CEE Macroeconomic and Fixed Income Research

Analysts’ view

HU Macro: Yesterday’s unemployment figures revealed the two-sided nature of the labour market in Hungary. At first sight, everything is fantastic: the unemployment rate was 7.1% in 4Q14, 2 percentage points lower than in the same period of 2013. The number of unemployed was 319 tsd, 80 tsd fewer than in the same period of the previous year, while the number of employed people was 4142 tsd, 172 tsd more than a year earlier. In 2014, in terms of the annual average, the unemployment rate was 7.7%, 2.5 percentage points lower than in 2013. So, should we be absolutely happy about this? Well, we would definitely be happier if this improvement was due to more jobs in the private economy. However, without the state-fostered workers, the unemployment rate would be 10-11%, around the level seen during the crisis. So, fostered workers still play an important role in the unemployment rate improvement. This, however, continues to underpin arguments that a potential rate cut will not be undermined by the overheated state of the labour market (as resources are not being stretched on the labour market in the private economy). Hence, we continue to see downward risks to our call for the base rate (unchanged at 2.1% this year). If there is a cut, however, it may only come in March, when the MNB reveals its new economic projections.

RO Macro: Yesterday, the European Commission turned down Romania’s request to bulk up the defense budget at the expense of a higher budget deficit for 2015 (+0.3% of GDP). The cabinet agreed with the IMF and EU back in December on a cash budget deficit of 1.8% of GDP, while Romanian officials had asked for additional fiscal space to squeeze in military expenditures to the tune of EUR 500 m or 0.3% of GDP. The EC’s recent reaction reinforces our wariness in terms of budget execution and we still do not rule out hikes in some taxes later this year, other than income tax, as revenue collection is poor in Romania (31-32% of GDP). That said, we maintain our call for 5-year ROMGB yields at 2.3% for end-June.

Traders’ Comments:

CEE Fixed income: The Fed said it will be “patient” but Greek depositors are clearly not hanging around. Outflows from Greek banks in January were purportedly EUR 11 bn. To put that into perspective, there are EUR 14 bn of deposits left. The 10y CDS risk premium has soared to a 70% probability of default. Does anybody care? The value of the PLN and HUF dropped slightly, CEE fixed income was mixed but not much more than that. Polish bank bonds were better bid as policymakers muse openly about their options with respect to the suddenly increased debt-load for CHF denominated Mortgage holders and we’ll have to see if ad-hoc announcements overnight from Raiffeisen Bank International give some support to their sub debt. According to the statement, RBI has a CET 1 ratio of approximately 10% as per 21.12.2014 and a total capital ratio of over 15%. Management has no plans to increase capital but expects to extend the capital buffer by reducing risk-weighted assets by 20%. Global investor sentiment does look a little fragile. Equities sold off overnight in the US and Asia but Strabag easily placed EUR 200 m in 7y bonds yesterday with a book over EUR 675 m for a BBB- rated issuer. At the moment, liquidity is still king and although there are good reasons to be nervous, the price action in fixed income is muted.