March 19, 2018 / 3:06 PM / 8 months ago

CEE MARKETS-Regional assets weaken before expected Fed rate increase

    * Polish industrial output rises less than forecast, PPI
drops
    * Romanian auction draws strong demand despite CEE yield
rise
    * Shares of OTP Bank fall, Romania blocks its acquisition
deal

 (Recasts, adding bond markets, comments from Polish rate setter
and Budapest-based trader)
    By Sandor Peto and Anna Wlodarczak
    BUDAPEST/WARSAW, March 19 (Reuters) - Central European
currencies and government bonds fell on Monday amid expectations
the Federal Reserve will raise U.S. interest rates at its
meeting on Wednesday and may hint at more to come.
    Stocks also fell, since rising U.S. rates would make assets
in the region's emerging markets relatively less attractive.
    Poland's weaker-than-expected data on manufacturing growth
in February and a decline in producer prices underpinned that
Poland's own interest rates are likely to remain at record lows
this year.
    The figures had only a passing impact on the zloty. The
Polish central bank had already lowered its inflation forecasts
two weeks ago, and its Governor Adam Glapinski said there was no
reason for rates to rise until the end of 2020.
    The zloty traded at 4.2166 against the euro at
1343 GMT, weaker by less than 0.1 percent, off a 3-month high
set in morning trade.
    However, a member of the Polish central bank's Monetary
Policy Council, Jerzy Osiatynski, warned later that inflation
may turn out higher than the bank's new forecasts. 
    Andrzej Kaminski, economist at Millennium Bank, took the
same view. "Due to rising labor costs, the MPC will raise the
cost of money in the second half of 2019, as wages and inflation
will be growing faster than assumed in the (central bank's)
projection," he said. 
    The forint, the Czech crown and the
Romanian leu also weakened. The crown and the leu
traded near two-month lows even though the Czech and Romanian
central banks have already started to raise rates.
    The latter is expected to raise rates again on April 6, but 
government bond auctions have mostly drawn healthy demand in the
past weeks after an earlier surge in yields.
    On Monday it sold more six-year bonds than planned, at lower
yield than at the previous auction on Feb. 12.
    Elsewhere in the region, government bond yields mostly rose
by a few basis points, tracking U.S. and euro zone peers. 
    "Markets are a bit clueless," one Budapest-based trader
said. "Much will depend on the (pace of) Fed rate hikes, and the
ECB's later decisions."
    "In Hungary, bonds could remain relatively well supported by
the central bank's measures (to stimulate demand)," the trader
added.
    Stocks mostly fell in the region, tracking a global decline
ahead of the expected Fed rate hike.
    Budapest led the retreat, shedding 2.5 percent.
    The stocks of the region's biggest independent bank, OTP 
 fell more than 3 percent from a one-month high set in
the previous session, after Romania's central bank torpedoed
OTP's takeover of Banca Romaneasca. 
    
            CEE       SNAPSHOT   AT                         
            MARKETS             1530 CET            
                      CURRENCI                              
                      ES                            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.4240   25.4200    -0.02%    +0.46%
 crown      >                                       
 Hungary    <EURHUF=  310.8800  310.7200    -0.05%    +0.01%
 forint     >                                       
 Polish     <EURPLN=    4.2166    4.2145    -0.05%    -0.95%
 zloty      >                                       
 Romanian   <EURRON=    4.6670    4.6650    -0.04%    +0.27%
 leu        >                                       
 Croatian   <EURHRK=    7.4335    7.4325    -0.01%    -0.04%
 kuna       >                                       
 Serbian    <EURRSD=  118.1500  118.4100    +0.22%    +0.30%
 dinar      >                                       
 Note:      calculated from               1800 CET          
 daily                                              
 change                                             
                                                            
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1118.66  1118.520    +0.01%    +3.76%
                                       0            
 Budapest             37805.57  38891.24    -2.79%    -3.99%
 Warsaw                2271.31   2285.08    -0.60%    -7.72%
 Bucharest             8807.12   8816.96    -0.11%   +13.59%
 Ljubljana  <.SBITOP    825.29    823.14    +0.26%    +2.35%
            >                                       
 Zagreb                1845.10   1843.11    +0.11%    +0.12%
 Belgrade   <.BELEX1    748.51    748.78    -0.04%    -1.49%
            5>                                      
 Sofia                  670.95    679.98    -1.33%    -0.96%
                      BONDS                                 
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
                                                    in
 Czech                                              spread
 Republic                                           
   2-year   <CZ2YT=R    0.8420    0.0470   +142bps     +4bps
            R>                                      
   5-year   <CZ5YT=R    1.3380    0.0670   +136bps     +5bps
            R>                                      
   10-year  <CZ10YT=    1.9640    0.0350   +137bps     +1bps
            RR>                                     
 Poland                                                     
   2-year   <PL2YT=R    1.5210    0.0000   +209bps     -1bps
            R>                                      
   5-year   <PL5YT=R    2.4270    0.0120   +245bps     -1bps
            R>                                      
   10-year  <PL10YT=    3.2700    0.0190   +268bps     +0bps
            RR>                                     
            FORWARD   RATE      AGREEMEN                    
                                T                   
                      3x6       6x9       9x12      3M
                                                    interban
                                                    k
 Czech Rep                0.96      1.07      1.22      0.90
            <PRIBOR=                                
            >                                       
 Hungary                  0.07      0.11      0.19      0.03
                                                    
 Poland                   1.72      1.73      1.76      1.70
                                                    
 Note: FRA  are for ask prices                              
 quotes                                             
 
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