NEW ZEALAND ECONOMICS MARKET FOCUS ANZ RESEARCH 13 October 2014 INSIDE Economic Overview 2 Interest Rate Strategy 6 Currency Strategy 8 Data Event Calendar 10 Local Data Watch 12 Key Forecasts 13 NZ ECONOMICS TEAM Cameron Bagrie Chief Economist Telephone: +64 4 802 2212 E-mail: [email protected]David Croy Head of Global Markets Research, NZ Telephone: +64 4 576 1022 E-mail: [email protected]Sharon Zöllner Senior Economist Telephone: +64 9 357 4094 E-mail: [email protected]Mark Smith Senior Economist Telephone: +64 9 357 4096 E-mail: [email protected]Steve Edwards Economist Telephone: +64 9 357 4065 E-mail: [email protected]Con Williams Rural Economist Telephone: +64 4 802 2361 E-mail: [email protected]Sam Tuck Senior FX Strategist Telephone: +64 9 357 4086 E-mail: [email protected]SHARE WEAR ECONOMIC OVERVIEW The fickle global scene and recent financial market volatility have us watchful. The New Zealand economy has points of vulnerability and is not immune from a global downturn. There is a growing possibility the RBNZ will be on hold for all of 2015. While the risk profile is more symmetrical than it was a few months ago, the New Zealand economy still has latent sources of strength. Apart from the broader global scene, prospects for the dairy industry continue to dominate as a major downside risk in light of the halving of dairy auction prices since February. This week’s auction is expected to be finely balanced, with reduced supply on offer. Sentiment measures for September are expected to show an election-related lull, with October consumer confidence looked at for signs of a post-election bounce. While a lower NZD is clearly in the interests of the wider export sector, it is of less benefit to consumers. Forthcoming inflation prints will show how the gain and pain is distributed. INTEREST RATE STRATEGY Interest rate markets have entered yet another period of “risk off” following the release of dovish US Federal Reserve minutes, cautious speeches from global policy- makers, and equity market gyrations. Although long-end interest rates are at extremely stretched valuations, safe-haven and “new normal” buying is keeping bond yields depressed. While the initial reaction to “risk off” is to sell the NZD, dovish overtones from the Fed only serve to highlight NZ’s yield advantage, keeping the NZD elevated and maintaining downward pressure on OCR expectations. With a hike priced in by July, there is scope for front-end rates to continue drifting lower if the market gravitates to the view that the RBNZ could be on hold for most of 2015, which is an assessment we are increasingly accepting as the central scenario. CURRENCY STRATEGY The NZD/USD is consolidating between 0.7750 and 0.7900, but the strong rejection of Thursday’s test higher suggests risks are growing of another test of support. We remain USD bulls, and see NZD/USD eventually breaking support, but further consolidation is likely before this occurs. NZD/AUD has built a strong base below 0.89 and looks to be gearing up to test topside resistance. However, we would view strength to the 0.91 level as a selling opportunity. Volatility continues to increase and we expect this to remain a defining feature of currency markets in Q4. THE ANZ HEATMAP Variable View Comment Risk profile (change to view) GDP 3.1% y/y for 2015 Q3 Confidence gauges suggest solid momentum, but lower commodity prices flag moderation. Global scene the wildcard Unemployment rate 5.4% for 2015 Q3 Lifts in working age population to partly accommodate rising employment. Wage inflation slowly lifting. OCR 4.0% by Sep 2015 RBNZ on hold – may be for a very long period. Global scene, NZD and commodity prices key. CPI 1.9% y/y for 2015 Q3 Benign near-term. Lower NZD to start to impact, with wage pressures lifting. Positive Negative Neutral Positive Negative Neutral Up Down Neutral Positive Negative Neutral
Transcript
NEW ZEALAND ECONOMICS
MARKET FOCUS
ANZ RESEARCH
13 October 2014
INSIDE
Economic Overview 2
Interest Rate Strategy 6
Currency Strategy 8
Data Event Calendar 10
Local Data Watch 12
Key Forecasts 13
NZ ECONOMICS TEAM
Cameron Bagrie Chief Economist Telephone: +64 4 802 2212 E-mail: [email protected] David Croy Head of Global Markets Research, NZ Telephone: +64 4 576 1022 E-mail: [email protected]
Sharon Zöllner Senior Economist Telephone: +64 9 357 4094 E-mail: [email protected] Mark Smith Senior Economist Telephone: +64 9 357 4096 E-mail: [email protected] Steve Edwards Economist Telephone: +64 9 357 4065 E-mail: [email protected] Con Williams Rural Economist Telephone: +64 4 802 2361 E-mail: [email protected] Sam Tuck Senior FX Strategist Telephone: +64 9 357 4086 E-mail: [email protected]
SHARE WEAR
ECONOMIC OVERVIEW
The fickle global scene and recent financial market volatility have us watchful. The
New Zealand economy has points of vulnerability and is not immune from a global
downturn. There is a growing possibility the RBNZ will be on hold for all of 2015.
