BoC on summer vacation in June, back in July
CAD: BoC leaves policy unchanged at its meeting overnight as widely expected, with policy rates at 0.25% and the pace of QE purchases continuing at C$3bn per week. Language around policy guidance is also largely unchanged, with latest projections showing a closing output gap in H2-2022. The statement acknowledges a solid start to growth in 2021 despite new lockdowns in Q1 and although final Q1 GDP growth is somewhat softer than expected, “underlying details indicate rising confidence and resilient demand” and the Canadian economy should rebound strongly as restrictions are lifted over the summer, led by consumption.
- CAD: The statement cites recent declines in employment in the most virus-sensitive sectors due to lockdowns. In a nod to comments from BoC Governor Macklem, the statement also mentions that the employment-population ratio remains below pre-COVID levels. Governor Macklem has recently noted an objective of regaining all lost jobs, plus jobs for new labor force entrants before the BoC considers raising policy rates. As of May, this benchmark is for ~770k jobs added over the coming months.
- CAD: As expected, the statement is dismissive of above-target headline CPI given stronger energy prices and base effects. The statement also notes rising core inflation, although again, dismissive of the increase as temporary. Citi analysts however see potential for core inflation to remain around 2% later in the year. A number of survey measures suggest firmer price increases and various global supply shortages have already pushed prices higher in the US. While the BoC has been relatively quiet on price pressures due to supply issues, Citi analysts expect the BoC to be less dismissive of consistently at-or-above-target core inflation later this year than the Fed. The team is particularly interested in any guidance around this issue at the appearance by Deputy Governor Lane tonight where his speech is likely to echo optimism about future activity, but also to continue to reiterate the BoC’s commitment to supporting the recovery.
- CAD: Bottom Line - while the Canadian economy “continues to require extraordinary monetary policy support”, Citi analysts continue to expect another reduction in the pace of asset purchases in July.
Data overnight – Chinese inflation data
CNH: China’s CPI relatively muted - CPI inflation comes in relatively muted at 1.3%YoY in May, well below market expectations (Citi/Mkt: 1.6%YoY). Sequential CPI growth also remains negative at -0.2%MoM vs -0.3%MoM in April. Food deflation continues (at -1.7%MoM vs -2.4%MoM in April) while non-food inflation is flat at (+0.2%MoM vs +0.2%MoM in April).
CNH: China’s PPI industrial inflation starting to pose growth challenges - PPI inflation jumps further to 9%YoY, from 6.8%YoY in April, beating consensus (Citi/Mkt: 8.7%/8.5%YoY). The headline reading, the highest since September 2008, already exceeds PPI at the height of supply-side reform. Sequential PPI inflation also returns to 1.6%MoM after dipping to 0.9%MoM in April. Rising commodity prices (metals) are still the main drivers for PPI in May. Industrial inflation pressure poses additional risks to growth - it seems global supply constraints and demand recovery as well as Chinese-style de-carbonization make a quick fix unlikely to this round of commodity-led inflation. Citi analysts see sequential PPI inflation peaking in Q2’21 as growth momentum softens into H2’21, but headline PPI readings will likely remain elevated above 8% in coming months.
Data for the remainder of this week
- USD: US inflation indicators set to strengthen further - CPI MoM – Citi: 0.5%, median: 0.4%, prior: 0.8%; CPI YoY – Citi: 4.8%, median: 4.7%, prior: 4.2%; CPI ex Food, Energy MoM – Citi: 0.6%, median: 0.4%, prior: 0.9%; CPI ex Food, Energy YoY – Citi: 3.6%, median: 3.4%, prior: 3.0% - after a much stronger-than-expected 0.9% increase in core CPI last month, Citi analysts expect many of the same factors pushing prices higher in April will persist in May. Supply-shortage issues now appear to now be flowing through to consumer prices. As these price increases will still likely be dismissed by the Fed as temporary, the more important components of CPI to watch will continue to be key services components, such as shelter prices.
- USD: University of Michigan Consumer Sentiment – Citi: 84.8, median: 84.0, prior: 82.9; University of Michigan 1y Ahead Inflation Expectation – Citi: 4.4%, median: NA, prior: 4.6% - The most important aspect of the University of Michigan survey are higher inflation expectations for both the one-year-ahead and five- to ten-years-ahead measures. The five- to ten-year measure, in particular, will be important for the outlook for Fed policy, and a continued climb higher into the end of the year would be a sign of more persistent price pressures lasting into 2022.
- EUR: ECB Policy Meeting Forecast: No Change – Citi analysts expect tonight’s ECB Meeting to err on the dovish side, notably by extending the current elevated pace of bond purchases to Q3 (currently at around €80bn per month) with the risk that it could be extended beyond Q3. For Q4-21, Citi analysts pencil in a pace of €60bn/ purchases per month but point to little or no pressure to reduce the current pace from the PEPP envelope, if needed. To fully use the PEPP envelope by the end March 2022 would require purchases at a monthly average pace of €75bn, just a little below the current ‘higher’ pace (€80.2bn in April and on track for €80bn in May). Therefore, the ECB may opt to not provide further guidance yet on the future of the PEPP, which in principle could expire as early as March 2022, with conversations likely to be pushed back to September at the earliest.
This is an extract from the Daily Currency Update, dated June 10, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -