Another mixed session for risk Friday with new vaccine hopes offsetting US coronavirus, election & US – China concerns
- USD: Friday’s session typifies the tactical nature of risk sentiment more recently with a decidedly negative tone earlier in the Asian and European sessions turning positive into the NY session. The earlier Asian and European sessions are focused on increasingly worrying COVID-19 statistics as well as US-China tensions and US election headline risk while the turnaround in the NY session is largely to do with vaccine hopes getting a boost from one US drug manufacturer though its study is based on less than 400 people.
- USD: Meanwhile, US continues to see the biggest increases in COVID-19 cases with exponential growth in California, Arizona, Texas and Florida accounting for half of new infections in US. Hospitalization is also potentially reaching a tipping point with half of all US states now seeing COVID-19 hospitalization pick up according to US CDC estimates. California has seen COVID-19 hospitalizations as a % of inpatient hospital beds jump from 8.6% to 15.6% in a week, Florida (now at 13.6%) and Texas (now at 13.8%) have also seen exponential growth.
- USD: In a speech late last week, Democratic presidential candidate Biden indicates he would likely raise corporate tax rate to 28% from the current 21% - this is likely a key issue for markets into the US presidential election, and it is noteworthy to see Biden already taking a more aggressive tone on corporate America especially this early.
- USD: Talk of further action on Hong Kong with Reuters reporting that the Trump administration plans to finalize regulations that will bar the US government from buying goods or services from any company that uses products from five Chinese companies.
- CNY: USCNH rebounds back to testing the 7.00 mark as Chinese equities trade lower Friday. Bloomberg notes two state-backed funds plan to trim holdings in a sign that the Chinese government wants to slow down the rally. This reverses the momentum from earlier last week when China’s SHCOMP gains 5.7% (the biggest daily increase since 2015) on reports of a front-page editorial in China’s Securities Times on Monday reminding investors that fostering a “healthy” bull market after the pandemic is now more important to the economy than ever.
G10 data releases – US jobless claims point to continued hiring, strong rise in Canadian jobs, German exports French IP post decent rebounds
- USD: Claims continue to trend lower but still lag payroll data - During the week of June 27, US continuing claims fall to 18 million from 18.7 million on a seasonally adjusted basis and to 16.8 million from 17.9 million on a non-seasonally adjusted basis. Meanwhile, initial claims remain elevated at 1.3 million during the week of July 4. Continuing claims have dropped more rapidly during the week of June 27, and are now down by roughly 7 million from the peak in May, despite recent leveling off in some higher frequency data. The falling claims, along with the job reports in May and June, point to continued net hiring.
- CAD: Canadian employment is up by 952.9k jobs in June, higher than consensus for +700K and the unemployment rate declines to 12.3%. The rise in employment in June is likely to be the strongest month for jobs and while Citi analysts still expect net employment gains again in July, the path of employment going forward is likely to be much more uncertain.
- EUR: Germany: Pandemic regulates export recovery – exports rebound by 9.0% MM in May, though underwhelming expectations (consensus 14.0). Imports – which had fallen less so far during the crisis, rise 3.5% MM (consensus 12.4). In May, exports are 29.7% YY lower, imports 21.7% YY.
- EUR: French industrial production (IP) soars in May, but remains below Jan/Feb levels – IP rises almost 20% MM in May, but is still down 23.4% YY, remaining around 21% below the Jan/Feb average. Despite another double-digit gain expected in June, IP will likely be still down 16.5% QQ in 2Q. However, the projected rebound in 3Q will likely be of the same magnitude or bigger.
Chinese disinflation eases, credit data ends H1 with a bang
- CNY: China’s June CPI comes in at 2.5%, in line with expectation vs 2.4% prior. Citi analysts see consumer disinflation taking a breather short-term in China but given the higher CPI inflation target (3.5% this year), do not see affecting monetary policy. In Q4 however, Citi analysts see disinflation regaining momentum as there appears to be little question China is still in the pork down-cycle & there is limited pressures seen elsewhere from non-food prices. Meanwhile, PPI deflation eases (-3.0%YoY, vs. -3.7%YoY in May).
