Surprising US data (Afternoon analysis 14.02.2018)

Inflation in the US appeared to be higher than expected, but retail sales data was in the red which resulted in large fluctuations in the market. The zloty remained stable, but the sentiment deterioration in the market may depreciate it.

Large fluctuations in the market

The most important event of this week was today's consumer inflation index (CPI) in the US. January's core inflation (excluding energy and food prices) amounted to 1.8% per year, and 0.3% per month. This is 0.1 percentage points above market expectations. Higher than expected inflation slightly increases the probability of even four rate hikes this year. Just after the data publication, the dollar has clearly strengthened. The main currency pair quotations, EUR/USD, fell even slightly below 1.23, from 1.235 before the publication.

The continuation of dollar growth can be hampered by retail sales data publication at the same time as inflation (2.30 p.m.). Sales fell by 0.3% in January compared to the previous month, although it was expected to grow by 0.2%. At the same time, it was the most significant depreciation for 11 months. On the other hand, sales excluding cars remained at a stable level compared to December, the market consensus assumed an increase of 0.5%.

The significantly worse than expected retail sales data may raise concerns about the economic growth pace. As a result, just after publication, sentiment on the market deteriorated - the main market indexes in Europe and the USA were depreciating. Combined with higher than expected inflation in the US, this is theoretically bad news for the zloty.

After initial dollar strengthening, it returned part of its profits and the share market pared its losses by 4.00 p.m. As a result, the Polish currency was relatively stable - the EUR/PLN pair was quoted close to 4.17-4.18 PLN, while USD/PLN, after the initial growth to 3.40 PLN, returned below 3.39 PLN. The Polish zloty condition in the following hours will depend on the dollar's behaviour and the potential change in market sentiment. If, in the afternoon, the dollar appreciates and the US indexes decline, then in such a scenario the zloty could be under pressure.

Tomorrow's preview

After Wednesday being full of important publications, Thursday will be calmer. At 10.00 a.m. January's data on consumer inflation (CPI) in Poland will be published by the Polish Central Statistical Office (GUS). This will be its second reading, therefore, the probability of a significant deviation from the preliminary reading (2.1% year-on-year) is limited.

However, this publication will include data on different categories, which allow evaluating the impact of the most variable factors. It is likely that food prices will continue to rise, although the increases in energy prices may not have been so significant (crude oil prices, despite still being high, have fallen from highs). This data will rather have limited impact on the zloty exchange rate tomorrow but may help to assess inflationary trends in the economy.

In the afternoon, macroeconomic data from the USA will be published. At 2.30 p.m., the Department of Labor will release a weekly report on initial jobless claims. A week ago, the number of submitted claims approached 44-year-old lows again and amounted to 221k, 15k below market expectations. The market consensus indicates a reading of 230k.

45 minutes later, the Federal Reserve will present partially significant January data on industrial production in the USA. A month ago, the increase in production at 0.9% per month pace was a positive surprise and was clearly above market expectations (0.4%). Its main component, i.e. manufacturing production, was slightly worse, with a slight increase of 0.1%. The median of expectations indicates an increase in the core index by 0.2% month-on-month and in the case of manufacturing production by 0.3%.

An increase in industrial production above these levels could strengthen the dollar. However, tomorrow, market participants may discount today's inflation data, therefore, the impact of the Fed's publication may be limited. On the other hand, in the case of jobless claims, only a reading about 250k (and above) could have a negative impact on the dollar, although this data is rather secondary in terms of its impact.