Market Summary by AFORTI: Inflation below expectations in Poland, currency markets react to macroeconomic developments, expectations of Central Banks' decisions
We ended the last week of May with the so-called ‘long weekend’, which, as usual, translated into reduced activity for market participants on Friday. This week was also not rich in macroeconomic information from the local market. The most important of the publications was the preliminary estimate of CPI inflation for May 2024, which was published by the Central Statistical Office. The data turned out to be slightly more optimistic than the average of market expectations. The value according to the Central Statistical Office is 2.5% year-on-year, while analysts had indicated 2.7-2.8%. Of course, we are dealing with a preliminary estimate and in our opinion this will not be the final value. Here, however, we see a possible revision to 2.6%. Inflation on a month-on-month basis was provisionally 0.1%.
Rising inflation is, of course, the result of the change in VAT on food from 0% to 5%. Another inflationary stimulus will be the abolition of the so-called ‘shield’ programmes for energy prices at the end of June 2024. The government announces the continuation of support in the form of energy vouchers, but the final version has not yet been formally announced. Undoubtedly, this will not be a 1:1 scheme compared to the current ones, but it should also be borne in mind that the schemes were in place at a time of soaring inflation and large fluctuations in electricity prices during the market turmoil. We will probably hear about the details within the next 10 days - due to the need to implement the changes.
Looking at the news from other markets - we also learnt about inflation data from the EU. Data released by Eurostat (the equivalent of our CSO) showed that inflation rose by 2.6% in the Eurozone vs a forecast of 2.5%. It is worth noting that we perform quite similarly in this comparison. Of course, this is an average value and individual countries vary quite significantly. The weakest results were shown by: Belgium (4.9%), Croatia (4.3%), Portugal (3.9%), Spain (3.8%), while the best performers were Latvia (0.2%), Finland (0.5%) and Lithuania and Italy (0.8%).
As expected, markets are commenting that the ECB will make its first cut in a long time at its upcoming meeting on 6 June 2024 and the current rate of 4.50% will be reduced. The expected cut is 0.25 percentage points.
The US also saw a shorter working week, with Memorial Day celebrated on Monday 27/05. London's Citi (UK, Spring Bank Holiday) was also out of action on this day.
The data from the States focused on the core consumer spending price index (Core PCE) on a year-on-year basis. The index turned out to be in line with expectations at 2.8 per cent, which did not result in any major changes on the EUR/USD. Less optimistic data concerned GDP. Here, the market was surprised ‘in minus’ and in quarter-on-quarter terms, instead of the expected 1.6%, the result was only 1.3% for the first 3 months. This compares with 3.4% for the last quarter of 2023. Could it be, then, that the economy is slowing down strongly? Here we can expect both of the above indicators to be closely watched by the FED. With another weaker quarter, the FED may revise its plans for potential rate cuts at the end of 2024 and accelerate them somewhat. However, it is too early to talk about this as decisions are made on the basis of a wider range of indicators.
Mentioning yet another upcoming Central Bank meeting - our MPC will be meeting on 05 June. Here, in line with market predictions, we expect no change, especially as the inflation associated with the reintroduction of 5% VAT is already noticeable in current readings.
Let us take a look at what was happening on the currency market and how the zloty therefore behaved. The first two days of the week were characterised by stabilisation and trading in the EUR/PLN 4.2500-4.2700 corridor. On Wednesday, the zloty, after dropping to the vicinity of 4.2500, began to weaken quite rapidly, reaching 4.2840. As the movement occurred on both EUR/PLN and USD/PLN, we were most likely dealing with a passing order for the purchase of foreign currencies by the client (selling of the zloty). The zloty also lost during the day off - 30.05, reaching EUR/PLN 4.2930. The last day of the month brought increased volatility, transferring volatility from EUR/USD. The zloty recovered by 3 cents to finally close the week and the month around EUR/PLN 4.2790.
EUR/PLN - perspective of the last 10 days
Looking at the US currency, the start of the week saw the zloty holding in the USD/PLN 3.9050-3.9250 corridor. Later, as for EUR/PLN, the market pushed the rate up around 3.9650, and during the day off the rate reached USD/PLN 3.9770. Here, volatility was, as usual, slightly higher and was due to fluctuations on EUR/USD. As in the previous week, we moved in a corridor around the EUR/USD central axis of 1.0850 (1.0790-1.0885). The end of the week and the end of the month, as for EUR/PLN, saw the zloty strengthening and returning to 3.9150 and finally closing at USD/PLN 3.9400.
USD/PLN - perspective of the last 10 days
EUR/USD quotes, as we mentioned above, have recently been moving in the 1.0790-1.0885 corridor. As can be seen, markets are currently awaiting the upcoming FED and ECB central bank meetings and the publication of further macroeconomic data. The continued consolidation around EUR 1.0850 seems to confirm this.
EUR/USD in the perspective of the last 10 days
How have oil prices behaved in the current situation? The situation in the Middle East is no longer the factor that previously pushed prices up. The price has been moving in the USD/barrel corridor of 81.00-85.00 for some time.
BRENT crude oil - last 3 months USD/barrel
Gold - there is some calming in the market. The current consolidation around USD 2,350 shows that the market is waiting for the next batch of macroeconomic news - including interest rates.
Gold - last 3 months USD/ounce
Finally, a brief look at our stock market. The WIG is losing around 1,000 points compared to last week. The correction did not surprise the market and a break of the 90,000 level is still expected in the short term.
Szymon Jańczak
Director of Treasury Department
Aforti.BIZ