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Daily analysis 17.05.2016

, author:

Marcin Lipka

This is an important day for the American currency. There will be many macro publications, as well as statements from the FOMC representatives. The zloty continues its growths from yesterday. Summary of the International Monetary Fund mission was more critical that the last year announcement.

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

  • 14.30: New investments in the real estates sector and building permits in the USA (estimations: 1.13 million and 1.14 million, respectively).
  • 14.30: Inflation from the USA (estimations: positive 1.1% y/y and positive 0.3% m/m; with exclusion of fuel and food: positive 2.1% and positive 0.2% m/m).
  • 15.15: Industrial production from the USA (estimations: positive 0.3% m/m).
  • 18.00: Discussion between Dennis Lockhart (chairman of the Atlanta Fed) and John Williams (the San Francisco Fed), which will occur in the event which is organized by Politico.

Focus on the USA

Last week's positive readings of retail sales, as well as a visible improvement in consumers sentiment, have increased the temperature of the discussion regarding the return to the concept of the monetary tightening in the USA. Moreover, these readings coincided the hawkish testimony of Eric Rosengren. Usually, he Rosengren represents the dovish faction, which wants the hikes to be made slightly later than the FOMC consensus assumes.

Growing chances for an increase in interest rates are also indicated by the behavior of the American debt. Two-year profitability of the American bonds increased from 72 base case points (quoted last week) to approximately 80 base case points. This is significantly less than before the Fed's decision in March. At that time, the FOMC had reduced the previously announced pace of hikes from four this year to two this year. However, it is possible that today's data is yet again better than expected. Moreover, the monetary authorities may sustain Rosengren's opinion.

This afternoon, we will receive three important readings – report from the real estates market, the CPI inflation (both at 14.30) and the industrial production. The reading of changes in consumers prices (especially with exclusion of fuel and food) will be definitely the most significant. The majority of economists which were surveyed by Bloomberg (36 out of 46), assumes that the base case CPI in a year on year relation will be 2.1%. The rest of them expects it to be at the level of 2.2%. This difference is small theoretically. However, it may be a significant signal that the CPI inflation clearly remains above 2.0%. This may cause the PCE inflation (May 31st) included by the Fed in its forecasts, to be within the range of 1.6%-1.7% y/y. It seems that these values should be sufficient enough, in order to speak of the monetary tightening.

Of course, the other publications are important as well. Improvement of activity in the real estates market and the industrial production (currently at the level of negative 2.03% y/y, due to mainly the weak condition of the mining sector), will also be a signal for Lockhart, as well as for Williams.

During his testimony at the Stranford on May 5th, Lockhart emphasized that the hikes in June are “on the table.” However, he also noticed in his statement for the CNBC that he would like the amount of 200k workplaces per month to be bigger. In April, the American economy had created 160k workplaces.

On the other hand, John Williams took note that the economy is in a better condition, than it is indicated by the GDP from the first quarter. In March the authorities were estimating two or three hikes. According to Williams, “this is a reasonable viewpoint,” but he will continue to observe the data.

As a result, we can claim that if the American data are better than the market's expectations, the FOMC members will emphasize the necessity of the hikes in the forthcoming months. This would make the chances for appreciation of the USD to significantly increase. The EUR/USD may move to the range of 1.1200-1.1250 already today. Moreover, the debt profitability should also add a few base case points.

However, we may not exclude an opposite scenario. If the American publications disappoint and the FOMC sees these unfavorable changes, some of the expectations, which were already included in prices would decrease. This could cause the USD to wear-off.

Regardless of the scenario, today's publications will be carefully observed, and statements from the FOMC members will be carefully analyzed. In our opinion, the chance for an increase in the USD to continue is bigger, due to the signals which suggest that the first quarter was unnaturally weak (as well as it was in the past few years).

IMF opinion is worse than it was one year ago

The annual International Monetary Fund mission has finished yesterday. It evaluated the current situation in the Polish economy and its environment. The positive information is an increase in perspective of the economic growth in 2017 to 4% of the GDP, as well as “the appropriate” monetary policy. The IMF had significantly more remarks regarding the fiscal policy, as well as the financial sector.

In 2015, the Fund wrote of, “a positively capitalized and profitable financial sector, which remains resistant to shocks.” This year, on the other hand, it took note that, “the sector remains positively capitalized, but its profitability decreased due to an extending period of low interest rates, as well as the regulations costs.”

The IMF also mentioned the idea of converting every loan denominated in the Swiss franc, and suggested that these problems need to be solved “one by one.” If they don't, “the risk regarding the financial stability will increase along with negative implications for the credit, as well as for the growth.”

The Fund took note regarding the fiscal matters that the idea of getting back to the previous retirement age, may deteriorate the public finance, as well as the professional participation index. Thus, it should be re-considered. According to the IMF, the family payments in cash should be re-directed towards childcare for children in kindergarten age, as well as for kindergarten education. This would help increase the professional participation index. The IMF also claims that, “the introduction of new ideas (retirement age, an increase in the tax-free amount), may clearly raise the deficit of the public finance sector above 3% of the GDP in 2017, as long as there are no balancing actions.”

When comparing the report from yesterday with the one from last year, we can see definitely more remarks in the first one. However, they are presented in a definitely milder way than they are by the rating agencies. Evaluation of the international institution did not cause clearer changes in the zloty's market. The decision was milder than the one published by Moody's. Thus, it continues to support the zloty. The EUR/PLN is currently in the area of 4.35, and the CHF/PLN went clearly below the level of 3.95. During the next days, the market should anticipate the retail sales readings, as well as the industrial production readings from Poland (Thursday). It is possible that after negative results in March, they will be positive now. This may support the PLN by 0.01-0.03 PLN by the end of the week.


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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