Lots of key events for the week ahead - Nomura

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

Key Quotes:

United States | Data preview

We expect steady increases in core retail sales and industrial production for July.

NY Fed Survey of Consumer Expectations (Monday): Both the one-year and three-year ahead median inflation expectations in the Survey of Consumer Expectations have remained relatively steady this year. The two measures remained at 3.0% in June. Longer-term inflation expectations are likely to remain steady over the medium term. In addition, consumer earnings growth and labor market expectations remained firm in the June survey, consistent with our optimistic consumer outlook in 2018.

Import prices (Tuesday): Import prices fell 0.4% m-o-m in June as declines in both fuel and nonfuel prices lowered the aggregate index. In particular, inflation of imported consumer goods prices excluding autos slowed on a 12-month change basis in June. In July, ex-petroleum import prices likely remained modest. Recent strength in US dollars suggests that the inflation of ex-petroleum import prices will likely stay modest in the near term. In addition, considering energy prices which trended lower in July, the prices of imported petroleum and related products likely remained weak. 

Empire State survey (Wednesday): We forecast an elevated reading of 21.0 for August Empire State survey, down 1.6pp from July’s 22.6. Trade-related concerns have weighed more on forward-looking indicators than on the current business conditions index. In July, the headline current business conditions measure eased somewhat, but was still above our and markets’ expectations. We expect strong domestic activity to remain supportive for manufacturers’ optimistic assessment of current conditions, while trade concerns will continue to weigh on forward-looking indicators. In particular, the six-month ahead capital expenditure index declined for two consecutive months. Continued escalation in trade tensions may contribute to further easing in this measure.

Retail sales (Wednesday): We expect a steady 0.4% m-o-m increase in core retail sales for July. Consumer fundamentals remained healthy and various business surveys displayed a favorable current outlook driven by firm domestic demand. While there is significant uncertainty, Amazon’s Prime Day sale, lasting six hours longer than last year’s 30-hour sale, poses some upside risk as monthly seasonal factors for retail sales are updated with a lag. Elsewhere, we think lower retail gasoline prices likely reduced the receipts at gasoline stations. Moreover, we expect a solid increase in receipts at food service places. Recently, consumer spending on food services has increased at a solid pace, likely driven by healthy consumer fundamentals. In addition, sales at autos and auto parts dealerships may have fallen notably considering the decline in WardsAuto’s total light vehicle sales report for July. Excluding sales of autos, we forecast 0.5% m-o-m increase in retail sales. Altogether, we expect a modest 0.2% m-o-m increase in total retail sales. 

Q2 productivity, preliminary (Wednesday): Nonfarm labor productivity increased 0.4% q-o-q saar in Q1. Productivity growth has been sluggish by historical standards. Given robust GDP growth in Q2 and incoming data on aggregate hours growth, Q2 will likely see a pickup in productivity growth although this increase will likely be transitory. In addition, a one-off jump in productivity growth with steady growth in compensation will likely lower unit labor costs in Q2.

Industrial production (Wednesday): We expect only a modest 0.2% m-o-m increase industrial production in July after a 0.6% increase in June. We think that the manufacturing output excluding autos likely remained steady after registering a 0.3% gain in the prior month. While trade uncertainties possibly weighed on manufacturers’ assessment of future conditions, current demand appears to have been firm and points to steady growth in output in the near term. Autos and auto parts production growth likely moderated in July after a sharp increase of 13.9% in June following an idiosyncratic disruption to truck production in May. Mining sector output likely rose at a modest pace in July. Incoming data suggest that while crude oil and liquid gas extraction continued to grow strongly, extraction of other materials slowed. In addition, based on industry data, utility production may have declined in the month.

Business inventories (Wednesday): Business inventories likely rose only modestly in June. During the month, growth in manufacturers’ inventories was only moderate, up 0.1% m-o-m, as durable goods inventories remained soft. Retail and wholesale inventories were soft as well, based on advance estimates by the Census Bureau. The June reading of aggregate business inventories will likely be in line with inventory drawdown during Q2, which was a drag on real GDP growth. However, the Q2 inventory drawdown could result in restocking activity during Q3, adding upward pressure on Q3 GDP growth.

NAHB housing market index (Wednesday): We expect a decline of 1.0pp to 67 in the NAHB housing market index for August. Home builders’ sentiment has been supported by strong demand for housing. However, supply-side headwinds such as rising building material costs and skilled construction labor shortage have been concerns for home builders. Further, concerns about the US-China trade tensions can possibly weigh on home builders’ sentiment. The NAHB expressed concerns over the supply-side effect of proposed tariff on $200bn in imported goods from China. The NAHB indicated that nearly 500 products used in residential construction have been targeted in this list and the impact tariff on material costs would be material. While demand for new home is still strong, it appears that trade concerns could meaningfully impact home builders’ sentiment.

Initial jobless claims (Thursday): Looking through weekly volatility, initial and continuing claims have remained low and point to continued labor market strength. We continue to expect low readings in the near term.

Housing starts (Thursday): We expect housing starts to come in at 1220k in July, up 4.0% from 1173k in June. Despite an expected rebound, 1220k would be below the Q2 average of 1262k and could indicate slow growth in housing starts in the near term. While single-family building permits were up decently in June, that increase was concentrated in the South. The three other Census regions saw declines in single-family permits. In particular, the West saw continued softening in permits in recent months, possibly suggesting that improvement in starts will likely be slow. Housing starts continue to be inhibited by supply-side constraints such as skilled construction labor shortages and rising building material costs. Multifamily housing starts, which tend to be quite volatile, likely rebounded strongly after a 19.8% decline in June. However, building permits for multifamily structures declined for the third consecutive month in June. The recent soft readings point to some downside risk on multifamily housing starts. On permits, we only expect a modest 0.2% m-o-m increase to 1295k in July. 

