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Afternoon analysis 04.07.2016

4 Jul 2016 16:39|Marcin Lipka

What did the Fed representatives spoke of Brexit and the monetary policy on Friday? Standard & Poor's downgrades the economic growth perspective for the United Kingdom, as well as the euro zone. The zloty sustains its losses from this morning.

Fed on Brexit

There were testimonies from two Federal Reserve representatives this Friday. They had no visible impact on the market. However, it is worth noting on how do the Fed members receive the economic condition, as well as the market situation after the British referendum.

The FOMC vice-chairman, Stanley Fischer, told the CNBC television that the American monetary authorities continue to estimate the possible Brexit consequences. Fischer also announced that the Federal Reserve will not make any decisions in July. This is not surprising, considering the current situation.

Fischer also added that the economy is, “doing rather well” in his opinion. Loretta Mester spoke in a very similar tone. The Cleveland Fed chairwoman is considered to be slightly more hawkish than the consensus. She said that, “it is too soon to estimate, whether Brexit will bring significant changes in the economic perspectives.”

What is interesting is that Mester's testimony in London was divided into three parts. The beginning, as well as the end, referred to Brexit, while the middle part regarded Mester's view on the economy that did not include the referendum consequences. It is difficult to say whether it was a deliberate action, to show that Mester does not see that the United Kingdom's decision could seriously impact the American base case scenario.

The FOMC representative took note of weaker data from the American labor market as well. In her opinion, it was a, “temporary effect.” On the other hand, she added that the new workplaces range between 75-120k should keep the unemployment level unchanged.

Mester also spoke of a positive condition of consumers. In the past quarters, they were taking advantage of lower fuel prices. She spoke of the real estates market as well. Its prices have recently reached the level from before the crisis.

In general, it is very important to focus on the comments from the FOMC representatives, due to a very strong impact of the debt instruments market on the global sentiment. A rapid improvement of the global sentiment, as well as a relatively small strengthening of the dollar, could be observed because of a decrease in profitability of the American treasury bonds and reduction of future interest rates on terminal contracts.

The market continues to anticipate the next hike for the beginning of 2018. If the Fed representatives begin to suggest that Brexit does not impact their plans regarding the monetary policy (or this impact is small), the profitability will most likely rebound rather quickly. This should be a positive sign for the USD.

S&P on the growth. Zloty remains weak

In today's Standard & Poor’s report that was cited by the Bloomberg agency, it states that because of Brexit the economic growth in the United Kingdom will be by 1.2% and 1% lower in 2017 and 2018, respectively. These calculations are a result of comparison to the rating agency's previous estimations.

The S&P also takes note that in comparison to the previous estimations, the euro zone economy will slow down by 0.8% per year in two next years, due to Brexit. We may claim that these differences are rather serious. Moreover, they are most likely to have a visible impact on the Polish economy as well. However, there was no particular data regarding Poland in Friday's review of the national ratings, apart from the remarks regarding Brexit.

The Polish currency continues its low quotations from the morning. For the time being there are no signs for an improvement in the PLN situation. Thus, the euro is most likely to remain in the 4.43 area in forthcoming hours. The franc should remain below the 4.10 level.

4 Jul 2016 16:39|Marcin Lipka

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 acknowledgement of the source is prohibited.

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