Summer Breeze, Autumn Leaves

Key points:

• Stellar Q3 GDP in the US puts the resilience theme even more in focus
• The ECB is now more cautious, but its “high for long” narrative will come under market pressure. 

A bumper print for Q3, driven by private consumption, further demonstrates the resilience of the US economy to the monetary tightening. At the beginning of this year, we were expecting US consumers to run out of excess saving to spend at a time when the labour market would start to correct in earnest. It however appears that the combination of still robust job creation, strong nominal wage gains and disinflation is allowing more than decent purchasing power growth, while the savings rate fell again. Spending was particularly strong for durable goods, normally quite sensitive to interest rates. It seems US consumers are still happy to ignore the monetary stance.

The resilience of the US economy is likely to rank high in the questions Jay Powell will be asked this week. The likely continuation of the policy pause was telegraphed clearly by his speech at the New York Economic Club we discussed last week. The market-driven tightening in financial conditions will help the FOMC stay in monitoring mode despite the strong real economy data, and we count on the ECI for Q3, to be released ahead of the Fed meeting, to confirm wages have started to decelerate.

In contrast, we think GDP stagnated last summer in the Euro area. This would further justify ex post the ECB’s cautiousness last week. While the press conference was uneventful, we would highlight the readiness of the Governing Council to explicitly acknowledge the impact the accumulated tightening is already having on inflation dynamics. The Bank Lending Survey confirms monetary transmission is operating “forcefully” in the Euro area – to quote directly from the ECB. While the financial position of the corporate sector provides a buffer, we are starting to detect some unease in some quarters of the Eurosystem. The idea that maybe the central bank has gone too far is gaining traction. We do not think rate cuts can be really within reach before the end of next spring at the earliest, but with base effects helping disinflation in the coming months, we expect the ECB to come under significant market pressure to accommodate well before that if, as we expect, the real economy displays more mediocrity.