Developing Europe Still Contracting

Of the major industrialized, only Japan and Canada have not reported Q3 GDP estimates. Japan reports on Monday is expected to have expanded at almost the same pace as the US. On the quarter the US expanded by almost 0.9%, while the Japanese economy may have expanded by around 0.7%. With the Big Three in the euro zone reporting, the preliminary estimate is that the euro zone expanded by 0.4% after a 0.2% contraction in Q2. The UK's 0.4% contraction represents the outlier. Canada reports at the end of the month and the economy probably was fairly stagnant.

A number of countries from central Europe reported Q3 GDP figures today. Slovakia and Czech reported positive quarterly growth of 1.6% and 0.8%. Hungary was the weak sister. The economy contracted 1.8% from the previous quarter, the sixth consecutive quarterly decline. The Hungarian government forecasts the economy will decline over the course of next year as well.

Poland does not report until the end of the month. The Economics Ministry has been particularly upbeat in its recent comment suggesting growth could be as high as 2% after 1.1% in Q2 year-over-year and Q4 could be even better. The Czech kronua has appreciated about 5% against the euro, while the Polish zloty has gained a little more than 1%. Most of the other currencies in the region, including the Hungarian forint (-1.3%) and Russian ruble (-4.3%)have not kept pace with the euro.

That said, we continue to like the Polish zloty and do not think that the market appreciates its fundamentals sufficiently. We continue to look for the zloty to appreciate vis a vis Hungary and Czech.

However, we recognize that Czech and Hungarian debt instruments continue to outperform Polish bonds. We suspect that this means that if there is a unwind of the risk trades, the Polish zloty might not be quite as vulnerable.