Analysts at Nomura offered a preview of the week ahead’s key scheduled events.
Key Quotes:
“United States | Data preview
We expect a strong gain in June nonfarm payroll employment while trade concerns may weigh on business sentiment.
Construction spending (Monday): Volatility in home improvement spending has recently played an outsized role in total construction spending fluctuations. Home improvement spending increased 11.6% m-o-m in April, the largest gain since 2002, after a 10.1% decline in March. Looking through this monthly volatility, we expect construction spending to increase at a trend-like pace over the near term. At the moment, our Q2 GDP tracking estimate sees a steady 1.7% q-o-q gain in residential investment during Q2.
ISM manufacturing index (Monday): We forecast a reading of 57.7 for the June ISM manufacturing index, 1pp below the level in May. Regional manufacturing surveys have been somewhat mixed thus far for June. The Empire State, Dallas Fed and Richmond Fed manufacturing surveys all improved during the month. However, the Philly Fed survey showed a material decline. Overall, the recent escalation in trade tensions will likely be enough to dampen manufacturer sentiment while keeping it above April’s reading of 57.3. However, the US economic outlook in 2018 remains bright and we expect many manufacturers to remain optimistic. Nonetheless, worsening trade tensions could disproportionately affect manufacturers, especially given the recent imposition of tariffs on steel and aluminum imports from major suppliers such as Canada, Mexico and the EU.
Factory orders (Tuesday): The advance durable goods report showed some softening in industrial activity in May Durable goods orders excluding volatile transportation components declined 0.3% m-o-m while core capital goods orders (excluding defense and aircraft) declined 0.2%. The overall softness in the advance durable goods report indicates that factory orders as a whole in May are likely to decline.
Vehicle sales (Tuesday): We expect vehicle sales to increase to 16.9mn saar in June, up from the 16.8mn saar pace in May. After a weather-related surge in September 2017, sales have steadily trended lower towards their mid-2017 average pace of 16.6mn saar.
ADP private employment (Thursday): Consistent with our forecast for the BLS June employment report, we expect ADP to report a 205k increase in June private payrolls.
Initial jobless claims (Thursday): Continued labor market strengthening should help to keep initial jobless claims low relative to historical standards.
ISM non-manufacturing index (Thursday): We expect the ISM non-manufacturing index to fall 0.6pp to 58.0 in June. Domestic demand appears to have remained strong in recent months but escalating trade tensions may have dampened business sentiment in the nonmanufacturing sector. Many industries such as mining, agriculture, and construction reported input price uncertainty and supply disruptions partly due to escalation in trade tensions in the May ISM non-manufacturing survey. Continued uncertainty from trade-related issues will likely weigh on business sentiment in the near term.
FOMC minutes (Thursday): The June FOMC meeting largely met our expectations, with the Committee raising the target range for the federal funds rate, and generally reiterated the positive US economic outlook We expect the minutes to provide additional insight into the Committee’s deliberations on longer-term monetary policy questions as well as the potential downside economic risks arising from US trade protectionism. Specifically, the Committee’s decision to remove forward guidance language from the post-meeting statement may have been accompanied by an interesting discussion during the meeting. Moreover, Chair Powell’s surprising announcement that a press conference will be held after every FOMC meeting, starting in 2019, may also have engendered an interesting discussion.
Employment report (Friday): We expect a steady 210k gain in June nonfarm payroll employment, consistent with the solid acceleration in activity during Q2, with a 205k gain from the private sector and 5k from the government. Labor market indicators including business surveys and initial jobless claims remain consistent with continued labor market strength. For average hourly earnings (AHE), we expect a trend-like 0.2% m-o-m increase as payback from an unusual increase in financial activity worker AHE offsets a positive calendar effect. Finally, with the unemployment rate at a very low 3.8% (3.75%) in May, we believe it will decline further in June to 3.7%. Continuing jobless claims have fallen sharply over the inter-survey period, consistent with a steady flow of workers from unemployment to employment.
Trade balance (Friday): The May advance goods trade balance surprised to the upside, showing a narrower goods trade deficit than expected.Goods exports increased strongly, driven by a pickup in exports of foods, feeds and beverage products. With expectations of trend-like readings on service imports and exports, we expect the May trade balance to register a $42.7bn deficit, roughly $3.5bn narrower than in April.
Euro area | Data preview
German data and UK PMIs will be in focus next week.
UK PMI manufacturing, June (Monday): While the headline manufacturing index remains below its previous year’s average, it did recover modestly in May to a level that remains about 2.5 points higher than its long-run average. The output index rose notably but new orders growth slowed further and the employment index reached its lowest level for a year. We forecast a similar headline reading in June, possibly with some rotation away from the output index to new orders.
