Daily analysis 19.04.2016

The relatively hawkish message from Rosengren. Expectations before the ECB meeting. Crude rises despite lack of agreement in Qatar. Weaker data from Polish economy could be affected by the holiday period. Both the euro and the dollar remain fairly stable close to 4.30 and 3.80 respectively.

• 14.30: Building permits and housing starts in the US (survey: 1.17 million and 1.2 million respectively).

Signals from the Fed

Yesterday’s comments from William Dudley regarding monetary policy didn’t bring any significant news. The FOMC member noted that the tightening will be gradual and cautious. This is in line with the most recent Fed’s consensus.

Much more interesting was speech presented by Eric Rosengren. The Boston Fed’s president votes this year on monetary policy and is regarded as fairly dovish, but his recent comments have been putting him more toward the neutral camp.

Rosengren referred in his presentation to Fed fund futures rates which price in only one quarter-percentage point rate hike every year for the next three years. He claims that the Fed will be hiking the benchmark faster than the market expects.

This view, according to Rosengren, is supported by solid fundamental condition of the US economy despite a weak Q1 performance. The FOMC member expects that the GDP will grow above the potential and unemployment will drop further.

The most significant message was presented in the summary. Rosengren sees that “the very shallow path of rate increases implied by financial futures market pricing would likely result in an overheating that necessitates the Fed eventually raising interest rates more quickly than is desirable, which could endanger the ongoing recovery and continued growth”

It seems that the FOMC doesn’t want to proceed toward market expectations and is committed to hold with two rate increases this year even if it remains on hold in June. We may expect that if the US data rebound after the first quarter it could start a more visible discussion on tightening policy. This should be dollar positive signal, but it may at the end of Q2.

Expectations before the ECB

Although none of the surveyed by Bloomberg economists do not expected changes in the monetary policy during the ECB meeting on Thursday around 40% predict that euro area MPC members loosen it during the second part of the year

Most of analysts who predict changes claim that the ECB will extend its QE operation beyond March of 2017. Economists also believe that (36% of those who predict changes) that further deposit rate can be expected and 25% sees that the scale of asset purchase will be increased.

Overall no action should be expected on Thursday but Mario Daghi may partly withdraw from the recent suggestions that further rate cut is less probable. If that happens and the ECB chief turns out to be more prone to monetary easing it should be regarded as euro negative issues.

No agreement but the crude rises

Yesterday the oil manged to rise above Friday’s closing price despite the fact that oil freezing agreement failed to meeting expectations. It can be regarded as a fairly surprising outcome due, but there is one reason which may explain it

On Monday we wrote that during last weekend oil industry workers began their strike in Kuwait. It caused that oil production from this country was reduced from around 3 million barrels a day to around 1.1 million barrels a day. It is a lot taking into the account that the global oversupply is around 1.5-2.0 millions. The real reaction on the Doha outcome may be spread over time. Firstly the market should wait for the strike to finish and then it has to receive signals that Saudi Arabia boosts it production at least for the Summer season. If this two issues occur the odds for further climbing may be reduced and the probability for a downside move can increase with the WTI and Brent to revisit levels below 40 USD/ barrel.

No agreement but the crude rises

Macroeconomic reports from Poland weren’t impressive today. The March industrial production rose only 0.5% y/y against expectations at +3.9% y/y. Also the seasonally adjusted figure, which has been in the range of +3.0-6.0% for the recent months dropped to 0.8% y/y. It should also be noted that the construction also dropped markedly. It shrank by 15.8% y/y what was the worst reading since almost 3 years.

No positive news came also from the retail sales reading which rose only by 0.8% y/y with the consensus at +3.4%. Almost always when weaker readings are reported there are questions whether this is a beginning of more negative trend. It seems, however, that it is too early to draw reliable conclusions, especially that this year we had Easter in March.

Since this holiday occurs rarely in March it is not spotted by seasonal adjustment and maybe it can be the main reason why the production failed to meet expectations. As a result we will have to wait till April or even May readings to fully offset the effects of March disorders. Regarding the zloty on the monetary policy one-time publication should not have a major impact and both dollar and the euro should remain around 3.8 and 4.30 respectively.