Key events for the week - Nomura

Analysts at Nomura offered their outlook for the week's key calendar events.

Key Quotes:

"United States | data preview

The week ahead Our core PCE inflation forecast is a steady 0.2% m-o-m (0.218%) gain, corresponding to 1.5% y-o-y growth.

New home sales (Monday): We expect a 4.9% m-o-m increase in new home sales to a 656k annualized pace in January to follow the 9.3% plunge in December. Our forecast for January new home sales reflects decent increases in single family residential construction permit data in prior months and expected positive payback from the sharp decline in December. However, December’s broad-based declines in new home sales point to some downside risks to our forecast. We remain conservative on near-term sales as low inventories will likely continue to constrain sales and rising interest rates could raise borrowing costs.

Advance goods trade balance (Tuesday): We expect the Census Bureau’s advance estimate of the goods trade balance for January to come in at a USD72.9bn deficit, following the USD72.3bn deficit in December. Based on container data at major US seaports, goods exports likely declined in January, while goods imports rose modestly. Net, we expect the goods deficit to widen in January.

Durable goods orders (Tuesday): Excluding volatile transportation orders, we expect a flat reading in January core durable goods orders. Based on the January industrial production report we estimate the output of durable goods orders excluding transportation equipment rose only modestly by 0.1% m-o-m. Although the January issue of the ISM manufacturing survey suggests healthy manufacturing activity, the indicator of new orders moderated somewhat from December. Based on these data, we expect extransportation durable goods orders to essentially remain flat in the month. 

For aggregate goods orders, we expect a 1.5% decline. Much of this forecast is driven by our expectation for sharp reversal from the previous month’s gains in civilian and defense aircraft and parts orders. While new orders of vehicle and vehicle parts likely rose decently given the increase in vehicle assemblies in January, we think the gain will not be enough to offset a forceful mean reversion in new aircraft orders. 

Case-Shiller home price index (Tuesday): Home prices increased at a 12-month rate of 6.4% in November, the fastest pace since July 2014. This gain was led by a 12.7% jump in Seattle and a 10.6% increase in Las Vegas. Driven by a supply shortage, home prices have been increasing at a faster pace than income growth. In the near term, a strong labor market and consumer expectations of rising interest rates appear to be driving up demand. However, higher home prices owing to the continued supply shortage will likely hurt consumer demand in the long run.

Conference Board’s consumer confidence (Tuesday): We expect Conference Board’s consumer confidence index to rise further to 128.0 in February from 125.4 in January. Incoming data on the labor market point to continued vigor. The labor market indicator of this survey still reflects healthy job market conditions. Further, although there was a pick-up in volatility in equity and bond prices, we think the favorable assessment of the recent tax cut likely outweighed negative news about financial markets. For many consumers, the new federal withholding tax rates kicked in around late January and early February with direct effect on their after-tax income. The University of Michigan consumer sentiment index rose strongly in February, likely driven by these new tax policies.

Q4 GDP, second estimate (Wednesday): We forecast a 2.5% q-o-q saar print for the second estimate of Q4 real GDP growth, implying a 0.1pp downward revision by the BEA from its advance estimate of 2.6%. Incoming data suggest stronger inventory accumulation than what was implied in the BEA’s advance report. Additionally, incoming housing construction data point to stronger real residential investment than the BEA’s assumption from its advance GDP report. However, the January retail sales report included downward revisions to core retail sales. Thus, we expect a decent downward revision in Q4 real PCE in the second Q4 GDP report by the BEA, which could more than offset modest upward revisions in other components of GDP. 

Chicago PMI (Wednesday): Based on relevant components of the Empire State and Philly Fed business surveys, we expect the Chicago PMI to fall slightly by 0.7pp to 65.0 in February. This forecast would be consistent with continued expansion in business activity, albeit at a slightly slower pace than in January. The Philly Fed and Empire State surveys’ headline business conditions indices rose modestly in the month pointing to continued optimism among businesses.

Pending home sales (Wednesday): Pending home sales rose decently by 0.5% m-o-m in December following a 0.3% increase in November. Pending home sales, which track contract signings on previously-owned home for sale, suggest modest boost to existing home sales in coming months. However, low inventories of home for sale continue to pose downside risks to sales.

