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Erste Group: CEE Macro/Fixed Income Daily

February 6, 2013
Analysts’ Views:

HU CB: Yesterday late evening, news broke that the government decided to nominate the current Economic Minister Gyorgy Matolcsy as governor of the central bank. A spokesman from the head of the parliamentary group of the governing party almost immediately denied the news. Despite the government’s denial, the EUR/HUF quickly jumped on the news from below 292 to above 295. We expect the EUR/HUF at 302.5 at the end of March and at 295 at the end of 2013.

RO Rates: In line with our expectations, the central bank left both the key rate (5.25%) and mandatory reserves (15%/20%) flat amid unrelenting inflationary pressures. The adverse trend of some supply-side factors (e.g. the meager harvest) and a run-up in FX volatility in the second half of last year drove inflation up to 5% in December 2012, well above the upper limit of the central bank’s target range (4%). Our baseline scenario for 2013 is consistent with inflation gliding above the upper bound of the inflation target set for this year (3.5%) due to several rounds of energy price liberalization. We see CPI tapering off to 4.1% in December 2013, in the wake of a normal agricultural year and expect a flat base rate for the remainder of this year. We forecast 5- year ROMGB yields of 5.3% and a EURRON at around 4.38 as of end-June.

RS Rates: The NBS surprised us and the market consensus after opting for another 25bp hike in the key interest rate amounting to an accumulative increase of 50bps ytd to 11.75%. The accompanying press statement was less of a surprise with the NBS citing its aim to anchor inflation expectations amid the preannounced regulated prices hikes.We see inflation peaking in 2Q12 and subsiding towards the year-end on a reversal of the base effect, weak demand side pressures and a better agricultural season. We expect this was the peak in the hiking cycle, as inflation moderates and thecountries risk profile becomes more benign with solid RSD performance and mitigated financing risks (if the announced USD 2bn Eurobond plans go through).

HR Macro: The December retail trade performance (-6.1% y/y) was disappointing showing some additional deterioration compared to the Oct-Nov figures (-5.7% y/y). The December figure put the finishing touch on the weak 4Q12 retail trade performance, courtesy of the labour market deterioration gaining pace and additional consumer confidence slippage. Private consumption should thus remain the primary drag on 4Q GDP performance (expected at -2% y/y), while, for 2013, given the ongoing weak fundamental factors, we see private consumption remaining in the red. We expect EURHRK to be relatively stable with a slight appreciation trend below 7.50 in 2Q2013 due primarily to seasonal factors.

CZ Macro: December’s retail sales fell in line with our expectation (-5.1% y/y, CS: -5.5% y/y). However, this figure is heavily influenced by the number of working days (three less in 2012 than in 2011). Adjusting for this, the decline was only 0.4% y/y. This, together with the facts that the yearly average of retail sales was -1.1% y/y, that there was a modest rise in consumer confidence since summer 2012 (that has not been dented by the January 2013 VAT rate hike), that leading indicators here and in Germany improved over the last few months and that fiscal austerity in the Czech Republic is moderating, raises hope that the drop in household consumption seen last year will not be repeated in 2013. Coupled with the questionable efficacy of potential FX interventions, we see this release as supportive for any decision to postpone any further relaxation of monetary policy. The CNB holds its monetary-policy meeting today and will debate interventions at length – we expect interventions to be debated but not initiated.

Traders’ Comments:

CEE Fixed Income: CEE fixed income markets had another quiet day with limited moves in yields in both local currency and foreign currency bond markets. The FX markets were also very calm apart from a blip in the HUF and all eyes are now on the rate setting meetings from the NBP in Poland, the CNB in the Czech Republic and, of course, the ECB. No action is anticipated so the focus will be on the accompanying press statements.