FX - The Week Ahead: A High Bar for MAS to Ease Financial Conditions in 2025

Higher September core CPI does not support January easing but outlook dovish

• SGD: Data released earlier last week shows Singapore’s September core CPI at 2.8% YoY and 0.14% MoM NSA. This is higher than consensus and MAS’s expectations for core CPI to end the year “around 2%”. Headline CPI also comes in higher than expected at 2.0% (consensus: 1.9%). The upside surprise sees the MAS/MTI outlook modified somewhat to be less dovish vs a month ago, but still closer to the October MPS with services inflation still seen on a “moderating trend” and expected to ease further for the rest of 2024. The MAS also believes that the pass through of earlier labor costs to CPI has “largely peaked” and is expected to continue at a reduced pace. And unlike last month’s outlook, core CPI is no longer seen “stepping down further in 4Q24”, but instead remaining on a “gradually moderating trend”.
   
• SGD: While the extent to which the core CPI data has been incorporated into the October MPS is not clear, the re-acceleration in core CPI momentum in Aug-September vs the preceding 2-3 months, likely >2% YoY Dec-24 core, is not supportive of a January easing. Still, with a dovish outlook maintained, Citi Research see a 35% chance of easing from April 2025 or later, once core CPI has fallen below 2%, and more so if growth is also seen falling 2%. If this assertion is correct, the recent drop in SGD NEER should not be construed as a sign of imminent easing, but rather efforts to “steer the NEER” within the band to keep real policy settings closer to neutral in October. Instead, a sharper and more sustained fall of the SGD NEER to 150bps (i.e., real policy settings below neutral) would be more consistent with a signal for imminent easing.

• SGD: Citi Research’s base case remains for MAS to stay on hold through 2025. Alongside Citi’s 2025 GDP forecast of 3% at the upper end of MAS’s potential growth ranges (of 2-3%), such a scenario would imply a closed or even mildly positive output gap, with monetary policy settings not deemed overly tight. An important caveat is that such a view assumes either no change in MAS’s implicit core inflation targets (i.e., near the long-term historical averages for core at 1.6-1.8%), and/or some tolerance for policy settings that are less accommodative than pre-covid levels. However, there remain considerable uncertainties on both these fronts and therefore, Citi Research attach a 35% chance of a slope reduction, more likely from April 2025 or later, especially if growth falls 2% and/or core is 1.5%.

Week Ahead:

US – jobs, Q3 GDP, ISM manufacturing and consumer confidence in focus this week

• USD: US October Nonfarm Payrolls – Citi: 90k, median: 135k, prior: 254k; Private Payrolls – Citi: 70k, median: 115k, prior: 223k; Manufacturing Payrolls – Citi: -45k, median: -30k, prior: -7k; Average Hourly Earnings MoM – Citi: 0.2%, median: 0.3%, prior: 0.4%; Average Hourly Earnings YoY – Citi: 3.9%, median: NA, prior: 4.0%; Unemployment Rate – Citi: 4.2%, median: 4.1%, prior: 4.1% - following a substantial upside surprise of 254k payroll jobs added in September, Citi Research expect a much more modest increase of 90k in October, reflecting both temporary issues unique to this month (38k striking workers) but also genuine softening. Much of the softer increase in October will likely reflect payback from an abnormally strong September. Wage growth was surprisingly strong in September and revised higher in August, but Citi Research expect a slowing to 0.2%MoM average hourly earnings in October. A decline in the unemployment rate from 4.22% to 4.05% last month was the most positive element of the September labor market data and further declines or stabilization would be encouraging evidence of a “soft landing” for the labor market. But Citi Research do not expect that to be the case and pencil in the unemployment rate rising back to 4.23% in October with further rises likely over the coming months.
   
• USD: US September JOLTS Job Openings – Citi: 8025k, median: NA, prior: 8040k - JOLTS job openings should pull back only modestly in September to 8025k from 8040k in August. This would be closely in line with patterns seen around the same time last year, with openings falling more into Q4. Job postings have moved sideways in recent weeks, but there needs to be caution in interpreting this as a signal of stabilizing labor demand. Job openings around 8 million are roughly 1 million higher than the level of openings pre-pandemic but likely no longer reflect true demand for workers.
   
