Key events this 'BUSY' week for the US - Nomura

Analysts at Nomura offered a round-up of the key events in the US this week, explained that recent data on employment point to a return to trend in nonfarm payroll gains in April following a downside surprise in March. 

• European data risks this week? - Nomura

Key Quotes:

Personal income and spending (Friday): Income growth has been steady in early 2017 with steady increases in aggregate earnings. In February, income growth accelerated to 4.6% y-o-y in February, faster than the average pace in 2016. However, the March employment report surprised on the downside. Private production and nonsupervisory job creation slowed to below the six-month pace leading up to February, and the average weekly earnings of those on production and nonsupervisory payrolls slipped. This development suggests the growth in aggregate earnings was slower in March. Thus, we expect a slower 0.2% m-o-m increase in personal income. Consumer spending growth was sluggish earlier in the first quarter despite heightened optimism. March retail sales data showed some signs of recovery even though January and February were revised down. Yet, sales at motor vehicle and parts dealers continued to fall, portending a continued drag on durable goods spending in March. On the other hand, the decent recovery in sales at various nondurable goods vendors suggests a modest improvement in consumer spending on nondurable goods. Moreover, we expect services spending to have grown strongly, as utilities demand recovered notably in March. Electric and gas utilities output rebounded strongly in March as the weather was closer to the historical norm after unusually warm weather in January and February. As for non-energy related services spending, we expect steady growth. In sum, we expect a steady 0.3% m-o-m increase following a 0.1% increase in February.

PCE deflator (Friday): Core CPI inflation in March surprised on the downside, falling by 0.122% m-o-m. However, as the core PCE price index is also based on the relevant components of the PPI in addition to CPI, we think March core PCE inflation may not have been as weak as core CPI inflation. For example, despite a 0.3% fall in CPI’s physician services, PPI’s corresponding price index, an input into the core PCE price index, increased by 0.2% m-o-m. Moreover, CPI’s food-away-from-home prices (which are categorized into non-core components in CPI but used for estimating food service component of core PCE price index) increased steadily by 0.2% m-o-m. Lastly, weakness in rent-related price indices in core CPI may not be so negative to core PCE price index as the weightings assigned to the rent-related items in the core PCE price index are smaller than those assigned to related components in core CPI. Altogether, we forecast a slight 0.034% m-o-m decline for core PCE inflation in March, which translates into a 1.7% (1.651%) y-o-y increase, down from 1.8% (1.753%) in the prior month. On non-core items, we expect PCE deflator for food to have improved decently. CPI’s prices of food at home increased notably by 0.5% m-o-m in March following a 0.3% increase in February. On the other hand, we expect a sharp decline in PCE deflator for energy. The CPI energy index fell 3.2%, driven by lower gasoline and utility gas services prices. Altogether, we forecast a 0.134% m-o-m decline in headline PCE (+1.92% on a y-o-y basis). 

Construction spending (Monday): In February, construction spending was up 0.8% m-o-m with backward revisions (January was revised up but December was revised down). Private construction outlays increased steadily by 0.8% m-o-m. Public construction outlays rebounded by 0.6% after three consecutive month to month declines. Incoming data on architectural billings suggest a strong increase in private nonresidential construction spending is unlikely. However, residential building permits increased steadily, which suggests growth in private residential construction continued. However, there has not been notable evidence that public construction outlays have strongly picked up. Consensus expects a modest increase of 0.4% m-o-m in March. 

ISM manufacturing (Monday): The ISM manufacturing index declined slightly to 57.2 in March from 57.7 in February, indicating some moderation in manufacturers’ optimism. Both production and new orders indices declined, implying a slight moderation in the improvement of business activity. Incoming data imply a continued moderation in April. The Philly Fed and Empire State surveys indicate steady activity in April, but their headline indices declined from historically high levels. Therefore, we expect the headline ISM index to decline slightly to 56.0. 

Senior loan officer survey (Monday): In the latest survey for Q4, respondents indicated that, on balance, the banks left their standards on commercial and industrial (C&I) loans basically unchanged. The standards on commercial real estate (CRE) loans loosened somewhat, but remains relatively tight compared to the period prior to 2016. The respondents started tightening the standards for CRE loans around the end of 2015, reflecting increased attention from regulators and an oversupply of apartment buildings in some major cities. We expect these tighter standards to have sustained in Q1. In addition, lending standards on auto loans, one of major consumer loan components, tightened notably in Q4. The tightening may have been a response to the delinquency rate of subprime auto loans which deteriorated in recent quarters. Consumer demand for auto loans declined, which may have contributed to weak auto sales in recent months.

