Afternoon analysis 31.05.2016

, author:

Piotr Lonczak

Unemployment in Germany at record lows. Private credit in the euro zone increases slowly. Negative inflation in the monetary union holds. The zloty gained, but remained near low levels.

Although the latest speech of Fed Chair Janet Yellen was not focused on the monetary policy issues, it has strengthened the case for higher rates in the summer. Currently, the probability of a hike in June is about 28 percent. In the case of July’s meeting it is about 59 percent, and rises in the latter months.

The dollar did not exploit the situation. On Monday the US currency dropped against the euro. And today the major currency pair was steady above 1.1130.

Friday's data on the labor market situation will be important for the US currency. The previous report suggested some deceleration in the labor market. Before the next report, the market expectations are rather limited - the forecast is for 161k in employment growth. The unemployment rate is expected at 4.9 percent against 5 percent in the prior month. A positive surprise will pave the way for hikes in the summer.

German unemployment

Today's data on the German unemployment rate was very optimistic. The number of unemployed people dropped 11k against the 4k drop forecast. The unemployment rate stood at 6.1 percent against 6.2 percent in the prior month. It was the lowest reading since the early 90s. The unemployment rate in the eurozone stood at 10.2 percent.

A strong labor market is not followed by rising consumption. Today's data showed that retail sales dropped 0.9 percent against the prior month. This was the second drop in a row. The market consensus was for a one percent increase. The report has heightened the risk that the major eurozone economy will slow down. Poor consumption results and deceleration in international trade may lower the GDP growth.

Softer consumption in Germany may limit the inflation pressure in the eurozone. It may limit the probability that the ECB will meet its inflation goal in the mid term. Moreover, the private credit growth stays subdued. In April it increased to 1.5 percent, little below the 1.6 percent that was forecast.

The Eurostat released the flash inflation report. In May, the HICP inflation stood at negative 0.1 percent against negative 0.2 percent in the prior month. The ECB will release its monetary policy decision on Thursday. During the press conference ECB President Mario Draghi will outline the assessment of the latest reports. The probability that the ECB will announce new measures is rather low.

A stronger zloty

On Tuesday, the zloty gained against all its major pairs. The Polish currency continued the move, which started in the prior week. Today, the CSO confirmed the first quarter GDP data, which was rather poor, but it did not affect the zloty.

The probability that the zloty will continue to appreciate is rather limited. The factors which will affect the zloty are the Fed's plan to raise rates and heightened political risk. Given the situation, the zloty will remain under a negative pressure in the longer term.

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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