Afternoon analysis 16.09.2014

The Polish labor market data supports the case for interest rates cut. The German economy sentiment deteriorated despite the ECB additional stimulus measures.

The German economy sentiment was deteriorated in September. The ZEW index fell to 6.9 points from 8.9 points in August. Although the index was lower than in the previous month, it was above expectations of 4.8 points. After a recent drop the ZEW index is at its lower level in 21 months.

The fall of the ZEW index showed that additional stimulus measures introduced by the European Central Bank in this month didn't fully mitigate the negative impact of the Ukrainian crisis and poor economic data. The German gross domestic product contracted in the second quarter of 2014. In September the European Central Bank cut major interest rates on record low and introduced asset-backed securities purchases starting in October. In addition, the ECB will allot TLTRO on Thursday to bolster credit flow to the real economy.

Key developments

The markets enter the period of the most important developments. On Wednesday the Federal Reserve will announce its decision on interest rates. The speculation that the Federal Reserve will rise interest rate sooner than later was one of the major factors pushing the dollar higher in the last few weeks. Tomorrow it all will be clearer, and if the Fed meets expectations, the dollar may be significantly strengthened.

In addition, on Wednesday morning data concerning the British labor market will be shown – the unemployment rate and the number of claims for social security benefit. The Bank of England announced that it will decide whether to rise interest rates based on labor market developments, what makes Tomorrow's data crucial. Moreover, the BoE minutes will be published, which may provide some hints for the outlook of interest rates.

The Scottish referendum takes place on Thursday. It makes the pound very susceptible to rumors concerning the outcome of the voting and the report releases increase uncertainty and volatility (a wider view in our morning commentary). The consumer inflation was in line with expectations – it fell to 1.5 percent from 1.6 percent in the preceding month, but core inflation was higher than projected – the core CPI growth stood at 1.9 percent, up from 1.8 percent in the previous month and more than 1.8 percent projected. The sterling rose after the data was shown.

The zloty was little changed

The Ukrainian parliamentary approved special status for the easternmost regions that allows them to use Russian as a second official language and to create their own economic framework. Moreover, Kiev allowed holding early local elections in December. That was the part of agreement on ceasefire.

Nevertheless, the end of the Ukrainian turmoil is still distant. Information agencies informed on fighting in Donetsk, what put the ceasefire under pressure. In addition, part of the pro-Russian separatists urged to resume fighting. All in all, the developments in Ukraine have had little impact on financial markets in the last few days.

The Polish labor market data was worse than expected, what strengthened the case for interest rates cut in October. In August the employment growth stood at 0.7 percent, lower than 0.8 percent expected. The wage growth stood at 3.5 percent from, lower than 3.8 percent expected. Core inflation rose 0.5 percent – more than 0.4 percent expected. The Central Statistical Office said yesterday, that inflation dropped to minus 0.3 percent. Nevertheless, the price development also increased the pressure for interest rates cut.

The zloty was little changed in a narrow range. The Polish currency awaits for the crucial developments – the Fed decision and the outcome of the Scottish referendum. The interest rate cut in October has been priced and today's data didn't cause significant moves.