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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- US data was mixed.

- German business confidence and consumer spending remains surprisingly resilient.

- RBA Governor Stevens presents a ‘glass half empty’ outlook for the Australian economy over the longer-term.

- Geopolitical tensions increase, with Turkey shooting down a Russian jet.

OUTLOOK

UPCOMING TODAY: No NZ data today. In Australia there is skilled vacancies (Oct) and construction work completed (Q3).

CURRENCY: The EUR will likely overlook the ECB financial stability review. Brexit and UK finances are likely to weigh on GBP. The last of the US data before Thanksgiving may pressure USD.

RATES: Given global moves, local yields are likely to open slightly lower.

REVIEW

CURRENCY: The USD remained solid, despite underwhelming data. EUR strengthened as German data outperformed. AUD rose as markets "chilled out". But JPY strengthened as geopolitical tensions rose.

GLOBAL MARKETS OVERVIEW: At the start of last night’s session there was a broad-based risk-off feel. The focus was on the news flow of a Russian warplane being shot down by Turkey near its border. This saw the major equity bourses in Europe pressured early and sovereign bonds rally. Crude oil prices spiked further on the increased Middle East tension and yesterday’s comment from Saudi Arabian officials of a commitment to work with both OPEC and non-OPEC members to help stabilise markets. However, the tone improved as the session progressed despite mixed US data. Sentiment was largely helped by Vladimir Putin’s response to the incident not mentioning any military consequences. All up major European equities bourses finished 1-1.5% lower and sovereign bond markets rallied. Ten-year yields in the major European economies fell 1-2bps. In the US both equity and yields were largely changed after early softness. Commodity prices bounced, with a general easing in the dollar and 3% increase for crude oil.

ANZ’S ASSESSMENT

GEOPOLITICAL TENSIONS ON THE RISE. A spreading and escalation in recent terror attacks and now the downing of a Russian warplane by Turkey are raising concerns of the possible unforeseen spill-over impacts of Middle East conflicts. The accumulation of these events is now beginning to have an influence on global markets. Concern centres on the possible economic consequences, further escalation in sanctions, and the impossible to foresee (such as last night’s events). On the first point, it’s a little too early to judge what the immediate economic consequences will be. Most surveys are yet to reflect recent events. It won’t be positive for sentiment at the very least, but to what extent will it influence consumer spending? Certain sectors such as European tourism activity are expected to be impacted and this is being reflected in equity prices for listed companies. For New Zealand food businesses this could have a knock-on impact to foodservice activity and sales. The lasting impact is likely to depend on the political response. Whether tensions in the Middle East can be brought under control, and the time and cost to achieve that goal, is very important. Talk of an escalation in trade sanctions between Turkey and Russia were also mentioned overnight. Many dairy farmers are aware of the indirect impacts amongst other market dynamics these tensions have delivered.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: The second estimate of Q3 GDP printed right on expectations at 2.1% q/q ann, revised up from the 1.5% q/q growth pace reported in the advance release.Most of the revision came through an upwardly revised inventories estimate. Inventories are now estimated to have subtracted 0.6ppts from growth in the quarter, versus 1.4ppt in the advance estimate. Personal consumption growth was nudged down 0.2ppts to 3% q/q, as were net exports. There was a small upward revision to investment growth. Overall, the composition of growth is a little disappointing relative to the advance release. In other data releases, consumer confidence surprised to the downside, easing to 90.4 in November. This is its lowest level in a year and well down from 99.1 in October (exp: 99.5). Meanwhile the Richmond Fed Manufacturing Index slipped to -3 vs -1 (exp: 1) with falls in many of the key sub-series. Nonetheless, activity remains sufficiently healthy so as not to dissuade the Fed from raising rates at its December policy meeting.

- UK: BoE Governor Carney and colleagues on the MPC testified before the UK’s Treasury Select Committee on the latest Quarterly Inflation Report. However little further illumination about near-term policy decisions was provided. Indeed, recent biases were reiterated, with Andy Haldane presenting a dovish outlook in contrast to Kristen Forbes’ more upbeat assessment. As such, the event had little noticeable impact on financial markets.

- Germany: Stronger than expected IFO business sentiment, in line with the resilience seen in yesterday's flash PMI release. The headline business climate index rose to 109 in November, from 108.2 in October. The increase was driven by both the current assessment index to 113.4 vs 112.7 and expectations series to 104.7 vs 103.9. Given the challenges facing the euro area economy, this result is impressive. However, front of mind for the ECB remains the very weak inflationary environment - the key reason why markets are expecting an expansion of QE and a cut in the deposit rate at the December policy meeting.

- Australia: RBA Governor Glenn Stevens spoke at an Australian Business Economists dinner in Sydney and offered a long term look of the big forces, many of them negative, impacting the economic outlook. When asked about the short term policy outlook, and particularly the February RBA board meeting, Stevens said we should just "chill out" over Christmas and "come back and see what the data say". Stevens’ speech was less positive than the "glass half full" varieties that have been given recently. We maintain our view that cash rate will be cut twice by 25bps, most likely in February and May.

- At the start of last night’s session there was a broad-based risk-off feel. This saw sovereign bond yields initially under pressure. Sentiment improved later in the session though. All up, 10-year sovereign bond yields in Europe finished 1-2bps lower and the US was little changed at the time of writing.

- Equity markets followed much the same pattern as bonds. Major European equity bourses finished 1-1.5% lower, but the late improvement in sentiment saw major US equity bourses little changed at the time of writing.

- Commodity prices bounced led by precious metals and crude oil. The other sub-indexes of the CRB index softened with grains back, led by wheat. Wheat exports from Europe are being supported by a lower euro similar to other soft commodities such as dairy.

NZD/USD: FROM TIMING TO PACE….

The markets continue to switch from the timing of the Fed hike to the pace of increases. The US data overnight missed expectations with the composition of the second read of Q3 GDP influenced by inventory accumulation. Consumer confidence also dropped to levels not seen since August 2014. While the pricing for a December hike remains north of 0.70% markets took the data flow as a lower for longer signal. The US data tonight (Personal income/spending, durable goods, new home sales, Michigan confidence) may weigh on USD.

Expected range: 0.6510 - 0.6610

NZD/AUD: "CHILL OUT"…

RBA Governor Stevens reaffirmed market pricing by stating "We’ve got Christmas. We should just chill out, come back and see what the data says." This helped support AUD, which has been stronger for a while now.

Expected range: 0.8960 - 0.9070

NZD/EUR: EXCEEDING EXPECTATIONS...

The German IFO survey was strong across the board and German Q3 GDP showed solid consumption growth. French business confidence also ticked higher. European data continues to exceed expectations.

Expected range: 0.6080 - 0.6180

NZD/JPY: GEOPOLITICS?

This cross took a dive with news of the dowing of a Russian warplane by Turkey (a NATO member). This cross will remain sensitive to the geopolitical situation.

Expected range: 79.10- 80.50

NZD/GBP: TESTIMONY…

CBI reported sales were weaker than expected as UK data continues the trend of missing expectations. BoE Governor Carney and Chief Economist Haldane presented a cautious view in testimony and GBP under-performed.

Expected range: 0.4310 - 0.4380

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