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Daily analysis 05.10.2015

5 Oct 2015 15:02|Marcin Lipka

Strong reaction on markets after the US data. Comments from the Fed official don't give enough hints. Friday's Polish MPC meeting may be negative for the zloty.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • 16.00: ISM non-manufacturing index (survey: 58 points).

This might have been a neutral job report

Before Friday there were no hints that the jobs data could have been disappointing. The economy during the recent quarters generated on average of 200k jobs each month and additionally historical revision was on the upside for August. Also, weekly jobless claims or Wednesday's ADP report didn't give significant doubts regarding “payrolls”.

The Labour Department data clearly surprised. The publications showed only a gain of 142k new jobs, around 60k less than economists expected. Also, the readings for the two previous months were revised downwards by 60k. Additionally, wages didn't change while the market expected a gain of 0.2% m/m.

The market reaction clearly summarized surprise. The dollar lost value which pushed the EUR/USD to around 1.13. Yields on 2-year US bonds dropped by 10bps to 0.56%. At the beginning, equities dived but later the market participants decided that the report might be a one-off event which does not mean that the economy is really slowing, but can be a good argument to keep interest rates beyond 2015. There is no better news for the capital markets than a loose monetary policy and fairly high GDP growth.

Theoretically, it is possible that the Fed may resign from monetary tightening this year. But it will not be due to one or two weaker data from the jobs market. Lower “payrolls” readings happen not that often but they have appeared in the previous quarters and despite that fact jobs gain was around 2-3 million on the yearly basis.

Currently, the Fed officials should calm down calls on the possibility to extend the zero-interest-rate policy beyond 2015. This approach, however, was not shared by Eric Rosengren, Fed president from Boston. He had been a guest on Fox Business TV before the payrolls hit the wire and had claimed that if the trend on the job market remains, he would back up the interest rate hike this year. But after the job data was published “The Wall Street Journal” interviewed him and he slightly withdrew from his previous view saying that if weak macro data remains he would vote on keeping the benchmark unchanged.

In the comments for Bloomberg Rosengren there was also noted that if the US economy slows below 2.0-2.5% on the yearly basis, then he would be less convinced to hike interest rates this year. It is also worth noting that the Boston Fed president is slightly more dovish than the Fed's consensus – Yellen, Dudley, Lockhart, Williams or Fischer. On the other hand, Rosengren may be a good barometer to which way the consensus can go, if further economic data fail to meet expectations. Some short comments were also presented by James Bullard. Leaning hawk from St. Louis still claims that the cumulative improvement in the economy should be a key argument to the interest rate hike.

Summarizing, despite the fact that Friday's publication failed to meet expectations the core Fed members should keep their view about interest rate hike to later this year. The confirmation of this view should come tomorrow after 21.30 CET when John Williams is scheduled to speak. It is, however, possible that some new comments may even appear before that speech. As a result, the EUR/USD appreciation move should be limited and the rise above Friday's tops is not the base case scenario.

The foreign market in a few sentences

Investors overreacted on Friday's data. The Fed is not going to resign from an interest rate hike this year after a single labour report. Market participants may be, of course, driven by the perception that the pace of hikes may be more shallow but it is still too early to price-in such a distant event. As a result, the EUR/USD should not exceed the 1.1300 mark and it is possible that the pair will return quickly to the 1.1200 range after the comments from Fed officials who are close to the consensus.

Slight zloty appreciation

Weaker US data combined with sentiment improvement on the global equities market pushed the zloty hither and is keeping the EUR/PLN below the 4.25 mark. However, the sentiment improvement on the PLN might be short lived. If the Fed remains on track to increase the benchmark this year and the incoming data turns out to be mixed, it should keep the pressure on EM currencies at least until the moment of further stimulation from the ECB, BoJ or PBOC.

Secondly, the MPC meeting scheduled for tomorrow should be important. The members will not suggest any interest rate changes but their more sceptical views on the economy both domestic and international may give the impression to the market that the new Council will have a real chance to cut the benchmark at the beginning of the year. As a result, the stronger zloty is less probable than the EUR/PLN increase towards 4.27-4.28.

Anticipated levels of PLN according to the EUR/USD rate:

Range EUR/USD 1.1150-1.1250 1.1250-1.1350 1.1050-1.1150
Range EUR/PLN 4.2200-4.2600 4.2200-4.2600 4.2200-4.2600
Range USD/PLN 3.7700-3.8100 3.7400-3.7800 3.8000-3.8400
Range CHF/PLN 3.8600-3.9000 3.8600-3.9000 3.8600-3.9000

Anticipated GBP/PLN levels according to the GBP/USD rate:

Range GBP/USD 1.5150-1.5250 1.5050-1.5150 1.5250-1.5350
Range GBP/PLN 5.7000-5.7400 5.6800-5.7200 5.7200-5.7600

5 Oct 2015 15:02|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:

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Afternoon analysis 02.10.2015

2 Oct 2015 13:20

Daily analysis 02.10.2015

1 Oct 2015 16:56

Afternoon analysis 01.10.2015

1 Oct 2015 13:23

Daily analysis 01.10.2015

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