This week in CEE
This week will be busy as we await a flood of data and two central bank meetings. Base effects continued to affect inflation prints in May. We expect Romanian CPI to have risen to almost 3.6% y/y, whereas Serbian inflation may have stood around the mid-point of the target band, at 3.1% y/y. Czech inflation likely went up to 3.2% y/y, slightly above the tolerance band, mainly as a result of the tight labor market and sound domestic demand. The headline CPI figure in Hungary probably reached its yearly peak at 5.3% y/y in May; and is expected to remain above the higher tolerance band of 4% this year. Romania will complete the list of 1Q21 GDP breakdowns. The Romanian economy likely contracted by 0.2% y/y, whilst marking a brisk 2.8% q/q growth on the back of strong service sector performance and household consumption. Strong base effects pushed up industrial production growth to the high double-digits in April – we expect it between 55.5% y/y and 71% y/y in Czechia, Slovakia and Hungary, whereas Slovenian industry likely marked a more moderate increase of 15% y/y. Czech retail sales are expected to have risen by 11.3% y/y in April, aided by better consumer sentiment, epidemiological situation and low base. Moreover, April trade balance will be published in Czechia, Slovakia, Romania, Hungary and Slovenia. Central bank meetings in Poland and Serbia are unlikely to bring any changes to the key rates, which should remain at 0.1% and 1%, respectively. However, indication of an earlier end of the Polish asset purchase program cannot be ruled out.
After plateauing around 1 for two weeks in mid-May, the CEE Recovery Index fell slightly at the end of last month. Yet, the nascent economic rebound continues amidst an improving epidemiological situation, continued vaccine rollout and easing of containment measures. Mobility to grocery stores inched down marginally, while mobility to retail stores and workplaces moved in the opposite direction. Workplace mobility reached its highest value this year. On the other hand, air pollution dropped visibly, dragging down the overall Recovery Index. Due to data availability issues, we have kept electricity consumption unchanged for the last two weeks. Overall, the CEE Recovery Index bodes well for the ongoing economic recovery in 2Q21 thus far.
FX market developments
CEE currencies continued in their appreciation vs. the euro last week, fueled by bets on an earlier start of monetary tightening. The Hungarian forint gained the most vs. the euro, but at the same time it has become extremely volatile. This could be seen in the second half of the previous week, when the EURHUF corrected after the release of very strong labor market data in the US. For the further development of CEE currencies, it will be decisive whether central banks will walk the talk. Given that markets have already priced in some tightening, any moderation of language could result in currency weakening. The first country to face the test will be Poland, where the central bank will decide on rates this week. We do not expect any change of rates at this meeting, but the wording and further downsizing or indication of an earlier stop of the QE program may signal a readiness to lift rates already this year. The pressure to do so could be even higher if the Hungarian and Czech central banks deliver their first hikes already this month (on June 22-23).
Bond market developments
Last week, there were hardly any movements in CEE sovereign bond yields. The European Commission published its assessment of Convergence/Stability programs last week, in which they recommended that fiscal policy be supportive this year and that warning be given before premature withdrawal of stimulus/pandemic measures. Regarding the start of the consolidation, the EC has not communicated any date, just very vaguely called for a differentiated approach, taking into account the stage of the economic recovery and urgency to fix public finances (countries with high medium-term risks). All countries have been encouraged to maximize the benefits of NGEU funds and boost investments. An explicit recommendation was provided to Romania, which is the only country under the Excessive Deficit Procedure (EDP). Romania was asked to reduce its fiscal deficit below 3% of GDP by 2024, and the consolidation path proposed is very similar the one proposed by the government. Although the path is very ambitious, putting some of the intended reforms into milestones of the National Recovery Plan could incentivize policy-makers (via sweeteners) to implement them.
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