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The week ahead and key events: eyes on FOMC statement & BoJ – Nomura

Analysts at Nomura offered their outlook for the week ahead and the key events.

Key Quotes:

United  States | Data preview

We expect a muted 0.06% m-o-m  increase in core PCE inflation in June (1.9% y-o-y) and a solid 195k gain in nonfarm payroll growth during July.

Pending home sales (Monday): Pending home sales have softened recently with declines in April and May of 1.3% and 0.5% m-o-m, respectively, corresponding with soft readings of existing home sales in recent months. At the moment, without a substantial change in housing market dynamics – with steady demand and low inventory – pending home sales activity may remain muted in the near term.

Personal income and spending (Tuesday): We forecast a steady 0.4% m-o-m  increase in June personal income as tightening  labor  markets and steady employment growth help gradually increase earnings. For personal spending, we expect a healthy 0.5% m-o-m  increase, despite soft core retail sales in June. Spending on nondurables excluding fuels and gasoline likely slowed, while spending on gasoline likely increased strongly. Sales of motor vehicles and parts likely increased healthily, based on the receipts at auto and parts dealers in June. In addition, we expect a rebound in service spending in June, driven by solid gains in spending on food services in June. A healthy  labor  market and persistent consumer optimism will continue to support personal spending in the near term.

PCE deflators (Tuesday): We expect core PCE inflation to slow to 0.06% m-o-m  in June, down from 0.2% in May, likely lowering the y-o-y  rate 0.1pp to 1.9% (1.88%). Within the details of core PCE, the contribution from components covered by CPI data  are  likely to slow, contributing only 2.3bp to the June m-o-m  increase after an 18.7bp contribution in May. While rent inflation in the June CPI report increased strongly, the core PCE price index places less weight on rent-related components. PPI-related components are likely to rebound in June, contributing roughly a weak 1bp to m-o-m  core PCE inflation in June after a negative contribution in May. For non-core components, we expect a modest 0.2% m-o-m  increase in food prices and a 0.3% m-o-m  decline in energy prices, consistent with the June CPI report. Altogether, we expect headline PCE inflation to register 0.053% m-o-m  in June, corresponding to 2.3% (2.26%) on a 12-month basis, unchanged from the 2.3 y-o-y  rate in May.

Employment cost index, Q2 (Tuesday): We forecast a 0.6% q-o-q gain in the overall employment cost index for Q2 2018 and a similar 0.6% q-o-q gain for the wages and salaries component, corresponding to 2.8% y-o-y  for both series. Wage growth during Q2, as reported by the monthly BLS employment report, increased healthily by 0.65% q-o-q for total private workers and 0.8% q-o-q for production and nonsupervisory employees. The ECI’s wages and salaries component increased strongly by 0.9% q-o-q in Q1 with broad-based strength among subcomponents. However, we view that pace as likely unsustainable in the coming quarters as some of that increase was driven by an unusually strong increase in the financial service sector.

Case-Shiller home price index (Tuesday): Residential home prices increased 6.6% y-o-y  in April,  well-above  the pace of income and wage growth. With scarce supply and steady consumer demand, home prices are likely to continue to climb over the near term.

Chicago PMI (Tuesday): We forecast a modest 1pp decline to 63.1 for the July Chicago PMI. On a Chicago PMI-adjusted basis, regional surveys have sent somewhat conflicting signals on business activity, with a decline from the Empire State survey but an improvement in the Philly Fed release. Taken  altogether, we believe business optimism remained firm in July, consistent with steady demand, but trade-related concerns may have marginally weighed on sentiment.

Consumer confidence (Tuesday): We expect consumer confidence to improve slightly to 127.0 in July. The University of Michigan consumer sentiment index ticked down marginally during the month, partly reflecting increased trade concerns from consumers. However, consumer fundamentals likely remain firm with a low unemployment rate and steady job growth and we continue to expect consumer confidence to remain elevated over the near- to medium-term.

ADP private employment (Wednesday): Consistent with our forecast for the July employment report, we expect ADP a report 190k gain in private employment during July.

Construction spending (Wednesday): Private residential  single family  construction spending increased by a healthy 0.6% m-o-m  in May after two prior somewhat soft months. However, private nonresidential construction was somewhat weak, declining 0.3% m-o-m. Construction spending in June may soften somewhat, largely reflecting a slowdown in incoming housing starts and permits data.

