Still little clarity on next direction for Fed policy post US jobs
USD: Following the US May jobs report attention is back to US inflation data - despite intense market interest, the May jobs report released last Friday provides little clarity on the next direction for Fed policy. Citi analysts think the average ~500K/month pace is just enough to keep plans to taper asset purchases at some point in the not-too-distant future on the table and a robust, public discussion seems almost certain over the summer given the number of officials that are now at least “talking about talking about” plans to taper asset purchases. The message of the last two jobs reports is clear - labor shortages are leading to weaker hiring and more wage pressure. Citi analysts’ base case remains a September FOMC taper announcement with a December start.
- USD: But the market reaction to the jobs report (higher stocks, lower bond yields and a weaker USD) suggests expectations may be shifting towards further delays to taper talk as most Fed officials continue to see rising prices and wages as “transitory” and await the fall for a read on the US labor market after schools have reopened and enhanced unemployment benefits have expired nationally. What’s next – attention now turns to US CPI inflation (Thursday) and the University of Michigan inflation expectations (Friday) as key data points this week. Citi analysts project US May core CPI to rise 0.6%MoM though Fed officials (and therefore markets) will likely be quick to look through this strength for a couple more months - similar to the reaction to the most recent print. The University of Michigan 5-10Yr inflation expectations may be more interesting as a continued rise from 3.0% would likely challenge the view that expectations are low and well anchored.
Bipartisan infrastructure negotiations continue in US
USD: Citi analysts remain skeptical on the prospects for a bipartisan infrastructure deal – but would not be surprised if bipartisan talks continue for another week or longer. President Biden and Republican Senator Capito have spoken twice last week and will connect again this week. Separately, a bipartisan group of Senators including Democrat Senator Manchin reportedly, may be willing to offer an $878bln proposal. While “end of May” and “June 7th” have been soft deadlines for the end of talks, Democrat and Senate Majority leader Schumer has indicated he will move forward with a budget in July meaning bipartisan talks will likely wrap up by July 4th if not before. The House Transportation Committee plans to begin marking up a bill that would include some administration priorities on Wednesday. But a bill passed before the August recess looks increasingly out of reach and Citi analysts expect a party-line package to pass in Q4’2021.
Data overnight - China exports soften while imports surge
CNH: China’s exports slow, below consensus in May – in USD terms, export growth decelerates from 32.3%YoY in April to 27.8%YoY in May, lower-than-expected (consensus: 32.1%). However, import growth further speeds up to 51.1% (consensus: 53.5%), benefiting from a low base effect to hit a 11 year-high. Strong commodity imports and a low base continue to support high import growth. But despite this, the May trade surplus remains large at US$45.5bn, from US$42.9bn previously.
CNH: But Citi analysts think the better than expected trade performance may not be repeated in H2 as re-opening in advanced economies benefits services consumption at the expense of goods consumption. And on imports, given significant room for China to catch up in meeting the Phase I Trade Agreement with the US, Citi analysts think that the strong import momentum will likely continue, which could weigh on China’s trade surplus in H2.
- USD: US inflation indicators set to strengthen further - CPI MoM – Citi: 0.5%, median: 0.4%, prior: 0.8%; CPI YoY – Citi: 4.8%, median: 4.7%, prior: 4.2%; CPI ex Food, Energy MoM – Citi: 0.6%, median: 0.4%, prior: 0.9%; CPI ex Food, Energy YoY – Citi: 3.6%, median: 3.4%, prior: 3.0% - after a much stronger-than-expected 0.9% increase in core CPI last month, Citi analysts expect many of the same factors pushing prices higher in April will persist in May. Supply-shortage issues now appear to now be flowing through to consumer prices. As these price increases will still likely be dismissed by the Fed as temporary, the more important components of CPI to watch will continue to be key services components, such as shelter prices.
- USD: University of Michigan Consumer Sentiment – Citi: 84.8, median: 84.0, prior: 82.9; University of Michigan 1y Ahead Inflation Expectation – Citi: 4.4%, median: NA, prior: 4.6% - The most important aspect of the University of Michigan survey are higher inflation expectations for both the one-year-ahead and five- to ten-years-ahead measures. The five- to ten-year measure, in particular, will be important for the outlook for Fed policy, and a continued climb higher into the end of the year would be a sign of more persistent price pressures lasting into 2022.
- EUR: ECB Monetary Policy Meeting Forecast: No Change – Citi analysts expect the Governing Council will choose to maintain its current pace of purchases under PEPP at a net amount of approximately EUR 80bn per month, and avoid conveying any specific message on what happens afterwards, either before or after March 2022 (the end-date of PEPP by default).
- CAD: BoC Rate Decision – Citi: 0.25%, median: 0.25%, prior: 0.25% - Citi analysts expect the pace of QE purchases to remain at C$3bn per week after the reduction at the April meeting. Language around inflation should be updated to acknowledge the above-target 3.4% headline CPI, though looked through by the BoC. More interesting could be any acknowledgement of core inflation measures returning to the 2% target as the latest estimates now show the output gap closing in H2-2022. Citi analysts’ base case remains that the next reduction in asset purchases will occur in July.
This is an extract from the Daily Currency Update, dated June 8, 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 -