While the risk profile is more symmetrical than it was a few months ago, the New
Zealand economy still has latent sources of strength. Apart from the broader global
scene, prospects for the dairy industry continue to dominate as a major downside
risk in light of the halving of dairy auction prices since February. This week’s auction
is expected to be finely balanced, with reduced supply on offer. Sentiment measures
for September are expected to show an election-related lull, with October consumer
confidence looked at for signs of a post-election bounce. While a lower NZD is clearly
in the interests of the wider export sector, it is of less benefit to consumers.
Forthcoming inflation prints will show how the gain and pain is distributed.
INTEREST RATE STRATEGY
Interest rate markets have entered yet another period of “risk off” following the
release of dovish US Federal Reserve minutes, cautious speeches from global policy-
makers, and equity market gyrations. Although long-end interest rates are at
extremely stretched valuations, safe-haven and “new normal” buying is keeping
bond yields depressed. While the initial reaction to “risk off” is to sell the NZD,
dovish overtones from the Fed only serve to highlight NZ’s yield advantage, keeping
the NZD elevated and maintaining downward pressure on OCR expectations. With a
hike priced in by July, there is scope for front-end rates to continue drifting lower if
the market gravitates to the view that the RBNZ could be on hold for most of 2015,
which is an assessment we are increasingly accepting as the central scenario.
CURRENCY STRATEGY
The NZD/USD is consolidating between 0.7750 and 0.7900, but the strong rejection
of Thursday’s test higher suggests risks are growing of another test of support. We
remain USD bulls, and see NZD/USD eventually breaking support, but further
consolidation is likely before this occurs. NZD/AUD has built a strong base below
0.89 and looks to be gearing up to test topside resistance. However, we would view
strength to the 0.91 level as a selling opportunity. Volatility continues to increase
and we expect this to remain a defining feature of currency markets in Q4.
THE ANZ HEATMAP
Variable View Comment Risk profile (change to view)
GDP
3.1% y/y
for 2015
Q3
Confidence gauges suggest solid momentum, but lower commodity
prices flag moderation. Global scene the wildcard
Unemployment
rate
5.4% for
2015 Q3
Lifts in working age population to partly accommodate rising
employment. Wage inflation slowly lifting.
OCR 4.0% by
Sep 2015
RBNZ on hold – may be for a very long period. Global scene, NZD
and commodity prices key.
CPI
1.9% y/y
for 2015
Q3
Benign near-term. Lower NZD to start to impact, with wage
SUMMARY The fickle global scene and recent financial market
volatility have us watchful. The New Zealand
economy has points of vulnerability and is not
immune from a global downturn. There is a growing
possibility the RBNZ will be on hold for all of 2015.
While the risk profile is more symmetrical than it was
a few months ago, the New Zealand economy still
has latent sources of strength. Apart from the
broader global scene, prospects for the dairy industry
continue to dominate as a major downside risk in
light of the halving of dairy auction prices since
February. This week’s auction is expected to be finely
balanced, with reduced supply on offer. Sentiment
measures for September are expected to show an
election-related lull, with October consumer
confidence looked at for signs of a post-election
bounce. While a lower NZD is clearly in the interests
of the wider export sector, it is of less benefit to
consumers. Forthcoming inflation prints will show
how the gain and pain is distributed.
FORTHCOMING EVENTS
GlobalDairyTrade auction (early am, Thursday, 16
October). Finely balanced. Increasing demand should
see prices soon start to find a floor and lift by the end
of the year.
ANZ Job Ads – September (10:00am, Thursday, 16
October).
ANZ Consumer Confidence – September (1:00pm, Thursday, 16 October).
BNZ Business NZ PMI – September (10:30am,
Thursday, October 16). A small fall from the 56.5
August print is expected. Production and new orders
are likely to remain above headline PMI.
BNZ Business NZ – PSI – September (10:30am,
Thursday, October 16). A small fall from the 57.9
August print is expected.
WHAT’S THE VIEW? We noted a few weeks ago that of the three candidates that could upset the apple cart for the New Zealand economy (the global scene, a
build-up of imbalances precipitating a cleanout or a
policy mistake), the global scene was the one to watch.
