Week Ahead Preview: AHOY


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Inflation touches Fed’s target

Core PCE inflation grew 0.2% MoM in July (0.156% unrounded), matching consensus forecasts. This pushed the YoY rate to 2.0% (1.984% unrounded(, hitting the Fed’s inflation target. Real spending grew 0.2% MoM, also meeting expectations and leaving the BofAML 3Q GDP tracking estimate unchanged at 3.3%

GDP little changed 

2Q GDP was revised slightly higher to 4.2% in the second estimate, up a tenth from the advance estimate. This was better expectations for a small downward revision to 4.0%. Within the components, consumption and residential investment were revised lower, but this was offset by better equipment, IPP investment, government, trade, and inventories. As expected, inflation indicators were unchanged with the GDP price index at 3.0% and core PCE at 2.0%.

Trade deficit rises further 

The July advance goods trade deficit came in worse than expected as we saw a widening to $72.2bn from $67.9bn in the prior month. This compares to BoAML’s and the Street’s consensus forecast of $69.9bn. Imports grew a solid 0.9% MoM, bolstered by an 11.1% spike in other goods imports as well as broad gains elsewhere. Meanwhile, exports tumbled 1.7% MoM as foods, feeds, & beverages slid 6.7% MoM and other goods plunged 8.4%. Consumer goods and capital goods exports also contracted. While trade disappointed the inventory data were a strong surprise as wholesale climbed 0.7% MoM and retail picked up 0.4%. Though it is still early, inventories look poised for a strong positive payback this quarter.

Consumer confidence surges unexpectedly 

Consumer confidence jumped to 133.4 in August from 127.9 in July, beating market expectations of 126.6 and reaching a new cyclical high. This is the highest level of confidence since October 2000. Both the present situation and expectations components improved, the former up to 172.2 from 166.1 and the latter up to 107.6 from 102.4. The labor differential similarly improved to a cyclical high of 30.0, from 28.0, the highest since March 2001.

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Total vehicle sales

BoAML estimates that light vehicle sales in August will increase by about 1.5% YoY to 16.8mm SAAR, which is roughly consistent with estimates from other industry sources. US auto sales have been tracking better than expectations so far this year but we continue to believe that the industry may revert to its 1H 2017 trend for a decline in the mid-single digit range.

Construction spending

BoAML expects a 0.5% mom increase in July construction spending, partially rebounding from the 1.1% decline in June. The drop in June was driven by an outsized decline to public construction spending after a steady streak of monthly gains. They are positive on broad government spending given stimulus and improved state budgets, the latter of which we discuss in more detail in the United States of stimulus. As a result, we expect the prior month’s weakness to prove temporary. Private nonresidential spending should also pick up amid elevated business confidence, while residential spending may be in for another soft month given the disappointment in July housing starts.

ISM manufacturing

The ISM manufacturing index should decline further in August, falling to 57.0 from 58.1. This would be the lowest reading since July of last year, but it would continue to indicate expansionary activity in the manufacturing sector. The strength of the economy continues to support growth in the sector while rising costs and supply shortages are placing downward pressure on the index.

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Trade balance

After a worse than expected widening in the advance goods trade deficit, the July total trade deficit should similarly widen by $4.3bn to $50.6bn. Goods exports plunged 1.7% mom while goods imports edged up by 0.9% mom in the advance estimate, likely due in part to the strengthening in the dollar. Meantime, we expect the services surplus to be little changed.

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Initial jobless claims

BoAML is looking for initial jobless claims to be 215k in the week ending September 1st following 213k in the prior week. In the latest reading, the 4-week moving edged lower to 212k from 214k, reaching a cyclical low.

Productivity and costs

Expectations are productivity growth will remain unchanged at 2.9% qoq saar in the final estimate for 2Q as the GDP figures from the BEA were little changed in the second estimate. Additionally, we expect unit labor cost to be unchanged at -0.9% qoq saar.

ADP Employment

BoAml’s forecasts that ADP employment grew by 200k in August after growing by 219k in July. We take signal from our private payrolls tracker based on internal BAC data which is looking for +200k increase in payrolls in August. Other labor market indicators such as the labor market differential index from the Consumer Confidence report and the number of employees’ indexes from regional Fed manufacturing surveys all point to a solid month of hiring.

ISM non-manufacturing

After falling by 3.4 points in July, we look for the ISM non-manufacturing index to stabilize at 56.0, edging up from the 55.7 July print. We take signal from regional Fed surveys of non-manufacturing activity which have mostly moved sideways in August. Strong domestic demand continues to support expansion in the sector although there are strengthening headwinds from rising costs.

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