CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

PL Macro: The current account deficit in August (EUR 986 mn) was larger than expected but the FX market response was limited. Today, however, any downward surprise to our inflation rate forecast of -0.4% y/y in September may move the market. Disappointing data may strengthen expectations for a bigger move from the central bank. After a series of more hawkish comments earlier this week, Osiatynski, one of the " doves" in the MPC, suggested that there is space for further rate cuts and, in his opinion, it should be one move. Bratkowski shares the view that the policy rate should be lower. Such a statement is in opposition to what Chojna-Duch believes i.e. that now the MPC should wait and assess the effects of the recent cut. While fundamentally there is space for another 50 bp cut, the MPC may be reluctant to deliver it unless data, including today's inflation rate, and the new inflation projection are well below expectations. Currently, we bet on a 25 bp cut in November with risks on the downside. This situation may translate into a further drop in long-term yields, posting a risk to our current forecast of 10Y yields close to 3% at the end of the year.

RO Bonds: The MinFin intends to tap international markets before the of this year with a view to pre-financing 2015 needs. The Deputy Treasury Director said the MinFin is looking for a maturity longer than 10 years and wants to make the most out of a low-interest rate environment, bearing in mind the big redemptions in 1Q15. The move could also be seen as a precaution in case the conflict between Ukraine and Russia takes a turn for the worse and some investors might chose to move their capital from the Eastern border of NATO towards western countries. For the time being we see local yields rising towards the end of this year, as presidential elections approach and the geopolitical risks are still there.

HU Macro: According to the final data, industrial production decreased in August by 5.7% m/m, and y/y output growth declined to 0.5%. The final figure was published by the CSO yesterday and included the details behind the drop. On one hand, it is due to a one-off effect because the Audi engine factory stopped production for 2-3 weeks and Suzuki has been operating at reduced capacity for some time. On the other hand, total new orders in the observed branches of manufacturing declined by 0.4% in August and the volume of new domestic orders fell by 4.7%. This may suggest a more permanent downturn in the business cycle. Despite these poor figures the volume of total stock of orders increased by 18.2% y/y, and, in July, industrial production was at a historic high. We tend to believe that the decline is not just a one-off effect and have modified our 2014 industrial production forecast from 10.8% to 8.9%. Our market forecasts remain unchanged.

Traders’ Comments

CEE Fixed Income: If bond markets needed any excuses to head higher in price yesterday, they got it when the German ZEW was published. The Bund yield touched a record-low of 0.835% and POLGBs took that as a lead, outperforming in the CEE region in spite of a weaker PLN. The yield on 10y GGBs, however, broke through the 7% barrier to the upside as a reminder that tensions in the Eurozone could easily flare up again especially as German policymakers continues to show intransigence on the question of austerity even though they have been forced to revise their own growth projections down quite radically. Most other areas of CEE fixed income were basically treading water. German CPI is due out this morning and will be in focus.