CEE Macroeconomic and Fixed Income Research

Chart of the Day:

US T-Bonds: Dovish comments from the Fed failed to calm bond investors nerves following a surprisingly strong GDP number.

Analysts’ Views:

CZ Rates: After today's CNB meeting, the bank board is expected to leave both the key interest rate (2W repo rate at 0.05%) and FX intervention target unchanged (EURCZK above, but close to 27). However, as the new macroeconomic projection is scheduled to be released after the meeting, the lower than previously anticipated CPI growth in 2015 (2.2% according to the current forecast) may force the CNB to further postpone the withdrawal from the FX intervention regime from next year's second quarter deeper into 2015, or even into 2016. In spite of CPI nestling down close to zero since the beginning of 2014 (0.0% in June), we see the probability that the CNB will proceed with an increase of the current FX intervention floor as fairly low (due to the rather positive outlook for CPI growth in the coming months, driven by rising core inflation - reflecting a continuing improvement in domestic demand). Therefore, we expect to see EURCZK remain at 27.50 at least until the end of 2Q15.

PL Macro: Russia announced another embargo on Polish products. This time, the importation of fruit and vegetables will be banned, starting from August 1, and Polish producers may have trouble redirecting the exports to other countries. However, we do not expect the embargo to have a major negative impact on our growth forecast of 3.1%. The inflation rate actually seems to be more endangered, as the embargo may only strengthen the downward pressure. In particular, food price developments have already surprised on the downside. That should further strengthen expectations of a rate cut and low level of yields (we currently see the 10Y yield at 3.4% at the end of 3Q14).

Traders’ Comments:

CEE Fixed Income: Argentina defaulted yesterday. BES announced a loss of EUR 3.58 bn in the first half of 2014 which basically reduced common equity Tier 1 ratio to 2 ppts below the regulatory minimum. BNP Paribas posted a record net loss of EUR 4.32 bn after being fined USD 8.97 bn by US prosecutors. Include the market perception of an increasing likelihood of a rate hike in the US and one could conclude things aren’t looking too rosy for fixed income investors. Not so if you’re a Caa1/CCC+ rated issuer of PIK toggle notes. Play Topco, the polish wireless telecom services company, raised EUR 415 m in 5.5NC1.5 notes at a cash yield of 7.959%. Overall, it was a day of profittaking in CEE fixed income with long dated HGBs looking particularly vulnerable to a shift toward “risk-off” sentiment.