Afternoon analysis 16.02.2016

The German ZEW looks better than the headline suggests. Another weak publication from US manufacturing. Record high employment in Poland, with wages up 4.0% y/y.

The ZEW and Empire State indexes

At first, the German ZEW index seemed to look quite weak. The publication at one point is the second lowest since November 2012, which was the year remembered as one of the worst sovereign debt crises in recent history. However, it is worth noting that the survey responds to a certain question, if the situation in the German economy is expected to “improve,” “get worse,” or remain “no change”.

Regarding this issue, the economists need to evaluate the current conditions. For example, in latter part of 2014 the ZEW also dropped towards the 0 level (range of publication from negative 100 to 100). At that time, the current economic situation was also seen as close to zero.

This time, the situation is different. Since the last three quarters, the current condition remains favorable at levels around 50-60. What that means is, on net, 50-60% of respondents see the economic situation as good. During a fairly positive grade, it is hard to expect further improvement, especially that the outside environment has clearly deteriorated in the recent weeks. As a result, when the current assessment turns to a much worse level, it would be a much more visible indication that problems are coming to the German economy. Currently, it is too premature to make such an assumption.

A few positives signals can be found in the New York Empire State. The index rose from negative 19.4 points (lowest level since March 2009) to negative 16.6 points, with expectations at around negative 10 points.

New orders remain deeply in negative territory while companies are still expecting a staff reduction. Summarizing the data, the New York Fed writes that, “The six-month outlook remained weak, with the index for future general business conditions up only slightly from last month's multi-year low”.

Regarding the current market situation, both ZEW and the Empire State have a small impact on currency valuation. Much more focus would be placed on tomorrow's Minutes publication from the January Federal Reserve meeting. Any hint regarding a longer pause on easing, should be regarded as negative for the dollar. On the other hand, if the dovish position looks weak in the discussion, it should put some pressure on the EUR/USD, and push the pair toward 1.1100.

Solid data from Poland

The zloty, in line with other EM currencies, remains under some pressure from a global risk aversion increase. It is, however, worth noting that publications from GUS look solid. Although, they have no immediate impact on the currency market, they show that the current employment situation in Poland looks robust and should decrease the odds for any monetary loosening.

Wages rose 4% y/y, while employment increased by 2.3% y/y, which is the best result since 2011. Additionally, the the employment rates in the enterprise sector exceeded 5.7 million, which was the highest in history. This data should discourage the MPC to push for more monetary policy stimuli.