FOMC Minutes – Cautious on taper for now, inflation risks balanced

FOMC Minutes – Cautious on taper for now, inflation risks balanced        

• USD: Citi analysts - Minutes to the March 17th FOMC show it will still be “some time” before tapering, but also that officials expect stronger growth ahead and more balanced risk around inflation. Citi analysts continue to expect a Q4 ’21 taper and a late 2022 first Fed rate hike.             

• USD: Fed guidance “well ahead” of tapering may come at or before the June FOMC meeting – there are few surprises in the Minutes to the March 17th FOMC meeting – where officials revise-up growth estimates but continue to see no rate hikes through 2023. Stronger jobs numbers though are likely increasing confidence around an eventual taper of asset purchases. Consistent with public comments, the Minutes confirm participants think it would be “some time” before “substantial further progress” toward the Fed’s goals will be reached and tapering of asset purchases can begin. Subsequent to this meeting however, the strong 916K increase in payrolls has likely further confirmed to Fed officials that progress may be coming more clearly into view. This is the takeaway from relative dove Chicago Fed President Evans who states overnight that the “employment goal will be in sight before too long.” Citi analysts continue to watch public comments carefully for more signs that guidance “well ahead” of tapering may be coming (likely at or before the June FOMC meeting).

• USD: Risks around the inflation outlook are judged as “broadly balanced” rather than “weighted to the downside.” It now seems that it will take more evidence for officials to change their view that inflationary pressure will rise in 2021 but dissipate rapidly in 2022. The trajectory of inflation expectations is likely to be particularly important in this respect. Only if inflation exceeds Fed official median projections in 2022 – which Citi analysts see as likely – would most officials advocate for a rate rise.

• USD: An upward adjustment to IOER (interest on excess reserves) and reverse repo rates remains on-the-table should Fed funds effective fall to 5bp or below. According to the Minutes “the deputy manager also notes that the Federal Reserve could consider adjusting its administered rates if undue downward pressure on overnight rates emerges.” Continued asset purchases and a shrinking Treasury cash balance are supplying more reserves to the private market which puts downward pressure on short-term rates. Some of the increase in reserves is being successfully drained by the reverse repo facility, as counterparty limits have been recently increased.         

ECB speak hints at unwinding accelerated bond purchases in Q3

• EUR: Overnight, ECB’s Wunsch comments that preserving favorable financing conditions can only work within a relatively limited timeframe of so many months or a year – “At some point you’re going back to the fundamentals and if the economy is strongly improving….it will have to mean some tightening at some point.” His comments are followed by the more powerful ECB Governor Council member Klaas Knot, speaking to Reuters and hinting at a PEPP unwind to begin from Q3, saying - “If the economy develops according to our baseline, we will see better inflation and growth from the second half onwards. In that case, it would be equally clear to me that from Q3 onwards we can begin to gradually phase out pandemic emergency purchases and end them as foreseen in March 2022”. 

Citi analysts longer term bullish RMB but cautious during Q2 

• CNH: Data released yesterday shows China’s FX Reserves falling largely on valuation effects which still leaves Citi analysts longer term bullish on  RMB. Total FX reserves decline by US$35bn to US$3170bn in March, worse than Citi and consensus expectations (Citi: US$3210bn, mkt: US$3178bn). The 2.6%MoM appreciation of DXY (Dollar Index) alone may be behind the reserves decline by US$32bn while rising UST yields may have have also weighed on the value of reserve assets held. Citi analysts’ balance of payments (BoP) based capital flow analysis suggests that net capital outflows could be as much as US$88bn. But RMB’s still attractive “carry” despite rising UST yields, inclusion of Chinese assets into international indexes, current global investor under-allocation in RMB assets and strong Chinese fundamentals as it runs ‘twin surpluses and Citi analysts’ more upside risks to their 16% growth forecast for China in Q1’2020, all likely contribute to the longer-term bullish outlook on RMB. But the near-term outlook during Q2 appears clouded by the US rates sell-off - that is seen to be less friendly to risk assets and which has already tightened financial conditions in EM Asia and as a result, Citi analysts remain more cautious on Asia EMFX including CNH during Q2.  

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 8, 2021. Please approach a Citigold Relationship Manager if you would like more information.