Erste CEE Macro Comments

So far, the doves are prevailing – low demand inflation, fiscal consolidation, a loose labour market and planned fiscal reforms for 2012 underscoring their wait-and-see approach. Low demand-pull inflation may persist for the best part of this year; thus, we forecast the first rate hike in 3Q11. This opens up trading opportunities in the forward curve which is currently pricing in a more aggressive scenario. An interesting footnote: Mojmir Hampl, Vice Governor at the CNB, is quoted as saying 'Sometimes I look at the markets and am surprised'.

RO Macro: Consumer prices increased by 0.8% m/m and 7% y/y in January, above our expectations and market consensus that stood at 0.6% m/m. However, due to a strong base effect, annual inflation rate fell by 1pp in a single month. January CPI and disappointing 4Q10 real GDP data (due on Tuesday) will be supportive for two cuts in the key rate of 25bp each by the end of 2011. The NBR governor recently implied that the bank could also cut minimum reserve requirements and enlarge the range of instruments used to provide liquidity in open market operations. That said, the NBR seems reluctant about injecting liquidity into the market for maturities longer than one month. The governor also suggested that the NBR could narrow the symmetrical corridor around the key rate used for the lending facility and the deposit facility (±4pp around the key rate at present). We remain bullish on 5y benchmark bonds financed at 6m Euribor.

Traders' comments:

HUF: Friday showed signs that the correction in EURHUF may have run its course. We expect the market to start building a new equilibrium around current levels. The bond market opened a bit weaker in Friday's session but the lack of sellers follow-through increases our confidence that the market is now ready for a consolidation phase.

PLN: The long end caught a modest bid on Friday whilst the 2y IRS was also better offered around 5.15%. We interpret this as a gradual pricing-out of early rate hikes.

CEE CDS: Events in Egypt have helped support CEE CDS. Early indications on the equity futures markets signal a positive mood.