Daily analysis 07.07.2016:
Mixed minutes are giving much decision space for the Federal Reserve. Very positive ISM readings from the USA and weak readings from the German industrial production. An important ADP reading. The zloty might begin taking advantage from the period of optimum conditions for the emerging markets currencies.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14.15: ADP reading from the USA (estimations: 173k).
Minutes are relatively neutral
Some of the market observers expected the message from the previous Federal Reserve meeting to be dovish. In our opinion, it can be described as rather preventive. On one hand, it may allow to keep interest rates at an unchanged level until the end of the year. On the other hand, it gives possibilities to raise interest rates, as long as the number of new workplaces returns to the area of positive 150k per month. Moreover, the Brexit consequences for the global economy need to be limited.
Many of the FOMC members think that a lower number of new workplaces is a result of temporary elements, such as statistical disturbances, as well as the strike of the telecommunications sector workers. Some of the Fed members claim that other indexes are not consistent with a clear weakening of the labor market. Probably two or four FOMC members think that a lower increase in employment can be related to problems with a work supply. This is because entrepreneurs are announcing a limited employee availability.
The same paragraph of minutes shows a completely different approach towards the data. Some of the Fed representatives claim that a lower increase in workplaces can suggest a slowdown of the economic activity. They also mention a larger amount of employees, who are employed part time.
Regarding Brexit, the Fed members agreed that it will be proper to wait and evaluate the consequences of the referendum for the global financial markets, as well as the future condition of the American economy.
In our opinion, the FOMC members, as well as the FOMC economists, were neither concerned with the recent American labor market readings, nor with the Brexit situation, despite a preventive tone of crucial paragraphs from minutes. Thus, we may assume that if the labor market data improve within the next two months, and the Brexit consequences are only limited to the United Kingdom, the Fed may return to the idea of hikes by the end of the year.
Positive data from USA and weak data from Germany
Even though the data from before the British referendum have currently a lower impact on the market, it is worth focusing on a very positive reading of ISM from the American services scetor from yesterday. It grew to the level of 56.5 points. This is its highest value since November 2015. The crucial components improved as well.
The subindexes of new orders, production and employment, all increased to the value of 59.9 points, 59.5 points and 52.7 points, respectively. Thus, we may claim that ISM does not confirm the concerns over the condition of the American economy. Moreover, it shows that it may grow even faster than it currently does. However, the surveys were received before the British referendum.
Not much positive information come from the German industrial production. Its significant acceleration from the beginning of the year, especially regarding investment goods (the most important component), has been canceled completely. As a result, the complete reading in month on month relation went down by 1.3%, while the estimations were near 0.0%.
A few words about the foreign market
The general tone of yesterday's minutes as well as the American ISM index, suggest that the next readings should be rather positive (more than 150k). This refers to today's ADP data, as well as payrolls on Friday. This should support the American dollar as well. However, until the Federal Reserve does not begin suggesting the hikes, an increase in value of the American currency may be limited. This is because of the capital flow to the currencies that are considered more risky, for example.
Does zloty benefit from global trends?
Yesterday's announcement, as well as the press conference under the leadership of the new chairman, were not surprising regarding the crucial matters. The MPC is most likely to withhold changes in interest rates in the next months, even if the economic growth is slightly below estimations. This should stabilize evaluation of the PLN in the mid-term.
In the short-term, the zloty may benefit from the global trends. The market may come to a conclusion that Brexit will have a minor impact on a worldwide economic slowdown. However, the fear of its consequences may extend the mild monetary policy of the Fed, as well as intensify the quantitative easing in the leading central banks.
This should support the emerging markets currencies, including the zloty. Thus, it is possible that the EUR/PLN may go to the 4.35 area and the CHF/PLN to the 4.00 level during the holiday. The dollar should be slightly cheaper as well, even if we take under consideration the positive readings from the American labor market.
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