Czechia and Serbia to release 4Q20 GDP growth

This week in CEE

Today, PMIs in manufacturing for January will be published in Czechia, Hungary and Poland. Despite the worsening of the pandemic in the euro area and the Czech Republic in the first month of this year, we expect the damage to manufacturing to be rather limited. German PMIs in manufacturing published earlier pointed to the continuation of expansion of output in January, although at a slightly slower pace. Also, confidence indicators for the industry published by Eurostat for January did not indicate any abrupt change in the trend in CEE. Besides the flash estimates of 4Q20 GDP growth for Czechia and Serbia, we will get December retail sales for Czechia, Hungary, Slovakia and Romania with the latter being the only one posting positive growth. MPC meetings will be held in Poland and Czechia this week; rates should remain unchanged in both countries. The Czech national bank will reconfirm its view that there is no need to change the policy rate at this time. However, we believe that the CNB will already be considering its first rate hike at the August meeting, while delivering it only in November. The incorporation of fiscal loosening (massive tax cuts) scheduled for this year into the inflation forecast will make the CNB even more hawkish later this year. The CNB will just wait for evidence that the threat of another wave of the pandemic is over until late Autumn and then pull the trigger.

The CEE Recovery Index remained broadly unchanged in the week ending with January 23. With the unfavorable pandemic development, governments across the CEE region kept or prolonged the current containment measures until the end of January or mid-February. Hence, mobility across all categories remains dampened and fluctuates around recent levels, with the exception of mobility to the workplace, which continued to recover. All in all, a stronger improvement of mobility trends and rebound of economic activity can only be expected when restrictions are eased more visibly and vaccination rollout gains speed. In the week ending with January 23, air pollution went up, while capacity utilization in the automotive sector remains unchanged at the prepandemic level.

FX market developments

The EUR benefited from the better than expected 4Q20 GDP growth figures published last Friday for Germany and other major EA economies, as the EURUSD returned above 1.21 at the end of the week. Local factors were positive for CEE currencies last week. Solid FY20 GDP growth (released on Friday) supported the zloty, as the EURPLN moved toward 4.51. On the other hand, the Czech koruna benefited from Governor Rusnok's comments and the EURCZK broke 26 level couple of times. Governor Rusnok commented that he sees ‘zero, one or two hikes' this year. In his view, the stronger Czech koruna and uncertainty could delay the rate hikes. However, gradual monetary tightening remains the baseline scenario for the CNB for this year. We expect the Czech central bank to deliver one 25bp hike in 4Q21, as the recent stronger than expected strengthening of the koruna already tightened monetary conditions.

Bond market developments

The long end of sovereign bond curves drifted up a little bit in Czechia and Hungary last week. In Hungary, the central bank hinted that they will shift their focus more to the mid part of the yield curve, as the QE has been approaching its per issue limit on longer maturities. The MNB also announced that it may reallocate liquidity provision from its collateralized loans provided to commercials more directly to bond purchases. The Romanian yield curve moved down last week, especially on shorter tenors, given the abundant RON liquidity on the market. The Romanian MinFin announced that they plan to borrow RON 600m via T-bills and about RON 4bn in local bond auctions in February, with maturities up to 15Y years in the offer. Last week, Slovenia sold EUR 500mn in a new 60Y bond via a syndicate of banks at a spread +75bp above mid-swaps.

In case you missed

PL: FY20 GDP landed at -2.8%. Strong industrial production at year-end.

HU: Central bank kept rates unchanged. QE program to be extended.

RO: Optimism prevailed in January.

HR: Retail sales came in above expectations in December, while industry posted mild rebound.

RS: Restrictions weighed on retail trade in December, while industry surprised to upside.

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