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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Bond yields continued to push higher despite misses to the downside on US durable goods and consumer confidence.

- The US dollar was under modest downward pressure, which led to a broad-based rally in commodity prices.

OUTLOOK

UPCOMING TODAY: New Zealand’s trade data for March, which we expect to show a surplus of $300m. Offshore there is Australian CPI for the first quarter. We are forecasting a rise of only 0.1% q/q with annual inflation ticking down to 1.6% y/y.

CURRENCY: Liquidity is likely to be low until the FOMC tomorrow morning. However, Australian Q1 CPI and UK Q1 GDP will both provide a distraction before the main event.

RATES: Local yields are expected to open a touch higher with a bias for the curve to steepen.

REVIEW

CURRENCY: The USD remains on the back foot ahead of the FOMC. This position leaves clear upside risks heading into the FOMC. JPY was the exception to the weak USD. Both AUD and NZD rallied.

GLOBAL MARKETS OVERVIEW: Our London colleagues reported a moderately quiet session ahead of this week’s main events (FOMC, BoJ, RBNZ and Australian CPI). There was weaker US durable goods orders and consumer confidence, but bond yields continued to push higher as the market increases the probability that the FOMC will be raising rates over the second half of 2016. There are no expectations for a rate rise tomorrow, but the market is anticipating that the FOMC may upgrade its assessment of the international economy given the better tone to Chinese data recently and reduction in financial market volatility. At the time of writing, US 10-year yields were up 2bps to 1.93% and core European yields had risen 3-5bps. The USD was under modest downward pressure though, which led to a broad-based rally in commodity prices. Oil prices were up 3.4% and CRB index 1.4% (month-to-date it’s up 6.4%). The major equity indices were little changed.

ANZ’S ASSESSMENT

FIRST UP. The US Fed is the first central bank up tomorrow morning at NZT 6am. The FOMC and Yellen will need to start prepping the market more if they believe June is a realistic possibility for a hike. For June to be on the table, the Fed needs to be confident that further progress will be made in achieving its dual mandate. In our opinion, an unchanged economic outlook (of above-trend growth, ongoing solid labour market and gradual rise in inflation) and a more balanced assessment of the risks should enhance the Fed’s confidence to proceed with further normalisation.

IN OTHER NEWS. A modest trade surplus for March is expected. There have only been two years since 2000 when a March trade surplus was not recorded, with one of those years being 2008, at the height of the global financial crisis. We have pencilled in a $300m surplus. The trade accounts have actually fared relatively well over the past six months. While the accounts remain in deficit in seasonally adjusted terms, the $89m deficit is modest. Moreover, the trend measure, at $130m, is actually the smallest since October 2014. This may seem surprising given the extent of the fall in dairy prices. It reflects a couple of other forces: first, NZD non-dairy export prices have held up relatively well; and second, the value of oil imports has fallen sharply in line with global oil prices. It is consistent with the signal from the broader terms of trade, which in Q4 were only 3% below levels from a year prior. But we expect a deteriorating trend in the trade accounts to return. The impact of previous oil price falls should begin to wane over the coming months. And together with an expected moderation in NZD export prices, we see the terms of trade falling by circa 10% over the course of 2016, which should begin to weigh on New Zealand’s trade performance once again

OVERNIGHT SPECIFICS AND KEY EVENTS

- United States: Durable goods orders and April consumer confidence continued the theme of weaker-than-expected US data. Provisional March data on durable goods showed a rise of 0.8% m/m vs expectations of a 1.9% m/m gain. The rise was entirely driven by a big increase in defence aircraft, with core orders unchanged on the month (the market had expected a 0.6% rise). Orders of non-defence capital goods rose a modest 0.3% m/m in March, but downward revisions to February shows a 9.6% y/y drop during the first quarter. Weak business investment remains a common theme as companies remain concerned about global demand.

- There was a small decline in April’s consumer confidence to 94.2 (expectations of 95.8 and previous of 96.1 in March). It can be a volatile series, and whilst rolling over a bit, consumer confidence is still towards the highs seen since the recovery started back in mid-2009. The present situations index rose to 116.4 (114.9) and expectations dipped to 79.3 (83.6). The fall in future expectations is likely due to some political uncertainty beginning to creep in as election year heats up. Consumer fundamentals remain healthy though, driven by a robust labour market, households having scope to run down savings, interest rates at historical lows and rising asset prices (housing and equity). Elsewhere, the April Richmond Fed index dropped to 14 vs +22 (an established theme this month), but the April preliminary Markit Services PMI rose to 52.1 vs 51.3. The composite index rose to 51.7 vs 51.3 suggesting broader economic activity is holding in. The Case-Shiller 20-city home price index rose 5.4% y/y in February. This continues a gradual appreciation in house prices.

- Australia: Q1 CPI data is expected to confirm that the inflation pulse remains low. We are forecasting a rise of only 0.1% in Q1 with annual inflation ticking down to 1.6% y/y. This reflects weak wages growth, softer price pressures in residential construction, strong international competition, and a benign global inflation environment. Tradables inflation will be watched closely to see if the strength in Q4 2015 persisted into Q1 2016. We are sceptical that it will, given the recent rise in the exchange rate and the intensity of international competition, particularly in the retail sector. The decline in retail margins in Q4 and a weak signal from the NAB survey of retail prices also support this view. On policy implications, the inflation profile is unlikely to be weak enough to trigger policy action by the RBA. That said, it is certainly no constraint should easier policy settings be needed if growth in demand falters.

- Equities: The major equity indices were little changed. The Euro Stoxx finished 0.12% higher. The FSTE was up 0.4%, but DAX and CAC were both back 0.3%. In the US the major bourses were little changed.

- Commodities: The USD was under modest downward pressure, which led to a broad-based rally in commodity prices. Oil prices were up 3.4% and CRB index 1.4% (month-to-date it’s up 6.4%).

NZD/USD: FOMC…

The USD has remained on the back foot as US data remains soft. Durable goods orders for March missed expectations, along with April consumer confidence, while the Richmond Fed declined a little less than expected. Tonight is all about the US Federal Reserve’s global outlook. Given financial volatility has eased and global fears receded, markets will be looking to see if this translates into an increased propensity to normalise policy.

Expected range: 0.6820 - 0.6960

NZD/AUD: AUSTRALIAN Q1 CPI…

Australian Q1 CPI will dominate the NZ March trade balance in terms of importance today. Markets are not expecting inflation to confirm that the RBA has time on its side. As pricing already reflects this it leaves topside risks.

Expected range: 0.8820 - 0.8960

NZD/EUR: SECOND TIER…

A series of second tier data results will keep EUR traders busy until the main event - the FOMC. Both NZD and EUR should have a similar reaction to the FOMC, although some downside pressure is likely to remain.

Expected range: 0.5960 - 0.6140

NZD/JPY: BOJ TOMORROW…

JPY continues to weaken ahead of tomorrow’s BoJ meeting.

Expected range: 75.50- 77.50

NZD/GBP: Q1 GDP…

The UK has the advance release of Q1 GDP tonight where markets are expecting an annual growth rate of 2%. Cable has broken above 1.45 as Brexit fears continue to recede.

Expected range: 0.4670 - 0.4800

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