10Y yield below 2.7%, in response to low inflation data

This week:

• February 19: Average wage and employment growth

We believe that nominal wage growth does not have much space to accelerate more visibly, which goes against market expectations (wage growth at 6.9% y/y in January). At the same time, growth of employment is expected to slow more visibly, as the consensus sees the growth at 1.8% y/y in January vs. 2.8% y/y in December. The slowing employment growth suggests lower dynamics of private consumption in the coming quarters, which is in line with our scenario of an economic slowdown.

• February 20: We see industrial output at 3.9% y/y in January, slightly above consensus at 3.6% y/y

Industry has been slowly, losing strength for the last couple of months already. We see January's growth in the positive area at 3.6% y/y, despite the PMI arriving below the threshold of 50 for the last three months. Calendar effects (one more working day) as well as an increase of new orders should support industry at the beginning of the year.

• February 21: Retail sales to grow at 6.5% y/y in January

After a disappointing December, we expect retail sales growth to accelerate in January to above 6%. As consumer confidence remains strong and the labor market has been tight, we keep expecting solid growth of retail sales.

Last week's highlights

• 4Q18 GDP growth arrived at 4.9% y/y, slightly above market expectations

• Inflation eased to 0.9% in January

Bond market drivers

• 10Y yield below 2.7%, in response to low inflation data

10Y German yields have been holding relatively stable over the last week. Polish 10Y yields dropped below 2.7% at the end of the week, after the publication of inflation data. In general, the downward trend on the long end of the curve is in line with easing inflation pressure over the last few months. This week, domestic releases should have a limited impact on the bond market.

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

The LCY market ended the week in negative territory, as yields went up in the Czech Republic, Hungary and Romania, resulting in capital loss in those countries. Increased interest rate expectations were the main reason behind this development in the Czech Republic and Hungary. In Romania, the uncertainty around the fiscal situation still persists, affecting the bond market. As far as the FX market is concerned, the Polish zloty clearly underperformed, as it weakened last week, while the Czech koruna, Hungarian forint and Romanian leu appreciated, turning into an FX gain.

FX market drivers

• Zloty kept weakening, EURPLN touched 4.34 level

The zloty has been weakening continuously since the beginning of February. Last week, the EURPLN touched 4.34, the lowest level in a couple of months. We believe that global factors are driving the zloty; in particular, the zloty is sensitive to the EURUSD development, as the macroeconomic outlook has not changed much recently. Although the economic slowdown is broadly expected, disappointing data on industrial output and/or retail sales growth is likely to limit appreciation potential further.

Download The Full Weekly Focus Poland