CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

SR Rates: After having taken a slightly more aggressive stance than anticipated at the previous rate setting meetings, we expect the NBS to stay on hold today, following the 100 bp cumulative cut in May and June. The main factors behind the decision to refrain from cutting again are, in our view, rising fiscal uncertainty, absence of progress on a new IMF deal, depreciation pressures on the dinar and abundant liquidity in the banking sector. However, until the end of this year, we still expect another 50 bp reduction of the policy rate.

HU Bonds: The Debt Management Agency deputy-CEO said government bond sales, especially T-Bill sales will be decreased to stop public debt from increasing further. The agency will try to continue to lower the ratio of FX debt, but no Eurobond repurchase is expected, he added. The FX ratio is expected to drop to 35% from 42% currently by the end of the year. The main risk to this target is the depreciation of the HUF. The GDMA has already cut back the weekly 3M and 12M T-Bill sales from HUF 60 bn to HUF 40 bn in an attempt to reduce liquid government reserves. We still expect the ratio of public debt to GDP to stay above the 79.2% seen last year-end as it was already helped by a halving of liquid reserves. We maintain our view that government bond yields will increase somewhat (to 4.8% for the 10-year maturity) by end-2014 as the impact of regulation to force non-resident investors out of 2-week CB T-Bills by August becomes apparent.

HU Macro: The trade balance surprised to the downside as net exports dropped to EUR 419 mn in May vs. EUR 550 mn expected and EUR 491mn last year. Export dynamics slowed down significantly during the month as they grew by only 2.4% y/y vs 4.2% ytd, while imports increased at an average pace of 3.8% y/y. Higher imports support our view that private consumption has already started to grow this year from an 11-year low in 2013. We maintain our forecast of 2% for household consumption growth this year, which could be the most important element of the 2.8% GDP expansion next to the recovery in investments (+7.9%).

HR Macro: Preliminary results for the May trade balance performance confirmed expectations, with exports virtually flat (owing also to the high 2013 base), while imports declined close to 5% y/y. This resulted in a narrowing of the trade gap by 12% y/y, while the export-import cover ratio picked up to 61.1% (+730 bps vs. the April figure). We expect a similar footprint ahead, with recovered external demand favouring the export dynamics (although competitiveness issues remain a constraining factor on stronger utilization), while imports are seen reflecting the ongoing domestic demand weakness. We see this figure as having no impact on our capital market forecasts.

Traders’ Comments:

CEE Fixed Income: Sometimes, sudden sea changes in sentiment come from unsuspected places. The FOMC minutes were on everybody’s radar and had the potential to change sentiment but contained no surprises. Espirito Santo, on the other hand, is a wake-up call and Mario Draghi reiterated how futile monetary policy will be in the absence of economic reforms in debt overladen peripheral countries in the Eurozone. Today’s planned issuance of 3y Greek debt will be a litmus test for investor sentiment. The main point in the FOMC minutes was their concern about investor complacency and the overriding fear is that when markets turn, which they inevitably will, the sell-off will be ferocious. The rally in CEE yields took a breather along with the Eurozone periphery yesterday but there is still no apparent catalyst for a discontinuation of the liquidity driven hunt for yield but a surprise rate hike from the BoE today would really put the cat amongst the pigeons.