Poland: Wage growth to remain in sideways trend

This week, the full set of macro indicators for February will be released. Wage and retail sales growth should remain in a sideways movement, with growth figures at 6.8% y/y and 6.0% y/y, respectively. Industrial production is expected to slow further and expand at a sluggish pace of 2.3% y/y. The Brexit talks and FOMC meeting will most likely have a weak impact on the FX and bond market.

 

This week:

• March 19: Wage growth to remain in sideways trend

We expect wage growth to arrive at 6.8% y/y in February, a bit more pessimistic than the market consensus at 7.2%. We believe in further stabilization of the wage increase in the coming months. On the other hand, employment is likely to increase by 2.9% y/y in February, suggesting that employment growth has stabilized around 3%, down from the average of 3.5% last year.

• March 20: Industry to expand at meager 2.3% y/y

Industrial output should expand at a rather sluggish pace of 2.3% y/y in February. Our call is visibly below the market consensus, which stands at 4.8%. The market sentiment and external demand have been showing signs of weakening for the last couple of months already. Further, construction growth is expected at 4.7% y/y, marking a second month in a row of growth below 5% and suggesting that economic activity is slowing down.

• March 21: Retail sales should maintain solid growth

We see retail sales increasing 6.0% y/y in February, supported by strong wage growth. However, the space for further acceleration is limited, as the recent drop of consumer sentiment toward 4 is consistent with 7-8% growth of nominal retail sales. After the retail sales data release, we will have the full dataset for February, allowing us to update our GDP now-cast for 1Q19.

 

Last week's highlights

• CPI arrived at 1.2% y/y in February, while January figure has been revised down from 0.9% y/y to 0.7% y/y.

• Governor Glapinski said that current slowdown is unlikely to require monetary loosening.

 

Bond market drivers

• Polish 10Y yields remain on hold

Over the course of the week, the 10Y yield remained stable and moved between 2.85% and 2.88%. Although some marginal increase of German 10Y Bunds after the second vote in the British Parliament against a hard Brexit has been observed, the spread stood at around 280bp. This week, further discussion regarding Brexit will take place with a third vote over the deal planned for March 20. If the vote is favorable or an agreement with the EU regarding a delay is struck, this could bring some relief to the German bond market. On the other hand, local macro releases should be neutral for the bond market. Only major disappointment in economic activity could bring downward pressure on yields.

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

Last week, 5Y LCY bond yields remained mostly flat in CEE, except for Romania and Croatia. Romania's 5Y bond increased by about 20bp w/w, due to the risk of a change of the S&P rating outlook to negative, while uncertainty about the resolution of the controversial bank levy weighed on Romanian government securities. In the end, Romania visibly underperformed. On the other hand, we observed a roughly 10bp w/w decrease of yields in Croatia, which translated into the biggest capital gains in the region.

 

FX market drivers

• Zloty has returned to 4.30 vs. EUR

The FX market was rather stable in CEE throughout the week, with the zloty anchored at 4.30 vs. the EUR. We see the zloty remaining on hold unless some breakthrough in the Brexit story comes. Passing the deal would support the euro and have a possible negative effect on the zloty. We see the zloty remaining rather stable until the end of the year, with increased pressure in 3Q19 coming from the parliamentary election.

 

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