Afternoon analysis 18.02.2016

The OECD cut its forecast for the world economy. The US labor market is above expectations. The zloty gained against the euro and the Swiss franc.

Federal Reserve members have shown a rather dovish stance recently. The minutes from the latest meeting of the FOMC was in a similar vein. The major sources of risk to the US economy are the situation in commodity market and a high volatility in the financial markets. China's slowdown was also cited. The release limited the probability of interest rate hikes.

Given the situation, interest rate hikes were shifted to mid-2016. The basis plan was for four interest rate hikes this year. The situation in the financial markets point at very low probability of hikes this year. A chance for increase will be at the end of year, but it is well below 50 percent.

Today's data from the US labor market was above the forecast. The number of unemployment claims dropped to 262k against the forecast 275k. However, the labor market data is now less important than the numbers concerning the inflation. This report supported the dollar, which has been highly correlated with the stock indexes recently. The EUR/USD dropped near 1.1070.

The OECD cuts forecasts

The latest forecasts released by the OECD were rather negative. The organization cited several risks to the world economy. The most important among them were falling commodity prices and low inflation, slow wage growth and heightened volatility in the financial markets. The growth factor is consumption, but investments and exports are rather weak.

The OECD expects 3 percent world GDP growth in the 2016-17 period. The forecast was lowered by 0.3 percentage points against the prior report. The major economies are expected to slow down in 2016. The US economy will grow 2 percent and Germany will grow 1.3 percent (cut by 0.5 percentage points against the previous forecast). The eurozone will expand 1.4 percent (revised down by 0.4 percentage points). The overall negative stance increased the probability that the ECB will provide more stimulus and the Fed will lower the pace of hikes.

The zloty gained against the euro

Given the latest reports concerning the Polish economy, the probability of interest rate cut increased. However, recent comments from the Monetary Policy Council and the minutes from the MPC's last meeting are still against additional cuts. The situation may change in March, when the newest NBP forecasts are expected.

Today's minutes showed that the MPC sees some improvement in the eurozone, as the labor market situation is getting better. The US economy growth is still quite solid in spite of some deterioration recently. However, the emerging market economies are facing severe problems.

The MPC noted that the Polish economy accelerated in the fourth quarter. Domestic demand is considered to be a major growth engine. The monetary authorities expect a steady GDP expansion that will be supported by consumption, as the government implemented a social spending program. Some MPC members said additional stimulus from the ECB, and the Fed's slowing down the pace of interest rate hikes could have limited the volatility of the zloty.

The MPC expects that inflation will stay negative longer than it was expected. The major factor responsible for the situation is the commodity prices decline. Given that the factors responsible for low inflation are external, the MPC left interest rates unchanged. In the longer term, the MPC expects that inflation will return to the target due to steady GDP growth and expansion in the labor market.

The MPC’s assessment of the decision on the monetary policy should take into account the situation in the financial markets. That reflects that the MPC is susceptible to weakness of the zloty. In contrast, some MPC members said that if the volatility is limited, there will be an opportunity to cut rates.

On Thursday, the zloty increased against the euro and the Swiss franc. The Polish currency was steady against the dollar. The developments of the zloty will be determined by broad market behavior. Currently, the probability of a stronger zloty is rather limited.