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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- US core CPI data was stronger-than-expected in September, but manufacturing data remained sluggish.

- ECB Governing Council member Nowotny: the ECB was "clearly missing" its inflation target and that "additional instruments" are required.

- US Crude oil stockpiles recorded their largest weekly increase since April, placing downward pressure on prices.

OUTLOOK

UPCOMING TODAY: NZ Q3 CPI data at 10.45am is the key focus.

CURRENCY: Q3 CPI dominates the NZD calendar today, and risks look skewed lower. The Australian Financial Stability Review will be watched by AUD traders, as will US data tonight.

RATES: Local yields are likely to open a tad higher following global moves.

REVIEW

CURRENCY: NZD continues to surge, with EUR under pressure from an ‘obvious’ case for further EU stimulus. SEK was also weak given they are engaged in QE. US data improved, but not as much as expected.

GLOBAL MARKETS OVERVIEW: The positive moves on Asian equity markets set the tone early in the session, with European stocks opening higher and extending these gains through the day. US equities also advanced early, with financial stocks outperforming on the back of positive earnings results, although gains were pared later in the session. The Euro Stoxx 50 closed 1.5% higher. US indices were also higher. AUD’s continued underperformance was potentially driven by the possibility that other Australian banks may also lift mortgage rates independently of the RBA, implying that the RBA was under more pressure to ease. US Treasuries sold off across the curve on the stronger core CPI data, but softer manufacturing data and comments from New York Fed President Dudley that the economy was slowing capped moves. Core European bond yields edged higher despite the ECB’s Nowotny noting that the ECB was "clearly missing" its inflation target and that "additional instruments" are required. The largest US crude stockpile increase in six months was the catalyst for a sharp decline in Brent and Crude oil prices, while gold prices were up modestly.

ANZ’S ASSESSMENT

LOCAL FOCUS ON CPI DATA TODAY. It seems there is a lot hanging on CPI data today, with markets eager to fine-tune expectations for the RBNZ’s upcoming October OCR decision. At the moment, the market is placing only slim odds on a move (and rightly so given the neutral tone of Wheeler’s recent speech, when he seemed in no hurry to cut). A low CPI print is likely to get the market excited, but the devil is likely to be in the detail given the spate of ‘one-off’ factors likely impacting the Q3 result. We expect a 0.3% result, but we will also be keeping an eye on the RBNZ’s core measures (to be published at 3.00pm), for it is here where the real focus - the trend in core inflation - lies. Stability, or increases in the core inflation measures would help boot thoughts of a near-term rate cut further into touch. The real focus lies offshore, but weakness in the core measures will have ramifications for domestic monetary policy as we go into 2016, even if it doesn’t make an October cut more likely.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US Headline CPI declined -0.2% m/m (mkt: -0.2% m/m), with the energy component declining 4.7% m/m. Core inflation was more robust, however, rising 0.2% m/m (mkt: 0.1%) lifting the annual pace of core inflation to 1.9% from 1.8%. Within the core component, residential rents (0.4% m/m), health services (0.3% m/m) and communications (0.3% m/m) all recorded solid rises. The further pick-up in core inflation continues to suggest reduced spare capacity in the economy is offsetting some of the impacts from the stronger USD and lower energy prices.

- The Philadelphia Fed survey was weaker than expected, with the headline number printing at -4.5 (mkt: -2.0) in October. However, the details were softer than implied by the headline number, with both the new orders and employment components declining sharply. However, the employment component is volatile and other partial indicators of the labour market (i.e. Jobless claims) continue to paint a relatively positive picture of conditions in the labour market. The Empire Fed survey also disappointed market expectations at -11.4 (mkt: -8.0) in October and combined with the Philadelphia Fed survey suggests activity in the manufacturing sector remains sluggish.

- Initial jobless claims declined to 255k (mkt: 270k) from 262k, which dragged the 4-week moving average to 265k from 267k - the lowest level since 1973. Overall, jobless claims continue to suggest that underlying conditions in the labour market remain solid, consistent with solid growth in non-farm payrolls growth and further declines in the unemployment rate.

- New York Fed President Dudley reaffirmed that if the US economy evolves in line with his forecasts then he would "favour lifting off later this year." However, a high degree of uncertainty remains around these forecasts. Dudley noted that recent dataflow suggested that the US economy was "slowing" and the recent developments in China and emerging market economies could have a negative impact on the US economy.

- Equities rebounded, with all major markets in Europe and all major US indices up on the day. US markets were buoyed by a rebound in bank shares after some better than expected earnings data from at least one major financial.

- Bond yields are generally higher across Europe and in the US, with markets unwinding some of yesterday’s sharp fall following slightly stronger than expected US core CPI data.

- It was another mixed session for commodities. The broad CRB futures index was down around 0.5% as at 6.45am NZT, with losers outnumbering gainers 12-7. Energy was the biggest loser, with WTI crude futures down around 50 cents to $46.14 at 6.45am. Gold prices rose slightly

NZD/USD: CAN CPI ARREST GAINS?

The kiwi is having no problems breaking up at the moment as it breaks through the second range in successive weeks. The resistance levels below 0.68 have been definitively broken and turn into support. US data improved overnight, with US Jobless claims matching the July record low - the lowest level since November 1973. However despite improving, both the NY Empire and Philadelphia Fed surveys missed expectations. Pricing risks for Q3 CPI today look skewed lower given the elevated NZD levels.

Expected range: 0.6760 - 0.6920

NZD/AUD: RBA FSR...

Markets look more likely to react to a weak NZ Q3 CPI rather than a strong one, leaving pricing risks skewed. The RBA FSR will also merit attention, given the recent focus on housing and bank capital increases in Australia.

Expected range: 0.9260 - 0.9440

NZD/EUR: "OBVIOUS"…

ECB Governing Council member Nowotny said "in my view it is quite obvious that in the current economic situation additional sets of instruments are necessary". This saw EUR weaken and this cross break back above 0.60.

Expected range: 0.5980 - 0.6080

NZD/JPY: STILL WARNING…

NZD’s general buoyancy is being tempered by demand for the ‘safe’ JPY. This does raise flags about the permanence of NZD strength.

Expected range: 80.20- 82.20

NZD/GBP: ‘NORMALISATION’…

Markets continue to push pricing for UK ‘normalisation’ further into the future relatively weakening GBP strength.

Expected range: 0.4360 - 0.4460

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