The week ahead: focus on key US CPI and retail sales - Nomura

 

Analysts at Nomura offered their preview for the week ahead and key scheduled events.

Key quotes:

"United States | Data Preview

We expect a steady 0.2% m-o-m increase in February core CPI and a healthy rebound in February core retail sales. 

NY Fed Survey of Consumer Expectations (Monday): Similar to other consumer surveys in February, we expect the New York Fed’s Survey of Consumer Expectations to highlight continued optimism. Earnings expectations reached their highest levels in the survey’s history in January, accompanied by a similarly historically low unemployment rate expectation. Inflation expectations at the one- and three-year horizons remained within a stable range, at 2.7% and 2.8%, respectively. 

US Budget (Monday): In the Congressional Budget Office’s monthly budget review for February, the agency estimated a deficit of $216bn, up $24bn from February 2017. The IRS set a 15 February deadline for employers to update their withholding tables to reflect the new tax law. Thus, the CBO noted that the decrease in withholding during the month more than offset the increase in revenues from increased wages and salaries. Looking ahead, March will mark the first full month of mandatory updated withholding tables and could show an even steeper drop in revenue, widening the FY18 budget deficit further. 

CPI inflation (Tuesday): After a surprisingly strong reading of 0.3% (0.349%) m-o-m in January, we expect a steady 0.2% (0.203%) m-o-m increase in core CPI for February, raising the year-on-year rate to 1.9% (1.88%). Core goods prices in January increased strongly, up 0.4% m-o-m, driven by a sharp pick-up in apparel prices. However, we do not believe this pace is sustainable and expect core goods prices to revert somewhat in February. In addition to apparel, we believe prices for new and used vehicles may have declined during the month as the transitory boost from hurricane-related factors wanes, adding further downward pressure on core goods prices. On the upside for core goods, a decline in medical care commodity prices in January should prove largely transitory and we expect a modest increase for February. For core service prices, we expect a moderate increase in rent inflation, a rebound in prices of lodging away from home and a modest decline in airline fares. Aside from core, we expect a slowdown in food price inflation to 0.1% m-o-m from 0.2% in January, as food at home prices was likely flat during the month. Energy prices in February likely declined by 0.2% on a seasonally adjusted basis. Taken altogether, our forecast for headline CPI in February is 0.2% (0.158%) m-o-m, corresponding to 2.2% (2.23%) on a 12-month basis. Our forecast for CPI NSA is 249.024.

PPI (Wednesday): Both top-line producer prices and those excluding food and energy increased by a firm 0.4% m-o-m in January, pointing to some firming of pipeline prices. Relevant healthcare service price indexes for core PCE all increased relatively strongly, foreshadowing the boost in core PCE prices from hospital services. However, hospital service prices in PPI and core PCE have shown divergent behavior since September, indicating that PPI could be revised somewhat in next week’s release.

Retail sales (Wednesday): We expect a 0.7% m-o-m increase in core (“control”) retail sales in February. The labor market likely remained strong in the month with continued wage growth. Further, the recent tax cuts appear favorable for consumer spending in the near term. This, combined with elevated consumer sentiment as suggested by most incoming consumer surveys, indicates continued momentum in consumer spending. However, we expect some drag from sales at auto and auto parts dealerships. Total light vehicle sales slowed in February. We think consumers’ purchase of light vehicles will slow further considering rising interest rates and tight burrowing conditions on auto loans. Sales at building material stores, which tend to be volatile, could rebound in February after falling 2.4% in January. The sales of home improvement and building material supplies may have been temporarily lowered by inclement weather in January. Finally, reflecting a decline in retail gasoline prices in February, we expect sales at gasoline stations to fall. Taken altogether, our forecast for February retail sales excluding autos and parts is a 0.6% m-o-m gain. Our forecast for total retail sales is a 0.5% m-o-m increase.

Business inventories (Wednesday): Incoming data point to a solid increase in business inventories in January. Inventories at factories rose a moderate 0.3% m-o-m in January. Wholesale and retail inventories likely contributed more strongly to aggregate inventory investment in January. In our view, a strong gain in wholesale inventories seems transitory. Considering a jump in energy prices in January, the gain in wholesale inventories in January was likely inflated by inventories of fuels and related goods. Solid gains in retail inventories likely reflect slowing auto sales. The increase in retail inventories in January was driven by motor vehicle and parts dealers’ inventories, which jumped 2.1% m-o-m in January. Excluding autos and parts, retail inventories rose a modest 0.3% m-o-m.

NAHB housing market index (Wednesday): Homebuilder optimism remained elevated in February with the NAHB’s housing market index at 72. We expect a slight deterioration to 71 in March, primarily reflecting sustained input cost pressures. The prospective buyers index was unchanged at 54 in February, while mortgage applications during the month declined overall. Moreover, there is some risk that increased media attention on tariffs could elevate some homebuilders’ concern that key input material prices will accelerate further. However, considering steady consumer demand, homebuilder sentiment will likely remain elevated over the medium term, in our view.

