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Daily analysis 01.03.2016

1 Mar 2016 13:30|Marcin Lipka

Worse PMI indexes from China and the United Kingdom. An interesting testimony of the New York Federal Reserve chairman. The EUR/PLN goes to the area of 4.33-4.34, due to better than expected PMI readings from Poland. According to the Eurostat data, the unemployment rate in Poland is at a record low.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • 16.00: The ISM index from the American industrial sector (estimations: 48.5 points).

Weak PMI from China and the UK

At night, the market received the weak PMI readings from China. The official index describing the future condition of the industry, which was prepared by the National Bureau of Statistics of China (NBS), dropped to the second lowest level since 2009, and is currently at the level of 49 points. The index remains below the level of 50 points, for seven months in a row. This is the limit which separates progress from regress of the given economy's sector.

Similar readings are published by Markit and Caixin. The latter focuses on smaller private companies from the industrial sector. In its examinations, the PMI goes down to the level of 48 points, against expectations at the level of 48.4 points. Moreover, the component of future employment depreciates to the lowest level since 2009.

In his comment on the data, He Fan, Caixin chief economist, says that, “readings of every crucial category, including production, new orders, and employment, announce a deterioration of conditions.” He Fan also takes note that, “the government should continue to reform, and at the same time, introduce a moderate stimulation policy, and strengthen the support for the economy with different methods, in order to prevent its downfall.”

The PMI readings from services sector, published by the NBS, are also not optimistic. Despite the fact that it remains above the level of 50 (52.7), these are the lowest readings since December 2008. This increases the risk that Thursday's publications from Caixin and Markit may be significantly closer to the level of 50. Summarizing these readings, we can notice that the goal of yesterday's decision about cutting the rate of obligatory reserves, is to decrease the negative effects of the growth slowdown. It is also possible that further stimulation elements will be introduced. This is the most likely reason for the market's relatively neutral reaction on these quite weak readings.

Also, the data from the United Kingdom was definitely below expectations. The PMI index for the industry went down to 50.8 points. This is the worst reading since April 2013. In his comment on the data, prepared by Markit and CIPS, the Markit senior economist Rob Dobson wrote that, “the production, which is near stagnation, emphasizes fragility of the economic revival at the beginning of the year.”

It is also worth interpreting the PMI readings from the United Kingdom in the context of expanding discussion about the Brexit, and Thursday's publication from the services sector. If the incoming surveys are unambiguous, and the entrepreneurs outside the industrial sector also take note of the deteriorating situation, further pressure on the pound remains possible, even with a relative stabilization in the global market.

Interesting testimony of William Dudley

William Dudley, chairman of the New York Fed, presented an interesting testimony at the common symposium of the People's Bank of China (PBOC), and the New York Federal Reserve. Dudley is considered as a close associate of Janet Yellen, and shares a majority of her views. The FOMC representative sounded quite dovish, especially regarding the crucial matters of monetary policy, such as inflation expectations and their stabilization.

Dudley claimed that, “according the New York Fed survey, during the past year, the 3-year consumer inflation expectations depreciated to the lowest level in their short history. The expectations, which were examined longer by the University of Michigan, are in a lower range of their historical changes. Further depreciation of each one of them will be disturbing.”

Even though Dudley claimed further on that, “depreciation of inflation expectations are not big enough to declare the inflation expectations unstable.” He also stated that, “the events require a deeper examination, because the previous experiences show that it is difficult to push inflation back to the central bank's target, if the expectations go clearly below the target. The Japanese experiences are a warning in this matter.”

It is worth noting that including two widely discussed and crucial elements of the monetary policy (stabilization of expectations, and the Japanese example) in one paragraph, and referring them to the American situation two weeks before the Fed meeting, may be a sign of a significantly clearer marking that the pause in the American monetary tightening may last longer than one quarter.

Global and local support for the zloty

Growing chances for an increase in monetary easing by the ECB, cutting of rates of obligatory reserves by China, and also today's testimony of William Dudley – these factors finally caused a positive external impulse, and the EUR/PLN went below the level of 4.35. Additionally, before noon the zloty was also supported by the national publications.

The industrial PMI increased to the highest levels for seven months, and is now 52.8 points, against estimations of economists surveyed by Bloomberg at the level of 50.6 points. The study was conducted by Markit, which wrote that, “the main factor influencing the general improvement of the conditions in the industrial sector in February, was the faster growth of new orders.” Also, “the pace of creation of new workplaces was solid.”

The Eurostat also published very good information regarding the labor market. In January, the unemployment in Poland dropped to the level of 6.9%, and was only 0.1% above its historical pits from before the 2008/2009 crisis. In general, information from Poland, as well as the external monetary policy, support the scenario of the EUR/PLN remaining within the range of 4.30-4.35.

1 Mar 2016 13:30|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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