A busy week ahead previewed - Nomura

Analysts at Nomura offered a peview of the week ahead. 

Key Quotes:

United States | Data preview

The week ahead We expect a strong gain in October’s employment report, reflecting a full reversal from September’s decline.

PCE deflators (Monday): We forecast a 0.1% (0.141%) increase in September core PCE inflation, which would keep the 12-month change at 1.3% (1.33%). The September CPI report was weaker than expected and the inflation measured by the core PCE price index should remain weak. However, we think some of this weakness should be mitigated by increases in the subcomponents of the PCE price index that derive from the PPI report. The September PPI report indicates that a few healthcare service prices such as nursing care and hospital services increased decently and prices of financial services such as portfolio management continued to increase. We expect increases in PCE prices that derive from these PPI data to offset the weakness in those deriving from CPI data. Moreover, although rent inflation slowed in the September CPI report, a smaller weight is assigned to rents in the core PCE price index than in the core CPI index, which would help mitigate the negative impact from the slowdown in rent inflation measured in the CPI report. Among non-core components, we expect a strong increase in the PCE index for energy prices considering a 6.1% advance in CPI energy. PCE food prices will likely be little changed given the subdued increase in CPI food prices. Altogether, we expect a strong 0.4% m-o-m increase in headline PCE deflator (1.62% y-o-y).

Personal income and spending (Monday): We expect a steady gain of 0.4% in personal income in September, reflecting the continued increase in aggregate earnings. 

For personal spending, we expect a solid increase of 0.9%. The net impact of the recent hurricanes on nominal spending appears to have been positive in September. Much of the increase in spending was likely driven by a pick-up in spending on autos and auto parts. Sales at auto dealerships rebounded in September, likely reflecting increased replacement demand for hurricane-damaged vehicles in Texas and Florida. Spending on gasoline likely jumped sharply as well. The recent hurricanes drove up domestic retail gasoline prices, boosting sales at gasoline stations. Moreover, despite power outages in hurricane-affected regions, utility production increased steadily. Thus, we expect consumer spending on utility services to have risen at a stable pace. Excluding transitory boosts from the hurricanes, the growth of personal spending expenditure has been solid in Q3. Given the continued gains in household income with higher equity prices, we expect much of this momentum to carry through Q4.

Employment cost index, Q3 (Tuesday): We forecast a 0.6% q-o-q increase in the employment cost index (ECI) for compensation (2.43% y-o-y). For wages and salaries, which make up roughly 70% of compensation, we expect a 0.7% q-o-q increase (2.5% y-o-y). Average hourly earnings increased notably in Q3 at a pace of 0.9% q-o-q (0.7% q-o-q for production & nonsupervisory workers). However, this acceleration only reversed the softness earlier this year, leaving the 12-month change (2.9%) at the level from December 2016. Some of the transitory factors that boosted average hourly earnings growth in Q3 related to inclement weather are unlikely to affect the ECI due to differences in methodology. That said, we expect a modest increase in the ECI in Q3. Over the medium term, we still expect wage growth to remain subdued due to structural headwinds such as low job-to-job transition rates and reduced business dynamism.

Case-Shiller home price index (Tuesday): Home prices have been rising steadily as buyers compete for a limited supply of homes for sale, worsening home affordability. While the Case-Shiller 20-city composite index rose 5.81% y-o-y in July, the number of listings for sale has not risen materially and remains low by historical standards. With steady demand from consumers, pressure on home prices likely persisted in August. We expect the August Case-Shiller 20-city composite index to have risen steadily.

Chicago PMI (Tuesday): We expect an elevated reading of 63.0 for the October reading of the Chicago PMI, following a high reading of 65.2. Manufacturing sector activity has been expanding at a solid pace, reflecting healthy domestic and foreign demand. We think that momentum likely carried through October considering elevated readings in the October Philadelphia Fed and New York Fed manufacturing surveys.

Consumer confidence (Tuesday): We expect the Conference Board’s consumer confidence index to increase slightly to 121 in October. In the preliminary reading of the October University of Michigan survey, confidence increased strongly, reflecting solid consumer fundamentals despite recent disruptions due to the active hurricane season. Retail gasoline prices have come down after a brief increase due to Hurricanes Harvey and Irma. Moreover, although nonfarm payroll employment fell temporarily due to the hurricanes in September, incoming data suggest that the pace of labor market improvement remains solid going into Q4. Finally, Conference Board consumer sentiment retreated in September primarily in Texas and Florida due to inclement weather, so some rebound would be reasonable in October.

ADP employment report (Wednesday): Reflecting our forecast for private payrolls in the BLS employment report on Friday, we expect ADP to report an increase of 340k in private payrolls for October.

