Daily analysis 23.06.2017

23.06.2017 12:38|Marcin Lipka

Below expectations PMI data from the euro zone without impact on the common currency. Bullard on the aggressive monetary tightening path in the US. The pound was marginally supported by Kritstin Forbes comments on the need to raise the interest rates. The zloty remains stable after yesterday’s strengthening.

Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information unless marked otherwise.

  • 15.45: Preliminary PMI readings from the US service and manufacturing sectors (survey: 53.5 and 53.0 points respectively,
  • 16.00: New Home sales in the US (survey: 590k).

Limited impact on the lower PMI readings

The June PMI composite index for services and manufacturing in the euro zone was below expectations. It reached 55.7 points while the broad market consensus was 56.6 points and the previous reading topped 56.8 level. Generally, however, the indicator above 55 mark should be considered positively, as it was stressed in parts of the IHS Markit research.

It is also worth noting that the slowdown was primarily in the services sector. The manufacturing component has risen for the euro area to its highest level in 74 months. While the services are responsible for most of the GDP growth, manufacturing has been fairly muted in recent years. Better results for the industry sector (both on the internal and external markets) increases the chance that recovery will be longer and more sustainable.

The PMI readings looked also positively for France. The employment component rose at the fast level since almost 10 years. Following the job market news Alex Gill, IHS Markit economists wrote that “Over a longer time horizon, with Emmanuel Macron’s “La Republique en Marche” now holding a majority in the national assembly, proposed labour market reforms are likely to occur which could help further reduce unemployment”.

The IHS Markit also expects, given historical correlation between the PMI and the GDP, that in the euro area economic growth in the second quarter may accelerate from 0.6% q/q to 0.7% q/q. If this projection turn out to be true it would be the fast quarterly development of the common currency area in 6 years.

Bullard and Forbes

Yesterday, “The Wall Street Journal” published an interview with James Bullard. He is regarded as the most dovish MPC member (the one who does want to seen no more rate increases).

Although Bullard does not have voting rights both in 2017 and 2018 his views may have some impact on the market and can be quite surprising. He stated that “The trajectory that the committee has laid out seems to be to be inappropriate given the situation that we’re in”. Federal Reserve Bank of St. Loius President also added that “projections to raise the federal-fund rate to 3% over the next 2.5 years is unnecessarily aggressive”. More active presence from dovish members (comments from Evans, Kashkari arguments explaining his vote against the benchmark hike) may still keep the market interest rate low and therefore preventing dollar from appreciation.

The opposite direction was taken in the other central bank – the Bank of England. Its the most hawkish member Kristin Forbes (leaving on June 30th) suggested that the declined of the pound and the lowest unemployment rate it 40 years combined with inflation pressure should be sufficient to hike the interest rates. Forbes also noted that the central bank should respond more quickly to the signals coming from the economy.

After the BoE June interest rate decision (3 out of 8 members voted for a hike) and recent hawkish comments from previously dovish Andrew Haldane may increase speculations on the rate increase during the incoming central bank meetings. It may even happen with a strong opposition from the BoE governor Mark Carney. This fact may prevent the pound against the downward pressure form Brexit issues.

The zloty maintains gains

Yesterday’s relatively good US stock market performance for the majority of the session and very limited expectations for further interest rate hikes helped the PLN. The domestic currency was also probably supported by better than expected data on the Polish budget. Deficit after May was only 200 million PLN which is the lowest value at least in 20 years. Additionally the VAT receipts for January-May increased 30% y/y. This information reduced the risks of breaching the 3 percent mark for the public finance deficit not only for this year by also for 2018.

If the global sentiment does not deteriorate significantly the zloty should be fairly stable in the afternoon trading around 4.23 level. Only some downward pressure on the US stocks combined with lower oil prices could lift the EUR/PLN toward 4.25. For today, however, it should not be the baseline scenario.

 


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