The week ahead: Fed to announce the start of its balance sheet roll-of? - Nomura

Analysts at Nomura offered a preview of the busy schedule in G10 global markets for the week ahead. 

Key Quotes:

"Markets wait with bated breath for the Fed to announce the start of its balance sheet roll-off.

United States | Data preview

The week ahead in its September meeting, we expect the FOMC to announce its balance sheet roll-off plan to start in October while leaving the target range for the policy rate unchanged.

NAHB Housing market index (Monday): We expect the NAHB housing market index to inch down to 66 in September, from 68 in August. 

Housing starts (Tuesday): We expect a decent 1.6% m-o-m increase in housing starts to an annualized rate of 1174k.

Import prices (Tuesday): Core CPI inflation picked up in August (0.248% m-o-m) with an upside surprise in rent and owner’s equivalent rent inflation as well as a strong rebound in lodging-away-from-home prices which fell sharply in July. 

Existing home sales (Wednesday): We expect existing home sales to increase 0.9% m-o-m in August to an annual rate of 5.49mn saar.

FOMC meeting (Wednesday): We expect the primary messages from the 19-20 September FOMC meeting to focus on the commencement of the balance sheet roll off in October. That said, we do not expect any additional substantive guidance or details than what has already been provided. Instead, major decisions involving the ultimate size of the balance sheet and its composition will rest with future Fed leadership, in our view. Based on incoming data and the performance of the economy, we expect only several modest changes to the Summary of Economic projections (SEP) compared to June, with the median forecasts for inflation for 2017 and 2018 being marked down in response to the recent weakness in inflation. We also expect the median longer-term federal funds rate to tick down below 3% as members revise down their views of the terminal rate. We expect the statement and press conference to contain only minor changes in language about the path of short-term rates. That is, we do not expect the statement or the press conference to be hawkish or dovish about a possible hike in December. Instead, over the next several months until the December meeting, we expect more vocal debates over the causes of weaker-than-expected-inflation and the role that financial conditions should play in policy decisions.

Initial jobless claims (Thursday): Initial jobless claims remained elevated for the week ending 9 September at 284k. This is slightly lower than the previous week’s 298k but still well-above the four-week average of 237k before Hurricane Harvey made landfall.

Philly Fed survey (Thursday): We expect top-line general business activity index of this survey to post another high reading of 19.5 in September. Regional manufacturing surveys have shown broad-based strength over recent months. 

Euro area | Data preview

The week ahead Euro area PMIs and UK retail sales are in focus this week. 

German ZEW index (Tues): We expect the ZEW expectations index to decline modestly to 7.4 in September from 10.0 in August. The strength of the EUR may have had an adverse impact on investors’ sentiment. However, the EUR has exhibited greater stability in recent weeks so we do not expect any retracement in this survey to be that large.

UK Retail sales (Weds): Official sales volumes rose in June and July – the first back-toback increases for a year. Still, the annual rate fell notably in July thanks to base effects (i.e., a strong monthly rise in July 2016). For August, the BRC retail sales survey reported an improvement in inflation-adjusted sales growth while the CBI took a turn for the worse. As a result, we have opted for a forecast somewhere in the middle – i.e., flat sales volumes in August relative to July. We think the risks are on the downside.

UK Budget deficit (Thurs): July was the first month since March that the budget deficit fell on a y-o-y basis.

Euro area August flash PMIs (Fri): We expect the Euro area composite PMI to increase to 56.3 in September from 55.7 in August. At the sector level, we expect the regional manufacturing PMI to rise to 57.6 from 57.4, reflecting a strengthening global economy. Meanwhile, we forecast the services PMI to increase to 55.5 from 54.7 thanks a robust domestic economy. These projected outcomes would be consistent with Q3 GDP growth of around 0.6% q-o-q after 0.5% q-o-q in Q2.

UK CBI industrial trends survey (Fri): This survey has generally proved somewhat stronger than the official data on manufacturing output growth over the first half of the year (notwithstanding the latest decent rise in July manufacturing production).

Japan | Data preview

The week ahead Our focus at Bank of Japan Governor's press conference will be on questions related to topics like US monetary policy.

BOJ policy board meeting (Wednesday/Thursday): We expect the BOJ to leave monetary policy unchanged. Core CPI inflation is on a moderate uptrend, albeit probably weaker than the Bank of Japan’s assumption. Economic indicators are generally healthy, with real GDP growth in Q2 2017 (April-June) fairly strong and industrial production projected to maintain growth in Q3. We think the assessment will remain that inflationary momentum is being maintained. Our focus in BOJ Governor Haruhiko Kuroda's press conference will be on questions about the impact on BOJ monetary policy from the downtrend in global long-term interest rates and the FOMC decision to reduce its balance sheet, a decision we expect will be made on 19-20 September.

August trade statistics: nominal exports (Wednesday):

Nominal exports rose by 12.7% y-o-y in the first 20 days of August (against a 14.3% gain in the first 20 days of July), while nominal imports rose by 5.5% (17.5%). 

We expect growth in exports to pick up in the latter part of the month (after the first 20 days) taking into account 1) calendar effects (one less business day in the first 20 days of August 2017 than in August 2016, and one more in the latter part of the month) and 2) forex rates and crude oil prices that are likely to apply in the latter part of the month. Considering the global manufacturing PMI rose month-on month in August – indicating a continuing pick-up in overseas economies – we expect exports to remain on a gradual growth track."