German economy in stagnation (Daily analysis 14.02.2020)

Europe's largest economy in stagnation in the Q4 - the EUR/USD pair in a limited fluctuation range, but still close to the lowest trading level since May 2017. Slightly higher inflation and economic growth in Poland with limited impact on the zloty. The EUR/PLN is in the 4.24-4.25 range.

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.: Retail sales in the USA in January (estimates: +0.3% month-on-month).
• 3:15 p.m.: Industrial production in the USA in January (estimates: -0.2% month-on-month).
• 4:00 p.m.: US consumer confidence index in February (estimates: 99.5 points).

The GDP of Germany and the eurozone does not disappoint much, but...

The anticipated market data on the GDP growth pace in Germany and the eurozone as a whole proved to be mixed. According to a preliminary reading by Destatis, the German economy remained stagnant in the Q4 in relation to the previous quarter. This is slightly below the expected growth of 0.1%, although on the other hand, the economic development in Q3 was revised upward by 0.1%. Therefore, the data are not entirely dramatic, but the stagnation in the last quarter of the year in Europe's largest economy may cause some concern that the German economy may be in a weakened condition to cope with the potential impact of the coronavirus or potential restrictions in international trade (next phase of US-China negotiations, negotiations of the UK-EU trade agreement).

Eurostat's aggregate data for the eurozone as a whole, published a little later, were also not bad: GDP in Q4 grew at an expected pace of 0.1% quarter-on-quarter. The annual data were slightly weaker: the 0.9% year-on-year growth was 0.1 percentage points below the market consensus and was also the lowest growth rate recorded by the eurozone economy in six years. As the data did not fail strongly, the response on the euro was limited. Around the midday, the EUR/USD exchange rate remained around 1.0840, practically unchanged from yesterday's closing level.

The quotations of other main currencies also remained within a limited fluctuation range. If we add to this the main European market indexes back close to historical records, there is a picture of stabilisation. Market participants seem reassured by the fact that the incoming data from China, despite an increase in coronavirus morbidity, indicate that the virus has been narrowed down primarily to Hubei - a province in China.

The stabilisation on the broader market also fosters limited fluctuations on the Polish currency. Until midday, only limited changes in the zloty basket were observed. The EUR/PLN exchange rate fluctuates in the range of 4.24-4.25, USD/PLN approx. 3.92, and GBP/PLN remains slightly above 5.10. By midday, slightly higher-than-expected data on inflation and economic growth pace in Poland were presented. January's CPI inflation was 4.4% year-on-year, 0.2 percentage points above expectations, and the pace of economic growth in Q4 was 0.2% quarter-on-quarter, exceeding the consensus by 0.3 percentage points.

These data may support the zloty somewhat, although they fundamentally change little. Inflation should be subdued later in the year, and the disinflationary impact of the coronavirus epidemic should support this. The main central banks will practically certainly not tighten monetary policy this year, due to, among other things, the lack of inflationary pressure or the still uncertain impact of the virus from China on economic growth. The valuation of financial instruments indicates that the monetary policy is currently easing. As a result, the Polish Monetary Policy Council will most likely have no arguments for raising interest rates. Although data from the Polish economy do not harm the zloty, the main factors influencing it remain the global market events. The domination of positive sentiment, market indexes in Europe and the USA on historical records support the zloty, and on the other hand, the strong dollar limits its growth potential, as a result stabilising its quotations. Next week, the first data from Europe (for January) will be published, which to some extent will already represent the increased uncertainty related to the coronavirus. They may show strong declines, which could significantly worsen sentiment in the market and, as a result, weaken the zloty basket.