CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

Looking ahead in CEE this week: In the upcoming week, mostly second-tier macroeconomic data will be disclosed; except for Friday when final GDP data for 3Q14 will be published by many CEE countries. The flash data surprised to the upside in many countries and we expect the details to reveal a strong contribution from domestic demand. In addition, Czech GDP is likely to be revised upwards (as this was usual in the last few quarters). The other important event to watch is this week’s rate setting meeting of the MNB.
Despite the HUF appreciation, the central bank will likely keep its interest rate unchanged at Tuesday’s meeting. A more active approach against the appreciation of the forint is likely only next year, when interventions could be used to stop the appreciation and ‘partially restock FX reserves’ which have been depleted by the recent FX conversions. Interventions anywhere below 308.97 EURHUF would result in realized profit and thus could be preferred over rate cuts. However, until the year-end, the government would be happier with a stronger exchange rate as already indicated by Economic Minister Varga in his earlier comments to the press. We see the EURHUF at 305 at year-end, but at 310-311 (or possibly even weaker) in the first few months of 2015.

TR Rating: S&P affirmed Turkey’s BB+ rating with a negative outlook on Friday. This was in line with our base case scenario, but we had not ruled out the likelihood of an outlook upgrade to stable. In that sense, the agency’s decision and emphasis on adverse risks to the Turkish economy were a bit more dismal than we had envisaged. S&P is wary about Turkey in an environment of low growth and political uncertainties. The decision is slightly negative for the markets and we maintain our 2.25 USD/TRY and 9% two-year bond yield forecast for the year-end.

Traders’ Comments:

CEE Fixed Income: The screens are green wherever you look this morning after China surprisingly cut interest rates for the first time in two years in what is quickly being touted as the first in a cycle of cuts which could also spur more easing measures from other Asian central banks too. S&P is attempting to temper those expectations in a statement that concludes that the BoC action is not seen by them as aggressive stimulus and the GDP growth target will actually be lowered but Mario Draghi had already given a boost to fixed income markets and yields reached new historic lows in large swathes of both the Eurozone core and periphery markets. According to the ECB website “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us. If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases,” Mr Draghi said. CEE bonds got caught up in the positive momentum of these events and the PLN also appreciated strongly. Today Romania re-taps the 7Y bond DBN022 with a RON 300 m target amount (our guidance is 2.95% +/-3 bps) and the Austrian Central Bank will hold a conference on Eastern European Economies. Later in the week, Thursday will be a day off in the US for Thanksgiving and we will also see the IFO this week along with details of German GDP growth where analysts will be looking closely to see how much of the recent growth came from inventories.”.