Domestic demand behind the wheel

An action-packed week awaits us. Many CEE countries will publish their 3Q21 GDP breakdown, followed by several monthly indicators. Serbian GDP footprint will likely be confirmed as one of the strongest ones in the region, standing at 7.4% y/y last quarter. As far as structure goes, domestic demand, notably household consumption, should be the key driver of growth. Brisk economic growth is also to be confirmed in Poland (5.1% y/y) and in Hungary (6.1% y/y), driven predominantly by private consumption and, in the latter case, also investments. Slovenian GDP is also thought to have marked a solid 4% year-over-year increase in 3Q21, driven mostly by domestic demand. A much milder GDP growth pace is likely to be confirmed in Slovakia and Czechia, at 1.3% y/y and 2.8% y/y, respectively, as solid domestic demand was mitigated by weak net exports (linked to supply-side semiconductor issues). Moreover, Poland and Slovenia will publish their flash inflation figures for November – these are likely to show an acceleration to 7.5% y/y and 3.9% y/y, respectively. Retail sales for October will be released in Hungary, Slovakia, Slovenia, Croatia, Serbia and Romania. Slovenian and Croatian prints are likely to be in the double-digits, but a relatively robust development of retail sales is expected also in the other regional economies, even despite some local restrictions that were in place. Industrial production for October is expected to have retained a modest but steady print in Croatia and Serbia, in the region of 2-2.5% y/y.

FX market developments

The deteriorating pandemic situation is taking its toll on emerging market assets, as investors are fleeing to safe havens. Negative global sentiment and the alarming pandemic situation weighed on the Czech koruna, which depreciated to 25.70 vs. the EUR. Meanwhile, Czech National Bank Governor Rusnok said that after a significant increase in interest rates in September and November, the CNB does not have to rush with further hikes. Rusnok added that he could imagine that the CNB would not raise interest rates at its December meeting. This is a significant change in comparison to his previous statements, probably affected by the current pandemic situation. Should the CNB remain on hold in December, koruna could depreciated further as 50-75bp increase was broadly expected. This comes on top of risks of country-wide lockdown, which could in our view send koruna to 26.0 vs. the EUR. The strengthening of the Hungarian forint following a bold move by the central bank was short-lived, as the HUF quickly pared its gains and returned to 368 vs. the EUR. The MNB raised the one-week depo rate by 40bp to 2.9% just 15bp below the upper limit of the interest rate corridor. We think that at this week’s non-rate-setting meeting (November 30) the MNB could reassess its toolkit and reiterate to the market its commitment to fight inflation, as recent tightening had limited impact on the forint. A mix of global and local factors continues to weigh on the Polish zloty. The PLN bounced back to 4.70 vs. the EUR and remains close to the 12-year low reached earlier last week. The zloty will closely watch the flash inflation reading for November, which will show further acceleration of inflation likely beyond the 7% margin and will be a key driver of the central bank’s decision next week.

Bond market developments

10Y yields on Hungarian government bonds topped 4.5% last week, the highest yield seen in the last seven years. The situation calmed down after the central bank increased the 1-week deposit rate by another 40bp (thus 110bp in total in November) at its Thursday meeting. Decisive action was targeted to primarily help the forint, but it also supported the long end, while the HGBs curve flattened at the 3Y-5Y segment (around 4.1%). The swap curve was already inverse, with the short end ranging between 3.5% and 4% and the long end falling below 3%. Romanian 10Y yields climbed to 5.5% last week (+30bp w/w) and ROMGBs have pretty much ignored the approval of the new government so far. Given the high pressure on CEE currencies and relatively stable RON observed last week, it is very likely that the NBR was intervening on the FX market and withdrawing RON liquidity, which could weigh on ROMGBs. This week, the Czech Ministry of Finance plans to reopen the CZGB 2031 floater and CZGB 2032. On top of that, Czechia, Croatia and Hungary will be selling T-bills. On Friday, Fitch Ratings is scheduled to review Slovenia’s sovereign rating, which currently stands at ‘A’ with a stable outlook.

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