Afternoon analysis 17.10.2016

Even though the American data is worse than expected, the euro remains at the level of approximately 1.10 against the dollar. Iran has yet again confirmed its intention of reaching the level of oil production from before the sanctions. The Polish currency is slightly increasing its depreciation against the currency basket.

Weak data from NY and negative industrial production

The Federal Reserve published a weak NY Empire State index, which measures the general level of business condition in the state of New York. The reading for September showed the level of negative 6.8. This result was definitely worse than the market consensus at the level of 1.0 (negative 1.99 in August). Moreover, this is the worst result of this index since March (negative 9.02, the readings above zero indicate an improvement of conditions.)

Shortly before the opening of the New York stock market, the Federal Reserve also revealed the industrial production data for September. Even though the production increased by 0.1% in month on month relation, this increase was not consistent with the market expectations (positive 0.2%). This was a 1% depreciation in year on year interpretation.

Mining industry experienced the largest increase in September (positive 0.4% m/m. However, it also quoted a 9.4% decline in year on year relation. Processing sector increased by 0.2% (no changes in y/y interpretation), but utilities experienced the worst month on month reading. The latter went down the second consecutive month (negative 0.3% in August and negative 1% in September (negative 0.4% y/y)). Today’s data from the American economy is quite weak, but the EUR/USD remains near the 1.10 level. The CPI inflation reading tomorrow, will most likely be more significant for the dollar.

Iran wants to produce more

The Bloomberg data shows that the oil mining in September was at the level of 3.63 million barrels per day. Today, the manager of the National Oil Consortium said at the conference in Tehran that the production level in Iran is currently at the level of 3.89 million barrels per day. The OPEC members will discuss the production limits for particular countries at the end of November in Vienna.

At the same time, Amir Hossein Zamaninia, vice-minister of foreign affairs for oil, criticized the secondary data (estimations of analysts or journalists) which has been the base of the OPEC reports and an indicator of individual limits in oil production. The Iranian minister described them as “unacceptable.” In his opinion, Iran intends to return to the level of 4.085 million barrels per day, which was the level from before the sanctions.

Even though he admits that the initial agreement achieved in Algiers in September, is “a small step in a positive direction”, he estimates negotiation with Iran, Libya or Nigeria to be rather difficult. Just as Rosneft (the largest oil producer in Russia), these countries intend to increase their oil production. The Nigerian sources cited by Bloomberg inform that Nigeria expects a production at the level of 2.2 million barrels per day. This would be an approximately 45% increase in comparison to the level from September. The WTI remains above the level of 50 dollars per barrel.

Zloty remains weak

The Polish currency is increasing its depreciation against the currency basket. The zloty lost approximately 0.5% against the euro, and neared the 4.34 level. However, the situation on the CHF/PLN was worse and its exchange rate was the highest since September 30th (3.99).

Friday’s neutral statement from the Fed chair, Janet Yellen, as well as weak data from the American economy today, caused the dollar to be weaker in comparison to the closing on Friday. However, it remains near the level of 1.10. This is most likely why the zloty experienced relatively minor losses against the dollar (approximately 0.2%). The USD/PLN has reached the level of 3.94.

Tomorrow’s events

At 10.30 AM, we will know the official inflation data from the British government. The market consensus assumes the CPI inflation to grow by 0.9% y/y in September (positive 0.6% in August) and by 0.1% m/m. The recent increase in oil prices (more than 50 on the WTI) caused by an initial agreement between the OPEC countries, will most likely translate to slightly higher inflation reading. A positive CPI reading could strengthen the weak British currency, which remains at its thirty-year minimum (not counting the flash crash). Due to this weakness, the CPI inflation data may appear better than the market consensus.

At 14.00 (2.00 PM), the Polish Central Statistical Office (GUS) will publish the data regarding increase in salaries in corporate sector and regarding increase in employment for September. We may observe an increase trend in case of both indexes since February 2014 and January 2013, respectively. The market consensus assumes the salaries to grow by 4.6% (4.7% in August) and employment to grow by 3.1% (the same as in August).

At 14.30 (2.30 PM) the Labor Statistic Bureau will publish the American CPI inflation for September. Even though the Fed does not take this data into consideration regarding the monetary policy, the CPI gives investors a better view on the future PCE inflation, which is significant for the FOMC. The CPI inflation may cause significant volatility on the dollar, if the reading is far from the consensus. The market consensus regarding the base case CPI (excluding energy and food) is at the level of positive 2.3% y/y (just as it was in August) and positive 0.3% m/m (against positive 0.2% in August).