Intesa Sanpaolo : The most important data for next week will be the April CPI in the US, which is still expected to be strong and probably not consistent with a rate cut by the Fed in the next three months;
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Weekly Economic Monitor – 10. May 2024
Intesa Sanpaolo – Research Department
cyclical data, however, (in particular, retail sales and industrial production) may show less vigour at the beginning of Q2, after the strong close of the previous quarter. In the Eurozone, industrial activity keeps contracting, but services are gaining momentum and leading the recovery, which might slow down on a quarterly basis in the current quarter before reaccelerating in the second half of the year; in any case, the ongoing disinflation process (confirmed by a PPI ex energy at its lowest level since 2009) seems consistent with a first rate cut by the ECB on 6 June. Finally, the EU Commission’s Spring Economic Forecasts are expected to show a trajectory of public debt at unchanged policies that is not fully reassuring for several countries, including France and Italy.
Eurozone.
This week, March industrial production data from major countries disappointed, showing a contraction in Germany (-0.4% m/m), Italy (-0.5% m/m) and Spain (-0.7% m/m), following last week’s release for France (-0.3% m/m). The data may have been negatively influenced by the anticipation of the Easter holidays. In any case, the weak end of the quarter for industry, together with the negative tone of the April surveys, leads us to be cautious in our forecasts for the quarterly change in GDP for the current quarter, which we expect to slow to 0.2% q/q (with some downside risks) after the encouraging 0.3% q/q at the beginning of the year, which was supported in part by temporary factors (favourable weather conditions, a large drop in imports in several countries, the completion of Superbonus-funded works in Italy).
In the face of the persistent weakness in industry, however, growth continued in services, which indeed gained momentum, as shown by the upward revision of the services PMI for the Eurozone in April, to 53.3 from 52.9 in the preliminary reading and from 51.5 in March: this is a high for almost a year. The revision was mainly due to the French figure (51.3 from 50.5 in the previous estimate); the first estimate for Italy and Spain recorded values very close to those, in already largely expansionary territory, in March (54.3 and 56.2 respectively). There are also signs of a revival in consumption, not only of services but also of goods: retail sales in the Eurozone as a whole returned to growth in March, both in the month (0.8% m/m from a previous -0.3%) and over the year (0.7% y/y from -0.5%), although the early timing of Easter may have played a role. Finally, on the inflation front, producer prices fell for the fifth month in a row in March, by -0.4% m/m from a previous -1.1%, for a y/y change at -7.8%, from -8.5% in February; net of energy, the PPI rose for the third month (by 0.2% m/m) but remained at -1.3% year-on-year (this is a low since 2009).
Next week’s macroeconomic calendar in the euro area promises to be poor in terms of relevant indicators:
In Germany, the ZEW survey (conducted not among entrepreneurs, but among financial analysts and institutional investors) is expected to show a further improvement in morale in May, spread to both expectations (49.8 from 42.9) and the current situation (-69.7 from -79.2); recent economic data (more encouraging than expected) and signs of a moderate rebound in global trade should have strengthened the assessments that the bottom of the cycle may have been reached in Germany as well;
Industrial production in the Eurozone is seen to grow for the second month in March, we estimate by 0.5% m/m after the partial rebound of 0.8% m/m seen in February; however, the aggregate will be supported by the volatile Irish figure (12.8% m/m), net of which output in the Eurozone would fall again (we estimate by -0.6% m/m);
In the Eurozone, employment growth is expected to have stabilised at 0.3% q/q in Q1, confirming the trend of a moderate y/y slowdown to 0.9% from 1.2% in the previous quarter; in France, we see a one-tenth drop in the unemployment rate to 7.4% in Q1.
Finally, the European Commission is expected to release its Spring Economic Forecast early next week, which will contain new estimates at unchanged policies on key public finance indicators. The projections may show issues with the debt trajectory for several countries, most likely including France and Italy. Those estimates will provide the framework for the debt sustainability analysis on the basis of which the Commission will outline, for each Member State with debt above 60% of GDP or a deficit above 3% of GDP, a ‚technical adjustment trajectory‘ that will initiate the budgetary planning process under the new EU fiscal framework. The Commission is expected to present its projections to the Eurogroup on Monday. The Ecofin scheduled for the following day will aim to endorse conclusions on the fiscal sustainability challenges that emerged from the ‘2024 Ageing Report’ released by the Commission last month, and will hold an exchange of views on the status of the implementation of the Recovery and Resilience Facility (as well as discuss the current situation in relation to the economic and financial consequences of the Russian aggression towards Ukraine).
United States.
Following the April employment report released last Friday, which showed a deceleration in payrolls, an increase in the unemployment rate and a slowdown in wage growth, the week now drawing to a close was relatively light in terms of economic data:
The ISM services dropped surprisingly to 49.4 in April from 51.4 in March, just the second time it has been in recessionary territory in almost four years. The decline was widespread across all major components and in particular brought both production and employment assessments down to 45.9; new orders, however, held up better, remaining in expansionary territory (52.2 from 54.4 previously); there was also a reacceleration in prices paid, to 59.2, after slowing to 53.4 in March. Less negative signals came from the S&P services PMI, revised upwards to 51.3 from 50.9 preliminary (however, decelerating from 51.7 in March).
Vehicle sales increased to 15.74 million in April from 15.49 million in March; also in the automotive sector in April, the Manheim used-vehicle price index continued to fall (-2.3% m/m, -14% y/y);
The Fed’s April Senior Loan Officer Opinion Survey reported that credit conditions tightened in the first quarter and loan demand weakened at a similar pace to the previous three months; on the household side, banks‘ willingness to lend to consumers improved significantly.
The intense stream of speeches by FOMC members confirmed the growing trend of shifts towards more hawkish positions, motivated mainly by the lack of progress in the disinflationary process. Among the members who signalled this during the week were Bowman (Board), Barkin (Richmond Fed), Kashkari (Minneapolis Fed, non-voting) and Collins (Boston Fed, non-voting).
Remaining on dovish positions were Williams (New York Fed) and Goolsbee (Chicago Fed, non- voting), who mainly emphasised the ongoing moderation in employment dynamics. Next week, the focus in the US will be on the April CPI, which is expected to increase by 0.4% m/m for the headline index and 0.3% m/m on the core, still strong and probably not yet consistent with a rate cut by the Fed in the next three months, although the annual trend should slow for both indices (to 3.4% from 3.5% y/y for the headline index, to 3.6% from 3.8% y/y on the core CPI); a more moderate increase (by 0.2% m/m) is expected to be recorded by the PPI (both headline and core) and import prices.
As for the real economy, data may show less vigour at the beginning of Q2, after the strong end of the previous quarter. The most important piece of data will be retail sales in April, which are expected to slow down after a very strong month in March, both on the overall index (0.4% m/m from 0.7% previously) and, above all, net of the more volatile components (sales net of cars, net of cars and gasoline, and the ‚counter group‘ aggregate, are expected to grow by just one/two tenths, after the more than one percentage point jump recorded the previous month). Industrial production is also seen to slow down in April, although continuing to expand, at 0.2% m/m (half the pace seen in March). Conversely, in the real estate sector, both housing starts and building permits are expected to rebound in April after March’s large drop. Finally, the first May surveys could be mixed, showing less negative values for the NY Fed’s Empire Manufacturing (expected at -10 from a previous -14.3) and conversely a deceleration for the Philly Fed (around 8.5 from 15.5 previously).
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