Afternoon analysis 28.10.2016

, author:

Bartosz Grejner

The American GDP in the third quarter was better than expected. However, investments are disappointing. The German inflation was consistent with the consensus. The Polish currency remains slightly stronger. The American quotations had a minor impact on the zloty.

Mixed GDP reading

The first GDP forecast by the Bureau of Economic Analyses indicated a 2.9% q/q growth. This result was better than the consensus (2.6%), as well as the data from the previous quarter (1.4%). This was mostly caused by a relatively high growth of export and supplies. Export increased 10% y/y (including a 14% growth of goods and 2.1% growth of services), which was a significantly better result than the previous 1.8%. On the other hand, supply growth in the third quarter was at the level of 0.6% contribution against the GDP growth (in two past quarters it was negative 0.41% and negative 1.16%, respectively.)

Constant investments appeared to be disappointing for the third consecutive quarter. According to the latest data, this index decreased by 0.6%. In the first quarter there was a 0.9% decrease and a 1.1% decrease in the second quarter. The real consumer expenses index was also slightly below expectations. Of course, there was a 2.1% growth, but it was below the consensus, as well as significantly lower than the second quarter reading (4.3% q/q).

Even though the main index was better than expected, the above components create a mixed picture of the GDP in the third quarter. Large changes in comparison to the previous quarters (export and supplies) show that there may be a large volatility in the future as well. This may impact future GDP readings. The market reaction seems to confirm this view. After the publication, the EUR/USD increased to 1.093.

Inflation increase in Germany

Today, Destatis informed that the CPI inflation for October was at the level of 0.8% y/y. This result was consistent with the market expectations. Inflation in month on month interpretation (more volatile) increased 0.2%, which was higher than the consensus (0.1%). The greatest contributor of the 0.8% growth was the services sector, in which the prices increased 1.4%. However, a 1.4% decrease was observed regarding energy prices (households and fuel).

Its negative impact on the general inflation index is slowly fading away. This is because the decrease pace of energy component prices within the past few months has been increasingly lower. Between July and October, it was negative 7.0%, negative 5.9%, negative 3.6% and negative 1.4%, respectively. Taking into consideration increasing oil prices and increasing consumer trust (Ifo, GfK), inflation will continue to grow at a similar pace in the forthcoming months (it has been increasing gradually since April 2015, when it was at the level of negative 0.1%.).

Zloty is slightly stronger

The polish currency sustained the majority of its gains from the first part of the day. Today’s main event (the American GDP) had a limited impact on the zloty’s behavior due to its mixed message. The dollar still costs 3.96 PLN. The data from the BEA wasn’t sufficiently positive enough to increase the likelihood of December rate hikes. This is why we shouldn’t expect the USD/PLN to return to the 4.00 level in the short-term.

Monday’s events

At 8.00 AM, Destatis will publish the German retail sales data for September. The market consensus assumes that there will be a 0.2% m/m increase (vs negative 0.4% in August) and a 1.5% y/y increase (vs 3.7% in August). The year on year reading from August (positive 3.7%) appeared to be better than expected (positive 1.3%), as well to be the highest growth since February. Recent Ifo and GfK data shows a high, and increasing, level of consumer trust in Germany. Therefore, it’s most likely that retail sales data for September will be positive. If the reading is near, or better than the consensus, this would be a positive signal for the euro. However, it would be positive for the Polish economy as well. This is because Germany is a highly significant trading partner for Poland.

Monday’s main event is the inflation data from the euro zone and from the United States. At 11.00 AM, Eurostat will publish the CPI inflation data for October. The market consensus for the base case component is 0.8% y/y (vs 0.8% in September). This data is crucial for the future actions from the European Central Bank, especially regarding the QE program. This is because the ECB confirmed that interest rates will remain at their current level (or they will decrease), even beyond duration of the QE.

At 13.30 (1.30 PM), the Bureau of Economic Analyses will publish the American PCE inflation data for September. This data is crucial because the Federal Reserve uses it for their future inflation projections. This data gives a pretty decent preview on the FOMC decisions regarding interest rates. The market expectations are at the level of 1.7% y/y, which is the same as it was in August. The consensus regarding the month on month interpretation is a 0.1% increase (vs 0.2% in August). Since July 2015, we have been observing a slow and gradual inflation growth in year on year interpretation (1.2% in July 2015 and 1.7% in August 2016). If the reading is better than expected, this would increase the likelihood of rate hikes in December (according to calculations based on the Fed rate contracts, the likelihood is at the level of 72%.).

Let’s keep in mind that the next FOMC meeting is scheduled for the 1st - 2nd November. The decision regarding interest rates will be made then. Even though rate hikes are unlikely to be announced during this meeting (8.3% of chances), we should expect significant fluctuations in the currency market (as well as the share market and the bond market). These fluctuations may be even larger, if the FOMC suggests rate hikes in December in the announcement.


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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