The week ahead and key scheduled calendar events - Nomura

Analysts at Nomura offered came with week ahead's key events for the US, European markets China and Australia.

Key Quotes:

United States | Data preview

"We expect a strong 205k increase in nonfarm payroll employment in January’s employment report, consistent with continued economic momentum.

Personal income and spending (Monday): We expect personal spending to increase 0.4% m-o-m in December, buoyed by increased spending on service-related categories. Utility spending during the month likely picked up after a return to colder weather from an unseasonably warm November. Reflecting incoming data from December’s retail sales report, spending on nondurable goods likely decelerated from the 1.2% pace in November, weighed down by a decline in gasoline station sales as retail gas prices fell during the month. Modest increases in motor vehicles & parts sales along with a pickup in furniture & home furnishing sales likely contributed to a modest increase in spending on durable goods. However, strong upward revisions to November’s core retail sales could suggest upward revisions in personal spending data in November, potentially lowering December’s personal spending growth as a result. For personal income, we expect a steady 0.5% m-o-m increase, reflecting continued labor market strength and a notable uptick in average hourly earnings growth during the month.

PCE deflator (Monday): Our forecast for core PCE inflation is +0.2% (0.178%) m-o-m, translating into a 1.5% (1.51%) increase on a 12-month basis, unchanged from the previous month. Relevant PPI components will likely be positive for December’s core PCE inflation reading, on net. The hospital services price index rose steadily by 0.6% m-o-m, partly offset by a 5.9% decline in scheduled passenger flight prices. Overall, we expect relevant PPI components to contribute about 6bp to m-o-m core PCE inflation, up from 4bp in the previous month. Most PCE-relevant subcomponents of December’s CPI report increased more in December relative to November. However, the weight assigned to rent in core PCE is smaller than in core CPI, thus an expected contribution from higher rent to core PCE inflation should be more moderate than to core CPI inflation. Finally, because of residual seasonality issues, core PCE inflation for December tends to be lower than for any other month. Among the noncore components, food prices likely increased modestly while we expect a decline in energy prices, reflecting declining retail gasoline prices during the month. Altogether, we forecast a 0.1% m-o-m increase in the PCE price index, corresponding to 1.7% y-o-y.

Case-Shiller home price index (Tuesday): Home prices increased at a 12-month rate of 6.4% in October, the highest reading since July 2014. Employment and income growth will likely continue to be favorable for healthy housing demand, pushing home prices higher as supply levels for previously-owned homes remain lean. West coast cities continue to see rapid home value appreciation: on a 12-month basis, the four cities with the highest home price growth in October were Seattle, Las Vegas, San Diego and San Francisco. The recently-passed tax law could put downward price pressure on high-end real estate markets in localities with higher state & local taxes. However, this change is likely to be gradual.

Conference Board’s consumer confidence (Tuesday): We expect the Conference Board’s consumer confidence measure to remain essentially flat at 122.0 in January, from 122.1 in December, a still-elevated reading. January sentiment in the University of Michigan survey declined slightly, driven by a sharp drop in the assessment of the current economic situation by self-identified Democrats and Independents. Part of this deterioration in sentiment may reflect the partisan opinion of the recently-passed tax bill. Despite the vast majority of consumers receiving a tax cut, the self-identified Democrats surveyed continue to believe their taxes will go up. As this sentiment ebbs, their evaluation of the current economic situation will likely rebound. Altogether, consumer fundamentals remain firm with healthy job, income and stock market gains, supporting a continued elevated reading for the Conference Board’s January survey.

ADP private employment (Wednesday): Reflecting our forecast for private payrolls in the BLS employment report on Friday, we expect ADP to report an increase of 200k in private payrolls for January Employment cost index, Q4 (Wednesday): We forecast a 0.6% q-o-q reading for the wages & salaries component of Q4 2017’s employment cost index (ECI), corresponding to 2.6% y-o-y. Average hourly earnings for production & nonsupervisory employees during Q4 decelerated but still increased modestly, up 0.4% q-o-q after a 0.7% reading in Q3. For total ECI compensation, of which wages & salaries comprise roughly 70%, we expect a 0.6% q-o-q reading, also corresponding to a 2.6% y-o-y reading. While wage growth likely remains inhibited by structural factors, we think continued tightening in the labor market will gradually increase upward pressure over the medium term.