Empire State survey (Thursday): For the first round of manufacturing survey indicators in March, we forecast a reading of 13.0 for the Empire State survey, essentially unchanged from February’s reading of 13.1. While we remain optimistic about the manufacturing sector outlook, our neutral forecast for February largely reflects the downside risk of deterioration in manufacturers’ sentiment in response to rising trade tension and its implications for input costs

Philly Fed survey (Thursday): Similar to the Empire State survey, we forecast 25.0 for the topline index of the Philly Fed survey in March, largely reflecting increased input cost angst, and close to February’s 25.8 print.

Import prices (Thursday): Import prices picked up notably in January with prices excluding petroleum products increasing 0.5% m-o-m, following continued weakness in the US dollar. Import price pressures in February could moderate somewhat relative to last month.

Housing starts (Friday): We expect housing starts to fall 2.6% m-o-m to an annualized pace of 1292k. Consumer demand likely remained firm considering healthy labor market conditions. However, incoming data on permits for single family residential construction trended lower in recent months, portending a more modest increase in single family housing starts in February. Multifamily housing starts, which rose sharply by 23.7% in January, will likely revert in February, lowering the aggregate starts. On construction permits, we expect a 1.1% m-o-m increase to an annualized pace of 1392k in February.

Industrial production (Friday): We believe industrial production increased a healthy 0.4% m-o-m in February. Ex-auto manufacturing likely rose at a steady pace of around 0.3%. This would be in line with most incoming business surveys that have been pointing to heathy expansion in manufacturing activity. Looking at seasonally-adjusted industry forecasts, we think it is possible that auto assemblies rose firmly, despite slowing vehicle sales, and contributed to growth in total industrial output. Judging from EIA data on oil and gas extraction, we expect mining sector output to rebound in February following decreases in the two prior months. Moreover, the number of active oil rigs in the US has picked up notably after declining modestly through Q4, pointing to continued expansion of mining sector output in the near-term. On the downside, utility output may have fallen notably in February, driven by a decline in demand for electric utilities following colderthan-usual weather in January.

JOLTS job openings (Friday): Job openings softened somewhat in Q4 2017, declining 366k after reaching a post-crisis peak of 6177k in September, with professional & business services accounting for roughly 60% of the drop. With a tightening labor market and strong growth this year, we expect job openings to remain elevated over the medium term. The quits rate increased 0.1pp to 2.2% in December, within the narrow 2.1-2.2% since May 2016. Labor market turnover, the sum of hires and separations as a percent of two times employment, remained unchanged in December at 4.0%, still well-below the 2005 and 2001 peaks of 4.5% and 5.0%, respectively.

University of Michigan consumer sentiment (Friday): Consumer sentiment remained buoyant in February in the University of Michigan survey. Optimism about larger paychecks following the tax legislation passed in December 2017, coupled with steady job growth, points to elevated consumer sentiment. In March, we largely expect consumer sentiment to stay near recent highs, although widespread news coverage of President Trump’s proposed tariffs and the subsequent market reaction poses some downside risk. In the February survey, inflation expectations at both the one-year and 5- 10 year horizon remained unchanged at 2.7% and 2.5%, respectively. We expect these measures to remain within a steady range in the upcoming report.

Euro area | Data preview

The week ahead Euro area final inflation and industrial production are in focus this week. 

Euro area industrial production (Jan), (Wed 14 Mar): We expect euro area industrial production to decrease by 0.7% on a month-on-month basis in January, after a 0.4% m-o-m increase in December. Leading indicators suggest a modest slowdown in many of Europe’s economies in recent weeks and we expect this to be reflected in January’s industrial production figure. Nonetheless and despite this likely weakness we expect growth to firm up again in coming months in line with our above-consensus view on growth for 2018 as a whole. 

Japan | Data preview

The week ahead Given firms' solid appetite for capex, we expect a rebound in January core machinery orders from the sharp decline in December.

January core machinery orders (private sector, excluding orders for ships and from electric power companies) (Wednesday): We forecast core machinery orders (private sector, excluding orders for ships and from electric power companies) will rise 5.0% m-o-m in January 2018, rebounding from the 11.9% decline in December. Related indicators for January showed a mixed picture. Industrial production declined 6.3% m-o-m in the production of items with short lead times from order to production. However, data from the Japan Machine Tool Builders' Association showed that machine tool orders for customers in Japan rose 1.0% m-o-m, the second straight rise (seasonal adjustment by Nomura). Another factor likely to boost order growth in January is the ongoing strength of corporate appetite for capex. Data in the Cabinet Office's Annual Survey of Corporate Behavior for FY17 project capex growth of 4.8% y-o-y in the next three years on an allindustries basis, the strongest growth in the survey in the past 10 years. In addition to the above, core machinery orders are a volatile set of data, and in the absence of any deterioration in corporate capex appetite, we expect to see a rebound from the sharp decline in orders in December.

Asia | Data preview

The week ahead We expect China’s jointly released January-February data to reveal slowing IP and fixed asset investment growth. 

China: The continued moderation of PPI inflation in January-February suggests domestic demand is weakening, which should weigh on investment and output growth. We expect industrial production and fixed asset investment growth to soften in JanuaryFebruary combined, in line with the lower output sub-index of the official manufacturing PMI over the same period, and high-frequency data such as coal consumption by the six major power plants, steel prices and furnace operation rates. Retail sales growth is likely to remain stable, supported by a favourable base effect. That said, solid trade growth in January-February points to slight upside risks."