CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

PL Rates: Despite our and market expectations of a more cautious cut in key rates (25 bps), we are not surprised with a move of 50 bps. The slowing economy and the risk that the inflation rate may well remain below the NBP target in the medium run are the main reasons behind the decision. In our view, upcoming data and the new inflation projection (to be released in November) should confirm these trends, which should lead to another cut of at least 25 bps. Given comments that the policy rate adjustment should be concentrated in time, we cannot exclude a 50 bp adjustment at the next meeting. Such a scenario supports a low level of yields and we believe that there is a downward risk to our current forecast of 3.0% at the end of the year.

CZ Bonds: At yesterday's auction, the Czech MoF sold in total CZK 15 bn worth of government bonds due 2020 and 2025. In the case of the 2025 paper, the average yield declined to 1.32% from 1.92% in May, while the bid-to-cover ratio came in somewhat higher than at the previous auction (2.11 from 1.55), confirming the persistently strong demand as a result of abundant liquidity within the Czech financial sector. With respect to the plan of Czech Finance Minister Andrej Babis to take on no new debt in 2014, we see the Czech MoF proceeding with only one T-Bond auction until the end of this year. As for the remainder of 2014, we expect the 10Y T-bond yield to remain rather flat (1.1% at the end of the year).

RO Macro: The 2Q GDP figure was reaffirmed at 1.2% y/y. On a quarterly basis, the economy contracted 0.9%, slightly less than the earlier estimate (- 1% q/q), after declining 0.1% in the first quarter. The reading thus confirmed that Romania is now in technical recession. The National Institute of Statistics (NIS) also confirmed the final reading for 2012 GDP growth at 0.6% y/y according to the ESA2010 methodology. The NIS announced that the restated historical time series (from 1995 until 2011 and the 2013 figure) will be released in December 2014. The IMF recently cut the country’s growth prospects for this year to 2.4%, from the previous 2.8%. Our GDP call for this year stands at 2.3%. The release does not have any impact on our capital market forecasts.

TR Macro: The government decreased its GDP growth forecast for 2014 to 3.3% from 4% and for 2015 to 4% from 5% in its three-year Medium Term Program (MTP) for 2015 to 2017. Inflation projections for 2014 and 2015 were also revised to 9.4% and 6.3%, respectively. These will most probably be the CBT's official estimates when it discloses the Inflation Report at the end of the month. A list of 25 “second generation” micro-level reforms which aim to support Turkey’s long-term growth potential were included in the MTP. Deputy Prime Minister Ali Babacan said that these reforms are a must for Turkey in order to support balanced growth going forward. Our capital market forecasts remain unchanged.

Traders’ Comments

CEE Fixed Income: CEE fixed income continued down the road of lower yields and bull flattening while FX remain unfazed even as major European equity indices took a dive. German economic data is deteriorating and this mornings export data compounded the picture of a sharp drop in industrial production and new orders. Put the Fed minutes on top of that and global growth prospects look anything other than upbeat. The 50 bp cut in Poland and the prospect of another 25 bp cut very soon propelled POLGB prices higher and the lack of follow through in EURPLN points to positive investor sentiment toward local currency bonds. Romania will give us a good indication of how strong that yield-hunting sentiment is. Today, we will see a re-tap of the DBN018 with a target amount of RON 200 mn just as the RON 4.5 bn weekly repo matures. News was also leaked that the MoF will soon announce the issuance of a Eurobond. The primary markets are in good shape and Czech Export Bank took advantage of high levels of liquidity, successfully issuing a EUR 150 m FRN maturing 2024. In the corporate space, we also saw Voestalpine place EUR 400 m of unrated 7y senior unsecured bonds at ms+155 bps.