The week ahead: Q1 GDP second estimate in focus - Nomura

Analysts at Nomura explained that the minutes from the May FOMC meeting may give us an additional indication on the balance sheet adjustment specifics and how the FOMC assessed economic momentum in Q1. 

Key Quotes:

New home sales (Tuesday): New housing sales improved at a steady pace in Q1. The lean supply of existing homes amid resilient demand from consumers may have been supportive of new single home sales. The survey indicator of the foot traffic of potential buyers remained especially elevated in January through April. However, incoming data suggest some moderation in new home sales in April following a strong 5.1% gain in March. Permits for single home constructions fell by 4.5% in April although mortgage applications for home purchases increased steadily by 1.7%. Thus, we forecast a 3.4% m-o-m decrease to an annualized rate of 600k. Note that our forecast of 600k would still hover above the monthly average pace in Q1 if realized. This would be consistent with our view that consumer fundamentals remained firm, coupled with steady increases in employment and wages. 

Existing home sales (Wednesday): Existing home sales rebounded strongly by 4.4% m-o-m in March. Both single-family home and condo sales increased decently, suggesting resilient momentum. As for April, we expect a decent increase in these data. Mortgage applications for home purchases increased steadily in April after a strong jump in March. Pending home sales, which tend to lead existing home sales by four to six weeks, slowed slightly in March, but a strong 5.5% increase in February suggests that some of the signed contracts may have carried over to April. This possibility suggests that some of the momentum may have sustained through April as more contract signings materialize. However, although consumer fundamentals remain favorable, a lean supply of inventory remains as a challenge. Altogether, we forecast a 1.6% m-o-m increase in April to an annualized rate of 5.6m units

FOMC minutes (Wednesday): At the end of 2-3 May meeting, the FOMC acknowledged that recent spending data had been weaker than expected. However, it stated explicitly that it viewed “slowing in growth during the first quarter as likely to be transitory.” Also, incoming information and our analysis on residual seasonality in real GDP suggest some of the weakness in spending data in Q1 might have reflected the underlying momentum. In this regard, it would be worth looking at which data and what kind of analysis the FOMC monitored in assessing the economic momentum. Moreover, recent data on inflation point to some deceleration in core inflation. Any remark on the FOMC’s assessment on the recent development on inflation would be interesting. Note that since the FOMC meeting, labor markets and inflation data have sent contradicting signals. Nonfarm payroll growth remained steady, but core CPI inflation was weaker than market expectations in March and April. The second month of soft core CPI data may marginally lower some members’ confidence regarding the progress on the Fed’s 2% inflation target. Last, minutes from this meeting may provide some indication of balance sheet adjustment specifics, while FOMC participants appeared to be forging consensus on the operations of balance sheet normalization. Initial jobless claims (Thursday): Initial unemployment insurance claims have stabilized around the historical low after a continued downtrend during the recovery. In the week ending 13 May, the four-week moving average of initial claims decreased to 241k from 244k. The sustained downtrend highlights a resilient improvement in labor markets and appears consistent with an uptick in the rate of transition from unemployment to employment in the monthly employment survey and a downtick in the unemployment rate. Advance goods trade balance (Thursday): Goods trade data were weak in March with the trade deficit widening further to $64.2bn. Both goods imports and exports decreased, while a decline in exports slightly outpaced that of imports. February and March posted declines in imports, marking a departure from the four prior months of strong import growth. Based in incoming container data at major US ports, we believe imports likely rebounded in April after two disappointing months. Regarding goods exports, outbound container shipments point to continued weakness. However, healthy demand from abroad may have contributed to growth in exports to a certain degree. All in all, we expect a goods trade deficit of $65.5bn in April, widening from $64.2bn deficit in March. 

Q1 GDP, second estimate (Friday): In the advance estimate, the BEA reported that GDP grew by 0.7% q-o-q in Q1 at a seasonally adjusted annualized pace, slowing from 2.1% in Q4 2016. Personal consumption was noticeably soft, increasing 0.3% compared to 3.5% annual pace in Q4. While the weakness in consumer spending was broadbased, warmer-than-usual weather and a delay in tax refunds likely contributed to some drag. Moreover, inventory investment also added a significant drag after a strong increase in Q4. However, nonresidential investment increased markedly by 9.4%, partially led by a strong increase in structures investment (22.1%) and equipment investment (9.1%). Further, much of the increase in structures investment was attributable to an astounding jump in mining exploration, shafts and wells. Recent data since the advance estimate suggest, on balance, no major changes to real GDP growth from its first estimate. Annual revisions to manufacturers’ shipments, inventories and orders as well as revisions in wholesale inventories for February and March indicate less drag from inventory investment. Moreover, nonresidential construction data indicate more business investment on nonresidential structures in Q1. On the other hand, annual revisions to retail sales changed the monthly profile of personal consumption unfavorably for its q-o-q growth in Q1. Further, the relevant elements of service spending in the advance Quarterly Service Survey report, on net, were negative to Q1 GDP growth as household spending on information (telephone, cable and satellite television, internet services)and other services was unexpectedly weaker than the BEA had assumed. All together, we expect headline Q1 GDP to be unchanged 0.7% in the second estimate. Durable goods orders (Thursday): We expect a modest decline of 0.2% m-o-m in total durable goods orders in April after a four-month stretch of monthly increases since December 2016. A primary factor of the expected decline is orders for volatile transportation equipment. Nondefense aircraft orders dropped sharply which may translate into a double-digit decline in non-defense aircraft orders. While motor vehicle and parts orders likely increased slightly given increased vehicle sales and assemblies, federal government spending on the Air Force points to some decline in orders for defense aircrafts and parts. Overall, we forecast a 1.3% decrease in transportation equipment orders. That said, excluding transportation equipment, we expect durable goods orders to continue to increase moderately in April and forecast an increase of 0.4%. Industrial production for ex-trans durable goods rose in April and ISM manufacturing survey’s new orders index inched down but remained elevated. We think that manufacturing activity continued to recover partly because of increased oil and gas well drillings activity and increasing international trade globally, although manufacturers’ sentiment fluctuated recently due to changes in expectations for fiscal policy. 

University of Michigan consumer sentiment (Friday): April’s preliminary reading from the University of Michigan indicated a slight uptick in consumer sentiment, from 96.9 in March to 98.0. There remains a deep partisan divide within the survey as Democrats and Republicans continue to view future economic conditions in diametrically opposed ways. With continued political partisanship, it is possible that lingering policy uncertainty, or even potential policy disappointments, would affect consumer sentiment materially. Median 1-year and 5-10 year ahead inflation expectations remained unchanged at 2.5% and 2.4%, respectively in the preliminary reading. While 1-year ahead inflation expectations have decreased across the distribution of respondents (with similar decreases seen in the 25th and 75th percentiles), 5-10 year ahead inflation expectations for the 75th percentile have decreased much more substantially compared to the median and 25th percentile, indicating some tightening in the distribution.