Afternoon analysis 13.10.2017

The US consumer inflation is rising, but below expectations - the more important core index for the fifth consecutive month was at 1.7%. The zloty was strengthened due to good sentiment and favourable data.

Data fails to meet expectations

The long-awaited September data on consumer inflation (CPI) in the US failed to meet market expectations. Although the price growth pace did not slow down, it was expected to be at a higher level. The inflation amounted to 2.2% in comparison to the same month of the previous year, 0.1 percentage points below market estimates (but 0.3 percentage points above the level of August).

However, the core inflation (excluding energy and food prices) reading seems to be more important and remained at the 1.7% YOY level for the fifth consecutive month, compared to expectations by 0.1 percentage points higher. Compared to August, the core index increased by 0.1%, also failing the expectation by 0.1 percentage points.

A positive aspect of today's data was the increase in retail sales, especially that with excluded vehicle sales. It increased by 1% per month, although it was expected to reach 0.3%, it was the highest growth since January this year. Total retail sales increased by 1.6%, 0.1 percentage points below expectations. In both cases, the data for last month was slightly revised - the scale of falls has decreased.

However, in the first few minutes, the market focused on significantly more important inflation data. The yields of the US Treasury bonds started to go down quickly, which also resulted in a significant dollar depreciation. The main currency pair's quotations, i.e. the EUR/USD, after the publication moved from 1.180 to 1.187 EUR/USD in just a few minutes.

Worse than expected inflation data may raise some concerns among market participants about the monetary tightening pace in the US. Another month of unchanged core inflation may evoke a wider discussion among the Federal Reserve members about the reasons for relatively low inflation and the continued appropriateness of maintaining the currently suggested interest rate growth pace.

Core inflation slightly higher

Today, the National Bank of Poland (NBP) released September's data on core inflation: excluding food and energy prices, its level was 1% in comparison to September last year. This is 0.1 percentage points above the median of market expectations and 0.3 percentage points above August's level. It is also the highest level of core inflation for just over three years.

The Polish currency was appreciating even before the NBP publication. The currencies from the region, similar to the zloty, were favoured by good sentiment on the market. DAX, the main German stock exchange market, for the first time in history, exceeded 13k points- the increases were observed also in the most of the case of the main European market indexes. In response to this positive sentiment and slightly better than expected core inflation data, the EUR/PLN quotations fell below 4.25 to the lowest level in a month.

The aforementioned worse than expected data from the US has helped the emerging countries' currencies, including the zloty. Although the subsequent trading hours may bring more volatility as US investors become more active, the probability of the dollar strengthening is currently limited. Consequently, the zloty will probably not depreciate much, although it may return some of the profits in the case of correction made on the dollar.

Next week's preview

The next week may have a significant impact on the pound. On Tuesday morning, the Office for National Statistics (ONS) will present September's data on consumer inflation (CPI) in the British economy. In the previous month, inflation increased to 2.9% (compared to the same period of the last year) and levelled the four-year highs since May.

This has been supported by the probability of faster than expected monetary tightening. This belief was confirmed by September's Bank of England meeting, after which rate hikes can be expected. Currently, the market consensus indicates a further increase in both the headline inflation reading and the core one by 0.1 percentage points to 3% and 2.8% respectively.

The following day, August's data on the average earnings of Britons will be published. Over the last few months, their increase has been lower than the average price growth in the economy, which means that the real wages are depreciating. On the one hand, it is caused by inflationary pressure, and on the other hand, it reduces consumer spending, which being at a relatively low level may negatively influence GDP. In turn, on Thursday retail sales data for September will be released, which growth pace since October 2016 has been on a downward trend, negatively impacting GDP growth.

Around the publication time of the aforementioned data, a significant fluctuation on the pound may be expected. Taking into account, that the rate hikes in the UK seem to be a closed matter, it is possible that only a very low inflation rate (by 0.2 - 0.3 percentage points) below the consensus could have a negative impact on the pound.

The monetary tightening perspective supports the British currency, but it must be noted that it will be performed during a climate of relatively low growth and uncertainty connected with Brexit. Therefore, wages and retail sales' data indicating the possibility of lower economic growth may cause the pound's depreciation.

In this context, the discussion on the bill connected with Brexit may be important - the recent impasse in the negotiations between the EU and the UK increases the likelihood of a' hard Brexit', which could be a burden to the pound. Reaching a compromise on this issue could, in turn, strengthen the pound.