Inflation to drop in January due to base effect
|This week in CEE
This week, December industrial output will, along with trade balances, be published for the remaining CEE countries. We expect that industrial output was nearly flat y/y in Slovenia and Romania, while slightly growing in Czechia (+1.5%) and Slovakia (+2.5%) in the last month of 2020, backed by sentiment indicators. On Friday, inflation data for January is due in Czechia, Hungary, and Romania. In Czechia, we expect a substantial drop of inflation below the target, mainly due to subdued domestic demand and the base effect. This decline should be temporary and a return of inflation above the target is expected in April. The base effect should also play an important role in Hungary, where inflation should dive below 3% in January and return above 4% in April. In Romania, the inflation rate is to increase to 2.5% in January (from 2.1%), driven by supply factors – higher gas prices and excise duties on tobacco products. Neither Serbia's nor Romania's central banks are expected to change rates at their meetings this week. Originally, we could imagine the NBR cutting rates at the next Inflation Report approval (though original Board meetings calendar is suspended), but due to delays in the approval of this year's government budget, the next cut looks more likely to take place in March.
Since the re-introduction of containment measures in 4Q20, the CEE Recovery Index has been fluctuating below the level observed during the summer months. In the last week of January, the CEE Recovery Index dropped somewhat. The main reason behind that move was the dropping air pollution. On the other hand, mobility to grocery stores and retail remained broadly unchanged, while mobility to the workplace inched up a bit. The partial easing of restrictions in some of the CEE countries as of the beginning of February could likely result in increased mobility and push the CEE Recovery Index up slightly.
FX market developments
With the sluggish pace of the vaccine roll-out in the EU compared to the US, the euro has been losing its advantage against the US dollar and the EURUSD went below 1.20. However, after the publication of January's labor market report in the US, which showed a weaker than expected increase of non-farm payrolls, the US dollar depreciated. CEE currencies moved stronger last week, on the back of an increased global risk-on mood and local factors. The Czech koruna continued to appreciate after the central bank's meeting and the EURCZK broke the 25.8 margin. We see that move as quiet surprising, as the CNB did not provide any strong signal about the possibility of a hike. For the coming weeks, we expect the koruna to remain relatively stable or to correct very slightly. Further appreciation could take place with the improvement of the pandemic situation. During the week, the Hungarian forint remained below 355 vs. the EUR. However, weaker than expected industrial production data for December pushed the EURHUF toward 357.
Bond market developments
The local currency sovereign bond yield curves reacted with an upward move on both the Bund curve and the USD Treasury curve last week. 10Y LCY yields increased about 10bp w/w in Czechia, Hungary and Poland. In the Czech Republic, we even saw the mid part of the yield curve increase about 10bp, as the market started to listen to the central bank more carefully and price in higher rates in 4Q21 (6x12 forwards moved up 20bp last week). In Hungary, we could see more steepening; the very long end (15-20Y) moved up +20bp w/w. Spreads on Eurobonds somewhat narrowed with the risk-on mode.
In case you missed
CEE: Retail sales for December were released in HU, SK, RO.
HU: Industry surprised to downside in December.
CZ: GDP growth came in visibly above expectations in 4Q20. Central bank kept rates unchanged.
PL: Unchanged monetary policy.
RS: FY20 GDP growth landed at -1.1%.
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