Spain with a sharp drop in retail sales (Daily analysis 29.04.2020)

One of the countries worst affected by the pandemic recorded a two-digit drop in sales - in March, only food sales increased strongly in Spain. Italy's rating was unexpectedly cut. Main currencies are stable before the data from the USA and the Fed's statement.

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.: The GDP growth pace in the USA in Q1 (estimates: -4.0% q/q).
• 8:00 p.m.: Federal Reserve's statement.
• 8:30 p.m.: Jerome Powell's press conference, the Federal Reserve chair.

Cost of Italy's debt may be a problem

Today, the market was surprised when Fitch Ratings cut Italy's credit rating. However, it was not only about the mere fact of lowering the rating to BBB- (one level above "junk") but also because it happened long before the creditworthiness verification scheduled for July 10th. The lower rating represents the deterioration of Italy's already weak fiscal position, and this decline is linked, of course, to the strong impact of the COVID-19 virus. However, the agency has changed the outlook for the rating from negative to stable, which may calm down market participants somewhat. This change was connected with the actions of the European Central Bank, whose asset purchase programme should maintain Italy's bond yields at a relatively low level.

As a result of Fitch Ratings' decision, the yields of Italian bonds maturing in 10 years increased to about 1.82% in the morning, gaining the most in the region, although still far from the high of March 18th (nearly 3%). A few days earlier, S&P Global Rating maintained its credit rating for Italy, and Moody's is likely to maintain its rating with a stable outlook on May 8th (also only one level above junk one). However, there is still a risk that the virus pandemic will have a greater impact on Italy's fiscal situation, and the country may lose its investment rating. This could result in the Italian debt turning out to be extremely difficult (or practically impossible) to manage and would burden the economic situation of the entire eurozone.

March in Spain with much lower results than expected

The situation of the southern eurozone countries is clearly worse than those in the north, and they are likely to be the ones that will strongly affect the economic growth of the region. The fact that they have suffered most from the virus across Europe does not make their situation any easier. In addition to Italy, Spain, whose economy was practically closed, has also suffered. Today there was a small portion of this in the form of retail sales data for March from the Spanish Statistical Office (INE). Adjusted to seasonal factors, it fell by 14.1% per year (15.3% per month). This is the highest drop since 2001 at least, far exceeding the falls from the financial crisis and the subsequent recession in Spain. The annual fall was 10 percentage points deeper than the economists' consensus.

The retail sales distribution in March highlights how much the pandemic has affected the country and consumer behaviour. Only one category recorded strong growth in March, compared to this huge drop in sales. Sales of food increased by 8.9 % per year - the effect of the stockpiling by the population. This one-off effect probably inflated the actual scale of consumption stoppage. Other sales recorded a fall of nearly 29.6%, including private consumer goods by 53.9% and household goods by 32%.

The retail sales data for March also illustrate how disproportionately the virus pandemic affected stores. Only large chains recorded an increase in sales (by 2.2 %), but sales in individual stores decreased by 16.7 % and in small chains by 26.5 %. In the case of Spain, particularly affected by the virus, this may complicate the recovery process, which may be more difficult than expected. April is likely to be an even worse month for sales. Sales data from Spain are also in line with the general trend: incoming macroeconomic data from the economies largely illustrate a deeper economic crisis than economic consensus.

The market is not particularly interested in the historical data (at least at present) and is waiting for GDP data, statements and press conference of the main economies' central banks. Tonight, the US GDP data for the Q1 will be announced, and in the evening, the Federal Reserve statement will be published and the conference of its head, Jerome Powell will be held. These are the events that will cause the biggest market volatility during today's session. The fluctuation range remained limited in the morning. The main currency pair's quotations oscillated around 1.0850 (here no significant changes), which also limited the potential for zloty fluctuations. Although there was a minimally positive reaction after the easing of some of the restrictions in Poland, which Prime Minister Mateusz Morawiecki announced today in the morning. However, the events (today) from the US and (tomorrow, analogously) from the eurozone will have the greatest impact on currency market fluctuations.