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US June University of Michigan inflation expectations fall

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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 - 

 https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy

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Ultra-high net worth investors are:

(a) Individuals who have a minimum net worth (or joint net worth with their spouse) of USD 25 million or more

(b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 25 million; or

(c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).

GLOBAL CONSUMER BANK (ASIA PACIFIC AND EMEA):

“Citi analysts” refer to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”), Citi Global Wealth Investments (“CGWI”) and voting members of the Citi Global Investment Committee.
Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document.

The information in this document has been obtained from reports issued by CGMI and CGWI. Such information is based on sources CGMI and CGWI believe to be reliable. CGMI and CGWI, however, do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute CGMI and CGWI's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended
as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits, are not obligations of, or guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware
of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Investment products are not available to US persons. Investors should be aware
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Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For more information, please refer to https://www.citivelocity.com/cvr/eppublic/citi_research_disclosures.

MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

Hong Kong: This communication is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL") and/or Citibank, N.A., Hong Kong Branch (“CBNA HK”, Citibank, N.A. is organized under the laws of U.S.A. with limited liability). CHKL and CBNA HK provide no independent research or analysis in the substance or preparation of this communication. Although information in this communication has been obtained from sources believed to be reliable, CHKL and CBNA HK do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.

This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
has not taken account of the objectives, financial situation or needs of any particular investor. Any person considering an investment should consider the suitability of the investment having regard to their objectives, financial situation and needs,
and should seek independent advice before making an investment decision. You should obtain and consider the relevant product terms and conditions and risk disclosure statement, and consider if it’s suitable for your objectives, financial situation or needs before making any investment decision. Investors are advised to obtain independent legal, financial and taxation advice prior to investing. Investments are not deposits, are not protected by the Deposit Protection Scheme in Hong Kong
and are subject to investment risk including the possible loss of the principal amount invested.

This communication does not constitute the distribution of any information in any jurisdiction in which it is unlawful to distribute such information to any person in such jurisdiction.

CHKL does not provide discretionary portfolio management services.

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the provisions of the Deposit Insurance and Policy Owners’ Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme.

This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors,
as appropriate. This communication does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom
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Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making
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themselves. Although information in this document has been obtained from sources believed to be reliable, CSL does not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from Its use.

CSL does not provide discretionary portfolio management services.

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