Preview of the Week Ahead in the U.S. - Nomura
Analysts at Nomura explained that an eventful week that will feature the
April FOMC meeting, GDP and the employment cost index for Q1, PCE
prices, housing data, and consumer and business sentiment.
New home sales:
Based on data for new homes such as homebuilder sentiment, singlefamily housing starts and building permits, we expect sales to continue on an uptrend in coming months. We forecast that new home sales rose by 0.6% to an annualized 515k in March. Homebuilders will likely need to ramp up construction to replenish the short supply of for-sale homes as we expect continued robust demand due to improving consumer fundamentals.
Durable goods orders:
Hard data on the industrial sector have yet to show any convincing signs of a turnaround in activity in the sector. On the other hand, survey data have been more optimistic, with the ISM manufacturing new orders subindex increasing by almost 7pts in March. Taking these mixed factors into account, we expect to see only a gradual 0.4% increase in durable goods orders excluding transportation in March, after the sharp 1.3% decline in February. An expected rise in orders for nondefense aircrafts and parts in March should place upward pressure on orders for transportation goods during the month. As such, we expect top-line durable goods orders to increase by 2.2% in March. Case-Shiller 20-City home price index: Home prices reaccelerated in the second half of 2015 as the limited supply of for-sale homes couldn’t keep up with the stronger demand.
The higher prices are a double-edged sword: homeowners are more likely to put their homes on the market but it can also price out potential homebuyers. Consensus expects the Case-Shiller home price index to increase by 5.4% y-o-y in February, a step down from the prior month’s print. Consumer Confidence: This index has remained relatively elevated - a sign that consumers continue to be optimistic on the US economy, labor markets and their finances. However, consumer spending has been subpar relative to these continued robust readings on consumer confidence. The relatively positive consumer sentiment suggests there is room for better spending in the near to medium term. With conditions stabilizing in the financial markets and equity prices rallying, low gasoline prices and favorable labor market conditions, we expect to see continued solid readings on consumer confidence in April. As such, we believe the consumer confidence index will trend higher to 97.0 in March.
Advanced goods trade balance:
Demand for US exports have sagged under the weight of the strong dollar and slower global growth. We expect that net trade continued to be a drag on growth in Q1. However, for the March advanced goods trade report –based on container data – we expect the Census Bureau to report that a decline in imports (payback from a strong gain in the prior month) outweighed a decline in exports, leading to a narrowing of the goods trade deficit to $58.0bn.
Pending home sales:
Housing market activity has been choppy in recent months – likely due to weather conditions – but on net, point to a continued gradual improvement in housing activity. As such, we continue to expect demand to remain robust this year as demographics, mortgage rates and labor market conditions remain favorable. That said, sales of existing homes will probably increase at a slower pace this year due to the limited availability of for-sale housing inventory. Consensus expects pending home sales to post a slight 0.1% increase in March after rebounding by 3.5% in February.
We believe that the FOMC will again stand pat on policy at its April meeting. We expect the FOMC to wait until June to raise short-term interest rates again. The FOMC will likely prefer to wait to see if growth will rebound in Q2 after somewhat slower growth in the last two quarters; it will probably want to see more data on inflation and also continue to monitor global economic and financial developments. Although we do not expect the Committee to change policy at its April meeting, we will see if it leaves any hints about moving in June, and whether or not it leaves open the possibility of a June hike. In this context, how the Committee describes the economy and risks to the outlook will be very important.
Initial jobless claims:
Jobless claims have been volatile recently, possibly due to calendar factors associated with Good Friday/Easter. We will have to wait for a cleaner read on claims data in coming weeks to get a better idea of trends in the labor market. We continue to believe that overall labor market conditions are solid.
Q1 GDP, first estimate:
Economic growth was likely subpar again in Q1. Incoming data suggest that consumer spending growth slowed, despite more favorable consumer fundamentals. Headwinds such as low energy prices, the strong dollar and slower global growth appeared to continue to weigh on activity in the industrial sector and international trade. Businesses also continued to pare back on inventory investment in Q1 after demand failed to meet expectations. We expect slower gains in inventory investment to subtract 0.2pp from Q1 GDP growth. We forecast a 0.6% increase in Q1 GDP, with real final sales growing by only 0.8%, slowing from 1.6% in the prior quarter.
Employment cost index, Q1:
The employment cost index increased by 2.1%, for the second consecutive year in 2015, as the marked improvement in the labor market has yet to lead to a pickup in wage growth. Incoming business surveys, and the average hourly earnings measure from the monthly employment reports for January through to March, point to steady wage growth again in Q1. As such, we forecast that total compensation increased by 0.6% q-o-q in Q1.This would translate to a 1.9% increase on a y-o-y basis, which suggests that a major acceleration in wage growth will likely remain elusive. As wages and salaries make up 70% of total compensation, we believe this component also grew by 0.6% q-o-q in Q1.
Personal income and spending:
Although employment grew at a slower pace in March than February, average hourly earnings bounced back, growing by 0.3%. As such, we expect a 0.3% increase in personal income in March. On the spending side of the ledger, we forecast a 0.3% increase. Core retail sales grew by a meager 0.1% for the second consecutive month in March and spending on energy services likely dropped as temperatures were generally warmer than historical norms. Other services spending likely remained on trend, balancing out some of the weakness in other categories. PCE deflator: Our expectations for the PCE deflator in March are shaped by the previously released CPI and PPI data. For March, the relevant elements of PPI, on balance, were slightly negative for the core PCE price index. Our models suggest that the relevant PPI data will contribute a negative 1bp to core PCE inflation. The 0.2% drop in core goods CPI and softness in other components of CPI point to a deceleration in core PCE inflation. Taking these inputs into account, our forecast for core PCE inflation is +0.042% m-o-m in March, which would drive down the y-o-y core PCE inflation to 1.5% in the month from 1.7% previously. We expect an increase in the food PCE deflator and a decline in the energy PCE deflator, both of which should roughly cancel each other out. As such, we expect the headline PCE deflator to increase by 0.048% m-o-m (+0.8 %y-o-y).
In line with other regional business surveys in March, the Chicago PMI reported an improvement in activity. However, hard data on the industrial sector suggest that activity many not be expanding as quickly as suggested by these surveys. In addition, although the Empire State manufacturing survey increased further in April, the Philly Fed manufacturing survey returned to contraction in April, indicating a possible convergence of the “hard” and “survey” data. Taking this into consideration, we expect to see a modest correction in the headline Chicago PMI to 52.5 in April from 53.6 in March.
University of Michigan consumer sentiment:
In the preliminary reading for April, this index declined modestly to 89.7 from 91.0 as consumers held a less optimistic view on the outlook. Consensus expects the index to inch up to 90.2 in its final reading for April, recovering some of its earlier decline. As for inflation expectations, the 5- to 10-year ahead measure dipped again to its historical low of 2.5% after rebounding to 2.7% in the prior month. This measure has been in the 2.5-2.7% range for the past nine months after hovering closer to 3% in previous years. Further declines would heighten concerns that inflation expectations are de-anchoring, which would be a major issue for the FOMC.