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Breathing Room as Risk Appetite Tentatively Returned

  • The greenback traded weaker on Friday as risk appetite tentatively returned. G10 commodity currencies led global outperformance last Friday in an episode of dip-buying, and short-covering absent major developments. Emerging market (EM) currencies also traded slightly firmer, however the scale of gains was fairly limited. Lastly, equities rose higher in tandem with yields. Citi analysts view the divergence from previous sessions more a testament to positioning dynamics rather than a meaningful shift in risk sentiment. Citi analysts remain tactically risk averse given the sharp resurgence of global COVID-19 cases and lockdowns.


  • USD: Core Personal Consumption Expenditures (PCE) inflation rose at a slower pace than the 0.18% MoM increase Citi analysts had been expecting, rising 0.09% MoM near consensus expectations. Revisions lower to previous months also brought the year-on-year reading to 1.4%, although core PCE remains on track to overshoot 2% in the next few months. Federal Reserve speakers, including Vice-Chair Clarida, highlighted that the overshoot of 2% inflation may need to be more than a 2021 issue to get to a first rate hike.


  • USD: Personal income fell 7.1% MoM in February, largely in line with consensus expectations at -7.2% and Citi analysts at -7.3%. The drop was due to one-time payments of $600 stimulus checks in January that were not repeated in February. Wages and salaries were flat on the month. Citi analysts acknowledge that while both spending and inflation data were softer in February, it does not their change their view for an upcoming acceleration in consumption and a pick-up in inflation to above the 2% target in the next few months. The market is also likely to be dismissive of temporary weakness, and continue to see widespread vaccinations supporting stronger growth and inflation this year.


  • Oil: Oil prices are looking more constructive at the end of last week, with Brent notching near 3.8% gains. Efforts to dislodge the container vessel blocking the Suez Canal reportedly could take at least until Wednesday.


  • EUR: The third wave of the COVID-19 pandemic spreading across EU member states could necessitate that governments introduce more restrictions in coming weeks/months. This could thus see a short-term downside risk to GDP in 2Q 2021 (expected to rise 1.3% QoQ). However, the economic trajectory could continue to improve into the second half of the year as vaccination campaigns progress.


  • CNH: Total industrial profit surged 178.9% YoY in Jan-Feb, way above 20.1% YoY in December or 4.1% YoY in the full year of 2020. Industrial profit’s average growth stood at 31.2% YoY, still showing an obvious acceleration. Solid industrial profit growth could continue in coming months, with state-owned enterprises (SOEs) outperforming. Chinese industrials are well positioned to benefit from the spillover effect of the ongoing US$1.9trln stimulus and potential infrastructure package.


Week Ahead

  • USD: President Biden plans to introduce a reportedly $3 trln+ proposal for infrastructure spending in a 31 March speech. Citi analysts see risks toward a smaller package with around 30% probability that no significant infrastructure bill is passed. In nonfarm payrolls, a strong 600k increase in March is expected, which could take the total number of jobs lost compared to pre-pandemic levels to just under 9 million. Largely broad-based job gains across sectors are expected as activity broadly picked up over recent weeks as increased vaccinations allow for a re-opening of many businesses and a gradual return towards more-normal activity patterns. Unemployment rate is expected to decline to 6.0% in March from 6.2% in February, although with slight downside risk. ISM manufacturing index could see another increase to 61.7 (prior 60.8) in March, continuing a trend of recent persistent strength. In particular, demand for manufactured goods could remain elevated, supported over coming months by substantial fiscal stimulus.


  • EUR: Economic sentiment may rebound sizably in March to 97.5. Final manufacturing Purchasing Managers’ Index (PMI) for March could rise to a record high of 62.4, as a reflection of the rapid improvement in global trade and external demand more broadly as the impact of the pandemic begins to recede. Final Eurozone composite PMI is expected to rise by 4.4 points to an eight-month high of 52.5 in march, meaning that private sector activity expanded for the first time in six months.


  • JPY: Industrial production probably decreased 1.6% MoM in February after a 4.3% increase in January, as Citi analysts expect strong January growth to drop out and shortages of semiconductors to affect auto production as well.


  • CNH: Citi analysts expect manufacturing PMI to return above 51 (Citi: 51.2) in March, on post-Chinese New Year seasonality.


  • HKD: February retail sales (Citi: retail sales value: 47.0% YoY) could be boosted by super low base.


  • KRW: CPI inflation is expected to slightly moderate by -0.1% MoM in March. Citi analysts expect full-month March exports to rise further by 23.6% YoY and imports to increase by 22.4% YoY.



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