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Singapore March core CPI’s positive surprise; watching upside risks

Singapore March core CPI’s positive surprise; watching upside risks                  

  • SGD: Singapore’s March core CPI (0.5% YoY) comes in above expectations on one-off jump in health insurance and a rise in some cyclical components. Citi analysts therefore do not anticipate the long- term historical average for core of ~1.7% to be reached in 2021. Still, the team now watches for upside risks. Citi analysts’ Base case (70%) remains for Apr 2022 normalization, with upward re-centering possible in 2022; In the interim, SGD NEER to crawl higher — With Citi analysts’ current forecast for core CPI to average 1.1-1.3% in 2H21 and 2022 without a GST hike, the team sees a 70% chance that MAS stands pat in October 2021 and normalizes only from April 2022, assuming the 2ppt GST hike is announced in the February 2022 Budget, which will lift average 2022 core CPI in the 1.5-2% range. In the meantime, the SGD NEER (nominal effective exchange rate) is likely to crawl higher on a path closer to policy neutrality (at the same YoY rate as core inflation), which based on Citi’s core inflation forecasts, translates into 150bps above the mid-point in April, 175bps in June and averaging 190bps in 2H21. An October 2021 normalization (30% odds currently) could become Citi analysts base case if either – (1) core CPI surprises sufficiently to come close to 1.7% for Jul-Aug 2021, which raises the forecast trajectory for 2022, and/or (2) if a 2022 GST hike is announced before the Oct’21 monetary policy statement. Once normalization commences, the team does not rule out an upward re-centering sometime in 2022.                            


Other data releases Friday - US, UK and euro area PMIs  

  • USD: US Markit manufacturing PMI prints at 60.6 for the preliminary April release, a bit higher than the 59.1 in March. Output and new orders both rise slightly compared to the previous month as does the employment indicator. The Markit Services PMI activity measure also prints higher at 63.1 versus the March reading of 60.4. Employment gains noticeably, while new orders push through to 63.2. The April PMI surveys for the US show a picture consistent with firm US economic growth as the vaccine rollout boosts activity. Questions though remain regarding how long supply chain issues will continue to be apparent and what the impact of this on hard price data will be.    
  • USD: US new home sales soar 20.7%MoM in March to 1021k from an upwardly revised 846k in February. This comes well above consensus for 885k and Citi’s expectation at 828k.  The strong sales push past the recent high-water mark in January. Appetite for housing remains strong, and with permits and starts still high, builders appear confident as well.
  • EUR: The flash euro area PMI composite output index rises 0.6 point to 53.7 (Mkt. 52.9) in April, a 3rd successive increase and the 2nd month of expansion in private sector activity which now stands at its highest level since Sep-18. Among the components, the flash euro area services PMI activity index rises by 0.7pt to an eight-month high of 50.3 (Mkt. 49.1) and shows the first above-50 reading since Aug-20 and the flash euro area manufacturing PMI is up by 0.8pt to a new record high of 63.3 (Mkt. 62). The report marks a positive start to Q2 and validates Citi analysts’ baseline that euro area real GDP should grow in 2Q-21 after a double dip recession in 4Q-20 and 1Q-21.
  • GBP:  UK flash services PMI for April prints at 60.1, up on March levels (56.3) and above consensus (consensus 58.9). This is the strongest rate of expansion since August 2014. Meanwhile, the flash manufacturing PMI prints at 60.7, also up on March levels (58.9) and above consensus (consensus 59.0) with the output index improving 2.5pp to 59.1. Citi analysts expect these data to remain strong over the coming months as the UK economy reopens. The key question for policy is the completeness of the recovery, rather than its speed.     


Week Ahead               

  • USD: The most watched event this week will be the FOMC meeting. There is a small probability the committee gives more decisive guidance toward tapering of asset purchases. However, the much more likely scenario is the statement will be tweaked to reflect a cautiously more optimistic outlook and Chair Powell will await more evidence that robust rehiring is continuing. More formal guidance “well ahead” of tapering may emerge at or before the June FOMC meeting, when officials will have had two more monthly jobs reports to assess the pace of rehiring. President Biden will also address a joint session of Congress and is expected to detail his “American Families Plan” proposal including increases in personal taxes and an extension of the enhanced child tax credit.        

  • USD: US Core PCE MoM Citi: 0.3%, median: 0.3%, prior: 0.1%; Core PCE YoY Citi: 1.8%, median: 1.8%, prior: 1.4% - Core PCE inflation should rise a strong 0.30%MoM in March based on elements of CPI and PPI which should push the Y/Y reading to 1.8%. While base effects will send core PCE well above 2% over the next few months, strength in these components of underlying inflation will be key to maintaining above 2% inflation into the end of the year after base effects pass.  

  • EUR: German Ifo Business Climate, April: Citi Forecast: 97.0, Prior: 96.6; Ifo Expectations, April: Citi Forecast: 99.0, Prior: 100.4; Ifo Current Assessment, April: Citi Forecast: 95.0, Prior: 93.0 - Citi analysts expect manufacturing should continue to enjoy solid confidence, but domestic oriented sectors should experience a setback as Germany has failed to prevent a third wave. 
  • AUD : Citi analysts raise their Q1 inflation forecast for Australia from 0.4% to 1.0%, which takes headline inflation to 1.5% YoY and underlying inflation is also revised higher from 0.4% to 0.5% QoQ (1.3% YoY) Australia’s Q1 CPI print will likely show a 1.0% increase in headline inflation over the quarter. Citi analysts see the risks as skewed to the upside. However, the team expects supply chains to adjust and inflation dynamics to begin normalizing in the second half of the year


This is an extract from the Daily Currency Update, dated April 26, 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 -

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