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US exceptionalism versus Europe?

-->US exceptionalism versus Europe?     
  • USD: Citi analysts: Do not underestimate how quickly Fed’s current dovish rhetoric could change - MNI sources late last week report that Fed officials are under pressure to define their tolerance for higher inflation much sooner than expected even as the core message from the Fed remains dovish for now. The pressure seems to be coming from regional Fed members. The Fed’s dovish rhetoric may stay in place in Q1, but Citi analysts warn that investors should not underestimate how rapidly Fed rhetoric can shift as the public health and economic background changes. As such, the team maintains its call for the Fed to begin tapering in Q4 2021.         

  • EUR: EU Commission sees a delayed economic recovery - European Commission downgrades its euro zone growth forecast for 2021 to 3.8% from 4.2%, saying its predictions “crucially” hinge on virus containment measures starting to be eased toward the end of Q2’21. The Commission turns more bearish as European governments grapple with new variants of coronavirus and vaccine rollout disruptions. Citi analysts, in their updated pandemic trajectory for the euro area find vaccine supply in the EU is significantly lower than expected for 1Q and the gap is unlikely to be closed before 3Q. In the worst case, EU may not reach herd immunity supply before end-2021.   


Data releases Friday

  • USD: Headline University of Michigan index comes in weaker than expected at 76.2 (80.9 expected, 79.0 prior) but 1Yr inflation expectations rise to 3.3% vs 3.0% prior and  5-10Yrs are flat at 2.7% vs 2.7% prior. The Fed may well look past the near term spike in inflation as a result of base effects but note the message from MNI sources (above) that Fed officials are under pressure to define their tolerance for higher inflation much sooner than expected.  
  • GBP: A resilient end to UK GDP in 2020 but outlook tricky - UK Q4 GDP is up 1.0% QQ, stronger than BoE and consensus expectations (BoE 0.6%, Consensus 0.5%). 2020 GDP is now estimated to have fallen by -9.9%, in line with Citi analysts forecast. Two key concerns – (1) trade data in Q4 seems to have disappointed expectations significantly with exports up by just 0.1% QQ in Q4 – Citi analysts had expected 6.3%; and (2) weak private consumption seems to be spreading increasingly up supply chains to business services, posing wider risks. Where does UK go from here? – Citi analysts expect a sharp drop in UK private consumption in Q1’21 as tighter restrictions weigh. Output should recover strongly in Q2 and Q3, but the team still expects a marked output gap to persist.     


Week Ahead               

  • USD: Fed speak - Fed’s Rosengren takes part in panel discussion, FOMC Meeting Minutes release, Fed’s Brainard speaks at IIF Climate Finance Summit, Fed’s Bostic discusses educational Inequality.    

  • USD: US Retail Sales – Citi: 1.8%, median: 0.8%, prior: -0.7%; Retail Sales ex Auto – Citi: 1.7%, median: 0.8%, prior: -1.4%; Retail Sales ex Auto, Gas – Citi: 1.4%, median: 0.3%, prior: -2.1%; Retail Sales Control Group – Citi: 1.5%, median: 0.7%, prior: -1.9% - Citi analysts expect a strong 1.8% bounce-back in headline retail sales in January after two months of declining sales, with a 1.5% increase in sales in the retail control group even as headwinds remain for services sectors.

  • USD: US Industrial Production – Citi: 0.2%, median: 0.4%, prior: 1.6%; Manufacturing Production – Citi: 0.5%, median: 0.7%, prior: 0.9%; Capacity Utilization – Citi: 74.6%, median: 74.9%, prior: 74.5% - Citi analysts expect more modest increases of 0.2% in industrial production and 0.5% in manufacturing production in January following a larger increase in production in December.

  • USD: PPI Final Demand MoM – Citi: 0.5%, median: 0.4%, prior: 0.3%; PPI Final Demand YoY – Citi: 0.9%, median: 0.8%, prior: 0.8%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.1%; PPI ex Food, Energy YoY – Citi: 1.0%, median: 1.1%, prior: 1.2% - Citi analysts expect a strong increase in PPI final demand in January, led by strength in food and energy prices while excluding food and energy prices and trade services prices, PPI should rise a more modest 0.2%.

  • EUR: Euro area GDP, 4Q, 2nd Flash Estimate Forecast: -0.6% QQ Prior: 12.4% QQ - A likely small upward revision to the GDP data in 4Q-20, from -0.7% QQ in the flash estimate. However, ample losses are still seen as large sectors of the euro area economy remain closed and Citi analysts do not expect much improvement in 1H-21 with another likely decline in 1Q.

