DXY in a 104 – 107 range may temporarily break through the upper end of the range on sharply rising geopolitical tensions

University of Michigan inflation expectations tick up but PPI leaves March core PCE (Fed’s favored inflation tracker) falling on a YoY basis

• USD: In data released Friday, the University of Michigan consumer sentiment index dips to 77.9 from 79.4, below consensus for 79.0. Sentiment jumped sharply across the turn of the year but has made no further net progress, despite the stock market hitting new highs. A combination of higher gas prices and increased fears of job loss likely explains the recent deterioration, which probably will continue. The dip in the April headline index is due mostly to a 2.9-point decline in the current conditions component, with expectations down just 0.4 points. The more important inflation expectations indicators show 5-to-10-year inflation expectations rising to 3.0% from 2.8%, still below the top of the recent range but relatively high compared to its historical relationship with inflation data and 1Yr inflation expectations up at 3.1% from 2.9% the prior month, signaling concerns that progress may have stalled and that the “last mile” on inflation may be more difficult to achieve than projected.

• USD: Meanwhile, US March PPI data released Thursday, comes in softer than expected, particularly those details of PPI that matter for PCE inflation. PPI final demand rises 0.2%MoM, softer than the 0.3% increase expected by consensus and core PPI, which excludes food, energy, and trade services, also rises 0.2%. Meanwhile, core goods prices in PPI final demand is up a modest 0.1% while core services prices rise 0.2%. Elements of the CPI and PPI reports released last week leave Citi Research expecting a 0.26%MoM increase in core PCE inflation in March. This is essentially the same as core PCE in February but still leaves YoY core PCE falling to 2.7% in March. Meanwhile, core services prices excluding housing should rise 0.29%MoM, stronger than in February but much softer than the 0.65% increase in “super core” in CPI.

UK economy expands for second consecutive month

• GBP: Data released on Friday shows UK GDP rising by 0.1% MM in February after an upwardly revised 0.3% MM growth in January. The sequential number is in line with consensus expectations. Backward revisions mean UK GDP is now estimated to have shrunk -0.1% over the prior twelve months (Jan-2024 vs Jan-23), rather than falling by -0.3% as estimated previously. On a three month by three month basis, growth accelerates to 0.2%, 0.1pp above BoE estimates for Q1.

• GBP: Manufacturing is the major surprise in February, gaining 1.2% MoM, above consensus for 0.1%, with growth in 11 of the 13 subsectors. This highlights the production side of the economy, where there now seem to be signs that supply challenges that have bedeviled the economic outlook over recent years are now beginning to fade, even with disruptions in the Red Sea. Partly, this reflects robust labor force growth. But more important is the drop in the relative price of non-labor inputs, and a subsequent re-balancing between labor and non-labor inputs. However, the weakness in consumer facing activity remains a concern. Here recent spending data remains subdued through March, with a recovery in retail activity offset by a softening in services.

• After the release, Citi Research forecast UK output to expand by 0.4% QQ in Q2, a little above the UK’s long-term trend and 0.1% above the BoE’s February forecast. The improving picture however, primarily reflects the reversal of somewhat idiosyncratic factors that drove the downturn in Q4 – in particular the drop in inventories alongside a softening in international trade. That said, the second monthly expansion of the UK economy compounds growing evidence that the UK has already emerged from the technical recession it slipped into in 2023 and upward revisions to back data suggest that 1Q-24 GDP data may print slightly stronger than expected. For Q2, Citi Research forecast private consumption to recover somewhat, most likely led by further price reductions in the retail sector. But notwithstanding the marginal recovery, the underlying picture remains more uncertain for H2.

Week Ahead:

US - retail sales, industrial production and housing data in focus this week

• USD: US March Retail Sales – Citi: 0.3%, median: 0.3%, prior: 0.6%; Retail Sales ex Auto – Citi: 0.3%, median: 0.4%, prior: 0.3%; Retail Sales ex Auto, Gas – Citi: 0.2%, median: 0.3%, prior: 0.3%; Retail Sales Control Group – Citi: 0.4%, median: 0.2%, prior: 0.0% - real goods demand has been weaker at the start of 2024 after a couple of strong quarters last year. Citi Research expect a modest 0.3% MoM increase in total nominal retail sales in March. With goods prices modestly higher on the month (with stronger gas prices), this would likely imply soft real goods consumption, keeping Q1 goods consumption on track for a decline. With nominal gasoline sales likely higher as gasoline prices increased on the month, Citi Research expect nominal retail sales excluding autos and gasoline to increase by a more modest 0.2% MoM. Control group sales should also be a bit stronger, up 0.4% MoM. That said, downside risk to labor market data with hiring soft and ISM Services and Manufacturing employment in contraction should ultimately weigh on consumption.

