Preview of last key US data for the week - Nomura

Analysts at Nomura offered a preview of the next key US data to end the week.

Key Quotes:

"Personal income and spending: We expect a trend-like 0.3% m-o-m increase in personal income in May (Consensus: 0.3%). Data from the BLS’ May employment report highlight a robust pace of job creation. Average hourly earnings of private production and nonsupervisory workers increased steadily in May, pointing to a steady increase in personal income. Personal consumption growth, on the other hand, appears to have been only moderate. Spending on durable goods likely slowed in May, as suggested by weak sales at motor vehicle and parts dealers and electronics and appliance stores, in particular. Moreover, we expect a sharp decline in spending on nondurable goods. Sales at gasoline stations dropped in the month and sales at other nondurable goods stores remained subdued. However, we think service spending likely increased steadily. Sales at dining and drinking venues remained weak, but elevated readings of the ISM nonmanufacturing survey index imply healthy activity in the service sector. Altogether, we expect a modest 0.1% m-o-m increase in personal spending (Consensus: 0.1%)

PCE deflator: Relevant elements of the May PPI and CPI inflation reports point to a subdued increase in core PCE inflation in May. Core CPI has been disappointing in recent months with continued weakness in core goods price inflation. The inflation data on the relevant components within the PPI report were mixed. PPI inflation of scheduled passenger air transportation fares dropped 4.1% m-o-m in May, following a 0.9% rise in April. Portfolio management service fees continued to increase, but at a slower pace than in April. As for medical care-related items of PPI, hospital service prices were down 0.2% m-o-m and physician service prices were essentially unchanged. Overall, based on CPI and PPI data, the May core PCE price index is estimated to rise only moderately by 0.02% m-o-m (Consensus: 0.1%). On a y-o-y basis, core PCE inflation is now likely to fall again to 1.4% (1.388%) in May from 1.5% (1.538%) in April (Consensus: 1.4%). As energy prices plummeted in May, energy prices in the CPI report dropped sharply with aggregate energy CPI falling 2.3%. Based on these data, we expect a notable drag from the PCE energy price index. Although we expect a steady increase in the PCE food price index, given continued growth in CPI food prices, the growth in PCE food prices will not be enough to offset the drag from energy prices. Altogether, our forecast for headline PCE inflation is a decline of 0.08% m-o-m, which is equivalent to a 1.5% y-o-y increase (Consensus: -0.1% m-o-m, 1.5% y-o-y).

Chicago PMI: In May, most of the excitement from the Chicago PMI report came after Market News International corrected the headline index to 59.4 (up 1.1pp from the previous month) after an initial report earlier in the morning of 57.0 (down 1.3pp from the previous month), which would have been the first decline since January. Correction aside, the headline reading of 59.4 marked the highest point since November 2014. The employment index jumped from 53.8 to 57.1, indicating a modest pick-up in the pace of employment growth. The production index increased by 3.7pp to 63.2 and continues the uptrend seen since February 2016. While the new orders index decreased by 4.5pp to 61.4 (a still-elevated reading), the order backlog index jumped by 8.8pp to 51.8, indicating steady demand. Similar to the ISM, Philly Fed, and Empire State manufacturing surveys, Chicago PMI has seen some softness in the prices paid index over the past two months. Given elevated readings in both headline indexes of the Philly Fed and Empire State manufacturing surveys earlier this month, we expect continued improvement in the Chicago PMI and forecast a reading of 60.0 for June (Consensus: 58.0).

University of Michigan consumer sentiment: In the preliminary reading for the University of Michigan consumer survey in June, the headline index dropped 2.6pp to 94.5, the lowest reading since November 2016. The survey director noted a sharp decline in sentiment, particularly among self-identified Republicans and independents, after 8 June, likely reflecting diminished expectations for the Trump administration’s agenda. The survey jumped sharply after the election in November 2016 while a sharp partisan divide emerged among respondents: Republicans consistently had more positive responses for current conditions and expectations, while Democrats experienced a noticeable drop in sentiment. Recent events, including ongoing Russia investigations, may have dampened sentiment among self-identified Republicans, and some independents, and could put more downward pressure on this survey. Consensus expects an unchanged reading of 94.5 for the final print of June. Regarding inflation expectations, while the one-year ahead expected inflation rate remained unchanged at 2.6%, the five- to 10-year ahead rate increased 0.2pp to 2.6% after three months at 2.4%. Inflation expectations have been trending steadily lower over the past three years but have leveled off somewhat recently, slightly easing policymaker concerns."