CEE Macroeconomic and Fixed Income Research

Analysts’ view

HU Rates: The Monetary Policy Council kept the interest rate unchanged at 2.1%, in line with our expectation. The MPC underlined the fact that the current level of the key rate is in line with the medium-term inflation target, and so further easing may not be required. But the MPC also published alternative scenarios, in which they foresaw a need for rate cuts: a further persistent drop in oil prices or further deteriorating external demand could cause lower inflationary pressure. The central bank also modified its GDP (from 2.4% to 2.3%) and CPI (from 2.4% to 0.9%) forecast for 2015. There were no market movements due to the announcement. We see downside risks for our 10y bond yield (4.4% at 1Q15) and base rate (2.1% unchanged for 2015) forecasts.

PL Macro: Core inflation came in at 0.4%, below market expectations confirming that demand pressure is limited. A bigger disappointment was seen in nominal wages that grew only by 2.7% y/y in November while the market expected more robust dynamics at 3.7% y/y. It will be important to see later if this drop was only a one-off effect or the sign of slowing wage growth. For markets, however, global events, in particular Russia, are much more important, driving the sell-off on the bond market associated with the increase in yield at the long end and weakening of the zloty to 4.21 that threatens our year end forecast of EURPLN at 4.18.

Traders’ Comments:

CEE Fixed Income: Yesterday was the day that our markets finally caved in to the mounting pressure in emerging markets worldwide. Finally, the long awaited capitulation in CEE local currency debt markets came to bear as currencies got hammered. As Warren Buffett once said "Only when the tide goes out do you discover who's been swimming naked." The markets most at risk in our region are now blatantly obvious: HGBs, ROMGBs and CROATEs. The flip side of this, is of course, that there are also some relative outperformers: CZGBs SLOVGBs and POLGBs. If one takes the standpoint of international investors, then POLGBs look more at risk than CROATEs due to the very different dynamics in their respective currencies. In Eurobonds, it’s the other way around. POLAND looks much more stable than CROATIs. This is also reflected in their respective 5y sovereign CDS. The risk premium in Poland only rose 5 bps compared to 30 bps in Croatia. Most of the repricing of risk is happening with very little turnover though. As we have grown accustomed to, the relative illiquidity in our region tends to insulate bonds from big price changes until we reach the point where we see the proverbial straw that breaks the camels back. A 45 bp intraday move in the yield of the HGB 6 23/A is a good example of how things typically play out. Outside of government bonds, RBI went into freefall in the financial space. The sub debt had been under pressure prior to yesterdays sell-off but the drop in prices intensified yesterday as bonds were sold at any opportunity at any price. Throw the FOMC into the mix today and it looks like it will take a while until we get any real respite. This is the last daily of 2014 but we’ll be back on January 7, 2015.