CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RO Rates: PM Victor Ponta said earlier this week that the NBR could cut the key rate to below 3% next week. He added that this was good news for SMEs, due to lower borrowing costs. This unprecedented statement comes in the context of the presidential election. In view of that, we now expect the central bank to cut the key rate by another 25 bps to 2.75% next Tuesday. The surprising statement from the PM is in contrast with the more cautious guidance that Governor Mugur Isarescu offered at the last MPC meeting held in late September. Back then, the governor specified that the current level of the key rate (3%) is appropriate and any future potential decision on rates would have to be carefully assessed. For now, we keep our market forecasts unchanged.

HU Rates: The Debt Management Agency held an extraordinary repurchase auction yesterday. Investors offered a substantial amount of securities (HUF 85.7 bn) for repurchase and the AKK accepted HUF 72 bn. The 1.5 year maturity 2016/C bonds were the most successful in the auction. A few market participants suspect that Templeton may have influenced the AKK and prompted this move. Be it as it may, in our opinion this step is in-line with the government’s aim to reduce the public debt via a drop in liquid reserves by the end of the year in a re-run of similar action taken toward the end of last year. .Liquid reserves now stand at HUF 2,013 bn vs. HUF 752 bn at the end of last year. For now we keep our capital market forecasts unchanged (4.5% yield for the 10-year HGB) but we see downside risks.

HR Macro: September industrial production exceeded all expectations, as the headline figure surprisingly increased 3.8% y/y (EBC: -1.5% y/y, consensus - 1.1% y/y). The monthly uptick of 4.6% (s.a.) was backed up by growth in practically all categories and the decline in the energy sector was the only component weighing down on the annual output number. The headline figure did not only erase a large part of last month’s strong decline (-4.7% y/y in August), but it also pushed quarterly performance into the black with production modestly increasing by 0.2% y/y in 3Q. Putting the more favorable September output aside, the volatility in industrial production thus far this year calls for a more cautious stance looking ahead. Expectations of a modest 2014 recovery remain constrained by ongoing domestic demand weakness and competitiveness issues, while the slowdown in external demand suggests limited offsetting potential with support coming only from a low base effect. Our capital market forecasts remain unaffected by the figure.

Traders’ Comments

CEE Fixed Income: The FOMC dropped the description of “significant underutilization of labor resources” pushing yields on USTs higher, the USD stronger and equities lower. This is not a good combination for CEE fixed income and does not bode well for today’s trading session so we expect markets in our region to give up some of the gains they made yesterday but, overall, the accompanying FOMC statement and the end of QE did not shock the markets so the fall-out should be modest. Erste announced 3Q results as the first large CEE lender to do so, recording a net loss of EUR 554 mn versus a consenus of EUR 566 mn. This is very much in line with guidance and the focus will now move to UniCredit, Raiffeisen, KBC, BRD, Komercni, OTP and Intesa. Raiffeisenbank AS, RBIs Czech subsidiary, successfully issued EUR 500 mn 7y covered bonds yesterday at ms + 32 bps. Today, we have Spanish GDP, German CPI, US GDP and jobless claims which all have the potential to move markets with no major data releases scheduled in CEE.