Chicago PMI (Wednesday): Based on relevant components of the Empire State and Philly Fed business surveys, we expect the Chicago PMI to decline 3pp to 64.8 in January, consistent with continued growth, albeit at a slightly slower pace. Business conditions starting off 2018 seem favorable for sustained optimism in the Chicago PMI report, especially considering that certain provisions of the tax bill, including a lowering of the statutory corporate tax rate from 35% to 21%, took effect 1 January. Thus, we expect the Chicago PMI to reflect continued business optimism to start off the year.

Pending home sales (Wednesday): Pending home sales increased modestly in November by 0.2% m-o-m following a strong, weather-related increase of 3.5% in October. Without a strong increase in the Northeast during November, possibly related to unseasonably warm weather, pending home sales may have declined during the month. A return to colder weather in December may have lowered contract signing activity in the Northeast, a potential downside risk for the month. As weather-related disruptions fade, we expect pending home sale growth to slow somewhat this year as the shortage of existing homes for sale continues to dampen contract signing activity.

FOMC meeting (Wednesday): We expect no change in the policy rate at the upcoming 30-31 January FOMC meeting and no material changes or surprises in the post-meeting statement. Incoming data during the intermeeting period has been largely positive, affirming continued growth above potential. December’s employment report indicated that the economy added more than enough jobs to absorb new labor market entrants and the unemployment rate remained at 4.1%. Inflation on a 12-month basis continued to run below the FOMC’s target of 2% while December’s core CPI reading indicated some firming of trend inflation towards the Committee’s objective. Therefore, we do not think the Committee will make any major changes to the first paragraph on the current assessment of recent economic developments. That said, as the impact from inclement weather last summer wanes, the Committee may drop the language on hurricanes.

There is no press conference scheduled after the January meeting, thus the Committee will likely refrain from making material changes to policy-related paragraphs in the statement besides minor tweaks. As the first meeting of 2018, the composition of voters in the FOMC will change, with Chicago Fed President Evans, Philadelphia Fed President Harker, Dallas Fed President Kaplan and Minneapolis Fed President Kashkari replaced by Cleveland Fed President Mester, Richmond Interim Fed President Mullinix (soon to be replaced by Thomas Barkin), Atlanta Fed President Bostic and San Francisco Fed President Williams. Finally, this will likely be Janet Yellen’s last meeting as Chair before her term ends 3 February 2018.

Initial jobless claims (Thursday): Initial jobless claims increased 17k to 233k during the week ending 20 January, a still-low reading consistent with subdued layoff activity. Overall, January’s claims data have so far returned to the pre-holiday trend, a good sign for January’s nonfarm payroll report (scheduled for release next Friday at 8:30am EST).

Productivity (Thursday): Nonfarm productivity may have slowed in Q4 2017 based on incoming aggregate hours and output data. Nonfarm business aggregate hours in Q4 likely increased at a quarterly annualized rate of just over 3% after adjusting for selfemployed workers. With an expected Q4 real GDP increase of 3% or lower, nonfarm productivity could come in much weaker than the Q3 2017 reading of 3.0%. However, even a small quarterly decline in productivity in Q4 could still translate to close to +1% on a 12-month basis, a positive reading relative to the trend over the past few years. Consistent with other subdued measures of compensation growth, unit labor costs likely increased only modestly in Q4 after declining for two consecutive quarters.

Construction spending (Thursday): Private construction spending increased healthily in November, supported by a surge in single-family residential construction. However, private multifamily residential construction remained weak. Construction spending likely increased modestly in December although some colder weather relative to November may have dampened building activity. As the hurricane recovery efforts continue, gradual rebuilding should support continued growth in construction spending, although multifamily construction spending likely continues to pose some downside risk.

ISM manufacturing (Thursday): We expect January’s ISM manufacturing report to affirm continued growth in the manufacturing sector at a slightly slower pace. We forecast a reading of 59.0 for the headline index, 0.7pp lower than December, consistent with regional manufacturing surveys that showed slight deceleration during the month. The headline and ISM-adjusted Empire State and Philly Fed manufacturing indexes both declined in January. In particular, while both surveys’ shipments sub-indices remained elevated, consistent with elevated current activity, the new orders index declined while the inventories index picked up in both surveys, pointing to less near-term momentum. A reading of 59.0 for the ISM manufacturing survey would sit just slightly above the sixmonth average of 58.8, the highest reading since April 2011.

