Key events for the week ahead - Nomura

Analysts at Nomura noted the key events for the week ahead.

Key Quotes:

United States | data preview

The week ahead We expect a 210k increase in February’s nonfarm payroll employment and a 0.2% m-om increase in average hourly earnings (AHE).

ISM non-manufacturing index (Monday): We expect elevated business sentiment to continue in February and forecast a reading of 58.0 for February’s ISM nonmanufacturing index, down 1.9pp from 59.9 in January. The January issue of this survey displayed broad-based strength. The new orders and business activity indices both rose solidly, pointing to continued momentum in the near term. Other incoming business surveys also point to continued expansion in business activity. In addition, employment-related indicators remain strong across incoming business surveys, which appear consistent with a strong labor market.

Factory orders (Tuesday): The advance durable goods orders report from the Census Bureau indicated that new durable goods orders fell 3.7% m-o-m in January, driven by highly volatile transportation equipment orders. Excluding transportation equipment orders, which tend to be volatile, durable goods orders fell 0.3%, below our and market expectations. However, we think this decline was likely a transitory pause following the strong surge in H2 2017. We remain optimistic about business investment during 2018 as the tax law, with immediate expensing and a lower statutory corporate tax rate, takes effect. That said, we think much of the positive effect will be seen in Q2 or Q3 as it takes time for businesses to adjust to changes in the tax code. On inventories, the factory orders report suggests steady increases in inventories held at factories. We expect a solid contribution to real GDP growth from inventory buildup in Q1.

ADP private employment (Wednesday): Reflecting our forecast for private payrolls in the BLS employment report on Friday, we expect ADP to report an increase of 205k in private payrolls for February.

Nonfarm productivity (Wednesday): We think there is a significant likelihood of downward revisions to Q3 and Q4 nonfarm labor productivity in the final BLS report. According to the preliminary report, Q4 labor productivity fell 0.1% q-o-q saar while the Q3 estimate was lowered to 2.7%, from 3.0%. Since the release of the BLS’ advance productivity estimates, the annual revision to the BLS’ establishment survey raised the pace of growth in aggregate weekly hours notably for Q3 and Q4. However, the BEA’s second report of Q4 real GDP did not materially change the real gross product of nonfarm businesses. Given these developments, the BLS’ measure of hours worked in 

the nonfarm business sector could be revised up notably, while output measures could remain mostly unchanged. The net effect will likely lower already weak Q4 productivity as well as Q3. In addition, the annual revision to the BLS’ establishment survey also raised average hourly earnings data notably for the end of 2017. Considering these revisions, we think it is likely for Q4 unit labor costs to be revised up as well. The preliminary estimate came in at 2.0% q-o-q saar.

Trade balance (Wednesday): Based on the advance goods trade balance report, we expect January’s trade balance to come in at a $54.1bn deficit, after posting a $53.1bn deficit in December. Goods exports fell notably by 2.2% m-o-m, while goods imports fell 0.5%. This widened the goods trade gap in January. On services, we expect steady increases for both imports and exports. 

Fed Beige Book (Wednesday): The Beige Book prepared for the upcoming 20-21 March FOMC meeting will likely reflect solid improvement in the labor market since the last meeting and continued momentum in the economy. Reflecting positive data, the Beige Book will likely maintain that economic growth continued at a “modest to moderate” pace. Moreover, we expect the Beige Book to indicate healthy labor market conditions in most districts, which would be consistent with incoming labor market indicators. In addition, January core CPI rose by 0.3% m-o-m with broad-based strength, which increases the likelihood of a pickup in the underlying inflation trend. Against this backdrop, changes in language on regional inflation trends, if any, would be telling. Further, we believe any further color on the impact of the tax bill would be telling. In the previous issue of the Beige Book, many business contacts expressed confidence that the tax bill would provide a boost to growth in 2018, but few reported that the bill would encourage investment on their part.

Consumer credit (Wednesday): The strong labor market and household financial gains have been supportive of continued expansion in consumer credit. In December, consumer credit expanded steadily by $18.4bn. Considering solid consumer fundamentals, we expect another steady gain in January.

Initial jobless claims (Thursday): Incoming initial claims data continued to trend lower. Initial claims for the week ending 24 February fell 10k to 210k, the lowest since December 1969. The increased volatility in claims data earlier this year around the holidays appears to have subsided. We expect initial and continuing claims to remain low, consistent with the strong labor market. Continued tightness in the labor market should encourage firms to hold on to workers, adding downward pressure on these data.

