Analysts at Nomura offered their outlook for the week ahead in terms of key Global data events, firstly, the U.S, Europe, Japan and China.
We expect a healthy rebound in core retail sales and steady improvement in industrial production in July though business sentiment may moderate further from elevated levels.
NY Fed Survey of Consumer Expectations (Monday): Survey-based measures of consumers’ inflation expectations have been within a steady range over both the short-term and medium-term horizon. According to the June survey, the median of consumer’s expected inflation rate fell slightly at the one-year horizon to 2.54%. Over the three-year horizon, it increased notably to 2.78%. The median three-year ahead expected inflation rate for high numeracy group, whose answers tend to reflect expected price changes more accurately, ticked up slightly as well. Despite month-to-month movements, the FOMC has repeated its assessment that survey-measured inflation expectations remain well anchored. Only sustained increases in expected inflation rates may be noteworthy.
Empire State Survey (Tuesday): Business sentiment has come down from high readings in recent months. Although still optimistic, businesses’ assessment of current and future conditions became less positive. In July, Empire State Manufacturing index fell 10.0 percentage points to 9.8. The six-month ahead general business index also declined by 6.8pp to 34.9. Recent declines in this survey and other regional business surveys may imply some correction in sentiment. Incoming hard data suggest steady improvement without notable acceleration. In addition, heightened uncertainty regarding policy changes may have affected business sentiment to a degree. We forecast a reading of 12.0, which would suggest continued optimism among businesses despite moderation from post-election peaks.
Retail sales (Tuesday): We expect core (“control”) retail sales to increase by 0.3% m-o-m in July, rebounding from weak readings in June (-0.1%) and May (0.0%). Our forecast is consistent with our view that personal consumption growth in Q3 will remain steady after contributing solid 1.93pp to Q2 real GDP growth. Our view is, in part, based on our view that high business optimism could continue in the near term despite recent moderation. The ISM non-manufacturing index fell notably in July from its June level but still remained high. The ISM report also indicated that business conditions remained stable in the retail trade sector. Further, considering healthy improvements in labor markets, consumer fundamentals remain favorable.
Among non-core components, sales at gasoline stations likely improved slightly considering a slight recovery in domestic gasoline prices. Moreover, we expect the sales of autos and auto parts to have increased steadily by 0.2% m-o-m, following 0.1% and 0.9% increases in June and May, as we expect light vehicles sold to consumers to have increased slightly in July. Note that although the pace of light vehicle sales has slowed, some of the decline can be attributed to automakers’ recent decisions to reduce fleet sales to businesses and government agencies. Altogether, our forecast for top-line retail sales growth is a 0.4% increase. Excluding autos, our forecast is also a 0.4% increase.
NAHB housing index (Tuesday): The headline housing market index from the NAHB decreased 2pp to 64 in July. After reaching a post-recession high of 71 in March, headline home builder sentiment has been gradually declining over the past three months although still at an elevated level. Some of the deterioration is likely related to recent increases in building material costs. In particular, lumber prices have ticked up amid disputes over softwood lumber imports from Canada. Rising building material costs may have continued to weigh on sentiment in August. However, sentiment regarding sales over the next six months remains healthy at 73, just below the recent peak of 78. With strong buyers’ interest in new homes, the August print of NAHB housing index may remain elevated. While the housing market continues to experience a shortage of supply, home builders still appear upbeat about future prospects for sales. For August, we expect sentiment to remain elevated at 63, a slight decline from July.
Housing starts (Wednesday): We forecast a 3.0% m-o-m decline in total housing starts in July to an annualized pace of 1178k, following a 1215k pace in June. We think that the underlying pace of single-family housing starts remains steady, although a strong 6.3% increase in June suggests that some mean reversion is possible in July. Compared to the pace 12 months ago, single-family housing starts have been steadily improving. However, multifamily housing starts have been slowing in recent months. Although they rebounded sharply by 13.3% in June, they had fallen for five consecutive months by then. With a recent pick-up in vacancy rates, we expect another decline in multifamily housing starts. For July building permits, we expect a 2.0% decline to an annualized 1250k pace. Although consumer demand appears to be high, we expect some negative payback after an outsized gain of 9.2% in June.