Construction spending (Wednesday): It is likely that the recent hurricanes affected activity in September as well as August. As Hurricane Harvey made a landfall in Texas only in the last week of the month, August construction spending advanced a decent 0.5% m-o-m. Hurricane Irma, which hit Florida in September, may have impaired construction activity in the month. Yet, aside from the transitory impact of the recent hurricanes, construction activity has been weak. Residential construction outlay has been weighed down by the continued slowdown in the multifamily sector in Q3. Coupled with tighter lending standards for commercial real estate loans, investment in business structures slowed relative to Q2 as well. Although rebuilding activity in the aftermath of the hurricanes could boost construction, we think the effect would be only gradual spread over the coming quarters. Therefore, we do not expect a material acceleration in overall construction spending.

ISM manufacturing (Wednesday): We forecast a modest decline to 59.0 for October, from 61 in September. Much of the sharp increase in the headline index in September was driven by a sharp increase in the suppliers’ delivery index, which showed the sharpest increase since September 2005 following the landfall of Hurricane Katrina. We expect some reversion in this index as disrupted supply chains get restored. Despite a likely pullback, we continue to expect an elevated reading for October considering solid expansion in manufacturing activity in recent months. Note that our forecast of 59.0 would still imply healthy expansion. Data on shipments and new orders or core capital goods (excluding defense equipment and aircraft) have been strong, reflecting elevated momentum. Considering the incoming information, we expect better equipment investment in the near term.

FOMC meeting (Wednesday): Overall, we expect no significant changes or surprises in the FOMC statement on 1 November. Despite the recent and continued weakness in inflation, it is unlikely that the FOMC will announce a material change in its inflation outlook. Instead, we think the Committee would prefer to wait for an addition inflation print ahead of the December meeting before changing its inflation assessment. That said, the FOMC might tweak the language on the impact from the recent hurricanes on inflation given the muted impact on non-energy prices in the September CPI report. Elsewhere, in the first paragraph where the Committee discusses the current economic assessment, we expect the statement to acknowledge but look through the decline in nonfarm payrolls caused by the hurricanes and cite the continued downtrend in the unemployment rate. Other than those small tweaks to language, the absence of a press conference next week by the Chair will likely discourage the Committee from making any major shifts in its language. Finally, recent remarks by FOMC participants suggest that they are, for now, inclined to look through the recent weakness. For example, Chair Yellen stated that she thinks soft inflation readings will not persist as labor markets continue to improve. San Francisco Fed President John Williams and New York Fed President William Dudley maintained a relatively hawkish tone that the recent weakness may be transitory. On monetary policy, the FOMC will likely state that the Federal Reserve will continue the balance sheet normalization program.

Vehicle sales (Wednesday): We think total light vehicle sales will come in at a strong pace of 17.5mn saar. On a strong jump in demand for replacement vehicles after hurricanes swept through the Texas and Florida, the sales in September reached a pace of 18.5mn, the highest since July 2005. While fleet sales appear to have been strong, sales at auto dealers increased solidly as well. Although we think that this sharp increase is likely transitory, we expect to see residual demand for replacement vehicles in October. Further, incentive spending appears to have been aggressive in the month as automakers strive to clear out inventories of older models.

Initial jobless claims (Thursday): Initial unemployment claims in the week ending 21 October reached the lowest point since March 1973 as the transitory impact caused by the recent hurricanes subsided. However, power outages in Puerto Rico and the Virgin Islands after Hurricane Maria disrupted the electronic filing process, which would have significantly delayed increases in unemployment claims. Although we continue to expect initial claims to remain low given strong labor market conditions, delayed filling in affected areas could increase uncertainty on upcoming readings.

Productivity (Thursday): Output likely increased strongly in Q3, according to our official forecast of 2.9% q-o-q saar. However, BLS data on aggregate hours in the private sector point to some softness during the quarter, increasing only 0.6% q-o-q after a strong 3.1% increase in Q2. Thus, the preliminary reading of productivity in Q3 from the BLS could show an above-trend increase. Part of the softness in aggregate hours during the quarter was likely attributable to transitory disruptions due to inclement weather. Thus, over the medium term, we still expect productivity growth to be constrained by reduced business dynamism and other structural headwinds.

