The week ahead: United States - Nomura

Analysts at Nomura explained that for the week ahead in the US, the relevant elements of the May PPI and CPI inflation reports point to subdued core PCE inflation in May. 

Key Quotes:

"Durable goods orders (Monday): We expect a 0.1% m-o-m decline in total durable goods orders in May following a 0.8% decline in April. We expect the forecast decline to be driven by weakness in durable goods orders excluding transportation. The May industrial production report suggests the output of durable goods manufacturing excluding transportation fell sharply in the month, portending a sharp slowdown in orders. Considering these data, we forecast a 0.5% decline in durable goods orders excluding transportation. The orders of transportation goods likely increased May, driven by a sharp increase in defense-related aircraft and parts orders. Motor vehicle and parts orders, however, are likely to decline as inventories of light vehicles remain high in the face of weaker-than-expected vehicle sales thus far in 2017. Case-Shiller home price index (Tuesday): The Case-Shiller 20-city home price index increased 5.89% y-o-y in March, a slight uptick from the February increase of 5.85%. The recent increase has outpaced the average year-on-year rate in 2016 as the number of homes for sale on the market lags high demand. On a monthly basis, this index was up 0.87%. Strong job gains in 2017, increases in personal income, and an influx of younger new home buyers may have contributed to increased demand in a low-inventory housing market, pushing up prices. However, continued increases in income and a recent downtick in mortgage rates may alleviate the adverse impact of rising prices on home affordability, to a certain degree.

Conference Board’s Consumer Confidence (Tuesday): The Conference Board’s consumer confidence index fell to 117.9 in May from 119.4 in April. In June, consumer sentiment likely continued to deteriorate modestly, to 117.5. The preliminary estimate for June by the University of Michigan consumer survey suggests a moderation in optimism as consumers, particularly self-identified Republicans and independents, became more skeptical about the current administration’s ability to enact its agenda. Although the unemployment rate has fallen notably since January and income gains have been steady, it is possible that a downward shift in expectations regarding the administration’s policy promises may have outweighed healthy consumer fundamentals.

Advance goods trade balance (Wednesday): Goods trade data were weak in April with the second consecutive decline in nominal goods exports. At the same time, nominal goods imports increased steadily, widening the trade gap to $67.1bn. Based on incoming container data at major US ports, we expect weakness in goods exports continued in May. Moreover, export prices dropped notably in May, the first time since August 2016, lowering the nominal value of goods exports. Further, goods imports may have declined after two consecutive months of increases. Altogether, we expect a goods trade deficit of $67.3bn in May, widening further from April.

Pending home sales (Wednesday): Pending home sales fell for a second month in April, down 1.4% m-o-m from March. It is possible that a limited supply of homes for sale on the market dampened the number of contract signings. However, consumer fundamentals have remained supportive for housing demand. Although low inventories have contributed to rising home prices, continued income growth and a recent tick-down in mortgage rates may partially mitigate the worsening of home affordability. For May, consensus expects an increase of 1.1% m-o-m.Initial jobless claims (Thursday): For the week ending 17 June, initial jobless claims increased by 3k to 241k. Smoothing out weekly volatility, the 4-week moving average increased by 2k to 245k, but remained near lows not seen since the 1970s. Continuing claims ticked up slightly as well, but the insured unemployment rate was unchanged at 1.4%, its historical low. Despite this slight uptick in initial claims, continued low readings suggest that the labor market is still healthy. Moreover, anecdotal evidence from various surveys suggests businesses find it increasingly difficult to fill open positions, pointing to further tightening in labor market conditions. Against this backdrop, initial claims are likely to stay low in the medium term.

Q1 GDP, third estimate (Thursday): In the second estimate, the BEA revised up real GDP growth to 1.2% q-o-q saar (from 0.7%). Although incorporation of the annual revision to retail sales boosted personal consumption expenditure (PCE) modestly, PCE growth was relatively soft at 0.6%, compared to 3.5% in Q4. Incoming service spending data point to a modest upward revision to PCE in the final estimate of Q1 GDP. The Quarterly Services Survey for Q1 suggests healthy growth in service sector revenues and expenses, indicating that spending on services may have been greater than the BEA’s prior estimates. However, incoming data on other components of GDP have been lackluster. Despite upward revisions to manufacturers’ inventories in Q1, a subsequent upward revision to aggregate inventory investment is likely to be only modest. In its final print, Q1 inventory accumulation is likely to be subdued. Private structure investment contributed to real GDP growth notably, but downward revisions to nonresidential construction in February and March imply that private structure investment may be lowered in its final print. Last, trade data that came in after the BEA’s second estimate included revisions to February and March that widened the trade gap, resulting in a greater drag from net exports. Altogether, we expect a 0.9% increase in the final estimate of Q1 real GDP growth, 0.3pp lower than the BEA’s second estimate.

