The week ahead: week will kick off with RBNZ and FOMC - Nomura

Analysts at Nomura offered a preview of the key events for the week ahead.

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United States | Data preview

The September FOMC meeting is in focus this week.

Case-Shiller home price index (Tuesday): After rising firmly for almost two years, the Case-Shiller home price index for major cities (composite 20-city) cooled in recent months. The slowdown coincided with easing of existing home sales over past several months. While the strong labor market likely remained supportive for demand, worsening home affordability, partly driven by higher mortgage rates and prices, are likely exerting some downward pressure. Overall, we expect steady increases in August Case-Shiller composite 20-city index

Conference Board’s consumer confidence (Tuesday): We expect a healthy reading of 133.0 for Conference Board’s consumer confidence index for September, mostly unchanged from August. The University of Michigan survey indicated continued optimism with improvement in buying plans for autos and household durable goods. The strong labor market has remained supportive for consumer confidence despite escalating trade tensions. Conference Board report for September will likely follow this trend. That said, the recent escalation of US-China trade tensions could have a material impact on consumer sentiment in the following month as many consumers goods are targeted by the finalized list of $200bn imports from China subject to 10% tariffs.New home sales (Wednesday): We expect new home sales to decline 3.0% m-o-m to 608k saar in August, following soft readings for housing starts. Permits for new singlefamily housing declined sharply in August, suggesting weaker sales activity in the month. Although m-o-m readings can be volatile due to a relatively small sample size, we expect only modest improvement in the underlying pace of new home sales as inventory remains low. Slower sales activity so far in Q3 will likely lower residential investment

FOMC meeting (Wednesday): At this point, it would be a significant surprise if the FOMC did not raise interest rates at the upcoming September meeting. The economy has remained strong, supported by substantial fiscal stimulus. Recent FOMC minutes and participant comments all point to another step in removing accommodative policy. On policy rate expectations in Summary of Economic Projections, we do not expect any changes to the FOMC’s median policy rate forecasts at the September meeting for 2018- 20. The FOMC will likely continue to forecast a total of four hikes in 2018, one more after the expected hike at the September meeting, three hikes in 2019 and one hike in 2020. However, the September Summary of Economic Projections (SEP) will be extended by one year, through 2021. We expect the Committee’s median rate forecast for 2021 to remain at 3.375%, unchanged from the median forecast for 2020. While we do not expect many participants to revise their longer-run policy rate forecast, we expect the median longer-run forecast to rise to 3.0% for a technical reason. The current median forecast of 2.875% for the long-run policy rate is the average of two participant’s forecasts due to an even number of submissions. Richard Clarida’s confirmation in lateAugust as Vice Chair adds an additional longer-run dot and will likely raise the median by 12.5bp to 3.0%. However, it is important to note that this is unlikely to signal a shift in the Committee’s thinking around the longer-run rate.

Initial jobless claims (Thursday): Low initial and continuing jobless claims remain consistent with labor market strength. However, potential business disruptions from Hurricane Florence on the southeast coast could result in temporary spikes in claims in coming weeks.

Advance goods trade balance (Thursday): We expect a deficit of $69.0bn for the advance estimate of goods trade balance for August, following $72.0bn deficit in July. Incoming container shipment data at US ports suggest that goods exports likely rebounded in August after recent declines, while goods imports likely slowed. 

Durable goods orders (Thursday): We expect a healthy 0.6% m-o-m increase in extransportation durable goods orders for August, following a modest 0.1% in July. The new orders index in the ISM manufacturing survey improved strongly. August industrial production report indicated that the output of ex-transportation durable goods rose at a solid pace. Our forecast, if realized, would be consistent with the solid momentum in the industrial sector, boosted by strong domestic demand. For volatile transportation components, we expect a sharp rebound in August after a slowdown in July. New orders for nondefense aircraft and parts likely jumped strongly following a sharp pullback in the previous month. Altogether, we expect a 2.5% m-o-m increase in aggregate durable goods orders. 

