The week ahead - Nomura

Analysts at nomura offered a preview of their expecations for the week eahd from the economic calendar.

Key Quotes:

United States | Data preview

"We expect a healthy increase in durable goods orders ex-transportation, consistent with continued momentum in the industrial sector during Q4

Existing home sales (Tuesday): Existing home sales increased 0.7% m-o-m to an annualized pace of 5390k in September, the first monthly increase since May of this year. The housing market continues to experience structural headwinds with a supply shortage combined with excess demand. Given the relatively soft readings from pending home sales, upstream from existing sales, we expect existing home sales to decrease 0.7% m-o-m to a seasonally adjusted annualized pace of 5350k for October.

Initial jobless claims (Wednesday): Initial jobless claims rose 10k to 249k for the week ending 11 November while continuing claims continued to fall in the week ending 4 November. Some of the uptick in initial claims was likely due to delayed processing of claims from Puerto Rico, an area severely affected by Hurricane Maria. During November, with the Veterans Day and Thanksgiving holidays, initial claims could show unusual behavior as seasonal adjustment patterns have a harder time with where the holiday falls during the calendar month.

Durable goods orders (Wednesday): We expect topline durable goods orders to increase 0.1% m-o-m in October, somewhat subdued by a likely decline in nondefense aircraft and parts orders. Given a steady increase in auto assemblies from the October industrial production report, new orders for motor vehicles and parts may rise robustly. Yet, this increase may not be enough to offset the drag from civilian aircraft orders. Excluding volatile transportation components, we forecast a healthy 0.5% m-o-m increase in durable goods orders ex-transportation. Industrial production data on durable goods ex-transportation production, based on our calculation, showed a moderate 0.3% m-o-m increase in October, consistent with firming momentum in the industrial sector during Q4. Moreover, the new orders index from October’s ISM manufacturing report remained elevated at 63.4, supporting another strong reading in durable goods orders.

University of Michigan consumer sentiment (Wednesday): Consumer sentiment ticked down slightly in the University of Michigan’s preliminary November report, decreasing 2.9pp to 97.8. However, consumers overall remain upbeat given healthy gains in employment and steady income growth. We expect little change in sentiment for November’s final reading as consumer optimism carries forward into the holiday season.

The median inflation expectations at the one-year horizon ticked up 0.2pp in November to 2.6%. Over the next five years, median inflation expectations were unchanged at 2.5%, which have been within a steady range.

FOMC minutes (Wednesday): The November FOMC statement contained few surprises, cementing our, and the market’s, view of an upcoming rate hike in December. While acknowledging that inflation remained below the Committee’s target, the statement gave no indication of a pause in the current hiking cycle. That said, the minutes could offer some additional color on participants’ medium-term views on inflation and any policy implications for 2018. However, October’s healthy reading for core CPI inflation after the meeting, coupled with positive implications for PCE inflation from recent PPI and import price data, could imply that the debate around inflation in the minutes is somewhat out of date. Overall, we expect few, if any, surprises in the minutes and continue to expect an additional rate hike at the 12-13 December FOMC meeting.

Euro area | Data preview

Euro area PMIs and UK budget are in focus this week. 

UK Public finances (Tues): The day before the Budget the ONS will publish the public finance data for October – covering the first seven months of the fiscal year. Over the past three months the deficit has been improving (relative to the same month a year ago), though it is not appropriate to extrapolate this improvement to draw conclusions for the year as a whole. Indeed, there are a number of one-off factors that suggest the fullyear outturn will not improve as much as that (including the timing of dividend payments and therefore the payment of income tax).

UK CBI monthly trends survey (Tues): The headline orders balance of this survey edged into negative territory last month, while there was notable slippage in the expected output balances too. Low sterling and the ongoing global recovery should help export orders, while continued optimism in recent PMI prints may well be reflected in this survey.

