A busy week ahead for the dollar: what will nonfarm payrolls have to offer? - Nomura

Analysts at Nomura published an insightful look at the busy week ahead in the US expecting a strong May employment report with healthy nonfarm employment growth, a tick-down in the unemployment rate and steady gains in average hourly earnings. 

Key Quotes:

Personal income and spending (Tuesday): Income growth remained steady in Q1, averaging a 0.3% m-o-m increase per month. April employment data suggest there may have been a slightly stronger increase in the month. The aggregate hours of private nonfarm workers in production and nonsupervisory positions increased notably by 0.7% m-o-m as both employment and average weekly earnings of these workers increased strongly from March. Thus, we expect a 0.5% increase in personal income. Personal consumption expenditure growth in Q1 was sluggish, but April retail sales data indicate a decent pick-up in personal spending. Durable goods spending likely increased recently, as sales at motor vehicle and parts dealers rebounded after three consecutive months of declines. Sales at electronics and appliance stores also increased steadily. Moreover, we expect a modest increase in spending on nondurable goods, as sales at gasoline stations and health care stores increased moderately despite slowing sales at clothing and other general merchandise stores. Last, we think the improvement in service spending likely remained steady. The ISM nonmanufacturing survey showed resilience in April, with the headline index rebounding by 2.3pp to 57.5, suggesting healthy activity in the sector. Also, a decent gain in utilities output in the month implies that spending on utility services likely contributed positively to the overall service spending April. In addition, sales at dining and drinking places increased modestly, implying a steady increase in expenditures on food services. Altogether, we expect a 0.4% m-o-m increase in personal spending.

PCE deflator (Tuesday): Core PCE price index declined by 0.1% (0.138%) m-o-m in March, marking the first fall since December 2008. At the FOMC meeting in early May, most participants saw the weakness in March as primarily reflecting transitory factors such as wireless telephone services. However, given incoming information since the meeting, core PCE inflation is unlikely to rebound strongly in April. The relevant components of PPI data appear to have made slightly more of a contribution to core PCE inflation in April than in the previous month. In PPI data, healthcare related prices continued to increase moderately. Yet, airline fares rose and some financial service prices, such as portfolio management services, showed strong increases in April. However, a 0.2% m-o-m decline in core goods prices of CPI points to another decline in goods prices of core PCE price index, as most of CPI core goods prices are used to estimate the corresponding components within the core PCE price index. Overall, we forecast only a moderate 0.08% m-o-m increase in core PCE price index in April. If realized, it would lower its year-on-year rate of change further to 1.5% (1.471%) from 1.6% (1.563%) in the previous month. In the past few years, due to residual seasonality, core PCE inflation has tended to trend higher in the first half of the year followed by some deceleration in the latter half. So far this year, we have not observed such a phenomenon. To some degree, the BEA’s efforts may have eliminated residual seasonality in core PCE inflation. However, incoming information on inflation poses some downside risks to our medium-term outlook for core PCE inflation. Including energy and food prices, our forecast for headline PCE inflation is 0.13% m-o-m (1.650% y-o-y).

Case-Shiller home price index (Tuesday): The Case-Shiller 20-city home price index was up 5.85% y-o-y in March, a slight acceleration from 5.66% pace in February. The increase in March was stronger than the average pace in 2016. Price increases in recent months may have been driven in part by a lean supply of available housing units and firm consumer demand buttressed by improving labor market conditions. The supply of previously-owned single family homes remained subdued, with the number of available units for sale down 8.6% y-o-y in April. However, continued improvement in income may alleviate the adverse impact of rising prices on home affordability to a certain degree. Further, rising prices may possibly encourage more single family homes to enter the market, potentially offsetting some of the upward price pressure. Moreover, mortgage rates, which rose sharply after the election, have stabilized somewhat, which could be positive for home affordability.

Conference Board’s Consumer Confidence (Tuesday): The Conference Board’s index fell to 120.3 in April from a high reading of 124.9 in March. With the deep partisan divide persisting in consumer sentiment, the recent stepdown in this index may have reflected partly ongoing policy uncertainty. Note that 120.3 is still a historically high reading with the March print, marking the highest since March 2000. This resilience suggests recent policy setbacks did not affect sentiment substantially. In line with this view, the University of Michigan consumer sentiment index continued to improve in recent months. In early May, it increased further by 0.7pp to 97.7. Moreover, continued improvement in labor market conditions, with above-trend growth in employment and a continued downtrend in the unemployment rate, has been supportive for alreadyelevated consumer sentiment. A recent development that may have had an adverse impact is the Trump administration and Russia turmoil, which has been dominating media attention since early May. Although it is difficult to gauge how much influence this development may have on consumer sentiment, it will likely have a lasting influence in coming months as various investigations unfold slowly. All in all, we expect this index to have increased slightly to 121.0 in May.

Chicago PMI (Wednesday): Continued improvement in this index in April suggests firming momentum in manufacturing activity in the Greater Chicago area. Chicago PMI increased further to 58.3 in April, up 0.6pp from 57.7 in March. Contrary to this index, some regional manufacturing surveys sent mixed signals in May. The Empire State survey reported a deterioration in sentiment, with its headline index falling sharply to -1.0 from 5.2. On the other hand, the Philly Fed survey indicated continued improvement in sentiment, rising to 38.8 from 22.0. Altogether, we expect the Chicago PMI to increase marginally to 60.0 in May. 

Pending home sales (Wednesday): Pending home sales slowed slightly in March, falling 0.8% m-o-m. It is possible that some of the weakness was due to an adverse impact from weather. Note that the weather in March was closer to normal after two previous months of unusually warm winter, which may have brought forward some sales contract signings. For this reason, we think that the decline in March was likely transitory. Consumer fundamentals have remained supportive for the housing demand. Although rising home prices could worsen home affordability, income growth has remained steady to offset the adverse impact from home prices to some degree. Reflecting this recent trend, consensus expects an increase of 1.0% m-o-m for April.

Beige Book (Wednesday): Prepared for policy discussions at the 13-14 June FOMC meeting, the Fed Beige Book will provide us with anecdotal evidence from each of the 12 district’s local business leaders and market experts. The most recent Beige Book, from before the 2-3 May FOMC meeting, indicated modest to moderate growth in economic activity. Additionally, mentions of increased difficulty in finding workers for low-skill positions caught attention. As the unemployment rate has continued to fall since the last Beige Book, some attention will be given to whether anecdotal evidence of tighter labor markets would increase. While average hourly earnings growth in the monthly establishment employment survey has slowed somewhat in recent months, local business leaders mentioned broadened wage gains in the April Beige Book. The discrepancy between wage growth from the BLS and what market experts have seen on the ground have engendered some discussion of measurement issues in the establishment survey. Moreover, with two consecutive months of sub-expectation core CPI growth, any mention of the breadth in price increases may be notable. 

ADP employment report (Thursday): In line with our forecast for BLS private payrolls, we expect ADP private employment to have gained an additional 190k jobs in May.

Initial jobless claims (Thursday): Initial unemployment claims have been within a low range for a while. For the week ending 20 May, the four-week moving average of initial jobless claims fell to 235k, the lowest level since April 1973. Adjusting for the relative size of the labor force today, the four-week moving average of initial claims as a share of payroll employment is at its lowest level observed. As the labor market tightens further, we expect initial claims to stay low.

Construction spending (Thursday): In Q1, construction expenditures contributed solidly to real GDP growth, partially boosted by unusually warm weather in January and February. The latest report indicates that total construction spending declined slightly by 0.2% m-o-m in March as warmer weather returns to normal, but the contribution to GDP growth was still substantial. Moreover, notable upward revisions to January and February construction outlays appear consistent with strong increases in private structures and residential investment in Q1. In April, consensus expects a decent 0.5% increase in total construction outlays. Firm consumer demand for housing and a low inventory of existing homes on the market may support residential construction in coming months. However, a recent tightening in lending standards of commercial real estate loans, as indicated by the latest Senior Loan Officer Survey by the Fed, may slow nonresidential construction outlays to some degree.

Productivity Q1, final (Thursday): A preliminary report for Q1 indicated that nonfarm productivity decreased by an annualized 0.6% q-o-q, a notable slowdown from a 1.8% increase in Q4 2016. Real output growth was slow in Q1 (1.0% q-o-q) relative to Q2 (2.7%), consistent with weak Q1 real GDP growth. On the other hand, hours of nonfarm private employees increased steadily, in line with continued improvement in the aggregate work hours of the total private sector as reported in recent employment reports. Incoming data on growth in spending during Q1 have been somewhat mixed although labor markets improved solidly. This suggests that a strong upward revision to nonfarm productivity is unlikely in the final estimate for Q1. 

