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NZ Morning Focus

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Contributor:
Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- Yellen and the FOMC strike a more dovish tone; USD weakens.

- Risk sentiment was stronger overnight, with equities higher before the Fed. The response to the Fed decision itself was fairly muted.

- The GlobalDairyTrade Trade-Weighted Index was unchanged, but key whole milk powder prices fell 4.5%.

OUTLOOK

UPCOMING TODAY: Q1 GDP (10:45am) is the highlight. Australian labour market data is out this afternoon.

CURRENCY: The NZD jumped in response to the more dovish Fed, though subsequently gave up most of its gains. Q1 GDP will drive NZD moves once the global dust has settled - until the Australian labour market data at 1:30pm.

RATES: A mixed bag for rates, with Australasian rates reluctant to participate in the global rally. Fed dovishness could weigh on short-end yields.

REVIEW

GLOBAL MARKETS OVERVIEW: Sentiment was better heading into the FOMC this morning, with equities up solidly in Asia and Europe as Brexit fears eased somewhat. US equity lifts were smaller but also on the right side of the ledger, and VIX - the ‘fear index’ - eased 5%. In response to the more dovish Fed commentary and ‘dot-plot’ projections (6am), the USD weakened and yields eased. The equity market response was lost in the wash. Near-date oil futures fell a little and the CRB commodity index was fairly steady. Gold jumped on the Fed, while industrial metals lifted.

DATAPULSE

ALL ABOUT THE FED: Data took a back seat overnight. No new Brexit polls provided a breather. UK labour market data was encouraging. The US Empire manufacturing index rebounded but the employment component was weak.

COMMENTARY - KEY THEMES AND VIEWS

FOMC MORE DOVISH, AS EXPECTED. Either the market or the Fed had to give some ground today. In the end, it was primarily the Fed who adapted its view, noting more mixed labour market data and recent renewed global market volatility in its decision not to raise the fed funds rate this morning. The ‘dot plots’ revealed that six FOMC member now only expect one hike this year (versus one in March); the decision not to hike was the first unanimous decision since January. In the press conference Yellen commented that Brexit risks was "one of the factors" underlying its policy decision. She also reiterated that "every meeting is live", noting that things can change rapidly. US labour market data is key to watch from here (lottery that it is, as in most countries). Markets largely took the change in their stride: equities gyrated but didn’t change much, while Treasury yields fell - the 2y yield fell as much as 6bps before rebounding somewhat. With global volatility rising, the risk is growing that the Fed may have missed its window. Time will tell.

DAIRY PRICES FAIL TO FIRE. While the aggregate price index was unchanged at the GlobalDairyTrade auction this morning, prices for whole milk powder, New Zealand’s largest export, fell 4.5%. This underlines that the recovery in global prices to more sustainable levels will be a hard slog.

NZ Q1 GDP DUE 10:45AM. ANZ concurs with the median of analyst expectations, anticipating quarterly GDP growth of 0.5% - a modestly softer rate of growth than seen in the second half of last year. Some of this softness should reflect temporary factors. Construction growth should be strong.

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