Recent price action across financial markets has us asking whether we witnessing a simple correction or whether something more ominous is pending. The S&P500 index is down more than
3% in 5 days and while it is clinging onto gains for
the year, equity declines are spreading through the
broader market. In the Russell 3000 Index nearly
80% of stocks are at least 10% off their highs. The
Value Line Arithmetic Index – unweighted by market
value – is down 10% since July. The number of
shares traded last week was the highest in three
years. The VIX volatility index is at its highest since
February and shows no signs of turning around.
Credit spreads are widening. Indexes of equity sub-
components typically seen as containing leading
information – small-caps, transport, banks, and
cyclical companies – are all pointing firmly down.
Volatility is nothing new – we’ve been here on numerous occasions. In both April and August the
US equity market corrected more than 3% and
subsequently bounced back as unease subsided.
Lower-for-longer expectations on the interest rate front has provided the panacea to calm markets time and time again.
But has the lower-for-longer steroid injection started to lose its efficacy? It appears so. It certainly hasn’t fixed the world’s imbalances. The
world has more debt now than it did prior to the GFC. Policymakers certainly don’t have the firepower to
fight battles on more fronts; fiscal policy is a damp
squib with net debt across the OECD standing just
under 80%. Governments, lulled into a false sense of
security by low interest rates, have failed to rally
around providing the necessary condition for long-
term solvency – microeconomic reform to lift growth.
And meanwhile, the incremental impetus from
progressive pump-priming continues to fade. Kicking
the fabled can down the road has its limits.
Suddenly prospects for the world’s largest economy are looking more delicate too; the jump
in the USD has tightened financial conditions and
partly explains stock market gyrations. There is no
free lunch when relative price measures such as
currencies shift, and recall we’re still in an
environment where the race to competitively devalue
continues. Europe’s juggernaut – Germany – looks to
be on the skids. Parts of the Eurozone periphery such
as Italy and Greece still face challenges; anaemic
growth will inevitably bring fiscal sustainability
questions to the fore once more. Financial conditions
have tightened in China too (falling property prices
and slower credit growth). While our financial
conditions index for China looks benign, it has a very
high weight on asset prices (such things happen
when you let the data speak for itself in optimising
the fit to GDP). This makes us uneasy, given current
happenings in the real estate market. Things could
unravel very quickly if asset prices don’t stabilise
soon.
ANZ Market Focus / 13 October 2014 / 3 of 16
ECONOMIC OVERVIEW
FIGURE 1. US GDP AND FINANCIAL CONDITIONS
Source: ANZ, Bloomberg
FIGURE 2. CHINA GDP AND FINANCIAL CONDITIONS
Source: ANZ, Bloomberg
And so we continue to have our ankles, fingers and toes crossed but increasingly pondering the prospect of the OCR remaining unchanged for all of 2015. While there are obvious inflation risks, risk and reality are divergent at present, disinflation
abounds internationally, and the fickleness across the
global scene simply doesn’t look conducive to
prospect of OCR increases.
New Zealand has points of vulnerability; where
the global scene goes, New Zealand will invariably
follow – particularly if China joins in the synchronised
slowdown this time. Leverage across the New
Zealand economy is still high. There will be some
squirming in the dairy sector over the coming year or
two. Auckland’s property market is overvalued; that
doesn’t mean it’s set to plunge, but corrections can
happen.
There are also latent sources of strength that should not be overlooked.
New Zealand sits in the right part of the world
producing the right stuff. China’s economic
gyrations will come and go; there’s still a massive
middle class. Opportunities for New Zealand in an
urbanising China will remain to all intents and
purposes infinite if they can be grasped.
The microeconomic reform agenda is several
steps ahead of other nations; these reforms are
the deposits on tomorrow’s growth story.
We’re seeing more leadership than populism in
the political arena; not too many nations can
claim that.
New Zealand has unique areas of comparative
advantage that are progressively being unlocked.
Witness all the irrigation-related development on
the Canterbury Plains.
There are some strong localised sources of
growth that should prove robust to the economic
cycle. A city rebuild and housing shortages are
front and centre here. They are creating tensions,
frictions and problems (i.e. housing affordability)
but we’ll still take what could prove to be some
well-timed stimulus.
Get the basics right (and the economy pointed in
a reasonable direction) and suddenly migration
gives you an additional kicker. But migration can
turn quickly; one must be wary of relying on it as
a growth driver.
Unlike many other nations New Zealand still has
firepower on both the fiscal and monetary policy
front if required, and a free-floating currency.
