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The week ahead: key events, watching US core CPI in July/trade tensions – Nomura

Analysts at Nomura offered a detailed preview of some of the key events to come this week.

Key quotes:

United States | Data preview

We expect a 0.3% m-o-m inflation of core CPI in July, driven by volatile components

JOLTS (Tuesday): Job openings remain near record levels this year as labor demand firms in an economy growing well-above potential. The job openings rate, at 4.3%, sits just 0.1pp below its historical high. In May, the quits rate was up 0.1pp to 2.4%, the highest since April 2001, as workers feel emboldened to leave their current employer for other opportunities in a strong labor market. However, labor market turnover, the sum of hires and separations divided by two times the employment level, remains subdued relative to previous cyclical peaks, indicating that the labor market remains less fluid.

Consumer credit (Tuesday): Consumer credit increased strongly by $24.6bn in May, the most since November 2017. The gain was driven by a sharp $9.8bn increase in revolving credit. This sharp increase is unlikely to persist in coming months. However, we believe consumer fundamentals will likely firm and support steady expansion in consumer credit. That said, buying plans in the July Conference Board’s consumer survey deteriorated somewhat, which may be a reflection of some moderation of consumers’ assessment of future economic conditions in recent months.

Initial jobless claims (Thursday): Initial and continuing claims remain low. With strong employment growth and aggregate demand, we expect initial jobless claims to remain subdued over the near term.

PPI (Thursday): The PPI report for July will likely reaffirm rising pipeline price pressure with input costs on the rise. Business surveys such as the ISM and Philly Fed surveys indicated continued input price pressure. Consistent with these surveys, the inflation of PPI for processed materials excluding food and energy has picked up on a 12-month change basis, while that of unprocessed nonfood materials less energy has remained elevated. This suggests that producers are increasingly raising the prices of their finished products to pass the rising costs to their customers.  

Among volatile components, prices of transportation and warehousing service have been rising sharply in recent month on a 12-month change basis. Some of these increases were possibly due to ongoing transportation difficulties. The ISM surveys in recent months reported persistent supplier delivery issues partly due to increased transportation constraints. We expect the transportation component in PPI to remain elevated reflecting this ongoing problem. Note that our CPI inflation forecasts for July may be subject to revisions depending on the PPI report.

Wholesale inventories (Thursday): The advance report on trade and inventories showed softer-than-expected wholesale inventory accumulation in June. The final report could add additional information on whether the weakness in inventory investment will persist into Q3.

CPI (Friday): We expect a 0.3% (0.260%) m-o-m in core CPI inflation in July. If realized, the 12-month change rate would remain at 2.3% (2.350%). Solid readings of the persistent components of core CPI in June suggest that the underlying trend of core inflation remains unchanged. We expect continued steady inflation of rent of primary residence and owners’ equivalent rent (OER), which account for about 40% of core CPI. Moreover, we think the inflation of used vehicle prices will show a steady increase in July after a sharp m-o-m jump in June. We see some upside risk from volatile components that lowered core inflation in June. In particular, we think apparel prices and lodgingaway-from-home prices could increase strongly in July after sharp declines in June, given their strong mean-reverting tendencies. Airline fares, which declined in June despite higher jet fuel prices, may also revert to its trend in July.

Among non-core components, we think food prices rose a steady pace of 0.2% m-o-m. Energy prices likely declined somewhat considering lower prices of retail gasoline and other fuel prices in July relative to June levels. Altogether, we expect a 0.2% (0.227%) increase in the headline CPI in July, which would be equivalent to 3.0% (2.993%) y-o-y growth. For CPI NSA, we forecast 252.112.

US budget (Friday): The monthly budget report has shown a rapidly increasing FY18 deficit with corporate tax receipts down sharply this year following the enactment of the December 2017 tax overhaul. At $607bn, the FY deficit is currently $84bn wider than at this point last year. Historically, Treasury posts a deficit in July, indicating further widening from the July budget statement should be expected. In addition, the July report will also provide additional information on how quickly defense spending has ramped up following the budget agreement in March. We expect the bulk of the spending impact on growth to occur in H2 2018.  

Euro area | Data preview

The week ahead Germany June industrial production and UK GDP data will be in focus next week.

UK BRC retail sales, July (Tuesday): Following some volatility in sales in April/May the BRC total values series settled at an annual rate of just over 2% in June, or just over 1% on a like-for-like basis. The July print could be influenced by weather/World Cup distortions though it is by no means clear that the effect will be positive. After all, sales already saw a football-boost in June and the heat may even have reduced spending in some sectors.

