Tuesday June 3, 2014 - 20:44:45 GMT
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Westpac Institutional Bank - www.westpac.co.nz
Australia & NZ Morning Thoughts
Australia & NZ Morning Thoughts
US interest rates rose further, but
the dollar and equities (S&P500 -0.1%) consolidated recent gains. US
economic data was supportive, factory orders and small business sentiment
beating expectations. Eurozone inflation undershot estimates but EUR rose,
suggesting bets on ECB easing this week had already been placed.
6:13AM, 04 Jun 2014
Global market sentiment: US interest rates rose
further, but the dollar and equities (S&P500 -0.1%) consolidated recent
gains. US economic data was supportive, factory orders and small business
sentiment beating expectations. Eurozone inflation undershot estimates but EUR
rose, suggesting bets on ECB easing this week had already been placed.
Interest rates: US 2yr treasury bond
yields rose from 0.38% to 0.40%. 10yr yields rose from 2.52% to 2.59%,
responding to the improved data, and perhaps somewhat to Fed hawk George’s
expectations that rates will need to rise earlier and faster than most Fed
members expect. Germany’s 10yr government bond yield rose from 1.36% to 1.42%,
despite a weaker than expected inflation report.
government bond yields (implied by futures) rose from 2.78% to 2.83%,
while the 10yr yield rose from 2.72% to 3.78%, partly following US yields and
partly on relief the RBA did not shift towards an easier stance.
Currencies: The US dollar index is
slightly lower. EUR rose from 1.3600 to 1.3648, resilient in the approach to
tomorrow’s ECB meeting. USD/JPY rose from 102.27 to 102.55. AUD initially rose
to 0.9287 but then retraced to 0.9244. NZD underperformed, thanks mainly to a
surprising weak milk powder auction. WMP fell 8.5% and had a clear impact on
the currency. AUD/NZD accordingly rose from 1.0935 to 1.0990.
U.S. factory orders beat
estimates thanks to large 0.7% price-boosted gain for nondurable
shipments, orders, and inventories. We saw large boosts in the inventory data
from the previous report, alongside minor tweaks in the orders and shipments
data and virtually no revisions in the equipment figures.
vehicle sales surged in May to 16.7m units (consensus 16.1m) to mark the
highest SAAR since 2006. Domestic auto sales rose to 5.5m (median 5.3m), while
truck sales increased to 7.6m (median 7.4m). Steady job growth coupled with low
interest rates prompted a boost in car sales in Q2 of last year that only
recently has dropped off.
Eurozone May HICP inflation fell to 0.5% y/y from 0.7%
y/y in the previous month. The numbers are slightly below initial expectations
but after yesterday's slump in the German reading markets had been poised for
an even lower number and Bund futures sold off on the release and the
coinciding unexpected decline in unemployment. Core inflation dropped to 0.7% from
1.0% and the data will add to the arguments of the doves at the ECB and make a
package of measures including a negative deposit rate even more likely.
Event risk today: NZ has Q1 construction,
minor for markets. The day’s highlight should be Australia’s Q1 GDP, the median
estimate being 0.9% qoq (Westpac is 1.1%). There’s also RBA-speak from Ellis
and Richards. Tonight’s events include Eurozone GDP, and US private sector
employment and the Beige Book.
AUD/USD 1 day: Neutral and contained between
0.9230 and 0.9287 ahead of today’s GDP report.
AUD/USD 1-3 month: The downward
correction since April remains in progress, targeting the 0.9150-0.9200 area.
Longer term, the RBA is expected to remain on hold until August 2015, but
markets will start pricing in the tightening cycle by late 2014 which should
eventually boost AUD above 0.9460.
NZD/USD 1 day: Negative momentum
remains intact, next target 0.8395.
NZD/USD 1-3 month: Remains in corrective
mode and should fall further to at least 0.8400. The market is expecting an
RBNZ track downgrade on 12 June, which should maintain downward pressure in the
interim. Beyond that, though, there is a decent risk of a rebound.
AUD/NZD 1 day: Yesterday’s bounce off
the 1.0905 neckline was textbook. Momentum is positive and there’s little to
slow it down ahead of 1.1200.
AUD/NZD 1-3 month: The break above the
bullish neckline at 1.0900 implies a larger move to around 1.1400. The catalyst
is likely to be increasing pricing for eventual RBA tightening, assisted by a
rebalancing of relative speculative positioning.
AU swap yields 1 day: In response to
movement in Australian bond futures overnight the 2yr should open around 2.87%
while the 10yr should open around 4.12%.
AU swap yields 1-3 month: The 2yr is trapped in a
multi-month 2.80%-3.05% range. The 10yr appears to have based at 3.97% and a
decent rebound is in prospect. By late 2014 we would expect markets to start
pricing in RBA tightening.
NZ swap yields 1 day: In response to
overnight changes in US and Australian bond yields the 2yr should open up 3bp
at 3.97%, while the 10yr should open 5bp higher at 4.81%.
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 4.20% 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% late in the year on the RBNZ .
The curve should flatten throughout 2014.
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