CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

PL Macro: Retail sales came in at 1.2% y/y in June, another disappointing reading, which seems to suggest that the economic recovery has been losing steam. The data release pushed 10Y yields down to 3.22% and, in our view, such a low figure is another argument calling for a rate cut. However, the MPC seems to need more 'proof' to become convinced of the need for further easing. The cut should come in November (at the soonest) after a few months of deflation and weaker growth prospects. We currently see 10Y yields at 3.55% at the end of the year.

HR Macro: The June unemployment rate fully met our expectations, with seasonal support kicking in and the headline figure declining to 18.3%. Furthermore, the 1.3 pp m/m downtick allowed for a 0.3 pp lower unemployment rate on an annual level. However, the headline figure suggests to us that the overall employment trends actually point to future deterioration, i.e. unemployment rate gains are driven by an ongoing decline in the participation rate. Our view remains unchanged: labour market trends will remain challenging, with the unemployment rate not fully reflecting labour market trends which remain adverse. Our capital market forecasts are unaffected by the figure.

Traders’ Comments:

CEE Fixed Income: Polish markets indicate that the NBP is in denial when it comes to the weakness of the economy and monetary policy. Money markets obviously think that policy is too tight as the 3x6 FRA dropped to 32 bps below 3m WIBOR and the 6x9 FRA fell to 42 bps below current 3m rates. The bond market is siding with money markets, leading a broad rally in CEE yesterday. Overwhelming optimism on the side of bond investors helped the Polish Finance Ministry raise PLN 6 bn in 5y POLGBs, 20% more than originally planned, as bids rose to the highest level in 15 months, driving the yield down to a 14 month low. Bids totaled an eye-watering PLN 20 bn, more than 4 times the amount of bonds on offer, fuelling an outperformance of POLGBs amongst emerging market bonds on the day. ROMGBs also had a good day following the announcement from JPMorgan that Romania would be included in the GBI-EM Global Diversified Investment Grade bond index with a weighting of 2%. This bodes well for the RON 300 m DBN034 tap today (guidance 3.12% +/- 5 bps). Hungary will also issue bonds today with 2018, 2019 and 2025 maturities which are also expected to meet with solid demand. It seems the prevarication of EU leaders with regard to sanctions on Russia has been taken by markets to mean really harsh measures will not be forthcoming. There is also anecdotal evidence that the sanctions against Russia are forcing a reallocation of investments away from Russian assets toward CEE.