FIGURE 3. GDT AUCTION VS MILK PRICE FORECAST
Source: ANZ, Fonterra
And so we remain cautiously optimistic over prospects for the coming year, whilst acknowledging the burgeoning negative risk profile around the outlook.
Turning to the week ahead, weak price sentiment continues to prevail through dairy markets, with the last GDT auction result filtering
through to other markets. In response Fonterra have
auction and over the next three. Hopefully this should
be enough to stabilise the market. Over the next 12 months the total product to be sold through GDT has been lowered by 4.6%, which is a large adjustment. Most of this is a 7% drop in WMP, but
SMP and butter volumes have been lowered too.
There is mention of increased cheese volumes,
suggesting Fonterra has begun to alter its product
mix in response to the slump in milk powder prices
and may be beginning to sell more value-add product
through other channels.
Mixed messages on the China dairy situation continue, perhaps suggesting things are slowly
improving as it has all been one-way to-date. Overall
Chinese import volumes have remained surprisingly strong in the second half of the year.
They are just paying half the price compared with last
year!
Looking ahead, farm-gate prices have started to adjust materially lower across many of the major dairy-producing countries. This should
start to slow supply growth (albeit not to the same
extent as in recent years in the US and Europe as
feed costs are now lower). When supply growth eases
prices are likely to start to gradually improve. This
still looks 6-9 months off though – too late for this
year’s payout. All up, the drop in supply through GDT should provide some more stability, but there is no catalyst for a strong turnaround yet. This will have dairy farmers (and Fonterra) nervous
as there is still a large gap between current auction prices and their payout forecast of $5.30/kg MS (and our pick of $4.85).
FIGURE 4. MANUFACTURING PMI, THE NZD AND CONSENT ACTIVITY
Source: ANZ, Statistics NZ, Business NZ, Bloomberg
So far we have observed a small dip in September business and consumer sentiment measures, and expect this to continue this week, but for releases to still depict a moderate pace
of expansion. Manufacturing sentiment has been
caught in the rip of opposing influences. Our internal
anecdotes suggest that agricultural production in
much of the country started the season on a strong
note, underpinned by favourable climatic conditions.
There is considerable trepidation over the
forthcoming hit to dairy incomes, with farmers
looking at adjusting budgets. The strengthening
construction outlook has been a major support to the
manufacturing sector. While recent falls in the NZD will be of welcome relief to manufacturing exporters, it will take time to flow through into sentiment and activity – and of course to the
extent it is due to lower global growth expectations,
it simply tempers the bad news. We expect a small
fall in the September PSI, but for the more forward-
looking new orders component to remain above the
headline PSI.
With consumer sentiment taking a dip in September, the focus will be whether we see a post-election bounce. A slowing nationwide
housing market and lower NZD could see consumers
scale back their assessment of it being a good time to
purchase a major item. There could also be a hit to
confidence in dairy-aligned regions. Underpinning the
consumer mood has been an improving employment
backdrop. While job advertising is likely to have been
impacted by election uncertainties, the improving
signal is clear.
FIGURE 5. CONSUMER CONFIDENCE AND JOB ADVERTISING
Source: ANZ
While impetus from the demand side of the economy has cooled somewhat in recent months, a very encouraging development has been that pricing pressures have remained contained through a period of very strong growth.
While it is too soon to declare that this improved
activity and inflation trade-off is permanent, it is
difficult to see signs of rising inflation on the
immediate horizon. Price readings from our Monthly
35
40
45
50
55
60
65
-4
-3
-2
-1
0
1
2
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
NZD TWI (adv 15m), LHS Consents, LHS PMI, RHS
Sta
ndard
ised
Index
15
20
25
30
35
40
45
50
55
60
80
90
100
110
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04 05 06 07 08 09 10 11 12 13 14
Num
ber (s
a, 0
00)
Index
Current conditions (sa, LHS) Future conditions (sa, LHS)
Job Ads (RHS)
ANZ Market Focus / 13 October 2014 / 5 of 16
ECONOMIC OVERVIEW
Inflation Gauge will be key in this regard. We will be
releasing the September Gauge later this week.
RECENT LOCAL DATA NZIER QSBO – 2014Q3. Firms’ assessment of the
general business situation fell to +20 sa (+32 sa in
Q2). Firms’ expected and experienced domestic
trading activity eased (to +14 sa and +29 sa
respectively). Surveyed capacity utilisation was
unchanged at 0.91; firms’ experienced average
selling prices rose (to +26); and expected selling
prices eased to +29. Experienced employment
intentions fell to -0.9, while employment intentions
rose to +18. Labour and capacity as limiting factors
eased.
