonds closed at lower yield levels d/d, CEE cash corporates, the HUF, PLN and TRY all back-peddled following headlines emanating from Russia that Putin has demanded in writing to EU Commission President José Manuel Barroso that the recently ratified trade pact between the EU and Ukraine be reopened, threatening retaliatory measures otherwise. Apparently, the Duma is now considering a new draft law that would allow Russia to seize foreign assets. In the primary markets, BB/BB+ rated Magyar Eximbank successfully placed USD 500 mn in senior unsecured bonds maturing 2020 at 235.7 bps over USTs to yield 4.15% with books accumulating USD 2.2 bn of bids.