Analysts at Nomura offered their outlook for the week ahead, noting the US payrolls and looming tariffs as a likely solid NFP report could be overshadowed by the US imposing more tariffs on China.
United States | Data preview
We anticipate a solid August employment report, but expect trade tensions to weigh on business sentiment.
Construction spending (Tuesday): Construction spending fell 1.1% m-o-m in June, weighed on by an unusually large 11.0% m-o-m decline in spending on public
educational structures. This series could revert in July, adding some boost to overall construction spending. However, looking beyond the unusual decline in the public education category, private residential construction spending was somewhat soft in June, falling 0.5% m-o-m.
ISM manufacturing index (Tuesday): We expect the ISM manufacturing index to decline by 0.6 percentage points (pp) to 57.5 in August, a still-solid reading consistent with firm economic momentum, but likely reflecting continued trade concerns. Regional manufacturing surveys in August were somewhat divided, with increases in the manufacturing indices from the Dallas, Philly and Kansas City Feds, but declines in the Empire State and Richmond Fed surveys. Despite the mixed signals, we expect trade concerns to weigh on manufacturer sentiment in August.
Total vehicle sales (Tuesday): We expect vehicle sales to grow slightly in August to a pace of 16.8m saar from 16.7m saar in July. Sales have steadily trended lower after a transitory increase following the damage from Hurricanes Harvey and Irma in the late summer of 2017.
Trade balance (Wednesday): We expect the trade deficit to widen in July to USD49.6bn, an increase of USD3.3bn from May. In an advance indicators report for the month, goods exports declined 1.7% m-o-m in July while imports increased by 0.9%. As we expect trend-like increases in service imports and exports, we expect the widening goods trade deficit to help push up the overall US trade deficit in July.
ADP private employment (Thursday): Consistent with our forecast for the BLS August employment report, we expect ADP to show a 205k increase in private payroll employment during the month.
Initial jobless claims (Thursday): Low readings on initial jobless claims remain consistent with steady job growth and a strong labor market.
Productivity, Q2 final (Thursday): The BEA’s second estimate of Q2 real GDP growth showed a slight 0.1pp upward revision, to 4.2% q-o-q saar. Thus, the final reading for productivity growth may be revised up slightly from the first estimate of 2.9% q-o-q saar. However, we continue to expect somewhat subdued productivity growth going forward.
Factory orders (Thursday): An advance reading for July showed modest gains in durable goods ex-transportation orders. However, the top line number for durable goods was weighed on in part by a sharp 34.6% m-o-m decline in orders for defense aircraft and parts, which could weigh on overall factory order activity in July.
ISM non-manufacturing index (Thursday): We expect the ISM nonmanufacturing index to increase slightly by 0.3pp to 56.0 in August after a sharp 3.4pp drop in July. Part of the weakness in July was related to another sharp decline in the supplier deliveries index. We expect some modest payback in the August survey and believe that trade concerns may weigh less heavily on nonmanufacturing firms relative to the manufacturing survey. However, given that agricultural and mining firms are technically classified as nonmanufacturers, and that many of the retaliatory tariffs thus far have targeted agricultural products, there remains some downside risk to the August print.
Employment report (Friday): After a 157k gain in nonfarm payroll employment in July, a somewhat stronger report than the headline reading suggests, we expect a solid 215k increase in NFP employment in August. Part of the below-forecast reading for July was attributable to unusual declines in certain industries that could revert in August (see July Employment Recap, 3 August 2018). A 220k NFP gain in August would be consistent with economic growth of roughly 3%. However, despite forecasting a solid 20k gain in manufacturer employment in August, we see some downside risk to the near- to medium-term employment growth outlook if manufacturing growth slows materially due to trade concerns. With a modestly negative bias due to calendar effects, we expect average hourly earnings (AHE) to increase by 0.18% m-o-m in August, corresponding to 2.69% y-o-y. Consistent with strong employment growth, we expect the unemployment rate to fall 0.1pp to 3.8% in August and see room for a possibly larger decline in light of a possible drop in LFPR.
Euro area | Data preview
Euro area August-final PMIs and UK PMI survey data will be in focus next week.
UK PMI surveys, Aug (Mon-Weds): The July composite PMI took a turn for the worse thanks largely to the deterioration in the services component (manufacturing was down only modestly, while construction was up). Still, it is worth noting that at 53.6 the composite output index stood very close to its average during the year to date (53.8). We expect the manufacturing index to be unchanged, while we would not be surprised to see some improvement in the services index – albeit not back to June levels. We have the composite index regaining 0.4 points to take it to 54.0 – consistent with between 0.4% and 0.5% q-o-q economic growth.
UK BRC retail sales, Aug (Tuesday): Official retail sales growth has improved of late. Indeed, the 3m average annual rate rose to 3.6% in July, its highest for over a year. The rise in sales growth seems to have been the result of rising food/drink purchases (rather than non-food purchases) which may have been at least partly weather/World Cup related. The BRC figures are nominal (rather than real) – they too have been more positive on sales over recent months. We are generally positive on the consumer due to low interest rates, rising wages, falling inflation and available finance.
Germany Industrial Production, Jul (Friday): July’s manufacturing PMI for Germany sent a positive message last month, as German companies registered a solid increase in output and new orders. In line with this message we forecast an improvement in Germany’s industrial production, up to +0.5% m-o-m in July from the -0.9% of June.
UK BoE inflation expectations survey (Friday): There are three main numbers to watch in this Q3 report: i) coming year inflation expectations, which were running at 2.9% in Q2, ii) inflation in the 12m after that, which was also 2.9% in Q2, and iii) longer-term expectations at 3.6%. All of these figures were quite high – in fact they were last higher at the end of 2013.
Asia | Data preview
China: Export growth is likely to rise in August. The evolution of the China-US trade conflict suggests further import tariff hikes and rising trade protectionism, while exporters may have continued to front-load shipments in August. We expect import growth to stay robust, due to several factors including front-loading by importers and a rise in import demand for autos and certain consumer products after the general tariff cuts on 1 July.
Emerging Markets | Data preview
Turkey: We expect the August CPI to rise 2.7% m-o-m, bringing the annual rate of inflation to 18.4% (from 15.9% in July) as the adverse effects of the sharp TRY depreciation and recent energy price hikes have led to a substantial acceleration in inflation. Normally, such a substantial deterioration in the inflation outlook leads to a sizable rate hike at the next MPC meeting, which is on 13 September. However, because of fierce opposition to rate hikes from President Erdogan, we do not have a strong view that there will be a hike.”
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