The week ahead: an economic snapshot - Nomura

Analysts at Nomura preview the week ahead.

Key Quotes:

United States | Data preview

We expect a modest 0.1% (0.134%) m-o-m increase in core CPI in March as base effects help push up the y-o-y rate to 2.1%.

NY Fed Survey of Consumer Expectations (Monday): Survey-measured consumer inflation expectations over the medium- to long run have remained steady. The median of three-year ahead inflation expectations, as measured by the NY Fed Survey of Consumer Expectations, remained within a steady range and registered 2.88% in February. University of Michigan data for March indicated consumers’ one-year ahead inflation outlook rose to 2.8% in March from 2.7% in February, but that their five-year outlook remained at 2.5%. Together, the surveys appear consistent with the FOMC’s judgment in March that survey-based measures of longer-term inflation expectations are little changed, on balance.

PPI (Tuesday): The March ISM manufacturing report indicated rising input prices amid heightened concern over the recent tariffs on steel and aluminum. The prices paid index, which often correlates with the PPI for intermediate goods, surged to the highest level since April 2011. Continued increases in input costs could exert upward pressure on PPI for intermediate goods, although this measure has yet to respond to the recent pickup in the ISM prices paid index. In February, metrics for pipeline inflation were mixed overall as non-food intermediate processed goods prices excluding energy rose by 0.7% m-o-m while non-food unprocessed goods prices excluding energy fell by 0.3% m-o-m. For March, we expect a steady increase "core PPI" which excludes volatile food, energy, and trade components. Note that our CPI inflation forecast can be subject to revision after the release of the March PPI report.

Wholesale inventories (Tuesday): Wholesale inventories increased strongly by 1.1% in February according to the Census Bureau’s advance report as inventories of both durable and nondurable goods picked up. The increase was stronger than we had anticipated, suggesting greater contribution from real inventory buildup to Q1 GDP growth. 

CPI (Wednesday): We expect a modest 0.1% (0.134%) m-o-m increase in core CPI in March following a 0.2% (0.182%) m-o-m gain in February. Note that core CPI inflation surprised to the downside in March 2017. Thus, despite the expected weak reading of m-o-m core inflation, base effects will likely help push up the y-o-y rate for March to 2.1% (2.069%), from 1.8% (1.848%) in February. Among core goods, we think apparel prices likely reverted following large gains in January and February. The outsized gains in the previous months were likely caused by changing seasonal sales pattern which the BLS’ seasonal adjustment process may not fully capture. Moreover, vehicle price inflation likely remained soft in March, exerting downward pressure on the CPI for core goods prices. We think rent inflation likely picked up after weakness in February. However, this pickup may not have been enough to offset the weak core goods price inflation. Looking beyond the March print, we maintain our conservative view that core inflation will rise only gradually. Considering structural factors, we expect rent and vehicle prices will exert downward pressure over the medium term while inflation of other components will likely accelerate in reaction to the tightening labor market.

We think CPI food prices likely rebounded from a flat reading in February when we consider incoming data on prices received at farms. However, CPI energy prices likely fell as incoming data indicate retail gasoline, natural gas and heating oil prices trended lower from their levels in February. Put together, our forecast for CPI inflation in March is 0.0% (-0.044%) m-o-m, which would yield 2.4% (2.369%) y-o-y growth. Our forecast for CPI NSA is 249.576.

FOMC meeting minutes (Wednesday): In addition to raising the policy rate 25bp to a range of 1.50-1.75%, the FOMC presented a much more optimistic outlook for the economy in its March Summary of Economic Projections (SEP). However, while the economic growth forecasts have moved considerably, we believe FOMC participants continue to underestimate the frontloaded nature of recent changes in US fiscal policy. In the recent press conference, Chair Powell said that “participants believe there will be meaningful increases in demand from the new fiscal policies for at least the next let's say three years.” However, we expect that the impact will be far more concentrated in H2 2018 and H1 2019. In the minutes, we expect more clarity indicating what the participants are assuming for the spend-out rate of the fiscal boost. 

Another area of interest involves the FOMC’s assessment of trade risk. Although Chair Powell indicated that the consensus on the Committee is that trade risk should not affect its outlook at this point, it will be interesting to see more robust discussions in the minutes. Most participants have indicated a “wait and see” approach. 

On inflation, many FOMC participants expected core PCE inflation to exceed 2% in the next couple of years but only slightly. We could glean some sense of how policymakers assessed potential inflationary pressure from further tightening of labor markets and how tolerant they are of above-target inflation.

