The week ahead:US jobs, BoE and BoJ headlining - Nomura
Sunday, 28 October 2018
Analysts at Nomura offered their outlook for the week ahead.
*United** States | Data preview*
The week ahead We expect a healthy 175k gain in nonfarm payroll employment, solid wage growth and moderating manufacturer sentiment.
Personal income and spending (Monday): We expect a steady 0.4% m-o-m increase in personal income in September. With steady readings of the household saving rate, continued gains in income should remain supportive for spending. In addition, tax cuts will likely continue to boost personal spending growth. Against this backdrop, we expect a steady 0.2% increase in personal spending, consistent with healthy momentum in personal consumption growth in Q3. Based on September retail sales data, consumer spending on autos likely rose solidly while spending on gasoline declined. In addition, a sharp decline in receipts at drinking and dining venues suggests a possible slowdown in service spending. The impact of Hurricane Florence on personal spending in September does not appear to be large as disruptions to sales activity were likely offset by a pickup in replacement demand for household goods. Similarly, personal spending in October will likely be affected by offsetting impact of Hurricane Michael.
PCE deflators (Monday): We forecast a steady 0.2% (0.155%) m-o-m increase in the core PCE price index in September. If realized, our forecast would be equivalent to a 1.965% y-o-y gain in September following a 1.959% increase in August. Although core CPI inflation remained weak in September, partly driven by a slowdown in homeowners’ equivalent rent inflation (OER), the relative importance for OER in the core PCE price index is less than in the core CPI. This difference in weights mitigates the negative impact on core PCE from the slowdown in OER inflation. Moreover, PCE-relevant PPI components will likely support core PCE price inflation in September. In particular, PPI’s airline fares increased strongly in September, likely contributing to core PCE inflation.
Among noncore components, we expect a 0.1% m-o-m decline in PCE food prices. PCE energy prices likely fell by about 0.5% m-o-m, considering declines in CPI energy prices. Altogether, we forecast 0.1% (0.111%) m-o-m increase in headline PCE price index, which would lower its 12-month change rate to 1.982% from 2.217%, previously.
Case-Shiller home price index (Tuesday): On a 12-month basis, home price appreciation in the composite 20 Case-Shiller index continued to ease in July, declining 0.5pp to 5.9% y-o-y. While still increasing at a pace above most measures of wage and income growth, home price growth may continue to slow over the months ahead as the housing market softens somewhat. Worsening home affordability may dampen home sale activity, putting downward pressure on prices.
Consumer confidence (Tuesday): We expect a modest 1.9pp decline to 136.0 in the Conference Board’s October consumer confidence index, a still-elevated reading consistent with solid labor market activity. Consumer confidence in the University of Michigan’s October survey declined slightly but remains in territory consistent with a healthy consumer outlook. Continued consumer optimism will likely support healthy growth in personal spending.
ADP private employment (Wednesday): Consistent with our forecast for the BLS employment report, we expect ADP to report a 170k increase in private employment for October.
Employment cost index (Wednesday): We expect a 0.5% q-o-q increase in the employment cost index in Q3, down from 0.8% in Q2. The deceleration is largely due to an expected slowdown in the pace of benefits growth, which increased by an unusually high 0.9% q-o-q in Q2. For wages and salaries, comprising roughly 70% of the total index, we expect a steady 0.7% q-o-q gain after a 0.5% increase in Q2. Altogether, the Q3 ECI reading should confirm the recent uptick in wage pressures evident in the monthly BLS employment report average hourly earnings (AHE) series.
Chicago PMI (Wednesday): We expect a healthy reading of 60.0 for October Chicago PMI following 60.4 in September. Regional Federal Reserve bank surveys pointed to continued optimism although some surveys indicated slowdown in business expansion. We expect the Chicago PMI to moderate slightly in October but this reading will still be consistent with elevated momentum in the industrial sector activity.
Nonfarm productivity (Thursday): Nonfarm productivity growth could increase solidly in Q3, after a strong 2.9% q-o-q saar increase in Q2, based on incoming information on aggregate real output and hours data. We expect a solid 3.4% q-o-q real GDP increase for Q3 and hours growth was somewhat weaker than previous quarters, highlighting the potential for a healthy increase in productivity. Recent productivity trends have been positive relative to an earlier bout of weakness from 2015-16. On a y-o-y basis, productivity growth has remained within a -0.3 to 1.9% range since 2012. The strong increase in Q2 productivity and muted growth in compensation per hour resulted in a 1.0% decline in Q2 unit labor costs.
