CEE Macroeconomic and Fixed Income Research

Analysts’ View:

PL Macro & Rates: The MPC left the policy rate flat at 1.5% as expected, but avoided answering questions about the level of EURPLN. At the same time, deflation eased slightly to -1.5% in February marking a potential turnaround in the downward trend but the magnitude was below expectations. The MPC did not comment on the inflation figures and did not want to comment on the recent PLN appreciation either. One rationale behind this behaviour may be the intent not to influence market movements, as earlier statements from the MPC about the definite ending of the easing cycle probably supported the strengthening of the zloty. Lesson learned. Nevertheless, an appreciating trend is likely to delay a rise in the inflation rate (and to target) so we tend to think that a movement toward 3.8-3.9 vs euro could trigger at least a verbal intervention. We see EURPLN close to 4.02 vs EUR at the end of 2Q15.

HR Macro: March CPI outstripped our expectations, with the headline figure reverting back to a positive print with a 0.1% y/y increase (vs. EBCe: -0.5% y/y). On a monthly level, CPI increased by 1%, with higher clothing and transport prices shaping the monthly change. We expect no market reaction, as exchange rate and bond market movements are determined much more by changes in external sentiment and by developments on the fiscal front. We expect the kuna to be supported by the customary seasonal pattern that should slowly kick-in and expect to see the EURHRK at 7.5 at end-1H15 but see the exchange rate increasing to 7.7 by the end of this year. We see the 5Y government bond yield at 2.8% at the end of this year.

TR Macro: The 12-month rolling budget deficit to GDP ratio widened in March by 0.1ppt m/m to 1.5% due to last year’s one-off revenue item, which was missing this time. In the absence of this, we would have seen an improvement instead. Tax revenues in general remained strong. The seasonally adjusted unemployment rate edged further down to 10.3% in January from 10.4% in December. Job creation in the non-farm sector increased to its 11-month high of 142K from the previous month's 56K. Despite the positive news, the market remains under pressure due to the increasing political uneasiness ahead of the parliamentary elections locally and to the Fed’s expected rate hike abroad. We see 2Y yields at 9.0% at the end of 1H15.

Traders’ Comments:

CEE Fixed income: Comments from Mario Draghi that fears of bond scarcity are premature drove bull-flattening in core euro area bonds yesterday with the yield on 10y German Bunds hitting all-time lows below 11 bps whilst short-end money market rates came under upward pressure after he ruled out a further deposit rate cut. Yield spreads to the periphery tightened with the notable exception of Greece which is still flirting with default. In our region, the knockon effect of this was rather muted but Hungary fell out of line following news that the EU suspended part of the payments from the European Regional Development Fund amounting to HUF 700 bn. A statement from NBH Director Nagy didn’t help either when he said that FX car loans and personal loans amounting to HUF 500 bn should be converted into HUF, overshadowing the positive effects of an upbeat IMF growth prognosis. The TRY, however, is the proverbial canary in the coalmine after hitting record lows against USD.