Poland: Unemployment rate to decrease

Unemployment rate expected to hit record-low level due to seasonal effect. Flash CPI for June should arrive at 2.4% and remain stable compared to previous month, but figure to, in our view, be neutral for MPC rate-setting meeting on July 3. Bond market should remain under global pressure, while FX market most likely to focus on President Trump and Xi Jinping meeting in Japan.

This week:

June 26: Unemployment rate to decrease

According to estimates from the Ministry of Family, the Labor and Social Policy unemployment rate should hit a record-low of 5.4% in May. The unemployment rate has decreased mostly due to seasonal factors in such sectors as construction and agriculture.

• June 28: CPI to remain stable

We expect the flash CPI in June to arrive at 2.4% y/y (0.2% m/m) and remain stable compared to the previous month. The figure will most likely be neutral for the MPC, which is to hold a rate-setting meeting at the beginning of July. Next week, the MPC will publish new inflation and growth projections and both paths are expected to be shifted upward. We believe that CPI will exceed the target in July and will peak at the turn of the year. Moreover, as of July, electricity prices for corporates will be unfrozen; it is our view that this could shift the inflation path up by 0.4pp beginning from 4Q19. All in all, we see CPI on average at 2.4% this year, with risks to the upside.

Last week's highlights

• Core inflation remained stable at 1.7% y/y in May.

• Wage growth surprised to upside, arriving at 7.7% y/y in May, while employment growth somewhat disappointed, with growth at 2.7% y/y in May.

• Industrial production sustained solid growth momentum, as it came in at 7.7% y/y in May, pointing to strong GDP growth in 2Q19.

• Retail sales came in at 7.3% y/y in May.

Bond market drivers

• Polish 10Y yields fell down

Over the course of the week, the Polish sovereign curve went further down along all maturities. As a reaction to the more dovish ECB and Fed, 10Y yields decreased by roughly 10bp last week. As a result, the spread vs. 10Y German Bunds oscillated around 265bp and holds well below the 1Y average. Given current market developments, we see risks to the downside to our current yield forecast. This week, global markets will focus on the G20 summit in Japan and the meeting between President Trump and Xi Jinping regarding the trade conflict. Local macro releases should have no major impact on the bond market, as inflation is expected to remain stable.

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

Yields again went further down last week amid the dovish external environment, and spreads over German Bund yields again mostly decreased. Romanian yields fell the most, likely due to the relatively high nominal yield level, but as the fiscal and political issues are far from being solved, further declines might be difficult to achieve. Hungarian yields also fell substantially, but here, the central bank is tolerating higher inflation vs. CEE peers, which could also limit further yield drops.

FX market drivers

• Zloty benefited from dovish sentiment

Last week, the zloty moved around 4.26 vs. the EUR, supported by dovish sentiment that spilled over onto global markets. Lower liquidity on the market due to public holiday did not impact the zloty. This week, the EURUSD will most likely focus on the Trump and Xi meeting during the G20 summit in Japan. Although the zloty was recently stronger vs. the euro, we expect it to somewhat weaken in 2H19.

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