CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

PL Rates: The MPC surprisingly left the policy rate flat at 2.0% despite the fact that the new inflation projection showed that inflation will reach only the lower bound of the target (1.5%) within the projection period and growth will remain rather sluggish. As such, we are puzzled by the decision. Governor Belka stated that growth was the main concern and if the slowdown is not deemed to be temporary and dissapointing data keep coming in, the door for further cuts is open. Fundamentally, we see the space for further easing and we currently think that weak economic data should eventually force the MPC to lower the policy rate further. At this point, we sustain our forecast of a record low level of yields on the 10Y POLGB at 2.31% at the end of the year.

CZ Rates: Retail sales, at 6.2% y/y in the Czech Republic in September (4.5% working-day adjusted), confirmed the ongoing recovery of domestic private consumption. Similarly to previous months, the sale of motor vehicles, edging up to 14.7% y/y (adding 3.5pp to the overall 6.2% y/y retail sales increase), served as the main driver of growth. For the coming months, we see retail trade continuing to expand (5.7% y/y in 2015), due largely to a combination of a declining jobless rate, accelerating wage growth and strong consumer confidence. The increase of retail sales, along with the already increasing rate of core inflation, should prevent the CNB from increasing the intervention floor in the EURCZK exchange rate. The bank should continue to use the exchange rate as a monetary policy tool at least until 2016. At today’s meeting, we expect the bank to keep the policy rate unchanged at 0.05%. We still see the EURCZK at 27.50 at the end of 2014 and yields on 10Y T-bonds at 1.25% at the end of 2015.

TR Rating: In its Annual Credit Risk Conference in Istanbul, Moody's highlighted Turkey's increased external vulnerabilities due to low growth, political uncertainty and geopolitical developments, but the agency did not signal any rating downgrade despite the negative outlook on Turkey’s Baa3 rating. A negative outlook means that there is a reasonable possibility of a rating downgrade in 12 to 18 months. We believe the company may be in a position to choose between cutting the rate or changing the outlook to stable by the end of next year. Prime Minister Ahmet Davutoglu will announce today a part of the structural reform agenda to boost Turkey’s growth potential. If the program manages to identify clearly defined measures to reach quantifiable objectives within a certain timeframe, the government may allay investor concerns about its credibility.

Traders’ Comments

CEE Fixed Income: US private sector payrolls data out yesterday point to a solid non-farm payrolls figure on Friday whilst German factory orders this morning painted a less than rosy picture for Eurozone growth. The ECB will be in focus today and we can expect questions from the press to Mario Draghi about the probability of fully blown QE but Ben Bernanke, former FED Chairman said what most of us think when he was speaking at a conference in Denver yesterday, by stating “It is going to be very difficult for the ECB to buy government debt,” and speculation about the purchase of corporate debt has also taken a hit after Reuters posted an article indicating their was a rift amongst high ranking central bankers in the Eurozone and Mr Draghi about his style of leadership. Our guess is that the ECB will deliver nothing today which will make the US data the primary driving force behind market moves which will extend to our markets. CEE fixed income in general is struggling a little bit to make further headway anyway and POLGBs in particular took a predictable hit after NBP Governor Belka reverted back to his style of mind games and admitted the MPC was split on the decision not to cut rates. The POLGB yield curve bear flattened as a result. CEE domestic government bond yield spreads to German government bonds are wider this morning as nervousness creeps in.