Vehicle sales (Tuesday): In March, vehicle sales slowed to an annual rate of 16.53m units, their lowest level since February 2015. We expect vehicle sales to have rebounded in April to 17.2m, which is still short of the 2016 level of 17.46m. Even though we expect some reversal of the decline in March, automakers have been struggling to maintain the current pace of sales as incentive spending to boost sales has already reached high levels following aggressive incentive battles. Moreover, the inventory to sales ratio has increased in recent months. Considering these challenges, in the medium term, we expect vehicle sales to gradually decline to a more sustainable range of 16.0-16.5m units.

Senior loan officer survey (Monday): In the latest survey for Q4, respondents indicated that, on balance, the banks left their standards on commercial and industrial (C&I) loans basically unchanged. The standards on commercial real estate (CRE) loans loosened somewhat, but remains relatively tight compared to the period prior to 2016. The respondents started tightening the standards for CRE loans around the end of 2015, reflecting increased attention from regulators and an oversupply of apartment buildings in some major cities. We expect these tighter standards to have sustained in Q1. In addition, lending standards on auto loans, one of major consumer loan components, tightened notably in Q4. The tightening may have been a response to the delinquency rate of subprime auto loans which deteriorated in recent quarters. Consumer demand for auto loans declined, which may have contributed to weak auto sales in recent months. 

Vehicle sales (Tuesday): In March, vehicle sales slowed to an annual rate of 16.53m units, their lowest level since February 2015. We expect vehicle sales to have rebounded in April to 17.2m, which is still short of the 2016 level of 17.46m. Even though we expect some reversal of the decline in March, automakers have been struggling to maintain the current pace of sales as incentive spending to boost sales has already reached high levels following aggressive incentive battles. Moreover, the inventory to sales ratio has increased in recent months. Considering these challenges, in the medium term, we expect vehicle sales to gradually decline to a more sustainable range of 16.0-16.5m units. 

ADP employment report (Wednesday): In line with our forecast for BLS private payrolls, we expect ADP private employment to have gained an additional 180k jobs in March. 

ISM non-manufacturing (Wednesday): The headline ISM non-manufacturing index decreased slightly to 55.2 in March from 57.6 in February. Survey-based measures of business activity, while elevated, suggest no acceleration between March and April. The Philly Fed headline index decreased slightly in April compared to March, while the Dallas Fed service sector activity index declined in April for the third consecutive month. These readings imply some moderation in business sentiment. Service-providing payrolls decelerated in March, while retail trade employment posted a consecutive month of employment losses. Moreover, given the recent turmoil in the brick and mortar retail industry, it will be interesting to see how this index fares. In April, we expect the ISM nonmanufacturing index to remain elevated but decline slightly to 54.5. 

FOMC meeting (Wednesday): We expect no change in short-term interest rate policy at the 2-3 May FOMC meeting. Recent Fedspeak indicates most members expect two more rate hikes later in 2017. While short-term interest rate policy will most likely remain unchanged at the upcoming meeting, markets will pay significant attention to the language of the FOMC statement at the end of the two-day meeting (3 May). Attention has shifted towards the Fed’s balance sheet policy in recent months with multiple speeches by Fed officials stressing the need for a well-communicated, smooth winding down. While there seems to be consensus among committee members regarding the timing of balance sheet adjustment, many questions remain regarding the specifics of the process. We find it most likely that there will be no significant change in language as it relates to the balance sheet – not much has changed since the most recent FOMC meeting. However, there is some possibility that the committee will attempt to provide more clarity regarding specifics of the long-term trajectory of the adjustment process. Additionally, the language of the first two paragraphs of the post-meeting statement, as they relate to recent economic developments and expectations, will be under some scrutiny as they may indicate the committee’s intentions for the next rate hike. Spending data over Q1 has remained soft since the last FOMC meeting and weakness in incoming data suggest the possibility of a significant slowdown in headline Q1 GDP. This development, combined with a downside surprise in both the March employment report and March core CPI, presents FOMC officials with some challenge in terms of how to assess the overall health of the economy. Given the data-dependency of monetary policy, it is important for the FOMC to describe the economic status in a way that it can manage market expectations. Language in the minutes from the March FOMC meeting indicates some willingness among members to look through Q1 weakness, attributing it to “temporary factors” including residual seasonality. However, we find the effect of residual seasonality, where some components contribute overly-negative growth to Q1 GDP, to be largely absent from the most recent Q1 data with previously-affected GDP components contributing positively to growth. In addition, the weaker-than-expected March employment report and core CPI might demand further elaboration regarding the committee’s intentions to overlook weak Q1 data.

