CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HR Macro: June industrial production brought a negative surprise by underperforming both our and market expectations (1% y/y and 0.6% y/y, respectively), with production contracting 1.7% y/y WDA (s.a. -1% m/m), thus putting a stop to a five-month-long positive pattern. While the monthly decline revealed weakness across all categories, the fall in the energy sector was the one weighing the most on the annual headline figure, where a strong 11.2% y/y contraction overcame the modest positive contribution from the other sectors. Regarding the outlook, this weaker than expected output puts some pressure on the expected industrial rebound in 2014, as supportive external demand lacks a stronger offsetting potential when it comes to the ongoing domestic demand weakness and struggling competitiveness. Nevertheless, our capital market forecasts remain unaffected by the figure.

HU Bonds: Demand for the 3M T-bill proved high at yesterday’s auction, amounting to HUF 186 bn. The Government Debt Management Agency sold HUF 45 bn worth of paper, HUF 5 bn higher than planned originally. Despite the end of MNB rate cuts, yields declined further - the maximum yield was only 1.72%. The high demand despite low yields should be seen in connection with changes in the main sterilization instrument of the MNB where, as of August 1, foreigners can no longer buy 2W T-Bills. Despite more declines on the short end of the yield curve, long-term bond yields increased and the forint weakened yesterday, amid a less favourable external market environment, and the 10Y reference yield jumped 20 bps. We expect the 10Y bond yield to continue to gradually increase to 4.80% by the year-end.

Traders’ Comments:

CEE Fixed Income: Yields in CEE fixed income drifted lower in yesterday’s trading session with the notable exception of Hungary. The headlines were thick with news about turmoil in the banking industry, an impending default in Argentina, sanctions against Russia, an intensifying bombardment in Gaza, record low Bund yields, tightening spreads in the Eurozone periphery and a flattening yield curve in the core of the Eurozone but it “felt” as if very little was going on. There’s this eerie atmosphere of calm before the storm. It’s hard to say what spooked HGBs the most but comments from PM Orban about Russia being a role model probably didn’t help. His desire to form an “illiberal” society is now out in the open but would probably not have surprised too many analysts. The announcement from Erste Hungary that the FX mortgage relief programme has cost more than 10% of the bank’s capital was probably also only confirmation of what most investors already knew. Interesting, but also just a side-note, were statements from the Czech and Slovak central banks. The CNB upgraded its GDP growth forecast quite substantially whilst the NBS voiced concern that a weaker export environment would put downward pressure on GDP growth. The flattening of the German yield curve seems to support the view of the latter. The combination of economic sanctions on Russia (and Russian retaliation), a banking sector under the cudgel and a potential rate hike in the US could well be contributing to an increasing likelihood of growth stagnation in the Eurozone and maybe even deflation (German CPI and US GDP will be announced today). If that is indeed the case, then CEE FX will come under pressure and the carry trade will lose its lustre.