Daily analysis 31.05.2016

Results of the surveys conducted among economists before Thursday's meeting of the ECB. Are we in for a clear deterioration of the global sentiment due to a wear-off of the renminbi? The zloty is stronger, despite a worse GDP reading for the first quarter.

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

• 14.00: Initial publication regarding inflation from Poland in May (estimations: negative 0.9% y/y).
• 14.30: Incomes and expenses of Americans (estimations: positive 0.4% m/m and positive 0.7% m/m, respectively).
• 14.30: PCE inflation from the USA (estimations: positive 1.1%; base case inflation: positive 1.6% y/y).
• 15.00: Changes of prices in the American real estate market according to S&P/Case-Shiller (positive 5.11% y/y).
• 15.45: The Chicago PMI index (estimations: 50.5 points).
• 16.00: Conference Board's consumers sentiment index in May from the USA (estimations: 96.3 points).

Before the ECB meeting

One of the main events for the current week is the ECB meeting. It is difficult to expect that any changes in the euro zone's monetary policy will be announced on Thursday. However, we may expect a slight increase in the current year's inflation forecasts, as well as in economic growth forecasts.

A relatively strong increase in the GDP for the first quarter (0.5%) may cause that the entire forecast for 2016 will be revised up slightly. It is also possible that inflation perspective will be raised as well. Especially considering that the expected average level of oil prices in March was 35 USD. The revision should be significant due to the fact that the ECB forecasts are derived from the terminal market. Thus, it is possible that a general inflation level will be higher as well.

However, it is very unlikely that the above matters would change the ECB's approach towards the monetary policy. The bank will continue to purchase treasury bonds, as well as corporation bonds, for 80 billion euro per month. Moreover, negative deposit rates at the level of negative 0.4%, are most likely to be sustained for the coming quarters.

We can expect that the coming months will bring a reduction of economists' expectations regarding an increase in monetary easing. That is of course, if inflation is slowly rising, and the economic growth remains within the range of 1.5% y/y.

For the time being, according to the Bloomberg survey, thirty one out of forty six economists expect the ECB to ease its monetary policy in the forthcoming months. They mostly expect an extension of the quantitative easing beyond March 2017. Thirteen economists claim that the coming months will bring a further decrease in interest rates. Five economists foresee an increase in assets purchase.

Thus, it is possible that Mario Draghi will not want to sound too hawkish, even if the ECB is not planning on increasing the monetary stimulation. The mild monetary policy should be sustained for the coming quarters, along with an extension of quantitative easing beyond the first quarter of 2017.

Does China inspire fears?

For the past year, investors got used to following the situation of the Chinese currency (CNY) very carefully. This is a result of the fact that depreciation of the renminbi caused a clear global disturbance last Summer, as well as during the first months of this year.

For the past two weeks, we could observe a systematic wear-off of the renminbi against the dollar. However, it was partly due to a result of a general consolidation of the USD in the global market. On the other hand, the CNY was quite weak in relation to the currencies included in China's trade exchange for the past few months. The Chinese currency is approximately 1% below its minimum from the beginning of this year. Moreover, the CNY/USD is near its minimum from January.

As a result, we can see that the Chinese authorities are allowing the renminbi to wear-off. However, these moves are relatively small, and they do not cause a clearer global commotion for the time being. The current situation is slightly different than the situation from the beginning of this year, especially considering the global context. The energetic resources market took a definite rebound from its long-term minimum. Macroeconomic data from the USA is improving. Moreover, the Chinese currency reserves have been stabilizing at an unchanged level for a few months. This suggests that the capital outflow has been stopped.

Thus, a clear deterioration of the global sentiment is not the base case scenario for the time being, even if the renminbi continues to wear-off gradually. The global risk aversion may be visibly increased, only if the CNY value decreases heavily (more than 0.5% during one day). This would suggest that the Chinese authorities have lost control over the exchange rate.

A few words about the foreign market

We will receive a lot of data from the USA this afternoon – expenses and incomes of Americans, PCE inflation, changes of houses' prices, PMI index for the Chicago region, and consumers sentiment. The expenses related readings, as well as the base case inflation, should be the most significant for the dollar. However, in order to see a clear reaction on the USD, the entire publication series would have to clearly differ from the expectations. If it does not, investors will anticipate Friday's data from the labor market.

Zloty is slightly stronger

A clear and broad consolidation of the zloty has been observed since morning. The Polish national currency is not only gaining against the euro and the dollar, but against the forint as well. Appreciation of the PLN has occurred before publication of the GDP data from the Polish Central Statistical Office (GUS) that appeared at 10 o'clock. It is possible that some investors bought the foreign currency before that long weekend, as well as the holidays in the USA and the United Kingdom. On the other hand, the sellers who have been waiting for a greater liquidity gained advantage this morning.

The GUS data was mixed. A weak growth from the first quarter (3.0% y/y) has been sustained. On the other hand, the Polish national demand remains strong (a 4.1% y/y increase). However, it was significantly determined by an increase in supplies. Investments were weak, but their negative contribution was only at the level of negative 0.2%. The biggest burden for the first quarter result was net export (negative 0.9%). Considering the fact that the demand for households should grow in the coming quarters, investments should recover. Thus, the growth in the coming quarters should aim for the range of 3.5-4.0% y/y once again.

The zloty will most likely stop gaining value in the forthcoming hours. The quotations of the EUR/PLN should remain slightly below 4.40. No larger changes are expected on the franc nor the dollar, as well.