Daily analysis 15.10.2015

The economic readings published yesterday support keeping rates unchanged but they were not bad enough to significantly disturb the Fed consensus. Nowotny's comments put some pressure on the euro. Important readings in the coming days. The zloty should remain stable.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 14.30: Weekly jobless claims from the US (survey: 270k)
• 14.30: Empire State manufacturing survey (survey: minus 7 points)
• 14.30: CPI from the US for September (survey: minus 0.2% m/m; +0.1% m/m excluding food and energy, +1.8% y/y excluding food and energy)
• 16.30-18.00: Discussion at Brookings Institution between William Dudley, New York Federal Reserve President and John Taylor. Topic: “The Fed at a crossroads: Where to go next?”

Data gives arguments to doves

Yesterday, we presented the consensus of voting Fed members regarding the monetary policy perspective in the US. However, during the day macroeconomic readings hit the wire and according to some economists they might push the monetary tightening towards March 2016.

It is true that retail sales published on Wednesday were weaker than expected. The monthly reading does not look good – overall sales rose only +0.1% m/m while the stripping cars and gasoline data was flat m/m. Additionally, the data for the previous month were revised downward. However, if we look at the y/y publication the publication looks fairly good.

At a glance, the Beige Book publication looked similarly pessimistic. Surveys conducted by the local Federal Reserve branches on the economic situation turned out to be slightly worse than in August. Two months ago, 6 out of 12 districts grew at a moderate pace, while now that number was halved. Currently, 6 districts were graded as modest.

The worst situation is in manufacturing, which is hurt by the stronger dollar, and therefore lower competitiveness of US products abroad. Also, the fall in commodities pushes mining companies to cut costs. However, this should not be a great surprise. It has been observed for a few quarters.

On the other hand, there is still a high consumer demand, the non financial sector performs well and the housing looks good, which has improved since the August report. The job market is also a bright spot. It tightened from the previous survey and companies have problems to find workers both skilled and unskilled.

Traditionally, the market focuses more on the “headlines” than on the details. Yesterday, the move was fairly broad. The dollar dropped to the basket of currencies by 1% and yields on 2-year bonds slumped below 0.60%. As a result, the odds for a rate increase, according to Bloomberg calculations dropped below 30% and the future contracts show that market participants expect the tightening in March 2016.

Investors should focus today on the incoming data. In the afternoon inflation, Empire State index and jobless claims are set to hit the wire. If all readings turn out to be worse than expected the upside move around 50-100 pips on the EUR/USD should not be excluded.

It is also worth noting the discussion between William Dudley and John Taylor at Brookings Institution. It is important how the New York Fed President comments on the most recent data. In our opinion he should focus more on the details which can outweigh the “headline” interpretation by the market. It may pause the dollar depreciation, if the data pushes the currency lower.

The foreign market in a few sentences

At the beginning, of the European session the EUR/USD dropped by 50 pips on some dovish comments from Ewald Nowotny. The ECB member mentioned that the central bank has failed to meet the inflation goal and was talking about some measures regarding the monetary policy. However, due to the fact that during the next week and the ECB meeting there is a slim chance that Mario Draghi will announce any changes regarding the monetary policy, the issues should be covered by the dollar sensitive comments.

Zloty remains stable. Comments from Chojna-Duch

The EUR/PLN volatility is minimal and the European currency is currently valued at 4.23 zloty. Slightly more nervous moves are seen on the USD/PLN, but it is only a consequence of global events and the EUR/USD changes. After Ewald Nowotny comments on the situation, the franc looks worse. The euro dropped to the Swiss currency and it pushed the CHF/PLN higher towards 3.90. Currently, the risks for further franc appreciation are still not the base case scenario, but the issues should be monitored.

Regarding the future economic activity in Poland it is worth noting some comments from professor Chojna-Duch. The MPC member, close to the consensus, claimed that “the Polish central bank 2016 GDP forecast of 3.6% may be optimistic” and “the Polish 2016 budget assumptions may need to be revised”. The market is aware of slower growth, but during the election period it may be a good argument to increase volatility especially in a scenario when none of the leading parties fail to form a stable government.

Anticipated levels of PLN according to the EUR/USD rate:

Anticipated GBP/PLN levels according to the GBP/USD rate: