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Daily analysis 01.12.2016

1 Dec 2016 12:55|Marcin Lipka

An agreement on capping the production of oil significantly supported the quotations of this material. A series of good data from the eurozone. The zloty remains under selling pressure, despite better than expected PMI reading from the Polish industry.

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

  • 14:30 Weekly data on US jobless claims (survey: 253 thousand)
  • 16:00 The industrial ISM reading for November (survey: 52.5 point)

An agreement and the consequences

After many worrisome statements from the OPEC and other crude oil producers, it was announced yesterday that the cartel will reduce production by 1.2 million barrels per day. It is no surprise that it’s Saudi Arabia which will take the heaviest weight of this agreement (486 thousand barrels). Iraq changed its mind at the last minute, and instead of freezing the production, it will be limited by 200 thousand barrels.

We suggested multiple times in our analyses that despite the skepticism on the market, the probability of reaching the consensus is high. To a large extent, this stance was supported by the fact that about three quarters of the demand and supply were to be balanced. Due to the fact that in 2017, the demand for oil is expected to be lower by 1.2 million barrels per day, and the supply likely won’t keep up with this trend. The agreement is thus temporary, and it isn’t trying to change the foundations of the market and rather, it accelerates the date of balancing the market.

It came as a surprise that Russia, and also other potential producers of crude oil from outside the cartel, will also reduce the production. At this moment, the Kremlin claims that it will reduce production by 300k barrels. As a result, the supply might be reduced by 1.5 million per day compared to the baseline scenario. In December, the US Energy Information Administration expected the app. market oversupply in 2017 to be at the level of 500k barrels per day. The majority of this was to occur in the first three quarters. Therefore the agreement will cause a deficit of 500k barrels on the market from January, and the oil reserves will shrink by approximately one million barrels in 2017, if we take the present data for the most likely scenario.

Such a significant reduction of the oil production clearly increases the probability of the prices remaining at the level of 50-60 dollars per barrel, and not 40-50 USD, as was expected before. This fact should also affect inflation, especially in the USA (because of low share of taxes in the price for recipients). This will be clearly visible in the first quarter of 2017, when the low base from the beginning of 2016 might cause the average retail price to be higher by even 20-25 percent than the prior winter.

Even though the members of the Federal Reserve quite often emphasize that the monetary policy doesn’t react to the increases of raw material prices, this trend can overlap with the increasing inflation expectations. The higher fuel prices will strengthen the increasing tendency of the CPI and the PCE, of which the Fed will probably react with slightly less hawkish attitude, especially given that it will pay attention to the increasing fiscal stimulation from the Republican side of the administration. As a result, there are still arguments for the dollar’s strength to maintain for a long time.

Good data from the eurozone

Today, the good readings from the industry, which were signalized by the initial readings of the Markit IHS, were confirmed. Our hypothesis also confirmed that the data from the periphery of the eurozone might be significantly better than expected. Both Italy and Spain had PMI readings above the market expectations by nearly one percentage point.

In the eurozone, the unemployment also fell to the level of 9.8 percent, compared to the consensus of 10 percent. These are still relatively high readings, but it is worth remembering that the employment against the population in the working age in the eurozone is at much higher level than what is shown in the unemployment rate. This also shows that the job market in the area of common currency isn’t in such a weak shape, excluding of course Greece and Spain. It is also worth emphasizing that the present unemployment rate is above the average levels from 2002-2005 only by one percentage point.

The falling pressure on the zloty maintains

This morning, the data on the domestic economy arrived and was finally better than expected. The industrial PMI increased to the level of 51.9 points, against the expectations of 51.0 points, as well as against the most recent reading at the level of 50.2. The currency market, however, didn’t react to this data at all. Thus, the zloty, along with other emerging market currencies, continued its depreciation initiated by the higher profitability of the American treasury bonds and the increasing chances for a more strict monetary policy of the FOMC.

Before noon, the euro reached its highest levels since the weakening of the domestic currency, which was soon after Great Britain’s decision to leave the structures of the European Union. The EUR/PLN exceeded the level of 4.46. The dollar is also around the level of 4.20, and in relation to the zloty, it broke its 14-year record. So far, there are no signals for the present situation to quickly stabilize, as a significant part of this movement is generated globally. Additionally, the shape of the Polish economy (apart from today’s PMI) is worse than expected, which might even support speculations regarding the interest rates cut by the Polish Monetary Policy Council.

1 Dec 2016 12:55|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.

See also:

30 Nov 2016 16:15

Afternoon analysis 30.11.2016

30 Nov 2016 12:16

Daily analysis 30.11.2016

29 Nov 2016 16:16

Afternoon analysis 29.11.2016

29 Nov 2016 13:14

Daily analysis 29.11.2016

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