Initial jobless claims (Thursday): For the week ending 17 February, initial unemployment claims fell 7k to 222k from the previous week’s 229k. Continuing unemployment claims dropped 73k to 1875k in the week ending 10 February, following relatively elevated readings in January. It is possible that seasonal layoffs near the yearend may have temporarily contributed to the elevated readings in January. Low jobless claims readings reflect strong labor market conditions. For upcoming reports, we expect continued downtrends in initial and continuing claims.

Personal income and spending (Thursday): We expect a steady 0.2% m-o-m increase in personal income in January. For personal spending, we expect a modest 0.2% m-o-m gain after a 0.4% increase in December. January retail sales were soft across many categories and pose some downside risk. Core retail sales were flat during the month, suggesting that consumer outlay on goods may have been weak. In addition, sales at auto dealerships slowed in January as weather-driven replacement purchases slowed gradually and incentive spending likely peaked in 2017. This suggests that personal spending on autos was likely weak in the month. On the other hand, we expect a decent 0.4% increase in spending on services, which may have offset some of the drag from spending on goods.

PCE deflator (Thursday): Based on relevant CPI and PPI data, our forecast for core PCE inflation is a steady 0.2% m-o-m (0.218%) gain. This translates into to 1.5% (1.46%) y-o-y growth, unchanged from the previous month after rounding. Among the elements relevant for core PCE price from the PPI report, the price indices for hospital, home healthcare and nursing care facility services all increased relatively strongly. This suggests a pick-up in health care prices will likely push up core PCE inflation in January. For the PCE food price index, we expect a modest 0.1% m-o-m increase, reflecting CPI food-at-home prices which rose by only a weak 0.1%. For PCE energy price index, we expect a strong increase, after incorporating a 3.0% m-o-m jump in CPI energy prices. Altogether, our topline PCE price index forecast is 0.3% (0.329%) m-o-m, which would be equivalent to 1.6% y-o-y growth.

ISM manufacturing (Thursday): We think the February ISM manufacturing survey will signal continued growth in the manufacturing sector albeit at a slightly slower pace. We expect the headline index to fall slightly by 0.6pp to 58.5, which is still an elevated reading. The Empire State and Philly Fed surveys indicated sustained expansion in February. The new orders subindices for both surveys improved, indicating a modest pickup in near-term manufacturing momentum. We expect the ISM survey to be mostly consistent with these regional surveys.

Construction spending (Thursday): Construction spending in December increased by 0.7% m-o-m following a 0.6% increase in November. Private residential construction spending increased by a solid 0.8% m-o-m in December, up from 0.7% in November. A solid increase in construction outlay in Q4 may partly have been boosted by rebuilding effort after the landfall of major hurricanes. However, strong growth near the end of the quarter suggests some of that momentum could continue in Q1.

Vehicle sales (Thursday): We expect vehicle sales to slow to a 17.0mn saar pace in February after coming in at 17.1mn saar in January. The accelerated sales pace near the end of 2017 was likely driven by transitory replacement demand following major storms and unsustainably high incentive spending. In 2018, we expect a gradual moderation from the high sales pace in Q4 2017. Further, rising interest rates will likely dampen consumer demand further and affect potential buyers with lower credit scores the most. 

University of Michigan consumer sentiment (Friday): The consumer sentiment index in the University of Michigan’s preliminary February survey rose solidly to 99.9, mostly driven by consumers’ favorable assessment of new tax policies (Many consumers appear to have looked through media coverage on the recent pick-up in volatility in equity and bond prices. This suggests ongoing strength in consumer confidence will remain supportive of healthy momentum in personal spending. Consumer inflation expectations over a one-year horizon remained at 2.7%. 5-10 year-ahead inflation expectations were unchanged at 2.5%. This appears consistent with the FOMC’s judgement that survey based measures of consumer inflation expectations remain stable.

Euro area | data preview

The week ahead Euro area inflation data and UK PMI manufacturing data are in focus this week.

