Daily analysis 13.05.2016

Rosegren of the Fed was definitely more hawkish than expected. Does the FOMC want to prepare the market for a hike within the next two meetings? The zloty is relatively stable after a significantly worse than expected GDP reading for the first quarter. Moody's decision is still today's main event.

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

• 14.00: Poland's payment balance (estimations of current account balance: positive 345 million euro; trade balance: 325 million euro).
• 14.30: Retail sales from the USA (estimations: positive 0.8% m/m; excluding fuel and cars: positive 0.3% m/m).
• 16.00: Consumer index from the University of Michigan for the USD (estimations: 89.5 points).
• Moody's publication – unknown hour. Last year the rating was announced on Friday, shortly after 22.00.

Does Rosengren suggests hikes?

A weak reading of the American GDP for the first quarter, as well as worse than expected data from the American labor market from April, could both suggest a lesser will for monetary tightening, especially from the dovish FOMC faction. However, yesterday's testimony from Eric Rosegren completely denies this approach.

The Boston Federal Reserve representative was for a longer time, considered a supporter of a milder monetary policy. However, the recent months have shown his gradual moves towards central views. Perhaps it was the FOMC consensus becoming more dovish. It is also worth noting that Rosegren has a right to vote this year. Therefore, his message is more significant than the message of the members who do not have that right.

In the past, we took note that the FOMC does not want the market expectations to be too inconsistent with the perspective of two hikes this year. Yesterday's testimony from Rosengren is a perfect example of these types of actions. He tried to suggest, with each argument, that the monetary tightening in the USA is closer, rather than further.

Yesterday, the chairman of the Boston Federal Reserve claimed that April’s data regarding jobs created by the American economy (160k) was relatively strong. Despite that, it appeared to be slightly below the market expectations, as well as below the average from the first quarter (203k). Rosengren focused on an increase in salaries at the level of 2.5% y/y. In his opinion, “it should increase the income of households, as well as become a positive factor for future consumption.”

The FOMC representatives also claim that a weak growth of the GDP from the first quarter (positive 0.5% q/q in annualized approach) was actually worse than economists' expectations. However, “not many analysts expect this weakness to be sustained currently.” Rosengren emphasized that since February we have experienced a work-off within the markets. Moreover, the value of the dollar decreased. Furthermore, there was an improvement in the economic indexes of the American trading partners. It is worth reminding that worse global sentiments, as well as the strength of the dollar, were very often mentioned as the elements which extend the period of leaving interest rates unchanged. Thus, the lack of negative signals suggests the market that the chances for the monetary tightening are growing.

Rosegren also spoke of the negative effects of keeping interest rates at a low level for too long. “Very low interest rates encourage speculative behaviors. I have certain fears regarding the market of commercial real estates,” said the Boston FOMC representative. He also presented data that indicated that transaction prices in the commercial real estates market returned to their historical peaks, which were quoted right prior the recent crisis.

Rosegren also claims that, “the market is being too pessimistic regarding the fundamental strength of the American economy. Moreover, the probability of dropping the accommodative monetary policy is bigger than the financial market estimates.”

In conclusion, the testimony of the Federal Reserve representative from Boston suggests that the moment of another hike. If these views are shared by the Fed consensus, we can expect that the FOMC will give a clear signal for the monetary tightening in June. An increase in interest rates would happen at the end of July. If this becomes the base case scenario for the market, we can expect a visible strengthening of the USD, especially considering that investors did not expect hikes earlier than December.

Weak GDP before Moody's decision

The initial GDP data from the Polish economy for the first quarter was published at 10.00. It was definitely below the market's consensus. Economists expected an economic growth at the level of positive 3.5% y/y, as well as positive 0.6% q/q (seasonally equalized). However, the Polish Central Statistical Office (GUS) announced that the economy increased 3.0% y/y, and decreased 0.1% q/q. This is the worst data on quarter to quarter relation since the end of 2012.

Theoretically, such weak data should be disturbing. However, it is possible that it is mainly caused by a weaker condition of the construction sector, which should improve soon. On the other hand, very weak seasonally equalized data could be disturbed by the Easter calendar, which was different than usual. Thus, it seems too early to expect a visible economic slowdown, including a reduction of interest rates.

The following hours will bring Moody's decision. The exact time is unknown. However, last year the announcement was published after 22.00 (10:00 PM). In our opinion, there is a slightly bigger chance that the rating will be reduced, rather than only a decrease of perspective. However, the market hesitates between these two scenarios. Thus, moves on the EUR/PLN and CHF/PLN should not be bigger than approximately 0.03-0.05 PLN.