Daily analysis 06.09.2016

One of the last important data before the Federal Reserve decision in September. The risk of a visible decline of the ISM index is large. The zloty should become stable before the MPC meeting tomorrow, as well as the decision from Moody's on Friday.

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

• 16.00: ISM index from the American services sector (estimations: 55 points; scope of forecasts: 52.6 points – 56.6 points).

Significant ISM

There are a few important macroeconomic publications before the Federal Reserve meeting that is scheduled for September 21st. These publications include the data regarding retail sale, industrial production, inflation and two weekly jobless claims. However, today's ISM from services sector for August may appear crucial as well, especially if its clearly lower than the market consensus.

Last week, some disturbances have been caused by a low reading of the ISM from industrial sector for August. The general index was below the level of 50 points, which separates progress from regress. Crucial components (orders and production) went strongly down. Moreover, employment indicated a reduction of workplaces, which was later confirmed by the ADP and NFP readings (for production only).

Correlation between services index and industrial index has not been perfect. However, a few past quarters confirm a similar trend direction, as well as similar changes in particular months. This suggests that today's data may be lower than expected.

Another reason that indicates the possibility of the services ISM to be closer to 52-53 points rather than 55 points, is the services PMI from the IHS Markit studies. The August data has shown a decrease in activity to 51 points. This is the lowest result since March. On the other hand, the employment subindex was the weakest since December 2014.

In his data commentary, Chris Williamson, Markit chief economist, wrote that, “a weak reading sends a pessimistic signal regarding economic growth in the third quarter.” He also took note that, “a low growth pace and a low employment, have been very often combined by companies with an increasing level of economic uncertainty, due to forthcoming elections. The companies have also been suggesting that the growth may rebound at the end of the year.”

Taking into consideration that PMI and ISM are very similar, the market should theoretically consider the risk of a lower than expected reading a long time ago. However, the truth is slightly different. PMI index has a definitely lower priority among investors than ISM, which is quite reputable.

In the end, it's also worth focusing on the ISM index trends. Some investors have assumed that two previous readings (with the average of 56 points) may be a beginning of a trend that would mean a higher economic activity of services sector. However, this matter can be interpreted differently. Two previous publications are rather an anomaly, because the trend is closer to 54.5 rather than 56 points.

In conclusion, there is quite a large risk that today's ISM would be lower than expected. This is a result of the data from industrial ISM, as well as services PMI. The return to the previous trend and equalization of the previous high readings, is also supportive for a lower ISM publication.

If our assumption is correct, we can expect the EUR/USD to grow by approximately 50 pbs and exceed the level of 1.1200. On the other hand, if the data is near the consensus or exceeds it, the dollar should gain value. However, it's very unlikely that the main currency pair would go below the level of 1.1100.

Zloty is waiting

This morning, the Polish currency made an attempt to strengthen by testing the area of 4.33 per euro. However, taking into consideration the risk related to the decision from Moody's on Friday, such a move would be too optimistic. Therefore, the EUR/PLN near the 4.35 level remains the base case scenario, until Moody's makes its review of Poland's loan credibility.

Regarding the MPC meeting tomorrow, we expect interest rates to remain at their current level. Such an approach may be supported by the recent resignation from Marek Chrzanowski. The more the monetary authorities will confirm their unanimous standpoint regarding interest rates, the less speculations that personal reasons were the only reason for Chrzanowski's resignation. As a result, the press conference after the MPC meeting tomorrow, may help the PLN slightly. However, taking into consideration the decision from Moody's on Friday, this impulse would rather be temporary.