An above consensus US CPI inflation points to more broad-based pressures

An above consensus US CPI  inflation points to more broad-based pressures  

• USD: US core CPI rises a solid 0.57%MoM in April, stronger than the 0.40% increase consensus expected but which brings the Y/Y reading from 6.5% in March to 6.2% (consensus had expected an even lower outcome of 6.0%). Strength is notable across many subcomponents, including shelter and transportation. Meanwhile, headline CPI is up 0.3%MoM, bringing the Y/Y reading to 8.3% from 8.5%. US inflation data has yet to show a meaningful easing in underlying inflationary pressures even if base effects imply that Y/Y readings are unlikely to move higher. US core CPI is consistently running at a 6-7% annualized pace since October 2021 which should keep risks for Fed policy tilted towards more hawkish outcomes in the near term - a base case for Fed rate hikes of 50bp at the next 2 FOMC meetings. Beyond that however, the Fed risks tightening excessively into a US economy that is already facing headwinds from much higher rates in anticipation of Fed tightening, a stronger USD and fiscal drag/ inventory buildup that could see inflation peak and consumption rapidly slow. This raises the possibility of the Fed being able to moderate its tightening stance heading into the latter half of H2’2022. 

China CPI beats expectations – markets partially unwind PBoC rate cut bets  

• RMB: China’s CPI rises 0.4%m/m and 2.1%y/y versus consensus for 1.8%y/y and up from 1.5%y/y in while PPI prints at 8.0% versus consensus for 7.8%. Excluding food and energy though, core CPI is up only 0.04%m/m in April, or 0.9%y/y, while services CPI comes in at 0.8%y/y, both down from an already tepid 1.1%y/y in March. The PBoC has stated the importance of CPI for its rates outlook though within the context of explaining its reasons behind the restraint to its RRR cut by just 25bps (and indirectly why the MLF rate has been kept unchanged), both of which disappointed markets. It seems though that the PBoC’s message on rate cut restraint is getting through as a market rethink seems to be underway since last month, reflected in some unwinding of trades that were positioning for lower rates. 

• RMB: Nevertheless, the data in China still continues to show inevitable demand destruction from lockdowns and the CPI/ PPI results should not threaten the accommodative stance of monetary policy to support growth in the near term though the emphasis in the recently released PBoC’s Q1 MPR seems to be shifting towards structural and quantity easing tools rather than aggressive rate cuts. The PBoC is also targeting lowering domestic corporate funding costs through the use of its deposit rate marketization mechanism (liberalizing deposit interest rates towards a more market-oriented setting). Citi analysts though still expect the PBoC to cut interest rates by 10 bps and reduce its RRR by a further 25bps during 2022 even as  monetary easing relies more on structural and quantity tools to stimulate the economy. 

ECB President Lagarde signals probable end of net asset purchases in early 3Q and a likely July rate hike

• EUR: The ECB’s mandate is the delivery of price stability which it defines as a symmetric target of 2% over the medium term. ECB President Lagarde, in a speech overnight, sees inflation expectations in the euro area at or above 2% over the longer-term forecast horizon (2024). As a consequence, President Lagarde indicates that “first, we will end net purchases under the asset purchase program (APP) and judging by the incoming data, my expectation is that they should be concluded early in the third quarter”. Afterwards, she adds, that a first interest rate increase could follow in “only a few weeks” after ending APP. 

• EUR: At the 8-9 June monetary policy meeting, Citi analysts expect the ECB Governing Council to announce the end of the APP in early July in response to a significant ratcheting up of the ECB’s euro area HICP inflation forecasts in the Eurosystem staff macroeconomic projections. While the Governing Council is unlikely to pre-commit to raising rates, Citi analysts expect the bar to raising the deposit facility rate in July from the current -0.5% would be very low, given the very elevated inflation levels currently that now risk de-anchoring the euro area’s  longer-term inflation expectations away from the ECB’s “slightly below” 2% goal.

• EUR: Barring a sudden stop of Russian natural gas to Europe (which would likely plunge the euro area economy into recession), key ECB interest rates are likely to be raised at least three times in 2H-22 (July, September and December) to end the year at +0.25% (the deposit rate is currently at -0.5%). A return to more “normal policy settings” would be consistent with the main policy rate ultimately rising towards a 1.25-1.5% range though that would depend on the euro area economy being able to successfully withstand growth headwinds emanating from the higher energy prices, tighter financial conditions and growth slowdown in China (as the euro area is heavily dependent on exports to China).    

Data for the remainder of this week

• USD: US April PPI Final Demand MoM – Citi: 0.8%, median: 0.5%, prior: 1.4%, PPI Final Demand YoY – Citi: 11.0%, median: 10.7%, prior: 11.2%; PPI ex Food, Energy MoM – Citi: 0.8%, median: 0.6%, prior: 1.0%, PPI ex Food, Energy YoY – Citi: 8.9%, median: 8.9%, prior: 9.2%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.6%, median: 0.6%, prior: 0.9% - since early 2021, producer prices have been a useful leading indicator of upward pressure on prices in CPI, especially for components like various consumer goods that could see further pressure from higher commodity prices or new lockdowns and supply disruptions in China.

• USD: University of Michigan Consumer Sentiment – Citi: 64.2, median: 63.8, prior: 65.2, University of Michigan 1Yr Inflation Expectations – Citi: 5.5%, median: 5.4%, prior: 5.4% - with inflation still high, Citi analysts expect a modest pullback in sentiment in the preliminary May reading. The more important elements of the survey however are the 12-month and 5-10Yr inflation expectations measure. Both have risen over the last year and risks especially for the 5-10Yr measure remain skewed to the upside.

This is an extract from the Daily Currency Update, dated May 12, 2022. Please approach a Citigold Relationship manager if you would like more information. For the latest CitiFX house views and strategy, please click here -

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