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US fiscal stimulus – still talking (with caveats) but its Fed Evan’s comments that likely cause the USD selloff overnight

-->US fiscal stimulus – still talking (with caveats) but its Fed Evan’s comments that likely cause the USD selloff overnight                
  • USD: US fiscal stimulus talks continue but a deal still looks elusive - Treasury Secretary Mnuchin and House Speaker Pelosi continue stimulus discussions overnight, seemingly breaking new ground with Pelosi announcing their “values,” are now aligned despite some differences. Pelosi states her goal is the passage of a bill by November 1, implying a bill could be drafted this week. But unconfirmed reports from the New York Times claim "Senator Mitch McConnell, Republican and majority leader has advised the White House not to strike a deal with Speaker Pelosi on a new stimulus bill before election day, cautioning against reaching an agreement that most in the party cannot accept”.      

  • USD: Fed President Evans -  willing to tolerate much lower US real yields – would be comfortable with ~2.5-2.75% inflation for a year or so, seemingly implying a three handle on headline CPI for ~12-months before tightening policy. Evans also posits he is not sure “long-term rates can go much lower” at this time, suggesting the Fed may not be so uncomfortable with a persistent curve-steepening in the near-future. That said, he does note that maturity extension and more QE could be valuable tools “later on” in the recovery.  

 

RBA October meeting minutes signal a likely shift towards QE 

  • AUD: RBA minutes released yesterday reiterate Governor Phil Lowe’s speech last week and show that the Bank maintains a firm easing bias, where it believes further easing could gain more traction as the economy reopens. Minutes confirm the tweak to forward guidance - new guidance signals the Bank is unlikely to increase the cash rate until actual inflation is comfortably within its 2%-3% band, not solely the inflation outlook. Moreover, in a speech yesterday, Assistant Governor Kent also mentions the Bank has used other tools—outside the interest rate channel—to help lower lending rates and that there is “still room to compress short-term rates.”   
  • AUD: Is November the right time to provide more stimulus? Citi analysts still believe there is no rush to cut rates immediately but consensus suggests the RBA may provide additional monetary stimulus given the actual cash rate is trading at around 12-13bps below the 0.25% target. The Minutes, together with the comments from RBA Governor Lowe and Assistant Governor Kent leads to greater investor confidence that the RBA could cut the cash rate to 10bps from 25bps (and related rates such as TFF and 3yr bond yield) and announce an LSAP program at the November meeting. Rising prospects of an easier RBA would likely act as headwinds for AUD even as broader USD weakness remains the bigger story.   

 

Data overnight: Strength in US single-family housing construction      

  • USD: US housing starts come in softer-than-expected, rising moderately to 1415k in September with single-family starts rising to 1108k and building permits up 1553k with single-family permits rising to 1119k. Despite softer-than-expected housing starts, underlying details confirm the strength of single-family starts and permits both rising well-above pre-COVID levels. Citi analysts expect US construction activity will likely remain elevated in coming months and would not be  concerned by a possible pull-back in housing activity towards more-normal levels into 2021.     

 

Week Ahead

  • EUR: Euro Area Consumer Confidence, Oct Flash: Forecast: -15, Prior: -13.9 – Citi analysts expect the effects of rising Covid cases and increasing restrictions on people’s social life to start having an impact on sentiment in October, falling back to July levels. Consumer sentiment had not really taken a as major a hit as business confidence but this means the rebound is also going to be less quick.

  • EUR: Euro area Manufacturing PMI, Oct Flash: Forecast: 54.7, Prior: 53.7; Services PMI, Oct Flash: Forecast: 49.2, Prior: 47.6; Composite PMI, Oct Flash: Forecast: 51.6, Prior: 50.1 – Citi analysts estimate that the euro area flash composite PMI will rebound in October, breaking the negative trend of the past couple of months despite a sharp increase in number of new Covid-19 cases in Europe.      

  • GBP: Manufacturing PMI, Oct Flash: Forecast: 53.8, Prior (Final): 54.1; Services PMI, Oct Flash Forecast: 52.1, Prior (Final): 56.1 - Citi analysts expect manufacturing PMI to remain well in expansionary territory as new orders continue to pick up and also expect the rate of employment reductions to fall somewhat. But amid a renewed increase in Covid cases in the UK, Citi analysts expect the UK services PMI to fall back though still in expansionary territory overall. 
  • GBP: CPI Inflation, Sep: Forecast: 0.4% YY, Prior: 0.2% YY; Core CPI, Sep: Forecast: 1.1% YY, Prior: 0.9% - Conventional seasonal inflation patterns have been heavily disrupted by the outbreak of Covid-19. Earlier in the summer this resulted in a surprisingly strong inflation reading in July but Citi analysts expect these trends to go into reverse in September.
  • GBP: Retail Sales, Sep: Forecast: 0.7% MM, 3.8% YY, Prior: 0.8% MM, 2.8% YY; Ex Auto Fuels, Sep Forecast: 0.5% MM, 4.9% YY, Prior: 0.6% MM, 4.3% YY - Soft data points to strong continued retail demand but this is likely to fade later this year.  
  • AUD: Australia September (prelim) retail sales: Citi forecast: -0.1%, Previous: -4.0% - Retail sales in September are expected to decline slightly following the sharper stepdown in August. That said, retail sales are still strong and Citi analysts’ forecast implies real retail trade will likely rise 5.7% in Q3
  • CAD: CPI NSA MoM (Sep) – Citi: -0.1%, median: NA, prior: -0.1%, CPI YoY – Citi: 0.4%, median: NA, prior: 0.1% - Following a softer than expected print last month, Citi analysts see another -0.1% decline in CPI in September while the Y-o-Y reading should rise to +0.4% due to base effects. The core measures, which have settled around a 1.7% average in recent months, should remain below 2%. 

 

This is is an extract from the Daily Currency Update, dated October 21, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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