Key events or the week ahead: eyes on nonfarm payrolls - Nomura
Key events for the week ahead from around the world, previewed by analysts at Nomura...
Key Quotes:
"US:
We expect another solid gain in nonfarm payroll employment in July, but only moderate core PCE inflation in June.
Chicago PMI (Monday): Manufacturers' sentiment held up in recent months despite the declining likelihood of a significant fiscal stimulus. The Chicago PMI soared to 65.7 in June, a fifth consecutive increase, and reached its highest level since May 2014. The ISM manufacturing index also improved, highlighting resilient optimism. The high reading in June, however, appears unsustainable. Manufacturing sector activity improved steadily, but without a sign of notable acceleration. Regional Fed survey data suggest some moderation in July. Thus, our forecast for the July Chicago PMI is 60.0.
Pending home sales (Monday): Pending home sales fell 0.8% m-o-m in May. Despite solid buyer interest, ongoing supply shortages have been weighing down sales as prices continue to rise. In particular, price increases have been acute in low-tier home. CaseShiller home price data indicate that home value appreciation in the low tier significantly outpaced the pace in high and middle tiers in recent months, suggesting that demand for low-tier homes has been stronger. Despite high demand, the lack of low-tier listings in the affordable price range has been squeezing out first-time buyers who are more likely to be interested in low-tier homes, the National Association of Realtors data on pending home sales indicate. The closing price gap between low-tier and higher-tier dwellings can contribute to sales in the long run as it can lead to larger capital gains on starter homes and encourage current homeowners to trade up to higher-tier homes. However, this trend suggests much of the demand could be driven by investors and those who upgrade to higher tiers. Acceleration in appreciation of low-tier home prices could make it more difficult for would-be homeowners to enter the market.
Personal income and spending (Tuesday): Robust job creation and steady gains in earnings suggest healthy growth in personal income. The BLS June employment report indicates a steady increase in aggregate earnings of production and nonsupervisory staff. Based on these data, we forecast a 0.4% m-o-m increase in personal income. Incoming data suggest subdued growth in personal spending in June. Our forecast is for a 0.2% m-o-m increase, a slight improvement from the 0.1% in May. Retail sales in June were soft with a 0.1% m-o-m decline in core (“control”) retail sales. Many nondurable good sales showed weakness, suggesting that personal spending on nondurables was likely weak in June. In particular, sales at food and beverage stores and health and personal care stores declined moderately.
The pace of consumer light-vehicle sales has remained subdued in recent months. Personal spending on autos, thus, was likely soft in June. We expect a steady increase in spending on services considering steady activity in the service sector. Sales at dining and drinking places declined, but utilities output increased modestly in the month, suggesting more spending on utility services.
PCE deflator (Tuesday): Based on relevant components of the June CPI and PPI reports, we forecast a 0.1% (0.098%) m-o-m increase in the core PCE price index in June, which would leave its year-over-year rate unchanged at 1.4% on a rounded basis (1.41%). We believe that the recent softening of core inflation has the potential to affect the future path of the policy rate more than the Fed’s balance-sheet policy. We continue to expect the Fed to announce a change to its reinvestment policy at the September FOMC meeting. Along with the argument that the balance-sheet reduction could be a substitute for a rate hike, the recent decline in core inflation might lower the possibility of the next rate hike coming in September. Further, the FOMC statement after its July meeting contained sharpened characterization of the recent decline in inflation. It said that overall and core inflation measures “have declined and are running below 2 percent.” In contrast, the previous statement said that inflation was running “somewhat below 2 percent.” This slight change sounds more definitive and appears in line with our view that the likelihood of a September hike remains low. Against this backdrop, we continue to expect the FOMC to raise short-term interest rates next at its meeting in December.
For headline PCE inflation, we expect a 0.02% m-o-m increase or no change after rounding. If realized, the year-over-year rate would slow to 1.3% from 1.4% in May. Our forecast is driven by expected weak food and energy PCE inflation. Food-at-home prices in the June CPI report fell 0.1%, portending weak PCE inflation of food prices. We expect the PCE inflation of energy prices to remain soft, considering weak CPI energy prices that fell again in June. Lastly, as a part of annual revisions to the National Income and Product Accounts, PCE deflators for the past three years will be subject to revisions. With an introduction of new seasonal factors and changes to the status of some subcomponents, the month-on-month change rates of headline and core PCE price indices could be different from our forecasts.
ISM manufacturing (Tuesday): We forecast a 56.5 print for the July ISM manufacturing index, implying a slight decline from 57.8 in June. We expect manufacturers’ sentiment to stay elevated, although a slight moderation is possible. Manufacturers’ sentiment has remained solid throughout H1. Some regional surveys reported notable declines in their headline indexes in July, but these remained at high levels. Further, incoming data on orders and shipments suggest steady growth in manufacturing activity. Core capital goods shipment and orders increased at a healthy pace in Q2, suggesting continued momentum in the months ahead. For this reason, we believe optimism among manufacturers remained resilient in July
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 170k in private payrolls for June.
