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FOMC December meeting preview - plotting the Fed dot plot

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FOMC December meeting preview - plotting the Fed dot plot  

  • USD: The Fed FOMC December meeting takes place on the 16th (a few hours earlier than the ECB). Citi analysts expect the Fed dots to drift higher – late last week, former New York Fed President Dudley suggested that markets will be surprised by the revised Fed “dot plot” this week which will suggest further rate hikes in 2022 and beyond. While dots may continue to drift higher, there seems to be less certainty about whether this will be a major hawkish surprise relative to market expectations. To be clear, Citi analysts continue to expect it most likely that Fed policy rates will move higher faster and further than markets are pricing or Fed dots are ready to fully indicate. The team’s base case is for a first rate hike in June – which is roughly priced by the market, followed by quarterly rate hikes at least until rates reach around 2%, whereas markets price a shallower path to a lower terminal rate (around 1.25-1.5%). The risks to this view are to the upside, implying markets are underpricing the distribution of outcomes. 

  • USD: Regarding the Fed’s dot plot, Citi analysts anticipate a median for two rate hikes in 2022 with three more in 2023 and a median for rates reaching around 2.5% (the Fed’s estimate of terminal) in 2024. It wouldn’t be too surprising to see as many as three hikes in 2022 and as many as four in 2023. However, markets will likely be most reactive to the 2022 median that looks likely to come in somewhere around or below market expectations. Close to three 2022 rate hikes priced and a widely expected acceleration of tapering from $15bln/month to $30bln/month limits remaining hawkish risks – but with asset purchases concluded in March, Chair Powell might use the press conference to signal that the March meeting is “live” for a rate hike – a scenario markets currently put a low probability on. 

  • USD: More hawkish, but less likely, would be any discussion of an earlier than expected move toward balance sheet reduction. In the last cycle, Fed officials waited until policy rates reached above 1% before reducing the balance sheet – and the market consensus is for a similar sequencing in the current cycle. However, low US real rates may make reducing the balance sheet earlier more attractive for Fed officials. Balance sheet reduction also may have come up in the context of some officials wanting to continue to taper purchases beyond March so that reinvestments do not fully offset maturities. For now, that is likely a minority view but Citi analysts expect a much more active discussion early next year. 

 

Data releases Friday     

  • USD: Strong US CPI inflation keeps Fed on track to speed taper – US core CPI advances 0.53%MoM in December, matching consensus with shelter prices running at a similarly robust pace to recent readings. The Y/Y core reading increases to 4.9% (its highest since 1991) and the headline to 6.8%YoY (its highest since 1982). Overall, Citi analysts see nothing to substantially change the inflation outlook and the report keeps the Fed firmly on-track to double the pace of tapering asset purchases at this week’s FOMC meeting. However, the close-to-expectations report may slightly reduce pressure on Fed officials to appear even more hawkish by discussing balance sheet reduction or placing higher “dots” in the dot plot. 

  • USD: The University of Michigan December (preliminary) consumer sentiment survey of current conditions rises to 74.6 in December from 73.6 in November, while the indicator of expectations is up at 67.8 from 63.5 the previous month. More importantly, household inflation expectations for the next 5 years hold steady at 3%, above its pre-pandemic level of 2.3% while expectations for 1-year inflation are also unchanged from November at 4.9%, its highest level since the summer of 2008.

  • GBP: UK October GDP – a weak start to Q4 - UK GDP grows by 0.1% MM in October, disappointing both Citi and consensus expectations. (Citi 0.3%, Consensus 0.4%). On a 3-month basis, monthly output is estimated to have grown by 0.9% versus 1.3% in Q3 – and 1.0% estimated by the BoE for Q4 as a whole. While services continues to grow, manufacturing seems to have stagnated, buffeted by supply chain challenges. Citi analysts expect some improvement in November, but with plan B (Covid restrictions) now likely to deduct around 0.7pp on output between December and January, the data suggest a weak start to a challenging period, meaning growth of 0.8% QQ and 0.1% QQ in Q4-21 and Q1-22 respectively. The Bank expects 1.0% and 1.2%. For now, Citi analysts think a window remains for the Bank to hike in Q1, but further downside growth surprises and/or Covid disruption could yet see this close. 

