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NZ Morning Focus

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Fuseworks Media
Fuseworks Media


- Mild improvements in euro area activity and labour market data fail to derail expectations of a multi-faceted ECB policy easing later this week.

- Small improvement in dairy prices (GDT-TWI +3.6%, WMP +5.3%).

- Disappointing US ISM manufacturing nudges UST yields and dollar lower.


UPCOMING TODAY: No local data today. Offshore the focus will be on Australian GDP for Q3 (exp. 0.8% q/q) and RBA Governor Stevens’ speech on economic conditions and prospects. Overnight there is European inflation data and US non-manufacturing data.

CURRENCY: Fed Chair Yellen is expected to hammer home the ‘gradual’ message keeping USD on the back foot. AUD will focus on Q3 GDP and Governor Stevens, both likely to support caution.

RATES: Overnight moves are likely to place downward pressure on yield at open with a bias to flatten the curve.


CURRENCY: The USD remained on the back foot overnight as the ISM dropped to levels not seen since 2009. This supported a lift in AUD and NZD. The EUR was lifted by USD weakness and strength in domestic data.

GLOBAL MARKETS OVERVIEW: US Treasury yields slipped 3-5bps across the curve following the weaker-than-expected ISM release, although the probability of a Feb hike in December remains around 70%. The non-manufacturing ISM on Thursday night, which encapsulates 85% of economic activity, will be more important to shaping December expectations. The ISM manufacturing data is another sign the Fed’s tightening cycle is likely to be very modest. In Europe there was a steady rally in UK gilts. Short and mid-end German, French and Italian sovereign bonds also rallied. Euro area equities fell as much as 1%, while UK stocks rose 0.6% and US bourses are up around 0.7% at time of writing.


IS IT ENOUGH? Dairy prices improved overnight, with WMP up 5.3% and the GDT-TWI lifting 3.6%. Current market expectations are for a further lift at the second auction in December. The key question is whether this enough - combined with other forward looking indicators - for Fonterra to hold their milk price forecast of $4.60/kg MS? Clearer communication has been provided this season that US$3,000/t for WMP in the first quarter of 2016 is required to deliver the $4.60/kg MS. However, year-to-date pricing is only indicating something around the $4.00/kg MS mark at present. This highlights the extent of downside risk for farm incomes. At this stage we struggle to see a favourable catalyst that is likely to deliver the US$3,000/t. Instead we expect a range of US$2,500-$2,800/t, which delivers something between $4.25-$4.50/kg MS. The most obvious catalyst for prices to move toward Fonterra’s target is El Nino. Certainty the East Coast of the South Island and bottom of North Island are looking dry at present. From a dairy perspective, a lot of this is under irrigation for now. Combined with many other regions being in reasonable shape, we see it as a watching risk. But for farm incomes, a summer drought is not a desirable driver for a turnaround in prices. In our opinion it would likely weigh more heavily on moral and 2015/16 bottom-lines. That said, depending on how the currency behaved, it could dramatically improve the outlook for 2016/17. A more sustainable and positive turnaround in prices requires two of three things changing. A marked slowdown in competitors’ supply (namely Europe), improved demand backdrop (most obvious is China, but needs to be broader based) and an increase in the cost of production (energy and feed prices key). Most are not picking a more sustainable turnaround until mid-2016. But these expectations keep getting kicked down the road.


- US: The November ISM manufacturing series disappointed, falling to 48.5 - a six-year low (exp. of 50.5 and a read of 50.1 in October). It was the softest result since the recession ended in mid-2009. A strong USD and weakening global trade has weighed on US manufacturing all year. Much of the softness centred on the forward-looking indicators of production and new order indices. The employment index improved though. The ISM result will increase jitters ahead of the December FOMC meeting, but it remains over 70% priced for a hike. The non-manufacturing ISM on Thursday, which encapsulates 85% of economic activity, is more important. What these data do confirm is that any tightening cycle will be very moderate.

- Germany / euro area: Better German unemployment figures indicate the continued tightening in the labour market. The number of unemployed fell by 13k in November (exp: -5k, last: -6k), seeing the unemployment rate decline to a new low of 6.3%. The final read of the German PMI manufacturing also nudged up 0.3pts to 52.9 from the flash print. The euro area result was unchanged from the flash at 52.8. The aggregate euro area unemployment rate declined by another notch to 10.7% in October.

- In other releases during London’s morning session, the Spanish manufacturing PMI also beat expectations, rising to 53.1 in November. This followed the better Spanish CPI data last week, showing government reform can help improvement. Italy's manufacturing PMI also rose to 54.9, although France's flash result was revised down 0.2pts to 50.6. Still for the ECB, extremely weak aggregate inflation remains the number one concern. On this basis the central bank is widely expected to ease monetary policy further on Thursday night despite mildly better data.

- UK: Slightly softer than expected manufacturing PMI, easing to 52.7 in November from 55.2 in October (exp: 53.6). This weakness in manufacturing is a global story, with the slowdown in global trade a consistent challenge for manufacturers everywhere. The relative strength of the GBP (in trade-weighted terms) adds an additional headwind to UK manufacturers.

- UST yields slipped 3-5bps across the curve following the ISM release. The probability of a Feb hike in December remains around 70%. In Europe there was a steady rally in UK gilts after the UK PMI came in softer than expected. Short and mid-end German, French and Italian sovereign bonds also rallied.

- Euro area equities fell as much as 1%, while UK stock rose 0.6%. US bourses were up around 0.7% at the time of writing.

- Commodity prices were mixed. Crude oil prices were whippy, falling mildly relative to prices traded during the Asian session overnight.


The USD sold off yesterday as markets digested the potential for a weak manufacturing print. This eventuated with the ISM printing at levels not seen since 2009. However, the slowdown in the manufacturing sector is likely to be offset with strength from the service sector and employment. Fed Chair Yellen speaks tonight and is expected to hammer home the gradual normalisation message. The NZ Q3 terms of trade fall of 3.7% offsets the 2.7% combined lift in Q1 and Q2, and we expect further falls in Q4.

Expected range: 0.6640 - 0.6730


Market expectations of Q3 GDP growth of 0.8% q/q and 2.4% y/y are respectable, but below trend. The domestic demand component will be the focus and a driver for AUD. We also get a speech on the economic outlook from Governor Stevens.

Expected range: 0.9090 - 0.9180


European data continues to belie ECB assertions of imminent economic risks. German unemployment dropped to 6.3%, and the final read of manufacturing PMIs had strong periphery components, as well as an uplift for Germany. European unemployment also dropped a tenth of a percent to 10.7%.

Expected range: 0.6200 - 0.6320


USD/JPY has remained relatively immune to USD weakness allowing this cross to rally with the kiwi.

Expected range: 81.50- 82.50


The BoE Financial Stability Report declared an end to the ‘post-crisis period’ for the UK financial system and decided to watch and wait over housing issues. However, GBP was capped by a weaker manufacturing PMI.

Expected range: 0.4390 - 0.4460

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