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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- The euro weakened despite many European centres being closed for Ascension Thursday.

- ECB’s Mersch said the effectiveness of negative interest rates is probably overstated.

- Weakening UK services sentiment, with tentative evidence "Brexit" fears are weighing on sentiment and activity.

OUTLOOK

UPCOMING TODAY: No New Zealand data today. Australia has the RBA Statement of Monetary Policy, foreign reserves and construction sentiment, whilst services and composite PMI’s are out for Japan. The focus tonight is US payrolls.

CURRENCY: All eyes are forward to payrolls tonight, where markets will be looking at wage rather than employment growth to drive USD. First however, the RBA SOMP will be closely scrutinised to determine potential for further cuts from the RBA to drive AUD.

RATES: No kiwi trades overnight. Local yields are expected to open broadly unchanged, with a flattening bias.

REVIEW

CURRENCY: EUR/USD fell almost a big figure, in an otherwise quiet market. As this fall puts EUR/USD back in the range, it signals a temporary top.

GLOBAL MARKETS OVERVIEW: Somewhat confusing price action overnight as markets seem a little less correlated than usual. Many European markets were closed for Ascension Thursday and thus liquidity was thin. Oil prices posted modest gains (1% at time of writing) despite put in a large run (up 5% at one point). Whilst equities struggled remaining relatively unchanged. Fixed income was better bid, with US 10 year Treasury yields down 3bps to 1.75% and larger falls for core European yields. Lower prices for softs, industrials dragged the CRB index down 0.5%

ANZ’S ASSESSMENT

PAST THE WORST. Data of late has been somewhat mixed, but it suggests growth is on a reasonable footing. Monetary policy accommodation and higher asset prices have acted to relax financial conditions (see overleaf for our Proprietary Financial Conditions Indexes (FCI’s)) and point to improving growth. Admittedly the relationship between FCI’s and subsequent growth outcomes is not always exact, especially over periods of marked structural change. Certainly, pessimists can highlight risks posed by higher debt levels (as monetary stimulus sees growth bought forward), stretched asset values, low productivity and even Brexit and US election uncertainties as reasons why future growth outcomes will disappoint. While we have some sympathy with this view, to completely write off the growth enhancing impact of technological change and policy stimulus still seems premature. For rates markets there is also an added twist, with central banks increasingly looking to be placing more weight on inflation outcomes rather than gauges of future inflation. With the luxury of low inflation, central banks can afford to be less pre-emptive, but one wonders what would happen if the costs of ultra-low monetary settings look to outweigh their benefits (via asset price largesse) or if low inflation appears to be fleeting. Time will tell.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: No major data of note. Initial claims rose 17k to 274k in the week ended April 30. Continuing claims eased to 2121k (2129 prior).

- Fed Bullard (2016 voter) was undecided on path of US rates, noting it was difficult to conclude whether rate predictions by the Fed or by the markets were more accurate. Financial stress has fallen and the effects of the stronger dollar appeared to have waned. Weak Q1 GDP contrasted with the US labor market "at or possibly well beyond reasonable conceptions of full employment", with the recent upward trend in inflation noted. "Still, combining actual data from the second half of 2015, the first quarter of 2016, and tracking estimates for the current quarter, the suggestion is that the U.S. is growing below a trend pace of 2 percent".

- ECB Economic Bulletin: "Looking ahead, the economic recovery is expected to proceed. Domestic demand, in particular, continues to be supported by the ECB's monetary policy measures. Their favourable impact on financing conditions, together with improvements in corporate profitability, is benefiting investment. Moreover, the accommodative monetary policy stance, continued employment gains and the still relatively low price of oil should provide ongoing support for households’ real disposable income and private consumption. In addition, the fiscal stance in the euro area is slightly expansionary," the Bulletin said.

- UK: The April services PMI index dropped to 52.3 vs 53.7 and the composite index consequently dropped to 51.9 vs 53.6. That compared with 56.2 in January and underlines how businesses are becoming cautious ahead of the UK referendum on EU membership on June 23.

- Global equity bourses were a mixed bag, with mild moves overall. The Euro Stoxx 50 and FTSE 100 closed up 0.1%, the DAX gained 0.22%, but the CAC 40 shed 0.1%. US bourses were slightly in the red.

- Sovereign yields fell. Strong buying for bunds, holding onto the previous day’s rally. US 10-year yields were a touch lower at 1.78%, while German 10-year yields held steady at 0.20%.

- Lower prices for softs, industrials and grains pushed the CRB index down 0.5%. WTI prices were up 5% at some stage as the Canadian wildfires impact on supply before paring recent gains. Prices for gold and silver were down 0.4%.

NZD/USD: IT’S ALL ABOUT CAPACITY…

Markets are focused on the US labour market prints. A weak headline jobs print, with soft wage growth will reinforce the weaker USD trend of late. However, a weak headline jobs number with solid wage growth could signal capacity constraints. With markets pricing very little chance (10%) of a June rate hike, and just north of 50% chance of 1 hike this year there is room for upside and downside surprises.

Expected range: 0.6860 - 0.6960

NZD/AUD: RBA…

It was announced yesterday that Deputy Governor Phillip Lowe will be the next Governor (September start). Markets will scrutinise todays RBA SOMP (equivalent to the RBNZ MPS) for signs of any further action from Governor Stevens as the May policy assessment provided little forward guidance. A greater reaction would come from a one and done guidance.

Expected range: 0.9180 - 0.9280

NZD/EUR: FLOORED…

EUR/USD dropped back into its range yesterday falling nearly 1c against the USD. For now this signals a temporary top in EUR - floor in NZD/EUR.

Expected range: 0.6010 - 0.6100

NZD/JPY: TIME TO REBOUND?

This cross close to lows, the longer it remains the more likely it is to bounce.

Expected range: 73.20- 75.00

NZD/GBP: UK SERVICES…

It was three from three this week with the UK Markit Services PMI missing expectations - along with the manufacturing and construction PMIs earlier this week. Brexit is clearly impacting sentiment in the UK.

Expected range: 0.4680 - 0.4780

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