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Sunday December 7, 2014 - 19:36:18 GMT
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Australia & NZ Morning Thoughts

Australia & NZ Morning Thoughts

Imre Speizer

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The US dollar surged to a fresh six-year high after a strong US payrolls report. Non-farm payrolls in November grew by 321k, well above the median estimate of 230k, there were positive back revisions, and wage costs rose. US interest rates also surged, while commodities suffered mostly moderate losses and equities rose slightly (S&P500 closing up 0.2% to a fresh record high).

5:56AM, 08 Dec 2014

Market Wrap

Global market sentiment: The US dollar surged to a fresh six-year high after a strong US payrolls report. Non-farm payrolls in November grew by 321k, well above the median estimate of 230k, there were positive back revisions, and wage costs rose. US interest rates also surged, while commodities suffered mostly moderate losses and equities rose slightly (S&P500 closing up 0.2% to a fresh record high).   

Interest rates: US treasury yields rose sharply in response to the US  jobs data, and the curve flattened. The 10yr gapped from 2.25% to 2.33%, closing at 2.31%. The 2yr gapped even more sharply, from 0.54% to 0.65% - the highest level since April 2011. The 2-10yr curve flattened from 172bp to 166bp – the flattest since May 2013.

Following suit, Australian 3yr government bond future yields jumped from 2.30% to 2.37%, while 10yr yields jumped from 3.04% to 3.11%.

Currencies: The US dollar index rose by around 0.8% to a six-year high in response to the US jobs data. EUR fell from 1.2380 to 1.2271 (two-year low). USD/JPY rose from around 120.00 to 121.69 (seven-year high), the yen the worst performer among the majors. AUD fell from 0.8383 to 0.8315 (five-year low) and opens this morning even lower at 0.8290. NZD fell from 0.7780 to 0.7700, and opens this morning at 0.7690. AUD/NZD ranged between 1.0770 and 1.0810.  

Economic Wrap 

US nonfarm payrolls rose 321k in November, and back revisions added 44k to the payrolls count in the previous two months. Payrolls jobs growth had seemed to be slowing somewhat from weather normalisation-boosted Q2 which averaged 267k per month, slowing to 239k in Q3, but after two months Q4 is running a 282k month average. As we noted last month, payrolls revisions have tended to be to the upside this year, consistently enough that one could assume October’s gain would be revised a lot higher, as indeed it was. This faster pace of hiring would be consistent with the considerable loss of momentum in business investment, consumer spending and housing expenditure in Q3 being reversed in the current quarter. Most of the November detail was upbeat: with average hourly earnings growth up 0.4% and hours worked up 0.3%, household income growth will have picked up sharply; the industry breakdown showed retail (early Thanksgiving may have pulled forward hiring at the expense of December), construction, financial and business services jobs all recording above trend outcomes, correcting for weakness in these sectors in the first estimate of October payrolls. Household employment almost stalled at +4k but this followed +683k in Oct and with labour force participation rising 119k the jobless rate rose from 5.76% to 5.83% although it was steady to one decimal place at 5.8%. Even so, the accelerating payrolls trend, if not reversed in December when retail jobs at least are likely to be a drag, is material enough to impact on the Fed policy tightening debate, ie some Fed officials are likely to see the payrolls and earnings story as arguing for an earlier rather than later initial move.

US factory goods orders fell 0.7% in October as durables rose 0.3% but non-durables fell for the fifth month running, by 0.5%.

US trade deficit was little changed at $43.4bn in October, with exports up 1.2% and imports rising 0.9%.  Meanwhile in Canada the trade balance dipped from a C$0.3bn surplus to C$0.1bn as exports   rose 0.1% and imports fell 0.5% (energy down 10% but consumer goods and metals up 3% each.

German factory orders rose 2.5% in October, building upon their their 1.1% September gain after falling 4.2% in August. Domestic orders jumped 5.3% and foreign orders rose 0.3% (Europe)/0.8% (rest of world), in both cases a further gain after failing to recover August’s fall in September.  Annual growth in orders had slowed to –0.7% yr in September which historically has been followed by stalled or negative GDP growth. But in October orders annual growth was back at 2.4% yr. Note that Eurozone GDP growth was confirmed at 0.2% in Q3, with the detail showing household spending accelerating again to 0.5%.

Market Outlooks

Event risk today: The local data is minor for markets: NZ Q3 manufacturing activity (an input to GDP), and Australian job ads. The day’s highlight should be China’s trade balance. Tonight there’s Eurozone investor confidence and Fedspeak from Lockhart.

AUD/USD 1 day: Capped at 0.8360, further declines expected. China’s trade data presents event risk today.

AUD/USD 1-3 month: We have changed our RBA forecast, from previously expecting a rate hike in August 2015, to now expecting two rate cuts during the first half of 2015 but rate hikes to commence in 2016.Lower AU interest rates and low commodity prices should weigh on the AUD during the next few months. Chartists will point to the 2010 low of 0.8075.

NZD/USD 1 day: Lower towards 0.7660, USD strength the main factor today.

NZD/USD 1-3 month: Until inflation appears and dairy prices start rising, we see the 0.7700 support area as vulnerable, a break then targeting 0.7500.

AUD/NZD 1 day: Breaking lower, below 1.0750 which would then target 1.0710.

AUD/NZD 1-3 month: During the remainder of this year the cross will be vulnerable to further weakness towards 1.0625 – the July low. Markets are negatively reassessing the outlook for the AU cash rate.

AU swap yields 1 day: In response to movement in Australian bond futures overnight the 2yr should open around 2.54%, while the 10yr should open around 3.48%.

AU swap yields 1-3 month: The 2yr has made a tentative low at 2.45% but it remains vulnerable. The 10yr made a multi-decade low of 3.40% recently, and remains under downward pressure as global yields continue to fall and market expectations for RBA cuts are increasing.

NZ swap yields 1 day: Given movements in US and AU yields overnight, NZ yields should open higher, the 2yr up 3bp at 3.87%, and the 10yr up 2bp at 4.31%.

NZ swap yields 1-3 month: NZ interest rates are likely to remain depressed during the next few months, the RBNZ’s switch to an almost neutral bias plus inflation threatening the bottom of the target band likely to result in the RBNZ on hold until at least Sep-2015. That should see the 2yr test 3.86% yield support, a break then taking it to around 2.75%.

 

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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
13:30 US- Durable Goods
15:00 US- final University of Michigan Survey
15:30 US- EIA Crude
19:00 US- FOMC Minutes
Thu 23 Nov
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13:30 CA- Retail Sales
Fri 24 Nov
All Day flash PMIs
09:00 DE- IFO Survey
US- Early Closes

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  • POTENTIAL PRICE RISK: HIGH Mon -- 14:00 GMT EZ- Draghi speaks in Brussels. Looking for any policy hints or bias


  • POTENTIAL PRICE RISK: HIGH Tue -- 13:30 GMT US- Existing Homes Sales. Top Housing Statistic

  • POTENTIAL PRICE RISK: HIGH Tue -- 23:30 GMT US- Yellen Speech. Early evening. Looking for anything on policy


  • 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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