Singapore - July core CPI rises amidst less dovish outlook

Singapore - July core CPI rises amidst less dovish outlook                                                                         

• SGD: Singapore’s July 2021 core CPI comes in line with expectations at 1% YoY (Citi/Consensus: 1%, Jun: 0.6%) while headline CPI remains elevated at 2.5% YoY (Consensus: 2.5%, Jun: 2.4%). Sequentially, core CPI rebounds 0.23% MoM (Jun: -0.19%) that reflects early signs of demand-pull pressure emerging. The latest MAS/MTI outlook is also marginally less dovish vs. June, as labor market slack “diminishes” – MAS/MTI maintain their expectations for 2021 core and headline CPI to average 0-1% and 1-2% respectively, with core CPI still expected to “gradually increase” in coming quarters. Although slack in the labor market will take time to be fully absorbed, MAS/MTI now anticipate “restrained” wage increases (vs. “muted” previously) and characterize slack as “diminishing” for the first time, which hints that emerging upstream cost pressures should be closely monitored.     

• SGD: Citi analysts’ base case is for MAS stand pat in October (75% chance) - in the absence of the GST hike, which has yet to be incorporated in MAS’s forecasts, core CPI trajectory through 2022 is likely to undershoot MAS’s April 2021 expectations due to temporary disinflationary effects from May-August restriction. With core CPI lower than earlier expected and below the historical average of 1.7%, Citi analysts expect MAS to stand pat in October and to normalize only from April 2022, assuming the 2%-ppt GST hike is announced in the February 2022 Budget, which will then lift average 2022 core CPI closer to 1.7% that historically triggered normalization. Still, some risk of an earlier October normalization could persist (25% chance), reflecting upside inflation risks from reopening, pass through from elevated headline CPI to expectations, upcoming policy adjustments on foreign and low wage workers and/or possible earlier announcement of the GST hike, before the October MPS. 

• SGD: The SGD nominal effective exchange rate (NEER) is likely to return to policy neutrality as the Singapore economy progressively reopens - SGD NEER has traded around 80-90 pips above the mid-point in the first 23 days of August (July: 76bps, June: 116bps, May: 114bps), and it is likely to crawl higher on a path closer to policy neutrality (at the same YoY rate as core CPI) as the economy progressively reopens. Based on Citi analysts’ core CPI forecasts, this translates into the SGD NEER strengthening and trading around 155bps above the mid-point in September and averaging 150-160bps in 4Q’21 and 1Q’22.  

US new home sales stabilize but prices still elevated

• USD: US new home sales rise to 708k SAAR in July, in-line with consensus for 697k. June new home sales are also revised up to 701k from 676k, implying a 1.0%MoM increase over the month. Level of new home sales is now stabilizing around pre-pandemic levels though the 5%MoM NSA gains in house prices is more difficult to interpret given the seasonality inherent to housing markets. Supply metrics though indicate some easing in what has been a very tight housing market. The months’ supply at current sales rate is steady at 6.2 months’ supply.

NZ - strong Q2 retail trade data vs lockdown extension in Q3  

• NZD: NZ’s ex-inflation retail sales increases a very strong 3.3% in Q2. This follows the upwardly revised 2.8% rise in Q1 (previously estimated at 2.5%). The Q2 result is above Citi’s 2.7% forecast and the 2.5% consensus estimate. Of the 15 surveyed industry sectors, 11 experience higher sales in the quarter. However, the Delta variant outbreak will likely reduce retail sales growth in Q3 as the Auckland lockdown is extended for another 7 days (Citi Research expect further extensions for at least another few weeks).

• NZD: Implications for the RBNZ – the NZ rates market has +13bps priced-in for the October 6 MPC decision for a target OCR of +38bps. This is below the target OCR rate of +54bps just prior to the announcement of the 1 positive COVID case. Based on the view of the lockdown being extended, market pricing for October could  retreat further. But note RBNZ Governor Orr’s reminder last week that his concern is with a possible un-anchoring of inflation expectations and not so much with making a “policy error”. So while Citi analysts prefer the November MPC meeting as a better option, the team does not rule out a 25bp rate hike at the October meeting.    

Week Ahead – Jackson Hole in focus       

• USD: On Friday, August 27th Chair Powell will speak at the Jackson Hole conference – offering a chance to provide more guidance on the likely timing and pace of asset purchases. In the wake of the 943K jobs report, Citi analysts expect he will guide that tapering can be announced at any upcoming meeting, depending on subsequent data. If he continues to emphasize job growth, this would put even more emphasis on the need for the August jobs report to be “strong enough” (probably 500K+) to keep the committee on track for tapering.    

• USD: US Durable Goods Orders – Citi: 1.1%, median: -0.2%, prior: 0.9%; Durable Goods Orders ex Trans – Citi: 0.9%, median: 0.5%, prior: 0.5%; Capital Goods Orders Nondefense ex Air – Citi: 1.4%, median: 0.5%, prior: 0.7% - Citi analysts expect a string of consistently solid increases in durable goods orders to continue in July, with a 1.1% increase in total durable goods orders and a 0.9% increase in orders excluding transportation goods. Core capital goods orders (nondefense goods excluding aircraft) should rise 1.4%. This continued strength in durable goods orders over recent months has been a particularly positive sign that demand for goods has remained strong despite supply issues continuing to weigh on production levels. Overall, persistently strong demand should lead production to increase further into next year as supply shortages are eventually resolved.

• USD: US Core PCE MoM – Citi: 0.4%, median: 0.3%, prior: 0.4%; Core PCE YoY – Citi: 3.7%, median: 3.6%, prior: 3.5% - Core PCE inflation should rise a solid 0.42%MoM in July, a similar pace to recent months and one that would take the Y/Y reading to 3.7% from 3.5%YoY in June. This would be  consistent with a still-firming underlying trend of inflation that should further support a more hawkish shift in Fed policy.    

• EUR: German Ifo Business Climate, August Forecast: 100 Prior: 100.8; Ifo Expectations, August Forecast: 100 Prior: 101.2; Ifo Current Assessment, August Forecast: 100 Prior: 100.4 - headwinds for German manufacturing sector are growing, with China appearing to slow and Delta variant spreading. However, Citi analysts though expect some of the weakness in the services sector to reverse. This should cushion the overall index in August.

• AUD: Australian retail sales seen weakening sharply - Australia July Retail Trade Citi forecast; -2.1%, Previous; -1.8% - retail trade is expected to decline further in July since Greater Sydney was in a lockdown through the entire period. Overall, retail activity will likely remain under pressure over the coming months thanks to declining mobility, especially in services orientated categories.

This is an extract from the Daily Currency Update, dated August 25, 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