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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

 Markets were fairly calm, with only a limited response to Friday night’s tragic terrorist events in Paris.

 Disappointing NY Fed survey with manufacturing continuing to struggle due to USD strength.

OUTLOOK

UPCOMING TODAY: Locally we get the Q4 RBNZ Inflation Expectations survey. Across the Tasman, we get the RBA Minutes.

CURRENCY: GBP and USD will likely be reactive to their respective inflation reads. AUD follows the RBA minutes, while NZD watches the GDT auction and RBNZ inflation expectations.

RATES: Expect the local interest rate market to open broadly unchanged following a reasonably calm night of trading in London and New York.

REVIEW

CURRENCY: Markets were resilient overnight. AUD and NZD traded lower following key commodities (oil). JPY weakened as markets focused on the second quarter of negative growth, and ‘safe-haven’ requirements eased.

GLOBAL MARKETS OVERVIEW: There was a muted response to Friday night’s awful events in Paris. Tragically, too many of these events have taken place in recent years, and as such, the market reaction has become less pronounced. Moreover, the broader themes in Europe have not changed. True, French confidence will likely take a hit and consumption may be slightly weaker in the near term (with tourism also potentially affected), but the expected policy actions of the ECB have not changed. Equity markets were little changed overnight. On FX markets, the initial move during Asian trading in USD/JPY has since unwound. AUD and NZD weakened during the London session on the back of broader USD strength, and there was a notable rise in USD/CAD following the release of disappointing Canadian manufacturing data. Most European sovereign bond markets rallied, as did the UST market. The initial rise in gold prices on the back of safe haven flows has since been almost entirely unwound, with mixed moves in oil markets.

ANZ’S ASSESSMENT

A QUESTION OF BALANCE. After what was a fairly quiet night in markets, today we echo comments made in yesterday’s Market Focus and Fixed Income Weekly around what is now a much more balanced outlook. By that, we mean that we can still see risks around the outlook, but whereas a few weeks ago the risk profile seemed heavily skewed one way (lower), we can now see upside risks to our central forecasts. Consider, for example tick-up in our confidence composite, which has been driven by improvements in both business and consumer confidence. Driving the former is services sector optimism, with our expectation that the services sector will drive the firming in economic activity from Q3 of this year. Of note, our composite confidence indicator is now pointing to GDP growth north of 3% again by early next year. We’re not pencilling in something that strong but it needs acknowledgement. In terms of what’s behind the improvement - catalysts include the 75bps of OCR cuts delivered since June, a long construction sector pipeline, a less stratospheric (albeit high) NZD, improving microeconomic facets and increased connectivity with via things like more direct flights to our shores. Our expectation of no further OCR cuts for 2015 reflects the improved domestic outlook but depends critically on the global scene holding together, the NZD remaining well behaved. All of this puts the economy at somewhat of an interesting juncture for the likes of the RBNZ. Better domestic growth prospects would usually be expected to correspond with a stronger medium-term inflation outlook. However, there are obviously lingering questions surrounding this, given subdued inflation pressures to date and evidence that the inflation process is being affected by structural forces. It is the latter that keeps the bias towards additional OCR cuts. That said, with the risks to the growth outlook not looking as skewed to the downside as they did, and the RBNZ’s Financial Stability Report highlighting that housing concerns have not disappeared, on the face of it this makes additional OCR reductions much closer calls from here, which will obviously have implications for wholesale interest rates and the NZD.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US data: The November Empire (NY Fed) manufacturing index was -10.74 vs -11.36 in October, below expectations (-6.50) but showing signs that the downtrend is moderating. New orders were -11.8 vs -18.9, shipments were -4.1 vs -13.6 and inventories plummeted to -17.3 vs -7.6. Manufacturing is still struggling and recent USD strength will delay any recovery against the backdrop of soft economic growth. However, this is a well-versed story and the non-manufacturing economy remains very healthy. Market implications from this release were negligible.

- Equity markets were mixed, with small moves in both directions in Europe. The FTSE 100 and Euro Stoxx 50 indices were both up, but the CAC40 was down slightly. US markets were mildly in positive territory.

- Bond markets behaved as you’d expect, with a safe haven bid for USTs dragging other markets along to a lesser extent. This was helped along by some weaker than expected US data, and after a brief pull-back we saw the day’s yield lows of 2.236% and 0.528% in 10y USTs and Bunds respectively.

- Commodity markets were mixed. The broad CRB futures index was up slightly, led by softs. Gold and WTI oil prices rose slightly.

NZD/USD: COMMODITIES….

The NZD/USD broke below the 0.65 pivot overnight in relatively illiquid conditions. Broader commodities are declining and markets have all the commodity currencies under pressure. The NZ GDT auction tonight will be a focus, but markets are informed as to the pricing signal that NZX futures are giving, thus risks of the GDT being surprisingly weak look limited. Last night the US New York Empire survey was weak, and tonight markets watch the October CPI and industrial production releases for direction.

Expected range: 0.6440 - 0.6550

NZD/AUD: RBA MINUTES VS GDT…

Local data aplenty to drive this cross today, but it is well foreshadowed. The RBA minutes have been preceded by the RBA Statement on Monetary Policy, and the GDT auction by the NZX futures price action.

Expected range: 0.9100 - 0.9240

NZD/EUR: CORE CPI….

Market reaction to the tragic events in Europe is best described as resilient. Core CPI ticked a tenth higher in the final read in October, which helped EUR resilience. November ZEW sentiment survey will be watched tonight.

Expected range: 0.6020 - 0.6110

NZD/JPY: TECHNICAL RECESSION…

Japanese Q3 GDP at -0.2% q/q was lower than expected, and the second consecutive negative quarter - dropping Japan into technical recession. This countered the safe-haven drive for JPY and saw this cross lift.

Expected range: 79.40- 80.40

NZD/GBP: CPI…

UK annual inflation is expected to remain negative today, but RPI and core inflation is expected to be more resilient, at 0.9% and 1% y/y respectively. With expectations low, risks for GBP today are for a tick higher in inflation.

Expected range: 0.4240 - 0.4300

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