US June University of Michigan inflation expectations fall

US June University of Michigan inflation expectations fall              

• USD: US June (preliminary) University of Michigan inflation expectations sees a drop with 5-10Yr inflation expectations (Fed’s more closely watched series) falling to 2.8% from 3.0% previously and 1Y inflation expectations falling to 4.0% (4.7% expected, 4.6% prior).  The drop stands in contrast to the headline consumer sentiment beat at 83.8 (78.7 expected, 78.8 prior). Fed officials will continue to see the recent inflation gains as mostly transitory and will likely be reassured by the decline in University of Michigan 5-10Yr inflation expectations from 3.0% to 2.8%.           

• USD: Citi analysts however point out that US data released over the last two months presents a picture of stronger and potentially more persistent inflationary pressure, including an unexpectedly tight labor market. The decline in Treasury yields most recently may therefore be more a function of expectations for continued dovish Fed policy than a reassessment of inflation risk (though the Michigan data likely strengthens the hand of Fed doves who view the inflation pickup as transitory).    

• USD: But with inflation expectations falling somewhat, total payrolls gains not entirely impressive, and most of the recent US CPI beat still driven by transitory factors, Citi analysts do not believe the Fed will hint at hinting at taper at their meeting this week. All in, the backdrop remains for the Fed's dovish stance to continue for now that may weigh on USD sentiment. The team however sees markets at risk from a pivot toward less-dovish Fed policy later this year.    

China - May credit data eases fears of faster tightening

• CNH: China’s M2 growth rebounds in May — M2 growth inches up by 0.2ppt to 8.3%YoY, higher than expected (Citi: 7.9%, Mkt: 8.1%), M0 growth improves by 0.3ppt to 5.6%YoY, while M1 growth slows only modestly by 0.1ppt to 6.1%YoY.  New loans also beat market expectations — rising from RMB 1.47trn previously to RMB 1.5trn, higher than expected (Citi: 1.3trn/mkt:1.4trn). 

• CNH: The better than expected M2 growth and credit data out-turn in particular, should ease fears created by the April credit data that led to a sizeable tightening in Citi’s Monetary Conditions Index for China. However, Citi analysts still expect monetary policy tightening may become more pronounced in H2 once the economic recovery is assured. But any monetary policy exit in this round will not be easy given the significant structural changes that have taken place and any eventual policy exit will likely also require a holistic approach so as to avoid unpleasant financial market fall-outs.        

UK: GDP rebound continues, services leading the charge               

• GBP: UK GDP grows 2.3% in April, the fastest monthly rate since July 2020 but still marginally undershooting both Citi and consensus expectations (Citi 2.6% MM, Consensus 2.4%). This leaves UK GDP 3.7% below the pre-pandemic level (Feb-2020) but 1.2% above output in October-2020 (the previous pandemic peak). Even with the undershoot, these data still pose upside risks to the Bank of England’s 4.2% QQ growth forecast for Q2.      

• GBP: UK trade data continues to recover but….UK trade balance for April shows a deficit of just £0.9bn (consensus -£2.5bn). However, goods trade with EU is down 14% and 22% for imports and exports respectively compared to Dec-20. These data are revised extensively and national data from EU economies suggest a stronger recovery in EU exports to UK than imports. Citi analysts expect these effects to become clearer in UK data over coming months, weighing on the net trade balance.

• GBP: Consolidation in UK manufacturing and other industrial production (IP) sees IP fall unexpectedly by 1.3% MM (Consensus 1.2%, Citi  2.3%). But the data is stronger than it looks – and corroborates other soft indicators suggesting a very rapid rebound in UK activity through Q2. However, there is some evidence that global supply disruptions are now beginning to bite more meaningfully.      

Week Ahead 

• USD: Fed FOMC meeting – Citi analysts expect 3 items to likely to dominate the meeting – (1) the 2023 median “dot” will likely be revised up to imply one hike by the end of the year. It takes only 2 dots moving higher for dots to imply ½ a 25bp hike and 3 dots to imply a full hike; (2) Inflation expectations moving higher – Citi analysts forecast Q4/Q4 core PCE inflation at 3% by year-end against consensus for 2.5%. While most Fed officials will still pencil in a significant step-down in inflation next year, the median will if anything likely move higher; (3) At least some talk about tapering - it may be too early to expect a clear signal that the economy is headed toward “substantial further progress” and tapering of asset purchases. However, Fed officials may be ready to admit the economy is making “good progress” and the time may be approaching to more fully discuss how a taper should play out. 

• CHF: SNB Policy Rate Forecast: -0.75% Prior: -0.75% - weak inflation, dovish foreign central banks and an appreciating Franc exert pressure on the SNB to reiterate a dovish message. The Franc remains “highly valued”, negative interest rates and FX interventions remain necessary and inflation and growth forecasts will probably remain largely unchanged at cautious levels.

• AUD: Australia’s May Labor Force Survey: Citi employment forecast; +39.1k, Previous; -30.6k; Citi unemployment rate forecast; 5.5%, Previous; 5.5%; Citi participation rate forecast; 66.1%, Previous; 66.0% - the May labor force survey should provide a cleaner reading on the state of the labor market after the end of JobKeeper in March. The May LFS is important because it will be the crucial data-point ahead of the RBA’s decisions around its QE programs in July - a strong reading in May could mean that the RBA may not roll forward to purchasing the Nov-24 bond. Citi analysts also maintain the RBA is likely to opt for a flexible LSAP program where it will purchase up to $AU100bn. This would give the Bank flexibility to slow its asset purchases if the economy is continuing to outperform.          

This is an extract from the Daily Currency Update, dated June 11, 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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