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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Markets will be relatively quiet today, with little data to note. US FOMC vice chairman Stanley Fischer delivers a speech "The Great Recession: Moving Ahead" in Stockholm, which will be of interest to markets.

RATES: NZ rates are likely to open unchanged to a touch higher, having rallied to 2-mth lows on Friday on escalating geopolitical concerns.

REVIEW

CURRENCY: Chinese export strength reversed the impact of a cautious RBA Statement of Monetary Policy on Friday. Q1 revisions to US unit labour costs were notable, and the CAD weakened after a weak unemployment report.

GLOBAL MARKETS: Friday saw a decent bout of volatility as markets digested US air strikes against ISIS targets but also reports that Russia is seeking to de-escalate the situation in the Ukraine. On the whole, the latter won the sentiment battle as the day wore on. Equities were generally a little weaker in Europe but lifted about 1.1% in the US. US Treasury yields lifted a touch, but UK yields were hit by a disappointing trade balance. Gold retreated. Oil prices fell on continued optimism that US military action will safeguard Iraq supply.

In other commodities, grains were again a sea of red as the US corn crop looks set to redefine "plentiful".

KEY THEMES AND VIEWS

US DATA IN FOCUS AS FED RUNS OUT OF EXCUSES. US data releases for July over the coming week will be important in assessing the degree to which the upward momentum in the economy evident in Q2 has carried over into Q3. In keeping with the Fed's dual mandate, inflation and labour data will be in the spotlight. July retail sales (Wednesday) are expected to rise 0.3% m/m, implying moderate growth in consumer spending is continuing. July industrial production (Friday) is also expected to lift 0.3% m/m, capacity utilisation is expected to have risen further to 79.2 from 79.1, and PPI inflation is expected to level off at 1.8% y/y. Such data would be consistent with further labour market improvement and ANZ's revised call that the FOMC will start to raise rates in late Q1 next year. In our view, the Fed is running out of excuses to not start normalising policy and thereby conditions in financial markets. Asset values need to start being priced off fundamentals again. The monetary transmission mechanism needs to normalise, and cash needs to once again have a price. Rising US rates will be the real test for whether global financial markets have truly healed since 2008 or have just gotten hooked on the stimulants.

OTHER EVENTS AND QUOTES

- China inflation data on expectations. Despite rising pork prices. China's CPI inflation remained unchanged at 2.3% in July. PPI inflation remained negative for the 29th consecutive month, largely due to sluggish coal prices. More positively, iron ore and steel output data suggested improving industrial demand - though no one is suggesting that it is self-sustaining. In general, China's inflation outlook remains mild, but deflation risks may rise in future if growth momentum weakens again. The data will support an accommodative bias in the monetary policy stance over at least the rest of the year.

- Canadian employment was flat in July, when a solid increase had been expected. Full-time jobs fell nearly 60,000.

NZD/USD: USD selling...

US Q2 non-farm productivity was stronger than expected and unit labour costs were weaker, but the real story was in Q1 revisions, which saw unit labour costs revised up to 11.8% from 5.7%, mostly as a result of higher hourly compensation. There are credible signs emerging in the US of labour cost pressures, which has implications for Fed monetary policy.

Expected range: 0.8440- 0.8520

NZD/AUD: Statement of Monetary Policy...

The dovish Australian Statement of Monetary Policy contained downgrades to both inflation and growth forecasts. For now, the RBA remains comfortably on hold, making breaking into a new range difficult for this cross.

Expected range: 0.9100 - 0.9160

NZD/EUR: Positive surprises...

EUR increased on Friday after European data releases had positive surprises for the market, French industrial and manufacturing production was ahead of consensus, and German imports reversed May's drop. However, with the second reads of Q2 GDP and July CPI later this week EUR is unlikely to maintain positive momentum.

Expected range: 0.6280 - 0.6350

NZD/JPY: BoJ...

USD/JPY was unmoved by an unchanged BoJ, and confirmation that the GPIF will increase its domestic equity allocation at the weekend.

Expected range: 85.80 - 86.80

NZD/GBP: BoE...

The GBP will be the focus for the week, with markets looking for signals from the quarterly Inflation Report, the July labour market data, and the second read of Q2 GDP. Markets will be disappointed if the BoE fails to signal changes.

Expected range: 0.5010 - 0.5080

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