Polish Industrial output dropped 4.3% y/y in June. This was significantly better than our forecast of a drop of 7.5% y/y and an improvement compared to the drop of 5.2% y/y seen in May. The continued improvement in industrial production is rather remarkable and is clearly an indication that the significant weakening of the zloty over the past couple of quarters has helped soften the blow to Polish exports from the drop in economic activity in Europe. That said, we remain a bit puzzled about the different signals we are getting about the Polish economy – some data indicates that Poland is still in the midst of a serious crisis (for example, labour market data) while other data (e.g., industrial production) show that the drop in economic activity is relatively mild compared to other CEE countries.
Russian consumption and labour market data were leaked on Friday by the Industry Ministry (IM). According to IM, retail sales dropped 6.5% y/y - completely in line with our forecast and thus show further deterioration. Russian consumers are really struggling and they are likely to do so for the remainder of the year - since wage pressures are declining and still being high inflation. There was LARGE revision of unemployment data. May unemployment rate was lowered from 9.9% to 8.5% as the Russian authorities shaved 1mln off in the working population (A “smart” way to reduce unemployment). Further the jobless rate fell to a six-month low of 8.3% from the revised 8.5%. Overall data suggest that private consumption will only begin to support a recovery very gradually and we are not that optimistic going forward due to risks and further need for financial deleveraging.
Preview
All the indications are that the continued negotiations between the Latvian Government and the IMF are going far from well. The negotiations were supposed to have been wrapped up on Friday. However, it has been announced that they will continue this week. Apparently, the IMF wants the Latvian Government to tighten fiscal policy even further. Last week the Latvian central bank said it was against any form of tax hikes in order to improve the budget situation. We find it odd that the Latvian central bank seems to think it has a power of veto on fiscal policy – and the fact that it has come out with this kind of statement could make it even harder for the IMF and the Latvian Government to reach a deal on the pay-out of the next instalment of Latvia’s IMF loan.
Trading update
Market movements were quite limited on Friday in EMEA FX and fixed income markets. This week we would focus on Baltic risks. A five-year Eurobond was issued in Hungary on Friday. There was a high bid-to-cover ratio, and the auction pricing (+395bp) was marginally better than the initial guidance of 400bp over mid-swap levels. After the bond was auctioned and began trading it performed quite well - so all in all a quite successful issuance.
