June ECB meeting preview - want to be dovish (vs the Fed)
EUR: Citi analysts expect the ECB Meeting this Thursday to err on the dovish side, notably by extending the current elevated pace of bond purchases to Q3 (currently at around €80bn per month) with the risk that it could be extended beyond Q3. For Q4-21, Citi analysts pencils in a pace of €60bn/month but point to little or no pressure to reduce the current pace from the PEPP envelope, if needed. To fully use the PEPP envelope by the end March 2022 would require purchases at a monthly average pace of €75bn, just a little below the current ‘higher’ pace (€80.2bn in April and on track for €80bn in May). Therefore, the Governing Council may opt to not provide further guidance yet on the future of the PEPP, which in principle could expire as early as March 2022, with conversations likely to be pushed back to September at the earliest.
- EUR: Citi analysts think that deep disagreements within the Governing Council and the fragile inflation dynamics within the euro area are reasons for inaction. The team expects any upward revision to medium-term euro zone HICP projections to be minor (2023 from 1.4% in March to 1.5%) and note that market-based euro zone inflation expectation measures remain much lower than 2% and have recently plateaued. The recent appreciation in EUR (1.3% in EURUSD since April meeting) is likely be another reason for the ECB to remain dovish.
- EUR: Multiple ECB officials have recently expressed concerns about an earlier tapering, including ECB’s Panetta, Villeroy de Galhau and Klass Knot, reinforcing the message from President Lagarde that the ECB is “at least as accommodative and will be at least as patient as [the Fed]”. Panetta has gone on to say that “only a sustained increase in inflationary pressure could justify a reduction in our purchases” while Dutch central bank governor Knot has indicated “there are no signs that the inflation pick-up will be permanent”. And the powerful Bank of France Governor Villeroy has been even more direct in saying that any hypothesis of a reduction in bond purchases partly in Q3 or the following quarters is purely speculative.
- EUR: The key event risk with respect to the ECB therefore lies with the September board meeting that is also likely to provide some conclusions of its Strategic Review. Citi analysts expect the Strategic Review to likely lead to the ECB opting for a symmetric 2% inflation objective, with a debate about how to take past undershoots into account. This could add to the medium to longer term dovish signals for EUR.
Data overnight - – solid business sentiment surveys
EUR: German ZEW survey approaches boom quadrant – the German ZEW expectations component in June drops from 84.4 prior to 79.8 (consensus 86.0) but the ZEW current assessment index shows a sharp pick-up to -9.1 from -40.1 prior (consensus -28.0). Expectations cool from historically high levels, but the current assessment improves far more than expected which, according to Citi analysts, leaves the move on the “ZEW” economic clock towards the “boom quadrant”.
AUD: Australian business confidence falls by 3pts to 20 but is still at elevated levels and well-above the long-run average of 5.2. Business conditions strengthen from 32 to 37 due to a pickup in trading conditions, profitability is up as is employment. Employment conditions in particular, portend solid job growth despite the end of JobKeeper. However, firms increasingly note labor is difficult to find with international borders closed, which means job growth will likely slow in H2 compared to strong gains in Q1. Citi analysts though still believe the Australian unemployment rate will fall further to around 5% by year-end. There is some upside risk to inflation in H2 as the survey notes rising input prices although the quarterly pace of growth eases from 1.8% in March to 1.5% in May.
- USD: US inflation indicators set to strengthen further - CPI MoM – Citi: 0.5%, median: 0.4%, prior: 0.8%; CPI YoY – Citi: 4.8%, median: 4.7%, prior: 4.2%; CPI ex Food, Energy MoM – Citi: 0.6%, median: 0.4%, prior: 0.9%; CPI ex Food, Energy YoY – Citi: 3.6%, median: 3.4%, prior: 3.0% - after a much stronger-than-expected 0.9% increase in core CPI last month, Citi analysts expect many of the same factors pushing prices higher in April will persist in May. Supply-shortage issues now appear to now be flowing through to consumer prices. As these price increases will still likely be dismissed by the Fed as temporary, the more important components of CPI to watch will continue to be key services components, such as shelter prices.
- USD: University of Michigan Consumer Sentiment – Citi: 84.8, median: 84.0, prior: 82.9; University of Michigan 1y Ahead Inflation Expectation – Citi: 4.4%, median: NA, prior: 4.6% - The most important aspect of the University of Michigan survey are higher inflation expectations for both the one-year-ahead and five- to ten-years-ahead measures. The five- to ten-year measure, in particular, will be important for the outlook for Fed policy, and a continued climb higher into the end of the year would be a sign of more persistent price pressures lasting into 2022.
- EUR: ECB Monetary Policy Meeting Forecast: No Change – refer to the above – “June ECB meeting preview - want to be dovish (vs the Fed)”.
- CAD: BoC Rate Decision – Citi: 0.25%, median: 0.25%, prior: 0.25% - Citi analysts expect the pace of QE purchases to remain at C$3bn per week after the reduction at the April meeting. Language around inflation should be updated to acknowledge the above-target 3.4% headline CPI, though looked through by the BoC. More interesting could be any acknowledgement of core inflation measures returning to the 2% target as the latest estimates now show the output gap closing in H2-2022. Citi analysts’ base case remains that the next reduction in asset purchases will occur in July.
This is an extract from the Daily Currency Update, dated June 9, 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 -