The week ahead: “further” guidance from the 30-31 January FOMC minutes? - Nomura

Analysts at Nomura offered a detailed insight to the week's key events coming up.

Key Quotes:

"United States | Data preview

We expect “further” guidance from the 30-31 January FOMC minutes.

Existing home sales (Wednesday): We forecast a 1.6% m-o-m increase in existing home sales to an annualized pace of 5660k in January. Pending home sales, which track contract signings that precede existing sales (which track contract closings), increased by 0.5% and 0.3% m-o-m in December and November, respectively, supporting a slight increase in existing home sales in January. There is some downside risk to our forecast from an unusually cold start to January, which may have dampened contract closing activity, although warmer weather returned towards month-end. Looking ahead, ongoing supply shortages continue to put downward pressure on pending and existing home sales, clouding the medium-term outlook. As job and income gains remain firm, buyer demand should stay high, resulting in continued demand in excess of available supply and worsening affordability. Inventory at the current sales pace is 3.2 months, the lowest level since the National Association of Realtors (NAR) started the measure in 1999. 

FOMC minutes (Wednesday): The FOMC minutes from the 30-31 January meeting should provide additional color on what we perceived to be a marginally hawkish postmeeting statement (January FOMC Recap, Policy Watch, 31 January 2018). In particular, the minutes will likely provide added context on the addition of the word “further” in two key sentences of the forward guidance paragraph of the statement. Moreover, the minutes may provide a rationale for other language changes including an upgrade to the FOMC’s near-term inflation outlook. The minutes will not, however, be timely enough to provide a view on the Committee’s reaction to recent financial market developments. Thus far, most FOMC participants who have commented publically on financial markets have indicated that the turbulence from the past few weeks has not fundamentally reshaped their medium-term outlook. The combination of market unrest, a strong core CPI print for January and the recently-passed budget agreement to boost federal spending appears to be engendering more interest than usual in Chair Powell’s first public remarks on 28 February before Congress (10am EST). In that sense, the January minutes may contain less information than usual given recent developments. We continue to expect a rate hike at the upcoming 20-21 March meeting, followed by three additional hikes in 2018 (Jun, Sep and Dec) and two hikes in 2019 (Mar and Sep). 

Initial jobless claims (Thursday): Initial jobless claims remain at multi-decade lows, consistent with our view that the unemployment rate will continue to drift lower over the coming quarters. For the week ended 10 February, initial claims increased slightly to 230k, while continuing claims also ticked up marginally to 1942k. For upcoming reports, we expect continued downtrends in initial and continuing claims.

Euro area | Data preview

The week ahead Euro area flash PMIs and UK GDP data are in focus this week.

UK CBI industrial trends survey, Feb (Tues 20 Feb): While the activity indicators of this survey were mixed in the January edition, the big news was the rise in the prices balance to +40% - its highest reading since 1984. It is this indicator that will most likely be the focal point of the February report. It is worth noting that price measures in other surveys, such as those of the BCC and PMI, have also risen recently.

German ZEW index, Feb (Tue 20 Feb): Following the past two weeks of increased financial market volatility and because of the implied tightening of financial conditions we expect the German ZEW Index to decline to a 12.3 (from 20.4 in January). This would reflect greater concerns among German analysts about financial market volatility rather than greater angst about the outlook for Germany’s economy. The fundamentals for the German economy, after all, remain sound in our view. 

UK Labour market report, Dec/Jan (Weds 21 Feb): The January labour market report revealed a generally upbeat set of numbers. Private sector regular pay growth rose to between 3% and 4% (based on 3m, 4m, 5m and 6m average annualised rates), while employment rose by around 100k over the latest published rolling quarter. We expect strong jobs growth to continue (+150k q-o-q) and wage growth to pick up (regular pay 2.6% y-o-y up from 2.3%) as the economy expands at or modestly above what is believed to be its trend rate

Euro area February flash PMIs (Wed 21 Feb): We expect the euro area composite PMI to fall to 57.6 in February from 58.8 in January. At the sector level, we expect the regional manufacturing PMI to decline to 58.8 from 59.6 and the services PMI to fall to 56.8 from 58.0. These projected declines are likely to have been triggered by heightened market volatility. The overall level of these indicators is likely to remain high and consistent with Q1 GDP growth of around 0.8% q-o-q after 0.6% q-o-q on Q4.

UK Public finances, Jan (Weds 21 Feb): It is this set of data that the Office for Budget Responsibility (OBR) will base its forecasts on at the time of the Treasury’s 13 March Spring Statement. So far in the first nine months of the fiscal year the budget balance has on average deteriorated relative to a year earlier by around £0.75bn per month. That may be set to change in January. The OBR expects a year-on-year worsening in the public finances thanks to the timing of dividend payments (due to past tax changes). In order to meet the OBR’s £49.9bn full-year deficit forecast we would need to see a £3.5bn average monthly deterioration in the public finances between January and March relative to a year earlier. As a result, we forecast a lower surplus of £8bn in January this year compared with a £11.6bn surplus in January 2017.

German Ifo, Feb (Thu 22 Feb): We forecast a decline in the German Ifo Business Climate index from 117.6 in January to 116.3 in February. The previous month’s Ifo figure touched a historical high and some pare back from that level should not be a big surprise. And it would still point to solid growth conditions for the German economy in the period ahead.

UK GDP, second estimate, Q4 (Thurs 22 Feb): In the absence of any revisions to the headline rates of growth (0.5% q-o-q and 1.5% y-o-y) the focus in the second estimate of GDP will be on the expenditure side of the accounts. Consumer and investment spending growth will be focal points as we try to make sense of how Brexit has influenced growth via its impact on sterling, inflation and uncertainty.

Japan | Data preview

The week ahead We expect all-Japan core inflation of 0.8% in January, a lower rate than in December.

January trade statistics: nominal exports (Monday): Nominal exports in the first 20 days of January rose 8.0% y-o-y (10.8% in the first 20 days of December 2017), while nominal imports rose 5.1% (12.3%). 

There were two fewer business days in the first 20 days of this January than in the first 20 days of January last year, while the remainder of the month has one more business day this year than in 2017. These differences in the number of business days in each part of the month suggest that year-on-year growth in exports and imports for the rest of the month will prove to have been stronger than in the first 20 days. Celebrations of the lunar new year across Asia typically disrupt trends in Japan's imports and exports in January and February. The first day of the new lunar year is 16 February this year and precedent suggests that this creates a seasonal distortion that probably lifted Japan's exports in January this year while lowering its imports. 

Customs data released by China and Taiwan to date show a conspicuous pick-up in imports into the two countries. In particular, the value of USD-denominated imports into China rose by 36.9% y-o-y, which is steep even accounting for the new year boost. It seems reasonable to expect Japan's exports, particularly to China, will prove to have increased significantly in January. Taking all of the above on board, we forecast a 15.4% y-o-y increase in nominal exports and an 11.4% increase in nominal imports for January. We estimate a trade deficit (original series) of JPY1,003.6bn and a seasonally adjusted trade surplus of JPY364.6bn. Adjusting our January nominal export and import estimates for seasonality and inflation (the latter based on the 1.8% y-o-y increase in export prices and the 4.9% rise in import prices in the corporate goods price index data for January) gives a real export growth estimate of 2.2% m-o-m and a real import growth estimate of -4.6%. Compared with the October-December 2017 averages, these numbers would mean that exports were 1.4% higher and imports 2.1% lower in January. Attempting to discern larger trends using January or February data is a fraught exercise, because of the lunar new year effect. Moreover, we see little likelihood of the global economy missing expectations in the immediate future. Nonetheless, it looks likely to us that the lunar new year effect will put downward pressure on Japan's exports in February, and we accordingly believe that Japan's exports could show slower average quarter-on-quarter growth in the January-March quarter than the 1.7% average increase in October-December 2017.

January all-Japan core CPI (ex-fresh food) (Friday): We expect the January all-Japan core CPI (ex-fresh food) to rise 0.8% y-o-y, 0.1pp lower than the December reading. As the boost from energy prices weakens, we look for inflation to ease back temporarily. We expect the January all-Japan core core CPI (ex-energy and food, except alcoholic beverages) to rise 0.1% y-o-y, unchanged from December. Finally, we forecast all-Japan CPI inflation excluding fresh food and energy (the BOJ's preferred measure of core core inflation) to have risen by 0.3% y-o-y in January, again unchanged from December."