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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- The Federal Reserve sounded a more dovish tone than anticipated by the market, taking two (of four) hikes out of the 2016 "dot plot" on global risks. Focus now turns to Yellen’s press conference, which is underway.

OUTLOOK

UPCOMING TODAY: New Zealand Q4 GDP is due at 10:45am. ANZ expects +0.6% q/q (+2.0% y/y), fractionally below the +0.7% q/q market consensus and the March Monetary Policy Statement pick, but we see risks to the upside. Australian labour market data is out at 1:30pm NZT.

CURRENCY: We look forward to a relatively busy day, with NZ Q4 GDP the dominant local factor. Australian employment will influence NZD/AUD, while secondary central banks dominate Europe.

RATES: Local yields are expected to open lower following the Fed.

REVIEW

CURRENCY: The dovish surprise from the Fed sent USD sharply lower and NZD squeezed harder than other currencies, an impact that we would expect to dissipate.

GLOBAL MARKETS OVERVIEW: Prior to the Fed announcement at 7am markets had a quieter night. European equities were mixed although the UK FTSE 100 received a small boost after a mildly expansionary 2016-17 UK budget was presented. US equity markets lost ground as they awaited the Fed, before bouncing sharply to be little changed at the time of writing. In bond markets, there was a mild but generally broad-based rally on European sovereign bonds. 10-year yields fell 1.3bp in the UK, 0.5bps in Germany and 1.9bps in France. In contrast, US Treasuries initially sold off, but rallied sharply following the Fed’s dovish tone. Oil prices bounced to see near-dated WTI rising 4.8% to USD38.10/bbl at the time of writing, and Brent up 3.5% to be just above USD40/bbl. Gold jumped in response to the weaker USD post-Fed to be up 1.7% at the time of writing.

ANZ’S ASSESSMENT

FED HOLDS THE COURSE. As universally expected, the Federal Reserve left the fed funds rate unchanged today. The "dot plot" of median participant forecasts implied just two hikes in 2016 rather than the four suggested in December, in a hat tip to growing downside risks from the global growth outlook (four hikes are still inferred in 2017). The market had been expecting just one cut to be shaved out of the 2016 numbers. The GDP forecasts for 2016 were revised down on global growth risks and tepid business investment. While oil has provided a downward shock to headline inflation, the more-important core inflation forecasts were unchanged for 2016, in line with recent data. Unemployment forecasts were also revised down, completing a rather mixed picture. The market generally liked the "low for longer" message (at least initially): equities rose and Treasury yields fell, while gold and other commodities jumped on the resulting USD weakness.

NZ Q4 GDP SET TO HAVE BEEN RESPECTABLE. ANZ expects the NZ economy grew 0.6% q/q (2.0% y/y) in the final quarter of last year. On the face of it such a growth rate is respectable, but it would barely keep pace with population growth. The quarter is expected to show solid growth in the construction, services and core manufacturing sectors offsetting weather-related weakness in primary sector production and manufacturing. Looking forward, tighter financial conditions and weak commodity prices look set to act as a brake on the economy, and we expect growth to slow below trend.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: The Federal Reserve left interest rates unchanged, as universally expected, but halved its expected degree of rate hikes in 2016, from four to two on a weaker growth outlook. Bad news is still good news: markets responded positively. Equities unwound their losses, Treasury yields fell across the curve (2-year -7bps, 10-year -5bps), and the USD fell.

- US: The February CPI report was better than expected with the headline annual rate at 1.0% and core (ex food and fuel) pushing up to 2.3% y/y. That was core's highest rate since May 2012 and should boost confidence that inflation will return to trend if oil is stabilising. Services inflation rose to 3.1% y/y. Meanwhile, the construction sector is continuing its moderate expansion with February housing starts up 5.2% y/y. The combined data are USD positive and bond negative but ahead of the FOMC, market moves were limited.

- US: February industrial production fell 0.5% as utilities output fell 4.0% and mining dropped 1.4%. However, manufacturing output rose 0.2% following January's 0.5% gain. That mirrors other data which suggests the downturn in manufacturing may be abating.

- UK: A mildly better than expected labour market report for February showedearnings stronger and the fall in jobless claims sharper than the market had forecast. Total earnings growth of 2.1% y/y in the three months to January was 0.1ppt above the market tip and 0.2ppts higher than December. Ex-bonuses, earnings rose 2.2% y/y. Jobless claims fell by 18k (exp: -9.1k) and January's result was revised stronger. These data suggest we could see a fall in the unemployment rate in coming months. On the slightly weaker side was the 116k change in employment in the three months to January (exp: 144k, last: 205k).

- UK Chancellor Osborne presented a mildly expansionary 2016-17 budget. In part due to the deterioration in the outlook for economic growth, the exchequer has raised its expected net borrowing by close to £40bn over the forecast horizon to 2019-20. Reductions in the effective rate of tax paid by corporations and individuals should be modestly supportive for growth, and there were new incentives to encourage savings. The exchequer still expects finances to return to surplus by 2019-20, targeting a steady decline in the deficit. At the margin, the budget should aid a slightly faster return of inflation to the 2% target.

- Bonds: There was a mild but generally broad-based rally on European sovereign bond markets, with yields down ½ - 2bps in core markets. US Treasuries sold off in the run-up to the Fed, with 10-year yields up 2bps. In response to the Fed yields fell markedly, down 7bps for the 2-year bond and 5bps for the 10-year bond.

- Equities: European equities were mixed, with the Euro Stoxx down 0.2%. US equities treaded water before the Fed, down 0.1-0.2% just before the decision before erasing losses on the Fed’s more dovish outlook.

- Oil prices bounced overnight, with near-dated WTI up 4.8% to USD38.10/bbl and Brent up 3.5% (USD40.12). Most of the move preceded the Fed.

- The broader CRB index lifted 1.4%, led by oil. Gold prices dipped slightly prior to the Fed, then leapt. They are currently up 1.7% at USD1254/oz.

NZD/USD: DOVISH SURPRISE…

The Fed surprised markets on the dovish side, remaining concerned with the global environment and halving its dot plot forecasts for hikes this year. But with the Fed out of the way, markets will focus on New Zealand Q4 GDP. We are marginally under expectations for this release, a factor that will see NZD remain capped despite USD weakness post the Fed.

Expected range: 0.6610 - 0.6760

NZD/AUD: Q4 GDP AND AU EMPLOYMENT…

This cross rallied on the Fed as NZD squeezed harder than AUD. Further direction will be driven by New Zealand Q4 GDP and Australian employment. We see little in either release to drive this cross to rebound from support.

Expected range: 0.8840 - 0.8940

NZD/EUR: STILL PIVOTING…

Prior to the dovish Fed surprise the EUR/USD returned to test the 1.10 pivot. Markets are moving EUR with overseas developments.

Expected range: 0.5920 - 0.6020

NZD/JPY: CALM…

Global markets were calmer again overnight allowing some ‘safe-haven’ demand for JPY to dissipate. However, the Fed concern over overseas developments saw fear quickly re-priced. We expect that to wane.

Expected range: 74.70 - 76.00

NZD/GBP: EMPLOYMENT STILL SUPPORTIVE…

UK employment remains a supporting factor for GBP, with average weekly earnings ticking up two tenths and the report remaining solid overall.

Expected range: 0.4660 - 0.4710

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