ISM manufacturing index (Wednesday): Manufacturer sentiment in July likely remained elevated, but we forecast that trade concerns and some capacity constraints may have resulted in the ISM manufacturing index retreating 0.8pp to 59.4 from 60.2. Incoming data on regional manufacturing surveys have been mixed. In addition, part of the increase in the June ISM manufacturing index was related to a sharp gain in the supplier deliveries index. Increases in this index are typically related to higher demand but, based on anecdotal evidence from business surveys, we think the increase in June likely reflects increased trade-related disruptions to supply chains. We expect this index to remain elevated as trade-related disruptions and supply constraints persist, but we believe that the current level of 68.2 is likely unsustainable. Overall, we believe the ISM manufacturing index will remain in healthy territory over the near term as the US growth outlook remains on firm footing.

FOMC meeting: We do not expect any major developments  at  the July/August FOMC meeting. However, it is possible that the post-meeting statement will add “for now” when describing the FOMC’s plans for “further gradual rate increases,” consistent with Powell’s prepared remarks at his semiannual testimony. This subtle change in language would be consistent with the Committee’s continued pullback from  forward  guidance language employed during the aftermath of the Global Financial Crisis. The economic backdrop for the July/August meeting, with a solid Q2 GDP reading and reduced trade tensions between the US and EU, will likely be positive, despite continued elevated trade tensions between the US and China.

Vehicle sales (Wednesday): We expect a sharp decline in total  light vehicle  sales in July to 16.8m  saar  from 17.4m in June. The sales pace in June was unusually strong and we think that this pace is likely unsustainable. Rising household wealth and the strong  labor  market likely supported consumer demand, but credit conditions remain  unfavorable. According to the Federal Reserve’s Senior Loan Officer Opinion Survey, the lending standards on consumer auto loans have remained tight in recent quarters while demand for those loans has been soft. Thus, we expect auto sales to slow in July. While monthly estimates of vehicle sales can be volatile, we expect 16.8m for total vehicle sales for 2018 following 17.2mn in 2017.  

Initial jobless claims (Thursday): With steady job growth and a low unemployment rate, we expect initial jobless claims to remain low, despite possible volatility around the summer months and holidays.

Factory orders (Thursday): Factory orders likely increased modestly during June given the 1.0% m-o-m  increase in the advance durable goods report for the month. New orders and shipments of nondefense capital goods excluding aircraft, together with positive backward revisions, appear consistent with healthy growth in business equipment investment in Q2. We expect the final estimates of these indicators to reaffirm healthy momentum in business equipment investment in coming quarters. However, final inventory data will likely be consistent with softer inventory buildup at the end of Q2.  

Employment report (Friday): We expect a gain of 195k in July nonfarm payroll employment, tightening the  labor  market further, with a 190k contribution from private employers and a 5k gain from government. For manufacturers, we expect a 15k gain considering still elevated manufacturer sentiment. However, strong increases in hiring by autos manufacturers in June were likely due to a transitory ramp up in production during the month following disruptions in  May,  and could revert in July. Payroll growth has accelerated over the past two months with gains of 244k and 213k in May and June, respectively. Consistent with solid economic momentum in Q3 and solid readings on initial jobless claims and business surveys, we think payroll growth is likely to remain strong. We forecast a 0.22% m-o-m  increase in average hourly earnings (AHE), corresponding to 2.65% y-o-y, with no calendar bias this month. We continue to expect wage growth to climb higher only gradually. For the unemployment rate, we expect a 0.1pp decline to 3.9% after a surprise 0.2pp increase last month driven by an influx of workers into the  labor  market and weaker employment growth relative to its payroll counterpart.

Trade balance (Friday): We expect the trade deficit to widen to $45.4bn in June from $43.1bn in May, driven by a wider-than-expected goods trade deficit as goods exports faltered during the month. Advance data indicate that goods exports likely slowed, with broad-based declines in product categories. Goods imports likely continued to rise at a modest pace. We expect continued steady improvement in service trade balance.

ISM non-manufacturing index (Friday): We forecast a 0.3pp decline in the July ISM non-manufacturing index to a reading of 58.8, consistent with steady non-manufacturer business activity albeit with some downside risks from trade. Given that the nonmanufacturer index includes agricultural industries, some decline following increased headlines regarding retaliatory tariffs against US farmers could be expected. However, steady growth in the non-manufacturing sector, helped by firm consumer fundamentals, should keep non-manufacturer sentiment elevated to start off Q3.

Euro area | Data preview

Euro area July flash HICP data and UK BoE meeting will be in focus next week.

UK BoE household borrowing, Jun (Monday): Encouraging numbers from UK Finance show a rise in net lending on dwellings, net consumer credit and mortgage approvals for house purchase in June. As a result, we expect this to show up in the Bank of England’s official figures.  

Euro area GDP, Q2 first release, (Tuesday): We expect the first reading of euro area Q2 GDP to grow steadily by 0.4%. While there will be no underlying expenditure details in this release, we expect domestic demand to support the economic expansion. However, protectionism fears continue to threaten the economy, and July PMI data shows the external demand is still weak. We continue to think the euro area economy will not return to the heady height of last year in the second half of 2018.