Vehicle sales (Thursday): We expect vehicle sales to slow in January as residual replacement buying activity from inclement weather continues to wane. Overall, we expect sales to slow to a pace of 17.0mn saar during the month, down from 17.8mn saar in December. Prior to 2017’s active hurricane season, vehicle sales consistently slowed, and surprised to the downside. August’s reading of vehicle sales, at 16.0mn saar, marked the lowest level since 2014. However, due to large scrapping of hurricanedamaged vehicles, vehicle sales rebounded in September-December. We expect sales will gradually move down from the past four months’ average increase of 17.9mn saar to somewhere close to the pre-hurricane trend. 

Employment report (Friday): We expect nonfarm payroll employment to increase strongly by 205k in January with 200k from the private sector and a 5k increase in government payrolls. While we do not view the current pace of goods-producing employment growth as sustainable, manufacturing employment likely contributed a solid 20k during the month based on regional manufacturing surveys. Moreover, some service-providing industries slowed unexpectedly in December, creating the potential for payback in January. Relevant labor market indicators remained in healthy territory during the month, including a low, 220k reading for the establishment survey week’s initial jobless claims (the week containing the 12th). Consistent with our view of payroll growth, we expect the unemployment rate to decline 0.1pp to 4.0% in January as unemployed workers continue to find employment opportunities in a tight labor market. Finally, partly supported by various states raising their minimum wages as well as a gradually tightening labor market, we expect average hourly earnings in January to increase by a healthy 0.3% m-o-m, corresponding to a 2.7% increase on a 12-month basis.

Factory orders (Friday): Factory orders likely increased steadily in December, although our forecast for a decline in the preliminary durable goods orders report could portend slower expansion of total orders relative to November’s 1.3% m-o-m increase. In general, factory activity has picked up, with steady increases in core capital goods shipments and orders. However, the recent pace might not be sustainable, and core orders and shipments could slow in the coming months.

University of Michigan consumer sentiment (Friday): Consumer sentiment in the University of Michigan’s preliminary January survey declined somewhat, driven by a drop in the evaluation of current economic conditions by self-identified Democrats and Independents. However, part of this decline likely reflects the partisan interpretation of the recently-passed Republican tax bill. Thus, as this sentiment fades, consumer sentiment will likely rebound, reflecting healthy job growth and income gains.

Inflation expectations at both the one- and five-year horizons ticked up by 0.1pp in the preliminary January survey, to 2.8% and 2.5%, respectively. Part of the pickup in shortterm inflation expectations may reflect rising gas prices. However the stabilization of longer-term expectations will be an encouraging sign for some FOMC participants who have recently expressed concern about the risks of declining long-term inflation expectations.

Euro area | Data preview

The week ahead Euro area inflation and UK PMI (manufacturing) are in focus this week.

BoE household borrowing, Dec (Tue): Over the previous 3-6 months net consumer credit averaged just under £1.5bn per month and mortgage borrowing about £3.5bn. We do not forecast any material shift in these numbers in the December report. Note that the BoE also publishes monthly data on net finance raised by private non-financial firms in this release though this can be volatile

Euro area flash Q4 GDP (Tue): We expect the first reading of euro area Q4 GDP growth to climb by 0.7% q-o-q after 0.7% q-o-q in Q3. While we do not get any underlying expenditure details in this release, we expect domestic demand to have made the largest contribution to GDP growth in Q4. We also expect exports to have pushed up GDP growth as global economic momentum remains strong. 

Germany, preliminary December inflation (Tue): We expect the flash reading of German HICP inflation to increase to 1.7% y-o-y in January from 1.6% y-o-y in December. We also expect core inflation to rise to 1.5% y-o-y in January from 1.4% in December. A roll-back of some specific items such as the volatile packaged holiday component should drive up core inflation.

Euro area preliminary December inflation (Wed): We forecast the flash estimate of euro area HICP inflation to fall to 1.3% y-o-y in January from 1.4% y-o-y in December. This fall will likely be caused by base effects from the energy component. By contrast, we expect core inflation to increase to 1.0% y-o-y in January from 0.9% y-o-y in December. A likely roll-back of volatile specific items, and shrinking economic slack should push up services sector components. Partly offsetting this will be last year’s euro appreciation which will weigh on industrial goods price inflation. 

