How did Poland perform at year-end?

Labor market statistics and retail sales data for December is due. We expect broadly unchanged picture on labor market, while retail trade likely benefited from eased restrictions. NBP is scheduled to buy bonds, MinFin to hold regular bond auction.

Watch this week

January 21 | Unchanged situation on labor market

Labor market statistics for December should show a broadly unchanged picture of the labor market, which weathered the crisis in quite good shape. We expect wage and employment growth to maintain similar growth dynamics as in November and arrive at 4.2% y/y and -1.0% y/y, respectively. The increase in unemployment was milder than expected in spring last year, as the initial data showed that the unemployment rate inched up to only 6.2% in December. This year, we could see some deterioration on the labor market, as government support programs are limited compared to last year. Moreover, the period in which companies were obliged to maintain full employment will come to an end in 2Q21, which could push the unemployment rate up.

January 22 | Retail sales to recover in December

As Poland eased restrictions and opened retail stores in shopping malls at the beginning of December, we expect an improvement of retail sales growth dynamics towards -0.8% y/y from the -5.3% y/y reported in November. In December, consumer sentiment improved slightly, suggesting better performance on the part of the retail sector compared to previous months. All in all, we see risks to the upside to our current FY20 GDP growth forecast, which stands at -3.3%, due to solid performance of industry during the second wave of the pandemic. Full-year growth could actually be 0.5-1.0pp better in the end.

Last week's highlights

• Central bank kept target rate unchanged at 0.1%.

• Governor Glapinski held press conference. In his view, stable monetary policy is most likely scenario. Rate cuts could only be considered in case of ‘radical' worsening of economic situation. NBP is prepared for further FX interventions, but Glapinski does not expect them to happen.

• Government prolonged all current measures until end of January. First three grades to return to schools as of January 18.

• Polish Development Fund PFR sold papers worth PLN 5.25bn.

• Current account surplus widened further in November, as it stood at EUR 1.725bn (YTD 3.4% of GDP).

• Core inflation eased visibly to 3.7% y/y in December.

Market developments

Bond market drivers | 10Y yield dropped below 1.2%

Over the course of the week, the long end of the Polish curve moved down and dropped below 1.2%. As a result, the spread over the 10Y German Bund narrowed towards 170bp. The spread narrowing has been observed since its height, of close to 200bp, reached in mid-December. The 2Y yield remains locked around 0.05%, while the 5Y was moving above 0.35% last week. The NBP is scheduled to buy bonds on January 20, while the MinFin will hold a second regular bond auction on January 22. The bond supply should stand at PLN 5-9bn. According to the MinFin, after the first bond auction at the beginning of the year, Poland had already covered 38% of this year's borrowing needs.

FX market drivers | EURPLN locked above 4.50

Last week, the zloty depreciated somewhat and moved toward 4.54 vs. the EUR, likely on the back of the stronger US dollar. The National Bank of Poland decision, as well as the press conference of Governor Glapinski, did not affect the zloty. The central bank left the target rate stable at 0.1% despite the governor's comments at the turn of the year about possible monetary easing in 1Q21. In the statement released after the rate meeting, the MPC reiterated its concern over the too strong zloty and did not rule out future market interventions. Furthermore, during the governor's press conference on January 15, he said that the NBP is prepared for further FX interventions, but he does not expect them to happen. All in all, we expect monetary policy to remain unchanged until the end of 2022 and further market interventions cannot be ruled out. However, we expect the zloty, supported by fundamentals, to gradually appreciate toward 4.45 vs. the EUR by the end of the year.

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