  • CNH: China’s M2 growth slides in November — M2 growth slows by 0.2ppt to 8.5%YoY in November and lower than consensus at 8.7%YoY though this seems largely due to a high base. However, M0 and M1 advance by 0.2 ppt and 1 ppt to 3% and 7.2%YoY. New loans improve in November, but still fall short of market expectations — new loans increase from RMB826.2bn in October to RMB1.27trn in November (Citi:1.5trn/mkt:1.55trn) but loan growth still slides by 0.2 ppt to 11.7%YoY on high base. Meanwhile, government and corporate bond issuance further boosts new TSF — new TSF improves visibly from RMB1.59trn last month to RMB2.61trn in November, lower than consensus but the growth rate of TSF outstanding seems to have bottomed, rising 0.1 ppt to 10.1%YoY.

  • CNH: While November’s M2 growth, new loans and new TSF, all turn out to be lower than expected, the TSF growth rate seems to have bottomed which suggests China’s credit impulse has likely rebounded and monetary conditions are improving. The recent RRR cut in December will likely further strengthen the trend of a more accommodative monetary policy stance ahead. Citi analysts think such an easing stance will continue in 2022 with both RRR and interest rate cuts. However, PBoC’s policy easing will likely also be measured, constrained by the Fed’s expected policy normalization and the authority’s unwillingness to see renewed risks of property market bubble. In a separate move, the PBoC also raised the RRR for FX deposits by 2ppt in an attempt to ease  RMB appreciation. This is the second such increase this year (last one in Jun’21) and Citi analysts think this represents a strong signal by the PboC to express its discomfort with sharp moves lower in USDRMB. 

 

Week Ahead – FOMC, ECB and BoE board meetings but don’t forget a raft of major UK, euro area, Japan, Australian and Canadian data this week

