The week ahead, preview of key scheduled data-events - Nomura
The week ahead / USA
While recent hurricanes continue to introduce uncertainty, we expect core CPI inflation to stabilize around 0.2% m-o-m in September, after a stronger-than-expected August.
NY Fed Survey of Consumer Expectations (Tuesday): Inflation expectations ticked down slightly in the New York Fed’s August survey. However, a sharp increase in gasoline prices following Hurricanes Harvey and Irma could boost inflation expectations in the September survey. Historically, consumer inflation expectations have been sensitive to gas price fluctuations. The labor market section of the survey in August showed resiliency among respondents: the mean probability of losing a job remains subdued, while the mean probability of leaving a job voluntarily has trended upwards since May 2017. Overall, we expect these trends to continue in September’s survey, although there could be residual effects from the recent hurricanes.
JOLTS (Wednesday): Job openings have remained near record highs in 2017. In July, job openings increased 54k to 6170k, the highest in the survey’s history. Much of the strength in job postings has come from leisure & hospitality as well as accommodation & food services. However, as a fraction of private employment, hires and separations in the survey remain subdued compared to previous expansions. This lack of labor market turnover has contributed to lackluster productivity and wage growth and will likely persist over the medium term.
FOMC minutes (Wednesday): The post-meeting press conference for the 19-20 September FOMC meeting highlighted the significant degree of uncertainty among FOMC participants about the causes of recent soft inflation. However, Chair Yellen sounded relatively hawkish on the short term during the question and answer session, indicating that while the weakness may not be well-understood, it should not be the cause to put off a hike in December.
We expect the minutes from the September meeting to reflect the amount of debate among participants about recent inflation weakness. However, there will likely also be some debate surrounding the FOMC’s evaluation of financial conditions and asset prices.
At the post-meeting press conference, Chair Yellen stated that “sometimes movements, upward movements and asset prices can, for example, reflect a change in market participants, a reduction in market participants' estimates of the longer-run level of interest rates.” This is a view previously shared by St. Louis Fed President Bullard but contrasts with previous statements by New York Fed President Dudley. Thus, the minutes could shed further light on this discussion.
In the “dot plot” for the September meeting, the number of participants expecting no further hikes this year was unchanged from the June meeting (at four). However, the minutes will likely show how comfortable participants are with their forecasts, or what it would take for a pause in the hiking cycle. While the Committee expressed a willingness to look through noisy data due to hurricanes over the next few months, the weak PCE inflation reading for August, which likely cannot be attributed to hurricanes, could be a concern.
Producer prices (Thursday): Producer price inflation in August remained modest with headline PPI increasing 0.2% m-o-m and core (excluding food, energy and trade) increasing 0.2% m-o-m. Finished core consumer goods prices, a component relevant for core CPI, rose steadily 0.1%. In September, the prices of refined petroleum increased sharply due to the recent hurricanes. It is likely that PPI for fuel would reflect the increases. Further, major supply-chain disruptions caused prices of raw material and intermediary goods to rise sharply as reflected in an increase in the price paid indices of business sector surveys. However, it is unclear how much of these increases will be passed through to prices of the finished products at the factory gates. Especially, there has been an increasing divergence between y-o-y inflation of the PPI of finished core consumer goods and core intermediate goods, suggesting that not all of the inflationary pressure on input prices would be passed to the prices of finished goods. In addition, producer prices of residential electricity are an area of increased uncertainty due to power outages caused by Hurricane Irma in Florida. We expect the power outage to be somewhat negative to PPI for electricity as damage to the electrical grid may likely have lowered the demand for residential electricity. Elsewhere, the prices of building materials may show transitory increases, considering the precedent of Hurricane Katrina. Note that our August CPI inflation forecasts may be subject to revision after the release of the PPI report.
US Budget (Thursday): September marks the last month of fiscal year 2017. In August, the fiscal-year-to-date deficit was $673.7bn, above the $619.1bn at the same point last year. However, monthly receipts in September usually increase sharply due to corporate income tax payments. Thus, the fiscal year 2017 budget deficit is likely to be somewhat smaller than the reading from August but still above that of last year.
CPI (Friday): We expect a 0.2% (0.235%) m-o-m increase in core CPI inflation in September, following stronger-than-expected 0.248% increase in August. On a 12-month basis, our forecast is 1.8% (1.805%). Disruptions caused by hurricanes raise uncertainty on our core CPI inflation. For goods, we expect new and used vehicle prices to show decent increases in September. This reflects increased demand for replacement vehicles as many storm-damaged vehicles get scrapped in the Greater Houston area. In line with this development, the Manheim used car price index, a leading indicator of the CPI used car price index, increased strongly in recent months. It is likely that the demand for used cars rose sharply as many consumers turn to used car markets to replace vehicles damaged by the recent hurricanes. The increased need for replacement cars will likely be positive for new vehicle prices as well. On non-vehicle goods prices, we expect an essentially flat reading for core goods prices given that the lagged effect of the recent depreciation of the US dollar will likely offset the negative impact from domestic factors. Among core service prices, we expect strong inflation of lodging-away-from-home prices continued as households in affected areas turn to hotels for temporary shelter. Further, households that suffered extensive damages to their homes may turn to rental housing markets. This transitory increase in demand for rental housing may boost rent inflation. Overall, we think that the hurricanes exerted some degree of inflationary pressure. That said, the uncertainty remains high as the recent hurricanes may have affected the data collection process in September. On the downside risks, some wireless telephone carriers offered new and existing customers new plans that bundle free video streaming services to regular cellular data plans. These bundled plans may have been treated as a price decline by the BLS after adjusting for quality changes in services.
