Chinese growth peaks but remains on track
CNH: China’s 2Q21 growth peaks while inflation surges — real GDP growth prints slightly lower than expected at 7.9%YoY in 2Q21 but remains well on track while the GDP deflator jumps to 5.3%YoY on rising PPI inflation. Organic growth drivers gain momentum — FAI expands steadily at 12.6%YoY Ytd in June, supported by the catch-up of industrial capex. Retail sales grows 12.1%YoY in June and beats market expectations and IP growth holds up at 8.3%YoY in June on resilient exports despite rising cost pressures.
CNH: What to expect next? — Citi analysts expect growth to converge to its potential in 2H21. While industrial investment and consumption are likely to take over from property and exports as main growth drivers, the team believes overall momentum has peaked and maintains their growth forecast for China at 6%YoY in 3Q21E and 5.1%YoY in 4Q21E with the full-year growth projection now at 8.7%YoY for 2021E. Policy Outlook — Citi analysts do not expect any monetary tightening from the PBoC though there are limited chances for the PBoC to cut RRR again as well. But fiscal stimulus may contract if the current pace of special bond and LGFV bond issuance were to persist in 2H, leaving the augmented fiscal deficit to contract by around 6ppt from 2020 – much more than the 3.9ppt previously expected. The team also remains constructive on RMB’s relative performance.
Singapore Q21 GDP contracts but reopening recovery seen in 2H21
SGD: Singapore’s 2Q21 GDP contracts -2% QoQ SA (+14.3% YoY) on tighter domestic restrictions and labor supply constraints. The result is also below consensus (-1.8% QoQ SA, 14.8% YoY). But recovery is likely to resume in 2H21 on further relaxation of restrictions as key vaccination milestones are met – Task Force expects the 50% milestone to be met on the week of 26th July and the subsequent 75% milestone likely to be met by late-August.
SGD: 2021 GDP forecast of 7% achievable, with official GDP forecasts likely to be raised in early August – Singapore’s exports and industrial production should benefit from strength in the semiconductor cycle and the manufacturing capex recovery could be sustained into 2022 by strong investment commitments in 2019-2020. Once the 75% vaccination milestone is met, border reopening could resume (albeit selectively) which may help consumer facing sectors which means, official GDP forecasts will likely be upgraded after National Day (9th Aug). Citi analysts’ base case remains for policy normalization in Apr-22 (75% chance), predicated on core CPI staying below historical average of 1.7% through 2H21, and the 2%-pts GST hike being announced and implemented in 2022. But there are risks of earlier October 2021 normalization (25%) on the basis of upside inflation risks from unleashed pent-up demand reopening, upstream cost pressures, spillovers from >2% headline inflation into inflation expectations, and/or if the announcement of the GST hike is brought forward.
Data releases overnight
- USD: US industrial production (IP) - somewhat softer manufacturing on headwinds from supply - US industrial production rises a modest 0.4%MoM, just softer than consensus at 0.6% and in line with Citi at 0.3%. Manufacturing production, the largest subset of IP, falls a modest 0.1%. Citi analysts are not surprised to see the modest decline in manufacturing production as supply shortages across various goods, as well as labor, could be weighing on overall output. On aggregate, supply constraints have not yet led to a notable contraction in output, but this becomes a greater risk the longer various shortages persist. But as long as indications of demand remain strong, such as very elevated durable goods orders, Citi analysts expect production to remain supported into 2022 as supply issues eventually ease.
- GBP: UK labor market shows strong recovery - UK labor market continues to recover relatively strongly, with Pay-E employees growing 356k in June – now just 200k below its pre-pandemic level. The LFS data already shows the number of employees back above their pre pandemic level. Strong demand – vacancies continue to recover strongly reaching 862k on a three month by three-month basis – 77.5k above pre-pandemic levels and in line with Citi expectations (865k). This suggests the single month vacancy estimates are now probably running at around 930k, a record level and Citi analysts expect the 3M estimates to continue to improve over the coming months. Pay growth also continues to accelerate with average weekly earnings growth reaching 7.3% 3M YY (Citi 6.8%, Consensus 7.1%), and regular pay growing by 6.6%. Underlying pay growth has begun to pick up according to the KPMG RECs survey, with the Pay-E data showing strong continued growth into June.
- AUD: The Australian labor market remains strong in June, but lockdowns to create volatility ahead - June employment rises +29.1k (Citi; 5k, Consensus; 20k), while the participation rate is unchanged at 66.2% (Citi; 66.0%, Consensus; 66.2%), leading the unemployment rate to fall from 5.1% to 4.9% (Citi; 4.9%, Consensus; 5.1%). The total number of unemployed falls to 679k but the underutilization rate rises from 12.5% to 12.8% and total number of hours worked declines 1.8% with the impact of the NSW lockdown still yet to be felt (likely in the July and August LFS). Citi analysts expect hours worked will likely decline and the underutilization rate rise again in July. Implications for the RBA - the move to a sub-5% unemployment rate in Q3 as well as the resilience in the participation rate is in-line with the Citi analysts’ view for the labor market that continues to improve in the future. But the RBA is expected to maintain its dovish stance throughout the lockdown and reopening phase, with the next decision on tapering not expected until November.
Data releases for Friday
- USD: Retail Sales – Citi: -1.1%, median: -0.5%, prior: -1.3%; Retail Sales ex Auto – Citi: 0.9%, median: 0.4%, prior: -0.7%; Retail Sales ex Auto, Gas – Citi: 0.8%, median: 0.2%, prior: -0.8%; Retail Sales Control Group – Citi: 0.4%, median: 0.5%, prior: -0.7% - With the level of control group (and total) retail sales well-above pre-COVID levels, Citi analysts would not be concerned by a further decline in sales as spending shifts back towards services.
- 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.
This is an extract from the Daily Currency Update, dated July 16, 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 -