Afternoon analysis 07.12.2016

The German industrial production increased in October. However, this growth was worse than expected. The British industrial production was even worse, because its YoY decline was the largest in more than three years. Polish interest rates remained unchanged and the zloty sustained its gains.

Slightly worse data from Germany

After yesterday’s positive data regarding the industrial orders in Germany (4.9% MoM increase, which was the highest in more than two years) the market focused on the German industrial production data for October. Destatis informed us that its growth was at the level of 0.3%. This was worse than expected (0.8%), but still better than last month (negative 1.6%, revised from negative 1.8%).

The best result was quoted by construction production (positive 1.7% MoM). The consumer goods production index was relatively weak (positive 0.1%). Moreover, yesterday’s data indicated that orders for consumer goods increased only by 0.5%. However, production of energy, as well as of intermediate products, went down by 0.5% in October. We need to keep in mind that industrial production has been historically volatile in the Month over Month interpretation.

A high level of orders in the German industry may translate to an increase in industrial production in the forthcoming months. This, combined with already increasing production, may eventually be positive for a larger economic growth in the fourth quarter. The euro’s reaction was relatively limited today. This is mostly due to the anticipated decision from the European Central Bank, which will be revealed tomorrow.

Disappointing industrial production in UK

Today, the Office for National Statistics published a report, which indicates that the British industrial production went down by 1.3% MoM and 1.1% YoY. These were its largest declines since January 2013 and August 2013 in the Month over Month and Year over Year interpretations, respectively. Industrial processing decreased as well (0.9% MoM and 0.4% YoY).

This data was a result of negative pressure from the mining sector (8.6% MoM and 8.7% YoY decline). The worst result in the industrial processing sector was quoted by pharmaceutical products (negative 3.6% MoM and negative 7.5% YoY). Moreover, it had the largest contribution to the decline of industrial processing.

The above data was disappointing for investors and it will create negative pressure on the pound. Even though this index’s contribution to the GDP is at the level of 14.6%, its depreciation may verify the view that the British economy is resistant to Brexit. Moreover, this may decrease the GDP growth, as well as wear-off the pound, which would cause stagflation.

Yesterday, the GBP/USD reached the level of approximately 1.28. However, this pair went below 1.25 today. In the case of weaker data regarding the services sector, the British currency leaves a path of slow appreciation, which has been observed since the beginning of November.

Polish currency is stronger

This afternoon, the zloty emphasized its growth by sustaining its previous gains. This was caused by a better global sentiment towards the emerging market currencies, as well as by a relatively stronger zloty. This rebound of the Polish currency may be disturbed by the decisions from the ECB (tomorrow) and from the Federal Reserve (next week). Both of these events may deteriorate the sentiment towards the emerging market currencies.

At 4.00 PM, the National Bank of Poland published the announcement from the Monetary Policy Council. Its content was consistent with expectations, which means that the interest rates were left unchanged. Moreover, the Council confirmed that the GDP growth for the fourth quarter will probably be worse due to decreasing investments. According to the MPC, this is caused by a temporary decrease in the use of EU funds after the previous financial perspective for the EU. Additionally, investment dynamics are decreased by uncertainty among enterprises.

The Council estimates that future GDP growth will be supported by an increase in consumption dynamics. According to the MPC, the investment dynamics should rebound in the second half of 2017 and this should support the economic growth as well. Moreover, the current level of interest rates should support the balanced growth of the Polish economy.

Tomorrow’s events

The European Central Bank will make its decision regarding interest rates and the QE program. This will be revealed at 1.45 PM. According to the current euro zone’s monetary policy, the refinancing operations rate is at the level of 0% and the deposit rate is at the level of negative 0.4%. Moreover, the central bank’s credit rating is at the level of 0.25%. Additionally, the ECB assets purchase is at the level of 80 billion euro per month.

The market doesn’t expect the above mentioned values to change. However, there have been speculations regarding a change in the period of asset purchases. The current assumptions suggest that it will last until the end of March 2017. The market consensus assumes that this program will be extended (the recent Bloomberg survey shows that the likelihood of this is at the level of 70%.) The euro eventually strengthened after the Italian referendum. The EUR/USD is near the area of 1.08.

The euro’s behavior has been slightly against common intuition. This is because the stimulation of the euro zone’s economy, with the extension of assets purchase program, will create negative pressure on the euro for the long-term. If the QE program is extended (with other conditions remaining unchanged), this will most likely wear-off the euro. This may be good news for the zloty, which has recently been weak. The demand for the Polish currency, as well as for the Polish treasury bonds, may eventually increase.

Mario Draghi’s press conference will be held at 2.30 PM. The ECB chairman will speak of the current, as well as of the future, monetary policy. Investors will search for clues regarding the future ECB activity that may significantly impact the fluctuations of currencies, as well as of the stock market indexes. At 2.30 PM, the American Labor Department will also publish data regarding last week’s jobless claims.

At the beginning of November, jobless claims reached their forty-year minimum (233k). However, their value has increased over the two succeeding weeks. Last week’s report indicated a result at the level of 268k, which was the highest since the end of June. The market expects the next reading to be at the level of 258k. Keeping in mind that, despite this index’s increase over the past two weeks, it still remains near its historical minimum. This is why this data will have a limited impact on the dollar, because of more significant information from the ECB, as well as of next week’s decision regarding interest rates from the Fed.