Afternoon analysis 17.03.2016:
Dovish Fed supported the market sentiment. Report from the Polish economy showed an ongoing expansion. The zloty gained against the dollar.
The Federal Reserve moved to a more dovish stance as the other major central banks did. Last week the ECB showed more loose stance. Earlier China and Japan increased the monetary stimulus. Less important banks also decided to loosen their policy.
On Wednesday the Fed left interest rates unchanged. Currently the federal funds rate at rage between 0.25 to 0.50 percent. The decision was in line with expectations. However, the Fed surprised with dovish forecast for interest rates. It pointed at two hikes this year. In December the Fed projected four hikes in 2016.
Fed President Janet Yellen said a press conference that the level of interest rates leaves more scope to address high inflation than low inflation. As a result, the central bank wants to be more certain the inflation rate moves to the goal before raising rates.
The latest reports from the US did not give clear answer whether the domestic factors are strong enough to support inflation, which is subdued by the global factors. Although the unemployment rate is at eight year low and employment is strong, the wages growth disappoints. Lackluster gains in wages will not support consumption. Retail sales at the beginning of the year was below the expectations. Given the situation, it is not very likely household consumption will support the inflation growth.
The market reaction was in line with the expectations. The dollar dropped against the euro and other major currency pairs. The US currency dropped against the emerging market currencies. Given a more dovish stance the major central bank, the risk assets may extend recent gains.
The latest reports from the Polish economy showed a solid expansion. After very good reports from the labor market, today the data on industrial production and retail sales surprised positively.
Industrial production increased 6.7 percent in February against 5.5 percent forecast. In the prior month it increased 1.4 percent. The consumption growth also exceeded the forecast. It increased 3.9 percent on a yearly basis after rising 0.9 percent in the prior month. The forecast was for 3.3 percent growth.
However, the producer prices index missed the forecast. The gauge dropped 1.4 percent against the prior year. The forecast was for minus 1.2 percent. The data suggest that the inflation rate above the zero level is still a distant perspective. The latest numbers on consumer inflation also missed the forecasts.
Strong economic expansion is coupled with low inflation environment. At the last meeting the Monetary Policy Council said it will not adjust the level of interest rates as the economy is balanced. A similar view was presented in the minutes from the March meeting. As a result, the probability of rate cuts is still very low. However, if the inflation rate remains at the currency level in the longer term, the MPC may be pressured to act.
Nevertheless, it is not a probable scenario. In contrast, the factor that will support the zloty in the longer term is a dovish stance of major central banks.
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