Key events ahead for the week - Nomura

Analysts at Nomura offered their outlook for this week's key events.

Key Quotes:

"United States | Data preview

The week ahead During a quiet week, we expect continued elevation of consumer sentiment and subdued labor market turnover.

Senior loan officer survey (Monday): The Federal Reserve’s senior loan officer survey, which tracks lending practices by major banks, reported that lending standards on commercial real estate (CRE) loans tightened while demand weakened on net in Q2. Investment in business structures in Q3 was subdued while major hurricanes disrupted construction activity to some degree. It appears unlikely that lending conditions on CRE loans loosened materially in Q3. On the household side, respondents reported that lending standards on all categories of residential real estate loans eased Q2, which may have been supportive for consumer demand housing in recent quarters. Lending standards on new and used auto loans tightened and demand for these loans fell. Some of the slowdown in the pace of light vehicle sales this year relative to 2016 can be attributed to tighter lending standards for these loans, though consumer demand for autos still appears steady. Considering the continued gradual increase in auto loan delinquency rates in recent quarters, lending standards on auto loans likely remained tight in Q3.

JOLTS (Tuesday): Job openings remained elevated in August at 6082k. September’s report will come with some uncertainty given the hurricane impact on the month’s nonfarm payroll numbers. Establishments in Florida make up 5% of the national JOLTS sample (which is not designed to study state-level patterns). However, the weather will likely have a varying effect on different subcomponents. The reference periods for job openings, hires and separations should limit the weather impact. However, for total employment, the reference period is the pay period containing the 12th of the month. Thus, there could be some effect on the denominator for the different rates. Overall, however, we expect any weather effect in the September report to be transitory and job postings to remain strong in a tight labor market. Labor market turnover, the sum of hires and separations divided by two times the employment level, remained subdued in August. We expect this trend to continue over the medium term.

Consumer credit (Tuesday): Consumer credit has been expending at a steady pace despite a slight slowdown this summer. With continued improvement in the labor market and steady income gains, we expect consumer fundamentals to have remained favorable. Although the hurricane season increased fluctuation in data, personal spending increased solidly in Q3, adding to economic growth. Against this backdrop, we expect another increase in consumer credit in September.

Initial jobless claims (Thursday): Initial unemployment insurance claims appear to have mostly stabilized after the recent hurricanes caused transitory increases. Incoming readings of both initial and continuing claims have posted declines. This development appears consistent with a labor market improving resiliently despite hurricane-related disruptions.

Wholesale inventories (Thursday): Wholesale inventories growth has been strong in Q3 despite the recent hurricanes, which tend to weigh down inventories. According to the advance estimate by the BEA, business inventory accumulation added solidly to real GDP growth in Q3. Further, an advance estimate by the Census Bureau showed a steady 0.3% m-o-m growth in wholesale inventories in September. In the September wholesale inventories report, we do not expect any significant revisions.

University of Michigan consumer sentiment (Friday): Consumer sentiment measured by the University of Michigan improved further in October. The consumer sentiment index reached 100.7 from 95.1 in September, as more consumers provided an optimistic assessment of current economic conditions relative to September. We expect consumer sentiment to stay elevated as the job market remains favorable and healthy income growth continues. The median of 5-10yr inflation expectations was steady at 2.5% (revised up from the preliminary estimate of 2.4%).

US budget (Friday): The October budget statement from the Treasury will mark the beginning of fiscal year (FY) 2018. During FY 2017, the budget deficit increased to $666bn from $586bn during the previous fiscal year. In June 2017 the CBO estimated a somewhat smaller deficit in FY 2018 ($563bn) owing to a modest increase in individual income tax payments. Historically, outlays outpace receipts in October. Thus, a budget deficit during the first month of FY 2018 would not be unexpected.

Euro area | Data preview

The week ahead German factory orders and UK industrial production are in focus this week. 

German factory orders (Mon): We expect German factory orders to increase 0.4% m-o-m in September, following a 3.6% m-o-m rise in August. We expect German manufacturing activity to remain strong in the period ahead supported by a solid global economy. 