Philly Fed survey (Thursday): We forecast 21.0 for August Philly Fed survey, which would indicate continued healthy expansion in the regional manufacturing sector. Similar to the Empire State survey, escalation in trade tensions will likely wear on forward looking indicators. The indices on current conditions will likely reflect continued steady momentum in the manufacturing sector and the broader economy. A sharp pickup in the new orders index in the previous month also suggests that positive momentum will likely carry on in August.

University of Michigan consumer survey (Friday): We expect elevated readings in the preliminary University of Michigan survey for August. The University of Michigan consumer sentiment index reached 97.9 in July, only 0.3pp below 98.2 in June. Inflation expectations were relatively steady at 2.9% (one year ahead) and 2.4% (5-10 year ahead). The July Conference Board consumer confidence report also showed resilient optimism despite trade-related concerns. Considering strong consumer fundamentals (low unemployment and steady income growth), current economic assessment indicator will likely remain strong and should support near-term consumer spending growth. However, future economic conditions measure will likely moderate as reflection of ongoing trade tensions between the US and China. The current and future conditions in both Michigan and Conference Board surveys have been diverging recently. Coupled with enduring trade tensions, the divergence will likely continue in the near term.

Euro area | Data preview

The second release of euro area Q2 GDP and UK inflation data will be in focus next week.

Euro area industrial production, June (Tuesday): After the negative surprise of Germany and Spain’s IP data, we expect euro area industrial production to fall 0.2% m-o-m. While domestic demand is still strong, global trade concerns continued to adversely affect external demand and manufacturers’ confidence. This result suggests the economic recovery should be modest relative to the heady heights of last year. 

UK Labour market report, Jun (Tuesday): Strong employment growth at the start of the year combined with weak GDP growth led to a fall in productivity in Q1 and a consequent rise in unit labour cost (ULC) growth – a key measure of domestic inflation. Employment growth looks to have slowed in Q2, while GDP growth recovered, and these should reduce the pace of ULC growth. As for wages, base effects could slow the 3m annualised rate of regular private sector pay, while we see the headline annual rates broadly unchanged.

Germany ZEW Index –economic expectations, Aug (Tuesday): We expect the German ZEW for August to increase to -8.5 from -24.7 in July owing to an improvement in market sentiment following July’s meeting between Trump and Junker. However, we would be cautious about reading too much into one month’s data. The concerns about the US’s protectionist policy may continue to weigh on the global economy, ultimately adding uncertainty to the German economic outlook. 

UK Consumer prices, Jul (Wednesday): The BoE in its August Inflation Report expected CPI inflation to rise to 2.6% in July. Our forecast is modestly lower at 2.5% and we see RPI inflation static at 3.4%. Lower petrol prices during the month and a fading upward effect from past falls in sterling are expected to push inflation back to target by the end of the year, but recent announcements of rising utility bills could yet modestly delay this.

UK Producer prices, Jul (Wednesday): The PMI output price balance edged up in July, while the CBI’s measure remained static (albeit well above its average over the past twenty years). We forecast another 0.2% monthly rise in core output prices because of these surveys. Headline output prices may be weaker due to petrol and food prices. As for input prices, a fall in oil prices during July looks likely to be broadly offset by the positive impact of lower sterling.

UK Retail sales, Jul (Thursday): Evidence on retail sales in July has been mixed. The reported balance of the CBI distributive trades survey was around its long-run average, while the BRC reported the slowest growth in sales values for three months. The hot weather may have also influenced the pattern of sales, but it is by no means obvious in which direction (in a recent research report we argued that the effect may be insignificantly negative). Even a small monthly rise would increase the annual average pace of growth in official sales to its highest for over a year.

Japan | Data preview

We expect a month-on-month increase in July real exports, indicating a moderate uptrend in exports
July trade statistics: nominal exports (Thursday): Trade statistics for the first 20 days of July showed a 6.9% y-o-y rise in exports and a 16.2% rise in imports. Taking into account the fact that growth was boosted by one more business day in the first 20 days of July this year than last year, we forecast exports to rise 6.2% y-o-y and imports by 13.9%. This would translate into a trade deficit of JPY32.4bn before seasonal adjustment and a trade surplus of JPY139.7bn after seasonal adjustment.

July export and import prices were not available as of the time of writing, but based on FX rates and other factors if we assume export prices rise 3.0% y-o-y (3.5% in June) and import price 7.4% (10.5%), July real exports show a 2.4% m-o-m increase and real imports a 7.6% rise. We estimate July real exports rose 0.6% versus the April-June average and real imports 3.8%. If our forecast is accurate, it would indicate a moderate uptrend in real exports after a 1.0% q-o-q increase in April-June.

Asia | Data preview

Despite policy easing, China’s July activity data should remain weak, while Malaysia’s Q2 GDP is set to weaken. Bank Indonesia is likely to stay on hold, but the risk is a hike.

China: Industrial production growth is likely to remain weak in July after taking a tumble in June, as suggested by a lower production sub-index in the official PMI and a moderation in high-frequency data. Recent policy easing and stimulus measures should be an overall positive for fixed asset investment growth, but the policy effect will be felt with a lag, so we expect investment growth to dip further in July. Retail sales growth is likely to slow as well, partly due to seasonal factors: over the past five years, retail sales growth has slowed by an average 0.3 percentage points from June to July.

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