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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- BoJ unexpectedly cut rates by 20bp to -0.1% to counter downside risks to growth and inflation.

- US Q4 GDP slows to 0.7% q/q saar but private consumption stronger at 2.2% q/q saar.

- Euro area inflation remains very weak, with flash January HICP of 0.4% y/y implying a 1.4% fall in monthly prices.

OUTLOOK

UPCOMING TODAY: NZ net migration data - Dec (10:45am). Offshore there is Australian housing data, RBA commodity prices and the TD inflation gauge for January. The focal point is likely to be Chinese manufacturing and non-manufacturing PMIs for January though.

CURRENCY: Domestically net-migration is expected to support NZD, however attention will turn to China’s PMIs during the Asia session.

RATES: Local yields are expected to open lower following the BoJ surprise decision to take interest rates into negative territory.

REVIEW

CURRENCY: NZD/USD did a round trip following the BoJ spike higher, however NZD appreciated against the EUR and GBP. Expect volatility in the NZD/AUD cross this week with the RBA decision up first on Tuesday.

GLOBAL MARKETS OVERVIEW: The big surprise to finish last week was the BoJ decision to cut its key policy rate by 20bps to -0.1% in an attempt to counter downside risks to growth and inflation. The financial market reaction was more predictable, seeing risk-on in the form of lower yields, higher equities and commodity prices. The JPY predictably weakened too with the USD/JPY up 2% from Thursday’s close. There was general USD strength as well - in part supported by reasonable US data (vs expectations).

ANZ’S ASSESSMENT

HOW FAR IS TOO FAR? The BoJ surprised at the end of last week by announcing it would adopt a negative discount rate. The BoJ called it "adding another dimension" to its policy tool box, which now has three dimensions: quantity (money base increase at JPY 80trn per annum); quality (asset purchases - principally JPY 80trn/per annum JGBs, also JREIT and ETFs); and now, negative rates. The two main reasons why the BoJ has done this are: first to force financial institutions to either lend out or invest in risky assets any money that they receive from selling JGBs to the BoJ under the QQE, and second, to extend the life of its current easing policy given its inflation goal is proving elusive. On the last count the BoJ highlighted growing downside risks to both the outlook for growth and inflation from the recent financial market turmoil. The backdrop for the latter has been the sharp drop in oil prices and uncertainty over EM growth prospects particularly China. We would also add that wage dynamics are not going its way. In particular, wage increases are not showing enough of a pick up to generate 2% inflation on a sustained basis. Last year Kuroda indicated that he would be prepared to act pre-emptively if wages did not increase more solidly. Financial markets took it as a shot in the arm that central banks are not finished yet and in the same vein as the ECB are willing to do "whatever it takes". Equities markets surged 2-3%, sovereign bond rallied with 10-yields falling 6-12.5bps and commodity markets bounced.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: Headline advance Q4 GDP rose by 0.7% q/q saar (exp. 0.8% q/q). Private consumption was 2.2% q/q higher, versus expectations of 1.8% q/q increase. The inventory contraction subtracted 0.5% q/q from GDP. Exports were weak falling 2.5% q/q saar. Capex was soft too. Structures investment, which includes oil rigs etc, fell 5.5% and equipment spending was down 2.5% following a 9.9% rise in Q3. The data confirm the softening in GDP that the FOMC noted in its statement earlier in the week, but we suspect that many of the influences that weakened growth in Q4 will prove transient. Nonetheless, the FOMC is on hold for now and will want to see how Q1 activity unfolds. We know the risks to the updated forecasts in March are that inflation and GDP forecasts for this year will be tweaked lower. FOMC central case dot points may therefore be taken down too. But given how markets have repriced recently this is already priced in. The key things to watch this week is non-farm payrolls for January with expectations of a 194k increase.

- Meanwhile, the Chicago PMI rose to 55.6 in January 2016 from 42.9 in December, well above expectations of 45.3. This represents the highest reading since January 2015 and provides upside risk to tonight’s ISM manufacturing report.

- Euro area: The flash January HICP was in line with expectations at 0.4% y/y (from 0.2% y/y in December), with the rise owing largely to modest energy related base effects. Core inflation ticked higher to 1.0% y/y vs 0.9% y/y as services inflation rose to 1.2% y/y. But the data continues to print too low for comfort. The ECB is also worried about the secondary effects on wages etc. Expectations will ebb and flow with the oil price, but Draghi did say he was monitoring other central bank actions. With the BoJ easing, that puts the ball back in the ECB's court. We think there is a strong chance the ECB will cut the deposit rate a further 10 bps to -0.40 on 10 March.

- Equities rose, with the Nikkei leading the way, closing up 2.8%. European stocks also rose with the FTSE 100 (2.56%) and IBEX (2.64%) leading the way. The Euro Stoxx and DAX rose by slightly less up 2.2% and 1.6% respectively. The positive sentiment spilled over into the US despite slowing growth. The major bourses finishing 2.5% up.

- Sovereign bonds have rallied - Japanese 10-year yields predictably fell 12.5bps to 0.09% as the BoJ took rates into negative territory. Major European 10-year yields fell 8-11bps and 10-year USTs yields were back 6bps to 1.92%.

- Commodity prices improved led by gains in energy and grain prices. Crude prices were up slightly, although trade was choppy with earlier gains unwound as reports emerged late in the day that Iran would not support an emergency OPEC meeting.

NZD/USD: BACK TO START…

The NZD initially took the news of BOJ slashing interest rates in stride, spiking to 0.6540, however from there the pair slowly grinded down to virtually unchanged. US Q4 GDP data were broadly in line with expectations highlighting a soft finish to the year. Locally, today we will get net-migration which is expected to be a domestic support for NZD, but the real focus will be on Wednesday’s labour market statistics. Globally, China’s manufacturing PMI will be watched closely. Expect NZD to be range bound through the morning before global events bring added volatility.

Expected range: 0.6430 - 0.6560

NZD/AUD: THE DIP HAS HELD…

Despite global currency volatiltiy taking a step higher after the BOJ surprised markets, the NZD and AUD have moved in tandem. Expect the curriencies to continue to trend together until dometic data drive a divergence in the pair. The RBA meeting on Tuesday and statement of monetary policy and retail sales on Friday; or NZ’s Q4 labour report could all be market moving.

Expected range: 0.9110 - 0.9230

NZD/EUR: EUR WEAKNESS...

The EUR finished the week declining a percent as US equities rebounded and commodity prices stabilised. The prospect for additional QE from the ECB is very real given low inflation and money supply growth underperformance. Expect this pair to be biased to the upside.

Expected range: 0.5940 - 0.6040

NZD/JPY: BOJ CONSOLIDATION...

BoJ’s rate cut saw this pair spike higher. Expect short term consolidation.

Expected range: 77.85- 79.10

NZD/GBP: TRENDING…

Few domestic drivers may see trends continue. GBP has been depreciating.

Expected range: 0.4510 - 0.4590

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