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Key events for the week ahead - Nomura

Analysts at Nomura offered their outlook on the week's key events.

Key Quotes:

"United States | Data preview

We expect core CPI inflation to rise back to its trend-like pace in October.

NY Fed Survey of Consumer Expectations (Monday): In October, the NY Fed’s inflation expectations measures increased slightly at both the one- and three-year horizons, but remained within a steady range. Elsewhere, household financial expectations deteriorated somewhat, in contrast with consumer surveys from the University of Michigan and Conference Board. This deterioration was likely transitory and November could see some rebound in sentiment as consumer fundamentals remain firm and the transitory effects from the recent hurricanes diminish further.

US budget (Monday): The October budget statement from the Treasury will mark the beginning of fiscal year (FY) 2018. During FY 2017, the budget deficit increased to $666bn, from $586bn during the previous fiscal year. In June 2017, the CBO estimated a somewhat smaller deficit in FY 2018 ($563bn) owing to a modest increase in individual income tax payments. Historically, outlays outpace receipts in October. Thus, a budget deficit during the first month of FY 2018 would not be unexpected. Consensus expects a deficit of $50bn for October. 

PPI (Tuesday): Producer prices picked up in September, up 0.4% m-o-m from August, partially boosted by a strong weather-driven increase in energy prices. Finished core consumer goods prices (excluding food and energy), a component relevant for core CPI, rose steadily by 0.2%. As the transitory impact from energy components subsides, aggregate producer price inflation may slow in October from the September pace. Excluding volatile food, energy, and trade, we expect a steady increase in core PPI. CPI (Wednesday): Core CPI surprised to the downside in September, rising only by 0.1% (0.127%) m-o-m. Many had expected some boost from the hurricanes but the actual impact on September core CPI appeared muted. For instance, we expected damaged homes and scrapped vehicles to have pushed up rent and vehicle prices, but inflation of both items slowed. That said, we cannot rule out the possibility of inflationary pressure arising from the hurricanes being realized with a longer lag than we initially thought. Thus, we expect a slight acceleration in rent inflation in October after a slowdown in the previous month. Moreover, some of prices which dropped sharply in September, such as prescription drug prices, will likely reverse those declines in October. Although vehicle prices, which have strong inertia, might have continued to decline in October, ex-auto core goods prices appear to have increased given the gap between the inflation of imported consumer goods prices and domestic retail prices widened significantly. Overall, we expect core goods and service prices to increase by 0.14% and 0.23% m-o-m, respectively. Altogether, we expect a rise of 0.21% m-o-m in the aggregate core CPI price index. This forecast translates to a 1.8% (1.76%) rise on a year-on-year basis, up from a 1.7% (1.69%) increase in the previous month.

On noncore components, we expect energy prices to have fallen, driven by a pullback in retail gasoline prices after a weather-driven surge in September. Further, food prices likely increased at a steady pace, as we expect food-at-home prices to have rebounded. Food-away-from-home prices likely increased at a trend-like pace. Altogether, we expect a 0.11% m-o-m increase in headline CPI inflation, which would translate into a 2.0% y-o-y rate. Our forecast for CPI NSA is 246.680.

Empire State Survey (Wednesday): We expect manufacturers’ optimism in the Greater New York area to remain elevated in November and forecast a headline reading of 26 for the Empire State survey. In October, the new orders and shipments indices both remained elevated, indicating sustained momentum in the near term. This appears consistent with elevated incoming data on industrial activity. A headline reading of 26 in November would be consistent with continued strength in the manufacturing sector.

Retail sales (Wednesday): We expect core (“control”) retail sales to have increased a healthy 0.4% m-o-m in October, in line with healthy labor markets and steady income gains. The hurricanes had varied effects on September core retail sales. For October, we expect core retail sales to have recovered mostly from any residual impact from the hurricanes. Among noncore components, we expect sales at auto dealers to have declined slightly. October light vehicle sales slowed from the strong pace in September, which was boosted by high demand for replacement vehicles following the hurricanes. Although there still was some residual replacement vehicle demand in October, it was not enough to sustain the strong pace in September. Moreover, retail gasoline prices trended lower in October following a weather-driven increase in September. This implies that sales at gasoline stations may have fallen in October. Altogether, our ex-auto retail sales forecast is an increase of 0.3%. We expect a 0.2% increase in total retail sales. 

