Daily analysis 03.07.2017

Eurozone manufacturing PMI index at new 6-year highs. Readings from the UK and more Brexit speculations. The Polish manufacturing activity below expectations. Slightly weaker zloty. The EUR/PLN close to 4.24 level.

Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information unless marked otherwise.

• 16.00: ISM manufacturing reading from the US (survey: 55.2 points).

Record high PMI readings

The midday trading on the EUR/USD is bringing some corrections from last week gains. The main currency pair is falling below 1.1400. Market participants may fear that both the minutes from June Fed’s meeting and Friday’s payroll data don’t have to be as dollar bearish as last week’s reports.

Regarding news flow from our continent, the IHS Markit published final manufacturing data from selected eurozone countries. Readings look fairly solid. Publications from Austria (60.7 points), Germany (59.6 points) and Netherlands (58.6 points) are at 6 year highs. Even Greek PMI, for the first time since August 2016, rose above 50 points.

Data for eight eurozone countries reached 74 month highs at 57.4 points. From the report, it is worth noting that the employment component remained at a record high level. Moreover, the sentiment for the next 12 months is at the highest level since 2012 when this sub-index was added to the survey.

Chris Williamson, chief business economist at IHS Markit writes, “at current levels, the PMI is indicative of factory output growing at an annual rate of some 5%.” However, it seems that the odds of such a positive scenario are fairly limited. The industrial production in the euro area was at 1.4% YOY for April despite the PMI’s rise above 55 (5-year high) at the beginning of the year.

The eurozone solid sentiment should be encouraging. It supports the expectations for further economic expansion. However, the scale of this improvement may be much softer than survey data suggests.The UK PMI and discussion about Brexit.

Today, IHS and CIPS also published data on UK manufacturing. The readings were around 2 points (54.3 vs 56.3) below market expectations. However, it is worth noting that the survey was conducted during the political turmoil caused by the conservatives losing their majority in the House of Commons. Taking this element into account, the deterioration of the data seems to be mild. A year ago when the EU referendum was conducted, the PMI slumped to 48.4 points, which suggested that the manufacturing activity would shrink.

Regarding the Brexit issue, The Sunday Telegraph reported that Theresa May suggested tough negotiations with the UE during the weekend and is ready to walk away from the deal if the bill turns out to be too high. The message from these pound negative comments was lessened by expectations that UK treasury secretary Philip Hammond will deliver a speech that will address need for British companies in the Brexit scenario. Overall, the message for the pound is negative but not bearish enough to generate significant pressure.

Slightly weaker readings from Polish manufacturing

In line with the eurozone, the UK schedule purchasing managers index was published for Poland. The reading, prepared by IHS Markit, was slightly below market expectations (53.1 vs 53.7 points). However, the overall message from the report was rather positive. The survey shows, “market expansions in new orders and production” while “price pressures ease further.”

One main negative element in the PMI report was the situation regarding the labor market. “Employment continued to rise in June, albeit at the slowest rate in 34 months,” the survey shows. The zloty at midday trading time is slightly weaker, but the odds that the EUR/PLN will breach the 4.25 level still remains limited.