FOMC minutes (Wednesday): The statement from the 25-26 July FOMC meeting all but explicitly stated “September” for the announcement of balance sheet roll off. Since then, a number of FOMC members have publicly commented on the appropriateness of an announcement next month while stressing their expectations of a very smooth and predictable process of the balance sheet reduction. In particular, Philadelphia Fed President Patrick Harker emphasized that the process should be “predictable, slow, and as boring as possible,” in his recent remarks. While balance sheet communication with respect to September was firmly addressed, the outlook for inflation was less clear. Compared to the June FOMC statement, the language on inflation in the one in July changed very little, while acknowledging that prices are “running below 2 percent,” instead of repeating “running somewhat below 2 percent.” The statement did not give additional color on this subtle change in language. It is possible that there may have been a considerable amount of discussion during the meeting. We think the minutes from this meeting may shed further light on this debate. As market consensus has firmed around September for a balance sheet announcement, market uncertainty around the FOMC now rests on the timing of the next rate hike. In that regard, changes in specific language with respect to the number of participants that attribute low prices to transitory factors will deserve some attention. In the minutes from the June meeting, it was noted that “[m]ost participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors.” Chair Yellen has previously referenced transitory declines in wireless telecom and prescription drug prices. However, some of the recent weakness extends beyond those two categories, apparel in particular, implying that more members may now see the weakness as attributable to more than transitory factors. We still expect the next rate hike in December of this year but will closely watch for any signals within the minutes about how firm this forecast should be.
Initial jobless claims (Thursday): Initial jobless claims have remained subdued recently in the face of a tightening labor market with healthy employment gains. The fourweek moving average of initial claims has remained within a 236-255k range since January, which is very low by historical standards. Continuing claims also remain subdued. We expect both series to remain low as the labor market continues to tighten in the medium term. Note that the initial claims data for the following week (which will contain data for the week ending 12 August) coincide with the survey period of the BLS’ August employment report. Initial claims during that week tend to have more predictive power than other observations.
Philly Fed Survey (Thursday): Manufacturers’ sentiment has remained elevated although having moderated in recent months. After reaching the historical peak of 43.3 in February, the Philly Fed Survey’s headline index has been drifting lower and reached 19.5 in July. Although it is still an optimistic reading, we expect this index to fall further to 16.0 in August. Overall, businesses have been optimistic with steady growth in manufacturing output. However, there has not been notable acceleration in activity, in contrast to heightened business sentiment. Additionally, ongoing uncertainty regarding policy changes may continue to weigh on business sentiment.
Industrial production (Thursday): We expect headline industrial production to increase 0.4% m-o-m in July after a similarly strong 0.4% increase in June. Manufacturing output has steadily improved over recent months and we expect this trend to continue in July. Core manufacturing output (excluding motor vehicles and parts), which accounts for roughly three-fourths of total industrial production, increased 0.1% in June following a 0.3% decline in May. Considering incoming information on aggregate hours worked in the core manufacturing sector, we expect another healthy gain of 0.2% in output from this sector. Elsewhere, the energy sector output has grown modestly over the past four months, averaging 1.5%, driven by strong increases in oil and gas well drilling. We expect another solid month of energy sector output growth in July as drilling activity continued to increase in the month. Further, the mining output of industrial materials also rose in the month. However, with weaker-than-expected auto sales thus far in 2017, automakers may gradually reduce production, adding some drag to headline industrial production growth. Moreover, the capacity utilization rate has recently improved, driven by solid increases in the mining sector. Considering the expectation that mining sector output may continue increase, the utilization rate of the mining sector may continue to improve in the near term. However, as automakers adjust their production, the utilization rate of light vehicle
producers fell below the 2016 average of 87%. The year-to-date average remains at 85%. It is possible that it will fall further, weighing on the aggregate capacity utilization rate.
University of Michigan consumer sentiment (Friday): The final release of the University of Michigan survey of consumers indicates that consumer sentiment moderated somewhat in July. The headline index fell 0.7pp to 93.4, driven by a sharp 7.3pp drop in the expectations index for self-identified Republicans. The future expectations index for this group spiked after the election, jumping from 61.1 in October 2016 to a peak of 122.5 in March 2017. Since then, the expectations index among Republicans has moderated somewhat, dropping to 108.7 in July. With Congress recently departing for the August recess with little to show in terms of the Republican legislative agenda, the expectations index could decrease further in August. Overall, consumer sentiment remains upbeat but the upcoming budget and debt-limit fiscal deadlines have the potential to weigh down optimism. Given the politicized nature of consumer sentiment during 2017, how Congress and the White House handle these deadlines and the roll out of tax reform may influence the trajectory of sentiment over the next few months. Inflation expectations in July at the 1-year horizon remained unchanged at 2.6%. Longer term, inflation expectations for the next five years ticked up 0.1pp to 2.6%, safely above the survey low reading of 2.3% in December 2016 but unchanged from January 2017.
