Intesa Sanpaolo : In the US, the April CPI data, accompanied by signs of a less robust cycle (which we believe will also be confirmed by indicators to be released next week), are consistent with the Fed starting a round of rate cuts this year, but not before September in our view.
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Weekly Economic Monitor – 17. May 2024
Intesa Sanpaolo – Research Department
In the Eurozone, the May PMIs are expected in the coming days to confirm that the economy is recovering, driven by the services sector; this week, the Commission’s Economic Forecasts showed a more favorable outlook on the inflation front and confirmed the GDP recovery scenario, but signalled a rise in public debt in several countries, including Italy, France and Belgium.
United States. This week, data showed on the one hand a moderate easing of inflationary pressures, at least on consumer prices (slowing to 0.3% m/m in April from 0.4% in March, with the annual change down from 3.5% to 3.4% on the overall index, and from 3.8% to 3.6% on the core, a two-year low), thanks in particular to a cooling of pressures on non-housing services (0,2% from 0.8% m/m), on the other hand a lower vigor of demand, particularly for consumption, as revealed by April retail sales, which were unchanged (after rising 0.6% m/m in March) and down by -0.3% m/m on the ‘control group’ aggregate (the most related to national accounts consumption), after the 1% m/m growth seen in March; the loss in consumption momentum appears consistent with the recent decline in household morale (the Conference Board’s index in April hit its second lowest value since early 2021), with the ongoing rise in delinquency rates on loans (in particular, on loans for car purchases and on credit cards), and with evidence of complete unwinding of the extra-savings accumulated during the pandemic (which, according to the San Francisco Fed’s estimate, have landed in slightly negative territory after peaking at 2.1 trillion in mid-2021).
Industrial production also disappointed expectations, coming in at a standstill in April (and the March figure was revised from 0.4% to 0.1% m/m), with a -0.3% decline in the manufacturing sector alone. In the real estate sector, also in April, housing starts recorded only a partial rebound after a slump in March, and building permits surprisingly fell for the second month; in addition, the NAHB Builders‘ Confidence Index dropped again in May, to 45, after having been in mildly expansionary territory (51) in the previous two months. The other May surveys have also been negative so far, having shown a surprise decline for the NY Fed’s Empire Manufacturing (-15.6 from a previous -14.3) and a larger-than-expected slowdown for the Philly Fed (to 4.5 from 15.5).
Overall, if the signs of cooling service price dynamics continue, and are accompanied by moderation in consumer demand and labor market (as evidenced by the April data), this development would be consistent with the start of a rate cut cycle by the Fed. However, April data do not make a summer, and it will take, in our view, a streak of at least three months of encouraging data especially on the core PCE deflator front (in the 0.1-0.2% m/m area) to induce the FOMC to concretely consider rate cuts. In our view this could happen but not in time to trigger a first move as early as by the late July FOMC. Our forecast of two Fed rate cuts this year (starting on Sept. 18) seems „balanced“ to us at the moment (prior to recent data, the risk was that the US central bank would further postpone the start of the accommodative cycle, but the recent flow of macro data makes this less likely).
Prior to the release of the April CPI data, there had been further rather hawkish-sounding speeches from Fed officials. Governor Powell himself, speaking after the April PPI release (which had surprised to the upside), had reiterated the need for a cautious approach on rates after recent upside surprises in the price data; Powell, however, had added that he thought rate hikes were unlikely. Several FOMC members had also confirmed a rather hawkish stance: these included Jefferson (vice chair), Schmid (Kansas City Fed, non-voting) and Kashkari (Minneapolis Fed, non-voting); conversely, Goolsbee (Chicago Fed, non-voting) and Mester (Cleveland Fed) had reiterated more accommodative tones. Something may change, however, after the encouraging CPI data in April, which may cause some Fed members to ease their concerns about the stickiness of inflation.
Next week’s agenda in the U.S. is rather light, but data should confirm signs of less robust economic cycle seen recently: durable goods orders are expected to slow in April, to 0.3% m/m after 0.9% in March (revised from an earlier 2.6% m/m), but could be little changed for the second month excluding transportation; May PMIs are seen to show a drop into recessionary territory for the manufacturing index, and further deceleration for the services PMI. On the housing front, sales of both existing and new homes could correct after strong increases in the previous month, partly due to the rise in mortgage rates in April. Finally, the minutes of the FOMC meeting concluded on May 1 will be released.
