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NZ Morning Focus

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Fuseworks Media
Fuseworks Media


- A tentative stabilisation in US manufacturing activity emerged from the November Philly Fed survey.

- UK retail sales partly unwound September’s Rugby World Cup boost.


UPCOMING TODAY: There is limited market-moving information today, with annual National Accounts (10.45am) and RBNZ credit card (3pm) data due.

CURRENCY: With nothing particularly market moving in Asia we expect a quiet session. Overnight central bankers are the focus, with speeches by Fed’s Fischer, Williams, Dudley and ECB’s Draghi.

RATES: Initial payside interest in the London session reversed on the global rally, which should see the local curve open with a flattening bias.


CURRENCY: Currency markets continued to squeeze overnight. The lack of new drivers saw poorly-positioned markets squeezed out of stale themes. NZD displayed its lack of liquidity, squeezing further than most.

GLOBAL MARKETS OVERVIEW: The signal from yesterday’s FOMC minutes of a gradual path of tightening (likely kicking off in December) inspired a rally on sovereign bond markets. There was a flattening in the UST curve as 10 year yields fell 3bps to 2.25%. Similar moves were seen in Europe. A strong start to the day for European equities progressively unwound through the session, but the major indices still managed to close higher. US stocks are flat in early trade. A weaker USD helped to lift gold prices by around 0.8%, but oil prices failed to benefit as US stockpiles rose to their highest levels for this time of year in 75 years.


FENCE-SITTING. There wasn’t a lot in yesterday’s FOMC minutes to sway expectations on the prospects of a December rate hike. Markets have the odds at around 68% - broadly where they have been hovering for the past couple of weeks. But just as expectations appear to be settling on the outcome of one key central bank decision, markets are fence-sitting when it comes to another one; that being what the RBNZ does at its December MPS (which is a week ahead of the Fed). Markets are currently putting 50/50 odds on a cut, which is in fact up from around 40% earlier this week. To be fair, the chance of a cut is non-trivial. And as we still have one further 25bp cut within our own base-line forecasts (but not until next March), in itself, a cut next month would not be overly surprising. However, we still feel that the most likely outcome is that the RBNZ "watch and wait" a little longer. While recent dairy developments do leave us mindful (although interestingly NZX WMP futures prices posted a decent bounce yesterday), and the NZD remains above the RBNZ’s September MPS assumption (albeit less so than at the time of the October Review), developments beyond dairy and the NZD are important too. With business and consumer confidence rebounding, evidence is growing that the economy is regaining momentum, and sectors such as tourism, construction and broader services continue to perform well. The RBNZ has reminded of late that it is watching the housing market (and no longer just Auckland). And even the news flow on the inflation front hasn’t been all benign, with yesterday’s PPI data showing evidence of the lower NZD coming through. The global backdrop remains the wildcard of course, but perhaps outside of geopolitical developments, this is looking more stable of late. Another "dovish pause" looks to be on the cards.


- There was a better than expected Philly Fed print for November at +1.9 vs -4.5 in October (exp: -0.5). New orders were less negative at -3.7 vs -10.6, unfilled orders rose to 2.4 vs -11.7 and the inventory drag was less (-7.9 vs -17.4). The data hint that manufacturing may be beginning to stabilise at low levels, in line with the modest improvement seen in Monday’s Empire (NY Fed) survey. Inflation obviously remains weak. Prices paid fell to -4.9 vs -0.1 and received to -0.4 vs 1.3. The market impact was negligible.

- UK retail sales for October were weaker than expected, with September's Rugby World Cup-inspired boost partially reversed. Total retail sales fell by 0.6% m/m in October (exp: -0.5% m/m) while ex-auto fuel sales fell by 0.9% m/m. Weakness was largely driven by the fall in textile, clothing and footwear stores (-1.8% m/m) and food store sales (-1.3% m/m). The strong growth in September was also revised down by 0.2ppts. While disappointing, UK economic activity remains solid and despite a lack of inflationary pressures, consumers do not appear to have been deterred from spending (annual growth in retail sales ex-fuel is running at a 3% pace, true a step down from the 5.7% y/y pace in September, but as that is largely due to base effects and due to the volatility of these data, watching the broader trends in the growth figures provides a better steer). Certainly the data do little to change expectations for the BoE in the near term.

- European stocks rose for the third time in four days, and to a three-month high, although larger gains were pared as the session progressed. The FOMC minutes, which were consistent with the likelihood of only a gradual pace of tightening, reassured markets somewhat. The Euro Stoxx 50 closed up 0.5%, while the FTSE, DAX and CAC lifted 0.8%, 1.1% and 0.2% respectively. US stocks were broadly flat at the time of writing.

- The gradual pace of tightening tone from the FOMC minutes also led to a rally in sovereign bond markets. The US Treasury curve flattened, with 10-year yields falling around 3bps to 2.25%. Similar moves were seen in core European sovereign bonds.

- Commodity prices were generally stronger on the back of a weaker USD, although crude oil was a major exception. At the time of writing, the CRB futures index had eked out a 0.3% gain, led by increases for soft commodities, precious metals and grains. WTI crude prices were around 1% lower (hovering around USD40/bbl) as data showed US stockpiles rose to their highest levels for this time of year in 75 years. The EIA also announced a surplus in crude oil supply of over 100mn barrels above the five-year seasonal average.


The FOMC minutes delivered on expectations, signalling December was a live meeting. However, markets were poorly positioned and with nothing new to drive USD further, NZD/USD squeezed higher. Markets also took note of the bounce in NZX dairy futures and broader stability in commodities. We’ll watch a speech by Vice-Chair Stanley Fischer on "transitioning Asia" at 10:45 this morning closely; the topic being of interest to New Zealand exporters.

Expected range: 0.6510 - 0.6620


This cross continues to consolidate, rejecting attempts to trade lower for now. With only minor releases today we expect this thematic to continue.

Expected range: 0.9060 - 0.9160


The ECB account of monetary policy showed "some members" wanted to ease policy at the 22 October meeting due to perceived deflationary tail risks. They reinforced the notion that the 4 December meeting is live for both further cuts and QE. However, again EUR is well positioned for that view and squeezed higher - just not as high as NZD.

Expected range: 0.6040 - 0.6170


As expected the BoJ held rates. The trade balance also showed a surplus. Combined these events helped to lift JPY offsetting some of the NZD squeeze.

Expected range: 80.00- 81.00


UK retail sales reversed a little more than expected in October, but not enough to change the theme of solid retail sales overall.

Expected range: 0.4260 - 0.4340

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