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Afternoon analysis 29.10.2015

29 Oct 2015 16:57|Marcin Lipka

Today's reports from the US support the case for tightening. The dollar dropped after significant gains on Wednesday. The zloty gained. The watering of campaign promises by lawmakers has supported the zloty.

The headline GDP reading from the US was rather disappointing. In the third quarter, the economy expanded 1.5 percent - less than the 1.6 percent growth that was forecast. The result was weaker than expansion in the second quarter, when the economy grew 3.9 percent (revised up from 2.3 percent reported initially).

The data showed a solid increase in consumption. Spending increased 3.2 percent against 3.6 percent in the preceding period. On the other hand, the GDP result was negatively affected by weaker investment. And net export was neutral. Although export was hit by a strong dollar, it was balanced by lower import.

The labor market report showed a decline in unemployment claims that stood at 260k. It was in line with the expectations. Last week it stood at 259k. It is the lowest level in forty years. The report showed that the expansion of the labor market is steady in spite of the weak data on employment change in the last month.

Generally, today's reports support the case for tightening. On Wednesday, the Federal Open Market Committee pointed directly at the next meeting as the possible moment for the hike. Moreover, the Fed is not worried any more about the impact of the deterioration of the global economy.

The euro rebound

Today, the dollar was weak in spite of reports increasing the probability of hikes in the US. In the last two weeks, the EUR/USD dropped from near 1.15 to almost 1.09. The extent of the move has increased the probability of correction.

A similar scenario has been supported by the latest reports from the eurozone. The euro was eager to increase. Especially after the German labor market data was released, that was better than expectations. Moreover, the country's inflation rate was slightly higher than expected. And finally, the eurozone report on sentiment showed a broad improvement.

However, it is not very likely that the tendency will hold in the longer term. The announcement of more easing by the European Central Bank and the Fed's hawkish stance will pressure the common currency.

Politicians water down promises

After dropping the 350 billion zloty investment scheme, today the PiS lawmakers refrained from the idea of larger tax relief. It could be shifted to 2017. It was positive information for public finance.

However, other problems are still actual. The major issues are comments from the winning party's lawmakers about the need for lower interest rates. In 2016, the PiS dominated parliament and the President will name almost all members of the Monetary Policy Council. It is very likely, that a more dovish MPC will be eager to support the economic growth.

After a severe decline in the past two weeks today the zloty gained. However, it is a correction. In the longer term the Fed's plan to raise rates will limit the zloty's appreciation potential.

29 Oct 2015 16:57|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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