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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- The US Federal Reserve left policy on hold, citing low inflation and developments abroad. However, it has signalled that it expects to begin raising rates at some stage this year (in either October or December).

- Markets were in a holding pattern ahead of this evening’s focal FOMC meeting, but bonds subsequently rallied hard and the NZD spiked higher.

- US housing market data were mixed in August, but on balance, housing market fundamentals remain positive.

OUTLOOK

UPCOMING TODAY: We get ANZ Job Ads and ANZ Consumer Confidence today.

CURRENCY: In the aftermath of the Fed decision, markets are likely to remain volatile. This could see larger than normal moves for NZD after ANZ NZ consumer confidence and for AUD after the RBA Stevens testimony.

RATES: Yields will open up lower this morning following the Fed’s decision to leave policy on hold, and the sharp rally in US bonds and the NZD.

REVIEW

CURRENCY: The USD weakened as the FOMC remained on hold and cautious. US data overnight added to the tone, as it generally softened. GBP was relatively unmoved by softer retail sales.

GLOBAL MARKETS OVERVIEW: Markets were largely in a holding pattern ahead of this morning’s focal FOMC meeting. G-10 currencies traded in tight ranges against the USD, although the AUD and NZD underperformed. It was initially a muted session in fixed income markets, with US dataflow eliciting little market reaction. However, yields in the US have subsequently fallen sharply. US and European stocks initially traded in tight ranges, with volumes light ahead of the FOMC. But volatility has increased post-FOMC. Brent and WTI oil prices modestly pared yesterday’s gains, while gold prices were broadly flat before the Fed decision.

ANZ’S ASSESSMENT

NO CHANGE! This morning’s US Federal Reserve meeting was billed as the must see event of the decade, but in the end it was a bit of a fizzer, with policy left on hold and the Fed’s so called "dot plot" projections for the Fed Funds rate lowered by 25bps across the board. In hindsight, I’m sure many a trader is now ruing their decision to get out of bed and come in early (we had a full complement on deck here at 5.45am!). But hang on - not so fast. A lot did happen, and when you have an event that is painted as the must-see thing, and then you don’t see anything, that has news content. For one, we know that the Fed is still keen on lifting the Fed Funds rate, and at the press conference later on, Yellen specifically said that October was a possibility, and that they expect to start hiking this year. So in terms of timing, we are talking about a slight delay, provided things evolve as expected. Beyond the sticker shock of the no-go decision, the implications for this are very limited, and should really only affect the very short end of the US yield curve. Three other things also came out of the statement, and various comments that were made at the press conference that followed. The first was the Fed’s somewhat cautious tone on inflation, which it had noted remained below the Fed’s target (it also noted that inflation expectations had also declined). Consistent with the Fed maintaining "a balanced approach", this strongly suggests that we cannot ignore inflation and only focus on the jobs market. Indeed, while unemployment continues to fall, core PCE inflation - the Fed’s preferred measure - continues to fall too. Second, the Fed has specifically said that it is "monitoring developments abroad", clearly signalling that it is cognisant of the implications of their actions abroad and in markets, which have been volatile. At the margin, this is indicative of a more cautious approach (i.e. more moderate than otherwise tightening). Third, and in our view, most importantly, the Fed has lowered its Fed Funds track and its long term central tendency expectation for the Fed Funds rate by 25bps (from 3.75% to 3.5%). If this were gospel, it would, all else equal, imply that the long term funding rate for owning financial assets has just declined by a quarter of a percent. That should be good for all assets, especially equities and long dated bonds, and especially as it would seem that it is the low inflation environment that prompted the change. If the Fed was backing away because it was looking for activity to improve, or was going soft on inflation, we’d be worried. But it is not, inflation is going soft on the Fed, and since inflation is the biggest bogey man of all for bonds, and is absent, we think it’s bond-positive. That said; market expectations are already well below the Fed’s dot plots anyway, so perhaps we should not over-emphasise this point. But net on net, it is positive for bonds and it should, at the margin add upside pressure to currencies like the NZD that have been relying on a stronger dollar to deliver some depreciation.

OVERNIGHT SPECIFICS AND KEY EVENTS

- The US Federal Reserve left the range for the Fed Funds rate unchanged at 0.00%-0.25%, siding with the market (who was expecting no change), rather than the analyst community (who were expecting a 25bp hike). The so-called "dot plot" projections for the Fed Funds rate were all lowered by 25bps, but the Fed has indicated that it still expects to hike this year (in either October or December).

- US Housing market data were mixed in August. Building permits gained 3.5% m/m to an annual rate of 1170k (mkt: 1159k) in August, up from 1130k in July. Both single family and multi permits recorded solid gains. Meanwhile, housing starts fell 3.8% m/m to a 1126k (mkt: 1160k) annual rate in August from 1161k. The decline in housing starts appears to have been driven by the expiration of tax incentives, which brought housing starts forward in recent months. On balance, conditions in the housing market remain upbeat as reflected by the NAHB survey yesterday, which hit a fresh 10-year high. Indeed, positive demographic fundamentals, low borrowing rates and improving labour market conditions are expected to continue to underpin housing market activity.

- US Initial jobless claims eased to 264k (mkt: 275k) from 275k last week. The four week moving average fell modestly to 273k from 276k. Overall, jobless claims remain low and continue to point to solid non-farm payrolls growth and a further decline in the unemployment rate.

- The headline US Philly Fed survey data were weaker-than-expected, declining to -6.0 (mkt: 5.9) in September from 8.3 in August. However, the details of the survey were more upbeat, with the new orders and employment components recording solid increases. In addition, the six-month outlook also notched a modest increase.

- Markets: Equities have experienced significant volatility since the Fed decision (at 6amNZT), rallying initially, only to come back later as Yellen highlighted the likelihood that the Fed would still hike in 2015. Bond yields fell sharply, and the NZD is up on broad USD weakness.

NZD/USD: STILL WAITING…

The Fed kept rates on hold and delivered a relatively cautious outlook. This saw USD sell off and the NZD/USD higher. US data was also soft, with declines in the Philadelphia Fed, and the preliminary BLS annual revisions being a negative 208k. With the data softening and the Fed more cautious, the USD may be on the back foot for a day or two. However, the offshore rational for Fed caution, is also valid for NZD prospects.

Expected range: 0.6340 - 0.6480

NZD/AUD: JUMPY...

Markets are still expected to be relatively jumpy in the aftermath of the Fed, as such the today’s NZ consumer confidence and the RBA Stevens testimony will mostly likely impact this cross.

Expected range: 0.8760 - 0.8930

NZD/EUR: G3 IMPROVEMENT…

EUR should benefit from this statement as it lowers the potential interest rate differential to the USD, but with the rational for Fed caution being EM focused you would expect the EUR to benefit more than the NZD.

Expected range: 0.5550 - 0.5680

NZD/JPY: STILL NEED FOR SAFETY…

Fed caution suggests there will be an ongoing demand for safety in markets. This should keep supply for NZD/JPY on rallies.

Expected range: 76.00 - 77.80

NZD/GBP: CAUTION BEGETS CAUTION…

Markets will translate Fed caution to the BoE, and that may see GBP underperform over the short term. However, GBP will continue to follow UK data, which remains reasonable.

Expected range: 0.4060 - 0.4160

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