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Daily analysis 06.06.2016

6 Jun 2016 13:14|Marcin Lipka

Friday's data from the American labor market made the Fed's task more complicated. In which direction will Janet Yellen's testimony go? The zloty is stable against the euro. The last Monetary Policy Council's meeting with Marek Belka as chairman will occur this week.

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

  • 18.30: Janet Yellen's testimony in Philadelphia. It will concern the economic matters, as well as the monetary policy.

American data and Fed

Friday's data from the American labor market caused a lot of commotion in the market. A significantly lower than expected payrolls reading, caused the EUR/USD to increase approximately 200 pbs. We could observe a strong reaction on profitability of the American two-year treasury bonds as well. They decreased from approximately 0.9% to 0.8%. This reduced the chances for a probability of the monetary tightening in the USA as well. The chances for hikes in July are currently estimated at approximately 25%, while it was approximately 45% before the data.

There is no doubt that the data from the Bureau of Labor Statistics (BLS) is complicating the Federal Reserve's task. Moreover, it was published when the majority of the FOMC representatives had sustained the perspective of two or three hikes this year, as well as had suggested the nearest increase by 25 base case points in June or July.

However, there is a question: do Friday's readings actually indicate a slowdown in the labor market? First of all, the data from the BLS is based on surveys in enterprises, which is contrary to the data regarding jobless claims, for example. However, each statistical method is burdened with an error.

According to the BLS, the 90% range of confidence for payrolls is approximately 115k. This means that there is approximately a 90% chance for the actual change in the amount of employed being within this range. It is also possible to assume that approximately one reading per year will probably be outside of this range. If, for example, the economy creates 150k workplaces, the BLS data will show more than 265k, or less than 35k.

Luckily, the BLS data is quite easy to verify by comparing it to the ADP readings. Even though the ADP data does not include public institutions, they examine more enterprises than the Labor Department (441k vs 116k). Moreover, if we compare the historical deflection of a specific reading with the average, we will see that the BLS data differs from the average more often than the ADP data.

Thursday's ADP data has shown that the American economy created 173k workplaces in the private sector, while the payrolls showed the value of 25k (in private sector only). Thus, it is much more likely that a clear deflection of the recent readings was mostly caused by statistical, rather than economic matters.

The above hypothesis becomes slightly complicated by a weak ISM reading from the services sector. Especially considering that its component regarding the employment was below 50 points. However, this index was as weak in February as well. Despite this, the BLS data was significantly above 200k and the ADP data was above 15k.

As a result, the available data shows a minor hazard of a beginning of a more serious slowdown in the American labor market, due to Friday's data. On the other hand, the Federal Reserve cannot ignore these readings. Its members repeat at almost every occasion that the FOMC decisions are dependent on the new data. Even despite the imperfectness of the BLS data, the Fed's members will probably need to wait for the next readings (as well as their revisions), in order to ensure that May's data was rather a one-time event.

Thus, we can expect Janet Yellen's testimony today (18.30) to be more cautious than if the BLS data was consistent with expectations. On the other hand, the FOMC chairwoman will probably not withdraw from the announcement of the hikes in the coming months. That is of course, if the data does not continue to deteriorate.

As a result, the chances for the dollar to work-off some of Friday's losses is relatively big. Even though, uncertainty in the market will remain visible. For the time being, the probability of a return to the appreciation trend on the dollar in the forthcoming days, seems limited.

Dollar is weaker, and euro is more stable

Friday's data from the American labor market overvalued the dollar against the zloty by approximately 0.07-0.08 PLN. The Polish national currency is stronger against the pound as well. This is due to the surveys that increase the probability of Brexit. On the other hand, quotations of the euro, as well as the franc are relatively stable.

Apart from Janet Yellen's testimony today (it may have the most significant impact on the dollar), it is worth noting that the MPC meeting will be held on Wednesday. This will be the last meeting of the Council with Marek Belka as the chairman. Thus, it is possible that there will be many questions regarding the economic growth for the coming months, especially considering that the MPC receives revised macroeconomic projections before each meeting.

6 Jun 2016 13:14|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.

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