ECB Minutes – reinforcing need for accelerated asset purchases in Q2

ECB Minutes – reinforcing need for accelerated asset purchases in Q2         

• EUR: The ECB Minutes overnight, note that while the overall euro area economic situation is likely to improve throughout 2021, uncertainty in the euro area remains high, owing to the persistently high rates of COVID-19 infection, spread of virus mutations and speed of vaccination campaigns. As a result, while the rebound in global demand and additional fiscal support measures are supporting global and domestic activity, the near-term euro area economic outlook remains challenging.              

• EUR: Looking beyond short-term weakness, risks surrounding the euro area growth outlook over the medium term have become more balanced with economic activity expected to gain momentum during the course of the year (H2’2021), supported by favorable financing conditions, an expansionary fiscal stance and a recovery in demand as containment measures are gradually lifted. Accordingly, the March 2021 staff projections foresee euro area growth rebounding to 4.0% in 2021 and to 4.1% in 2022, before stabilizing at 2.1% in 2023. 

• EUR: Meanwhile, euro area underlying price pressures remain subdued in the context of weak demand and significant slack in labor and product markets. Survey-based measures and market-based indicators of longer-term inflation expectations remain at low levels (compared with ECB’s inflation aim), although market-based indicators have risen gradually. Looking ahead, euro area inflation is expected to rise temporarily, reaching 2.0% towards year-the. The March 2021 staff projections foresee HICP inflation averaging 1.5% in 2021, 1.2% in 2022 and 1.4% in 2023.

  EUR: The overriding theme in euro area and global financial markets has been the continued rise in longer-term sovereign bond yields. ECB notes that a sizeable and persistent rise in market interest rates would prematurely tighten financing conditions for all sectors of the euro area economy and challenge the ECB’s medium-term assessment in the context of a largely unchanged inflation outlook. This is the reason behind the ECB proposal to increase net bond purchases under the pandemic emergency purchase program (PEPP) over Q2 be conducted at a significantly higher pace than during the first few months of the year. The Minutes note that the proposed significant increase constitutes a proportionate response to the risks that rising market interest rates pose to ECB’s price stability mandate. However, the Governing Council will review the purchase pace on a quarterly basis at its monetary policy meetings, based on joint assessments of financing conditions and the inflation outlook.  

UK PMI up sharply as broad construction recovery takes hold 

• GBP: UK construction PMI significantly overshoots expectations in March, printing at 61.7 (Citi 53.5, Consensus 55.0). These data now indicates the fastest rate of expansion in six and a half years. All three areas of construction (residential, civil and commercial construction) share in the rebound as UK firms prepare for economic reopening over Q2. Growing business optimism is evident in the data, with growth projections for the year ahead the most upbeat since Jun’15. 

• GBP: However, supply disruption worsens in March – 41% of respondents report longer delivery times from already elevated levels in February. March also sees the largest increase in purchasing prices since August 2008. Both Brexit and Covid are cited as drivers of ongoing disruption. Citi analysts expect outperformance in construction to continue through Q2 as deferred projects are realized and strong public investment and residential demand provide further support. However, supply disruption is likely to constrain the UK recovery – Citi analysts expect pressures here to remain elevated through 2021.

• GBP: Nevertheless, despite the strengthening in UK fundamentals, Cable has notably underperformed this week as political risk seems to be creeping back into sterling - in four weeks’ time, the UK holds local elections. Of most relevance is the Scottish Parliamentary elections with a host of polls suggesting that the pro-independence SNP is on track to become the biggest party while a 2nd pro-independence party Alba, also seems to be making a push to gain substantial representation. Meanwhile there continues to be unrest in Belfast, Northern Ireland. Add to that the decision by UK government advisers that UK citizens aged 18-29 will be offered an alternative to the Oxford-AstraZeneca vaccine, and this potentially means that keeping the current pace of vaccination in the UK may be a challenge down the road.  

Data/ events for the remainder of the week       

• USD: PPI Final Demand MoM – Citi: 0.4%, median: 0.5%, prior: 0.5%; PPI Final Demand YoY – Citi: 3.7%, median: 3.8%, prior: 2.8%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.2%; PPI ex Food, Energy YoY – Citi: 2.7%, median: 2.6%, prior: 2.5%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.3%, median: NA, prior: 0.2% - Citi analysts expect a solid 0.4% increase in total producer prices, with a 0.3% increase in the core measure.     

• CAD: Canada’s Net Change in Employment (March) – Citi: 175k, median: 75k, prior: 259.2k; Unemployment Rate – Citi: 7.6%, median: 8.0%, prior: 8.2%; Hourly Wage Rate Permanent Employees – Citi: 1.7%, median: NA, prior: 4.3% - Citi analysts expect a strong 175k increase in employment in March following a ~260k job gain in February. This would put employment at its highest level since pre-pandemic employment levels. Citi analysts continue to see risks for a faster normalization of employment levels than currently suggested by the BoC’s assessment of the labor market that likely leads the BoC to commence its asset taper this month.            

This is an extract from the Daily Currency Update, dated April 9, 2021. Please approach a Citigold Relationship Manager if you would like more information.