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China - better-than-expected June credit data and RRR cut reaffirm a dovish monetary policy tone ahead

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China - better-than-expected June credit data and RRR cut reaffirm a dovish monetary policy tone ahead                                     

  • CNH: PBoC announces a 50bps RRR cut on Friday, effective on July 15th — as indicated at the State Council meeting, the PBoC cuts RRR two days later and would inject RMB1trn permanent funds to financial institutions (except those whose RRR rate is already at 5%). After this cut, the weighted average RRR ratio will be at 8.9%. This broad-based RRR cut is stronger than expected and could infer China’s 2Q GDP growth  disappoints, though it could also signal dovish monetary policy ahead, which bodes well for China’s continued growth recovery and financial stability and risk assets. June credit data also alleviates some fear of further quantity of money tightening in 2H. M2 growth picks up further in June by 0.3 ppt to 8.6%YoY, much higher than consensus (Mkt: 8.2%) while M0 growth also accelerates by 0.6 ppt to 6.2%YoY, but M1 growth slows 0.6 ppt to 5.5%YoY. The RRR cut however also does little to change the Citi analysts outlook for a strengthening of RMB later this year.      

 

Data released Friday      

  • CNH: China: Inflation divergence poses policy challenge - CPI inflation lowers from 1.3%YoY in May to 1.1%YoY in June while sequential CPI deflation widens from -0.2%MoM to -0.4%MoM. Meanwhile, PPI inflation comes off from 9%YoY in May to 8.8%YoY in June and sequential PPI inflation pulls back sizably from 1.6%MoM to 0.3%MoM due to metals prices correcting. PPI inflation may have peaked but PPI-CPI divergence remains a policy concern though last week’s RRR cut does not represent the start of another round of policy easing.    
  • GBP: UK May GDP is up 0.8% MM in May, a disappointment to both Citi and consensus (Citi 2.1%, Consensus 1.5%). This leaves UK GDP 3.1% below the pre-pandemic level (Feb-2020) with services the main downside surprise but manufacturing and construction also contracting for the 2nd month in a row. Downside risks loom – Citi analysts had expected growth of 5.7% QQ in Q2; this now looks optimistic. Instead, the team now expects growth of 4.8% in Q2 and 2.0% in Q3 – implying growth of 6.4% for 2021.  That said, BoE forecasts for Q2 may still be too pessimistic at 4.2% QQ but with recovery momentum faltering, this sees downside risks medium term. 
  • CAD: Canadian June jobs report - strong start to recovery period job growth - Canadian economy adds 231k jobs in June, stronger than consensus for a 175k increase. The unemployment rate declines to 7.8%, while the participation rate rises to 65.2%. The 231k increase in employment in June is a strong start to the summer recovery period and Citi analysts expect further strong rehiring, with around 400-500k jobs possibly regained from June through August. Following the June report, the benchmark for employment gains set by the BoC for raising rates stands at around 540k jobs and Citi analysts still see this goalpost met sometime around Q2-2022.        

 

Week Ahead         

  • USD: Fed Chair Powell testifies to Congress this week and Citi analysts think there is some chance the current fall in UST yields may accelerate taper discussions. The team is interested to see whether – (1) Whether the move lower in long-term yields has changed Powell's monetary policy views; (2) Powell's reaction to Tuesday's CPI inflation report; and (3) Any updated guidance on "substantial further progress" toward the employment objective. 
  • USD: CPI MoM – Citi: 0.5%, median: 0.5%, prior: 0.6%; CPI YoY – Citi: 5.0%, median: 4.9%, prior: 5.0%; CPI ex Food, Energy MoM – Citi: 0.5%, median: 0.4%, prior: 0.7%; CPI ex Food, Energy YoY – Citi: 4.1%, median: 4.0%, prior: 3.8% - The most important components of CPI over coming months will be shelter prices that currently contribute less to Y/Y core CPI than a year ago. However, as shelter prices tend to be more indicative of economic conditions, consistent strength over coming months would be a sign of underlying inflation running above 2%.  
  • USD: PPI Final Demand MoM – Citi: 0.6%, median: 0.5%, prior: 0.8%; PPI Final Demand YoY – Citi: 6.8%, median: 6.8%, prior: 6.6%; PPI ex Food, Energy MoM – Citi: 0.4%, median: 0.4%, prior: 0.7%; PPI ex Food, Energy YoY – Citi: 4.9%, median: NA, prior: 4.8%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.5%, median: 0.5%, prior: 0.7% - Citi analysts are particularly interested in goods prices in PPI, which have led goods prices in CPI by a few months this year and would suggest further upside to CPI if price increases continue. 
  • USD: University of Michigan Sentiment – Citi: 83.9, median: 86.5, prior: 85.5; University of Michigan Inflation Expectations 1Yr – Citi: 4.1%, prior: 4.2% - The most important part of the University of Michigan consumer survey report are inflation expectations and Citi analysts expect a modest decline in the one-year ahead inflation expectations to 4.1%, but attention will be more on the 5-10 year measure. Citi analysts expect a continued increase would support the start of QE tapering later in H2 ahead of the first Fed rate hike by the end of 2022.
  • NZD: NZ RBNZ July Monetary Policy Preview: Citi forecast; 0.25%, Previous; 0.25% - There has been an ongoing shift in OCR pricing since the last MPS at the end of May, where the Bank’s forecast implied an OCR hike in H2 2022. Citi analysts also bring brought forward their view that the RBNZ will begin its hiking cycle in Q3 2022 but push back against the view of an earlier rate hike because it would cause a tightening in financial conditions.
  • AUD: June Labor Force Survey: Citi employment forecast; +5k, Previous; +115.2k; Citi unemployment rate forecast; 4.9%, Previous; 5.1%; Citi participation rate forecast; 66.0%, Previous; 66.2% - following the extended Sydney lockdown, Citi analysts see greater volatility across the labor force surveys in the next few months.
  • CAD: BoC meeting – Citi: 0.25%, median: 0.25%, prior: 0.25% - Citi analysts expect another taper in asset purchases at this week’s meeting, with the weekly pace reduced from C$3bn per week to C$2bn. In the team’s base case, the pace is slowed further to C$1bn at the October meeting, with a December meeting announcement to reach net zero by the end of 2021. However, markets have already come to expect a hawkish BoC and are currently pricing substantial rate hikes in 2022 and a “neutral” statement could be a somewhat dovish surprise. 
  • SGD: Singapore GDP (%QoQ sa) 2Q A: Citi -1.0, Consensus -2.0, Previous 3.1; GDP (%YoY): Citi 15.4, Consensus 14.6, Previous 1.3 - Apr-May data points to a relatively mild 1% QoQ SA contraction (+15.4% YoY) for 2Q21E GDP Advance Estimates, far smaller than the 13.1% QoQ SA contraction from the Circuit Breaker in 2Q20, as strength in trade related sectors offset mild contractions in consumer facing sectors on tighter restrictions.        

 

This is an extract from the Daily Currency Update, dated July 12, 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 - 

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

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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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