Poland springs into 2020

January real economy data is due this week. Industry might return to red, due to unfavorable calendar effect. Retail sales are likely to lose some of their strong dynamics, as trends on labor market stabilize. Markets are to focus on global news regarding Coronavirus development.

Watch this week

February 19 | Mixed labor market data

Wage and employment growth in January should show a mixed picture. The market expects wage growth to accelerate to 7.0% y/y (up from 6.2% y/y in December), while employment growth is set to lose some of its dynamics and drop towards 2.2% y/y (from 2.6% y/y at the year-end). In our view, the labor market will show a reversed pattern, with slowing wage growth to 5.9% y/y and employment growing at around 2.6% y/y.

February 20 | Weak start of year for industry

We see industrial production output to increase by a meager 1.4% y/y in January, while the market is more pessimistic and expects a decrease of 0.4% y/y. The negative calendar effect (-1WD) as well as dropping market sentiment (PMI Index at 47.4 in January) will likely weigh on the performance of industry.

February 21 | Retail sales to remain strong

Retail sales growth has been oscillating around 6% y/y in 2H19, and we expect this trend to continue in January. We see retail sales to increase by 5.6% y/y (4.5% y/y in real terms) at the beginning of the year, while the market is a bit more optimistic and expects the figure to land at 6.1% y/y. With GDP landing at 4.0% in 2019 and private consumption slowing down to 3.9%, from 4.3% in 2018, the retail sales development will likely be carefully watched in the coming months. More considerable weakening of the consumption trend could weigh on the economic growth in Poland this year, as household consumption remains the key driver of the growth. We see GDP growth at 3.0% in 2020.

Last week's highlights

• Headline inflation surged in January to 4.4% y/y (0.9% m/m), beating our and market expectations. We revised our FY20 inflation forecast up to 3.6%. Food and services prices remain the main drivers of CPI.

• 4Q19 GDP growth arrived at 3.1% y/y; detailed data is due at the end of the month.

Market developments

Bond market drivers | Spreads widened due to inflation fears

Over the course of the week, the whole Polish yield curve moved up by roughly 10bp. The 10Y yield increased to 2.2%, while the spread over the 10Y German Bund widened to 260bp. We think that regional factors were in play last week, especially the higher than expected inflation readings. In Hungary, inflation surged to 4.7% y/y in January, triggering a reaction from the central bank. Vice Governor Nagy reassured the markets that the MNB is doing what it possibly can to get inflation back under control. We believe it could have an influence on the whole region by building up expectations for a similar reaction in Poland, especially as the inflation number had been forecasted to land above 4% y/y in January. After the release on Friday, we saw a correction on the long end of the Polish curve, as the MPC reaction was not as hawkish as in the cases of Hungary or Czechia. This week, macro releases should be neutral for the market, given the limited reaction to the surge in inflation in January.

FX market drivers | EURPLN returned below 4.25

Despite renewed fears about the Coronavirus outbreak in China, the zloty remained strong and appreciated over the course of the week. Unlike in the case of the Hungarian forint, which appreciated visibly following the January inflation reading, the zloty's reaction was mild. We see the zloty remaining under the sway of global factors in the coming weeks and moving towards 4.28 vs. the EUR until the end of 1Q20.

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