Afternoon analysis 25.11.2016

The United Kingdom’s GDP growth is consistent with expectations, as well as with its previous reading. The zloty is supported by a slightly weaker dollar.

Outlay for fixed assets grow slightly slower

According to the report from the Office for National Statistics, the British GDP growth for the third quarter (from July to September) was at the level of 2.3% YoY and 0.5% MoM. The services sector was the only GDP component that increased in QoQ interpretation. Three out of four components declined and contributed to the 0.5% QoQ production decrease in the third quarter (revised down by 0.1%). Only the mining sector increased by 4.3% QoQ. Let’s note that this sector contains oil and gas mining.

Processing, which is production’s largest component, quoted a 0.9% QoQ decline. However, the entire production index went up by 1% in the Year over Year interpretation (revised down by 0.2%) and processing increased by 0.5% YoY. The building sector also quoted declines, but they were revised up by 0.3% to the level of negative 1.1 QoQ (positive 0.1% YoY). The services sector increased by 0.8%, which was slightly more than in the previous quarter (0.6%). This was also the fifteenth consecutive quarter in QoQ growths in the services sector.

Outlays for fixed assets increased by 1.1% QoQ in the third quarter, which was slightly less than in the second quarter (1.6%). Enterprise investments, which have the largest contribution in these outlays, increased by 0.9% QoQ. However, they also decreased by 1.6% in Year over Year interpretation. At the same time, this was the largest decline in YoY interpretation (by 0.7 million pounds), which partially compensated the annual increase in outlays for the public sector (0.8 million pounds growth), as well as for private housing (0.7 million pounds growth). Outlays for the public sector increased in both Quarter over Quarter and Year over Year interpretations by 4% (491 million pounds) and 7% (842 million pounds), respectively.

Weaker dollar supports zloty

The Polish currency took advantage of the dollar’s global wear-off and not only strengthened against the American currency, but also against the pound, the franc and the euro. This appreciation of the zloty was caused by a better global sentiment. Moreover, the dollar wore-off against the other currencies as well. The EUR/USD increased to approximately 1.06, and the USD/JPY went slightly below 113. The dollar’s index was near the level of 101.5. However, the zloty remains quite weak, which is indicated by its relation to the forint. The PLN/HUF went back below the level of 70 and was nearing its minimum from yesterday.

The American currency wore-off because of today’s data from the Bureau of Economic Analysis, which shows that the American trade deficit increased by 5.5 billion dollars to 62 billion dollars. This is its largest level since May. Import increased by 2.1 billion dollars in Month over Month relations, while export decreased by 3.4 billion dollars. This increase of deficit was mainly caused by an increase in consumer goods import by 1.7 billion dollars and a decrease in their export by one billion dollars. Significant decline in export was also quoted in the food and drink category, as well as in industry supply products, by 1.5 billion dollars and 1.4 billion dollars, respectively.

Next week’s events

At 2.30 PM on Tuesday, the Bureau of Economic Analysis will publish the second reading regarding the American GDP growth. The first reading, which was published last month, has been a positive surprise for the market (2.9% QoQ vs 2.5% QoQ). The market consensus assumes that the second reading will be at the level of 3% QoQ. The first data appeared before the American presidential elections and was increasing the likelihood of rate hikes in December. Currently, investors are almost 100% certain that these rate hikes will occur in the forthcoming FOMC meeting.

However, moves on the dollar have been significant for the global sentiment since the election of the new American President. Even though the second reading shouldn’t differ much from the first reading, a significant deflection from the consensus may not only cause significant fluctuations on the dollar, but also on the other currencies, including the zloty.

At 11.00 AM on Wednesday, Eurostat will present the euro zone’s CPI inflation data for November. Since mid-2016, the euro zone’s inflation has been gradually growing (from negative 0.1% YoY in May, to positive 0.5% in October). The market expects this trend to continue in November as well, with a result of positive 0.6% YoY. This would be its highest result since March 2014. Increasing oil prices may have also contributed to inflation growth over the past few months. If this upper trend continues, this would support the euro, which is weaker due to the strengthening of the dollar.

At 2.30 PM on Wednesday, the Bureau of Economic Analysis will publish the PCE inflation data. The Federal Reserve has been using this index in its forecasts, because it is considered as the main reference point when it comes to prices in the American economy. This index has been gradually increasing for more than one year. Taking into consideration that rate hikes in December are basically decided, the market will estimate the likelihood of hikes on next year’s meetings. Therefore, we may expect relatively large fluctuations after the publication of the PCE inflation data for October.

Next Friday, the markets will receive new and significant data that may impact the evaluation of currencies. At 2.30 PM, the Bureau of Labor Statistics will present the American labor market data for November. We will know the new unemployment rate, which has been decreasing since October 2009 (10.2% at that time). Since the beginning of 2016, the American unemployment rate has been near the level of 5% (4.9% in October).

Even though last month’s changes in nonfarm payrolls were slightly disappointing (161k vs 175k), this index has been quoting growths beyond the level of 150k since June. Historically, this index has been relatively volatile and they may be significant for the dollar’s quotations (and currently for the other currencies, as well.) The market consensus is at the level of 174k.