Czech bonds slightly lost in a soft trading yesterday. Given the absence of important domestic events the market concentrated on euro zone market with their mild slips before the ECB interest rate announcement. A slight revival brought the bond auction, however as we expected the demand exceeded supply just little only. The bond yields closed higher at the short end and unchanged at the long end of the yield curve.
Today, the market should focus initially on a release of the May CPI. The inflation came much higher than we and the market expected (3.1% y/y versus 2.9% y/y), which should elevate the front end of the yield curve up. Nevertheless even though the headline CPI is currently above the CNB inflation target, we do not change our short-term expectations for the official rate. We still believe that the CNB will lift the official rate in the fourth quarter this year.
The strong koruna and expected favourable inflation development in the second half of the year should discourage the CNB from any tightening aims. Latter on, however, the ECB meeting and especially its press conference will drive the market. While a 25 bps hike is expected a fully priced in the ECB has kept open the possibility of a larger 50 basis points move. Recent financial turmoil on the equity and commodity markets however has diminished the chances on such a bold move today. Nevertheless, recent eco and inflation data suggest that an increase in the pace of tightening may be warranted. Hence, ECB’s ongoing vigilance This might push long Czech yields further north this afternoon.
(CSOB - Investment research)