EEC inflation on an upward trajectory
This week in EEC
This week will be busy pending a flood of data and two central bank meetings. Base effects continued to affect inflation numbers in May. We expect the Romanian CPI to have risen to almost 3.6% yoy, while Serbian inflation could be around the midpoint of the target band, at 3.1% yoy. Czech inflation likely rose to 3.2% year-on-year, slightly above the tolerance band, mainly due to the tight labor market and strong domestic demand. The overall CPI figure in Hungary probably peaked at 5.3% year-on-year in May; and is expected to remain above the upper tolerance range of 4% this year. Romania will complete the list of 1Q21 GDP breakdowns. Romania’s economy likely contracted 0.2% year-on-year, while recording rapid growth of 2.8% quarter-on-quarter thanks to strong performance in the service sector and household consumption. Strong base effects pushed industrial production growth to a high double-digit level in April – we expect it to be between 55.5% yoy to 71% yoy in Czechia, Slovakia and Hungary, while the Slovenian industry probably registered a more moderate increase of 15%. % a / a. Czech retail sales are expected to have grown 11.3% year-on-year in April, helped by better consumer sentiment, an epidemiological situation and a weak base. In addition, the April trade balance will be released in Czechia, Slovakia, Romania, Hungary and Slovenia. Central bank meetings in Poland and Serbia are not expected to make changes to key rates, which are expected to remain at 0.1% and 1% respectively. However, the indication of an early end of the Polish asset purchase program cannot be excluded.
After peaking at around 1 for two weeks in mid-May, the EEC recovery index edged down slightly at the end of last month. However, the nascent economic rebound continues in a context of improvement in the epidemiological situation, continuous deployment of vaccines and relaxation of containment measures. Mobility to grocery stores declined slightly, while mobility to retail stores and workplaces moved in the opposite direction. Mobility in the workplace has reached its highest value this year. On the other hand, air pollution has visibly decreased, causing the overall recovery index to drop. Due to data availability issues, we have kept electricity consumption unchanged for the past two weeks. Overall, the EEC recovery index bodes well for the economic recovery underway in 2Q21 so far.
Evolution of the foreign exchange market
EEC currencies continued to appreciate against the euro last week, fueled by bets on an earlier start to monetary tightening. The Hungarian forint gained the most against the euro, but at the same time it became extremely volatile. This could be seen in the second half of the previous week, when EURHUF corrected after the release of very strong US labor market data. For the further development of CEEC currencies, it will be decisive whether central banks follow the rhetoric. Since the markets have already incorporated some tightening, any moderation of the language could cause the currency to weaken. The first country to face the test will be Poland, where the central bank will decide rates this week. We do not anticipate any rate changes at this meeting, but the formulation and continuation of downsizing or the indication of an early termination of the quantitative easing program could signal a desire to raise rates as early as this year. The pressure in this direction could be even stronger if the Hungarian and Czech central banks deliver their first hikes as early as this month (June 22-23).
Evolution of the bond market
Last week, there was virtually no movement in EEC sovereign bond yields. The European Commission published its assessment of the Convergence / Stability Programs last week, in which it recommended that fiscal policy be favorable this year and that a warning be given before the premature withdrawal of the stimulus / pandemic measures. Regarding the start of consolidation, the EC did not communicate any date, contenting itself with calling very vaguely for a differentiated approach, taking into account the stage of economic recovery and the urgency of consolidating public finances (countries with high risk in the medium term). All countries were encouraged to maximize the benefits of NGEU funds and stimulate investment. An explicit recommendation was addressed to Romania, which is the only country subject to the excessive deficit procedure (EDP). Romania has been urged to reduce its budget deficit below 3% of GDP by 2024, and the proposed consolidation path is very similar to that proposed by the government. Although the path is very ambitious, the fact of including some of the reforms envisaged in the milestones of the national recovery plan could encourage decision-makers (via sweeteners) to implement them.