NZ Government Financial Statements – June 2014. The Obegal deficit of $1.099m was $332m
higher than forecast. Gross debt at $82.15bn was
below forecasts, whilst net debt at $59.5bn was
$453m higher than forecast.
SNZ Electronic Card Transactions – September. There was no change in retail ECT spending (+5.2%
y/y), with core ECT retail spending down 0.4% sa
(4.5% y/y).
SNZ Food Price Index – September. Food prices
fell 0.8%, with food prices 0.1% lower than a year
ago.
REINZ Housing Market Report – September. House sales volumes rose 3.4% sa (-12% y/y). Annual
house price inflation fell to 4.1% y/y (from 4.8% y/y),
with the median days to sell easing to 38.2 sa.
ANZ Market Focus / 13 October 2014 / 6 of 16
INTEREST RATE STRATEGY
SUMMARY
Interest rate markets have entered yet another period
of “risk off” following the release of dovish US Federal
Reserve minutes, cautious speeches from global policy-
makers, and equity market gyrations. Although long-
end interest rates are at extremely stretched
valuations, safe-haven and “new normal” buying is
keeping bond yields depressed. While the initial
reaction to “risk off” is to sell the NZD, dovish
overtones from the Fed only serve to highlight NZ’s
yield advantage, keeping the NZD elevated and
maintaining downward pressure on OCR expectations.
With a hike priced in by July, there is scope for front-
end rates to continue drifting lower if the market
gravitates to the view that the RBNZ could be on hold
for most of 2015, which is an assessment we are
increasingly accepting as the central scenario.
THEMES The odds of the RBNZ sitting out 2015 are growing
by the day; this week’s GDT auction will be key.
The NZD is adjusting to the precarious global scene
but remains elevated, and hasn’t adjusted enough. Price action matters more than economics at the
moment. Equity markets have tanked and US bond
yields are at the year’s lows, forcing markets to re-
think the fashionable view that yields must rise. The benign low-risk environment portrayed a few
months ago looks to have been a head-fake.
PREFERRED STRATEGIES – INVESTORS
KEY VIEWS – FOR INVESTORS GAUGE DIRECTION COMMENT
Duration Neutral
Strong cyclical case for yields to
rise, but dovish Fed and unusual
cycle dynamics suggest caution.
2s10s Curve Steeper Curve “should” steepen, but this
depends on US rates rising.
NZ-US 10yr spread
Neutral Will narrow if US rates rise;
otherwise they feel a bit tight.
Swap
spreads Neutral /
Wider
Flatter curve should draw payers
out of the woodwork.
Front-end interest rates look set to break lower yet, with a move below the 4% level in the bellwether 2 year swap now on the cards. Technically, this will require a significant re-rating of
OCR expectations, but this is now underway, with
forward interest rates moving aggressively lower in the
past week. OCR expectations have been slower to
adjust, with 22bps of hikes still priced in by July. This is
well below the RBNZ’s projections, but with the onus now on dairy prices to rise and the TWI to fall, and with a wave of caution sweeping through the rural community, markets are beginning to seriously ask whether the RBNZ might be on the side-lines for much – if not all – of 2015. At this
stage, it is a bridge too far to make that call, but it
does feel like the more vulnerable side from a price
action perspective. As such, we expect short-end interest rates to continue moving gradually lower, and to continue “teasing out” the possibility of an extended policy siesta.
Price action is also the name of the game at the long
end of the curve. Recent market moves have certainly
tested our strategically bearish forecast for global
interest rates, with US 10yr bond yields at fresh lows
for the year. Technically, there is a strong case to be
made for US bond yields to rise: QE is about to cease,
the Fed is making decent progress towards its dual
mandate, and most forecasters expect the Fed to
tighten next year. But bond markets are now debating
the exact timing of the first tightening in the context of
an uncertain geopolitical environment, faltering equity
markets, and slowing European and Chinese growth.
