-->ECB bond purchases to stay “significantly higher” over coming quarter (3Q)
EUR: There is no change to any policy tool or to communication overnight with the ECB’s PEPP envelope (ECB’s bond purchase facility under the Pandemic Emergency Purchase Program) confirmed at EUR1.85tr and to run at least until March 2022, as before. The pace of bond purchases is confirmed to stay “significantly higher” over the coming quarter (3Q) than in the first months of 2021 (€80.2bn in April and on track for €80bn in May) alongside President Lagarde repeating the phrases “premature” and “too early” when asked whether the ECB discussed tapering PEPP.
- EUR: Assessment and parameterization of financing conditions is also unchanged and there is unanimous support for the introductory statement though the flexibility of PEPP is also confirmed, which means less purchases than the total envelope, if necessary, in case financial condition targets are met. However, any such conversations are likely pushed back to September at the earliest. Euro area growth risks are now “broadly balanced” for the first time since December 2018 while euro area core inflation forecasts are revised up - 2023 growth and headline inflation forecasts are unchanged but core CPI is raised by 0.1% versus March. For 2021 and 2022, core CPI forecasts are up more robustly versus April.
- EUR: Remaining Q3 ECB meetings live for updates – prior to the overnight meeting, Reuters sources had suggested that ECB officials are holding a retreat on June 18-20, aiming to make ‘major progress’ in the Strategic Review. This suggests possible signals emerging as early as July. Citi analysts expect the Strategic Review to likely lead to the ECB opting for a symmetric 2% inflation objective, with a debate about how to take past undershoots into account. This could send potentially dovish signals for EUR.
- EUR: But there now appears to be a twist – following the ECB meeting, Reuters sources suggest 3 ECB members had wanted to reduce the pace of PEPP at the overnight meeting while Bloomberg sources outline that some ECB officials “note upside risks to inflation”. The September Strategic Review could therefore be used as an opportunity by the ECB to drop the phrase “significantly” from the characterization of the pace of net PEPP purchases – a potentially more hawkish signal for EUR.
Data overnight – US CPI - stronger shelter prices most important part of May CPI
USD: US core CPI rises a sharp 0.737%MoM in May, stronger than consensus for 0.5% and Citi at 0.57%. This brings the Y/Y reading to 3.8%. Meanwhile, headline CPI is up 0.6%MoM with energy prices essentially unchanged on the month. Strength is again largely led mostly by “transitory” components but key shelter prices are also strong, with a 0.31% increase in owners’ equivalent rent and a 0.24% increase in primary rents. Citi analysts note these are elements of consumer prices in May that show signs of more sustainable price gains, in particular, the strong 0.31% rise in owners’ equivalent rent (OER), which tends to be a more persistent and “slack sensitive” component of inflation.
USD: There is still some potential for more moderate shelter price increases over the coming months (less favorable seasonal factors for instance in H2), but Citi analysts expect that a few months of ~0.3% increases in OER would be a sign that the underlying pace of inflation has strengthened. There are also other signs in the May CPI report that rising wages could be affecting consumer prices and while risks to upcoming months’ inflation remain to the upside predominantly from “transitory components,” signs that inflation can remain strong into the fall – like accelerating shelter prices – after the transitory factors pass could refocus attention on US inflation data later this year.
Data releases tonight
- USD: University of Michigan Consumer Sentiment – Citi: 84.8, median: 84.0, prior: 82.9; University of Michigan 1y Ahead Inflation Expectation – Citi: 4.4%, median: NA, prior: 4.6% - The most important aspect of the University of Michigan survey are higher inflation expectations for both the one-year-ahead and five- to ten-years-ahead measures. The five- to ten-year measure, in particular, will be important for the outlook for Fed policy, and a continued climb higher into the end of the year would be a sign of more persistent price pressures lasting into 2022.
- GBP: GDP Quarterly Estimate, Feb-Apr Forecast: 1.6% 3M/3M Prior: -1.5% 3M/3M; GDP Monthly Estimate, Apr Forecast: 2.6% MM Prior: 2.1% MM – Citi analysts expect UK GDP to have accelerated strongly in April. The easing of restrictions on 12 April seems to have driven a sharp rebound in private consumption which is likely to drive the majority of this month’s rebound. While reopening only actually occurred on 12 April, the PMI data for April suggest more of the associated benefits for business services (sectors that supply consumer services) may have been front loaded this time than in 2020 – in part as a result of greater business confidence. This suggests a sharper rebound. Manufacturing and industrial production seem to have also remained relatively robust through the month, with construction output falling back following very strong gains in March. These data look set to remain very strong in May and June, before easing a bit thereafter.
This is an extract from the Daily Currency Update, dated June 11, 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 -