Dovish Fed and Poland at the top of the class (Daily analysis 31.01.2019)

The surprisingly mild Fed's attitude can have serious consequences for the market. Italy is entering recession and the eurozone is developing slowly. The zloty appreciates due to the dovish statement from the Fed and good data from the Polish economy.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:30 p.m.: Spendings and earnings of the US citizens for December.
• 2:30 p.m.: PCE inflation for December from the USA.

Surprisingly dovish Fed

It is clear that yesterday's message from the FOMC was dovish, not to say extremely dovish. This may also fundamentally change the situation on the currency market for the coming months, and in particular, weaken the dollar against most of the currencies of both emerging and developed countries.

In the statement and the conference, it was made clear that further increases in interest rates are no longer a baseline scenario. Such a suggestion could have been expected, but it was much clearer than the one presented in the last minutes, the statements of FOMC members in recent weeks or the standard function of the Fed's reaction (the fierce changes in the message from the meeting to the meeting).

At this point, we would have to have a series of really good macro data, a solution to all trade problems between the US and China, a significant easing of political disputes between the White House and the Congress (concerning the budget), and an acceleration of core inflation processes in order to consider a return to the path of interest rate increases at all. At this point, it seems very unlikely, so it is a fundamentally negative signal for the US dollar.

The much milder than expected Fed's attitude is confirmed not only by yesterday's weakening of the dollar but also by the behaviour of Treasury bonds and equities. Yields on 10-year Treasury instruments fell by 7 basis points since just before the Fed's meeting and reach only 2.66%. The behaviour of the shorter end of the yield curve suggests that the market begins to value even a slight reduction in rates at the turn of 2019 and 2020. Moreover, all this happens with strong increases in the equity market.

Another dovish component is the message concerning the balance sheet of the Fed, which has been reduced so far. The FOMC is clearly beginning to consider when to complete the reduction in the Treasury bond and MBS portfolio. With the downturn, although this has not been clearly stated, the Fed's balance sheet can be expected to freeze from meeting to meeting. This, in turn, opens the door to interest rate cuts. With a quick and violent reaction to recent events, this cannot be ruled out.

Italy in recession. Strong zloty

The weakening of the dollar would probably have been much stronger if it had not been for the fact that the situation in competitive currency regions also does not look so good.

The data published by Italstat showed that Italy entered recession in the second half of 2018. For the second quarter in a row, GDP quarter-on-quarter dropped. This time it was by 0.2%quarter-on-quarter. On a year-on-year basis, growth in Q4 was only 0.1%, which is the worst result since Q3 2014. According to Italstat, domestic demand contributed negatively to the growth (according to partial data - stocks, which is positive information in the negative series), and positive exports. Overall, however, Italy's statistics look terrible given the general economic situation. On the other hand, the initial data from the eurozone as a whole was not more surprising. In quarterly terms, the growth was 0.2% in the Q4 and 1.5% year-on-year.

The data from Poland looks a bit like from another world. According to the Polish Central Statistical Office (GUS) data, the growth for Poland in 2018 amounted to 5.1% and was slightly above market forecasts. Consumption of households (4.5%) and investments (7.3%) continued to grow strongly (after the exceptionally strong year 2017). A significant surprise is the lack of negative contribution of exports. The balance of foreign exchange (goods and services), after data for 11 months, deteriorated by over 10 billion PLN as compared to 2017. It could be expected that it would contribute to a negative input to GDP at the level of 0.5 percentage points. Why in the GUS data 0.0 (no negative input, surprisingly good information) is difficult to explain?

When describing the zloty's condition, a drop in the EUR/PLN pair to the range of 4.27-4.28 is justified. The FOMC message is extremely dovish, and the Polish economy is in surprisingly good shape. There is a chance that the upward movement of the Polish currency may continue, especially if the FOMC maintained a surprisingly mild attitude, and subsequent data from Poland would show a mild behaviour of the Polish economy.