Germany, preliminary February inflation (Tue): We expect the flash reading of German HICP inflation to fall to 1.3% y-o-y in February from 1.4% y-o-y in January. This decline will almost entirely be caused by energy-related base effects. We expect core inflation to remain unchanged at 1.5% y-o-y in February. 

Euro area preliminary February inflation (Wed): We forecast the flash estimate of euro area HICP inflation to remain at 1.3% y-o-y in February. In contrast, we expect core inflation to increase to 1.1% y-o-y from 1.0% y-o-y in January. A likely step-up in the prices of volatile items (e.g. packaged holidays) and a more generic shrinkage of slack should push up services sector inflation a little compared with last month.

BoE household borrowing, Jan (Thu): In December there was a fall in the number of mortgage approvals for house purchase to its lowest since the start of 2015 (to 61k during the month). Approvals are, unsurprisingly, closely correlated with net lending data with an optimal lag of around three months. We expect some decline in net lending over the coming months on account of this, but would not be surprised to see a small uptick in approvals after their sharp December fall.

UK PMI manufacturing survey, Feb (Thu): The headline index fell to a more than sixmonth low in January, though at over 55 it remains 3.5 points above its long-run average. Our forecast is for a consolidation in the headline index broadly around current levels in February as output and orders are supported by global growth and a weak currency (despite the 6% trade-weighted rally over the last six months).

Japan | data preview

The week ahead We forecast February Tokyo area core inflation to be unchanged from January.

January industrial production (Wednesday): We forecast the January 2018 industrial production index to show a fall of 4.5% m-o-m, the first drop in production for four months. Manufacturers' production plans called for a decline of 4.3% m-o-m in January, partly reflecting a sharp projected decline in production of transportation equipment owing to the protracted impact from issues related to the final inspection of vehicles. Indicators related to the industrial production index were not bad in January. The Japanese manufacturing PMI output index was 54.7 and the current conditions DI for manufacturers in the Economy Watchers Survey (seasonally adjusted) was 52.3, both indicating healthy sentiment. However, month-on-month changes of 0.2 points and -4.6 points, respectively, point to momentum being lackluster. Japanese real exports, which have a strong correlation with industrial production, were also weak, falling 0.6% m-o-m (our estimate). In light of this, we expect a sharp decline in production, as projected by initial production plans for January. However, production plans project an increase for February, and since January production plans do not call for a wide-ranging decline in production in the manufacturing sector as a whole, we think the decline in production in January will be a one-off phenomenon. As such, even if there is a sharp fall in production in January, we do not think it would warrant special attention. 

February Tokyo area CPI (Friday): We forecast the February 2018 Tokyo core CPI will be up 0.7% y-o-y, the same inflation rate as in January. We forecast the core core CPI reading for February will be up 0.3% y-o-y, as in January, and that the BOJ version of the core core CPI (all items ex energy and fresh food) will be up 0.4%, also the same as in January. We have been expecting inflationary pressure to weaken as the impact from rising energy prices – which have been a main driver of inflation since 2017 – declines from its peak. 

January Labour Force Survey (Friday): We forecast an unemployment rate of 2.7% for January, down 0.1pp m-o-m, and a job openings-to-applicants ratio of 1.61x, up 0.02 points m-o-m. The job openings-to-applicants ratio, which tends to lead the unemployment rate, has been rising amid tight labour supply-demand conditions, and we therefore think the unemployment rate will have fallen versus the previous month too. Looking at leading indicators of the job openings-to-applicants ratio, the new jobopenings-to-applicants ratio rose month-on-month in December and the Indexes of Business Conditions (the leading composite index) maintained the level of the previous month, which had registered sharp growth. We expect the January job openings-to applicants ratio to rise month-on-month.

Asia | data preview

The week ahead We expect China’s official PMI to ease further, an expansionary Hong Kong budget, the Bank of Korea to stand pat and GDP growth to be stable in India but fall in Hong Kong. China: The official PMI is likely to dip again to 51.0 in February from 51.3 in January, as February this year has fewer working days than last due to a later lunar new year. High-frequency data (such as the furnace operation rate, coal consumption by major power plants and steel price inflation) also point to weakness in February."