More positives on US – China trade further firms up risk sentiment; US core PPI rebounds with underlying inflation close to target

More positives on US – China trade further firms up risk sentiment; US core PPI rebounds with underlying inflation close to target       

• Safe Havens (JPY, Gold): More positives on US – China trade further firms up risk sentiment - In a gesture of goodwill, President Trump this morning says he will delay the 5% increase in tariffs on USD250bn of Chinese goods from October 1 to 15th out of respect for celebration of the 70th anniversary of the Chinses revolution that brought the communist government to power. The news follows reports that China will waive import tariffs on 16 US products including shrimp, fish meal and cancer treatment drugs. This exemption will last 1 year starting September 17 and marks China’s first such offer since the trade war has begun though the exemptions do not cover the more important agricultural and manufacturing products that President Trump seems to care about.      

• USD: US underlying inflation seen strengthening - US PPI final demand rises 0.1%MoM in August while the core measure excluding food, energy and trade services is up 0.4%. The strong rebound in core PPI in August reaffirms the Citi analyst view that the underlying pace of US inflation is running close to the 2%-target. This should continue to become more apparent in the data, with core PCE inflation returning to 2%YoY by early-2020. Citi’s base case remains for one more 25bp cut from the Fed next week. With still-solid growth and around-target inflation, there could be more hesitancy by a growing number of Fed members to add further accommodation unless data warrants it.   

• USD: US CPI Preview: solid CPI to support August core PCE inflation - Following two months of stronger 0.3%MoM increases in core CPI, Citi analysts expect a more-moderate 0.18% increase in August. This expectation results from solid increases in underlying components of inflation consistent with the Fed’s 2% target, and a moderation in strong transitory factors. Citi’s expectation for core CPI is consistent with another solid monthly increase in core PCE inflation, which could rise as high as 1.8%YoY due to favorable base effects. After running at a pace around 1.5-1.6%YoY since February, core PCE inflation could be much closer to 2% when released at the end of the month.     

• USD: More tax reform headlines – Bloomberg, citing sources, says President Trump advisers are discussing a new tax plan with the capital gains tax appearing to be the focus, though there is no consensus for now.              

Tonight’s ECB meeting in focus; Firmer support for sterling as PM Johnson seen pivoting towards a Brexit deal     

• EUR: Tonight’s ECB meeting sees more opposition - Reuters reports the ECB will cut some growth projections for 2019 and 2020 GDP and forecast a slow and protracted rise in headline and underlying inflation. Meanwhile, MNI quotes unnamed ECB sources as suggesting “there is always a chance there could be a suspended announcement on QE, where the plans are laid out but with a forward execution date” and that "there could be a reinforced or clearer message saying QE could have a delayed start, perhaps by shifting it to December….“ Meanwhile President Draghi also receives a letter from the Dutch Parliament, voicing its opposition to rates tiering as it passes a motion deeming tiered rates for banks as unfair to pensions that are currently forced to invest at negative rates.  

• EUR Outlook: A firmer floor but a strong rally unlikely for now - Citi analysts expect the ECB to deliver a full package of measures, including a rate cut (10bp), the resumption of QE (EUR360bn over 12 months) and a reformulation of forward guidance to make it more open-ended, more state-contingent and more directly linked to (core) inflation performance. Markets on the other hand, are discounting much more - a 15bp ECB rate cut for this meeting + QE (Citi analysts think markets are discounting somewhere around EUR40-45bn of asset purchases per month over 12 months) + strengthening forward guidance + cheapening TLTRO pricing. Citi analysts highlight that despite the fact that the headline rate decision will likely grab initial attention, the most significant announcement to watch could be whether QE is (1) delivered (even with a forward start) and (2) whether QE comes with a fixed tenor (12 months) or is open-ended and linked to core CPI performance (the latter is seen as a more powerful stimulus and would likely argue for a weaker EUR).              

• GBP: Scottish court yesterday rules on PM Johnson's decision to suspend parliament for five weeks ahead of the October 31 Brexit deadline to be illegal. The government says it will appeal the decision scheduled for September 17. Meanwhile, media speculates PM Johnson could soften his position on the Irish border in a bid to cut a last-minute deal given the series of multiple setbacks faced. This follows newly elected EU official - EU trade Commissioner Phil Hogan sounding encouraging on PM Johnson’s idea to get past the Irish backstop through the development of an ‘All Ireland’ zone for agricultural and other products”.  Also note German Chancellor Merkel’s comments overnight that there’s “every chance” an 11th hour Brexit deal can be reached.          

China – August bond inflows decline as RMB depreciates but likely to remain sticky on index inclusion   

• CNY: China’s portfolio flows in August - China’s foreign bond inflows decline to US$2bn in August from US$8bn last month. But GBI-EM inclusion could bring US$20bn of inflows into Chinese government bonds starting from 2020, further supporting bond (and possibly RMB) sentiment while FTSE Russell's WGBI has also entered the review cycle in summer, with potential to announce CGB inclusion. Overall, portfolio (equity) flows are likely to remain pro-cyclical, impacted by trade war headlines, but bond flows could be sticker due to (1) index inclusion demand, (2) decent yield pick-up against global peers and could also potentially limit trade induced weakness in RMB.      

This is an extract from the Daily Currency Update, dated September 12, 2019. Please approach a Citigold Relationship Manager if you would like more information.