Afternoon analysis 03.03.2016

, author:

Piotr Lonczak

The dollar dropped before the employment data. Kamil Zubelewicz from the MPC, presented a hawkish view on the monetary policy. The zloty dropped against all its major pairs.

The US labor market continues to expand. Yesterday's ADP report on employment change in private sector, showed a 214k increase in employment. The reading was better than the forecast. Today's data on unemployment, also claims a confirmed expansion in the labor market, despite the fact that the reading missed the forecast. The number of unemployment claims increased to 278k against the 271 forecast. Moreover, the Challenger data was quite good.

Given the latest reports, it is highly probable that tomorrow's monthly report on the employment situation will also be positive. The forecast is for a 190k jobs increase in February. A result close to the expectations, will support the scenario of interest rate hikes in the US.

The latest reports concerning industry were rather weak. The ISM report, the most important sentiment gauge, showed some deceleration in the industry. However, the reading was better than the previous so it may suggest a rebound in the coming months. The report on orders showed a similar tendency.

The latest reports suggest that the deterioration of industry was a relatively transitory situation. A strong labor market will eventually push households to spend more money and as a result, the inflation rate will accelerate. The factor that supports spending are low gasoline prices.

Given the situation, the probability of the interest rate hikes has recently increased. The futures market shows a more than 50 percent probability for an interest rate hike in September. This is a significant turnaround, as a few weeks ago, the probability of hikes in 2016 were virtually zero. This factor should support the dollar in the longer term.

In spite of numbers supporting a tightening scenario, the dollar dropped against the euro and other major currencies. The EUR/USD exceeded 1.09 against 1.0830 on Wednesday.

Weaker zloty

Easing anxieties concerning the current condition of the world economy, were reflected in the developments in the commodity markets. The oil prices have been recently supported by the possible agreement of output limits. As a result, the emerging market currencies posted some gains. This move was weakened on Thursday.

The zloty was supported by recent comments from the MPC. They support the general view that the current level of the interest rates is appropriate. It will not be altered by the expectations that the European Central Bank will add to the stimulus in March.

Today, Kamil Zubelewicz from the MPC presented a clearly hawkish stance (PAP agency). He said the current deflation is positive, as it was not caused by a drop in the money supply. The price level dropped due to the large supply of goods and technological progress.

Zubelewicz said the NBP's inflation goal is a long term guidance. He added that the bigger problem is an upside deviation of inflation from the goal, than downside move. Hawkish comments did not support the zloty. The Polish currency posted broad losses against its major currencies.

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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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