CEE Macroeconomic and Fixed Income Research

Analysts’ view

Looking Ahead in CEE This Week: After last week’s ‘force majeure‘ coming from the ECB, this week may be at least slightly more interesting in terms of macro releases in CEE. The emphasis is on the word slight, though, as the data releases are mostly second-tier publications as far as implications for markets are concerned. We will see Polish GDP data tomorrow (though only for FY2014, hinting a little bit at the shape of 4Q14 dynamics), while labour market and retail sales data will offer additional information to the NBP on whether or not to continue with their wait and see stance towards rate decisions. On Wednesday, industrial prices will come from Slovakia, and unemployment statistics from Hungary. Croatia will disclose industry data on Thursday, while Serbia concludes the week with trade balance and industrial figures on Friday. Perhaps the most interesting local event will be the rate decision in Hungary on Tuesday. Especially after the ECB’s QE, the wording from the MNB can be interesting. However, at this moment it is more likely that the MNB will not yet flag any rate easing, as it has strongly committed itself to keeping rates unchanged. If the MNB does shift toward further easing, the earliest time for the next cut will be March.

HR Rating: In the first rating assessment of the year, S&P remained on hold leaving both the rating and the outlook unchanged at 'BB' and stable, respectively. The rationale offered no surprises. Reform potential and the growth outlook remain constrained (no big reforms ahead of the year-end election and GDP is expected to stagnate in 2015 – our call for 2015 is -0.5%), while the fiscal outlook remains demanding amidst a lack of policy responses. EU membership and the related mid-term boost to growth outlook remains the key rating anchor. The policy response to the aforementioned vulnerabilities remains the key rating constraint. With QE now in full swing and yield compression continuing, we are not surprised by S&P’s call.

Traders’ Comments:

CEE Fixed Income: CEE fixed income surged on Friday amid large gains in the FX markets for both the HUF and the PLN. This week, however, kicks off with the results of the Greek election which already seems to be putting downward pressure on the DAX ahead of the opening. Syriza won a landslide victory and may be able to govern alone, outstripping the poll expectations prior to the vote. Given Alexis Tsipras vow to renegotiate Greek debt this is obviously cause for some consternation but the price moves in Asian equities overnight and European equity futures this morning appear to indicate that fears are currently contained. Such is the power of the technical bid stemming from the ECB’s QE. Fundamentals can, however, not be ignored forever and we will see IFO this morning and US GDP later in the week. We will also have to deal with the FOMC meeting on Wednesday so markets will have a lot to digest given that events in Ukraine also continue to escalate further. What this means for monetary policy in CEE is quite clear as far as Poland is concerned: Governor Belka said on Friday that the MPC is close to forming a majority supportive of rate cuts. In Hungary, where the MNB meets this week, it can only be a question of time. In the Czech Republic where rates are already de facto at zero, Governor Singer reemphasized that the floor in EURCZK will remain in place longer than previously expected. Romania will face also face pressure to cut rates. The ROMGB 5.9% 2017 already yields substantially less (1.92%) than the policy rate (2.5%) and the bond market got an additional boost from rumours that JPM is considering adding yet another ROMGB to the GBI EM index. As such, we expect decent demand for today’s RON 400 m re-tap of the DBN018. Elsewhere, CEE cash corporates are bid only but there is no respite for RBIAV sub debt after S&P cut the ratings on junior bonds to BB-, citing concerns that a clause blocking interest payments may be triggered.