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Preview of the week ahead - Nomura

Analysts at Nomura offered their outlook for the week ahead.

Key quotes by region:

United States | Data preview

"We expect a solid increase in November nonfarm payroll employment, consistent with continued strong improvement in the labor market.

Factory orders (Monday): In an advance report, topline durable goods orders declined 1.2% m-o-m in October, weighed down by a sharp decline in civilian aircraft orders. However, durable goods orders excluding transportation increased solidly by 0.4%. Moreover, core capital goods shipments point to healthy equipment investment during Q4 and highlight the recent industrial-driven upswing in growth.

We expect October’s factory orders report, with revised durable goods numbers as well as new data in nondurable orders, to largely reflect continued momentum in Q4.

Trade balance (Tuesday): We forecast a trade deficit of $46.4bn in October, somewhat wider than September’s $43.5bn deficit. In an advanced report, the goods trade deficit widened to $68.3bn in November, driven by a sharp deceleration in foods, feeds & beverages exports. We expect that this will translate into a widening overall trade deficit in October. However, part of the widening goods trade deficit in October could have been driven by seasonal factors and commodity prices. Thus, the widening total trade deficit in October could revert the next month.

ISM non-manufacturing (Tuesday): We expect the ISM nonmanufacturing index to decline slightly to 58.6 in October, a still-elevated level consistent with continued Q4 momentum. The ISM non-manufacturing survey increased to 60.1 in October, the highest reading since 2005. However, persistent weather-related disruptions in the month likely kept the supplier delivery index unsustainably elevated. Thus, we expect some pullback in November. However, a reading of 58.0 would remain above the prehurricane level of 55.3 from August, consistent with other survey indicators that have shown material improvement since the summer. Moreover, the new orders index, unaffected by recent inclement weather, jumped sharply in September and remained elevated in October, signaling positive momentum to close out 2017. 

ADP employment report (Wednesday): Reflecting our forecast for private payrolls in the BLS employment report on Friday, we expect ADP to report an increase of 175k in private payrolls for November.

Productivity (Wednesday): In the initial reading, Q3 nonfarm productivity increased strongly by 3.0% q-o-q saar. However, some of the pickup was likely due to softness in employee hours, a possible consequence of weather disruptions. That said, with the BEA’s second estimate of Q3 GDP growth at 3.3%, up from 3.0%, an upward revision in nonfarm productivity for Q3 would not be unexpected. Consistent with other restrained measures of compensation, unit labor costs in Q3 increased only 0.5%.

Initial jobless claims (Thursday): We expect initial claims to continue to fall to its low trend. Subdued initial jobless claims would portend continued strength in the labor market. With voluntary quits, unqualified for unemployment insurance, now comprising roughly 60% of total firm-worker separations, initial jobless claims will likely remain subdued as workers freely move between employers in a tight labor market instead of facing potential layoffs.

Consumer credit (Thursday): Consumer credit expanded modestly in September by $20.8bn. On a 12-month basis, both revolving and nonrevolving consumer credit growth continues to decelerate somewhat, but both measures remain in healthy territory and likely reflect supportive consumer fundamentals going into 2018. We expect steady expansion in consumer credit for October.

Employment report (Friday): We expect nonfarm payroll employment to increase strongly by 180k in November, reaffirming continued labor market strength. Out of our +180k forecast, we expect the private sector to contribute 175k and government payroll employment to add 5k. In October, nonfarm payroll employment increased sharply by 261k, reflecting strong rebounds in sectors that were affected by the hurricanes in September. For November, incoming data point to continued strength in the labor market. Employment indicators in various business surveys remained elevated. In particular, the employees index of the Philly Fed survey registered 22.6. Although lower than October, this points to heathy hiring activity in the region. Further, the Conference Board’s labor market differential index reached 20.2 in November, up from an already-elevated 19.6 in October, suggesting favorable labor market conditions for job seekers. Additionally, we expect the manufacturing sector to add a healthy 20k jobs in November, which would be consistent with sustained momentum in the manufacturing and industrial sectors.

We expect the unemployment rate to inch down to 4.0%, consistent with the strong pace of job creation. The labor force participation rate fell by 0.4pp to 62.7% in October, from an elevated 63.1% in September, driven by a sharp and peculiar increase in the flow of workers from employed to nonparticipation. We expect some of these nonparticipants to rejoin the labor market, but we do not think a possible rebound in the labor force participation rate will be enough to push up the unemployment rate in November. 

