Market Summary by AFORTI: MPC again in the spotlight, 10th term of office of the Sejm, FED decisions

The last week was mainly about waiting for the decision on the level of interest rates. The meeting of the Monetary Policy Council surprisingly did not bring any changes to interest rates. Although most economists predicted a decline of 25 basis points, there were also expectations of a move of 50 points. Our assessment was also towards 25 points, but considering the high unpredictability of the decision, we also took into account a larger drop. Meanwhile, the Monetary Policy Council/NBP once again showed that forecasting is a big lottery in this case. Unfortunately, the conference of the President of the NBP did not usually provide clear answers and specifics, so let's try to think about what this decision means and what message it carries. Well, previous declines in inflation resulted in reductions of 0.75 and 0.25 percentage points. However, it was the pre-election period and the NBP tried to fit into the government's narrative about the effectiveness of actions that resulted in a decline in inflation. The current signal of no change suggests that the reductions are over, and the correction of fuel and energy prices and the restoration of VAT on food from January 1, 2024 may reverse the market trend. According to fuel estimates, at least approximately 1.2-1.4% translates into the inflation reading and approximately 1.8% is still frozen in the reduced VAT in food prices.

Meeting the inflation target and keeping prices in check have again become the main goal of the Monetary Policy Council. Information from the Monetary Policy Council/NBP that the economy is in conditions of high volatility and uncertainty may suggest that the previous data were treated too optimistically and the belief that the decline in inflation will quickly reach the levels recorded by European economies from the EURO zone was too optimistic. At this point, we can assume with a very high probability that the December MPC meeting will not bring any changes in rates and that we will remain unchanged until the end of the year. Moreover, GDP and inflation projections will be important in subsequent decisions. The next data release is March (November data has already been released). This means that the Monetary Policy Council will be rather conservative and cautious in interest rate movements, especially since the political element has disappeared. So what do we expect next year in terms of inflation? Decreases of 2% (percentage points) are definitely behind us, taking into account the above factors (fuel, VAT). In this perspective, GDP growth in 2023 can be estimated at approximately 0.55-0.60%. Next year without an assessment of the state of public finances and the opening balance by the new government is estimated on the market in the range of 3-3.5%. However, it is worth waiting for the announcements coming from the new political opening...

We are having quite an important moment in politics - on Friday, three blocs of opposition parties signed an agreement on cooperation. This means that 248 MPs are ready to vote on entrusting the mission of forming a government to Donald Tusk. However, before this happens - on Monday, November 13 - the first session of the Sejm of the new term will be held. This involves the dismissal of the current government and the election of a new marshal and deputy marshals. At the same time, as previously announced, the President will hand over the mandate to form the government to Mateusz Morawiecki. Since, in accordance with the signed agreement and declarations, neither party will cooperate - we can expect that this will mean extending the wait for a new government with majority support - by another month. As expected, the new government and its composition will be announced in mid-December. This is important because applications for the payment of funds from the KPO should reach Brussels before the end of the year. If this actually happens, it may significantly affect the Polish zloty and its exchange rates against foreign currencies. However, let's wait for Monday's inauguration of the Sejm and Senate sessions, because this will be quite crucial and will show us the further direction of development of the political situation.

It's time to look at how the above factors affect our currency market. The EUR/PLN valuation and further movement in the EUR/PLN corridor of 4.4200-4.4600 is once again our very accurate forecast. At the beginning of the week, the zloty only briefly went below 4.4680, but later it held the resistance at EUR/PLN 4.4600. The decision of the Monetary Policy Council turned out to be crucial, as it strengthened our currency by 3 groszy and the EUR/PLN exchange rate dropped rapidly to 4.4350. There was immediate demand, which took advantage of this decline. Corrections to 4.4540 were short-lived and another sale of foreign currencies allowed the zloty to fall to 4.4175. Ultimately, we closed the week at EUR/PLN, 4300. So what will next week bring us? In our opinion, the Polish zloty should continue to appreciate slowly. EUR/PLN levels 4.4100-4.4450. Short corrections towards 4.4550, with a consistent return to the strengthening zloty.

EUR/PLN over the last 7 days
Looking at the US currency, the dollar broke out of expected ranges, mainly due to EUR/USD volatility. We expected that the upper limit of the corridor would remain slightly above 4.2000, but strong movements of EUR/USD towards 1.0750 resulted in currency quotations, with the EUR/PLN remaining within the expected corridor, strengthening the Polish currency against the dollar. The zloty gained, stopping at support around 4.1320, returning to the USD/PLN range of 4.1400-4.1600 at the end of last week.

Surprising information from the FED turned out to be a strong factor influencing the domestic market and revised expectations - the USD/PLN exchange rate will move in the range of 4.1350-4.1650.

USD/PLN over the last 7 days
The above-mentioned words coming from overseas are, above all, a surprise at the words of the head of the FED, Jerome Powell. The tightening of the tone of statements, which suggested that interest rates may still increase, surprised the market.

Earlier statements suggested that US interest rates have reached their current high. In the light of this statement, we may have a situation in which we will see even higher interest rates. It is worth emphasizing here that the Fed must keep a close eye on the extraordinary increases in American credit card debt - which is reaching record levels. This may pose a high risk, especially since the interest rate on this payment instrument is usually higher than that of classic short-term loans.

The International Monetary Fund report was also interesting. The increase in development forecasts and GDP estimates gave an interesting signal that there is a growing chance of a slow recovery in the EURO zone economies. Earlier estimates suggested an increase of 0.8%. New data indicate levels of 1.2-1.3%. However, this does not change the issue of interest rates, because not all countries can achieve the inflation target for the EURO zone in 2024. The year 2024 will therefore give us time to observe how the European economy will behave in relation to the American and Chinese economies. The coming year will certainly not bring any sudden changes. PMI indices, as we wrote in the previous report, are still below the important level of 50 points, but actions on Asian markets, where governments are making decisions aimed at stimulating slowing economies, may be helpful here. This is important because those markets are a significant partner in trade.

EUR/USD over the last 7 days
Of course, we should look at the situation in the Middle East and the closely related prices of raw materials - especially oil. The BRENT price temporarily dropped to USD 80, showing that the market is now more calm. Does this correction mean that the price will be maintained? We continue to point out that the ongoing conflict in the Middle East does not cause optimism, and current valuations may be subject to demand pressure and the price of oil may increase.

BRENT crude oil – last month USD/barrel
Gold – still remains a safe asset, but the level of USD 2,000/ounce brought a slightly larger correction and the week closed around USD 1,940. Profits were certainly realized after longer increases, so the correction should bring prices back closer to the psychological level of 2,000.

Finally, a short look at the stock markets. The slight optimism remaining on the capital market keeps WIG20 above 2,100. However, investors remain cautious and do not make major purchases.
Quite similar things happened at WIG. The index break at 72,500 was quite short and the market returned to 71,500. Rates of return with a risk premium attract investors, but they also closely monitor the political situation. The decision to wait safely was also influenced by the Monetary Policy Council's decision to keep rates unchanged.

Szymon Jańczak

Director of the Treasury Department
AFORTI Exchange S.A.