Afternoon analysis 18.09.2014

The ECB's plan undermined by a weak TLTRO allotment. The dollar strengthened by sound labor market data. The Polish MPC minutes prejudged interest rates cut in October.

The TLTRO allotment was smaller than expected. The European Central Bank provided only 82.6 billion euros four-year loans at a 0.15 percent fixed interest rate. It was lower than a range of 100 billion euros to 300 billion anticipated in Bloomberg survey. The median forecast was 150 billion euros.

Presumably some banks prefer to wait until the ECB starts its asset-backed securities purchases in October – according to Martin Van Vliet from ING Groep cited by Bloomberg. The ABS purchases will allow creditors to improve their balance sheets resulting in higher capital adequacy ratios. In addition, the ECB is going to end asset quality revision as a part of taking over supervision of the European banking system in the next month. Given that, some bank may be willing to wait to get positive assessment from the ECB before getting TLTRO. These two factors explain, why banks were reluctant to TLTRO and may foreshadow higher demand on next tender offer in December.

Nevertheless, the poor TLTRO result signals, that the ECB is going to have some problems in fulfilling its commitment to bolster balance sheet to three billion euro from current level at two billion euros. A part of commentators have argued that the ECB will need to use quantitative easing in the British or American style eventually to fulfill its goals. This proposition has been criticized by the Bundesbank. Moreover, the German central bank didn't support the September's actions undertaken by the ECB.

In September the ECB cut interest rates at the lowest levels in history and announced introduction of the ABS purchases in October. The measures were introduced to spur growth and ward off deflation. The TLTRO was aimed to support those measures. The TLROT was announced in June, when the ECB introduced negative deposit rate for the first time.

The dollar went up after data

The Federal Reserve showed an opaque statement. On one hand, it preserved the phrase “considerable time”, what pleased dovish investors. That means that the Fed may keep interest rates at near zero level for an extended period. But, on the other hand, the Fed increased its forecast for interest rate (median is up to 1.375 percent from 1.125 percent), inflation and growth. In addition, the Fed president Janet Yellen said a press conference that the monetary authorities are not tied to time-schedule but they rather move to a “data-dependent” approach.

Eventually, the dollar rose significantly after Fed's statement. The US currency touched new highs against the euro and the yen. Later the dollar was weakened due to profit-taking after significant moves. But it recouped gains after labor market data was shown.

The number of unemployment claims fell to 280,000, what was below expectations of 316,000 and lower than 316,000 in the previous week. In turn, the real estate market reports were below predictions. Building permits stood at 1 million against 1.04 million forecast and home starts was 0.96 million, lower than 1.04 expected. The labor market data was more important, what was reflected by dollar gains.

The MPC will cut rates

Minutes from September's Monetary Policy Council meeting showed, that interest rates cutting in the next month was prejudged. The monetary authorities pointed on a variety of factors supporting the case for lowering the cost of credit – the Ukrainian crisis, weakness of the European economy and risk stemming from interest rates disparity.

Some members of the MPC argued that assessment of these factors should be different and their impact is weak. Nevertheless, the latest data from the Polish economy was poor – industrial production fell significantly (minus 1.9 percent in August against 0.5 percent forecast) and employment data and inflation reports also supported the case for cuts. In the minutes there was clear indication that “the majority of MPC members” support the case for cuts.

The zloty after latest crucial developments was weakened. The Polish currency fell against its all major pairs. The Fed dropping its accommodative policy means that investors are going to sell risky assets. In addition, the zloty was affected by poor performing euro. In data on unemployment rate and retail sales in the next week are poor, it will begin speculations that the MPC may cut rates by 50 basis points, up from current consensus saying about 25 bp. cut.