Daily analysis 14.12.2017

The Fed rose the interest rates, but the chances for acceleration of the monetary tightening are limited. Outstanding data from the eurozone and good data from the UK before the ECB and Bank of England meetings. SNB is still dovish. The zloty did not benefit from good sentiment or a decrease in the yields of the US Treasury bonds. The EUR/PLN pair close to the 4.22 boundary, while the PLN/HUF pair continued its drops.

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

• 1:00 p.m.: Publication of statements as well as the minutes after December's Bank of England meeting (estimate: interest rates unchanged, 0.5%),
• 1:45 p.m.: Decision on increases of interest rates in the eurozone (estimate: no changes; negative deposit rate at 0.4%),
• 2:30 p.m.: Press conference after ECB meeting,
• 2:30 p.m.: Weekly initial jobless claims in the USA (estimate: 236k).

More dovish than hawkish Fed statement

Yesterday, we pointed out that a hasty attitude of some market participants towards a hawkish Fed statement may result in the dollar's depreciation. After the FOMC statement and during the press conference, the dollar has significantly depreciated and the yields of the US Treasury bond also incurred losses. It seems that some investors were hoping that apart from December's increase in interest rates, we could see four rate hikes in 2018 instead of the three expected in September.

However, the trajectory of future interest rates for 2018 and 2019 remained unchanged in relation to September's projections. The GDP perspective for the next year (from 2.1% to 2.5%) has been markedly raised, but the FOMC has not observed any acceleration of potential development yet despite the announced fiscal changes. Unemployment is also expected to be slightly lower (change from 4.1 to 3.9% in 2018 and 2019), however, according to FOMC estimates, this event will not affect the inflation acceleration. Therefore, the projection of rate hikes for the next two years has probably not been changed.

As a dovish signal appeared, the two voices against the decision to raise rates in December (Kashkari and Evans). It can also be observed that a noticeable opposition to further monetary tightening is being created until a clear inflation or wage growth acceleration will be seen.

Janet Yellen's press conference itself did not provide much additional information. The only curious thing could have been the fact that according to the present FOMC President, some members had considered fiscal stimulation in their projections. On the other hand, if it has not created a necessity to accelerate the monetary policy tightening pace, it can also be seen as dovish.

In general, the whole statement from the FOMC was neutral or moving towards a more dovish tone. The Fed will not intentionally hurry to introduce increases in interest rates if inflationary pressure (core and based on PCE price index) remains inhibited. In addition, there is still no acceleration of wage growth pace, which is also not an argument for a faster tightening of the monetary policy. As a result, yesterday’s weakening of the dollar seems to be justified.

Positive data before central bank meetings

Shortly after the opening of the European session, prominent PMI readings from Germany, France and the eurozone for December were published. In many cases, they present historical records (e.g. PMI for the industry in the single currency area - 60.6 points) or multi-year highs (e.g. production in French industry - 208 monthly highs). Therefore, it is hard to find any weaker elements of today's Markit and IHS publications.

In summary to the data, Chief Business Economist at IHS Markit, Chris Williamson, points out that the German economy could grow in Q4 by up to 1.0% QOQ, by 0.7-0.8% QOQ in France and by by 0.8% QOQ in the eurozone as a whole. Williamson also stresses that France's rapid recovery from economic stagnation is a great surprise and that thanks to it the eurozone, it can shift up.

Positive readings also came from Great Britain. Retail sales (volume) excluding fuels (estimated at 0.2% YOY) increased by 1.5% YOY. At a glance, this is not much, but it is worth noting that last year's basis was very high (7.5% YOY) and we may even be fearing a negative reading. The Office of National Statistics (ONS) pointed out that sales growth in its statement had been relatively strong in the last few months, and some retail shops have increased sales thanks to "Black Friday discounts".

Although data from Europe (and especially that of the eurozone) has surprised positively, the chances for it to change the monetary policy at both of today's meetings for the Bank of England and the ECB are unlikely. The market expects that the interest rate will increase by 0.25 percentage points at the end of next year. It seems that all members of the British monetary authorities seem to support the cost of credit at the unchanged level today. The chance for long-term movement after the BoE meeting seems limited.

Moreover, in the case of signals from the ECB, they are likely to be suppressed. The QE program was extended during the last meeting until September 2018. Rate hikes are not expected before Q1/Q2 2019 (by 0.1 percentage points). Recent positive data may suggest that there is no need to prolong quantitative easing rather than to withdraw from it. In the case of the ECB, a press conference and new macroeconomic projections which may increase the euro's volatility slightly will happen. In general, the message from Mario Draghi should be rather neutral. The market is also not speculating on major changes as was the case with the Fed.

Franc and dollar weaker but zloty does not pare any losses

Drops in the yields of the US Treasury bonds and lower dollar quotations translate into USD/PLN depreciation. The EUR/PLN did not pare past losses, which may be surprising in the context of FOMC messages as well as reactions from other markets. The zloty also weakened in relation to the forint. Since Tuesday morning, the loss has already been at approx. 0.7%.

Today's franc's quotations are lower than yesterday’s which is due to the maintenance of a dovish message during today's SNB meeting. The Swiss monetary authorities have confirmed the possibility of currency intervention to weaken the franc and the suggestion that the CHF will remain "highly valued." It still seems that the SNB will be one of the last central banks to decide on whether they should tighten the monetary policy. Combined with the current absence of any risk connected with eurozone disintegration, this should maintain downward pressure on the franc for the long term.

In the absence of any surprises from the ECB, the EUR/PLN valuation should remain relatively stable. However, if the market ignores positive information from the Fed on the Polish currency, it may mean that the sentiment towards the zloty is starting to deteriorate. This would mean that good PLN data will be ignored, and bad data will quickly translate into a general weakening of the zloty. We have to wait a few days for an assessment of whether such changes have actually taken place and observe the behaviour of the Polish currency on incoming reports from Poland and abroad.