Intesa Sanpaolo : The ECB cut its growth and inflation estimates, and Christine Lagarde’s wording seems consistent with our idea of a first rate cut on 6 June.
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Weekly Economic Monitor – 08. March 2024
Intesa Sanpaolo – Research Department
For the Fed we also confirm the idea of a June start to the accommodative cycle, but if the February data on the labour market and inflation were to surprise on the upside again as in January, the chances of a postponement of the first cut to the following months would increase.
Eurozone.
The most important event of the week was the ECB Governing Council meeting. The news came from the staff’s new projections, which incorporated a downward revision of the numbers for both growth and inflation in 2024 (to 0.6% from 0.8%, and to 2.3% from 2.7%, respectively); most importantly, the estimate for the 2025 HICP was revised down by a tenth, to 2%, essentially setting up the target to be reached as early as next year instead of 2026 as previously expected. What Christine Lagarde said in the press conference seems to us consistent with our view (only a few weeks ago misaligned with the market and now substantially in line with investors’ expectations), which includes a first rate cut on 6 June and three total 25-basis-point cuts this year (although the possibility that there may eventually be four cuts cannot be ruled out entirely).
This week, the January industrial production numbers in Germany, France and Spain, apart from a pronounced volatility on a monthly basis also due to issues in seasonal adjustment procedures that emerged in the post-pandemic era, confirmed that it is still early to see a recovery in manufacturing activity. In Germany, output showed a partial rebound (1% m/m) after the previous month’s decline (-2% m/m), but order data and confidence surveys suggest that weak demand will continue to weigh on activity in the short term (we recently cut our forecasts for German GDP, from 0.2% to zero for 2024 and from 1.5% to 1.1% in 2025; this also results in a lower expected acceleration for the Eurozone next year, to 1.3% from a previously estimated 1.5%). In France, not only did output fall much more than expected in January (-1.1% m/m), but the previous figure was revised downwards (from 1.1% to 0.4% m/m), confirming that December’s robust increase was due to seasonal anomalies and did not represent a turnaround. Overall, the already released national data, also assuming a correction in Ireland after the exceptional jump at the end of 2023, are consistent with industrial production in the Eurozone (due on Wednesday 13) declining by around -1% m/m in January, after the previous figure of 2.6% m/m (which will most likely be revised downwards).
Otherwise, the coming week in the Eurozone looks to be poor in terms of relevant economic data. The final inflation readings in the four major economies should not hold any particular surprises, confirming the generalised decline in February (with the sole exception of Italy, where there was stability for the month). Our current euro area inflation estimates are lower than those of the ECB for 2025 (at 1.8% for both the headline and core index).
As for the remaining data released this week, the February PMIs were revised upwards, by four tenths for manufacturing, to 46.5, and by two tenths for services, to 50.2 (to the highest since last July). In particular, the services PMIs of Italy and Spain surprised to the upside, at 52.2 and 54.7 respectively, in both cases the highest since May last year. In Italy, Istat reported the new quarterly GDP series consistent with the annual data released on 1 March: 2023 expansion (on a working day adjusted basis) is now estimated at 1% (from 0.7% previously), with the carry-over growth for 2024 up from +0.1% to +0.2%. In the euro area, PPI fell more than expected in January (-0.9% m/m, as in December, for a year-on-year change still in broadly negative territory, to -8.6% from -10.7%), and retail sales were broadly stagnant in the same month after December’s broad decline (-0.6%m/m), for a year-on-year change down further to -1% from -0.5% previously. Overall, therefore, the week’s data did not change the economic picture much, showing only renewed weakness in the industrial sector against a (moderate) reacceleration of demand in services. Our estimates for economic growth in the Eurozone remain lower than those of the ECB staff, both for this year (0.4% vs. 0.6%) and for 2025 (1.3% vs. 1.5%).
United States.
