Daily analysis 24.05.2017

China's rating downgrade should not affect the broad market. A limited probability that the White House budget will be executed. Fed’s Harker on interest rate hikes. A positive sentiment dominates on the zloty. The EUR/PLN remains close to the 4.20 level.

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

• 16.00: Existing home sales in the US (survey: 5.65m),
• 20.00: Minutes from the May’s FOMC meeting.

Lower Chinese rating with no impact for the broad market.

During the Asian session, Moody's lowered China's rating from AA3 to A1. “The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” the agency claims.

The impact to Moody's decision on both the Chinese and global markets was relatively calm. The RMB only weakened 0.06% to the dollar, and yields of government bond denominated in the US currency rose 1-2 base points. It is also worth noting that in China, public debt is not a concern (42.9%), but the debt owed by state-owned enterprises (SOE) is. A year ago, Moody's estimated SOE liabilities at 115 percent of the GDP, which is several times higher than in other developing countries’ economies.

Trying to find some positive elements in Moody’s decision it should be noted. While the rating was cut, the perspective was raised to neutral from negative which lowers the odds for further cuts. Moody's also expects China's economic growth to be close to 5 percent over the next five years, which is still a robust result not only for developed, but also developing countries.

The US budget plans

On Tuesday afternoon, the White House presented the budget plan for both the next fiscal year and the incoming decade. As we wrote yesterday, it assumes expenditure cuts and a significant acceleration of the economic growth (to 3% from 2020). The new documents presented by the administration show that the positive savings and higher GDP will only have a chance to be significant after 2022. Between 2018 and 2022, the deficit is expected to decrease by a total of $887 billion compared to the baseline scenario, and by $5.62 trillion over a 10-year period (2018-2027).

Today's Financial Times wonders whether there is a double counting in the US budget, “in which the revenue benefits of an (as yet unspecified) tax cut are counted in the budget while the cut itself is not.”

It is also not clear whether the current project actually takes tax cuts into account. Yesterday, Treasury Secretary Steven Mnuchin said that it is "premature to account for tax changes in budget plans" This, however, puts an even larger question mark on the possibility of a strong acceleration of economic growth in the following years.

Overall, yesterday's budget projections slightly helped the dollar. It also boosted yields on treasury bonds by 2-3 base points. Moreover, comments from Philadelphia Federal Reserve president Patrick Harker regarding three interest rate hikes in both 2017 and 2018 help the dollar to gain some ground. However, when it comes to the effects of tax cuts and stimulation of growth, and consequently the acceleration of monetary tightening, we may even wait several more months for some substantial actions.

No significant changes on the zloty

The zloty, similarly to the forint, remains fairly stable to major currencies. The EUR/PLN is still moving in a very tight range near the 4.20 level. Slightly more volatility is on the dollar due to movements on the EUR/USD. The PLN/HUF ratio is also mostly stable around the 73.5 mark.

The FOMC minutes are scheduled to be published in the evening. The picture of the US economy may be fairly positive as the May statement stressed a solid job market and investment prospects. However, the recent weeks were turbulent in Washington and the budget discussion failed to boost the USD. As a result, investors may finally regard the minutes as outdated and the dollar movement could be limited.