Business inventories (Wednesday): Inventory accumulation was strong in Q3 despite the hurricanes. Change in nonfarm inventory investment added a solid 0.65pp to Q3 real GDP growth. We expect a modest gain for the final estimates of September business inventories. In the aftermath of the recent hurricanes, September retail inventories fell 1.0% according to the Census Bureau’s advance estimate, but resilient growth in manufacturing and wholesale inventory investment would likely offset this weatherrelated drop in the retail counterpart. September wholesale inventories increased at a steady 0.3% m-o-m and incoming data included modest upward revisions to July, pointing to resilient growth. Factory inventories also rose strongly by 0.7% in September.

Initial jobless claims (Thursday): Initial claims rose 10k to 239k during the week ending 4 November. Much of the increase was likely driven by an uptick in Puerto Rico which was affected heavily by Hurricanes Irma and Maria. The Labor Department reported that the ability to take claims has improved in Puerto Rico and they are now processing backlogged claims. The recent increase was likely a delayed reflection of backlogged claims in Puerto Rico. Further, the Labor Department also noted that claims taking procedures continue to be severely disrupted in the Virgin Islands. This region will continue to add to initial claims as recovery continues and backlogged claims get processed. However, these hurricane-driven spikes are likely transitory. We maintain our view that initial unemployment claims will gradually return to their previous downtrend considering the continued strength of the labor market.

Import prices (Thursday): The divergence between imported core consumer goods prices (excluding food, energy, and autos) and CPI core goods prices suggests that the recent weakness in CPI core goods price inflation may not attributable to an external shock. The core consumer goods import prices have stabilized in recent months, but core goods prices in CPI have been declining in recent months, suggesting that domestic factors may be weighing down inflation. Considering the weaker dollar, we expect steady increases in import prices. Higher oil prices will likely push up import prices as well.

Philly Fed survey (Thursday): Consistent with our view for the Empire State survey, we forecast an elevated reading for the November Philly Fed survey of 24.0. Our forecasts reflect elevated manufacturing activity in recent months. Similar to the Empire State survey, this would be a slight pullback from the previous month but still highly elevated. 

Industrial production (Thursday): We expect a healthy 0.5% m-o-m increase in October industrial production. Industrial activity has been expanding at a solid pace despite some lingering impact from the recent hurricanes. Given improvement in manufacturing activity driven by healthy domestic and foreign demand, we expect a decent increase in ex-auto manufacturing output. Further, a recovery in petrochemical production as more refineries regain their production capacities will likely contribute to ex-auto manufacturing output. Moreover, WardsAutos forecasts suggest that, after seasonal adjustment, auto assemblies will likely increase in October. Elsewhere, mining sector production will likely be weak as the landfall of Hurricane Nate caused outages across many oil production platforms in the Gulf of Mexico. Although the US Energy Information Administration reported that most of these platforms had returned to operation, this transitory decline likely lowered the crude oil output in the month. However, looking through weather-related volatility, crude oil output’s recovery appears resilient. Recent increases in global oil prices will likely contribute to oil output growth.

NAHB housing market index (Thursday): After rebounding from a hurricane-related decline, we forecast a still-elevated reading of 67 for the November NAHB’s housing market index. Rising building material costs and labor shortages will likely remain a concern for home builders. However, given the continued shortage of single-family homes for sale, we expect home builders to remain optimistic overall.

Housing starts (Friday): We expect a decent rebound of 1.9% m-o-m in October housing starts to an annualized rate of 1148k after hurricanes lowered the starts in the south. The negative impact from the hurricanes on single-family housing starts will likely be reverted gradually. Permits for new single-family housing construction also improved in September. However, we expect continued weakness in multifamily housing starts to weigh down the total starts. Given higher vacancy rates in the multifamily housing sector, it appears likely that growth in multifamily housing construction would remain sluggish. For housing permits, we expect a rebound of 2.4% m-o-m to an annualized rate of 1255k.

Euro area | Data preview

Euro area industrial production and UK CPI are in focus this week. 

Euro area industrial production (Tues): We expect euro area industrial production to fall by 0.4% m-o-m in September, following a 1.4% m-o-m increase in June. The result would reflect some payback from previously strong figures. Indeed, notwithstanding some likely slippage, we believe production activity will remain robust across the region in the period ahead.

German ZEW index (Tues): We expect the ZEW expectations index to rise to 19.5 in November from 17.6 in October. Loose financial conditions should have supported investor sentiment. That said, the ZEW index has not been a particularly reliable forwardlooking indicator of the German economy in recent months. 

