The ECB meeting triggered a lot of volatility

Macro releases for August to be in focus this week. Industrial production most likely to suffer from lower number of working days and we see it at meager 1.8% y/y. If such low industrial activity persisted, we could see GDP below 4% in 3Q19. Retail sales should benefit from favorable situation on labor market and increased social transfers. FOMC rate decision to be decisive factor for EURUSD development and reaction from zloty cannot be ruled out.

This week:

• September 18: Wage growth to remain solid
  We expect wage growth to arrive at 6.7% y/y (market consensus at 6.8% y/y) in August, while employment should maintain recent dynamics – slightly below 3% and come in at 2.6% y/y. The situation on the labor market remains favorable and supports high levels of household spending.

• September 19: Industry to drop in August
  Performance of industry in August will most likely be downplayed by the negative calendar effect (-1WD) and sentiment remaining depressed. We are a bit more optimistic than the market and expect industrial production growth at 1.8% y/y vs. the consensus at 1.3% y/y. If such low growth dynamics persist in September, we could see GDP dropping below 4% in 3Q19. Separately, price pressure remains sluggish and we see it at 1.3% y/y in August.

• September 20: Retail sales to keep up strong pace
  The good situation on the labor market and extension of the 500+ program should support private consumption. We expect retail sales growth of 7% y/y in August (5.2% y/y in real terms).

Last week's highlights

• MPC kept policy rate flat at 1.5%. View of MPC is that expected increase of inflation in 1Q20 will be short-lived and will not justify monetary tightening.

• We published 3Q19 Macro Outlook for Poland.

Bond market drivers

• Bond market volatile
  Last week, the ECB meeting triggered a lot of volatility on the core and local bond market. The 10Y yield continued to go up at the beginning of the week, only to reverse on Wednesday and bottom out below 2% shortly after Thursday's announcement of ECB monetary easing. Once the market had digested the ECB decision, the rally on German Bunds began and the Polish 10Y yield also went up, closing the week above 2.1%. The spread over the 10Y German Bund was swinging in a narrow range between 255bp and 260bp. This week, the FOMC meeting and important local macro releases for August will shape yield development in Poland. The publication of industrial production data could have negative impact on the long end, if we see a negative surprise.

• Weekly performance of 5Y bonds (% in EUR)
  There were strong fears that possible disappointment from the ECB could trigger yield increases not just on the Bund market, but also for CEE bond markets. While yields already edged up before the Thursday decision, only Bund yields reacted to the ECB meeting as feared, as CEE yields, on average, did not go up as much as Bund yields did, or even showed some decline.

FX market drivers

• Calm week for zloty
  The ECB decision did not bring much that was new to EURPLN development and the zloty was mostly stable throughout the week, fluctuating between 4.33 and 4.34 vs. the EUR. The EURPLN strengthened slightly at the end of the week and moved towards 4.32. This week, the FOMC meeting will be the most important event for the EURUSD. A rate cut is fully priced in by markets. Moreover, any news on Brexit could also give the market direction, but this is unpredictable. Local releases should remain neutral for the zloty.

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