CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

PL Politics: Prime Minister Tusk was chosen to become president of the European Council starting from December 1. Until the end of November, he will remain in his current position. His resignation, however, means the dismissal of the whole government. After that, the President will designate the new Prime Minister, who will be responsible for creating a new government that needs to survive a vote of confidence. Failure to do so could lead to early elections, but we see this as an unlikely option. The new candidate should be known tomorrow. These changes in the political scene should be neutral for Polish markets.

CZ GDP: In 2Q14, GDP growth came in at 2.7% y/y in the Czech Republic, according to the first revision on Friday (up from 2.6% y/y in the flash estimate). As the manufacturing sector remained the key contributor to GDP growth on the supply side (adding 2.2pp), fixed capital formation (6.9% y/y; contributing 1.5pp), as well as private consumption (adding 1.0pp) served as the main drivers on the demand side. As the recent development is basically in line with our estimates, we maintain our forecast for GDP growth for the whole of 2014 at 2.5%. However, with respect to the threat of further escalation in the Ukrainian conflict and a possible extension of Russian retaliatory sanctions, the risks are currently to the downside. Our EURCZK forecast remains unchanged (27.5 through 2Q15).

HR GDP: The first 2Q GDP estimate came in a few notches below our expectation on Friday, as the headline figure declined by 0.8% y/y. This marks the eleventh consecutive quarter in the red. While waiting for the detailed release (due on Sept. 10), we are not expecting to see any major changes in the structure with monthly-frequency indicators point to another strong drag coming from weak domestic demand, while net exports are seen as the sole positive contributor to the headline figure. The outlook remains challenging with risks to our current -0.5% GDP forecast to the downside due to the more demanding external outlook. That said, we see EURHRK stabilizing around 7.6 in Q314.

SI GDP: 2Q GDP exceeded our expectation, with growth accelerating to 2.9% y/y (1% q/q, s.a.), as reported on Friday. The detailed breakdown revealed a positive surprise coming from gross capital formation (5.2% y/y), while private consumption momentum slowed down, as expected, to 0.2% y/y (vs. 1.1% y/y in 1Q). Net exports also delivered a strong performance, with both exports and imports keeping up the strong pace from 1Q and supporting the headline figure. Despite a more demanding external impulse, which implies some growth moderation in the second half of the year, our FY14 GDP forecast (0.7%) is subject to upward revision, taking into account the strong 2.5% growth in 1H14. We expect the 10y yield spread to Bunds to fall towards 170 bps in Q115.

Traders’ comments:

CEE Fixed income: This week has the potential to be very busy as geopolitics in Ukraine and Hong Kong, Non-Farm payrolls and the ECB rate setting meeting are all in focus. In CEE, we will have the Polish MPC decision on Wednesday. With respect to the central bank decisions, investor expectations have probably got ahead of themselves but the escalation of the conflict in Ukraine and a subsequent extension of sanctions against Russia will put further downward pressure on growth expectations and keep the probability of further monetary expansion on the agenda whilst strong employment data in the US has the potential to put more pressure on CEE FX, basically loosening monetary conditions in the region even in the absence of rate cuts or QE. The tug of war between deflation risks in Europe and monetary tightening in the US continues unabated. The risks appear to be skewed toward “risk-off” sentiment this week.