Afternoon analysis 07.03.2016

, author:

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 a strong increase of employment (242k against the 190k forecast). However, average wage growth disappointed, as it stood at negative 0.1 percent against a positive 0.2 percent forecast.

After raising the rates in December, the Federal Reserve gave a signal that it will watch inflation data more closely than labor market numbers. In this context, Friday's numbers may not support the dollar, thus rising employment was not followed by the wage growth. Additionally, without a higher wages consumption of households would be not enough to support inflation rebound. As a result, the data may result in a 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 of industrial orders in Germany was little above the forecast, but it did not change the situation. A broader look at the eurozone’s latest reports shows some deterioration of the economic landscape.

ECB President Mario Draghi, is expected to announce an additional stimulus on Thursday. The market expects the ECB to cut deposit rates by 10 basis points and increase the level of asset purchases 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 in the 6.5-7.0 percent range against the previous goal of 7 percent. China will widen the budget deficit to 3 percent GDP from 2.3 percent. The government will also revamp state owned companies and will continue to liberalize the financial market. A 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, but 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.

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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