Week Ahead: Manufacturing sentiment should at least stabilize

A first flash estimate of manufacturing PMI of the Eurozone, Germany and France for April will be released next week. In March, contrary to market expectations, manufacturing sentiment deteriorated once again. In Germany, in particular, sentiment collapsed to levels comparable to those during the euro crisis in summer 2012. Due to its high export surpluses, the German economy is suffering the most from the effects of the global trade conflict. In addition, the automotive sector, which is so important for Germany, is struggling with considerable structural problems (e.g. emission tests, switch to e-mobility), as a result of which Germany's automobile production in 1Q19 was also around 12% below the level of 1Q18. Of course, the never-ending Brexit question is also a nuisance for the industry. On the other hand, the mood in industry in France and Spain was much better in March. Here, the data indicates a stabilization of industrial production in 1Q19.

Since a hard Brexit by the end of this week can be ruled out now, we expect at least a stabilization of the manufacturing sentiment in the Eurozone in April. However, the postponement of the Brexit question will lead to continued uncertainty in the coming months. Furthermore, the smouldering trade conflict between the US and the EU (most recently the escalation around forbidden subsidies for EADS and Boeing) will continue to have a dampening effect on the manufacturing sentiment in the Eurozone. Nonetheless, recently, the positive signals have continued on the global level. Trade talks between the US and China are likely to have moved closer together. Accordingly, manufacturing sentiment in China has already improved significantly in February and March. In Brazil, India and Russia, too, manufacturing sentiment has improved continuously since the beginning of the year. In addition, the continuing stable to slightly positive trend in emerging market currencies shows that investors still have confidence in the growth prospects of these markets. In our view, the upward trend in commodity prices is an additional indication that global economic activity has gained momentum in recent weeks. We expect that the positive development of emerging markets will sooner or later have a positive impact on the growth prospects of the Eurozone economy through rising export orders for consumer and capital goods. In general, therefore, the sentiment in Eurozone industry should gradually brighten in 2Q19, despite the ongoing Brexit uncertainty as well as the US trade conflict.

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