CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Rates: The MNB is expected to keep rates unchanged at its meeting today: the policy rate should stay at 2.1%. Although inflation is near historic lows (-0.4% y/y after -0.5% in September), rate setters told journalists after the last meeting that current monetary conditions are sufficient to reach the inflation target within the relevant policy horizon. A more interesting situation could come about in the first few months of 2015, when the exchange rate will be very closely observed by FX debtors due to the FX loan conversion decided upon by policymakers which will be carried out at 308.97 EURHUF. We still think that if the forint is much stronger than this level, the MNB has the option of direct FX intervention rather than lowering the policy rate in order to weaken the HUF. We see the base rate at 2.1% throughout 2015, but we think that the recent, strong decline in 10Y yields are a little bit overdone. We see 10Y yields at 4.2% at the end of this year and at 4.5% at end-1H15.

PL Macro: Retail sales are expected to grow by roughly 2% y/y in October, while unemployment should drop marginally to 11.4%. Increasing consumer spending should be the reflection of relatively good labour market conditions and strong purchasing power of households. Given that the bond market seems to be driven more by global events than domestic ones, we expect the data to be neutral for investors and the MPC will likely not change its wait-andsee approach because of strong GDP data. We sustain our forecast of a low level of yields (10Y close to 2.4% toward the end of 1Q15).

RO Bonds: Romania sold RON 300 m in T-bonds maturing April 2020, as planned. The bid-to-cover ratio stood at a robust 6.6x after investors showed strong interest in the auction. The yield went down to 2.93%. The unexpected victory of central-right candidate Klaus Iohannis over leftist PM Victor Ponta has already created tension within the ruling Social Democratic Party but this has not resulted in higher yields. Our end-year 5y ROMGB yield forecast for 2015 is 2.9%.

Traders’ Comments:

CEE Fixed Income: Yesterday’s trading session was a mixed bag with yields on local currency CZK government debt moving down a tad across the curve, up a bit in Slovakia with a little bear curve steepening in HGBs and a bit of bear curve flattening in POLGBs whilst CROATIs didn’t do very much one way or the other. ROMGBs stood out following a very strong auction and yields fell strongly at the long end. The recent strength in CEE FX hit a road bump in the HUF with no particular catalyst but the CZK had a strong day following a higher than expected IFO and another rise in both Czech Consumer and Business Confidence. Cash CEE Corporates started the day well enough but lost momentum during the trading session. In international capital markets, Slovenia’s Eurobonds stood out. The tightening in Eurozone periphery yields to Bunds and the drop in Spanish 10y yields to a historic low south of 2% had a positive knock-on effect for Slovenia and the yield spread to Germany fell 15 bps. With 2014 slowly drawing to a close, pundits are falling over themselves to prophecy exactly when the ECB will engage in fully-blown QE and this is taking precedence over concerns that the Fed could hike rates sooner than many expect. That may all be turned on its head in 2015 and Polish Central Banker, Jan Winiecki, indicated again yesterday that POLGBs had got ahead of themselves with expectations of rate cuts in Poland. He expects GDP growth to be a solid 3% in both 2014 and 2015. Polish retail sales will be watched closely today.”.