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Dreadful data from Poland (Daily analysis 2.01.2019)

2 Jan 2019 12:43|Marcin Lipka

PMI readings from the eurozone and China are not great, but those from the UK were relatively good. The dollar is paring losses, even though the market is valuing interest rate cuts in the US at the turn of 2019 and 2020. Fatal data from Poland may overestimate the slowdown scale. The zloty depreciates.

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

  • A lack of macro data may noticeably impact the analyzed currency pairs.

Weakness of China and the eurozone

First trading hours of 2019 are not favourable for investors. Indexes in Asia were depreciating. This trend was followed by the markets in Europe and S&P 500 future contracts.

The driving force behind these declines was data from the Chinese economy that was worse than consensus. The industrial index fell below 50 points in December (49.7 vs 50.2 forecasts). In addition, it was the lowest reading since May 2017. Furthermore, even worse than the overall index, was the key component, i.e. new orders. It fell to its lowest values since June 2016 - according to data prepared by Caixin and IHS Markit.

Dr Zhengsheng Zhong commenting on Chinese data wrote that "the industry sector is facing weakening domestic demand and limited external demand." He also added that "there is a growing likelihood that the Chinese economy will be under increasing pressure."

The PMI readings from the eurozone were not much better. For the third consecutive month, the Italian PMI is below 50 points (this time 49.2). Moreover, indexes from Spain (51.1 points - the worst since August 2016) and France (below 50 points - as the preliminary reading before Christmas showed) were also below the line. On the other hand, the publication from the Netherlands (57.2 points) looked surprisingly good, because this economy slows down much slower than other leading eurozone economies.

Readings from the UK also looked quite good, where according to CIPS and IHS studies PMI rose to six-monthly highs of 54.2 points. The increase in new orders to 10-month highs, due to both domestic and foreign demand, is particularly positive. Overall, however, the outlook for the next 12 months is rather weak according to British entrepreneurs, for which Brexit is responsible, as well as exchange rate uncertainties.

Apart from signals from macro or market data, there is also risk aversion on the currency market. The yen is clearly appreciating. The franc is also highly valued. After the weakening in the morning, the dollar is gaining as well, although its fate is quite uncertain in the current situation.

This is mainly because the market is already starting to value interest rate cuts. For the time being, this is about 5-6 basis points from the current levels of 2.4%. It seems that with such a strong belief that there is no need for interest rate increases, the Fed will be under serious pressure to give up with monetary tightening in March. This may harm the dollar unless the panic in the broader market is so strong that the issue of escaping to the safe haven outweighs the prospect of a much milder monetary policy. In the short term, the dollar may also be adversely affected by a lack of political agreement on the budget.

Zloty under external pressure and weak data

At the beginning of the session, the Polish PMI reading was surprisingly low. It dropped to 47.6 points, which was the worst result in over 4 years. Few positives can also be said about the sentiments of Polish entrepreneurs in the context of the next 12 months. They fell to the lowest level since January 2013, according to the IHS and Markit surveys.

Other components (production multiplicity, orders and employment) were also weak. It is possible, however, that this pessimism may be too deep. The period of collecting the surveys was connected with prospects of high energy prices growth, which, however, will not happen at least in the coming year. The economic slowdown in the eurozone does not have to be as deep as it happened in Q4 2018 (the problem of the automotive sector should be resolved in Germany). As a result, the slowdown in economic growth will be significant in the following quarters, but probably not enough for us to see a drop in production year-on-year, which would be suggested by such low PMI readings.

The zloty reacted negatively to today's data from Poland, but these are not dramatic movements. We are still close to 4.30 PLN per euro and only slightly exceed the value of 3.75 PLN per dollar. It does not seem that this situation will deteriorate significantly in the coming hours.

2 Jan 2019 12:43|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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