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Afternoon analysis 30.09.2014

, author:

Piotr Lonczak

The euro extended losses as euro zone inflation data increased pressure on the ECB. The zloty was affected by major market trends.

Flash inflation estimate pushed the euro at its lowest level in two years. The Eurostat said core inflation was 0.7 percent in September, down from 0.9 percent in the previous month, and lower than 0.9 percent expected. The consumer inflation HICP growth stood at 0.3 percent, down from 0.4 percent in the month before (after revision from 0.3 percent). The figures matched expectations.

In addition, the labor market data was broadly poor. The number of unemployment increased by 12,000 in Germany against the 2,000 drop expected. Conversely, the unemployment rate in Italy fell to 12.3 percent from 12.6 percent. But euro zone wide unemployment rate stood at 11.5 percent as in the previous month – in lines with expectations.

To sum up, today's data showed increase of deflation risk in the monetary union and persistent under-utilization of the labor market. Yesterday's data was in similar fashion by showing deterioration of economic sentiment and falling inflation expectations among households and entrepreneurs.

The data was exploited by investors to bring the euro down. As a result, the EUR/USD dropped below 1.26 at its lowest since September 2012.

On Thursday the European Central Bank will provide its decision on interest rates. The key parameters of monetary policy won't be changed, but president Mario Draghi is going to unveil details on asset-backed securities purchases starting in October. The launching of ABS purchases is aimed at restoring credit inflow to the real economy in line with TLTRO allotment and record low interest rates.

Currently, market participants speculate that the ECB may be willing to introduce a full-blown quantitative easing that encompasses government bonds. Until now the Bundesbank's defiance was the major obstacle for QE. But in the face of poor data Draghi will be probably asked to comment on QE. If the ECB president says something what may signal new unorthodox measures, the euro will surely extend its losses.

The dollar growth was tamed by poor housing market data. The S&P / Case-Shiller index – measure of house prices in 20 largest US cities – dropped unexpectedly to 6.7 percent from 8.1 percent in the previous month. It was lower than 7.5 percent expected. Nevertheless, the data was exploited by some investors as a reason to close profitable positions and won't change the longer term trend of the EUR/USD.

The zloty follows major trends

Eurostat said the Polish unemployment rate fell to 8.8 percent in August, down from 9 percent in the previous month and down from 10.3 percent in the preceding year. The European data show much better condition of labor market than domestic data do. The Central Statistical Office said that the unemployment rate stood at 11.7 percent in August against 11.8 percent in the previous month and 13 percent a year ago.

The National Bank of Poland said inflation expectations were unchanged at 0.2 percent in September. Inflation expectations at the same level in August, but we up form 0.1 percent in July – when it was the lowest level in history. The inflation rate was minus 0.3 percent in August after minus 0.2 percent in the previous month. The inflation rate in Poland is at its lowest since the country stated transition in 1989.

In addition, the NBP showed data concerning international trade. In the second quarter export rose by 6.1 percent and imports gained 8.2 percent on a yearly basis. The trade balance was positive and stood at 71 million euro. The NBP said also that current account balance was minus 533 million euro – lower than 650 million expected. In the preceding quarter the balance stood at minus 1.403 billion euro (after revision from 766 million).

Solid labor market data and unexpected inflation expectations report won't change the plans of the Monetary Policy Council. The Polish monetary authorities will cut interest rates by 25 basis points and announce next cuts before the end of the year.

Slowing pace of the Polish economy was reflected by poor industrial production data, disappointing retail sales and a weaker than expected growth of employment. It is true, that the unemployment rate is lower than it was a year ago. But the labor market may deteriorate as other data continues to be below expectations. Given the current circumstances, the lowering of interest rates is necessary to avoid further slowing of the growth.

In addition, tomorrow's PMI report will probably show that manufacturing sector slowed further. PMI is expected to drop to 48.8 from 49 point in the previous month. Deterioration of manufacturing sector strengthens the case for interest rates cuts.

The zloty remained under influence of major trend in the financial markets. Sharp decline of the euro resulted in stabilizing of the EUR/PLN and the CHF/PLN. And the strength of the dollar pushed the USD/PLN above 3.32 for the first time since July 2013.


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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