UK CPI and RPI inflation (Tues): Inflation looks set to rise further in the October report – we have a forecast for CPI inflation of 3.1%, compared with the Bank of England’s view (in its Inflation Report) of 3.2%. One of the reasons we do not expect inflation to rise further is that petrol prices fell during the month despite the rise in the price of oil. Combined with negative base effects (petrol rose in October a year ago), this is enough to have a -0.1pp impact on the headline rate of inflation. We think a 3.1% reading in October will prove to be the peak in inflation. It would also require the BoE to write an open letter to the Chancellor to explain the overshoot and the Bank’s plans to correct it.

UK Producer prices (Tues): Evidence from the PMI survey in October showed output prices rising at their fastest rate for six months (the CBI equivalent was less strong), which explains our forecast of an acceleration in core output price growth to 0.3% m-o-m during the month. Petrol prices fell in October despite rising oil prices, which explains our slightly weaker headline output price print of 0.2% m-o-m. As for input prices, rising oil prices and a fall in GBP/USD during the month point to a rise of around 0.5% m-o-m.

UK labour market report (Weds): Headline earnings growth stands at just over 2%, substantially lower than during previous monetary policy tightening cycles. However, with far weaker productivity growth now, earnings growth needs to be weaker in order to keep unit wage cost growth contained. Earnings growth may slow in this month’s report as a result of base effects (a strong June print drops out of the 3mma rate), but we expect it to generally improve in 2018 thanks to the tightening labour market. We forecast real wage growth to move back into positive territory in early 2018 as nominal wage growth rises and the rate of CPI inflation begins to slow.

UK retail sales (Thurs): After a string of three consecutive monthly rises in retail sales volumes between June and August, sales fell in the month of September taking the annual rate to 1.5% – its second-lowest print since mid-2013. Survey evidence for October has been weak thus far. The CBI distributive trades balance turned markedly negative during the month, as did the BRC’s like-for-like measure of retail sales growth. We expect flat official retail sales volumes during October due to the offsetting impact of weak survey evidence, but we also see a risk of a bounce from September’s decline.

Japan | Data preview

We expect a large boost to growth from inventory investment, but concerns about the quality of growth linger.

First set of preliminary estimates for Q3 2017 real GDP (Monday): We expect real GDP growth in Q3 (July-September) 2017 of 2.8% q-o-q annualised (0.7% q-o-q), a seventh consecutive quarter of quarter-on-quarter growth. However, we expect this to be driven largely by inventory investment which, in our opinion, will be hard to sustain. External demand was weak in Q2 2017, but we expect it to have recovered in Q3 to drive overall growth; exports in the summer benefited from the clear recovery in the global economy. 

However, final demand in Japan looks to have been weak. Consumer spending was solid in the first half of the year, but seems to have weakened in Q3. We also expect housing investment and public investment to have declined. We believe housing investment will reflect a fall in building starts for rental housing, which had been solid, due to stricter oversight on bank lending. The quarter-on-quarter boost to public investment from the implementation of the second supplementary budget for FY16 is likely to have broadly run its course in Q2, and started to decline in Q3. Although we forecast overall growth in capex, we expect a slower pace in Q3, with the boost from solid exports largely offset by sluggish growth in construction investment. 

Elsewhere, we expect growth in private inventory investment, mainly wholesale inventories, to have boosted GDP growth. While we estimate overall growth to have accelerated from a solid Q2, given weak final demand in Japan it is difficult to see how the boost from inventory investment can be sustained. Our focus looking ahead is whether or not a protracted global economic recovery can lead to a sustainable increase in domestic demand.

Asia | Data preview

We expect Q3 GDP growth to beat the consensus forecast in the Philippines, even more so in Malaysia, China’s activity data to soften and Bank Indonesia to stand pat. 

China: We forecast an easing of industrial production growth to 6.3% y-o-y in October from 6.6% in September, as this October has one less working day than last October and we believe factory production may have been suspended during the Party Congress meeting. We expect fixed asset investment growth to edge down by 0.1 percentage points to 7.4% y-o-y year-to-date in October, in line with the cooling property market. Weak retail sales growth over the national holiday week suggests retail sales growth moderated slightly. New RMB loans and aggregate financing likely fell, in line with seasonal patterns, while M2 growth likely moderated slightly in line with our view of softening investment demand."

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