Market Summary by AFORTI: further uncertainties regarding the future government in Poland, expectations regarding the FED meeting and GDP forecasts

Another week has passed since the elections and the situation regarding the formation of the new government is still unclear. We now know the date of the first session of the new Parliament - which has been set for November 13, 2023. Unclear statements coming from the Presidential Palace suggest that the mission of forming a government will be entrusted to the party that obtained the most votes - PiS - but at the same time does not currently have the coalition capacity that would provide 231 votes in Parliament. This means that PiS will receive 14 days to form a government and obtain support in the vote. Since three opposition parties have nominated one candidate and have a total of 248 votes in the Sejm, we can expect that the decision to entrust the coalition with the same mission will be made in early December. We can therefore expect that mid-December is a realistic date for the formation of a new government that will have the support of the parliamentary majority. Due to the fact that applications for the payment of funds from the KPO should be received by the end of December, we are dealing with a quite tight schedule.

How does this situation translate into our currency market? As we predicted last week, the zloty will wait for a clear signal that will allow it to take a direction and create a trend. Last week's forecast about the EUR/PLN corridor of 4.4450-4.4750 came true very accurately. The zloty gravitated towards 4.4700 without exceeding the EUR/PLN level of 4.4900. The coming days should not change the situation - the zloty will remain in a situation of waiting for further developments in politics. Therefore, let us expect that the zloty will not strengthen below 4.4400 and will not permanently break 4.4800 against the EURO

EUR/PLN over the last 10 days

The US dollar was also influenced by policy uncertainty, but apart from the correction to 4.1700, it returned to our forecast level around USD/PLN 4.2200.

The FED meeting will undoubtedly have an impact on the zloty/dollar ratio. However, market expectations should probably come true, so we do not expect any sudden movements or "range trading". In our opinion, USD/PLN this week is in the range of 4.2000 – 4.2300.

USD/PLN over the last 7 days

Looking at the debt market, quite disturbing information appeared regarding the reporting of the level of debt/deficit of the public finance sector, which according to forecasts will reach PLN 192 billion at the end of the year. The current ratio of public debt to GDP is approximately 50%, which was positively influenced, paradoxically, by inflation. Thanks to the so-called "hidden inflation tax", which consumed Poles' savings and weakened their purchasing power, this level remained at a safe level. At the end of the year, public debt may reach PLN 1.8-2 trillion, and the ratio will increase to approximately 52.8-53%. Let us recall that the so-called precautionary level in the range of 55-60% imposes a number of obligations and restrictions on the government of the country that will enter this corridor - including the adoption of no deficit in the budget act for year x+2 (Maastricht criterion of 2014).

The future government will have to find investors for bonds worth PLN 420 billion. This may be due to market expectations of higher yields and high volatility on the currency market.

Looking at macroeconomic data from Poland - the 3rd quarter is a GDP growth of 0.5%. Therefore, the entire year should be in the range of 0.45-0.50% of GDP growth. We estimate next year at 2.4-2.6% GDP growth.

Looking at international markets - the event that the markets were waiting for was the meeting of the European Central Bank, which held its meeting last Thursday. This was the penultimate meeting in 2023. So far, the ECB has continuously raised rates 10 times. This time the decision was made to leave rates unchanged. This did not surprise the market, which was betting on just such a decision. Current rates in the EUR zone are currently 4.50% for the refinancing rate and 4.00% for the deposit rate.

Such a decision may mean that the ECB has ended the cycle of increases, and the beginning of next year may bring a reverse trend and decisions will start to be made to reduce interest rates. However, the situation is quite complex and downward movements in interest rates may be postponed to the 2nd and 3rd quarter of 2024. Although falling inflation and weak economic recovery suggest there is room for interest rates to decline, we cannot forget about high oil prices, which are fueled by the conflict in the Middle East. Concerns about whether inflation has actually been brought under control or whether we are only dealing with a temporary slowdown are not subsiding. We will therefore have to find out whether the 2% inflation target will be achieved.

Looking at the PMI "optimism index" - it is still weak for the largest two European economies. France – 42.6, Germany – 40.7. It is generally accepted that values ​​above 50 indicate good market sentiment, while readings around 40 indicate that managers are still pessimistic about the situation.

Completely different data is coming from the USA at the same time. The latest manufacturing PMI readings rose to 50 and services to 50.9. This is much higher than market analysts predicted. These data, along with information on GDP growth in the third quarter, which also surprised positively: 4.9% vs. consensus 4.3%, show that the American economy is gaining speed.

These signals will probably encourage the FED to leave rates unchanged at 5.25-5.50%. The next meeting will be held on November 1, which means that only on Thursday, when trading on EUR/USD will be fully implemented, will we know the impact of the decision on the valuation level.

Speaking about the USA, we must take into account the growing employment, but also the rising yields of mortgage bonds. Another problem is the growing debt on credit cards, with interest rates rising and savings falling at the same time. At the FED meeting, all this information will probably mean that the decision will not be easy, but we also believe that the combination of this information will result in rates remaining unchanged.

So what awaits us for EUR/USD? Currently, this currency pair is looking for a trend direction. The return to EUR/USD 1.0700 was quickly corrected and we found ourselves in the range of 1.0530-1.0600. It is difficult to determine whether the dollar will appreciate rapidly, but comparing the two economies, the United States is undoubtedly in a better position. We will therefore repeat our assessment - that we can expect a move south - towards EUR/USD 1.0400. However, let's wait for Wednesday's Fed meeting. After this decision, it will be easier to forecast the further situation on the market.

 EUR/USD over the last 10 days

Markets are constantly concerned about the situation related to the conflict in the Middle East and the possibility of its escalation and spread to neighboring countries. Fortunately, the increase in oil prices has been stopped and oil, which cost almost USD 95 (Brent), is currently quoted at USD 90 per barrel. Gold - as a safe asset, slightly exceeded the level of USD 2,000/ounce, and analysts expect further increases in the price of this precious metal.

A quick look at the stock markets. After a temporary decline in optimism, enthusiasm returned to the Polish stock exchange. After the declines, WIG20 returned above the level of 2,100. Banks gained mainly.

A similar thing happened at WIG. The 70,000 level was exceeded again and interest in the shares was clearly increased. Is this a lasting trend? Until a new government is appointed, we expect mood fluctuations.

Szymon Jańczak

Director of the Treasury Department

AFORTI Exchange S.A.