Poland Weekly Focus | Did economy recover in May?
After three consecutive cuts, we expect central bank to remain on hold. Labor market conditions should deteriorate further in May, while industry likely somewhat recovered as measures began to be relaxed in May. Bond and FX market to focus on global risk-off mood.
June 16 | End of easing cycle. After an unexpected rate cut to 0.1% at the last MPC meeting, we expect the central bank to remain on hold this time. According to the comments of MPC members, negative interest rates can be ruled out for the time being and stability of rates is the most likely scenario. We think that the target rate will remain locked at 0.1% at least until the end of 2021, while the QE program should continue throughout 2020.
June 18 | Labor market to deteriorate further in May. We expect that the situation on the labor market deteriorated further in May, reflecting the impact of lockdown measures and worsening financial conditions of enterprises. In our view, wage growth should ease to a meager 0.7% y/y, while employment should decline by a stronger -2.7% y/y.
June 19 | Industry should restart production. Together with the easing of lockdown measures since the beginning of May, industrial production has likely gradually restarted. However, with limited operating capacities for hygiene reasons, growth will remain subdued in the coming months. Nevertheless, the contraction should be milder compered to April, as we see industrial production at -16.8% y/y (consensus of -18.0% y/y) in May. We expect the biggest hit to come in 2Q20 and a double-digit economic contraction is a highly likely scenario.
Bond market drivers | Long end of curve followed core markets. Over the course of the week, the long end of the Polish curve went down by almost 20bp towards 1.3%, mirroring the strong decline of German Bunds, which went down by 15bp to below -0.45%. This move reflects last week’s worsening of market sentiment due to the renewed threat of a second wave of COVID-19.
FX market drivers | EURPLN fluctuated around 4.45. On the back of deteriorating global sentiment and increasing risk-off mood, the zloty depreciated and the EURPLN moved to the weaker side of 4.45. Uncertainty over the future path of the recovery and potential second wave of the pandemic are the key factors for both the zloty and markets at the moment. Neither local macro releases, nor the central bank meeting should impact the zloty.