Afternoon analysis 03.01.2017

Today’s data confirms a positive condition of the German labor market. However, the highest inflation growth in more than three years was the most surprising. The zloty is stronger, thanks to positive data from Germany.

German labor market

Destatis announced that employment in Germany was at the level of 43.8 million in November 2016. This was a 305k increase in the Year over Year interpretation. However, employment growth has been gradually decreasing in the second part of 2016. This index was a the level of 1.1% in June, 0.9% in July and at the level of 0.8% between August and October. Employment growth in November was at the level of 44k MoM. This was slightly higher than the five-year average (37k).

In November, the unemployment level decreased by 17k, to the level of 1.71 million. This was this index’s largest decrease since January 2016. Last year, this result was 11.9% higher (1.94 million). In the Month over Month interpretation, this index was 0.1% lower. However, seasonally equaled data showed that unemployment rate didn’t change in cpmparison to October (4.1%). The seasonally equaled data regarding employment rate was also better and showed a 0.3% increase (66.7%).

At 2.00 PM, Destatis published the CPI data for December (1.7% YoY and 0.7% MoM against the expected 1.5% and 0.6%, respectively). At the same time, the Year over Year result was the highest in more than three years. The available data also shows that the average German inflation in 2016 was at the level of 0.5%.

Prices increased from 0.8% in November to 1.8% in December. The largest increase was quoted in prices of food and energy (2.5%). The baseline inflation was at the level of 1.5% YoY. Impact of increasing oil prices will gradually fade away. Therefore, inflation will be crucial in the forthcoming months. If this index continues to increase, this would support the euro.

American ISM

The American industrial ISM for December was at the level of 54.7 points. This result was definitely better than the market consensus and the reading from November (53.8 and 53.2, respectively). Moreover, this is this index’s best result since December 2014. The prices subindex reached the level of 65.5 points, which was its highest value in five years. Subindexes of employment and new orders were better than expected as well (53.1 and 60.2, respectively). Due to this data, the EUR/USD reached its fourteen-year minimum (1.034).

Zloty is stronger

Today, the zloty was losing against the dollar. Due to the positive ISM, the USD/PLN reached the level of 4.23-4.24, despite the zloty’s attempts to work-off its losses. The zloty remained weak against the forint. However, the PLN/HUF was going further from the level of 70. We could also see an improvement in the zloty’s quotations against the euro.

The EUR/PLN went below 4.39 after the German inflation data. This was its lowest level since November 11th, 2016. Positive condition of the German economy will most likely be positive for the Polish economy. In January, we will know the decision from the Polish Monetary Policy Council regarding interest rates. Speculations regarding rate hikes may return after improving condition of the German, as well as the Polish economy. This would be positive for the zloty.

Tomorrow’s events

IHS Markit will publish the data regarding the services PMI for December. This will be the second reading for Germany, as well as for the euro zone. Therefore, we shouldn’t expect any larger changes. At 9.55 AM, we will receive the German index. The euro zone data will be published five minutes later. The market estimates that both indexes will remain unchanged (53.8 and 53.1, respectively). However, due to positive data regarding the industrial PMI from yesterday, investors may expect the services data to be slightly better than expected. Positive data would support the euro, but its impact will most likely be relatively limited. This is due to the difference between the American and the European monetary policy.

At 10.30 AM, Markit/CIPS will publish the building PMI for the United Kingdom. This index went clearly below the level of 50 points shortly after the referendum. This means that the activity of this sector decreased as well. However, it has been gradually increasing since September and reached the level of 52.8 points in November. The market expects further growths (53.0 points). If the building sector index is positive, this may support the British currency. Currently, the GBP/USD is near the level of 1.23.

At 11.00 AM, the Eurostat will publish the initial CPI data for December. At that time, prices within the euro zone most likely increased due to increasing oil prices. The market consensus assumes that this index will grow 1% YoY (the highest in more than three years). However, after eliminating the products that are relatively volatile (food, energy, alcohol, tobacco), the baseline CPI is expected to remain unchanged. Increasing inflation is theoretically positive for the euro. However, this impact is limited by the European Central Bank’s accommodative monetary policy.

At 8.00 PM, the Federal Reserve will publish the minutes from their previous meeting (in December). During this meeting, interest rates were raised by 25 base case points. Moreover, expectations regarding rate hikes for 2017 increased from two to three. Therefore, we expect the minutes to emphasize the Fed’s hawkishness. What may be interesting are expectations regarding the planned fiscal stimulation, as well as its impact on the Fed’s decision. If the growing dollar is considered as a result of improving condition of the American economy, this would be positive for the American currency. This morning, the EUR/USD went below 1.04.