Intesa San Paolo : The main economic events on next week’s calendar concern the Eurozone: the rise in inflation for the second month (to 2.3% in November, according to our estimates) was expected and should not worry the ECB, which at this stage seems more focused on the downside risks to the growth scenario.
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Weekly Economic Monitor – 25 November 2024
Intesa Sanpaolo – Research Department – Luca Mezzomo Economist – Paolo Mameli Economist – Andrea Volpi Economist Euro Area – Mario Di Marcantonio Economist US
These risks should be confirmed by the completion of the November round of confidence surveys (Ifo, Istat surveys and EU Commission indices are due out next week). In the United States, the first nominations announced by the Trump administration seem to signal, at least on the economic policy front, more moderation than the announcements made during the election campaign; the star of the first 100 days may not be the introduction of universal trade tariffs but a wave of deregulation.
Eurozone:
This week:
The November flash PMIs once again surprised to the downside, with unexpected declines in both the manufacturing index (from 46 to 45.2) and the services one (from 51.6 to 49.2); the composite PMI fell from 50 to 48.1, its lowest level since January. The contraction in service sector activity, which was widespread in Germany and France, is worrisome and signals a risk that the sector may no longer be able to offset the ongoing weakness in industry. The downside risks to the Eurozone economy are growing significantly.
The INSEE survey in France showed a recovery, albeit not a full recovery, in manufacturing business morale in November, to 97, following a decline to 93 in October. However, the composite index dropped to 96 from 97 previously, due to increased pessimism in retail trade, construction and especially services.
The consumer confidence index released by the European Commission surprisingly dropped significantly in November to -13.7 from -12.5, returning to its lowest level since June.
Negotiated wages accelerated broadly in Q3, from 3.5% y/y to 5.4% y/y (however, below our expectations). The rise was mainly due to Germany, where a high since 1993 was reached (8.3% y/y); yet, this should be a peak, after the renewal signed last week by the IG Metal union (covering nearly 4 million workers) implies more moderation, with increases of 2% in April 2025 and a further 3.1% a year later (the demand was 7% in 12 months). We think negotiated wage growth will slow in the coming quarters, but remain at rates above inflation.
The second reading of German Q3 GDP saw a downward revision of a tenth from the first estimate, to 0.1% q/q, after the figure for the previous three months was revised downward to -0.3% q/q. The cross-section of demand components confirms that growth was driven by public and private consumption (0.4% and 0.3% q/q, respectively), while investment contracted, albeit marginally. A significant negative contribution came from foreign trade, given the large decline in exports (-1.9% q/q) in the presence of a slight increase for imports.
We think GDP may be stagnant in the current quarter. Relevant downside risks remain on the expected recovery next year (after two years of GDP contraction).
Next week:
IFO, Istat and European Commission surveys close November confidence survey round: general decline expected. In Germany, the IFO could fall again after rising in the previous month, with the expectations component in particular likely to start feeling the effects of uncertainty related to the complex domestic and international political environment: we see a decline to 86 from a previous 86.5, with current situation assessment at 85.4 from 85.7 and expectations at 86.6 from 87.3. In Italy, the November Istat surveys are seen to show a new decline in both household (to 97 from 97.4) and business (to 93 from 93.4) morale, again especially in manufacturing (to 85 from 85.8). The EU Commission’s surveys are expected to show a decline in business confidence in both industry (to -13.4 from -13) and services (to 5.9 from 7.1); together with the already reported drop in consumer sentiment, this should be consistent with a decline in the ESI composite index to 94.8 from 95.6.
The November flash estimate of consumer prices for the Eurozone as a whole is expected to show an increase in inflation to 2.3% y/y from a previous 2%, mainly due to the reversal of the base effect on the energy component, which should continue to push up price growth through the end of the year. The core component (excluding fresh food and energy) could also rise by a tenth to 2.8% yoy after two months of stability. A temporary reacceleration of prices was expected at the end of 2024, but according to our estimates, inflation should remain below the ECB’s September forecast and, barring any significant surprises, should not be a particular concern for the ECB board, which currently seems more focused on the downside risks to the growth scenario (which, as we have said, are materially increasing). In Italy, inflation could rise to 1.4% y/y both on the harmonized index and on the NIC.
Finally, M3 growth may increase in October, to 3.4% y/y from a previous 3.2%. In recent months we have begun to see a slight upward trend for loans to households and businesses, which we expect to have continued, at a still modest pace, in October.
United States:
In the last week:
October retail sales exceeded expectations (buoyed by autos), rising 0.4% m/m, though slowing from September (0.8% m/m, revised upward from 0.4%). The control group aggregate, the most related to national accounts consumption, showed a surprise decline (-0.1% m/m), but the September figure was revised upward to 1.2% m/m from an earlier 0.7%. Overall, consumption dynamics could remain relatively robust in Q4.
