Intesa Sanpaolo : In the US, the new economic data, together with Powell’s remarks, caused a further retreat in market expectations on rate cuts: now investors are no longer even fully discounting two Fed interventions by year-end.
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Weekly Economic Monitor – 19. April 2024
Intesa Sanpaolo – Research Department
Next week, we could see more upside surprises in GDP data, and possibly in the PCE deflator. In the Eurozone, the April confidence surveys will be released, which we believe could give on average signs of a moderate recovery in economic activity.
United States. The data released this week also confirmed the resilience of the economy: in particular, the retail sales figure was significantly higher than anticipated, showing, in addition to an upward revision to February’s figures, an acceleration in March of all the ‘core’ aggregates (in particular, the ‘control group’, the one most related to national accounts consumption, recorded 1.1% m/m from 0.3% in February). Industrial production grew in line with expectations by 0.4% m/m in March, but again the previous month’s figure was revised upwards (from 0.1% to 0.4% m/m). The April surveys were also positive, with both the Empire Manufacturing index and the Philly Fed improving. More negative were the indications on the housing market: the NAHB Index remained stable at 51 in April, but there was a larger-than-expected decline in both housing starts and building permits, and in existing home sales in March.
Fed’s Chairman Powell explicitly stated that, due to the recent upward surprises in inflation data, it will be necessary to wait longer than previously anticipated before cutting interest rates. Powell emphasised the lack of further progress in the CPI after the rapid decline in the latter part of last year, adding that if price pressures persist, the Fed may hold rates steady for “as long as needed”. Powell’s remarks were complemented by Vice-Chairman Jefferson’s comments that the persistence of inflation warrants keeping rates high for longer, and those of Richmond Fed Governor Barkin, who said that some recent data have not been supportive of the ‘soft landing’ scenario. The market is now no longer fully pricing even a September rate cut and only 40 basis points of easing are priced by the end of 2024. We have recently revised downwards the expected size of Fed cuts for this year from three to two, but the risk at the moment is that the easing will be even less than that.
Next week, the focus will be on the March PCE deflator, which is expected to grow 0.3% m/m as in February, and to slow marginally year-on-year, to 2.7% (with upside risks) from 2.8%, on the core aggregate. Income and personal spending should maintain significant monthly growth rates (0.5% and 0.6% m/m, respectively). The preliminary estimate for GDP in Q1 will be released: we expect a possible upside surprise compared to consensus expectations, at 2.6% q/q ann.. April PMIs are seen little changed in both services and manufacturing. Durable goods orders are expected to show an acceleration in March, maintaining a growth pace of 0.3% m/m, as in February, excluding transport. Finally, new home sales should rebound in March after the decline seen the previous month.
Eurozone. This week, the macro agenda was light and brought no particular news in the outlook. The ZEW index, which measures the 6-month expectations of financial analysts and institutional investors on the German economy, showed a further improvement (for the ninth month in a row, at over two-year highs), but the assessment on the current situation, although recovering for the second month, remains at depressed levels. Industrial production in the Eurozone recorded only a partial rebound in February (0.8% m/m, in line with expectations) after the sharp decline of -3% m/m the previous month, for an annual change that remains, at -6.4%, close to the lows since the Spring 2020 lockdown.
Next week will see the release of the April confidence surveys, from which we expect encouraging signals, on average:
– Flash PMIs should show widespread progress in manufacturing and services in Germany, France and the Eurozone as a whole. Recent signs of recovery in world trade suggest a pick-up in industrial morale, and the previous month’s reading had already shown a softening of the contraction in production and orders: the manufacturing PMI is expected to move in a less recessionary direction, to 46.8, after the decline to 46.1 recorded in March. In services, the previous month’s survey had shown a return to expansionary territory in new orders and a marked improvement in expectations: we expect the services PMI to improve to 52 from 51.5 previously. The PMI composite could therefore rise to 50.8 from 50.3, a level consistent with moderate GDP expansion after the stagnation seen between late 2022 and early 2024;
– In Germany, the IFO index could rise for the third month, we estimate to 88.8 from 87.8, with progress widespread to expectations (to 88.7 from 87.5) and assessments of the current situation (to 88.9 from 88.1). As in the March survey, progress is likely across all major sectors; the survey could signal that the worst is over for German industry as well;
– In France, the INSEE survey for the manufacturing sector is expected to stabilise at 102, for the third month above its historical average. The Banque de France survey at the beginning of the month recorded expectations of a slight increase in production, but it confirmed that the recovery is not widespread as it is driven by aeronautics and electronics (as well as agrifood) in the presence of persistent weakness in the other sectors. In contrast, consumer confidence should rise by one point to 92;
– In Italy as well, Istat surveys are expected to show an improvement both for manufacturing business confidence (for the second month, to 89 from 88.6), in the wake of the recovery in expectations reported in the March reading, and for consumer morale (at 96.8, after the drop to 96.5 recorded the previous month), although the rebound in this case could be dampened by the recent fuel price hikes;
– The European Commission’s preliminary estimate of the consumer confidence index is expected to improve for the third month to -14.4 from -14.9, as suggested by the previously published GfK and IPSOS surveys.
Also on the calendar is the M3 growth figure, which we see accelerating to 0.7% y/y in March from a previous 0.4% y/y. The monetary aggregate should have passed its low point, but still offers no prospects for a decisive reacceleration of the economic cycle in the short term.
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