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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- US durable goods orders rebound strongly in January, tentatively boding well for business investment trends in Q1.

- Market sentiment whippy although overall action more settled.

- Attention will turn to the G20 for a response. We’re not hopeful of a microeconomic one, which remains the missing link.

OUTLOOK

UPCOMING TODAY: NZ merchandise trade (Jan) - 10.45. We expect a monthly trade deficit of $300 million. ANZ Regional Trends (Q4) - 1pm.

CURRENCY: Currency markets remain driven by politics and flows. The Shanghai G20 meeting, equity markets, the NY Fed US monetary policy forum and the Irish elections will all be watched.

RATES: Some receiving interest in the kiwi overnight should see local yields open a touch lower, with pressure to flatten the curve.

REVIEW

CURRENCY: NZD/USD and AUD/USD both lifted, despite weak commodities, a drop in Chinese equities, and stronger US data. GBP/USD and EUR/USD look to have found a level post the "Brexit" lines being drawn. USD/CAD dropped precipitously despite oil declining.

GLOBAL MARKETS OVERVIEW: The tone across equities was generally better overnight,following last night’s 1.4% improvement on the Nikkei and glossing over weakness in Chinese shares. The European Stoxx 600 was up 2.3%. US equities were up smalls at the time of writing. FX markets were whippy, with decent swings in dollar sentiment (particularly against the euro and sterling). Overall, the dollar weakened mildly (except versus the yen). The NZD was a notable outperformer. US bonds rallied, reversing an earlier sell-off. UK, German and French 10-year yields were generally flat. Crude oil suffered a late-session drop to see prices 1-2% weaker, whilst gold prices firmed.

ANZ’S ASSESSMENT

THE PRESSURE IS ON. Amidst market turbulence there is a call to arms for the G20 to get the global economy back on track. The IMF has called for those countries with money to boost growth via public investment. This was played down by US Secretary of State Lew; "don’t expect a crisis response in a non-crisis environment". We concur. Markets are stressed and vulnerable but it’s not a crisis - yet. We continue to beat the microeconomic reform drum as a necessary condition for improvement. Fiscal and monetary policy can only do so much and we note the debate is swinging substantially towards the downside consequences of negative rates. Negative rates are akin to dropping your suit off to be dry-cleaned. You pay for the service. So maybe you should pay for someone to look after your money. But your money is used, it’s not stored. It’s akin to your dry cleaner leasing your suit to someone else before returning it (cleaned) to yourself. Meanwhile, back to the topic at hand and the G20, while we can hope for a substantive policy prescription, it’s a forlorn one. There is simply too much self-interest globally and that dominates group interest.

ODD MAN OUT. The NZ rates market is increasingly gung-ho about prospects for the OCR moving lower. About 40bps of cuts are priced in by year end. That doesn’t fit with a NZD on a TWI basis at 72.9, and gravitating higher. Obviously global forces are holding sway and NZ still looks better than most. We expect the NZD to become more sensitive to local data outturns over the coming months. Data needs to remain strong to validate current levels. The tightening in financial conditions of late suggests we will see some cracks. The rates market looks to be expecting this while the FX market is not.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US durable goods data printed above market expectations in January. Headline durable goods increased by 4.9% m/m and the all-important core figure which gives a decent guide on business investment (capital goods orders stripping out aircraft and defence goods) rose by 3.9% m/m. Moreover, growth in December was revised up.

- Jobless claims in the week of 20 February printed close to market expectations, rising to 272k from 260k in the week prior and pointing to continued strength in the labour market.

- The Kansas City Fed Manufacturing index was unchanged in February (-8),though the composite measure fell to the lowest level since April 2009.

- The Federal Reserve Governor Williams in a speech:

− Expects the Fed to continue gradually lifting rates.

− Opposes tying monetary policy to a single rule (we fully concur on that!).

- The five-year, five-year forward inflation-swap rate dropped to 1.39 percent for the Eurozone. That is the lowest since Bloomberg started tracking the data in 2004. This is the gauge of inflation expectations in the euro region, which ECB President Draghi has referred to previously.

- A reasonable tone across equities which looked beyond yesterday’s volatility in Chinese shares. The Stoxx 600 was up 2.3%. Lloyds rallied strongly after raising its dividend. The DAX was up 1.8%, CAC 40 2.2% and the FTSE 100 2.5%. US stocks oscillated and were up smalls at the time of writing. Bank shares generally were higher, with anything oil related lower.

- Bond markets: US Treasuries advanced with 10 year yields down 5bps to 1.70%. Ten year gilt yields were unchanged at 1.36%, with core Eurozone yields down 1-2bps.

- Oil was once again soft in the commodity space, with WTI and Brent prices down 1.7% and 1% respectively. Action across the wider commodity complex was generally down, including industrial metals and grains, whilst prices for soft commodities rose and gold prices were up close to 1%.

NZD/USD: WHAT TO FOLLOW?

NZD/USD rallied a little further overnight and looks set to again test the top of the range. The rally was against a broader commodity sell off, following European equities which gained - US equities were flat and Chinese equities closed down 7%. US data rebounded somewhat with much better than expected durable goods orders, offsetting slight disappointments in house price data and the Kanas City Fed survey. Markets expect US Q4 GDP to be lower at the second read and we expect NZD to respect ranges and today’s NZ trade data to continue to indicate NZD has some rebalancing work to do.

Expected range: 0.6640 - 0.6750

NZD/AUD: WEAKER CAPEX INTENTIONS…

The Australian Q4 capex report was stronger overall than markets expected, but the forward looking capex intentions series weakened. This drove this cross higher; gains which were held overnight.

Expected range: 0.9230 - 0.9330

NZD/EUR: DATA SLOWING...

EU data remains soft, with Italian releases below expectations and EU wide CPI for January lower, illustrating the inflation battle the ECB faces. Despite this, EUR has held in well. This weekend we have the Irish election to watch, as well as the first reads of German and Spanish February CPI.

Expected range: 0.5990 - 0.6150

NZD/JPY: MORE VOLATILE THAN NORMAL...

NZD/JPY rebounded with equities, and remains highly volatile.

Expected range: 74.50- 76.20

NZD/GBP: WRONG SORT OF ACTIVITY…

The second read of Q4 GDP in the UK showed weakness in capital formation and private consumption being offset by government spending. UK data continues to soften, but GBP is already at a discount due to ‘Brexit’ risks.

Expected range: 0.4740 - 0.4840

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