Key events in EMEA and Latam next week

The Russian current account has probably halved from the seasonally strong $34 billion in 1Q19 to $17 billion in 2Q19. The key question is whether the net private capital outflow, which primarily reflects the accumulation of international assets by the corporate sector and the population, has decelerated accordingly. The preliminary data for 5M19 suggests that it is a quite significant $5 billion per month, and that is in addition to the $3-5 bn monthly mandatory FX purchases by the central bank mandated by the budget rule, which is here to stay.

With the current account surplus effectively sterilised by the accumulation of international assets by the private sector and the government, portfolio flows into the state bond market (OFZ) is the key variable tipping the scales for the rouble. This year has been very successful in this regard, with monthly inflows into OFZ reaching $3.0-3.5 bn in the last couple of months, but further prospects are uncertain, as the level of non-resident holding local bonds has approached the historical high of $41 bn. The prospects of further global risk-on are unclear, and it remains to be seen how the recent idea of investing part of the Russian state savings (NWF) locally from 2020 chimes with foreign investors who have perceived Russia as a low macro risk.

We expect Serbia's central bank to keep its key rate on hold at 3.00% at the July meeting. The inflation peak is behind us - 3.1% in April - and we estimate that inflation will remain relatively stable in the vicinity of 2.0% for the rest of the year.

With this impediment out of the way, we believe the central bank is mulling another round of policy easing. As the currency is almost at a five-year high against the euro, the NBS had to ramp-up its interventions to new historical highs: €735 million were bought in June to keep the EUR/RSD close to the 118.00 level. For now, it looks that the central bank is happy to expand its FX reserves and keep the exchange rate stable, but should the inflows (predominantly bond related) continue, a rate cut will likely be seriously considered in the near term. Moreover, chiefly mentioned as main reason for which the NBS still takes a cautious approach was “persistent uncertainty in the international environment”.

While issues are still there – e.g. trade tensions, oil price, global slowdown etc – at least from the monetary policy side a wave of dovishness seems to be mounting as the long-expected policy normalisation of the ECB appears more and more distant, while US Fed is expected to cut rates. Hence, with the external uncertainties slightly diminished, we forecast a 25 basis points rate cut from the NBS in 3Q19 and another 25 basis points in 4Q19.

We expect June CPI to inch 0.4ppt lower to 3.7% driven by lower fuel price and stronger RON. Assuming no supply shocks, the inflation path should be better behaved for the rest of the year, although we don’t necessarily envisage meaningfully lower prints going forward. The NBR is likely to look-through this year’s above-target inflation numbers and even turn dovish once it’s got the chance.

After slightly higher than expected inflation in May, driven mainly by higher vegetable prices, we will probably see annual CPI growth to decelerate towards 2.7 % on the back of higher base effect, as in MoM terms, prices stagnated or increased just slightly in June. Indeed, fuel prices just stagnated in June and food prices should also moderate its rapid price growth as new harvest is entering the market. June unemployment rate will stagnate, while May industrial production growth will slow down, as well as retail sales, which were affected by the effect of Easter shopping in April. We will also see the Minutes from the June CNB monetary meeting next Friday.

In Hungary, the key release of the week comes on Tuesday - the June CPI readings. We expect to see a significant drop in the headline indicator due to the high base on energy and tobacco prices. On the other hand, we saw some softening in fuel and food prices throughout last month, which has also dragged down headline inflation. In the meantime, we forecast core CPI to move further upwards, meaningfully above the 4% YoY level. However, we don't expect any reaction by the central bank as its latest forecast also sees the core CPI remaining above the upper limit of the tolerance band.

The central bank of Poland will present its inflation projection. According to the latest MPC statement, CPI forecast for 2019 was revised higher from 1.7% to 2%YoY. The change to the 2020 figure was marginal to 2.8%YoY, but still, we expect the central bank to present a considerably different structure in comparison to the last report in March.

For the rest of 2019, we expect strong upward revision to food prices, and downward revision to core inflation and energy prices. On the other hand, the 2020 figures should be opposite – next year CPI should be dominated by a core inflation increase. In the case of GDP, the central bank revised its 2019 forecast from 4.0% to 4.5% and made minor changes to estimates for 2020 and 2021. The performance of investments should be a major focus – we expect deceleration after the very strong 12.1% Q1 reading.