Intesa Sanpaolo : The Fed opted for a first 50bps rate cut, partially surprising markets; however, we expect in the remaining two meetings of the year moves limited to 25bps, in our view more consistent with the economic scenario
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Weekly Economic Monitor – 20. September 2024
Intesa Sanpaolo – Research Department – Luca Mezzomo Economist – Paolo Mameli Economist – Andrea Volpi Economist Euro Area – Mario Di Marcantonio Economist US
next week, too, the U.S. economy may continue to show signs of resilience, and data on the core PCE deflator should not show an acceleration of the disinflationary process. In the Eurozone, from the ZEW released this week came indications of downside risks to the cycle, which could be confirmed by the round of September confidence surveys that kicks off next week.
United States:
In the last week:
Monetary easing kicks off. The dominant event of this week was the FOMC meeting: the Fed opted for a first 50bps rate cut, which came as somewhat of a surprise, but which seems to be due to increased confidence in the completion of the disinflationary process, despite a relatively resilient economy (and labor market). However, we believe that smaller cuts can be expected in the upcoming meetings: since our macroeconomic projections are not much different from the Fed’s new SEPs, we now see (in line with the September FOMC dot plot) two 25bps rate cuts at the November and December meetings, and we maintain our forecast of cumulative rate declines of 100 bp next year.
We have more doubts about the continuation of the easing cycle in 2026 (implied in the dot plot), as we see a higher level of long-term rates than the FOMC forecast (at 3-3.25%).
Consumer spending holds up. August retail sales data were better than expected (0.1% m/m vs. -0.2% expected, albeit slowing sharply from 1.1% in July), thanks in part to lower energy prices; the control group aggregate (the most closely related to national accounts consumption) maintained a solid pace (0.3% m/m, from 0.4% in July). The September preliminary survey of consumer confidence according to the University of Michigan showed an improvement to 69 (the highest since May), from 67.9 in August.
Signs of recovery in manufacturing. Industrial production rebounded more than anticipated in August (0.8% m/m after -0.9%, revised downward due to Hurricane Beryl, in July), and capacity utilization rose to 78% from 77.4% previously. Signs of recovery also came from September surveys: both the NY Fed’s Empire Manufacturing and Philly Fed returned to expansionary territory, from -4.7 to 11.5 (highest since April 2022) and -7 to 1.7,respectively.
Mixed indications on the housing sector. Builders’ confidence, as measured by the NAHB index, rose slightly in September, although it remained in recessionary territory, to 41 from 39 previously. August saw a rebound in both building permits (4.9% m/m, vs July’s -3.3%) and housing starts (9.6% m/m from -6.9%); however, the July figures were distorted by the effects of Hurricane Beryl. Finally, existing home sales fell more than expected again in August (-2.5% m/m from 1.5% in July).
Next week:
Focus on the PCE deflator. In August, personal income is seen to continue to grow relatively solidly (0.4% m/m, up a tenth from the previous month). Personal spending is also expected to increase, but at a more moderate pace (0.3% m/m, slowing from July’s 0.5%); as a result, we should see a rise in the savings rate. On the inflation front, the PCE deflator could see a one-tenth increase in the headline index to 2.3% year-on-year (from 2.5% in July), while the core PCE should maintain last month’s pace (0.2% m/m), for a one- tenth rise in the year-on-year change to 2.7%.
Surveys: mixed signals. September PMIs could see a smaller contraction in manufacturing (to 48.5 from 47.9) and conversely a slowdown in expansion in services (to 55.2 from 55.7). The Conference Board’s consumer confidence index is seen declining
slightly to 102.8 in September from 103.3 in August.
Durable goods orders: little change net of more volatile components. A correction is expected in August after July’s jump (-2.9% m/m from 9.8%), but net of transportation, orders are seen stable after July’s -0.2% m/m.
New home sales: Summer volatility. A decline of -6.3% m/m is expected in August, but again this is a partial correction after the previous month’s jump (10.6%).
The stream of speeches by FOMC members resumes. Powell and Williams will speak Thursday, 26, at the U.S. Treasury Market Conference, and may offer more guidance on the timing and magnitude of upcoming rate cuts by the Fed.
Politics: the ’sword of Damocles‘ of shutdown returns. Congress again faces an imminent deadline to fund the activities of the Federal Government and avoid a partial ’shutdown‘: action is needed by September 30, and an agreement is unlikely to be reached before the last days of the month. Both parties, moreover, seem intent on avoiding a shutdown five weeks before the elections.
Euro area:
This week:
Germany’s ZEW index fell (for the third month) much more than anticipated in September, to 3.6 from a previous 19.2: the drop brings the index back to its lowest level in a year; also, the correction affected assessments of the current situation (-84.5 from -77.3). In France, the manufacturing INSEE, after a large rebound in August, was stable at 99, still below its long-term average, although the composite index of business morale rose one point to 98.
Labour costs slowed less than our expectations in Q2, to 4.7% y/y from 5% (revised downward by one-tenth) in the previous three months; growth is driven by the non-wage component (5.2%), and by the construction sector (5.3%); among the countries with the lowest dynamics is Italy (3.3%).
Next week:
September surveys: downside risks. The special watcher remains Germany after this week’s slump in the ZEW and recent news certifying difficulties in the auto sector. We expect the German Ifo to fall one point to 85.6 (this would be a low since the beginning of the year), with widespread declines to both the current situation assessment (85.8 from 86.5) and expectations (85.5 from 86.8). It is possible that the survey is not yet fully affected by the impact of the floods that hit the Eastern part of the country (along with Austria and Eastern European countries). As for the PMIs for the Eurozone, we expect a continuation of the recessionary trend for the manufacturing sector (45.5 from 45.8), but the services PMI is also seen to correct (to 51.7 from 52.9) after the August figure was buoyed by the impact of the Olympic Games in France; the composite PMI should then stand at 50, a level normally associated with stagnant economic activity. The European Commission’s surveys are also expected to be consistent with only modestly positive GDP growth rates; in particular, the latest business confidence surveys have shown increasing signs of downsizing hiring intentions, now consistent with a sharp slowdown in employment at the end of 2024 (which could be an obstacle to the expected rebound in consumption in 2025). Also due, Istat confidence surveys in Italy, which could show a new drop in the manufacturing index, and the French consumer sentiment print for September, expected to continue the uptrend of the last few months.
Inflation possibly falling in September (but not in subsequent months). Harmonized consumer price indexes in France and Spain are expected to see a decline to 1.7% y/y, from 1.8% previously, and to 2.2% y/y, from 2.4% in August, respectively. The data would be consistent with a further marginal decline in Eurozone inflation in the month, to 2.1% after 2.2% in August; however, in our view the slowdown will not continue in the final months of the year, when conversely, we might see (at least on the headline index) a temporary re-acceleration.
Fiscal policy: more time to submit the new medium-term Fiscal Structural Plans. By the formal deadline of September 20, only two countries (Malta and Denmark) have, as far as is known, sent their Fiscal Structural Plans to the European Commission. According to reports by Reuters, there would be 20 Governments (including those of Italy, Spain and Germany) intent on postponing the submission to October (in the Italian case, the plan will be finalized and sent to Parliament only after Istat unveils the announced upward revision of last years‘ GDP estimate on Tuesday 23, which will have a significant downward impact on the level of the debt-to-GDP ratio). Finally, for other countries such as France, Belgium, and Austria, uncertainties on the political front could further delay the timeline.
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