Analysts at Nomura offered their preview for the week ahead.
"The week ahead: United States
Given relevant data from August PPI and CPI reports, we expect steady progress in core PCE inflation for August
Case-Shiller home price index (Tuesday): Home prices have been rising steadily as buyers compete for a limited supply of homes for sale. The Case-Shiller 20-city composite index rose 5.65% y-o-y in June. This index has averaged 5.79% y-o-y so far in 2017, higher than the average pace of 5.24% in 2016. The supply of existing singlefamily homes is likely to remain lean in coming months as homeowners appear hesitant to put their homes on the market. Against this backdrop, we continue to expect steady increases in home prices.
Conference Board’s Consumer Confidence (Tuesday): Consumers have remained highly optimistic throughout 2017. The Conference Board’s consumer confidence index remained high at 122.9 in August, driven by strong improvements in the labor market. We expect the underlying pace of job creation to remain solid in September, but it is possible that economic disruptions caused by the recent hurricanes may have adversely affected consumer sentiment in September. The preliminary September University of Michigan consumer survey showed a modest deterioration in expectations due to inclement weather. Thus, we forecast a decline to 120.0.
New home sales (Tuesday): Hurricane Harvey may have caused major disruptions to construction activity in the Gulf Coast area in August. New home sales data are collected via the same survey for construction starts and permits data, the collection of which was affected by the hurricane. Thus, there is some downside risk for new home sales in August. We expect a 1.1% decline to an annualized pace of 565k for August new home sales.
Durable goods orders (Wednesday): We expect a 0.2% m-o-m decline in August core durable goods orders (excluding transportation goods), after a 0.6% increase in July. Our estimates indicate that the production of durable goods excluding transportation equipment fell moderately in August. The new orders index in the ISM survey slipped slightly by 0.1pp to 60.3, which is still an elevated reading. Transportation goods orders may rebound in August following a sharp decline in July. Auto assemblies output rebounded in August from July’s level although its pace remains weak relative to the 2016 average. Moreover, industry data suggest civilian aircraft and parts orders will likely rebound. A sharp decline in US Air Force spending suggests weak defense-related orders, which will likely be offset by rebounds in other transportation orders. Altogether, our forecast for topline durable goods orders is a 0.9% increase.
Pending home sales (Wednesday): Pending home sales, which tend to lead existing home sales, have been weak over the past five months. Continuing supply shortages for available homes for sale will likely continue to weigh on pending home sales. However, with new home affordability deteriorating more relative to existing homes, consumers could shift towards more affordable existing homes on the market, adding a gradual tailwind to pending home sales. In addition, strong job gains and steady income growth will continue to support consumer demand in the housing market.
Initial jobless claims (Thursday): Initial jobless claims decreased 23k to 259k for the week ending 16 September, but remain above the pre-Harvey level of roughly 240k. However, in the advance estimate, initial jobless claims in Florida did not increase as strongly as expected, indicating that there could be some delay in filing due to electricity outages from Hurricane Irma. For the week ending 9 September, continuing jobless claims increased 44k to 1980k, likely reflecting the influx of initial claims from Hurricane Harvey. Overall, we expect initial jobless claims to remain somewhat elevated over the near term due to the negative impact from the active hurricane season. While labor market readings will be distorted over the next few months due to inclement weather, we still expect the underlying pace of job growth to remain steady.
Advance goods trade balance (Thursday): We expect the advance estimate of the August goods trade balance to show a widening deficit to $66.1bn, from $63.9bn in July. Goods exports picked up notably in Q2, but the July trade report indicates that goods exports fell 0.3% m-o-m and imports fell 0.2%. Based on inbound container data at major US ports, we expect the decline in goods exports continued in August. Goods imports, on the other hand, likely rebounded, contributing to a wider goods trade gap.
Q2 GDP, third estimate (Thursday): In the final estimate of Q2 GDP, we expect the BEA to raise its estimate by 0.2pp to 3.2% q-o-q saar, from 3.0%. The Quarterly Services Survey for Q2 suggests that personal consumption expenditure (PCE) could be revised up in the final estimate, while it implies somewhat weaker investment in intellectual property. In addition, backward revisions to core retail sales were negative to our tracking model and will likely offset some of the positive impact from the inclusion of the Quarterly Services Survey. The revisions to inventories were not substantial, implying that the contribution from inventories to topline real GDP growth will remain weak, which was reported at a meager 0.02pp in the BEA’s second estimate.
