CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

CZ Rates: Yesterday's CNB bank board meeting was closely watched, due to the expected revelation of the new macroeconomic forecast, as well as rising speculation that the CNB might proceed with further EURCZK weakening (from 27 to 28 or higher). In line with the consensus, the CNB decided to leave both the key interest rate (2W repo rate at 0.05%) and FX intervention target unchanged (EURCZK above, but close to 27). However, regarding the actual downward revision of CPI growth for both 2014 (from 0.8% to 0.4%) and 2015 (from 2.2% to 1.8%), the CNB announced that the FX intervention regime will not be terminated before 2016. As we do not expect CPI growth to fall significantly into negative territory (forcing the CNB to further increase the current FX intervention cap), we see the EURCZK remaining at 27.50 until the end of 3Q15.

HU T-bill auction: Demand for the 12M T-bill proved surprisingly low at yesterday’s auction, less than the offered amount of HUF 45 bn. The Government Debt Management Agency sold only HUF 33 bn worth of paper, with a maximum yield of 1.93%. Meanwhile, long-term bond yields jumped considerably, with the 10Y reference yields approaching our year-end forecast of 4.8%, while the forint weakened as well. The effects of the deterioration of sentiment were visible everywhere on CEE markets, but Hungary stood out as the worst performer. (The relatively significant jump in bond yields can also be attributable to the low liquidity of the HGB market.) There might have been some profit taking amid worsening external market sentiment, burdened by geopolitical tensions and increased expectations of an earlier Fed rate hike. The positive interest rate differential for the forint has narrowed considerably, which is not supportive now. However, the good external balance position of Hungary may protect the exchange rate from a durable weakening. We expect the EURHUF to stand at 307 at year-end.

SI Macro: July CPI painted a more benign picture than we expected, with the inflation rate strongly decelerating from 0.8% y/y in June to the current 0% y/y (EBCe: 0.5% y/y). On the monthly level, CPI decreased 1.1%, with seasonal factors playing the most important role behind the decline, i.e. lower food and clothing prices, with the summer sales season shaving off 1.2pp from the monthly headline figure. Looking ahead, weak domestic demand and limited supply-side pressures suggest furtherdisinflation ahead, while taking the lower July reading into account, we will likely revise our 2014 average CPI forecast (0.7% y/y) downward a few notches.

RS Macro: The Serbian economy contracted by 1.1% y/y in 2Q, in-line with our expectations. Details will be published at the end of September only. The effect of floods on industrial production and agriculture are viewed to have had the strongest negative impact, while exports continued to support the headline figure. Our call for 2014 for real-GDP growth (-0.5%) is not affected by the release. The impact on monetary policy is limited – fiscal uncertainties and mounting pressure on the RSD puts NBS in “wait-&-see“ mode until more details on the budget/IMF programme are known in September.

Traders’ Comments:

CEE Fixed Income: The surprisingly strong drop in the Chicago PMI helped USTs erase prior losses triggered by an 8y low in the 4 week average of initial jobless claims in the US but came too late for HGBs, POLGBs and ROMGBs. After a long period of complacency, the vulnerability of CEE fixed income to a combination of stagnation in the Eurozone and a rate hike in the US has now become blatantly apparent for all to see. An increase in US yields makes CEE levels look relatively unattractive forcing the carry trade into reverse. All eyes will be on US Non-Farm Payrolls today.