The week ahead and key events - Nomura

Analysts at Nomura offered their outlook for the week ahead.

Key Quotes:

"The week ahead for USA

We expect a steady 0.2% m-o-m increase in January core CPI inflation and a solid increase in retail sales. 

NY Fed Survey of Consumer Expectations (Monday): Inflation expectations at the one- and three-year horizons rose in the December 2017 New York Fed consumer survey. At the one-year horizon, inflation expectations increased 0.2pp to 2.8%, while inflation expectations at the three-year horizon increased 0.1pp to 2.9%. Survey-based measures of consumer inflation expectations have remained steady. We continue to expect steady readings over the near to medium term.

US Budget (Monday): In the Congressional Budget Office’s (CBO) monthly budget review for January 2018, the agency projected a budget surplus of $51bn for January’s budget statement, slightly smaller than the $52bn surplus from January 2017. The IRS issued new withholding tables for the recently enacted tax law in mid-January, but employers are not required to use them until February. Thus, with the new withholding tables taking full effect in February, we do not expect a substantial change in the budget deficit relative to last year’s path until after January.

CPI (Wednesday): We expect core CPI to increase at a more moderate pace in January after a steady gain of 0.239% m-o-m in December. Our forecast for core CPI inflation is 0.2% (0.188%) m-o-m, which would lower the y-o-y change to 1.7% (1.682%) in January, from 1.8% (1.776%) in December. As we discussed in our Monthly Inflation Monitor, December core CPI was partly boosted by temporary factors such as idiosyncratic jumps in rent data for certain metropolitan areas and positive payback from softness in prior months. As those temporary factors wane, we think that core inflation decelerated. slightly in January. Moreover, although January core CPI has historically tended to outperform market expectations, new seasonal factors may appear to address such residual seasonality issues. 

In addition, methodological changes to the calculation of used vehicle prices should have a negative impact on January’s CPI inflation. For noncore components, we expect energy prices to move up modestly by 2.6% m-o-m, led by higher gasoline prices, while we think food prices probably continued their trend-line increase of 0.2% m-o-m. All in, our forecast for headline CPI is an increase of 0.4% (0.369%) m-o-m or 2.0% (1.960%) y-o-y. We expect CPI NSA to be 247.599 (see January CPI Preview, 8 February 2017).

Retail sales (Wednesday): We forecast a healthy 0.5% m-o-m increase in core (“control”) retail sales in January. Survey indicators suggest healthy business activity in the month. The ISM non-manufacturing index rose notably to 59.8, above markets’ expectations. The report also indicated strong expansion in new orders and business activity. We think core retail sales will reflect this vigor. Among non-core components, we expect a notable boost from sales at gasoline stations. Retail gasoline prices likely increased strongly in the month, which should boost nominal sales at gasoline stations. Further, we expect a slowdown in sales at autos and auto parts dealerships from the prior month. If realized, this would be consistent with the slowdown in light vehicle sales in January from the pace in December, as reported by WardsAuto. Excluding auto sales, we forecast a 0.8% m-o-m increase in retail sales. Altogether, we expect a 0.4% m-o-m increase in total retail sales.

Business inventories (Wednesday): Business inventories likely rose at a steady pace in December. The Census Bureau’s December factory orders report indicated inventories at factories rose at a solid pace. However, advance estimates by the Census Bureau suggest inventories held by wholesalers and retailers only rose modestly. Altogether, it is likely the final business inventory estimates for December will come in close to the estimates implied by the BEA’s advance Q4 real GDP report. Change in inventories subtracted 0.67pp from real GDP growth in Q4, after a strong Q3 contribution. 

NAHB housing market index (Wednesday): For the February NAHB report, we expect no change in the NAHB housing market index which fell to 72 in January, from 74 in December. In our view, consumer fundamentals remain healthy with strong labor market conditions and steady gains in personal wealth and the NAHB survey reflects the strong fundamentals. However, incoming survey data suggest that fast-rising home prices may have dampened consumers’ assessment of home buying conditions. 

Initial jobless claims (Thursday): As the labor market continues to tighten, we expect unemployment to remain low. Incoming data highlight a continued downtrend in claims. Initial unemployment claims fell 9k to 221k for the week ending 3 February. The fourweek moving average of initial claims fell 10k to 224.5k, the lowest since 1973. Given the heightened pace of job creation and the economy in the vicinity of full employment, we think unemployment claims data will remain low.

