Australia: Revision to forecasts - lower unemployment, higher wages & growth

Australia: Revision to forecasts - lower unemployment, higher wages & growth

• AUD: Citi analysts upgrade their forecasts for Australia given resilience of the labor market and higher commodity prices for key Australian exports. The team upgrades their real GDP growth forecast by 0.3pp across 2022 and 2023 to 4.6% and 2.8% respectively and higher nominal exports, terms of trade and rising commodity prices suggest nominal GDP will rise by 9.6% this year. The team expects Australia’s unemployment rate to fall to 3.3% in 2022 and to 3% by 2023-end, suggesting a labor market at full-employment. The team also upgrades its inflation outlook with headline CPI expected to peak at 5.1% in H2’22, while underlying CPI rises to 3.5% across H2 and overshoots the RBA’s 2%-3% target range with risks skewed to the upside.

• AUD: Citi analysts’ key upward revision is to household consumption, which is expected to rise 8.7% (+2.4pp) in 2022, driven by better-than-expected labor market outcomes and suggests that excess spare capacity in the labor market will likely be eroded by the end of 2022. With the unemployment rate expected to fall to 3.3%, this will be lower than RBA’s February SMP forecast of 3.75% across 2022 and 2023 and to 3% by the end of next year and RBA’s estimate on NAIRU around 4%. Meanwhile, higher iron-ore, coal and gas prices will likely boost company profits and increase nominal export values–rising 20.1%.

• AUD: Reiterating Citi analysts’ RBA view…the RBA tightening cycle should see August as the timing of the first cash rate hike (15bp to 0.25%) and a cash rate likely to rise to 0.75% by the end of 2022, and up to 1.75% by end of 2023, with a terminal cash rate of 2.5% later in 2024. This is still less hawkish than market pricing and unlike the BoC and possibly the RBNZ, the team favors a more gradual RBA tightening cycle to alleviate concerns that the Bank may have around the sensitivity of households to interest rate rises. That said, the risk is tilted towards a more hawkish policy path where the RBA may need to hike earlier in June, with inflation surprising on the upside and with a year-end cash rate of 1.00% in 2022.

Canadian jobs report - labor market tightens further

• CAD: Canada’s headline employment rises by ~73k jobs in March, with the unemployment rate falling further below pre-pandemic levels to 5.3% with participation unchanged at 65.4%. Meanwhile, average wages of permanent employees rise 3.7%YoY, further evidence of a tight labor market that Citi analysts expect would support the BoC accelerating the pace of its rate hiking cycle with a 50bp hike this week, followed by additional 50bp hikes in June and July and the policy rate reaching 2.75% by year-end. Citi analysts also look for signs of stronger wage growth over coming months while the low unemployment rate could also be used as further evidence that actual output is outpacing potential and rates need to rise back towards neutral.

Week Ahead

• USD: US March CPI MoM – Citi: 1.3%, median: 1.2%, prior: 0.8%; CPI YoY – Citi: 8.6%, median: 8.4%, prior: 7.9%; CPI ex Food, Energy MoM – Citi: 0.4%, median: 0.5%, prior: 0.5%; CPI ex Food, Energy YoY – Citi: 6.5%, median: 6.6%, prior: 6.4% - Citi analysts expect a 0.42%MoM increase in core CPI in March with risks tilted slightly to the upside, although with a notable downside risk as well. The latter will be very important to assess in the event of a possible downside surprise to core CPI in March. 

• USD: US March Retail Sales – Citi: 1.3%, median: 0.6%, prior: 0.3%, Retail Sales ex Auto – Citi: 2.6%, median: 0.9%, prior: 0.2%, Retail Sales ex Auto, Gas – Citi: 1.2%, median: 0.0%, prior: -0.4%, Retail Sales Control Group – Citi: 1.2%, median: -0.1%, prior: -1.2% - Citi analysts expect a strong rise in retail sales in March, with total sales up 1.3%, sales excluding autos rising by 2.6%, and sales in the retail control group rising 1.2%. 

• USD: US March Industrial Production (IP) – Citi: 0.3%, median: 0.4%, prior: 0.5%, Manufacturing Production – Citi: 0.5%, median: 0.4%, prior: 1.2%, Capacity Utilization – Citi: 77.7%, median: 77.8%, prior: 77.6% - US IP should rise 0.3%MoM with a slightly stronger 0.5% increase in the largest subset of manufacturing production. This would be in line with another rise in the number of hours worked in manufacturing in March.

• USD: US March PPI Final Demand MoM – Citi: 1.6%, median: 1.1%, prior: 0.8%, PPI Final Demand YoY – Citi: 11.0%, median: 10.6, prior: 10.0%, PPI ex Food, Energy MoM – Citi: 0.8%, median: 0.5%, prior: 0.2%, PPI ex Food, Energy YoY – Citi: 8.7%, median: 8.4%, prior: 8.4%, PPI ex Food, Energy, Trade Services MoM – Citi: 0.8%, median: 0.5%, prior: 0.2% - Similar to CPI, and likely even to a greater degree, PPI should jump substantially in March due to food and energy prices, reflecting the jump higher in global commodity prices in March.

• USD: University of Michigan April Consumer Sentiment – Citi: 61.1, median: 58.8, prior: 59.4; University of Michigan April 1Yr Inflation Expectations – Citi: 5.5%, prior: 5.4% - Citi analysts expect another rise in the 1Yr inflation expectations measure to 5.5% in April, with upside risks to the Fed’s preferred 5-10Yr measure. This longer-term measure of inflation expectations is unlikely to remain stable if short-term expectations continue to rise.

