CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

PL Rates: In line with our expectations, the MPC left the policy rate flat at 2.5% at this meeting and dropped the forward guidance. The new inflation path is much lower than the one projected in March and the MPC voiced concerned over whether the pace of acceleration is sustainable. Although the MPC sees a cut as a risk, we think that the upcoming data on the real economy and inflation rate should finally convince the MPC to undertake such a move in the fall. Such a scenario supports our expectation of a low level of yields (10Y at 3.4% at the end of 3Q14).

RO Macro: Monthly retail sales flipped back into positive territory in May, while the annual advance picked up to more than 10%. Sales of fuels and non-food products drove the entire growth in May, while the volumes of food sold again failed to make the grade (-1% m/m). We continue to see private consumption consolidating into positive territory and the economy growing 3% this year. For the time being, we maintain our year-end call for 5-year ROGB yields at 4.3%.

HU Macro: Government net borrowings (ESA95) decreased to 3.6% of GDP in 1Q compared to 4.0% a year before, CSO reported yesterday. Although the 3.6% deficit is above the 3% threshold, the full-year target seems to be achievable as the first quarter is seasonally weaker than the others. However, the decreased general reserves, the lower inflation environment and the FX mortgage aid plan pose risks to the budget this year. But we believe that the government will make the necessary steps if needed (probably on the income side). Therefore we keep our forecast for full-year budget deficit of 2.9%/GDP for 2014 and 2015 as well.

Traders’ Comments:

CEE Fixed Income: Treasuries and Bunds sold off yesterday following ADP employment change numbers which surprised to the upside printing 281k vs median expectation of 205k. In most CEE markets we saw local currency and EUR bonds mirroring yield performance of safe heaven markets with yields closing the day higher between 1 to 4 bps with the exception of Romania and Croatia. ROMGBs traded lower in yield across the curve with the long end of the curve outperforming and tightening 6 bps in yield following strong retail sales and GDP numbers. ROMGBs also supported by recent actions of the Romanian central bank which reduced reserve requirement ratio to 16% from 18% on foreign currency liabilities releasing around EUR 500mn of additional liquidity. Today the attention will shift towards the ECB and US Non-farm payroll data. Although no new policy action is expected from the ECB, additional details on previously announced TLTRO could shed some light on the effectiveness of such operation.