Intesa Sanpaolo : In the euro area, preliminary May inflation data, due next week, are expected to be interlocutory, with HICP headline marginally rising and core indices little changed..
Abonnieren Sie unseren kostenloser Newsletter
Weekly Economic Monitor – 24. May 2024
Intesa Sanpaolo – Research Department
in our view, more evidence of a resumption of the disinflationary process may not come until late summer, making a second ECB rate cut after the one essentially already announced for next month more likely in September than in July; the subsequent evolution is more uncertain, as it is unclear how much real growth will accelerate in second half of the year. In the U.S., the focus next week will be on the April core PCE deflator, seen stable at 0.3% m/m with some downside risk; after the release of the FOMC minutes, and a stream of still hawkish Fed member speeches, the market has lowered its expectations for rate cuts this year, to levels now below our forecast (50 basis points).
Eurozone.
Data on the business cycle in the euro area continue to surprise on the upside: the May round of confidence surveys so far is reassuring. In particular, the composite PMI index rose for the fifth month to 52.3, a one-year high: the contraction of activity in the industrial sector eased (the manufacturing index rose nearly two points to 47.4, a high since February last year, and the leading indicator consisting of the difference between firms‘ assessments of orders and those of inventories returned to positive territory for the first time in two years), and the services sector maintained an expansionary pace (53.3, with an improvement in both new business and expectations about future business). The progress is in Germany and not in France, where there was also a decline in the INSEE manufacturing index (for the second month) in May, to 99 from 100 previously (but there is conversely a recovery in services).
In summary, we maintain our view of a modest slowdown in GDP on a quarterly basis in the current quarter (to 0.2% q/q), as the Q1 figure (0.3% q/q) had been partly affected by temporary factors (favorable weather conditions and the decline in imports). However, we believe that the GDP acceleration expected from the second half of the year onward, and then looking into 2025, is now significantly more certain than it appeared just a few weeks ago.
Next week, the main focus will be on preliminary consumer price numbers for May in the Eurozone and major countries. We believe that this may be rather interlocutory data, which should not shift either the expectation of a first rate cut by the ECB next month or expectations about possible action thereafter. In fact, we see inflation in the euro area to rise marginally to 2.5% in May from 2.4% in April, with the „core ECB“ index (i.e., net of energy and fresh food) stable at 2.8%. Looking ahead, we think that the May to July data on consumer prices in the Eurozone may prove to be interlocutory: the downward trend may not resume, in our estimates, until August. This makes a second ECB intervention (after the essentially already announced one on June 6) in September much more likely, in our view, than in July. The subsequent path of rates is more prone to uncertainty, as developments will depend on how close inflation comes to the target, and how intense the recovery of the cycle will be in the second half of the year. At the moment, we maintain a central scenario of 3 rate cuts by the ECB this year (June, September and December); our forecast for ECB rates, which for all of the past six months has been lower than the market was discounting, is now slightly above investors‘ expectations (57 basis points of rate cuts by year- end).
Other macroeconomic indicators on the calendar next week will include:
The completion of the May round of confidence surveys, in particular:
- In Germany, the IFO index is expected to rise for the fourth month in May, consistent with what the previously published PMI surveys have reported: we see an increase to 90.1 (from 24 May 2024 a previous 89.4), which would represent a one-year high; the progress would be spread to expectations (90.7 from 89.9) and the assessment of the current situation (89.7 from 88.9);
- The Istat confidence surveys in Italy should see an improvement in the morale of both households (to 95.7 from 95.2) and manufacturing firms (to 88.2 from 87.6), following a decline in the previous month;
- The European Commission’s ESI index is also expected to rebound after April’s surprise drop: we see a rise to 96.5 from a previous 95.6, with widespread progress in industry, services and retail trade, while morale could remain weak in construction;
- Finally, French consumer confidence is expected to return to rise one point, to 91, after April’s correction;
The April labor market data, which should show a stabilization of the unemployment rate at 6.5% in the Eurozone and 7.2% in Italy. The labor market continues to show good resilience, and hiring intentions inferred from business confidence surveys remain consistent with a continuation of employment growth in the coming months;
Data on monetary aggregates, expected to register an acceleration of M3 growth in April, we estimate at 1.3% y/y from a previous 0.9%; numbers on credit flows are expected to confirm the trend of substantial stagnation for loans to households and businesses.
United States.
The most notable event of this week was the release of the May FOMC minutes, from which a decidedly hawkish tone emerged compared to the March meeting: most Fed members acknowledged that first-quarter inflation data had not shown progress toward the 2% target. While some members noted widespread price increases, others signaled that volatile components and seasonal distortions may have influenced the readings. Most central bankers maintained their forecast that inflation would return to 2% over the medium term, but believed that such a development might take longer than anticipated. The FOMC discussed the possibility of maintaining the current fed funds rate longer if inflation persists, or reducing it if the labor market worsens; only a few members would be ready to tighten monetary policy further to counter inflationary risks. The committee anticipates a slowdown in GDP, but believes that supply- side factors (a pickup in immigration and productivity gains) could simultaneously support economic activity on the one hand and the disinflationary process on the other.
In any case, the minutes refer to the FOMC meeting that ended May 1, i.e., before the release of April data on the labor market and CPI, which showed a slowdown in payrolls (and wage growth) and an easing (albeit moderate) of inflationary pressures. This week, several Fed members spoke to emphasize the need for further evidence of disinflation before embarking on a path of monetary policy easing: Waller (Board) pointed out that several months of good inflation data will be needed, admitting that a deterioration in the labor market could change his position; Bostic (Atlanta Fed), Mester (Cleveland Fed) and Collins (Boston Fed, non-voting) remain of the view that more time is needed to gain sufficient confidence in the completion of the disinflationary process; Jefferson (Vice President) and Barr (Vice President for Supervision) took „neutral“ positions, stressing that it is premature to conclude that progress on the price front has stalled.
Overall, following the release of the May FOMC minutes, and the still moderately hawkish stream of speeches by Fed officials, the market has returned to moderately lower its expectations for rate cuts this year, to 36 basis points from last week’s 44. As with the ECB, our Fed rate expectations, which have long been more hawkish than the market’s, are now slightly more dovish (we see two fed funds rate cuts by December).
Next week’s focus in the U.S. will be the April Personal Consumer Expenditure deflator data: both the headline and core indexes are seen to grow at similar rates to March (0.3% m/m), with some downside risks; even on a year-over-year basis, we should see stability from the previous month, at 2.7% for headline PCE and 2.8% for core. Numbers on personal income and spending should show a slowdown in April compared to March (in both cases, to 0.3% m/m). On the cyclical front, further signs of moderating growth are expected to arrive, following those already seen in recent weeks: consumer confidence released by the Conference Board could decline further in May, from 97 to 95; March home prices in the two S&P Corelogic and FHFA surveys are seen slowing (from 0.6% to 0.3% m/m and from 1.2% to 0.5% m/m, respectively); the second estimate of Q1 GDP could see a slight downward revision from the 1.6% q/q ann. previous; the Chicago PMI index is seen recovering but still in recessionary territory, at 40.4 in May from 37.9 in April. Finally, the Beige Book prepared for the June 11-12 FOMC will be released.
Appendix
Analyst Certification
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Valuation Methodology
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.
Source: InvestmentWorld
Newsletter