• USD: US October Employment Cost Index – Citi: 0.9%, median: 0.9%, prior: 0.9% - the employment cost index should rise 0.9%QoQ in Q3, a similar increase as in Q2 and still a bit stronger than a typical pre-pandemic increase. This could help support recently building market concerns over reinflation risk and continued strength in wages could be a factor in a possible decision by Fed officials to pause rate cuts at some upcoming meeting (not the Citi Research base case), but Citi Research continue to see signs that weakening demand for labor is indeed putting downward pressure on wages.
   
• USD: US September PCE Deflator MoM – Citi: 0.1%, median: 0.2%, prior: 0.1%; PCE Deflator YoY – Citi: 2.0%, median: 2.1%, prior: 2.2%; Core PCE MoM – Citi: 0.2%, median: 0.3%, prior: 0.1%; Core PCE YoY – Citi: 2.6%, median: 2.6%, prior: 2.7% - core PCE inflation will likely pick up in September relative to a very subdued increase in August but should continue to average close to 2% over the coming months. Slowing in shelter inflation that was already seen in CPI data should be echoed in PCE inflation as well. Core goods prices should be close to flat, with a large drag from medical goods prices. Headline PCE – the Fed’s official inflation target – should rise 0.1%MoM and touch 2.0%YoY for the first time since early 2021.
   
• USD: US October ISM Manufacturing – Citi: 48.0, median: 47.6, prior: 47.2 - manufacturing PMIs have generally remained in contraction pointing to continued weakness in manufacturing activity. Key sub-indices like new orders and production have remained sub-50. The employment details have been weak too and this has been in line with weak manufacturing payrolls. Citi Research expect a modest increase in ISM manufacturing in October to 48.0 from 47.2. The employment sub-index could rebound somewhat after falling in September but will likely remain in contraction. Citi Research expect that manufacturing PMIs will remain at subdued levels in the near term as interest rates remain at restrictive levels.
   
• USD: US October Conference Board Consumer Confidence – Citi: 99.1, median: 98.5, prior: 98.7 – the Conference Board Consumer Confidence index has remained within a 95-110 range in recent months but has generally been at more supported levels than the University of Michigan Consumer Sentiment Index. The present situation index has been falling this year as the labor market differential has been declining. More consumers are saying that jobs are not as plentiful or they are hard to find with the labor market now being looser than during the pre-pandemic period. Citi Research expect the Conference Board Consumer Confidence index to increase modestly to 99.1 from 98.7 in October but more important will be the labor market differential reading that is likely to continue to decline in October though residual seasonality in recent years suggests that the labor market differential could stabilize or even rebound at the end of this year/beginning of next year. An increasing share of consumers saying jobs are hard to find continues to point to upside risk for the unemployment rate.
   
• USD: US Q3 (advanced) GDP Annualized QoQ – Citi: 2.6%, median: 3.0%, prior: 3.0%; Personal Consumption – Citi: 3.3%, median: NA, prior: 2.8%; Core PCE QoQ – Citi: 2.0%, median: NA, prior: 2.8% - Citi Research expect Q3 GDP to rise 2.6%QoQ SAAR, with a strong boost from consumption and business equipment investment. The quarterly inflation reading should be a benign 2.0%QoQ, right on target by the Fed.
   
• USD: US September Personal Income – Citi: 0.3%, median: 0.4%, prior: 0.2%; Personal Spending – Citi: 0.5%, median: 0.4%, prior: 0.2% - personal spending should rise 0.5%MoM in September, following a strong retail sales figure. Services should drive most of the increase. Meanwhile, personal income should rise 0.3%MoM in September. Increases in wages and salaries should offset the drag from asset income.

Europe and UK – Euro area and Swiss October inflation data in focus this week

• EUR: Euro area October (flash) HICP - with the October PMIs releases having been delivered last week, the ECB focus will now shift to this week’s inflation prints. Eurozone September HICP was dovish all around and contributed to trigger the ECB dovish pivot. October HICP. Citi Research expect the October data to be equally soft on core inflation – the “autumn blues” do not last just one month – and pencil in another soft 0.1% MM (SA) gain for core HICP. Base effects are likely to push headline inflation back up from 1.7% to 1.9% YY, but nowhere near the large bump the ECB September forecasts envisaged (2.6% in 4Q). Citi Research broadly agree with market pricing in seeing HICPxT averaging 1.7-1.8% in 2025, comfortably below 2% from 1Q-25.
   
