Market awaits data (Daily analysis 1.02.2019)

01.02.2019 14:18|Marcin Lipka

The investors hesitate whether the message from the Federal Reserve is as dovish as suggested by its head and statement after the FOMC meeting. Unclear impact of data from the US labour market. The zloty maintains the recent increases, but weak PMI does not help the Polish currency.

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

  • 2:30 p.m.: Labour market in the US in January. Change in employment in non-farm sector (estimates: 165k), change in the average wage (estimates: 0.3% month-on-month and 3.2% year-on-year), employment rate (estimates: 3.9%).
  • 4:00 p.m.: ISM index from the US industry (estimates: 54 pts).

Market does not believe in Fed?

Since yesterday afternoon until the start of Friday's session in Europe, the dollar has pared some of the last losses. This was a surprising move, as the message from the Federal Reserve on Wednesday was very dovish, suggesting no further interest rate hikes.

However, some investors started to question this approach. There were also articles (e.g. in the Financial Times) suggesting an overly abrupt or even irrational decision made by the Fed, taking into account economic conditions (economic growth above potential all the time and no clear increase in risks compared to December) or inflation prospects. There were also speculations that if the Fed had changed its attitude so clearly compared to December, it could as well do so in the other direction if the prospects for the US and global economy were better than currently expected.

An argument against the dollar's depreciation is also the behaviour of economies in other currency areas and thus the consequences for their monetary policies. It is known that the trend in the eurozone is declining, as shown by Italy's entry into recession and the long-term lows on leading indexes for the future economic situation. This may lead the ECB to maintain negative interest rates in the region, so the difference between interest rates in the eurozone and the US will not decrease at all. This means that the outflow of capital from the dollar is unlikely to go to the eurozone.

For the time being, it is not possible to expect that the pound will be the favourite choice of investors. The Brexit process is prolonged and although an agreement is likely to be reached which will prevent chaos in the exit process of Britain's from the EU. Moreover, after the recent decisions of Prime Minister Theresa May (renegotiation of the agreement at the last minute) the risk of disorderly Brexit has rather increased.

Another argument that could have helped the dollar and at the same time confirmed the suspicions that monetary policy might be milder in many countries. There were speculations (e.g. published by Bloomberg) that due to the economic downturn in China, the local central bank (PBOC) could lower interest rates even today.

When these rumours were not confirmed, the dollar weakened slightly in the early Friday afternoon, but it is still not as strong a decrease in its value as one would have expected after Wednesday's change in the Federal Reserve's attitude.

US labour market and the zloty

In the afternoon, data from the US labour market will attract market attention. It is worth noting, however, that it may be strongly disrupted by the shutdown observed since the beginning of 2019. This may apply both to surveys conducted in households from which unemployment or wages as well as surveys on changes in employment conducted in the non-farm sector.

Therefore, in theory, the market should be slightly excited by today's reading, as one-off factors can very clearly distort it. Also, the range of estimates of new payrolls resulting from Bloomberg's surveys among economists is extremely wide (from estimates of job losses to growth exceeding 200k).

However, it cannot be ruled out that the market will still react to strongly distorted data. This reaction should be negative for the dollar, as it will probably be difficult to maintain strong wage growth at the level of 0.3% month-on-month and 3.2% year-on-year. Weaker readings may also show that the Fed may be right with withholding further interest rate increases, as the economic situation is slowly going out. It seems that the dollar will lose rather than gain from the publication of payrolls.

As far as the zloty is concerned, it is in a relatively good condition, but it has lost part of the strengthening observed after the mild message from the Fed. In addition, PMI readings (for January) from the Polish industry were not impressive again (staying below 50 points, the biggest drop in production since 2009). As a result, the chance to further increase the scale of the Polish currency appreciation significantly decreased, especially if the market further questioned the maintenance of the very mild message of the Federal Reserve at subsequent meetings.

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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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