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BoJ remains comfortable as the outlier among G10 central banks

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JPY: BoJ bucks the trend of major central bank tightening by leaving monetary policy settings unchanged at Friday’s meeting (cash rate at -0.1% and a YCC target on the 10Yr JGB yield at 0% +/- 25bp). In the policy statement, BoJ adds the sentence that “it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices”, and Governor Kuroda in his press conference again describes sharp depreciation in the Yen as hindering corporate business planning. However, Governor Kuroda remains steadfastly dovish in his commitment to support BoJ’s YCC (yield curve control) policy by noting that “the Bank will not hesitate to take additional easing measures if necessary while expecting short- and long- term policy interest rates to remain at their present or lower levels”.
 
JPY: This leads Citi analysts to maintain their base case that change in BoJ policy may only come under a new governor who takes over in April 2023, though excessive Yen volatility and potential for political pressure from the Japanese government to contain FX volatility, could see a 30%-40% likelihood to adjustments under Governor Kuroda with the September (21-22) board meeting sees as the earliest timing. This is premised on an LDP victory in July’s Upper House elections and a consequent strengthening of PM Kishida’s support base. If the BoJ does adjust its policy settings, it is likely to be in the form of – (1) broadening the range of fluctuation in 10Yr JGB yields (currently ±0.25%) while maintaining the target (c0%), (2) raising the yield target outright, or (3) shifting the YCC target to the 5yr JGB maturity from the current 10Yrs. Of these, alternative 3 seems the most likely (Citi analysts).
 

Another solid Australian labor force print points to RBA lifting the cash rate by 50bps in July

AUD: In data released Friday, Australia’s unemployment rate comes in unchanged at 3.9% in May (Citi & consensus; 3.8%) despite a large 60.6k increase in employment (Citi; 20k, consensus; 25k), offset by an increase in the labor force participation rate from 66.4% to 66.7% (Citi and consensus; 66.4%). Citi analysts point to the strong 60.6k increase in employment, a record-high labor force participation rate of 66.7%, and a steady, multi-decade low unemployment rate of 3.9% suggesting the Australian labor market is now close to, or below, levels consistent with full-employment, which will likely generate wage pressures over the coming year. Citi analysts therefore reconfirm their view that the RBA will likely lift the cash rate by another 50bps at the July Policy Board Meeting but now follow up with +50bps hikes across August and September and a +25bps in November for a year-end cash rate of 2.6%, followed by a year-end cash rate of 3.1% in 2023. This represents a significant upward revision to the team’s prior forecast.
 

Negative Omicron hit to NZ Q1 GDP hit won’t stop RBNZ raising rates further this year 

NZD: New Zealand’s GDP growth falls by -0.2% in Q1, underwhelming consensus for +0.6% and below Citi’s +0.2% forecast. The surprise result means YoY GDP growth eases considerably from 3.1% to 1.2%. The result also undershoots RBNZ’s 2.5% forecast published only last month and leaves NZ GDP growth around 1pp below potential growth. Citi analysts expect GDP growth to recover in Q2 (1.5% but with downside risks) due to economic reopening, still accommodative rate settings, rising wages and a record low unemployment rate. That said, the 2022 year-average GDP growth is now likely to be lower at 2.2% (down from 2.8%) before moderating.
 
NZD: Citi analysts now look for two +50bp rate hikes from the RBNZ at the next 2 MPC meetings (13 July and 17 August) followed by 2 +25bp rate hikes (5 October and 23 November) for a 2022 year-ended OCR of 3.50% thanks to higher expected NZ CPI inflation of 6.2% in 2022 (from 5.6%) but pencil-in rate cuts beginning Q2 2023 for a terminal OCR of 2.75% in Q3 2023 on the back of slower growth GDP (1.5% from 2.3% prior forecast) and CPI inflation (2.7%) in 2023. Within inflation forecasts, Citi analysts expect NZ CPI to come back within the bottom half of RBNZ’s target band in H2’ 2023 that may allow it to lower the OCR to 2.75% in Q3 2023.
 

Week Ahead – Fed, ECB and BoE speak, French legislative elections

USD: Fed speak - the two most important appearances this week will be Fed Chair Powell's semi-annual testimonies before the Senate Banking Committee and the House Financial Services Panel. There could be some slight hawkish nuances if Powell makes it clearer that 50bp increments are the new baseline pace or if he puts 100bp hikes more concretely on the table in case future inflation prints surprise to the upside. The week also sees speeches from Waller, Bullard, Mester, Barkin, Harker and Daly. St. Louis Fed President Bullard and Governor Waller have consistently been the most hawkish FOMC members.
 