Construction spending (Thursday): Private construction spending remained weak in August, decreasing 0.5% m-o-m, with softness across all major components. Hurricane recovery efforts may help increase construction activity over the next few months but the effect will likely be spread out. Public construction spending, on the other hand, particularly for state and local governments, increased strongly in August by 2.0%, driven by healthy building activity in the state and local nonresidential sector. Incoming data on housing starts indicate continued softness for private construction spending. In addition, it remains to be seen if state and local government outlays will sustain the recent robust pace.
ISM manufacturing index (Thursday): We expect the ISM manufacturing index to decline to 59.0 in October. Although incoming data on the manufacturing sector suggest continued expansion in activity, the ISM manufacturing index appears highly elevated relative to the Philly Fed and Empire State survey headline indices after adjusting for differences in weights. Both regional surveys have trended down in recent months. We expect the ISM manufacturing index to moderate to a level that is more consistent with incoming regional surveys
Vehicle sales (Thursday): Vehicle sales in October may be temporarily boosted by replacement demand following widespread damage and flooding in the wake of Hurricane Florence, similar to the effect of Hurricanes Harvey and Irma in the fall of 2017. Some automakers reported weaker-than-usual sales activity in regions affected by Hurricane Florence in September. However, we expect any boost from replacement buying activity to be transitory as vehicle sales continue on their downward trend this year.
Trade balance (Friday): We expect a slight narrowing of the trade gap in September to $52.2bn from $53.2bn. According to the Census Bureau’s advance report, the nominal goods trade deficit widened only modestly as goods exports rebounded sharply and outpaced a healthy gain in goods imports. A sharp gain in goods exports will narrow the trade gap only temporarily. We think that the diverging external and domestic growth and a stronger US dollars should contribute to a widening trade deficit in coming months.
Employment report (Friday): We expect a 175k gain in nonfarm payroll employment in October as modest positive payback from Hurricane Florence is offset by weakness due to Hurricane Michael. While incoming employment data has remained strong, the timing of Hurricane Michael’s landfall, albeit in a less-populated region relative to Hurricane Irma in 2017, suggests that business disruptions and civilian evacuations may have depressed payroll numbers during the month. We expect a modest 0.17% m-o-m increase in average hourly earnings (AHE). Unusually large increases in AHE in the Carolinas during September, likely weather related, may revert in October, offsetting any weather effect from Hurricane Michael. However, the position of the BLS survey week relative to the first of the month suggests a modest downward bias on monthly AHE growth. Despite this downward bias, base effects are likely to push up AHE growth on a 12-month basis to 3.08%, its highest level since April 2009. We expect the unemployment rate to remain at a low-3.7% after a sharp decline in September.
Factory orders (Friday): September advance durable goods orders report indicated slowing nondefense ex-aircraft capital goods shipments and orders. Continued moderation in shipments and new orders of these goods highlights downside risk to equipment investment growth in coming quarters. Overall durable goods orders increased 0.8% m-o-m as a sharp decline in civilian aircraft orders was offset by a jump in vehicles and parts orders and defense aircraft and parts. Orders for defense aircraft and parts increased to their highest level since October 2001, suggesting a pickup in near-term defense spending, consistent with the budget deal from earlier this year that increased FY18-19 defense appropriations. In addition, manufacturers’ durable goods inventories increased strongly by 0.7% following a 0.2% decline. Nondurable goods inventories at factories likely rose at a steady pace.
*Euro area | Data preview*
The week ahead Euro area October flash HICP data and the BoE’s MPC meeting will be in focus next week.
UK BoE household borrowing, Sep (Monday): Net household borrowing fell notably in July and August, averaging less than £4bn per month relative to the previous year’s average of over £5bn.
UK CBI distributive trades survey, Oct (Monday): Recent outturns have been positive, with the reported balance averaging about +25% over the last four months (vs. just +4% in the first five months of the year). Rising real wage growth, low unemployment and loose monetary policy are likely supporting spending. Perhaps the biggest risk stems from Brexit and the risk of a sharp FX fall reversing the improvement in real wage growth.er, mortgage approvals did rise modestly to a more than six-month high, suggesting an improvement in net mortgage lending in coming months.
