CEE Macroeconomic and Fixed Income Research

Analysts’ View:

CEE PMI’s: Freshly released PMI’s in CEE Poland and Hungary remained visibly above the threshold of 50 (54.8 and 55.6 respectively). In the Czech Republic a figure of above 55 is expected. In Turkey, the drop was bigger than expected as PMI arrived at 48 vs. consensus of 49.

RO Macro: The National Bank of Romania cut the key rate by another 25 bps to a new record low of 2% while keeping the level of minimum reserve requirements flat at 10% for RON liabilities and 14% for FX liabilities. The corridor around the key rate was symmetrically narrowed to ±1.75pp from ±2pp. We now see a small probability of further cuts in the key rate. Meanwhile, the minimum reserves could be diminished in the following months, as the low-inflation environment, coupled with the stable EURRON, leaves room for the central bank to continue its monetary easing cycle. We maintain our 5-year ROMGB yield forecast at 2.3% for the remainder of this year.

CZ Macro: Czech GDP growth came in at 1.4% y/y in 4Q14 (instead of the previously estimated 1.5%), according to the final revision released by the Czech Statistical Office. On a q/q basis, the pace of economic expansion remained unchanged at 0.4%. The most significant positive change came from the contribution of government spending which was revised up to 0.8pp (from 0.3pp), due mainly to higher compensation of employees and social transfers in kind. In spite of the fairly weak headline figure, GDP growth adjusted for the one-off negative contribution of taxes on products arrived at 3% y/y, which confirms that the Czech economy remained in fairly good shape at the end of the previous year. As we did not register any noticeable market reaction immediately after the release of the revised data, we maintain our EURCZK forecast at 27.60 at the end of 2Q15.

HR Macro: Industrial production confirmed its volatile nature and rebounded back into the black (January 2015, -5% y/y), posting 1.9% growth on an annual level in February (+3.2% m/m s.a.). The figure had broad support, with the exception of a decline in energy and capital goods production (-3.9% and - 1.3% y/y, respectively), which held back an even stronger reading. Looking ahead, we see domestic demand weakness continuing to counter supportive external dynamics, although the positives will likely prevail, ensuring a similar growth footprint throughout 2015. We see the February release as having no impact on our capital market forecasts.

TR Macro: The Turkish economy grew by 2.6% y/y in 4Q14, falling slightly short of our 2.8% forecast, while full year GDP growth reached 2.9% in 2014. The growth composition changed towards domestic demand from external demand, in line with our expectations. The details were not very encouraging though and downside risks to our 3.8% GDP growth forecast for 2015 remain. Meanwhile, the foreign trade deficit continued to improve in February. The deficit narrowed by USD 0.5 bn y/y to USD 4.7 bn as we had expected, hinting at a further improvement in the C/A deficit. We interpret the details as positive signals for the February industrial production. Given the weaker than expected growth outlook in 2015, expectations are for government stimulus but so far media sources report the possibility of merely investment incentives which are unlikely to give a substantial boost to the economy. The slow economy could be supportive of low yields but despite the improving external deficit, the outlook for the currency is still mixed ahead of the elections. We see 2Y yields at 8.5% at the end of this year and the USDTRY at 2.59 at end-2015.

Traders’ Comments:

CEE Fixed income: We had the usual flurry of activity at month- & quarter-end yesterday but turnover was still light and price moves were contained in secondary fixed income markets. FX markets were also very calm. In the primary markets, UniCredit sold EUR 500 m in 6y covered bonds at ms – 14 bps to yield 0.195%, slightly tighter than the initial price talk of ms – 10 bps.