EUR: EU Summit 23/24 June – the provisional agenda foresees discussions on the rise and divergence of sovereign borrowing costs (will ECB President propose a “grand bargain” where the ECB creates an anti-fragmentation tool and member states progress towards more risk sharing) and relations with the UK.
 
EUR: France: second round of legislative elections – seat projections after the first round suggest that Macron’s Ensemble alliance would remain the largest group in parliament but could fall short of a majority. And even if a majority is secured, deteriorating loyalty to parties as a consequence of the decline of traditional formation could mean Macron needs new partners. In this regard, statements from the center-right as well as from moderates within the left-wing NUPES alliance could give a clue which way Macron may lean.
 
Euro Bloc: ECB & BoE – a plethora of ECB rate setters will be speaking. Citi analysts remain skeptical that ECB President Lagarde’s appearance in the European Parliament’s Economic and Monetary Affairs committee will yield insight ECB staff’s thinking on the anti-fragmentation tool. But national central bank governors’ intervention will matter to judge where intervention threshold may settle or what conditions may be attached. BoE: What is the message? – having all but jettisoned their ‘guidance’ in June, five of the nine-person committee will be talking this week. The key question will be the balance of the growth and inflation risks in UK, and the associated burden of proof to an outsized move. The bigger questions surround UK data and developments in services inflation, the Agent data on wages and prices and the Decision Maker survey data.
 
EUR: Euro area data releases: Euro Area (flash) PMI Manufacturing, June: Citi Forecast 54.1, Consensus 54.0, Prior 54.6;  PMI (flash) Services, June: Citi Forecast 54.5, Consensus 55.5, Prior 56.1;  PMI Composite Output, June: Citi Forecast 54.0, Consensus 54.1, Prior 54.8; German Ifo Business Climate, June: Citi Forecast 93.8, Consensus 92.5, Prior 93.0; Ifo Expectations, June: Citi Forecast 87.5, Consensus 87.1, Prior 86.9;  Ifo Current Assessment, June: Citi Forecast 99.0, Consensus 98.8, Prior 99.5.
 
GBP: CPI and (flash) PMIs: Will inflation join in the upside surprises? – Citi analysts expect UK CPI to print at 9.2% YY in May, with an uptick in goods, services and food inflation M/M all behind the small acceleration. If realized, this would leave CPI inflation in line with the BoE forecast from May, though upside risks loom for the months ahead. Both the EA and US have seen upside surprises in May on the back of core goods and rental prices respectively. Read across into UK inflation is limited in both cases, with core goods inflation in the EA lagging UK developments, rather than leading. CPI Inflation, May: Citi Forecast 9.2% YY, Consensus 9.2% YY, Prior 9.0% YY; BoE Forecast: 9.2% YY (May MPR); CPI Core, May: Citi Forecast 6.3% YY, Consensus 6.0% YY, prior 6.2% YY (goods inflation uptick). UK PMI Manufacturing, June Flash: Citi Forecast 54.5, Consensus 53.8, Prior 54.6;  PMI Services, June Flash: Citi Forecast 52.0, Consensus 53.0, Prior 53.4 (expectations suggests downside risk)
 
JPY: Japan Nationwide Consumer Prices, Overall (May): Citi Forecast 2.3% YoY, Previous: 2.5% YoY; Excluding Fresh Food: Citi Forecast: 2.0% YoY, Previous: 2.1% YoY; Excluding Fresh Food and Energy: Citi Forecast: 0.7% YoY, Previous: 0.8% YoY – Citi analysts expect nationwide core CPI (excluding only fresh food) to rise 2.0% YoY in May, down from a 2.1% YoY but advance from April as energy’s boost moderates. The team expects core CPI excluding special factors to rise 1.15% YoY in May as in April and overall CPI to increase by 2.3% YoY in May (+2.5% YoY in April), while CPI excluding fresh food and energy likely gains 0.7% YoY (+0.8% YoY). Citi analysts estimate that the core CPI inflation will remain elevated at or over 2% YoY for the rest of the year.
 
