What Investors Concluded From Polish Retail-Sales Shock

Investors are snapping up Polish bonds as they boost bets the nation’s central bank will cut interest rates after a surprise slump in retail sales growth signaled the economic recovery is weakening.

The Finance Ministry sold 6 billion zloty ($2 billion) of 2019 securities yesterday, 20 percent more than planned, drawing the most bids in 15 months from investors, data compiled by Bloomberg show. The yield on five-year zloty notes slid to a 14-month low yesterday in the biggest drop among 24 major emerging markets as wagers central bank Governor Marek Belka will lower borrowing costs increased to the most in more than a year.

With June retail sales growing 1.2 percent from last year, lower than all estimates in a survey of 26 economists by Bloomberg, evidence is accumulating that Poland’s economy probably slowed in the second quarter. Policy makers remain reluctant to reduce borrowing costs as the record-low 2.5 percent benchmark rate ensures “balanced” growth, Belka said yesterday in parliament.

“It is a matter of time when the data convinces the rate council to cut,” Grzegorz Ogonek, an economist at ING Groep NV’s Polish unit, said by phone from Warsaw yesterday. “For now, there’s no majority supporting a reduction, but another month of data showing the economic recovery got stuck sooner than we thought it would may cause the council to back down.”

Rate Bets

The Monetary Policy Council will probably lower rates at its next meeting in September and may follow with another cut later this year, he said. Six-month zloty forward-rate agreements traded 41 basis points below the three-month Warsaw Interbank Offered Rate today after declining to 42 basis points, the least since May 2013, yesterday, data compiled by Bloomberg show.

Poland sold 4.78 billion zloty of fixed-rate bonds maturing in July 2019 and 1.22 billion zloty of floating-rate notes due January 2019 at yesterday’s auction, the Finance Ministry said in an e-mailed statement. Investors bid for a total of 20 billion zloty of bonds, the most since April 2013. The sale allowed the government to “practically” meet this year’s borrowing needs of 132.4 billion zloty, Finance Minister Mateusz Szczurek said in parliament yesterday.

“The auction was a huge success,” Arkadiusz Urbanski, a fixed-income analyst at UniCredit SpA’s Polish unit Bank Pekao SA, said by phone yesterday. “The macroeconomic environment is still favorable for bonds.”

Unexpected Slowdown

Retail sales growth in the European Union’s largest eastern economy slowed from 3.8 percent in May, missing the median estimate of an acceleration to 4 percent in Bloomberg’s survey. Data on June industrial output and wage growth also trailed forecasts. Inflation, which rose to 0.3 percent last month from a record low 0.2 percent in May, has remained below the central bank’s 2.5 percent target for 19 months.

“Weak growth will continue to fuel the rally in zloty bonds, but we believe current yield levels on the long end are already very close to last year’s lows,” Piotr Kalisz and Cezary Chrapek, economists at Citigroup Inc.’s Polish unit Bank Handlowy SA, wrote in a note yesterday. They see a “high” risk of “a sharp jump” in yields if growth surprises positively or in the event of “hawkish signals” from the Federal Reserve.

While Fed Chair Janet Yellen said last week that U.S. inflation “is evolving in line” with the Federal Open Market Committee’s expectations, James Bullard, president of the St. Louis Fed, said that the central bank may have to raise rates more quickly than planned because the rapid drop in unemployment may push inflation “well above” the Fed’s target.

Bonds Gain

The yield on Poland’s five-year zloty notes rose one basis point after sliding 12 basis points to 2.78 percent yesterday, or 15 basis points above an all-time low reached in May last year. The yield on 10-year bonds added two basis points to 3.25 percent. The zloty lost less 0.1 percent to 4.1386 per euro at 2 p.m. in Warsaw, cutting this year’s increase to 0.4 percent.

“Sooner or later the Fed will have to make a turn,” ING’s Ogonek said. “Despite the clouds hanging over our market, the sentiment remains positive.”

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