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NZ Morning Focus

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Fuseworks Media
Fuseworks Media


- Markets finished the week in a reserved fashion.

- RBNZ Governor Wheeler gave an interview with the NZ Herald over the weekend commenting on the economy and monetary policy.


UPCOMING TODAY: BNZ-Business PSI Index for August at 10:30am.

CURRENCY: Today is likely to be the quietest day of what will be a busy week. Softer Chinese data at the weekend should keep a lid on AUD and NZD, but markets are looking forward - to the Fed.

RATES: It was quiet in London, but yields may open under downward pressure.


CURRENCY: Markets consolidated on Friday. A stronger US PPI was offset by weaker Michigan sentiment, leading USD to decline somewhat. EUR found a modicum of support from strong Italian industrial production.

GLOBAL MARKETS OVERVIEW: Markets finished the week in a reserved fashion. US 10-year Treasuries rallied moderately on the back of initial weakness in equity markets and a further slide in oil prices. Core euro area 10-year sovereign bond yields also declined. European bourses closed lower, while US stocks managed to end in positive territory. Oil prices fell further, as supply side concerns continued to dominate market sentiment and after a major bank downgraded its price forecasts.


THE COUNTDOWN HAS BEGUN. It is only a few days now until an event where the outcome has been debated, fought, argued and fretted over by many people for months now. Yes the Rugby World Cup (which kicks off this weekend) fits that bill. But for the majority of financial market participants, the event is of course the FOMC meeting, where it may - for the first time in close to a decade - decide to hike interest rates. To say that views are split on what the outcome will be is an understatement. Markets and analysts are polarised, with a 25bp hike about 30% priced and around half of the 97 commentators surveyed by Bloomberg expecting a hike (ANZ also expects a hike - although it is a view that is finely balanced). But what is adding to the remarkable degree of apprehension and uncertainty is that it is not just the decision itself that is causing intense debate. So too is what a hike (or no hike) could potentially mean for the US economy, the broader global economy, and financial markets. It is fair to say that the full spectrum of views is on offer. Clearly this is the most anticipated Fed meeting in a number of years.

WHEELER IN THE PRESS. Over the weekend, RBNZ Governor Wheeler gave an interview with the NZ Herald discussing the economy and monetary policy. One section of the article no doubt raised a few eyebrows. Following a reference in the article by its author regarding the RBNZ’s forward guidance -"At this stage, some further easing in the OCR seems likely" - the article added that it "has been interpreted by markets as a certain rate cut in October". The article then included a quote from Wheeler - "At this stage we believe that, but there are three qualifiers in the sentence." Now if you interpret the "that" in Wheeler’s quote as meaning an October OCR cut, then he was clearly being quite explicit about the timing of future rate cuts, and far more explicit than what was evident in the MPS. But if instead (as we believe) the "that" was just referring to rate cuts in general (and not October explicitly), then this comment was really just consistent with what the Bank signalled last week. That being, the OCR is going lower, although the timing is unclear and data dependent.


- The headline University of Michigan consumer confidence survey declined to 85.7 (mkt: 91.1) in September from 91.9 in August, likely reflecting the impact on confidence from the recent financial market volatility. Despite the plunge in oil prices, inflation expectations remained firm, with long-term expectations rising marginally to 2.9% from 2.8%. Nonetheless, at the margin this report helps those FOMC members arguing against hiking rates next week.

- The US headline Producer Price Index printed at 0.0% in August, against market expectations of a 0.1% m/m decline. Moreover, the core measure rose 0.3% m/m (mkt: 0.1% m/m) lifting the annual pace of growth to 0.9% from 0.7%. The CPI data published next week will also highlight the tug of war impacting on US inflation. Headline CPI is expected to fall by 0.1 m/m in August following the renewed slide in oil prices and ongoing strength in the USD, leaving the y/y pace of inflation unchanged at 0.2%. Core inflation is expected to rise slightly on a y/y basis (to 1.9% from 1.8% in July), suggesting that domestic price pressures are offsetting the disinflationary impact from the stronger currency and weaker oil prices.

- Chinese economic data for August released over the weekend was mixed. While retail sales growth at 10.8% y/y (mkt: 10.6% y/y) accelerated slightly and exceeded expectations, industrial production at 6.1% y/y (mkt: 6.5% y/y) and fixed asset investment at 10.9% y/y (mkt: 11.2%) were weaker. In fact the latter is the weakest growth in 15 years.

- Bank of England MPC member Forbes noted that "sterling’s recent appreciation could create less drag on import prices and inflation than we might have expected if the levels of pass-through seen after the crisis persisted." She added that "if this plays out, monetary policy would need to be tightened sooner than based on the older models."

- It was a mixed end to the week for global equity markets. In Europe major bourses ended in the red, with the Stoxx 50, DAX and FTSE 100 closing down 1.0%, 0.9% and 0.6% respectively. US stocks also began Friday’s session under pressure, but managed to post a modest rally, ending up between 0.5% and 0.6%.

- Bond yields were generally lower in key markets. Weakness in equities (notwithstanding the late rally in the US) and a further slide in oil prices set the tone. US 10-year Treasury yields finished down 3.4bps to 2.19%, while 10-year yields for core euro area sovereigns finished down around 4bps. There was some modest widening in peripheral spreads to bonds however.

- Despite finishing the session off its lows, the CRB futures index closed down 0.7%. Energy prices were again a drag (-1.4%), with WTI and Brent prices down 2.8% and 1.6% respectively, as supply side concerns continued to dominate market sentiment and after a major bank downgraded its price forecasts. Gold prices fell 0.3%.


The NZD/USD closed last week consolidating after RBNZ-induced falls and should remain capped today, after Chinese data continued to soften at the weekend. This week is likely to be volatile - New Zealand has Q2 GDP and ANZ expects the Fed to embark on the first hiking cycle since 2004.

Expected range: 0.6270 - 0.6360


We expect this cross to be of secondary focus this week. There are risks from NZ Q2 GDP, and also the RBA minutes tomorrow / RBA Stevens on Friday, but we see the Fed as having a dominant impact on both currencies.

Expected range: 0.8850 - 0.8980


On the domestic data front Europe has a quiet week, leaving this cross at the mercy of USD flows.

Expected range: 0.5540 - 0.5630


While markets are not expecting the BoJ to alter policy tomorrow, there is a growing sentiment that the BoJ could do more, keeping a base in this cross.

Expected range: 75.50 - 77.20


While all eyes will be on the USD this week, markets will remember that the BoE is the heir apparent, aka the next to normalise. Thus lessons from the Fed will be applied to GBP. This week’s monthly data - employment, retail sales and CPI - should continue to build the case for normalisation.

Expected range: 0.4060 - 0.4120

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