March retail sales expected to show mixed development in Central and Eastern Europe
This week, Serbia will release its flash estimate of GDP for 1Q21, which we see at a promising level of -0.5% y / y (+ 1.4% q / q). The country’s service sector has probably performed better than in most Central and Eastern European countries thanks to lighter restrictions, higher mobility and a good vaccination rate. Retail sales figures for March will be released in Romania, Slovakia, Czechia and Hungary. While base and calendar effects likely pushed Czech retail growth up close to double digits, last year’s weak base should have helped soften the sharp decline in early 2021 in Slovakia. In Romania, March is likely to show only a slight increase, reflecting slower wage growth and further regional restrictions. Hungarian retail sales may have fallen as much as 7% year-on-year, affected by the reintroduced foreclosure measures and the relatively higher base last year. In addition, industrial production growth in March probably reached 12% y / y in Czechia and 15% y / y in Hungary, driven by strong external demand and strong base effects. The central banks of Poland and the Czech Republic are expected to keep their monetary policy unchanged, with key rates remaining at 0.1% and 0.25% respectively. The Czech central bank remains in the wait and the spotlight will be on its new macroeconomic projections. Economic development in our view indicates the need for two hikes in 2021, but the exact timing remains uncertain. Our baseline forecast sees August as the most likely option for the blue chip upside.
In the week ending April 24, the EEC recovery index visibly rebounded and returned to its pre-Easter level. As COVID-19 restrictions continue to be lifted across the region, mobility across all subcategories has improved. Mobility to retail has increased sharply, while mobility to the workplace has maintained its upward trajectory and reached its highest level since mid-October 2020. Among the most volatile components of the index, air pollution jumped sharply, while electricity remained stable. We expect to see further improvement in the Recovery Index in the coming weeks as mobility will benefit from more relaxed restrictions.
Evolution of the foreign exchange market
The US dollar depreciated slightly over the week, while CEEC currencies were mixed. The Hungarian forint took advantage of the weakness of the USD and fell below 360 against the euro. A conciliatory comment from central bank board member Benda weighed on the Czech Koruna, which depreciated in the first half of the week. In addition, better than expected GDP growth in 1Q21 had only a limited impact on EURCZK, which closed the week below 25.9. Separately, the ECJ ruling on CHF lending in Poland stated that local courts should decide whether foreign exchange mortgage contracts containing an unfair term should be canceled or not. Before the decision, the zloty weakened, but reduced most of the losses after the release. The upcoming decision of the Polish Supreme Court (expected on May 7 and 11) could bring more clarity on the issue. On the other hand, a surprisingly high inflation impression for April did not weigh on the PLN.
Evolution of the bond market
Hopes for a stronger economic outlook, supported by better-than-expected economic data released last week, pushed up yields in both the eurozone and the CEECs. Czech bonds were outliers, as yield increases had already been strongly anticipated and experienced some correction last week. This is also evident from a comparison of the yield spreads between 10-year CZBGS and POLGB, which narrowed to 5bp, compared to nearly 50bp in mid-March. Polish yields rose around 15bp w / w despite last week’s PLN 5 billion QE auction. The higher flash estimate in the CPI, which landed at 4.3% y / y in April, could set headwinds on the central bank’s efforts to keep yields low. The NBP will continue its QE activity in May via two auctions and additional transactions cannot be ruled out. In addition, Poland will organize a regular bond auction with a supply of PLN 4-7 billion and a substitute auction. The Hungarian central bank is also expected to continue buying HGBs in the second quarter, with the next technical review scheduled after hitting HUF 3 trillion.