August 12, 2016

Markets Today: 1999

Almost 24 hours after yesterday’s decision by the RBNZ to lower the OCR by 25bps and the NZD USD is almost exactly where it was before the rate announcement.

Prince 1999 song and album by the same name were released in 1983 and it reflected a mix of fears of nuclear war and Armageddon given that it was written during the cold war period, but it also had an optimistic approach to life arguing that we should enjoy our time on earth even if it all ends before the end of the 20th century. Well, as we know now the world didn’t end on the 31st of Dec 1999, curiously however the Dow Jones, S&P500 and Nasdaq closed the century making new record highs. Today, sixteen years and 225 days later all three indices have done it again, closing simultaneously at new record highs.

The rally in equities was sparked by the move higher in oil prices following comments from Saudi Arabia’s energy minister saying that the kingdom could participate in co-ordinated action to help balance the oil market. Equities were then further boosted by better than expected earnings from Macy’s and Kohl’s. As result consumer discretionary and energy stocks spearheaded broad gains across the market. Meanwhile European equities also closed higher, boosted by  Zurich Insurance group after it announced that profits fell less than projected.

The improvement in risk appetite pushed core global yields higher with 10y UST climbing almost 6bps to 1.50%, while 10y Bunds and Gilts were up 1.8bps and 1.1bps to 0.535% and 0.118% respectively.

Not surprisingly oil linked currencies are the G10 outperformers with the CAD and NOK sitting at the top of the leader board, up 0.49% and 0.36% respectively. True to form the improvement has weighed on the Yen given its safe haven attributes (-0.66%) and the AUD and NZD are little changed at 0.7699% and 0.7209% respectively.

So almost 24 hours after yesterday’s decision by the RBNZ to lower the OCR by 25bps and the NZDUSD is almost exactly where it was before the rate announcement. Interestingly, yesterday we also got NZ Food prices for July and the -0.2% for the month prompted our BNZ colleagues to nudge their Q3 estimates to -0.2%qoq/-0.2%yoy. In contrast RBNZ’s new forecast published yesterday show Q3 CPI at +0.1% qoq/ +0.2% yoy.  Based on yesterday’s food prices and the reaction by the Kiwi, it looks like the RBNZ will need to do more if it wants to push CPI inflation higher.

Incidentally, RBNZ’s McDermott was also on the wires last night and expressed dissatisfaction with the NZD reaction to the MPS and he was clear that that was not the reaction the Bank was looking for, stressing that the scenarios with two downside risks to rates were “over-looked” by the market.

Coming Up

It’s a quiet end to the week in Australia with no major data or events scheduled for today. That said China’s data releases at midday could be important for the domestic market. The July prints for industrial production, retail sales ad Fixed assets are all due out today.

Bloomberg is currently showing the market consensus for industrial production to hold steady at 6.2% which would be consistent with recent PMI prints that have remained relatively steady and close to 50. Retails sales (10.5%yoy  exp vs 10.6% prev) and Fixed Assets (8.9%yoy vs 9.0% prev) are expected to remain fairly unchanged relative to the previous month, suggesting the combined PBoC/Government stimulus are helping the economy grow without necessarily triggering a material rebound.

Ahead of China’s data deluge, New Zealand releases its business manufacturing PMI (Jul) and retails sales ex inflation (Q2).

Looking at Europe, Germany’s preliminary Q2 GDP growth is the highlight in the old continent. Consensus forecast suggest a slowdown in the German economy to 0.2% in Q2 following a solid print of 0.7% in Q1. The UK Construction output for June is also out today and the market is looking for -1% outcome with activity slowing due to a pullback in spending ahead of the referendum.

Then we move on to the US where we get retail sales and PPI numbers for July along with the August preliminary UoM Consumer Sentiment Survey. Consumer spending was one of the positive from the anaemic Q2 GDP growth print and as such the market will be looking to see if household spending will continue to boost the economy in Q3. So today’s retail sales will be important in this regard, the market is currently looking for a print of 0.4% for the headline number, down from 0.7% previously and the expected ex-auto number is 0.1% vs 0.7% prev.

So far in August, the USD has struggled against most currencies as the market has pulled back on expectations of Fed hikes this year, however given the rather subdued consensus for the July retail numbers, a solid print could well be the catalyst for a rebound on the big dollar.


On global stock markets, the S&P 500 was +0.47%. Bond markets saw US 10-years +5.19bp to 1.56%. In commodities, Brent crude oil +4.90% to $45.99, gold-0.7% to $1,335, iron ore -2.0% to $59.36. AUD is at 0.7698 and the range since yesterday 5pm Sydney time is 0.7698 to 0.7724.

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