Q2 GDP, third estimate (Thursday): Incoming data since the release of the BEA’s second estimate of Q2 GDP have been solid. The data on business equipment and nonresidential structures investment, government spending, and net exports have been stronger than the BEA’s assumptions. However, residential investment was likely modestly weaker than its assumptions. Altogether, we expect the BEA to revise up the Q2 real GDP estimate by 0.3pp to 4.5% q-o-q saar in its final report. 

Pending home sales (Thursday): Existing home sales remain constrained by lower turnover in the market as rising home prices and higher mortgage rates affect both supply and demand. Likewise, pending home sales, which tend to lead existing home sales, will likely show signs of moderation in August. 

Personal income and spending (Friday): We expect a stable 0.4% m-o-m increase in personal income in August. For personal spending, we also forecast a steady 0.4% increase, consistent with healthy momentum in household spending growth. Retail sales report for August suggests consumer spending on durable goods such as motor vehicles and furniture declined in the month, but spending on gasoline and certain nondurable goods likely rose firmly and offset weaker spending on durable goods. Moreover, spending on services likely increased at a steady pace. Looking ahead, we expect the recent tax cuts and the healthy labor market to remain supportive for personal consumption growth in the near term. 

PCE deflators (Friday): Reflecting CPI and PPI data for August, our forecast for core PCE inflation for the month stands at +0.0% (+0.038%) m-o-m, which would drive down its y-o-y change to 1.9% (1.919%) from 2.0% (1.984%), previously. On the relevant components of PPI, inflation of hospital service prices remained moderate, rising only 0.1% m-o-m (on a non-seasonally adjusted basis) in August, while physicians’ services prices increased steadily by 0.5% in the month. In addition, scheduled passenger air transportation prices declined. Financial service prices of PPI did not move substantially. Altogether, we estimate the aggregate contribution to the m-o-m core PCE inflation from relevant PPI components is +0.03pp (3bp) in August, up from +0.01pp (1bp) in the previous month. However, the estimated contribution from CPI data declined in August from July, mostly due to lower core goods prices. Overall, we expect core PCE price index to increase only modestly by +0.038% m-o-m (rounded to no change) in August, which would drive down its y-o-y change to 1.9% (1.919%) from 2.0% (1.984%), previously.

Chicago PMI (Friday): We think Chicago PMI likely declined to 62.5 in September from 63.6. Early manufacturing surveys for September sent mixed signals. The Empire State manufacturing survey headline index fell sharply by 6.6pp to 19.0, but the Philly Fed manufacturing survey index for September jumped 11.0pp to 22.9 in September. We think Chicago PMI could reflect some of the concerns over an escalation in trade tensions between the US and China. 

University of Michigan consumer sentiment (Friday): University of Michigan consumer sentiment index rose to 100.8 (highest since March 2018), beating market expectations of 96.6. The improvement appears to have been driven by household financial gains, which were cited by 56% of respondents, close to record high readings of 57% in March 2018 and February 1998. The concerns over trade appear to have persisted, mentioned by about one-third of all consumers. Given much of the recently announced list of $200bn goods from China subject to US tariffs include a large share of consumer goods, any additional color on consumers’ reaction to the recent news would be of interest. 

Euro area | Data preview

The week ahead Germany and euro area September HICP data will be in focus next week

Germany Ifo Business Climate, Aug (Monday): We expect the Ifo Business Climate Survey to decrease to 101.7 in September from 103.8 in August. We forecast current conditions and expectations to drop 105.2 and 98.0 in September from 106.4 and 101.2 in August, respectively, as PMI survey data for September decreased from the previous month with a sharp drop in the manufacturing index. An escalation of the trade dispute between the US and China has raised concerns about manufacturing sector activity. 

UK CBI industrial trends survey, Sep (Monday): Over the past three months the total orders balance of this survey has averaged +10% versus its long-run average of -18%. Export orders have been broadly stable at just under +10% for the past six months – which is not the story we’ve heard from the PMIs (recall the August PMI export orders index collapsed from 53.0 to 47.4). Indeed this is a story we have witnessed globally in recent months. We would not be surprised to see that being reflected in the CBI survey.

UK CBI distributive trades survey, Sep (Tuesday): According to this survey measure retail sales have performed well over the summer months, probably aided by the hot weather and the World Cup. The ONS also reported an uptick in its official data (the annual rate of growth of sales volumes stood at 3.7% in July). While low interest rates, falling unemployment and rising wages are supportive of consumption it will be interesting to see whether there is any autumn payback from the summer’s rebound.

