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Australia & NZ Morning Thoughts

Australia & NZ Morning Thoughts

 

Imre Speizer

The US dollar and US interest rates fell. The main catalyst was a surprisingly weak Q1 US GDP report. Also contributing was news that a special closed Fed Board meeting was held yesterday, raising speculation a pause in tapering was discussed. However, the FOMC did taper QE by another $10bn as was widely expected. The S&P500 took all this in its stride and is up 0.3% currently.

6:12AM, 01 May 2014

 

Market Wrap:

Global market sentiment: The US dollar and US interest rates fell. The main catalyst was a surprisingly weak Q1 US GDP report. Also contributing was news that a special closed Fed Board meeting was held yesterday, raising speculation a pause in tapering was discussed. However, the FOMC did taper QE by another $10bn as was widely expected. The S&P500 took all this in its stride and is up 0.3% currently.    

Interest rates: US 2yr treasury bond yields fell from 0.44% to 0.41% following the GDP report, while 10yr yields fell from 2.72% to 2.64%. The FOMC announcement had little effect, while the remaining US data releases (private sector payrolls, personal consumption and Chicago PMI all beat estimates) caused only minor ripples.

Australian 3yr government bond yields (implied by futures) followed the US move and fell from 2.97% to 2.92%, while the 10yr yield fell from 3.97% to 3.90%.

Currencies: The US dollar index fell following the GDP report and made a three-week low. EUR initially fell to 1.3775 following a slightly disappointing CPI report but quickly reversed as US factors took hold, rising to 1.3877. USD/JPY fell from 102.66 to 102.03. AUD was volatile, fluctuating between 0.9253 and 0.9296 before pushing higher to 0.9301. NZD performed well, rising from 0.8350 to 0.8633. AUD/NZD fell from 1.0860 to 1.0767.

Economic Wrap:

US FOMC tapers further $10bn. The first paragraph of the statement describing the current state of the economy noted, inter alia,that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions.... Household spending appears to be rising more quickly. Business fixed investment edged down, while the recovery in the housing sector remained slow.” That compared to the March statement which assessed “that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions... Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow.” Essentially the FOMC acknowledged the weak Q1 growth story that they pre-empted on March 19, then tweaked the wording according to the detail in today’s GDP report, discussed below. How the economy performs in Q2 will be pivotal not, maybe, to ongoing tapering decisions, but certainly to the assessment of when to begin to remove policy accommodation.  

US GDP growth stalled in Q1, printing just 0.1% annualised, after 3.3% annualised in H2 2013 . Personal consumption of household services contributed 2.0 ppts to near zero growth, at the expense of spending on durable and non-durable goods, both flat in the quarter. That is similar in one respect to the Q4 consumption picture, 1.6 ppts from household services but a weak durables growth contribution of just 0.2 ppt, though non-durables held up at just under 0.5 ppt in Q4. In Q1, household consumption was offset by falling business investment (-0.3 ppts) and housing spending (-0.2 ppts), and drags from net exports (-0.8 ppts) and inventory rundown (-0.6 ppts). Government took off another 0.1 ppts. Some of that is due to the harsh winter both adding to and taking from growth (consumption of utilities up, destocking down), but this is also further evidence that GDP growth was overstated in late 2013 by seasonal issues most likely, corrected for in Q1 (which overstated the weakness). The Fed tapered, in part, on the stronger looking economy in Dec, but the emperor was wearing no (new) clothes it seems... neither were Americans apparently, given the flat consumption of non-durables noted above. The core PCE deflator was steady at 1.3% annualised.

US ADP private payrolls rose 220k in April, and back revisions worth 33k lifted Feb and March.

US Chicago Fed factory index soared from 55.9 in March to 63.0 in April, its highest since October with faster orders, production and jobs growth.

Euroland CPI rose from 0.5% yr to 0.7% yr in April, according to the flash estimate based on German and Spanish figures, and in line with our below consensus forecast.

Market Outlooks:

Event risk today: NZ’s calendar is empty but Australia has terms of trade to watch. The day’s highlight will probably be China’s PMI (official version). US data includes jobless claims, personal income and spending, the PCE deflator, ISM manufacturing activity and construction spending.

AUD/USD 1 day: May play catchup to the NZD today and rise to 0.9315.  

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: Needs to move above 0.8640 to change the near term bias from negative to positive. We expect it to trade between 0.8550 and 0.8630 today.

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: Near term momentum has flipped to negative. If 1.0760 below gives way, we will target the 1.0600 area.

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 2.94% while the 10yr should open around 4.22%.

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 down 2bp  at 3.98%, while the 10yr should also open down 3bp  at 4.88%.

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. The 10yr could slip to 4.60% during the next month, following the US, but should rise above 5.20% later in the year on the RBNZ . The curve should flatten throughout 2014.

 

 

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Amazing Trader EVENT RISK Calendar:


Tue 21 Nov
15:00 US- Existing Homes Sales
23:00 US- Yellen Speech
Wed 22 Nov
13:30 US- Weekly Jobless
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15:30 US- EIA Crude
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  • POTENTIAL PRICE RISK: HIGH Mon -- 14:00 GMT EZ- Draghi speaks in Brussels. Looking for any policy hints or bias


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  • POTENTIAL PRICE RISK: Medium Wed -- 13:30 GMT US- Weekly Jobless, Durable Goods
  • POTENTIAL PRICE RISK: Medium Wed -- 15:00 GMT US- final University of Michigan Survey
  • POTENTIAL PRICE RISK: Medium Wed -- 15:30 GMT US- EIA Crude
  • POTENTIAL PRICE RISK: HIGH Wed -- 19:00 GMT US- FOMC Policy Minutes. Key policy release


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