The Euro-to-Dollar PMI Surprise Stokes Potentially Misplaced Optimism

- EUR rallies after GER manufacturing PMI rises in Feb. 

- Services PMI softened, France delivered a mixed bag. 

- First glance suggests little coronavirus economic impact.

- Optimism may be misplaced by slower supplier deliveries.

- EUR expresses relief but risks abound as market mulls data.

- Commerzbank cuts June EUR/USD forecast from 1.14 to 1.06.

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The Euro-to-Dollar rate rallied Friday after IHS Markit PMI surveys surprised on the upside for February, inciting potentially-misplaced hope the currency bloc will weather the coronavirus storm better than has been feared.

Germany’s manufacturing industry does not appear at first glance to have been ravaged by the coronavirus in the same way the Chinese factory sector has, given the IHS Markit PMI barometer rose from 45.3 to 47.8 in February. Consensus had looked for a fall to 44.8. 

The services PMI did, however, decline from 54.2 to 53.1 when markets were looking for a decline to only 53.9. Meanwhile, France’s manufacturing PMI posted a surprise fall while its services barometer ticked higher, with results for the two countries leading both broader Eurozone PMIs to rise sharply.

February’s Eurozone manufacturing PMI rose from 47.9 to 49.1, when consensus was looking for a decline to 47.4, leaving it close to the 50.0 level that separates industry expansion from contraction. And the services PMI rose from 52.5 to 52.8 when consensus was looking for 52.4.

"Green shoots in manufacturing were especially apparent in Germany, the epicentre of the manufacturing downturn. In Germany, but also elsewhere in the eurozone, the decline in new orders and output has slowed, meaning that a bottoming out is still in the making. That said, there are early signs that the coronavirus is starting to have an effect, with businesses reporting longer supply delivery times," says Bert Colijn, an economist at ING.

Above: IHS Markit composite PMI for Eurozone, alongside Eurozone GDP growth. 

"The first macro data to reflect at least some of the impact of the coronavirus underpins the fact that the economy is not collapsing. In addition, assuming the virus can be contained in the foreseeable future, a significant portion of the loss of economic momentum can be recouped later on. Having said that, the ultimate impact of the virus remains uncertain, so some caution is warranted," says Jeroen Blokland, a multi-asset portfolio manager at Robeco. 

PMI surveys measure changes in industry activity by asking respondents to rate conditions for new orders, production, hiring intentions, prices and inventories. A number above 50.0 indicates industry expansion while a number below 50 is suggestive of contraction. The survey results often correlate with official measures of output, although they can often be wide of the mark too.

February's surveys suggest that conditions actually improved in two of the bloc’s most important industries during the early weeks of February, challenging the perception that Europe will suffer a large economic hit from the coronavirus that’s brought China to a standstill this year. 

"This a solid headline, but the more we think about it, the more we’re now inclined to ignore it. We apologise in advance on behalf of our profession; we didn’t play this very well," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics. 

Above: Euro-to-Dollar rate shown at 15-minute intervals.

The Euro-to-Dollar rate spiked from 1.0796 to 1.0819 following publication, leaving it 0.28% higher on an intraday basis but still down -0.11% for the week. However, those gains could be short-lived if it materialises that Fridays PMI bounce was just a mirage of improvement in current conditions for companies.

"Almost half of the index’s month-on-month gain was attributable to a deterioration in supplier delivery times*," IHS Markit says. "In the calculation of the headline Manufacturing PMI, the supplier delivery times index is inverted."

Nearly half February's manufacturing bounce resulted from slower supplier deliveries owing to the shutdown of coronavirus affected factories in China, which might not be good news for the German growth outlook because for manufacturing to add to GDP then output from the sector needs to rise. 

Manufacturing output cannot rise if suppliers aren't delivering parts because slower deliveries would mean a lesser level of work completion. That itself could mean output still fell this month and that companies were prevented from a GDP-enhancing, faster accumulation of finished goods inventories.

"The PMIs are designed to interpret a tightening supply side—which is exactly the first-order effect of the coronavirus—as a bullish signal, because it normally signals that activity is picking up. From this perspective, today’s data are decidedly bearish; they’re effectively warning that the supply side is being choked, and if that continues, growth and employment eventually will take a hit," Pantheon's Vistesen warns.

Above: Unicredit graph showing changes in Chinese car sales volumes.

"This morning, Chinese passenger car sales data for the first two weeks of February were released and showed a shocking decline of 92% yoy," says Dr Andreas Rees, chief economist in the Frankfurt office of Unicredit Bank. "The plunge is a direct result of the coronavirus outbreak which led to the extension of the Lunar New Year holiday into mid-February when car dealerships were closed. Furthermore, customers stayed away to avoid infection. The Chinese auto market is the largest one in the world. Last year, more than 21mn passenger cars were sold compared to nearly 17mn in the US and 15mn units newly registered in the EU. German auto companies, which export to China and/or have production facilities in China, are particularly negatively affected."

There have been concerns that Europe's economy, which wounded more in the trade war than both the U.S. and China, may suffer as the world's second largest economy crumbles in the first quarter due to the deadly viral pneumonia that's brought the country to a halt.

Those concerns appeared to be dissipating in some parts on Friday although they could still return over the coming days and weeks. 

"The US dollar. It is relatively immune to real economic risks resulting from the corona epidemic, but is also one of the currencies in the G10 universe with the highest interest rate levels. This justifies a significant appreciation of the US currency in the short to medium term. We expect EUR-USD levels to be around 1.06 by mid-year," says Ulrich Leuchtmann, head of FX and commodity research at Commerzbank.

Above: Euro-to-Dollar rate shown at daily intervals.