Personal income and spending (Friday): We expect a trend-like increase in personal income of 0.3% m-o-m in August, after July’s 0.4% rebound. The underlying pace of income growth has been steady during 2017 and aggregate earnings in August increased steadily in the BLS employment report.
For spending, we expect a 0.1% increase in August, a slight deceleration from the 0.3% increase in July. Incoming retail sales data have been weaker than expected. Motor vehicles and parts sales declined in August, likely reflecting at least in part some weakness caused by Hurricane Harvey in the Greater Houston area. Electronics and appliance store sales were weak for the fourth month in a row in August. However, healthy increases in non-durable goods spending should offset weakness from durables. Moreover, services spending likely increased. While utility consumption most likely declined over the month, partially reflecting unseasonably cool weather in the northeast, healthy sales at dining & drinking places and other services spending likely counteracted the weakness in utilities.
PCE deflators (Friday): Based on relevant data from the August CPI and PPI reports, our forecast for August core PCE price inflation is a steady 0.2% (0.183%) m-o-m increase, equivalent to a 1.4% (1.37%) y-o-y gain. Core CPI jumped strongly by 0.248% m-o-m in August (compared to 0.114% m-o-m in July). However, given the difference in relative importance for rent-related items and health care service prices between the core PCE price index and core CPI, we do not expect that core PCE inflation will be as strong as core CPI inflation in August. Note that physician service and hospital service prices from the PPI report earlier this week, which are used for estimating the corresponding prices of the core PCE price index, were essentially unchanged in August. Additionally, the relative importance of rent and OER, which pushed up core CPI inflation, is smaller in core PCE than in core CPI, implying core PCE inflation will come in lower than core CPI. Regardless, given August CPI data, y-o-y core PCE inflation is now less likely to decline further in coming months from the current level of 1.4%.
Among non-core components, we expect aggregate energy PCE prices to increase sharply as the prices of motor fuel rose in the month. For food PCE inflation, we expect a slight decline based on the CPI food-at-home price index. Altogether, we expect headline PCE index to increase by 0.3% (0.270%) m-o-m, which is equivalent to a 1.49% y-o-y increase.
Chicago PMI (Friday): We expect the Chicago PMI to increase 1.1pp to 60.0 in September, reflecting continued business optimism. Regional manufacturing surveys have been strong so far in September with both the Philly Fed and Empire State surveys showing modest improvement. Moreover, the re-weighted subcomponents of these surveys that correspond to the Chicago PMI showed healthy gains. Abstracting from the temporary impact of the active hurricane season, economic growth and the business outlook have both been healthy in September and we expect the Chicago PMI to reflect these trends during the month.
University of Michigan consumer sentiment (Friday): The preliminary estimate of consumer sentiment from the University of Michigan in September showed a slight, 1.6pp decline to 95.3. While current conditions sentiment improved, expectations deteriorated as consumers expressed some concern over the effect of the active hurricane season on the national economy. However, consumer sentiment overall remains elevated with the current economic conditions index at its highest level since November 2000. We expect the drop in expectations to reverse in coming months as post-hurricane rebuilding efforts come underway. Inflation expectations at both the one and 5-10 year horizons ticked up by 0.1pp in the preliminary September report, to 2.7% and 2.6%, respectively.
The week ahead: Euro area
Euro area inflation data are in focus this week.
German Ifo (Mon): We expect the German Ifo business climate index to increase to 116.5 in September from 115.9 in August. We forecast the current situation and expectations indices to pick up to 124.8 (from 124.6) and 118.4 (from 107.9) respectively.
Germany, preliminary July inflation (Thu): We expect the flash reading of German HICP inflation to be 1.9% y-o-y in September after 1.8% y-o-y in August. Core inflation is expected to remain at 1.5% y-o-y.
