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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- A very quiet overnight session given public holidays in the US and UK.

- European equities hit a one month high on Friday’s rate hike hint from Yellen. Fed's Bullard says global markets seem "well-prepared" for a summer rate hike.

- Oil prices edge higher on thin trading ahead of this week’s OPEC meeting.

OUTLOOK

UPCOMING TODAY: Domestically, today sees the release of April building consents, the May ANZ Business Outlook and April credit growth. Australia has the Q1 current account, April building approvals and private sector credit.

CURRENCY: Data picks up today with ANZ NZ Business confidence a key watch for NZD traders. US data will also be important despite markets awaiting ISM/Payrolls later in the week.

RATES: Local yields are expected to open unchanged.

REVIEW

CURRENCY: Markets mostly marked time with both the US and UK out for holidays. EUR/USD posted a modest advance as inflation and confidence lifted, while USD/JPY held onto gains from yesterday’s Asian session.

GLOBAL MARKETS OVERVIEW: Public holidays in the US and UK contributed to thin trading, with few catalysts to drive market direction. European equities closed at around one month highs on thin volumes, with the Euro Stoxx 50 up 0.4%, with similarly sized increases in the DAX and CAC 40. European bond yields rose modestly on thin volumes. Oil prices retraced earlier falls to just under USD50 per barrel, whilst gold prices declined for a ninth consecutive day.

ANZ’S ASSESSMENT

THE DATA DILEMMA. US monetary policy normalisation and its likely impact has remained a key theme for markets. Recent comments by the regional Fed Presidents (including those by St Louis Fed President Bullard yesterday) pointing to pending near-term Fed rate hikes have been given increased credence following last Friday’s assertion from Fed Chair Yellen that it was likely appropriate to continue to lift the fed funds rate "in the coming months". This leaves little doubt there has been a deliberate move by the Fed to prepare the market for higher rates. Indeed, odds for a June hike have firmed from sub 5% in mid-May to around 36% at present according to OIS pricing. So far, wider financial markets appear to have coped reasonably well. The USD is firmer than prior to Yellen’s comments, European and Asian equity values have continued to advance and the government bond market has not yet spit the dummy, although this will be tested when the US rates market reopens tonight. None of this provides warning signs yet for the Fed. Certainly, a look at recent inflation outturns in the US and abroad suggests that annual inflation is starting to firm - albeit from low levels - implying rates would need to do likewise. The dilemma facing a data-dependent Fed is that some US data does not look as strong as it once did, with the manufacturing sector under the pump. At some stage the Fed will chose which course of action it will take, and trust that the economy (and financial markets) is resilient enough to bear it.

OVERNIGHT SPECIFICS AND KEY EVENTS

- St Louis Fed President Bullard (2016 voter) comments after speaking at an academic conference in Seoul: "My sense is that markets are well-prepared for a possible rate increase globally, and that this is not too surprising given our lift-off from December and the policy of the committee which has been to try to normalize rates slowly and gradually over time."

- CFTC data, week ended 24 May. Leveraged funds turned net long in the USD (USD5.3bn), the first time in five weeks. Net USD buying was broad-based, with the main exception of the GBP. Leveraged accounts raised net shorts in the EUR by USD3.6bn to USD6.5bn, the most in five weeks. Leveraged funds pared back net longs in most commodity currencies, including the AUD, NZD and CAD.

- GDPNow update. US GDPNow for Q2 jumped to 2.8% saar (from 2.4%) on solid gains from housing. Euro area GDPNow for Q2 rose slightly on better business confidence (+0.2% q/q). ANZ’s GDPNow for Japan in Q2 is unchanged at 0.1% q/q. Our China GDPNow for Q2 remained unchanged at just above 6.6% y/y.

- It was a quiet session for equities, given US and UK public holidays. European equities closed at around one month highs, on volumes less than half the daily average. The Euro Stoxx 50 rose 0.4%, with similarly sized gains in the DAX and CAC 40. Within the Euro Stoxx 50, consumer discretionary stocks recorded the biggest gains, with small falls for energy and industrial stocks.

- Treasury futures (10 year) slid the most in more than a week as the market digested Yellen’s Friday rates comments. The increased likelihood of Fed hikes contributed to a 3bp climb in French and German 10 year yields. Spreads to bunds for Italian and Spanish 10 year yields narrowed.

- Oil prices advanced amid fighting in Libya and before this week’s OPEC meeting in Vienna, with WTI and Brent prices rising 0.6% and 0.9% respectively to a shade under USD50 per barrel.

- Gold prices declined 0.6%, their ninth consecutive daily decline as the prospect of higher US rates hurts the outlook. Bullion prices for immediate delivery dropped to around USD1205/oz, their lowest level since late February.

NZD/USD: REBUFF?

Kiwi rebuffed early attempts to test lower, but also failed to regain 0.67. ANZ NZ business confidence today will be a key read for kiwi, but the kiwi will still mostly be driven by US data flow which begins to pick up tonight, with US consumer confidence, personal income/spending, and the Chicago PM.

Expected range: 0.6660 - 0.6760

NZD/AUD: NZ FACTORS…

It will be NZD factors (ANZ business confidence) which drive this cross today despite expectations that the Australian Q1 current account deficit will show improvements to Q4. However, markets are unlikely to push NZD/AUD too far before they see Australian Q1 GDP tomorrow.

Expected range: 0.9280 - 0.9360

NZD/EUR: A PICK UP?

European data picked up a little last night with German inflation and EU confidence marginally above expectations. The EU wide inflation print tonight will determine if EUR remains bid.

Expected range: 0.5980 - 0.6040

NZD/JPY: FURTHER ACTION…

JPY weakened yesterday as markets took the delayed increase in Japanese sales tax as a sign that further stimulus is on the way in Japan.

Expected range: 73.60 - 75.20

NZD/GBP: FOLLOWING OTHERS…

GBP is mostly side-lined this week as Brexit risks have been reduced and markets remain focused on other matters (USD, JPY and CNY).

Expected range: 0.4540 - 0.4620

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