June FOMC board meeting this week - preview
USD: Another potentially pivotal data release (stronger-than-expected US core CPI inflation) has come and gone with a counterintuitive market response – 10Yr Treasuries yields falling to their lowest levels since early March on Friday. With this backdrop, Citi analysts see hawkish risks from upcoming Fed communications, including this week’s FOMC meeting. The team sees three items dominating the meeting – (1) the 2023 median “dot” will likely be revised up to imply one hike by the end of the year. It takes only 2 dots moving higher for dots to imply ½ a 25bp hike and 3 dots to imply a full hike; (2) inflation expectations moving higher - mechanically it is hard to forecast Q4/Q4 core PCE inflation at the end of 2021 below 2.5% (Citi analysts forecast above 3%, but Fed officials tend to be conservative in adjusting these). Fed officials will be quick to point out that some of this strength is due to base effects, making 2022 projections potentially more interesting. While most Fed officials will still likely pencil in a significant step-down in inflation next year, the median is likely to, if anything, move higher; (3) at least some talking about tapering - after weeks of “talking about talking about” tapering, a signal in the Fed Minutes that the discussion would be forthcoming and Vice-Chair Clarida associating himself with those Minutes, Citi analysts would be surprised not to see at least some discussion of the next policy move.
- USD: That said, it may be too early to expect a clear signal that the economy is headed toward “substantial further progress” and tapering of asset purchases. However, officials may be ready to admit the economy is making “good progress” and that it may be becoming time to more fully discuss how a taper should play out.
- USD: Citi analysts think that the recent move lower in UST yields is likely a signal of increased market confidence that the Fed will keep monetary policy easy, rather than a significant revision of expectations regarding how transitory (or not) stronger inflation will be. However, while much of the strength in prices may indeed be transitory, Citi analysts see some signs of more persistent inflationary pressure building in categories like shelter. Also, while job growth has surprised to the downside twice in two months – this is likely mainly due to an (inflationary) shortage of labor, rather than a lack of demand. All this brings back the idea that it is not so much the data itself, but the market’s perception of how central bankers interpret that data that is driving bond yields lower. This implies that subtle shifts in communication and policy orientation have the potential to have an outsized influence, raising the importance of this week’s FOMC meeting.
UK: Some minor short term headwinds unlikely to alter the positive fundamental backdrop for sterling
- GBP: A stall in cable’s rally this week as hopes of lifting all social distancing rules in the UK on June 21 appear to have receded, with most expecting re-opening to be delayed by four weeks. There also seems to be a further escalation between UK and EU over Northern Ireland – with the 30 June deadline for alleviations on goods trade approaching, UK government accuses EU of “not respecting” UK’s territorial integrity. Risk of UK unilateral actions and EU retaliation appears to be rising as the next formal meeting between UK PM Johnson and EU leaders is only scheduled for November.
- GBP: However, neither of these represents more than a short term blip to sterling’s bullish sentiment – a 4 week delay in UK’s re-opening still puts it well ahead of its peers while problems over Northern Ireland are well known and markets seem well prepared to digest any intermittent friction arising between UK and EU, even if risk of UK unilateral actions and EU retaliation appears to be rising.
- USD: Fed FOMC meeting – refer to the above piece “June FOMC board meeting this week.
- USD: Retail Sales MoM – Citi: -1.1%, median: -0.4%, prior: 0.0%; Retail Sales ex Auto – Citi: 0.4%, median: 0.6%, prior: -0.8%; Retail Sales ex Auto, Gas – Citi: 0.1%, median: 1.0%, prior: -0.8%; Retail Sales Control Group – Citi: -0.6%, median: 0.6%, prior: -1.5% - moderation in control group sales would line up with some easing in goods spending after a stimulus-related boost in March and would not be a concerning sign for underlying demand.
- USD: PPI Final Demand MoM – Citi: 0.4%, median: 0.4%, prior: 0.6%; PPI Final Demand YoY – Citi: 6.0%, median: 6.2%, prior: 6.2%; PPI ex Food, Energy MoM – Citi: 0.3%, median: 0.5%, prior: 0.7%; PPI ex Food, Energy YoY – Citi: 4.4%, median: 4.8%, prior: 4.1%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.5%, median: 0.4%, prior: 0.7% - a more moderate increase compared to recent months, but further upside to goods PPI could signal further goods price gains in CPI in coming months.
- USD: Industrial Production – Citi: 0.7%, median: 0.6%, prior: 0.5%; Manufacturing Production – Citi: 0.5%, median: 0.7%, prior: 0.4%; Capacity Utilization – Citi: 75.1%, median: 75.1%, prior: 74.6% - while total manufacturing production has mostly returned to pre-COVID levels, further upside could be limited in the near term as various commodity and labor inputs are constrained.
- CHF: SNB Policy Rate Forecast: -0.75% Prior: -0.75% - Franc remains “highly valued”, negative interest rates and FX interventions remain necessary and inflation and growth forecasts will probably remain largely unchanged at cautious levels.
- AUD: Australia’s May Labor Force Survey: Citi employment forecast; +39.1k, Previous; -30.6k; Citi unemployment rate forecast; 5.5%, Previous; 5.5%; Citi participation rate forecast; 66.1%, Previous; 66.0% - May LFS is important because it will be the crucial data-point ahead of the RBA’s decisions around its QE programs in July.
This is an extract from the Daily Currency Update, dated June 15, 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 -