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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- German HICP inflation fell 0.2% y/y in September, raising downside risks to the preliminary euro area HICP data due tonight.

- US consumer confidence rose in August showing that they remain upbeat despite heightened financial market volatility.

OUTLOOK

UPCOMING TODAY: Today in the local session there is building permits for August (10.45am), followed by ANZ business confidence for September (1.00pm) and then credit growth data for August (3.00pm). In Australia there is private sector credit for August and building approvals. There are also a number of data releases for Japan throughout the day.

CURRENCY: Month and quarter end should ensure volatility increases. US ADP and Chicago PM, along with UK Q2 GDP marks the start of an increased run of data flow that lasts until the weekend.

RATES: Local yields are likely to open broadly unchanged, although the bias to flatten the curve could remain.

REVIEW

CURRENCY: After escalating in Asia, global ‘risk sentiment’ settled in Europe. Commodity currencies regained some lost ground (AUD, NZD) and safe havens like JPY gave up some of their gains.

GLOBAL MARKETS OVERVIEW: Markets were in a more consolidative mood overnight following the aftermath of Monday night’s noticeable equity market weakness. Influencing markets is the fact that equity market weakness over the last two months and the recent widening in credit spreads has prompted a tightening in monetary conditions - which is being read as a hurdle to the start of policy normalisation. Thus the market is ignoring the guidance from various FOMC members that they favour moving rates up in the fourth quarter if the economy holds its current path. European equities finished slightly down (DAX -0.4%, FSTE -0.8%), while the major US bourses were slightly up, with better consumer confidence data providing stabilisation. US 10-year yields were down a further 4bps to 2.06%, but core European sovereign bond yields were little changed. Commodity prices were up led by oil and grains.

ANZ’S ASSESSMENT

PUMPED UP: NZX whole milk powder future prices took another jump of roughly 4-8% yesterday. This takes prices definitively through the US$3,000/t barrier, which Fonterra mentioned as a key level to deliver its latest milk price forecast of $4.60/kg MS last week. There wasn’t any new information yesterday, so it appears to be market positioning ahead on announced auction volumes latter this week for the next GDT auction (6 Oct). There appears to be an element of fear creeping in around New Zealand supply and further reductions in GDT volumes. Certainly Fonterra reaffirmed last week of lower milk supply with year-to-date production back 8% on the same period last year and an overall forecast decline of 5% now. Ingredient sales (i.e. sales outside GDT) were also stronger than expected in 2014/15 only being back 2%, despite tough market conditions. China was soft, but this was offset by better sales elsewhere particularly into other key Asian markets. However, milk supply did increase by 3% in 2014/15 and GDT auction volumes were lower implying some end of season carryover that will be used to fill some of the emerging gaps this season. The other interesting aspect appears to be a change in pricing strategy for ingredients and other value-add products. This certainly showed up in generally improved margins over the second half of 2014/15, but also in recent trade statistics where average dairy prices have not matched the aggressive dips seen on GDT. So it would appear the strategy of selling less product through GDT and a different pricing strategy off it is helping returns. From a farmers perspective, lower supply is far from the ideal catalyst for a turnaround in prices. But if the price turnaround is large enough then the impact on total revenue could be minimal and perhaps even positive.

OVERNIGHT SPECIFICS AND KEY EVENTS

- Germany: The preliminary September German HICP release came in below expectations, falling 0.2% y/y. The market had anticipated an unchanged outcome. It was the first negative reading since January and unsurprisingly has made the market nervous that the preliminary euro area September HICP release tonight could be negative. The main culprit was lower energy prices, which in Germany fell 9.3% y/y. The important point for markets is that a negative euro area number could lead to heightened calls for additional QE from the ECB.

- US consumer confidence rose to 103.0 in September, up from 101.3 in August.Expectations were for it to fall to 96.8. The strength in confidence, which can be volatile, is encouraging in that it suggests that the financial market volatility in August has not unsettled consumers’ upbeat outlook. Trends in gasoline prices and the labour market have contributed to that buoyancy. Consumer buying intentions also remained firm with more consumers planning to buy homes and cars. Confidence about the labour market was also strong. Those saying that jobs were plentiful rose to 25.1 in Sept vs 22.1 in August. Those viewing business conditions as bad dropped to its lowest level since October 2007.

- Markets were in a more consolidative mood overnight following the aftermath of Monday night’s noticeable equity market weakness. The likes of Glencore’s share price bounced, after reassuring the market that it has no solvency issues. European equities finished slightly down (DAX -0.4%, FSTE -0.3%, Euro Stoxx -0.3%) after beginning the session sharply lower. Major US bourses were slightly in positive territory, with better consumer confidence data providing stabilisation.

- Equity market weakness over the last two months and the recent widening in credit spreads has prompted a tightening in monetary conditions, which is being read as a hurdle to the start of policy normalisation. This has seen a further 4bps decline in US-10 year treasury yields to 2.06%. Core European sovereign bond yields were little changed, but we will be watching European inflation tonight to see if the ECB will be required to increase its policy support once more.

- The CRB index increased by 0.6%, with the lift led by oil and grains. Crude oil prices lifted by 2.3%, with expectations US stocks will decline for the third week in a row. Soybeans led the lift in grain prices with a fall in global oilseed supply. Corn and wheat prices continue to fluctuate. The corn harvest has now commenced in the US with yields being report are very variable. Where this lands will have important implications for milk and meat prices over the come 12 months.

NZD/USD: SETTLING NERVES…

Equity markets nerves settled overnight, allowing commodities and commodity currencies to regain some lost ground. However, US consumer confidence increased against expectations last night, supporting the USD. US ADP employment, the Chicago PM and month and quarter end flows should ensure nerves remain elevated into the weekend.

Expected range: 0.6280 - 0.6400

NZD/AUD: BUSINESS CONFIDENCE...

Australasian data picks up today with ANZ NZ Business Confidence being an important driver today. The key question is, will it follow ANZ Roy Morgan Consumer Confidence and stabilise, or will it continue to decline? Credit aggregate and building approval data is released for both economies today.

Expected range: 0.9000 - 0.9160

NZD/EUR: INFLATION…

European confidence picked up overnight, but both Spanish and German September CPI prints missed expectations, ensuring the ECB will need to remain vigilant, which in turn keeps EUR capped.

Expected range: 0.5600 - 0.5700

NZD/JPY: RELUCTANT TO RALLY…

Despite a settling in ‘risk’ sentiment last night, this cross continues to flash amber, and warns against complacency.

Expected range: 75.4 - 77.00

NZD/GBP: Q2 GDP…

The final read of Q2 GDP is the driver for GBP today, with expectations for a staid release. However, other indicators of the UK economy allow for upside surprises, and GBP/USD remains on solid support.

Expected range: 0.4140 - 0.4220

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