CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

TR Macro: The 12-month rolling budget deficit to GDP ratio remained flat m/m in March, at 1.2% (Erste: 1.2%), and the primary surplus rose to 1.9% of GDP from 1.8% during the same period. The government targets a 1.9% budget deficit to GDP ratio by the end of the year, up from the 1.2% deficit in 2013. The lack of a visible slowdown in the economy poses a downside risk to our 2.9% budget deficit forecast for 2014. In the meantime, the seasonally adjusted unemployment rate dropped to 9.1% in January from 9.4% in December. The non-farm payroll gains accelerated to 184K m/m in January, up from a 123K average increase in the previous three months and also the highest monthly job creation since November 2010. Overall, the surprisingly healthy labour market outlook confirms that the economy has probably escaped any sharp slowdown in the first quarter, as already evidenced by the industrial production figures for January and February. In essence, if the CBT’s looser liquidity management, as well as strengthening sentiment after the local elections remains valid over the rest of the year, then growth momentum can gain speed. We remain cautious on yields and maintain our 10.5% two-year bond yield forecast for the year-end.

PL Macro: The inflation rate came in at 0.7% y/y, in line with market expectations. The inflation rate has remained well below the NBP target for quite a while now and we do not expect that to change anytime soon. The slow build up of domestic inflationary pressure may push the inflation rate above 1.5% but only toward the end of the year. The data release did not bring anything new for the MPC or the markets. However, overall economic improvement may drive the appreciation of the zloty over the medium term and we see the EURPLN at 4.09 at the end of 3Q14.

Traders’ Comments:

CEE Fixed Income: Romania raised EUR 1.25 bn at a record-low yield in 10 year debt yesterday as investors shrugged off news of armed confrontation in Ukraine. Moreover, the final pricing of ms+200 bps settled well below initial guidance of ms + 225 bps, equivalent to a yield of 3.7% with bids outstripping the issued amount by more than a multiple of four. Overall, though, trading in CEE fixed income is sluggish with markets gyrating in line with the mood swings of major equity indices. European stocks were struggling after the release of a weak German ZEW survey where expectations have now fallen for four consecutive months and also came in below analyst expectations but higher than expected inflation data in the US did nothing to derail the bounce back in the S&P 500. Optimists will point to the fact that the ZEW Current Situation Survey rose for the sixth time in a row and that there were positive earnings surprises in the US. Even the price of gold fell which is typically indicative of a “risk-on” mentality. Today’s much awaited Chinese GDP data showed a further moderation of the economy’s expansion to a rate of 7.4% but this was better than anticipated and Asian equity markets are being pulled higher by a sharp bounce in the Nikkei. This all bodes well for the carry trade in CEE as long as the conflict in Ukraine remains contained to smaller skirmishes between the armed forces and separatists but liquidity is low and markets are fickle. POLGBs look like a good buy today though. Yields rose between 3 and 8 bps across the curve yesterday in spite of the fact that inflation is still way below the NBPs 1.5% inflation target and the yield on German bunds fell.