FOMC Preview – Cautious confidence, but too early to taper

FOMC Preview – Cautious confidence, but too early to taper                    

• USD: Citi analysts - the April 28th FOMC meeting is most likely too-early to send any strong signals that “substantial further progress” toward full employment and tapering of asset purchases are on the horizon. Officials are expected to continue to “look through” transitory strength in inflation, but there is a risk that this week sees an earlier-than-expected indication that the time to taper is approaching. 

• USD: Fed statement likely to be tweaked to reflect stronger jobs data, inflation rising above 2% — the main development since the March FOMC is another month of strong US data including on jobs (+916K in March) and retail sales (+9.8%MoM in March). This should result in a slight upgrade to language from March that indicators have “turned up.” US headline CPI inflation is now above 2%, meaning some adjustment to this language will be needed, likely making reference to any stronger inflation being ultimately transitory in the Fed’s view. 

•  USD: Fed officials still looking through higher inflation — in addition to language in the statement, Citi analysts expect Chair Powell to repeat the now familiar rhetoric that upcoming above 2% Y/Y inflation readings will prove transitory. Of particular interest though will be any guidance Chair Powell gives on what would constitute an inflation outcome that would necessitate a policy reaction. Recently, Vice-Chair Clarida has stated that if inflation at the end of 2021 is not below mid-2021 readings, the committee would need to reassess the persistence of inflationary pressure. Citi analysts continue to think it will take at least several of months of, for instance, stronger shelter inflation readings, to provoke a change in Fed inflation views.  

• USD: Expect Q4 ’21 taper, December 2022 first rate hike — strong job growth (500K+ per month) should keep the Fed on-track to announce tapering of asset purchases late in 2021 (September or November meeting). The team expects the Fed to taper Treasury purchases at $10bln/mth and MBS $5bln/mth, implying an eight month timeline to get to zero net purchases. This would make a hike by the end of 2022 a possibility, but the decision to hike will primarily depend on the strength of inflation. Citi analysts expect a moderate overshoot (~2.3% core PCE in 2022) to convince officials to raise rates at the end of 2022.               

Data/ events over the past 24 hours 

• JPY: BoJ meeting – the BoJ maintains its current policy parameters unchanged yesterday (cash rate at -0.1% and the 10Yr JGB yield target at 0%). In the updated outlook, BoJ lowers its Japan inflation forecast for FY2020 and FY2021, while slightly revising it up for FY2022. Japan’s growth forecast is also revised up, despite the latest virus spread in Japan and lockdowns.         

• USD: US consumer confidence up sharply again in April – the Conference Board Consumer Confidence Index rises sharply in April and now stands at 121.7 from 109.0 in March. The Present Situation Index—based on consumers' assessment of current business and labor market conditions—soars from 110.1 to 139.6 while the Expectations Index—based on consumers' short-term outlook for income, business, and labor market conditions—rises moderately, from 108.3 last month to 109.8. The index has rebounded sharply over the last 2 months and is now at its highest since February 2020. Meanwhile, short-term inflation expectations hold steady in April, but remain elevated.    

Week Ahead               

• USD: The most watched event this week will be tonight’s FOMC meeting (refer to the piece “FOMC Preview – Cautious confidence, but too early to taper” on PP1). Meanwhile, the Biden administration confirms that “American Families Plan” proposal, to be detailed tonight, will include an increase in capital gains taxes for high earners.        

• USD: US Core PCE MoM Citi: 0.3%, median: 0.3%, prior: 0.1%; Core PCE YoY Citi: 1.8%, median: 1.8%, prior: 1.4% - Core PCE inflation should rise a strong 0.30%MoM in March based on elements of CPI and PPI which should push the Y/Y reading to 1.8%. While base effects will send core PCE well above 2% over the next few months, strength in these components of underlying inflation will be key to maintaining above 2% inflation into the end of the year after base effects pass.  

• AUD : Citi analysts raise their Q1 inflation forecast for Australia from 0.4% to 1.0%, which takes headline inflation to 1.5% YoY and underlying inflation is also revised higher from 0.4% to 0.5% QoQ (1.3% YoY) Australia’s Q1 CPI print will likely show a 1.0% increase in headline inflation over the quarter. Citi analysts see the risks as skewed to the upside. However, the team expects supply chains to adjust and inflation dynamics to begin normalizing in the second half of the year. 

• EUR: Euro area HICP Inflation, April Flash: Citi Forecast: 1.5% YY, Prior: 1.3% YY - Citi analysts expect further unwinding of the Jan/Feb pick up in euro area core CPI in April as core inflation eases further from 0.9% YY in March to 0.6% YY. The team expects euro area core inflation to remain close to 0.5% in 2Q-21, before rebounding to around 1¼% YY in 4Q-21.

• CNH: China Manufacturing PMI April: Citi 51.7, Consensus 51.6, Previous 51.9 – Citi analysts expect manufacturing PMI to moderate to a still robust 51.7. Blast furnace operating rates by steel mills declined in April due to the production cut for carbon neutrality, likely putting pressures on manufacturing production. Nevertheless, Emerging Industries PMI reached a five-year high. Exports might also hold up, and new orders should be supported by the continued domestic recovery.  

This is an extract from the Daily Currency Update, dated April 28, 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