The week ahead: eyes on US IP (Tuesday) and other key global economic events

The week ahead in the US is holding a number of second-tier events, while greater risks come elsewhere from Euroland CPI, UK CPI, retail sales and labour force data, the RBA's minutes and Aussie unemployment data. The New Zealand dollar may find support from the GDT Price index should the improvements continue there. 

Disappointing data clouds dollar's near-term outlook - BBH

The US dollar has been better bid for the most part of last week, although the latest data in retail sales and consumer prices took some of the bullishness out of the market although the dollar still finished the week higher against the major currencies, except the Norwegian krone.  

For this week, analysts at Nomura are expecting a strong increase in April industrial production, driven by a pick-up in core manufacturing (ex-autos) output and continued improvement in mining activity. The analysts offered the following week ahead preview for the US calendar:

"Empire State Survey (Monday): The Empire State survey indicated moderation in optimism among manufacturers in the Greater New York area in April. The headline business conditions index dropped notably to 5.2 in April from 16.4 in March. Although this series tends to be more volatile than the ISM manufacturing survey, which covers the national sample, the recent moderation in business sentiment from post-election highs was seen in other regional surveys. In May, we think the downtrend may have continued, albeit remaining in expansionary territory. Moreover, the decline in new orders and unfilled orders sub-indexes in April may possibly suggest that momentum subdued somewhat. Therefore, we expect a headline index of the Empire State survey to have declined slightly to 5.0 in May. 

NAHB housing index (Monday): Homebuilders’ sentiment has remained elevated in 2017. Much of the strong surge seen after the election was driven by the respondents’ confidence on tax reforms and deregulation, proposed by the Trump administration. Ongoing uncertainty and potential setbacks in tax reform may have damped the optimism to some degree. However, homebuilders remained highly sanguine in April, with the topline housing market index at a high reading of 68. This resilience may have been due to persistent consumer demand for new homes. The traffic of prospective buyers sub-index remained elevated at 52 in April, only one point lower than the March print. Mortgage applications for home purchases also held up in April. Given a steady pace of job creation and income gains, we think this index may have remained elevated in May. On the other hand, some issues on the supply side such as limited availability of developable land, labor shortage, and rising construction costs (especially those of building materials), could have hindered the index from improving materially. Recently, the NAHB has denounced the decision by the White House to impose countervailing duties on Canadian lumber imports, while imported lumber prices continued to increase this year after the trade agreement between the US and Canada over softwood lumber expired at the end of 2016. Further increases in building material costs could hurt builders’ sentiment. All considered, we expect a steady reading of 69 for this index. 

Industrial production (Tuesday): Industrial production (IP) increased 0.5% m-o-m in March, but core factory output (ex-motor vehicles and parts) fell 0.2% as suggested by a pullback in aggregate hours in this sector in the month. In April, however, a rebound in aggregate hours in the core manufacturing sector points to a strong rebound in manufacturing ex-auto output. Yet, note there is some downside risk given some moderation in business sentiment in recent months. As for motor vehicle and parts output, after seasonally adjusting auto assembly data from WardsAuto, we expect auto production to have recovered modestly in April. Moreover, mining sector output likely jumped strongly, as suggested by robust increases in active oil and gas rig counts and domestic crude oil and liquid gas extraction. As for utility output, we expect a steady increase after sharp declines in January and February attributable to an unusually warm winter. All in all, given that core manufacturing and mining sector outputs account for the lion’s share of total IP, we think it is likely to see a sharp m-o-m increase in top-line IP. Our forecast for April is a 1.1% increase. 

Housing starts (Tuesday): In Q1, homebuilding activity remained robust, with housing starts increasing 8.8% y-o-y in Q1 following 10.0% in Q4. Much of the strength in Q1 was driven by the second-warmest January-March period on record as well as healthy consumer demand coupled with a steady pace of job creation and income gain. Incoming data suggest this momentum may have continued in April. Employment in residential construction and residential speciality trade contractors increased modestly in that month. Moreover, single-family building permits remained elevated in February and March on a y-o-y basis, which leads us to expect a healthy increase in single family housing starts in April. Moreover, permit data also suggest that the pace of multi-family housing starts held up steadily in April after a sharp drop in March. Altogether, we expect a 3.7% m-o-m increase in total housings starts, accelerating to an annualized rate of 1260k from 1215k in the prior month. As for building permits in April, we expect a slight decline of 0.9% m-o-m. This forecast, if realized, would lower the annualized rate to 1255k from 1267k in the prior month. Note that building permits data are relatively volatile on a monthly basis. Home-builders’ sentiment still remains highly elevated and consumer demand remains firm. This points to steady improvement on a y-o-y basis, in our view, although building permits in Q1 were boosted by unusually warm weather (+10.2% y-o-y). 

Initial jobless claims (Thursday): Initial unemployment insurance claims have stabilized around the historical low after a continued downtrend during the recovery. For the week ending 6 May, the four-week moving average of initial claims was little changed at 244k, down 1k from prior week’s reading. This recent trend appears consistent with other labor market indicators, such as a steady gain in nonfarm payroll employment and low levels of involuntary worker separations. Continuing claims have decreased substantially over the first four months of the year, reflecting a similar decrease in the unemployment rate from the monthly household employment survey. The initial claims release next week, by overlapping with the monthly employment survey period, may provide some indication of the continued strength in the labor market. 

Philly Fed Survey (Thursday): As did other regional surveys, the Philly Fed survey indicated continued moderation in business sentiment in April. Its top-line general business activity index dropped to 22.0 from 32.8 in March. Although still an elevated reading, the topline index indicates a sign of softening from high readings after the election. New orders and shipments sub-indexes both declined notably in April from March readings. In Q1, the growth in spending data did not accelerate materially despite heightened business sentiment. Moreover, continued policy uncertainty and the prospect of delays in delivering the promises made by the current administration may continue to affect manufacturers’ sentiment. We think it is likely that the Philly Fed business activity index will continue to show moderation and forecast a reading of 22.0 in May. Nomura | US Economic Weekly 12 May 2017 5 US Economic Outlook We expect continued growth with balanced risks."