The week ahead in the US: CPI to pick up modestly in August - Nomura
According to Nomura's Economics Team, this week's US core CPI inflation is to pick up modestly in August as transitory factors revert, despite enduring factors may continue to weigh on core inflation, Nomura adds.
NY Fed Survey of Consumer Expectations (Monday): Inflation expectations in the New York Fed survey have ticked down slightly in recent months. Governor Brainard recently noted that “frequent or extended periods of low inflation run the risk of pulling down private-sector inflation expectations,” highlighting the decline in inflation expectations since the financial crisis. August data from the Survey of Consumer Expectations will add some color to recent developments in inflation expectations.
JOLTS (Tuesday): We expect July Job Openings and Labor Turnover Survey (JOLTS) to indicate continued strength in the labor market as voluntary quits remain elevated and job openings stay near historical highs. In June, job openings reached 6163k, the highest level recorded. It is possible to see some rebound from this high reading, but we expect an elevated reading for July. Note that with the JOLTS release we will update the Nomura Labor Market Turnover (LMT) index.
Producer prices (Wednesday): PPI inflation was weak in July. Excluding volatile food, energy, and trade, core PPI inflation remained weak. In August, we are likely to see some rebound in PPI inflation considering possible rebounds in volatile components. PPI for trade (which represents the margin of wholesalers) could rebound. Moreover, PPI for portfolio management and securities brokerage services, which are inputs into the core PCE index, may also revert. Note that our August CPI inflation forecasts may be subject to revision after the release of the PPI report.
US Budget (Wednesday): With a proposed fiscal deal likely averting any debt limit deadline in late September, less attention will be paid to Treasury’s monthly budget statement. The fiscal year-to-date deficit is at $566.0bn. Historically, outlays in August usually outpace receipts. Thus, a larger than usual deficit may not be surprising.
Initial jobless claims (Thursday): Initial jobless claims increased 62k to 298k in the week ending 2 September, reflecting the beginning of a transitory spike in claims from Hurricane Harvey. Upcoming claims releases will likely show a transitory increase reflecting the widespread economic damage from Hurricane Harvey in the Gulf Coast region. There is also some risk from the impact of Hurricane Irma, which could impact the South Florida economy. However, the overall labor market remains healthy and we expect the increase related to inclement weather to eventually subside.
CPI (Thursday): We expect a decent 0.2% (0.189%) m-o-m increase in August core CPI. Our forecast of its y-o-y rate is 1.63%. We think a sharp 4.2% drop in lodging-awayfrom-home prices in July, which lowered core CPI m-o-m inflation rate by 0.05pp, may have reverted to some extent in August. That partial reversal in lodging-away-from-home prices would largely explain an expected acceleration in core CPI m-o-m inflation to 0.189% from 0.114% in the previous month. Airline fares, another volatile series, likely have remained stable in the month, contributing to a steady increase in core service prices. On rents, however, we expect a gradual slowdown to continue considering weakening rental housing markets. The vacancy rate of apartment buildings has picked up in Q2. Further, the absorption rate of new apartments (new units rented within three months) has been trending downwards.
Considering this trend, it is unlikely to see material acceleration in the inflation of rents and homeowners’ equivalent rent in the near term. As for wireless telecom service prices which often surprised on the downside, we expect another moderate decline in August, but an introduction of two-tiered price strategies by one of major carriers increases uncertainty. On core goods, we expect enduring factors to continue to weigh on inflation. Considering industry data we think new and used car prices remained subdued. Further, prices of apparel may get pushed down further as competition from online retail stores intensifies, which often occur deep discounts to attract shoppers.
Our headline CPI forecast is 0.4% (0.385%) m-o-m (1.91% y-o-y). Our CPI NSA forecast is 245.455. Our forecast is partially driven by a strong increase in energy prices. Retail gasoline prices likely surged sharply in August following a slowdown in July. We expect a trend-like increase in food prices. Based on prices received at farms, prices of food at home likely increased steadily. As for food prices outside home, we expect continued stable increases, reflecting tightening of labor markets in restaurant industry.
Empire State Survey (Friday): Survey data so far have been consistent with an economy that is operating modestly above trend. Specifically, incoming data on orders and shipments suggest that industrial activity has been improving at a solid pace in recent months. Given the continued improvement in activity, we expect another elevated reading in the September reading of the Empire State survey. However, the Empire State survey manufacturing index has shown increased volatility in recent months. Considering our outlook for continued growth, we forecast a reading of 15.0 for September.
Retail sales (Friday): We expect a 0.3% m-o-m increase in core (“control”) retail sales for August. Core retail sales increased solidly in July with upward revisions to prior months, suggesting strong momentum going into Q3. We think this trend will continue in August, as strong consumer fundamentals so far have likely been supportive of consumer spending. Moreover, the ISM non-manufacturing survey for August indicated broad-based strength, suggesting healthy domestic demand with many businesses indicating a favorable outlook. For noncore components, increases in retail gasoline prices may have boosted the nominal sales at gasoline stations. However, it is likely retail auto sales declined. August total light vehicle sales slowed sharply from the pace in July with a likely decline in the share of vehicles sold to consumers. Excluding sales of autos and auto parts, we forecast an increase of 0.6%. Altogether, we expect a decent 0.3% increase in headline retail sales.
Industrial production (Friday): We expect a steady 0.2% m-o-m increase in top-line industrial production in August. Core (non-auto) manufacturing activity has been improving at a solid pace. According to the August employment report from the BLS, aggregate hours worked in the core manufacturing sector increased solidly by 0.6% following a 0.3% increase in July. Further, various business survey data suggest continued healthy activity. These data point to a strong growth in core manufacturing output. However, autos and auto parts production will likely remain weak as automakers continue to adjust their production levels. Weaker-than-expected auto sales in August, the seventh consecutive month of downside surprises, portend another month of weak autos output. Moreover, although oil and gas extraction continued to increase in August, the number of active oil rigs plateaued in July through August. For this reason, weak mining support sector output may likely offset a steady increase in oil and gas extraction output. Lastly, utility output likely fell in the month, lowering top-line industrial production. The summer heat in August was milder than historical norms, which may have reduced consumers’ need for cooling.
University of Michigan consumer sentiment (Friday): Consumer sentiment remained elevated in the final reading for August with a continuation of the partisan divide in current and expectations sentiment. We expect consumers to remain optimistic in September. The partisan tinge will likely persist over the next few months but overall, consumers appear to be upbeat about the current situation and future outlook for the economy. In August, inflation expectations at the 1-year horizon remained unchanged at 2.6%; at the 5-10 year horizon, expectations ticked down 0.1pp to 2.5%. We expect a steady reading within a stable range. Note that the FOMC tends to look through monthly volatility in these measures.
Business inventories (Friday): Advance readings of inventories suggest a steady increase in July. Inventories held by manufacturers and wholesalers likely grew steadily but retailers’ inventories fell modestly. The contribution to real GDP growth from the change in inventories in Q2 was weak, but we continue to expect a decent improvement in inventory accumulation in Q3.