Daily analysis 12.09.2016:
Rosengren's testimony has caused a clear deterioration of the global sentiment. This afternoon Lael Brainard will be in center of attention, because she has a chance to decrease appreciation pressure on the dollar. The zloty basically did not benefit from unchanged rating.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 19.15: Lael Brainard's testimony.
Sudden reaction on Rosengren's words
Eric Rosengren's testimony on Friday had become an argument for an intense sale in the shares market, an increase in the American two-year treasury bonds and appreciation of the dollar. The Boston FOMC member sounded really hawkish. However, are his views really shared by the rest of the voting Federal Reserve members?
Before we will try to answer this question, it's worth noting why the reaction was so strong. Rosengren has been considered a neutral, or sometimes even dovish member of the FOMC. Moreover, his hawkish statement from May (however, not as hawkish as the one on Friday) was considered as a start of a more serious discussion regarding rate hikes, which had been stopped by weaker macro data and Brexit.
Currently, the temperature of the discussion regarding rate hikes in the USA is growing yet again. With his hawkish testimony, Rosengren has made an impression that rate hikes are necessary. He took note of the risk of overheat of the American economy, as well as its impact on monetary tightening.
However, the basic question is, do the other Federal Reserve members (mostly the Fed governors) support such views. In our opinion, it's very doubtful. This is suggested by Daniel Tarullo's statement, for example. He was interviewed by CNBC shortly after Rosengren's testimony has been published.
The Fed governor said that he is among those FOMC members who would like to wait for more convincing evidence regarding inflation. He also took note that the employment level continues to grow, but the unemployment level is not decreasing. This means that the economy is not overheating in his opinion. Tarullo was also directly asked by Steve Liesman of CNBC about Rosengren's statement who showed his concern of financial stability regarding low interest rates. However, Tarullo claims the we are not dealing with such situation these days.
As a result, Rosengren's two main arguments have been denied by Tarullo rather quickly. However, the market ignored these statements and carried on with the scenario that has been started after the statements from the Boston FOMC representative.
Lael Brainard in center of attention
Lael Brainard will have an opportunity to reverse the situation from Friday today after 19.00 (7.00 PM). She is one of the most dovish FOMC representatives and she is also in the Board of Governors. In her testimony from June, she mentioned many long-term arguments for necessity of keeping interest rates at a low level for a long time.
Brainard took note that employment for people within the range of 25-54 years is still clearly below the values from before the crisis. Moreover, the salaries growing slowly. This goes to show that the economy still has some free supplies of workforce.
In June, the FOMC representative also focused on a low base case inflation and the GDP. She also presented arguments for a significant sensitivity of the American currency for the monetary tightening. Just like many other Fed members, she was also concerned with a low productivity.
Many of the above arguments are fundamental. They have not changed over the past quarter. Therefore, they will most likely appear in today's testimony as well. However, it is not clear whether the market would react to this data. Much depends on what elements would attract the attention of information agencies.
Despite all of these doubts, we think that Lael Brainard's testimony should cause a work-off of the recent growths on the dollar, as well as the debt instruments profitability.
Moody’s did not change the rating
Moody's did not change Poland's rating on Friday, just as we expected. However, this did not cause a visible appreciation of the zloty, due to a clear deterioration of the global sentiment, as well as an overvalue of the emerging market currencies (we focused on this in the Afternoon analysis on Friday).
However, there is no doubt that this information is positive for the zloty. If the loan credibility had been reduced, the EUR/PLN would probably be testing the 4.40 area with such a sudden increase in risk aversion. If the situation in the global market begins to stabilize (after Brainard's testimony today, for example), there will be a chance that the euro exchange rate will begin to go towards 4.30. The zloty would become stronger to the other emerging market currencies as well.
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