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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Oil prices reach highest level since 6 January in choppy trade on Saudi and Russian production comments.

- Big miss on US durable goods reflects weakness in manufacturing and oil, and bring more questions over path for the Fed. USD on the back foot.

OUTLOOK

UPCOMING TODAY: NZ Building Consents Issued - Dec (10:45am). Activity in the sector is expected to remain on a strengthening trend. RBNZ Credit Aggregates - Dec (3:00pm). Expected to be solid.

CURRENCY: The Asian session will look to the BoJ. If expectations for further easing are confirmed, this would weaken JPY. US Q4 GDP is universally expected to be soft, but USD has this priced in.

RATES: There was some volatility overnight, but local yields should open broadly unchanged.

REVIEW

CURRENCY: NZD/USD recovered from the RBNZ induced dip, but only paced other risk currencies like AUD/USD as sentiment improved. GBP lifted despite a soft Q4 GDP, while USD was on the back foot as durable goods plunged.

GLOBAL MARKETS OVERVIEW: European stock markets fell through the day, with key bourses trading 1-3% lower. Wall St indexes were in positive territory. European sovereign bonds rallied, with 10-year yields in Germany, France and the UK falling 2-4bps. US 10-year Treasury’s whipped around but settled around 2%. It was a choppy day for oil prices as they bounced around on production cut headlines from Saudi and Russian officials. At the time of writing, Brent is trading up 3.0% at USD34.10/bbl, while WTI is 3.7% higher on the day at USD33.50/bbl. The USD was generally on the back-foot, weighed down by continued question-marks over the path of tightening from the Fed, with more uncertainty / cautiousness following a sharp drop in durable goods orders.

ANZ’S ASSESSMENT

SEE-SAW. Not too much to get excited about overnight following yesterday’s more wiggle-room style commentary from both the Fed and RBNZ. Yes we saw weakness in more US data (durable goods) but you can track that directly to softness in manufacturing and oil, which is distinct from strength across the service sector. Nonetheless, it’s more ammunition to strengthen the hand of those pointing to the Fed doing less and questions the case of the USD bulls. Oil prices were in the black, but quite frankly all over the place - positive at the time of writing but paring back gains somewhat. Expect attention to shift back sharply to the key issue of 2016; how is the Chinese performing and set to perform? Few seem to have conclusive answers.

SMALL POINTS, QUICK RETURNS. A poll points to a 1.2% contraction in the Russian economy in 2016, coming on the heels of a 3.7% fall last year. With oil prices still well below the marginal cost of production, 1.2% still seems optimistic. Ouch. Not all central banks are in easing mode; South Africa hiked rates by 50bps overnight despite weaker growth, with inflation heading higher and out of sync with almost everyone else! Analyst expectations towards the first hike from the BoE have been pushed back to Q4 (previously Q3). A poll puts the median expectation amongst primary dealers for three hikes by the Fed in 2016; the market is not saying anywhere near the same! Better results from Caterpillar - somewhat of a bellwether; responding well to a turn in the commodity cycle.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US durable goods data for December plunged 5.1% on the month with core down 4.3%. The weakness in core orders was concentrated in machinery, which fell 5.6%. That likely reflects the weakness in manufacturing and oil. The FOMC statement yesterday did allude to the economy softening towards the end of last year and it downgraded its assessment of capex. So the policy implications from this release offer little new. But it all adds up to a Fed on hold for now.

- US initial claims data is once again declining (to 278k from 294k) following the normal seasonal adjustment problems at the start of the year. They suggest the labour market is still strong and the services sector must be continuing to hold up.

- US pending home sales held steady in December, up a tepid 0.1% m/m, below the consensus pick of 0.9%.

- The German January HICP was in line with expectations rising 0.4% y/y vs 0.2% y/y in December. The rise is due to base effects, and despite the fact that January is a seasonally weak month for prices, with inflation falling 0.9% m/m it does illustrate the extent of the problem facing the ECB. Provisional January euro area inflation is duetomorrow and the market is expecting headline at 0.4% y/y (0.2% in December) and core to remain stable at 0.9% y/y.

- Relief at the UK GDP release for Q4 with growth on expectations at 0.5% q/q and 1.9% y/y. The composition was good with services (representing almost 80% of the economy) rising 0.7% q/q and production suffering the most weakness in the quarter (-0.2% q/q, due to well-discussed factors including the fall in oil prices, warm weather weighing on utilities production, and the broader global softness in manufacturing).

- Persistent volatility and fickleness continues to underpin US and German bond demand. European sovereign bonds rallied, with 10-year yields in Germany, France and the UK falling 2-4bps. US 10 year bonds were "settled" around 2% at the time of writing after whipping around a 1.97-2.04% range.

- European stock markets were generally down overnight with the Euro Stoxx 50 falling 2.1%, the CAC 40 1.3%, FTSE 1% and the DAX down 2.4%, taking their initial lead from US stocks the day prior but also disappointing earnings reports. Wall St indexes were in positive territory somewhat on the back of an earlier boost to the energy sector.

- Oil prices lifted once again (WTI +3.7% to USD33.5/bbl at the time of writing; Brent +3.0% to USD34.10/bbl). Supposed proposals from various energy ministers to cut crude output by both OPEC and non-OPEC members lifted oil prices before retractions were later issued. At one point, near-dated Brent was trading 8.5% higher at USD35.75/bbl, but gains were subsequently partially unwound as credibility of the headlines wore thin.

- Other commodities were generally flat to lower. Spot gold eased 1%, with metals such and zinc and copper down 2 and 1% respectively.

NZD/USD: REBOUNDING…

This cross remains driven by global and US forces. After declining in response to the RBNZ’s easier bias we are once again on familiar ground near 0.65. Weaker US durable goods and a continued unwind of global ‘fear’ helped to lift NZD/USD. We expect ‘fear’ to continue to subside, supporting NZD/USD.

Expected range: 0.6410 - 0.6560

NZD/AUD: A PERSISTENT IMPACT…

The RBNZ did have a persistent impact, with NZD/AUD down. This cross is testing a major pivot near 0.91 (1.10 in AUD/NZD). A break would see a test back toward 2015 lows, and for now that seems the direction of travel. But this cross has a history of stopping out a concensus view first.

Expected range: 0.9060 - 0.9230

NZD/EUR: WARNING SIGNS...

Consumer confidence was the odd one out in Europe, with manufacturing and economic confidence dropping overnight. German CPI was a tenth above expectations, but still negative on the month keeping the ECB in play.

Expected range: 0.5860 - 0.6010

NZD/JPY: BOJ...

With the Japanese Government suffering from scandal, that cost the Finance Minister Amari his job, it may be up to the BoJ to carry "Abenomics" for now. While expectations for today’s meeting are small, there are concensus expectations that further easing is required, which would boost NZD/JPY.

Expected range: 75.40- 78.40

NZD/GBP: MEETING EXPECTATIONS…

GBP lifted after Q4 GDP met expectations. The result, while showing Q4 was soft, wasn’t particularly alarming and the UK economy continues to perform reasonably well, leaving just Brexit fears depressing GBP.

Expected range: 0.4450 - 0.4560

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