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Daily analysis 31.10.2017

31 Oct 2017 12:30|Marcin Lipka

The combination of higher than expected economic growth in the eurozone with lower unemployment and falling inflation has resulted in limited movements on currencies. The US dollar has weakened the risk of a time lag of fiscal reform. EUR/PLN in the range 4.24-4.25 before inflation data from Poland.

Key macro data (CET time - Central European). Estimates of macro data are based on Bloomberg data unless otherwise noted.

  • 2:00 p.m.: Preliminary inflation data from Poland for October (estimates: 0.4% MOM and 2.1% YOY),
  • 3:00 p.m.: The US consumer confidence index by Conference Board (estimate: 121.3 pts).

Faster growth with limited inflationary pressure

At 11.00 a.m., a series of macroeconomic data from the eurozone was published. Firstly, it is worth noting that the GDP for the single currency area in Q3 grew to 2.5% YOY, which was 0.1 percentage point higher than estimates by economists. Today's reading has been the highest since 2011 and the second best publication in the past decade.

Theoretically higher than consensus GDP growth in the eurozone is positive information for the EUR/USD pair. However, the data coincided with October's inflation reading, which was 0.1 percent below expectations. Moreover, core inflation decelerated to 0.9% YOY. This was the lowest reading since May. The economists surveyed by Bloomberg expected the publication to be 1.1% YOY (no one expected it to be below 1.0% YOY).

Just after yesterday's statement, the partial data from Germany and components' changes from the largest land, we pointed out that core inflation may be well below the estimates for the whole eurozone. The limited pressure on price increases in the single currency area is supported by the very mild monetary policy attitude of the ECB. This element may prevent further EUR/USD increases even in the case of relatively good other macroeconomic publications.

On the other hand, the decline in unemployment (from 9.0% to 8.9% in September) should be seen positively in the context of the economic situation of the eurozone. However, what may be disturbing, in those countries where the percentage of jobseekers has been still very high (France, Italy) unemployment has not changed and amounts to 9.7 and 11.1 %, respectively. Mixed Eurostat data for the single area currency did not change the valuation of EUR/USD significantly, which before midday breached the 1.1600 boundary by 20-30 pips.

Question mark over tax reduction in the US

Although the most important publications for European currency market participants were those that took place in the morning, it is worth noting that there were also some interesting reports from the US yesterday that disturbed the US dollar and US government bonds.

After 4.00 p.m., Bloomberg's reports were received about possible significant changes in the plans for tax system reform in the US. The news agency, referring to a person familiar with the case, wrote that the Republicans were considering expanding the tax reduction over the next 5 years.

According to the original plans, entrepreneurs income tax (CIT) was to be reduced from 35 to 20% in 2018. Now (likely one day before the planned presentation of reform details) a version of CIT reduction by 3 percentage points is discussed. In such a scenario, the one-off effect on businesses would be much smaller. It would translate into decreased fiscal stimulation effect on the whole economy, therefore, for further lower inflationary pressure and a limited probability of accelerating rate hikes. After this information was given, yields of the 5-year US Treasury bonds fell below the 2% boundary and were 10 basis points below Friday’s levels. If Bloomberg information is confirmed in the coming days, the dollar may have problems with continuing the increases that started last week.

Stable zloty. Inflation data

Since the beginning of the week, we have dealt with limited changes on the zloty. The EUR/PLN pair is moving in a narrow range of fluctuations; between 4.24 - 4.25. In the afternoon, inflation data from Poland will be received. In theory, lower pressure on price increases in the eurozone should limit the inflation in the country. It is worth noting, however, that in the common currency area and Germany (mainly core categories), which are more related to local circumstances (e.g. salary changes), decreased.

In the eurozone, food and beverage inflation accelerated notably (from 1.9 to 2.4% YOY). This component is cross-border and its share in Poland's inflation basket is simultaneously higher than in the eurozone as a whole. As a result, it is possible that the CPI in Poland will be in line with expectations (2.1%) and may even remain at September's level (2.2%). If this scenario happens, it could support the zloty.


31 Oct 2017 12:30|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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