The week ahead - Nomura

Analysts at Nomura offered their outlook for the economy for the week ahead.

Key Quotes:

US | Data preview - Nomura

We expect the lingering effects of Hurricanes Harvey and Irma to weigh on industrial production and housing starts in September.

Empire State Survey (Monday): We expect an elevated reading of 22.0 for the headline business conditions index for October. This index slipped only by 0.8pp to 24.4 in September, from 25.2 in August, which was the highest reading since September 2014. The improvement in the manufacturing sector has been steady so far this year. Demand from abroad has been solid and domestic activity appears to have been steady. Given the broad-based strength in the September report, we think most of the momentum in the prior month was likely carried through to October. 

Import prices (Tuesday): The import prices of consumer goods excluding autos have stabilized in recent months. We think this development has likely been positive for core CPI inflation. Oil prices rose steadily in September, indicating some boost from the prices of imported fuels and petroleum products. However, the recent hurricanes raise the uncertainty on our inflation outlook. Due to the surge in energy prices, September could see a sharp increase in top-line import prices. However, import prices ex-petroleum are likely to increase only modestly.

Industrial Production (Tuesday): Industrial production in August fell 0.9% m-o-m, 0.75pp of which was attributed to Hurricane Harvey’s impact on the Gulf Coast region. The Federal Reserve Board released a detailed note describing its procedure for estimating the impact of the storm. September is likely to be affected by the continued recovery from Harvey as well as the landfall of Hurricane Irma in Florida. Thus, there is increased uncertainty on our forecast for September and potential for another downside surprise. Due to differences in industry composition in Florida, the Board noted that for September, “pulling together estimates of IP will present a number of challenges.”

That said, we expect headline industrial production to be flat in September. Recovery of autos and parts output and a modest rebound in utility output were likely positive to topline IP. However, while the output of petrochemical industries could rebound, softness in manufacturing ex-auto aggregate hours points to some weakness in core (ex-auto) manufacturing output, which we expect to be flat during the month. Moreover, oil and gas extraction fell while the oil and gas rig count also declined, suggesting some drag from mining output. 

NAHB housing index (Tuesday): For October, we forecast an unchanged reading of 64 for the NAHB housing market index. In September, the headline index declined 3 points, reflecting concerns about labor shortages and building costs exacerbated by the recent hurricanes. Moreover, the traffic of prospective buyers deteriorated somewhat last month. This sentiment will likely persist into October until the rebuilding process from the recent hurricanes starts to accelerate. However, rising building material costs and continued labor shortages in the construction industry may continue to weigh on home builders’ sentiment over the near term.

Housing starts (Wednesday): We expect a 1.7% m-o-m decline in housing starts to an annualized pace of 1160k in September. Based on single-family housing permits data which declined notably in August, we expect a slowdown in single-family starts. Further, Hurricane Irma, which made landfall in Florida, caused widespread blackouts in the region, which likely disrupted construction activity. On multifamily housing construction, we expect a decent rebound after a 6.5% decline in August. However, the rebound in this series is unlikely to offset the anticipated weakness in single-family housing starts.

The recent hurricanes will likely raise uncertainty on upcoming readings. Due to Hurricane Harvey, the information on the status (starts or completion) of authorized construction projects in the FEMA-designated disaster counties was collected for only about 60% of the cases. Typically, this information is collected for almost 95% of the cases. The Census Bureau reported the cases for which the information was not collected were considered as having “no change” in status (i.e., no starts or completion). This suggests as more data on these no-response cases come in, August starts will likely be revised in the upcoming print. Likewise, it is possible Hurricane Irma disrupted the collection of the information on starts and completion status of housing projects. 

On permits, we expect a 1.7% m-o-m decline to an annualized pace of 1250k. Although solid job market conditions and lower mortgage rates likely have been supportive, we think disruptions from the recent hurricanes may have lowered the permits in September.

Fed Beige Book (Wednesday): In the Beige Book prepared for the September FOMC meeting, the Federal Reserve noted that economic activity expanded at a “modest to moderate pace” across the 12 reserve districts in July and August. Most of the information for the September Beige Book was collected before Hurricane Harvey’s landfall. In preparation for the October FOMC meeting, we expect the Beige Book to point to sustained economic activity albeit with some transitory disruptions due to the recent hurricanes. In particular, activity in the 11th district (Dallas) and sixth district (Atlanta) will likely provide more anecdotal evidence on the impact from Hurricanes Harvey and Irma, respectively. As the Beige Book is based largely on anecdotal evidence from business leaders and market participants, the report for October’s meeting could provide additional information from local businesses in the affected areas on how long the recovery is expected to last. Elsewhere, anecdotal information on the housing market, currently experiencing a supply shortage, and local price pressures will be worth noting.

Initial jobless claims (Thursday): For the week ending 7 October, initial jobless claims returned to just slightly above pre-hurricane levels. Moreover, for the week ending 30 September, the number of continuing claims declined to the lowest level since 1973 while the insured unemployment rate reached a historical low. Both indicators point to underlying strength in the labor market, suggesting that September’s weak payroll employment reading was likely transitory.

Philly Fed survey (Thursday): We expect the Philly Fed survey to pull back slightly in October but remain elevated. For the headline general business conditions index in October, we forecast a reading of 23.0, just barely below September’s 23.8. The new and unfilled orders indices in September’s survey both improved, indicating sustained momentum going into October. Overall manufacturing activity has been strong in recent months and we expect this trend to continue over the near term.

