Intesa Sanpaolo : Next week will be dominated by the ECB Governing Council meeting: we think recent developments in the macroeconomic scenario should allow a new 25bps cut of the depo rate.
Abonnieren Sie unseren kostenloser Newsletter
Weekly Economic Monitor – 06. September 2024
Intesa Sanpaolo – Research Department
In the United States, August price data, following labor market figures, should be consistent with a gradual easing of the degree of the Fed’s monetary tightening in the coming months.
Euro area:
In the week ending today:
Industrial production in Germany and France fell again on a monthly basis in July (by as much as -2.4% in Germany, and -0.5% in France), after rising in June. Overall, manufacturing output in the Eurozone is on course for a new contraction in Q3, and confidence surveys signal that a recovery in the coming months is unlikely.
The second reading of Q2 GDP data showed in the euro area a downward revision of a tenth to 0.2% q/q: note the large decline, for the second consecutive quarter, in investment (-2.2% from -1.8% q/q previous), and the unexpected, albeit marginal, drop in consumption (the first since Q4 2022): in our view, downside risks to growth in the eurozone are growing, as industry keeps shrinking, construction suffers in several countries, and services also appear to be losing momentum; on the demand side, the export increase seen in the Spring quarter may be episodic given the ongoing slowdown in other major economies, and the recovery in household purchasing power is struggling to translate into higher consumption: overall, we do not expect, in the short term, a change of pace for the European economy, which will maintain weak growth (not far from H1 average) at least until next Spring. In Italy, growth was confirmed at 0.2% q/q: construction surprised to the upside, thanks to growth in the non-residential sector that offset the correction in residential investment, and there was a contraction in exports: in our view, downside risks on both residential construction and exports could continue to characterize the coming quarters, while we could see a pickup in investment both in machinery after the entry into force of the „Transition 5.0“ incentives, and in non- residential construction in the wake of the implementation of the NRRP; recovery in consumption, particularly of goods, appears to be postponed until 2025.
In France, Macron has given the task of forming a new Government to Michel Barnier, a member of Les Républicains with a long political career in Paris and Brussels. The names of ministers will be announced in the coming days, and Barnier will present his programmatic address to Parliament. The attempt is to get the support of the center and moderate right-wing parties, and it is possible that the Rassemblement National will decide to abstain on the motion of censure the left-wing coalition is likely to present. Yet, the executive will be fragile and forced to find a laborious synthesis between the demands of the different political areas. The first stumbling block will be the presentation of the budget bill that must go before the National Assembly on Oct. 1, and which will force the Government to make difficult choices and significant spending cuts if only for minimal compliance with EU fiscal rules.
Next week:
The focus will be on the ECB Governing Council meeting: after Summer data showed a sharp slowdown in wage growth, a decline in inflation roughly in line with staff expectations, and a somewhat weaker real economy performance, we think the scenario is consistent with a new 25bps official rate cut at the September 12 meeting. The deposit rate will therefore drop to 3.50%. The ECB will confirm its data-dependent approach, with meeting-by-meeting decisions. As markets are tempted by the assumption of rate cuts at every meeting, it is possible that the ECB will decide to cool down enthusiasm a bit to ease the pressure on the October meeting. As before, this will happen outside of formal communication, that is, in answers to journalists‘ questions and in post-meeting statements. Recall that the rate on the Main Refinancing Operations will be set at 15bps above the Deposit Facility Rate instead of 50bps. The narrowing of the corridor has no implications for monetary policy positioning (the guiding rate now is the DFR). However, it will reduce the risk of rate tensions when the drain on excess reserves becomes more advanced.
As far as the macroeconomic calendar is concerned, the July round of data on industrial production will be completed: in Italy, after growth of half a percentage point in each of the last two months, we see a possible correction in July; in the Eurozone, the m/m drop could be close to one percentage point; overall, there are no signs of a significant rebound in either goods consumption or international trade, which is not consistent with an imminent recovery in manufacturing activity.
In Italy, the Medium-Term Fiscal Plan that will outline the trajectory of the next budget should be approved by the Council of Ministers by the end of next week. It is possible that the resources to be found ahead of the 2025 Budget Law could be reduced to around 10 billion due to a possible frontloading of spending to this year (after data on Central Government cash borrowing requirements have shown an improvement in recent months), and, perhaps, due to a possible upward revision of GDP growth estimates. In any case, to ensure compliance with EU fiscal rules, the 2025 deficit target will have to be set at no more than 4% of GDP (from 3.7% under current legislation last April).
