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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- The Fed’s Rosengren (FOMC voter) said he was surprised the market’s expected path for fed funds was so low and that if the data remains okay the Fed may have to hike sooner than the market thinks.

- US February factory orders fell by 1.7% m/m following a downwardly revised 1.2% gain in January (1.6% previously reported).

- Oil remained offered as uncertainty ahead of the April 17 oil producers meeting continued.

OUTLOOK

UPCOMING TODAY: Locally we get the ANZ Commodity Price Index for March, while in Australia the highlight is the RBA’s interest rate decision.

CURRENCY: The RBA decision will drive the AUD and NZD, with currency commentary the key focal point. Globally it’s the service sector PMIs that will set direction, expectations are for increases.

RATES: Local rates likely to open broadly unchanged after a quiet and rangebound London session.

REVIEW

CURRENCY: AUD and NZD are lower ahead of today’s RBA decision, but otherwise currency markets broadly consolidated. USD remained relatively stubborn in the face of further dissenting Fed commentary.

GLOBAL MARKETS OVERVIEW: It was a day of consolidation in markets as an absence of data allowed participants and investors time to reflect on the volatility in Q1, the current health or dislocations in global economies and what may lie ahead in Q2. US 10-yr Treasury yields were broadly unchanged during lacklustre trade. Stock markets in Europe and the US were little changed following on from a subdued Asian session. Oil (WTI futures) were down around 3% at6.45am NZT, while gold was down around $5.

ANZ’S ASSESSMENT

RBA IN FOCUS - NO CUT EXPECTED: Today’s RBA meeting is the main risk event of the day, particularly in light of tweaks in RBA language and media speculation that cuts may be coming later in the year. For our part, we do not expect a change, with our Australian colleagues noting that the domestic economy continues to track reasonably well. Of particular note will be any comments the Bank makes about the AUD. There was scant commentary on the AUD in previous minutes other than to note that the non-mining sectors had been supported by the depreciation over the past couple of years. However, AUD/USD was trading around 0.7150 at the time, but is now around 0.76. We therefore think that a tweak to the commentary on the AUD in this week’s statement is likely. We expect that the Bank would not be comfortable with this level of the exchange rate and would much prefer to see the AUD closer to the mid-60s. However, to be sure, we do not see the RBA cutting rates in a mechanical response to the stronger AUD. The Bank is much more likely to wait for evidence that a stronger currency is having a materially detrimental impact on the economy. If it becomes apparent that the strength in the AUD is feeding through into deteriorating business conditions, this would be a concern. So far we’ve seen business conditions moderate from a very high level, but they remain at elevated levels, suggesting that the recovery in the non-mining sector is continuing. Moreover, we still think that the depreciation cycle in the AUD is not yet over and this will provide a renewed kick for economic growth through 2017.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: The final February durable goods report showed orders fell 3% m/m after initially being reported down 2.8%. Within the data, non-defence aircraft orders were down 27.2% while defence orders were down 28%. Excluding civilian aircraft, non-defence capital goods orders fell 2.5% m/m. That was a weak reading and in part may have been adversely affected by the financial market volatility in January and early February as uncertainty may have tempered spending plans. If manufacturing is recovering and the labour market continues as it is, then capex should recover, especially as equities and credit markets have recovered and the dollar is now weaker.

- Euro area: The unemployment rate fell to 10.3% in February vs 10.4% in January and 11.2% a year earlier, continuing its slow but steady improvement. Pipeline disinflationary pressures remain intense in the euro area, however. In February, producer prices fell 0.7% m/m and were 4.2% down y/y. That was the biggest decline since December 2011.

- UK: The construction PMI held steady at 54.2 in March, beating expectations of a small decline. That implies the non-manufacturing economy outside of services remains healthy.

- European equity markets were generally up slightly, but moves were muted compared to what we have seen in recent weeks. On the other hand, US equity markets were generally down slightly, having come off the year’s highs on Friday. Newswires attributed the falls to declines in consumer and industrial shares, and weaker oil prices.

- Bonds and rates: Our rates trader in London reported that it was a very quiet session, with US 10y Treasury bond yields trading in a tight 3.5bp range. Similar ranges were also seen for Bunds and ACGBs. With only minor data prints around, the small moves saw yields at their highest after modestly higher oil/equities and some hawkish comments from the Fed’s Rosengren expressing surprise at how little the market has now priced in terms of hikes for this year. As oil and equities rolled over a touch, yields have dropped back 1.5bps to 1.77% currently.

- Losers outnumbered gainers on commodity markets, with the broad CRB index down around 2.2% at 6.45am NZT. Indeed, 15 of 19 commodities in the index are down on the day, led by energy and grains. Crude oil and Diesel were among the biggest losers, but Natural Gas was the biggest gainer. WTI is down almost 16% since its March 18th peak.

NZD/USD: MARY, MARY, QUITE CONTRARY…

Outside of Australasia the USD was broadly stable, despite Boston Fed (and FOMC voter) President Rosengren stating he thought market pricing was too pessimistic. US yields were also broadly unchanged. US data was softer with the labour market conditions index declining 2.1pts against expectations of a 1.5pt increase, durable goods weaker at the final read, and core factory orders also below expectation. However, NZD/USD fell with commodities, and equities, and the AUD.

Expected range: 0.6780 - 0.6940

NZD/AUD: HOW DOES YOUR DOLLAR GROW?

The key question for today is; how will the RBA react to AUD strength? Should the RBA remain staid on dollar commentary then markets will take that as an implicit endorsement of strength.

Expected range: 0.8900 - 0.9030

NZD/EUR: SERVICE SECTOR…

The EU unemployment rate is 10.3%, an improvement on the upwardly revised January read. PPI dropped faster than expected. Markets will watch the service sector PMIs today, which should remain supportive for EUR.

Expected range: 0.5960 - 0.6060

NZD/JPY: TESTING RESOLVE

JPY strengthened as markets continue to test BoJ resolve.

Expected range: 75.40- 77.00

NZD/GBP: SERVICES…

Markets watch service PMIs for signs of impact from Brexit fears, as the Financial Policy Committee minutes should reveal further BoE concerns..

Expected range: 0.4810 - 0.4890

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