Afternoon analysis 28.09.2015

Risk aversion returned to the markets. William Dudley from the Federal Reserve said he expects the central bank to tighten this year. The zloty posted significant losses on Monday.

Last week the Federal Reserve Chair Janet Yellen dispelled doubts on whether the central bank will increase rates this year. The Fed President said that she supports the scenario to tighten by the end of the year and a similar view prevails among the Federal Open Market Committee. In the context of the emerging markets problems, she said that this factor is unlikely to alter the central bank's plans.

As a result, the likelihood of a hike in December increased. Given the situation, the speeches of the Fed members scheduled in the coming days will not affect the markets as the situation is rather clear. As a result, the probability of insightful remarks is very limited.

The first Fed member to speak was William Dudley from the New York Fed. He said today that rates will be increased this year. Moreover, it is likely that the hike will come as soon as October. However, a similar scenario is not very likely.

Today Charles Evans from the Chicago Fed and John Williams from the San Francisco Fed are scheduled to speak. The first is dovish, and the second presents a stance near to the FOMC consensus.

The dollar was supported by the reports from the economy. The reading on income missed the forecast (it increased 0.3 percent on a monthly basis). However, the data on spending exceeded the expectations (plus 0.4 percent against the 0.3 percent that was projected). Moreover, the prior month’s reading was revised up.

In addition, the PCE inflation index supported the case for a hike. It increased 1.3 percent on a yearly basis. Coupled with other reports, the overall assessment of the US economy is rather positive. The final GDP reading showed a 3.9 percent growth in the second quarter (annualized). The consumption data showed that in the third quarter this factor will add to the growth. Consumption accounts for almost 70 percent of the economy.

Zloty weakness

Initially, the markets reaction to the coming tightening in the US has been positive. Yellen's change of a stance was seen as proof that the central bank reduced concerns over the future developments in the world economy.

However, in the longer term a decision to lift rates in the US will negatively affect the emerging markets and hurt stock markets. As a result, the risk currencies dropped and stock indexes also moved lower. An additional factor that hurts risk appetite is the European Central Bank unwillingness to provide more stimuli. Although the European monetary authorities see a possibility for similar actions, it is conditioned on future developments.

The zloty posted a very poor start of the week. The Polish currency was negatively affected by the heightened risk aversion. However, the zloty stance is clearly weaker than other currencies from the CEE region. The situation may be due to the recent weakness in the economic reports and heightened political risk due to October's general election. The likelihood of a stronger zloty is currently limited.