US, euro area and UK PMIs – continuing rising price pressures the common theme

US, euro area and UK PMIs – continuing rising price pressures the common theme                  

• EUR: Euro area October flash composite PMI falls by 1.9pt to a 6-month low of 54.3 (Mkt. 55.2, Citi 55.0) and within that, the flash services PMI declines 1.7pt, also to a 6-month low of 54.7 (Mkt. 55.4, Citi 55.5) while the flash manufacturing PMI drops by 0.1pt to an 8-month low of 58.5 (Mkt. 57.1, Citi 57.0). The weaker-than-expected report will likely put pressure on the ECB to sharpen its narrative at the November meeting if it wants to push back against aggressive market pricing of rates liftoff vs its dovish interest rate forward guidance (euro area short rates now price some 12bp of ECB rate hikes for 2022 and 37bp in total by end of 2023). The euro area PMI report shows widespread softening in the flash estimates amid further increases in supply bottlenecks and ongoing Covid-19 concerns, while price pressures are rising to survey records according to IHS Markit. This further correction from the 15-year highs seen in July would be consistent with a gradual deceleration in the pace of economic expansion towards the end of summer as euro area GDP closes in on its pre-pandemic level.        

• GBP: UK October PMIs surprise to the upside, supply the marginal constraint - the UK flash October PMIs proves unexpectedly strong, with implied growth the strongest in three months. Service sector activity outpaces manufacturing by the widest margin since February 2009. The UK services PMI accelerates to 58.0 (Citi 54.4, Consensus 54.5) with the roll back of pandemic related restrictions on travel contributing to a pickup in exports. New business volumes also expand at the fastest pace since June – with both business and consumer services driving the rebound. The manufacturing PMI is also above consensus at 57.7 (Citi 56.5, consensus 56.0). Importantly, employment growth remains robust with both the manufacturing and services sector noting increasing challenges filling vacancies. As yet, there is little to no sign of furlough related disruptions in these data. Meanwhile, input price growth continues to accelerate across both manufacturing and services sectors to a record degree. Output prices also accelerate at a record rate.   

• USD: US Markit PMI - prices rise as supply chain issues continue - US services business activity PMI for October comes in a little stronger than expected at 58.2 and September’s 54.9. The employment index rises up to 54.3 after hovering at 50 for the last couple of months and prices indices also continue to rise, with output prices jumping to 68.3 (from 62.4) and input prices moving higher to 76.6. Meanwhile, the October manufacturing PMI comes in at 59.2, a touch below expectations for 60.5 and mildly weaker than the 60.7 recorded in September. Both output and new orders fall by about 4pts to 52.3 and 57.9 respectively and the employment index is flat at 53.2. Supply chain disruptions are more pronounced in the manufacturing data and both input and output price indices are at new record highs of 88.2 and 77.5, respectively. Wages are likely a key part of the increase in input prices for services but demand is also clearly strong.    

Rest of the data releases Friday 

• JPY: Japan core CPI to approach 1% at year-end - with markets watchful about BoJ attention on the more harmful effects of higher energy prices on the Japanese economy, Japan core CPI data is back in focus. In data released Friday, nationwide core CPI increases 0.1% YoY in September, up from no change (0.0% YoY) in August. This is the first positive inflation since March 2020 and driven mainly by a stronger boost from energy prices.  Meanwhile, core CPI excluding special factors rises 0.61% YoY, picking up slightly from a 0.57% YoY increase in August. Citi analysts also estimate Japan core CPI may well rise c1.5% YoY next spring. The question for markets is whether such a push up is enough for Japanese authorities to stem Yen’s fall to limit higher imported inflation.  

• CAD: Canadian retail sales rise 2.1%MoM in August, in line with consensus and Statistics Canada’s early estimate of a 2.0% increase. Ex autos, sales rise 2.8%. Supportive demand through the coming months should be a consequence of notable accumulated savings and a labor market that has fully recovered to pre-COVID levels. 

Week Ahead 

• USD: US GDP Annualized QoQ – Citi: 2.4%, median: 2.6%, prior: 6.7%; Personal Consumption – Citi: 0.7%, median: 0.7%, prior: 12.0%; Core PCE QoQ – Citi: 4.4%, median: 4.4%, prior: 6.1% - Citi analysts expect Q3 to be  the softest quarter of growth in the pandemic recovery period, reflecting the now-higher level of activity, thus with less mechanical reopening upside as well as from supply constraints even if demand remains very strong.  

• USD: US Personal Income – Citi: -0.8%, median: -0.2%, prior: 0.2%; Personal Spending – Citi: 0.7%, median: 0.5%, prior: 0.8%; Core PCE MoM – Citi: 0.1%, median: 0.2%, prior: 0.3%; Core PCE YoY – Citi: 3.6%, median: 3.7%, prior: 3.6% - despite stronger underlying inflation, Citi analysts expect a more modest 0.10% rise in core PCE in Sep with the Y/Y measure remaining at 3.6% though indicating a much stronger underlying pace of inflation. 

• USD: US Durable Goods Orders – Citi: -1.8%, median: -0.5%, prior: 1.8%; Durable Goods Orders ex Trans – Citi: 0.3%, median: 0.4%, prior: 0.3%; Capital Goods Orders Nondefense ex Air – Citi: 0.7%, median: 0.4%, prior: 0.6% - headline durable goods orders should post the largest decline since April 2020, but other sectors outside of autos should show elevated orders. This would be a positive sign for continued production after supply issues ease. 

• USD: Employment Cost Index – Citi: 0.8%, median: 0.8%, prior: 0.7% - Citi analysts expect the employment cost index to rise 0.8%QoQ in Q3 with upside risks. Rising employment costs would be in line with a notable increase in average hourly earnings and a sign of wage pressures broadening across industries.

• EUR: German Ifo Business Climate, Oct – Citi: 97.8, prior: 98.8; Ifo Expectations, Oct – Citi: 96.0, prior: 97.3; Ifo Current Assessment, Oct – Citi: 99.6, prior: 100.4 - the spike in energy prices will likely be a significant headwind, directly for manufacturing and indirectly for services via diminished household disposable incomes. However, Citi analysts also expect some relief after voters reject a left-wing alliance at the German 26 September election.

• EUR: Euro area Economic Sentiment, Oct – Citi: 117.6, prior: 117.8 - growing signs of concerns about the rise in energy prices impacting the household sector – and in some cases the energy-intensive manufacturing sector on top of continued supply bottlenecks, are likely to weigh on sentiment in October. This would still represent a high level of economic confidence though Citi analysts expect the ESI to soften on average during 4Q-21 that translates into a euro area GDP gain of around 0.7% QQ in 4Q-21 after a likely 2.4% QQ gain in 3Q. 

• EUR: Euro area HICP Inflation, Oct Flash – Citi: 3.9% YY, prior: 3.4% YY – Citi analysts estimate whole energy HICP has risen by 5% MM. Core inflation should also edge higher again to 2.0% YY. The team sees euro area inflation peaking in Nov-Dec at 4.1% YY. 

• EUR: Euro area GDP, Preliminary Flash Estimate, 3Q – Citi: 2.4% QQ, 3.8% YY, prior: 2.1% QQ, 14.2% YY - real GDP will likely increase by around 2.4% QQ in 3Q-21, meaning economic activity will be back to within 0.4% of its pre pandemic level before softening significantly to around 0.7% QQ in 4Q-21. Citi analysts now estimate that real GDP will likely catch-up with its pre-pandemic trend by the middle of 2023. 

• AUD: Australian Q3 Headline CPI forecast; 0.8%, Previous; 0.8%; Underlying CPI forecast; 0.5%, Previous; 0.5% - Citi analysts pencil a +0.8% QoQ reading for headline inflation taking the yearly inflation rate to 3.1% while the quarterly estimate of underlying inflation is expected to come in at 1.9% Y/Y, still at the bottom end of the RBA’s 2%-3% target band. Australia’s inflation narrative remains a global outlier and inflation pressures will likely remain contained as broad-based increase in wages are yet to materialize. 

• AUD: Australia September Retail Trade: Citi forecast; 0.5%, Previous; -1.7%;  Q3 Real Retail Trade Citi forecast; -5.1%, Previous; 0.8% - Citi analysts expect the monthly nominal retail trade data to be 0.5% stronger in September with the worst having passed in terms of negative growth for the largest States in lockdown NSW and VIC.

• CAD: Bank of Canada Rate Decision – Citi: 0.25%, median: 0.25%, prior: 0.25% - this week’s BoC meeting is probably not the time for a change in the policy stance as the spread between actual and potential growth (the output gap) is unlikely to close any earlier than the current guidance for H2-2022. This guidance remaining unchanged could be a disappointment to markets pricing over 30bp of rate hikes by the April 2022 meeting. Citi analysts however expect the BoC to further reduce the pace of asset purchases to C$1 billion per week.

• JPY: Japan lower house elections - PM Kishida is advocating the recreation of a substantial middle class and a shift to growth when the election is over (in this regard, how LDP tackles the impact of higher energy costs on Japanese households will be watched). Citi analysts expect an “absolute stable majority” for the ruling coalition. 

• SGD: Singapore CPI (%MoM, NSA) September: Citi 0.1, Consensus 0.3, Prior 0.5; CPI (%YoY): Citi 2.4, Consensus 2.4, Prior 2.4; CPI Core (%YoY): Citi 1.0, Consensus 1.0, Prior 1.1; Singapore Industrial Production (%MoM, SA) September: Citi -0.4, Consensus -1.0, Prior 5.7; Industrial Production (%YoY): Citi -1.2, Consensus -1.8, Prior 11.2. 

• SGD: Singapore MAS Macroeconomic Review – Citi analysts will focus on the upcoming Review as the key release in Singapore for details on MAS’s inflation and growth assumptions, along with clues on further policy action. 

• CNH: China Manufacturing PMI October: Citi 49.1, Prior -- 49.6 – China’s official manufacturing PMI might contract further in Oct-21. Power outages are likely to show a material impact on production as blast furnace operating rates by steel mills weaken nationwide. Short supply and elevated prices of industrial goods might also weigh on new orders, including export orders. Nevertheless, price indices might remain elevated on tight supply. 

This is an extract from the Daily Currency Update, dated October 25, 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 - 

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