Structure of economic growth in the third quarter
In the second half of the week, the structure of GDP growth will be published in several CEE countries. The development of private consumption will remain in focus for an evaluation of the extent to which rising inflation has impacted households’ spending so far. In Poland and Slovenia, November’s inflation rate will be published, while in Hungary, Romania and Slovakia, the development of producer prices in October will be released; we will be looking for signs of easing cost pressure. In Croatia and Serbia, retail sales and industrial output growth will be published. The high inflation is likely to leave a mark on Croatian retail sales growth dynamics, which are likely to slip into negative territory, while in Serbia, moderation of growth is expected. As for industry performance, further deterioration is our baseline scenario in both countries. Finally, the November PMI indices will be published in Czechia, Hungary and Poland. After a better-than-expected PMI performance in Germany, any signs of a revival of manufacturing industry would be positive news.
FX market developments
Over the week, the FX market in the region showed a mixed performance. The Polish zloty and Romanian forint slightly appreciated against the EUR. On the other hand, the Czech koruna and Hungarian forint weakened. In Hungary, the threat of having the cohesion funds frozen weighed on the local currency, as the European Parliament voted (416 to 124) to oppose any release of EU funds to Hungary. Although the vote does not have any material consequences, it shows the most likely development when it comes to the decision of the European Commission. The unfolding development regarding both Recovery Funds as well as Cohesion Funds will remain the key local driver of the Hungarian forint. Finally, the central bank remarks on the recent government policies interfering with monetary policy are not helping the FX market stability.
Bond market developments
CEE government bonds continued their rally last week. LCY yield curves shifted down 10-25bp w/w, with the exception of Hungary. The Hungarian long end saw a correction after the media reported that the EC would recommend that Member States freeze EUR 7.5bn from three Cohesion Funds, due to the insufficient progress of Hungary in its promise to tackle corruption. We believe that, for further market development, it is more important to keep the RRF on track and approved by year-end, as it includes the road map and incentives for conducting the most necessary reforms, which, if executed, should also unfreeze the above-mentioned EUR 7.5bn. In the last bond auction, Romania repeated the success from the previous week; due to high demand, it placed two and a half times higher volume of 2032 bonds than it originally planned to issue. The average yield collapsed to 8.1%, from the 9.7% recorded in the previous auction of the paper at the end of September. This week, Romania will reopen ROMGB 2025, Czechia will issue bonds and, on top of that, Romania, Croatia and Hungary will auction T-bills.