Intesa Sanpaolo : The most important market mover on next week’s calendar is the October CPI figure in the US, which is expected to fall again after rising in recent months…
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Weekly Economic Monitor – 10. November 2023
Intesa Sanpaolo – Research Department
we may also see the first symptoms of growth cooling after the robust expansion seen in the summer quarter. In the Eurozone, signs of cyclical weakness are intensifying, now affecting not only industry but also services; in the coming week, the first confidence survey for November (the German ZEW) will be released, which is unlikely to change the picture. Also on the calendar are the EU Commission’s Autumn Economic Forecasts. At the end of the week, Moody’s pronouncement on Italian sovereign debt is expected.
Eurozone. This week, the September data on industrial production in Germany and Italy, as well as retail sales in the Eurozone, confirmed a picture of generalised cycle weakness at the end o the Summer, which could extend to the current quarter, for which we now estimate no longer a marginal rebound in GDP, mirroring the one-tenth drop seen in Q3, but stagnant economic activity at best. Indeed, a “technical” recession at the end of 2023 cannot be ruled out entirely, given that: 1) the manufacturing sector remains in contraction and shows no signs of reversing in the short term; 2) there are increasing indications of a deceleration, in some countries even a very marked one, in services; 3) no boost is to be expected from construction, the most interest- sensitive sector and which could therefore suffer from the impact of monetary tightening the most. On the other hand, it would, in our view, take a significant contraction in GDP to induce the ECB to start an accommodative monetary policy cycle as early as next Spring, as now implied by the OIS curve: in the presence of stagnation, or only a modest downturn in economic activity, the ECB could take more time to assess whether the ongoing disinflationary process is consistent with achieving its price stability objective over the medium term; indeed, we think that, after the downward acceleration seen in October – induced by significant base effects -, inflation could pick up again in the coming months, settling in next spring at values not dissimilar to those seen last month, just below 3%; also, substantial progress has yet to be seen on the core ECB inflation front, which stood at 5% y/y in October.
Among the major Eurozone economies, short-term risks appear most pronounced in Germany and, albeit to a lesser extent, in Italy. German manufacturing remains in a crisis with few precedents, and the marked drop in industrial output in September (-1.4% m/m, -3.7% y/y) leaves a heavy negative statistical legacy for the final quarter of 2023, when a new GDP contraction cannot be ruled out. At this stage, the German economy seems to suffer from at least partly structural criticalities stemming from a development model centred on world trade (which is struggling to recover), and characterised, moreover, by an unfavourable specialisation of exports both geographically (given the links with Asia and Eastern Europe) and by sector (given the high weight of energy-intensive sectors, which seem to be suffering from a permanent loss of production capacity following the energy crisis). In Italy, where industry was essentially stagnant in Q3 (production was unchanged in September, against expectations of a slight decline) and services disappointed expectations of a reacceleration, the readings of the PMI indices in October surprised sharply downwards (47.7 from 49.9 in services, 44.9 from 46.8 in manufacturing), and are consistent with GDP at best stagnant even between the end of 2023 and the beginning of 2024. Finally, the Ecofin ended as expected in a deadlock on the EU fiscal rules reform front, but the Spanish Presidency has announced a new text for the coming days on which a new extraordinary Ecofin could be convened at the end of the month.
Next week’s macroeconomic calendar in the euro area looks poor in terms of relevant indicators.
In addition to the second reading of the October consumer price and Summer GDP numbers, the Q3 employment growth figure will be published, which we still estimate to be positive; at the moment the labour market remains robust, although we expect a slowdown in hiring and a modest increase in unemployment in the coming quarters, in the wake of a weakening economic cycle. The ZEW survey, the first for November, may show less pessimism in the outlook, but with assessments of the current situation at their lowest since Summer 2020. Less relevant, as it is anticipated by the national readings, is the September industrial production figure for the euro area as a whole, which is seen as declining. On 15 November, the EU Commission’s Autumn Economic Forecasts are expected, preliminary to the preparation of Brussels‘ opinion on the national Draft Budgetary Plans, which should arrive the following week. Finally, on Friday, with the European markets closed, the last and most awaited pronouncement on Italy’s sovereign rating is scheduled, by Moody’s, whose current rating (the most pessimistic among those of the four main agencies) is only one step above the non-investment grade category (Baa3/negative).
United States. After an interlocutory week, which saw only the release of the data on the trade deficit, which worsened (more than expected) in September (to USD 61.5 bn, after the lowest deficit in almost three years had been reached in August), next week’s calendar is particularly busy. The most important market mover will be October’s CPI, which is expected to slow down again both year-on-year (to 3.3%, from 3.7% in the previous two months) and month-on-month (to 0.1%, from 0.4% in September and 0.6% in August); the core index is seen at 0.3% m/m, 4.1% y/y (stable from the previous month). The downward trend in inflation, which should be confirmed by the cooling of m/m growth in the PPI, could be accompanied by the first signs of a slowdown in the cycle in the current quarter: the October data could show a correction on a monthly basis for both industrial production and retail sales (output in industry should feel the effects of the strikes in the automotive sector, and the weakness in sales appears consistent with the correction in household confidence, the cooling of the labour market and the evidence of thinning margins for the use of savings). Finally, real estate market data should show no signs of recovery in the sector, which so far appears to be the only one significantly dampened by monetary tightening, and which we expect to contribute negatively to GDP growth in the first part of next year as well.
In summary, the data coming out next week may provide further arguments that the Fed’s rate hike cycle may be over. As in the case of the ECB, however, we think that the US central bank is unlikely to cut rates as early as the first half of the year as markets have started to discount, as the economy remains more resilient than anticipated, and it takes time for the incipient cooling of labour demand (together with the trend of increasing supply through higher participation and a greater contribution from immigration) to be reflected in an effective removal of excess demand on the labour market: only in this context does the prospect of significantly reduced wage and core price pressures appear credible, opening the door to a possible reversal of the monetary cycle.
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