ISM non-manufacturing (Thursday): In June, the ISM nonmanufacturing index increased to 57.4, up 0.5 points from May. The report showed broad-based strength within subindices. In particular, the new orders index increased by 2.8pp to 60.5, indicating continued momentum in upcoming months. Although the employment index decreased moderately to 55.8, it remains well within expansionary territory and above the six-month average of 54.4. The retail sector continues to experience transformation within the industry. As it gradually shifts away from brick and mortar stores to online stores, employment in June increased for the first time in five months. However, its overall business sentiment appears to have remained optimistic in recent months. Moreover, activity in the mining and drilling support sector picked up strongly as gas and oil output continues to rise. Considering the rising number of active gas and oil rigs, we expect this sector to maintain its optimistic outlook. A soft patch, however, could be in the healthcare and social assistance industry, with high uncertainty over healthcare reforms potentially continuing to affect sentiment. Altogether, we expect the ISM nonmanufacturing index to decline slightly to 56.5 in July from 57.4 in June.
Employment report (Friday): We expect an increase of 175k in nonfarm payrolls with 170k from the private sector and 5k from government. Additionally, we expect manufacturing employment to increase by 5k. Payroll growth has averaged a healthy 180k per month during H1 2017, just slightly below the 2016 average of 187k. Incoming data suggest this trend will continue in July. Employment indicators from regional business surveys remain well within expansionary territory, although slightly lower than in June. Additionally, the labor market differential index in the Conference Board’s consumer confidence survey has improved over the past four months, while initial jobless claims remain subdued. Continuing claims have ticked up recently, but remain low by historical standards. Payrolls surprised to the upside last month, driven by a sharp 22k increase in local government employment excluding educational services. We do not expect a similar surprise for July.
We expect the unrounded unemployment rate to fall to 4.3%. Last month, the unemployment rate bounced back to 4.4% from 4.3%. We would highlight that on an unrounded basis, last month’s reading was 4.36%, just barely pushing into 4.4% territory. Thus, it would not take much to drive it back down to 4.3% as strong household employment gains continue. Headline unemployment is low by historical standards, but due to changes in the labor force composition there is still some room for further declines."
EU:
Euro area inflation, GDP and the BoE MPC meeting are in focus this week. Euro area preliminary July inflation (Monday): We expect the flash reading of euro area HICP inflation to be unchanged at 1.3% y-o-y in July from the reading for June. Core inflation is also expected to remain unchanged at 1.1% y-o-y in July. Although the unwinding of seasonal distortions from package holiday prices in Germany will likely have depressed price pressures, other service sector items in the broader eurozone region are likely to have pushed the other way.
Euro area flash Q2 GDP (Tuesday): We expect the first reading of euro area Q2 GDP growth to come in at 0.7% q-o-q after 0.6% q-o-q in Q1. 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 Q2. That is supported by the strong pace of industrial production through the quarter. We also expect domestic consumption to have maintained its recent positive contribution to growth.
UK PMI surveys (Tues, Weds, Thurs): The composite PMI slowed in June to 53.8, though this remained close to its long-run average of 54.2. We see a modest rise in the composite PMI in July to 54. This will be an important set of data for the MPC – on more than one occasion in the past has the PMI had a crucial marginal impact on the Bank’s monetary policy decisions.
BoE policy decision (Thursday): The Bank of England announces its monetary policy decision on Thursday at midday, publishing its quarterly Inflation Report at the same time. The press conference is from 12.30 to 13.30. We expect the Bank to raise interest rates by 25bp to 0.50%, but this is a highly non-consensus call. We ascribe a probability of 60% to such an event (which is quite low for a central view), leaving a relatively high 40% chance of no change.
German factory orders (Friday): We expect German factory orders to increase 2.3% m-o-m in June following a 1.0% m-o-m increase in December. We expect German factory orders to show strong manufacturing sector activity as the details of the manufacturing PMI indicate some acceleration in the new orders and export orders components.
Japan:
"We expect to see confirmation of a bounce in the production index in June and solid manufacturing activity in April-June.
June industrial production (Monday): We expect the June industrial production index to climb 1.6% m-o-m. Based on this forecast, production rose 1.9% q-o-q in April-June, which would indicate solid activity in the manufacturing sector. The survey of manufacturers' production forecasts indicates plans for production to increase by 2.8% m-o-m in June. Actual production tends to be lower than planned, and adjusting the production plan using realization rates over the past three months gives an increase of 1.8%.
In related statistics for June, negative items tend to stick out. Among indicators of corporate sentiment, the current conditions DI for manufacturers in the Economy Watchers Survey (seasonally adjusted) improved 1.1 point month-on-month, but the Japanese manufacturing PMI output index fell 1.8 points from May to 52.2, although remains above the growth/contraction threshold of 50. Japan's real exports, which have a strong correlation with industrial production, were down 0.4% m-o-m, indicating weakening external demand (seasonally adjusted by Nomura). In light of the above, we forecast an increase in production in June that is slightly lower than the production plan figure adjusted for the realisation ratio.
Asia:
China: We expect the official PMI to edge down to 51.3 in July after a strong June print, as the drag from the cooling property sector becomes more obvious in the months ahead.
Australia: We expect no change to the cash rate in August, or indeed the rest of the year. We expect comments in the post-meeting press release to be mixed, although concern over AUD strength may be dialled up."