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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Euro area March industrial production fell 0.8% m/m following February’s downwardly revised 1.2% drop.

- FOMC’s Mester said inflation has moved higher and is cautious about taking inflation expectations from market measures.

- BoE says Brexit would be negative for UK growth and GBP. Remaining in the EU is the assumption it bases it forecasts on.

OUTLOOK

UPCOMING TODAY: New Zealand Q1 retail trade at 10:45am (ANZ expects a 1.1% q/q increase in sales volumes). Non-resident bond purchase data is also out at 3pm.

CURRENCY: The US dataflow picks up tonight with the all-important US consumer on stage. US retail sales will drive USD direction. NZ Q1 retail sales should continue data support for the NZD.

RATES: Local rates are expected to open a touch higher, with pressure to steepen the curve.

REVIEW

CURRENCY: The USD caught a slight bid last night, but the trend was weak. JPY strengthened, EUR fell, and GBP did a nice round trip post the BoE. NOK also strengthened after economic growth forecasts were increased.

GLOBAL MARKETS OVERVIEW: European markets took their cue from the weaker Asian session, with weak corporate earnings and BoE warnings over the costs of Brexit adding to the negative tone. The Euro Stoxx 50 fell 0.7% the FTSE 100 shed 1%, and the DAX declined 1.1%. Rebounding oil prices helped erase earlier declines in US bourses, despite further falls in Apple shares. US Treasury yields rose on hawkish comments from three Fed voters (Rosengren, Mester and George), with European yields modestly higher. While oil prices staged a further modest increase, the modestly higher USD capped overall commodity prices, with gold prices down.

ANZ’S ASSESSMENT

BoE ISSUES WARNING. As widely expected, the Bank of England’s MPC chose to keep its key policy rate unchanged at 0.5% and maintained the asset purchase programme at £375bn. That said, the 9-0 vote in favour took some by surprise who had been expected some dissention in the ranks. With about six weeks to go before the June 23 binding referendum on EU membership, the Bank issued a stark warning over the potential costs of UK exit from the EU. At the press conference, Governor Carney said that a vote to leave could have "material effects" on demand, supply and the pound, and could even push the UK economy into a "technical recession". He added that with UK rates already close to zero, the BoE has limited ability to cushion the blow. Furthermore, it would face a difficult balancing act in the aftermath of a "leave" vote over whether to raise interest rates to restrain surging inflation or cut borrowing costs to support growth, but said the MPC doesn’t have a "pre-wired" response. While the "remain" camp have hailed the BoE view as evidence that the risks of Brexit are too high to consider voting to leave, the BoE’s stance may leave it open to fresh criticism that it was trying to unduly influence a democratic process. Indeed, members of the "leave" vote camp pounced on Carney’s comments, with former Chancellor Lamont warning that the "Governor should be careful that he doesn’t cause a crisis".

OVERNIGHT SPECIFICS AND KEY EVENTS

- BoE rates decision: As was widely expected, the MPC chose to keep the key policy rate unchanged at 0.5% and maintained the asset purchase programme at £375bn. The vote was unanimous.

- BoE Inflation Report: The Bank of England cut its 2016 GDP forecast to 2.0% vs 2.2%, noting that Brexit could be contributing to the loss of momentum in activity. Inflation forecasts were left virtually unchanged, with the two year ahead forecast still at 2.1%. The 2017 CPI forecast was tweaked to 1.5% (1.6%) and this year’s was unchanged at 0.4. Growth and GBP could rebound on a "remain" vote. The BoE said that based on its analysis, probably half of the 9% decline in the UK’s TWI over the past six months had been a function of Brexit concerns.

- Eurozone. Following the disappointing national releases on industrial production for March, it was no surprise that the wider measure fell 0.8% m/m in March.

- US: April import prices fell 5.7% y/y compared to a 10.5% drop a year earlier. The drag on import prices from USD strength and energy price weakness is continuing to fade. Initial claims climbed 20k to 294k in the week ended May 7, their highest level since end-February 2015. There were no special factors behind the rise.

- Fed 2016 voter comments were reasonably explicit:

− Mester: "I support a gradual adjustment of short-term interest rates toward a more normal level, but I view the current level as too low for today's economic conditions. The economy is at or near full employment and inflation is close to the FOMC's target of 2 percent, yet short-term interest rates remain near historic lows."

− Rosengren: "The market remains too pessimistic about the fundamental strength of the US economy, and the likelihood of removing monetary accommodation is higher than is currently priced into financial markets based on current data".

− George: "Moving rates to a more-normal level and at a gradual pace is necessary to minimize distortions in the economy that can build over many years when rates are held so low,"

− Market odds of a June Fed hike rose to 6%, with 53% odds of a hike by the end of the year.

- Equities: Further falls in Europe. The Euro Stoxx 50 closed down 0.7%, as markets took their cue from the Asian session, with the CAC40 and DAX down 0.5% and 1.1% respectively. Weaker earnings reports from Bayer and Monsanto added to the negative tone. The FTSE 100 was down 1%, not helped by BoE Brexit warnings. US stocks erased earlier declines, amid a rebound in crude oil prices, which offset further falls in Apple shares. US bourses were broadly flat at the time of writing.

- Fixed income markets: Mild firming in yields. US 10 year Treasury yields rose 3bps, supported by Hawkish Fed member comments. European bond yields were up 1-3bps, with yields on 10 year gilts up 1bp.

- Commodities: Oil prices rose, others were mixed. There were modest increases innear-dated Brent and WTI contracts - up 0.7% to USD48.00 and USD46.50/bbl at the time of writing, with no immediate catalysts for the move evident. The modestly stronger USD contributed to a mild fall in prices for gold (-0.5%) and silver (-1.9%). The broad CRB index was up 0.2%, supported by grains, industrial metals and softs.

NZD/USD: THE CUSTOMER IS ALWAYS RIGHT…

Kiwi remained stable yesterday, despite a broader USD bid. Data has continued to support the NZD, and we would expect Q1 retail sales to support this theme today. However, with three hawkish FOMC voters speaking last night we would suspect that the USD may strengthen if US retail sales show a pick-up US in consumer activity tonight.

Expected range: 0.6760 - 0.6860

NZD/AUD: EXPECTATION SWINGS…

Markets are downgrading prospects for the RBA cash rate, and this saw NZD/AUD regain 0.93 yesterday. For now risks still look higher still.

Expected range: 0.9260 - 0.9350

NZD/EUR: TEPID GROWTH…

Eurozone industrial production fell 0.8% in March with negative revisions, leaving the annual rate of growth tepid at 0.2% y/y. EUR fell back on this result and we doubt the second read of EU Q1 GDP will change that theme.

Expected range: 0.5960 - 0.6040

NZD/JPY: JPY WEAKNESS…

JPY weakened again last night helping this cross maintain small gains.

Expected range: 73.90 - 74.90

NZD/GBP: RECESSION RISKS…

The BoE fired their clearest warning yet of recession risks if the UK chooses Brexit, but markets had clearly been expecting more as GBP/USD initially gained before succumbing to sensibility.

Expected range: 0.4690 - 0.4760

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