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Daily analysis 01.03.2017

1 Mar 2017 12:17|Marcin Lipka

Donald Trump’s testimony did not contain many economic details. Increasing chances for rate hikes in the USA. Crucial testimonies from the FOMC members. The PMI reading was optimistic, even though it was slightly lower than expected. The zloty wore-off against the dollar, but increased against the euro.

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

  • 14.00: The German consumer inflation (estimates: positive 2.1% YoY).
  • 14.30: The American PCE inflation (estimates: 53.3 points).
  • 16.00: The American industrial ISM (estimates: 53.5 points).
  • 00.00: Leal Brainard’s testimony.

No significant details in Donald Trump’s testimony

The widely announced testimony from President Donald Trump contained definitively too little economic details to impact the market. Apart from a promise of increasing infrastructural expenses by one trillion dollars, there were no specific numbers regarding economy, especially the tax system changes.

Investors expected far more economic details from Donald Trump’s statement, especially that these details had been suggested by his administration. Besides, whenever a presidential campaign was focused on economic matters, their elements had been appearing in every initial testimony of a new president in front of the Congress. For example, in 2001 George W. Bush announced lowering taxes and defined specific levels. Bill Clinton did the similar with his announcement of increasing fiscal burdens for the wealthiest households in 1993.

However, president Trump’s testimony as a whole was of a standard character. A small amount of controversial matters could have caused that investors have interpreted it positively. This may be indicated by the sentiment during the first part of the European session.

Fed is at the center of attention

If Donald Trump’s testimony had not exceeded the market expectations, then what has caused the dollar’s index 0.6% bounce? This was mainly a result of a very interesting, as well as hawkish interview with William Dudley for CNN.

The market has been interpreting Dudley’s views as similar to the views of Janet Yellen. Moreover, he has a constant right to vote and has often been considered as the third most important person in the FOMC. A statement that intrigued investors the most, was defining the scenario of the monetary tightening as, “a lot more compelling.”

This relatively harmless statement had usually appeared whenever a Fed member wanted to suggest approaching rate hikes. Moreover, the entire interview’s transcription on CNN website, proves that this was not a random statement. Dudley also said that, “fiscal policy is going to move in a more stimulative direction.” He also did not rule-out that, “if we could get back to that kind of level of productivity growth, then I think 3% plus growth would actually be achievable.”

As a result, the profitability of the American two-year treasury bonds bounced to the area of 1.30% before Donald Trump’s testimony. Moreover, the likelihood of rate hikes in March increased from 52% to 80%. Such a strong belief that the monetary tightening will be performed in two weeks, gives the Federal Reserve an opportunity to make a relatively orderly move.

Today’s PCE data from the USA will be very crucial regarding the above. Estimates from economists who were surveyed by Bloomberg give approximately same chances for both the 1.7% and 1.8% result. However, if the reading is at the level of 1.9%, this would be a positive argument for an increase in the profitability of bonds, as well as for strengthening the dollar’s index.

The market will also focus on Leal Brainard’s testimony, which is scheduled for midnight. She has been considered as a relatively dovish FOMC member. However, if her testimony contains statements similar to Dudley’s interview, this will make rate hikes in March even more likely. Moreover, the market may begin to estimate three rate hikes for 2017. This would be an upward impulse for the dollar. We should also keep in mind that testimonies from both Janet Yellen and Stanley Fischer are scheduled for Friday.

Zloty remains relatively stable

The globally stronger dollar caused the USD/PLN to reach the area of 4.08. However, a relatively positive global sentiment, as well as the low profitability of the euro zone’s bonds caused the EUR/PLN to be pushed to 4.30. In general, the zloty’s condition is relatively stable, which is confirmed by it’s behavior against the forint.

This stabilization of the zloty was supported by the industrial PMI from Poland. Even though this reading was slightly below its twenty-two month peaks from January, the level of 54.2 points is still satisfying. IHS Markit (author of the reading) focused on a further increase in production, new orders and employment. According to the IHS Markit senior economist, Paul Smith, the surveyed companies see increasing inflation as the biggest threat for an improvement of the business cycle. However, Smith also added that the advantages of improving business cycle should overcome the risk of increasing prices.

1 Mar 2017 12:17|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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