Poland: CPI inflation to stabilize

This week, markets to focus on global releases and rate decision by FOMC. First estimate of July inflation and 2Q19 GDP growth in Eurozone should be carefully observed. In Poland, flash estimate of inflation for July to be published. We expect it to land at 2.6% y/y due to stabilization of food price growth and still relatively low oil prices. Local yields to follow core market development, while zloty should remain stable around recent levels.

This week:

• July 31: CPI inflation to stabilize

We expect the flash reading of headline inflation to land at 2.6% y/y (-0.1% m/m) in June. In our view, food prices should stabilize around recently observed levels of 5%, while oil prices remaining relatively low should be a limiting factor to inflation as well. All in all, we see inflation on average at 2.4% in 2019 with risks to the upside coming from uncertainty around electricity prices. On the other hand, core inflation should remain on an upward trend due to wage pressure.

• August 1: PMI to drop further

The market expects that the PMI for July will decrease to 48 from the 48.4 observed in the previous month; such a move would be in line with the drop observed in Germany (flash manufacturing PMI for July went down to 43.1).

Last week's highlights

• Construction output decreased by 0.7% y/y in June.

• MPC member Ancyparowicz against any discussion of a rate hike due to expected economic slowdown and is not concerned about accelerating inflation.

• MinFin sold papers worth PLN 7bn, while demand stood at PLN 10.8bn.

• We revised down our yield forecast and expect only mild increase of 10Y yield by year-end, to 2.3%.

Bond market drivers

• Polish 10Y yields recovered after ECB meeting

Last week, the ECB meeting was the key driver of the FI market in Europe and Poland. The ECB expects rates at current or lower levels until the end of 1H20 and a high probability of a rate cut in September was signaled. Ahead of the decision and press conference of the ECB's Governing Council, the 10Y Polish yield slid down by 20bp to 1.96%. As some of the market expectations for monetary easing could have been dampened during the press conference, the 10Y German Bund recovered somewhat toward the end of the week. As did 10Y Polish yields that increased by almost 15bp and closed the week around 2.1%. The spread vs. 10Y German Bunds holds below 250bp and it hit a 1Y low of 240bp last week. This week will be hot on global markets. The FOMC will announce their rate decision and a 25bp cut is expected. Moreover, the first flash estimate of Eurozone GDP for 2Q19 and July inflation will be released. Hence, we might observe increased volatility on the bond market.

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

Last week, yields in CEE remained under the influence of the ECB decision and fell across the region. Due to the recent drop in yields across CEE and expectations for a rate cut by major central banks, we revised downward our yield forecast for Hungary, Poland and Slovakia.

FX market drivers

• Zloty slightly weaker vs. EUR

Ahead of the ECB meeting, the zloty was rather stable and moved around 4.25 vs. the EUR. However, at the end of the week, the zloty depreciated on the back of the stronger US dollar and moved toward 4.28 vs. the EUR. The expected rate cut by the FOMC is already priced in by the markets, hence we expect that the volatility on the FX market ahead of the decision will most likely be limited. We expect the EURPLN to remain around 4.27 in the short-term.

Download The Full Weekly Focus Poland