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US data supports the Fed’s current view of raising rates by no more than 50bps

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US data supports the Fed’s current view of raising rates by no more than 50bps   

  • USD: University of Michigan consumer sentiment falls sharply, inflation expectations remain unchanged – the May University of Michigan Consumer Sentiment index (preliminary) drops to 59.1 from April’s 65.2, much lower than consensus looking for 64. The current economic conditions and consumer expectations index both fall to 63.6 (from 69.4) and 56.3 (from 62.5) respectively for the month with the declines broad based - continuing the general downward trend in sentiment seen over the past year. The more important inflation expectations indicators sees the median expected 1Yr ahead inflation rate at 5.4%, little changed over the last three months while the 5-10Yr ahead inflation expectations also remain well anchored at a relatively unchanged 3.0%. The data supports a stabilizing of the Fed’s view of raising rates by no more than 50bps at upcoming meetings, especially in June.  

 

China’s money & credit data shows falling demand and velocity during lockdown      

  • CNH: China’s money & credit data shows lack of demand and velocity during lockdown - China’s aggregate financing drops sharply in April to less than half that of consensus expectations, while M2 growth accelerates to an 18-month high. These may seem at odds with each other but China’s lockdown has caused credit growth to slow due to a drop in demand as business activities ground to a halt. PMI data has also been at lows since February 2020, while some cities like Shanghai have had near zero subway ridership. Supply chains have also been severely disrupted and consumer demand has disappeared aside from basic life needs. In this environment, there is little need for additional financing. The only sectors that still need financing are real estate, but this is also restricted. Trade finance has also slowed, as export growth slows and imports turned negative.
  • CNH: Meanwhile, the boom in money supply is also a result of lockdowns, as what incomes that households and firms still have is left in bank deposits. This means money growth has accelerated even as the velocity of money has likely shrunk substantially in April, given the sharpest economic contraction since February 2020. Taken together, the retreat in credit growth should not be interpreted as policy tightening. To the contrary, the PBOC is actively promoting lending to SMEs and unfinished property projects while cutting the reserve requirement ratio (RRR) in April. When the lockdowns are eventually lifted, there is likely to be another round of strong credit growth.  

 

Week Ahead 

  • USD: Fed speak this week – will 75bp hikes be back on the table? Fed President Williams will participate in a discussion organized by the Mortgage Bankers Association, Bullard is set to speak about economic and monetary policy, Chair Powell to speak on a Wall Street Journal live event, Mester to give the opening speech at a Cleveland Fed event and Evans to discuss the outlook for monetary policy and the economy.

  • USD: US April retail Sales – Citi: 0.6%, median: 0.9%, prior: 0.7%, Retail Sales ex Auto – Citi: 0.1%, median: 0.3%, prior: 1.4%, Retail Sales ex Auto, Gas – Citi: 0.4%, median: 0.8%, prior: 0.7%, Retail Sales Control Group – Citi: 0.4%, median: 0.7%, prior: 0.7% - Citi analysts see a solid increase in topline retail sales for April with data showing a still active consumer but one that is shifting preferences away from goods towards services. 

  • JPY: Japan Customs-Clearance Trade Balance (April): Citi Forecast: -¥1391.2bn NSA; -¥1704.0bn SA, Previous: -¥414.1bn NSA; -¥899.8bn SA – due to surging resource prices and a drop in real exports, Japan’s trade balance after seasonal adjustments probably logged the largest deficit since March 2014. 

  • JPY: Japan Nationwide CPI, Overall (April): Citi Forecast: 2.6% YoY, Previous: 1.2% YoY; Excluding Fresh Food: Citi Forecast: 2.1% YoY, Previous: 0.8% YoY; Ex Fresh Food & Energy: Citi Forecast: 0.7% YoY, Previous: -0.7% YoY – Citi analysts estimate Japan’s core CPI will remain elevated at around 2% YoY to year end. 

  • EUR: Recession Watch: Euro area consumer confidence in focus – UK, Belgium, Netherlands and euro area will release consumer confidence data for May. Citi analysts expect weakness to continue. Euro Area Consumer Confidence, May: Citi Forecast -21.0, Consensus -21.5, Previous -22.0 (Cost of Living Crisis). 

  • GBP: UK Employment, Jan-March: Citi Forecast 46k 3M/3M, Consensus 35k 3M/3M, Previous -12k 3M/3M (participation pushing higher); Unemployment Rate, Jan-March: Citi Forecast 3.8%, Consensus 3.8%, Previous 3.9% (small reduction owing to base effects); Average Weekly Earnings, Jan-March: Citi Forecast 5.5% YY, Consensus 5.4% YY, Previous 4.8% YY (bonus pay still strong (base effects)); UK CPI Inflation, April: Citi Forecast 9.2% YY, Consensus 9.1% YY, Previous 7.0% YY (BoE: 9.1% YY (May MPR)); CPI Core, April: Citi Forecast 6.1% YY, Consensus 6.2% YY, Previous 5.7% YY (services inflation picking up). 

  • GBP: BoE under pressure? – Following a censure from the UK House of Commons, this week will see a plethora of Central Bank speakers - Governor Bailey, Deputy Governor Ramsden, Haskel and Saunders followed by speeches from both Cunliffe and chief economist Pill

  • AUD: Australia April Labor Force Survey: Citi employment forecast; 38k, Previous; 17.9k, Citi unemployment rate forecast; 3.9%, Previous; 4.0%, Citi participation rate forecast; 66.5%, Previous; 66.4% - the risk to the forecast is for a lower unemployment rate, possibly higher employment growth, and a lower participation rate than forecast. Overall, Citi analysts expect this will put further pressure on the RBA to persist with its tightening cycle. 

  • CAD: Canada CPI NSA MoM (Apr) – Citi: 0.6%, median: 0.5%, prior: 1.4%, CPI YoY – Citi: 6.8%, median: 6.7%, prior: 6.7% - following a 1.4%MoM increase in CPI in March, the largest monthly increase since the early 1990s, Citi analysts expect a more moderate 0.6%MoM increase in April but for the Y/Y reading to climb further to 6.8%. Citi analysts expect the risks for inflation to remain titled towards the upside over the coming months. 

 

This is an extract from the Daily Currency Update, dated May 16, 2022. Please approach a Citigold Relationship manager if you would like more information. For the latest CitiFX house views and strategy, please click here -

https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy

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