Afternoon analysis 16.12.2016

The CBI survey shows that the British industrial production growth was the largest in two years. Positive data regarding employment and wages in Poland support the zloty.

Positive data from British industry

The CBI survey, which was conducted among 428 companies, showed that the industrial production growth was at its highest level since mid-2014. Only four out of eighteen sectors quoted declines. The companies from the mechanic engineering quoted the best results. Approximately 35% of companies quoted production growth and 16% quoted declines. Therefore, the balance was at the level of positive 19%, which is the highest since June 2014. The companies are also optimistic towards the first quarter of 2017 and expect a larger production (34% vs 13%).

Due to the weak pound, export of raw materials increased. The expectations of companies regarding an increase in prices of their products was at the highest level in two-and-a-half year. Moreover, 34% of companies intend to increase their prices in the first quarter of 2017. Only 8% wants to decrease their prices. If these forecasts are fulfilled, this may cause additional inflation pressure. Moreover, the Bank of England may take into consideration more rapid rate hikes.

The pound was relatively stable today. The GBP/USD was within the rage of 1.24-1.246. The pound was supported by a work-off on the dollar. The dollar’s index was below the level of 103 for the most of the day and went significantly above this level after the opening of the New York stock exchange market.

Positive day for zloty

The Polish Central Statistical Office published the data regarding employment and salaries in the company sector for November. Employment increased by 3.1% YoY and 0.1% MoM (both better than expected). Moreover, this index has increased by a total of 2.9% over the past eleven months in comparison to the same period on 2015. The salaries growth was also better than expected (4% vs the expected 3.9% and 3.6% for October).

The zloty was in a better condition due to a work-off on the dollar. The USD/PLN was at the level of 4.24, which was 0.04 PLN lower than its fifteen-year records from yesterday. Moreover, the EUR/PLN was near the level of 4.41. The zloty will be under a strong impact of the industrial production data for November, which will be published on Monday. If this data is worse than expected, the GDP growth for the fourth quarter may be lower than expected.

Next week’s events

On Monday at 10.00 AM, the Ifo Institute will publish the German economic sentiment index for December. This index has been in the upper trend for the past few years. Moreover, it has reached higher level than this from before the 2007/2008 financial crisis. Currently, this index is near its historical level (110.4) and the market expects it to reach the level of 110.6 in December. This would be its highest level in more than two-and-a-half years. This positive sentiment is also confirmed by other indexes (IHS Markit, industrial PMI). The Ifo index will most likely confirm positive sentiments in the German economy. This data should be positive for the euro, as well as for the zloty. However, its impact should be limited. This is because the market is currently dominated by the sentiment related to the Fed’s decision.

Also on Monday, at 2.00 PM, the Polish Central Statistical Office (GUS) will publish the data regarding the Polish industrial production (including the building production). Both of these indexes appeared to be worse than expected in October. The market expects that the current industrial production index will increase by 1.8%. However, if the building production is disappointing yet again, this would mean that the GDP growth forecasts for 2016 will decrease. Currently, it is expected that it will go below 2% YoY.

GUS will also present the retail sales change data for November. After a 5.6% growth in August, this data was disappointing in two following months. In October, this index increased by 3.7%. According to the market consensus, the growth of this index for November should be at the level of 4.8%. The retail sales index is good for estimating the consumption, which is a large portion of the GDP. Therefore, its worse result would wear-off the economic growth even more.

On Thursday, we will know the third reading regarding the American economic growth for the third quarter and the PCE inflation data. These readings may impact the dollar, as well as the other currencies. The PCE inflation is significant, because the Federal Reserve takes it into the consideration when making inflation projections. In October, the base case reading (excluding energy and food) was at the level of positive 0.1% MoM and positive 1.7% YoY. The market expects similar growths for November. The economic growth for the third quarter appeared to be 0.4% lower than expected in the firs reading. The second reading revised this data upward to 3.2% QoQ. If the new data is significantly inconsistent with its previous reading, the dollar will be more volatile.