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FX

BoC to raise rates by 50bp this week but risks to the statement more mixed

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CAD:  Citi analysts expect a 50bp rate hike from the BoC at the June 1 meeting this week, taking the policy rate to 1.5%. Risks for the policy statement however skew modestly hawkish, particularly as recent Canadian inflation data shows CPI is likely to overshoot the BoC’s most recent April forecasts by around a full percentage point. The April MPR penciled in a peak in CPI in Q2 at 5.8%YoY though it is not quite clear yet if CPI will peak in Q2, and current levels are already much higher 6.8%YoY as of April data. Core inflation measures also continue to rise and should keep the BoC leaving all policy options open for now.

CAD: The policy statement should continue to emphasize bringing inflation back in line with target. However, there are some dovish risks to the policy statement as well. For instance, any mention of recently soft housing data as a sign that higher rates are weighing on demand could mean the BoC is comfortable with current market pricing. Following the BoC board meeting mid-week, Deputy Governor Beaudry will deliver the Economic Progress Report later this week that could serve as a better avenue for BoC to give guidance on the possible future path of policy. Most notably, market attention will be on any discussions about what the BoC might need to see for rates to rise above neutral, or if they are more inclined to pause at around neutral (a per Citi analysts’ current base case).

 

BoE likely the first G10 central bank approaching the end of its tightening cycle

 GBP: UK households' long run inflation expectations are stable in May according to the Citigroup/YouGov Inflation Tracker. However, long-run expectations (5-10 years ahead) remain at 4.2% - well above long-run averages while expectations for the next 12 months also increase marginally to 6.1% – 3.6% above their long-term average. Citi analysts point to the data  as still suggesting a heightened risk that expectations could become de-anchored. However, the team also notes that inflation expectations are not jumping further even as realized inflation accelerates while the worrying trends in skew and dispersion in the recent past are also somewhat abating – an encouraging sign for the MPC. This is now the second month in a row that UK’s inflation expectations data appears to be showing signs of stabilization.

GBP: The UK fiscal announcement last week is likely to add 0.3pp to headline UK GDP over the coming twelve months and having set a precedent, the Chancellor may do more before the end of the fiscal year. The fiscal package however, seems carefully calibrated so as not to give the BoE reason to raise rates more aggressively and Citi analysts expect the MPC to be on hold from Q3 after raising rates twice by 25bp each with a pause thereafter. The fiscal package however may limit the extent of any BoE rate cuts to just one cut in 2023, and a second twelve months later.

 

Week Ahead 

USD: US May Nonfarm Payrolls – Citi: 315k, median: 350k, prior: 428k, Private Payrolls – Citi: 295k, median: 302k, prior: 406k; Average Hourly Earnings MoM – Citi: 0.5%, median: 0.4%, prior: 0.3%, Average Hourly Earnings YoY – Citi: 5.4%, median: 5.2%, prior: 5.5%; Unemployment Rate – Citi: 3.4%, median: 3.5%, prior: 3.6% – Citi analysts continue to expect that monthly job gains are likely to slow over the coming months as labor supply shortages limit the pace of hiring, with 315k payrolls added in May and some further slowing back towards a pre-pandemic pace of ~150k-250k over the coming months. 

USD: US May ISM Manufacturing – Citi: 53.8, median: 55.0, prior: 55.4, ISM Services – Citi: 56.4, median: 57.5, prior: 57.1 – Citi analysts expect the production component to fall below 50. This could partly be related to disruptions to global supply chains that have occurred in recent months and are just now starting to impact production more noticeably. 

EUR: Recession Watch: Euro Area Economic Sentiment: Citi forecast; 104, Previous; 105 - Following the resilient PMIs and Ifo index, Citi analysts expect the EU Commission’s Euro Area Economic Sentiment index to ease only moderately, despite extremely weak consumer confidence. The first Q2 hard-data will be released, including retail sales in France and Germany, trade and industrial production data. This could corroborate whether the resilience in sentiment surveys also prevailed on the ground. 

EUR: Euro Area HICP: Citi forecast; 7.9%, Previous; 7.4%. Euro Area core inflation: Citi forecast; 3.7%, Previous; 3.5% –  Climbing oil prices have pushed petrol prices higher again and together with further pass through into food prices, will contribute to push euro area headline inflation close to 8% already in June, from 7.4% in May. Euro area core should also continue to move higher to 3.7%, as Citi analysts see further strength in core goods prices and hospitality/travel services fees. 

AUD: Australia April Trade Balance: Citi forecast; $AU7.1bn, Previous; $AU9.3bn – Demand for Australian commodities remains firm. Citi analysts expect the value of the major three commodities; iron ore, coal, and gas to increase further in April. Global prices for these commodities had risen following the conflict in Ukraine. Elsewhere, there is little evidence of supply-bottlenecks easing materially; the conflict in Ukraine and lockdowns across China have pushed out the timeline of when we can expect a reasonable resolution to various supply-chain issues. Therefore, imports have been volatile and prices have accelerated, adding to domestic inflationary pressures. Citi Research expects values of consumer and capital goods to increase further, while intermediate goods imports could fall following the surge at the start of the year. 

CAD: BOC policy meeting: – Citi: +0.5% to 1.5% - refer to the lead piece above. Citi analysts expect a 50bp rate hike from the BoC at the June 1 meeting this week, taking the policy rate to 1.5%. 

CNH: China May Manufacturing PMI: Citi Forecast 50.5, Consensus 48.7, Previous 47.4 – As a measure of sequential momentum, Citi analysts think manufacturing PMI would post slightly above 50 in May. Citi analysts’ high-frequency trackers also point to gradual improvements in public health conditions and supply chains. Having said that, the economy is still far from back on track and needs more timely and decisive policy support.

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