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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Global dairy price continue to rise with the GDT-TWI +16.5% and wholemilk powder up 20.6%. In-market prices are now consistent with a milk price forecast of $4.25-$4.50/kg MS.

- Global markets were in a more buoyant mood with core sovereign bond yields and equity markets rising in both Europe and the US.

- US retail sales were better, but industrial production continued to struggle with weakness in the export-orientated sector being weighed down by the strong USD.

OUTLOOK

UPCOMING TODAY: Main focus today will be the New Zealand current account for the second quarter. We expect a slightly larger seasonally adjusted deficit, with the annual balance to remain at 3.6% of GDP

CURRENCY: The Q2 current account will draw some NZD attention back onshore, with GBP expected to find support from employment data and US data continuing with August CPI.

RATES: Local yields are expected to open higher on the back of the solid dairy auction and offshore moves.

REVIEW

CURRENCY: Another night of stasis on currency markets. The USD was broadly stronger, with positive revisions offsetting a weak batch of US data. GBP lost ground despite CPI being on expectation.

GLOBAL MARKETS OVERVIEW: US data was watched overnight for late clues on the US FOMC meeting this week. There continued to be a divergence between healthily consumer spending and industrial production weighed down by the high USD. Nevertheless healthy consumer spending indicates positive domestic momentum and this saw yields rise across the curve, with 10-year Treasuries up 10bps to 2.27% at the time of writing. Equity markets also jumped higher with the major US bourses up 1.3-1.6%. It was a similar theme in Europe too. Commodities had a more mixed session with the CRB largely unchanged. Oil tracked higher, but prices for most other commodities fell.

ANZ’S ASSESSMENT

THE REBOUND. Just like the cure for high prices was higher prices; it looks like the same can be said for low dairy prices. GlobalDairyTrade registered another solid improvement last night with the GDT-TWI +16.5% and WMP +20.6%. While year-to-date prices are tracking in the mid-$3/kg MS range, forward prices are now consistent with a $4.25-$4.50/kg MS forecast (our revised view for now). The main catalyst for further improvement would appear to be China’s higher seasonal requirements, slowing European supply in some key regions and building expectations of lower New Zealand supply in 2015/16. Fonterra did all but cut its milk production forecast further last week and the market continues to price in some risk of an El Nino impact later in the season with the milk powder curve now upward sloping. Outside of a widespread El Nino impact (which is impossible to forecast) we believe milk supply will be down by 5+% due to lower cow numbers and farm management changes. There is a risk the drop could be larger with milk production already running behind last season and a generally wetter, cooler spring impacting on early season production, which will affect the seasonal peak. The flipside is an improved milk price outlook will no doubt bring supplementary feed back into the equation. This combined with a change in product mix and desire by Fonterra to sell a smaller proportion of supply through the GDT platform saw further reductions in GDT powder volumes, which was were the price gains were concentration last night. On this basis the New Zealand supply outlook remains key for price direction. However, it must be remembered lower New Zealand production is not the ideal catalyst for a turnaround as it still impacts on farm profitability. Additionally a milk price in the mid-$4/kg MS - if that were the final outcome - would still be well below par and cashflow for the 2015/16 financial year is still only around the mid-$3/kg MS. It has seen most businesses require seasonal finance of around $1-$2/kg MS to make it through. So while the bottom has been seen, things will remain tough down on the farm for some time to come.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US retail sales rose 0.2% m/m vs a revised 0.7% gain in July. Last month’s softer headline increase was driven by weaker sales at gasoline stations. The control group, which feeds directly into GDP, rose a better than expected 0.4% m/m and the July release was revised up to +0.6% (+0.3%). The data suggest the consumer is in fine fettle, and hasn’t been unsettled by August’s equity volatility or slowdown in China and may now be spending some of the windfall gains from lower oil prices. The data indicate above trend Q3 GDP growth and suggest further improvement in the labour market. Whilst the household sector is doing well, manufacturing is still struggling. August industrial production fell 0.4% following a revised 0.9% gain in July. Manufacturing output was down 0.5% as motor vehicle production fell 6.4% m/m. Production of consumer goods, rose 0.4% m/m as did non-vehicle business equipment.

- Euro area: The July trade surplus (sa) was EUR22.4bn - the second highest monthly surplus on record. On a nsa basis, the trade surplus was EUR31.4bn in July - a record high and up 19% m/m. Exports on this measure were a record EUR185.2bn, as exports to the US rose 23% y/y in Jan-July and to China they rose 6.1% y/y. The current conditions component of the September ZEW index for Germany rose to 67.5 vs 65.7, suggesting investor sentiment around the euro area has settled after the difficulties facing Greece. However, investors are wary of the future with the 6 months expectations index falling to 12.1 vs 25.0 - its lowest this year.

- UK: August inflation data was in line with expectations at 0.0% y/y. The weakness in the index was largely a function of soft fuel prices. There was little in the data to alter the view that the BoE holds - the next move in interest rates will probably be up towards the end of Q1 next year.

- Bond yields were generally higher overnight, with US bonds leading the charge after what was a strong night of data. The bellwether US 10 year Treasury bond yield is up by 10bps compared to where it was yesterday. Perhaps more significantly, the US 2 year bond yield (which tends to move with expectations for the Fed Funds rate) moved sharply higher, clearly showing signs of nervousness ahead of this week’s FOMC meeting (due at 6.00amNZT Friday). European sovereign bond yields were also higher.

- Equities had a good day, with European and North American bourses generally up by at least 1-1.5%. Newswires and commentators attributed the rise to the better overnight dataflow and the rally in oil, which helped boost energy stocks.

- While the broad CRB commodity index was up a touch (around 0.1% at 7.15am NZT), the move reflects an outsized move in oil and gasoline futures (up 1.5% and 2.2% respectively), with only 5 of the 19 constituent commodities in the index up. By sector, grains, industrials, precious metals and softs were all down, but energy and livestock were up.

NZD/USD: SAVED BY REVISIONS…

US headline data was weak overnight, but positive revisions saved the day maintaining solid overall levels. The USD broadly gained; a trend NZD was immune to. This immunity was partially due to further strength from the GDT auction. All else being equal this supports the NZD, but price is only part of the equation, and volumes are lower negating some of the impact.

Expected range: 0.6280 - 0.6360

NZD/AUD: FINDING SUPPORT...

This cross has found some support in the 0.8850 area. Improvements in key export commodities like milk, mirror those in Australian commodities like iron ore. This should lead to this cross remaining range bound.

Expected range: 0.8840 - 0.8960

NZD/EUR: LOW POINT?

German and European confidence looks to be at the low point of the cycle. ZEW expectations dropped sharply - both in Germany and the EU - yet the current situation continued to improve. This was backed up by a very solid July trade balance - record surpluses - and stable Q2 employment growth.

Expected range: 0.5580 - 0.5660

NZD/JPY: UNCHANGED…

The BoJ economic outlook was unchanged and they are confident that their inflation target will be met. JPY strengthened, but quickly reversed.

Expected range: 75.70 - 77.00

NZD/GBP: EMPLOYMENT…

GBP lost ground overnight as inflation remained at 0% y/y. This was expected, but markets were clearly hoping for reasons to buy. Tonight markets will look to employment, historically a GBP supportive release.

Expected range: 0.4080 - 0.4150

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