Intesa Sanpaolo : In the U.S., the Fed has revised upward its projections on inflation and consequently the level of rates (only one cut is now expected by the end of the year, as opposed to the three anticipated in March);
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Weekly Economic Monitor – 14. June 2024
Intesa Sanpaolo – Research Department
..yet, recent developments in CPI and PPI data, in a context where the cycle is weakening and the labor market may be less strong than suggested by the May payrolls, lead us to maintain the idea of two possible rate cuts this year (in September and December). In Europe, the event of the week was the elections for the renewal of the EU parliament, from which there could be consequences, not so much for the composition of the new Commission, but because a shift of domestic governments toward more nationalist positions would imply backward steps on the road to greater fiscal integration at the EU level; next week, a verdict is expected on the opening of an Excessive Deficit Procedure, which seems a foregone conclusion, among the major countries, for France, Italy and Belgium.
United States.
The FOMC has revised upward its inflation projections and, consequently, those on the level of rates: the median of FOMC members‘ expectations now incorporates only one cut by the end of 2024 (from the three anticipated in March), while the projected declines in 2025 have increased from three to four. However, we believe that the upward revision in inflation projections is largely due to the stronger-than-expected Q1 data, but the April and, especially, May readings on CPI (which showed notably a noticeable moderation in non-housing services prices, in an environment where deflationary pressures from core goods persist and indeed intensify) and PPI were encouraging, and progress toward the 2% target was acknowledged both in the FOMC statement and, repeatedly, by Powell remarks. In summary, we do not judge the June FOMC as markedly hawkish, also because participants are very split between one or two rate cuts this year. Because we do not rule out positive inflation surprises over the Fed’s projections, in an environment where the cycle is losing momentum and the labor market, while still strong, is rebalancing, we maintain our view of two fed fund rate cuts this year, with a first move expected in September and a second in December.
Next week, the most important data coming out in the United States is likely to be May retail sales, which will give clues on the possible evolution of consumer spending in the current quarter, after April numbers showed a -0.3% m/m decline in the so-called „control group“: a rebound is expected in May (0.3% m/m), but, if the figure disappoints, it would be a further signal of declining vigor of the consumer, consistent moreover with the depletion of post-pandemic extra-savings and rising default rates on credit cards and consumer loans. A sign of loss of momentum in the real economy could also come from the June PMI indices, expected to slow in both manufacturing (to 51 from 51.3) and services (to 53.4 from 54.8). Conversely, Empire Manufacturing and Philly Fed could show a modest rebound in June after May’s decline. Finally, industrial production and capacity utilization should have returned to growth in May after stalling in April. Overall, hard data for May could be less negative than weak figures seen in April, but not such as to reverse the trend of gradual, albeit moderate, slowdown in the cycle.
Euro Area.
The week was rather poor in terms of data releases: industrial production in April surprised on the downside both in Italy (where output dropped a surprise -1% m/m after -0.5% in March) and in the Eurozone as a whole (where there was a one-tenth correction after the half- point increase seen the previous month). The indications are consistent with our forecast of a quarterly slowdown in GDP in both the Eurozone (to 0.2% q/q) and Italy (to 0.1% q/q) in the current quarter, as services continue to contribute positively but industry is still stagnant and construction is dampening growth.
The event of the last week was the elections for the renewal of the European Parliament, which were broadly consistent with opinion polls in the aggregate. The consequences, however, in terms of domestic policies are potentially disruptive, and important implications for future EU policies could also follow from them: the government that will be formed after the early elections called for June 30-July 7 in France could see a sharp shift to the right, toward more extreme and Euroskeptic positions. Besides, it could exacerbate the difficulties already manifested earlier in reducing the government deficit. Repercussions for the stability of the governing coalition in Germany cannot be ruled out either: the debate on the 2025 budget is making little progress and the FDP may be tempted to break ranks. A shift of the main governments toward more nationalist positions could imply not only a possible downsizing of some of the flagship programs of recent Brussels policies (such as the green deal), but also a reduction in the chances of progress in the direction of greater fiscal integration at the EU level, which would have potentially negative implications for high-debt countries.
Next week, the most important data in the Eurozone will be the June flash PMI indices, expected to offer further signs of gradual albeit moderate acceleration in economic activity from the summer quarter. We think the composite PMI may rise for the sixth consecutive month, to 52.7 from 52.2, due to a smaller contraction in manufacturing (to 48 from 47.3 previously, as last month’s rise to a 14-month high was driven by improvement in the more forward-looking components) and a reacceleration in services to 53.6 from 53.2 (the previous month’s slight decline masked an improvement in expectations and new orders). The German ZEW index is expected to show a further recovery in June for both expectations and the current situation; a modest increase should also be seen for the French INSEE. June’s preliminary estimate of consumer confidence according to the EU Commission survey is seen improving for the fifth month, we estimate at -13.4 from a previous -14.3, on the heels of the ongoing recovery of purchasing power lost in recent years, although this is still partial and leaves household morale at levels below the long-term average. Finally, the labor cost data will close out the round of wage surveys in Q1, and, consistent with the indications already released on hourly, per-employee and contractual earnings, should see an acceleration at the beginning of the year; in our view, wage growth will remain elevated in the rest of the year, but Indeed high-frequency data on job vacancies and the ECB’s anticipatory indicator on contractual salaries suggest that the peak should have been reached. On June 20, the ECB publishes the Economic Bulletin.
On June 19, the European Commission will present the Semester Package, which will contain its decision on the possible opening of Excessive Deficit Procedures (EDP) for member states with deficits above 3% of GDP. The opening of an EDP appears to be a foregone conclusion, among the largest countries, for Italy, France and Belgium; more uncertain is the decision regarding Spain, for which the Commission may judge that the deviation is of minimal magnitude, and temporary in nature. Country recommendations should also be sent to national governments, as well as technical trajectories (which, however, will not be made public) for the preparation of multi-year fiscal plans to be submitted by Sept. 21
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