Daily analysis 30.07.2015

The Federal Reserve was slightly more hawkish yesterday but the improving jobs market cited by the Fed is arguable. A large range in today's GDP reading from the US. The zloty is weaker in the late morning again.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 14.30: GDP data for Q2 from the US (survey: +2.5% q/q seasonally adjusted annualized data)
• 14.30: Initial jobless claims from the US (survey: 270k)

Interesting change in Fed statement

Yesterday, we presented a few points regarding the hypothetical changes in the Fed's statement. In line with expectations the Federal Reserve kept the description of growth as “moderate”. The phrase on stabilizing prices of energy commodities was erased also in line with our analysis.

The view on weak investments and export was also kept in the statement. Before the Fed's message hit the wire we described the jobs market situation as balanced since the last Fed meeting. We pointed out that payrolls were weaker, and can be confirmed by the 6 month moving average, which slumped to the lowest point in a year. It was also clear that the most recent unemployment rate dropped due to the falling participation rate and the wages growth slowed in June to only two percent.

The Fed, however, described the current situation differently claiming that “the labour market continued to improve, with solid job gains and declining unemployment”. Additionally, in the part of the statement describing the conditions which warrant an interest rate hike the Federal Reserve wrote that “it will be appropriate to raise the target range for federal funds when it has seen some further improvement in the labour market”.

Earlier the statement didn't include the word “some”. The market understood this as slight hawkishness because less improvement in the job market is required to hike the benchmark.

It was the main element which pushed the dollar higher. We also observed that yields on 2-year US bonds rose to almost 4-year highs around 0.72%.

The Federal Reserve opened the door to raising interest rates in September slightly more or at least it would like the market to interpret it in such a way. Of course, if we get a set of weaker data in the coming weeks the message in the statement will not be valid. On the other hand, in the case of job gains around 220k both in July and August we should get ready for the first hike in September.

Puzzling GDP reading from the US

After yesterday's Fed meeting the market is anticipating another important publication. In the afternoon the US Q2 GDP reading is expected to hit the wire. The median economist's projection surveyed by Bloomberg is around +2.5% (seasonally adjusted q/q annualized reading).

It is worth noting, however, that the range is quite a bit higher (from 1.2% to 3.8%). Moreover, even if we look at the top economists the publication is still not clear. IHS Global Insight claims that the US economy can grow at a pace of 2.3 while High Frequency Economics, which is second according to the Bloomberg ranking, expects the expansion to be 3.5%.

According to “The Wall Street Journal” The Commerce Department is expected to present a yearly data update and even some seasonality changes, which may reduce the weakness in the first quarters but also flatten future rebounds.

The foreign market in a few sentences

The Fed made yesterday another small step to the first interest rate hike. Today, however, the market attention will be focused on the GDP reading from the US. But the uncertainty regarding the advanced estimate, revisions and seasonal adjustment might generate more turmoil after the publication.

Another morning zloty weakness

For the second time in a row the zloty weakened in the morning. In the recent hours there were no significant changes on the forint or Turkish lira which might have put pressure on the Polish currency. It is possible that some derivatives are set to expire and the final price is derived from the central bank fixing rate. That might be a reason to why the zloty gets hurt before the midday hours.

The base case scenario for the zloty is still trading around 4.12-4.13 even taking into account the more hawkish comments from the Federal Reserve. Only significantly better GDP reading from the US and a series of positive data from across the pond might push the zloty lower both to the euro and to the dollar.

Anticipated levels of PLN according to the EUR/USD rate:

Anticipated GBP/PLN levels according to the GBP/USD rate: