The week ahead's key events: central banks in focus - Nomura

Analysts at Nomura explained the week ahead's key events as follows.

"United States | Data preview

We expect a rate hike from the FOMC, a 0.2% m-o-m increase in May core CPI and solid growth in May core retail sales

New York Fed Survey of Consumer Expectations (Monday): Inflation expectations in the April Survey of Consumer Expectations rose modestly at the one- and three-year horizons, up 0.2pp and 0.1pp, respectively, to 3.0%. Part of the recent pickup is likely related to the increase in gas prices this year. Consumer gas price change expectations in the SCE have increased 0.9pp to 4.8% over the past six months. The FOMC is likely to look through this temporary commodity price-related increase unless a sustained change in longer-term inflation expectations emerges.

CPI (Tuesday): After core CPI inflation slowed to 0.1% (0.098%) m-o-m in April, we expect only a modest rebound to 0.2% (0.158%) m-o-m in May, corresponding to 2.2% (2.198%) on a 12-month basis. Part of the softness in May core CPI inflation was likely owing to continued weakness in used vehicle prices and negative payback from an unusually large increase in April rent inflation. Higher jet fuel prices may have pushed up airline fares in April, posing some upside risk. However, we think that overall, core CPI likely increased at a trend-like pace in May, consistent with our view that inflation will accelerate only gradually. For non-core components, higher crude oil prices likely translated into higher retail gasoline prices while food prices likely increased at a steady pace of 0.2% m-o-m. Altogether, we expect headline CPI to increase by 0.3% m-o-m (0.259%), corresponding to 2.8% (2.834%) on a 12-month basis. Our forecast for CPI NSA is 251.670. 

US Budget (Tuesday): The Treasury Department reported a $215bn budget surplus in April, lowering the fiscal-year-to-date budget deficit to $385bn. Part of the large surplus was related to calendar payment shifts. However, incoming receipts in April were larger than the CBO originally estimated in its April 2018 updated budget outlook, suggesting some upside risk to the FY18 budget deficit forecast. The receipt numbers for the May budget statement will likely provide additional information on the near-term deficit trajectory. In addition, the May numbers will provide an update on how quickly government spending has ramped up since the budget agreement earlier this year

PPI (Wednesday): PPI excluding food, energy and trade services increased only 0.1% m-o-m in April, following two monthly gains of 0.4%, indicating some moderation in producer price pressures. In addition, all PCE-related components of PPI showed some weakness. As PPI-related components have recently been large contributors to monthly variation in core PCE inflation, the May report will likely garner more attention than usual

FOMC meeting (Wednesday): We think it is highly likely that the FOMC will raise rates at the 12-13 June meeting. At this point, it would be extremely surprising were the Committee to forego a rate hike. Economic data have indicated accelerating activity over the intermeeting period, with an unemployment rate at 3.8% and inflation approaching the Committee’s 2% objective. Given that economic momentum has accelerated since March, we expect the Committee’s new rates forecast to reflect a total of four rate hikes in 2018, up from three previously. While a rate hike appears likely, we expect the mechanics of the policy change to be somewhat different in June. Consistent with the May FOMC minutes, we believe the Committee will raise the target range for the federal funds rate by 25bp, to 1.75-2.00%, but will increase the interest rate on excess reserves (IOER) by only 20bp, 5bp lower than the top of the target range. Consistent with the May minutes and recent comments by Governor Brainard and San Francisco Fed President Williams in particular, we expect revisions to the post-meeting statement’s forward guidance language. Finally, we expect Chair Powell’s post-meeting press conference remarks, in addition to explaining the IOER adjustment and forward guidance language changes, to largely adhere to points made by Governor Brainard in her speech on 31 May.

Initial jobless claims (Thursday): Initial jobless claims remain near historical lows. We expect this trend to continue as the unemployment rate declines further and the economy continues to grow above trend.

Import prices (Thursday): Import prices have been under steady pressure from dollar weakness over recent months. However, recent dollar strengthening could lessen that pressure somewhat. Import prices in April increased 0.2% m-o-m, partly driven by a pickup in crude oil prices. Excluding petroleum products, import prices rose only 0.1%.

