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NZ Morning Focus

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Fuseworks Media
Fuseworks Media


- US retail sales growth (although undershooting market expectations) flagged sufficient growth in private consumption to support the commencement of a gradual tightening cycle by the Fed in December.

- US consumer confidence jumped and longer-term inflation expectations stabilised.

- Slightly disappointing euro area Q3 GDP growth adds marginally to the case for further monetary policy accommodation from the ECB.


UPCOMING TODAY: October services sector sentiment for New Zealand at 10:30am, with the Q3 retail trade report at 10:45am.

CURRENCY: Increased uncertainty means position reduction is likely to be a factor today, but we expect currency markets to remain relatively resilient overall.

RATES: Our London desk reported a quiet session for kiwi trades at the end of last week. We expect local rates to open with a mild downside bias given global moves and tensions.


CURRENCY: NZD and AUD are only showing a marginal reaction this morning to the weekend events. EUR is likewise resilient, while JPY has seen a bid, as markets seek safety. Soft Q3 GDP was unable to dent EUR last Friday.

GLOBAL MARKETS OVERVIEW: There appeared to be a consolidation theme dominating markets at the end of last week, with a broad-based rally seen on US and European sovereign bond markets - the moves triggered by soft data flow. US and European equities were weighed down by a weaker session in Asia and a softer tone to US and European data. Falls in oil and wider commodity prices continued, with prices for WTI and Brent down around 2%, and gold prices down fractionally. The broader CRB futures index fell 0.9%.


DAIRY IN FOCUS. Dairy auction prices look set for a third consecutive decline in the row. NZX futures are pointing to a substantial drop of 15% for WMP this week (not moving from starting price) and 9% for GDT-TWI. Milkfat prices are expected to rise a touch (although the market is very illiquid), helping compensate somewhat for an expected substantial fall for milk powders. Some of the reasons for the expected decline in powder prices is buyers are largely well stocked, there has been an increase in sellers with older milk powder (less shelf-life) recently, some European SMP has recently been rejected from intervention stocks due to packaging issues and the general lacklustre performance of the rest of the commodity complex. To us, a 15% drop for WMP looks too much. On a valuation basis this would place New Zealand sourced product below Europe and the US again. Additionally, there has been another 20,000 mt reduction in WMP auction volumes due to lower New Zealand supply and many analysts/buyers following the last auction suggested it was a good time to re-establish hedges. We expect a drop in prices this week, but struggle to see it being 15% for WMP. That said further falls in powder prices will place downward pressure on Fonterra’s current milk price forecast of $4.60/kg MS (we are currently at $4.25-$4.50/kg MS). This is expected to be reviewed at the9th December board meeting.


- Fed’s Rosengren: "We have yet to have a real success story with lifting off the zero lower bound and staying off the zero lower bound" …"Let’s make sure this is actually a successful lift-off. Let’s not tighten so much that we weaken the economy and create a negative shock, and let’s make sure we don’t delay for so long that we get built-up inflationary pressures that cause us to react more in the future".

- The Fed’s Mester was broadly supportive of a December ‘lift-off,’ and like other Fed speakers earlier in the week, appears reasonably confident of more progress on the inflation half of the Fed’s dual mandate in 2016 as the influence of the sharp fall in energy prices fades and the USD stabilises.

- US: October retail sales were softer than expected. The important control group rose 0.2% vs expectations of a 0.4% rise, but growth in September was revised to +0.1% vs -0.1%. The October data point to private consumption growth of c.3%. But note that only 30% of private consumption is in retail sales, the rest is in services. Given the weight of services in private consumption, the only real indications we get of that in the retail sales are restaurants. Eating and drinking was up 0.5% m/m, so discretionary spending looks firm. Nevertheless, the markets will try and reprice against the Fed going in December, especially given recent weakness in oil prices. However, these data are unlikely to dissuade the FOMC from going if that is their intention. The consumer is doing ok.

- The University of Michigan consumer confidence rose more than expected to 93.1 in November from 90 in October (exp: 91.5). There were improvements in both the current conditions (104.8 v 102.3) and the expectations (85.6 v 82.1) series. Encouragingly, inflation expectations 5-10yrs ahead have stabilised at 2.5% (although this remains their lowest level since 2002). What the data point to is a very gradual tightening cycle as the Fed governors and presidents have hinted at especially with headline inflation so low.

- Eurozone: Q3 GDP printed a tenth weaker than market expectations at 0.3% q/q and 1.6% y/y. While we don't get a breakdown of growth in this first release, the monthly data flow indicates that growth has been supported by a continued pick up in modest consumer spending and decent momentum in exports. Evidence of the better export performance is provided in the September trade figures also released, which showed a rise in the seasonally adjusted trade surplus to EUR20.1bn from EUR19bn in August, with exports rising by 1.1% m/m. For the ECB, the slightly disappointing GDP result only adds to the case for additional monetary policy accommodation from the ECB at its December meeting, although it is the inflation situation that is a more potent concern for the bank.

- It was a sea of red ink in equity markets. A negative tone started in the Asian session, and this carried over to Europe and the US. Major European bourses were down 0.8% to 1.0%, while US bourses finished 1.1% to 1.5% in the red.

- The softer tone to the data flow and weaker equity markets led to a rally in US and European sovereign bond markets. US 10-year yields finished down 4.6bps, with German, France and UK 10-year yields down 5.0bps, 5.0bps, and 2.8bps respectively.

- Commodity markets also had a weak session. The broad CRB futures index fell 0.9%, with all major sectors declining, led by livestock, grains and soft commodities. Oil prices also fell.


NZD is sensitive to global risk sentiment, and the USD is a source of global safety. However, the USD is highly positioned and sensitive to anything that may delay ‘normalisation’. Thus we are cautious over expecting a ‘typical’ sell-off on flight to safety. The first of the November Fed surveys is tonight, with the New York Empire Manufacturing survey, which is expected to rise. The USD was relatively unaffected by weaker retail sales on Friday.

Expected range: 0.6440 - 0.6600


This cross will remain out of focus early this week. The RBA minutes tomorrow are the largest event, but having already had the statement of monetary policy we expect little new information to drive markets.

Expected range: 0.9100 - 0.9240


Short EUR is one of the markets favoured positions, and while Q3 GDP was weaker than expected on Friday - driving markets talk of further QE - positioning will be important today. ECB President Draghi speaks in Madrid, shortly after the final read of EU October CPI tonight.

Expected range: 0.6010 - 0.6120


Japan Q3 GDP is forecast to fall -0.1% q/q today, which would be the second consecutive quarter of declines. As this week’s BoJ is unlikely to be in play the flight to safety is expected to dominate this cross.

Expected range: 79.00- 80.40


Market expectations for UK CPI and retail sales this week are soft. This leaves the risk for GBP lying toward positive surprises. As we still believe the BoE will be the second central bank to ‘normalise’ the NZD/GBP trend is lower.

Expected range: 0.4220 - 0.4320

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