First glimpse at inflation development in March
|This week in CEE This week’s calendar is dominated by monthly data releases in our SEE countries, followed by a few releases in the V4 region. Croatia, Slovenia and Serbia will all publish their February retail sales prints which are likely to show a positive year-over-year development in two out of three of these countries. Slovenia’s retail trade may moderate the large decline it sustained in January, but it is still expected to be 5% lower than in February 2020. Industrial production in Croatia and Serbia should mark a mild, but positive rate of growth. Moreover, we will see the first inflation data for March in Slovenia and Poland. Whereas inflationary pressures remain muted in Slovenia and are only expected to rise to 0.2% y/y, Poland’s consumer price increases paint a different picture altogether, as the headline figure is expected to reach 2.7% y/y and to move in the upper bound of the central bank's target range throughout the year. Nevertheless, the Polish central bank is unlikely to respond to this development. Hungary’s unemployment rate in February may have increased mildly, with the 3-month moving average reaching 4.7-4.8%. Czechia will publish its final GDP print for 4Q20 –" despite some possible slight revisions in the data, the economic story should be confirmed. Furthermore, March economic sentiment and PMI data for some countries will also become available this week.
In the week ending with March 20, the CEE Recovery Index continued its downward trend. Across the CEE region, people’s mobility is being affected by the deteriorating pandemic situation, which is likely resulting in more cautious behavior, and tighter measures. Mobility to grocery and retail stores went down, while mobility to workplace remained broadly unchanged at a low level. Furthermore, both electricity consumption and air pollution decreased. All in all, the prolongation of restrictions into April in the CEE region will dampen the expected economic recovery and likely shift it more towards 2H21.
FX market developments
CEE currencies were mixed last week, with the Polish zloty hitting the lowest level in almost 15 years. Given the recent weakening bias of the PLN and persisting negative factors, we revised our EURPLN forecast and we now expect the zloty to remain undervalued and the EURPLN to hold above 4.60 until the end of the year. The Czech koruna followed the PLN and depreciated, with the move likely amplified by the CNB’s willingness to wait for an improvement of the pandemic situation before raising rates. The forint went in the opposite direction and appreciated. We think that the central bank calmed markets down, reiterating that higher inflation will only be temporary, under the influence of base effects.
Bond market developments In all CEE countries except for Czechia, government bond yields followed the downward correction of yields that took place on major markets last week, with Romanian and Hungarian bonds benefiting most from the move. In Czechia, 10Y yields stayed close to 2%, as the market expects monetary tightening from the central bank starting already this year and a larger supply of bonds to finance the widened deficit. Spreads on 10Y CZGBs are currently traded at around their all-time high (230bp) vs. German bunds. We see an uneven risk related to the timing of the first rate hike, which may result in some correction of Czech yields towards 1.7% in the next couple of months. Czechia will offer 5Y, 10Y and 20Y bonds in this week’s auctions. Romania will sell RON 300m via reopening of ROMGB 2034, currently traded at about a 70bp wider spread vs. the German Bund in comparison to the spread on 10Y ROMGB vs. the 10Y Bund, given that the Romanian curve is much steeper on the 10-15Y segment.
In case you missed
HU: Central bank kept policy rate unchanged and published new economic forecast.
CZ: Target rate remained stable at 0.25%. CNB to wait with tightening until pandemic situation improves.
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