The week ahead - Nomura

Analysts at Nomura offered a preview of the week ahead.

Key Quotes:

"The week ahead in the US:

Our forecasts for housing market indicators reflect our view that new and existing home sales will grow gradually in the near term, but supply constraints persist.

New home sales (Wednesday): New home sales increased at a gradual pace in Q2. We think that demand for new homes has been steady, despite rising home prices. Some of the slowdown in Q2 relative to Q1 was likely a reflection of some negative payback from warmer-than-usual weather in Q1. Further, low supply has been weighing on sales and pressuring home prices as a lack of developable lots and skilled construction labor constrain new construction. We expect this trend to continue in the near term. Although gradual improvement will likely continue in Q3, a notable acceleration would be unlikely with persisting supply constraints. For July, we expect new home sales to register an annual pace of 610k, unchanged from June. 

Initial jobless claims (Thursday): Initial and continuing jobless claims have remained within a low range recently in the face of a tightening labor market with healthy gains in employment. Subdued readings suggest involuntary separations remain low. We expect both series to remain low as the labor market continues to tighten in the medium term. 

Existing home sales (Thursday): We forecast a 0.4% m-o-m increase in existing home sales to an annualized pace of 5.54m saar in July. Based on a solid 1.5% increase in pending home sales (sales contracts signed), we expect a rebound in existing home sales (sales contracts closed). The 1.8% decline in June can be attributed to a low supply of previously-owned homes. Strong consumer fundamentals such as job creation and income gains will likely support underlying demand for previously-owned homes. However, rising home prices, coupled with low inventories, pose a challenge in the medium term. A sustained uptrend in home prices would exacerbate home affordability if it continues to outpace wage gains. 

Durable goods orders (Friday): We expect a 0.3% m-o-m increase in July core durable goods orders (excluding transportation goods), after a 0.1% increase in June. We think that the underlying pace of core manufacturing activity has been steady. Core durable goods output increased by a decent 0.2% in July, following a 0.3% increase in June. Survey data also indicate steady activity. The ISM new orders index remained elevated at 60.4 in July, albeit slightly lower than 63.5 in June. However, we expect a modest decline in motor vehicles and parts orders, based on the industry’s production plans. Further, nondefense aircraft orders will likely revert sharply after an outsized 131% gain in June. Although a sharp increase in US Air Force R&D spending implies strong growth in defense-related orders, it may not be enough to offset declines in other transportation orders. Our forecast for topline durable goods orders is a 5.2% decline.

The week ahead in Europe:

The week ahead Euro area PMI data and the UK GDP (second estimate) are in focus this week. 

UK Public finances (Mon): Since the start of 2015 the deficit has generally been narrowing relative to the same month a year earlier. Over this period the annual narrowing averaged almost £2bn per month, leading to a notable improvement in the deficit over the past two years (2.4% of GDP in 2016-17, from 5% two years earlier and a peak of around 10% in 2009-10). In June, however, there was a widening of the deficit by £2bn versus a year earlier, the largest annual increase for over three years. This was largely due to timing changes of payments to the EU, alongside higher interest payments (related to higher inflation). We expect the deficit to be £1bn in July, around £0.5bn higher than a year earlier.

German ZEW index (Tues): We expect the ZEW expectations index to decline modestly to 16.3 in August from 17.5 in July. Financial conditions have tightened a little over the past few weeks and this may have had an adverse impact on investor sentiment. However, we do not expect this retracement to be that large and overall sentiment should remain at a relatively high level.

UK CBI industrial trends survey (Tues): Currently, there is much focus on the business surveys because of the divergence between them and official estimates of growth. For example, the monthly CBI survey reported a sharp improvement in output volumes in H1, in particular in July (highest in over 20 years), while official manufacturing output has performed poorly. We will be watching the surveys closely for signs of any Brexit impact.

Euro area August flash PMIs (Wed): We expect the euro area composite PMI to increase to 56.2 in August from 55.7 in July. At the sector level, we expect the regional manufacturing PMI to rise to 57.1 from 56.6.Though financial conditions have slightly tightened, the global economic recovery should support its component of export orders. We forecast the services PMI also to increase to 55.8 from 55.4. These projected outcomes would be consistent with Q3 GDP growth of 0.7% q-o-q after 0.6% q-o-q in Q2.

UK GDP, second estimate (Thurs): Economic growth slowed in the first half of the year to 0.2% q-o-q in Q1 and 0.3% in Q2, though the BoE expects an eventual upward revision to the former to 0.4%. In the absence of any revisions to headline GDP growth in this release, the focus will be on the expenditure detail – the impact of the Brexit negotiations on business investment in particular.

UK CBI distributive trades survey (Thurs): Retail sales growth has slowed since the start of the year, most likely the result of higher rates of inflation limiting real wage growth. However, the deterioration could have been worse, with the results of this survey improving last month and the BRC volumes continuing to grow.

German Ifo (Fri): We expect the German Ifo business climate index to increase to 116.9 in August from 116.0 in July. We forecast the current situation and expectations indices to pick up to 126.4 (from 125.4) and 107.7 (from 107.3) respectively.

The week ahead for Japan:

We forecast July all-Japan core CPI inflation of 0.5% y-o-y, marking a rise from June. We also expect August Tokyo core CPI inflation to be higher than in July. July all-Japan core CPI (all items ex-fresh food) (last month: 0.4% y-o-y; Nomura forecast: 0.5%) (Friday): We expect July all-Japan core CPI inflation (all items, ex-fresh food) to come in at 0.5% y-o-y, 0.1 percentage points stronger than the June reading. Besides a positive contribution from energy prices, we believe the negative impact of accommodation and overseas package tours on the core core component will fade to some extent. We forecast a 0.1% y-o-y decline in the July all-Japan core core CPI (all items ex-energy and food except alcoholic beverages), a smaller drop than the 0.2% fall in June. For the all-Japan CPI ex-fresh food and energy (the BOJ's core core inflation metric) we forecast a 0.1% rise in July, versus a flat reading in June. For August Tokyo core CPI we forecast a rise of 0.3% y-o-y, up from 0.2% in July. We expect energy prices to continue to contribute to higher inflation. Meanwhile, we forecast August Tokyo area core core inflation of -0.3% and Tokyo area inflation ex-fresh food and energy (the BOJ’s core core inflation) of -0.1%, both unchanged from July levels."