  • EUR: German ZEW Expectations, February Forecast: 64.0 Prior: 61.8; ZEW Current Assessment, February Forecast: -69.0 Prior: -66.4 - equity markets, timelier at reflecting investors’ economic expectations – have continued to rise and Citi analysts expect ZEW expectations component to follow. However, Citi analysts expect economies where vaccination progress has been faster, such as the UK and US, to post bigger gains (a potential signal of impending USD and GBP outperformance vs EUR). 

  • EUR: Euro Area: Manufacturing PMI, February Flash 56.0, Prior 54.8; Services PMI, February Flash 47.5, Prior 45.4; Composite PMI, February Flash 49.7, Prior 47.8 – An eighth month of expansion in services while the contraction in manufacturing is likely to continue but at a slower pace. The Composite euro area PMI is likely to post a marginal contraction but is seen at a 4-month high.

  • EUR: German Manufacturing PMI, February Flash Forecast: 57.5 Prior: 57.1; Services PMI, February Flash Forecast: 45.0 Prior: 46.7 – the ongoing lockdown, emergence of virus mutations and disappointing vaccination campaign so far are all likely to weigh on service sector confidence. Citi analysts expect supply disruptions in manufacturing to lead to a higher manufacturing PMI in February.

  • GBP: UK CPI Inflation, January Forecast: 0.7% YY Prior: 0.6% YY; CPI Core, January Forecast: 1.4% YY Prior: 1.4% YY – Citi analysts expect CPI inflation to accelerate further this month due to less price discounting and higher import costs – in part as a result of the acute border disruption observed over recent weeks. Citi analysts expect UK inflation to pick up notably from April this year.

  • GBP: Retail Sales, January Forecast: -6.1% MM, -4.1% YY Prior: -3.8% MM, 2.4% YY; Ex Auto Fuels, January Forecast: -5.4% MM, -0.8% YY Prior: -2.6% MM, 5.6% YY – Citi analysts expect UK retail sales to have been hit hard by the recent national lockdown and expect negative Y/Y growth for the first time since May-20.  

  • GBP: UK Manufacturing PMI, February Flash Forecast: 53.2 Prior (Jan Final): 54.1 - headline UK manufacturing PMI in January was inflated by the 2nd largest increase in supplier lead times on record. Citi analysts expect some pressure to have eased with output stronger but the index still a little weaker.

  • GBP: UK Services PMI, February Flash Forecast: 44.5 Prior (Jan Final): 39.5 - January’s PMI suggested the sharpest decline in output since May 2020 due to tightened lockdown restrictions. This month, Citi analysts expect a rebound, largely reflecting the sequential change in output for many firms is likely to be steady. However the team still expects these data to remain below the 50-no-change mark.

  • AUD: Australia January Labor Force: Citi employment; +20k, Previous; +50k; Citi unemployment rate forecast; 6.6%, Previous; 6.6% - Citi analysts expect labor market to continue recovering in 2021 despite JobKeeper wage subsidy ending in March though excess spare capacity is expected to persist.

  • AUD: Australia January Preliminary Retail Trade - Citi forecast; 1.0%, Previous; -4.1% - Retail trade likely recovered by 1% in January after a 4.1% fall in December. This would imply retail sales are up 11.2% on a year-ago basis, thanks to fiscal stimulus.

  • CAD: Canada CPI NSA MoM (January) – Citi: 0.4%, median: NA, prior: -0.2%; CPI YoY – Citi: 0.9%, median: NA, prior: 0.7% - Following a much weaker than expected headline December print, Citi analysts expect a more solid 0.4%MoM increase in January CPI with the Y/Y reading rising to 0.9%. Meanwhile, continued activity restrictions could keep average core CPI measures on the softer side again in January, although Citi analysts expect a climb back towards the 2% target later in the year.

  • CAD: Canada Retail Sales (December) – Citi: -3.1%, prior: 1.3%; Retail Sales ex Auto – Citi: -2.0%, prior: 2.1% - retail sales are expected to decline in December though is an incomplete picture for consumption in as some sales at large online retailers based outside Canada might not be captured.

  • SGD: Singapore 2021 budget preview - fiscal tapering amidst recovery signs - Citi analysts expect a small fiscal deficit of 2% of GDP in FY21E (FY20E: 14.5% of GDP), with a negative fiscal impulse likely. Targeted measures could be rolled out to “smoothen” the policy cliff, with greater emphasis placed on job creation and economic restructuring.         


This is an extract from the Daily Currency Update, dated February 15, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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