-->Q2’21 commodities outlook – strong rebound, but no new super cycle
COMMODITIES: The late Q1 commodity sell-off is likely to fade quickly as temporary lockdowns give way to strong, diffuse growth, robust commodity demand and higher prices. Therefore, Citi analysts are neutral to bullish a long list of commodities - especially energy, metals, and row crops with no outright bearish views, citing recoveries from deep recessions as almost always bullish for most commodities. But robust recovery does not portend a super cycle as missing elements include – (1) a weak USD, (2) a long-term oil supply gap removing energy cost support for the energy-intensive commodities sector, and (3) strong sustainable commodity demand or prices except in metals, led by copper, given their central role in de-carbonization.
COMMODITIES: Staying constructive on Chinese commodity demand but watching for policy exit - China is likely to continue funding commodity intensive expansion as its commodities demand benefits from robust manufactured goods exports and solid property construction activity over the coming months. Citi analysts expect manufacturing fixed-asset investment (FAI) to lead the Chinese economic recovery. Property investment over the next five years should also benefit from Beijing’s mandate to increase residence-based urbanization ratio to 65% by 2025 from 60% currently. Durable goods consumption has also largely recovered to pre-COVID levels. However, the risk of an accelerated China’s monetary policy tightening remains, should China’s economic growth outlook improve more than expected. Furthermore, a larger-than-expected fiscal consolidation could also weigh on demand growth in 2H’21.
Chinese activity accelerates in both manufacturing and services
CNH: China’s manufacturing and services PMIs accelerate more than expected in March - manufacturing PMI rebounds, up 1.3pp from February to 51.9 and higher than expected (Citi/Mkt: 51.2). Improvement is across the board in production, demand, employment, exports and imports with producer and purchasing prices printing higher. China’s Services PMI also beats consensus, up by 4.9pp from February to 56.3 vs consensus for 52 with gains in employment and construction.
CNH: Citi analysts now see more upside risks to their 16% growth forecast for China in Q1’2021 and expect momentum to remain robust until a possible moderation around the midyear with industrials well positioned to benefit from the spillover effect of the ongoing US stimulus spending and from China’s ambitious plan to vaccinate 40% of its 1.4bn people by the end of June.
RBA persists with its easing bias at the April Board Meeting
AUD: Despite a stronger than expected recovery, inflation is still expected to lag – new quote from the RBA at the April board meeting is that “unemployment is still too high”, even with the better-than-expected result of 5.8% reported in February. The Board views “wages and price pressures are subdued and expected to remain so for some years”. Therefore, the RBA will look through the temporary rise in inflation from reversal of some COVID-19 related price reductions in the short-term and remain focused on the outlook that “underlying inflation is expected to remain below 2 per cent over the next few years”. There is also no hint of any concern on house price gains from the policy statement as credit growth is being driven by owner-occupiers thanks to “strong demand from first-home buyers, in contrast, investor credit growth remains subdued.”
AUD: Citi analysts - RBA adds a reference in the statement noting that it will consider whether to retain the April 2024 bond as the target bond or to shift to the next maturity later this year. Citi analysts however, believe the Bank will likely roll down purchases of its 3Yr bond target from the April 2024 to the November 2024 bond later this year. On the exchange rate, RBA reconfirms that the current monetary policy settings are contributing to a lower exchange rate than otherwise. Bottom Line – Citi analysts outlook is consistent with the RBA’s April and unchanged policy guidance that “the Board will not increase the cash rate until actual inflation is sustainably within the 2 - 3 per cent target range…. it does not expect these conditions to be met until 2024 at the earliest.” Markets however price a 40% chance of a 25bp rate hike in 15 – 18 months’ time.
Data/ events for the remainder of the week
- USD: FOMC Minutes from March 17th – US economic forecasts are raised but median “dots” continues to signal no rate hikes through 2023 – the Minutes may provide some further insight into Fed thinking about the conditions necessary for tapering of asset purchases and eventually raising rates and in particular, what would be required to conclude “substantial further progress” had been made toward the dual objective and that tapering of asset purchases can commence.
- USD: PPI Final Demand MoM – Citi: 0.4%, median: 0.5%, prior: 0.5%; PPI Final Demand YoY – Citi: 3.7%, median: 3.8%, prior: 2.8%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.2%; PPI ex Food, Energy YoY – Citi: 2.7%, median: 2.6%, prior: 2.5%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.3%, median: NA, prior: 0.2% - Citi analysts expect a solid 0.4% increase in total producer prices, with a 0.3% increase in the core measure.
- CAD: Canada’s Net Change in Employment (March) – Citi: 175k, median: 75k, prior: 259.2k; Unemployment Rate – Citi: 7.6%, median: 8.0%, prior: 8.2%; Hourly Wage Rate Permanent Employees – Citi: 1.7%, median: NA, prior: 4.3% - Citi analysts expect a strong 175k increase in employment in March following a ~260k job gain in February. This would put employment at its highest level since pre-pandemic employment levels. Citi analysts continue to see risks for a faster normalization of employment levels than currently suggested by the BoC’s assessment of the labor market that likely leads the BoC to commence its asset taper this month.
This is an extract from the Daily Currency Update, dated April 7, 2021. Please approach a Citigold Relationship Manager if you would like more information.