UK PMI manufacturing survey, Jan (Thu): While the euro area flash manufacturing PMI eased back slightly in January (falling one point to 59.6), it remains strong and the services index rose by over a point. Thus, with European and global growth continuing apace, and sterling (despite its recent rise against both USD and EUR) still low relative to 2015 levels, we see continued strength in the UK manufacturing survey. We forecast a small rise in the headline index after last month’s 2-point decline.

Japan | Data preview

The week ahead We think manufacturing production was strong again in December. We await revisions to weak January production plans and expect a bounce-back in the February production plan.

December 2017 Labour Force Survey (Tuesday): We expect an unemployment rate of 2.7% for December, flat m-o-m, and a job openings-to-applicants ratio of 1.58x, up 0.02 points m-o-m. The job openings-to-applicants ratio, which tends to lead the unemployment rate, has been improving, but rose only moderately in November, and thus we forecast no change in the unemployment rate from November. The new job-openings-toapplicants ratio and Indexes of Business Conditions (the leading composite index) are leading indicators of the job openings-to-applicants ratio, and both rose in November. In particular, the leading composite index rose relatively sharply, with the seven-month moving average up 0.57 points m-o-m. We expect the job openings-to-applicants ratio to rise m-o-m in December. 

December Family Income and Expenditure Survey, real household consumption expenditure (all households) (Tuesday): We expect December real household consumption expenditure (per household) to be up 1.7% y-o-y and down 0.3% m-o-m. The December Consumer Confidence Index was down 0.2 points m-o-m, and in the Economy Watchers Survey for December, the household activity-related current conditions DI (seasonally adjusted) was down 0.2 point m-o-m, indicating a deterioration in both household and corporate sentiment. Among sales statistics, December major department store sales were down m-o-m, weighed down chiefly by clothing and food. December new auto sales volumes (passenger car total) were up 2.9% m-o-m (seasonally adjusted by Nomura). We think this was mainly a reaction to a temporary slide in October owing to irregularities in the inspection of registered cars for the Japanese market and we think this is not an accurate reflection of consumption trends. In view of weak spending-related data, we think December household spending will be down from November. 

December industrial production (Wednesday): We expect the December 2017 industrial production index to rise 1.7% m-o-m. Companies' production plans called for growth of 3.4% m-o-m in December. However, actual production tends to be lower than production plans, and adjusting this figure using realization and amendment ratios over the past three months gives growth of 1.7% m-o-m. If this forecast materializes, October-December production would have increased by 1.4% q-o-q. Indicators related to the industrial production index were mixed in December, but strong overall. Corporate sentiment appears to be strong, with the Japanese manufacturing PMI output index (confirmed) up 0.2 points m-o-m at 54.5, and the current conditions DI for manufacturers (seasonally adjusted) in the Economy Watchers Survey up 2.1 points m-o-m at 56.9. The real export index for Japan, which is strongly correlated with the industrial production index, fell by 3.3% m-o-m. That said, the weakness in real exports appears to be in reaction to month-on-month growth of 2.0% in October and 4.4% in November. We do not view it as an indicator of weakness in production activity. The January survey of manufacturing production projections, which will be announced at the same time, may be used to assess the cyclical phase of the economy in terms of 1) revisions to production plans for January, which pointed to sharp production cuts in the previous survey, and 2) whether or not a bounce-back appears in production plans for February. The Japanese manufacturing PMI for January, released on 24 January, was 54.4, up 0.4 points from December, providing no indication that production has entered a correction phase. A point to watch will be whether or not the increase in production looks sustainable when looking at plans for January and February on balance.

Asia | Data preview

The week ahead We expect China’s official PMI to edge down.

China: We expect the official manufacturing PMI to edge down to 51.5 in January from 51.6 in December as support from government expenditure likely faded.

Australia: We forecast a 0.7% q-o-q rise in Q4 headline CPI inflation, but a more subdued 0.3% q-o-q rise in the trimmed, or core, measure. Headline inflation should be pushed higher by sharp gains in volatile and tax-impacted items such as fuel, electricity and tobacco, despite fierce retail competition from Amazon’s arrival in Q4 and “Black Friday” sales in November which should hold down a range of related prices. We also note the weaker-than-expected Q4 CPI inflation reading in New Zealand, including for tradable goods prices, which came in despite a fall in the currency."