Daily analysis 28.09.2017

After a strong increase in US Treasury bond yields and the dollar, Thursday's quotations brought an accommodative mood. The slightly different situation was for the US currency in comparison to the beginning of the year. The zloty has pared some of the recent losses. The EUR/PLN fell to approx. 4.33 to 4.31.

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

• 2.00 p.m.: September's preliminary data on inflation from Germany (estimate: 1.8% YOY),
• 2.30 p.m.: Final GDP reading for Q2 from the US (estimate: 3.0%, annualised),
• 2.30 p.m.: Weekly initial jobless claims in the US (estimate: 270k).

The US taxation in the spotlight

Even before President Donald Trump's official speech, a several-page document on changes in the tax system was released yesterday. Most of the aforementioned elements were included there. Fiscal burdens are to be reduced for both businesses and households. An introduction of a reduced tax rate for the repatriation of the collective companies' profits is also planned.

What could have been surprising was the fact that the amount ranges of tax rates for personal income tax are still unknown. It is also unknown what the rate for profits gained outside the US will be.

This makes it difficult to estimate the actual costs of change, but these costs are likely to exceed 1.5 trillion USD in the 10-year perspective.

A higher budget deficit compared to the core scenario would theoretically require being supported by as much as 60 Senate members. The Representatives, on the other hand, have 52 votes in the upper chamber of Congress. In order to vote in favour of this deficit, the Democrats have to support it. This seems relatively unlikely, given the debate on changes in healthcare.

The Republicans, of course, may look for savings, but taking into account the deadlines and difficulties with the implementation of other changes, a significant deficit reduction through a limitation of spending also seems to be unlikely. The solution that can be considered can be one in which a mix of tax and spending reductions is prepared so that they do not increase the final deficit over the next decade. This, in turn, would mean that the changes that need to be made should expire at some point in the coming decade.

However, would such an "unstable" effect of tax changes really support the economic situation very clearly? This is a question that market participants will probably have to answer in the coming weeks, given, that this scenario will be fulfilled.

Apart from the theoretical issues of budget passing, it is worth noting the strong reshuffling in expectations on future interest rates. About three weeks ago, at the end of 2018, the market valued rate hikes at 0.15 percent. Now, it is 0.50 percentage points. This is a huge difference that is clearly seen in the yields on Treasury bonds maturing in 2-years. Today, they tested 1.50%, i.e. the highest values for almost 9 years.

Higher expected interest rates supported the US currency. However, it should be noted that we are dealing with a slightly different situation than in the beginning of 2017, when monetary policy tightening was to be introduced in the US only. Now, less dovish statements that are presented the Bank of England, the ECB or the Bank of Canada, but in a smaller extent than 3 quarters ago.

The zloty has pared some losses, but still remained weak

Compared to morning quotations, most of the main currencies cost 2-3 gr less. The decreased pressure on the zloty, however, comes mainly from the slight rebound of the dollar in the global market. The national currency has remained weak, which clearly shows its comparison with the forint, to which it has lost 0.7% since the beginning of the week.

In the afternoon, strong external signals connected with macro readings are unlikely. The final Q2 GDP data for the US is unlikely to have a decisive impact on the dollar's condition. Moreover, September's inflation readings from Germany should not bring dramatic changes, especially given the mixed publications from particular lands. The zloty may, therefore, stabilise close to current levels if there are not very strong movements on the US bonds after the opening of the US market.