US Budget (Wednesday): March marks the first full month of updated employer withholding tables consistent with the new tax law. In February, the Congressional Budget Office (CBO) noted that while revenue from withholding declined, it was partly offset by rising wages and salaries. However, the new withholding schedules did not take effect until 15 February, indicating that the reduced withholding revenue in March could result in a notably wider budget deficit than the $176bn in March of last year. 

Initial jobless claims (Thursday): Initial claims jumped by 24k in the most recent reading, an increase that could easily reverse next week. Overall, labor demand remains strong in an economy operating above potential. We expect jobless claims to stay near their multi-decade lows over the near term.

Import prices (Thursday): Import prices have been rising steadily against the backdrop of continued US dollar weakness. We expect this increase to have continued in March. Excluding petroleum products, import prices showed a strong increase of 0.5% m-o-m in February. Further, imported consumer goods prices excluding autos, food and energy jumped sharply by 0.5% m-o-m. Key questions include whether and how the recent stabilization of imported goods prices will affect domestic consumer prices. We think that the impact on domestic consumer prices would be only modest. On a y-o-y basis, inflation of core goods prices of CPI and PCE has been much weaker than that of corresponding import prices, suggesting domestic factors may be playing a greater role in holding down core inflation.

JOLTS (Friday): Job openings jumped to 6.3mn in January, marking a new series high. The increase in vacancy postings was broad-based across most industries with notable pickups in the construction and manufacturing sectors. The quits rate fell to 2.2%, but remained within a steady range. This measure implies that workers remain willing to voluntarily leave their current employers, highlighting workers’ confidence in a healthy labor market. This report appears consistent with the nonfarm payroll employment data in recent months, which increased solidly in January and February. We expect the February JOLTS report to reflect this continued labor market strength.

University of Michigan consumer sentiment (Friday): Consumer sentiment remained elevated according to the final reading of the University of Michigan’s March report. At 101.4, consumer sentiment is at its highest level since 2004. Consumers mostly looked through the increased volatility in financial markets, but increased uncertainty about the impact of tariffs appears to have driven a slight downward revision in the final estimate that incorporates more information covering the full month. For early April, we expect consumers to remain optimistic considering the strong job market and consumers’ favorable assessment of the recent changes to tax policy. However, ongoing media coverage on trade tensions with China may affect consumer sentiment adversely. 

Inflation expectations at the one-year horizon inched up 0.1pp from February to 3.8% in March, while 5-10-year inflation expectations were unchanged at 2.5%. We expect steady readings for April.

EZ | Data preview

Euro-area industrial production and UK BRC retail sales data are in focus next week. 

UK BRC retail sales, Mar (Tuesday): BRC like-for-like retail sales values have grown at a constant annual pace of 0.6% over the past four months and at an average rate of just over 1% in real terms. We would not be surprised to see some hit to sales growth in March thanks to a weather effect (the coldest March in five years, including snow disruption). 

UK Trade, Feb (Wednesday): January’s goods deficit widened by just over £0.5bn to £12.3bn thanks to a worsening in the underlying position which more than offset a surge in the erratics surplus. We look for a small improvement in the deficit in February.

UK Industrial production, Feb (Wednesday): Manufacturing production has risen for nine months in a row now helped by a combination of strong global growth and a weak sterling. While there is always the risk of an erratic fall in these figures in any given month (they can be highly volatile), the surveys give us no reason not to forecast another rise in February.

Euro area Industrial Production, Feb, (Thursday): After reaching historical highs at the end of 2017, euro area PMI survey data slowed down at the beginning of 2018. Despite this deceleration in the survey data, the numbers still demonstrate solid economic conditions in the euro area and point to strong q-o-q GDP growth for Q1 2018. Consistent with this, after a decline of 0.1% m-o-m in January we estimate euro area industrial production will increase by 0.3% m-o-m in February."

Asia | Data preview

China: We expect CPI inflation to fall from its peak in February, mainly on lower food prices, and PPI inflation to moderate further, as suggested by the weakening in the output price sub-index of the March official manufacturing PMI. New RMB loans and new aggregate financing are likely to rebound in March on seasonal factors, while M2 growth is likely to remain stable, underpinned by flush interbank market liquidity. Distortions in yearon-year trade growth caused by the lunar new year effect should disappear in March. We expect import growth to rise after a sharp fall in February and export growth to drop sharply after February’s surge. We expect headline FX reserves to grow by USD20bn to USD3154.5bn in March; after adjusting for FX and coupon effects, we estimate the adjusted change to be a USD4.0bn rise from a USD19.3bn contraction in February.