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Confluence of factors leaves risk appetite, USD mixed late week

Confluence of factors leaves risk appetite, USD mixed late week    

  • USD: Month-end rebalancing flows mixed with elevated US political tensions (Trump tweets on delaying the USD election, dithering on phase 4 fiscal stimulus), strong earnings from US tech companies, positive Chinese manufacturing PMI showing recovery momentum carrying into H2 and mixed data from euro zone/ US in a summer market all add to a day of choppy price action on Friday. US equites sell off for the first part of the NY session only to bounce during the 2nd half and USD extends its decline during the Asian and European sessions only to recover fairly strongly across the board (ex Gold) during the latter part of the NY session.       
  • USD: Fiscal fears ramp up - Little progress on the US phase 4 stimulus so far with White House chief of staff Mark Meadows saying he is "not very optimistic about any kind of agreement on a comprehensive bill in the near future”. Meanwhile, Republican Senate Majority Leader  McConnell says "about 20 of our members think that we've already done enough," meaning 20 Republicans will likely vote "no" on any coronavirus relief package. All this come against the backdrop of the final payments of supplemental unemployment insurance in the last stimulus having expired on July 25. Citi analysts however remain confident Congress will reach agreement and if anything, may mean raising the total cost of the bill to ~$1.5trln.                         

 

US – China tensions likely to ramp up but more recovery optimism in the euro zone and for an UK – Japan trade deal            

  • USD: Reports Friday that the Trump administration plans to take action on a Chinese popular app and will set up a working group to investigate US investments in Chinese companies. Investors may also see further criticism from US regarding HK likely to be matched by China.             
  • EUR: Meanwhile, ECB’s Villeroy turns more optimistic about the French recovery, noting“ our forecasts predict a 10% fall in GDP this year, it may be a little better, with a strong rebound afterwards to hopefully regain a pre-COVID level of activity at the start of 2022". Notes that the 'whatever it takes' must progressively give way to the 'when it is needed'”.
  • GBP: UK - Japan trade deal now close – reports late last week suggest the UK and Japanese governments are closing in on a post-Brexit trade deal. Negotiators have reportedly used the existing EU-Japanese deal as a template and Citi analysts expect a deal in early August.          

 

Data releases Friday: US Q2 GDP plunge and weekly jobless claims lag; euro zone and China recovery firms; Elevated UK inflation expectations       

  • USD: Q2 GDP - largest-recorded drop on record but  bounce back seen rapidly - US real GDP falls -32.9% (QoQ SAAR) in Q2-2020, the worst quarter of growth on record. Citi analysts however expect activity to pick up more significantly in May and June, likely leading to a strong rebound in activity in Q3 (around ~+27%). As expected, the decline in consumption is the largest drag on GDP growth. Meanwhile. core PCE inflation falls 1.1% (QoQ SAAR) in Q2 but Citi analysts expect a 0.3% monthly increase in June core PCE but with downside risks to Y-o-Y.                           
  • USD: During the week of July 18, continuing claims are slightly higher at 17 million (seasonally adjusted) from 16.1 million. Similarly, non-seasonally adjusted continuing claims increase to 16.9 million from 16.3 million. Meanwhile, initial claims (seasonally adjusted) are largely unchanged at 1.4 million for the week of July 25, after an uptick last week. Citi analysts - the increase in claims over the past weeks is not a clear sign of rising unemployment and as a result, the team still expect solid net rehiring in the July payroll report    
  • EUR: Following the record plunge in euro zone Q2 GDP, business sentiment recoups half of Covid losses, German retail sales consolidate v-shaped recovery as labor market turns around - Euro area Q2 GDP falls by -12.1%QoQ, representing the worst of the COVID-19 impact. However, 2Q is likely the trough and Citi analysts expect a big rebound in 3Q. Meanwhile, German retail sales consolidate v-shaped recovery, falling only 0.3% QQ in 2Q, but amid a strong shift to online shopping. The cumulative 12% drop during the lock-down in March and April had already been more than reversed in May and retailers appear to have mathematically recovered half of the revenue losses they incurred during the lockdown. Finally, German unemployment unexpectedly falls by 18k in July (Consensus +41) while the unemployment rate is unchanged at 6.4% and with employment nearly unchanged in June. The data remains heavily distorted by the furloughing scheme but the hiring intentions index BA-X posts its first (modest) monthly rise since 2018.
  • GBP: Citi/YouGov Inflation Tracker – Already elevated UK inflation expectations tick-up further as UK households’ short-run inflation expectations rise further in July with data now nearing the upper end of the post-2016 range. 1 year ahead – households’ expectation of price changes rise in July to 3.2% from 3.0% in June with inflation expectations now back to levels seen in March and April 2020 while households inflation expectations for 5-10 years’ time increase to 3.3% in July from 3.2% prior – above the 2.9-3.1% corridor they had oscillated within since August 2019. This is now the highest level since July 2019 and at the upper end of ranges since 2016.        
  • CNY: China recovery momentum carries over into H2 as manufacturing PMI rises 0.2pp in July to 51.1, higher than consensus for 50.8. Production edges up 0.1pp to 54 with the underlying momentum likely stronger than suggested by the print, considering the disruptions by the floods along the Yangtze River region and new orders gain 0.3pp to 51.7.  Meanwhile, China’s non-manufacturing PMI moderates but still at elevated levels in July, dropping 0.2pp to 54.2 in July. Overall, the data suggests China’s recovery momentum is carrying over into 20H2.   

