The U.S. week ahead is a busy one - Nomura

Analysts at Nomura expect durable goods orders and new homes sales to confirm the slowdown in August. But consumer spending should prove to be on a steady track. 

Key Quotes:

New home sales (Monday): New home sales have trended notably higher this year. Since starting out the year at an annualized 530k in Q1, new home sales are now averaging an annualized 594k. In the latest reading, new home sales were 654k in July, the strongest annualized pace of sales since late 2007. We remain positive on the housing market and expect a steady pickup of new home sales as more new construction comes on the market. But in the near term, we expect some pullback after a strong month in July. We forecast a decline of 5.0% to an annualized 621k in August. 

Case-Shiller home price index (Tuesday): This index has fallen for three consecutive months on a m-o-m basis, the longest streak since it declined for 21 consecutive months between 2010 and 2012. Some of the weakness could be attributable to imperfect seasonal adjustment factors, as the m-o-m change rate has shown more rapid appreciation in the winter and slower increases/declines during summer months. But further declines, especially through the fall months, could mean that home prices may be settling into a more stable equilibrium following a recovery in home prices post-housing market crash. Consensus is looking for a decline of 0.1% m-o-m in July. This should translate into a y-o-y increase of 4.95% in July, modestly lower from 5.13% y-o-y in June. 

Consumer Confidence (Tuesday): According to this report, consumer confidence improved in August as consumers were generally more optimistic about current and future economic conditions. The labor market differential index improved to 2.6 from 0.9, the highest reading since January 2008 and suggests labor market conditions are becoming more favorable for workers. However, equity price declines in mid-September could have dinged sentiment. Plus, the preliminary estimate of the University of Michigan’s consumer sentiment was unchanged from the prior month. All these recent developments suggest to us that confidence should tilt to the downside. Therefore, we forecast that consumer confidence declined to 97.0 in September from 101.1 in August.

Durable goods orders (Wednesday): Durable goods orders increased strongly in July, as demand for manufactured goods was better for most durable goods categories. A 10.5% increase in transportation orders highlighted the broad-based gains, reversing much of slowdown in the prior month. We do not think the strong gains in July were sustained through August, as the August ISM manufacturing survey showed a sharp drop in the new orders index and durable goods production excluding transportation fell in August. Furthermore, incoming data on orders for nondefense aircrafts and parts imply a strong negative reversal after a whopping 90% m-o-m increase in July. Using our bottom-up approach, we forecast that durable goods orders excluding transportation declined 1.5% and total durable goods orders declined by 2.2% in August. 

Advanced goods trade balance (Thursday): The goods trade balance narrowed sharply in July, as goods exports grew by 2.9% m-o-m while goods imports fell by 1.0% m-o-m. Container data for August suggest that both goods exports and imports increased but growth of real exports likely outpaced imports. However, export prices likely declined more than import prices over the month. Thus, on a nominal basis, we forecast that goods trade balance widened modestly, to -$59.2bn in August from -$58.8bn in July. 

Q2 GDP, second estimate (Thursday): We think that the BEA is likely to revise up modestly its estimate of Q2 GDP. Incoming data since the last estimate have been generally more favorable for growth. The quarterly service survey for Q2 suggests that personal services spending was likely stronger than what the BEA had assumed previously. On the flip side, the survey results suggest that software investment likely was weaker than previously expected. Construction spending appears to be more favorable for nonresidential investment but implies more drag on growth from residential investment in Q2. Last, revisions to inventory and trade data for June were less favorable for growth. On balance, we expect BEA to revise up Q2 GDP to 1.2% from 1.1%, previously. 

Initial jobless claims (Thursday): Initial jobless claims trended lower over the latest reported week. With job gains still above “sustainable” levels and involuntary layoffs at historically low levels, labor market conditions appear to be healthy. 

Pending home sales (Thursday): Pending home sales, which tend to lead existing home sales, increased 1.3% in July following two consecutive months of declines. The declines in May and June translated into declines existing home sales in July and August. Given the pickup in pending home sales in July, existing home sales could rebound in September. However, this could prove temporary, as consensus expects pending home sales declined slightly by 0.1% in August. 

Personal income and spending (Friday): Aggregate personal income grew at a steady pace in July, up 0.4% m-o-m, following a somewhat weaker pace of income growth in the prior two months. The employment report for August suggests that total aggregate weekly earnings stalled following a sizable earnings growth in July. We think that the slowdown in earnings in August should hold back aggregate income somewhat and forecast only a 0.2% m-o-m increase in August. On the spending side of the balance sheet, we think consumption grew on balance at an average pace. Data on durable goods spending were quite weak as demand for autos slowed sharply in August. Nondurable goods spending appeared to have remained flat while service spending likely accelerated in August. Our bottom-up approach implies that personal spending likely grew by 0.3% m-o-m in August. 

PCE deflator (Friday): The relevant elements from the August PPI report for the core PCE price index were positive. Among major items of PPI, the price index for hospital service prices rose moderately in the month. Moreover, the price index for portfolio management services jumped by 2.8% m-o-m. From the CPI, the rise in some goods prices and the acceleration in lodging-away-from home inflation in CPI should push up core PCE inflation in August. However, medical care service prices of the PCE price index are estimated based on the corresponding components of PPI as opposed to CPI. For instance, in August, the price index for hospital services of CPI jumped by 1.7% m-o-m, but the PPI’s equivalent index rose only moderately. So, to that extent, medical inflation should make a more modest contribution to core PCE inflation it did for core CPI. Taking all these factors into account, we think that core PCE price index increased by 0.2% (unrounded: 0.189%) m-o-m in August, pushing up its y-o-y change rate to 1.7% from 1.6%. Based on CPI data, we think that the PCE food prices declined slightly and energy prices were likely flat in August. All together, we think that headline PCE index increased by 0.2% m-o-m (0.9% y-o-y). 

Chicago PMI (Friday): After registering two solid readings, this index fell over 4 points in August to 51.5, the lowest reading since May, when it dipped under 50. Regional business surveys for September so far suggest that the weakness in business activity carried over into September. The Empire State Manufacturing index improved but remained in negative territory and the underlying details painted a weak picture on current activity. Although the headline index from the Philly Fed survey improved notably, other details such as the shipments index swung 16 points to -8.8, an important signal that currently activity regressed. Given the latest round of weak business data, we think that the Chicago PMI is likely to edge down to 50.9 in September from 51.5 in August. 

University of Michigan consumer sentiment (Friday): The preliminary estimate of the consumer sentiment index in September was unchanged at 89.8. According to the report, better outlook for the national economy offset the less positive sentiment on income growth as well as buying plans. Economic conditions have, on balance, remained steady since the preliminary estimate. As such, consensus expects only a modest increase to 90.1 in the final reading in September. On inflation expectations, the 5- to 10-year ahead measure was unchanged at 2.5% in September. Recent readings on longer-run inflation expectations (e.g., NY Fed consumer expectations survey) suggest they remain relatively stable.