USA events: Fed and GDP eyed- Nomura

Nomura's analysts preview for the USA schedule this week ... 

Key Quotes:

"Existing home sales (Monday): Despite a lean supply of previously owned homes for sale, steady demand for housing has remained supportive for sales. In May, existing home sales increased by 1.1% m-o-m to an annual rate of 5.62mn, with healthy increases in both single and multifamily homes. For June, we forecast a 1.1% m-o-m decline to a 5.56mn annual pace. The forecasted decline reflects a slowdown in pending home sales in recent months, which tend to lead existing home sales by a month or two. Moreover, it is possible that the low supply of homes for sale on the market may have continued to weigh on pending home sales (contract signings), lowering existing home sales (contract closings). In May, previously-owned homes available for sale fell by 8.4% y-o-y continuing a prolonged decline. Yet, we think underlying demand for existing homes remains healthy. Consistent with this view, mortgage application volumes for home purchases increased by 3.5% in June. Further, labor markets have been improving solidly with strong job gains and low unemployment, which should be supportive of a steady increase in housing demand.

Case-Shiller home price index (Tuesday): Low inventory levels of homes for sale amid strong demand may have contributed to a recent acceleration of home prices. In April, the Case-Shiller 20-city home price index eased slightly to 5.67% y-o-y from 5.88% in March. The latest reading is still above the average year-on-year rate in 2016 (5.24%). Strong job gains so far in 2017 and an influx of younger new home buyers may have contributed to increased demand in a low-inventory housing market, pushing up prices. As the supply shortage continues, it is likely that home prices continued to rise at a steady pace. An additional acceleration in home price growth may have the potential to further exacerbate affordability.

Conference Board’s Consumer Confidence (Tuesday): The June Conference Board Report showed continued heightened optimism but consumers’ assessment of future conditions deteriorated slightly. We expect the Conference Board’s consumer confidence index to fall slightly to 117.0 in July from 118.9 in June. Although our forecast for July still implies heightened sentiment, it reflects our view that recent downward shifts in expectations regarding the Trump administration’s policy promises may have dampened optimism. In line with this view, the preliminary July estimate of the University of Michigan consumer sentiment index fell 2.0pp to 93.1, driven by a drop in the future expectations index. The decline in this forward looking index may have been a reflection of the decreasing likelihood of major policy promises being delivered. In particular, according to the Michigan survey, self-identified Republicans and independents have become increasingly skeptical of the current administration’s ability to enact its agenda. Recent setbacks in Congress with Republican’s efforts to repeal and replace the Affordable Care Act make it less likely for consumer confidence to improve further from currently high levels or even have the potential to weigh it down. 

FOMC meeting (Wednesday): For the July FOMC meeting, we expect no changes in interest rates and no major announcements on the balance sheet. Based on Chair Yellen’s recent congressional testimony, remarks by FOMC participants and the minutes from the June FOMC meeting, we hold that the timing of the balance sheet roll-off will be made in September, not July. Further, it would not be surprising if the statement included additional signals that the Committee expects to take this decision at the September meeting. For other changes in the statement, we will be looking especially at the language on inflation. During a semiannual testimony before Congress on 12 July, Chair Yellen acknowledged that “the recent lower readings on inflation are partly the result of a few unusual reductions in certain categories of prices.” On the other hand, she also mentioned the uncertainty about inflation – in particular “… uncertainty about when – and how much – inflation will respond to tightening resource utilization” – as one of the key risks to the outlook. Following her testimony, core goods CPI inflation for June, released on 14 July, came in weak despite an absence of external shocks. Against this backdrop, we think the July FOMC statement may provide some additional color on the recent underperformance of inflation in its assessment of current economic conditions. However, we do not expect the FOMC's basic views on the economy to change materially with its 2017 growth pace roughly in line with the Committee’s outlook. On the FOMC’s future economic outlook, we expect balanced risks with no major changes

New home sales (Wednesday): We expect new home sales to increase by 1.6% m-o-m in June to an annual pace of 620k. The permits for single family residential construction declined for three consecutive months from March to May but rebounded strongly in June. Further, despite low inventories of newly built single family homes for sale, consumer demand has been steady, coupled with a low unemployment rate and strong job gains in recent months. Although the NAHB’s index for current sales of single family homes fell moderately by 3.0pp to 72 in June, this was likely reflected a margin squeeze felt by home builders as building material costs continue to rise instead of a material deterioration of consumer demand. That said, continued acceleration in building material costs may possibly contribute to rising new home prices as home builders are pressured to pass increased costs onto consumers.

