Daily analysis 20.12.2017

The dollar remains under pressure despite higher yields on the US Treasuries, higher odds for implementation of tax reform and better than expected macroeconomic data. The PPI in Germany stays muted. The EUR/PLN is close to the 4.20 level. Solid data from Poland failed to push the PLN higher.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 4:00 pm: Exisitng home sales in the US (survey: 5.53 million on annualised basis for November).

Will the President will sign the bill today?

Yesterday, in the late evening the House of Representative voted in favor of tax changes. However, due to small errors the final version had to be modified in the Senate. As a result, the document was returned to the lower chamber of Congress.

Voting in the House seems to be a done deal, and the bill is expected to be signed shortly by President Trump. At 7:00 PM the conference is scheduled in the White House.

The market reaction to the events looks surprising. Since Tuesday, afternoon yields on US Treasuries have been rising. On 5-year bonds, they topped 2.22%, the highest level since the first half of 2011.

Besides the tax cut element, which was pushing yields higher, readings from the economy also supported market expectations on future interest rates. Building permits were higher than expected in November and data from the previous month were revised higher. The readings, however, failed to push the dollar higher and in relation to the euro the greenback fell even though the yields in the eurozone were unchanged at a low level.

The dollar divergence from typical catalysts is usually short-term. Market interest rate differences between different currencies are usually a good indicator of FX movement. As a result, the weaker dollar environment should be rather short-lived, and the greenback is supposed to benefit from the broader economic expansion and inflation pressure.

Limited inflation pressure in Germany

Inflation in Germany rose by 0.1% m/m in November (consensus 0.2% m/m; previous month 0.3% m/m). Besides a significant rise in petroleum products (8.5% y/y) other categories showed limited price pressure. Capital goods were rising at 1.1% y/y which may mean that when the commodities price pressure abate the overall PPI reading may be pushed to the subdued territories.

Limited inflation pressure from producers may also be combined with weak wage growth in the euro area. According to the Eurostat estimates for Q3, labor costs rose only 1.6% (1.8% in Q2). As a result, any expectations that the ECB may withdraw monetary policy earlier than expected are not warranted at this time.

The data supports a scenario for weaker rather than stronger euro. However, currently, the dollar is much weaker regarding the US yields. Until this issue clears out the EUR/USD trade may be more chaotic and disconnected to the broader economic picture.

Solid economic preformance with no impact for the PLN

Economic readings published by the GUS yesterday were quite solid. The retail sales volume in November rose in many discretionary categories at 15% y/y (cars, cosmetics, furniture, appliances) while clothing demand increased by hefty 26.4% year-on-year.

Keeping such strong demand may be hard especially that family 500 plus benefits impact is set to disappear and the employment increase will probably be somewhat slower than in the recent quarters. In the long run, such strong consumption, if it is financed by savings or loans, generates more harm than good for the economy.

The GUS readings failed to push the PLN higher because it will probably be ignored by the MPC as the council is much more focused on core inflation than other indicators.