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NZ Morning Focus

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Fuseworks Media
Fuseworks Media


- Oil prices fell to new post-2008 lows at one point, weighing on equity markets ahead of this week’s FOMC decision.

- Dovish comments from the BoE’s Shafik weigh on GBP.


UPCOMING TODAY: It’s about fiscal policy in our time-zone today, with the Half-Year Economic and Fiscal Update (1pm) locally and the Mid-Year Economic and Fiscal Outlook (3pm) in Australia. December RBA minutes are also due (1:30pm).

CURRENCY: The respective fiscal positions of Australia and NZ will drive NZD/AUD. The US has the NY Empire survey. The Swedish Riksbank rate decision and BoC’s FSR complete the picture.

RATES: Following global moves, local yields may open slightly higher.


CURRENCY: AUD and NZD rallied in reasonably uniform fashion despite warning signs from other markets - such as commodities, equities, and high yield. GBP was pressured lower by Deputy Governor Shafik, while EUR rose.

GLOBAL MARKETS OVERVIEW: In a quiet start to the week for data and news flow, oil price weakness continued to dominate markets. Near-dated WTI prices initially fell towards USD34.50/bbl before recovering. Weaker oil prices, and the associated concerns over global growth and credit markets, weighed on equity markets, particularly in Europe, although US stocks were broadly flat at the time of writing. Bond markets also generally followed oil, and after initially rallying, a modest bounce in oil prices led to a broad-based sell-off, and moves were violent in some cases. UST 10-year yields are currently up over 9bps and yields in Europe are up between 3 and 10bps. Gold prices are weaker.


FISCAL FOCUS. Earlier this year, the NZD was knocking on the door of parity against the AUD. Things have of course changed since then, with the RBNZ reversing its 2014 OCR hikes and dairy prices well off their highs. But while the NZD/AUD has retraced from those earlier lofty levels, it has remained above its historical average (and has actually strengthened again of late). Arguably, one of the reasons (although certainly not the only one) of why the NZD/AUD has remained at a historically elevated level is fiscal outperformance - and some could even say greater credibility - on this side of the Tasman. That outperformance is expected to again be on show today with the release of respective half-year fiscal updates from New Zealand and Australia. To be fair, New Zealand’s fiscal picture is not expected to be quite as rosy as presented in the May Budget, with a weaker nominal GDP growth outlook likely to lower revenue forecasts and see smaller projected fiscal surpluses. There is even a good chance a small OBEGAL deficit is forecast in 2015/16. But this will still compare favourably to the Australian figures, where our Australian colleagues are looking for additional downgrades to the Government’s underlying cash balance, and larger deficits projected for the entire forecast period. Admittedly, net debt is probably still slightly higher in New Zealand, although the gap has certainly closed of late. When thinking about the outlook for the NZD/AUD, the fact the RBA is expected to cut interest rates again next year is obviously going to a key driver. But the fiscal backdrop is another factor in the rationale for why we feel an above average NZD/AUD is set to persist for the foreseeable future.


- Euro area industrial production rose a stronger-than-expected 0.6% m/m in Oct (mkt: 0.3%), and has seen annual growth lift to 1.9% y/y. From a country perspective, there were large gains in French, Italian and Dutch production, which overshadowed weaker results from Germany and Spain.

- Bank of England MPC member Shafik delivered some reasonably dovish comments and noted that wage growth would need to pick up to a sustainable pace to support a recovery in inflation towards the BoE’s 2% target before the bank would raise rates given the headwinds presented by weaker oil prices, softer growth in EM economies and a stronger GBP.

- Oil price weakness continues to dominate markets, with near-dated WTI prices initially falling towards USD34.50/bbl and Brent to below USD36.40/bbl before recovering back to over USD36/bbl and USD38/bbl respectively. Although oil prices have declined by almost 25% since the conclusion of the last FOMC meeting on 28 October, we do not think that they will derail a much-anticipated rate hike by the Fed this week. That said, the headwind that lower oil prices present to headline inflation is consistent with the view that the Fed’s tightening cycle will be very gradual and the path of future interest rate rises shallow. Indeed, combined with the fact that 2015 FOMC voters Brainard, Tarullo and Evans have all expressed reservations about the Fed hiking too soon, it is possible that the decision is more finely balanced than current market pricing (76%) suggests. In addition, we think that the weakness in oil prices (combined with the strength of the EUR) will increasingly become a focus for the market’s thinking on future ECB policy (easing) in early 2016 given ECB President Draghi’s commitment to further intensifying monetary stimulus should economic and financial conditions require it to do so.

- Lower oil prices and some concerns over global credit markets generally weighed on equity markets. European stocks were under pressure, with the Euro Stoxx 50 closing down 2%, and a similar magnitude of falls experienced by other major country-based bourses. While lingering credit market concerns also influenced US stocks, the late recovery in oil prices has supported a rally in major US bourses, which were broadly flat at the time of writing.

- Like equities, bond markets appeared to follow oil price movements, although moves were reasonable violent. After initially rallying, the bounce in oil prices contributed to a broad-based sell-off in sovereign bond markets in both Europe and the US. UST 10-year yields were up over 9bps at the time of writing, with yields up 3-10bps for 10-year yields in Europe.

- Broader commodity prices were weak. The broader CRB futures index fell 0.1%. While the late recovery in crude prices supported, sharply weaker natural gas prices weighed on the energy sub-sector. Precious metals, soft commodities and livestock prices were also weaker, partially offset by grains and industrials.


Markets remain nervous. High yield stresses remain forefront of market thinking, with another fund closing its doors. Equity markets were weak - although the US managed to reverse losses. WTI oil briefly broke USD35/bbl (but rallied back strongly) and despite all this, NZD/USD went one way; higher, against normal risk correlations. NZD/USD is attempting to break post-RBNZ resistance, having made a new marginal high. New Zealand’s Crown finances are expected to remain reasonable at today’s HYEFU.

Expected range: 0.6720 - 0.6820


Australia and New Zealand both have half-year fiscal updates. We expect the NZ budget to remain, within margin of error of, balanced. But the Australian Mid-Year update to show a continued deficit. This divergent fiscal position is one of the reasons we expect NZD/AUD to remain above long-run averages.

Expected range: 0.9290 - 0.9380


European industrial production (+0.6% m/m) expanded at double the rate expected in October. Italian CPI was also above expectations at the final read. EU data continues to outperform and support EUR.

Expected range: 0.6080 - 0.6190


There was a theme in yesterday’s Tankan survey of better-than-expected current conditions, but pessimism regarding the outlook. The tertiary industry index was also above expectations.

Expected range: 81.00- 82.60


Deputy Governor (Markets and Banking) Shafik sent GBP lower by adopting a cautious tone and stating an actual wage jump would be required to overcome the weak global outlook.

Expected range: 0.4420 - 0.4500

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