UK PMI services and composite, June (Wednesday): The services index rose to a three-month high in May. A similar reading for this (and the construction report) would keep the composite PMI around similar levels (about 54.5) which in turn would be consistent with economic growth of around 0.5% q-o-q (2% annualised).
Germany Factory Orders and Industrial Production, May (Thursday-Friday): We expect Germany’s factory orders to increase by 1.2% m-o-m in May after a 2.5% decrease in April, for a fourth consecutive monthly decline. A bounce back in orders after such prolonged weakness would not be a big surprise. For industrial production, however, we forecast a month-on-month decline of 0.5% in May after a fall of 1.0% in April. The weakness of industrial output has not been as pronounced relative to orders and a month-on-month decline would be consistent with recent survey indicators suggesting some slowdown of manufacturing activity.
Japan | Data preview
The week ahead We forecast a continued strong corporate appetite for capex in FY18.
June BOJ Tankan (Monday): We expect to see the current business conditions DI for large manufacturers come in at 22, off 2 points from the March survey. We suspect that the threat of a US-China trade war and worries over an economic slowdown in China have taken a toll on sentiment among exporters, and we therefore expect manufacturers’ business confidence to remain in a holding pattern following the rapid run of improvement through the end of last year.
Meanwhile, we expect the current business conditions DI for large non-manufacturers to come in at 23, unchanged from March. The business climate for non-manufacturers is more mixed than it is for manufacturers. On the one hand, weak consumer spending has dealt a blow to sentiment among retailers and, as suggested by the Economy Watchers Survey, we believe rising raw material prices, rising labor costs and other such unfavorable developments may be weighing on corporate sentiment more generally. . On the other hand, it appears that sentiment in construction and peripheral industries has been lifted by growth in demand in various areas in conjunction with major urban development projects and preparations for the 2020 Tokyo Olympics.
below the current conditions DI, and expect the future conditions DI for large nonmanufacturers to come in at 21, also 2 points below the current conditions DI. While corporate business confidence remains high in absolute terms, we see little reason to expect further improvement ahead. Another reason to expect the future conditions DI to be lower than the current conditions DI is that there is an historical tendency for this to happen when the current conditions DI reading is high in absolute terms. We expect companies’ FY18 forecasts for year-on-year growth in fixed investment (ex-software investment, including land purchasing expenses) to be revised up from -0.7% in the March survey to 3.6% in the June survey, going by the historical pattern of forecast revisions. We forecast sustained steep growth in manufacturing industry capex for the time being, pulled up by overseas demand, and the incoming data on machinery orders (a leading indicator of capex) lends support to this view. Among non-manufacturing industries as well, we expect capex appetite (particularly for software) to be underpinned by investments in laborsaving technologies aimed at providing relief from persistent labor shortages.
May Family Income and Expenditure Survey, real household consumption expenditure (all households) (Friday): We forecast May real household spending (per household) to fall 2.1% y-o-y and 0.5% m-o-m. Looking at household consumption-related statistics released thus far, new passenger car sales volumes fell back in May with a decline of 2.0% m-o-m. Based on sales data issued by major department stores, department store sales likely fell 3.3% m-o-m in May (seasonal adjustments by Nomura) . In the May Economy Watchers Survey, the household activity-related current conditions DI (seasonally adjusted) fell 2.5 points from April to 45.2, indicating weak sentiment. Taking this into account too, we forecast a decline in consumer spending in the May Family Income and Expenditure Survey, as in April.
Asia | Data preview
We expect a moderate drop in China’s official manufacturing PMI, while growth in Korea’s exports – the first country in Asia to release June data – is likely to slow sharply.
China: We expect the official PMI to moderate to 51.6 in June from 51.9 in May. High-frequency data suggest growth momentum is losing some steam: the growth of coal consumption by six major power plants moderated, while the blast furnace operation rate fell significantly in year-on-year terms. Deleveraging of the economy and rising external uncertainties are weighing on growth, and we view the fact that Beijing has started to introduce subtle easing measures as a further sign that growth momentum is weakening.
Australia: We are very confident the cash rate will again remain unchanged at 1.50% this week. The RBA has been indicating that the next move in the cash rate is likely up, not down, but appears very patient at present. Increased global trade uncertainties, higher local BBSW rates and further, albeit modest, declines in house prices have likely added to its sense of caution. We will be examining its press release for any signs of new, more dovish sentiment.”
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