Initial jobless claims (Thursday): As labor markets tighten further, initial claims remain stable at historically low levels after continued downtrend during the recovery. For the week ending 22 April, the four-week moving average of initial unemployment claims was steady at 242k compared to 243k a week earlier. This recent trend appears consistent with other labor market indicators, including low levels of layoffs and a healthy average pace of payroll gains. 

Trade balance (Thursday): According to the advance report on goods trade balance for March, both goods exports and imports declined but goods exports fell more sharply. Barring any big surprise on service trade, which tends to be relatively stable, we expect slight widening of trade deficit to USD44.5bn in March from USD43.6bn in February. 

Factory orders (Thursday): March readings for manufacturing surveys indicated a continued improvement in optimism during the month. Headline durable goods orders increased 0.5% m-o-m but, excluding volatile transportation components, durable goods orders decreased by 0.2%. However, the softness in durable goods orders extransportation stands in contrast to relatively strong capital goods shipments, which increased by 0.4% m-o-m, suggesting healthy current activity in the manufacturing sector. Overall, consensus expects a steady 0.6% m-o-m increase in factory orders for March. 

Productivity Q1, preliminary (Thursday): Nonfarm productivity increased by an annualized 1.3% in Q4 2016, a moderately slower pace than the annualized 3.3% in Q3 2016. Incoming data for Q1 GDP indicates substantial weakness relative to previous quarters, portending further slowdown in productivity. Recent data on average weekly hours and average hourly earnings for production and nonsupervisory employees indicate relatively unchanged total hours worked in Q1 compared to Q4 2016. Reflecting these developments, consensus expects a flat reading of nonfarm productivity in 2017 Q1. 

Unit labor costs Q1, preliminary (Thursday): According to the BLS, unit labor costs increased by an annualized rate of 1.7% in Q4 2016, rebounding somewhat from the 0.7% reading in Q3. Average hourly earnings have increased moderately over the first three months of the quarter. However, incoming data portends some weakness in first quarter output which, combined with moderate increases in average hourly earnings, points to some pick up in unit labor costs. Consensus expects the preliminary reading for Q1 2017 to show an increase of 2.5% in unit labor costs. 

Employment report (Friday): We expect nonfarm payrolls to have increased by 185k in April and private payrolls to have increased by 180k, implying a 5k gain in government jobs. Recent data on employment point to a return to trend in job creation following a downside surprise in March, which was likely due to temporary factors. Including March’s lower-than-expected reading, nonfarm payroll employment has an average increase of 178k over the first three months of 2017. Moreover, labor market indicators from the Philly Fed and Empire State surveys improved further in April, indicating steady hiring activity in the manufacturing sector. In this regard, we expect an increase of 15k for manufacturing employment. Additionally, initial jobless claims and continuing claims remain subdued and currently hover near the lowest levels in the past three decades. From the household survey, we expect the unemployment rate to remain unchanged at 4.5% as increases in household employment will likely revert to trend after two months of outsized gains. Favorable labor market conditions over the past three months may also motivate discouraged workers to re-enter the labor force in search of employment. Regarding average hourly earnings, we expect a healthy 0.3% m-o-m (2.69% y-o-y) increase, a slight uptick from March’s 0.2% m-o-m (2.67% y-o-y) increase. 

Consumer credit (Friday): According to the Federal Reserve report, consumer credit increased $15.2bn in February, which is slight acceleration from the USD10.9bn increase in January. Revolving credit, which primarily consists of credit card loans, rebounded by 3.5% in February after an unexpected 3.2% drop in January. Nonrevolving, such as education and auto loans, continued to increase at a steady pace of 5.3%. As consumer fundamentals remain firm, we expect consumer credit to have expanded at a steady pace in March.