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Optimism relating to US fiscal stimulus plans vs US – China tensions and ever expanding vaccine delays/ extended lockdown in Europe

-->Optimism relating to US fiscal stimulus plans vs US – China tensions and ever expanding vaccine delays/ extended lockdown in Europe 
  • USD: US fiscal stimulus expectations continues to support the risk rally despite declining potential for a bipartisan COVID-19 related spending package based on the $1.9trn Biden proposal to deliver stimulus checks to individuals. However, markets remain optimistic even if bipartisan talks fail as Democrats are expected to revert to passing a larger spending package (that includes infrastructure spending estimated to be an additional $2trn) along party-lines via the “reconciliation” process (needing a simple majority of 51 votes in the Senate). But this could potentially delay proceedings to March when Federal unemployment benefits expire. In any case, the end result carries risks, including – (1) Congress not being able to pass the entire 2-part fiscal plan in full could be met with investor disappointment, OR (2) if the entire fiscal package should pass (including infrastructure), this may bring the prospect of significantly higher US bonds yields leading to a stronger USD (especially if Fed also starts to taper its QE program).        
  • CNH: President Biden still hawkish on China - Bloomberg sources report various headlines overnight from a White House speech (1) China is growing more authoritarian at home, (2) Biden’s multilateral approach includes China tariffs, and (3) Biden wants to make sure US tech is not funding the Chinese military. Secretary of State Anthony Blinken has also previously alluded to the administration being in no rush to bring about significant changes in China policy. The overnight headlines come on the back of a recent move by the US to deploy an aircraft carrier group into the South China Sea that have long been a source of tension between both nations and rebuked by China’s foreign ministry spokesman Zhao Lijan. CNH remains unmoved by the headlines. Nonetheless, developments in the space should be closely watched alongside tail risk that could entail another economic tit-for-tat exchange. 
  • EUR: Rising European vaccine distribution delays leading to extended lockdown risk  - reports overnight highlight the EU struggle with its vaccine rollout, with both supply and distribution issues delaying current vaccine timelines. Consequently, lockdown risk in Q4 may not be eliminated by the vaccine rollout. It also serves as a reminder that mutations and potential pitfalls around vaccine rollout present major risks to the euro area 2021 recovery and to EU’s target to vaccinate 70% of its adult population by the end of summer with European Council President Charles Michel now saying it looks increasingly unlikely. EU would need to increase its vaccination rollout fivefold to reach this deadline. The by-product is that the Netherlands is expected to reset its vaccination strategy with only 40-60% of the 1Q-21 orders likely to be delivered and France set to announce its third lockdown as early as Wednesday for at least three weeks.            

 

Data releases overnight          

  • EUR: German IFO – manufacturing resilience not enough – the German Ifo Business Climate index declines to 90.1 from 92.1 prior (consensus 91.4, Citi 92.3) with expectations down to 91.1 from 92.8 prior (consensus 93.6, Citi 93.5) and the current assessment also down to 89.2 from 91.3 prior (consensus 90.6, Citi 91.0). The result stands somewhat in contrast to the more resilient EU manufacturing PMIs on Friday. But, while manufacturing confidence is barely changed in January, retail trade plunges (not included in PMI Services) and services and construction confidence also drops. 
  • SGD: Singapore core CPI weak but outlook less dovish - December core CPI comes below consensus at -0.3% YoY (Citi: -0.3%, consensus/Nov: -0.1%) but the details appear less negative – on a MoM basis, core inflation edges up by 0.1% (Nov: 0%) while headline CPI is flat in YoY terms (November: -0.1%) – suggesting disinflationary pressures have eased. The MAS/MTI outlook is also less dovish vs December – external inflation is now expected to “pick up” (vs “remain low” previously), reflecting higher than expected oil prices vs October-20, though with weaker pass through to core CPI. Citi analysts anticipate core CPI averaging 0.7% in 2021E (2020E: -0.2%), and slightly above the mid-point of MAS’s 0% to 1% forecast. The change in inflation guidance suggests an April-21 easing is less likely and  Citi analysts now expect the MAS to stay on hold in April- 21.  

 

Week Ahead      

  • USD: FOMC meeting - After significant market and policy-maker discussion of the potential for Fed to taper its QE program in 2021, Citi analysts expect little new for now as neither policy plans nor the outlook have substantially changed. Market reaction will consequently be to the nuances of how – if at all – Powell characterizes “well ahead” (3m, 6m, 9m?) regarding signaling of the start of QE taper.        

  • USD: US Durable Goods Orders – Citi: 1.1%, median: 0.9%, prior: 1.0%; Durable Goods Orders ex Trans – Citi: 0.8%, median: 0.5%, prior: 0.4%; Capital Goods Orders Nondefense ex Aircrafts – Citi: 1.4%, median: 0.3%, prior: 0.5% - Citi analysts expect a strong increase in durable goods orders in December, with total orders rising 1.1%MoM with even some upside risks, and orders excluding transportation up 0.8%. Orders of nondefense capital goods excluding aircraft should rise a strong 1.4% and would continue a recent string of very strong demand for manufactured goods.    

  • GBP: UK Employment, Sep-Nov Forecast: -74k 3M/3M Prior: -144k 3M/3M; Unemployment Rate, Sep-Nov Forecast: 5.2% 3M Average Prior: 4.9% 3M Average; Average Weekly Earnings, Sep-Nov Forecast: 2.6% 3M YY Prior: 2.7% 3M YY; AWE Ex-Bonus, Sep-Nov Forecast: 3.0% 3M YY Prior: 2.8% 3M YY - The proportion of furloughed staff increased in November and Citi analysts expect this to weigh on headline earnings growth in the three months to November. The team also expects UK unemployment to increase to around 5.5%, driving the 3m average to 5.2%.

  • AUD: Australia Q4 CPI: Citi headline CPI forecast; +0.9%, Previous; +1.6%; Citi trimmed-mean CPI forecast; +0.4, Previous; 0.4% - Citi analysts’ Q4 QoQ CPI forecast is 0.9% and would take the yearly inflation reading to 0.9%, while trimmed-mean inflation is expected to rise 0.4% QoQ, taking yearly growth to 1.3% with risks skewed to the upside.   

 

This is an extract from the Daily Currency Update, dated January 26, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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