CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HR Macro: June inflation matched our expectations and remained in the deflation zone, with the headline figure landing at an annual rate of -0.4% (EBCe: -0.4% y/y; market consensus -0.1% y/y). On a monthly level, the CPI dropped by 0.3% amid seasonal factors, i.e. lower food and clothing prices, which were the main items behind the m/m fall. A similar pattern is expected ahead, with the deflation trajectory being supported by suppressed domestic demand and limited pressures on the supply side, on top of the still high base effect. Nevertheless, toward the end of the year we expect to see inflation gradually picking up, as the base effect eases and food prices stabilize, thus bringing the average 2014 inflation rate virtually close to zero. June’s CPI release is seen as having no major impact on our capital market forecasts and monetary policy actions, i.e. we continue to see 7y yields hovering around the 4.25 mark throughout 2014.

SI Macro: The May unemployment rate confirmed the ongoing stabilization trend, with the figure declining by 0.45 ppts m/m and leveling off on an annual level. The recovering growth momentum and less fragile outlook are seen as supporting stabilization and only a gradual recovery, which in turn implies lower risks to the domestic demand outlook ahead. We thus remain comfortable with our 0.7% GDP growth forecast for 2014 and expect 10y yields to rise to 3.2% in Q3.

Traders’ Comments:

CEE Fixed Income: The top news this morning revolves around US sanctions targeting specific Russian companies at the same time as Euopeans dither. The new list covers Russian banks, energy and defence companies which will face major restrictions on their ability to do business in the US. The sanctions elicited an aggressive response from Russian President Putin and talk of retaliation. Gazprom was notably exempt from the sanctions which can only be seen as caving in to European pressure not to go too far. Nevertheless, the sanctions are substantial, pushing dovish comments from Yellen to the back of minds of investors. The saga surrounding BES also continues in spite of a massive rally in the banks subordinated debt on talk of plans to raise capital. But that’s all it is – talk, so the rally may very well be short-lived. CEE FX is already on the back-foot this morning as the „buy on dips“ call disipates into a „risk-off“ day. Serbia was already under pressure following the resignation of the reform-minded Finance Minister and yesterday ROMGBs sold off as the RON weakened.