CEE Update: Hungary's Inflation Dips Below 20%; Focus on State Budget and Forint's Movement

CEE: Inflation in Hungary finally below 20%

Yesterday's meeting of the National Bank of Romania (NBR) was as expected and there were no surprises. Tomorrow, the NBR will present a new inflation report, however, for now we have silence from this side. This morning, July inflation in Hungary was released, posting a drop from 20.1% to 17.6% year-on-year. This is 0.1pp below market expectations and 0.1pp above central bank expectations. While inflation remains by far the highest in the CEE region, it is below 20% for the first time since last September and we expect it to be in single-digit territory by the end of the year. This is good news for the economy and the central bank, but also good news for the forint. Without many surprises, the market has no reason to push the central bank to cut rates faster, undermining the main attraction – FX carry. This, despite the decline in recent weeks, is one of the highest in the emerging market universe and by far the highest in the CEE region.

Later today we will also get the Hungarian state budget result for July. The last two months show signs of stabilisation of the deficit at 85% of this year's target. State budgets are showing bad numbers across the region. However, in the Czech Republic, we have already seen the trend turn over, and in Romania, the government is trying to come up with a revision of the state budget in an attempt to keep the numbers under control. Today, we expect the deficit in Hungary to remain roughly unchanged. This should be good news for Hungarian government bonds. However, in case of a negative surprise, we could also see a spillover into FX due to the higher market attention. Moreover, this topic is of course linked to the EU money issue, which we expect to be back on the table in the coming weeks.

So overall, everything revolves around the Hungarian forint at the moment. Values around 390 EUR/HUF open the question of whether we will hear some comments from the National Bank of Hungary, given that we are entering sensitive waters. Market positioning is probably rather balanced after the sell-off over the last few days, so we believe this leg of the move-up is over. But it is also hard to see a quick recovery. Despite a lot of local story, the correlation with the US dollar has been almost perfect for the past month. In other words, the main driver in our view is global factors and we don't see too much potential either way on this into US inflation numbers. So EUR/HUF may try to lower levels but we don't expect a big rebound after today's numbers.