The week ahead data preview: eyes on FOMC minutes - Nomura

Analysts at Nomura explained their outlook for the week's key events coming up.

Key Quotes:

United States | Data preview

We expect a steady increase in durable goods orders excluding transportation, while the May FOMC minutes could provide clues for the H2 2018 rates outlook.

New home sales (Wednesday): We expect a 1.3% m-o-m decline in new home sales to 685k saar in April. Incoming data point to healthy consumer demand. Mortgage applications in April rose at a solid pace and home builders remained optimistic according to the NAHB home builder survey. Yet, the strong increases in the West (28.3% m-o-m) in March appear unsustainable and may have partly reverted back to trend in April. Moreover, weather in the Midwest, Northeast and South was colder than usual in April which may have dampened sales activity.

FOMC minutes (Wednesday): The May FOMC statement provided little new information for our views on the likely trajectory of policy. However, we expect that the minutes may reveal a more nuanced discussion about the changes to the inflation language in the statement (emphasizing “symmetric” and dropping “monitoring inflation closely”). Moreover, the minutes will likely show the Committee discounted the slight deceleration in Q1 real GDP growth while highlighting the positive US economic outlook. For policy, we continue to expect a total of four rate hikes this year, one more than the current SEP median for 2018. The May minutes will likely include some signal of the widely expected June hike and potentially give additional information as to whether the Committee is likely to revise up its 2018 rate forecast. 

For other discussions on the outlook, language on US trade policy and financial conditions will be of particular interest, especially given the slight softening of business confidence surveys over the past few weeks. Moreover, with policymakers frequently referring to a potential inversion of the yield curve after the May FOMC meeting, the minutes could show an in-depth discussion of the policy implications of an inverted yield curve. 

Finally, the March minutes noted a discussion about revising statement language in the future to acknowledge monetary policy would eventually move from an accommodative to neutral or restrictive stance. Combined with San Francisco Fed President Williams’ recent comments about revisiting the statement’s forward guidance language, any additional discussion on the statement in the May minutes would be of note.

Initial jobless claims (Thursday): We expect initial jobless claims, which have steadily trended lower, to decline further and remain near historical lows as the labor market strengthens.
Existing home sales (Thursday): We forecast a modest 0.4% m-o-m increase in existing home sales to 5620k. March and February estimates indicated elevated sales activity heading into Q2. Data on consumer sector suggest that consumer demand remained solid. However, pending home sales, which tend to lead existing home sales, rose only modestly in March suggesting that sales in April could be softer than in March. Further, lack of housing inventory will likely continue to constrain sales. 

Durable goods orders (Friday): Durable goods orders in April likely declined 1.2% m-o-m driven by weaker orders of new transportation equipment. We think new orders of autos and civilian aircraft and parts softened during the month while defense aircraft orders likely picked up. Excluding volatile transportation equipment, we forecast a 0.6% m-o-m increase in durable goods orders. Incoming data point to solid momentum in industrial activity heading towards end-Q2. Production of ex-transportation durable goods rose solidly by 0.7% m-o-m in April after a decline in March. Moreover, incoming business surveys point to elevated activity near term despite concerns over US trade policy.

University of Michigan consumer sentiment (Friday): Consumer sentiment remained elevated in the University of Michigan’s preliminary May survey. Trade concerns appear to have ebbed over recent weeks as consumers increasingly focus on a low unemployment rate and steady income growth, a good sign for consumer spending in Q2. Inflation expectations at the one-year horizon increased 0.1pp to 2.8%, possibly reflecting a recent acceleration in gas prices, while longer-term inflation expectations held steady at 2.5%.

Euro area | Data preview

The week ahead Euro area flash PMIs and UK April inflation are in focus this week.

Public finances, April (Tues 22 May): Headline public sector net borrowing (ex-public sector banks) was £42.6bn in fiscal year 2017-18, over £7bn less than expected by the Office for Budget Responsibility six months ago. 

CBI industrial trends survey, May (Tues 22 May): The activity balances of this survey have generally slowed since the turn of the year, but remain positive. However, a solid reading on output expectations last month could be supportive for this week’s survey.

