Positive sentiment puts data in the shade (Daily analysis 4.11.2019)

The first phase of a trade agreement between the USA and China is getting closer and closer. Reduced risks associated with customs wars improve global sentiment and push macroeconomic data into the background. The zloty is supported by the positive sentiment and does not respond to the poor industrial readings of PMI from the Polish market.

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

• 8:30 p.m.: First public appearance of Christine Lagarde after taking over the presidency of the European Central Bank.

Data not so crucial

On Friday, important data were released. The key publications include readings from the US labour market and the ISM industry index. The former were generally good - a strong increase in the payrolls, excluding the issues of the strike at GM, the increase in professional activity, and the acceleration of wage growth. The latter, in turn, remained below the limit of 50 points in the main categories but came out slightly better than in September. On the other hand, ISM Markit revised its preliminary PMI readings from the European industry slightly upward in the morning. The negative surprises included data from Spain and the Netherlands, where the overall indexes reached a 6-year low. The eurozone industry is still shrinking, but the pace of decline is, fortunately, not accelerating.

It seems that investors are now looking at the macroeconomic readings with their eyes a bit closed. Their high tolerance towards variable publications is probably due to the fact that two key problems of the world economy - the trade war and Brexit - are heading towards a positive solution.

Bloomberg reports that Chinese Deputy Prime Minister Li Keqiang and US Secretary of Commerce Wilbur Ross met in Bangkok on Monday. Before this meeting, as Bloomberg writes, Ross said that the United States was very engaged in the first phase of the trade agreement with China. Also, the location where the agreement can be signed, including Hawaii, Alaska and Iowa, is under discussion. The previously considered location - Chile during the APEC summit - was excluded due to protests by the local population about income inequalities.

It remains unclear what will be included in the agreement, but it appears that, in addition to greater purchases of agricultural goods by China, restrictions on Chinese companies that have recently been banned from trading with their US counterparts may also be expected to decrease. The issue of customs duties imposed on Chinese goods by the US remains a question mark. Currently, they cover almost all imports from the Middle Kingdom, and in the weeks to come, trade restrictions were supposed to be further increased. This increase is unlikely to happen, but it is difficult to say whether the earlier duties will be relaxed, which is what Beijing is calling for. There will probably be no breakthrough in intellectual property or cybersecurity issues. These issues will be transferred to the second phase of the negotiations. It is possible, however, that Beijing will agree to some gesture to open up its financial services sector, although this problem can also be negotiated only in the second phase.

What is worth noting is that investors have already discounted a significant part of the positive information. This has pushed, among others, the US stock exchange to new historical highs. The good sentiment is also visible on the Chinese yuan. The USD/CNY pair is approaching the 7.00 boundary, i.e. about 2% below the limit achieved when concerns about Beijing's relations with Washington over a month ago were at the crucial point.

It is likely that the agreement will be signed. Both sides may have left some positive surprise beyond the reports that already exist in the public space. If this were to happen, it would prevent a sudden worsening of sentiment right after the signing of the documents.

There is also a positive picture of the Brexit issue, although, in the case of the United Kingdom, the uncertainty about the elections scheduled for next month is extremely high. A high result of the Brexit Party or another undecided parliament may bring back fears about relations with Brussels and further economic uncertainty in the country. In general, Brexit is currently helping to reinforce the good sentiment (the agreement has finally been adopted).

Zloty strong and stable

The Polish currency maintains most of the increases of the last few days. This is mainly due to positive global events (trade and Brexit - details in the previous paragraphs). On the other hand, the zloty does not react to domestic data, which are getting weaker every month.

The PMI index for Polish industry published by Markit IHS this morning fell to 45.6 points, the lowest since mid-2009. Orders also fell the fastest in over a decade, and future production forecasts were the worst since the introduction of this question to the surveys (2012). The weak sentiment, according to Markit, is mainly a consequence of the slowdown in Europe and competition from China. The weaker demand for products manufactured in Poland also puts pressure on their prices, which were reduced for the first time in over three years. It is also worth noting that there is another piece of bad news - decreases in orders or production result in cuts in employment, which, of course, is negative in the context of future consumption. It may grow at a slower pace than most economists expect.

On the other hand, the impact of PMI on the economy as a whole should not be overestimated. Even in Germany, where industry indexes have been at record low levels for many months now, employment in the whole economy is growing (about 0.7% year-on-year; by half less than during the economic boom). So far, the collapse in the Polish economy should not be feared, but GDP growth may slow down to a level below 3% in 2020.

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