UK Budget (Weds): A number of factors will affect the Office for Budget Responsibility’s (OBR) forecasts for the deficit this time. Measures announced between the last Budget in March and this one could add up to £1.5bn to the annual deficit. In addition, any new measures announced on Wednesday must be costed – though we do not expect such measures to move the fiscal stance in either direction this time (in other words, what the Chancellor gives with one hand he is likely to take back with the other). The most important effect on the deficit, however, will be the OBR’s announcement last month that it will be reducing the growth rate of productivity it bases its forecasts upon. This is by far the biggest unknown in this Budget, and while it might not have a large impact on this year’s deficit, it could have a sizeable impact on both the deficit and gilt issuance in subsequent years.

Euro area November flash PMIs (Thu): We expect the euro area composite PMI to decrease to 55.7 in November from 56.0 in October. At the sector level, we expect the regional manufacturing PMI to increase to 58.7 from 58.5 reflecting a strong global economy. By contrast, we expect the services PMI to decrease to 54.6 from 55.0 due to the recent pull back in stock prices. However, the overall PMI level is likely to remain high, and these projected outcomes would be consistent with Q4 GDP growth of around 0.5% q-o-q after 0.6% q-o-q in Q3.

UK GDP, second estimate (Thurs): In the absence of any revisions to the headline rate of growth in Q3 (0.4% q-o-q, 1.5% y-o-y) the focus will be on the expenditure details. In particular there will be much interest as to how households are coping with higher inflation (in terms of real consumer spending growth) and how firms are responding to uncertainty with respect to business investment growth. Monthly trade data suggest that the contribution from net exports turned negative in Q3.

UK CBI distributive trades survey (Thurs): Retail sales have suffered at the hands of higher inflation this year, in turn the result of sterling’s fall since the end of 2015. As wage growth slowly improves and the FX effects on inflation wane, we expect consumer spending to recover as we move through 2018.

German Ifo (Fri): We expect the German Ifo business climate index to fall to 116.6 in November from 116.7. We forecast the expectations index to pick up to 109.2 (from 109.1) and the current situation index to drop to 124.2 (from 124.8) respectively.

Japan | Data preview

We expect large increase in both real exports and imports against a backdrop of high capex demand in developed economies.

October trade statistics: nominal exports (Monday): Nominal exports in the first 20 days of October were up 17.3% y-o-y (versus a rise of 14.8% in the first 20 days of September), while nominal imports showed particular acceleration, up 26.4% (14.6%). According to a recent Nikkei QUICK News report, exports increased for autos, steel and semiconductor production equipment, while imports increased for crude oil, coal and petroleum products. While the number of business days in the final 11 days of October was the same as in 2016, there was one more business day in the first 20 days of the month, so we expect calendar effects pushed up import and export figures in that period. We believe crude oil prices are likely to have been a factor in the latter part of the month, having more of a positive impact on growth in nominal imports than in the first 20 days. We note that the impact of the number of business days tends to be larger for imports. Bearing in mind these various factors, we estimate nominal exports for October rose 15.7% y-o-y while nominal imports rose 23.6%, which would be a lower rate of growth for both than in the first 20 days of the month. We estimate a trade surplus (original series) of JPY126.9bn and a seasonally adjusted trade surplus of JPY243.8bn. 

Adjusting our October nominal import/export estimates to reflect corporate goods price index data for October (export prices: up 9.7% y-o-y; import prices: up 15.3%) results in seasonally adjusted estimates of 3.4% m-o-m growth for real exports and 4.6% m-o-m growth for real imports. Turning to quarterly data, we estimate 1.4% growth in real exports in October versus the July-September average and 3.2% growth in real imports. Exports have been on the rise since July-September, and these estimates imply that imports, which had been weak in July-September, will turn upwards. From here, we expect components for new smartphone models – for which supply has not yet caught up with demand – to support Japanese exports. In our view, the strength of capex demand in more developed markets could be a longer-term investment theme. We believe companies were holding back on replacement demand due to political uncertainty, but this is now emerging as uncertainty fades. We expect such demand to support growth of the global economy and Japanese exports in the near term. However, as this capex is not directed toward capacity increases, we would caution against its sustainability."