The week ahead: expecting a Fed hike - Nomura

Analysts at Nomura offered a review of the forthcoming key events for the week ahead.

Key Quotes:

" United States | Data preview

We expect a rate hike at the March FOMC meeting as participants incorporate tailwinds into their economic outlook.

FOMC meeting (Wednesday): At this point, we still appear to be on track for a rate hike at the 20-21 March meeting. The focus now is largely on the medians of FOMC participants’ target federal funds rate projections (the “dots”) in the Summary of Economic Projections (SEP). Given recent remarks by FOMC participants, we think the dots distribution will shift up across the forecast horizon. We believe more likely than not the medians will rise for 2018-20 but this remains a very close call. Recent remarks, particularly by Chair Powell and Governor Brainard, have highlighted an improved economic outlook as headwinds appear to be shifting to tailwinds. Tailwinds include synchronized global growth, strong aggregate demand, still-accommodative financial conditions and, most important, substantial fiscal stimulus in an economy close to full employment. Governor Brainard’s speech on 6 March was particularly notable given her hawkish shift. More likely than not, the median dot will imply 4 hikes in 2018 (up from 3) and 3 in 2019 (up from two and a quarter). However, we do not expect the median of the longer-run dots to change from its current level of 2.75% although upward adjustments to some dots may be possible. Elsewhere, relative to the December SEP, we expect upward revisions to growth forecasts for 2018-19 but a downward revision for 2020 as we think the boost from fiscal policy will wane that year. Moreover, we expect downward revisions to the unemployment rate forecasts for 2018-20 from their levels in December. 

Existing home sales (Wednesday): We expect existing home sales to increase only modestly by 0.2% m-o-m to an annualized rate of 5390k. Incoming data on pending home sales, which track contract signings, were weak in January, suggesting some drag on existing home sales (contract closings). Although consumer fundamentals remain favorable, mortgage applications for home purchases fell in February, pointing to some downside risk on our existing home sales forecast. Looking ahead, the ongoing shortage of previously owned homes for sale as well as the prospect of rising mortgage rates will likely weigh on sales.

Initial jobless claims (Thursday): We expect initial and continuing claims to remain low in the near term as the labor market improves further. Initial claims remained subdued during the week ending 10 March and their four-week moving average continued to fall gradually, highlighting continued strength in the labor market. The insured unemployment rate sits at 1.3% — its historical low. Labor-related indicators of the business surveys for March so far suggest labor market strength remains firm.

Durable goods orders (Friday): We expect a 0.4% m-o-m increase in new orders of durable goods excluding transportation equipment in February. Incoming data suggest that business activity continues to expand at a healthy pace. The ISM new orders index remained high in February despite a slight decline to 64.2, from 65.4. Other business surveys point to continued expansion in activity reflecting firm demand. Together with volatile transportation equipment orders, total durable goods orders likely increased a healthy 1.6% m-o-m. We expect a strong rebound in new orders of transportation equipment following a sharp decline in the prior month. New orders of defense aircraft and parts likely drove up the increase in transportation orders. For motor vehicle orders, we expect a modest increase based on industry forecasts.

New home sales (Friday): We expect new home sales to have increased 2.9% m-o-m to a 610k annualized pace in February. New home sales fell a sharp 7.8% m-o-m to 593k in January. This decline was likely transitory, in our view. Colder-than-usual weather in the South and Northeast likely amplified the decline in sales in January. Further, weaker sales in January were possibly driven by the sales pace returning to its previous trend after strong growth in Q4 driven by pent-up demand after the major hurricanes. As new home sales tend to be highly volatile on a monthly basis, the recent data do not affect our outlook. That said, we will observe data in the coming months to assess the impact, if any, of the recent appreciation of mortgage rates and the new tax law on new home sales. We maintain that the strong job market and elevated consumer sentiment remain supportive of consumer demand, while a pick-up in home price appreciation and mortgage rates pose downside risks.

Euro area | Data preview

Euro area flash PMIs and the BoE policy decision are in focus this week.

Germany ZEW Survey Expectations, (Mar), (Tuesday): We expect the German ZEW expectations index to decline sharply in March to 5.5, after 17.8 in February. We think that the recent fall in the DAX together with one reason for this, namely heightened fears about protectionism, may have negatively affected analysts’ expectations across Germany in recent weeks. However, we would not read too much into any weakness as the index has not enjoyed a particularly high correlation with German GDP growth in recent years.

