ECB poised for second consecutive cut, while September CPI lands

14 October 2024

Emily Nicol
ECB poised to cut rates in successive meetings as hawks wake up to domestic risks

* When its policy meeting concludes on Thursday, it would now be a huge surprise if the ECB did not cut rates by 25bps for a second successive meeting and a third time since June, taking the Deposit Rate to a 16-month low of 3.25%. The account of the previous policy meeting in September revealed that the balance of views on the Governing Council was already becoming more downbeat about the economic outlook, with members also more alert to the possibility that inflation might eventually undershoot the target over the medium term. And while not universally soft, the economic data published since this meeting have suggested that the ECB’s macroeconomic projections published just last month are overoptimistic. Of course, a wide range of views exist on the Governing Council. And so, it is possible that this week’s rate decision will not be unanimous. Uncertainty about the trajectory of the US economy and events in the Middle East, among other things, mean that the ECB’s forward guidance is bound to repeat that a data-dependent and meeting-by-meeting approach will be maintained. And Lagarde might again be frustratingly unenlightening in her press conference.

Euro area: Final September inflation, ECB Bank Lending Survey and August IP, trade & construction data due

* There will be a handful of top-tier euro area data releases including final inflation figures for September (Thursday), which will include the granular component breakdown. The flash estimate showed headline HICP inflation moderating 0.4ppt to 1.8%Y/Y, the first sub-target reading since June 2021, due principally to a decline in energy prices. Core inflation dropped 0.1ppt to 2.7%Y/Y, as services inflation moderated slightly to a still-elevated 4.0%Y/Y. In terms of economic activity, the coming week will bring August figures for euro area industrial production (tomorrow), goods trade (Thursday) and construction activity (Friday). Based on member state figures published so far, which revealed positive growth in Germany, France and Ireland, we expect aggregate euro area IP to have risen around 1.8%M/M in August. In addition, the ECB’s bank lending survey (tomorrow) will likely signal an easing in credit conditions over the past quarter as the Governing Council cut rates by a cumulative 50bps, but still suggest that high borrowing costs continue to restrain loan demand.

UK: September inflation and August labour market data in focus
* In a busy week for UK top-tier data, the September CPI figures (Wednesday) and August labour market report (tomorrow) will be of significant interest to BoE policymakers ahead of November’s monetary policy meeting and updated macroeconomic projections. In particular, having moved sideways in August, we forecast headline CPI to fall back below the Bank’s 2% inflation target, easing 0.4ppt to 1.8%Y/Y, which would mark the lowest rate since April 2021. It would also come in well below the BoE’s 2.1%Y/Y estimate for September in its August Monetary Policy Report. The decline in September will in part also reflect falling petrol prices (down around 4.0%M/M). However, services price pressures should have eased too. So, we expect core inflation to soften to 3.3%Y/Y, which would further strengthen our expectation for a 25bps cut at the forthcoming MPC meeting.

* Tomorrow’s labour market figures are expected to show that the unemployment rate remained steady at 4.1%3M/Y, the joint-lowest for six months, amid another solid increase in employment. Meanwhile, private sector regular wage growth is also expected to move broadly sideways at July’s more than two-year low of 4.9%3M/Y. But total pay growth will likely take a further drop down, perhaps by around ½ppt to around 3½%3M/Y. In addition, despite positive signals from various surveys, September retail sales figures (Friday) might well show that sales volumes were flat at the end of Q3 following respective increases of 0.7%M/M and 1.0%M/M in July and August. But this would still leave them around 1.8%3M/3M in Q3.

Japan: CPI inflation to take a step down in September due to energy subsidies, but BoJ’s preferred core rate to remain steady at 2%

* A key focus in Japan this week will be national CPI figures for September on Friday. Having risen to a 12-month high in August, headline inflation is expected to take a notable step down last month, by ½ppt to 2.5%Y/Y, a five-month low. Core CPI, excluding fresh foods, is also expected to have fallen ½ppt to 2.3%Y/Y. But this will principally reflect lower energy inflation related to the extension of government utility subsidies – indeed, the forward-looking Tokyo CPI release saw the energy component drop almost 8ppts to 9.5%Y/Y in September. So, when excluding fresh foods and energy, the BoJ’s preferred core measure is expected to move sideways at 2.0%Y/Y, bang in line with its target, while the internationally comparable core inflation gauge – excluding all food and energy – is expected to be steady at 1.7%Y/Y.

* In terms of economic activity, updated industrial production figures for August (tomorrow) are likely to confirm a marked contraction that month (-3.3%M/M) related not least to the effects of a typhoon. Tertiary activity (Thursday) is expected to have declined slightly in August (-0.3%M/M), but only partially offset the rise at the start of Q3 (1.4%M/M). Thursday will also bring goods trade data for September, which are expected to show that the adjusted deficit narrowed to a seven-month low (¥521bn).

US: September retail sales and industrial production

* In the US, September’s retail sales and industrial production figures (Thursday) will provide an update on economic momentum at the end of Q3. Daiwa America’s research team expects sales values to be flat in September, in part due to a drag from gasoline stations amid the drop in prices that month. But excluding autos and gasoline, sales are expected to have risen 0.3%M/M, marking the fifth consecutive monthly increase. And this would leave both total and core (excluding autos and gasoline) up more than 1% over the third quarter as a whole. Meanwhile, US industrial production is also expected to have been flat at the end of Q3, but this will follow a strong rise in August (0.8%M/M) as production bounced back from the hurricane-impacted decline in July. This would leave output over the third quarter as a whole a touch below the Q2 level. Friday will also bring housing starts figures for September.

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