Daily analysis 24.05.2016

Chances for the hikes in the USA are increasing due to new statements from the Fed representatives. Brexit is becoming less likely after the recent surveys. The zloty remains under clear pressure. Will the limitation of deficit be milder than it was indicated in April's Convergence Program?

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

• 16.00: Sales of new houses in the USA in April (estimations: 523k; the reading was seasonally equalized and annualized).

New comments from the Fed representatives

Many market participants anticipate Janet Yellen’s comments on Friday. However, it is worth noting that during the past few hours, two other FOMC representatives spoke of the future level of the American interest rates.

James Bullard made his testimony in Beijing. It consisted of a comparison between the arguments of the Fed and the arguments of the market. The FOMC stands for a faster monetary tightening. In its opinion, a relatively strong labor market, and as inflation nears 2%, as well as a decreasing danger from the global economy, are favorable for this scenario. On the other hand, the market claims that due to a weaker real economic growth, as well as low inflation expectations, interest rates should be raised at a slower pace.

Bullard did not say which scenario is more likely in his opinion. However, the tone of the testimony shows that the FOMC representative claims that the American economy has a full employment. In his opinion, this should cause salaries, as well as inflation to increase. Thus, this is a strong argument in favor of the hikes.

Patrick Harker also made some optimistic comments regarding the American economy. The Philadelphia Fed chairman presented a study which suggested that the result of payrolls in April (160k) was determined by a low temperature. This goes to show that the economy has created 229k workplaces in April.

Harker also claimed that, “there will probably be two, or even three hikes in the USA by the end of the year.” For a moment, the matters of Brexit were interpreted as an element which could postpone the monetary tightening. However, both Bullard and Harker have claimed that the British referendum should not impact the FOMC decision.

In conclusion, since Rosengren's testimony on May 13th, the statements from the Federal Reserve members have had a similar tone. The Fed's representatives are preparing the market for an increase in interest rates in June or July. This should happen even if the testimony from Janet Yellen on Friday is not as unambiguous as the recent comments from her colleagues.

Another survey supports the pound

The past few days were positive for the Brexit opponents, as well as for the supporters of the British currency. Last night we received a new survey which decreases the chances for the United Kingdom leaving the European Union. The phone survey prepared by the ORB and the Daily Telegraph, 55% is for the status quo, and 43% supports Brexit.

What's interesting is the fact that there have been some significant changes in views of the older respondents. In March, only 34% of pensioners were for remaining in the EU, and 62% supported Brexit. Currently, the situation reversed and 52% of them want the United Kingdom to stay in the European Union, and 44% are against this scenario.

The pound received these results positively. The British currency strengthened 2% against half of the currencies that are included in the United Kingdom's trade exchange. The move against the zloty was definitely the most spectacular. For slightly more than one week, the GBP/PLN pair increased 0.20 PLN. This was a result of two factors – a global wear-off of the Polish currency, and a broad consolidation of the pound.

However, the positive influence of the surveys should withhold slightly. This is especially because the closer we are to the referendum (June 23rd), the bigger the fear in the market, regardless of an advantage of the Brexit opponents.

Zloty is weak and volatile

At approximately 10 o'clock, the zloty tested at its lowest level in many months. The EUR/PLN went above 4.4500, and the USD/PLN was only 0.015 PLN below the level of 4.00. The situation had calmed down slightly later on, thanks to an improvement in the global sentiment. This could also be observed on the Turkish lira, as well as on the Hungarian forint. The zloty will probably remain very sensitive for the local factors, as well as the global factors.

Regarding the anxieties of the rating agencies concerning the fiscal discipline, it is worth noting today's interview with the vice-minister of finance, Leszek Skiba, which was published in Dziennik Gazeta Prawna newspaper (DGP). The journalists focused on the update of the Convergence Program (APK). It indicates that the deficit between 2017 and 2019, will decrease from 2.9% GDP to 1.3% GDP. This result is 0.5% per year faster than the European Commission suggested. On the other hand, the current Polish administration disagrees with these estimations, and claims that the pace will be within the range of 0.25%.

However, Leszek Skiba said that, “APK indicates a certain fiscal space for political decisions that have not been made yet. We still do not know what will happen with the retirement age, the tax-free amount, a decrease in VAT, nor any other mid-term decisions which may appear in the future.” Moreover, Skiba claims that, “if the decisions regarding the tax-free amount or the retirement age are made, the pace will become flat. In my opinion, this is a probable scenario.”

Thus, the interview may suggest that the above elements will be introduced, despite negative feedback from the rating agencies, as well as from the European Commission. As a result, it is possible that further fiscal easing (especially the matter of the retirement age), may be an argument for further downgrades of Poland's loan credibility, as well as a worse evaluation of the PLN in the mid-term.