Intesa Sanpaolo : Next week’s meeting of the ECB Governing Council is expected to be an interlocutory one..
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Weekly Economic Monitor – 05. April 2024
Intesa Sanpaolo – Research Department
the data of recent weeks, and in particular the fall in inflation in March (to 2.4% from 2.6% previously), in our view do not hinder the cautious approach to the easing phase, but neither do they make an immediate start compulsory, also because there are signs, albeit timid for now, of a moderate recovery in both industry and services activity. In the US, the March payrolls and CPI will clarify whether or not the doubts about the start of the expansionary monetary policy cycle in June, which have begun to emerge among investors, are well-founded.
Eurozone. The main news this week was the higher-than-expected drop in inflation in March, to 2.4% from 2.6% y/y previously. Like last month, however, the drop was mainly due to fresh food. It is true that the ECB core index also fell (but a tenth less than our estimates), to 3.1% from 3.3% (at more than two-year lows), but this was only due to a further decline in annual inflation in non- energy industrial goods, whose prices, however, have rebounded in recent months (+1.9% m/m in March). Conversely, inflation in services has not budged from the 4% pace maintained since last November, but it is possible that the earlier timing of Easter has had an impact, and we may therefore see a fall in prices in April. We confirm our view that inflation could fall permanently below 2% from early 2025 onwards, a path that seems compatible with a first ECB rate cut in June.
Next week’s ECB Governing Council meeting on 11 April is expected to be an interlocutory one. In our view, the data of the last month do not hinder the cautious approach to the ECB’s official rate cut phase, but neither do they make an immediate start compulsory. The approach will remain data-dependent, with meeting-by-meeting decisions. This limits the possibility of giving a clear guidance on the speed of the easing process, but does not exclude that a forecast on the direction of rates can be given, if there is a solid internal consensus. Judging by the statements of the last two weeks, a consensus seems to have formed in favour of an easing of tightening from the 6 June meeting onwards. In our view, the most likely scenario remains that of three 25bps rate cuts in 2024. However, a somewhat larger reduction of -100bpb cannot be ruled out, with two or three moves concentrated between June and September, if inflation and wage data are favourable.
Among the few economic data released next week, the industrial production numbers for February in Germany and Italy are the most relevant. In Germany, output could increase again, albeit more modestly than in January (0.3% m/m from 1%), as suggested by the data on HGV traffic and car production, also thanks to temperatures far above the seasonal average; in Italy, a rebound is expected (by about half a percentage point) after January’s decline (-1.2 % m/m) may have been influenced by anomalies in seasonal adjustment processes. Meanwhile, data for France and Spain were released this week, which saw a partial rebound (0.2% m/m) after the previous month’s decline (-0.9% m/m) in France, and stronger growth, for the second month, in the Iberian country (0.7% from 0.6% m/m previously).
In general, business confidence surveys in the manufacturing sector, while remaining at far from brilliant levels, have shown a coordinated global rebound recently, consistent with signs of a recovery, albeit slow and uneven, in world trade (see charts on p. 6). The recovery in demand for goods, and in international trade, could herald a turning point for the industrial sector, at least in all the major developed countries. The signs of incipient rebound in manufacturing are accompanied in the Eurozone by a reacceleration in services, particularly in the Mediterranean countries, as highlighted recently by the recovery of the services PMI in Italy and Spain (in both cases in broadly expansionary territory and at the highest level for almost a year).
In Italy, next week (probably Tuesday 9) the DEF (Stability Programme) should be released, which will outline the expected trend for the main public finance aggregates in the coming years. However, it should be a ‘light’ document, since the government is not obliged to present its economic policy guidelines for future years, as there is an agreement at EU level to present the first multi-year plans under the new rules next September (therefore, it will most likely be the NADEF at the end of September that will outline the policy targets for 2025-27, which will then be detailed in the budget to be presented in October). GDP growth assumptions are likely to be revised downwards, with a limited impact on the deficit for the time being, but the new fiscal framework is unlikely to prevent the debt-to-GDP ratio from rising already this year (albeit to lower levels than indicated in the September NADEF).
United States. Awaiting the March employment report, which is expected to show a lower growth in payrolls (around 215k, from 275 in February), a stable unemployment rate at 3.9% after February’s rise and hourly wages reaccelerating to 0.3% m/m after the slowdown to 0,1% in the previous month was due to the effect of weather conditions between January and February, the most important data on the calendar next week is the March CPI, expected to slow to 0.3% from 0.4% m/m in the previous month on both the headline and core index; the PPI is also seen to show an increase of 0.3% (from 0.6% previously), with the core PPI expected at 0.2% from 0.3%. The preliminary April estimate of consumer confidence released by the University of Michigan is seen in modest recovery. Finally, the March FOMC minutes will be unveiled.
This week, the March ISM saw a better-than-expected rebound in the manufacturing index, which returned to expansionary territory (to 50.3) as it had not been since September 2022, and conversely a surprise slowdown in services (to 51.4 from 52.6). On Friday, data on personal spending and income in February showed a slowdown in income but a reacceleration in spending (resulting in a fall in the savings rate), with real consumption rebounding by 0.4% m/m from -0.1% in January; the core consumption deflator came in as expected at 0.3% m/m, 2.8% y/y, but the previous month’s figure was revised up by a tenth.
In recent days, the stream of speeches by Fed officials has confirmed that a shift of consensus within the FOMC towards a more cautious stance on rate cuts is underway. Powell himself advocated a very careful handling of monetary policy, emphasising the importance of waiting for further confirmation of the disinflationary process before considering rate cuts, and stating that the Fed will not make any precipitous moves. Kashkari (Minneapolis Fed, non-voting) said that at last month’s US central bank meeting he had expected two rate cuts this year, but “if we continue to see inflation moving sideways, then that would make me question whether we needed to do those rate cuts at all”. Mester (Cleveland Fed) warned against the risks of premature cuts, and Barkin (Richmond Fed) is convinced that keeping rates at a high level may help to bring inflation back towards the desired target. On the other hand, on the dovish side, Goolsbee (Chicago Fed, non-voting) expressed concern about the negative repercussions on employment of an overly restrictive policy, Kugler (Board member) forecasts a drop in inflation that should not weigh on employment, and Daly (San Francisco Fed) continues to consider three rate cuts this year as reasonable.
Overall, the resilience of the economy and the stickiness of inflation make a first rate cut in June more uncertain: unlike for the ECB, there is an increasing risk that we may see only two 25bp cuts this year instead of three as indicated in the latest dot plot, and that consequently the start of the expansionary cycle may be shifted to the Summer quarter.
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