Consumer price inflation, April (Weds 23 May): Clothing and footwear, alcohol and tobacco, and personal care/insurance each took around 0.1pp off CPI inflation in March. We see inflation remaining at 2.5% despite those moves partly reversing and petrol prices rising. A 0.9pp wedge means a small rise in RPI inflation from 3.3% to 3.4%. 

Euro area flash PMIs, May-Flash (Wed 23 May): We expect the euro area composite PMI for May to climb to 55.3 from 55.1 in April. At the sector level, we expect the regional manufacturing PMI to increase to 56.4 from 56.2 and the services PMI to increase to 54.9 from 54.7. Recent restraints on activity such as strikes and poor weather should reverse and more favourable financial market conditions should also improve sentiment.

Producer price inflation, April (Weds 23 May): While sterling rose between March and April the rise in oil prices should dominate input prices, which we expect to rise by 0.8% m-o-m. Higher petrol prices suggest a stronger rise in headline output prices than core. 

CBI distributive trades survey, May (Weds 23 May): The combination of: 1) better weather; 2) real earnings growth moving into positive territory; and 3) the previous month’s solid expectations reading, could mean an uptick in the reported sales balance. 

Retail sales, April (Thurs 24 May): There are many moving parts to April retail sales: 1) the BRC survey was weak (largely due to Easter timing effects which should not affect the official data); 2) the CBI survey was also soft; 3) the March official outturn was weak due in part to the snow; and 4) April’s reading could be buoyed by the onset of better weather. Taking all of this into consideration, we look for a 0.8% monthly bounce, though even that would reduce the 3mma annual rate to below 1%. 

Germany Ifo Survey, May (Fri 25 May): Germany’s survey data has showed some signs of stabilisation over the past two weeks. The Sentix and ZEW expectations indices, for example, were unchanged in May compared to April, following three consecutive months of decline. In line with those messages, we forecast an unchanged Ifo expectations component compared to the previous month.

GDP second estimate, Q1 (Fri 25 May): In the absence of revisions to the headline 0.1% quarterly growth rate, the focus will be on the expenditure details, particularly on consumer spending and business investment (both of which grew at 0.3% in Q4 2017).

Japan | Data preview

We forecast an acceleration in core inflation in the May Tokyo-area CPI data.

April trade statistics: nominal exports (Wednesday): We forecast nominal export growth of 6.7% y-o-y, 9.5% m-o-m in April. We estimate a trade surplus (original series) of JPY344.9bn and a seasonally adjusted trade surplus of JPY272.3bn. Nominal exports in the first 20 days of April increased by 10.0% y-o-y (compared with 5.8% in the first 20 days of March) and nominal imports grew by 12.7% (compared with 9.9% in the first 20 days of March). The first 20 days of April included one more business day than the same period a year earlier and the remainder of April included one less business day. We believe growth in nominal exports and imports in April as a whole is likely to be lower than that for the first 20 days of the month, as the year-on-year difference in the number of business days is likely to boost growth in the first 20 days and weigh on growth for the remainder of the month. Adjusting our April nominal import/export estimates for corporate goods price index data for April (2.2% y-o-y), import prices (5.0%) and seasonal factors gives us our forecasts for real exports of 2.8% m-o-m and for real imports of 1.9%. If our forecasts are realized, full-month exports and imports will have risen by 1.5% and 0.6%, respectively, from the January-March average. Real exports (GDP-basis) rose 0.6% q-o-q in January-March (2.2% in October-December 2017), the growth rate slowed due to the effects of slower growth in overseas economies. However, we expect the April data to suggest that this weakness is temporary. 

May Tokyo area core CPI (all items, ex fresh food) (Friday): We forecast May Tokyo core CPI inflation to come in at 0.7% y-o-y, stronger than the April figure. Growth in energy prices looks to have slowed in May again, but we forecast the overall core inflation rate to have gained momentum due to cost increases as a result of the growing labor shortage and an expected lull in the slowdown in core food prices seen in March and April. We forecast CPI inflation excluding fresh food and energy (the BOJ’s version of core core CPI) of 0.4% y-o-y, up 0.1 percentage points on April."