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Daily analysis 31.03.2016

, author:

Marcin Lipka

Charles Evans of the Federal Reserve, presented a dovish view regarding monetary policy, which was consistent with the recent testimony from Janet Yellen. Base inflation from the euro zone was better than expected. The zloty worked-off some of yesterday's losses to the euro, and it is currently within the range of 4.26-4.27.

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

  • 14.00: Initial data regarding inflation from Poland (estimations: positive 0.2% m/m, negative 0.8% y/y).
  • 14.30: Weekly jobless claims from the USA (estimations: 265k).
  • 15.45: Chicago PMI index (estimations: 50.7 points).
  • 23.00: Testimony of William Dudley, chairman of the New York Fed department. It is not clear, whether it will also concern the current monetary policy.

Evans appeared to be dovish

In yesterday's Afternoon Analysis we took note of statements from Charles Evans. In his interview with CNBC, the chairman of the regional Fed department in Chicago sounded slightly less dovish. This could have been suggested by his previous approach towards the monetary policy. We were also wondering, whether the support for Janet Yellen within the FOMC will be sufficient enough to keep interest rates at a low level.

However, our conclusions from Wednesday were not supported by the official testimony of Evans. He presented many arguments which sustained the necessity of a shallow tightening of the monetary policy. Apart from global dangers which were widely discussed by Janet Yellen, the Fed representative also spoke of inflation related dangers, and problems of the central bank in keeping an increase in prices within the limit of the target.

“Not reaching our two-percent inflation target for such a long time (fourty six months – author's footnote) increases the risk that the citizens will expect durably low inflation in the future. If such attitude is based on decisions regarding salaries and prices, the return to the two-percent inflation target will be significantly more difficult.” said Evans.

The Fed representative touched the matter of inflation abandoning its target, which is one of the basic anxieties of central banks that want to keep an increase in prices close to the two-percent target.

Evans also referred to anxieties of some economists, who claim that too mild monetary policy generates the risk of a sudden increase in inflation. In consequence, interest rates will need to be increased faster in the future.

However, Evans also claims that the risks related to too fast hikes are currently more harsh. This is because they increase the probability of cutting the value of money down to zero in case of economic disturbances. Moreover, this could cause the return to unconventional monetary policy, “which everybody would like to avoid.”

On the other hand, if the Fed makes a potential mistake and would keep interest rates low for too long, it could “simply increase them by 25 base case points at each meeting, just as we did during the 2004-2006 tightening,” said Evans.

One of the last paragraphs stated that, “sticking to a milder monetary policy would be an additional impulse for a security for negative shocks in the future, which could force us to return to lower interest rates.”

The market will probably anticipate a similar attitude from the other Fed representatives. Testimony from William Dudley is planned today before midnight. The chairman of the New York Federal Reserve is considered the third most important person in the FOMC. However, it is not certain whether he will touch the topic of the current monetary policy in his testimony. For the time being, we should seriously consider that a milder policy will continue to cause the decrease pressure on the USD.

Higher base inflation in the euro zone

Data about consumer prices in the euro zone from March have been published before noon. As expected, they decreased by 0.1% y/y. This was mainly a result of lower fuel prices. Base inflation increased by 1.0% y/y. This result was slightly better than the forecasts (positive 0.9%), and the reading from the past month (positive 0.8%).

However, it is possible that an increase in prices was caused by the Easter holiday. This year it occurred in March, and last year in April. Costs of transports (airplane tickets, trips) may be one of the biggest disturbances in this reading. However, these speculations can be confirmed by future publications, because initial readings do not consist of such specific data categories.

On the other hand, if an increase in base inflation is caused by an increase in salaries, what follows will be more expensive services. This would be a positive signal for the European economy, which would also decrease the risk of cutting interest rates further. This would also be an argument for the stronger euro.

Zloty is weaker against euro

Yesterday, we observed a clearer wear off of the zloty, and testing of the level of 4.28 on the EUR/PLN. The Polish national currency probably reacted nervously to a slight deterioration of the global sentiment. Perhaps some investors feared of a decrease in oil prices, which is recently an indicator of a worse sentiment in the shares market, and a decrease in global appetite for risk.

Today's wear-off is partly revised, but it is likely that yesterday's nervousness will remain. There is also an argument of profit taking. Since mid-January, the zloty gained 10% to the dollar, and approximately 5% to the euro. Thus, in the forthcoming days quotations, the EUR/PLN may run closer to the central areas of the range 4.25-4.30, rather than near its lower limit.


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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