Germany Industrial Production, June (Tuesday): Germany’s survey data showed a modest improvement in June, although mainly driven by a rebound in service sector activity. In fact, the German economy is still negatively affected by capacity constraints, trade fears and political uncertainty. Given these factors, together with some payback from a particularly strong industrial production number in May, we expect June industrial production to decrease by 0.8% m-o-m.

UK Trade, June (Friday): The trade deficit remained unchanged at GBP12.4bn in May, around GBP1bn higher than it was on average during 2011. Annual growth in underlying exports values has turned negative in recent months – that in part may reflect the strength of world trade growth a year ago, but also a weaker trade outlook presently.

UK Monthly GDP, Q2 (Friday): Last month the ONS switched the way it produces its GDP statistics from a quarterly to a rolling monthly basis. We already know the GDP data for April and May, and because June is the last month of the quarter it has only a small impact on Q2 growth as a whole. Were GDP to be flat between May and June it would be up 0.3% q-o-q, while anything between 0.1% and 0.3% for the month of June would produce 0.4% quarterly growth in Q2. We forecast 0.1% m-o-m for June and 0.4% q-o-q for Q2. Note that industrial, construction and services output are published at the same time for June, as well as the expenditure detail for Q2 as a whole.


First set of preliminary estimates for Q2 2018 real GDP (Friday): We expect Q2 (April-June) real GDP growth of 1.4% q-o-q annualized (+0.3% q-o-q). This would be the first quarter-on-quarter growth in two quarters (since Q4 2017). We think exports and private-sector demand continued to grow in Q2. We think consumer spending recovered in Q2 and helped to drive overall growth in GDP, having weakened in Q1 due to the poor weather. We also think capex continued to grow at a moderate pace. The June BOJ Tankan pointed to strong appetite for capex in FY18, suggesting continued firm demand for labor-saving technologies and strong construction demand in major cities in Japan.  

We think exports continued to grow in Q2 due to the solid US economy. That said, we think slower economic growth in Europe since the start of the year, coupled with economic slowdown in emerging markets, has caused Japanese export growth to lack momentum. Nevertheless, we expect a fairly strong contribution from overseas demand, as imports likely fell in Q2 on the heels of weak domestic demand in Q1.  

We expect gradual growth overall, albeit not to the same extent as through mid-2017, when GDP grew considerably more than the potential growth rate. We expect the global economy to gradually decelerate while avoiding a sharp slowdown, and look for the Japanese economy to continue growing albeit with little sign of an acceleration. We think investors should be aware of additional downside risks to overseas demand in the shape of US trade policy and a sharp slowdown in emerging economies.”


China: We expect export growth to slow as US-China trade tensions have escalated and the import tariff hike by the US on Chinese goods has come into effect. Import growth is likely to accelerate in year-on-year terms as Chinese importers could have postponed their shipments to July given the tariff cuts on certain imports (such as autos and daily commodities) came into effect on 1 July. We expect PPI inflation to soften in July as high-frequency data suggest largely stable prices of overall industrial products, while favourable base effects subside in Q3. Recent fiscal stimulus measures could pose some upside risk to our forecast, but we believe it will take longer to fully feel their effect. CPI inflation is likely to edge down further in July as high-frequency data suggest food price deflation widened modestly in the month, more than offsetting the seasonal increase in non-food price inflation implied by historical patterns. Our FX strategists believe headline FX reserves will fall by USD1.4bn to USD3110.8bn in July. After adjusting for FX and coupon effects, we estimate the adjusted change to fall by USD5.0bn, from an increase of USD3.6bn in June. We expect M2 growth to rebound in July from its record low in June, mainly driven by the 50bp reserve ratio requirement (RRR) cut effective 5 July, stronger-than-usual net liquidity injections through the People’s Bank of China’s (PBoC) medium-term lending facility (MLF), and a reported proportional MLF injection by the PBoC to encourage bank lending and high-yield bond investment. We see some upside risk to July credit supply from: 1) the State Council call for a more pro-active fiscal policy and the requirement for financial institutions to meet reasonable financing needs of LGFVs at its meeting on 23 July; 2) several reputable media reports in late July that the PBoC has lowered the “structural” and “pro-cyclical contribution” parameters in its macro-prudential assessment framework for banks, which allows banks to lend more without compromising their performance in the PBoC’s risk assessments; and 3) the PBoC and CBIRC’s special policies on 20 July to facilitate moving off-balance sheet loans back on to balance sheets. We expect new RMB loans to increase in July, compared to a seasonal fall from June to July in past years, which could help cushion the seasonal decline in aggregate financing.

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