Euro area preliminary July inflation (Fri): We expect the flash reading of euro area HICP inflation to increase to 1.7% y-o-y in September from 1.5% y-o-y in August. This is primarily due to energy-related base effects. Core inflation, however, is also expected to rise modestly to 1.3% y-o-y from 1.2% and reflecting modest wage-related pressures.
UK Current account (Fri): The current account balance can be broken down into four distinct components: goods trade, services trade, incomes and transfers. Two of these we already know for the second quarter – the services trade surplus was unchanged from Q1 while the goods deficit improved by a modest £1bn. The incomes deficit is far more modest than it was a year ago, and that may continue to improve thanks to the global economic recovery leading to an increase in repatriated income. As a result we see a small improvement in the current account deficit from £16.9bn in Q1 to £16.2bn in Q2 (i.e. from 3.4% to 3.2% of GDP).
UK Household borrowing (Fri): Net mortgage lending fell in July as did consumer credit, reducing household borrowing from £5.5bn in June to £4.8bn in July – a three-month low. We expect some recovery in the August figures, possibly helped by the rise in the number of mortgage approvals for house purchase recorded in last month’s report. Note that the UK’s credit impulse – the rate of change in net new (as opposed to the stock of) private sector credit as a percentage of GDP – has recovered recently, with households’ debt/income ratios having risen from their lows of around 132% to 140% currently.
UK GDP (Fri): There have been no significant revisions to monthly services, construction or production output in Q2 that would point to a revision to overall GDP. Thus we expect the final estimate to be the same as the second at 0.3% q-o-q. Indeed, the BoE is not forecasting any revisions to Q2 GDP in its “backcasts”, though it does expect Q1 GDP to eventually be lifted by the ONS from 0.2% to 0.4% q-o-q. In the absence of any headline revisions, look out for the saving ratio and income detail in this report.
The week ahead: Japan
We forecast August all-Japan core CPI inflation will strengthen from July to 0.7%. We also expect Tokyo core inflation for September to be stronger than in August.
August all-Japan core CPI (CPI for all items excluding fresh food) (Friday): We expect the all-Japan core CPI for August to rise to 0.7% y-o-y from 0.5% in July. In addition to the positive contribution from energy prices, we expect a rise in medical fees caused by system changes to boost the core core component. We also expect the August all-Japan core core CPI (which excludes energy and food, except alcoholic beverages) to rise to 0.1% y-o-y from -0.1% in July. August core core CPI inflation for the Tokyo area (already released) rose sharply from July, and we believe the all-Japan figure will follow this pattern. We also forecast a 0.3% y-o-y August rise in the all-Japan CPI excluding fresh food and energy, commonly known as the BOJ's version of the core core CPI, up from 0.1% in July. For the September Tokyo area core CPI, we forecast a rise of 0.5% y-o-y, up from 0.4% in August. We expect the rebound in energy prices to continue to boost the core CPI. Also, we forecast a core core CPI for September of 0.0% y-o-y, the same as in August. We also expect the Tokyo area CPI inflation excluding fresh food and energy (the BOJ's version of the core core CPI) for September to come in at 0.0%, the same as in August.
August industrial production index (Friday): We expect industrial production growth in August to have risen to 2.5% m-o-m.
The survey of manufacturers' production forecasts called for strong month-on-month growth of 6.0% in August. However, we note that, since 2008, actual production growth in months when projected growth for the current month has been in the top 10% for the survey has been around 3.5pp lower than forecastl. The sectors expected to contribute to the sharp rise in August, such as general-purpose, production, business-oriented machinery and information and communication electronics equipment, often tend to fall short of production forecasts, and we believe the high growth forecast for production in August could well be affected by these sectors. That said, related indicators for August were buoyant. First, Japan's real exports, which have a strong correlation to industrial production, rose by 3.1% m-o-m in August, gaining momentum from the preceding month. Furthermore, Japan’s manufacturing PMI stood at 52.5, up 0.9 points from July, above the expansion/contraction threshold of 50, while the current conditions DI for manufacturers in the Economy Watchers Survey (seasonally adjusted) was up 2.3 points from July. Taking these indicators into account as well, we expect actual production for August to rise by 2.5% m-o-m."
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