Week ahead in the US: Watch for FOMC minutes and NFP - Nomura


The Economics Team at Nomura takes a look at the events for the week ahead in the US, highlighting the FOMC minutes and the US Non-Farm Payrolls as the key data release to keep an eye on.

Nomura suspects that although the pace of job creation may have moderated slightly, incoming data suggest a healthy gain in nonfarm payroll employment in June.

Key Quotes

Construction spending (Monday): In April, total construction spending declined 1.4%, driven by a slowdown in both residential and nonresidential construction outlays. Despite this decline, the underlying pace of construction spending appears to be steady. The
three-month moving average increased modestly by 0.5% in April after increasing 1.3% in March. On a year-over-year basis, total construction spending has been improving steadily, although public construction spending has been falling. Given incoming data onprivate investment in structures, we think that private construction outlays will likely increase steadily in Q2. The ISM nonmanufacturing survey for May reported growth in activity in the construction sector although respondents reported increasing effects of recent tariffs on lumber. Active oil rig counts have been gradually rising, pointing to continued growth in energy-related structures investment. However, the data is, in our view, unlikely to show another strong jump from energy-related structures investment, previously led by pent-up effects from increased drilling activity. For May, consensus expects a steady 0.3% m-o-m increase in total construction spending.

ISM manufacturing (Monday): We expect the ISM manufacturing index to remain mostly unchanged at 55.0 in June after a moderate increase to 54.9 in May. The May report indicated that the manufacturing sector continued to expand. The new orders index improved 2.0 percentage points (pp) to 59.5 while the production index fell 1.5pp to 57.1, but remained very high. Inventories and the employment index also improved. Incoming data suggest it is likely that this momentum continued in June. The regional surveys in June were mixed but stayed at elevated levels. Core capital goods shipments moderated slightly in May, but the underlying pace suggests healthy activity. Moreover, despite slowing light consumer vehicle sales, industry data on automakers have not shown a sign of material slowdown, although there could be a slowdown in production if inventories continue to remain high. 

Factory orders (Wednesday): Durable goods orders for May fell 1.1% m-o-m, driven by a sharp decline in transportation goods orders. Excluding transportation, durable goods orders increased only moderately by 0.1%. Reflecting these mixed readings, factory orders (which also include nondurable goods) are likely to decline in May. However, manufacturing activity still appears steady although month-to-month readings may post a decline. In particular, core capital goods shipments, a concurrent indicator ofmanufacturing activity, fell slightly by 0.1% in May, but its 3-month average pace suggests steady improvement in activity. Additionally, we expect steady improvements in inventories as manufacturers enter a phase of intentional inventory build-up.

FOMC minutes (Wednesday): At the post-meeting press conference for the 13-14 June FOMC meeting, Chair Yellen mentioned the prices of both prescription drugs and wireless telephone services as transitory factors contributing to recent weakness in inflation. The most recent CPI release, also weaker than expected, came out the morning of the day of the press conference (14 June), possibly contributing to some FOMC members’ cautious remarks on the progress towards the FOMC’s goal of 2% inflation. On the labor market front, data suggest tightening labor markets with the unemployment rate falling to 4.3%. Given the divergence between the strong labor market and weaker-than-expected inflation data, the minutes from the June meeting will shed further light on how the committee reconciled these two trends. Moreover, given the
specificity of the updated Policy Normalization Principles and Plans, the minutes may contain some further information on how FOMC participants discussed the timing and other aspects of balance-sheet adjustment, although we may not see substantive details.

With markets largely expecting the balance-sheet adjustment announcement in September and the next rate hike more uncertain, more attention may be given to any part of the minutes that hint at how participants view the trajectory of the policy rate path and how sensitive another rate hike in 2017 would be to upcoming inflation data.

ADP employment report (Thursday): Reflecting our forecast for private payrolls in the BLS employment report on Friday, we expect ADP to report an increase of 160k in private payrolls for June. Initial jobless claims (Thursday): For the week ending 24 June, initial unemployment
insurance claims increased by 2k to 244k. Looking through the monthly volatility, the four-week moving average of this series decreased slightly to 242k from 245k one week prior. For the week ending 17 June, continuing claims increased 6k to 1948k. This series dropped sharply over the first five months of 2017 but has recently picked up slightly. However, both series for unemployment insurance remain low by historical standards, indicating continued strength in the labor market as firms remain reluctant to let go of their workers. Reflecting this continued labor market strength, we expect both series to remain subdued over the medium term.

Trade balance (Thursday): The advance goods trade balance for May was stronger than expectations, with a decent rebound in goods exports. Incorporating this upside surprise, we expect the trade balance report for May to post a deficit of $46.3bn, which is slightly narrower than the $47.6bn deficit in April. A recovery in goods exports appears consistent with healthy trade activity abroad. On trade of services, we expect exports increased modestly while imports remained unchanged.

ISM non-manufacturing (Thursday): We forecast 57.0 for the June print of the ISM non-manufacturing index, unchanged from the reading in May. Although slowing sales in bricks and mortar stores led to weak employment in the retail sector, business activity in other industries in the non-manufacturing sector remained firm. The mining sector has improved its industrial output in recent months, boosted by increased drilling activity. Construction sector activity has remained healthy, although rising building material costs and scarcity of skilled labor are causing increased concerns. Anecdotal evidence also suggests a healthy business outlook for professional and technical services. Incorporating this information, the overall sentiment in the non-manufacturing sector likely held up in June.

Employment report (Friday): We expect an increase of 165k in nonfarm payrolls with 160k from the private sector and 5k from the government in June. For manufacturing sector employment, we expect an increase of 10k. Payroll employment growth has been trending lower in recent months. In December through February, payroll gains averaged 201k. Between March and May, growth slowed to an average of 122k. Yet, incoming data suggest continued strength in the labor market. Some survey employment indicators are still at high levels despite some moderation. In particular, the Empire State manufacturing employment index ticked down to 16.1 in June from 17.3 in May, and the Philly Fed employment index fell to 27.6 in June from 38.8 in May. However, both still remain in healthy territory. In addition, initial jobless and continuing claims remained low in June, suggesting healthy employment gains in the month. 

Moreover, we expect the unemployment rate to be unchanged at 4.3% in June. Last month’s payroll gain of 138k, while below consensus, was still above the level needed to absorb growth in the working-age population. Yet, as more previously discouraged job seekers re-enter the labor force, we may see a slight uptick in the labor force participation rate. Further, the relative deceleration in job growth over the past three months indicates a slowdown in the flow of workers from unemployment to employment, likely holding the unemployment rate steady.

Reflecting continued labor market tightness, we expect a healthy 0.3% m-o-m (2.69% y-o-y) increase in average hourly earnings. A recent pick-up in the growth rate of aggregate hours, outpacing that of aggregate earnings, has caused a slight deceleration in average hourly earnings growth. However, given healthy employment gains in recent months and a low unemployment rate, earnings growth will likely pick up slightly.

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