Employment report (Friday): We expect a strong, 210k increase in nonfarm payroll employment in February, with 205k from the private sector and 5k from government payrolls. Relevant employment indicators remained elevated during the month as initial jobless claims stayed near historical lows and business survey employment indices remained firmly within expansionary territory. Underlining the favorable state of the US labor market, the Conference Board’s labor market differential – the difference between those reporting jobs “plentiful” versus “hard to get” – increased 3.8pp to 24.7 in February, the highest reading since 2001. More important, given the market reaction to January’s wage data, we expect a 0.2% (0.19%) m-o-m increase in February’s average hourly earnings (AHE). January’s AHE reading was partly boosted by relatively weak aggregate hours data, likely weatherrelated and was primarily focused among supervisory workers. Our forecast of 0.2% mo-m corresponds to a 2.8% y-o-y increase, a slight dip from the 2.9% reading in January. Finally, we expect the unemployment rate to decline 0.1pp to 4.0% in February, consistent with our expectation that job growth will continue to outpace the number of new labor force entrants.

Wholesale inventories (Friday): In the advance estimate by the Census Bureau, wholesale inventories rose strongly by 0.7% m-o-m with upward revisions to prior months. The increase in oil prices in January likely boosted the nominal value of wholesale inventories. The 1.3% increase in nondurable wholesale inventories may have reflected this oil price increase, in our view. We expect buildup in inventories to contribute solidly to Q1 real GDP growth.

Euro area | data preview

The week ahead ECB Meeting and UK PMIs data are in focus.

UK PMI services, Feb (Mon 5 Mar): The services index fell to its lowest in over a year in January. However, with some of the detail stronger than the headline index (namely rises in the employment, new business, outstanding business and business expectations indices) we would not be surprised to see a small rebound in the February report.

UK BRC retail sales, Feb (Tues 6 Mar): In nominal terms, BRC retail sales growth has settled around the 0.7-0.8% y-o-y mark in recent months while, in real terms, growth has been around 1% (reflecting ongoing modest deflation in High Street prices). As the year progresses, we might see a pick-up in sales thanks to the fading effect of sterling’s past fall on inflation and improving wage growth.

ECB Meeting, Mar (Thu 8 Mar): There will be two focal points at the upcoming ECB meeting. The first concerns the easing bias on the asset purchase programme, which we think – in line with communications from the minutes of recent meetings – will probably be dropped but at the very least amended. Specifically we think the following phrase: “If the outlook becomes less favourable of if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration” might be changed to something like: “If the outlook becomes less favourable……….the Governing Council stands ready to use all its available tools to foster a re-adjustment of inflation towards its target level.” Alternatively, the ECB might use the following wording: “If the outlook becomes less favourable……….the Governing Council stands ready to increase the duration (i.e. not the size) of the asset purchase programme (APP)” The second issue concerns the new ECB staff forecasts that reflect heightened optimism about growth and possibly the inflation outlook as well. The former will probably be pinned on stronger global growth and increasingly solid indications about domestic growth from the incoming data. The latter will probably be pinned on higher-thanexpected oil prices relative to the December 2017 projections. The latter means that the ECB’s core inflation outlook will probably be little-changed, though we nevertheless see some risk of very modest downgrades off the heels of the stronger euro exchange rate.

Germany Factory Orders and Industrial Production, Jan (Thu 8 Mar, Fri 9 Mar): We expect Germany’s factory orders to grow by 0.6% m-o-m after a 3.8% increase in December. The slowdown would be, in part, due to some payback from the previous month’s solid figure but would not necessarily indicate any major slowdown in the German economy. For industrial production, we are forecasting a month-on-month increase of 0.3% in February, which follows a fall in January of 0.6%. Survey indicators for Germany have softened a little in January and February but they still point to healthy underlying growth in the industrial sector as a whole.

UK Trade, Jan (Fri 9 Mar): A sharp deterioration in the balance on erratic items was only partly offset by a strong end to the year for underlying exports. As a result, the total goods deficit widened by over £1bn during the month. We forecast a modest narrowing of the deficit in January albeit with the usual bands of uncertainty due to the monthly volatility of this series.

UK Industrial production, Jan (Fri 9 Mar): Manufacturing output rose for the eighth month in a row in December having averaged just over 0.4% m-o-m during that period. There was nothing in the January PMI or CBI surveys to suggest this run will be broken in January, though of course the official data represent a volatile series, so there is always the risk of a decline. We forecast a small rise of 0.2% m-o-m in manufacturing output. As for industrial production, we expect a sizable increase following the repair to the Forties oil and gas pipeline, meaning a rebound in IP following December’s fall.

Japan | data preview

The week ahead We forecast the Bank of Japan will maintain its current monetary policy, and the focus at the governor’s press conference will be on questions regarding strong yen against dollar. 

BOJ policy board meeting (Thursday/Friday): We expect the BOJ to leave monetary policy unchanged at the next meeting. The all-Japan core inflation rate (the general CPI excluding fresh food) has come in at 0.9% y-o-y for three consecutive months through January 2018 and, although the reading has been solid, the results are unlikely to satisfy the BOJ. Yen appreciation versus the dollar since the start of 2018 is another factor that makes it difficult to decide to normalize monetary policy. 

