Afternoon analysis 31.10.2016

PCE inflation data in line with market expectations. Slightly higher CPI inflation in Poland without an effect on zloty.

PCE inflation doesn’t disappoint

Core PCE price index, published by Bureau of Economic Analysis, was in accordance with market consensus at 1.7% year-to-year in September (a 0.1% increase on a monthly basis). The index maintains an upward trend since August 2015. After a 0.2% fall in August this year, Real Personal Consumption increased by 0.3%, which was a 0.1 percentage point above what the market expected.

Dollar’s reaction to the data was fairly limited. EUR/USD was near 1.095. The PCE inflation data are relevant because FOMC uses them in their inflation projection. Therefore, they have a direct impact on the probability of interest rate changes in the US. The inflation currently remains below the 2% FOMC target, so one shouldn’t expect a change in the current distribution of probable interest rate hikes (one this year and two in the next year).

Polish CPI above expectations

Central Statistical Office published today a preliminary reading of CPI inflation for October: -0.2% year-to-year (vs. expectations of -0.3%) which was the highest since July 2014. The 0.5% increase on a monthly basis was above market consensus, as well. The aforementioned increase was the highest since April 2012.

A better than expected inflation reading is positive news for the Polish currency, but it hasn’t caused any significant reaction. Zloty fluctuated in the relatively narrow range observed in the last weeks. The most import event this week, that could potentially have an effect on zloty, will be the FOMC statement on Wednesday. The dollar is currently worth 3.95 zl and euro 4.33 zl.

Tomorrow’s preview

We will learn tomorrow Great Britain’s and the US Manufacturing PMI for October. At 10.30 Markit will publish the data for the British economy. The final September reading of 55.4 was the highest since June. While market expectations are a bit lower this time (54.5), this would still be considered a high level. Taking into account the relatively good data (in the context of Brexit) coming from the British economy, a reading in the vicinity of market consensus, or even last month’s level, is probable.

In addition, Manufacturing PMI and ISM for the US economy will be published tomorrow as well. One should remember that in the case of this country, ISM is more important and exerts historically greater impact on the dollar. The final PMI index will be shared at 14.45, 15 minutes before ISM data. The market expects the index to remain unchanged at 53.2 relative to the 24th October predictions – which would be the best data since 12 months. The median of market expectations in the case of October’s ISM index points to 51.7, which would be slightly higher than 51.5 in September. The index has been coming back from the September dip, when the index unexpectedly fell to 49.4

Wednesday’s preview

Markit will publish Manufacturing PMI data for the Polish economy – market consensus is at 52.5 (vs. 52.5 in September), which would be the highest level since March. Taking into account that Markit PMI data are generally above expectations of late, it is more probable that a reading that failed to meet expectations would have a greater impact on the Polish currency.

The final October data regarding Manufacturing PMI for Germany and the Euro Zone will be published at 9.55 and 10.00 respectively. In both cases, it is expected that the indices remain unchanged at 55.1 and 53.3. The last batch of PMI data for both regions positively surprised, mainly because of a better business climate in the biggest economy in the Euro Zone. The latest Ifo and GfK data suggest of continuation of this good sentiment, so the risk of this indices falling below the aforementioned levels is limited.

Before the opening bell at the New York Stock Exchange, ADP will publish the change in Nonfarm Employment in October. The September data disappointed the investors because the increase of only 154k was the worst since January 2014. Market consensus is currently at 165k. An increase in employment in the nonfarm sector above this level, or even close to August’s 175k, could support the dollar, which moved away from the 1.09 boundary.

FOMC statement at 19.00 will be the most import event of this day. The interest rate decision will also be known at the same time, but the probability of a 25 bp rate hike is low (currently at 8.3%, according to contracts for fed funds). The significant thing will be whether FOMC will point to a rate hike in December, just as it did last year. This could potentially cause a strengthening of the dollar – a drop in EUR/USD below 1.09 and increase of USD/PLN towards 4.00.