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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- US data flow disappoints, with consumer confidence softening in February.

- The Saudi oil minister rules out crude production cuts, while the Iranian oil minister calls the January production freeze "ridiculous," seeing oil prices fall around 4-5%.

OUTLOOK

UPCOMING TODAY: Very quiet on the data front locally. In Australia there is labour data on skilled vacancies (Jan) and the wage price index (Q4). There is also construction work done for the fourth quarter.

CURRENCY: NZD will continue to follow global sentiment. For the NZD/USD there is the question of the USD to consider with their data continuing to weaken. GBP, EUR and JPY all still have to find a level.

RATES: It was a quiet night for kiwi rates in the London session. Local yields are expected to open broadly unchanged.

REVIEW

CURRENCY: GBP was weighed on by the BoE. AUD/USD managed to hold onto most of yesterday’s gains as risk weakened, but NZD/USD reversed its gains. EUR/USD continues to test support, as does the USD/JPY.

GLOBAL MARKETS OVERVIEW: Market sentiment softened overnight following weakness in Asia, worse than expected US data and oil prices reversing as the political ping pong on supply caps continued. US Treasury yields opened down after a low fix in the Yuan, but then rallied with equities and oil holding their ground early on. However, the move proved to be short lived as comments from Saudi oil minister Ali al-Naimi that Saudi Arabia would not cut output, and from Iranian oil minister Bijan Namdar Zanganeh that last week’s agreement between Saudi Arabia and Russia to freeze oil production at January levels was "ridiculous," weighed on equity markets and pushed oil prices around 4-5% lower. The moves in equity markets and sovereign bond yields were then exacerbated by the weaker than expected US data flow (see detail over page). At the close, European equity markets were back around 1.5%, while the major US bourses are down around 1% at the time of writing. European sovereign bond yields rose a touch, but eased back at the end of the session. US yields are lower across the curve with 10-year yields falling 1.5bps. Commodity prices were weaker led by energy (oil) and grains. Precious and industrials metals generally had a better session.

ANZ’S ASSESSMENT

SUPPLY WATCH. With demand growth having slowed for many commodities and prices below the cost of production for a significant proportion of producers in various sectors, many are watching to see how the supply side responds to judge if there will be a change in price trends. In the oil market it continues to be political ping pong between many of the large ‘traditional’ producers on whether or not they have the will to work together to cap supply. We place a very low probability on this being the case, as evidenced by last night’s scuttle-butt. While supply from higher cost US shale is expected to come under more pressure as the year progresses - which should provide some price recovery at the back end of 2016 - the key question is can the other ‘traditional’ sources wait out the pain and will the lower US shale production be enough with more supply expected from the likes of Iran and Iraq? Similar dilemmas exist in the dairy market with increasing emerging financial stress being reported across Europe, New Zealand and parts of the US. While seasonal dynamics are playing their part in the renewed bout of price weakness, there is also the structural realities of efficient European producers playing for market share.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: The data flow out of the US was a little disappointing, but overall it is not sufficiently significant to derail the Fed in its task to gradually raise interest rates this year. What would be worrying is if the deterioration in consumer confidence starts to negatively affect spending.

- Consumer confidence fell to 92.2 in February, a sharp decline from January's(downwardly revised) 97.8 (exp: 97.2). The decline in the Conference Board's measure of consumer sentiment was most notable in those under 35 years old, and in household income groups under $50k.

- Meanwhile, the Richmond Fed index disappointed at -4 in February vs +2 in January (exp: +2), although existing home sales were a little stronger than expectations, rising to an annualised pace of 5.47m in January. Case-Shiller house price growth was steady in the 20 city index at 5.75% y/y in December.

- Germany: IFO business sentiment took a bigger than expected tumble in February, easing to 105.7 from 107.3 in January. The expectations series drove the entire decline, with the current assessment actually 0.4pt higher at 112.9 in February. Business sentiment has now slipped below its average post-crisis level of 107.7, but what is interesting is how resilient it has remained (in level terms) relative to the volatility on financial markets and sharp falls in asset prices. This was in part reflected in the Q4 GDP detail, with capital investment (+1.5% q/q) and construction investment (+2.2% q/q) important reasons why domestic demand was solid in the quarter (+0.8% q/q). Still, the easing in the IFO points to a softening in Q1 GDP to around 1% y/y (from 1.3% y/y in Q4), with manufacturing activity being negatively affected by sluggish Chinese demand (also reflected in yesterday’s manufacturing PMI result). For the ECB, it is economic conditions in the euro zone as a whole, and weak inflationary pressure in particular, that it is focussed on. As such, these data will likely do little to dissuade it from easing policy again on 10 March.

- Equities: Market sentiment softened overnight following weakness in Asia, worse than expected US data and oil prices reversing as the political ping pong on supply caps continued. At the close, European equity markets were back around 1.5%, while the major US bourses are down around 1% at the time of writing.

- Bond markets: US Treasury yields opened down after a low fix in the Yuan, but then rallied with equities and oil holding their ground early on. However, the move proved to be short lived as oil prices reversed and then there was weaker US data. Core European sovereign bond yields rose a touch, but eased back at the end of the session. US yields were lower across the curve with 10-year yields falling 2.4bps.

- Commodity prices were weaker led by energy (oil) and grains. Precious and industrials metals generally had a better session.

NZD/USD: EASING WITH RISK…

US consumer confidence declined; there were cautious speeches from Fed Presidents Kaplan and Kashkari; and a soft Richmond Fed print last night. But the session was dominated by weakening risk sentiment. This allowed the USD to gain, driving the NZD back into the 0.66’s. We have Fed Vice-Chair Fischer speaking on monetary policy in our session today (14:30), and Fed Lacker and Kaplan (again overnight). On the data front the US has the Markit services PMI and new home sales to watch.

Expected range: 0.6630 - 0.6730

NZD/AUD: EASING…

NZD bore the brunt of risk sentiment overnight, while the AUD was able to hold up better driving this cross back to test the 0.92 level.

Expected range: 0.9180 - 0.9280

NZD/EUR: SOFT EXPECTATIONS.

The German IFO survey last night was the latest in the run of data that indicates softening activity in Germany. Interestingly while the current climate and outlook was deemed weaker than expected, the current assessment was above expectation, indicating businesses are coping.

Expected range: 0.5980 - 0.6140

NZD/JPY: BACK TO SUPPORT...

NZD/JPY dropped and price action suggests of a test of the 73-74 support.

Expected range: 73.60- 75.80

NZD/GBP: LITTLE TOLERANCE…

Governor Carney testimony reiterated the point that the BoE has "relatively little tolerance for further downside surprises and should downside surprises continue then I think we will get relatively quickly to a point where I would find it appropriate to respond". GBP predictably declined, even with this cross having an upward bias.

Expected range: 0.4720 - 0.4800

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