Daily analysis 16.07.2014

Details have caused yesterday's speech of Janet Yellen in front of the congress to have been received a little less doveish than expected. Relatively good readings from China and mixed from USA. The pound once again tested 6-years maximums. Zloty remains stable after slightly higher inflation and signals from Fed. Hausner intends to co-operate with Belka.

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

• 15.15 CET: Industrial production for June in USA (estimations: +0.4% m/m; use of production powers: 79.2%).
• 16.00 CET: Janet Yellen's speech in front of House of Representatives Financial Services Committee.

Yellen. Data. The pound

Relatively strong EUR/USD fall would indicate that Janet Yellen's speech was much more hawkish. That was not the way things turned out. The chairwoman actually did not sound as mild as it was announced by Lockhart (there was not a moment when anyone could guess that money rates will not be raised until the second half of 2015) but there is still a lot of time until the moment of monetary policy tightening.

Today's comments concentrate only on one sentence of the speech, published punctually at 16.00 CET (the series of questions and answers occurred not until then). We can read there that “if the labor market will continue its improvement in the faster tempo than the one assumed by FOMC and as a consequence, approach even our double mandate, the increase of interest rates will probably appear earlier and will be faster than we currently expect”. Truly this statement itself is hawkish. Mostly because of “admitting” that current improvement on the labor market is far bigger than expected. However, the next sentence slightly soothes this communicate. “On contrary, if economy's condition will be disappointing, the future path of money rates will be more accommodative than it is currently expected”. Fed also underlines that they are also on other indexes describing the labour market (lack of wages' increase, record low index of participation, high participation of part-time employed), and they indicate “a high level of vacant labour resources".

Federal Reserve also notices the recent increase of inflation (up to 1.8%), however, constantly assumes, that in the end of the year its value will be somewhere in-between 1.5% and 1.75%. There is not a moment when Fed sees the anxiety with higher than previously expected increase of prices (what can be considered as a doveish signal). According to Fed, the condition of real estates market is also not very good, which also is not a signal for faster interest rates increase. Market's attention (especially the debt instruments and shares) was attracted by the statement, that because of the low level of interest rates, some assets (e.g. corporate bonds with low rating) seem to be overvalued. Additionally, in the “Report of Monetary Policy” (similar to Report on Inflation made by NBP) published every six months, Federal Reserve underlines, that “the lower companies, and also those from the social media and biotechnology branch seem to be overvalued”. This fact slightly deteriorated the sentiment on the shares behind the ocean, which also resulted in increase of American dollar's value.

Apart from Fed information, we also had data on retail sale from behind the ocean. These were rather neutral. The main reading was clearly below the forecasts +0.2% m/m vs the expected +0.6% m/m, but the data from previous month was revised upwards by 0.3 per cent, which allowed the index to maintain above 4% in the year to year relation. Additionally, the reading with exclusion of cars and including the review of data from May, was in general better than estimations.

We have received relatively positive informations from China though. This country's GDP increased by 7.5% r/r in second quarter, while Bloomberg estimations were predicting the development on level of +7.4%. Publication of industrial production (+9.2% r/r) and retail sale (+12.4% r/r) for June, were also positive and accordant to expectations. Anxieties of Beijing's clearer slowdown, are not becoming a fact at the moment, which should also help other economies.

Yesterday's GBP/USD pair achieved new six years maximums in limits of 1.7190. However, the increase was not maintained due to the global appreciation of the dollar. “The cable” also does not look too satisfied because of today's data. Despite that the unemployment decreased to the lowest level since 5 years (6.5%, according to the prognoses), and the applications for unemployment benefit descended faster than expected, the wages increase on the level of only +0.3% (descend from +0.8%) shows, that there still should not be any inflation pressure from the wages, and what follows a chance for increasing the money rates is lower. Thus, as a consequence, the data for the pound were not good enough, to continue the increases.

In conclusion, yesterday's speech of Janet Yellen was slightly more hawkish (ad the labor market), however, her underlining the lack of threat with inflation's growth and real estates market's weakness shows, that we are still far away from the real monetary policy's tightening. Thus, if no surprising information appears, the further appreciation of the dollar should not be strong and we will maintain in the division of 1.35 – 1.36 until the end of the week.

Slightly stronger zloty

Yesterday's data about inflation helped the national currency a little. CPI resulted in 0.3% r/r, while the expectations assumed the readings in limits of 0.2% r/r, and the market feared that the publication would be even lower. Thus, it carries away the chance for the decrease of interest rates in the nearest future, which is a positive element for the zloty. Additionally, as the biggest positive CPI contribution came from the “connection” component, it can be also stated with a big probability, that also today's basis reading (that also consists of “connection”), will be higher than 0.8%, which should maintain EUR/PLN in limits of 4.13.

In his interview for “Tygodnik Powszechny” fragments of which were quoted by Polish Press Agency, a member of MPC Jerzy Hausner claims, that “it was Marek Belka (in reference to Wprost tapes – author's note) who caused the problem, but I am ready to co-operate with him in order to solve the problem”. Hausner however does not say, that after finishing his current term of office (in one-and-a-half year) Belka should not run for another.

In conclusion, thanks to slightly higher inflation, zloty has a chance to maintain appreciation of approximately PLN 0.01 and in the hours to come (up until tomorrow's data on industrial production) EUR/PLN should maintain in the limits of 4.13 and CHF/PLN slightly above 3.40.

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

Expected GBP/PLN levels according to the GBP/PLN rate: