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Two reports over the past week serve as a reminder of limits to vaccine optimism and the recovery in risk assets

-->Two reports over the past week serve as a reminder of limits to vaccine optimism and the recovery in risk assets                
  • EUR: Mutations and potential pitfalls around vaccine rollout suggest risks to Q4 2021 onwards are higher than previously anticipated and could change parameters of the current virus narrative. Adding to these concerns is confirmation from a key drug manufacturer it will temporarily reduce vaccine deliveries across Europe, meaning any upsizing in vaccine distribution will likely be capped.      

    USD: Distribution challenges aren’t the only issue – monitor the supply situation too - in the US, Washington Post reports that expanded access to vaccines is unlikely. Bottom Line – the reports speak to distribution challenges and supply shortfall of Covid-19 vaccines, adding to risks that vaccination timelines can be further delayed. It also increases global lockdown and growth risks for Q4 – which poses risks to the global recovery outlook and risk assets (FX).    

     

US data releases Friday - retail sales weaker but firming inflation data may start to see markets focused more on Fed tapering watch   

  • USD: US December retail sales decline sharply but expected to bounce in January – Friday’s most significant miss sees headline retail sales down -0.7%MoM in December and the control group, which strips out strong auto sales also down -1.9%MoM. Citi analysts however aren’t concerned, as spending levels run well above pre-COVID. Looking-ahead, the team expects stronger sales data.

  • USD: US December Industrial production is up 1.6%MoM, above consensus for 0.5% with manufacturing advancing a strong 0.9%MoM. Citi analysts expect the constellation of industrial data from “soft” survey indicators to point to an ongoing and broad-based rebound in manufacturing.

  • USD: US consumer confidence meets expectations but inflation expectations rise – January University of Michigan Consumer Sentiment Survey comes roughly in line with consensus forecasts at 79.2 (80.7 prior). Notably though, the 5-10Yr inflation segment rises to 2.7% from 2.5% amid growing optimism about reflation.

  • USD: December PPI imply firmer core PCE inflation -  PPI final demand rises 0.3%MoM and remains at 0.8%YoY in December, closely in line with expectations. The core measure, which excludes food, energy, and trade services, is also firmer, rising 0.4%MoM. Citi analysts flag that the print reinforces the outlook for core PCE to overshoot 2% temporarily starting in April of this year.  

 

UK data releases Friday - GDP notably more resilient than expected

  • GBP: UK GDP falls - 2.6% in November – though still substantially stronger than consensus for a -4.6% decline. This leaves UK GDP 8.5% below the pre-pandemic level (Feb-2020) even as growth on a three month by three month basis is now running at 4.1%. The print coincides with the England wide lockdown measures imposed during November, and similar restrictions in Scotland, Wales and Northern Ireland. In comparison with April though, nearly all sectors (particularly manufacturing and construction) prove more resilient except consumer services. Citi analysts downgrade 2021 growth – drivers behind the 2020 resilience are unlikely to provide the same support in early 2021 and the team now expects a sharp reduction in output in Q1-2021, with activity in January 2021 falling to 14.9% below February 2020 levels (a similar hit to June 2020).      

     

Week Ahead   

  • EUR: ECB Monetary Policy meeting – Refi Rate Forecast: 0.00% Prior: 0.00%; Deposit Facility Forecast: -0.50% Prior: -0.50%; Marginal Lending Facility Forecast: 0.25% Prior: 0.25% - Citi analysts do not expect any changes on policy or communication but it is of interest to see what message President Lagarde sends with respect to the near-term outlook and risks surrounding the baseline and current strength in EUR and impact on euro area’s longer term inflation outlook.  

  • EUR: Euro area Manufacturing PMI, January Flash Forecast: 57.0 Prior: 55.2; Services PMI, January Flash Forecast: 43.0 Prior: 46.4;  Composite PMI, January Flash Forecast: 47.5 Prior: 49.1 – Citi analysts estimate that the flash composite PMI will fall back in January, by around 1.5 points to a two-month low of 47.5, signaling economic activity is contracting due to lockdowns but the impact is smaller than in November, let alone than in the spring.    

  • EUR: German ZEW Expectations, January Forecast: 60 Prior: 55.0; ZEW Current Assessment, January Forecast: -70 Prior: -66.5 - On the back of  vaccine roll-out, hopes for more US fiscal stimulus and continued central bank support, equity markets in Germany continue to surge, which will likely be reflected in investor expectations.

  • GBP: Manufacturing PMI, January Flash Forecast: 52.5 Prior (Nov Final): 57.5 – Citi analysts expect the UK headline manufacturing PMI to fall back sharply this month as recent data has been flattered by both Brexit stockpiling effects and growing pressure on supply chains.

  • GBP: Services PMI, January Flash Forecast: 40.3 Prior (Nov Final): 49.4 – Citi analysts expect UK services sector to be hit hard by the move on 4 January back into a national lockdown though not by the same order as in April 2020.

  • CAD: Bank of Canada Rate Decision – Citi: 0.25%, median: 0.25%, prior: 0.25% - Citi analysts are most curious to hear about any possible guidance around upcoming changes to monetary policy. Citi’s base case continues to be that the next adjustment to monetary policy will be to allow for a slower pace of weekly bond purchases later this year (possibly the April BoC meeting).  

 

This is an extract from the Daily Currency Update, dated January 18, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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