Slow growth of the Employment Cost Index may be important, but not a ground breaking benchmark for the Federal Reserve. The crude oil slump pushes the rouble lower. The zloty is slightly stronger after solid data from Polish manufacturing.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- 14.30: Personal income and spending from the US (survey: +0.3% m/m and +0.2% m/m respectively).
- 14.30: Core PCE from the US (+0.1% m/m and +1.2% y/y).
- 16.00: ISM Manufacturing (survey: 53.5 point).
High volatility after the ECI publication
There was a real surprise on the market after the Employment Cost Index (ECI) hit the wire on Friday. When it turned out that the ECI rose only 0.2% q/q (the weakest reading in more than 30 years) speculations about the hypothetical impact on the Federal Reserve occurred immediately.
Firstly, however, it is worth noting a few issues regarding ECI. The index differs from the monthly wage data published by the Labor Department where only an hourly wage is available. The ECI consists of other parts like health insurance or bonuses.
Additionally, it is interesting that the ECI was rising at +0.7% q/q in the last four quarters which pushed the year on year growth to 2.6%. There were suggestions that the ECI might better show how the employment expenditures rise especially comparing to the Labor Department monthly data where y/y publication is around 2.0%.
As a result, when it turned out on Friday that the ECI rose only 0.2% q/q and 2.0% y/y one of the arguments about a quicker rate hike in the US was questioned.
The market significantly lowered the US currency and yields on 2-year bonds dropped by 8 bps from 0.74% to 0.66%. The probability regarding the interest rate hike during the September meeting dropped from 48% to 40%.
Later, however, it was observed that the first reaction might have been too strong. In an interview for “The Wall Street Journal” James Bullard said: “I am not going to put as much weight on the wage data”, as in the long term they are close to the levels he anticipated, if the inflation and the productivity changes are taken into consideration. Despite the fact that the Fed's president from St. Louis will not vote this year and is regarded slightly hawkish, his views are closely observed and may be close to the Fed's consensus currently – two hikes till the end of the year and 100 bps in 2016.
Pressure on the rouble
The Russian currency lost more than 20% since mid-May and the US dollar currently costs more than 62 roubles. Most of the depreciation is caused by the oil slump which is moving towards this year's lows.
It is also worth noting that in June's statement the Russian Central Bank (CBR) was expecting that with the 70 USD Brent price the economy of the world's largest country may grow 0.7% in 2016. However, if the main exporting commodity slides to 60 USD Moscow will have to deal with shrinking GDP at around a pace of 1.2%. Taking into account the simple dependency on the Brent price and the economy we can see that if Brent stays around 50 USD it would guarantee at least a 3% contraction of the Russian economy.
The test of January lows of Brent should push the rouble rate per dollar to the 65-70 range, but breaching the upper end of the band is not expected. To predict the dollar above the 70 mark we would have to see a slide on European oil to 40 USD and a deterioration on the east border of Ukraine.
The foreign market in a few sentences
The behaviour of the investors proved the market's reaction is nervous and unsure of the future Fed decisions. Currently, all the data regarding inflation and jobs market is expected to be closely watched and the reaction might be much stronger than usual. The payrolls data due on Friday is seen as the most important report, but today's PCE and ISM readings may also push for more changes. However, if we see no surprises the EUR/USD should be traded around 1.10 till the labor data on Friday.
Positive surprise from PMI
Solid data from Poland hit the wire today. The PMI manufacturing data rose to 54.5 points. The economists' expectations were around 54.1, but it is worth noting that the average value is around 50.3 since the survey started in the late 90s.
The subindexes also looked good. Markit, which runs the survey, noted that it was the strongest rise in export orders for 17 months. Commenting on the data senior Markit economist Trevor Balchin said that “the PMI data suggest that June's official 8.9% year-on-year rise in manufacturing output will be broadly sustained at the start of Q3”. The Polish data looks also solid if we compare them to Hungarian where the PMI run by the MLBKT dropped from 54.9 in June to 50.0 in July.
The Markit data confirms our base case scenario that the EUR/PLN should remain in the 4.13-4.14 range. Currently there is also no significant threat that the CHF/PLN may rise markedly above 3.90.
Anticipated levels of PLN according to the EUR/USD rate:
Anticipated GBP/PLN levels according to the GBP/PLN rate: