Retail sales likely peaked in summer

This week in CEE

On Monday morning, October PMIs for the Czech Republic, Hungary and Poland should confirm the continuation of the good momentum in manufacturing. Other surveys already published for October, such as German PMIs at a 2.5-year high, and this week's Confidence in Industry for EU member countries, point in such a direction. On Thursday, the Czech Republic, Romania, Slovakia and Hungary will publish retail sales data for September. We expect positive y/y growth in all four countries. However, the growth is to slow down everywhere except for Hungary, where the growth should just turn positive. The worsening of the pandemic situation has already started to erode consumer confidence in some countries, and with new rounds of partial lockdowns, it is very likely that retail sales will be dented in 4Q. The Czech and Polish central banks are to decide on rates next week; we do not expect any changes.

The CEE Recovery Index has been deteriorating since mid-September, reflecting rising restrictions to curb the spread of the pandemic. The latest figure for the week ending October 24 includes the partial lockdown introduced in Czechia and Slovakia, which resulted in the closure of restaurants and retail stores, but does not yet include the limitations introduced in Poland. All subcategories except for air pollution decreased last week. Falling mobility to grocery stores and retail is in line with the introduced measures and suggests deteriorating consumer confidence. Moreover, mobility to workplace sustained its downward trend, suggesting an increasing number of employees switching to home office or being unable to work due to quarantine. All in all, the decreasing Recovery Index points to downside risks to growth prospects in 4Q20.

FX market developments

The deteriorating global sentiment and rising concerns about the economic impact of the recent tightening of containment measures on economic activity in 4Q20 took a toll on CEE currencies, which weakened against the EUR. The stronger US dollar weighed on the performance of the CZK, HUF, and PLN. For the Polish zloty, it is likely that local political tensions were in play as well, as the EURPLN hit a decade low and remains locked above 4.60. As a result, we revised our year-end forecast for the EURPLN up to 4.64 due to the expected volatile sideways movement of the US dollar and deteriorating economic outlook for 4Q20. The dovish stance of the ECB and possible additional monetary stimulus in December took some of the pressure away from local currencies in the second half of the week.

Bond market developments

LCY government bonds performed well this week and yields even slightly declined in Hungary, Poland and Romania. The worsening of the pandemic situation alarmed the ECB, which signaled yesterday that further actions will be announced in December. Next week, the CNB meeting will be in focus. Markets have been speculating on the possibility of a rate cut, which has been ruled out by several MPC members a couple of times. We do not see any sense in cutting rates now, especially given that the currency is rather weak and the economic rebound in 3Q was much better than expected (not just in Czechia, but also in some EA countries). Furthermore, the Czech koruna usually gets weaker and implied short-term rates turn negative ahead of the year-end, due to the contribution to the resolution fund.

In case you missed

CZ: Strong rebound of economic activity in 3Q20.

PL: Inflation eased in October.

SI: Inflation remained in negative territory in October.

RO: Economic sentiment deteriorated in October.

HR: Industrial production remained stable in September, while retail trade drop moderated.

RS: Industry positively surprised in September, while retail activity went further up.

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