CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

TR Rates: The CBT left interest rates unchanged yesterday, in line with the consensus and our view. Accordingly, the one week repo rate (the main policy rate) remains at 8.25% and the interest rate corridor around 11.25% to 7.5%. The statement was barely changed from the previous one, except with a slightly more confident approach toward the expected decline in inflation in 2015. The CBT’s cautious stance, despite favourable developments on the inflation front, is positive for the TRY provided that the CBT maintains tight liquidity management in the coming days. After the quarterly Inflation Report is disclosed on October 31, we may drop our expectation for a final 25 bp cut this year. For now, we continue to foresee the USD/TRY at 2.23 by the year-end.

PL Macro: Retail sales surprised on the downside, coming in at 1.6% y/y in September, while unemployment dropped to 11.5%. In our view, the data was mostly neutral for the MPC decision makers. Minutes from the meeting revealed that the latest cut was not a unanimous decision. Most of the members were of the opinion that the adjustment should be quick. There were, however, some that opposed the easing. Despite the relatively hawkish comments, we believe that the MPC will lower rates further. We remain sceptical about claims that the move will be as big as in October, but the inflation projection - confirming that inflationary pressure is almost non-existent and growth is going to be lower - should convince a majority of the members to lower the policy rate further. Such a scenario supports a low level of yields (no higher than our current forecast of 3% at the end of the year).

RO T-bonds: The MinFin sold 10-year T-bonds worth RON 594 mn yesterday, exceeding the initial plan of RON 500 mn. The average accepted yield fell to 3.93% from 4.36% at the last reopening in late September. Demand was roughly two times higher than the raised amount. Despite investors’ recent enthusiasm for local debt, the yields on the secondary market may go higher in 4Q14 and early 2015, given the elevated geopolitical risks and potential uncertainties related to the presidential election.

PL T-bonds: The Ministry of Finance started pre-financing of next year's borrowing needs with an auction of short-term Treasuries. The 2Y paper was priced to yield 1.65% and the 5Y paper to yield 2.00%. As market conditions should remain favourable, we expect the MinFin to continue with pre-financing. As expectations for the upcoming easing are heavily priced in, we expect the 2Y yield to remain close to 1.6% toward year end.

Traders’ Comments

CEE Fixed Income: Elections in Ukraine this weekend. AQR on Sunday. Ebola in New York. Big losses for Amazon. These are the headlines this morning so it’s unsurprising that markets in our region are treading water with a slight skew towards weakness amid very light turnover. In primary markets, PEGAS NONWOVENS SA (unrated), a leading European producer of nonwovens textiles, mandated Ceska sporitelna (Erste Group) as a sole lead manager for an inaugural 4 year CZK-denominated bond issue. The transaction is expected to be launched at the beginning of November 2014, subject to market conditions. Shares in Telekom Austria are now down over 13% since the beginning of the month following the company announcment that it will proceed faster than previously expected with a EUR 1 bn increase in capital. The bonds are largely unaffected.