Employment report (Friday): We forecast a 350k increase in nonfarm payroll employment for the October BLS employment report. This above-trend forecast reflects our expectation of a full reversal from September’s 33k decline. The increase of 350k in October would imply a two-month average of 159k, close to the pre-hurricane six-month average of 153k. Almost all of the weakness in the September report was focused in Florida, likely due to widespread but temporary power outages as opposed to permanent closure of businesses. This implies that a full reversal of September’s decline should be expected. Our nonfarm payroll employment forecast of 350k includes 340k from the private sector and a 10k increase from government. For manufacturing employment, corresponding with healthy regional survey data and manufacturing output as well as some reversal from September’s 1k decline, we expect an increase of 30k. Average hourly earnings (AHE) in September were likely boosted by transitory factors related to Hurricanes Harvey and Irma as aggregate weekly hours fell, likely driven by the recent hurricanes. However, there were upward revisions to back months, putting the y-o-y AHE rate back at the December 2016 level before the recent softness. However, we expect only a 0.1% (0.14%) m-o-m increase in October as wage growth returns to a more trend-like pace. In contrast to the establishment survey, the household survey showed a notable decline in the unemployment rate and an increase in labor force participation. Initial jobless claims have recovered back to pre-hurricane levels and continuing claims have decreased notably. Thus, we expect the unemployment rate in October to remain unchanged at 4.2%. Labor force participation, at its highest rate since March 2014, could remain elevated during the month.

Trade balance (Friday): The advance estimate of the trade deficit for September came in at $64.1bn. Goods exports increased decently by 0.7% m-o-m but were outpaced by goods imports. It appears that much of the adverse impact from the recent hurricanes dissipated. However, much of the increase in exports was driven by firm increases in export prices, suggesting that there still may have been some lingering effect. On the service side, we expect trend-like gains in both service imports and exports. Altogether, we forecast a trade deficit of $42.3bn for September.

ISM non-manufacturing (Friday): We forecast a decline in the ISM non-manufacturing index to 56.0 in October, from 59.8 in September. Much of the gain in the topline index in September was driven by a pick-up in supplier delivery time. The stronger-than-usual increase in the supplier deliveries index in September suggests that disruptions to supply chains created by the recent hurricanes were material. Of the total 4.5pp increase in the topline non-manufacturing index in September, 1.9pp was the result of the jump in the delivery time measure. We think this strong contribution will be transitory and expect some reversion in October as recovery efforts pick up momentum. However, there is some risk that the recovery in supply chains took longer than our expectations. Besides transitory effects from the hurricanes, various regional business surveys suggest domestic demand likely remained solid. We continue to expect healthy momentum in the near term. 

Factory orders (Friday): In an advanced reading, durable goods orders increased strongly in September with strength in the underlying components A strong jump in nondefense aircraft orders contributed much of the upside surprise. Consistent with the strength in early durable goods orders data, factory orders in September will likely indicate sustained momentum in the industrial sector heading into Q4.

Euro area | Data preview

The week ahead Euro area inflation data and the BoE’s policy decision are in focus this week. 

Germany, preliminary October inflation (Mon): We expect the flash reading of German HICP inflation to remain at 1.8% y-o-y in October. Core inflation is also expected to remain at 1.5% y-o-y.

BoE household borrowing (Mon): The BBA report for September pointed to a rise in net mortgage lending during the month, and this could translate into a higher figure published by the BoE (recall it was £4bn in the August BoE report). What is probably more important as a forward-looking indicator of the UK housing market is the number of mortgage approvals, which the BBA data suggest should remain around the previous month’s level in September.

Euro area flash Q3 GDP (Tuesday): We expect the first reading of euro area Q3 GDP growth to be 0.6% q-o-q after 0.7% q-o-q in Q2. While we do not get any underlying expenditure details in this release, we expect investment to have made the largest contribution to GDP growth in Q3. We also expect exports to have pushed up GDP growth as global economic momentum remains strong. If the result is in line with our expectations, the data would be above the ECB’s Q3 GDP forecast (0.5% q-o-q). 

Euro area preliminary October inflation (Tuesday): We expect the flash reading of euro area HICP inflation to increase to 1.6% y-o-y in October from 1.5% y-o-y in September. This is mainly due to the energy component, but the non-energy industrial goods component should also help to push up headline inflation. Indeed, partly for this reason core inflation we also expect it to climb to 1.2% y-o-y from 1.1% y-o-y.

UK PMI surveys (Weds, Thurs, Fri): The headline composite PMI has consolidated around the 54 level over the past five months, which is broadly in line with its long-run average and consistent with between 0.4% and 0.5% q-o-q GDP growth (the former of which was printed for Q3 this week). Global PMI surveys have generally remained upbeat and these should be helpful to the UK PMIs because of the high degree of openness in the economy. Brexit remains the greatest risk to these surveys and growth more generally.

