CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

Looking ahead this week in CEE: We will have three central bank meetings in the region this week, but none of them is likely to result in a rate cut. Czech rates have reached bottom, the Hungarian easing cycle is officially over and the Turkish central bank is keeping an eye on the exchange rate which prevents it from cutting rates. (The MNB will have its meeting on Tuesday, while the CBT and the CNB boards will meet on Thursday.) The macro calendar will be relatively empty, but Polish retail sales (Tuesday) and the Hungarian current account (also on Tuesday) could get some attention. A slowdown of retail sales in Poland might increase the probability of a deeper than anticipated rate cut at the October meeting. The Hungarian current account surplus, which should increase towards EUR 3.6 bn by year-end according to our calculations, could provide more confidence to the central bank for a temporary reduction of FX reserves (to supply funds to banks for the upcoming FX loan conversion).

RO Bonds: After scrapping a previous auction in August for 5-year T-bonds maturing June 2019, the MinFin retapped the local market at the end of last week and raised RON 235 mn. The amount was less than half the target amount (RON 500 mn). The average accepted yield went up to 3.54%, from 3.3% at a previous reopening in mid-July. Demand was decent and investors submitted bids worth RON 600 mn but yields on the local secondary market are still under upwrad pressure, pushing debt managers to scale down two consecutive tenders in September. We see yields on an upward trend going into December 2014, due to political noise and heightened geopolitical tensions. We reaffirm our year-end 5-year ROMGB yield forecast for December at 4.1%.

PL Politics: The new government was sworn in on Friday by the president. Ewa Kopacz will be the new prime minister, as Donald Tusk resigned in order to become president of the European Council as of 1 December. The reshuffling of the cabinet should be neutral for the bond market, as most of the ministers, including the Minister of Finance, Mateusz Szczurek, remain in their respective positions. We expect the Parliament to be approved on October 1. Our market forecasts remain unaffected by this news.

Traders’ Comments

CEE Fixed Income: We have a major week behind us and a relief rally in CEE fixed income. The low take-up of the TLTRO and another drop in the EUR 5y5y IRS has fuelled expectations that the ECB will have to resort to full-blown QE. Mario Draghi is scheduled to speak to the EU parliament committee in Brussels today and will likely reiterate that fiscal reforms need to begin in earnest. All in all, the growth and inflation outlook in Europe appears as bleak as ever whilst the recovery in the US chugs ahead, driving the USD up. Asian equities couldn’t build on the positive impetus from last week but it looks more like profit taking and any losses in CEE fixed income will likely be capped by increasing expectations of QE in the Eurozone. Whilst the USD soars, CEE FX are holding their own against the EUR as the carry trade entices investors into higher yielding bonds. The biggest gainers last week were long dated HGBs and the HUF vs EUR.