So far, so good! Cagliari Calcio is indeed gradually moving up in the Serie A ranking and thus away from the relegation zone. It secured an important point this weekend against Atalanta (3rd in Serie A rankings) with a draw. Same could be said about the economy and financial markets despite the persistent volatility and uncertainty due to ongoing geopolitical headlines and the daily declarations (& gyrations) of Trump regarding tariffs among many others. As there is still a long way to go before the end of the year (or the Italian soccer championship), let’s do a quick temperature check of the US and European economies.
In the US, despite some recent weakness in retail sales released last Friday and a hotter surprise in the latest CPI report, the goldilocks’ scenario still prevails. In other words, we aren’t (too) concerned by these latest figures as consumption has been so hot for so long that a payback was due at some point… Moreover, the fires on the West Coast and the snowstorms in some North Eastern regions likely proved also a drag on retail sales last month. There is no reason at this point to fear a sudden and prolonged weakness in consumption spending as real income growth remains strong (see graph below) as well as households‘ balance sheet. Absent a sharp deterioration of the US labor market and/or financial conditions, consumption (representing more than 2/3 of GDP) will continue to support overall US economic growth.
US personal disposable income & consumption expenditures ($bn, real terms)
As far as the US prices trajectory is concerned, we had another big upside surprise last month as both headline and core January CPI came above expectations. However, a close look at the details revealed that it was mainly coming from volatile components such as used cars & trucks or transportation services. Moreover, the PPI report showed that the components that will subsequently be included in the PCE deflator were overall consistent with ongoing disinflationary pressures. So, the recent apparent lack of progress in the CPI should be considered with a pinch of salt. The next release of the PCE deflator (Friday 28 February) could be more reassuring for both the Fed and investors. Nevertheless, it confirms our long-standing view that this process will be longer, bumpier and more challenging than expected at the turn of 2022… when consensus was already expecting several Fed’s rate cuts for 2023.
YoY % change of selected US CPI components: supercore inflation is receding
Q/Q% a.r. in core inflation, supercore & core PCE: there have been divergent trends recently between core CPI and core PCE
Turning to Europe, the big (good) news, which has gained momentum lately, is an eventual end of the war in Ukraine. Without entering into the details of the form of how it could happen, here are a few considerations about the impact it could have on our macro scenario. First of all, just keep in mind that tariffs still represent a sword of Damocles clouding the European growth outlook. However, this uncertainty was already known and the delay in implementation could be considered both negatively (uncertainty remains elevated and continue weighing on investments and economic agent decisions overall) and positively (no negative front-loaded news so far, which may be seen as a form of relief).
In the case of a cease fire in Ukraine, the positive economic impact will come from different channels: lower energy prices, a boost to confidence, reconstruction spending, trade’s revival with Eastern Europe, or easier financial conditions among others. According to Goldman Sachs, Euro Area GDP growth could be revised up in between +0.1%-0.2% in a “limited” scenario until +0.5% in the most favorable one. More interestingly, the main beneficial effect on growth will be due to lower energy prices as it will automatically and instantaneously increase households real disposable income, while also lowering costs of the most energy intensive production. In this context, Germany and Italy would be the main beneficiaries given their high dependence on (Russian) energy. As a result, it will be key to follow again the EU gas price (see graph below) to assess if European economy could move to a more (or less) goldilocks scenario.
EU natural gas price
As far as ECB policy rates trajectory is concerned, it won’t change much over the next few months given the widespread range of potential outcomes on both growth and inflation (depending on the mix of incoming tariffs and where we end with Ukraine): ECB will likely continue to ease with a -25bp rate cut at each meeting until June in order to prevent the European economy to fall in recession. Then, it will reassess the situation (assuming there is more clarity on tariffs and Ukraine).
Last but not the least, one of the consequences of this week-end security conference in Munich (and probably also a key element of future tariffs negotiations and deal with the US) is that Europe will likely need to spend more for its defense sooner rather than latter: as national budgets are already very tight in France or Italy, not to mention that Spain and Portugal feel somewhat less at risk from a Russia invasion, the only possible way to expand significantly defense spending -in my views- is through joint EU debt… forcing de facto more defense but also fiscal and budgetary integration at EU level.
So, all in all, a still challenging -but moving in the right direction- context for the European economy with eventually more growth, lower inflation, ongoing monetary policy easing and a due wake-up call to the EU governments and the whole EU project to move ahead… thanks to the new Trump administration aggressive policies. As someone said: the kick in the ass is the poor man’s electroshock, while in the ass-kicking strategy, you always have to wonder about the responsibility of the buttocks.
Economic Calendar
The global flash PMIs for February (Friday), January inflation report in the UK (Wednesday) and Japan (Friday) will be among the key data releases of this week. From central banks, the highlights are the FOMC minutes on Wednesday as well as rate decisions in Australia tomorrow. Finally, major companies reporting earnings over the next few days include BHP, Medtronic, HSBC, Walmart and Alibaba.
After last week disappointing US retail sales (due to some extent -but not only- to snowstorms on the East Coast and fires on the West), investors will scrutinize the global flash PMIs on Friday to assess economic activity trends, across the globe, in both the manufacturing and services sectors. The Bloomberg consensus expects an improvement in/rebound of most European indicators. In the US more specifically, we will also get the regional manufacturing indices (Empire State and Philadelphia Fed) for February, the January housing starts and building permits, as well as the weekly initial jobless claims and the final reading of the University of Michigan Consumer Sentiment. Note that US markets are closed today (President’s day). Other notable activity indicators due in Europe include the German ZEW and UK retail sales, while this morning the first estimates of Japan Q4 GDP estimates surprised meaningfully on the upside (+2.8% a.r. vs +1.1% expected) on top of an upward revision to previous quarter (+1.7% a.r. vs +1.2% previously released).
As prices trajectories remain also uncertain in most economies, February inflation reports in the UK on Wednesday (core inflation foreseen to accelerate to 3.7% from 3.2% on a yoy basis… despite a MoM decline) and Japan on Friday (headline inflation may hit 4%, while it should remain around 2.5% excluding food & energy) will be closely watched as they may greatly influence the next BoE and BoJ meeting’s decisions respectively. Speaking about central banks, the FOMC minutes from January will be released on Wednesday evening, while a policy interest rate decision is due in Australia tomorrow: a -25bps rate cut is widely, but not unanimously, expected among the 32 economists surveyed. It would be the first of a new easing cycle for the RBA.
Ending with the earnings season, more than 380 companies of the S&P500 have already reported (vs. about 200 for the Stoxx600). The focus this week will be on Walmart and Alibaba (both on Thursday), as well as on European mining companies (BHP, Rio Tinto and Anglo American) among others. The German election will take place next Sunday. According to the latest polls, the Conservatives (led by Friedrich Merz) are still leading by a wide margin at around 30%, followed by the far-right AfD at circa 20%, while the third place’s race remains tight between the SPD with 15% of total votes and the Greens with 14%. More importantly, it will be key to see how many smaller parties hit the 5% threshold required to join parliament as it could impact the key votes going forward (two-thirds majority is required for amending the constitutional debt brake at some point if agreement can be made to do so). If none or one do then the majority will likely be secured. If two do, then it most likely won’t be…
Non-exhaustive list of major earnings releases over the week (market cap > $100bn)
Source: https://earningshub.com/earnings-calendar/week-of/2025-02-17
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