Daily analysis 06.09.2017

Dovish comments from the Federal Reserve and the threat of another hurricane have clearly overestimated the yields of US Treasury bonds. The zloty has incurred slight losses compared to the morning quotes. Important MPC meeting.

The most important macro data (CET - Central European Time). Surveys of the macro data are based on information from Bloomberg unless noted otherwise.

• 4:00 p.m.: ISM index in the US service sector (estimates: 55.6 pts.),
• 4:00 p.m.: Press conference and statement's publication after the meeting of the Monetary Policy Council in September.

Ground breaking speech?

After Monday's US Labor Day, American investors had to respond quickly to new events. The most important of these was Lael Brainard's speech (member of Board of Governors).

Although Brainard is considered to be a relatively dovish Fed representative, therefore she is the one who would see lower interest rates than consensus, however, in any of the last votes she did not oppose tightening the monetary policy. This distinguishes her from the most benign FOMC members who expressed their opposition to the more restrictive monetary policy (Kaskhari - in the vote, Bullard - in the speeches).

Brainard will attend the Board of Governors (currently 5 members, always with the right to vote), which may have a greater impact on the Committee than the representatives of regional Feds. Therefore, her suggestion yesterday was to keep interest rates unchanged before there will be convincing information that inflation is heading towards the Federal Reserve 2% target can be very important. It is also worth noting that her speech does not have to be based solely on personal opinions. It is possible that Brainard's views are being shared by an increasing part of the FOMC, which could even cause a significant reduction in the future median of interest rates in FOMC projections, which will be presented at the Committee's meeting in two weeks.

There is an interesting fact that the initial market's reaction to comments from Brainard was rather limited. Perhaps, it was related to the early time of speech publication (8 a.m. New York time) and Monday's holiday in the United States. However, after several dozen minutes, one of the major moves in the US Treasury Bond market was observed this year.

The yields of Treasury instruments maturing in 5-years fell by as much as 8 basis points to 1.64%. These are the lowest readings since last November. A similar movement was observed on 10-year bonds, whose yields fell by 10 basis points to approx. 2.06 percent. The interest rate market has practically stopped to price any interest rate increases for the forthcoming quarters. For the time being, the market priced in an approx. 10 bp (0.1 percentage point) rate increase until the end of the current year and 20 basis points (0.2 percentage point) by January 2019. Therefore, there is a small chance to see at least one increase by 25 basis points for another 16 months.

In addition, it should be noted that low yields were also sustained by the risk of another hurricane hitting the US, as well as extreme dovish comments from the chairman of the regional Minneapolis Federal Reserve. "It is possible that our rate hikes for the past 18 months have led to slower payroll growth, leaving more people from the labour market, lower wages, inflation, and inflation expectations," Neel Kashkari said at the University of Minnesota's Minneapolis. While this comment may seem a bit exaggerated, it may, to some extent, prove that the Fed is heading toward a dovish attitude because its representatives who were against the interest rate hike have begun to suggest that a lower cost of money than the current one would be better for the economy.

Sharp declines in government bond yields and dovish comments from FOMC members should be unfavourable to the dollar. Moreover, the EUR/USD rises could be seen around 1.1920-1.1930 boundaries yesterday afternoon, however, this movement seems to be relatively small. Probably it is the result of expectations for the outcome of the ECB's meeting tomorrow. However, if Thursday's ECB message did not contain concerns about the euro's strong rise, then the main currency pair could cross the 1.20 boundary relatively quickly.

Slightly weaker zloty

The beginning of today's session on the Polish currency was favourable. The EUR/PLN pair tested the 4.23 boundary and the USD/PLN fell even below 3.55. In the morning, however, the euro exchange rate moved toward 4.24-4.25 PLN, but still, the Polish currency is quite strong in the region and one has to pay for it 72.2 forint.

An interesting event in the domestic market may be the afternoon's press conference after the MPC meeting. More hawkish members may have reason (a strong increase in consumption, a low rate of savings) to start suggesting the need to tighten the monetary policy. On the other hand, moreover, very slow investment growth and a lack of inflationary pressure are the arguments for the more dovish part of the MPC. We will see which view has dominated today's message, but it seems that it may be a good time to begin suggesting the need to move slowly to a more restrictive monetary policy. If this scenario began to emerge, then we could be dealing with a recovery from the morning losses of the zloty.