Weekly Focus Poland
Industrial output grew 7.4% y/y in February, while PPI arrived at -0.2% y/y. Retail sales are expected to sustain solid growth as well (due Tuesday) and the unemployment rate should drop to 6.8% in February. Although the domestic data releases are important, the FOMC meeting is likely to be the main driver of the bond and FX market, especially as the new economic forecast and expected interest rate development will be presented.
March 20: Retail sales expected to sustain robust growth above 8% y/y in February Retail sales should sustain robust growth dynamics above 8% y/y in February. Growing wages and employment as well as dropping unemployment translate into improving consumer confidence and high levels of spending. Private consumption growth should thus remain one of the main growth drivers.
Inflation rate below expectations left mark on bond market Last week, an inflation rate of 1.4% y/y in February was a major surprise to the downside. As a reaction, 10Y yields went down, supported additionally by similar development on the core markets. Such a low inflation number will have an impact on the inflation trajectory throughout the year and average inflation is likely to remain below the target for the whole of 2018. That supports Governor Glapinski’s suggestions that the inflation rate may stay flat beyond 2018. This week, industrial output and retail sales growth data should give a pretty good picture of economic growth in 1Q18, which we expect to slow below the 5% y/y seen in 4Q17. The FOMC meeting is due this week and a hawkish tone may also leave its mark on the bond market, especially as the new economic forecasts and the expectations for interest rate development will be presented.
Zloty weakens further The zloty has been weakening lately and the EURPLN held above 4.20 throughout the week. An inflation rate well below expectations was zlotynegative, as it supports a stability of rates scenario for longer. This week, domestic data is most likely to support recent trends, as industrial output arrived below market expectations. The expected rate hike in the US and projection for the extent of monetary tightening in the US (more rate hikes than currently expected) limit chances for any zloty recovery. All in all recent development on domestic market i.e. the change in this year’s inflation trajectory due to lower than expected inflation in February) and possible delay of rate hikes is the source of the risks to the upside for our current EURPLN forecast.