Euro area and Germany HICP, July flash, (Monday-Tuesday): We expect the flash reading of German HICP inflation to increase to 2.2% y-o-y  in July from 2.1% in June. For core inflation, we expect an increase to 1.2% y-o-y  in July from 1.1% in June. In regard to Euro area flash reading of HICP, We forecast it to remain at 2.0% y-o-y  in July. The support from the energy price increase should weaken from last month. For core inflation, we forecast an increase to 1.0% y-o-y  in July from 0.9% in June. This is partly due to an unwinding of seasonal distortions caused by the different timing of holidays this year compared with last year.

UK PMI surveys, Jul (Wednesday): The headline manufacturing index has been around the 54.0 to 54.5 level over the past three months. Concerns about protectionism, Brexit, China etc. could have a negative effect on this index. Combined with a fall in the business activity index of the services survey (we forecast a fall from 55.1 to 54.5) that would imply a decline in the composite index to around 54.5 – which would mean that it remains about half a point above its H1 average.  

UK BoE policy decision, Aug (Thursday): We expect the Bank of England to raise interest rates for a second time this cycle by 25bp. This is supported by the data – unlike in the  run up  to the August 2017 and May 2018 policy meetings the surprise index has not collapsed ahead of the forthcoming meeting. The Bank publishes its Inflation Report forecasts too – the focus  as usual  will be on the Bank’s estimate of inflation towards the end of the horizon (i.e., two to three years ahead), but also on the Bank’s thoughts on equilibrium interest rates. Recall that based on  unchanged  monetary policy the Bank saw inflation settling at a little over 2.35% in two to three years’ time. See our main article this week for a preview of the meeting.  

Japan | Data preview

We expect the BOJ to justify prolonging the current monetary easing policy and also start a discussion on letting its policy become more flexible to mitigate side-effects.  

BOJ monetary policy  meeting ;  Outlook for Economic Activity and Prices (Outlook Report; Monday/Tuesday): We expect the BOJ to leave monetary policy unchanged. On 20-22 July, a number of media outlets including Jiji Press and Reuters reported that the BOJ could discuss adopting a more flexible monetary policy. However, in view of the increased focus on the side effects of the current easing policy on earnings at financial institutions, we think all that will happen at the upcoming meeting is that methods of making adjustments toward a more flexible monetary policy will be debated and  considered,  and that there will be no immediate change in policy. In the Outlook for Economic Activity and Prices (Outlook Report), which will be released at the same time, we think the main focus will be on an analysis of the factors behind the inflation rate remaining  lackluster. Based on recent communication from the BOJ, we think it likely that the waning impact from hysteresis is likely to be noted as the main reason for sluggish inflation   A  waning  of hysteresis effects refers to the waning effects over time of the decline in supply capacity as employment and investment are reined in as a result of an economic downturn, and increased supply capacity easing the upward pressure on prices from stronger demand. The waning impact of hysteresis could become the basis for structural factors unrelated to monetary policy that cause the inflation rate to be lower than expected. However, these reversal effects do not continue forever and taking a longer-term perspective, it could also be possible to claim that inflation momentum will recover as the effects of easing emerge. Through such a debate, we think the BOJ will justify prolonging the current monetary easing policy and underscore the validity of taking a more flexible approach to easing in order to lessen the side effects on earnings at financial institutions that have cumulatively built due to the prolonged easing. We forecast the core inflation projections for FY18 and FY19 (excluding the effect of an increase in the consumption tax rate) in the Outlook Report will each be lowered by 0.3pp. We think the projection for FY20 will be maintained at +1.8%, as in the April Outlook Report. We forecast that the projection for GDP growth in FY18 will be lowered slightly, reflecting the decline in January-March 2018 and the carryover effect from that, but that the growth projections for FY19 and FY20 will be maintained. A key point is how the above debate related to taking a more flexible approach to monetary policy is described in the post-meeting statement (or sometimes in the Outlook Report), including whether it is actually mentioned. Similarly, a key point in the governor’s post-meeting press conference will be how specific his statements are on what was discussed about adopting a more flexible monetary policy and specific ways to do this. We think these points will also be a litmus test for gauging when a decision will be taken to change the guideline for market operations to pave the way toward a more flexible approach to monetary policy.


We expect the official manufacturing PMI to fall to 51.2 in July from 51.5 in June, as high-frequency data (such as of blast furnace operating ratio and crude steel production) points to weakening growth momentum. Seasonality could also be a factor, as, over the past three years, the official PMI has slowed by an average of 0.2pp from June to July.”

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