November’s inflation in focus

Throughout the week, we will continue to see inflation numbers across the region. On Monday, Czechia will release November’s inflation. We expect a significant slowdown to 7%. However, if we were to account for the impact of last year’s Savings Tariff, it would be close to 4%. On Tuesday, Serbia will release its headline inflation and this is also expected to moderate in November. On Wednesday, it will be Romania’s turn to publish inflation data. Slovakia will follow on Thursday and Poland and Croatia will confirm the flash estimates on Friday. Apart from that, we will see industrial output growth in October in Slovakia, Slovenia and Romania. With regard to trade data, Romania and Poland will publish trade and current account balances for October.

Finally, on Friday after market close, Fitch will decide on Hungary’s rating; Hungary currently has a negative outlook. Given this year’s improvement in the external balance, stable financing position, lower gas prices and rapid disinflation, a downgrading step is not fundamentally justified, in our view. A weak fiscal position and unresolved debates with the EU and delays in the flow of funds would make Fitch hesitant to raise the outlook from negative to stable. We thus expect no change.

FX market developments

CEE currencies have been weakening throughout the week against the euro. The simultaneous move suggests that global factors are in play, as investors seem to be shifting expectations for the major central banks to begin with monetary easing sooner rather than later amid falling inflation and weak economic development. In the region, the Polish and Serbian central banks kept policy rates unchanged at last week’s meetings. This week, markets in the region will primarily focus on the Fed and ECB meetings, especially in the context of the recent inflation decline. As for inflation development, it will be particularly watched in Czechia this week, as Czechia is just ahead of its last central bank meeting (due the following week) and the decision on whether interest rates will be lowered remains unclear. Governor Michl commented that, on the one hand, it is time to move on, while on the other, he stressed that the central bank would remain hawkish in its approach and would be careful with monetary easing.

Bond market developments

This week, long-term yields declined further, mirroring development on core markets. The long end of the curve in Germany shifted visibly downward, as market expectations for monetary easing to begin have been shifting in response to November’s flash inflation estimate at 2.4% y/y. This week, the Fed and ECB meetings will be in focus and will be key events for market development in the region as well. Locally, Czechia, Poland and Romania will be active on the bond market this week.

On Friday, Fitch downgraded Slovakia to 'A-' with stable outlook. The main factor driving the change of the rating was recent development of public finances as well as uncertainty about fiscal consolidation. Slovakia thus may face higher borrowing costs in the future.

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