Market summary according to AFORTI: first session of Parliament, time of the MPC decision and PLN prospects for the coming days

The October elections are behind us and we are constantly waiting for the appointment of a new government. In this context, the first meeting of Parliament, scheduled for November 13, will probably be crucial. We will then learn about the Senior Marshal - but also about the actual distribution of votes in the new Sejm. This should also give a signal that the political option is able to create a government with a parliamentary majority. The current announcements by the leaders of the three opposition parties, holding a total of 248 seats, indicate quite clearly that the balance of power will not change. We may consider here whether we will be dealing with a situation where, contrary to parliamentary mathematics, an attempt will be made to create a minority government. We will definitely find out in about a week, and potential changes in the government may give an impetus to sudden changes in the local currency and capital markets.

The most important other information in recent days - we learned the inflation data. The Central Statistical Office's quick estimate was very optimistic and set the value at 6.5%, which is a significant change compared to the 8.2% we had in September. Did these data surprise market analysts? Not entirely, because attention was paid to lower fuel prices (which we will mention later), but also to the base effect. High inflation meant that subsequent increases related to previously raised prices, and growth slowed down. CPI readings at an annual level reaching almost 17% in 2022 caused prices to rise further - but from levels higher than when inflation was gaining speed.

The current decline in inflation still means an increase in prices, but smaller - looking at previous values. We are certainly not saying that prices are falling, but only their increase results from the previous high inflation. September and mid-October were very unusual looking at the data. However, it is necessary to take a clear look at the prices of fuels and electricity subsidies, which have significantly distorted the readings of price increases. The price of Pb95 fuel, artificially kept below PLN 6.00, is currently quoted by PLN 1 more, reaching PLN 7.00 per liter of unleaded fuel. Orlen's published report for the third quarter showed a significant drop in profit - meaning that the company lowered prices and realized a much smaller margin. Since fuel prices are an important element of prices (transport, logistics, etc.), we can expect that subsequent inflation readings may be revised upwards. Food prices remained at a similar level and increased by less than 0.2%, but this may also be the result of good weather conditions, and seasonal prices of fruit and vegetables have not yet been subject to correction.

Taking into account the above data, a decision to reduce rates will probably be made at the next meeting of the Monetary Policy Council. In our opinion, we can expect a downward change of 25-50 basis points. Due to the sharp drop in inflation, we can expect that the next cut will be at the upper end. Will it be justified? In our opinion – not entirely. We are after the election period and only the next weeks will "break the spell" of this period when statistical data are not necessarily clear.

So let's look at how this situation translates into our currency market. The valuation of EUR/PLN and further movement in the EUR/PLN 4.4450-4.4750 corridor has once again proven to be very accurate. The zloty only briefly went below 4.4800, but later showed a strengthening trend. We were dealing with very strong daily volatility - which suggested the execution of transactions - including typical "hedge" ones. Volatility was also fueled by changes in the EUR/USD market - but more on this later in the report. Ultimately, we closed the week with consolidation in the middle of the corridor - around EUR/PLN.4550. So what will next week bring us? Even though we are getting closer to a political breakthrough, the market clearly expects a clear signal. This time, however, we expect a slight shift related to market optimism, and the corridor in which the zloty will move should gravitate downwards. EUR/PLN 4.4200-4.4600. Short corrections towards 4.4750, with a quick return of the strengthening zloty.

EUR/PLN over the last 7 days
 

Looking at the US currency, the dollar was also trading within the expected corridor, but due to the volatility in global markets it broke out of the range and we observed significant corrections up to USD/PLN 4.1450, which resulted from information from the US and EU markets and significant movements on the EUR/USD currency pair.

In our opinion, this strong EUR/USD correction will be compensated by a downward move in the near future, and at levels closer to EUR/USD 1.0600, the USD/PLN rate will move in the range of 4.1650-4.2150

USD/PLN over the last 7 days

Last week brought us the long-awaited Fed decision on interest rates. When we had a day off from work in Poland on November 1, the United States worked normally, and the decision confirmed that interest rates in the US had reached the current maximum.

The market was not surprised by the Fed's decision not to raise rates, which remained in the range of 5.25-5.50%. This was also the market consensus, but the message justifying the decision was also important. Jerome Powell, the head of the Fed, despite the message suggesting a hawkish approach, did not convince the markets, which assumed that this was the end of interest rate changes in 2023 in the US. So can we expect declines in 2024? Probably yes - but in our opinion - in the second quarter at the earliest. This may also be suggested by the falling yields on 10-year bonds, which slightly exceeded 5%, and the current quotations are around 4.6%. This may translate into a greater appetite for risk and a shift in investments towards the stock market. Enthusiasm cooled somewhat on Friday, when labor market data turned out to be overestimated to the upside by about 30,000 new jobs, and unemployment remained at almost 4%. The reaction was the weakening of the American currency and the escape to EUR and gold. The weakening of the dollar moved the exchange rate to around EUR/USD 1.0735. In our opinion, this move will be corrected and EUR/USD will return to levels below EUR/USD 1.0620

EUR/USD over the last 10 days

Last week also brought decisions from the central banks of the UK and Japan. There was no surprise here either and the rates were not changed. Let us recall that the Bank of Japan consistently keeps rates at negative levels, and the yield on 10-year bonds is 1%.

The previously mentioned commodity markets are mainly oil. The BRENT price per barrel is currently around USD 93. The gentle correction, however, remains questionable whether it will be maintained. The prolonged conflict in the Middle East does not make us optimistic, and the most orthodox analysts, predicting growing problems, mention levels of around USD 160/barrel. In our opinion, this is quite an extreme forecast, but prices around USD 105 per barrel may be recorded - if the conflict spills over to neighboring countries.

BRENT crude oil – last month USD/barrel

Gold - as a safe asset, after exceeding the level of USD 2,000/ounce, slightly corrected its price, consolidating around USD 1,992. In case of uncertainty in the markets, a return above the 2,000 level mark can be expected.

Finally, a short look at the stock markets. Optimism remained on the market, and WIG20 gained gradually, reaching 2,180. It was mainly banks that gained.

A similar thing happened at WIG. The level of 72,500 was almost broken, and interest in shares was clearly increased. This is certainly the result of the increased interest in investments carrying a slightly higher risk but at the same time with higher rates of return.

Szymon Jańczak

Director of the Treasury Department

AFORTI Exchange S.A.