BoE policy decision and Inflation Report (Thurs): Following the BoE’s decision to keep interest rates on hold at its August Inflation Report policy meeting, we shifted our view out to November for the first hike in a decade. Since then, sentiment expressed in the September policy meeting and minutes has convinced financial markets that a move is imminent. While a November move is still not a done deal, it is rare for the market to price in a move in rates that the Bank does not deliver upon. We expect a 25bp rise on 2 November will be the first in a number of tightening moves – we see the Bank raising rates by 25bp every six months thereafter, which while far slower than the historical average tightening cycle is somewhat faster than the market is expecting. As such, what the BoE says in its Inflation Report and press conference about the need for further tightening will be important in influencing market pricing looking further ahead.

Japan | Data preview

The week ahead In the next BOJ outlook report we expect a downward revision to the central bank’s FY17 inflation forecast, but no change to its growth outlook. 

BOJ policy board meeting; Outlook for the Economy and Price (Outlook Report; Monday/Tuesday): We expect the BOJ to leave monetary policy unchanged at the next meeting. We see no clear issue with the economic climate, with evidence of solid corporate business conditions in the BOJ September Tankan survey. Core CPI inflation is likely to be weaker than the BOJ projected, in our opinion, but is on a moderate uptrend and we expect the BOJ to keep its assessment that inflationary momentum is being maintained. Real GDP growth figures for April-June, published after the July Outlook Report, were on the high side, up 2.5% q-o-q, annualized. The FY17 real GDP growth forecast in the Outlook Report was a bullish 1.8% y-o-y, and may have already factored in to some extent the acceleration in growth in April-June. We expect the BOJ’s real GDP forecast to be unchanged. The July Outlook Report projected core CPI inflation of 1.1% y-o-y in FY17, but for this to be attained inflation should have increased to more than 1% y-o-y by now. In August, the inflation rate picked up, but only moderately, to 0.7% y-o-y, thus we believe the BOJ will have little choice but to lower its inflation forecast for FY17, 0.8% y-o-y, from 1.1% y-o-y. We expect forecasts for FY18 and FY19 to be left as they were.

September industrial production (Tuesday): We expect the industrial production (IP) index to fall 2.4% m-o-m in September. The survey of manufacturers' production forecasts calls for output to fall by 1.9% m-o-m in September. Looking at production-related indicators for September, of those that measure business confidence, the Japanese manufacturing PMI output index rose 0.7 points from August to 53.2. The current conditions DI for manufacturers in the Economy Watchers Survey (seasonally adjusted) fell 0.2 points, but at 52.6 remains above the expansion/ contraction threshold of 50. The BOJ’s real export index, which is strongly correlated with the IP index, fell a sharp 5.4% m-o-m, with all types of goods, with the exception of intermediate goods, contributing to the decline. Overall, we see no indication of a deterioration in corporate confidence, but hard data indicate weak production in September.  On this basis, we expect production to fall short of the forecast of manufacturers and exhibit a clear decline versus August. 

September Labour Force Survey (Tuesday): We forecast an unemployment rate of 2.8% for September, flat month-on-month, and a job openings-to-applicants ratio of 1.53x, up 0.01 m-o-m. The job openings-to-applicants ratio, which tends to lead the unemployment rate, was flat month-on-month in August, and we expect unemployment to be flat month-on-month as well. The new job openings-to-applicants ratio, a leading indicator of the job openings-to-applicants ratio, fell by 0.06 m-o-m in August, but the indicators do not strictly correspond to each other every month. The new job openingsto-applicants ratio has remained high since spiking sharply to 2.31x in May, and the sixmonth trailing moving average, which has a strong correlation to the job openings-toapplicants ratio, indicates that the September job openings-to-applicants ratio is on an uptrend. We thus expect the September job openings-to-applicants ratio to rise moderately. 

September Family Income and Expenditure Survey, real household consumption expenditure (all households) (Tuesday): We expect real household consumption expenditure (per household) in September to rise 1.4% y-o-y and 0.1% m-o-m. The September Consumer Confidence Index rose by 0.6 m-o-m, and in the Economy Watchers Survey for September, the household activity-related current conditions DI (seasonally adjusted) rose 1.2 points m-o-m, indicating improved household and corporate sentiment. Looking at sales statistics, September nationwide department store sales rose 0.4% m-o-m (seasonally adjusted by Nomura) on strong sales of clothing and luxury items. September new auto sales volume (passenger car total) fell 0.4% m-o-m (seasonally adjusted by Nomura), but it is possible that bad weather in August made it difficult for consumer behavior based on economic sentiment to be reflected. Auto purchases only account for a small share of household spending and do not have much impact on consumption. We thus think the available data point to solid overall household activity, and we expect household spending to rise from August levels.

Asia | Data preview

China: We expect a fall in China’s official PMI. High-frequency data (coal consumption and steel prices) point to a moderation of economic activity in October, despite our proprietary China composite leading index and heat-map suggesting an improvement. Overall, we expect the official manufacturing PMI in October to fall from its 65-month high in September.