The week ahead: US CPI in focus - Nomura

Analysts at Nomura offered their outlook for the week ahead.

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United States | Data preview

Early indicators of manufacturing sentiment could decline further in October; we expect a steady reading for core CPI month-on-month inflation.

NY Fed survey of consumer expectations (Tuesday): Inflation expectations in the NY Fed’s survey remain within a steady range with both the one-year and three-year ahead expected inflation holding at 3.00% in September. Other indicators in the survey support an outlook for favorable consumer spending with elevated earnings growth expectations and a favorable evaluation of the labor market.

US budget (Tuesday): October’s budget statement marks the beginning of FY19 where we expect the budget deficit to widen further after increasing markedly in FY18. Of particular interest in October will be the pattern of government defense spending as fiscal policy remains a key driver of US growth. 

CPI (Wednesday): We expect a steady 0.231% (2.192% y-o-y) m-o-m in core CPI inflation in October. Idiosyncratic declines in some components of the core CPI in September will likely revert in October. In particular, used vehicle prices declined 3.0% m-o-m in September and contributed to the downside surprise in core CPI inflation relative to our forecast. Most other core CPI components were in line with our expectations and support our medium term inflation outlook. At the moment, we think the decline in used vehicle prices was transitory and should partially revert in October. Moreover, the notable slowdown in homeowners’ equivalent rent (HOER) in September was concentrated in the Midwest, implying that HOER inflation should pick up in October, and we expect a 0.26% m-o-m increase in rent CPI. Elsewhere, we expect a modest 0.5% m-o-m increase in lodging-away-from-home prices, a 2.9% decline in airline fare prices. 

Among non-core components, we expect a modest 0.1% m-o-m increase in the CPI for food. The CPI for energy likely rebounded considering seasonally-adjusted prices of energy components. Altogether, we expect a solid 0.352% increase in headline CPI (2.555% y-o-y). Our forecast for CPI NSA is 252.965.

Initial jobless claims (Thursday): The residual impact of recent inclement weather continues to show up in initial jobless claims data but we expect a continued downtrend over the medium term as the labor market remains strong.

Empire State survey (Thursday): We expect the Empire State manufacturing survey index to fall to 20.0 in November after rebounding to 21.1 in October. We think concerns over logistics and trade tensions will continue to weigh on regional Federal Reserve manufacturing surveys although the momentum in the sector appears intact. 

Philly Fed survey (Thursday): We expect the Philly Fed manufacturing survey index to fall to 21.0 in November after declining by 0.9pp to 22.2 in October, a still-healthy reading consistent with steady growth but possibly weighed down by concern over trade tensions.

Import prices (Thursday): Import prices will likely hold steady in the near term as the US dollar remains elevated. Recent declines in crude oil prices will likely lead to declines in imported fuel prices and lower aggregate import prices. Excluding petroleum products, the inflation of imported ex-auto consumer goods will likely remain modest.

Retail sales (Thursday): We expect a healthy 0.4% m-o-m increase in “core” retail sales in October, following a 0.5% gain in September. Consumer sentiment remains elevated despite recent stock market volatility and heightened concerns about global trade. The labor market remains strong and income gains have been steady. Considering these factors, we think personal spending momentum will remain robust in Q4. Among non-core components, sales at gasoline stations and building materials stores likely increased firmly. We expect a steady increase in receipts at autos and parts dealerships considering WardsAuto’s light vehicle sales data for October. Excluding autos and auto parts, we expect 0.6% m-o-m gain in retail sales. Altogether, we expect a 0.6% m-o-m increase. 

Business inventories (Thursday): The business inventory report for September will likely reflect strong investment in inventories in Q3. The Census Bureau’s data suggest manufacturing inventories accumulation accelerated in September. Moreover, wholesale inventories picked up sharply in Q3, driven by buildup of agricultural products as well as autos. Advance data suggest retail inventories likely increased at a modest pace with a slight decline in non-auto components.

Industrial production (Friday): We expect a soft 0.1% m-o-m increase in industrial production in October, following a 0.3% advance in September. The aggregate production in October was likely weighed down by a sharp pullback in autos production. Excluding autos, manufacturing sector output likely increased at a steady pace of around 0.3% in October after rising by only a modest 0.1% in September. Steady gains in exautos manufacturing output appear consistent with the healthy momentum in the manufacturing sector. The mining sector output will likely contribute steadily to aggregate output in October. Active oil and gas rig counts picked up in October, pointing to healthy drilling activity.

Euro area | Data preview

The week ahead Euro area October final inflation and UK October inflation data will be in focus next week. 

Germany ZEW Survey, Nov (Tuesday): We forecast a decline in the expectations component of the ZEW survey to -26.2 from -25.9 in October. The trade issues between China and the US have not yet been resolved and, in the meantime, domestic political instability continues to negatively affect confidence We think both factors have contributed in the month to lower financial analyst expectations for Germany’s economy.

UK Labour market report, Sep/Oct (Tuesday): Wage growth will once again be the statistics to watch in this report. Our preferred measures relates to private sector regular pay on 3-, 4-, 5- and 6-month annualised bases. They currently range from around 3.5% to 4.5% (August), and we think are likely to remain in that vicinity in this report (September). Elsewhere, watch employment growth, which has slowed to a standstill in recent months.

UK Consumer price inflation, Oct (Wednesday): We forecast an unchanged CPI print of 2.4% and an unchanged RPI print of 3.3%. While oil prices fell in October, during the month they were, on average, higher than in September, so there should be no downside pull from this. Also, forecast errors for October have tended to be on the downside in recent years for both RPI and CPI inflation, presenting possible downside risks to consensus forecasts.

Euro area Industrial Production, Sep (Wednesday): Germany and Spain have already reported industrial production data, showing that IP ex-construction decreased in the month of September. Following new emission standard rules that adversely affected car production in al EA countries, we expect EA industrial production to echo the message sent by these two countries that have already reported. We forecast a 0.5% m-o-m decrease in IP, which follows a 1.0% m-o-m increase in August. 

UK Producer price inflation, Oct (Wednesday): Despite the recent notable fall, oil prices rose on average from September to October. The upward impact on import prices during the month should, however, be tempered by a rise in sterling’s trade weighted index. This explains our modest +0.5% monthly forecast. As for output prices, we expect a smaller 0.1% increase (core), which would be in line with the PMI and CBI output price indicators during the month.

UK Retail sales, Oct (Thursday): Anecdotal and survey evidence suggests retail sales growth has slowed in recent months. The CBI distributive trades survey softened in October, while the BRC measure of sales growth was also weaker than earlier in the year. Many high street stores seem to be struggling, although it is difficult to tell how much of this is cyclical versus structural (i.e., the rise of online shopping). However, September’s fall in the official volume series may limit how weak the October print ends up being and, as such, we forecast a flat reading for the month.

Asia | Data preview 

Activity momentum in China likely stabilised in October; we expect central banks to leave rates unchanged in Indonesia and Thailand but hike by 25bp in the Philippines.

China: We expect industrial production growth to remain unchanged from September, at 5.8% y-o-y in October, despite its recent downtrend, partially because this October has one more working day than last October. Retail sales growth will likely slow in October on weaker domestic demand. Although we expect a further slowdown in property investment, September’s investment data suggest that infrastructure investment may have reached its nadir (its year-on-year growth rate rose to -2.0% in September from - 5.9%) and manufacturing investment remained robust (16.3% y-o-y in September); these factors likely offset the weakness in property investment. We expect year-to-date fixed asset investment growth to remain stable after an uptick in September, as the policy easing seems to be starting to have an effect."