CEE Macroeconomic and Fixed Income Research

Analysts’ View:

HU Rates: The National Bank of Hungary will hold its monthly rate setting meeting today. The MPC embarked on a rate cutting cycle in March and cut the key rate by 15 bps to 1.95%. According to the statement released after the decision and the press releases by policymakers, the MPC will continue the easing cycle. We believe (in line with the market consensus) that the Council will cut the rate again by 15 bps to 1.8%. Deputy Governor Balog stressed that the MNB’s decisions will not be influenced by its peers in the region and, as such, the Polish 1.5% key rate will not constrain the MNB if the forint continues to appreciate. We maintain our view that the key rate will be cut to 1.5% by the end of 2Q15, with the cycle stopping there. In the case that the forint continues to strengthen, the MPC may continue the rate cuts in July, albeit in smaller steps. In our opinion, the back end of the yield curve may slightly follow the short tenors and the 10-year yield may fall to 2.80% by end-2015.

RO Bonds: The MinFin yesterday reopened a bond issue maturing June 2021, raising RON 200 m, as planned. Although the bid-to-cover was pretty comfortable (2.2), the average yield edged higher to 2.7% from 2.6% at the previous auction held in early March. The mood among investors has been in flux on the rapidly changing news about Greece. Thus, the yields on longdated bonds edged higher recently, after the IMF rejected Greece’s request to delay loan payments. This notwithstanding, we continue to see 5-year ROMGB bond yields hovering around 2.3% for the better part of this year.

PL Macro: Industrial output and retail sales growth (8.8% y/y and 3.0% y/y, respectively) were well above market expectations, suggesting that economic growth remained robust in 1Q15. The average growth of industry accelerated to above 5% in 1Q15 (form 3.2% in the previous quarter), while the retail sales figures are in line with further growth of private consumption, which in our view should be the pillar of this year's growth. The positive development of economic activity also supports stability of rates and makes the MPC confident about their recent decision (a 50 bp cut and end of the cycle). The improving economic outlook is also positive for the zloty which appreciated to 3.98 vs. the EUR on Monday. We keep our forecast of 4.04 at the end of this year, as the expected rate hikes in the US in 2H15 should have an adverse impact and weaken the Polish currency.

HR Fiscal: Yesterday, the CBS published its semi-annual EDP report. The budget deficit increased to HRK 18.8 bn or 5.7% of GDP in 2014 (up 0.3 pp from the 2013 figure) which was not dramatically different from our 5.5% of GDP call. Public debt at the end of 2014 stood at 85% of GDP, up 4.4 pp vs. 2013. It should also be noted that, due to methodological reasons, the public debt series has been adjusted upwards to include several entities, most notably CBRD, which resulted in a one-off increase (close to 5% of GDP).
Lower economic activity and the absence of stronger inflationary pressures only added to the adverse trend. While the fiscal numbers were in line with our expectations, this release again confirms a demanding fiscal profile as the expected consolidation path continues to lag behind the EDP related targets. Nevertheless, we see the fiscal risks being somewhat overlooked as current market conditions continue to favour downward yield movements.

Traders’ Comments:

CEE Fixed income: The Greek drama and poor fiscal numbers may have taken their toll on investor confidence in Croatian Eurobonds yesterday with bonds trading down 1 full big figure. Serbian Eurobonds moved in sympathy but to a lesser extent. The PLN strengthened vs EUR on the back of strong economic data and yields in POLGBs backed up but while the HUF followed the PLN stronger, yields on HGBs fell in anticipation of a rate cut today.