Good macroeconomic data and comments from the Fed resulted in strong increases in yields of the US Treasury bonds and the US dollar. The zloty remains under pressure due to the appreciating dollar. The euro is quoted above the 4.30 and the dollar reaches the 3.75 PLN level.
The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.
- 2:15 p.m.: Weekly data on initial jobless claims from the US labour market (estimates: 215k).
- 4:00 p.m.:Orders in industry for August (estimates: 2.1% m/m).
Multi year records achieved by US bonds
The market moved its attention to the US bond market, where exceptional things are happening. It seems that investors have finally begun to take seriously the monetary tightening path suggested by the Fed over the last few months. What prompted them to do this?
Mainly it was caused by very good macroeconomic data. Both employment growth accelerated significantly according to ADP readings for September (230k vs. 184k expected by the market) and yesterday there was the highest reading of the ISM index in 20 years from the US services sector. In addition, raising Amazon's minimum wage to 15 USD per hour could be a catalyst for an upward revision of wages in other leading US companies. The economic situation is therefore accelerating, which supports the prospect of tightening monetary policy by 25 basis points per quarter for at least the next year.
Moreover, Jerome Powell's statement also boosted the mood. The head of the Federal Reserve said yesterday night that "interest rates are still accommodative, but we are slowly moving in the direction where they will be neutral". In addition, during a meeting organised by Atlantic magazine and the Aspen Institute, Powell said (according to Bloomberg) that "we can go through a neutral level of interest rates, but we are still a long way from a neutral point".
As a result, yields were first supported by macro data and the prospect of higher wages, and then they got an argument for growth from the Federal Reserve, where the head of FOMC suggested the possibility of their growth beyond the neutral level (while the neutral is still far from being achieved). This could mean more than 4 interest rate increases until the end of next year.
Today, the yields of the Treasury bonds maturing in 2-years reached 2.9%. (most since a decade), and 10-year treasury instruments exceed the 3.20% level (most since 2011, after an increase of 15 basis points in just 24 hours). Currently, until September 2019, the market is valuing almost three increases by 0.25 percentage points (0.7 percentage points). This shows, on the one hand, how much interest rate movement we had and, on the other hand, that there is still room for the interest rate market to adjust to FOMC's current estimates.
Movements on bonds support the dollar. The EUR/USD was quoted below the 1,1500 but it returned to this boundary around midday. However, the strengthening of the dollar in relation to the euro in the past few days is still high (drops from 1.1800). In addition, this exerts pressure on emerging market currencies, especially those dependent on US dollar funding (Turkish lira) or on those sensitive to oil costs (Indian rupee). Taking into account the general market situation and the condition of the US economy, the current dollar strength should be maintained, and with better than expected Friday's data from the USA, it may even be increased.
Stronger dollar bad for zloty
Significant increases in yields of the US Treasury bonds, the strengthening of the dollar and a slight correction on the New York market are negative signals for the zloty. The EUR/PLN moves in the range of 4.30-4.31, and the dollar reaches the 3.75 PLN limit. The Polish currency is also damaged by high oil prices, which may worsen the country's trade balance, reduce consumption slightly and increase the operating costs of enterprises.
Similarly to the global market, tomorrow's data from the US Department of Labor will also be important for the zloty. The increase in wages to 3.0% y/y in September (consensus 2.8% y/y) and the fall in unemployment below the expected level of 3.8% may prolong the good run of the dollar and even direct the USD/PLN towards 3.80.