March Retail Sales likely to show mixed development in CEE

This week, Serbia will publish its flash GDP estimate for 1Q21, which we see at a promising -0.5% y/y (+1.4% q/q). The country’s services sector likely fared better than in most CEE countries thanks to milder restrictions, higher mobility, and a good vaccination rate. March retail sales figures will be published in Romania, Slovakia, Czechia, and Hungary. Whereas base and calendar effects likely shifted up Czech retail trade growth close to the double digits, low base from last year should have helped soften the vast decline from early 2021 in Slovakia. In Romania, March will likely show only a slight increase, reflecting slower wage growth and new regional restrictions. Hungarian retail sales may have declined by almost 7% y/y, affected by re-introduced lockdown measures and last year’s relatively higher base. Moreover, March industrial production growth likely reached 12% y/y in Czechia and 15% y/y in Hungary, driven by solid external demand and strong base effects. Central banks in Poland and Czechia are expected to keep monetary policy unchanged, with key rates remaining at 0.1% and 0.25%, respectively. The Czech central bank remains in a wait-and-see mode and the spotlight will be on its new macroeconomic projections. Economic development indicates in our view the need for two hikes in 2021, but the exact timing remains unclear. Our baseline forecast sees August as the most likely option for the first-rate hike.

In the week ending with April 24, the CEE Recovery Index bounced back visibly and returned to its pre-Easter level. As COVID-19 restrictions continue to be lifted across the region, mobility across all sub-categories improved. Mobility to retail stores went up substantially, while mobility to the workplace sustained its upward trajectory and reached the highest level since mid-October 2020. Among the more volatile components of the index, air pollution jumped strongly, while electricity remained stable. We expect to see further improvement of the Recovery Index in the weeks to come, as mobility will benefit from more relaxed restrictions.

FX market developments

The US dollar slightly depreciated over the course of the week, while CEE currencies were mixed. The Hungarian forint benefited from the weaker USD and went below 360 vs. the EUR. A dovish comment from central bank board member Benda weighed on the Czech koruna, which depreciated in the first half of the week. Moreover, better than expected 1Q21 GDP growth had only a limited impact on the EURCZK, which closed the week below 25.9. Separately, the ECJ ruling on CHF loans in Poland stated that the local courts should decide whether FX mortgage contracts containing an abusive clause should be annulled or not. Ahead of the ruling, the zloty weakened, but pared most of the losses after the release. The upcoming decision of the Polish Supreme Court (due May 7 and May 11) could provide more clarity on the issue. Separately, a surprisingly high inflation print for April did not weigh on the PLN.

Bond market developments

Hopes of stronger economic prospects, backed by the better than expected economic data released last week, inched yields up in both the Euro Area and CEE. Czech bonds were outliers, given that yield increases had already been strongly frontloaded and saw some correction last week. This was apparent also from the comparison of yield spreads between 10Y CZBGS and POLGBs, which narrowed to 5bp, from nearly 50bp in mid-March. Polish yields increased about 15bp w/w, despite last week’s PLN 5bn QE auction. The higher CPI flash estimate, which landed at 4.3% y/y in April, could cause some headwinds for the central bank’s effort to keep yields down. The NBP will continue in its QE activity in May via two auctions and additional operations cannot be ruled out. Moreover, Poland will hold a regular bond auction with supply at PLN 4-7bn and one switch auction. The Hungarian central bank should also keep buying HGBs in 2Q, with the next technical review scheduled after reaching HUF 3000bn.

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