Personal income and spending (Friday): We expect a trend-like 0.3% m-o-m increase in personal income in May. Data from the BLS’s May employment report highlight a robust pace of job creation. Average hourly earnings of private production and nonsupervisory workers increased steadily in May, pointing to a steady increase in personal income. Personal consumption growth, on the other hand, appears to have been only moderate. Spending on durable goods likely slowed in May, as suggested by weak sales at motor vehicle and parts dealers and electronics and appliance stores, in particular. Moreover, we expect a sharp decline in spending on nondurable goods. Sales at gasoline stations dropped in the month and sales at other nondurable goods stores remained subdued. However, we think service spending likely increased steadily. Sales at dining and drinking venues remained weak, but elevated readings of the ISM nonmanufacturing survey index imply healthy activity in the service sector. Altogether, we expect a modest 0.1% m-o-m increase in personal spending.

PCE deflator (Friday): Relevant elements of the May PPI and CPI inflation reports point to a subdued increase in core PCE inflation in May. Core CPI has been disappointing in recent months with continued weakness in core goods price inflation. The inflation data on the relevant components within the PPI report were mixed. PPI inflation of scheduled passenger air transportation fares dropped 4.1% m-o-m in May, following a 0.9% rise in April. Portfolio management service fees continued to increase, but at a slower pace than in April. As for medical care-related items of PPI, hospital service prices were down 0.2% m-o-m and physician service prices were essentially unchanged. Overall, based on CPI and PPI data, the May core PCE price index is estimated to rise only moderately by 0.02% m-o-m. On a year-on-year basis, core PCE inflation is now likely to fall again to 1.4% (1.388%) in May from 1.5% (1.538%) in April. As energy prices plummeted in May, energy prices in the CPI report dropped sharply with aggregate energy CPI falling 2.3%. Based on these data, we expect a notable drag from the PCE energy price index. Although we expect a steady increase in the PCE food price index, given continued growth in CPI food prices, the growth in PCE food prices will not be enough to offset the drag from energy prices. Altogether, our forecast for headline PCE inflation is a decline of 0.08% m-o-m, which is equivalent to a 1.5% y-o-y increase.

Chicago PMI (Friday): In May, most of the excitement from the Chicago PMI report came after Market News International corrected the headline index to 59.4 (up 1.1pp from the previous month) after an initial report earlier in the morning of 57.0 (down 1.3pp from the previous month), which would have been the first decline since January. Correction aside, the headline reading of 59.4 marked the highest point since November 2014. The employment index jumped from 53.8 to 57.1, indicating a modest pick-up in the pace of employment growth. The production index increased by 3.7pp to 63.2 and continues the uptrend seen since February 2016. While the new orders index decreased by 4.5pp to 61.4 (a still-elevated reading), the order backlog index jumped by 8.8pp to 51.8, indicating steady demand. Similar to the ISM, Philly Fed, and Empire State manufacturing surveys, Chicago PMI has seen some softness in the prices paid index over the past two months. Given elevated readings in both headline indexes of the Philly Fed and Empire State manufacturing surveys earlier this month, we expect continued improvement in the Chicago PMI and forecast a reading of 60.0 for June.

University of Michigan consumer sentiment (Friday): In the preliminary reading for the University of Michigan consumer survey in June, the headline index dropped 2.6pp to 94.5, the lowest reading since November 2016. The survey director noted a sharp decline in sentiment, particularly among self-identified Republicans and independents, after 8 June, likely reflecting diminished expectations for the Trump administration’s agenda. The survey jumped sharply after the election in November 2016 while a sharp partisan divide emerged among respondents: Republicans consistently had more positive responses for current conditions and expectations, while Democrats experienced a noticeable drop in sentiment. Recent events, including ongoing Russia investigations, may have dampened sentiment among self-identified Republicans, and some independents, and could put more downward pressure on this survey. Whether or not this decline appears in other measures of consumer sentiment, such as the Conference Board’s consumer confidence index, remains to be seen. Regarding inflation expectations, while the one-year ahead expected inflation rate remained unchanged at 2.6%, the five- to 10-year ahead rate increased 0.2pp to 2.6% after three months at 2.4%. Inflation expectations have been trending steadily lower over the past three years but have leveled off somewhat recently, slightly easing policymaker concerns."