The week ahead: eyes turn to nonfarm payrolls - Nomura

Analysts at Nomura highlight the key scheduled data events for the week ahead.

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United States | Data preview

We expect a below-trend 0.1% m-o-m increase in April’s core PCE index and a 205k NFP increase in May’s employment report.

Case-Shiller home price index (Tuesday): Home price appreciation continued to accelerate in February with the 12-month percent change in the Case-Shiller composite 20 index increasing 0.4pp to 6.8%. With steady demand and continued supply shortages, we expect this trend to continue over the medium run. However, houses in low- to medium-tier markets may see a disproportionate share of the increases given recent tax legislation that could negatively affect high-end house price gains.

Conference Board’s consumer confidence (Tuesday): Considering continued strength in the labor market, we expect Conference Board’s consumer confidence index to rise to 130.0 in May, from 128.7 previously. The University of Michigan consumer sentiment index was unchanged at 98.8 as favorable assessment of tax cuts balanced concerns over tariffs. However, the future expectations index rose, consistent with consumers’ ongoing optimism about future economic conditions. Conference Board’s confidence measures likely reflect consumers’ positive outlook on the economy. 

ADP private employment (Wednesday): Consistent with our forecast for the May employment report from the BLS, we expect ADP to report a 205k gain in May private payroll employment.

Q1 GDP, second estimate (Wednesday): The first estimate of Q1 GDP came in at 2.3% q-o-q saar. Incoming data since then suggest that the Q2 GDP growth will likely be lowered to 2.1% q-o-q saar in the second release by the BEA. Annual revisions to manufacturers’ inventories by the Census Bureau lowered inventory buildup at factories in Q1. In addition, the advance release of the Quarterly Services Survey for Q1 suggests weaker-than-expected consumer spending on services relative to the BEA’s assumptions, while business investment in intellectual properties may have been greater. Taken together, the net effect was likely negative.

Advance goods trade balance and inventories (Wednesday): Trade deficit narrowed in March as exports rose sharply and outpaced imports. Imports slowed in March, reverting gains in February. We think that a strong increase in goods exports in March likely reverted in April while goods imports rebounded, and we forecast a modest widening in the goods trade deficit to $69.8bn, from $68.3bn. 

Fed Beige Book (Wednesday): The Beige Book prepared for the 12-13 June FOMC meeting is likely to show continued modest to moderate growth across the 12 districts. Incoming data indicate some pickup in consumer confidence during March and April, after disappointing readings in January and February. Moreover, while concerns about US trade policy regarding steel and aluminum tariffs will likely show up again in the June Beige Book, broader concerns about trade tensions with China may have abated somewhat. Tight labor markets and labor shortages likely persisted across most districts with price increases at a “moderate” pace, similar to April. Overall, the data for 2Q has so far been strong and we expect the June Beige Book to reflect that.

Initial jobless claims (Thursday): Initial and continuing jobless claims have recently shown increased volatility, but remain at low levels. Consistent with our optimistic labor market outlook, we expect these indicators to gradually stabilize and decline further.

Personal income and spending (Thursday): Personal income likely rose at a trend-like pace of 0.4% m-o-m in April, after rising 0.3% in March. We expect a healthy 0.5% m-om increase in personal spending in April, reflecting a solid 0.4% m-o-m increase in core (“control group”) retail sales which exclude volatile components. Retail sales data suggest that momentum in personal spending could firm in Q2, after softness in Q1. Sales at most vendors rose steadily in April. Sales at auto dealerships were up 0.2% mo-m, implying that consumer purchases of autos rose modestly. Among non-core components, receipts at gasoline stations grew 0.8% m-o-m, reflecting higher retail gasoline prices during the spring driving season. Looking ahead, the recent tax cuts and healthy labor market should support consumer spending. 

PCE deflators (Thursday): Incorporating relevant components from April’s CPI, PPI and import price releases, we expect core PCE to increase 0.132% m-o-m in April, lowering its 12-month rate to 1.8% (1.830%), from 1.9% (1.882%) previously. The further slowdown in m-o-m core PCE inflation, from 0.15% m-o-m in March, is driven by weakness in PPI’s medical care services, financial services and airline fare prices. We continue to expect core PCE inflation to pick up only gradually over the forecast horizon after base effects help drive up the y-o-y rate 0.3pp in March.

For non-core components, we expect a steady 0.3% m-o-m increase in food prices, consistent with April’s CPI data, while energy prices likely rose 1.5% m-o-m as retail gasoline prices picked up during the month. Altogether, we expect a 0.2% (0.195%) m-om increase in the PCE index in April, corresponding to 2.0% (1.987%) y-o-y.

