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Intesa Sanpaolo : European confidence surveys beat expectations

Intesa Sanpaolo : All European confidence surveys beat expectations by far in February.

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Weekly Economic Monitor – 28 February 2020

Intesa Sanpaolo – Research Department


The indices are consistent with a sharp quarterly reacceleration of GDP growth. Therefore, the first three weeks of reports on the COVID-19 epidemic have not damaged sentiment, nor the expectations components of the surveys. However, the arrival of COVID-19 in Italy was widely reported only a week ago, and clusters of cases may soon be detected in other countries.

A decline in confidence indices may therefore only be postponed until March. In any case, even if significant, the impact will be short-lived and therefore irrelevant from the point of view of monetary policy.

The Fed has been cautious so far in its assessment of the potential effects of the early 2020 negative shocks, i.e. the Covid-19 epidemic and the production freeze at Boeing. February data will start to provide more information, which in our view will prompt the FOMC to take a more dovish approach. It is possible that the Fed may have, once again, to follow the ongoing market correction, should the yield curve inversion and the equity market correction persist for a longer period. However, it is too soon for an explicit reversal, that needs further signals of a widespread weakening of economic activity, unlikely to emerge before 2Q.

The week’s market movers

In the euro area , the most important release will be the February inflation rate, expected to slow to 1.2%. Also in the Eurozone, in January, unemployment is forecast stable, whereas retail sales will not recover the loss suffered in December. The second estimate of the February PMI is expected to confirm a recovery of the indices. In Italy, the 2019 deficit should emerge to be under control; details on the decline of GDP at the end of 2019 should highlight the decisive role played by inventories; unemployment is expected to increase slightly in January.

The main data due out in the United States are referred to February and will be useful to assess the initial effects on 1Q growth of the COVID-19 epidemic and of the production freeze at Boeing. The manufacturing and non-manufacturing ISM indices should correct, offering further support to expectations for a slowdown of GDP growth in 1Q. The Employment Report, while still positive, should outline a slowdown in job gains, after the strong January rise, restoring the trend of non-farm payrolls to a more moderate path. Among January data, the trade balance deficit should widen modestly, outlining a negative contribution of net exports to growth, and construction sector spending is forecast higher, helped by unseasonably mild weather conditions. The Beige Book could provide new information on the effects of the COVID-19 and on the production freeze at Boeing on economic activity in February, as well as on business expectations.


Appendix
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