Afternoon analysis 16.09.2015:
S&P cut Japan rating. Unexpected drop in the US inflation. The zloty supported by solid reports form the labor market.
Standard & Poor's cut Japan rating on level to A+ from AA- previously. The rating outlook was set positive. S&P said the decision was caused by the deterioration in the economic outlook. Given the situation, the creditworthiness has been recently deteriorated. Today's cut should be considered in the context on yesterday's inaction of the Bank of Japan.
The monetary authorities did not implement new measures to help the economy. They consider tool that has been introduced as sufficient to spur inflation and GDP. As a result, the burden of the economic stimulation was shifted to the government. However, any additional stimulus will increase public debt already forecast at 247 percent GDP (according to the IMF) and will hurt its sustainability. Surprisingly, the S&P decision did not affect the yen.
Eurozone inflation eased in August. Inflation increased 0.1 percent against the 0.2 percent in the prior month. It was the lowest level in the last four months. Moreover, it was below the flash estimate. Core inflation, a measure that excludes volatile prices of food and energy, dropped to 0.9 percent from 1 percent reported previously.
Earlier this month European Central Bank President Mario Draghi said, the monetary authorities will consider whether to expand quantitative easing if the inflation outlook is deteriorated. As a result, the common currency dropped in the first part of the day.
However, the US inflation also was below the forecast. Consumer prices dropped 0.1 percent on a monthly basis in August. Inflation increased 0.1 percent on a yearly basis. The major cause of the inflation drop was low energy prices. Currently lower about 15 percent against the previous year.
Although the report will not alter the Federal Reserve decision on interest rates, it was clearly negative for the dollar. The US currency gave away earlier gains after the report. The market consensus is for no hike, but if the statement and forecasts will be hawkish, the dollar may gain.
Today the Chinese market rebounded. The Shanghai Composite Index increased 4.9 percent. Stock rebounded in the last hour of trading just after the gauge dropped below 3000 points. The move was associated with a pattern of government interventions. Similar speculations were given by the media.
All in all, strong gains after tow days of declines confirmed that the market is not stable. In the long term government will not calm the market given the economic slowdown. The latest reports on production and investment confirmed the deterioration of the economic landscape. This factor will negatively weight on the risk assets in the future.
The zloty rebounded in the second part of the day after earlier decline. It was helped by the US inflation report, that resulted in a weaker dollar. Moreover, the zloty was supported by the economic reports.
The situation in the labor market is still optimistic. Although wages increased 3.4 percent (less than the 3.5 percent forecast), it was better result than in the prior month. Moreover, the employment data exceeded the forecast. It increased 1 percent on a yearly basis against the 0.9 percent that was expected. Last moth employment increased 0.9 percent.
In the short term, the zloty developments will be shaped by the FOMC statement. If the Fed is rather dovish, the zloty may gain.
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