- CNY: China’s M2 growth stays flat in June as expected while M1 growth slows by 0.3ppt to a still healthy 6.5%YoY and M0 stays intact at 9.5%YoY. Meanwhile, new loans exceed Citi analysts expectations, rising to RMB 1.81trn from RMB 1.48trn in May. Specifically, new household loans improve notably from RMB 704bn previously to RMB 978bn (mostly mortgage loans), reflecting a robust property market. Finally, new TSF data continues its strong momentum, supported by central government bond issuance, rising to RMB 3.43trn in June from RMB 3.19trn in May. For H1, new TSF stands at RMB 20.8trn, almost 70% of the RMB30trn target set by the PBoC. Bottom Line - The strong June and H1 credit data suggest the transmission of PBoC monetary policy has improved markedly, despite concerns of rising financial arbitrage risk that can likely be addressed using the macro-prudential policies with tightened regulation.
The Week Ahead: US retail sales, ECB & BoC board meetings, Australian jobs but China data is the one to watch
- USD: June Retail Sales – Citi: 4.4%, median: 4.6%, prior: 17.7%; Retail Sales ex Auto – Citi: 4.9%, median: 4.5%, prior: 12.4%; Retail Sales ex Auto, Gas – Citi: 3.7%, median: 5.8%, prior: 12.7%; Retail Sales Control Group – Citi: 2.5%, median: 4.5%, prior: 11.0% - Following a very-strong initial rebound in retail sales in May, Citi analysts expect a more moderate but still-solid 4.4% increase in total retail sales in June while sales in the retail control group should rise 2.5%.
- EUR: ECB meeting on 16 July may turn out to be the least eventful of the year. The foreseeable bounce in activity as European economies re-open is likely to see ECB adopt a wait-and-see attitude for now. However, Citi analysts still expect the ECB will need to dynamically adjust its asset purchases more or less in line with the increase in public deficits later in 2020.
- CAD: BoC meeting – Citi: 0.25%, median: 0.25%, prior: 0.25% - BoC is expected to keep rates unchanged and retain its weekly bond purchases of CAD5bn. The July meeting will also feature an updated Monetary Policy Report to serve as BoC’s base case for activity this year. Inflation estimates will likely show inflation below the 2% target in 2020 and into next year.
- AUD: Australian June Labor Force Survey: Citi employment forecast; -60k, Previous; -227k; Citi unemployment rate forecast; 7.6%, Previous; 7.1%; Citi participation rate forecast; 62.9%, Previous; 62.9% - There’s a high degree of uncertainty around the data but overall, it will likely show additional job losses in June, though Citi analysts expect this to be the final month of a decline in employment. Citi analysts also expect 7.6% to be the peak in unemployment rate.
- CNY: China Exports (%YoY) June: Citi -4.6, Consensus -2.0, prior -3.3; Imports (%YoY): Citi -9.0, Consensus -8.8, Prior -16.7; Trade Balance (US$bn): Citi 54.5, Consensus 57.1, Prior 62.9 – Citi analysts expect negative trade growth to continue as deteriorating external demand weighs on exports. Meanwhile, the negative growth of Chinese imports may narrow from -16.7%YoY in May to -9%YoY. This leaves the trade balance a still large US$54.5bn versus US$62.9bn in May.
- CNY: China GDP (%YoY) 2Q: Citi 2.5, Consensus 2.5, Prior -6.8 – Citi analysts maintain their GDP forecast at 2.5%YoY for Q2. Meanwhile, China industrial production may have further improved to 4.8%YoY in June given the rise in Manufacturing PMI. Together, industrial production should maintain its 4~5%YoY growth in June, though the curve may not be as steep as it has been for April and May. Chinese retail sales may decline though the drop is likely to be less, to -1%YoY in June. Overall however, consumer spending is still likely to remain sluggish.
- CNY: China Fixed Assets Ex Rural (%YoY YTD): Citi -3.0, Consensus -3.4, Prior -6.3 - FAI growth may have advanced further to around -3%YoY Ytd in June as policy efforts deployed earlier to boost investment should be at work and particularly support traditional and new infrastructure development. Property investment’s relative resilience will likely continue, while manufacturing investment may remain a drag given the cloudy business outlook.
This is is an extract from the Daily Currency Update, dated July 13, 2020. Please approach a Citigold Relationship Manager if you would like more information.