European PMIs keep deteriorating with French services plunging again

Summary:

• All European preliminary PMIs for January came in well below expectations

• French services PMI tumbled again, yellow vests’ protests could be blamed for it

• Mixed hints when it comes to price pressures

• Euro slightly lower as USD demand prevails ahead of the ECB meeting

Gloomy moods prevail

The European managers’ assessment did deteriorate at the beginning of the new year pressuring the European Central Bank to revised down its macroeconomic projections when it meets in March. The data at an European level brought a widespread deterioration in both manufacturing and services sectors. The euro slid to some extent, however, this fall was predominantly due to a rising demand for US dollars.

Preliminary PMIs showed an array of declines in January with another massive slide in the French services sector. Source: Macrobond, XTB Research

There are some points deserving more attention. First of all, the German manufacturing sector slid into a contraction territory for the first time since in four years. Secondly, the German manufacturing output index reached its 69-month low. Thirdly, the French services PMI plunged (it reached its 59-month low) reflecting a continued drag stemming from yellow vests’ protesters. Finally all three indices for the euro area economy declined in January signalling that the economic slowdown, began in the fourth quarter of 2018, will continue as the new year kicks off. The details are as follows:

France:

• Manufacturing: 51.2 vs. 49.7 previously

• Services: 47.5 vs. 49

• Composite: 47.9 vs. 48.7

Germany:

• Manufacturing: 49.9 vs. 51.5 previously

• Services: 53.1 vs. 51.8

• Composite: 52.1 vs. 51.6

Euro Area:

• Manufacturing: 50.5 vs. 51.4 previously

• Services: 50.8 vs. 51.2

• Composite: 50.7 vs. 51.1

Looking into the details one may perceive a wide differentiations of readings with disappointments in French services and German manufacturing, and some encouraging readings coming from French manufacturing and German services. However, the indices for the entire Eurozone economy showed a broad decline in each category suggesting that other peripheral countries may have seen some falls as well. The data came just hours before the ECB’s press conference and it is very likely to Mario Draghi will be asked about his view regarding a balance of risks to the economic outlook. Let us remind that the ECB altered this phrase in December saying that these risks remained roughly balanced but acknowledging that downside risks were becoming more prominent. Note that it is probable that the ECB would have changed this reference even more substantially, if it had not revised down its GDP forecasts. We reckon that these projections could be subject to further cuts. On the other hand, the ECB might hope that the elections to the European Parliament could result in more fiscal stimuli aimed at reviving economic growth. If it happens, it would be brought relief to the ECB’s policy.

Technical analysis

The EURUSD seems to be heading lower but this slide should be limited to 1.12 where quite the notable support is placed. What’s more, the US govt shutdown coupled with rate differentials being in favour of the euro are expected to contain undue USD appreciation. In the medium-term the pair is likely to move toward 1.18. Source: xStation5