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Afternoon analysis 27.10.2014

, author:

Piotr Lonczak

The German economy failed to meet the expectations. Stress-test left some time for the ECB. JPMorgan cut its forecasts for CEE countries including Poland. The zloty afflicted by a deterioration of market sentiment.

The Ifo institute's business climate index – a major economic activity gauge in Germany – fell below expectations. The index dropped to 103.2 from 104.7 in the previous month, below projected 104.5. It was its sixth drop in a row and it stood at its lowest level since December 2012. This report was a next to show a deterioration of economic environment in Germany, as industrial production, industrial orders and ZEW index also failed to meet expectations.

The only positive information was the PMI report, that apparently showed some improvement (the index rose to 51.8 – a level above 50 is reflecting expansion). However, the overall view on October's data is rather negative. After a decline in GDP in the second quarter there are growing concerns that in the third quarter the scenario is going to be similar. So it may result in a recession of the largest euro zone economy.

For the euro a poor performance of Germany is important not only due to fact that it is the biggest economy in the monetary union, but also due to a strong defiance of the Bundesbank against unorthodox policy measures. Still, in the face of faltering growth the European Central Bank President Mario Draghi might be willing to one again try to cram his plan on a broader scope of asset purchases as the Bundesbank might be more opened to relief the economy. So it means that the idea of full quantitative easing that encompasses government bonds or at least corporate bonds purchases, is going to be back on the agenda.

Stress-tests on the European largest bank showed that the capital shortfall is not significant and additionally, it has been already filled in a large part by part of banks. Asset quality review reassured investors that the condition of the European financial sector is quite good and it should yield in improvement of confidence. The bottom line is the banking sector that looks ready to pursue the ECB plan on revive the credit inflow to the real economy.

After a lower than expected amount of cheap loans allotted in September, the December TLTRO may be more successful. Nevertheless, the overall impact of the measures introduced by the ECB is assessed through the prism of economic performance and we currently can't see any improvement in this area.

The ECB informed that it bought 1.7 billion euro of securities since the beginning of purchases scheme. The number surprised as it was expected It was in higher than expectations for 800 million euro. The number didn't affect the currency market.

JPMorgan cut forecasts

Investment bank JP Morgan cut forecasts for Central Eastern Europe economies as Russia and the euro zone will lower the pace of growth and demand for CEE exports. The Russian GDP will drop 0.8 percent in 2015, down from plus 0.9 percent expected earlier. The euro area GDP growth forecast was cut to 1.6 percent from 1.8 percent previously.

Polish economy is expected to grow 2.8 percent in 2015, down from 3.2 percent in the previous forecast, according to JPMorgan. In addition, investment bank expects the Monetary Policy Council to cut interest rates by 25 basis points in November and December. In addition, the MPC may also lower further the rate in 2015 to avert headwinds from poor economic environment.

Nevertheless, the MPC members dampened the odds for additional cuts. The NBP president Marek Belka said that the zloty is undervalued and Jerzy Hausner from the MCP sees no room for additional cuts. Moreover, Elżbieta Chojnaq-Duch from the MPC said although rate cut is possible in November, it is not certain. Lower probability for cuts may result in a decrease of volatility in the zloty market.

The zloty moved lower on Monday after a significant rise on Friday. The Polish currency was higher only against the dollar as the EUR/USD rose. The zloty is affected by the poor economic data that resulted in increased risk aversion. Given current circumstances this tendency will be prevailing in the near future.


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 Cinkciarz.pl Sp. z o.o is prohibited.

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