Existing home sales (Friday): We expect existing home sales to decline 0.7% m-o-m in September to an annual rate of 5.31mn. Pending home sales have been soft over recent months, indicating some weakness in existing sales further downstream. Some residual weakness in sales due to Hurricanes Harvey and Irma may be expected, compounding longer-term structural issues impeding existing home sales including a supply shortage of available homes for sale. 

Euro area | Data preview

The week ahead: The German ZEW index and UK CPI data are in focus this week. 

German ZEW index (Tues): We expect the ZEW expectations index to climb to 21.0 in September from 17.0 in September. The strength of stock prices may have had a positive impact on investor sentiment. If the result is in line with our expectation, the data would suggest prospects for the German economy will improve further in coming months.

UK CPI (Tues): We forecast a further rise in CPI inflation to 3%, though the risks may be on the upside (our forecast falls on the cusp between 3.0% and 3.1%). Higher food price inflation and a rise in petrol prices during the month are responsible. We expect the peak in CPI inflation to come in October’s print at 3.1% or 3.2%.

UK PPI (Tues): If the PMI and CBI price balances prove to be good indicators then official output prices should rise further in September. We expect a 0.2% m-o-m increase in the core measure, but a larger 0.4% m-o-m rise in the headline thanks to a rise in fuel prices during the month. We expect sterling’s rise during the month to broadly offset the rise in oil prices to keep input prices constant in September.

UK Labour market report (Weds): The unemployment rate reached a fresh cyclical low of 4.3% in last month’s release, where we expect it to remain in this month’s report. We would once again suggest focusing on the monthly change in private sector regular pay to avoid base effect issues associated with the headline (3mma % y-o-y) earnings data. Monthly growth has averaged just over 0.2% in the past six months, or around 2.6% annualised.

UK Retail sales (Thurs): The CBI and BRC measures of retail sales reported notable recoveries in growth in September, suggesting an upbeat official print. However, this would come after three consecutive monthly increases in sales volumes between June and August, marking the most prolonged period of growth since 2015.

UK Public finances (Fri): While this is not the last set of public finance data ahead of the 22 November Budget (the October figures are due the day before), they will be the basis for economists’ forecasts for the Office for Budget Responsibility’s (OBR) deficit numbers. Note that the latest publication from the OBR suggests a marking down of productivity growth weakening the medium-term outlook for the public finances.

Japan | Data preview

The week ahead: We forecast July-September real export growth to be firm, but probably not sustainable. 

September trade statistics: nominal exports (Thursday): Nominal exports in the first 20 days of September rose 14.8% y-o-y (versus 12.7% in the first 20 days of August), while nominal imports rose 14.6% (5.5%). Although growth in nominal imports was markedly higher than a month earlier, growth was strong in late August (32.5%), and we therefore do not think it is reasonable to conclude from the data for the first 20 days of September that imports rose sharply. A 6 October Nikkei QUICK News article reported growth in exports of organic compounds and semiconductors and other manufacturing equipment, as well as growth in imports of semiconductors and other electronic components, crude oil, and coal.

We see no impact from the calendar effect on imports and exports in the first 20 days of September because there was the same number of business days in the first 20 days of September 2017 as in September 2016. However, we expect growth in imports and exports to slow in the latter part of the month compared with the first 20 days because we think forex rates and crude oil prices that are likely to apply in the latter part of the month will have a greater negative impact on growth in nominal imports and exports than in the first 20 days. We therefore forecast growth in nominal exports in September as a whole to narrow to 14.2% y-o-y and growth in nominal imports to fall to 12.1%. We estimate a trade surplus (original series) of JPY668.7bn and a seasonally adjusted trade surplus of JPY75.9bn.

Adjusting our September nominal import/export estimates for inflation, based on corporate goods price index data for September (export prices 9.4% y-o-y, import prices 13.5%) and seasonality, results in a real exports falling 4.4% m-o-m and a real imports declining 2.5% m-o-m. While this is a rather large drop in exports, we attribute this partly to a reactive decline from fairly strong growth in August. On a quarterly basis, we forecast 2.7% q-o-q growth in July-September, a sizable acceleration from weak growth (0.4%) in April-June.

We had expected the global economy to begin to lose momentum starting in the latter half of 2017 amid rising inventory levels and expected this to lead to a slowdown in Japanese exports. While we had factored in some degree of re-acceleration in JulySeptember owing to the launch of new smartphone models, growth appears to have outpaced our expectations. We believe recent strong growth is probably not sustainable because we think the inventory cycle may trigger a correction and we also think there may be uncertainty about economic stimulus measures following the meeting of the 19th National Congress of the Communist Party of China. However, we also believe there is a risk that growth will continue to surpass expectations.

Asia | Data preview 

The week ahead: We expect a slight slowing in China’s GDP growth in Q3.

China: We expect GDP growth to slow slightly to 6.8% y-o-y in Q3 from 6.9% in H1, dragged by the cooling property sector. For September activity data, we expect industrial production growth to rebound slightly after a sharp moderation in August, supported by stable growth in trade and industrial profit. Fixed asset investment growth should moderate further on cooling property investment, and consumption growth is likely to rebound partly due to last year’s low base. On inflation, we have an out-of-consensus call in which PPI inflation rises further to 6.8% y-o-y (Consensus: 6.3%) in September, partly driven by China’s continued efforts to reduce overcapacity in upstream industries and pollution. We believe that rising high-frequency data and the price sub-indexes of the September PMIs also support out above-consensus PPI forecast. We expect CPI inflation to ease modestly because of the high base of food prices last September."