Empire State survey (Thursday): We expect the Empire State survey’s general business conditions index to rebound slightly to 18.0 in February after falling to 17.7 in January. Incoming business surveys point to robust activity in the manufacturing sector. The January employment report by the BLS reported a solid 15k gain in manufacturing jobs, reflecting healthy expansion in business activity. Further, anecdotal evidence from various surveys suggest that many respondents expressed favorable assessments of the recent changes to tax policies. That said, we do not think a decline in January signals material deterioration in activity. The Empire State survey’s general business conditions index remains very high.

Philly Fed survey (Thursday): We forecast a modest increase to 23.0, from 22.2, for the February Philly Fed index. Business sentiment remained elevated through the beginning of 2018 despite slight moderation. The details of various surveys point to continued momentum rather than continued moderation. The ISM manufacturing index, for example, fell slightly to 59.1 in January, from 59.3, but many of its subindices remained elevated, pointing to continued expansion.

PPI (Thursday): The PPI unexpectedly fell 0.1% m-o-m in December, after increasing a solid 0.4% in November. For January, there could be some positive payback from a weak reading in December, and inclement weather in the month likely boosted various fuel prices. Excluding volatile food, energy and trade components, the PPI rose modestly by 0.1% m-o-m in December. Inflationary pressure on pipeline prices has been modest. 

Input prices have been rising, as suggested by various business surveys, but prices of finished consumer goods have not responded strongly, remaining essentially flat in December. Given the recent slow pass-through we do not expect material acceleration in PPI excluding volatile food, energy and trade components.

Industrial production (Thursday): We expect a 0.3% m-o-m decline in industrial production in January after increasing a solid 0.9% in December 2017. Business survey data suggest that the manufacturing sector is on solid footing. Further, aggregate hours in the manufacturing sector excluding autos rose steadily by 0.3% in January, recovering from a decline in December. The rebound in aggregate hours points to a steady increase in ex-auto manufacturing output. However, incoming industry data portend a notable decline in auto assemblies in January. Moreover, we expect a significant drag from the mining sector. EIA data indicate that crude oil and liquid gas extraction slowed in the month, suggesting that mining sector output likely fell in the month. Moreover, after a strong weather-driven increase in December, utility output likely fell in January, acting as an additional drag on total industrial output. 

Import prices (Friday): Import prices increased only slightly in December, weighed down by declines in food and consumer goods prices. Excluding food and energy components, import prices declined 0.1% m-o-m, the first decline since November 2016. With a weakening dollar and a rise in energy prices during January, import prices may rebound during the month, although any pass-through to domestic inflation will take some time.

Housing starts (Friday): We expect housing starts to increase 3.6% m-o-m in January to an annual rate of 1235k. Strong single-family permits data over recent months indicate that a pickup in single-family starts should more than offset a modest decline in the more volatile multi-family starts series. On the downside, aggregate hours worked in construction in January were somewhat soft, declining 0.3% m-o-m, but this may have been the result of a cold spell during the BLS survey week early in the month. Weather over the rest of January was milder, resulting in average temperatures in line with regular seasonal variation. For building permits, we expect a 0.8% m-o-m increase to an annualized pace of 1310k, consistent with solid gains in residential construction employment and resilient home builder confidence.

University of Michigan consumer sentiment (Friday): Consumer sentiment likely remained elevated in the University of Michigan’s preliminary February survey of consumers. However, there is some risk that recent stock price volatility early in the month may have dampened consumers’ outlook somewhat (the survey period for the preliminary reading covers 31 January to 14 February). If that were the case, we would expect the slight deterioration to only be temporary as the outlook for job growth and income gains remains firm, especially in light of the changes consumers experienced in their February paychecks as a result of the tax bill. Inflation expectations at the one-year horizon remained unchanged at 2.7% in January while those for the 5-10-year horizon ticked up 0.1pp to 2.5%.

Euro area | Data preview

Euro area industrial production and UK consumer price data are in focus this week.

Consumer prices, Jan (Tues 13 Feb): We expect a small decline in CPI inflation in January to 2.9% from 3% in December. We expect more notable declines over the coming months thanks to the inflationary effect of past falls in sterling beginning to unwind. We see CPI inflation falling below 2.5% by mid-year. As for RPI inflation we see that falling a tenth too, with downside risks on account of a possible unwind in the RPICPI wedge (which rose sharply in December).

Producer prices, Jan (Tues 13 Feb): A feature of the January PMI and CBI manufacturing surveys was a sharp rise in the output price indicators (the latter to its highest since 1984). This explains our forecast for a strong rise in official output prices at the core and headline levels (0.4% m-o-m). We expect sterling’s rise during January to almost offset the rise in dollar crude oil prices when it comes input prices.

Euro area industrial production, Dec (Wed 14 Feb): We expect Eurozone industrial production in December to increase by 0.5% on a month-on-month basis. Although Germany’s industrial production fell 0.6% m-o-m that decline was mostly owing to a payback from an outsized gain in November (+3.4% m-o-m). By contrast, the figure for Spain’s industrial production was much healthier (on the month) and we assume similar, sturdy monthly gains from the Eurozone's other major economies. This would be in line with forward-looking PMI survey data. 

Retail sales, Jan (Fri 16 Feb): Official sales volumes have been volatile over the past two months, rising over 1% m-o-m in November, but then falling back by more than that in December. Generally, however, survey evidence has held up (BRC and CBI volumes growth) despite reports of a mixed Christmas. We expect a rebound in January driven primarily by volatility, but improving fundamentals in 2018 (rising wages, lower inflation) should be positive for the sector.

The week ahead for Japan

We estimate that private sector demand was firm in October-December 2017, but public sector demand was weak.
First set of preliminary estimates for Q4 2017 real GDP (Wednesday): We expect Q4 (October-December) 2017 real GDP growth was 1.0% q-o-q annualized (0.2% q-o-q), which would be the eighth consecutive quarter of q-o-q growth. Our overall view is that growth in private sector demand has been firm, while public sector demand has been on the weak side. We also believe external demand’s contribution (which has boosted real GDP growth in many quarters up until the latest set of data) will likely be close to zero, with imports having shown particularly sharp growth. We estimate that private sector demand was generally quite brisk in Q4 2017. Consumer spending proved quite weak during summer, but there appears to have been a rebound in Q4, most notably in services-related spending. We also expect capex to have risen. Construction investment looks to have been sluggish, but we believe firm exports likely boosted machinery investment. Meanwhile, we estimate that public sector demand was quite sluggish. Public investment grew sharply in H1 2017 on the execution of the second FY16 supplementary budget, but with these already having run their course, we expect there to have been a decline in Q4 (following on from a similar fall in Q3). Core statistics also suggest that private sector housing investment continues to trend on the weak side, and we expect there to have been another q-o-q decline in this category. As overseas economic conditions were quite healthy in Q4, we believe growth in exports from Japan was also likely quite strong. That said, imports rose sharply in December, with the result being that overseas demand’s contribution (which has boosted real GDP growth in many quarters) was likely somewhere close to zero. While we expect there to have been positive growth for an eighth-straight quarter overall, growth is likely to be more moderate in Q4 compared with previous quarters which had exceeded the potential growth rate. 

December 2017 core machinery orders (private sector, excluding orders for ships and from electric power companies) (Thursday): We forecast that core machinery orders (private sector, excluding orders for ships and from electric power companies) declined 1.1% m-o-m in December 2017. Looking at related indicators for December, Japan Machine Tool Builders' Association data showed a sharp rise of 22.4% m-o-m in machine tool orders for customers in Japan (seasonal adjustment by Nomura). Meanwhile, industrial production data showed the production of items with short lead times from order to production was broadly flat, falling just 0.5% m-o-m. Taking these statistics at face value, we would expect there to have been an increase in core machinery orders in December. However, as these statistics only account for a portion of overall orders, the pace of orders in the previous two months has been somewhat faster than the outlook for orders as of end-September 2017, and we could therefore see a correction. Based on the above, we forecast that there was a small decline in December. For Q4 (Oct-Dec) 2017, however, we forecast growth of 3.7% q-o-q, a second consecutive quarter of growth. Along with machinery orders for December, machinery manufacturer orders forecasts for Q1 (Jan-Mar) 2018 will be released. We think this will help gauge whether companies will step up machinery capex in early 2018. We will also be watching for whether strong machinery orders are projected from the nonmanufacturing sector (excluding orders for ships and from electric power companies), as these orders have been sluggish."