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US exceptionalism continues versus the euro area and UK

-->US exceptionalism continues versus the euro area and UK                
  • USD: US Markit PMIs show continued strength and rising prices - US Markit Manufacturing PMI  declines modestly to 58.5 in the preliminary February release from 59.2 in January but shows input and output prices running at multi-year highs while the Markit Services PMI rises to 58.9. Both February PMI readings remain firmly in expansionary territory and point to a continued US recovery. The data also shows input prices up markedly from 66.8 to 70.3, a new high, while output prices move closer to their peak in October. This supports the Citi analysts view of firming US inflation later in 2021.     

  • Euro Bloc: Euro area PMIs - double-dip recession likely – the composite euro area PMI rises 0.3pt to 48.1 (consensus 48.0) with services activity dropping to a three-month low of 44.7 (consensus 45.9). Meanwhile, manufacturing PMI outperforms, with a 2.9pt gain to three-year high of 57.7 (consensus 54.3). But employment falls for the twelfth successive month as losses in services outweighed gains in manufacturing. COMMENT: Economic activity in the euro area is contracting by more than Citi analysts anticipate and the fourth successive decline in business activity remains consistent with the team’s baseline of a euro area double-dip recession spanning 4Q-20 and 1Q-21.  

  • GBP: UK PMIs suggest Brexit continues to hit hard – the flash UK services PMI prints significantly stronger than consensus at 49.7 (consensus 42.0) and the flash manufacturing PMI remains resilient at 54.9 (consensus 53.1) but among UK manufacturers, the output index falls to a 9-month low of 50.5 – suggesting only a very marginal increase. The manufacturing PMI continues to be inflated by longer supplier delivery times – with reports of acute supply disruption. Exports exhibit further declines, consistent with an unwind of Brexit stockpiling effects. Meanwhile, inflationary pressures remain robust with the strongest increase in average input and selling prices in 24 and 12 months respectively. COMMENT: The data are heavily distorted by the sectoral asymmetric character of the Covid shock. Citi analysts expect the data to improve further in the coming months before potentially stagnating around mid-year as the economic rebound proves disappointing.

  • GBP: UK retail sales fall sharply in January, with the series excluding auto fuel falling by 8.8% MM (consensus -2.1%). The series including auto fuel is also down by 8.2% MM (consensus -3.0%). COMMENT: After the stronger than expected data in Q4, Citi analysts expect UK output in Q1 to disappoint consensus expectations (likely to fall by around 5% in Q1, compared to a consensus fall of 3%). This reflects weaker household consumption, as well as greater degree of trade disruption.



Key data/ events in the week ahead                     

  • USD: This week, attention will likely be on Fed Chair Powell’s semi-annual testimony to Congress amidst rising US inflation expectations and Q1 growth projections. Despite these developments, Citi analysts do not expect a shift to more hawkish. Other Fed speak this week includes Governor Brainard discussing the maximum employment mandate, Governor Clarida discussing the US economic outlook and President Bullard  discussing the US economy and monetary policy outlook.  

  • USD: The US House of representatives is expected to pass its version of a COVID relief bill. However, the bill may include a minimum wage provision that may be ruled out of the reconciliation process by Senate parliamentarians, and is unlikely to attract all 50 Democrat votes in any case. This might delay (though not imperil) passage of the bill by the Senate in the first weeks of March. 

  • USD: Personal Income – Citi: 9.6%, median: 10.0%, prior: 0.6%; Personal Spending – Citi: 2.2%, median: 1.3%, prior: -0.2%; Core PCE YoY – Citi: 1.6%, median: 1.4%, prior: 1.5% - Personal incomes should rise strongly in January, largely reflecting the payout of $600 direct payments to individuals (stimulus checks) legislated in late December. Spending should also rise solidly, reflecting strong goods spending in January. And despite softer-than-expected flat core CPI in January, Citi analysts expect a much stronger increase of 0.3% in core PCE for the second month in a row. US core PCE remains well on track to overshoot 2% around Q2 this year, before settling back closer to, and even a bit above, 2% by the end of the year. 

  • EUR: German Ifo Business Climate, Feb Forecast: 90.5 Prior: 90.1; Ifo Expectations, Feb Forecast: 93.0 Prior: 91.1; Ifo Current Assessment, Feb Forecast: 88.0 Prior: 89.2 - German economy continues to face massive headwinds from the extended lockdown via the slow vaccine roll-out and semiconductor shortages to extremely cold weather for the construction sector. Still, most of these should fade, in particular with significant progress in bringing Covid-19 infections down. 

  • NZD: RBNZ OCR Announcement - Citi forecast; unchanged (0.25%), Previous; unchanged (0.25%) - No changes to the cash rate (OCR) or LSAP (bond purchases at NZ$100bn) in February but the RBNZ will likely significantly upgrade its employment and inflation forecasts. Consensus and market pricing has moved in-line with Citi’s long-held view of no negative rates in NZ. But RBNZ’s balance sheet expansion is expected to persist and financial conditions remain accommodative. Citi analysts expect the RBNZ to remain dovish in the February MPS as talk of rate hikes remains premature since NZD remains elevated. However, RBNZ could lift its estimate of the unconstrained OCR though will likely balance that by pushing out its timing on how long it keeps the OCR unchanged.  

  • CAD: BoC Governor Macklem speaks – Citi analysts expect the speech to touch on “labor market impacts of COVID and sector implications”. The team expects his message to be optimistic, but expressing caution over substantial remaining job losses. More dovish risks could be highlighting downside risks from a stronger CAD or a recently sluggish pace of the vaccine rollout. However, any indication that Q4/Q1 activity is likely to be at least as strong as current BoC forecasts (Citi analysts expect much stronger) would likely solidify expectations for tapering to commence in April


This is an extract from the Daily Currency Update, dated February 22, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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