CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RS Rates: While the inflation trajectory (March CPI at 2.3% y/y) and more comfortable FX market developments following the parliamentary elections may support a looser monetary policy stance, we see the NBS remaining on hold at today’s meeting. We see the NBS maintaining a cautious stance until the final formation of a new government and a subsequent fiscal framework update (and potential IMF arrangement). Under the precondition that no major negative surprise occurs, i.e. the new government illustrates its commitment to fiscal and structural reforms, we see the NBS having the maneuvering space to further cut the key rate by 50 bps in 2H14.

HR Macro: March inflation remained in the deflation zone, with the annual rate landing only one notch above our expectation at -0.4%, revealing practically no price pressures across the board. On the monthly level, CPI increased by 0.5%, where the prices of clothing and footwear were the main upward driver with a 10.7% m/m uptick (due to new collection arrivals). The weak domestic demand footprint and limited supply-side pressures suggest inflation bordering the deflation zone in the near future as well. Nevertheless, a gradual unwinding of the base effect is seen driving inflation towards higher ground in 2H13 and we see inflation rebounding to the 1%+ region by year-end. The release is seen as having no impact on our capital market forecasts, as we expect the exchange rate to advance towards the 7.55-7.60 level in the following months, supported by seasonal tourism-driven FX flows.

PL Macro: Nominal wage growth (4.8% y/y) and employment (0.5% y/y) beat market expectations and confirmed the ongoing recovery. Improving labour market conditions should further improve sentiment and the higher income of households means an increase in spending. However, as demand pressure may appear only toward the end of the year, at this point, the data has not influenced the expectations for a hike in any way. However, in the medium term, it should support the zloty strengthening toward 4.09 at the end of 3Q14.

Traders’ Comments:

CEE Fixed Income: While most people we talk to don’t expect a major breakthrough with regard to Ukraine at today’s talks in Geneva, we also sense a feeling of increasing complacency toward geopolitical risk. For example, in CEE cash corporates RBI weakened as the armed conflict in Ukraine gained traction but with no evidence of real selling. This is obviously a positive for CEE fixed income and should be compounded by Fed Chairwoman Yellen’s dovish statements made yesterday at the Economic Club of New York. In fact, we observe the beginnings of a reinvigoration of the technical bid for higher yielding assets and expect this to accelerate once the Easter break is over. Romania easily issued EUR 1.25 bn of 10y debt in international capital markets the other day and it is worth mentioning that we didn’t see the typical pattern of investors “making space” for the new issue by selling older paper. Indeed, as time passes we hear over and over again that investors are not happy with current valuation levels but observe very little real selling when the market goes into sporadic “risk-off” behaviour. Polish industrial output and producer price data are expected to confirm the goldilocks picture of non-inflationary growth today and the reluctance of investors to bid more aggressively for POLGBs recently makes them look increasingly attractive given that HGBs rallied in yesterday’s trading session.