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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Yesterday’s weak Chinese manufacturing PMI and the further undershoot in US data weighed on equity market sentiment.

- The recent recovery in oil prices faltered, although this wasn’t enough to stop a modest fixed income sell-off.

OUTLOOK

UPCOMING TODAY: Locally, there is our Commodity Price Index for January (1:00pm), while the RBA meeting is the main event in Australia (4:30pm).

CURRENCY: The RBA will provide direction, with NZD/AUD (which broke short-term resistance) the focus. Markets are likely to remain nervous and seek ‘safety’ (EUR), capping NZD and AUD.

RATES: It was a relatively quiet overnight session for the kiwi market, although the curve looked to outperform the global sell-off.

REVIEW

CURRENCY: Currency markets remain nervous, creating some demand for EUR and even stabilising JPY. The USD was on the back foot with weaker US ISM data, while GBP caught a bid after manufacturing PMIs were better.

GLOBAL MARKETS OVERVIEW: Yesterday’s weak Chinese data set the tone for the overnight session, and softer US data and renewed falls in oil prices didn’t help matters. Following yesterday’s decent session, major European bourses retreated 0.3-0.8%, with US stocks down by a similar magnitude at the time of writing. That said, this tone didn’t spill over to fixed income markets, with 10-year yields modestly higher (off low levels of course) in the US and core Europe. Sharp falls in oil prices weighed on the CRB index, although precious metal prices were higher.

ANZ’S ASSESSMENT

JOIN THE CLUB. One of the clear themes in markets so far this year has been the sharp lift in volatility and nervousness brought about by Chinese economic weakness (and yesterday’s PMI data hasn’t helped the cause). The sharp declines in oil and other commodity prices, and broader concern over the health of the global economy has added to woes. How central banks have chosen to respond to this backdrop has been another key theme, and the preference appears to be a further easing in (BoJ) or at least a signal that further policy easing is a real prospect (ECB and RBNZ - although we suspect a little more reluctantly in the case of the latter). In general, cautiousness has been a common undertone in central bank communication, with the Fed also acknowledging that it is closely monitoring global economic and financial developments. Today we should learn if another central bank has joined this club, with the RBA Board decision released this afternoon. Since RBA Governor Stevens’ "chill out" comments last year there has actually been some reasonable Australian economic data, particularly on the labour market. However, our Australian colleagues expect the RBA to counterbalance that by acknowledging concern over the state of financial markets and the downside risks stemming from Chinese growth prospects. The uncertainty ahead of the decision is therefore how much weight the RBA chooses to put on domestic versus offshore events. Whatever the case, its easing bias will no doubt be retained. For RBA and RBNZ watchers, the trick is now trying to assess what could potentially be the trigger to see them act on this bias’, and with the RBA’s Statement on Monetary Policy and a key "scene setting" speech by RBNZ Governor Wheeler also this week, there should be plenty of "new" information to help shed some more light on the risks.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US personal income posted a +0.3% m/m increase in December (+0.2% expected), while personal spending was flat, and core PCE prices were also flat, but up 1.4% over the year. While the income figures were better than expected, this income was not spent, as the saving rate jumped to its highest level since December 2012 of 5.5%. For all 2015, personal income was up 4.5% after a gain of 4.4% in 2014. The data suggests little change in the underlying economy, with household caution prevailing.

- The US manufacturing ISM came in slightly below expectations at 48.2 vs. 48.4 expected, although this was a slight lift on last month’s (downwardly revised) 48.0. Prices paid also matched last month’s decline to 33.5, against expectations of a lift to 35, reinforcing that inflation pressures are still mild. Other sub-components were mixed, with new orders and production lifting slightly, but employment easing. Overall, the data reinforce that the manufacturing sector has been lagging the rest of the economy, and early 2016 is not proving to be the start of a rebound.

- Separately, US construction spending rose 0.1% in December, well below the 0.6% rise expected and comes after downward revisions to the previous two months. Total 2015 construction spending rose 10.5% after a 9.6% gain in 2014, while private residential construction spending was up 12.6% following a 14.4% gain in 2014.

- Federal Reserve Vice Chairman Fischer commented that "If these [global] developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. " He added that "But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy."

- Yesterday’s weak Chinese data appeared to weigh on global equity markets overnight. The disappointing US data overnight didn’t help matters. While moves were modest compared with some of the daily falls seen year-to-date and they come after yesterday’s stronger session, major European bourses finished down 0.3% to 0.8%. The Euro Stoxx closed down 0.8%, while the FTSE 100 finished 0.4% lower. At the time of writing, major US stock indices were 0.5% to 0.7% lower.

- Despite equity market falls and renewed weakness in oil prices, fixed income markets were generally sold. At the time of writing, the yield on the 10-year US Treasury was 2bps higher (at 1.94%), while 10-year yields for the UK, Germany and France finished 6.1bps, 2.6bps and 3.8bps higher respectively.

- Oil prices renewed their falls overnight. After recording their longest rally this year, oil prices turned negative again with weak Chinese economic data and evidence that OPEC production continues to hold. At the time of writing, near-dated WTI and Brent prices were 6.0% and 5.0% lower to USD31.6/bbl and US34.2/bbl respectively.

- Lower energy prices weighed on the broader CRB index. The index was 2.2% lower at the time of writing, with 12 of the 19 constituent commodities experiencing falls. Modest offsets were provided by soft commodities and precious metals.

NZD/USD: ANCHORED…

The NZD/USD remains stuck near the 0.65 level. Last night’s weaker US ISM continues the run of softer US data that is arresting the NZD’s attempts to move lower, while the weaker Chinese PMIs ensure the NZD can’t rally too far. The result is continued stasis until one factor dominates.

Expected range: 0.6460 - 0.6560

NZD/AUD: RBA DAY…

Today is RBA day and this cross has broken a short term resistance established when the RBNZ shifted bias. A shift from the RBA today would see the reversal of the rest of the RBNZ move.

Expected range: 0.9080 - 0.9280

NZD/EUR: DIVERGENCE...

The January Markit PMI report showed a resurgent Spain, but a slowing Italy. France remains mired neither expanding nor contracting, while Germany lifted a little. These divergences highlight the challenge ahead for the ECB, which are likely to keep EUR soft.

Expected range: 0.5930 - 0.6010

NZD/JPY: BOJ BOOST...

This cross continues to consolidate after Friday’s BoJ boost. The lack of continuation is a sign that the BoJ’s ability to weaken JPY is waning.

Expected range: 78.00- 79.40

NZD/GBP: REBOUND…

The Markit UK manufacturing PMI rebounded in January, helping to support the GBP. However, the BoE still looks to be very much on hold for its decision later in the week. Markets are not expecting a full hike now until 2018. This will need to change before GBP can really strengthen.

Expected range: 0.4490 - 0.4560

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