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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: The US April ISM survey keeps attention on USD. Indicators suggest this will increase as forecast. Manufacturing PMIs from China and the UK should also show growth, but NZD should remain in demand.

RATES: Expect NZ interest rates to open lower following global moves.

REVIEW

CURRENCY: USD broadly suffered as the impact on Q1 GDP from winter weather was larger than feared. Forward looking indicators continued to show growth, but the lower base ensured carry remains sought boosting NZD.

GLOBAL MARKETS: US Treasuries rallied strongly on weak US GDP data, with an as-expected FOMC Statement (see below). Given lofty expectations for Friday’s non-farm payrolls (the consensus is for +215k), the risk is growing of a break in yields to the downside, with only good news expected. The USD was also under pressure with the DXY falling to its weakest level for three weeks, and NZD popping above USD0.86 again. In Europe, inflation fell to +0.7% y/y which was not a surprise given Tuesday’s German CPI data. A larger than expected 25k fall in German unemployment had little impact. European equities were mixed, and US equities were up.

KEY THEMES AND VIEWS

KEEP CALM AND CARRY ON: We characterise this morning’s FOMC Statement as "business as usual" with no surprises. If anything, the tone was perhaps mildly less dovish than that portrayed by Yellen in recent speeches. There were minimal changes to the statement itself, but the tweaks were a touch more upbeat - with economic activity confirmed to have picked up after the weather-related slowdown, and household spending "appears to be rising more quickly". But this is largely confirmation that the adverse weather is behind us, and we don't read much into it. The policy action itself was as expected - a US$10bn taper - US$5bn apiece of Treasuries and MBS. One point of note was the lack of dissent from Minneapolis Fed President Kocherlakota. He has said his earlier dissent was "for two reasons". The first reason was that the new guidance weakened the credibility of the Committee’s commitment to target 2 percent inflation. The second reason was that the new guidance fostered policy uncertainty and thereby suppressed economic activity". He has also since said he would, for example, have preferred to have shifted forward guidance on unemployment to 5.5%, as that would have been a clearer sign of the Fed’s commitment to getting (currently low) inflation to 2%. Still, we don’t read too much into the dissent as he also indicated ahead of today that he would withdraw it. The paragraph describing the updating of forward guidance was also dropped, but this is a technicality as it didn't need to be retained. All in all, business as usual for bond markets and the focus goes back on the data.

MAYDAY: US GDP data came in much weaker than expected, registering growth of just 0.1% in Q1 (vs 2.6% in Q4; +1.2% expected). Still, don’t drop your coffee cup just yet, as these numbers are annualised, so in truth it’s like comparing flat actual growth over the quarter against expectations of +0.3% growth. Perhaps more troubling was the paltry 0.3% lift in the employment cost index (ECI), matching earlier record low prints. Remember the Fed has an inflation target, so it can’t lift the Fed Funds rate until inflation starts to rise (core PCE is running at 1.1% and their target is 2%) and given the link between wages and inflation, the Fed has much work yet to do. We may yet see a few more bond bears get flushed out in weeks to come.

NZD/USD: Growth from a lower base…

The US can be summed up by positive forward looking data, but from a much lower base. Strength from the ADP and the Chicago PMI were not enough to offset the weakness evident in Q1 GDP. The Q1 employment cost index also showed no signs of wage prices feeding inflation, rising just 0.3%. This lower base ensures the carry and growth available in NZD remains very attractive.

Expected range: 0.8600 - 0.8650

NZD/AUD: One way traffic…

NZD demand was very evident into month end, pushing the cross higher. Resistance around 0.93 and an absence of data should ensure further gains are harder to come by.

Expected range: 0.9240 - 0.9320

NZD/EUR: European CPI…

European CPI at 0.7% y/y suggests ECB policy action next week is a 50/50 proposition. QE is probably a step too far, but possible actions are a cut in the refinancing rate and leaving the OMO unsterilised. EUR should remain under pressure despite fundamental support continuing.

Expected range: 0.6180 - 0.6260

NZD/JPY: Kiwi demand…

Yen remains range bound as the BoJ again remains on hold, but Kiwi demand is boosting this cross.

Expected range: 87.80 - 88.70

NZD/GBP: Confident, PMI tonight…

British confidence increased, and sterling has found demand. Markets still prefer the carry available in NZD, but the growth in GBP looks equally attractive. The Markit Manufacturing tonight should confirm this theme.

Expected range: 0.5080 - 0.5120

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