Germany and euro area flash HICP, Sep (Thursday - Friday): We expect the first reading of German HICP inflation to remain at 1.9% y-o-y in September, unchanged from August. For September core inflation, we expect a fall to 0.9% y-o-y from 1.1% in August. Though energy prices should drive up headline inflation, we believe a drop in the volatile components should weigh on the core HICP. At the euro area level, we forecast the first reading of HICP inflation to increase to 2.1% y-o-y in September, compared with 2.0% in August thanks to support from rising energy prices. We expect core HICP inflation to remain at 1.0% y-o-y in September, unchanged from August (because of our forecast for large rises in core inflation in smaller euro area countries offsetting Germany’s expected fall).

UK GDP, Q2 final (Friday): The ONS moved over the summer to publishing monthly estimates of GDP (on or around the 10th of each month). However, it continues to publish separately the ‘quarterly national accounts’ which is what this estimate of GDP is part of. All of the data since the start of 2017 are potentially up for revision in this release. Also look out for data on the saving ratio, real household disposable income and firms’ profits.

UK Current account, Q2 (Friday): There are four component parts to the current account. First, the goods balance (which we know was £2.7bn further in the red in Q2 vs. Q1) and second the services balance (which recorded a similar surplus to Q1). The third component is the incomes balance which is the most important part that we don’t yet know. Faster world growth than that of the UK suggests an improvement in this balance as the UK repatriates fewer profits to overseas holders of UK assets than vice versa. And finally we assume the transfers balance remains around its recent average of £5bn in Q2. In sum that leaves the current account deficit broadly unchanged at £17bn.

Japan | Data preview

The week ahead We expect September Tokyo-area core CPI to be unchanged from August, with the disappearance of the boost from hotel charges offset by a boost from energy prices.

September Tokyo-area core CPI (all items, less fresh food) (Friday): We forecast Tokyo-area core CPI inflation for September to come in at 0.9% y-o-y, unchanged from the August figure. We expect the BOJ’s version of core core CPI inflation, which excludes fresh food and energy prices, to come in at 0.5%, from 0.6% in August. The Tokyo-area CPI inflation rate in August was boosted by 0.14 percentage points (pp) m-o-m by hotel charges, which is a volatile category. We expect this boost to have disappeared in September, but its loss to be offset by higher prices for energy-related items. As such, we expect core CPI inflation to be the same as in August. 

August industrial production (Friday): In the survey of manufacturers’ production forecasts carried out on 10 August, the production forecast for August adjusted for forecast error by the Ministry of Economy, Trade & Industry, was 1.2% m-o-m. Trade statistics for August show a 6.6% y-o-y rise in exports (nominal), which are highly correlated with industrial production, higher than the consensus forecast (Bloomberg survey median) of 5.2% growth, suggesting that growth in exports in late August was stronger than expected. We expect industrial production in August to exceed the figure in the survey of production forecasts. 

August Labour Force Survey (Friday): We forecast an August unemployment rate of 2.5%, unchanged from July. The job openings-to-applicants ratio, which tends to lead the unemployment rate, rose 0.01 m-o-m to 1.63x in July, but we believe the correlation between the two data sets to have been weak recently. We forecast the job openings-to-applicants ratio for August to come in at 1.64x, from 1.63x in July. The new job openings-to-applicants ratio, a leading indicator of the job openings-to-applicants ratio, fell by 0.05 m-o-m in July, but the six-month trailing moving average continued its gradual rise, up 0.01 to 2.38x. We believe labour supply-demand remained tight. 

Asia | Data preview

The week ahead Growth momentum is expected to slow further in China, while central banks in Indonesia and the Philippines look set to raise rates. 

China: We believe overall growth momentum lost more steam this month as suggested by high-frequency data. Coal consumption growth by six major power plants has slowed so far this September by more than the historical average over 2013-17. We expect the official PMI to tick 0.1 point lower, to 51.2 in September, and the Caixin PMI by 0.2 points to 50.4 as it includes more small enterprises, which are under stress, in its sample.