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RBA upgrades activity forecasts but still expects low inflation

RBA upgrades activity forecasts but still expects low inflation                          

  • AUD: RBA maintains its dovish tone in the board meeting yesterday, despite upgrading its key economic forecasts, by committing to making a decision on rolling forward its yield curve control (YCC) and asset purchases (LSAP) at the July Board meeting. Citi analysts’ view remains unchanged – the team expects the RBA to roll-over to the November 2024 bond to maintain its YCC (3Yr yield at the same rate as the cash rate of 0.1%) and to embark on a third round of LSAP with an upper limit of $AU100bn. Conditions for a tightening in monetary policy are again stated as “unlikely to be until 2024 at the earliest”. The key to Citi’s view here is the re-inserting into the policy statement the comment - “the Board places a high priority on a return to full employment”. Citi analysts expect this requires an unemployment rate below 4%, in order to drive wages growth above 3%, something that is unlikely before 2024. Monetary and financial conditions are unlikely to be tightened before this.       
  • AUD: The Board provides markets with some guidance on timing for possible YCC roll-over and QE extension – the key difference from the April policy statement is that instead of saying “later in the year” the May statement says, “at its July meeting, the Board will consider whether to retain the April 2024 bond as the target bond for [YCC] or to shift to the next maturity”. The Board will also in July “consider future bond purchases following the completion [of the second round of LSAP]. The Board is prepared to undertake further bond purchases if doing so would assist with progress towards the goals of full employment and inflation”.  
  • AUD: The Bank upwardly revises its GDP and unemployment rate forecasts for Australia… GDP growth for 2021 is upwardly revised from 3½% to 4¾% in 2021 and left unchanged at 3½% for 2022. More significantly, the unemployment rate is expected to fall to 5% by the year-end, and then to 4.5% by the end of 2022. Overall, the labor market forecasts are more bullish than expected…but inflation is still expected to be below the 2%-3% target band. The RBA doubles down on the view that inflation gains will take time, saying “…recent CPI data confirmed that inflation pressures remain subdued in most parts of the Australian economy”. The Bank’s underlying inflation forecast remains at 1.5% in 2021 before rising to 2% by June 2023. Given the strong recovery projected in the labor market but muted underlying inflation, Citi analysts believe RBA’s forecasts reflect the view that the natural rate of unemployment (NAIRU) is closer to high 3%, rather than 4.5%. This would be supportive of wages growth not rising meaningfully until late 2023. 

 

Data releases overnight 

  • USD: Strong goods demand boosts imports - As expected, the US trade balance widens to -$74.4bn in March from -$70.5bn in February. Goods exports bounce back by 8.9%MoM while services exports rise 1.4%. Meanwhile, goods imports are up a strong 7%MoM while services imports gain 2.8%. Notably, the trade balance with China widens to -$36.9bn, the widest point December 2018 before tariffs were enacted in 2019. The persistent widening in the trade balance over the last few months unsurprisingly continues as domestic demand for goods, and thus imports, remains strong. Strong consumer spending on goods boosts Q1 GDP by 4.9pp, but partly offset by a widening trade balance (-0.9pp) and a drawdown in inventories (-2.6pp).                  

 

Week Ahead                    

  • USDUS nonfarm Payrolls – Citi: 1150k, median: 950k, prior: 916k; Private Payrolls – Citi: 1000k, median: 885k, prior: 780k; Average Hourly Earnings MoM – Citi: 0.1%, median: 0.0%, prior: -0.1%; Average Hourly Earnings YoY – Citi: -0.3%, median: -0.4%, prior: 4.2%; Unemployment Rate – Citi: 5.8%, median: 5.8%, prior: 6.0% - Citi analysts expect another strong month of broad-based job across sectors as activity normalizes with increased vaccinations.     

  • USD: ISM Services – Citi: 64.5, median: 64.2, prior: 63.7 - US ISM services index should continue to increase in April as a rising share of services-related businesses see activity continuing to pick up as vaccinations increase and activity patterns normalize.   
  • GBP: At tonight’s MPC meeting, the focus will be on forecast revisions, the immediate future of asset purchases, guidance and potentially the exit strategy. Improved forecasts pose a hawkish temptation, but other than a more or less mechanical QE taper, Citi analysts expect the Bank to be on hold. Citi analysts continue to expect a £50bn QE extension in November.  Bank’s forecasts are likely to see significant upgrades to near-term growth. Extension of furlough and a stronger rebound suggests the Bank may conclude unemployment has peaked. Citi analysts expect inflation to be revised up for 2022 but down in 2024 as fiscal drag weighs in the latter part of the horizon.  
  • CAD: Canada Net Change in Employment (Apr) – Citi: -210k, median: NA, prior: 303.1k; Unemployment Rate – Citi: 8.1%, median: NA, prior: 7.5%; Hourly Wages Permanent Employees – Citi: -1.8%, median: NA, prior: 2.0% - Following two months of strong job gains resulting from temporary re-openings, Citi analysts expect job losses of 210k in April. The April employment report will cover the period from mid-March to mid-April when lockdowns were reintroduced.     
  • CNH: China Export growth may continue to slow in April  - on the one hand, trade related cargo throughout capacity in China’s major ports (including both imports and exports) grew only 2.5%YoY in the first 10 days of April. On the other, the Baltic Dry Index, a lead indicator for global trade activities, continued to improve. Together with the higher base, Citi analysts expect export growth to decelerate to around 22%YoY. On the import front, Citi analysts envisage import growth to remain as high as 38%YoY in April. As a result, the trade surplus is likely to come at US$30bn.  

 

This is an extract from the Daily Currency Update, dated May 5, 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 - 

 https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy

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