Afternoon analysis 11.12.2014

, author:

Piotr Lonczak

The second TLTRO tender was below expectations what increased the likelihood for full QE in the euro zone. The euro dropped after three days winning streak. The rouble hit record lows after rates hike. The zloty weakened as risk aversion rose.

The second TLTRO tender – an offer of four year cheap loans for banking system – will not result in breakthrough in the euro zone. Creditors made a bid for less than 130 billion euro – less than 150 billion anticipated by analysts according to Bloomberg.

The European Central Bank stated a goal of bringing its balance sheet to 2012 levels as a measure to improve growth and ward off inflation risk. However, as new reports are released (concerning economic conditions and impact of ECB's actions) it is becoming more clear that the monetary authorities will fail to meet this target in the reasonable future.

Moreover, the private sector credit continued to shrink in spite of record low interest rates and first round of TLTRO in September. That proves persistent risk aversion among creditors, companies and households.

After the announcement of the rates decision, Mario Draghi pointed at first quarter of 2015 as an appropriate moment to assess measures introduced earlier and decide whether to use additional tools. A low interest in TLTRO tender shifts decision on quantitative easing to the beginning of the 2015.

The euro posted three days winning streak this week without solid ground. As a result we today observe strong move down as TLTRO increased odds for full QE and above expectations US data fueled the dollar.

Solid US data

The US economy consistently ensures investors on its viability. Today's data on retail sales proved that the probability for interest rates increases in mid 2015 is growing.

In November retail sales rose 0.7 percent on a monthly basis – more than 0.4 percent anticipated by analysts. The report excluding auto sales also exceeded expectations by growing 0.5 percent against 0.1 percent increase that was projected. Moreover, the data from last months was revised up.

The growth of retail sales was the steepest since eight months. It proves that the willingness for consumption spending is strong as confidence was improved and the labor market is growing. In addition, a four year low of gasoline price is also helpful. The consumptions spending comprises to almost 70 percent of the economy, what is a very good premise before GDP data.

In addition, today's labor market data was solid. The number of unemployment claims – a measure of new unemployment people – dropped to 294k form 297k in the previous week. It was slightly below expected 295k. However, a wider view at the US labor market (especially the latest monthly data on employment change) proved that the momentum is strong.

Given recent economic report, the Federal Reserve will keep its goal to increase interest rates in mid 2015. This factor is a key driver in the dollar market, that pushes the US currency up against other major currencies.

Rates hikes didn't save the rouble

The Bank of Russia increased interest rates more than anticipated. The key interest rate was lifted up by 100 basis points – more than 50 basis points expected in Bloomberg survey. Main interest rates is currently at 10.50 percent.

Although this move will probably support the rouble, it will not certainly stop its decline that is spurred by deterioration of economic conditions due to Western sanctions over Ukraine and falling oil prices.

A more significant taming of the rouble's slide would have needed steeper interest rates hikes. The central bank is not willing to decide on that as the economy is to face recession in 2015. Moreover, companies were severely hit by rising financing cost and households purchasing power is decayed by rising inflation (it may hit 10 percent).

As a result, the rouble end today's session at its new lows against the euro and the dollar.

The zloty hit by risk aversion

After a very good first part of the week today the zloty is weakened against the dollar and little changed against the euro. The Polish currency's correction is a result of heightened risk aversion. However, as market sentiment improves, the zloty will increase as the Polish economy is prospering and the Monetary Policy Council ended easing cycle.

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.

Return to the main list

See also: