Afternoon analysis 04.05.2016

, author:

Piotr Lonczak

The US labor market missed the expectations. Eurozone reports this time are below the forecasts. The euro recouped some losses. The zloty moved higher, but it remained near low levels.

The latest reports from the euro zone have been above the forecast. But, today's data missed the expectations. The readings showed a weaker than expected increase of retail sales and a slightly slower expansion in the service sector.

In March, sales increased 2.1 percent on a yearly basis, after rising 2.7 percent in the prior month (revised from 2.4 percent). On a monthly basis, retail sales dropped 0.5 percent after increasing 0.3 percent (revised from 0.2 percent). The report was below expectations.

The reports reflected an ongoing tendency which had been seen earlier in the German economy. The consumption growth remains subdued in spite of a very positive situation in the labor market. Given the situation, it is not very likely the inflation rate will rebound at a faster pace. However, ECB President Mario Draghi recently suggested that the monetary authorities are not going to increase stimulus.

The PMI indexes from the service sector showed some deterioration. However, the pace of expansion remains quite high in spite of some slowdown. Only France is clearly under negative pressure, as the PMI index stood at 50.6. However, the gauge moved to positive territory from the prior month’s reading below the neutral level of 50. The broad index for the monetary union stood at 53.1, slightly below the forecast.

US labor market

Contrast to the eurozone, in the US, the latest reports have been rather negative. On Monday, the ISM index suggested a slowdown in industry. Earlier, the GDP growth missed the forecast and the expansion was the slowest it has been for two years. As a result, the dollar was under a negative pressure.

On Tuesday, the dollar rebounded from the lowest level since January 2015 against the euro after hawkish comments from the Fed. Atlanta Fed President Dennis Lockhart said that two hikes are possible this year and tightening may resume in June. Additionally, San Francisco Fed President John Williams made some upbeat remarks on the US economy, which supported the tightening scenario.

The US labor market data used to point at solid expansion. But, it has changed today. The ADP report on employment change showed only a 156k increase in employment. It was a lower reading than the 195k forecast. Last month, employment increased 194k (revised down from 200k). Given today's data, the Friday report on the situation in the labor market may also be poor.

As a result, the dollar dropped against the euro and other major pairs. The latest data has put the Fed into quite a difficult position. The US central bank has been talking about two hikes this year, in spite of deterioration in reports. It is possible that the Fed will be forced to adjust its stance. A similar scenario would be negative for the dollar.

Zloty at low level

Rising risk aversion was reflected by a drop in the European stock markets. The major indexes dropped to the lowest level in three weeks. A negative sentiment was supported by sliding commodity prices and poor reports from China.

The zloty was susceptible to risk aversion. This was caused by high probability that the Moody's agency may lower the nation's rating. Moreover, poor reports coupled with rising deflation pressure may push the MPC to adjust its stance to more dovish. Given the situation, the probability of a stronger zloty is rather low.

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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