CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

PL Politics: After a meeting of the President and Deputy PM (Piechocinski, leader of the coalition party), the President’s press office announced that Ewa Kopacz will be the candidate for the post of Prime Minister once Donald Tusk signs his resignation. Ewa Kopacz will be responsible for forming a new Cabinet that needs to be accepted by parliament which will most likely should happen by the end of September. We expect the reshuffling process to be neutral for markets and yields to remain low, close to 3.0% at the end of the year.

CZ Macro: Industrial production accelerated to 8.6% y/y in July (6.0% workingday- adjusted), largely due to surging output within the sector of manufacture of motor vehicles (46.6% y/y, driven by persistently strong demand from EU countries and a low base brought about by company holidays in some major car producing companies in July 2013). However, in spite of the ongoing strong inflow of new foreign industrial orders (14% y/y in July), we expect the growth of industrial output to slow down in 2H14 (slightly below the 5% threshold, on average), largely due to ongoing weakening in the growth of manufacturing output in Germany. Yesterday’s release did not have any significant impact on markets but we see the yields of 10Y T-bonds rising to 1.19% at the end of 2Q15.

RO Bonds: The MinFin raised the planned RON 100 m in a T-bond issue with a residual maturity of slightly below 13 years and an average yield of 4.35%. The demand was roughly 2.9 times higher than the initial target. It seems that the fresh stimulus measures offered by the ECB in early September have renewed investors’ appetite for local government bonds. Even so, we still believe that the upcoming presidential election in early November and heightened geopolitical tensions in the region remain the key risk factors for local yields. For the time being, we stick to our 5Y ROMGB yield call for December 2014 at 4.1%.

TR Macro: Industrial production contracted by a sharp 4.7% y/y in July due to the lower number of working days. Nevertheless, there was a surprisingly sharp 1.8% seasonally adjusted m/m increase in July, recording the strongest growth since November last year and indicating an acceleration in the underlying growth rate. Such strong momentum has not been verified by other indicators and creates some ambiguity in our view. Annual production growth could be significantly stronger in August, shedding more light on the risks to our 3.4% GDP forecast for 2014. The data is, however, not likely to change the CBT’s view that aggregate demand conditions are supportive for a decline in inflation. We, therefore, maintain our 9% year-end forecast for the two-year bond yield.

Traders’ Comments:

CEE Fixed Income: With not too much economic data of importance on yesterday’s agenda and few headlines related to geopolitical developments, trading was slow and yields on CEE fixed income drifted lower in secondary markets. Issuance in primary markets, however, is starting to pick up and Wienerberger AG invited holders of its EUR 500 m perpetual subordinated hybrid bonds to offer to exchange for resettable bonds in an attempt to opitimise the issuers capital structure. We are also seeing a lot more activity in the more opaque private placement arena. Other than that, there seems to be a growing consensus view amongst our client base that yields on core Eurozone government bonds are too low and investors are looking elsewhere for alternatives.