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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- The US September ISM fell to 50.2 vs 51.1 in August, as weak overseas demand weighs on activity.

- The euro area PMI mirrored the flash estimate of 52.0, easing only modestly from August’s 52.3.

- Bond markets treaded water ahead of US non-farm payrolls data tonight, which should help firm the market’s view on "October versus December" in terms of picking the start of Fed hikes.

OUTLOOK

UPCOMING TODAY: Locally we get ANZ Commodity Prices for September, and Australia has August retail sales. But the big ticket item is US non-farm payrolls tonight. The street expects a +201k result and 5.1% unemployment.

CURRENCY: US non-farm payrolls are the focus tonight, and markets are generally quiet prior to the data. AUD will take a lead from retail sales, which drives the Asian session.

RATES: Yields on the bellwether US 10 year Treasury bond were unchanged overnight, hovering above the 2% mark (which they tried to punch through twice). Trading in Kiwi rates was quiet overnight in the London session, and markets are likely to tread water ahead of US data tonight, but the downside bias probably has it given poor positioning across global fixed income.

REVIEW

CURRENCY: It was a night of two halves that resulted in a draw, with most currencies broadly unchanged. First up risk was on the offensive, but faded late in the game as weaker US data saw global sentiment again sour.

GLOBAL MARKETS OVERVIEW: In general it was a quiet start to the new quarter. The weaker than expected ISM in the US pushed EUR/USD higher although ahead of tomorrow’s US non-farm payrolls report, the upside was limited. Continuing an established theme this week, the market continues to trade on the expectations that the Fed won’t raise interest rates and ignored comments from FOMC member Lacker that interest could possibly rise in October. European equity markets failed to take heart from the firmer overnight tone to Asian markets, with the DAX falling 1.6%, CAC 40 down 0.7% and FTSE unchanged. Fixed income markets were little changed.

ANZ’S ASSESSMENT

NON-FARM PAYROLLS IN THE SPOTLIGHT: Questions like "will they or won’t they?" and "October or December" might not get any easier to answer after US labour market data tonight, with the street expecting a so-so +201k gain in payrolls and no change in the unemployment rate. Sure, the US economy has the strength to be able to withstand a 0.25%-0.50% cash rate (they’re all versions of zero at the end of the day), but ahead of such a symbolic act, markets have got themselves in a tangle and are looking at every piece of data for clues as if they emanate from 221B Baker Street. While payrolls are in the spotlight, and is an important data print, our focus is more on the trend of the data and the likely trend (very gradual) in the Fed funds rate, when it starts to move (we expect December). Sure, any change always creates volatility, but with inflation nowhere to be seen, the Fed has less "license" to "get ahead of the curve", and we expect the upcoming tightening cycle to be glacially slow and punctuated by long freezes. That being the case, while we expect a degree of volatility after tonight’s data, chances are it will be something we can comfortably look through.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: The September ISM came in below expectations at 50.2 vs 51.1 in August. That was the third consecutive monthly fall and brings the index to levels that are statistically insignificant from 50. Manufacturing is stagnant and the sub-components of the index point to further potential weakness near term. New orders dropped to 50.1 (51.7), production fell to 51.8 (53.6) and the export index was unchanged at 46.5. Employment eased to 50.5 vs 51.2. Those readings point to a potential drop sub-50 near term. Manufacturing is suffering from weak overseas demand and is soggy globally. The ISM said that its members reported that uncertainty over the Fed and China were contributing to manufacturing weakness. On a brighter note, August construction spending rose 0.7% m/m, driven by a 1.3% increase in private residential construction, and preliminary car sales for September outstripped expectations.

- Euro area: The final September PMI matched the flash estimate of 52.0, down fractionally from August’s 52.3 print. Germany’s PMI fell to 52.3 vs 53.3, but the market will be looking forward to October’s release to see what impact the VW scandal has had. By contrast, the French manufacturing PMI was upgraded to 50.6 vs the flash 50.4 estimate. That was the first reading above 50 in three months. The message for the ECB is that the "soft" data did not pick up a sudden weakening in demand in September, but given the weak HICP data for Sept (-0.1% y/y), the ECB’s bias will remain skewed towards additional easing.

- Government bond yields are generally lower. Yields are lower across the board in Europe and North America compared to this time 24 hours ago, but moves in the key US market were more muted. German bunds and French OATs were the stand out performers (ignoring the periphery), down 5bps apiece. German 10 year bunds are at a 3 month low and are knocking on the door of 0.5%; just as US 10yr Treasury yields are knocking at the door of 2%. So things have hardly gone the way of the consensus’s received wisdom (not "received" from us - we have been bullish), with bond yields edging lower still as we enter Q4.

- Equity markets bathed in a sea of red ink (and we’re tiring of it), with most major European indices down, with the FTSE 100 the notable exception. Weaker European PMIs copped the blame there, while US markets were said to be cautious in the first day’s trading after a horrid quarter.

- In commodity markets, the broad CRB index was down about a third of a percent, led by livestock. Crude oil was little changed, as was gold.

NZD/USD: CONCERNING…

NZD/USD gave up overnight gains as markets interpreted the implications weaker US data to wider global weakness. Risk sentiment soured again, and commodity prices reversed gains. Equities were unable to hang onto early optimism. Tonight’s US non-farm payrolls report is only likely to inject further volatility. However, before that, markets will take note of the non-dairy component of ANZ commodity prices (due out at 1.00pm NZT today).

Expected range: 0.6360 - 0.6480

NZD/AUD: RETAIL SALES...

We expect Australian retail sales to be soft today, which should provide support for this cross.

Expected range: 0.9080 - 0.9170

NZD/EUR: STEADY…

The final read of European PMIs met expectations, with French manufacturing notably revised up to 50.6. This is only the second positive read for French manufacturing in the last 12 months.

Expected range: 0.5660 - 0.5750

NZD/JPY: BOJ DENIALS

The BoJ saw little immediate need for further stimulus, dampening market expectations for next week’s meeting. This saw JPY strengthen.

Expected range: 76.00 - 77.10

NZD/GBP: PMI…

The British manufacturing PMI was stronger than expected, but GBP remained stubbornly under pressure.

Expected range: 0.4200 - 0.4260

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