Daily analysis 15.07.2016

, author:

Marcin Lipka

The pound sustains a significant portion of its growths from yesterday. The Chinese data is consistent with estimations, but the investment level may be of concern. Important inflation data from the USA. The zloty remains steady on the day of the decision of Fitch regarding Poland's rating.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • 14.30: Consumers inflation from the USA (estimations: 1.1%; excluding fuel and food positive 2.2%).
  • 14.30: Retail sales from the USA (estimations: positive 0.1% m/m and positive 0.3% excluding fuel and food).
  • 15.15: Industrial production from the USA (estimations: positive 0.3% m/m).
  • 16.00: Initial estimations of the University of Michigan consumers index (estimations: 93.5 points).
  • This evening, we will know the decision of Fitch regarding Poland's rating. In January, it was announced at 22.00 CET (10.00 PM).

Strong growths of the pound this week

It is likely that this week will be successful for the pound. Its appreciation against the dollar is at a 4% level in comparison to its lowest levels from Monday. This growth has been mainly generated by a rapid reduction of political uncertainty (the new UK government), as well as the lack of a decrease in interest rates that was expected by the market.

The fact that a lot of the market participants directed their positions to the GBP depreciation was probably an element that increased the growth scale even more. These positions were being closed by a sudden rebound of the pound that made the rebound even larger. However, the 1.35 level on the cable can make investors wonder how much space for a rebound is left.

The main problems of the United Kingdom are not completely solved yet. Moreover, Theresa May's nominations for the crucial posts in the negotiations with the EU suggest that these discussions will be neither fast nor easy. Additionally, the pound still has to deal with a record high deficit on the current account. Its reduction will be difficult, even if the depreciation of the pound is significant.

We must also not forget that the decision of the Bank of England is most likely postponed by three weeks. The announcement directly stated that interest rates may be decreased at the next meeting. Moreover, there is a risk that despite a relatively calm reception of Brexit by investors, the new data from the United Kingdom will deteriorate. Thus, the above matters may rest on the GBP for months.

Chinese data

The basic data from the Chinese economy was consistent with estimations, or even slightly better. Retail sales and industrial production increased by 10.6% and 6.2%, respectively. The GDP reading for the second quarter is positive as well. It is at the 6.7% y/y level, against the 6.6% in the economists consensus.

However, investments are slightly weaker, especially taking under consideration that we divide them into investments generated by the nation and by the private sector. At the beginning of 2016, both of these components were growing at the 10% y/y level. Later on, we could see that the pace of the national investments is growing and the pace of the private investments is reducing.

Currently, the public investments are growing at the pace of more than 23% y/y, and the public investments – 2.8%. Theoretically, we can imagine that fiscal stimulation will create a demand that is sufficient enough to increase the activity of the private sector as well. However, the current process continues to last for a longer time and there is no improvement in sight. Worsening conditions of the private sector may be a symptom of decreasing foreign demand. This may be noticed by the broad market at a certain point.

A few words about the foreign market

Today, investors may focus on the data about the consumers prices in the USA. Economists expectations are almost equal between the base case inflation reading, at the level of 2.2% and 2.3% y/y. If it eventually appears that the higher value is published, we will be dealing with readings that have only been seen twice since the financial crisis. This should be a positive argument for the hawkish Federal Reserve members, to consider rate hikes on the forthcoming months.

Decision of Fitch

Most likely we will find out whether Fitch modified Poland's loan credibility today after 22.00 (10.00 PM). That's the time at which the Agency published its most recent decision regarding Poland on January 15th. Due to the fact that the dangers mentioned in the previous report did not come true, it is unlikely that the rating will be downgraded.

However, there is definitely a bigger risk that the perspective will be downgraded from stable to negative. The most recent NBP projection, showed that the growth for this, as well as for the next year will be weaker. Moreover, the investment growth has clearly been revised down. The matter of Brexit is not a positive element as well. However, its impact is limited for the time being. If Fitch decides to downgrade the perspective, it may consider the announced decrease in the retirement age (costs at an approximately 0.4-0.5% level per year in a higher deficit). It is obvious as well, that the income from the trade tax will be lower than expected. In January, the Agency estimated them to be at the level of two billion.

Thus, by adding all of these economic reasons together there are arguments for a downgrade of Poland's loan credibility today. However, it should not impact the exchange rate of the zloty dramatically in our opinion. A wear-off on the main currency pairs within the range of 0.01-0.02 PLN, is the most likely move on Monday. This is because it is already partly included in the exchange rates. On the other hand, if Fitch does not change the rating, the EUR/PLN could go slightly below 4.40.

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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