Intesa Sanpaolo : The European Central Bank preferred to proceed according to plan, raising rates by 50bp this week.
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Weekly Economic Monitor – 17. March 2023
Intesa Sanpaolo – Research Department
The ECB emphasised the soundness of the European banking system on the capital and liquidity front, as well as the possibility to intervene to support liquidity and against market fragmentation if necessary. However, financial tensions led the central bank to drop the guidance on future rate trends. Should the financial tensions ease, in our view the current economic development would justify further hikes of 50 to 100bps.
Fed caught between two fires: financial risks and persistent inflation . The recent turmoil in the U.S. banking system has complicated the monetary policy scenario and revolutionized market expectations. On the macroeconomic front, early 2023 data showed increasing risks of high and persistent inflation and a still tight labor market. On the financial front, signs of stress to the banking system are increasing. We expect that, if liquidity-supportive measures succeed in keeping the banking crisis circumscribed, the FOMC should proceed with a 25bp hike and signal an end point for rates at 5.5%, conditioning its actions on evolving conditions in the banking system. Forward guidance will be limited due to extreme uncertainty.
The week’s market movers
In the euro area , the first set of March confidence surveys should confirm the recovery of economic activity in 1Q. The manufacturing PMI is expected to close back in the no-change threshold, whereas the services PMI could correct, after surging in February. The composite PMI should be roughly unchanged compared to February. The consumer confidence index should continue along its “normalisation” course. By contrast, the ZEW index could be negatively affected by the recent turmoil in the markets. Lastly, construction sector output in the Eurozone should rise back in January, after two months on the decline.
This week in the United States focus will be on the FOMC meeting, particularly important in a phase in which risks of financial instability have increased, on top of persistent inflation risks. The Committee’s updated projections and the evolution of macro data should result in a 25bps rate hike being implemented despite the tensions in the banking sector, so far contained by the joint action of the Fed and the Treasury. For what concerns February data, new home sales should correct somewhat, while existing home sales are forecast to recover. Orders of durable goods should confirm a moderately positive trend, net of transport. March flash PMIs are forecast in line with a contraction in the manufacturing sector, as opposed to a modest expansion in services.
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