UK CPI/RPI inflation (Tuesday): We forecast a two-tenths fall in CPI inflation to 2.8% in February. With a wedge of around 1pp, that would leave RPI inflation also 0.2pp lower at 3.8%. The February fall is partly due to base effects related to food and transport, but more generally a decline this year should be related to fading exchange rate effects.

UK Producer prices (Tuesday): The survey indicators of output prices have eased but remain strong enough to justify our forecast of a 0.2% monthly rise in core prices in February. A rise in GBP and fall in oil prices could push input prices down by 1%.

UK Labour market report (Wednesday): While the unemployment rate rose in last month’s report, jobs were up too. Focus will once again be on earnings, especially private sector/ex-bonuses, where annualised growth over the past six months has been 3.5%.

UK Public finances (Wednesday): The OBR’s forecasts for the headline deficit in 2017- 18 (£45.2bn) suggest an average monthly deterioration of £3.3bn in February and March versus a year earlier. Relative to recent improvements, this would be quite a turnaround, which is why we think the risks are for a narrower deficit (£1bn in February).

UK CBI monthly industrial trends survey (Wednesday): The orders and expected output balances have moderated in recent months (as have the European surveys), but remain at above-average levels. We expect slightly higher readings in the March survey.

Euro area flash PMIs (Mar-Flash), (Thursday): We expect the euro area composite PMI to fall to 56.5 in March from 57.1 in February. At a sector level, we expect the regional manufacturing PMI to decline to 58.2 from 58.6 and the services PMI to drop to 55.6 from 56.2. Forward-looking survey data (e.g. Germany’s Ifo) suggest that manufacturing activity has decelerated a little in recent weeks. As we noted above, market sentiment has become more pessimistic in light of heightened uncertainty about global trade. However, the overall level of these indicators is still likely to remain high and consistent with our upbeat forecasts for eurozone growth in the near term.

Germany Ifo (Mar), (Thursday): In line with our comments above concerning the ZEW survey and the flash PMIs, we expect the Ifo Business Climate index to decline to 113.2 in March, after 115.4 in February. Much of this decline will likely stem from a sharp a fall in the expectations component; in contrast, we expect only a modest decline in the current assessment component.

UK Retail sales (Thursday): With the BRC, CBI, Visa and JLP indicating very modest growth in sales in February we expect this to be borne out in the official data. A 0.4% monthly rise would mean a similar annual rate of growth of 1.3% to recent outturns.

BoE policy decision (Thursday): While we do not expect a move at this meeting we do expect the Bank to underpin market pricing for a May rate rise. It may continue to say that markets are pricing in insufficient tightening to achieve its inflation forecast in the medium term.

Japan | Data preview

The week ahead We forecast February all-Japan core inflation will be stronger than in January owing to a boost from accommodation and overseas package tours, whose price volatility is high.

February trade statistics: nominal exports (Monday): Nominal exports in the first 20 days of February 2018 fell 4.8% y-o-y (+8.0% in the first 20 days of January), while nominal imports rose 25.0% (+5.1%). Nominal exports declined sharply after growth in January, while nominal imports gained momentum, but this may well be partly because of distortions caused by the Lunar New Year in Asia. The first day of the Lunar New Year was 16 February this year and precedent suggests this created a seasonal distortion that probably dented Japan's exports in February this year while boosting its imports. At the same time, it appears that in the latter part of the month there was a turnaround to some extent from the decline in nominal exports and an acceleration in nominal imports in the first 20 days of February. As there was one fewer business day in the first 20 days of February in 2018 than in 2017, but the same number in the remainder of the month, we think growth in exports and imports in the latter part of the month will likely have been higher than in the first 20 days. Taking all of the above factors into account, we forecast a 0.5% y-o-y increase in nominal exports and a 19.0% rise in nominal imports for February. We estimate a trade deficit (original series) of ¥210.1bn and a seasonally adjusted trade deficit of ¥501.9bn. This would be the first seasonally adjusted trade deficit for 28 months, but we see this as a temporary phenomenon resulting from the Lunar New Year effect and do not expect a trade deficit to become established.

February all-Japan core CPI (ex-fresh food) (Friday): We expect the February allJapan core CPI (ex-fresh food) inflation to rise to 1.0% y-o-y, 0.1pp stronger than the January reading. We forecast February all-Japan core core CPI (ex-energy and food, except alcoholic beverages) inflation to increase to 0.2%, and the so-called BOJ version of core core CPI (all items ex energy and fresh food) inflation to rise to 0.5% in February, both improvements of 0.1pp from January. We think accommodation and overseas package tours, for which price volatility is high, will boost the various inflation readings for February."