Key macro numbers : Slight slowdown in Polish retail sales

We are looking for Polish retail sales growth to have slowed moderately to 5.1% y/y in September from 6.6% y/y in August. Overall, the outlook for Polish private consumption is relatively bright given the continued improvement in the labour market situation in Poland and a generally robust recovery. That said, real wage growth is rather weak, which over the longer term could contain retail sales a bit. The relatively moderate growth in real wages is also the key reason we expect a slight slowdown in retail sales in September. Also out next week are Polish unemployment numbers for September. We expect a seasonal rise in unemployment to 11.4% in September from 11.3% in August.

However, the longer trend is for lower unemployment in Poland. We expect Polish unemployment to drop to 10.7% by the end of next year.

South African inflation eases further
South African inflation continues to ease. We expect inflation in September to fall further to 3.2% y/y from 3.5% y/y and slightly more than the consensus expectation of 3.5% y/y. Looking ahead, we expect inflation to hover below 3.5% for the rest of the year before it starts picking up towards Q2 11, although it should stay within the inflation target range for the whole of 2011.

Lithuanian GDP growth accelerates
The Lithuanian statistical office will announced the flash estimate for Lithuania GDP next week. In general, we expect to see an acceleration of GDP growth to 1.9% y/y in Q3 10 from 1.3% y/y in Q2 10. The main uncertainties are associated with agricultural activities.

Agriculture has greater weight in GDP in Q3 on average than in other quarters, so the results of this sector are very important. Industrial recovery is gaining momentum but is still not sustainable; thus based only on industrial activities and retail trade, GDP growth in Q3 10 could be lower than we expect. However, major agricultural producers in Lithuania argue that despite the reduction in harvest this year due to poor weather
conditions, all of them were compensated by substantial increases in agricultural output prices. In summary, we can say that risk for our forecast is balanced.


Fixed income market update
Review: QE2 still is the main driver
The overall theme for global fixed income markets remains the outlook for monetary policy in the US and particularly to what extent the Federal Reserve will step up its quantitative easing of monetary policy. This undoubtedly is a massive force in keeping global bond yields down and that is also the case across the EMEA region, where the local fixed income markets continue to benefit from the “low-for-longer” environment.

That said, we are getting to a situation where this is more or less fully priced into the markets and for some countries we are clearly getting to a situation in which one could begin to question how much further this rally could go – for example South Africa and Turkey, but for other – particularly Poland – we see more room for yields to drop.

Review: Rate decisions take centre stage
On top of the EMEA agenda next week will undoubtedly be the rate decisions in Poland and Hungary. While the rate decision in Hungary is likely to be relatively “boring” there is a lot more at stake for the markets when the Polish central bank announces its rate decision on Wednesday. Hence, some analysts still continue to believe that the Polish central bank (NBP) will hike its key policy rate next week and the market is still priced
for the initiation of a monetary policy tightening cycle over the coming three months.

However, we have long argued that there was no need for the NBP to start a tightening cycle anytime soon and have in fact recently changed our forecast in a more dovish direction and now don’t expect rate hikes in either 2010 or 2011. The reasons why we are so relatively dovish recently compared with the market is threefold. First, the global trend is clearly toward more monetary easing, rather than the opposite – with the Federal Reserve now kicking off QE2. Second, Polish inflation is well-contained and we expect Polish inflation to be well within the NBP’s inflation target range of 2.5% +/-1 percentage point in the coming 12-18 months. On our monetary based long-term inflation models Polish inflation is closer to 2% than to 2.5% on a two- to three-year horizon. Finally, despite Polish recovery continuing one can hardly say that the Polish economy is overheating – something, which was clearly illustrated by September’s wage data, which showed that Polish wage growth has been less than 4% over the past year. Hardly something that should give Polish central bankers sleepless nights.

We would also note that the media reporting on Polish monetary policy have been disproportionately dominated by the hawks on the NBP’s Monetary policy council (RPP), which have consistently argued for rate hikes – mostly due to the fact that they feel uncomfortable with the (historically) low level of interest rates in Poland. However, the fact that it is the media picture has been dominated by the RPP hawks is not the same as to conclude that they also speak for the majority of RPP members. In fact, we believe the NBP governor Marek Belka is much closer to being the decisive vote and voice on the RPP and his has been significantly less hawkish in his comments recently. We therefore continue to expect the NBP to stay on hold for the remainder of 2010 and 2011, which means that there is a further potential for Polish market rates and yields to move lower.
See also our Strategy Update on page 8 for more on how to play the expectation of lower Polish yields.

As mentioned the Hungarian rate decision on Monday is likely to be somewhat of a nonevent in the sense that the Hungarian central bank (MNB) is likely to maintain its waitand-see stance on monetary policy. That said we believe the MNB will sound slightly less concerned than in recent months and on the back of the recent continued recovery in the Hungarian markets and especially the marked stabilisation (and even strengthening) of the Hungarian forint. We maintain our call for the MNB to stay on hold for the coming 12 months.
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Full report : Key macro numbers : Slight slowdown in Polish retail sales