Initial jobless claims (Thursday): Initial unemployment claims have been within a historically low range for quite a while. For the week ending 15 July, which corresponds to a survey sample period of BLS’ July employment report, initial claims fell 15k to 233k, well below its four-week moving average. A solid decrease in initial claims points to another month of healthy job gains. Continuing claims rebounded slightly in the week ending 8 July, but its four-week moving average remained low. The recent trends in initial and continuing claims highlight strong labor markets with a low rate of involuntary separations. Advance goods trade balance 

Advance goods trade balance (Thursday): We expect the advance goods trade balance to post a deficit of $67.2bn in June, a slight widening of the trade gap from May ($66.3bn deficit). For June, based on outbound container data at ports, we expect a decline in goods exports after a decent increase in May. For imports, inbound container data suggest that goods imports fell in the month. Yet, on balance, the decline in goods exports may likely have outpaced the decline in imports, widening the trade gap. If realized, our forecast suggests that goods exports were somewhat weak in Q2 compared to Q1. In Q1, a healthy rebound in goods exports with modest increases in imports contributed positively to topline GDP growth. However, for Q2, we expect a moderate drag from net exports

Durable goods orders (Thursday): Incoming data suggest manufacturing activity has been improving steadily. For June, we forecast a healthy 0.5% m-o-m increase in core durable goods orders (excluding transportation goods), following a steady gain of 0.3% in May. Our forecast reflects a solid rebound in industrial production of durable goods excluding transportation components in June, following a weak reading in May. Further, the new orders index of the ISM manufacturing survey was elevated at 63.5 in June, highlighting continued momentum in the sector. Moreover, we expect a strong rebound in volatile transportation goods orders. Civilian aircraft and parts orders, which fell sharply in May, likely rebounded strongly in June considering new orders data from the industry. The orders of defense aircraft likely have reverted to their mean following a sharp 30.8% drop in May. In addition, we think the motor vehicles and parts orders increased modestly by 0.7%, based on a healthy increase in real vehicle assemblies during the month. Consumer light vehicle sales have slowed in recent months, but new orders of vehicles at factories (which include orders from all sectors) suggest that the production of autos may not decelerate quickly in the near term. Altogether, we expect a 1.8% increase in topline durable goods orders for June.

 Employment cost index, Q2 (Friday): From the BLS’ Establishment Survey, average hourly earnings for production and nonsupervisory workers picked up slightly in Q2, increasing 0.6% q-o-q compared to 0.5% in Q1. However, on a y-o-y basis, wages have decelerated recently, decreasing to 2.3% in Q2 compared to 2.4% in Q1 2017. Labor markets have tightened further in 2017, with the unemployment rate decreasing to 4.4% in Q2 compared to 4.7% in Q1 2017. Further, nonfarm payroll job gains have been strong in Q2, averaging 194k. Reflecting these trends, we expect the wages and salaries component of the ECI to increase by 0.6% q-o-q, resulting in a 2.4% y-o-y increase, unchanged from Q1. For the topline index, 70% of which comes from wages and salaries, we expect a similar reading of 0.6% q-o-q, which is equivalent to 2.4% y-o-y.

Q2 GDP, first estimate (Friday): We expect real GDP growth to accelerate to 2.5% q-o-q saar in Q2 from 1.4% in Q1. The Q1 growth was on the back of a solid 2.6% increase in final sales, which were boosted by a sharp 22.6% increase in private investment in structures. This increase in structures investment was driven by an outsized gain in investment in mining, exploration, shafts, and wells. Based our analysis, we think this subcategory will continue to increase robustly in Q2 considering the persistent upward trend in active rig counts and drilling support activity, but it is unlikely to see another unusually strong jump. Thus, we expect only a modest increase in aggregate structures investment. Moreover, we expect some acceleration in personal consumption expenditures (PCE) relative to Q1. The growth in non-energy goods spending has been only modest during Q2. In particular, given slowing light vehicle sales, spending on autos will likely remain subdued in Q2, which deducted 0.6pp from PCE growth in Q1. On the other hand, incoming data suggest service spending increased steadily and would likely contribute robustly to Q2 PCE growth. Elsewhere, we think inventories likely contributed moderately to topline Q2 GDP growth in as they recover from unsustainable weakness in Q1 that reduced Q1 growth by 1.1pp. A soft patch in Q2 GDP would be weak residential construction growth. Incoming data suggest multifamily construction decelerated notably although single family construction increased at a steady pace in Q2. On balance, we expect a modest drag on growth from residential investment in Q2. Altogether, our topline forecast of 2.5% suggests 1.9% average growth in H1 and 2.1% average y-o-y growth in 2017. This is consistent with our view that the economy continues to grow above potential, a trend we expect to continue in the medium term.

University of Michigan consumer sentiment (Friday): In the preliminary report for July, the University of Michigan of consumers sentiment index declined by 2.0pp to 93.1, driven mostly by a decline in the expectations index. Given that this drop was most acutely seen in responses from respondents who identified themselves as Republicans, recent setbacks at a Republican-controlled Congress to repeal the Affordable Care Act may continue to weigh down consumer sentiment. Inflation expectations for the preliminary July reading increased 0.1pp at both the 1-year and 5-year horizon to 2.7% and 2.6%, respectively. These readings, while within a steady range, point to a slight uptick from near-historical lows over the past few months."