The week ahead: eyes on US CPI - Nomura

Analysts at Nomura offered a preview of the week's key events ahead.

Key Quotes:

"The week ahead, United States:

We expect slight acceleration in July core CPI inflation from June with rebounds in core service prices although core goods price inflation may likely remain subdued.

• Consumer credit (Monday):
• JOLTS (Tuesday):
• Productivity Q2, preliminary (Wednesday):
• Wholesale inventories (Wednesday):

Producer prices (Thursday): Headline PPI increased 0.1% m-o-m in June, partly boosted by idiosyncratic factors related to holiday demand for certain food item prices. Further, a 0.5% decrease in energy prices lowered the headline index. Core PPI (excluding food, energy and trade) increased by a modest 0.2%. Relevant components in June’s PPI report did not strongly boost core PCE—some financial service prices were up but medical care services prices, such as hospital inpatient care and physician care services, increased only moderately. For July, consensus expects a steady increase in core PPI. Although the top-line PPI may be lowered by volatile energy components again, steady increases in core PPI would suggest stable pace of pipeline price inflation. 

Initial jobless claims (Thursday):

 Initial jobless claims have remained subdued recently in the face of a tightening labor market with healthy employment gains. For the week ending 22 July, initial claims increased 10k to 244k while the 4-week moving average remained unchanged at 244k. Since January, initial claims have remained within a range of 227-261k. Continuing claims also remain subdued; for the week ending 15 July, continuing claims decreased 13k to 1964k. While increasing marginally since April, continuing claims have declined overall by 97k during 2017. We expect both series to remain low as the labor market continues to tighten.

US Budget (Thursday): 

The monthly budget statement from Treasury has received increased attention recently due to the upcoming deadline for raising the debt ceiling. In June, the US government posted a monthly budget deficit of $90bn. Earlier this year, in its monthly budget review, the Congressional Budget Office noted that revenues were coming in below expectations. That concern seems to have eased recently, but upcoming budget reports will be worth closely monitoring. Treasury Secretary Mnuchin recently sent a letter to Congress on 28 July urging to increase the debt limit by 29 September. Once Congress returns from the August recess, there will be 12 legislative days to address the debt ceiling before the end of September.

CPI (Friday): 

"We expect core CPI inflation (excluding food and energy) to increase by 0.2% (0.202%) m-o-m in July. This forecast implies a slight acceleration from moderate increase of 0.1% (0.119%) m-o-m in June which was in line with our forecast of a 0.129% increase but slightly lower than the market consensus. On a year-over-year basis, our forecast is equivalent to a 1.8% (1.788%) increase, a slight pick-up from 1.703% in June. Our forecast reflects our view that core goods prices would likely be little changed in July although they may not fall as much as they did in June. Among core goods components, industry data suggest that new and used vehicle price inflation may remain subdued amid high inventories and slower sales. However, apparel prices, which fell for the fourth consecutive month in June, may rebound in July partially owing to the series’ mean-reverting tendency. That said, an increasing share of online apparel sales may continue to exert downward pressure on apparel prices in the medium term as deep discounts often accompany online sales to attract consumers amid heated competition among retailers. On the service side, we think that a pick-up in core service prices would offset the weakness in core goods price inflation. In particular, prices of lodging away from home may rebound after a sharp 1.9% decline in June. Considering industry data, we also expect an upswing in the inflation of airline fares, another volatile component, which fell 2.7% in June. On rent prices, we expect a steady increase but don’t expect any material acceleration in its inflation in July.

Combining core CPI inflation and noncore components, we expect headline CPI index to increase 0.2% (0.196%) m-o-m. Our forecast of CPI NSA is 245.019. This forecast is equivalent to a 1.8% (1.825%) y-o-y, a decent acceleration from 1.633% in June. An expected recovery in energy price inflation contributed positively to our forecast. Moreover, based on a solid gain in prices received at farms, we expect a decent increase in prices of food at home. With trend-like increases in food-away-from-home prices, we expect a healthy increase in CPI food prices."

The week ahead, Europe:

Germany industrial production (Monday): 

We expect German industrial production to increase 0.4% m-o-m in June after a strong rise in May. An outcome in line with our expectations would bring the average IP level for Q2 about 2.2% above the average for Q1, indicating a strong positive contribution from the industrial sector to Q2 GDP.

UK BRC retail sales (Tues): 

The annual rate of like-for-like sales values growth has picked up on this measure over the past few months, rising to 1.4% on a 4mma % y-o-y basis – its highest for over three years. However, generally falling rates of shop price deflation – thanks to sterling’s past depreciation – have meant that in real terms retail sales have slowed relative to the end of last year.

UK Industrial production (Thurs):

 Official indicators of manufacturing output have been surprisingly weak over the past few months (declining in four out of the past five months), despite recent strength in the surveys – notably the CBI and PMI reports. Exports seem to be holding up well as a result of sterling’s past falls and the strengthening world economy. We think that a rebound of production is overdue and forecast a 0.4% monthly rise in both manufacturing and industrial production in June.

UK Trade (Thurs): 

The global goods trade balance deteriorated by around £1.3bn between April and May, with the majority of the weakening due to the underlying deficit (as opposed to erratic items or oil). This, in turn, was due to a combination of weaker exports and stronger import growth during the month. However, in general terms, exports growth has been strengthening over the past year and on a 3mma basis the annual rate is currently running at over 7% – its highest since end-2015. We forecast a modest recovery in the headline deficit, though caution that these figures are highly volatile.

The week ahead, China:

With the July official PMI and our proprietary indices suggesting some loss in growth momentum post-June, we expect both export and import growth to moderate in July, but to remain in double-digits, consistent with the decline in the new export orders sub-index of the PMI. CPI inflation should tick up slightly as high-frequency data suggest that food prices rose month-on-month, while PPI inflation is likely to remain unchanged from June on resilient demand. For money and credit supply growth, we expect new RMB loans and aggregate financing to drop seasonally, with downward pressure coming from the corporate and household sectors due to rising financing costs and already high property prices, respectively. M2 growth should edge up in July due to a favourable base effect. Our FX strategists believe China’s headline FX reserves will rise by USD34.5bn to USD3.091trn in July. After adjusting for FX and coupon effects, we estimate a fall of USD10.0bn after a decline of USD14.0bn in June."