FIGURE 1: NZ/US 10 YEAR BOND SPREAD
Source: Bloomberg, ANZ Research, RBNZ
FIGURE 2: 10 YEAR BOND EXPECTED RISK/RETURN
Source: Bloomberg, ANZ Research, RBNZ
Geographic spreads also leave us cautious, with
the NZ-US spread now around 20bps wider than it was
four weeks ago. Given the NZ market’s low-beta
characteristics and the tendency for the spread to
contract as US yields rise, we are cautious about being
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
Oct 13 Jan 14 Apr 14 Jul 14 Oct 14
US
Australia
NZ
Canada
UK
Germany Sweden
Norway
Switzerland
Japan
Denmark
1%
2%
3%
4%
5%
2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
Annualised E
xpecte
d R
etu
rn
Historic 12mth Annualised Return Volatility
ANZ Market Focus / 13 October 2014 / 7 of 16
INTEREST RATE STRATEGY
too bearish. In addition, the wider the bond spread, the less likely it is that the NZD depreciates, further challenging monetary policy. New Zealand
continues to offer the best expected returns in the G10,
and we expect offshore bond holdings data (due later
this week) to confirm ongoing strong demand for NZGS
and other NZD denominated debt. Recall that data for
August showed record levels of offshore participation in
the NZ debt market.
PREFERRED STRATEGIES – BORROWERS
For borrowers, the focus is all on the long end. The shape of the curve (flatter) makes fixing considerably cheaper, as does the fall in outright interest rates. Of note, the 10yr swap rate has moved
back below 4.5%, taking it to levels not seen in at least
15 months. Given that this move is largely a reflection
of global – rather than domestic – factors, we see it
opening up a real opportunity for borrowers. However,
recent developments have thrown up a couple of
caveats. The first is the dramatically changing local
scene, which has seen us put our OCR forecasts under
review. This is swinging the balance away from fixing
and in favour of floating. The second is the changing
global scene. Global interest rates are falling again, and
it’s not just because of the economics. With geopolitics
and sentiment in the driving seat, more caution is
required. Rather than taking a strong view on the
direction of outright interest rates, we see more merit
in taking a view on the shape of the curve. It makes
sense to concentrate hedge exposures at the long end,
where rates are historically lower, and more likely to
rise as global rates rise, but to maintain a higher
degree of dollar exposure to the front end. Because we
now see a material risk of the RBNZ being on hold for
longer, we do favour being more exposed to floating.
FIGURE 3: 5Y/5Y SWAP
Source: Bloomberg, ANZ Research, RBNZ
Blend-and-extend strategies remain attractive, as do forward-starting swaps, which cheapen as the
yield curve flattens. We have seen very wide trading
ranges for bellwethers like the 5yr/5yr swap over the
past 12 months – it reached a high of almost 6.1% at
the end of last year, but spiked below 4.7% last week.
KEY VIEWS – FOR BORROWERS
GAUGE VIEW COMMENT
Hedge ratio Extend term
of cover
Blend-and-extend hedges.
Add to 5-10yr cover on dips.
Value Long end
still cheap
Global rates remain low and
the yield curve flat.
Uncertainty Elevated US yields keep moving lower. Geopolitics an issue.
GLOBAL SCENE Last week’s Fed minutes were the main catalyst for the
sharp move lower in bond yields. They certainly
conveyed a cautious tone, as did follow-up speeches
from a number of Fed officials. Of note, FOMC participants now see slowing global growth and the stronger USD as a risk to the outlook for the US economy, despite being more confident that the risks of inflation undershooting the Fed’s 2% target had diminished. Although markets have been
under-pricing the risk of Fed rate hikes for some time,
this latest development suggests we will be in for an
extended period of questioning, with global safe-haven
demand for bonds keeping a lid on yields. Until we see
a break in the downward momentum in yields, we’re
cautious about taking aggressive positions despite our
strategic bias.
DOMESTIC SCENE AND MARKET PRICING Market pricing continues to moderate, but still has some way to go should the consensus of opinion shift to the RBNZ being on hold for most of 2015. With 22bps of hikes priced in by July (which
is well below the RBNZ’s projections) progress will be
slow, and it will take a real change of heart for pricing
to change dramatically. With attractive carry limiting
upside and the onus still on dairy prices, the TWI, and
inflation to validate the RBNZ’s projections,
expectations are likely to change only gradually.
FIGURE 4: OCR EXPECTATIONS
Source: Bloomberg, ANZ Research, RBNZ
4.50
4.70
4.90
5.10
5.30
5.50
5.70
5.90
6.10
Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14
3.40
3.60
3.80
4.00
4.20
4.40
4.60
4.80
Oct 14 Apr 15 Oct 15 Apr 16 Oct 16 Apr 17 Oct 17
Rate
(%
)
ANZ's OCR Forecasts
Market implied forward 3mth bill rates
RBNZ 90 day bill projections (Sep 2014 MPS)
ANZ Market Focus / 13 October 2014 / 8 of 16
CURRENCY STRATEGY
SUMMARY The NZD/USD is consolidating between 0.7750 and
0.7900, but the strong rejection of Thursday’s test
higher suggests risks are growing of another test of
support. We remain USD bulls, and see NZD/USD
eventually breaking support, but further consolidation
is likely before this occurs. NZD/AUD has built a strong
base below 0.89 and looks to be gearing up to test
topside resistance. However, we would view strength to
the 0.91 level as a selling opportunity. Volatility
continues to increase and we expect this to remain a
defining feature of currency markets in Q4.
TABLE 1: KEY VIEWS CROSS WEEK MONTH YEAR
NZD/USD ↔ Consolidation. Expect USD to
strengthen.
NZD/AUD ↔ Defining a new
range. Range trade.
NZD/EUR ↔/↑ NZD driving. EUR remains weak.
NZD/GBP ↔/↓ GBP strength. GBP resurgence.
NZD/JPY ↔/↓ Consolidate. Yen weakness.
Equity markets look wobbly, and the NZD is finding a
renewed correlation to risk sentiment.
THEMES AND RISKS The fortnightly GDT dairy auction will be key for
NZD price action this week.
October Federal Reserve surveys should continue
to show strong US activity, supporting USD.
We continue to track Chinese activity for signs of
IMPORTERS’ STRATEGY We would target levels close to 0.80 for further
hedging.
DATA PULSE
The US is the main driver for markets, and a raft of
Fed speakers, and the September FOMC minutes, hit
cautious tones. While the data – JOLTS job openings,
jobless claims, and economic optimism – continue to imply the US economy is comfortably accelerating, the Fed is cautious and happy to remain behind the curve. The divergence between
the rates markets (with yields at 2014 lows at the long
end) and the currency markets (where USD
positioning is at cycle longs) suggests caution in
expecting further acceleration in USD.
In New Zealand, the ANZ Truckometer reversed
August losses, but points to a slowing in the pace of
growth of activity in Q3. Finally, the QSBO declined, in
keeping with the signals from the monthly ANZ
business confidence, but details continue to show the economy is still expanding at about trend pace, a supporting factor for the NZD.
The AUD was under pressure after the unemployment
rate increased, and last month’s outsize employment
strength was revised sharply lower. The AUD needs a strengthening labour market but the data quality is
now being questioned.
TABLE 3: NZD VS AUD: MONTHLY GAUGES GAUGE GUIDE COMMENT
Fair value ↔ Close to fair value.
Yield ↔/↑ Next move is still likely from NZ.
Commodities ↔ Both countries’ prices are weak.
Data ↔ Similar trends.
Techs ↔ In the middle of a 1.095-1.135 range.
Sentiment ↓ NZD has been under pressure.
Other ↑ Markets shorting AUD.
On balance ↔ We view dips as buying opportunities.
TABLE 4: NZD VS USD: MONTHLY GAUGES GAUGE GUIDE COMMENT
Fair value ↔/↓ Still expensive.
Yield ↔/↑ Yield advantage not going away.
Commodities ↓ Forward GDT prices weak.
Risk aversion ↓ USD is a ‘safe haven’ again.
Data ↓ US data looking strong.
Techs ↔/↑ On strong support Other ↑ Still a very stretched move.
On balance ↔/↓ Consolidating, but the risk of a move lower is building.
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ally neutral.
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ANZ Market Focus / 13 October 2014 / 10 of 16
DATA EVENT CALENDAR
DATE COUNTRY DATA/EVENT MKT. LAST NZ TIME
13-Oct NZ Food Prices MoM - Sep -- -0.8%(a) 10:45
NZ REINZ House Price Index MoM - Sep -- 0.2%(a) 12:00
NZ REINZ House Price Index YoY - Sep -- 4.1%(a) 12:00
NZ REINZ House Sales YoY - Sep -- -12.0%(a) 12:00
AU Credit Card Balances - Aug -- $A49.4B 13:30
AU Credit Card Purchases - Aug -- $A23.4B 13:30
CH Trade Balance - Sep $41.10B $49.84B 15:00
CH Exports YoY - Sep 12.0% 9.4% 15:00
CH Imports YoY - Sep -2.0% -2.4% 15:00
GE Wholesale Price Index MoM - Sep -- -0.2% 19:00
