CEE Macroeconomic and Fixed Income Research

Analysts’ view

Looking Ahead in CEE This Week: The holiday season is approaching fast and, therefore, after the relatively dense macro calendar at the beginning of the week, we will not see as much data coming out in the second half of this week. There will be two central bank meetings which deserve attention though. On Tuesday, the MNB from Hungary is expected to keep the policy rate unchanged at 2.1%. However, a change in the communication towards a more dovish tone cannot be ruled out due to the persistently negative surprises in inflation readings. In the Czech Republic, the CNB is also expected to hold the rate at 0.05%. Due to low inflation readings, however, the CNB might think about prolonging the exit from the current FX intervention regime (keeping the EURCZK above 27.00) until early 2017.

PL Macro: We expect the inflation rate to remain negative at -0.5% y/y in November (-0.1 m/m), however, the risks are on the downside as dropping food prices and the low level of the oil price add to deflationary pressures. Any disappointing reading may bring a drop in 10Y yields from the recent 2.6% towards the 2.4% which we expect to see at the end of 1Q14. Otherwise, we expect the figure to have limited impact on the MPC stance and policy rate stability

RO Politics: Prime Minister Ponta yesterday announced the cabinet reshuffle and summoned the coalition MPs for their backing in the Parliament later today. As the Ethnic Hungarians have made a clean break from the cabinet, the Liberal Reformist Party, a small rump of the bigger Liberal Party, has joined the political fray. Of note, the former Ministry of the Budget and the Ministry of Finance have merged into one, led by Darius Valcov. As the coalition built around the Social-Democrats still enjoys a majority in the Parliament and the Ethnic Hungarians have offered their support, we see high chances of the new cabinet getting the go-ahead from the lawmakers. We continue to look for a 5-year ROMGB yield of 2.9% in 1Q15.

Traders’ Comments:

CEE Fixed Income: Success for Abe in Japan’s snap elections should have been met with a rise in equity prices but after a low turnout and a landslide win the Nikkei has fallen over 1.5% this morning in a market vote of nonconfidence. Weak global growth prospects and deflationary fears are also being compounded by marginal growth in Euro area industrial production and a record payback in the LTRO. It’s obvious there is only so much the ECB or BoJ can do to spur growth in the absence of meaningful political reforms and, as such, the recent shift from equities into safe-haven fixed income and out of EM currencies and CDS. Put the rise in Greek 3y bond yields to close to 11% on top of that, then it’s no surprise that CEE FX and CDS are starting to show some indications of strain. We saw an especially big move in EURRON on Friday and a rise in risk premiums on CEE CDS across the board. ROMGBs certainly look like one market that has got ahead of itself. Whilst it’s logical that QE should support bond prices, pressure on the currency will lessen the relative value of the carry trade at these extremely low yield levels. The same goes for short-dated HGBs which also appear very vulnerable given how they compare to Poland, Romania or Croatia. It should be noted that one country that should benefit disproportionately from the drop in the oil price is coming under increased pressure: Turkey. Erdogan’s purging of the press has definitely accelerated the trend but a tendency toward a weaker TRY was already visible. Statements from OPEC that it is prepared to watch the oil price fall to USD 40 before actively attempting to cut output may soon claim it’s most prominent victim soon as Venezuelan bonds are now pricing in a default scenario. Russia is getting hammered and RBI along with it. The pressure on markets could intensify over the course of the week as we await the FOMC policy announcement, US CPI and the German IFO.