German industrial production (Tues): We expect German industrial production to fall 0.8% m-o-m in September, following a 2.6% increase in August. However, we expect a decline in September production to reflect payback from a strong previous number. An outcome in line with our expectations would bring the average IP level for Q3 about 1.1% above the average for Q2, indicating a positive contribution from the industrial sector to Q3 GDP. 

UK BRC retail sales (Tues): From a low point around the middle of the year the trend rate of BRC annual retail sales value growth has picked up, the latest 1.9% y-o-y reading (like-for-like) being the strongest non-seasonal reading for some time. These are value numbers, which of course may be influenced on the upside by higher prices. We expect retail sales volumes to suffer in the near term as inflation moves towards its peak, but to improve as we move through 2018 and inflation edges lower. 

UK industrial production (Thurs): We already know (via the Q3 preliminary GDP report) how the industrial and manufacturing sectors performed during the quarter as a whole. As a result, forecasting production growth in September typically involves working out what monthly rate of growth is consistent with that quarterly outturn. Of course, there may well be revisions to the back-data, but assuming not the quarterly numbers imply a further modest increase in output in September. That would be consistent with the continued strength of the PMI surveys. 

UK trade (Thurs): A sharp rise in the oil and erratic deficits during recent months added over £2bn to the monthly trade deficit between May and August – around half of the total increase in the headline deficit. Together with a partial unwind of the 5% monthly rise in underlying import volumes in August, this could see an improvement in the total goods deficit in September (we forecast a narrowing of around £1bn).

Japan | Data preview

The week ahead We forecast 0.3% m-o-m core machinery orders growth in September, for a third consecutive monthly rise and the first quarterly growth in three quarters.

September core machinery orders (private sector, excluding orders for ships and from electric power companies) (Thursday): We expect September core machinery orders (private sector, excluding orders for ships and from electric power companies) to rise 0.3% m-o-m. If core machinery orders rise as we forecast, growth for JulySeptember will be 7.8% q-o-q, the first increase in three quarters and exceeding the orders forecast of machinery producers in late June. Related data for September offer mixed results. Within industrial production, the production of items with short lead times from order to production was down 4.4% m-o-m, but machine tool orders for customers in Japan (Japan Machine Tool Builders' Association data), a coincident indicator of machinery orders, were up sharply, by 10.3% m-o-m (seasonally adjusted by Nomura). The September BOJ Tankan (companies of all sizes, all industries) showed FY17 capex plans, including software (excluding investment in land), up 8.1% y-o-y, which is high historically, indicating a strong appetite for capex. That said, we expect orders to be essentially flat month-on-month as August core machinery orders were boosted by largescale projects. Along with machinery orders for September, machinery manufacturer order forecasts for Q4 will be released. The survey of production forecasts in the industrial production statistics indicates another possible step-up in production before year-end. We are interested to see if the machinery producer forecast indicates the same. 

October Economy Watchers Survey - current conditions DI (Thursday): We expect economic sentiment as measured by the Economy Watchers Survey to improve. Looking at the economic indicators that are highly correlated with economic sentiment in the Economy Watchers Survey, again we see mixed messages. The October manufacturing PMI fell month-on-month, the sales DI in the Japan Finance Corp Monthly Survey on SME Trends was little changed, while the survey of manufacturers' production forecasts called for a sharp increase in production in October, of 4.7% m-o-m. While it is difficult to forecast the direction of economic sentiment based on these indicators, we expect an improvement given in part the sharp rally in equities. The increase in crude oil prices could hurt economic sentiment by boosting costs, but our focus is more on the effects of higher equity prices, which reflect improvements in the global economy.

Asia | Data preview

The week ahead We expect GDP growth to pick up in Indonesia but moderate in Hong Kong, China’s FX reserves to rise and the central banks meeting this week to keep policy rates unchanged. 

China: We forecast CPI inflation to remain benign in October as the rise in non-food prices will likely be offset by falling food prices. We expect PPI inflation to resume its moderation as implied by a sharp decline in the price sub-index of the official PMI. We expect export and import growth to both moderate in October, as external and domestic demand likely weakened, but the trade account surplus likely widened. Headline FX reserves should rise only by USD0.1bn to USD3.1087trn in October. After adjusting for FX and coupon effects, we estimate a rise of USD10.0bn, from an increase of USD22.3bn in September."