The Polish economy expected to sustain strong growth 2Q

On global markets:

Next week, the most important macro data for the EURUSD will come from the Eurozone. PMIs for the month of May will be released and will give markets an important update on the status of the economy of the Eurozone as a whole, as well as from large member countries.

CEE currencies:

The forint again proved to be the most vulnerable in the CEE region to negative international news, as last week brought an almost one percent weakening against the EUR. As long as the weakening in the forint is not severe and long-term government bond yields do not reflect the fact that the market is pricing in a substantially larger inflation premium quickly, the central bank is unlikely to act. We think that the forint could remain subject to volatility in the coming weeks. Other currencies in the region only marginally weakened last week, or remained little changed, amid the deteriorating international sentiment (due to trade wars). The Croatian kuna seems relatively weak, as, despite the approaching holiday season, the HRK does not show the usual appreciation pattern. Appreciation of the HRK could be further burdened by comments from central banker Vujcic that, although he sees appreciation pressure on the kuna, he still sees the exchange rate as flat going forward. Interesting comments came from the NBS in Serbia as well, as they made it clear that they do not prefer to see much lower levels in the EURRSD going forward, as they do not want such moves to create disinflationary pressure. This reinforces our view that the dinar could remain stable against the euro.

CEE rates and yields:

CEE bond markets were affected by developments of German Bunds last week, as the latter declined by 5bp on the 10Y tenor w/w. Still, Czech and Hungarian yields fell much more than Bund yields in the region. The narrowing of the spread in these countries is a bit at odds with the good GDP data released last week (especially for Hungary, which posted 5.3% y/y real GDP growth for 1Q19, while the Czech figure was at 2.5%), but could perhaps be better understood against the backdrop of the deteriorating international sentiment. This latter element was likely driven by the worsening of global trade war prospects, which is especially problematic for Czechia and Hungary, which are heavily exposed to the international auto sector. For Hungary, the bond market does not seem to be pricing in increasingly higher inflation for the time being, despite evident signs of economic overheating and a still rather dovish central bank. Poland also showed interesting developments, as the 10Y yield went up by 10bp (to 2.9%) after the publication of the 1Q19 GDP estimate, which came as a positive surprise (at 4.6%) compared to market expectations. Currently, the 10Y is at 2.85-2.90%, which is roughly in line with our forecast for the end of 2Q19. Additionally, Governor Glapinski said that he would see unchanged rates until the end of his term, which will come in three years – a rather strong commitment, while core inflation is at the highest level since 2012. As for Romania, the central bank kept rates unchanged at 2.5%, while reiterating that strong liquidity control will be kept in place and added that this measure could be equivalent to a 75bp hike in the policy rate. This comment reaffirms our view for an unchanged base rate this year in Romania, despite the fact that the NBR is expecting inflation to stay above the target even at the end of this year.

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