Industrial production declined for the second consecutive month in October (-0.3% m/m from -0.5% in September), but the contraction was attributable to the Boeing strike (-0.2%) and the effects of hurricanes (-0.1%): net of these factors, output would have been unchanged for the month; in our view, a gradual recovery is possible in the coming months. The capacity utilization ratio also fell further, to 77.1%, the lowest level since April 2021.
November surveys: mixed signals. The fading of election uncertainty and the end of the dockworkers‘ strike may have been behind the broad rebound in the NY Fed’s Empire Manufacturing index, which rose from -11.9 to 31.2, a nearly 3-year high. In contrast, the Philly Fed index fell again, from 10.3 to -5.5.
Weakness in the housing sector continues: hurricanes weighed on October data on both housing starts (-3.1% m/m from -1.9% previous) and building permits (-0.6% m/m vs -3.1% in September). In the same month, existing home sales rebounded by 3.4% m/m after a – 1.3% decline in September. The NAHB index measuring builder confidence remained in recessionary territory in November, although it surprisingly rebounded from 43 to 46 (a high since last April).
As for the stream of speeches by Fed members, less dovish tones were used by Bowman (Board), who remains doubtful about progress on inflation and sees greater risks on achieving the price stability target, and Cook (Board), who warned that if inflation progress slows, there could be a pause for rate cuts. Schmid (Kansas City Fed, non-voting) said that if the new administration’s policies prove to be inflationary, the Fed would react.
More dovish indications came vice versa from Williams (NY Fed), who said that inflation is expected to slow further and therefore rates could fall from current levels, Collins (Boston Fed, non-voting), according to which more rate cuts are needed, and Goolsbee (Chicago Fed, non-voting), who believes the neutral level of rates to be at significantly lower levels than at present.
After gaining control of the House and Senate, President-elect Donald Trump is preparing to unveil his cabinet, subject to Senate confirmation. The first appointments include prominent figures such as Marco Rubio (Secretary of State), with an interventionist approach toward China, and Pete Hegseth (Secretary of Defense), an advocate of military spending and national security. Appointed to the key role of Trade Representative is Howard Lutnick, who during the campaign was a leading proponent of policies to increase tariffs and reduce corporate taxes, but who does not appear to favor universal but selective tariffs. More controversial choices include Matt Gaetz as Attorney General, known for his uncompromising positions on justice and immigration, and Robert F. Kennedy Jr. at Health, who may propose deregulation policies in the healthcare sector.
To overcome possible objections to these appointments, Trump’s team is reportedly considering using the „recess appointments“ procedure to bypass the Senate, despite legal difficulties related to the 2014 Supreme Court ruling. For the position of Treasury Secretary, candidates such as Marc Rowan, Scott Bessent, Kevin Warsh and Robert Lighthizer remain in the running, which could mark decisive breakthroughs in fiscal policy and in relations with the Federal Reserve. Deregulation (in energy, finance, and technology) could dominate the first 100 days of the new administration, which hopes through this tool to generate productivity gains, a wave of innovation, and a lowering of energy costs such that a supply shock can be generated to offset the inflationary impact of trade restrictions, fiscal expansion, and lower inflow of immigrants. However, in our view, the benefit may be temporary if the economy is pushed beyond full employment; moreover, deregulation is often followed by boom & bust cycles, with possible creation, and subsequent bursting, of asset bubbles (especially if monetary policy is constrained by low inflation).
The following data/events are on next week’s calendar, pending the preliminary November PMI readings due out later today, which are expected to improve slightly, and the final reading of the University of Michigan’s Consumer Confidence Index (an upward revision to the first estimate is expected):
Household income and spending in October should remain robust: income is seen to grow by 0.3% m/m as in September, consumption could maintain a solid pace (0.4% m/m), albeit slowing by a tenth from September. The PCE deflator is expected to maintain the same pace as the previous month on both the headline (0.2% m/m) and core (0.3%) index, for a year-on-year change in both cases up (2.1% to 2.3%, and 2.7% to 2.8%, respectively).
Consumer confidence according to the Conference Board is seen rising again in November, to 113 from 108.7.
Durable goods orders may show only a partial rebound in October (0.3% m/m) after falling -0.7% the previous month; orders net of transportation may slow from the 0.5% pace seen in September.
New home sales are expected to fall again in October (-1.4% m/m) after the 4.1% rebound seen in September.
The October trade deficit could improve to -99.2 billion, from -108.2 in the previous month.
Finally, on Tuesday, the 26th, the minutes of the FOMC meeting held on November 7 will be released
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