For average hourly earnings (AHE), we expect a healthy increase of 0.26% m-o-m in November, which translates to a 2.66% y-o-y rate, up from 2.43% in October. In October, AHE declined by 0.04% m-o-m. Some of the downside surprise in October can be attributed to a strong rebound in aggregate hours worked in specific hurricane-affected industries (construction and leisure & hospitality). As these series return to their means, we expect AHE to revert to trend levels.

University of Michigan consumer sentiment (Friday): Consumer sentiment remained elevated in both the University of Michigan and Conference Board surveys, indicating sustained consumer optimism closing out 2017. For the preliminary December reading from the University of Michigan, we expect sentiment to remain buoyant. Moreover, inflation expectations stabilized somewhat during 2017 after a slow decline since 2012. In November, expected inflation over the next year ticked up 0.1pp to 2.5% while medium-term (5 to 10-year) inflation expectations ticked down 0.1pp to 2.4%. 

Wholesale inventories (Friday): In an advanced estimate, wholesale inventories fell 0.4% in October, driven by a 1.4% decline in inventories for nondurable goods. Inventory investment during Q3 contributed a solid 0.8pp to topline real GDP growth but softer inventory buildup during Q4 could add some drag to growth in the current quarter.

Euro area | Data preview

The week ahead German factory orders and the UK services PMI are in focus this week. 

UK Construction/services PMs (Mon/Tues): The headline services PMI jumped 2 points between September and October, helping cement the Bank of England’s decision to raise interest rates (note the MPC would have had the figures at the time of its decision). With some of the other activity indices in this report having been weaker (the employment and outstanding business indices fell, for example) we would not be surprised to see a moderation in the headline business activity index in November.

UK BRC retail sales (Tues): Indicators of retail sales have been mixed over recent months. The CBI’s distributive sales survey has alternated between negative and positive readings over the previous five months, the BRC disappointed in October, while the official index has risen for four out of the last five months. The BRC index will be an important barometer of demand going into the all-important Christmas season.

German factory orders (Wed): We expect German factory orders to increase 1.2% m-o-m in October following a 1.0% m-o-m increase in September. An outcome in line with our expectations would take the January level 3.2% above the average for Q3, suggesting strong industrial output growth in coming months.

German industrial production (Thu): We expect German factory orders to increase 1.4% m-o-m in Oct following a 1.6% m-o-m decrease in September. German manufacturing activity should be strong in line with recent forward-looking data. An outcome in line with our expectations would take the October level of IP 1.2% above the average for Q3, signalling a positive contribution from the industrial sector to GDP.

UK Industrial production (Fri): Despite the continued strength of survey evidence (the manufacturing PMI increasing further, rising orders in the CBI monthly trends survey thanks to exports), the fact that production has risen for the previous five months in a row suggests that some payback would not be a surprise. We have opted to forecast a flat reading for manufacturing as a balance between strong surveys and the risk of payback.

UK Visible trade (Fri): The trade deficit narrowed by just over £1bn in September thanks to a combination of a higher erratics balance and an improvement in the underlying deficit. As a result of the ability of the erratics balance to be exactly that – i.e. erratic – we expect the improvement to partly unwind in October, potentially offset by lower underlying exports following on from a sharp rise in September.

The week ahead/ Japan

We expect the current conditions DI in the Economy Watchers Survey to rise and the future conditions DI to fall slightly.

November Economy Watchers Survey - current conditions DI (Friday): We expect the current conditions DI to rise and the future conditions DI to fall slightly. The economy is solid overall and we see no convincing reason to expect sentiment to deteriorate. We expect the current conditions DI in November to rise from the October level, when it was weighed down by the one-off negative impact from the typhoons. In terms of the future conditions DI, we would not be surprised by a small decline from the October level, when there was a sharp 3.9 m-o-m rise, since the increase in share prices has slowed since the beginning of November.

The week ahead/ Asia

We expect China’s exports to slump but headline FX reserves to rise; inflation to ease in China.

China: We expect export and import growth to fall sharply in November, partially due to a high base last year, culminating in a smaller November trade surplus. PPI inflation should moderate as indicated by the falling output price sub-index of the official PMI, and also partially reflecting a base effect, while CPI inflation should edge down slightly, as suggested by high-frequency food-price data. Headline FX reserves likely rose by USD17.6bn to USD3.1268trn in November. After adjusting for FX and coupon effects, we estimate a fall of USD15.0bn, from an increase of USD10.6bn in October."

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