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Australia & NZ Morning Thoughts
Australia & NZ Morning Thoughts
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
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.
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%.
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.
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
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.
private payrolls rose 220k in April, and
back revisions worth 33k lifted Feb and March.
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.
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.
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.
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.
month: The RBNZ tightening cycle will remain supportive but much
is already priced in. That means US factors will become more important
day: Near term momentum has flipped to negative. If 1.0760
below gives way, we will target the 1.0600 area.
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.
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%.
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.
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%.
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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