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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- There was something for everyone in the US labour market data. On the one hand, there was a modest gain in employment of 160k (exp: 200k) and unemployment was unchanged at 5%. However, the mix of employment was encouraging, average earnings rose 2.5% y/y and the workweek increased.

- The AUD maintained its weaker bias on the RBA’s revised outlook for inflation and expectations of further cuts to its cash rate.

- China’s current account was better than expected. This was mainly due to weaker imports and the continued depreciation in the yuan.

OUTLOOK

UPCOMING TODAY: There is no New Zealand data and only Australian job ads for April across the Tasman.

CURRENCY: We expect a slow start to what is a quiet week. The BoE will ensure the GBP is a focus, while the RBNZ’s FSR will keep NZD in play, with the ANZ NZ inflation gauge also important.

RATES: Pay-side pressure was evident during the Friday London session that should see the local curve open higher.

REVIEW

CURRENCY: For once US payrolls came and went with barely a shrug from currency markets. AUD lead the falls, while JPY gained.

GLOBAL MARKETS OVERVIEW: The focus to end last week was US non-farm payrolls. The initial reaction in markets of a monthly employment gain of 160,000 and unchanged unemployment rate of 5% was to sell the USD and lower yields. However, as the market digested the broader content of the report, the dollar retraced much of its lost ground and fixed income gave back its gains, with US 10-year yields finishing 3bps higher. While the headline gain in employment missed expectations, the broader context was positive with the mix of employment encouraging, average earnings accelerating to 2.5% y/y, the workweek increasing and the U6 measure of unemployment falling to 9.7%. Elsewhere sovereign bond yields were little changed. Equities had a mixed session in Europe, but the detail in the NFP gave the major US equity indices a bit of a boost (0.3-0.5%). The CRB had a positive finish to the week, up 0.6%, with grains, energy and gold prices all leading the way.

ANZ’S ASSESSMENT

WHERE TO NOW? The NFP report had something for everyone, but it does confirm the ongoing improvement and absorption of slack in the labour market. The probability of a hike from the Fed is only 8% priced for June and 50% by the end of the year. That seems too low for a "live" meeting, but it highlights the huge difficulty facing the Fed. Data releases apart, for a central bank that prides itself on nurturing market expectations, it has a mountain to climb to raise rates in June if it deems that appropriate. Should a central bank lead? Academics could give you chapter on verse on that. But Yellen’s remarks back in March that the better tone to financial markets was a result of re-priced interest rate expectations helped to cede control to the markets and, without volatility picking up, it will be hard to take that control back. The market will be listening closely to the various Fed members due to speak this week (Evans, Kashkari, Dudley, Rosengren, George and Williams).

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: NFPs rose 160k in April, the unemployment rate was unchanged at 5.0% and the participation rate fell to 62.8% vs 63%. Whilst the headline number undershot expectations, it came as little surprise considering the stage of the business cycle and following the softer ADP report. The average monthly gain in NFPs this year is 213k. Encouragingly, average earnings rose 2.5% y/y, the workweek increased to 34.5 hrs (+0.1 hrs) and the U6 measure of unemployment fell to 9.7% vs 9.8%. The report had something for everyone, but it does confirm the ongoing improvement and absorption of slack in the labour market. After the volatility of Q1, and recent softness in the economic pulse, it wasn’t a bad report. Mining and logging jobs fell 8,000, retail fell 3,000 (vs +39,000 the prior month) and government jobs fell 11,000. Manufacturing jobs rose 4,000 and private service producing jobs rose 174,000.

- Australia: The RBA’s revised forecasts released last Friday included a full percentage point reduction in its inflation forecast for December 2016 from 2-3% to 1-2%. If this does materialise it means the RBA would miss its 2-3% target through the entire 2016 year. The downgrade was prompted by lower expectations for wages growth, increased retail competition and moderating housing costs. Elsewhere the Bank’s forecasts were largely unchanged. GDP growth in the near term was revised up as a result of the strong Q4 GDP print, but from December 2016 onwards the numbers were unchanged. The unemployment rate forecasts were also broadly unchanged. Given the unchanged growth and unemployment rate forecasts, and the very substantial shift down in the inflation outlook, last week’s cut was clearly prompted by the Bank’s miss on its inflation target.

- China: Trade balance for April was $45.6 billion, which was better than expectations. However, this was mainly due to weaker imports and the continued depreciation in the yuan. Local export returns rose 4.1% y/y in April and year-to-date are back only 2%. This might not seem too awful, but with the yuan back 4.5% this year it highlights an even softer global demand backdrop. Imports also fell 5.7% y/y in local terms in April. The first four months saw imports of commodities rising in volume but not in value. According to Customs, China bought 325m tons of iron ores (+6.1% y/y), 124m tons of crude (+11.8%) and 1.88m tonnes of copper (+23.1%) but their import prices fell 24.9%, 35.3% and 16.2% respectively. Imports of coal dropped 2.5% and 21.5% in volume and average price respectively. Unless these prices surge sharply in the near term, the value of China's imports is unlikely to pick up. All up, April's trade data is unlikely to have a major impact on the PBoC's exchange rate policy as the government attributes the sluggish trade figures to the weakness of global demand.

- Global equity bourses were a mixed bag, with mild moves overall. The Euro Stoxx 50 closed down 0.1%, but the FTSE 100 and DAX both gained 0.2%. The major US indices had a positive session finishing up 0.3-0.5%. Material, industrial and consumer staples/discretionary outperformed on strong commodity prices and wage gains in NFP.

- Sovereign yield movements were mixed too, but overall movement was fairly limited in the scheme of things.

NZD/USD: PAY RISE…

The market reaction to payrolls was muted despite the 40k miss in the headline result. This is down to the fact that wages and hours worked lifted and NY Fed President Dudley still saw two hikes in 2016. The Chinese trade data at the weekend remained okay.

Expected range: 0.6780 - 0.6880

NZD/AUD: INFLATION CAPITULATION…

Our Australian colleagues have changed our RBA call expecting a follow up cut due to the substantial downgrade in inflation forecasts. This change will keep the NZD/AUD supported as it offsets our expected RBNZ cuts.

Expected range: 0.9220 - 0.9340

NZD/EUR: FLOORED…

NZD/EUR eased as EUR/USD remained resilient last week. Spanish industrial output lifted as EU data continues to print on the ‘right side’ of the line.

Expected range: 0.5920 - 0.6060

NZD/JPY: REBOUND?

As this cross tests its lower bound, we look to the possibility of a rebound.

Expected range: 72.50 - 74.50

NZD/GBP: BOE WEEK…

The BoE meets this week and we also get the inflation report. With UK data softening of late and Brexit fears easing we would get a bigger reaction if the BoE turned optimistic - as unlikely as that seems.

Expected range: 0.4680 - 0.4780

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