Among noncore components, energy prices likely rose sharply in September. The landfall of Hurricane Irma resulted in a sharp increase in retail gasoline prices. On the other hand, power outages in Florida will likely be negative for residential electricity prices as damages to the grid in the region likely cut demand for the utility. However, the uncertainty is high as increases in input prices paid by electricity producers may have been passed through to utility prices. Elsewhere food prices likely increased by a trendlike 0.2% m-o-m, as we expect the prices of food at home to have recovered in September, after falling 0.2% in August. The food away from home prices likely increased at a steady pace. Altogether, we expect a 0.7% (0.688%) m-o-m in topline CPI inflation. Our forecast for CPI NSA is 247.131.
Retail sales (Friday): We expect a modest 0.2% m-o-m increase in core (“control”) retail sales. The impact of the recent hurricanes increases the uncertainty in our forecast. As the recovery continues in the Greater Houston area, we think increased replacement purchases will boost retail sales in September. However, Hurricane Irma brought extensive power outages in Florida, which may have resulted in considerable loss of sales. Yet, these transitory effects from the hurricanes will likely not change our outlook on personal consumption over the medium term as labor markets remain healthy and steady growth in personal income continues. Among noncore components, we expect a sharp increase in sales at auto and auto parts dealers. September light vehicle sales increased sharply after many months of disappointing sales. Although much of the increase was due to a pick-up in fleet sales, it is likely to show a strong increase in sales at dealerships as well. Moreover, sharp increases in retail gasoline prices caused by Hurricane Irma’s landfall in Florida may boost the sales at gas stations sharply. Altogether, our forecast for total retail sales is 1.5% m-o-m. Excluding autos and auto parts, we expect a 0.7% m-o-m increase.
Business inventories (Friday): Advance readings of inventories suggest a strong increase in August, contrary to our expectation of some drawdown due to Hurricane Harvey. Advance reports of both retail and wholesale inventories showed strong increases. Moreover, factory inventories also increased at a healthy pace with upward revisions to the August numbers. Historically, inclement weather, and resulting temporary supply disruptions, have resulted in a temporary decline in inventories. However, incoming data following Hurricane Harvey indicate that inventories may not follow the typical pattern. We continue to expect a healthy contribution from inventory investment to topline Q3 GDP growth after a weak Q1 and Q2 2017.
University of Michigan consumer sentiment (Friday): Consumer sentiment declined slightly in September in both the Michigan and Conference Board surveys due to the recent hurricanes. However, consumers overall remain upbeat about the economic outlook and sentiment could rebound in October as the hurricane season comes to a close. However, elsewhere in the Michigan survey, the home buying conditions index has shown material deterioration in recent months as home buyers grapple with increasing prices and a dearth in supply. Inflation expectations in the September survey remained within a steady range. At the one-year horizon, inflation expectations increased 0.1pp to 2.7%. Over the next five years, expectations are steady at 2.5%.
Euro area | Data preview
The week ahead Euro area and UK industrial production data are in focus this week.
German industrial production (Mon): We expect German industrial production to increase 0.7% m-o-m in August, which will follow a flat reading in July. German manufacturing output should also have risen on the month, supported by a strong global economy and in line with forward-looking survey data.
UK Industrial production (Tues): Official measures of manufacturing output failed to live up to the survey evidence in the first half of this year. Not once in those six months did we see a rise in manufacturing production. Production did rise more meaningfully in July, however, though even a 0.5% m-o-m rise could not prevent output falling by around 1.5% relative to the end of last year. Based on a strengthening of the PMI and CBI surveys in August we forecast another rise in output in August (0.2% m-o-m), though the previous month’s gain raises the risk of some payback.
Euro area industrial production (Thu): We expect euro area industrial production to increase 0.4% m-o-m in August, following a 0.1% m-o-m increase in July. An outcome in line with our expectations would take the Q3 level of IP 0.3% above the average for Q2.
China: We expect a significant rebound in export and import growth in September as the launch of new smartphones could boost the trade of electronics products, in line with the strong trade growth between China and South Korea in the first 20 days of the month. New RMB loan and aggregate financing levels likely remained broadly stable in September, though we expect M2 growth to edge up, boosted by a low base last year.
The week ahead / China
Export growth likely rose in China with the launch of new smartphones."