Afternoon analysis 05.01.2017

According to the British PMI, the services sector activity was definitely better than expected. However, the British companies are experiencing the highest inflation pressure since 2011. The weaker dollar helps the zloty to sustain its gains.

Growths in British services sector

Today’s CIPS/IHS Markit report states that activity in the British services sector increased in December. This index has been increasing for the third consecutive month and reached the level of 56.2 points, while the market consensus assumed a 0.5 points decline in comparison to November (55.2 points). This result was mainly caused by an increase in new orders. Employment subindex remained unchanged. Nevertheless, the company sentiment for 2017 increased, despite that uncertainty regarding Brexit remains.

However, the production costs growth was at its highest level in sixty-seven months. This was mainly caused by the weaker pound and the recent increase in the oil prices. The IHS Markit business economist, Chris Williamson, claims that the collective PMI indicates a 0.5% economic growth in the fourth quarter of 2016. Last month, the British currency wore-off to the level from the beginning of November.

Despite positive macroeconomic data, the pound remains weak. This is due to the negative Brexit-related sentiment. The pound’s appreciation may be caused by rate hikes in the United Kingdom, or clear intentions of doing so, from the Bank of England.

Mixed American data

Today’s ADP report regarding employment changes in the American private sector for December, was slightly disappointing. This index increased by 153k, while the market consensus was at the level of 170k. Weak results were quoted in production sector (negative 16k). However, this disappointing reading was caused by decrease in industrial processing (negative 9k). Moreover, the smallest companies (1-19 employees) quoted a result at the level of negative 3k.

Nevertheless, the American jobless claims data from the American Labor Department was positive (235k vs 236k). Moreover, this result was near the historical record from the beginning of November 2016 (233k). This decline was most likely related to the holiday season. However, the amount of people who use insurances for unemployed reached the level of 2.1 million, which is its highest level since September 2016.

Investors ignored this data in the majority of cases. Shortly after the data from the Labor Department, the EUR/USD reached the level of 1.0540 and the USD/JPY went down to 116. The yen’s appreciation against the dollar was not only caused by the weakness of the American currency. The yen strengthened to the majority of currencies. Last night, the Bank of Japan published the data regarding its monetary base, which increased 23.1% YoY in December. This was its highest growth since August 2016.

Shortly before realising this afternoon analysis, we received the data regarding the American ISM for the services sector for December. This index didn’t change in comparison to November (57.2 points). However, this result was better than expected (56.6 points). The majority of subindexes remained at similar levels. Nevertheless, the employment subindex decreased from 58.2 to 53.8 points. This reading caused the EUR/USD to reach the level of 1.0555.

Zloty is stable

The zloty managed to sustain its gains. This happened due to the weaker dollar, as well as decreasing profitability of the American treasury bonds. The USD/PLN reached the level of 4.14, which is its lowest since the 8th of December. At approximately 3 PM, the euro was at a similar level, as it was this morning. During the day, the EUR/PLN reached the level of 4.38 at maximum. Moreover, the PLN/HUF increased to from 70.5 to 70.65.

Tomorrow’s events

Due to the Epiphany, the Polish stock market will be closed tomorrow. Nevertheless, the market will receive some crucial data. At 8.00 AM, Destatis will present the data regarding the German industrial sector for November (retail sales and orders). Potential changes in the retail sales components are significant, because they show the consumption level, which determines the economic growth. The data for October was disappointing. Instead of a 1% YoY increase, this index quoted a 1% YoY decline.

Currently, the market consensus assumes this index to increase 1.2%. This would confirm a positive condition of the German economy, which was suggested by other positive data for November (labor market, inflation and PMI, among others).

The order component has been historically volatile. In August, this index increased 0.9% MoM and decreased 0.3% MoM in September. Moreover, it increased again in October (4.9%). The market consensus is at the level of negative 1.9% MoM and positive 3.7% YoY.

At 2.30 PM, we will know the American labor market data for December. This will be Friday’s main event. In November, the unemployment rate was pushed to its lowest level in more than nine years (4.6%). Investors will also focus on the data regarding the average hourly wage and the private sector employment.

November also brought the first decline of the average hourly wage index in nine months (negative 0.1% MoM). The market expects a positive 0.3% result for December. Employment in the non-agricultural sector is expected to increase slightly (175k). However, this growth will most likely be neutral for the dollar.

If the above mentioned data confirms a positive condition of the American labor market, this may strengthen the dollar after its wear-off, which was caused by the FOMC minutes.