The week ahead and key events- Nomura

Analysts at Nomura offered their outlook for the week ahead.

Key quotes:

"United States | Data preview

The week ahead We expect a solid 2.4% q-o-q saar advance reading for Q4 real GDP growth, consistent with an economy that continues to grow above potential. 

Existing home sales (Wednesday): We expect a 1.0% decline in existing home sales in December to an annualized pace of 5750k, after two consecutive months of hurricanerelated increases. November’s existing home sales data brought the three-month increase to 8.6%, the highest reading since January 2011. Part of the increase was attributable to stronger-than-expected pent-up demand in the South after the active hurricane season. Thus, we expect some moderation in December as weather-related demand recedes. With continued deterioration in the inventory of previously-owned homes, we expect that growth in existing home sales will continue to moderate somewhat over the medium term."

Initial jobless claims (Thursday): After a period of increased volatility related to the holiday season, initial claims have returned to historical lows as the labor market continues to show strength. We expect this trend to continue over the near to medium term as the economy continues to operate above potential.

Advanced goods trade balance (Thursday): We forecast a narrower goods trade gap of $66.8bn in December, down from November’s reading of $70.0bn. Incoming container data from sea ports indicate a modest increase in exports while imports may have slowed during the month. 

New home sales (Thursday): We forecast a 6.5% m-o-m decline in December new home sales to an annualized pace of 685k. November new home sales were driven in part by demand that was shifted to later months due to hurricanes (see New Home Sales Rose Strongly in November, 22 December 2017). As this demand wanes, new home sales should return to more stable growth. Similar to December’s housing starts data, we could see notable payback in the month for new home sales. However, with the strong labor market and solid income growth, consumer fundamentals should support continued growth in new home sales over the medium term.

Q4 GDP, advance estimate (Friday): We forecast a 2.4% q-o-q saar print for the advance estimate of Q4 real GDP growth, a slight deceleration from the previous two quarters of above-3% growth but a strong reading nonetheless. PCE likely increased notably during the quarter, reflecting robust retail sales data and solid increases in personal spending on services. Higher stock prices and continued job growth supported strong consumer activities. For businesses, equipment investment continued its recent surge of double-digit annualized growth, likely contributing 0.7pp to topline growth, as new domestic shipments of core capital goods increased healthily during the quarter. Other business fixed investment such as structures and IPP likely grew more modestly in the quarter, while we think residential investment, partly boosted by hurricane recovery efforts, grew strongly by about 12% q-o-q saar after two consecutive quarters of negative growth. Finally, government spending likely increased during the quarter, buoyed by steady increases in both federal and state and local expenditures. 

On the downside, inventory accumulation in Q4 may not have kept pace with the robust build-up in Q3, adding some drag to topline growth. While there is some uncertainty around our inventory forecast, preliminary data on December’s wholesale and retail inventories, which will be released next week one day before the Q4 GDP release, could provide more clarity on inventory investment during the quarter. Additionally, a surge in imports well-above the growth in exports reduced net exports, adding additional headwinds.

Durable goods orders (Friday): Based on incoming data, we forecast a 0.2% m-o-m decline in topline durable goods orders for December’s preliminary report. While industrial production data on vehicle assemblies indicate a positive contribution from motor vehicles and parts orders, volatile orders for civilian aircraft likely dragged down transportation-related orders overall. We expect durable goods orders excluding transportation to decrease 0.1% m-o-m, primarily reflecting softness in December’s industrial production of durable goods excluding transportation.

Euro area | Data preview

The week ahead ECB policy meeting, euro area PMIs, UK wages, and UK GDP are in focus this week.

German ZEW index (Tue): We expect the ZEW expectations index to decline modestly to 16.1 in January from 17.4 in December. The euro’s appreciation may have had an adverse impact on investor sentiment. However, this survey has not been a good predictor of other more high-profile business surveys of activity in recent months, and we expect German economy to maintain strong momentum in the period ahead.

UK Public finances, Dec (Tue): In the fiscal year to date (eight months from April to November inclusive) the aggregate deficit is around £3bn smaller than it was in the same period the previous fiscal year. Our forecast is for the trend towards a marginally narrower deficit to continue in the December data. However, in January’s data a reduction self-assessment receipts could push the deficit higher as dividend forestalling unwinds.

UK CBI quarterly industrial trends survey, Jan (Tue): The CBI’s quarterly survey is always closely watched with a number of additional balances published over and above those in the monthly survey being helpful in identifying trends in spare capacity, employment and investment spending. We expect the business optimism balance to rebound from its weak -11% reading a quarter ago as industrial sentiment has benefited from the weak pound, the ongoing global recovery and more moderate headlines on the issue of Brexit.

Euro area December flash PMIs (Wed): We expect the euro area composite PMI to increase to 58.5 in January from 58.1 in December. At the sector level, we expect the regional manufacturing PMI to rise to 61.2 from 60.6 and the services PMI to increase to 56.8 from 56.6. Solid global growth should support the region’s economic activity and manufacturing activity may be further supported by some re-stocking of inventory following some rapid destocking of finished inventory in recent months.

UK Labour market report, Dec (Wed): Base effects (a reasonably large rise in monthly earnings a year ago) could hold back the annual rates of average wage growth in this report. Still, we expect the trend in earnings growth to generally be upwards over this year and expect it to end the year around 3% (a similar view to that expressed by MPC member Michael Saunders in a speech this week). Productivity growth will inevitably need to improve if wages are to perform better over a more prolonged period of time, of course. We see no change in the unemployment rate, currently standing at 4.3%.

