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.
Key Quotes:
Monday
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.
Tuesday
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.
Wednesday
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.
FOMC meeting:
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.
Thursday
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.
Friday
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).
Chicago PMI:
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.
