Afternoon analysis 17.03.2016:
Dovish Fed supported the market sentiment. Report from the Polish economy showed an ongoing expansion. The zloty gained against the dollar.
The Federal Reserve moved to a more dovish stance as did the other major central banks. Last week, the ECB showed a more loose stance. Earlier, China and Japan increased the monetary stimulus. Less important banks also decided to loosen their policy.
On Wednesday, the Fed left interest rates unchanged. Currently, the federal funds rate at range between 0.25 to 0.50 percent. The decision was in line with expectations. However, the Fed surprised with a dovish forecast for interest rates. It pointed at two hikes this year. In December, the Fed projected four hikes in 2016.
Fed President Janet Yellen, said at the press conference, that interest rates at that level, leaves more of a scope to address high inflation than low inflation. As a result, the central bank wants to be more certain that the inflation rate moves to the goal before raising rates.
The latest reports from the US did not give a clear answer whether the domestic factors are strong enough to support inflation, which is subdued by global factors. Although the unemployment rate is at an eight year low and employment is strong, the wage growth disappoints. Lackluster gains in wages will not support consumption. Retail sales at the beginning of the year were below the expectations. Given this situation, it is not very likely that household consumption will support inflation growth.
The market reaction was in line with expectations. The dollar dropped against the euro and the other major currency pairs. The US currency dropped against the emerging market currencies. Given a more dovish stance by the major central bank the risk assets may extend recent gains.
The latest reports from the Polish economy showed a solid expansion. After very positive reports from the labor market, the data on industrial production and retail sales surprised today.
Industrial production increased 6.7 percent in February against the 5.5 percent forecast. In the prior month, it increased 1.4 percent. The consumption growth had also exceeded the forecast. It increased 3.9 percent on a yearly basis, after rising 0.9 percent in the prior month. The forecast was for a 3.3 percent growth.
However, the producer prices index missed the forecast. The gauge dropped 1.4 percent against the prior year. The forecast was for negative 1.2 percent. The data suggested that the inflation rate above the zero level is still a distant perspective. The latest numbers on consumer inflation had also missed the forecasts.
Strong economic expansion is coupled with an environment of low inflation. At the last meeting, the Monetary Policy Council said it would not adjust the level of interest rates, as the economy is balanced. A similar view was presented in the minutes from the March meeting. As a result, the probability of rate cuts is still very low. However, if the inflation rate remains at the current level in the long term, the MPC may be pressured to act.
Nevertheless, it is not a probable scenario. In contrast, the factors that will support the zloty in the long term are dovish stances of the major central banks.
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