CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Rates: The central bank is to decide on the base rate today at 2 pm CET. We expect that the policy rate (currently at 2.1%) will not be changed, in-line with the earlier announcement that the monetary easing cycle has been discontinued. The press statement will likely emphasize again that the loose monetary conditions will remain intact for an extended period of time. We believe that the base rate will be untouched until the end of next year, given the recent ECB decision and the start of the monetary expansion programs. The CB will publish the main figures of its new Inflation Report too (the full document is to be published on Thursday). The June GDP forecast for 2014 will likely be improved from 2.9%, while next year‘s growth expectation may remain intact at 2.5%. As for the CPI, the CB might not change the current 0% forecast for 2014, but it may expect higher inflation for 2015 than in June (2.5%). We keep our forecasts unchanged and we do not expect any market moving effects.

RO Bonds: The MinFin sold just RON 242 mn in a 10-year T-bond issue at an average accepted yield of 4.36% (up 8 bps compared to the previous tender in late August). The allocation was well below the initial plan of RON 400 mn. After yields hovered near all-time lows in early September, they now seem to be under upward pressure, due to rising concerns over further monetary policy actions from the Fed. Besides the external context, the political noise ahead of the presidential election in early November could also lead yields to go higher later this year. We continue to see the 5-year ROMGB yield at 4.1% in December 2014.

PL Macro: Although the growth dynamics of retail sales have been slowing recently, we still expect to see a positive figure (1.2% y/y) in August, in contrast to last week’s industrial output releases. Domestic demand has been losing strength, private consumption, however, seems to remain the strongest factor and we hope that today’s reading will confirm that. The unemployment rate should drop further, mostly due to seasonal patterns. A surprise on the downside may strengthen expectations for a deeper policy rate cut in October and push 10y yields down toward our expectation of 2.9% at the end of 3Q14.

Traders’ Comments

CEE Fixed Income: Austrian financials came under pressure yesterday in what was otherwise a relatively upbeat day for CEE sovereigns. Large parts of the cash CEE corporate market were also unfazed by the downward pressure on prices of Austrian bank bonds but turnover was low in the FX and government bond markets. The weakness of Austrian banks will obviously have negative growth implications for the region, but new legislation in Austria held an unexpected twist for investors. The Volksbanken, of which Austria holds 43% after pumping in EUR 1.35 bn of state aid, is widely expected to fail the upcoming AQR following a report by Fitch which indicated as much earlier this month. The government has now proposed a new bail-in tool which Moody’s regards to be credit negative. On the face of it, the draft law appears to allow the regualtor to impose losses on junior bondholders in the instance that a bank requires emergency state aid. This sparked fears amongst holders of HAA bonds which is currently in the process of restructuring that even senior bondholders could suffer losses. This was rebuked by the Finance Ministry this morning which should give a lift to HAA bonds today but RBI sub debt, which was actually hardest hit in yesterday’s trading session, is preparing to announce increased provisioning for losses in Ukraine and Russia. The mood remains dire but offers opportunites for the brave. HAA 4 3/8 2017 fell from 92 to 78 yesterday but surged by as much as 10 points in pre-trade today.