June FOMC - hawkish upward revisions to dots, taper into view
USD: Citi analysts see the updated Fed projections overnight as more hawkish than expected, with the median dot implying two 25bp hikes by the end of 2023 versus Citi analysts’ base case of the median 2023 dot to move to only one 25bp hike. Chair Powell embraces the more hawkish projections by twice referencing that the conditions for lift-off will be met sooner than expected. Citi analysts base case remains for a first rate hike in December 2022. On tapering, Chair Powell characterizes the meeting as “talking about talking about” tapering and indicates that “substantial further progress” is “a ways away” (perhaps a slight hawkish shift from “some time”) but progress is continuing and will be evaluated at “upcoming meetings.” Citi analysts continue to expect a taper announcement in September and with a $15bln/month decrease in purchases beginning in December.
- USD: Fed forecasts see US core inflation revised up to 3.0% in 2021 while both 2022 and 2023 projections both now stand at 2.1% showing a multi-year overshoot. Chair Powell still characterizes higher inflation as “transitory” but, in an important shift in rhetoric, acknowledges the risk of higher inflation as demand rebounds faster than supply. Chair Powell also emphasizes that he expects labor shortages to normalize. But unemployment rate projections are nudged down, despite weaker job growth. Overall changes to the Fed statement though are unsurprising, with slight adjustments to reflect the improved public health outlook.
Data releases overnight – China’s factory output, retail sales and FAI miss expectations in May but still well supported
- CNH: China’s May industrial production rises 8.8% Y/Y, slower than the 9.8% gain in April and lower than consensus for a 9.0% Y/Y gain. However, consensus expected some moderation due to softer export orders, higher input costs for factories and tighter environmental restrictions on heavy industry.
- CNH: China’s retail sales rise 12.4% Y/Y in May, weaker than consensus looking for 13.6% Y/Y growth and down from the 17.7% jump seen in April. The 2-year average growth for retail sales though stands at 4.5% in May, faster than 4.3% in April, in a sign sales are gradually rebounding.
- CNH: China’s fixed asset investment rises 15.4% in the first five months from the same period a year earlier, versus consensus looking for a 16.9% rise, but slowing from January-April's 19.9% gain. Notably though, the two-year average growth in manufacturing investment turns positive in May.
Data releases overnight (continued) - UK CPI – a robust rebound with further upside likely; Canadian core CPI measures still rising in May
- GBP: Headline UK CPI inflation accelerates to 2.1% MM (Citi, consensus and BoE forecast 1.8%) in May. This is the first time UK inflation is above target since July 2019 – if only marginally. The BoE only expected this for late 2021. Core CPI also rises to 2.0% YY (Citi 1.4%, consensus 1.5%). Headline CPI is now 0.3pp above the BoE's May forecast with further overshoots likely. Underlying price growth is even stronger than it looks – having disappointed in April, UK core CPI data has overshot Citi analysts expectations and suggests strong ongoing pricing pressures with goods prices likely to rise further as input cost pressures still remain at all-time highs and inventories depressed.
- CAD: Canadian headline CPI rises 0.5%MoM in May, stronger than consensus for at 0.4%. The Y/Y measure rises to 3.6% while the core inflation measures are also up across the board, with the CPI-common measure increasing to 1.8%, the CPI-median measure rising to 2.4% and the CPI-trim measure up to 2.7%. Elevated core inflation measures, which now average 2.3%, can potentially catalyze a more hawkish shift from the BoC. Deputy Governor Lane last week noted that “inflation above target in a more persistent manner” would have “implications for our outlook and monetary policy going forward”. Citi analysts see potential for core inflation to see a sustained return to 2% sooner than the BoC currently expects and would not be surprised by another hawkish shift from the BoC, with more clarity around when a first rate hike might be warranted.
Data/ events for the remainder of this week
- CHF: SNB Policy Rate Forecast: -0.75% Prior: -0.75% - SNB will likely acknowledge that the 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. Citi analysts expect the furthest out Swiss inflation forecast (Q1 2024) at 0.6%-0.7%.
- GBP: UK Retail Sales, May Forecast: 1.3% MM 28.5% YY Prior: 9.2% MM, 42.4% YY; Ex Auto Fuels, May Forecast: 0.9% MM, 25.9% YY Prior: 9.0% MM, 37.7% YY – Citi analysts expect retail sales growth to slow sharply in May as the surge in durable and semi-durable spending in April has likely eased in the weeks since – weighing on overall growth. Citi analysts expect these data to moderate over the coming months as the rotation towards consumer goods evident during the pandemic begins to unwind somewhat. However, the overall level is likely to remain relatively resilient.
- AUD: Australia’s May jobs report a key input to the RBA decision in July: 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% - the May labor force survey should provide a cleaner reading on the labor market after the end of JobKeeper in March. The data is important because it will be the crucial data-point ahead of RBA’s decisions around its QE programs in July - a strong reading in May could mean the RBA may not roll forward to purchasing the Nov-24 bond. Citi analysts also maintain the RBA is likely to opt for a flexible LSAP program where it will purchase “up to” $AU100bn. This would give it flexibility to slow asset purchases if the economy continues to outperform.
This is an extract from the Daily Currency Update, dated June 17, 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 -