• USD: US March Housing Starts MoM – Citi: -3.0%, median: -2.7%, prior: 10.7%; Building Permits – Citi: 1534k, median: 1510k, prior: 1524k; Building Permits MoM – Citi: 0.7%, median: -0.9%, prior: 2.4% - housing starts should pull back in March to 1475k after a very strong increase to 1521k in February. Overall, housing activity will likely remain supported by improving homebuilder sentiment with expectations for Fed rate cuts this year amidst still-resilient demand. This should be especially supportive of single-family housing activity, with multifamily construction likely to remain somewhat soft. Building permits should rise modestly to 1534k, with single-family permits having climbed consistently since the start of 2023. Residential investment will likely be a boost to GDP growth in Q1.

• USD: US March Industrial Production – Citi: 0.1%, median: 0.4%, prior: 0.1%; Manufacturing Production – Citi: -0.1%, median: xx, prior: 0.8%; Capacity Utilization – Citi: 78.4%, median: 78.5%, prior: 78.3% - industrial production data will be increasingly important to watch over the coming months as the consensus narrative has shifted towards expecting a reacceleration in manufacturing activity. Citi Research expect a modest 0.1%MoM increase in total industrial production and a modest 0.1% decline in manufacturing production. Manufacturing production continuing to move sideways would be counter to the signal in ISM manufacturing in March, which rose back above the expansionary 50-level with a strong increase in the production subcomponent. But signals from survey data have been less reliable in the post-pandemic period, and hard data on manufacturing like IP or durable goods orders have yet to show a renewed pick-up in activity.

• USD: US March Existing Home Sales – Citi: 4.15m, median: 4.10m, prior: 4.38m; Existing Home Sales MoM – Citi: -5.2%, median: -6.4%, prior: 9.5% - Citi Research expect a retracement in existing home sales in March to 4.15 million after a substantial jump in sales in February. Strong February sales likely reflect partly an increase in demand as buyers perceive a peak in rates and mortgage rates fell at the end of 2023. But if Fed officials proceed with rate cuts in the summer, support for housing demand could be somewhat stronger than an increase in supply, putting upward pressure on prices if the labor market remains strong.

Euro area and UK – UK employment and inflation data, BoE speak and German ZEW in focus this week

• EUR: Euro Area Recovery Watch — German equity prices have continued to rise despite dwindling rate cut expectations, which should trigger further increases in economic expectations. Key at this stage will be whether this also translates in a less bad current assessment. Recent rebounds in industrial output suggest a chance. German ZEW Expectations, April – Citi Forecast 35.0, Consensus 34.0, Prior 31.7; ZEW Current Assessment, April – Citi Forecast -77.0, Consensus -78.0, Prior -80.5; Euro Area: ZEW Expectations, April – Citi Forecast 38.0, Prior 33.5.
   
• GBP: BoE’s Lombardelli to testify — A busy week of BoE MPC speak this week. In focus will be Governor Bailey and Deputy Governor Ramsden. In the former case, interesting is whether he re-affirms the dovish guidance given in March. In the latter, Ramsden and Breeden are now central in determining the resistance to an initial dovish ‘adjustment’. Elsewhere, markets will hear for the first time from Claire Lombardelli.
   
• GBP: UK labor market moderating further — Citi Research expect total pay growth of 5.5% for the three months to February. Private sector regular pay will have likely grown by 0.4% MoM and annual growth of 5.8%, suggesting a 20bps undershoot versus MPC forecasts in March. Citi Research also expect UK employment to have remained relatively soft, with unemployment increasing marginally, and vacancies easing further. UK Vacancies, January-March – Citi Forecast 901k, Prior 932k (continuing to ease); Pay rolled Employees (MM Change), March – Citi Forecast 14k, Consensus 25k, Prior 48k (Downward revisions); LFS Unemployment, December – February – Citi Forecast 4.0%, Consensus 4.0%, Prior 3.8% (Stable for now); LFS Employment Change (3M/3M), December – February – Citi Forecast 80k, Consensus 72k, Prior -21k; Average Weekly Earnings, December – February – Citi Forecast 5.5% 3M YY, Consensus 5.5% 3M YY, Prior 5.8% 3M YY; AWE Ex Bonus, December – February – Citi Forecast 5.8% 3M YY, Consensus 5.8% 3M YY, Prior 6.2% 3M YY.
   
• GBP: UK Inflation: Approaching a 2% handle — close but not quite, at least with respect to the 3.0% threshold at which the MPC must write a letter. Citi Research expect headline inflation to fall to 3.0%, 0.1pp below the Bank’s February projection. Domestic’ services inflation will have increased by 0.4% MoM. Rental prices will have increased by a further 0.5%MM. Citi Research expect services inflation at 5.8%, in line with MPC forecasts, but with upside risks and expect these data to continue to suggest a margin of inflationary persistence over the coming months, before cost pressures turn disinflationary through 2H-24. UK CPI Inflation, March – Citi Forecast 3.0% YY, Consensus 3.1% YY, Prior 3.4% YY (BoE: 3.1% YY - Feb MPR); CPI Core, March – Citi Forecast 4.0% YY, Consensus 4.0% YY, Prior 4.5% YY (Goods still subdued); CPI Services, March – Citi Forecast 5.8% YY, Consensus 5.7% YY, Prior 6.1% YY (Underlying services inflation falling 6.1% to 5.9%).

