Intesa Sanpaolo : In the US, the March FOMC saw an upward revision of growth and inflation estimates as well as of the median of rate projections for end-2025…
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Weekly Economic Monitor – 22. March 2024
Intesa Sanpaolo – Research Department
albeit balanced by Powell’s dovish tone in the press conference: we maintain the idea of 75bp of cumulative cuts in 2024, with a first move in June, although the likelihood of the risk scenario with 50bp of cuts, and a first action postponed to the Summer quarter, seems to us to be increasing; at the same time, we reduce our expectations of cuts for 2025, from 100bp to 75bp. In Europe, March confidence surveys showed a moderate improvement in morale, driven by services.
United States.
The FOMC meeting in March saw an upward revision of growth and inflation estimates, as well as the median on rate projections for the end of 2025, albeit balanced by Powell’s accommodative tone in the press conference, which ended up prevailing in investors’ considerations (the implied probability in futures of a cut in June rose to 80%, and the expected cuts by the end of 2024 increased to 81 basis points). Our macroeconomic forecast, compared to the Fed’s, sees a slower decline in core inflation, while on the growth front we are more cautious about 2024 but more optimistic about 2025. Overall, the differences are not such as to warrant a fundamentally different baseline scenario from that of the FOMC at the moment, although we believe the risks to the Fed’s baseline scenario on rates are to the upside. We maintain the idea of 75bp of cumulative cuts in 2024, with a first move in June, although the probability of the risk scenario with 50bp of cuts, and a first action postponed to the Summer quarter, seems to us to be increasing. At the same time, we reduce our expectations of cuts for 2025, from 100 to 75 basis points (end-of-2025 fed funds rate target point: 3.75-4.00%).
The week’s data showed signs of improvement in the real estate sector: the NAHB Builders’ Confidence Index rose for the fifth consecutive month in March, returning to expansionary territory for the first time since July last year, both new home openings and new building permits showed a rebound in February after a (weather-related) decline in January, and existing home sales rose a surprise 9.5% m/m in February (a one-year high).
Other signals on the cycle were mixed: industrial production registered only a marginal rebound in February (0.1 % m/m) after January’s -0.5 % m/m decline, and surveys showed a broad decline in Empire Manufacturing but a recovery in the Philly Fed, while the PMI survey saw an acceleration in manufacturing (to 52.5, highest since June 2022) but a slowdown in services (to 51.7). Overall, the new economic information does not fundamentally change the outlook.
Next week, the main focus will be on the PCE core deflator, the Fed’s preferred inflation measure (due out on Friday 29): we expect monthly growth to moderate slightly to 0.3% from January’s 0.4% m/m, and a stable annual increase to 2.8%; the headline deflator is seen accelerating to 0.4% from 0.3% m/m, and to 2.4% to 2.5% y/y. Personal income is seen to slow to 0.4% after 1% m/m previously, while spending should accelerate to 0.4% from 0.2% m/m (thus resulting in a rise in the savings rate). New home sales are expected to accelerate in February. Durable goods orders should show only a partial rebound in February after January’s large drop, but the aggregate net of defence and aircraft could grow again, albeit marginally, after the previous month’s stability.
Euro area.
This week, the first confidence surveys for March were on average better than expected (especially outside the manufacturing sector). The composite PMI rose more than expected, to 49.9 from 49.2 previously, returning to close to the threshold separating expansion from contraction in activity for the first time since June last year; the recovery was driven byservices, which saw an acceleration to 51.1 from 50.2, while the manufacturing index surprisingly dropped to 45.7 from 46.5. In Germany, there was an improvement for both the Ifo and ZEW indices, although both were mainly driven by expectations for the future rather than assessments of the current situation. The INSEE indices in France also improved, both in manufacturing (from 101 to 102), showing plans to increase company production, and in the composite index of business morale (from 98 to 100).
Conversely, the industrial production figure in Italy was much lower than expected, highlighting that industry in the narrow sense is unlikely to return to support GDP in the short term. The figure points to downside risks for Italian GDP in the current quarter, even compared to our estimate of a slowdown to 0.1% q/q after the 0.2% seen in the second half of 2023: in general, even for the next 3-6 months, an acceleration in services (which would be consistent with the signals coming from the sector’s PMI) is necessary to prevent a contraction in GDP, given that industry in the strict sense, and probably also construction after the Superbonus race at the end of 2023, could dampen added value.
The March round of business surveys will be completed next week with the European Commission survey, which should see a recovery in both industry and, to a greater extent, services, with the composite ESI index at 96.1 from 95.4 in February. Italy should also see a rebound in business confidence indices, driven by services and trade, after the March decline. In France we should see a rebound after the previous month’s decline, but only a partial one, both for consumer confidence in March and consumer spending in February, and March inflation should fall to 2.6% from 3.1% previously (on EU harmonised data). Finally, after the unexpected slowdown in January, M3 growth could pick up by two tenths to 0.3% y/y in February; in general, monetary aggregates data have now passed the low point but credit indications are not yet consistent with a reacceleration of the cycle in the short term.
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