Surprising deterioration of Spain's economic situation (Daily analysis 1.03.2019)

PMI data from the eurozone surprised with information about the weak condition of the Spanish industry. Inflation in the single currency area does not encourage a tightening of monetary policy. Data from Poland are weak, but the market has become accustomed to the fact that PMI from Poland has recently overestimated the scale of the economic downturn. The zloty loses some of yesterday's growths. The euro quotations are close to the 4.31 PLN limit.

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.: US PCE inflation from December (estimates: 1.7% year-on-year and 0.0% month-on-month; excluding fuels and food 0.2% month-on-month and 1.9% year-on-year).
• 4:00 p.m.: ISM from the US industry (estimates: 55.8 pts.).

PMI and inflation are low

Compared to the preliminary PMI readings for eurozone industry, the final February data published this morning differed marginally (49.3 vs 49.2 previously estimated). This is the weakest reading since mid-2013. Italy and Germany have so far been at the forefront in the case of low data (below 50 points). In the first case, this is a consequence of a mixture of external (weakening of external demand) and internal situation, as the country is troubled by political issues and long-term structural negligence. In the second case, Germany, the international context was much more important, although insufficient preparation for regulatory changes in the automotive sector should also have a negative impact.

Unfortunately, apart from Germany and Italy, another eurozone country is starting to have problems with its industry. In Spain, the PMI index fell below 50 points for the first time in more than 5 years. According to IHS Markit data, employment is stagnating and new orders declined slightly.

Also, export is getting weaker and weaker. The IHS Markit report shows that the decline in foreign orders occurred for the first time in less than six years due to weaker demand from neighbouring European countries and a slowdown in sales to China. Overall production increased, but at the slowest pace since the end of 2013. In a commentary to the data, Paul Smith, Director for Economic Indices at IHS Markit, said that, apart from issues related to Brexit or external demand, the producers of capital goods suffered the most (there was a noticeable drop in production and new orders).

Apart from the issue of extending the economic slowdown to Spain, which is negative information for the euro, it is also important to pay attention to low inflation readings in the eurozone. In core terms, it fell to 1.0% (previously and in 1.1% forecasts).

The inflation of the services sector looks even more interesting in the context of monetary policy, which, to a large extent, is simply the result of a change in wages. In February it dropped to only 1.3% year-on-year. This is exactly the same as a year ago and by 0.1 percentage points more than two years ago. Given the worsening industrial situation and such limited price pressure in the services sector, there is no argument for the ECB to seriously consider tightening monetary policy. These data should also be included in the macroeconomic forecasts to be presented at the Bank's March meeting. They may be an argument for clearly withdrawing from interest rate increases in the following quarters.

Zloty stable despite weak PMI data

Nothing positive can be said about the PMI index from Poland. According to IHS Markit data, the industry shrank for the fourth month in a row. "The latest reading together with the December reading is the two weakest readings recorded in the last 70 months," wrote IHS Markit. In addition, demand from foreign markets remains weak, and the number of export orders fell for the seventh month in a row at a rate similar to the January 115-month record. It should also be noted that "stocks of unsold goods are growing at the fastest pace in 20 years", and Polish producers have been forced to "reduce employment and purchase".

Although the data sound disastrous, industrial production readings and other leading indexes (e.g. those published by the Polish Central Statistical Office) do not confirm such a strong slowdown. It is present, but not on a scale visible, e.g. in 2013. The market has managed to get used to the fact that PMI, in the case of Poland, has been overestimating the scale of the slowdown in the past months. The zloty did not react to the data.

The nearest hours should be relatively quiet on the zloty. Readings from the USA (PCE inflation or ISM index) are important, but they are unlikely to cause a strong reshuffle in the global market. As a result, the euro exchange rate should end the current week close to the 4.31 PLN boundary. Also the dollar, even in case of good readings from the USA, is not likely to exceed the 3.80 PLN value in the following hours.