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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Dairy auction result overnight was particularly weak with the overall index back 7.4%. The result pulls the farm-gate milk price back below current estimates and means tight cash flow is here to stay for 2015/16.

- US Treasuries extended their recent sell-off ahead of a number of Fed speakers and US labour market later this week.

OUTLOOK

UPCOMING TODAY: NZ employment (10.45am) will be the main focal point today. Offshore there is raft of manufacturing and services PMI data over the next 24 hours. There is also the US ADP employment and trade data.

CURRENCY: Q3 labour market data is the focus for the NZD today. For the USD, the tone will be set by the ADP employment report and a number of Fed speakers, including FOMC Chair Yellen.

RATES: Local yields are expected to open higher following global moves.

REVIEW

CURRENCY: The USD advanced through the London session. A weak GDT result weighed on the NZD, while the AUD unwound its post-RBA meeting gains. The CAD, however, found support following a bounce in oil prices.

GLOBAL MARKETS OVERVIEW: US Treasuries extended their recent sell-off, with 10-year yields up 5bps at time of writing. Core and peripheral euro area sovereign bonds consolidated following the sharp sell-off yesterday. It was a fairly subdued session for equity markets, but a late rise saw most major US bourses up 0.2-0.5%. In the commodities space, oil prices rose ahead tomorrow’s US crude oil inventory report.

ANZ’S ASSESSMENT

CHALLENGES REMAIN. Overnight’s dairy auction was very weak with the GDT-TWI back 7.4%. Whole milk powder prices were back 8%. But what this fails to capture is some of the front-end contracts (where the largest volumes were on offer) either failed to sell, or only traded at the opening level (-15% from last auction price) and did not price any higher. Part of the weakness has been linked to Fonterra looking to introduce a new classification for both SMP and WMP in the first December auction. This new product is expected to have a much shorter age profile of 90-120 days. There has been little information provided for the reasoning and other aspects like the expected volumes to be offered. Therefore, it appears the market has taken somewhat of a wait-and-see approach, which affected this auction result. But equally, as we highlighted pre-auction the news-flow since the last auction has generally been price negative. Peak milk volumes from Fonterra indicate production has picked up with the arrival of warmer soil temperatures. Production now appears to be tracking 3-4% behind the same period last year. Earlier on it had been tracking 6-7% behind due to a slow start for spring pasture growth and other farm management changes. While backward looking New Zealand export data for September was disappointing, and combined with the pick-up in milk flows and some auction volumes potentially failing to clear overnight, this will only increase speculation of increasing inventory levels. Offshore European milk supply continues to expand and China’s latest import data for September suggests import demand could be up to 3.5 billion litres (liquid milk equivalents) lower in 2015 for the main commodity products, or nearly 19% of New Zealand’s annual production. For dairy farmers, the concern remains that prices are still quite someway below what Fonterra flagged (US$3,000/t) after its financial results as needed to deliver its current forecast of $4.60/kg MS. By our assumptions, US$3,000/t should deliver something around the high $4/kg MS, as opposed to mid $4/kg MS. But we don’t have full disclosure to all the working assumptions. So if reported correctly it highlights either a worse cost base, higher currency assumption, or slower track in the recovery to US$3,000/t. We suspect it could be a bit of all these things, combined with a touch of conservatism. All up it suggests cash-flow will remain tight for dairy farmers into at least the middle of next year and conservative budgets will continue to dominate as market pricing moves more back into line with our current milk price range of $4.25-$4.50/kg MS.

OVERNIGHT SPECIFICS AND KEY EVENTS

- New Zealand employment data today: The tone of the Q3 labour market figures should be consistent with a further softening in overall conditions. Softer (but not weak) labour demand, in conjunction with still-strong labour supply growth, should see the unemployment rate rise to 6.1%. The risks are skewed towards a higher outcome if the participation rate does not ease modestly off near-record highs as we expect. These softer labour market conditions are hardly surprising considering the labour market ultimately lags the broader business cycle, but it does mean that wage growth looks set to remain modest.

- US: The NY ISM bounced back into expansionary territory of 65.8 and well exceeded expectations (45.7). However, US factory orders remained under pressure, declining 1% in September and there were downward revisions too. This is highlighting a still challenging global backdrop and effect of USD strength.

- UK: The construction PMI eased modestly to 58.8 (mkt: 58.8) in October, from 59.9. Despite the slight moderation, activity remains firmly in expansionary territory and continues to suggest the UK economy remains on a solid footing.

- US bond yields rose, before Wednesday testimony from Federal Reserve Chair Janet Yellen and labour data at the end of the week that may provide clarity on whether the economy is strong enough for the central bank to raise interest rates in December. US 10-year Treasury yields rose 5bps (to 2.2%, a six week high). Core and peripheral euro area sovereign bonds consolidated following the sharp sell-off yesterday.

- It was a fairly subdued session for equity markets until a late flurry saw most major US bourses up 0.2-0.5%.

- The CRB index rose 1.4%, led by energy, industrials and soft commodities (including grain). Brent and WTI crude oil prices rose 3.7% and 4.0% ahead tomorrow’s US crude oil inventory report. Base metals also gained, but iron ore prices continued to slide, falling 0.8% to USD49.1 per tonne.

NZD/USD: GDT AUCTION DISAPPOINTS…

While the USD advanced overnight, the NZD underperformed other G-10 currencies following the weaker-than-expected GDT auction. The NZD is likely to remain under downward pressure during the local session, with risks to the Q3 labour market report skewed to the downside. ADP employment data will be the key driver of the USD tonight, with partial indicators continuing to signal solid underlying momentum in the labour market.

Expected range: 0.6590 - 0.6780

NZD/AUD: DATA DIVERGENCE….

The combination of a less dovish-than-expected RBA and the disappointing GDT auction result propelled this cross lower. Given our expectations for a soft NZ labour market report, the NZD/AUD is likely to remain under downward pressure.

Expected range: 0.9200 - 0.9410

NZD/EUR: A PERIOD OF CONSOLIDATION….

With the single currency remaining under pressure on the prospect of further ECB policy easing, a period of consolidation for NZD/EUR beckons in the near-term.

Expected range: 0.6060 - 0.6140

NZD/JPY: LACKING DRIVERS…

With Japanese news and dataflow limited, the NZD leg will continue to be the key driver for this currency pair.

Expected range: 80.00- 81.80

NZD/GBP: SERVICES PMI IN FOCUS…

The UK services PMI will provide direction to GBP overnight, with the manufacturing and construction PMIs signalling that the economy is continuing to expand at a healthy pace. We expect this cross to grind lower.

Expected range: 0.4280 - 0.4370

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