Afternoon analysis 01.04.2016

The dollar gained in the US labor market data. The wage growth was more important than a higher unemployment rate. The zloty kept its earlier gains.

The US labor market surprised positively. Non-farm employment increased more than expected (215k against 205k that was expected) and wage growth stood at 0.3 percent against the 0.2 percent forecast. Given the other reports, a higher unemployment rate (at 5 percent against 4.9 percent) was not a significant negative factor.

After the release, the dollar gained against the euro. The EUR/USD dropped from the highest level since October 2015, but it hovered above the 1.14 level. The move was limited due to the fact that the Fed has recently moved to a more dovish stance.

Yesterday, the York Fed President William Dudley presented quite a dovish stance. Earlier, a similar stance was shown by Fed Chair Janet Yellen and Chicago Fed President Charles Evans. The labor market situation has been very good for quite a long time. However, the Fed’s major problems are low inflation pressure and deterioration in the global economic situation. As a result, until the situation in these areas improves, the Fed will be rather dovish - thus the dollar will remain under negative pressure.

The Chinese PMI

The factor which may positively affect the markets, has been better than expected data from the Chinese economy. The PMI index not only gained more than the forecast, but it also returned to the level that suggests expansion. It stood at 50.2 against the 49.3 forecast and 49 in the prior month. It has been the first reading above the neutral level of 50 in nine months.

Concerns regarding China were the major risk factor at the beginning of the year. They were strong enough to force the Fed to loosen its stance (the US central bank refrained from four interest rate hikes plan announced in December). Although today's data has not cleared the situation, it suggests some improvement. The Fed may be forced to revise its plans, it the situation evolves positively.

Stable zloty

Today, after a streak of positive reports concerning industry, retail and employment, the PMI index was better than the forecast. The gauge increased to 53.8 from 52.8 in the prior month. It has been the highest reading in nine months.

The report showed an increase of production and higher domestic and abroad orders. The costs fall, but at a slower pace than they did previously. The PMI report confirmed an ongoing expansion in the labor market. All in all, the latest data suggests that the slowdown observed at the beginning of the year was only transitory. The next reports will probably confirm that the Polish economy expansion will continue.

In the context of interest rate expectations, the latest reports support the basis scenario to stabilize the level of interest rates. A lower than expected inflation growth will rather not push the MPC to cut rates as the economic expansion is very strong. A somewhat hawkish stance of the MPC may stabilize the zloty in the long term. Given the situation, the basis scenario for the zloty is to stabilize with a tendency for appreciation.