Daily analysis 15.03.2017

The Federal Reserve may want to take advantage of the market trends and accelerate the expected pace of rate hikes for 2018. The American data series. The zloty has been stable today, but the Fed’s meeting may increase the volatility on the PLN.

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

• 13.30: The American retail sales (estimates: positive 0.1% MoM; excluding cars: positive 0.2% MoM).
• 13.30: The American CPI (estimates: 2.7% YoY; excluding fuel and food: positive 2.2% YoY).
• 14.00: Baseline inflation from Poland (estimates: positive 0.3% YoY).
• 19.00: The decision regarding interest rates in the USA (estimates: a 25 base case points increase to the range of 0.75-1.00%). Publication of both the FOMC announcement and macroeconomic forecasts.
• 19.30: Janet Yellen’s press conference.

Fed with a plan?

This afternoon we will receive the macroeconomic data series from the USA, the election survey results from Holand and the Federal Reserve meeting will be held. All of this should set the market sentiment for the forthcoming days or even weeks. The Fed meeting seems to be the most crucial for the market.

We wrote repeatedly about how the FOMC members have changed the market expectations towards today’s meeting. Regardless of their previous views, their message had become homogeneous and had suggested an increase in interest rates for this month. Due to the fact that this behavior was not a coincidence, we may assume that the American monetary authorities would try to go even further and make attempts of building expectations of increasing interest rates by 25 base case points each quarter, until the first half of 2019. That is of course, if the market conditions don’t deteriorate significantly.

Even though we don’t expect this suggestion to appear tonight, the Fed may increase the expectation median from three to four rate hikes (25 base case points each) in 2018. This would be the first step towards the above mentioned scenario. In December, seven out of seventeen FOMC members expected more than a 0.75 base case points increase next year. Moving this value up to 100 points only requires two more representatives. Due to positive economic events of the previous quarter, this scenario seems very likely.

However, the expectation median for 2017 should remain at the level of three hikes (one today, plus two more later). Nevertheless, a relatively hawkish announcement (strong labor market, inflation near its target), as well as no dovish references during the press conference, should cause that the market will interpret this decision as hawkish. This may strengthen the dollar and increase the profitability of the American bond market.

The scenario of a 25 base case points hike each quarter may be announced in June. If the next rate hike is made in mid-2017 (this scenario is expected by 70% of economists surveyed by “The Wall Street Journal”), this would be a good moment to increase the perspectives for monetary tightening to a total of 100 base case points for this year as well.

American data and Dutch elections

The forthcoming hours will bring the new American data. The CPI above the level of 2.7% YoY should be positive for the dollar, especially that this would mean the PCE reaching the FOMC goal (2.0%).

The most recent election surveys from Holland indicate that the chances for the Party for Freedom’s victory are decreasing. This has reduced the likelihood of Geert Wilders creating the government independently. The euro may slightly gain value when the market receives positive exit polls for the central parties (at approximately 21.00).

Zloty is calm

The zloty’s condition is relatively calm. Of course this situation may change this evening, if the FOMC announcement is relatively hawkish. However, the risk of the USD/PLN going above the 4.10 level remains relatively limited.

This afternoon, we will also receive the data regarding baseline inflation. If this index goes above the level of 0.3% YoY, this would support the scenario of the zloty’s stabilization. Currently, increasing baseline inflation is one of a few arguments that could change the MPC attitude to slightly more hawkish.