Daily analysis 03.02.2016

Lower oil prices, depreciation of stock market indexes and a decrease in profitability of treasury bonds – these factors suggest that the chances for continuing the monetary tightening in the USA are becoming smaller. Important publications from the United States. The zloty remains stable before today's meeting of the Monetary Policy Council.

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

• 14.15: The ADP report from the American labour market (estimations: +193k).
• 16.00: The ISM from the American sector of services (estimations: 55.1 points).
• 16.00: Publication of the announcement and press conference after the MPC meeting (estimations: no changes in interest rates, the level of 1.5%).

Further increase in aversion towards risk

The session in the United States and Asia passed in the atmosphere of an increase in aversion towards risk. Significant reductions of prices of stock market indexes were observed, the WTI oil went below 30 USD, and treasury bonds of the leading economies quoted a significant decrease in profitability. This all suggests that the period of low inflation and a slow economic growth can last for a longer time than it was previously expected.

According to Bloomberg agency calculations based on terminal contracts for interest rates, it is currently more likely that interest rates' level will remain unchanged, rather than there will be any increase this year. One-and-a-half month ago investors expected three hikes in 2016, 0.25% each. On the other hand, in mid December the Fed published the prognoses of the particular Federal Reserve representatives. They suggested that the expectations' median assumes an increase in interest rates by 1% in 2016.

Serious changes in views on the future monetary policy are also confirmed by the behaviour of treasury bonds in the United States. At the end of December 2015, profitability of 2-year treasury bond was reaching 1.1%, and currently they are quoted slightly above 0.7%. Profitability of 10-year bonds depreciated within slightly more than a month from more than 2.3% to 1.85%. This is the lowest level for almost a year.

Such significant limits regarding the future cost of the money put the Federal Reserve representatives in front of a difficult question. Due to an anxiety of economic slowdown and a low inflation, the market expects the Federal Reserve to leave the monetary policy unchanged. On the other hand, the Fed can consider these expectations as unjustified, and increase the cost of the credit. However, they take a risk that if the situation on the capital market deteriorates, inflation pressure weakens, and economic growth abroad is limited, the market can force the Fed to cut interest rates if the economic situation in the USA begins to deteriorate. This would only prove that the monetary tightening was initiated too early.

Thus, the FOMC will try to avoid confronting with investors, and will try to use the market's evaluations. Especially that they very clearly differ from the base case scenario presented by the Fed in December. This causes that the likelihood of hikes is currently really small.

On the other hand, in the past we had some significant changes in evaluation of interest rates suggested by the 2-year treasury bonds. In mid October they were evaluated for 0.55%, only to reach the level of 1.10% at the end of 2015. Thus, a change in sentiment is theoretically still possible. However, if it has to happen within one-and-a-half mont, there would have to be a very significant improvement in the global sentiment, and the American data need to be very good.

Important macro publications

Apart from the news from the global economy, it is worth noting the ADP and ISM readings. The first publication will concern workplaces in the private sector, and is a good introdution before the Friday's payrolls. The second one is one of the basic accelerating index for the American sector of services.

The employment subindex will be the most important in the ISM data. If it shows a visible slowdown (a decrease below the level of 52), we can expect the discussion about the power of labour market to begin. Additionally, if the Friday's payrolls are below 150k, we can expect a further deterioration in the global sentiment, a pressure on the dollar, and limited chances for the hikes.

Zloty before the MPC meeting

At 16.00 we will receive the first MPC announcement co-written by recently appointed members of the national monetary authorities. Even though no change of the level of interest rates is expected, it is worth noting whether the Council will change its view on the future monetary actions.

However, considering the disturbances on the currency market and an unstable global situation, it is likely that the conference and the announcement will suggest that currently the Council's preferred scenario is to keep interest rates unchanged.

As a result, the meeting itself will probably not cause any clearer moves on the currencies. The next month's meeting will be definitely much more interesting. The Council will receive then the new Report About Inflation, and the MPC circle will be completed by the members nominated by the Senate and the president.