Poland: Unemployment rate to remain at record-low level

We expect 4.7% y/y GDP growth in 3Q18 (due mid-November), based on our now-cast model incorporating last week's data. Unemployment rate most likely to remain stable at record-low level of 5.8% in September. With almost no macro releases due this week in Poland, local bond and FX market to remain under global pressure. Ongoing conflict between Italy and European Commission regarding Italy's budget could impact EURUSD and zloty.

This week:

• October 23: Unemployment rate to remain at record-low level

We expect the unemployment rate to remain at the record-low level of 5.8% for the second month in a row. This week's data completes the picture of the labor market in Poland, which in our view stabilized recently, given the September reading for wage growth and employment.

• Our now-cast model incorporating last week's data points to 4.7% y/y growth in 3Q18 (due mid-November)

After last week's macro releases (industrial output and retail sales growth arrived well below market expectations), we updated our now-cast model for 3Q18 growth. We expect GDP growth to slow down to 4.7% y/y in 3Q18, given the drop in industrial production and retail sales growth in September. Flash GDP growth is due mid-November.

Last week's highlights

• Law and Justice (PiS), at 33%, won local election ahead of Civic Coalition (KO), at 26.7%, and Polish People's Party (PSL), at 13.6%. Turnout was highest in history of local elections and reached 53.4%.

• We observe stabilization on labor market, with wage growth of 6.7% y/y in September and employment slowing down to 3.2% y/y.

• Industrial production arrived at only 2.8% y/y in September, below market and our expectations. Construction output sustained double-digit growth and increased by 16.4% y/y in September.

• Retail sales growth also disappointed in September, arriving at 5.6% y/y in nominal terms (3.6% y/y in real terms), i.e. lowest growth dynamics for two years.

• Budget deficit revised to -1.4% pf GDP in 2017. Bond market drivers

• 10Y yields under pressure from weak data and ECJ decision

Over the week, the long end of the curve remained stable and 10Y yields held at around 3.20% until Friday. Weaker than expected retail sales data, the ECJ injunction immediately freezing the reforms of the Supreme Court in Poland, and increased global risk aversion had an impact on 10Y yields, which went up by 6bp on Friday. Although a yield increase was also observed on core markets (in Germany, 10Y yields went up by 5bp), the spread vs. 10Y Bunds widened from 272bp to 284bp over the week. Given the empty calendar this week, the bond market in Poland should follow global developments.

• Weekly performance of 5Y bonds (% in EUR)

LCY bond markets in CEE did not show much movement over the course of the week apart from in Hungary. Appreciation of the forint and the drop of 10Y yields by about 15bp in Hungary translated into overall positive performance of the LCY bond market, with total positive return of 0.91% (in EUR). On the other hand, the Eurobonds market showed some movement, mostly in the Czech Republic, where the yield decrease contributed to positive performance of 0.35%.

FX market drivers

• Zloty moves in sideways trend

Last week, despite macro releases being below expectations, the stronger US dollar and increased global risk aversion, the zloty was rather stable and was traded at between 4.28 and 4.31 vs. the EUR. It is our view that the zloty has recently been moving in a sideways trend. This week, the ongoing conflict between Italy and the European Commission over Italy's budget, and the ECB meeting, might put some pressure on the EURUSD, what could translate into weakening of the zloty in the coming days.

 

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