Chicago PMI (Thursday): We expect a steady increase of 2pp to 59.4 for the Chicago PMI in May. Early indicators for business activity during the month are consistent with a pickup in activity. The Philly Fed, Empire State and Richmond Fed manufacturing surveys showed an improvement in their topline indices after some softening during April. As businesses focus more on the robust economic outlook for 2018 amid easing tension between the US and China, we expect them to remain optimistic. However, an escalation in trade tension may significantly affect business confidence.

Pending home sales (Thursday): Pending home sales, a leading indicator of existing sales, increased 0.4% m-o-m in March, but remained 4.4% below their level 12 months ago. A burst of colder-than-usual weather in April may have affected contract signing activity during the month. Over the longer term, we expect growth in pending home sales to continue to face supply constraints despite steady consumer demand.

Employment report (Friday): We forecast a solid 205k nonfarm payroll employment increase in May, with essentially all of the gain coming from private employers. Incoming labor market data point to steady employment growth and a still-low unemployment rate, consistent with our optimistic outlook for Q2 and 2018. Initial jobless claims remain subdued while the four-week moving average of continuing unemployment insurance claims has recently reached levels not seen since the early 1970s. We expect average hourly earnings to increase 0.22% m-o-m, likely leaving the y-o-y rate unchanged at 2.6%. Finally, we expect the unemployment rate to remain unchanged on a rounded basis at 3.9%. The downward pressure on the unemployment rate from the solid pace of job creation may have been partly offset by those joining the labor market encouraged by continued strong labor market conditions.

ISM manufacturing index (Friday): We expect the ISM manufacturing index to rise to 58.0 in May, from 57.3 in April. The Empire State and Philly Fed surveys indicate solid activity in May, while concerns over US trade policies likely weighed on forward-looking measures.  Overall, the strength was broad-based across measures of current business activity and demand, which suggests a strong May ISM manufacturing report. 

Construction spending (Friday): Construction spending fell 1.7% m-o-m in March, partly driven by a sharp 8.0% decline in private residential improvement spending. However, private residential construction spending overall was weak as both single- and multi-family construction spending declined. Construction spending in April could rebound given idiosyncratic declines in home improvement spending. 

Vehicle sales (Friday): We think vehicle sales slowed to 16.6mn saar in May, from 17.1mn saar in April. Vehicle sales in April registered a 17.1mn saar, surprising to the upside, but we think sales will continue to slow following the continued downward trend after a surge in replacement buying activity in Q4 2017. That said, consumer purchases of autos remained steady in April, implying that consumer demand remains firm. If automakers spend more than usual on Memorial Day holiday promotions to unload high inventories, May’s vehicle sales figure could surprise to the upside. Looking through monthly volatility, although a strong labor market and gains in real disposable income will likely support consumer demand, sales boosted by high incentive spending and tight lending standards on auto loans point to some downside risk for auto sales in 2018.

Euro area | Data preview

The week ahead Euro area flash HICP inflation and UK PMI manufacturing data are in focus this week.

Germany inflation, May flash (Wed 30 May): We expect the flash reading of German HICP inflation to increase to 2.2% y-o-y in May from 1.4% in April. For core inflation, we expect a climb to 1.6% y-o-y in May from 1.0% in April.

BoE household borrowing, April (Thurs 31 May): Typically, the mortgage approvals series is the main focus in this report, but the scale of the decline in net consumer credit in the March report means that this will be watched closely for any signs of a rebound. Note that our forecast for net consumer credit was made before UK Finance publishes its figures (which correlate highly with the BoE’s numbers) on Friday 25 May.

Euro area inflation, May flash (Thurs 31 May): We expect the flash estimate of euro area HICP inflation to increase to 1.7% y-o-y in May from 1.2% in April. This increase stems from a positive impact from a higher oil price and the unwinding of seasonal distortions caused by the timing of the Easter holidays. The unwinding of seasonal distortions is also the main reason why we expect core inflation to increase to 1.1% y-o-y in May from 0.7% in April. 

PMI manufacturing survey, May (Fri 1 Jun): Since its peak at the end of last year the headline index of the manufacturing PMI has fallen by around 4.5 points to just below 54. With the euro area survey having fallen for a fifth consecutive month in May, we expect a further modest decline in the UK survey too. We forecast around a 0.5 point fall to 53.5.

Asia | Data preview

Japanese April industrial production (Thursday): We expect industrial production to rise for a third straight month in April. In the survey of manufacturers' production forecasts carried out on 10 April, the production forecast for April, adjusted for prediction error, was 1.4% m-o-m. Exports, which are highly correlated with industrial production, were stronger than expected in April, and from the middle to the end of the month, economic activity appears to have improved, with JPY weakening against USD and the stock market rallying, indicating a strong likelihood that production will come in stronger than the survey of forecasts suggests. 

China: We expect China’s official PMI to remain unchanged at 51.4 in May from April. High-frequency data (such as coal consumption by six major power plants) suggest solid production during the month, but other factors such as weakening domestic demand could be a drag.