Afternoon analysis 07.10.2015:
Investors still doubt the Federal Reserve is going to hike before the end of the year. The dollar dropped after a brief increase. The German industry disappointed again. The zloty exceeded gains.
Once again, the reading from the German economy missed the forecast. After yesterday's weak report on orders in industry, today the report concerning production disappointed. The report showed a 1.2 percent decline against the plus 0.2 percent that was expected. In the prior month, production increased 1.2 percent (revised from plus 0.7 percent).
The latest data confirm that the economy was negatively affected by the Chinese slowdown and problems of other emerging market economies. The rising problems in export oriented the economy to have recently been signaled by the sentiment indexes in the industry. However, the weakness of external demand is mitigated by an expansion in the labor market and strong consumption. As a result, significant deceleration of the GDP growth is not very likely.
Among the countries that reported industrial data, Spain was a large disappointment. Production in this country declined 1.4 percent. It was the slowest pace in more than two years. The Bank of Spain said that the economy may slow down in the third quarter.
In contrast, the British industry exceeded the forecast. The production growth stood at 1 percent on a monthly basis after declining 0.3 percent in the prior period (revised up from the minus 0.4 percent reported initially). It was a better result than the 0.3 percent that was expected. The report increased the probability of the Bank of England increasing rates. Thus the pound increased. The British currency posted the second winning session against the dollar in a row.
Lack of faith
The dollar's weak performance suggests that investors still don't want to believe that the Federal Reserve is going to increase interest rates by the end of the year.
John Williams from the San Francisco Fed in his speech yesterday said that the central bank will hike the cost of credit this year. This Fed member is close to the FOMC's consensus. Moreover, Williams lowered expectations for the labor market performance. He sees a 100k monthly pace of employment gains as sufficient for the Fed to fulfill its goals. As a result, the Fed's tolerance for deterioration of data is larger than it had been thought.
Thus, after initial gains, the dollar fell against the euro. A similar development suggests that the weakness of the trade balance report, slowdown in the eurozone and overall deterioration of the global economic landscape lower the probability of a hike. However, the recent market move leaves space for a surprise, which may result in a volatility spike.
The zloty increased due to the MPC optimism
Before the Monetary Policy Council press conference one would have thought that the monetary authorities will signal some anxiety over the future of the Polish economy as the latest reports missed the forecasts. However, the MPC sees no reason to worry and is not going to adjust its stance.
It was surprising, given the recent actions of other central banks. As a result, the zloty gained due to the tighter stance of the MPC. Moreover, the Polish currency was supported by a stronger risk appetite in the broad market. The major stock indexes posted significant gains today. As a result, the zloty may gain further.
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