Key events for the week ahead - Nomura

Analysts at Nomura explained the key events for the week ahead:

Key Quotes:

ISM non-manufacturing (Monday): We expect a slight moderation in the ISM nonmanufacturing index for October to 59.3 from 61.6. The strong jump in the ISM nonmanufacturing index in September was unexpected and was coupled with a broad-based improvement in the sub-indices. While we think domestic demand remains strong, concerns about skilled labor shortages and the impact of tariffs on input costs, especially for construction and mining sectors, remain. Non-manufacturing sentiment will likely remain robust in Q4, but it will likely stabilize as economic growth gradually slows after the acceleration in recent quarters. 

Election Day (Tuesday): A variety of factors – public polling, fund raising, early voting and expert opinion – suggest Democrats are likely to take control of the House and Republicans are likely to retain control of the Senate. For our most recent election guide, see Midterm Election Guide, 26 October 2018.

JOLTS (Tuesday): JOLTS data in August showed a modest acceleration in labor market turnover, suggesting some upside risks to wage growth over the next few months. Incoming data for September will be important to evaluate whether the acceleration is part of a new trend. Vacancies remain at multiyear highs with more than one job posting for every unemployed worker, consistent with steady labor market strength.

Consumer credit (Wednesday): Healthy labor market conditions have remained supportive of consumer spending. We expect another healthy expansion of consumer credit in September after a solid $20bn increase in August.

Initial jobless claims (Thursday): Initial and continuing jobless claims have trended down for a while and appear consistent with the strong labor market. Hurricane Michael affected recent readings of claims in Georgia and Florida. However, increased volatility from the storm will likely be short-lived. 

November FOMC meeting next week. Since the meeting in September, the economy has remained on solid footing. In the post-meeting statement, the FOMC will likely state that economic activity continued to grow steadily rather than "rising at a strong rate." 

Because of a slowdown in nonresidential fixed investment growth in Q3 GDP following the acceleration in previous quarters, there is some risk of the FOMC downgrading its assessment of business investment growth. Recently, financial conditions have tightened somewhat, driven by sharp declines in equity prices. However, we view it as unlikely for the FOMC to react to this development at the moment. Against the backdrop of the recent convergence of the effective federal funds rate (EFFR) to the interest paid on reserves (IOR), the FOMC may discuss the possibility of introducing another widening of the gap between the IOR and the upper limit of the fed funds target range. Such a discussion could be reflected in the minutes of the November meeting along with any additional comments regarding longer-run issues such as the Fed’s implementation framework or alternative monetary policy strategies.

PPI (Friday): We expect only modest inflation of upstream prices as measured by the PPI. The headline PPI rose a steady 0.2% m-o-m in September. A solid 0.4% m-o-m increase in “core” PPI (which excludes volatile energy, food and trade services) was boosted by a sharp 5.5% m-o-m increase in airline passenger service prices, which appears to be transitory. The 0.4% advance in the core PPI is likely unsustainable and the pace of monthly inflation will should remain modest in coming months.

University of Michigan consumer sentiment (Friday): Consumer optimism remained resilient, partly owing to expectations that the labor market will remain robust in the near term. The consumer sentiment index from the Michigan survey eased slightly to 98.6 in October, but still points to consumers’ optimistic outlook and suggests the increased volatility in the equity market and rising interest rates did not dampen consumer sentiment materially. We expect continued optimism in the November preliminary report. Consumer sentiment will likely be sensitive to the result of the US midterm election (6 November) and will likely be driven by a sharp partisan divide in the assessment of the economy. The impact could be captured at least partly in the final report, scheduled for release on 21 November.

On inflation expectations, one year and 5-10 year ahead inflation expectations inched up to 2.9% in October from 2.7% in September. 5-10 year ahead expectations eased slightly to 2.4% from 2.5%. We expect these measures to remain within a steady range.

Wholesale inventories (Friday): The advance report by the Census Bureau indicates that whole inventories were up 0.3% m-o-m in September following a 0.9% jump in August. The solid contribution to GDP growth from the inventory buildup in Q3 offset the increased drag from net exports. However, the strong buildup of inventories in Q3 poses downside risk to Q4 GDP growth as inventory investment slows.

Euro area / Data preview

The week ahead Euro area October final PMI and UK GDP data will be in focus next week.

UK Services & composite PMI, Oct (Monday 5 November): After last week’s poor reading on the manufacturing PMI and the further slowing in the euro area services report, we would not be surprised to see a meaningful decline in the UK services and composite indices.

Germany Industrial Production, Sep (Wednesday 7 November): Manufacturing output in Germany’s PMI survey dropped by more than 3 points in September because of new emission standard rules that adversely affected the German car industry, causing substantial bottlenecks and production slowdowns. Because of this, we think German IP will fail to recover even after three consecutive m-o-m declines, and we forecast -0.7% m-o-m for September IP. 

UK Trade, Sep (Friday 9 November): We expect a broadly similar deficit of around £11bn in September as August, which itself was higher than July’s reading thanks to a large shift in the erratics balance.

UK Industrial production, Sep (Friday 9 November): The manufacturing PMI and CBI surveys held up reasonably well in September before falling in October; however, car production (worth just 6½% of total industrial production and about 9% of manufacturing) was weak during September according to the SMMT (Society of Motor Manufacturers and Traders) figures. We forecast a flat manufacturing reading, but the risk is that weak auto production ends up dominating the figures.

UK GDP, Q3 (Friday 9 November): Based on our forecasts for flat industrial production, a small 0.1% rise in service sector output and a modest rebound in construction output, GDP would rise by 0.1% in September. That would in turn imply a 0.6% q-o-q growth rate for Q3. While it would take a material downside surprise to the monthly rate to yield something weaker than 0.6% q-o-q, only a small upside surprise could easily push growth up to 0.7% during the quarter relative to our 0.6% view.

China|/Data preview

China: We expect export growth to moderate, but remain relatively solid at 13.0% y-o-y in October after higher-than-expected growth in September, as front-loading activity should extend into the rest of this year. Import growth is likely to slow more visibly, as importers may postpone some of their import orders from October to November to benefit from import tariff cuts (the most-favoured nation import tariff rate cuts announced by the State Council on 30 September came into effect on 1 November). CPI inflation is likely to ease in October, as high-frequency data suggest negative month-on-month food price inflation, while non-food price inflation may have moderated seasonally. PPI inflation may drop further in October because of sequentially lower month-on-month inflation of industrial product prices and a high base last year. We expect M2 growth to rebound, and the seasonal slowdown of new RMB loans and aggregate financing to be shallower, mainly benefiting from the 100bp reserve requirement ratio (RRR) cut that came into effect on 15 October, with a net liquidity injection of RMB750bn. Our FX strategists believe China’s headline FX reserves would fall by USD47bn to USD3.040trn in October. After adjusting for FX and coupon effects, we estimate the adjusted change to fall by USD28.2bn, from a fall of USD24.2bn in September."

Australia/Data preview

Australia: We expect the RBA to again announce an unchanged cash rate and anticipate that its press release will contain mixed comments. It is, however, likely to repeat that it expects to achieve its growth and inflation objectives over time, based on current policy settings. The press release may provide clues to any forecast revisions in the Quarterly Statement on Monetary Policy (SOMP) released on Friday 9 November. Here, we expect to see an unchanged growth profile, with GDP growth still “a bit above 3%”; a slightly lower unemployment rate forecast and a largely unchanged inflation profile. We retain a low-conviction call for a 25bp rate hike in August 2019, but note that this will require some evidence of stronger inflation pressures in the interim."