Tuesday April 29, 2014 - 20:48:06 GMT
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Australia & NZ Morning Thoughts
Australia & NZ Morning Thoughts
A moderately upbeat session
overnight largely ignored data disappointments. Eurozone economic sentiment
(EC survey) missed, as did US consumer confidence (Conference Board). US
equities were inspired by positive earnings surprises from Merck and
Sprint. The S&P500 is currently up 0.5%, and AUD/USD and NZD/USD are
6:09AM, 30 Apr 2014
Global market sentiment: A moderately upbeat
session overnight largely ignored data disappointments. Eurozone economic
sentiment (EC survey) missed, as did US consumer confidence (Conference Board).
US equities were inspired by positive earnings surprises from Merck and Sprint.
The S&P500 is currently up 0.5%, and AUD/USD and NZD/USD are slightly
Interest rates: US 2yr treasury bond
yields rose 1bp to 0.45%, while 10yr yields initially rose from 2.70% to 2.73%
but reversed to 2.69% following the US data.
government bond yields (implied by futures) traded in a slightly higher
2.93%-2.96% range, while the 10yr yield mimicked the US’ and rose from 3.93% to
3.98% before reversing to 3.94%.
Currencies: The US dollar index
recovered from the previous day’s selloff. EUR fell from 1.3879 to 1.3806,
mostly around noon following a weaker-than-expected German inflation outturn.
USD/JPY rose from 102.50 to 102.78 (three-week high) before retracing. AUD
bounced from 0.9234 to 0.9282. NZD bounced from 0.8517 to 0.8557. AUD/NZD
traded between 1.0830 and 1.0865 for little net change.
US consumer confidence slipped
1.6 pts to 82.3 in April from March’s 83.9, itself revised up by 1.6 pts. The slippage
was due entirely to the present situation component; expectations edged up a
tick. The detail included a weaker assessment of the labour market (-19.6 in
April from –17.6 in Mar). Also, house prices decelerated a little from 13.2% yr
to 12.9% yr in Feb, according to the S&P-CS 20 city index.
Euroland money supply M3 growth
slipped 0.2 ppts to 1.1yr in Mar, just above the recent low of 1.0% yr in Dec. Loans to
corporate and households continued to contact at -2.2% yr.
Euroland business climate
indicator slipped from 0.40 to 0.27 in April, contrasting with other
surveys of businesses this month which showed further improvement, such as Ifo
in Germany.The BCI is a survey of 92000 manufacturing firms from right
across the Eurozone. The economic sentiment index fell 0.5 pts to 102.0,
its first fall in a year. Maybe Ukraine, China slowing are factors at play.
German inflation rose from 1.0%
yr to 1.3% yr in the preliminary April report, and in EU harmonised terms
(HICP), from 0.9% yr to 1.1% yr. The detail available in some of the six early
reporting states shows the main driver to be package holiday prices. These fall
sharply just before Easter, which this year occurred three weeks later than in
2013. For example in Saxony, package holiday prices fell 20.5% in April last
year but this year they only fell 10.3% because the discounting started much
later in the month. Consequently the leisure component of the CPI (11% weight)
fell 2.6% this year compared to 5.0% last year, adding about 0.25 ppts to the
headline annual CPI for Saxony which rose from 0.9% yr to 1.3% yr in April. The
rise in the EU harmonised CPI in particular, just 0.2 ppts vs the consensus 0.4
ppts, is supportive of our below consensus 0.7% yr forecast for the Eurozone
CPI out tomorrow (from 0.5% yr in March). The Easter effect will also impact
the May data. German leisure prices are always lower in May relative to
February for seasonal reasons, and without going into the technical detail, the
most they could rise this May is 2%; they might be flat or lower. All else
being equal, the harmonised CPI for May at
a minimum will be 0.15% lower than April’s 1.1% yr; it follows that
the Eurozone CPI in May will be 0.6% yr at most. The rise in inflation we
expect to be reported for April tomorrow needs to be viewed in that context.
Also German consumer confidence was steady at 8.5 in the May report, surveyed
earlier this month.
UK GDP grew 0.8% in Q1 for a 3.1% yr annual
growth pace, its fastest since the end of 2007. The detail showed services
accelerating further to 0.9%, manufacturing more than doubling its growth rate
from 0.6% to 1.3% but construction barely reversing its small fall in Q4 with a
0.3% gain in Q1, impacted by flooding during the quarter. Pockets of weakness
were apparent in utilities, mining and forestry & fishing.
Event risk today: NZ’s building permits
and monthly business confidence releases will be watched, as will Australia’s
private sector credit. However, more important for markets will be the Eurozone
CPI release, which will be pivotal for the ECB. Later, US private sector
payrolls, personal consumption and GDP will be the foci.
AUD/USD 1 day: Expected to trade in a
0.9225-0.9300 range with the near-term negative bias intact.
AUD/USD 1-3 month: The medium term looks
more constructive, with a retest of 0.9450 possible during the months ahead.
RBA’s neutral policy bias and some encouraging Australian economic data (CPI
aside) are supportive.
NZD/USD 1 day: Expected to trade in a
0.8515-0.8590 range with the near-term negative bias intact.
NZD/USD 1-3 month: The RBNZ tightening
cycle will remain supportive but much is already priced in. That means US
factors will become more important over time.
AUD/NZD 1 day: Looking more positive
near term, a test of 1.0875 above expected.
AUD/NZD 1-3 month: By mid-year we expect
another stab at 1.05 below. The multi-year decline has already undershot fair
value by around 7% we estimate. That said, over/undershoots have historically
been worth 10%, suggesting there is potential for lower still, particularly if
RBNZ has hiked three times by June.
AU swap yields 1 day: In response to
movement in Australian bond futures overnight the 2yr should open around 2.96%
while the 10yr should open around 4.26%.
AU swap yields 1-3 month: The 2yr is heading
towards the lower boundary of the multi-month 2.80%-3.05% range. The 10yr is
heading towards 4.20% below, with further downside potential.
NZ swap yields 1 day: In response to
overnight changes in US and Australian bond yields the 2yr should open
unchanged at 4.00%, while the 10yr should also open unchanged at 4.91%.
NZ swap yields 1-3 month: The upward trend in NZ
interest rates remains intact, mainly due to NZ’s improving fundamentals and
RBNZ tightening cycle which is now in play. The 2yr targets beyond 4.30% during
the next few months, while the 10yr targets 5.20%. The curve should flatten
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