A Conversation about the Conversation
- 04 March 2024 (10 min read)
- We think the ECB will admit the conversation has started on cutting, but we do not expect a clear timeline. June is still our base case for the first cut.
- There might be green shoots of recovery in global manufacturing, but the signals from China remain uncertain.
- In the US, the January CPI worried us. The PCE version of core inflation did not reassure us.
Many members of the ECB Governing Council have already taken to the wires to opine on cutting rate, so it is unlikely in our view that Christine Lagarde will deny this week that the conversation has started internally. The council is however probably too divided – with varying degrees of patience - for her to embark on a precise discussion of the timeline. The recent dataflow did not send a clear signal. Core inflation fell less than expected in February and the three and six-month momentum suggests a re-acceleration may be ongoing. Yet, the doves can take comfort in the fact the negotiated wages decelerated in Q4 2023 for the first time since the spring of 2022, and they can easily point to the weakness in the real economy to argue against wasting time. The hawks however can argue that the credit impulse has improved lately. We expect the new forecasts to maintain ambiguity and we continue to think that the first cut will come in June. The lack of momentum of the Euro area economy is to some extent a product of the weakness in the manufacturing sector at the global level. Even in the otherwise stellar US economy, the latest ISM index in manufacturing was deep in contraction territory. We look however to the recent rebound of export orders in Taiwan – still the world’s key producer of chips - for early signals of a turnaround in global manufacturing. Still, we think that to solidify a proper recovery more Chinese traction would be needed. The cut in the 5-year LPR rate by the PBOC was an encouraging step, but how the central bank’s signals will be transmitted remains uncertain. Finally, we explore again the inflation dataflow in the US. Two weeks ago, we expressed our concerns over the January core CPI print. The PCE version did not reassure us. The “last mile” of disinflation is decidedly arduous.
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