The week ahead: eyes on US CPI - Nomura

Analysts at Nomura offered their outlook for the week ahead.

Key Quotes:

United States | Data preview

We expect a 0.2% (0.169%) m-o-m increase in core CPI in April, which translates to a 2.2% (2.193%) y-o-y increase, up from 2.1% in the prior month.

Consumer credit (Monday): Consumer credit likely expanded steadily in March following a $10.6bn increase in February. Solid gains in employment and income growth should support consumer credit growth in the near term.

JOLTS job openings (Tuesday): Against the backdrop of a strong labor market, the job openings rate remained elevated at 3.9% in February, consistent with steady labor demand. The quits rate also remained relatively high at 2.2%, pointing to increased workers’ confidence in moving between jobs. As the labor market improves further, we expect continued improvement in these indicators in the near term.

PPI (Wednesday): Upstream producer price pressures have strengthened recently. Stripping out volatile food, energy and trade service components, “core” PPI increased strongly by 0.4% m-o-m for the third consecutive month in March. The recent pickup in PPI is consistent with elevated prices paid index readings from incoming business surveys. Various regional surveys pointed to rising input prices while citing concerns over upward input price pressure from tariffs. A steady increase in April’s PPI report should highlight continued pipeline price pressure.

Wholesale inventories (Wednesday): The Census Bureau’s advance estimate suggests that wholesale inventories rose a solid 0.5% m-o-m in March, driven by a firm 0.8% increase in the stock of durable goods. The improvement in wholesale inventories added solidly to GDP growth in Q1. We expect continued contribution from inventory accumulation to growth.

Initial jobless claims (Thursday): Incoming data point to continued strength in the labor market. Weekly claims can often be volatile around holidays. The sharp drop in recent weeks portends a possible pick-up in coming weeks. However, the underlying trend should be intact. We look for initial jobless claims to remain low in the near term.

CPI (Thursday): We expect a 0.2% (0.169%) m-o-m increase in core CPI in April, which translates to 2.2% (2.193%) y-o-y, up from 2.1% in the prior month. In our view, the underlying trend of core CPI is unchanged despite recent volatility in its subcomponents. We expect continued weakness in used vehicle prices to contribute to a somewhat soft reading on core goods prices overall. For core service prices, we expect a trend-like increase, bolstered by steady increases in rent inflation although at a lower rate relative to March.

Among non-core components, various energy prices rose strongly. Retail gasoline prices picked up quickly in April as the spring driving season arrived. Further, heating oil and natural gas prices likely picked up after sharp declines in March. Thus, we expect a solid rebound in CPI energy prices in April. In addition, based on prices received at farms, prices of food at home likely rose firmly. Moreover, considering the continued labor shortage in the restaurant industry, we anticipate steady increase in prices of food consumed away from home. Altogether, we forecast a 0.3% (0.313%) m-o-m in aggregate CPI for April, which translates to 2.5% (2.545%) on a 12-month change basis. Our forecast for CPI NSA is 250.747.

US budget (Thursday): The fiscal year-to-date budget deficit grew to $600bn in March, $73bn wider than this time last year. The US government historically posts a surplus in April bolstered by a notable inflow of receipts. We continue to expect the FY18 budget deficit to expand notably to roughly $800bn, up from the $666bn FY17 deficit. Recent tax and spending legislation account for a significant portion of the increase. Net defense outlays reported in the monthly statement for the next few months should be of particular interest to us as they will shed further light on how quickly federal government spending ramps up after the recent budget deal in Congress.

Import prices (Friday): US dollar weakness over the past 12 months has yet to translate into firmly pushing up prices of imported consumer goods excluding autos. Import prices for this category fell 0.1% m-o-m in March after a sharp 0.6% increase in February while it remained within a steady range on a 12-month change basis. A sharp decline in petroleum prices during March held down overall import prices. Given the pickup in oil prices in April, headline import prices are likely to rebound during the month.

University of Michigan consumer sentiment (Friday): Various consumer sentiment surveys have recently sent mixed signals. In the final reading of the University of Michigan consumer survey for April, consumer sentiment deteriorated somewhat as a number of respondents spontaneously mentioned concern about US trade policy. However, the Conference Board’s consumer survey showed a pick-up in consumer optimism during April. Overall, the variation across surveys indicates that perhaps trade concerns will not weigh as much on consumer sentiment going forward. That said, we continue to see trade policy as an elevated risk. Inflation expectations at the one-year horizon ticked down 0.1pp to 2.7% in April and appear to have stabilized somewhat since January 2017 after a prolonged decline. The expected inflation rate over the next five years remained unchanged at 2.5%.

Euro area | Data preview

Germany’s March Industrial production and BoE policy decision are in focus this week.

Germany Industrial production, Mar (Tues 8 May): Germany’s latest PMI data suggest that capacity constraints have been affecting production and together with strikes and some bad weather, this compressed economic activity in March. While we expect some improvement in the coming months, we forecast industrial production to climb only modestly in March, at 0.6% m-o-m, 2.8% y-o-y. 

BRC retail sales, Apr (Weds 9 May): The BRC reported a recovery in retail sales growth in March but this looks to have been spurious in that it related to the timing of Easter. As such, we expect to see some payback in April – a sub-zero reading on nominal sales growth should not come as a surprise.

Trade, Mar (Thurs 10 May): The goods trade balance improved by some GBP2bn between January and February, the result of a more sizable fall in underlying imports than exports and a surge in the erratics balance. These are erratic numbers on a monthly basis and we would not be surprised to see the deficit widen again in March.

Industrial production, Mar (Thurs 10 May): The Q1 GDP report showed industrial production rising by 0.7% q-o-q (largely due to mining and energy output) and manufacturing up 0.2%. Assuming no revisions to the back-data, that implies a small rise in industrial production but a small fall in manufacturing during the month of March.

BoE policy decision & Inflation Report (Thurs 10 May): We expect no move in policy rates this month but expect the Bank to continue to point to the need for gradual and limited policy tightening on the assumption of a recovery in the data.

Asia | Data preview

China: We expect CPI inflation to ease further due to lower food prices and PPI inflation to rise slightly on a positive base effect and in line with the improvement in the output price sub-index in April’s official manufacturing PMI. Export growth should pick-up in April after a contraction in March, and import growth should remain largely stable, resulting in a trade surplus after a one-off deficit in March. Our FX strategists believe China’s headline FX reserves fell by USD5bn to USD3137.8bn in April. After adjusting for FX and coupon effects, they estimate the valuation adjusted change to be a rise of USD15.0bn, from -USD7.6bn in March.