Daily analysis 31.03.2017

A significant decrease in the eurozone’s inflation was partially caused by the calendar effects. William Dudley’s relatively hawkish comments. The British current account deficit is clearly lower than expected. The zloty’s situation against the developed market currencies remains favorable.

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

• 14.00: CPI data from Poland (estimates: positive 2.3% YOY).
• 14.30: Incomes and expenses in the USA (estimates: positive 0.4% MoM and positive 0.2% MoM, respectively).
• 14.30: PCE data from the USA (estimates: positive 2.1% YOY; positive 1.7% YOY in baseline interpretation).

Inflation is lower due to calendar

The eurozone’s inflation data for March shows a significant withhold of this index. The CPI increased 1.5% YOY, whereas the market consensus was at the level of 1.8% YOY. Moreover, inflation for February was at the level of 2.0% YOY.

Pressure on an increase in the fresh food prices has reduced clearly (3.0% vs 5.3% in February). This withhold will most likely be durable, because unfavorable weather conditions in the south of Europe had increased pressure on an increase of these products’ prices in the break of 2016 and 2017.

However, it’s worth noting that fresh food is only 7.5% of the eurozone’s expenses, whereas the services index is 45%. The latter went down from 1.3% to 1.0%. Taking into consideration that we’re talking about one month, this is a huge difference, which has decreased the entire reading by 0.15 percentage points. However, this element most likely results from the calendar effect.

Last year, Easter holiday occurred in March. This period has been burdened with a significant increase in the transport prices. Even though there is no detailed data regarding this topic, this index most likely went down significantly this year. However, this depreciation results from the fact that Easter occur in April this year. Therefore, the transport prices were significantly lower this year.

A decrease in the eurozone’s inflation is not as significant as it seems. Therefore, its impact on the euro should be limited.

New comments from Fed

Yesterday, one of the leading Fed members, William Dudley, made his testimony. This testimony didn’t concern the monetary policy in its entirety. However, it has shown that yet another FOMC member tries to sustain the previously established plan regarding the monetary tightening.

Dudley said that, “fiscal policy is likely to shift in time to more stimulus.” He also emphasized that, “Fed shouldn’t react to every ‘wiggle’ in the market.” Moreover, Dudley estimated that, “it appears that the risks (chances – author’s footnote) for both economic growth and inflation over the medium to longer term may be shifting gradually to the upside.” The latter statement is very significant, because it shows a gradual shift in the Fed’s forecasts. Moreover, this increases the chances for a more restrictive monetary policy, hence may strengthen the dollar.

British current account

The British current account (C/A) has improved significantly. According to the data from the Office for National Statistics (ONS), this index’s deficit for the fourth quarter was at the level of 12.2 billion pounds. The estimated result was at the level of 16 billion. Moreover, this is this index’s best result since the beginning of 2012.

Every crucial component of the C/A has improved. The negative trade balance decreased, the positive services balance increased and the primary account deficit reduced. It seems that the weaker pound is finally beginning to translate to a gradual external balance of the British economy. This may become an argument for limiting the pound’s depreciation, despite the forthcoming difficult negotiations between London and Brussels.

Zloty remains strong

The zloty’s situation remains favorable. However, the appreciation potential may be exhausting slowly. The EUR/PLN remains near its eighteen-month minimum, but the PLN/HUF decreased by 0.3% (73.00). Moreover, both the Mexican peso and the Indian rupee continue to gain against the majority of the developed market currencies, whereas the appreciation trend on the zloty seems to have stopped.

Today’s inflation readings may appear significant. At first, we will know Poland’s inflation (estimates: 2.3%). The recent depreciation in the fuel prices, as well as a withhold in the eurozone’s food prices may suggest that the data will be below the consensus.

The American data may be even more interesting. The PCE is estimated to increase to 2.1%. This means that the Federal Reserve’s goal may be exceeded for the first time in five years. Moreover, the baseline PCE is relatively high as well (1.7% YOY). Inflation’s rebound above the consensus may cause the USD/PLN to go above 3.95.