Afternoon analysis 16.11.2015

, author:

Marcin Lipka

The Bundesbank is calm before the key meeting of the European Central Bank. The euro was steady in the face of developments in France. The zloty under pressure of risk aversion.

The Bundesbank's monthly report showed a rather calm view of the current situation. The German central bank sees the developed economies as resilient to the turmoil in the emerging market countries. Although the situation in China poses some worries, it has not worsened in the last few months. Low commodity prices rather reflect an overall slowdown in the global economy than are the cause of the deterioration in growth outlook.

Moderate views from Bundesbank limit the probability that Germany will support the idea of additional stimulus in the eurozone. The European Central Bank will decide in early December whether to increase the stimulus. The decision is expected after the dovish remarks made by ECB President Mario Draghi in October. He suggested the possibility of a QE extension and deposit rate cut during the press conference after the rates decision. The major reasons for a similar action are that of the ECB missing its inflation goal and the economy slowing down.

Today's data limits put pressure on the ECB to act. Inflation in the eurozone was higher than expected. In October, consumer prices increased 0.1 percent against the 0 percent that was forecast. Similarly, core inflation (that excludes the volatile prices of energy and food) increased 1.1 percent against the 1 percent that was expected. It was the highest level in two years.

Last Thursday, the ECB President Mario Draghi said that positive tendencies shown by core inflation data have been limited. There was a notion that the ECB Chief has seen the newest data on inflation. Given Draghi's remarks today's Eurostat data was somewhat surprising.

However, it is not very likely that the expectations will alter in a significant way. Nevertheless, the chance for a brief rebound has increased. And the euro was not significantly affected by the developments in France. On Monday, the EUR/USD moved in a narrow band around 1.07. In the coming days, the major currency pair may be affected by the FOMC's minutes.

Zloty pressured

The core inflation rate in Poland did not surprise. In October, the price gauge that excludes the volatile prices of food and energy increased 0.3 percent on a yearly basis after increasing 0.2 percent in the previous month. The report did not affect the zloty. In the coming days, a few reports on the Polish economy are scheduled. On Wednesday, the labor market data are due and on Thursday readings on production and retail sales are to be released. However, the reports will not alter the expectations on the monetary policy.

Andrzej Rzońca from the Monetary Policy Council expects the normalization of the monetary policy to start at the beginning of 2016. He warned, if the policy tightening is not started, it will pose a threat to sustained economic expansion. And wage pressure may erode the cost competitiveness of export. In contrast, a strong labor market supports consumption and adds to growth, according to Rzońca.

This task is going to be assigned to the new MPC as in January and February eight members will be replaced, including Andrzej Rzońca.

The zloty was under the influence of risk aversion. This factor was perceived at the end of last week after the negative information from China was announced. It has strengthened after news coming from France. As a result, the pound increased above 6 zlotys to the highest level in a decade. The dollar was also near its highest level in years.

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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