China - growth surges with shift in drivers
CNH: China’s Q1’21 GDP - GDP growth jumps from 6.5%YoY in 4Q20 to 18.3%YoY in 1Q21. The NBS reports average annual growth of key indicators from Q1’19 to Q1’21 has helped filter out the huge base effect and the two-year average growth rate of 5% represents a visible slowdown from Q4’20. GDP deflator picks up from 0.5%YoY to 2.4%YoY. As a result, nominal GDP growth surges from 7%YoY to 21.2%YoY but household income growth still lags behind GDP growth.
CNH: FAI decelerates from 35%YoY in January-February to 25.6%YoY in Q1’21, but its two-year average growth picks up from 1.7% to 2.9%, with sequential growth largely stable. Real estate investment continues to lead FAI growth, but manufacturing and infrastructure investment also improve significantly. Meanwhile, retail sales are up 34.2%YoY in March, up from 33.8%YoY in January-February. The two-year average at 6.3% also accelerates significantly from the previous 3.2%. But IP growth decelerates from 35.1%YoY in January-February to 14.1%YoY in March and the two-year average also falls from 8.1% to 6.8% due to weaker exports and production cuts.
CNH: Strong commodity imports and exports show robust Chinese demand - March trade data shows Chinese commodity demand remains robust. This trends should continue over the next few months as global demand for intermediate and finished goods from China remains firm in Q2’21. Q1’21 has seen imports in crude oil, natural gas, iron ore, copper and agricultural products at higher than pre-Covid 2019 levels. Imports should stay robust Y/Y overall but some commodities such as iron ore and copper may see a pull back over next 1-2mths (may have implications for AUD).
CNH: Forecasts and risks - Citi analysts raise their growth forecast for China to 8.8%YoY for 2021E, but expect sequential momentum to peak in Q2’21E. The team now forecasts growth at 8.5%YoY in 2Q21E (vs. 8% previously) and maintains 6%YoY in Q3’21E and 5%YoY in Q4’21E. Citi analysts see consumption and industrial capex expansion taking over property and exports as main drivers for growth. Risks to watch include – (1) Policy overtightening and (2) US-China tensions.
CNH: Policy outlook - Citi analysts also believe that policy exit has been underway and tightening could become more pronounced in H2’21E. That said, the PBoC would likely exert extra caution in policy exit in Q2’21E for stability. Citi analysts also see RMB appreciation pressures to remain throughout the rest of this year on expected continued large capital inflows.
Week Ahead: Key data/ events – ECB and BoC meetings
- EUR: ECB Monetary Policy Outcome – the ECB meeting is unlikely to be a major event this time round. Very little has changed since the March meeting and Citi analysts expect the ECB to reiterate its guidance on rates and reinvestments, as well its expectation that purchases under the PEPP in 2Q-21 will be conducted at a significantly higher pace than during the first months of 2021.
- EUR: Euro area Manufacturing PMI, April Flash Forecast: 61.0 Prior: 62.5; Services PMI, April Flash Forecast: 47.2 Prior: 49.6; Composite PMI, April Flash Forecast: 51.0 Prior: 53.2 – Citi analysts estimate that the flash composite PMI will fall back in April by a little bit more than a point to a two-month low of 51.0. For services, Citi analysts expect the rate of contraction worsened in April to a two-month low of 47.2, while the pace of expansion for manufacturing likely moderated a little from the all–time high of 62.5 in March.
- GBP: UK CPI Inflation, March Forecast: 0.7% YY Prior: 0.4% YY; CPI Core, March Forecast: 1.1% YY Prior: 0.9% YY - the key question is how much of the inflation undershoot in February is now transferred into stronger M/M inflation over coming months. As such, Citi analysts expect a moderate pickup in UK inflation this month and then a further boost in April with likely upside surprises over the coming months.
- GBP: Manufacturing PMI, April Flash Forecast: 48.1 Prior (Mar F): 58.9; Services PMI, April Flash Forecast: 61.8 Prior (Mar F): 56.3 – Citi analysts expect manufacturing PMI to remain relatively robust in the first weeks of April while also expecting UK services PMI to rebound above its 60 threshold for the first time since the start of the pandemic. Looking further out, the team expect these data to remain robust through Q2. The key question will be how long this can be sustained. Citi analysts’ bias remains for a rapid but incomplete recovery.
- AUD: Citi analysts raise their quarterly Q1 inflation forecast for Australia from 0.4% to 1.0%, which takes headline inflation to 1.5% YoY and their quarterly forecast for underlying inflation is also revised higher from 0.4% to 0.5% QoQ (1.3% YoY). The team see risks as skewed to the upside, and this transient inflation could persist into Q2. However, Citi analysts expect supply chains to adjust and inflation dynamics to begin normalizing in the second half of the year.
- CAD: Bank of Canada Rate Decision – Citi: 0.25%, median: 0.25%, prior: 0.25% - The recent rapid increase in new virus cases and subsequent new closures of businesses have now complicated the outlook for this week’s BoC meeting, with additional complexities around forecasts and guidance in the policy statement. Citi analysts base case is for asset purchases to slow to C$3bn per week (down from C$4bn), with a dovish characterization around the start of tapering given new headwinds to the recovery. However, in the policy guidance, the team expects a removal of the reference to a closing output gap in 2023. All-in-all, Citi analysts expect a slightly hawkish outcome, as the change to the policy guidance could take more market participants by surprise.
This is an extract from the Daily Currency Update, dated April 19, 2021. Please approach a Citigold Relationship Manager if you would like more information.