Daily analysis 16.09.2016

The amount of arguments for rate hikes by the Federal Reserve is reducing. The dollar's reaction from yesterday might have been disturbed by changes in the American treasury bonds market. The zloty remains stable against the majority of currencies.

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

• 14.00: Data regarding employment and salaries (estimations: positive 3.2% y/y and positive 5.0% y/y, respectively).
• 14.30: CPI inflation data from the USA for August (estimations: positive 1.0% y/y and 0.1% m/m; excluding fuel and food positive 2.2% y/y and 0.2% m/m).
• 16.00: Consumer sentiment index examined by the University of Michigan (estimations: 90.6 points).

Data is limiting chances for rate hikes

Yesterday's readings from the American economy were weak. However, they have only caused a temporary reaction of the market. The data might be much more significant than the behavior of global investors suggests. Not only does it basically exclude rate hikes in September, but also question the monetary tightening this year in general.

Retail sales from the USA only increased 1.9% y/y yesterday. Even if we exclude fuel, which generates lower sale values, we would receive a reading at the level of 2.92%. This is the lowest level since the beginning of 2014. A lower consumer demand has also caused a down revision of growth perspectives for the USA, which was generated by the Atlanta Federal Reserve's model.

Currently the GDPnow is showing a 3.0% growth for the third quarter. This is half of percentage point below estimations from the month's beginning. We must also keep in mind that this is an annualized interpretations of a particular quarter. This means that the growth may be near the level of 0.75% q/q. However, taking into consideration that three last quarters have shown an average growth of 0.25% each, the year on year data may be near 1.5% y/y. This is also not an argument in favor of rate hikes.

The data regarding industrial production may also cause anxiety. This index was at the level of negative 1.1% y/y in August. Even if we exclude the mining sector, the industrial processing will still be shrinking at the pace of 0.4% per year. The situation seemed to be improving recently. However, the data from yesterday denies this theory, which is confirmed by the recent ISM data from the industrial sector. It went below the level of 50 points, which separates progress from regress.

If we follow the macro data since the month's beginning, we will see that it's not positive. Apart from the industrial ISM, we also had a significant decrease in accelerating index from services sector. The American Labor Department data wasn't outstanding as well, especially regarding a decrease in pace of salaries growth, as well as a shorter average working week.

In conclusion, despite that we still expect the Fed to raise interest rates in December, the road to rate hikes may be clearly more difficult than we had expected at the beginning of September. Therefore, a weaker dollar remains the base case scenario. The currency's expected appreciation is beginning to move further into the future.

Did American treasury bonds ceased USD overvalue?

If yesterday's macro data was negative for the dollar, how come its wear-off was temporary? The answer to this question (although it's not very convincing) might be the behavior of the American debt instrument market. Over past few days, we have been observing an increase in difference between profitability of 10year and 2-year treasury bonds.

Theoretically, this means that investors expect rate hikes. Usually, this is correlated with faster economic growth, as well as with inflation. Therefore, this should also be a positive signal for the American currency. On the other hand, we need to keep in mind that the debt market is seriously disturbed by central banks and their policy of negative interest rates.

It's possible that the recent increase in profitability is the result of selling the American treasury bonds that were bought by foreign investors after Brexit. At that time, the majority of debt in Europe was quoting extremely low or negative profitability. Currently, some of these positions is reversed, which may cause a wrong impression that the market is expecting a higher inflation.

Another reason for an increase in profitability of bonds with a long-term maturity, might also be speculations regarding more aggressive fiscal policy in the USA. However, it seems definitely to soon to jump to such conclusions for the time being. However, they might actually appear valid in few years.

Stable situation on zloty

At approximately 12 o'clock the zloty has been stable against the main currencies, as well as the forint. After 14.00 (2.00 PM), the Polish Central Statistical Office (GUS) will publish the data regarding salaries and changes in employment. Estimations are optimistic and they assume an increase in salaries by approximately 5% y/y and employment by 3.2%. However, despite that this data is significant for the entire economy, it should have a margin impact on the PLN evaluation, as long as its relatively near the consensus. Only clearly worse readings may be an argument for a slight depreciation of the zloty.

Theoreticall, the Polish currency may be under influence of the American inflation data, as well as the consumer sentiment index by the University of Michigan. However, the global market appeared surprisingly stable yesterday. Therefore, an important publication before the FOMC meeting in September may also go unnoticed today.

However, the lower CPI and the worse consumer sentiment from the USA will be, the less arguments the FOMC will have to raise interest rates. If there's no reaction today, weaker publications from the United States will be favorable for the PLN in perspective of forthcoming weeks.