CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

CZ Macro: In July, CPI came in at the highest reading since the beginning of 2014 (0.5% y/y) in the Czech Republic, largely due to rising prices of food and non-alcoholic beverages (0.8% y/y). As we expect inflation to further accelerate in coming months, largely due to improving domestic demand, the probability that the CNB will have to proceed with further monetary easing via an increase of its current FX intervention floor (EURCZK above 27) has declined considerably. Managed strengthening of EURCZK by the CNB seems to be improbable also given the recent market-driven EURCZK appreciation (up to 28 during the previous week) as a result of increasing global risk aversion and a weaker EURUSD. We forecast a level of 27.5 in EURCZK through 2Q15.

RO Macro: Monthly inflation fell 0.1% in July, mainly due to cheaper food items. The annual inflation rate picked up to 1% from its all-time low of 0.7% in June but has remained for the seventh month in a row below the central bank’s inflation target of 2.5%. The CPI reading renewed market expectations for further monetary easing in the coming months. For the time being, we expect another 25 bp key rate cut by the end of the year, but we are not completely discounting the possibility of fresh reductions in the reserve requirement ratios, especially for domestic currency liabilities. Our inflation call for December 2014 is 2.2%. We forecast a slight weakening of the RON vs EUR to 4.5 by year end, a loss in the value of the RON by just over 1% vs current levels.

RO Bonds: The MinFin yesterday re-opened a five-year EUR-denominated Tbond issue and raised the planned EUR 250 mn at an average yield of 2.19%. Demand was modest as investors submitted bids worth only EUR 281mn. We see five-year RON-denominated T-bond yields going higher by December 2014 (forecast 4.1%, equivalent to a drop in price of more than 3% on the ROMGB 4.75% 19), due to the upcoming presidential election scheduled for early November and new rhetoric from the government in its relations with the IMF which might lead to a friendly break-up in the next few quarters.

Traders’ comments: Yesterday’s trading session had the feel of a deadcat- bounce to it. News about an international aid convoy to Lugansk in eastern Ukraine to be led by the International Committee of the Red Cross, with the participation of EU, Germany and Russia raised a few eyebrows and will be watched closely by jumpy markets and on the economic data front the German ZEW will take precedence today with investors looking for any further signs of a negative impact from the conflict in Ukraine on German GDP growth. RBIAV sub debt bounced significantly as buyers found it difficult to find sellers but in CEE cash corporates there is a sense that investors are searching for bids as they cautiously reduce risk exposure. The primary market has, unsurprisingly, ground to a halt for the time being. In the sovereign space, the short end of ROMGBs saw a big jump in yields after bonds had reached record low yield levels but inflation now looks as if it may also have bottomed out.