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FX

US PPI implies solid core PCE but July Fed cut likely a done deal; China to undertake more macro prudential controls to stabilize CNY

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US PPI implies solid core PCE but July Fed cut likely a done deal;  China to undertake more macro prudential controls to stabilize CNY         

 

  • US PPI final demand rises 0.1%MoM in June while PPI excluding food and energy is up a solid 0.3%MoM. Together with the strong 0.29% increase in core CPI earlier last week, Citi analysts expect core PCE inflation in June to rise 0.20%MoM and 1.7%YoY. However, the stronger inflation data is unlikely to prevent a Fed rate cut in July as Fed President Evans on Friday indicates that while he does not see timing of rate cuts as critical, he does see a 50bp reduction by year end as critical to raising core PCE to 2.2% by 2021.  Bottom Line - Citi analysts now expect the Fed to cut rates by 25bp at its July meeting together with an early-end to balance sheet reduction. Following the July cut, Citi analysts expect one additional 25bp cut, most likely in September. Base-effects returning core PCE close to 2% though should help keep rates on hold in 2020.            
  • This week in the US, Citi analysts expect June retail sales at 0.1%MM (consensus 0.2%) and industrial production at -0.1%MM (consensus 0.1%MM). The Fed’s Beige Book will also be released. Fed speakers include Williams (FOMC Voter), Bostic, Evans (FOMC Voter), Bullard (FOMC Voter), and Rosengren (FOMC Voter).     
  • China data highlights on Friday - A strong USD50.98bn June trade surplus for China vs USD45bn consensus forecast masks the fact that the gain is due to deteriorating imports rather than improving exports, highlighting the impact of the ongoing trade war and weakening domestic demand in China. Citi analysts do not expect China’s trade data to meaningfully improve especially as the last round of tariffs on USD200bn products should start to have an impact in the hard data.           
  • China also sees strong credit growth in June with aggregate financing stronger than expected: TSF at RMB2,260bn vs RMB1,900bn forecast and new yuan loans mostly in line with consensus at RMB1,660bn vs RMB1,700bn estimated. Sun Guofeng, director of the PBOC’s monetary policy department however suggests the PBoC is paying attention to the rate cut signal sent by the US Fed and adds that China will likely take macro-prudential measures when necessary to keep yuan basically stable.          

 

Euro rebounds as EZ data shows life and ECB speak is mixed on prospects for further easing; BoE’s Vlieghe leans towards rate cuts    

  • EURUSD ends the week stronger at 1.1270 as Bund yields rise close to 20bp last week as euro zone data shows life with May posting a solid rebound in euro zone industrial production (IP) with gains seen in all 5 of the largest euro area member states. Euro zone IP gains 0.9% MM after a drop of 0.4% MM in April (revised up from -0.5% MM) and better than the 0.2% MM consensus.  Mixed ECB speak follows with ECB’s Visco dovish, saying in coming weeks, ECB will assess measures at its disposal and may need to adopt further expansionary measures if the economy does not pick up. But Coeure is more hawkish, arguing the bulk of the drop in market’s longer term inflation expectations measure (5Yr forward 5Yr CPI swap) is due to a drop in risk premia while euro area household inflation expectations have remained more stable and close to a six-year high.         
  • Bottom Line - Citi analysts still expect slower real euro zone GDP growth of around 0.2% QQ in 2Q-19 and look for manufacturing PMI continuing to suggest activity is still contracting into 3Q, mainly due to trade headwinds. Citi analysts baseline remains that the door to QE will likely be reopened at the ECB July 25 meeting together with the prospect of a 10bp rate cut.
  • In UK, BoE’s Vlieghe maintains the “UK outlook for monetary policy continues to be materially affected by Brexit uncertainty” that is more likely to see weak business investment and a more volatile 1Q/2Q GDP. Therefore, it would be “unwise to take a strong steer” from numbers and more likely mean a move to cut Bank Rate towards the effective lower bound in the event of a “No Deal” scenario. This week, Citi analysts expect UK CPI at 1.9%YY and retail sales at 0.2%MM.       

 

NZ CPI this week unlikely to trigger RBNZ rate cut; further solid data expected in Canada       

  • NZ Q2 CPI data to be released this week likely rose 0.7%, lifting yearly CPI from 1.5% back to 1.8% and closer to the 2.0% midpoint of the RBNZ CPI band. As a result, Citi analysts do not expect the data to trigger an OCR cut.  In Canada, Citi analysts expect a solid rise in retail sales and headline CPI should retrace to 2.0%YoY in June that reinforces the case for no BoC rate cuts.   

            

Singapore – Q2 GDP downside surprise justifies weaker SGD     

  • Singapore GDP weakest since Q2’2009 at +0.1% YoY, -3.4% QoQ SAAR, (consensus: +0.5% QoQ SAAR, 1.1% YoY), marking the weakest growth since the GFC in 2Q09. The data highlights broad-based sequential weakness led by an extended manufacturing recession though Citi analysts do not yet forecast a technical recession, which would bring 2019 growth  Downgrade to core CPI forecast is still key for MAS slope reduction hurdle to be cleared (40%), but weaker SGD vs band is still justified regardless. Any softening of the job market to “slack” territory though and/or collapse in oil prices would likely provide clearer triggers for easing.
  • This week, China GDP for Q2 is released. Citi analysts expect growth to slow to 6.3%YoY as the  damage caused by renewed tensions with the US in Q2 to China’s trade has at least partly realized and domestic momentum has also softened, with policy efforts yet to fully come through.              

 

This is an extract from the Daily Currency Update, dated July 15, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

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