CEE Macroeconomic and Fixed Income Research

Chart of the Day:

CEE PMIs: Yesterday’s PMI data for August showed a slowdown for all the countries in CEE, with the exception of Turkey, where we saw a slight improvement. The strongest decline in CEE from a month earlier was observable in Hungary; that being said, the gauge is very volatile in Hungary so the current marked decline may not be a good harbinger for the magnitude of a slowdown of economic activity. In Poland, the figure was below 50 points for the second time in a row (further declining by 0.4 points to 49 points), underlining our expectation for a rate cut in Poland later this year. The strongest data came from the Czech Republic, where we saw a level of 54.3 points; this data, however, still means a decline from a month earlier (from 56.5). The intensifying risks of additional sanctions against Russia amid the escalation of tensions in the conflict in Ukraine could cause a further slowdown in CEE economies later this year and also in 2015. A possible further rise of tensions can have ambiguous effects on CEE bond markets: earlier this year, when the crisis in Ukraine escalated, CEE bond markets did not unanimously witness a sell-off, again indicating that the region is heterogeneous. In the meantime, the expected quantitative easing from the ECB should keep Bund yields very low. Overall, we see downward risks to our yield forecasts in CEE.

Traders’ comments:

CEE Fixed income: Trading was slow yesterday due to the US Labor Day. Investors are probably also trepid about taking large positions ahead of the ECB meeting, US Non-Farm payrolls and the announcement of further sanctions against Russia. That said, the fact that CEE fixed income remained relatively stoic in spite of statements out of Ukraine that the country is now practically engaged in open warfare with Russia shows the extent to which expectations of QE in the Eurozone is an overriding factor in asset allocation decision making. In essence, it appears as if investors assume the military fallout from the conflict in Ukraine will be contained whilst the West is willing to accept lower growth via the impact of economic sanctions, compounding already weak growth and inflation dynamics in the Eurozone. At the moment, the parameters are all still in place for lower yields and weaker FX in CEE.