CPI is of course important for the Fed

On global markets: Next week, important data from the US will be released. CPI is of course important for the Fed, but at the same time unlikely to show any significant change. Retail sales numbers for May have more potential to move the EURUSD. The impact from highly volatile equity markets in May is unknown and poses downside risks for the release.

CEE currencies: Regional currencies were driven by external factors amid the worsening of the global growth outlook and dampened rate expectations. Currency appreciation was strongest on markets where yield and rate declines on longer tenors were not as large (i.e. Czechia, Hungary) as elsewhere (i.e. Poland, Romania). In Hungary, as the central bank may perceive that external developments could justify a loose policy, and local inflation was also not above expectations, the forint is unlikely to have much room to soar further. (Another big question is if very strong domestic price pressures could be tamed by external developments – this still remains to be seen in Hungary, in our view.) The Czech koruna finally got a boost, after ailing in the last few weeks, given the lowered rate outlook. The koruna may not weaken much after this move, unlike the forint, as the central bank has a different approach there. Stability or slight appreciation is most likely for the koruna in the coming months. For the Serbian dinar, moves were not very strong, but central bank intervention was very intensive to fend off appreciation, stemming from inflows. The situation may remain tense for the NBS to keep this up, as the policy rate was not cut, despite inflows. Still, we expect the NBS to stand ready to keep the currency relatively stable.

CEE rates and yields: Rates and yields further declined substantially in CEE last week against the backdrop of easing external growth prospects. Additionally, yield spreads over German Bunds declined further as well. The most dramatic decline in yields took place in Serbia, where longer-dated (above 8Y) yields fell by approx. 50-60bp w/w. Interventions from the central bank to tame inflows also intensified, while the bank itself said that inflation is under control. However, despite this statement and currency developments, the NBS kept the policy rate unchanged this week. While some profit-taking after such a yield drop could be reasonable, we see further potential of Serbian longer-dated yields to go down to around 4%. In addition, we changed our forecasts in Hungary: after the recent decline in yields, an upward move by the year-end could only reach around 3% in the 10Y segment. Domestic pressures are very strong in Hungary, however, so yields are unlikely to stay too low for very long. Polish yields also declined strongly, as the 10Y now prints below 2.5%. We now expect only a marginal increase to 2.55% until the end of 3Q19 and to 2.65% until the end of the year, with risks to the downside if German yields continue going down. As the short end of the Polish curve is much more stable, the flattening of the curve could be more and more visible.

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