CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

TR Rates: Despite growing concerns about the growth outlook and the drop in oil prices that could filter into lower inflation at home, the CBT is likely to keep interest rates on hold today. We believe that the economic outlook is uncertain and that the markets are very volatile, which should discourage the CBT from capitalizing on short-term opportunities, if any, to ease. The CBT had already announced two days ago that it would start paying remuneration on the TRY reserve requirements, but this indicates only very limited monetary easing and its key aim instead is to support banks’ core liabilities and increase the efficiency of the reserve option mechanism (ROM) that allows banks to hold their TRY reserves in hard currency. If the CBT provides a dovish message today, the TRY may shed some of its recent gains.

PL Macro: We expect retail sales to have grown roughly 2.4% y/y in September. The positive trend in private consumption has been sustained largely by relatively good labour market conditions. Another sign of the ongoing improvement in the labour market should become visible, if as we expect, the unemployment rate dropped to 11.6% in September (visibly lower than one year ago). We do not think that the data release will have any major impact on the FX or bond market, especially as the Ministry of Finance is holding an auction today (the beginning of pre-financing of next year's borrowing needs). Market conditions are favourable and 10Y yields should remain low (there are downward risks to our current year-end forecast of 3%), as, in our view, there is more easing in the pipeline.

RS Fiscal: During yesterday's session, the government adopted a set of laws aimed at achieving financial stability, among which the most attention was drawn by the 2014 budget revision law. According to this legislation, public wages will be cut linearly by 10% and pensions will be cut progressively from December. The full-year deficit was revised upwards by 23.6%, mostly due to the underperformance of revenues as a result of the economic slowdown after the massive floods. Thus, the public deficit figure will reach 7% of GDP, in line with our expectations. The Minister of Finance also announced that he expects a conclusion of the IMF talks by the end of year and that the government will certainly tap the Eurobond market and use some of the funds for pre-financing. All of the government proposals from yesterday’s session will be sent to the Parliament on Friday.

HU T-Bills: Hungary failed to sell the tendered amount (HUF 40 bn) of 12- month T-Bills yesterday due to weak demand. This behaviour was also evident on Tuesday when only HUF 20 bn was sold at the 3-month auction, half of the original amount. We believe that the willingness to curtail supply is in connection with the indication from the GDMA that it intends to reduce debt issuance ahead of year-end in order to contain the gross debt level / GDP below the 77.3% in 2013 (revised in accordance with ESA2010) as required by the Hungarian debt brake law. We expect that the government to use tight budget control (expected budget gap 2.7%), the recent forint appreciation and the financing from excessive cash reserves to achieve this goal.

CZ FX: Yesterday, the EURCZK suddenly depreciated from 27.58 to 27.70. As there were neither fundamental reasons nor comments from the monetary authorities preceding this weakening, we believe technical factors (e.g. algorithmic trading) and the recent increase in market volatility are behind the movement. In the coming weeks, we see the EURCZK returning closer to 27.50 and expect to see it at this level at least until the end of 2H15.

Traders’ Comments

CEE Fixed Income: Lethargic? Complacent? Trepid? The mood was described by our CEE cash corporate trading desk as “stable, quiet, nervous and fragile”. Call it what you will but large sections of our markets were once again better bid in the morning only to be better offered later in the day. Local currency government debt markets were mixed, FX markets unexciting, Eurobonds flat, equities uninspiring. The Damocles sword of the Comprehensive Assessment is hanging over the markets so we don’t expect big position taking ahead of the weekend but when a Spanish newspaper announced Erste had failed the CA and the banks sub debt priced down it was without real selling. In fact, opportunistic buyers dominated activity in Austrian sub debt with RBIAV 6.625% 21 at the center of attention.