Rising Chances of a Sharp Repricing in Hungarian Markets
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We see an increased chance for a stark repricing
On rates, the 6x9 month FRA rose 8bp in the immediate aftermath of the August meeting, although we acknowledged that this is still relatively modest, so we saw some room for further correction. However, the market has ignored the hawkish message and continues to price in a more dovish monetary policy with the three-month implied rate at 10.1% at the end of the year.
In our view, investors need evidence of hawkishness, and, like the central bank, the market is becoming data-dependent, just like the National Bank of Hungary. The next test will be the incoming August inflation print on 8 September. If we see a higher-than-consensus inflation reading - and we see a fair chance of upside risk here, mainly on food, services and fuel - then it could really reverse the market's pricing of an aggressive easing cycle.
Hungarian sovereign yield curve
The Hungarian government bond (HGB) market went through a bull steepening in August as a result of the ongoing rate cut cycle, the strengthening disinflation and some risk reversal which was also visible in HUF gains. As the summer lull comes to an end and the market deepens, we may see more interest in forint bonds. The only limitation here could be the expected budget review.
However, the retail bond market is doing well and we see the Government Debt Management Agency filling the gap with FX debt issuance, so we believe that HGBs will remain attractive. The fastest disinflation in the region should also be supportive. A big red flag here is the possibility of another negative sovereign credit rating outcome. Tactically, investors need to be quick because of the volatility, while strategic market players need to have nerves of steel.
Forecast summary