UK Budget (Monday): The Chancellor presents his budget to the House of Commons on Monday at 3.30pm. Recent UK public finance show narrower deficit outcomes – we see £11bn less of a funding requirement as a result, with around £8bn of that showing up in less Gilt issuance than previously expected.
Euro area and German inflation, Oct-flash (Tues, Wed): We expect the first estimate of German HICP inflation to increase to 2.4% y-o-y in October from 2.2% y-o-y in September. For September core inflation, we also expect a climb to 1.4% y-o-y from 1.2% in September. Energy prices should drive up headline inflation, and we believe core HICP inflation will accelerate owing to base effects related to falling car insurance costs a year ago. At the euro area level, we forecast the first estimate of HICP inflation will rise to 2.2% y-o-y in October, compared with 2.1% in September. We expect core HICP inflation to climb to 1.1% y-o-y in October from 0.9% in September thanks to base effects related to falling education costs in Italy a year ago.
Euro area GDP, Q3-1st (Tues, Wed): Disappointing production figures in the quarter, alongside weak retail sales and investment suggest that growth in earlier quarters is unlikely to be achieved in Q3. PMIs have been declining since July, but still point to growth of around 0.4%; however, in the past PMIs have overestimated growth. Rather, we see growth of just 0.3% in Q3, which would be its weakest rate for two years.
UK PMI manufacturing (Thursday): The manufacturing PMI has remained in a relatively tight range over the past six months – from 53.0 to 54.3. In September the headline index rose from the lower end of that range to broadly in the middle of it (53.8). We expect a modestly lower reading in October. Note there may be particular interest in the export orders index thanks to concerns about global risks and Brexit effects.
BoE MPC decision and Inflation Report (Thursday): We do not see much need for the BoE to alter its policy guidance in November. Brexit remains a sizeable risk, and while economic growth could surprise on the upside in Q3, weaker global growth and recent market moves could be negative further out. We see the Bank sticking with a similar inflation profile as in August. More hawkish members may position themselves to vote for a rate rise in early 2019, Brexit notwithstanding.
Euro area manufacturing PMIs, October final (Friday): PMI flash releases are based on 85% of the responses that make up the final number, but there are no figures published for either Spain or Italy, this is why our attention in this release will be on Italy and Spain. According to the euro area flash PMI “Growth slowed across the rest of the single currency area to the weakest since November 2013, dropping in both sectors but slipping most prominently in the service sector.” As a consequence we would likely expect some further weakening in Spain and Italy With the manufacturing PMI in Italy having slowed to a level of 50 in September, a further slowdown in the sector would bring the manufacturing industry into contractionary territory. We will closely monitor the Spanish and Italian numbers, most of all in the context of ongoing fiscal concerns. We expect no change compared with the flash number for Germany France and the euro area.
*Japan | Data preview*
BOJ monetary policy meeting and Outlook for the Economy and Prices (Outlook Report) (Tuesday/Wednesday): One key focus when gauging whether the Bank of Japan will change policy at its October monetary policy meeting has been whether there will be new and additional statements on the side effects of monetary easing in the October 2018 Financial System Report, issued on 22 October. There were no major changes in that report on the perceptions of financial institutions’ earnings and the degree of stability in the financial system. On this basis, we think there are unlikely to be additional policy adjustments aimed at correcting the side effects of monetary easing. From another standpoint, in view of the rise in US long-term interest rates since September, a key focus is whether the tolerable fluctuation range in 10yr JGB yields will be increased further. Even with US interest rates rising, in view of 10yr JGB yields not yet having reached 0.2%, seen as the upper limit of the tolerable fluctuation, and with US interest rates and USD/JPY both looking to have reached a ceiling in early October, we see little likelihood of policy changes that are based on higher yields in US bond markets. In the Outlook Report, we forecast the outlook for real GDP growth and core CPI inflation (median of Policy Board members' forecasts) will be broadly unchanged from the July Outlook Report. We forecast FY18 real GDP growth will be revised down from 1.5% to 1.2%, factoring in a one-time impact from natural disasters in July-September 2018. For FY19 and FY20, while sticking to the existing view that factored in a cyclical slowdown in the growth rate, we think the BOJ will maintain its outlook for a moderate rise in inflation owing to the effects of an improvement in the output gap to date and an acceleration in the virtuous cycle in wages and spending."
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