Hungary starts the monetary easing
|After a busy week of releases, the upcoming week is anticipated to be relatively calm. Poland will be the main source of data publications, while other countries in the CEE region will only witness sporadic releases. The highlight of the week will be the rate decision by the Hungarian Central Bank on Tuesday. Although the policy rate is expected to remain unchanged, we expect a 100bp reduction in the effective 1-day depo rate to 17%, reflecting an improved risk assessment. On Monday, Poland will release important indicators such as industrial production, producer price index, and wage growth. Despite a robust Q1 GDP performance, industrial production is forecasted to remain below last year's figures. On Tuesday, Polish retail sales figures will also be unveiled, and they are expected to show a decline in real terms compared to the previous year’s reference. Towards the end of the week, both Poland and Hungary will publish their unemployment rates, which are projected to remain unchanged. Additionally, Slovakia's PPI release on Friday is likely to reveal further disinflationary trends.
FX market developments
CEE currencies were under depreciation pressure last week, due to the surging dollar, which strengthened to well below 1.08 against the euro, supported by reports of progress in the ongoing US debt ceiling negotiations. The Hungarian forint suffered the most significant blow among CEE currencies, depreciating by 1.7% against the euro. The depreciation of the forint was likely intensified by Prime Minister Orban's threat to block the EU's financial aid to Ukraine and the new sanctions against Russia, as well as much firmer expectations of the first rate cut to be delivered by the MNB this week. The depreciation of the Romanian leu against the euro is also worth mentioning (1% w/w), as it confirms the previous warning from the NBR that the central bank is willing to tolerate a broader fluctuation of the RON (meaning weakening) in order to discourage companies from excessive FX borrowing.
Bond market developments
CEE government bonds followed the trend of higher yields experienced on major markets last week. While 10Y yields increased 15-20bp w/w almost everywhere, 10Y yields on ROMGBs and HBGs remained almost flat, despite weakening of their currencies. The main reason for the relatively good performance is still the good demand for ROMGBs from offshore investors and anticipation of the first rate cut in the region, which should be delivered by the Hungarian central bank this week. Indeed, FRAs 1x4 declined 40bp w/w and yields on short-term government securities even fell 50-100bp w/w. Yields on Croatia’s governments bonds have already touched the level of Slovak bonds on a couple of maturities. Fitch Ratings released a note in which they stated that the installation of a new technocratic government in Slovakia does not change the country’s underlying political dynamics and that the new parliament emerging from the elections scheduled for September could have difficulties supporting essential reforms due to further fragmentation.
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