Afternoon analysis 17.09.2015

No direction in the financial markets as investors are waiting for the Federal Open Market Committee's policy statement, The zloty was stable in spite of poor reports from the Polish economy.

Before the Federal Reserve decision on interest rates the market atmosphere is rather calm. Investors are reluctant to make any bets due to uncertainty concerning the Fed and expected volatility spike after the decision. The EUR/USD hovered above the 1.13 level.

Our base case scenario is the Fed leaving the interest rates unchanged and announcing a hike before the end of the year. As a result, the path for the interest rates will be lowered. A similar scenario will be negative for the dollar, but it will support risk assets (more on expected scenarios in our previous commentary). The Fed will announce its decision at 8.00 PM.

Today's report on unemployment claims showed that the labor market expansion has remained solid. The number of unemployment claims dropped to 264k – clearly a lower result than was projected and less that in the previous week. It was the lowest reading in the last two months. Nevertheless, the report will not influence the Fed's decision.

Poor data

August reports on the industrial production and retails sales missed the forecasts. Production increased 5.3 percent on a yearly basis. It was lower than the 6 percent that was expected. Expansion was noted in 24 among 34 examined sectors. The best result were posted by the automotive sector (plus 26 percent increase). In contrast, declines were observed in metal and electronic industry.

The report on retail sales was even worse. The reading showed a 0.3 percent decline on a yearly basis. The forecast was for a 1.2 percent increase. The largest gains were noted by automotive and food sectors. And declines were recorded by fuel sellers.

August and July reports were quite weak. As a result, the third quarter growth may be slower that it had been expected earlier. Thus, the economic deceleration from the second quarter may extend to the next three month period. It is not very likely that reports in September will be strong enough to limit the impact of earlier poor data. Even strong expansion in the labor market will not change the outlook (more on the issue in yesterday commentary).

Minutes from the latest Monetary Policy Council meeting showed that the monetary authorities are assessing the economic situation in the eurozone and in the US rather positively. However, the MPC saw threat in the emerging market slowdown. In this context, the major issue is the Chinese crisis, but the Russian and the Brazilian problems are also important.

The MPC said that the slowdown in the second quarter was caused by the net export deterioration and smaller investment. Given the situation in the emerging market countries, it is very likely that the expansion in Poland will be weaker.

The slowdown in the emerging market economies may hurt the global growth and put additional pressure on the commodities prices. This factor will deteriorate the outlook for the inflation rate returning to positive level. All in all, the majority of the MPC member expect interest rates to remain at the current level.

Before the Fed, the zloty was steady. If the Fed decides to leave interest rates unchanged and points at only one hike this year, the zloty will increase. But if the Fed shows more hawkish stance, the Polish currency will drop.