Afternoon analysis 09.10.2017

Despite the September elections in Germany, economists’ sentiment rose both in Germany and in the euro area. No substantial changes to the zloty, however, continuation of the good sentiment could support it.

Positive data from the eurozone

Further positive data regarding the euro area was published today. The sentix economic index (based on a survey of 992 investors, 267 of those being institutional) rose in October to 29.7 points, which was the highest level in 10 years. The main components, namely the assessment of both the current situation and future expectations increased, as well.

A similar situation was observed in the index for Germany, which grew for the second consecutive month, despite the September elections. The continuous positive state of the German economy was further bolstered by the industrial output data in August, which increased 2.6% from the previous month, even though an increase of more than three times smaller was expected (0.7%).

Production in the energy sector increased by 1.7% on July, while it fell in the construction sector by 1.2%. The volatility has historically been relatively high in those sectors – if excluded, the industrial output would rise to 3.2%. The highest increase was noted in the production of capital goods, which was up by 4.8% when compared to the previous month.

Although the industrial production data has generally been quite volatile, it contributed to an improvement in the market sentiment, when put in the context of previous positive macroeconomic data regarding both Germany and the eurozone. The main European indexes gained in most cases and Germany’s DAX reached all-time highs closing in on 13,000 points.

The aforementioned positive sentiment in the region could support the euro, which also profits from the dollar’s lack of appreciation. The main currency pair (EUR/USD) was only slightly above Friday’s level. It also looks like the Catalonia events, which have been hurting the euro, have been limited due, in part, to today’s sentix economic index and Germany’s industrial data publications.

Friday’s data on consumer inflation (CPI) in the US could also be crucial for the euro’s valuation this week. Should the data miss the market expectations, the single currency could gain in value due to a lower probability of an increase in the difference between the interest rates in the US and in the euro area.

No major changes in zloty valuation

The Polish currency was relatively stable today. Some more substantial movements could be observed in relation to the Turkish lira (1 lira valued below 1 PLN for the first time in history) or to the pound, which has been in a better condition today and gained approx. 0.5% on the zloty. The better sentiment caused the Swiss franc to lose value as well. One franc was valued at slightly above 3.74 PLN – close the lower boundary of the last two weeks trading.

The EUR/PLN pair was somewhat below the 4.31 level, slightly below the level observed at the end of the previous week. The next days could see limited volatility in the zloty’s valuation. However, it could increase on Thursday as we will get to know more in-depth data about last month’s consumer inflation. The more specific data could help assess the core index (excl. food and energy prices) which will also be published the next day. The zloty could gain, if it turned out that September’s increase in consumer prices by 2.2% (on a yearly basis), wasn’t mostly due to higher prices of energy commodities.

Tomorrow’s preview

Tomorrow could be an important day for the pound. It has been under significant pressure due to the Brexit uncertainty and also rebellion in Theresa May’s own party (some members demand her to quit by the end of the year).

The Office for National Statistics (ONS) will publish August production output in the UK. After decreases in April and May (year-on-year), the next two months saw a steady increase both in the headline index and in its biggest component, namely manufacturing production. The market consensus points toward a further increase in industrial production (by 0.8% vs. 0.4% a month earlier) and maintaining the manufacturing output growth at 1.9%, on a yearly basis.

The construction sector fared slightly worse. The output in the current year has been decreasing in all months bar March (on a month-on-month basis). The median of market expectations suggests an increase of 0.2% compared to July, which would constitute the first increase for half a year.

At the same time, the ONS will also publish UK’s international trade data in August. The trade deficit in the previous month was 11.58 billion pounds and even though it was the biggest since April, a significant revision of the June’s data also took place – a reduction of the UK’s deficit from 12.7 to 11.53 billion pounds. Economists’ estimations point toward the deficit to further decrease to 11.2 billion pounds in August.

Around the time of the publications (10.30 a.m.), we expect an increase in both investors’ activity and in the pound’s volatility. Taking into account the recent sell-off, strong readings could suggest a positive impact on the GDP growth on the one hand, and a lower downward pressure on the pound on the other (due to the lower deficit). This, in turn, could help the British currency to appreciate and make up for some of the losses sustained in the past few weeks.