Softer US data but relatively upbeat Fed speak maintains the risk positive backdrop

Softer US data but relatively upbeat Fed speak maintains the risk positive backdrop; Canada - BOC lending survey points to rebound later this year                          

• The forward looking US Empire manufacturing for April released overnight is up at 10.1 vs 8.0 expected though details are not as strong as the headline suggests. Improvement is led by new orders, deliveries and inventories, while future business conditions drop 17 points to 12.4, the lowest in more than three years, shipments fall by 5 points to 22.7 and prices paid by nearly seven points. Fed President Evans though delivers a fairly optimistic assessment on the US economy, saying he sees rates unchanged through the fall of 2020.  Note that his rates view is at odds with current market pricing which implies 30bps of cuts by September 2020. 

• Further developments on US – China trade talks over the weekend in a further sign that a deal is imminent, with the US reportedly said to temper its demand for China to cut industrial subsidies (one of 2 sticking points on a US – China deal so far).                                     

• The headline Bank of Canada bank lending survey (BOS) for Q1 declines to -0.6 from 2.2 but Citi analysts are not putting too much weight on this. Instead, details of the report, although somewhat softer than in Q4, are consistent with a Canadian economy already known to be operating at a rate below potential in the near term but with the more forward-looking measures in the survey such as investment intentions consistent with the outlook for a rebound in activity later this year. Key highlights of the survey include – (1) balance of future sales growth rises back into positive territory, implying that more Canadian firms expect stronger sales growth than weaker, and that real GDP could grow at a faster rate in Q1 than in Q4; (2) Investment intentions in machinery and equipment remain solid and should support a rebound in investment. This measure has not significantly softened despite the earlier decline in oil prices and continued trade tensions.        

The Week Ahead - US   

• In the US, Friday sees the US International Trade Commission (USITC) releasing its report on the impact of USMCA (trade deal with Mexico and Canada). The US Treasury Report on FX Practices is also expected sometime this week. Data wise, US industrial production tonight is expected to come in at -0.1%MM while strong March retail sales on Thursday should send a signal that US consumption is bouncing back in Q2 (Citi at 1.2%MM). Fed speakers include Bullard (Wednesday).  

The Week Ahead – Euro zone and UK               

• In Europe, the key data release this week are the German ZEW survey for April (consensus 8.5 versus 11.1 prior), German manufacturing PMI (consensus 45.0 versus 44.1 prior) and Eurozone manufacturing PMI (consensus at 48.0).                   

• In the UK, with parliament officially on its Easter recess, Brexit headlines are expected to be few and far between and data may play a more important role in driving sterling sentiment. This week sees UK jobs data where Citi analysts expect continued robustness in employment and wage growth, UK inflation (Citi at 2.0%YY) and UK retail sales (Citi at 0.4%MM). Moreover, given a Brexit extension is now secured, there is potential for BoE rate expectations to rise for August given the recent data strength out of the UK.    

• On Brexit itself, Politico reports that “most MPs and officials now believe PM May’s only realistic chance of assembling a majority is through an indicative votes process which, if the talks with Labor stall, could come within weeks. If a deal is still not agreed upon and passed by the UK parliament, then the prospect of a more polarized UK electorate with a second referendum or perhaps general elections after the European parliamentary elections on May 23rd could see greater headwinds to sterling. Nevertheless, with the prospect of a “No Deal” Brexit greatly diminished and the tide having turned towards a softer “pro-euro” Brexit, coupled with the underlying strength of UK data, this also suggests a stronger floor on sterling to support sentiment should a 2nd referendum or UK general election related headwinds start to hit sterling.   

The Week Ahead – NZ and Canada    

• New Zealand – Q1 CPI probably rose by just 0.3%, lowering yearly inflation from 1.9% to 1.7%Citi’s Q1 forecast is slightly above the RBNZ’s 0.2% forecast and comes at a time of renewed dovishness on the part of the RBNZ Governor around global downside risks and concerns around the level of the NZD. CPI data therefore presents a low hurdle to follow through on guidance that “the more likely direction of our next OCR move is down”. Citi analysts continue to forecast 25bps cut in the OCR on May 8. 

• Canada - CPI inflation should continue to rise with higher oil prices, likely up 1.9%YoY in March while retail sales should gain 0.7%MoM in February after recent weakness.          

The Week Ahead - China   

• Citi analysts this week expect Chinese GDP growth to remain stable at 6.2%YoY in Q1 though FAI growth might have edged up to 6.3%YoY Ytd, while retail sales could have grown 8.5%YoY in March and industrial production (IP) growth likely accelerated to 6.1%YoY in March.            

• Regarding IP, coal consumption of power plants likely grew 4.2%YoY in March vs -14.9%YoY in February. The PMI sub-index of production also likely jumped, by 3.2% suggesting that the post-CNY recovery of industrial activity has come earlier this year than last year, given the earlier holidays. This tends to inflate the headline reading of IP growth somewhat.                     

• This is an extract from the Daily Currency Update, dated April 16, 2019. Please approach a Citigold Relationship Manager if you would like more information.