• EUR: ECB Meeting – Policy Rate (Deposit Facility Rate): Citi Forecast -0.5%, Consensus -0.5%, Prior -0.5% - net asset purchases are set to continue at least until the end of June, rate hikes can only happen thereafter and TLTROs carry on until end-2024. However, nothing is set in stone and every meeting is live. A fixed end-date to net asset purchases, signals on pace or step-size of rate hikes could trigger a market reaction.

• EUR: Germany: ZEW Expectations, April: Citi Forecast -46.0, Consensus -48.5, Previous -39.3 (Sentix data last week plunged further); Current Assessment, April: Citi Forecast -31.0, Consensus -35.0, Previous -21.4; Euro Area: ZEW Expectations, April: Citi Forecast -46.0, Previous -38.7.

• GBP: UK Employment, Dec-Feb: Citi Forecast 75k 3M/3M, Consensus 35k 3M/3M, Prior -12k 3M/3M (participation pushing higher); Unemployment Rate, Dec-Feb: Citi Forecast 3.8%, Consensus 3.9%, Prior 3.9% (small reduction owing to base effects); Average Weekly Earnings, Dec-Feb: Citi Forecast 5.3% YY, Consensus 5.4% YY, Prior 4.8% YY (bonus pay strong); AWE Ex-Bonus, Dec-Feb: Citi Forecast 3.8% YY, Consensus 4.0% YY, Prior 3.8% YY (but Pay-E data suggests weakness) – Citi analysts expect unemployment to have fallen back to pre-Covid levels with headline wage growth also accelerating. 

• GBP: UK CPI Inflation, March: Citi Forecast 6.8% YY, Consensus 6.7% YY, Previous 5.5% YY (BoE: 5.9% YY (Feb MPR)), CPI Core, March: Citi Forecast 5.3% YY, Consensus 5.4% YY, Previous 4.4% YY (core goods resilient) – UK CPI inflation is likely to once again surprise to the upside as core goods and transport inflation show signs of upward pressure. Services inflation is also likely to jump higher from April. 

• CAD: Bank of Canada Rate Decision – Citi: 1.00%, median: 0.75%, prior: 0.50% - following the start of its rate hiking cycle with a 25bp hike in March, Citi analysts now expect the BoC to speed up the pace that it raises rates with a 50bp increase in the policy rate to 1.0% at its April meeting this week. The team also expects this to come alongside an announcement that the BoC will begin to run down its balance sheet. Governor Macklem indicated in March that the BoC plans to allow all Government of Canada bonds on its balance sheet to mature without reinvestment, which would suggest around C$50bn running off this year. The meeting will also feature updated forecasts in the April MPR. Citi analysts see mostly balanced risks around GDP forecasts with some slight upside risks, but inflation forecasts will be the more important update.

• NZD: RBNZ OCR Decision Citi forecast; +25bps to 1.25%, Previous; +25bps to 1.0% - Citi analysts expect the MPC to lift the OCR by 25bps at the April 13 meeting to a level of 1.25% and to repeat the sentence from the February 23 policy statement that “the committee agreed that further removal of monetary policy stimulus is expected over time given the medium-term outlook for growth and employment, and the upside risks to inflation”. This is because the RBNZ remains concerned about inflation expectations rising above the target for longer and for employment to remain above its maximum sustainable level.

• AUD: Australian March Labor Force: Citi employment change forecast; 40k, Previous; 77.4k, Citi unemployment rate forecast: 3.9%, Previous; 4.0%, Citi participation rate forecast; 66.5%, Previous; 66.4% - Citi analysts expect a solid monthly increase in jobs that will likely see the unemployment rate drop below 4% in March (RBA’s NAIRU estimate), despite the expected pick-up in the labor force participation rate. Record labor demand, as evidenced by the 423.5k vacant jobs across the country, suggests that the Australian labor market will tighten further over the coming months. Underemployment and underutilization rates have steadily declined, and Citi analysts expect the trend to continue. An unemployment rate of 3.9% would likely be considered consistent with levels of full-employment, although the RBA has stated previously that NAIRU could be even lower.

• CNH: China Trade Balance (USD bn) March: Citi Forecast 17, Consensus 23.7, Previous 94.4; Exports (%YoY): Citi Forecast 6.0, Consensus 13.1, Previous 20.9; Imports (%YoY): Citi Forecast 4.0, Consensus 8.0, Previous 19.5 – China’s trade growth might slow down substantially in March amid the lock downs in Shanghai, Shenzhen, Dongguan, etc. However, although Shanghai and Guangdong province account for 7.3% and 23.1% of China’s exports and 14.4% and 18.5% of imports in 2021, the impact on trade may be controllable. Indeed, China’s PMI export order and import sub-index have declined -1.8ppt and -1.7ppt, much less than 20 ppt and 17.1 ppt declines in February 2020. Citi analysts expect export and import growth to remain positive but decelerate to single digits, at 6%YoY and 4%YoY, respectively, from 16.3%YoY and 15.5%YoY in January-February. As a result, the trade surplus is estimated at ~US$17bn in March.

This is an extract from the Daily Currency Update, dated April 11, 2022. Please approach a Citigold Relationship manager if you would like more information. For the latest CitiFX house views and strategy, please click here -

https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy