The week ahead: eyes on nonfarm payrolls - Nomura

Analysts at Nomura noted the week's key events ahead.

Key Quotes:

"United States | Data preview

We expect nonfarm payroll employment to increase by 220k in April following a weather depressed 103k increase in March.

Personal income and spending (Monday): We expect a 0.5% m-o-m increase in personal spending in March, consistent with a healthy increase in core retail sales in the month. However, backward revisions to core retail sales suggest that the personal spending data for January and February could be revised down as well, pointing to weaker momentum in personal consumption expenditure (PCE) in Q1. Spending on durable goods was likely boosted by a solid recovery in expenditure on autos. Spending on nondurable goods likely rose modestly, while we expect services spending to rise firmly driven by a surge in spending on gas and electric utility services due to unseasonably cold weather. We forecast a steady 0.3% m-o-m increase in personal income following a healthy 0.4% m-o-m in February. 

PCE deflators (Monday): Incorporating March CPI and PPI data, we expect a 0.191% m-o-m increase in the core PCE price index for March after a 0.228% gain in February. On a y-o-y basis, we expect a 1.9% (1.946%) y-o-y advance, up from 1.6% in February. Because of slowing in the PPI’s hospital services inflation in March, the contribution from medical care components to m-o-m core PCE price inflation will likely be more modest in March than in February. However, stronger-than-expected rent and lodging-away-fromhome prices appear to partly offset weak inflation of medical care related prices. That said, on a year-on-year basis, the positive base effect should push up core PCE inflation by almost 0.3pp in March. After the boost from this base effect, we expect a more gradual acceleration in core PCE inflation.

Among non-core components, we expect a solid increase in PCE food prices, while PCE energy prices will likely decline notably reflecting declines in various energy prices in March. Altogether, we expect a 0.058% m-o-m increase in the aggregate PCE price index, equivalent to 2.1% (2.063%) y-o-y growth. 

Chicago PMI (Monday): We expect the Chicago PMI to come in at 59.0 in April, increasing from 57.4 in March. The Chicago PMI points to continued expansion in business activity but the pace of expansion has been slowing in Q1. The decline in March was driven by a sharp drop in the production index, which fell 12.7 index points to 55.2, the biggest drop since February 2016. Considering other incoming business surveys, this drop appears transitory and could partly recover in April. Moreover, similar to other surveys, the price paid index of the Chicago PMI report picked up in March, reflecting rising input prices which were partly boosted by the recent tariff announcement. Additional anecdotal accounts on the near-term impact of elevated concerns over US trade policies could be noteworthy in the upcoming report.

Pending home sales (Monday): Pending home sales increased 3.1% m-o-m in February, driven by a sharp, 10.3% increase in the Northeast and a moderate 3.0% increase in the South. February’s rebound is unlikely to be repeated in March. The National Association of Realtors noted that “the miniscule number of listings on the market and its adverse effect on affordability are squeezing buyers and suppressing overall activity.” Supply shortage will likely continue to constrain sales in the near term.

ISM manufacturing index (Tuesday): We expect 59.0 for the April estimate ISM manufacturing index after coming in at 59.3 in March. Incoming business surveys indicated modest moderation in activity. The new orders and shipment indices of the Empire State and Philly Fed surveys fell in April, although they are still well within expansionary territory. Moreover, notable declines in forward-looking business sentiment measures of these surveys appear consistent with manufacturers’ concerns over US trade policies. Although current activity appears healthy, escalation in trade concerns will likely weigh on business sentiment. 

ADP private employment (Wednesday): Reflecting our forecast for private payrolls in the BLS employment report on Friday, we expect ADP to report an increase of 210k in private payrolls for April.

FOMC meeting (Wednesday): We expect few new developments out of the 1-2 May FOMC meeting. We think the post-meeting statement will acknowledge somewhat softerthan-expected economic activity thus far in 2018. However, the Committee will likely expect this slowdown to be largely transitory. In a speech on 18 April, New York Fed President Dudley noted that he views the slowdown as “mostly due to two transitory factors: a retrenchment following the spurt in activity from recovery efforts following Hurricanes Harvey, Irma, and Maria, and the delay in this year’s tax refund payments to those receiving certain tax credits.” For the May meeting, the minutes (scheduled for release on 23 May) will rightly deserve more attention given the Committee’s expected discussions on trade, fiscal policy, inflation and financial conditions. Consistent with incoming regional business surveys, the Beige Book, prepared for the May FOMC meeting, reflected elevated concerns over US trade policies among business contacts. The minutes may include discussions on the short-term impact of a deterioration in business sentiment in response to developments in trade policies.

Initial jobless claims (Thursday): Although picking up slightly over the past few weeks, initial jobless claims remain very low by historical standards. As firms continue to grapple with a tightening labor market, we expect them to hold on to current employees, which should put downward pressure on initial jobless claims over the medium term.

Productivity (Thursday): Based on the monthly employment reports from the BLS, aggregate hours in the nonfarm business sector likely increased at a pace close to 2% q-o-q saar in Q1 2018. Incorporating our Q1 real GDP growth estimate, Q1 nonfarm productivity growth could be modest for the second consecutive quarter. On a year-onyear basis, productivity growth is likely to remain close to 1%. Unit labor costs in Q4 2017 increased 2.5%, partly driven by a 0.05% decline in productivity growth. We expect productivity to remain subdued in light of structural changes in the economy.

Trade balance (Thursday): According to the Census Bureau’s advance goods trade balance report, net exports of goods grew sharply as imports dropped unexpectedly while exports grew solidly. Reflecting these estimates, we forecast a sharp narrowing of the nominal trade balance to $48.7bn, from $57.6bn. We think the slowdown in goods imports in March was likely transitory. Incoming survey data on trade suggest steady momentum in import activity and domestic demand appears to be firm. However, we should closely monitor incoming data to discern any impact from changes to trade policies.

Factory orders (Thursday): New orders received at factories likely increased strongly in March reflecting an outsized increase in aircraft orders according to the March advance durable goods report. However, the report also indicated declines in core capital goods shipment and orders with downward revisions to previous months’ estimates. This report points to weaker-than-expected momentum in business spending on equipment in Q1. However, this weakness may be transitory as business sentiment remains elevated and new tax policies should remain favorable. That said, new orders of core capital goods were down 0.1% m-o-m in March with downward revisions to February, implying that a pickup in equipment investment could be more gradual in coming months.

ISM non-manufacturing index (Thursday): Business activity likely expanded steadily despite rising concerns over trade tensions. We expect a healthy reading of 58.6 for the April estimate of the ISM non-manufacturing index, down slightly from 58.8 in March. Incoming business surveys reflected mounting concerns over escalating trade tensions, but incoming data point to steady expansion in business in non-manufacturing sectors which appears consistent with elevated demand.

Employment report (Friday): After a weather-related soft reading of a 103k increase in March, we expect nonfarm payroll employment to increase at an above-trend pace of 220k in April. Despite the soft reading last month, nonfarm employment growth so far in Q1 2018 has been solid, averaging a 202k gain per month. Our private payroll forecast is for a 210k increase, implying a 10k gain in government employment. Our forecast assumes some rebound in weather-sensitive industries in April, although colder-than-usual temperatures may attenuate the total amount of positive payback. In addition, incoming labor market data have been strong. Initial jobless claims remained low during the BLS survey week for the April report. The Conference Board’s labor differential stayed near multi-year highs. Partly due to calendar effects, we expect average hourly earnings (AHE) to increase 0.27% m-o-m in April, bringing the year-onyear rate to 2.76%. Finally, we expect the unemployment rate to decline about 0.1pp to 4.0%. The unemployment rate in March was at 4.07%. The steady pace of job growth so far this year should be sufficient to remove additional slack from the labor market and lower the rounded unemployment rate to 4.0%.

Euro area | Data preview

The week ahead The euro area inflation estimate for April and UK PMIs are in focus this week.

Germany inflation, April flash, (Monday): We expect the flash reading of German HICP inflation to decline to 1.4% y-o-y in April from 1.5% in March, almost entirely because of lower food prices. For core inflation, we expect a fall to 1.2% y-o-y in April from 1.3% in March.

UK PMI manufacturing survey, April (Tuesday): Despite recent weaker survey evidence globally, and inclement UK weather in March, the headline index of this survey has remained remarkably stable at around 55 over the first three months of 2018. We expect a similar reading in April.

BoE household borrowing, March (Tuesday): Stronger mortgage lending and consumer credit in February raised total household borrowing to GBP5.4bn during the month, its highest reading since September 2017. However, that did come after a particularly weak January reading. We expect a return to recent average levels in March, while the weather may have been a factor in dampening mortgage approvals.

Euro area GDP, Q1 flash, (Wednesday): We expect the first reading of euro area Q1 GDP growth to show 0.5% q-o-q growth after a 0.7% q-o-q print in Q4 2017. While there will be no underlying expenditure details in this release, we expect temporary factors such as bad weather and strikes to have weighed on GDP growth in Q1.

Euro area inflation, April flash, (Thursday): We forecast the flash estimate of euro area HICP inflation to remain at 1.3% y-o-y in April, while we expect core inflation to fall to 0.8% y-o-y in April from 1.0% in March. This drop in the core rate is mainly due to base effects from last year’s Easter break, but also because last year’s EUR appreciation should weigh on goods prices. In spite of this, we still believe that the uptrend in inflation will not change, but accelerate, after the summer.

Asia | Data preview

China: We believe the March rebound of the official PMI was temporary, and forecast a decline to a well below-consensus 50.8 (Consensus: 51.3) in April from 51.5 in March, returning to January-February levels. High-frequency data such as growth of coal consumption by six major power plants moderated in month-on-month terms, and steel prices continued to fall. 

Australia: We expect the Reserve Bank of Australia to leave the cash rate unchanged at 1.50% and repeat that it expects to achieve its unemployment and inflation objectives, over time, based on current policy settings. We see some risks that its comments on global growth momentum and the local labour market could sound less upbeat, but also see a clear risk that it may hint at greater-than-forecast inflation pressures."