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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- An exceptionally quiet night on the markets, with the US out for the Thanksgiving Day holiday. Tonight is likely to be the same with many in the market on leave for an extended weekend.

- Bond markets hold steady, equities were generally higher, while oil prices pared gains from the rebound earlier in the week.

OUTLOOK

UPCOMING TODAY: There is no data scheduled in either New Zealand or Australia today. The next major data releases locally are ANZ Business Outlook survey (Mon), Terms of Trade (Tue) and ANZ Commodity Prices (Wed).

CURRENCY: We expect the lull to extend today, but expect EUR to remain under pressure from Spanish CPI, and GBP to be supported by the second read of Q3 GDP. Next week will be pivotal, with a multitude of releases. Markets will be flow-driven until then.

RATES: Expect markets to open broadly unchanged, with a mild downside bias given the retracement in yields seen yesterday, and signs of demand at last returning in the bonds (yesterday’s NZGS 2020 tender was well subscribed).

REVIEW

CURRENCY: Thanksgiving markets flat-lined overnight, but AUD held up reasonably well after yesterday’s weak CAPEX performance.

GLOBAL MARKETS OVERVIEW: Market moves were incredibly muted with the US celebrating Thanksgiving. Today is expected to be similar with many in the US making it a long weekend. There was little response to the day’s only data release - euro area money supply - which rose to 5.3% y/y in October from 4.9% y/y (despite the better than expected improvement in this series, it is secondary to the ECB’s primary concern of very weak inflation). On FX markets, G10 currencies have traded within tight ranges. European equities enjoyed another positive session, with the major bourses gaining around 1%. On sovereign bond markets, there has been a decent rally in UK gilts, with yields down 3-5bps across the curve. Bloomberg reports the move was down to 7 December gilt coupon payments which will go ex-dividend at the close of business today. Major euro area sovereign bond yields (French, German, Italian, Spanish) were little changed. Crude oil prices eased from the highs made during Asian trade overnight as the EIA reported a rise in US oil stockpiles last week. Gold prices were little changed.

ANZ’S ASSESSMENT

A DAY OF REFLECTION. With little going on in offshore markets and no data due out here today, it looks like we’re set for a fairly lazy Friday. But it also offers the opportunity for a bit of reflection, with just 13 days to go till the RBNZ December MPS, and the market now pricing 60/40 odds in favour of a cut. Most readers will be aware that we don’t expect a cut. This is largely because right here, right now, we just can’t see the RBNZ acting on its easing bias now when it didn’t take the opportunity to do so in October and developments have largely improved since then (and dramatically so since September). The NZD is still likely higher than the RBNZ would like it, but it has eased, and the fixed rate mortgage roll-off profile points to more easing in the pipeline as people re-fix at ever lower rates. Much of course hangs on the Fed, and while we won’t know what they will do till after the MPS, at this stage, most are primed for "lift-off", and the tone of "Fedspeak" seems to back that idea up. Inflation is, however stubbornly low, and potentially on track to stay low, with anecdotes aplenty of a lack of retail pricing power, commodity prices still depressed and US inflation surprising a touch to the downside yesterday. From a purely domestic perspective, how these things unfold hold the key to what the RBNZ ultimately does next, but while we can see valid arguments for a lower OCR, we can’t see the urgency - hence our call that a lower OCR is a 2016 story. With the market now "odds on", we’re certainly in for a jolt in a couple of weeks unless pricing changes. What is less certain (and the main reason why the market is sitting on the fence) is what’s going on offshore. Technically, US market pricing is about 70/30 in favour of a hike next month. Those odds could change if we see a soft non-farm payrolls print next Friday, or if Thanksgiving sales volumes and ISM data reads disappoint. While the December OCR decision looks to be a coin toss, it feel like it will be something offshore that forces the RBNZ’s hand into cutting, rather than something domestic.

OVERNIGHT SPECIFICS AND KEY EVENTS

- European data: M3 Money Supply grew by 5.3%y/y in October, slightly outpacing market expectations. M3 growth shot up over 2014 but has been fairly stable over much of 2015

- Equity markets were generally up. All major European bourses closed higher, with the Euro Stoxx and FTSE up 1.1% and 0.9% respectively, building on yesterday’s gains. US markets were closed, but Canadian and Mexican markets followed Europe higher.

- European sovereign 10 year yields continued to fall, led by UK Gilts (down 4bps) and Portugal (down 9bps). The commentary in the market continued to focus on potential ECB action next week, with some saying that it’s less about whether they ease further, but how they do it and how decisively they do it.

- Yesterday’s NZGS bond tender (for $200m of NZGS 2020s) was well subscribed, with bid cover of 5.2 times and the bonds getting issued at yields below/prices above market. Whether that’s a sign that the bond market rout is over (or close to over) remains to be seen, but that was the first bit of encouraging news we had seen for a while, with the yield on the newly minted 2033 bond having capitulated since syndication in mid-October.

- Commodity prices were mixed again, with 10 of the 19 constituent commodities of the broad CRB index up. Industrial metals (copper, nickel, aluminium) led the gainers, while energy led the losers, with WTI crude down around 1.2%, coming close to lows seen during yesterday’s dip.

NZD/USD: LOOKING FORWARD….

Thanksgiving markets were very quiet, and we would expect the week to end on the same note too. Looking forward to next week, we would expect a significant pickup in volatility with the last of the major US data releases before the Fed - expected to support the case for ‘lift-off’. However three speeches by Fed Chair Yellen are expected hammer home the gradual pace of ‘normalisation’ message which should limit USD gains.

Expected range: 0.6540 - 0.6630

NZD/AUD: Q3 CAPEX…

Q3 Capex was weak yesterday, and with a soft outlook for Capex, markets are likely to keep AUD capped. We expect NZD/AUD to appreciate from here as market pricing for the RBA and RBNZ doesn’t represent our view.

Expected range: 0.9060 - 0.9140

NZD/EUR: IMBALANCES...

With little to drive the EUR, we instead look at the news overnight that the European commission flagged potential troubles in 12 of 19 Eurozone economies including Germany’s large trade and current account surplus, which is a factor supporting EUR.

Expected range: 0.6160 - 0.6240

NZD/JPY: LESSONS FROM THE ECB…

Risk aversion is unlikely to change into the weekend. Next week the ECB will drive JPY direction, as markets translate outcomes to the BoJ.

Expected range: 80.10- 81.20

NZD/GBP: CHANGE IN RHETORIC…

The rhetoric against GBP has shifted more dovish recently. This is typically the time when GBP stages a comeback.

Expected range: 0.4320 - 0.4380

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