Afternoon analysis 15.03.2016

US households are still reluctant to spend money. The dollar dropped after the report on retail sales. The markets are waiting for the Fed's statement. The zloty dropped on inflation report.

Today's data on retail sales showed that US households are still reluctant to spend money. Retail sales dropped 0.1 percent on a monthly basis. The reading which excludes transportation equipment showed a similar decline.

Although the results of both indicators were above the forecasts, a more important issue was the revision of the prior month data. The revised estimates showed retail sales as well as the report excluding transportation equipment, dropped 0.4 percent. Earlier, the numbers were positive 0.2 percent and positive 0.1 percent, respectively.

However, the fact that households are not willing to spend money poses severe issues for the Federal Reserve. Earlier, there was a notion that the consumption growth will support the GDP at the beginning of the year. Now however, the impact of this factor will be smaller. Moreover, given the situation, consumption will not support the inflation rates, thus the probability of the price gauge returns to the Fed's goal in the mid-term, has declined.

Today's data may push the Fed to lower the pace of tightening. Earlier, the wage report was in a similar fashion. In spite of the lowest level of unemployment in eight years as well as rising employment wages, it dropped 0.1 percent in February. This factor will not support the inflation rate.

After the European session, the Federal Reserve will release the monetary policy decision and the latest forecasts. The Fed is expected to leave rates unchanged. The most important issue will be the Fed's stance.

Given the latest developments in the financial markets and the slightly negative reports for inflation, the Fed may show a somewhat dovish stance. A similar scenario may result in a weaker dollar and would support the risk assets.

Weaker zloty

The CSO released data on inflation. The reading was below the forecast. The inflation rate stood at 0.8 percent on a yearly basis against the 0.7 percent forecast. Moreover, the prior month data was revised down to negative 0.9 percent from negative 0.7 percent. The major factors responsible for low inflation were low gasoline and energy prices.

After the inflation report, the zloty dropped. It was somewhat surprising. Last Friday, the MPC said it will not adjust rates in spite the NBP inflation-cut outlook.

On the other hand, the report on the current account balance exceeded the forecast. The surplus stood at 764 million euros against the forecasted amount of 400 million euros. However, the report showed that export declined 0.4 percent on a yearly basis.

The hawkish stance of the MPC was supportive of the zloty. However, today's data showed that the inflation issue may be larger than previously expected. As a result, the case for lower interest rates may be discussed again.