First peek into June CPI prints and more hikes in Hungary

This week brings a string of macroeconomic data releases, including the first look at June inflation figures, and a central bank meeting. The Hungarian National Bank is likely to announce further tightening on Tuesday. The increased difference between the policy rate and the effective one-week deposit rate could justify a bigger move – thus, we anticipate a 100bp hike to 6.9%. Thursday could bring another 30bp increase in the one-week deposit rate. Poland and Slovenia will be the first in the region to release their June inflation prints. Further acceleration of the year-on-year rates is likely – although the Slovenian CPI figure will likely still remain in the single-digits (around 8.5% y/y). Producer price inflation in Hungary and Slovakia is expected to have remained heated in May, rising as much as to almost 50% y/y in the latter. Slovenia, Serbia and Croatia will release their May retail sales prints, which are likely to point moderating, but positive growth paces. Industrial production in Croatia is expected to have fallen by 5% y/y in May, whereas Serbian industry likely still expanded by 1% y/y last month. Serbian May trade balance and Romanian unemployment for May will also be published.

FX market developments

CEE currencies strengthened in the first half of last week, but later reversed the moves. Hungarian forint and Polish zloty ended up close to 400.8 and 4.71 vs. EUR respectively, whereas Czech koruna inched towards 24.75 against the euro. Investor sentiment has deteriorated, amidst global recession worries and aggressive US monetary policy tightening. As far as local factors go, Czech National Bank raised its key rate by 125bp to 7.00%, in the last meeting of the current Bank Board. Moreover, exchange rate interventions may be used as a complementary monetary policy tool now. We do not expect another rate hike as the new Bank Board could be less hawkish. The Hungarian central bank kept its one-week deposit rate at 7.25%, somewhat disappointing the markets. Hungary must reply to the European Commission letter regarding rule of law concerns by Monday – the HUF will likely respond to it. Polish central bankers sent mixed signals regarding potential end of monetary tightening – suggesting the MPC is of split opinion. Several ECB policymakers have argued for timely and sufficient rate hikes, as well as stressing the central bank will only prevent “unwarranted” market moves, but will not solve countries’ debt issues.

Bond market developments

Both global and CEE bond markets bounced back last week on news pointing to a weakening of global growth. CEE LCY bond yields collapsed more than 60bp w/w, mostly in the second half of the week. The decline in POLGBs yields was the most pronounced, with the whole yield curve shifting down about 75bp w/w. It is very likely that CEE bond markets have finally bottomed out, as the markets started to scale back their rate hike expectations. In Poland, short-term FRAs also declined visibly (40-75bp w/w depending on maturity); in Czechia and Hungary the decline was much milder (20-50bp w/w), while we saw the peak of FRA rates just last week. For further normalization of yields in CEE, it will be very important to see any signs that inflation has peaked or commodity prices are falling. The auction calendar will be rather empty this week, with only ROMGBs 2026 and T-bills in Hungary and Czechia being offered. Today, Hungary is expected to give its answer to an EC letter on EU concerns about the rule of law that led to a freeze in access to EU funds.

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