Intesa Sanpaolo : November consumer price data for the Eurozone and major countries are expected next week: for the euro area average, we expect a further decline to 2.7% from 2.9% in October (but we think inflation may rise again, to 3.5%, in December)…
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Weekly Economic Monitor – 24. November 2023
Intesa Sanpaolo – Research Department
the EU Commission’s ESI and Istat indices in Italy will complete the November round of confidence surveys, which has so far seen a partial recovery in sentiment, which however remains at levels consistent with an economy that is at best stagnant even between late 2023 and early 2024. On the fiscal policy front, Italy avoided a tout court rejection of its 2024 budget and received an improved outlook from Moody’s; however, the political events of the last few days in Northern European countries could complicate reaching an agreement at EU level on the reform of fiscal rules. In the US, data on personal income and spending and the consumption deflator, as well as the ISM manufacturing, should confirm the economy’s ’soft landing‘, in a context of gradual cooling of inflationary pressures.
Eurozone. Next week, the European Commission’s ESI, and the Istat indices in Italy, will complete the November round of confidence surveys, after this week’s flash PMIs and the national surveys Ifo in Germany and Insee in France, while breaking the downward trend, confirmed the downside risks on economic activity at the turn of the year. In particular, the flash PMIs rose again, offering some indication of stabilising activity, but remain at levels consistent with an economy at best stagnant at the end of 2023. The consumer confidence index, while rising more than expected, also stays well below its historical average, suggesting that, despite early signs of a recovery in purchasing power, households remain very cautious in their spending decisions.
Investors‘ attention will mainly be on preliminary consumer price data for November in the major countries and the Eurozone as a whole: for the euro area average, we see a further decline to 2.7% from 2.9% in October (but we think inflation may pick up again, to 3.5%, in December); we expect the same for German inflation, seen slowing by three tenths in November (to 2.7% on the harmonised index), before picking up again next month. For Italy, we expect both HICP and NIC to fall further this month (to 1.2% from 1.8%, and to 1.1% from 1.7%, respectively), and to remain at about the same levels in December.
Also on the calendar are the October data on the M3 monetary aggregate (which, although still contracting year-on-year, should have passed its low point) as well as on the unemployment rate in both Italy and the Eurozone. The first estimate of the November manufacturing PMI in Italy and Spain is expected to show a lesser pace of contraction in activity, after the large drop in October.
The account of the October ECB meeting confirmed that the central bank formally maintains a tightening bias and wants to avoid an „unwarranted loosening of financial conditions.“ On the other hand, however, the ECB judges progress on the inflation front to be roughly in line with expectations and is increasingly aware that the economic picture in the eurozone is weakening, so much so that it is looking ahead to a possible technical recession before the still expected re- acceleration in 2024. Despite the ECB’s maintenance of a tightening bias, markets continue to expect a full quarter-point cut by June and more than a half-point decline by September-a scenario that, in our view, is only possible if there is a significant contraction in economic activity between late 2023 and early 2024.
Tuesday saw the EU Commission’s verdict on the member states‘ Draft Budgetary Plans: among the major countries, only Spain was found to be in line with the recommendations (along with Cyprus, Estonia, Greece, Ireland, Lithuania and Slovenia). Germany and Italy (together with Austria, Luxembourg, Latvia, Malta, the Netherlands, Portugal and Slovakia) are considered to be ’not fully in line‘ (Germany is asked to phase out the measures against high energy prices, Italy is ‘accused’ of not having used the savings resulting from the expiring of energy measures to contain the 2024 deficit to a greater extent). The most delicate situation is that of Belgium, Finland, France and Croatia, which risk being out of line and are therefore asked to take the necessary measures to contain the increase in net expenditure. Overall, for Italy the recent news on the debt front has been positive, given that a tout-court rejection of the 2024 budget by the Commission has been avoided, and after Moody’s maintained its Baa3 rating on Italian sovereign debt last week but improved its outlook to ’stable‘ from ’negative‘. This news flow was reflected in a drop in the 10-year Btp-Bund spread to 175bp, a two-month low.
The week just ended was full of significant political events. In Germany, the Constitutional Court’s ruling, which prevents the use of funds originally intended to tackle the pandemic emergency for climate protection-related programmes (around 60 billion), forced the Government to suspend the vote on the 2024 budget law, which was scheduled for Thursday 23rd. An agreement between the different souls of the executive seems far away at the moment, and, considering that the last Bundestag meeting of the year is on 15 December, the possibility of a ‘provisional budget’ to enter in force cannot be ruled out. One possibility for overcoming the impasse would be to propose that parliament votes on a state of emergency for 2024 (a procedure that will also be used for expenditure in 2023). In the Netherlands, the elections saw Wilders‘ Freedom Party win
37 seats, followed by the centre-left coalition (25 seats). Wilders will, therefore, have to find a majority in the parliament (consisting of 150 seats) by seeking an agreement with the VVD (24 seats) and the New Social Contract (20 seats), who have not ruled out a dialogue with the most voted party. Following the Dutch vote, reaching agreements at EU level will become more challenging on several fronts (reform of EU tax rules, aid to Ukraine, climate change policies).
United States. Next week will see the release of data on personal income and spending in October and consumer confidence (as measured by the Conference Board) in November, which should provide more arguments for a slowdown in consumption in Q4. The PCE deflator could confirm the comforting signals coming from the CPI, slowing to 3% y/y on the headline index (from 3.4%) and 3.5% y/y on the core index (3.7%), touching a low since June 2021. As for the latest November surveys, the ISM manufacturing is expected to rebound moderately after October’s large drop (due in part to strikes in the automotive sector), but should remain at levels still not consistent with an appreciable recovery in industrial activity. Also on the mid-week calendar is the release of the Beige Book ahead of the mid-December monetary policy meeting.
Meanwhile, signs of contraction in the real estate market multiplied: the NAHB index fell to 34 in November, not far from the lows reached in the last decade only in April 2020 and December 2022, and existing home sales fell by -4.1% m/m in October, to the lowest in more than 13 years, with the mortgage rate at a two-decade high. October’s durable goods orders figure, net of recent volatility due to Boeing orders, anticipates substantial stability in equipment investment in the current quarter (after -3.8% q/q ann. in Q3).
Finally, Tuesday’s Fed minutes did not change significantly the outlook for monetary policy, confirming the central bank’s restrictive stance, which intends to keep rates high until there is sufficient evidence that inflation is falling sustainably towards the 2% target. The October labour market and CPI data, released after the last FOMC, reinforced the view that the central bank has ended its policy rate hike cycle; markets now expect a full 25bp cut by June, plus two quarter- point cuts by September and three-quarters of a point cuts by end-2024 (we continue to believe these expectations are overly dovish, given the resilience of the economy and that the slowdown in employment, wage and core price dynamics will be slow)
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