The week ahead: a busy calendar, including ECB, US/ UK GDP, Aussie CPI- Nomura

Analysts at Nomura offered a preview of the week's key events.

Key Quotes:

United States | Data preview

For the advance estimate of Q3 real GDP, we expect above-potential growth despite the negative impact from the recent hurricanes.

Durable goods orders (Wednesday): We expect a solid 1.0% m-o-m increase in durable goods orders excluding transportation, following a 0.5% increase in August. September industrial production data suggest that production of durable goods increased at a healthy pace. Further, survey-based measures of new orders improved strongly in September, pointing to healthy gains in ex-transportation durable goods orders. On noncore components, September industrial production indicates a decent increase in vehicle assemblies, which points to a steady increase in new orders for motor vehicles and parts. Aircraft manufacturers reported a decent increase in new orders in civilian aircrafts, but after seasonal adjustment, we expect some decline in nondefense aircraft and parts orders following a sharp 44.8% jump in August. For defense aircraft and parts orders, we expect a steady increase. Altogether, we expect a 1.0% m-o-m increase for total durable goods orders.

New home sales (Wednesday): We expect new home sales to have fallen slightly by 0.9% m-o-m to 555k in September, reflecting disruptions to sales activity brought by Hurricane Irma. Moreover, Hurricane Harvey affected the Census Bureau’s data collection in the South in August. As delayed data become available, August sales estimates could be revised in the September report. Incorporating the negative impact from the recent hurricanes, it appears likely that residential investment will subtract from real GDP growth in Q3. Looking ahead, recovery work after the recent storms could boost construction modestly in the South, which will likely be smoothed out over next couple of quarters. However, shortages of skilled labor and of developable lots could continue to weigh on inventory growth, constraining sales.

Initial jobless claims (Thursday): Initial unemployment claims reached the lowest point since March 1973 in the week ending 21 October as the transitory impact caused by the recent hurricanes subsides. However, power outages in Puerto Rico and the Virgin Islands after Hurricane Maria disrupted the electronic filing process, which would have significantly delayed increases in unemployment claims. Although we continue to expect initial claims remain low given strong labor market conditions, delayed filling in affected areas could increase uncertainty on upcoming readings.

Advance goods trade balance (Thursday): We expect the goods trade gap to have widened to $64.6bn in September, from $63.3bn in August. Based on container data at sea ports so far, both nominal imports and exports appeared to have increased, but imports likely exceeded exports. However, uncertainty is high due to disruptions to supply chains and ports in the Gulf Coast area caused by the recent hurricanes.

Pending home sales (Thursday): With strong job markets, consumer demand likely remained firm. However, disruptions brought by the recent hurricanes may have depressed the sales of previously-owned homes, which fell 2.6% in August. Another weak print of pending home sales in September may imply weak existing home sales numbers, which track contract closings. Besides hurricane-related disruptions, the markets for previously-owned homes have been constrained by shortages of homes for sale. These negative factors may have weighed on Q3 residential investment. 

Q3 GDP, advance estimate (Friday): In the advance estimate of Q3 real GDP, we expect the BEA to report growth of 2.7% q-o-q saar. Despite the negative impact from the recent hurricanes, we think the US economy continued to grow above potential in Q3. Incoming data on personal spending suggest steady growth. On the business side, reflecting healthy growth in new domestic orders of core capital goods, we expect steady gains in equipment investment. Inventory investment likely contributed strongly to Q3 growth as businesses build up inventories in the face of better demand. Although the recent hurricanes may have disrupted production in affected areas, incoming data suggest resilient growth in inventory investment. Further, exports in recent quarters have been strong. We expect this trend to have continued in Q3, reducing the drag from net exports, despite hurricane-related disruptions to global shipments. On the downside, we expect some drag from business investment in structures, likely reflecting the negative impact from the hurricanes, tighter credit standards for commercial real estate loans, and plateauing oil and gas well drilling activity. Residential investment likely remained sluggish in Q3. Residential construction has been soft, constrained by a lack of developable lots and skilled labor. Further, the recent hurricanes severely interrupted housing sales activity in August and September, lowering our expectations on brokers’ commissions.

University of Michigan consumer sentiment (Friday): Consumer sentiment improved further in the University of Michigan’s October preliminary consumer survey with broadbased strength across demographic groups and political affiliations. It appears unlikely for this measure to be revised significantly in the final print of this survey for October. Increases in short-term (one-year) and medium-term (5-10 year) inflation expectations seen in September appeared transitory in the preliminary estimates for October with both measures falling back to 2.3% and 2.4%, respectively, below the levels seen in August.

