Drops in the activity greater than expected (Daily analysis 7.05.2020)

March in the European industrial sector was much worse than expected, and retail sales in Italy fell by more than 20%. Changes observed on the market, however, remain limited and the positive sentiment surrounding the opening of economies prevails. The zloty remains stable.

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.: Initial jobless claims submitted last week in the USA (estimates: 3 million).

A set of disastrous data

At night, the Caixin PMI data in China was released. Activity in the services sector according to the PMI index turned out to be clearly below the expected 50.1 pts., reaching 44.4 pts. in April, only marginally above March's 43.0 pts. As the economy most rapidly affected by the virus, China is a kind of case study of how economies can return to their pre-pandemic state. Incoming data from various parts of the world show that economists may have somewhat underestimated the decline in the activity, and in turn, the recovery path was overstated.

The data published today from Europe fit well with this underestimation. Industrial production in Germany fell by 9.2% on a monthly basis in March (expected to fall by 7.4%) and in France by 16.2% (a 13.4% decrease was expected). Data on retail sales in Italy were also not impressive, sales fell by 21.3% on a monthly basis in March, while they were expected to fall by 15%. If we look more to the east, activity in the Russian services sector also dived in April - the PMI index reached 12.2 pts., down from 37.1 pts. in March (the consensus assumed 28.8 pts.). Note that 50.0 pts. is the borderline separating the expansion in the sector from the decrease in the activity.

Hopefully the demand will follow the supply

The market is now practically entirely focused on economies that are already opening up or are scheduled to lift restrictions in the coming days. This will involve increased activity in services and industry, but returning (some people) to work is just the easiest step ahead of the economies. The real unknown is still the question of demand.

As some restrictions will continue to apply, it is virtually certain that consumers will not return quickly to pre-pandemic consumption levels. The challenge for the economies will be to cope with the potential gap between supply (from companies) and consumer demand. This imbalance may lead to a wave of redundancies and bankruptcies. The scale of activity of some companies may be too big to cope with a slow return of demand.

This is one of the concerns that will be verifiable in the macro data for the following months. It will show the pace at which business activity returns as well as private consumption. As long as such data do not come in, fundamental changes in the valuation of the main currencies are unlikely to occur. It is also practically certain, as the European Commission also warned yesterday in the new macroeconomic projections, that the recovery path to the initial state (before the virus) will be very uneven.

Zloty with a chance to pare some losses

Generally speaking, the currencies of emerging countries should both profit and pare the losses incurred in the event of a pandemic. The zloty should also appreciate in the following months because the Polish economy has not been as deeply affected by the pandemic as some more economically developed countries. This may have an impact not only on the path to return to business but also on the return of consumption. This path will not be easy for any country, but the zloty has the potential to appreciate in relation to the main currencies in the coming months.

However, the back of the year is burdened with certain risks for the market, so the potential growth of the zloty is also subject to them. US presidential elections, negotiations of a new trade agreement between the UK and the EU (the current one expires at the end of the year), as well as the threat of a second wave of the virus in autumn-winter may strongly change the market sentiment and even hinder somewhat the appreciation of emerging countries' currencies.

The zloty continues to be stable and moves within a limited fluctuation range: the USD/PLN pair is approx. 4.21-4.22 and the EUR/PLN is around 4.54-4.55. Later in the day, especially for the dollar, data on the number of initial jobless claims submitted last week may be relevant. The fluctuation of the US currency may slightly increase, although ultimately a significant change is not expected today. This may happen tomorrow when the April report on the US labour market is published.