Afternoon analysis 16.03.2016

Rising inflation supports a tightening scenario in the US. Solid data from the Polish labor market. The zloty extended losses.

Today's report on inflation supported the tightening scenario in the US. In February, the price index increased 1 percent on an annual basis - more than the 0.9 percent forecast. In the prior month it stood at 1.4 percent. Moreover, the core inflation rate (a measure excluding volatile prices of food and energy) was higher than expected. The gauge stood at 2.3 percent against the 2.2 percent forecast. In the prior month the inflation rate stood at 2.2 percent.

The inflation numbers are very important for the Federal Reserve. As a result, the report supported the case for higher interest rates. Currently, the market consensus is for three hikes within the current year. However, just after the Fed raised rates in December 2015, the expectations were for four hikes.

The other reports were rather neutral. The number of building permits stood at 1167k against the 1200k forecast. The number of residential new-build permits increased to 1178k against the 1150k expected. Readings showed an ongoing expansion in the housing market.

However, a few parameters of the labor market still don't satisfy the Fed. The latest report on wages was disappointing. It showed a drop of the average wage in February. In addition, the data on consumption is weak. Retail sales dropped in February after negative revision in the prior month. Cited reports may negatively affect the inflation rate in the longer term.

Today's reports supported the dollar. The move may be strengthened if the Fed shows a more hawkish stance. A similar scenario may negatively affect the demand for risky assets.

Zloty declined

The labor market expansion is still very strong. Employment increased 2.5 percent on a yearly basis - more than 2.3 percent in the prior month. Moreover, the forecast was for 2.4 percent. Wages also exceeded the expectations. The average wage increased 3.9 percent against 4 percent in the last month. The forecast was for positive 3.8 percent. Today's data showed that the economic growth remains strong.

However, the core inflation data surprised. In February, the gauge that excludes volatile prices of food and energy, dropped 0.1 percent on a yearly basis. The expectations were from positive 0.1 percent. In the last month the core inflation stood at minus 0.1 percent. Yesterday's data on consumer prices also missed the forecast. The price index dropped 0.8 percent on a yearly basis against the negative 0.7 percent forecast. Moreover, the prior month data was revised down to 0.9 percent.

The latest inflation data was negative for the zloty. Yesterday's data spurred a broad decline of the zloty. The move continued today. Low inflation may resume the discussion on interest rate cuts in the short term. Moreover, if the Fed signals more hawkish stance, the demand for risky assets may falter. As a result, the zloty may decline even further.