Afternoon analysis 02.10.2015:
The dollar dropped after poor reports from the US labor market. The reading disappointed investors. It was reflected in heightened risk aversion in the markets. The zloty increased against the pound and the dollar.
In September, the US labor market missed the forecasts. Today's reports showed that employment increased only 142k - less than the 201k expected by analysts in the Bloomberg survey. Moreover, the prior month data was revised down to 136k against the 173k that was previously reported.
However, it was only the beginning. Other labor market parameters also missed the expectations. Employment in industry declined. It confirmed tendencies that has been signaled by industry indexes published in recent days.
The workforce shrank again. The participation rated declined to 62.4 percent from 62.6 percent in the prior month. It was the lowest level since 1977. The average work week dropped to 34.5 hours from 34.6 hours. Moreover, wages stagnated in September on a monthly basis against the plus 0.2 percent forecast.
Today's report diminished the probability that the Federal Reserve will increase interest rates before the end of the year. According to Bloomberg data, the probability of hike in December declined to 28 percents. Chance the Fed will hike in January increased to 39 percent. The first month when the probability was above the 50 percent level was in March.
As a result, the dollar dropped against the euro and other major currencies. In addition, the US bonds posted significant gains. And the US stock market declined. Weakness of the labor market may suggest that the economy is slowing down and it may hurt companies' profits.
European Central Bank President Mario Draghi said, the economic landscape is improving. During a speech in New York he said the GDP growth is getting stronger. Draghi said that the eurozone needs more integration as it is still an unfinished project. In his speech there was no remark regarding the monetary policy.
General elections in Portugal are scheduled this weekend. In polls the party of ruling Prime Minister Pedro Passos Coelho is leading. As the party that is going to continue the reform will likely win, the impact of voting in the financial markets will be minimal. Moreover, other parties are also going to pursue reform plan. There is no party that is going to take a Greek-like negotiation stance in the EU.
Portugal is a proof that the austerity policy works. The unemployment rate declined form close 18 percent to 13 percent and is significantly lower than in Spain (22 percent) and Greece (25 percent). The debt to GDP ratio is still very high (120 percent GDP), but it will likely improve in the longer term.
Steady zloty's basket
In the longer term, the zloty may be under pressure of weak economic reports. Recent data on industrial production, inflation and retail sales missed the forecasts. Given the situation, the Monetary Policy Council may start to discuss the possibility of interest rate cut. If this is the case, the zloty may be negatively affected.
On Friday, the zloty increased against the dollar and the pound. But the Polish currency declined against the euro and the franc. However, the zloty's basket against the major currencies was steady. All in all, the probability of a stronger zloty is currently limited.
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