Afternoon analysis 17.11.2016

The British retail sales data is positive. The American base case inflation for October is below the consensus. However, jobless claims are at their lowest level since 1973. The zloty is becoming weaker. A warning from Fitch rating agency.

Positive sales, but anxieties remain

Today, the Office for National Statistics published a report regarding retail sales for October. This reading indicates that retail sales increased by 1.9% MoM and 7.4% YoY. This is the largest growth since May 2008 in the latter case. Both readings were better than expected (0.4% and 5.3%, respectively).Online sales increased by 1.3% MoM and by 26.8% YoY.

Sales of clothes and shoes increased by 5.1%, which is its best result in more than two-and-a-half year. This is most likely because of lower temperatures recently. This data shows that consumption in the United Kingdom remains high, despite the decision of leaving the European Union. However, it remains unknown, how long this situation will last. Inflation is increasing and employment growth is going down. With time, this factors may limit purchase power of the Brits.

Mixed data from USA

Today, the Bureau of Labor Statistics informed that the CPI inflation for October is at the level of 0.1% MoM and 2.1% YoY. Both of these results were worse than expected (0.2% and 2.2%, respectively). Even though this data is not included in the Fed’s projection (they use the PCE inflation data), it has always had a relatively large impact on the dollar. This is because this data give investors hints regarding the future PCE inflation.

However, this data was slightly dimmed by the best in forty-three years jobless claims index. This reading decreased to the level of 235k, which is by 19k in comparison to last week’s data. This is the second lowest level since November 24th, 1973 (233k). Moreover, this was the eighty-ninth consecutive week, in which jobless claims index was below 300k. This is its longest growth streak in forty-six years.

Despite negative CPI inflation, the dollar is strengthening. The dollars index reached its highest level today (more than 100) and the EUR/USD returned below 1.07. Before this data was published, a written version of Janet Yellen’s testimony appeared on the Federal Reserve’s website. Yellen emphasized that rate hikes may happen relatively soon. However, the FOMC will continue to anticipate next arguments in favor of improvement of the American economy.

Zloty is losing the majority of its gains

The zloty gave away the majority of its gains from this morning. The American data, as well as strengthening of the dollar that happened after its publication, not only emphasized the zloty’s weakness against the USD, but also against the other currencies. Moreover, Fitch rating agency weighed in on a decrease in retirement age by the Polish government (as provided by the Polish Press Agency).

Fitch warned that Poland should adjust its fiscal policy to the above mentioned decision. If the GDP deficit is above 3%, this will be an argument in favor of downgrading Poland’s rating. The matter of a decrease in retirement age was mentioned in a negative context for Poland’s rating by Moody’s rating agency as well. At approximately 10.00 AM, the dollar was at the level of 4.13 and became approximately 0.03 PLN higher in the afternoon. The zloty’s weakness can also be observed on the franc and the euro (4.15 and 4.45, respectively).

Tomorrow’s events

At 10.00 AM, The European Central Bank will publish the data regarding the euro zone’s current account for September. The last time this index was at a negative level was in February 2012. Since then, we have been observing its upper trend. In August, its value was at the level of 29.7 billion euro. The market expects tomorrow’s reading to be at the level of 31.3 billion euro, which is near the value from May (31.8 billion euro). If the reading is consistent with the consensus or slightly above the consensus, this may strengthen the euro. However, much depends on Janet Yellen’s testimony this afternoon, as well as behavior of the dollar. If Yellen’s testimony is definitively dovish or definitively hawkish, the majority of the market would probably ignore the data regarding the euro zone’s current account and focus on the testimony’s impact.

At 2.00 PM, the Polish Central Statistical Office will publish the data regarding changes in salaries in enterprise sector, as well as the data regarding employment growth. The first of these indexes increased by 5.3% YoY in June. However, it has been decreasing since then and its growth reached the level of 3.9% YoY in September. The market consensus assumes that this index has grown by 4.3% in October. If the reading is consistent with the consensus (or it is higher), this may suggest that inflation is growing faster, which should be positive for the zloty. In the opposite case, the recent overvalue of the Polish currency may increase.

The employment growth index has been showing the opposite tendency over the past years. Since the beginning of 2014 (0 YoY), we have been observing an upper trend of this index, which reached the level of 3.2% YoY in September. This was the same level as the one from July (the highest level in approximately five years). The market expectations regarding the reading for October are at the level of 3.1% YoY. However, taking into consideration a progressive decline of unemployment rate, the above mentioned index should not go significantly below the consensus. Therefore, it most likely will have a minor impact on the zloty.

At 7.00 PM, Baker Hughes will publish its weekly data regarding active oil drills in the USA. This index has been gradually increasing since the end of May (316 active oil drills). Last week, it increased to 452 (according to the American Department of Energy, the oil production increased by 2% at that time.) The latest report from the Department of Energy indicated that the American oil production decreased slightly (by 11k barrels per day). If the amount of active oil drills is slightly lower, this could be positive for the oil prices (lower supply). However, it seems that information regarding a potential agreement regarding oil production limit from OPEC, will determine the oil prices within the forthcoming two weeks.