US May jobs to be released Friday, pivotal for Fed’s taper decision
- USD: The strength of Friday’s US jobs report for May could mean the difference between a pivot to tapering talk at the June FOMC or, if job growth is weaker than expected, a summer spent waiting for stronger confirmation that the labor market is healing. The US economy is down 8mln jobs relative to pre-pandemic levels and 10mln relative to trend. Citi analysts think a 750K+ number is probably needed to keep June in play for a robust taper discussion and 1mln+ would make that more likely whereas 500K might get the FOMC there by Jackson Hole (Aug 26-28), but weaker readings could have tapering not seriously discussed until Q4 or beyond.
- USD: Citi analysts expect 760K new jobs in May which would make the weaker-than-expected 266K April reading look like the outlier as two out of three months would have added jobs at a 750K+ pace. However, the team admits it could be underestimating the extent to which labor shortages will hold back the number. While a labor shortage is not really a dovish development, in the current context it could keep Fed rhetoric dovish for several more months. This is because some officials would want to wait until September data (released in early October) to ascertain if the end of unemployment benefits and reopening of schools relieves labor supply constraints.
- USD: The Fed has linked tapering more directly to job gains, and less to inflation, but the inflation outlook still matters. With this in mind, any discomfort among Fed officials that the 2021 inflation overshoot can be “looked-through” would on the margin argue for an earlier and/or more aggressive taper. Citi analysts highlight rising survey based expectations as something that could affect Fed thinking – University of Michigan 5-10y expectations rose to 3.1% in the preliminary reading fell back to 3.0% in the final. A reading of 3.5%, particularly if the move higher is swift, could potentially shake officials’ confidence that inflation expectations are low and well anchored.
This week’s Fed speak relatively more circumspect
USD: In contrast to Fed Vice Chair Clarida last week who seems to have moved tapering discussions into higher gear, Governor Brainard earlier this week is more circumspect saying - “Looking through the noise,….the economy is far from our goals and there are risks on both sides. The best way to achieve maximum-employment and average-inflation goals is to be steady and transparent in our outcome-based approach to monetary policy while remaining attentive to evolution of the data and prepared to adjust as needed.” However, Fed President Harker overnight (non voter) says “it may be time to at least think about thinking about” reducing asset purchases.
Data releases overnight – Some downside risks to Australian GDP in H2’2021, upside risks to Canadian GDP during the same period
AUD: Australian GDP returns to pre-covid levels - Australian Q1 headline GDP growth surpasses 1.5% expectations, rising by 1.8% on the back of a solid platform of domestic demand. The most positive aspect of the Q1 National Accounts is that business investment returns and households contribute positively to growth. A rotation towards services consumption seems to be under way as consumer behavior returns to normal patterns after strong spending on goods during the lockdowns in 2020. The outlook, however, still hinges on health outcomes. The current Melbourne lockdown has been extended further, which could increase uncertainty and lower business and consumer sentiment. Consequently, Citi analysts believe the RBA needs to remain firmly committed to dovish policy for the foreseeable future.
CAD: Slightly softer Canadian H1 activity likely to be followed by much stronger H2 - Canada’s real GDP rises 5.6% in Q1, softer than consensus for 6.8%, Citi at 7.2% and BoC’s latest forecast for 7.0% but still a much stronger increase in output than expected a few months ago. Household consumption is up 2.7%, while business investment rises 20.3%. In monthly GDP data releases, GDP by industry rises 1.1% in March but Statistics Canada estimate a 0.8% decline in output in April that suggests downside risks for Q2. However, with sustained re-openings starting in June, Citi analysts expect to see a much stronger H2-2021. And while the 5.6% increase in Q1 GDP is softer than final expectations, the overall pick-up in activity over the quarter is still much stronger than the decline in output initially expected a few months ago. The resilience of economic activity to repeated lockdowns has been a key factor in BoC’s April decision to begin tapering asset purchases and could support further reductions in purchases later in the year.
Data for the remainder of this week
- USD: US May nonfarm payrolls report key input to Fed tapering decision – Citi: 760k, median: 665k, prior: 266k; Private Payrolls – Citi: 700k, median: 600k, prior: 218k; Average Hourly Earnings MoM – Citi: 0.3%, median: 0.2%, prior: 0.7%; Average Hourly Earnings YoY – Citi: 1.7%, median: 1.2%, prior: 0.3%; Unemployment Rate – Citi: 5.9%, median: 5.9%, prior: 6.1% - Citi analysts expect Fed officials will want to see ~750K to keep a robust discussion of tapering over the summer months (June/ July FOMC). A weaker reading (sub-500K) could have them waiting until Jackson Hole in late-Aug.
- USD: May ISM Services – Citi: 63.5, median: 62.6, prior: 62.7 – Citi analysts will pay particular attention to prices components of ISM services, as further price pressures outside of just goods-producing industries would be a sign of potentially more persistent inflation.
- CAD: May Net Change in Employment – Citi: -80k, median: NA, prior: -207.1k; Unemployment Rate – Citi: 8.4%, median: NA, prior: 8.1% - after a 207k decline in Canadian employment in April, employment should decline by a further 80k jobs but with re-openings in some regions set to begin as early as this week, Citi analysts expect the June employment report to reveal substantial job gains.
This is an extract from the Daily Currency Update, dated June 3, 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 -