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Afternoon analysis 07.03.2016

, Autor:

Piotr Lonczak

The major central banks may support risk taking in the markets. The ECB pressured after weak numbers from the eurozone. The zloty posted some losses.

Recent economic reports increased pressure on the major central bank to increase stimulus. Friday's data from the US labor market showed strong increase of employment (242k against the 190k forecast). However, average wage growth disappointed as it stood at minus 0.1 percent against plus 0.2 percent forecast.

The Federal Reserve, after raising the rates in December, gave a signal that it will watch inflation data more closely than the labor market numbers. In this context the Friday's numbers may not support the dollar thus rising employment was not followed by the wage growth. And without higher wages consumption of households would be not enough to support inflation rebound. As a result, the data may result in decline of interest rate hike probability.

Moreover, the reports from the eurozone increased pressure on the ECB to increase stimulus. The Sentix index dropped to 5.5 from 6 in the prior month against the 8 forecast. The reading on industrial orders in Germany was little above the forecast, but it did not change the situation. A broader look at the eurozone latest reports show some deterioration of economic landscape.

ECB President Mario Draghi is expected to announce additional stimulus on Thursday. The market expects the ECB cuts deposit rate by 10 basis points and increased the level of asset purchase by 15 billion euros. Moreover, the quantitative easing program may be extended.

Also the Chinese government plans to support the economic growth. On Sunday Prime Minister Li Keqiang said the GDP growth target is 6.5-7.0 percent range against the previous goal at 7 percent. China will widen budget deficit to 3 percent GDP from 2.3 percent. The government will also revamp state owned companies and continue to liberalize the financial market. Loose fiscal stance will be coupled with additional easing from the People's Bank of China.

Stronger risk demand

If the Fed lowers the pace of tightening and the ECB adds to stimulus as expected, the positive sentiment in the financial markets will be strengthened. The tendency will be supported, if the People's Bank of China moves in a similar direction.

Actions of the Chinese government will influence not only the broad market. This factor will especially support commodity markets. China's impact is significant as the nation is the major consumer of commodities.

On Friday the MPC will decide on the interest rates. The MPC is expected to leave rates unchanged. Moreover, the monetary authorities may show rather a hawkish stance. The notion was based on the recent statements of the policymakers. Given the situation, the zloty may gain in the longer term. However, on Monday the zloty was lower against its major pairs.


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