Euro area | Data preview

ECB policy meeting, Euro area PMIs and UK GDP data are in focus this week. 

UK CBI quarterly Industrial Trends survey (Mon): This survey provides a rich database of firms’ responses to various questions, including on capital spending, employment, spare capacity and factors limiting activity – as well as the usual monthly indicators of orders, output and prices. The monthly survey has held up well in the recent past, in line with other reports such as the PMI manufacturing survey. A weak sterling is likely to remain supportive.

Euro area August flash PMIs (Tues): We expect the euro area composite PMI to increase to 56.9 in October from 56.7 in September. At the sector level, we expect the regional manufacturing PMI to rise to 58.5 from 58.1, reflecting a strengthening global economy. Leading indicators such as capital goods orders and world trade growth suggest a strong global economy. Meanwhile, we forecast the services PMI to increase to 55.9 from 55.8 as financial market conditions remain accommodative. 

German Ifo (Wed): We expect the German Ifo business climate index to increase to 115.8 in October from 115.2 in September. We forecast the current situation and expectations indices to pick up to 124.1 (from 123.6) and 107.6 (from 107.4) respectively.

UK GDP (Wed): The first print of GDP is based on only limited information (40% of what is typically needed to produce a final estimate of GDP) and is, as a result, often revised. Industrial production looks set to have rebounded well in Q3, while there is much uncertainty about how swiftly services output will have recovered from its fall in July. We look for a 0.4% q-o-q rise, which would be an improvement on the 0.3% growth rates in the first half of the year.

ECB policy announcement and press conference (Thu): The ECB is widely expected to announce that the monthly pace of asset purchases will be reduced from the beginning of next year. As far as the parameters of the APP are concerned, in our base case we expect monthly purchases to be cut by EUR20bn to EUR40bn per month from January to June 2018. We further expect the forward guidance on interest rates and the APP to remain unchanged. However, the bigger issue here is whether the ECB keeps the programme open-ended or sends a firm signal about ending it. And with no change expected in the forward guidance we are in the former – and thus the more dovish – camp. Preventing a sharp market response that would tighten financial conditions and potentially destabilise economic activity are clearly a key priority for the ECB at present in its wish to see firmer inflation data in the period ahead.

UK CBI distributive trades survey (Thurs): Consumer spending has generally slowed thanks to the sterling-induced rise in inflation. However, recent surveys – including this one and that of the British Retail Consortium – have been more upbeat. We doubt that this survey will be able to sustain the exceptionally high readings of September, however, and see some payback in the October report.

Japan | Data preview

We expect an all-Japan core inflation rate of 0.7% y-o-y, 0.0% m-o-m in September. We expect the Tokyo area core inflation rate to rise 0.1 percentage point m-o-m in October.

September all-Japan core CPI (ex-fresh food) (Friday): We forecast the all-Japan core CPI (ex-fresh food) was 0.7% y-o-y in September, unchanged from August. We expect a brief softening in the boost to prices from the recovery in energy prices and weakening of JPY. We forecast all-Japan core core CPI (CPI ex-energy and food (except alcoholic beverages)) was 0.0% y-o-y in September, again unchanged from August, and we forecast CPI less fresh food and energy (known as the BOJ version of core core CPI) was 0.2% y-o-y in September (also unchanged from August).

We expect Tokyo area core CPI of 0.6% y-o-y in October, up 0.1pp from September. We look for higher costs stemming from JPY weakness and other factors to contribute again to the elevation of prices. We expect Tokyo area core core CPI of 0.0% y-o-y in October, up 0.1pp from September. We expect Tokyo area CPI less fresh food and energy (the BOJ’s version of core core CPI) to be 0.1% y-o-y in October, up 0.1pp from September.

Asia | Data preview

Australia: We expect headline CPI inflation to rise by 0.7% q-o-q in Q3, boosted by seasonal rises in property rates and charges, overseas travel and accommodation costs, and by a sharp jump in the price of electricity and gas – while a ~3% fall in the fuel price provides only a partial offset. Underlying (trimmed) CPI inflation is expected to rise by a more modest 0.5% q-o-q, highlighting ongoing fierce retail competitive pressure.