The US week ahead: CPI, retail sales, FOMC - Nomura

Analysts at Nomura explained that the June FOMC statement release and post-meeting press conference are scheduled on 14 June in addition to key data releases—May CPI inflation and retail sales.

Key Quotes:

"At this point it would be very surprising if the FOMC does not raise its target rate for the funds rate to 1-1.25% at its meeting next week. The preponderance of Fed speakers in recent weeks has made no attempt to dissuade markets that a hike is coming in June. The bigger issue at stake is what the FOMC signals about what comes afterwards

CPI (Wednesday): We expect core CPI inflation in May to accelerate to a trend-like pace. Core CPI inflation increased only 0.1% (0.071%) m-o-m in April, after the first negative reading since January 2010 in March. A sharp slowdown in some items in March (e.g., wireless telephone service prices and cigarette prices) proved transitory in April, but excluding these items core CPI inflation was still soft. We think it is possible to see weakness in some components carry over to May, particularly among core goods prices. In particular, used car and truck prices may continue to fall considering incoming industry information. Moreover, a 4.5% jump in cigarette prices in April appears unsustainable and warrants a sharp reversion in following months. However, a decent acceleration in core service prices may offset weak growth in core good prices. We think physicians’ service prices, which fell sharply in April, was likely transitory and expect a strong rebound in May. In addition, it is likely that the impact from a sudden drop in wireless telephone service prices in March continue to wane through May. Last, we expect a steady but a modest advance in the inflation of homeowners’ equivalent rent (HOER), which rose only moderately by 0.2%. Altogether, our forecast for core CPI inflation in May is 0.2% (0.177%) m-o-m. On a year-over-year basis, we forecast an increase of 1.9% (1.858%), which is slight acceleration from a 1.883% increase in April.

As for noncore components, retail gasoline prices trended lower in May. Moreover, futures prices suggest declines in natural gas and heating oil prices in the month. Against this backdrop, we expect a sharp slowdown in aggregate energy CPI inflation. Furthermore, we expect a decent pick-up in food-at-home prices as prices paid at farms likely increased steadily. For food-away-from-home prices index (the other subcomponent of food prices), tighter labor markets in the restaurant industry continue to exert steady upward pressure. Taking these subcomponents into account, we expect continued improvement in aggregate food CPI. All in all, we expect a 0.034% m-o-m decline in the headline CPI in May, which is equivalent to a flat reading if rounded. On a year-over-year basis, we forecast an increase of 2.0% (1.973% y-o-y). Our CPI NSA forecast for April is 244.995. Note that our forecast is subject to the PPI report, scheduled for release on 13 June. 

Retail sales (Wednesday): Top-line retail sales increased 0.4% m-o-m April. Core (“control”) retail sales (excluding autos, gasoline, building material and food services), an important component in estimating real growth in personal consumption expenditure, increased steadily in recent month. Incoming data suggest continued growth in core retail sales in May. Although ISM nonmanufacturing index declined slightly in May, it still remained at a highly elevated reading of 60.7 pointing to resilient optimism. The employment in core retail sector has been soft, declining 0.1% in May after remaining flat in April. However, given healthy consumer fundamentals such as firm job gains and income growth, we think core retail sales continued to improve. Thus, we forecast a steady 0.2% m-o-m increase in core retail sales. For non-core components, we expect a sharp slowdown in sales at gasoline stations as domestic gasoline prices plunged in May after a solid gain in April. Despite OPEC’s effort to buoy oil prices, increases in domestic oil production may have allayed upward pressure on prices. Moreover, we expect a sharp decline in sales at motor vehicle and parts dealers as suggested by sluggish consumer light vehicle sales in May. Total light vehicle sales came in below expectation at an annualized pace of 16.6mn units, much lower than a 2016 average of 17.5mn units. Excluding auto sales, we forecast a 0.2% mo-m decline. Altogether, we expect top-line retail sales to have fallen 0.2% m-o-m."