Euro Area. This week, the EU Commission’s Spring Economic Forecasts showed, as expected, a downward revision of inflation estimates (to 2.5% in 2024 and 2.1% in 2025, from 2.7% and 2.2%, respectively), while the GDP growth forecast was confirmed at 0.8% on 2024 and reduced by a tenth on 2025, to 1.4%. Our current estimates are only moderately lower than those of the Commission on both growth and inflation. For Italy, the public finance estimates for 2025 diverge from those of the government in that they include a deficit-financed renewal of measures (mainly tax cuts) that should expire at the end of 2024 (worth 20 billion): finding coverage will be the main economic policy challenge to be faced in preparing the budget for next year; in addition, the climb in the debt ratio is more pronounced than estimated by the Italian administration due to lower nominal GDP growth (real GDP: 0.9% vs. the Govt’s 1% in 2024, 1.1% vs. 1.2% in 2025; GDP deflator: 2.2% vs. the Govt’s 2.6% this year, 1.8% vs. 2.3% next year), as well as the fact that the Commission’s estimates, lacking details, do not include the privatization plan announced by the Government. The trajectory of debt at unchanged policies also sees a climb in 2025 for France and Belgium, among others.
The week’s macroeconomic calendar in the euro area offered few insights:
– In Germany, the ZEW survey (conducted not among businesspeople but among financial analysts and institutional investors, thus influenced by the recent stock market rally) showed a further improvement in morale in May, widespread both to expectations (from 42.9 to 47.1, a high since February 2022 i.e. since the Russian invasion of Ukraine, against a historical average at 20.9) and to the current situation (from -79.2 to -72.3, a value that is, moreover, still far below the historical average, which stands at -11.1);
– Industrial production in the Eurozone rose for the second month in March, by 0.6% m/m after the partial rebound of 1% m/m seen in February; however, the aggregate was supported by the volatile Irish figure (12.8% m/m), net of which output in the Eurozone would have fallen by -0.4% m/m;
– Also in the Eurozone as a whole, employment growth stabilized at 0.3% qoq in Q1, confirming the moderately slowing trend year-on-year, at 1% from 1.2% in the previous quarter; GDP, in the same quarter, was confirmed to expand by 0.3% qoq.
Next week’s focus in the Eurozone will be on the May flash PMIs, which are crucial in assessing whether after a better-than-expected Q1 the recovery can consolidate during the spring. At the moment the picture is one of an economy driven by services against a manufacturing sector that is struggling to rebound. Industry, however, may also be close to stabilizing: we see a slight improvement, albeit to still recessionary levels, in the manufacturing PMI, to 45.9 from a previous 45.7. In contrast, the services PMI is expected to slow to 53 from 53.3 in April. The composite PMI is seen to remain in expansionary territory for the third month, at 51.5 from 51.7 previous, slowing slightly after two months of sharp increases. As for other data coming out over the next week:
– The May preliminary estimate of the European Commission’s consumer confidence index should confirm the gradual recovery trend (we estimate at -14.5 from -14.7);
– In Germany, the second estimate of GDP will provide the component cross-section, which is expected to show a decline for private consumption against a positive contribution from net exports and investment (the latter likely driven by construction);
– In the Eurozone, production in construction is expected to grow for the fourth month in March, we estimate by 0.5% m/m from a previous 1.8% m/m, supported by progress in Germany and France. Thus, in Q1 the sector should have contributed positively to value added formation, but, especially in some countries such as Germany, growth could be explained by favorable weather conditions: this effect may already be returning in the current quarter;
– Finally, the data on negotiated wages in Q1 is on the calendar: national contract renewals, as well as higher frequency Indeed surveys, seem to suggest that the peak for wage growth has now been passed (we estimate a deceleration to 4.1% from a previous 4.5%).
In an interview with Nikkei published today, Schnabel (ECB) voiced support for a rate cut at the 6 June meeting, while being cautious about the continuation of the easing phase. This is because of the remaining uncertainty factors that could still hamper the achievement of the inflation target: in her view, the risks are related to the cross-cutting developments in wages, productivity and profit margins, but also to the possibility of new supply-side shocks. Therefore, he said, “based on the data, a rate cut in July does not seem warranted”. Schnabel’s statements are completely in line with what the markets discount already and with our central forecast, which sees the subsequent cut only in September.
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