Daily analysis 03.02.2017

Mixed data from the European Union – accelerating indexes for services were positive, but the retail sales index was clearly below the market consensus. Optimistic attitude towards the American data is burdened with a large risk. The amount of arguments in favor of the zloty’s further appreciation is decreasing. The EUR/PLN is testing the area of 4.30.

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

• 14.30: American labor market data: workplaces in non-agricultural sector (estimates: 180k, range: 140k – 238k); hourly wage (estimates: positive 0.3% MoM, 2.8% YoY); unemployment rate (estimates: 4.7%).
• 16.00: ISM reading for the American services sector (estimates: 57 points).

Retail sales is worse than expected

This was the last PMI readings series from the euro zone for January. This time, Markit IHS published the final data from the services sector, as well as the data for eight examined countries from the euro zone. General readings confirm that this year’s beginning was positive for the majority of the euro zone’s economies.

The services PMI was at a solid level of 53.7 points. However, it’s also worth focusing on pace of creating new workplaces, which was the fastest since February 2008. This was expected by the unemployment data, which was better than expected. Moreover, the production index increased to its highest level since July 2012.

In his commentary regarding the final data, Chris Williamson, Markit senior economist, stated that he expects the euro zone’s GDP to increase by 0.4% percentage point in the first quarter. He also claims that, “the impressive pace of employment growth should also help drive consumer spending higher in coming months, further boosting the economy.”

However, the latter statement has not been confirmed by today’s retail sales data from the euro zone for December. This index went down 0.3% MoM. Moreover, its YoY growth was only at the level of 1.1%, against the 1.8 consensus. This fact should decrease speculations regarding the necessity of reducing the QE by the European Central Bank.

Will optimistic expectations be fulfilled?

We have repeatedly took note that single data from the American labor market are basically irrelevant, due to its relatively small sample-group. The ADP readings are definitely more reliable in the short-term and they appeared to be a positive surprise on Wednesday. Moreover, the employment component in the industrial ISM to the level of 56.1 points.

We also need to notice that the ADP publications and payrolls have approximated significantly in Month over Month interpretation over the past six months. This suggests that the new Labor Department data should be very positive, or even remarkable.

Theoretically, this should also cause the dollar to grow significantly. However, we could also find some counterarguments regarding this theory. Some of the market participants most likely expects that the data will be above 200k, even though the official consensus is at the level of approximately 180k. Therefore, only a reading which would exceed estimates by 50k (including revisions) will be able to support the dollar.

Additionally, investors will focus on the data regarding salaries. The data for December indicated a 2.9% YoY increase in hourly wage, which was its best result since June 2009. Currently, economists who were surveyed by Bloomberg, expect a growth at the level of approximately 2.8%. The average estimate is at the level of 2.75%. Fourteen out of twenty-eight surveyed economists expects a result within the range of 2.6%-2.7%. Twelve economists estimate that the result will be consistent with the average. This increases the risk that the reading will be worse than the consensus, as well as decreases the chances for the dollar’s appreciation in the case of positive payrolls.

Of course, in the long-term strong increase in the amount of new workplaces, as well as decreasing unemployment rate, should cause an increase in salaries and a pressure on rate hikes. This should most likely translate to the stronger dollar. However, today’s data may not confirm this optimistic scenario.

Decreasing space for zloty’s appreciation

The zloty’s chances for continuing its growth are decreasing. Primarily, this is a result of the scale of the PLN’s strengthening since the year’s beginning. Secondly, the foreign capital may come to a conclusion that there are no more arguments for the zloty’s appreciation. Over the past few days, the profitability of the ten-year treasury bonds decreased by 10 base case points. This means that potential capital profit is smaller. Moreover, the stronger zloty reduces chances for profits from exchanging the Polish currency.

The zloty will be sensitive to the American data over the forthcoming hours. If payrolls are not clearly better than the consensus and an increase in salaries slows down, the zloty will remain in a positive condition. However, a positive surprise from the Labor Department may wear-off the entire zloty basket. The dollar may increase 1.5% and the EUR/PLN may reach the range of 4.32-4.33.