CEE Macroeconomic and Fixed Income Research

Analysts’ view

HU Rates: We expect the central bank to keep the policy rate unchanged at 2.1% at its meeting today. However, due to low inflation figures the MNB may change the tone of communication towards a more dovish bias. All eyes will be on the press release which is to be released at 15.00 CET, one hour after the rate decision is published. We see downward risks to our current call that the policy rate will remain unchanged in 2015 and also see risks to the downside to our 10Y yield forecasts (currently envisaging 4.5% for 1Q15).

RO Politics: In line with our expectations, the reshuffled cabinet led by Social- Democrat Victor Ponta has been approved by the Parliament (377-134) and will be sworn in this evening. With two ministers, the Liberal Reformist Party is now a member of the new cabinet replacing the Ethnic Hungarians who broke away from their coalition with the Social-Democrats, but are likely to continue to back the coalition in power. In a separate event, debt managers sold 1-year T-bills worth RON 1 bn yesterday, in line with their initial plan. The average yield was 1.6%, marginally lower than five weeks ago (1.63%). Demand was decent and corresponded to a bid-to-cover ratio of 1.8. We are looking for a rie in the 5-year ROMGB yield to 2.9% in the first half of 2015.

TR Macro: The 12-month rolling central government budget deficit to GDP ratio widened by 0.2 ppts m/m to 1.7% in November, deviating further from the government’s 1.4% year-end target. The seasonally adjusted unemployment rate increased m/m to 10.4% reaching a four-year high but non-farm payrolls continued to strengthen, raising hopes for a stronger economy in 4Q. Meanwhile, the CBT sold USD 60 mn at the FX auction yesterday, 50% above the USD 40 mn minimum size. This indicates that the CBT is starting to become worried about the FX rate, but this step is too small to suggest that the CBT is alarmed. On December 24, the CBT will hold its MPC meeting. The FOMC meeting and its market impact will be important for the CBT’s decision and a corridor hike could be an option if the TRY weakens further.

PL Macro: The inflation rate came out at -0.6% y/y in November, lower than the market had expected (-0.5% y/y). There are mostly external factors behind the deflationary pressure (low food and oil prices). However, there is also limited demand pressure as core inflation remained subdued despite market expectations for a pick up to 0.5% y/y in November. Later today, labour market data will also be released and it is widely expected that both wages and employment will continue to grow. The data should be neutral for markets (we sustain our forecast of 10Y yields at 2.4% at the end of 1Q15) with global releases overshadowing domestic news.

Traders’ Comments:

CEE Fixed Income: The big news this morning is the surprise rate hike in Russia. It was large in magnitude and whilst many may argue it will be futile the immediate impact on the RUB was also large. Rates were hiked from 10.5% to 17% and the RUB surged 9% against the USD but the MICEX crushed another 2.3% in the aftermath. It will be interesting how this works out in CEE fixed income markets because the weakness of the oil price and its impact on Russia have had a negative effect on our markets recently. We’ve seen a divergence in the fortunes of Eurobonds and local currency debt recently with hard currency debt coming under pressure as CEE FX weaken but local currency debt has managed to hold its ground given the increasing prospect of QE in the Eurozone and lower than expected inflation data across CEE economies. The first indication that Eurobonds and CEE FX will not take any solace from the action of the Russian central bank is the extended nosedive in Asian equities this morning but local currency debt also looks shaky. POLGBs stood out on Monday as investors once again start to price in a greater likelihood of a rate cut. The difference between 3m WIBOR and 3x6 FRAs is now 27 bps. The oil price has taken another leg lower this morning and with the FOMC meeting also on the agenda later this week, investors will remain cautious.