Interesting data from the US labour market (Afternoon analysis 8.03.2019)

Awaited by the market report of the US Department of Labor surprised in many ways. In the non-farm sector in the USA, only 20,000 new payrolls were created in February, i.e. nine times less than expected. However, better than expected data on the unemployment rate and wages may increase the chance of rate hikes in the USA. The zloty pares some of yesterday's losses but may be weaker in the coming months.

EUR/USD stays above 1.12

Today, the Department of Labor published a report on the US labour market in February. When it was published, it caused considerable confusion on the market due to the increase in employment in the non-farm sector. The median of market expectations indicated an increase by 180,000, and Wednesday's ADP report showed an increase by 183,000. However, according to official data, the number of new payrolls increased by only 20,000. This is the lowest reading since September 2017.

To some extent, the partial government shutdown may be responsible for such a low reading. Regardless of whether this was really a decisive factor, it should be treated as a one-off event. Apart from employment data, the report still shows a positive picture of the US labour market. The unemployment rate fell by 0.2 percentage points to 3.8%, compared to expectations of 3.9%. The most important data from this report also exceeded expectations - the average hourly wage growth pace was 3.4% per year (the highest for 10 years) and 0.4% per month - in both cases by 0.1 percentage points above the market consensus.

Both data are very important in terms of monetary policy and give a clear signal to the Federal Reserve (Fed). According to the Phillips curve, which Fed members often refer to, the falling unemployment rate means higher inflation. If we combine this with higher than expected wage pressure on prices, there is a higher probability of a monetary tightening in the USA in the second half of the year. This, in turn, may support the dollar, especially in the context of the lack of prospects for higher interest rates and a stronger than expected economic slowdown in the eurozone.

The EUR/USD quotations remained slightly above 1.12 today, after yesterday's depreciation caused by a press release and conference of the European Central Bank (ECB). Over the last two days, a relatively clear picture of an increase in the euro's downward potential and, at the same time, a significant reduction in its growth potential has now emerged. This may turn out to be bad news for the zloty in the long run. Yesterday afternoon, along with strong decreases in the EUR/USD pair, there was a decrease in the whole basket of the zloty. Today, with the return of the exchange rate above 1.12, the zloty pared most of the losses. In the following months, the zloty may gradually weaken, which, should have been visible the most in the dollar and pound exchange rates. Today, the euro returned to about 4.30 PLN, and in this case, the potential for exchange rate growth is much smaller - the euro is also subject to much smaller fluctuations than the dollar in historical terms.

Next week's preview

After the ECB's decisions, the euro found itself under great supply pressure, and this may increase next week. After today's data on orders in Germany's industrial sector, which fell by 2.6% on a monthly basis in January (recording the biggest fall since June 2018), little good can be expected from the industrial production data that Destatis will publish on Monday. The median of market expectations indicates an increase of 0.4%, but a further decline in production may significantly weaken the euro, confirming a significant economic slowdown revealed in the cuts in growth forecasts and GDP made by the OECD.

Tuesday will be an important day for the market for two reasons. First of all, data on consumer inflation (CPI) in the USA in February will be published. This is not the preferred type of inflation by the Federal Reserve (it is PCE inflation), but it may well reflect price trends in the economy - especially its core index. It becomes more important now, as the ECB has also significantly lowered its inflation projections for the current year for the eurozone. We can expect significant fluctuations around this publication if the core index deviates from the consensus (2.2% year-on-year).

The second reason will be the vote in the British Parliament on the Brexit plan worked out by Prime Minister Theresa May. The plan is unlikely to be adopted. However, a significant increase in the pound's volatility can be expected. This will also be the day following the next vote - this time on leaving the EU without an agreement. It is almost certain that it, too, will be voted through - there are few supporters of the so-called hard Brexit. Therefore, the baseline scenario is that some sort of agreement or extension of the Brexit process will take place, which should support the pound's appreciation in the coming months.