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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- A raft of Fed speeches kept markets on their toes, but ultimately the comments did little to sway expectations of a December commencement to a Fed rate rise. Evans notably lived up to his dovish bias.

- ECB’s Draghi reiterated concern regarding developments in the current dynamics and the outlook for inflation, maintaining market expectations of a further easing in monetary policy at the ECB’s December meeting.

OUTLOOK

UPCOMING TODAY: A fairly quiet day on the data front, with no data in Australia and NZ non-resident bond holdings data (which will be worth watching, with a jump likely given the role offshore buyers played in the recent syndication of the new NZGS 2033 bond).

CURRENCY: US retail sales and University of Michigan Confidence will set the tone tonight with expectations that USD will continue to find support. EUR may squeeze higher again with Q3 GDP out.

RATES: Expect the local rates to open with a mild downside bias given global moves, and ECB President Draghi’s dovish tone.

REVIEW

CURRENCY: Central bank messages were consistent with themes, but currencies danced to the ‘risk beat’. Safety was bid with EUR, CHF and JPY outperforming and NZD and AUD finding sellers.

GLOBAL MARKETS OVERVIEW: There was a raft of Fed speakers today. Chairman Janet Yellen’s comments covered broader issues in monetary policy and economics, and did not address the current policy debate. St Louis Fed President, James Bullard, stated that there is "no need" to maintain such accommodative monetary policy with near-zero rates because the Fed had largely met its employment and inflation goals, in line with his recent comments. Chicago Fed President Charles Evans lived up to his dovish bias. He is not sufficiently confident in the state of inflation, thinking that we may be well into 2016 before headwinds to inflation fade. He also sees slack remaining in the labour market despite the progress that has been made. He believes that the path of rates is more important than the timing of Fed funds rate rises, and thinks it should be slower than 25bps every other meeting. As such, he favours a "somewhat later liftoff" for policy than many of his colleagues at the Fed, and thinks a fund rate of 0.75% to 1% by the end of 2016 would be appropriate. That said, Evans’ comments earlier in the week suggest that while he’d prefer ‘liftoff’ to occur next year, he is unlikely to dissent should there be a quorum on the FOMC for a hike in December.

ANZ’S ASSESSMENT

CROSS CURRENTS APLENTY! Markets remain "gripped" by a plethora of cross currents, with most now expecting the Fed to "lift-off" next month, yet we are still getting diverse view among FOMC panellists. We are also now getting mixed messages coming out of the ECB (will they or won’t they add to stimulus in December?), and the Bank of Japan maintains it has no plans to expand stimulus despite clearly missing its inflation target. Add to that data overnight showing a sharp decline in Chinese loan growth in October (portending of soft Q4 GDP), USD funding costs over year-end rising sharply (creating tensions in basis swap markets) and all of a sudden there’s a lot to think about. Distilling it all down is going to be tricky but our sense is that saying goodbye to zero interest rates after 7 years will be anything but easy for markets. When all is said and done, US policy normalisation will likely be positive for New Zealand in terms of allowing the NZD to move closer to fair value. Broadly speaking, we should generally be upbeat about the fact that the US economy is in good enough shape to start raising rates. But there seem to be plenty of nervousness in emerging markets and in China, where debt levels have mushroomed. The risk profile certainly suggests that the NZD should be lower.

OVERNIGHT SPECIFICS AND KEY EVENTS

- ECB President Draghi maintained his recent dovish tone during his presentation to the European Parliament today, weighing EUR/USD down in early trade. In his introductory statement, Draghi acknowledged that while the economic recovery in the euro area is progressing, the ECB is concerned about the deterioration in inflation dynamics and subdued price pressures that prevail. Further, he sees "signs of a sustained turnaround in core inflation have somewhat weakened" and that "a sustained normalisation of inflation could take longer than we anticipated in March." These views support market expectations of additional monetary policy accommodation at the upcoming governing council meeting on 3 December. Specifically, Draghi acknowledged that should it view its medium-term price stability objective to be at risk, all instruments available within its mandate would be used, including the extension of its asset purchase programme to beyond its current end-September 2016 date. Recall that a minimum 10bp cut in the deposit rate is expected by markets, and that talk yesterday included the possible extension of asset purchases to include municipal (city and/or region) euro area bonds. Note that the inflation outlook, as presented in the revised Eurosystem staff projections that will accompany the December ECB decision, will be an important input into the ECB’s policy deliberations.

- US initial jobless claims disappointed mildly. Indeed, they were unchanged at 276k in the week of 7 November. Continuing claims rose by 5k to 2174k in the week of 31 October. There was nothing unusual in the data. Meanwhile, JOLTS job openings rose to 5.526mn in September, their second-highest level on record, after falling by more than expected to 5.377mn in August. The result is in line with the strength seen in last week’s NFP report. These data have limited market impact.

- Euro area industrial production was weaker than expected, falling by 0.3% m/m in September (versus expectations of a 0.1% drop). The weakness in September was widespread; production of durable consumer goods fell 3.9%, non-durable consumer goods by 1.0% and capital goods by 0.3%. The weakness underscores the downside risks to growth but with much easing already discounted for the 3 December ECB meeting, the market impact was negligible.

- It was a sea of red ink in equity markets, with the Dow down around 1%. European equity markets fared far worse, with the major bourses there down closer to 2%. Markets seemed to take a "Europe is weak" message from Draghi’s comments, rather than "more easing is coming".

- Core country bond yields were generally down a touch after Draghi’s comments. US Treasury bond yields are also down slightly.

- Commodities were mixed, but energy and metals were generally softer. WTI crude fall almost 3% to its lowest level in 10 weeks (around $41.75).

NZD/USD: RISK UNDER PRESSURE….

Declines in commodity markets continue to weigh on global risk sentiment. Oil continued to decline and markets are taking note of the decline in NZX milk futures. Commodity stocks and commodity currencies are bearing the brunt of pressure. The market is also eyeing global funding costs; - Chinese aggregate financing was lower than expected overnight despite sharp increase in money supply. In all, sentiment looks poised to deteriorate.

Expected range: 0.6440 - 0.6560

NZD/AUD: WOW EMPLOYMENT…

There was little fault to find with Australian employment yesterday, driving NZD/AUD lower. Despite the recent unreliability of this statistic, the result should ensure that this cross remains capped for now.

Expected range: 0.9130 - 0.9220

NZD/EUR: POSITIONING….

The EUR/USD rallied despite a dovish message from ECB president Draghi in his testimony to the EU Economics Committee. Determination remains to do ‘whatever it takes’ - but market is clearly positioned for that eventuality. The focus tonight will be on the Q3 GDP result from Europe, which may further pressure this cross.

Expected range: 0.6010 - 0.6120

NZD/JPY: TRACKING RISK…

We expect this cross to remain under-pressure tracking risk sentiment.

Expected range: 79.40- 80.60

NZD/GBP: BACK TO DOVISH…

After expressing some optimism yesterday, BoE Chief Economist Andy Haldane was back to his normal dovish self, reiterating his view that the next move from the BoE may be a cut. Despite this GBP remained strong.

Expected range: 0.4250 - 0.4330

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