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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: There is little information to impact markets today so we expect a continuation of recent muted ranges. Australian consumer confidence could add to the body of evidence that suggest the economy is basing.

RATES: Local rates are expected to open lower today in line with global moves.

REVIEW

CURRENCY: NZD was a quiet achiever overnight as local fundamentals remain at the forefront of thinking. USD continues to be little impacted by recent data strength as short end rates remain anchored.

GLOBAL MARKETS: Our London team reported light trading again with many looking to wind down into the end of the year. Broad trends included a mild rally (drop in yield) in core sovereign bond markets, equities traded modestly lower and the USD generally underperformed. Budget negotiations in the US on spending cuts are underway and many remain nervous of a repeat in political brinkmanship from earlier in the year. This seemed to be overshadowing better-than-forecast US economic data. Gold prices gained (+2.2%) on the USD move lower and good buying in Asia.

KEY THEMES AND VIEWS

to taper or not to taper? The clock is ticking down to next week’s FOMC meeting and the question of whether or not tapering will begin remains. Since the September meeting there has been solid job momentum and forward indicators suggest this can be sustained in the short term. Financial conditions have eased with mortgage rates falling. Fed fund futures pricing has moved back to pre-taper talk of late May. Inflation has remained weak and well below the FOMC’s 2% y/y inflation target. On balance, better data and the asset purchase program (APP) losing some of its efficacy has brought forward and increased the chance of a small taper in December. Our global strategy team now believe the FOMC will proceed with a modest taper (probability 55%) of around USD10bn at next week’s meeting. It is a close call though. The strength of the labour market leans in favour of a December start and Bernanke’s speech on 19 November highlighted he favoured more forward guidance over the APP, because the latter may be losing some if its efficacy. However, the weakness in inflation gives the FOMC time to be more convinced of the durability (or unambiguity) of the labour market recovery. If the FOMC does not proceed in December, we don’t think it will be long after and we would expect Bernanke to provide more detail on a tapering framework/timetable at his post Statement press debrief next week.

OTHER EVENTS

- French industrial production was weaker than expected at -0.3% m/m in October. Manufacturing output was flat, indicating the French economy to be stagnant, whilst the PMI data suggested deterioration in November. The French would like a weaker euro as it would take pressure off the Hollande administration, but this seems unlikely to occur as the focus for boosting growth at the Euro Group level is the implementation of economic reforms, not exchange rate depreciation.

- Italian industrial output rose 0.5% m/m in October. In contrast to its French counterpart it increasingly looks like the Italian economy is stabilising. Meanwhile, there was a modest revision to Q3 GDP - revised up to 0.0% vs an initial -0.1% q/q, following eight consecutive quarters of negative economic growth.

NZD/USD: The quiet achiever...

With the market less concerned about prospects for a Fed taper, the NZD has been a quiet achiever. US short rates remain firmly anchored - unlike last time - and US 10 year yields have been unmoved by recent data. Interest rate differentials are a strong driver of currencies and the RBNZ is likely to confirm tomorrow that the yield divergence is only going to grow between the US and New Zealand, which when combined with seasonality, should keep NZD in demand for December

Expected range: 0.8270 - 0.8350

NZD/AUD: Consumer confidence…

Australian housing data showed resilience yesterday and business conditions improved, closing the gap to confidence expectations. Today Australian consumer confidence may also highlight a basing Australian economy which would support AUD ahead of tomorrow’s RBNZ.

Expected range: 0.9040 - 0.9120

NZD/EUR: Italian Q3 GDP…

French and Dutch industrial production missed expectations overnight, but positive surprises in Italy (production and GDP) provided an offset.

Expected range: 0.6020 - 0.6100

NZD/JPY: Consolidation…

Yen and NZD have continued to pace each other in an unusually tight range. We see nothing to change this today.

Expected range: 85.25 - 85.75

NZD/GBP: November GDP estimate…

UK’s trade deficit widened, but offsetting this, the NSIER November GDP estimate ticked higher. Industrial and manufacturing production were both in line with expectations.

Expected range: 0.5040 - 0.5100

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