CEEMEA Economics & Strategy Daily: Hungary and Czechia growth, NBU surprise hike

Research evidence excerpt

CEEMEA Economics & Strategy Daily: Hungary and Czechia growth, NBU surprise hike

eek’s FOMC meeting ratified our view of some degree of

comfort with the current financial/monetary conditions (8-3 voting split in favour

of unchanged Fed Funds), although rhetoric remains relatively cautious. A small

calibration in the front-end of the US curve will likely provide an additional boost

for high-yielding currencies, but the steepening bias in the US curve is becoming

quite clear in our view. Higher inflation premium, unless equities really derail (which

hasn’t been the case yet).

The cautious rhetoric by chairman Warsh will likely persist, even if there is some

moderation in growth/labour in the coming months. In various op-eds and

interviews (notably in the Wall Street Journal, 7/1), he cautioned that inflation could

prove more persistent and structural than the Fed's baseline projections suggest,

making early cuts potentially dangerous. More importantly, the implementation of

Warsh’s no guidance approach in monetary policy has clearly introduced some

additional volatility in the US rates markets (see table below). In the medium-term,

without any significant credit shocks, the US economy is expected to reflate (from

an already above target position in core PCE), but we believe it is realistically too

early for the Fed to react now. The current weakness on the tech equity front also

suggests there has been some degree of mild tightening in financial conditions,

which together with a recent softer CPI release, may suffice for now. Back to

Warsh’s no guidance policy – in the event of a hike, that may re-ignite a much larger

reaction in the front-end of the curve, as the ‘price discovery’ on the actual fair