Afternoon analysis 29.10.2015

, Autor:

Marcin Lipka

Today's reports from the US support the case for tightening. The dollar dropped after significant gains on Wednesday. The zloty gained. Watering of campaign promises by lawmakers has supported the zloty.

The headline GDP reading from the US was rather disappointing. In the third quarter the economy expanded 1.5 percent - less that the 1.6 percent growth that was forecast. The result was weaker than expansion in the second quarter, when the economy grew 3.9 percent (revised up from 2.3 percent reported initially).

The data showed solid increase of consumption. Spending increased 3.2 percent against 3.6 percent in the preceding period. On the other hand, the GDP result was negatively affected by weaker investment. And net export was neutral. Although export was hit by strong dollar, in was balanced by lower import.

The labor market report showed decline that unemployment claims stood at 260k. It was in line with the expectations. Last week it stood at 259k. It is the lowest level in forty years. The report showed that expansion of the labor market is steady in spite of weak data on employment change in the last month.

Generally, today's reports support the case for tightening. On Wednesday the Federal Open Market Committee pointed directly at the next meeting as a possible moment of hike. Moreover, the Fed is not worried any more by the impact of deterioration of the global economy.

The euro rebound

Today the dollar was weak in spite of reports increasing probability of hikes in the US. In the last two weeks the EUR/USD dropped from near 1.15 to almost 1.09. The extent of the move has increased the probability of correction.

A similar scenario has been supported by the latest reports from the eurozone. The euro was eager to increase. Especially after the German labor market data was released, that was better than expectations. Moreover, the country's inflation rate was slightly higher than expected. And finally, the eurozone report on sentiment showed a broad improvement.

However, it is not very likely the tendency will hold in the longer term. The announcement of more easing by the European Central Bank and the Fed's hawkish stance will pressure the common currency.

Politicians water down promises

After dropping the 350 billion zlotys investment scheme, today the PiS lawmakers refrained from the idea of larger tax relief. It could be shifted to 2017. It was a positive information for public finance.

However, other problems are still actual. The major issue are comments from winning party's lawmakers about the need of lower interest rates. In 2016 the PiS dominated parliament and the President will name almost all members of the Monetary Policy Council. It is very likely, that more dovish MPC will be eager to support the economic growth.

After severe decline in the past two weeks today the zloty gained. However, it is a correction. In the longer term the Fed's plan to raise rates will limit the zloty's appreciation potential.

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