China's service sector with the strongest growth in 10 years (Daily analysis 3.06.2020)

Positive surprise in the PMI data of China services in May. Not only was there an increase in activity, while a further recession in the sector was expected, but its pace was the fastest since October 2010. The zloty without major changes during morning trade.

China as a reference point for Europe

On Wednesday morning, we observed the continuation of positive sentiment in the market. IHS Markit also published the final PMI data for the eurozone, but it is worth noting the PMI for China for May, published during the Asian session. China, as the first to emerge from the closure of part of the economy, may be a good indication of what we can expect in other countries in the coming months.

The data were positive, in fact, far exceeding expectations. The PMI service sector's reading of 55.0 points was well above the expected 47.3 points. This was also the strongest increase in activity in the sector since October 2010. In the report, it is stated that the improvement in supply and demand was still not fully able to balance the decline caused by the pandemic, and more time is needed for the economy to recover. As far as the outlook for the coming year is concerned, the lifting of restrictions has been encouraging for service sector companies.

Two issues remain problematic. The increase in activity was mainly driven by domestic demand, the execution of previous orders. External demand remains very weak. The labour market remains equally weak. The employment sub-index, despite a slight rebound, shows a downward trend for the fourth consecutive month. Chinese companies surveyed were cautious about employment growth, giving cost reductions and productivity improvements as reasons.

This scenario fits well with the expectations of economists about increased pressure on the labour market. The first weeks and months of rapid activity growth will most likely be followed by a flattening of this growth path. Consumer demand below pre-pandemic levels combined with the end of some aid packages for companies may create pressure to reduce costs and, consequently, reduce employment. This may affect both China and Europe.

Slight movements in the eurozone

IHS Markit also released PMI data for the eurozone this afternoon. In this case, it was not a big surprise, as it was already the second (final) reading. Nevertheless, the data exceeded market expectations for both the entire zone and the largest economies, i.e. Germany, France, Italy and Spain. It should be remembered, however, that unlike China, these are still dire levels - about 30 points, and in the case of Spain even slightly below. Meanwhile, it is only the barrier of 50 points that separates the decrease in activity from growth.

Although the financial market is currently reacting to macroeconomic data to a limited extent, focusing on the optimism associated with the opening of economies, slightly higher than expected PMI data may support the currently prevailing positive sentiment. In the case of currencies, the trend has remained unchanged for several weeks now - we are still observing a weaker dollar. Today, around midday, the EUR/USD reached 1.1228, setting a new high since mid-March for another day in a row.

Optimism supports the zloty

The euro-Swiss franc exchange rate also sets new highs. Optimism, as well as fiscal and monetary stimulation, support the euro while weakening demand for the franc. As a result, the EUR/CHF exchange rate approached the 1.08 (around 1.0799) limit, which was last quoted in mid-January. These changes continue to support the zloty, which is maintaining recovered losses from recent weeks. The USD/PLN quotations oscillate around approx. 4.93 and the EUR/PLN quotations are close to 4.40.

However, one should keep in mind the growing potential threats to positive sentiment, such as the increasing geopolitical tensions between the USA and China or protests in the US cities, which may disrupt the rate of economic activity growth and the still uncertain picture of consumer demand in Europe. These factors may potentially weaken sentiment in the coming weeks or months, also negatively affecting the value of the zloty in relation to the main currencies.