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Singapore MAS preview: Citi analysts - risk of early normalization

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Singapore MAS preview: Citi analysts - risk of early normalization   

  • SGD: MAS will likely release its monetary policy statement on October 14th. Citi analysts’ base case (60%) is for MAS to stand pat, reflecting a continued negative output gap and baseline forecasts for 2022 core CPI staying below the historical average of 1.7%. The team expects a slope steepening and upward re-centering in April 2022 instead, after the announcement by the Singapore government of a 2% GST hike. Yet, risks of an earlier 50bp pre-emptive slope steepening this October remain elevated (40%), especially if MAS chooses to purchase insurance against upside inflation risks from supply constraints and recent strong momentum in price indicators, with an early announcement of the GST hike tilting odds in favor of a possibly more aggressive October normalization.

  • SGD: Singapore’s growth is now slightly weaker than expected, but recovery remains intact, with the output gap likely closing in mid-2022 – both global and domestic growth are slightly weaker than expected on (manageable) pandemic-related demand headwinds and supply constraints. Despite slightly tighter restrictions on unexpected surge in daily cases, the endemic reopening strategy remains broadly on track, with further gradual border reopening likely from 4Q’21 amidst a capex recovery. Citi analysts forecast for Singapore’s output gap to close in mid-2022 points to normalization starting in April 2022, but supply constraints could bring forward the closing of the gap and policy normalization.  

  • SGD: Singapore’s job market slack to be absorbed amidst supply constraints, with wage inflation risks compounded by policy shifts – while resident unemployment remains above pre-COVID levels of around 3%, Q2 job vacancies-to-job-seekers ratio have surged to the highest since 1997, with wage growth rebounding above levels seen in past normalization episodes. Despite transitory weakness in Q3, job market slack should be absorbed by 2022, which alongside policy shifts on foreign and low wage workers could compound wage inflation risks.

  • SGD: Below “target” baseline for core CPI without GST hike, but upside risks from supply constraints and strong momentum – while 2021 headline inflation forecasts will likely be raised further to 1.5-2.5% on accommodation costs, without a  GST hike, Citi analysts’ 2022 baseline forecast remains below the 1.7% threshold that has historically triggered normalization. Risks though are tilted to the upside, especially if supply constraints prove more persistent than expected. Momentum in some cost indicators is close to past normalization levels and extrapolating recent core CPI momentum points to swifter convergence towards the 1.7% threshold within 2022.                 

 

Australia  - retail spending falls further in August, but focus is on Q4 reopening

  • AUD: Australian retail sales come in better than expected, falling 1.7% in August, a smaller decline than consensus or Citi Research expect (-2.5% and -3.0% respectively). Nominal retail trade have held up better than expected in August but Citi analysts expect another month or two of relatively weak retail trade data before the reopening across October and November in NSW and VIC should help lift spending across retail categories most impacted by lockdowns. There is likely to be a level of pent-up demand for services-based consumption as well as some in-person goods purchases, as measures of household mobility improve. And particularly in Q4, household savings could be a little stronger thanks to the combination of State-based fiscal support in Q3 that could not be fully spent.    

 

Week Ahead  

  • USD: US August Personal Income – Citi: 0.3%, median: 0.2%, prior: 1.1%; Personal Spending – Citi: 0.4%, median: 0.6%, prior: 0.3%; Core PCE MoM – Citi: 0.3%, median: 0.2%, prior: 0.3%; Core PCE YoY – Citi: 3.6%, median: 3.5%, prior: 3.6% - despite a soft 0.10% increase in core CPI in August, Citi analysts expect a much stronger 0.26% increase in core PCE inflation leaving the Y/Y measure elevated, rising closer to 4.0% by year-end. 
  • USD: US September ISM Manufacturing – Citi: 58.9, median: 59.5, prior: 59.9 - ISM manufacturing should fall to 58.9 in September from 59.9 in August as supply issues constrain production and employment. In particular, the employment component is likely to remain in contractionary territory, in line with persistent labor shortages.

  • EUR: Euro area HICP Inflation, September Flash – Citi: 3.2% YY, prior: 3.0% YY - the sizable increase in electricity and gas prices (refer above to – “Europe - soaring energy prices’ impact on inflation more a concern in UK than the euro area”) will contribute to push headline inflation again higher in September, adding around 0.2pp to the YY rate. Core inflation should also edge higher still, from 1.6% to 1.7% YY. Citi analysts still pencil in further above-trend growth in core goods prices, reflecting supply chain disruptions and strong demand for durable goods and see euro area inflation peaking in November probably above the team’s current forecast of 3.5% YY.

  • CNH: China Manufacturing PMI September: Citi 50.2, Prior -- 50.1 – China’s official manufacturing PMI might stay above the 50 mark in Sep-21 due to seasonality. Blast furnace operating rates by steel mills have weakened somewhat nationwide due to tighter environmental policy, but impact of the flooding in some parts of China should have diminished. Meanwhile, new orders could hold up if export orders are supported by production disruptions by the pandemic outside China. Price indices though are likely to remain elevated due to tight supply constraints.   ​​​​​​

  • JPY: LDP presidential election on September 29 — Citi analysts continue to think no candidate will earn a majority in the first ballot. If Kishida wins the election, the market is unlikely to react much. However, if Kono and Sanae Takaichi go to a runoff, it looks quite uncertain whether voters for the more liberal Fumio Kishida in the first round will go to Sanae Takaichi, a conservative candidate, making the outcome unpredictable.

 

This is an extract from the Daily Currency Update, dated September 29, 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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