The week ahead: US retail sales, FOMC minutes and EZ/UK CPI in focus - Nomura

Analysts at Nomura offered full details of the scheduled data events for the week ahead.

Key Quotes:

"United States | Data preview

September retail sales will likely show robust growth, consistent with solid momentum in personal consumption growth in Q3, while housing data will likely continue to soften

Empire State survey (Monday): We expect the Empire State survey’s general business conditions index to improve modestly to 21.0 in October, up 2pp from September after a sharp 6.6pp decline. Growth remains in firm territory with our Q3 real GDP tracking estimate roughly above 3.5% and resilient incoming data. In addition, the Empire State survey has been somewhat volatile recently, indicating the potential for mean reversion following last month’s sharp decline. There may be some downside risk as a result of the recently-imposed US tariffs on an additional $200bn in imports from China, but the solid economic outlook has so far outweighed any concerns regarding US trade protectionism.

Retail sales (Monday): We expect retail sales to increase by a solid 0.7% m-o-m in September, likely driven by a strong rebound in sales at auto and auto parts dealerships. The light vehicle sales in September were strong after a slowdown in August. However, the expected increase in sales of autos and parts will likely be transitory. Excluding autos and auto parts, we forecast a 0.4% m-o-m increase in retail sales. For core (“control”) retail sales, we expect a healthy 0.5% m-o-m gain for September, following a modest 0.1% advance in August. The weak reading for August came on the heels of a sharp increase in July. Strong incoming labor market data and elevated consumer sentiment suggest momentum in personal consumption growth remains intact. Thus, we continue to expect robust PCE growth to lead GDP growth in the near term. Elsewhere, gasoline prices appear to have trended lower in September after seasonal adjustment. Receipts at gasoline stations will likely slow in September and lower the total retail sales slightly.

Business inventories (Monday): Wholesale inventories rose solidly by 1.0% m-o-m in August, reflecting a 0.2pp upward revision to the Census Bureau’s initial estimate. While manufacturing inventories declined in August, gains in retail inventories likely offset this decline. Altogether, assuming no significant revisions to retail inventories, the final business inventories report for August will likely confirm solid contribution to GDP growth in Q3 from change in inventories.

Industrial production (Tuesday): We expect a steady 0.4% m-o-m increase in industrial production in September, some of which will likely be driven by strong contributions from autos and mining sectors. Autos and auto parts output likely increased at a solid pace, based on industry forecasts. The mining sector production likely rose firmly, based on incoming EIA data on crude oil and liquid gas production. We think ex-auto manufacturing sector output increased only modestly, with downside risk related to disruptions caused by the Hurricane Florence in South Carolina and North Carolina. Carolinas’ production of textile products, food, beverage & tobacco products, furniture products and wood products accounts for substantial shares of national production. These industries were likely most exposed to the storm. That said, the negative impact from the storm on manufacturing output was likely more modest than the effects of a series of hurricanes that hit the Gulf of Mexico area in 2017 and led to prolonged disruptions to rig operation, oil refining, and petrochemical production. Looking through weather-related volatility, we expect continued expansion in output considering strong domestic demand in the near term. However, the easing of some manufacturing survey indices in late Q3, coupled with signs of slowing external growth, raise some concern.

JOLTS job openings (Tuesday): Job openings remain at historical highs as strong economic growth results in sustained demand for workers. In addition, the quits rate, a measure of worker bargaining power, increased to 2.4% in July, the highest reading since April 2001. Finally, labor market turnover, the sum of hires and separations divided by two times employment has picked up, consistent with a modest acceleration in wage growth. 

NAHB housing market index (Tuesday): We expect the NAHB housing market index to ease slightly to 66 from 67 in October. While our forecast of 66 still indicates strong optimism, the recent incoming data have shown indication that worsening affordability may be affecting demand for new housing. The consumer sentiment on home buying conditions has been deteriorating for a while on rising prices. On positives, the labor market remains strong and demographic factors still remain favorable for housing demand. In addition, the recent stabilization of softwood lumber prices may have alleviated some concern among homebuilders. 

Housing starts (Wednesday): We expect housing starts to fall 8.1% m-o-m to 1179k saar in September. Single-family housing starts rose firmly by 1.9% m-o-m in August, but much of that growth was driven by a 14.2% m-o-m gain in the West. This sharp jump does not appear sustainable and could possibly revert. Further, the recent hurricanes in the Southeast coastline may have disrupted housing starts in the month. Severe storms tend to suppress concurrent construction activity but lead to a burst of activity during recovery. Looking through idiosyncratic volatility, we do not see signs of material acceleration in single-family housing starts given the significant supply-related challenges. In addition, multifamily housing starts jumped 29.3% m-o-m in August. A potential reversion will likely lower total housing starts. On housing permits, we expect a 1.9% m-o-m rebound to 1273k saar.

FOMC minutes (Wednesday): The September FOMC meeting held few surprises as the Committee raised the federal funds target range 25bp to 2.00-2.25%, the third hike of 2018. However, the minutes will likely provide important context for some of the decisions the Committee made in September, including the choice of dropping the “accommodative” language in the post-meeting statement. Recent FOMC meeting minutes have been more interesting than expected, highlighting longer-term topics such as alternate monetary policy frameworks and the balance sheet. We expect the minutes for the September meeting to emphasize the Committee’s expectation of another rate hike in December, the fourth of 2018. In addition, we will pay particular attention to the discussion around the appropriate path of policy in 2019, given the dispersion in participants’ forecasts, along with discussions on the neutral rate and whether a restrictive monetary stance will be appropriate to slow the economy.

Initial jobless claims (Thursday): Initial jobless claims may be unusually volatile due to the impact of Hurricanes Florence and Michael but, excluding weather effects, we expect claims to remain consistent with steady labor market strength.