CAD: Canada CPI NSA MoM (May) – Citi: 1.1%, median: 1.0%, prior: 0.6%; CPI YoY – Citi: 7.4%, median: 7.3%, prior: 6.8% - May CPI is likely to show inflation climbing still even higher than in the BoC’s most recent inflation forecasts, rising 1.1%MoM and to 7.4%YoY. Strength should again be largely broad-based across various goods and services prices with rising interest rates likely leading to the mortgage cost component becoming a larger boost to shelter prices in CPI, even if higher mortgage rates eventually lead to softer home prices. Overall, home prices have started to decline in data for April and May, which should lead to a slowing in new home prices that matter even more for CPI. The general trend of price pressures though remains strong and broad-based across various types of goods and services. This should be evident in core inflation measures continuing to climb higher, closer to 5% on average, over the coming months.
 

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In various jurisdictions (including, without limitation, the European Union and the United States) national authorities have certain powers to manage and resolve banks, broker dealers and other financial institutions (including, but not limited to, Citi) when they are failing or likely to fail. There is a risk that the use, or anticipated use, of such powers, or the manner in which they are exercised, may materially adversely affect (i) your rights under certain types of unsecured financial instruments (including, without limitation, BRRD Financial Instruments), (ii) the value, volatility or liquidity of certain unsecured financial instruments (including, without limitation, BRRD Financial Instruments) that you hold and / or (iii) the ability of an institution (including, without limitation, a BRRD Entity) to satisfy any liabilities or obligations it has to you. In the event of resolution, the value of BRRD Financial Instruments may be reduced to zero and or liabilities may be converted into ordinary shares or other instruments of ownership for the purposes of stabilisation and loss absorption. The terms of existing BRRD Financial Instruments (e.g., date of maturity or interest rates payable) could be altered and payments could be suspended.

There can be no assurance that the use of any BRRD resolution tools or powers by the BRRD Resolution Authority or the manner in which they are exercised will not materially adversely affect your rights as a holder of BRRD Financial Instruments, the market value of any investment you may have in BRRD Financial Instruments and/or a BRRD Entity’s ability to satisfy any liabilities or obligations it has to you. You may have a right to compensation from the relevant authorities if the exercise of such resolution powers results in less favourable treatment for you than the treatment that you would have received under normal insolvency proceedings. By accepting any services from Citi, you confirm that you are aware of these risks.

In Canada, Citi Private Bank is a division of Citibank Canada, a Schedule II Canadian chartered bank. References herein to Citi Private Bank and its activities in Canada relate solely to Citibank Canada and do not refer to any affiliates or subsidiaries of Citibank Canada operating in Canada. Certain investment products are made available through Citibank Canada Investment Funds Limited (“CCIFL”), a wholly owned subsidiary of Citibank Canada. Investment Products are subject to investment risk, including possible loss of principal amount invested. Investment Products are not insured by the CDIC, FDIC or depository insurance regime of any jurisdiction and are not guaranteed by Citigroup or any affiliate thereof.

This document is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities to any person in any jurisdiction. The information set out herein may be subject to updating, completion, revision, verification and amendment and such information may change materially.

This document is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities to any person in any jurisdiction. The information set out herein may be subject to updating, completion, revision, verification and amendment and such information may change materially.

Citigroup, its affiliates and any of the officers, directors, employees, representatives or agents shall not be held liable for any direct, indirect, incidental, special, or consequential damages, including loss of profits, arising out of the use of information contained herein, including through errors whether caused by negligence or otherwise.

CCIFL is not currently a member, and does not intend to become a member of the Mutual Fund Dealers Association of Canada (“MFDA”); consequently, clients of CCIFL will not have available to them investor protection benefits that would otherwise derive from membership of CCIFL in the MFDA, including coverage under any investor protection plan for clients of members of the MFDA.

Bahrain: IN BAHRAIN, CITI PRIVATE BANK OPERATES UNDER SPECIFIC APPROVAL ISSUED ON THE BASIS OF CITIBANK, N.A., BAHRAIN BRANCH’S BANKING LICENSE

Marketing and distribution of Investment Funds to clients in Bahrain requires Notification to the Central Bank of Bahrain and will be limited to UHNWI as defined below. Minimum investment subscription criteria will apply for products for all subscriptions for Bahrain domiciled clients.

Ultra-high net worth investors are:

(a) Individuals who have a minimum net worth (or joint net worth with their spouse) of USD 25 million or more

(b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 25 million; or

(c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).

GLOBAL CONSUMER BANK (ASIA PACIFIC AND EMEA):

“Citi analysts” refer to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”), Citi Global Wealth Investments (“CGWI”) and voting members of the Citi Global Investment Committee.
Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document.

