The week ahead: central banks minutes, Fed speak and RBNZ

The week ahead for the US is summed up below by analysts at Nomura, followed by a look at the key events for the rest of the world.

Key events in the US

Existing home sales (Wednesday): Existing home sales fell 2.3% m-o-m in April to an annualized pace of 5.57mn units. Both single-family home and condo sales slowed modestly. Much of the slowdown was due to low inventory levels of homes for sale on the market. For May, we forecast a slight decline of 0.1% m-o-m to an annualized rate of 5.565mn. Pending home sales, which tend to lead existing home sales by four to six weeks, declined moderately in April and March, portending a slowdown in existing home sales. Moreover, a low supply of home for sale may continue to constrain sales in coming months. Despite this industry challenge, consumer demand has been firm and mortgage rates have trended lower recently after a sharp pickup following the election in November 2016. Although the University of Michigan survey for May indicates that rising home prices were beginning to hurt consumers’ assessment of home buying conditions, relatively low mortgage rates and steady income growth would limit deterioration in home affordability and likely contribute to consumer demand for housing. 

Initial jobless claims (Thursday): For the week ending 10 June, initial jobless claims fell 8k to 237k (this level of initial claims is consistent with private nonfarm payroll growth in June of 155k). The 4-week moving average remained relatively unchanged at 243k (242k one week prior). Continuing unemployment insurance claims increased 6k to 1935k with the 4-week moving average increasing slightly to 1927k from 1918k for the week ending 3 June. Incoming data suggest layoffs remain low and job creation remains healthy. As firms become less willing to let go of their employees and the labor market tightens further, we expect continued low readings in the medium term. 

New home sales (Friday): New home sales dropped 11.4% m-o-m in April after strong increases in Q1. It is possible that a blip in April was likely transitory. There still are lingering challenges in the industry such as a lack of skilled labor and developable land, which may adversely affect the supply of newly built home for sale, which have been slow to catch up with consumer demand. Yet, home builders’ assessment of the future and current single home sales remains confident according to an NAHB survey for June. A steady increase in mortgage applications for home purchase suggests that consumer demand remained healthy, coupled with strong consumer fundamentals. Furthermore, permits for single family housing construction improved modestly in May, after decreases in April and March, pointing to some recovery in new home sales. Thus, we forecast a 3.9% m-o-m increase to an annualized rate of 591k in May."

Key events rest of the world

• Fed's William Dudley speech (Mon)
• Fed's Evans Speech (Mon)
• RBA minutes (Tue)
• GDT Price Index (Tue)
• BoJ minutes (Tue)
• RBNZ Interest Rate Decision (Wed)
• German Markit PMI Composite (Jun) (Fri)
• German Markit Services PMI (Jun) (Fri)
• German Markit Manufacturing PMI (Jun) (Fri)
• Canadian CPI's (Fri)

Given the recent communication from the FOMC last week, markets will be looking for Fed speakers to echo the hawkish tone from Yellen and discussion around timings for when the Fed will likely start to reduce their balance sheet and potentially hike rates again before the year is out. 

This week's key event

RBNZ this week: on hold? - Westpac

Analysts at Westpac explained that they expect the Reserve Bank to hold the OCR at 1.75% and to maintain a neutral outlook for interest rates.

Key Quotes:

"In its May review the RBNZ regarded the recent jump in inflation as temporary, and noted that the softer than expected starting point for the economy would mean a more gradual lift in domestic inflation pressures. Recent developments will only bolster those views.

There is a risk that next week’s statement could emphasise the equal likelihood of rate cuts or hikes. That could rattle financial markets, which are largely focusing on rate hike scenarios

We expect that next Thursday’s OCR review won’t stray from the firmly neutral tone of the May Monetary Policy Statement. Economic developments since May have been mixed, but we regard them as more or less balanced in terms of their consequences for monetary policy. So the straightforward option for the Reserve Bank would be to simply repeat much of the language from the May statement, concluding that “monetary policy will remain accommodative for a considerable period”.

If there’s anything that could surprise the market, though, it’s that the RBNZ might decide to escalate the language around its neutral stance. For instance, in an interview that followed up the May MPS, the RBNZ chief economist emphasised that “there is an even chance of a hike or a cut in the future”. Repeating those words next week certainly wouldn’t be a shift in the RBNZ’s position. But even so, elevating them to the OCR statement itself could wrong-foot financial markets, which are still pricing in a return to rate hikes by mid-2018.