The week ahead: Eyes on US Q3 real GDP growth - Nomura


Analysts at Nomura offered their outlook for the event calendar this week.

Key Quotes:

United States | Data preview

The week ahead We expect a solid 3.4% q-o-q saar reading for Q3 real GDP growth, consistent with an economy benefiting from substantial fiscal stimulus

New home sales (Wednesday): We expect a 0.6% m-o-m decline in new home sales to 625k saar in September following a rebound in August which appears transitory. New home sales increased strongly by 3.5% to 629k saar in August as sales in the Northeast rebounded sharply and sales activity in the West continued to recover after a slowdown in Q2. Some of the strong rebound in the Northeast will likely revert in September. Moreover, the landfall of Hurricane Florence in North Carolina and South Carolina may have disrupted sales activity in the South and pose some downside risk to the September report. However, considering a strong 2.9% m-o-m rebound in the volume of mortgage loan applications for purchase in September following a 7.2% decline in August, it is possible to see healthy sales activity in other regions.

Initial jobless claims (Thursday): Initial claims declined in recent weeks following an increase which was likely due to disruptions from Hurricane. The effects from inland flooding may continue affect the data in future weeks, but unemployment claims will likely continue to fall as the labor market remains strong.

Advance goods trade balance (Thursday): We expect the nominal goods trade deficit to widen $3.9bn to $79.4bn in September. Goods exports have been weak recently, likely reflecting some moderation in external growth and continued uncertainty around US trade protectionism. However, goods imports have remained strong as stimulative fiscal policy boosts domestic demand. In September, the uncertainty is high due to the imposition of 10% tariffs on roughly $200bn imports from China and subsequent retaliation by China. Many businesses in China and the US may have expedited shipments ahead of the implementation of those tariffs. With an impending deadline of 1 January 2019 when the US tariff rate on the $200bn list increases to 25% from 10%, it is possible that US importers will frontload certain orders of Chinese products to minimize their exposure to the higher rate in Q4.

Durable goods orders (Thursday): Durable goods orders excluding volatile transportation components likely advanced a solid 0.5% m-o-m in September after a flat reading in August. Industrial production of durable goods excluding transportation increased healthily by 0.3% m-o-m in September while the new orders subindex in the September ISM manufacturing survey remained elevated at 61.8, albeit slightly lower than the August reading. However, we expect total durable goods orders to fall 0.9% mo-m due to an expected sharp decline in civilian aircraft orders. September’s report will help us evaluate the trajectory of business equipment investment: orders for core capital goods (nondefense excluding aircraft) in August declined 0.2% m-o-m, indicating some near term risk to our business equipment outlook if the weakness persists in September.

Pending home sales (Thursday): Existing home sales have been lowered by slow turnover in recent months. Rising prices and mortgage rates have hurt affordability and likely dampened consumer demand somewhat, putting additional downward pressure on pending home sales.

Q3 GDP, first estimate (Friday): We expect real GDP growth to increase solidly by 3.4% q-o-q saar in Q3, consistent with an economy growing well-above potential. In the details, consumer spending activity has remained strong in Q3, likely contributing roughly 2.5pp to topline GDP growth. Fixed investment in Q3 was likely mixed as modest growth in equipment and IPP investment was partly offset by weakness in residential and structures. Defense spending increased modestly in Q3 as did construction expenditures from state and local governments, helping to keep total government spending elevated during the quarter. The drag from net exports likely increased in Q3 as exports slowed and imports increased notably, although part of this drag will likely be offset by a substantial pickup in inventory investment. That said, the surge in inventory buildup in Q3 could lower Q4 GDP growth. Note that our Q3 real GDP forecast may be revised after the advance trade and inventories report for September, scheduled for release on 25 September.

University of Michigan consumer sentiment (Friday): Consumers remained optimistic in the preliminary October University of Michigan consumer survey despite a small 1.1pp decline in the headline index to 99.0. Solid job and income growth continue to keep consumer sentiment elevated. Consumer buying plans remain elevated and point to continued strong growth in personal consumption although worsening affordability has dampened home buying plans. Inflation expectations at the one-year horizon increased 0.1pp to 2.8% while longer-term inflation expectations declined 0.2pp to 2.3%, their lowest level since December 2016. The FOMC tends to look through monthly fluctuations in longer-term inflation expectations, but the sharp decline in October, after some stabilization during 2017-18, may be worth monitoring.

Euro area | Data preview

The week ahead The ECB’s meeting and UK CBI total orders data will be in focus next week.

Euro area PMIs, October flash (Wednesday): We expect the euro area flash composite PMI for September to decrease to 53.8 from 54.1 in August. At the sector level, we expect the regional manufacturing PMI to drop to 53.0 from 53.3 and the services PMI to fall to 54.4 from 54.7. Concerns about escalation of the global trade disputes are still weighing on the region’s manufacturing sector, and heightened market volatility may put a downward pressure on the service sector. Our September flash PMI forecast is consistent with euro area GDP growth of around 0.3% q-o-q in Q3 2018.

Germany Ifo survey, Oct (Thursday): We expect the Ifo business expectations and current situation component of the survey to decline in October. This is in line with what was communicated by the ZEW survey compiler earlier this week: “Expectations for the German economy are dampening above all due to the intensifying trade dispute between the USA and China … A further negative influence on economic and export expectations is the danger of a ‘hard Brexit’, which is becoming ever more likely. Last but not least, the situation of the governing coalition in Berlin is perceived to have become more unstable.” We do not expect this trend in sentiment to revert, most of all ahead of the elections in the state of Hesse – to be held on 28 October. As a consequence, we think the Ifo business climate index will fall to 102.9 in October from 103.7 the previous month. 

ECB Governing Council meeting, Oct (Thursday): At September’s meeting the ECB reiterated its forward guidance on interest rates (on hold through next summer at least) and asset purchases (no wind-down for an extended period after purchases cease). We do not think there is any urgent need to change this guidance, so we expect for the next few months the ECB will at least retain its “extended period” wording in relation to the stock of asset purchases, and “through the summer of 2019” for rates on hold. Of course, there may need to be some trivial adjustment to the wording as “extended period” relates to the period after net asset purchases – which are due to cease at the end of this year. On rates, we continue to expect the ECB will raise rates slowly from September 2019, similar to market expectations. In the press conference we expect questioning along the lines of European (i.e. Italian/Spanish) fiscal policy and the ECB’s confidence about rising core inflation in light of recent disappointments.

Japan | Data preview

October Tokyo area core CPI (all items, less fresh food) (Friday): We forecast Tokyo-area core CPI inflation for October to come in at 1.1% y-o-y, an acceleration of 0.1 percentage point from 1.0% in September. With crude oil prices rising, we expect energy-related items to boost the core inflation rate. However, we expect growth of final goods/consumer goods readings in the corporate goods price index (CGPI) to still be moderate, and therefore forecast CPI inflation excluding fresh food and energy prices (the BOJ’s version of core core CPI) to come in at 0.7%, flat on the September figure.

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