CEE Macroeconomic and Fixed Income Research

Analysts’ View:

PL Macro & Rates: The 4Q14 GDP structure should confirm that growth was fully driven by domestic demand. Nevertheless, for markets the MPC meeting that takes place next week will take precedence. The voting results released yesterday showed that in January only Bratkowski and Osiatynski supported a rate cut but the balance should be different once the inflation projection shows forecasts for a prolonged period of deflation and we expect to see a 25 bp cut in March. Such a move should stop the recent strengthening of the zloty for a while (supported not only by the upcoming QE in the Eurozone but also by S&P comments on the prospects that Poland’s debt rating could improve) and we see EURPLN close to 4.18 at the end of 1Q15.

HR GDP: Ahead of today’s flash GDP estimate, favourable short-term indicators suggest recessionary pressures eased in the last quarter of 2014, with the GDP figure expected to stagnate. In line with expectations of a flat 4Q GDP reading, we see slight upside potential to our call for a 0.7% contraction in 2014 and a slightly more moderate downturn closer to -0.5 to 0% in 2015. Our market forecasts remain unchanged (e.g. 7y CROATI at 3.1% by the end of 1Q15).

SI GDP: With regard to today’s GDP release, we see the strong pace of growth continuing as the economy is expected to expand 2.9% y/y in the last quarter, mainly on the back of strong exports, though support is also coming from a stabilisation in domestic demand as well. Thus, 2014 GDP is seen settling around 2.5%, followed by a somewhat moderated - but stabilized - growth pattern of around 1.5-2.0% in 2015. In spite of this, we forecast a drop in 10y yields to 1% by 3Q14.

HU Macro: Investments showed a remarkable deceleration, growing only 1.9% in 4Q14. The downward correction was caused by several factors. Firstly, the decline in the manufacturing sector, accounting for nearly one-third of investments, was 4.1%, while in 1H14 they grew 30% y/y. The other strong break was a drastic fall in public administration and defense, as well as compulsory social security (-30.6% y/y). Furthermore, the higher base in 4Q13 also contributed to the moderate increase. The investments in transportation and storage somewhat offset this impact, rising 19%. To sum it up, a slowdown in investments appeared in 4Q14 and in our view the subdued dynamics in investments may continue this and next year, as less EU funds will flow into the country this year and the base is also higher. However, the impact of the Funding for Growth Scheme may offset the dragging effect of investments to some extent. There was no market reaction after the figure was released and our market forecasts remain unchanged (10y HGB at 2.1% by the end of 2Q15.

Traders’ Comments:

CEE Fixed income: The hunt for yield drove yields lower once again in CEE government bonds and the trend towards bull flattening gained traction as investors take on more risk via longer duration bonds. The outperformer was Hungary where poor investment data (see above) fuelled more expectations of rate cuts given that the strengthening HUF is cancelling out the expansionary monetary effects of lower interest rates. Poland is facing a similar quandary but this is the typical result of the carry trade so central banks will attempt to reduce the interest rate differential that is driving the contractionary force of stronger currencies. Where rates cannot go much lower, most prominently in the Czech Republic, the monetary authorities will continue to intervene in the FX market to prevent FX appreciation. Markets are already looking ahead to next week’s ECB purchases and US Non-Farm Payrolls. The phenomenal rise in the price of German Bunds is a direct consequence of the ECBs bond buying plans whilst the expectations of rate hikes in the US is driving the yield spread to USTs wider, weakening the EUR further.