GE Wholesale Price Index YoY - Sep -- -0.6% 19:00
CH Foreign Reserves - Sep $4009.5B $3993.2B 13-15 Oct
CH New Yuan Loans - Sep 750.0B 702.5B 13-15 Oct
CH Aggregate Financing RMB - Sep 1150.0B 957.4B 13-15 Oct
14-Oct AU ANZ-RM Consumer Confidence Index - 12-Oct -- 112.6 11:30
AU NAB Business Confidence - Sep -- 8 13:30
AU NAB Business Conditions - Sep -- 4 13:30
NZ Non Resident Bond Holdings - Sep -- 66.9% 15:00
UK CPI MoM - Sep 0.2% 0.4% 21:30
UK CPI YoY - Sep 1.4% 1.5% 21:30
UK CPI Core YoY - Sep 1.8% 1.9% 21:30
UK Retail Price Index MoM - Sep 0.3% 0.4% 21:30
UK Retail Price Index YoY - Sep 2.3% 2.4% 21:30
UK PPI Input NSA MoM - Sep -0.5% -0.6% 21:30
UK PPI Input NSA YoY - Sep -6.7% -7.2% 21:30
UK PPI Output NSA MoM - Sep -0.1% -0.1% 21:30
UK PPI Output NSA YoY - Sep -0.3% -0.3% 21:30
UK PPI Output Core NSA MoM - Sep 0.0% 0.1% 21:30
UK PPI Output Core NSA YoY - Sep 0.9% 0.9% 21:30
UK ONS House Price YoY - Aug -- 11.7% 21:30
GE ZEW Survey Current Situation - Oct 15 25.4 22:00
GE ZEW Survey Expectations - Oct 0 6.9 22:00
EC ZEW Survey Expectations - Oct -- 14.2 22:00
EC Industrial Production SA MoM - Aug -1.6% 1.0% 22:00
EC Industrial Production WDA YoY - Aug -0.9% 2.2% 22:00
CH Foreign Direct Investment YoY - Sep -14.0% -14.0% 14-18 Oct
15-Oct US NFIB Small Business Optimism - Sep 95.8 96.1 00:30
AU Westpac Consumer Conf Index - Oct -- 94 12:30
AU Westpac Consumer Conf SA MoM - Oct -- -4.6% 12:30
AU New Motor Vehicle Sales MoM - Sep -- -1.8% 13:30
AU New Motor Vehicle Sales YoY - Sep -- -3.5% 13:30
CH PPI YoY - Sep -1.5% -1.2% 14:30
CH CPI YoY - Sep 1.7% 2.0% 14:30
GE CPI MoM - Sep F 0.0% 0.0% 19:00
GE CPI YoY - Sep F 0.8% 0.8% 19:00
Continued on following page
ANZ Market Focus / 13 October 2014 / 11 of 16
DATA EVENT CALENDAR
Key: AU: Australia, EC: Eurozone, GE: Germany, JN: Japan, NZ: New Zealand, UK: United Kingdom, US: United States, CH: China. Source: Dow Jones, Reuters, Bloomberg, ANZ Bank New Zealand Limited. All $ values in local currency Note: All surveys are preliminary and subject to change
DATE COUNTRY DATA/EVENT MKT. LAST NZ TIME
15-Oct GE CPI EU Harmonized MoM - Sep F 0.0% 0.0% 19:00
GE CPI EU Harmonized YoY - Sep F 0.8% 0.8% 19:00
UK Claimant Count Rate - Sep 2.8% 2.9% 21:30
UK Jobless Claims Change - Sep -35.0K -37.2K 21:30
UK ILO Unemployment Rate 3Mths - Aug 6.1% 6.2% 21:30
UK Employment Change 3M/3M - Aug 30K 74K 21:30
US Monthly Budget Statement - Sep $82.6B $75.1B 15-18 Oct
16-Oct US MBA Mortgage Applications - 10-Oct -- 3.80% 00:00
US Empire Manufacturing - Oct 20.9 27.54 01:30
US Retail Sales Advance MoM - Sep -0.1% 0.6% 01:30
US Retail Sales Ex Auto MoM - Sep 0.2% 0.3% 01:30
US Retail Sales Ex Auto and Gas - Sep 0.4% 0.5% 01:30
US Retail Sales Control Group - Sep 0.3% 0.4% 01:30
US PPI Final Demand MoM - Sep 0.1% 0.0% 01:30
US PPI Ex Food and Energy MoM - Sep 0.1% 0.1% 01:30
US PPI Final Demand YoY - Sep 1.8% 1.8% 01:30
US PPI Ex Food and Energy YoY - Sep 1.7% 1.8% 01:30
US Business Inventories - Aug 0.4% 0.4% 03:00
US US Federal Reserve releases Beige Book -- -- 07:00
Baltic Dry Freight Index 1197 1029 1015 991 974 963
Milk futures (USD) 143 142 143 144 145 146
ANZ Market Focus / 13 October 2014 / 15 of 16
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