 

Week Ahead – US July jobs & manufacturing to see rebound continue but much more uncertainty seen thereafter; RBA and BoE meetings preview

  • USD: Nonfarm Payrolls – Citi: 3000k, median: 2000k, prior: 4800k; Private Payrolls – Citi: 2250k, median: 2250k, prior: 4767k; Manufacturing Payrolls – Citi: 250k, median: 375k, prior: 356k; Average Hourly Earnings MoM – Citi: -0.5%, median: -0.5%, prior: -1.2%; Average Hourly Earnings YoY – Citi: 4.2%, median: 4.2%, prior: 5.0%; Unemployment Rate – Citi: 10.1%, median: 10.2%, prior: 11.1% - Citi analysts expect another solid month of 3 million job gains in July though much of this rise is likely to come from government employment. But subsequent jobs data looks much more uncertain.
  • USD: ISM Manufacturing – Citi: 52.4, median: 53.6, prior: 52.6; ISM Non-manufacturing – Citi: 53.9, median: 55.0, prior: 57.1 – Citi analysts expect the ISM manufacturing index to remain in expansionary territory in July, little changed at 52.4 vs 52.6 in June. This reflects manufacturing activity continuing to pick back up to more accurately capture trends in recovery activity. Meanwhile, after a strong bounce back above the 50-level to 57.1 in June, Citi analysts expect a moderation in the ISM services index to 53.9 in July led by business activity and new orders.
  • AUD: RBA August board meeting: Citi Cash Rate forecast; 25bps, Previous; 25bps; Citi 3-Year Yield forecast; 25bps, Previous; 25bps - The Board will have access to the new RBA staff economic forecasts that will be formally presented in the August Statement on Monetary Policy (SMP) on Friday. As reference point, note that the June 2020 GDP forecast was slashed from 2% to -8% and the unemployment rate forecast revised from 5.25% to 10%.
  • GBP: BoE board meeting: Executing a Dovish Tilt - Bank Rate Forecast: 0.10%, Prior: 0.10%; Asset Purchases Forecast: £745bn; Prior: £745bn – Citi analysts expect no change in the policy stance at the MPC meeting on 6 August but expect further monetary policy support before the end of the year – more QE and a possible 10bp rate cut most likely in November and  important to watch this week will be any guidance on future cuts to the Bank Rate.
  • CAD: Net Change in Employment (Jul) – Citi: 400k, median: 390k, prior: 952.9k; Unemployment Rate – Citi: 11.0%, median: 11.2%, prior: 12.3%; Hourly Wage Rate Permanent Employees – Citi: 5.1%, median: 5.4%, prior: 6.8% - Following a strong ~950k increase in employment in June, Citi analysts expect another solid increase of 400k in July. This would be a retracement of just over 50% of total jobs lost over March and April though will likely represent the last of the job gains made as a result of the initial re-openings.
  • CNY: China exports (%YoY) July: Citi forecast 0.5, prior 0.5; Imports (%YoY): Citi forecast 3.4, prior 2.7; Trade Balance (US$bn): Citi forecast 39.1, prior 46.4 – Citi analysts expect a continued recovery in trade growth in July as the Baltic Dry Index, representative of trade activity, continues to recover. On imports, recovery in commodity prices and domestic demand, together with rising imports from US to fulfill the phase 1 deal, might have further pushed up import growth, from 2.7%YoY in June to 3.4%YoY, leaving the trade balance sizeable at US$39bn.           

 

This is is an extract from the Daily Currency Update, dated August 3, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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