More dovish than hawkish of the Fed with little impact on the market. Weak data from Germany. The Italian economy is shrinking in Q3 2018. Surprisingly low inflation reading from Poland. The zloty remains stable, close to 4.29 PLN per one euro.
The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.
Weekend: G20 summit in Argentina and expected talks between China and the US on customs duties.
Minutes may idicate early termination of rate hikes
Yesterday, we suggested that the market was rushed to judge Jerome Powell's speech, the President of the Federal Reserve. We focused on issues that do not necessarily mean a change of attitude towards further interest rate hikes by the head of the US central bank. However, the minutes of the November's FOMC meeting suggest that the tightening of monetary policy does not need to continue in 2019.
In the minutes, there is a passage that says that "almost all members have confirmed their belief in further interest rate hikes", but several of them have expressed uncertainty as to the timing of these hikes. The main issue seems to be the increases in 2019. In addition, two members said that interest rates were close to neutral levels and that further increases could weaken both economic activity and help reduce inflation.
In addition, a statement that "monetary policy is not at a pre-established path" became a general view. This may suggest that the market should not get used to raising rates on a quarterly basis. Other comments suggest that there is more and more uncertainty within the Fed. This should not put the rise in interest rates in December at risk. Also, the one in March seems quite probable, but from the Q2 of next year, uncertainty may clearly begin to appear. Will the Fed really lead the interest rates above the 3% limit?
The Federal Reserve meeting in December will be important in this context. Recent data is not supportive of the hawkish faction (lower than expected inflation, real estate market, investment in GDP has failed) of the Federal Reserve. If the readings do not improve, then perhaps the Fed will reduce estimates of interest rate increases from 3 to 2 next year. This would confirm the recent weakening of the dollar and would be a strong argument for continuing the correction of its recent increases.
Weak data from eurozone
From the US flew negative information for the dollar, but the eurozone also has no positive reports for the single currency. Italy's economy contracted by 0.1% in Q3, with the growth of only 0.7% y/y. In Germany, retail sales fell for the fourth consecutive month in a row. The 5.0% y/y increase was misleading, as it resulted from the fact that in October 2018 there were 2 working days more than in the same period last year. If we consider this effect, Destatis estimated the increase in retail sales at 0.6% y/y.
Throughout the eurozone, there is again low inflation. In base terms, it only increases by 1.0% y/y, which reduces the pressure on the ECB to leave the mild monetary policy. As a result, although the chances of strengthening the dollar are diminishing (the milder Fed), there are no arguments for strengthening the euro either.
Low inflation in Poland
The GUS publication on inflation was interesting today. In November, prices in annual terms increased by only 1.2%, with market estimates at 1.6%. This caused very strong drops in the yield of Polish Treasury bonds. In addition, when looking at the FRA market, investors practically do not value interest rate increases for the next two years in general. This may weaken the zloty in the coming days, especially if the external situation becomes less favourable.
In addition to information about Poland, it is worth remembering about the G20 summit. The meeting of the presidents of China and the USA takes place there. Apart from the rumours of recent days, it seems that this will be a step towards a truce between the powers. Both sides will probably officially resume negotiations, and new duties will not be introduced next year. However, if this baseline scenario does not materialise and a breakthrough does not take place, then weak moods can be expected at the beginning of next week, and the zloty will weaken.
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.
See also:
29 Nov 2018 16:18
Weaker dollar supports zloty (Afternoon analysis 29.11.2018)
More dovish than hawkish of the Fed with little impact on the market. Weak data from Germany. The Italian economy is shrinking in Q3 2018. Surprisingly low inflation reading from Poland. The zloty remains stable, close to 4.29 PLN per one euro.
The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.
Minutes may idicate early termination of rate hikes
Yesterday, we suggested that the market was rushed to judge Jerome Powell's speech, the President of the Federal Reserve. We focused on issues that do not necessarily mean a change of attitude towards further interest rate hikes by the head of the US central bank. However, the minutes of the November's FOMC meeting suggest that the tightening of monetary policy does not need to continue in 2019.
In the minutes, there is a passage that says that "almost all members have confirmed their belief in further interest rate hikes", but several of them have expressed uncertainty as to the timing of these hikes. The main issue seems to be the increases in 2019. In addition, two members said that interest rates were close to neutral levels and that further increases could weaken both economic activity and help reduce inflation.
In addition, a statement that "monetary policy is not at a pre-established path" became a general view. This may suggest that the market should not get used to raising rates on a quarterly basis. Other comments suggest that there is more and more uncertainty within the Fed. This should not put the rise in interest rates in December at risk. Also, the one in March seems quite probable, but from the Q2 of next year, uncertainty may clearly begin to appear. Will the Fed really lead the interest rates above the 3% limit?
The Federal Reserve meeting in December will be important in this context. Recent data is not supportive of the hawkish faction (lower than expected inflation, real estate market, investment in GDP has failed) of the Federal Reserve. If the readings do not improve, then perhaps the Fed will reduce estimates of interest rate increases from 3 to 2 next year. This would confirm the recent weakening of the dollar and would be a strong argument for continuing the correction of its recent increases.
Weak data from eurozone
From the US flew negative information for the dollar, but the eurozone also has no positive reports for the single currency. Italy's economy contracted by 0.1% in Q3, with the growth of only 0.7% y/y. In Germany, retail sales fell for the fourth consecutive month in a row. The 5.0% y/y increase was misleading, as it resulted from the fact that in October 2018 there were 2 working days more than in the same period last year. If we consider this effect, Destatis estimated the increase in retail sales at 0.6% y/y.
Throughout the eurozone, there is again low inflation. In base terms, it only increases by 1.0% y/y, which reduces the pressure on the ECB to leave the mild monetary policy. As a result, although the chances of strengthening the dollar are diminishing (the milder Fed), there are no arguments for strengthening the euro either.
Low inflation in Poland
The GUS publication on inflation was interesting today. In November, prices in annual terms increased by only 1.2%, with market estimates at 1.6%. This caused very strong drops in the yield of Polish Treasury bonds. In addition, when looking at the FRA market, investors practically do not value interest rate increases for the next two years in general. This may weaken the zloty in the coming days, especially if the external situation becomes less favourable.
In addition to information about Poland, it is worth remembering about the G20 summit. The meeting of the presidents of China and the USA takes place there. Apart from the rumours of recent days, it seems that this will be a step towards a truce between the powers. Both sides will probably officially resume negotiations, and new duties will not be introduced next year. However, if this baseline scenario does not materialise and a breakthrough does not take place, then weak moods can be expected at the beginning of next week, and the zloty will weaken.
See also:
Weaker dollar supports zloty (Afternoon analysis 29.11.2018)
Dollar incurs losses (Daily analysis 29.11.2018)
Dollar still strong (Afternoon analysis 28.11.2018)
The uncertain outcome of G20 (Daily analysis 28.11.2018)
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