Erste Group: CEE Macro/Fixed Income Daily

Analysts’ Views: HU Bonds: Bond auctions went quite well yesterday as the Debt Management Agency was able to sell HUF 63bn of 3Y, 5Y and 10Y bonds, HUF 16bn more than planned. Yields came in 100-106bp lower than the previous auctions. Yields declined to below 8% for the 10Y paper. In addition, the Agency sold another HUF 15.5bn at the non-competitive tenders in the afternoon. After the important step forward last week in connection with IMF/EU talks, we expect 10Y yields to fall to 7.3% by the end of this year. However, for the coming weeks or months, we do not expect a further decline of yields, as there are still open questions related to the IMF talks, not to mention that the date of the start of formal talks is also not yet set. TR CPI: Inflation in April came in at 1.5% month on month, equivalent to a 12- month rate of 11.14%. This is well above the market consensus of around 10.8% and closer to our forecast of 11%. As for monetary policy, the CBT governor in his latest statements underlined that the CBT would do everything in its power to achieve its official forecast of 6.5% for this year rather than change the forecast. With this unfavourable inflation development including an additional burden from administrative price hikes and high oil prices, it is most likely that the CBT will tighten monetary policy to keep expectations from deteriorating further and to contain second-round effects. The market consensus for year-end inflation is already at around 7.6% and unlikely to ease without a decisive monetary policy move. It is quite likely that the CBT will push the average funding rate to a higher 9-10% band from the current 8-9% band. This may lead to some appreciation in the currency to below 1.75 against USD but we don’t expect it to have any major impact on bond yields as the Treasury’s planned redemptions are quite weak in the next three months at around TRY 6.5bn in total. CZ Monetary Policy: The CNB held rates unchanged at its rate setting meeting yesterday (0.75%). The outcome wasn’t surprising but the voting pattern was. While E. Zamrazilova again voted for higher rates, 2 board members voted for a cut. This is consistent with our previous view - in our December 2011 forecast we called for rate cuts (we then changed our forecast to “no change in rates in 2012” as a consequence of the LTRO). While no rationale has been given by the doves, weak April EMU data (PMI, credit activity, retail sales) increase the risk of a longer-than-forecast recession in EMU in 2012 and this, combined with planned fiscal restriction (which we see shaving 0.6-0.8% off of real GDP growth in 2013) makes for a prolonged weakness in household demand and limits demand pressures on prices. We view the probability of a cut this year as only slightly lower than 50%. The main argument against it is the potential weakness of the CZK should the situation in Western Europe worsen. The CZK weakened some 0.1 CZK versus EUR to a bit above 25 as a result of today’s vote. Traders’ comments: Whilst yields fell substantially at the auctions in Hungary compared to similar auctions 2 to 4 weeks ago, the move in the secondary market on a day to day basis was muted with yields virtually unchanged following a massive rally that gained impetus on the 25th of April as progress in negotiations between the Hungarian government and the Troika became apparent. The bid cover ratios were modest as the rally lost a bit of steam. The same cannot be said for REPHUNs, however, where we saw drops in yield between 7 and 25 bps. Overall, the picture was a little mixed in CEE fixed income but the solid undertone of the last few weeks is still apparent. Polish local markets were closed but Eurobonds performed well. Probably the most notable performer was Romania. The new finance minister confirmed his commitment to the EU to bring the budget deficit below 3% GDP & ROM22$ rallied almost a point.For more details please go to our Comments section.

Erste Group: CEE Macro/Fixed Income Daily

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