Daily analysis 12.08.2016

Slightly stronger dollar after William comments, new record high levels on the S&P 500 and firmer oil prices. Retail sales from the US. Weaker than expected GDP, but positive data on the foreign trade. Speculations on interest rate reduction seem to be premature.

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

• 14.00: Balance of payments from Poland. The trade balance (survey: +200 million euro). Current account balance (survey: minus 85 million euro)
• 14.30: Retail sales from the US (survey: +0.4% m/m excluding gasoline and cars +0.3% m/m)
• 16.00: University of Michigan consumer confidence index (survey: 91.5 points)

The dollar is slightly stronger

During yesterday's session in the US there were several market events. Firstly the oil returned to the headlines. Reuters quoted the statement of the Minister for Energy of Saudi Arabia, Khalid al-Falih, who had said in an interview with the state news agency SPA, that at a meeting in Algeria at the end of September members of the "OPEC and the main exporters outside OPEC will discuss the market situation along with possible actions that may be necessary to stabilize the market."

We can conclude that this strategy is similar to what we saw a few months before the Doha meeting. At that time there were speculations about a possible freeze of production which pushed the prices higher. Although the agreement formally did not work, crude prices increased. It may be an argument for some market participants to close some “short positions,” which resulted to hefty gains yesterday.

Higher oil prices also helped energy companies on the US stock market. As a result, the S&P 500 hit all-time-record-high levels. Slightly higher future inflation, due to an increase in oil prices and good sentiment on stocks, pushed the bonds by a few basis points thereby increasing the probability of the market interest rate increases. Finally, the EUR/USD fell from around 1.1180 to 1.1140.

The element which could also contribute to a firmer dollar was The Washington Post interview with John Williams. Traditionally, the chief of the San Francisco Fed has been relatively optimistic and noted that "there is always the risk that inflation will increase faster than we expect." The unwillingness to wait until inflation rises to around 2% before hiking interest rates, shows that Williams may seek to convince some FOMC to signal to push higher interest rates in the near future.

Overall, however, even taking into account all these elements, the weak GDP from the first half of the year will still be a more significant argument to remain in “wait and see” mode during the September meeting.

It is worth noting some macroeconomic reports from the US in the afternoon. The most important should be retail sales, which will show consumer behaviour at the beginning of the second part of the year. Overall, however, the readings would have to significantly exceed the growth rate of 0.3% m/m (consensus excluding energy and cars) to support the US currency.

Weak GDP, but solid surplus in foreign trade data

At 10:00, the Polish GDP reading was published for Q2. The growth on a y/y basis rose 3.1% while the market consensus was at 3.3%. As it is, none of the details in the preliminary data revealed growth contribution, but investments were probably on the weak side again.

Shortly after the GDP hit the wire, comments from Professor Żyżyński appeared on PAP news agency. The MPC member said that he would eventually back the interest rate reduction by 50 bps, but he is concerned whether such a move would be effective.

However, even if similar conclusions appear at one of the next meetings of the Council, it’s very unlikely to be supported by anybody else other than Professor Łona and Professor Żyżyński. MPC members, especially those appointed by the President, rather represent a fairly conservative approach and probably won’t make the decision to cut the cost of money if there is no real threat of long-time GDP growth below 3%.

Today’s GUS report on Polish trade can be regarded as much better. The surplus after the first half of the year rose to 4.2 billion euro, while in the first 5 months it was less than three billion. This means that the June trade surplus exceeded 1 billion euro. So, the afternoon reading from the NPB on the balance of payments may be much better than the market consensus.

Summarizing the situation on the zloty should not change significantly even taking into account the lower than expected GDP reading or Żyżyński’s comments. If the global sentiment remains stable, the Polish currency should hold onto recent gains and the risk for the EUR/PLN to rise above 4.30 remains limited.