United States:
Highlights of the first week of September were as follows:
Confidence surveys: mixed signals. August data continued to show a divergence between a shrinking manufacturing industry and the still-growing service sector. The manufacturing ISM saw a less pronounced recovery than expected, to 47.2 from 46.8, but new orders fell to 44.6 from 47.4, to the lowest since May last year; in contrast, the services ISM rose marginally to 51.5 from 51.4, with new orders at 53 from 52.4 previously.
The services PMI also rose, to 55.7 from 55 in the preliminary survey, while the manufacturing index was revised down a tenth to 47.9 from 49.6 in July; this brings the composite PMI to 54.6 in August from 54.3 in July.
Hard data: indications of resilience of the economy (at least outside construction). Q2 GDP was revised upward to 3% from 2.8% q/q ann., thanks mainly to consumption (2.9%, from 2.3% previously estimated), while private investment was revised downward to 7.5% from 8.4% q/q ann. In July, factory orders rebounded significantly (5% m/m, the largest monthly increase since July 2020), after a -3.3% decline in June, with 0.4% m/m growth excluding transportation. Conversely, construction spending contracted -0.3% m/m in July, although growth in the previous two months was revised upward.
Labor market: payrolls up again, but vacancies fall. Ahead of the August employment report to be released later today
– which is expected to show a rebound to 165k for payrolls, after July’s very weak figure, with the unemployment rate expected to decline marginally again, and wages moderately (and temporarily, we believe) reaccelerating
– the JOLTS data showed a drop in vacancies to 7.67 million in July from 7.91 million in June: it is the lowest level since January 2021; the vacancy-to-unemployed ratio marked a new low at 1.07, down from 1.17 in the previous month, confirming the trend of gradual rebalancing between labor supply and demand.
Income and personal spending: still solid picture for consumption. In July, both disposable income and household spending accelerated again (to 0.3% and 0.5% m/m, respectively). The savings rate fell to 2.9%, a low since July 2022.
Prices: still strong trend for services. The headline and core PCE deflators both registered increases of 0.2% m/m in July, for an unchanged annual change in both cases, at 2.5% and 2.6%, respectively. The monthly contribution from goods was almost nil, following the large decline in previous months (-0.6% m/m cumulative between May and June; but the decline for durable goods continued: -0.3% m/m), while the services deflator increased by 0.2% m/m (3.7% y/y).
Monetary policy: toward easing, but gradual. The Beige Book prepared for the Sept. 17- 18 FOMC meeting indicates that economic activity is stagnant or declining in three- quarters of the districts, compared to less than half in the July edition; three districts reported slight growth, while nine reported flat or declining activity; employment remained stable, with few layoffs and modest wage growth; companies filled only essential positions, often reducing hours worked; consumption declined, and auto sales were hurt by high interest rates and high prices; manufacturing activity fell in many districts, and real estate showed mixed results; the outlook remains mostly stable, with possible slight declines in activity. On the front of speeches by FOMC members, pending today’s remarks by Williams (New York Fed) and Waller (Board), the only one among the central bankers to speak was Bostic (Atlanta Fed), who recommended a balanced approach to monetary policy, warning of the risks of both excessive tightening and premature easing. Overall, in our view the picture of a moderate slowdown in the cycle, the labor market and inflation is consistent with a gradual easing of the degree of monetary tightening, namely with two/three 25bps cuts by the Fed this year and a total 100bps next year (in other words, we expect less aggressive cuts than those now being priced in by markets).
Next week in the United States:
The most important data point is that on August CPI, expected to show 0.2% m/m growth, stable from July, which would bring annual inflation from 2.9% to 2.6% y/y, a low since March 2021 (we do not rule out downward surprises due to the large drop in fuel prices). Core prices are also expected to rise by 0.2% m/m as in July, again with a stable annual change (at 3.2%).
August’s PPI is seen reaccelerating to 0.2% m/m, after July’s 0.1% m/m, but the annual change is expected to slow to 1.8% from 2.2% previously; the core index is also seen rising 0.2% m/m (after the previous month’s stability), for a year-on-year change upward to 2.6% from 2.4% previously.
Finally, the consumer confidence index released by the University of Michigan is expected to rise in the preliminary September survey, to 69 from 67.9 in August.
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
