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Erste Group: CEE Macro/Fixed Income Daily

January 10, 2013
Analysts’ Views: 

CZ Inflation: December CPI was in line with expectations – the 2.4% figure is a deceleration from the 2.7% seen in November (the yearly average is thus 3.3%). This was mostly due to a base effect, but to some extent also to the deceleration of the growth of fuel prices (gasoline prices are the lowest since December 2011, for example). This figure is below the CNB October forecast of 2.8% - as such, this is an anti-inflationary risk. However, this is to a good extent offset by the current weakness of the CZK (slightly below 25.60). We do not think that the CNB will start intervening against the CZK at these levels and we do not foresee further weakening of the CZK to levels above 26 to EUR (as some recent reports have argued will happen). Yesterday’s data is consistent with our outlook of decelerating inflation and a stagnating economy and also with our EURCZK forecast of around 25.3 in 1Q13. 

PL Rates: As was broadly expected, the council voted for a 25bp cut, but further easing is not certain any more. NBP Governor, Marek Belka, indicated that the cycle of cuts was coming to an end and, although another cut in February is still possible, a return to “wait-and-see” mode seems to be only a matter of time. If economic activity is weak enough to convince the MPC to cut the key rate again in February, this will likely be the last for a while. However, as the statement lacked a promise to cut this may suggest a ‘wait and see’ mode already in February. In this scenario, we expect the cut to be delivered after the new inflation projection is released in March rather than in February. As at least one more 25bp cut will be delivered, we expect bond yields to remain low over the course of 1Q13 and 10y yields to be 3.69% at the end of the quarter. 

RO Macro: Turnover in industry increased 4.6% y/y in nominal terms in November, due to double-digit increases in the oil processing industry, car industry, chemicals, pharma and the food industry. Monthly exports of goods mirrored the solid performance of industry, rising to EUR 4.2bn in November, the second highest level ever recorded, while imports were muted at EUR 4.6bn. The data suggests that the C/A deficit continued to shrink to 3.5% of GDP in 2012 and will remain around this level in 2013, in spite of a gradual resumption in household consumption. We think that the NBR is satisfied with the present level of the RON because it helps to lower the inflation rate and diminishes the burden on FX-indebted consumers without endangering exports. Our EURRON forecast for June is 4.41. 

Traders’ Comment: 

CEE Fixed Income: Whilst the 25 bp cut in Poland was in line with the consensus, there had been growing speculation that the NBP may even cut rates by 50 bps and FRAs had indicated a drop in rates over the the first quarter of up to 66 bps prior to yesterday‘s MPC rate setting decision. Comments from the Head of the Central Bank at the accompanying press conference put paid to that and POLGBs began pricing out a continuation of the aggressive expansionary monetary policy. The short end of the yield curve was hit hardest and the yield on 2y benchmark bonds rose the most in 13 months. That said, the PLN obviously got a boost from the reduced expectations of rate cuts with the EURPLN falling from 4.12 to 4.08 on the day. CDS were unmoved. Elsewhere, in the Czech Republic inflation fell to the slowest yoy growth rate in a year and the unemployment rate rose to a 22 month high. With key rates close to zero, the CZK continued to weaken and yields fell. In Hungary, Economy Minister, Gyorgy Matlocsy, said publicly that Hungary must reject policies that support the HUF in an attempt to suppress inflation. The HUF appreciation we saw yesterday has already lost momentum this morning.