Daily analysis 31.08.2016

, author:

Marcin Lipka

The United Kingdom data appeared to be better than expected and continue to support the pound. The ADP data from the American labor market will be in center of attention today. The zloty remains weak against the majority of the foreign currencies.

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

  • 14.00: Inflation for August from Poland (estimations: negative 0.9% y/y, negative 0.3% m/m).
  • 14.15: New workplaces in non-agricultural sector according to ADP (estimations: 175k).
  • 15.45: Chicago PMI (estimations: 54 points).

Pound is supported by lower pessimism

We have received inflation data from the euro zone for August at 11.00 AM. It is at the level of positive 0.2% y/y, which is 0.1 percentage point lower than the consensus. After yesterday's data from Germany we took note that today's readings regarding prices in the euro zone, may be lower than expected.

Apart from the general inflation reading, it's worth noting that the data with exclusion of fuel and food was at the same level as it was in July. However, it has been expected to increase 0.1 percentage point, to the level of positive 0.9% y/y. This may theoretically increase the appetite for an increase in easing scale by the ECB. In our opinion, it's definitely too soon to speculate about the possibility of the QE program extension. Therefore, the only real solution for the September meeting is the decision regarding extension of assets purchase beyond March 2017. This doesn't change the fact that lower base case inflation is negative for the euro.

However, information that is coming from the United Kingdom is definitely more interesting. Today's reading of the consumers sentiment by the GFK is definitely better than the one from July (negative 7 points vs negative 12 points). What's most interesting is the growth of subindex of the general economic situation evaluation. It went up from negative 33 points to negative 22 points. However, we have to take note that one year ago this subindex was at the level of positive 3 points.

The eagerness to making larger shopping (furniture, for example) needs to be evaluated positively as well. This component increased from negative 2 points to positive seven points. A sudden decrease in eagerness to saving money is also relatively positive (from 1 to negative 17 points). This means that the actions from the Bank of England may be bringing effects and a breakdown of the consumers demand will probably not happen. However, a low level of savings may be interpreted negatively in the long-term.

Apart from the GFK survey, the market also received the Nationwide data regarding prices of houses in the United Kingdom. Their growth has unexpectedly accelerated from 5.2% to 5.6%. However, Robert Gardner, the Nationwide chief economist, takes note that this may partially be caused by a decreasing supply for houses. According to Gardner, the amount of real estates in the market remains near its thirty-year minimum.

Even though both of the above publications are not exceptionally optimistic, they also don't correspond with the business cycle breakdown that some of the market participants were afraid of. This will probably cause some investors to reduce their positions that are disposed to a wear-off of the pound. As a result, the EUR/GBP went to its lowest level in three weeks today. Moreover, the pound costs approximately 5.15 PLN, which is 0.25 PLN above the minimum from mid-August.

Tomorrow's PMI readings from industrial and building sector, as well as Monday's PMI from services, will be most significant in the perspective of forthcoming days. If the mentioned data clearly works-off its recent decreases, we may expect the pound to continue to grow. Moreover, the GBP/PLN may reach the 5.20 level.

The pound's situation may remain uncertain during the forthcoming months. The Brexit negotiation process should begin soon. This will also be related to an increasing risk of the financial sector losing its access to the common market. Moreover, we don't expect the deficit of the current account (currently at the level of approximately 7% GDP) to be reduced quickly. In the end, it's also worth to keep in mind the situation related to Scotland. As a result, despite that we have identified the chances for a visible rebound on the pound quickly, we continue to expect a large risk of the pound to increase its recent minimum.

ADP readings

The ADP reading regarding new workplaces in non-agricultural sector is scheduled for today at 14.15 (2.15 PM). Theoretically, the market should focus more on these readings, rather than the official payrolls. This is because the ADP readings have lower volatility and identify better the labor market trends. This is mainly because the ADP sample group consists of more than 400 thousand companies, while the payrolls are based on the data from approximately 146 companies.

Therefore, if the ADP is near the level of 170k, we may assume that there has been an improvement in the American labor market. On the other hand, a clear decrease below 150k could cause anxiety over the Friday data, as well as slightly wear-off the dollar. However, the data doesn't have to overlap in the short-term. For the time being there are no signals of deterioration in the American labor market. This is why the reading near the consensus is the most likely and it would sustain a positive condition of the USD.

Zloty remains under pressure

The situation on the zloty did not change much during the past few hours. The Polish currency is mostly weakened by internal factors (weak macroeconomic data, anxieties over the decision of Moody's). However, the external situation might deteriorate as well, if the market estimates a larger probability of rate hikes in the USA.

As a result, the risk of a further wear-off of the Polish currency remains increased. Pressure on the PLN may decrease after the decision of Moody's on the 9th of September. We still don't expect a downgrade in rating. However, the latest data regarding investments confirm (at least partially) the Agency's anxieties over a weaker economic condition related to institutional matters.

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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