Japan – Nationwide CPI for March in focus this week

• JPY: Nationwide core CPI to increase 2.6% YoY in March — Nationwide consumer prices (March) – Citi Forecast 2.6% YoY, Previous: 2.8% YoY; Excluding Fresh Food - Forecast: 2.6% YoY, Previous: 2.8% YoY; Excluding Fresh Food and Energy - Forecast: 2.9% YoY, Previous: 3.2% YoY – Citi Research expect nationwide core CPI (excluding only fresh food) to increase 2.6% YoY in March, moderating from a 2.8% YoY rise in February. Downward pressure from energy likely decreased while CPI excluding fresh food and energy likely moderated from a 3.2% YoY advance in February to a 2.9% YoY rise in March. As March Tokyo CPI data suggested, goods inflation, including food, likely continued moderating.

Commodity Bloc – Australian jobs, NZ and Canadian inflation in focus this week

• AUD: Australia labor force data for March – Consensus +10k, Prior +116.5k; Unemployment rate – Consensus 3.9%, Prior 3.7%, Participation Rate – Consensus 66.7%, prior 66.7%.
   
• NZD: NZ Q1’24 CPI QoQ – Consensus 0.6%, Prior 0.5%; Q1’24 CPI YoY – Consensus 4.0%, Prior 4.7%; Q1’24 CPI Tradeable QoQ – Consensus -0.2%, Prior -0.2%; Q1’24 Non-tradeable QoQ – Consensus 1.3%, Prior 1.1%.
   
• CAD: Canada CPI NSA MoM (Mar) – Citi: 0.7%, median: 0.7%, prior: 0.3%; CPI YoY – Citi: 3.0%, median: 2.9%, prior: 2.8% - the March and April inflation reports released ahead of the June BoC meeting will be very important for timing the start of rate cuts, and Citi Research expect at least one of them to be stronger than very weak readings in January and February. This could be the case for the March release this week, where Citi Research expect a 0.7%MoM increase and for the YoY rate to rise to 3.0% from 2.8%. The most important element upcoming inflation data will be the 3-month pace of core inflation. The 3-month pace of core inflation declined notably below 3% in February for the first time this cycle, at 2.2%. Core inflation can be subject to large revisions but is very likely to decline again in March as a strong reading from December drops out of the 3-month calculation. Assuming a monthly increase in line with the average of the last 6 months and no revisions, 3-month core would fall to 1.6% in March. But the reverse may be true in April data, with a chance that 3-month core CPI may be closer to 3% again (but likely still below) in April. Annual rates of core inflation could remain around 3.1-3.2% in March. Ultimately, markets will take signals for trends in core inflation from leading indicators like the CFIB price plans survey. This measure suggests annual core inflation possibly stuck around 3% for a few more months before slowing in the fall but only very gradually.

Asia EM – China Q1 GDP and monthly activity data in focus this week

• CNH: China Q1’24 GDP (%YoY) – Citi Forecast 5.1, Consensus 5.0, Prior 5.2 – Citi Research recently upgraded their GDP forecasts with the stronger-than-expect PMI readings reinforcing the upgrade. Citi Research expect GDP growth to hit 5.1%YoY in 24Q1E, well on track to the ~5% growth target this year. Meanwhile, the monthly indicators though could continue to show the entrenched dual-tracked pattern.
   
• CNH: China Industrial Production (%YoY) March – Citi Forecast 5.5, Consensus 6.0, Prior 7.0 - industrial production could stay solid at 5.5%YoY in March, partially thanks to external demand. The domestic side however, could be softer with crude steel output declining -6.8%YoY in the first 20 days of March.
   
• CNH: China Retail Sales (%YoY) March – Citi Forecast 5.0, Consensus 5.0, Prior 5.5 – the CPCA projected slower auto sales growth at 3.7%YoY vs. 8.2%YoY in Jan-Feb (CPCA, Mar 21).
   
• CNH: China Fixed Assets Ex Rural (YTD, %YoY) March – Citi Forecast 4.2, Consensus 4.0, Prior 4.2 - policy support could continue to shore up Fixed Asset Investment (FAI) despite the property weakness, expected to grow 4.2%YoY YTD. Capex should remain robust, with large-scale equipment upgrade underway, while infrastructure investment could be somewhat lagging amid the local debt cleanup.