-->US rates in focus on Powell testimony and fiscal spending
USD: Fed Chair Powell’s semi-annual testimony to Congress – welcoming higher yields on improved outlook - there is little unexpected in Chair Powell’s testimony overnight which heavily emphasizes the Fed would continue to provide accommodation even as the economic outlook improves. Still notable is Chair Powell not pushing back on earlier pricing of Fed hikes and higher Treasury yields. Most importantly, Chair Powell follows other statements from Fed officials in suggesting that the rise in Treasury yields (including a full rate hike priced in mid-2023, ahead of guidance implied by median “dots”) is due to an improved economic outlook, and is therefore not concerning.
USD: Chair Powell argues that the recent uptrend in equity valuations is also reflective of a strong improvement in earnings, an improving COVID backdrop, and optimism related to broader global economic outlooks. Citi analysts think it is becoming increasingly evident that Fed policy views have the potential to evolve rapidly as growth and inflation outcomes remain on track to exceed Fed forecasts. The team continues to see risks as balanced toward earlier Fed action and maintain a base case for a Q4 tapering of asset purchases.
USD: US stimulus vote on the horizon – likely to validate the recent rise in US yields - House Democrats pass through President Biden’s $1.9tn stimulus package via the House budget committee Monday. The vote comes along party lines, and the next phase will see the stimulus plan advance to the House floor for a formal vote by this weekend at the latest. Notably, the current rendition includes a protracted minimum wage hike. The provision however, is likely to be declined and considered “extraneous” to the reconciliation process (Byrd Rule). A successful bid to remove the provision would likely result in the revised bill returning to the House for an additional vote.
USD: The applicability of the Byrd rule may also weigh on other provisions, and lead to a package that is trimmed relative to the initial $1.9tn sticker price. Nonetheless, Citi analysts expect the final package to arrive at a figure of 1.5tn+ likely to be approved by both houses of Congress prior to the expiration of PUA benefits March 14. Meanwhile, market attention will remain on the direction of US yields during that time, in particular real yields. A knee-jerk move higher could replay similar dynamics in previous weeks where the greenback has been bid amidst sharp upward pushes in US rates.
Key data/ events overnight
- USD: US Conference Board’s consumer confidence index improves again in February, after increasing in January. The Index now stands at 91.3, up from 88.9 in January. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—climbs from 85.5 to 92. But the Expectations Index—based on consumers’ short-term outlook for income, business, and labor market—falls marginally, from 91.2 last month to 90.8 in February.
- GBP: UK unemployment ticks up, challenges remain for H2’2021 - continued (albeit slowing) deterioration - UK headline jobs data deteriorates further in December with total employment falling by 114k on a 3M/3M basis (consensus -30k). Hours worked, having improved over Q3’20, stagnate as new restrictions weigh while headline unemployment rises from 5.0% in the three months to November to 5.1% in December (consensus 5.1%, BoE 5.1%). But resilient bonus pay - total pay in the three months to December grows by 4.7% YY (consensus 4.1%) while regular pay is up 4.1% (consensus 4.0%). Compositional effects are continuing to add around 2.0pp to these data, but this still suggests trend pay growth above inflation. However, Citi analysts expect underlying pay pressures to ease off through 2H -21 and continue to think substantial challenges likely lie ahead as fiscal support is wound down –likely at the end of Q2.
- SGD: MAS normalization may start in April 2022 - Singapore’s January 2021 core CPI comes in line with consensus at -0.2% YoY (consensus: -0.2%, Dec-20: -0.3%) while headline inflation turns positive (0.2%, Dec-20: 0%). MAS maintains its 2021 core and headline forecasts at -0.5 to 0.5% and 0 to 1% respectively while Citi analysts see core CPI rising through 2021, turning positive from February (1QE: 0.1%, 2QE: 0.7%, 2HE: 1 to 1.1%), with 2021 core inflation averaging 0.7%. Citi analysts also revise up their 2021 headline CPI forecast to 0.7% (Previous: 0.3%), with the peak possibly in 2Q21 while MAS/ MTI headline forecasts could be revised upwards by 50-100bps as early as next month. Citi analysts expect the MAS to stand pat in April - with the output gap still negative, the negative fiscal impulse necessitates monetary policy staying accommodative in 2021, especially with core inflation averaging below 1%. Citi analysts estimate that folding in the CPI readings and maintaining the same average 140bps real rate of NEER depreciation seen between March 2020 to January 2021 would likely put the target path of the SGD NEER averaging around 10bps below the mid-point in 1H21, and around 30bps above the mid in 2H21. Citi analysts also think MAS normalization could start in April 2022.
Key events today
NZD: RBNZ OCR Announcement - Citi forecast; unchanged (0.25%), Previous; unchanged (0.25%) - No changes to the cash rate (OCR) or LSAP (bond purchases at NZ$100bn) in February but the RBNZ will likely significantly upgrade its employment and inflation forecasts. Consensus and market pricing has moved in-line with Citi’s long-held view of no negative rates in NZ. But RBNZ’s balance sheet expansion is expected to persist and financial conditions remain accommodative. Citi analysts expect the RBNZ to remain dovish in the February MPS as talk of rate hikes remains premature since NZD remains elevated. However, RBNZ could lift its estimate of the unconstrained OCR though will likely balance that by pushing out its timing on how long it keeps the OCR unchanged.
This is an extract from the Daily Currency Update, dated February 24, 2021. Please approach a Citigold Relationship Manager if you would like more information.