CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RS Rates: Increased FX volatility and ongoing fiscal uncertainties suggest that the NBS will probably stay on hold at today's rate setting meeting, thus keeping the key rate at 8.50%. Looking forward, with delayed actions on the fiscal front and the present uncertainties on international markets, we expect the NBS to keep the policy rate unchanged until the YE. For 2015, we see some space for additional cuts, given the deteriorated economic prospects and comfortable inflation outlook. We view the recent weakening of the RSD to be a little bit overdone but in the coming quarters, the Serbian dinar may remain under some pressure. We see the EURRSD at 117 at the end of this year, and at 118 at the end of 1H15.

TR Macro: The central government budget deficit widened to 1.5% of GDP in September on a 12-month rolling basis, while the government reiterated its 1.4% target for the year-end. Meanwhile, the C/A deficit edged up very slightly to USD 48.9 bn (6.1% of GDP) in August as the services balance partially offset the wider trade deficit. We maintain our 6.1% forecast for the year-end, with risks to the downside. The labour market, on the other hand, has been hit the most by the economic slowdown as the seasonally adjusted unemployment rate shot up to 10.4% as of July from 9.2% in April. While the weak job creation ignites worries about growth, yields have been on a downtrend mimicking the core markets. We maintain our 9% two-year bond yield forecast for the year-end.

PL Macro: The positive surprise presented by the inflation rate (-0.3% y/y in September, vs. market expectations of -0.4% y/y) may cool down expectations for a big rate cut in November. Yesterday, Zielinska-Glebocka said that leaving the rate flat and cutting it are equally likely scenarios. She also suggested that everything would depend on the new inflation projection. If this is indeed the case, we should see a bigger move in interest rates, as the growth forecast should be revised visibly downward and inflation expectations should remain low. However, we currently think that a 50 bp cut is rather a risk scenario than the baseline, especially as there may be more positive data coming that could lessen the impact of the projection. Today, employment and nominal wage figures should post annual increases, and industry (to be released the following day) has the potential to surprise on the upside as well. We see risks to the downside for our 10Y bond yield forecast currently set at 3% for the end of this year.

HR Macro: September inflation came out closely in line with our expectation (EBCe -0.3% y/y), with the headline figure slightly accelerating to -0.2% y/y vs. -0.3% y/y in August. On the monthly level, CPI increased 0.7% as seasonally higher clothing and footwear prices (+13.2% amid new collection arrivals) were the strongest drivers behind the m/m uptick. Looking ahead, we see inflation heading further towards higher ground as the base effect reverses and cost side pressures stabilize. Subdued demand-side pressures should keep the inflation trajectory moderate and we expect a flat 2014 average rate. The September CPI release only has a limited impact on our capital market forecasts and we continue to see 7y HRK yields moving towards the 3.50% level by YE14.

SK Fiscal: The government approved the new budget proposal for 2015 – 2017. The budget will now be debated in parliament and sent to Brussels for consideration. Next year’s proposed budget deficit is set at 1.98% of GDP and is expected to decrease to 1.43% of GDP in 2016 and 0.39% of GDP in 2017. We regard the expected tax revenues as realistic, however, the planned expenditures may be increased in the parliament and thus the final deficit could be more in the vicinity of 2.5% of GDP for 2015 (as originally planned). Our current 10Y yield forecast for end-2014 is at 1.6%, while for 1H15, we see 10Y yields edging up to 2.1%.

Traders’ Comments

CEE Fixed Income: Technicals went into overdrive yesterday as global equity markets plunged and the yield on the 10y UST tanked. It smacks of leveraged players getting stopped out especially given the stoic response in CEE, which, if this was a fundamental change in global investor perceptions should really be selling off.