Weekly Focus Poland
Flash CPI arrived at 1.7% y/y in July, above market expectations. PMI dropped to 52.1, suggesting economy losing momentum. The long end of the curve edged up and the zloty remains under pressure.
The PMI dropped to 52.1 in July from the 53.1 seen in June. Over the last couple of months, the index has stabilized around 53, which is consistent with our view that growth dynamics will be somewhat lower in 2Q17 than in 1Q17. The drop of the index in July, however, suggests that the economy may be losing the momentum from the beginning of the year, supporting our expectations of economic growth dynamics stabilizing around recent levels rather than accelerating further.
Yields follow development on core markets Over the last week, the long end of the curve edged up following developments on the core markets, as the German 10Y yield also increased. Moreover, the curve has steepened. While the short end of the curve remains anchored around 1.8% (2Y yield), long-term interest rates have, affected by the FOMC statement, been rising, as expectations are increasing that balance sheet normalization will begin soon. On top of that, domestic factors and the political turmoil surrounding judiciary system reform have added upward pressure to yields. That was mainly reflected in the widening spread vs. Bunds toward 280bp. Also, the European Commission launched infringement procedure against Poland, adding to the increasing political risks and higher risk premium for Poland. This week, the Ministry of Finance will hold a switch auction, while no new issuances are planned in August.
Zloty under pressure from domestic political risks The zloty remains under pressure from domestic factors, in particular increasing political risks related to judiciary system reform. Although the president vetoed the two most controversial bills, allowing the zloty to gain, the European Commission continues to see risks related to the independence of the judiciary system in Poland and launched the infringement procedure. That naturally put the zloty back under pressure and the EURPLN is holding around 4.25. Moreover, Moody’s sees risks that judiciary system reform would worsen the investment climate and institutional framework in Poland, which is a credit negative development. We thus see limited space for the appreciation of the zloty