CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Rates: The Monetary Council’s meeting is going to be held today at 2pm. At the last meeting, the Council reduced the base rate by 20 basis points from 2.30% to 2.10%. At the press conference, they confirmed that the base rate had reached an appropriate level. In line with this, we expect that monetary policy will not have changed since then. The press conference at 3pm will be in focus, as it is likely that the central bank will reiterate the previous statement and give more information on future policy. In our opinion, the base rate will remain at 2.1% until the end of 1H15. The first hike could be in 2H15, in sync with our expectation for monetary tightening from the Fed. We maintain our 2.1% forecast for this year and expect 3% for the end of 2015.

RO Bonds: The MinFin sold bonds maturing in February 2025 worth RON 200 m as planned, at an average yield of 4.28%. Investor demand reached RON 335 m. We continue to foresee higher bond yields by year-end (4.1% in December for the 5Y maturity), due to the presidential election and a possible break-up with the IMF.

PL Macro: We expect the unemployment rate to drop to 11.7% reflecting the impact of seasonal employment patterns. We also expect retail sales to grow around 3% y/y in July, but we see the risks to the downside due to recent disappointing releases of leading indicators (such as PMI) suggesting that the economy has been slowing. Disappointing figures may only strengthen expectations for a rate cut which, in our view, is mostly priced in by the markets and supports a low level of bond yields. We expect 10Y yields to stand at 3.55% at the end of this year.

Traders’ comments:

CEE Fixed income: Yesterday’s bank holiday in the UK meant that turnover was very subdued in our markets. Government bond yields took the path of least resistance and fell in line with the drop in yields in the Eurozone, especially the periphery, where comments from Mario Draghi at Jackson Hole were taken as an increased probability of more monetary policy easing in the Eurozone. Equities had a decent session which gave a boost to the risk-on camp as the S&P 500 broke through 2.000 for the first time. In terms of economic data, things weren’t quite so rosy with consumer confidence posting declines in both the Czech Republic and Hungary. The Economic Sentiment Index in Hungary also fell to a nine month low. The market impact was negligible and nothing is expected from today’s MHB rate decision either.
Investor attention will turn to the talks between Putin and Poroshenko but expectations of any breakthrough have already been doused which basically leaves Eurozone CPI data as the next big thing on this week’s scheduled agenda. Analysts are falling over themselves in a rush to adjust their forecasts for ECB monetary policy since Draghi mentioned the drop in market inflation expectations and markets appear to be factoring in the increased possibility of QE but CEE FX markets took it all with a pinch of salt.