The week ahead: a busy schedule in Japan, EU and USA - Nomura

Analysts at Nomura offered their outlook for the week ahead.

Key Quotes:

United States | Data preview

The BEA is likely to report a temporarily soft 1.6% q-o-q saar print for Q1 real GDP growth but we expect an acceleration in coming quarters.

Existing home sales (Monday): We forecast a 2.7% m-o-m decline in existing home sales to an annualized pace of 5.39mn. Pending home sales, upstream from existing home sales, rose 3.1% in February but fell 5.0% in January, pointing to a mild downside risk for March existing sales. Moreover, cold weather returned in March after an unseasonably warm February, likely further dampening contract closing activity. Finally, ongoing structural issues in the existing homes market, including a shortage of available units, will likely continue to put downward pressure on existing home sales this year.

Case-Shiller home price index (Tuesday): Home price appreciation has shown no signs of slowing so far in 2018. The Case-Shiller composite 20 home price index increased 6.4% y-o-y in January, the highest 12-month increase since 2014, and easily outpacing income and wage growth over a similar period. A shortage of available homes for sale combined with firm consumer fundamentals supporting increased demand will likely continue to push up residential home prices over the medium term. However, given headwinds for high-end markets such as a reduction in property tax deduction, price appreciation will be more concentrated in middle- to low-end markets going forward. 

New home sales (Tuesday): We expect new home sales to remain essentially flat in March, increasing only 0.3% m-o-m to an annualized pace of 620k. Despite decreasing for the past three months, soft single-family permits data combined with unfavorable weather conditions will likely result in a muted reading for new home sales in March.

Conference Board’s consumer confidence (Tuesday): We expect consumer confidence to pull back slightly in the April reading of the Conference Board’s survey, falling 3.4 index points to 124.3. Consumer sentiment in the preliminary April reading of the University of Michigan’s consumer survey declined somewhat, while remaining elevated, as a number of respondents highlighted concerns about aggressive protectionist policies. As news reports have continued to focus on trade issues between the US and China, this sentiment likely spilled over into the Conference Board’s survey. However, consumer optimism remains firm overall in the face of a low unemployment rate, elevated stock prices and modest tax cuts taking effect.

Initial jobless claims (Thursday): Initial jobless claims remain subdued in light of a tight labor market and steady job growth. Over the medium term, we continue to expect low readings as the labor market tightens further.

Advance goods trade balance and inventories (Thursday): Incoming container data at major US ports have been somewhat mixed. It appears likely that the imports of goods may have declined more than the slowdown in exports. Altogether, we forecast a narrowing of the trade deficit to $74.0bn in March, from $75.9bn in February.

Durable goods orders (Thursday): We expect durable goods orders excluding volatile transportation components to increase 0.5% m-o-m in March, consistent with steady growth in the industrial sector. The March industrial production report showed steady output of durable goods excluding transportation. Moreover, the ISM new orders index in March remained elevated at 61.9. For total durable goods orders, we forecast a 0.8% m-o-m reading, as increases in motor vehicles and parts orders will likely help offset expected declines in orders for civilian and defense aircraft.

Employment cost index (Friday): We forecast a reading of 0.6% q-o-q for the wages and salaries component of the Q1 2018 employment cost index (ECI) reading, bringing the y-o-y rate down to 2.4%. Wage growth was steady in the first three months of the year, pointing to a solid ECI reading. For total ECI, of which the wages and salaries component comprises roughly 70%, we expect a reading of 0.7% q-o-q (2.6% y-o-y), likely partly boosted by one-time bonuses as a result of the tax bill.

The Q1 reading of the employment cost index (ECI) will garner more attention than usual. In particular, it will be the first comprehensive look at compensation changes since the new tax law took effect. In response to the new tax law, a number of companies reported one-time bonuses as well as some permanent wage increases for employees. More timely measures of wage growth, such as average hourly earnings (AHE) from the monthly employment report, do not include one-time bonuses in their calculations. However, the bonuses should show up in the ECI’s “benefits” series, which includes nonproduction bonuses, while the permanent wage increases will show up in the “wages and salaries” sub-component. As there seemed to be more companies delivering bonuses as opposed to wage increases, the quarterly increase in total ECI (benefits plus wages and salaries) will likely be greater than the growth rate of wages and salaries alone, consistent with our forecast.

Q1 GDP, first estimate (Friday): We expect the first reading of Q1 real GDP growth to come in at 1.6% q-o-q saar, the first sub-2% print since Q1 2017. Consumer spending has been tepid over the past three months, contrasting somewhat with elevated consumer optimism and firm fundamentals. Thus, we expect somewhat soft PCE growth in Q1 to be largely temporary. Besides weaker-than-expected personal spending, net exports and residential investment are likely to add some drag on growth. Imports in Q1 likely rose by a notable 8.5% while export growth decelerated to 2.1%, from 7.0% in Q4 2017. Residential investment likely pulled back as hurricane rebuilding efforts waned and new home sales softened. We expect non-residential investment to be mixed: a fall in equipment investment should be more than offset by positive contributions from structures and intellectual property products. The largest contributor to Q1 GDP growth is likely to be a robust build-up in inventories. We expect that inventory accumulation overall will contribute 1.4pp to top-line GDP growth in Q1. Finally, government spending likely picked up modestly in Q1, but we expect the quarters ahead will show much larger increases as the Congressional spending deal goes into effect.

University of Michigan consumer sentiment (Friday): While remaining elevated, consumer sentiment pulled back in the preliminary April reading of the University of Michigan’s consumer survey. The headline sentiment index decreased to 97.8, from a previous reading of 101.4. The survey noted that the decline was “mainly due to concerns about the potential impact of Trump's trade policies on the domestic economy.” Those that spontaneously mentioned trade policy as a concern showed a collective 64.2 for their expectations index. This pales in comparison with the 93.9 reading for respondents not mentioning trade policy. Despite the decline, consumer optimism remains elevated as the economy continues to add jobs at a healthy clip and income growth remains firm.

Inflation expectations in the preliminary reading ticked down 0.1pp at the 1-year and 5- 10-year horizons to 2.7% and 2.4%, respectively, remaining within a steady range.

Euro area | Data preview

The week ahead Euro area PMIs, the ECB policy meeting and UK GDP data are in focus next week.

Euro area flash PMIs (Apr-Flash), (Mon 23 Apr): We expect the euro area composite PMI to fall to 54.5 in April, from 55.2 in March. At the sector level, we expect the regional manufacturing PMI to decline to 55.8, from 56.6, and the services PMI to drop to 54.4, from 54.9. Strikes in Germany and France have acted as a drag on economic activity, and heightened uncertainty about protectionism has weighed on market sentiment. Nevertheless, we note that the overall level of these indicators is likely to remain high. Further, we expect some rebound in coming months as some of these recent and temporary restraints reverse. 

Germany Ifo Survey, Apr (Tues 24 Apr): Following some disappointing German survey data in recent weeks and most notably last week’s ZEW Survey for April we forecast a further decline in the headline indices from April’s Ifo Survey. Specifically, we expect a drop in the business climate index to 102.1, from 103.2 in March.

UK public finances, Mar (Tues 24 Apr): At the time of the March Spring Statement, the OBR’s forecast was for a £45.2bn PSNB deficit for 2017-18 – or 2.2% of GDP. That would imply a £1.7bn rise in the deficit in March this year compared with the same month in 2017 (i.e., a deficit of £3.8bn during the month). March’s deficit figures carry more than the usual market resonance as the Debt Management Office announces revisions to its remit – which will depend on the outturn of the central government net cash requirement.

UK CBI industrial trends survey, Apr (Tues 24 Apr): The orders balance slipped to just +4% in the March survey. That may have been owing to poor weather conditions (though activity growth in the manufacturing PMI survey did not slow). We forecast a recovery to its recent average of around +10% in April.

ECB policy announcement and press conference (Thu 26 Apr): We are not expecting too much new information from next week’s ECB policy board meeting. Although recent economic data have been weaker than expected, the ECB is likely to downplay the consequences. Similarly, while core inflation data have also been subdued, that’s partly because of last year’s euro appreciation and should not – at this stage – alter the ECB’s longer-term inflation outlook. Therefore, we expect the ECB to maintain the status quo and reinforce its view that gradual monetary policy normalisation steps are still needed. As articulated in our recent update, we continue to expect the ECB to shift toward more a hawkish stance in coming months.

UK CBI distributive trades survey, Apr (Thu 26 Apr): The reported balance fell to -8% in March, its worst reading in five months. Easter timing distortions and weather effects make this particularly difficult to forecast, but with warmer conditions in April and expected sales having held up in the March survey, we think a recovery can be expected.

UK GDP, Q1 (Fri 27 Apr): We forecast 0.3% q-o-q GDP growth in the initial Q1 print. As usual, there is no detail on the expenditure components in the first estimate – the numbers are constructed primarily from the output side of the accounts. Because the initial print is made up of only 40% of the information used for the final estimate of GDP, it can be subject to sizeable future revisions.

Japan | Data preview

The week ahead This will be the first BOJ meeting held under the new leadership. Our focus will be on questions at the news conference related to monetary policy management.

BOJ monetary policy meeting; Outlook for Economic Activity and Prices (Outlook Report; Thursday/Friday): We expect the BOJ to leave monetary policy unchanged. This will be the first meeting since the reappointment of Governor Haruhiko Kuroda and the appointment of Deputy Governors Masayoshi Amamiya and Masazumi Wakatabe. Based on remarks made by the three nominees before the Diet, we expect no immediate changes to monetary policy.

In the Outlook for Economic Activity and Prices (Outlook Report), which will be released at the same time, we expect the core inflation forecasts for FY17 and FY18 to be lowered by 0.1 percentage points (pp) as we believe signs of acceleration in inflation in the run-up to the end of March were scarcer than anticipated by the BOJ. We expect the core inflation forecast for FY20 (excluding the effect of an increase in the consumption tax rate), which will appear in the forecast for the first time, to be the same as the 1.8% forecast for FY19. 

We expect a slightly lower GDP growth forecast for FY17 and FY18, reflecting the slowdown in growth in January-March, and FY19 to be unchanged. The first FY20 GDP growth forecast should continue to be in line with potential growth, if we assume no rise in the consumption tax rate in October 2019. We would expect a growth forecast of 0.6% if the downturn in response to the demand surge prior to the consumption tax hike is taken into consideration. 

At the governor's post-meeting press conference, we expect questions on the JPY80trn annual JGB purchase target, the need to continue ETF purchases, and the possibility of raising the target for long- and short-term interest rates under YCC. With the new line-up of deputy governors we are interested – from the perspective of gauging the policy stance – to see whether or not the tone of their answers to these questions changes. 

April Tokyo area core CPI (all items, ex fresh food) (Friday): We forecast the April Tokyo core CPI inflation to come in at 0.8% y-o-y, unchanged from March. We forecast CPI inflation excluding fresh food and energy (the BOJ version of core core CPI) of 0.6% y-o-y, up 0.1pp on March, as we believe costs rose as a result of increased labor shortages, among other factors. However, energy price inflation seems to have grown at a slower pace in April. Overall, we expect core CPI to be unchanged from the March reading. 

March industrial production (Friday): We forecast March industrial production to be essentially unchanged month-on-month. In the survey of manufacturers' production forecasts carried out on 10 March, the production forecast for March adjusted for prediction error was 0.5% m-o-m. In the March trade statistics, export growth fell short of consensus expectations. Exports, which are highly correlated with industrial production, eased from the middle to the end of the month, weighing on production, in our view. We thus expect March industrial production to be slightly weaker than indicated by the manufacturers forecast. 

March Labor Force Survey (Friday): We forecast a March unemployment rate of 2.5%, unchanged from February. The job openings-to-applicants ratio, which tends to be a leading indicator of the unemployment rate, was 1.58x in February, the first monthly decline in about five and a half years. Based on this alone, it would suggest a change in the progressive tightening in labor supply-demand conditions. We believe the decline in the job openings-to-applicants ratio is attributable to weakness in the number of new job openings since the beginning of 2018 (the average for January-February 2018 is 4.3% lower than the average for October-December 2017). In the March Tankan survey, the employment conditions DI indicated that the shortage of workers for companies remains dire, and we do not believe labor supply-demand conditions have started to ease. Sometimes swings in the number of new job openings that appear when data is released become less pronounced when adjusted for seasonal factors. This time, too, it is possible that seasonal adjustment distortions could have had an effect on weakness in the number of new job openings and the decline in the job openings-to-applicants ratio. On the labor-supply side, the number of non-regular employees in service jobs, which are jobs that see rapid turnover, increased sharply again in February. In March, the resignation of people in such jobs may have boosted the number of unemployed persons. As such, we expect the March unemployment rate to be unchanged from February. We forecast a March job openings-to-applicants ratio of 1.59x, up 0.01pp. Looking at leading indicators, the number of new job openings rose month-on-month in February, which we believe led to an increase in the job openings-to-applicants ratio in March.

Aussie | Data preview

Australia: We forecast a 0.6% q-o-q rise in headline CPI inflation in Q1 2018, which would see year-end inflation rise to 2.1% y-o-y from 1.9%. We expect headline CPI inflation to be pushed up by higher tobacco and electricity prices, a 1% rise in fuel prices, and seasonal rises in health and education costs. Core inflation should be relatively more contained, and should provide evidence of subdued retail price pressures – we forecast the trimmed-mean measure to rise by 0.48% q-o-q and by 1.8% y-o-y