Markets
January PMI’s confirmed the gut feeling of an economic setback caused by fresh and extended lockdown measures to fight Covid-19 (mutants). The EMU composite PMI declined from 49.1 to 47.5, broadly in line with consensus. The underlying divide between strength in the export-oriented manufacturing sector (54.7 from 55.2) and weakness in the domestic services industry (45 from 46.4) remains. Details showed that the employment component remains (slightly) below the 50 boom/bust marks while more inflationary pressure seems to be building via rising input prices. So far this doesn’t translate into higher prices for consumers, especially not in the services industry. Furthermore, supplier delivery times point at ever bigger constraints in (international) supply chains. PMI-respondents keep faith in the outlook of brighter economic prospects after mass vaccination. Still, enthusiasm eased somewhat compared to last month. Looking forward, PMI’s hint at negative growth in Q1 especially as EMU government extended and expanded measures over the past weeks. The February report risks being even worse. On a national level, German manufacturing (57 from 58.3) remains a stronghold, keeping the composite gauge (50.8 from 52) above water despite a stabilization of the services number (46.8 from 47). A disappointing French services PMI (46.5 from 49.1) pushed the composite index to 47 from 49.5. Manufacturing slightly improved from 51.1 to 51.5.
The direct market impact from PMI’s was rather limited. German yields return part of yesterday’s ECB-triggered gains. The central bank formally stated that it could leave part of its €1.85tn PEPP-portfolio unused. The German yield curve bull flattens with yields shedding 1.3 bps (2-yr) to 2.1 bps (30-yr). Peripheral yield spreads vs Germany widen by up to 2 bps with Greece (+5 bps) and Italy (+8 bps) underperforming. Italian PM Conte is still in search of Senate support as he faces another key vote in the upper house next week. Failing to secure a majority increases the risk of early Italian elections. Apart from domestic politics, the ECB story and today’s risk aversion weighed on peripheral bonds as well. Main European equity indices shed around 0.5% to 1% with Italy (-1.5%) underperforming. US stock markets opened 0.5% weaker. The US yield curve bull flattens with yields 0.1 bp to 1.9 bps lower.
The single currency managed to hold to yesterday’s gains against the dollar despite EMU PMI’s and despite risk sentiment. EUR/USD spent the trading day so far in the narrow range between roughly 1.2150 and 1.2180. EUR/GBP does eke out additional gains and trades back above the 0.89 big figure. This week’s failed test of EUR/GBP 0.8864 support and relatively weaker UK PMI’s explain the move. The UK composite PMI crashed from 50.4 to 40.6! The services sector (38.8 from 49.4) was hard-hit by restrictions on trade and reduced consumer spending at the start of the year with activity falling at the fastest rate in 8 months.
News Headlines
According to data published by the Central Bank of Turkey, holdings of foreign currencies among real persons in Turkey declined more than $ 1bn in the week up to 15 January. The decline was the first in three months. The move might be an indication that residents in the country are growing a bit more confident on the Lira after President Erdogan changed personal at some key functions and paved the way for the central bank to return to a more orthodox monetary policy. Yesterday, the lira still gained marginal ground after the CBTR policy decision. Today the Turkish currency weakened again north of EUR/TRY 9.00 as global sentiment turned risk-off.
The German economy minister Peter Altmaier is rumoured to downgrade the government’s 2021 growth forecast next week as the impact of extended coronavirus lockdown hurts activity in the first quarter. The government is said to reduce the 2021 growth forecast to 3%, down from 4.4% expected in October. The German economy is expected to have contracted about 5.0% in 2020.