Powell used his two-year testimony to Congress (Humphrey-Hawkins) to reiterate that the Fed is in no hurry to cut interest rates, that it remains alert to inflation risks and therefore does not want to loosen its grip too quickly. The few changes from recent wording suggest that the Fed’s baseline scenario remains the one consistent with the December FOMC projections of around 75bp of rate cuts over the course of 2024 (and with our idea of a first cut, also for the Fed as for the ECB, in June). The stream of speeches from influential contributors such as Bostic, Mester, Collins, Kugler and Barkin, Daly and William (voters), as well as Goolsbee and Kashkari (non-voters) reaffirmed on average a confidence in the ‘soft landing’ scenario, emphasising the importance of a cautious and data-dependent approach, which does not seem consistent to date with a start of the accommodative cycle before 12 June. On the contrary, in the event of an upside surprise on the February payrolls and CPI data, it cannot be excluded that expectations will shift to the FOMC on 31 July or 18 September.
The Beige Book prepared for the FOMC of 19-20 March reports that overall economic activity increased slightly compared to the beginning of January. Consumer spending, particularly on retail goods, showed a downward trend, also influenced by increased price elasticity. Employment increased at a slight or modest pace in most districts, with a further easing of tensions in the labour market. Almost all districts reported an improvement in labour supply, although wage growth continued in all districts, but at a slower pace, aligning more closely with historical averages. Price pressures remained, but some districts reported some moderation in inflation.
On the subject of the presidential race, Super Tuesday closed with few surprises. Donald Trump strengthened his position to win the Republican nomination, having won in 14 of the 15 states; Nikki Haley announced her withdrawal from the White House race, adding that she will not give her endorsement to Trump. Biden also swept the Democratic caucuses. Both candidates have lost supporters since 2020 but, barring any legal (for Trump, less and less likely) or health (for Biden) hitches, it is very likely that we will see a repeat of the Biden-Trump clash of four years ago next November. In the meantime, difficult balances are being sought in Congress to avert the renewed spectre of ‘shutdown’. The next deadline for the approval of a deal to break the impasse is midnight today (Friday 8 March).
On the cyclical data front, pending this afternoon’s employment report, and after the surprise drop in the ISM manufacturing index released on 1 March (to 47.8 in February, from 49.1 the previous month), with in particular a return to recessionary territory in new orders and a further decline in hiring intentions, this week showed instead an upward revision in the manufacturing PMI index released by S&P (to 52.2 in February, from 51.5 in the preliminary estimate and 50.7 in January). However, the ISM services index fell more than expected, to 52.6 from 53.4 previously, showing an improvement in new orders but a return to contractionary territory in the employment component. The S&P Services PMI was also revised upwards, to 52.3 from a preliminary 51.3 and from 52.5 in January. Factory orders fell -3.6% m/m in January (-0.8% net of transportation), and
durable goods orders net of defence and aircraft were revised upwards (to zero, on a monthly change). Perhaps the biggest surprise of the week was the much higher-than-expected increase in car sales in February (to 15.8 million), which fully recovered the 15.4 million decline recorded in January. In sum, economic indications were mixed; most nowcasting indicators now see GDP growth in the current quarter between 2% and 2.5% q/q ann. (slightly below our own estimate).
Next week, the most important data on the calendar will be the February CPI (on the agenda on Tuesday 12th): a growth of 0.4% m/m is expected for the headline index and 0.3% for the core; on a yearly basis, the headline index is seen stable at 3.1%, the core slowing to 3.7% from 3.9%. Producer prices (on calendar Thursday 14) are expected to show smaller monthly increases, of 0.3% and 0.2% m/m for the headline and core indices respectively. Retail sales are seen partially recovering in February after the drop in the first month of the year (0.6% m/m, 0.4% net of cars), as well as industrial production and capacity utilisation: the intensity of the rebound should clarify to what extent January’s weak data were to be considered temporary because they were spoilt by the particularly bad weather conditions. Finally, the preliminary March consumer confidence figure released by the University of Michigan is expected to show a substantial stabilisation (at 77) after February’s decline
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