Last week, markets welcomed news that the Chinese government is launching a new support package to halt the downturn in the real estate market and stimulate investment and consumption. News from China led to a rise in commodity prices reflected in the foreign exchange market. The Polish zloty briefly strengthened, but ultimately gave up its gains, which is linked to the gloomy mood around Europe.
Key points:
– Risk currencies benefit from the announcement of the stimulus package in China.
– Concerns about a slowdown in the USA are dispelled in view of strong data on economic activity.
– Markets are increasing expectations for the ECB’s October cut.
– The Eurozone economy appears to be entering stagnation.
– Inflation in Poland increased to 4.9% – however, this should not significantly affect the rhetoric of the Monetary Policy Council (RPP).
Last week’s top performers were currencies highly dependent on commodities, such as the Chilean peso and the Brazilian real. The Australian and New Zealand dollars performed best among G10 currencies, largely due to their close economic ties with China. The euro, pound, and dollar ended the week virtually unchanged against each other despite poor news about the Eurozone economy. These negatively impacted the zloty, which ended the week slightly weaker against the reference euro.
The main focus this week is the NFP (Non-Farm Payrolls) report from the US labor market (Friday, Oct 4). The PCE inflation reading a few days ago confirmed that price momentum in the US is essentially on target for the Federal Reserve, with the focus now on indicators of labor market resilience. Jobless claims last week suggest it is doing better than the latest NFP data indicates. Looking towards the European continent – the preliminary report on September inflation in the Eurozone (Tuesday, Oct 1) is unlikely to stand in the way of the European Central Bank’s October interest rate cut. The consensus expects another low reading and the economic downside continues to grow. We also have the RPP meeting (Wednesday, Oct 2) and the accompanying conference by Chairman Glapiński (Thursday, Oct 3). The focus is on the rhetoric, as it seems too early for a return to interest rate cuts.
In the previous week, the zloty reached its strongest level since mid-July (EUR/PLN marginally above 4.25). It fared the best among regional currencies but ended the week slightly down against the euro and the dollar. The initial appreciation of the Polish currency was supported by news of Chinese economic stimulation, which strengthened emerging market currencies. However, the latest signals from Europe are gloomy and fuel fears about the impact of poor Eurozone economic performance on Poland, and domestic readings have not been impressive recently.
Today’s inflation data showed an expected rise to 4.9% in September. This is not a desired change, but it is unlikely to change the rhetoric (let alone the action) at the RPP meeting on Wednesday (Oct 2). Neither during it nor over several subsequent sessions are changes in interest rates expected – in our opinion and according to the consensus, the earliest date when a rate cut in Poland can realistically be considered is March. However, it will be interesting to see how the NBP will react to the start of the US monetary policy easing cycle and the latest readings from Poland and the Eurozone.
It seems that the steady influx of poor economic data from the Eurozone is not set to abate. Last week’s PMI indicators, which are perhaps the best leading measure of economic activity in the common bloc, fell to levels unquestionably suggesting economic contraction. The industrial sector is in deep recession, while services are barely growing. This has fueled new concerns about the state of the Eurozone economy, which may end the third quarter in stagnation.
Combined with low inflation readings from Spain and France, this seems to seal another interest rate cut at the ECB’s October meeting, which is suggested by the statements of officials. The preliminary inflation reading on Tuesday (Oct 1) is unlikely to change this. We believe that the recent appreciation of the euro may be coming to an end.
Economic readings from the US continue to confirm that the Federal Reserve is steadily moving towards a soft landing, where bringing inflation to the target does not result in a recession. The PCE inflation stayed below the expected level in September, and its core measure only increased marginally. The data published so far are in line with an increase in economic growth of around 3% in annualized terms.
The result of the November presidential elections is still unpredictable like flipping a coin, which imposes uncertainty, but we believe that the pace of the Federal Reserve’s interest rate cuts in 2025 will be cautious. The NFP report this Friday (Oct 4) should continue to indicate a moderate increase in job growth in the market, which remains close to full employment. If the data proves to be weak again, the market may prepare for the possibility of a second consecutive 50 bp cut at the FOMC meeting in early November.
In the UK, September PMI indicators for business activity were slightly worse than expected, but they still indicated steady growth in the services and industrial sectors, a stark contrast to the readings from the Eurozone. Greene, a member of the Bank of England’s decision-making committee, said last week that she prefers a ‘calm’ approach to lower rates in the UK, which is consistent with the rhetoric of bank officials and our belief of maintaining cuts no more frequently than once a quarter.
The continued very good results of the UK economy coupled with the Bank of England’s cautious approach to interest rate cuts should help the pound continue to strengthen against the euro in the coming weeks. However, the publication of the first Labour government’s budget next month poses a significant risk. Taxes are almost certain to be raised, but depending on the range and scale of these increases will determine whether the foreign exchange market responds negatively.
Authors: Enrique Díaz-Alvarez, Matthew Ryan, Roman Ziruk, Michał Jóźwiak – Ebury analysts.
Source: https://managerplus.pl/chinski-pakiet-stymulacyjny-wzmacnia-rynki-surowcow-chwilowe-umocnienie-zlotego-oslabione-przez-obawy-o-europe-16290
