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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- US ISM manufacturing came in below expectations, but remained in expansion territory (50.8). There was a spike in ISM prices paid to 59.0 from 51.5.

- Markit Eurozone manufacturing PMI beat expectations, with stronger readings in Germany, Italy and Spain offsetting a contraction in France.

- RBA today, with the market pricing in a 50/50 chance of a 25bp cut. Our Australian colleagues expect no change.

OUTLOOK

UPCOMING TODAY: The focal point today will be the RBA at 4.30pm. There is also Australian building approvals (Mar) and the Caixin Chinese PMI for April.

CURRENCY: The RBA is the main event today, and with rates markets 50/50 AUD volatility is assured. We expect the AUD to be supported as the RBA holds steady.

RATES: The local curve is likely to open largely unchanged.

REVIEW

CURRENCY: The USD remained on the back foot as the ISM declined to match the Markit PMI. EUR followed the JPY breaking higher and both the AUD and NZD climbed. The NZD/AUD is beginning to top out.

GLOBAL MARKETS OVERVIEW: It was a quiet session overnight with London out for the May Day holiday. Global equities were mixed on thin volumes. Euro Stoxx was up 0.1%, the DAX up 0.8%, FTSE MIB down 1%, and US equities up 0.6-0.7%. In the US, the minor gains come off the biggest weekly retreat since February and were led by bank stocks and a continued climb by Amazon (+12.6% over the last two sessions). Commodity prices were also mixed, with oil down 2.4% as Iraq’s exports hit 3.36 million barrels per day in April, just shy of the all-time high of 3.365m in November last year. The USD remained on the back foot against the majors with the weaker manufacturing data offsetting a spike in the prices paid component and a positive revision to construction spending. Sovereign yields were mixed too, with US 10-year yields up (+2.8bps); but Germany (-0.5bps) and France (-1.9bps) 10-year yields were both down.

ANZ’S ASSESSMENT

NEXT BATTER UP. The next batter up today after last week’s big swingers and the RBNZ is the Reserve Bank of Australia. Following Australia’s weak Q1 CPI report, the market is increasingly trying to second-guess the RBA, particularly as its April assessment flagged that continued low inflation "would provide scope for easier policy". Market odds of a 25bp cut have risen significantly to 50/50, and according to Bloomberg 12/27 analysts are forecasting a cut too. Our Australian colleagues expect no change, but knowledge it’s an incredibly close call. On the one hand, the RBA is an inflation targeting bank. Friday’s Statement on Monetary Policy is likely to show the Bank forecasting underlying inflation staying below the 2-3% target band until early next year. The question is, is this consistent with the RBA’s mandate to keep "consumer price inflation in the economy at 2-3 per cent, on average, over the medium term"? If the RBA views the next few quarters as "the medium term", then it has little choice but to cut rates. On the other hand, activity and labour market data have continued to improve. Business conditions in the NAB survey are at their highest level since the GFC and the unemployment rate has been tracking lower since the peak of 6.3% in July last year. In isolation, the trend in these numbers would suggest monetary policy should be less expansionary, not more. Moreover, the global backdrop continues to look a little better with the reassessment of the near-term prospects for China and the (not unrelated) lift in commodity prices. The RBA will also be acutely aware that central banks around the world are missing their inflation targets. And it remains questionable how successful lower and lower policy rates will be in achieving inflation targets, given the commonality of weak global inflation trends. So it all feels airily similar to the debate New Zealand has been having on this side of the Tasman. We don’t have to wait long to see whether the RBA will once again be drawn to the table like the RBNZ has been this year.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US ISM manufacturing came in below expectations in April at 50.8. This is down from 51.8, but still the second highest result in the past eight months. New orders were at 55.8, from 58.3, and production was at 54.2, from 55.3 in March. There was a continued drawdown in inventories, with the index at 45.5, from 47.0. The ISM prices paid index spiked to the highest level since September 2014 at 59.0 (mkt: 52.0), from 51.5. The spike is partly due to the recent rebound in commodity prices, but this doesn’t explain the whole move suggesting other forces, such as a lower USD, might be starting to generate prices pressures. Separately, the final Markit manufacturing PMI was at 50.8, in line with market and matching the initial estimate.

- US construction spending expanded 0.3% m/m in March (mkt: 0.5%) and there were backward revisions to January and February. Private sector spending (+1.1%), led by a 1.5% gain in residential construction, was able to offset a 1.9% fall in public spending in March. The firmer spending data will provide a modest upward revision to Q1 GDP data due to better than expected business investment.

- The Atlanta Fed GDPNow model forecast for Q2 is now at 1.8% through May 2, unchanged from April 29. The forecasts for Q2 real residential investment growth and real non-residential structures investment growth increased after the construction spending release. These were offset by declines in the forecasts of real equipment investment growth and real consumer spending growth following the Manufacturing ISM.

- Puerto Rico defaulted on USD422m Government Development Bank bond which matured 1 May. The bond was issued in 2011 with a 4.7% interest rate and last traded at 32 cents on the dollar in March. The country has racked up USD70bn worth of debt across more than a dozen issuers. The Governor Garcia Padilla warned 10 months ago that the debt was unpayable, highlighting more restructuring is likely moving forward.

- Eurozone manufacturing PMI edged up 0.1pt to 51.7 in April, from 51.6 the previous month. Germany (51.8), Italy (53.9), Spain (53.5) were able to offset weaker French (48.0) figures to keep the overall index gradually rising. New orders were at 52.1, from 52.2, the 17th consecutive month of expansion.

- Canadian manufacturing PMI continued to rise in April, up to 52.2, from 51.5. It’s the highest reading since December 2014. New orders rose to 52.4 vs 51.8 in March. Output was the highest since June 2015.

- Global equities were mixed on thin volumes. Euro Stoxx was up 0.1%, the DAX up 0.8%, FTSE down 1%, and US equities up 0.6-0.7%.

- Sovereign yields were mixed too with US 10 year yields up (+2.8bps); but Germany (-0.5bps) and France (-1.9bps) 10-year yields both down.

NZD/USD: JUST ABOVE STALL SPEED…

NZD/USD regained 0.70, as the US ISM softened. While the prices paid component spiked - reflecting commodity price rises - markets noted that US manufacturing remains just above stall speed. Fed speakers dominate the USD today, with the NZD likely to follow the fortunes of AUD. While NZD/AUD is more at risk from an unchanged policy rate, the NZD/USD looks to be more at risk from a cut.

Expected range: 0.6900 - 0.7060

NZD/AUD: RBA TODAY…

The rates market is priced 50/50 going into today’s RBA meeting. This should ensure that this cross sees some volatility today. We expect the RBA to hold steady, which should reinforce the nascent topping structure.

Expected range: 0.9000 - 0.9250

NZD/EUR: LOST IN TRANSLATION…

EUR/USD broke above 1.15 as markets translate the USD/JPY moves. The Markit PMIs showed a strong periphery performance to lift the final estimate from its disappointing advance read. However France remains an issue.

Expected range: 0.6000 - 0.6170

NZD/JPY: BASING…

USD/JPY stabilises as markets conclude the move observed is sufficient.

Expected range: 73.80 - 75.50

NZD/GBP: HOLIDAY…

GBP/USD followed EUR/USD higher as the UK enjoyed a May Day holiday. However, it’s back to business today with the Markit manufacturing PMI.

Expected range: 0.4720 - 0.4830

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