Afternoon analysis 04.01.2018

Strong end to the year at the US labour market - employment and earnings above expectations. Part of the concerns about economic growth is fading and some of the fears about interest rate rises are also disappearing. The zloty is slightly weaker, but the risk of depreciation is limited despite dollar appreciation.

Clear improvement in sentiment

The last session in this first week of the new year started with positive sentiment. Strong gains were observed on the equity markets around the world, and a greater appetite for risk somewhat reduced the yen and the franc's valuation. Today, PMI reading of the service sector and the aggregate one failed slightly, being 0.7 and 0.6 points lower, respectively, than the initial data. Those for France were 0.6 and 0.7 points lower, respectively. However, the most important data, i.e. the core index of consumer inflation in December in the eurozone turned out to be in line with the consensus and amounted to 1.0% per year. After all, the data's impact on euro quotations or market sentiment was very limited, although lower than expected activity in Europe's two largest economies may later put some pressure on the euro.

Mainly because the dollar received an impulse of positive information today. The awaited report from the US labour market in December brought some surprises. Yesterday, a publication by a private company ADP suggested that the growth of new non-farm payrolls was high (271,000). However, today's data from the Department of Labor exceeded this: the increase in employment by 312,000 was the highest since February 2018. The average for the last quarter was 254 thousand, 33 thousand more than last year. Employment in the whole 2018 grew by 2.6 million in the economy, 18% more than last year.

This was not the end of good data. The average hourly earnings increased by 3.2% in December compared to December 2017. This is 0.2 percentage points more than the market consensus indicated and 0.1 percentage point more than the level of November. The index of economic activity also increased from 62.9% to 63.1%.

This is good data for both the dollar and the equity market. Positive international trade reports (next week's US-China talks) combined with very strong employment growth may reduce fears of a strong economic slowdown and a decline in demand (which was feared by the market recently and which translated into an increase in risk aversion). Yesterday's very weak reading of ISM's activity in the industrial sector may be largely ignored, mainly as this could have been influenced by significant depreciation in the equity market and concerns about trade (ISM produces data based on surveys).

The EUR/USD quotations fell to about 1.1350 before 4:00 p.m., from 1.14 before the labour market report was published. After such good data and the aforementioned weaker PMI of Germany and France, the euro may be under slightly more supply pressure, which may push the EUR/USD pair even lower.

A potentially strong fall in the main pair's quotations could weaken the zloty basket. It was already weaker today, although the changes were within the fluctuation range of recent days and were relatively limited. In the case of appreciation pressure, the very good sentiment on the equity and commodity market (oil prices rose by more than 3% around 4:00 p.m.) should protect the zloty against a deeper depreciation.

Next week's preview

On Monday, ISM will publish PMI data for the US service sector in December. A similar index for the industrial sector failed expectations, which weakened the dollar. If a similar decline also occurs in services, in theory, this could add an argument to fear about a faster than expected economic slowdown. Theoretically, because after today's data from the US labour market, the reading from ISM may also be largely ignored.

On Wednesday evening, the record of the talks of the last Federal Reserve monetary committee meeting will be published. The minutes may provide some more detailed arguments in favour of flattening the members' expectations regarding the future level of interest rates (dot plot). Currently, there are concerns about lower global growth pace, but also the USA growth in the coming years and later. If such suggestions also appear among FOMC members, this could weaken the dollar.

On Thursday, the European Central Bank (ECB) will present a similar publication. However, here the situation is somewhat clearer - the ECB does not intend on raising interest rates or changing its message for the time being (currently, there is a plan to keep the rates unchanged at least for the summer holiday period this year). Therefore, the impact on euro quotations will be rather limited.

On Friday morning, data from the British economy will be published, including the one on industrial and construction production, GDP growth pace and foreign trade balance. Looking at the recent significant fluctuations, the data may increase the pound's volatility. In theory, it could also change the pound's value a lot, but after next weekend there will be much more important events for this currency. On the week beginning January 14th, the British Parliament is expected to vote on the Brexit plan. This event will have, at least in the short term, the biggest impact on the pound's quotations.

The same day in the afternoon, December's consumer inflation (CPI) data will be published in the USA. Core inflation data (excluding energy and food prices) will be the most important. If the core index exceeds 2.2% per year (last reading and consensus also), it may result in a significant increase in the dollar's value, strengthening the argument about the need for monetary tightening. A higher chance of faster monetary tightening together with fears of economic growth could negatively affect sentiment on the broader market, putting pressure on the equity and currency markets of emerging countries, including the zloty.