CEE Macro Weekly: CEE sentiment holds up

Please note that the next issue of CEE Macro Weekly will be released on Friday, June 12th.

TOP MACRO THEME(S):

Sentiment and inflation expectations remain well contained (p.3) – May ESI data suggests that pessimism remains contained and inflation expectations remain well anchored across the CEE region despite ongoing geopolitical tensions.

WHAT ELSE CAUGHT OUR EYE:

CEE: We have constructed the PKO BP Economic Surprise Index, which illustrates the direction of surprises in macroeconomic data released over the past three months in Czechia, Hungary and Poland. Higher index values indicate positive surprises, while lower values point to negative surprises. We treat official data as a positive surprise when they come in above the median forecast for indicators such as GDP growth, retail sales or industrial production, and below expectations in the case of CPI inflation, PPI inflation or the unemployment rate. The magnitude of data surprises is adjusted using the standard deviation of past surprises, while also accounting for differences in variable weights within the overall index (GDP, inflation and production data are considered more important than consumer confidence or PMI readings). The index also accounts for the declining relevance of surprises over time, meaning that today’s surprise matters more than an unexpected reading two months ago. We plan to publish updated index values on a weekly basis.

HUN: The MNB kept the base rate unchanged at 6.25%. According to Governor M. Varga, the decision was not unanimous, with one proposal put forward in favour of a rate cut. In our view, both the press release and Governor Varga’s remarks during the press conference confirm that the MNB remains the only central bank in the region currently seeing scope for near-term monetary easing. Changes in the section of the press release referring to the monetary policy outlook were subtle, but they confirm that one of the key factors in the MNB’s reaction function will be the persistence of the decline in risk premia. In addition, elevated global uncertainty now justifies not a “stability-oriented” approach, but rather a “cautious” approach to monetary policy. Indeed, Governor M. Varga acknowledged that lower risk premia create room for rate cuts, although the durability of this trend will be crucial. Given the still highly tense geopolitical backdrop, we expect the MNB to deliver a rate cut, though not at the next meeting - more likely in 4q26, unless a peace agreement in the Middle East is reached in the near term.

THE WEEK AHEAD:

Next week will begin with the release of PMI indices across the region, where the key focus will be on signs of mounting cost pressures in manufacturing linked to the geopolitical situation. The main market event, however, will be the NBP’s interest rate decision - we expect rates to remain unchanged.
In addition, detailed GDP growth breakdowns for Hungary, Romania and Poland will be released. In Hungary, private consumption was most likely the main driver of annual growth, while investment dynamics remained negative. In Romania, the pattern was likely the opposite. In Poland, both private consumption and investment made a positive contribution to growth.
Thursday will be a public holiday in Poland, while in Czechia the preliminary May inflation estimate will be published. Inflation likely edged down slightly compared with April, but should remain above the 2% target.