European Commission’s new forecasts (Daily analysis 8.11.2018)

The dollar pares some losses, but the environment is less favourable for the US currency than it was at the beginning of the month. According to the European Commission, Italy's public finance deficit will exceed 3.0% of GDP. The zloty is stable despite the dovish message from the Monetary Policy Council. The Fed should not have a clear impact on the zloty's situation.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 8:00 p.m.: Statement publication after the two-day Fed meeting.

Dollar strengthens but has fewer arguments for support

A strong US equity session significantly increased the yields of US Treasury bonds. On instruments maturing in 5 years, the value of 3.08% was exceeded, i.e. the highest level in 10 years. It is worth noting that although the situation for the dollar remains favourable, there may still be no arguments for a decrease in EUR/USD below the 1.1300 limit.

Relatively good global sentiment is not only the result of increases in the US markets but also of lower oil prices. The matter of foreign trade and the customs war with China also looks less pessimistic than in October. Coming closer to a solution to this problem (e.g. at the G20 summit at the turn of November and December) is very likely to harm the dollar and help currencies in Asia (especially the yuan).

The Federal Reserve is not expected to change the message significantly. Today's meeting will probably not provide any guidelines for the bond and dollar markets (no conference, no new economic projections). Recently (between 1 August and 26 September), no word in the statement has changed except for technical issues (interest rate increases and date related issues). On Thursday evening, we will probably be able to read the same as on September 26th (strong labour market, strong growth in investment and consumption, core inflation close to target). Although we are still positive about the dollar and new highs seem to be ahead of us, achieving them may be more difficult and spread over time.

European Commission's estimates

There is little positive information for the eurozone from the most recent EC economic projections. This is particularly the case for Italy. According to the European Commission, Italy's public finance sector deficit is expected to reach 3.1% in 2020. The structural deficit is expected to reach 3.0% of GDP next year, i.e. by 1 percentage point above what was expected in the spring estimates.

The EC estimates that in 2019 Italy will devote as much as 3.8% of GDP to debt service costs (the highest in the EU) and 0.3 percentage points of GDP more than was estimated in spring. Service costs will, therefore, be 5 billion EUR higher than expected, and in 2020 they are expected to grow further and reach 3.9% of GDP (approx. 66 billion EUR).

Most of the negative changes related to Italy's indexes concern the plans of the new coalition in power in the country. The EC notes that "the growth outlook is burdened with high uncertainty due to growing negative risks. Persistently high levels of fiscal yields will worsen financing conditions for banks and further reduce the availability of credit, while public spending can push private investment out". The key issue now will be whether Italy will modify its budgetary plans next week. If not, it could be once again a catalyst for euro depreciation against most currencies.

Stable trading in zloty

The most important element of yesterday's press conference after the MPC meeting was the presentation of basic economic indexes from the November Inflation Report. In particular, attention was drawn to the strong upward revision of consumer price growth expectations for next year (from 2.7 expected in July to approximately 3.2-3.3%). At the same time, it was linked to a still dovish statement from the Council suggesting that this price increase is to a large extent related to higher electricity prices, which, according to the MPC, are of a one-off nature and at the same time interest rates are not able to counteract them.

According to the statement, the bar for the MPC to raise interest rates is high. Therefore, the chance for any tightening of monetary policy in the next two years, despite yesterday's and today's increase in FRA 21x24 contracts (Wibor 3M for 21 months) to 2.28 to 2.36%. As a result, this is negative information for the zloty, but it will probably be spread over time. The coming hours should be relatively calm in the zloty's quotations, and this calm will probably not be disturbed by the FOMC message, which is not likely to cause deeper global movements either.