The week ahead Euro area industrial production and the UK CPI and labour market report are in focus this week. Euro area industrial production (Mon): We expect euro area industrial production to increase by 0.2% m-o-m in June following a 1.3% m-o-m increase in May. If the outcome is in line with our expectations, IP would have risen by 1.5% q-o-q in Q2 after a 0.1% q-o-q increase in Q1, indicating robust economic activity.
UK CPI & RPI inflation (Tues): Food prices may rise during July in contrast with July 2016’s fall. But fuel prices look set to decline by just over 1% in July this year compared with a small rise a year ago. The result is that we expect CPI inflation to be unchanged at 2.6% in July – which is in line with the BoE’s July forecast in last week’s Inflation Report. A similar RPI-CPI wedge to the previous month should keep RPI inflation at 3.5% (July index 272.6).
UK Producer price inflation (Tues): We expect the upward impact on input prices from the weaker sterling in July versus June to be broadly offset by a fall in crude oil prices. A decline in the PMI and CBI measures of output price growth suggests that core output prices may grow at a weaker 0.1% m-o-m rate during the month.
UK Labour market report (Wed): Wage growth will again be the focus. Ex-bonus earnings on a 3mma annual basis grew 2.0% in May’s report, and 1.8% including bonuses. It would take very strong monthly growth rates to shift those headline annual rates by more than 0.1pp – they will almost certainly remain low because of past weakness around the turn of the year. We thus suggest focusing on the run-rate of private sector regular pay which, over the previous three months, has averaged 0.36% m-o-m (i.e. over 4% annualised). Measures of market tightness such as the unemployment rate, vacancies and the proportion of part-timers that would prefer to work full-time will be key.
UK Retail sales (Thurs): Retail surveys have been mixed for July. The CBI survey along with John Lewis store sales improved, while the BRC and Visa’s expenditure index reported a modest slowing. The problem with the official data is that they are volatile on a monthly basis. We would not be surprised – as has been the case for the previous six months – if the July data turn out weak after a strong print the previous month. We forecast zero m-o-m growth which would push the 3mma annual rate to its lowest since mid-2013.
The week ahead Domestic demand has become increasingly solid, but we expect a negative quarter-onquarter contribution from external demand. The first set of preliminary estimates for Q2 2017 real GDP (Monday): We project 2017 real GDP in Q2 (April-June) rose 2.6% q-o-q annualized (up 0.6% q-o-q), a fairly high level of growth. We think the data will show the sixth consecutive quarter of quarteron-quarter growth, as the Japanese economy achieves a sustained recovery. We think strong domestic demand will have driven real GDP growth in Q2 2017. Real consumer spending (excluding housing) from the Family Income and Expenditure Survey rose a healthy 1.1% q-o-q in Q2 2017, suggesting GDP-basis consumer spending was strong. We think this reflects an improvement in household sentiment. We also expect housing investment, public investment and capex to have risen, and think construction investment as a whole was likely strong. In regard to public investment, we think the second FY16 supplementary budget has started to be implemented. Despite strong growth in domestic demand, in Q2 2017 we expect to see a negative quarter-on-quarter contribution from external demand, which has driven real GDP growth since H2 2016. We think imports rose sharply as a result of solid domestic demand, but that exports were sluggish, particularly to Asia. We think the key points going forward are whether domestic demand can remain solid and whether the sluggishness in external demand will become protracted. Domestic demand’s strength started to stand out from Q1 2017, and we think the recovery in external demand since H2 2016 may well have spread to domestic demand. However, if the sluggishness in exports becomes protracted, there is likely to be a negative impact on domestic demand. We think global economic growth has levelled off, and that underlying growth in exports from Japan is slowing. However, with new smartphone production getting fully underway in H2 2017, we think exports from Japan will likely pick up slightly compared with Q2, when they were broadly flat q-o-q. Meanwhile, we forecast that the rate of real GDP growth will slow in future as CPI growth gains pace and consumer spending slows, after having boosted domestic demand since the beginning of 2017.
Supported by the lower official PMI, our proprietary composite leading index and weaker-than-expected trade growth, we believe growth momentum weakened in July after a strong June. We expect industrial production growth to slow to 7.0% y-o-y from a high 7.6% in June. Fixed asset investment growth may have ticked down to 8.5% y-o-y ytd from 8.6%, dragged down by slower property investment. Retail sales growth is likely to ease to 10.7% y-o-y from 11.0% as the drag from rising household debt starts to bite."
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