Afternoon analysis 02.12.2016

The unemployment rate in November in the U.S. fell to the lowest level in 9 years. However, average hourly earnings disappoint. The Polish currency remains weak in anticipation of S&P Global Rating decision.

Mixed data from the U.S. labor market

As on every first Friday of the month, the Department of Labor published today a report regarding the state of the labor market in November. Although the increase in employment in the private sector was lower than it was in yesterday’s ADP data (219k), a growth of 178k was virtually in line with market expectations. However, markets were surprised by a decrease in the unemployment rate by 0.3 percentage point to 4.6% and a fall in the average hourly earnings, which contracted by 0.1% MoM.

Although the decline in the unemployment rate from 4.9% to 4.6% is relatively big taking into consideration recent months and appears to be positive on the outside, the U.S. labor force shrank by 226k in November. It caused to elevate the number of people not in the labor force to 95.1 million. The participation rate fell from 62.8% to 62.7% as well. It’s only 0.3 percentage points above the 35 year low of 62.4% from October 2015.

The average hourly earnings disappointed and fell from 25.92 USD to 25.89 USD. That constituted a 0.1% MoM decrease, which was below expectations of a 0.2% increase (there was a 0.4% increase in October). As a result, they grew by only 2.5% over the last 12 months, following a 2.8% YoY increase in October and was below expectations of 2.8%. Today’s labor market data were mixed which could somewhat cool the market expectations down and cause the government bond yields to fall a bit, which in turn could provoke a slight depreciation of the dollar. However, it shouldn’t fundamentally affect the U.S. currency in the long run: a rate hike by the Federal Reserve in December is almost certain and furthermore, the trend remains to be favorable.

The zloty breathed a sigh of relief but remains weak

The aforementioned mixed data from the U.S. labor market favor the zloty for the time being. If they had been better (exceeded expectations), this would have most probably caused a deeper depreciation of the Polish currency (together with other emerging market currencies). Let’s not forget that the zloty is additionally weakened by the anticipation of the S&P Global Rating decision. We expect, however, that there will be no change of Poland’s rating, which we covered in our morning comment.

The whole situation (both external and internal) doesn’t help the zloty. The CHF/PLN pair reached 4.18 – the Swiss frank was the most expensive since 24th of June, a day after the Brexit referendum (it cost 4.24 zl that day). A similar scenario was seen in relation to the euro, the pound or the dollar – they remained near the highest levels in recent days. Should the rating remain unchanged (which we expect will happen), the zloty should recover and strengthen on Monday.

Monday’s preview

On Monday we will get to know the November PMI indices data from IHS Markit regarding the services sector in euro zone countries. This will be the second release after last week’s preliminary data. The economic activity in the services sector in Germany picked up in October, after a weaker August and September. The preliminary November data indicates that the upward trend has continued – according to this release, the PMI rose from 54.2 in October to 55. The median of market expectations implies that the second reading of the November data will be similar to the first.

The quick growth of the aforementioned index of the services sector in Germany also caused a noticeable improvement in the PMI of the euro zone in November, according to last week’s preliminary reading. It rose from 52.8 in the last month to 54.1. The market consensus indicates that Monday’s data will be at an identical level. Should this come to pass, it would be the highest level of this index for the whole euro zone since May. The increase in services sector activity in the euro zone countries could support the euro before the Thursday’s European Central Bank’s decision regarding interest rates and non-standard monetary policy measures (monthly asset purchases). The data for the German economy are expected to arrive at 9.55 and 5 minutes later for the euro zone.

The same day at 10.30 CIPS/Markit will publish a similar index for the British economy in November. It fell in July below the 50 boundary (meaning a decrease in the sector’s activity) and was at its lowest level in 7 years. This is most probably because of the unexpected Brexit referendum result, which hit the markets at the end of June. However, it rose in the following months above 50, underlining the resilience of the British economy. In the last month, the activity of the services sector measured by the PMI index rose to the highest level since January. The market consensus points to a slightly lower level in November – a decrease from 54.5 to 54. Against the backdrop of Brexit, the pound sterling is relatively volatile and is particularly susceptible to data regarding the British economy. Hence, a deviation from the above expectations could cause this volatility to increase.

At 16.00, half an hour after the NYSE is opened, we will learn the ISM data regarding the U.S. services sector. The August’s activity in this area visibly weakened – the ISM index fell from 55.5 a month earlier to 51.4. However, it returned to approximately June level in the next two months. The median of market expectations implies that this index could climb to 55.3 in November, in comparison to 54.8 in October. It could also overlap with the rising manufacturing ISM index, which Thursday’s level exceeded expectations and confirmed an upward trend. This is positive for the dollar, which could strengthen in the case of favorable Monday’s data from the services sector.