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FOMC Minutes - confirming taper on track, upside risks to inflation

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FOMC Minutes - confirming taper on track, upside risks to inflation           

  • USD: Minutes from the September 21-22 FOMC meeting released overnight, confirm that taper is likely to be announced November 3 and proceed at a pace of $10bln/month Treasuries and $5bln/month MBS. Officials discuss starting to taper in mid-November or mid-December, and Citi analysts expect the November start date is slightly more likely. Fed officials see risks to inflation as balanced to the upside but continue to see most elements of inflation as “transitory.”         

  • USD: On inflation, while some Fed officials see factors driving inflation as “largely transitory,” others point to the rise in inflation expectations and recent inflation data as signaling broader price pressures. However, “several others” emphasize that inflation is being driven by COVID-19 related price pressure. The assessment of the labor market is also relatively unchanged with “some” noting that the participation rate (supply of workers) has not improved as rapidly as expected. “Several” think participation would rise only after the unemployment rate falls further. “Various” other participants though think participation may remain structurally depressed, while “a number of others” expect pre-pandemic participation and employment/population rates could be achieved.   

  • USD: Overall the September minutes offer little new information, other than making it a bit more likely that a slowdown in purchases will commence in mid-November. For the most part, the Minutes make it more interesting to see how Fed official views may have evolved in the wake of last week’s jobs report showing a tighter-than-expected labor market in September and the overnight CPI inflation report showing more persistent pressures in core inflation. Atlanta Fed President Bostic has already declared “transitory” as the wrong word to describe inflation, which may be the leading edge of a broader rhetorical shift. But despite growing Fed official focus on upside risks to inflation, Citi Research maintain their long-held call for a first Fed 25bp rate hike in December 2022.

 

US CPI - stronger details of core CPI as upside risks to shelter prices materialize

  • USD: US core CPI rises 0.24%MoM in September, in line with consensus at 0.2%. Meanwhile, headline CPI rises 0.41%MoM and to 5.4%YoY. While a monthly increase in core CPI of 0.24% is much more modest than the 0.7-0.9pp increases seen over the summer, details of the CPI print indicate a much stronger picture of underlying inflation with strength in various services prices (primary rents and owners’ equivalent rent) suggesting a growing persistence of stronger inflation while the weakness in “transitory” components is likely to reverse in coming months. A growing persistence of strong underlying inflation should keep the Fed maintaining the option to hike rates in H2’2022.  

 

Other data releases overnight

  • GBP: UK August GDP stagnation - UK GDP is grows by 0.4% MM in August, disappointing both Citi and consensus expectations (Citi 0.8%, Consensus 0.5%). Growth is also revised down for July – now shrinking by 0.1%. On a 3-month basis, monthly output is up by 2.9% versus 4.2% in July and 5.5% in June. These data are consistent with an easing of activity momentum in UK but with GDP now just below 1.9% short of Q4-19 levels, this is unlikely to significantly shift the dial on the policy debate. Fading momentum? – However, UK activity data seems to be  slowing in recent months, likely due to supply constraints that should prove temporary but also due to softening demand and activity in some parts of the economy, according to Citi analysts. With Covid cases once again increasing, costs growing and simultaneous fiscal and monetary policy normalization all looming, Citi analysts expect economic momentum to fade further over the months ahead. 
  • CNH: Chinese trade outperforms again in September - Chinese export growth accelerates in September in USD terms, advancing from 25.6%YoY in August to 28.1%YoY, surprising consensus by a large margin (Citi/mkt:22%). Meanwhile, import growth almost halves to 17.6%YoY, weaker than expected (Citi: 25%, mkt: 20.9%). As a result, the trade surplus grows to US$66.8 bn, from US$58.3 bn in August which likely helps support the RMB currently. However, Citi analysts expect export growth will likely slow into Q4 and coupled with concerns over China’s regulatory crackdown and power shortage in Q4, may put some downside pressure on RMB near term. 

Week Ahead – US inflation indicators, UK jobs and Singapore’s MAS meeting      

  • USD: US September PPI Final Demand MoM – Citi: 0.4%, median: 0.6%, prior: 0.7%; YoY – Citi: 8.4%, median: 8.8%, prior: 8.3%; PPI ex Food, Energy MoM – Citi: 0.4%, median: 0.5%, prior: 0.6%; YoY – Citi: 7.0%, median: 7.1%, prior: 6.7%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.4%, median: 0.4%, prior: 0.3% - Citi analysts expect still stronger than pre-pandemic increases to be supportive for PCE inflation.
  • USD: US September Retail Sales – Citi: -0.6%, median: -0.3%, prior: 0.7%; Retail Sales ex Auto – Citi: 0.1%, median: 0.5%, prior: 1.8%; Retail Sales ex Auto, Gas – Citi: -0.1%, median: 0.2%, prior: 2.0%; Retail Sales Control Group – Citi: -0.4%, median: 0.4%, prior: 2.5% - Citi analysts expect a 0.6% decline in total retail sales in September and a 0.4% decline in sales in the retail control group. Overall though, goods demand in the coming months should remain strong, with a risk of another very strong increase in October sales though possible delays and supply shortages could weigh on spending towards year-end.

  • USD: US University of Michigan 1Yr Inflation Expectation – Citi: 4.7%, median: NA, prior: 4.6% -  continued increases in energy prices into the winter months could lead to further increases in inflation expectations, even extending to the 5-10Yrs, which is more important for the Fed. 

  • AUD: Citi September employment change forecast; -70k, Previous; -146.3k; Citi unemployment rate forecast; 4.8%, Previous; 4.5% - Citi analysts forecast a 70k decline in jobs in September, which in combination with the 146k decline in August would more than erase the total employment gains in the preceding five months.    

  • SGD: MAS Policy Decision: Citi analysts expect MAS to stand pat this week (60% chance), assuming its baseline scenario sees core CPI staying below the historical average of 1.7% through 2022E. Still, the risk of a “slight” 50bps slope steepening is at 40%, if MAS wants to purchase insurance against upside risks, and/or supply disruptions. 

 

This is an extract from the Daily Currency Update, dated October 14, 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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