Market Summary by AFORTI: Decline in industrial and construction production, wage growth and inflation in Poland. Stabilization of the zloty and strengthening of the dollar. Gold remains a strong investment asset.
Last week brought us a large amount of macroeconomic data. Let's start with our market - where we learned about industrial production data. The data surprised all analysts, as the scale of the decline, estimated at -1%, amounted to -6% y/y. Equally serious declines were recorded in construction and assembly production where the drop was even more - namely 13.3% y/y (the assumed 4.4%). All this was topped by an increase in corporate wages, where wages rose by 12% y/y. This data gave analysts a lot to think about, especially since employment was virtually unchanged at the same time. The slight decline of 0.2% did not come as a surprise. What remains, of course, is the interpretation of these results, when production falls, but at the same time wages rise. This implies strong wage pressure, which becomes a burden for companies that register smaller orders. The question then becomes whether, due to rising labor costs, we are still an attractive market for foreign investors for replacement labor. Undoubtedly, the direction that we can be an interesting and competitive market invariably remains innovation and the export of goods that are a local product, rather than exclusively processed through supplied technologies. One example is the Levi Strauss factory in Plock, which, after expressing expectations of a PLN 1,000 wage increase, decided to close its Polish plant and move production to Bulgaria and Romania, citing precisely the issue of declining profitability. Of course, this raises the question of inflation. Here, exactly, we have a positive signal coming from the Ministry of Finance, which said that inflation at the end of the year will be lower than in the assumed range of 6-7% and should be closer to 4.5% (with a deviation of +/- 0.5%). This is a sizable difference, which was undoubtedly helped by players in the retail market, who, thanks to the price war, have been very much cushioned by the impact of the return of 5% VAT on food.
Returning to the other data we met. On Tuesday, we learnt about the data provided by the Central Statistical Office (CSO) on retail sales data, in y/y terms. March brought an increase of 6.1%, which - despite a very positive signal for the economy - was lower than expected. Economists had estimated growth of 6.7%. What do these data together tell us? Well, production is falling while consumer purchases are rising. That is, we rely on household spending and imports to clearly make up the difference between rising consumption and falling output. Unfortunately, the concern is that we will see this trend continue over the coming months. It probably goes without saying that this is not a very good signal for the economy. Unfortunately - the economy has the pictorial inertia of a large tanker at sea. Every movement of the steering wheel brings change with a long delay. Investment or development decisions by companies will result in effects in a few months, not immediately.
Of course, the economy is not solely in isolation when it comes to market sentiment and investor decisions. In Poland, we had a large return of capital to the stock market and considerable interest in companies from the information and technology sector. We had similar behaviour ‘across the Big Water’ - i.e. in the USA, where Wall Street was clearly gaining.
Let us therefore take a broader look at what has been happening in global markets. First of all, we have seen a calming of the situation in the Middle East. Despite speeches and verbal messages from both sides, the conflict has happily remained without major escalation and the countries involved have not made any significant military moves. Such a situation for financial markets is always a good signal for investors to return and increase their interest in investing in slightly riskier and higher-yielding assets. And this is exactly what happened - where in the USA the rise in 10-year bond yields stopped and the stock market gained. Here too, companies from the technology and IT sectors led the way. Of course, increases also have their limits, as exemplified by the Meta Platforms (Facebook) data and weaker forecasts for the coming months. Could it be that the delight and faith in AI is losing a little of its momentum? Undoubtedly, prolonged surges and a growing bubble are cause for concern and bring to mind, for example, the crisis of the so-called 'dotcoms', i.e. internet domain companies that were considered to be the stars of the stock market, but later fell often by 95-99% on valuations. For now, we do not have such strong signals, but it is worth keeping an eye on technology companies and their performance (Alphabet, Microsoft, etc) in the coming weeks and months.
Apart from the aforementioned Met (Facebook), macro data from the US generally failed to impress. US economic growth was clearly at its lowest in almost two years, with GDP growing by only 1.6% q/q (quarter-on-quarter), showing that analysts assuming 2.5% growth had badly missed their forecasts. Looking at the Q4 readings, where we had a reading of 3.5% - the US economy was clearly getting breathless. This is compounded by a decline in personal consumption - 2.5% - which is 0.8 percentage points lower than the previous quarter (3.3%). Analysts had expected a decline of only 0.3% - which again surprised the market. The question remains whether persistent inflation, combined with weakening GDP and consumption, will give impetus to interest rate changes. We fear that the Fed has quite a nut to crack in terms of stimulating the economy on the one hand, but not letting inflation run wild on the other.
Looking at Europe - here, unfortunately, we still do not have positive signals. The data on the PMI index - that is, which speaks of business sentiment - was very negative. Let us remind ourselves - a level of 50 means a neutral attitude, and values below - pessimism. The largest economy in the EU zone - i.e. Germany - is still in a strong sense of malaise, with the PMI oscillating around 42 (a slight increase from 41.9 to 42.2), France is not enthusiastic either (a drop from 46.2 to 44.9), and in general for the entire Eurozone - we recorded a drop from 46.1 to 45.6. The economy remains in anticipation of moves by the ECB and there are increasing calls to stimulate the economy by cutting interest rates. As we mentioned - June and the reading of inflation projections will be key. If these are in line with expectations - we can count on the first cut of 25 basis points in months.
Let's take a look at how the zloty has behaved. After a lot of nervousness between 12 and 20 April, the EUR to PLN has clearly stabilised. After a large and rapid weakening on Friday 19 April, when the zloty returned to the 4.3700 area, the last week was clearly subdued and the zloty entered a sideways trend - where it traded in the EUR/PLN 4.3060-4.3350 range. It looks like the speculative jitteriness of the zloty, based on the situation in the Middle East, is behind us and the drive to break through the EUR/PLN 4.3000 support will clearly attract like a magnet. Should we therefore expect further strengthening of our currency this week? All indications are that we can count on an offsetting of the EUR/PLN surge and we will return sooner or later to the EUR/PLN 4.2500-4.3000 corridor.
EUR/PLN in the perspective of the last 10 days
Looking at the US currency, volatility against the zloty was noticeably lower than in the period 12-19/04. The dollar, like the EUR, entered a sideways trend and did not make any sudden movements. The dollar traded first below USD/PLN 4.0680 to then enter the USD/PLN 4.0200-4.0550 corridor. The calming of EUR/USD certainly had an impact. Will we therefore see USD/PLN below 4.0000? In our view, the chance of moving in the 3.9800-4.0200 corridor is clearly increasing.
USD/PLN in the perspective of the last 10 days
The EUR/USD quotes referred to earlier showed somewhat less volatility last week. The dollar, which had been losing sharply towards EUR/USD 1.0600, even returned to 1.0750 to finally consolidate around EUR/USD 1.0700. Trade was clearly offset by calm from the Middle East region and weaker macroeconomic data.
As you can see - the markets have clearly 'digested' the anxiety over the conflict and returned to current data, which has a rather short-lived effect. So will EUR/USD return to 1.0600? Momentarily, all indications are that the dollar is potentially more likely to move EUR/USD 1.0670-1.0730 than a stronger correction towards 1.0600
EUR/USD in the perspective of the last 10 days
