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Erste Group: CEE Macro/Fixed Income Daily

December 5, 2012
Analysts’ views: 

RO Macro: Retail sales (-2% m/m and +0.7% y/y, seasonally-adjusted data) came in weaker than expected in October. Rising consumer prices and sluggish retail lending weighed on households’ propensity to consume. However, a rebound is possible in the next few months due to the increase in public wages in December and the announcement of a possible hike in pensions in 2013. We foresee a flat key rate at 5.25% next year. 5y government yields could rise to 6.8% by next March due to inflationary pressures and negotiations over the formation of a new government. 

CZ Macro: The real average wage fell 1.8% in 3Q12, as inflation more than offset the meager 1.4% growth in nominal wages. This was somewhat worse than the market had expected but certainly far from a surprise. After all, household demand weakness has been prevalent for some time now as seen in the retail sales data (October data to be released today) which we also expect to be confirmed in the quarterly data for GDP (to be released this Friday). This is another data release that increases the probability of the CNB employing FX interventions to weaken the CZK. We think that, if the CZK were to fall below 25, it would certainly move the FX intervention debate onto a whole new level. With the CZK above 25, we think that the CNB will hold off. 

HR Macro: October retail trade data confirmed the weak momentum in domestic demand with the figure coming in at -5.7% y/y. The drop in retail trade moderated marginally vs. the September observation (-6.0% y/y) and modestly outperformed our expectations (-6.5% y/y) as we had anticipated a stronger drag from fading tourism activity. Unfavourable trends in the labour market, both on the employment and negative real wages side, along with weak consumer sentiment and low credit demand/supply indicate that there is little to no room for a rebound in the period ahead. The data rounded up the first round of monthly statistics in the 4Q with industrial production maintaining a weak tone, while the trade balance showed more robust performance after exports put in a strong performance. With retail trade figures remaining deep in the red, private consumption will likely continue to weigh on headline GDP performance in 4Q12 which we expect to decelerate to a region around -2.5% y/y. 

TR Monetary Policy: The CBT held its bi-weekly meeting with economists yesterday. Year-end inflation is likely to be at or slightly above 6%, according to CBT. This means that the CBT will undershoot its 7.4% inflation estimate disclosed in its October Inflation Report. Meanwhile, the CBT hinted that the government may take steps to limit the impact of the tobacco tax hike on inflation next year, which could necessitate a downward revision in our 2013 CPI estimate. Even though the recent steep decline in inflation does not change the CBT’s medium-term inflation outlook, the Bank is ready to cut the policy rate depending on the TRY’s performance. We continue to think that there is a strong possibility of a policy rate cut at the December meeting, but the rate cut may be more limited than our original forecast of 50 bps. (Please see our Short Note). The expectations of further monetary easing pushed the benchmark bond yield to as low as 5.73% as of this morning. For now, we maintain our 6% benchmark bond yield estimate for the year-end, yet the current low levels may be sustainable if the 2013 inflation forecasts are revised down. Turkey tapped the international markets by re-issuing USD 1bn worth of Eurobonds tagged with a maturity of January 2041 at a spread of 158bps over U.S. Treasuries. This will be used to pre-finance 2013, when the Treasury plans to raise a sum of USD 6.5bn from international markets. 

Traders’ Comment: 

CEE Fixed Income: Week on week, yields on the shorter end of the POLGB curve are down by around 15 – 20 bps. Consensus opinion is that the NBP will cut rates by another 25 bps today. We haven’t seen a great deal of activity in Eurobonds in either EUR or USD paper but we have observed buying interest for mid to long dated EUR denominated paper on the Polish curve. The demand is predominantly from local clients who still find yields around 1-2% attractive.