Sunday November 10, 2013 - 19:56:45 GMT
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Westpac Institutional Bank - www.westpac.co.nz
NZ Morning Thoughts - FX & IR
NZ Morning Thoughts - FX & IR
A surprisingly strong US payrolls
report pushed US interest rates and the US dollar sharply higher. October saw
204,000 jobs added, versus 120,000 expected, and there were positive back
revisions. This caused the market to reassess the timing for Fed tapering,
some expecting it could be as early as December. US equities initially fell,
but quickly shrugged off any tapering prospect to close up 1.3% (S&P500).
5:43AM, 11 Nov 2013
Global market sentiment: A surprisingly strong
US payrolls report pushed US interest rates and the US dollar sharply higher.
October saw 204,000 jobs added, versus 120,000 expected, and there were
positive back revisions. This caused the market to reassess the timing for
Fed tapering, some expecting it could be as early as December. US equities
initially fell, but quickly shrugged off any tapering prospect to close up
1.3% (S&P500). A subdued PCE deflator (Fed inflation measure) and later
on, disappointing consumer confidence, may have helped boost equities. Fed
dove Lockhart said a December taper remains on the table, Williams said the
jobs report was encouraging, but Bernanke said there is a lot of slack in the
labour market. WSJ Fedwatcher Hilsenrath said the October report was
unreliable given the government shutdown.
Interest rates: US 10yr treasury bond
yields surged from 2.60% to 2.76% - a six-week high - following the jobs
3yr government bond yields (implied by futures) followed the US and rose from
3.08% to 3.19%, while the 10yr yield rose from 4.08% to 4.23% - a four-week
Currencies: The US dollar index
rose by around 0.9% following the jobs report, making a one-month high. EUR
fell from 1.3438 to 1.3318, consolidating late NY to 1.3373. Standard &
Poor’s downgraded France from AA+ to AA, adding the EUR-negative sentiment.
USD/JPY rose from 98.00 to 99.22. AUD fell from 0.9461 to 0.9354. NZD fell
from 0.8343 to 0.8225. AUD/NZD bounced from 1.1310 to 1.1385, possibly
reflecting NZD positioning. The weekly CFTC futures positioning report showed
that as at last Tuesday NZD longs were pared slightly, while AUD shorts were
maintained. Modest USD longs were increased while EUR shorts were
extended, as were JPY shorts.
payrolls rose by an impressive 204k in Oct, and there was an upward revision
of 60k to the Aug-Sep data, for a three month average gain of 202k in
Aug-Oct, up from 145k in May-Jul though weaker than the 224k in the previous
3 months and 205k at the turn of the year. In Aug-Oct 2012, payrolls averaged
154k per month. Looked at this way, it appears that payroll jobs initially grew
at a much faster pace during the first half of the past year, before losing
some momentum in mid 2013 and only partially recovering it since then.
Interpretation is clouded, however by the unknown number of private sector
jobs that were temporarily lost as collateral damage during the October
government shutdown. White House advisor Furman said last month there could
be a 120k impact on Oct payrolls (ie private sector workers laid off because
of the shutdown; govt workers on furlough remained on the payroll so there
was no direct impact). Today, the BLS said was “no discernible impact from
the shutdown but it is not clear if they meant they could not identify it, or
they could but it was minor. The separate household survey showed a jobs fall
of 735k, including 448k on temporary layoff, many of which were federal
workers impacted by the shutdown, although the BLS did not provide a precise
estimate of the shutdown impact and noted some misclassification of
employed/unemployed workers. This survey also showed a 735k fall in labour
force participation but that should not be related to the shutdown.
Consequently unemployment only rose 17k although the jobless rate rounded up
from 7.2% to 7.3%. Hours worked rose 0.2%, hourly earnings by 0.1%,
contributing to what should be a modest household income gain in the month.
US core PCE
deflator rose 0.1% in Sep from a revised lower 0.1% in Aug, for a 1.2% yr
annual pace, down from 1.7% yr in Sep 2012, when QE3 was commenced by the
Fed. They want inflation to go up, not down! The report also included a 0.5%
rise in personal spending despite a modest 0.2% personal income gain.
US Uni of
Michigan consumer sentiment slipped from 73.2 to 72.0 in the preliminary Nov
reading, such that in four months it has dropped from a multi year high to
its lowest in almost two years. The Nov detail showed most of the decline in
current conditions; the outlook index was little changed.
employment rose 13k in Oct, its third rise on the trot for a 28k average
monthly gain, up from 18k in the previous three months. The jobless rate held
at its five year low of 6.9%.
housing starts rose 1.2% in Oct, with a 13% rise in rural starts offsetting a
1.7% fall in urban single starts.
exports rose 1.7% in Sep on top of a 1.0% rise in Aug, a solid end to the
quarter after a moderate 0.8% fall at the start. That contrasted with the
weak industrial production outcome for Sep reported yesterday. Across the
border, French industrial production fell 0.5% in September, its fourth fall
in five months, to be down –0.9% yr.
fell 0.8% in Sep, while imports rose a very modest 0.2%, lifting the global
visible trade deficit from £9.6bn to £9.8bn.
Event risk today: It’s a quieter day.
NZ electronic spending and Australia’s home loans aren’t major market movers,
and there’s little scheduled in the Eurozone or US to capture attention.
NZD/USD 1 day: Negative momentum
suggests the 0.8200 area below is the next multi-day target.
NZD/USD 1-3 month: Fed tapering
expectations have returned to the fore and should hurt NZD/USD multi-week.
Longer term, though, NZ’s positive economic outlook should take NZD/USD
towards 0.8675 (30 April peak) by early 2014.
AUD/USD 1 day: Negative momentum
suggests the 0.9300 area below is the next multi-day target.
AUD/USD 1-3 month: Fed tapering
expectations have returned to the fore and should hurt AUD/USD multi-week.
Longer term, a more neutral sounding RBA and some encouraging data should
support AUD/USD during the next few months towards 0.9790 (3 June peak) by
AUD/NZD 1 day: 1.1450 should cap the
AUD/NZD 1-3 month: A 1.1200-1.1660
sideways range since July is in formation. However, longer term relative
fundamentals (e.g. RBA possibly easing further vs RBNZ hiking) favour the NZD
over a multi-month horizon such that a fall below 1.1200 is expected by early
NZ swap yields 1 day: In response to
changes in US and Australian bond yields overnight (see above) the 2yr should
open up 4bp at 3.54% and the 10yr should open up 7bp at 5.04%.
NZ swap yields 1-3 month: An expected
multi-week bounce in long-end US interest rates, based on US data surprises
more likely to be positive than negative, should steepen the NZ curve. The NZ
2yr swap is likely to be stuck inside a 3.40%-3.60% range but the 10yr
is freer to follow US rates higher.By Jan-2014 all NZ swap rates should be
significantly higher, the 2yr beyond 3.80% based on NZ’s improving
fundamentals and eventual RBNZ tightening in 2014.
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