Fear weakens (Daily analysis 01.10.2018)

Despite weak PMI data from the eurozone and continuing concerns about Italy, the market is reversing last week's fall in the single currency and an increase in Italy's debt yield. Lower than expected inflation and worse than consensus condition of Polish industry without impact on the zloty.

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

• 4:00 p.m.: ISM reading from the US industry for September (estimates: 60 points).

Fear is reduced

The back of September was dominated by the events in Italy. Today, the situation on the Italian bond market has calmed down. We have slight drops in the yields of treasury instruments, but the 10-year bonds are listed in the range of 3.10-3.15%. Today, a meeting of eurozone finance ministers is held in Luxembourg. The agenda does not include Italy, but it is not excluded that this topic will be brought up during the talks of the heads of ministries today.

La Repubblica, quoted by Bloomberg in the morning, wrote that the plan to increase the deficit to 2.4% of GDP in 2019-2021 means that the European Commission will reject this proposal in November. Valdis Dombrovskis, deputy head of the European Commission, said that the plans of the Italian budget might not be in line with the Stability and Growth Pact.

Today's PMI readings from the industry match well with concerns about Italy. According to the IHS Markit study, this index fell to 50 points, the exact limit between regression and growth. These are also the lowest levels in 25 months. The employment component was particularly weak (the worst since the beginning of 2015), although recently the Italian labour market has been in relatively good shape. Stagnating regions of the basic reading also confirm the behaviour of orders and production, which have slightly decreased.

The size of the Italian economy, a lack of willingness to cut spending and structural reforms and a confrontational approach to Brussels may mean that the issue of Italy may weigh on the euro for weeks to come. This, too, will be a test for the cohesion of the Union, especially in the context of the persisting risks of systems for the eurozone.

Zloty insensitive to data

Today, not much positive information has come from Poland. PMI for Polish industry fell to the lowest levels in 23 months and recorded only 50.5 points. For the first time in less than two years, there has been a fall in new orders and export orders have fallen the most in over 4 years. Out of the main sub-indexes, production and employment increased.

IHS Markit also points out that the prospects for the next 12 months remain good, "but they have continued to weaken for the sixth consecutive time in eight months. The optimism is at its lowest level since November 2016".

In the context of future zloty quotations, it is also worth noting that September inflation was below market estimates (1.8% y/y vs. 1.9% y/y). This also means that core inflation is not likely to exceed the 1.0% limit. Therefore, the combination of a weaker economic situation and lower than consensus inflation means that the MPC will not think about tightening monetary policy. As a result, the Council will not support the zloty.

However, the zloty does not react to weaker readings at all. On the one hand, it is good news suggesting that investors do not believe in the dramatic downturn in Poland. On the other hand, however, if the data continues to deteriorate, at some point the exchange rate may adjust to the worsening economic prospects. In the coming hours, the situation should not change significantly and the EUR/PLN will probably remain 0.02-0.03 PLN below the 4.30 limit.