Retail sales (Thursday): We expect a 0.5% m-o-m increase in control retail sales in May, consistent with firming momentum in Q2 personal spending. Yet, some of the increase was likely driven by a pickup in gasoline sales at superstores and warehouse clubs, which may have been boosted by rising retail gasoline prices. As the Census Bureau does not separate gasoline sales at these stores, rising oil prices will likely affect control retail sales to some degree. Receipts at gasoline stations, separate from other large-scale retail stores, will likely pick up for the same reason. In addition, light vehicle sales slowed in May, suggesting retail sales at auto and auto part dealerships will likely fall. Finally, we expect a rebound in sales at building material stores after weather-driven softness over the past two months. 

Business inventories (Thursday): Business inventories in March were flat, weighed down by a decline in autos and auto parts retail inventories. Wholesaler and manufacturer inventories both increased 0.3% m-o-m and we expect total business inventory accumulation to rebound in April. 

Empire State survey (Friday): We forecast a reading of 17.0 for the Empire State manufacturing survey in June, a modest 3pp decline largely reflecting concerns about US trade policy. The past few months have seen increased volatility in manufacturing sentiment as businesses struggle to incorporate US trade policy announcements. After some deterioration in April following a pickup in trade tensions, sentiment rebounded in May as US-China relations improved on the margin. However, the recent application of steel and aluminum tariffs on major US suppliers (the EU, Canada and Mexico) will likely result in a modest pullback in manufacturer sentiment in June. Despite our forecast for June, we think business prospects overall for 2018 remain bright as does the US economic outlook.

Industrial production (Friday): We forecast a modest 0.1% m-o-m increase in May industrial production, but we expect this slowdown to be transitory. Based on industry forecasts, auto production likely slowed sharply in May. However, manufacturing output excluding autos and parts likely increased steadily, consistent with elevated business sentiment, but possibly not enough to offset the drag from the auto sector. Mining sector output likely rose solidly in May following strong gains earlier this year when crude oil prices picked up materially. Industry data on electric utility points to another solid increase in utility output.

University of Michigan consumer sentiment (Friday): Consumer optimism remained elevated in May but pulled back further from the recent March high of 101.4 to 98.0. Despite the small declines in recent months, we think consumers remained optimistic in June. We expect their optimism, bolstered by recent tax cuts, to help propel consumer spending during 2018. Spending has picked up in recent months after a slow start to the year and a healthy job market combined with steady income growth should help to continue this trend.

Short-term inflation expectations in the May University of Michigan consumer survey have picked up recently, consistent with increases in retail gasoline prices, increasing 0.4pp above their recent October 2017 low to 2.8%. However, longer-term expectations have remained unchanged at 2.5% over the same period. It is possible that the June Michigan report indicates a modest increase in short-term inflation expectations given continued elevation in gasoline prices.

Euro area | Data preview

The week ahead For May, final euro area inflation and UK inflation data will be in focus next week.

UK Trade, Apr (Mon 11 June): Much of the near-GBP2bn widening of the deficit between February and March was due to underlying (ex-oil and erratic items) non-EU trade. We expect the deficit to move back to GBP11.5bn, similar to the previous six-month average.

UK Industrial production, Apr (Mon 11 June): A string of 10 monthly rises in manufacturing output (from April 2017 to January 2018) came to an end with small falls in February and March. With the survey evidence still supportive, we forecast a modest rise in April. Weaker energy output due to warmer weather could hold back overall industrial output.

Germany ZEW Survey - economic expectations, Jun (Tues 12 June): We expect Germany’s ZEW to fall to -17 in June from -8.2 in May. Other forward-looking survey data (e.g., June’s Sentix) point to a further deterioration. More broadly, fears about the US protectionist policy and the flare-up of political instability in Italy have added additional uncertainty to the German outlook. 

UK Labour market report, May (Tues 12 June): Employment surged in Q1 while private sector regular pay growth rose to 3% y-o-y – the strongest since H2 2015. A 0.2% monthly rise in private regular pay should raise the 3m and 6m annualised rates of growth – which fell back in last month’s report – to around the 2.5% mark.