Unit labor costs Q1, final (Thursday): In a preliminary estimate by the BLS, unit labor costs increased strongly by an annualized rate of 3.0% q-o-q in Q1, accelerating from a 1.3% increase in Q4. Compensation per hour increased steadily, but real output growth slowed in Q1, pushing unit labor costs higher. However, as a strong rebound is expected in Q2 real GDP growth, it may be possible to see a pullback in unit labor costs as the output growth accelerates sharply. For Q1, consensus expects the final print of unit labor costs to be unrevised from the preliminary estimate.

ISM manufacturing (Thursday): The latest ISM report suggests some moderation in manufacturers’ optimism. The ISM manufacturing index declined to 54.8 in April after slipping to 57.2 in March, driven by a notable decline in the new orders index. The production index, however, improved modestly by 1pp to 58.6, suggesting manufacturing activity continued to strengthen. On balance, demands from abroad remained healthy in May. Markit Eurozone Manufacturing PMI continued to increase while the China PMI moderated somewhat but remained high. Domestic regional surveys, however, sent mixed signals. The Empire State survey headline index declined notably to contractionary territory, but the Philly Fed survey indicated resilient improvement in activity. Complicating matters, it is possible that continued uncertainty regarding proposed health care and tax reforms may have affected manufacturers’ sentiment to some degree. Altogether, we expect the headline ISM index to decline slightly to 54.6 in May. 

Vehicle sales (Thursday): In April, total light vehicle sales rebounded to an annual rate of 16.81mn units after posting the weakest sales since February 2015 in the prior month. Despite a moderate rebound, the sales in April were still short of the 2016 average pace of 17.46mn. In May, we expect only a slight acceleration to 16.90mn units. Sales boosted by aggressive incentives peaked in December at 18.32mn units. With an already-high level of incentive spending, automakers have been struggling to maintain the current pace of sales since earlier this year. Moreover, as sales have slowed, the inventory to sales ratio picked up sharply in recent months and exerted additional pressure on automakers. On the demand side, despite gradually rising personal income, tightening auto loan standards are likely to have a lasting adverse impact on consumer demand. In recent years, auto sales have been partially boosted by an increased access to easy credit with lax lending standards as competition among auto lenders intensified. A recent trend of tightening, initiated in part by rising delinquency rates, may continue to dampen consumer demand. 

Trade balance (Friday): In an advance report by the Census Bureau, goods trade data were weaker than expected in April with the trade deficit widening further to $67.6bn. Although global demand appears to have been healthy, goods exports declined 0.9%. On the other hand, goods import increased steadily, widening the deficit from the prior month. As for services, we expect exports to post a modest decline after a strong increase in the previous month. We think service imports may have rebounded after declining in two previous months. Altogether, we believe the trade deficit widened to $46.8bn in April.

Employment report (Friday): We expect nonfarm payrolls to have increased by 195k in May and private payrolls to have increased by 190k, implying a 5k gain in government jobs. Labor market indicators in various surveys remained elevated in May after falling modestly in April. The number of employees index in the Empire State survey declined slightly by 2.0pp to 11.9 and an equivalent indicator in the Philly Fed survey slipped 2.6pp to 17.3. Although these readings are still very high, slight decreases suggest nonfarm payroll employment may not increase as strongly as it did in April (211k). Additionally, initial and continuing unemployment insurance claims continued to trend lower in May, suggesting involuntary separations remain low. Moreover, considering the continued recovery in manufacturing activity, we forecast an increase of 10k in manufacturing sector employment. Hard data on this sector, such as core manufacturing output in the industrial production report and core capital goods shipments, have remained elevated in recent months. Coupled with elevated business sentiment, manufacturing sector is likely to see a decent gain in hiring. With a steady pace of job creation in recent months and a steady drop in continuing unemployment insurance, we expect the unemployment rate to have inched down to 4.3% in May. Household employment increased healthily by 156k in April while reverting to trend after two outsized gains in March and February. Increasing household employment may have exerted downward pressure on the unemployment rate. However, our forecast has a slight downside risk from the possibility that favorable labor market conditions over the past few months may have motivate discouraged workers to re-enter the labor force in search of employment, pushing up unemployment rate. Moreover, we expect a steady 0.2% m-o-m (2.51% y-o-y) increase in average hourly earnings in May, a slight slowdown from April’s 0.3% m-o-m (2.55% y-o-y) increase. Although labor market slack has been diminishing quickly, average hourly earnings growth has not accelerated materially. A definitive explanation for the lack of acceleration remains elusive. Potential explanations could be a recent decrease in employer-to employer transitions and industry composition changes."