CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RO Rates: In line with our expectations, the central bank yesterday cut both the key rate and the mandatory reserves on RON liabilities to 3% and 10% (from 3.25% and 12%, respectively). Also, the central bank narrowed the corridor around the key rate to ±2.75pp (from ±3pp) in a bid to contain MM rate volatility. We see the National Bank holding fire at the next MPC scheduled between the first and second round of presidential elections (November 5), while assessing the impact of the previous moves. As the situation on the Eastern border remains tense and local political risks though moderate will be there we continue to see ROGB yields edging higher towards the end of this year. We maintain our year-end call for 5-year ROGB yields at 4.1%.

HR macro: August industrial production fell short of all expectations (EBCe 2.5% y/y, consensus 0.7% y/y), with the headline figure bringing a strong decline of 4.7% y/y (WDA) and revealing the strongest contraction since May 2013. While the monthly decline (-4.2% s.a.) revealed weakness across practically all categories, the robust fall in the energy sector was the one weighing the most on the annual headline figure, with a strong 18.4% y/y decline. We now remain more on the cautious side when it comes to the outlook, with weaker than anticipated August output putting strong downside pressure on the expected industrial recovery in 2014. On one hand, production is still facing difficulties, given the ongoing domestic demand weakness and competitiveness issues, while the decelerated external demand impulse lacks stronger offsetting potential, thus suggesting a weaker industrial performance in the remainder of the year. As for capital market forecasts, we see them remaining unaffected by the figure.

HU Macro: Hungary’s statistics office has modified the GDP data retrospectively from 1995 to 2013 thanks to the new ESA2010 methodology. The nominal GDP data has been increased significantly by 1.2-2.7% in the given period. 2013 FY avg real GDP growth has been revised to 1.5% from 1.1%, while the nominal GDP has been increased by 2.7% to HUF 29,900bn. The main difference between the old and new methodology is that the R&D spending is now accounted as fixed-capital formation rather than current expenditure. Therefore the GFCF figures have been revised upward, while consumption, export and import (also net exports) are decreased in nominal terms. Last year’s investment ratio is lifted to 19.9% from 18.1% reported earlier. Our investment figure expectation will likely be elevated by some 2pp this year from 19.3%. Furthermore, all the ratios depending on nominal GDP GDP (public debt, external debt, C/A and trade balance, FDI, etc) will likely be reduced in our forecasts. Nonetheless, GDP growth and CPI figures will likely be unchanged as well as market (forint, bond yield) forecasts. We neither expect market moving effect on the news.

Traders’ Comments

CEE Fixed Income: Romanian bonds outperformed yesterday following the actions by the Romanian national bank. ROMGBs tightened between 5 and 12 bps across the cure with the long end outperforming. Other markets in CEE traded relatively calm with no major yield movements. In major markets, aside the political instability in HK and ME the focus in the next days will shift towards the ECB where Mr. Draghi is expected to unveil details of ABS asset purchase program tomorrow. While in corporate bonds, Moody’s downgraded PGNiG’s rating by one notch from Baa2 to Baa3 sighting evolving risks relating the exploration and production activities of the company.