US interest rate sensitive sectors may be feeling the impact of higher rates

US interest rate sensitive sectors may be feeling the impact of higher rates 

• USD: New home sales starting to feel the impact of higher mortgage rates? - US new home sales drop significantly to 763k SAAR in March, though in-line with consensus for 768k SAAR and with Citi’s 755k SAAR. February sales are upwardly revised to 835k from 772k,  implying a 8.6%MoM decrease in March. The median sales price also rises in March by over 3.5%MoM (NSA) – up to over 4% after applying a seasonal adjustment but median prices have been volatile for the last few months, though generally still rising with prices higher by 21%YoY.  Overall, Citi analysts think that higher mortgage rates could be starting to have an impact on housing demand generally as housing sales slow considerably with mortgage rates marching past 4% (now > 5%). As a result, there could be further downside risks to sales in coming months as mortgage rates potentially climb even further. 

• USD: Durable goods orders rise with stronger prices - US durable goods orders rise 0.8%MoM and 1.1% excluding transportation goods in March, roughly in line with expectations for a solid increase. Core capital goods orders also rise 1.0%, while shipments increase a more modest 0.2%. Meanwhile, orders are revised slightly higher in February. Strength is broad based across most components of durable goods and likely in part reflects higher prices for manufactured goods, consistent with continued increases in various goods prices in PPI data and still suggests a solid boost from business equipment to Q1 GDP. Relative weakness in orders in recent months, if there is one, has largely been concentrated in transportation goods, reflecting various supply issues that will likely remain a headwind for this sector with new global supply disruptions due to geopolitical conflicts or new lockdowns in China potentially impacting further, although the extent and timing of any impact remains highly uncertain.  

ECB hawks pushing for a first rate hike in July and positive rates by year-end  

• EUR: There is no reason for rate rises to pause at zero, according to ECB Governing Council member and Latvia central bank governor Kazaks in a Reuters interview Tuesday. He goes on to say that two or three 25 basis point (bp) steps by the end of 2022 being priced in by markets is “quite a reasonable view to take” and suggests “a rate rise in July is possible and reasonable” though even if “it happens in July and September, it is not dramatically different”. Kazaks references a “neutral” deposit rate range of between 1.00% - 1.50% while another Reuters story on Sunday says ECB policymakers are keen for a quick end to asset purchases and an early rate hike, referencing a 1.00%-1.25% “neutral” range, implying cumulative increases of 150-175bp above the current deposit facility rate of -0.5%. Euro rates markets currently price a 23bp hike for July, a cumulative 40bp for September and 79bp for December 2022.  

Week Ahead

• USD: US Personal Income – Citi: 0.5%, median: 0.4%, prior: 0.5%; Personal Spending – Citi: 1.0%, median: 0.6%, prior: 0.2%; Core PCE MoM – Citi: 0.3%, median: 0.3%, prior: 0.4%; Core PCE YoY – Citi: 5.3%, median: 5.3%, prior: 5.4% -  markets will focus their attention on US core PCE inflation in March that should rise 0.29%MoM, a similar increase as in core CPI. While the monthly trend of core PCE inflation should remain strong in coming months, base effects that will likely push Y/Y core CPI lower should also impact core PCE inflation. Still, Citi analysts do not expect a slowdown in core PCE from close to 5.5%YoY to closer to ~5%YoY in the coming months to change the Fed’s assessment that underlying inflationary pressures are still too strong.

• USD: US employment Cost Index – Citi: 1.2%, median: 1.1%, prior: 1.0% - Citi analysts expect a 1.2%QoQ increase in the US employment cost index in Q1 but with upside risks of a possibly even stronger increase. This would be consistent with still-strong wage gains, which have been evident in data like the Atlanta Fed wage tracker. The strength in employment costs have been a key factor highlighting the tightness of the labor market and leading the Fed to turn even more hawkish.

• EUR: Euro Area inflation not peaking yet – energy price likely dropped sharply in April and while the peak in energy inflation may be behind, Citi analysts still expect strong MM prints for food HICP and non-energy goods. Domestically-generated services inflation to remain subdued but overall, headline inflation should tick higher to 7.6% and core to 3.4% YY. Euro Area: HICP, April – Citi Forecast 7.6%YY, Consensus 7.6% YY, Prior 7.5% YY; Core HICP, April – Citi Forecast 3.4%YY, Consensus 3.1% YY, Prior 3.0% YY. 

• JPY: BoJ monetary policy preview: Policy status quo, further yen weakness likely - BoJ holds its policy meeting on April 27-28 amid close scrutiny of the government/BoJ response to sharp yen depreciation. Citi analysts expect policy to be on hold, in which case Yen could well weaken further. This implies growing pressure from various quarters for policy change at the June 16-17 or subsequent policy meetings.

• AUD: Q1 CPI preview – Citi analysts upwardly revise their estimate for Australia’s Q1 CPI, with headline inflation expected to rise 1.8% (an upward revision of 0.2pp), and underlying inflation expected to increase by 1.2% (a revision of 0.3pp). This would imply a yearly headline inflation of 4.7%, with a yearly underlying inflation of 3.4%, above the RBA’s 2-3% target range. The Q1 CPI print appears to be a perfect storm of global supply chain issues, rising commodity prices and domestic idiosyncrasies. 

• SGD: Singapore core CPI (%YoY) March: Citi Forecast 2.3, Consensus 2.5, Prior 2.2; CPI NSA (%MoM): Citi Forecast 0.9, Prior 0.9; CPI (%YoY): Citi 5.0, Consensus 4.6, Prior 4.3.

• CNH: China Manufacturing PMI April: Citi Forecast 49.0, Consensus 48.0, Prior 49.5 - amid the prolonged Shanghai lockdown, Citi analysts expect China’s manufacturing PMI to drop by 0.5ppt to 49 in April. Although blast furnace operating rates by steel mills improved further in April, the impact of Shanghai’s lockdown on supply chain disruption is real. Meanwhile, new orders remain under pressure amid the continued property downturn and prolonged Omicron wave. However, price indices might continue to rise, given higher energy prices.

This is an extract from the Daily Currency Update, dated April 27, 2022. Please approach a Citigold Relationship manager if you would like more information. For the latest CitiFX house views and strategy, please click here -

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