US CPI strong on transitory components & solid shelter prices

US CPI strong on transitory components & solid shelter prices            

• USD: Citi analysts take – the strong increase in March US core CPI released overnight is in line with upside surprises expected in the coming months as a number of components normalize. Key shelter prices in CPI however show signs of potential earlier-than-expected firming with another solid increase in owners’ equivalent rent (OER), the key shelter price component of consumer price inflation and the largest share of CPI. Overall, US core CPI in March rises 0.339%MoM, stronger than consensus for 0.2%. Meanwhile core CPI YoY rises to 1.6% and headline CPI gains 0.6%MoM on strength in energy (+5%) and food (up a modest 0.1%).                  

• USD: Above-average strength in core CPI is partly led by transitory components and will likely be looked through by the Fed – this leads US Treasury yields and USD to somewhat counter-intuitively move lower in the minutes following the overnight release. But the most important part of March CPI is another solid increase in owners’ equivalent rent (OER), the key shelter price component of consumer price inflation and the largest share of CPI. While the 0.23% increase is slightly more modest than 0.27% in February, if anything over the last few months, Citi analysts see signs that shelter prices have started to firm a few months earlier than previously expected. Citi analysts expect OER to increase at a pace similar to March over the next 2-3 months, with even firmer price increases into year-end. Based on elements of CPI and PPI, Citi analysts expect a 0.30%MoM increase in core PCE inflation in March, with the year-on-year reading rising to 1.8%. US core PCE remains well on track to overshoot 2% next month in April.  

Some better news out of the euro zone on pace of vaccination

• EUR: Italy is now on track for 500K/day Covid vaccinations from end-April and 45mln vaccine doses to be supplied by end of June, according to the updated government’s vaccine plans. 500K/day for 7 days would imply administering doses to 6% of the population every week – roughly the current US pace. In Spain, vaccination rate has also significantly picked up last week with over 2mln doses (4.3% of the population) compared to the previous week at 2.5% of the population. 6.6% of population fully vaccinated and in Germany, the vaccination pace is also picking up dramatically and appears to be overtaking UK’s pace as vaccine supply broadens and could end up being more complete than the US’s according to polls of people’s willingness to take the jabs. That being said, the Covid-19 ICU occupancy continues to surge in Germany and a harder lockdown will likely be necessary and the longer the decision takes, the later the re-opening will be.

Other data releases overnight 

• EUR: Germany’s ZEW expectations for April come in sharply below consensus at 70.7 (Consensus 79.0, Citi 75.0, prior: 76.6) but the ZEW Current Assessment comes in slightly better than consensus at  -48.8 (Consensus -54.1, Citi -65.0, prior: -61.0). Amid the extended lockdown, investor expectations for Germany drop for the first time since November, when the second lockdown started. However, the current assessment component, a proxy for the perceived output gap, improves to its least bad level since March 2020.

• EUR: Bank of France business sentiment survey - business confidence in the manufacturing sector is up by 4pts in March to a 7-month high of 105 and up from 101 in February (revised up from 99; Consensus 101, Citi 100). There are broad-based gains, driven by the global manufacturing rebound and the vaccination campaign slowly gaining momentum. Restrictions related to third lockdown in the whole of April and likely part of May though will likely impact confidence in coming weeks. Bank of France estimates that third lockdown will push activity 7% below in April. 

• GBP: UK trade balance for February comes in lower than expected at -£7.1bn (vs -£2.4bn expected, -£1.6bn prior) and reinforces tactical cautiousness on GBP. The data is backward looking but adds to the current account rebalancing dynamic that is currently difficult to clearly observe until after the UK economy has meaningfully reopened.     

Week Ahead – key data/ events       

• USD: Retail Sales – Citi: 6.3%, median: 5.4%, prior: -3.0%; Retail Sales ex Auto – Citi: 4.9%, median: 4.8%, prior: -2.7%; Retail Sales ex Auto, Gas – Citi: 4.9%, median: 6.3%, prior: -3.3%; Retail Sales Control Group – Citi: 4.7%, median: 6.9%, prior: -3.5% - Citi analysts expect a strong rebound in retails in March with upside risks seen for many components in the retail control group. This could also help keep prices for various goods elevated after increases over the last year.

• NZD: RBNZ meeting: Citi cash rate forecast; +25bp, Previous; +25bp – the MPC will likely continue to convey a dovish message given the unexpected negative Q4 2020 GDP result of -1.0% is a reminder that the path to complete recovery is not linear.  

• AUD: Australian March Labor Force: Citi 35k, Previous; +88.7k, Citi unemployment rate forecast; 5.6%, Previous; 5.8% - improvements in February/ March suggest another positive month for jobs. April and May data however could exhibit volatility from the end to JobKeeper.  

• SGD: MAS meeting -- With a negative output gap, job market slack and below historical average core CPI, Citi analysts expect MAS to keep band parameters unchanged. However, a slight upward tilt in outlook could bias MAS towards tolerating a slightly higher NEER within the band.  

• CNH: China GDP (%YoY) 1Q: Citi 16.0, Consensus 18.9, Previous 6.5 – Citi analysts maintain their growth forecast for China at 16%YoY for 21Q1 with risks tilted to the upside. Manufacturing and services PMIs both accelerated more than expected in March, pointing to a strengthening in the growth momentum.             

This is an extract from the Daily Currency Update, dated April 14, 2021. Please approach a Citigold Relationship Manager if you would like more information.