UK Consumer prices, May (Weds 13 June): We forecast a 0.1pp fall in CPI inflation in May (to 2.3%), with the risks to the upside. Reasons for a fall are: negative base effects related to household energy and recreation prices more than offsetting the upside from transport costs. An unchanged RPI-CPI wedge suggests a fall in RPI inflation to 3.3%.

EA Industrial production, Apr (Weds 13 June): We expect euro area industrial production to decrease by 0.3% in April, echoing the message that has emerged from recent manufacturing PMI surveys and some country-specific production data.

UK Producer prices, May (Weds 13 June): The price indicators in the surveys suggest a further rise in core output prices in May. Headline output prices could rise materially more thanks to rising oil prices. The fall in sterling and rise in oil prices over the month should mean a significant rise in input prices (Nomura forecast: +2.5% m-o-m).

UK Retail sales, May (Thurs 14 June): Sales volumes grew more than 1% in April after falling in March, probably partly due to weather effects. While we expect sales growth to generally improve this year, we see some payback in the May report.

ECB meeting, June (Thurs 14 June): The ECB has made it clear that it will be actively debating its QE exit strategy at the 13 June meeting. But while it is admittedly a very close call, we are not expecting a concrete announcement on this strategy to be made this month, and instead expect it to be delayed to the July meeting. We are reminded here that a decision on a QE extension last year was discussed at the September meeting but a final decision was not made until the October meeting. Currently, we expect the ECB to announce in July that will reduce its asset purchases to EUR20bn in October, EUR10bn in November and stop in December. We then expect a first hike in the deposit rate in September 2019.

The key considerations that will frame the ECB’s decision-making at this meeting concern: 1) more disappointing growth data; 2) some better-than-expected news on the inflation front; and 3) the flare-up of political and financial instability in Italy. We do not, however, expect any of these factors to yield major changes to the ECB’s outlook. Some very modest downgrades to the GDP outlook for 2018 are likely to be counter-balanced by a modest raising of headline inflation forecasts (for both 2018 and 2019). Also, we see a small risk that the inflation outlook for 2020 might be revised up. The reasons for the latter, however, lie more in oil price and exchange rate-related considerations rather than heightened confidence that inflation will meet the ECB’s medium-term target level. Indeed, we think forecasts for core inflation are likely to be left unchanged. 

Japan | Data preview

The week ahead At the BOJ governor's press conference after the MPC, we expect the focus to be on the inflation slowdown and the BOJ’s reduction of its long-term JGB purchases.

BOJ monetary policy meeting (Thursday/Friday): We expect the BOJ to leave monetary policy unchanged. The all-Japan core inflation rate (CPI ex-fresh food) fell to 0.7% in April, indicating underlying weakness. We do not see this as a figure that will satisfy the BOJ, which has set a price stability target of 2%. At BOJ Governor Haruhiko Kuroda’s post-meeting press conference, we expect questions about whether additional easing is needed due to the inflation rate undershooting. However, Mr Kuroda has previously talked about the ongoing tightening in the macro output gap, and we believe he will state the view that the underlying uptrend in inflation will remain, while refraining from making a statement about the need for additional easing. Moreover, due to the Bank’s decision to reduce purchases of long-term JGBs on 1 June, we expect questions about the aim of its reduction, how it interpreted the market’s reaction to the decision, and the divergence between the target for the pace of long-term JGB purchases set by the BOJ (an annual increase of around JPY80trn in outstanding holdings) and its operation of monetary policy at present. We believe Mr Kuroda will state his position that intentions with regard to changes to monetary policy are not reflected in daily market operations and that the BOJ will persist with monetary easing.

Asia | Data preview

The week ahead We expect an agreement in principle on denuclearisation to be reached at the US-North Korea summit, and inflation and industrial production growth to rise in China."

"China: We expect industrial production growth to tick up in May, as indicated by highfrequency indicators, a better-than-expected official PMI and strong export growth. Fixed asset investment growth should stabilise in May after slowing in previous months, as the acceleration in fiscal expenditure likely offset the negative impact from deleveraging. We expect retail sales growth to rebound after a sharper-than-expected drop in April. CPI inflation is likely to rebound as high-frequency data suggest some pick-up in food price inflation. We expect a continued rise in PPI inflation, partly due to a low base last year and in line with the rise in price-related sub-indices in the official manufacturing PMI."