Afternoon analysis 03.10.2014:
September labor market data supported the case for interest rates increase in the US and sent the dollar at new highs against its major pairs. The Ukrainian crisis is further softening. The pound under pressure.
Labor Department monthly data reassured investors on the strength of the US economy. Non farm employment growth stood at 248k - more than expected 215k. In addition, the previous month data was revised up to 180k from 142k. Private sector employment rose 236k - more than 215 k projected and more than 175k (revised from 134k) in the preceding month.
The unemployment rate stood at 5.9 percent, down from 6.1 percent in August. It was better than projected 6.1 percent. The unemployment rate fell to a six year low. Somewhat disappointing was that the wage growth was flattened. It was less than 0.2 percent growth expected and 0.3 percent in the previous month.
All in all, the US labor market proved its resilience and as a result it strengthened the case for interest rates increase. The Federal Reserve will probably increase rates in the first half of 2015, according to market expectations and Fed projections. This results in growth of the dollar as other key central banks remain still in accommodative stance.
The US currency rose against the major pairs. The GBP/USD fell below 1.60 for the first time since November 2013. The USD/JPY rose near 110 – the highest level since 2008. The major currency pair – EUR/USD – dropped below 1.2520. It was the lowest level since September 2012. The USD/PLN rose above 3.34.
The European Central Bank will purchase asset-backed securities with investment grade. Although his rule doesn't apply to assets from Greece and Cyprus – countries with non investment grades – until they remain under bailout program. This way the ECB wants to provide support for banks otherwise ineligible.
This poses some problems. Greece planed to quit bailout program before the end of the year. In addition, the country said it may forgo remaining disbursements form the International Monetary Fund. This step would entice foreign investors better than bailout and it will leave some wiggle room for the government in the field of public finance.
The euro zone data was better than estimated. In August retail sales rose 1.9 percent on a yearly basis, up from 0.5 percent in the previous month. It was better than 0.5 percent estimated. But morning data was somewhat poor – the PMI reports showed further deterioration of economic conditions in services. Earlier this week industrial PMI was also below expectations.
Ukraine and Russia talk
Moscow and Kiev are moving closer to interim agreement on gas supplies. Both countries are willing to achieve common ground before winter. The UE energy commissioner Guenther Oettinger informed on progress made as he facilitates the talks.
The outlined agreement says that first Ukraine must pay its outstanding debt to Russian Gazprom in order to get new supplies. Some disagreement was noted on price levels but it is going to be overcome. Although agencies informed on skirmishes in Donbas, the Ukrainian crisis didn't influence on markets.
The pound under pressure
After failure of the Scottish independence vote the British currency was viewed as a currency next to the dollar that is poised to rise. It was based on solid economy performance that pushed the Bank of England to rise rates as the first major central bank.
But the situation is very different. The sterling fell against the dollar to its lowest since November 2013. The move was sparked by recent economic data, what showed some impairment in economic conditions – especially this was reflected by poor PMI indices. In addition, some MPC members said that the economy isn't ready for higher rates.
The zloty before MPC week
The zloty ends week with slightly changed against the euro and the frank. It rose more than 0.2 percent against the pound. Conversely, the dollar rose about 1.5 percent to as high as 3.35 – the highest since
From the Polish perspective the key event will be next week's meeting of the Monetary Policy Council what will probably result in lowering interest rates by 25 basis points. In addition, the MPC will provide guidance for the end of the year. Total amount of cuts is to be 75 basis points.
After poor industrial production data, lackluster retail sales and employment numbers the MPC has no other option than lowering the credit cost. Moreover, the softening of the Ukrainian crisis – what was seen as an obstacle for cuts in September – is less valid for markets as it was a month ago. The MPC pointed on Ukraine as a threat for exchange rate.
The zloty probably won't exploit softening of the Ukrainian crisis. The Polish currency is under influence of movement on major markets. It results in heightened volatility what pushes the zloty lower.
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