• CHF: Swiss October CPI YoY – Consensus 0.8%, Prior 0.8%; October CPI MoM – 0.0%, Prior -0.3%.

Japan – BoJ meeting in focus this week

• JPY: Citi Research share the widely held view that policy will be left unchanged at the October 30-31 MPM. Current consensus is a rate hike in either December or January (more likely December) but do not expect the BoJ to signal for it vigorously in October given uncertainty around the approaching US election and payroll data. However, policymakers might send a hawkish message that they would respond nimbly to any increase in upside risks to inflation, depending on forex levels when the MPM is held. The BoJ will likely emphasize the continued trend of rate hikes while pointing to external uncertainty.

Commodity Bloc – Australia’s Q3 CPI & BoC Governor Macklem’s comments in focus this week

• AUD: Australia Q3 CPI Citi headline QoQ forecast; 0.3%, Previous; 1.0%; Citi headline YoY forecast; 2.9%, Previous; 3.8%; Citi trimmed-mean forecast QoQ; 0.8%, Previous; 1.0%; Citi trimmed-mean forecast YoY; 3.5%, Previous; 3.9%; Citi September monthly CPI forecast; 2.4%, Previous; 2.7% - despite the low headline CPI thanks to subsidies and falling petrol prices, Citi Research’s measure of underlying inflation remains unchanged, still forecasting a chunky 0.8% rise in trimmed-mean inflation, which leaves inflation still 0.5pp above the RBA’s 2%-3% target band but with the balance of risks for underlying inflation skewed slightly to the downside. Implications for the RBA at 0.8% imply that there is a strong risk for rate cuts to be delayed after February (currently Citi Research’s base case) next year. A print of 0.9% or higher on trimmed-mean inflation would suggest that the November Board meeting is live for an RBA rate hike.
   
• AUD: Australia’s September and Q3 Retail Trade: Citi MoM Retail Trade forecast; -0.2%, Previous; 0.7%; Citi QoQ Real Retail Trade forecast; 0.4%, Previous; -0.3% - following five consecutive monthly increases, Citi Research expect a -0.2% change in September retail trade despite ongoing solid population growth, recently delivered tax cuts and better-than-expected employment growth. The -0.2% September forecast would still produce a respectable 1.0% increase in nominal quarterly retail trade. And when combined with a retail deflator forecast of 0.6%, it produces a real Q3 increase of 0.4%. This would be an improvement on Q1 and Q2 (-0.4% and -0.3% respectively) and lift yearly real retail trade growth into positive territory for the first time since Q1’23.
   
• CAD: Fireside Chat with Bank of Canada Governor Macklem - Macklem will speak in a fireside chat on Monday following this week’s 50bp rate cut. Given limited new information around the state of the economy before then, there is unlikely to be any change to the conclusions for the outlook for policy. Generally, officials tried to frame the inflation outlook as now balanced and with inflation itself at 2%YoY, a larger cut back closer towards neutral would be justified. But with a backdrop of 2% inflation already and balanced risks, rates remaining in restrictive territory in coming months will elevate the downside risks to inflation. Macklem’s press conference comments following the BoC’s October 50bp cut seemed increasingly more concerned about these downside risks and less convicted in the upside ones.
   
• CAD: Canada CFIB Business Barometer (Oct) - with headline inflation dipping below 2% on a YoY basis and core inflation measures continuing to slow, upside risks to inflation have greatly diminished. Markets will continue to watch CFIB price plans for a sense of the path of core inflation, and there could still be some remaining stickiness for the next few months. But generally, price plans indicate still-subdued core inflation and may become even more important for gauging any downside risks to core inflation over the coming months. If price plans fall below 2% for any extended period, this would increase the risk that policy rates may have to dip more materially below neutral at some point in the next year (closer to 2% or below).

Asia EM – China’s October manufacturing PMI in focus this week

• CNH: China Manufacturing PMI October – Citi Forecast 50.1, Prior 49.8 – Citi Research expect China’s manufacturing PMI to improve to 50.1 in October, defying seasonality. Heavy industries have shown visible improvements: as of 18th, cement shipment to production ratio increased 1.7ppt from last month; as of 23rd, operation rates of asphalt rose a notable 2.7ppt from September; and steel production significantly increased from last month, with an accelerating drawdown of inventory. Export orders may improve as well ahead of the US elections. While seasonal factors tend to dampen October’s PMI, the early impact of stimulus could start to show and it could perform better than seasonals