The information in this document has been obtained from reports issued by CGMI and CGWI. Such information is based on sources CGMI and CGWI believe to be reliable. CGMI and CGWI, however, do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute CGMI and CGWI's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended
as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits, are not obligations of, or guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware
of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Investment products are not available to US persons. Investors should be aware
that it is his/her responsibility to seek legal and/or tax advice regarding the legal and tax consequences of his/her investment transactions. If an investor changes residence, citizenship, nationality, or place of work, it is his/her responsibility
to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable. Citibank does not provide legal and/or tax advice and is not responsible
for advising an investor on the laws pertaining to his/her transaction.

Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For more information, please refer to https://www.citivelocity.com/cvr/eppublic/citi_research_disclosures.

MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

Hong Kong: This communication is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL") and/or Citibank, N.A., Hong Kong Branch (“CBNA HK”, Citibank, N.A. is organized under the laws of U.S.A. with limited liability). CHKL and CBNA HK provide no independent research or analysis in the substance or preparation of this communication. Although information in this communication has been obtained from sources believed to be reliable, CHKL and CBNA HK do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.

This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
has not taken account of the objectives, financial situation or needs of any particular investor. Any person considering an investment should consider the suitability of the investment having regard to their objectives, financial situation and needs,
and should seek independent advice before making an investment decision. You should obtain and consider the relevant product terms and conditions and risk disclosure statement, and consider if it’s suitable for your objectives, financial situation or needs before making any investment decision. Investors are advised to obtain independent legal, financial and taxation advice prior to investing. Investments are not deposits, are not protected by the Deposit Protection Scheme in Hong Kong
and are subject to investment risk including the possible loss of the principal amount invested.

This communication does not constitute the distribution of any information in any jurisdiction in which it is unlawful to distribute such information to any person in such jurisdiction.

CHKL does not provide discretionary portfolio management services.

Singapore: This communication is distributed in Singapore by Citibank Singapore Limited (“CSL”) to selected Citigold/Citigold Private Clients. CSL provides no independent research or analysis of the substance or in preparation of this communication. Please contact your Citigold/Citigold Private Client Relationship Manager in CSL if you have any queries on or any matters arising from or in connection with this communication. Investment products are not insured under
the provisions of the Deposit Insurance and Policy Owners’ Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme.

This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors,
as appropriate. This communication does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom
it is unlawful to distribute such information or make any offer or solicitation.

Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making
an investment decision. Interested investors should seek the advice of their financial adviser about the issues discussed herein as appropriate. Should investors choose not to seek such advice, they should carefully consider the risks associated
with the investment and make a determination based upon the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives and assess whether the investment product is suitable for
themselves. Although information in this document has been obtained from sources believed to be reliable, CSL does not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from Its use.

CSL does not provide discretionary portfolio management services.

UAE: This document is distributed in UAE by Citibank, N.A. UAE. Citibank N.A. UAE is licensed by UAE Securities and Commodities Authority (“SCA”) to undertake the financial activity as Promoter under license number 602003.

Citibank N.A. UAE is registered with Central Bank of UAE under license numbers BSD/504/83 for Al Wasl Branch Dubai, 13/184/2019 for Mall of the Emirates Branch Dubai, BSD/2819/9 for Sharjah Branch, and BSD/692/83 for Abu Dhabi Branch.

This is not an official statement of Citigroup Inc. and may not reflect all of your investments with or made through Citibank. For an accurate record of your accounts and transactions, please consult your official statement. Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making an investment decision. Each investor should carefully consider the risks associated with the investment and make a determination based upon the investor’s own particular circumstances, that the investment is consistent with the investor’s investment objectives.
At any time, Citigroup companies may compensate affiliates and their representatives for providing products and services to clients.

United Kingdom: This document is distributed in the U.K. by Citibank UK Limited and in Jersey by Citibank N.A., Jersey Branch.

Citibank UK Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Our firm’s Financial Services Register number is 805574. Citibank UK Limited
is a company limited by shares registered in England and Wales with registered address at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, Companies House Registration No. 11283101.

Citibank N.A., Jersey Branch is regulated by the Jersey Financial Services Commission. Citi International Personal Bank is registered in Jersey as a business name of Citibank N.A. The address of Citibank N.A., Jersey Branch is P.O. Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A. is incorporated with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, USA.

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