German Ifo (Thu): We expect the German Ifo business climate index to climb to 117.7 in January from 117.2. We forecast the expectations index to pick up to 109.7 (from 109.5) and the current situation index to rise to 125.9 (from 125.4) respectively.

ECB policy announcement and press conference (Thu): We are not expecting too much new information to emerge from next week’s ECB policy board meeting. The minutes from the December meeting surprised market participants in suggesting the Council plans to revisit the asymmetric nature of the forward guidance on QE early this year, sooner than was previously assumed. However, we think it more likely that the QE bias will be removed at the March meeting when the ECB will release its macroeconomic projections. Meanwhile, with recent inflation data subdued and a still high level of uncertainty about how tighter financial conditions might affect the economic outlook, we doubt whether the ECB will deliver further hawkish communications at present. Still, on a multi-month horizon we believe the region’s pace of growth and the level of inflation will surprise the ECB on the upside. And that will pave the way for a signal in the middle of the year that the APP will not continue beyond September. We believe that will then pave the way for some softening of the forward guidance on interest rates in Q3 and then a 10bp depo rate hike by the end of the year.

UK GDP, Q4 first estimate (Fri): There remains a notable divergence between the performance of different sectors in the UK economy. While industrial production looks set to have grown by 1% or more during Q4 (the global economy and sterling have helped), construction output may have fallen to a similar degree. Assuming a 0.5% q-o-q rise in services output during the quarter (implying increases of 0.2% m-o-m in both November and December) then that would mean GDP grew by 0.5% q-o-q last quarter (compared with the MPC’s November Inflation Report forecast of 0.4% q-o-q). Under that forecast the annual rate falls from 1.7% to 1.5% in Q4 for a full-year 2017 average rate of 1.8%.

Japan | Data preview

The week ahead We expect monetary policy to be left unchanged and will focus on questions at the BOJ governor's press conference about trimming its JGB purchases. 

BOJ policy board meeting; Outlook for the Economy and Price (Outlook Report; Monday/Tuesday): We expect the BOJ to leave monetary policy unchanged at the meeting. The economy has been solid and, although core inflation (inflation based on all items in the CPI index less fresh food) has been rising, it is far from the 2% target, indicating there is little justification for making any changes to monetary policy. In the Outlook for the Economy and Prices (Outlook Report) that will be released at the time of the meeting, we expect GDP growth forecasts for FY17 and FY18 to be raised. Since the Outlook Report was last released in October 2017, growth in the global economy has gathered pace, and we expect this to be reflected in the upcoming release of the report. Annual revisions to GDP data might also affect FY17 forecasts. We think the forecast for core inflation will be left unchanged. Recent increases in crude oil prices are likely to boost inflation, but yen strengthening against the dollar is likely to counter this boost and we do not expect changes to the core inflation forecast resulting from changes to import prices to be carried out this time. 

At the BOJ governor's press conference after the meeting, the governor might be asked about the decision to reduce the amount of longer-term bonds it purchases and his view of the market's reaction, as JPY strengthened after the purchase amount was scaled back on 9 January. We expect Governor Kuroda to reiterate the position that intentions with regard to changes to monetary policy are not reflected in daily market operations and that, regardless of the market's reaction, tenacious easing efforts will continue.

December trade statistics: nominal exports (Wednesday): Nominal exports in the first 20 days of December rose by 10.8% y-o-y (versus a rise of 15.0% in the first 20 days of November), while nominal imports rose by 12.3% (22.2%). We think differences in the number of business days had no effect on growth in imports or exports in December 2017, as the number of business days in both the first 20 days of the month and in the remainder of the month were the same as in December 2016. We forecast export growth of 9.6% y-o-y and import growth of 11.2% y-o-y in December, slightly down from the respective growth rates in the first 20 days of the month, as we think the changes that are likely to have been applied to forex rates and crude oil prices in the last 10 days of the month weighed on growth in nominal imports and exports in the last 10 days more than in the first 20 days. We estimate a trade surplus (original series) of JPY598.7bn and a seasonally adjusted trade surplus of JPY136.0bn. Adjusting our December nominal export and import estimates for inflation, based on corporate goods price index data for December (export prices up 2.3% y-o-y, import prices up 7.1% y-o-y), and seasonality, results in a real export estimate of -3.1% m-o-m and real import estimate of -0.1% m-o-m. We expect a decline in real exports in December, but a solid increase of 1.7% q-o-q in October-December. 

December all-Japan core CPI (ex-fresh food) (Friday): We expect the December allJapan core CPI (ex-fresh food) to rise 1.0% y-o-y, 0.1pp stronger than the November reading. We expect the December all-Japan core core CPI (all items ex energy and food, except alcoholic beverages) to rise 0.3%, up 0.2pp from November. We think prices of food and a broad range of consumer goods contributed to higher inflation. We expect the so-called BOJ version of the all-Japan core core CPI (all items ex energy and fresh food) to rise 0.5% y-o-y, a 0.2pp improvement from November.

We forecast the January Tokyo core CPI to rise 0.8% y-o-y, unchanged from December. As the boost from energy prices weakens, we look for inflation to temporarily stall. We expect January Tokyo core core CPI to rise 0.3%, a 0.1pp improvement from December, and the BOJ version of January Tokyo core core CPI to rise 0.4%, unchanged from December."