Philly Fed survey (Thursday): Consistent with our forecast for the October Empire State survey, we expect the Philly Fed survey to remain elevated in October with a headline reading of 21.0, only a minor step down from 22.9 in September.

Existing home sales (Friday): We expect a 1.6% m-o-m decline in existing home sales to 5.26mn saar in September from 5.34mn saar in August. Pending home sales, which tend to lead existing home sales, slowed in August and July and pose downside risk to September existing home sales. Slowing existing home sales suggest waning demand as affordability continues to deteriorate. Moreover, higher mortgage rates will likely continue to constrain supply via mortgage rate lock-in despite rising prices. We think real residential investment will remain a weak spot in the strong overall economy.

Euro area | Data preview

Euro area final HICP and UK prices data will be in focus next week.

Germany ZEW index (economic expectations), Oct (Tuesday): We expect the Germany’s ZEW expectations index to decrease to -12.7 in October after a small improvement in August. The decline should reflect protracted concerns about trade wars. Germany’s equity market dropped in the month and German data released at the start of October disappointed the consensus on the downside, and we think all of these factors adversely affected the German financial analysts surveyed. 

UK Labour market report, Sep (Tuesday): We expect wage growth to remain broadly similar to what it was in last month’s report – i.e. 2.6% headline/2.9% ex-bonuses. A tighter labour market (we see the unemployment rate remaining at 4%, its lowest since the mid-1970s) and past rises in inflation (related to FX weakness) should keep upward pressure on wage growth, which has been subdued over recent years in part thanks to weak productivity growth.

UK Consumer price inflation, Sep (Wednesday): We forecast a fall in CPI inflation in September following its above-consensus print the previous month. Rises in petrol prices and utility bills could limit how far inflation declines in September, however, which explains our forecast of just a one tenth fall to 2.6%. We look for CPI inflation to fall back towards its 2% target over the next six months.

UK Producer price inflation, Sep (Wednesday): We expect a rise in crude oil prices in September to lead to a monthly increase of 0.5% in input prices – our forecast is limited by the downward impact of a rise in sterling during the month. As for output prices, we note the rise in the output prices index of the PMI manufacturing survey, but a fall in the equivalent balance of the CBI survey. We see a larger monthly rise (0.3%) in headline output prices than core (0.2%) thanks to higher oil prices.

UK Retail sales, Sep (Thursday): There are a number of reasons we forecast a fall in official sales volumes in September including: i) payback from the cumulative 1.5% rise in sales during the previous two months, and ii) a weaker reading on the BRC survey and (to a lesser extent) the CBI distributive trades survey.

UK Public sector finances, Sep (Friday): In the first four months of the fiscal year (i.e. April-July) the average monthly improvement in the fiscal balance vs. the same month the previous year was around £2.5bn. In August, however, there was a deterioration of a similar amount. Higher spending was the reason, according to the Office for Budget Responsibility, across “several spending lines”. Note this month’s September release is particularly important as it is the last set of figures ahead of the 29 October Budget.

Japan | Data preview

We forecast an acceleration in all-Japan core inflation to 1.0% for September, boosted mainly by energy prices.

September trade statistics: nominal exports (Thursday): Trade statistics for the first 20 days of September 2018 showed exports rose by 1.0% y-o-y and imports increased by 17.2%, with both slowing from growth of 5.5% and 19.6%, respectively, in the first 20 days of August. There may well have been an impact from operational problems at Kansai International Airport because of the large typhoon but, as other airports were used to cope with some of the effects from this, we think the export slowdown also reflects less underlying demand. As the last 10 days of September 2018 had two fewer business days than in September 2017, we expect growth in exports and imports in September as a whole will be lower than in the statistics for the first 20 days of the month. 

Based on September import and export price data, we calculate real exports in September fell by 5.3% m-o-m and real imports fell by 2.2%. This is a substantial decline for real exports, with the July-September average also down 2.5% q-o-q. We think exports will be considered weak if the actual result is in line with our forecast. 

September all-Japan core CPI (all items ex-fresh food) (Friday): We expect the September all-Japan core CPI (all items ex fresh food) to rise to 1.0% y-o-y, a 0.1pp increase from 0.9% in August. 

September core CPI inflation for the Tokyo area (already released) was boosted notably by higher prices for overseas package tours and clothing & footwear, but as these items account for a somewhat smaller weighting in the all-Japan CPI data than in the Tokyo area data, we forecast CPI inflation excluding fresh food and energy (the BOJ’s version of core core CPI) of 0.4% y-o-y, flat from August. We think the all-Japan core CPI figure for September will be stronger than in August, mainly on a contribution from energy prices.

Asia | Data preview

We are below consensus on China’s Q3 GDP growth, in line with consensus on the Bank of Korea staying on hold and above consensus on Singapore’s export growth.

China: We expect real GDP growth to slow to 6.4% y-o-y in Q3 from 6.7% in Q2 as headwinds blew strongly in the quarter. Industrial production (IP) growth will likely moderate to 5.9% y-o-y in September from 6.1% in August, reflecting weakening demand, but also due to a high base last year. One less working day this September than last could also be a factor. Fixed asset investment growth is likely to slow modestly by 0.1 percentage point (pp) to 5.2% y-o-y ytd in September, weighed on by property and infrastructure investment. Retail sales growth may have eased as well, weighed on by weakening domestic demand, an expected moderation of price inflation, and a relatively high base last year. We expect both CPI and PPI inflation to moderate in September, as implied by weak high-frequency data and a high base last year. Notably, vegetable price indices in Shouguang – one of China’s major vegetable production bases, hit by flooding in August – have started to stabilise in recent weeks."