Afternoon analysis 28.04.2016:
Unemployment in Germany unexpectedly declined. Prices continue to drop in the eurozone. The US GDP growth the weakest in two years. The zloty remained at low levels.
The German economy continues to surprise. Recently, the industrial sector data surprised positively. Production and orders were higher than expected. Moreover, the sentiment indexes improved. A positive tendency has been shown by the reports on PMI, Ifo and ZEW indexes.
Today, the labor market reports surprised positively. The number of unemployed dropped 16k, which was more than anticipated. Moreover, the prior month’s reading was revised down to negative 2k. As a result, the unemployment rate stood at 6.2 percent. Last time the unemployment rate was this low was more than 25 years ago.
The latest data from the German economy suggests that the slowdown seen in the beginning of 2016 was only transitory. The strong labor market reflects that companies expected a rise in demand and as a result, will continue to increase the employment level.
In March, employment increased 44k to the record level at 43.4 million. The German government expects the employment level to increase to 43.5 million this year and to 44 million next year. Given the strong labor market, consumption may be the major growth engine. Moreover, the economy will be less susceptible to a slowdown in China and other emerging countries. It is also positive information for Poland, as the nation sends 28.8% of its exports to Germany.
Deflation in the eurozone accelerated. In April, prices dropped 1.2 percent in Spain against the 0.9 percent forecast. In March, deflation stood at 1 percent. The report was below expectations. Despite some improvement, the economic situation in Spain remains negative. The unemployment rate stood at 21 percent, in spite of solid GDP growth.
The Spanish data did not affect the broad market. However, the report may suggest next phase of price drops in the eurozone. If the coming data confirms similar developments, the ECB may consider adjusting its stance. The ECB left the policy unchanged at its recent meeting, and ECB president Mario Draghi was not eager to suggest more stimulus.
Slowest growth in two years
The US labor market data confirmed a strong expansion. The number of unemployment claims stood at 257k - little below the forecast. The prior month’s reading was revised up 1k, to 248k. It was the lowest level in four decades.
Still, the most important data was the GDP report. The US economy slowed down 0.5 percent in the first quarter. It was the slowest increase in two years. The forecast was for a 0.7 percent growth. The weak reading was caused by a slowdown in consumption (1.9 percent against 2.6 percent in the prior quarter) and a drop in investments.
All in all, the reading did not increase market volatility as the data was in line with the scenario outlined by the Fed. The report limits the probability of interest rate hikes. In the longer term, it may support emerging market currencies, including the zloty. However, the Polish currency did not exploit the opportunity to gain.
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