Afternoon analysis 30.10.2015

In spite of a hawkish Fed the dollar dropped. In contrast, the euro gained on inflation and unemployment reports. China surprised again. The zloty exceeded gains.

Today's data from the US were slightly worse than expectations. Household income and spending both increased 0.1 percent on a monthly basis. A result weaker than the plus 0.2 percent expected. Last month both measures increased 0.4 percent.

The core PCE inflation (that measures prices excluding volatile food and energy costs) also missed the forecast. The most important price measure for the Federal Reserve increased 0.1 percent on a monthly basis. It increased 1.3 percent on a yearly basis. The University of Michigan sentiment index also missed the forecast.

On the other hand, the Chicago PMI index exceeded the expectations and suggested an improvement in the industry. The reading showed the strong growth of production and orders. Comments in the report pointed out that last month's weak result was an aberration and the prospect is positive.

To sum up, today's reports have shown that the inflation rate remains subdued and consumption was weaker. However, given the report on GDP in the third quarter, consumption seemed strong. As a result, it is hard to believe that the latest data will alter the Federal Reserve's plans. In October's statement the Fed pointed at its December meeting as the possible moment of the hike.

Correction mood

In spite of clear suggestions from the Fed regarding interest rate hikes at its next meeting, the market is not fully pricing a similar scenario. The currency market tendencies are also different than expected. The EUR/USD increased for the second day.

The euro was supported by economic reports. The unemployment rate in the monetary union dropped to 10.8 percent from 10.9 percent in the preceding month. The result was better than the 11 percent expected by analysts. And the inflation rate was also better than the forecast. Although the consumer price growth was flat, the index that excludes volatile food and energy prices increased 1 percent against the 0.9 percent that was expected.

The last session of the week brought a rebound of the common currency. The severe decline of the EUR/USD in the last two weeks needed correction. However, in the longer term the hawkish Fed and the European Central Bank's plan to expand stimulus will not allow this tendency to hold.

China surprises again

China plans to soften capital controls. The People's Bank of China said it will launch a trial program to allow domestic investors to purchase foreign assets. The Chinese government is going to strengthen the yuan's role as a global currency and force the IMF to include it in a reserve currency basket.

Information helped the yuan. The currency gained 0.6 percent against the dollar. It was the largest increase since China dropped the currency peg in 2005. It was yet another surprise from China in the last few days. Yesterday nation's government said it will drop the one-child policy.

Zloty extended gains

The correction in the broad market supported the zloty. Recently the Polish currency was the weakest among the emerging market currencies. It was caused by heightened political risk due to general elections.

However, the extent of the zloty's rebound will be limited by the Fed's plan to raise rates. The probability of a similar mover increased after October's statement. Given the situation, a longer appreciation period is not very likely.