  • USD: Fed FOMC meeting – Citi analysts expect the Fed to announce an acceleration in taper pace this week to $30bln/month ($20bln in Treasuries, $10bln in MBS). This would finish Fed asset purchases by March 2022 (refer above to – “FOMC December meeting preview - plotting the Fed dot plot”). 
  • USD:  The US debt ceiling is approaching imminent resolution (Citi analysts expect the ceiling to be raised by $2tln) and brings with it the potential for some turbulence in funding markets. The most obvious consequence of raising the debt ceiling will be large issuance of T-bills by the US Treasury as it rebuilds its cash balance (the TGA). While most of this will likely come out of the Fed’s reverse repo facility (RRP), there is the potential for some turbulence in reserves depending on how much cash has been kept as bank deposits due to debt ceiling concerns. Citi analysts expect the US Treasury to ultimately rebuild the TGA back up to $650bln – (by December’s end to a bit below $300bln and the rest by late January). This would pull somewhere around $150-$200bln into the TGA in the span of a couple of weeks - enough to temporarily leave funding markets slightly squeezed, compounded by typical year-end liquidity issues.  
  • EUR: ECB Board meeting - the meeting takes place in the context of high uncertainty and deep divisions within the Council. Citi analysts expect this will lead the Council to only make decisions it cannot postpone (those relating to asset purchases) and to make decisions that require minimum innovation. That would likely mean terminating PEPP on schedule in March 2022, committing to net asset purchases post-PEPP only to December 2022, and carrying over into those residual net purchases and reinvestment a promise of flexibility that may not be implemented in practice.
  • GBP: BoE board meeting – Citi analysts expect the MPC to hold rates steady this week. The spread of Omicron has replaced the end of furlough – as the key uncertainty. However, tightness in the labor market and some signs of stiffening demand mean the MPC are still likely to signal a tightening of policy in early 2022. Citi analysts now expect a 15bps hike in February, a further 25bps hike in May with the MPC then on hold until May 2023. However, a more persistent Covid disruption or further delay may mean the MPC either hikes only once in 2022, or even not at all. 
  • CHF: SNB board meeting - SNB may for once enjoy the benefits of a ‘highly valued’ currency but signal that this remains a problem in the medium-term. 
  • GBP: UK jobs - Vacancies, Sep-Nov Citi Forecast 1266k; Previous 1172k - New record; Employment, Aug-Oct: Citi Forecast 255k 3M/3M, Consensus 205K 3M/3M, Previous 247k 3M/3M - strong growth implied by PAYE data; Unemployment Rate, Aug-Oct: Citi Forecast 4.2%, Consensus 4.2%, Previous 4.3% - furloughed workers reemployed; Average Weekly Earnings, Aug-Oct: Citi Forecast 4.4% YY, Consensus 4.5% YY, Previous 5.8% YY - moderation continues in underlying pay; - AWE Ex-Bonus, Aug-Oct: Citi Forecast 3.9% YY, Consensus 4.0% YY, Prev. 4.9% YY. 
  • GBP: UK CPI Inflation, November: Citi Forecast 4.8% YY, Consensus 4.7% YY, Previous 4.2% YY; CPI Core, November: Citi Forecast 3.7% YY, Consensus 3.7% YY, Previous 3.4% YY - higher food and goods prices.
  • GBP: UK: PMI Manufacturing, December (flash): Citi Forecast 57.3, Consensus 57.6, Previous 58.1 - demand softening, supply chains; PMI Services (flash), December: Citi Forecast 57.0, Consensus 57.5, Previous 58.5 - weaker demand, more pessimism. 
  • EUR: German: PMI Manufacturing (flash), December: Citi Forecast 57.5, Consensus 57.1, Previous 57.4 - steady amid easing constraints; German PMI Services (flash), December: Citi Forecast 52.5, Consensus 52.0, Previous 52.7 - fading delta, rising omicron; Euro Area PMI Manufacturing, December: Citi Forecast 58.0, Consensus 57.7, Previous 58.4 - fading constraints; Euro Area: PMI Services, December – Citi Forecast 54.3, Consensus 54.5, Previous 55.9 - inflation, pandemic headwinds; Euro Area PMI Composite Output, December: Citi Forecast 54.5, Consensus 54.2, Previous 55.4.
  • EUR: German ifo Business Climate, December: Citi Forecast 96.5, Consensus 95.5, Previous 96.5; ifo Expectations, December: Citi Forecast 95.0, Consensus 93.5, Previous 94.2 - looking through headwinds; ifo Current Assessment, December: Citi Forecast 98.0, Consensus 97.5, Previous 99.0.
  • JPY: BoJ’s Tankan report for December is expected to show clear improvement in non-manufacturers’ sentiment — large manufacturers’ business confidence DI is expected to rise 2 points to +20, driven by easing auto supply constraints while the large non-manufacturers’ DI is likely to increase 6 points to +8 due to a sharp improvement in service sectors’ DIs on the back of the lifting of the state of emergency.  
  • NZD: NZ Q3 GDP Growth: Citi forecast; -3.7%, Previous; 2.8% - the NZ economy is likely to contract sharply in Q3 from Covid-caused lockdowns in Auckland. However, Citi analysts’ forecast is less pessimistic than the RBNZ’s -7% estimate, which was announced at the same time as the MPC lifted the OCR by 25bps to 0.75%. Regardless of the outcome, the team expects the Q3 GDP data to have little to no bearing on the next MPC decision on Feb 23.  
  • AUD: Australian November Labor Force: Citi employment change forecast; 200k, Previous; -46.3k; Citi unemployment rate forecast; 5.1%, Previous; 5.2%; Citi participation rate forecast; 65.5%, Previous; 64.7% - the Australian labor market is expected to recover further, following the reopening of the economy across October. Other metrics of the labor market are also set to improve, and Citi analysts expect the number of hours worked to rise sharply. November is also when the government stimulus support measures ended, so the LFS will also be a good indicator of how the labor market withstood the end of stimulus. The  November and December LFS will be watched with keen interest by investors because it will help determine whether the RBA ends its QE program in February. 
  • CAD: Canada CPI NSA MoM (Nov) – Citi: 0.3%, median: xx, prior: 0.7%; CPI YoY – Citi: 4.9%, median: xx, prior: 4.7% - Citi analysts expect a 0.3%MoM increase in CPI in November which would send the Y/Y reading higher still to 4.9%YoY. While headline CPI rising to 4.9%YoY would be a sign of continued upside risks to inflation, the November increase would still roughly be in line with the BoC’s latest forecast for 4.8%YoY CPI in Q4. Likely more important over the coming months will be the path of the core inflation measures. After stabilizing in October, core CPI is likely to see a renewed increase, if not in November than in December. 

 

This is an extract from the Daily Currency Update, dated December 13, 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 - 

 https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy

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