Afternoon analysis 28.11.2014

Euro zone inflation drop prodded the European Central Bank to additional stimulus. The rubble plunged as OPEC leaves quotas unchanged. The zloty little changed despite solid GDP data.

The HICP inflation growth slowed to 0.3 percent on a yearly basis – Eurostat said today. It was in line with expectations. In the previous month inflation stood at 0.4 percent. The core inflation – measure that excludes volatile prices of energy and food – was 0.7 percent.

The pace of consumer prices growth hit the lowest level since 2009. Thus, it is next argument for stimulus advocates in the European Central Bank who are willing to introduce full quantitative easing – an asset purchase program that encompasses government bonds. Similar actions in the United States and the United Kingdom proved to be efficient in battling the unemployment.

Persistent lack of work

Government bond purchases conducted by the Federal Reserve and the Bank of England helped to bring down unemployment to before-crisis level. In the mean time, Eurostat said that unemployment rate stood at 11.5 percent in the euro zone – near 12 percent – the highest level in history of the monetary union.

In Italy the unemployment rose to 13.2 percent in October – more than 12.9 percent in the previous month and more that 12.6 percent anticipated by analysts. It was a record high level. Third biggest euro zone's economy struggle with recession and swelling debt (debt to GDP ratio exceeded 130 percent this year). That poses significant threat to the euro zone economy.

In next week the European Central Bank announces decision on monetary policy. There are no expectations for the monetary authorities change the policy. However, the full quantitative easing looms as ECB vice-president Vitor Constancio pointed at first quarter of 2015 as a good moment to decide whether to introduce additional measures (implied QE) and Mario Draghi spoke about QE by many occasions. Draghi seems to be certain that he accomplishes his goal to introduce QE despite the defiance from Bundesbank president Jens Weidmann.

OPEC provided stimulus

OPEC countries decided not to cut production quotas to support falling price of oil. The decision was as important as the ECB moving toward QE and additional stimulus from the Bank of Japan. Bundesbank president Jens Weidmann said that this is a “little stimulus” package for the world economy.

Falling oil price – the key energy commodity – will not only support growth (like a record low interest rates and asset purchases), but it will reshape income structure of countries that export oil and limit expenses of oil-importing countries.

Russia – as one of the major oil-exporting countries – draws attention due its role in the Ukrainian crisis. Western countries imposed sanctions on Russia over its ongoing participation in turmoil.

Currently, the Russian economy ail as it struggles with currency crisis (the Rubble posted record low levels today) what results in inflation above 8 percent and rising interest rates that puts companies at the brink of bankruptcy. Russia is heading into recession in 2015, what puts government in difficult position due to lower revenue from oil exports.

The zloty little changed

Today's data on the GDP growth was very good – the growth stood at 3.3 percent in the third quarter. The structure of growth was also very positive as it was fueled by strong domestic demand and investments. If the PMI on Monday meets expectations, the Monetary Policy Council won't even consider changing interest rates.

As a result, the zloty is set to exceed its recent gains. The Polish currency will exploit favorable market environment.