Skip to main content

Adding to the list of potential risk negative events to year-end - a Fed/ US Treasury tiff as US gets closer to a fiscal cliff

-->Adding to the list of potential risk negative events to year-end -  a Fed/ US Treasury tiff as US gets closer to a fiscal cliff              
  • USD: Risk sentiment sours somewhat on Friday following US Treasury Secretary Mnuchin’s surprise announcement, asking the Fed to return unused funds (USD455bn) given as part of the CARES Act. News reports out in early morning Asian time Friday also say that Treasury Secretary Mnuchin has indicated he will not renew the Fed’s authority to add assets to the corporate credit (PMCCF & SMCCF), muni (MLF), main-street lending (MSL) and asset backed (TALF) facilities beyond December 31st.              

  • USD: Mnuchin’s statement comes as a surprise to both markets and Fed chair Powell who subsequently responds to Mnuchin’s request by saying - “the Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” Powell’s comments indicate he wants to keep these facilities into 2021 as a backstop even as liquidity conditions have largely normalized and recent usage has been modest. Mnuchin’s statement and Powell’s response therefore signal tensions between the US Treasury and Fed. This sees risk assets retreating on Friday as concerns mount about the indirect impact of a less-firm backstop.     

  • USD: Meanwhile, the New York Times notes that “if the Fed does give back untapped funds, a Democratic administration will not be able to simply restart the programs, because congressional appropriation cannot be used to make new loans after the end of the year. It will take a new appropriation or some more creative solution to insure the facilities against credit losses.”  Tensions between the Fed and the outgoing US administration come at a time when there is talk among GOP (Republican) circles to try to push for further fiscal stimulus in December. Mnuchin’s decision to reclaim funds held by the Fed therefore may be a Republican strategy to use the unused funds as part of a fiscal package to appease Republican fiscal hawks.  

  • USD: Impact of Mnuchin’s announcement Friday is felt in equities, not FX though friction between the Fed and Treasury, should it escalate, would likely add to the list of risk negative factors already in play to year-end, including Covid shutdown risks in US, stalled fiscal stimulus talks in US and possible US – China tensions by Trump’s actions against China before he leaves office. Amidst this, an escalation in tensions between the 2 peak financial institutions in US could drive more broad based risk aversion sentiment and a stronger tactical safe haven bid in USD to year-end.         


Data releases Friday – stronger retail sales all round           

  • GBP: UK retail sales ex auto fuel grow by 1.3% MM in October, stronger than consensus looking for 0.0% while the index including auto fuel is up by 1.2% MM. Well above normal levels Y/Y retail sales (ex. fuel) are now 7.8%  higher than levels in the same month last year – the strongest since 2002. Retail sales make up just 1/3 of total consumption in UK and Citi analysts see the strong data as less of a reflection of consumer strength and more a reconfiguration of consumption during Covid         

  • AUD: Preliminary October Australian retail trade data shows a monthly gain of 1.6% which is 0.5% above Citi’s expectation, with total retail trade up 7.3% in year-ago terms. The data is consistent with NAB’s business survey showing conditions in the retail sector are near record highs. Furthermore, sentiment around revenue suggests that more businesses expect an increase in December.        

  • CAD: Canadian retail sales rise 1.1%MoM in September, stronger than consensus for 0.2%. Ex autos, sales are up 1.0%. Stronger-than-expected retail sales in September caps off a strong Q3 - Citi analysts expect Q3 real GDP growth of 47.9% (annualized) but with Q4 likely to be much softer.   


Week Ahead – FOMC minutes and euro area and UK flash PMIs          

  • USD: Fed speak - Fed’s Evans takes part in a moderated Q&A on the economy; Fed’s Bullard discusses monetary policy challenges; FOMC Meetings Minutes (Nov 5)  
  • USD: Personal Income – Citi: -0.7%, median: 0.0%, prior: 0.9%; Personal Spending – Citi: 0.4%, median: 0.3%, prior: 1.4%; Core PCE MoM – Citi: 0.0%, median: 0.0%, prior: 0.2%; Core PCE YoY – Citi: 1.4%, median: 1.4%, prior: 1.5% - Personal income should decline in October due to a pullback in government transfers while spending should climb. Meanwhile, core PCE inflation should be almost flat on the month and Y/Y reading should decline to 1.4%. However, the underlying trend of inflation still appears supportive for US core PCE to overshoot 2% in H1-2021 to at least 2.3%YoY. 
  • EUR: Euro Area Manufacturing PMI, November Flash Forecast: 51.0, Prior: 54.8; Services PMI, November Flash Forecast: 33.0, Prior: 46.2; Composite PMI, November Flash Forecast: 40.0, Prior: 49.4 – Citi analysts estimate the flash composite PMI will drop sharply in November by almost 10 points to a six-month low, confirming that economic activity is likely to contract noticeably again in Q4. 
  • EUR: November German Ifo Business Climate, Forecast: 91.0, Prior: 92.7; Ifo Expectations, Forecast: 93.0, Prior: 95.0; Ifo Current Assessment, Forecast: 89.0, Prior: 90.3 The 2nd lockdown is likely to outweigh the good vaccine news, the US election result and the resilience of growth in China.
  • GBP: Manufacturing PMI, November Flash Forecast: 51.0, Prior (Oct Final): 53.7 - Timelier data suggests manufacturing seems to have been considerably less effected by the current lockdown restrictions than in Q2. Citi analysts expect this to be reflected in a stronger PMI print this time.
  • GBP: Services PMI, November Flash Forecast: 39.1, Prior (Oct Final): 51.4 – Citi analysts expect new lockdown restrictions to weigh heavily on Services PMI but recover somewhat in December.     


This is an extract from the Daily Currency Update, dated November 23, 2020. Please approach a Citigold Relationship Manager if you would like more information.

Leave a Reply

Enter the characters shown in the image.