Dreadful data from the service sector (Daily analysis 23.09.2020)

According to the PMI index, activity in the service sector of the eurozone fell back into recession already in September. The market sentiment around midday is positive, but its potential deterioration and a renewed appreciation of the dollar may increase the pressure on the relatively weak zloty.

On Wednesday, near midday, the sentiment on the broader market was positive. Nearly 2% profits of the main European market indexes highlighted the increased risk appetite. This also prevented the dollar from further strong appreciation to some extent.

In the early morning hours, the euro-dollar quotations fell to about 1.1670 - the lowest level since the end of July, but with the increases on European markets, the demand for the dollar also declined. The EUR/USD exchange rate was again above the 1.17 boundary around midday - just above yesterday's closing level.

However, there is no doubt that the demand for the US currency has increased in recent days, and this may not be the end of its appreciation. Especially since today, inconclusive data from the eurozone has emerged, which may support the argument for further strengthening of the dollar.

A two-speed economy

Today IHS Markit published the preliminary PMI data for the eurozone for September. The aggregate activity rate in both the industry and services sectors fell to 50.1 points, i.e. only marginally remained in the growth zone (a reading below 50 points would mean a recession). September activity was clearly below that of August at 51.9 points, which was also the market's expected reading.

The aggregate index does not reflect the enormous disparity between sectors in September. The industry recorded strong growth (from 51.9 pts. to 53.7 pts.), driven mainly by the German industrial sector. The services sector, however, significantly disappointed expectations: a drop in PMI from 50.5 to 47.6 points meant not only a recession but also the lowest level since June when the last time we observed a level below the threshold separating growth from recession in the sector.

In a commentary to the report, IHS Markit commented, "a two-speed economy is evident, with factories reporting that production growth was buoyed by rising demand, notably from export markets and the reopening of retail in many countries, but the larger service sector has sunk back into decline as face-to-face consumer businesses in particular have been hit by intensifying virus concerns."

The strong decline in activity and the return to recession in the service sector as early as September may be worrying as the economies have not even entered the period of late autumn and winter, when the rate of coronavirus infection may increase. This will probably mean downward pressure on service sector activity later in the year, especially now that it can be seen that the increase in service activity after the closure of the economies may have lasted shorter than expected.

Looking at the zloty quotations, the Polish currency is in a position for further depreciation. Despite relatively favourable conditions in the morning, i.e. stopping the appreciation of the dollar and strong increases in the equity market (increased appetite for risk), the zloty was losing to the main currencies. The EUR/PLN exchange rate was again close to 4.50 and the USD/PLN to 3.85. The potential deterioration of the current sentiment combined with a resumed appreciation of the dollar may again result in increased supply pressure on the zloty basket.