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Singapore - considering various MAS normalization scenarios

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Singapore - considering various MAS normalization scenarios

  • SGD: Citi analysts examine various scenarios for MAS policy band adjustments required to accommodate a “neutral” path of the nominal effective exchange rate (NEER) into 2023 – in assessing the degree of monetary accommodation, MAS likely pays close attention to the real rate of NEER appreciation (akin to a real interest rate measure), which can be proxied by subtracting YoY core inflation from YoY changes in the NEER. Historically, the policy band has been adjusted to accommodate the desired real rate of NEER appreciation/depreciation, with the “neutral” path of the NEER (i.e., zero real rate of NEER appreciation) mostly within the band in most episodes.       

  • SGD: Key observations - (1) Under most scenarios, a faster pace of normalization vs the 2018 cycle would be required to keep the “neutral” NEER path comfortably within the band; (2) Starting normalization earlier allows for gentler (and less disruptive) adjustments to the band; (3) Without a GST hike, core CPI is unlikely to reach the 1.7% threshold in 2022 that would warrant normalization in Oct 2021. This is unless MAS lowers its inflation “target” and decides to be more pre-emptive or places more weight on currently elevated headline; (4) A positive slope (but not a re-centering) is eventually needed to accommodate the “neutral” NEER path even without GST hike, but this can be delayed into 2022; and (5) Unless the slope is steepened more aggressively, a concurrent upward re-centering is likely needed to accommodate the “neutral” NEER path if GST is hiked.    

  • SGD: Base case remains for MAS to commence normalization in April 2022 (75% chance), but an earlier Oct 2021 normalization remains a plausible risk scenario - Assuming MAS’s core CPI forecasts are close to Citi’s and a GST announcement is made only during the February 2022 Budget, the Citi analyst base case is for normalization to start from April 2022, with a concurrent slope steepening and upward re-centering (of 100-150bps) increasingly plausible. However, as starting normalization earlier allows for a more gradual tightening cycle, an October 2021 normalization remains a plausible risk scenario, with odds to increase sharply if (a) the GST announcement is made before the October MPS, (b) MAS lowers its implicit inflation “targets” and places more weight on headline, (c) MAS’s core CPI forecasts are more hawkish than expected, or (d) MAS adopts an even more pre-emptive approach (e.g., with an eye on 2023 core CPI or in anticipation of a GST hike even before a formal announcement). 

 

Data releases overnight

  • USD: US retail sales suggest still-strong demand despite Delta - US retail sales unexpectedly rise by 0.7%MoM in August, contrary to consensus for a -0.7% decline. Control group retail sales also rise a strong 2.5%, although with a revision lower to -1.9% in July and control group retail sales are now 35% higher than pre-COVID levels in February 2020 and 7.5% higher than a year ago. While some components of retail sales are largely as expected in August, surprising strength in other components is an encouraging story for continued strong demand. This is despite some recent concerns that the spread of the Delta variant would cause a slowdown in activity. As both strong demand and short supply persist, further upward pressure on various prices could also continue.    
  • AUD: Australian employment falls by 146k, well in excess of consensus for -80k. But the unemployment rate also falls 0.1pp from 4.6% to 4.5%, half a percentage point below consensus for 5.0%. This is because the participation rate declines from 66.0% to 1-year low of 65.2%. Hours worked also fall by 3.7%. But provided the lockdowns are eased sometime in Q4, Citi analysts expect little to no permanent scarring of the labor market. Implications for monetary policy - given the RBA’s view of labor market volatility being temporary, this data is likely to be seen as a natural reflection of government-imposed movement restrictions. In any case, the RBA has maintained that rate rises are so far into the future that they are not an impediment to labor market performance. Instead, QE can be made even more accommodative if required. This though is not Citi analysts’ central view.        
  • NZD:  NZ Q2 GDP(P) rises by a very strong 2.8%, which is more than twice the pace of consensus estimate of 1.1% and Citi analysts’ 1.0% forecast. It is also the second strongest quarterly gain after the 14.1% growth spurt in Q3’22. A strong contribution from net exports - the 2.6% rise in GDP(E) is driven entirely by net exports and largely thanks to the trans-Tasman travel bubble. However, this could be short-lived given its suspension in Q3. Consequently, Citi analysts believe net exports will likely contribute negatively to GDP growth in H2’2021, potentially leaving Q3 GDP growth declining by 3.5% followed by a 2.5% bounce in Q4. Implications for RBNZ policy - the Q2 GDP result of 2.8% is way ahead of the RBNZ’s August SMP forecast of 0.7% and the RBNZ has already made clear that they do not view Q3 Delta induced weakness as an impediment to a near-term rate hike, citing concerns with a possible inflation overshoot. Citi analysts therefore expect a +25bps hike in October but bring forward the +25bp Q1 2022 rate hike forecast to November 2021, leaving the OCR at 75bps by year end. This is in line with market pricing. The risk is +50bps in October, given hawkishness of RBNZ forward guidance.            

 

Data for the remainder of the week

  • USD: University of Michigan Consumer Sentiment – Citi: 73.9, median: 72.0, prior: 70.3; University of Michigan Inflation Expectations 1y – Citi: 4.7%, median: NA, prior: 4.6% - Citi analysts expect a moderate rebound in the University of Michigan consumer sentiment index to 73.9 in September after a sharp drop in confidence to 70.3 in August sparked by concerns of a renewed slowdown in activity. The drop in sentiment is likely in part related to elevated prices of many consumer goods. Inflation expectations components of the University of Michigan survey will also continue to be particularly important for the outlook for inflation. Citi analysts expect the 1-year ahead measure to rise slightly back to 4.7% although the 5-10 year expectations will be more important for the Fed. 

  • GBP: Further gains seen in UK retail sales - UK Retail Sales, August Forecast: 1.6% MM, 3.5% YY Prior: -2.5% MM, 2.4% YY; Ex Auto Fuels, Aug Forecast: 1.4% MM, 3.1% YY Prior: -2.4% MM, 1.8% YY – Citi analysts expect retail sales to have been strong in August, reversing some of the weakness observed in July though household goods may fall back somewhat owing to supply shortages.    

 

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

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

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