Catastrophic business climate in Germany (Daily analysis 24.04.2020)

The April business climate index of German companies fails expectations and falls at an unprecedented pace to a record low. Retail sales in the UK fell significantly in March, although food and alcohol were breaking growth records month-on-month.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:30 p.m.: Orders for durable goods in the USA in March (estimates: decrease by 12% m/m).
• 4:00 p.m.: University of Michigan sentiment index - final reading (estimates: 68.0 pts.).

Weak data without significant impact on the sentiment

Friday morning brought further low data from major European economies. The Office for National Statistics (ONS) published data on retail sales in the UK in March, which recorded the largest ever (since the introduction of statistics) decline of 5.1% monthly. This was not a surprising reading, no one currently expects positive data, given the practical closure of economies, and it did not differ significantly from the median of economists' expectations (drop by 5.0%).

Only two sectors recorded growth, i.e. food and "non-store" retail (mainly online) sales, which can be linked primarily to British stockpiling. Nevertheless, the increase in sales in these sectors by 10.4 percent was record-breaking. Strong restrictions and the closure of, among others, pubs in the UK had yet another effect. In March, sales in alcohol stores increased by 31.4 percent on a monthly basis - the highest in the history of research conducted since 1988.

However, today's data on sales in the Islands had a limited impact on the pound. They were in line with expectations and can also be seen by the market as historic. Due to increased restrictions at the end of March, the figures for April are expected to be much worse.

The ifo Institute provided further weak April data from Germany today. The business climate index in Germany fell to a record low of 74.3 points, by 11.6 points below the March level and 5.4 points below expectations. Rapid declines in sentiment were noted in all sectors, both in the context of the current assessment and the expectations for the following months. The Institute assessed German companies' moods as catastrophic already in the first sentence of the report.

In a phone conversation with Bloomberg Clemens Feust, President of the ifo Institute, also added that German companies have heavily cut the capex (capital expenditure) and returning to work can be expensive for them. Especially as there are fears of opening economies too quickly, which may lead to a second coronavirus wave in the autumn-winter period. The publication of the ifo basically confirmed what PMI activity indexes already showed yesterday: the economy in the European Union practically ceased in April, and the crisis in particular affected the service sector. All currently published data indicate even a two-digit recession in the second quarter and most likely unmanageable debt in some EU countries, such as Italy or Spain.

Given the disastrous data that are published practically every day, the market mood can be considered very good. Volatility is still significant (although it has been gradually declining in recent weeks), but the market is clearly looking beyond the hard to interpret disastrous macroeconomic data and looks forward to a resumption of economic activity with the planned slow easing of restrictions in some European countries and some US states. Unprecedented fiscal and monetary stimulation has also helped to stop the financial market from a downward spiral that would contribute to a further deterioration in consumer confidence.

Where the economy revives, there is a chance of currency appreciation?

Currency market fluctuations were relatively limited until midday today. The main currency pair, i.e. the EUR/USD, was just below the 1.08 limit. However, the dollar is gradually appreciating over the past week. Unless we observe a significant deterioration in sentiment and economic situation caused by the pandemic, the Federal Reserve's mild monetary policy should stop the dollar from appreciating strongly. The absence of a sharp outflow of capital into the US currency has also kept the zloty within a narrow fluctuation range over the last 3-4 weeks. The USD/PLN exchange rate continued to move around 4.20 and the EUR/PLN rate around 4.53-4.54.

In the short term, fluctuations may be increased by the question of when and to what extent individual economies will be opened and restrictions lifted. This may allow market participants to assess which economies may feel the recovery somewhat faster and strengthen the currencies somewhat. The valuation of emerging countries' currencies can now be described as attractive in the long run, although on the other hand, the majority of emerging countries (including Poland) may experience the economic effects of the pandemic slightly more and start the recovery a bit later. As a result, the zloty may remain relatively weak (in relation to major currencies) until the last months of this year.