CEE Macroeconomic and Fixed Income Research

Analysts’ view:

PL Macro: While employment and wages continued to rise (0.8% y/y and 3.5% y/y in July, respectively), today's data on industrial output growth has the potential to come in below market expectations. We expect the dynamics to slow to 2.6% y/y, especially following the disappointing PMI numbers which printed a figure below 50, which put considering downside risk to our forecasts. Any disappointing result should strengthen rate cut expectations, suggesting a slowing pace of economic growth. An easing scenario supports a low level of yields close to 3.4% at the end of the year.

SI Politics: Yesterday President Borut Pahor expectedly nominated Miro Cerar for prime minister-designte, sending the motion to the parliament.
Parliamentary vote is not expected to bring surprises as Miro Cerar is seen getting comfortable support. Upcoming days would reveal more details on the coalition setup and positioning of DeSUS, SD, ZaAB. Fast scenario implies government may be in place in mid-September, nevertheless likelihood of detour in the collation talks may not be neglected. With financing secured deep into 2015 we continue to expect rather benign market developments and actors taking wait-and-see tactics until the resolution of the post-election coalition puzzle.

TR Politics: Current President Abdullah Gul, whose term will be over on August 28, said that Foreign Minister Ahmet Davutoglu will apparently become the new prime minister replacing President Elect Recep Tayyip Erdogan.
Reuters quoted this morning a senior AKP member saying that the Deputy PM in charge of economy Ali Babacan and Finance Minister Mehmet Simsek will maintain their posts in the new cabinet to be formed after Erdogan leaves for the presidency. This news is market-positive and may help the currency and the bonds to recover their losses. We forecast the USD/TRY at 2.11 and twoyear bond yield at 8.4% for 3Q.

Traders’ comments:

While 10Y German yields continued trading around 1% yesterday, CEE bonds prices firmed higher. CEE bonds have managed to regain more than half of their losses since the selloff began during last trading week. The performance is most evident in local currency bonds from Hungary and Romania, i.e. HGB 23 tighten 51 bps week on week while ROMGB 23 tightened 23 bps in a similar period. In Croatia we also saw better bid interest especially in the USD denominated debt but nevertheless on lower client volume and activity when compared to the last sell off. In global politics, news emerged that Russian president Vladimir Putin will meet with his Ukrainian counterpart Petro Poroshenko in Minsk during a summit of Eurasian Customs Union. It will be the first encounter since D Day anniversary in Normandy in July. The willingness to meet each other could be perceived as a positive sign that could help to deescalate current situation in Eastern Ukraine. In Corporate bonds the bid only dynamic also returned to our markets with strong interest in Polish names including PKO 22, PKNPW 21 and BREPW 19.