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Sharp Tightening In Financial Conditions Pricing in Further Downside Risk

POLAND
  • We have seen recently that the sharp increase in Polish ST rates have led to an inversion in the 2Y10Y yield curve, increasing recession fears.
  • Another interesting market indicator that tends to lead the business cycle is the 2-year change in the 2Y bond yield.
  • While the 2-year change in 2Y tends to lead the economic cycle by 2 years in the developed market, it is usually shorter in the EM world (i.e. 6 months for Poland).
  • The chart below shows that the sharp tightening in financial conditions is currently pricing in further deceleration in the industrial production, which we use as a proxy for the economic activity.
  • We smoothed the 2021 April/May Industrial Production due to the base effect.

Source: Bloomberg/MNI

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