Intesa Sanpaolo : Next week is packed with economic indicators, but the main focus will be on the CPI data in the Eurozone and the core PCE deflator in the US, which will provide further indications as to the timing and extent of the rate cuts expected this year on both sides of the Atlantic.
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Weekly Economic Monitor – 23. February
Intesa Sanpaolo – Research Department
Euro area
Next week, the February round of confidence surveys will conclude with ISTAT’s surveys in Italy and the European Commission’s surveys for the euro area as a whole. The flash PMIs offered moderately encouraging signals, especially in the services sector (the relative index returned to 50, at the highest level since July last year), against a manufacturing sector that, especially in Germany, remains in difficulty: the German manufacturing PMI, after having risen – though remaining in recessionary territory – in each of the last six months, returned to fall in February, to 42.3 (however, less negative indications came from the Ifo, which recovered slightly in the same month). Indeed, even in industry, surveys outside Germany seem to have stopped deteriorating: in France, the manufacturing PMI rose more than expected to 46.8 in February, and the INSEE rose to 100 from 99 previously: in both cases this is a high since July last year; the manufacturing PMI may also rise in February in Italy (our forecast: 48.7 from 48.5) and Spain (our forecast: 49.5 from 49.2). We expect the European Commission’s ESI composite index of economic confidence to rise as well, from 96.2 to 96.6, due to an improvement in both household (to 15.5 from -16.1 in the preliminary estimate) and business morale (with the likely exception of construction). Istat surveys could also show a further recovery in February after the one already seen the previous month (we estimate consumer confidence at 96.6 from 96.4 and the manufacturing index at 88.8 from 88.3).
Overall, surveys are consistent with a marginal growth of euro area GDP in the current quarter (0.1% q/q), after the stagnation of the previous six months. Yet, against the backdrop of still sluggish world trade, at least in the first part of 2024 the Eurozone will continue to feel the lagged effects of monetary tightening: growth of the M3 monetary aggregate, which returned to positive territory at the end of 2023, may have accelerated slightly to 0.3% y/y in January – a figure which, however, as suggested by the results of the ECB’s latest BLS, should not yet anticipate a significant rebound in credit.
The risks on the expected reacceleration in the second half of the year remain on the downside, but seem more balanced today than a few weeks ago. The main reason why we continue to expect a rebound, albeit moderate, later in the year is the resilience of the labour market. We see the unemployment rate to remain unchanged at 6.4% in the Eurozone and 7.2% in Italy in January, and 5.8% in Germany in February. Businesses’ hiring intentions are still expansionary, and the job vacancy rate remains close to historical lows. Against this backdrop, wage growth could continue: the negotiated wage index released by the ECB this week showed a slowdown (the first since Q2 2022) but remains at very high levels (4.5%, up from 4.7% previously), and the contractual renewals expected in Germany in particular could keep this dynamic sustained in the coming months.
Above all, next week sees preliminary inflation estimates for February in the Eurozone and the major economies in the area: we expect a general slowdown (with the exception of Italy). In Germany we see a price increase of half a point in the month, for annual inflation at 2.6% (from 2.9% on the national index and 3.1% on the harmonized measure last month). Consumer prices in France are also expected to return to growth on a monthly basis (driven by higher fuel prices and planned increases in motorway tolls and excise duties on electric utilities), but the trend is seen at 2.7% y/y from 3.1% on the national measure (2.9% from 3.4% on the HICP). In Italy conversely, annual inflation could rise for the second month, albeit by just a tenth, to 0.9% y/y on the NIC and 1% on the HICP. The data are consistent with Eurozone inflation at 2.6% y/y in February (with some downside risks), from 2.8% the month before. The index excluding energy and fresh food is also seen moderating, to 3.2% from 3.6% in January.
Finally, Italy will release annual GDP and PA deficit figures in 2023: we expect GDP unadjusted for working days at 0.6% in volume (from 3.7% previously) and 4.7% at market prices (from 6.8% in 2022); the PA deficit could stand at 5.9% of GDP, higher than in the NADEF forecasts due to an even higher-than-expected take-up of the Superbonus; the debt-to-GDP ratio in our estimates would fall to 140.5% from 141.7% the previous year (but maintaining a downward trajectory will be much more challenging already from this year). In France, consumer spending is expected to have fallen again in January, we estimate by -0.6% m/m from 0.3% previously, weighed down by the end of car purchase incentives.
The market further downgraded its expectations for ECB rate cuts in 2024 to 75-100bp overall (from 150 expected at the beginning of the year), reducing the implied probability of a first move in April to 35-40%. The further revision this week is partly a side-effect of developments in the US money markets, but also reflects the cautious tones that have emerged from ECB communications – not least, the report of the monetary policy meeting at the end of January.
From the latter, we learned that the return of inflation to target was still perceived as “fragile and dependent on the realisation of several favourable assumptions”. Thus, there was ‘broad consensus’ that a discussion of rate cuts was premature for reasons of ‘risk control’. However, the ECB Governing Council did not think it appropriate to openly contradict market expectations because they reflected a different assessment of future inflation developments from that of the staff, and not a misinterpretation of the ECB’s reaction function. Therefore, the consensus choice was to wait and see how market expectations and new data would change the growth and inflation projections in March. For this reason, the scenario of a first rate cut in April is still not entirely ruled out. On the other hand, the minutes reveal a certain divergence of views among the members regarding the risk of not reaching the inflation target and the strategy to be followed if inflation falls below 2% (although, in the latter case, the internal consensus is that no action will be necessary in the event of non-persistent and large deviations).
United States.
The most notable event of the week out was the release of the January FOMC minutes, which showed that most Fed members were more concerned about cutting rates too fast than keeping them too high for too long. Most participants emphasised the importance of incoming data in judging whether inflation is moving sustainably towards 2%, and the staff gave “some weight” to the possibility that further progress on inflation could take longer than expected; concern also emerged about the recent easing of financial conditions, which could hamper the disinflationary process. Only a couple of members emphasised the risks of maintaining an excessively restrictive policy for too long. Many members stated that it would be appropriate to have an in-depth discussion on slowing the pace of budget reduction at the March meeting. Moreover, the minutes refer to the FOMC at the end of January, which was held before the release of the latest data on the labour market and inflation, which according to Richmond Fed President Thomas Barkin complicate the picture for the central bank in view of the next monetary policy choices; according to Michelle Bowman, the time to lower rates ‘is certainly not now’. The tone of the remarks of other exponents (Bostic, Daly, Waller) was also rather hawkish on average. After the release of January’s higher-than-expected CPI and PPI data, and then in the wake of the FOMC minutes, investors further lowered their expectations of Fed cuts this year, to 79 bp from last Friday’s 93 bp and from around 150 bp expected at the start of the year, basically aligning with our forecast; now, even a first move in June is no longer entirely discounted (but with a 78% probability)
Next week, the most important figure will be the core PCE deflator, the Fed’s preferred measure of inflation (on Thursday 29), which is expected to accelerate to 0.4% m/m in January (highest in almost a year), although on an annual basis we should still see a slight slowdown, to 2.8% from 2.9% (the deflator is seen at 2.4% from 2.6% previously); growth in personal income is seen to gain momentum (to 0.5% m/m) against a slowdown in spending (to 0.2%, with downside risks), resulting in a rise in the savings rate. Durable goods orders should fall sharply in January, but may still show a positive change (albeit decelerating from the previous month) excluding transport. Consumer confidence according to both the Conference Board and the University of Michigan’s second release could show little change in February. Finally, also in February, the ISM manufacturing could improve by a few tenths from January’s 49.1, taking it to its highest level in almost a year and a half.
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