The week gone by started with positive news from industrial production, as the January figure exceeded expectations and rose by 3.4% on an annual level (for more information, see our Tuesdays daily). Even though the low base also played a role in industrial production growth, the coming months should reveal the true nature and sustainability of the January performance. 

Taking into account the still subdued domestic demand and uncertainty over the external demand outlook, we remain cautious for now and expect broadly stagnant industry performance in 2013. On the other hand, the latest trade balance figures for January failed to bring a more positive tone, as exports declined by 9% y/y, mainly driven by robust contraction in ship- related exports, while imports remained practically flat on an annual level. This resulted in a low export import coverage ratio of 53.7%. As for the outlook, imports should remain subdued on weak domestic demand, while EU growth weakness weighs on export performance.


With regard to this weeks data releases, the CBS will publish the January retail trade and February inflation figures. We see retail trade performance remaining under pressure, as ongoing weak fundamental factors would be accompanied by a higher base from last year's front-loaded spending ahead of the VAT hike. Inflation is expected to hit a peak in February, also on the base effect.


No major changes in market performance. Yields were holding broadly steady, with yields on the domestic market remaining practically flat on a weekly basis. On the other hand, USD yields put in the best performance by declining up to 20bp w/w. The exchange rate remained flat throughout the week, continuing to hover slightly below the 7.60 mark. We see the HRK moving in a tight band in the coming period, where the announced MoF USD 1.5bn bond placement should provide an anchor to the exchange rate performance.