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Erste Group: CEE Macro/Fixed Income Daily

November 21, 2012
Analysts’ views: 

PL Bonds: The Ministry of Finance sold 12Y Eurobonds at a yield of 3.21%. Taking advantage of low borrowing costs, the ministry continued with prefinancing and secured 75% of 2013 borrowing needs denominated in foreign currency. The rally on the Polish bond market is likely to continue. Although the economy is slowing, the interest rate differential and rate of growth are still attractive. We expect 10Y yields to stabilize around the current level of 4.25% until the end of the year. 

PL Macro: The industrial production figure surprised on the upside, coming in at 4.6% y/y. This is, however, the effect of two more working days. The underlying trend remains weak (as evidenced by a PMI below 50) and the economy is slowing. Thus, the reduction in inflationary pressure is becoming increasingly visible – October PPI was 1.0% y/y, half a percentage point below consensus and 0.8 pp below the annual inflation figure in September (PPI fell 0.7% m/m). The council will continue with monetary easing but we will not see any sharp moves in the EURPLN as we believe that the cuts are mostly priced in. We expect the EURPLN to be around 4.15 at the end of the year. 

TR Rates: The CBT reduced the upper boundary of the interest rate corridor by 50 bps to 9% while leaving the floor of the corridor and the policy rate unchanged at 5% and 5.75%, respectively. This came as a partial surprise considering that almost half of participants in the CNBC-e poll had penciled in a 25bp-50bp cut in the lower end of the interest rate corridor along with a reduction at the upper end and a few had even foreseen a 25bp policy rate cut. While the decision itself failed to fully meet expectations of further easing, the dovish statement that accompanied the cut in the upper boundary seems to have filled this gap as the CBT leaves the door open for a simultaneous cut in the floor of the corridor and the policy rate this side of year end. An FX basket trading at or below 2.02 would significantly boost the possibility of this scenario. On the other hand, the CBT may not be in a hurry to further narrow the interest rate corridor from the top unless volatility in global markets abates significantly. That may be related to the fact that the efficiency of the ROC mechanism in smoothing currency volatility has not been tested yet, and therefore, leaving the CBT inclined to keep an eligible mechanism such as the wide interest rate corridor as a safeguard, even if possibly not used at the end of the day. This should be positive for TRY as it would limit the downside during periods of stress. 

Traders’ Comments: 

 EE Fixed Income: CEE fixed income markets continue to bobble around without any real direction. Turnover is low turnover and global sentiment dictates the days’ moods. The French downgrade didn’t really have a major impact and Ben Bernanke’s indication that a change in Fed policy is not imminent can hardly be contrived as a market mover either. Disappointment with Eurozone Finance Ministers is nothing new and their failure to reach an agreement regarding Greece will just delay the day of reckoning. Markets will likely get over it pretty quickly. The conviction of former Croatian PM, Ivo Sanader, who was found guilty of bribery and abuse of power put pressure on MOLs equity but this has long been in the works and shouldn’t come as a surprise. In fact, the conviction should bode well for Croatia when the European Commission makes its final assessment early next year before signing off on a Croatian entry to the EU in July. MOLHB 5 7/8 2017 actually rose marginally in price. With the HUF, PLN and CZK all slightly stronger yesterday, CDS moved tighter with the strength in major equity markets and we saw a modest bid for CEE cash corporates return. Comments from polish Central Banker, Kazmierczak, that indicate he is not inclined to vote for aggressive cuts put a spanner in the works for POLGBs but we didn’t see a major sell off and don’t expect one if global sentiment doesn’t deteriorate further. Today’s core inflation data will be watched closely following weaker than expected PPI.