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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Markets traded in fairly tight ranges with no major data releases and ahead of the Veterans Day holiday in the US on Wednesday.

- RBNZ Financial Stability Report today is expected to note the financial system being in reasonable shape, although risks around housing, dairy, China and the global financial backdrop are expected to be discussed.

OUTLOOK

UPCOMING TODAY: Locally the focus will be on the RBNZ Financial Stability Report at (9.00 am). Offshore the focus will be on retail sales and industrial production in China for October.

CURRENCY: The RBNZ FSR is expected to show a sound system but with risks. The NZD should be relatively unmoved by this assessment. China is the big event today with the October data run and ‘Singles day’ sales the events to watch for global risk sentiment.

RATES: Following moves in London, the local curve should open lower and flatter.

REVIEW

CURRENCY: EUR fell as politics reared its head in Europe again. Generally markets continued consolidate on the change in US expectations.

GLOBAL MARKETS OVERVIEW: Markets traded in fairly tight ranges with no major data releases and ahead of the Veterans Day holiday in the US on Wednesday. Most major equity bourses were little changed, but weaker Chinese data (trade over weekend and CPI/PPI yesterday) and market conviction of a Fed rate hike in December continues to weigh on sentiment. US and major European sovereign bond yields declined due weaker inflationary pressures in China. German, French and Italian 10-year yields declined 4-6bps on industrial production figures for the latter two, which showed euro-zone industrial growth might have slowed in Q3. Commodity prices were mixed with crude oil up, but grains down.

ANZ’S ASSESSMENT

STILL SEARCHING. Domestic and global inflation pressures remained benign yesterday signalling the risk profile for the RBNZ remains tilted toward further OCR cuts. Our domestic Monthly Inflation Gauge posted a 0.1% increase in October and was up just 0.4% in the three months to October. Both are sub-par for this time of year. Meanwhile China’s deflationary pressure intensified in October as CPI inflation eased further (1.3% y/y) and the PPI (-5.9% y/y) remained sharply negative. On a m/m basis, China’s CPI fell 0.3%, compared with a 0.1% increase in September, indicating the momentum of consumer price rises is petering out. The decline in the PPI was the same as the previous month, but continues to reflect weak domestic demand and the drop in global commodity prices. Indeed the likes of the mining PPI is back 20.8% y/y in October. All up, our Chinese team believe the door remains wide open for the PBoC to further cut the RRR and benchmark interest rates too.

FINANCIAL STABILITY REPORT. While the report will no doubt reiterate that the financial system is generally sound, it is the discussion on the various risks and vulnerabilities facing the economy, and the degree of concern the RBNZ is showing with regard to those risks, that will be of most interest. At its most recent Report in May, the RBNZ singled out three specific areas of risk: High household debt and sharply rising Auckland house prices (from already elevated levels); dairy sector stress, with low incomes meeting elevated (albeit concentrated) levels of debt; and loose global financial conditions and the prospect that a tightening could prove destabilising for financial markets and asset prices. We have little doubt that these factors will remain concerns. In fact, it is possible that the degree of concern could have increased. In particular, while the Auckland housing market does look to have plateaued of late, prices remain extremely stretched on a number of metrics, and household debt relative to income has lifted further recently, sitting at 155%. What’s more, Auckland house price strength is broadening to other regions and so it will be interesting to see how the RBNZ is interpreting that in the face of its recently announced relaxation of non-Auckland LVR restrictions. Indeed, we will be scouring the report for any hints additional macro-prudential measures are being considered. With regard to the dairy sector, troubles remain intense, with the RBNZ recently noting caution over the sustainability over the recent bounce in milk prices. And finally, loose global financial conditions are clearly topical as Fed lift-off approaches. But it is quite possible that other factors are also singled out. In fact, we would not be surprised if the RBNZ made more specific mention of Chinese developments too.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US NFIB Small Business Optimism survey was unchanged at 96.1 in October, a level historically consistent with a US GDP growth rate of 2% to 2.5%.

- Europe: French and Italian industrial production for September added to evidence that euro-zone industrial growth might have slowed in Q3 from its already weak pace. That said, French industrial production still surprised on the upside, although this was largely due to a strong rise in the volatile energy production. The core manufacturing component flat-lined. Meanwhile Italian industrial production disappointed expectations rising 0.2% (exp. 0.5%).

- Equity markets were mixed, but traded fairly tight ranges. The major European bourses opened on the back foot following the weaker CPI/PPI data from China. However, they mainly finished flat to slightly up with the Euro Stoxx and DAX both up 0.2%. The FTSE 100 finished lower though (0.3%). In the US, the major indexes were modestly lower at the time if writing, with the weaker Chinese data and market conviction of a Fed rate hike in December continuing to weigh on sentiment.

- US and major European sovereign bond yields declined due weaker inflationary pressures in China. US 10-year Treasury yields decline 3bps and the chance of a December hike has been trimmed a touch to 64%. German, French and Italian 10-year yields declined 4-6bps on industrial production figures for the latter two, which showed euro-zone industrial growth might have slowed in Q3.

- Commodity prices were mixed, with crude oil and soft commodities leading the increase. The jump in soft commodities was led by sugar and orange juice. Raw sugar headed for the biggest one-day rally in more than two months on mounting concern that diminishing yields in Brazil, the top producer, will further shrink global supplies. Orange juice rose due to an expected 5% decline in US production. However, grain prices (2-3%) declined after the USDA crop production report for November showed an increase in soybean and corn production.

NZD/USD: CHINA DRIVING RISK….

This cross was stable despite marginally weaker US data. The Veterans Day holiday in the US tonight should see USD stable. NZD and broader risk will be driven by Chinese data today. The China October data releases are expected to continue to show stabilisation. Markets are focusing on the Singles Day sales in China as a barometer for consumer demand.

Expected range: 0.6460 - 0.6570

NZD/AUD: RISKS TO THE ECONOMY....

Australian Business Confidence dipped yesterday and despite strong home credit growth, investment lending dropped steeply, leading to NZD outperformance. The RBNZ FSR should cap this as it will keep markets focused on risks to the NZ economy.

Expected range: 0.9210 - 0.9320

NZD/EUR: POLITICS….

Politics is rearing its head in Europe again. A day after Greece was given an extension in order to unlock bailout funds the Portuguese Government has fallen after just 6 weeks in power. Bond spreads are wider, but for the moment the impact on EUR has been minimal.

Expected range: 0.6080 - 0.6180

NZD/JPY: DOWNSIDE RISKS…

The RBNZ FSR and China releases present downside tail risks to NZD/JPY, but we expect this cross to ultimately remain relatively stable.

Expected range: 79.80- 81.40

NZD/GBP: WAGES…

The UK employment report tonight should keep GBP from declining as we expect it to remain strong. But politics is playing its part in suppressing GBP after UK PM David Cameron outlined reforms that are needed to keep the UK in Europe.

Expected range: 0.4260 - 0.4360

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