Afternoon analysis 19.07.2017

Better than expected industrial production growth in Poland in June was slightly overshadowed by the slowest increase in retail sales since October and producer inflation since November. The dollar was in better shape, but still near the recent limit values ​​against the euro.

Mixed data from Polish economy

Today, the Polish Central Statistical Office (GUS) has reported important data for the zloty for June. The industrial output rose by 4.5% YOY, although the market expectations indicated a reading of 3.8%. It is definitely a lower pace than in the last month (9.1%), however, it should be noted that last year June had one more working day. The increase of construction and assembly production surprised on the upside - its increase by 11.6% year-on-year was higher than the median of market consensus by 1.8 percentage points, although it has been within a fairly wide range of estimates (from 6% to 13.6%).

The retail sales data was slightly worse than expected. It increased by 6%, compared to 8.4% a month ago and expectations of 6.9%. This was the lowest increase since October 2016. In comparison with June last year, the sales of cars, motorcycles and parts have decreased by 0.9%, while sales of furniture, TV and household appliances have increased only by 2.7%. These were the main reasons for worse than expected readings in June. On the other hand, the sales of pharmaceuticals, cosmetics and orthopedic equipment have significantly increased (by 12.7% YOY), along with textiles and footwear (by 7.7%) and food, beverages and tobacco (by 7.1%).

In turn, the producer price index fell in June to 1.8% YOY, the lowest level since November 2016, highlighting the lack of inflationary pressure in the economy (as indicated by consumer inflation as well). Today’s GUS publications turned out to be relatively mixed. On one hand, the growth of production increased, but the lower retail sales (meaning lower consumption) and subdued inflation among producers may slightly reduce the chances for the National Bank of Poland to tighten its monetary policy, if such a trend continues.

Zloty incurred slight losses while the dollar got stronger

As a result, the data turned out to be relatively neutral for the zloty. It was in a somewhat weaker position today. This could be a result of a slightly stronger dollar, and a correction of the zloty’s recent appreciation. However, the appreciation of the US currency was not significant, the EUR/USD pair was around 1.153, which is only 50 pips below yesterday's peaks. The Japanese currency was noticeably weaker - the yen has significantly lost to the dollar in anticipation to tomorrow's announcement from the Bank of Japan. The USD/JPY exchange rate fell around 3 p.m. to 111.6 points, the lowest level for more than 3 weeks.

The Swiss currency was also visibly stronger today - the franc gained both in relation to the euro and to the dollar. This was also reflected in the zloty's exchange rate - today, we paid about 3.83 zł for the franc, as much as 3 gr more than during yesterday's session. A similar rebound could be observed in relation to the pound, the dollar or the euro - the Polish currency was about 2 gr cheaper. The slight devaluation of the Polish currency may also be influenced by political factors that may cause some anxiety among investors and prompt them to sell the zloty.

Tomorrow’s preview

At 10.30 a.m. CET, the Office for National Statistics (ONS) will present June's data on retail sales. After yesterday's inflation report, which turned out to be worse than expected and caused a slight drop in the pound, investors' eyes have been turned to tomorrow's retail data. Recently, there have been more and more speculation about a possible rise in the interest rates in the British economy, although, the probability has been reduced as an effect of yesterday's data. On the other hand, retail sales recorded a weak performance in May - its growth of 0.9% year-over-year was the lowest since January. However, in June it is expected to rebound to 2.5% YOY. If the ONS reading failed market expectations, the pound could further lose value.

The statement from the European Central Bank will probably be the most important event of the day (scheduled to be released at 1.45 p.m. CET). Although changes in interest rates and asset purchase programs are not expected, the recent appreciation of the euro was due to the interpretation of the ECB members' comments, which suggested a possibility of monetary policy tightening. Therefore, the expectations for the somewhat hawkish message from the ECB have risen. However, taking into account the recent rapid appreciation of the euro and the weakness of the dollar, the ECB may be cautious in sending a hawkish message in order not to overly strengthen the euro area’s currency. A stronger euro could hinder the return of inflation to its target set by the ECB (2%).

Hence, both the announcement and Mario Draghi's (the president of the ECB) press conference at 2.30 pm, could eventually cause the euro to weaken. At the same time, the US Department of Labor will publish the initial jobless claims and the insured unemployment data. Although the publication could be considered second-tier with regards to its impact on the dollar, better-than-expected readings combined with a weaker euro could trigger a rebound of the last dollar's drops. Such a scenario, which as a result would strengthen the dollar, could, in turn, weaken the Polish currency. On the other hand, the lack of a clear signal for the monetary tightening in the eurozone is a positive signal for European stock exchanges, which would probably limit the zloty's potential losses.