We see the focus at BOJ Governor Haruhiko Kuroda's press conference as being on the correction of global financial markets since early February and yen appreciation versus the dollar. Governor Kuroda may well again emphasize that the BOJ is persisting with monetary easing. There could also be questions about the government submitting to the Diet its nomination of Professor Masazumi Wakatabe of Waseda University, a well-known reflationist, as a BOJ deputy governor at the same time as proposing the reappointment of Mr Kuroda as BOJ governor. We think the reply will be along the lines that the BOJ will carry out the most appropriate monetary policy while taking part in a wide-ranging exchange of opinions. 

Second preliminary estimate for Q4 2017 real GDP (Thursday): The second preliminary GDP estimates will reflect the Financial Statements Statistics of Corporations by Industry, released 1 March, as well as various fundamental statistics released since the first set of preliminary GDP estimates were announced on 14 February. We forecast that the second preliminary estimate for real GDP growth in Q4 2017 will be 0.7% q-o-q annualized, up from 0.5% in the first set of estimates. In the second preliminary GDP estimates, figures for inventory of works in progress and raw materials in the inventory investment category will be revised to reflect data from the Financial Statements Statistics of Corporations by Industry released on 1 March. These items dented real GDP growth in the first set of preliminary estimates (real basis quarteron-quarter contribution of -0.1pp). Based on the latest Financial Statements Statistics of Corporations by Industry, we expect downward revisions for inventory of works in progress and raw materials, although we expect the revisions to be small. In the first preliminary GDP estimates, private-sector capex was up 0.5% q-o-q (nominal basis; 0.7% on a real basis). According to the FSSCI, capex (nominal basis, ex software and financials & insurance, seasonally adjusted) rose 3.1%, and we thus think real capex in the second preliminary GDP estimates will be revised up to 1.2%. Among other demand-side items, we forecast an upward revision for public investment, reflecting fundamental statistics for December. We forecast a small upward revision for GDP overall, again indicating moderate economic expansion. Industrial production and retail sales value data are Japanese economic indicators for January 2018 that have already been released, and we note that the data were generally weak. The major turmoil in global financial markets from the beginning of February may well have also had a negative impact on consumer spending in Japan, and GDP growth in Q1 2018 could be somewhat low. However, we think Japanese real GDP will be solid through summer 2018 at least, driven by exports and capex on support mainly from healthy economic conditions in the US. We note that weak economic indicators for Japan in January could reflect one-time factors, such as unfavorable weather. At present, we see little need to revise our above scenario.

February Economy Watchers Survey - current conditions DI (Thursday): We forecast a small rise in the current conditions DI and expect the future conditions DI to come in broadly flat. The current conditions DI fell sharply month-on-month in January, reflecting unfavorable weather. February snowfall in the greater Tokyo area appears to have been less than usual this year but continued to exceed the usual average on the Japan Sea side of Japan, and although we forecast an improvement in the February current conditions DI versus January, we think the improvement will be small. Looking at economic indicators for February that are currently available, there was a sharp improvement of 6.2 points in the sales DI in the Japan Finance Corp (JFC) Monthly Survey on SME Trends, while the survey of manufacturers' production forecasts also calls for a sharp rebound to growth of 9.0% m-o-m in February. The manufacturing PMI fell slightly versus January, but is nevertheless at a high level. Meanwhile, share prices underwent a correction in February and, although they are gradually recovering, share prices during the survey period at end-February were still lower than in January. Overall, we think the February future conditions DI will come in broadly flat m-o-m. 

January Family Income and Expenditure Survey, real household consumption expenditure (all households) (Friday): We expect January real household consumption expenditure (per household) to be down 2.5% y-o-y and down 2.1% m-o-m. In the Economy Watchers Survey for January, the household activity-related current conditions DI (seasonally adjusted) fell by a sharp 4.8 points, indicating deterioration in sentiment at companies sensitive to household activity. January real retail sales value in the Current Survey of Commerce were down by 2.4% m-o-m (Nomura estimate). In addition to weaker consumer sentiment because of rising consumer prices, we think the decline reflects one-time downward pressure on spending from unfavorable weather and recalls by major automakers. Based on the above, we expect a month-on-month decline in January household consumption.

Asia | data preview

The week ahead We expect the RBA and BNM to leave policy rates on hold, export growth to moderate in China and Taiwan, and inflation in the Philippines to rise above the central bank’s target.

China: We expect headline CPI inflation to rise in February on rising food prices and a positive base effect, while PPI inflation is likely to soften, in line with the fall in the producer price sub-component of the official PMI. We expect import and export growth to both slow in February due to the lunar new year effect (fewer working days in this February than last) and we expect the trade surplus in January to turn to a deficit in February. Our FX strategists expect China’s headline FX reserves to rise by USD2bn to USD3163.5bn in February. After adjusting for FX and coupon effects, they estimate FX reserves rose by USD9.6bn after a USD29.6bn decline in January.

Australia: We expect Q4 GDP growth to moderate to 0.5% q-o-q due to headwinds from dwelling investment and weak export volumes which were held back by temporary disruptions to coal exports, but still be supported by a rebound in consumer spending and a rise in inventories. We see some downside risks to this forecast."

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