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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- A subdued trading session.

- Strong language from Fed hawks ahead of FOMC minutes (8am NZT).

- BoE’s Broadbent acknowledged the BoE’s forecasts are "far from perfect" but the bank focuses on more than just inflation when assessing its monetary policy stance.

OUTLOOK

UPCOMING TODAY: FOMC minutes at 8am will be the focus, followed by New Zealand job ads at10am and NZ PPI at 10:45am, neither of which typically move the market.

CURRENCY: The FOMC minutes are expected to see USD support continue, as is the Philly Fed overnight. The BoJ is unlikely to impact JPY. GBP has retail sales, which have been supportive.

RATES: With global rates little changed overnight the local rates open will be dominated by the release of the FOMC minutes.

REVIEW

CURRENCY: AUD, NZD, CAD, and NOK fell overnight, driven by further falls in commodity markets. GBP found support from a hawkish Deputy Governor. EUR was relatively stable, while USD found support from Fed commentary.

GLOBAL MARKETS OVERVIEW: Another subdued London session. European equity markets gave back some of yesterday’s gains, while US stocks are trading around 0.8% higher at the time of writing. There was a broad-based rally in European sovereign bonds, with moves most pronounced in longer-dated bonds. In contrast, there has been a modest sell-off in US Treasuries. Crude oil prices were driven by the stronger US dollar today, with an early rise later entirely unwinding. Gold prices also finished a little lower.

ANZ’S ASSESSMENT

AWAITING THE WORDS OF THE FED. At 8am, markets will have their latest chance to sift the tea leaves of the FOMC minutes and assess the likelihood the Federal Reserve will raise the fed funds rate at its next meeting in December. The market is currently pricing about 66% odds they will follow through on the long-foreshadowed move. Adding to the fun, Fed Governors Lacker, Lockhart, Mester and Dudley all made public appearances overnight. As usual, Richmond Fed President Jeffrey Lacker (who dissented in September and October, calling for higher rates) made some pretty hawkish pronouncements, stating that with strong consumer spending the case for a Fed rate hike is strong, and that the Fed risks getting behind the curve and having to act more aggressively later. Cleveland Fed President Loretta Mester supported a December lift-off, stating that the US economy can handle a 25bp rise in the funds rate. Meanwhile, Atlanta Fed President Dennis Lockhart thinks that the US economy is on a reasonably solid path, with the Fed’s mandate on employment met and only transitory factors holding down overall prices. However, he reiterated that the path of rate rises is likely to be relatively gradual and shallower than previous tightening cycles. NY Fed President William Dudley conceded that "this is probably the most well-advertised, discussed, thought about, mused-over prospect of beginning a normalisation of monetary policy in history" and as such, he is not expecting a significant market reaction when the Fed finally does raise rates. Time will tell, with the market possibly having learned from experience that if it throws a tantrum, it gets to play with its toys a little longer.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US data: Housing starts were much weaker than expected in October, declining 11.0% to an annual rate of 1060k (mkt: 1160k). The weakness was concentrated in the multi-family sector, which recorded a 25.1% m/m decline, partly unwinding the sharp 18.1% m/m gain in September. Single family housing starts fell by 2.4% m/m. Meanwhile, building permits gained 4.1% m/m and are running at an annual rate of 1150k (1147k), up from 1105k in September. While these data are mixed, the upward trend in both housing starts and building permits remains intact.

- Strength in sentiment amongst home builders moderated in November with the NAHB index easing to 62 from a 10-year high of 65.

- UK: BoE Deputy Governor Broadbent in a speech this morning stated that the BoE’s forecasts were "far from perfect" as a guide to when the first interest rate hike might occur. He added that the "behaviour of the economy matters more for interest rates than prior forecasts." As such, Broadbent felt that some of the coverage following the Bank’s last inflation report, which inferred the "Bank says interest rates won’t go up until X" was "misplaced". That said, Broadbent noted that the current yield curve is "very flat" and that BoE’s most recent inflation forecasts implied that inflation would overshoot the target moving forward based on current market pricing.

- Equity markets went their separate ways overnight. While the FTSE 100 eked out a 0.2% gain, the Euro Stoxx 50 index gave back 0.6% of its previous day’s gain. The DAX fell 0.1% and the French CAC 40 fell 0.6%. US markets are up 0.7-1.0% at the time of writing.

- Bond markets: European yields were generally lower (UK 10-year bonds -5bps, Germany -2bps) with a narrowing of peripheral spreads (Portugal 10-year yields -10bps, Spain -4bps). US yields were little changed as the market awaited the FOMC minutes (8amNZT).

- Commodities had another rough night, with the CRB index down another 0.5% at 13-year lows (-20.5% y/y). Livestock was the only component to increase, with broad-based falls for industrials, grains, soft commodities, precious metals and energy.

- WTI crude oil fell briefly below USD40/bbl - threatening to break through its low of USD39.22 in late August seen in the midst of market turmoil - as ongoing concerns about a supply glut outweighed smaller-than-expected increases in US inventories.

- The bear tone in the gold market continues. The lows were made in the Asian session before the metal staged a recovery to close down 0.1%. Silver followed similar dynamics to close down 0.5%, while platinum and palladium also fell.

NZD/USD: COMMODITIES….

Commodity markets continue to pressure NZD, with the rest of the commodity complex catching up to kiwi’s lead. The USD was helped by Fed comments reiterating ‘December’, but the real test of Fed determination comes with the Fed minutes at 8am this morning. US housing continues to soften with housing starts dropping. The Philly Fed is the main release today.

Expected range: 0.6430 - 0.6500

NZD/AUD: CONSOLIDATING…

With AUD/NZD seemingly reluctant to remain above 1.10 - NZD/AUD below 0.9090 - we would expect this cross to consolidate around current levels.

Expected range: 0.9060 - 0.9160

NZD/EUR: ECB AOMP...

EUR found some stability ahead of tonight’s ECB Account of Monetary Policy. The surprise would be if these ‘minutes’ showed that the ECB was divided on December QE. The current account surplus is also a supportive factor tonight.

Expected range: 0.5940 - 0.6080

NZD/JPY: BOJ…

The BoJ has another meeting today. Coming so soon after the late October meeting there are few - if any - expectations for it, although recent rhetoric has been JPY supportive.

Expected range: 79.00- 79.80

NZD/GBP: PREDICTIONS NOT PROMISES…

BoE Deputy Governor Broadbent delivered a speech markets read as hawkish. He downplayed BoE forecasts, suggesting the market was reading too much into them recently in pushing hikes further away. Tonight retail sales are expected to revert from September strength. The real surprise would be if they didn’t.

Expected range: 0.4180 - 0.4260

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