The week ahead in the US: Retail sales and inflation main focus - Nomura

The key data out of the US this week will be concentrated on Friday, with the release of retail sales, CPI and industrial production

Expectations are for a solid rebound in June retail sales and industrial production and a gradual re-acceleration in June core CPI inflation, according to the Economics Team at Nomura. 

Key Quotes

CPI (Friday): We expect core CPI inflation in June to pick up slightly to the pace of 0.1% (0.129%) m-o-m from a 0.063% increase in May. Our forecast for the year-on-year change is 1.7% (1.723%), a slight slowdown from 1.733% in the prior month. We think core CPI inflation will re-accelerate to a trend-like pace but only gradually, as we expect the inflation of some components of core CPI to remain subdued. Among core goods components, we expect continued weakness in new and used vehicle prices, both of which fell 0.2% m-o-m in the prior month. Industry data suggest inventories of both new and used vehicles have been on the rise, which may continue to exert some downward pressure on respective prices. Further, apparel prices, which dropped for the third consecutive month in May, pose some degree of uncertainty. A possible factor involves an increasing share of online shopping, which might have been a source of downward pressure on apparel prices. Online prices of apparel in general tend to be lower than instore prices as shoppers tend to seek deep discounts. It is difficult to exactly quantify the impact of this recent trend, but it is possible that apparel prices will continue to trend lower. On services, we expect a steady increase overall. However, the inflation of homeowners’ equivalent rent (HOER) has slowed modestly in recent months. We expect this slowdown to continue in the near term as the rental vacancy rate has ticked up in recent months. Additionally, we do not expect another sharp drop in wireless telephone service prices despite a recent development in the market. Recently, one of the big four service carriers announced aggressive options for customers switching from another particular carrier. However, our correspondence with the BLS indicates it is unlikely that BLS would reflect these new options in its quality adjustment model as they only affect a small group of consumers.

As for noncore components, retail gasoline prices continued to trend lower in June. Against this backdrop, we expect another decline in energy CPI inflation, following a 2.7% drop in the previous month. Moreover, we expect a trend-like increase in food CPI inflation as our analysis indicates prices paid at farms increased steadily. Further the food-away-from-home price index (the other subcomponent of food prices) likely increased steadily as tighter labor markets in the restaurant industry continue to exert upward pressure.

All in all, we expect a 0.046% m-o-m increase in the headline CPI inflation in June, which is equivalent to a flat reading when rounded. On a year-over-year basis, we forecast an increase of 1.7% (1.721%). Our CPI NSA forecast is 245.166. Note that our forecast is subject to the PPI report, scheduled for release on 13 July.

Retail sales (Friday): Personal spending in Q2 has been improving gradually. Core (“control”) retail sales (excluding autos, gasoline, building material and food services), an important component in estimating real growth in personal consumption expenditure, has been increasing steadily in recent months despite a flat reading in May. Given incoming data, we think this pause was likely transitory and forecast a healthy 0.5% m-o-m increase in core retail sales in June. The latest ISM nonmanufacturing report saw the headline index improve further to 57.4 from 56.9 in June. The report also shows that overall business of the retail trade sector is trending up and its outlook for 2017

Further, healthy consumer fundamentals such as firm job gains and income growth in recent months would be favorable for steady growth in core retail sales. For non-core components, we expect continued a decline in nominal sales at gasoline stations as domestic gasoline prices fell again in June after a decline in May. Given the slower pace of light vehicle sales, we expect a 0.1% decline in sales at autos and auto parts dealers, following a 0.2% decline in the prior month. Excluding autos, we expect retail sales to post a steady gain of 0.3%. Altogether, we expect topline retail sales to increase by a modest 0.2% in June following a 0.3% decline in May.

Industrial production (Friday): We expect a healthy 0.5% increase in industrial production (IP) in June after a flat reading in May. A slowdown in May was attributable to a sharp decline in auto production and slight moderation in factory output excluding autos. Autos output will likely come in weak again in June, as automakers adjust their output in response to slowing light vehicle sales. Auto production could continue to weigh down topline IP in the near or medium term as automakers continue to adjust their production in coming months. However, incoming data point to a continued improvement in core factory output (excluding autos and auto parts). The ISM manufacturing index improved in June with broad-based strength in its subindexes. Core capital goods orders and shipments posted modest gains in May, implying continued momentum in business activity as well as equipment investment in concurrent and upcoming months. Therefore, we expect core factory output to rebound decently in June. Moreover, we expect mining sector output to contribute solidly to total output growth. Industry data suggest crude oil and liquid gas output increased steadily in June. Further, active oil and gas rig counts continued to rise in the month, implying persistent strength mining support sector output.