The week ahead - Nomura

Analysts at Nomura offered the key events for the week ahead.

Key Quotes:

United States | Data preview

"We expect continued expansion from January’s ISM non-manufacturing index and a slightly wider trade deficit for December. ISM non-manufacturing (Monday): We forecast a slight moderation to 55.8 in January, from 56.0 in December, considering slight moderation in incoming business surveys. Business sentiment was solid throughout 2017 and we think it will remain so in the near term. That said, our forecast does not necessarily signal material deterioration in business sentiment further out. Details of recent survey data point to continued momentum. Senior Loan Officer Opinion Survey (Monday): The January 2018 Senior Loan Officer Opinion Survey (SLOOS) will provide further context on lending activity to businesses and households in the last three months of 2017. The October 2017 SLOOS showed softening demand for business loans despite, on net, an easing of lending standards. Demand for commercial & industrial (C&I) loans eased, despite a firming outlook for business investment and easing lending standards. Moreover, demand for commercial real estate (CRE) loans softened while a number of banks reported tightening lending standards for CRE loans secured by multifamily residential properties, one reason for our relatively pessimistic outlook for multifamily housing starts and construction. For households, banks reported some tightening of lending standards for auto and credit card loans, partly driven by a softening or a more uncertain economic outlook, while standards for residential real estate (RRE) loans remained relatively stable. Given the strong incoming data over the survey reference period, an easing of lending standards for credit card loans may be possible. However, tightening auto loan standards likely reflect a modest pickup in delinquency rates for auto loans in recent quarters. 

Trade balance (Tuesday): We expect December’s trade balance to come in at a $51.2bn deficit, widening from a $50.5bn gap in November. According to the advance trade balance estimate released by the Census Bureau, both goods import and exports increased robustly while goods exports outpaced goods imports. However, we expect some moderation in net exports of services. JOLTS job openings (Tuesday): Job openings declined for a second month in November, bringing the job openings rate down 0.1pp to 3.8%. However, labor demand remains strong in an economy with historically low levels of labor market slack. Moreover, the quits rate, which captures how willing workers are to leave their current employer, remains elevated at 2.2%, its post-recession high. Consumer credit (Wednesday): With strong consumer fundamentals, we continue to expect steady expansion in consumer credit in the near term. In November, consumer credit expanded sharply by $28bn, with healthy increases in both revolving and nonrevolving credit. A strong $16.8bn increase in non-revolving debt coincided with a pick up in vehicle sales. Rising household financial gains combined with healthy labor market conditions should support another robust increase in consumer credit in December. Initial jobless claims (Thursday): Initial claims remained low in the most recent reading, decreasing marginally to 230k for the week ending 27 January. Continuing claims ticked up slightly but remained subdued, consistent with our view that the labor market will strengthen further this year. Wholesale inventories (Friday): Wholesale inventories increased a modest 0.2% m-o-m in December after increasing 0.7% in November, according to the advance estimate by the Census Bureau. The strong increase in November was in part driven by a sharp increase in petroleum prices, which could revert in December. According to the BEA’s advance estimate of Q4 GDP, inventory investment was soft in Q4 following a strong contribution to GDP growth in Q3. Consistent with this report, we expect only modest growth in wholesalers’ inventories in Q4.

Euro area | Data preview

The week ahead German factory orders and the BoE’s policy meeting are in focus this week. UK PMI services survey, Jan (Mon): The manufacturing survey slowed for a second consecutive month in January, though the headline index remained consistent with a relatively strong expansion in output. The services PMI was below that of manufacturing for almost all of 2017 as a weaker sterling and stronger global growth have benefited manufacturing more. We expect a similar reading on the services PMI in January as December (around 54). German factory orders (Tues): We expect German factory orders to increase 1.3% m-o-m in December following a 0.4% m-o-m decrease in November. An outcome in line with our expectations would lead to a 3.1% q-o-q in Q4, following a 3.7% q-o-q in Q3, suggesting strong industrial output growth in the coming period. German industrial production (Weds): We expect German industrial production to increase 0.2% m-o-m in December, following a 3.4% increase in November. BoE policy decision and Inflation Report (Thur): With only three months having passed since the BoE’s decision to raise rates for the first time since the financial crisis, we do not expect any changes in policy from the MPC at this month’s meeting. However, at some point in the near future we expect to see a language-change that will ultimately signal a policy move at the May meeting. A significant shift in signalling – like we saw in September last year – seems unlikely at this week’s meeting, but the Governor may leave all options on the table, so as not to rule out a move as soon as May. It will be interesting to see how the combination of rising oil prices and sterling’s rally affects the BoE’s end horizon forecasts for inflation (which currently stand at 2.39% and 2.15% based on constant and market interest rates). UK Industrial production, Dec (Fri): The final quarter GDP release last week reported a 0.6% rise in industrial production and a 1.3% rise in manufacturing output during the quarter. That would be consistent with eight months in a row of rising manufacturing output (we forecast a rise of 0.3% m-o-m in December). However, the slower rate of industrial production was thanks to a fall in mining output during Q4, in turn the result of a shutdown of the Forties oil pipeline for much of December. This explains our December forecast of a fall in industrial production at the same time manufacturing output rises. UK Trade, Dec (Fri): The £0.5bn deterioration in the trade deficit between October and November was primarily the result of a move in the underlying (ex oil and erratics) deficit. Sharply rising export volumes (an annual rate close to 10%) and slowing import growth could help narrow the trade deficit in the period ahead.

Japan | Data preview 

The week ahead We expect sentiment among ordinary workers to fall in January, following some slightly weak economic data. January Economy Watchers Survey – current conditions DI (Thursday): We forecast a slight decline in both the current conditions DI and the future conditions DI. Among economic indicators for January that have been released, the Japanese manufacturing PMI rose for a third straight month, but the sales DI in the monthly survey of SME trends fell sharply, down 6 points month-on-month. The survey of production forecasts call for a 4.3% m-o-m decline in January. The rise in share prices since the survey was conducted in December should give a boost to sentiment, while a higher crude oil price should have the opposite effect due to cost implications. Seeing that new job openings rose by 9.6% y-o-y in December, we believe it unlikely that the labor shortage has eased. Overall, we expect sentiment as measured by the Economy Watchers Survey in January to be weaker than in December."